Prepared By:

Prof.Chhaya Patel

Mutual Funds

SMT.K.K.PATEL MBA/MCA COLLEGE, MEHSANA(818)

Emergence

Because financial market become sophisticated and

complex

In USA Mutual fund industry has overtaken banking

industry

Concept of MF

Common pool of money

Joint or “mutual” ownership

Units are the representation of ownership

Advantages

Expert & Professional Mgmt.

Diversification of Portfolio.

Reduction of Transaction Cost.

Liquidity.

Convenience & Flexibility.

Tax Benefits.

History

I First phase (1964-87)

UTI MF created under the UTI Act, 1963.

UTI had Monopoly from 1963-1987.

II Second phase (1987-93)

In 1987, Public Sector was opened.

SBI MF –The 1st bank sponsored MF, Nov.1987.

Canbank MF, LIC, GIC, Indian Bank, Bank of India, PNB

III Third phase (1993-2003)

SEBI got regulatory powers in 1993.

In 1993, Private Sector was opened.

SEBI (MF) Regulations, 1996.

IV Fourth phase (since 2003)

UTI bifurcated in two separate entities:

Specified Undertaking of UTI – assured return schemes.

UTI Mutual Fund Ltd.

Types of Funds

7

Asset-allocation fund -- Balanced fund in which changes are made in the stock

and bond percentage mix, based on the outlook for each market

Balanced funds -- Mutual funds that invest in both stocks and bonds, typically in

relatively equal proportions

Types of Funds

8

Capital appreciation funds -- Mutual funds that strive for maximum growth.

Although these funds can earn the greatest gains, they also can rack up the heaviest

losses. Also known as aggressive growth funds.

Closed-end funds -- Funds whose shares are traded on an exchange, similar to

stocks. The price per share doesn't typically equal the net asset value of a share.

Types of Funds

9

Equity income funds -- Mutual funds that favor investments in stocks

that generate income over growth. As a result, they can be less risky

than other types of stock funds.

•Fixed-income fund -- Another term for a mutual

bond fund. ...

•Front-end loads -- Sales commission paid to

purchase shares of mutual funds.

Types of Funds

10

General purpose money funds -- Mutual funds that invest largely in bank CDs

and short-term corporation called commercial paper.

Global funds -- Mutual funds that invest in both the U.S. and foreign countries. Also

known as world funds.

Government-only money funds -- Mutual funds that invest in treasury bills and

short-term loans to the U.S. government. These are the least risky money funds because

their investments are backed by Uncle Sam.

Types of Funds

11

Growth funds -- Mutual funds that invest in the stocks of well-established firms

that are expected to be profitable and grow for years to come.

Growth and income funds -- Mutual funds that own primarily blue-chip

stocks of well-established companies that pay out a lot of dividends to their

shareholders. These funds generally develop stock portfolios that balance the

potential for appreciation with the potential for dividend income.

Types of Funds

12

High-quality corporate bond funds -- Mutual funds that buy bonds issued

by the nation's financially strongest companies.

High-yield bond funds -- Risky bond mutual funds that invest in high-yield

bonds of companies with poor credit ratings. The bonds are rated below triple B by

Standard ST Poor's and Moody's. Also known as junk bond funds.

Types of Funds

13

Income funds -- Mutual funds that invest in higher-yielding stocks, but may own some

bonds. You get income first along with some growth. These funds usually invest in utility,

telephone, and blue-chip stocks.

Insured municipal bond funds -- Mutual funds that invest in insured bonds issued

by cities, towns, states, toll roads, schools, water projects, and hospitals. The interest income

is tax-free, and the bonds are insured against default by large private insurance companies,

such as American Municipal Pond Assurance Corp. (AMRAC) and Municipal Bond Insurance

Association (MBIA).

Types of Funds

14

Intermediate-term bond funds -- Mutual funds that invest in bonds

that mature in about 5 to 10 years. International bonds Debt instruments issued

by foreign governments or corporations.

International funds -- Mutual funds that invest in stocks or bonds of

worldwide companies.

Junk bond funds -- Mutual funds that invest in bonds issued by companies

or governments that are rated below BBB by Standard and Poor's or Moody's.

Also know as high-yield bond funds.

Types of Funds

15

Long-term bond funds -- Mutual funds that invest in bonds that mature in more

than 10 years

Money market mutual fund -- Mutual fund that invests typically in short-term

government and company loans and CDs. These tend to be lower-yielding, but less

risky than most other types of funds. Also known as money market funds or money

funds.

Municipal bond funds -- Mutual funds that invest in tax-exempt bonds is sued

by states and local governments

Types of Funds

16

No-load mutual fund -- Mutual fund that is sold without sales commission

Open-end funds -- Funds that permit ongoing purchase and redemption of fund

shares (mutual funds are open-end funds).

Regional funds -- of Mutual funds that invest in one specific region the globe

Short-term bond funds -- Mutual funds that generally invest in bonds that mature

in less than three years.

Types of Funds

17

Single-country funds -- Mutual funds or closed-end funds that invest in

one country.

Single-estate municipal bond funds -- Mutual funds that invest in the

bonds of a single state so that investors avoid paying both state and federal taxes

on their interest income.

Small company stock funds -- Volatile mutual funds that invest in

younger companies whose stocks are frequently traded on the over-the-counter

stock market.

Types of Funds

18

Socially responsible funds -- Mutual funds that invest in companies that

don't pollute the environment or sell arms. They will not own tobacco or alcohol

stocks, nor invest in companies with poor employee relations.

Specialty funds -- Funds that invest in one specific industry or industry

sector.

Taxable bond funds -- Bond mutual fund in which interest income is taxed

by Uncle Sam

Types of Funds

19

Tax-deferred investment -- An investment that is not taxed until money is

withdrawn, usually at retirement.

Tax-free bond funds -- Tax-free mutual funds that invest in municipal bonds issued

by states, cities, and towns.

Uninsured high-quality municipal bond funds -- Mutual funds that invest in

the least risky municipal bonds. These bonds are rated single A to triple A, but they are

not insured.

Types of Funds

20

Uninsured high-yield municipal bond funds -- Mutual funds that

pay the highest tax-free yields but invest in states or municipalities with lower

credit ratings.

U.S. government agency bonds -- Debt instruments issued by

federally sponsored agencies of the U.S. government.

U.S. Treasury bond funds -- Mutual funds that invest in U.S. Treasury

bonds and notes

Types of Funds

21

U.S. Treasury-only money funds -- Funds that invest in Treasury bills,

or T-bills, which are short-term I.O.U.s to the U.S. Treasury. These funds

typically pay the lowest yields but are considered the least risky money funds

World funds -- Mutual funds that invest in both the U.S. and foreign

countries. Also known as global funds.

Types of Mutual Fund Schemes

Functional Classification

Open-ended schemes

Closed-ended schemes

Interval scheme

Portfolio Classification

Income funds

Growth funds

Balanced funds

Money market mutual funds

Types of Mutual Fund Schemes… Geographical Classification

Domestic funds

Offshore funds

Others

Sectoral

Tax saving schemes

Equity-linked savings scheme (ELSS)

Pension Schemes

Special Schemes

Gilt funds

Load funds

Index funds

P/E ratio fund

Exchange traded funds

Mutual Fund Investors Residents including

Resident Indian Individuals

Indian Companies

Indian Trusts/ Charitable Institutions

Banks

Non-Banking Finance Companies

Insurance Companies

Provident Funds

Non-Residents including

Non-Resident Indians

Other Corporate Bodies

Foreign entities namely FIIs registered with SEBI

Foreign citizens/entities not allowed

Organization and Procedures

26

Organization

Sponsor

Trust

Asset Management Company

Custodian

Procedures

Sponsoring Organization

Forming Trust

Organization and Procedures

27

Procedures (Contd…)

Appointing Asset Management Company

Registration of Scheme with SEBI

Releasing Advertisement

Pooling Funds

Investment in Portfolios

Calculation of NAV

Distribution of Dividend (in the case of income funds)

Repurchase formalities

Asset Management Company

28

AMC is formed to manage the fund

Responsible to file documents with SEBI

Should have good track record

Board of Directors consists of representatives of sponsor also

Should prepare annual accounts in respect of each fund and publish

Compliance of SEBI guidelines

US-64

1st scheme of UTI Unit Scheme 1964.

LIC, SBI, other Scheduled banks, Foreign as well

Around 2 cr. investors.

Returns as high as 18% in 93-94

In 1992, debt based fund to one linked to equity

In 1997, Chidambaram pushed liberalisation

US-64 does not come under SEBI Regulations

In 1998, UTI crashed: new BJP-led government organised

Rs. 3500 crore bail-out

US-64…..

New Chairman P. S. Subramanyam appointed

Huge investments in K-10 scrips

UTI continued to buy shares even when prices crashed in

mid-2000

Rs. 34 crores investment in Cyberspace Infosys Ltd. at a huge

price of Rs. 930 per share

US-64….. Also invested in junk bonds like Pritish Nandy

Communications (Rs. 1.5 crores), Jain Studios (Rs. 5 crore),

Sanjay Khan’s Numero Uno International (Rs. 7.5 crores),

Malavika Spindles (Rs. 188 crores)

Chairman organised high profile propaganda campaign

promoting UTI at the same time leaking information to

large corporates

So, two month prior to freezing of dealings, Rs. 4,141

crores was redeemed (97% corporate investments:

repurchased at Rs. 14.20 when NAV was not more than Rs.

8)

US-64…..

Thus, small investors further lost Rs. 1300 crores

July 4, 2001, sales and purchase freezed for 6 months

BSE Sensex falls 114 points the next day

Declared dividend of 7%

M. Damodaran, joint secretary in banking division of finance

ministry declared as new UTI chief

US-64…..

Finance ministry rolls out Rs 300 crore rescue package

Investors can offer upto 3, 000 units for repurchase between

August 2001 and May 2003 at Rs. 10 (to be increased by 10

paise every month)

Govt. apoints 3 member committee headed by RBI deputy

governor S S Tarapore

US-64…..

Revamp the portfolio of various UTI schemes with three-

pronged strategy-avoid further losses, prevent market from

getting hit, make value of holdings go up

Exit scrips with marginal holdings and also those with heavy

weightage in sectors UTI is not so bullish on

Plan to set up more than one asset management companies to

handle different schemes

US-64…..

Three-tier structure

Malegam committee recommends strategic partner for UTI,

disposing off equity investments in assured return schemes

Requirement for UTI of $ 500 mn to $ 1 bn to stay solvent

Malegam committee report recommends RBI & LIC to convert

their holdings and form a sponsoring company

US-64…..

Government decides to provide cash assstance upto Rs. 5 billion

to UTI

Restructure equity-debt composition

UTI raises minimum units from 3, 000 to 5, 000 at repurchase

price or NAV, whichever is higher.

On 1st January 2002, US-64’s first NAV Rs 5. 81

2nd January, NAV drops to Rs 6

US-64….. As cost-cutting exercise, delist all schemes and sale and repurchase

through repurchase window

In June 2002, govt. gave guarantee for Rs 1, 000 crore in two

tranches. UTI reduce equity exposure by Rs 915 crore

Centre announces Rs 500 crore support to meet shortfall

In August 2002, another bail-out package of Rs 6, 000 crore for

US-64 and Rs 8561 crore for other assured return schemes

Tax concessions and 7-7.5% 10 year tax free bonds

In Sept. 2002, bifurcation of Trust into UTI-I and UTI-II

US-64…..

UTI-I: US-64 & assured return schemes with asset base of Rs 25, 000

cr (UTI Trustee Co.)

UTI-II: NAV-based schemes in excess of Rs 17, 000 cr (In Jan 2003,

handed to SBI, PNB, BOB & LIC) (UTI Asset Mgmt. Co.)

Splitting of US-64: Old US-64 and US-2002

M. Damodaran: CEO of UTI-II and admnistrator of UTI-I

US-64 issued on or before 3oth June 01, after trading on 28th January

2003, will be treated as tax-free, tradeable bonds with effect from 1st

June 2003 (Bonds maturing in May 2008: interest)

Secondary market trading in US 64 commences from 28th January

2003

Major Fund Houses Fortis

Birla Sunlife

Bank of Baroda

HDFC

ING Vysya

ICICI Prudential

SBI Mutual Fund

Tata

Kotak Mahindra

Unit Trust of India

Reliance

IDFC

Franklin Templeton

Sundaram Mutual Fund

Religare Mutual Fund

Principal Mutual Fund

Portfolio Management Services (PMS)

It is a hybrid service provided by portfolio managers, which

includes personalized stock and mutual fund investing

Discretionary & Non-discretionary Portfolio Managers

Eligibility Criteria

Appointment of Custodian

Application fees

Registration

Restriction as to placement of funds

Difference Between PMS & Mutual Fund

Degree of Customisation

Minimum Investment

Concept of Profit Sharing

Benefits of PMS

Professional Management

Risk Control

Convenience

Constant Portfolio Tracking

Transparency

The following portfolio reports are accessible online :

Performance Statements

Portfolio Holding Reports

Transactions Statements

Capital Gain / Loss Statements

Dedicated Relationship Manager

Choosing a PMS

Investment Philosophy: HSBC Strategic, Angel Bluechip

Scheme Benchmarks

Minimum Investment: Asia BNP Paribas-1cr.

Cost Structure

Frequency of Disclosure

Broking House

Real Estate Investment Trusts (REITs)/Real Estate Mutual Funds

(REMF)

A trust that uses investors’ money to purchase and manage

real estate

Trusts that are publicly traded companies that own, develop

and operate commercial properties. An association of

investors formed under trust agreement for the purpose of

real estate investment, which derive 90% of income for the

trust from real estate.

Characteristics of mutual fund structure for real

Estate Investment:

A highly desirable structured form to introduce real estate investing in

India.

Suggestion of a close ended or interval fund. (Can be open ended once

liquidity picks up)

NAV’s can be calculated on a quarterly basis.

Eligible Investments

Directly in real estate properties within India where lease rental

revenues are expected

Mortgage (housing lease) backed securities

Equity shares/ bonds/ debentures of listed/ unlisted companies

which deal in properties and also undertake property development

Buying & selling of real estate projects

Major Players

ICICI

HDFC

Kotak Mahindra

Kshitij

Tishman Speyer Properties, a US real estate company in

association with ICICI