REPORT

ON

MUTUAL FUND:
A TOOL FOR WEALTH CREATION
BY:

BHARAT BHUSHAN KHATRI

ANAND RATHI FINANCIAL

SERVICES LTD.

A REPORT
ON

MUTUAL FUND: A TOOL FOR WEALTH

CREATION
BY:

BHARAT BHUSHAN KHATRI

A report submitted in partial fulfillment of
The requirements of

BBA Program
Mrs. Soumyasree Nandi

Mr. Shyam Ajmera

Faculty Guide

Company Guide

IIAS School of Informatics, Kolkata

ANAND RATHI

SECURITIES Ltd.

ACKNOWLEDGEMENT
1

I extend my sincere gratitude towards the under mentioned dignitaries whose

valuable guidance and support made possible grounding of this dissertation.
This entire work has been completed under the kind and competent supervision
of Mrs. Soumyasree Nandi (Placement Coordinator, IIAS School Of
Informatics, Kolkata). I express my deep gratitude to her for all her sustained
interest and willing help.
The most difficult task was to collect the reliable data and information
regarding different Mutual Funds. In this connection, I am greatly thankful to
Mr. Shyam Ajmera (Company Guide, Anand Rathi Financial Services Ltd.,
Jaipur) whose knowledge, valuable suggestions and guidance has help me a lot
in completing my project.
I am also grateful to Mr. Vinod Pandey (HR Manager, Anand Rathi Financial
Services Ltd., Jaipur) for giving me inspiration and mental support. In spite of
being fraught with unending engagements in office, he kept me motivating to
try best at all times.
I also would extend a special thanks to the colleagues in office for assisting me
in compiling this Dissertation and enhancing my knowledge.
Lastly, I would like to thank IIAS School Of Informatics, Kolkata and Anand
Rathi Financial Services Ltd., Jaipur for providing me an opportunity to gain
hands-on experience by working in a corporate environment. I believe that it is
going to prove beneficial for my career.

TABLE OF CONTENTS
2

Acknowledgments

Abstract

1.

Introduction

1.1 Literature Survey

1.2 Need for the study

1.3 Objective of the Study

1.4 Sources of data

1.5 Methodology

10

1.6 Limitations

10

2.

Investment Options

11

3.

Mutual Fund

4.

5.

3.1 Introduction

12

3.2 History of Mutual Fund in India

13

3.3 How a Mutual Fund is Organized

14

3.4 Classification of Mutual Fund

15

3.5 Building Wealth in EMIs

19

3.6 Investors Clientele

22

3.7 Investors Rights and Obligations

22

3.8 Legal Framework and SEBI Guidelines

23

Financial Analysis

25

4.1 Analysis of Primary Data

26

4.2 Reliability and Validity

26

4.3

27

Priority in Decision Making

4.5 Why not Mutual Fund

30

4.6 Age decides Mutual Fund

31

Other Analysis
5.1

Mutual Fund v/s Sensex

33

5.2 Tax Implication of Mutual Fund

35

5.3

37

Rupee Cost Averaging

6.

Advantages of Mutual Fund

39

7.

Disadvantages of Mutual Fund

41

8.

Trends in Mutual Fund Industry

42

9.

India in Global market

43

10.

Conclusion

44

11.

Suggestion

46

12. Appendices

48

12.1 Company Profile

49

12.2 Questionnaire

50

12.3 Difference between Mutual Fund and Equity

Investment
12.5 Frequently Used Terms

53
54

13.

References

55

14.

Glossary

56

ABSTRACT
The Indian capital market has been increasing tremendously during last few years. With the
reforms of economy, industrial policy, public sector and financial sector, the economy has
been opened up and many developments have been taking place in the Indian money market
and capital market. The significant outcome of the government policy of liberalization in
industrial and financial sector has been the development of new financial instruments that
are expected to impart greater competitiveness, flexibility and efficiency to the financial
sector. In order to help the small investors, mutual fund industry has come to occupy an
important place by imparting greater competitiveness, flexibility, liquidity, growth, return and
efficiency to the financial sector. Development of various mutual fund products in Indian
capital market has proved to be one of the most helpful instruments in generating significant
investment growth.
In this context, prioritization, preference building and close monitoring of mutual funds are
essentials for fund managers to make this the strongest and most preferred instrument in
Indian capital market for the coming years. With the changes in the bank interest rates,
frequent fluctuations in the secondary market and the inherent attitude of Indian small
investors to avoid risk, it is important on the part of fund managers and mutual fund product
designers to combine various elements of liquidity, return and security in making mutual
fund products the best possible alternative for the small investors in Indian market.
MF is a retail product designed to target small investors, salaried people and others who are
intimidated by the mysteries of stock market but, nevertheless, like to reap the benefits of
stock market investing. At the retail level, investors are unique and are a highly
heterogeneous group. Hence, their fund/scheme selection also widely differs. Researcher
have attempted to study various need expectations of small investors from different types of
mutual funds available in Indian market and identify the risk return perception with the
purchase of mutual funds. With this background an attempt is made in this report to study the
factors influencing preference of consumers regarding mutual fund in India.

INTRODUCTION
This dissertation is assigned to me as a part of the partial fulfillment of the requirement of
BBA Program. The aim of the study is to analyze the Mutual Fund Industry in India and
evaluate the substantial effect of Mutual Fund tool.
The Indian financial system in general and the mutual fund industry in particular continue to
take turnaround from early 1990s. During this period mutual funds have pooled huge
investments for the corporate sector. The investment habit of the small investors
particularly has undergone a sea change. Increasing number of players from public as well
as private sectors has entered in to the market with innovative schemes to cater to the
requirements of the investors in India and abroad. The reason for launching of these large
number of mutual fund products is the distributed pattern of investment behavior of Indian
small investor .The purchase decision of a mutual fund is largely dependent upon investors
level of savings, investment pattern and the risk profile.
Private and foreign mutual funds are operating in the Indian market and constitute a
substantial portion of the mutual fund industry. Today the industry consists of Unit Trust of
India, mutual funds sponsored by public sector banks and insurance corporations, private and
foreign mutual funds. Investors are constantly being bombarded by questions concerning
their risk profile. This report helps to find answers to all these questions and judge investors
preference regarding investment option and factors affecting their selection of mutual fund.
The objective of the study was to gather the statistics about the prominent mutual funds of all
the categories and thereby analyze its impact on wealth creation. The investor's preference is
also judged by getting a questionnaire filled by them and finding out the factors that play a
significant role in the inclination towards a fund. This will also help in analyzing the
preference that mutual fund hold in an individual's saving criterion. I have also tried to put
forth the current trends in the Mutual Fund Industry along with the changing environment as
well as future scenario of the industry. It also weighs the Indian mutual fund industry against
the global market.

LITERATURE SURVEY
In past a range of studies have been done by various organizations, financial institutions,
rating agencies, distribution houses, government agencies etc to judge the importance and
benefits of mutual fund in India. Some of them are: 1. SEBI (Securities Exchange Board of India)
2. RBI (Reserve Bank of India)
3. Finance Ministry of India
4. CRISIL
5. IIMs (Indian Institute of Management)
6. UTI (Unit Trust of India)
7. NSE (National Stock Exchange)
8. BSE (Bombay Stock Exchange)
9. Association of Financial Planners
10. FICCI
Shanmugham (2000) conducted a survey of 201 individual investors to study the
information sourcing by investors, their perceptions of various investment strategy
dimensions and the factors motivating share investment decisions, and reports that among the
various factors, psychological and sociological factors dominated the economic factors in
share investment decisions. Using their results, suggestions and criticisms I have endeavored
to make this project report and learn about this investment avenue.
The information is collected from a wide variety of sources including the AMCs fact sheets
and websites, ANAND RATHI intelligence reports, internet, AMFI, daily news on mutual
fund, etc.

NEED FOR THE STUDY

It is widely believed that MF is a retail product designed to target small investors, salaried
people and others who are intimidated by the stock market but, nevertheless, like to reap the
benefits of stock market investing.
The investors are unique and are a highly heterogeneous group. Currently there are around
1200 schemes with varied objectives and AMCs compete against one another by launching
new products or repositioning old ones. MF industry is not only facing competition from
within the industry but also from other financial products that may provide many of the same
economic functions as mutual funds but are not strictly MFs. This product is structured as a
certificate of deposit but it could have been set up as a Mutual Fund. All this, in aggregate,
heightens the consumer confusion in his selection of the product. Unless the MF schemes are
tailored to his changing needs and unless the AMCs understand the fund selection/switching
behavior of the consumers, survival of funds will be difficult in future.
With this background an attempt is made in this report to study the factors influencing
preference of consumers regarding mutual fund in India.

OBJECTIVE OF THE STUDY

The investors do not evaluate all possible product attributes while making a choice, but the
marketers' search is for identification of "The key buying criteria" or "The key choice
criteria" which are defined as certain features of a product offering that are closely associated
with preferences. The objective of the study is to understand the growth of Mutual Fund
Industry in India and to analyze whether this investment tool has substantial effect on wealth
creation or not.
In order to examine the issues, this dissertation has the following objectives before it:
To understand the savings avenue preference among investors
To analyze the substantial effect of mutual fund on wealth creation
To find factors influencing on a consumer investing behavior
To identify the features the investors look for in Mutual Fund products
To identify the investment preference of investors
To identify the information sources for mutual fund

SOURCES OF DATA
Qualitative Data and or Primary Data
Use of primary data collected through interviews and questionnaire.
Quantitative or Secondary Data
Print/Electronic Data Sources
Monthly reviews of AMCs Magazines and Journals, Website of the Mutual fund
companies

 Other websites related to mutual funds as amfi.com, moneycontrol.com,

valueresearch.com etc.
Other Data Sources Fact sheets

METHODOLOGY
Research Methodology is a way to systematically solve the research problem. It will assist
me in achieving the main objective of the study in an effective and efficient manner. The
study will be based on a survey of around 200 respondents through a questionnaire covering
different groups of investors out of which an effective sample will be taken. Respondents will
be both new clients and existing investors. The data obtained will be analyzed by using
frequency analysis, factor analysis and correlation for identification of the key features
preferred by the respondents in a mutual fund product. These analysis methods are used
because of a number of reasons like:
They will help us to know which investment option is the most favored by the
investors, What is the income group, age group and occupation of people who are
interested in investing,
What is the cause of people investing or not investing in mutual funds,
What holds a priority in financial decision making i.e. Whether risk or return or both,
For people who are investing in mutual fund what factors play an important role
while judging a fund and investing in it.

LIMITATIONS OF THE STUDY

Sample size is limited to 200 investors in Jaipur only. The sample size may not
adequately represent the universe as a whole.

10

 This study has not been conducted over an extended period of time having both
market ups and downs. The market state has a significant influence on the buying
patterns and preferences of investors. For example, the July 2001 UTI fall has sent
violent shock waves across the MF investor community and is bound to influence the
scheme preference/selection of the investors. The study has not captured such
situations.

INVESTMENT OPTIONS
Savings form an important part of the economy of any nation. With the savings invested in
various options available to the people, the money acts as the driver for growth of the
country. Indian financial scene too presents a plethora of avenues to the investors. Though
certainly not the best or deepest of markets in the world, it has reasonable options for an
ordinary man to invest his savings. Let us examine several of them:

INVESTMENTS
EQUITY
FI BONDS
CORPORATE
DEBENTURES
COMPANY
FIXED DEPOSIT
BANK
DEPOSITS
PPF
LIFE
INSURANCE
GOLD

RETURN

SAFETY/
CONVENIENCE

VOLATILITY

LIQUIDITY

High Moderate

Low

High

High or Low

Moderate High

High

Moderate

Moderate

Moderate Low

Moderate

Moderate

Low

Moderate

Low

Low

Low

Low High

High

Low

High

Moderate High

High

Low

Moderate

Low Moderate

High

Low

Low

Moderate Low

High

Moderate

Moderate

11

REAL ESTATE

High Low

Moderate

High

Low

MUTUAL FUNDS

High

High

Moderate

High

INTRODUCTION
The liberalization of the financial sector has sent signals to a wave of changes in savings and
investment behavior adding a new dimension to the growth of financial sector. The Indian
financial system in general and the mutual fund industry in particular continue to take
turnaround from early 1990s. During this period mutual funds have pooled huge investments
for the corporate sector. The investment habit of the small investors particularly has
undergone a sea change. Increasing number of players from public as well as private sectors
has entered in to the market with innovative schemes to cater to the requirements of the
investors in India and abroad. For all investors, particularly the small investors, mutual funds
have provided a better alternative to obtain benefits of expertise- based equity investments to
all types of investors.
MUTUAL FUNDS play a significant role in the development of the financial market and
this has been proved in the developed countries like United States, United Kingdom and
Japan. India is at the first stage of a revolution that has already peaked in the United States.
Mutual Funds have been around for a long time, dating back to the early 19th century. The
first modern American Mutual Fund opened in 1924, while India's mutual fund
industry began in 1963 with the state owned Unit Trust of India, now the single largest
mutual fund in the country, with assets under management of more than $5.5 billion, with
6.77 million accounts in its 55 domestic schemes.
A mutual fund is a type of Investment Company that gathers assets from investors and
collectively invests those assets in stocks, bonds, or money market instruments. Through
the collective investments of the mutual fund, each investor shares in the returns from the
funds portfolio while benefiting from professional investment management, diversification,
liquidity, and other services.

12

HISTORY OF MUTUAL FUNDS OF INDIA

The Mutual fund industry has been in operation in India since 1964 when the Unit Trust of
India (UTI) was set up under a special Act of parliament. For about 23 years, the various
schemes of UTI were the only options available to Indian investors. However the monolithic
structure of the industry changed in 1987 with the establishment of mutual funds by public
sector banks and investment institutions like the Life Insurance Corporation of India (LIC)
and the General Insurance Corporation of India (GIC). Finally, in 1993 the field was opened
to private sector as well, to make the industry more competitive. The mutual industry has
grown manifold in terms of size and operations during the three decades of its existence.
From Rs.24.67 crores in 1964-64, the cumulative resources mobilized by the mutual funds
industry had risen to about Rs. 231862 crores by March 2006. Currently, the industry has 34
players which are engaged in mutual fund business in India. The number of mutual fund
schemes rose to 592 in 2006 from 451 in 2005.
All mutual funds whether promoted by public sector or private sector entities including those
promoted by foreign entities are governed by the same set of Regulations. There is no
distinction in regulatory requirements for these mutual funds and all are subject to
monitoring and inspections by SEBI. The risks associated with the schemes launched by the
mutual funds sponsored by these entities are of similar type.
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.
It 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 and any income earned through these investments and the
capital appreciation are shared by its unit holders in proportion to the number of units owned
by them.
13

CONCEPT OF MUTUAL FUND

A mutual fund is set

up in the form of a
trust, which has
sponsor, trustees, asset
Management
Company (AMC) and
custodian. The trust is
established by one or
more sponsors who
are like promoters of a
company who hold its property for the benefit of the unit holders. AMC approved by SEBI
manages the funds by making investments in various types of securities. SEBI registered
custodian holds the securities of various schemes of the fund in its custody. They monitor the
performance and compliance of SEBI Regulations by the mutual fund. Also, 50% of the
directors of AMC must be independent. All mutual funds are required to be registered with
SEBI before they launch any scheme. Mutual Funds diversify their risk by holding a
portfolio of asset instead of only one asset. This is because if money is hold only in one asset,
the entire fortunes of our portfolio depend on this one asset. So by creating a portfolio of a
variety of assets, this risk is substantially reduced. Mutual Fund investments are not totally
risk free. In fact, investing in Mutual Funds contains the same risk as investing in the
markets, the only difference being that due to professional management of funds the
controllable risks are substantially reduced.

14

CLASSIFICATION OF MUTUAL FUNDS

With an increase in interest and awareness about mutual funds amongst investors, there has
also been a steady increase in the number of mutual fund schemes offered in India by as
many as 35 Asset Management Companies (as on 1st January 2007).
Different schemes are introduced to suit different needs of investors. Mutual funds schemes
may have different investment objectives which can be to earn recurring income for
investors or growth of their invested capital or both. So investors should choose a scheme
whose investment objective matches their personal objectives. To achieve the scheme's
investment objectives, the fund manager, as per his own understanding, invests in a portfolio
of asset classes which he thinks may provide the best returns to investors in the future.
Different assets are exposed to a different level of risk. For example, investing in equities is
riskier than investing in debt and investing in debt is slightly riskier than investing in moneymarket instruments. However, riskier investment options have a higher potential to provide
higher returns.

MUTUAL FUND SCHEME TYPES

Equity Diversified Schemes: These schemes mainly invest in equity. They seek to
achieve long-term capital appreciation by responding to the dynamically changing Indian
economy by moving across sectors such as Lifestyle, Pharma, Cyclical, Technology, etc.

Sector Schemes: These schemes focus on particular sector as IT, Banking, etc. They seek
to generate long term capital appreciation by investing in equity and related securities of
companies in that particular sector.

Index Schemes: These schemes aim to provide returns that closely correspond to the
return of a particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes
invest in all the stocks comprising the index in approximately the same weightage as they are
given in that index.

15

Exchange Traded Funds (ETFs): ETFs invest in stocks underlying a particular stock index
like NSE Nifty or BSE Sensex. They are similar to an index fund with one crucial difference.
ETFs are listed and traded on a stock exchange. In contrast, an index fund is bought and sold
by the fund and its distributors.
Equity Tax Saving Schemes: These work on similar lines as diversified equity funds and
seek to achieve long-term capital appreciation by investing in the entire universe of stocks.
The only difference between these funds and equity-diversified funds is that they demand a
lock-in of 3 years to gain tax benefits.
Dynamic Funds: These schemes alter their exposure to different asset classes based on the
market scenario. Such funds typically try to book profits when the markets are overvalued
and remain fully invested in equities when the markets are undervalued. This is suitable for
investors who find it difficult to decide when to quit from equity.
Balanced Schemes: These schemes seek to achieve long-term capital appreciation with
stability of investment and current income from a balanced portfolio of high quality equity
and fixed-income securities.
Medium-Term Debt Schemes: These schemes have a portfolio of debt and money market
instruments where the average maturity of the underlying portfolio is in the range of five to
seven years.
Short-Term Debt Schemes: These schemes have a portfolio of debt and money market
instruments where the average maturity of the underlying portfolio is in the range of one to
two years.
Money Market Debt Schemes: These schemes invest in debt securities of a short-term
nature, which generally means securities of less than one-year maturity. The typical shortterm interest-bearing instruments these funds invest in Treasury Bills, Certificates of Deposit,
Commercial Paper and Inter- Bank Call Money Market.

16

Medium-Term Gilt Schemes: These schemes invest in government securities. The average
maturity of the securities in the scheme is over three years.
Short-Term Gilt Schemes: These schemes invest in government securities. The securities
invested are of short to medium term maturities.
Floating Rate Funds: They invest in debt securities with floating interest rates, which are
generally linked to some benchmark rate like MIBOR. Floating rate funds have a high
relevance when interest rates are on the rise helping investors to ride the interest rate rise.
Monthly Income Plans (MIPS): These are basically debt schemes, which make marginal
investments in the range of 10-25% in equity to boost the schemes returns. MIP schemes are
ideal for investors who seek slightly higher return that pure long-term debt schemes at
marginally higher risk.
MUTUAL FUND TYPES
Here the investors money is pooled in and then managed by professionals to maximize
diversification within a set strategy. It has 2 types: open ended and close ended. The
difference is in how the fund is structured in terms of ownership.
Open-Ended Schemes: - These do not have a fixed maturity. An investor can deal directly
with the Mutual Fund for their investments and redemptions. The key feature of this scheme
is liquidity. An investor can conveniently buy and sell their units at Net Asset Value ("NAV")
related prices.
Close-Ended Scheme: - These schemes have a stipulated maturity period. An investor can
directly invest at the time of initial issue but thereafter they can buy or sale the units on the
stock exchanges when they are listed. The market price at the stock exchange could vary
from the schemes NAV on account of demand and supply situation, Unit holders
expectations and other market factors. One of the characteristics of the close-ended Schemes
is that they are generally traded at a Discount to NAV; but closer to maturity, the discount
Narrows.

17

DIFFERENT MODES OF RECEIVING INCOME

Growth Plan: In this plan, dividend is neither declared nor paid out to the investor but is
built into the value of the NAV. In other words, the NAV increases over time due to such
incomes and the investor realizes only the capital appreciation on redemption of his
investment.
Income Plan: In this plan, dividends are paid-out to the investor. In other words, the NAV
only reflects the capital appreciation or depreciation in market price of the underlying
portfolio.
Dividend Re-investment Plan: In this case, dividend is declared but not paid out to the
investor, instead, it is reinvested back into the scheme at the then prevailing NAV. In other
words, the investor is given additional units and not cash as dividend.
18

BUILDING WEALTH IN EMIS

Every mutual fund advertisement you come across has that statuary warning: Mutual Fund
Investments are subject to Market risks, please read the offer document carefully before
investing. The risk being mentioned in this warning is with reference to the volatility in the
equity market. While investing in equities is considered risky, the fact remains that higher
risk generates higher returns. Therefore instead of shying away from the market, we should
in fact use these fluctuations to our advantage as they give us an opportunity to increase our
wealth.
SYSTEMATIC INVESTMENT PLANS (SIPS) are the intelligent and affordable way of
investing in mutual funds. The magic of SIPs lies in their convenience. These are best suited
for young people who have started their careers and need to build their wealth. SIPs entail an
investor to invest a fixed sum of money at regular intervals in the Mutual fund scheme the
investor has chosen, an investor opting for SIP in xyz Mutual Fund scheme will need to
invest a certain sum on money every month/quarter/half-year in the scheme, and this will
help them acquire the power of compounding.
SYSTEMATIC WITHDRAWAL PLANS is the opposite of an SIP. A fixed amount is
redeemed on a predetermined day of the month and paid to the investor. SWPs are
especially useful for retirees who need a steady stream of income. In this plan, an investor
invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at regular
intervals to take care of his expenses.
A monthly dividend option can also do the same but there is a steep 14-28% dividend
distribution tax (DDT) on dividend paid on debt and debt-oriented mutual funds. DDT is
compulsorily deducted by the mutual fund regardless of the persons tax status. To avoid
DDT, go for the cumulative option and start an SWP. SWPs allow investors to customize the
cash flow to their needs.

19

For example: Imagine a pensioner who needs Rs 10,000 a month for expenses but gets a
monthly dividend of only Rs 7,000. He would be better off with an SWP of Rs 10,000. Of
course, that would deplete the corpus by around Rs 3,000 a month. Profits from the sale of
units being redeemed by every withdrawal are taxable. In the first year of investment, the
profits are taxed at normal rates. But after a year, the profit is treated as long term capital
gains and taxed at a lower rate.
SYSTEMATIC TRANSFER PLANS is an SWP-SIP combo that allows the investor to
transfer on a periodic basis a specified amount from one scheme to another within the same
fund family meaning two schemes belonging to the same mutual fund. A transfer will be
treated as redemption of units from the scheme from which the transfer is made. Such
redemption or investment will be at the applicable NAV. This service allows the investor to
manage his investments actively to achieve his objectives. Many funds do not even charge
any transaction fees for his service an added advantage for the active investor.
Suppose you invest Rs 5 lakh lump sum in a bond fund with an STP of Rs 10,000 into the
equity fund. You would be transferring about 2% of the invested amount into the equity fund
every month. The amount to be transferred can be customized to suit the risk appetite of the
investor. If you can take risks, raise the STP amount to Rs 15,000-20,000 a month. The
principal scheme itself can be one with a tinge of equitysuch as a monthly income plan. If
market volatility makes your stomach churn, go for a capital appreciation STP. The mutual
fund will transfer only what the principal fund has earned during the month. That way, your
invested amount remains untouched. If the principal scheme is a debt fund, the profits are
treated as capital gains and taxed at a lower rate.

20

BUT HERE FEW THINGS TO WATCH OUT FOR ARE Make sure you take an SWP or STP that does not attract an exit load. If your mutual
fund slaps an exit load for early withdrawal, start withdrawals after the stipulated
period.
Work out the tax implications of the arrangement before you jump in. If you are in the
higher income bracket, start withdrawals (or transfers) after one year of investment so
that the profits are treated as long-term capital gains for tax purposes.
Switching is possible only within a fund family, which may not always offer the best
bond and equity fund options.
To avoid a suboptimal choice, you may have to open an SWP with a good debt fund
and a concurrent SIP with an equity fund.
Also early investment has its own advantage. Consider the following example
Suppose one start investing in a diversified
Equity MF through SIP at age
Monthly Investment
Stop investing at age
Total contribution
Assuming CAGR from the fund of 15% ,
ones saving grows to

35

40

5000
60
15 Lacs

6250
60
15 Lacs

Rs.1, 37, 82,803.88

Rs.66, 35,367.20

It is evident in the present economic circumstances that inflation is a reality and has to be
tracked. Mutual Funds and especially SIP may be an ideal mix for an investor to overcome
inflationary consequences and further create wealth.

INVESTORS CLIENTELE

21

Mutual Funds in India are open to investment by Residents including: Resident Indian
Individuals/HUF, Indian Companies/Partnership Firms, Indian Trusts/Charitable Institutions,
Banks/Financial Institutions, Non-Banking Finance Companies, Insurance Companies,
Provident Funds, and Mutual Funds, Non Residents including: Non-Resident Indians, and
Persons of Indian Origin, Overseas Corporate Bodies (OCBs) and Foreign entities, viz.
Foreign Institutional Investors (FIIs) registered with SEBI.

INVESTORS RIGHTS AND OBLIGATIONS

The offer document of a scheme lays down the investors rights. Investors are the owners
of the schemes assets, and it is, therefore, very important that they are aware of their rights
with respect to schemes assets, its management, and recourse to the trustees, the AMC and
the other constituents. The important rights of the unit-holders are to proportionate
beneficial Ownership, to get timely service and information, wind up a Scheme and to
terminate the AMC
LEGAL LIMITATIONS TO INVESTORS RIGHTS:
Except in certain circumstances the sponsors of a mutual fund do not have any legal
obligation to meet the shortfall in case the assured return is not achieved.
Only if the offer document has specifically provided such a guarantee by a named
sponsor, the investor will have the right to sue the sponsors to make good any
shortfall in promised returns
Any prospective investor does not enjoy any standing or rights with respect to the
fund, AMC or any other constituents.

LEGAL FRAMEWORK AND SEBI GUIDELINES

22

To manage the smooth working and functioning of AMCs and the mutual funds there are
various regulatory bodies present like SEBI, RBI, AMFI, SRO etc. . A brief description about
them is as follows:

SEBI the Capital Market

Regulator registers all the mutual
funds, issues guidelines for all
operations as where they can
invest, investment limits and restrictions, how they should account for income and expenses,
disclosures of information to the investors and generally act in the interest of investor
protection.
RBI The Money Market Regulator reviews the capital adequacy and financial
implications of the guaranteeing bank. Any fund mergers of bank-sponsored funds with
others will also involve RBI approvals. However, the RBI no longer issues guidelines on
bank-owned funds' operations. Recently, the RBI has decided to disallow all non-banking
entities access to the inter-bank call money market. This means that liquid funds can no
longer invest in the call money market.
Stock Exchanges are self-regulatory organizations supervised by SEBI. Many closed-end
schemes of mutual funds are listed on one or more stock exchanges, subject to regulations
like trading, clearing, transfer and settlement of buying and selling of mutual fund units in
the markets through a listing agreement.
Self-Regulatory Organizations represent a group of market participants, who are specially
empowered to exercise pre-defined authority over the regulation of their members. They

23

have powers to regulate the criteria and procedures for admission of its members, set of code
of conduct for their members market activities, determine the professional rules and
bylaws of the association, involve the market players in the regulatory process and ensure
that the regulatory policies and procedures do not ignore market realities or become
unmanageable for the apex regulatory body.
Association of Mutual Funds in India (AMFI) is an apex body of all Asset Management
Companies (AMC) which has been registered with SEBI. It functions under the supervision
and guidelines of its Board of Directors. Its principle objectives are to promote the interest
of mutual fund and unit-holders, and interact with SEBI/RBI/Govt./regulators, to set and
maintain ethical, commercial and professional standards in the industry and to recommend
and promote best business practices and code of conduct to be followed by members and
others engaged in the activities of mutual fund and asset management, to undertake investor
awareness programmes, and to disseminate information on the mutual fund industry etc.

FINANCIAL ANALYSIS
All said and done but until and unless a practical revelation is made no learning is complete.
For the same I have chosen MUTUAL FUND: A TOOL OF WEALTH CREATION as my
study area, wherein I have compared mutual fund with other investment options and now will
survey investorspreference in this regard. It will involve both practical and theoretical

24

analysis. This study will help me in classifying the investors in groups of conservative,
moderate and aggressive and thus help us to identify their needs and provide them solution
accordingly.
This study will involve filling a questionnaire by the clients which will help in profiling the
investors on the basis of answers provided by them. This will help to judge the popularity of
mutual fund among the various investment options available to the investors nowadays.

QUESTIONNAIRE
The questionnaire designed to get the investors viewpoint on mutual fund and surveying their
preference of investment avenues is given in the annexure.

ANALYSIS OF PRIMARY DATA

On the basis of outputs (which are shown in the annexure) the various factors which are
taken into consideration while deciding about buying of a mutual fund can be interpreted.
These ranges of factors begin with investor perception, the promised return, the attractiveness

25

of the offer, etc. With references to earlier studies, all the relevant variables in the purchase of
a mutual fund were included in the study.

RELIABILITY AND VALIDITY

In order to check the reliability and validity of the data, I had kept some similar kind of
variables in the questionnaire like security and attitude towards risk. This would help in
judging the accuracy of answers and will also help in making the interpretations. Also I have
got the questionnaire verified by the company guide several times before starting to use it in
the survey.
In order to increase the reliability and validity, I have excluded the questionnaires filled by
those respondents who had a varied opinion on the similar kind of variables. For example
someone whos most important criterion for financial decision making is security and his
answer for investment option is shares then that is sure a fake answer and who thus should
not be included in analyzing or else it would lead to wrong interpretations.
Thus out of a total of 200 samples covered, only 168 is taken to be the effective respondents
who are been evaluated. The forms were rejected due to incompleteness, inaccuracy of data,
mismatched answers, etc.

PRIORITY IN DECISION MAKING

The tables shown below provide details of ranks allocated to the factors that hold priority in
the financial decision making for an individual. The factors considered are RISK, RETURN,

26

SECURITY and LIQUIDITY. They are been given ranks from 1 to 4. Every individual
consider them and gives them importance on the basis of their investment objective, riskreturn attitude, age, income level, amount invested etc. An analysis of them is given below:-

Priority Of Decision Risk

Frequency

Percent

Valid Percent

Cumulative

valid1

84

50.0

50.0

50.0

18

10.7

10.7

60.7

12

7.1

7.1

67.9

54

32.1

32.1

100.0

total

168

100.0

100.0

Percent

This frequency table shows the priority that RISK carries in making the financial decision. 14 are the ranks allocated to this factor. Here we see that 50% of the investors have chosen
risk as the most important factor of their decision making. This means that investors consider
the risk involved in the investment option before making any investment in it. But for 32.1%
people it is also the last thing to be considered i.e. they are aggressive investors who give
importance to returns and liquidity.

Priority Of Decision Return

Frequency

Percent

Valid Percent

Cumulative
Percent

27

valid1

18

10.7

10.7

10.7

33

19.6

19.6

30.4

28

16.7

16.7

47.0

89

53.0

53.0

100.0

total

168

100.0

100.0

This frequency table shows the priority that RETURN carries in making the financial
decision. 1-4 are the ranks allocated to this factor. Here we see that 53.0% of the investors
have chosen return as the least important factor of their decision making. This means that
people invest their money not only looking at the return given by investment option but they
may also look at the security and liquidity been provided by investing in it. Rank 1, which
signifies that it is most important factor, is given by only 10.7% of the investors.
Priority Of Decision Security
Frequency

Percent

Valid Percent

Cumulative
Percent

valid1

24

14.3

14.3

14.3

78

46.4

46.4

60.7

48

28.6

28.6

89.3

18

10.7

10.7

100.0

total

168

100.0

100.0

This frequency table shows the priority that SECURITY carries in making the financial
decision. 1-4 are the ranks allocated to this factor. Here we see that out of 168 respondents,
48 i.e. 46.4% of the investors have chosen security as the second most important factor of
their decision making. They count security provided by an investment option just after
considering the risk associated with it. 28.7% people have considered it the third most
important factor also. This factor is given more importance by either a retired person or a
middle income group earning individual.
Priority Of Decision Liquidity
Frequency

Percent

Valid Percent

Cumulative Percent

28

valid1

12

7.1

7.1

7.1

24

14.3

14.3

21.4

68

46.4

46.4

67.9

54

32.1

32.1

100.0

total

168

100.0

100.0

This frequency table shows the priority that LIQUIDITY carries in making the financial
decision. 1-4 are the ranks allocated to this factor. Liquidity means the ease provided by the
fund in depositing and withdrawing money as and when required. Its importance depends on
an individuals requirement of fund and time duration of investment because if a retired
person invests money in any of the investment option then he would pay importance to
liquidity factor. Out of 168 investors 78, i.e. 46.4% people give it 3rd rank. This is because of
the fact that the investors comprises of majorly people of age group 25-35 who want to make
long term investments so they rarely think about the liquidity involved in the investment
option.
A collective result of these factors that hold priority in financial decision making for an
investor is as follows:

WHY NOT MUTUAL FUND

29

The above pie graph shows the reasons for not holding mutual funds by certain investors.
Some of the reasons that came up while learning about mutual funds where lack of
awareness, too technical, perceived as unsafe investment, volatile market, not interested,
extra expenses involved, not meant for low earning people, etc. out of them only lack of
awareness, too technical, perceived as unsafe investment, volatile market were taken into
consideration and rest were clubbed into other reasons. Here we see that out of 168
respondents only 18 do not know about mutual funds.
The reason that holds top priority for not investing is perceived as unsafe investment/volatile
market, this may be because of the current fluctuations in the stock market as well as the
change in market conditions due to hike in inflation rate. Even 5 out of 28 respondents gave
lack of awareness as their answer. This means that still mutual funds are in their initial stage
and the Asset Management Companies (AMCs) really need to promote themselves harder to
come into the investment purview of people and prove mutual fund as a tool of wealth
creation.

30

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 and distributors 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 day, the post offices and banks also distribute the units of mutual
funds .However, the investors should 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.

AGE DECIDES MUTUAL FUND

To decide which funds would be most appropriate for one to invest the hard earned money
one must first decide on what he/she would like to accomplish with the investments.
These are the questions you must answer that are unique to your situation: Where are you
now? Are you in your twenties just starting out in your chosen career? Perhaps you're in your
fifties approaching the peak of your career. Maybe you're preparing to send your oldest child
off to their first day of school and you want to make sure he or she will be able to attend
college. Maybe you want to save and invest for that house or vacation hideaway you've been
dreaming about for years. What do you want to accomplish? What are your goals?
Investing in mutual funds is not some sort of get-rich-quick scheme. Investments in mutual
funds are generally for the longer term - they should be measured in years, not weeks or
months. One should not be investing money in mutual funds if one will need that money next
month.

31

Generally twenties and thirties are a time of beginnings: career, marriage, children, first
home, etc. It is also a good time to begin investing in mutual funds. With time on your side,
growth and aggressive growth funds may be a good choice to begin mutual fund investing.
These funds could be used for future college costs, a new home, or to get a head start on your
retirement. Ones forties and fifties are likely to be their peak earning years. Perhaps a time
when one should have less of his mutual fund assets in growth funds and more in income and
tax-free income funds. In ones sixties and beyond, most of his biggest expenses are behind
him, i.e., college expenses, housing, etc., and one will have more time to enjoy oneself.
Perhaps a time to shift more of ones assets into fixed income funds to increase income for
living expenses or leisure activities.

MUTUAL FUNDS v/s SENSEX

32

Mutual funds on an average give an annualized return of 30-35% (without considering

inflation) while a return of 25-30% if inflation is also considered. Even after so many up and
downs in the stock market since last 5 years, Mutual Funds gave excellent returns, which no
other financial avenue has given.
Since Inflation is one of the most important factor in the economy. So while calculating the
returns we cannot ignore this important aspect. Inflation is the rate at which the general level
of prices for goods and services is rising, and subsequently, purchasing power is falling.
Keeping a close eye on inflation is most important for fixed income investors as future
income streams must be discounted by inflation to determine how much value today money
will has in the future.
For stock investors, inflation, whether real or anticipated, is what motivates us to take on the
increased risk of investing in the stock market, in the hope of generating the highest real rates
of return. Real returns are the returns on investment that are left standing after commissions,
taxes, inflation and all other frictional costs are taken into account. As long as inflation is
moderate, the stock market provides the best opportunity in comparison to fixed income and
cash.
The following table shows the comparison of mutual fund return with returns of bank fixed
deposit.
BANK FDS

MUTUAL FUND
Growth Plan

Dividend

10%

10%

Plan
10%

7%

8%

9%

8.75%

6.5%

6.5%

6.5%

6.5%

Investor's tax bracket

30%

20%

Pre-tax return

10%

Post-tax return
Inflation

This is just for illustrative purposes only. However the actual returns may vary. Under the
growth plan, long term capital gains tax @ 10% (without surcharge) has been considered
assuming a one year plus horizon. Under the dividend plan, it is assumed that the entire gains
are distributed. Surcharge has not been taken into consideration.

33

The results give a clear picture that the returns of mutual fund are high above the returns of
bank FDs even after considering the inflation, although the returns in growth and dividend
option comes out to be different. Also the returns under bank FDs vary according to the
investors tax bracket he lie in.
Now let us take an example of current scenario. An average inflation rate of 5.5% as being
considered and then the calculations of returns have being done. Considering the
performance of Mutual Funds over the last 10 years, as on May 16, 2008, the average return
of top 5 diversified equity Mutual Fund schemes is 23% to 46% CAGR, whereas the BSE
Sensex has grown only 20% CAGR. It implies that Rs. 100000 invested in Mutual Funds 10
years back only would have grown to Rs. 20.04 lakhs, whereas the same amount invested in
BSE Sensex companies would have grown to only Rs. 4.30 lakhs. This is power of active
management of our wealth.
This tells that mutual funds are far better than the fixed return instruments like FD, PF,
Gratuity, Bonds, Traditional tools like KVP etc.

TAX IMPLICATION OF MUTUAL FUND

FOR DOMESTIC CORPORATE INVESTORS

34

TAX
Short Term Capital Gains

EQUITY
15%
No capital gains taxable.

DEBT
30%
20% with the cost inflation index

However, securities transaction tax

benefit or 10% without the cost

payable at 0.25% of redemption

inflation index benefit, whichever

Dividend Income

price.
Nil

is beneficial;
Nil
22.66% (including surcharge of

Dividend Distribution Tax

Nil

10% and education cess of 3% on

Long Term Capital Gains

the amount of tax plus surcharge)

TDS

on dividend distributed.
Nil

Nil

FOR RESIDENT INDIVIDUAL INVESTORS

TAX

EQUITY

Short Term Capital Gains

15%

Long Term Capital Gains

DEBT
Added to Individuals Income,
therefore as per Individuals tax
bracket

No capital gains taxable.

20% with the cost inflation index

However, securities transaction tax

benefit or 10% without the cost

payable at 0.25% of redemption

inflation index benefit, whichever

Dividend Income

price.
Nil

is beneficial;
Nil
14.1625% (Including a surcharge

Dividend Distribution Tax

NA

of 10% & an additional surcharge

by way of education cess of 3% on

Tax Deducted at Source

Nil

the amount of tax + surcharge)

Nil

FOR NON RESIDENT INDIANS (NRIS)

TAX

EQUITY

DEBT
Added to Individuals Income,

Short Term Capital Gains

15%

therefore as per Individuals tax

No capital gains taxable.

bracket
20% with the cost inflation index

However, securities transaction tax

benefit or 10% without the cost

payable at 0.25% of redemption

inflation index benefit, whichever

price.

is beneficial;

Long Term Capital Gains

35

Dividend Income

Nil

Dividend Distribution Tax

Tax Deducted at Source

Nil

Short Term Capital Gain-30% ;

Long Term Capital Gain -Nil

Nil
14.1625% (Including a surcharge
of 10% & an additional surcharge
by way of education cess of 3% on
the amount of tax + surcharge)
Short Term Capital Gain-30% ;
Long Term Capital Gain -20%
with indexation benefit

From the above 3 tables we could make out that the dividend received under the mutual
funds is tax-free. This is the biggest advantage of mutual funds. Difference could be clearly
seen in dividend distribution tax, debt funds, which is highest for the corporate investors of
22.66%. However, in dividend distribution tax, an equity fund, there is not tax applicable.
The tax deducted at source is also nil for corporate investors and individual investors but for
NRIs is charged for both equity and debt schemes. NRIs are charged for both short term
capital gain as well as long term capital gain. The long term capital gain is also tax free under
all three categories except that there is a 0.25% security transaction charge applicable.

RUPEE COST AVERAGING

Rupee Cost Averaging is a strategy involving investing a fixed amount of money at regular
intervals, irrespective of market conditions. It enables investors to buy less when prices are
high and buy more when prices are low.
It involves the concept of FV = PV (1 + r) n
FV = Future Value

36

PV = Present Value (the more you save, makes a difference)

r = Rate of Return/ Coupon Rate (The more you earn, makes a difference)
n = No. of compounding periods (The sooner you start, makes a difference)
MONTH
1
2
3
4
5
6
7
8
9
10
11
12

AMOUNT
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000
1000

NAV
12.00
11.00
13.00
15.00
14.00
12.00
10.00
9.00
11.00
8.00
10.00
12.00

UNITS
83.333
90.909
76.923
66.667
71.429
83.333
100.000
111.111
90.909
125.000
100.000
83.333

Making Volatility Work for you

Average Sales Price of Units: Rs. 11.42
Average Purchase Cost of Units: Rs. 11.08
This is the benefit of averaging that we get the benefit of buying more units when price is
low and get low units when price is high, and also average our funds irrespective of volatile
market conditions.
Let us take a practical example of a fund and find out its return since the date of its inception
if investment is made on monthly basis.
Bluechip Fund v/s

Sensex

37

Scheme Name
Franklin India Bluechip - Growth

Date
Monday, July 28, 2008

NAV
133.4355

* Franklin India Blue-chip Fund was launched as a close-end fund and became open-ended in

Jan-1997. Let us assume, a systematic investment of Rs. 1000 per month is made since June
1998:
Total investment made till July 31, 2008: Rs. 1, 20,000
Value of investment as on July 31, 2008: Rs. 9, 28,941
Annualized return on investment: 33.28% p.a.
This example is provided for illustrative purposes only. Calculations are based on NAV of
Growth Plan. Load is taken into consideration in the calculations. Thus Wealth creation is
nothing but enhancement of future value. When chasing a financial goal, the simplest form of
planning is to invest regularly and start early.

ADVANTAGES OF MUTUAL FUND

PROFESSIONAL MANAGEMENT: Mutual Funds provide the services of
experienced and skilled professionals, backed by a dedicated investment research team
that analyses the performance and prospects of companies and selects suitable
investments to achieve the objectives of the scheme. Presumably, professionals have
38

more experience, knowledge, and ability to focus on just a single area of expertise than
the average investor when it comes to deciding which securities to buy and sell.
DIVERSIFICATION: Mutual Funds invest in a number of companies across a broad
cross-section of industries and sectors which reduces the risk because seldom do all
stocks decline at the same time and in the same proportion. One achieves this
diversification through a Mutual Fund with far less money than one can do on his own.
CONVENIENT ADMINISTRATION: Investing in a Mutual Fund reduces paperwork
and helps an individual avoid many problems such as bad deliveries, delayed payments
and follow up with brokers and companies. Mutual Funds save 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: 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.
LIQUIDITY: In open-end schemes, the investor gets the money back promptly at net
asset value related prices from the Mutual Fund. In closed-end schemes, the units can be
sold on a stock exchange at the prevailing market price or the investor can avail of the
facility of direct repurchase at NAV related prices by the Mutual Fund.
TRANSPARENCY: Individual get regular information on the value of investment in
addition to disclosure on the specific investments made by scheme, the proportion
invested in each class of assets and the fund manager's investment strategy and outlook.

39

 FLEXIBILTY: Through features such as regular investment plans, regular withdrawal

plans and dividend reinvestment plans, one can systematically invest or withdraw funds
according to your needs and convenience.
AFFORDABILITY: Investors individually may lack sufficient funds to invest in highgrade stocks. A mutual fund because of its large corpus allows even a small investor to
take the benefit of its investment strategy.
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. It notified regulations
in 1993 (fully revised in 1996) and issues guidelines from time to time. Mutual Funds
either promoted by public or by private sector entities including one promoted by foreign
entities are governed by these Regulations.
ADDITIONAL SERVICES: Some mutual funds offer additional services to their
shareholders, such as tax reports, reinvestment programs, and automatic withdrawal and
contribution plans.

DISADVANTAGES OF MUTUAL FUND

NO GUARANTEES: No investment is risk free. If the entire stock market declines in
value, the value of mutual fund shares will go down as well, no matter how balanced the
portfolio. Investors encounter fewer risks when they invest in mutual funds than when

40

they buy and sell stocks on their own. However, anyone who invests through a mutual
fund runs the risk of losing money.
FEES AND COMMISSIONS: All funds charge administrative fees to cover their dayto-day expenses. Some funds also charge sales commissions or "loads" to compensate
brokers, financial consultants, or financial planners. Even if an investor doesn't use a
broker or other financial adviser, he will pay a sales commission if he buys shares in a
Load Fund.
TAXES: During a typical year, most actively managed mutual funds sell anywhere from
20 to 70 percent of the securities in their portfolios. If the fund makes a profit on its sales,
the investor will pay taxes on the income he receives, even if he reinvests the money he
makes.
\MANAGEMENT RISK: When an investor invests in a mutual fund, he depends on the
fund's manager to make the right decisions regarding the fund's portfolio. If the manager
does not perform as well as hoped, the customer might not make as much money on his
investments as expected. Of course, if he invests in Index Funds, he foregoes
management risk, because these funds do not employ managers.

TRENDS OF MUTUAL FUND

INDUSTRY
41

 HOST OF SECTOR SPECIFIC & THEMATIC FUNDS:

The Indian mutual funds are now allowed to invest in foreign securities. On the anvil are
gold-funds, real estate funds & capital protection funds. Fund of funds, exchange traded
funds; mid-cap funds, fixed maturity plans & arbitrage funds have all made their
appearance.
RETURN OF CLOSE ENDED FUNDS:
Until SEBI changed the rules for amortizing initial issue expenses, funds could charge
6% & amortize it over a 5-year period which allowed AMCs to push their new funds by
offering commission as high as 5-6%. While the short-term investors went in and out of
schemes, long-terms investors had to bear a large share of initial issue expenses. By
allowing only close-ended funds to amortize their expense, SEBI paved the way for the
return of close-ended funds.
SYSTEMATIC INVESTMENT PLANS (SIP):
The most encouraging trend has been the growing popularity of SIPs, where investors put
aside a fixed amount every month for investment in a fund. The investors learned that the
secret of successful investing is to invest for the long-term, diversify their assets &
average out ones cost. The number of SIPs estimated in the industry is currently pegged
at around a million.

INDIA IN GLOBAL MARKET

42

Since private players were allowed in 1993, the Indian Mutual fund industry has witnessed a
sea change in the way it operates, in the regulatory and investor attitude towards Mutual fund
products. From a single player in 1987 today there are 34 mutual funds offering as many as
477 schemes. The total assets under management have risen to $67.1 billion in year 2006.
However, the accolades regarding the growth of the MF industry should be reserved until this
growth is analyzed taking the MF industry in other developed countries in consideration.
Here are certain statistics that reflect that Indian Mutual fund industry still has a long way to
go when compared to global standards:
AUM AS A PERCENTAGE OF GDP

In

most of the developed countries the total assets under management ranges from
30% -60% of the GDP. Total assets under management are only 9.5% of the GDP
in case of India.
PENETRATION OF MUTUAL FUND:
In India it is estimated that 6.7% of the households hold mutual funds. This figure
is close to 50% in case of the US and 17% in case of UK. Mutual funds account
for only 0.73% of total financial assets in India (11% of bank deposits). AUM for
Mutual funds had exceeded the bank deposits in US in as early as 1998.
EXISTING TYPES OF FUNDS:
In India commodity mutual funds, gold mutual funds, real estate fund and
exchange traded fund are still under process to come while in countries like US
and UK the major chunk of investment goes into these funds. Moreover the
number of funds operational in India is about 34 where as in USA it is about 800.

CONCLUSION
43

Customer orientation is necessary in a market like India where the market is turning
competitive due to large number of players with varied financial instruments. This study has
made an attempt to understand the financial behavior of MF investors in connection with the
scheme preference and selection.
Running a successful MF requires complete understanding of the peculiarities of the Indian
Stock Market and also the psyche of the small investor. This study has made an attempt to
understand the investment behavior of an individual. Hence, surveys similar to the present
one need to be conducted at intervals to develop useful models. Nevertheless, it is hoped that
the survey findings will have some useful managerial implication for the AMCs as well as for
the distributing firms in their product designing and marketing.
We see that an investment reward is a function of risk. But mutual funds help to reduce risk
through diversification and professional management. The experience and expertise of
mutual fund managers in selecting fundamentally sound securities and timing their purchases
and sales help them to build a diversified portfolio that minimizes the risk and maximizes the
returns.
After analyzing all the data I have come to a conclusion that Mutual funds have substantial
positive impact on the wealth creation of an individual which is reflected by the huge number
of purchases made by them with the increase in the years of their inception and thus the
increase in the size of Asset Under Management (AUM).
Also every fund has its unique time of selling and redemptions thus a cycle is meant to be
followed and this leads to growth of the Asset Management Companies. The change in equity
market, economic conditions, stock movements, weather, rupee appreciation, and various
other factors do form a point of concern but still the effect of all of them combined is very
little so as to hamper their performance.
Mutual Funds, a pool of like-minded people allow investors to reap the benefits of a
diversified, well researched and an actively managed portfolio, without having to worry
about liquidity.
44

An investor avails an annualized return of 25-30% after considering the inflation. The beauty
of the return is that these returns are tax-free. Any income from redemption of Mutual Fund
after one year forms part of long term capital gain and thereby income is completely tax free.
In fact, the ELSS (Equity linked Saving Schemes) is giving on an average an annualized
return of 30-35%, which is tax-free return.
With the structural liberalization policies no doubt Indian economy is likely to return to a
high grow path in few years. Hence mutual fund organizations are needed to upgrade their
skills and technology. Success of mutual fund however would highly depend upon the
implementation of changes and adjusting itself to the fluctuations in the external
environment.
At last to mention, as long as mutual fund companies are performing with lower risks and
higher profitability within a short span of time more and more people will be inclined to
invest.

SUGGESTIONS
45

It is important to study the present industry scenario to gain a better understanding of the
impediments to the growth of the industry:
LACK OF INVESTOR AWARENESS:
Retail investors had a wrong notion about mutual funds as an investment avenue. The
benefits of risk diversification, professional management and ease of administration involved
while investing in mutual funds are not clearly understood. Knowledge of financial products
is inbuilt in school and college curriculum in countries like UK, US and France and the same
should be followed in the Indian context too.
INVESTOR RISK APPETITE:
Equity funds account for 30% of the total AUM in India. This figure is more than 50% in
most developed countries. Frequent stock market scams and the bust of technology sector
specific MFs have contributed to this worry. The growth in mutual funds has come through
the growth in investments in short term instrument like Money Market Mutual Funds which
account for 40% of AUM.
HIGHER RETURNS OF ALTERNATIVE DEBT INSTRUMENTS:
Government guaranteed schemes provide risk free returns at competitive rates of returns.
This is why mutual funds are facing difficulty in competing with the retail business. So the
companies should compete on this factor and try to overcome it.
CONCENTRATION OF CORPORATE INVESTORS:
Mutual funds have become overly attractive to corporate investors because of higher returns
than bank deposits and ability to distribute capital gains tax. Corporate investors account for
57% of the AUM (by value). Though the turnover rates have increased the average fund in
management has grown by only 25% in the past 4 years which shows the lack of growth in
funds under management in India because of the absence of long term investors. Thus it
should also be promoted as a retail product for everyone who wants to invest.

46

 DISTRIBUTION:
One of the major factors impacting the growth of mutual fund industry is the absence of any
regulation in distribution of mutual funds. Mutual fund investors need distributors who are
able to inform them about the efficacy of distribution product for a particular risk profile and
stage in life cycle. Lack of distributor awareness and the absence of any disclosures from
distributors make wrong selling of MF products commonplace. Also penetration in rural
areas is a problem. Only 3% of rural households own mutual funds. So the companies so
work on this aspect also and try to penetrate this investment option to every village and city
to earn revenues and profits along with providing a better investment option to people.

APPENDICES
ANAND RATHI
47

Anand Rathi is a leading full service securities

firm providing the entire gamut of financial
services. The firm, founded in 1994 by Mr.
Anand Rathi, today has a pan India presence as
well as an international presence through offices
in Dubai and Bangkok. AR provides a breadth
of financial and advisory services including
wealth management, investment banking,
corporate advisory, brokerage & distribution of
equities, commodities, mutual funds and
insurance - all of which are supported by
powerful research teams.
The firm's philosophy is entirely client centric,
with a clear focus on providing long term value addition to clients, while maintaining the
highest standards of excellence, ethics and professionalism. The entire firm activities are
divided across distinct client groups: Individuals, Private Clients, Corporate and Institutions
and was recently ranked by Asia Money 2006 poll amongst South Asia's top 5 wealth
managers for the ultra-rich.

ABOUT LOGO
Anand Rathi is written in gold lettering with a green
background. It stands for turning your money to gold.
Green is the colour of money and growth. The gold
lettering indicates wealth and prosperity. The font is
classy and serious. It gives a personal feel, a sense of security of your money being in safe
hands. The baseline 'behind every successful investoris understated.'
Thats keeping in line with our philosophy of being client centric. The focus is on client. We
just work behind the scenes to make money for client.

48

MILESTONES
1994: Started activities in consulting and Institutional equity sales with staff of 15
1995: Set up a research desk and empanelled with major institutional investors
1997: Introduced investment banking businesses Retail brokerage services launched
1999: Lead managed first IPO and executed first M & A deal
2001: Initiated Wealth Management Services
2002: Retail business expansion recommences with ownership model
2003: Wealth Management assets cross Rs1500 crores Insurance broking launched.
Launch of Wealth Management services in Dubai Retail Branch network exceeds 50
2004: Commodities brokerage and real estate services introduced, Wealth
Management assets cross Rs3000 crores, Institutional equities business relaunched
and senior research team put in place. Retail Branch network expands across 100
locations within India.
2005: Real Estate Private Equity Fund Launched, Retail Branch network expands
across 200 locations within India.
2006: AR Middle East, WOS acquires membership of Dubai Gold & Commodity
Exchange (DGCX). Ranked amongst South Asia's top 5 wealth managers for the
ultra-rich by Asia Money 2006 poll, Ranked 6th in FY2006 for All India Broker

Performance in equity distribution in the High Net worth Individuals (HNI) Category,
Ranked 9th in the Retail Category having more than 5% market share Completes its
presence in all States across the country with offices at 300+ locations within India
2007: Citigroup Venture Capital International picks up 19.9% equity stake. Retail
customer crosses 200 thousand Establishes presences in over 450 locations.

QUESTIONNAIRE FOR SURVEYING CONSUMERS PREFERENCE REGARDING

MUTUAL FUND IN INDIA
NAME:

DATE:

49

MARITAL STATUS:

GENDER:

ACADEMIC QUALIFICATION:
1. What is your age?
Below 25

25 to 35

35 to 45

45 to 55

55 and above

2. What is your occupation?

Govt. Employee
Self Employed
Student
Professional (Doctor, CA, Engineer etc.)
Other
3. How much is your average annual income?
Below Rs.300000
Rs.300, 000 to Rs.800, 000
Rs.800, 000 to Rs.1300, 000
Rs.1, 300, 000 to Rs.2, 000, 000
Rs.2, 000, 000 and above
4. How much do you save annually?
0% to 5%
5% to 15%
15% to 30%
30% to 45%
45% or more
5. In the next five years, you expect that your income will:
Decrease slightly
Remain about the same
Increase slightly
Increase dramatically
6. What is your primary objective for investment?
Saving the Principal Amount
Current Income
Growth and Income

50

 Low Growth
High Growth
7. Which of these investment options are you most comfortable with?
Equity Shares, Preference Shares, Debentures, Public Sector Bonds, Savings Certificates,
Gilt-Edged Securities and Money Market Securities
Bank Deposits, Post Office Deposits, Company Fixed Deposits, Provident Fund Schemes,
National Savings Schemes and Life Insurance.
Real Estate, Gold & Silver, Precious Stones, Rare Coins & Stamps and Art Objects.
If mix of above, Please specify______________________________________________
_______________________________________________________________________
8. Are you satisfied with the returns from your investments?
Unsatisfied
Somewhat Satisfied
Indifferent Satisfied
Very Satisfied
9. What is your appetite for risk and return?
High risk high return
Low risk low return
High risk low return
Low risk high return
10. Rank them according to the priority they hold in your financial decision making:
(1 being most important and 4 being least important)
Risk

Return

Security

Liquidity

11. You would prefer to have:

Minor rise and fall in the value of your account, but regularly earn a lower return on your
investments.
Some rise and fall in the value of your account, but earn a normal return.
Noticeable monthly rise and fall in the value of your account, but earn a higher return.
Noticeable daily rise and fall in the value of your account, but earn the highest possible
return.
12. What is the time horizon for your investment?

51

Very short (2- 4weeks)

Moderate (around 1 year)
Long (1 5 years)
Very long (more than 5 years)
13. Have you ever used mutual funds as an investment tool?
Yes
No
If 'yes' then move to next question or else please move to Q 17
14. How did you come to know about Mutual Fund?
Print Media (Newspapers / Magazines)
Electronic media (TV / Internet)
Brokers / Agents
Word of Mouth
15. For how long have you been investing in mutual funds?
Less than 1 year
1 to 3 years
3 to 5 years
5 years or more
16. What is the reason for not holding Mutual Fund? Lack of awareness Too technical
Perceived as an unsafe investment/ volatile market Others, please
specify______________________________________________________
Suggestions:________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
____________
Thank you

EQUITY V/S MUTUAL FUNDS

IDENTIFYING THE

EQUITY INVESTMENT

MUTUAL FUND

Detail research and

Experts carry out the

52

STOCK

monitoring of the market

research, which is beyond

DIVERSIFICATION

Very difficult for an investor

individual
Easy as diversified funds are

PROFESSIONAL

No such specialization is

available
They employ people who

MANAGEMENT

available.

specialize in wealth

INVESTMENT

Income or growth

management
Income, growth or tax saving

OBJECTIVES
LIQUIDITY

Highly liquid

Open and close ended option

TRANSACTION COSTS

High (Brokerage, stamp duty, Moderate (only charges a

CONVENIENCE

commissions, etc.)
management fees
Cannot switch to other equity Switch over to the other
stock.

scheme within the family of

fund house.

FREQUENTLY USED TERMS

NET ASSET VALUE: The performance of a particular scheme of mutual fund is
denoted by the Net Asset Value (NAV). Net Asset Value is the market value of the assets
of the scheme minus its liabilities. Per unit NAV is the net asset value of the scheme
divided by the number of units outstanding on the Valuation Date. For Example Mutual

53

Fund X owns a portfolio of stocks worth Rs. 60, 00,000; its liabilities are Rs.60, 000; and
its shareholders own 500,000 shares. Then
Net Asset Value (NAV) = Market Value in Dollars of a Funds Securities Minus
Its Liabilities (Rs.60, 00,000 Rs.60, 000)
--------------------------------------------------------------Number of Investor Shares Outstanding (500,000)
= Rs. 11.88
Since market values of securities changes every day, NAV of a scheme also varies on a day to
day basis. NAV is required to be disclosed by the mutual funds on a regular basis daily or
weekly depending on the nature of the scheme.
SALES PRICE: Is the price you pay when you 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: Is a charge collected by a scheme when it sells the units. Also called,
Front-endload. Schemes that do not charge a load are called No Load' schemes.
REPURCHASE OR BACK END LOAD: Is a charge collected by a scheme when
it buys back the units from the unit holders.

REFERENCES
www.amfiindia.com
www.moneycontrol.com
finance.indiamart.com

54

 finance.yahoo.com
www.fool.com
www.articlesbase.com
www.hsbcinvestments.co.in
www.hedgeweek.com
www.investorwords.com
www.mutualfundsindia.com
www.outlookmoney.com
www.riversource.com/rvsc/global/docs/qw/floating-rate.pdf
www.sec.gov/investor/pubs/inwsmf.htm
www.smartmoney.com
www.standardcharteredmf.com/learningcenter/undfloat.asp - 35k
www.thehindubusinessline.com

GLOSSARY
It is very hard to understand a new subject unless we know the basic vocabulary used when
talking about that subject. Here I have provided a glossary of words and terms used in the
mutual fund industry.
Adviser - The organization employed by a mutual fund to give professional advice on
the fund's investments and to administer its assets.
Balanced Funds - Generally have a three-part investment objective: 1) to conserve
the investors' principal, 2) to pay current income, and 3) to promote long-term growth
of both principal and income. Balanced funds have a portfolio mix of bonds,
preferred stocks, and common stocks.
Bear Market - A sustained period in which prices of stocks or bonds drop. Usually
indicates a period of poor economic activity. The opposite of a bull market.

55

 Blue Chip - The common stock of a well-known national company with a history of
earnings growth and dividend increases, e.g., IBM, General Motors, AT&T, etc.
Broker - A person in the business of effecting securities transactions for others.
Generally paid by commission.
Bull Market - A sustained period in which prices of stocks or bonds are advancing
(going up). Usually indicates a period of economic growth. The opposite of a bear
market.
Capital Gains Distribution - When a mutual fund sells an investment for a profit, it
realizes a capital gain. Most mutual funds distribute these capital gains once a year.
Capital Growth - An increase in the market value of a mutual fund's securities, as
reflected in the net asset value of the fund shares.
Closed-End Fund - Investment Company that issues a fixed number of shares which
are then bought and sold on a stock exchange or over the counter. The price of a
closed-end share is determined by supply and demand - it may be more or less than
the fund's net asset value.
Compound Interest - When you deposit money in the bank, it earns interest. When
that interest also begins to earn interest, the result is compound interest.
Compounding also occurs if income or dividends from mutual funds are reinvested.
Because of compounding, money is able to grow much faster if an investment's
earnings are left in the account
Diversification - The spreading of one's investment risk by putting assets in a wideranging portfolio of securities. Most mutual funds are highly diversified; most
containing dozens, or even hundreds of individual stocks
Dividend - When companies pay part of their profits to shareholders, those profits are
called dividends.

56

 Net Asset Value Per Share (NAV) - This is the market value of a mutual fund's total
net assets, divided by the number of shares outstanding.
Open-End Mutual Fund - The more technical description of a mutual fund. The
term open-end refers to the fact that this type of mutual fund is continuously offering
new shares to investors as well as redeeming, or buying, them back.
Prospectus - The official booklet that describes a mutual fund. The prospectus
contains information as required by the Securities and Exchange Commission on such
subjects as the fund's investment objectives and policies, services, fees, restrictions,
officers and directors, how shares are bought and redeemed, and the fund's financial
statements.

57