1.

Introduction:

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus, 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

Anybody with an investible surplus of as little as a few thousands of rupees can invest in mutual funds. The investors buy units of a fund that best suit their investment objectives and future needs. A Mutual Fund invests the pool of money collected from the investors in a range of securities comprising equities, debt, money market instruments etc. after charging for the AMC fees. The income earned and the capital

appreciation realized by the scheme, are shared by the investors in same proportion as the number of units owned by them. In case of mutual funds, the investments of different investors are pooled to form a common investible corpus and gain/loss to all investors during a given period are same for all investors. In a mutual fund, the money you invest is in turn invested by the manager, on your behalf, as per the investment strategy specified for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or distributed as income. Likewise, loss, if any, with the expenses, is to be borne by you. A Mutual Fund may not, through just one portfolio, be able to meet the investment objectives of all their Unit holders. Some Unit holders may want to invest in riskbearing securities such as equity and some others may want to invest in safer securities such as bonds or government securities. Hence, the Mutual Fund comes out with different schemes, each with a different investment objective. Mutual funds can be divided into various types depending on asset classes. They can also invest in debt instruments such as bonds, debentures, commercial paper and government securities apart from equity.

Every mutual fund scheme is bound by the investment objectives outlined by it in its prospectus. The investment objectives specify the class of securities a mutual fund can invest in.

1.1 SOME DEFINITIONS OF MUTUAL FUNDS:

According to SEBI (MF) Mutual Fund means a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments.

The other common and well-known definitions of Mutual Funds are as follows:

A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day.

Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having received it, make investments with the money via an AMC. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own part of the overall fund.

A Mutual Fund is a company that pools the money of many investors, its shareholders to invest in a variety of different securities.

The beauty of mutual funds is that anyone with an investible surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments.

In conclusion, we can say that Mutual Fund collects the money of individuals, partnership firms, association of persons/body of individuals, trust, HUFs, banks, company/body corporate, society, financial institutions, foreign individuals, foreign financial institutions or any other person, or of public or any part of public at large and deploys the collected fund according to the scheme into the diversified portfolio of equities, bonds, financial market instruments and other securities to generate returns. As and when any person redeems his/her units, the Mutual Fund Asset Management Company (AMC) will pay him his invested amount with the return generated depending on the option chosen by the person.

2. HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY:

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases.

First Phase 1964-87:

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India.

In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI.

The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 cr of assets under management.

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).

SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).

LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 cr.

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

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families.

1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed.

The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.

As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 cr. The Unit Trust of India with Rs.44, 541 cr of assets under management was way ahead of other mutual funds.

Fourth Phase since February 2003:

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities.

One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 cr as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 cr of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations

With recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.

As at the end of September 2004, there were 29 funds, which manage assets of Rs.153108 cr under 421 schemes.

3. Types of mutual funds:

MUTUAL FUNDS

By Objective

By Nature

By Investment

By Market Capitalisation

Open Ended Schemes

Equity fund

Growth Schemes

Large Cap Funds

Close Ended Schemes

Debt funds

Income Schemes

Mid Cap Funds

Interval Schemes

Balanced Funds

Balanced Schemes

Small Cap Funds

Money Market Schemes

Multi/FlexiCap Funds

Any mutual fund has an objective of earning income for investors and / or getting increased value of their investments. To achieve these objectives mutual funds adopt different strategies and accordingly offer different schemes of investments.

3.1 By Objective:

By Objective

Open Ended Schemes

Close Ended Schemes

Interval Schemes

Open Ended Schemes:

As the name implies the size of the scheme (Fund) is open i.e., not specified or predetermined.

Entry to the fund is always open to the investor who can subscribe such funds at any time. They stand ready to buy or sell its securities at any time. It implies that the capitalization of the fund is constantly changing as investors sell or buy their shares. The shares or units are normally not traded on the stock exchange but are repurchased by the fund at announced rates. Open-ended schemes have comparatively better liquidity despite the fact that these are not listed. The reason is that investor can any time approach mutual fund for sale of such units. No intermediaries are required.

The realizable amount is certain since repurchase is at a price based on declared net asset value (NAV). No minute to minute fluctuations in rates haunt the investors. The portfolio mix of such schemes has to be investments, which are actively traded in the market. Otherwise, it will not be possible to calculate NAV. This is the reason that generally open-ended schemes are equity based.

Option to reinvest its dividend is also available. Since there is always a possibility of withdrawals, the management of such funds becomes more tedious as managers have to work from crisis to crisis. Crisis may be on two fronts, one is, that unexpected withdrawals require funds to maintain a high level of cash available every time implying thereby idle cash. Fund managers have to face questions like what to sell. He could very well have to sell his most liquid assets. Second, by virtue of this situation such funds may fail to grab favorable opportunities. Further, to match quick cash payments, funds cannot have matching realization from their portfolio due to intricacies of the stock market. Thus, success of the open-ended schemes to a great extent depends on the efficiency of the capital market.

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Close Ended Schemes:

Such schemes have a definite period after which their shares/ units are redeemed. Unlike open-ended funds, these funds have fixed capitalization, i.e., their corpus normally does not change throughout its life period. Close ended fund units trade among the investors in the secondary market since these are to be quoted on the stock exchanges.

Their price is determined on the basis of demand and supply in the market. Their liquidity depends on the efficiency and understanding of the engaged broker. Their price is free to deviate from NAV, i.e., there is every possibility that the market price may be above or below its NAV.

If one takes into account the issue expenses, conceptually close ended fund units cannot be traded at a premium or over NAV because the price of a package of investments, i.e., cannot exceed the sum of the prices of the investments constituting the package. Whatever premium exists that may exist only on account of speculative activities. In India as per SEBI (MF) Regulations every mutual fund is free to launch any or both types of schemes.

Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

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3.2 By nature:

BY NATURE Equity fund Debt funds Gilt Funds Income Funds MIPs
Short Term Plans (STPs)

Balanced funds

Liquid Funds

1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
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2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

Gilt Funds:
Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

Income Funds:
Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.

MIPs:
Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs):

Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

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Liquid Funds:
Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on riskreturn matrix and are considered to be the safest amongst all categories of mutual funds.

3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter viz, Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

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3.3 By investment objective:

Growth Schemes Income Schemes Balanced Schemes Money Market Schemes

BY INVESTMENT OBJECTIVE

Growth Schemes:
Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

Income Schemes:
Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

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Balanced Schemes:
Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes:

Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

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3.4 Other schemes:

Tax Saving Schemes:

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.

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3.5 By market capitalisation:

Large Cap Funds

Multi/Flexi -Cap Funds

BY MARKET CAPITALISATION

Mid Cap Funds

Small Cap Funds

Market capitalization:
Stock Funds are often grouped by the size of the companies they invest in big, small or tiny. By size we mean a company's value on the stock market: the number of shares it has outstanding multiplied by the share price. This is known as market capitalization. Big companies tend to be less risky than small companies. But smaller companies can often offer more growth potential. The best idea is probably to have a mix of funds that gives an exposure to large-cap, midsize and small companies. A fund's market capitalization will indicate whether the fund emphasizes the stocks of blue-chip companies with large market capitalizations, emerging companies with small capitalizations, or something in between.
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a) Large Cap Funds:

Large cap funds invest their assets primarily in companies, which have a sizable market capitalization. Different fund houses define `Sizable' differently. This is usually mentioned in the fact sheets for the investor's benefit. For instance, in its IPO (Franklin Flexi Cap), Templeton defined large caps as companies with a market capitalization in excess of Rs 15 bn (Rs 1,500 cr). Companies below this threshold were categorized as mid/small caps. Investing in large caps is a lower risk-lower return proposition (vis--vis mid cap stocks), because such companies are usually widely researched and information is widely available. Large-cap funds are less volatile than funds that invest in smaller companies. Usually, that means we can expect smaller returns but stable returns. E.g.: Kotak 30, HDFC Top 200 Fund, Franklin India Bluechip Fund, HSBC Equity.

b) Mid Cap Funds:

These funds invest in companies that have a lower market capitalization than the large caps. For instance, Sundaram Mutual Fund defines mid caps as stocks with a market capitalization of less than Rs 18 bn. However, this level varies from fund house to fund house. As with large caps, BSE (BSE Mid Cap 200) and S&P CNX (S&P CNX Mid Cap 200) have designed their own indices for mid cap stocks. Investments in mid caps are a riskier proposition as compared to investments in large cap funds. In fact, a mid cap stock could well graduate to a large cap over the years

giving the investor a significant return on his investment. E.g.: Franklin India Prima Fund, Kotak Mid-Cap, Magnum Global Fund, Sundaram Select Mid Cap fund are some examples of mid cap funds.
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c) Small Cap Funds:

Small cap funds invest in companies with a smaller market capitalization. Mutual Fund defined small caps as stocks with a market capitalization of less than Rs 2 bn. investing in small cap funds is fraught with considerable risk. Small cap companies in most cases are just evolving. Again, as with mid caps, information on small caps is not easily available so these companies are underresearched or maybe not researched at all. However, the risk-return trade-off is much higher vis--vis large caps and mid caps. The volatility of the fund often depends on the aggressiveness of the manager. Aggressive small-cap managers will buy hot growth and technology companies, taking high risks in hopes of high rewards. More conservative "value" managers will look for companies that have been beaten down temporarily by the stock market. Sundaram SMILE is probably the first small cap fund of its kind.

d) Multi/Flexi-Cap Funds:
The fund manager has the mandate to shift across market capitalizations depending on the growth opportunity. This is generally dictated by the market happenings i.e. which sector is driving growth at a given time or which market segment (market capitalization) is witnessing the latest rally. But generally, there's a ceiling on how far the fund manager can go in a particular market segment or sector. This helps in keeping the portfolio relatively diversified and mitigate risks. In terms of risk-return trade-off, these funds are positioned between large caps and mid caps. Some multi cap funds include - DSP ML Opportunities, Tata Equity Opportunities and Principal Resurgent India Fund.
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3.6 Other investment plans in mutual fund:

SYSTEMATIC INVESTMENT PLAN:

Systematic Investment Plan (SIP) is a simple, time-honoured strategy designed to help investors to accumulate wealth in a discipline manner over the long-term and to plan a better future for them.

SIP is more suitable for a salaried employee with investable savings every month and who wishes to generate better returns than other instruments at a low risk of price volatility.

Instead of a lump sum amount, you invest a pre-specified amount in a scheme at prespecified intervals. The number of units that accrue to you on each periodic investment is a function of the then prevailing net asset value (NAV) of the scheme you have opted for. Thus irrespective of market conditions, your cost of investment will be mostly lower than the average cost of market prices.

1) Reduces average cost 2) Can be done regularly even for savings of Rs 1000 3) Encourages disciplined investing, 4) Eliminates the need to decide when to invest 5) Avoids the temptation to time the market.

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SYSTEMATIC WITHDRAWAL PLAN (SWP):

Such plan allows the investor to make systematic withdrawals from his fund investment account on periodic basis, thereby providing the same benefit as regular income.

The amount withdraw is treated as redemption of units at the applicable NAV as specified in the Offer Document. E.g. the withdrawal could be at the NAV on the first day of the month of payment. The investor is usually required to maintain a minimum balance in his fund account under this plan. As investor withdraws regularly, this will also reduce effect of income tax at the end of maturity period.

Investors should note the difference between SWP and Monthly Income Plan, as the former allows the investor to get back the principle amount invested while the later only pays the income part on a regular basis.

SYSTEMATIC TRANSFER PLAN (STP):

This plan allows the investor to transfer a specified amount from one scheme to another on a periodic basis within the same fund. A transfer will be treated as redemption of units from the scheme from which the transfer is made, and is invested in the scheme in which transfer is made.

Such redemption or investment will be at the applicable NAV for the respective scheme as specified in the Offer Document. It is necessary for the investor to maintain minimum balance in the scheme from which transfer is made. Many funds do not charge any transaction fees for this service it is an added advantage for the active investors.

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4. Types of returns:
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:

Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.

If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

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5. Pros & cons of investing in mutual funds:

For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.

5.1 Advantages of Investing Mutual Funds: 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.

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.

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.

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.

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

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

Transparency:
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 managers investment strategy and outlook .

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.

Affordability:
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.

Choice of Scheme:
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

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Well Regulated:
All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.

5.2 Disadvantages of mutual funds: Hidden costs:

The mutual fund industry tactfully buries costs under layers of jargon. These costs come despite of negative returns. Examples of such costs include sales charges, annual fees, and other expenses; and depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive even if the fund went on to perform poorly after they bought shares.

Lack of control:

Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.

Dilution:

Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
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Price Uncertainty:

With an individual stock, one can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or through a broker, as can one observe stock price changes by the hour or minute. By contrast, with a mutual fund, the price at which one purchases or redeems shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after the order has been placed. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.

Taxes:

Fund managers don't consider personal tax situation while making decisions regarding the fund. For example, when a fund manager sells a security, a capital-gains tax is triggered, which affects the profitability of an individual investor from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

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6. The risk returns trade off:

Investment horizon

Sector fund Potential for Return Growth fund

Balance fund Ratio of Debt: equity Debt fund Liquid fund

Risk

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesnt mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also
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invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile. Direct equity provides the investors greatest return compared to any other investment avenue. Before doing any investment any wise investor analyzes the risk and return proportion of the particular investment option. If we take a comparative study of money market options like Bank F.D., Insurance, Returns given by Debt market and that of stock market i.e. direct equity then direct equity has always beat both of them by a great deal.

6.1 Risk involved in mutual fund:

All investments involve some form of risk. Even an insured bank account is subject to the possibility that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you started (Rs.1000 gets you less than it got your father when he was your age). Consider these common types of risk and evaluate them against potential rewards when you select an investment.

Market Risk:
At the times prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an

outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to Market Risk.

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Inflation Risk:
Sometimes it is also referred to as Loss of Purchasing Power. Whenever inflation sprints forward faster than the earnings on your investment, you run the risk that youll actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than your returns.

Credit Risk:
In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?

Interest Rate Risk:

Changing interest rates affect both equities and bonds in many ways. Investors are reminded that predicting which way rates will go is rarely successful. A diversified portfolio can help in offsetting these changes.

Employee Risk:
An industries key asset is often the personnel who run the business i.e. intellectual properties of the key employees of the respective companies. Given the ever changing complexion of few industries and the high obsolescence levels, availability of qualified, trained and motivated personnel is very critical for the success of industries in few sectors.

Exchange Risk:
A number of companies generate revenues in foreign currencies and may have investments or expenses also denominated in foreign currencies. Changes in

exchange rates may, therefore, have a positive or negative impact on companies which in turn would have an effect on the investment of the fund.
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7. ENTITIES IN MUTUAL FUND OPERATIONS:

In India, the following are involved in mutual fund operations the sponsor, the mutual fund, the trustees, the asset management company, the custodian, and the registrars and transfer agents.

Sponsor:
The sponsor of a mutual fund is like the promoter of a company. The sponsor may be a bank, a financial institution, or a financial service company. It may be Indian or foreign. The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is the settler of the mutual fund trust. The sponsor delegates the trustee function to the trustees. The sponsor is required, under the provisions of the Mutual Fund Regulations, to have a sound track record, a reputation of fairness and integrity in all his business transactions.

The sponsor should contribute at least 40% to the net worth of the AMC. However, if any person holds 40% or more of the net worth of an AMC shall be deemed to be a sponsor and will be required to fulfill the eligibility criteria specified in the Mutual Fund Regulations.

Mutual fund :
The mutual funds constituted as a trust under the Indian trust act, 1882, and to be registered with SEBI. The instrument of trust must be in the form of a deed between the sponsor and the trustees of the mutual fund duly registered under the provisions of the Indian Registration Act, 1908.
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 Trustees:
A trust is a notional entity that cannot contract in its own name. so, the trust enters into contracts in the name of the trustees. Appointment by the sponsor, the trustees can be either individuals or a corporate body. The trustees appoint the asset management company (AMC), secure necessary approval, periodically monitor how the AMC functions, and hold the properties of the various schemes in trust for the benefits of investors. The mutual fund is required to have an independent Board of Trustees, i.e. two thirds of the trustees should be independent persons who are not associated with the sponsors in any manner whatsoever.

An AMC or any of its officers or employees is not eligible to act as a trustee of any mutual fund. In case a company is appointed as a trustee, then its directors can act as trustees of any other trust provided that the object of such other trust is not in conflict with the object of the mutual fund.

Additionally, no person who is appointed as a trustee of mutual fund can be appointed as a trustee of any other mutual fund unless he is an independent trustee and prior approval of the mutual fund of which he is a trustee has been obtained for such an appointment. The trustees are responsible for inter alia - ensuring that the AMC has all its systems in place, all key personnel, auditors, registrars etc. have been appointed prior to the launch of any scheme.

The trustees are also required to ensure that an AMC has been diligent in empanelling and monitoring any securities transactions with brokers, so as to avoid any undue concentration of business with any broker.

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The trustees should prevent any conflicts of interest between the AMC and the unit holders in terms of deployment of net worth.

The trustees are also responsible for ensuring that there is no change carried out in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change that would modify the scheme and affect the interest of unit holders, unless each unit holder is provided with written communication thereof.

Asset Management Company:

It also referred to as the investment manager, is a separate company appointed by the trustees to run the mutual fund. The AMC should have a certificate from sebi to act as portfolio manager under SEBI rules and regulations, 1993. The sponsor or the trustees are required to appoint an AMC to manage the assets of the mutual fund. Under the Mutual Fund Regulations, the applicant must satisfy certain eligibility criteria in order to qualify to register with SEBI as an AMC.

Eligibility criteria:
The sponsor must have at least 40% stake in the AMC; The directors of the AMC should be persons having adequate professional experience in finance and financial services related field and not found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws. The AMC should have and must at all times maintain, a minimum net worth of Rs. 100 million. The board of directors of such AMC has at least 50% directors, who are not associates of, or associated in any manner with, the sponsor or any of its subsidiaries or the trustees.
33

The Chairman of the AMC shall not be a trustee of any mutual fund.

Restrictions:
Any director of the AMC cannot hold office of a director in another AMC unless such person is an independent director and the approval of the board of the AMC of which such person is a director, has been obtained; The AMC shall not act as a trustee of any mutual fund. The AMC cannot undertake any other business activities except activities in the nature of portfolio management services, management and advisory services to offshore funds, pension funds, provident funds, venture capital funds, and management. Of insurance funds, financial consultancy and exchange of research on commercial basis if any of such activities are not in conflict with the activities of the mutual fund. However, the AMC may, itself or through its subsidiaries, undertake such activities if it satisfies the Board that the key personnel of the asset management company, the systems, back office, bank and securities accounts are segregated activity wise and there exist systems to prohibit access to inside information of various activities. The AMC shall not invest in any of its schemes unless full disclosure of its intention to invest has been made in the offer. However, an AMC shall not be entitled to charge any fees on its investment in that scheme. An AMC cannot, through any broker associated with the sponsor, purchase or sell securities, which is an average of 5% or more of the aggregate purchases and sale of securities made by the mutual fund in all its schemes. However, the aggregate purchase and sale of securities excludes the sale and distribution of units issued by the mutual fund and the limit of 5% shall apply only for a block of any three months.

34

 Custodian:
The custodian handles the investment back office operations of a mutual fund. It looks after the receipt and delivery of securities, collection of income, distribution of dividends, and segregation of assets between schemes. The sponsor of a mutual fund cannot act as its custodian. The mutual fund is required, under the Mutual Fund Regulations, to appoint a custodian to carry out the custodial services for the schemes of the fund. Only institutions with substantial organizational strength, service capability in terms of computerization, and other infrastructure facilities are approved to act as custodians.

The custodian must be totally de-linked from the AMC and must be registered with SEBI.

Under the Securities and Exchange Board of India (Custodian of Securities) Guidelines, 1996, any person proposing to carry on the business as a custodian of securities must register with the SEBI and is required to fulfill specified eligibility criteria.

A custodian in which the sponsor or its associates holds 50% or more of the voting rights of the share capital of the custodian or where 50% or more of the directors of the custodian represent the interest of the sponsor or its associates cannot act as custodian for a mutual fund constituted by the same sponsor or any of its associate or subsidiary company.

35

 Other intermediaries:
The other intermediaries are like banker and transfer agent. Banker provide the banking services like transfer of funds . The registrars and transfer agents handle investor related services such as issuing units, redeeming units, sending fact sheets and annual reports, and so on.

7.1 Graphically structure of mutual fund entities can be represented as:

Sponsor Company Managed by a Board of Trustees

Establishes MF as Trust, Registers MF with SEBI Hold Unit holders fund in MF, Ensure compliance to SEBI, Enter into agreement with SEBI Float Mutual Funds fund, Manages funds as per SEBI guidelines and AMC agreement Provides necessary Custodian Services

Mutual Fund

Appointed by Board of Trustees AMC Appointed by Trustees Custodian Appointed by Trustees Bankers Appointed by Trustees

Provides Banking Services

Register Transfer Agents

Provide Registrars Services and act as a transfer Agents

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8. Terminologies in mutual fund: Net asset value (nav):

The net asset value, or NAV, is the current market value of a fund's holdings, less the fund's liabilities, usually expressed as a per-share amount. Just as a business is evaluated by the level of its profits, a mutual fund is assessed on the basis of its net asset value.

The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. The public offering price, or POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV, and so process orders only after the NAV are determined. Closed-end funds (the shares of which are traded by investors) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes. Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their
37

value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.

Calculating Net Asset Value:

The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below.

Entry load:
The costs of the fund management process that includes marketing and initial costs are charged when you enter the scheme. These charges are termed as the entry load. It is the additional charge you pay when you join a scheme. It is also known as FRONT END LOAD. Eg. If an open end funds per unit is Rs. 11 with entry load of Rs. 2%. The price at which an investor can buy a unit of Rs. 11.22

Exit load:
Just like entry load some funds impose a fee when you leave the scheme or transfer the scheme, i.e., redeem your units, called the exit load. The exit load is deducted from the NAV at the time of redemption or transfer between schemes. It is also known as BACK END LOAD. Eg. If the redemption price is Rs. 10.70, with a back end load of 2%, the exit load charged by the fund amounts to Re. 0.21 so that net sales proceeds will be (10.70-0.21) = Rs. 10.49.
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9. Regulation for mutual fund in India: SEBI (securities exchange board of India):
SEBI was established to promote the orderly and healthy development of securities market and to provide adequate investor protection. SEBI has an independent constituted board with regulatory powers over stock exchange, merchant banking, brokers, registrar and transfer agents, custodians, mutual funds and capital issues. SEBI issues guidelines for various market players to conform with. All players need to register with SEBI and consent to comply with the regulations of SEBI. In the case of mutual funds, the SEBI guidelines were first issued in the SEBI Mutual Fund Regulations of 1993. In December 1996, SEBI published the revised Mutual Fund Regulations, 1996, regulating several aspects including management fees, expenses, and NAV calculation and standardized reporting practices.

Schemes of mutual fund:

The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board. Every mutual fund has to pay filling fees along with the offer document. The offer document should contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor. No one can issue any application form for units of mutual fund until the memorandum containing such information is issued. With each application form fund house has to provide such a memorandum providing guidelines to investors.
39

Each close-ended scheme should be listed on a recognized stock exchange within six months from the closure of the subscription. A closed-ended scheme should be fully redeemed at the end of the maturity period. Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution.

The mutual fund and asset Management Company should be liable to refund the application money to the applicants. The asset management company should issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible within six weeks from the date of closure of the initial subscription list and/or from the date of receipt of the request from the unit holders in any open ended schemes.

General obligations:
Each asset management company should keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the mutual fund and can intimate to the Board the place where such books of accounts, records and documents are maintained. The financial year for all the schemes should end as of March 31st of that year. Each mutual fund or the asset management company should prepare an annual report and annual statement of accounts for each scheme. Each mutual fund should have an annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company.

40

Restrictions on investment:
A mutual fund cannot invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment grade by a credit rating agency authorized to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustee and the Board of Asset Management Company.

A mutual fund scheme cannot invest more than 10% of NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments should not exceed 25% of the NAV of the scheme. All such investments should be made with prior approval of the Board of Trustee and the Board of Asset Management Company.

No mutual fund should own more than 10% of any companys paid up capital carrying voting rights under all its schemes.

Transfers of investments from one scheme to another (switch over) in the same mutual fund should be allowed ifa. b. Such transfer is done at the prevailing market price for quoted instruments on spot basis. The securities so transferred should be in conformity with his investment objective of the scheme to which such transfer is being done.

I.

Transfer of investment may be done in another scheme of the same asset management company or any other without charging any fees.

II.

The initial issue expenses in respect of any scheme may not exceed six per cent of the funds raised under the scheme.
41

III.

Each mutual fund should get the securities purchased or transferred in the name of the mutual fund on account of the concerned scheme, wherever investments are intended to be of long-term nature.

IV.

Each mutual fund can diversify its portfolio of each scheme as per market condition and this should be published by that fund in the monthly fact sheets issued to investors.

V.

No mutual fund scheme should make any investment in; 1) Any unlisted security of an associate or group company of the sponsor, Or 2) Any security issued by way of private placement by an associate or group company of the sponsor, Or 3) The listed securities of group companies of the sponsor, which are in excess of 30% of the net asset of all the schemes of a mutual fund.

No mutual fund scheme should invest more than 10% of its NAV in the equity shares or equity related instruments of any company. This limit of 10% is not applicable to index fund and sector specific scheme

A mutual fund scheme cannot invest more than 5% of its NAV in the equity shares or equity related investments in case of open-ended scheme and 10% in case of close-ended scheme.

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AMFI (association of mutual fund India):

Establish standards of Mutual fund industry on different aspects

To define and maintain high professional and ethical standards in all areas of operation of mutual fund industry

To recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management including agencies connected or involved in the field of capital markets and financial services.

To interact with the Securities and Exchange Board of India (SEBI) and to represent to SEBI on all matters concerning the mutual fund industry.

To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the Mutual Fund Industry.

To develop a team of well trained Agent distributors and to implement a program of training and certification for all intermediaries and other engaged in the industry.

To undertake nationwide investor awareness program so as to promote proper understanding of the concept and working of mutual funds.

To disseminate information on Mutual Fund Industry and to undertake studies and research directly and/or in association with other bodies.

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10. Distribution channels in mutual fund industry:

In India, AMCs work with five distinct distribution channels those are direct, banking, retail, corporate and individual financial adviser.

The Direct Channels:

In the direct channel, customers invest in the schemes directly through AMC. In most cases, the company does not provide any investment advice, so these investors have to carry out their own research and select schemes themselves. The fund companies provide several tools to investors who invest through this channel. This includes monthly a/c statement, processing of transaction, and maintenance of records. In this channel most investors can invest through websites, or receive information through telephonic services provided by the company. About 10-20% of the total sales of an AMC come through this direct channel.

The banking channel:

The large customer base of banks, in developed countries, has played an important role in the selling MFs. In the recent years, this channel has also opened up in India. Banks operating in India, including public sector, private and foreign banks have established tie-up with various fund companies for providing distribution and servicing. The banking channel is likely to develop as the most vital distribution channel for fund companies there are several reasons for the same. Customers remain invested in banks for long periods of time and therefore banks maintain a relationship of trust with their customers. Customers are relying on advice provided to them by bankers as they are always on the look out for better investment avenues. Managers are guiding to customers about various funds.
44

An additional advantage that banks provide is that the concerned customer becomes a permanent contact of the banks and therefore can be reached during launch of (new fund offer) NFO or new schemes any time in the future.

The retail channel:

A customer can deal with directly with a sub broker belonging to a distribution company, instead of taking trouble of dealing with several agents. Distribution companies sell the schemes of several fund houses simultaneously and brokerage is paid by the AMC whose funds they sell. The retail channel offer the benefits of specialist knowledge and established client contact and,

therefore private fund houses are generally prefer this channel. Some of the major players in India in this in this channel are national players like Karvey, Birla sunlife IL&FS and cholamandalam. The key factor for this channel to sell a companys fund used to be the brokerage paid. The banking and retail channel generally contribute to about 50-70% of the total Asset Under Management (AUM).

The corporate channel:

The corporate channel includes a variety of institutions that invest in shares on the companys name. these are businesses, trust, and even state and local governments. For institutional investors, fund managers prefer to create special funds and share classes. Corporate can either invest directly in mutual funds, or through an intermediary such as a distribution house or a bank. Corporate exhibit varying degrees of awareness of mutual fund products. Most of the established corporate, such as the TVS industries in Hyderabad, are wellversed with the performance and composition of various funds. The smaller companies and start-up firms, however, need to be educating on several aspects of mutual funds. In order to provide information to such clients, fund
45

companies usually organize presentation for these companies or set-up meetings with the finance managers.

Individual Financial Advisors(IFA) or Agents:

i. The IFA channel is the oldest channel for distribution and was widely employed at the time when UTI monopoly in the market. In recent times

with the emergence significantly decreased. ii. An agent who basically acts as an interface between the customer and the fund house there is a unique systems in place in India , wherein several sub-brokers are working under one main broker. The huge network of sub-brokers, thus ensure larger market penetration and geographic coverage. As per AMFI, over one lakh agents are registered to sell mutual funds and other financial products such as insurance across the country.

46

11. Cost involved in mutual fund:

An investor must know that there are certain costs involved while investing in mutual funds.

OPERATING EXPENSES:
These refer to cost incurred to operate a mutual fund. Advisory fee is paid to

investment managers, audit fees to charted accountant, custodial fees, register and transfer agent fees, trustee fees, agent commission. Operating expenses also known as expenses ratio which is annual expenses expressed as a percentage of these expenses is required to be reported in the schemes offer document or prospectus. Depending upon scheme and net asset, operating expenses are determined by limits mandated by SEBI mutual funds regulation act. Any excess over specified limits as to borne by Management Company, the trustees or sponsors.

SALES CHARGES:
These are known commonly sale loads, these are charged directly to investor. Sales loads are used by mutual fund for the payment of agents commission, distribution and marketing expenses. These charges have no effect on the performance of the scheme. Sales loads are usually expression percentage and or of two types front-end and backend.

47

CONTINGENT DEFERRED SALES CHARGES (CDSC):

Contingent differed sales charges of a structured back end load. It is paid when the units are reading during the initial years of ownership. It is for a predetermined period only and reduced over the time you invested for a fund. The longer remains in a fund the lower the CDSC. The SEBI stipulate the a CDSC may be charge only for first four years after purchase of units and also stipulate the maximum CDSC that can we charge every year. This is the SEBI mutual funds regulations 1996 do not allow either the front end load or back end load to any combination is higher than 7%.

TRANSACTION COST:
Some funds may also impose a switch over fee which is charge on transfer of investment from one scheme to another within a same mutual funds family and also to switch from one plan to another within same scheme. The real estate mutual funds sector is now being considered as the engine of economic growth.

48

12. SWOT ANALYSIS OF MUTUAL FUNDS

Strengths of Mutual Funds are:

The fund industry has introduced the best products and services, and delivered superlative performances. It allows small investors to invest in market cheaply and efficiently. You get to own several companies no matter how much you decide to invest. In other words you get instant diversification. You can easily make monthly contributions. A professional manager is the one managing the money. Theoretically because of his/her experience and knowledge you should receive above average returns. Very high transparency, risk of fraud is very less. For every kind of profile (i.e. conservative, moderately aggressive, aggressive) there are investment options available.

Weaknesses of Mutual Funds are:

Load being charged for entry into and exit from a particular fund is the biggest weakness of funds. Lack of flexibility. Load is charged irrespective of the performance of the fund. Expense ratio is charged separately i.e. you pay management fee no matter if the fund makes you money or not. A large majority of mutual fund companies dont come close to beating market averages like the S&P 500.

49

Opportunities for Mutual Funds:

Only .5% of Indian savings is invested in mutual funds. Therefore there is a large potential for the fund industry to mobilize the savings of people into investments in MFs. Mutual funds are currently not allowed to invest in real estate. MF making investments in property should be allowed. Government is making necessary efforts.

Threats to the Mutual Funds:

One of the biggest ills plaguing the fund industry today is called late trading. The deal is to offer preferential treatment to large investors by offering them backdated net asset values (NAVs). ULIP (Unit Linked Investment Plan)- if the time horizon of the investor is more than 15 years, ULIP becomes a threat to fund industry. Also the brokers say (banks) get higher brokerage if an investor invests in ULIP rather than MFS. PPF (Public Provident Fund) is also a threat since it gives guaranteed return since no investment is risk free. Anyone who invests in mutual funds runs the risk of losing money. Real estate also poses a big threat for the industry since investor prefers investing in property rather than funds. Portfolio management has now been started by various institutions such a (Kotak securities), whereby a separate portfolio can be designed for an individual investor. Here an individual is saved if the fund manger does not make right decision regarding funds portfolio.

50

13. Other Investment Strategies in India:

Conventionally, Indian investors investing in the following avenues:

Bank Deposits:
They cover the fixed, saving & recurring deposits of varied tenors offered by the commercial banks and other non-banking financial institutions. These are generally a low risk prepositions as the commercial banks are believed to return the amount due without default. By and large these FDs are the preferred choice of risk-averse Indian investors who rate safety of capital & ease of investment above all parameters. Largely, these investments earn a marginal rate of return.

Government Bonds:
The Central and State Governments raise money from the market through a variety of Small Saving Schemes like national saving certificates, Kisan Vikas Patra, Post Office Deposits, Provident Funds, etc. These schemes are risk free as the government does not default in payments. But the interest rates offered by them are in the range of 7% 9%.

Insurance:
Insurance in India is mostly sold and bought as investment products. They are preferred because of their add-on benefits like financial life-cover, tax-savings and satisfactory returns. Even if one does not manage to save money and invest regularly in financial instruments, with insurance, the policyholder has no choice. If he does not pay his premiums on time, his insurance cover will lapse. Money-back Insurance schemes are used as investment avenues as they offer partial cash-back at certain intervals. This money can be utilized for childrens education, marriage, etc. These policies are term policies. Investors have to pay the premiums for a particular term, and at maturity the accrued bonus and other benefits are returned to the policyholder if he survives at maturity.

51

Unit Linked Insurance Plans - ULIPs are remarkably alike to mutual funds in
terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same. In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component.

Bullion Market:
Precious metals like gold and silver had been a safe heaven for Indian investors since ages. Besides jewellery these metals are used for investment purposes also. Since last 1 year, both Gold and Silver have highly appreciated in value both in the domestic as well as the international markets. In addition to its attributes as a store of value, the case for investing in gold revolves around the role it can play as a portfolio diversifier.

Stock Market:
Indian stock markets particularly the BSE and the NSE, had been a preferred destination not only for the Indian investors but also for the Foreign investors. This is evident from the fact that FIs are buying huge stakes on the Indian bourses. Although Indian Markets had been through tough times due to various scams, but history shows that they recovered very fast. Many types of scrip had been value creators for the investors. People have earned fortunes from the stock markets, but there are people who have lost everything due to incorrect timings or selection of fundamentally weak companies.

Real Estate:
Approximately one fourth of all homes have been purchased as an investment. Returns are almost guaranteed because property values are always on the rise due to a growing world population. Residential real estate is more than just an investment. There are more ways than ever before to profit from real estate investment.

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14. Comparative study of mutual fund with other investment option:

14.1 Analysis of Banks With Mutual Funds:

PARTICULAR RETURN RISK INVESTMENT OPTION NETWORK LIQUIDITY QUALITY OF ASSETS INTEREST CALCULATION

BANKS
LOW

MUTUAL FUND BETTER LOW MORE LOW BUT IMPROVING BETTER TRANSPARENT EVERY DAY

HIGH LESS HIGH PENETRATION AT A COST NOT TRANSPARENT MINIMUM

BETWEEN BALANCE

10TH AND 30TH

OF EVERY MONTH.

ADMINISTRATION
EXPENSES GUARANTEE

HIGH

LOW

MAX. RS 1LACK ON DEPOSIT

NONE

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S.No. BASIS OF ANALYSIS Saving

BANK Time Deposits R.D.

MUTUAL FUNDS

1.

Rate of Return

4%-5.5%

6.5%-

9%-10%

As per market and Co. performance Depend performance upon

8.5% (p.a) (p.a) 2 Interest Received 3 Tenure N.A. Quarterly On Maturity On Maturity

180days-5 6 months- 3yrs Lock in pd for years and 10 years above ELSS schemes,.6mths

for SIP, open and close ended

4 Minimum Investment

Rs. 500

Depend upon banks

Rs. 100

Rs.500 for ELSS SIP, Rs1000 for Equity SIP, Rs.3000 for One time investment.

Maximum Investment

No Limit

No Limit

No Limit

No

limit

for

other

Schemes,

Rs.100,000

for Tax Saving Scheme 6 Tax Benefits Sec 80 C Sec 80 C Sec 80 C Sec 80 C, both Capital gain and Dividend are Tax Free 7 8 Liquidity Transparency/ Risk Very High Low Low Low Low Low Very High Very high Transparency and Diversified Risk.

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14.2 Analysis of National Saving Certificate with Mutual fund:

Investment Amount Period Maturity Value Tax on Income/ Capital gains Inflation 4185.19 4185.19 25674.65 NSC 10000 6 years 15868.74 1573.68 MF 10000 6 years 29859.84 0

Value of Inv after 5 10109.87 Years (post tax post inflation) Difference Rates Inflation Rate of Interest on NSC Rate of Return 20% (15564.78) Per annum 6% 8%

(Last five years average 40%)

Income Tax rate

30%

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14.3 Analysis of ULIP with mutual fund:

ULIPs Unit Linked Insurance Plans Popularly known as ULIPs, it is an investment option provided by Insurance Companies. It is a single contract comprising of insurance cover with an investment benefit. The insurance company allots units to the ULIP investors and the net asset value (NAV) is calculated and declared on a daily basis. An investment in ULIP is divided into two parts a) Life Cover Premium b) Investment. Premium paid in ULIP, certain portion goes for life cover and the remaining portion goes for investment. Mutual Funds Mutual Fund is an investment instrument which pools money from many investors and invest in (stocks, bonds, money market instruments). The mutual fund company allots units to the mutual fund investors and the current value of such investments is calculated on a daily basis and the same is declared through the Net Asset Value. Difference between ULIPs and Mutual Funds The basic difference between ULIP and Mutual fund is in terms of insurance cover. A ULIP provides a insurance component whereas a mutual fund is a pure investment product. Generally speaking, ULIPs are mutual funds with an insurance cover. ULIP = Mutual fund + Insurance cover Now after understanding the difference between ULIP and Mutual funds, lets understand in detail which is better investment option ULIP or Mutual Funds.

Parameters for comparison ULIPs vs. Mutual Funds:

a) Expenses Expenses incurred in a Mutual Fund is lesser than the expenses of ULIPs. The reason is expenses in a mutual fund is capped, there is a pre-set upper limit, whereas for
56

ULIPs no upper limit in terms of controlling the expenses is set by the insurance company. b) Tax benefits Any investment made in ULIP qualifies under section 80C of income tax act, where an investor can save tax on Rs 1, 00, 000. In case of mutual funds, only investment in ELSS (equity linked tax savings scheme) a specific type of mutual fund scheme qualifies for tax benefits under section 80 C. c) Portfolio disclosure Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, however there is no such statutory requirements for ULIPs. d) Return on investment As both the products are long term investment products, these products have given good returns to its investors. Many analysts feels, from a long term view ULIP provides better return than mutual funds. However this is not true in all cases, it all depends on the type of investment and the fund managers skills in managing the funds. Considering all the above factors, a mutual fund investment is better than ULIPs. Insurance is meant for your future protection and it takes care of uncertainties in the future. However a mutual fund is meant for only investment. As we investors do not have the expertise to invest in the stock market and other financial instruments, through mutual funds it is possible. What is the best investment option? ULIP vs Mutual Fund The best investment option available for anyone is A low-cost term insurance (Insurance) and the remaining amount should be invested in a diversified equity mutual fund.

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14.4 Analysis of Bullion market with mutual fund:

1. Gold just preserves your capital it does nothing to increase or grow it its price just increases because of market hike and demand 2. Storage and safekeeping is risky; risk of theft 3. Gold is tangible so person have take utmost care as if misplaced your investment is lost as gold like jewellery doesnt have any registration in name of owner. 4. Gold is bearer means who holds he/she is owner. 5. Gold purchase doesnt provide you professional assistance 6. Gold doesnt guarantee you that you purchased is pure or not as there is no governing authority. v/s 1. Mutual fund invests your capital to increase or have growth in its value. 2. Mutual fund is safe from theft as its just a form of documents 3. Mutual fund is intangible investment so there is no risk of misplacement as if you lost your document you are registered with company in your name 4. Mutual fund is not bearably transferable means its not possible by just holding document in hand you should have owned or named in it. 5. Mutual fund provide you professional assistance in purchasing or selecting mutual fund 6. In mutual fund dealing no one can cheat you as all there is governing authority like SEBI & AMFI

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14.4 Analysis of Real estate with mutual fund:

1. There is huge capital investment collectively. 2. There is lot of legal regulations required for its acquirement and it is to be performed in personal presence 3. No professional assistance as you personally have to choose which area is good for investment objective. 4. There is lot of other recurring expenses involved in maintaining it. 5. you cannot invest regularly. v/s 1. There is no huge investment require you can even start with Rs5000 initial investment. 2. There is minimal legal process like transfer for its acquirement and that also performed by AMC or agent or broker 3. Mutual fund is guided by professional assistance. 4. There is no recurring expense if you invest it for long time as there will not be load or no-load expense. 5. You can invest regularly.

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14.5 Comparative picture of risk and return involved in various investment option:

Types of investment

Risk

Returns

1. Government Securities

Low to Moderate

2. Bank Deposits

Low to Moderate

3. Recurring Deposits

Low to Moderate

4. RD in Post Office

Low to Moderate

5. Other saving Schemes of PO

Low to Moderate

6. Debentures and Pref. Shares

Moderate

7. Insurance sector

Moderate to Low

8. PF Schemes

Moderate to Low

9. MUTUAL FUNDS

Moderate to High

Diversified Risk

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15. Research methodology: What is research?

Research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organizing and evaluating data; making deductions and reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. ---- By Clifford Woody

What is research methodology?

Research methodology is the way to systematically solve the research problems. It not only considers the research methods but also the logic behind the methods used in context of research study and explains why a particular method/technique is being used, so that research results are capable of being evaluated either by the researcher himself or by others.

15.1 METHODOLOGY ADOPTED

A. Objectives of the research:

To find out the various options available to the investors. Compared the investment options with each other to find out which option is best for investors. Understanding the saving pattern of the Consumers. To know the preferences of the costumers as regards their savings. Purpose of investing in mutual funds.

To determine which option would bring maximum returns.

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B. Type of research:
Descriptive and Analytical research.

C. Collection of Data and Information: Primary DataThis data was collected through-

Questionnaire Method.

Secondary DataThis data was collected through-

Different Web Sites.

15.2 DATA COLLECTED THROUGH QUESTIONNAIRE:

The size of the selected sample taken was 50 persons Questionnaire was filled up by walk-in-clients. All this included brokers, agents, investors, businessman, service class people, professionals, etc.

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16. Analysis of the data:

Besides sampling various statistical and analytical tools were used to depict and analyse the data and information collected.

What is your occupational background?

Businessman. Service class. Professionals.

Investors.

investors

32%

profestionals

14%

service class

24%

businessman 0 2 4 6 8 10 12 14

30%

16

Interpretation: In this research majority of the people were investors with 32% there after comes businessman with 30% and then service class people and professionals with 24% and 14% respectively.

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 Where do you like to invest your savings?

Bank deposit. Post office. Mutual funds. Bullion market. Real estate.

Insurance.

18 16 14 12 10 8 6 4 2 0 bank deposits post office 12% 22%

32%

24%

6%

4%

mutual fund

bullion mkt

real estate

insurance

Interpretation: Majority of the people preferred to have mutual fund with 32% as their priority for investing their savings, then comes the most common investment option of insurance and bank deposit with 24% and 22% respectively and lastly bullion market, real estate & post office were least preferred as investment objective with 6%, 4% & 12% respectively.

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 Will you like to invest in mutual fund in near future? Yes. No.

NO 38% YES 62%

YES NO

Interpretation: This question was asked to them who preferred other investment option other than mutual fund in that it was fined that majority of people with 62% said yes that they will prefer to invest in mutual fund in near future.

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 What are the reasons for investing your savings in mutual funds? Diversified Risk. Rate of Return. Safety & tax. Mix of all.

22%

35%

Tax incentives Return

13%

Diversified Risk Mix of all

30%

Interpretation:
Here it was founded that the majority of people with 35% invest in mutual fund with the intention for gaining tax benefits secondly 30% of people invest in mutual fund to have returns,13% of people invest to have diversified portfolio for safe investment and rest 22% invest to enjoy the mixture of all benefits.

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 According to you, which of the following gives the maximum returns? Bank deposit. Post office. Mutual funds. Bullion market. Real estate. Insurance.

35 30 25 20 15 10 5 0 bank deposits post office 12% 22%

32% 24%

6%

4%

mutual fund

bullion mkt

real estate

insurance

Interpretation: Here it shows that maximum people feel that mutual fund gives maximum benefit comparative to other investment option available as above which option people have choose for investment that option is only their preference for maximum returns.

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 What returns you expect from mutual funds? 5%-10% 11%-15% 16%-20% Cant say

29%

35%

16%-20% 11%-15%
7%

5%-10% Can't say

29%

Interpretation: With 35% of maximum people feel that mutual fund gives 16% - 20% p.a 29% of people feel 11% - 15% and other 29% said that they cant speculate the returns from mutual funds.

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 What type of scheme you prefer to invest in Mutual Funds? Sectoral Equity Equity - oriented Tax Saving

Debt

33%

12% 15%
Sectoral equity Equity-oriented Tax saving Debt

40%

Interpretation: As we have seen above that maximum people said they invest in mutual fund with the intention for gaining tax benefits this shows the effect in their investment pattern of choosing mutual fund maximum people of 40% preferred tax saving and secondly 33% of people preferred debt fund.

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17. Findings and suggestions:

After making certain analysis, following were the findings: Maximum number of customers wants to invest in mutual funds because of tax benefits.

Mutual funds have given 15% to 20% return averagely each year.

Nearly 60% of the people are ready to invest in Mutual funds in near future.

Reasons for not investing in Mutual Funds-

Not willing to take risk Lack of knowledge about Mutual Funds. Still belief in traditional investment.

Not good experience

Respondents were agreed with the fact that a mutual fund provides better benefits.

Most of the investors invest their savings for future and for tax incentives & higher rate of return.

As per people intention of gaining tax benefits maximum people preferred tax saving funds

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There are some suggestions to investors before investing in any investment avenue
Before investing in option go through the ins and outs of schemes Consult a market specialists before investing Make a plan before investing. Set your priorities before investing. Dont go before markets until you are fully satisfied that investment is safe. Dont believe in humors. Regular Meeting of consultants to share experience on various aspects related to business as one can learn a lot from experience of others.

17.1 How to invest in mutual fund: Step One - Identify the Investment needs:
Our financial goals will vary, based on the age, lifestyle, financial independence, family commitments, and level of income and expenses among many other factors. Therefore, the first step is to assess the needs. We can begin by defining the investment objectives and needs, which could be regular income, buying a home or finance a wedding or educate children etc.

Step Two - Choose the right Mutual Fund:

The important thing is to choose the right mutual fund scheme, which suits our requirements. The offer document of the scheme tells us its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are the track record of the performance of the fund over the last few years. Other factors could be the portfolio allocation, the dividend yield and the degree of transparency etc.
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Step Three - Select the ideal mix of Schemes:

Investing in just one Mutual Fund scheme may not meet all the investment needs. We may consider investing in a combination of schemes to achieve our specific goals.

Step Four - Invest regularly:

The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, we buy fewer units when the price is higher and more units when the price is low, thus bringing down the average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. We can also avail the systematic investment plan facility offered by many open-end funds.

Step Five- Start early:

It is desirable to start investing early and stick to a regular investment plan. If we start now, we will make more than if we wait and invest later. The power of compounding lets us earn income on income and our money multiplies at a compounded rate of return.

Step Six - The final step:

Finally we need to fill in the application forms of various mutual fund schemes and start investing. We may reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor - whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.

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18. Limitations of the study:

Although the study has been done with optimal accuracy yet there are some limitations, which I have faced during completion of my project. Some of them are summarized Below: -

Sample size was very small as compared to the universe.

The research was restricted to Mumbai suburbs only so it was difficult to generalize the interpretations.

Some of the respondents were lacking from dedication in giving response.

The researcher has to depend upon the information provided by the respondents, which might be false as respondents are very reluctant in providing right information.

Time constraint was one of the major limitations while conducting research.

The investors sample can be biased on some questions and doesnt want to share their personal details of investment.

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19. CONCLUSION:

So from this it can be concluded that A common investor is risk averse and invests in opportunities with minimum risk such as bank deposits, post office savings, small savings scheme, etc for the reasons of liquidity, assured returns and attached tax benefits. However, an investor with a moderate to high risk appetite has the opportunity to invest in the capital market so as to earn higher returns. The answer to maximizing returns lies in diversification .By creating a portfolio and investing in different stocks the investor is able to spread his risk within the portfolio rather than concentrating the risk in one investment. This allows him to make gains even if a few of the stocks in the portfolio do not perform well. Mutual funds provide an excellent solution to such problems. Not only the investments are continuously monitored for a risk taking investor but also enable a small investor to acquire a diversified portfolio to maximize his benefits as mutual funds enable an investor to invest in the capital market even with the minutes of investments. The investors are of a mixed breed, some of them are risk averse and some are risk taking. The investors who are risk taking have adequate knowledge of mutual funds, but those who are risk averse either lacks knowledge or they have some misconception regarding the concept of mutual funds. The main problem was that there were more myths and fewer facts known to the investors. Like some of them were only aware of the equity oriented schemes offered by the companies and not about the Debt oriented schemes; so the perception that was in their mind was that mutual fund investment is a very risky game as it involves stock market. To some extent it is true that investment in mutual fund involves risk but not in all types of schemes that todays fund houses offer.

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The schemes that mutual fund companies are offering are so diversified that it suits the investment criteria of every investor. Let the investor be risk averse or risk taking or a combination of both there are schemes for everyone. There are a potentially large number of investors but they lack knowledge regarding the benefits of investing in a mutual fund. Every type of investment in this world involves risk, some has high risk and some has low risk. Mutual Fund investments have both types of plans (schemes); higher the risk higher is the returns and lower the risk-comparatively lower is the return. There are advantages and disadvantages in all kinds of investments. Investing is not a game but a serious subject that can have a major impact on investor's future well being. Virtually everyone makes investments. Even if the individual does not select specific assets such as stock, investments are still made through participation in pension plan and employee saving programs or through purchase of life insurance or a home. Each of this investment has common characteristics such as potential return and the risk you must bear. The future is uncertain, and an investor must determine how much risk he is willing to bear since higher return is associated with accepting more risk. The individual should start by specifying investment goals. Once these goals are established, the individual should be aware of the mechanics of investing and the environment in which investment decisions are made. These include the regulations and tax laws that have been enacted by various levels of government, and the sources of information concerning investment that are available to the individual

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20. Bibliography:

Websites:

www.investopedia.com/categories/mutualfunds

www.mutualfundsindia.com/glossary

www.valueresearchonline.com/learning

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