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Cholamandalam Distribution Services Ltd is an independent Financial Advisory and Investment company and is one of the few to have been registered with Association of Mutual Fund in India (AMFI) for having undertaken to adhere to AMFI Guidelines and Norms for Intermediaries. CDS is a fully owned subsidiary of Cholamandalam Financial Services Group, a part of Rs. 4200 Crore Murugappa Group – one of the most trusted business houses in India. Cholamandalam, incorporated in 1978 as the financial services are of Rs. 4200 Crore Murugappa Group, is one of the leading Financial Services Groups (FSG) in India.
All its investment counselors across the country are compulsorily required to get individual certification from AMFI and IRDA and are supported by a highly qualified research team, fully equipped with resources to ensure that customers get access to the best quality timely advice. Moreover, insights into the investment environment are also achieved through constant interaction between the CDS Research team and fund managers, bankers, treasury managers and other key players in the industry to make sure investments performance to their best.
Cholamandalam FSG offers a wide range of financial products and services like, Mutual Funds, Fixed Deposits, Stock Broking & Depository Services, Finance Against Shares, Vehicle Loans, General Insurance and Investment Advisory Services. PRODUCTS OFFER BY CHOLAMANDALAM FINANCIAL SERVICES GROUP: 1. Mutual Funds Equity, Income, Balanced, Money Market, Child Care Plans, Pension Plans, Equity Linked Saving Services (ELSS). 2. Company Deposits Cumulative and Fixed Deposits from rated NBFCs and manufacturing companies. 3. Bonds Capital Gains, Tax Saving, State Government and PSU. . Life Insurance Endowment, Money-back, Annuity Term, Retirement and Unit Linked Plans. 5. Non Life Insurance (Personal Lines) Personal Accident, Health, Travel, Householders, Shopkeepers and Motor Insurance, Small Business. 6. Direct Equity IPOs, Stock Broking and Depository Services (through Cholamandalam Securities Ltd. ) SERVICES OFFER BY CHOLAMANDALAM FINANCIAL SERVICES: Tax Planning Reducing tax outflows and filing tax documents, Answers to tax queries. Retirement Planning Saving enough using insurance and mutual funds to create a buffer on retirement.
Portfolio Advice Asset Allocation and Security Selection. Portfolio Review and Rebalancing Advising regularly on actual risk level versus ideal risk levels and the need to change portfolio. Regular News Updates through email and newsletters. STRENGTHS OF CHOLAMANDALAM FINANCIAL SERCICES : Research All product tie-ups, selection and recommendations are screened by a centralized Research wing and communicated regularly through presentations (group and one-on-one), house visits, newsletters and research publications. 1.
Customized Solution Each individual has unique financial planning requirements that vary across his lifecycle. Backed by extensive research, CDS packages and financial products to suit the needs of each individual depending on specific investment objectives, tax liabilities, age profile, family circumstances and their risk appetite. Based on these it provides customized solution to each of its clients as per their needs and requirements. 2. Convenience Provides all these products and services at clients’ doorstep – free of cost.
THE INDIAN FINANCIAL SYSTEM The Indian Financial System comprises a variety of intermediaries, markets, and instruments that are related in the manner shown below, it provides the principal means by which savings are transformed into investments. [pic] FINANCIAL MARKETS A financial market is a market for creation and exchange of financial assets. If we buy or sell financial assets, we will participate in financial markets in some way or the other. Functions of Financial Markets: 1. Financial markets facilitate price discovery.
The continuous interaction among numerous buyers and sellers who throng financial markets helps in establishing the prices of financial assets. 2. Financial markets provide liquidity to financial assets. Investors can readily sell their financial assets through the mechanism of financial markets. 3. Financial markets considerably reduce the cost of transaction. Two major costs associated with transaction are search costs and information costs. THE INDIAN FINANCIAL SYSTEM Financial Markets perform an important function of mobilization of savings and channellising them into the most productive uses.
The financial market in India can be divided into four broad categories: a) Money Market b) Debt Market c) Forex Market d) Capital Market FINANCIAL INTERMEDIARIES Financial intermediaries are firms that provide services and products that customers may not be able to get more efficiently by themselves in financial markets. A good example of financial intermediary is a mutual fund, which pools the financial resources of many people and invests in a basket of securities. Life makes many demands of us.
There’s so much to indulge in and deal with. At work or at home, with family, friends or self. Woven into these threads is the inescapable truth that money is a means to many an end. A house in the suburbs, good education for the kids, a set of four wheels to zip around, an early retirement…. The end might differ, but the means-at least one of them- to reach them remains the same: money. Earned wisely, saved regularly, invested smartly. Mutual Funds are investment products that operate on the principle of ‘STRENGTH IN NUMBERS’.
They collect money from a large group of investors, pool it together, and invest them in a large and well-diversified portfolio of securities such as money market instruments, corporate and government bonds and equity shares of joint stock companies. A mutual fund is a pool of commingles funds invested by different investors, who have no contact with each other. These investment vehicles don’t demand a deep understanding of financial matter; they even don’t demand oodles of time. Mutual funds are conceived as institutions for providing small investors with avenues of investments in the capital market. Since small investors generally do not have adequate time, knowledge, experience and resources for directly accessing the capital market, they have to rely on an intermediary, which undertakes informed investment decisions and provides consequential benefits of professional expertise. The raison d’etre of mutual funds is their ability to bring down the transaction costs. The advantages for the investors are reduction in risk, expert professional management, diversified portfolios, liquidity of investment and tax benefits. By pooling their assets through mutual funds, investors achieve economies of scale.
The interests of the investors are protected by the SEBI, which acts as a watchdog. Mutual funds are governed by the SEBI (Mutual Funds) Regulations, 1993. THE MUTUAL FUND OPERATION FLOW CHART Origin: In 1774, a Dutch merchant invited subscription from investors to set up an investment trust by the name of Eendragt Maakt Magt (translated into English, it means ‘Unity Creates Strength’), with the objective of providing diversification at low cost to small investors. The birth of the Investors Trust in US was in 1924; it had started a chain of events that would bring mutual funds to American homes for good.
There was an initial euphoria among American investors over a new investment vehicle, but much of this died with the onset of the Great Depression in1929. But the birth of a powerful market regulator, laying down of rules for all industry participants, enhancement of legislation for the mutual fund had once again did it and it never stopped up till now. Mutual Fund – in India: History of Mutual Funds in India: (Reference: amfiindia. com) PhaseI-1964 to 1987 : In 1963, Unit Trust of India was set up by Parliament under UTI Act and given a monopoly. The scheme launched by UTI was Unit Scheme-64. ater in 70’s and 80’s, UTI started offering some special purpose schemes like ULIP and Children’s Gift Growth Fund. The first equity mutual fund product was Master Share in 1986. Phase II –1987 to 1993 : 1987 marked the entry of non-UTI, Public Sector mutual fund. In 1987 banks, financial institutions and insurance companies in the public sector were permitted to set up mutual funds. Some of the funds launched during this period are SBI Mutual Fund, Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. Phase III –1993 to 1996 : Permission was granted for entry of private sector funds.
It gave a greater choice to the Indian Investors. These private funds have brought in with them the latest product innovations, investment management techniques and investor servicing technology that makes the Indian mutual fund industry vibrant and growing. This phase also marked the launch of an open-end funds. Phase IV –1996 : Investor friendly regulatory measures have been taken both by SEBI to protect the investor, and by the government to enhance investor’s returns through tax benefits. As on March 2000, there were 33 Mutual Funds and 337 schemes with total assets of Rs. 1,13,005/- Crores.
While around 1,40,000/- Crores of total assets are under management, as on March 2004. Worldwide, the Mutual Fund, or Unit Trust as it is called in some parts of the world, has a long and successful history. The popularity of the Mutual Fund has increased manifold. In developed financial markets, like the United States, Mutual Funds have almost overtaken bank deposits and total assets of insurance funds. 1. As at the end of December 1999, in the US alone there were 7,791 Mutual Funds with total assets of over US $ 6. 8 Trillion (296 Lac Crores). 2. Out of the top 10 mutual funds worldwide, eight are bank sponsored.
Only Fidelity and Capital are non-bank mutual funds in the group. 3. In US about 9. 7 million households are managing their assets on-line, such a facility is not yet available in India. 4. On-line trading is a great idea to reduce management expenses from the current 2% of total assets to about 0. 75% of the total assets. Internationally, on-line investing continues its meteoric rise. Many have debated about the success of e-commerce and its breakthroughs, but it is true that this aspect of technology could and will change the way financial sectors function.
However, mutual funds cannot be left far behind. In fact advanced countries like US, mutual funds buy-sell transactions have already begun on the net, while in India the net is used as a source of information. Such changes could facilitate easy access, lower intermediation costs and better services for all. A research agency that specializes in Internet technology estimates that over the next four to five years mutual fund assets trading will grow by ten folds, where equity trading will increase during the period by seven to eight folds.
This will increase the share of mutual funds from 34% to 40% during the period. [pic] [pic] [pic] Investment Avenues available to the Indian Investors are as follows: 1. Bank Deposits 2. Equity Instruments 3. Debentures 4. Fixed Deposits by Companies 5. Bonds 6. RBI Relief Bonds 7. Public Provident Fund 8. National Saving Certificates / National Saving Schemes 9. Monthly Income Schemes 10. Life Insurance 11. Mutual Funds • Mutual Funds Vs. Other Investment: Product |Return |Safety |Liquidity |Tax Benefit |Convenience | |Bank Deposit |Low |High |High |No |High | |Equity Instrument |High |Low |High or Low |No |Moderate | |Debentures |Moderate |Moderate |Low |No |Low | |Fixed Deposits by Companies |Moderate |Low |Low |No |Moderate | |Bonds |Moderate |Moderate |Moderate |Yes |Moderate | |Life Insurance |Moderate |High |Low |Yes |Moderate | |Mutual Funds (Open-ended) |Moderate |Moderate |High |No |High | |Mutual Funds (Close-ended) |Moderate |Moderate |High |Yes |High | |RBI Relief Bonds |Moderate |High |Low |Yes |Moderate | |PPF |Moderate |High |Low |Yes |Moderate | |National Saving Certificates |Moderate |High |Low |Yes |Moderate | |Monthly Income Schemes |Moderate |High |Low |Yes |Moderate | While instruments like shares give high returns at the cost of high risk, instruments like NSE and bank deposits give lower returns and higher safety to the investor. Mutual Funds aim to stike a balance between risk and return and give the best of both to the investors. • Direct Equity Investment Vs. Mutual Fund Investing: a.
Identifying Stocks that have high growth potential involves through research and monitoring of the market. It is beyond the capability of most individual investors whereas Mutual Funds specialize in this area. b. Diversification is the key to success in equity investments. A diversified portfolio serves to minimize risks. An individual investor may not have the capital to build a diversified portfolio. c. Professional Management by Mutual Funds ensure that the best avenues are tapped with the aid of comprehensive information and detailed research. d. Investment Objectives of an investor are met by Mutual Funds which offer a variety to him. He can choose from income or growth mutual funds depending on his requirement. e.
Liquidity of Mutual Funds is high through listing on stock exchange for closed-end funds and repurchase options for open-end funds. f. Transaction Costs are lower in mutual funds as compared to direct investment due to economies of scale. g. Convenience is high for Mutual Funds as they sell through service networks, banks and other distributors. Many funds allow investors the flexibility to switch between schemes within a family of funds. h. Blue Chip portfolio available to investors for as low as Rs. 2000/-. i. High Service Standards maintained by Mutual Funds. j. Transparency high degree of transparency is maintained by the funds. Mutual Funds target the small investors. Most schemes keep their minimum investment at Rs. 1000-5000.
For an affordable amount such as this, investors get lots more through a mutual fund than what would ever manage on own. e. g. on 22 April 2004, for instance, one share of Infosys alone cost Rs. 5400, one share of Wipro Rs. 1600. If an investor wanted to invest Rs. 5400 he would get only one stock of Infosys while investing the same amount in mutual fund he would get more numbers of diversified stocks. These funds can survive and thrive only if they can live up to the hopes and trusts of their individual members. These hopes and trusts echo the peculiarities, which support the emergence and growth of such in rescue of such investors who come to the rescue of such investors who face following constraints while making direct investments: 1.
Limited resources in the hands of investors quite often take them away from stock market transactions. 2. Lack of funds forbids investors to have a balanced and diversified portfolio. 3. Lack of professional knowledge associated with investment business unable investors to operate gainfully in the market. Small investors can hardly afford to have ex-pensive investment consultations. 4. To buy shares, investors have to engage share brokers who are the members of stock exchange and have to pay their brokerage. 5. They hardly have access to price sensitive information in time. 6. It is difficult for them to know the development taking place in share market and corporate sector. 7.
Firm allotments are not possible for small investors on when there is a trend of over subscription to public issues. Mutual Funds are becoming a very popular form of investment characterized by many advantages that they share with other forms of investment characterized by many advantages that they share with other forms of investments and what they possess uniquely themselves. The primary objectives of an investment proposal would fit into one or combination of the two broad categories, i. e. , Income and Capital gains. How mutual fund is expected to be over and above an individual in achieving the two said objectives is what attracts investors to opt for mutual funds. Mutual fund route offers several important advantages. 1. Diversification:
A proven principle of sound investment is that of diversification which is the idea of not putting all your eggs in one basket. By investing in many companies the mutual funds can protect themselves from unexpected drop in values of some shares. The small investors can achieve wide diversification on his own because of many reasons, mainly funds at his disposal. Mutual funds on the other hand, pool funds of lakhs of investors and thus can participate in a large basket of shares of many different companies. Majority of people consider diversification as the major strength of mutual funds. 2. Professional Management: Making investments is not a full time assignment of investors. So they hardly have a professional attitude towards their investment.
When investors buy mutual fund scheme, an essential benefit one acquires is expert management of the money he puts in the fund. The professional fund managers who supervise fund’s portfolio take desirable decisions viz. , what scripts are to be bought, what investments are to be sold and more appropriate decision as to timings of such buy and sell. They have extensive research facilities at their disposal, can spend full time to investigate and can give the fund a constant supervision. The performance of mutual fund schemes, of course, depends on the quality of fund managers employed. 3. Liquidity of Investment: A distinct advantage of a mutual fund over other investments is that there is always a market for its unit/ shares.
Moreover, Securities and Exchange Board of India (SEBI) requires the mutual funds in India have to ensure liquidity. Mutual funds units can either be sold in the share market as SEBI has made it obligatory for closed-ended schemes to list themselves on stock exchanges. For open-ended schemes investors can always approach the fund for repurchase at net asset value (NAV) of the scheme. Such repurchase price and NAV is advertised in newspaper for the convenience of investors. 4. Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save time and make investing easy and convenient. 5. Transparency:
Regular information on the value of investment in addition to disclosure on the specific investments made by investors, the proportion invested in each class of assets and the fund manager’s investment strategy and outlook is provided on regular basis by different fund houses. 6. Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, investors can systematically invest or withdraw funds according to investors’ needs and conveniences. 7. Reduced risks: Risk in investment is as to recovery of the principal amount and as to return on it. Mutual fund investments on both fronts provide a comfortable situation for investors. The expert supervision, diversification and liquidity of units ensured in mutual funds minimise the risks.
Investors are no longer expected to come to grief by falling prey to misleading and motivating ‘headline’ leads and tips, if they invest in mutual funds. 8. Safety of Investment: Besides depending on the expert supervision of fund managers, the legislation in a country (like SEBI in India) also provides for the safety of investments. Mutual funds have to broadly follow the laid down provisions for their regulations, SEBI acts as a watchdog and attempts whole-heartedly to safeguard investors interests. 9. Tax Shelter: Depending on the scheme of mutual funds, tax shelter is also available. As per the union budget-99, income earned through dividends from mutual funds is 100% tax-free to investors. 10. Well Regulated:
All Mutual Funds are registered with SEBI and they function within the provisions of strict relations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. 11. Minimize Operating Costs: Mutual funds having large investible funds at their disposal avail economies of scale. The brokerage fee or trading commission may be reduced substantially. The reduced operating costs obviously increases the income available for investors. Investing in securities through mutual funds has many advantages like – option to reinvest dividends, strong possibility of capital appreciation, regular returns, etc. Mutual funds are also relevant in national interest.
The test of their economic efficiency as financial intermediary lies in the extent to which they are able to mobilise additional savings and channelising to more productive sectors of the economy. Any mutual fund has an objective of earning income for investors and/ or getting increased value of their investments. To achieve these objectives mutual funds adopt different strategies and accordingly offer different schemes of investments. On these basis the simplest way to categorise schemes would be to group these into two broad classifications: Operational Classification and Portfolio Classification. Operational classification highlights the two main types of schemes, i. e. open-ended and close-ended which are offered by the mutual funds. Portfolio classification projects the combination of investment instruments and investment avenues available to mutual funds to manage their funds. Any portfolio scheme can be either open ended or close ended. A. Operational Classification (a) Open Ended Schemes: As the name implies the size of the scheme (Fund) is open – i. e. , not specified or pre-determined. Entry to the fund is always open to the investor who can subscribe at any time. Such fund stands ready to buy or sell its securities at any time. It implies that the capitalisation of the fund is constantly changing as investors sell or buy their shares.
Further, the shares or units are normally not traded on the stock exchange but are repurchased by the fund at announced rates. Open-ended schemes have comparatively better liquidity despite the fact that these are not listed. The reason is that investor can any time approach mutual fund for sale of such units. No intermediaries are required. Moreover, the realizable amount is certain since repurchase is at a price based on declared net asset value (NAV). No minute to minute fluctuations in rates haunt the investors. The portfolio mix of such schemes has to be investments, which are actively traded in the market. Otherwise, it will not be possible to calculate NAV. This is the reason that generally open-ended schemes are equity based.
Moreover, desiring frequently traded securities, open-ended schemes hardly have in their portfolio shares of comparatively new and smaller companies since these are not generally traded. In such funds, option to reinvest its dividend is also available. Since there is always a possibility of withdrawals, the management of such funds becomes more tedious as managers have to work from crisis to crisis. Crisis may be on two fronts, one is, that unexpected withdrawals require funds to maintain a high level of cash available every time implying thereby idle cash. Fund managers have to face questions like ‘ what to sell’. He could very well have to sell his most liquid assets. Second, by virtue of this situation such funds may fail to grab favourable opportunities.
Further, to match quick cash payments, funds cannot have matching realisation from their portfolio due to intricacies of the stock market. Thus, success of the open-ended schemes to a great extent depends on the efficiency of the capital market. (b) Close Ended Schemes: Such schemes have a definite period after which their shares/ units are redeemed. Unlike open-ended funds, these funds have fixed capitalisation, i. e. , their corpus normally does not change throughout its life period. Close ended fund units trade among the investors in the secondary market since these are to be quoted on the stock exchanges. Their price is determined on the basis of demand and supply in the market.
Their liquidity depends on the efficiency and understanding of the engaged broker. Their price is free to deviate from NAV, i. e. , there is every possibility that the market price may be above or below its NAV. If one takes into account the issue expenses, conceptually close ended fund units cannot be traded at a premium or over NAV because the price of a package of investments, i. e. , cannot exceed the sum of the prices of the investments constituting the package. Whatever premium exists that may exist only on account of speculative activities. In India as per SEBI (MF) Regulations every mutual fund is free to launch any or both types of schemes. B. Portfolio Classification of Funds:
Following are the portfolio classification of funds, which may be offered. This classification may be on the basis of (a) Return, (b) Investment Pattern, (c) Specialised sector of investment, (d) Leverage and (e) Others. (a) Return Based Classification: To meet the diversified needs of the investors, the mutual fund schemes are made to enjoy a good return. Returns expected are in form of regular dividends or capital appreciation or a combination of these two. Income Funds: For investors who are more curious for returns, Income funds are floated. Their objective is to maximize current income. Such funds distribute periodically the income earned by them.
These funds can further be splitted up into categories: those that stress constant income at relatively low risk and those that attempt to achieve maximum income possible, even with the use of leverage. Obviously, the higher the expected returns, the higher the potential risk of the investment. Growth Funds: Such funds aim to achieve increase in the value of the underlying investments through capital appreciation. Such funds invest in growth oriented securities which can appreciate through the expansion production facilities in long run. An investor who selects such funds should be able to assume a higher than normal degree of risk. Conservative Funds:
The fund with a philosophy of ” all things to all” issue offer document announcing objectives as: (i) To provide a reasonable rate of return, (ii) To protect the value of investment and, (iii) To achieve capital appreciation consistent with the fulfillment of the first two objectives. Such funds which offer a blend of immediate average return and reasonable capital appreciation are known as ” middle of the road” funds. Such funds divide their portfolio in common stocks and bonds in a way to achieve the desired objectives. Such funds have been most popular and appeal to the investors who want both growth and income. A BIG MUTUAL FUND INDUSTRY TODAY [pic] (b) Investment Based Classification:
Mutual funds may also be classified on the basis of securities in which they invest. Basically, it is renaming the subcategories of return based classification. Equity Fund: Such funds as the name implies, invest most of their investible shares in equity shares of companies and undertake the risk associated with the investment in equity shares. Such funds are clearly expected to outdo other funds in rising market, because these have almost all their capital in equity. Equity funds again can be of different categories varying from those that invest exclusively in high quality ‘blue chip’ companies to those that invest solely in the new, unestablished companies.
The strength of these funds is the expected capital appreciation. Naturally, they have a higher degree of risk. Debt Funds: Such funds have their portfolio consisted of bonds, debentures, etc. this type of fund is expected to be very secure with a steady income and little or no chance of capital appreciation. Obviously risk is low in such funds. In this category we may come across the funds called ‘Liquid Funds’ which specialize in investing short-term money market instruments. The emphasis is on liquidity and is associated with lower risks and low returns. Balanced Fund: The funds, which have in their portfolio a reasonable mix of equity and debt, are known as balanced funds.
Such funds will put more emphasis on equity share investments when the outlook is bright and will tend to switch to debentures when the future is expected to be poor for shares. (c) Sector Based Funds: There are number of funds that invest in a specified sector of economy. While such funds do have the disadvantage of low diversification by putting all their all eggs in one basket, the policy of specialising has the advantage of developing in the fund managers an intensive knowledge of the specific sector in which they are investing. Sector based funds are aggressive growth funds which make investments on the basis of assessed bright future for a particular sector. These funds are characterized by high viability, hence more risky. Type of Fund |Characteristics |Recommendation time frame of investment | |Sector Fund |Concentration on specific sectors and are |5 years | | |designed to give diversification in that | | | |sector. | | |Diversified Growth Fund |Gives superior returns but highly volatile |3 – 5 years | | |in the short term.
Best suited for wealth | | | |accumulation and long term goal. | | |Balanced Funds |Gives an optimal mix of capital appreciation|2 – 3 years | | |and stability of capital. | | |Income Funds |Gives modest returns but are more stable in |? – 3 years | | |value. Best suited for current – regular | | | |income. | |Money Market Funds |Provides total principal safety and more |Less than 6 months | | |attractive yields compared to bank deposits. | | | |Best suited for instant access to money. | | 1) SYSTEMATIC INVESTMENT PLAN Systematic Investment Plan (SIP) is a simple, time-honored strategy designed to help investors to accumulate wealth in a discipline manner over the long-term and to plan a better future for them.
SIP is more suitable for a salaried employee with investible savings every month and who wishes to generate better returns than other instruments at a low risk of price volatility. How do SIPs work? Instead of a lumpsum amount, you invest a pre-specified amount in a scheme at pre-specified intervals. The number of units that accrue to you on each periodic investment is a function of the then prevailing net asset value (NAV) of the scheme you have opted for. Thus irrespective of market conditions, your cost of investment will be mostly lower than the average cost of market prices. This disciplined approach for investing will provide the investors with the following benefits: 1) Reduces average cost ) Can be done regularly even for savings of Rs 1000 3) Encourages disciplined investing, 4) Eliminates the need to decide when to invest 5) Avoids the temptation to time the market. 1. Power of compounding – The benefit of starting early Most of us regard investing as a necessary evil and delay it until the last movement. In short, the longer you delay, the greater will be the financial burden on you to meet your goals. On the other hand, you would be amazed what you could achieve by saving a small sum of money regularly at an early age. In other words, the earlier you invest, greater will be the power of compounding and higher will be the benefits. . Rupee Cost Averaging – The power of disciplined investment Investing would be simple if you always pick the best time to buy and sell. However, timing the market consistently can be difficult task and you could be hit with a loss sooner at later. What you need is an automatic market timing mechanism like Rupee Cost Averaging (RCA) that eliminates the need to time your investments. In other words, with RCA you don’t have to worry about where share prices or interest rates are headed. You just invest a fixed amount at regular interval, regardless of NAV. The idea is that you buy fewer units when NAV is higher and more when it is lower.
This is in line with our natural desire to buy low and sell high and when money is invested regularly, the average cost unit is smoothened out over time – over high and low NAV. RCA however, does not guarantee a profit. But with a sensible and long-term investment approach, it can smoothen out the market ups and downs and reduce the risk of investing in volatile markets. How do SIPs better market average? | | |Rising Market |Falling Market |Volatile Market | |Month |Amount |NAV |Units Allotted |NAV |Units Allotted |NAV |Units Allotted | | |Invested (Rs. | | | | | | | |1 |1000 |10 |100 |10 |100 |10 |100 | |2 |1000 |12 |83. 33 |8 |125 |12 |83. 33 | |3 |1000 |14 |71. 43 |6 |166. 67 |8 |125 | |4 |1000 |16 |62. 5 |4 |250 |10 |100 | |TOTAL |4000 |52 |317. 26 |28 |641. 67 |40 |408. 33 | |Average Cost per Units | |12. 61 |6. 23 |9. | |(Total Investment/Total | | | | | |Units Allotted) | |(Average Cost 13) |(Average Cost 7) |(Average Cost 10) | As one can see, the average cost per unit under an SIP programme results in an average cost which is lower than most of the prices at which one bought units. 3. Convenience – Save yourself the trouble of doing the same thing Investor does not have to take time out from his busy schedule for managing his investments. Enroll for the SIP by starting an account and providing the fund with post-dated cheques of periodic investment (monthly, quarterly) based on his convenience.
Investor can relax once he has enrolled the form along with post-dated cheques. Fund then bank his cheques on the requested date and credit the units to his account. Besides the fund will send quaterly reports giving complete transparency about his investments. 4. A boon for small investors (Low income group) SIP has proved to be a boon for small investors, who has got a small saving every month, but cannot find a suitable scheme to invest. Mutual funds SIP plan provides a higher return than other small saving scheme. 2) AUTOMATIC REINVESTMENT PLAN (ARP) This require investor to invest a fixed sum periodically, thereby let the investor save in a discipline manner.
The mode of investment could be through direct debit to the investor’s salary or bank account. Such plans are also known as systematic investment plan. Investor looking for ‘rupee cost averaging’ will generally opt for funds that offer this facility. A modification of ARP is the Voluntary Accumulation Plan (VAP) that allows the investor flexibility with respect to the amount and frequency of investment. 3) SYSTEMATIC WITHDRAWAL PLAN (SWP) Such plan allows the investor to make systematic withdrawals from his fund investment account on periodic basis, thereby providing the same benefit as regular income. The amount withdraw is treated as redemption of units at the applicable NAV as specified in the Offer Document. E. g. he withdrawal could be at the NAV on the first day of the month of payment. The investor is usually required to maintain a minimum balance in his fund account under this plan. As investor withdraws regularly this will also reduce effect of income tax at the end of maturity period. Investors should note the difference between SWP and Monthly Income Plan, as the former allows the investor to get back the principle amount invested while the later only pays the income part on a regular basis. 4) SYSTEMATIC TRANSFER PLAN This plan allows the investor to transfer a specified amount from one scheme to another on a periodic basis within the same fund.
A transfer will be treated as redemption of units from the scheme from which the transfer is made, and is invested in the scheme in which transfer is made. Such redemption or investment will be at the applicable NAV for the respective scheme as specified in the Offer Document. It is necessary for the investor to maintain minimum balance in the scheme from which transfer is made. Many funds do not charge any transaction fees for this service it is an added advantage for the active investors. All mutual funds comprise four constituents – Sponsors, Trustees, Asset Management Company (AMC) and Custodians. a) Sponsors: The sponsors initiate the idea to set up a mutual fund. It could be a registered company, scheduled bank or financial institution.
A sponsor has to satisfy certain conditions, such as capital, record (at least five years’ operation in financial services), de-fault free dealings and general reputation of fairness. The sponsors appoint the Trustee, AMC and Custodian. Once the AMC is formed, the sponsor is just a stakeholder. b) Trust/ Board of Trustees: Trustees are like internal regulators in a mutual fund, and their job is to protect the interest of unit holders. Sponsors appoint trustees. Trustees float and market schemes, and secure necessary approvals. They check if the AMC’s investments are within well-defined limits, whether the fund’s assets are protected, and also ensure that unit holders get their due returns. They also review any due diligence by the AMC. For major decisions concerning the fund, they have to take the unit holders ‘consent.
They submit reports every six months to SEBI; investors get an annual report. Trustees are paid annually out of the fund’s assets – 0. 5 percent of the weekly net asset value. c) Fund Managers/ AMC: An AMC-Asset Management Company is the legal entity formed by the sponsor to run a mutual fund. They are the ones who manage money of the investors. There is the head of the fund house, generally referred to as the chief executive officer (CEO). Under him comes the chief investment officer (CIO), who shapes the fund’s investment philosophy, and the fund managers, who manage its schemes. They are assisted by a team of analysts, who track markets, sectors and companies.
An AMC takes decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes. It also exercises due diligence on investments, and submits quarterly reports to the trustees. A fund’s AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below Rs. 10 Crore. And, its fee should not exceed 1. 25 percent if collections are below Rs. 100 Crore and 1 percent if collections are above Rs. 100 Crore. SEBI can pull up an AMC if it deviates from its prescribed role. d) Custodian: Often an independent organisation, it takes custody of securities and other assets of mutual fund.
Its responsibilities include receipt and delivery of securities, collecting income-distributing dividends, safekeeping of the units and segregating assets and settlements between schemes. Their charges range between 0. 15-0. 2 percent of the net value of the holding. Custodians can service more than one fund. FUND STRUCTURE AND ITS CONSTITUENTS 1. Open-ended / Closed-end Schemes: Based on the accessibility they provide investors, mutual fund schemes can be classified into ‘open-ended’ and ‘close-end’. Open-ended schemes, as their mane suggests, don’t have a fixed tenure and are always open for investment. We can invest them any time. Same for withdrawals. This ease can entry and exit makes them more popular choice among both mutual funds and investors.
Close-end schemes, on the other hand, are of fixed tenure, which is stated at the time of the birth itself. Such schemes invite subscriptions only once during their lifetime, at the time of launch. And we can sell our units in the market. Most of the closed-end schemes are listed on stock exchange. 2. Corpus: The total money available with a scheme, at any point in time, is referred to as the ‘corpus’ or ‘assets under management’. 3. Unit: Mutual fund issues ‘units’ against investment. A unit is the currency of a fund. What a share is to a company; a unit is to a fund. 4. Net Asst Value (NAV): Units are allotted on the basis of a scientific pricing mechanism. This price, measured per unit, is called the net asset value (NAV) of the unit.
Just as a share or bond is bought and sold at a price, a mutual fund is bought and sold at NAV. If, we invest Rs. 10,000 in a scheme when its NAV is Rs. 10, then we get 1000 units of that scheme. NAV of any scheme tells how much each unit of it worth at any point in time, and is therefore the simplest measure of how it is performing. 5. Load: Fund houses levy a nominal charge, on most of their schemes to meet their processing costs and to discourage investors from leaving. This charge is referred as ‘load’, it is the price that investor pays over and above the fund’s NAV when that investor buy or sell units. Investors pay ‘entry load’ at the time of buying and ‘exit load’ at the time of selling.
Loads are always expressed as a percentage of the NAV, and have effect of reducing returns. An entry load increases NAV, which places fewer units, an exit load decreases NAV which reduces sale proceeds. 6. Expenses: This is what fund charges for managing investors’ money. Fund managers have to be paid a fee, as do the other constituents involved in managing money. All this entails costs, which schemes recovers from investors, within limits. Every year, a fund charges some amount to scheme’s NAV, reducing returns by that amount. SEBI rules allow equity schemes to charge a maximum of 2. 5% of corpus as expenses every year; the corresponding figure for debt schemes is 2. 25%. 7. Disclosures:
From time to time, fund houses will share information with investors relating to schemes. Under SEBI rules, fund houses have to send to all unitholders annual reports, disclosing the complete portfolio of all their schemes, and publish half-yearly results in newspapers. These documents shed light on scheme’s performance over various time periods, and how it stands up in the given market conditions. Most of the fund houses update their scheme portfolio on their websites even quicker. Its information, investors can use to make an informed decision about their investment in the schemes. 8. Redemption: Whenever an investor wants to sell his units, partly or fully, in mutual fund it is called ‘repurchase’ or ‘redemption’.
Mutual fund will pay the scheme’s NAV prevailing on that date of redemption minus the exit load. SEBI was established to promote the orderly and healthy development of securities market and to provide adequate investor protection. SEBI has an independent constituted board with regulatory powers over stock exchange, merchant banking, brokers, registrar and transfer agents, custodians, mutual funds and capital issues. SEBI issues guidelines for various market players to conform with. All players need to register with SEBI and consent to comply with the regulations of SEBI. In the case of mutual funds, the SEBI guidelines were first issued in the SEBI Mutual Fund Regulations of 1993.
In December 1996, SEBI published the revised Mutual Fund Regulations, 1996, regulating several aspects including management fees, expenses, NAV calculation and standardized reporting practices. SCHEMES OF MUTUAL FUND • The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board. • Every mutual fund has to pay filling fees along with the offer document. • The offer document should contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor. No one can issue any application form for units of mutual fund until the memorandum containing such information is issued. With each application form fund house has to provide such a memorandum providing guidelines to investors. • Each close-ended scheme should be listed on a recognized stock exchange within six months from the closure of the subscription. • A closed-ended scheme should be fully redeemed at the end of the maturity period. Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution. • The mutual fund and asset management company should be liable to refund the application money to the applicants. The asset management company should issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible within six weeks from the date of closure of the initial subscription list and/or from the date of receipt of the request from the unit holders in any open ended schemes. INVESTMENT OBJECTIVES AND VALUATION POLICIES • Money collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securities debts. • Provided that money collected under any money market scheme of a mutual fund shall be invested only in money market instruments in accordance with directions issued by the Reserve Bank of India. The mutual fund can not able to borrow except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit holders. • The mutual fund can not advance any loan for any purpose. • Each mutual fund should compute and carry out valuation of its investments in its portfolio and publish the same in accordance with the valuation norms specified in schedule 80. • Each mutual fund should compute the Net Asset Value of each scheme by dividing the net assets of the scheme by the number of units outstanding on the valuation date. • The Net Asset Value of the scheme should be calculated and published atleast in two daily newspapers at intervals of not exceeding one week. The price at which the units may be subscribed or sold and the price at which such units may be repurchased by the mutual fund should be available to the investors. GENERAL OBLIGATIONS • Each asset management company should keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the mutual fund and can intimate to the Board the place where such books of accounts, records and documents are maintained. • The financial year for all the schemes should end as of Mach 31st of that year. Each mutual fund or the asset management company should prepare an annual report and annual statement of accounts for each scheme. • Each mutual fund should have an annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company. RESTICTION ON INVESTMENTS • A mutual fund can not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment grade by a credit rating agency authorized to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustee and the Board of Asset Management Company. A mutual fund scheme can not invest more than 10% of NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments should not exceed 25% of the NAV of the scheme. All such investments should be made with prior approval of the Board of Trustee and the Board of Asset Management Company. • No mutual fund should own more than 10% of any company’s paid up capital carrying voting rights under all its schemes. • Transfers of investments from one scheme to another (switch over) in the same mutual fund should be allowed if- ag. Such transfer is done at the prevailing market price for quoted instruments on spot basis. ah.
The securities so transferred should be in conformity with he investment objective of the scheme to which such transfer is being done. I. Transfer of investment may be done in another scheme of the same asset management company or any other without charging any fees. II. The initial issue expenses in respect of any scheme may not exceed six per cent of the funds raised under the scheme. III. Each mutual fund should get the securities purchased or transferred in the name of the mutual fund on account of the concerned scheme, wherever investments are intended to be of long-term nature. IV. Each mutual fund can diversified its portfolio of each scheme as per market condition and this should be published by that fund in the monthly fact sheets issued to investors. V.
No mutual fund scheme should make any investment in; 1) Any unlisted security of an associate or group company of the sponsor, or 2) Any security issued by way of private placement by an associate or group company of the sponsor, or 3) The listed securities of group companies of the sponsor, which are in excess of 30% of the net asset of all the schemes of a mutual fund. • No mutual fund scheme should invest more than 10% of its NAV in the equity shares or equity related instruments of any company. This limit of 10% is not applicable to index fund and sector specific schemes. • A mutual fund scheme can not invest more than 5% of its NAV in the equity shares or equity related investments in case of open-ended scheme and 10% in case of close-ended scheme. Investors often view the tax angle as an important consideration while deciding on the appropriate investment.
This section examines the area of mutual fund taxation with respect to taxation of income (dividend and capital gain) in the hands of fund itself and the income when received in the hands of the investors. • Taxation in hands of funds: When we talk about a mutual fund for taxation purposes, we mean the legally constituted trust that holds the investors’ money. It is this trust that earns and receives income from investments it makes on behalf of investors. Most countries do not impose any tax on this entity – the trust – because income it earns is meant for the investors. The trust is considered to be only a pass through entity. It would double the tax payment when first trust and then an investor pays tax on same amount of income. Generally the rust is exempted and the investor pays the tax on his share of the income. Tax provision: v Income earned by any mutual fund registered with SEBI or setup by a public sector bank/financial institution or authorized by RBI is exempt from tax. v Income distributed to unit holders by a closed-end or debt fund has to pay a distribution tax of 10% plus surcharge of 1%. This is also applicable to open-end funds which have less than 50% allocation to equity. • Taxation in hands of the investors: Tax rebate available to individual investor on subscriptions to mutual funds in accordance with section 88 of the Income Tax Act. Investment upto Rs. 10,000 in an equity linked saving schemes qualifies for tax rebate of 20%.
However, total investment eligible for tax rebate under section 88 is not allowed to exceed fro Rs. 60,000. • Taxation on dividends received from mutual funds From financial year 2002-2003 the dividend in hands of investors is completely tax-free. There is no dividend tax to be paid by investors. Tax is already paid by funds at the rate of 12. 5% before distributing to investors. • Taxation on capital gain in hands of the investors: Capital gains tax is charged when something is sold at profit. If the investor sells his units and earns capital gain, the investor is subjected to the Capital Gain Tax. 1. Capital Gain on sale of units for short term:
If units are held for not more than 12 months, they will be treated as short-term capital gain. The tax charged depends on the income bracket of the investor. 2. Capital Gain on sale of units for long term: If units are held for more than 12 months, they will be treated as long-term capital gain. Here investor gets the benefit of ‘Indexation’ by which his purchase price is marked up by an inflation index. The tax charged at either 10% flat rate or 20% with indexation at investor’s option. • Wealth Tax: Ownership of units is not considered as ‘wealth’ under the Wealth Tax Act, and is therefore not charged to wealth tax. The Offer Document of a scheme lays down investors’ rights.
Investor is the owner of the scheme and assets of that company, and it is therefore imperative that they are aware of their rights with respect to the scheme’s assets, its management, and resources to the trustee, the AMC and other constituents. The important rights of the unit-holders are outlined below: Right of proportionate “Beneficial Ownership” Unit-holders have the right to have beneficial ownership of the scheme’s assets. They have right to have dividend and/or income declared under the scheme. The right to assets, income etc. is in proportion that the units held by the unit-holder bears to the total number of the fund units issued and outstanding. Right to have timely services Unit-holders are entitled to receive dividend warrants within 30 days of the date of declaration • Unit-holders have the right to payment of interest at 15% per annum in the event of failure on the part of the mutual fund to dispatch the redemption or repurchase proceeds within 10 working days such interest must be born by the AMC. • When any investor is failed to claim redemption proceeds or dividends due to him, he has the right to do so within a period of 3 years of the due date at the prevailing NAV. After 3 years, he will be paid at the NAV applicable at the end of the third year. • For initial offers in case of open-ended schemes, investors have a right to expect the allotment of units and dispatch of account statement to be completed within 30days from the closure of the initial offer period. Right to be informed • Unit-holders have right to obtain all the information from the trustee that may have an adverse bearing on their investment. Unit-holders have the right to inspect major documents of the fund. Such documents include material contracts (trustee deed, the investment management agreement, the custodian services agreement and the registrar and transfer agency agreement), memorandum and article of association of the AMC, recent audited financial statements, the texts of SEBI regulations, Indian Trust Act and the Offer Document of the scheme. • Each unit-holder has the right to receive a copy of the annual financial statement. • Each unit-holder has the right to receive a complete statement of scheme’s portfolio before expiry of one month from the close of each half year (31st March and 30th Sept. , unless such statement of portfolio should be published in one English daily, circulating countrywide and in a newspaper published in the language of the region in which the head office is located. Right to approve changes in fundamental attributes of the scheme A change in ‘fundamental attributes’ of a scheme (type of scheme, investment objective, terms of issue), or trust or fees and expenses payable or any other change which would modify the scheme and affects interest of investors can’t be carried out until investors are individually informed in writing and advertisements about the proposed changes are given in an English newspaper having countrywide circulation and in a newspaper published in the language of the region in which the head office is located. Right to terminate the AMC
The approval of an AMC of a fund can be terminated by 75% of the unit-holders of the scheme with the prior approval of SEBI. Right to wind-up a scheme If 75% of the investors pass a resolution demanding the Trustees to wind-up a scheme prior to its earlier fixed duration then fund has to repay the investors. This right applies to both close-ended funds and open-ended funds. Investors’ Obligations It is the duty of investors to carefully study the Offer Document before investing in a scheme. He must appreciate the fundamental attributes of the scheme, the risk factors, his rights, fund’s and sponsor’s track record. Failure to effectively study the Offer Document does not entitle him later to have resource to the fund, the trustees or the AMC.
The investor should regularly study financial statements, portfolio of scheme and research reports published by mutual fund to monitor performance of scheme. He has right to ask the trustee for any information that he requires, but monitoring is entirely investor’s own responsibility. MARKETING STRATEGIES ADOPTED BY THE MUTUAL FUNDS The present marketing strategies of mutual funds can be divided into two main headings: i) Direct marketing ii) Selling through intermediaries iii) Joint Calls 1) Direct Marketing: This constitutes 20 percent of the total sales of mutual funds. Some of the important tools used in this type of selling are: Personal Selling: In this case the customer support officer of the fund at a particular branch takes appointment from the potential prospect.
Once the appointment is fixed, the branch officer also called Business Development Associate (BDA) in some funds then meets the prospect and gives him all details about the various schemes being offered by his fund. The conversion rate in this mode of selling is in between 30% – 40%. Telemarketing: In this case the emphasis is to inform the people about the fund. The names and phone numbers of the people are picked at random from telephone directory. Sometimes people belonging to a particular profession are also contacted through phone and are then informed about the fund. Generally the conversion rate in this form of marketing 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 customer support officer (CSO) then mails the literature of the schemes offered by the fund. The follow up starts after 3 – 4 days of mailing the literature. The CSO calls on the people to whom the literature was mailed. Answers their queries and is generally successful in taking appointments with those people. It is then the job of BDA to try his best to convert that prospect into a customer. Advertisements in newspapers and magazines: The funds regularly advertise in business newspapers and magazines besides in leading national dailies.
The purpose to keep investors aware about the schemes offered by the fund and the their performance in recent past. Hoardings and Banners: In this case the hoardings and banners of the fund are put at important locations of the city where the movement of the people is very high. Generally such hoardings are put near UTI offices in order to tap people who are at present investing in UTI schemes. The hoarding and banner generally contains information either about one particular scheme or brief information about all schemes of fund. 2) Selling through intermediaries: Intermediaries contribute towards 80% of the total sales of mutual funds. These are the people/ distributors who are in direct touch with the investors.
They perform an important role in attracting new customers. Most of these intermediaries are also involved in selling shares and other investment instruments. They do a commendable job in convincing investors to invest in mutual funds. A lot depends on the after sale services offered by the intermediary to the customer. Customers prefer to work with those intermediaries who give them right information about the fund and keep them abreast with the latest changes taking place in the market especially if they have any bearing on the fund in which they have invested. Regular Meetings with distributors: Most of the funds conduct monthly/bi-monthly meetings with their distributors.
The objective is to hear their complaints regarding service aspects from funds side and other queries related to the market situation. Sometimes, special training programmes are also conducted for the new agents/ distributors. Training involves giving details about the products of the fund, their present performance in the market, what the competitors are doing and what they can do to increase the sales of the fund. 3) Joint Calls: This is generally done when the prospect seems to be a high net worth investor. The BDA and the agent (who is located close to the HNI’s residence or area of operation) together visit the prospect and brief him about the fund.
The conversion rate is very high in this situation, generally, around 60%. Both the fund and the agent provide even after sale services in this particular case. Meetings with HNI’s: This is a special feature of all the funds. Whenever a top official visits a particular branch office, he devotes atleast one to two hours in meeting with the HNI’s of that particular area. This generally develops a faith among the HNI’s towards the fund. MARKETING OF MUTUAL FUNDS: CHALLENGES AND OPPORTUNITIES When we consider marketing, we have to see the issues in totality, because we cannot judge an elephant by its trunk or by its tail but we have to see it in its totality.
When we say marketing of mutual funds, it means, includes and encompasses the following aspects: • Assessing of investors needs and market research; • Responding to investors needs; • Product designing; • Studying the macro environment; • Timing of the launch of the product; • Choosing the distribution network; • Finalising strategies for publicity and advertisement; • Preparing offer documents and other literature; • Getting feedback about sales; • Studying performance indicators about fund performance like NAV; • Sending certificates in time and other after sales activities; • Honouring the commitments made for redemption