A

On Mutual Fund in INDIA A study of Kotak Securities

Submitted in the partial fulfillment of Master of Business Administration (2008-10)

Submitted to: Controller of examination Maharishi Dayanand University Rohtak

Submitted by: Preeti Aggarwal MBA- 4th semester 2k8-mrce-mba-036

MANAV RACHNA COLLEGE OF ENGINEERING, FARIDABAD Sector-43, Aravalli hills, surajkund badkhal road , faridabad
(Approved by AICTE & Affiliated to Maharishi Dayanand University, Rohtak)

DECLARATION

I PREETI AGGARWAL Roll no. MRCE- MBA-2K8-036 of the (Manav Rachna Institute of Engineering , Faridabad ) hereby declare that the report entitled Mutual funds in India a

case study of Kotak Securitiesis an original work and the same has not been submitted to
any other institute for the award of any other degree.

(Faculty of Finance)

(Signature of the candidate)

(Director/ Principal of the institute )

PREFACE
Mutual fund is the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Mutual fund serves as a link between the saving public and the capital markets in that they mobilize saving from investors and brings them to the borrowers in the capital markets. The capital market is one of the most vibrant sectors in the financial system, marking an important contribution to economic development. Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporate, entrepreneurs to raise resources for their companies and business ventures through public issues. A typical dilemma which an investor faces today is whether to directly buy stocks or alternatively invest through the mutual funds. My project focuses on answering this dilemma which lies in appreciating the differences between the two routes and deciding as to which one is more suited to ones knowledge & understanding, investment objective, risk appetite and personal profile. To grow personal capital from Indias growth one has to choose the correct investment avenue. And choosing an investment avenue is like getting into a marriage, so do it wisely. The research assigned i.e. Mutual funds in india a case study of kotak securities. The questionnaire method has been applied to collect the data from respondents

Preeti Aggarwal

ACKNOWLEDGEMENT
The process of this project writing was a wonderful learning experience on my academic life which was filled with challenges and rewards. The completion of the present study leads a new beginning and a step forward towards my future and when writing this preface, a quotation by the Scottish Physicist James Clark Maxwell came to my mind. Maxwell once stated What is done by what is called me is, I feel, done by something greater than myself in me. The question is justifiable. Did I really do this? Did I really manage to get it all together? This research provides a welcomed opportunity and chance to acknowledge the help and assistance of the people who with their intellectual insights or constructive criticism, other times in the form of friendship have helped me to develop this research. I am highly indebted to Mrs. REKHA SACHDEVA , for providing me the prompt assistance and valuable support and allowing me to work on this project. I have benefited a great deal from her incisive analyses and erudite suggestions. I humbly acknowledge her congeniality.. I am very thankful to her, that she has given me this pleasure to use his valuable comments, feedbacks and suggestions. My special thanks to all my friends for their unremitting help in numerous ways, which deserve adequate expression on this page. I would also like to thank all the respondents of questionnaire for their cooperation. In the end, I would like to say that it was a great experience working on this project.

(Preeti Aggarwal)

INDEX
1. Significance of the study 2. Review of existing literature 3. Objective of the study 4. Company profile- Kotak Securities 5. Conceptualization of the topic o Introduction of mutual fund 1. Concept of Mutual fund 2. Types of Mutual fund 3. Benefits of Mutual fund 4. Disadvantages of Mutual fund 5. Scope of Development of Mutual fund Business in India o introduction of stock market 1. Concept of Stock Market 2. Market Participants 3. Importance and purpose of Stock Market 4. GROWTH of Stock Market 5. Current Status of Indian Stock Market 6. Reforms in Indian Stock Market 5. Comparative Study Between Investment In Stock Market and Mutual Fund 6. Research methodology 7. Findings and analysis 8. Recommendation 9. Conclusion 10. Bibliography 11. Appendix

SIGNIFICANCE OF THE STUDY

Today it is essential to look into our lives and analyze our needs for the present and the future. The situation has changed from the period of our parents and grandparents when they considered their savings would suffice through their lifetime. Though the core ideas behind savings have remained much the same such as emergency needs and social needs, there has been the introduction of aspiration needs as well. The fact that aspirations have become realizable has furthered this need. This is evident from the fact that the average age for house owners was 42 years in late nineties as compared to about 34 years now. The aspirations of flying abroad for holidays, maintaining a certain lifestyle, quality education for children and various personal goals have come The consumer revolution and the easy availability of loans for almost every purpose have increased the household liabilities many fold. Infact, the average retail liabilities of the country have jumped to above Rs 2 lakh cr . The result of this change has been an increased need of money, which at times becomes difficult to be met by simply saving. The savings philosophy too seems to have changed. Earlier savings preceded expenditure while it is now vice-versa. Simple forms of savings in the form of deposits or administered savings are no longer sufficient to meet the ever-increasing requirements of the household. Thus the time has come to save intelligently through the various avenues of investment. The time has come for us to look at investment avenues, which can beat inflation and help our money to grow further in order to meet our future requirements. Investments in various forms will enable us to meet inflation and protect our purchasing power along with aiding us to generate a sustained income post retirement. One of the available investment avenues is investment in stock market, where currently only 2-3% of household savings are invested. It has been statistically proven in many markets, including ours, that over time, equity outperform most asset classes. It helps to

think of risk as an opportunity. "Nothing ventured, nothing gained" applies just as much to the stock market as to other aspects of life. The markets have become very volatile and are dominated by wholesale investors. Such wholesale investors do extensive research on all the companies that they invest in. The markets today discount the forward performance in advance and the stock prices merely adjust depending upon the quarterly performance. It, therefore, becomes very difficult for a lay investor to track corporate performance on a continuous basis. It is here that the mutual funds offer adequate diversifications

LITERATURE REVIEW The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better understood divided into following phases:

Phase 1. Establishment and Growth of Unit Trust of India - 1964-87

Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years.

UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (Indias first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores.

Phase II. Entry of Public Sector Funds - 1987-1993

The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.

Mobilisa Amou 199293 nt Mobil ised 11,05 7 1,964 13,02 1 Assets Under Manage ment tion % gross Domestic Savings UTI Public Sector Total 38,247 8,757 47,004 5.2% 0.9% 6.1% as of

Phase III. Emergence of Private Sector Funds - 1993-96

The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutal fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investorservicing technology. By 1994-95, about 11 private sector funds had launched their schemes.

Phase IV. Growth and SEBI Regulation - 1996-2004

The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds.

Inventors interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry. In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual fund players on the same level. UTI was re-organized into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund

Phase V. Growth and Consolidation - 2004 Onwards

The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29

funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

HISTORICAL EVOLUTION OF INDIAN STOCK MARKET The mists of time

As already stated, the Indian capital markets have played a significant role in the early attempts at industrialisation in India in the late nineteenth and early twentieth centuries. The early textile mills and the first steel plants were funded in the capital market. Some of these capital raising exercises were large in relation to the size of the financial sector in those days.

The planned economy

Beginning in the late fifties, the country embarked on an inward looking socialistic model of development that sought to put the commanding heights of the economy in the hands of the public sector. The state took control of the allocation of resources in the economy as the banks and insurance companies were nationalised and development financial institutions grew in importance. A regime of financial repression came into being and the stock market stagnated.

The eight golden years

The period from 1984 to 1992 was in some ways the high water mark of the Indian capital markets. As the markets responded enthusiastically to the first whiff of reforms in the mid 1980s and to the major reform initiative of 1991, the stock market soared through the roof. From October 1984 to September 1992, the stock market index went up more than ten times representing an annual compound return of 34per cent.

The Sensex crossed the 1,000 mark on July 25, 1990; the 2,000 mark on January 15, 1992; the 3,000 mark on February 29, 1992; the 4,000 mark on March 30, 1992; the 5,000 mark on October 11, 1999; the 6,000 mark on January 2, 2004; the 7,000 mark on June 21, 2005; the 8,000 mark on September 8, 2005; the 9,000 mark on December 09, 2005; and finally the historic 10,000 mark on February 7, 2006. It created another landmark when it touched 11,000 on March 27, 2006. The Sensex reached an all time high of 12,671 in May

2006 . To reach from the 11,000 mark to the 12,000 mark only took 19 working days, the shortest time interval for a 1000 points climb in BSE Sensex history, surpassing the just set record of 29 days that it took to reach 11,000 from 10,000.

OBJECTIVE OF THE STUDY

The Objective of my work initiated when I came across various discussions in the financial markets on comparison between direct investment in stock market or investing through mutual fund. Both stock market and mutual fund is yet to reach its peak level. There is still a lack of knowledge about Mutual fund and Stock market amongst the majority of market players. High degree of volatility in the recent times in the Indian market has led to development of Mutual fund.. Today investors prefer more Mutual fund to enter into stock market rather invest directly in stock market. The main Objective of this study is to find and analyze which is more preferred investment instrument direct investment in equity market or investing through mutual fund on the basis of different parameters like risk, returns, cost etc. The study would facilitate the reader to know the future prospects of mutual fund and stock market.

COMPANY PROFILE OF KOTAK SECURITIES

Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank and Goldman Sachs (holding 25% - one of the world's leading investment banks and brokerage firms) is India's leading stock broking house with a market share of around 8%. Kotak Securities Ltd. has been the largest in IPO distribution. The accolades that Kotak Securities has been graced with include:

1) Prime Ranking Award (2003-04)- Largest Distributor of IPO's 2) Finance Asia Award (2004)- India's best Equity House 3) Finance Asia Award (2005)-Best Broker In India 4) Euro money Award (2005)-Best Equities House In India The company has a full-fledged research division involved in Macro Economic studies, Sectoral research and Company Specific Equity Research combined with a strong and well networked sales force which helps deliver current and up to date market information and news.

Kotak Securities Ltd is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), providing dual benefit services wherein the investors can use the brokerage services of the company for executing the transactions and the depository services for settling them.

Kotak Securities has 195 branches servicing more than 2,20,000 customers and a coverage of 239 cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers Internet Broking services and also online IPO and Mutual Fund Investments.

Kotak Securities Limited manages assets over 2500 crores of Assets Under Management (A.The portfolio Management Services provide top class service , catering market. Portfolio Management from Kotak Securities comes as an answer to those who would like to grow exponentially on the crest of the stock market ,with the backing of an expert.

INVESTING WITH KOTAK SECURITIES

Kotak Securities is committed in making trading easy for its customers. It understand customers level of expertise in trading and provide them solutions to fit their needs - whether they are a beginner, a seasoned investor or a professional trader. With kotak Securities, making your investment decisions becomes a lot easier and speedier. All you need to do is trust your instinct and experience and go for the stocks you want to - because we put trading in your hands, literally. Kotak Securities brings you a range of advanced on-line trading systems where you can see, follow and analyse market movements and take informed decisions, every time.

KEAT and KEAT Premium are two such trading tools that enable you to view unlimited scrips, Intraday and historical charts for scrips, set scrip alerts, use most of the charting tools, view the graphs type you want to, see derivative chains, see online order and trade confirmations, view dynamic net positions, dynamic profit and loss, select indices/sectors or business groups and lots more.

Kotak Securities help their investors to invest wisely while taking into account,

1) The amount investors wish to invest 2) Their risk appetite 3) Their major life goals whether they are looking to accumulate assets, securing there children's education, retirement planning and more.

PRODUCTS OFFERED BY KOTAK SECURITIES

1) If trading is your line of work, then we have Easy Derivatives for you. 2) If you want your investments to appreciate quickly, Easy Equity could be your best bet. 3) Want to save taxes and play safe with your investments? Easy Mutual Fund is what you can go for. 4) If you are looking to save taxes, get risk cover and ensure a safe future, you can invest in Easy Insurance schemes. 5) Kotak Securities also provide the facility of Portfolio Management System (PMS)6) IPO or Initial Public Offer presents good opportunities for netting high returns on your

investments in a relatively short period of time - if you invest early. Kotak securities have made investing in IPOs so simple.

INTRODUCTION TO MUTUAL FUND:The mutual fund industry is a lot like the film star of the finance business.Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The one investment vehicle that has truly come of age in India in the past decade is mutual funds. Today, the mutual fund industry in the country manages around Rs 100,000 crore of assets, a large part of which comes from retail investors. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). Each Mutual Fund scheme has a defined investment objective and strategy. A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In

effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. But every coin has a flip side. With mutual funds, you have no control on the investments of the fund; and, more importantly, the downside of diversification is that a fund can hold so many stocks that a tremendously great performance by a stock will make very little difference to a fund's overall performance. Now if you think that the world of Mutual Funds is intimidating, complicated and definitely not for you then think once again.

Mutual Funds Concept

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

Net asset value (NAV) of a scheme

Net asset value denotes the performance of a particular scheme of a mutual fund. Mutual funds invest the money collected from the investors in securities markets. In simple terms, NAV is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on a day-to-day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakh units of Rs 10 each to the investors, then the NAV per unit of the fund is Rs 20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

Mutual Fund Structure

The structure consists of:1. Sponsor

Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute atleast 40% of the networth of the Investment Manged and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

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

3. Asset Management Company (AMC)

AMC is approved by SEBI manages the funds by making investments in various types of securities.

4. Custodian
Custodian is registered with SEBI, holds the securities of various schemes of the fund in its custody.

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

The intelligent investor's seven rules

Its one thing to understand mutual funds and their working; its another to ride on this potent investment vehicle to create wealth in tune with your risk profile and investment needs. Here are seven must-dos that go a long way in helping you meet your investment objectives.

1. Know your risk profile

Can you live with volatility? Or are you a low-risk investor? Would you be satisfied if your fund invests in fixed-income securities, and yields low but sure-shot returns? These are some of the questions you need to ask yourself before investing in a fund. Your investments should reflect your risk-taking capacity. Equity funds might lure when the market is rising and your neighbour is making money, but if you are not cut out for the risk that accompanies it, dont bite the bait. So, check if the funds objective matches yours. Invest only after you have found your match. If you are racked by uncertainty, seek expert advice from a qualified financial advisor.

2. Identify your investment horizon

How long you want to stay invested in a fund is as important as deciding upon your risk profile. A mutual fund is essentially a savings vehicle, not a speculation vehicledont get in with the intention of making overnight gains. Invest in an equity fund only if you are willing to stay on for at least two years. For income and gilt funds, have a one-year perspective at least. Anything less than one year, the only option among mutual funds is liquid funds.

3. Read the offer document carefully

This is a must before you commit your money to a fund. The offer document contains essential details pertaining to the fund, including the summary information (type of scheme, name of the

asset management company and price of units, among other things), investment objectives and investment procedure, financial information and risk factors.

4. Go through the fund fact sheet

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

5. Diversify across fund houses

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

6. Do not chase incentives

Dont get lured by investment incentives. Some financial intermediaries give upfront incentives, in the form of a percentage of your initial investment, to invest in a particular fund. Dont buy it. Your focus should be to find a fund that matches your investment needs and risk profile, and is a performer.

7.Track your investments

Your job doesnt end at the point of making the investment. Its important you track your investment on a regular basis, be it in an equity, debt or balanced fund. One easy way to keep track of your fund is to keep track of the Intelligent Investor rankings of mutual funds, which are complied on a quarterly basis. These rankings allow you to take note of your funds performance and risk profile, and compare it across various time periods as well as across its peer set. In addition, you should run some basic checks in the fund fact sheets and the quarterly reports you get from your fund. If you come across negative reports of the fund, ask your financial advisor or broker about it, especially if theres a possibility of your investment depreciating in value. If the threat is real, reduce your exposure to the fund.

DERIVATIVES Measuring performance of Mutual Fund 1. Relative to benchmark method

Under this method a comparison is made between the returns given by a market index, and the fund over a given period of time. If the returns generated by the fund as measured by changes in NAV over that given period of time are greater than those generated by the benchmark then the fund is deemed to have outperformed the market portfolio.

2. Risk-Return Method
The Relative-to-Benchmark measure is very simplistic, as it does not incorporate any measure of risk in its calculation. An investor would naturally be interested in finding out the return generated for the risk undertaken, as, in a bid to generate super normal return, the fund may go overboard on the risk parameter. Therefore, risk adjusted measures of return are needed to measure the performance of funds. There are several such measures prominent among which are the Sharpe ratio, the Treynor ratio, and Alpha-:

a) Sharpe ratio
This measure uses standard deviation as a measure to evaluate a fund's riskadjusted returns. Mathematically, it is arrived at by deducting the risk free returns from the returns generated by the fund and dividing the residual figure by the standard deviation of the fund's returns. One thing that has to be kept in mind while using this measure is that the ratio is not an absolute figure. Its real utility lies in inter scheme comparison.

b) Treynor's ratio
The other measure Treynor's ratio also has the same attributes with the difference that the residual figure in this case is divided by beta rather than the standard deviation, thus reflecting only the systematic risk. Beta of the fund is a volatility measure that quantifies sensitivity of the fund's return to the benchmark index's returns i.e. given the

movements of the benchmark how much the fund will move. It does not give representation to unsystematic risk under the assumption that the fund manager can easily wipe out the unsystematic risk by diversifying across a large number of stocks.

c) Alpha
Basically, alpha is the difference between the return that would be warranted by its beta (expected return) and the return that is actually generated by the fund. If a fund returns more than what is anticipated by beta, it has a positive and favourable alpha, and if it returns less than the amount predicted by beta, the fund has a negative alpha. Mathematically, Alpha= fund return - [Risk free rate + Beta of fund (Benchmark return Risk free return)]

Risks involved in investing in Mutual Funds 1. Market risk

If the overall stock or bond markets fall on account of macro economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the NAV.

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

3. Interest rate risk

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

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

Types of Mutual Fund

Mutual fund schemes may be classified on the basis of its structure and its investment objective:1. By Structure: a) Open-ended Funds
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

b) Closed-ended Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.

c) Interval Funds
Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

2. By Investment Objective: a) Equity Oriented Schemes

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

b) Debt Based Schemes

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

c) Hybrid Schemes

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

d) Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.

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

3. OTHER SCHEMES: a) Tax Saving Schemes

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

b) Special Schemes:

i) Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, Pharmaceuticals etc.

ii) Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50

iii) Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings.

Benefits Of Investing In Mutual Funds

1.Professional Management
Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.

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

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

4. Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.

5.Low Costs
Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

6.Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund.

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

8.Tax Benefits

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

1) Capital Gains
Units of mutual fund schemes held for a period more than 12 months are treated as longterm capital assets. In such cases, the unit-holder has the option to pay capital gains tax at either 20 % (with indexation) or 10 % without indexation.

2) Tax Deducted at Source (TDS)

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

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

4) Income from units

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

5) Income Distribution Tax

As per prevailing tax laws, income distributed by schemes other than open-end equity schemes is subject to tax at 20 % (plus surcharge of 10 %). For this purpose, equity schemes have been defined to be those schemes that have more than 50 % of their assets in the form of equity. Open-end equity schemes have been left out of the purview of this distribution tax for a period of three years beginning from April 1999.

6) Section 88
The investment in mutual funds designated as Equity Linked Laving Scheme (ELSS) qualifies for rebate under Section 88. The maximum amount that can be invested in these schemes is Rs.10,000, therefore the maximum tax benefit available works out to Rs.2000. Apart from ELSS schemes, the benefit of Section 88 is also available in select schemes of some funds such as UTI ULIP, KP Pension Plan etc

Disadvantages of Mutual Funds

1.The Wisdom of Professional Management.

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

2.No Control.
Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of somebody else's car.

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

4.Buried Costs.
Many mutual funds specialize in burying their costs and in hiring salesmen who do not make those costs clear to their clients.

Scope for Development of Mutual Fund Business in India

A Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. India has a burgeoning population of middle class now estimated around 300 million. A typical Indian middle class family can have liquid savings ranging from Rs.2 to Rs.10 Lacs today. Investments

in Banks are liquid and safe, but with the falling rate of interest offered by Banks on Deposits, it is no longer attractive. At best a part can be saved in bank deposits, but what is the other sources of investment for the common man? Mutual Fund is the ready answer. Viewed in this sense globally India is one of the best markets for Mutual Fund Business, so also for Insurance business. This is the reason that foreign companies compete with one another in setting up insurance and mutual fund business units in India. The sheer magnitude of the population of educated white collar employees provides unlimited scope for development of Mutual Fund Business in India. The Indian capital market has witnessed some significant reforms on the structural, operational and regulatory front over a period of time. The changes such as abolition of controller of capital issues, establishment of market regulator [SEBI], introduction of a nationwide screen-based trading, dematerialisation of securities, electronic trading, sophisticated risk-management techniques, derivative trading, rolling settlement, shortening of settlement cycle, ban on deferral products, formation of Clearing Corporation of India and demutualisation of stock exchanges have marked a new era in the functioning of the capital market."

INTRODUCTION TO STOCK MARKET

As a part of the process of economic liberalisation, the stock market has been assigned an important place in financing the Indian corporate sector. Besides enabling mobilising resources for investment, directly from the investors, providing liquidity for the investors and monitoring and disciplining company managements are the principal functions of the stock markets.The main

attraction of the capital markets is that they provide for entrepreneurs and governments a means of mobilizing resources directly from the investors, and to the investors they offer liquidity.It has also been suggested that liquid markets improve the allocation ofresources and enhance prospects of long term economic growth.

Stock markets are also expected to play a major role in disciplining company managements.In India, stock market development received emphasis since the very first phase of liberalisation in the early 'eighties. Additional emphasis followed after the liberalization process got deepened and widened in 1991 as development of capital markets was made an integral part of the restructuring strategy. Today, Indian markets conform to international standards both in terms of structure and in terms of operating efficiency

CONCEPT OF STOCK MARKET

The concept of stock markets came to India in 1875, when Bombay Stock Exchange (BSE) was established as The Native Share and Stockbrokers Association', a voluntary non-profit making

association. We all know it, the bhaji market in your neighborhood is a place where vegetables are bought and sold. So, no big deal in defining a stock market as a place where stocks are bought and sold. You deserve to know more. The stock market determines the day's price for a stock through a process of bid and offer. You bid to buy a stock and offer to sell the stock at a price. Buyers compete with each other for the best bid, i.e. the highest price quoted to purchase a particular stock. Similarly, sellers compete with each other for the lowest price quoted to sell the stock. When a match is made between the best bid and the best offer a trade is executed. In automated exchanges high-speed computers do this entire job. Stocks of various companies are listed on stock exchanges. In India, the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and the Calcutta Stock Exchange (CSE) are the three large stock exchanges. There are many small regional exchanges located in state capitals and other major cities.

STOCK EXCHANGES
India boasts of the oldest stock exchange in Asia -- the Bombay Stock Exchange is 125 years old. There are 23 recognized exchanges spread across the country, but a process of consolidation is now under way. Many of the regional stock exchanges have started aligning themselves with one or both of the two large exchanges (the Bombay Stock Exchange and the National Stock Exchange) both of which have VSAT networks that give them a nation wide reach. The National Stock Exchange is an unlisted for-profit company set up by some of the leading financial institutions of India. Most of the remaining stock exchanges are broker-owned (mutual) organizations, but the Bombay Stock Exchange is actively considering demutualization. The Securities and Exchange Board of India (SEBI), the apex regulator of the capital market has regulations that mandate a minimum number of outside directors on the governing board and provide greater autonomy to the professional executives in the day-to-day running of the exchange.

MARKET PARTICIPANTS
Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations (think Ford). Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups, and banks). The rise of the institutional investor has brought with it some improvements in market operations (but not necessarily in the interest of the small investor or even of the nave institutions, of which there are many). Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees (they then went to 'negotiated' fees, but only for large institutions). However, corporate governance (at least in the West) has been greatly affected by the rise of institutional 'owners.'

IMPORTANCE OF STOCK MARKET

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

Function and Purpose

Just as it is important that networks for transport, electricity and telecommunications function properly, so is it essential that, for example, payments can be transacted, capital can be saved and channeled to the most profitable investment projects and that both households and firms get help in handling financial uncertainty and risk as well as possibilities of spreading consumption over

time. Financial markets constitute an important part of the total infrastructure for every society that has passed the stage of largely domestic economies. The financial system performs three main tasks: firstly, it handles transfer of payments; secondly, it channels savings to investments with a good return for future consumption; and thirdly, it spreads and reduces (local enterprise) economic risks in relation to the players' targeted returns (but note that systemic risk is not thereby reduced it merely becomes less concentrated and uneven). Moreover, unforeseen risks, or catastrophic risks (such as the complete collapse of the financial system or government institutions), may not be capable of being spread, or insured against. The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.

GROWTH OF INDIAN STOCK MARKET

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

Years No. of Stock Exchanges No. of Listed Cos. No. of Stock Issues of Listed Cos. Capital of Listed Cos. (Cr. Rs.) Market value of Capital of Listed Cos. (Cr. Rs.) Capital per Listed Cos. (4/2) (Lakh Rs.) Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per Listed Cos. (Lak Rs.)

1946

1961

1971

1975

1980

1985

1991

1995

14

20

22

1125

1203

1599

1552

2265

4344

6229

8593

1506

2111

2838

3230

3697

6174

8967

11784

270

753

1812

2614

3973

9723

32041

59583

971

1292

2675

3273

6750

25302

11027 9

478121

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564

358

170

148

126

170

260

344

803

REFORMS IN INDIAN STOCK MARKET

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

SOME FACTS OF THE INDIAN STOCK MARKET

No of listed companies: Around 9,000 Market cap at BSE (as on 11 July 2003): Rs 738971(000cr) Demat settlement accounts for 99.99% of turnover settled by delivery Shortening of settlements cycle from T+3 to T+2 has Indian Stock Market move a step ahead of some developed markets like the US, Japan, Singapore, and Australia, which is still following T+3 Up Till 18 July 2003 FIIs have pumped in $2400.3 million in the Indian stock market

DRIVERS OF TRANSITION

Policy and Regulation

SEBI, RBI Electronic Trading, Settlement systems

MFs, FIIs, Hedge Funds, Pvt Equity investors, Prof Fund Mgr, Pvt Bkg arms of Banks

The National Stock Exchange Players

Asset Classes Rating Agencies

Private equity, debt, Equities, derivatives ICRA, FITCH, CARE, CRISIL

Accounting Standards

CURRENT STATUS OF INDIAN STOCK MARKET Market capitalization and turnover

As on March 31, 2000, the Indian stock market had a market capitalisation of over Rs. 10 trillion ($ 230 billion) representing 58per cent of GDP. The annual trading volume in all the exchanges put together amounted to Rs 20 trillion (approximately twice the market capitalisation). The average daily trading volume is about $2 billion and there are days on which the turnover is twice this level. Sideshows 'Stock exchange-wise turnover' and 'Stock market indicators', provide more details about turnover and market capitalisation.

India has 9,871 listed companies; this number is second only to that of the United States. However, most of the trading volume is concentrated in a few hundred stocks, and even within this, the top hundred stocks account for a disproportionate share of the trading volume. The Indian capital market is well-diversified in terms of ownership pattern and industry structure. Most of the top 50 companies are domestic private sector companies with no single family or business group accounting for a disproportionate share. There is no foreign owned corporation, public sector organisation or newly privatised company in the top five stocks by market capitalisation. Companies with a market capitalisation of $1 billion or more are present in industries as diverse as software, petrochemicals, oil refining, consumer goods, telecom, banking, pharmaceuticals, and entertainment. In the last few years, however, new economy stocks have shown rapid increase in their market capitalisation and turnover. In the BSE 500 index covering the top 500 listed companies, new economy stocks account for about 49per cent of market capitalisation and 50per cent of the average daily turnover. Vibrant capital market comprising 23 stock exchanges with over 9000 listed companies. Bombay Stock Exchange is the second largest after NYSE. Stock market trading and settlement system are world class. Research shows that global fund managers rate India above China and are shovelling funds into the Indian stock markets, said Channel News Asia on Thursday, quoting a report by Credit Lyonnais Securities Asia, a global investment banker. The Indian Capital market witnessed a sharp bullish trend with the BSE Sensex has crossed 9,919 mark for the first time in its history on 30 January 2006. India has the third largest investor base in the world. India has one of the world's lowest transaction costs based on screenbased transactions, paperless trading and a T+2 settlements cycle.

COMPARISON BETWEEN MUTUAL FUND INVESTING AND STOCK INVESTING:Mutual Funds or Stocks? The Investors biggest Dilemma
The Indian equity market is on the roll for the last 2-3 years. The future too looks quite promising with GDP growth projected at 8-10% for the next few years. This superior return expectation is, therefore, attracting a whole lot of new investors both domestic and foreign - to the equity markets. A typical dilemma for an investor today is whether to directly buy stocks or alternatively invest through the mutual funds. The key to answering this dilemma lies in appreciating the differences between the two routes and deciding as to which one is more suited to ones knowledge & understanding, investment objective, risk appetite and personal profile.

Active Vs Passive Style

Direct investment into stocks is an active form of investment. You do your own research and decide which stocks to buy, when to buy, when to sell etc. You have a control over the investment decisions. It is more fun and challenging. Managing your own portfolio would, however, require you to commit a fair amount of time and effort. Moreover, considering the dynamic nature of businesses and stock markets, almost a daily involvement is necessitated. Else you may miss the opportunity to either buy or sell at the right time. In contrast, Mutual Fund investing is a passive form of investing. You hand over your money to the fund manager and he manages your money along with that of the others. With this all the responsibilities of investment decisions and day-to-day management are handed over to a professional. You need to only periodically check the performance of the fund. And depending on whether it meets your expectations or not, you either let him continue to manage your funds or switch over to some other better performing funds.

Now let us compare both investments avenues on different parameters:1) Skill set
Managing ones own portfolio requires a sufficient level of knowledge and expertise. Not many of us would have the educational qualifications, the knowledge and the experience of that of a typical fund manager. Even if one had sufficient time, money and resources at ones disposal, it may be difficult to consistently match the performance levels of a professional fund manager. Therefore, many a times it may be prudent to depend on the expertise of the fund manager. In addition, a mutual fund would pool in different skills a research analyst to identify stocks, a fund manager to decide on investment strategy, back-office to manage all the associated paperwork, etc. This support structure may be lacking when managing on ones own. By purchasing mutual funds, you are essentially hiring a professional manager at an especially inexpensive price. It would be a bit cocky to think that you know more than mutual fund manager. These managers have been around the industry for a long time and have the academic credentials to back it up. Saying you could outperform a mutual fund manager is similar to a football fan sitting on their couch saying "I could have made that catch" -possible, but not likely. But on the flip side as funds are run by people and sometimes those people move on to greener pastures. But when fund managers walk out the door, their funds excellent performance walks with them. Investors have to wonder if the new manager will follow in his or her predecessor's footsteps ...or stumble.

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

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

Mutual funds save the day

01-Jan-99 14-Feb-00 Indices BSE Sensex Diversified Equity Funds Sundaram Growth (G) HDFC Equity (G) Stocks Wipro Infosys Mphasis BFL 100.00 100.00 100.00 359.76 366.26 316.45 115.56 219.59 58.13 100.00 100.00 246.30 225.50 301.18 153.70 164.22 192.47 Templeton India Growth (D) 100.00 100.00 193.58 119.75 17-Oct-00

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

Consider the performance of the leading software stocks in that rally. While they did hit the roof at the peak of the rally, their fall from grace is just as well-documented. At the end (in October 2000 when the market fall stemmed) the diversified equity funds in our sample were in much better shape than the BSE Sensex and the stocks except Infosys. The mutual funds did better than the stocks mainly due to prudent fund management based on the virtues of diversification. Though of course there is a downside to too much diversification. The excellent returns from say some multi-baggers can be undone by the average performance of the other large number of stocks in the portfolio.

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

4) Corpus size
Investing in equity requires a fairly large amount of money. On the other hand, mutual funds allow us to participate in the stock markets even with very small amount say Rs.1000 or so, which would not be possible in direct investing. Today, if you wanted to buy government securities, you would have to invest a minimum amount of Rs 25,000. Much the same is the case if you want to build a decent-sized portfolio of shares of blue-chips. Now, that might be too large an amount for many small investors Hence, if one has limited capital but wants to take advantage of the equity markets, mutual fund may be the better choice. A mutual fund, however, gives you an ownership of the same investment pie at an outlay of Rs 1,000-5,000. Thats because a mutual fund pools the monies of

several investors, and invests the resultant large sum in a number of securities. So, on a small outlay, you get to participate in the investment prospects of a number of securities.

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

6) Liquidity
Generally the liquidity may not be an issue whether one invests directly or through a mutual fund. However, with some stocks there could be an issue sometimes if it is a thinly traded scrip. The investors can withdraw or redeem money at the Net Asset Value related prices in the open-end schemes. In closed-end schemes, the units can be transacted at the prevailing market price on a stock exchange. Mutual funds also provide the facility of direct repurchase at NAV related prices. The market prices of these schemes are dependent on the NAVs of funds and may trade at more than NAV (known as Premium) or less than NAV (known as Discount) depending on the expected future trend of NAV which in turn is linked to general market conditions. Bullish market

may result in schemes trading at Premium while in bearish markets the funds usually trade at Discount. This means that the money can be withdrawn anytime, without much reduction in yield. Some mutual funds however, charge exit loads for withdrawal 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.

7) Convenience
Apart from being easier to monitor, the mutual funds are relatively easier to manage vis--vis equity investments. One doesnt need a demat account. One can buy/sell the units directly from/to the Mutual Fund without depending on a broker, whom we need if we are to buy/sell shares. Also, the mutual funds send regular reports pertaining to ones investment, which contains all the details we may need for assessing our income and tax liability, if any, thus reducing our paperwork. Having looked at the pros and cons of each of the investment options, we can make our choice based on ones comfort level. One could of course also partly invest through mutual funds and partly directly. This would enable us to say enjoy the expertise, stability and security offered by a mutual fund and also try ones luck with some unknown/lesser known stocks which may have the potential to become multi-baggers.

8) Restrictive gains
Diversification helps, if risk minimization is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security.

In our earlier example, say, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation.

9) Tax breaks
Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability. Whats more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. You can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year.

10) No Control.

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

11) Get Focused

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

12)Flexibility
Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. While in investing in stocks there are no such features. Every time you need to contact your broker for buying or selling of stocks.

13) Solid structure

Mutual funds have a solid 3-tier structure in place that works in the investor's interest. The promoter/sponsor sets up a mutual fund, but does not exercise direct control over it. For this, it sets up a board of trustees. The trustees in turn set up an asset management company (AMC). The latter looks after the day-to-day administration, sales, marketing and fund management. This way there is very little link between the sponsor/promoter and the mutual fund schemes. This ensures that mutual fund schemes are managed professionally without any 'interference'. On the other hand, Indian companies still have some way to go before they can be managed as professionally as mutual funds. The promoter's 'involvement' is considered normal and any negative news at the promoter's level often percolates down to the stock.

14) Offering solutions

How many times have we heard this before - mutual funds are very flexible? There is a reason for that. Today mutual funds have evolved at a level that gives investors solutions for retirement planning, planning for child's education/marriage, even buying a house to outline a few goals. There are mutual funds tailor-made to help investors achieve these financial goals. With stocks it's a little different. Stocks do not offer solutions apart from a very broad solution of providing capital appreciation. You can't provide for retirement or for a child's education through stocks, rather you must build a customised portfolio of stocks and debt and actively manage it to help you meet a financial goal. That is exactly what mutual funds do.

15) Risk
In general, mutual funds carry much lower risk than stocks. This is primarily due to diversification (as mentioned above). Certain mutual funds can be riskier than individual stocks, but you have to go out of your way to find them. A fund's beta ratio is a standard risk parameter. Beta measures movements relative to the index and thus, the relative riskiness of a fund compared to the market. The higher the beta, the more volatile the fund. Expressed as a single digit number, a beta of plus 1 means the fund is exactly as volatile as the market. (A negative beta indicates it moves in the opposite direction to the market). If the fund's beta is 2, it moves twice as much as the market. That is, if the market moves up 10 per cent, a 2-beta fund moves up 20 per cent. A beta less than 1 means that the fund is less volatile. For example, a beta of 0.5 indicates that if the Sensex moves up 10 per cent, the fund moves up 5 per cent. With stocks, one worry is that the company you are investing in goes bankrupt. With mutual funds, that chance is next to nil. Since mutual funds typically hold anywhere from 25-5000 companies, all of the companies that it holds would have to go bankrupt.

16) Returns:Returns are not guaranteed in Mutual fund as well as in stock market. Returns are totally dependent on the sensex. If Market is up definitely your investment in stocks will give good returns as well NAV of mutual fund will also increase.

STOCKS V/S MUTUAL FUNDS

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

RESEARCH METHODOLOGY

PLACE OF RESEARCH
The study was primarily conducted at Kotak Securities Ltd, Lucknow. The market survey was done to have market perspective whether investors directly invest in stock market or they invest in mutual fund.

RESEARCH OBJECTIVES:The study was conducted to find out the investors preference between direct investment in Indian stock market and Mutual fund. The research was also conducted to find and analyze the more preferred investment instrument direct investment in Indian Stock Market or Mutual fund on the basis o different parameters such as-risk, return, cost, etc.

SAMPLING PLAN
Sample Unit: Retail Investors Sample Size: 100 Investors. Sampling Technique: Random Sampling Research Design: Descriptive studies.

SAMPLE SIZE:The sample size considered in our study is 100

SAMPLE CHARACTERISTICS:The sample considered is a homogenous one, the characteristics of the respondents were more or less the same. The people generally belonged to middle class strata. The results deduced can be projected on the middle class population on a wider class.

METHOD OF DATA COLLECTION:The research was conducted on the availability of information from Primary and Secondary sources:-

PRIMARY SOURCE OF DATA: Interaction with the employees of various organization Viz public and private. A proper Questionnaire was designed to collect the primary data, which is attached here with this report

SECONDARY SOURCES OF DATA:

Journals, magazines etc Internet

FINDINGS

1) What % of earnings do you save for investment purposes? The responses is reflected in following table.
% OF EARNINGS 100 % 10-20 % 44 44% 20-30% 30 30% 30-40% 26 26% 40-50% 0 0% More than 50 % 0 0%

DIAGRAM DEPICTING % OF EARNING SAVED BY RESPONDENTS FOR INVESTMENT PURPOSES

50 PERCENTAGE 40 30 20 10 0 10-20% 20-30% 30-40% 0 40-50% 0 more than 50% 44 30 26 %

% OF EARNING

ANALYSIS:It can be easily seen from the above graph that 44% of respondents save 10-20% of earnings for investment purposes while 30% and 26% save 20-30% and 30-40% respectively. This shows that people still are not aware of different investment options available in the market rather they prefer to keep cash or invest in gold. Thus there is a lot of scope to tap the earnings of investors and invest in different other investment avenues available in the market.

2) Which is your most dominant investment instrument for investment purposes?

The responses is reflected in following table.

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

DIAGRAM DEPICTING MOST DOMINANT INVESTMENT INSTRUMENT IN THE MARKET

2% 26%

28%

Equity Mutual fund Debentures Derivatives Bank F.Ds

3% 1% 40%

Others

ANALYSIS:There are varieties of investment avenues available in front of investors but the most preferred investment avenue for investors today is mutual fund.40 % of respondents in the survey had chosen mutual fund as the most dominant investment option while 28 % had chosen equity and 26 % had chosen Bank fixed deposits. Investors of today are no more sticked to previous modes of investments like post office savings, government securities etc. They had identified new investment options and they are ready to take risk in lieu of higher returns. Mutual funds offer several benefits that are unmatched by other investment options. In mutual fund Investments are spread across a wide cross-section of industries and sectors and so the risk is reduced. Diversification reduces the risk because all stocks dont move in the same direction at the same time. One can achieve this diversification

through a Mutual Fund with far less money than one can on his own. Investing in individual stocks is prone to more risk & less diversification. Thus 40 % had chosen mutual fund while 28 has chosen equity. Still 28% of investment is done in bank FD which means that 28% of the investors are still not ready to take risk by investing in equity market or mutual fund it means that they are risk aversive and they have no faith in equity market or mutual fund. Thus there is an opportunity to tap this segment of investors by identifying and pursuing them to invest in equity market or mutual fund.

3) What is your investment horizon? The responses is reflected in following table:Period Short term (0 6 months) 6 Medium term (6 months 1 year) 34 34% Long term (More than 1 year) 60 60%

100 respondents % 6%

DIAGRAM DEPICTING INVESTMENT HORIZON OF INVESTORS

NO OF RESPONDENTS 80 60 40 20 0 Short term Medium term Long term PERIOD OF INVESTMENT 6 34 60 No of respondents

Analysis:-

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

4) Do you directly invest in stock market? The responses is reflected in following table:Alternative choice No of respondents % Yes 55 86% No 45 14%

DIAGRAM DEPICTING DIRECT INVESTMENT IN STOCK MARKET

44 56

Yes No

ANALYSIS:From the above pie chart and table we can conclude that equity market is not left untouched by the investors.56% of the respondents out of the sample size of 100 invest directly in equity market while 44% of respondents either dont invest in equity market or they invest in equity market through mutual fund.. Direct investment in equity market requires lot of time, professional expertise as well as high risk which the individual investors do not have as well as they are not ready to take it .While investing in mutual fund overcomes all these problems. But on the other side there are restrictive

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

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

The responses is reflected in following table:Experiences No of respondents % Excellent 9 18% Good 26 45% Moderate 19 35% Bad 1 2% Worst 0 0%

DIAGRAM DEPICTING THE EXPERIENCE OF INVESTORS BY INVESTING IN MUTUAL FUNND

NO OF RESPONDENTS 30 25 20 15 10 5 0
Ex ce lle nt M od er at e oo d W or st G Ba d

26 19 No of respondents

9 1 0

EXPERIENCE

ANALYSIS:55 % of the respondents who have directly invested in the stock market out of which 26 % described their experience of investing in stock market as good. The returns generated by them by investing in stock market were above expectation. While 9 % of respondents had identified their experience as excellent which means they got excellent returns from the stock market.19% were moderate as they didnt lost their money invested nor they earned any returns. Only 1% had bad experience with the stock market. Overall we can conclude that respondents are satisfied by directly investing in stock market.

6) If no? Please tell the reason why? The responses is reflected in following table:Reasons Uneducated about the market 4 9%
Lack of resources Risk associated with stock market Lack of faith No interest Lack of time

No of respondents %

7 16%

11 25%

6 14%

3 7%

13 29%

DIAGRAM DEPICTING REASONS FOR NOT INVESTING DIRECTLY IN STOCK MARKET

Uneducated about stock market Lack of resources 16% Risk associatedwith stock market Lack of faith 7% 25% 14% No interest lack of time

9% 29%

ANALYSIS:There are several reasons why respondents do not invest directly in equity market. These reasons can be seen in the above pie chart and table. The above pie chart depicts that 29% of the respondents who do not directly invest in stock market do it mainly because they do not have the time to daily analyze the stock prices and thus take buying and selling decisions.25% do not invest because of the risk associated with investing in stock market. These 25 % are risk aversive and they still believe in investing in old modes of investment such as post office savings or bank fixed deposits. They feel that their money is more safe by investing in old modes of investment. These two reasons contribute about 54 % for not investing in stock market. By investing in mutual fund investors can overcome these reasons.

7) Which broking house do you like to associate with? The responses is reflected in following table:Broking Houses No of respondents %
Kotak India bulls Karvy Anand rathi HDFC securities ICICI Others specify

23 42%

11 20%

15 27%

2 4%

0 0%

3 6%

1 2%

DIAGRAM DEPICTING BROKING HOUSE RESPONDENTS LIKE TO ASSOCIATE

NO OF RESPONDENTS 25 20 15 10 5 0 23 11 15 2 Karvy Kotak 0 HDFC securities 3 No of repondents 1 Others specify

BROKING HOUSES

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

8) D0 you invest in mutual fund? The responses is reflected in following table:-

Alternative choice No of respondents %

Yes 71 71%

No 29 29%

DIAGRAM DEPICTING % OF RESPONDENTS INVESTING IN MUTUAL FUND

29% Yes No 71%

ANALYSIS:Today mutual fund is the most preferred investment instrument for the investors as shown in the second analysis. In the sample survey conducted through questionnaires it can be clearly seen that more than 70 % of respondents invest in mutual fund which is fairly a very large number. As mutual fund is the safest route to enter into equity market hence respondents are more comfortable investing in mutual fund and not direct investment in stock market. Of the remaining 29% do not invest in mutual fund. This 29% is untapped hence AMC should come up with different unique schemes in order to attract this segment

9) If yes? How was your experience of investment in Mutual fund? The responses is reflected in following table:-

Experiences No of respondents %

Excellent 11 15%

Good 49 69%

Moderate 10 14%

Bad 1 2%

Worst 0 0%

DIAGRAM DEPICTING THE EXPERIENCE OF INVESTORS BY INVESTING IN MUTUAL FUNND

NO OF RESPONDENTS 60 50 40 30 20 10 0
Ex ce lle nt M od er at e oo d Ba d W or st G

49

No of respondents 11 10 1 0

EXPERIENCE

ANALYSIS:Out of 71 respondents who invest in mutual fund 49 respondents had good experience of investing in mutual fund while 11 and 10 had excellent and moderate experiences respectively. These figures are more when compared with experience of respondents who invest in stock market. Thus it can concluded that respondents are benefited when they invested in mutual fund as compared with investment in stock market. This shows why mutual fund is the most preferred investment instrument.

10) Reason behind your investment in mutual fund? The responses is reflected in following table:-

Reasons No of respondents %

Professional Expertise

Diversification of fund

Liquidity

Low cost

Convenience

Greater returns

Low risk

23 33%

12 17%

0 0%

15 21%

1 1%

10 14%

10 14%

DIAGRAM DEPICTING THE REASONS OF INVESTMENT IN MUTUAL FUND

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

ANALYSIS:The most common reasons for investment in Mutual fund were Professional expertise and Diversification of fund. These two are biggest advantages for investing in mutual fund. Out of total respondents 33% of them invest in mutual fund because of professional expertise, 17% invest due to diversification of fund while remaining 50% invest due to low cost, low risk, greater convenience and greater returns. Thus Mutual fund industry is on the road of growth.

11) If no? Please tell the reason why? The responses is reflected in following table:Reasons Lack of faith
Lack of resources Less than expected Uneducated

Others

returns

No of respondents %

11 38%

6 21%

4 14%

5 17%

3 10%

NO OF RESPONDENTS

DIAGRAM DEPICTING REASONS FOR NOT INVESTING IN MUTUAL FUND

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

Lack of faith

Less than expected returns

REASONS

ANALYSIS:Out of the total respondents who dont invest in mutual fund 11% says they dont have faith on AMCs, 6% says they dont have enough resources to invest in Mutual fund, 5% are uneducated about the concept of mutual fund, and rest 4% think that mutual fund gives less than expected returns. As in mutual fund investor has to give his money to the fund manager of AMC hence there is no control of the investor on his investment while in case of direct investment in stock market you have full control on your investment. This shows that investors do not believe in the concept of mutual fund and hence 29% of investors do not invest in mutual fund.

12) Which scheme of Mutual fund do you prefer?

The responses is reflected in following table:Schemes Equity schemes
Debt schemes Balanced schemes Growth schemes

Uneducated

Lack of resourses

Others specify

Others

No of respondents %

51 72%

0 0%

11 15%

9 13%

0 0%

DIAGRAM DEPICTING SCHEMES OF MUTUAL FUND PREFERRED BY INVESTORS

NO OF RESPONDENTS 60 50 40 30 20 10 0 Balanced schemes Equity schemes Debt schemes Growth schemes Others

No of respondents

SCHEMES

ANALYSIS:- The Mutual fund investors think that equity schemes are the best schemes to
invest in mutual fund which can be proved from the above bar graph. The above graph shows that out of 71 respondents who invest in mutual fund ,more than 70% had chosen Equity schemes as there preferred scheme, while 15% and 13% thinks balanced and growth schemes better. Hence it can concluded that investors want to invest in equity market but they prefer to chose mutual fund and not direct investment in stock market.

13) Are you satisfied with the cost associated with Mutual fund? The responses is reflected in following table:Alternative choice Yes No

No of respondents %

49 69%

22 31%

DIAGRAM DEPICTING WHETHER INVESTORS ARE SATISFIED WITH COST ASSOCIATED WITH MUTUAL FUND
No 31%

Yes 69%

ANALYSIS:When asked about the cost associated with mutual fund out of the total respondents 69% thinks that they are satisfied with the cost associated with mutual fund while 31% do not accept the logic behind cost associated with mutual fund. The 31% respondents thinks that it is better to invest directly in stock market as the buried cost in direct investing is less as compared with investing through mutual fund. Mutual fund companies need to revise the cost of their schemes in order to tap the untouched segment of the market.

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

The responses is reflected in following table:-

Alternative choice No of respondents %

Mutual fund 81 81%

Investment in stocks 19 19%

DIAGRAM DEPICTING SAFER INVESTMENT INSTRUMENT

19% Mutual fund Investment in stocks 81%

ANALYSIS:Out of the total respondents 81% of them think Mutual fund as more safer when compared with direct investment in stocks, while merely 19% thinks investment in stocks as more safe. Thus from the above analysis it can be easily concluded that when ever we compare the two on the basis of risk Mutual fund will always be proved better as it helps the investors in saving their capital invested in equity market.

15) According to you which among the two will have a better future prospects? The responses is reflected in following table:Alternative choice No of respondents % Mutual fund 84 84% Investment in stocks 16 16%

DIAGRAM DEPICTING INVESTMENT INSTRUMENT HAVING BETTER FUTURE PROSPECTS

16% Mutual fund Investment in stocks 84%

ANALYSIS:When asked about the better future prospects the reactions were same Mutual fund. Out of total respondents 84% of the respondents had said that Mutual fund has a better future prospects while only 16% said investment in stocks has better future prospects. Respondents while answering to this question said that mutual fund had a better prospects because it has different characteristics which make it more popular among investors such as low risk, greater returns, diversification, professional expertise etc.

RECOMMENDATIONS
The training revealed various problems that are encountered during the whole process. I suggest the following recommendations, which will be useful for the organization:1) For creating awareness and faith in the organization kotak securities needs an aggressive advertisement and for that an extra effort is required. The company should focus more on improvement in the frequency of advertisements, different media etc. 2) The organization should adopt some different strategies to attract that segment of investors who do not invest in equity market which will help them to increase their customers base.

CONCLUSION

The study was very fruitful, as it helped me to understand the behavior of investors very well. As my objective of the study was to identify whether investors more invest in mutual fund or they directly invest in equity market, hence I easily found that investors today want to invest in equity market but more through mutual fund route and not directly. The future of Mutual fund is definitely very bright as it helps the investor in every way as well as it also protect the investors capital when compared with direct investing in stock market.There are numerous benefits of investing in mutual funds and one of the key reasons for its phenomenal success in the developed markets like US and UK is the range of benefits they offer, which are unmatched by most other investment avenues and thus a better investment option. Mutual fund also fulfills the requirements of short term investors and prove to be the best for those who do not want to lock their money for long. Mutual funds is the right decision for parking their ideal money for suitable tome period.

BIBLIOGRAPHY

Books: Pricing and Hedging Long-term Options - Bakshi, Gurudip ,Charles Cao, and Zhiwi Chen The Stock Options Manual - M Gastineau, G., Mc Graw-Hill, New York, 1979 Buy and Sell stocks-J W Mathew, Steven Publications, Chicago. WEB RESOURCES: Data & Charting:

www.bseindia.com www.nseindia.com www.buzzingstocks.com www.equis.com

News Reports & Articles:

www.investopedia.com www.mckinseyquarterly.com www.moneycontrol.com www.outlookmoney.com www.equitymaster.com www.sharekhan.com

APPENDIX

QUESTIONNAIRE
1) What % of earnings do you save for investment purposes? 2) Which is your most dominant investment instrument for investment purposes? 3) What is your investment horizon? 4) Do you directly invest in stock market? 5) If yes? How was your experience of direct investment in equity market? 6) If no? Please tell the reason why? 7) Which broking house do you like to associate with? 8) D0 you invest in mutual fund? 9) If yes? How was your experience of investment in Mutual fund? 10) Reason behind your investment in mutual fund? 11) If no? Please tell the reason why? 12) Which scheme of Mutual fund do you prefer? 13) Are you satisfied with the cost associated with Mutual fund? 14) Which is more safer instrument according to you as an investor? 15) According to you which among the two will have a better future prospects?