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Who is Sponsor in a Mutual Fund?

• Sponsor: A Sponsor establishes the Mutual Fund, along with any individual/body corporate. The Sponsor''s liability is restricted to his contribution. Sponsor must contribute a minimum 40% to the net worth of AMC.

• Sponsor is a person who has a continuing interest in the Mutual Fund and whose credibility is significantly responsible for mobilizing the savings of the public for the Mutual Fund

• Example :UTI Mutual Fund is promoted by the four of the largest Public Sector Financial Institutions as sponsors, viz., State Bank of India, Life Insurance Corporation of India, Bank of Baroda and Punjab National Bank with each of them presently holding a 18.5% stake in the paid up capital of UTI AMC.

What are the qualifications required to be Sponsor of a Mutual Fund?

• The sponsor should have a sound track record and a general reputation for fairness and integrity in all his business transactions.

What role does a Sponsor play in a Mutual Fund?

• Files an application with SEBI for grant of registration.

• Has to incorporate and capitalize the Asset Management Company and the Trustee Company.

• Nominates the Directors on the board of the AMC and also appoints Trustees or Directors on the Trustee Company.

• Establishes the Mutual Fund after obtaining registration from SEBI.

• Performs all the function of a promoter.

What are the obligations of a Sponsor towards a Mutual Fund?

• Only one obligation is imposed upon the Sponsor. When there is a shortfall in the net worth of the AMC or when there is a shortfall in the returns assured on an assured return scheme, the Sponsor - if he is the guarantor - is required to meet such shortfall.

Who are the trustees of a Mutual Fund?• The word ''Trustees'‘ refers to the Board of Trustees, who hold the property of the Mutual

Fund, for the benefit of the unit holders.

What are the pre-requisites /conditions for the Trustee/Board of Trustees of a Mutual Fund?

• A Trustee should be a person of ability, integrity and standing. A Trustee should not have been found guilty of moral turpitude or been convicted for any economic offence or violation of any securities law.

• A person who is appointed as a Trustee of a Mutual Fund cannot be appointed as a trustee of any other Mutual Fund - unless such a person is an independent Trustee referred to in sub-regulation (5) of SEBI or he has obtained the approval of the Mutual Fund on whose Board he is a Trustee.

• Two-thirds of the Trustees shall be independent persons and shall not be associated with the Sponsors in any manner whatsoever.

• If a company is appointed as a Trustee, its Directors can act as Trustees of any other Trust provided that the objects of the different Trusts are not conflicting.

What are the obligations of Trustees? The Trustees are obliged to:• Act in the interests of the unit holders• Take reasonable care to ensure that the funds under the various schemes are managed in

accordance with the Trust Deed and the regulations• Supervise the collection of any income due to be paid to the scheme• Supervise the claiming of any repayment of taxes• Disclose to unit holders any information that may have an adverse bearing on their investments.• Deal with the Trust property as carefully as a man of ordinary prudence would deal with such

property if it were his own.

Who is the custodian of a Mutual Fund?

The custodian is a person holding a certificate to carry on the business of a custodian of securities, under the regulations of SEBI. A custodian is appointed to carry out the custodial services for the schemes managed by the fund. The Board has to be intimated within 15 days of the appointment of the Custodian.

Custodian means a person who has been granted a certificate of registration to carry on the business of custodian of securities under the Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996. The responsibilities of a sponsor includes :

(i) Provide post-trading and custodial services to the Mutual Fund;

(ii) Keep securities and other instruments belonging to the Scheme in safe custody

(iii) Ensure smooth inflow/outflow of securities and such other instruments as and when necessary, in the best interests of the unit holders;

(iv) Ensure that the benefits due to the holdings of the Mutual Fund are recovered.

(v) Be responsible for loss of or damage to the securities due to negligence on its part or on the part of its approved agents.

What are the powers of Trustees?• Trustee have the power to obtain from the AMC any information about the

operations of the various schemes, at such intervals and in such a manner as is required to ensure that the AMC is complying with the provisions of the Trust Deed as well as the Regulations.

• The Indian Trust Act also vests general authority on Trustees to take any action that is reasonable and proper for protecting the property of the Trust.

• Trustees have power to dismiss the AMC, under certain events of default, with the approval of SEBI.

REGULATIONS:

Regulations ensure that schemes do not invest beyond a certain percent of their NAVs in a single security. Some of the guidelines regarding these are given below :-

No scheme can invest more than 15% of its NAV in rated debt instruments of a single issuer. This limit may be increased to 20% with prior approval of Trustees. This restriction is not applicable to Government securities.

No scheme can invest more than 10% of its NAV in unrated paper of a single issuer and total investment by any scheme in unrated papers cannot exceed 25% of NAV.No fund, under all its schemes can hold more than 10% of company’s paid up capital

No scheme can invest more than 10% of its NAV in a single company.If a scheme invests in another scheme of the same or different AMC, no fees will be charged. Aggregate inter scheme investment cannot exceed 5% of net asset value of the mutual fund

CONTD………

• No scheme can invest in unlisted securities of its sponsor or its group entities.

• Schemes can invest in unlisted securities issued by entities other than the sponsor or sponsor’s group. Open ended schemes can invest maximum of 5% of net assets in such securities whereas close ended schemes can invest upto 10% of net assets in such securities

• Schemes cannot invest in listed entities belonging to the sponsor group beyond 25% of its net assets

SEBI Mutual Fund Regulations:

• The regulations governing the functioning of mutual funds in India were introduced by SEBI in Dec 1996. The objectives of these regulations was to bring in existence the regulatory norms for the formation, operation and management of mutual funds in India. The regulations also laid down the broad guidelines on investment valuation, investment restriction, advertising code and code of conduct for mutual funds and AMCs.

Registration of mutual funds:• Every mutual fund shall be registered with SEBI through

an application to be made by the sponsor in a prescribed format accompanied by an application fee of Rs.25000.

• Every mutual fund shall pay Rs.25lakhs towards registration fee and Rs:2.5lakhs per annum as service fees.

• Registration shall be granted by the board on fulfillment of conditions such as sponsor’s, sound track record of 5yrs integrity, net worth etc.

Regulations for the trust:• Mutual fund shall be constituted in the form of a trust under the provisions of

Indian Registrations Act and provisions laid down by SEBI.

• A trustee should be person of integrity, ability, and should not have been found guilty or being convicted of any economic offence or violation of securities law.

• At least 50% of the trustees shall be independent trustees.

• The trustees and the AMC with SEBI’s prior approval shall enter into an investment management agreement.

• The trustees shall ensure the AMC has the necessary infrastructure and personnel.

• The trustees shall ensure that AMC is monitoring security transaction with brokers.

• The trustees shall ensure that the EMC has been managing the scheme independently.

• The trustees should fulfill all its duties in order to protect the interest of the investors.

Regulations for AMC:• It should have a sound track record, reputation and fairness in

transaction.• The sponsor or trustee shall appoint an AMC with SEBI’s approval.• The appointment of the AMC can be terminated by majority of

trustees or by 75% of unit holders.• The directors of AMCs should have adequate professional

experience. • At least 50% of the director’s of the AMC should not be associated

with the sponsors or it’s subsidiaries or the trustees.• The chairman of the AMC should not be trustee of any other mutual

fund.• The AMC shall have a minimum net worth of Rs.10 crores.• The AMC shall not act as an AMC for any other mutual funds.

Regulations for custodians:

• The mutual fund shall appoint a custodian to carry out the custodian services for the schemes of the fund.

• The agreement with the custodian shall be entered into with prior approval of trustees.

GUIDELINES FOR A NEW FUND OFFER:

• All the schemes to be launched by the AMC should be approved by the trustees and are to be filed with SEBI.

• The offer document should contain adequate disclosures to enable the investors to make informed decisions.

• Advertisement of schemes should be in conformance with SEBI’s code.

• The listing of closed ended schemes is mandatory and it should be listed on a recognized stock exchange within 6 months of its subscriptions.

• Units of close ended schemes can be opened for redemption at a fixed interval.

• The AMC shall specify in the offer document the minimum subscription to be raised under the scheme.

• The AMC may repurchase, reissue the units of close ended schemes.

• The units of close ended schemes can be converted into open ended schemes.

• Any scheme on mutual fund shall not be opened for subscription after 45 days.

• The mutual fund and AMC shall be liable to refund the application money to the applicants if minimum subscription is not received.

SEBI Advertisement Code / Guidelines:• Any form of communication issued by or on behalf of the asset management

company / Mutual Fund should adhere to the Advertisement code prescribed under the SEBI (Mutual Funds) Regulations, 1996 and other applicable Guidelines / Circulars.

• As per Securities and Exchange Board of India (Mutual Funds) Regulations, 1996

• Regulation 2(b) :

• Definition - "advertisement" shall include all forms of communication issued by or on behalf of the asset management company / Mutual Fund that may influence investment decision of any investor / prospective investors.

• Regulation 30:

• Advertisement materials - Advertisements shall be in conformity with the Advertisement Code as specified in the Sixth Schedule.

Sixth Schedule of SEBI (Mutual Funds) Regulations, 1996, Advertisement Code:

• Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise.• Advertisements shall not contain statements which are false, misleading, biased or deceptive,

based on assumption/projections and shall not contain any testimonials or any ranking based on any criteria.

• Advertisements shall not be so designed as likely to be misunderstood or likely to disguise the significance of any statement. Advertisements shall not contain statements which directly or by implication or by omission may mislead the investor.

• Advertisements shall not carry any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to the nature and risk and return profile of the product.

• No celebrities shall form part of the advertisement.• Advertisements shall not be so framed as to exploit the lack of experience or knowledge of

the investors. Extensive use of technical or legal terminology or complex language and the inclusion of excessive details which may detract the investors should be avoided.

• Advertisements shall contain information which is timely and consistent with the disclosures made in the Scheme Information Document, Statement of Additional Information and the Key Information Memorandum.

• Disclosures in the offer document : (1) The offer document shall contain disclosures which are adequate in order to

enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor.

(2) The Board may in the interest of investors require the asset management company to carry out such modifications in the offer document as it deems fit.

(3) In case no modifications are suggested by the Board in the offer document within 21 working days from the date of filing, the asset management company may issue the offer document.

(4) No one shall issue any form of application for units of a mutual fund unless the form is accompanied by the memorandum containing such information as may be specified by the Board.

(5) The offer document shall contain the disclosure regarding the prior in principle approval obtained from the recognized stock exchange(s), where units are proposed to be listed in accordance with these regulations.

SEBI(MUTUAL FUND) AMENDMENT REG., SEBI(MUTUAL FUND) AMENDMENT REG., 20032003

ASSETS MANAGEMENT COMPANY:• Trustees appoint the Asset Management Company (AMC), to

manage investor’s money. The AMC in return charges a fee for the services provided and this fee is borne by the investors as it is deducted from the money collected from them.

• The AMC’s Board of Directors must have at least 50% of Directors who are independent directors. The AMC has to be approved by SEBI. The AMC functions under the supervision of it’s Board of Directors, and also under the direction of the Trustees and SEBI.

• It is the AMC, which in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities. In order to do this the AMC needs to follow all rules and regulations prescribed by SEBI and as per the Investment Management Agreement it signs with the Trustees.

ROLE OF AMC:• The role of the AMC is to manage investor’s money on a day to

day basis. Thus it is imperative that people with the highest integrity are involved with this activity.

• The AMC cannot deal with a single broker beyond a certain limit of transactions.

• The AMC cannot act as a Trustee for some other Mutual Fund.

• The responsibility of preparing the OD lies with the AMC.

• Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC.

• Finally, it is the AMC which is responsible for the acts of its employees and service providers.

TRUSTEE:• Sponsor creates a public trust and appoints trustees.

Trustees are the people authorized to act on behalf of the Trust. They hold the property of mutual fund.

• Once the Trust is created, it is registered with SEBI after which this trust is known as the mutual fund. The Trustees role is not to manage the money but their job is only to see, whether the money is being managed as per stated objectives. Trustees may be seen as the internal regulators of a mutual fund.

• A minimum of 75% of the trustees must be independent of the sponsor to ensure fair dealings.

• Trustees appoint the Asset Management Company (AMC), to manage investor’s money.

ROLE OF TRUSTEE:

(1) The trustees and the asset management company shall with the prior approval of the Board enter into an investment management agreement.

(2) The investment management agreement shall contain such clauses as are mentioned in the Fourth Schedule and such other clauses as are necessary for the purpose of making investments.

(3) The trustees shall have a right to obtain from the asset management company such information as is considered necessary by the trustees.

(5) The trustees shall ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker.

(6) The trustees shall ensure that the asset management company has not given any undue or unfair advantage to any associates or dealt with any of the associates of the asset management company in any manner detrimental to interest of the unit holders.

(7) The trustees shall ensure that the transactions entered into by the asset management company are in accordance with these regulations and the scheme.

(8) The trustees shall ensure that the asset management company has been managing the mutual fund schemes independently of other activities and have taken adequate steps to ensure that the interest of investors of one scheme are not being compromised with those of any other scheme or of other activities of the asset management company.

(9) The trustees shall ensure that all the activities of the asset management company are in accordance with the provisions of these regulations.

(10) Where the trustees have reason to believe that the conduct of business of the mutual fund is not in accordance with these regulations and the scheme they shall forthwith take such remedial steps as are necessary by them and shall immediately inform the Board of the violation and the action taken by them.

ROLE OF REGISTRAR AND TRANSFER AGENT:

• The registrar and transfer agents are appointed by the AMC. AMC pay compensation to these agents for their services. They carry out the following functions

• Receiving and processing the application forms of investors

• Issuing unit certificates• Sending refund orders• Giving approval for all transfers of units and maintaining

records• Repurchasing the units and redemption of units• Issuing dividend or income warrants

Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. An ETF is a basket of stocks that reflects the composition of an Index, like CNX Nifty. The ETFs trading value is based on the net asset value of the underlying stocks that it represents.

In recent times, Exchange-traded funds (ETFs) have gained a wider acceptance as financial instruments whose unique advantages over mutual funds have caught the eye of many an investor. These instruments are beneficial for Investors that find it difficult to master the tricks of the trade of analyzing and picking stocks for their portfolio. Various mutual funds provide ETF products that attempt to replicate the indices on NSE, so as to provide returns that closely correspond to the total returns of the securities represented in the index. ETF's available on NSE are diverse lot. Equity, Debt, Gold and International Indices ETF's are available.

EXCHANGE TRADED FUNDS:

ADVANTAGES OF ETF’s

• While redemptions of Index fund units takes place at a fixed NAV price (usually end of day), ETFs offer the convenience of intra-day purchase and sale on the Exchange, to take advantage of the prevailing price, which is close to the actual NAV of the scheme at any point in time.

• They provide investors a fund that closely tracks the performance of an index throughout the day with the ability to buy/sell at any time, whereby trading opportunities that arise during a day may be better utilized.

• They are low cost.

• Unlike listed closed-ended funds, which trade at substantial premia or more frequently at discounts to NAV, ETFs are structured in a manner which allows Authorized Participants and Large Institutions to create new units and redeem outstanding units directly with the fund, thereby ensuring that ETFs trade close to their actual NAVs.

• ETFs are like any other index fund, wherein, subscription / redemption of units work on the concept of exchange with underlying securities instead of cash (for large deals).

• Since an ETF is listed on an Exchange, costs of distribution are much lower and the reach is wider. These savings in cost are passed on to the investors in the form of lower costs. Further, the structure helps reduce collection, disbursement and other processing charges.

• ETFs protect long-term investors from inflows and outflows of short-term investors. This is because the fund does not incur extra transaction cost for buying/selling the index shares due to frequent subscriptions and redemptions.

• Tracking error, which is divergence between the NAV of the ETF and the underlying Index, is generally observed to be low as compared to a normal index fund due to lower expenses and the unique in-kind creation / redemption process.

CONTD………

• An Exchange Traded Fund (ETF) is essentially a scheme where the investor has to buy/ sell units from the market through a broker (just as he would by a share).

• An investor must have a demat account for buying and selling ETFs.

• An important feature of ETFs is the huge reduction in costs. While a typical Index fund would have expenses in the range of 1.5% of Net Assets, an ETF might have expenses around 0.75%

CHARACTERISTICS OF ETF’S:

HEDGE FUNDS:• Hedge funds are aggressively managed portfolio of

investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns,

• Hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment

• Hedge funds are a more risky variant of mutual funds. Hedge funds are aimed at high net worth investors. They operate with high fee structures and are less closely monitored by the regulatory authorities.

The risk in hedge funds is higher on account of following features:

• Risky investment styles• Hedge funds take extreme positions in the market, including short-selling

of investments.• Ex. In a normal long position, the investor buys a share at say, Rs. 15. The

worst case is that the investor loses the entire amount invested. The maximum loss is Rs. 15 per share.

• Suppose that the investor has short-sold a share at Rs. 15. There is a profit if the share price goes down. However, if the share price goes up, to say, Rs. 20, the loss would be Rs. 5 per share. A higher share price of say, Rs. 50 would entail a higher loss of Rs. 35 per share. Thus, higher the share price more would be the loss. Since there is no limit to how high a share price can go, the losses in a short selling transaction are unlimited.

Contd….• Borrowings: Normal mutual funds accept money from

unit-holders to fund their investments. Hedge funds invest a mix of unit-holders’ funds (which are in the nature of capital) and borrowed funds (loans). Unlike capital, borrowed funds have a fixed capital servicing requirement. Even if the investments are at a loss, loan has to be serviced. However, if investments earn a return better than the cost of borrowed funds, the excess helps in boosting the returns for the unit-holders

FUND OF FUNDS SCHEME:• A scheme that invests primarily in other schemes of

the same mutual fund or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through one scheme. It spreads risks across a greater universe

• There are different types of "fund of funds", each investing in a different type of collective investment scheme e.g:

• Mutual fund FOF• Hedge fund FOF• Private equity FOF• Investment trust FOF

Feature:• Investing in a collective investment scheme may increase diversity

compared with a small investor holding a smaller range of securities directly. Investing in a fund of funds may achieve greater diversification. According to modern portfolio theory, the benefit of diversification can be the reduction of volatility while maintaining average returns. However, this is countered by the increased fees paid on both the FoF level, and of the underlying investment fund.

Considerations:• Management fees for Funds of Funds are typically higher than those

on traditional investment funds because they include the management fees charged by the underlying funds.

Comparison of MF industry us and Indian market

• A study based on comparison between Indian and US mutual funds. That describes the benefits of mutual funds and the best options available in the current market situation. The main thing is conducted through a comparison of various performance measures including Expense Ratio, Portfolio Turnover, and most importantly Standard Deviation, Sharpe ratio, Beta.

• Evaluation Parameters:

Following are the evaluation parameters based on which the analysis and comparison of various equity schemes is done.

• Net asset value (NAV):The value of a collective investment fund based on the market price of securities held in its portfolio. NAV per share is calculated by dividing net assets of the scheme /number of Units outstanding. It is the price per share or exchange-traded funds (ETFs). The higher the value of NAV better is the performance.

• The reason is the trust the fund enjoys over a period. Mutual funds pay out virtually all of their income and capital gains. As a result, changes in NAV are not the best gauge of mutual fund performance, which is best measured by annual total return.

NAV Formula :

• Standard Deviation:

Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for expected volatility.Standard Deviation helps in analyzing the 'quality' of the average. It tells us how much the individual numbers deviate from the average. In other words, how closely the average represents the underlying numbers. Higher the Standard Deviation of a fund, means the fund is more volatile and its' returns are likely to fluctuate more. Investing in a fund with lower standard deviation one can expect to reduce the uncertainty of returns. It does not mean that one will not lose money; only the probability is lower.

• Beta: Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

• A mutual fund that see saws in perfect sync with the market has a beta of 1.0. Portfolios that are more volatile relative to the underlying benchmark, such as aggressive-growth funds, have betas greater than 1.0; more conservative investments have coefficients of less than 1.0.

• Assets under Management: This is the market value of assets managed by an investment company on behalf of its investors. Asset under management (AUM) is looked at as a measure of success against the competition. It consists of growth/decline due to both capital appreciation/losses and new money inflow/outflow.

A higher AUM portrays that the fund is better compared to one having a lower AUM.

• Sharpe Ratio:

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of

the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio formula is:

It is a ratio used to compare the rate of reward with the risk of gaining that reward. The higher the ratio, the better is the risk-adjusted performance.

US Mutual Funds :• In the United States, mutual funds must be registered with the Securities and Exchange

Commission, are usually overseen by a board of directors or board of trustees and managed by a registered investment adviser

• There are 3 types of U.S. mutual funds: open-end, unit investment trust, and closed-end.

• The most common type, A type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell.

• A closed-end fund (or closed-ended fund) is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds, new shares/units in a closed-end fund are not created by managers to meet demand from investors.

• Unit investment trusts or UITs issue shares to the public only once, when they are created. nvestors can redeem shares directly with the fund at any time (as with an open-end fund) or wait to redeem upon termination of the trust.

US (Blue Chips Fund) : It is a share in a large, safe, prestigious company, of the highest class among stock market investments. A blue chip company would be called thus by being well known, having a large paid-up capital, a good track record of dividend payments and skilled management.

Parameters First American Large Cap

Growth Opp Yield

Goldman Sachs Equity Growth

Strategy A

JP Morgan Large Cap Growth Select

Morgan Stanley Inst Intl Growth

Equity I

Vanguard Equity Growth

NAV (G)($) 26.90 10.40 16.57 9.30 9.17

AUM ($ millions) 586.20 603.30 611.80 64.30 584.70

Expense ratio 0.95 0.59 0.99 1.00 0.72

Portfolio turnover (%) 92.00 22.00 124.00 49.00 222.00

Standard Deviation 18.87 23.25 21.01 27.15 1.68

Sharpe Ratio -0.11 -0.33 -0.05 -0.15 -0.29

Beta 0.91 0.95 0.97 1.12 1.02

Source :www.morningstar.com

JPMorgan Large Cap Growth Select :

• Higher the Standard Deviation of a fund, means the fund is more volatile and its' returns are likely to fluctuate more. Vanguard Growth Equity enjoys a very low standard deviation compared to all others, which means it has sustained to keep the volatility of the portfolio lower than its competitors offering the similar kind of products.

• Sharpe Ratio for all the funds shows the negative figure. However, in that JP Morgan Large Cap Growth Select fund is in better position when compared with its counterparts.

• Beta measures a mutual fund's volatility relative to a broad benchmark. JP Morgan Large Cap Growth Select has managed to enjoy a beta of 0.97, which means it is close to perfect sync with the market. On the other hand, First American Large Cap Growth has a beta of 0.91, which makes it a conservative investment whereas Vanguard Growth Equity has a beta of 1.02, which makes it a very volatile portfolio

Tax Benefit Funds:

Parameters First American Tax-Free Y

GoldmanSachs Structured Tax-Mgd Eq I

JP Morgan CA Tax Free Bond Instl

Morgan Stanley CA Tax-Free Income B

Vanguard CA Long Term Tax

NAV (G)(Rs.) 10.79 8.82 10.36 11.29 11.03

AUM ($ millions) 100.40 241.70 265.10 336.00 2900.00

Expense ratio 0.50 0.69 0.50 0.85 0.15



Sharpe Ratio 0.12 -0.47 0.32 -0.06 0.00

Beta 1.25 1.00 0.89 1.26 1.13

These funds often seeks medium to long-term growth of capital, with income tax rebate. An Ideal Tax-saving Instrument - Equity Linked Savings Schemes (ELSS) offers an easy option to obtain tax benefits and an opportunity to harness the potential upside of investing in the equity market. Higher return potential - ELSS funds invest a large part of the fund in equity, which despite short-term volatility has the potential to build wealth over the long term.


First American Tax-Free Obligations Y:

• On the basis of standard deviation, the maximum volatility is seen in the Goldman Sachs structured Tax-Mgd fund obviously they are more risky and can result into higher profit to investors followed by JP Morgan CA Tax Free Bond Instl fund. The least volatility is observed on the funds of Vanguard CA Long Term Tax. Since volatility is less, one can infer that the risk associated with the fund is less.

• Sharpe ratio (also known as Reward-To-Volatility Ratio) indicates the excess return per unit of risk associated with the excess return. The higher the ratio, the better is the risk-adjusted performance. JP Morgan CA Tax Free Bond Instl is having highest Sharpe ratio when compared with its counterparts.

• Beta measures the fund's volatility to a broad benchmark. Goldman Sachs Structured Tax-Mgd has managed to be in perfect synchronization with the underlying index and hence enjoys a beta of 1. On the other hand, JP Morgan equity has a beta of 0.89, which means that the fund is conservative and not in sync with the market whereas Morgan Stanley CA Tax-Free Income has a beta of 1.26, which makes it an extremely volatile portfolio.

Balanced Funds: A balanced fund invests in debt and security in comparable proportion. The proportion need not be exactly same but comparable. Balanced funds are normally investing 60% in debt and remaining in equity. A balanced fund tends to provide investors exposures to both equity and debt market in a one product. A balanced fund gives an investor exposure in equity at a relatively lower volatility.

Parameters FirstAmerican Strategy Balanced Allc R

Goldman Sachs Balanced A

JP Morgan Investor Balanced A

Morgan Stanley Inst Balanced

Instl

Vanguard Balanced Index

NAV (G)($) 9.11 17.13 11.35 12.08 19.39

AUM ($ millions) 402.20 134.40 1800.00 71.30 8600.00

Expense ratio 0.65 1.04 0.50 0.57 0.20



Sharpe Ratio -0.13 -0.14 -0.03 -0.09 -0.15

Beta 1.16 0.98 0.82 1.00 0.96


JPMorgan Investor Balanced A:

• Portfolio Turnover is very high for Morgan Stanley Inst Balanced product emphasizing the view that the portfolio manager holds a very aggressive position and is not holding a long-term view on the funds. He just books profits and moves out, unlike the fund manager of JP Morgan Investor Balanced who has a long-term view on the funds and follows the buy-and-hold strategy.

• In case of Standard deviation, First American balanced fund is lagging behind when compared with funds like JP Morgan and Vanguard etc. The fluctuation in First American Balanced fund is more as compared to other funds, which is a cause of concern because higher standard deviation means high risk. It indicates the tendency of fund's NAV to rise and fall in short period. In addition, in any fund NAV is the performance evaluation yardstick. Same is the case with Goldman Sachs Balanced.

• In case of Sharpe Ratio, the risk-free rate assumed at 5.14% T-Bill index. JP Morgan Investor Balanced is the best here, as the Sharpe ratios of all the funds considered are negative. On this front, Vanguard Balanced Index Fund is in the last position when compared with same category funds and with its competitors.

• However, the Beta of the Morgan Stanley Inst Balanced funds appears to be in perfect sync with the underlying index with no signs of volatility. Whereas, other funds have Beta which is either more or less than 1,which shows that they are either conservative or volatile in nature and are not in proper sync with the market.

India Mutual Funds:• The first introduction of a mutual fund in India occurred in 1961, when the Government

of India launched Unit Trust of India (UTI). Until 1987, UTI enjoyed a monopoly in the Indian mutual fund market. Then a host of other government-controlled Indian financial companies came up with their own funds. These included State Bank of India, Canara Bank, and Punjab National Bank.

• Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. They have a long history in the United States. Today they play an important role in household finances, most notably in retirement planning.

• Increased diversification: A fund normally holds many securities. Diversification decreases risk.

• Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at the close of every trading day at a price equal to the closing net asset value of the fund's holdings.

• Ability to participate in investments that may be available only to larger investors: For example, individual investors often find it difficult to invest directly in foreign markets.

India Blue Chip Funds:

Parameters FranklinIndia Bluechip

Reliance EquityICICIPrudential Growth

SBIMagnum Contra

UTIMastershare

NAV (G)(Rs.) 181.39 15.14119.60 54.47 47.22

AUM (Rs. crore) 2705.66 2188.40386.56 3034.282327.14

Expense ratio 1.89 1.862.33 2.50 1.91

Portfolio turnover (%) 110.00 182.00147.00 - 17.4

Standard Deviation 31.93 29.8229.89 36.01 31.89

Sharpe Ratio 0.35 0.260.26 0.36 0.32

Beta 0.87 0.810.83 0.99 0.87

Blue chip Funds: Such funds aim to achieve a high degree of capital appreciation through investments in well- established, large size blue chip companies.

Source — www.valuresearchonline.com

UTI Equity Fund:

• Portfolio turnover of Reliance Equity is very low at 1.86% as compared to others, followed by UTI Master Share at 17.4 %. ICICI Prudential Growth is having highest portfolio turnover of 147%, which means that it is resulting into higher expenses for its unit holders and reducing their return.

• Franklin India Blue chip is having highest standard deviation followed by SBI Magnum Contra and UTI Master Share. Highest Standard deviation suggests that fund is highly volatile and can give heavy returns or losses.

• SBI Magnum Contra and Franklin India Blue chip are having comparatively higher Sharpe ratio. All other funds are lagging behind and are having lower Sharpe ratio. Higher the Sharpe ratio better is the performance.

• SBI Magnum Contra is having a beta of 0.99, which is same as exact 1. This shows that the fund is in exact sync with the market and performs as market performs. All other funds are not close to 1, which indicates that these funds are not in accordance with the market, or are working in opposite direction.

Tax Benefit Funds: Such schemes aim to provide growth of capital along with income tax exemption benefits to investors.

Parameters Franklin India Taxshield

Reliance Tax Saver

ICICI Prudential Tax Plan

SBI Magnum Taxgain

UTI Equity Tax Savings

NAV (G)(Rs.) 174.57 17.51 116.79 56.59 35.99

AUM (Rs. crore) 732.04 1922.82 1018.53 4758.55 468.98

Expense ratio 2.21 1.91 2.12 2.50 2.31



Sharpe Ratio 0.33 0.21 0.25 0.26 0.14

Beta 0.89 0.87 0.98 0.95 0.89


Reliance Tax Saver Fund:

• Portfolio turnover of ICICI Prudential Tax Plan fund is highest and UTI Equity Tax Savings is the lowest. Higher turnover results into various costs such as brokerage,

• commissions etc that funds ultimately cover from its unit holders. Therefore, when it comes to Portfolio Turnover- the lower the turnover, better it is for its unit holders.

• SBI Magnum Tax gain is having higher standard deviation of 34.43. It measures the extent to which the NAV fluctuates as compared to the average returns during a period. A higher standard deviation means that the returns of the fund have been more volatile due to high risk. It shows that SBI Magnum Tax gain is among the highly volatile funds.

• A higher Sharpe ratio is better as it represents a higher return generated per unit of risk. Franklin India Tax shield is the best performer among all these funds. All other funds are having more or less similar Sharpe ratio.

• A low-beta fund will rise less than the market on the way up and lose less on the way down. When safety of investment is important, a fund with a beta of less than one is a better option. Such a fund may not gain much more than the market on the upside; it will protect returns better when market falls. Beta of ICICI Prudential Tax Plan is highest and very close to 1, which shows that fund moves according to market and behaves as market or index behaves.

Balanced Funds: Balanced funds aim to provide a long-term capital appreciation and current income by investing in equity and equity related securities and high quality fixed income instruments.

Parameters FT India Balanced

Reliance Regular Savings Balanced

ICICI Prudential Balanced

SBIMagnum Balanced

UTI Balanced

NAV (G)(Rs.) 43.2218.99 39.18 46.75 71.20

AUM (Rs. crore) 302.14147.38 265.63 462.92 1034.08

Expense ratio 2.342.25 2.30 2.50 2.10

Portfolio turnover (%) 57.83842.00 198.00 129.00 5.06

Standard Deviation 23.7128.35 24.89 28.48 25.89

Sharpe Ratio 0.310.54 0.11 0.27 0.24

Beta 0.891.04 0.94 1.08 0.98


ICICI Prudential Balanced Fund - Regular Plan:

• Among the recently available turnover ratios UTI Balanced fund is having a very less portfolio turnover of 5.06 indicating a very low churning, which is unbeatable by its competitors.

• All these funds are having a standard deviation almost equal, are showing that all these funds in this segment are equally volatile, and are exposed to same risk that other funds are exposed. FT India Balanced fund has the lowest standard deviation and is comparatively exposed to less risk.

• Sharpe ratio is a measure that uses the standard deviation and excess return to determine reward per unit of risk. High values indicate greater return per unit of risk. Reliance Regular Savings Balanced fund steals the show on this factors loosely followed by FT India Balanced.

• Beta of UTI Balanced fund is 0.98, which is very close to 1, which shows that the fund is in direct sync with the market while other funds are either extremely volatile or very conservative and are not in tandem with market.

Conclusion :• The Indian mutual fund industry is one of the fastest growing sectors in the

World's financial market. The mutual fund industry in India has seen dramatic improvements in quantity as well as quality of product and service offerings in recent years. Indeed, although the Indian mutual-fund industry has finally started growing like a teenager since mutual funds in their true sense were opened to the private sector in 1993.

• Comparing mutual funds in India with the United States, where mutual funds truly function as they should - to increase the wealth of smaller investors - the picture looks completely different: more than 80% of the AUM belongs to retail investors.

• "One major issue with less retail participation [in mutual funds] is the income level of smaller investors. Indian investors follow a typical investment hierarchy where risk-free investments like bank deposits and bonds get the top priority and, after making such investments, there is little money in the hands of the investors to invest in equity-linked mutual funds."

Contd...• The Indian mutual fund industry needs to widen its range of

products with affordable and competitive schemes to tap the semi-urban and rural markets in order to attract more investors.

• Mutual fund companies need to introduce products for the semi-urban and rural markets that are affordable and yet competitive against low-risk assured returns of government sponsored saving schemes such as post office saving deposits

• The mutual fund industry also faces some major challenges in terms of labour crunch, diminishing talent pool of fund managers, pressure of consolidation, innovation and product differentiation as increasing responsibility is being placed on the trustees to ensure that the funds are managed to the full benefit of the unit holders.

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