Synopsis 1

A Detailed Synopsis on

MUTUAL FUNDS & INVESTMENT BEHAVIOR (A Comparative study of Major Players)

Submitted for partial fulfillment of award of

Post Graduate Diploma in Management (PGDM)

Submitted by

Ambreesh Bajpai Fourth Trimester (PGDM 2008-10) Dr. Virendra Swarup Institute of Computer Studies, Kanpur Under the able Supervision of

Miss Gagneet Kaur Bhatia Asst. Lecturer Dr. Virendra Swarup Institute of Computer Studies, Kanpur

Mutual Fund Industry in India The Evolution The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better understood divided into following phases:

Phase 1. Establishment and Growth of Unit Trust of India - 1964-87 Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (Inida's first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores.

Phase II. Entry of Public Sector Funds - 1987-1993 The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Can bank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share. Mobilisation Amount Assets as % of 1992Mobilise Under gross 93 d Management Domestic Savings UTI 11,057 38,247 5.2% Public Secto 1,964 8,757 0.9% r Total 13,021 47,004 6.1%

Phase III. Emergence of Private Secor Funds - 1993-96 The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutal fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes.

Phase IV. Growth and SEBI Regulation - 1996-2004 The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilisation of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Invetors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry. In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutal fund players on the same level. UTI was re-organised into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilisation of funds from investors and assets under management which is supported by the following data: GROSS FUND MOBILISATION (RS. CRORES) PUBLIC PRIVATE FROM TO UTI TOTAL SECTOR SECTOR 0131April- March- 11,679 1,732 7,966 21,377 98 99 0131April- March- 13,536 4,039 42,173 59,748 99 00 0131April- March- 12,413 6,192 74,352 92,957 00 01

01April01 01April02 01Feb.03 01April03 01April04 01April05

31March- 4,643 02

13,613 1,46,267 1,64,523

315,505 Jan-03

22,923 2,20,551 2,48,979

31March03 31March04 31March05 31March06

*

7,259*

58,435

65,694

-

68,558 5,21,632 5,90,190

- 1,03,246 7,36,416 8,39,662

- 1,83,446 9,14,712 10,98,158

ASSETS UNDER MANAGEMENT (RS. CRORES) PUBLIC PRIVATE AS ON UTI TOTAL SECTOR SECTOR 3153,320 8,292 6,860 68,472 March-99

Phase V. Growth and Consolidation - 2004 Onwards The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

The major players in the Indian Mutual Fund Industry The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existance of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market. The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund. The succeeding decade showed a new horizon in indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund Regulations came into existance with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996. Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India. Major Mutual Fund Companies in India ABN AMRO Mutual Fund Birla Sun Life Mutual Fund Bank of Baroda Mutual Fund (BOB Mutual Fund) HDFC Mutual Fund

HSBC Mutual Fund ING Vysya Mutual Fund Prudential ICICI Mutual Fund Sahara Mutual Fund State Bank of India Mutual Fund Tata Mutual Fund Kotak Mahindra Mutual Fund Unit Trust of India Mutual Fund Reliance Mutual Fund Standard Chartered Mutual Fund Franklin Templeton India Mutual Fund Morgan Stanley Mutual Fund India Escorts Mutual Fund Alliance Capital Mutual Fund Benchmark Mutual Fund Canbank Mutual Fund Chola Mutual Fund LIC Mutual Fund GIC Mutual Fund

Concept of Mutual Funds 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 then invested in capital market instruments such as shares , debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. 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 basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

“….Mutual funds are popular among all income levels. With a mutual fund, we get a diversified basket of stocks managed by a professional……” -

Barbara Stanny, author of Prince Charming Isn’t Coming & How Women Get Smart About Money

“…A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings……..” -The U.S. Securities and Exchange Commission Recent trends in the mutual funds

The recent trends in the mutual funds industry has certainly reversed, which was expected given the state of the capital markets. If we look at the FII figures for the last three months, month-on-month they have turned from net buyers of Rs 6688.80 and Rs 521.90 in March and April respectively to net sellers of equities to the tune of Rs 7354.20 crores in May, whereas, local mutual funds consistently bought equities worth Rs 4476.81, 3120.56 and 7893.37 crores in the last three months, aggregating a total investment of over Rs 15000 crores. Although their buying spree has not helped to prevent the slide in the markets, but the situation could have been much worse. The fresh inflows have been possible because of the swelling asset base of the industry, and the huge NFO collections, which resulted in MFs sitting on huge amount of cash. Total industry assets has grown from around Rs 2.3 lakh crore in March to over 2.76 lakh crore in May. The industry assets have grown despite the conditions of the markets, whether bullish or bearish. Category-wise look at the net inflow for the last three months reveals that liquid fund in general are witnessing fresh inflows whereas equity category is facing redemption pressures The transaction trends are certainly reversing and the total industry AUM is rising chiefly because of inflows in liquid and money markets funds, whereas equity and debt-oriented funds face redemption pressures. Out of a total of 25 equity-oriented NFOs (sorted on close date) launched this year cash and equivalent holding is around

13.36%.which translates into 2000 crores of assets, whereas earlier, cash reserves of around 5%-8% was considered good enough. Markets do not recognize positive factors in falling markets much like, when they refused to factor in any of the negatives in the bullish markets. Strong GDP growth, favourable monsoon and other factors are failing to revive the markets in the short term, but Indian growth story is still pretty much intact, and present levels have made the Indian markets all the more attractive, fundamentals can’t be ignored for long, and here’s wishing the bulls are back with a vengeance, bigger and stronger after this “extended healthy correction”. Dominant players at present Some of the major players on the Indian mutual fund scene: •

ABN AMRO Mutual Fund

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Benchmark Mutual Fund

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Birla Mutual Fund

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BOB Mutual Fund

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Canbank Mutual Fund

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Chola Mutual Fund

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Deutsche Mutual Fund

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DSP Merrill Lynch Mutual Fund

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Escorts Mutual Fund

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Fidelity Mutual Fund

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Franklin Templeton Investments

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HDFC Mutual Fund

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HSBC Mutual Fund

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ING Vysya Mutual Fund

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JM Financial Mutual Fund

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Kotak Mahindra Mutual Fund

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LIC Mutual Fund

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Morgan Stanley Mutual Fund

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PRINCIPAL Mutual Fund

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Prudential ICICI Mutual Fund

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Reliance Mutual Fund

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Sahara Mutual Fund

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SBI Mutual Fund

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Standard Chartered Mutual Fund

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Tata Mutual Fund

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Taurus Mutual Fund

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Unit Trust of India

•

UTI Mutual Fund ECONOMIC ENVIRONMENT GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

While the Indian mutual fund industry has grown in size by about 320% from March, 1993 (Rs. 470 billion) to December, 2004 (Rs. 1505 billion) in terms of AUM, the AUM of the sector excluding UTI has grown over 8 times from Rs. 152 billion in March 1999 to $ 148 billion as at March 2008.Though India is a minor player in the global mutual fund industry, its AUM as a proportion of the global AUM has steadily increased and has doubled over its levels in 1999. The growth rate of Indian mutual fund industry has been increasing for the last few years. It was approximately 0.12% in the year of 1999 and it is noticed 0.25% in 2004 in terms of AUM as percentage of global AUM. Some facts for the growth of mutual funds in India •100% growth in the last 6 years. •Number of foreign AMC’s is in the queue to enter the Indian markets. •Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. •We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

•Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products. •SEBI allowing the MF's to launch commodity mutual funds. •Emphasis on better corporate governance. •Trying to curb the late trading practices. •Introduction of Financial Planners who can provide need based advice. Recent trends in mutual fund industry The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by the nationalized banks and smaller private sector players. TECHNOLOGICAL ENVIRONMENT IMPACT OF TECHNOLOGY •Electronic fund transfer facility. •Investment and re-purchase facility through internet. •Added features like accident insurance cover, mediclaim etc. •Holding the investment in electronic form, doing away with the traditional form of unit certificates. •Cheque writing facilities. •Systematic withdrawal and deposit facility. ONLINE MUTUAL FUND TRADING The innovation the industry saw was in the field of distribution to make it more easily accessible to an ever increasing number of investors across the country. LEGAL AND POLITICAL ENVIRONMENT ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI) With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organization. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August 1995.

Research MethodologyObjectives of the Study •

To analyze current trends and growth patterns of the mutual funds.

•

To study the performance of mutual funds in the market.

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To depict the present and future potential of mutual funds.

The Design A research design is a type of blueprint prepared depending on various types of blueprints available for the collection, measurement and analysis of data. A research design calls for developing the most efficient plan of gathering the needed information. Research design is the specification of methods and procedures for acquiring the information needed. The sample The sample size taken is 4 i.e. four banks are been taken for the analysis of the report. The four banks taken are as follows: 1. HDFC 2. STATE BANK OF INDIA 3. HSBC 4. BANK OF INDIA

The tools used Data collection The data used in this study is secondary data. Various magazines and journals were referred. The banks websites was an effective source for collecting the information. The annual reports of banks were analyzed for financial appraisal.

For data analysis Following Ratios were used for analysis-

ASSET QUALITY  Gross NPA / Gross advance  Gross NPA / Total asset  Net NPA / Net advances

PROFITABLITY RATIOS • Interest on advances / total income • Interest on investment / total income • Other income / total income • Profit margin = net profit / total income • Net profit / working fund • Interest income / working funds • Non interest income / working funds • Interest income / total assets • Asset utilization = total income / total asset • Return on assets = total income / total asset

Chapter Plan -

1-

234-

Introduction  Evolution & History  Concept and Definitions  Major Players Present state of the Industry Dominant players at present Local, National & Global Environment

5678-

Facilities or Services Development in Indian mutual Fund Industry Public sector V/S Private sector Companies Impact of Globalisation  Present Scenario  Future……… What`s Ahead

9-

Research Methodology  Population:  Source of data  Methodology of collection of data.  Statistical tools for evaluating and utilizing data.

9- Swot Analysis  Limitations  Recommendations & Suggestions  Conclusion 10- Bibliography & Annexure

BIBLIOGRAPHYMagazines :     

Outlook Money Mutual Funds review : (SBI investment guide meant for internal circulation) Standard charted Mutual Funds Concepts booklet on INDEXATION Capital Market SBI Presentation booklet (for internal circulation) Newspapers :

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Economic Times Websites :

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www.personalfinance.com www.sbimf.com www.statebankofindia.com www.mutualfundsindia.com www.amfiindia.com www.indiainfoline.com www.navindia.com www.equitymaster.com Fact Sheets, Fund Statements and Web Sites of the various Fund Houses.

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