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WHAT IS A MUTUAL FUND?

WHAT IS A MUTUAL FUND? A Mutual Fund is a trust that pools the savings of a number of investors who share a common investment objective IN turn buy assets LEGAL STRUCTURE FUND SPONSPOR/SETTLOR KOTAK MAHINDRA FINANCE LTD. TRUST KOTAK MAHINDRA MUTUAL FUND INVESTMENT MANAGER & ADVISOR

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WHAT IS A MUTUAL FUND?

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  1. WHAT IS A MUTUAL FUND? A Mutual Fund is a trust that pools the savings of a number of investors who share a common investment objective IN turn buy assets

  2. LEGAL STRUCTURE FUND SPONSPOR/SETTLOR KOTAK MAHINDRA FINANCE LTD. TRUST KOTAK MAHINDRA MUTUAL FUND INVESTMENT MANAGER & ADVISOR KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. TRUSTEE KOTAK MAHINDRA TRUSTEE CO. LTD. UNIT HOLDERS Contd…

  3. LEGAL STRUCTURE INVESTMENT MANAGER & ADVISOR KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD. • APPOINTS • CUSTODIANS • REGISTRARS • BANKS • DISTRIBUTORS

  4. Working of a Mutual Fund INVESTORS Pool their money with Passed back to INVESTORS GET A BLEND OF LIQUIDITY RETURNS & SAFETY FUND MANAGEMENT RETURNS • MUTUAL FUND • LARGE CORPORATE • SPECIALISTS MANAGE Generate Invest in PORTFOLIO YIELDS HIGH RETURN TO MFs INVEST IN BALANCED PORTFOLIO SECURITIES

  5. TYPES OF MUTUAL FUNDS

  6. OPEN ENDED OPEN FOR ALL THE YEAR MIN SUBS AMT 50CR NO DURATION REFUNDED IF MIN SUBS NOT ACHIEVED REPURCHASED ANY TIME REDEEMED AT NAV & LOAD FACTOR RANGES (4% TO 6%) AS REPURCHSED SO NOT LISTED AT STOCK EX TRADED AS PERMITTED LOT DIVID MAY /MAY NOT SWITCHOVER ALLOWED CLOSE ENDED OPEN FOR FIXED PERIOD MIN SUBS AMT 20CR DURATION (5TO7 YEARS) REFUNDED IF MIN AMT NOT ACHIEVED MAY BE REPURCHASED (AFTER 2 TO 3 YRS) REDEMPTION SPECIFIED & DONE AT NAV - SERVICE CHARGE LISTED AT STOCK EX DIVID MAY/MAY NOT BE SWITCHOVER ALLOWED MUTUAL FUNDS

  7. WHY INVEST IN MUTUAL FUNDS? • SAVE THROUGH MUTUAL FUNDS INVEST THROUGH MUTUAL FUNDS • Park surpluses • Short term investment • Easy liquidity • Tax benefits • Have a long term objective • Profile your risk • Select appropriate MF scheme, • based on risk return requirement • Mix of equity and debt • Invest regularly/with flexibility

  8. BENEFITS OF MUTUAL FUNDS Professional Management & Analysis Diversification & Divisibility Across Companies & Sectors Liquidity Entry & Exit at NAV Transparency Regular disclosures Convenient Administration (Record Keeping) Low Costs of operations (Lower transaction cost) Choice of schemes. Well Regulated. (By SEBI)

  9. Instrument Tenure Pre-Tax Returns Risk Liquidity Bank Deposits 7 days to 1 yr. 6% - 12% Low Possible by breaking FD at cost ICD’s <180 days 9% - 11% Medium No secondary mkt. Call (thro’ PD’s) Overnight 6.5% - 9% Low Routed thro’ PD’s T-Bills <12 months 7% - 9% Price Risk High Mutual Funds Liquid Overnight to 1 month 8% to 9.5% No High Bond 1 month – 12 months 9% - 10.5% Low Credit High Serial Over 1 year 9% - 10% No price risk High INVESTMENT OPTIONS

  10. RIGHTS AS A MUTUAL FUND UNITHOLDER • Receive statement of accounts within 6 weeks from the date your request is received by the Mutual Fund • Receive information about the investment policies, objectives, financial position and general affairs of the scheme • Receive dividend within 30 days of their declaration, receive redemption proceeds within 10 days from the date of the valid redemption • Vote in accordance with the Regulations to: • - change the Asset Management Company • - wind up the schemes. • To receive communication from the Trustee about change in the fundamental attributes of any scheme

  11. MUTUAL FUNDS STRUCTURAL ISSUES (MUTUAL FUNDS) • MUTUAL FUND (REGISTERED WITH SEBI) MEANS: • A FUND ESTABLISHED IN THE FORM OF TRUST

  12. MUTUAL FUNDS STRUCTURAL ISSUES (MUTUAL FUNDS) • BY A SPONSOR • BODY CORPORATE WHO ACTING ALONE OR IN COMBINATION WITH ANOTHER BODY CORPORATE • FLOATS THE IDEA OF SETTING UP OF MUTUAL FUND • ESTABLISHES MUTUAL FUND IN FORM OF TRUST • TRUST DEED EXECUTED WITH BOARD OF TRUSTEES • REGISTERS IT WITH SEBI • 40% CONTRIBUTION TO AMC

  13. MUTUAL FUNDS STRUCTURAL ISSUES (MUTUAL FUNDS) • TO RAISE MONIES BY TRUSTEES • HOLDG PROPERTY OF MF IN TRUST FOR BENEFIT OF UNIT HOLDERS • THROUGH THE SALE OF UNITS • REPRESENTING ONE UNDIVIDED SHARE IN THE ASSETS OF A SCHEME • FOR INVESTING IN SECURITIES • APPLICATION FEES:5000; • REGISTRATION FEES:10 LACS; • ANNUAL FEES : 1 LAC

  14. MUTUAL FUNDS STRUCTURAL ISSUES(MUTUAL FUND TRUST) • MF TO BE CONSTITUTED IN FORM OF MF TRUST • MANAGED BY A BOARD OF TRUSTES IN WHOSE FAVOUR TRUST DEED IS EXECUTED BY SPONSORS • 50% MEMBERS NOT AFFILIATED WITH SPONSORS • CONTROLS ALL CAPITAL PROPERTY OF MF SCHEMES/ HOLDS THEM IN TRUST FOR HOLDERS

  15. MUTUAL FUNDS STRUCTURAL ISSUES(MUTUAL FUND TRUST) • APPOINTS AMCs • ENSURES SCHEMES FLOATED & MANAGED BY AMC ARE IN ACCORDANCE WITH TRUST DEED • POWER TO OBTAIN REPORT/DISMISS AMC • AN AMC NOT TO ACT AS TRUSTEE OF ANY MF • APPOINT CUSTODIAN &SUPERVISE ITS ACTIVITIES

  16. MUTUAL FUNDS STRUCTURAL ISSUES (MUTUAL FUND TRUST LIST) • ALLIANZ CAPITAL & MGT SERVICES LTD • ANZ GRINDLAYS BANK • TIMES MUTUAL FUNDS • UNIT TRUST OF INDIA • VLS FINANCE LTD. • KOTAK MAHINDRA FINANCE LTD • PRUDENTIAL CAPITAL MARKETS LTD. • SBI FUNDS MANAGEMENT LTD • CEAT MF & ASSET MANAGEMENT COMPANY LTD.

  17. MUTUAL FUNDS STRUCTURAL ISSUES (AMC) • MFs OPERATED BY AMCs -APPTD BY TRUSTEES • AMCs & TRUSTEES TWO SEPARATE LEGAL ENTITIES & ARM’S LENGTH RELATIONSHIP MNTD • AMCs TO APPROVE MOA & AOA FROM SEBI

  18. MUTUAL FUNDS STRUCTURAL ISSUES (AMC) • AMCs MIN NW 5 CR (40% CONTRIB BY SPOSORS) • 50% MEMBERS FROM OUTSIDE • CAN’T ACQUIRE OUTSIDE THE SCHEME PROPERTY • DISCLOSE REPURCHASE PRICE/NAV OF SCHEMES

  19. MUTUAL FUNDS STRUCTURAL ISSUES (AMC LIST) • 20TH CENTURY AMC LTD • APPLE ASSET MGT LTD. • BOI AMC LTD. • CREDIT CAPITAL AMC LTD. • GIC AMC LTD. • ICICI AMC LTD. • ITC PIONEER AMC LTD. • MORGAN STANLY AM INDIA LTD. • PNB AMC LTD.

  20. MUTUAL FUNDS STRUCTURAL ISSUES (INVESTMENT MIX) • EQUITY SHARES/EQUITY RELATED INSTRTS (CDs)/ DEBT INSTRUMENTS (NCDs, PSBONDS,GOVT SECT)/MONEY MARKET INSTRTS(TBs, CPs & BILLS) • 5% CAP FROM ONE SCHEME IN ONE CO’S SHARE • 10% CAP FROM ALL SCHEMES IN ONE CO’S SHARE • 15%CAP FROM ALL SCHEMES IN ONE INDUSTRY • TYPICAL ASSET MIX SCHEME EQUITY DEBT MONEY MKT GROWTH 70-90% 5-20% 0-10% INCOME 20-30% 60-70% 0-15% BALANCED 40-60% 40-50% 0-10%

  21. MUTUAL FUND INDUSTRY KEY FINANCIALS • NAV= M.V OF FUND’S INVESTS+REC+ACCRUED INCOME- LIABILITIES-ACCRUED EXP NO. OF SHARES OR UNITS OUTSTANDING • MARKET PRICE: IN CASE OF CLOSE ENDED • REPURCHASE/REISSUE PRICE: OPEN ENDED • DISCOUNT • RATE OF RETURN= NAV AT END-NAV AT BEGINNING + DIVIDEND PAID NAV AT BEGINNING • INITIAL EXPENSES: CEILING OF 6% • RECURRING EXPENSES: MAX 3% OF AV NET ASSETS IN A YEAR

  22. MUTUAL FUND INDUSTRY KEY FINANCIALS LOADS(CHARGED TO MF SCHEME) THREE TYPES • INITIAL ISSUE EXP (6% OF FUND RAISED)HIDDEN • RECURRING EXP (3% MAX OF NET ASSETS) • OTHER THAN INITIAL ISSUE EXP/ INCLUDES TRUSTEESHIP FEES /INCLUDES INVST MGT & ADVISORY FEE OF AMC (1.25% UPTO RS 100 CR & 1% OVER 100 CR)

  23. MUTUAL FUND INDUSTRY KEY FINANCIALS LOADS(CHARGED TO MF SCHEME) THREE TYPES • AMC CHARGE FOR ISSUE/RECURRING COST(6%) • IN OPEN END SCHEME DIFF BETWEEN PURCHASE & SALE PRICE NOT TO EXCEED 7% OF SALE PRICE • BACK END (DISCOUNT TO NAV) DEDUCTED DURING REPURCHASE/REDEMPTION

  24. MUTUAL FUND INDUSTRY KEY FINANCIALS NAV OF A NO-LOAD FUND (20 LACS UNITS ISSUED) VALUE OF SECURITIES HELD IN PORTFOLIO 500 LACS CASH IN HAND OF MUTUAL FUND 10 LACS TOTAL ASSETS 510 LACS LESS : OUTSTANDING LIABILITIES 110 LACS TOTAL NET ASSETS 400 LACS THUS NAV = Rs 400 LACS =RS 20 PER UNIT UNITS 20 LACS IF 10,000 NEW UNITS ISSUED AT NAV OF RS 20 PER UNIT THUS NAV = ^TOTAL ASSETS =RS 4,02,00,000= RS 20 PER UNIT ^UNITS UNITS 20,10,000 THUS NAV DOES NOT VARY DUE TO SELING OR BUYING NAV VARIES ON ANY VARIATION OF MARKET PRICES OF SECURITIES HELD IN THE PORTFOLIO OF MF

  25. MUTUAL FUND INDUSTRY KEY FINANCIALS NAV OF A NO-LOAD FUND NAV VARIES ON ANY VARIATION OF MARKET PRICES OF SECURITIES HELD IN THE PORTFOLIO OF MF NAV=(RS 6 MILL EQ + RS 4 MILL DEBT)- 2 MILL LIAB AS DEBT = 0.5 16 MILL UNITS IN TRUST IF VALUE OF EQUITY IS DOUBLED, NAV SHIFTS NAV=(RS 12 MILL EQ + RS 4 MILL DEBT)- 2 MILL LIAB AS DEBT = 0.875 16 MILL UNITS IN TRUST IF VALUE OF EQUITY IS HALFED THEN THE NEW NAV IS NAV=(RS 3 MILL EQ + RS 4 MILL DEBT)- 2 MILL LIAB AS DEBT = 0.3125 16 MILL UNITS IN TRUST • IN ABOVE, FUND SHOULD SWITCH FROM AGGRESSIVE TO DEFENSIVE INVEST TO AVOID RAPID EROSION OF NAV • INVEST IN DEBT INSTRTS MAY BE ONE SOLUTION

  26. MUTUAL FUND INDUSTRY KEY FINANCIALS NAV OF A LOAD FUND (20 LACS UNITS ISSUED) IF MF IS A 4% FRONT LOAD FUND THEN NAV=NAV(OF NO-LOAD FUND) PER UNIT/1-% OF LOAD = RS 20= RS 20 = RS 20 = RS 20.80 AS CALLED OFFERING 1-4% 1-4/100 0.96 HERE • OFFER PRICE (SALE PRICE) WILL BE 20.80 PER UNIT • BID PRICE (REPURCHASE PRICE) WILL BE RS 20.00 PER UNIT • DIFFRENCE BETWEEN OFFER & BID PRICE IS 4% i.e. 80 PAISE IS CALLED “SPREAD” PAID TO FUND • THERE IS A TWO WAY QUOTE PROVIDED BY IN OPEN FUND

  27. MUTUAL FUND INDUSTRY KEY FINANCIALS • MARS, PVT SECTOR MF LAUNCHED A GROWTH SCHEME WITH AN INITIAL TARGET OF Rs 100 CR. DEPLOYMENT OF FUNDS IS TO CONFIRM THE FOLLOWING COMPOSITION • EQUITY 70%, DEBT 25% MONEY MARKET 5% • INITIAL EXPENSES 4% • DEBT COMPONENT INVESTED EQUALLY IN AAA & AA RATED INSTRUMENTS AT 18% & 20% RESPECTIVELY • EQUITY PORTION INVESTED IN SENSEX SCRIPS • AV. YIELD ON MONEY MARKET COMPONENT WAS 8% • SENSEX WAS AT 3800 & AT TIME OF INVEST IS AT 2900 AFTER ONE YEAR • DEBT & MONEY MKT INSTRTS VALUED AT COST • RECURRING EXP MET OUT OF INCOME EARNED ON DEBT & MONEY MKT INSTRTS (assume 3% on size of fund) • COMPUTE NAV & SALE PRICE IF FRONT LOAD FACTOR IS 5%

  28. MUTUAL FUND INDUSTRY • PASSING THROUGH CRITICAL PHASE • “LIVING DEAD” IN STOCK MARKETS • LOST INVESTOR’S CONFIDENCE • UTTER FAILURE IN INDIA

  29. MUTUAL FUND INDUSTRY FEW EVIDENCES • SHRIRAM ASSET MGT CO FINED (JUN 96) • MORGAN STANLEY FINED (2/6/97) • RESORTING TO SHORT SALES • PRICE RIGGING IN BHEL SCRIPS • RENDERING PORTFOLIO MGT SERV TO GROUPS • CANSTAR UNABLE TO PURCHASE AT PROMISED NAV • LIC MF HAD TO PURCHASE AT PROMISED NAV & BOOK THE LOSS TO AMC

  30. MUTUAL FUND MONITOR

  31. MUTUAL FUND MONITOR

  32. MUTUAL FUND OPEARATION FAILED IN ALL CHAINS OF OPERATIONS INVESTOR’S SERVICE PRODUCT DESIGN THE CHAIN OF OPERATION PRODUCT MARKETING OUT SOURCING FUND MANAGEMENT

  33. MUTUAL FUND OPERATION • PRODUCT DESGIN • INNOVATION • SUPERIOR DESIGN • ADAPATABILITY

  34. MUTUAL FUND OPERATION PRODUCT DESIGN • DID LITTLE TO INNOVATE WITH INNOVATION • 70% SCHEMES CLOSE END WITH POOR RETURNS • UTI STILL CONTINUES WITH PLAIN VANILLAS • INNOVATION ONLY IN OPEN END SCHEMEDS • TIME TO DESIGN SECTOR, LOCATION BASED MFs

  35. MUTUAL FUND OPERATION PRODUCT DESIGN- PACKAGED POTFOLIO MODEL • KNOW BEFOREHAND Cos WERE INVEST BE MADE • PORTFOLIO TO CONSIST OF 50 BLUE CHIP Cos WHICH HAVE CREATED ENORMOUS WEALTH TO HOLDERS & THEIR MKT CAP HAVE INCREASED • FLEXIBILITY TO TIME INVESTMENTS TO TAKE ADVANTAGE OF PRICE MOVEMENTS • FUND INITIALLY TO BE OPEN ENDED • AUTOMATICALLY CONVERTED INTO CLOSE ENDED ONCE THE INVESTMENT CEILING IS ACVD

  36. MUTUAL FUND OPERATION • PRODUCT MARKETING • COST • AGGRESSIVE MARKETING • UPFRONT COST

  37. MUTUAL FUND OPERATION PRODUCT MARKETING • COST & ETHICS ARE TWO IMPORATNT FACTORS • UPFRONT COST BORNE BY INVESTOR OR AMC • UTI CAN’T AGGRESSIVELY MARKET ITS PRODUCT • MORGAN STANLEY MADE MFs AS IPOs & ALL NUANCES OF IPOs WERE BROUGHT IN

  38. MUTUAL FUND OPERATION • FUND MANAGEMENT • CAPITAL PROTECTION • MARKET TIMING • ASSET QUALITY

  39. MUTUAL FUND OPERATION FUND MANAGEMENT • NON-QUALIFIED, UNPROFESSNL FUND MANAGERS • LOOK MFs AS ANOTHER EQUITY PRODUCT • IGNORE ASSET ALLOCATION, PORTFOLIO, TURNOVER & COST • NO QICK ASSET REALLOCATION ON TIME • DON’T INCLUDE HIGH LIQUID BLUE CHIP STOCKS • NOT BALANCING RISK RETURN EXPECTATION OF INVESTORS

  40. MUTUAL FUND OPERATION FUND MANAGEMENT- SUGGESTED MODEL • PROTECT CAPITAL FROM EROSION • ALTERNATIVELY GUARANTEE CAPITAL SAFETY • POSSESS EXCELLLENT RESEARCH CAPABILITIES • TO ENSURE MARKET TIMING • INVESTMENT STRATEGY FORMULATION • FOLLOW APPROPRIATE ASSET ALLOCATION MODEL SUITING FUND’S OBJECTIVE • QUICKLY RESTRURE ASSET ALOCATION ON NEED • ENSURE QUALITY OF ASSETS BE IT EQTY OR DEBT • ENSURE ECONOMICAL COST OF OPERATIONS BE IT MANAGEMENT FEES OR OTHER EXPENSES

  41. MUTUAL FUND OPERATION • OUTSOURCING • COST CONTROL • FLEXIBILITY • CHOICE

  42. MUTUAL FUND OPERATION OUTSOURCING • NEW CONCEPT THAN TO DO THINGS IN HOUSE • ENDORSED AS A GREAT COST CUTTING MEASURE • CONVERTS FIXED COSTS TO VARIABLE COSTS • ABROAD OUTSOURCING 100% FROM PRODUCT DESIGN TO INVESTOR SERVICING • YET TO COME IN INDIAN FUND MANAGEMENT • ONE AREA MAY BE DISTRIBUTION NETWORK

  43. MUTUAL FUND OPERATION • INVESTOR SERVICE • CUSTOMER FOCUS • BETTER CONFIDENCE • EFFICIENT SERVICE

  44. MUTUAL FUND OPERATION CUSTOMER FOCUS • SCANT ATTENTION TO INVESTOR’S SERVICING • IGNORING INVESTOR’S EDUCATION • NOT INCLINED TOWARDS TRANSPARENCY • NON DISCLOSURE OF PORTFOLIO • LACK LUSTER SHOW ON RETURNS FRONT • UNIT HOLDERS NOT TREATED AS CUSTOMERS • GOOD SERVICE ATTRACTS MULTIPLE CUSTOMERS • MORALE “TREAT HIM LIKE CUSTOMER & INVEST IN TECNOLOGY TO REACH HIM FAR & WIDE” • LESSONS TO LEARN FROM Pvt SECTOR MFs

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