Finance Project on Mutual Fund

8/7/2019 Finance Project on Mutual Fund

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A Project on

Analysis of mutual fund: as a Preferred investment source(a study of Karnal District)

Submitted in

The partial fulfillment of the requirement ofMaster of Business Administration, Distance Education,

Guru Jambheshwar University of science & Techonology ,Hisar

Research Supervisor: - Submitted by:-

Sanjeev Kumar Reena Jaglan

Faculty GHIM, karnal Enrollment No. 06061104082Specialisation :- Finance

Session 2006-08

Dorectorate of Distance Education

Guru Jambheshwar University of Science & Technology Hisar(India)

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PREFACE

Master of Business Administration is a stepping stone to the Management Career . It has

great pleasure in presenting this research project which is essential in partial fulfillment

of MBA programme.

Research project is an integral part of curriculum and its purpose is to provide the

student with the practical exposure of the todays changing scenario. It helps in the

development of practical skills and analytical thinking process. It provides with basic

skills required to perform the survey and statistical tool needed to analyses the data. Thus

it helps in moulding the students according to the requirement of actual world.

This research project makes the study on Analysis of Mutual Fund: as a preferred

investment Source. The objective of this research is to find the preferences given by

people to mutual funds while investment. Also to find out the perception of the investors

regarding different financial instruments and to examine why and where people wish to

invest.

.

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ACKNOWLEDGEMENT

It is a matter of declaration for me to express my gratitude to my revered guide and true

mentor Mr. Sanjeev Kumar Lecturer, Guru Harkrishan Institute of management &

Technology, who has been very generous and ever willing to help me through out this

research work. He helped me in shaping this research work by his knowledge and

wisdom, penetrating judgment and expertise. His valuable guidance, constructive

criticism and analytical approach and ever-lasting internet taken through out this

investigation in a warm and self-offering academic environment have been a constant

source of inspiration to me.

My grateful acknowledgement is due to Mr. Ravinder Singh, my husband who has

encouraged and inspired me from time to time during the course of my study. I am also

thankful to all staff members of our institute and to the library , for extending me every

help during my research work. I would like to take this opportunity to thank my parents,

my brother pradeep, sister Ritu & other family members, Relatives, friends , near and

dear ones who faced that brunt of this venture gracefully.

(REENA JAGLAN)

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CONTENTS

Page No.

LIST OF TABLES 5

LIST OF CHARTS 6

CHAPTER 1

INTRODUCTION 7-39

CHAPTER 2

LITRATURE REVIEW 40-54

CHAPTER 3

RESEARCH METHODOLOGY 55-60

CHAPTER 4

ANALYSIS AND INTERPRETATION OF DATA 61-78

CHAPTER 5

FINDINGS AND RECOMMENDATIONS 79-81

CHAPTER 6

BIBLIOGRAPHY 82-84

CHAPTER -7

APPENDIX

Questionnaire 85-88

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LIST OF TABLES

Sr.No. Tables Page No.

1. List of various mutual fund 24with their schemes

2. Bank Vs. Mutual fund 27

3. How to read a mutual fund table 31

4, NAV report of growth scheme 60-64

5, Monthly and yearly performance of top funds 65

6. Dividend in different plans 66

7. AMFI monthly 68-71

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LIST OF Charts

Sr.No. Name of chart Page No.

1. organization of a mutual fund 8

2. Mutual fund operation flow chart 9

3. Types of Risk 36

4. Growth in assets under management 43

5. Investment options 71

6. Investment awaareness 72

7. Investment in mutual fund 72

8. Investment criteria 72

9. Profitability in mutual funds 73

10. Investment guidance 73

11. Factors considered while investing in MF 74

12. Sources of information 74

13. Scheme preferred 75

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CHAPTER - I

INTRODUCTION

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MUTUAL FUND

CONCEPTA Mutual Fund is a trust that pools the savings of a number of investors who share a

common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned through

these investments and the capital appreciation realised are shared by its unit holders in

proportion to the number of units owned by them. Thus a Mutual Fund is the most

suitable investment for the common man as it offers an opportunity to invest in a

diversified, professionally managed basket of securities at a relatively low cost. The small

savings of all the investors are put together to increase the buying power and hire a

professional manager to invest and monitor the money. Anybody with an investible

surplus of as little as a few thousand rupees can invest in Mutual Funds. Mutual fund

scheme has a defined investment objective and strategy.

The Definition

A mutual fund is nothing more than a collection of stocks and bonds. investors can think

of a mutual fund as a company that brings together a group of people and invests their

money in stocks, bonds, and other securities. Each investor owns shares, which represent

a portion of the holdings of the fund.

Investors can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out

nearly all of the income it receives over the year to fund owners in the form of a

distribution.

2) If the fund sells securities that have increased in price, the fund has a capital gain.

Most funds also pass on these gains to investors in a distribution.

3) If fund holdings increase in price but are not sold by the fund manager, the fund's

shares increase in price. investors can then sell your mutual fund shares for a profit.

Funds also usually give investors a choice either to receive a check for distributions or to

reinvest the earnings and get more shares.

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Mutual Fund is a investment company that pools money from shareholders and invests in

a variety of securities, such as stocks, bonds and money market instruments. Most open-

end mutual funds stand ready to buy back (redeem) its shares at their current net asset

value, which depends on the total market value of the fund's investment portfolio at the

time of redemption. Most open-end mutual funds continuously offer new shares to

investors.

A mutual fund is a professionally managed type of collective investment scheme that

pools money from many investors and invests it in stocks, bonds, short-term money

market instruments, and/or other securities.The mutual fund will have a fund manager

that trades the pooled money on a regular basis. Also known as an open-end investment

company, to differentiate it from a closed-end investment company. Mutual funds investpooled cash of many investors to meet the fund's stated investment objective. Mutual

funds stand ready to sell and redeem their shares at any time at the fund's current net asset

value: total fund assets divided by shares outstanding.

In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units

to the investors and investing funds in securities in accordance with objectives as

disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors

and thus the risk is reduced. Diversification reduces the risk because all stocks may not

move in the same direction in the same proportion at the same time. Mutual fund issues

units to the investors in accordance with quantum of money invested by them. Investors

of mutual funds are known as unitholders.

In Short, amutual fund is a common pool of money in to which investors with commoninvestment objective place their contributions that are to be invested in accordance with

the stated investment objective of the scheme. The investment manager would invest the

money collected from the investor in to assets that are defined/ permitted by the stated

objective of the scheme. For example, an equity fund would invest equity and equity

related instruments and a debt fundwould invest in bonds, debentures, gilts etc. Mutual

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Fund is a suitable investment for the common man as it offers an opportunity to invest in

a diversified, professionally managed basket of securities at a relatively low cost

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. In India, 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.Mutual funds can give

investors access to emerging markets

ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates the organisational set

up of a mutual fund:

The Association of Mutual Funds in India (AMFI) is dedicated to developing the

Indian Mutual Fund Industry on professional, healthy and ethical lines and to

enhance and maintain standards in all areas with a view to protecting and

promoting the interests of mutual funds and their unit holders.

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Mutual Fund Operation Flow Chart

INVESTMENT MIX OF MUTUAL FUNDS:

Mutual funds in India invest in three broad kinds of instruments.

Equity shares and equity related instruments

Debt instruments

Money market instruments.

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Types of Mutual Fund

Mutual fund schemes may be classified on the basis of its structure and its investment

objective.

By Structure:

Open-ended Funds

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. It is the

one that is available for subscription all through the year these do not have a fixed

maturity. It is always open to subscribe at any time.

Closed-ended Funds

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.

Interval Funds

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.

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By Investment Objective:

Growth Funds

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.

Income Funds

The aim of income funds is to provide regular and steady income to investors. Suchschemes generally invest in fixed income securities such as bonds, corporate debentures

and Government securities. Income Funds are ideal for capital stability and regular

income.

Balanced Funds

The aim of balanced funds is to provide both growth and regular income. Such schemes

periodically distribute a part of their earning and invest both in equities and fixed incomesecurities in the proportion indicated in their offer documents. 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.

Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital andmoderate 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.

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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.

No-Load Funds

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.

OTHER SCHEMES:

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.

Special Schemes

Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer document.

The investment of these funds is limited to specific industries like InfoTech,

FMCG, Pharmaceuticals etc.

Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE

Sensex or the NSE 50.

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Assured Return Scheme

In Mutual Funds, Assured Return Schemes are those schemes that assure a specific return

to the unitholders irrespective of performance of the scheme. A scheme cannot promise

returns unless such returns are fully guaranteed by the sponsor or AMC and this is

required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire

period of the scheme or only for a certain period. Some schemes assure returns one year

at a time and they review and change it at the beginning of the next year.

It's important to understand that each mutual fund has different risks and rewards. In

general, the higher the potential return, the 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 the risk.

Each fund has a predetermined investment objective that tailors the fund's assets, regions

of investments and investment strategies. At the fundamental level, there are three

varieties of mutual funds:

1) Equity funds (stocks)

2) 2) Fixed-income funds (bonds)

3) 3) Money market funds

All mutual funds are variations of these three 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.

Money Market Funds

The money market consists of short-term debt instruments, mostly Treasury bills. This is

a safe place to park investors money. You won't get great returns, but you won't have to

worry about losing your principal. A typical return is twice the amount you would earn in

a regular checking/savings account and a little less than the average certificate of deposit

(CD).

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Bond/Income Funds

Income funds are named appropriately: their purpose is to provide current income on a

steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and

"income" are synonymous. These terms denote funds that invest primarily in government

and corporate debt. While fund holdings may appreciate in value, the primary objective

of these funds is to provide a steady cash flow to investors. As such, the audience for

these funds consists of conservative investors and retirees.

Bond funds are likely to pay higher returns than certificates of deposit and money market

investments, but bond funds aren't without risk. Because there are many different types of

bonds, bond funds can vary dramatically depending on where they invest. For example, a

fund specializing in high-yield junk bonds is much more risky than a fund that invests in

government securities. Furthermore, nearly all bond funds are subject to interest rate risk,

which means that if rates go up the value of the fund goes down.

Balanced Funds

The objective of these funds is to provide a balanced mixture of safety, income and

capital appreciation. The strategy of balanced funds is to invest in a combination of fixed

income and equities. A typical balanced fund might have a weighting of 60% equity and

40% fixed income. The weighting might also be restricted to a specified maximum or

minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to

those of a balanced fund, but these kinds of funds typically do not have to hold a

specified percentage of any asset class. The portfolio manager is therefore given freedom

to switch the ratio of asset classes as the economy moves through the business cycle.

Equity Funds

Funds that invest in stocks represent the largest category of mutual funds. Generally, the

investment objective of this class of funds is long-term capital growth with some income.

There are, however, many different types of equity funds because there are many

different types of equities.

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Global/International Funds

An international fund (or foreign fund) invests only outside your home country. Global

funds invest anywhere around the world, including your home country.

It's tough to classify these funds as either riskier or safer than domestic investments. They

do tend to be more volatile and have unique country and/or political risks. But, on the flip

side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing

diversification. Although the world's economies are becoming more inter-related, it is

likely that another economy somewhere is outperforming the economy of your home

country.

Specialty Funds

This classification of mutual funds is more of an all-encompassing category that consists

of funds that have proved to be popular but don't necessarily belong to the categories

we've described so far. This type of mutual fund forgoes broad diversification to

concentrate on a certain segment of the economy.

Sector funds are targeted at specific sectors of the economy such as financial,

technology, health, etc. Sector funds are extremely volatile. There is a greater possibility

of big gains, but you have to accept that your sector may tank.

Regional funds make it easier to focus on a specific area of the world. This may mean

focusing on a region or an individual country. An advantage of these funds is that they

make it easier to buy stock in country, which is otherwise difficult and expensive. Just

like for sector funds, you have to accept the high risk of loss, which occurs if the region

goes into a bad recession.

Socially-responsible funds (or ethical funds) invest only in companies that meet the

criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in

industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to

get a competitive performance while still maintaining a healthy conscience.

Index Funds

The last but certainly not the least important are index funds. This type of mutual fund

replicates the performance of a broad market index such as the S&P 500 or Dow Jones

Industrial Average (DJIA). An investor in an index fund figures that most managers can't

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beat the market. An index fund merely replicates the market return and benefits investors

in the form of low fees.

REGULATORY STRUCTURE OF MUTUAL FUNDS IN INDIA

The structure of mutual funds in India is governed by the SEBI (Mutual Fund)

Regulations, 1996 (hereinafter referred to as SEBI Regulations). These regulations make

it mandatory for mutual funds to have a three-tier structure of Sponsor-Trustee-Asset

Management Company (AMC). The sponsor is the promoter of the mutual fund, and

appoints the Trustees. The trustees are responsible to the investors in the mutual fund,

and appoint the AMC for managing the investment portfolio. The AMC is the business

face of the mutual fund, as it manages all the affairs of the mutual fund. The mutual fund

and the AMC have to be registered with SEBI. SEBI regulations also provide for who can

be a sponsor, trustee and AMC, and specify the format of agreements between these

entities. These agreements provide for the rights, duties and obligations of these three

entities.

The UTI is also structured as a trust. The important different through, is that UTI does not

have sponsors or a separate AMC. Financial institutions and banks that contributed to the

initial capital of the UTI have their representatives on UTIs Board of Trustees, which

overseas the operators of the UTI. The Chairman appointed by the Board, who in turn

employs manages and staff to run its activities, manages UTI.

CONSTITUTION

i) The sponsoring Company, called Sponsor.

ii) The Trustees

iii) The Asset Management Company (AMC).

iv) The Custodians

ADVANTAGES OF MUTUAL FUNDS

Professional Management - The primary advantage of funds is the professional

management of your money. Investors purchase funds because they do not have the time

or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive

way for a small investor to get a full-time manager to make and monitor investments.

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Diversification - By owning shares in a mutual fund instead of owning individual stocks

or bonds, your risk is spread out. The idea behind diversification is to invest in a large

number of assets so that a loss in any particular investment is minimized by gains in

others. In other words, the more stocks and bonds you own, the less any one of them can

hurt you Large mutual funds typically own hundreds of different stocks in many different

industries. It wouldn't be possible for an investor to build this kind of a portfolio with a

small amount of money.

Economies of Scale - Because a mutual fund buys and sells large amounts of securities

at a time, its transaction costs are lower than what an individual would pay for securities

transactions.

Liquidity - Just like an individual stock, a mutual fund allows you to request that your

shares be converted into cash at any time.

Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of

mutual funds, and the minimum investment is small. Most companies also have

automatic purchase plans whereby as little as $100 can be invested on a monthly basis.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such

as bad deliveries, delayed payments and follow up with brokers and companies. Mutual

Funds save your time and make investing easy and convenient.

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.

Low Costs

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Mutual Funds are a relatively less expensive way to invest compared to directly investing

in the capital markets because the benefits of scale in brokerage, custodial and other fees

translate into lower costs for investors.

Transparency

Investors 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.

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.

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 itsinvestment strategy.

Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

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.

mutual funds have become extremely popular over the last 20 years. What was once just

another obscure financial instrument is now a part of our daily lives. In fact, too many

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people, investing means buying mutual funds. After all, it's common knowledge that

investing in mutual funds is better than simply letting them cash waste away in a savings

account, but, for most people, that's where the understanding of funds ends. It doesn't

help that mutual fund salespeople speak a strange language that is interspersed with

jargon that many investors don't understand.

A mutual fund is nothing more than a coming together of a group of investors like

investors who contribute different sums of money to make up a large lump sum. The

money collected is invested by the fund manager in stocks, bonds and other securities -

across companies, industries and sectors and in some cases, across countries as well. As

an investor, investors are issued units in proportion to the money invested. Since

investors own units of the fund, it makes them less reliant on the success or failure of any

individual stock, which would have been the case if you had invested directly in the

shares of a single company.

Is it really that simple?

Yes that's the long and short of mutual funds! What's even more heartening to know is

that the analysis and strategic thinking that goes into investing is not investors worry.

That's what a fund manager does for investors.

Ten reasons to invest in mutual funds

Expert on investors side: When investors invest in a mutual fund, you buy into the

experience and skills of a fund manager and an army of professional analysts

Limited risk: Mutual funds are diversification in action and hence do not rely on the

performance of a single entity.

More for less: For the price of one blue chip stock for instance, investors could get

theirrself a number of units across a number of companies and industries when investors

invest in a fund.

Easy investing: investors can invest in a mutual fund with as little as Rs.5,000. Salaried

individuals also have the option of investing in a monthly savings plan.

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Convenience: investors can invest directly with a fund house, or through your bank

or financial adviser, or even over the internet.

Investor protection: A mutual fund in India is registered with SEBI, which also

monitors the operations of the fund to protect your interests.

Quick access to your money: It's good to know that should you need your money at

short notice, you can usually get it in four working days.

Transparency: As an investor, you get updates on the value of your units, information

on specific investments made by the mutual fund and the fund manager's strategy and

outlook.

Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry

out cost-effective brokerage transactions.

Tax benefits: Over the years, tax policies on mutual funds have been favourable to

investors and continue to be so.

Where can an investor look out for information on mutual funds?

Almost all the mutual funds have their own web sites. Investors can also access the

NAVs, half-yearly results and portfolios of all mutual funds at the web site of

Association of mutual funds in India (AMFI) AMFI has also published useful literature

for the investors.

Investors can log on to the web site of SEBI and go to "Mutual Funds" section for

information on SEBI regulations and guidelines, data on mutual funds, draft offerdocuments filed by mutual funds, addresses of mutual funds, etc. Also, in the annual

reports of SEBI available on the web site, a lot of information on mutual funds is given.

There are a number of other web sites which give a lot of information of various schemes

of mutual funds including yields over a period of time. Many newspapers also publish

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useful information on mutual funds on daily and weekly basis. Investors may approach

their agents and distributors to guide them in this regard.

HOW TO INVEST IN MUTUAL FUNDS

Mutual funds normally come out with an advertisement in newspapers publishing the

date of launch of the new schemes. Investors can also contact the agents anddistributors

of mutual funds who are spread all over the country for necessary information and

application forms. Forms can be deposited with mutual funds through the agents and

distributors who provide such services. Now a days, the post offices and banks also

distribute the units of mutual funds. However, the investors may please note that the

mutual funds schemes being marketed by banks and post offices should not be taken as

their own schemes and no assurance of returns is given by them. The only role of banks

and post offices is to help in distribution of mutual funds schemes to the investors.

Investors should not be carried away by commission/gifts given by agents/distributors for

investing in a particular scheme. On the other hand they must consider the track record of

the mutual fund and should take objective decisions.

Non-Resident Indians(NRI) can also invest in mutual funds. Normally, necessary details

in this respect are given in the offer documents of the schemes.

STEP 1 - Identify Your Investment Needs Investors financial goals vary, based on

their age, lifestyle, financial independence, family commitment, and level of income and

expenses among many other factors. One can start with defining the investment objective.

STEP 2 Choose the right mutual funds Some factors to evaluate before choosing a

particular Mutual fund are the track record of the performance of the fund over the last

few years in relation to the appropriate yardstick and similar funds in the same category.

Others factors can be portfolio allocation, the dividend yield and degree of transparency.

STEP 3 Select the ideal mix of schemes - Investing in just one mutual fund scheme

may not meet all investment needs. One may consider investing in a combination of

schemes to achieve you specific goals.

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STEP 4 Invest Regulatory By investing a fixed sum each month, one can buy fewer

units when the price is higher and more units when the price is low, thus bringing down

the average cost per unit.

STEP 5 Start Early It is desirable to start investing early and stick to a regular

investment plan. The power of compounding lets the investor to earn income on income

and their money multiples at a compounded rate of return.

How to fill Mutual Fund Application Form

An investor must mention clearly his name, address, number of units applied for and such

other information as required in the application form. He must give his bank account

number so as to avoid any fraudulent encashment of any cheque/draft issued by themutual fundat a later date for the purpose of dividend or repurchase . Any changes in the

address, bank account number, etc at a later date should be informed to the mutual fund

immediately

Mutual Fund can change Schemes

Yes, investors can However, no change in the nature or terms of the scheme, known as

fundamental attributesof the Mutual Fund e.g .structure, investment pattern, etc. can becarried out unless a written communication is sent to each unitholder and an

advertisement is given in one english daily having nationwide circulation and in a

newspaper published in the language of the region where the head office of the mutual

fund is situated. The unitholders have the right to exit the Mutual Fund at the prevailing

NAV without any exit load if they do not want to continue with the scheme. The mutual

funds are also required to follow similar procedure while converting the scheme form

close-ended to open-ended scheme and in case of change in sponsor.

The mutual funds are required to inform any material changes to their unitholders. Apart

from it, many mutual funds send quarterly newsletters to their investors.

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At present, offer documents are required to be revised and updated at least once in two

years. In the meantime, new investors are informed about the material changes by way of

addendum to the offer document till the time offer document is revised and reprinted.

Mutual Fund Offer Document

An abridged offer document, which contains very useful information, is required to be

given to the prospective investor by the mutual fund. The application form for

subscription to a Mutual Fund is an integral part of the offer document. SEBI has

prescribed minimum disclosures in the offer document. An investor, before investing in a

Mutual Fund scheme, should carefully read the offer document. Due care must be given

to portions relating to main features of the Mutual Fund, risk factors, initial issue

expenses and recurring expenses to be charged to the Mutual Fund entry or exit loads,

sponsors track record, educational qualification and work experience of key personnel

including fund managers, performance of other Mutual Fund schemes launched by the

mutual fund in the past, pending litigations and penalties imposed, etc.

TYPES OF MUTUAL FUND SCHEMES

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial

position, risk tolerance and return expectations etc. The table below gives an overview

into the existing types of schemes in the Industry.

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LIST OF VARIOUS FUNDS ALONG WITH THEIR MAJOR SCHEMES:

Fund name Major Schemes

Alliance Capital Mutual Fund 1)Alliance 95 Fund

2)Alliance Equity Fund

3) Alliance Liquid Income Fund

Birla Mutual 1) Birla Advantage Fund

2) Birla Income Plus

Kothari Pioneer Mutual Fund 1)Kothari Pioneer Prima Plus

2)Kothari Pioneer Blue ChipSBI Mutual Fund 1)SBI Magnum Multiplier Scheme90

2)SBI Magnum Taxgain Scheme 1993

3) SBI Magnum Bond Fund

4) SBI Rising Income Scheme

Prudential - ICICI 1) Prudential ICICI Growth Plan

2) ICICI Premier

DSP Merrill Lynch Fund DSP Merrill Lynch Equity Fund

Morgan Stanley Morgan Stanley Growth Fund

Tata Mutual Fund Tata Balanced Fund

Canbank Mutual Fund Canganga

Templeton Asset Management Ltd. Templeton India Income Fund

Unit Trust of India UTI MIP 94 (III)

LIC Mutual Fund LIC Dhanvarsha

Mutual Funds: The Costs

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Costs are the biggest problem with mutual funds. These costs eat into your return, andthey are the main reason why the majority of funds end up with sub-par performance.

What's even more disturbing is the way the fund industry hides costs through a layer

of financial complexity and jargon. Some critics of the industry say that mutual fundcompanies get away with the fees they charge only because the average investor doesnot understand what he/she is paying for.

Fees can be broken down into two categories:Ongoing yearly fees to keep you invested in the fund.

2. Transaction fees paid when you buy or sell shares in a fund (loads).

The Expense Ratio

The ongoing expenses of a mutual fund is represented by the expense ratio. This is

sometimes also referred to as the management expense ratio (MER). The expenseratio is composed of the following:

The cost of hiring the fund manager(s) - Also known as the management fee, thiscost is between 0.5% and 1% of assets on average. While it sounds small, this feeensures that mutual fund managers remain in the country's top echelon of earners.Think about it for a second: 1% of 250 million (a small mutual fund) is $2.5 million -fund managers are definitely not going hungry! It's true that paying managers is anecessary fee, but don't think that a high fee assures superior performance.

Administrative costs - These include necessities such as postage, record keeping,customer service, cappuccino machines, etc. Some funds are excellent at minimizingthese costs while others (the ones with the cappuccino machines in the office) arenot.

Mutual Funds: Picking a Mutual Fund

Buying and Selling

Investors can buy some mutual funds (no-load) by contacting the fund companiesdirectly. Other funds are sold through brokers, banks, financial planners, or insuranceagents. If they buy through a third party there is a good chance they'll hit you with asales charge (load).

That being said, more and more funds can be purchased through no-transaction feeprograms that offer funds of many companies. Sometimes referred to as a "fundsupermarket," this service lets you consolidate your holdings and record keeping,and it still allows you to buy funds without sales charges from many differentcompanies.

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A popular example is Fidelity's Funds network. Many large brokerages have similarofferings. Selling a fund is as easy as purchasing one. All mutual funds will redeem(buy back) your shares on any business day.

Mutual Funds: Don't Be Fooled By Mutual Fund Ads

All those mutual fund ads that quote their amazingly high one-year rates of return.

Investors first thought is "wow, that mutual fund did great!" Well, yes it did great last

year, but then you look at the three-year performance, which is lower, and the five year,

which is yet even lower. What's the underlying story here? Let's look at a real example.

These figures came from a local paper:

1 year 3 year 5 year

53% 20% 11%

Last year, the fund had excellent performance at 53%. But in the past three years the

average annual return was 20%. What did it do in years 1 and 2 to bring the average

return down to 20%? Some simple math shows us that the fund made an average return of

3.5% over those first two years: 20% = (53% + 3.5% + 3.5%)/3. Because that is only an

average, it is very possible that the fund lost money in one of those years.

It gets worse when we look at the five-year performance. We know that in the last year

the fund returned 53% and in years 2 and 3 we are guessing it returned around 3.5%. So

what happened in years 4 and 5 to bring the average return down to 11%? Again, by

doing some simple calculations we find that the fund must have lost money, an average

of -2.5% each year of those two years: 11% = (53% + 3.5% + 3.5% - 2.5% - 2.5%)/5.

Now the fund's performance doesn't look so good

It should be mentioned that, for the sake of simplicity, this example, besides making

some big assumptions, doesn't include calculating compound interest. Still, the point

wasn't to be technically accurate but to demonstrate how misleading mutual fund ads can

be. A fund that loses money for a few years can bump the average up significantly with

one or two strong years

Disadvantages of Mutual Funds:

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Professional Management - Did you notice how we qualified the advantage of

professional management with the word "theoretically"? Many investors debate whether

or not the so-called professionals are any better than you or I at picking stocks.

Management is by no means infallible, and, even if the fund loses money, the manager

still takes his/her cut. We'll talk about this in detail in a later section.

Costs - Mutual funds don't exist solely to make your life easier - all funds are in it for a

profit. The mutual fund industry is masterful at burying costs under layers of jargon.

These costs are so complicated that in this tutorial we have devoted an entire section to

the subject.

Dilution - It's possible to have too much diversification. Because funds have small

holdings in so many different companies, high returns from a few investments often don't

make much difference on the overall return. Dilution is also the result of a successful

fund getting too big. When money pours into funds that have had strong success, the

manager often has trouble finding a good investment for all the new money.

Taxes - When making decisions about your money, fund managers don't consider your

personal tax situation. For example, when a fund manager sells a security, a capital-gains

tax is triggered, which affects how profitable the individual is from the sale. It might have

been more advantageous for the individual to defer the capital gains liability

BANKS V/S MUTUAL FUNDS

BANKS MUTUAL FUNDS

Returns Low Better

Administrative exp. High LowRisk Low Moderate

Investment options Less More

Network High penetration Low but improving

Liquidity At a cost Better

Quality of assets Not transparent Transparent

Guarantee Maximum Rs.1 lakh on deposits None

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Given the present scenario, bank deposits offer low returns. Chances are

that most of your savings reside in bank deposits. Post income tax and inflation,

it is likely that you will be left with little or no gains. In short, the money you

have worked very hard for has failed to do the same for you. But there's a way to

make your money earn enough to beat inflation while it earns you worthwhile

returns diversification. And, the simplest way to diversify your investments is

to begin investing in mutual funds.

Importance of Mutual Fund

Small investors face a lot of problems in the sharemarket, limited resources, lack of

professional advice, lack of information etc. Mutual funds have come as a much needed

help to these investors. It is a special type of institutional device or an investment vehicle

through which the investors pool their savings which are to be invested under the

guidance of a team of experts in wide variety of portfolios of Corporate securities in

such a way, so as to minimise risk, while ensuring safety and steady return on investment.

It forms an important part of the capital market, providing the benefits of a diversified

portfolio and expert fund management to a large number, particularly small investors.

Now a days, mutual fund is gaining its popularity due to the following reasons :

l. With the emphasis on increase in domestic savings and improvement in deployment of

investment through markets, the need and scope for mutual fund operation has increased

tremendously. The basic purpose of reforms in the financial sector was to enhance the

generation of domestic.

2. An ordinary investor who applies for share in a public issue of any company is not

assured of any firm allotment. But mutual funds who subscribe to the capital issue made

by companies get firm allotment of shares. Mutual fund latter sell these shares in the

same market and to the Promoters of the company at a much higher price. Hence, mutual

fund creates the investors confidence.

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3. The phyche of the typical Indian investor has been summed up by Mr. S.A. Dave,

Chairman of UTI, in three words; Yield, Liquidity and Security. The mutual funds, being

set up in the public sector, have given

the impression of being as safe a conduit for investment as bank deposits.Besides, the

assured returns promised by them have investors had great appeal for the typical Indian

investor.

4. As mutual funds are managed by professionals, they are considered to have a better

knowledge of market behaviours. Besides, they bring a certain competence to their job.

They also maximise gains by proper selection and timing of investment.

5. Another important thing is that the dividends and capital gains are reinvested

automatically in mutual funds and hence are not fritted away. The automatic reinvestment

feature of a mutual fund is a form of forced saving and can make a big difference in the

long run.

6. The mutual fund operation provides a reasonable protection to investors. Besides,

presently all Schemes of mutual funds provide tax relief under Section 80 L of the

Income Tax Act and in addition, some schemes provide tax relief under Section 88 of the

Income Tax Act lead to the growth of importance of mutual fund in the minds of the

investors.

7. As mutual funds creates awareness among urban and rural middle class people about

the benefits of investment in capital market, through profitable and safe avenues, mutual

fund could be able to make up a large amount of the surplus funds available with these

people.

8. The mutual fund attracts foreign capital flow in the country and secure profitable

investment avenues abroad for domestic savings through the opening of off shore funds

in various foreign investors. Lastly another notable thing is that mutual funds are

controlled and regulated by S E B I and hence are considered safe. Due to all these

benefits the importance of mutual fund has been increasing.

Mutual Funds :conclusion

A mutual fund brings together a group of people and invests their money in

stocks, bonds, and other securities.

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The advantages of mutuals are professional management, diversification,

economies of scale, simplicity and liquidity.

The disadvantages of mutuals are high costs, over-diversification, possible tax

consequences, and the inability of management to guarantee a superior return.

There are many, many types of mutual funds. You can classify funds based on

asset class, investing strategy, region, etc.

Mutual funds have lots of costs.

Costs can be broken down into ongoing fees (represented by the expense ratio)

and transaction fees (loads).

The biggest problems with mutual funds are their costs and fees.

Mutual funds are easy to buy and sell. You can either buy them directly from the

fund company or through a third party.

Mutual fund ads can be very deceiving

NET ASSET VALUE

Net asset value (NAV), which is a fund's assets minus liabilities, is the value of a

mutual fund. NAV per share is the value of one share in the mutual fund, and it is the

number that is quoted in newspapers. You can basically just think of NAV per share

as the price of a mutual fund. It fluctuates everyday as fund holdings and shares

outstanding change.

When you buy shares, you pay the current NAV per share plus any sales front-end

load. When you sell your shares, the fund will pay you NAV less any back-end load.

The Term Net Asset Value (NAV) is used by investment companies to measure net

assets. It is calculated by subtracting liabilities from the value of a fund's securities and

other items of value and dividing this by the number of outstanding shares. Net asset

value is popularly used in newspaper mutual fund tables to designate the price per share

for the fund.

The value of a collective investment fund based on the market price of securities held in

its portfolio. Units in open ended funds are valued using this measure. Closed ended

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investment trusts have a net asset value but have a separate market value. NAV per share

is calculated by dividing this figure by the number of ordinary shares. Investments trusts

can trade at net asset value or their price can be at a premium or discount to NAV.

Value or purchase price of a share of stock in a mutual fund. NAV is calculated each day

by taking the closing market value of all securities owned plus all other assets such as

cash, subtracting all liabilities, then dividing the result (total net assets) by the total

number of shares outstanding.

Calculating NAVs - Calculating mutual fund net asset values is easy. Simply take the

current market value of the fund's net assets (securities held by the fund minus any

liabilities) and divide by the number of shares outstanding. So if a fund had net assets of

Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is

Rs.50.00.

Mutual Funds: How To Read A Mutual Fund Table

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Columns 1 & 2: 52-Week High and Low - These show the highest and lowest prices themutual fund has experienced over the previous 52 weeks (one year). This typically doesnot include the previous day's price.

Column 3: Fund Name - This column lists the name of the mutual fund. The company

that manages the fund is written above in bold type.

Column 4: Fund Specifics - Different letters and symbols have various meanings. Forexample, "N" means no load, "F" is front end load, and "B" means the fund has both frontand back-end fees. For other symbols see the legend in the newspaper in which you foundthe table.

Column 5: Dollar Change -This states the dollar change in the price of the mutual fundfrom the previous day's trading.

Column 6: % Change - This states the percentage change in the price of the mutual fund

from the previous day's trading.

Column 7: Week High - This is the highest price the fund traded at during the past week.

Column 8: Week Low - This is the lowest price the fund traded at during the past week.

Column 9: Close - The last price at which the fund was traded is shown in this column.

Column 10: Week's Dollar Change - This represents the dollar change in the price of themutual fund from the previous week.Column 11: Week's % Change - This shows the percentage change in the price of themutual fund from the previous week.The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which are published in the newspapers. Some mutual funds send theportfolios to their unitholders.The scheme portfolio shows investment made in each security i.e. equity, debentures,money market instruments, government securities, etc. and their quantity, market valueand % to NAV. These portfolio statements also required to disclose illiquid securities inthe portfolio, investment made in rated and unrated debt securities, non-performing assets(NPAs), etc. Some of the mutual funds send newsletters to the unit holders on quarterlybasis which also contain portfolios of the schemes

FREQUENTLY USED TERMS

Net Asset Value (NAV)

The net asset value of the fund is the cumulative market value of the assets fund net of its

liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the

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assets in the fund, this is the amount that the shareholders would collectively own. This

gives rise to the concept of net asset value per unit, which is the value, represented by the

ownership of one unit in the fund. It is calculated simply by dividing the net asset value

of the fund by the number of units. However, most people refer loosely to the NAV per

unit as NAV, ignoring the "per unit". We also abide by the same convention.

Calculation of NAV

The most important part of the calculation is the valuation of the assets owned by the

fund. Once it is calculated, the NAV is simply the net value of assets divided by the

number of units outstanding. The detailed methodology for the calculation of the asset

value is given below.

Asset value is equal to Sum of market value of shares/debentures+ Liquid assets/cash

held, if any + Dividends/interest accrued + Expenses accrued but not paid+Amount due

on unpaid assets

Sale Price

Is the price investor pay when they invest in a scheme. Also called Offer Price. It may

include a sales load.

Repurchase Price

Is the price at which a close-ended scheme repurchases its units and it may include a

back-end load. This is also called Bid Price.

Redemption Price

Is the price at which open-ended schemes repurchase their units and close-ended schemes

redeem their units on maturity. Such prices are NAV related.

Sales Load

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Is a charge collected by a scheme when it sells the units. Also called, Front-end load.

Schemes that do not charge a load are called No Load schemes.

RISK TOLERANCE\

Different investment avenues are available to investors. Mutual funds also offer good

investment opportunities to the investors. Like all investments, they also carry certain

risks. The investors should compare the risks and expected yields after adjustment of tax

on various instruments while taking investment decisions. The investors may seek advice

from experts and consultants including agents and distributors of mutual funds schemes

while making investment decisions. With an objective to make the investors aware of

functioning of mutual funds, an attempt has been made to provide information in

question-answer format which may help the investors in taking investment decisions.Risk

is a fact of life for any investor. Stock markets go down, companies may go bankrupt,

inflation rates may soar or the government may not have enough funds to pay back. The

discussion on investment objectives would not be complete without a discussion on the

risks that investing in a mutual fund entails. At the cornerstone of of investing is the

basic principal that the greater the risk you take, the greater the potential reward.

Remember that the value of all financial investments will fluctuate. Typically, risk is

defined as short-term price variability. But on a long-term basis, risk is the possibility thatyour accumulated real capital will be insufficient to meet your financial goals. And if

you want to reach your financial goals, you must start with an honest appraisal of your

own personal comfort zone with regard to risk. Individual tolerance for risk varies,

creating a distinct investment personality for each investor. Some investors can accept

short-term volatility with easy, others with near panic. So whether one considers ones

investment temperament to be conservative, moderate or aggressive, one investment

temperament to be conservative, moderate or aggressive, one needs to focus on how

comfortable or uncomfortable he will be as the value of his investment moves up or

down.

Management Risk

Mutual funds offer incredible flexibility in managing investment risk. Diversification and

Automatic Investing (SIP) are two techniques one can use to reduce investment risk

considerably and reach your long-term financial goals.

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Diversification

When one invests is one mutual fund, he instantly spreads his risk over a number of

different companies. One can also diversify over several different kinds of securities by

investing in different mutual funds, further reducing his potential risk. Diversification is abasic risk management tool that one will want to use throughout his lifetime as one

rebalance his portfolio to meet his changing needs and goals. Investors, who are willing

to maintain a mix of equity shares, bonds and money market securities have a greater

chance of earning significantly higher returns over time than those who invest in only the

most conservative investments. Additionally, a diversified approach to

investingcombining the growth potential of equities with the higher income of bonds and

the stability of money markets--- helps moderate your risk and enhance your potential

return.

Systematic Investment Plan (SIP)

The unit holders of Scheme can benefit by investing specific Rupee amounts periodically,

for a continuous period. Mutual fund SIP allows the investors to invest a fixed amount of

Rupees every month or quarter for purchasing additional units of the Scheme at NAV

based prices.

TYPES OF RISK

All investments involve some form of risk. Even an insured bank account is subject to the

possibility that inflation will rise faster than your earnings, leaving you with less real

purchasing power than when you started (Rs 1000 gets you less than it got your father

when he was your age). Consider these common types of risk ands evaluate them against

potential rewards when you select an investment.

37

Managing Risks

Diversification

SIP

Types of Risk

RISK


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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.

Inflation Risk

Sometimes referred to as loss of purchasing power. Whenever inflation sprints forward

faster than the earnings on your investment, you run the risk that youll actually be able

to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.

Credit Risk

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?

Inflation Risk

38

Market

Inflation

Credit

Interest Rate

Employees

Exchange Rate

Investment

Government Policies

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Changing interest rates affect both equities and bonds in many ways. Investors are

reminded that predicting which way rates will go is rarely successful. A diversified

portfolio can help in offsetting these changes.

Effect of loss of key professionals and inability to adapt.

An industries key asset is often the personnel who run the business i.e. intellectual

properties of the key employees of the respective companies. Given the everchanging

complexion of few industries and the high obsolescence levels, availability of qualified,

trained and motivated personnel is very critical for the success of industries in few

sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet

the changing environment and challenges the sector offers.

Failure or inability to attract/retain such qualified key personnel may impact the prospects

of the companies in the particular sector in which the fund invest.

Exchange Risks

A number of companies generate revenues in foreign currencies and may have

investments or expenses also denominated in foreign currencies. Changes in exchange

rates may, therefore, have a positive or negative impact on companies which in turn

would have an effect on the investment of the fund.

Investment Risk

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 equities.

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.

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Chapter-II

Review

Literature40


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Review of Literature

ISSN Raju (2005) give the view the research on the investment opportunities in the

mutual funds . ISSN Raju takes a sample of of 200 Investors which is invested in the

mutual fund. ISSN Raju see the factors considered before investing safety, Returns, Risk,

Liquidity etc factor are considered ISSN Raju tape a Bank deposit, Post Office, Mutual

Fund, Insurance, and the Gold according to survey in the 200 Investors 16 Respondents

Invest in the mutual fund & percentage of Investment in the Fund 8% and 48 Respondent

Deposit their money and the percentage is 24%. The more percentage in the Gold. In the

insurance 36 Respondent invest it 36%. This is the view of the ISSN Raju.

Urvashi Makkar (2005) give the view on this research on according to Urvashi Makkar

research that 36% Investment in 2005-06 and 2004-05 Investment in 0.4% people

investment in Bank FDs 46.7%. People are more investment in the Bank FD than the

Mutual Fund.

Meenu Verma (2004) give a view point on that research. Meenu take the 210 investorsacross the country. Around 50% of the people found medium risk attached mutual fund

investment 27%, 15% and 8%. People said that according to them the risk attached with

mutual fund investment is high, low and very high respectively. People have a perception

that mutual fund are more Risky than other investment avenues as they do not even offer

guarantee of the capital. 39% people wanted high return & while 28% of respondents

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wanted safety of their money. The liquidity factors fixed returns were expected by 19%

and 14% respondents respectively. It clearly that people are being influenced by the

returns of the mutual fund & they expect the same to happen in future.

Ajaya Kumar Mohanty (1964) give a view point on that research according to Ajaya

Kumar. Benefits retail Investors as a source of saving with highest return. There is

Flexibility of portfolio diversification MF prepares an offer document wherein essential

information about the scheme is given to enlighten the prospective investors. It presents a

swot analysis and clearly specifies that the post performance are Indicative of future

performance. It contain standard risk factors and schematic disk factor detail. It also

clarifies the investment objective and policies investors, right, dividends distribution

policy as well as accounting policies. The MFs are marging various schemes for overall

benefits. It can be said that with the consolidation of MFs the future performance of the

MFs will be better than those in past.

Shaveta Gupta (2004-05) given a view point on that research. There are a number of

mutual fund schemes that offer a chance to invest in a particular sector but the emergence

of REMs will give the small investors a chance to invest in real estate and earn the

potential returns. From the real estate market. The setting up of REMFs can also provide

some support to the cash starved housing sector. RMMF would throught the pooling in of

resources, allow individual with small amounts of cash to also take the advantage from

the real estate market. It can be used as an excellent diversification tool for minimizing

risk and maximizing return.

Russwermers (2005) :- This paper analyzes the performance of portfolio strategies that

invest in no-load open-end U.S. domestic equity mutual funds, incorporating

predictability in (i) manager skills, (ii) fund risk loadings, and

(iii) benchmark returns. Predictability in manager skills is found to be the dominant

source of investment profitabilitylong-only strategies that incorporate such

predictability considerably outperform prior documented hot-hands and smart money

strategies, and generate positive and significant performance with respect and significant

performance with respect to the Fama-French and momentum benchmarks. Specifically,

these strategies outperform their benche marks. Specifically, these strategies outperform

their benchmarks by 2-4% per year through their ability to time industries over the

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business cycle. More ever they choose individual funds that outperform their industry

benchmarks to achieve an additional 3-6% per year. Overall, our findings indicate that

industries are important in locating outperforming mutual funds, and that active

management adds much more value than documented by prior studies.

Keith C. Brown (2002):- While a mutual funds investment style influences the returns it

generates, little is known about how a managers execution of the style decision might

affect performance. Using multivariate techniques for measuring the consistency of a

portfolios investment mandate, we demonstrate that more style-consistent funds tend to

produce higher total and relative returns than less consistent funds, after controlling for

past performance and portfolio turnover. These findings are robust across fund

investment style classification, the return measurement period, and the model used to

calculate expected returns. We document a positive relationship between measures of

fund style consistency and the persistence of its future performance, net of momentum

and past performance effects. We conclude that the decision to maintain a consistent

investment style is an important aspect of the portfolio management process.

Vikram K. Nanda (1997):- this paper provides a model that explains the structure of

mutual funds. Specifically, the paper explains why funds structure as open-or closed-end

funds, and managers generate earn excess returns that on the margin are increasing in

their ability and decreasing in the size of funds under management. Managers capture the

rents from their ability by optimally setting the management fee and attracting funds from

investors. Investors have stochastic liquidity needs that impose a cost on open-end funds

available for investment to deviate from an optimal level. While managers of open end

funds can charge loads to discourage investors with high anticipated liquidity needs, they

need to pay a premium in the form of higher expected returns to attract the relatively

scarce investors with low liquidity needs. Fund managers whose ability is known with

more precision can avoid paying which provide investors liquidity without exposing the

fund to liquidity shocks. Managers whose ability is more uncertain will fund prefer to

form open-end funds, however, since an open-end fund will tend to be closer to an

optimal size as investors respond to new information about management.

HISTORY OF MUTUAL FUNDS

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History of the Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the formation of Unit Trust ofIndia, at the initiative of the Government of India and Reserve Bank the. The history of

mutual funds in India can be broadly divided into four distinct phases

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)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector

banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation

of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June

1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund

(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda

Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set

up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had

assets under management of Rs.47,004 crores.

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

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(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

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was

bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust

of India with assets under management of Rs.29,835 crores as at the end of January 2003,

representing broadly, the assets of US 64 scheme, assured return and certain other

schemes. The Specified Undertaking of 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

assets under management and with the setting up of a UTI Mutual Fund, conforming to

the SEBI Mutual Fund Regulations, and with recent mergers taking place among

different private sector funds, the mutual fund industry has entered its current phase of

consolidation and growth.

The graph indicates the growth of assets over the years

GROWTH IN ASSETS UNDER MANAGEMENT

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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.

Mutual Funds In India

Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallendown and are generally below the inflation rate. Therefore, keeping large amounts ofmoney in bank is not a wise option, as in real terms the value of money decreases over aperiod of time.

One of the options is to invest the money in stock market. But a common investor is notinformed and competent enough to understand the intricacies of stock market. This iswhere mutual funds come to the rescue.

A mutual fund is a group of investors operating through a fund manager to purchase adiverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easyto invest in. By pooling money together in a mutual fund, investors can purchase stocksor bonds with much lower trading costs than if they tried to do it on their own. Also, one

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doesn't have to figure out which stocks or bonds to buy. But the biggest advantage ofmutual funds is diversification.

Diversification means spreading out money across many different types of investments.When one investment is down another might be up. Diversification of investment

holdings reduces the risk tremendously.

Mutual Funds in India (1964 - 2000)

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 groupsto 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.

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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 Rs. 25 crore in 1964 the

industry has grown at a compounded average growth rate of 27% to its current size of

Rs.90000 crore.

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.

1999YEAR OF THE FUNDS Mutual funds have been around for a long period of

time to be precise for 36 yrs but the year 1999 saw immense future potential and

developments in this sector. This year signaled the year of resurgence of mutual fundsand the regaining of investor confidence in these MFs. This time around all the

participants are involved in the revival of the funds ----- the AMCs, the unit holders, the

other related parties. However the sole factor that gave lifer to the revival of the funds

was the Union Budget. The budget brought about a large number of changes in one

stroke. An insight of the Union Budget on mutual funds taxation benefits is provided

later.

It provided centre stage to the mutual funds, made them more attractive and provides

acceptability among the investors. The Union Budget exempted mutual fund dividend

given out by equity-oriented schemes from tax, both at the hands of the investor as well

as the mutual fund. No longer were the mutual funds interested in selling the concept of

mutual funds they wanted to talk business which would mean to increase asset base, and

to get asset base and investor base they had to be fully armed with a whole lot of schemes

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for every investor .So new schemes for new IPOs were inevitable. The quest to attract

investors extended beyond just new schemes. The funds started to regulate themselves

and were all out on winning the trust and confidence of the investors under the aegis of

the Association of Mutual Funds of India (AMFI)

One cam say that the industry is moving from infancy to adolescence, the industry is

maturing and the investors and funds are frankly and openly discussing difficulties

opportunities and compulsions.

Global Scenario

Some basic facts:

Currently, the worldwide value of all mutual funds totals more than $26 trillion.

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.

Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only

Fidelity and Capital are non-bank mutual funds in this group.

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

Internationally, mutual funds are allowed to go short. In India fund managers do

not have such leeway.

In the U.S. about 9.7 million households will manage their assets on-line by the

year 2008, such a facility is not yet of avail in India.

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.

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 2008.

(Source: The Financial Express)

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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)

Such increases in volumes are expected to bring about large changes in the way Mutual

Funds conduct their business. Some of the basic changes are:

Lower Costs: Distribution of funds will fall in the online trading regime by 2006.

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.

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.

In India , brokers could get more Net savvy than investors and could help the

investors with the knowledge through get from the Net.

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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.

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.

Net based advertisements: There will be more sites involved in ads andpromotion 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.

Since 1940, there have been three basic types of investment companies in the United

States: open-end funds, also known in the US as mutual funds; unit investment trusts

(UITs); and closed-end funds. Similar funds also operate in Canada. However, in the rest

of the world, mutual fund is used as a generic term for various types of collective

investment vehicles, such as unit trusts, open-ended investment companies (OEICs),

unitized insurance funds, and undertakings for collective investments in transferable

securities (UCITS).

FUTURE SCENARIO:

The asset base will continue to grow at an annual rate of about 30 to 35 % over the next

few years as investors 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

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8/7/2019 Finance Project on M

Finance Project on Mutual Fund

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