1. INTRODUCTION 1.1 INTRODUCTION Investors are confronted with the problem of choosing the best investment opportunities in the financial market in order to earn higher return for their investments. The complexities of financial market can be dealt with certain intuitions with sound technical back ground. A small investor cannot afford to invest sizeable amount to maintain their position in fact with market conditions. A mutual fund foresees market conditions and invests substantial funds collected from the pool of investors. Whatever be the type of investor there is a mutual fund that fits everyone. It is important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk- it's never possible to diversify away all risk. This is a fact for all investments. Each fund has a predetermined investment objective that tailors the fund's assets, sectors of investments, and investment strategies.
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1. INTRODUCTION
1.1 INTRODUCTION
Investors are confronted with the problem of choosing the best investment
opportunities in the financial market in order to earn higher return for their
investments. The complexities of financial market can be dealt with certain
intuitions with sound technical back ground. A small investor cannot afford to
invest sizeable amount to maintain their position in fact with market conditions. A
mutual fund foresees market conditions and invests substantial funds collected
from the pool of investors.
Whatever be the type of investor there is a mutual fund that fits everyone.
It is important to understand that each mutual fund has different risks and
rewards. In general, the higher the potential return, higher the risk of loss.
Although some funds are less risky than others, all funds have some level of risk-
it's never possible to diversify away all risk. This is a fact for all investments.
Each fund has a predetermined investment objective that tailors the fund's
assets, sectors of investments, and investment strategies.
All mutual funds are varying based on their asset classes. For example,
while equity funds that invest in fast-growing companies are known as growth
funds, equity funds that invest only in companies of the same sector or region are
known as specialty funds. Hence Mutual Funds have their own risk and return
potential.
There are a number of investment options available in the economy. But
there are some investment options available that provides both saving benefit
and return benefits particularly tax benefits. Hence it becomes necessary to
study the investment option which gives maximum benefits to the investor
1.2 STATEMENT OF PROBLEM
Mutual funds could not survive in the early years of inception and went
dark. The initiation made by the government results in the development of Mutual
fund growth in the economy. At the same time the products by Insurance
companies prevail as a good investment option for the investors from the early
periods. Hence the growth of economy made opportunity available to the
investors. The government of India encouraged public sector mutual Funds, set
up public sector Banks and Insurance Corporation. It was not sufficient to
mobilize potential investment and it promoted the private sector Mutual Funds in
1993. Hence there are dozens of leading Mutual funds and Insurance
Companies in the economy. Therefore it is worth while to measure the
performance and benefits to the investors. Such comparison will bring to light any
loopholes in the present system and to offer such suggestions based on such
comparison.
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2. COMPANY PROFILE
HDFC STANDARD LIFE INSURANCE
HDFC and Standard Life first came together for a possible joint venture, to
enter the Life Insurance market, in January 1995. It was clear from the outset
that both companies shared similar values and beliefs and a strong relationship
quickly formed. In October 1995 the companies signed a 3-year joint venture
agreement.
Around this time Standard Life purchased a 5% stake in HDFC, further
strengthening the relationship. The next three years were filled with uncertainty,
due to changes in government and ongoing delays in getting the IRDA
(Insurance Regulatory and Development authority) Act passed in parliament.
Despite this both companies remained firmly committed to the venture.
In October 1998, the joint venture agreement was renewed and additional
resource made available. Around this time Standard Life purchased 2% of
Infrastructure Development Finance Company Ltd. (IDFC). Standard Life also
started to use the services of the HDFC Treasury department to advise them
upon their investments in India.
Towards the end of 1999, the opening of the market looked very promising
and both companies agreed the time was right to move the operation to the next
level. Therefore, in January 2000 an expert team from the UK joined a hand
picked team from HDFC to form the core project team, based in Mumbai.
Around this time Standard Life purchased a further 5% stake in HDFC and
a 5% stake in HDFC Bank. In a further development Standard Life agreed to
participate in the Asset Management Company promoted by HDFC to enter the
mutual fund market. The Mutual Fund was launched on 20th July 2000
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2.1 STATEMENT OF OBJECTIVES
Following are the objectives of the study:
► To find the awareness among the customers about investment
alternatives.
► To indicate the Schemes which provides higher returns to the Investors
and also tax benefits.
► To compare the performance of ELSS with ULIP.
► To find the reasons which influence the decision of investors to choose a
particular investment.
► To identify the drawbacks in promoting products of HDFC Mutual Funds
2.2 HYPOTHESIS
1) There is no significant relationship between nature of investment and
choice of schemes.
2) There is no significant relationship between reasons to influence decision
of investors and range of income.
3) There is no significant relationship among awareness of customers and
qualification of respondents.
4) There is no significant relationship between drawbacks in promoting
products and choice of investment.
5) There is no significance relationship between the range of income and risk
taking capacity.
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3. THEORETICAL FRAMEWORK
MUTUAL FUNDS
A mutual fund is a pool of money, collected from investors and is invested
according to certain investment objectives.
A mutual fund is created when investors put their money together. It is
therefore a pool of the investor’s funds. The most important characteristic of a
mutual fund is that the contributors and the beneficiaries of the fund are the same
class of people, namely the investors. The term mutual means that investors
contribute to the pool and also benefit from the pool.
A mutual fund’s business is to invest the funds thus collected, according to
wishes of the investors who created the pool.
CHARACTERISTICS OF MUTUAL FUND
A mutual fund belongs to the investors who have pooled their funds. The
ownership of the mutual fund is in the hands of the investors.
Investment professionals and other service providers, who earn a fee for
their services, from the fund, manage the mutual fund.
The pool of funds invested in a portfolio of marketable investments. The
value of the portfolio is updated everyday.
The investor’s share in the fund is denominated by “units”. The value of
the units changes with change in the portfolio’s value, everyday. The value
of one unit of investment is called as the Net Asset Value (NAV).
The common retort to the oft-asked question by anxious investors, of the
best way to save tax, is to invest in Post Office savings schemes, or perhaps a
regular investment in a public provident, or to buy insurance policies or Equity
Linked Saving Schemes.
ELSS holds the advantage of being the equity-based tax saving
instrument in the country today and offers tax deduction on investments up to
Rs.100000, under Section 80C of the Income Tax Act.
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EQUITY LINKED SAVING SCHEME
Equity Linked Saving Schemes (ELSS) is similar to the normal equity
diversified schemes that invest across the board and market segments. Features
that differentiate ELSS from an open-ended equity diversified scheme are tax
saving benefit (deductions under Sec 80C) and a lock-in period of three years,
which are explained hereunder. Also, one can invest in these schemes in small
amounts through a Systematic Investment Plan and begin with a small fund size
to add to this expense (i.e.) of investing in an ELSS is similar to any other equity
scheme.
Tax
Benefit:
Until FY 05, Sec 88 of Income Tax Act had fixed an overall ceiling of
Rs.100000 for investments in the tax saving instruments, including a cap of
Rs.10000 for investment in ELSS. The investors would get a rebate based on his
taxable income. In FY 05 the budget has scrapped Sec 88 and replaced it with
Sec 80C. under this section, investments up to Rs.100000 are eligible for
deduction from Gross Taxable Income and the ceiling on investments in ELSS is
removed. These investments deducted from the Gross Total Income, hence
reducing the taxable income.
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ELSS
Better Return than that of other savings instruments and similar to other equity schemes
Saves from short-term volatility: Lock in of 3 years
Tax Benefit:Up to Rs.1 lakh, u/s Sec 80C
Illustration:
Particulars Rupees(till 05) Rupees (after 05)
Gross Total Income 4,00,000 4,00,000
(-) Deductions Nil 1,00,000
Taxable Income 4,00,000 3,00,000
Advantages of Lock-in-period
The close-ended nature of the scheme gives the investment team an
opportunity to take decisions without the pressures of dealing with constant
fund cash flow considerations.
This would also help to focus on long-term opportunities in mid-cap
and small-cap companies that are strategically placed to take advantage of
the robust economic growth in India and of the global outsourcing trend.
Since the fund would remain with the fund manager for a long duration,
it would give him more flexibility with regards to the illiquid nature of mid-cap
space. Therefore, the Fund is likely to perform better than an open-ended
scheme.
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ELSS VS ULIP
ULIPs basically works like a mutual fund with a life cover thrown in. they
invest the premium in market-linked instruments like stocks, corporate bonds and
government securities. Investments in ULIPs attract Tax benefit under Section
80C.
A tax –saving fund is a diversified equity fund. It works like an open-ended
diversified equity fund that invests predominantly in the stock market to generate
growth by way of capital appreciation for investors.
The only difference between an equity fund and taking a tax saving fund is
that the latter has a 3-year lock-in tax benefits under Section 80C. To that end
there is a common ground between tax-saving funds and ULIPs in the shape of
Section 80C tax benefits.
RETURN ASPECTS
The reason why ULIP returns are on the lower side compared to tax-
saving funds is due to the higher expenses charged by them. The expenses take
their toll on the ‘investible surplus’ which reduces to the extent of expenses.
For example, mortality charges as well as the commission paid to agents
are factored into the ULIP expenses. While mortality charges are unique to
ULIPs as compared to tax-saving funds, commissions form a part of tax-saving
funds as well.
Tax-saving funds offer is the option of staying invested in the scheme
during maturity. But ULIP do not give the option of staying invested. The investor
has to necessarily collect the maturity proceeds.
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Age
Life
Insurance
Premium(Rs)
EPF(Rs) PPF / NSC ELSS
Total
Deduction
u/s 80C
25-35 10% 20% 20% 50-60% 1,00,000
35-40 10% 30% 25% 35-40% 1,00,000
45-55 10% 35% 30% 25-30% 1,00,000
>55 10% 0 65% 20-25% 1,00,000
TAX ASPECTS
Income Tax Provision Impacting Investment in Mutual Funds:
Investors receive two types of incomes from investment in Mutual Funds,
namely, Dividends declared from time to time by the mutual fund and Capital
Gains arising out of redemption of mutual fund units. Both these incomes are
subject to the provisions of the Income Tax Act, 1961.
The following are the Tax provisions, applicable after the Finance Act 2006-
07:
Dividends from mutual funds for the year 2006-07 are tax-free in the
hands of investors.
In case of mutual fund scheme with more than 50% in debt, a dividend
distribution tax of 10% plus surcharge has to be paid by the mutual funds.
In case of mutual funds scheme with more than 50% in equity, the
dividend distribution tax is not to be paid
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INVESTMENT IN ELSS:
Investment in specific Equity Saving Schemes, as notified by the
Government of India, are eligible for tax rebate under Section 88, up to a
maximum limit of Rs.10000 on the investment. The rebate is available according
to the taxable income of the investor.
Taxable Income Available IT Rebate Maximum Amount of
Rebate
Up to Rs.10,00,000 30% of the investments
made
Rs.3000
> 1.00 lakh < 1.5 lakh 20% of the investments
made
Rs.2000
> 1.5 lakh 15% of the investments
made
Rs.1500
Investors whose taxable income exceeds Rs.5 lakh are not eligible for any
tax rebates under Section 88.
A mutual fund which is registered under the SEBI (mutual Fund)
Regulation, 1996 is fully exempt from paying tax on its incomes, under section 10
(23D) of the IT Act. Since it is only a pass through entity, income is not taxed in
the hands of the mutual fund.
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4. RESEARCH METHODOLOGY
INTRODUCTION
Research methodology is a systematic way that solves the research
problem. It may be understood as a science of studying how research is done
scientifically. It is, we study the various steps that are generally adopted by a
researcher in studying the research problem along with the logic behind them. It
is necessary for the researcher to know not only the research methods or
techniques but also methodology. Researcher need to know how to develop the
tests, how to calculate the mean , how to apply research techniques which are
relevant and which not the knowledge of research methodology provides tools to
take things objectively.
4.1 RESEARCH DESIGN
Research design is a plan of action that guides the entire research. There
are four types of research design
a) Exploratory research design
b) Descriptive research design
c) Diagnostic research study
d) Experimental research design
The researcher has adopted Descriptive Research design.
4.2 SAMPLE SIZE
The sample size for the study is 120. It is derived from the universe of
250.
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4.3 SAMPLING METHOD
The sample design used by the researcher in this study is Systematic
Sampling Method. The list of investors in Equity Linked Saving Scheme given by
HDFC Mutual Funds were assigned with numbers. The even numbers have been
chosen as samples.
4.4 PRE-TESTING
Pre-testing as it is known is a method which has to be followed strictly.
Once questionnaire is drafted it should be field tested before finalizing. The
responses are studied to determine the need for restructuring the questionnaire.
Pre-testing was done on a group of 15 respondents. With the result of the pre-
testing the researcher has reframed some of the questions.
4.5 PERIOD OF STUDY
The period of study is from JANUVARY 2007 to APRIL 2007.
4.6 SOURCES OF DATA
a. Primary Data:
Primary data are generally information gather or generated the researcher
for the purposes of the project immediately at hand. When the data are collected
for the first time, the responsibility rests with the researcher to analyze as well.
Primary data has been collected through a structured questionnaire.
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b. Secondary Data:
Data that has already been collected for some other purpose, perhaps
processed and subsequently stored, are termed Secondary Data. The main
types of secondary data: Documentary, surveys and those from multiple sources.
Researcher has used all the types of secondary data to solve the problem.The
secondary data for the study has been extracted from text-books, offer
documents, magazines and through websites.
The data that have taken for the study is collected from source are:
Published information and other report of HDFC Mutual fund.
Other published material of mutual fund
Records and information available with the fund manager.
Data and information available with SEBI.
Article and information published in various journals.
Other information necessary for the study has been obtained from various
books, journals etc.
4.7 QUESTIONNAIRE DESIGN
Quite often questionnaire is considered as the heart of survey operation.
Hence it should be very carefully constructed. A questionnaire was prepared with
the combinations of various type of questions which have been listed below. The
number of questions used under each type are 2 Yes/No questions, 11 closed
ended questions, 2 open ended questions and 1 Scaling/Ranking question.
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4.8 STATISTICAL TOOLS
The various statistical tools used by the researcher for data analysis in this study
are:
PERCENTAGE ANALYSIS
Percentage refers to a special kind of ratio in making comparison between
two or more data and to describe relations between the data. Percentage can
also be used to compare the relative terms, the distribution of two or more series
of data. The formula used here is given below:
Percentage (%) = No. of respondents Total no. of respondents
WEIGHTED AVERAGE
Weighted average means assigning weight standards for the relative
importance of relative item. The weight stands for the relative Importance for
different items.
Weighted average method = ( X1W1+X2W2+X3W3+…….)
N
STEPS:
1. Multiply the weights with variable X and obtain the value ΣWX
2. Divide the total by the sum of weight ΣW
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CHI-SQUARE TEST:
Chi-square test is an important test among the several tests of
significance developed by statisticians. It is a statistical measure used in the
context of sampling analysis for comparing a variance to a theoretical variance.
The Chi-square is one of the most popular statistical inference procedures
today. With the help of Chi-square test we can find out whether two or more
attributes associated or not.
In order to test whether or not the attributes are associated we can take
null hypothesis that there is no association in the attribute under the study or the
attributes are independent.
If the calculated value of Chi-square test is greater than the table value at
a certain level of significance (generally 5%), we say from results that the
attributes are not associated.
The formula used here is given below:
n
χ² = Σ (O – E )²
i=1 E
Where O = Observed frequency from the cell.
E = Expected frequency from the cell.
E = Row Total* Column Total
Grand Total
Degrees of freedom = (r-1)(c-1)
Where r = Number of rows in the column.
c = Number of columns in the table.
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ANALYSIS OF VARIANCE (ANOVA)
ANOVA is essentially a procedure for testing the difference among
different groups of data for homogeneity.
ANOVA consists in splitting the variance for analytical purpose. Hence, it
is a method of analyzing the variance to which a response is subject into its
various components corresponding to various sources of variation.
Correction Factor = (T)²
n
Total sum of Squares = ΣX²ij – (T)²
n
Where i = 1,2,3,….
j = 1,2,3,…
Between Sum of Square = Σ (Tj)² - (T)²
nj n
Where j =1,2,3,….
Error Sum of Squares = Total Sum of Squares – Between Sum of Squares.
= ΣXij² - Σ (T)²
nj
where i = 1,2,3,…
j = 1,2,3,…
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SHARPE’S RATIO:
William F.Sharpe (1966) devised an index of portfolio performance measure. He
assumes that a small investor invests fully in the mutual fund and does not hold
any portfolio to eliminate unsystematic risk and hence demands a premium for
the total risk.
Sp = Rp – Rf
σ p
Where Sp = Sharpe’s Ratio,
Rp = portfolio return,
Rf = risk free return, and
σp = standard deviation of portfolio returns.
The Sp for benchmark portfolio is Rm - Rf/ σm
where σm = standard deviation of market returns.
If Sp of the mutual fund scheme is greater than that of the market portfolio,
the fund has out performed the market.
TREYNOR’S RATIO:
In Treynor’s measure, the risk measure of standard deviation, namely total
risk of the portfolio is replaced by market risk, measured by Beta, which is not
diversifiable. The can be set out as
Tn = Rn-Rf
βn
Where
Tn = Treynor’s measure of evaluation.
Rn = Return on the portfolio,
Rf = risk free rate
βn = Beta of the portfolio as a measure of systematic risk.
The Sharpe’s measure relates a portfolio’s excess return to total risk (as
measured by the standard deviation), while the Trenyor measure relates a
portfolio’s excess return to non-diversifiable or systematic risk (as measured by
the beta coefficient).
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4.9 SCOPE OF THE STUDY
HDFC has various operations like Banking, Insurance, and Mutual Funds
etc. The scope of this study is restricted to Mutual Fund investors only. It is
confined to customers of HDFC Standard life insurance, mutual funds and
concentrates only on the comparison of ELSS and ULIP.
4.10 LIMITATIONS OF THE STUDY
The edifice of this study entirely stands up on the pillars of information
supplied by the respondents.
Limitations applicable to questionnaire method of research may be applicable
to this study also, such as biased answer, memory access variations, in co-
operative and doubtful approach.
The time for the study was very short.
Secondary data available for comparative analysis is only for the period of
2005-2007.
Due to various factors associated, the information provided by customers has
its own bias.
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5. DATA ANALYSIS AND INTERPRETATION
The data, after collection, has to be processed and analysed in
accordance with the outline laid down for the purpose at the time of developing
the research plan. This is essential for a scientific study and for ensuring that we
have all relevant data for making contemplated comparisons analysis.
Technically speaking, processing implies editing, coding, classification and
tabulation of collected data, so that they are amenable to analysis.
The term ‘analysis’ refers to the computation of certain measures along
with searching for patterns of relationship that exist among data groups-thus, “ in
the process of analysis, relationships or differences supporting or conflicting with
original or new hypothesis should be subjected to statistical tests of significance
to determine with that validity data can be said to indicate any conclusions.