SIP Project (Savi) - Updated

Systematic Investment Planning in Mutual fund investment
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INTRODUCTION TO MUTUAL FUND
Meaning:
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 appreciations realized
are shared by its unit holders in proportion to the number of units owned by
them.
Thus a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket
of securities at a relatively low cost.
Mutual funds are associations or trusts of public members who wish to make
investments in the financials instruments or assets of the business sector for the
mutual benefit of its members.
The fund collects the money of these members from savings and invests them
in diversified portfolio of financial assets with a view to reduce risks and to
maximize their income and capital appreciation for distribution to its members
on a pro-rata basis. They enjoy collectively the benefits of expertise in
investment by specialists in the trust, economies of scale which no single
individual by himself could enjoy.
Govt. R.C College of Commerce & Management

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A mutual fund thus is a concept of mutual help of subscribers for portfolio
investment and management of these investments by experts in the field. These
funds are set up under the Indian Trusts Act. UTI is governed by its own Act.
A mutual fund is a group of investors operating through a fund manager to

purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost
efficient and very easy to invest in. By pooling money together in a mutual
fund, investors can purchase stocks or bonds with much lower trading costs
than if they tried to do it on their own. Also, one doesn't have to figure out
which stocks or bonds to buy. But the biggest advantage of mutual funds is
diversification.
Mutual Fund Operation Flow Chart

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The price per share at any given time is known as the net asset value, or
NAV, which is the current market value of all the fund's assets, minus
liabilities, divided by the total number of outstanding shares. As new
investors buy into a fund, the number of outstanding shares goes up,
as does the market value of assets, but the NAV remains the same.
TYPES OF MUTUAL FUND
CLOSE-END MUTUAL FUNDS
A closed-end mutual fund has a set number of shares issued to the public
through an initial public offering. These funds have a stipulated maturity period
generally ranging from 3 to 15 years. The fund is open for subscription only
during a specified period. Investors can invest in the scheme at the time of the
initial public issue and thereafter they can buy or sell the units of the scheme on
the stock exchanges where they are listed.
Once underwritten, closed-end funds trade on stock exchanges like stocks or

bonds. The market price of closed-end funds is determined by supply and
demand and not by net-asset value (NAV), as is the case in open-end funds.
Usually closed mutual funds trade at discounts to their underlying asset value.
OPEN-END MUTUAL FUNDS
An open-end mutual fund is a fund that does not have a set number of shares. It
continues to sell shares to investors and will buy back shares when investors
wish to sell. Units are bought and sold at their current net asset value.

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Open-end funds keep some portion of their assets in short-term and money
market securities to provide available funds for redemptions. A large portion of
most open mutual funds is invested in highly liquid securities, which enables
the fund to raise money by selling securities at prices very close to those used
for valuations.
LARGE-CAP FUNDS
Large cap funds are those mutual funds, which seek capital appreciation
by investing primarily in stocks of large blue chip companies with
above-average prospects for earnings growth. Different mutual funds
have different criteria for classifying companies as large cap.
Generally, companies with a market capitalization in excess of Rs 1000

crore are known large cap companies. Investing in large caps is a
lower risk-lower return proposition (vis-à-vis mid cap stocks),
because such companies are usually widely researched and
information is widely available.
MID-CAP FUNDS
Mid cap funds are those mutual funds, which invest in small / medium
sized companies. As there is no standard definition classifying
companies as small or medium, each mutual fund has its own
classification for small and medium sized companies.
Generally, companies with a market capitalization of up to Rs 500 crore

are classified as small. Those companies that have a market
capitalization between Rs 500 crore and Rs 1,000 crore are classified
as medium sized.
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Big investors like mutual funds and Foreign Institutional Investors are
increasingly investing in mid caps nowadays because the price of large caps has
increased substantially.
Small / mid sized companies tend to be under researched thus they present an
opportunity to invest in a company that is yet to be identified by the market.
Such companies offer higher growth potential going forward and therefore an
opportunity to benefit from higher than average valuations.
But mid cap funds are very volatile and tend to fall like a pack of cards in bad
times. So, caution should be exercised while investing in mid cap mutual
funds.
EQUITY FUNDS
Equity mutual funds are also known as stock mutual funds. Equity mutual
funds invest pooled amounts of money in the stocks of public
companies. Stocks represent part ownership, or equity, in companies,
and the aim of stock ownership is to see the value of the companies
increase over time.
Stocks are often categorized by their market capitalization (or caps), and
can be classified in three basic sizes: small, medium, and large. Many
mutual funds invest primarily in companies of one of these sizes and
are thus classified as large-cap, mid-cap or small-cap funds.
Equity fund managers employ different styles of stock picking when they
make investment decisions for their portfolios. Some fund managers
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use a value approach to stocks, searching for stocks that are
undervalued when compared to other, similar companies.
Another approach to picking is to look primarily at growth, trying to find

stocks that are growing faster than their competitors, or the market
as a whole. Some managers buy both kinds of stocks, building a
portfolio of both growth and value stocks.
BALANCED FUNDS
Balanced fund is also known as hybrid fund. It is a type of mutual fund that
buys a combination of common stock, preferred stock, bonds, and short-term
bonds, to provide both income and capital appreciation while avoiding
excessive risk.
Balanced funds provide investor with an option of single mutual fund that
combines both growth and income objectives, by investing in both stocks (for
growth) and bonds (for income).
Such diversified holdings ensure that these funds will manage downturns in the
stock market without too much of a loss. But on the flip side, balanced funds
will usually increase less than an all-stock fund during a bull market.
GROWTH FUNDS
Growth funds are those mutual funds that aim to achieve capital
appreciation by investing in growth stocks. They focus on those
companies, which are experiencing significant earnings or revenue
growth, rather than companies that pay out dividends.

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Growth funds tend to look for the fastest-growing companies in the
market. Growth managers are willing to take more risk and pay a
premium for their stocks in an effort to build a portfolio of companies
with above-average earnings momentum or price appreciation.
In general, growth funds are more volatile than other types of funds, rising
more than other funds in bull markets and falling more in bear
markets. Only aggressive investors, or those with enough time to
make up for short-term market losses, should buy these funds.
NO LOAD FUNDS
Mutual funds can be classified into two types - Load mutual funds and No-
Load mutual funds. Load funds are those funds that charge commission at the
time of purchase or redemption.
They can be further subdivided into (1) Front-end load funds and (2) Back-end
load funds. Front-end load funds charge commission at the time of purchase
and back-end load funds charge commission at the time of redemption.
On the other hand, no-load funds are those funds that can be purchased without
commission. No load funds have several advantages over load funds. Firstly,
funds with loads, on average, consistently underperform no-load funds when
the load is taken into consideration in performance calculations.
Secondly, loads understate the real commission charged because they reduce
the total amount being invested. Finally, when a load fund is held over a long
time period, the effect of the load, if paid up front, is not diminished because if
the money paid for the load had invested, as in a no-load fund, it would have
been compounding over the whole time period.
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EXCHANGE TRADED FUND
Exchange Traded Funds (ETFs) represent a basket of securities that are traded
on an exchange. An exchange traded fund is similar to an index fund in that it
will primarily invest in the securities of companies that are included in a
selected market index. An ETF will invest in either all of the securities or a
representative sample of the securities included in the index. The investment
objective of an ETF is to achieve the same return as a particular market index.
Exchange traded funds rely on an arbitrage mechanism to keep the prices at

which they trade roughly in line with the net asset values of their underlying
portfolios.
VALUE FUNDS
Value funds are those mutual funds that tend to focus on safety rather
than growth, and often choose investments providing dividends as
well as capital appreciation. They invest in companies that the market
has overlooked, and stocks that have fallen out of favor with
mainstream investors, either due to changing investor preferences, a
poor quarterly earnings report, or hard times in a particular
industry.
Value stocks are often mature companies that have stopped growing and
that use their earnings to pay dividends. Thus value funds produce
current income (from the dividends) as well as long-term growth
(from capital appreciation once the stocks become popular again).

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They tend to have more conservative and less volatile returns than
growth funds.
MONEY MARKET FUNDS
A money market fund is a mutual fund that invests solely in money market
instruments. Money market instruments are forms of debt that
mature in less than one year and are very liquid. Treasury bills make
up the bulk of the money market instruments. Securities in the money
market are relatively risk-free.
Money market funds are generally the safest and most secure of mutual
fund investments. The goal of a money-market fund is to preserve
principal while yielding a modest return. Money-market mutual fund
is akin to a high-yield bank account but is not entirely risk free. When
investing in a money-market fund, attention should be paid to the
interest rate that is being offered.
INTERNATIONAL MUTUAL FUNDS
International mutual funds are those funds that invest in non-domestic

securities markets throughout the world. Investing in international
markets provides greater portfolio diversification and let you
capitalize on some of the world's best opportunities. If investments
are chosen carefully, international mutual fund may be profitable
when some markets are rising and others are declining.

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However, fund managers need to keep close watch on foreign currencies and
world markets as profitable investments in a rising market can lose money if
the foreign currency rises against the dollar.
REGIONAL MUTUAL FUNDS
Regional mutual fund is a mutual fund that confines itself to investments

in securities from a specified geographical area, usually, the fund's
local region. A regional mutual fund generally looks to own a
diversified portfolio of companies based in and operating out of its
specified geographical area. The objective is to take advantage of
regional growth potential before the national investment community
does.
Regional funds select securities that pass geographical criteria. For the
investor, the primary benefit of a regional fund is that he/she
increases his/her diversification by being exposed to a specific foreign
geographical area.
SECTOR FUNDS
Sector mutual funds are those mutual funds that restrict their investments
to a particular segment or sector of the economy. These funds
concentrate on one industry such as infrastructure, heath care,
utilities, pharmaceuticals etc. The idea is to allow investors to place
bets on specific industries or sectors, which have strong growth
potential.
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These funds tend to be more volatile than funds holding a diversified
portfolio of securities in many industries. Such concentrated
portfolios can produce tremendous gains or losses, depending on
whether the chosen sector is in or out of favor.
INDEX FUNDS
An index fund is a type of mutual fund that builds its portfolio by buying
stock in all the companies of a particular index and thereby
reproducing the performance of an entire section of the market.
The most popular index of stock index funds is the Standard & Poor's 500.
An S&P 500 stock index fund owns 500 stocks-all the companies that
are included in the index.
Investing in an index fund is a form of passive investing. Passive investing has

two big advantages over active investing. First, a passive stock market mutual
fund is much cheaper to run than an active fund. Second, a majority of mutual
funds fail to beat broad indexes such as the S&P 500.
FUND OF FUNDS
Fund of funds is a type of mutual fund that invests in other mutual funds.
Just as a mutual fund invests in a number of different securities, a
fund of funds holds shares of many different mutual funds.
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Fund of funds are designed to achieve greater diversification than
traditional mutual funds. But on the flipside, expense fees on fund of
funds are typically higher than those on regular funds because they
include part of the expense fees charged by the underlying funds.
Also, since a fund of funds buys many different funds which themselves
invest in many different stocks, it is possible for the fund of funds to
own the same stock through several different funds and it can be
difficult to keep track of the overall holdings.
ADVANTAGES OF MUTUAL FUNDS
Diversification
Using mutual funds can help an investor diversify their portfolio with a
minimum investment. When investing in a single fund, an investor is actually
investing in numerous securities. Spreading your investment across a range of
securities can help to reduce risk. A stock mutual fund, for example, invests in
many stocks - hundreds or even thousands.
This minimizes the risk attributed to a concentrated position. If a few securities

in the mutual fund lose value or become worthless, the loss maybe offset by
other securities that appreciate in value.
Further diversification can be achieved by investing in multiple funds which

invest in different sectors or categories. This helps to reduce the risk associated
with a specific industry or category. Diversification may help to reduce risk
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but will never completely eliminate it. It is possible to lose all or part of your
investment.
Professional Management:
Mutual funds are managed and supervised by investment professionals. As per

the stated objectives set forth in the prospectus, along with prevailing market
conditions and other factors, the mutual fund manager will decide when to buy
or sell securities.
This eliminates the investor of the difficult task of trying to time the market.
Furthermore, mutual funds can eliminate the cost an investor would incur when
proper due diligence is given to researching securities.
This cost of managing numerous securities is dispersed among all the investors
according to the amount of shares they own with a fraction of each dollar
invested used to cover the expenses of the fund. What does this mean? Fund
managers have more money to research more securities more in depth than the
average investor.
Convenience:
With most mutual funds, buying and selling shares, changing distribution
options, and obtaining information can be accomplished conveniently by
telephone, by mail, or online.
Although a fund's shareholder is relieved of the day-to-day tasks involved in

researching, buying, and selling securities, an investor will still need to evaluate
a mutual fund based on investment goals and risk tolerance before making a
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purchase decision. Investors should always read the prospectus carefully
before investing in any mutual fund.
Liquidity:
Mutual fund shares are liquid and orders to buy or sell are placed during market
hours. However, orders are not executed until the close of business when the
NAV (Net Average Value) of the fund can be determined. Fees or
commissions may or may not be applicable. Fees and commissions are
determined by the specific fund and the institution that executes the order.
DISADVANTAGES OF MUTUAL FUND
No Insurance:
Mutual funds, although regulated by the government, are not insured against
losses. The Federal Deposit Insurance Corporation (FDIC) only insures against
certain losses at banks, credit unions, and savings and loans, not mutual funds.
That means that despite the risk-reducing diversification benefits provided by

mutual funds, losses can occur, and it is possible (although extremely unlikely)
that you could even lose your entire investment.
Dilution:
Although diversification reduces the amount of risk involved in investing in

mutual funds, it can also be a disadvantage due to dilution. For example, if a
single security held by a mutual fund doubles in value, the mutual fund itself
would not double in value because that security is only one small part of the
fund's holdings.
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By holding a large number of different investments, mutual funds tend to do
neither exceptionally well nor exceptionally poorly.
Fees and Expenses:
Most mutual funds charge management and operating fees that pay for the
fund's management expenses (usually around 1.0% to 1.5% per year). In
addition, some mutual funds charge high sales commissions, 12b-1 fees, and
redemption fees. And some funds buy and trade shares so often that the
transaction costs add up significantly.
Some of these expenses are charged on an ongoing basis, unlike stock

investments, for which a commission is paid only when you buy and sell .
Poor Performance:
Returns on a mutual fund are by no means guaranteed. In fact, on average,

around 75% of all mutual funds fail to beat the major market indexes, like the
S&P 500, and a growing number of critics now question whether or not
professional money managers have better stock-picking capabilities than the
average investor.
Trading Limitations:
Although mutual funds are highly liquid in general, most mutual funds (called
open-ended funds) cannot be bought or sold in the middle of the trading day.
You can only buy and sell them at the end of the day, after they've calculated
the current value of their holdings.
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Size:
Some mutual funds are too big to find enough good investments. This is
especially true of funds that focus on small companies, given that there are
strict rules about how much of a single company a fund may own.
If a mutual fund has $5 billion to invest and is only able to invest an average of
$50 million in each, then it needs to find at least 100 such companies to invest
in; as a result, the fund might be forced to lower its standards when selecting
companies to invest in.
Inefficiency of Cash Reserves:
Mutual funds usually maintain large cash reserves as protection against a large
number of simultaneous withdrawals. Although this provides investors with
liquidity, it means that some of the fund's money is invested in cash instead of
assets, which tends to lower the investor's potential return.
MUTUAL FUNDS IN INDIA
The origin of mutual fund industry in India is with the introduction of the
concept of mutual fund by UTI in the year 1963. Though the growth
was slow, but it accelerated from the year 1987 when non-UTI players
entered the industry.
In the past decade, Indian mutual fund industry had seen dramatic
improvements, both quality wise as well as quantity wise. Before, the
monopoly of the market had seen an ending phase, the Assets Under
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Management (AUM) was Rs. 67bn. The private sector entry to the
fund family raised the AUM to Rs. 470 bn in March 1993 and till
April 2004, it reached the height of 1,540 bn.
Putting the AUM of the Indian Mutual Funds Industry into

comparison, the total of it is less than the deposits of SBI alone,
constitute less than 11% of the total deposits held by the Indian
banking industry.
The main reason of its poor growth is that the mutual fund industry
in India is new in the country. Large sections of Indian investors are
yet to be intellectuated with the concept. Hence, it is the prime
responsibility of all mutual fund companies, to market the product
correctly abreast of selling.
The mutual fund industry can be broadly put into four phases
according to the development of the sector. Each phase is briefly
described as under.
First Phase - 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of

Parliament. It was set up by the Reserve Bank of India and
functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and
the Industrial Development Bank of India (IDBI) took over the
regulatory and administrative control in place of RBI. The first
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scheme launched by UTI was Unit Scheme 1964. At the end of 1988
UTI had Rs.6700 crores of assets under management.
Second Phase - 1987-1993 (Entry of Public Sector Funds)
Entry of non-UTI mutual funds. SBI Mutual Fund was the first
followed by Canara bank Mutual Fund (Dec 87), Punjab National
Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89),
Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets
under management.
Third Phase - 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in
the Indian mutual fund industry, giving the Indian investors a wider
choice of fund families. Also, 1993 was the year in which the first
Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed.
The erstwhile Kothari Pioneer (now merged with Franklin Templeton)

was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a

more comprehensive and revised Mutual Fund Regulations in 1996.
The industry now functions under the SEBI (Mutual Fund)
Regulations 1996.
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The number of mutual fund houses went on increasing, with many
foreign mutual funds setting up funds in India and also the industry
has witnessed several mergers and acquisitions.
As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 121805 crores. The Unit Trust of India with Rs.44541 crores of
assets under management was way ahead of other mutual funds.
Fourth Phase - since February 2003
This phase had bitter experience for UTI. It was bifurcated into two
separate entities. One is the Specified Undertaking of the Unit Trust
of India with AUM of Rs.29,835 crores (as on January 2003). The
Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India
and does not come under the purview of the Mutual Fund
Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB,
BOB and LIC. It is registered with SEBI and functions under the
Mutual Fund Regulations.
With the bifurcation of the erstwhile UTI which had in March 2000 more
than Rs.76,000 crores of AUM and with the setting up of a UTI
Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and
with recent mergers taking place among different private sector
funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of September, 2004, there
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were 29 funds, which manage assets of Rs.153108 crores under 421
schemes.
Indian Mutual Funds - highest returns in world
Indian mutual funds (MFs) have rewarded their investors better than any other
funds in world. According to a report by Lipper, a leading market research
agency, Indian funds have grabbed eight of the top 10 ranks over a 10-year
period.
If one takes the last five years, they account for seven of the top 10 and over a
3-year period, six of the 10 best performing mutual funds are from India.
However this is in the medium and long term segments. If one takes a short-
term view, there is no Indian fund among the top 10 global performers over last
year (November 1, 2005 to October 31, 2006) under preview.
This is despite the fact that the last twelve months have been among the best
periods ever for Indian markets, with the Bombay Index (sensex) rising by
64.2%.
As of today the size of the asset under management (AUM) in India is $68
billion against the country's GDP of $ 780 billion. In some developed
economies AUM size is close to the GDP figure. This clearly shows the further
scope for growth. If you take the last four year period (January 2003-007) the
AUM of the mutual fund industry has risen substantially about 277%.
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The MF sector has 30 active players and they have mopped up nearly $8 billion
through equity mutual fund schemes. Market pundits expect that this will
further grow to $ 10-12 billion.
Thirty-eight new equity schemes were launched in 2006 and garnered around
$6.3 billion. New categories of funds, like capital protection-oriented funds and
equity derivative funds were launched.
In calendar year 2006, the total AUM of mutual funds grew 6.47 percent to
cross the $68 billion. The MF industry had achieved this landmark first in
August 2006 according to the data released by Association of Mutual Funds in
India (AMFI).
While, the Securities and Exchange Board of India (SEBI) has already made
few amendments for launch of gold exchange-traded funds, whereby investors
can trade in gold as any other instrument, it is likely to take a final call on realty
funds as well.
Consolidation and growth
The MF industry has been seeing few consolidations. With the Indian MF
industry witnessing sustained high growth, it is natural that the foreign players
are eyeing the huge Indian opportunity.
It is likely to get further boost with major players like AIG, Japanese Shinsai
Bank and Nikko AMC planning to set shops in the country. Indian MF market
is expected to witness the entry of more global mutual funds in 2007.
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Five leading global asset management companies are planning to enter India's
mutual fund industry in the face of the spectacular 65 per cent growth in 2006.
American International Group (AIG), JP Morgan, AXA Investment, Korean

financial services major Mirage Asset Group and a Japanese company are
planning to foray into the MF business in India in 2007. "This year at least four
to five international players should come in. The more the merrier," AMFI
Chairman A.P. Kurien said in a statement.
Existing foreign funds like Franklin Templeton, Merrill Lynch, Fidelity and
HSBC made good returns in 2006. Out of 30 AMCs in the country now, nine
are predominantly controlled by global players.
The non-resident Indians (NRIs) have also increased their exposure in the
Indian mutual fund industry by 30 times in the past four years. While the NRI
share in total AUM in January 2003 stood at $102 million, in January 2007, the
figure rose to $3.1 billion, according to industry estimates. In percentage terms,
the NRI share has risen from 0.5% to more than 4%.
The Reserve Bank of India (RBI) has recently hiked the investment limit of
mutual funds in foreign equity and debt instruments from the current US$ 2
billion to US$ 3 billion. This is a reform step. Domestic mutual funds are yet to
even come near the existing limit of $ 2 billion as the Indian markets currently
look to be more attractive.
The mutual fund (MF) industry is seeking to get tax relief on debt schemes and
a solution to the issue of treating Fund of Funds (FoF) schemes on par with
equity schemes from this Budget. The decisions, it expects, will boost retail
participation in these schemes.
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The debt-oriented mutual fund schemes, at present, pay around 12.5 per cent
and institutional investors pay 23 per cent distribution tax plus surcharge and
cess on the premium they earn on their investment, while equity-oriented
schemes are exempt from these taxes.
The industry in its wish list, which it submitted to the finance ministry, sought
nullification or reduction of this tax. The industry expects the government to
take a call on this issue. If the tax limit is brought down, the industry will be
able to attract far more retail investments that, at present, go to conventional
investment sources.
If the market remains subdued in 2007, returns from the equity schemes may
narrow down, but it still will be nearly 20 percent, predicts market analysts.
With new products, as many as 54,000 distributors (including 80 banks), retail
investors are clearly swarming in large numbers to invest in mutual funds.
AMFI believes this trend will reinforce itself as innovative products woven
around commodities, and even real estate, make their entry in the coming days.
A total of 13 new fund houses are either waiting for SEBI's approval or have
plans to enter the Indian mutual fund market. According to Lipper the best
performer over the five and ten-year period is Reliance Growth Fund, which
has given a compounded annual return of 71.38% and 35.21% respectively
against the sensex's improvement of 34.10% and 15.14% respectively.
According to observers, the growth in MF has been spectacular so far and the
bottom line and top line of the industry is attractive. With more players entering
the market, the industry is expected to grow 23% to 24% a year. The yields are
good. The AUM will witness tremendous growth.
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Classes of Funds
Many mutual funds offer more than one class of shares. For example, you may
have seen a fund that offers "Class A" and "Class B" shares. Each class will
invest in the same "pool" (or investment portfolio) of securities and will have
the same investment objectives and policies.
But each class will have different shareholder services and/or distribution
arrangements with different fees and expenses. As a result, each class will
likely have different performance results.
A multi-class structure offers investors the ability to select a fee and expense
structure that is most appropriate for their investment goals (including the time
that they expect to remain invested in the fund). Here are some key
characteristics of the most common mutual fund share classes offered to
individual investors:
• Class A Shares — Class A shares typically impose a front-end sales

load. They also tend to have a lower 12b-1 fee and lower annual
expenses than other mutual fund share classes. Be aware that some
mutual funds reduce the front-end load as the size of your investment
increases. If you're considering Class A shares, be sure to inquire about
breakpoints.
• Class B Shares — Class B shares typically do not have a front-end sales

load. Instead, they may impose a contingent deferred sales load and a
12b-1 fee (along with other annual expenses). Class B shares also might
convert automatically to a class with a lower 12b-1 fee if the investor
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holds the shares long enough.
• Class C Shares — Class C shares might have a 12b-1 fee, other annual
expenses, and either a front- or back-end sales load. But the front- or
back-end load for Class C shares tends to be lower than for Class A or
Class B shares, respectively. Unlike Class B shares, Class C shares
generally do not convert to another class. Class C shares tend to have
higher annual expenses than either Class A or Class B shares.
Recent trends in mutual fund
RECENT trends in mutual fund flows suggest that the Indian investor is
regaining his appetite for equities. But is he willing to make them a part of his
regular diet? The evidence on this is not conclusive. For this, the robust inflows
into equity funds since 2003 will have to be sustained through the ups and
downs of the stock market.
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Equity funds are certainly making a comeback, judging by their sales numbers
over the past year and a half. Equity funds notched up average sales of about Rs
2,700 crore a month in 2004. This is a hefty 70 per cent increase over the
number for 2003 and about five times the monthly sales registered during the
bull market of 1999.
With new investments steadily building up the corpus and rising equity values
lending a helping hand, equity funds have doubled their asset base over the past
year.
Consistently higher sales
Sales numbers have also been more consistent than they have been at any time
in the past. Since August 2003, the monthly sales have consistently remained
above the Rs 1,800-crore mark, except in one month. This is a healthy sign, as
inflows into equity funds in the period before 2003, tended to yo-yo month to
month.
With fund sales keeping up a steady tempo the last 18 months, market watchers
are drawing a parallel with the American experience of the 1980s. Then, rising
household incomes and a steady acceleration in fund sales saw the household
penetration of American mutual funds climb from 5 per cent to over 20 per cent
in just six years.
But an analysis of trends in Indian mutual fund flows over a five-year period
shows that it may be early days yet to expect such a jump. It is only in the 22
months since August 2003 that equity fund flows accelerated sharply, and this
has been a particularly buoyant period for the stock market.
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Judging from the experience until 2003, investors appear typically comfortable
entering an equity fund midway through a stock market rally, when the NAVs
(net asset values) are trending steadily upwards. Few investors venture into
equity funds in a moribund market, confident that they will gain upon recovery.
Robust monthly inflows into equity funds usually follow a month or two of
good stock market returns. In this respect, the period since August 2003 has
been quite conducive to equity fund sales.
The stock market has either notched up positive monthly returns or has stayed
flat in 18 of the 22 months between May 2003 and February 2005. With the
market marching predictably upwards and the returns on equity funds
outpacing the market by a big margin, recent investors have tasted the rewards
of equity investing, without experiencing its risks.
So, while investors are now allocating a larger portion of their savings to
equities, it is not clear if this represents a sustainable trend. The recent pace of
inflows into equity funds will be tested if the market witnesses a sharp reversal.
Over the past year and a half, there was just one month when the stock market
suffered a significant reversal.
In May 2004, the Nifty lost 17 per cent in value, on post-election jitters. Sure
enough, the following month was the only one in recent history when equity
fund sales plummeted below the Rs 1,800-crore mark. They were at Rs 912
crore.
True, smaller corrective phases in the market, such as in January 2004 or in

January 2005, had no noticeable impact on equity fund flows. But before
concluding that more Indian investors are now willing to make equity funds a
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part of their portfolios, we would have to wait for a corrective phase that lasts
longer than the previous one did.
In contrast, the pattern of redemptions or pullouts from equity funds in recent

times does show that, once in, fund investors are a patient lot. Equity funds do
not seem to experience any panic pullouts in the midst of, or even after, a sharp
corrective phase in the market.
If equity fund sales slumped in June 2004, so did the pace of redemptions.
Pullouts from equity funds, which hovered between Rs 1,500 and Rs 2,500
crore a month over the preceding 12 months, shrank to Rs 906 crore in June
2004 following the stock market rout in May.
But investors do seem to use a buoyant phase in the stock market to cash in on
their fund investments. As the market climbed, monthly pullouts from equity
funds also picked up pace over the past year and half, though they remained at
much lower levels than the inflows.
This is probably healthy for the mutual fund industry over the long term.
Traditionally, the bulk of inflows into equity funds have come in at, or close to,
peaks in the stock market. As a result, investors who entered equity funds in
1994, end-1999 or early 2000 have probably had to wait several years to earn a
reasonable return.
The steady pace of pullouts from equity funds in recent months signals that a
good number of these investors may be trying to exit from their investment.
This trend could help mitigate the poor experience that many Indian investors
seem to have with investing in equity funds, despite the latter's good return
numbers.
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Another welcome trend is the reduced rates of churn — the proportion of
inflows and outflows to equity fund assets. With the equity assets rising sharply
over the past year, flows into and out of equity funds have caused fewer
upheavals in fund size in 2004.
After rising steadily through 2003, monthly inflows and outflows taken
together accounted for as much as 33 per cent of the average equity fund assets
in December 2003.
Such a high proportion of inflows and outflows from an equity fund may not be
healthy from the investors' perspective. It could force the fund manager to
replace a large proportion of the stocks in his portfolio at a time when market
conditions are less than ideal.
But with the assets managed by equity funds swelling sharply over the past
year, inflows and outflows, as a proportion of the fund size, have been waning.
By February 2005, the churn rates for the inflows and pullouts taken together
added up to just 20 per cent of the average assets. This shows that fund
managers probably have to contend with lower volatility on the corpus they
manage now, than was the case a year ago.
However, the one disconcerting feature of the recent inflows is that new funds
garnered a significant portion of the money flowing into equity funds. Over the
past year, about 16 per cent of all inflows into equity funds (or Rs 5,168 crore)
poured into initial public offerings from fund houses. Though old funds with an
established record have garnered much more (Rs 27,000 crore), investments
routed through an IPO suffer from a couple of disadvantages.
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One, many investors who take the IPO route make one-off investments in
equity funds and are not regular investors. This may not be the ideal way to
invest in equity funds, as the returns from such an investment would depend
heavily on the timing of the IPO.
Should the market enter a corrective phase, these investors may be vulnerable
to sharp erosion in the value of their entire investment.
Two, many investors who prefer a new fund over an established one do so
under the mistaken notion that entering a fund at an NAV of Rs 10 reduces the
downside risk associated with an equity investment.
These investors may be less prepared (than those who invest in established
funds) for a blip in the value of their investments, in the event of a market
correction.
Instead of rolling out new funds, fund houses need to put greater effort into
persuading investors to place faith in established funds that have a good track
record. Regular monthly investments in mutual funds also need to encouraged,
rather than one-off investments prompted by a booming stock market.
They have made a beginning on this, by announcing entry load waivers on

investments routed through the systematic investment route.
If the fund industry, through its distributors, does manage to convince a larger
proportion of investors to make systematic investments in equity funds, one can
look forward to fund flows that are not too influenced by the ebb and flow of
the stock market.
THE ROLE OF MUTUAL FUNDS IN THE FINANCIAL SYSTEM

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Like other financial intermediaries, mutual funds channel savings to different
forms of investments. To the saver, mutual funds offer several advantages over
the closest, no intermediary alternative--the direct purchase of stocks and
bonds.
First, by pooling the savings of many investors, mutual funds can afford to
employ professional asset managers and analysts with investment expertise
exceeding that of the typical small investor.
Second, mutual funds allow small savers to invest in a diversified portfolio,

thus reducing their exposure to certain types of risk. Typically, the higher
transactions costs and minimum purchase sizes encountered in direct
investment make diversification difficult for the small investor
Finally, mutual funds offer investors a greater degree of liquidity than would be
available through direct investments in the capital markets. For example,
mutual funds offer a variety of convenient means for purchasing and redeeming
shares, such as making fund investments and portfolio adjustments over the
phone and (for money market funds and some bond funds) making redemptions
by writing checks.
Mutual funds are distinct from other intermediaries, especially depository

institutions, in the way they channel savings. In raising funds, mutual funds
issue shares that represent an ownership interest.
Shareowners assume all the market risk and credit risk of the fund's assets and
share proportionally in all the gains and losses of the fund.
Consequently, the return on the shareholder's investment fluctuates with

general market conditions and the investment performance of the fund. Banks
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and thrift institutions, in contrast, primarily issue deposit liabilities with a fixed
rate of interest. Most depositors are fully protected by deposit insurance and are
not subject to any credit risk.
In supplying funds, mutual funds primarily specialize in marketable securities

of firms that have access to the capital markets. Funds must confine their
investments to marketable securities in order to meet investor redemptions in a
timely manner.
Although depository institutions purchase marketable securities, their special

role is in providing funds to borrowers who, because of their small size or the
complexity or monitoring requirements of the debt contract, may lack access to
the public securities markets.
Mutual funds actively compete with banks and thrift institutions for the
balances of households and in supplying funds to borrowers. Such competition
is limited, however, to those households that are willing to take on additional
risk for higher expected returns and to those borrowers capable of financing
their needs directly through the securities markets.
THE DEVELOPMENT OF MUTUAL FUNDS
Offered in the mid-1920s, closed-end funds gained acceptance ahead of open-

end mutual funds; in 1929 they accounted for 95 percent of industry assets.
Open-end mutual funds, however, soon overshadowed them, and between 1940
and 1970 their assets grew more than a hundredfold, to about $48 billion.
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Throughout this period, they almost exclusively invested in equity, although
bond funds also emerged and grew.
In the early 1970s, when volatile stock market conditions along with persistent
inflation reduced the attractiveness of bond and equity funds, the industry
created money market mutual funds.
These funds met the desire of investors to benefit from money market rates,
which were then above the level that federal regulation allowed depository
institutions to offer on retail accounts, and the success of these funds spurred
the development of other funds investing in fixed-income securities: Municipal
bond funds were introduced in the mid-1970s, and mortgage-backed and
government bond funds were started in the mid- 1980s.
Mutual funds have continued to play an active role in equity markets, with
holdings of equity funds growing from about $40 billion in 1970 to about $580
billion in the first half of 1993. Bond and money funds grew faster over this
period.
As a result, the assets of stock funds declined from about 80 percent of
industry assets to 34 percent between year-end 1970 and mid-1993, by which
time bond funds accounted for about 40 percent of industry assets and money
funds about 26 percent.
Mutual Fund Investing vs. Stock Investing
It seems strange to compare mutual funds to stocks since mutual funds are
primarily composed of stocks, but it is important to distinguish the two because
there are some notable advantages to using mutual funds.
Get Focused
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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.
Diversification
There is no greater advantage to using mutual funds than diversification. Do

you honestly believe wealthy investors purchase just a couple of stocks? Of
course not! If they are not using mutual funds (many do), than they are
purchasing a large number of stocks.
Smart investors diversify because it greatly reduces risk without sacrificing
returns. If the idea of diversification is new to you, I recommend this article.
Professional Management
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.
Even if some of us are better at picking stocks than a professional and their
support staff, most of us would not want to spend the amount of time it takes to
watch, research and trade the market on a daily basis.
Efficiency
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By pooling investors' monies together, mutual fund companies can take
advantage of economies of scale. With large sums of money to invest, they
often trade commission-free and have personal contacts at the brokerage firms.
Ease of Use
Can you imagine keeping track of a portfolio consisting of hundreds of stocks?

The bookkeeping duties involved with stocks are much more complicated than
owning a mutual fund. If you are doing your own taxes, or are short on time,
this can be a big deal.
Liquidity
If you find yourself in need of money in a short amount of time, mutual funds
are highly liquid. Simply put in your order during the day and when the market
closes a check will be sent to you or you can have it wired to a bank account.
Stocks can be much more difficult depending on what kinds of stocks you are
invested in. CD's offer no liquidity (not without a hefty fee) and bonds can be
difficult, too. Some mutual funds also carry check writing privileges, which
means you can actually write checks from the account, similar to your checking
account at the bank.
Cost
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
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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!
Wealthy stock investors get special treatment from brokers and wealthy bank
account holders get special treatment from the banks, but mutual funds are non-
discriminatory. It doesn't matter whether you have $50 or $500,000, you are
getting the exact same manager, the same account access and the same
investment.
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.
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.
Glossary of Key Mutual Fund Terms
12b-1 Fees — fees paid by the fund out of fund assets to cover the costs of
marketing and selling fund shares and sometimes to cover the costs of
providing shareholder services. "Distribution fees" include fees to compensate
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brokers and others who sell fund shares and to pay for advertising, the printing
and mailing of prospectuses to new investors, and the printing and mailing of
sales literature. "Shareholder Service Fees" are fees paid to persons to respond
to investor inquiries and provide investors with information about their
investments.
Account Fee — a fee that some funds separately impose on investors for the
maintenance of their accounts. For example, accounts below a specified dollar
amount may have to pay an account fee.
Back-end Load — a sales charge (also known as a "deferred sales charge")

investors pay when they redeem (or sell) mutual fund shares, generally used by
the fund to compensate brokers.
Classes — different types of shares issued by a single fund, often referred to as

Class A shares, Class B shares, and so on. Each class invests in the same "pool"
(or investment portfolio) of securities and has the same investment objectives
and policies. But each class has different shareholder services and/or
distribution arrangements with different fees and expenses and therefore
different performance results.
Closed-End Fund — a type of investment company that does not continuously

offer its shares for sale but instead sells a fixed number of shares at one time (in
the initial public offering) which then typically trade on a secondary market,
such as the New York Stock Exchange or the NASDAQ Stock Market. Legally
known as a "closed-end company."
Contingent Deferred Sales Load — a type of back-end load, the amount of

which depends on the length of time the investor held his or her shares. For
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example, a contingent deferred sales load might be (X) % if an investor holds
his or her shares for one year, (X-1) % after two years, and so on until the load
reaches zero and goes away completely.
Conversion — a feature some funds offer that allows investors to

automatically change from one class to another (typically with lower annual
expenses) after a set period of time. The fund's prospectus or profile will state
whether a class ever converts to another class.
Deferred Sales Charge — see "back-end load" (above).
Distribution Fees — fees paid out of fund assets to cover expenses for
marketing and selling fund shares, including advertising costs, compensation
for brokers and others who sell fund shares, and payments for printing and
mailing prospectuses to new investors and sales literature prospective investors.
Sometimes referred to as "12b-1 fees."
Exchange Fee — a fee that some funds impose on shareholders if they

exchange (transfer) to another fund within the same fund group.
Exchange-Traded Funds — a type of an investment company (either an open-

end company or UIT) whose objective is to achieve the same return as a
particular market index. ETFs differ from traditional open-end companies and
UITs, because, pursuant to SEC exemptive orders, shares issued by ETFs trade
on a secondary market and are only redeemable from the fund itself in very
large blocks (blocks of 50,000 shares for example).
Expense Ratio — the fund's total annual operating expenses (including

management fees, distribution (12b-1) fees, and other expenses) expressed as a
percentage of average net assets.
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Front-end Load — an upfront sales charge investors pay when they purchase
fund shares, generally used by the fund to compensate brokers. A front-end
load reduces the amount available to purchase fund shares.
Index Fund — describes a type of mutual fund or Unit Investment Trust (UIT)
whose investment objective typically is to achieve the same return as a
particular market index, such as the S&P 500 Composite Stock Price Index, the
Russell 2000 Index, or the Wilshire 5000 Total Market Index.
Investment Adviser — generally, a person or entity who receives

compensation for giving individually tailored advice to a specific person on
investing in stocks, bonds, or mutual funds. Some investment advisers also
manage portfolios of securities, including mutual funds.
Investment Company — a company (corporation, business trust, partnership,

or limited liability company) that issues securities and is primarily engaged in
the business of investing in securities. The three basic types of investment
companies are mutual funds, closed-end funds, and unit investment trusts.
Load — see "Sales Charge."
Management Fee — fee paid out of fund assets to the fund's investment
adviser or its affiliates for managing the fund's portfolio, any other management
fee payable to the fund's investment adviser or its affiliates, and any
administrative fee payable to the investment adviser that are not included in the
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"Other Expenses" category. A fund's management fee appears as a category
under "Annual Fund Operating Expenses" in the Fee Table.
Market Index — a measurement of the performance of a specific "basket" of

stocks considered to represent a particular market or sector of the U.S. stock
market or the economy. For example, the Dow Jones Industrial Average (DJIA)
is an index of 30 "blue chip" U.S. stocks of industrial companies (excluding
transportation and utility companies).
Mutual Fund — the common name for an open-end investment company.

Like other types of investment companies, mutual funds pool money from
many investors and invest the money in stocks, bonds, short-term money-
market instruments, or other securities. Mutual funds issue redeemable shares
that investors purchase directly from the fund (or through a broker for the fund)
instead of purchasing from investors on a secondary market.
NAV (Net Asset Value) — the value of the fund's assets minus its liabilities.
SEC rules require funds to calculate the NAV at least once daily. To calculate
the NAV per share, simply subtract the fund's liabilities from its assets and then
divide the result by the number of shares outstanding.
No-load Fund — a fund that does not charge any type of sales load. But not
every type of shareholder fee is a "sales load," and a no-load fund may charge
fees that are not sales loads. No-load funds also charge operating expenses.
Open-End Company — the legal name for a mutual fund. An open-end

company is a type of Investment Company
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Operating Expenses — the costs a fund incurs in connection with running the
fund, including management fees, distribution (12b-1) fees, and other expenses.
Portfolio — an individual's or entity's combined holdings of stocks, bonds, or

other securities and assets.
Profile — summarizes key information about a mutual fund's costs, investment

objectives, risks, and performance. Although every mutual fund has a
prospectus, not every mutual fund has a profile.
Prospectus — describes the mutual fund to prospective investors. Every

mutual fund has a prospectus. The prospectus contains information about the
mutual fund's costs, investment objectives, risks, and performance. You can get
a prospectus from the mutual fund company (through its website or by phone or
mail). Your financial professional or broker can also provide you with a copy.
Purchase Fee — a shareholder fee that some funds charge when investors
purchase mutual fund shares. Not the same as (and may be in addition to) a
front-end load.
Redemption Fee — a shareholder fee that some funds charge when investors
redeem (or sell) mutual fund shares. Redemption fees (which must be paid to
the fund) are not the same as (and may be in addition to) a back-end load
(which is typically paid to a broker). The SEC generally limits redemption fees
to 2%.
Sales Charge (or "Load") — the amount that investors pay when they
purchase (front-end load) or redeem (back-end load) shares in a mutual fund,
similar to a commission. The SEC's rules do not limit the size of sales load a
fund may charge, but NASD rules state that mutual fund sales loads cannot
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exceed 8.5% and must be even lower depending on other fees and charges
assessed.
Shareholder Service Fees — fees paid to persons to respond to investor

inquiries and provide investors with information about their investments. See
also "12b-1 fees."
Statement of Additional Information (SAI) — conveys information about an

open- or closed-end fund that is not necessarily needed by investors to make an
informed investment decision, but that some investors find useful. Although
funds are not required to provide investors with the SAI, they must give
investors the SAI upon request and without charge. Also known as "Part B" of
the fund's registration statement.
Total Annual Fund Operating Expense — the total of a fund's annual fund
operating expenses, expressed as a percentage of the fund's average net assets.
You'll find the total in the fund's fee table in the prospectus.
Unit Investment Trust (UIT) — a type of investment company that typically

makes a one-time "public offering" of only a specific, fixed number of units. A
UIT will terminate and dissolve on a date established when the UIT is created
(although some may terminate more than fifty years after they are created).
UITs do not actively trade their investment portfolios.
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INTRODUCTION TO SYSTEMATIC INVESTMENT PLAN
Meaning
Systematic investment plan is a method of investing a fixed sum, on a

regular basis, in a mutual fund scheme. It is similar to regular saving
schemes such as a recurring deposit.
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A SIP allows one to buy units on a given date each month. They help
averaging out of investment over the bull and bear cycles.
A Systematic investment plan is not a type of mutual fund. It is a method of
investing in a mutual fund.
A SIP is nothing but a planned investment programme, which takes a small

sum of money from the investor and invests it in a mutual fund at regular
intervals. The minimum amount can be as small as Rs 500 and the
frequency of investment is monthly or quarterly.
All types of Equity funds, Debt funds and Balanced funds offer a SIP.
Liquid funds, Cash funds and Floating rate Debt funds do not offer a SIP
because these are funds that invest in very short-term fixed-return
investments.
Load in SIP:
Load is a fee investor pay to the fund when investor sell the units, just like
the entry load is a fee investor pay when investor buy the units.
Initially funds charged entry load as well as exit load for SIP’s but now most
of the funds have removed both the load and the conditions vary between
Mutual funds.
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Minimum investment in SIP:
The minimum investment in SIP is Rs 500 and if the investor opt for one
time investment in the schemes the minimum investment would be Rs. 5000.
Instalment Options in SIP:

The instalment options in SIP’s given to the investor varies with the scheme.
The options given in the scheme may be of following types:
1. Monthly basis
2. Quarterly basis
3. Half yearly basis
4. Annual basis
Need for SIP:
SIP is a tool optional given to the investor for investment in their

schemes.
SIP help the investor in providing an option of investment amount of
investor who does not have a lump sum amount to invest.
The optional tool brings in different category of income earners to invest

in the scheme and has a very important role to play in making the Mutual
Fund scheme more investor friendly.
By the assessment of India’s population and their occupation we can

easily find out the dominance of salaried class and their saving ability
over other classes. Tapping them would help in increasing the schemes
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total amount and the economy growth of the country in the productive
and very needy sector’s of the country.
Advantages of investing Systematic investment planning:
1. Light on the wallet:
Given that average per capital income of an Indian is approximately only

Rs 25,000 (i.e. monthly income of Rs 2,083), a Rs 5,000 one-time entry in a
mutual fund is still asking for a lot (2.4 times the monthly income!). And
mutual funds were never meant to be elitist; far from it, the retail investor is
as much a part of the mutual fund target audience as the next high networth
investor (HNI). So if you cannot shell out Rs 5,000, that’s not a huge
stumbling block, take the SIP route and trigger your mutual fund investment
with as low as Rs 500 (in most cases).
2. Makes market timing irrelevant:
If market lows give you the jitters and make you wish you had never
invested in equity markets, then SIPs can help you blunt that depression.
Most retail investors are not experts on stocks and are even more out-of-
sorts with stock market oscillations. But that does not necessarily make
stocks a loss-making investment proposition. Studies have repeatedly
highlighted the ability of stocks to outperform other asset classes (debt, gold,
property) over the long-term (at least 5 years) as also to effectively counter
inflation. So if stocks are such a great thing, why are so many investors
complaining? Its because they either got the stock wrong or the timing
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wrong. Both these problems can be solved through an SIP in a mutual fund
with a steady track record.
3. Helps investor build for the future:
Most of us have needs that involve significant amounts of money, like

child’s education, daughter’s marriage, buying a house or a car. If you had to
save for these milestones overnight or even a couple of years in advance,
you are unlikely to meet your objective (wedding, education, house, etc).
But if you start saving a small amount every month/quarter through SIPs that
is treated as sacred and that is set aside for some purpose, you have a far
better chance of making that down payment on your house or getting your
daughter married without drawing on your PF (provident fund).
4. Compounds returns:
The early bird gets the worm is not just a part of the jungle folklore. Even
the ‘early’ investor gets a lion’s share of the investment booty vis-à-vis the
investor who comes in later. This is mainly due to a thumb rule of finance
called ‘compounding’. According to a study by Principal Mutual Fund if
Investor Early and Investor Late begin investing Rs 1,000 monthly in a
balanced fund (50:50 – equity:debt) at 25 years and 30 years of age
respectively, Investor Early will build a corpus of Rs 8 m (Rs 80 lakhs) at 60
years, which is twice the corpus of Rs 4 m that Investor Late will
accumulate. A gap of 5 only years results in a doubling of the investment
corpus! That is why SIPs should become an investment habit. SIPs run over
a period of time (decided by you) and help you avail of compounding.
5. Lowers the average cost :

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SIPs work better as opposed to one-time investing. This is because of
rupee-cost averaging. Under rupee-cost averaging an investor typically
buys more of a mutual fund unit when prices are low. On the other hand,
he will buy fewer mutual fund units when prices are high. This is a good
discipline since it forces the investor to commit cash at market lows,
when other investors around him are wary and exiting the market.
Investors may even be pleased when prices fall because the fixed rupee
investment would now fetch more units.
Title
“SYSTEMATIC INVESTMENT PLANNING IN MUTUAL

FUND INVETMENT”
Introduction:
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Mutual funds is an a important means of investment and mutual funds

plays a major role in polling the capital required for the building of a
country. This sector of investment has attracted investor’s confidence
towards it and is a growing sector of investment.
The study of Systematic investment plans which is an important tool used

in the schemes of investment will help us to bring the need for it and
understanding its importance in the schemes. Thus, more studies in this
sector would help making this field of investment more investor friendly.
Statement of the Problem:
Systematic Investment Planning tool is a optional given to the investor in

the scheme but however the analysis of the benefits of tool in helping the
investor is a problem to be understood and analyzed.
This optional tool will benefit the customer during different market
situation or will only under particular Market conditions is the fact to be
known and to be cleared with.
Hence the problem has been selected as my study which would help the
investors in deciding to opt or not to opt for this tool.
Objects of the study:
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The main focus of the study into clearly brings out the following
objectives:
1. To study the individual investor behaviour to Systematic Investment
planning option in Mutual Funds.

2. To study the Role of Systematic investment planning in Mutual Fund
Investment.
3. To study the growth prospects of Systematic Investment Planning in
Mutual Funds.
Scope of the study:
1. The scope of the present study is confined to Bangalore city.

2. Study is confined only to Mutual Fund Investment.
3. The study is confined only with Systematic Investment Planning tool
with respect to Mutual Fund investment only.
4. The study considered feedback of 50 respondents randomly selected.
5. The study does not take into account the external factor influence on
investor selection of Systematic Investment Planning tool.
6. The study does not analyze the decision of institutional investors in
selection of Systematic Investment Planning tool.
Methodology:
To achieve the aforesaid objectives of the study primary and secondary

data have been used.
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Primary Data: The study followed survey method. It is a study that

concentrates on the behaviour patterns of mutual fund investors towards
Systematic investment Planning options in their investment.
The primary data have been gathered with the help of well structured
questionnaire supplied to the respondents (i.e., Mutual Fund investors )
Secondary Data: The study has used secondary data for background
chapter. The study examined books, articles, reports and other sources.
Plan of analysis:
The collected data have been analyzed with the help of statistical tools
and techniques like averages, percentages and the like. And wherever
necessary tables, charts, graphs have been used to make the data in a
presentable way.
Limitations of the study:
1. The study is based on sample size of 50 respondents, hence finding

may not be accurate.
2. Some of the respondents were not co-operating to fill the
questionnaire and to give their opinion and not ready to give answer
for all the questions in the questionnaire.
3. The time constraint
51

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4. The availability of data and the analysis is based on the information
available during the study.
5. Limitations of sampling may affect the quality of the results of the
study.
6. Lack of awareness of the concept of Systematic Investment Planning
options in the mutual fund investment among the investors may affect
reliability of data collected.
Over view of the Chapters:
Chapter 1 : Introduction
In this chapter the general introduction of mutual funds like definitions,
Types of mutual funds, advantages, disadvantages, mutual fund in India, the
role of mutual funds in the financial system, the development of mutual
funds. The introduction to Systematic Investment Planning options like
meaning, load in SIP’s, need for Systematic Investment planning option.
Chapter 2 : Design of the Study

Under this chapter , introduction, statement of the problem, objectives
and scope of the study, Methodology , plan of analysis, limitations of the
study and overview of the chapter.
Chapter 3 : Analysis and interpretations of data
52

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This chapter provides information regarding the techniques used for
analysis, supported by a descriptive interpretation this simplifies the graphs
into clear words.
Chapter 4 : Growth Prospects of SIP’s in Mutual funds.

This chapter gives brief explanation of growth prospects of systematic
investment planning options in mutual fund investment.
Chapter 5 : Findings , Suggestions and Conclusions
This chapter states the various results and findings of the study, which are
derived from the analysis of the questionnaire and various suggestions and
conclusions are made.
BIBLIOGRAPHY
ANNEXURE – QUESTIONNAIRE
ANALYSIS AND INTERPRETATION
This chapter deals with the analysis and interpretation of data collected
from, the respondents sample size of respondent is 50. The primary data
collected from them is tabulated and interference is drawn from it. The
53

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questionnaire was framed in such a way to get the actual reflection of the
minds of the mutual fund investor of Bangalore city toward Systematic
Investment Planning. Hence the study was only confined to the Mutual fund
investors.
The data collected was grouped into categories this task is statistically
known as data tabulation. This data collected is scrutinized so as to ensure
consistency, unambiguity and accuracy. This process were done under
different headings, represented in the form of tables have been carefully
analyzed arriving at the correct conclusion. The table shows the count or
occurrence of individual categories among this sample also the frequency
distribution was presented pictorially by bar graph.
Table 1 : Showing the classification of respondents on the basis of gender
Sex Number of respondents % of respondents

Male 40 80
Female 10 20
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Total 50 100
Graph 1: Representation of respondents of the basis of gender:
100
80
60
Male
40 Female
Total
20
0
Number of % of
respondents respondents
It is observed from the above table that out of 50 respondents, 40

respondents i.e., 80% of them are male Mutual fund investors and 10
respondents i.e., 20% consist of Female Mutual fund investors.
Table 2: Table showing the classification of respondents on the basis of Age
Age Number of respondents % of respondents

Below 25 03 06
25 - 35 15 30
35 – 45 23 46
45 – 55 07 14
Above 55 02 04
Total 50 100
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Graph 2 : Representation showing the classification of respondents on the
basis of Age
100
80
Below 25
60 25 - 35
35 – 45
40
45 – 55
20 Above 55
0 Total
Number of % of respondents
respondents
It is observed from above table and chart that the sample considering in the
study has covered more respondents between the age group of 35 – 45 that is
46%. And it is followed by 25 – 35 age group with 30% , 45 – 55 with 14%
and above 55 with 06%.
Table 3: Showing the respondents Educational Qualification

Level of Arts Commerce Science Engineering Tota Percentage
Education l
SSLC 0 0 0 0 0 0
PUC 01 04 02 --- 07 14
Graduation 04 12 06 08 30 60
Post 02 08 02 01 13 26
Graduation
Total 07 24 10 09 50 ---
Percentage 14 48 20 18 --- 100
Graph 3: Representation showing the qualification of respondents
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70
60
50
Percentages
40
Series1
30
20
10
0
SSLC PUC Graduation Post Graduation
Level of education
Graph 4: Break up of Educational Qualifications
60
50
40
percentages
Education
30
Percentage
20
10
0
Arts Commerce Science Engineering
Strems of education
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It is observed from the table that sample consists of 60% of respondents who
have completed their graduation, 26% of the respondents having completed
their post graduation and 14% of the respondents having completed PUC.
And it is also to be noted that majority of them belong to commerce stream.
Table 4: Showing the Occupation of respondents

Occupation Number of respondents Percentages
Salaried Class 30 60
Professional 10 20
Self employed 07 14
Others 03 6
Total 50 100
Graph 5: Representation showing the respondent occupation
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Percentages
70
60
50
Percentages
40
Percentages
30
20
10
0
Salaried Class Professional Self employed Others
Occupation
It is observed from the above table that 60%, 20%, 14% and 05% of the
respondents belong to salaried class, professional , self employed and others
group respectively. This implies that people from salaried class are have
more interest in Mutual funds.
Table 5: Showing the classifications of respondent on the basis of total

monthly income
Monthly Income Number of respondents Percentages
Below 20,000 20 40
20,000 – 30,000 13 26
30,000 – 40,000 07 14
40,000 – 50,000 06 12
Above 50,000 04 08
Total 50 100
Graph 6: Representation of respondent on the basis of monthly income
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45
40
35
30
Percentages
25
Series1
20
15
10
5
0
Below 20,000 20,000 – 30,000 – 40,000 – Above 50,000
30,000 40,000 50,000
Montly Income ( In Rupees )
It is observed from the above table that, 40% of the respondents belong to
the group of people whose monthly income is below Rs. 20,000, 26% of
respondents belongs the income of group of Rs 20,000 to 30, 000, followed
by 14% belongs to Rs 30, 000 to 40,000, 12% belongs to Rs. 40,000 to
50,000 and 08% belongs to the income group of above Rs 50, 000.
Table 6: Classification of respondents on the basis of Savings per month
Savings per month Number of respondents Percentage
1,000 – 3,000 15 30
3,000 – 6,000 25 50
6,000 – 10,000 07 14
10, 000 above 03 06
Total 50 100
Graph 7: Representation of respondent saving per month
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60
50
40
Percentage
30 Series1
20
10
0
1,000 – 3,000 3,000 – 6,000 6,000 – 10,000 10, 000 above
Savings per month (in rupees )
The table shows that out of the 50 respondents 25 respondents that is 50% of
their savings per month is between Rs. 3,000 to 6,000, 15 respondents that
30 % of their savings per month is between Rs. 1,000 to 3,000, 7
respondents that is 14% of their savings per month is between Rs 6,000 to
10,000and 3 respondents that is 06% of their savings per month is above
Rs. 10,000.
Table 7: Showing the information gathering about mutual funds
Information Number of respondents Percentages
Advertisement 15 30
Financial Advisor 28 56
Friends 05 10
Broker 02 04
Total 50 100
Graph 8: Representation of information about the mutual funds by the

mutual fund investors
61

_____________________________________________________________
60
50
40
Percentages
30
20
10
0
Advertisement Financial Advisor Friends Broker
Information
It is observed from the above table that out 50 mutual fund investors
(Respondents), 28 respondents that is 56% got information from financial
advisors, 15 respondents that is 30% got information form advertisements, 5
respondents that is 10% got information from friends and 2 respondents that
is 4% got information from brokers.
Table 8: Table showing preference of respondents towards SIP option

Preference Number of respondents Percentages
Yes 33 66%
No 17 34%
Total 50 100
Graph 9: Representing the preference of mutual fund investor towards SIP

option
62

_____________________________________________________________
No, 34%
Yes
No
Yes, 66%
From the above table and chart it shows that out of 50 mutual fund investors
66% that is 33 respondents prefers to opt for Systematic investment planning
options in their investments, where as 34% that is 17 respondents do not
prefers to opt for Systematic investment planning.
Table 9: Table showing reasons to Choose SIP’s by the mutual fund

investors
Reasons Number of respondents Percentage
Rate of Return 07 21.2
Safety 06 18.18
Tax shelter 00 00
Liquidity 00 00
Savings 20 60.6
Total 33* 100
Chart 10: Showing reasons to choose SIP’s by the M.F investors
63

_____________________________________________________________
Rate of Return,
21.2
Savings, 60.6 Safety, 18.18
Rate of Return Safety Savings
From the above table and chart it is observed that out 33 respondents, 20
respondents who prefers to opt for Systematic Investment planning in their
mutual fund investment because they feel it will boost the saving habit
among middle income group of people. 7 respondents thinks rate of return
is more in SIP,s and 6 respondents feels it is safe to invest in SIP’s.
(* out of 50 respondents only 33 respondents are opted for SIP’s)
Table 10: Table showing investor perception towards SIP,s benefit
Remarks Number of respondents Percentages
Yes 28 84.8
No 05 15.15
Total 33* 100
Chart 11: Representing investor perception towards SIP’s benefit
64

_____________________________________________________________
No, 15.15%
Yes
No
Yes, 84.80%
It is observed from the above table and chart that 28 respondents that is
84.8% feels that they are benefited out of Systematic Investment Planning
option in their mutual fund investments. Where as 5 respondents that is
15.15% feels that they are not benefited.
(* out of 50 respondents only 33 respondents are opted for SIP’s)
Table 11: Showing the awareness of SIP’s among responded Mutual fund
investors
Remarks Number of respondents Percentage
Yes 23 46
No 27 54
Total 50 100
Graph 12: Represents the awareness of SIP options among responded mutual
fund investors
65

_____________________________________________________________
Yes
46% Yes
No
No
54%
It is observed from the above table that out of 50 respondents 23 respondents

that is 46% has awareness about SIP plans where as 27 respondents that is
54% don’t have any awareness about Systematic Investment Planning in
mutual fund investments.
Table 12: Showing preferred saving avenue between SIP’s and Recurring
Deposit
Preference Number of respondents Percentages
SIP’s 47 94
Recurring deposite 3 06
Total 50 100
Graph 13: Representing preferred saving avenue between SIP’s and

recurring deposit
66

_____________________________________________________________
Recurring
deposite
6%
SIP’s
Recurring deposite
SIP’s
94%
It is observed from the above table and chart out 50 respondents 47 that is
94% of respondents prefers to invest in Systematic Investment Planning
rather to invest in Recurring deposit account. Where as only 3 respondents
prefers to invest in Recurring deposit account rather to invest in Systematic
investment planning option.
Table 13: Showing comparison between SIP returns and One time
investment in Mutual funds
Plan SIP Investment One time investment

Values (in. Rs.) % growth Value ( in Rs. ) % growth
Birla advantage 97,103 70.3 51,251 -10.1
FT Blue chip 1,19,328 109.3 1,13,254 98.7
FT Prima 1,78,571 213.3 1,37,934 141.9
FT Prima plus 1,17,940 106.1 96,570 69.4
UTIGrowthvalu 1,21,353 112.9 78,371 37.5
e
67

_____________________________________________________________
Pru ICICIgrowth 93,469 63.9 62,392 9.5
Pru ICICI power 1,17,829 106.7 82,983 45.6
Reliance growth 1,70,271 198.7 1,26,077 121.1
Reliance vision 1,67,218 193.4 1,44,401 153.3
Tata Pure equity 1,18,372 107.7 86,590 51.91
HDFC equity 1,32,038 131.9 99,605 74.7
HDFC Top 200 1,32,217 131.9 99,605 74.7
(*the returns are on a SIP from 1st Feb 2000 to 29 th oct 2004 ( 57 months ) i.e., the markets were
at 6000 levels at both times. The investment amount is Rs. 57,000 which grew to the values
shown above)
Analysis: The table presented above contains comparison of values and

growth systematic investment planning option and one time investment in
mutual funds.
The change in the value and percentage growth among selected schemes
of selected mutual fund companies are analyzed.
If we look at the table the growth in all the schemes through systematic
investment planning option is higher when compared to one time investment
68

_____________________________________________________________
again, in the value of all the schemes selected in SIP investment is also
higher when compared to one time investment .
GROWTH PROSPECTS OF SIP’S IN MUTUAL FUNDS
The mutual fund industry has grown enormously since its introduction in
India in 1964.
The rapid growth in the industry was seen after privatization of the
mutual fund sector in 1993 on wards. The prospects for mutual fund industry
is positive.
69

_____________________________________________________________
The prospects of Systematic Investment Planning option in Mutual fund
investment is also positive in nature. The reasons indicating its positiveness
are as follows.
 With the analysis of occupation of majority of Indian population we

can see growth in the population ratio coming under the salaries class
 The growth of sectors like Service Industry in India has increased the
employment opportunity, earning capacity and their ability to invest
more in Mutual funds and Opting more for Systematic Investment
planning option.
 Analysis of population of India on the basis of Income we can see the

growth of middle class and their presence in the overall population is
high.
 The fundamentals of Indian Economy is strong for the long run and
hence Indian Economy can be seen in growth stage this is an
advantage for SIP prospects. Because the performance of SIP,s in
growth market conditions are good.
 The entry load and exit load that was made compulsory in every
scheme for investors opting for Systematic Investment Planning has
been removed by most of Mutual Fund companies this reduction or
70

_____________________________________________________________
removal of load on SIP option is another factor contributing or
influencing the investor decision for SIP selection.
 SIP Investment Option would act as a strategy for investors to take

advantage of market volatility and build their respective portfolio’s
for long term.
SUMMARY OF FINDINGS
1. The middle aged people’s willingness to invest in mutual fund is high.
2. The highest Percentages of mutual fund investor’s qualification is
graduation and out of this the commerce graduates are more in

number.
71

_____________________________________________________________
3. The salaried class employees interest and involvement in mutual fund
investment is high
4. Investors under the category of below Rs. 20, 000 monthly income
have shown more interest in mutual fund investment.
5. The ability to save among the respondents was high on the category of
Rs . 3,000 to 6,000 categories.
6. Financial advisor role in providing information and communication of

investments in mutual funds is dominant than other promotional and
other tools.
7. Mutual fund investor’s preference for SIP option in their investment
was high but not dominant to the extent of 66% of the survey results.
8. The Decision factor considered by investors for selection of SIP in
their investment is the saving ability followed by rate of return and
safety.
9. Investors benefited by option for SIP has been high.
10. The awareness among investors about the SIP advantages all low by
a small margin and this may contradicts their above response.
72

_____________________________________________________________
11. The investor’s preference for Systematic investment planning tool in
mutual fund versus the recurring deposit of commercial banks is high.
12.The selection and procedural to be followed for opting Systematic

investment planning option is easy and simple.
13.The period for which investors would opt for Systematic investment
planning in their investment is for 2 to 3 years.
14.Investors are more depended on the financial advisor for information

and other assistance for investment and details related to scheme.
15.The Systematic investment planning option would fetch better return

when compared to one time investment option in mutual fund
schemes.
The result mentioned above would be true when market conditions are
volatile followed by growth in the long – term.
73

_____________________________________________________________
SUGGESTIONS:
1) The entry of exit loads in mutual funds schemes Systematic

Investment Planning option are high around 0.5% to 2% . The mutual
fund companies should try to bring down the entry load so that would
help in attracting more investors.
74

_____________________________________________________________
2) The Broachers containing information about the schemes contains
very less information about SIP’s returns risk and their advantages.
Hence mutual fund companies should provide more data relating to
SIP investment.
3) The investors making self decisions in their investment would try to

analyze the SIP tool option in the scheme and then go ahead for
selecting either one time investment and SIP investment as if not
considered would be affecting their returns from the scheme.
4) Mutual fund companies should give proper training to financial

advisors and they should be asked to undertake refresher course so
that they get updated.
As the findings suggest that investors are more depended on financial
advisor for information hence training and refresher courses would
help the financial advisor communicate right information.
5) Mutual fund companies should try to attract the small investors by

briefing the SIP’s advantages to them who have low saving ability.
6) The rural masses and public sector employees are another source of
investors which have not seen tapped by the Mutual fund companies
who can start investing in Mutual funds with a minimum SIP of
Rs. 500.
75

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CONCLUSION:
Mutual funds are one of the reliable means to invest the investors hard
earned money and savings the growth of the mutual fund industry in India is
an example for the above statement.
Mutual fun Investment are common and most preferred avenue for saving
among salaried class, Private Organizational employees and professionals
76

_____________________________________________________________
looking for safety and steady return for their savings. However their growth
among the rural masses and public sector employees has been low.
Mutual fund companies should concentrate on there factors and increase

their presence among rural people and the awareness about Systematic
Investment Planning option and mutual fund functioning has to be
communicated properly among these population and this would help in
increasing their customer base and making mutual funds a highly preferred
means of Investment among Indians.
77

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Systematic Investment Planning in Mutual fund investment

INTRODUCTION TO MUTUAL FUND

Govt. R.C College of Commerce & Management

A mutual fund is a group of investors operating through a fund manager to

Mutual Fund Operation Flow Chart

Govt. R.C College of Commerce & Management

TYPES OF MUTUAL FUND

CLOSE-END MUTUAL FUNDS

Once underwritten, closed-end funds trade on stock exchanges like stocks or

OPEN-END MUTUAL FUNDS

Govt. R.C College of Commerce & Management

Generally, companies with a market capitalization in excess of Rs 1000

Generally, companies with a market capitalization of up to Rs 500 crore

Govt. R.C College of Commerce & Management

Govt. R.C College of Commerce & Management

Another approach to picking is to look primarily at growth, trying to find

Govt. R.C College of Commerce & Management

Govt. R.C College of Commerce & Management

EXCHANGE TRADED FUND

Exchange traded funds rely on an arbitrage mechanism to keep the prices at

Govt. R.C College of Commerce & Management

MONEY MARKET FUNDS

INTERNATIONAL MUTUAL FUNDS

International mutual funds are those funds that invest in non-domestic

Govt. R.C College of Commerce & Management

REGIONAL MUTUAL FUNDS

Regional mutual fund is a mutual fund that confines itself to investments

Govt. R.C College of Commerce & Management

Investing in an index fund is a form of passive investing. Passive investing has

Govt. R.C College of Commerce & Management

ADVANTAGES OF MUTUAL FUNDS

This minimizes the risk attributed to a concentrated position. If a few securities

Further diversification can be achieved by investing in multiple funds which

Govt. R.C College of Commerce & Management

Mutual funds are managed and supervised by investment professionals. As per

Although a fund's shareholder is relieved of the day-to-day tasks involved in

Govt. R.C College of Commerce & Management

DISADVANTAGES OF MUTUAL FUND

That means that despite the risk-reducing diversification benefits provided by

Although diversification reduces the amount of risk involved in investing in

Govt. R.C College of Commerce & Management

Fees and Expenses:

Some of these expenses are charged on an ongoing basis, unlike stock

Returns on a mutual fund are by no means guaranteed. In fact, on average,

Govt. R.C College of Commerce & Management

Inefficiency of Cash Reserves:

MUTUAL FUNDS IN INDIA

Govt. R.C College of Commerce & Management

Putting the AUM of the Indian Mutual Funds Industry into

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of

Govt. R.C College of Commerce & Management

Second Phase - 1987-1993 (Entry of Public Sector Funds)

Third Phase - 1993-2003 (Entry of Private Sector Funds)

The erstwhile Kothari Pioneer (now merged with Franklin Templeton)

The 1993 SEBI (Mutual Fund) Regulations were substituted by a

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Fourth Phase - since February 2003

Govt. R.C College of Commerce & Management

Indian Mutual Funds - highest returns in world

Govt. R.C College of Commerce & Management

Consolidation and growth