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The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India, at the initiative of the Government of India and Reserve Bank of
India. The history of mutua l funds in India can be broadly divided into four
distinct phases

First Phase ± 1964-87

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 Rs.6,700crores of
assets under management.

Second Phase ± 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non - UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General
Insurance Corporation of India (GIC). SBI Mutual Fund was the first non - UTI
Mutual Fund established in June 1987 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
established its mutual fund in June 1989 while GIC had set up it s mutual fund in
December 1990.
At the end of 1993, the mutual fund industry had assets under management of
Rs.47,004crores.

Third Phase ± 1993-2003 (Entry of Private Sector Funds)

·ith 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 substi tuted 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 Rs. 1,21,805crores. The Unit Trust of India with
Rs.44,541crores of assets under management was way ahead of other mutual
funds.

Fourth Phase ± since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI
was bifurcated into two separate entities. One is the Specified Undertaking of the
Unit Trust of India with assets under management of Rs.29,835crores as at the
end of January 2003, representing broadly, the assets of US 64 scheme, assured
return and certain other schemes. 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
Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. ·ith the
bifurcation of the erstwhile UTI which had in March 2000 more than
Rs.76,000crores of assets under management and with the setting u p of a UTI
Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent
mergers taking place among different private sector funds, the mutual fund
industry has entered its current phase of consolidation and growth.
The graph indicates the growth of assets over the years.

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking
of the Unit Trust of India effective from February 2003. The Assets under
management of the Specified Undertaking of the Unit Trust of India has
therefore been excluded from the total assets of the industry as a whole from
February 2003 onwards.
Y

3

3 

There are a lot of investment avenues available today in the financial market for
an investor with an investable surplus. He can invest in Bank Deposits,
Corporate Debentures, and Bonds where there is low risk but low return. He may
invest in Stock of companies where the risk is high and the returns are also
proportionately high. The recent trends i n the Stock Market have shown that an
average retail investor always lost with periodic bearish tends. People began
opting for portfolio managers with expertise in stock markets who would invest
on their behalf. Thus we had wealth management services provi ded by many
institutions. However they proved too costly for a small investor. These investors
have found a good shelter with the mutual funds.

Mutual fund industry has seen a lot of changes in past few years with
multinational companies coming into the c ountry, bringing in their professional
expertise in managing funds worldwide. In the past few months there has been
a consolidation phase going on in the mutual fund industry in India. Now
investors have a wide range of Schemes to choose from depending on their
individual profiles.

My study gives an overview of mutual funds ± definition, types, benefits, risks,

limitations, history of mutual funds in India, latest trends, global scenarios. I
have analyzed a few prominent mutual funds schemes and have given my
findings.




The main purpose of doing this project was to know about mutual fund and its
functioning. This helps to know in details about mutual fund industry right from
its inception stage, growth and future prospects.
It also helps in understanding different schemes of mutual funds. Because my
study depends upon prominent funds in India and their schemes like equity,
income, balance as well as the returns associated with those schemes.
The project study was done to ascertain the asset allocation, entry load, exit
load, associated with the mutual funds. Ultimately this would help in
understanding the benefits of mutual funds to investors.

 



In my project the scope is limited to some prominent mutual funds in the mutu al
fund industry. I analyzed the funds depending on their schemes like equity,
income, balance. But there is so many other schemes in mutual fund industry
like specialized (banking, infrastructure, pharmacy) funds, index funds etc.

My study is mainly concentrated on equity schemes, the returns, in income

schemes the rating of CRISIL, ICRA and other credit rating agencies.



3

‡ To give a brief idea about the benefits available from Mutual Fund investment
‡ To give an idea of the types of schemes av ailable.
‡ To discuss about the market trends of Mutual Fund investment.
‡ To study some of the mutual fund schemes and analyse them
‡ Observe the fund management process of mutual funds
‡ Explore the recent developments in the mutual funds in India
‡ To give an idea about the regulations of mutual funds

c
 

To achieve the objective of studying the stock market data has been collected.
Research methodology carried for this study can be two types
1. Primary
2. Secondary

PRIMARY:
The data, which has being collected for the first time and it is the original data.
In this project the primary data has been taken from HSE staff and guide of the
project.

SECONDARY:
The secondary information is mostly taken from websites, books, journals, etc.






‡ The time constraint was one of the major problems.

‡ The study is limited to the different schemes available under the mutual funds
selected.
‡ The study is limited to selected mutual fund schemes.
‡ The lack of information sources for the analysis part.

3 
 3 

ëOMëAY STOCK EXCHANGES:

This stock exchange, Mumbai, popularly known as ³BSE´ was established in

1875 as ³The Native share and stock brokers association´, as a voluntary non -
profit making association. It has an evolved o ver the years into its present
status as the premiere stock exchange in the country. It may be noted that the
stock exchanges the oldest one in Asia, even older than the Tokyo Stock
Exchange, which was founded in 1878.
The exchange, while providing an effi cient and transparent market for trading in
securities, upholds the interests of the investors and ensures redressed of their
grievances, whether against the companies or its own member brokers. It also
strives to educate and enlighten the investors by mak ing available necessary
informative inputs and conducting investor education programmes.

A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public

representatives and an executive director is the apex body, which decides the
policies and regulates the affairs of the exchange.

The Executive director as the chief executive officer is responsible for the day
today administration of the exchange. The average daily turnover of the
exchange during the year 2000 -01(April-March) was Rs 3984.19 crores and
average number of daily trades 5.69 Lakhs.
However the average daily turn over of the exchange during the year 2001 -02
has declined to Rs. 1244.10 crores and number of average daily trades during
the period to 5.17 Lakhs.
The average daily tur n over of the exchange during the year 2002 -03 has
declined and number of average daily trades during the period is also decreased.
The Ban on all deferral products like BLESS AND ALBM in the Indian capital
markets by SEBI with effect from July 2,2001, abo lition of account period
settlements, introduction of compulsory rolling settlements in all scripts traded
on the exchanges with effect from Dec 31,2001, etc., have adversely impacted
the liquidity and consequently there is a considerable decline in the da ily turn
over at the exchange. The average daily turn over of the exchange present
scenario is 110363(laces) and number of average daily trades 1057(laces).

ë



In order to enable the market participants, analysts etc., to track the various
ups and downs in the Indian stock market, the Exchange has introduced in 1986
an equity stock index called BSE -SENSEX that subsequently became the
barometer of the moments of the share prices in the Indian Stock market. It is a
³Market capitalization weighted´ index of 30 component stocks representing a
sample of large, well-established and leading companies. The base year of
Sensex is 1978-79. The Sensex is widely reported in both domestic and
international markets through print as well as electronic media.
Sensex is calculated using a market capitalization weighted method. As per this
methodology, the level of the index reflects the total market value of all 30 -
component stocks from different industries related to particular base period. The
total market value of a company is determined by multiplying the price of its
stock by the number of shares outstanding. Statisticians call an index of a set of
combined variables (such as price and number of shares) a composite Index. An
Indexed number is used to represent the results of this calculation in order to
make the value easier to work with and track over a time. It is much easier to
graph a chart based on Indexed values than one based on actual values world
over majority of the well-known Indices are constructed using ´Market
capitalization weighted method´.

In practice, the daily calculation of SENSEX is done by dividing the aggregate

market value of the 30 companies in the Index by a number called the Index
Divisor. The Divisor is the only link to the original base period value of the
SENSEX. The Divisor kee ps the Index comparable over a period or time and if
the reference point for the entire Index maintenance adjustments. SENSEX is
widely used to describe the mood in the Indian Stock markets. Base year
average is changed as per the formula new base year ave rage = old base year
average*(new market value/old market value).


3  
  

The NSE was incorporated in Now 1992 with an equity capital of Rs 25 crores.
The International securities consultancy (ISC) of Hong Kong has helped in
setting up NSE. ISE has prepared the detailed business plans and installation of
hardware and software systems. The promotions for NSE were financial
institutions, insurances companies, banks and SEBI capital market ltd,
Infrastructure leasing and financial services ltd and stock holding corporation ltd.
It has been set up to strengthen the move towards professionalisation of the
capital market as well as provide nation wide securities trading facilities to
investors.NSE is not an exchange in the traditional sense wher e brokers own and
manage the exchange. A two tier administrative set up involving a company
board and a governing aboard of the exchange is envisaged.
NSE is a national market for shares PSU bonds, debentures and government
securities since infrastructure and trading facilities are provided.
NSE-NIFTY:
The NSE on April 22, 1996 launched a new equity Index. The NSE -50. The new
index, which replaces the existing NSE -100 index, is expected to serve as an
appropriate Index for the new segment of futures and opt ions.
³Nifty´ means National Index for Fifty Stocks.
The NSE-50 comprises 50 companies that represent 20 broad Industry groups
with an aggregate market capitalization of around Rs. 1,70,000crs. All
companies included in the Index have a market capitalizati on in excess of Rs 500
crs each and should have traded for 85% of trading days at an impact cost of
less than 1.5%.
The base period for the index is the close of prices on Nov 3, 1995, which makes
one year of completion of operation of NSE¶s capital market segment. The base
value of the Index has been set at 1000.

c3 3 
The NSE madcap Index or the Junior Nifty comprises 50 stocks that represents
21 aboard Industry groups and will provide proper representation of the madcap
segment of the Indian capital Market. All stocks in the index should have market
capitalization of greater than Rs.200 crores and should have traded 85% of the
trading days at an impact cost of less 2.5%.
The base period for the index is Nov 4, 1996, which signifies two years for
completion of operations of the capital market segment of the operations. The
base value of the Index has been set at 1000.
Average daily turn over of the present scenario 258212 (Laces) and number of
averages daily trades 2160(Laces).

At present, there are 24 stock exchanges recognized under the securities

contract (regulation) Act, 1956. They are

c

  

Bombay stock exchange,
Ahmedabad share and stock brokers association,
Calcutta stock exchange association Ltd,
Delhi stock exchange association Ltd,
Madras stock exchange association Ltd,
Indore stock brokers association Ltd,
Banglore stock exchange,
Hyderabad stock exchange,
Cochin stock exchange,
Pune stock exchange,
U.P.stock exchange,
Ludhiana stock exchange,
Jaipur stock exchange Ltd,
Gauhati stock exchange Ltd,
Manglore stock exchange,
Maghad stock exchange Ltd, Patna,
Bhuvaneshwar stock exchange association Ltd,
Over the counter exchange of India, Bombay,
Saurastrakuth stock exchange Ltd,
Vsdodard stock exchange Ltd,
Coimbatore stock exchange Ltd,
The Meerut stock exchange,
National stock exchange,
Integrated stock exchange


c
  

There are numerous benefits of investing in mutual funds and one of the key
reasons for its phenomenal success in the developed markets like US and UK is
the range of benefits they offer, which are unmatched by most other investment
avenues. ·e have explained the key benefits in this section. The benefits have
been broadly split into universal benefits, applicable to all sch emes, and benefits
applicable specifically to open -ended schemes. Universal Benefits

Affordability: A mutual fund invests in a portfolio of assets, i.e. bonds, shares,

etc. depending upon the investment objective of the scheme. An investor can
buy in to a portfolio of equities, which would otherwise be extremely expensive.
Each unit holder thus gets an exposure to such portfolios with an investment as
modest as Rs.500/-. This amount today would get you less than quarter of an
Infosys share! Thus it would be affordable for an investor to build a portfolio of
investments through a mutual fund rather than investing directly in the stock
market. Diversification The nuclear weapon in your arsenal for your fight against
Risk. It simply means that you must spread your investment across different
securities (stocks, bonds, money market instruments, real estate, fixed deposits
etc.) and different sectors (auto, textile, information technology etc.). This kind
of a diversification may add to the stability of your retu rns, for example during
one period of time equities might under perform but bonds and money market
instruments might do well enough to offset the effect of a slump in the equity
markets. Similarly the information technology sector might be faring poorly bu t
the auto and textile sectors might do well and may protect your principal
investment as well as help you meet your return objectives. Variety Mutual
funds offer a tremendous variety of schemes. This variety is beneficial in two
ways: first, it offers different types of schemes to investors with different needs
and risk appetites; secondly, it offers an opportunity to an investor to invest
sums across a variety of schemes, both debt and equity. For example, an
investor can invest his money in a Growth Fund (equity scheme) and Income
Fund (debt scheme) depending on his risk appetite and thus create a balanced
portfolio easily or simply just buy a Balanced Scheme.

Professional Management: Qualified investment professionals who seek to

maximize returns and minimize risk monitor investor's money. ·hen you buy in
to a mutual fund, you are handing your money to an investment professional
who has experience in making investment decisions. It is the Fund Manager's job
to (a) find the best securities for the fund, given the fund's stated investment
objectives; and (b) keep track of investments and changes in market conditions
and adjust the mix of the portfolio, as and when required.

Tax ëenefits: Any income distributed after March 31, 2002 will be subject to
tax in the assessment of all Unit holders. However, as a measure of concession
to Unit holders of open-ended equity-oriented funds, income distributions for the
year ending March 31, 2003, will be taxed at a concessional rate of 10.5%.
In case of Individuals and Hindu Undivided Families a deduction uptoRs. 9,000
from the Total Income will be admissible in respect of income from investments
specified in Section 80L, including income from Units of the Mutual Fund. Units
of the schemes are not subject to ·ealth-Tax and Gift-Tax.

Regulations: Securities Exchange Board of India (³SEBI´), the mutual funds

regulator has clearly defined rules, which govern mutual funds. These rules
relate to the formation, administration and management of mutual funds and
also prescribe disclosure and accounting requirements. Such a high level of
regulation seeks to protect the interest of investors

 
     
-iquidity: In open-ended mutual funds, you can redeem all or part of your units
any time you wish. Some schemes do have a lock -in period where an investor
cannot return the units until the completion of such a lock -in period.

Convenience: An investor can purchase or sell fund units directly from a fund,
through a broker or a financial planner. The investor may opt for a Systematic
Investment Plan (³SIP´) or a Systematic ·ithdrawal Advantage Plan (³S·AP´).
In addition to this an investor receives account statements a nd portfolios of the
schemes.

Flexibility: Mutual Funds offering multiple schemes allow investors to switch

easily between various schemes. This flexibility gives the investor a convenient
way to change the mix of his portfolio over time.

Transparency: Open-ended mutual funds disclose their Net Asset Value

(³NAV´) daily and the entire portfolio monthly. This level of transparency, where
the investor himself sees the underlying assets bought with his money, is
unmatched by any other financial instrument. Thus the investor is in the know of
the quality of the portfolio and can invest further or redeem depending on the
kind of the portfolio that has been constructed by the investment manager.

3
c
  

The Risk-Return Trade-off:

The most important relationship to understand is the risk -return trade-off.
Higher the risk greater the returns/loss and lower the risk lesser the
returns/loss.
Hence it is upto you, the investor to decide how much risk you are willing to
take. In order to do this you must first be aware of the different types of risks
involved with your investment decision.

Market Risk: Sometimes prices and yields of all securities rise and fal l. Broad
outside influences affecting the market in general lead to this. This is true, may
it be big corporations or smaller mid -sized companies. This is known as Market
Risk. A Systematic Investment Plan (³SIP´) that works on the concept of Rupee
Cost Averaging (³RCA´) might help mitigate this risk.

Credit Risk: The debt servicing ability (may it be interest payments or

repayment of principal) of a company through its cashflows determines the
Credit Risk faced by you. This credit risk is measured by inde pendent rating
agencies like CRISIL who rate companies and their paper. A µAAA¶ rating is
considered the safest whereas a µD¶ rating is considered poor credit quality. A
well-diversified portfolio might help mitigate this risk.

Inflation Risk: Things you hear people talk about:

"Rs. 100 today is worth more than Rs. 100 tomorrow."
"Remember the time when a bus ride costed 50 paise?"
"MehangaiKaJamanaHai."
The root cause, Inflation. Inflation is the loss of purchasing power over time. A
lot of times people make conservative investment decisions to protect their
capital but end up with a sum of money that can buy less than what the principal
could at the time of the investment. This happens when inflation grows faster
than the return on your investment. A well -diversified portfolio with some
investment in equities might help mitigate this risk.

Interest Rate Risk: In a free market economy interest rates are difficult if not
impossible to predict. Changes in interest rates affect the prices of bonds as well
as equities. If interest rates rise the prices of bonds fall and vice versa. Equity
might be negatively affected as well in a rising interest rate environment. A well -
diversified portfolio might help mitigate this risk.

Political/Government Policy Risk: Changes in government policy and political

decision can change the investment environment. They can create a favorable
environment for investment or vice versa.

-iquidity Risk: Liquidity risk arises when it becomes difficult to sell the
securities that one has purchased. Liquidity Risk can be partly mitigated by
diversification, staggering of maturities as well as internal risk controls that lean
towards purchase of liquid securities.

u Call Risk. The possibility that falling interest rates will cause a bond
issuer to redeem²or call²its high-yielding bond before the bond's
maturity date.
u Country Risk. The possibility that political events (a war, national
elections), financial problems (rising inflation, government default), or
natural disasters (an earthquake, a poor harvest) will weaken a country's
economy and cause investments in that country to decline.
u Credit Risk. The possibility that a bond issuer will fail to repay interest
and principal in a timely manner. Also called default risk.
u Currency Risk. The possibility that returns could be reduced for
Americans investing in foreign securities because of a rise in the value of
the U.S. dollar against foreign currencies. Also called exchange -rate risk.
u Income Risk. The possibility that a fixed -income fund's dividends will
decline as a result of falling overall interest rates.
 u Industry Risk. The possibility that a group of stocks in a single industry
will decline in price due to developments in that industry.
u Inflation Risk. The possibility that increases in the cost of living will
reduce or eliminate a fund's real inflation -adjusted returns.
u Interest Rate Risk. The possibility that a bond fund will decline in value
because of an increase in interest rates.
u Manager Risk. The possibility that an actively managed mutual fund's
investment adviser will fail to execute the fund's investment strategy
effectively resulting in the failure of stated objectives.
u Market Risk. The possibility that stock fund or bond fund prices overall
will decline over short or e ven extended periods. Stock and bond markets
tend to move in cycles, with periods when prices rise and other periods
when prices fall.
u Principal Risk. The possibility that an investment will go down in value,
or "lose money," from the original or invested amount.


  
 

c

  
To cater to different investment needs, Mutual Funds offer various investment
options. Some of the important investment options include:
Growth Option:
Dividend is not paid-out under a Growth Option and the investor realises only
the capital appreciation on the investment (by an increase in NAV).

Dividend Payout Option:

Dividends are paid-out to investors under the Dividend Payout Option. However,
the NAV of the mutual fund scheme falls to the extent of the dividend payout.

Dividend Re-investment Option:

Here the dividend accrued on mutual funds is automatically re -invested in
purchasing additional units in open -ended funds. In most cases mutual funds
offer the investor an option of collecting dividends or re -investing the same.

Retirement Pension Option:

Some schemes are linked with retirement pension. Individuals participate in
these options for themselves, and corporates participate for their emp loyees.

Insurance Option:
Certain Mutual Funds offer schemes that provide insurance cover to investors as
an added benefit.

Systematic Investment Plan (SIP):

Here the investor is given the option of preparing a pre -determined number of
post-dated cheques in favour of the fund. The investor is allotted units on a
predetermined date specified in the offer document at the applicable NAV.
Systematic Withdrawal Plan (SWP):
As opposed to the Systematic Investment Plan, the Systematic ·ithdrawal Plan
allows the investor the facility to withdraw a pre -determined amount / units from
his fund at a pre-determined interval. The investor's units will be redeemed at
the applicable NAV as on that day.


 
 

 

    
 
   
    
 

 


  
     
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3 



The Indian Mutual fund industry has witnessed considerable growth since its
inception in 1963. The assets under management (AUM) have surged to Rs
4,173 bn in Mar-09 from just Rs 250 mn in Mar-65. In a span of 10 years (from
1999 to 2009), the industry has registered a CAGR of 22.3%, albeit
encompassing some shortfalls in AUM due to business cycles.

The impressive growth in the Indian Mutual fund industry in recent years can
largely be attributed to various factors such as rising household savings,
comprehensive regulatory framework, favourable tax policies, introduction of
several new products, investor education campaign and role of distributors.

In the last few years, household¶s income levels have grown significantly,
leading to commensurate increase in household¶s savings. Household financial
savings (at current prices) registered growth rate of around 17.4% on an
average during the period FY04 -FY08 as against 11.8% on an average during
the period FY99-FY03. The considerable rise in household¶s financial savings,
point towards the huge market potential of the Mutual fund industry in India.

Besides, SEBI has introduced various regulatory measures in order to protect

the interest of small investors that augurs well for the long term growth of the
industry. The tax benefits allowed on mutual fund schemes (for example
investment made in Equity Linked Saving Scheme (ELSS) is qualified for tax
deductions under section 80C of the Income Tax Act) also have helped mutual
funds to evolve as the preferred form of inv estment among the salaried income
earners.

Besides, the Indian Mutual fund industry that started with traditional products
like equity fund, debt fund and balanced fund has significantly expanded its
product portfolio. Today, the industry has introduced an array of products such
as liquid/money market funds, sector-specific funds, index funds, gilt funds,
capital protection oriented schemes, special category funds, insurance linked
funds, exchange traded funds, etc. It also has introduced Gold ETF fund in 2 007
with an aim to allow mutual funds to invest in gold or gold related instruments.
Further, the industry has launched special schemes to invest in foreign
securities. The wide variety of schemes offered by the Indian Mutual fund
industry provides multiple options of investment to common man.
·ith a strong growth in the AUM of domestic Mutual fund industry, the ratio of
AUM to GDP increased gradually from 4.7% in 2001 to 8.5% in 2009. The share
of mutual funds in households¶ financial savings also witnes sed a substantial
increase to 7.7% in 2008 as against 1.3% in 2001.
The investor-wise pattern of asset-holding as well as investors accounts reveals
that individual investors account for almost 96.75% of total investors account
and contribute Rs 1552.8 bn which is 37.0% of the total net assets as on March
31, 2009. The comparatively lower share of net assets of individual investors in
total net assets is mainly because of lower penetration of mutual fund as an
investment instrument among working populat ion (age group 18-59 years). A
majority of investors in the age group 18 -59 years are not aware of mutual
funds or of investing in mutual funds through Systematic Investment Plan
(SIP). However, take up of mutual fund as an investment opportunity by
individual investors, particularly in Tier 2 and Tier 3 towns, is expected to
increase in the near future.

Corporate/institutions sector on the other hand, though account for only 1.2%
of the total number of investors¶ accounts in Mutual funds industry, contribu te
as much as 56.3% to the total net assets of the industry as on March 31, 2009.
Despite a rise in net FII inflows in the domestic mutual funds, FIIs constitute a
very small percentage of investors¶ accounts (0.0003%) and contribute Rs
49.83 bn to the total net assets (1% of total net assets of the Indian Mutual
fund industry as on March 31, 2009).
The net resource mobilisation of domestic mutual funds which registered strong
growth in FY2000 due to the tax incentives announced in the Union Budget for
FY2000, witnessed a sharp decline in FY01. The decline in resource mobilisation
in FY01 was primarily due to the bearish trend in the domestic stock markets
and problems in UTI. The resource mobilisation continued to remain at low level
upto FY05. In FY05 re source mobilisation by mutual funds declined by almost
95.3% on account of redemption pressures on income, gilt and equity -linked
saving schemes subsequent to shift of resources in favour of small saving
schemes that offered attractive tax adjusted rates o f return. Mutual funds
mobilised huge amount of resources under liquid/money market schemes &
growth/equity oriented schemes, while resource mobilisation under debt
schemes experienced sharp fall due to change in interest rate scenario. ·hile,
the resource mobilisation by mutual funds witnessed strong growth during
FY06-FY07 and in the period Apr -Aug 07 due to buoyant capital market
conditions, the eruption of sub-prime mortgage crisis during Sep-07 and
consequent volatility witnessed in the domestic stock markets led to decline in
resource mobilisation. The net resource mobilisation of mutual funds turned
negative as there was a net outflow of Rs 282.97 bn during FY09 as against a
net inflow of Rs 1,538.01 bn during FY08. The uncertain conditions in stock
markets coupled with redemption pressures from banks and corpoates amidst
tight liquidity conditions resulted in significant outflows during the months of
Jun-08 (Rs 392.3 bn), Sep-08 (Rs 456.5 bn) and Oct-08 (458 bn). This led the
RBI to announce various liquidity augmentation measures to provide liquidity
support to mutual funds through banks. ·ith the easing of overall liquidity
conditions, net resource mobilisation by mutual funds again turned positive
between the period Dec-08 to Feb-09. Further, with liquidity conditions
remaining comfortable and stock markets registering strong gains, the net
resource mobilisation by mutual funds grew considerably during the first
quarter of FY10.
The data reveals that the increase in revenue and profitability of the Mutual
fund industry has not been commensurate with the AUM growth in past few
years. The increased expenditure on marketing, distribution and administration
exerted upward pressure on the operating expenses, thereby impacting AMC¶s
margins. The operating expenses as a percentage of AUM rose from 41 basis
points in FY04 to 113 basis points in FY08.

Impact of the Global Financial Crisis

Deepening of the global financial crisis during September 2008, which resulted
in liquidity crunch world-over, had dampening impact of the Indian Mutual fund
industry. ·ith the drying up of credit inflows from banks and external
commercial borrowings route, mutual funds witnessed redemption pressure
from corporates. Although the mutual funds promised immediate redempti on,
their assets were relatively illiquid. Besides, mutual funds faced problems such
as maturity mismatches between assets & liabilities of mutual funds, shift from
mutual funds to bank deposits in view of the comparatively higher interest rates
being offered by banks and freezing up of money markets due to lack of buyers
for assets like certificates of deposits of private sector banks.

During Apr-Sep 08, net mobilisation of funds by mutual funds declined sharply
by 97.7% to Rs 24.8 bn due to uncertain cond itions prevailing in the domestic
stock markets. The redemption pressures witnessed by mutual funds led to net
outflows under both the income/debt-oriented schemes and growth/equity-
oriented schemes. Further, the AUM of Mutual fund industry contracted by
20.7% from Rs 5,445.4 bn as on August 31, 2008 to Rs 4,319.0 bn as on
October 31, 2008. During the same period, liquid and debt schemes which
contribute more than 65% to the total AUM witnessed a decline of 19% in AUM.

In an endeavour to ease liquidity pres sures in the system and restore stability
in the domestic financial markets, the RBI announced a slew of measures. The
key measures announced by the RBI include:
 u The RBI decided to conduct a special 14 day repo at 9% per annum for a
notified amount of Rs 200 bn from October 14, 2008 with a view to enable
banks to meet the liquidity requirements of mutual funds.
u Scheduled Commercial Banks (SCBs) and All India term lending and
refinancing institutions were allowed to lend against and buy back CDs
held by mutual funds for a period of 15 days.
u As a temporary measure, banks were allowed to avail of additional
liquidity support exclusively for the purpose of meeting the liquidity
requirements of mutual funds to the extent of up to 0.5% of their net
demand and time liabilities (NDTL). Accordingly on November 1, 2008, it
was decided to extend this facility and allow banks to avail liquidity
support under the LAF through relaxation in the maintenance of SLR to
the extent of up to 1.5% of their NDTL. This relaxation in SLR was
provided for the purpose of meeting the funding requirements of NBFCs
and mutual funds.
u The borrowing limit prescribed in Regulation 44(2) of SEBI (Mutual Fund)
Regulations, 1996 was enhanced from 20% of net asset of the scheme to
40% of net asset of the scheme to those mutual funds who approached
SEBI. This enhanced borrowing limit was made available for a period of
six months and could be utilised for the purpose of redemptions/
repurchase of units.
u In order to moderate the exit from close en ded debt schemes and in the
interest of those investors who choose to remain till maturity and with a
view to ensure that the value of debt securities reflects the current market
scenario in calculation of NAV, the discretion given to mutual funds to
mark up/ mark down the benchmark yields for debt instruments of more
than 182 days maturity was enhanced from 150 basis points to 650 basis
points.

The significant reduction in CRR & SLR, net injection of Rs 9,279 bn through the
repo window during Oct-08, the repurchase of MSS bonds worth Rs 200 bn
along with the earlier mentioned liquidity augmentation measures helped to
ease liquidity pressures for domestic mutual funds. The data reveals that about
18 mutual funds borrowed from banks. Further, the increase of borrowing limits
enabled the mutual funds to meet redemption pressures without engaging in a
large scale sale of assets which could have caused systemic instability. As on
November 10, 2008, 15 mutual funds had been extended the enhanced
borrowing limit as per their requests made to SEBI.

However, with some recovery in the Indian financial markets as well as

improvement in the liquidity conditions, the RBI in it¶s Q2 FY10 review of
monetary policy withdrew some liquidity boosting measures that were
introduced as a part of monetary stimulus in FY09. The special term repo facility
for SCBs, for funding to NBFCs, mutual funds, and housing finance companies
was terminated.