CHAPTER I

INTRODUCTION
Financial planning is an ongoing process for an individual. It is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child's education or planning for retirement. A person may start it at an early age and carry it forward through his life with changes to suit his changing goals and needs. Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. Financial Planning can take a "big picture" view of our financial situation and make financial planning recommendations that are right for us. The financial planning can look at all of our needs including budgeting and saving, taxes, investments, insurance and retirement planning. Financial Planning is very important to achieve your financial goals which take different faces in ones life. Financial goals can vary from buying a house to buying crockery, buying car to buying seat covers and also from planning for children's expenses to buying their uniform and stationery. Basically Financial Planning has four important aspects which take care of the entire financial planning spectrum. They are following: 1. Investment Planning, 2. Retirement Planning, 3. Insurance Planning, 4. Tax Planning. India is a growing economy and therefore is attracting more and more investments as the savings are also growing. GDS (Gross Domestic Savings) is currently about 30% of GDP (Gross Domestic Product). Some of the investments options which are prevailing or taking a shape are as follows: 1.

Small Savings, Bonds, Equity Shares, Mutual Funds, Insurance Based investments, Derivatives, Real Estates, Commodities, Bullions etc., There are some important factors to consider while choosing the different investment options, some of them are 1. Risk, 2. Return, 3. Marketability and Liquidity, 4. Diversification, 5. Tax, 6. Denomination and Tenor. Most investors constantly live with a certain amount of anxiety and fear about their investments. It is because they feel they lack market knowledge, investing experience and other similar things. As a result, they often invest on impulse or emotion. Because of their inherent design that taps professional expertise and spreads risk, mutual funds can go a long way towards relieving the anxiety associated with investing. Beauty of mutual funds is that one can invest a few amounts in one fund and obtain instant access to a diversified portfolio. The main reason to invest in mutual funds is their adherence to a basic principle of investing: Dont put all your eggs in one basket. Many different types of

investments in one portfolio decrease our risk of loss from any one of these investments. If we invest in a mutual fund that owns many different stocks, it is more likely that our money will be growing over the time. Mutual fund industry has seen a lot of changes in past few years with multinational companies coming into the country, bringing in their professional expertise in managing funds worldwide. In the past few months, there has been a consolidation phase going on in the mutual fund in India. Now investors had wide range of schemes to choose from depending on their individual profits. Wide variety of mutual fund schemes exist to cater to the needs such as financial position, risk tolerance and return expectations

etc.Thus, mutual funds have variety of flavours, being a collection of many stocks. An investor can go for picking a mutual fund might be easy.

A mutual fund is a common pool of money into which investors place their contribution that is to be invested in accordance with a stated objective. The ownership of the fund is their joint or mutual, the fund belongings to all investors. A mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objective. A single investors ownership of the fund is in the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund.

Statement of the Problem Wealth creation over the years has changed its avenues and area of interest for the investors in India. Mutual fund has become an excellent route to create wealth for public at large. It offers the common man an opportunity to invest and diversify, professionally managed basket of securities at low cost. Investors in mutual fund can get rebate from tax under Sec.80C of Income Tax Act, 1961, by investing in Tax Saving Schemes of mutual fund. Tax planning is an essential part of our financial planning. Efficient tax planning enables us to reduce our tax liability to the minimum. This is done by legitimately taking advantage of all tax excemptions, deductions, and rebate and allowances while ensuring that our investments are in line with our long term goals. For this, mutual fund acts as a supporting wall by providing tax saving schemes. Thus, mutual fund is a trust which subscribes its schemes to a number of investors and in turn safeguards their savings.

Owing to the merits of mutual fund and high contribution of the tax saving schemes in mutual fund industry, it is essential to study tax saving schemes under mutual fund.

Significance of the Study The investment policy selected must be tailored to meet ones tastes and requirements. In the present economic liberalization scenario, mutual fund is one of the revolutionary investment alternatives. Investors with their huge surplus funds need highly diversifiable instrument alternative for moderate returns with low risks. The present study reveals the growth of mutual fund industry in India and the better options to invest in. This also enables an investor how to make an investment in mutual fund by saving tax. Anyhow, this study and analysis shall help a new investor to start his new investing programme by investing in a more profitable investment portfolio.

Scope of the Study This study gives an overview of mutual funds which includes its working, types, advantages and disadvantages etc. A prominent mutual fund scheme has been analysed in depth in this study. Mainly, the area of study I confined to five most performing tax saving funds under mutual fund. Even though the scope of the study is limited to a particular kind of mutual fund scheme, this study also gives an overview of other schemes to invest under mutual fund. The study is confined to five years, commencing from 2007 to 2012.

Objectives of the Study 1. To analyse the market trends of mutual fund investment. 2. To evaluate the performance of tax saving scheme, popularly known as Equity Linked Saving Scheme (ELSS) under mutual fund based on returns and risks. 3. To suggest the best ELSS fund to invest in.

Period of the Study A period of five years has been selected for the study beginning from 2007 to 2012.

Methodology The present study is entirely based on secondary data.The relevant information were collected from periodicals, jouarnals issued by AMFI , other topic related books and websites.

Tools for Analysis For evaluating and analyzing the performance of proposed topic for the study, certain simple statistical tools like averages, trend percentages and diagrams are used. Other statistical tools like standard deviation, beta etc. are also applied.

Limitations of the Study 1. The available information on mutual fund in websites and journals are completely on cumulative basis.

2. Non-availability of per year returns is a limitation of the study. Chapterisation The study report has been presented in four chapters. The details of the chapter plan are given below. Chapter I is the introductory chapter. It deals with general introduction and design of the study which highlights the statement of the problem under study, scope and significance of the study, the specific objectives, the methodology adopted, period and tools for analysis, limitations of the study and the chapter plan. Chapter II is devoted to make an overview of mutual funds, its working, advantages and an overall description on tax saving scheme. Chapter III involves analysis and interpretation of collected data. Chapter IV highlights the findings, suggestions and conclusion of the study.

CHAPTER II

AN OVERVIEW OF MUTUAL FUNDS

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. Mutual funds are considered as one of the biggest available investments. As compared to others, they are very cost efficient and also easy to invest in. Thus, by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Mutual Fund is a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the people under one or more schemes for investing in securities including, money market instruments.

Securities And Exchange Board Of India

Mutual fund is a trust that pools the savings of several investors and then invests these into different kinds of securities in keeping with a prestated investment objective. The income thus generated and the capital appreciation is distributed among mutual fund unit holders in proportion to the number of units held by them. A mutual fund uses the money collected from investors to by those assets which are specifically permitted by its stated investment objective. A single investors ownership of the fund is in the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund.

Working of Mutual Fund The basic idea of how mutual funds work is straightforward. Investors pool their money and hire a portfolio manager to invest in a variety of investment securities. When an investor buys a mutual fund, their investment monies are used to purchase new shares of the mutual fund. In other words, shares of the mutual fund are created for the new investor, these

new shares are issued to the new investor, and the new investors money is combined with money of the other mutual fund holders. The manager of the fund, called the portfolio manager, then buys investments according to the objective if the fund. The funds prospectus will inform investors of the funds objectives. The result is that investors are able to invest potentially a small amount, but have access to a professionally managed and diversified portfolio.

Types of Mutual Fund Mutual fund companies offer different investment avenues for the investors in accordance with their capabilities to invest. Funds are generally distinguished from each other by their investment objectives and types of securities they invest in. Wide variety of mutual fund schemes exist to cater

to the needs such as financial position, risk tolerance and return expectations etc.

By Investment Objective 1. Open ended Schemes An open-ended 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 an open-ended scheme is liquidity. 2. Close-ended schemes A close-ended fund has a stipulated maturity period 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 initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. 3. 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. By Structure 1. Growth Schemes Such funds are aimed at capital appreciation over the medium to long term. Usually, such funds invest a major portion of the portfolio in equities and are willing to bear short-term decline in value for possible future appreciation. 2. Balanced Schemes Such funds have a balanced portfolio and invest in equity and preference shares in addition to fixed income securities. The aims of such fund is to provide both income and capital appreciation over a long-term. 3. Income Schemes These schemes invest primarily in fixed income instruments issued by the government, banks, financial institutions and private companies. The main objective of this scheme is preservation of capital and to provide fixed income over the medium to long-term. 4. Money Market Schemes

Money market schemes invest in short-term debt instruments, which earn interest and have high liquidity. Though these are considered to be the safest investment option, such funds are subject to fluctuations in the rates of interest. Other Schemes 1. Tax Saving Schemes Tax saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. UnderSec.8 of the Income Tax Act, contributions made by an Equity Linked Savings Scheme (ELSS) are eligible for rebate. This scheme comes with a lock-in period of three years. 2. Index Schemes Index scheme is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. 3. Sector Schemes Sector funds are those mutual fund schemes which invest in a particular sector or industry of the market. These are riskier than equity diversified funds since they invest in shares belonging to a particular sector which gives them fewer diversification opportunities.

Advantages of Mutual Fund 1. Professional Management

The basic advantage of mutual funds is that, they are professionally managed, by well qualified professionals. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. 2. Diversification Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimised by gains in others. 3. Economies of Scale Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for the investors. 4. Liquidity Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. 5. Simplicity Investments in mutual fund is considered to be easy, compared to other instruments in the market, and the minimum investment is small

Disadvantages of Mutual Fund 1. Professional Management Some funds doesnt perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market,

thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor himself, for picking up stocks.

2. Costs The biggest source of AMC income is generally from the entry and exit load which they charge from an investor, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon. 3. Dilution Because funds have small holdings across different companies, high returns from a few investments often dont 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. 4. Taxes When making decisions about your money, fund managers dont consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Risk associated with Mutual Fund Investment 1. Market risk 2. Inflation risk 3. Credit risk 4. Interest Rate risk

5. Other risks associated: - Investment risks - Liquidity risk - Changes in government policy

Tax Saving Schemes Tax Saving Mutual Fund is a category of mutual fund where a major portion is invested in equity and equity related instruments. These are aimed at offering tax rebates to investors under specific provisions of the Income Tax Act,1961.These are popularly known as ELSS(Equity Linked Saving Scheme).Investments in ELSS funds are qualified for deduction from taxable income(up to Rs1lakh)under Sec.80C of the Income Tax Act,1961. The tax saving mutual funds usually have a lock in period of 3 years. As a result of this, the manager of the fund is not concerned about factors such as the pressures of redemption, performance of the fund during a short time, and thus does his job by keeping in view the long term goal. The fund manager of the tax saving funds in India invests the money in instruments that are related to equity. ELSS is a great instrument for tax planning which also ensures good returns. It is a special category of mutual funds that invest predominantly in stocks. They are very comparable to diversified equity funds. ELSS is an open-ended equity growth scheme that is offered by mutual funds in line with existing ELSS guidelines. The investor also has the option to choose between growth and dividend options, and Systematic Investment Plans (SIP).

ELSS is the best option for investors who are looking with a time frame of 3 to5 years. The short term weakness in the market will glide down and will earn the investor with better returns in the long run. The performance and the ability of the stocks in the long run can never be beaten with any other financial instruments. The ELSS beats mostly all the equity based mutual fund schemes. The minimum investment that can be made on ELSS is Rs500 and multiples of it. The fund should be allotted to the investors to those who have applied with the prescribed form before March 31 every year. From the date of allotment, the fund should be hold for 3years.On the completion of the 3years, the investor gets the option to tender the units for repurchase.

Types of ELSS

1. Growth

Investor does not get any income during the tenure of the investment. He will get a lump sum amount at the time of redemption or on maturity.

2. Dividend Investor gets a dividend from the fund house. He has two options: - He can cash on the dividends. -He can opt for dividend re-investment option. In most funds, we have Growth as well as Dividend options which we can choose depending upon our priorities.

Advantages of ELSS 1. ELSS has a three year lock-in period. 2. The earning potential is high since it is an equity linked scheme. 3. Investor can see some gain if he opt for dividend option within the lock-in period. 4. Systematic Investment Plan is available in ELSS wherein a regular amount every month can be invested in the scheme. 5. ELSS provides returns of 12per cent to 15per cent

Disadvantages of ELSS 1. Risk factor is high. 2. No assured return. 3. Premature withdrawal is not allowed.

4. Returns will change according to the stock market volatility.

Parameters for Selecting the best ELSS A smart investor can make maximum revenue out of ELSS by choosing the best available plan in the market. While selecting, one should keep the following parameters in mind: 1. Historical track record of the fund The historical performance of the fund can be evaluated across various time periods to see how the fund has performed compared to its benchmark or other comparable indices and the 2. Choose the correct option Many ELS Schemes offer a choice between dividend and growth options. Choosing the dividend option, will make an investor eligible to receive dividends from the scheme which, if declared during the lock in period. 3. Potential to declare dividends and bonus For investors not very not very enthusiastic to put in their money for a three year period, it makes sense to choose a scheme that can potentially declare a dividend or a bonus.Because,this allow them to withdraw the dividend or bonus amount during the lock in period.

Why an ELSS? It has been an established fact that in the long run, equity gives a much higher inflation adjusted returns when compared with any other investment, except for real estate. The top five ELSS funds have given

returns from 22 per cent to 26 per cent compounded annually over the past five years. This is again higher than the market returns over the same period, which is at 19 per cent. ELSS is part of the Sec.80C, instruments that are cumulatively eligible for a deduction from income upto Rs 1 lakh.This gives tax payers benefits from 10 per cent to 30 per cent based on their current tax slab. The three year lock-in period makes sure one stays invested. Otherwise in a normal mutual fund, one tends to withdraw in case of any monetary requirement. The lock-in period also helps the fund managers to plan their investments better and also to hold on to valuable investments as they do not have to worry about sudden redemption pressures. The above logic is proved in the higher returns achieved by the ELSS funds when compared to market returns. Wealth creation because of this is much better than most of the other mutual funds. Only some sector based mutual funds have given better returns than the ELSS fund in the past five years.

CHAPTER III

ANALYSIS OF DATA

There are lots of financial schemes available in India. Many of them provide us guaranteed returns, high interest rates, tax savings under various sections of Indian Income Tax Act and much more benefits. Investors choose mutual funds as their primary means of investing. Mutual funds provide liquidity. The main purpose of investing for most investors is tax saving. Equity Linked Saving Schemes (ELSS) are those mutual fund schemes that help the investors to save taxes as well as generate decent returns. Though there is a plethora of tax saving instruments available at the disposal of the investors, none of them is as attractive as the ELSS. In the present study, an attempt has been made to ascertain the ideal tax planning scheme and to analyse its performance. The study is based on secondary data. Five tax saving schemes (ELSS) have been selected from different alternatives for the present study. Each of the five schemes is compared based on their returns and risks. Following are the selected tax saving schemes: 1. BNP Paribas Tax Advantage Plan(G) 2. Canara Robeco Equity Tax Saver(G) 3. Franklin India Taxshield(G) professional management, diversification, convenience and

4. ICICI Prudential Tax Plan(G) 5. Reliance Tax Saver(G) From here, a brief description on each of the above ELSS shall be mentioned. An analysis is also made based on their returns and risks.

1. BNP Paribas Tax Advantage Plan

1. Performance Evaluation based on One year Returns Table 3.1 Scheme Name BNP Paribas Tax Advantage Plan Canara Robeco Equity Tax Saver Franklin India Taxshield ICICI Prudential Tax 5.1 .8 3/5 5/5 3.8 4/5 Returns in per cent 9.7 Rank 1/5

Plan Reliance Tax Saver 5.9 2/5

Source: nseindia.moneycontrol.com Table 3.1 indicates the performance evaluation of selected tax saving mutual funds based on one year returns.BNP Paribas Tax Advantage Plan with 9.7percent returns rank first in the list.ICICI Prudential Tax Plan ranks lowest in the table with a percent of .8.

2. Performance Evaluation based on Two year Returns Table 3.2 Scheme Name BNP Paribas Tax Advantage Plan Canara Robeco Equity Tax Saver Franklin India Taxshield ICICI Prudential Tax Plan Reliance Tax Saver 6.5 3/5 7.8 4.3 1/5 5/5 6.9 2/5 Returns in per cent 5.1 Rank 4/5

Source: nseindia.moneycontrol.com Table 3.2 indicates the performance evaluation of selected tax saving mutual funds based on two year returns.As per the table, Franklin India Taxshield ranks first among the selected ELSS with a return of 7.8 percent. ICICI Prudential Tax Plan ranks lowest in the table with a percent of 4.3.

3. Performance Evaluation based on Three year Returns Table 3.3 Scheme Name BNP Paribas Tax Advantage Plan Canara Robeco Equity Tax Saver Franklin India Taxshield ICICI Prudential Tax Plan Reliance Tax Saver 34.0 4/5 34.8 40.6 3/5 1/5 40.5 2/5 Returns in per cent 29.2 Rank 5/5

Source: nseindia.moneycontrol.com Table 3.3 indicates the performance evaluation of selected tax saving mutual funds based on three year returns. ICICI Prudential Tax Plan ranks first in the list with 40.6percent return

4. Performance Evaluation based on Five year Returns Table 3.4 Scheme Name BNP Paribas Tax Advantage Plan Canara Robeco Equity Tax Saver Franklin India Taxshield ICICI Prudential Tax Plan Reliance Tax Saver 9.5 4/5 12.3 10.7 2/5 3/5 15.9 1/5 Returns in per cent 3.9 Rank 5/5