LOVELY PROFESSIONAL UNIVERSITY

DEPARTMENT OF MANAGEMENT

Report on Summer Training

[COMPARISION BETWEEN MUTUAL FUNDS AND STOCK
MARKET]

Submitted to Lovely Professional University

In partial fulfillment of the Requirements for the award of

Degree of Master of Business Administration

Submitted By
PRIYA KAPIL
RT1901A14
 DEPARTMENT OF MANAGEMENT
LOVELY PROFESSIONAL UNIVERSITY
PHAGWARA

ACKNOWLEDGEMENTS

During the course of my project, I had the good fortune of being guided
by Mr.Tarun Arora, manager PUNJAB NATIONAL BANK,
SAHARANPUR who with all his magnanimity supervised this
project report through all its stages.I have benefited a great deal from
his incisive analysis and erudite suggestions. I humbly acknowledge
his congeniality.

The atmosphere of a learning organization that he has created along with

his peers in SAHARANPUR Branch has not only helped me but all
the other trainees..

Acknowledgement is also due to all the other staff in PNB, Saharanpur

for providing information at various point of the project, especially
the discussions on the market.

My special thanks to all my friends for their unrmmiting help in

numerous ways, which deserve adequate expression on this page.

I would also like to thank all the respondents of questionnaire for their
co-opearation. In the end, I would like to say that it was a great
experience to work on this project.

2
 PREFACE
Mutual fund is the mitigation of risk through the spreading of investments
across multiple entities, which is achieved by the pooling of a number of
small investigations into a large bucket.
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. Mutual fund serves as a link between the
saving public and capital markets in that they mobilize saving from
investors and brings them to the borrowers in the capital markets.
The capital market is one of the most vibrant sectors in the finanancial
system, marking a important contribution to economic development
.Securities Market is a place where buyers and sellers of securities can
enter in to transactions to purchase and sell shares, bonds, debentures etc.
Further, it performed an important role of enabling corporate,
enterprenures to raise resources for their companies and business ventures
through public resources.
A typically dilemma which an investor faces today is whether to directly
buy stocks or alternatively invest through the mutual fund. My project
focuses on answering this dilemma which lies in appreciating the
differences between the two routes and deciding as to which one is more

3
suited to once knowledge & understanding investment objective, risk
appetite and personal profile.
To grow personal capital from India’s growth one has to choose the
correct investment avenue. And choosing an investment avenue is like
getting into a marriage, so do it wisely.
TABLE OF CONTENT

Serial no. CONTENTS

1. COMPANY PROFILE
CHAPTER 1
2. Introduction to Mutual Fund
Concept of Mutual Fund
History of Mutual Fund in India(AMFI)
Mutual Fund structure
Advantages of mutual Fund
Disadvantages of Mutual Fund

Future of Mutual Fund in India

Measuring Performances of Mutual fund
3.
CHAPTER 2
Introduction Stock market
Historical evolution of Stock Market
4. Concept of Stock market
Importance and purpose of stock market
Reforms in Indian Stock market

5. CHAPTER 3
Comparative study Between Investment In
Stock Market and Mutual Fund

6. LETARATURE REVIEW
7. OBJECTIVE
8.
RESEARCH METHODOLOGY
9. CHAPTER 4
FINDINGS
RECOMMENDATION

4
 10. CONCLUSION

11. BIBLIOGRAPHY

EXECUTIVE SUMMARY

I have a great pleasure in presenting this work as a part of the “Two years
full time MASTERS IN BUSSSINESS ADMINISTRATIVE”

Objective of my work initiated when I came across various discussion in

the financial markets on comparison between direct investment in stock
market or investing through mutual fund. Both stock market and mutual
fund is yet to reach its peak level. There is still a lack of knowledge
about Mutual Fund and Stock Market amongst the majority of market
players .
High degree of volatility in the recent times in the Indian market has led
to development of Mutual Fund. In Today Investors prefer more mutual
fund to enter into a stock market rather invest directly stock market.
Objective of this study is to find and analyze which is more preferred
investment direct investment in equity market or investing through
mutual fund on the basis of different parameters like risk, returns, cost
etc.

The study would facilitate the reader to know the future prospects of
mutual fund and stock market.

5
 PROFILE OF PUNJAB NATIONAL BANK

With over 56 million satisfied customers and 5002 offices, PNB has
continued to retain its leadership position amongst the nationalized banks.
The bank enjoys strong fundamentals, large franchise value and good
brand image. Besides being ranked as one of India's top service brands,
PNB has remained fully committed to its guiding principles of sound and
prudent banking. Apart from offering banking products, the bank has also
entered the credit card & debit card business; bullion business; life and
non-life insurance business; Gold coins & asset management business,
etc.
Since its humble beginning in 1895 with the distinction of being the first
Indian bank to have been started with Indian capital, PNB has achieved
significant growth in business which at the end of March 2010 amounted
to Rs 435931 crore. Today, with assets of more than Rs 2,96,633 crore,
PNB is ranked as the 3rd largest bank in the country (after SBI and ICICI
Bank) and has the 2nd largest network of branches (5002 offices
including 5 overseas branches ).During the FY 2009-10, with 40.85%
share of CASA deposits, the bank achieved a net profit of Rs 3905 crore.
Bank has a strong capital base with capital adequacy ratio of 14.16% as
on Mar’10 as per Basel II with Tier I and Tier II capital ratio at 9.15%
and 5.01% respectively. As on March’10, the Bank has the Gross and Net

6
NPA ratio of 1.71% and 0.53% respectively. During the FY 2009-10, its’
ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.5% &
Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also higher
than the stipulated requirement of 40% & 18%.
The Bank has maintained its stake holder’s interest by posting an
improved NIM of 3.57% in Mar’10 (3.52% Mar’09) and a Return on
Assets of 1.44% (1.39% Mar’09). The Earning per Share improved to Rs
123.98 (Rs 98.03 Mar’09) while the Book value per share improved to Rs
514.77 (Rs 416.74 Mar’09)
Punjab National Bank continues to maintain its frontline position in the
Indian banking industry. In particular, the bank has retained its NUMBER
ONE position among the nationalized banks in terms of number of
branches, Deposit, Advances, total Business, Assets, Operating and Net
profit in the year 2009-10. The impressive operational and financial
performance has been brought about by Bank’s focus on customer based
business with thrust on CASA deposits, Retail, SME & Agri Advances
and with more inclusive approach to banking; better asset liability
management; improved margin management, thrust on recovery and
increased efficiency in core operations of the Bank.

Parameters Mar'08 Mar'09 Mar'10 CAGR(%)

Operating
4006 5744 7326 22.29
Profit
Net Profit 2049 3091 3905 23.98
Deposit 166457 209760 249330 14.42

7
Advance 119502 154703 186601 16.01
Total Business 285959 364463 435931 15.09

PNB has always looked at technology as a key facilitator to

provide better customer service and ensured that its ‘IT strategy’
follows the ‘Business strategy’ so as to arrive at “Best Fit”. The
bank has made rapid strides in this direction. All branches of the
Bank are under Core Banking Solution (CBS) since Dec’08, thus
covering 100% of its business and providing ‘Anytime Anywhere’
banking facility to all customers including customers of more than
3000 rural & semi urban branches. The bank has also been offering
Internet banking services to the customers of CBS branches like
booking of tickets, payment of bills of utilities, purchase of airline
tickets etc. Towards developing a cost effective alternative
channels of delivery, the bank with more than 350 ATMs has the
largest ATM network amongst Nationalized Banks.
With the help of advanced technology, the Bank has been a
frontrunner in the industry so far as the initiatives for Financial
Inclusion is concerned. With its policy of inclusive growth in the
Indo-Gangetic belt, the Bank’s mission is “Banking for
Unbanked”. The Bank has launched a drive for biometric smart
card based technology enabled Financial Inclusion with the help of
Business Correspondents/Business Facilitators (BC/BF) so as to
reach out to the last mile customer. The Bank has started several
innovative initiatives for marginal groups like rickshaw pullers,
vegetable vendors, dairy farmers, construction workers, etc. Under

8
Branchless Banking model, the Bank is implementing 40 projects
in 16 States. The Bank launched an ambitious ‘Project Namaskar’
under which 1 lakh touch points will be established in unbanked
villages by 2013 to extend the Bank’s outreach. Under this, 30
Kiosks have been opened covering 119 Villages reaching 1.32
Lakh beneficiaries.
Backed by strong domestic performance, the bank is planning to
realize its global aspirations. Bank continues its selective foray in
international markets with presence in 9 countries, with branches at
Kabul and Dubai, Hong Kong & representative offices at Almaty,
Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK, a
joint venture with Everest Bank Ltd. Nepal and a JV banking
subsidiary “DRUK PNB Bank Ltd.” in Bhutan. Bank is pursuing
up gradation of its representative offices in China & Norway and is
in the process of setting up a representative office in Sydney,
Australia and taking controlling stake in JSC Dana Bank in
Kazakhstan .Bank has been a recipient of many awards and
accolades during the year:-

Gold trophy of SCOPE Meritorious Award for Excellence in

Corporate Governance 2009 by StandingConference of Public
Enterprise• As per Financial Express-Ernest & young (FE-EY)
India’s Best Banks Survey, PNB is identified as the best bank
among the nationalized banks in terms of overall ranking. As per
HT-MaRS Survey on Customer Satisfaction, PNB stood NUMBER
ONE in Delhi and Chennai in terms of customer satisfaction.
• As per the Forbes Annual list of 2000 global giants, PNB tops the

9
list of nationalized banks with a global ranking of 695, substantial
improvement over last year’s placement at 946th position.
• The Economic Times has ranked CEO of PNB as the 32nd Most
Powerful CEO of 2010.
• Skoch Challenge Award 2010 for “Livelihood Linkage” of the
milk producers in Bulandshahr District, UttarPradesh.• IDC
Financial Insights Innovation awards 2010 by IDC Financial
Insights

10
 CHAPTER-1
INTRODUCTION TO MUTUAL FUND

The mutual fund industry is a lot like the film star

of the finance business. Though it is perhaps the smallest segment of the
industry, it is also the most glamorous – in that it is a young industry
where there are changes in the rules of the game every day, and there are
constant shifts and upheavals. The one investment vehicle that has truly
come of age in India in the past decade is mutual funds. Today, the
mutual fund industry in the country manages around Rs 100,000 crore of
assets, a large part of which comes from retail investors.

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 appreciations realized by the
scheme are shared by its unit holders in proportion to the number of units
owned by them (pro rata). Each Mutual Fund scheme has a defined
investment objective and strategy.

A mutual fund is the ideal investment vehicle for today’s complex and
modern financial scenario. Markets for equity shares, bonds and other
fixed income instruments, real estate, derivatives and other assets have

11
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.

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.

But every coin has a flip side. With mutual funds, you have no control on
the investments of the fund; and, more importantly, the downside of
diversification is that a fund can hold so many stocks that a tremendously
great performance by a stock will make very little difference to a fund's
overall performance.

Now if you think that the world of Mutual Funds is intimidating,

complicated and definitely not for you then think once again.

Mutual Funds – Concept

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 then invested in capital market instruments such as shares, debentures
and other securities. The income earned through these investments and
the capital appreciation realized are shared by its unit holders in

12
proportion to the number of units owned by them. Thus a Mutual Fund is
the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost. The flow chart below describes broadly
the working of a mutual fund:

Mutual Fund Operation Flow Chart

HISTORY OF MUTUAL FUND:

When three Boston securities executives pooled their money together in

1924 to create the first Mutual Fund, they had no idea how popular
mutual funds would become.
The Idea of pooling money together for investing purposes started in
Europe in the mid-1800s. the first pooled fund in the U.S was created in
1893 for the faculty and staff of a Harvard University. On march 21st
1924 the first official Mutual Funds was born. It was called the
Massachusetts Investors trust.
After one year, the Massachusetts Investors Trust grew from $50,000 in
assets in 1924 to $392,000 in assets (with around 200 share holders). In
contrast, there are over 10,000 Mutual Fund in the U.S. today totaling
around $7 trillion (with approximately 83 million individual investors )
according to the investment Company Institute.
The Stock market crash of 1929 slowed the growth of Mutual funds. In
response to the stock Market crash, Congress passed the securities Act

13
of 1933 and the Securities exchange Act of 1934. These laws require that
a fund be registered with the SEC (U.S Securities and Exchange
Commission) helped create the Investment Company Act of 1940, which
provides the guidelines that all funds must comply with today.
With renewed confidence in the stock market, mutual funds began to
blossom. By the end of the 1960s there were around 270 funds with $48
billion in assets.
In 1976, John c. Bogle opened the first retail index Fund called the First
Index Investment Trust. It is now called the Vanguard 500 Index Fund.
In November of 2000 it becomes the largest Mutual Fund ever with $100
billion in assets.

HISTORY OF INDIAN MUTUAL FUND

INDUSTY

The history of Mutual Funds in India can be broadly divided into 4

Phases:

1.First phase (1964-1987)

 The Unit Trust of India (UTI) was established in the year
1963 by passing an Act in the Parliament.

 The UTI was set up by the Reverse Bank Of India (RBI) and
functioned under the Regulatory and Administrative control
of the RBI.

 The first scheme in the history of Mutual funds was UNIT

SCHEME-64,which is popularly known as US-64.

 In 1978,UTI was de-linked from RBI. The Industrial

Development Bank of India (IDBI) took over the Regulatory
and Administrative control.

 At the end of the year 1988, UTI had Rs.6, 700/-Crores of

Assets Under Management.

2.Second phase (1987-1993)

14
  Entry of Public Sector Funds.

 In the year 1987, public sector Mutual Funds setup by public sector
banks, life Insurance Corporation of India (LIC) and General
Insurance Corporation (GIC) are came in to existence.

 State bank of India Mutual Funds was the first non-UTI Mutual
Fund.

 The following are the non-UTI Mutual Fund at initial stages.

 SBI Mutual Fund in December 1987.

 LIC Mutual Fund in June 1989.

 Punjab National Bank Mutual Fund in August 1989.

 Indian Bank Mutual Fund in November 1989.

 Bank of India Mutual Fund in June 1990.

 GIC Mutual Fund in December 1990.

 Bank of Baroda Mutual Fund in October 1992.

At the end of 1993, the entire Mutual Fund Industry had Assets
Under Management of Rs.47,004/ - crores.
3. Third Phase (1993-2003)
 Entry of Private Sector Funds- a wide choice to Indian Mutual
Fund investors.

 In 1993, the first Mutual Fund Regulations came into existence,

under which all mutual funds except UTI were to be registered and
governed.

 The Erstwhile Kothari Pioneer (now merged with Franklin

Templeton) was the first private sector mutual registered in July
1993.

15
 In 1996,the 1993 Securities Exchange Board of India (SEBI)
Mutual Funds regulation were substituted by a more
comprehensive and revised Mutual Fund Regulations.

 The number of Mutual Fund houses went on increasing, with many

foreign mutual funds setting up funds in India.

 In this time, the Mutual Fund industry has witnessed several

Mergers & acquisitions.

 The UTI with Rs.44,541/-Cores of Assets Under management was

way ahead of all other Mutual Funds

The following was the status at end of February 2003:

Schemes status Number of schemes Amount in (Crores)
Open-ended schemes 321 82,693
Close-ended schemes 51 4497
TOTAL 372 87,190

4. Fourth phase (since 2003 February)

 Following the repeal of the UTI Act in February 2003,it was (UTI)
bifurcated into 2 seprate entities.

 One is the specified undertaking of the UTI with Asset under

management of Rs.29,835/-Crores as at the end of January 2003.

 The second is the UTI Mutual Funds Limited, sponsored by State

Bank of India, Punjab National Bank, Bank of Baroda and Life
Insurance Corporation of India.

 UTI is functioning under an Administrator and under the rules

framed by the Government of India and does not come under the
preview of the Mutual fund Regulations.

 The UTI Mutual Fund Limited is registered with SEBI and

functions under the Mutual Fund Regulations.

16
  With the Bifurcation of the Erstwhile UTI, with the setting up of a
UTI Mutual Fund, confirming to the SEBI Mutual Fund Regulation
and with recent mergers taking place among different private sector
funds, the Mutual Fund Industry has entered its current phases of
consolidation and growth.

 At the end of September 2004, there were 29 Fund, which manage

assets of Rs.1, 53, 108/- Crores under 421 different schemes.

 At the end of July 2005, the status of Mutual Fund Industry was:

Scheme Status No. of schemes Amount (in Crores)

Open-ended scheme 414 1,64,998
Close-ended scheme 46 10,920
TOTAL 460 1,75,918

The following graphs shows the amount invested in Mutual Fund

Industry And the graph indicates the growth of assets over the years.

GROWTH IN ASSETS UNDER MANAGEMENT

Association of mutual Funds in India (AMFI)

With the increase in Mutual Fund players in India, a need for Mutual
Fund Association in India was generated to function as a non-profit
organization. Association of Mutual Fund in India (AMFI) was
incorporated on 22nd August 1995.
AMFI is an apex body of all Asset Management Companies (AMC)
which has been registered with Securities Exchange Board of India
(SEBI). Till date all the AMC’s are that have launched mutual fund
schemes are its members. It functions under the supervision and guideline
of its Board of Directors.
Association of Mutual Funds India has brought down the Indian Mutual
Fund Industry to a professional and healthy market with ethical lines
enhancing and maintaining standards.
It follows the principle of protecting and promoting the interests of
Mutual Funds as well as their unit holders.

17
CLASSIFICATION OF MUTUAL FUND SCHEME:

Any mutual fund has an objective of earning income for the investors and/or
getting increased value of their investments. To achieve these objectives mutual
fund adopt different strategies and accordingly offer different schemes of
investments. On this basis the simplest way to categorize schemes would be group
these in two broad classifications:
OPERATIONAL CLASSIFICATION

PORTFOLIO CLASSIFICATION.

1. Operational classification highlights the two main types

of schemes, i.e., open- ended and close-ended which are
offered by the mutual funds.

2. Portfolio classification projects the combination of

investment instruments and investment avenues available
to mutual funds to manage their funds. Any portfolio
scheme can be either open ended or close ended.

1. Operational classification:-

Open ended schemes: as the name implies the size of the scheme
(Fund) is open – i.e. not specified or pre-determined. Entry to the fund is
always open to the investor who can subscribe at any time. Such fund
stands ready to buy or sell its securities at any time. It implies that the
capitalization of the fund is constantly changing as investors sell or buy
their shares. Further, the shares or units are normally not traded on the
stock exchange but are repurchased by the fund at announced rates.
Open-ended scheme have comparatively better liquidity despite the fact
that these are not listed. The reason that investor can any time approach
mutual fund for sale of such units. No intermediaries are required.
Moreover desiring frequently traded securities, open-ended scheme
hardly have in their portfolio shares of comparatively new and smaller

18
companies since these are not generally traded. In such fund, option to
reinvest its dividend is also available. Since there is always a possibility
of withdrawals, the management of such fund becomes more tedious as
managers have to work from crisis to crisis.

Close ended schemes: such schemes have a definite period after which
their shares/ units are redeemed. Unlike open- ended funds. These funds
have fixed capitalization, i.e., their corpus normally does not change
throughout its life period. close ended fund unit trade among the investors
in the secondary market since these are to be quoted on the stock
exchanges, Their liquidity depends on the basis of demand and supply in
the market, Their liquidity depends on the efficiency and understanding
of the engaged broker, their price is free to deviate from NAV, i.e., there
every possibility that the market price may by above or below its NAV ,
If one takes into account the issue expenses, conceptually close ended
fund units cannot be traded at a premium or over NAV because the price
of a package of investments. i.e., cannot exceed the sum of the investment
constituting the package. Whatever premium exists that may exists only
on account of speculative activities. In India as per SEBI (MF),
Regulations every mutual fund is free to launch any or both types of
scheme.

2. Portfolio Classification of funds:

Following are the portfolio classification of funds, which may be offered.
This classification may be on the basis of
A. Return,

B. Investment pattern,

C. Specialized sector of investment

D. Leverage and

E. Others.

(A)Return based classification:

19
To meet the diversification needs of the investors, the mutual fund
schemes are made to enjoy a good return. Returns expected are in form of
regular dividends or capital appreciation or a combination of these two.
1. Income Funds : For investors who are more curious for returns,
Income funds are floated. Their objective is to maximize current
income. Such funds distribute periodically the income earned by
them. These funds can further be spited up into categories: those
that stress constant income relatively low risk and those that
attempt to achieve maximum income possible, even with the use of
leverage. Obviously, the higher the expected returns, the higher the
potential risk of the investment.

2. Growth Funds: Such Funds aim to achieve increase in the value

of the underlying investments through capital appreciation. Such
funds invest in growth oriented securities which can appreciate
through the expansion production facilities in long run. An investor
who selects such funds should be able to assume a higher than
normal degree of risk.

3. Conservative funds: The fund with a philosophy of “ all things to

all” issue offer document announcing objective as:

i. To provide a reasonable rate of return.

ii. To protect the value of investment.

iii. To achieve capital appreciation consistent with the fulfillment of

the first two objectives. Such funds which offer a blend of
immediate average return and reasonable capital appreciation are
known as “middle of the road” funds. Such funds divide their
portfolio in common stock and bonds in a way to achieve the
desired objectives. Such fund have been most popular and appeal
to the investors who want both growth and income.

Investment Based Classification:

20
Mutual Fund may also be classified on the basis of securities in which
they invest. Basically, it is renaming the subcategories of return based
classification.
1. Equity Fund: such funds, as the name implies, invest most of their
investible shares in equity shares of companies and undertake the
risk associated with the investment in equity shares. Such funds are
clearly expected to outdo other fund in rising market, because these
have almost all their capital in equity. Equity funds again can be of
different categories varying from those that invest exclusively in
high quality ‘ blue chip companies to those that invest solely in the
new,unestablished companies. The strength of these funds is the
expected capital appreciation. Naturally, they have a higher degree
of risk.

2. Equity funds: Such funds have their portfolio consisted of bonds,

debentures, etc. this type of fund is expected to be very secure with
a steady income and little or no chance of capital appreciation.
Obviously risk is low in such funds. In this category we may come
across the funds called ‘Liquid Funds’ which specialize in
investing short-term money market instruments. The emphasis is
on liquidity and is associated with lower risks and low returns.

3. Balance Fund: The funds, which have in their portfolio a

reasonable mix of equity and bonds, are known as balanced funds.
Such funds will put more emphasis on equity shares investment
when the outlook is bright and will tend to switch to debentures
when the future is expected to be poor for shares.

(c) Sector Based Funds:

There are number of funds that invest in a specified sector of economy.
while such funds do have the disadvantages of low diversification by
putting all their all in one basket, the policy of specializing has the
advantage of developing in the fund managers an intensive knowledge of
the specific sector in which they are investing. Sector based funds are
aggressive growth funds which make investments on the basis of assessed
bright future for a particular sector. These funds are characterized by high
viability, hence more risky.

21
(D) Others:

1. Debt Based Schemes:

These schemes, also commonly called Income Schemes, invest in debt

securities such as corporate bonds, debenture and government securities.
The prices of these schemes tend to be more stable compared with equity
scheme and most of the returns to the investors are generated through
dividends or steady capital appreciation. These schemes are ideal for
conservative investors or those not in a position to take higher equity
risks, such as retired individuals. However, as compared to the money
market scheme they do have a higher price fluctuation risk and compared
to a Gilt fund they have a higher credit risk.

2. Hybrid Schemes:

These schemes are commonly known as balanced schemes. These

schemes invest in both equities as well as debt. By investing in a mix of
this nature, balanced schemes seek to attain the objective work income
and moderate capital appreciation and are ideal for investors with a
conservative, long term orientation. HDFC balanced fund & HDFC
children’s gift fund are examples of hybrid schemes.

3. Load Funds:

A Load funds is one that charge’s a commission for entry or exit. That is,
each time you buy or sell units in the funds, 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.

4. No-Load Funds :

A No- Load Fund is one that does not charged a commission for entry or
exit. That is, no commission is payable or purchase or sale of the units in
the fund. The advantage of a no load fund is that the entire corpus is put
the work.

5. Tax Saving Schemes:

These schemes offer tax rebates to the investors under specific provisions
of the Indian Income Tax Law as the government offers tax incentives for
investment in specified avenues. Investments made in Equity Linked

22
Savings Schemes (ELSS) and Pension Schemes are allowed as deduction
u/s 88 of the Income tax Act, 1961. The Act also provides opportunities
to investors to save capital gains u/s 54EA and 54EB by investing in
mutual fund.

6. Special Schemes:

a. Industry specific schemes

Industry specific schemes invest only in the industries specified in

the offer document. The investment of these funds is limited to
specific industries like Info Tech FMCG, Pharmaceuticals etc.

b. Index Schemes

Index Funds attempt to replicate the performance of a particular

index such as the BSE Senses or the NSE 50.

7. GEOGRAPHICAL CLASSIFICATION MUTUAL FUNDS:

Countries boundaries make territorial restrictions on the sale and

purchase of mutual fund units or shares, as in case in commodity trade or
services. In view of this, mutual funds which operate within the nation’s
boundaries are different to those which are meant for subscription of
foreigners or the nationals living abroad. This classification is of two
types:

DOMESTIC MUTUAL FUND: Domestic mutual funds are saving

schemes that are opened for mobilizing savings of the nationals within
the country; these schemes may be of different types as discussed above
under the portfolio classification and functional classification.

c. INTERNATIONAL MUTUAL FUND:

International funds hold primarily foreign securities. There are two

elements of risk in this investment: the normal economic risk of
holding stocks; as well as the currency risk associated with
repatriating money after taking the investment profits. These funds

23
 are an vital aspect of many portfolios, but any individual fund may
prove too volatile for the average investors as the sole investment.

Mutual Fund Structure

The structure consists of:-

1. Sponsor

24
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 net worth of the Investment Managed and meet the
eligibility criteria prescribed under the Securities and Exchange Board of
India (Mutual Funds) Regulations, 1996.

2. The trust

The trust is established by a sponsor or more than one sponsor who is like
promoter of a company. The trustees of the mutual fund hold its property
for the benefit of the unit holders.

3. Asset Management Company (AMC)

AMC is approved by SEBI manages the funds by making investments in

various types of securities.

4. Custodian

Custodian is registered with SEBI, holds the securities of various

schemes of the fund in its custody.

5. Trustee

The trustees are vested with the general power of superintendence and
direction over AMC. They monitor the performance and compliance of
SEBI Regulations by the mutual fund.

25
The intelligent investor's seven rules

It’s one thing to understand mutual funds and their

working; it’s another to ride on this potent investment vehicle to create
wealth in tune with your risk profile and investment needs. Here are
seven must-dos that go a long way in helping you meet your investment
objectives.

1. Know your risk profile

Can you live with volatility? Or are you a low-risk investor? Would you
be satisfied if your fund invests in fixed-income securities, and yields low
but sure-shot returns? These are some of the questions you need to ask
yourself before investing in a fund.

Your investments should reflect your risk-taking capacity. Equity funds

might lure when the market is rising and your neighbour is making
money, but if you are not cut out for the risk that accompanies it, don’t
bite the bait. So, check if the fund’s objective matches yours. Invest only
after you have found your match. If you are racked by uncertainty, seek
expert advice from a qualified financial advisor.

2. Identify your investment horizon

How long you want to stay invested in a fund is as important as deciding

upon your risk profile. A mutual fund is essentially a savings vehicle, not

26
a speculation vehicle–don’t get in with the intention of making overnight
gains.

Invest in an equity fund only if you are willing to

stay on for at least two years. For income and gilt funds, have a one-year
perspective at least. Anything less than one year, the only option among
mutual funds is liquid funds.

3. Read the offer document carefully

This is a must before you commit your money to a fund. The offer
document contains essential details pertaining to the fund, including the
summary information (type of scheme, name of the Asset Management
Company and price of units, among other things), investment objectives
and investment procedure, financial information and risk factors.

4. Go through the fund fact sheet

Fund fact sheets give you valuable information of how the fund has
performed in the past. You can check the fund’s portfolio, its
diversification levels and its performance in the past. The more fact
sheets you examine, the better.

5. Diversify across fund houses

If you are routing a substantial sum through mutual funds, you should
diversify across fund houses. That way, you spread your risk.

6. Do not chase incentives

Don’t get lured by investment incentives. Some financial intermediaries

give upfront incentives, in the form of a percentage of your initial

27
investment, to invest in a particular fund. Don’t buy it. Your focus should
be to find a fund that matches your investment needs and risk profile, and
is a performer.

7. Track your investments

Your job doesn’t end at the point of making the investment. It’s important
you track your investment on a regular basis, be it in an equity, debt or
balanced fund. One easy way to keep track of your fund is to keep track
of the Intelligent Investor rankings of mutual funds, which are complied
on a quarterly basis. These rankings allow you to take note of your fund’s
performance and risk profile, and compare it across various time periods
as well as across its peer set. In addition, you should run some basic
checks in the fund fact sheets and the quarterly reports you get from your
fund.

If you come across negative reports of the fund, ask

your financial advisor or broker about it, especially if there’s a possibility
of your investment depreciating in value. If the threat is real, reduce your
exposure to the fund.

Risks involved in investing in Mutual Funds

1. Market risk

If the overall stock or bond markets fall on account of macro economic

factors, the value of stock or bond holdings in the fund's portfolio can
drop, thereby impacting the NAV.

28
2. Non-market risk

Bad news about an individual company can pull down its stock price,
which can negatively affect funds holding a large quantity of that stock.
This risk can be reduced by having a diversified portfolio that consists of
a wide variety of stocks drawn from different industries.

3. Interest rate risk

Bond prices and interest rates move in opposite directions. When interest
rates rise, bond prices fall and this decline in underlying securities affects
the NAV negatively. How bad the damage will be is dependant on factors
such as maturity profile, liquidity etc.

4. Credit risk

Bonds are debt obligations. So when the funds invest in corporate bonds,
they run the risk of the corporate defaulting on their interest and principal
payment obligations and when that risk crystallizes, it leads to a fall in the
value of the bond causing the NAV of the fund to take a beating.

29
Types of Mutual Fund

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

and its investment objective:-

1. By Structure:

a) 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.

b) Closed-ended Funds

A closed-end fund has a stipulated maturity period which generally

ranging from 3 to 15 years. The fund is open for subscription only
during a specified period. Investors can invest in the scheme at the

30
 time of the initial public issue and thereafter they can buy or sell
the units of the scheme on the stock exchanges where they are
listed. In order to provide an exit route to the investors, some close-
ended funds give an option of selling back the units to the Mutual
Fund through periodic repurchase at NAV related prices. SEBI
Regulations stipulate that at least one of the two exit routes is
provided to the investor.

c) Interval Funds

Interval funds combine the features of open-ended and close-ended

schemes. They are open for sale or redemption during pre-
determined intervals at NAV related prices.

2. By Investment Objective:

a) Equity Oriented Schemes

These schemes, also commonly called Growth Schemes, seek to

invest a majority of their funds in equities and a small portion in
money market instruments. Such schemes have the potential to
deliver superior returns over the long term. However, because they
invest in equities, these schemes are exposed to fluctuations in
value especially in the short term.

31
b) Debt Based Schemes

These schemes, also commonly called Income Schemes, invest in

debt securities such as corporate bonds, debentures and
government securities. The prices of these schemes tend to be more
stable compared with equity schemes and most of the returns to the
investors are generated through dividends or steady capital
appreciation. These schemes are ideal for conservative investors or
those not in a position to take higher equity risks, such as retired
individuals. However, as compared to the money market schemes
they do have a higher price fluctuation risk and compared to a Gilt
fund they have a higher credit risk.

32
c) Hybrid Schemes

These schemes are commonly known as balanced schemes. These

schemes invest in both equities as well as debt. By investing in a
mix of this nature, balanced schemes seek to attain the objective of
income and moderate capital appreciation and are ideal for
investors with a conservative, long-term orientation. HDFC
Balanced Fund and HDFC Children’s Gift Fund are examples of
hybrid schemes.

d) Load Funds

33
 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.

e) No-Load Funds

A No-Load Fund is one that does not charge a commission for

entry or exit. That is, no commission is payable on purchase or sale
of units in the fund. The advantage of a no load fund is that the
entire corpus is put to work.

3. OTHER SCHEMES:

a) Tax Saving Schemes

These schemes offer tax rebates to the investors under specific

provisions of the Indian Income Tax laws as the Government offers
tax incentives for investment in specified avenues. Investments
made in Equity Linked Savings Schemes (ELSS) and Pension
Schemes are allowed as deduction u/s 88 of the Income Tax Act,
1961. The Act also provides opportunities to investors to save
capital gains u/s 54EA and 54EB by investing in Mutual Funds.

b) Special Schemes:

34
 i) Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in

the offer document. The investment of these funds is limited to
specific industries like InfoTech, FMCG, Pharmaceuticals etc.

ii) Index Schemes

Index Funds attempt to replicate the performance of a particular

index such as the BSE Sensex or the NSE 50

iii) Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified

industry or a group of industries or various segments such as 'A'
Group shares or initial public offerings.

Advantages of Investing In Mutual Funds

1. Professional Management

Mutual Funds provide the services of experienced and skilled

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

35
2.Diversification
Mutual Funds invest in a number of companies across a broad cross-
section of industries and sectors. This diversification reduces the risk
because seldom do all stocks decline at the same time and in the same
proportion. You achieve this diversification through a Mutual Fund with
far less money than you can do on your own.

3. Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and follow up with
brokers and companies. Mutual Funds save your time and make investing
easy and convenient.

4. 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.

5. 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.

6. Liquidity

36
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.

7.Transparency
You get regular information on the value of your investment in addition
to disclosure on the specific investments made by your scheme, the
proportion invested in each class of assets and the fund manager's
investment strategy and outlook.

8. Tax Benefits

The taxman has, over the years, been more or less kind to mutual funds!
With laws varying from time to time, the overall objective has been to
encourage the growth of the mutual funds industry. Currently, a variety of
tax laws apply to mutual funds, which are broadly listed below:

1) Capital Gains

Units of mutual fund schemes held for a period more than 12

months are treated as long-term capital assets. In such cases, the
unit-holder has the option to pay capital gains tax at either 20 %
(with indexation) or 10 % without indexation.

2) Tax Deducted at Source (TDS)

37
 For any income credited or paid by a fund, no tax is deducted or
withheld at source. The relevant sections in the Income Tax Act
governing this provision are Section 194K and 196A.

3) Wealth Tax

Mutual fund units are not currently treated as assets under Section
2 of the Wealth Tax Act and are therefore not liable to tax.

4) Income from units

Any income received from units of the schemes of a mutual fund

specified under section 23 (D) is exempt under Section 10 (33) of
the Act. While section 10(23D) exempts income of specified
mutual funds from tax (which currently includes all mutual funds
operating in India), Section 10(33) exempts income from funds in
the hands of the unit-holders. However, this does not mean that
there is no tax at all on income distributions by mutual funds.

5) Income Distribution Tax

As per prevailing tax laws, income distributed by schemes other

than open-end equity schemes is subject to tax at 20 % (plus
surcharge of 10 %). For this purpose, equity schemes have been
defined to be those schemes that have more than 50 % of their
assets in the form of equity. Open-end equity schemes have been

38
 left out of the purview of this distribution tax for a period of three
years beginning from April 1999.

6) Section 80c

The investment in mutual funds designated as Equity Linked

Laving Scheme (ELSS) qualifies for rebate under Section 80c. The
maximum amount that can be invested in these schemes is
Rs.10,000, therefore the maximum tax benefit available works out
to Rs.2000. Apart from ELSS schemes, the benefit of Section 80c
is also available in select schemes of some funds such as UTI
ULIP, KP Pension Plan etc.

Disadvantages of Mutual Funds

1. The Wisdom of Professional Management.

That's right, this is not an advantage. The average mutual fund manager is
no better at picking stocks than the average nonprofessional, but charges
fees as though she is.

2. No Control.

Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else's car.

3. Dilution.

39
Mutual funds generally have such small holdings of so many different
stocks that insanely great performance by a fund's top holdings still
doesn't make much of a difference in a mutual fund's total performance.

4. Buried Costs.

Many mutual funds specialize in burying their costs and in hiring

salesmen who do not make those costs clear to their clients.

Scope for Development of Mutual Fund Business in India

A Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed
basket of securities at a relatively low cost. India has a burgeoning
population of middle class now estimated around 300 million. A typical
Indian middle class family can have liquid savings ranging from Rs.2 to
Rs.10 Lacs today. Investments in Banks are liquid and safe, but with the
falling rate of interest offered by Banks on Deposits, it is no longer
attractive. At best a part can be saved in bank deposits, but what are the
other sources of investment for the common man? Mutual Fund is the
ready answer. Viewed in this sense globally India is one of the best
markets for Mutual Fund Business, so also for Insurance business. This is
the reason that foreign companies compete with one another in setting up
insurance and mutual fund business units in India. The sheer magnitude
of the population of educated white collar employees provides unlimited
scope for development of Mutual Fund Business in India.

The Indian capital market has witnessed some significant

reforms on the structural, operational and regulatory front over a period

40
of time. The changes such as abolition of controller of capital issues,
establishment of market regulator [SEBI], introduction of a nationwide
screen-based trading, dematerialization of securities, electronic trading,
sophisticated risk-management techniques, derivative trading, rolling
settlement, shortening of settlement cycle, ban on deferral products,
formation of Clearing Corporation of India and demutualization of stock
exchanges have marked a new era in the functioning of the capital
market."

41
 CHAPTER-2

INTRODUCTION TO STOCK MARKET

As a part of the process of economic liberalization, the stock market has

been assigned an important place in financing the Indian corporate sector.
Besides enabling mobilizing resources for investment, directly from the
investors, providing liquidity for the investors and monitoring and
disciplining company managements are the principal functions of the
stock markets. The main attraction of the capital markets is that they
provide for entrepreneurs and governments a means of mobilizing
resources directly from the investors, and to the investors they offer
liquidity. It has also been suggested that liquid markets improve the
allocation of resources and enhance prospects of long term economic
growth. Stock markets are also expected to play a major role in
disciplining company managements. In India, stock market development
received emphasis since the very first phase of liberalization in the early
'eighties. Additional emphasis followed after the liberalization process
got deepened and widened in 1991 as development of capital markets was
made an integral part of the restructuring strategy. Today, Indian markets
conform to international standards both in terms of structure and in terms
of operating efficiency.

42
HISTORICAL EVOLUTION OF INDIAN STOCK MARKET

The mists of time

As already stated, the Indian capital markets have played a significant

role in the early attempts at industrialization in India in the late nineteenth
and early twentieth centuries. The early textile mills and the first steel
plants were funded in the capital market. Some of these capital raising
exercises were large in relation to the size of the financial sector in those
days.

The planned economy

Beginning in the late fifties, the country embarked on an inward looking

socialistic model of development that sought to put the commanding
heights of the economy in the hands of the public sector. The state took
control of the allocation of resources in the economy as the banks and
insurance companies were nationalized and development financial
institutions grew in importance. A regime of financial repression came
into being and the stock market stagnated.

CONCEPT OF STOCK MARKET

The concept of stock markets came to India in 1875, when Bombay Stock
Exchange (BSE) was established as ‘The Native Share and Stockbrokers
Association', a voluntary non-profit making association. We all know it,
the bhaji market in your neighborhood is a place where vegetables are
bought and sold. So, no big deal in defining a stock market as a place
where stocks are bought and sold. You deserve to know more.

43
The stock market determines the day's price for a stock through a process
of bid and offer. You bid to buy a stock and offer to sell the stock at a
price. Buyers compete with each other for the best bid, i.e. the highest
price quoted to purchase a particular stock. Similarly, sellers compete
with each other for the lowest price quoted to sell the stock. When a
match is made between the best bid and the best offer a trade is executed.
In automated exchanges high-speed computers do this entire job.

Stocks of various companies are listed on stock exchanges. In India, the

Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and
the Calcutta Stock Exchange (CSE) are the three large stock exchanges.
There are many small regional exchanges located in state capitals and
other major cities.

STOCK EXCHANGES

India boasts of the oldest stock exchange in Asia -- the Bombay Stock
Exchange is 125 years old. There are 23 recognized exchanges spread
across the country, but a process of consolidation is now under way.
Many of the regional stock exchanges have started aligning themselves
with one or both of the two large exchanges (the Bombay Stock
Exchange and the National Stock Exchange) both of which have VSAT
networks that give them a nation wide reach.

The National Stock Exchange is an unlisted for-profit company

set up by some of the leading financial institutions of India. Most of the
remaining stock exchanges are broker-owned (mutual) organizations, but
the Bombay Stock Exchange is actively considering demutualization. The
Securities and Exchange Board of India (SEBI), the apex regulator of the

44
capital market has regulations that mandate a minimum number of
outside directors on the governing board and provide greater autonomy to
the professional executives in the day-to-day running of the exchange.

IMPORTANCE OF STOCK MARKET

The stock market is one of the most important sources for companies to
raise money. Experience has shown that the price of shares and other
assets is an important part of the dynamics of economic growth. Rising
share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of
households and their consumption. Therefore, central banks tend to keep
an Argus eye on the control and behavior of the stock market and, in
general, on the smooth operation of financial system functions.

Function and Purpose

Just as it is important that networks for transport, electricity and

telecommunications function properly, so is it essential that, for example,
payments can be transacted, capital can be saved and channeled to the
most profitable investment projects and that both households and firms
get help in handling financial uncertainty and risk as well as possibilities
of spreading consumption over time. Financial markets constitute an
important part of the total infrastructure for every society that has passed
the stage of largely domestic economies.

The financial system performs three main tasks: firstly, it handles transfer
of payments; secondly, it channels savings to investments with a good

45
return for future consumption; and thirdly, it spreads and reduces (local
enterprise) economic risks in relation to the players' targeted returns (but
note that systemic risk is not thereby reduced— it merely becomes less
concentrated and uneven). Moreover, unforeseen risks, or catastrophic
risks (such as the complete collapse of the financial system or
government institutions), may not be capable of being spread, or insured
against.

The smooth functioning of all these activities facilitates economic growth

in that lower costs and enterprise risks promote the production of goods
and services as well as employment. In this way the financial system
contributes to increased prosperity.

GROWTH OF INDIAN STOCK MARKET

Stock exchanges have a long presence in India. The BSE, the oldest one,
was established in 1875. At the time of Independence there were seven
stock exchanges functioning in different parts of the country. The
'eighties witnessed impressive expansion in the number of listed
companies, amount of capital listed, market capitalization and value of
shares sold and purchased on the exchanges. Eleven stock exchanges
were given recognition during this period. The number increased further
to 22 (excluding the National Stock Exchange) by1995. The overall
number of exchanges continues to be the same. The expansion during the
'eighties was probably the after-effect of the acceptance of the
recommendations of the Study Group on Financing of the Private
Corporate Sector in the Sixth Five Year Plan (1980-81 to 1984-85).

46
 Years 1946 1961 1971 1975 1980 1985 1991 1995
No. of
7 7 8 8 9 14 20 22
Stock Exchanges
No. of
1125 1203 1599 1552 2265 4344 6229 8593
Listed Cos.
No. of
Stock Issues of 1506 2111 2838 3230 3697 6174 8967 11784
Listed Cos.
Capital of
3204
Listed Cos. (Cr. 270 753 1812 2614 3973 9723 59583

Market
value of Capital of 1102 47812
971 1292 2675 3273 6750 25302
Listed Cos. (Cr.

Capital
per Listed Cos. 24 63 113 168 175 224 514 693
(4/2) (Lakh Rs.)

Market
Value of Capital
86 107 167 211 298 582 1770 5564
per Listed Cos.
(Lakh Rs.) (5/2)

Appreciat
ed value of Capital
358 170 148 126 170 260 344 803
per Listed Cos.
(Lakh Rs.)

47
REFORMS IN INDIAN STOCK MARKET

The Indian capital market has witnessed some significant reforms on the
structural, operational and regulatory front over a period of time. The
changes such as abolition of controller of capital issues, establishment of
market regulator [SEBI], introduction of a nationwide screen-based
trading, dematerialization of securities, electronic trading, sophisticated
risk-management techniques, derivative trading, rolling settlement,
shortening of settlement cycle, ban on deferral products, formation of
Clearing Corporation of India and demutualization of stock exchanges
have marked a new era in the functioning of the capital market."

SOME FACTS OF THE INDIAN STOCK MARKET

No of listed companies: Around 9,000

Market cap at BSE (as on 11 July 2003): Rs 738971(000cr)

Demat settlement accounts for 99.99% of turnover settled by delivery

Shortening of settlements cycle from T+3 to T+2 has Indian Stock

Market move a step ahead of some developed markets like the US, Japan,
Singapore, and Australia, which is still following T+3

Up Till 18 July 2003 FIIs have pumped in $2400.3 million in the Indian
stock market

48
 DRIVERS OF TRANSITION

Policy and Regulation SEBI, RBI

Electronic Trading,
The National
Stock Exchange Settlement systems
MFs, FIIs, Hedge Funds,
Pvt Equity investors, Prof Fund
Players
Mgr, Pvt Bkg arms of Banks

Asset Classes Private equity, debt,

Equities, derivatives
Rating Agencies
ICRA, FITCH,
CARE, CRISIL

Accounting Standards

49
 CHAPTER-3

COMPARISON BETWEEN MUTUAL FUND INVESTING AND

STOCK INVESTING:-

Mutual Funds or Stocks? The Investors biggest Dilemma

The Indian equity market is on the roll for the last 2-3 years. The
future too looks quite promising with GDP growth projected at 8-10% for
the next few years. This superior return expectation is, therefore,
attracting a whole lot of new investors – both domestic and foreign - to
the equity markets.

A typical dilemma for an investor today is whether to directly buy

stocks or alternatively invest through the mutual funds.

The key to answering this dilemma lies in appreciating the

differences between the two routes and deciding as to which one is more
suited to one’s knowledge & understanding, investment objective, risk
appetite and personal profile.

Active Vs Passive Style

Direct investment into stocks is an active form of investment. You

do your own research and decide which stocks to buy, when to buy, when
to sell etc. You have a control over the investment decisions. It is more
fun and challenging. Managing your own portfolio would, however,
require you to commit a fair amount of time and effort. Moreover,
considering the dynamic nature of businesses and stock markets, almost a

50
daily involvement is necessitated. Else you may miss the opportunity to
either buy or sell at the right time.

In contrast, Mutual Fund investing is a passive form of investing.

You hand over your money to the fund manager and he manages your
money along with that of the others. With this all the responsibilities of
investment decisions and day-to-day management are handed over to a
professional. You need to only periodically check the performance of the
fund. And depending on whether it meets your expectations or not, you
either let him continue to manage your funds or switch over to some other
better performing funds.

Now let us compare both investments avenues on different

parameters:-

1) Skill set

Managing one’s own portfolio requires a sufficient level of

knowledge and expertise. Not many of us would have the educational
qualifications, the knowledge and the experience of that of a typical fund
manager. Even if one had sufficient time, money and resources at one’s
disposal, it may be difficult to consistently match the performance levels
of a professional fund manager.

Therefore, many a times it may be prudent to depend on the

expertise of the fund manager. In addition, a mutual fund would pool in
different skills – a research analyst to identify stocks, a fund manager to
decide on investment strategy, back-office to manage all the associated

51
paperwork, etc. This support structure may be lacking when managing on
one’s own.

By purchasing mutual funds, you are essentially hiring a

professional manager at an especially inexpensive price. It would be a bit
cocky to think that you know more than mutual fund manager. These
managers have been around the industry for a long time and have the
academic credentials to back it up. Saying you could outperform a mutual
fund manager is similar to a football fan sitting on their couch saying "I
could have made that catch" -possible, but not likely. But on the flip side
as funds are run by people and sometimes those people move on to
greener pastures. But when fund managers walk out the door, their fund’s
excellent performance walks with them. Investors have to wonder if the
new manager will follow in his or her predecessor's footsteps ...or
stumble.

2) Diversification

When it comes to diversification - definitely funds have an

advantage over shares. The ability to invest and maintain a broad mix of
stocks, without the enormous expense of brokerage trading fees, is a
mutual fund’s raison d’ EAtre. Most fund prospectuses add their own
diversification and investment-style requirements that increase the
number of stocks the fund must hold. You can be fully diversified by
owing just four five funds. Compare this to the fact that stock investors
must hold a dozen or so blue chips spread among different industries to
give them the full benefit of large-stock diversification. With small
companies, however, there's safety in numbers. You may need as many as
35 to 40 stocks to provide enough diversification. Not all businesses or

52
sectors will perform equally. Not all companies would be equally
efficient. Therefore, owning ‘few’ stock exposes an investor to high level
of business and market risk. Even a poor performance of 1-2 stocks can
significantly affect one’s overall returns. A mutual fund enables an
investor to achieve a fairly high degree of diversification, which is
difficult to achieve by buying into individual stocks unless one has a
fairly large corpus. This helps to minimize risk, as a loss in a few stocks
will not dampen the returns too much. There is a relative safety in
numbers. Take a simple–even if extreme– example. Say, you have Rs
10,000 invested in one stock, Reliance. Now, for some reason, the stock
drops 50 per cent. The value of your investment will halve to Rs 5,000.
Now, say you had invested the same amount in a mutual fund, which had
parked 10 per cent of its corpus in the Reliance stock. Assuming prices of
other stocks in its portfolio stay the same, the depreciation in the fund’s
portfolio– and hence, your investment–will be 5 per cent. That’s one of
the merits of diversification. By diversifying across a number of stocks
and sectors, investors lower the risk during a market downturn that
usually follows a blistering market rally. Let's understand this in light of
what actually happened in the stock markets some years ago.

Mutual funds save the day

01-Jan-99 14-Feb-00 17-Oct-00

Indices
BSE Sensex 100.00 193.58 119.75
Diversified Equity Funds
Sundaram Growth (G) 100.00 246.30 153.70
Templeton India Growth 100.00 225.50 164.22

53
 (D)
HDFC Equity (G) 100.00 301.18 192.47
Stocks
Wipro 100.00 359.76 115.56
Infosys 100.00 366.26 219.59
Mphasis BFL 100.00 316.45 58.13

It was 1999- early 2000. On display was one of the most scorching stock
market rallies the country had ever seen until then. Technology, media
and telecom were the leading lights of the new economy. Then the stock
market collapsed burning a big hole in investor portfolios. However, as is
evident from the above table, mutual funds did a better job at
safeguarding the investor's portfolio than stocks.

Consider the performance of the leading software stocks in that rally.

While they did hit the roof at the peak of the rally, their fall from grace is
just as well-documented. At the end (in October 2000 when the market
fall stemmed) the diversified equity funds in our sample were in much
better shape than the BSE Sensex and the stocks except Infosys. The
mutual funds did better than the stocks mainly due to prudent fund
management based on the virtues of diversification.

Though of course there is a downside to too much diversification. The

excellent returns from say some multi-baggers can be undone by the
average performance of the other large number of stocks in the portfolio.

3) Regulatory issues

Mutual funds are bound by certain regulations, which may sometimes be

a hindrance to the performance of the fund.

54
For example a fund cannot invest more than a certain % in a particular
company. Therefore, if there were a great opportunity to invest in, the
mutual fund would be restricted to invest only a certain amount in it and
the balance may have to be invested in a comparatively lesser performing
stocks. (Or say a fund cannot invest in a good small cap stock as the same
does not meet the investment criteria as yet. It would be able to invest
only after it has achieved a set level of performance, by which time the
stock may have already run-up and hence an opportunity loss to the fund.

4) Corpus size

Investing in equity requires a fairly large amount of money. On the other

hand, mutual funds allow us to participate in the stock markets even with
very small amount say Rs.1000 or so, which would not be possible in
direct investing. Today, if you wanted to buy government securities, you
would have to invest a minimum amount of Rs 25,000. Much the same is
the case if you want to build a decent-sized portfolio of shares of blue-
chips. Now, that might be too large an amount for many small investors

Hence, if one has limited capital but wants to take advantage of the equity
markets, mutual fund may be the better choice. A mutual fund, however,
gives you an ownership of the same investment pie– at an outlay of Rs
1,000-5,000. That’s because a mutual fund pools the monies of several
investors, and invests the resultant large sum in a number of securities.
So, on a small outlay, you get to participate in the investment prospects of
a number of securities.

5) Management fee

55
Mutual funds charge an annual fee, which is a generally about 2.5% of
the corpus they manage. This is deducted from the corpus itself and the
NAV is a reflection of the post-expenses unit value. The costs of the
fund management process are deducted from the fund. This includes
marketing and initial costs deducted at the time of entry itself, called
"load". Then there is the annual asset management fee and expenses,
together called the expense ratio. Usually, the former is not counted
while measuring performance, while the latter is. No such fees is
payable if you are directly owning the stocks except maybe a nominal fee
charged by the depository. Hence, if you hold your investment for a large
no. of years, the overall returns from a mutual fund would be a bit lower
than managing your own portfolio, all other things remaining the same.
The most efficient way to invest from an out-of-pocket point of view is to
buy individual stocks and hold them for the long term. If you buy and
hold, that’s a one-time rather than annual expense But on the other side
Mutual funds are excellent for the new investors because you can invest
small amounts of money and you can invest at regular intervals with no
trading costs. Stock investing, however, carries high transaction fees
making it difficult for the small investor to make money. If an investor
wanted to put in $100 a month into stocks and the broker charged $15 per
transaction, their investment is automatically down 15 percent every time
they invest. That is not a good way to start off!

6) Convenience

Apart from being easier to monitor, the mutual funds are relatively easier
to manage vis-à-vis equity investments. One doesn’t need a demat
account. One can buy/sell the units directly from/to the Mutual Fund

56
without depending on a broker, whom we need if we are to buy/sell
shares.

Also, the mutual funds send regular reports pertaining to ones investment,
which contains all the details we may need for assessing our income and
tax liability, if any, thus reducing our paperwork.

Having looked at the pros and cons of each of the investment options, we
can make our choice based on one’s comfort level.

One could of course also partly invest through mutual funds and partly
directly. This would enable us to say enjoy the expertise, stability and
security offered by a mutual fund and also try one’s luck with some
unknown/lesser known stocks which may have the potential to become
multi-baggers.

7) Restrictive gains

Diversification helps, if risk minimization is your objective. However, the

lack of investment focus also means you gain less than if you had
invested directly in a single security.

In our earlier example, say, Reliance appreciated 50 per cent. A direct

investment in the stock would appreciate by 50 per cent. But your
investment in the mutual fund, which had invested 10 per cent of its
corpus in Reliance, will see only a 5 per cent appreciation.

8) Tax breaks

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

57
They also give you the advantages of capital gains taxation. If you hold
units beyond one year, you get the benefits of indexation. Simply put,
indexation benefits increase your purchase cost by a certain portion,
depending upon the yearly cost-inflation index (which is calculated to
account for rising inflation), thereby reducing the gap between your
actual purchase cost and selling price. This reduces your tax liability.

What’s more, tax-saving schemes and pension schemes give you the
added advantage of benefits under Section 88. You can avail of a 20 per
cent tax exemption on an investment of up to Rs 10,000 in the scheme in
a year.

9) No Control.

58
Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else's car. Your portfolio is totally managed
by the fund manager. You are entitled to pick stocks of your own choice.

10) Get Focused

I will admit that investing in individual stocks can be fun because each
company has a unique story. However, it is important for people to focus
on making money. Investing isn't a game. Your financial future depends
on where you put you hard earned dollars and it shouldn't be taken
lightly.

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

While in investing in stocks there are no such features. Every time

you need to contact your broker for buying or selling of stocks.

12) Solid structure

Mutual funds have a solid 3-tier structure in place that works in the
investor's interest. The promoter/sponsor sets up a mutual fund, but does
not exercise direct control over it. For this, it sets up a board of trustees.
The trustees in turn set up an asset management company (AMC). The
latter looks after the day-to-day administration, sales, marketing and fund
management. This way there is very little link between the
sponsor/promoter and the mutual fund schemes. This ensures that mutual
fund schemes are managed professionally without any 'interference'.

59
On the other hand, Indian companies still have some way to go before
they can be managed as professionally as mutual funds. The promoter's
'involvement' is considered normal and any negative news at the
promoter's level often percolates down to the stock.

13) Offering solutions

How many times have we heard this before - mutual funds are very
flexible? There is a reason for that. Today mutual funds have evolved at a
level that gives investors solutions for retirement planning, planning for
child's education/marriage, even buying a house to outline a few goals.
There are mutual funds tailor-made to help investors achieve these
financial goals.

With stocks it's a little different. Stocks do not offer solutions apart from
a very broad solution of providing capital appreciation. You can't provide
for retirement or for a child's education through stocks, rather you must
build a customized portfolio of stocks and debt and actively manage it to
help you meet a financial goal. That is exactly what mutual funds do.

14) Risk

In general, mutual funds carry much lower risk than stocks. This is
primarily due to diversification (as mentioned above). Certain mutual
funds can be riskier than individual stocks, but you have to go out of your
way to find them. A fund's beta ratio is a standard risk parameter. Beta
measures movements relative to the index and thus, the relative riskiness
of a fund compared to the market. The higher the beta, the more volatile
the fund. Expressed as a single digit number, a beta of plus 1 means the
fund is exactly as volatile as the market. (A negative beta indicates it

60
moves in the opposite direction to the market). If the fund's beta is 2, it
moves twice as much as the market. That is, if the market moves up 10
per cent, a 2-beta fund moves up 20 per cent. A beta less than 1 means
that the fund is less volatile. For example, a beta of 0.5 indicates that if
the Sensex moves up 10 per cent, the fund moves up 5 per cent.

With stocks, one worry is that the company you are investing in goes
bankrupt. With mutual funds, that chance is next to nil. Since mutual
funds typically hold anywhere from 25-5000 companies, all of the
companies that it holds would have to go bankrupt.

61
62
Equity Asset NAV 1wk 1mth 3mth 6mth 1yr 2yr 3yr
Diversified Size (Rs./Unit)
(Rs. cr.)

ICICI Pru -
23.
Infrastructure 2,481.02 20.56 -1.4 7.0 20.6 28.0 26. 3.8
3
(G) 4
Can Robeco -
Infrastructure 83.54 13.48 -1.5 7.6 25.2 28.5 31. -5.4 -4.0
(G) 6
UTI -
Opportunitie 362.01 15.26 -1.7 8.2 24.0 28.1 15. 7.6 -1.4
s Fund (G) 9
UTI
-
Dividend 11.
931.95 17.13 -1.7 4.9 14.2 16.8 17. 0.8
Yield Fund 9
4
(G)
IDFC
-
Premier 14.
521.67 15.51 0.3 7.0 23.7 20.0 26. 2.3
Equity - A 3
8
(G)

Equity Tax Asset NAV 1wk 1mth 3mth 6mth 1yr 2yr 3yr
Saving Size (Rs./Unit)
(Rs. cr.)

Sundaram -
Tax Saver 620.49 26.93 -2.9 6.8 15.8 12.1 23. -2.8 -2.4
(G) 9
Religare -
India Tax 50.99 9.01 -1.5 5.4 12.9 14.3 27. -6.7 --
Plan (G) 5
Fidelity Tax - -
Advantage 669.33 11.34 -1.5 5.7 17.8 16.9 25. 14. -0.8
(G) 6 2
- - -
HDFC Tax
1,197.86 115.32 -1.2 7.8 21.1 16.3 25. 20. 20.
Saver (G)
2 1 5

63
CONCLUSION

STOCKS V/S MUTUAL FUNDS

STOCKS MUTUAL FUNDS

Returns Depends on market Depends on market
Cost Low Moderate
Risk High Low
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Transparency Transparent Transparent
Diversification Less More
Skill set Less More
Investment More Less
Control More Less
Convenience Less More
Regulatory issues Almost equal Almost equal
Tax benefits Less More

64
 Literature review

Ramsey Bala, Matthew C.H. Yeung2003Growth, both in terms of size

and choice, in the mutual fund industry among emerging markets has
been impressive. However, mutual fund research in emerging markets
hardly exists. This paper intends to fill this gap. In particular, the paper
surveys the relative importance of factors considered important in the
selection of mutual funds by financial advisors in emerging markets. Our
survey focuses on Malaysia where the mutual industry started in the
1950s but only gained importance in the 1980s with the establishment of
a government initiated programme. The results of our survey point to
three important factors which dominate the choice of mutual funds. These
are consistent past performance, size of funds and costs of transaction.
Factors which relate to fund managers and investment style are not
considered to be relatively important. With the impending liberalization
of the financial markets in the developing world, our findings would
assist those international funds that are considering expanding their
operations into these emerging markets. Bhattacharyya Nalinaksha
Bruce A. Huhmann, 2005 Mutual fund advertisements are not providing
the information necessary for optimal investment decisions. Mutual funds
use techniques known to increase the likelihood that their advertisements
are noticed, but they also use techniques known to decrease the
readership of their advertisements. Also, they rarely included
convenience information Thomas, F. Scott John C. Jaye2005 For
smaller hedge fund managers who have recently registered with the SEC
and desire to sponsor a new registered fund product as part of their
advisory business, converting and registering an existing hedge fund is a

65
viable alternative to forming an entirely new fund. The conversion
process involves converting an existing hedge fund into a Delaware trust
and then registering the new trust as a mutual fund under the 1940 Act.
The adviser may, under certain circumstances, advertise the past
performance of the hedge fund when marketing the new mutual fund. In
addition, the adviser may continue to receive performance based or
incentive compensation within the boundaries established by the Advisers
Act. The authors believe that the conversion process is a viable and cost-
effective method for smaller hedge fund advisers to expand their existing
investment advisory products and more easily grow assets under
management Arugaslan Onur, Ed Edwards, Ajay Samant2007 The
results show that the funds with the highest returns may lose their
attractiveness once the degree of risk had been factored into the analysis.
Conversely, some funds may look very attractive once their low risk is
factored into their performance. funds Low Soo-Wah 2007. The findings
indicate that, on average, the funds display negative overall performance
with either the KLCI or the EMAS Index. In addition, there is little
variation in the manager's market-timing and selectivity performance
across alternative market benchmarks. It is also reported that a manager's
poor timing ability contributes significantly to the fund's negative overall
performance. Soo-Wah Low, Noor Azlan Ghazali 2007 Co integration
results show that the long run pricing performance of the unit trust funds
differs significantly from that of the KLCI. Interestingly, the findings also
reveal that two index funds are found not to be cointegrated with the
stock market index. In the short run, one-way Granger causality test
shows that changes in the KLCI Granger causes changes in the unit trust
funds. This suggests that fund managers are responding to the past
changes in the stock market index over the short run. Ru Wu Cheng
2008 The most important criteria of mutual fund performance should be
“mutual fund style,” following is “market investment environment.” This
result indicates investors' focus when they evaluate the mutual fund
performance.. Swinkels Laurens, Rzezniczak Pawel 2009. For each of
the three categories, equity, balanced, and bond funds, the paper positive,
but insignificant selectivity skill of the mutual fund managers. No
evidence is found of bond or equity market timing skills in the sample. )
Banko John Scott Beyer, Richard Dowen2010 This study contributes to
the literature on mutual-fund managers, and the literature on the structure
of mutual funds, by showing that market concentration at the asset-
manager level varies substantially across Morningstar styles, particularly
for the fixed-income funds. The paper shows that increased market

66
concentration is associated with greater expenses for the funds under
management, within a given Morningstar-style box, for both equity funds
and for fixed-income funds. We also show that increased costs are
partially offset by economies of scope for the fixed-income

STATEMENT OF PROBLEMS

Every person wants to invest their money to beat the inflation and to get
the better the return on their investment. Many investment options are
available in the market through they can fulfill their invest needs. But the
common people don’t have the proper knowledge of the investment tools.
They are confused which option is suitable for them. So the main
problem is that for the different kinds of investors, which investment
tools is suitable, Stock Market or M utual fund?

There are the different and disking of persons who have the different kind
of investment objectives and different level of risk tolerance. These
people don’t know which investment option is suitable for them
according to their profile. This profile consists of different content like
age, income, risk taking ability, return on investment etc.

Every study has some limitation. This study also has a limitation. The
limitation of this study is that this study provides the comparative
information of these both option only. The investors can’t get the
information of other investment like FD’s RD’s and Insurance etc.

OBJECTIVE OF THE STUDY

Objective of my work arise when I came across various disscussion in the

financial markets on comparison between Stock Market and Mutual
Fund. There is still a lack of knowledge about mutual fund and insurance

67
amongst the customers. So this study would help to increase, costomer
knowledge and awareness about stock market and mutual fund.
Objective of this study is to find add analyze which is more proffered
investment instrument insurance or mutual fund on the basis of different
parameters like risk,return,cost etc.
This study help the investors ot take a better investment decision to
consider the following points.
.

• To make aware investor about the risks availability exists in the

both investment options.

• To draw a comparative picture between stock market and mutual

fund.

• To study the growth of stock market and mutual fund in India.

RESEARCH METHODOLOGY

I will collect the data by following two types.

 Primary data collection.

 Second data collection.

PRIMARY DATA COLLECTION

I will conduct a survey in Saharanpur region to find out the preference of

investors regarding in stock market and mutual funds. The survey will
also provide information on the level of risk people are willing to take
and also reveals the mind set or rather the confusion the people have
related to stock market and mutual fund.

68
SECONDARY DATA COLLECTION

I will collect the secondary data from the different sources which are as
following-

 invest Magazines

 News papers

 Online

 Individual financial Consult

CHAPTER-4

FINDINGS

1) What % of earnings do you save for investment purposes?

The responses are reflected in following table.

% OF 10-20 % 20-30% 30-40% 40-50% More than

EARNINGS 50 %
100 44 30 26 0 0
% 44% 30% 26% 0% 0%

69
 DIAGRAM DEPICTING % OF EARNING SAVED
BY RESPONDENTS FOR INVESTMENT
PURPOSES

50 44
PERCENTAGE

40
30
30 26
%
20
10
0 0
0
10-20% 20-30% 30-40% 40-50% more
than 50%
% OF EARNING

ANALYSIS:-

It can be easily seen from the above graph that 44% of respondents save
10-20% of earnings for investment purposes while 30% and 26% save 20-
30% and 30-40% respectively.

This shows that people still are not aware of different

investment options available in the market rather they prefer to keep cash
or invest in gold. Thus there is a lot of scope to tap the earnings of
investors and invest in different other investment avenues available in the
market.

2) Which is your most dominant investment instrument for

investment purposes?

The responses are reflected in following table.

70
Investment Equity Mutual Debentures Derivatives Bank Others
instruments fund F.Ds
100 28 40 1 3 26 2
respondents
% 28% 40% 1% 3% 26% 2%

DIAGRAM DEPICTING MOST DOMINANT

INVESTMENT INSTRUMENT IN THE MARKET

2% Equity
26% 28%
Mutual fund
Debentures
Derivatives
3%
Bank F.Ds
1% 40% Others

ANALYSIS:-

There are varieties of investment avenues available in front of investors

but the most preferred investment avenue for investors today is mutual
fund.40 % of respondents in the survey had chosen mutual fund as the
most dominant investment option while 28 % had chosen equity and 26
% had chosen Bank fixed deposits.

Investors of today are no more stacked to previous modes of investments

like post office savings, government securities etc. They had identified
new investment options and they are ready to take risk in lieu of higher
returns. Mutual funds offer several benefits that are unmatched by other
investment options. In mutual fund Investments are spread across a wide
cross-section of industries and sectors and so the risk is reduced.

71
Diversification reduces the risk because all stocks don’t move in the same
direction at the same time. One can achieve this diversification through a
Mutual Fund with far less money than one can on his own. Investing in
individual stocks is prone to more risk & less diversification. Thus 40 %
had chosen mutual fund while 28 has chosen equity.

Still 28% of investment is done in bank FD which means that 28% of

the investors are still not ready to take risk by investing in equity market
or mutual fund it means that they are risk aversive and they have no faith
in equity market or mutual fund. Thus there is an opportunity to tap this
segment of investors by identifying and pursuing them to invest in equity
market or mutual fund.

3) What is your investment horizon?

The responses are reflected in following table:-

Period Short term Medium term Long term

(0 – 6 (6 months – 1 (More than 1 year)
months) year)
100 6 34 60
responden
ts
% 6% 34% 60%

72
 DIAGRAM DEPICTING INVESTMENT HORIZON
OF INVESTORS

80
RESPONDENTS 60
60
NO OF

40 34 No of respondents

20 6
0
Short term Medium term Long term
PERIOD OF INVESTMENT

Analysis:-

The above diagram clearly depicts that investors are long term investors
as 60 % of respondents had chosen long term as there investment
horizion.It also shows that respondents are investors and not speculators.
Thus most of the respondents go for long term investment rather than
short term.

4) Do you directly invest in stock market?

The responses are reflected in following table:-

Alternative choice Yes No

No of respondents 56 44
% 56% 44%

73
 DIAGRAM DEPICTING DIRECT INVESTMENT IN
STOCK MARKET

44 Yes
56 No

ANALYSIS:-

From the above pie chart and table we can conclude that equity market is
not left untouched by the investors.56% of the respondents out of the
sample size of 100 invest directly in equity market while 44% of
respondents either don’t invest in equity market or they invest in equity
market through mutual fund..

Direct investment in equity market requires lot of time, professional

expertise as well as high risk which the individual investors do not have
as well as they are not ready to take it .While investing in mutual fund
overcomes all these

problems. But on the other side there are restrictive gains by investing in
mutual fund when compared with direct investment in stocks. As the
sensex is on the ride again the untouched investors can be attracted
towards stock market which can lead the Indian economy to greater
heights.

74
5) If yes? How was your experience of direct investment in equity
market?

The responses are reflected in following table:-

Experiences Excellent Good Moderate Bad Worst

No of 9 26 20 1 0
respondents
% 17% 46% 36% 1% 0%
NO OF RESPONDENTS

DIAGRAM DEPICTING THE EXPERIENCE OF

INVESTORS BY INVESTING IN MUTUAL FUNND

30 26
25
20
20
15 No of respondents
9
10
5 1 0
0
te
nt

ts
oo

Ba
a
lle

or
er
G
ce

W
od
Ex

EXPERIENCE

ANALYSIS:-

56 % of the respondents who have directly invested in the stock market

out of which 46 % described their experience of investing in stock market
as good. The returns generated by them by investing in stock market were
above expectation. While 17% of respondents had identified their
experience as excellent which means they got excellent returns from the
stock market.36% were moderate as they did not lose their money
invested nor did they earn any returns. Only 1% had bad experience with

75
the stock market. Overall we can conclude that respondents are satisfied
by directly investing in stock market.

6) If no? Please tell the reason why?

The responses are reflected in following table:-

Reasons Uneducated Lack of Risk Lack No Lack

about the resources associated of interest of
market with stock faith time
market
No of 4 7 11 6 3 13
respondents
% 9% 16% 25% 14% 7% 29%

DIAGRAM DEPICTING REASONS FOR NOT

INVESTING DIRECTLY IN STOCK MARKET

Uneducated about
9% stock market
Lack of resources
29%
16%
Risk associatedwith
stock market
Lack of faith

7%
No interest
25%
14%
lack of time

ANALYSIS:-

There are several reasons why respondents do not invest directly in equity
market. These reasons can be seen in the above pie chart and table. The
above pie chart depicts that 29% of the respondents who do not directly
invest in stock market do it mainly because they do not have the time to
daily analyze the stock prices and thus take buying and selling
decisions.25% do not invest because of the risk associated with investing

76
in stock market. These 25 % are risk aversive and they still believe in
investing in old modes of investment such as post office savings or bank
fixed deposits. They feel that their money is safer by investing in old
modes of investment. These two reasons contribute about 54 % for not
investing in stock market. By investing in mutual fund investors can
overcome these reasons.

7) Which broking house do you like to associate with?

The responses are reflected in following table:-

Broking Kotak India Karvy Anand HDFC ICICI Others

Houses bulls rathi securities specify
No of 23 11 15 2 1 3 1
respondents
% 41% 19% 27% 4% 1% 6% 2%

DIAGRAM DEPICTING BROKING HOUSE

RESPONDENTS LIKE TO ASSOCIATE
23
RESPONDENTS

25
20 15
NO OF

15 11
No of repondents
10 3
5 2 0 1
0
Karvy

specify
Kotak

securities

Others
HDFC

BROKING HOUSES

ANALYSIS:-

77
From the above bar graph we can easily depict that highest number of
respondents wants to associate themselves with Kotak securities while
karvy comes at the 2nd most preferred broking house and India bulls at the
3rd. Kotak securities still has to tap about 58% of the investors who invest
through other broking houses by providing high quality services with low
cost.

8) Do you invest in mutual fund?

The responses are reflected in following table:-

Alternative choice Yes No

No of respondents 71 29
% 71% 29%

DIAGRAM DEPICTING % OF RESPONDENTS

INVESTING IN MUTUAL FUND

29%

Yes
No

71%

ANALYSIS:-

Today mutual fund is the most preferred investment instrument for the
investors as shown in the second analysis. In the sample survey
conducted through questionnaires it can be clearly seen that more than 70
% of respondents invest in mutual fund which is fairly a very large

78
number. As mutual fund is the safest route to enter into equity market
hence respondents are more comfortable investing in mutual fund and not
direct investment in stock market. Of the remaining 29% do not invest in
mutual fund. This 29% is untapped hence AMC should come up with
different unique schemes in order to attract this segment.

9) If yes? How was your experience of investment in Mutual fund?

The responses are reflected in following table:-

Experiences Excellent Good Moderate Bad Worst

No of 11 49 10 1 0
respondents
% 15% 69% 14% 2% 0%

DIAGRAM DEPICTING THE EXPERIENCE OF

INVESTORS BY INVESTING IN MUTUAL FUNND

60
NO OF RESPONDENTS

49
50
40
30 No of respondents
20 11 10
10 1 0
0
nt

e
d

st
at
oo

Ba
lle

or
er
G

W
ce

od
Ex

EXPERIENCE

ANALYSIS:-

Out of 71 respondents who invest in mutual fund 49 respondents had

good experience of investing in mutual fund while 11 and 10 had
excellent and moderate experiences respectively. These figures are more

79
 when compared with experience of respondents who invest in stock
market.

Thus it can conclude that respondents are benefited when they

invested in mutual fund as compared with investment in stock market.
This shows why mutual fund is the most preferred investment instrument.

10) Reason behind your investment in mutual fund?

The responses are reflected in following table:-

Reasons Professional Diversificati Liquidity Lo Convenience Greater Low

Expertise on of fund w returns risk
cost
No of 23 12 0 15 1 10 10
responde
rs
% 33% 17% 0% 21 1% 14% 14%
%

DIAGRAM DEPICTING THE REASONS OF INVESTMENT IN

MUTUAL FUND

Professional Expertise
14% Diversification of fund
33%
14% Liquidity
Low cost
1% Convenience
21% 0% 17% Greater returns
Low risk

ANALYSIS:-

The most common reasons for investment in Mutual fund were

Professional expertise and Diversification of fund. These two are biggest

80
advantages for investing in mutual fund. Out of total respondents 33% of
them invest in mutual fund because of professional expertise, 17% invest
due to diversification of fund while remaining 50% invest due to low
cost, low risk, greater convenience and greater returns. Thus Mutual fund
industry is on the road of growth.

11) If no? Please tell the reason why?

The responses are reflected in following table:-

Reasons Lack of Lack of Less than Uneducated Others

faith resources expected
returns
No of 11 6 4 5 3
respondents
% 38% 21% 14% 17% 10%

DIAGRAM DEPICTING REASONS FOR NOT

INVESTING IN MUTUAL FUND
NO OF RESPONDENTS

11
12
10
8 6 5
6 4 3 NO OF RESPONDENTS
4
2
0
Lack of

specify
Less than

Uneducated
resourses

Others
expected
Lack of
faith

returns

REASONS

81
ANALYSIS:-

Out of the total respondents who don’t invest in mutual fund 11% says
they don’t have faith on AMC’s, 6% says they don’t have enough
resources to invest in Mutual fund, 5% are uneducated about the concept
of mutual fund, and rest 4% think that mutual fund gives less than
expected returns.

As in mutual fund investor has to give his money to the fund

manager of AMC hence there is no control of the investor on his
investment while in case of direct investment in stock market you have
full control on your investment. This shows that investors do not believe
in the concept of mutual fund and hence 29% of investors do not invest in
mutual fund.

12) Which scheme of Mutual fund do you prefer?

The responses are reflected in following table:-

Schemes Equity Debt Balanced Growth Others

schemes schemes schemes schemes
No of 51 0 11 9 0
respondents
% 72% 0% 15% 13% 0%

82
 DIAGRAM DEPICTING SCHEMES OF MUTUAL
FUND PREFERRED BY INVESTORS

NO OF RESPONDENTS 60
50
40
30 No of respondents
20
10
0

Balanced
schemes

schemes

schemes

Others
schemes

Growth
Equity

Debt

SCHEMES

ANALYSIS: -

The Mutual fund investors think that equity schemes are the best schemes
to invest in mutual fund which can be proved from the above bar graph.
The above graph shows that out of 71 respondents who invest in mutual
fund ,more than 70% had chosen Equity schemes as there preferred
scheme, while 15% and 13% thinks balanced and growth schemes better.

Hence it can conclude that investors want to invest in

equity market but they prefer to choose mutual fund and not direct
investment in stock market.

13) Are you satisfied with the cost associated with Mutual fund?

The responses are reflected in following table:-

83
Alternative choice Yes No
No of respondents 49 22
% 69% 31%

DIAGRAM DEPICTING WHETHER INVESTORS

ARE SATISFIED WITH COST ASSOCIATED WITH
MUTUAL FUND

No
31% Yes
69%

ANALYSIS:-

When asked about the cost associated with mutual fund out of the total
respondents 69% thinks that they are satisfied with the cost associated
with mutual fund while 31% do not accept the logic behind cost
associated with mutual fund.

The 31% respondents thinks that it is better to invest directly

in stock market as the buried cost in direct investing is less as compared
with investing through mutual fund.

Mutual fund companies need to revise the cost of their

schemes in order to tap the untouched segment of the market.

14) Which is safer instrument according to you as an investor?

The responses are reflected in following table:-

Alternative choice Mutual fund Investment

84
 in stocks
No of respondents 81 19
% 81% 19%

DIAGRAM DEPICTING SAFER INVESTMENT

INSTRUMENT

19%
Mutual fund
Investment in stocks
81%

ANALYSIS:-

Out of the total respondents 81% of them think Mutual fund as safer
when compared with direct investment in stocks, while merely 19%
thinks investment in stocks as more safe.

Thus from the above analysis it can be easily concluded that

when ever we compare the two on the basis of risk Mutual fund will
always be proved better as it helps the investors in saving their capital
invested in equity market.

15) According to you which among the two will have a better future
prospects?

The responses are reflected in following table:-

Alternative choice Mutual fund Investment

in stocks
No of respondents 84 16
% 84% 16%

85
 DIAGRAM DEPICTING INVESTMENT
INSTRUMENT HAVING BETTER FUTURE
PROSPECTS

16%
Mutual fund
Investment in stocks
84%

ANALYSIS:-

When asked about the better future prospects the reactions were same
Mutual fund. Out of total respondents 84% of the respondents had said
that Mutual fund has better future prospects while only 16% said
investment in stocks has better future prospects.

Respondents while answering to this question said that mutual

fund had better prospects because it has different characteristics which
make it more popular among investors such as low risk, greater returns,
diversification, professional expertise etc.

RECOMMENDATIONS

86
The training revealed various problems that are encountered during the
whole process. I suggest the following recommendations, which will be
useful for the organization:-

1) For creating awareness and faith in the organization. needs an

aggressive advertisement and for that an extra effort is required. The
company should focus more on improvement in the frequency of
advertisements, different media etc.

2) The organization should adopt some different strategies to attract that

segment of investors who do not invest in equity market which will help
them to increase their customer’s base

CONCLUSION

87
The study was very helpful as it helped me to understand the behavior of
investors very well. As my objective of the study was to identify whether
investor more invest in mutual fund or they directly invest in equity
market, hence I easily found that investor today wants to invest in equity
market but more through mutual fund route and directly. The future of
mutual fund is very bright as it helps the investor capital when compared
with direct investing in stock market. There are numerous benefits of
investing in mutual fund and one of the key reason for its phenomenal
success in the developed markets like US and UK. mutual funds also
fulfill the requirement of short term investors and proves to be the best for
those who do not want to lock their money for long time. At last we can
understand that mutual funds are the right decision for parking their ideal
money for suitable time period.

Bibliography

88
 www.karvi.com

 www.investopedia.com

 www.moneycontrol .com

 www.sharekhan.com

 www.emerald.com

 www.bseindia.com

 www.buzzingstock.com

 http://www.emeraldinsight.com/search.ht
m?
st1=literature+review+on+mutual+fund+
and+stock+market&ct=jnl&go=Go

 Journal

89
 ANNEXURES
Questionnaire
Answer your following questions with (√) mark

Name:_________________
Age:__________________
Occupation:___________
1) What % of earnings do you save for investment purposes? Mark
your Ans.

10-20 % 20-30% 30-40% 40-50% More than

50 %

2) Which is your most dominant investment instrument for

investment purposes?

Equity Mutual Debentures Derivatives Bank Others

fund F.Ds

3) What is your investment horizon? Mark your Ans.

Short term Medium term Long term

(0 – 6 (6 months – 1 (More than 1 year)
months) year)

90
4) Do you directly invest in stock market?

Yes

No

5) If yes? How was your experience of direct investment in equity

market?

Excellent Good Moderate Bad Worst

6) If no? Please tell the reason why?

Uneducated Lack of Risk Lack No Lack

about the resources associated of interest of
market with stock faith time
market

7) Which broking house do you like to associate with?

Kotak India Karvy Anand HDFC ICICI Others

bulls rathi securities specify

8) Do you invest in mutual fund?

91
Yes

No

9) If yes? How was your experience of investment in Mutual fund?

Excellent Good Moderate Bad Worst

10) Reason behind your investment in mutual fund?

Professional Diversificati Liquidity Lo Convenience Greater Low

Expertise on of fund w returns risk
cost

11) If no? Please tell the reason why?

Lack of Lack of Less than Uneducated Others

faith resources expected
returns

12) Which scheme of Mutual fund do you prefer?

The responses are reflected in following table:-

Equity Debt Balanced Growth Others

schemes schemes schemes schemes

13) Are you satisfied with the cost associated with Mutual fund?

Yes

92
NO

14) Which is safer instrument according to you as an investor?

Mutual funds

Investment in Stock

15) According to you which among the two will have a better future
prospects?

Mutual funds

Investment in Stock

93