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INTRODUCTION
The Industrial Development Bank of India (IDBI) was establish on
1st July, 1964 under the Industrial Development Bank of India Act, as a
wholly owned Subsidiary of the Reserve Bank of India. In terms of the
public Financial Institutions Laws (Amendment) Act, 1975,the ownership
of the IDBI has been transferred to the Central Government with effect
from 16th February 1976. It is deal with all the problems of Industrial
financing and development and to enforce a system of priorities in
promoting industrial growth. Unlike commercial banking, which had a
fairly long history in must development countries, development banking
is of a comparatively recent origin. The role played by Government and
the central banks in establishing development banks in Asian Countries
has bees much more comprehensive than the institutions in the developed
countries of the west.
In India after independence, many financial and development
institutions the Industrial finance corporation, the Industrial Credit and
investment corporation, the National Industrial Development
Corporation, the Refinance corporation and the National and state small
Industries corporations have been established to serve the needs of IndianIndustry. But all their institutions have not been able to make substantial
contributions to the Industrial progress as envisaged in our five-year
plans.
The Industrial Development Bank of India (IDBI) was established
on July 1, 1964 as a wholly owned subsidiary of the Reserve Bank of
India (RBI - the Central Bank of the country) under an Act of Parliament.
In view of the manifold increase in its activities and diverse
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responsibilities, the ownership of IDBI was transferred to Government of
India (GoI) in February 1976 and it was made the principal financial
institution for co-ordination the activities of institutions engaged in
financing, promotion or development of industry in the country as also
for providing credit and other facilities for the development of industry.
Later, in 1995, IDBI made its first public offering of equity shares, after
the IDBI Act was amended in 1994 to permit public ownership up to 49%
of its issued capital. Government of Indias shareholding in IDBI today
stands at around 58%.
IDBI played a pioneering role, particularly in the pre-reform era
(1964-91), in catalyzing broad-based industrial development in the
country in keeping with its Government-ordained 'development banking'
charter. IDBIs activities were not confined merely to long-term project
lending to industry; instead, these covered a host of services undertaken
in pursuit of broader development goals aligned to Government of Indiasvaried socio-economic objectives in the realm of industry. The latter
encompassed, among others, balanced industrial growth through
development of identified backward areas, modernization of specific
industries, employment creation, identification and encouragement to
new entrepreneurs along with support services for creating a deep and
vibrant domestic capital market, including apposite institutionaldevelopment.
A slew of financial sector reforms unveiled by the Government
since 1992, aimed at domestic deregulation and greater global integration,
posed new challenges for DFIs like IDBI in pursuit of their DFI mandate.
IDBI sought to address the environmental challenges and the
opportunities they represent by evolving an array of fund and fee-based
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services to provide an integrated solution to the entire gamut of financial
and corporate advisory requirements of its clients, extending IDBIs
business platform to other geographical areas and related new business,
besides undertaking innovative resource-raising initiatives in domestic
and foreign markets, both wholesale and retail.
Total assistance sanctioned under all products by IDBI aggregated
Rs. 28.89 billion in 2002-03. Disbursements during the same year
amounted to Rs. 39.24 billion. Cumulative assistance sanctioned and
disbursed by IDBI since its inception upto end-March 2003 stood at
around Rs. 2250 billion (USD 48 billion) and Rs. 1700 billion (USD 36
billion) respectively.
IDBI is a fundamentally strong, consistently profit-earning and
dividend-paying organization. The Bank continues to maintain a sound
capital base as represented by the Capital Adequacy Ratio (CAR), basedon the calculation of risk-weighted assets, as per RBI norms. As against
the RBI stipulation of 9% for Total CAR, the CAR as at end-March 2003
was 18.7%.
The reasons is that their institutions were neither intended nor
equipped to carry the major burden of financing industrial expansion andgrowth in various directions. Their capital resources are relatively
meager, and the statutory framework with which they operate is
restrictive. The Industrial Development Bank of India was established
mainly with a view to overamaking the limitations of these institutions.
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H The Functions of the Industrial Development Bank of India are:
To grant loans and/or to subscribe to the debentures of Industrial
concerns, with the provision that such loan, advances oz debentures
may, if so desired by the bank;
To refinance loans given by specified financial institutions to
Industrial concern.
To subscribe to or purchase stock, share or bonds of any Industrial
concern or financial institution or to underwrite stocks, share, bonds,
debentures, etc., of any of them;
To guarantee loans floated by industrial concerns, as also the deferred
payment credits for exports; and
To undertake marketing and investment research and surveys or carry
out techno-economic studies.
As an open financial institution, the IDBI has been assigned a
special role for planning, promoting and developing industries to fill vital
gaps in the industrial structure; providing technical and administrative
assistance for promotion, management and expansion of Industry; and
undertaking market and Investment research and surveys as also techo-
economic studies in connection with development of industry. Beside itsHead office at Mumbai, Calcutta, Guwahati, Chenndi and New Delhi and
49 branch offices in various states.
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The Future
IDBI bank looks confidently into the future to face and thrive in
the intense competitive environment that is emerging. The bank has now
gained experience and has in place the strategies required for gaining a
leadership position. With cutting edge relevant technology, aggressive
marketing, innovation, tight control over costs and with its motivated
workforce, the bank is all set to emerge as a model global corporate
citizen in the days ahead.
IDBI, the tenth largest development bank in the world has
promoted world class institutions in India. A few of such institutions built
by IDBI are The National Stock Exchange (NSE), The National
Securities Depository Services Ltd. (NSDL), Stock Holding Corporation
of India (SHCIL) etc. IDBI is a strategic investor in a plethora of
institutions, which have revolutionized the Indian Financial Markets.
IDBI promoted idbi bank to mark the formal foray of the IDBI
Group into commercial Banking. This initiative has blossomed into a
major success story. IDBI bank, which began with an equity capital base
of Rs.1000 million (Rs.800 million contributed by IDBI and Rs.200million by SIDBI), commenced its first branch at Indore in November
1995. Thereafter in less than seven years the bank has attained a
frontranking position in the Indian Banking Industry.
IDBI bank successfully completed its public issue in February 99
which led to its paid-up capital expanding to Rs.1400 million. The
promoters holding consequent to this public issue stood reduced to 71%
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with IDBI holding 57% and SIDBI 14% of the paid up capital of IDBI
Bank. This is in line with the requirement of RBI which stipulates that
eventually the promoters holding should be brought down to 40%.
Future Prospects
The present liberalized industrial and financial sector environment
makes it imperative for the Development Financial Institutions (DFIs) to
reinvent them in the changed business environment. One alternative is to
diversify business activities so that dependence on industry sector is
reduced. A strategic migration into a viable commercial banking model
could be one way to achieve such diversification. Commercial banking
would, inter alia, provide a wide retail reach, making it possible to raise
low-cost funds, the benefits of which would be passed on to our clients.
Such a transformation would also enable the Bank to acquire a wider
array of assets, which would thereby facilitate maintaining overall asset
quality at the required level.
While advent of new technology has obviated the need to have a
widespread branch network, it is important to build an appropriate
technology platform to attract and retain customers. It would also be
necessary to acquire a critical mass of banking assets to be able to
expeditiously derive the benefits of diversification.
In the immediate future, IDBI envisions a continued strategic focus
on corporate and wholesale banking segments, building upon its secular
core competence in term lending and project finance. This would also
enable IDBI to offer an integrated financial solution to its corporate
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clients. The Bank would strive to be a major player in the infrastructure
finance area, besides retaining leadership status in industrial finance.
IDBI would dedicate itself towards exploring new markets and industries
(including constituents of the burgeoning services sector), offer new
customized products and services, access newer sources of finance and
generate innovative and gainful business solutions for its corporate
clientele.
IDBI would also consider entering into mutually beneficial
alliances with financial players, both domestic and international. These
business nuptials would centre around sharing of resources, markets,
technology and skills to enhance shareholder value on both sides. IDBIs
diversification charter would emphasize ring fencing and adding synergy
to its core competence in project finance.
In view of the felt need to impart operational flexibility anddiversified charter to IDBI, Government of India has sought to repeal the
IDBI Act, 1964, by introducing the Industrial Development Bank
(Transfer of Undertaking and Repeal) Bill 2002 in the Lok Sabha. The
Bill, which is awaiting Parliamentary approval, is aimed at converting
IDBI into a Company under the Companies Act and enabling it to
undertake banking business. The corporate form is considered to be moreappropriate as it would enable the Bank to operate in a flexible manner.
These initiatives are in consonance with IDBIs long-term strategy
of achieving a top-drawer status in the emerging configuration of
institutional finance and assuming a globally relevant character.
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INTRODUCTION OF MUTUAL FUND
A 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 invested by the fund manager in different types of securities depending
upon the objective of the scheme. These could range from shares to
debentures to money market instruments. The income earned through
these investments and the capital appreciation realized by the scheme are
shared by its unit holders in proportion to the number of units owned by
them (pro rata). 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 portfolio at a relatively low cost. Anybody with
an investible surplus of as little as a few thousand rupees can invest inMutual Funds. Each Mutual Fund scheme has a defined investment
objective and strategy.
A mutual fund is the ideal investment vehicle for todays complex
and modern financial scenario. Markets for equity shares, bonds and other
fixed income instruments, real estate, derivatives and other assets have
become mature and information driven. Price changes in these assets are
driven by global events occurring in faraway places. A typical individual
is unlikely to have the knowledge, skills, inclination and time to keep
track of events, understand their implications and act speedily. An
individual also finds it difficult to keep track of ownership of his assets,
investments, brokerage dues and bank transactions etc.
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A mutual fund is the answer to all these situations. It appoints
professionally qualified and experienced staff that manages each of these
functions on a full time basis. The large pool of money collected in the
fund allows it to hire such staff at a very low cost to each investor. In
effect, the mutual fund vehicle exploits economies of scale in all three
areas - research, investments and transaction processing. While the
concept of individuals coming together to invest money collectively is
not new, the mutual fund in its present form is a 20th century
phenomenon. In fact, mutual funds gained popularity only after the
Second World War. Globally, there are thousands of firms offering tens
of thousands of mutual funds with different investment objectives. Today,
mutual funds collectively manage almost as much as or more money as
compared to banks.
A draft offer document is to be prepared at the time of launching
the fund. Typically, it pre specifies the investment objectives of the fund,
the risk associated, the costs involved in the process and the broad rules
for entry into and exit from the fund and other areas of operation. In
India, as in most countries, these sponsors need approval from a
regulator, SEBI (Securities exchange Board of India) in our case. SEBIlooks at track records of the sponsor and its financial strength in granting
approval to the fund for commencing operations.
A sponsor then hires an asset management company to invest the
funds according to the investment objective. It also hires another entity to
be the custodian of the assets of the fund and perhaps a third one to
handle registry work for the unit holders (subscribers) of the fund.
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In the Indian context, the sponsors promote the Asset Management
Company also, in which it holds a majority stake. In many cases a
sponsor can hold a 100% stake in the Asset Management Company
(AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life
Asset Management Company Ltd., which has floated different mutual
funds schemes and also acts as an asset manager for the funds collected
under the scheme.
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What is Mutual Fund?
Invest / Pool Profit/LossTheir money from Portfolio
Of investments
Investing a Profit/LossNumber of from individual
Stocks/Bonds Of investments
A Mutual Fund is a common pool of money in to which investors
with common investment 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 fund would invest in bonds,
debentures, gilts etc.
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Investors
Mutual Fund Co.(Pool of money)
Market(Fluctuates)
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Benefits of Mutual Funds:-
1. Universal Benefits
Affordability:
A mutual fund invests in a portfolio of assets, i.e. bonds, shares,
etc. depending upon the investment objective of the scheme. An investorcan buy in to a portfolio of equities, which would otherwise be extremely
expensive. Each unit holder thus gets an exposure to such portfolios with
an investment as modest as Rs.500/-. This amount today would get you
less than quarter of an Infosys share! Thus it would be affordable for an
investor to build a portfolio of investments through a mutual fund rather
than investing directly in the stock market.
Diversification:-
The nuclear weapon in your arsenal for your fight against Risk. It
simply means that you must spread your investment across different
securities (stocks, bonds, money market instruments, real estate, fixed
deposits etc.) and different sectors (auto, textile, information technology
etc.). This kind of a diversification may add to the stability of your
returns, for example during one period of time equities might
underperform but bonds and money market instruments might do well
enough to offset the effect of a slump in the equity markets. Similarly the
information technology sector might be faring poorly but the auto and
textile sectors might do well and may protect your principal investment as
well as help you meet your return objectives.
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Variety
Mutual funds offer a tremendous variety of schemes. This variety
is beneficial in two ways: first, it offers different types of schemes to
investors with different needs and risk appetites; secondly, it offers an
opportunity to an investor to invest sums across a variety of schemes,
both debt and equity. For example, an investor can invest his money in a
Growth Fund (equity scheme) and Income Fund (debt scheme) depending
on his risk appetite and thus create a balanced portfolio easily or simply
just buy a Balanced Scheme.
Professional Management:-
Qualified investment professionals who seek to maximize returns
and minimize risk monitor investor's money. When you buy in to a
mutual fund, you are handing your money to an investment professional
that has experience in making investment decisions. It is the Fund
Manager's job to (a) find the best securities for the fund, given the fund's
stated investment objectives; and (b) keep track of investments and
changes in market conditions and adjust the mix of the portfolio, as and
when required.
Tax Benefits
Any income distributed after March 31, 2002 will be subject to tax
in the assessment of all Unit holders. However, as a measure of
concession to Unit holders of open-ended equity-oriented funds, income
distributions for the year ending March 31, 2003, will be taxed at a
confessional rate of 10.5%.
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In case of Individuals and Hindu Undivided Families a deduction
upto Rs. 9,000 from the Total Income will be admissible in respect of
income from investments specified in Section 80L, including income
from Units of the Mutual Fund. Units of the schemes are not subject to
Wealth-Tax and Gift-Tax.
Regulations:-
Securities Exchange Board of India (SEBI), the mutual funds
regulator has clearly defined rules, which govern mutual funds. These
rules relate to the formation, administration and management of mutual
funds and also prescribe disclosure and accounting requirements. Such a
high level of regulation seeks to protect the interest of investors.
1. Benefits of Open-ended Schemes
Liquidity
In open-ended mutual funds, you can redeem all or part of your
units any time you wish. Some schemes do have a lock-in period where
an investor cannot return the units until the completion of such a lock-in
period.
Convenience: -
An investor can purchase or sell fund units directly from a fund,
through a broker or a financial planner. The investor may opt for a
Systematic Investment Plan (SIP) or a Systematic Withdrawal
Advantage Plan (SWAP). In addition to this an investor receives
account statements and portfolios of the schemes.
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Flexibility: -
Mutual Funds offering multiple schemes allow investors to switch
easily between various schemes. This flexibility gives the investor a
convenient way to change the mix of his portfolio over time.
Transparency :
Open-ended mutual funds disclose their Net Asset Value (NAV)
daily and the entire portfolio monthly. This level of transparency, where
the investor himself sees the underlying assets bought with his money, is
unmatched by any other financial instrument. Thus the investor is in the
know of the quality of the portfolio and can invest further or redeem
depending on the kind of the portfolio that has been constructed by the
investment manager.
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Structure of Mutual Fund
Sponsor:
Sponsor is the person who acting alone or in combination with
another body corporate establishes a mutual fund. Sponsor must
contribute at least 40% of the networth of the Investment Managed and
meet the eligibility criteria prescribed under the Securities and Exchange
Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not
responsible or liable for any loss or shortfall resulting from the operation
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SEBI
AMC
Fund Manager
Mutual Fund
Schemes
Investor
SponsorTrustee
Operations
Market/Sales Market/Sales
Distributor
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of the Schemes beyond the initial contribution made by it towards setting
up of the Mutual Fund.
Trust:
The Sponsor constitutes the Mutual Fund as a trust in accordance
with the provisions of the Indian Trusts Act, 1882. The trust deed is
registered under the Indian Registration Act, 1908.
Trustee:-
Trustee is usually a company (corporate body) or a Board of
Trustees (body of individuals). The main responsibility of the Trustee is
to safeguard the interest of the unit holders and inter alia ensure that the
AMC functions in the interest of investors and in accordance with the
Securities and Exchange Board of India (Mutual Funds) Regulations,
1996, the provisions of the Trust Deed and the Offer Documents of the
respective Schemes. At least 2/3rd directors of the Trustee are
independent directors who are not associated with the Sponsor in any
manner.
Asset Management Company (AMC):-
The Trustee as the Investment Manager of the Mutual Fund
appoints the AMC. The AMC is required to be approved by the Securities
and Exchange Board of India (SEBI) to act as an asset management
company of the Mutual Fund. At least 50% of the directors of the AMC
are independent directors who are not associated with the Sponsor in any
manner. The AMC must have a networth of at least 10 crore at all times.
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Registrar and Transfer Agent: -
The AMC if so authorized by the Trust Deed appoints the Registrar
and Transfer Agent to the Mutual Fund. The Registrar processes the
application form, redemption requests and dispatches account statements
to the unit holders. The Registrar and Transfer agent also handles
communications with investors and updates investor records.
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TYPES OF MUTUAL FUNDS
In the investment market, one can find a variety of investors with
different needs, objectives and risk talking capacities.
MUTUAL FUND
On the basis of On the basis ofExecution and yield and investment
Operation pattern
Close- Open - Income Growth Balance
Ended Ended Fund Fund Fund
Specialised Money TaxationFund Market Fund
Mutual Fund schemes can broadly be classified into many types asgiven below:
Close-ended Funds:-
The unit capital of a close-ended product is fixed as it makes a one-
time sale of fixed number of units. These schemes are launched with an
initial public offer (IPO) with a stated maturity period after which the
units are fully redeemed at NAV linked prices. In the interim, investors
can buy or sell units on the stock exchanges where they are listed. Unlike
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open-ended schemes, the unit capital in closed-ended schemes usually
remains unchanged. After an initial closed period, the scheme may offer
direct repurchase facility to the investors. Closed-ended schemes are
usually more illiquid as compared to open-ended schemes and hence
trade at a discount to the NAV. This discount tends towards the NAV
closer to the maturity date of the scheme.
Features: - The main features of the close-ended funds are:
The period and/or the target amount of the fund are definite and fixed
beforehand.
Once the period is over and/or the target is reached, the door is closed
for the investors. They cannot purchase any more units.
These units are publicly traded through stock exchange and generally,
there is no repurchase facility by the fund.
The main objective of this fund is capital appreciation.
The whole fund is available for the entire duration of the scheme and
there will not be any redemption demands before its maturity.
At the time of redemption, the entire investment pertaining to a
closed-end scheme is liquidated and the proceeds are distributed
among the unit holders.
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.
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Features: - The main features of the Open-ended funds are:
There is complete flexibility with regard to one's investment or
disinvestment.
These units are not publicly traded but the Fund is ready to repurchase
them and resell them at any time.
The investor is offered install liquidity in the sense that the unit can be
sold on any working day to the Fund.
The main objective of this fund is income generation. The inventors
get dividend, right or bonuses as rewards for their investment.
Generally, the listed prices are close to their Net Asset Value. The
Fund fixes a different price for their purchases and sales.
On The Basis Of Income
Income Funds:-
The aim of income funds is to provide regular and steady income
to investors. Such schemes generally invest in fixed income securities
such as bonds, corporate debentures and Government securities. Income
Funds are ideal for capital stability and regular income.
Features: - The main features of the Income funds are:
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The investor is assured of regular income at periodic intervals, says
Half- yearly or years and so on.
The main objective of this type fund is to declare regular dividends
and not capital appreciation.
The pattern of investment is oriented towards high and fixed income
yielding securities like debentures, bonds etc.
This is best suited to the old and retired people who may not have any
regular income.
It concerns itself with short run gains only.
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.
Features: - The main features of the Growth funds are:
The Growth oriented fund aims at meeting the investors' need for
capital appreciation.
The Investment strategy therefore, conforms to the Fund objective by
investing the fund predominantly on equities with high growth
potential.
The Fund tries to get capital appreciation by taking much risk and
investing on risk bearing equities and high growth equity shares.
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The Fund may declare dividend, but its principal objective is only
capital appreciation.
This is best suited to salaried and business people who have high risk
bearing capacity and ability to defer liquidity. They can accumulate
wealth for future needs.
Balance 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 income securities 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.
Specialised Funds:-
Index schemes:-
The primary purpose of an Index is to serve as a measure of the
performance of the market as a whole, or a specific sector of the market.
An Index also serves as a relevant benchmark to evaluate the
performance of mutual funds. Some investors are interested in investing
in the market in general rather than investing in any specific fund. Such
investors are happy to receive the returns posted by the markets. As it is
not practical to invest in each and every stock in the market in proportion
to its size, these investors are comfortable investing in a fund that they
believe is a good representative of the entire market. Index Funds are
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launched and managed for such investors. An example to such a fund is
the HDFC Index Fund.
Tax Saving schemes:
Investors (individuals and Hindu Undivided Families HUFs) are
being encouraged to invest in equity markets through Equity Linked
Savings Scheme (ELSS) by offering them a tax rebate. Units purchased
cannot be assigned / transferred/ pledged / redeemed / switched out
until completion of 3 years from the date of allotment of the respective
Units.
Money Market Funds:
The aim of money market funds is to provide easy liquidity,
preservation of capital and moderate income. These schemes generally
invest in safer short-term instruments such as treasury bills, certificates of
deposit, commercial paper and inter-bank call money. Returns on these
schemes may fluctuate depending upon the interest rates prevailing in the
market. These are ideal for corporate and individual investors as a means
to park their surplus funds for short periods.
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
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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.
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 assets in the fund, this is the amountthat 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 givenbelow.
Asset value is equal to
Sum of market value of shares/debentures
+ Liquid assets/cash held, if any
+ Dividends/interest accrued
Amount due on unpaid assets
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Expenses accrued but not paid
For liquid shares/debentures, valuation is done on the basis of the
last or closing market price on the principal exchange where the security
is traded
For liquid and unlisted and/or thinly traded shares/debentures, the
value has to be estimated. For shares, this could be the book value per
share or an estimated market price if suitable benchmarks are available.
For debentures and bonds, value is estimated on the basis of yields of
comparable liquid securities after adjusting for illiquidity. The value of
fixed interest bearing securities moves in a direction opposite to interest
rate changes Valuation of debentures and bonds is a big problem since
most of them are unlisted and thinly traded. This gives considerable
leeway to the AMCs on valuation and some of the AMCs are believed to
take advantage of this and adopt flexible valuation policies depending onthe situation.
Interest is payable on debentures/bonds on a periodic basis say
every 6 months. But, with every passing day, interest is said to be
accrued, at the daily interest rate, which is calculated by dividing the
periodic interest payment with the number of days in each period. Thus,accrued interest on a particular day is equal to the daily interest rate
multiplied by the number of days since the last interest payment date.
Usually, dividends are proposed at the time of the Annual General
meeting and become due on the record date. There is a gap between the
dates on which it becomes due and the actual payment date. In the
intermediate period, it is deemed to be "accrued".
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Financial Planing
1) Financial Planner - Generalist or Specialist?
It is useful to draw parallels between the family doctor and the
Financial Planner. The family doctor takes care of your physical health.
She is typically a general practitioner (GP), who recommends you to a
cardiologist, surgeon, dentist, and ophthalmologist etc as per your needs.
The Financial Planner takes care of the fiscal (financial) health of
the investor, and ensures orderly bequeathing of wealth to the next
generation. The skill set requirement include-
General awareness of various assets classes and financial products.
Understanding of portfolio management principals.
Understanding of economic cycles and their impact on markets.
Knowledge of income tax.
Knowledge of laws related to ownership of assets, estate planing etc.
Reading of people and their comfort zones.
Expecting a financial planner to be an expert in all the above skills
is like expecting a person to jump between building like Superman,
hypnotise people like Mandrake and shoot like Phantom- an idealistic
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situation. A good financial planner would have all the above skill sets to
an extent. She may also be an expert on some of these skills.
Thus, we can view the financial planner as more of as generalist,
who would fall back on a specialist as per the needs of the situation.
2) Steps to Financial Planing
The certified Financial Planner-Board of Standards (USA)
recommends. The following six broad steps-
Establish and define the client planner relationship.
Gather client data, define client goals.
Analyse and evaluate client's financial status.
Develop and present financial planing recommendations.
Implement the financial planing recommendations.
Monitor the financial planing recommendation.
3) Assets Classes
As seen earlier, investing the entire portfolio in debt is not
necessarily a prudent option. Inflation and re-investment risks can wreak
havoc to the life of such investors. Prudence therefore lies in investing in
a mix of asset classes.
The performance of different assets class hinges on how of
economy performs. Economies tend move in cycles- often referred to as
business cycles. From a trough the economy expands, then reaches a
peak, and then contracts into a trough.
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The financial planner's reading of the economic environment is
important. For instance, while economy is becoming, equity investment
would generate good returns. But in a contractionary phase in the
business cycle, debt investments may be more prudent.
Financial planners need to be able to anticipate the cycles. To draw
an analogy, it is difficult the day to day temperature and rainfall- but the
seasonal cycle can be predicted. So also financial planners may not be
able to read the short-term fluctuations, but the long term business cycle
need to be factored in the financial plans they make.
One categorization of assets would be debt and equity. In India,
even gold is an important asset category. Besides, real estate could be
another component of a client's asset portfolio.
An asset categorization relevant for a fund distributor is liquid
schemes, Gilt Schemes, Balanced Schemes, Index Schemes, Bond
Schemes, Diversified Schemes, Equity Schemes, and Sectoral or
Focussed Schemes, etc.Every asset class and mutual fund type implies a risk- return
tradeoff. Generally, one has to take a greater risk for a chance to earn a
higher return. The AMFI Mutual Fund Testing Programme Workbook
provides a useful comparison of investment alternatives.
Return Safety Volatility Liquidity ConveniencesEquity High Low High High or Low
Moderate
FI Bonds Moderate High Moderate Moderate High
Co.Debenture
Moderate Moderate Moderate Low Low
Co. FDs Moderate Low Low Low Moderate
BankDeposits
Low High Low High High
PPF Moderate High Low Moderate HighLife Low High Low Low Moderate
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Insurance
Gold Moderate High Moderate Moderate Low
Real Estate High Moderate High Low Low
Mutual
Funds
High High Moderate High High
Notes: - Table reproduced with permission of the Association of Mutual
Funds of India.
4) Asset Allocation: -
The optimum asset allocation for a client would depend on her
wealth cycle and life cycle.
The Wealth Cycle
People typically go through three-wealth cycle phases-
Accumulation / sowing: -
Where the person's saving is much more than current needs. So she
is in a position to set apart something for the future.
Distribution / Reaping / Harvesting: -
Where the person's needs cannot be fully met by current savings.
The gap would need to be met out of savings or loans.
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Transition: -
This is a phase between the accumulation and distribution phases,
when the distribution needs are very clearly in the person's radar,
although the harvesting may not have commenced.
Windfall: -
This is a phase that touches people's lives occasionally. It could be
winning from a lottery, super- normal profits booked on investments,
inheritance etc.
The risk-based asset allocation would be different foe each phase.
The AMFI Mutual Fund Testing Programme Workbook proposes the
following mix:
Accumulation: -
Asset Allocation
Diversified equity, sector and balanced funds 65-80%
Income and gift funds 15-30%
Liquid funds and bank deposits 5%
Distribution: -
Asset Allocation
Diversified equity and balanced funds 15-30%
Income funds 65-80%
Cash funds 5%
Note: - Tables reported with permission of the Association of Mutual
Funds of India.
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A thumb-rule often followed is that age of the client would
determine the share of debt in the portfolio. Thus, a 30-year old person
would have 30% debt, an 80-year old person would have 80% debt in her
portfolio. The thumb rule should not be stretched too much- else a person
who lives beyond 100 would end up short-selling equity-hardly an age for
such all portfolio management style! The approach is referred to as
strategic asset allocation.
During the transaction stage, the investor would be well advised to
park increasing proportions of money in liquid assets. Once the expected
goals have passed, the investor can go back the distribution suggested by
strategic asset allocation.
The windfall situation is interesting. When the client wins a lottery,
she realise there are so many so- called friends or relatives - includingmany who have not bothered to maintain contact for several years.
Money in the bank is always a temptation for a splurge (person
accustomed to travel by train, deciding to buy a Mercedes Benz!) or
altruism.
It would be prudent not to blow up the money, nor invest all themoneys at the same time. The moneys could first be invested in a safe
and liquid avenue (liquid schemes for instance). Progressively, the
moneys can be invested in equity or other investments, as per the
preferred asset allocation. Through progressive investments, the investor
can avail of the benefits of SIP.
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Thus, during the transition and windfall stages, the investor's asset
allocation would be temporary at variance from that suggested by the
strategic asset allocation approach.
The Life Cycle
Birth, childhood, graduation, early employment, marriage,
children, education/ marriage of children and retirement - these are the
phases that people normally go through. The asset allocation and
investment choices that are made would need to keep the life cycle in
mind.
Thus in the early stages of one's professional career, the investment
mix would be more like that set our above for the 'Accumulation' phase in
the wealth cycle. Towards retirement, it would be more like the
'Distribution' phase in the wealth cycle. The investment mix would need
to specifically provide for expected spikes in expenses in between
('Transition' phase), such as for buying house, marriage of children etc.
An aggressive growth fund would find a place in the portfolio ofyounger investors with a propensity to take risk.. Older investors would
find the equity portion of their portfolio dominated by equity income
funds. As seen earlier, close to a large and sure fund outflow for people
who are in the transition phase (some requirement of funds in the radar),
moneys would be transferred to money market or other debt funds. Thus,
scheme selection becomes a function of both risk profile and cash flow
needs of an investor.
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5) Financial plan Investing and Goal-
oriented Investing
A financial plan sets out a complete road map for the investor to
realize her dreams. It would consider the requirement of funds at various
points of time in future, current wealth, expected earnings in future, and
mix of investments, the return on which would help realize the dreams.
By combining all dreams and funding possibilities, a financial plan
optimizes the dream fulfillment. It provides the investor a cockpit view of
her entire financial landscape. She knows right the dreams that are likely
to be fulfilled, and the dreams that are only 'day dreaming exercises'. If
required, she can review her future before failed dreams become a
nightmare. Similarly, on the investment side, she gets the complete
picture in terms of her debt-equity exposure.
The alternative to investing as per financial plan is goal- oriented
investment. In a goal oriented investment process, each dream is viewed
in isolation and investments are made to fulfill the dream. Thus each
dream has an identified set of investments made the intention of funding
the dreams. For instance, it is decided that the daughter's marriage would
be funded out of gold, while the extra land would be sold to fund the
son's education.
6) Scheme selection: -
The parameters to compare scheme were set out in above. Risk
profile, asset allocation and relative risk levels in different investments
were discussed earlier in this chapter. Based on these, the financial
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planner would advise the investor on distribution of investment across
different schemes. In effect, the financial planner would recommend a
model portfolio most appropriate for the investor.
ICICI
Prudential ICICI Asset Management Company, (55%: 45%) a joint
venture between Prudential Plc, UK's leading insurance company andICICI Bank Ltd, India's premier financial institution.
The joint venture was formed with the key objective of providing
the Indian investor mutual fund products to suit a variety of investment
needs. The AMC has already launched a range of products to suit
different risk and maturity profiles.
Prudential ICICI Asset Management Company Limited has a
networth of about Rs. 69.89 crore (1 crore = 10 million) as of March 31,
2002. Both Prudential and ICICI Bank LTD have a strategic long-term
commitment to the rapidly expanding financial services sector in India.
PruICICI will conduct its business with
Honesty and trustworthiness in all interactions.
A pioneering spirit and excellence in action.
Collaboration and teamwork.
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An understanding of customer needs and the desire to satisfy them.
The highest service standards.
A consistently above average performance.
SPONSORS: -
Prudential plc is a leading international financial services group
providing retail financial products and services and fund management to
many millions of customers worldwide. As a group Prudential plc has, as
of 31 December 2002, over GBP155 billion of funds under management,
more than 12 million customers and over 15,000 employees, worldwide.
Prudential is focused on the Internet generation and is one of the
first financial service organisations to use the Internet on a fully
integrated basis. In October 1998, Prudential launched a "branches" bank
based on the Internet. The bank has in a short span of its existence
become a leading banking service provider in the UK. Infect in the first
six months of its existence it garnered over 5 billion (US$ 8 billion) in
deposits from over 500,000 customers. Development of superior products
and services that offer value for money and security while producing
superior financial returns, enables Prudential to maximise the value of its
shareholder's investment and to establish lasting relationships with
customers and policy holders.
ICICI Ltd (Since Merged into ICICI Bank Ltd) was established in
1955 by the World Bank, the Government of India and the Indian
Industry, to promote industrial development of India by providing project
and corporate finance to Indian industry.
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Since inception ICICI has grown from a development bank to a
financial conglomerate and has become one of the largest public financial
institutions in India. ICICI Bank is Indias second largest bank with an
asset base of Rs.106, 812 crore. ICICI Bank provides a broad spectrum of
financial services to individuals and companies. This includes mortgages,
car and personal loans, credit and debit cards, corporate and agricultural
finance. The Bank services a growing customer base of more than 7
million customers and 6 million bondholder accounts through a multi-
channel access network. This includes about 450 branches and extension
counters, 1675 ATMs, call centers and Internet banking (Source: Press
Release dated May 23, 2003 at www.icicibank.com ). ICICI Bank posted
a net profit of Rs.1, 206 crore for the year ended March 31, 2003. ICICI
Bank is the only Indian company to be rated above the country rating by
the international rating agency Moodys and the only Indian company to
be awarded an investment grade international credit rating. The Bank
enjoys the highest AAA (or equivalent) rating from all leading Indianrating agencies. ICICI Bank was originally promoted in 1994 by ICICI
Limited, an Indian financial institution, and was its wholly owned
subsidiary.
Prudential ICICI offer employees an ideal environment to progress
their careers and enhance their skills. At Prudential ICICI, each person is
given a great deal of independence and responsibility to manage their
assignments and make their contributions count.
We strive to provide our people with a professional work
environment and a culture of respect, openness and trust. We seek to
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reward our people commensurate with their contributions at a competitive
standard compared to the industry. Our managers in PruICICI are
measured on how they build an environment that engenders meritocracy
and rewards contribution. Our salary plus bonus compensation
framework provides each person a means of substantially benefiting
through performance related pay.
Birla Sun Life Insurance Company
Birla Sun Life Financial Services offers a range of financial
services for resident Indians and Non Resident Indians. Brought together
by two large, powerful and reputed business houses, the Aditya Birla
Group and Sun Life Financial, it is our aim to offer diverse and top
quality financial services to customers. The Mutual Fund and Insurance
companies provide wealth management and protection products to
customers while the Distribution and Securities companies provide
brokerage and trading services for investment in equities, debt securities,
fixed deposits, etc.
Birla Sun Life Asset Management Company Limited
Birla Sun Life Mutual Fund follows a conservative long-term
approach to investment, which is based on identifying companies that
have good credit-worthiness and are fundamentally strong. It places a lot
of emphasis on quality of management and risk control. This is done
through extensive analysis that includes factory visits and field research.
It has one of the largest team of research analysts in the industry. The
company is one of India's leading, private mutual funds with a large
customer base. It has been recognised nationally with coveted awards.
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HDFC
HDFC was incorporated in 1977 as the first Specialised housing
finance institution in India. HDFC provides financial assistance to
individuals, corporates and developers for the purchase or construction of
residential housing. It also provides property related services (e.g.
property identification, sales services and valuation), training and
constancy. Of these activities, housing finance remains the dominant
activity. HDFC currently has a client base of over 5,00,000 borrowers,
13,00,000 depositors, 1,00,000 shareholders and 52,000 deposit agents.
HDFC raises funds from international agencies such as the World Bank,
IFC (Washington), USAID, CDC, ADB and KfW, domestic term loans
from banks and insurance companies, bonds and deposits. HDFC has
received the highest rating for its bonds and deposits program for the
eighth year in succession. HDFC Standard Life Insurance Company
Limited, promoted by HDFC was the first life insurance company in theprivate sector to be granted a Certificate of Registration (on October 23,
2000) by the Insurance Regulatory and Development Authority to
transact life insurance business in India.
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EQUITY FUNDS
ICICI HDFC BIRLA
Date of inception 04-Oct-94 23-Dec-94 25-Dec-94Corpus pr. Month incrs.
805.80 977.98 810.62
Corpus Cur. Monthin crs.
720.92 986.98 886.32
% change in Corpus -10.53% 0.82% 0.70%
Top 10 Stocks SBI8.66Infosys
6.38HCL Tech5.01Hughes S/W4.91RIL4.43Jai prakash Ind.4.18ABB4.14GE Shipping4.10BHEL3.85Siemens India3.84
Infosys9.78Grasim Ind.
9.76SBI9.10Marutiudyog6.57BHEL6.30Satyam Com6.13RIL5.68Bharat Ele.5.10Zee Tel4.46Indo RamaSynth3.54
SBI8.65Infosys
6.35HCL Tech6.01Hughes S/W3.91RIL5.43Jai prakash Ind.3.18ABB3.14GE Shipping3.10BHEL6.85Siemens India5.84
Total 49.50 66.42 52.46
Total Debt/Cash/CA 1.22 2.23 1.26
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Benchmark NSE 50 NSE 500 NSE 500
NAV as on 1-Jun-04 30.75 52.29 53.46
NAV as on 31-Jun-04
28.87 51.26 53.26
Performance Ranking
NOTE: - All returns bellow 1 yr. Are on simple annualized basis &
above 1 yr. Are on a compound annualized basis.
Last 180
days
Last 1 year Last 2 year Last 3 year
ICICI 110.56 120.88 60.37 NIL
HDFC 115.95 128.89 62.70 37.28
BIRLA 120.6 125.3 63.2 35.32
Interpretation: -
In this chat determined the equity funds of ICICI, HDFC, and Birla
for last 180 days, 1 years, 2 years, & 3 years.
We see that in last 180 days ICICI, HDFC, and Birla has a Equity
Funds i.e. 110.56, 115.55, 120.6 receptively. In last 180 days Birla has a
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20
40
60
80
100
120140
180 days 1 year 2 year 3 year
ICICI
HDFC
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High equity funds i.e 120.6 as compares to ICICI, HDFC i.e. 110.56 &
115.55 receptively it is better for them
In last 1st year H.D.F.C. has high equity funds as compared to
ICICI & Birla i.e. 128.89. In last two years Birla has a High equity fund
i.e. 163.2. Last three years ICICI has not equity funds which is not good
for the firm and HDFC has a high equity funds i.e. 37.28.
Specific risk factor under Equity Oriented schemes ofMutual Funds.
(1) Tax Plan / Tax Saver Scheme: -
Type of
Securities
Investment
Pattern
Credit
Risk
Market
Risk
Interest
Rate Risk
Liquidity
Risk
Equity andEquity relatedinstrument
90% Higher Higher Medium Lower
Debt andMoneyMarketinstrument
10% Lower Medium Higher Lower
Conclusion: -Tax saver scheme would under normal conditions invest a
minimum of 90% or more of its assets in equity and related instruments
and maximum or less than 10% in debt, money market instrument, cashand cash equivalents. The investor's here have to note that the securities,
which provide higher returns, typically, display higher volatility.
Accordingly, the investment portfolio of the scheme would reflect
moderate to high volatility in its equity and equity related investments
and low to moderate volatility in its debt and money market investment.
Tax plan option which is a make up of approximately 90% equity relatedsecurities & 10% debt securities offers a good amount of return and since
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return expectation is high its volatility is also higher and so is the risk.
Credit risk is definitely higher. Similarly, Market risk is high on account
of 90% equity market risk. However interest rate risk is medium since the
equity base is earning good returns and liquidity is not a problem since
both equity debts are easily tradable in market. The overall risk involved
by investing in Tax Plan is medium to higher risk.
(2) Growth Fund: -
Type of
Securities
Investment
Pattern
Credit
Risk
Market
Risk
Interest
Rate Risk
Liquidity
Risk
Equity andEquity relatedinstrument
95% Higher Higher Medium Lower
Debt andMoneyMarketinstrument
5% Lower Medium Medium Lower
Conclusion: -
Growth fund which is made up of approximately 95%
Equity & Equity related securities & 5% of debt money market
instruments offers good returns and since the return expectation is high,
its volatility is also higher and so it the risk. According the investment
portfolio of the scheme would reflect moderate to high volatility in its
equity and equity related securities and low to moderate volatility in debt
and money investment. Under this fund, Credit risk is higher. Similarly,
Market risk is also high on account of 95% Equity market risk. However,
Interest Rate Risk is medium since equity base is earning good return &
liquidity is not at all problem as both Equity & Debt securities are easily
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tradable in the market. Growth fund has an overall risk ranging from
moderate to higher risk.
(3) Balanced Fund: -
Option 1: -
Type of
Securities
Investment
Pattern
Credit
Risk
Market
Risk
Interest
Rate Risk
Liquidity
Risk
Equity andEquity relatedinstrument
40% Lower Medium Medium Lower
Debt andMoneyMarketinstrument
60% Higher Higher Lower Tedium
Conclusion: -
Balanced Fund may invest approximately in 40% Equity
related securities and 60% Debt & Money market securities. Theinvestment portfolio reflects lower to moderate risk in its equity and
equity related securities and moderate to higher risk in its Debt & money
Market securities. Credit risk is lower. Similarly, Market risk is medium
on account of 40% equity market risk. Interest Rate Risk is medium to
lower since equity base is earning good returns and Liquidity is not at all
problem as Equity and Debt Securities are easily tradable in the market.
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Option: - 2
Type of
Securities
Investment
Pattern
Credit
Risk
Market
Risk
Interest
Rate Risk
Liquidity
Risk
Equity andEquity relatedinstrument
60% Higher Medium Lower Medium
Debt andMoneyMarketinstrument
40% Lower Medium Medium Lower
Conclusion: -
Since balance fund is a mixture of Equity and Debt securities
it may invest approximately 60% in equity and related securities and
around 40% in Debt and Money Market securities. Here 60% investment
is made in equity securities the profolio runs higher to moderate risk and
lower to moderate risk in 40% investment in Debt and money market
security. Since the proportion of investment in equity securities is more it
runs higher Credit risk and Market risk. Interest rate risk is medium to
lower since equity bas is earning good returns and Liquidity is not at all
problem in both equity and debt as both are easily tradable in the market.
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Finding
In compassion to MFs people are more interested in investing in
other instruments like bank deposits, post office saving schemes,
PPF, NSC, LIC etc.
People with more good income are not investing in MFs becausethese do not know the concept of NF properly and more area thinks
that MFs now a day's are becoming risky due to unstable equity
market.
People are investing their money for regular income in post office,
Bank Deposits and there sources but they don't
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Suggestions
Considering the above findings the suggestion is: -
Due to lack or less awareness of people about MFS they are not
investing in it. Hence, it is necessary to educate them by arranging
some educational seminar be on MFS to show them how to invest
in MFS? What is the liquidity? What is the risk covered in MFS?
Most of people know only UTI MFs only. Hence, it is necessary to
increase advertisement effort for private MFs & public MFs.
They are have to increase their awareness advertisement campaign
as they do in cash of bonds and fixed deposits so that manned
awareness of MFs increase and inventory can think before investity
in bon do or fixed deposits or equity shares.
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BIBLIOGRAPHY
NO. NAME OF BOOK EDITION AUTHOR
1 Investment Management 4th V.A.Avadhani
2 Investment Management - V.K.Bhalla
3 Capital Market in India - Gordon &
Natarajan
4 Investment Management - V.Gangadhar
Wed Site: -
www.idbibank.com
www.hdfcfund.com
www.pruicici.com
www.birlasunlife.com
http://www.idbibank.com/http://www.hdfcfund.com/http://www.pruicici.com/http://www.birlasunlife.com/http://www.idbibank.com/http://www.hdfcfund.com/http://www.pruicici.com/http://www.birlasunlife.com/