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To study the investment procedure in mutual funds
data provided here is not absolute…its only for reference
INTRODUCTION
MUTUAL FUND
A mutual fund collects the savings from small investors, invest them in Government and other corporate securities and earn income through interest and dividends, besides capital gains. It works on the principle of ‘small drops of water make a big ocean’. For instance, if one has Rs. 1000 to invest, it may not fetch very much on its own. But, when it is pooled with Rs. 1000 each from a lot of other people, then, one could create a ‘big fund’ large enough to invest in a wide varieties of shares and debentures on a commanding scale and thus, to enjoy the economies of large scale operations. Hence, a mutual fund is nothing but a form of collective investment. It is formed by the coming together of a number of investors who transfer their surplus funds to a professionally qualified organization to manage it. To get the surplus funds from investors, the fund adopts a simple technique. Each fund is divided into a small fraction called “units” of equal value. Each investor is allocated units in proportion to the size of his investment. Thus, every investor, whether big or small, will have stake in the fund and can enjoy the wide portfolio of the investment held by the fund. Hence, mutual funds enable millions of small and large investors to participate in and derive the benefit of the capital market growth. It has emerged as a popular vehicle of creation of wealth due to high return, lower cost and diversified risk.
Mutual fund is a mechanism for pooling the resource by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them investors of mutual funds are known as unit holders.
The profits or losses are shared by the investors in proportion to their investments. The mutual fund normally comes out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. 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 invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by them that are on pro rata basis. 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 portfolio at a relatively low cost. Anybody with an inventible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.
A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily.
An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.
A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks.
NEED FOR THE STUDY
The main purpose of doing this project was to know about mutual fund and its functioning. This helps to know in details about mutual fund industry right from its inception stage, growth and future prospects. It also helps in understanding different schemes of mutual funds because my study depends upon importance of mutual fund in financial planning in India and their schemes like equity, income, balance as well as the returns associated with those schemes.
And to also know about the benefits available from mutual funds and what are the types of schemes are available and how the fund manager allocates the funds of the investors in different sectors. And to also know how it is benefited to capital market growth and role of mutual funds in financial planning. How the fund manager diversified risk.
The project study was done to ascertain the asset allocation entry load, exit load associated with the mutual funds. Ultimately this would help in understanding the benefits of mutual funds to investors. It also ensures good returns quick liquidity and creates a good rapport with the investors.
OBJECTIVES OF THE STUDY
❖ To have a brief idea about the benefits available from mutual fund investment.
❖ To give an idea of the types of schemes available.
❖ Observe the fund management process of mutual funds.
❖ Explore the recent developments in the mutual funds in India.
❖ To study the investment procedure in mutual funds.
METHODOLOGY OF THE STUDY
Data has been obtained from two sources viz;
❖ Primary Data
❖ Secondary Data
❖ Primary Data: It is the first hand information collected directly from the respondents. Primary data is collected through survey among existing clients along with the other investors.
❖ Secondary Data: It is the indirect or secondary hand information collected from factsheets, website of company and books. Company’s periodical reports newspapers, economic times, business line. The financial express, magazines, business today, business world, capital markets.
LIMITATIONS
❖ The study is confined to selected AMCs.
❖ Lack of information for analysis is a limitation.
❖ Availability of time is a constraint in the proposed survey, since the project should be completed in 4 weeks.
❖ Reliability on usage of secondary data.
❖ Complexity and confidentiality of the company is also a limitation for the study.
❖ The company could not discharge certain information about the business.
Evolution of Indian Mutual Fund Industry
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 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 cores 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 Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 cores.
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 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.
Fund House Expertise
Investment Expertise:
The best investment strategies put together by the best minds, our Fund Managers. With a sharp eye to monitor, gauge and understand the changes in the market, our fund managers and analysts gear up to meet new challenging environments. Their ability to capture the growth potential of Indian securities and manage complex portfolios as well as the drive to deliver optimum results is their forte. With superior securities selection, incisive research, intensive coverage including internal forecasts, active monitoring and regular tracking, our dedicated team ensures minimization of risks while protecting our investor's interest.
Investment Philosophy:
Growth through innovation.
Our expert team of experienced and market savvy researchers prepare comprehensive analytical and informative reports on diverse sectors and identify stocks that promise high performance in the future.
What is innovation? Innovation is the process of turning ideas into concrete plans for progressive growth. We always seek to provide our investors with opportunities for progressive growth through our innovative products, superior stock selection and active portfolio management. Accordingly, we also enhance and optimize asset allocation and stock selection based on internal and external research. Derivatives are used to hedge and rebalance portfolios to keep the risk factors at reasonable levels,
The three main phrases, which act as a guiding force for the investment performance, are as follows:
• Long-term capital appreciation for the investor: Our fund manager's view is not guided by any momentum play but by the objective of generating sustainable performance for the investor.
• Superior stock selection: Our team is encouraged to be ahead of the rest of the industry in terms of identifying new ideas & opportunities.
• Active fund management: While the performance of all the funds is benchmarked against a specific index, we do not encourage our investment team to replicate the index composition with the fund portfolio.
Optimal Risk Management:
Risk Management is an inherent part of any business. As one of the core focus areas, each of our strategies is subject to close scrutiny on a continuous basis. Regulatory agencies around the world are placing increasing pressure on institutions to measure and manage risk better. At SBI Funds Management, we follow enterprise wide approach to risk management with a dedicated, experienced and professional risk management team covering significant functions of the organization. Risk Management focuses on:
• Identifying actual and potential areas of risk
• Assessing the adequacy of internal controls
• Proposing risk mitigating measures and
• Safeguarding investor interest through ongoing analysis and monitoring
Investment Objective:
Setting benchmarks time and again for our investors.
Our objective is to endeavor to outperform our benchmarks through well researched investments in Indian equities. This is achieved by implementing an active management style based on fundamental analysis, leading to the construction of a portfolio. It could be blended, large cap, mid cap, or specific sector oriented - which aims at capturing the growth potential of Indian equities.
Indian Mutual Funds – Growth Strategy
The basic approach to mutual fund is planning and policy making in India, is slowly emerging as a clearly discernible strategy. Though a mutual fund is primarily an economic activity, both the economic and non-economic environment influences an organization and policy of mutual funds. Among the critical elements of the non-economic environment, the role of government is very crucial. Against this backdrop, mutual funds have a ten-point emerging strategy for growth in India.
Horizontalisation: The investment base has to be horizontalised, schemes should be so well dispersed that there is constant inflow of new investors and diffused investors with varied income backgrounds to effect market integration.
Structural integration: The time has come to attempt a structural integration of the small savings, deposits and the capital unit cult, so that the economy is monetized, production increased and employment expanded. Mutual funds are most suited for such structural integration in the emerging scenario.
Cost Rationalization: Financial product managers work towards cost rationalization to reduce inflation and to cope with low productivity. Capital market resource mobilization is becoming increasingly costly. Cost rationalization can be achieved through efficient management of mutual funds in financial, marketing and investment areas.
Corpus Optimization: The goal of higher productivity and lower costs is achieved in mutual funds through optimization of resource mobilization and utilization as well as process optimization.
Conservation: Conservation implies sustainability of a system so that the future generation is assured of integration equity i.e. benefit to a greater or at least to the same extent than the present generation. The milking of the economy through the mutual fund route for resource intensification should not entail a high future cost i.e. the loss of future credibility of the mutual fund system. The regulatory mechanisms tend to ensure this.
Capacity Utilization: It is an aspect of corpus build-up, planning and control. Capacity utilization in mutual funds depends on better resource management, security management and opportunity management. It also depends on another crucial factor i.e., preventive vigilance rather than breakdown survey of the garnered resources.
Technology Upgradation: Modernization in fund management techniques, investment in R&D and inducting on-line, real time transaction processing, custodial banking and security trading are becoming increasingly critical for success of mutual funds.
Professionalization of management: The growing competition in the market needs to be matched by a total change in the management paradigm. Mutual funds need sensitive professional managers for their nodal activities like corpus planning, marketing, security trading, custodial banking, portfolio management and technological up gradation.
Internationalization: The Indian resource market is under pressure from competing forces of opportunities arising out of constantly increasing demands. The global resource market is both huge and open. Some unique selling propositions backed by a policy of liberalization and diversification will enable Indian mutual funds to be truly globalized beyond their present activities.
Quality Orientation: As mutual funds must stay and operate on a continuing basis to become market leaders in financial management, they need quality orientation to meet both domestic and international standards. This needs continuous R&D, supervision backed by well-laid down programmers, policies and procedures.
Future Focus
The mutual fund industry has evolved in many aspects in the last decade or so, be it product innovation, distribution reach, investor education or leveraging technology. At present, only small portions of public savings reach the capital markets through the MF route. In the future, the percentage of savings reaching capital markets through MF route will rise gradually. Innovations like arbitrage funds, exchange-traded funds are going to benefit investors in a very tangible way. However, again within the exchange traded funds category, products like real estate exchange-traded funds will take some time to be introduced in the Indian market. The industry is one of the most regulated and has so far seen a very small number of issues. This fact alone should illustrate the likely future development of the mutual funds industry. Although the competitive scenario is getting together by the day, it actually helps in the expansion of the market. Competition will also lead to innovation in product development and a race for better returns. Going by India’s demography, the purchasing power and the savings rate and the kind of money people earn will increase in the future. Obviously, they need investment opportunities and mutual funds will be one of the best opportunities for the future, because of the kind of returns they yield, which no other class can give vis-à-vis the risks. Investors can map these risks and returns on the basis of investments in the mutual fund industry. With this background, the industry’s future seems bright for the coming years. It has great potential to grow and is already on that path.
Mutual Fund in financial planning
"Riches do not respond to wishes. They respond only to definite plans, backed by definite desires, through constant persistence." - Napoleon Hill
The importance of Financial Planning couldn't have been summed up better than this. To simply put, financial planning is a tool through which you can chalk out definite plans in order to achieve your financial goals thus ensuring you peace of mind at various stages of your life cycle.
All of us have financial goals – be it buying a house, buying a car, getting children married, their education and then our retirement. But, unless we do not assess where we stand in terms of our income, expenses, assets, liabilities, age and risk appetite, all the financial goals would just remain "dreams" and would never turn into a reality.
Today there are several investment avenues; but for you to optimally undertake financial planning (to achieve financial freedom), what is required is combination of various financial products in the respective asset classes – be it equity, debt or gold. However, your asset allocation also needs to be optimally structured for work for you (in the financial plan); or else it would not help you attaining financial freedom
Strategic Asset Allocation
Barring "most conservative portfolios" which do not hold equities at all, every portfolio should be optimally structure and diversified to hold all asset classes:
Cash - for security and liquidity, so that one can take advantage of opportunities as they arise.
Bonds - to help preserve capital and provide a steady income.
Stocks - for growing wealth and to help you beat inflation and counter the impact of taxes.
Real estate - because of their low correlation with stocks and bonds.
Gold - for its ability to be a hedge against the inflation bug and other economic and political uncertainties .Once your asset allocation is optimally structured, the next important action point should be having the right investment avenues / products under each asset class, in order to achieve the financial goals (within the time frame) with comfort.
Lower entry level – With the minimum investment amount in mutual funds being as low as ` 5,000, the encouragement to start small and at the same time take exposure to the fund's portfolio of 20-30 stocks (due to diversification) is also present. Now this is unlike stocks because there with [pic] 5,000 you can barely buy few quality stocks – and this especially true when valuations are expensive.
Innovative plans/services for investors – Today for regular investing in mutual funds (which is much needed to achieve financial goals), AMC (Asset Management Companies) offer innovative plans such as SIP (Systematic Investment Plan) / STP (Systematic Transfer Plan). Also for facilitating withdrawals too (taking care of your cash flow requirements), SWPs (Systematic Withdrawal Plans) are in place, thus enabling you to manage your portfolio from a financial planning perspective too.
Liquidity – Unlike direct stock investing where you may encounter a situation where a stock turns illiquid (due to various reasons); in mutual funds you would not face such a situation if the scheme selected by you follows strong investments systems and process. This because the stock selection process helps in eliminating such illiquid stocks. Moreover as an investment avenue, mutual funds per se, especially the open-ended mutual funds offer you the much required liquidity as you can simply buy / sell units at the day's NAV (Net Asset Value) by approaching the fund house directly, or by approaching your mutual fund distributor or even by transacting online.
Hence having assessed the inherent advantages of mutual funds, you can strategies your portfolio with the help of equity funds, debt funds, hybrid funds and gold funds whereby the under-mentioned financial objectives can be categorized to
• Growth
• Income
• Inflation protection
• Peace of mind and preservation of capital
• Tax saving
Among the various investment avenues available today, mutual funds (amongst other investment avenues) are a wealth creating avenue, aiding you achieve your financial goals. Moreover they power your portfolio with diversification benefit. And mind you diversification immensely helps during the turbulence of the capital markets as the jerks (of turbulence) are felt far lesser. The other benefits which you enjoy while investing in mutual funds are:
Professional management – Your money is managed by a professional fund manager, hence ascertaining the prospect of the companies is not your headache and portfolio churning (if required) too is taken care by him.
Economies of scale –Even though if a mutual fund does engage in high portfolio churning in the race to deliver luring returns, the voluminous trade carried out by it helps to enjoy the economies of large scale and have lower impact on their profitability. But on the other hand if you were to do this by yourself, you may get negatively impacted on the profitability front due to small volume of trades carried out.
But your financial planner should ideally balance the importance of each of these, while structuring a portfolio. Remember there are no one rules for all in Financial Planning.
While drawing a financial plan you need to cooperate with your financial planner and try to ask yourself the following questions and attempt answering them too in a very honest manner.
• Towards what objective/goal am I investing my money?
Knowing the objective of investing enables you to select the right options. For example, if you have a long term objective of wealth creation, then going with an equity oriented fund (following a growth style of investing) would be prudent. However if your objective is to maintain short-term fund requirements, you may invest liquid funds or ultra-short term funds.
• What is the time horizon?
Time horizon refers to, when you want to enjoy the fruits of your investments. Ascertaining this is critical because both, the risk and the reward of investments can vary according to the time horizon.
Generally, a longer horizon allows for more aggression in investment. Lesser the time, the more one needs to avoid risk.
• What is my risk appetite?
There is a risk-reward continuum running from cash to bonds to stocks. Returns are commensurate with the risk someone is willing to tolerate. High risks may also eat into your capital. And if there is no income to make up for that lost capital, replacing it would be difficult; which means a more conservative approach needs to be followed. Other considerations could be the present financial situation, estate planning and level of taxation.
Another important factor is age. As a general rule, the younger one is, the more aggressive someone can afford to be with their investment portfolio.
SBI MUTUAL FUND
KEY INFORMATION
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|Mutual Fund |SBI Mutual Fund |
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|Setup Date |Jun-29-1987 |
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|Incorporation Date |Feb-07-1992 |
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|Sponsor |State Bank of India |
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|Trustee | |
| |SBI Mutual Fund Trustee Company Private Limited |
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|Chairman |N.A |
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|CEO / MD |Mr. Deepak Kumar Chatterjee |
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|CIO |Mr.Navneet Munot |
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|Compliance Officer |Ms.Vinaya Datar |
| |Mr. C A Santosh |
|Investor Service Officer | |
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|Assets Managed |Rs. 47874.46 crores (Jun-30-2011) |
Other Details:
|Auditors | |
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| |M/s Deloitte Haskins & Sells Jt Auditor SBI Funds Mgmt P Ltd, M/s Khandelwal Jain & Co CAs Jt |
| |Auditor SBI Funds Mgmt P Ltd. |
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|Custodians | |
| |Bank of Nova Scotia / Citi Bank / HDFC Bank / Stock Holding Corporation of India |
| |Computer Age Management Services Pvt. Ltd, |
|Registrars | |
| |Computronics Financial Services (I) Ltd, Datamatics Financial Software Services Ltd |
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|Address |191 Maker Tower E, Cuffe Parade, Mumbai - 400005. |
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|Telephone Nos. |022 - 22180221-27 |
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|Fax Nos. |022 – 22189663 |
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|E-mail |partnerforlife@ |
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|SBI Mutual Fund Portfolio |
|There are no two opinions on the fact that mutual funds are increasingly gaining widespread acceptability among masses. Investors who|
|have traditionally embraced fixed deposits, post-office schemes and even stocks have bought the idea of investing through a |
|professional money manager. Now for some bad news .There is too many mutual funds in the country and investors aren't able to decide |
|which fund to own and which to abandon. A steady stream of mutual fund IPOs compounds the issue even further. This is how we can |
|define an ideal mutual fund portfolio for the investor with a moderate risk appetite and an investment time frame of at least 5 |
|years. |
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| A Large-Cap Diversified Equity Fund | |
| A Mid-Cap Diversified Equity Fund | |
| A Balanced Fund | |
| A Monthly Income Plan | |
| A Floating Rate Fund | |
| Mutual Fund Portfolio Management Strategies | |
| No Strategy | |
| Over | |
| Duplication Of Fund Securities | |
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|A Large-Cap Diversified Equity Fund: | |
|One of the first funds that investors must probably considering owning is a large-cap diversified equity fund with a steady track | |
|record of at least 5 years. Large cap stocks would usually include stocks from the BSE Sensex/S&P Nifty. A well-diversified fund must| |
|have not more than 40% of assets in the top 10 stocks (this is a global standard). A steady track record must involve outperformance | |
|vis-à-vis the benchmark index and peers especially during a downturn in equity markets. There are few funds that fit the bill, but | |
|the ones that qualify are the ones worth owning. | |
|A Mid-Cap Diversified Equity Fund: | |
|Mid-cap funds (except few) did not exist until even 3 years ago. So it’s a fairly nascent fund category. You can give the "steady | |
|5-Yr track record" criterion a miss for mid-cap funds. Though, you need to be careful of 'mid-cap funds' as right now its | |
|'fashionable' to be invested in mid-cap stocks. There are a lot of 'opportunity' funds with equity portfolios that swing in line with| |
|the market mood. So if the accent is on large cap stocks the 'opportunity' fund will be invested in large caps. If the mood in the | |
|markets turns and mid-cap stocks are pitch forked into the limelight, the fund's strategy will reflect the change in the market mood.| |
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|Choose funds that define themselves as 'mid-cap' either by name or by investment objective. Also look at the benchmark index; a fund | |
|that benchmarks itself against the CNX 500 or BSE 500 can be considered a mid-cap fund. Though, a fund that tracks the Sensex or | |
|Nifty may not necessarily be a mid-cap fund even if it has a lot of mid-cap stocks in its current portfolio. In other words, a fund's| |
|investment objective and investments must both correspond to its benchmark index. | |
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|A Balanced Fund : | |
|Balanced funds work mostly well during a downturn in equity markets, when the fund manager has a window to shift assets on to the | |
|debt side. The flexibility helps the fund manager curtail losses in a falling market. While selecting a balanced fund, choose the | |
|conventional type - 60:40 (equity: debt) with a steady track record. You have to make sure that the fund manager sticks to the 60:40 | |
|mandates even during bullish times, when most balanced fund managers succumb to the temptation of over-allocation to equities for | |
|higher growth. | |
|A Monthly Income Plan: | |
|A monthly income plan (MIP) works on the same premise as a balanced fund. The fund manager has the flexibility to invest a portion of| |
|assets (between 5-25% of assets in most cases) in equities. An MIP works well when debt markets are witnessing a subdued phase, like | |
|now for instance. When debt markets are in turmoil, the fund manager has the flexibility to shift assets in equities (provided equity| |
|markets are robust) to generate that extra growth. Again, since MIPs are a relatively recent phenomenon, investors can consider the | |
|short-term performance (at least 1-Yr) before selecting a good MIP. If you are looking for a regular income stream, choose the | |
|quarterly option as opposed to a monthly option, to allow the fund manager to declare a dividend in volatile equity markets. | |
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|A Floating Rate Fund: | |
|Floating rate debt funds invest in floating rate paper. Floating rate instruments have their coupon rates adjusted at periodical | |
|intervals, which reduces price fluctuations arising out of interest rate volatility. Investors can park funds in a floating rate fund| |
|(short-term plan) until more attractive investment opportunities emerge. Given the situation in debt markets at present, we believe | |
|it makes more sense to own a floating rate fund for some time going forward, rather than a regular long-term debt fund. Floating rate| |
|funds have a relatively short history and investors can look at the 1-Yr performance before selecting a floating rate fund. | |
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|Mutual Fund Portfolio Management Strategies: | |
|Following are the strategies that can be adopted to avoid the pit fall in Mutual fund Portfolio management. | |
|No Strategy: | |
|This is perhaps the most common mistake in mutual fund investing. It never ends to be surprised by the large number of individuals | |
|who select specific mutual funds without giving any idea to an asset allocation strategy. Many investors may actually define and | |
|identify their investment objectives, but then miss out the next critical step in establishing a successful mutual fund | |
|portfolio-creating a detailed asset allocation strategy. Exclusive of a well-defined, appropriate asset allocation strategy that | |
|accurately reflects individual investment objectives and preferences (time horizon, return objectives, risk tolerance, etc), the | |
|selection of mutual funds is haphazard (messy) instead of a logical, clear-cut process. | |
|With very few exceptions, the result of haphazard fund selection is inappropriate asset allocation, which in turn causes ineffective | |
|diversification with the final result being poor or mediocre portfolio performance. Ineffective diversification has both allocation | |
|and risk/reward characteristics which do not precisely represent the chosen investment objectives in a given portfolio. In | |
|particular, these characteristics may include over-weighting of fund categories, under-weighting of fund categories and/or | |
|inappropriate funds in the portfolio. Over-weighting and under-weighting of fund categories are significant percentage imbalances in | |
|allocation correspondingly, they account for additional and insufficient of a portfolio's assets. Inappropriate funds do not robust | |
|the chosen investment objectives and they are the "wrong" funds for a portfolio. | |
|On the contrary, effective diversification is a straight result of an appropriate detailed asset allocation strategy that fits | |
|individual investment objectives and preferences. Effective diversification distributes investment assets among different fund | |
|categories to achieve both a variety of distinct risk/reward objectives and a reduction in overall risk. Appropriate in depth asset | |
|allocation not only eliminates unattractive characteristics of over-weighting, under-weighting and inappropriate funds, it perfectly | |
|matches fund categories and their percentage of portfolio assets to specified objectives -- in essence, it is the "blueprint" for | |
|suitable fund selection. | |
|Establishing a successful mutual fund portfolio is a three-step process. The first step is identifying investment objectives and | |
|preferences, including portfolio amount, return objectives, time horizon and risk tolerance, second step are formulating a detailed | |
|asset allocation strategy by fund type category to reflect chosen objectives and the last step is suitable fund selection to match | |
|each category. | |
|The second step is the trickiest due to the abundance of asset allocation theories and strategies. Most asset allocation strategies | |
|fall into two groups, the first group is the one primarily treats risk as a stock/bond allocation, with risk tolerance changing the | |
|percentage of stock and bond funds and the other one is primarily a fund category allocation, with risk tolerance affecting the type | |
|of fund categories and their allocation percentages within a basic stock/bond allocation. | |
|Apart from of which asset allocation method an investor prefers, the important note is clear that is to avoid the pitfalls of | |
|haphazard fund selection, develop a detailed asset allocation strategy which accurately represents your investment objectives and | |
|preferences. | |
|Over: | |
|Weighting in High-Risk, Non-Diversified Funds- This error is a precise example of portfolio imbalance. A huge percentage of total | |
|portfolio assets are concentrated in funds with very high risk/reward characteristics, even if the fund types may actually reflect | |
|chosen investment objectives. The result is extreme unpredictability in the price movement of these funds which, in many instances, | |
|can cause disappointing portfolio performance because the very large percentage of risk does not justify the potential reward. In | |
|other terms, the risk is highly disproportionate to overall profit potential. Over-weighting can arise with any type of risk | |
|tolerance, although this specific type of over-weighting is more likely to be a problem in portfolios with aggressive risk | |
|tolerances. | |
|A high-risk, non-diversified stock fund category includes domestic and foreign small-cap growth, emerging markets and sector funds. | |
|In bond categories, emerging market and assured high-yield funds are also high risk. These fund types can be appropriate in many | |
|portfolios, provided an investor sticks to the principles of effective diversification. That is the distinct risk or reward | |
|objectives within a variety of fund types and a reduction in overall portfolio risk. | |
|Are there an acceptable percentage of high-risk, non-diversified funds to own in a portfolio? Most strategy recommend between 5-30% | |
|of total portfolio assets, depending upon the choices of aggressive, moderate or conservative risk tolerances and growth, balance or | |
|income-oriented return objectives. The solution is to treat high risk, non-diversified mutual funds as a suitable portfolio | |
|supplement without dramatically increasing overall risk. | |
| | |
|Duplication Of Fund Securities: | |
|This type of fault is a case of inefficient diversification and occurs when an investor has two (or more) funds with identical | |
|objectives. For example, owning two small-cap growth funds, two large-cap growth funds and one intermediate corporate bond fund in a | |
|five-fund portfolio is inefficient diversification due to the replication of fund objectives in the small and large-cap growth | |
|categories. In this type of arrangement they lack the array of distinct risk or reward characteristics of ideal diversification. To | |
|avoid replication, it is most excellent to represent a fund category with just one fund. | |
|The essential familiar factor in avoiding these three common mistakes is appropriate detailed asset allocation. It provides effective| |
|diversification and eliminates the troubles associated with haphazard fund selection. It is the explanation in establishing a | |
|successful mutual fund portfolio. | |
SBI Mutual Fund-Scheme Name
|Scheme Name |Rating |Download | Category |Latest |1 year |AUM (Rs. cr.) |
| | | | |NAV |Return (%) |Jun 11 |
|SBI Arbitrage Oppor. Fund (G) |Not Rated | |Debt - Speciality |13.89 |8.5 |41.98 |
|SBI Blue Chip Fund (G) |[pic][pic] | |Equity Diversified |14.31 |-1.4 |824.52 |
|SBI Capital Protection - Sr -I | | |Debt - Speciality |11.11 |3.1 |218.10 |
| |Not Rated | | | | | |
|SBI Capital Protection Fund- Sr-II |Not Rated | |Debt - Speciality |10.16 |-- |107.23 |
|SBI Dynamic Bond Fund (G) | | |Debt - Long Term |12.13 |8.5 |16.07 |
| |Not Rated | | | | | |
|SBI Gold Exchange Traded Fund |Not Rated | |Gold |2,260.63 |23.3 |218.31 |
|SBI Infrastructure - Sr I (G) |[pic] | |Equity Diversified |9.09 |-12.4 |946.55 |
| |[pic] | |Balanced |49.98 |-0.5 |459.97 |
|SBI Magnum Balanced Fund (G) | | | | | | |
| |[pic][pic][p| |Money Market |17.36 |7.9 |346.60 |
|SBI Magnum Cash-Liq Float -G |ic][pic][pic| | | | | |
| |] | | | | | |
|SBI Magnum Childrens Benefit |Not Rated | |Debt - Speciality |23.13 |7.8 |23.26 |
|SBI Magnum Comma Fund (G) |[pic][pic] | |Equity Diversified |23.69 |-1.3 |553.25 |
|SBI Magnum Contra Fund (G) |[pic][pic] | |Equity Diversified |55.13 |-4.1 |3,139.54 |
|SBI Magnum Emerging Busi (G) |[pic][pic][p| |Equity Diversified |44.42 |16.5 |354.56 |
| |ic][pic][pic| | | | | |
| |] | | | | | |
|SBI Magnum Equity Fund (G) |[pic][pic][p| |Equity Diversified |43.85 |4.3 |440.76 |
| |ic] | | | | | |
|SBI Magnum FMCG Fund |Not Rated | |Equity - FMCG |33.15 |22.3 |42.71 |
|SBI Magnum Gilt - LTP (G) |[pic][pic] | |Debt - Long Term |20.08 |4.9 |51.64 |
|SBI Magnum Gilt - STP (G) |[pic][pic] | |Debt - Short Term |19.91 |5.9 |65.72 |
|SBI Magnum Gilt LTP - PF (G) |[pic][pic] | |Debt - Long Term |12.87 |5.0 |90.98 |
|SBI Magnum Gilt LTP-PF 1Yr (G) |Not Rated | |Debt - Long Term |12.55 |4.5 |2.62 |
|SBI Magnum Gilt LTP-PF 2Yr (G) |Not Rated | |Debt - Long Term |12.39 |4.3 |9.08 |
|SBI Magnum Gilt LTP-PF 3Yr (G) |Not Rated | |Debt - Long Term |12.18 |4.2 |4.77 |
|SBI Magnum Global Fund (G) |[pic][pic][p| |Equity Diversified |59.28 |7.8 |978.86 |
| |ic][pic] | | | | | |
|SBI Magnum Income Fund (G) |[pic][pic][p| |Debt - Long Term |24.07 |5.9 |46.71 |
| |ic] | | | | | |
|SBI Magnum Income Plus -IP (G) |Not Rated | |Debt - Speciality |16.41 |2.9 |69.03 |
|SBI Magnum Income Plus-SP (G) |Not Rated | |Debt - Long Term |11.51 |5.3 |1.81 |
|SBI Magnum Income-FRP -STP (G) |Not Rated | |Debt - Floating Rate |15.59 |8.1 |250.80 |
|SBI Magnum Income-FRP-LT IP -G |Not Rated | |Debt - Institutional |11.95 |-- |0.15 |
|SBI Magnum Income-FRP-LTRP (G) |Not Rated | |Debt - Floating Rate |15.17 |7.7 |6.05 |
|SBI Magnum Index Fund (G) |Not Rated | |Equity Index |47.66 |3.6 |33.83 |
|SBI Magnum Insta Cash (G) |[pic][pic][p| |Money Market |22.31 |7.6 |3,207.45 |
| |ic][pic] | | | | | |
|SBI Magnum IT Fund |Not Rated | |Equity - Technology |22.17 |4.5 |46.70 |
|SBI Magnum Midcap Fund (G) |[pic][pic] | |Equity Diversified |23.10 |0.7 |255.44 |
|SBI Magnum MIP (G) |[pic][pic] | |Monthly Income Plan |20.41 |4.4 |380.19 |
|SBI Magnum MIP - Floater (G) |Not Rated | |Monthly Income Plan |13.60 |7.5 |10.93 |
|SBI Magnum Multicap Fund (G) |[pic][pic] | |Equity Diversified |17.40 |-4.2 |489.25 |
|SBI Magnum Multiplier Plus (G) |Not Rated | |Equity Diversified |81.44 |-1.0 |1,159.05 |
|SBI Magnum NRI Fund - FAP (G) |Not Rated | |Equity Diversified |29.22 |3.8 |8.71 |
|SBI Magnum Pharma Fund (G) |Not Rated | |Equity - Pharma |48.06 |14.2 |40.15 |
|SBI Magnum Tax Gain (G) |[pic][pic] | |Equity Tax Saving |59.68 |-1.0 |5,224.14 |
|SBI One India Fund (G) |[pic][pic] | |Equity Diversified |10.69 |-4.1 |582.14 |
|SBI Premier Liquid - IP (G) |Not Rated | |Debt - Institutional |15.97 |7.6 |1,748.62 |
|SBI Premier Liquid - SIP (G) |Not Rated | |Debt - Institutional |15.81 |7.7 |6,849.94 |
|SBI PSU Fund (G) |[pic] | |Equity Diversified |9.74 |-2.7 |599.78 |
|SBI SHDF - Short Term -IP (G) |Not Rated | |Debt - Institutional |11.55 |7.0 |30.02 |
|SBI SHDF - Short Term -RP (G) |[pic][pic][p| |Debt - Short Term |13.10 |6.7 |33.38 |
| |ic] | | | | | |
|SBI SHDF - USTBF - IP (G) |Not Rated | |Debt - Institutional |13.13 |7.9 |7,427.75 |
|SBI SHDF - USTBF - RP (G) |[pic][pic][p| |Debt - Short Term |12.94 |7.8 |337.74 |
| |ic][pic] | | | | | |
|SBI Tax Advantage Sr-1 (G) |[pic][pic][p| |Equity Tax Saving |11.97 |-2.8 |624.65 |
| |ic] | | | | | |
Awards received by Sbi Mutual FUnd
At SBI Funds Management, we devote considerable resources to gain, maintain and sustain our profitable insights into market movements. The trust reposed on us by millions of investors is a genuine tribute to our expertise in Fund Management and dedication to our singular focus. And this has resulted in various awards and accolades for us from the fund industry, motivating us to do better. Some of the awards won by us are listed below.
❖ 2011
Readers Digest Awards 2011 for Trusted Brand in Fund Management Category.
ICRA Mutual Fund Awards 2011 for Magnum Income Fund - Floating Rate Plan - Long Term Plan.
❖ 2010
ICRA Mutual Fund Awards 2010 for Magnum Global Fund.
❖ 2009
ICRA Mutual Funds Awards 2009 for Magnum Tax Gain Scheme 1993.
The Lipper India Fund Awards 2009 for Various Schemes.
❖ 2008
Outlook Money NDTV Profit Awards 2008.
The Lipper India Fund Awards 2008 for Magnum Balanced Fund – Dividend.
ICRA Mutual Fund Awards 2008 for Various Schemes.
❖ 2007
Outlook Money NDTV Profit Awards 2007.
CNBC Awaaz Consumer Awards 2007.
The Lipper India Fund Awards 2007 for Various Schemes.
ICRA Mutual Funds Awards 2007 for Various Schemes.
CNBC TV18 - CRISIL Mutual Fund of the Year Award 2007 for Various Schemes
Developments of SBI Mutual Fund
Indian Bank to sell SBI Mutual Fund Products
New Delhi: Indian state-run lender Indian Bank has entered into an agreement with the fund house SBI Mutual fund to sell the latter's mutual fund products in the market, it said.
Established in 1987, SBI Mutual Fund is a joint venture between the country's largest lender State Bank of India, and France-based fund management company Societe Generale Asset Management.
Indian Bank's 1,850 branches will sell SBI Mutual Fund's products, wherein the bank will also have access to products of other fund houses UTI Mutual Fund and Reliance Mutual Fund, as per the agreement.
The partnership is aimed towards improving the non-interest income of the bank, Indian Bank's Chairman and Managing Director T M Bhasin said.
Indian Bank's shares Wednesday ended at Rs 214.45 on the Bombay Stock Exchange, up 3% from the previous close.
Definition of Mutual Fund
The Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 defines a mutual fund as “a fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations”.
These mutual funds are referred to as Unit Trusts in the U.K. and as open end investment company as “an organization formed for the investment of funds obtained from individuals and the institutional investors who in exchange for the funds receive shares which can be redeemed at any time at their underlying asset values”.
According to Weston J. Fred and Brigham, Eugene, F., Unit Trusts are “Corporations which accept dollars from savers and then use these dollars to buy stocks, long term bonds, short term debt instruments issued by business or government units; these corporations pool funds and thus reduce risk by diversification”.
Thus, mutual funds are corporations which pool funds by selling their own shares and reduce risk by diversification.
Origin of the fund
The origin of the concept of mutual funds dates back to the very dawn of commercial history. It is said that Egyptians and Phoenicians sold their shares in vessels and caravans with a view to spreading the risk attached with these risky ventures. However, the real credit of introducing the modern concept of mutual fund goes to the Foreign and Colonial Government Trust of London established in 1868. Thereafter, a large number of close-ended mutual funds were formed in the U.S.A. in 1930’s followed by many countries in Europe, the Far East and Latin America. In most of the countries, both open and close-ended types were popular.
In India, it gained momentum only in 1980, though it began in the year 1964 with the Unit Trust of India launching its first fund, the Unit scheme 1964.
Importance of Mutual Funds
The Mutual Fund industry has grown at a phenomenal rate in the recent past. One can witness a revolution in the mutual fund industry in view of its importance to the investors in general and the country’s economy at large.
The following are some of the important advantages of mutual funds:
• Channelizing Savings for Investment: Mutual Funds act as a vehicle in galvanising the savings of the people by offering various schemes suitable to the various classes of customers for the development of the economy as a whole. A number of schemes are being offered by MFs so as to meet the varied requirements of the masses, and thus savings are directed towards capital investments directly. In the absence of MFs, these savings would have remained idle. Thus, the whole economy benefits due to the cost efficient and optimum use and allocation of scarce financial and real resources in the economy for its speedy development. Again, MFs prefer less risky investments.
• Offering Wide Portfolio Investment: Small and medium investors used to burn their fingers in stock exchange operations with a relatively modest outlay. If they invest in a select few shares, some may even sink without a trace never to rise again. Now, these investors can enjoy the wide portfolio of the investment held by the mutual fund. The fund diversifies its risks by investing on large varieties of shares and bonds which cannot be done by small and medium investors. This is in accordance with the maxim ‘Not to lay all eggs in one basket’. These funds have large amounts at their disposal, and so, they carry a clout in respect of stock exchange transactions. They are in a position to have a balanced portfolio which is free from risks. Thus, MF’s provide instantaneous portfolio diversification.
• Providing Better Yields: The pooling of funds from a large number of customers enables the fund to have large funds at its disposal. Due to these large funds, mutual funds are able to buy cheaper and sell dearer than the small and medium investors. Thus, they are able to command better market rates and lower rates of brokerage. So, they provide better yields to their customers. They also enjoy the economies of large scale and can reduce the cost of capital market participation. The transaction costs of large investments are definitely lower than that of small investments. In fact, all the profits of a mutual fund are passed on to the investors by way of dividends and capital appreciation. The expenses pertaining to a particular scheme alone are charged to the respective scheme. Most of the mutual funds so far floated have given a dividend at the rate ranging between 12% p.a. and 17% p.a. It is fairly a good yield. It is an ideal vehicle for those who look for long term capital appreciation.
• Rendering Expertise Investment Service at Low Cost: The management of the Fund is generally assigned to professionals who are well trained and have adequate experience in the field of investment. The investment decisions of these professionals are always backed by informed judgement and experience. Thus, investors are assured of quality services in their best interest. Due to the complex nature of the securities market, a single investor cannot do all these works by himself or he cannot go to a professional manager who manages individual portfolios. In such a case, he may charge hefty management fee. The intermediation fee is the lowest being 1 per cent in the case of a mutual fund.
• Providing Research Service: A mutual fund is able to command vast resources and hence it is possible for it to have an in-depth study and carry out research on corporate securities. Each Fund maintains a large research team which constantly analyses the companies and the industries and recommends the fund to buy or sell a particular share. Thus, investments are made purely on the basis of a thorough research. Since research involves a lot of time, efforts and expenditure, an individual investor cannot take up this work. By investing in a mutual fund, the investor gets the benefit of the research done by the Fund.
• Offering Tax Benefits: Certain funds offer tax benefits to its customers. Thus, apart from dividends, interest and capital appreciation, investors also stand to get the benefit of tax concession.
For instance, under section 80L of the Income Tax Act, a sum of Rs. 10,000 received as dividend (Rs. 13000 to UTI) from a MF is deductible from the gross total income. Under section 88A 20% of the amount invested is allowed to be deducted from the tax payable. Under the Wealth Tax Act, investments in MF are exempted up to Rs. 5 lakhs.
The mutual funds themselves are totally exempt from tax on all income on their investments. But, all other companies have to pay taxes and they can declare dividends only from the profits after tax. But, mutual funds do not deduct tax at source from dividends. This is really a boon to investors.
• Introducing Flexible Investment Schedule: Some mutual funds have permitted the investors to exchange their units from one scheme to another and this flexibility is a great boon to investors. Income units can be exchanged for growth units depending upon the performance of the funds. One cannot derive such flexibility in any other investments.
• Providing Greater Affordability and Liquidity: Even a very small investor can afford to invest in Mutual Funds. They provide an attractive and cost effective alternative to direct purchase of shares.
In the absence of MFs, small investors cannot think of participating in a number of investments with such a meagre sum. Again, there is greater liquidity. Units can be sold to the Fund at any time at the Net Asset Value and thus quick access to liquid cash is assured. Besides, branches of the sponsoring bank are always ready to provide loan facility against the unit certificates.
• Simplified Record Keeping: An investor with just an investment in 500 shares or so in 3 or 4 companies has to keep proper records of dividend payments, bonus issues, price movements, purchase or sale instruction, brokerage and other related items. It is tedious and it consumes a lot of time. One may even forgot to record the rights issue and may have to forfeit the same. Thus, record keeping is the biggest problem for small and medium investors. Now, a mutual fund offers a single investment source facility, i.e., a single buy order of 100 units from a mutual fund is equivalent to investment in more than 100 companies. The investor has to keep a record of only one deal with the Mutual Fund. Even if he does not keep a record, the MF sends statements very often to the investor. Thus, by investing in MFs, the record keeping work is also passed on to the Fund.
• Supporting Capital Market: Mutual funds play a vital role in supporting the development of capital markets. The mutual funds make the capital market active by means of providing a sustainable domestic source of demand for capital market instruments. In other words, the savings of the people are directed towards investments in capital markets through these mutual funds. Thus, funds serve as a conduit for dis-intermediating bank deposits into stocks, shares and bonds. Mutual funds also provide a valuable liquidity to the capital market, and thus, the market is made very active and stable. When foreign investors and speculators exit and re-enter the markets en masse, mutual funds keep the market stable and liquid. In the absence of mutual funds, the prices of shares would be subject to wide price fluctuation due to the exit and re-entry of speculators into the capital market en masse. Thus, it is rendering an excellent support to the capital market and helping in the process of institutionalisation of the market.
• Promoting Industrial Development: The economic development of any nation depends upon its industrial advancement and agricultural development. All industrial units have to raise their funds by restoring to the capital market by the issue of shares and debentures. The mutual funds not only create a demand for these capital market instruments but also supply a large source of funds to the market, and thus, the industries are assured of their capital requirements. In fact the entry of mutual funds has enhanced the demand for India’s stocks and bonds. Thus, mutual funds provide financial resources to the industries at market rates.
• Acting as Substitute for Initial Public Offerings (IPOs): In most cases investors are not able to get allotment in IPOs of companies because they are often oversubscribed many times. Moreover, they have to apply for a minimum of 500 shares which is very difficult particularly for small investors. But, in mutual funds, allotment is more or less guaranteed. Mutual funds are also guaranteed a certain percentage of IPOs by companies. Thus, by participating in MFs, investors are able to get the satisfaction of participating in hundreds of varieties of companies.
• Reducing the Marketing Cost of New Issues: The mutual funds help to reduce the marketing cost of the new issues. The promoters used to allot a major share of the Initial Public offering to the mutual funds and thus they are saved from the marketing cost of such issues.
• Keeping the Money Market Active: An individual investor cannot have any access to money market instruments since the minimum amount of investment is out of his reach. On the other hand, mutual funds keep the money market active by investing money on the money market instruments. In fact, the availability of more money market instruments itself is a good sign for a developed money market which is essential for the successful functioning of the central bank in a country.
Thus, mutual funds provide stability to share prices, safety to investors and resources to prospective entrepreneurs.
DIFFERENT TYPES OF MUTUAL FUND SCHEMES.
Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open – ended Fund/Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-ended schemes is liquidity.
Close – ended Fund/Scheme
A close-ended fund or schemes has a stipulated maturity period e.g. 5 – 7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
Growth/Equity Oriented Scheme
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 preference. 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.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAV’s on such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes invent both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth they generally invest 40 – 60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund: These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money, government securities, etc. returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as in the case with income or debt oriented schemes.
Index Fund
Index funds replicate the portfolio of a particular index such as the BSE sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or all in accordance with the rise or fall in index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
Structure of Mutual Fund
The SEBI (Mutual Fund) Regulations 1996 a mutual fund as a fund established in the form of a trust by a sponsor to raise monies by the trustees through the sale of units to the public under one or more schemes for investing in securities with the regulations.
The structure consists of:
➢ Sponsor: Sponsor is a person who acting alone or in a combination with another body corporate establishes a mutual fund and registers it with SEBI. Sponsor must contribute at least 40% of the net worth of the investment managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual funds) Regulations, 1996. The Sponsor forms a Trust and appoints a Board of Trustees. The Sponsor appoints the custodian and the Asset Management Company either directly or indirectly through the Trust, in accordance with SEBI regulations. The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.
➢ Trust: Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.
➢ Trustee: Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the SEBI (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.
Rights of Trustees
1. Approve each of the schemes floated by the AMC.
2. The right to request any necessary information from the AMC.
3. May take corrective action if they believe that the conduct of the fund’s business is not in accordance with SEBI regulations.
4. Have the right to dismiss the AMC.
5. Ensure that, any shortfall in the net worth of the AMC is made up.
➢ Asset management company (AMC): The AMC acts as an investment manager of the trust under the supervision and direction of the trustees. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the mutual fund. At least 50% of the directors of the AMC are independent directors who are not associated with the sponsor in any manner. The AMC must have a net worth of at least 10 crores at all times.
➢ Registrar and Transfer Agent: The AMC is of authorized by the Trust Deed appoints the registrar and transfer Agent to the mutual funds. The registrar processes the application form; redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.
➢ Custodian: The custodian has the responsibility of physically hand lint and safe keeping of securities. The custodian is independent of the sponsors and is registered with SEBI.
➢ Depositories: Indian capital markets are moving away from physical certificates for securities to ‘dematerialized’ form. This is done by depository. The depository will hold the dematerialized security holdings of the mutual fund.
Role of Mutual Funds in Financial Planning
A Financial Plan involves various steps: gathering and processing information, establishing goals and setting objectives, drawing up, implementing and finally, monitoring the plan. While the initial steps leading up to it are important, the success of any financial plan depends on how well you implement it. You could say implementation is probably the most difficult stage: lack of access to the right securities or investments across desired asset classes, difficulty in rebalancing a portfolio due to the illiquid nature of some investments and lack of time to continuously track a portfolio are some of the key challenges that individuals face while implementing a financial plan. However, it is relatively easy to overcome most of these challenges with the innovative products and facilities that mutual funds have started offering in recent times. Here are some reasons why you could consider investing in mutual funds to help you implement a financial plan successfully.
Wide range of products across asset classes
Whether you are planning for retirement or children's education, you are most likely to need an allocation across different asset classes in order to earn returns at a risk level that you are comfortable with. These could include domestic equities, emerging market equities, global equities, bonds, cash, commodities, real estate, gold, etc. It is possible to invest in some of these directly, but for individuals, it is difficult to access some investments, such as bonds, for instance. More importantly, investing calls for time and specialized skills. For example, individual investors may have direct access to equities, but to choose stocks, you need time and talent in order to track companies, their performance and growth plans, etc. Investing in mutual funds makes investing simple as they offer you a variety of products - from the basic diversified equity funds to the more sophisticated real estate funds and exchange traded gold funds - that can help you implement your financial plan.
Flexibility
Financial planning does not end once you construct your desired portfolio. Monitoring investments at regular intervals and rebalancing is equally important. If there is a cost involved in liquidating your investments, it may affect overall performance of your portfolio. For this reason, it makes sense to invest in relatively liquid options that can help you to redeem your investments, if required. Also, while rebalancing, you may need to make incremental investments in some asset classes. Most mutual funds offer both these facilities thereby making the process of portfolio rebalancing a lot easier.
Diversification
Diversification is an important requirement of any investment strategy. Mutual funds ensure diversification within and across asset classes, across securities, across geographies and also across fund managers - if diversification in investment styles is what you are looking for. For example, the fund manager of an equity fund could focus only on large caps or may invest across all market caps. Or, there could be a fund manager who focuses on value investing or growth investing or a blend of both. As different investment styles often work at different points in a market cycle, investing in multiple funds managed by different fund managers provide "style diversification" to the investment strategy.
Mutual funds facilitate regular investment
If you earn a regular income like a salary, you may prefer to invest a certain amount at regular intervals. The Systematic Investment Plan (SIP) facility offered by mutual funds is one of the best ways to make such regular investments for your long-term goals. Since SIP investments can be as little as Rs. 500 per month, you can also diversify across different types of funds. For example, if you are planning for a retirement corpus of Rs. 10,000,000 after a 20-year period and if you expect equities to deliver 15% cumulative returns, you could consider investing Rs. 8000 every month in diversified equity funds over the next 20 years. (This example is for illustration purposes only. You may actually need to reduce your exposure to equities as you approach retirement. Also, the actual return that you earn on equity investments could be more or could be less than 15%).
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|Ways of Investing In Mutual Funds |
|There are two ways of investing in mutual fund. |
|Lump sum Investment |
|Systematic Investment Plan ( SIP) |
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| Lump Sum Investment | |
| Systematic Investment Plan (SIP) | |
| Expanation | |
| Process of Systematic Transfer Plan | |
| Benefits of Systematic Transfer Plan | |
| SIP OR LUMPSUM Investment In The Current Market Conditions | |
| |
|Lump Sum Investment: Also known as Online Payment. When you put in a substantially large sum of money in a mutual fund and subsequently gain a | |
|number of units of that fund based on the Net Asset Value of the fund at the time of buying is what we know as a lump sum investment. | |
| | |
|Systematic Investment Plan (SIP): Also known as Periodic Investment. It’s a scheduled investment done periodically in a mutual fund. That means | |
|that, every month, you commit to invest say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund. | |
| | |
| | |
|Explanations: The SIP is the best direction to invest with regular cash flows. But what if someone has an enormous corpus and plans to invest in | |
|equities and at the same time is worried about the widespread uncertainty in the market? Still, the systematic investment route remains the most | |
|excellent vehicle to move forward. The gains could be improved by opting for a systematic transfer plan (STP) all along with the SIP. STP allows | |
|one to make cyclic transfers from one fund into another. | |
|In an SIP, an investor characteristically parks the money in a bank savings account and a certain amount is transferred at a regular interval | |
|from the savings account to the fund house for buying into a specified equity fund. | |
|In the case of an STP, the lump sum is invested in a liquid or a balanced short-term plan and is transferred at regular interval to a specified | |
|equity fund. For an illustration, one has Rs 60,000 to invest in equities; he can put the entire amount in a liquid plan and go for a monthly SIP| |
|of Rs 5,000 in an equity plan through a systematic transfer. However, the drawback of this investment process is its inability to invest in | |
|different fund houses. So, if you have an equity fund to invest through the SIP approach, you would have to choose the liquid fund of the | |
|identical fund house. But with slight difference in returns among different liquid funds and it’s approximately risk free status, STP is still a | |
|better stake. | |
|Despite the fact that an investor earns only around 3.5% pa interest on the amount parked in the savings account, a liquid fund gives a higher | |
|return of 5-7% pa on the corpus with the same level of liquidity. Since these funds invest in safe and liquid debt instruments, the level of risk| |
|remains very low. | |
|“An STP helps you accomplish your financial goals by investing a fixed sum in your preferred fund for a pre-determined number of installments. We| |
|would recommend the STP option to those sitting on cash hand not defective to take the risk of lump-sum investment in the equity market.”This | |
|helps take the edge off any risk arising from volatility or improve the fund’s returns in a boom. Thus, an investor can match his risk enthusiasm| |
|with that of the equity scheme. | |
|To this point, 48 investors have opted for the facility. Lowest edge to transfer from liquid fund to equity schemes is Rs 10,000 while the | |
|highest edge is Rs 5 lakh. An STP is best suited when markets have worn out or are volatile and uncertain. Through it, an investor takes | |
|advantage of the reasonably consistent returns of debt while banking on the potential of equities to create wealth for him in the long term. | |
|“STP is definitely going to achieve ground as aspirations, possibilities and opportunities increase among the youth. I am sure that questions | |
|pertaining to efficient management of their wealth would be answered by STP and many such other facilities.” Industry experts see a relationship | |
|between systematic transfer plan and systematic investment plan but both the options fluctuate from each other by way of nature of cash flow. | |
|“STP is as good as an SIP and a better option for investors with large amounts to invest. An SIP is targeted at investors with small regular cash| |
|flows. STPs are for investors with large unplanned cash flows.” Nevertheless, fund managers feel, STP is yet to be promoted in India to its full | |
|coverage. Investors need to be sufficiently informed about it. | |
|Systematic Transfer Plan (STP) is a package of transaction options, which aims toward offering you a rate free, disciplined and efficient | |
|investment solution in all types of existing schemes in the market. Transfer either a fixed sum or just the appreciation accrued. By transferring| |
|only the appreciation in a scheme, you can guard your capital | |
|The continued ambiguity in the financial markets has led to a situation where investors are frightened about their investments and its | |
|performance. It is during these hard times that the various strategies available to the investor can be used to accomplish their objectives. | |
|One significant strategy is the use of the systematic transfer plan to structure their mutual fund investments. This can be used very effectively| |
|by the investor to make sure that they are getting the best out of the money invested. | |
|The Systematic Transfer Plan (STP) has some features alike to a Systematic Investment Plan (SIP) that is quite recognized to the investors. The | |
|final objective is a regular investment into equities that takes place on a monthly basis. However, there are times when the investor already has| |
|a lump sum and something more has to be done in order to ensure that the money earns good returns. | |
|This will involve the practice of ensuring that this lump sum is invested properly at the initial juncture and then there is an amount that is | |
|transferred to equities in a regular approach. This will help the investor accomplish a buildup in their portfolio of equities with a small | |
|amount of risk. | |
|Process of Systematic Transfer Plan | |
|The process of the entire STP is very important because it enables the investor to make the best use of the money that is already present with | |
|them. The investor would want to invest the available amount into equities, but they could be faced with a typical problem. | |
|On one occasion investment into equities might turn out to be very costly, because this will concentrate the investment risk at one particular | |
|point of time. The main plan in such a situation would be to ensure that the initial lump sum amount is invested into debt and from this debt | |
|there is a transfer of a regular sum of money each month into equities. | |
|This will guarantee that the aim of achieving a regular investment into equities is done and at the same time there is also the protection of the| |
|investment in the interim time period. | |
|There have been a bunch of upheavals as far as the debt mutual funds are concerned because of the increase in the yields that have been witnessed| |
|in the Market. In such a situation, the investor has to make certain that the debt investment does not have any risk. The debt investment will be| |
|into funds that do not carry much of a risk of a decline in value. This will signify selecting liquid or money Market Mutual funds that will | |
|usually not see wearing away in the value of the investment. | |
|The transfer then is done to an equity-oriented scheme each month by giving the required instructions to the mutual fund. This ensures that the | |
|entire process is completed automatically each month because the commands will not have to be given each month and at the same time the process | |
|is completed effortlessly without much of a problem. | |
| | |
|Benefits of Systematic Transfer Plan | |
|There are a small number of benefits of this entire process for the investor that has to be taken into consideration. First of all, there is the | |
|averaging out of the cost in the equity investment just like a SIP, because the investment is made regularly each month. This ensures that there | |
|is an efficient manner of buying into the units of the equity scheme. | |
|The additional benefit is that the investment till the time of the transfer earns a higher rate of return than the normal amount that would be | |
|earned had the money been left in a savings bank account. The return for liquid funds is higher than the savings bank interest and this will | |
|promote the investor in terms of a higher return. | |
|There is also the easiness of the process and the fact that the entire requirement of the investor is being completed effortlessly without much | |
|of administrative work. All this is helpful for the investor as they are comfortable with the process. | |
|Wealth creation out of capital market can be very tough and uncontrollable task. The people who earn through capital markets have to give large | |
|amount of time to understand its every aspect. But with mutual funds, investing in capital market has become all the further simpler and less | |
|risky. If followed methodically it also lead to wealth creation. Systematic investment plan, S.I.P is been termed as a pathway to wealth creation| |
|due to its feature of disciplined and long term nature. Capital markets are made up of a lot of different investors who participate in it. There | |
|are bulky institutions, such as fund houses, as well as companies, brokers and individual investors. Over the long-term, the financial market can| |
|do better but in the short- term, prices rise and fall on many accounts but the basis of fluctuation are quiet similar like fundamental reasons | |
|like company news, market sentiment, expectations, rumor or competitor activity. | |
|There are statistical measures and techniques, such as price-earnings ratios, which help determine the true value of a stock or bond, but many | |
|times in the financial market rational measures are often unnoticed and sentiment can take over. | |
|Deciding when to invest in this environment can be a traumatic task. If the market is doing better you may fear that you’re buying when prices | |
|are too high. By contrast, when the market is falling, there is a lack of enthusiasm to invest due to fears that it may fall further. So what | |
|should an investor need to do in order to keep away from having to make these timing decisions? | |
|Many a times by the time a common investor realize that its time to invest, the market is already at its hit the highest point. The Systematic | |
|Investment Plan is not a kind of mutual fund. It is a technique of investing in a mutual fund. Systematic investment plan is generally known as | |
|SIP. SIP is a good way to invest as it leads to regimented and regular investment. | |
|When you purchase the units of a fund, you may do so when the NAV is really high. For occasion, let's say you bought the units of a fund when the| |
|market is at its hit the highest point, leading to an elevated NAV. If the market drops after that, the value of your investments falls and you | |
|may have to remain for a long while to make a return on your investment. But, if you invest through a SIP, you do not entrust the mistake of | |
|buying units when the market is at its peak. In view of the fact that you are buying small amounts continuously, your investment will average out| |
|over a period of time. Investing on a regular basis removes the nervous tension of “timing the market” because you are employing the concept of | |
|“Rupee Cost Averaging”. If you are an investor in mutual funds it means that you buy additional units when the purchase price is low and smaller | |
|quantity units when the purchase price is high. The trap to all this is to remember that it’s not the cost you pay for each unit that matters. | |
|It’s the average price per unit over time that determines you’re by and large return. This will be lesser than the cost accrued to lump sum | |
|investment. | |
|More over a systematic investment carry definite other benefits for the investors like diversifying the risk. If you are investing regularly then| |
|the oscillation in the market won’t give heart ache to the investor as the investment is not done lump sum. The investor spreads out his risk | |
|through the pathway of SIP. | |
|The quantity to be invested to get started is very less and therefore it is in everybody’s reach. Some persist the SIP must be done every month. | |
|Others give you the alternative of investing once in three months or once in six months. Similarly investor can keep away from timing the market | |
|by withdrawing constant amounts periodically (Systematic Withdrawal Plan), or systematically transferring investment between diverse schemes | |
|(Systematic Transfer Plan). | |
|Would you like to have access to the SIP calculators which are designed to help investors in analyzing different scenarios for automatic | |
|investment plan, which include: Your sip need, your sip amount, sip return | |
|You can put different information/amount for generating different results and know how secured your financial future would be if you invested | |
|1000 every month opening this month, for the next 20years and you are expecting a return of 20%(I have taken the minimum consideration, some | |
|funds give 35% to 50% return for such medium/long term investments) and the total amount that you will be receiving at the end 20 years will be: | |
|2476194.Your overall investment for 20 years was 240000. | |
|SIP OR LUMPSUM Investment In The Current Market Conditions | |
|In a positive market scenario, a lump sum investment would earn remarkably as the investor would have purchased a huge number of units and so | |
|with the increase in NAV, it will fetch higher profits. As SIPs would be a scattered investment, so the returns would be considerably lower. | |
|Looking at the present market condition, it doesn’t seem a promising prospect to opt for a lump sum investment. In a volatile market, an SIP | |
|definitely wins hands down, as an investor would have a chance to purchase more number of units of a fund when the value is less. | |
|If a person goes for SIP he is benefited from a phenomenon known as "rupee cost averaging", no matter how markets are performing: | |
|If the market goes up, the units you already own will increase in value. | |
|If the market goes down, your next payment will buy more units. Thereby, a lump sum investment will get fixed units of the fund while an SIP will| |
|get various units of the fund on a monthly basis according to the current Net Asset Value. A lump sum investment would see returns in extremes, | |
|which is either a high or a low. On the other side, with an SIP, investor will achieve a steady return. Even when the market is dismal, an | |
|investor earns by the units bought. This can be seen in the table given below; a lump sum investor will get 3000 units for Rs60000 whereas by | |
|opting for SIP, investor will receive 3110 units for the same amount invested. | |
| | |
|LUMP SUM INVESTOR | |
|REGULAR SAVER | |
| | |
|Month | |
|Unit Price (Rs.) | |
|Amount invested (Rs.) | |
|Units bought | |
|Amount invested (Rs.) | |
|Units bought* | |
| | |
|1 | |
|20 | |
|60,000 | |
|3,000 | |
|10,000 | |
|500 | |
| | |
|2 | |
|18 | |
| | |
| | |
|10,000 | |
|556 | |
| | |
|3 | |
|14 | |
| | |
| | |
|10,000 | |
|714 | |
| | |
|4 | |
|22 | |
| | |
| | |
|10,000 | |
|455 | |
| | |
|5 | |
|26 | |
| | |
| | |
|10,000 | |
|385 | |
| | |
|6 | |
|20 | |
| | |
| | |
|10,000 | |
|500 | |
| | |
|Total invested | |
|0 | |
|60,000 | |
|60,000 | |
| | |
|Average price paid | |
|0 | |
|20 | |
|19 | |
| | |
|Total units bought | |
|0 | |
|3,000 | |
|3,110 | |
| | |
|Value of investment after six months | |
|0 | |
|60,000 | |
|62,200 | |
| | |
| | |
| | |
| | |
| |
| |
| |
|Recent Developments in Mutual Fund |
| | |
| |
|Gold Exchange Traded Funds | |
|The modern international method of investing in gold is via gold mutual funds. India has now up in this area. | |
|In his Union Budget for 2005-06, Finance Minister P. Chidambaram had proposed that SEBI should permit mutual funds to introduce Gold Exchange | |
|Traded Funds (Gold ETFs) with gold as the underlying asset. According to the Budget proposals, the scheme would enable households to buy and | |
|sell gold in units for as little as Rs. 100 and such units could be traded in the same manner as units of mutual funds. | |
|In Gold Exchange Traded Fund (Gold ETF), the underlying asset is exclusively gold bullion, and not a basket of stocks as is the case of equity| |
|ETFs. Gold ETFs are shares or units of gold that are owned by investors and are fully backed by gold bullion bars held by a custodian. Like | |
|other ETFs, they are traded on a stock exchange. | |
|Gold ETFs allow investors to buy gold in small increments. In the global market, one unit represents one-tenth of an ounce fine gold (1 | |
|oz-28.35 grams). If an investor in the fund holds 100 units, the fund must have physical gold worth 10 ozs. The value of the unit will move in| |
|accordance with the price of gold. Just like mutual funds, the value per unit will be the total value of the gold held, divided by the number | |
|of units, minus the expenses of the fund. Gold ETFs, like any share, can be traded and bought by the investors through their stockbrokers. | |
|They can be used for speculating in the short-term for betting on the price of gold, or it can be used for long-term investing. Just like the | |
|ETFs, Gold ETFs can be open-ended funds or closed ended funds. | |
| | |
|Gold Exchange Traded Funds(ETFs) In India | |
|The first proposal of a gold exchange traded fund was initiated by an Indian company called Benchmark Asset Management; a proposal was | |
|launched with the SEBI (Securities Exchange Board of India) in 2002. This proposal was not approved at that time. | |
|The Australia Stock Exchange was the first to launch a gold exchange traded fund in 2003 by Gold Bullion Securities under the symbol ‘GOLD’. | |
|This fund was fully backed, insured and deposited by gold bullion. | |
| | |
|Benefits Of Trading In Gold ETFs | |
|In ETF’s investors have the opportunity of buying as less as 1 unit on the exchange. Investors don’t have to pay entry or exit load and | |
|expenses on brokerage are less. Here gold ETF’s score over mutual funds as in case of later investor has to bear defined load structure, entry| |
|and exit loads and other expenses. | |
|If you take a look at gold prices in the past few months, they have been moving in just one direction that is upwards. From Rs 10, 650 for 10 | |
|grams last January 2008, the price has moved to more than Rs15,000 today. Gold price is at a seven month high and is up by 10 per cent since | |
|January this year. The World Gold Council reports that global demand was up by 4 per cent in 2008. Gold and stock markets have negative | |
|correlation, which can be witnessed in the current scenario where volatility in stock markets has led to sky rocketing gold prices. In 2009 | |
|itself Gold ETFs have outperformed gold mutual funds. ETFs have given 29 per cent returns in 2008 and over 8 per cent till now in 2009. In | |
|this current financial turmoil investing in shining yellow metal turns out to be the safest bet. | |
|Why should an investor invest in Gold ETF? | |
|There is nothing to worry on adulteration | |
|Gold provides diversification to the portfolio | |
|Gold is considered as a Global Asset Class | |
|Gold is used as a Hedge against Inflation | |
|Gold is considered to be less volatile compared to equities | |
|Held in Electronic Form | |
|Store of value | |
|Extremely Liquid | |
| | |
| | |
| | |
| | |
|Advantages Of Investing In Gold ETFs | |
|Potentially cheaper to have price exposure to gold price as compared to other available avenues | |
|Quick and convenient dealing through demat account | |
|No storage and security issue for investors | |
|Transparent pricing | |
|Taxation of Mutual Fund | |
|Can be traded on stock exchange like buying / selling a stock | |
|Ideal for retail investor as minimum lot size to trade is one unit on secondary market | |
|NAV of a unit will track price of approximately ½ or 1 gram of gold. | |
SWOT Analysis of Mutual Funds
STRENGTHS
Large number of potential customers as base.
Government support by way of tax concessions for MF investors.
Sophisticated capital market.
Volatility of bank interest rate.
Vital source of capital formation.
Better scope for accessing market information.
Offer liquidity to the investors at any time.
Offer variety of products such as equity, debt and balanced schemes to the investors to suit their risk appetite and time horizons.
The size of the market is very large.
WEAKNESSES
Poor participation of retail investors.
There is a very high degree of discomfort along with uncertainty.
Lack of focus.
Leadership vacuum.
Under performance.
Inability to scale up.
Unclear value proposition.
Overemphasis on funds under management.
Strategic vacuum.
Poor service conditions.
Distribution network is confined only to metro cities.
Increasing NPAs in the portfolio.
OPPORTUNITIES
Huge untapped market in semi-urban and rural areas.
High level of savings habit among the people.
Liberalized business environment.
Increasing number investors have begun turning toward money market instruments of mutual funds.
Using on-line mode of trading system.
Linkage of ATMs for cash withdrawal is ongoing.
Consolidation in the industry is in progress.
Investment opportunities abound in the international market.
Failures of non-bank financial company operations.
THREATS
Increasing competition among the players.
High level of volatility in the stock market.
NAVs are highly sensitive to internal and market factors.
Possibility of more stringent regulations by SEBI, RBI, AMFI etc., in future.
Future Scenario of the Mutual Fund Industry
In the four decades of its existence in India, the mutual fund industry has gone through several structural changes. The mutual fund industry in India has been roll as the assets under management continues to see a strong spurt in growth. Apart from this, the industry has also seen a spurt in the number of schemes catering to varied needs of investors. A booming economy and a conductive regulatory environment and other factors have added to the growth of an industry. Given the huge opportunity in the market, which is higher if one considers the untapped and growing income levels in the country, the industry’s future looks bright.
A mutual fund is an alternative investment avenue for investors, especially in a scenario where the interest rates are falling. The only thing is that an investor should bear in mind that investment in mutual funds is not risk-free, unlike a bank deposit. It carries a certain amount of risk and one has to accordingly weigh the risks and returns, and the investment objectives.
Though there are around 30 players operating in the industry, the competition is limited. There is nothing like competition between the public and private sector, as all players operate in the same environment. Mutual Funds players formulate their strategies to have a share of the growing market. They develop their products for both the mass and niche markets, considering clients’ financial goals, risk-taking ability and time duration. They meticulously segment and target their customers and position their products according to their needs. There is a remarkable change in the promotional activities taken up by mutual fund players.
AMCs now opt for the services of large distributors to sell their products by leveraging their value chain, which comprises of a broker, sub-brokers and agents. The AMCs also use banks and Non-Banking Financial AMCs as distribution channels to leverage their reach and huge client base. Mutual fund players also make use the Internet to distribute products because of the cost advantages and increased communications.
Even as the number of funds operating in India is high, the penetration of the industry is significantly low. So there is a huge market available in the country for channelizing the savings of the people into mutual funds. Currently, mutual funds are concentrating on the urban market and it is incumbent on them to take proper steps to study the rural population and its investing capability before penetrating the rural market.
ANALYSIS STUDY
This analysis study is based on the comparative study and the performance of five equity funds, five income funds, five balanced funds, five MIP funds with that of market (Sensex), CCIL tri index, government security yield, GDP(growth rate) and inflation.
The data are taken from the year 2006 to 2011. The NAV of equity funds are taken from Jan 2006 and it’s taken on quarterly basis. Which means Jan ’06, Apr’06, Jul ’06, Oct ’06….and so followed till June 2011. These values are then arranged and further quarterly return, half yearly return and yearly return is calculated, and finally average return is calculated, and then ranking is done on the basis of Sensex average quarterly return, quarterly return and yearly return.
ASSUMPTIONS:
• This analysis is based the data taken from the year 2006 to June 2011.
• The analysis is based on a quarterly basis and not on a daily basis and finally average quarterly, half- yearly and yearly returns are calculated.
• The sensex values, the sensex (P/E) ratios are obtained from BSE website.
• The bond index value is obtained from the CCIL bond index website
• The bond index values are taken from CCIL bond tri index
• The inflation datas are obtained from economic India survey website
• All the datas are taken for the first day of the month, and if by chance the first day of the month is Sunday or holiday then the day closest to holiday the value is taken for the working day.
The following data are the rankings:
|RANKING ON THE BASIS OF AVERAGE RETURN |
|EUITY FUNDS |QUARTERLY RETURN |HALF-YEARLY RETURN |YEARLY RETURN |RANKS |
|MAGNUM CONTRA |7.29% |15.10% |42.98% |1 |
|DSBR TOP 100 |6.08% |12.75% |-46.66% |5 |
|RELIANCE GROWTH |-0.18% |14.06% |39.94% |4 |
|HDFC EQUITY |6.28% |12.85% |35.97% |2 |
|BIRLA FRONTLINE |6.27% |13.35% |37.84% |3 |
|BSE SENSEX |4.44% |9.70% |28.18% | |
[pic]
Graph: Ranking on the basis of Average return.
ANALYSIS:
SBI Magnum Contra ranks number one among the five equity funds. The average quarterly return, average half yearly return and average yearly return when compared with that of sensex average return is the highest when compared with that of other four equity funds. This means if market is giving return of 4.44% then Magnum Contra will yield 7.29% with 2.85%(7.29%-4.44%) return on quarterly basis…. So the overall comparison is highest in case of SBI Contra.
|INCOME FUNDS |QUARTERLY RETURN |HALF -YEARLY RETURN |YEARLY RETURN |RANKS |
|BIRLA INCOME PLUS |2.23% |4.51% |10.08% |2 |
|ICICI INCOME |2.36% |4.82% |10.45% |1 |
|MAGNUM INCOME |1.04% |2.07% |3.96% |4 |
|LIC BOND |1.89% |3.82% |7.96% |3 |
|BARODA INCOME |1.01% |2.03% |3.82% |5 |
|CCIL TRI INDEX |1.55% |3.18% |6.36% | |
RANKING ON THE BASIS OF AVERAGE RETURN
[pic]
Graph: Ranking on the basis of average return of Income funds.
Analysis:
ICICI income fund ranks number one when compared with other income funds. The returns are compared with that of CCIL bond Index. For this CCIL TRI INDEX values are taken and its average quarterly, half yearly and yearly returns are calculated. The returns of the income funds when compared with that of bond index data then ICICI Income ranks number one and Baroda Income ranks the least. Although ICICI income fund and Birla Income plus fund gives a very negligible difference result but still ICICI ranks number one among the Income funds.
RANKING ON THE BASIS OF AVERAGE RETURN
|BALANCED |QUARTERLY RETURN |HALF-YEARLY RETURN |YEARLY RETURN |RANKS |
|MAGNUM BALANCED |4.32% |9.15% |25.60% |5 |
|HDFC PRUDENCE |5.66% |11.56% |26.07% |1 |
|HDFC BALANCE |4.58% |9.30% |22.80% |4 |
|DSPBR |4.99% |10.31% |27.90% |2 |
|RELIANCE |4.81% |10.07% |25.33% |3 |
|BSE SENSEX |4.44% |9.70% |28.18% | |
|CCIL INDEX |1.55% |3.18% |6.36% | |
[pic]
Graph: Ranking on the basis of average return of balanced funds.
Analysis:
Now this is the case of balanced funds, where the fund is balance between debt and equity. The distribution of debt is 65% and that of equity is 35%. Hence the fund is known as balance fund. Hence to compare the performance of the fund we need to compare the average returns of the fund with both CCIL bond index as well as BSE Sensex return.
• HDFC prudence ranks number one among the performance of the balanced funds. Although there are two funds from HDFC fund house which are HDFC prudence and HDFC balance but both of their performance differs…although the values does not vary so much but this values when compared in the long run and compared to other balance funds and Sensex and CCIL Bond tri index then I find HDFC prudence ranks number one and HDFC balance ranks number four which sounds a great diversification in the performance of balanced fund in HDFC mutual fund house.
• Now HDFC prudence yearly return is less than that of DSPBR but still I rank HDFC prudence higher then DSPBR as I find DSPBR quarterly and half yearly average return yield is less as compared to that of HDFC prudence and hence to look at the overall performance of the fund then HDFC prudence is ranked as number one among the performance of various balanced funds.
| |QUARTERLY RETURN |HALF-YEARLY RETURN |YEARLY RETURN |RANKS |
| | | | | |
|MIP | | | | |
|RELIANCE |3.07% |6.23% |13.57% |1 |
|SBI MIP |1.31% |2.61% |5.35% |5 |
|HDFC MIP STP |1.72% |3.49% |7.44% |4 |
|TATA MIP PLUS |1.80% |3.65% |7.71% |3 |
|ICICI MIP |2.12% |4.03% |9.16% |2 |
| BSE SENSEX |4.44% |9.70% |28.18% | |
| CCIL TRI INDEX |1.55% |3.18% |6.36% | |
Table: Ranking on the basis of average return of MIP funds
[pic]
Graph: Ranking on the basis of average return of MIP funds.
Analysis:
MIP funds stands for monthly income plan funds. In case of MIP funds it’s also a mixture of both debt as well as equity. But the proportion of debt is much more as compared to that of equity. Here debt is around 85% and equity is around 15%.Hence it can be easily said that MIP funds are risk free funds when compared to equity funds. Here also to compare the performance of various MIP funds we need to compare the returns of the following funds to that of BSE Sensex as well as CCIL tri index.
• RELIANCE MIP ranks number one among the performance of the MIP funds. Although no fund has crossed the market return value but mostly all the index values are crossed over.
• As percentage of equity is very less in case of MIP funds hence the returns generated by the MIP funds is very less when compared to the market Sensex return.
• The returns generated by RELIANCE MIP is more as compared to other MIP funds with those of market BSE Sensex and that of CCIL bond tri index.
• SBI MIP ranks the least when compared with other MIP funds and market Sensex and CCIL bond tri index.
Interpretations of BSE sensex and that of CCIL bond tri index
This comparison is taken from the year 2006 onwards till June 2011. This is done on a quarterly basis. However there is a huge difference in the values of BSE sensex and that of CCIL tri index.
• The sensex value gives us the market equity values and the CCIL bond tri index gives the debt values.
• There is a huge difference between the market BSE sensex values with that of CCIL bond tri index values.
• Mostly all the values of BSE sensex are about 10-15% higher than those of CCIL bond tri index values.
• The market sensex reaches its highest value on 1st Jan ’08 which is “20286.99” and the most interesting thing is that the least market sensex value is on 1st Jan ’09 that is just after one year with value “9647.31”.
• This means the alpha between this ranges is “10639.68” which is a huge value, and hence justifies the high volatile nature of the market
• For the year 2009 the market return shows an increasing trend and rest all the years it shows a fluctuating trend.
• The CCIL tri index values are also showing a fluctuating trend.
• The CCIL tri index is also highest for the day 1st Jan ’09 and is least for the date 1st July ’06.
• The CCIL tri index value is showing an increasing trend for the year 2010.
• On 1st Jan ’09 we have both the highest CCIL tri index as well as the BSE sensex. Hence this is a nice day for any investor who wants to withdraw money which he has purchased to invest in any funds.
Findings
❖ SBI Magnum Contra ranks number one among the five equity funds. The average quarterly return, average half yearly return and average yearly return when compared with that of sensex average return is the highest when compared with that of four other equity funds. So the overall comparison is highest in case of SBI Magnum Contra.
❖ ICICI income fund ranks number one when compared with other income funds. The returns are compared with that of CCIL Bond Index. For this CCIL TRI INDEX values are taken and its average quarterly, half yearly and yearly returns are calculated. The returns of the income fund when compared with that of bond index data then ICICI income ranks number one.
❖ HDFC prudence ranks number one among the performance of the balanced funds. Although there are two funds from HDFC fund house which are HDFC prudence and HDFC balance but both of their performance differs…although the values does not vary so much but this values when compared in the long run and compared to other balance funds and Sensex and CCIL Bond tri index then I find HDFC prudence ranks number one and HDFC balance ranks number four which sounds a great diversification in the performance of balanced fund in HDFC mutual fund house.
Now HDFC prudence yearly return is less than that of DSPBR but still I rank HDFC prudence higher then DSPBR as I find DSPBR quarterly and half yearly average return yield is less as compared to that of HDFC prudence and hence to look at the overall performance of the fund then HDFC prudence is ranked as number one among the performance of various balanced funds.
❖ RELIANCE MIP ranks number one among the performance of the MIP funds. Although no fund has crossed the market return value but mostly all the index values are crossed over. As percentage of equity is very less in case of MIP funds hence the returns generated by the MIP funds is very less when compared to the market Sensex return. The returns generated by RELIANCE MIP is more as compared to other MIP funds with those of market BSE Sensex and that of CCIL bond tri index. SBI MIP ranks the least when compared with other MIP funds and market Sensex and CCIL bond tri index.
Summary
The journey of mutual funds began, in 1822. Four decades later, in 1868, the mutual fund caravan reached England with the setting up of the Foreign and Colonial Government Trust. In the United States, the first mutual fund was launched in Boston in 1924. The take off of mutual funds was however not spectacular. Two factors contributed to their slow growth. One, a number of close-ended mutual funds bombed in the market. And two, the great crash of 1929. These factors killed public interest in the funds. It was only in 1940 that a formal attempt at regulating the functioning of mutual fund was made. But the publics’ enthusiasm was soon snuffed out as the market collapsed in 1969-70. The number of mutual funds grew during 1940-1990. Since the beginning of 1991, more than half a trillion dollars have been invested in units and share of mutual funds. According to Wall Street estimates, by 2000 AD the US funds alone would have crossed the 4,000 billion dollar barrier. The sharp growth in the assets reflects the underlying strong demand, implying that mutual funds are a superior vehicle for meeting genuine investment needs. The mutual fund industry serves about 50 million investors. Japan tops in the member of mutual funds with around 5400 million investors. The UK has around 1400 mutual funds, while France has 1000 odd. Though the concept of mutual fund was first introduced in India as early as 1964 with the setting up of the Unit Trust of India, it became popular in a big way only from 1987 onwards. As financial intermediaries, mutual funds mobilize savings from the masses and channelize them to productive investment avenues through the capital market. They are particularly very useful to small investors who do not have access to stock market. With the liberalization of economy gaining momentum and the opening up of the financial sector, the monopoly of public sector mutual funds has come to an end. Many private sector mutual funds have appeared in the scene. Kothari Industries promoted the Kothari Pioneer Mutual fund in November 1993 followed by the foreign mutual funds led by Morgan Stanley entry of private sector mutual funds has imparted competitive efficiency to the industry, helped investors to choose from funds with different maturity periods and offered different risk-return trade-offs
Indian investors are attracted to put their money in mutual funds for two reasons. First, they offer a better return than fixed deposits. Second, the funds are being run by professionals with requisite infrastructure to monitor company workings, their outlook of stock markets etc. The sophisticated information cells, coupled with professionalism and prompt customer services have become a part and parcel of the growth of mutual funds. Another feature of mutual funds is that most of them are already into leasing and hire purchase business. Mutual funds are also organized by reputed industrial houses like the Birla’s and Tata’s. Some of the mutual funds provide assured returns.
All these factors are responsible for the great popularity of mutual funds. There are also a good number of mutual funds operating various schemes tailored to meet the needs of their target customers. Basically, they can be grouped under open-ended mutual funds and close-ended mutual funds. In addition to this, different mutual funds are designed to meet the objectives of different types of savers such as bond funds, income funds, money market funds; growth oriented mutual funds, balanced funds, industry funds and tax relief funds, index funds and off-shore funds etc. However open-ended funds are still more popular in India due to the distinctive feature of regular sale and purchase of securities.
At present, the mutual funds industry over the years has grown and there are 36 mutual funds registered with Securities & Exchange Board of India. Despite the falling markets, mutual funds have been able to generate good returns for their investors. Mutual funds have undergone considerable quantitative as well as qualitative changes. At present, the SEBI has permitted Indian mutual funds to invest in Global Depository Receipts/American Depository Receipts of Indian companies. Further, the 1999-2000 budgets have showered liberal concessions on the mutual fund industry. The government’s decision to exempt them from income tax and the dividend being paid mutual funds in the hands of the investors is welcomed by the investing public. Despite all the advantages linked with mutual funds, people still prefer to invest their money independently. This is largely due to lack of investors’ confidence. Further, mutual funds have increased significantly in number during the short period and each fund has come out with multiple schemes, which has increased competition. As a result, they lose their stabilizing factor in the market. Investors have the right to know and asset management companies have an obligation to inform where and how their money has been deployed. But investors are deprived of obtaining this information. So far mutual funds have not been able to introduce any scheme that is suitable to the needs of agricultural farmers, small entrepreneurs and merchants to tap rural savings. Further, mutual funds are not yet a developed product structural to tap target customers. There is a lack of product conceptualization and innovation. The weak distribution and marketing channels are another problem which the mutual fund industry faces today. Again, the merchant banking industry is not sufficiently matured, which hampers the development of the mutual fund industry. The interesting thing is that mutual funds are the most misunderstood financial products in India. Mutual fund industries are not making efforts towards investor awareness programmes, which are the need of the day.
Suggestions
• According to the analysis study among the equity funds SBI Magnum Contra equity funds performance is the best. SBI Magnum Contra ranks number one among the five equity funds. The average quarterly return, average half yearly return and average yearly return when compared with that of sensex average return is the highest when compared with that of four other equity funds.
• In case of income funds ICICI income fund performs the best. ICICI income fund ranks number one when compared with other income funds. The returns are compared with that of CCIL bond Index. For this CCIL TRI INDEX values are taken and its average quarterly, half yearly and yearly returns are calculated. The returns of the income funds when compared with that of bond index data then ICICI Income ranks number one.
• In case of balanced funds HDFC prudence performs the best. HDFC prudence ranks number one among the performance of the balanced funds. Although there are two funds from HDFC fund house which are HDFC prudence and HDFC balance but both of their performance differs…although the values does not vary so much but this values when compared in the long run and compared to other balance funds and Sensex and CCIL Bond tri index then I find HDFC prudence ranks number one
• In case of MIP funds RELIANCE MIP performs the best. RELIANCE MIP ranks number one among the performance of the MIP funds. Although no fund has crossed the market return value but mostly all the index values are crossed over. As percentage of equity is very less in case of MIP funds hence the returns generated by the MIP funds is very less when compared to the market Sensex return.
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