CHAPTER-I

INTRODUCTION
1.1 ABOUT THE STUDY A mutual fund is a professionally-managed type of collective investment

scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. In the United States, a mutual fund is registered with the Securities and Exchange Commission (SEC) and is overseen by a board of directors (if organized as a corporation) or board of trustees (if organized as a trust). The board is charged with ensuring that the fund is managed in the best interests of the fund's investors and with hiring the fund manager and other service providers to the fund. The fund manager, also known as the fund sponsor or fund management company, trades (buys and sells) the fund's investments in accordance with the fund's investment objective. A fund manager must be a registered investment advisor. Funds that are managed by the same fund manager and that have the same brand name are known as a "fund family" or "fund complex". The Investment Company Act of 1940 (the 1940 Act) established three types of registered investment companies or RICs in the United States: open-end funds, unit investment trusts (UITs); and closed-end funds. Recently, exchange-traded funds (ETFs), which are open-end funds or unit investment trusts that trade on an exchange, have gained in popularity. While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-end type

Hedge funds are not considered a type of mutual fund. While they are another type of commingled investment scheme, they are not governed by the Investment Company Act of 1940 and are not required to register with the Securities and Exchange Commission (though many hedge fund managers now must register as investment advisors.

Mutual funds are not taxed on their income as long as they comply with certain requirements established in the Internal Revenue Code. Specifically, they must diversify their investments, limit ownership of voting securities, distribute most of their income to their investors annually, and earn most of the income by investing in securities and currencies.[2] Mutual

funds pass taxabl income on to t ei investors. The t pe of income they earn is unchanged as it passes through to the shareholders. For example, mutual fund distributions of dividend income are reported as dividend income by the investor. There is an exception: net losses incurred by a mutual fund are not distributed or passed through to fund investors. Outside of the United States, mutual fund is used as a generic term for various types of collective investment vehicles available to the general public, such as unit trusts, open-ended investment companies uniti ed insurance funds, UC TS (Undertakings for Collective Investment in Transferable Securities " and SIC Vs

1.2 What is mutual fund schemes

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. It offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes bro dly the a working of a mutual fund:

These Trusts are run by experienced Investment Managers who use their knowledge and expertise to select individual securities, which are classified to form portfolios that meet predetermined objectives and criteria. These portfolios are then sold to the public. They offer the investors the following main services:

Portfolio Diversification

Marketability: A new financial asset is created that may be more easily marketable

than the underlying securities in the portfolio.

1.3 Organization o a Mutual Fund

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 unit holders. 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.

1.4 Types o mutual funds

There are three basic types of registered investment companies defined in the Investment Company Act of 1940: open-end funds, unit investment trusts (UITs); and closed-end funds. exchange-traded funds (ETFs)are open-end funds or unit investment trusts that trade on an exchange.  Open-end funds Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value. A

professional investment manager oversees the portfolio, buying and selling securities as appropriate.  Closed-end funds Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on an exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from net asset value. It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or, more commonly, at a "discount" to net asset value (meaning that it is lower than net asset value). A professional investment manager oversees the portfolio, buying and selling securities as appropriate.

 Unit investment trusts Unit investment trusts or UITs issue shares to the public only once, when they are created. Investors can redeem shares directly with the fund (as with an open-end fund; they may also be able to sell their shares in the market. Unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT and does not change. UITs generally have a limited life span, established at creation.

 Exchange-traded funds A relatively recent innovation, the exchange-traded fund or ETF is often structured as an open-end investment company, though ETFs may also be structured as unit investment trusts, partnerships, investments trust, grantor trusts or bonds (as an exchange-traded note). ETFs combine characteristics of both closed-end funds and open-end funds. Like closed-end funds, ETFs are traded throughout the day on a stock exchange at a price determined by the market. However, as with open-end funds, investors normally receive a price that is close to net asset value. To keep the market price close to net asset value, ETFs issue and redeem large blocks of their shares with institutional investors. Most ETFs are index funds.

 Index fund Index funds invest in securities to mirror a market index, such as the S&P 500. An index fund buys and sells securities in a manner that mirrors the composition of the selected index. The fund's performance tracks the underlying index's performance. Turnover of securities in an index fund's portfolio is minimal. As a result, an index fund generally has lower management costs than other types of funds.  Growth fund A growth fund invests in the stock of companies that are growing rapidly. Growth companies tend to reinvest all or most of their profits for research and development rather than pay dividends. Growth funds are focused on generating capital gains rather than income.  Value fund This is a fund that invests in "value" stocks. Companies rated as value stocks usually are older, established businesses that pay dividends.  Sector fund A fund that invests in one area of industry is called a sector fund. Most sector funds have a minimum of 25% of their assets invested in its specialty. These funds offer high appreciation potential, but may also pose higher risks to the investor. Examples include gold funds (gold mining stock), technology funds, and utility funds.  Income fund An equity income fund stresses current income over growth. The funds objective may be accomplished by investing in the stocks of companies with long histories of dividend payments, such as utility stocks, blue-chip stocks, and preferred stocks. Option income funds invest in securities on which options may by written and earn premium income from writing options. They may also earn capital gains from trading options at a profit. These funds seek to increase total return by adding income generated by the options to appreciation on the securities held in the portfolio.

 Balanced fund Balanced Funds invest in stocks for appreciation and bonds for income. The goal is to provide a regular income payment to the fund holder, while increasing its principal...

 Asset allocation fund These funds split investments between growth stocks, income stocks/bonds, and money market instruments or cash for stability. Fund advisers switch the percentage of holdings in each asset category according to the performance of that group. Example: A fund may have 60% invested in stocks, 20% in bonds, and 20% in cash or money market. If the stock market is expected to do well, that could switch to 80% stocks, and 10% each in both bond and cash investments. Conversely, if the stock market is expected to perform poorly, the fund would decrease its stock holdings.  Fund of funds "Fund of funds" implies that the assets of a fund are other funds. The other funds may be stock funds, in which case the original fund can be called "fund of stock funds". See fund of funds.  Hedge funds "Hedge fund" is a legal structure. Hedge funds often trade stocks, but may trade or invest in anything else depending on the fund. This is done to reduce the risk of investments in stocks.

1.5 Benefits of Mutual fund

1.5.1 Professional Management

Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

1.5.2 Diversification

Mutual Funds invest in a number of companies across a broad cross section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.

1.5.3 Affordability

A mutual fund invests in a portfolio of assets, i.e. bonds, shares etc. depending upon the investment objective of the scheme. An investor can buy into a portfolio of equities, which would otherwise be extremely expensive.

1.5.4 Tax Benefits Any income distributed after March 31, 2002 will be subject to tax in the assessment of all unit-holders. However, as a measure of concession to Unit holders of open ended and equity oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10%.

1.5.5 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.

1.5.6 Low Costs

Investing in the capital markets because the benefits of scale in brokerage, mutual funds are a relatively less expensive way to invest compared to directly custodial and other fees translate into lower costs for investors.

1.5.7 Liquidity

In open ended schemes, the investor gets the money back promptly at MA

related prices

from the mutual fund. In closed ended schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NA related prices by the mutual fund.

1.5.8 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 managers investment strategy and outlook.

1.5.9 Flexibility

Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

1.5.10 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. 1.5.11 Tax breaks Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor.

They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase yo ur purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability. Whats more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. You can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year 1.5.12 No assured returns and no protection of capital If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India). There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. This is because most closed -end funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch, resulting in losses to investors.

1.5.13 Restrictive gains Diversification helps, if risk minimization is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security. In our earlier example, say, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation. 1.6 Risk Associated with Mutual Fund

Credit

Political

inflation

RISKS Liquidity Market

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

1.6.2 Market Risk

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

1.6.3 Credit Risk The debt servicing ability 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.

1.6.4 Inflation Risk Inflation is the loss of purchasing power over a time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principal could, at the time of investment. A welldiversified portfolio with some investment in equities might help mitigate this risk.

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

1.6.6 Political Risk Changes in government policy and political decision can change the investment environment. They can create a favourable environment for investment or vice versa.

1.6.7 Liquidity Risk Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. It can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.). This kind of a diversification may add to the stability of your returns, for example, during one period of time equities might under perform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity Markets.

1.7 DISADVANTAGES OF MUTUAL FUNDS

There are certainly some benefits to mutual fund investing, but you should also be aware of the drawbacks associated with mutual funds. 1.7.1 No Insurance: Mutual funds, although regulated by the government, are not insured against losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible (although extremely unlikely) that you could even lose your entire investment. 1.7.2 Dilution: Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly. 1.7.3 Fees and Expenses: Most mutual funds charge management and operating fees that pay for the fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell . 1.7.4 Poor Performance: Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of critics now question whether or not professional money managers have better stock-picking capabilities than the average investor. 1.7.5 Loss of Control: The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for you when trying to manage your portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for you. You

also should remember that you are trusting someone else with your money when you invest in a mutual fund. 1.7.6 Trading Limitations: Although mutual funds are highly liquid in general, most mutual funds (called open-ended funds) cannot be bought or sold in the middle of the trading day. You can only buy and sell them at the end of the day, after they've calculated the current value of their holdings. 1.7.7 Size: Some mutual funds are too big to find enough good investments. This is especially true of funds that focus on small companies, given that there are strict rules about how much of a single company a fund may own. If a mutual fund has $5 billion to invest and is only able to invest an average of $50 million in each, then it needs to find at least 100 such companies to invest in; as a result, the fund might be forced to lower its standards when selecting companies to invest in. 1.7.8 Inefficiency of Cash Reserves: Mutual funds usually maintain large cash reserves as protection against a large number of simultaneous withdrawals. Although this provides investors with liquidity, it means that some of the fund's money is invested in cash instead of assets, which tends to lower the investor's potential return. Different Types: The advantages and disadvantages listed above apply to mutual funds in general. However, there are over 10,000 mutual funds in operation, and these funds vary greatly according to investment objective, size, strategy, and style. Mutual funds are available for virtually every investment strategy (e.g. value, growth), every sector (e.g. biotech, internet), and every country or region of the world. So even the process of selecting a fund can be tedious.

Net Asset Value (NAV)Open-end mutual funds price their shares in terms of a Net Asset alue (NA ) (note that you can calculate NA for a closed-end fund too, but it will not is calculated by

necessarily be the price at which you buy or sell closed-end shares). NA

adding up the market value of all the fund's underlying securities, subtracting all of the fund's liabilities, and then dividing by the number of outstanding shares in the fund. The resulting NA per share is the price at which shares in the fund are bought and sold (plus or minus any sales fees). Mutual funds only calculate their NA s once per trading day, at the close of the trading session.

1.8 Corporate Profile

1.8.1 SBI Mutual fund With over 24 years of rich experience in fund management, we at SBI Funds Management Pvt. Ltd. bring forward our expertise by consistently delivering value to our investors. We have a strong and proud lineage that traces back to the State Bank of India (SBI) - India's largest bank. We are a Joint enture between SBI and Socit Generale Asset Management (France), one of the world's leading fund management companies, managing over US$ 500 Billion. With our network of over 200 points of acceptance across India, we deliver value and nurture the trust of our vast and varied family of investors. Excellence has no substitute. And to ensure excellence right from the first stage of product development to the post-investment stage, we are ably guided by our philosophy of growth through innovation and our stable investment policies. This dedication is what helps our customers achieve their financial objectives.
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SBI Mutual Fund is Indias largest bank sponsored mutual fund and has an enviable track record in judiciou s investments and consistent wealth creation. The fund traces its lineage to SBI - Indias largest banking enterprise. The institution has grown immensely since its inception and today it is India's largest bank, patronised by over 80% of the top corporate houses of the country. SBI Mutual Fund is a joint venture between the State Bank of India and Socit Gnrale Asset Management, one of the worlds leading fund management companies that manages over US$ 500 Billion worldwide.

Exploiting expertise, compounding growth

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In twenty years of operation, the fund has launched 38 schemes and successfully redeemed fifteen of them. In the process it has rewarded it's investors handsomely with consistent returns. A total of over 5.8 million investors have reposed their faith in the wealth generation expertise of the Mutual Fund. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors and HNIs. Today, the fund manages over Rs. 42,100 crores of assets and has a diverse profile of investors actively parking their investments across 38 active schemes. The fund serves this vast family of investors by reaching out to them through network of over 130 points of acceptance, 29 investor service centers, 59 investor service desks and 6 Investor Service Points. SBI Mutual is the first bank-sponsored fund to launch an offshore fund Resurgent India Opportunities Fund. Growth through innovation and stable inv estment policies is the SBI MF credo.

1.8.2 Our Services 1.8.2.1 Mutual Funds Investors are our priority. Our mission has been to establish Mutual Funds as a viable investment option to the masses in the country. Working towards it, we developed innovative, need-specific products and educated the investors about the added benefits of investing in capital markets via Mutual Funds. Today, we have been actively managing our investor's assets not only through our investment expertise in domestic mutual funds, but also offshore funds and portfolio management advisory services for institutional investors. This makes us one of the largest investment management firms in India, managing investment mandates of over 5.5 million investors. 1.8.2.2 Portfolio Management and Advisory Services SBI Funds Management has emerged as one of the largest player in India advising various financial institutions, pension funds, and local and international asset management companies. We have excelled by understanding our investor's requirements and terms of risk / return expectations, based on which we suggest customized asset portfolio recommendations. We also provide an integrated end-to-end customized asset management solution for institutions in terms of advisory service, discretionary and non-discretionary portfolio management services.

1.8.2.3 Offshore Funds SBI Funds Management has been successfully managing and advising India's dedicated offshore funds since 1988. SBI Funds Management was the 1st bank sponsored asset management company fund to launch an offshore fund called 'SBI Resurgent India Opportunities Fund' with an objective to provide our investors with opportunities for longterm growth in capital, through well-researched investments in a diversified basket of stocks of Indian Companies.

1.9 GUIDING PRINCIPLES OF SBI MUTUAL FUND: 1.9.1 Consistency alue oriented investment philosophy is designed to produce consistent results aiming to beat the benchmark at all times. 1.9.2 Flexibility Offers investors a broad range of managed investment products in various asset classes and risk parameters, within the at most operational flexibility to suit their investment needs. 1.9.3 Stability Our commitment to the highest quality of service and integrity are the foundation upon which clients can build their trust with us

1.10 Team Members Board of Directors - AMC

Mr. Pratip Chaudhuri Chairman & Associate Director Mr. Jayesh Gandhi Independent Director

Mr. Deepak Kumar Chatterjee Managing Director

Mr. Rajas R. Doshi Independent Director

Mrs. Madhu Dubhashi Independent Director

Mr.R.Sridharan Associate Director

Dr. H. K. Pradhan Independent Director Mr. Didier Turpin Alternate Director to Mr. Mazoyer

Mr. Jean-Paul Mazoyer Associate Director

Management Team
Mr. Deepak Kumar Chatterjee MD & CEO Mr. Didier Turpin Deputy CEO

Mr. K. T. Ravindran Chief Operating Officer Ms. Aparna Nirgude Chief Risk Officer Ms. inaya Datar CS & Compliance Officer

Mr. Navneet Munot Chief Investment Officer Mr. R. S. Srinivas Jain Chief Marketing Officer Mr. . . Anand Executive ice President (SBG Marketing)

Mr. Rakesh Kaushik Mr. C. A. Santosh Senior ice President (Accounts,Chief Manager - Customer Service Administration & Customer Service)

Investment Team
Navneet Munot Chief Investment Officer

Erwan Keraudy P Investments

Fund Managers - Equity

R. Srinivasan Senior Fund Manager Sohini Andani Head of Research Ajit Dange Fund Manager Raviprakash Sharma Chief Dealer & Fund Manager Fund Managers - Fixed Income Dinesh Ahuja Fund Manager Rajeev Radhakrishnan Fund Manager Jayesh Shroff Fund Manager Dharmendra Grover Senior Fund Manager Suchita Shah Fund Manager & Dealer Neeraj Kumar Dealer

Portfolio Management Services

Nipa Ladiwala Head PMS (Institutional) Richard DSouza Fund Manager PMS (Retail) Aashish Wakankar ice President & Senior Fund Manager PMS (Offshore) Amruth Rao Senior Fund Manager PMS (Debt)

Trustees
SBI Mutual Fund Trustee Company Private Limited (the Trustee), through its Board of Directors discharge its obligations as Trustee of the SBI Mutual Fund. The Board of Directors of SBI Mutual Fund Trustee Company Private Limited are as under: Ms. Bharati Dr. Malati Anagol Rao Independent Associate Ms. Sandra Martyres Associate Shri Rajkumar S. Adukia Independent

Shri T.L. Palani Kumar Independent

Shri C.M. Dixit Independent