SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST

GRADUATE DEGREE IN MBA(GENERAL)

SUBMITTED BY:

VIJAY KANT SAHNI

MBA-GEN (2005-2007) Roll No. : A1100205240

INDUSTRY GUIDE FACULTY GUIDE

Mr. Rashim Bagga Mrs. Rashmi Goel Regional Sales Manager-North Deutsche Asset Management (India) Pvt. Ltd.

AMITY BUSINESS SCHOOL, NOIDA AMITY UNIVERSITY – UTTAR PRADESH

Company Certificate

(In the LETTER HEAD of the Company)

TO WHOM IT MAY CONCERN

This is to certify that _____________________, a student of Amity International Business School, Noida, undertook
a project on “___________________” at ________________________ from __________to _____________.

Ms./Mr.________________ has successfully completed the project under the guidance of

Mr./Ms.____________________. She/He is a sincere and hard-working student with pleasant manners.

We wish all success in her/him future endeavours.

Signature with date (Name) (Designation) (Company Name)

CERTIFICATE

This is to certify that the project work done on “Submitted to Amity Business School,
Amity University Uttar Pradesh, by Vijay Kant Sahni in partial fulfillment of the
requirement for the award of degree of Master of Business Administration, has been
reportedly completed with lot of involvement and diligence under my academic guidance
and supervision.

This work has not been submitted anywhere else for any other degree/diploma.

The original work was carried out during 08th May 2006 to 8th July 2006 in Subros Ltd.

Mrs. Rashmi Goel

Faculty,
Amity Business School, Amity University,
Noida.

Acknowledgement

I would like to take this opportunity to thank various people who have given me their invaluable help. Without their
constant help and support this project could not have been completed. First and foremost I would like to express my
gratitude to my project guide Mr. Rashim Bagga (Regional Sales Manager) and Professor Rashmi Goel (faculty ABS)
for their constant guidance and help.

I also feel obliged to name Mr. Dronacharya Basu (Sales Manager) for his invaluable guidance and support given
to me throughout the project
Lastly I would like to thank my family and friends for extending their faith in me.

Thanking You

TABLE OF CONTENTS

Chapter No. Subject Page No.

Ch.-1.0 Executive Summary 6

Ch.-2.0 Introduction 7

History of Mutual Funds 9

Structure of a Mutual Fund 13

Company Profile 19

Ch.-3.0 History of Mutual Funds in India 24

Ch.-4.0 Performance of Mutual Funds in India 27

Risk In Mutual Fund Investments 39

Ch.-5.0 Effect of Market Dynamics on

Product ( Mutual Fund) Designing 43

Ch.-6.0 Success of IPO in Indian Mutual 50

Fund Industry
 Ch.-7.0 Analysis and Recommendations 66

Ch.-8.0 Bibliography 68

Executive Summary

The Indian Mutual Funds Industry has witnessed a sea change since UTI was first established in 1963. From a single
player the number of players has increased to 38 and the number of schemes has spiraled to more than 500. The last
decade has been a period of rapid growth for the MF industry. The project begins by analyzing the current scenario in
the industry characterized by its history and present status. A comparison of the MF industry with global standards is
done. The project is an analysis of the various market dynamics affecting the mutual fund industry and how these
dynamics affect new product design and innovation of existing ones. In the end, a report has been made on the
success of IPO’s in the Indian Mutual Fund Industry and its prospects in the future.
INTRODUCTION

What is a Mutual Fund?

A mutual fund is a collective investment vehicle formed with the specific objective of raising money from a large
number of individuals and investing it according to a pre specified objective. The word “ mutual ” in a “ Mutual fund
” signifies a vehicle wherein the investments accrue pro rata to all the investors in proportion to their investment.

The following are some of the more popular definitions of a Mutual Fund

A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities,
bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be
redeemed as needed. The fund's Net Asset Value (NAV) is determined each day.

Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having
received it, make investments with the money Via an AMC. It is an ideal tool for people who want to invest but don't
want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund
manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you
invest, you own part of the overall fund.

The beauty of mutual funds is that anyone with an investible surplus of a few hundred rupees can invest and reap
returns as high as those provided by the equity markets or have a steady and comparatively secure investment as
offered by debt instruments.

The diagram below describes broadly the working of a mutual fund:

 Mutual fund vehicle exploits economies of scale in all three areas – research, investing and transaction processing.
While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its
present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War.
Globally there are thousands of firms offering tens of thousands of mutual funds with different investment objective.
Today mutual funds collectively manage almost as much as money as banks.

“Any mutual fund is as safe or unsafe as the assets that it invests in.”

A mutual fund invests in a diversified portfolio of securities. People who buy mutual fund are its owners or
shareholders. Their investments provide the money for a mutual fund to buy securities such as stocks and bonds. A
mutual fund can make money from its securities in two ways: a security can pay dividends or interest to the
fund , or a security can rise in value. A fund can also lose money and drop in value.

Funds diversify the investment portfolio substantially so that default in any single investment will not affect the
overall performance of a fund in a significant manner.

Generally, mutual funds are not guaranteed by anybody. However in the Indian context some of the mutual funds
have floated “guaranteed” or “assured” return schemes which guarantee a certain annual return or guarantee a buy
back at a specified price after some time. Examples of these include funds floated by the UTI, Canbank Mutual Fund,
SBI Mutual Fund, LIC Mutual Fund etc. The profits or losses are shared by the investors in proportion to their
investments. The mutual funds normally come out with a number of schemes with different investment objectives
which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board
of India (SEBI) which regulates securities markets before it can collect funds from the public.
HISTORY OF MUTUAL FUNDS

Mutual funds have been on the financial landscape for longer than most investors realize. In fact, the industry traces
its roots back to 19th century Europe, in particular, Great Britain. The Foreign and Colonial Government Trust,
formed in London in 1868, resembled a mutual fund. It promised the “investor of modest means the same advantages
as the large capitalist . . . by spreading the investment over a number of different stocks.” Most of these early British
investment companies and their American counterparts resembled today’s closed-end funds. They sold a fixed
number of shares whose price was determined by supply and demand. Until the 1920s, however, most middle-income
Americans put their money in banks or bought individual shares of stock in a specific company. Investing in capital
markets was still largely limited to the wealthiest investors.

1.1. The idea of pooling-in money for the purpose of investing started in Europe in the mid-1800s.
2.2. The first pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard University.
3.3. The first open-end mutual fund, Massachusetts Investors Trust was founded on March 21, 1924 and after one
year had 200 shareholders and US$ 3,92,000 in assets.
4.4. The entire industry, which included a few closed-end funds, represented less than US$ 10 million in 1924.

A REVOLUTION IN INVESTING
The 75th anniversary of the first modern mutual fund is rapidly approaching. The Massachusetts Investors Trust was
introduced in March 1924 and began with a modest portfolio of 45 stocks and $50,000 in assets. This was the first so-
called open-end mutual fund. It introduced concepts that would revolutionize investment companies and investing: a
continuous offering of new shares and redeemable shares that could be sold anytime based on the current value of the
fund’s assets.

THE INDUSTRY REGULATES

The early mutual fund industry was, however, overtaken by events. The 1929 stock market crash and the Great
Depression that followed prompted Congress to enact sweeping laws to protect investors and to regulate the securities
and financial markets, including the mutual fund industry. First was the Securities Act of 1933. It required for the first
time something easily recognized by today’s investor: a prospectus describing the fund. The Securities Exchange Act
of 1934 made mutual fund distributors subject to SEC regulations and placed them under the jurisdiction of the
National Association of Securities Dealers, Inc., which established advertising and distribution rules. The most
important laws relating to mutual funds and investor protection were adopted in 1940: the Investment Company Act
and the Investment Advisers Act. The Investment Company Act of 1940, enacted with strong industry support, has
been remarkable in its effectiveness. The Act’s core provisions— the requirement that every fund price its assets
based on market value every day; prohibitions on transactions between a fund and its manager; leverage limits; and a
statutory system of independent directors—are unique to

the mutual fund industry. The 1940 Act imposes regulations not only on mutual funds themselves, but also on their
investment advisers, principal underwriters, directors, officers and employees. It mandates that mutual funds redeem
their shares anytime upon shareholder request and requires them to pay redeeming shareholders a price based on the
next calculated net asset value of the fund’s investment portfolio within seven days of receiving a request for
redemption. The Advisers Act requires the registration of all investment advisers to mutual funds with the exception
of banks. It also imposes a general fiduciary duty on investment advisers and contains several broad antifraud
provisions. It further requires advisers to meet recordkeeping, reporting, disclosure, and other requirements. It is no
wonder that a former SEC Chairman once observed, “No issuer of securities is subject to more detailed regulation
than mutual funds.”
MUTUAL FUNDS TAKE ROOT AND GROW
Mutual funds began to grow in popularity in the 1940s and 1950s. In 1940, there were fewer than 80 funds with total
assets of $500 million. Twenty years later, there were 160 funds and $17 billion in assets. The first international stock
mutual fund was introduced in 1940; today there are scores of international and global stock and bond funds. The
complexion and size of the mutual fund industry dramatically changed as new products and services were added. For
example, before the 1970s, most mutual funds were stock funds, with a few balanced funds that included bonds in
their portfolios. In 1972, there were 46 bond and income funds; 20 years later, there were 1,629. Innovations in
investment and retirement vehicles also swept the industry. In 1971, the first money market mutual funds were
established. They offered check writing and higher interest rates than bank savings accounts. In 1974, the Employee
Retirement Income Security Act (ERISA) was enacted and IRAs were created. In 1976, the first tax-exempt
municipal bond funds were offered, and three years later, the tax-free money market fund was created. It combined
the convenience of money market funds and the tax advantages of municipal bond funds. In 1978, the now ubiquitous
401(k) retirement plan was created, as well as the individual retirement plan for the self-employed (or SEP-IRA). The
mutual fund industry also began to introduce even more diverse stock, bond, and money market funds. Today’s
mutual funds run the gamut from aggressive growth funds to global bond funds to single state tax-exempt money
market funds to “niche” funds that may specialize in one segment of the securities market.

SERVICES MATURE TOO

Over the past 50 years, mutual fund investors have come to receive an unparalleled array and level of services. These
include professional management in global securities markets, portfolio diversification, trading and execution
services, periodic account statements, tax information, daily liquidity and pricing of portfolios, access to fund
personnel, and custody of fund portfolio assets. Mutual funds are also constantly developing and offering new
products, services, and distribution channels to meet consumer demands. Much of what we take for granted today—
toll-free 24-hour telephone access, computerized account information, and shareholder newsletters—was unknown or
in its infancy 20 years ago.

How is a mutual fund set up?

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and
custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The
trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC)
approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is
registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with
the general power of superintendence and direction over AMC. They monitor the performance and compliance of
SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of
the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they
launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January15,2002).

The Structure of a Mutual Fund

The Indian mutual fund industry is dominated by the Unit Trust of India which has a total corpus of Rs700bn
collected from more than 20 million investors. The UTI has many funds/schemes in all categories ie equity, balanced,
income etc with some being open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred to
as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. UTI was floated by
financial institutions and is governed by a special act of Parliament. Most of its investors believe that the UTI is
government owned and controlled, which, while legally incorrect, is true for all practical purposes.

The second largest category of mutual funds are the ones floated by nationalized banks. Canbank Asset Management
floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC
AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the
other prominent ones. The aggregate corpus of funds managed by this category of AMCs is about Rs150bn.

The third largest category of mutual funds are the ones floated by the private sector and by foreign asset management
companies. The largest of these are Prudential ICICI AMC and Birla Sun Life AMC. The aggregate corpus of assets
managed by this category of AMCs is in excess of Rs250bn.

There are many entities involved and the diagram below illustrates the organisational set up of a mutual
fund:
1.1. Shareholders / Unit Holders: People who put money into mutual funds are called shareholders since their
investment buys shares of mutual funds. A shareholder's investment is added together with other shareholders'
investments. The resulting pool of money is often very large, in the millions of dollars.
2. Board of Directors (40% of boards must be independent directors): Oversees the fund’s activities, including
approval of the contract with the management company and certain other service providers whose contracts usually
represent the
majority of fees paid by fund shareholders.
2.3. Mutual Fund Investment Adviser/Management Company: Manages the fund’s portfolio according to the
objectives described in the fund’s prospectus.
3.4. Distributor: Sells fund shares, either directly to the public or through other firms.
4.5. Custodian: Holds the fund’s assets, maintaining them separately to protect shareholder interests. In other
words we can say Custodian is the agency which will have the physical possession of all the securities purchased by
the mutual fund.
5.6. Independent Public Accountants

Certify the fund’s financial reports.

1.7. Transfer Agent : Processes orders to buy and redeem fund shares.
2.8. Registrar: A Registrar accepts and processes unitholders' applications, carries out communications with them,
resolves their grievances and despatches Account Statements to them. In addition, the registrar also receives and
processes redemption, repurchase and switch requests. The Registrar also maintains an updated and accurate register
of unitholders of the Fund and other records as required by SEBI Regulations and the laws of India. An investor can
get all the above facilities at the Investor Service Centres of the Registrar.
3.9. Investment Companies (Mutual Funds): Financial firms form new companies expressly for the purpose of
investing and follow special Securities and Exchange Commission rules. There are several kinds of investment
companies; the most common types being open-end mutual funds, closed-end investment companies, and unit
investment trusts. There are legal differences between these types of investment companies, but this pamphlet will
refer generically to all such companies as mutual funds.
10. Fund Sponsors: The financial firms which form new investment companies are called sponsors. Names of fund
sponsors are easily recognized. Their names range from "A" to "Z;" from American Funds to Fidelity, from Franklin
to Templeton,
and from Twentieth Century to Zweig. Each sponsor may offer several different mutual funds within its family of
investment product.
4.11. Fund Managers: The fund sponsors hire fund managers who run the business of the mutual fund. Although this
booklet uses the term fund manager which suggests just one person, in reality several different companies perform
specialized services for the mutual fund which is governed by a board of directors or a board of trustees.

Investment advisors buy and sell investments, also called securities, for the fund. These advisors are professional
investors who use computer programs and rely on years of knowledge in picking investments which have a good
chance of making money.

The custodian, usually a large bank, safeguards the fund's securities and cash held in its portfolio. It also pays out
fund money to buy securities and receives money when the fund's securities are sold.

A specialized type of bookkeeping company called a transfer agent keeps track of investor share purchases and
redemptions, which are the sales of shares. The transfer agent also distributes dividends and capital gains
payments to shareholders.

The principal underwriter markets and sells the fund's shares to investors. As underwriter, it may sell directly to
investors or act as a wholesaler dealing with local brokerage houses which contact investors. These professionals
together manage the affairs of the fund and are paid fees for their services. The fund manager has a key role in
operating the mutual fund.
ADVANTAGES OF INVESTING IN A MUTUAL FUND

1.1. Portfolio Diversification: Mutual funds normally invest in a well-diversified portfolio or securities. Each
investor I a fund is a part owner of all of the fund’s assets. This enables him to hold a diversified investment portfolio
even with a small amount of investment, that would otherwise require big capital.
2.2. Professional Management: Even if an investor has a big amount of capital available to him, he benefits from
the professional management skills brought in by the fund in the management of the investor’s portfolio. The
investment management skills, along with the needed research into available investment options, ensure a much better
return than what an investor can manage on his own. A mutual fund is usually managed by an individual or a team
choosing investments that best match the fund’s objectives. As economic conditions change, the managers often
adjust the mix of the fund’s investments to ensure it continues to meet the fund’s objectives.
3.3. Reduction / diversification of risk: Diversification reduces the risk of loss, as compared to investing directly
in one or two shares or debentures or other investments. When an investor invests directly, all the risk of potential loss
in his owned. A fund investor also reduces his risk in another way. While investing in the pool of funds with other
investors, any loss on one or two securities is also shared with other investors.
4.4. Liquidity: Liquidity is the ability to readily access your money in an investment. Often investors hold shares
or bonds they cannot directly, easily and quickly sell. Investment in a mutual fund, on the other hand, is more liquid.
An investor can liquidate the investment, by selling the units to the funds if open-end, if selling them in the market if
the fund is closed-end, and collect funds at the end of a period specified by the mutual fund or the stock market.The
price per share at which you can redeem shares is known as the fund’s net asset value (NAV). NAV is the current
market value of all the fund’s assets, minus liabilities, divided by the total number of outstanding shares.
5.5. Variety Within the broad categories of stock, bond, and money market funds, you can choose among a variety
of investment approaches. Today, there are about 8,200 mutual funds available in the U.S., with goals and styles to fit
most objectives and circumstances.
6.6. Reduction of transaction Costs: A direct investor bears all the costs of investing such as brokerage or
custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costs
because of larger volumes, a benefit passed on to its investors. In other words we can say that since, Mutual funds
usually hold dozens or even hundreds of securities like stocks and bonds and the total cost is distributed over all
securities therefore cost per unit declines.
7.7. Convenience and Flexibility: Mutual fund management companies offer may investor services that a direct
market investor cannot get. Investors can easily transfer their holdings from one scheme to the other; get updated
market information, and so on. You can purchase or sell fund shares directly from a fund or through a broker,
financial planner, bank or insurance agent, by mail, over the telephone, and increasingly by personal computer. You
can also arrange for automatic reinvestment or periodic distribution of the dividends and capital gains paid by the
fund. Funds may offer a wide variety of other services, including monthly or quarterly account statements, tax
information, and 24-hour phone and computer access to fund and account information.
8.8. Protecting Investors: Not only are mutual funds subject to exacting internal standards, they are also highly
regulated by the federal government through the

U.S. Securities and Exchange Commission (SEC). As part of this government regulation, all funds must meet
certain operating standards, observe strict antifraud rules, and disclose complete information to current and
potential investors. These laws are strictly enforced and designed to protect investors from fraud and abuse.
But these laws obviously can not help you pick the fund that is right for you or prevent a fund from losing
money. You can still lose money by investing in a mutual fund. A mutual fund is not guaranteed or insured by
the FDIC or SIPC, even if fund shares are purchased through a bank. For more information about how funds
are regulated and supervised.

1.9. Well regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by
SEBI.
2.10. Choice of schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
3.11. Transparency: You get regular information on the value of your investment in addition to disclosure on the
specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's
investment strategy and outlook.
4.12. Affordability: Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund
because of its large corpus allows even a small investor to take the benefit of its investment strategy.

.
13. Return potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as
they invest in a diversified basket of selected securities.
DISADVANTAGES OF INVESTING IN MUTUAL FUND

1.1. No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual
fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they
invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a
mutual fund runs the risk of losing money.
2.2. No control over costs: An investor in a mutual fund has no control over the overall cost of investing. He pays
investment management fees as long as he remains with the fund, although in return for the professional management
and research. Fees are usually payable as a percentage of the value of his investment, whether the fund value is rising
or declining. A mutual fund investor also pays funds distribution cost, which he would not incur in direct investing.
However, this shortcoming only means that there is a cost to obtain the benefits of mutual fund services. However,
this cost is often less than the cost of direct investing by the investors.
3.3. No tailor-made portfolios: Investors who invest on their own can build their own portfolios of shares, bonds
and other securities. Investing through funds means he delegates this decision to the fund managers. The very high-
net-worth individuals (HNI’s) or large corporate investors may find this to be a constraint in achieving their
objectives. However, most mutual funds help investors overcome this constraint by offering families of schemes – a
large no of different schemes – within same fund. An investor can choose from different investment plans and
construct a portfolio of his choice.
4.4. Managing a portfolio of funds: availability of a large no of funds can actually mean too much choice for the
investor. He may again need advice on how to select a fund to achieve his objectives, quite similar to the situation
when he has to select individuals shares or bonds to invest in.
5.5. Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds
also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if
you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.
6.6. Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the
securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive,
even if you reinvest the money you made.
7.7. Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right
decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not
make as much money on your investment as you expected..
Asset Management Company (AMC)
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and
custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The
trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC)
approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is
registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with
the general power of superintendence and direction over AMC. They monitor the performance and compliance of
SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be
independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be
independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit
Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

Every Mutual Fund has an Asset Management Company (AMC) associated with it. The AMC is responsible for
managing the investments for the various schemes operated by the Mutual Fund. The Trust oversees the performance
of the AMC. The AMC employs professionals to manage the funds. The AMC may be assisted by a custodian and a
registrar.

AMCs are obliged to make investments in compliance with SEBI regulations. SEBI regulations specify certain
restrictions and limits for investments that can be made by a mutual fund. Further, SEBI regulations require that every
scheme of a fund should have an investment objective and an investment pattern.

DEUTSCHE ASSET MANAGEMENT

Deutsche Asset Management, a member of the Deutsche Bank Group, is a leading financial powerhouse in
global asset management. With over 5000 highly qualified professionals covering local, regional and global markets
in the world’s major financial centers, they serve clients in more than 40 countries who have entrusted them with over
EUR 535.6 billion in assets.

Their diverse institutional client base includes pension funds, insurance companies, corporations, local government
authorities and charities. They are committed to producing consistent, risk-controlled performance for their clients
and adding value through all stages of the investment process.

Their retail business encompasses the following leading brands: the award-winning DWS Investments in Europe;
DWS Scudder, one of the largest and most experienced investment management organisations in the United States;
and Deutsche Asset Management, one of the leading asset managers in the Asia Pacific region.

Established in 2002, Deutsche Asset Management India (DeAM India) is responsible for client servicing and fund
management across India. The successive launch in January 2003 of four products across debt and equity asset
classes, witnessed a mobilization of around Rs. 500 crores. Building upon this success over the past three years, their
product range today consists of 10 domestic fund schemes with assets under management of Rs. 3500 crores.

As part of their commitment to strengthen their mutual fund business in Asia, they have introduced the renowned
retail brand of the Deutsche Bank Group to India: DWS Investments.

DWS Investments a proud heritage spanning over 50 years in Germany and over 10 years of steady growth in Europe.
Today, DWS Investments is the leading mutual fund company in Germany, capturing close to 25% market share. In
Europe, they are among the top players in the international fund market.

Not only is DWS a leader in terms of size but also in terms of performance. In fact, they have been voted Germany’s
top fund manager by Standard & Poor’s for the last 12 years in a row, a feat no other investment company has ever
achieved. The superior quality of DWS Funds is recognized by independent fund rating agencies across all key
markets in Europe as well. This success serves as an excellent foundation to carry over our expertise to the Indian
market.

Being a leader also means being prepared to meet the challenges of the future. We are strongly positioned to bring our
know-how to new markets and to actively pursue our vision: the extension of our No. 1 mutual funds market position
and brand leadership to the Asian region.
The introduction of DWS brand in India is an important step towards realizing our vision. This new beginning also
marks the introduction of our new appearance and claim: st choice for your money., which symbolizes our driving
force and our guiding aspiration to continue to deliver performance excellence, innovation products and first-class
service.

Investors in India can now profit the know-how and expertise of a world-class financial services provider with a
proven success story in mutual fund management.

Global Network

Facts & Figures

DWS Investments is present in 11 European countries and, since February 2006, also in USA with the launch of DWS
Scudder. They manage assets in total of over EUR 241 billion for investors globally. With well over 500 funds
worldwide, DWS Investments offers investors a palette of products covering a broad range of regions and sectors.
Their 600 investment experts deliver topnotch, award-winning solutions for every investment style and profile. As
part of Deutsche Bank Group, DWS Investments is connected to a network of expertise from one of the largest banks
in the world.

Since 1956, DWS Investments has pursued a consistent strategy, one that focuses on quality, innovation, performance
and trust. Our global expertise local know-how enables DWS Investments to provide top-rate solutions in investment
management, keeping a finger on the pulse of the market today, to determine what investors want tomorrow.
DEUTSCHE ASSET MANAGEMENT, INDIA

The India office was established in the second quarter of 2002 and covers marketing, client servicing and fund
management .DeAM, India started its operations in January 2003 with launch of four products across debt and equity
asset class. The launch witnessed mobilization of around 500 crores in January 2003, over the last six quarters they
have successfully launched new products and as of august 2004 their product portfolio consists of eight domestic
mutual funds with assets under management of Rs. 26 crores .They take full advantage of the global research
platform and a team of five investment professionals in India to manage the mutual funds.

Going forward, they intend to launch more new products in line with opportunities presented by the Indian markets
and core product range requirements. They are also witnessing growth in terms of distribution and people/functional
resources. They are adding people in client services and have also setup a fully operational product development
function. They currently have employee strength of 23 in Deutsche Asset Management (I) Pvt ltd. Their present
product offering is as under:

Equity schemes
DWS Investment Opportunity Fund DWS Alpha Equity Fund DWS Tax Saving Fund

Debt Schemes
DWS Fixed Term Fund DWS Fixed Maturity Plan 385 Days Series DWS Insta Cash Plus Fund DWS Short Maturity
Fund DWS Premier Bond Fund DWS Dynamic Bond Fund DWS Floating Rate Fund DWS Money Plus Fund

Hybrid Schemes
DWS MIP Fund A DWS MIP Fund B
DEUTSCHE MUTUAL FUND

Incorporated 28/10/2002

Ownership Private

Ownership pattern Foreign – 100%

Domestic – 0%

Sponsor Deutsche Asset Management (Asia )s

Total Asset (Rs Cr) 4,688.31 as on 4/30/2006

Equity Funds (Open End) 2

Debt Funds (Open End) 3

Short –Term Debt (Open End) 5

Hybrid Funds (Open End) 1

Closed-End Funds 8

Chief Executive Officer Sandeep Dasgupta

Chief Investment Officer

Investor Relations Officer Ashutosh Sharma

Address 2nd Floor,222 Kodak House Dr. D.N Road

Fort Mumbai-400001

Telephone 91 [22] 56584600/56584000

Fax 91 [22] 22074411

URL www.deutschemutual.com

Email deutsche.mutual@db.com

HISTORY MUTUAL FUND INDUSTRY IN INDIA:

Mutual Funds in India (1964-2000):

The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the
year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the
industry.

The end of millennium marks 36 years of existence of mutual funds in this country. The ride through these 36 years
is not been smooth. Investor opinion is still divided. While some are for mutual funds others are against it.

UTI commenced its operations from July 1964 .The impetus for establishing a formal institution came from the desire
to increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during a
period marked by great political and economic uncertainty in India. With war on the borders and economic turmoil
that depressed the financial market, entrepreneurs were hesitant to enter capital market. The already existing
companies found it difficult to raise fresh capital, as investors did not respond adequately to new issues. Earnest
efforts were required to canalize savings of the community into productive uses in order to speed up the process of
industrial growth. The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that would be "open
to any person or institution to purchase the units offered by the trust. However, this institution as we see it, is intended
to cater to the needs of individual investors, and even among them as far as possible, to those whose means are small."

His ideas took the form of the Unit Trust of India, an intermediary that would help fulfill the twin objectives of
mobilizing retail savings and investing those savings in the capital market and passing on the benefits so accrued to
the small investors.

UTI commenced its operations from July 1964 "with a view to encouraging savings and investment and participation
in the income, profits and gains accruing to the Corporation from the acquisition, holding, management and disposal
of securities." Different provisions of the UTI Act laid down the structure of management, scope of business, powers
and functions of the Trust as well as accounting, disclosures and regulatory requirements for the Trust.

One thing is certain – the fund industry is here to stay. The industry was one-entity show till 1986 when the
UTI monopoly was broken when SBI and Canbank mutual fund entered the arena. This was followed by the
entry of others like BOI, LIC, GIC, etc. sponsored by public sector banks. Starting with an asset base of
Rs0.25bn in 1964 the industry has grown at a compounded average growth rate of 26.34% to its current size of
Rs1130bn.

The period 1986-1993 can be termed as the period of public sector mutual funds (PMFs). From one player in 1985 the
number increased to 8 in 1993. The party did not last long. When the private sector made its debut in 1993-94, the
stock market was booming.
The opening up of the asset management business to private sector in 1993 saw international players like Morgan
Stanley, Jardine Fleming, JP Morgan, George Soros and Capital International along with the host of domestic players
join the party. But for the equity funds, the period of 1994-96 was one of the worst in the history of Indian Mutual
Funds.
In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both qualitywise as well as
quantitywise. Before, the monopoly of the market had seen an ending phase, the Assets Under Management (AUM)
was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April
2004, it reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI
alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor
growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be
intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the
product correctly abreast of selling.

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

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.6,700 crores of assets under management.

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

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

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 and governed. The erstwhile Kothari
Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.The
1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund
Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.The number of
mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the
industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds
with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management
was way ahead of other mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified
Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified
Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of
India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd,
sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations.
With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM 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. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421
schemes.

GROWTH IN ASSETS UNDER MANAGEMENT

Note: 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.

Performance of Mutual Funds in India

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 was accustomed with
guaranteed high returns by the begining of liberalization of the industry in 1992. This good record of UTI became
marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people
were miles away from the praparedness of risks factor after the liberalization.

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance
of mutual funds in India through figures. From Rs. 67bn. the Assets Under Management rose to Rs. 470 bn. in March
1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.

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 were 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 a loss in the secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses by
disinvestments and of course the lack of transparent rules in the whereabout 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 of 1020 percent of their net asset value.

The supervisory authority adopted a set of measures to create a transparent and competitve 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 the 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.
THE INDUSTRY TODAY
The mutual fund industry has enjoyed substantial growth by avoiding the bumps in the road that have occurred in
other financial services sectors. The principles that exemplify the industry’s longstanding commitment to shareholders
— ensuring strong regulation, educating investors, and promoting opportunities for long-term investing—have guided
the industry for the past 50 years, and will continue to do so in the future.

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 nationalized banks and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the
stock market boom prevailing then. These banks did not really understand the mutual fund business and they just
viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the
parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes
had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of
money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of
these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few
exceptions, they have serious plans of continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly
realized that the AMC business is a business, which makes money in the long term and requires deep-pocketed
support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others
and there is general restructuring going on.

The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can
be credited with introducing many new practices such as new product innovation, sharp improvement in service
standards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry
to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years in
response to the competition provided by these.

Current Asset Under Management (AUM):

(Source: AMFI Database)

Future Scenario
The asset base will continue to grow at an annual rate of about 30 to 35 % over the next few years as investor’s shift
their assets from banks and other traditional avenues. Some of the older public and private sector players will either
close shop or be taken over.

Out of ten public sector players five will sell out, close down or merge with stronger players in three to four years. In
the private sector this trend has already started with two mergers and one takeover. Here too some of them will down
their shutters in the near future to come.

But this does not mean there is no room for other players. The market will witness a flurry of new players entering the
arena. There will be a large number of offers from various asset management companies in the time to come. Some
big names like Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously. One important reason for it
is that most major players already have presence here and hence these big names would hardly like to get left behind.

The mutual fund industry is awaiting the introduction of derivatives in India as this would enable it to hedge its risk
and this in turn would be reflected in it’s Net Asset Value (NAV).

SEBI is working out the norms for enabling the existing mutual fund schemes to trade in derivatives. Importantly,
many market players have called on the Regulator to initiate the process immediately, so that the mutual funds can
implement the changes that are required to trade in Derivatives.
Global Scenario
Some basic facts-

1.1. The money market mutual fund segment has a total corpus of $ 1.48 trillion in the U.S. against a corpus of $
100 million in India.
2.2. Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only Fidelity and Capital are non-bank
mutual funds in this group.
3.3. In the U.S. the total number of schemes is higher than that of the listed companies while in India we have just
277 schemes
4.4. Internationally, mutual funds are allowed to go short. In India fund managers do not have such leeway.
5.5. In the U.S. about 9.7 million households will manage their assets on-line by the year 2003, such a facility is
not yet of avail in India.
6.6. On- line trading is a great idea to reduce management expenses from the current 2 % of total assets to about
0.75 % of the total assets.
7.7. 72% of the core customer base of mutual funds in the top 50-broking firms in the U.S. are expected to trade
on-line by 2003.

(Source: The Financial Express September, 99)

Internationally, on- line investing continues its meteoric rise. Many have debated about the success of e- commerce
and its breakthroughs, but it is true that this aspect of technology could and will change the way financial sectors
function. However, mutual funds cannot be left far behind. They have realized the potential of the Internet and are
equipping themselves to perform better.

In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions have already begun on
the Net, while in India the Net is used as a source of Information.

Such changes could facilitate easy access, lower intermediation costs and better services for all. A research agency
that specializes in internet technology estimates that over the next four years Mutual Fund Assets traded on- line will
grow ten folds from $ 128 billion to $ 1,227 billion ; whereas equity assets traded on-line will increase during the
period from $ 246 billion to $ 1,561 billion. This will increase the share of mutual funds from 34% to 40% during the
period.

(Source: The Financial Express September ,99)

Such increases in volumes are expected to bring about large changes in the way Mutual Funds conduct their
business.

Here are some of the basic changes that have taken place since the advent of the Net

1. Lower Costs: Distribution of funds will fall in the online trading regime by 2003. Mutual funds could bring
down their administrative costs to 0.75% if trading is done on- line. As per SEBI regulations, bond funds can charge a
maximum of 2.25% and equity funds can charge 2.5% as administrative fees. Therefore if the administrative costs are
low , the benefits are passed down and hence Mutual Funds are able to attract mire investors and increase their asset
base
.
1.2. Better advice: Mutual funds could provide better advice to their investors through the Net rather than through
the traditional investment routes where there is an additional channel to deal with the Brokers. Direct dealing with the
fund could help the investor with their financial planning.
2.3. In India , brokers could get more Net savvy than investors and could help the investors with the knowledge
through get from the Net.
3.4. New investors would prefer online: Mutual funds can target investors who are young individuals and who
are Net savvy, since servicing them would be easier on the Net.
4.5. India has around 1.6 million net users who are prime target for these funds and this could just be the
beginning. The Internet users are going to increase dramatically and mutual funds are going to be the best beneficiary.
With smaller administrative costs more funds would be mobilized .A fund manager must be ready to tackle the
volatility and will have to maintain sufficient amount of investments which are high liquidity and low yielding
investments to honor redemption.
5.6. Net based advertisements: There will be more sites involved in ads and promotion of mutual funds. In the
U.S. sites like AOL offer detailed research and financial details about the functioning of different funds and their
performance statistics. a is witnessing a genesis in this area . There are many sites such as indiainfoline.com and
indiafn.com that are doing something similar and providing advice to investors regarding their investments.

In the U.S. most mutual funds concentrate only on financial funds like equity and debt. Some like real estate funds
and commodity funds also take an exposure to physical assets. The latter type of funds are preferred by corporate’s
who want to hedge their exposure to the commodities they deal with.

For instance, a cable manufacturer who needs 100 tons of Copper in the month of January could buy an equivalent
amount of copper by investing in a copper fund. For Example, Permanent Portfolio Fund, a conservative U.S. based
fund invests a fixed percentage of it’s corpus in Gold, Silver, Swiss francs, specific stocks on various bourses around
the world, short –term and long-term U.S. treasuries etc.

In U.S.A. apart from bullion funds there are copper funds, precious metal funds and real estate funds (investing in real
estate and other related assets as well.).In India, the Canada based Dundee mutual fund is planning to launch a gold
and a real estate fund before the year-end.

In developed countries like the U.S.A there are funds to satisfy everybody’s requirement, but in India only the tip of
the iceberg has been explored. In the near future India too will concentrate on financial as well as physical funds.

Association of Mutual Fund in India

One of the most effective industry bodies today is probably the Association of Mutual Funds in India (“AMFI”). It
has been a forum where mutual funds have been able to present their views, debate and participate in creating their
own regulatory framework. The association was created originally as a body that would lobby with the regulator to
ensure that the fund viewpoint was heard. Today, it is usually the body that is consulted on matters long before
regulations are framed, and it often initiates many regulatory changes that prevent malpractices that emerge from
time to time. This year some of the major initiatives were the framing of the risk management structure, a code of
conduct and registration structure for mutual fund intermediaries, which were subsequently mandated by SEBI. In
addition, this year AMFI was involved in a number of developments and enhancements to the regulatory framework.
AMFI works through a number of committees, some of which are standing committees to address areas where there
is a need for constant vigil and improvements and other which are adhoc committees constituted to address specific
issues. These committees consist of industry professionals from among the member mutual funds. There is now some
thought that AMFI should become a self-regulatory organization since it has worked so effectively as an industry
body.

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 organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22nd
August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all
the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and
guidelines of its Board of Directors.

Association of Mutual Funds in India has brought down the Indian Mutual Fund Industry to a professional and
healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and
promoting the interests of mutual funds as well as their unit holders.
 Mutual Funds give returns in two ways - Capital Appreciation or Dividend Distribution.

1.1. Capital Appreciation : An increase in the value of the units of the fund is known as capital appreciation. As
the value of individual securities in the fund increases, the fund's unit price increases. An investor can book a profit by
selling the units at prices higher than the price at which he bought the units.
2.2. Dividend Distribution : The profit earned by the fund is distributed among unit holders in the form of
dividends. Dividend distribution again is of two types. It can either be re-invested in the fund or can be on paid to the
investor.

Types of Mutual Funds Schemes in India

A. By Structure

1.1. Open - Ended Schemes : An open-end 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. The key feature of open-end schemes is liquidity.
2.2. 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 periodic repurchase at NAV related prices. SEBI Regulations
stipulate that at least one of the two exit routes is provided to the investor.
3.3. Interval Schemes: Interval funds combine the features of open-ended and close-ended schemes. They are
open for sale or redemption during pre-determined intervals at NAV related prices.

B. By Investment Objective

1. Growth Schemes : The aim of growth funds is to provide capital appreciation over the medium to long- term.
Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have
outperformed
most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-term
outlook seeking growth over a period of time.
1.2. Income Schemes : The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.
Income Funds are ideal for capital stability and regular income.
2.3. Balanced Schemes: A balanced fund is one that has a portfolio comprising debt instruments, convertible
securities, preference and equity shares. Their assets are generally held in more or less equal proportions between
debt/money market securities and equities. By investing in a mix of this nature, balanced funds seek to attain the
objectives of income, moderate capital appreciation and preservation of capital, and are idea for investors with a
conservative and long term orientation. In a rising stock market, the NAV of these schemes may not normally keep
pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and
moderate growth.
3.4. Money Market Schemes: The aim of money market funds is 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. Returns on these schemes may fluctuate
depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a
means to park their surplus funds for short periods.
4.5. Gilt Fund: These funds invest exclusively in government securities. Government securities have no default
risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case
with income or debt oriented schemes. Government Securities (G-secs or Gilts)

Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing
program approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity
ranging from 1 year to 20 years.

Like T-Bills, Gilts are issued through the auction route but RBI can sell/buy securities in its Open Market Operations
(OMO) . OMOs include conducting repos as well and are used by RBI to manipulate short-term liquidity and thereby
the interest rates to desired levels The other types of Government Securities are:
• Inflation linked bonds
• Zero coupon bonds
• State Government Securities (State Loans)

D. Other Schemes
1.1. Tax Saving Schemes: These schemes offer tax rebates to the investors under specific provisions of the Indian
Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in
Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax
Act, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB by investing in
Mutual Funds, provided the capital asset has been sold prior to April 1, 2000 and the amount is invested before
September 30, 2000.
2.2. Index Funds: Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P
NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index.
NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the
same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this
regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds
launched by the mutual funds which are traded on the stock exchanges.
3.3. Sector Funds: Sector funds have portfolios comprising of investments in only one industry or sector of the
market such as Information Technology. Pharmaceuticals or fast moving consumer goods that have recently been
launched in India. Since sector funds do not diversify into multiple sectors, they carry a higher level of sector and
company specific risk than diversified equity funds.
4.4. Load and No-Load Funds: A Load Fund is one that charges a commission for entry or exit. That is, each
time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to
2%. It could be worth paying the load, if the fund has a good performance history. A No-Load Fund is one that does
not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund.
The advantage of a no load fund is that the entire corpus is put to work.

C. By Risk

1.1. Equity Funds: Equity funds invest a major portion of their corpus in equity shares issued by companies,
acquired directly in initial public offerings or through secondary market. Equity funds would be exposed to the equity
price fluctuation risk at the market level, at the industry or sector level and at the company specific level. The issuers
of equity shares offer no guaranteed repayment as in case of debt instrument.
2.2. Debt Funds: These Funds invest a major portion of their corpus 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. These schemes aim to provide capital preservation and consistent
income, and aren't limited to any one kind of debt. Their returns range from 10 to 13 per cent. Most have a
good mix of retail and corporate investors. Among other things, risk arises from the quality of paper held and
from unjustifiably large exposures to particular companies or sectors (See Side Show: Check List for Debt
Fund Investors). Income schemes usually offer the best returns among those investing in various forms of
debt. However, these superior returns do come at the cost of slightly higher risk.

1.1. Money Market Funds

2.2. Hybrid Fund
3.3. Real Estate Funds
Parameters which can be compared across different funds of the same category before investing:
1.1. Average Returns: An investor should look at the returns given by the fund over a period of time. Care should
be taken to see whether all dividends and bonuses have been accounted for. The higher and more consistent the
returns the better is the fund.
2.2. Volatility: In addition to the returns one should also look at the volatility of the returns given by the fund.
Volatility is essentially the fluctuation of the returns about the mean return over a period of time. A fund giving
consistent returns is better than a fund whose returns fluctuate a lot.
3.3. Corpus size: A Large corpus is generally considered good because large funds have lower costs, as expenses
are spread over large assets but at the same time a large corpus has some inefficiencies too. A large corpus may
become unwieldy and thus difficult to manage.
4.4. Performance VIS A VIS Benchmark Other Schemes: An investor should not

only look at the returns given by the scheme he has invested in but also compare it with benchmarks like BSE
Sensex, S & P Nifty, T-bill index etc depending on the asset class he has invested in. For a true picture it is
advised that the returns should also be compared with the returns given by the other funds in the same
category. Thus it is prudent to consider all the above-mentioned factors while comparing funds and not rely on
any one of them in isolation. This is important because as of today there is no standard method for evaluation
of un-traded securities.

5. Net Asset Value (NAV): Net Asset Value (NAV) is the actual value of one unit of a given scheme on any
given business day. The NAV reflects the liquidation value of the fund's investments on that particular day after
accounting for all
expenses. It is calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of all
assets and dividing it by number of units outstanding.
1.6. Load: The charge collected by a Mutual Fund from an investor for selling the units or investing in it. When a
charge is collected at the time of entering into the scheme it is called an Entry load or Front-end load or Sales load.
The entry load percentage is added to the NAV at the time of allotment of units. An Exit load or Back-end load or
Repurchase load is a charge that is collected at the time of redeeming or for transfer between schemes (switch). The
exit load percentage is deducted from the NAV at the time of redemption or transfer between schemes. Some schemes
do not charge any load and are called "No Load Schemes"

Risk In Mutual Fund Investments

Risk is a term that is bandied about almost casually in the financial media. This should come as no surprise. Risk and
the management of risk are at the core of investment success. Without a solid understanding of risk and the principles
for mitigating it, you might as well be buying a series of lottery tickets.

The basic concept of risk is simple. It is the potential for change in the price or value of some asset or commodity.
Note that we do not need to think of risk as restricted to the potential for loss. There is upside risk and there is
downside risk as well.

Types of Risk

After a bond is first issued, it may be traded. If a bond is traded before it matures, it may be worth more or less than
the price paid for it. The price at which a bond trades can be affected by several types of risk.

1. Interest Rate Risk: Think of the relationship between bond prices and interest rates as opposite ends of a
seesaw. When interest rates fall, a bond’s value usually rises. When interest rates rise, a bond’s value usually
falls. The longer a bond’s maturity, the more its price tends to fluctuate as market interest rates change.
However, while longer-term bonds tend to fluctuate in value more than shorter-term bonds, they also tend to
have higher yields (see page 24) to compensate for this risk. Unlike a bond, a bond mutual fund does not have
a fixed maturity. It does, however, have an average portfolio maturity—the average of all the maturity dates
 of the bonds in the fund’s portfolio.

In general, the longer a fund’s average portfolio maturity, the more sensitive the fund’s share price will be to changes
in interest rates and the more the fund’s shares will fluctuate in value.

Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in the
interest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interest
rates drop, the prices increase. Interest rate movements in the Indian debt markets can be volatile leading to the
possibility of large price movements up or down in debt and money market securities and thereby to possibly large
movements in the NAV.

2. Credit Risk: Credit risk refers to the “creditworthiness” of the bond issuer and its expected ability to pay
interest and to repay its debt. If a bond issuer is unable to repay principal or interest on time, the bond is said to be in
default. A decline in an issuer’s credit rating, or creditworthiness, can cause a bond’s price to decline. Bond funds
holdingthe bond could then experience adecline in their net asset value. In short, how stable is the company or entity
to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are
promised, or repay your principal when the investment matures?

1.3. Prepayment Risk: Prepayment risk is the possibility that a bond owner will receive his or her principal
investment back from the issuer prior to the bond’s maturity date. This can happen when interest rates fall, giving the
issuer an opportunity to borrow money at a lower interest rate than the one currently being paid. (For example, a
homeowner who refinances a home mortgage to take advantage of decreasing interest rates has prepaid the mortgage.)
As a consequence, the bond’s owner will not receive any more interest payments from the investment. This also
forces any reinvestment to be made in a market where prevailing interest rates are lower than when the initial
investment was made. If a bond fund held a bond that has been prepaid, the fund may have to reinvest the money in a
bond that will have a lower yield.

2.4. Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad
outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a
fledgling corporation may be affected. This change in price is due to "market risk".

3.5. Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever the rate of inflation exceeds
the earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Typically a higher
inflation rate means higher interest rates. The interest rates prevailing in an economy at any point of time are nominal
interest rates, i.e., real interest rates plus a premium for expected inflation. Due to inflation, there is a decrease in
purchasing power of every rupee earned on account of interest in the future; therefore the interest rates must include a
premium for expected inflation. In the long run, other things being equal, interest rates rise one for one with rise in
inflation

4.6. Investment Risks: The sectoral fund schemes, investments will be predominantly in equities of select
companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of
such companies and may be more volatile than a more diversified portfolio of equities.

5.7. Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near their real
values. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of
the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market.
6.8. Changes in the Government Policy: Changes in Government policy especially in regard to the tax benefits
may impact the business prospects of the companies leading to an impact on the investments made by the fund. Since
the government is the biggest borrower in the debt market, the level of borrowing also determines the interest rates.
On the other hand, supply of money is done by the Central Bank by either printing more notes or through its Open
Market Operations (OMO).

7.9. Demand/Supply of money: When economic growth is high, demand for money increases, pushing the
interest rates up and vice versa. RBI can change the key rates (CRR, SLR and bank rates) depending on the state of
the economy or to combat inflation. RBI fixes the bank rate which forms the basis of the structure of interest rates and
the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which determines the availability of credit and
the level of money supply in the economy. (CRR is the percentage of its total deposits a bank has to keep with RBI in
cash or near cash assets and SLR is the percentage of its total deposits a bank has to keep in approved securities. The
purpose of CRR and SLR is to keep a bank liquid at any point of time. When banks have to keep low CRR or SLR, it
increases the money available for credit in the system. This eases the pressure on interest rates and interest rates move
down. Also when money is available and that too at lower interest rates, it is given on credit to the industrial sector
that pushes the economic growth)

National And International Risks

National and world events can profoundly affect investment markets.

1.1. Economic risk is the danger that the economy as a whole will perform poorly. When the whole economy
experiences a downturn, it affects stock prices, the job market, and the prices of consumer products.
2.2. Industry risk is the chance that a specific industry will perform poorly. When problems plague one industry,
they affect the individual businesses involved as well as the securities issued by those businesses. They may also
cross over into other industries. For example, after a national downturn in auto sales, the steel industry may suffer
financially.
3.3. Tax risk is the danger that rising taxes will make investing less attractive. In general, nations with relatively
low tax rates, such as the United States, are popular places for entrepreneurial activities. Businesses that are taxed
heavily have less money available for research, expansion, and even dividend payments. Taxes are also levied on
capital gains, dividends and interest. Investors continually seek investments that provide the greatest net after-tax
returns.
Effect of Market Dynamics on Product ( Mutual Fund) Designing

A. Inflation Rate: Inflation is a situation in the economy where, there is more money chasing less of goods and
services. In other words, it means there is more supply/availability of money in the economy and there is less of
goods and services to buy with that increased money. Thus goods and services commands a higher price than
actual as more people are willing to pay a higher value to buy the same goods.

Types of inflation:
1.1. Modest Inflation (2-3%)
2.2. Creeping Inflation (5-!0%)
3.3. Running Inflation (Over 10%)

Ways Of Measuring Inflation

1.1. Consumer Price Index (CPI) – This measures the consumer prices of a basket of commodities in different
cities.
2.2. Wholesale Price Index (WPI) – This measures the different prices of a basket of commodities in the
wholesale markets.

Causes of inflation
1.1. Excess Money Supply
2.2. Hoarding & Black Marketing
3.3. Excess of demand over supply
4.4. Fluctuations in the exchange rate

Effect of inflation
1.1. No real growth in the output of the economy per se. It’s simply more money chasing few goods and service.
2.2. Rising price of raw materials, labour cost, shortage of skilled labour
3.3. Higher indirect taxes imposed by the government
4.4. Reduces incentives to save and to invest.
5.5. Devaluation in the currency
6.6. Fall in the standard of living: Rich become richer and poor become poorer

Control inflation

1.1. monetary policy (increase or decrease the money supply),

2.2. fiscal policy (change the amount of taxes and governmental spending), and various controls on prices, tariffs,
and monopolies
3.3. Encourage measures to increase the productivity in the economy,
4.4. Use government borrowing programs to suckout the excess liquidity
5.5. Use CRR/SLR margin requirements to maintain the required liquidity in the economy etc
6.6. 'progressive' tax systems

Impact on Market

1.1. Investment Impact: Banks must charge higher interest rates on loans to compensate for inflation; this
decreases net investment via shifting the supply curve for loans back.
2.2. Equity market: equities are the best bet to overcome inflation in the long run. "Inflation isn’t linked to the
equity market as it is to the debt market,". However, it is often found that low-inflation periods are marked by falling
equity prices.
3.3. Debt Market Falling inflation is often accompanied by falling interest rates. Declining interest rates will force
you to manage your debt investments actively. "You will need to spread your monies in several baskets and with
varying degrees of liquidity," known as income ladder.. Invest in instruments of different maturities, so that some
returns can be reinvested in higher paying options as and when the rates go up.
4.4. International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be
undermined through a weakening balance of trade. higher rate of domestic inflation than that experienced in other
economies can lead to increased imports and reduced exports and can create potential problems for stable exchange
rates.
5.5. Commodity market: Also suffer from rising in price due to increase in money supply or increasing demand.

B. Interest Rate

• The risk to the earning or market value of a portfolio due to uncertain future interest rate.
• Generally, interest rates and debt security value are inversely related; as interest rates rise, the resale value of a
debt security falls, and vice versa
• Interest rate risk is measured by comparing weighted average duration of asset with weighted average of
liabilities. If Asset duration > Liability duration. Increase in the interest rate and vice versa.
• If average maturity of fund increases interest rate increases and individual investing in long term bond lose
more as compared t o the short term fund. If the interest rate fall long term fund will appreciate and short term fund
depreciate.

Investor perspective
• As the interest rate increases the cost of holding the bonds decreases. Since investor is able to realize greater
yield by switching to other investment that reflect increase in interest rate.

Borrower perspective
1.1. In a rising rate environment, loan customers may not be able to meet interest payments because of the increase
in the size of the payment or a reduction in earnings. The result will be a higher level of problem loans.
2.2. Inflationary expectations. Most economies generally exhibit inflation, meaning a given amount of money
buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.
3.3. If the interest rate falls the people generally start buying the stock to get more at less amount. The
consumption level increases.

Market perspective
1.1. Output and unemployment If interest rates increase then investment decreases, causing a fall in national
income. Note that if interest rates are high, that means the broad economy is doing well and thus people will be
willing to borrow money at higher interest rates.
2.2. Supply and Demand Interest rate levels are a factor of the supply and demand of credit: an increase in the
demand for credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely,
an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them
3.3. Inflation

Inflation will also affect interest rate levels. The higher the rate of inflation, the more interest rates are likely to
rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in the
purchasing power of the money they will be repaid in the future.

CREDIT RISK

Credit risk, in short, represents how stable is the company or entity to which you lend your money when you invest?
How certain are you that it will be able to pay the interest you are promised, or repay your principal when the
investment matures?
The debt servicing ability (may it be interest payments or repayment of principal) of a company through its cash flows
determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like
CRISIL who rate companies and their paper. A ‘AAA’ rating is considered the safest whereas a ‘D’ rating is
considered poor credit quality. A well-diversified portfolio might help mitigate this risk.
There is no credit risk attached with government paper, but that is not the case with debt securities issued by
companies. The ability of a company to meet its obligations on the debt securities issued by it is determined by the
credit rating given to its debt paper. The higher the credit rating of the instrument, the lower is the chance of the issuer
defaulting on the underlying commitments, and vice-versa. A higher-rated debt paper is also normally much more
liquid than lower-rated paper.

While assessment of MFs usually takes the form of performance rankings, based largely on the measurement
of risk and return, more sophisticated variants of MF evaluation include credit risk rating (CRR) for debt
funds and grading of management quality of fund houses.
While CRR covers only debt funds, management quality gradings (MQG) rate the asset management companies,
encompassing all schemes of the same.

The CRR of a debt fund is a symbolic indicator of the relative credit quality of the fund's investment portfolio.
Specifically, the ratings address the relative expected loss a fund can suffer because of the default risk. The
focus of credit risk assessment is on the downside risk. To measure the expected loss (or downside), raters use their
own estimates of the default risk associated with each rating category. The raters make their assessment of the implicit
rating of the fund's investments that are not rated. While the credit quality of the securities that the fund is invested in
is the focus of the credit risk calibration, a complete evaluation requires the measurement of the likely impact of
various qualitative factors associated with the scheme being examined, such as published investment objective; fund's
investment guidelines/policies and style; quality of fund's management; its systems and controls; internal appraisal
systems; portfolio composition and its diversification; fund's disclosure standards and accounting quality.

In this context, the portfolio composition of a scheme is of paramount significance. The understanding of the outlook
for each sector the fund has invested in is critical. Typically, a fund invests in many sectors and each sector has its
own dynamics and complexities. Further, they could all be in different stages of the business cycle. Understanding the
sectoral sensitivities is very important for an analyst to understand the industry's prospects. Sectoral sensitivities, in
turn affect the performance of the companies operating in these sectors and consequently their ability to service the
debt. Hence, an analyst would need to make a judgment on whether the extent of portfolio diversification is adequate,
keeping in mind the future business scenario.

DEMOGRAPHIC AND PSYCHOGRAPHIC PROFILE

Over the long term, the changing demographic profile of India and the expected improvement in income levels will
also lead to an explosion in demand for a range of goods and services. This is expected to benefit a wide swathe of
companies in all sectors of the economy.

India's demographic and consumption story is now well known, but there's also the feel-good factor. Prices have gone
up across asset classes in the last couple of years - at today's prices, around $200 billion of extra wealth has been
created and that encourages people to spend more

Demographic transition
India is a young country with an average age of approximately 24 years, compared with 32 in China or 34 in South
Korea. Indian demographic transition is several years behind the rest of the Asian continent. Since the beginning of
the 1990s, India has experienced swift growth in the ratio of the working-age population (15-64 year olds deemed as
the potential workforce) to the total, automatically reducing the dependency ratio of the young age groups and the
over-65s to the working population. Indian growth thus enjoys a kind of “demographic dividend”. The working-age
population was estimated at 690 million in 2005. It could reach 760 million in 2010, meaning an annual increase of 14
million. It should continue to rise until 2045, pushing the percentage of 15-64 year olds in the total population up
from 63% today to 68%. Demographic pressure has so far been managed by the controlled increase in the labour
participation rate (ratio of the working population to the working-age population), notably by restricting growth in
female workers. However, this rate is still likely to rise. Demography and internal migrations from rural to urban
areas should also have a deep impact on the economic footprint of India over the next 20 years. The percentage of the
rural population in the total is still more than 65% but the United Nations estimates that the urban population should
account for more than half of the total by 2025-2030.
The population of the main cities will have risen significantly on this timescale:
Delhi (40 million), Mumbai (30-35 million), Kolkata (20-25 million), Bangalore, Surat, Hyderabad, Chennai, Pune,
Ahmedabad (10-15million each), Jaipur (7 million), Lucknow (5 million).

Current urban infrastructures are not ready for such a shock.

Reality of the Indian middle class

Income growth and the enlargement of the middle class have helped raise purchasing power. There are different ways
of defining the Indian middle class. We have used the NCAER’s (National Council for Applied Economic Research),
which includes households with an annual income of between 200,000 and 1 million rupees (i.e. USD 4,000-23,000).
In 2001/02, 11 million households (or 57 million individuals), i.e. 6% of the national total, belonged to this group.
The percentage has doubled in six years and should reach 13% on a 2009/10 horizon (28 million households, 160
million individuals) (see Table 2, page 21). However, certain specialised enterprises in the segment of consumer
goods target a more or less large population depending on the products they sell. Bearing in mind that with annual
income of USD 3,000 it is possible to buy a car, the middle class in the broader sense is more like 300 million
individuals, i.e. a little more than the population of the United States. The income effect doubles with a wealth effect
arising from greater ownership of shares (the percentage of household savings held in shares is estimated at 20%) and
a booming stock market (+74% y/y in March 2006 for the Mumbai marketplace). Furthermore, the strength of
consumer lending gives the impression that mass consumption is more accessible. According to the Fitch rating
agency, consumer credit rose by an average of 40% per year between 2000 and 2005. It accounts for 24% of total
outstanding bank loans, compared with 11% in 1999/00, but only 10% of GDP.

FOREX RESERVES

The revaluation effect and the dollar mop-up by the Reserve Bank of India (RBI), the country’s central bank, have
pushed its forex reserves up by over $2 billion. The RBI’s Weekly Statistical Supplement stated that India’s reserves
reached $157.262 billion at the week ended April 21, an increase of $2.066 billion. Foreign currency assets, which are
expresses in terms of dollars, and which take into account the effect of appreciation or depreciation of other major
currencies such as the euro, pound sterling, and the yen, increased by $2.056 billion to touch $150.737 billion during
the same week.

The total FII inflow into the equity market was $34.8 million against outflows of $475.9 million in the previous week.

How is a currency valued?

The floating exchange rate system is a confluence of various demand and supply factors prevalent in an economy like
-
• Current account balance: The trade balance is the difference between the value of exports and imports. If
India is exporting more than it is importing, it would have a positive trade balance with USA, leading to a higher
demand for the home currency. As a result the demand will translate into appreciation of the currency and vice versa.
• Inflation rate: Theoretically, the rate of change in exchange rate is equal to the difference in inflation rates
prevailing in the 2 countries. So, whenever, inflation in one country increases relative to the other country, its
currency falls down.
• Interest rates : The funds will flow to that economy where the interest rates are higher resulting in more
demand for that currency
• Speculation: Another important factor is the speculative and arbitrage activities of big players in the forex
market which determines the direction of a currency. In

the event of global turmoil, investors flock towards perceived safe haven currencies like US dollar resulting in a
demand for that currency.

Implications of currency fluctuations on debt markets

Depreciation of a currency affects an economy in two ways, which are in a way counteractive to each other. On the
one hand, it makes the exports of a country more competitive, thereby leading to an increase in exports. On the other
hand, it decreases the value of a currency relative to other currencies, and hence imports like oil become dearer
resulting in an increase of deficit.

Foreign Institutional Investors (FIIs) registered with SEBI enjoy a high degree of capital account convertibility in an
otherwise closed capital account. FIIs are are allowed to buy and sell shares in the stock exchange and repatriate the
proceeds freely to their home countries.

The aggregate holding of FIIs in any company cannot normally exceed 30per cent, but the company itself could if it
so chooses raise this limit to 40per cent. FIIs, as the name suggests, are institutions like mutual funds, pension funds,
banks and insurance companies. However, there is a provision for a corporate or high net worth individual to also
avail of the same benefits by coming in as a registered sub account of a registered FII. All such non-institutional
investors are in the aggregate limited to a holding of 10per cent in any company. The rationale for this distinction is
that institutional investors who are regulated in their home markets can be presumed to be portfolio investors, while
corporate and individual investors could well be strategic investors trying to get around the regulations regarding
Foreign Direct Investment.

Liberalisation and the entry of FIIs affect market behaviour through their implications for economic policy as well.
Foreign Institutional Investors (FIIs), whose exposure in Indian markets is an extremely small share of their
international portfolio, pursue international investment strategies that could involve periodically investing in or
withdrawing from India. This forces government’s, keen to have them constantly making net purchases and driving
markets upwards, to bend over backwards in appeasing them. A corollary of this influence of the FIIs is that any
market player who is able to mobilize a significant sum of capital and is willing to risk it in investments in the market
can be a major influence on market performance. As on March 31, 2000, FIIs had in the aggregate invested $11.23
billion representing about 5 per cent of the market capitalisation.
Success of IPO in Indian Mutual Fund Industry

INITIAL PUBLIC OFFERING (IPO):

A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young,
small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs
generally must be prepared to accept very large risks for the possibility of large gains. IPO's by investment companies
(closed end funds) usually contain underwriting fees which represent a load to buyers.

• Designed to provide access to funds on an ongoing basis

• Not advisable unless a minimum of $5 million is being raised, preferably $10 to $15 million
• Company needs to be relatively mature in terms of size, products, and financial life cycle
• Timing is important – premature start may mean failure to complete the offering

The IPO Phenomena:

.a. Over time the Indian equity markets have become a good capital raising avenue for Corporate India.
.b. Investors have benefited from investing in IPOs. (Primary Markets).
.c. Typical investor behavior is to IPOs on listing. This strategy has worked well over the last 3 years.
.d. Over 280 IPOs of more than 85000 Crores to hit the market in the next two years

For a retail investor, the advantages of investing in IPO funds are:

1.1. Mutual Funds can invest in IPOs by just paying the margin money: Retail investors have to invest 100%
of the application amount upfront while investing in an IPO, while a Mutual Fund, as a Qualified Institutional Buyer,
has to pay just the margin money (10% of the intended investment amount in IPOs).
2.2. Reserved Allotment for Mutual Funds: Investing in IPOs through a mutual fund provides more than just a
good chance of allotment as 5% of the QIB (Qualified Institutional Buyer) portion is reserved for Mutual Funds.
3.3. AMC’s does not pay short term capital gains tax while investors have to: An investor attempting to sell
his allotment without holding the investment for more than 1 year has to pay short term capital gains tax. The IPO
Fund will not have to pay short term capital gains tax.
4.4. Convenience: Investing in IPOs through a Mutual Fund is operationally more convenient as it saves the retail
investor the hassle of investing through cumbersome forms, waiting for allotment and/or getting the refund cheque.

AMC’s will seek to invest in as many IPOs as possible and may sell the allotment once the company is listed. This
strategy will allow the Fund to benefit from the prospective premium on listing of IPOs and also take advantage of the
increasing number of IPOs. This would minimize the fund management risk which would further benefit investors.

If the IPO that is invested in by the Fund does not list at a premium or if the Listing Price is lower than the Issue
Price, the Fund Manager has the option of holding the stock for 15 days post which he would sell the stock regardless
of whether it fetches a profit or loss. Any amount that is not invested by the fund into IPOs will be invested into the
NIFTY index.

Advantages of IPO
1.1. Provides liquidity for all existing shareholders
2.2. Provides new source of money immediately, and potential source of money for the future
3.3. Provides a higher profile for the company.

Investing in IPO’s has certain advantages but there are also certain limitations attached to it. These may
be for the investors or the company as a whole.

Some top fund managers in the industry agree that investing in IPOs just because they are being sold 'at par' is not the
correct strategy. The investor must look at whether the new product is needed for his portfolio. Most fund managers --
speaking on condition of anonymity -- agree that the spate of IPOs may end up doing more harm than good in the
long term. But they can't seem to resist the short -term favourable climate for mobilising assets. Thus, while on one
hand mutual funds are trying to 'educate' investors on prudent investing, on the other they are busy selling IPOs
hoping the investor is not educated enough to take a wise decision

The markets have gone up significantly and investors mentally feel that entering a fund at Rs10 is preferable to
buying funds at net asset values (NAVs) which are higher than Rs
10. Another point that needs to be made is that the Indian mutual fund industry has been restricted to few product
themes in the equity fund category

IPOs have done well because such launches involve a focused effort and become a
talking point for the sales force to go out and sell the new scheme.
Secondly, IPO launches are usually backed by heavy advertising and marketing spends,
which are otherwise not undertaken during the normal course of the year.
Lastly, the age-old mentality of investors with regard to IPOs still persists. They believe
they are purchasing units at a par value of Rs 10, whereas in reality the cash collected

will, in a rising market, only buy assets at a higher price compared to a scheme launched much earlier
Investors have not yet fully understood the importance of a consistent, top-quartile track record, which a new scheme
lacks, instead paying more attention to its supposedly 'lower' price. The high media spends undertaken by mutual
funds during IPOs tends to create better pull for the product. Distributors are better incentivised to sell new products
during their IPOs than they are to sell existing schemes.

Hence, the 'push' is also far higher. Also, mutual funds have entered a vicious circle, where, to prevent any
erosion in their retail investor base, they have to launch new schemes.

In an IPO, the sales machinery of the MF and its distributors are geared towards selling the maximum in a
minimum period of time. This typically helps build size faster and quicker. In the drive to increase assets under
management (AUM), this can be a very powerful invigorator.

Distributors will typically tend to sell what sells. Also, since the focus of the MF is on building asset size through
aggressive means, the distributor can drum up volumes at a higher margin than what he would do conventionally

Clearly, many investors are paying higher prices (through multiple loads) and earning less as they churn their
money across new and old funds.

MFs too lose out by not having steady, long-term money remaining in funds - the volatility of flows makes fund
management far more challenging. The long-term impact of this churning can result in lower returns to investors and
lower investor confidence in mutual funds (due to lower returns). Investor education is clearly the remedy to this
situation. Only a well-informed investor would be able to make the right choice based on his/her financial plan.

Some Other Disadvantages of IPO are

1.1. Expensive process
2.2. Best efforts only
3.3. Significant management time commitment to sell the IPO and to maintain a public company
4.4. Continuous disclosure
5.5. More accountability – compensation/failure to reach objectives
6.6. Escrow and pooling requirements
7.7. No guarantees that there is a market for shares
8.8. Management and systems must be ready

AN OVERVIEW ON INDIAN MARKET

Only four countries in the world (namely U.S.A., India, Romania and Canada) have more than three thousand listed
companies in their stock exchanges. In India, during 1990s alone, 3,537 companies got listed on the Bombay Stock
Exchange (BSE).

Today India INC is on a huge growth initiative which will see India INC raise over INR 80,000 cr over the next
3 years across sectors and market capitalisations.

Following are two statistical diagrams to explain the above stated statement:
Features generally observed in the respect of the IPO markets include:

1.1. Typically, IPO prices are below the level that they reach on the market a few days or weeks later, when more
public information is available (under pricing). However the extent of underpricing will narrow with several
companies coming up for listing.
2.2. Each IPO generates beneficial information externalities for other companies that are about to go public.
3.3. Privatized companies tend to list in public equity markets that offering better legal protection of shareholders.
4.4. The decisions to go public are affected by firms’ ownership structure. When company has only one owner or
when banks holds majority shares, companies are less likely to prefer public equity.

Deregulation of the cross border financial flows that particularly intensified the pace of portfolio and foreign direct
investment flows have greatly encouraged the growth of the public equity capital markets worldwide. Aided by
technology, design and distribution of innovative products and services, real time data generation and dissemination
enabled rapid growth of stock exchanges. The very forces of deregulation and globalization that enabled the public
equity capital markets to grow at astounding rates have also unleashed intense competition that generated alternatives
that now pose a great challenge to their future.
Boom and Slump Periods in the Indian IPO Market
Before going to the core issue of IPO boom let’s analyse the reasons for sudden spurt in IPO activity in Indian capital
markets. The Indian stock market had never had it so good. The benchmark BSE Sensex has gained almost 100%
from its lows in just under a year’s time. What are the factors that contributed to such a sharp rise in the stock prices
in India?

1) The turnaround in sales and profitability reported by corporates across industry

spectrum making the valuations very attractive. 2) Very well
distributed monsoon across the country. 3) Accelerated reforms and infrastructure development in the country. 4)
Sharp fall in interest rates leading people to shift some part of their assets from
debt to equity 5) Under ownership of stocks as an asset class in India; household savings in
equities was only about 2% in 2002.
6) Spurt in stock markets across the globe.
7) Huge inflow of FII money in Indian stocks.
8) Opening of global opportunities for Indian companies.

The economy itself has shown tremendous buoyancy in last one year. The so-called Hindu rate of growth of 4-5% is
behind us and we are witnessing GDP growing at more than 7%. The business confidence index is at its highest in last
decade. All these factors indicate enormous growth potential that exists in India. Opportunities in large infrastructure
projects and new businesses, hitherto unknown to Indians are now visible. For all this to materialize will require huge
amount of money to be invested in these businesses. While part of it will come through debt funding a substantial part
will also be raised through equity route. And that’s where the IPO boom is coming from.

Last three months, the Indian Capital Market witnessed a slew of IPOs. As a retail investor one had to spend a lot of
time and energy in filling up the mammoth forms every third day. This trend is bound to continue with more IPO’s
planned in the Financial Year 2004-2005.At this juncture it is difficult to say whether Stock Market is shining or not
but definitely the printing industry related to IPO’s are shining. In the present days when a depository account is
mandatory for applying for an IPO account, one is at a loss to understand as to why there is huge data redundancy in
the entire systems this one way of creating employment generation and more business to registrar?
Previous performance of IPO
Indian companies, enthused by the strong growth in domestic demand as well as increasing opportunities in the global
marketplace, are increasingly looking at the capital markets to fund their growth plans. In the years 2004 – 2005 more
than 90% of the equity IPOs have given above average returns compare to other investment products & secondary
market. Year 2005 promises another good year for equity IPO’s with growing Indian economy & increasing
awareness towards Indian Equity’s among Indian & global investors.

• Year 2004 generated Rs 30,511 crore, which is the highest-ever in the history of the Indian capital market.
• The issues slated to hit the markets are across sectors - Oil & gas, Telecom, Power, Chemicals, Banking,
Technology, Finance, Infrastructure and even Aviation.
• Public issues lined up to hit the markets in 2005 include follow-on offers from PSUs like BHEL, Neyveli
Lignite, ONGC, RCF and SCI.
• As far as sectors go, the telecom sector will see lots of action in 2005. Telecom companies like BPL Comm.,
Hutch, Idea, Reliance Info & Tata Tele are expected to come out with IPOs.
• Other issues are likely are AB Corp, Air Deccan, Yes Bank, Fortis Healthcare, GE Capital International,
IL&FS Investsmart, MTR Foods, Shantha Biotech, Shoppers' Stop & Sify.
• The good news is tat 2005 promises to be equally good, if not better.
During 2003-04, eleven IPOs were listed on NSE of different sectors viz., Media and Entertainment, Finance,
Information Technology, Pharmaceuticals and Manufacturing. The market price of almost all the IPOs appreciated
quite substantially on the first day of listing/ trading itself against their issue price. The price of Indraprastha Gas
Limited rose by a whopping 148.75%, followed by TV Today Networks Limited (91.74%) and UCO Bank (63.33%).
For few IPOs like Vardhaman Acrylics Limited, BAG Films Limited, Surya Pharmaceuticals Limited, Patni
Computers Systems Limited and Petronet LNG Limited, the prices depreciated by end March 2004 (Table 2-6).

As quoted in the RBI annual report 2003-04, “empirical evidence regarding the variation of IPO share prices for the
period 2001-02 to 2003-04 indicates that share prices of about 75% IPOs improved upon listing. The variation was
measured as the percentage change between the offer price and the market price of the scrip’s after six months.
Stringent entry and disclosure norms introduced by the SEBI have had a significant impact on the quality of issues
entering the market as well as their post-listing performance”.

Return of IPO over the past few years:

From the following diagram, we can compare the number of IPO’s launched over the last three years and also the
returns (in %) (ie. Listing – issue price) over the same period. We can see that in 2004 and 2005, the number of IPO’s
launched were 21, while in 2006, the number has almost tripled to 60. the increase in the number of IPO’s has been
massive.

For the returns factor, the scene does not seem that favourable. In 2004, the average return from IPO’s was 45% with
the maximum being 209%. In 2005, the average return was 39%, which dropped further in 2006 to 35%. The reasons
for the decline in returns in 2006 may be attributed to the global as well as domestic market fall. The sensex rose as
well as fell by great points leaving a significant impact on sentiments of people. The fall in the global markets
resulted in decline in the returns from the offers.

Returns = Listing – Issue Price

Average returns from IPOs have been steady and have no relationship to the state of the market or the number of
IPOs.

IPO Returns Vs Nifty

 SWOT ANALYSIS OF IPO FUNDS IN INDIA STRENGTHS:
• Reserved allotment for mutual funds
• Consistent performance – IPO’s have delivered average returns over the past three years

WEAKNESSES:

• Investors invest in IPOs just because they can buy 'at par' is not the correct
strategy.

• Most fund managers feel the spate of IPOs may end up doing more harm than good in the long term.
• Investors have to look at top-quartile track record, which a new scheme lacks, instead looking at 'lower' price.
• Investor education is the only remedy

OPPORTUNITIES:

• Opening of global opportunities for Indian companies.

• Accelerated reforms and infrastructure development in the country.

THREATS:

• Negative listings, whereby, the listing price is less than the actual price and the investor suffers a loss
• Issue quality may not be of standard quality, ie. A company that you might consider good may not turn out as
expected.
• Wrong pricing – the prices at which the IPO is launched may not be set properly or keeping all considerations
in mind. This may lead to a huge loss for the company.

IPO strategy for investors

The dilemma for an IPO investor is to decide whether to buy the issue & hold it for some time or go for listing
gains. Experts say both strategies are valid, but one should make up one's mind on whether one wants to invest in a
company for the long term or just want to participate for quick gains. Considering the listing gains made by most
stocks that got listed last year, going for listing gains does make sense. Dishman Pharma (209% premium on listing)
and Power Trading Corp (179 %) are classic examples. But if you had opted merely for listing gains, you would have
missed out on the rest of journey. At current market prices, Dishman Pharma is up 252% & PTC up 298%. Indiabulls,
for example, had a premium of 25% on listing but now its price has gone up by 328%.
Performance snapshot
IPO Price Latest Price Listing Gain/(Loss) Gain/(Loss)
Company
(Rs) (Rs) Date % % (A)
31-Mar-
Gateway Dist 72 123 71 2165
05
24-Sep-
India Bulls 19 115 503 917
04
30-Dec-
Bharti Shipyard 66 148 124 438
04
07-Apr-
PTC 16 48 200 198
04
19-May-
NDTV 70 182 160 178
04
14-Mar-
Jet 1100 1251 14 173
05
26-Mar-
Petronet LNG 15 42 179 171
04
25-Aug-
TCS 850 1381 62 99
04
17-Mar-
UTV 130 139 7 99
05
11-Nov-
NTPC 62 85 37 89
04
Indoco 14-Jan-
245 297 21 88
Remedies 05
25-Feb-
PCS 230 355 54 48
04
22-Apr-
ICICI Bank 280 408 46 47
04
Bank of 12-Apr-
23 33 45 45
Maharashtra 04
07-Apr-
Biocon 315 421 34 33
04
08-Apr-
ONGC 713 885 24 24
04
25-Mar-
GAIL 176 212 21 20
04
27-Mar-
PNB 390 393 1 19
05

Book Building - About Book Building

Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand
discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where,
during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are
above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price
is then determined after the bid closing date based on certain evaluation criteria.

The Process:

1.1. The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.
2.2. The Issuer specifies the number of securities to be issued and the price band for orders.
3.3. The Issuer also appoints syndicate members with whom orders can be placed by the investors.
4.4. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This
process is called 'bidding' and is similar to open auction.
5.5. A Book should remain open for a minimum of 5 days.
6.6. Bids cannot be entered less than the floor price.
7.7. Bids can be revised by the bidder before the issue closes.
.8. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation
criteria which may include -
.a. Price Aggression
.b. Investor quality
.c. Earliness of bids, etc.

1.9. The book runner and the company conclude the final price at which it is willing to issue the stock and
allocation of securities.
2.10. Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered
through the book building process.
3.11. Allocation of securities is made to the successful bidders.
4.12. Book Building is a good concept and represents a capital market which is in the process of maturing.

In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer
company can issue securities in the following manner:

a. 100% of the net offer to the public through the book building route.
b. 75% of the net offer to the public through the book building process and 25%
through the fixed price portion.
c. Under the 90% scheme, this percentage would be 90 and 10 respectively.

Difference between shares offered through book building and offer of shares through normal public issue

Features Fixed Price process Pricing
Price at which the securities are
offered/allotted is known in advance to the
investor. Demand Demand for the
securities offered is known only after the
closure of the issue Payment Payment if
made at the time of subscription wherein
refund is given after allocation.
Book Building process Price at which
securities will be offered/allotted is not
known in advance to the investor. Only
an indicative price range is known.
Demand for the securities offered can be
known everyday as the book is built.
Payment only after allocation.
IPO Grading

IPO grading (initial public offering grading) is a service aimed at facilitating the assessment of equity issues
offered to public. The grade assigned to any individual issue represents a relative assessment of the
‘fundamentals’ of that issue in relation to the universe of other listed equity securities in India. Such grading is
assigned on a five-point point scale with a higher score indicating stronger fundamentals.

Requirement for IPO grading

SEBI has been taking a pioneering role in investor protection by increasing disclosure levels by entities seeking to
access equity markets for funding. This has caused India to be amongst one of the more transparent and efficient
capital markets in the world. However, these disclosures demand fairly high levels of analytical sophistication of the
reader in order to effectively achieve the goal of information dissemination.

IPO grading is positioned as a service that provides ‘an independent assessment of fundamentals’ to aid comparative
assessment that would prove useful as an information and investment tool for investors. Moreover, such a service
would be particularly useful for assessing the offerings of companies accessing the equity markets for the first time
where there is no track record of their market performance. As mentioned above, the IPO grade assigned to any issue
represents a relative assessment of the ‘fundamentals’ of that issue in relation to the universe of other listed equity
securities in India. This grading can be used by the investor as tool to make investment decision. The IPO grading will
help the investor better appreciate the meaning of the disclosures in the issue documents to the extent that they affect
the issue’s fundamentals. Thus, IPO grading is an additional investor information and investment guidance tool.

Credit Rating agencies (CRAs) registered with SEBI will carry out IPO grading. SEBI does not play any role in the
assessment made by the grading agency. The grading is intended to be an independent and unbiased opinion of that
agency. IPO grading is optional.

It is intended that IPO fundamentals would be graded on a five point scale from grade 5 (indicating strong
fundamentals) to grade 1 (indicating poor fundamentals). The grade would l read as:" Rating Agency name " IPO
Grade 1 viz CARE IPO Grade 1, CRISIL IPO Grade 1 etc.

The assigned grade would be a one time assessment done at the time of the IPO and meant to aid investors who are
interested in investing in the IPO. The grade will not have any ongoing validity.

CRAs have to forward the names and details of IPOs graded by them on monthly basis to SEBI/ Stock Exchanges for
uploading on their website for public information. As such the company which has opted for IPO grading, does not
have a choice in accepting or rejecting the grade. The IPO grading given by CRAs, shall form part of the prospectus
for the IPO.

For getting its IPO graded, the company needs to first contact one of the grading agencies and mandate it for the
grading exercise.

The agency would then follow the process outlined below.

1.1. Seek information required for the grading from the company.
2.2. On receipt of required information, have discussions with the company’s management and visit the company’s
operating locations, if required.
3.3. Prepare an analytical assessment report
4.4. Present the analysis to a committee comprising senior executives of the concerned grading agency. This
committee would discuss all relevant issues and assign a grade
5.5. Communicate the grade to the company along with an assessment report

outlining the rationale for the grade assigned. Though this process will ideally require 2-3 weeks for
completion, it may be a good idea for companies to initiate the grading process about 6-8 weeks before the
 targeted IPO date to provide sufficient time for any contingencies.

Difference between an investment recommendation and an IPO grading

Investment recommendations are expressed as ‘buy’, ‘hold’ or ‘sell’ and are based on a security specific
comparison of its assessed ‘fundamentals factors’ (business prospects, financial position etc.) and ‘market
factors’ (liquidity, demand supply etc.) to its price. On the other hand, IPO grading is expressed on a five-
point scale and is a relative comparison of the assessed fundamentals of the graded issue to other listed equity
securities in India. As the IPO grading does not take cognizance of the price of the security, it is not an
investment recommendation. Rather, it is one of the inputs to the investor to aiding in the decision making
process. All other things remaining equal, a security with stronger fundamentals would command a higher
market price.

What to look at when investing in an IPO?

1.1. Take a view on the market: The equity market decides the price of a stock and fundamentals in the short-
term play only a 30-40% part in the valuation of a stock. If markets are on a sharp uptrend in the recent past and the
rally looks suspect, one could avoid a IPO, however good it may be. The listing price depends on the market when the
stock lists and not the market today.
2.2. Research the stock: Adequate research is, without a doubt, the most effective way to identify and stay away
from the IPO disasters waiting to happen. The prospectus, which contains nearly all aspects of a company's business
and game plan, is the first place any investor interested in purchasing a new issue should look. Getting a prospectus is
easy. If you're reading this online, you should be able to electronically download a prospectus without any problem.
Prospectuses for all Indian companies are available for free from the Securities and Exchange Board of India's Web
site, www.sebi.gov.in. A abridged portion of the prospectus is also available with the form. Companies have to be
completely honest about all of their warts in order to avoid future lawsuits. Thus, bullish statements are often
followed by cautionary

disclaimers, and there's an entire section titled "Risk Factors" dedicated to what may go wrong at the
company. Before you get scared off from investing in an IPO, however, you should realize that many of these
risk factors and disclaimers are included in every prospectus. Litigations, key patent challenges and
indebtedness are risks that should not be ignored.

Following is a list of some warning signs that prospective IPO investors should pay close attention to. In
general, they're listed in order of where one would find them in the prospectus, from the front of the document to the
end.

.a. Investment Banker: A well known name helps.

.b. Business and Strategy: This is contained in the summary portion of the offer document. A key factor to
consider is the attractiveness of the industry that the company operates in. A company in a growth sector in which
there are few listed stocks is attractive if at the right price. Competition and small market share in a fiercely
competitive sector is a negative for the company. Also, overreliance on a few and large customers is a danger as these
customers can switch or put pressure on margins and hence earnings.
.c. Financials: Look at summary financials especially book value, earnings per share, dividend payment track-
record, debt to equity. Also, check for declining revenues or margins. High working capital is a negative signal.
.d. Promoters Holding & Equity History: A background check on the promoters and history of other group
companies is very helpful. Also, one needs to look for any issue of shares to promoters in the last one-year and the
price of the issue.
.e. Objects of the issue: Is the money for the use of the company or is the promoter offloading his/her shares. If
the money goes to the company it helps the shareholders in the form of future growth. If the object of the issue is to
fund working capital, avoid the issue. Ditto for repayment of loans.
.f. Valuations: Comparison of P/E, P/BV and dividend yield with other companies in the industry helps. Data on
competitors is available in a prospectus or can be obtained from sites of exchanges - www.bseindia.com or
www.nseindia.com. Valuations hold the key. Sometimes not much is left on the table for investors, especially if the
promoter is trying to offload his/her share.

3. Look at demand: A good IPO will have huge amount of over-subscribtions. Allocations could vary from
zero to very low. Hence, while one could make phenomenal profits on the allocation, one may not make a
decent return on one's investment.

Above all one must remember that the investment in equities and equities are risky - one must be
ready to loose money.

The IPO mechanism:

The IPO market has made enormous progress in recent years, moving away from fixed-price offerings to price
discovery through a screen-based auction. This has reflected a quest to discover the price through an open, fair,
competitive auction, which is done in a fully transparent way, where all investors participate in an equal setting, and
the investment bankers’ or other influences do not vitiate the allocation of shares. These attributes are similar to the
secondary market, where all kinds of investors participate in a unified, competitive process of price discovery
unengineered by interested parties. Till recently, mutual funds registered with Securities and Exchange Board of India
(SEBI) in terms of SEBI (Mutual Funds) Regulation were not given any separate allocation within the Qualified
Institutional Buyer (QIB) category in case of book-built issues. The guidelines were amended in September 2005 to
provide for a specific quota of 5 per cent to the mutual funds within the category of QIBs. This will help ensure
minimal sale of shares to mutual funds in IPO auctions. Recent events have revealed individual investors placing
multiple bids in the IPO auctions, in order to benefit from the quota that has been made available to individual
investors. While the full investigation is still underway, this experience emphasises the need to shift away from a
system of quotas to a nondiscretionary price discovery through a unified auction, in a framework which is close to the
price discovery of the secondary market. Till recently, the allotment to QIBs was decided by the Issuer Company in
consultation with the Book Running Lead Managers (BRLMs). In an attempt to shift towards non-discretionary,
competitive price discovery through a pure auction process, the discretionary allotment system for QIBs has been
withdrawn. The SEBI Board has granted ‘in principle’ approval for introduction of optional “grading” of public issues
by unlisted companies (viz. IPOs) by credit rating agencies registered with SEBI. The rating is intended to be an
independent and unbiased opinion of the credit rating agency about the likelihood of positive returns for the investor
between purchase at the IPO and sale on the secondary market. If the issuer pays for the rating, this introduces
conflicts of interest. Hence, the cost of IPO grading is sought to be passed on to stock exchanges and the Investor
Education and Protection Fund (IEPF).

CONCLUSION AD RECOMMENDATION:

The Indian Capital Market witnessed a slew of IPOs in the last few months. As a retail investor one had to spend a lot
of time and energy in filling up the mammoth forms every third day. This trend is bound to continue with more IPO’s
planned in the Financial Year 2004-2005. At this juncture it is difficult to say whether Stock Market is shining or not
but definitely the printing industry related to IPO’s are shining. The benchmark BSE Sensex has gained almost 100%
from its lows in just under a year’s time. Some of the factors that contributed to such a sharp rise in the stock prices in
India are given below. This is the present scenario in the country and hence will help I the success of IPO’s in the
future time period:
• The turnaround in sales and profitability reported by corporates across industry spectrum making the
valuations very attractive.
• Accelerated reforms and infrastructure development in the country.
• Sharp fall in interest rates leading people to shift some part of their assets from debt to equity
• Spurt in stock markets across the globe.
• Huge inflow of FII money in Indian stocks.
• Opening of global opportunities for Indian companies.
• Rapid industrial growth and GDP growing at more than 7%
According to the present scenario, the prospects of IPO’s in Indian Mutual Fund Industry in the future look bright and
successful. If the conditions remain favourable then IPO’s will continue with their success story in India.