Introduction to Mutual Funds

1.1 Meaning
The Mutual Fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. A mutual fund is an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money (the funds assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities). The fund manager then continues to buy and sell stocks and securities according to the style dictated by the funds prospectus. Mutual Funds are considered as one of the best available investments. As compared to others they are very cost efficient and easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.

1.2

Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investments holdings reduces risk tremendously up to certain extent. The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. growth companies, emerging or mid-size companies, low-grade corporate bonds, etc).

History of Mutual Funds

2.1 World
Mutual Funds really captured the publics attention in the 1980s and 90s when mutual fund investment hit record highs and investors saw incredible returns. However, the idea of pooling assets for investment purposes has been around for a long time. Here we look at the evolution of this investment vehicle, from its beginnings in the Netherlands in the eighteenth century to its present status as a growing, international industry with fund holdings accounting for trillions of dollars in the United States alone.

2.1.1

In the Beginning

Historians are uncertain of the origins of investment funds; some cite the closed-end investment companies launched in the Netherlands in 1822 by King William I as the first mutual funds, while others point to a Dutch merchant named Adriaan Van Ketwich whose investment trust created in 1774 may have given the king the idea. Van Ketwich probably theorized that diversification would increase the appeal of investments to smaller investors with minimum capital. The name of Van Ketwichs fund, EendragtMaaktMagt, translates to unity creates strength. The next wave of near-mutual funds included an investment trust launched in Switzerland in 1849, followed by similar vehicles created in Scotland in 1880s. The idea of pooling resources and spreading risk using closed-end investments soon took root in Great Britain and France, making its way to the United States in the 1890s. the Boston personal Property Trust, formed in 1893, was the first closed-end fund in the U.S. The creation of the Alexander Fund in Philadelphia, Pennsylvania, in 1907 was an important step in the evolution toward what we know as the modern mutual fund. The Alexander Fund featured semi-annual issues and allowed investors to make withdrawals on demand.

2.1.2

Recent Developments

In 1971, William Fouse and John McQuown of Wells Fargo Bank established the first index fund, a concept that John Bogle would use a foundation on which to build The Vanguard Group, o mutual fund powerhouse renowned for low-cost index funds. The 1970s also saw the rise of the no-load fund. This new way of doing business had an enormous impact on the way

mutual funds were sold and would make a major contribution to the industrys success. With the 1980s and 90s came bull market mania and previously obscure fund managers became superstars; Max Heine, Michael Price and Peter Lynch, the mutual fund industrys top gunslingers, became household names and money poured into the retail investment industry at a stunning pace.

2.2 India
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 Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases.

2.2.1

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 delinked 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.

2.2.2 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 its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004crores.

2.2.3 Third Phase 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 &

governed. The 1993 SEBI (mutual funds) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (mutual funds) 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.

2.2.4

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 UTI 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 UTI, 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 Ltd, sponsored by SBI, PNB, BOB & LIC. It is registered under the SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76000crores of assets under management and with the setting up 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.

Mutual Fund Explained

3.1 Mutual Fund Basics

3.1.1

Stocks

Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.

3.1.2

Bonds

Bonds are basically the money which you lend to the government or a company, and in return you can get interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals) but the majority of mutual funds invest in stocks and/or bonds.

3.1.3

Regulatory Authorities

To protect the interest of investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues

guidelines from time to time. Mutual Funds either promoted by public or by private sector entities including one promoted by foreign entities is governed by these regulations.

3.1.4

Asset Management Companies

SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.

3.1.5

AMFI

The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry.

3.2 Working
A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

3.2.1

Risk Return Trade Off

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vice versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investor opts for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. The investors choose mutual fund as their primary means of investing, as mutual funds provide professional management, diversification, convenience and liquidity. That doesnt mutual fund investments are risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.

3.3 Advantages

3.3.1

Professional Management

The basic advantage of funds is that, they are professionally managed, by well qualified professional. Investors purchase funds because they do not have the time or expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.

3.3.2

Diversification

Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gain in others.

3.3.3

Economies of Scale

Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.

3.3.4

Liquidity

Just like an individual stock, mutual fund also allows investors to liquidate their holdings as when they want.

3.3.5

Simplicity

Investment in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small.

3.4 Disadvantages

3.4.1

Professional Management

Some funds doesnt perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor himself, for picking up stocks.

3.4.2

Costs

The biggest source of AMC income is generally from the entry & exit load which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers if jargon.

3.4.3

Dilution

Because funds have small holdings across different companies, high returns from a few investments often dont make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

3.4.4

Taxes

When making decisions about your money, fund managers dont consider your personal tax situation. For example, when a fund manager sells a security, a capital gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Types of Mutual Funds

Wide variety of Mutual Fund Scheme exists to cater the needs such as financial position, risk tolerance and return expectations etc. thus mutual fund has variety of flavours. Being a collection of many stocks, an investor going for picking a mutual fund might be easy. There are over hundreds of mutual funds schemes to choose from. It is easier to think of mutual funds in categories, mentioned below.

4.1 By Structure

4.1.1

Open Ended Schemes

An openend fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices. They key feature of open end schemes is liquidity.

4.1.2

Close Ended Schemes

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through the periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. OPEN ENDED No fixed maturity Variable corpus Not listed Buy from and sell to the fund Entry/Exit at NAV related prices CLOSED - ENDED Fixed maturity Fixed corpus Generally Listed Buy and sell in the stock exchange Entry/Exit at the market prices

4.1.3

Interval Schemes

Interval Schemes are the schemes which combine the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

4.2 By Nature

4.2.1

Equity Fund

These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending on their investment objective, as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Saving Funds (ELSS)

Equity investments are meant for a longer time horizon, thus equity funds rank high on the risk-return matrix.

4.2.2

Debt Fund

The objective of this fund is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors.

4.2.3

Balanced Funds

As the name suggests they, are a mix of both debt and equity funds. They invest in both equities and fixed income securities, which are in line with predefined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

4.3 By Investment Objective

Further the mutual funds can be broadly classified on the basis of investment parameter viz, each category of fund is backed by an investment philosophy, which is predefined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

4.3.1 Growth Schemes

Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

4.3.2 Income Schemes

Income schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

4.3.3 Balanced Schemes

Balanced schemes aim to provide both growth and income by periodically disturbing a part of income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

4.3.4 Money Market Schemes

Money market schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

4.3.5 Tax Saving Schemes

Tax-saving schemes offer tax rebate to the investors under tax laws prescribed from time to time. U/s 88 of the income tax act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

4.3.6 Index Schemes

Index schemes attempt to replicate the performance of a particular index such as BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes will be more or less equivalent to those of the index.

Mutual Fund Industry in India

Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that investing in mutual funds provide like diversification, professional management, the ease of investment process has proved to be a major enabling factor. However, with the introduction of innovative products, the world of mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors needs to choose a mutual fund that meets his risk acceptance and risk capacity levels and has similar investment objectives as the investor. In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. The mutual funds industry in India has grown at a strong pace of 16.4 per cent for the last 8 years which is better compared to the growth rate of the mutual fund industry worldwide, which was about 13 per cent for the same period. The Indian mutual fund industry has Rs. 204,519 crores worth of assets under management as on November 30, 2005, which is an impressive growth of 37 per cent from the earlier year, thanks to the booming equity markets in majority of the countries across the globe. The year 2005 was also important year for Indian mutual fund investors as many schemes paid excellent dividends. Almost 99 mutual fund schemes paid dividends to their investors against 75 schemes in year 2004. As of April 30, 2006, there are 29 mutual funds in India having AUM of more than Rs. 257,500 crores. As on June 30, 2005, the mutual funds globally manage assets worth $16.41 trillion, while India has a small share of 0.22 per cent. The huge participation of investors in the NFOs recently demonstrates the increased acceptance levels of equity mutual funds in the country. As on November 30, 2005 the equity assets have increased to almost 36 per cent of the total Indian mutual fund assets bringing it close to the global levels. However, it is still to be seen whether the mutual fund industry will hold the gains once the equity markets change trend. Mutual fund industry has to be matured enough to handle the downside in case the market does not favour mutual funds. For the mutual fund industry to emerge as the most preferred investment option for the investor in 2006, it has to overcome all the obstacles including launching of more innovative products as we witnessed in 2005 and the penetration and expanding the market reach.

5.1 Performance of Mutual Funds in India

The year was 1963. Unit trust of India invited investors or rather to those who believed in savings, to park their money in UTI Mutual Fund. For 30 years it goaled without a single second player. Though the 1988 year saw some new mutual fund companies, but UTI remained in a monopoly position. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of the investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization. The Assets Under Management of UTI was Rs. 67 billion by the end of 1987. From Rs. 67 billion AUM rose to 470 billion in March 1993 and the figure had a three times higher performance by April 2006. It rose as high as Rs. 1540 billion. The Net Asset Value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There was rather no choice apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at loss in the secondary market. The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandals, the losses by disinvestments and of course the lack of transparent rules in the where about rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount on 1020 per cent of their net asset value. The supervisory authority adopted a set of measures to create a transparent and competitive environment in mutual funds. Some of them were like relaxing investment restrictions into the market, introduction of open-ended funds, and paving the gateway for mutual funds to launch pension schemes. The measure was taken to make mutual funds key instrument for long term saving. The more the variety offered, the quantitative will be investors. At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual funds.

5.2 Future of Mutual Funds in India

The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. Some facts for the growth of mutual funds in India 5.2.1 100% growth in last 6 years 5.2.2 Number of foreign AMCs are in the queue to enter the Indian markets like Fidelity Investments, US based, with over $1 trillion assets under management worldwide. 5.2.3 Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. 5.2.4 We have approximately 29 mutual funds which is much less than US having more than 800. There is big scope for expansion. 5.2.5 B and C class cities are growing rapidly. Today most of the mutual funds are concentrating on the A class cities. Soon they will find scope in the growing cities. 5.2.6 Mutual funds can penetrate rural areas like the Indian Insurance Industry with simple and limited products. 5.2.7 SEBI allowing MFs to launch commodity mutual funds. 5.2.8 Introduction of financial planners who can provide need based advice.

The Mutual Fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in rules of the game every day, and there are constant shifts and upheavals. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. Source (RBI Handbook)

5.3 The BCG

The BCG matrix is a chart that had been created by Bruce Henderson for the Boston Consulting group in 1970 to help corporations with analysing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management and portfolio analysis. To use the chart, analysts plot a scatter graph to rank the business units (or products) on the basis of their relative market shares and growth rates.

5.3.1

Relative Market Share

This indicates likely cash generation, because the higher the share the more cash will be generated. The exact measure is the brands share relative to its largest competitor. Thus, if a brand had a share of 20 per cent, and the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share of 60 per cent; however, the ratio would be 1:3, implying that the organizations brand was in a relatively weak position. If the largest competitor only had a share of 5 per cent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flows. The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flow. It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future. It can also show what type of marketing activities might be expected to be effective.

5.3.2

Market Growth Rate

Rapidly growing in rapidly growing markets, are what organisations strive for; but, as we have seen, the penalty is that they are usually net cash users they require investment. The reason for this is often because the growth is being bought by the high investment, in the reasonable expectation that a high market share will result into a sound investment in future profits. The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment.

5.3.3

Cash Cows

Cash cows are units with high market share in a slow growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a mature market and every corporation will be thrilled to own as many as possible. They are to be milked continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.

5.3.4

Dogs

Dogs, or more charitably called pets, are units with low market share in a mature, slow growing industry. These units typically break even, generating barely enough cash to maintain the businesss market share. Though owing a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. They depress a profitable companys return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.

5.3.5

Question Marks

Question Marks (also known as problem child) are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analysed carefully in order to determine whether they are worth the investment required to grow market share.

5.3.6

Stars

Stars are unit with a high market share in a fast growing industry. The hope is that stars become the next cash cows. Sustaining the business units market leadership may require extra cash, but this is worthwhile if thats what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom. As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, and then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into dog. The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell. Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks.

As the BCG started in 1970:

Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has: Stars whose high share and high growth assures the future; Cash cows that supply funds for that future growth; and Question marks to be converted into stars with the added funds.

5.3.7.1

Star

The top five asset management companies in terms of asset under management as of Mar31, 2008 have been considered as stars. 1. Reliance 2. ICICI Prudential 3. UTI Mutual Fund 4. IDFC Mutual fund 5. Birla Sun Life

5.3.7.2

Question Marks

Question mark consists of basically those asset management companies that are new to the ever increasing mutual fund industry. At least four foreign fund biggies would soon enter the Indian Mutual Fund Industry, a sign that re-affirms overseas interest in the countrys stock markets though indices continue to sway. Listed below are some AMCs: Bharti AXA Mutual Fund Lotus India Mutual Fund Mirae Asset Mutual Fund

5.3.7.3

Cash Cow

Cash cow will typically be a fund house that was once the market leader bowed down to others but still has a large number of resources. Franklin Templeton is one such fund house. It was the first private AMC that came in, formerly known as Kothari Pioneer. It flagged off the mutual fund business with the launch of Templeton India Growth Fund in September 1996. Over the years, Franklin

Templeton has emerged as one of the largest and renowned mutual funds in the country. Franklin Templeton has over Rs. 2684222.22 crore under management as of Mar 2008. It has contributed tremendously to the mutual fund industry. Franklin Templeton, although is now slowly losing ground in the market.

5.3.7.4

Dogs

Dogs are basically AMCs that have slowed down and are at the end of their life cycle. Such companies either need to be sold off or can be divested.

Potential for sale of Mutual Funds in India

Mutual fund industry in India at the moment is like dormant volcano that can explode. There is a huge scope for sale of mutual funds.

The above graphs clearly show the potential for mutual fund industry in India. Though the industry is coming of age in recent times on the back of a strong bull run, what remains a sore toe is the limited reach among retail investors and the inefficacy of distribution channels in penetrating the retail investor market.

Distribution Channels

Innovations in distribution have contributed significantly to the growth of the mutual fund industry in recent years. Traditionally, financial institutions offered a limited product range banks and thrifts offered checking and savings accounts, securities firm offered stocks and bonds, and insurance companies offered insurance. Over the last decade, however, a new financial landscape has emerged. Todays financial institutions sell a broad range of financial products including mutual funds. The increased accessibility of mutual funds, combined with the growth in the number of mutual funds offered, enables todays shareholders to choose from among many investment alternatives. Because the road shareholders travel to purchase mutual funds is a key component of mutual fund marketing, mutual fund companies must understand the distribution channels role in the investors fund purchase process, particularly as it evolves over time. How shareholders choose a fund, the information and advice they receive during the fund purchase process, and the service received at the point of sale are critical to the continued success of the industry. A variety of factors motivate respondents to use channels to purchase mutual funds, but the need for advice, past experience, fees and commissions, and convenience are the most important drivers of channel use. The prominent channel members are: Direct marketing channels Banks and NBFCs Distribution Companies Individual Agents

7.1 Direct channel