CONTENTS

INTRODUCTION .................................................................................................................... 2 y y WHAT IS A MUTUAL FUND? ................................................................................. 3 WHY MUTUAL FUNDS ARE BETTER ? ................................................................ 4

MUTUAL FUND REGULATIONS .......................................................................................... 5 REGULATIONS ON THE INVESTMENTS OF A MUTUAL FUND ..................................... 6 CHARACTERISTICS OF MUTUAL FUNDS.......................................................................... 8 STRUCTURE OF MUTUAL FUNDS .................................................................................... 10 MERITS OF MUTUAL FUNDS............................................................................................. 12 DEMERITS OF MUTUAL FUNDS ....................................................................................... 13 BRIEF HISTORY OF MUTUAL FUNDS .............................................................................. 14 MUTUAL FUND SCHEMES ................................................................................................. 17 y y Operational Classification ......................................................................................... 17 PORTFOLIO CLASSIFICATION ............................................................................ 18

CALCULATION OF NAV ..................................................................................................... 20 PERFORMANCE OF MUTUAL FUNDS IN INDIA ............................................................. 22 CONCLUSION ....................................................................................................................... 25 REFERENCES ....................................................................................................................... 26 y y BOOKS .................................................................................................................... 26 URL .......................................................................................................................... 26

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INTRODUCTION
 Indian households started allocating more of their savings to the capital markets in 1980s, with investments flowing into equity and debt instruments, besides the conventional mode of bank deposits. Until 1992, primary market investors were effectively assured good returns as the issue price of new equity issues was controlled and low. After introduction of free pricing of shares, new issues prices were higher and with greater volatility in the stock markets, many investors who bought highly priced shares lost money, and withdrew from the markets altogether. Even those investors who continued as direct investors in the stock markets realized that the key to successful investing in the capital markets lay in building a diversified portfolio, which in turn required substantial capital. Besides, selecting securities with growth and income potential from the capital market involved careful research and monitoring of the market, which was not possible for all investors. Under similar circumstances in other countries, mutual funds had emerged as professional intermediaries. Besides providing the expertise in stock market investing, these funds allow investing in small amounts and yet holding a diversified portfolio to limit risk, while providing the potential for income and growth that is associated with the debt and equity instruments. In India, Unit Trust of India occupied this place as the only capital markets intermediary from 1964 until late 1987, when the Government started allowing other sponsors also to set up mutual funds. With some ups and downs, this new class of intermediary institutions has emerged, in India as elsewhere, as a good alternative to direct investing in capital markets.

 Mutual funds units are investment vehicles that help small investors to take a big ride through capital market, which is not possible individually with small amount of investment. It provides a means of participation in the stock market for people who do not have the time not perhaps the expertise to take direct investment decisions in equities successfully.

 Mutual funds serve as a link between the saving public and the capital markets, as they mobilize savings from investors and bring them to borrowers in the capital markets. By the very nature oftheir activities, and by virtue of being knowledgeable and informed investors, they influenced the stock markets and play an active role in promoting good corporate governance, investor Page 2 of 26

protection and the health of capital markets. Mutual funds have imparted much needed liquidity into the financial system and challenged the hitherto dominant role of banking and financial institutions in the capital markets.

WHAT IS A MUTUAL FUND?

 A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an inventible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

 A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.

 A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Page 3 of 26

Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks.

MUTUAL FUND OPERATION FLOW CHART

5

WHY MUTUAL FUNDS ARE BETTER ?

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 investors who face following constraints while making direct investments:  Limited resources in the hands of investors quite often take them away from stock market transactions.  Lack of funds forbids investors to have a balanced and diversified portfolio.  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.  To buy shares, investors have to engage share brokers who are the members of stock exchange and have to pay their brokerage.  They hardly have access to price sensitive information in time. Page 4 of 26

MUTUAL FUND REGULATIONS

 The Association of Mutual Fundsin India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework.

 The different entities such as the Mutual Fund, the Asset Management Company and the Custodian operate as per the provisions of the SEBI Mutual Fund Regulation 1996 and the rules and guidelines issued by SEBI. Each of these entities has independent Boards of Directors and separate auditors.

 SEBI keeps a close watch on the mutual funds through periodical reports and every three months, each mutual fund submits to SEBI a report conforming compliance with regulatory provisions and mutual funds are required to record their investment decisions. Any deficiency or non-compliance is dealt with suitably by SEBI.

 Every year, each mutual fund is inspected by SEBI and such inspection is both a detailed scrutiny of operations and a rectification exercise. Thus, the mutual funds are strictly supervised and regulated entities and the regulatory provisions match with international standards.

 The mutual fund industry is a fast growing segment of the Indian Financial Market and it provides a variety of schemes to suit the needs and risk return profile of different categories of investors who are kept completely informed regularly through periodical reports and statutory disclosures.

 AMFI as the umbrella body of the mutual fund industry which has Unit Trust of India and all mutual funds as its members would like to reiterate that investors in mutual fund schemes should not be influenced much less guided by any misplaced and patently wrong propaganda being carried out in some quarters.

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REGULATIONS ON THE INVESTMENTS OF A MUTUAL FUND

The investments of a mutual fund are subject to a set of regulations prescribed by SEBI. Presently the following restrictions apply:  No term loan shall be granted by a mutual fund scheme.

 A mutual fund, under all its schemes taken together, will not own more than 10 percent of any companys paid up capital carrying voting rights.

 A scheme may invest in another scheme under the same asset management company or any other mutual fund without charging any fees, provided that the aggregate inert-scheme investments made by all the schemes under the same management or in schemes under the management of any other asset management company shall not exceed 5 percent of the net asset value of the mutual fund.

 Transfers of investments from one scheme to another of a MF are permitted provided that:  Such transfers are done at the prevailing market price for quoted instruments on spot basis.  The securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made.  The registration and accounting of the transaction is completed and ratified in the next meeting of the Board of Trustees, if the regulations so require.

 A mutual fund may borrow to meet liquidity needs, for the purpose of repurchase, redemption of units, or payment of interest or dividend to the unit holders. Such borrowings shall not exceed 20 percent of the net assets of the scheme and the duration of the borrowing shall not exceed 6

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months. The fund may borrow from permissible entities at prevailing market rates and may offer the assets of the scene as collateral for such borrowing.  A scheme shall not invest more than 15 percent of its NAV in debt instruments issued by a single issuer which are rated not below investment grade by an authorized credit rating agency. Such investment limit may be extended to 20 percent of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of Asset Management Company. This limit however, is not applicable for investments in government securities and money market instruments.

 A scheme shall not invest more than 10 percent of its NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25 percent of the NAV of the scheme. All such investments shall be made with the prior approval of the Board of trustees and the board of Asset Management Company.

 A mutual fund will buy and sell securities on the basis of deliveries. It cannot make short sales or engage in carry forward transactions.

 A mutual fund can enter into derivatives transactions on a recognized stock exchange for purpose of hedging and portfolio balancing in accordance with SEBI guidelines.

 A scheme shall not make any investment in :  Any unlisted security of associates or group companies of the sponsor or  Any security issued by way of private placement by an associate of group companies of the sponsor or  The listed securities of group companies of the sponsor in excess of 25 percent of the net assets.

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CHARACTERISTICS OF MUTUAL FUNDS

Unlike most other financial products like provident fund, insurance and post office schemes, Top Mutual Funds not only provides convenience while investing money, but it also offers a variety of features that benefit investors. A few of most common features of mutual funds are highlighted below:

 Micro SIP
Top Mutual Fund Companies offer its investors an option to invest extremely small amounts such as ` 100/-, ` 500/-, ` 1000/- each month depending on individuals capacity into many of its mutual fund schemes.E.g.:Daily Wage Workers, Rickshaw Taxi Drivers, Laborerscan invest into Mutual Funds.

 Flexibility of Dates
There is ease of investing on convenient datesInvestor can invest in top Mutual Fund Scheme on their choice of dates. Many large Mutual Fund companies offer multiple dates for investing into its top performing mutual fund schemes. E.g.few dates would be 1st, 5th, 10th, 15th, and 25th of each month. This makes regular investments on salary dates possible.

Timely Payments through ECS

Investors in Mutual Funds need not worry about making timely payments each month through opting for ECS Payment Method. This ensures regular, hassle free, timely and correct monthly payments. Feature is useful for people who are busy or travel a lot, as he does not have time to keep track of his monthly payments.

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Investing Through POA (Power of Attorney)

Investments in Mutual Funds can be done through Assignment of a Power of Attorney for effective financial planning. The Financial Planning for familys benefit cannot be discontinued in ones absence. Defense and Police Officers can appoint wife or family members to be POA and allow them to invest on their behalf.

 Top-up Facility for Mutual Funds

Apart from regular payments investors can also invest via top-up facility. The amount can be increased at fixed intervals. The Top-up amount has to be in multiples of ` 500/- depending upon fund. The frequency is fixed at Yearly and Half-Yearly Basis.

 Direct Credit of Dividend Payments

Asset Management Companies offer direct credit of dividend payment proceeds to investors bank accounts in order to ensure faster processing and timely credits of dividend amount. Thereis no need to stand inhuge bank queues to deposit the dividend cheques, Mutual Fund cheque will be deposited directly into the bank account.

 Direct Credit of Redemption Payments

When a mutual fund is sold the money is directly credited to investors bank account to facilitate quick withdrawal of funds.

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STRUCTURE OF MUTUAL FUNDS

All mutual funds comprise four constituents  Sponsors  Trustees  Asset Management Company (AMC)  Custodians

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.

TRUST/ BOARD OF TRUSTEES: Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Trustees float and market schemes, and secure necessary approvals. They check if the AMCs investments are within well-defined limits, whether the funds 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 funds assets 0.5 percent of the weekly net asset value.

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FUND MANAGERS/ AMC: They are the ones who manage money of the investors. 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 funds AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below `10 crore. And, its fee should not exceed 1.25 percent if collections are below ` 100 crore and 1 percent if collections are above ` 100 crore. SEBI can pull up an AMC if it deviates from its prescribed role.

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.

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MERITS OF MUTUAL FUNDS

 DIVERSIFICATION

The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
 PROFESSIONAL MANAGEMENT

Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.
 REGULATORY OVERSIGHT

Mutual funds are subject to many government regulations that protect investors from fraud.
 LIQUIDITY

It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.
 CONVENIENCE

You can usually buy mutual fund shares by mail, phone, or over the Internet.
 LOW COST

Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index

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DEMERITS OF MUTUAL FUNDS

 NO GUARANTEES

No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
 FEES AND COMMISSIONS

All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if onedoesnt use a broker or other financial adviser, he will pay a sales commission if hebuys shares in a Load Fund.
 TAXES

During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If the fund makes a profit on its sales, he will pay taxes on the income you receive, even if he reinvests the money you made.
 MANAGEMENT RISK

When one invests in a mutual fund, hedepends on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform well, he might not make as much money on the investment as he expected. Of course, if he invest in Index Funds, he forego management risk, because these funds do not employ managers

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BRIEF HISTORY OF MUTUAL FUNDS

 The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered theindustry.  In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets under Management (AUM) were `67bn. The private sector entry to the fund family raised the AUM to `470 billion in March 1993 and till April 2004; it reached the height of ` 1,540 billon.Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking.  The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling.
1

The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under:

PHASE I - 1964-1987
.

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had `6, 700 crores of assets under management.

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PHASEII - 1987-93 (ENTRY OF PUBLIC SECTOR FUNDS)

.

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked `47,004 as assets under management.

PHASE III - 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS)

.

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of `1, 21,805 crores. The Unit Trust of India with `44, 541 crores of assets under management were way ahead of other mutual funds.

PHASE IV - SINCE FEBRUARY 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of `29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund RegulationsMARKET TRENDS

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 Alone UTI with just one scheme in 1964, now competes with as many as 400 odd products and 38 players in the market. In spite of the stiff competition and losing market share, UTI still remains a formidable force to reckon with.

 Last six years have been the most turbulent as well as exiting ones for the industry. New players have come in, while others have decided to close shop by either selling off or merging with others. Product innovation is now pass with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulators have become more mature and responsible.

 The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as the debt markets, the new generations of private funds which have gained substantial mass are now seen flexing their muscles. Fund managers, by their selection criteria for stocks have forced corporate governance on the industry.

 Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and technology sector. Funds performances are improving. Funds collection, which averaged at less than `100bn per annum over five-year period spanning 1993-98 doubled to `210bn in 1998-99. In the current year mobilization till now has exceeded `300bn. Total collection for the current financial year ending March 2000 is expected to reach `450bn.

 What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funds rather than public sector mutual funds. Indeed private MFs saw a net inflow of ` 7819.34 Crore during the first nine months of the year as against a net inflow of `604.40 crore in the case of public sector funds.Mutual funds are now also competing with commercial banks in the race for retail investors savings and corporate float money. The power shift towards mutual funds has become obvious.

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MUTUAL FUND SCHEMES

 Any mutual fund has an objective of earning income for the 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 this basis the simplest way to categorize 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 closeended 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.

Operational Classification
 OPEN ENDED SCHEMES As the name implies the size of the scheme (Fund) is open i.e., not specified or predetermined. 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 capitalization 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.  CLOSE ENDED SCHEMES Such schemes have a definite period after which their shares/ units are redeemed. Unlike openended funds, these funds have fixed capitalization, 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. In India as per SEBI (MF) Regulations every mutual fund is free to launch any or both types of schemes. Page 17 of 26

PORTFOLIO CLASSIFICATION
Following are the portfolio classification of funds, which may be offered. This classification may be on the basis of:  Return  Investment Pattern  Specialized sector of investment  Leverage  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 incomepossible. 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 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. Page 18 of 26

 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. The strength of these funds is the expected capital appreciation. Naturally, they have a higher degree of risk. Bond 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 bonds, 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.  SECTOR BASED CLASSIFICATION 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 specializing 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.

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CALCULATION OF NAV
 The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention.

 The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below.

NET ASSET VALUE = SUM OF MARKET VALUE OF SHARES/DEBENTURES+ LIQUID ASSETS/CASH HELD + DIVIDENDS /INTEREST ACCRUED +AMOUNT DUE ON UNPAID ASSETS + EXPENSES ACCRUED BUT NOT PAID

DETAILS ON THE ABOVE ITEMS

 For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the principal exchange where the security is traded.

 For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares, this could be the book value per share or an estimated market price if suitable benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing securities moves in a direction opposite to interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives Page 20 of 26

considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation.

 Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic interest payment with the number of days in each period. Thus, accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date.
.

 Usually, dividends are proposed at the time of the Annual General meeting and become due on the record date. There is a gap between the dates on which it becomes due and the actual payment date. In the intermediate period, it is deemed to be "accrued".

 Expenses including management fees, custody charges etc. are calculated on a daily basis.

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PERFORMANCE OF MUTUAL FUNDS IN INDIA

AVERAGE ASSETS UNDER MANAGEMENT (AAUM) FOR THE QUARTER OF OCTOBER - DECEMBER 2011 (`IN LAKHS) AVERAGE AUM EXCLUDING FUND OF FUNDS - DOMESTIC FUND OF BUT FUNDS INCLUDING FUND OF DOMESTIC FUNDS - OVERSEAS 71807.02 859813.71 458167.70 16119.76 6037726.70 480524.14 735603.37 85816.90 1331435.43 3056490.31 57555.62 20479.82 879687.03 3564162.94 434918.54 8862802.61 489722.26 0 3315.31 0 0 2904.26 0 0 0 0 0 0 0 8359.62 167019.74 0 10905.04 0

S.NO

MUTUAL FUND NAME

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

AIG Global Investment Group Mutual Fund Axis Mutual Fund Baroda Pioneer Mutual Fund Bharti AXA Mutual Fund Birla Sun Life Mutual Fund BNP Paribas Mutual Fund CanaraRobeco Mutual Fund Daiwa Mutual Fund Deutsche Mutual Fund DSP BlackRock Mutual Fund Edelweiss Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund Franklin Templeton Mutual Fund Goldman Sachs Mutual Fund HDFC Mutual Fund HSBC Mutual Fund

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18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

ICICI Prudential Mutual Fund IDBI Mutual Fund IDFC Mutual Fund IIFL Mutual Fund India bulls Mutual Fund ING Mutual Fund JM Financial Mutual Fund JPMorgan Mutual Fund Kotak Mahindra Mutual Fund L&T Mutual Fund LIC NOMURA Mutual Fund Mirae Asset Mutual Fund Morgan Stanley Mutual Fund MotilalOswal Mutual Fund Peerless Mutual Fund Pramerica Mutual Fund PRINCIPAL Mutual Fund Quantum Mutual Fund Reliance Mutual Fund Religare Mutual Fund Sahara Mutual Fund SBI Mutual Fund Sundaram Mutual Fund Tata Mutual Fund Taurus Mutual Fund Union KBC Mutual Fund UTI Mutual Fund Grand Total

6936779.24 610188.90 2647593.33 2577.22 130786.95 106930.11 691535.25 675871.93 2973805.82 461609.32 622257.13 42247.10 208607.02 23213.49 439043.98 208441.25 394159.28 17329.62 8230580.65 1181399.82 47295.30 4155151.16 1477477.78 2147330.74 459976.29 54015.12 5781734.00 68170771.66

10428.68 0 38853.77 0 0 48991.44 0 0 46457.09 0 0 0 0 0 0 0 0 556.00 199455.75 354.91 0 55610.42 0 0 0 0 0 593212.03 Page 23 of 26

 It is incorrect to think that all mutual funds have performed poorly. If one looks at some income funds, they have come with reasonable returns. It is only the performance of equity funds, which has been poor. Their poor performance has been amplified by the closed end discounts i.e. units of these funds quoting at sharp discounts to their NAV resulting in an even poorer return to the investor.

 One must remember that a Mutual Fund does not provide assured returns and neither can it "manufacture" returns out of thin air. Returns provided by mutual funds are a function of the returns in the underlying asset class in which the fund invests. Good funds can beat returns in their asset class to some extent but thats all. E.g. take the case of a sector specific fund like a pharma fund which invests only in shares of pharmaceutical companies. If the Govt. comes with new regulation that severely restricts the pricing freedom of these companies resulting in negative outlook for the sector, the prices of all stocks in the sector could fall substantially resulting in severe erosion in the NAV of the fund. No one can do anything about it. A good fund manager would probably sell part of the fund before prices fall too much and wait for an opportune time to reinvest at lower levels once the dust has settled. In that case, the NAV of the fund would fall to a lesser extent butit will fall.

 Most mutual fund managers took some time to realize the changed circumstances wherein the open economy ushered in by the liberalization took the full impact of the global deflation in commodity prices. This problem was compounded further by the Asian crisis after which cheap imports from Asia caused severe pressure on profits.

 One more issue is that the fund managers in many funds were not "professionally qualified and experienced". This is especially true of some of the funds floated by nationalized banks. Some of these individuals were transferred from the parent organization and did not really know much about investment management.

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CONCLUSION
 The Indian corporate scene is gradually transforming to cope with globalization and liberalization of the Indian economy. Indian shareholders are getting restless to prevent corporate board from offering them inferior deals. Mutual funds need to devise different strategies for companies with different types of ownerships. In an effort to realign ownership with control, the company should not develop a too comfortable relationship with the stakeholders. This may also work against the interests of the minority shareholders.

 Mutual funds will have to do what the market fails to do- take initiative to make the market for corporate control more efficient to counter the abuse of the separation of ownership from control and the lack of contestability in the corporate boards, which are the root causes of existing corporate governance practices.

 The initiatives as suggested will help mutual funds not only release value for the shareholders in many inefficient companies but also in the process promote better corporate governance practices in the Indian corporate sector.

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REFERENCES

BOOKS
 SEBI note on investor Grievances- Rights & Remedies  Annual Investment Planner- A.N. Shanbhag  Investors Handbook- P. Nandagopal  Mutual Fund Business- Robert C. Pozen

URL
 http://www.moneycontrol.com/mutualfundindia/learn/  http://www.indiainfoline.com/MutualFunds/ETF.aspx  http://www.nseindia.com/products/content/equities/mutual_funds/mfss.htm  http://www.equitymaster.com/outsideview/strategic-fund/

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