GROWTH OF MUTUAL FUNDS INDUSTRY IN DISTRICT MEERUT

Transcription

1 GROWTH OF MUTUAL FUNDS INDUSTRY IN DISTRICT MEERUT During the past one decade, the mutual funds industry has witnessed major transformation. The industry has grown several folds not only in terms of the number of mutual funds and their schemes but also in respect of investable funds available to the industry. Further, the industry has also grown in terms of other parameters such as the number of mutual fund schemes, investor base and the range of products being offered to the investors. With the entry of private sector funds, the industry is becoming far more competitive. Thus, at present the industry has three types of players viz. (a) the Public Sector Banks, (b) Financial Institutions and (c) the Private Sector. The total assets under management of the industry in March 2010 stood at Rs. 500 crore. Out of the total assets under management of Mutual funds Industry, UTI alone accounted for Rs.80 crore (16 per cent). The share of equity funds was Rs. 410 crore (82%). The remaining resources of Rs. 90 crore (18%) were with the debt funds. As on March 31, 2010 the total number of schemes offered by all the mutual funds stood at 843, of which 641 were open-ended while the remaining 202 were closed-ended. The industry has also designed several new funds to suit the need of different types of investors. Thus, at present an investor has a choice to invest his saving into (i) growth funds (ii) income funds (iii) balanced funds (iv) monthly income plans (v) gilt funds (vi) liquid / money market funds (vii) index funds (viii) sector funds (ix) tax-saving funds (x) systematic withdrawal plans and (xi) miscellaneous funds. In recent years, mutual funds particularly the private sector funds

2 have also taken initiatives to improve their investor services and distribution network. Thus, the mutual funds industry has enjoyed substantial growth: A. Growth of Mutual funds in terms of Accumulation of Funds; B. Growth of Mutual funds in terms of Annual Return paid; C. Growth of Mutual funds in terms of Products offered to Investors; D. Growth of Mutual funds in terms of Development of Investors Support System; A. GROWTH OF MUTUAL FUNDS IN TERMS OF ACCUMULATION OF FUNDS The relative size of mutual funds companies is assessed by their assets under management (AUM). When a scheme is first launched, assets under management would be the amount mobilized from investors. Thereafter, if the scheme has a positive profitability metric, its AUM goes up; a negative profitability metric will pull it down. AUM means the market value of assets that an investment company manages on behalf of investors. Assets under management are looked at as measures of success against the competition and consists of growth / decline due to capital appreciation / losses and new money inflow / outflow. Further, if the scheme is open for receiving money from investors even post-nfo, then such contributions from investors boost the AUM. Conversely, if the scheme pays any money to the investors, either as dividend or as consideration for buying back the units of investors, the AUM falls. 89

3 The AUM thus captures the impact of the profitability metric and the flow of unit-holders money to or from the scheme. Growth of Mutual funds Industry: The total assets under management of Meerut mutual funds industry had touched Rs. 500 crore from 843 schemes offered by 38 mutual funds (in March 2010), of which, Reliance alone accounted for Rs. 60 crore (12%). The share of equity funds was Rs. 410 crore (82%) and the remaining resources of Rs. 90 crore (18%) were with the debt funds. Let s look at some highlights of the Meerut mutual funds industry in March 2010: Total Assets under Management (AUM) which were Rs. 250 crore in March 2008 have grown to Rs. 500 crore in March Their year-wise progress from 2008 to 2010 has been shown in Table 4.1. There were 11 active AMCs in district Meerut, with total assets under management of Rs. 350 crore in March 2010 and their distribution of assets under management has been given in Table 4.2. In March 2010, about 82% of the assets under management came from equity schemes. Despite a steep bull run in the equities markets, nearly 18% of the assets continue to be in debt schemes. (See Table 4.3) 90

4 TABLE: 4.1 Growth of Asset under Management ( to ) Source: Personal Survey. Period AUM (Rs. Cr.) An examination of Table 4.1 indicates that the investible resources which stood at Rs. 250 crore in March 2008 grew exponentially to Rs. 500 crore in March TABLE: 4.2 Asset Management Companies (In March 2010) S.No. Asset Management AUM Share Companies (Rs. Cr.) (%) AMC Type 1. Reliance Capital AMC Private-Indian Ltd. 2. UTI AMC Pvt. Ltd Bank-Others 3. LIC Mutual Fund AMC Institution Ltd. 4. Prudential ICICI AMC Private-JV-Indian Ltd. 5. HDFC AMC Ltd Private-JV-Indian 6. SBI Funds Management Pvt. Ltd. 7. Birla Sun Life AMC Ltd. 8. Kotak Mahindra AMC Ltd Bank-JV-Indian Private-JV-Indian Private-Indian 91

5 9. Tata Asset Management Private-Indian Ltd. 10. J.M. Financial AMC Private-Indian Pvt. Ltd. 11. Religare AMC Ltd Private-Indian Grand Total Source: Personal Survey. An examination of Table 4.2 indicates that the total AUM of 11 AMCs stood at Rs. 350 crore in March 2010, out of which, Reliance alone accounted for Rs.60 crore (17.14%), while the share of UTI was Rs.80 crore (22.86%). Prudential ICICI AMC Ltd. stood at third place with total AUM of Rs. 35 crore (10.00%). Likewise HDFC AMC Ltd. was at fourth place with its AUM of Rs. 33 crore (9.43%) and SBI Funds Management Pvt. Ltd. was at fifth place with its AUM of Rs. 32 crore (9.14%). Category TABLE: 4.3 Growth of Asset under Management (Category wise) Share AUM Share AUM (%) (Rs. Cr.) (%) (Rs. Cr.) AUM (Rs. Cr.) Share (%) Equity Debt Total Source: Personal Survey. An examination of Table 4.3 indicates that the total assets under management of Meerut mutual funds industry, in March 2010, have touched Rs. 500 crore. In which, the share of equity funds was Rs

6 crore (82%) and the remaining resources of Rs. 90 crore (18%) were with the debt funds. The table also indicates that the total equity funds raised through the primary market increased from Rs. 238 crore in March 2008 to Rs.410 crore in March 2010 and the total debt funds raised through the primary market increased from Rs. 12 crore in March 2008 to Rs. 90 crore in March B. GROWTH OF MUTUAL FUNDS IN TERMS OF ANNUAL RETURN PAID The most vital statistic in measuring the performance of a mutual fund is the rate of return. Rate of return has many possible definitions and there is no single definition, which can be applied to all the purposes. Luckily, there is one possible definition for each purpose. So the trick is to have clarity about the purposes for which the performance is to be measured and then look at an appropriate return measure. Measures of Return: An investor needs to understand the basis of appropriate performance measurement for the fund and acquire the basic knowledge of different measures of evaluating the performance of a fund. This helps him to measure the performance of his fund and take right decisions. The main methods of calculating returns are: Simple Return Annualized Return Compounded Return Compounded Annual Growth Rate (CAGR) 93

7 PERFORMANCE EVALUATION OF MUTUAL FUNDS RETURN Evaluating historical performance of mutual funds is important both for investors as well as portfolio managers. It enables an investor to assess as to how much return has been generated by the portfolio manager and what risk level has been assumed in generating such returns. Further, an investor can also appraise the comparative performance of different fund managers. Similarly, fund managers would also be able to know their performance over time and also vis-à-vis that of other competitors in the industry. The evaluation also provides a mechanism for identifying strengths and weaknesses of fund managers in the investment process, which helps them to take corrective actions. It is generally believed that professional fund managers have expertise in managing investments as they have access to information that is normally not available to common investors. In addition, they are supposed to possess superior analytical skills for making investment decisions. Thus, they are expected to provide a relatively higher rate of return on managed portfolios. However, higher returns may also arise due to higher exposure to risk on investments. Therefore, the observed returns on managed portfolios may be generated due to all of these factors. Thus, in any performance evaluation exercise it becomes important to examine the role of different factors that have contributed to the performance of managed portfolios. The general framework that has been developed over the years for performance evaluation utilizes the asset pricing theories such as the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory 94

8 (APT). Under the two-parameter model, evidence of skill could be reflected in the mean and variance of the distribution of returns from the investment. A superior investment skill would be implied if portfolio managers are generating abnormally high returns for the given level of risk in obtaining these returns. Nevertheless, in recent years, some efforts have also been made to consider higher moments of return distribution. INVESTMENT PERFORMANCE OF TOP 10 MUTUAL FUNDS SCHEMES: The total number of schemes offered by 38 Mutual funds stood at 843 as on 31 March, In these schemes the most popular top ten mutual funds schemes are ICICI Prudential Dynamic Plan, ICICI Prudential Power, HDFC Growth Fund, HDFC Top 200 Fund, Tata Infrastructure Fund, Tata Equity P/E Fund, Birla Sun Life Tax Relief 96, Birla Sun Life Frontline Equity Fund, Reliance Growth Fund and Reliance Vision Fund. Table 4.4 gives the performance record of Top ten performing mutual funds schemes as on 31March, 2010 & 31 May,

9 TABLE: 4.4 PERFORMANCE RECORD OF TOP TEN MUTUAL FUNDS SCHEMES (As on 31 March, 2010 & 31 May, 2010) Annual Return (%) S.No. Scheme s Name 6mths 1yr 3yrs 5yrs Mar. May Mar. May Mar. May Mar. May ICICI Prudential Dynamic Plan ICICI Prudential Power HDFC Growth Fund HDFC Top 200 Fund Tata Infrastructure Fund Tata Equity P/E Fund Birla Sun Life Tax Relief Birla Sun Life Frontline Equity Fund 9. Reliance Growth Fund Reliance Vision Fund Source: 96

10 Interpretation: Table no. 4.4 indicates the performance record of last 6mths, 1yr, 3yrs and 5yrs of top ten mutual funds schemes as on 31 March, 2010 & 31 May, Returns less than one year are absolute returns and returns more than one year are compounded annualized returns. Last 6mths Returns: As on 31 March 2010, ICICI Prudential Dynamic Plan stood at first place which gives the highest rate of return (13.42%) in top ten mutual funds schemes. Likewise, Reliance Growth Fund stood at second place with its rate of return of 12.66% and Tata Equity P/E Fund stood at third place with its rate of return of 11.57%. Consequently, ICICI Prudential Power, HDFC Growth Fund, Birla Sun Life Frontline Equity Fund, Birla Sun Life Tax Relief 96, Reliance Vision Fund, HDFC Top 200 Fund and Tata Infrastructure Fund stood at fourth, fifth, sixth, seventh, eight, ninth and last place. As on 31 May 2010, ICICI Prudential Dynamic Plan stood at first place which gives the highest rate of return (10.37%) in top ten mutual funds schemes. Likewise, Reliance Growth Fund stood at second place with its rate of return of 8.99% and HDFC Growth Fund stood at third place with its rate of return of 8.52%. Consequently, Birla Sun Life Frontline Equity Fund, Birla Sun Life Tax Relief 96, HDFC Top 200 Fund, Reliance Vision Fund, Tata Equity P/E Fund, ICICI Prudential Power and Tata Infrastructure Fund stood at fourth, fifth, sixth, seventh, eight, ninth and last place. Last 1yr Returns: As on 31 March 2010, Reliance Growth Fund stood at first place which gives the highest rate of return (91.76%) in top ten mutual funds 97

11 schemes. Likewise, Tata Equity P/E Fund stood at second place with its rate of return of 88.81% and Birla Sun Life Tax Relief 96 stood at third place with its rate of return of 88.37%. Consequently, HDFC Top 200 Fund, Birla Sun Life Frontline Equity Fund, HDFC Growth Fund, Reliance Vision Fund, ICICI Prudential Dynamic Plan, ICICI Prudential Power and Tata Infrastructure Fund stood at fourth, fifth, sixth, seventh, eight, ninth and last place. As on 31 May 2010, ICICI Prudential Dynamic Plan stood at first place which gives the highest rate of return (40.54%) in top ten mutual funds schemes. Likewise, Tata Equity P/E Fund stood at second place with its rate of return of 40.03% and Reliance Growth Fund stood at third place with its rate of return of 35.54%. Consequently, HDFC Growth Fund, HDFC Top 200 Fund, ICICI Prudential Power, Birla Sun Life Tax Relief 96, Birla Sun Life Frontline Equity Fund, Reliance Vision Fund and Tata Infrastructure Fund stood at fourth, fifth, sixth, seventh, eight, ninth and last place. Last 3yrs Returns: As on 31 March 2010, Tata Equity P/E Fund stood at first place which gives the highest rate of return (19.29%) in top ten mutual funds schemes. Likewise, HDFC Top 200 Fund stood at second place with its rate of return of 18.71% and Reliance Growth Fund stood at third place with its rate of return of 18.23%. Consequently, Birla Sun Life Frontline Equity Fund, HDFC Growth Fund, ICICI Prudential Dynamic Plan, Tata Infrastructure Fund, Reliance Vision Fund, Birla Sun Life Tax Relief 96 and ICICI Prudential Power stood at fourth, fifth, sixth, seventh, eight, ninth and last place. 98

12 As on 31 May 2010, HDFC Top 200 Fund stood at first place which gives the highest rate of return (15.77%) in top ten mutual funds schemes. Likewise, Reliance Growth Fund stood at second place with its rate of return of 14.47% and Tata Equity P/E Fund stood at third place with its rate of return of 13.84%. Consequently, HDFC Growth Fund, Birla Sun Life Frontline Equity Fund, ICICI Prudential Dynamic Plan, Tata Infrastructure Fund, Reliance Vision Fund, Birla Sun Life Tax Relief 96 and ICICI Prudential Power stood at fourth, fifth, sixth, seventh, eight, ninth and last place. Last 5yrs Returns: As on 31 March 2010, Reliance Growth Fund stood at first place which gives the highest rate of return (29.54%) in top ten mutual funds schemes. Likewise, ICICI Prudential Dynamic Plan stood at second place with its rate of return of 29.52% and HDFC Top 200 Fund stood at third place with its rate of return of 29.16%. Consequently, Birla Sun Life Frontline Equity Fund, Tata Equity P/E Fund, HDFC Growth Fund, Tata Infrastructure Fund, ICICI Prudential Power, Reliance Vision Fund and Birla Sun Life Tax Relief 96 stood at fourth, fifth, sixth, seventh, eight, ninth and last place. As on 31 May 2010, HDFC Top 200 Fund stood at first place which gives the highest rate of return (27.45%) in top ten mutual funds schemes. Likewise, ICICI Prudential Dynamic Plan stood at second place with its rate of return of 27.34% and Reliance Growth Fund stood at third place with its rate of return of 27.22%. Consequently, Birla Sun Life Frontline Equity Fund, HDFC Growth Fund, Tata Equity P/E Fund, Tata Infrastructure Fund, Reliance Vision Fund, ICICI Prudential Power and 99

13 Birla Sun Life Tax Relief 96 stood at fourth, fifth, sixth, seventh, eight, ninth and last place. INVESTMENT PERFORMANCE OF SIMILAR COMPETING SCHEMES: Fund houses make internal comparisons of how their scheme has performed against schemes of their competitors that have a similar investment objective and investment style. As in the case of benchmark index, it is important to select a competing scheme that is representative of the scheme under consideration. Table no. 4.5 compares the investment performance of Top 5 ELSS Schemes while Table no. 4.6 compares the investment performance of Top 5 Monthly Income Plan (MIP) as on 31 May,

14 TABLE: 4.5 PERFORMANCE RECORD OF TOP 5 ELSS SCHEMES (As on 31 May, 2010) S.No. Schemes Name Annual Return (%) 6mths 1yr 3yrs 5yrs Latest NAV Category Structure 1. Birla Sun Life Tax Relief 96 Dividend 2. HDFC Tax Saver Fund Dividend 3. ICICI Prudential Tax Plan Dividend 4. Reliance Tax Saver Fund Dividend 5. Tata Tax Saving Fund Dividend Average Performance of Similar Category Funds Equity Open-ended Equity Open-ended Equity Open-ended Equity Open-ended Equity Open-ended BSE Sensex Source: 101

15 TABLE: 4.6 PERFORMANCE RECORD OF TOP 5 MIP SCHEMES (As on 31 May, 2010) S.No. Schemes Name Annual Return (%) 6mths 1yr 3yrs 5yrs Latest NAV Category Structure 1. Birla Sun Life Monthly Income Growth 2. HDFC Monthly Income Plan LTP Growth 3. ICICI Prudential MIP Growth 4. Reliance Monthly Income Plan Growth 5. Tata Monthly Income Fund Growth Average Performance of Similar Category Funds Debt Open-ended Debt Open-ended Debt Open-ended Debt Open-ended Debt Open-ended BSE Sensex Source: 102

16 Interpretation: Table 4.5 compares the performance record of last 6 mths, 1 yr, 3 yrs and 5 yrs of top 5 ELSS Schemes as on 31 May, Returns less than one year are absolute returns and returns more than one year are compounded annualized returns. Last 6mths Returns: ICICI Prudential Tax Plan stood at first place which gives the highest rate of return (11.75%) in top five ELSS mutual funds schemes. Likewise, Reliance Tax Saver Fund stood at second place with its rate of return of 10.97% and HDFC Tax Saver Fund stood at third place with its rate of return of 9.44%. Consequently, Birla Sun Life Tax Relief 96 and Tata Tax Saving Fund stood at fourth and fifth place. Last 1yr Returns: ICICI Prudential Tax Plan stood at first place which gives the highest rate of return (48.92%) in top five ELSS mutual funds schemes. Likewise, HDFC Tax Saver Fund stood at second place with its rate of return of 43.19% and Reliance Tax Saver Fund stood at third place with its rate of return of 33.91%. Consequently, Birla Sun Life Tax Relief 96 and Tata Tax Saving Fund stood at fourth and fifth place. Last 3yrs Returns: ICICI Prudential Tax Plan stood at first place which gives the highest rate of return (11.13%) in top five ELSS mutual funds schemes. Likewise, HDFC Tax Saver Fund stood at second place with its rate of return of 10.55% and Reliance Tax Saver Fund stood at third place with its rate of return of 8.55%. Consequently, Birla Sun Life Tax Relief 96 and Tata Tax Saving Fund stood at fourth and fifth place. 103

17 Last 5yrs Returns: HDFC Tax Saver Fund stood at first place which gives the highest rate of return (22.31%) in top five ELSS mutual funds schemes. Likewise, Birla Sun Life Tax Relief 96 stood at second place with its rate of return of 21.00%, ICICI Prudential Tax Plan stood at third place with its rate of return of 19.35% and Tata Tax Saving Fund stood at fourth place. Table 4.6 compares the performance record of last 6mths, 1 yr, 3 yrs and 5 yrs of top 5 MIP Schemes as on 31 May, Returns less than one year are absolute returns and returns more than one year are compounded annualized returns. Last 6mths Returns: Birla Sun Life Monthly Income stood at first place which gives the highest rate of return (5.14%) in top five MIP mutual funds schemes. Likewise, HDFC Monthly Income Plan stood at second place with its rate of return of 4.15% and Reliance Monthly Income Plan stood at third place with its rate of return of 3.67%. Consequently, ICICI Prudential MIP and Tata Monthly Income Fund stood at fourth and fifth place. Last 1yr Returns: HDFC Monthly Income Plan stood at first place which gives the highest rate of return (16.45%) in top five MIP mutual funds schemes. Likewise, Reliance Monthly Income Plan stood at second place with its rate of return of 16.04% and Birla Sun Life Monthly Income stood at third place with its rate of return of 10.20%. Consequently, ICICI Prudential MIP and Tata Monthly Income Fund stood at fourth and fifth place. 104

18 Last 3yrs Returns: Reliance Monthly Income Plan stood at first place which gives the highest rate of return (14.57%) in top five MIP mutual funds schemes. Likewise, HDFC Monthly Income Plan stood at second place with its rate of return of 12.04% and Birla Sun Life Monthly Income stood at third place with its rate of return of 9.66%. Consequently, ICICI Prudential MIP and Tata Monthly Income Fund stood at fourth and fifth place. Last 5yrs Returns: Reliance Monthly Income Plan stood at first place which gives the highest rate of return (13.50%) in top five MIP mutual funds schemes. Likewise, HDFC Monthly Income Plan stood at second place with its rate of return of 13.20% and Birla Sun Life Monthly Income stood at third place with its rate of return of 10.18%. Consequently, ICICI Prudential MIP and Tata Monthly Income Fund stood at fourth and fifth place. C. GROWTH OF MUTUAL FUNDS IN TERMS OF PRODUCTS OFFERED TO INVESTORS The success of mutual funds is reflected in the confidence of the investors on the organization in totality taking into account the quality of the product offered to public. Mutual fund s products are the schemes launched by it from time to time. To evolve schemes one has to look at the profile of mutual funds investors. Their perception to return, risk and liquidity matter is most in designing the schemes. Marketing of schemes presupposes an extensive market study. Since it is mere icing in the cake, innovations in schemes do not matter much, thus Mutual funds can hardly depend completely on this aspect for acceptability of the schemes. 105

19 FIGURE: 4.1 CATEGORIES OF MUTUAL FUNDS PRODUCTS Based on their Structure Based on Investment Objective Diversified Equity Funds Sector Funds Open-ended Funds Equity Funds Thematic Funds ELSS Dividend Yield Funds Arbitrage Funds Balanced Funds Monthly Income Plan Capital Protected Funds Gilt Funds Mutual Fund Close-ended Funds Debt Funds Diversified Debt Funds Junk Bond Funds FMPs Floating Rate Funds Liquid Funds Gold Funds Interval Funds Special Funds Real Estate Funds Commodity Funds International Funds Fund of Funds Exchange Traded Funds 106

20 A. BASED ON THEIR STRUCTURE: Open-Ended Funds: Open-ended funds are open for investors to enter or exit at any time, even after the NFO. When existing investors buy additional units or new investors buy units of the open ended scheme, it is called a sale transaction. It happens at a sale price, which is equal to the NAV. When investors choose to return any of their units to the scheme and get back their equivalent value, it is called a re-purchase transaction. This happens at a re-purchase price that is linked to the NAV. Although some unit-holders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. The ongoing entry and exit of investors implies that the unit capital in an open-ended fund would keep changing on a regular basis. The UTI s Unit Scheme-64, Alliance Equity Fund, Birla Advantage Fund and Chola freedom Income Fund are few examples of such funds. Close-Ended Funds: Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme from the fund only during its NFO. The fund makes arrangements for the units to be traded, post-nfo in a stock exchange. This is done through a listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO, investors who want to buy Units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell Units will have to find a buyer for those units in the stock exchange. Since post- NFO, sale and purchase of units happen to or from counter-party in the 107

21 stock exchange and not to or from the mutual funds the unit capital of the scheme remains stable. Examples of such funds are: Morgan Stanley Growth Fund, Can bonus, ICICI Premier and Master share. Interval funds: Interval funds combine features of both open-ended and close ended schemes. They are largely close-ended, but become open-ended at pre-specified intervals. For instance, an interval scheme might become open-ended between January 1 to 15, and July 1 to 15, each year. The benefit for investors is that, unlike in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or sell units of the interval fund. B. BASED ON INVESTMENT OBJECTIVE: Equity Funds: A scheme might have an investment objective to invest largely in equity shares and equity-related investments like convertible debentures. Such schemes are called equity schemes. Types of Equity Funds: Equity funds can be sub-classified in the following ways: Diversified Equity Funds: Diversified equity fund is a category of funds that invest in a diverse mix of securities that cut across sectors. Sector Funds: Sector funds however invest only in a specific sector. For example, a banking sector fund will invest in only shares of banking companies. Gold sector fund will invest only in shares of goldrelated companies. 108

22 Thematic Funds: Thematic funds invest in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure construction, infrastructure tollcollection, cement, steel, telecom, power etc. The investment is thus more broad-based than a sector fund; but narrower than a diversified equity fund. Equity Linked Saving Schemes (ELSS): Equity Linked Savings Schemes (ELSS) offer tax benefits to investors. However, the investor is expected to retain the Units for at least 3 years. Examples of ELSS are: Dundee Tax Saver Fund, Kothari Pioneer open end Tax Saving Equity Fund, HDFC Tax Plan 2000 and Sundaram Tax Saver Fund. Dividend Yield Funds: Dividend Yield Schemes invest in securities whose shares fluctuate less, and therefore, dividend represents a larger proportion of the returns on those shares. The NAV of such equity schemes are expected to fluctuate lesser than other categories of equity schemes. Arbitrage Funds: Arbitrage Funds take contrary positions in different markets / securities, such that the risk is neutralized, but a return is earned. For instance, by buying a share in BSE, and simultaneously selling the same share in the NSE at a higher price. Most arbitrage funds take contrary positions between the equity market and the futures and options market. Debt Funds: Schemes with an investment objective that limits them to investments in debt securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt funds. 109

23 Types of Debt Funds: Debt funds can be sub-classified in the following ways: Gilt Funds: Gilt funds invest only in treasury bills and government securities, which do not have a credit risk (i.e. the risk that the issuer of the security defaults). Alliance Government Securities Fund, Kotak Mahindra Gilt Unit Scheme 98, Pru ICICI Gilt Fund are few examples of such funds. Diversified Debt Funds: Diversified debt funds on the other hand, invest in a mix of government and non-government debt securities. Junk Bond Funds: Junk bond schemes or high yield bond schemes invest in companies that are of poor credit quality. Such schemes operate on the premise that the attractive returns offered by the investee companies makes up for the losses arising out of a few companies defaulting. Fixed Maturity Plans: Fixed maturity plans are a kind of debt funds where the investment portfolio is closely aligned to the maturity of the scheme. AMCs tend to structure the scheme around pre-identified investments. Further, like close-ended schemes, they do not accept moneys post-nfo. Floating Rate Funds: Floating rate funds invest largely in floating rate debt securities i.e. debt securities where the interest rate payable by the issuer changes in line with the market. For example, a debt security where interest payable is described as 5-year Government Security yield plus 1%, will pay interest rate of 7%, when the 5-year Government Security yield is 6%; if 5-year Government Security yield goes down to 3%, then only 4% interest will be payable on that debt security. The 110

24 NAVs of such schemes fluctuate lesser than debt funds that invest more in debt securities offering a fixed rate of interest. Liquid Funds: Liquid schemes or money market schemes are the variant of debt schemes that invest only in debt securities where the moneys will be repaid within 91 days. These are widely recognized to be the lowest in risk among all kinds of mutual funds schemes. Examples are: IDBI-Principle Cash Management Fund, DSP Merrill Lynch Liquidity Fund, IL & FS Liquid Account and HDFC Liquid Fund. Balanced Funds: Balanced funds have an investment charter that provides for a reasonable level of investment in both debt and equity. Balanced funds can be sub-classified in the following ways: Monthly Income Plan: Monthly Income Plan seeks to declare a dividend every month. It therefore, invests largely in debt securities. However, a small percentage is invested in equity shares to improve the scheme s yield. The term Monthly Income is a bit of a misnomer and investor needs to study the scheme properly, before presuming that an income will be received every month. Examples of Monthly Income Plans are: Alliance Monthly Income, Birla MIP, Sun F&C Monthly Income Plan and Templeton Monthly Income Plan. Capital Protected Funds: Capital Protected Schemes are closeended schemes, which are structured to ensure that investors get their principal back, irrespective of what happens to the market. This is ideally done by investing in Zero Coupon Government Securities whose maturity is aligned to the scheme s maturity. Zero coupon securities are securities that do not pay a regular interest, but accumulate the interest, and pay it along with the principal when the security matures. 111

25 Special Funds: Special funds can be sub-classified in the following ways: Gold Funds: These funds invest in gold and gold-related securities. They can be structured in either of the following formats: * Gold Exchange Traded Fund, which is like an index fund that invests in gold. The NAV of such funds moves in line with gold prices in the market. * Gold Sector Funds in which the fund is invested in shares of companies engaged in gold mining and processing. Though gold prices influence these shares, the prices of these shares are more closely linked to the profitability and gold reserves of the companies. Therefore, NAV of these funds do not closely mirror gold prices. Real Estate Funds: These take exposure to real estate. Such funds make it possible for small investors to take exposure to real estate as an asset class. Although permitted by law, real estate Mutual Funds are yet to hit the market in India. Commodity Funds: Commodities, as an asset class, include Food crops like wheat and gram; Spices like pepper and turmeric; Fibers like cotton; Industrial metals like copper and aluminum; Energy products like oil and natural gas; and Precious metals (bullion) like gold and silver. The investment objective of commodity funds would specify which of these commodities it proposes to invest in. International Funds: These are funds that invest outside the country. For instance, a mutual fund may offer a scheme to investors in India, with an investment objective to invest abroad. One way for the fund to manage the investment is to hire the requisite people who will manage the fund. Since their salaries would add 112

26 to the fixed costs of managing the fund, it can be justified only if a large corpus of funds is available for such investment. Fund of Funds (FoFs): The feeder fund was an example of a fund that invests in another fund. Similarly, funds can be structured to invest in various other funds, whether in India or abroad. Such funds are called fund of funds (FoFs). These fund of funds pre-specify the Mutual funds whose schemes they will buy and / or the kind of schemes they will invest in. They are designed to help investors get over the trouble of choosing between multiple schemes and their variants in the market. Exchange Traded Funds: Exchange Traded Funds (ETF) is open - ended index funds that are traded in a stock exchange. A feature of openended funds, which allows investors to buy and sell units from the mutual funds, is made available only to very large investors in an ETF. 113

27 FIGURE: 4.2 RISK V/S RETURN Diversified Equity Index Equity Sector Fund Equity Index Fund Capital appreciation Balanced Fund Bond Fund Return G. Sec Liquidity MMMF Return Risk Safety of Principal with steady return MUTUAL FUNDS SCHEMES AND THEIR PATTERN OF GROWTH The Indian Mutual funds have been very slow in creating innovative schemes for which several factors are responsible. The important factors are Lack of competition in the early period; Sponsors of Mutual funds treating mutual funds schemes as public issues of capital to raise funds easily; The tendency of investors to treat mutual funds schemes at par with any other issue of capital; Inertia of so called fund managers and more often lack of competence to think anything new; and General apathy towards the investor. 114

28 Table 4.7 gives the data relating to number of schemes launched by different funds during the period & TABLE: 4.7 SCHEMES LAUNCHED BY MUTUAL FUNDS (During & ) Months Openendeendeendeended Close- Open- Close- Total Total April May June July August September October November December January February March Total Source: A reference to table no. 4.7 indicates that the total number of schemes launched by all the Mutual funds stood at 506, of which 55 were open-ended while the remaining 451 were close-ended at the end of Similarly, the total number of schemes launched by all the Mutual funds stood at 174, of which 54 were open-ended while the remaining 120 were close-ended at the end of Table no. 4.8 gives the distribution of schemes according to their investment objectives during the period to

29 Nature Balanced ELSS FoF investing overseas Gilt Gold ETF Growth Income Liquid / Money Market Other ETF Open -end TABLE: 4.8 DISTRIBUTION OF MUTUAL FUNDS SCHEMES (During to ) Close -end Total Open -end Close -end Total Open -end Close -end Total Open -end Close -end Total Open -end Close -end Total Total Source: 116

30 Table no. 4.8 indicates that the total number of schemes offered by all the Mutual funds stood at 592, of which 463 were open-ended while the remaining 129 were closed-ended. It also indicates that the industry was dominated by income schemes numbering 251 followed by 194 growth schemes, 45 money market schemes, 37 tax saving schemes, 36 balanced schemes and 29 gilt schemes at the end of March The total number of schemes offered by all the Mutual funds stood at 756, of which 486 were open-ended while the remaining 270 were closed-ended. It also indicates that the industry was dominated by income schemes numbering 367 followed by 267 growth schemes, 55 money market schemes, 40 tax saving schemes, 38 balanced schemes, 28 gilt schemes and 1 gold ETF at the end of March The total number of schemes offered by all the Mutual funds stood at 956, of which 592 were open-ended while the remaining 364 were closed-ended. It also indicates that the industry was dominated by income schemes numbering 506 followed by 270 growth schemes, 58 money market schemes, 42 tax saving schemes, 37 balanced schemes, 30 gilt schemes, 8 other ETF schemes and 5 gold ETF at the end of March The total number of schemes offered by all the Mutual funds stood at 933, of which 589 were open-ended while the remaining 344 were closed-ended. It also indicates that the industry was dominated by income schemes numbering 443 followed by 291 growth schemes, 56 money market schemes, 47 tax saving schemes, 35 balanced schemes, 34 gilt schemes, 12 other ETF schemes, 10 Fund of Funds (FoFs) schemes and 5 gold ETF at the end of March The total number of schemes offered by all the Mutual funds stood at 843, of which 641 were open-ended while the remaining 202 were 117

31 closed-ended. It also indicates that the industry was dominated by income schemes numbering 330 followed by 305 growth schemes, 56 money market schemes, 48 tax saving schemes, 35 gilt schemes, 33 balanced schemes, 15 Fund of Funds (FoFs) schemes, 14 other ETF schemes and 7 gold ETF at the end of March The growth trend of the total number of mutual funds schemes during the period to is shown in Figure 4.3: FIGURE 4.3 On the analysis of the above graph it is observed that the total number of schemes available to the investors increased from 592 in to 956 by the end of 2008, later than it decreased to 843 at the end of It indicates that, at present, the scope of Mutual funds is in downward trend and the future of Mutual funds is uncertain. This is why, from April 2008 to March 2010, the economy of Indian mutual funds 118

32 market was in downward trend and the investors could not get good return from new schemes. So they had not been interested for investing in new schemes. Thus, mutual funds companies showed interest for launching only debt schemes. D. GROWTH OF MUTUAL FUNDS IN TERMS OF DEVELOPMENT OF INVESTORS SUPPORT SYSTEM The system which gives the protection to the unit holders is described as follows: STRUCTURAL PROTECTION: In the case of other investment products such as bonds, fixed deposits and equities, the investor s funds go to an organization that uses the funds within the overall supervision of external regulatory authorities such as SEBI, RBI, etc. With Mutual funds, however, there is also an internal regulator in the form of a Board of Trustees, which supervises the operations of the AMC. Thus, the structural framework of mutual funds operations is sounder with in-built checks and balances. ROLE OF AMFI: AMFI plays a proactive role in identifying the steps that need to be taken to protect investors and promote the mutual funds sector. Various regulatory measures taken by SEBI are on the basis of recommendations of committees appointed by AMFI. This approach is in the long-term interest of the mutual funds industry. 119

33 However, to clarify, AMFI is not a Self Regulatory Organization (SRO). Its recommendations are not binding on the industry participants. AMFI recommendations become mandatory only if and when SEBI incorporates any of them in the regulatory framework it stipulates for Mutual funds. RIGHTS OF UNIT HOLDERS: Investors are expected to read the Offer Document before they apply for units of a scheme. The principle of caveat emptor let the buyer beware is applicable. Therefore, an investor cannot proceed against the trustees, the AMC or any one else for something that is provided for in the Offer Document, merely on the grounds that she was not aware of it. An investor is deemed to have constructive notice of whatever is mentioned in the Offer Document. INVESTOR RELATIONS OFFICER: Every AMC has an investor relations officer; to whom unit holders can approach for redressal of grievances. The track record of the AMC in redressing investor complaints, including specifics of number of complaints and the time period when they were redressed needs to be disclosed in the Offer Document. This ensures that AMCs take an interest in sorting out investor complaints. SEBI: To begin with, SEBI s approval is required to start a mutual fund operation. Thus there is a quality and credibility check on every one who enters the mutual funds business. SEBI also seeks to ensure that only persons of integrity and reputation for fair dealings become trustees who, in turn, keep an eye on who is appointed a director in an asset 120

34 management company. Various qualifications and disqualifications have been provided in the regulations to keep out people of disrepute. If a unit holder is aggrieved by the actions of the AMC, and the grievance is not satisfactory redressed by the investor relations officer, then the doors of SEBI would be a good place to knock. SEBI forwards the complaints to the AMC. This puts an additional pressure on the AMC to redress the grievance. IMPLICATIONS UNDER VARIOUS OTHER STATUTES: Consumer Protection Act, 1986: Unit holders cannot approach consumer courts to redress their grievances against trustees because the nature of the relationship between unit holders and trustees is a fiduciary one. Unit holders themselves are beneficiary owners of the trust property. Being owners, they do not qualify as consumers under the Consumer Protection Act. Indian Trust Act, 1882: A legal technicality is that a trust is not a distinct or separate legal entity. A mutual fund trust is therefore, in the nature of a Notional Entity, which is not distinct from the unit holders themselves. Therefore, its unit holders cannot sue against a mutual fund. However, since the trustees have a fiduciary responsibility to protect the interests of the beneficiaries (unit holders), the unit holders can sue the trustees for breach of faith if there are strong grounds to prove that the trustees were fraudulent or willfully negligent in their role. In case the trustees breach of faith is proved and they need to personally pay damages, the Indian Trust Act provides that 121

35 the trust cannot even compensate the trustees for such damages. The mutual funds regulations provide that neither the sponsor nor the AMC can compensate the trustees for such damages. Companies Act, 1956: Investors in a fund are neither shareholders of the AMC nor depositors in the AMC. Therefore, the normal protection available to company depositors through agencies such as Department of Company Affairs and Company Law Board is not available to unit holders of a mutual fund. The Companies Act provides for piercing the corporate veil in specific cases, including fraud. If fraud can, therefore, be proved, unit holders may then be able to pierce the corporate veil and hold the directors and management of the AMC responsible for such fraud. THE ROLE OF PRESS: The press in India has performed a useful role in making people aware of the benefits of Mutual funds. New fund offering, as well as NAV and other performance parameters are widely reported by the press. The press also takes up various investor protection issues. Several regulatory measures had their base on some press article on the subject. 122

36 FUTURE PROSPECTS OF MUTUAL FUNDS INDUSTRY IN DISTRICT MEERUT The current economic environment foretells the future of Mutual funds industry in district Meerut. In years to come they are to emerge as most exciting players in the share market to manage the fund of comparatively smaller investors. Over 16 per cent of financial savings by householder sector is, at present, in this industry and thus, it is the fastest growing sector compared to the traditional avenues as banks and insurances. Investors, finding difficult to interact directly on primary and secondary market have been, rather, forced on many accounts like proportionate allotment, application for minimum 500 shares, etc. to opt for mutual funds. They are becoming more aware as to how Mutual funds operate. The future of mutual funds to a great extent depends on the response of regulatory agencies on the demands and expectations of small investors. Greater transparency increases innovations, better services liquidity and higher returns in future will make mutual funds more investor friendly. Investors perceptions are changing fast. Their expectation from mutual funds will be increasing day by day. Thus check on operation expenses will be crucial. For investors welfare something like credit rating should be developed to evaluate the mutual funds as well as their schemes. Of course, it will require more and more disclosures as well as standardized accounting practices. To regulate confidence in investors, regulatory body, fund managers, investor organizations and association of mutual funds of India have to make concerted and coordinated efforts. Mutual funds besides being serious about 123

37 performance of the scheme should innovate such features in their schemes which appeal the investors. With the emergence of private sector, foreign - based mutual funds and expected participation of foreign banks in this field, competition on all fronts including efficiency is bound to be intense. Inefficient mutual funds in years to come may face merger with efficient funds. YEAR 2012 FOR THE MUTUAL FUNDS INDUSTRY It is believed that the year 2012 would continue to bring in reforms in the mutual funds industry, making every initiative pro-investor. Also, many new players are likely to enter the mutual funds space, thus leading to an increase in the product offering to mutual funds investors. The potential for growth will come from inherent strengths and sustained interest by foreign and domestic funds as well as the common investor. However, the challenges will come from maintaining the interest of all the participants in the market. Increasing Assets under Management (AUM) will also be a major challenge, since there is no incentive for the distributor to promote mutual funds. Also after April 1, 2012, when the Direct Tax Code (DTC), come into effect, mutual funds companies and investors would be very watchful on the tax implication of various mutual funds. But, it is believed that the overall long term economic outlook for India seems bullish and therefore investors should consider mutual funds investing for wealth creation. FUTURE OUTLOOK: As mutual funds has entered into the Indian Capital market, growing profitable enough to attract competitors into this cherished territory encouraging competition among all the mutual funds operators, 124

38 there is need to take some strategy to bring more confidence among investors for which mutual funds would be able to project the image successfully. The followings are some of the suggestions: As the investors are not willing to invest in mutual funds unless a minimum return is assured, it is very essential to create in the mind of the investors that mutual funds are market instruments and associated with market risk hence mutual funds could not offer guaranteed income. All the mutual funds are operated in the public sector. Hence private sector may be allowed to float mutual funds, intensifying competition in this industry. Due to operations of many mutual funds, there will be need for appropriate guidelines for self-regulation in respect of publicity / advertisement and inter-scheme transactions within each mutual fund. The growth of mutual funds tends to increase the shareholdings in good companies, give raise the fear of destabilizing among industrial group, hence introduction of non-voting shares and lowering the debt-equity ratio will help to remove this apprehension. As there is no distinction between trustees, sponsors and fund managers, it is necessary to regulate frame work for a clear demarcation between the role of constituents, such as shelter, trustee and fund manager to protect the interest of the small investors. 125

39 Steps should be taken for funds to make fair and truthful disclosures of information to the investors, so that subscribers know what risk they are taking by investing in fund. Infrastructure bottlenecks should have to be removed and banking and postal systems should have to be taken place for growth of mutual funds. Mutual Funds need to take advantage of modern technology like computer and tele-communications to render service to the investors. Mutual Funds are made for investors and investors interest ought to be paramount by setting standard of behaviours and efficiency through self regularizations and professionalism. In fine, it can be said that with the structural liberalization policies no doubt Indian economy is likely to return to a high grow path in few years. Hence mutual funds organizations are needed to upgrade their skills and technology. Success of mutual funds however would bright depending upon the implementation of suggestions. * * * 126