SBI, L&T mutual funds to discontinue 19 schemes

An assignment in Financial Management -2

Submitted by Group 3 Sinclair Furtado Oswinda Gomes Cliff Gonsalves Heloise Monteiro Rincy Johnson Duncan Rodrigues Lemar Khan R-11-15 R-11-17 R-11-19 R-11-21 R-11-31 R-11-32 R-11-38

Department of Bachelor of Business Administration Rosary College of Commerce and Arts

2011-2012

Case
SBI Mutual Fund and L&T Mutual Fund have decided to discontinue 19 schemes cumulatively for fresh SIP investments to comply with market regulator SEBIs 'one-plan, one scheme' guidelines. The two fund houses have informed the Bombay Stock Exchange, where these schemes were listed, that 10 schemes of SBI MF and nine of L&T MF would be discontinued for fresh SIP (Systematic Investment Plan) registration and subscription. Earlier, five fund houses, including leading companies including Reliance and ICICI Prudential MF, had listed out a total of 190 schemes that have been discontinued for fresh SIP investments to comply with SEBI guidelines. The move follows new SEBI regulations, which require fund houses to launch only one plan per scheme with effect from this month. The SEBI direction has affected hundreds of schemes across the found houses. Reliance MF, ICICI Prudential, HSBC, Morgan Stanley and IDFC Mutual Funds has already communicated the required changes in their schemes to the BSE, where many of their schemes are listed for trading. SIP offers mutual fund investors an option to invest as low as Rs 100 per month and have gained popularity in the market. However, many fund houses have launched multiple SIP plans under one scheme, prompting market regulator SEBI to ask them to move to 'single plan per scheme' model in a move to make the investment process simpler for investors. The five fund houses had also communicated to the BSE a list of 22 schemes where the Minimum Purchase Amount and Additional Purchase Amount have been lowered as per SEBI guidelines. All the changes are effective immediately and are part of wide-ranging reforms notified by SEBI recently.

What are mutual funds?

A mutual fund is a special type of company that pools together money from many investors and invests it on behalf of the group, in accordance with a stated set of objectives. Mutual funds raise the money by selling shares of the fund to the public; much like any other company can sell stock in itself to the public. Funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund.

What are the different types of mutual fund schemes?

On the basis of their structure and objective, mutual funds can be classified into following major types:

On the Basis of Structure

Closed-ended Funds/ Scheme A close-ended fund or scheme has a fixed maturity period for e.g. 57 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. Open-ended Funds/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can easily buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

Interval fund A fund that combines the features of open-ended and closed-ended schemes, making the fund open for sale or redemption during pre-determined intervals.

On the Basis of Investment

Balanced funds Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds. The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. These funds are also affected because of fluctuations in share prices in the stock markets. Income funds The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. These funds are not affected because of fluctuations in equity markets. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. Growth funds The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their amount in equities. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Money market funds A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. These funds aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such

as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Gilt fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

On the Basis of Special Schemes

Industrial Specific Schemes Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc. Sector funds Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. Segments where Sector specific funds invest are Health care, financial service, Infrastructure, Automobile, Fast moving consumer goods etc. Tax saving schemes Such schemes are aimed at offering tax rebates to investors under specific provisions of the Income Tax Act, 1961. For instance, investors of Equity Linked Savings Schemes (ELSS) and Pension Schemes are applicable for deduction of the Income Tax Act, 1961. Index funds The aim of an index fund is to replicate the performance of that market index. So if the markets are rising, then your investment will rise with almost the same per cent age and if it is falling, you will get similar negative returns.

Organization of Mutual Fund

The structure consists of Sponsor Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund. Custodian Holds the fund's assets, maintaining them separately to protect shareholder interests. Trustee The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908. Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The

main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alias ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner. Asset Management Company (AMC) The Trustee as the Investment Manager of the Mutual Fund appoints the AMC. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. Atlas 50% of the directors of the AMC is an independent director who is not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times. Registrar and Transfer Agent The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form; redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.

Why invest in mutual funds?

Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time. One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the workings of stock market. This is where mutual funds come to the rescue. It may not be obvious at first why you would want to purchase shares in different securities through a mutual fund "middleman" instead of simply purchasing the securities on your own. There are, however, some very good reasons why a lot of people opt to invest in mutual funds instead of, or in addition to, buying securities directly. Mutual funds can offer you the following benefits: Diversification: Diversification can reduce your overall investment risk by spreading your risk across many different assets. With a mutual fund you can diversify your holdings both across companies (e.g. by buying a mutual fund that owns stock in 100 different companies) and across asset classes (e.g. by buying a mutual fund that owns stocks, bonds, and other securities). When some assets are falling in price, others are likely to be rising, so diversification results in less risk than if you purchased just one or two investments.

Choice: Mutual funds come in a wide variety of types. Some mutual funds invest exclusively in a particular sector (e.g. energy funds), while others might target growth opportunities in general. There are thousands of funds, and each has its own objectives and focus. Liquidity: It is the ease with which you can convert your assets--with relatively low depreciation in value--into cash. In the case of mutual funds, it's as easy to sell a share of a mutual fund as it is to sell a share of stock although some funds charge a fee for redemptions and others you can only redeem at the end of the trading day, after the current value of the fund's holdings has been calculated. Low Transaction Costs: Mutual funds are able to keep transaction costs -- that is, the costs associated with buying and selling securities -- at a minimum because they benefit from reduced brokerage commissions for buying and selling large quantities of investments at a single time. Of course, this benefit is reduced somewhat by the fact that they are buying and selling a large number of different stocks. Annual fees of 1.0% to 1.5% of the investment amount are typical. Additional Services: Some mutual funds offer additional services to their shareholders, such as tax reports, reinvestment programs, and automatic withdrawal and contribution plans. Professional Management: Mutual funds are managed by a team of professionals, which usually includes one mutual fund manager and several analysts. Presumably, professionals have more experience, knowledge, and information than the average investor when it comes to deciding which securities to buy and sell. They also have the ability to focus on just a single area of expertise. Convenience and Flexibility: You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar in order to make sure that your convenience remains at the top of our mind. Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme.

Systematic Investment Plan (SIP)

SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a MF by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you

to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in an MF. Thus, you can invest in an MF without altering your other financial liabilities. SIP has brought mutual funds within the reach of an average person as it enables even those with tight budgets to invest Rs 500 or Rs 1,000 on a regular basis in place of making a heavy, onetime investment. While making small investments through SIP may not seem appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you attractive returns. A monthly SIP of Rs 1000 at the rate of 9% would grow to Rs 6.69 lakh in 10 years, Rs 17.83 lakh in 30 years and Rs 44.20 lakh in 40 years.

Advantages of SIP
More convenient for average person on wallet: Its more easy for a person to invest in small amount every month, rather than a lump sum amount. Investing through SIP is lighter on wallet. Its easy to pay Rs 5,000 per month for 1 year, rather than investing 60,000 at a same time. Discipline: The basic rule of building your quantity is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundred set aside every month will not affect your monthly disposable income. You will also find it easier to part with a few hundred every month, rather than set aside a large sum for investing in one shot. Power of compounding: Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. For example, Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, A had built a amount of Rs 12.23 lakh while person B's amount was only Rs 7.89 lakh. For this example, a rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end-amount. That difference is due to the effect of compounding. The longer the compounding period, the higher the returns. Rupee cost averaging: This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in

volatile markets. People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.

Disadvantages of SIP
It will not work in bullish markets or when market goes up over time :When market goes up and keeps growing over time , the units bought every time will be at high price then the previous one, which will ultimately bring the average cost up , compared to the lump sum investment at the start. In case of tax saving fund, the lock in period gets extended for every investment: Tax saver mutual funds lock your money for 3 yrs, when you invest through SIP, each of your investment is locked separately for 3 yrs from the date of investment. So if you pay your first installment on Jan 2007 , it will locked till Jan 1 2010 , then the installment paid on Feb 1 , 2007 will be locked till Feb 1 , 2010 and like this each installment will be locked with the gap of 1 month . Fixed Amount: There are times when you feel that markets are undervalued and you want to invest more but then in SIP only a predetermined fixed sum gets invested. Same is the case when you want to invest less, you cant do it. Stopping intermediate payment: It may so happen that you got an emergency or have a major expense this month and so you dont want to invest. But with SIP this is not possible; if theres money in your bank it will get debited and invested. The only way out is to cancel the SIP which can be a nightmare if you have a lot of SIPs and also when you want to start again you need to go through all the formalities to start the SIP. Also for cancellation you need to inform 2 weeks in advance and even then you may not be sure that SIP would not be debited. Even though SIP suffers from these disadvantages but it still seems to be one of the best investment option available to a long term investor. It particularly suits First-time investors in equity and those who do not have a lump sum or the time to track their investments. The salaried class should also opt for SIPs since it becomes a good savings habit. Investors who do not wish to be stressed by market volatility should adopt the rupee-cost averaging method for secured long-term investment planning.

SBI Mutual Fund

SBI Mutual Fund is Indias largest bank sponsored mutual fund and has an enviable track record in judicious investments and consistent wealth creation. The fund traces its lineage to SBI -

Indias largest banking enterprise. The institution has grown immensely since its inception and today it is India's largest bank, patronized by over 80% of the top corporate houses of the country. SBI Mutual Fund is a joint venture between the State Bank of India and Socit Gnrale Asset Management, one of the worlds leading fund management companies that manages over US$ 500 Billion worldwide. In twenty years of operation, the fund has launched 38 schemes and successfully redeemed fifteen of them. In the process it has rewarded its investors handsomely with consistent returns. A total of over 5.8 million investors have reposed their faith in the wealth generation expertise of the Mutual Fund. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors. Today, the fund manages over Rs. 42,100 crores of assets and has a diverse profile of investors actively parking their investments across 38 active schemes. The fund serves this vast family of investors by reaching out to them through network of over 130 points of acceptance, 29 investor service centers, 59 investor service desks and 6 Investor Service Points. SBI Mutual is the first banksponsored fund to launch an offshore fund Resurgent India Opportunities Fund.

The discontinued schemes of SBI

SBI Premier Liquid Fund - Institutional Plan SBI Short Horizon Debt Fund SBI Magnum Income Fund in Floating Rate Plan SBI Magnum short term Fund in Floating Rate Plan SBI Magnum Short Horizon Debt Fund in Floating Rate Plan SBI Magnum Gilt fund

L&T Mutual Fund

L&T Mutual Fund is one of the premier mutual funds in India which caters to the investment needs of different kinds of investors through a suite of mutual fund schemes. L&T Mutual Fund is a part of Larsen & Toubro Limited which is one of the largest and most respected companies in India's private sector. L&T Mutual Fund is one of the most respected mutual funds in India that serves the investment needs of investors through a suite of acclaimed mutual fund schemes. With world class investment management practices and an equally competent fund management team, L&T Mutual Fund helps its investors reach their financial goals. The company claims to have sound investment management practices and a knowledgeable fund management team. L&T Mutual Fund has significant resources and assets under its management.

SEBIs Single Plan per Scheme

According to the new regulations, fund houses are required to launch only one plan per scheme. The SEBI direction has affected hundreds of schemes across the fund houses and also led to confusion amongst the investors. Fund houses launched multiple SIP plans under one scheme, which reportedly prompted SEBI to ask them to move to single plan per scheme model. The regulation is expected to make the investment process simpler for investors. The SEBI said that these guidelines are aimed at ensuring that funds collected in a scheme are invested as per the investment objective stated in the offer document of an MF scheme. This decision is taken by SEBI to do away with the present practice of cluttering one scheme with numerous plans. The new guidelines would be applicable to all fresh investments whether in a new scheme or an existing one. In cases of an existing scheme, where the scheme has already parked funds in shortterm deposits, the asset management company has been given three-months time to conform with the new guidelines. In the National Stock Exchange (NES) total of 126 schemes are discontinued for subscription/ SIP registration based on the intimation received from the Asset Management Companies with regard to SEBI guidelines on single plan structure for mutual funds schemes. Separately Bombay Stock Exchange (BSE) listed out 84 mutual fund schemes where subscription/ SIP registration is being discontinued. Even if some fund houses have discontinued some plans, few plans have been accept in mind that the single plan structure would apply to all new schemes. The existing schemes with multiple plans will also accept new subscriptions only under one plan.

Benefits of discontinuing the schemes to the investors

The regulation is expected to make the investment process simpler for investors. With the one plan one scheme investors will find it much simpler and can get more information regarding their investments. The investors tend to benefit from this as the investment pool under one scheme will broaden significantly providing an advantage to the fund managers for better allocation of investable resources. Hence, even the returns may also improve. However, SEBI could bring the regulation in a phased-wise manner enabling the investors to get complete information and they could take an informed decision or strategies their investments accordingly. These guidelines set by the SEBI will lead to greater transparency for the common investor. SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. With these guidelines falling in

place it would create better trust and transparency and an investable environment that would attract investors with greater faith and confidence. The move of SEBI is expected to reduce mess and make life easy for investors who have struggled with thousand of plans under hundred of schemes launched by 40 players in the industry. Till now each mutual fund scheme had different plans for different types of investors. Therefore each scheme came with multiple plans such as retail, wholesale, regular institutional, super institutional etc, catering to different classes of investors. That led to allegation that funds houses treated big investors favorably often putting the small ones at a disadvantage. With the one scheme one plan even small investors will benefit. The institutional investor, who had a lower expense ratio, got a better deal than a retail investor. Fund houses used to charge the highest expense structure to retail investors, followed by institutional investors and the lowest to super institutional investors. SEBI has just stopped this discriminatory practice to ring in parity among all investors. Now under the One SchemeOne Plan scheme, the retail investor will get the benefit of a lower expense structure, and also enable them to invest in schemes which previously had a higher minimum investment amount. For instance, Religare ultra short fund previously had a minimum amount investment of Rs 2 crore. It has been brought down to Rs 5000. So, now retail investors can also invest in this fund, There could be rate of capital gain tax, if the investors exit from discontinued plan to invest in the continuing one.

Drawbacks of discontinuing the scheme to the investors

No choice for the investors. In the multiple schemes the investors could invest in multiple things like equity, bonds etc but in one with one plan one scheme they can invest only in one scheme. If they want to invest the investors can only invest in equity, or only bonds etc. The investors cannot invest in the old schemes. The single plan structure would apply to all new schemes, while existing schemes with multiple plans (based on investment amount) can accept fresh subscriptions only under one plan. Mutual funds had multiple plans under each scheme, which created confusion, scope for partial treatment schemes to have single plan. Investors in discontinued plans can stay invested, redeem or shift to new plans. If the investors decide to exit the discontinued plan, he may have to face tax implications.

Fund houses will have to charge their investors a little bit more as incentive for expanding to small cities, but would also have to set aside a small portion of their assets for investor education and awareness. So here the expense ratio and the operating ratio will increase thereby increasing the companies cost. When the expense ratio and the operating ratio increase, the cost of the company will increase. So when the cost of the company increases SEBI will increase the basic points of the mutual fund company. Since the basic point of the company has been increased the mutual fund company will increase its commission depending on the basic points there by reducing the investors margin of returns. It is a disadvantage for the investors since it gets a lesser return than before.

Benefits of discontinuing the schemes to the company

Fund houses will have to charge their investors a little bit more as incentive for expanding to small cities, but would also have to set aside a small portion of their assets for investor education and awareness. So here the expense ratio and the operating ratio will increase thereby increasing the companies cost. When the expense ratio and the operating ratio increase the cost of the company will increase. So when the cost of the company increases SEBI will increase the basic points of the mutual fund company. Since the basic point of the company has been increased the mutual fund company will get a commission depending on the basic points there by reducing the investors margin of returns. It is an advantage for the company since it gets a higher commission.

Drawbacks of discontinuing the schemes to the company

New fund flows may decline further as SEBI has also mandated that fund houses need to keep only a single plan per scheme. Mutual fund houses had different plans for the same scheme depending on the investor category (retail or institutional). The discontinued plans will not receive any new inflows Mutual fund houses cannot launch multiple investments plans for one single scheme. Mutual funds will stop accepting fresh investments in over 100 schemes with SIP (Systematic Investment Plan) option, as market regulator SEBI has asked fund houses to move to 'one plan, one scheme' structure. As per SEBIs guidelines, the single plan structure would apply to all new schemes, while existing schemes with multiple plans (based on investment amount) can accept fresh subscriptions only under one plan.

Our Analysis
To conclude we say that SEBIs new guidelines of one plan one scheme is a good plan as it will help the investors in different ways. With the SIP system it will encourage the people with less income also to invest in the mutual funds. SEBIs new rule protects the investors' interest and expands the country's investment culture with greater and more cost-effective access to products like IPOs and mutual funds. The new system will help retail investors whose IPO application money is often blocked for weeks even when they are not allotted shares. The investors would benefit because they won't have to pay anything upfront. So the cash won't be required to be paid immediately. The funds would be blocked with the bank. The time and costs involved in waiting to get the refunds and then crediting them to the account would be eliminated altogether.

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