Mutual Ghanshyam

8/3/2019 Mutual Ghanshyam

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The first portion of the project explains the basics of a Mutual Fund including the history andevolutionof the history. Then it highlights the types of Mutual Funds and the recent trends in the industry.Asection follows this on how to choose the right fund for you which covers all things one shouldlook atbefore investing in a fund.The chapter on ranking of mutual funds is aimed at selecting the star performers amongst the 590ormore schemes available in the market.The second portion deals with doubts and questions that arise in investors' mind about MutualFunds.The FAQs cover questions with explanatory answers to all possible queries.

4 INTRODUCTIONA GLOBALLY PROVEN INVESTMENT AVENUEWorldwide, Mutual Fund or Unit Trust as it is referred to in some parts of the world, has a longand

successful history. The popularity of Mutual Funds has increased manifold in developedfinancialmarkets, like the United States. As at the end of March 2006, in the US alone there were 8,002mutualfunds with total assets of over US$ 9.36 trillion (Rs.427Iakh crores).In India, the mutual fund industry started with the setting up of the Unit Trust of India in 1964.Publicsector banks and financial institutions were allowed to establish mutual funds in 1987. Since1993,private sector and foreign institutions were permitted to set up mutual funds.In February 2003, following the repeal of the Unit Trust of India Act 1963 the erstwhile UTI was

bifurcated into two separate entities viz. The Specified Undertaking of the Unit Trust of India,representing broadly, the assets of US 64 scheme, assured returns and certain other schemes andUTIMutual Fund conforming to SEBI Mutual Fund Regulations.As at the end of March 2006, there were 29 mutual funds, which managed assets of Rs. 2,31,862crores (US $ 52 Billion) under 592schemes. This fast growing industry is regulated by the Securities andExchange Board of India (SEBI).THEORETICAL BACKGROUNDFinancial markets are the backbone of any economic system. Indian economic growth isinevitable, butstability and dynamism of the financial system is imperative to aid allocation of scarce capital

acrosscrucial sectors of the economy. The Indian financial system had for long been dominated bygovernmentsponsored financial institutions and . nationalized commercial banks. However, in recent yearstheprivate sector has been showing steady progress in the areas of banking, asset management andother


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financial services. Mutual Funds is one such financial institution, which has now become afavorableinvestment option for the Indian investor.5Equity MarketThe current slide in the market is mostly due to profit booking at higher levels. Nothing haschangedfundamentally for the Indian economy. The Indian economy appears to be entering into a highertrajectory of growth. Due to some concerns over interest rates in domestic market and increasedinterestrates in US, stock market has seen correction in the last few days of October-2005. FIIs weresellers inIndian stock market. We expect this is a temporary phenomenon. The bull run is expected tocontinue incoming days. Most of bluechip stocks have corrected very well and now available at better ratesfromwhich we can see decent upside. Investors should use this correction phase for building

investmentportfolio. While growth has averaged 5-6% in the past, the reforms initiated in the last few yearshaveimproved the business environment and the Indian economy is expected to be amongst the top 5economies over the next 20 years. The latest economic data has reinforced our view that capitalformation is on the rise and the manufacturing sector could start witnessing capacity additions inthefuture as demand picks up. Overall, the economic fundamentals are strong with various driverssuch asinfrastructure spending, retail lending, positive demographics, outsourcing opportunities and apotentialcapex recovery, in place. One of India's key advantages is that it does not rely excessivelyon external demand as a source of growth. As a result, India has much better balance in itsgrowth modelthan the rest of the region - giving it a built-in macro resilience that other Asian economies lack.With Sensex at 8500, many would wonder, are there any worthwhile investment opportunities. Itis easyto give reasons in retrospection suggesting the index growth from 6100 in May 2005 to 8500 inSeptember 2005. Although majority of the market is abuzz on the huge foreign institutionalinflows(FIIs have pumped in US$9bn up to September 2005 as against US$8.5bn in 2004), these havebeenattracted by the strong historical performance and expectation of good corporate earnings growth

overthe next few years. The long-term structural story remains intact. We expect India to post aconsistentGDP growth of 6.5-7% over the next few years, which would continue to attract foreign investorattention.6The direction of the equity markets over the medium to long term looking very positive.Economic


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growth is expected to improve demand for goods and services across sectors and this should leadtobetter profit growth for the corporate sector. Global investors are positive on emerging marketsingeneral and India in particular given the superior growth of these economies vis--vis thedevelopedeconomies over the next few decades. And given the low equity ownership amongst Indianhouseholdscontinues to be very low, this trend seems to be changing on the back of the buoyancy in thestockmarkets and declining returns from traditional savings avenues, combined with various taxreformsundertaken by the government. If the proposed pension reforms are implemented, it should giveafurther fillip to the domestic markets over the long term.So the moot question remains, where do we invest our money? The major Indian index namelySensex is

currently trading at around 17.8x its historical earnings and an expected one year forwardearningsmultiple of around 15.5x. This compares India at par with most of the emerging market indices.At thecurrent levels we feel four major factors would affect the market movement. Firstly corporateearnings,secondly FII inflows, thirdly rising interest rates and finally rising crude oil price impact on theeconomy. While crude prices have not impacted the market sentiment, which could be becauseofthe balance sheet strength gained by companies over the last few years through good financialperformance, the same could dent going forward. However, we expect the companies withrelativelystronger balance sheets to help sustain the high crude price impact.WHAT IS A MUTUAL FUND ?A Mutual Fund is a trust that pools the savings of a Number of investors who share a commonfinancialGoal. Anybody with an investible surplus of as little as a few thousand rupees can invest inMutualFunds.These investors buy units of a particular Mutual Fund Scheme that has a defined investmentobjectiveand Strategy.The money thus collected is then invested by the fund manager in different types of securities.

Thesecould range from shares to debentures to money market instruments, depending upon thescheme's stated7objectives. The income earned through these investments and the capital appreciation realised bythescheme are shared by its unit holders in proportion to the number of units owned by them.


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Thus a Mutual Fund is the most suitable investment for the common man as it offers anopportunity toinvest in a diversified, professionally managed basket of securities at a relatively low cost.Mutual funds are open-ended investment funds, meaning that new investors can contributemoney tothe fund at any time, and existing investors can return their units or shares to the fund forredemption atany time. When you redeem your units or shares of a mutual fund you will receive a chequebased onthe current market value of the fund s portfolio.

Growth of Assets(Rs.In Crores)

8Number of Schemes

SchemesSeveral parties are involved in the organization and Operation of a mutual fund, including:Mutual Fund Manager: Establishes one or more mutual funds, markets them and oversees theirgeneral administration.Portfolio Adviser: The professional money manager appointed by the Mutual Fund Manager to

directthe fund s investments. The Mutual Fund Manager also often acts as the Portfolio Adviser.Principal Distributor: Coordinates the sale of the fund to investors, either directly or through anetwork of registered dealers.9Custodian: The bank or trust company appointed by the Mutual Fund Manager to hold all of thesecurities owned by the fund.Transfer Agent and Registrar: The group responsible for maintaining a list of all investors inthe


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fund.Auditor: The independent accountants retained by the Mutual Fund Manager to audit each year,andreport on the financial statements of the fund.Trustee: The entity that has title to the securities owned by the fund (when the fund is organizedas atrust, instead of as a corporation) on behalf of the unitholder.10TYPES OF MUTUAL FUND SCHEMESThere are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age,financialposition, risk tolerance and return expectations. Whether as the foundation of your investmentprogramme or as a supplement, Mutual Fund schemes can help you meet your financial goals.(AI) By StructureOpen-Ended SchemesThese do not have a fixed maturity. You deal directly with the Mutual Fund for your investmentsand

redemptions. The key feature is liquidity. You can conveniently buy and sell your units at NetAssetValue ("NAV") related prices.Close-Ended SchemesSchemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-endedschemes. You can invest directly in the scheme at the time of the initial issue and thereafter youcan buyor sell the units of the scheme on the stock exchanges where they are listed. The market price atthestock exchange could vary from the scheme's NAV on account of demand and supply situation,Unitholders' expectations and other market factors.One of the characteristics of the close-ended schemes is that they are generally traded at adiscount toNAV but closer to maturity, the discount narrows. Some close-ended schemes give you anadditionaloption of selling your units directly to the Mutual Fund through periodic repurchase at NAVrelatedprices. SEBI Regulations ensure that at least one of the two exit routes are provided to theinvestor.Interval Schemes11

These combine the features of open-ended and close-ended schemes. They may be traded on thestockexchange or may be open for sale or redemption during predetermined intervals at NAV relatedprices.(B) By Investment ObjectiveGrowth SchemesAim to provide capital appreciation over the medium to long term. These schemes normallyinvest a


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majority of their funds in equities and are willing to bear short-term decline in value for possiblefutureappreciation. These schemes are not for investors seeking regular income or needing their moneybackin the short term.Income SchemesAim to provide regular and steady income to investors. These schemes generally invest in fixedincomesecurities such as bonds and corporate debentures.Capital appreciation in such schemes may be limited.Ideal forRetired people and others with a need for capital Stability and regular incomeInvestor who need some income to supplement their earnings.Balanced SchemesAim to provide both growth and income by periodically distributing a part of the income andcapitalgains they earn. They invest in both shares and fixed income securities in the proportion

indicated intheir offer documents. In a rising stock market the NAV of these schemes may not normally keeppace,or fall equally when the market falls.Ideal for:Investors looking for a combination of income and moderate growth.12Money Market/Liquid SchemesAim to provide easy liquidity, preservation of capital and moderate income. These schemesgenerallyinvest in safer, short-term instruments such as treasury bills, certificates of deposit, commercialpaperand inter bank call money. Returns on these schemes may fluctuate, depending upon the interestratesprevailing in the market.Ideal for:corporate and individual investors as a means to park their surplus funds for short periods orawaiting a more favorable investment alternative.Other SchemesTax Saving SchemesThese schemes offer tax rebates to the investors under tax laws as prescribed from time to time.This ismade possible because the Government offers tax incentives for investment in specified avenues.

For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes. The details ofsuch taxsaving schemes are provided in the relevant offer documents.Ideal for:Investors seeking tax rebates.Special SchemesThis category includes index schemes that attempt to replicate the performance of a particularindex


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such as the BSE Sensex or the NSE 50, or industry specific schemes (which invest in specificindustries)or sectoral schemes (which invest exclusively in segments such as A Group shares or initialpublicofferings).13Index fund schemes are ideal for investors who are satisfied with a return approximately equal tothat ofan index.Sectoral fund schemes are ideal for investors who have already decided to invest in a particularsector orsegment. Keep in mind that anyone scheme may not meet all your requirements for all time. Youneed toplace your money judiciously in different schemes to be able to get the combination of growth,incomeand stability that is right for you. Remember, as always, higher the return you seek higher therisk you

should be prepared to take.A few frequently used terms are explained here below:Net Asset Value ("NAV")Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unitNAV is thenet asset value of the scheme divided by the number of units outstanding on the Valuation Date.Sale PriceIs the price you pay when you invest in a scheme. Also called Offer Price. It may include a salesload.Repurchase PriceIs the price at which a close-ended scheme repurchases its units and it may include a back-endload. Thisis also called Bid Price.Redemption PriceIs the price at which open-ended schemes repurchase their units and close-ended schemesredeem theirunits on maturity. Such prices are NAV related.Sales LoadIs a charge collected by a scheme when it sells the units. Also called , 'Front-end' load. Schemesthat donot charge a load are called 'No Load' schemes.14Repurchase or 'Back-end' Load

Is a charge collected by a scheme when it buys back the units from the unit holders.BASIC FUNDAMENTALS OF MUTUAL FUNDWHY SHOULD YOU INVEST IN MUTUAL FUNDS?The advantages of investing in a Mutual Fund are:1. Professional Management: You avail of the services of experienced and skilled professionalswho arebacked by a dedicated investment research team which analyses the performance and prospectsof


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companies and selects suitable investments to achieve the objectives of the scheme.2. Diversification: Mutual Funds invest in a number of companies across a broad cross-sectionofindustries and sectors. This diversification reduces the risk because seldom do all stocks declineat thesame time and in the same proportion. You achieve this diversification through a Mutual Fundwith farless money than you can do on your own.3. Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps youavoidmany problems such as bad deliveries, delayed payments and unnecessary follow up withbrokers andcompanies. Mutual Funds save your time and make investing easy and convenient.4. Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide ahigherreturn as they invest in a diversified basket of selected securities.15

5. Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directlyinvestingin the capital markets because the benefits of scale in brokerage, custodial and other feestranslate intolower costs for investors.6. Liquidity: In open-ended schemes, you can get your money back promptly at net asset valuerelatedprices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stockexchange at the prevailing market price or avail of the facility ofdirect repurchase at NAV related prices which some close-ended and interval schemes offer youperiodically. '7. Transparency: You get regular information on the value of your investment in addition todisclosureon the specific investments made by your scheme, the proportion invested in each class of assetsand thefund manager's investment strategy and outlook.8. Flexibility: Through features such as regular investment plans, regular withdrawal plans anddividendreinvestment plans, you can systematically invest or withdraw funds according to your needs andconvenience.9. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over alifetime.10. Well Regulated: All Mutual Funds are registered with SEBI and they function within the

provisionsof strict regulations designed to protect the interests of 'investors. The operations of MutualFunds areregularly monitored by SEBI.UNDERSTANDINGAND MANAGING RISKAll investments whether in shares, debentures or deposits involve risk: share value may go downdepending upon the performance of the company, the industry, state of capital markets and the


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economy; generally, however, longer the term, lesser the risk; companies may default in paymentofinterest/ principal on their debentures/bonds/deposits; the rate of interest on an investment mayfall short16of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillfulmanagement can minimize risk. Mutual Funds help to reduce risk through diversification andprofessional management. The experience and expertise of Mutual Fund managers in selectingfundamentally sound securities and timing their purchases and sales, help them to build adiversifiedportfolio that minimizes risk and maximizes returns.HOW TO INVEST IN MUTUAL FUNDS.Step One - Identify your investment needs. Your financial goals will vary, based on your age,lifestyle,financial independence, family commitments, level of income and expenses among many otherfactors.Therefore, the first step is to assess your needs.

Begin by asking yourself these questions:l. What are my investment objectives and needs?Probable Answers: I need regular income or need to buy a home or finance a wedding or educatemychildren or a combination of all these needs.2.How much riskamI willingto take?Probable Answers: I can only take a minimum amount of risk or I am willing to accept the factthat myinvestment value may fluctuate or that there may be a short-term loss in order to achieve a long-termpotential gain.3. What are my cash flow requirements?Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a specificneed aftera certain period or I don't require a current cash flow but I want to build my assets for the future.Bygoing through such an exercise, you will know what you want out of your investment and can setthefoundation for a sound Mutual Fund investment strategy.Step Two - Choose the right Mutual Fund.17Once you have a clear strategy in mind, you now have to choose which Mutual Fund and schemeyou

want to invest in. The offer document of the scheme tells you its objectives and providessupplementarydetails like the track record of other schemes managed by the same Fund Manager. Some factorstoevaluate before choosing a particular Mutual Fund are:the track record of performance over the last few years in relation to the appropriate yardstickand similar funds in the same category.how well the Mutual Fund is organised to provide efficient, prompt and personalized service.


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degree of transparency as reflected in frequency and quality of their communications.Step Three - Select the ideal mix of Schemes. Investing in just one Mutual Fund scheme may notmeetall your investment needs. You may consider investing in a combination of schemes to achieveyourspecific goals.The following charts could prove useful in selecting a combination of schemes that satisfy yourneeds.This plan may suitInvestor seeking Income & moderate growth.Investor looking for growth & stability with moderate riskAggressive Plan

GrowthScheme-70%IncomeScheme-15%

Money market Scheme-10%Balanced Scheme-5%

This plan may suitRetired & other investor who needs to preserve capital & earn regular incomeStep Four - Invest regularlyFor most of ,the approach that works best is to invest a fixed amount at specific intervals, sayeverymonth . By investing a fixed sum each month, you buy fewer units when the price is higher andmoreunits when the price is low, thus bringing down your average cost per unit. This is called rupeecostaveraging and is a disciplined investment strategy followed by investors all over the world. Withmanyopen-ended schemes offering systematic investment plans, this regular investing habit is madeeasy foryou.Step Five - Keep your taxes in mindAs per the current tax laws, Dividend/Income Distribution made by mutual funds is exempt fromIncome Tax in the hands of investor. Further, there are other benefits available for investment inMutualFunds under the provisions of the prevailing tax laws. You may therefore consult your taxadvisor or

Chartered Accountant for specific advice to achieve maximum tax efficiency by investing inMutualFundsStep Six- Start early It is desirable to start investing early and stick to a regular investment plan.If youstart now, you will make more than if you wait and invest later. The power of compounding letsyouearn income on income and your money multiplies at a compounded rate of return.


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Step Seven -The final step all you need to do now is to get in touch with a Mutual Fund or youragent/broker and start investing. Reap the rewards in the years to come. Mutual Funds aresuitable forevery kind of investor-whether starting a career or retiring, conservative or risk taking , growthorientedor income seeking.19YOUR RIGHTS AS A MUTUAL FUND UNITHOLDERAs a unitholder in a Mutual Fund scheme coming Under the SEBI (Mutual Funds) Regulations,you areentitled to:1. Receive unit certificates or statements of accounts Confirming your title within 30 days fromthe dateof closure of the subscription under open-end schemes or within 6 weeks from the date yourrequest fora unit certificate is received by the Mutual Fund.2. Receive information about the investment policies, investment objectives, financial position

andgeneral affairs of the scheme.3. Receive dividend within 30 days of their declaration and receive the redemption or repurchaseproceeds within 10 days from the date of redemption or repurchase.4. Vote in accordance with the Regulations toa change the Asset Management Company;b. wind up the schemes.5. To receive communication from the Trustee about change in the fundamental attributes of anyschemeor any other changes which would modify the scheme and affect the interest of the unit holdersand tohave option to exit at prevailing Net Asset Value without any exit load in such cases.6. Inspect the documents of the Mutual Funds specified in the scheme's offer document.In addition to your rights, you can expect the Following from mutual fund. To publish their NAV, inaccordance with the regulations daily in case of open-ended schemes and once a week, in case ofcloseendedschemes. To disclose your schemes' entire portfolio twice a year, unaudited financial results halfyearly and audited annual accounts once a year. In addition many mutual funds send outnewslettersperiodically. To adhere to a Code of Ethics which require that investment decisions are taken inthe bestinterests of the unit holders.

20What are the potential advantages of investing in mutual funds?There are many reasons why people invest in mutual funds:Diversification: Investing in a number of different securities helps reduce the risk of investing.Whenyou buy a mutual fund, you are buying an interest in a portfolio of dozens of different securities,givingyou instant diversification, at least within the type of securities held in the fund.


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Affordability: With many mutual funds, you can begin buying units with a relatively smallamount ofmoney(e.g., Rs 5000 for the initial purchase). Some mutual funds also let you buy more units onaregular basis with even smaller installments (e.g., Rs 500 per month).Professional Management: Mutual funds are managed by professionals who are experienced ininvesting money and who have the skills and resources tore search many different investmentopportunities.Liquidity: Units or shares of mutual funds can be redeemed at any time.Flexibility: Many mutual fund companies administer several different mutual funds (e.g., moneymarket ,fixed-income, growth, balanced and international funds) and allow you to switchbetween fundswithin their fund family at little or no charge. This can enable you to change the balance of yourportfolio as your personal needs or market conditions change.Performance Monitoring: The value of most mutual funds is reported daily in the financialpress andon many internet sites, allowing you to continually monitor the performance of your investment.

What are some of the potential disadvantages?When you invest in a mutual fund you place your money in the hands of a professional manager.Thereturn on your investment will depend heavily on that manager s skill and judgement. Even thebest21portfolio advisers are wrongs one times, and studies have shown that few portfolio advisers areable toconsistently out-perform the market. Check the fund manager s track record over a period of timewhenchoosing a fund.As a mutual fund investor, you will also be paying, through management expenses andcommissions, formanagement services and for various administrative and sales costs. Those fees and commissionsreducethe return on your investment and are charged, in almost all cases, whether the fund performswell ornot. Sales commissions and redemption fees can have a very significant impact on your return ifyoudecide to redeem your mutual fund investment in the short-term.How will I know if mutual funds are right for me?For most investors, choosing a qualified financial adviser is an important first step in anyinvestment

program With the help of your financial adviser(s), you ll want to establish your investmentgoals,assess your risk tolerance, and develop a personal investment strategy. Ask your financialadviser ifmutual funds are an appropriate investment for you. Discuss what type of fund best matches yourpersonal investment strategy, then ask for some specific suggestions.Once you have identified some funds that seem to meet your investment needs, read theprospectus and


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financial statements for each one.Consider:Investment Objectives: Are the fund s investment objectives consistent with your own? Can thefundprovide the level of regular income you need? Does it provide the type of diversification you relookingfor? If you have other investments, how will this fund affect the overall balance of yourportfolio?Risk: Are you comfortable with the level of risk associated with the fund? If you have otherinvestments, would this fund tend to increase or decrease your overall risk exposure? UnlikeGICs orsavings accounts, mutual funds are not covered by deposit insurance. Values of most mutualfunds willfluctuate and you can lose money depending on changes in the marketplace.

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Time Horizons: Does the investment fit with your expected investment time horizon? Forexample, ifyou re investing for a relatively short time, will sales charges and redemption fees offset anypossiblegains? Might the value of the fund be down just when you need to redeem your investment?Expected Return: Does the fund have the potential to provide the returns you need to meet yourgoals?Remember, predicting the return of any mutual fund requires that you predict the futuresomething thatcan never be done with certainty. Past performance will tell you about the fund s historicalvolatility andits performance relative to competing funds, but it is not are liable indicator of futureperformance. Thereturn you can expect from a mutual fund is closely related to its risk. The lower the risk of thefund, thelower the return you should expect. Be realistic in your expectations.Costs: Fees and commissions associated with mutual funds will affect your overall return andcanvary widely from one fund to the next. Higher fees and commissions do not necessarily meanbetterperformance. Check and compare fees and commissions before you invest.Service Provider: Do you know something about the mutual fund firm offering the mutual fundsfor

sale? Consider who operates the mutual fund and who provides the services necessary for itsoperations.You ll also want to look at the performance history of the fund manager who selects thesecurities to beheld in the fund.Flexibility: Will you be entitled to switch your investment to other funds in the same fund family?Can you afford the minimum initial investment? Does the fund offer other


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features such as regular monthly purchase plans or redemption plans that are attractive to you?Tax Considerations: Is the mutual fund a qualifying investment for your RRSP, RegisteredRetirement Income Fund (RRIF) or other registered plan? If you are investing in the fund outsidearegistered plan, do you understand the tax implications of the distributions of income or capitalgainsthat the fund may make to you?23Who can sell mutual funds?Like other securities, mutual funds must be sold through dealers who are registered with thesecuritiesregulator in your province or territory. The names of registered dealers in your area can be foundin thetelephone book. Most financial institutions such as banks, credit unions and trust companies alsohave subsidiaries that are registered to sell mutual funds. You will also be able to findinformation aboutdealers and salespersons from your provincial securities regulator or its web site.

What should I expect from the salesperson when I buy a mutual fund?You should expect your salesperson:to deal with you fairly, honestly and in good faith;to discuss with you your general investment objectives and tolerance for risk;to make recommendations that are consistent with your objectives and risk tolerance;to disclose to you any significant conflicts of interest (the form of disclosure may vary dependingon the nature of the conflict);to promptly deliver a disclosure document (simplified prospectus) and current financialinformation for any mutual fund you buy;to relay your purchase order to the fund on the day you place it, or on the next business day if theorder was given after normal business hours;

Research MethodologyResearch Methodology is a systematic method of discovering new facts or verifying old facts,theirsequence, inter-relationship, casual explanation and the natural laws which governs them.Research Methodology explained by Redman and Mory are as follows systematized effort togain newknowledge Research Methodology is original contribution to the existing stock of knowledgemakingfor its advancement. It is the purist of truth with the help of study. Observation, comparison andexperiment. In short also covers the systematic method of finding solution to a problem isresearch. Italso covers the systematic approach concerning generalization and the formulation of the theory.

24Different stages involved in research consists of enacting the problem, formulating a hypothesis,collecting the facts or data, analyzing the facts and reaching certain conclusion either in the formofsolution towards the concerned problem or in generalization for some theoretical formulation.In Research Methodology mainly Data plays an important role.The Data is divided in two parts:a) Primary Data.


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b) Secondary Data.Primary Data is the data, which is collected directly by direct personal interview,interview, indirect oral investigation, Information received through local agents,drafting a schedule, drafting a questionnaire.Secondary Data is the data, which is collected from the various books, magazine and material,reports.The data which is stored in the organization and provide by the FINANCE people are alsosecondarydata. The various information is taken out regarding that subject as well other subject fromvarioussources and stored. The last years data stored can also be secondary data. This data is kept for theinternal use of the organizatioThe FINANCE manual is for the internal use of the organization they are secondary data whichhelppeople to gain information. In this report the data plays a very crucial role. For this report thedata wasprovided to me by FINANCE department and other departmental head in the organization.

The Primary and Secondary data which is specified above was provided by:a) Dy- Manager - finance.b) Other department head.Due to discussion with these people lot data as well latest information was known by thesepeople whowas very beneficial and was primary data to me. This is the Research Methodology used in theproject.The primary and secondary data method has been used in this project. Unless the data iscollected noproject can be complete. So both these data is very important in the project.25SURVEY ANALYSISOBJECTIVESI conducted a survey to assess the popularity and awareness among people about the, mutualfunds. Forthe purpose we chose a random sample of 50 end consumers in the city of Mumbai. Themethodologyadopted was that of questionnaire. The question addressed the basic questions relating toinvestment inmutual Funds like the rationale of investmentSampling MethodThe sampling method so as to obtain a representative sample is the Non- Probability Samplingmethods.

Under non-probability sampling, we selected the respondents to the survey on the basis ofJudgmentsampling with Convenience taken into account.Research instrument26The research instrument used for this survey is a structured questionnaire. The questionnairecontains


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both open-ended and close ended questions. The questionnaire provides a provision with respecttorating scales.AssumptionsThe sample selected represents the population fully.The data has been collected by administering an open and close ended questionnaire to sample ofend investors with the assumption that the primary data collected is true and reflects the actualpreferences of the investors.The sample selected has thorough knowledge of the subject.Limitations of StudyThe respondents who have not given any information are not included in the sample but do comeunder the population.Factors like change in tax and regulatory framework has not been considered.Analysis Interpretation Of DataChart 1: Penetration of mutual funds among respondents.Penetration of mutual funds amongrespondents.

mutual funds: 84%others: 16%

Out of the 60 respondents only 50 (84%) had invested in any kind of mutual fund scheme. Thisshows7that the penetration of mutual funds among the populace is still low in spite of the industry'spresence inIndia for more than 36 years. This reach is in a city like Mumbai which is considered the

commercialhub for the country; one can easily imagine the penetration level in other smaller cities/towns.Chart 2: Age wise distribution of investment patternAge wise distribution of investment pattern

Age 20-40yearInvestment;40%

Age40-55yearInvestment;30%

Age Above 55 year

Investment:30%

As can be seen from the above charts that for the age group 20-40 the percentage is 50% percentwhichshows that the popularity of mutual funds is at its peak among the people in the age group and isthe


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lowest for age group above 55. This pattern may be due to the fact that 40-55 the time framewhen aperson has maximum responsibilities and may be unwilling to put money into schemes do notofferassured returns or safety. 25-40 one has few responsibilities and can afford take higher risks.Peopleabove 55 are either retired or nearing retirement so they might have some excess cash and hencetheytoo are willing to take some amount of risks.

28Chart 3: Gender wise distribution of investment

Gender wise distribution ofinvestment. :

Male 72%Female 28%

In our sample of 60 respondents only 72% of the male respondents invested in mutual fundswhich ismore or less in line with over all proportion of people (73.33%).In India it is found that womenare weakin making decision where to invest the money. Women in India are found to keep there fundsidealrather than invest some where.Due to lack of knowledge & awareness women participants in investing is less compared to thatof male.In a survey only 28% women were found who are aware of mutual funds. Here in the survey,percentagegap between male and female is too much more.


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Chart 4: Distribution of incomeincome wise distributionupto 1lakhs

52%1-3 lakhs28%3-5lakhs14%above 5 lakhs6%

29Mutual seem to have reached their peak in their reach among people in the income group 5 lakhsandabove as all 3 of the respondents in our sample falling in that income bracket have invested in

mutualfunds. For incomes groups upto1 lakh & 1-3 lakhs the reach is penetration is more than 80%which isacceptable. The only surprising trend is that for income group 3-5 lakhs the penetration seems tobe only14% wl improved immediately.OBSERVATIONS:Fixed deposits still have high values in the Indian economy as vehicles are concerned.Number of people having mutual funds or Shares as first choice are( requires the mutual funds todo a rethinking as shares are fraught wit than mutual funds still a large number of people preferto enter the rather than through mutual funds, this could mean that there is a mutual funds in

these individuals. It is these individuals that could for mutual funds and the need to pullthemselves up and gear up to attract these investors through better designed schemes, simplifiedprocedures.One disturbing trend that has come out of this analysis is that 26 out of 60 respondents haveranked government securities as the last choice even though these have sovereign guarantee andare absolutely safe. This means Gilt funds have to be careful while designing their schemes asthe preference for governmentsecurities is quite low. This low preference could be either due to filling interestrates or due to the cumbersome procedures involved in acquisition, redemption of thesesecurities or due to lack of well developed secondary market for Gilts.On second number is Public provident fund which has been ranked as number one by 12 andnumber two by 24 which makes it a close second to fixed deposits,

Chart 5: Information source

30print46%T.V28%newsletter14%friends


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safety40%higher returns26%0%liquidity

14%appreciations6%tax benefits14%

safety higher returns liquidity appreciations tax benefitsSafety seems to be the uppermost concern in people while taking investment decisions. Nextimportantfactor that people look for while making an investment decision is the tax benefit. Safety and tax

benefits taken together influence more than 50% of the peoples investment decision.

32There are only 26% who are interested in higher returns. Others are ready to invest but withsecurefuture. There investment carry less risk and more return.Chart 8: Satisfaction with investment choices.Satisfaction with investment choices

yes60%no30%cant say10%yesno

cant sayMost of the people are satisfied with their investment choices while Asset Managementcompanies can'take advantage of and win them over 30% of the people are not happy with their investmentdecisionswhich could be a potential avenue for mutual funds waiting to be tapped. Here there 10% peoplewho


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cant say anything about their satisfaction with their investment choice and in the survey 60%people arefound who have greater satisfaction in their investment choice this in because of their awarenessofmutual fund and other investment options.

33Chart 9: Regulatory frameworkRegulatory framework

Yes-52%No-48%

Around 48% of the people are not satisfied with the regulatory framework available formutual funds. The regulatory authorities need to take a serious view of this feeling amongthe investors and take some concrete Steps for the direction of developing faith in theregulatory system for Asset Management Companies (AMCs). Some of the suggestionsgiven by the respondents are:RBI and SEBI guideline should be tightened.Manipulations in the equity prices should be closely monitored. . The frameworkshould be more investor friendly.Clear-cut guidelines. Accountability of the auditors /inspectors. . Disclosurenorms should be more stringentRegulatory bodies should be more proactive rather than post active and reactingafter something goes wrong.Each scheme should be treated as profit center and closely watched by experts34Chart 10: Popularity of various fundsAfter the analysis of what factors affect people's investment decision let us have a look at

how the various Mutual funds have fared for our sample group of small investors.Popularity of various funds

0510152025KotakMahindra 30%UTI 25%SBI 22%Reliance DSP 23%

It can be observe from the above chart that the popularity of the mutual funds Kotak ismuch popular among others mutual fund. Even UTI also have popularity from variousfund. The main reason why UTI is much popular is duration from which plays in themarket. UTI was the first among mutual fund who has started its function in 1964.

35MARKETING PIAN


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A marketing plan for mutual fund services needs to stress the firm-product-customerrelationship. The following are the points for considerationProduct Design and Range1. Mutual fund products (schemes) are basically investment-oriented and the savingsmobilized by them are invariably invested in. the instruments (shares, debentures)projected in the schemes. There is little scope for flexibility.2. Due care needs to be taken while designing particular products taking into accountexpected changes in capital stock market in view of future investment return.3. The changing profile of customers (investors) must be taken into account in identifyingsavings market. Different segments of the potential savings market have afferentexpectations long-term growth, regular income tax benefits, and so on. New productsmust be aimed at satisfying one or more objectives. Fax laws and other relatedregulations also play an important role in designing a new product because benefits canbe offered to investors within the existing framework of tax regulations.India lags behind countries like the USA, the UK and Japan in terms of innovativeproducts. Most of the products launched in India are either income or income-cumgrowth schemes; few are pure growth schemes. Investor options have been restricted due

to limited product range. This has probably happened on account of lack of experienceand the risk-averse, conservative attitude of mutual fund management.Like product planning, product launching is a crucial clement in marketing. Many Indianmutual funds have performed poorly due to wrong, timing of launch. Market research canhelp to assess the needs of potential customers, availability of existing products andfuture growth in demand. Before formally launching a new product, test marketing can beconducted.

36Brand PolicyBrand name highlights the market segments, inherent benefits and investment objectives,and ensures customers loyalty.Brand identity is an important marketing factor because it facilitates productidentification at the market place. In India, most of the products are linked to the namesof the mutual funds. However, there are products not linked to the names oforganizations: the 'Dhan Series' is identified with LIC Mutual Fund, 'Master Series' withUTI and "Magnum with SBI Mutual Funds. It can be said that Indian funds have beenquite successful in brand policy and brand identification.Pricing PolicyThe price of a service should he related to the achieving of marketing and organizationalgoals. The price of mutual fund products in inextricably linked with returns.Indian mutual funds follow the historic pricing structure. The schemes may (also) providefor the price at which the units may be subscribed or sold to the independent participants

in the scheme and the prices at which such units may at any time be repurchase prices atleast once in a week. Mutual funds are also to ensure that the difference between the saleand repurchase prices does not exceed 7 per cent of the sale price.CostThe costs of investing in mutual funds in India are not as high as in the US, the UK andJapan. This is because SERI has strictly laid down the limits of various expenses.According to SEBI regulations, the AMC can charge the mutual funds with investment,management and advisory fees, which are fully disclosed in the prospectus. Accordingly,


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the initial expenses under one scheme cannot be more that 6 per cent of the funds raised.These expenses include:Issue cost of sponsoring the fund and its scheme.Recurring expenses, including -marketing, selling, agents' and brokers'commissions, transaction costs, registrars' and transfer agents'(R&T) fees so on.Incentives are often offered to investors for early payment.Agents 'commission is paid out of the funds collected.

37Distribution And Promotion Of ProductsA new mutual fund product may have all the desired qualities but that does not ensure itsspontaneous acceptance by customers. Success would greatly depend on appropriatemarket segments for the product, selection of appropriate distribution channels andpromotional aids are essential. The identification of market segments is crucial for thepromotion and distribution of products. Market segments are identified on the basis ofnature of the product, direct and indirect benefits of the product requirements of the

customers, product usage rule, Indian mutual funds still depend mostly on retailing, adistinct change has been noted m marketing strategy .i.e. major market intermediaries areagents appointed by respective mutual funds, brokers who are members of stockexchange and arc registered with the mutual fund, institutional and corporate agents.Public sector mutual funds like LIC MF and UTI have an edge over other due to theirwell-established agency network. In order to tap the savings potential in rural India,mutual funds are paying greater attention to rural marketing. UTI has taken specific stepsto promote units in rural areasCustomer ServiceThe marketing of services is significantly influenced by the quality of service and theinterpersonal relationship between customers and the service organization. Servicing hasgreat significance in the mutual fund industry. Prompt and timely service in usingcertificate cheques and attending to any customer problems would make a distinctdifference. Expected rates of return being more or less the same for all the schemes; it isthe quality of service, which becomes the deciding factor.In order to ensure quality service to customers, service audit would be of great help tomonitor the range of services usually rendered by mutual funds. These are sales relatedcomplaint-related and suggestion-related services. Service standards can be fixed on thebasis of expectation levels of customers which can be found through market surveys.It must be remembered that marketing is a dynamic process and aims not only at 'sale' butalso at 'resale' and an enduring relationship with customers.

38

MARKETING STRATEGIES ADOPTED BY THE MUTUAL FUNDSThe present marketing strategies of mutual funds can be divided into two main headings:Direct marketingSelling through intermediariesJoint callsDIRECT MARKETINGThis constitutes 20 percent of the total sales of mutual funds. Some of the important toolsused in this type of selling are:


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Personal Selling: In this case the customer support officer of the fund at a particularbranch takes appointment from the potential prospect. Once the appointment is fixed, thebranch officer also called Business Development Associate (BDA) in some funds thenmeets the prospect and gives him all details about the various schemes being offered byhis fund. The conversion rate in this mode of selling is in between 30% -40%.Telemarketing: In this ease the emphasis is to inform the people about the fund. Thenames and phone numbers of the people are picked at random from telephone directory.Sometimes people belonging to a particular profession are also contacted through 'phoneand are then informed about the fund. Generally the conversion rate in this form ofmarketing is 15% - 20%.Direct mail: This one of the most common method followed by all mutual funds.Addresses of people are picked at random from telephone directory. The customersupport officer (CSO) then mails the literature of the schemes offered by the fund. Thefollow up starts after 3-4 days of mailing the literature. The CSO calls on the people towhom the literature was mailed. Answers their queries and is generally successful intaking appointments with those people. It is then the job of BOA to try his best to convertthat prospect into a customer.

39Advertisements in newspapers and macaws: The funds regularly advertise in businessnewspapers and magazines besides in leading national dailies. The purpose is to keepinvestors aware about the schemes offered by the fund and their performance.Hoardings and Banners: In this case the hoardings and banners of the fund are put AImportant locations of the city where the movement of the people is very high. Generallyhoardings arc put near UTI offices in order to tap people who are at present Investing inUTI schemes. The hoarding and banner generally contains information either about oneparticular scheme or brief information about all schemes of fund.Selling Through Intermediaries: Intermediaries contribute towards 80% of the totalsales of mutual funds. These are the people/distributors who are in direct touch with theInvestor They perform an important role in attracting new customers. Most of theseIntermediaries are also involved in selling shares and other investment instruments. Theydo a commendable job in convincing investors to invest in mutual funds. A lot dependson the after sale services offered by the intermediary to the customer. Customers prefer towork with those intermediaries who give them right information about the fund and keepthem abreast with the latest changes taking place in the market especially if they have anybearing on the fund in which they have invested.Regular Meetings with distributors: Most of the, funds conduct monthly/bi-monthlymeetings with their distributors. The objective is to hear their complaints regardingservice aspects from funds side and other queries related to the market situation.Sometimes, special training programmers are also conducted for the new agents/

distributors. Training involves giving details about the products of the fond, their presentperformance in the market, what the competitors are doing and what they do to increasethe sales of the fund.Joint Calls: This is generally done when the prospect seems to be a high net worthinvestor. The BDA and the agent (who is located close to the HNI's residence or area ofoperation) together visit the prospect and brief him about the fund. The conversion rate isvery high in this situation, generally, around 60%. Both the fund and the agent provideeven after sale services in this particular case.


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40MARKETING OF FUNDS: CHALLENGES AND OPPORTUNITIESWhen we consider marketing, we have to see the issues in totality, because we cannotjudge an elephant by its trunk or by its tail but we have to see it in its totality. When wesay marketing of mutual funds, it means, includes and encompasses the followingaspects:Assessing of investors needs and market researchResponding to investors needs;Product designing;Studying the macro environment;Timing of the launch of the productChoosing the distribution network;Preparing offer documents and other literatureGetting feedback about sales;Studying performance indicators about fund performance like N A VSending certificates in time and other after fia1es services

Honoring the commitments made for redemptions and repurchasePaying dividends and other entitlementsCreating positive image about the fund and changing the nature of the market itself. Theabove are the aspects of marketing of mutual funds, in totality. Even if there is a singleweak-link among the factors, which are mentioned above, no mutual fund cansuccessfully market its funds.41Some of the older public and private sector players will either close shop or be takenover. Out often public sector players five will sell out, close down or merge with strongerplayers in three to four years. In the private sector this trend has already started with twomergers and one takeover. Here too some of them will down their shutters in the nearfuture to come.The market will witness a flurry of new players entering the arena. There will be a largenumber of offers from various asset management companies in the time to come. Somebig names like fidelity, Principal, Old Mutual etc. arc looking at Indian market seriously.One important reason for it is that most major players already have presence here andhence these big names would hardly like to get left behind.BANKS MUTUAL FUNDSReturns low betterAdministrationexpenses high lowRisks low moderateInvestment option less more

Network high penetration low but improvingLiquidity at cost betterQuality of assets not transparent transparentInterest calculation minimum balance everydayGuarantee none none42Inspired Marketing will help Mutual Funds walk away with the blank DepositsBankers better watch out The Indian mutual fund industry will soon start relieving the


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banking system of its priced deposits. Innovative distribution, marketing and aggressiveconcept selling will drive savings into the lap of the Indian Mutual Fund industry in thenext millennium, fond managers predicted at the Second Economic Times Roundtable onmutual funds held last week. Fund chiefs predicted that ease of transactions, thanks totechnology and increased awareness, would lead to more investors putting their moneyinto mutual funds. The day was not far, they said, when small savings account too beganmoving into mutual funds. Significantly, fund chiefs were unanimous that the credibilitygap, which the industry suffered for the past few years, did not exist any more. All thefund chiefs were unanimous that performance, service and support were all imperativefor growth."Performance, transparency and after sales service and genuine retail investor interest asopposed to hot corporate money, an important contributor to many mutual fund schemes,will drive the industry growth. " Performance, transparency, after sales customer serviceand genuine retail investor interest are opposed to hot corporate money, an importantcontributor to many mutual fund schemes, will drive the industry growth"Tata Mutual Fund chief K.N. Atmaramani said. On the state of market in general, fundchiefs attempted to allay fears that an overvalued market may pose hurdles to stock

picking.According to them, while investors may feel that information technology pharmaceuticalsand consumer' goods stocks - or the BSE Sensex for that matter - might have peaked, newopportunities are opening up in areas like retail, healthcare and even in internet business.Fund chiefs also made a case for the code to prevent mutual funds from projecting shorttermgains in an attempt to attract investors into their schemes. They were of the viewthat, "Mutual Funds have to agree to present performances in an annualized fashion, overa longer period. The industry as a whole should standardize its performance."India is at the first stage of a revolution that has already peaked in the US. The US boastsof a mutual fund asset base that is much higher than its bank deposits. In India, mutual

43fund assets are not even 12% of the bank deposits, but this trend is beginning to, change.This is forcing a large number of banks to adopt the concept of narrow banking whereinthe deposits are kept in Gilt and me other assets which improves liquidity and reducesrisk. The basic fact is that hanks cannot be ignored and they will not close downcompletely. Their role as intermediaries cannot be ignored. It is just that mutual fundswould change the way banks do business in future.44RECIPE FOR MUTUAL FUND PERFORMANCEMORE BANGS FOR THEBUCKOn a closer scrutiny an income fund seems to have done well followed by balanced fundsunitarily, it can be attributed to bad equity market conditions and good debt market

conditions. There is obviously more to it than that.The number of investors who invested in the growth schemes far out number the othercategories. Hence there is a large-scale resentment among mutual fund investors today.The question now is whether the poor performance is attributable totally to bad marketcondition or if there are other ignored fundamental problems which the industry is yet toaddress it self to? While to an extent the poor market condition is responsible for thepoor market condition is responsible for the poor show , there are others serious issueswhich the industry has overlooked so fur. The three areas require in-depth rethinking:


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Product conceptualizationInvestment strategyOutsourcingProduct conceptualizationThe first and foremost ill that is plaguing the industry is lack of innovation. Abroad, ld isa very innovative industry. In India, the industry has squarely failed in conceptualizationand innovation.While is a huge potential to tap the individual savings of the investors, the industry hasoverlooked their needs so far. To tailor products to a particular need is not easy. It is aprofessional job and a lot of thought should be given to it. There are basically two fconceptualizing a mutual fund product. They areInvestment target based andNeed based45The investment target based mutual fund products are the one which we are used to sofar. They design their theme based on the target where the money is going to be invested.pure growth scheme will invest 90 per cent in equity shares, 5 per cent in fixed-income

yielding securities and the balance in the money market. Here the theme is growth andthe growth is based on investments in equity shares. Another variety is need based. Herethe theme is based on investor's specific needs. For e.g. the Children Gift Growth scheme[CGGF] UTI is a classic case where the theme is based on the need for the children asthey grow. Here there is no explicit mention as to where the fund is going to derive thegrowth from. The fund has the freedom to invest either in equity market or in debt marketdepending on the attractiveness.Packaged portfolio conceptThe major reason for the poor performance of 50% schemes out of 592 should beattributed mainly to poor stock picking skills. Otherwise there is no reason why 17schemes should generate double-digit returns in the same time-frame. Almost all theinvestors who have invested in the mutual funds do realize the fact that in the long run itis the stock market that will provide extraordinary returns. Time and again this is testedby statistical analysis. Today a well informed investor will not have doubts in his mindabout future performance of blue chips like HLL, Infosys, Castrol, Bajaj Auto, lTC, andColgate etc. But unfortunately, he is not in a position to invest in these scripts due to theirhigh price though they are relatively cheap].Certainly beyond the reach of an intelligent,ordinary, middle-class executive. The classification is done separately for man andwoman as their needs and desires differ quite considerably. The classification is also donebased on the stages of life. The product to be tailored should carefully link the effect ofperiodic savings on achievements of the above needs/desires. Then, there is a great dealof innovative mutual fund products that can emerge out of every segment of the aboveneeds and desires of individuals. As we zero-in on a specific need, like the one described

above, the target investors become a focused group. With innovative marketing ideas, itbecomes that much easier to sell the idea than to have a very broad theme like growth andattack the universe as the target! Today, we have barely catered to the specific needs ofthe individual Almost all the 592 schemes analyzed are plain vanilla variety of growth,income or balanced. To an extent, we can give credit to UTI & LIC which havesucceeded in tailoring schemes based on children needs, medical needs, etc

46


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Investment strategiesThe second ill that is troubling the industry is poor fund management track record formost of the fund managers. Smart funds which have topped their performance are theones who have quickly reallocated their assets on time. While funds which are prohibitedfrom doing this like a pure equity fund or pure income fund did face a tough task. Evenhere clever fund managers shifted their portfolio well to include highly liquid blue chipstocks even at the cost of booking loss in mid-cap illiquid non-performing stocks.A good investment strategy would then aim to achieve the following:Protection of capital from erosion or alternatively guaranteeing capital safety.Possess excellent research capabilities to ensure market timing and investmentstrategy formulation.OutsourcingThe most important aspect for the success of a mutual fund is the ability to outsourcecertain critical activity. This is quite a new thinking, given the Indian obsession to doeverything in-house. Abroad, there are certain mutual funds which outsource to the extentof 100 per cent! from product design to investor servicing. Though the concept ofoutsourcing has been prevalent in manufacturing, it has yet to come of age in fund

managementIt will ensure rapid penetration at the quickest possible time at the most economical cost.It also gives flexibility for the mutual fund to change them if their performance is sloppy.Aspects like investor servicing, information needs, research, fund management, etc. canbe effectively outsourced in the context of a mutual fund.Product conceptualization Outsourcing Investment Strategies1.Innovation 1.Cost control 1.Capital protection2.Superior design 2.Flexibility 2.Market timing3.Adaptability 3.Choice 3.Assest quality47INVESTMENT OBJECTIVETo generate capital appreciation from a portfolio of predominantly equity and equity relatedsecurities with investment in, generally, not more than 30 stocks.SCHEME PHILOSOPHYKotak 30 is a diversified equity growth scheme, with a portfolio of generally not more than30 choicest stocks, handpicked by our fund management team. The portfolio comprises ofstocks with an emphasis on financial strength of the company, quality of management,brands and franchises, its track record and the market liquidity of the stock regardless of thesector to which they belong.The scheme is suitable for investors with a time horizon of 2 to 3years.As On July 31, 2006 Kotak 30BSESensitive

IndexS&P CNXNifty1 YEAR 41.8 40.2 35.73 YEARS 52.6 41.2 38.05 YEARS 39.0 26.8 24.2SINCE ALLOTMENT (DEC 29,1998)


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29.8 18.1 18.4

48DIVIDEND HISTORY

Date Cum Dividend NAV Rate (Rs./unit)DEC-27-05 Rs. 27.711 1.00JUN-03-05 Rs. 20.345 1.00NOV-05-04 Rs. 18.060 1.50JAN-31-04 Rs. 21.093 5.00OCT-20-03 Rs. 18.983 2.00DEC-28-01 Rs. 11.036 1.00OCT-09-00 Rs. 17.556 2.00DEC-11-99 Rs. 22.954 2.00FACE VALUE : RS. 10/UNIT.DIVIDEND DISTRIBUTION IS SUBJECT TO AVAILABILITY AND ADEQUACY OFDISTRIBUTABLE SURPLUS.

AFTER DIVIDEND IS DISTRIBUTED, THE NAV FALLS TO THE EXTENT OF THEDIVIDEND AND DISTRIBUTION TAXES, IF ANY.49PORTFOLIO OF KOTAK 30 AS ON 31-July-2006Issuer / Instrument Industry/Rating QuantityMarket Value(Rs.in Lakhs)% to


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NetAssetsEquity & Equity relatedListed/Awaiting listing onStock ExchangeInfosys Technologies Ltd. Software 1366002,261.488.66%Bharat Heavy Electrical Ltd.IndustrialCapital Goods890001,820.236.97%Larsen And Toubro Ltd.

IndustrialCapital Goods690001,524.595.83%Reliance Industries Ltd.PetroleumProducts1450001,419.265.43%50Mahindra & Mahindra Ltd.Auto 2380001,404.445.38%Wipro Ltd. Software 2500001,227.004.70%

Grasim Industries Ltd. Cement 530001,102.564.22%ITC Ltd.ConsumerNon Durables600000


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1,004.403.84%Bajaj Auto Ltd. Auto 40000 984.88 3.77%I-Flex Solutions Ltd. Software 63850 847.19 3.24%Steel Authority of India Ltd. Ferrous Metals 1204000 845.81 3.24%Sun Pharmaceuticals Industries Ltd. Pharmaceuticals 101550 829.10 3.17%EID Parry (India) Ltd.ConsumerNon Durables413095 775.38 2.97%Nestle India Ltd.ConsumerNon Durables73800 737.74 2.82%HDFC Ltd. Finance 60000 706.44 2.70%Sterlite Industries (India) Ltd

Non FerrousMetals175000 656.51 2.51%Siemens Ltd.IndustrialCapital Goods73000 646.85 2.48%Deccan Chronicle Holdings Ltd.Mediaand Entertainment167316 644.75 2.47%Punjab National Bank Banks 160000 608.40 2.33%Aditya Birla Nuvo Limited Textile Products 83666 606.29 2.32%The Associated Cement Companies Ltd Cement 65000 548.47 2.10%ICICI Bank Ltd. Banks 95000 526.16 2.01%Lupin Ltd. Pharmaceuticals 52600 472.19 1.81%51Hindustan Lever Ltd.ConsumerNon Durables200000 465.40 1.78%Mahindra Gesco Developers Ltd. Construction 58000 309.05 1.18%TajGVK Hotels & Resorts Ltd. Hotels 147250 264.46 1.01%

Oil & Natural Gas Corporation Ltd. Oil 200 2.35 0.01%Listed/Awaiting listing on StockExchange - Total23,241.3888.95%Futures


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Oil & Natural Gas Corporation Ltd.-AUG200630000 343.83 1.32%Sun Pharmaceuticals Industries Ltd.-AUG200619350 155.78 0.60%Futures (Market value representsNotional Value) - Total 499.61 1.92%Collateral Borrowing & LendingObligation1,250.00 4.78%Term Deposits 800.00 3.06%Net Current Assets/(Liabilities) 337.86 1.29%Grand Total 26,128.85100.00

%52KOTAK MAHINDRA K-30 - SIZE DOES MATTERAfter a long bull the BSE Sense x finally started its upward journey during April in 1999.Surely, the question doing the rounds is whether this rise is based on strong fundamentals ofthe-economy or fueled by speculative activities. And for how long this momentum can besustained. These are also some of the highly contested topics among the analysts and theinvestors. But harping on these things is not a game of the mutual funds which claim to playit clean and safe. They are the least bothered entities about the market movements and thetiming, as they claim.This case study, in its quest to find answers to these questions and many more, strives todelve deeper into the performance of a fund, K-30. The entire study revolves around thefund's investment strategy, its style of portfolio management, an in-depth analysis of theportfolio composition and last but not the least quantitative evaluation of the performance,applying relevant evaluation models.K-30 is an equity oriented open-ended fund From the house of Kotak Mahindra AMC.Launched on December 22,1998, it was the time when the stock market was down. The fundwas able to pick up some of the best stocks at fairly cheaper valuations (see .'Stock Speak).After a wait of nearly four months i.e. From the April-end onwards the stock prices startedflaring up. Some of the factors like revival of economies of East-Asian nations has increasedFDI and a good monsoon helped sentiments look up. Increase in trade with USA and Europeadded to the rise in industrial activities. This, apart From the booming IT sector provided themuch needed support to fuel the stock market. The boom culminated in Sense x roaring past

the 5000 level in October, 1999.A break-up of the performance of the K-30's NAV over a period of one year since inceptionbeautifully depicts its movement during this period. The NAV of the fund was Rs. 14.64 , ason March 31, 1999. The return since inception till then worked out to around 46 percent. TheNAV fell marginally to Rs. 13.22 on April 9,1999. The return since inception till that datewas over 32 percent. The NAV outperformed the BSE Sensex by a huge margin of over 16percent. There was a reshuffling of the portfolio between April and July 1999. That helpedthe NA V to appreciate handsomely. The NA V rose to Rs. 15.90, as on August 6, 1999


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thereby giving a return of around 60 percent since inception. Between August and October531999, the portfolio was in for another rebalancing. As a result of this reshuffling, theportfolio's exposure to market heavyweights like Infosys, Satyam, Zee and Hughes Softwareincreased significantly. This resulted in N A V vaulting to Rs.21.3 8 level, as on December22, 1999. Thus, exactly within a year since its inception the fund's NA V got more thandoubled. The return since inception works out to 113.80 percent, over this period. And, afterconsidering the entry load of 1.50 percent the return since inception works out to 85.91percentOne interesting thing that emerges From this study is that there has been a continuous seesaw kind of shift in the sectoral exposure of the portfolio, especially with regard to the ITsector. The exposure to the IT sector was 34.86 percent of the net investible corpus of thefund on March 31. 1999. During April 1999 it was pulled down to 28.7 percent whichsurprisingly was below that of the FMCG sector (31.1 percent). During August 1999 the fundtrimmed the exposure to the IT sector further to 24.81 percent. But in a sudden reversal of theearlier strategy, the exposure to the sector was pushed up substantially to 37.61 percent, itshighest ever level, in the beginning of the current year 2000. This shows that the fund

manager has, From the very beginning, actively churned the portfolio.And, he has been pursuing a dynamic asset allocation strategy. Ironically, it is the troika ofi.e. IT, Pharma and FMCG, which has been at the core of this see-saw.Focus on GrowthThe investment objective of K 30 mutual fund is to generate capital appreciation From aportfolio of predominantly equity and equity related securities. The portfolio composition isdesigned in such a way as to comprise equity of not more than 30 companies at any point oftime which mayor may not be the same companies which constitute the BSE Sensex or NSENifty index.The fund lays great emphasis on a small universe of equities as well as their constantmonitoring rather than indulging in an aimless stock chase. The fund strongly believes thathaving a portfolio constituting a greater number of investments does not necessarily resulteither in superior returns or significant. Reduction in risk through diversification. On theother hand, it does reduce the attention which can be given to each stock and to the portfolio54as a whole The fund further argues that one of the ground rules of investing in stocks is neverto spread yourself thin over too many scrip's. It believes that less is indeed more. The K-30scheme restricts itself generally to only 30 scrip's because of this belief.It's a good thinking on the part of the fund because monitoring as well as managing a largenumber of shares not only require a lot of time and effort but also entail greater risks,comparativelySimply put, with increase in number of companies, in a given portfolio, the interplay amongthem, or the correlation factor, becomes more pronounced, which, if not managed carefully,

can increase the portfolio risk thereby constraining the growth. The trick here lies in having abasket of securities where the correlation among them is minimal so that an optimum tradeoffof risk and return can be achieved. Keeping in tune with the changing times, the fundaims to use derivatives to hedge exposures as and in a manner approved by SEBI. On theanvil is, also, the plan to seek permission to invest in GDR/ ADR ofIndian companies for theK 30 portfolio.Low turnover is the keyThe fund aims to follow a specified target for portfolio turnover. It states that the portfolio


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turnover will normally not exceed 150 percent once the corpus is invested. The turnover,here, means the simple average of the aggregate of purchases and sales net of the followingThe turnover caused on account of investing the initial, corpus;The turnover caused on account of investing in debt and money market securities;The turnover caused on account of fresh purchasesAnd redemptions by Unit holders. As the purchases and sales invite transaction costs viz.brokerage, stamp duty and custodial charges, a predetermined turnover limit becomesessential to enable portfolio restructuring when warranted.55Focus on Intrinsic ValueThe fund seeks to invest 90 percent of its investible corpus in equity and equity relatedsecurities and rest in debt and money market instruments. As far as the equity component isconcerned the fund aims to invest in diverse sectors such as information technology,pharmaceuticals, FMCG, automotives, services, utilities, petroleum and engineering.The fund aims to invest in stocks which it believes are priced at a material discount to theirintrinsic value. Such intrinsic value will be a function of both past performance and futuregrowth prospects. For selecting particular stocks as well as determining the potential value of

such stocks, the fund has a set of parameters to guide it in choosing the stocks which satisfythe selection criteria.The foremost among these criteria is the financial strength of the companies as indicated bywell recognized financial parameters. Some of the important parameters which the fundlooks at are total cash flow, return on capital employed (ROCE), return on net worth(RONW), dividend per share and earnings per share. The second criteria is the quality of themanagement and track record. The fund looks for those companies which have highlycompetent management and those companies which practice the code of corporategovernance. And, it also looks at the companies which are regular tax payer and have a soundtax planning in place. Consistency in performance by the companies over a period of time isalso one of the factors which the fund takes into consideration.Third significant consideration is that the companies should be less prone to recessions orbusiness cycles either because of the nature of their businesses or because of superiorstrategies followed by their management.Fourth criteria are that the companies should pursue a strategy to build strong brands for theirproducts or services and they should be capable of building strong franchises. And lastly, themarket liquidity of the stocks. If a company does not have sufficient number of floatingstocks, the fund does not consider it fit for making investments56Guiding force of dynamismIt is the triumvirate of IT, Pharma and FMCG which has constituted more than fiftypercent of the investible corpus of the fund, since inception. The portfolio of K 30 fundcomprises of around 30 stocks, spread across 12 industries. This provides a fair degree of

protection from risk arising out of being concentrated in a few industries.But what is worrying about the portfolio is its unusually high concentration in the ITsector. Though the fund claims that one of the ground rules of investing is not to spreadone's portfolio too thin over too many stocks, it is also equally not very wise to get highlyexposed to a few stocks. Diversification strategy needs to be oriented more towardstrimming the concentration in order to further lower the risk.If we look at the portfolio composition of K 30 fund it becomes pretty clear that theportfolio has seen a lot of structural changes in terms of sectoral exposure. Rebalancing


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on a regular basis, during the first year, has been one of the main features of the portfolio,since inception. And, it won't be an exaggeration to say that throughout the fund hasadopted a dynamic asset allocation strategy. The dynamic asset allocation strategy, insimple words, involves a process of shifting the exposure of the portfolio among variousasset classes such as equities, debts etc. at regular intervals. The method focuses oncombining assets whose expected returns are not highly correlated so as to obtain the bestpossible expected return, given the level of risk assumed.Apart from a regular shift in sectoral exposure, the investments in money marketinstruments have also been increased to a high of 12.70 percent in January, this year,from a low of2.87 percent in March, 1999.Though the assets of the fund too haveincreased to around 90 crore in between, the strategy seems to be to spread the risk.In quest of a right blendThe portfolio of K-30 fund has been on a continuous reshuffling spree, ever since it waslaunched in December 1998. A brief study of the portfolio composition strategy whichhas been in search of a right blend of stocks and sectors guides us through some of the57interesting trends it went through over a period of time, since its inception.

A glance at the portfolio composition suggests that Information Technology sector hasbeen the most dominant sector in K-30 fund's portfolio in terms of exposure.The dominance of Information Technology stocks in the portfolio of the K 30 fund isquite understandable, given the fact that the fund aspires to produce superior returnsthrough a balanced exposure to specific sectors. It is another thing that the exposure to ITsector has been more than the desired exposure. Anticipation of a higher growth might bethe reason.The apprehension about the high concentration in the sector is not unfounded as the kindof valuation these technology stocks are getting have not been fully justified by theirrespective performances. The valuations in case of these stocks seem to be over stretched.Because the kind of prices investors are willing to pay is based on expectations of futureperformance of the companies concerned. And there is no guarantee that performanceswill match investors' perception. What will happen once a company fails to meet theinvestors' expectations? To seek an answer one does not have to go far.The price performance of Infosys on the bourses during the current month (January 2000)itself gives enough indication of what future has in store for the soaring technologyscrip's prices. In the first few trading sessions, in January 2000, the price of Infosysjumped up to Rs. 15,000 a share. But during the next few sessions the price starteddeclining and touched the level ofRs. 12,000. Thus in a few strokes it shed Rs. 3000 pershare. The sheer loss in M-Cap of the stock had a telling effect on the bourses as well.The exposure to the IT sector reached an time high of37.61 percent in January 2000,From 34.56 percent in March, 1999. Among the IT stocks, Infosys has the lion's share.The exposure to the stock is at 12.45 percent. Satyam, Pentafour Communications (now,

Pentasoft Technologies), Polaris, Citicorp Securities, BFL Software, Hughes Software,Software Solutions are the other technology scrip's in the portfolio of the K-30 fund.58One of the heavyweights in K-30's portfolio, Infosys has been among the front runners inthe ongoing Bull Run. Financial for the third quarter ended December 31,1999 look quiteimpressive. Contrary to the general expectations, the drop in revenues From Y2K relatedprojects, to 5.8 percent in the said quarter From 9.4 percent in the second quarter of thesame fiscal, did not have any adverse impact on the bottom lines. The company has been


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able to successfully make the transition to E-Commerce business From Y2K relatedprojects. Revenues From E-Commerce increased From Rs. 6.4 crore to Rs. 15.6 croreduring the said periodThe higher proportion of E-Commerce revenues has helped Infosys improve its operatingprofit margins in the third quarter of 1999-2000 by 1.67 percentage points to 40.35percent. It has also successfully added 23 new clients in the quarter, of which seven are inthe area of e-business and voice and communication technologies.During the quarter, the company undertook two very exciting new projects. The first oneis related to the execution of projects in the area of optical networking fur a leadingdeveloper of next generation optical transport products. The second one is thedevelopment of an internet based pricing tool for a large drug store chain in the US. Thesuccessful execution of these two products will certainly establish Infosys' credentials asa top class global software player.The stock holds promise for strong growth in medium to long-term, given its top qualitymanagement and proven track record, even at this level (Rs. 12,000, as on January 6,2000). But an exposure of 12.45 percent is certainly unwarranted, From diversificationpoint of view.

Satyam Computer, one of the leading domestic techno logy scrip's, though does not boastof a strong management like Infosys but has a very fascinating business story. Itsbusiness model is quite unique, in the sense that unlike other ISPs (Internet ServiceProviders) it not only offers the internet access but almost the entire gamut of softwaresolutions. Today, Satyam is an access provider, a portal company, a corporate networkservice provider and an E-Commerce provider all rolled into one. This not only providesa greater synergy to the company, but also offers tremendous opportunity to grow. Its59business model's most exciting aspect is the fact that the high investments required arespread across Our different business streams; which means that payback is much faster.This also translates into evenly distributed cost, full utilization of the assets andgeneration of high returns. . From the fund's point of view the Satyam scrip is a goodmedium to long-term bet. The fund also participated in the initial public offerings ofHughes software and Polaris Lab, both From the IT sector. Hughes software is a leadingcommunications software company. The promoter of the company, Hughes ElectronicsCorporation, a subsidiary of General Motors, is engaged in telecom, information andentertainment services. Hughes Software is engaged primarily in developing packagesoftware, providing software consultancy services and other ancillary product andservices for the telecommunications industry. The company's major client has so far beenits parent which accounts for 74 percent of its revenue. This shows the overdependenceon one client for revenue but on the other hand also provides a stable revenue base. Theparent's worldwide marketing and distribution network has come handy for the company,as major part of its balance 26 percent comes from exports.

The FMCG sector accounts for 11.22 percent of the net investible corpus of the K-30fund, as per the latest portfolio composition figure. The scrip's which form a part of thefund's portfolio are HLL, Cad bury India, Indian Shaving Products and International BestFoods (IBL). IBL's inclusion in the fund's portfolio is very interesting as it is not on thebuy list of many funds.Unlike other FMCG companies, IBL has been keeping a low profile for a long time,despite being in possession of some of the top brands like Captain Cook, Knorr, Brown &Poison, Taria Dalal etc. The company has zeroed in on four areas of competency in


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which it would expand its product base. These are - sweet, savory, staples and drinks.The rationale behind the move to enter areas besides custards and jellies was to grow theturnover, and to be part of the housewife's daily repertoire.In order to gain greater market penetration, IBL has rapidly increased its distributionreach from 600 to 1,600 and the number of outlets from one lakh to 2.5 lakh. And, giventhe increased demand for packaged atta and salt among the urbanites, the company stands

60a good chance to grow in future given the strong brand equity of its products. But a lotwill depend on the company's ability to counter the competition from biggies like HLL,Nestle and Tata:The company also hopes to cater to the export markets of South Africa and South-EastAsia. If it fructifies, this can bring substantial revenue to the company.The vision of the company is to be the BEST run foods company through strong brandleadership in specialized ethnic and international food categories. A food for thought!Though, the company has been reporting losses for the two consecutive years, the long

term potential appears bright. The fund has cut exposure to the stock :from 1.67 percent,in August, 1999, to 0.83 percent, as on January 6, 2000. Quite similarly, the exposure toHLL has also been pared to 5.07 percent :from a high of 10.20 percent during the sameperiod. The move seems to be in line with the market mood which has kept shifting thefocus among the IT, Pharma, FMCG and Cyclicals, all through 1999 and is still going on.The Pharmaceutical sector accounts for 10.39 percent of the net corpus of the fund. Infact, the exposure to the sector is slightly lower than the FMCG sector. The exposure toRanbaxy at 3.21 percent-is the highest among the other pharmacy stocks in the fund'sportfolio. Cipla, Knoll, Pfizer, SB Pharma and Novartis are the other scrip's from thesector.One of the top counters in the portfolio From this sector, Ranbaxy is front runner amongthe domestic Pharma companies in R&D arena. Concentration on dosage form sales,globalizing the operations with on-guard presence in key advanced and emerging marketsand enhancing the intellectual wealth through a strong R&D and a regulatory base havegiven the company a significant competitive advantage. The company's global marketingstrategy of building large brands is well on track. It crossed a major milestone in itsinternationalization drive with the launch of Cefaclor and Ranitidine formulations in theUS market. It has become the first Indian company to market its products in this largegenerics market under its own label.

61In the last five-six years, Ranbaxy has steadily increased its intellectual wealth andexperiential knowledge, especially in the advanced and emerging international markets.

One of the company's key success factors has been its ability in regulatory filings withrespective drug authorities in the US, UK, South Africa, Australia and New Zealand.These drives are expected to push the company in the forefront of global market arena.The company is a good long-term bet for the fund.Companies like Cipla, Knoll, Novartis, SmithKline Beecham Pharma and Pfizer havealso been showing considerable advancement on the R&D front. Although Pfizer hasbeen marred with controversies over its parent's plan to set up a hundred percentsubsidiary. These are the good long-term bets where the fund needs to stay invested in.


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After IT, FMCG and Pharma sector, one sector that has gained importance in theportfolio ofK-30 is Media. Zee Telefilms is the only scrip from the sector in which theexposure of the portfolio is at 7.52 percent. In fact, the exposure to Zee Telefilms is wellabove the technology stocks except Infosys. This shows the strong faith the fund has inZee. After the famous deal with the Star group last year. Zee has been seeing phenomenalgrowth. A lot of initiatives are being taken to propel the group's foray in internet relatedventures which will further push the growth of the company. Launch of some of theregional language channels and with few more in the pipeline (this includes proposal forlaunching of English channels), and' on top of it all the restructuring drive which is underw

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Mutual Ghanshyam