1) INTRODUCTION

Investment in share markets are influenced by the analysis & reasoning which help in
predicting the market to some extent. Over the past years a number of techniques & theories
for analysis have evolved, these combined with modern technology guides the investor. The
big players in the market, like Foreign Institutional Investors, Mutual Funds, etc. have the
expertise for various analytical tools & make use of them. The small investors are not in a
position to benefit from the market the way Mutual Funds can do. Golaghat is not a very
commercially developed area and is still in the developing mode. So, there is enough scope
for mutual funds to capture the market. Generally, here investor’s investments are based on
market sentiments, inside information, through grapevine, tips & intuition. The small
investors depend on brokers and brokerage house for his investments. There is enough scope
on the part of these brokers to learn the movements of the market which leave their client’s
investments too in danger, so there is a need of expertise in the field from the big managers.
These small investors can invest through the Mutual Funds who are more experienced and
expert in this field than a small investor himself.

In recent years, a large number of players have entered into this market. The project has
been carried out to have an overview of Mutual Fund Industry and to understand investor’s
perception about Mutual Funds in the context of their trading preference, explore investor’s
risk perception & find out their preference over the various schemes.

1.1 INDUSTRY PROFILE

Structure of the Indian Mutual Fund industry

The largest categories of Mutual Funds are the ones floated by the private sector and by
Foreign Asset Management Companies. The largest of these are Prudential ICICI AMC and
Birla Sun Life AMC. The aggregate corpus of assets managed by this category of AMCs is in
excess of Rs.350 billion. Earlier the Indian Mutual Fund industry was dominated by the Unit
Trust of India which has a total corpus of Rs.700 billion collected from more than 20 million
investors. UTI was floated by financial institutions and is governed by a special Act of
Parliament. The second largest categories of mutual funds are the ones floated by
nationalized banks. SBI Funds Management floated by the State Bank of India is the largest
of these. GIC AMC floated by the General Insurance Corporation and Jeevan Bima Sahayog

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AMC floated by the LIC are some of the other prominent ones. The aggregate corpus of
funds managed by this category of AMCs is about Rs.200 billion.

2) ABOUT MUTUAL FUNDS

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

2.1) WHY MUTUAL FUNDS

An investor normally prioritizes his investment needs before undertaking an

investment. So, different goals will be allocated in different proportions of the total
disposable amount. Investments for specific goals normally find their way into the debt
market as risk reduction is of prime importance. This is the area for the risk-averse investors
and here, mutual funds are generally the best option. The reasons are not difficult to see. One
can avail of the benefits of better returns with added benefits of anytime liquidity by
investing in open-ended debt funds at lower risk. Many people have burnt their fingers by
investing in fixed deposits of companies who were assuring high returns but have gone bust
in course of time leading to distraught investors as well as pending cases in the Company
Law Board.

This risk of default by any company that one has chosen to invest in, can be minimized
by investing in mutual funds as the fund managers analyze the companies’ financials more
minutely than an individual can do as they have the expertise to do so. They can manage the
maturity of their portfolio by investing in instruments of varied maturity profiles. Since there
is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide
enough liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the
prices of the securities as a result of interest rate variation and one can benefits from any such
price movement.

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 Apart from liquidity, these funds have also provided very good post-tax returns on year
to year basis. On an average debt funds have posted returns over 10 percent over one-year
horizon. The best performing funds have given returns of around 14 percent in the last one-
year period. Though they are charged with a dividend distribution tax on dividend payout at
10 percent with a surcharge of 10 percent, the net income received is still tax free in the
hands of investor

This risk of default by any company that one has chosen to invest in, can be minimized
by investing in mutual funds as the fund managers analyze the companies’ financials more
minutely than an individual can do as they have the expertise to do so.

They can manage the maturity of their portfolio by investing in instruments of varied
maturity profiles. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed
deposits, debt funds provide enough liquidity. Moreover, mutual funds are better placed to
absorb the fluctuations in the prices of the securities as a result of interest rate variation and
one can benefits from any such price movement.

Next comes, the risk takers, risk takers by their very nature, would not be averse to
investing in high-risk avenues. Capital markets find their fancy more often than not, because
they have historically generated better returns than any other avenue, provided, the money
was judiciously invested. Though the risk associated is generally on the higher side of the
spectrum, the return-potential compensates for the risk attached.

Capital markets interest people, albeit not all for there are several problems associated.
First issue is that of expertise. While investing directly into capital market one has to be
analytical enough to judge the valuation of the stock and understand the complex undertones
of the stock. It is very difficult for a small investor to keep track of the movements of the
market. Entrusting the job to experts, who watch the trends of the market and analyze the
valuations of the stocks will solve this problem for an investor.

Next problem is that of funds/money. A single person can’t invest in multiple high-
priced stocks due to lack of adequate funds. This limits him from diversifying his portfolio as
well as benefiting from multiple investments. Here again, investing through MF route enables
an investor to invest in many good stocks and reap benefits even through a small investment.
This not only diversifies the portfolio and helps in generating returns from a number of
sectors but reduces the risk as well. Though identification of the right fund might not be an
easy task, availability of good investment consultants and counselors will help investors take
informed decision.

2.2) How are the Mutual Funds Structured?

The Mutual Funds are structured in two forms: -
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  Company Form: - These forms of mutual funds are more popular in US.

 Trust Form: - In India, mutual funds are organized as Trusts. The Trust is either
managed by a Board of Trustees or by a Trustee Company. There must be at least 4
members in the Board of Trustees and at least 2 / 3 of the members of the board must
be independent. Trustee of one mutual fund cannot be a trustee of another mutual
fund.

2.3 Unit Trusts – Constituents: -

A Mutual Fund is set up in the form of a Trust which has the following constituents:-

1. Fund Sponsor

2. Asset Management Company

3. Other Fund Constituents: -

3.1. Custodian and Depositors

3.2. Brokers

3.3. Transfer Agent

Fund Sponsors

What a promoter is to a company, a sponsor is to a mutual fund. The sponsor initiates

the idea to set up a mutual fund. It could be a financial services company, a bank or a
financial institution. It could be Indian or foreign. It could do it alone or through a joint
venture. In order to run a mutual fund in India, the sponsor has to obtain a license from SEBI.
For this, it has to satisfy certain conditions, such as on capital and profits, track record (at
least five years in financial services), default-free dealings and a general reputation for
fairness. The sponsor must have been profit making in at least 3 years of the above 5 years.
The sponsor appoints the trustees, custodian and the AMC with the prior approval of SEBI
and in accordance with SEBI regulations. Like the company promoter, the sponsor takes big-
picture decisions related to the mutual fund, the sponsor should inspire confidence in you as a
money manager and, preferably, be profitable. Financial muscle, so long as it is
complemented by good fund management, helps, as money is then not an impediment for the
mutual fund- it can hire the best talent, invest in technology and continuously offer high
service standards to the investors.

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Trustees

Trustees are like internal regulators in a mutual fund, and their job is to protect the
interests of the unit holders. Trustees are appointed by the sponsors, and can be either
individuals or corporate bodies. In order to ensure they are impartial and fair, SEBI rules
mandate that at least two-thirds of the trustees be independent, i.e., not have any association
with the sponsor. Trustees appoint the AMC, which subsequently, seeks their approval for the
work it does, and reports periodically to them on how the business being run. Trustees float
and market schemes, and secure necessary approvals. They check if the AMCs investments
are within defined limits and whether the fund’s assets are protected. Trustees can be held
accountable for financial irregularities in the mutual fund.

Asset Management Company (AMC)

An AMC is the legal entity formed by the sponsor to run a mutual fund. The AMC is
usually a private limited company in which the sponsors and their associates or joint venture
partners are the shareholders. The trustees sign an investment agreement with the AMC,
which spells out the functions of the AMC. It is the AMC that employs fund managers and
analysts, and other personnel. It is the AMC that handles all operational matters of a mutual
fund i.e. from launching schemes to managing them to interacting with investors.

There is the head of the fund house, generally referred to as the Chief Executive Officer
(CEO). Under him comes the Chief Investment Officer (CIO), who shapes the fund’s
investment philosophy, and fund managers, who manages its schemes. They are assisted by a
team of analysts, who track markets, sectors and companies. Although these people are
employed by the AMC, it’s the unit holders, who pay their salaries, partly or wholly. Each
scheme pays the AMC an annual ‘fund management fee’, which is linked to the scheme size
and results in a corresponding drop in your return. If a scheme’s corpus is up to Rs.100
Crores, it pays 1.25% of its corpus a year. So, if a fund house has two schemes, with a corpus
of Rs.100 Crores and Rs.200 Crores respectively, the AMC will earn Rs.3.25 Crores (1.25+2)
as fund management fee for that year.

Regulatory requirements for the AMC:

 Only SEBI registered AMC can be appointed as investment managers of mutual

funds.

 AMC must have a minimum net worth of Rs.10 Crores at all times.

 An AMC cannot be an AMC or Trustee of another Mutual Fund.

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 AMCs cannot indulge in any other business, other than that of asset management

 At least half of the members of the Board of an AMC have to be independent.

 The 4th schedule of SEBI Regulations spells out rights and obligations of both trustees
and AMCs.

Custodian & Depositors: -

A custodian handles the investment back office of a mutual fund. Its responsibilities
include receipt and delivery of securities, collection of income, distribution of dividends and
segregation of assets between the schemes. It also track corporate actions like bonus issues,
right offers, offer for sale, buy back and open offers for acquisition. The sponsor of a mutual
fund cannot act as a custodian to the fund. This condition, formulated in the interest of
investors, ensures that the assets of a mutual fund are not in the hands of its sponsor. For
example, Deutsche Bank is a custodian, but it cannot service Deutsche Mutual Fund, its
mutual fund arm.

Brokers

Role of Brokers in a Mutual Fund: -

 They enable the investment managers to buy and sell securities.

 Brokers are the registered members of the stock exchange.

 They charge a commission for their services.

 In some cases, provide investment managers with research reports.

 Act as an important source of market information.

Registrar or transfer agents

Registrars, also known as the transfer agents, are responsible for the investor servicing
functions. This includes issuing and redeeming units, sending fact sheets and annual reports.
Some fund houses handle such functions in-house. Others outsource it to the Registrars;
Karvy and CAMS are the more popular ones. It doesn’t really matter which model your
mutual fund opt for, as long as it is prompt and efficient in servicing you. Most mutual funds,
in addition to registrars, also have investor service centers of their own in some cities.

Some of the investor – related services are:-

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  Processing investor applications.

 Recording details of the investors.

 Sending information to the investors.

 Processing dividend payout.

 Incorporating changes in the investor information.

 Keeping investor information up to date.

3) HISTORY OF INDIAN MUTUAL FUNDS

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 In early 1990s,
Government allowed only public sector banks and institutions to set up mutual funds. In the
year 1992, Securities and exchange Board of India (SEBI) Act was passed. SEBI formulates
policies and regulates the mutual funds to protect the interest of the investors. SEBI notified
regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private
sector entities were allowed to enter the capital market. The history of mutual funds in India
can be broadly divided into four distinct phases: -

First Phase – 1964-87 (Era of the UTI)

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 Crores 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, 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

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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 Crores.

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

With the entry of private sector funds in 1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being. The erstwhile Kothari
Pioneer 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.

The number of mutual fund houses went on increasing, with many national & foreign
mutual funds setting up funds in India. As at the end of January 2003, there were 33 mutual
funds with total assets of Rs. 1, 21,805 Crores. The Unit Trust of India with Rs.44, 541
Crores 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 Crores 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 Crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector funds,
the mutual fund industry has entered its current phase of consolidation and growth. As at the
end of September, 2004, there were 29 funds, which manage assets of Rs.153108 Crores
under 421 schemes.

4) GROWTH IN ASSETS UNDER MANAGEMENT

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 The Assets under Management of UTI was Rs. 67 billion by the end of 1987. The
performance of mutual funds in India through figures is appreciable. The performance figures
have risen to three times higher till April 2004. It rose as high as Rs. 1,540 billion and as for
the last year they hold around 8 lakhs Crore of assets. The net asset value (NAV) of mutual
funds in India declined when stock prices started falling in the year 1992. One should notice,
since only closed-end funds were floated in the market, the investors disinvested by selling at
a loss in the secondary market. The performance of mutual funds in India suffered
qualitatively. The 1992 stock market scandal, the losses by disinvestments and of course the
lack of transparent rules in the whereabouts rocked confidence among the investors.

Funds now have shifted their focus to the recession free sectors like
pharmaceuticals, FMCG and technology sector. Funds collection, which averaged at less than
Rs. 100billion p.a. over 5 year period spanning 1993-98 doubled to Rs210

billion in 1998-99. Total collection for the financial year ending March 2000 reached Rs.
450billion.

India had been at the first stage of a revolution that has already peaked in the U.S.
The figures indicate that in the 1st quarter of the year 1999-2000, mutual fund assets went up
by 115% whereas bank deposits rose by only 17%. The basic fact lies that banks cannot be
ignored and they will not close down completely. Their role as intermediaries cannot be
ignored.

The graph indicates the growth of assets over the years.

Note: While UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the
Unit Trust of India effective from February 2003. The Assets under management of the
Specified undertaking of the Unit Trust of India has therefore been excluded from the
total assets of the industry as a whole from February 2003 onwards.

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 5) TYPES OF MUTUAL FUNDS

Mutual fund schemes may be basically be classified on the basis of its structure and its
investment objective.

5.1) Structure:

Open-ended Funds:-

An open-end fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value
("NAV") related prices. The key feature of open-end schemes is liquidity.

Closed-ended Funds:-

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

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.

5.2) Investment Objective:

Growth Funds:-

The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a majority of their corpus in equities. It has been proven
that returns from stocks, have outperformed most other kind of investments held over the

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long term. Growth schemes are ideal for investors having a long-term outlook seeking growth
over a period of time.

Income Funds:-

The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures and
Government securities. Income Funds are ideal for capital stability and regular income.

Balanced Funds:-

The aim of balanced funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and invest both in equities and fixed income
securities in the proportion indicated in their offer documents. In a rising stock market, the
NAV of these schemes may not normally keep pace, or fall equally when the market falls.
These are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds

The aim of money market funds is 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. Returns on
these schemes may fluctuate depending upon the interest rates prevailing in the market. These
are ideal for Corporate and individual investors as a means to park their surplus funds for
short periods.

5.3) Other Schemes:

Tax Saving Schemes:-

These schemes offer tax rebates to the investors under specific provisions of the Indian
Income Tax laws as the Government offers tax incentives for investment in specified
avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes
are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides
opportunities to investors to save capital gains u/s 54EA and 54EB by investing in Mutual
Funds, provided the capital asset has been sold prior to April 1, 2000 and the amount is
invested before September 30, 2000.

5.4) Special Schemes:

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

Sectoral Schemes:-

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

6) BANKS V/S MUTUAL FUNDS

Mutual Funds are now also competing with commercial banks in the race for retail
investor’s savings and corporate float money. The coming few years will show that the
traditional saving avenues are losing out in the current scenario. Many investors are realizing
that investments in savings accounts are as good as locking up their deposits in a closet. The
fund mobilization trend by mutual funds indicates that money is going to mutual fund in a big
way. In India, mutual fund assets are not even 10 per cent of the bank deposits, but this trend
is beginning to change. This is forcing a large number of banks to adopt the concept of
narrow banking wherein the deposits are kept in Gilts and some other assets which improves
liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not
close down completely. Their role as intermediaries cannot be ignored. A comparison
between the both is made in the Table 1.1

CATEGORY BANKS MUTUAL FUNDS

Returns Low High

Risk Low Moderate

Investment options Less More

Network High penetration Low but improving

Liquidity At a cost Better

Quality of assets Not transparent Transparent

Table 1.1

7) BENEFITS OF MUTUAL FUND INVESTMENT

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1) Professional Management

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

2) Diversification

Mutual Funds invest in a number of companies across a broad cross-section of

industries and sectors. This diversification reduces the risk because seldom do all stocks
decline at the same time and in the same proportion. You achieve this diversification through
a Mutual Fund with far less money than you can do on your own.

3) Return Potential with lower costs

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.

4) 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.

5) Liquidity
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 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.

6) 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.

8) RISKS ASSOCIATED WITH MUTUAL FUNDS

The most important relationship to understand is the risk-return trade-off. Higher the
risk greater the returns/loss and lower the risk lesser the returns/loss. Hence it’s up to the
investor to decide how much risk they are willing to take. In order to do this they must first
be aware of the different types of risks involved with their investment decision. Some of the
possible risks associated are outlined as follow –

a) Market risk
Sometimes prices and yields of all securities rise and fall. Broad outside influences
affecting the market in general lead to this. This is true, may it be big corporations or
smaller mid-sized companies. This is known as Market Risk. A Systematic
Investment Plan (“SIP”) that works on the concept of Rupee Cost Averaging (“RCA”)
might help mitigate this risk.

b) Credit risk

The debt servicing ability (may it be interest payments or repayment of principal) of a

company through its cash flows determines the Credit Risk faced by you. This credit risk is
measured by independent rating agencies like CRISIL who rate companies and their paper.
An ‘AAA’ rating is considered the safest whereas a ‘D’ rating is considered poor credit
quality. A well-diversified portfolio might help mitigate this risk.

c) Inflation risk

Inflation is the loss of purchasing power over time. A lot of times people make
conservative investment decisions to protect their capital but end up with a sum of money
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that can buy less than what the principal could at the time of the investment. This happens
when inflation grows faster than the return on your investment. A well-diversified portfolio
with some investment in equities might help mitigate this risk.

d) Interest rate risk

In a free market economy interest rates are difficult if not impossible to predict.
Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise the
prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising
interest rate environment. A well-diversified portfolio might help mitigate this risk.

e) Political risk

Changes in government policy and political decision can change the investment
environment. They can create a favorable environment for investment or vice versa.

f) Liquidity risk

Liquidity risk arises when it becomes difficult to sell the securities that one has
purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities
as well as internal risk controls that lean towards purchase of liquid securities.
Diversification, simply means, that you must spread your investment across different
securities (stocks, bonds, fixed deposits etc.) and different sectors (auto, textile, IT etc.). This
kind of a diversification may add to the stability of your returns.

9) VALUATION

9.1 Net Asset Value (NAV)

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

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number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring
the “per unit”. We also abide by the same convention.

9.2) Calculation of 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 the units outstanding. The detailed methodology for the calculation of the net asset value is
given below:

NAV = Market value of investments XXX

ADD:-

Current assets and other assets XXX

Accrued income XXX
XXX
XXX
LESS:-
Current liabilities and other liabilities XXX
Accrued expenses XXX
XXX
Net Assets Value XXXX

9.3) Other Important terms

A. BETA RATIO

A Beta ratio is the ratio of movement of securities variably with the market. A high
beta is good or bad depending on the state of the market. If the market sentiments are bullish,
i.e., the market is seeing a rise in general, then a high beta stock is better and if the market
sentiment is bearish then low beta is preferred.

B. R_SQUARED

It’s a statistical measure that represents the rate of percentage of fund or

security movements that are explained by movements in a benchmark index. R-squared
values range from 0 to 100. An R-squared of 100 means that all movements of a security are
completely explained by movements in index

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C. SHARP RATIO

High returns are generally associated with a high degree of volatility. The Sharpe ratio
represents this trade off between risk and returns. At the same time it also factors in the desire
to generate returns, which are higher than those from risk free returns.

D. EXPENSE RATIO

The percentage of total fund assets that is used to cover expenses associated with the
operation of a mutual fund. This amount is taken out of the fund's assets and lowers the return
that fund holders achieve. These expenses include management fees and operating expenses

10) COMPETITION IN MUTUAL FUNDS INDUSTRY

The most important trend in the mutual fund industry is the aggressive expansion of the
foreign owned mutual fund companies and the decline of the companies floated by
nationalized banks and smaller private sector players. Some schemes had offered guaranteed
returns and their parent organizations had to bail out these AMCs by paying large amounts of
money as the difference between the guaranteed and actual returns were huge. The service
levels were also very bad.

The experience of some of the AMCs floated by private sector Indian companies was
also very similar. They quickly realized that the AMC business is a business, which makes
money in a long term and requires deep-pocketed support in the intermediate years. Some
have sold out to foreign owned companies, some have merged with others and there is
general restructuring going on.

The foreign owned companies have deep pockets and have come in here with the
expectation of a long haul. They can be credited with introducing many new practices
such as new product innovation, sharp improvement in service standards and disclosure,
usage of technology, broker education and support etc. In fact, they have forced the
industry to upgrade itself and service levels of organizations like UTI have improved
dramatically in the last few years in response to the competition provided by these.

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11) MAJOR PLAYERS IN MUTUAL FUNDS INDUSTRY

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life
Financial. Sun Life Financial is a global organization evolved in 1871 and is being
represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from
India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment.
It has also crossed an AUM of Rs. 10,000 Crores.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the
largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on
13th of October, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee
Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset
Management Company Limited incorporated on 22nd of June, 1993.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore
fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the
largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of
which 15 have already yielded handsome returns to investors. State Bank of India Mutual
Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs
spread over 18 schemes.

Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the
UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset
Management Company presently manages a corpus of over Rs.20000 Crore. The sponsors of
UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of
India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual
~ 18 ~
Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds
and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The
sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the
Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was
changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various
schemes under which units are issued to the Public with a view to contribute to the capital
market and to provide investors the opportunities to make investments in diversified
securities.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It
contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as
a Trust in accordance with the provisions of the Indian Trust Act, 1882. The Company started
its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan
Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual
Fund

GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a

Government of India undertaking and the four Public Sector General Insurance Companies,
viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The
Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is constituted
as a Trust in accordance with the provisions of the Indian Trusts Act, 1882.

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12) DATA ANALYSIS

AND

INTERPRETATION

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1. Investment in mutual funds

9%
yes

28% no

63% earlier,now
stopped

Interpretation: - The major part of the sample taken has invested in the Mutual
Funds. The demand for the mutual funds have increased in the past few years with many
Foreign players entering in the Indian market, Fidelity, Franklin Templeton, DSP Meryll
Lynch to name few. Still there are few who are not investing in MF.

2. Trading Preference of the Investors

Trading Preference

16% 28%
Speculation
Investment
Both
56%

Interpretation: - The presence in the market is because of two reasons. Either the
investors prefer to speculate and benefit out of it or it is simply to have it as one more
investment avenue just like the fixed deposits, etc. Main purpose of investment in MF by
people was not to speculate. They considered it as a safer avenue for investment rather than
going to Share Market which is much risky as compared to MF. Few still prefer to speculate
and wait for NAVs to appreciate.

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3. Average Investment Period of Investors

Average Investment Period

50% 42%

23% 25%
10%
S1
0%
Less Than 3-9 Months 9 months - More Than
3 months 2 Year 2 Year
Investment Period

Less Than 3-9 Months 9 months - More Than

Series1 23% 10% 42% 25%

Interpretation: - The investment period is very important to increase the profits. The
timing must be right enough to benefit from fluctuations. The smart investor decides it in
advance for how much time he would be keeping his money in the market and when he
should leave squaring-up. Many people consider the investment for 9 months – 2 years as a
right option. Still some want to be invested for over 2 years. The least responded to the 3-9
months period.

4. Risk Taking

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 Interpretation: - “The higher the Risk, the more the Profits”. The people need to take
the risk to enjoy the benefits. Some investors were willing to take lower risk and this was the
reason they gave for investing in the MF. Most of the people would like moderate level of
risk in there investments.

5. Preference in mutual funds

Preference in Mutual Funds

Equity Balanced Income Money Market
ELSS SIP Others

2% 19%
17%

15% 18%
9%
20%

Interpretation: - There are different types of mutual funds available in the market
according to the needs of the investors. There are Equity funds, SIP, Income Funds, Balanced
Funds, etc. The highest sought after fund is the Income fund which offers a regular income
through investments in the Govt. Bonds. It was also seen that Equity Fund which offers
higher returns gives high risk to the investments also and so is moderately invested in. Some
people would like to have Equity Linked Saving Schemes (ELSS). This provides some
exemption in the Tax also.

6. Types of Schemes

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 Type of Schemes

44%

56%

Closed Ended Funds Open Ended Funds

Interpretation: - The schemes offered in the market are of two types, closed ended and
open ended. The more demand was for the Close ended funds with a locking period of around
2-3 years. The exit load refrain the person from quitting earlier.

7. Brand name effectiveness

60% 56%

50%

40%

30% 23%
21%
20%

10%

0%
F Parti... Not Mat...

Interpretation: - From the data collected it is clear that most of the people are not
influenced by the company name while investing in a Fund

8. Influence

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 60% 56%

50%

40%

30% 23% 21%

20%

10%

0%
BY NAV RETURNS Both

Interpretation: - From the data collected it is clear that most of people look at the
returns that the Mutual funds are providing .They look at the returns not the current NAV.
However there is some class of people who look at these parameters and their percentage is
23% and some consider both factors while investing in funds and their percentage is 21%.

9. Experience in the Market

Experience

Less Than a Year

26%

1-4 Years
53%

21% More Than 4

Years

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Interpretation: - The experience in the market was the factor which influenced the
investments. There are very few who have experience of less than a year. These are those
investors who entered into the market after noticing the rise in the market. The achievement
of 12,000 marks by SENSEX was motivational force in this. Major part was having vast
experience that is of more than 4 years. These are the ones who have been in the market and
saw it rising to conquer the 10.000 peak

13) FINDINGS & CONCLUSIONS

The study done was a tool to analyze the present setup and to know the investors
perception regarding investment in Mutual Funds. The study proved fruitful and many facts
came to the light. The following were the findings of the study: -

 Amongst the survey, most of the people who were not investing held their ignorance
responsible for that. They lacked knowledge about these schemes of the mutual
funds. Among others, a no. investors are not willing to take much risk most of them
opted for diversification, followed by reduction in risk, which helps in achieving
long term goals and helps in achieving long term goals respectively

 People with less experience were inclined towards investment in the Mutual Funds. It
attracted as a safer avenue as compared to share market. Young agers were diverted
towards direct share trading.

 The industry is made up by mostly joint ventures between the various funds houses
discussed as above, except for SBI Mutual Fund. Rest of them has multiple sponsors
& trusts.

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 Mutual Funds are more of an investment option than the speculative avenue. People
tend to gain through long investments rather than through short term. The most
alluring feature of MFs were, most of them opted for diversification, followed by
reduction in risk, helps in achieving long term goals and helps in achieving long term
goals respectively i.e. the Income funds, equity and ELSS are among the few top
funds as they suited the above necessities.

 At the survey conducted upon a no. of people, some were already mutual fund
investors or were interested to invest in future and a few remaining are not interested
in it. So, that shows a good market area for the mutual funds & proper eagerness of
people is present in here to use there savings.

Most of the people were from GOLAGHAT town itself. Most look at the returns that
are being given by a Fund. 60% are in this favour and only 23% people are there who
consider current NAV of the fund before investing into a Mutual Fund 17% were such that
choose to move along with the crowd. Experience was the main factor that made them invest
in the mutual funds.

14) Recommendations

What I recommend firstly there should be

[1] Creating an enquiry office for investors of the Fund Market: - This will be a new
step towards a good trust – builder of market widening in the area. After seeing such a boost
in the share market, not only our Adult generation but also the young generation is also so
much excited to enter the share market. Now the actual problem starts as they don’t having
enough knowledge & lacking of experience about the market trends just rush and lose their
money as happened in my case & later they blames the company about the loss. Before this
could happen, proper guidance giving office should be there.

(1) Targeting the perfect crowd for investments: - Mutual funds offer a lot of benefit
which no other single option could offer. But most of the people are not even aware of what
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actually a mutual fund is? They only see it as just another investment option. So the advisors
should try to change their mindsets. The advisors should target for more and more young
investors. Young investors as well as persons at the height of their career would like to go for
advisors due to lack of expertise and time.

[2] Provision for Class Room training for the new investors: - So, to make them
adequate knowledgeable in the field of investments, local stock brokers, colleges & other
Non Governmental Organisations should take initiative and hold seminars for the general
public and support them to enter slowly but surely the market.

[3] Luring the investors by showing him the benefits : - The advisors may try to
highlight some of the value added benefits of MFs such as tax benefit, rupee cost averaging,
and systematic transfer plan, rebalancing etc. these benefits are not offered by other options
singlehandedly. So these are enough to drive the investors towards mutual funds. Investors
could also try to increase the spectrum of services offered.

(4) Reduction in fees structure of the investors: - Now the most important reason for
not availing the services of advisors was spotted was being expensive. The advisors should
try to charge a nominal fee at the beginning. But if not possible then they could go for
offering more services and benefits at the existing rate. They should also maintain their
decency and follow the code of ethics so that the investors could trust upon them. Thus the
advisors should try to attract more and more persons and turn them into investors and finally
their clients.

Note:

The recommendations which I have listed here above are strictly based on the
knowledge of the securities market that I have acquired during preparation of this project. All

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the recommendations are for the improvement of general investors’ knowledge base and for
the mutual funds industry in relation to Golaghat.

The recommendations are purely based on the interviews made & questionnaires
developed by me.

15) LIMITATIONS

There were certain limitations faced during the study.

 Some people were not willing to disclose the investment profile

 The biasness was being taken care of.

 The total no. of people investing overall is very small as compared to those who

don’t.

 The area of sample was decided after taking into consideration the major factors like

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 o Availability of investors.

o Approachability.

o Time available with investor for interaction, etc.

16) ANNEXURE – 1

QUESTIONNAIRE

Name: ...…………………….. Occupation: ………………………

Investment Presently Held:

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Please list the value of the assets in your total investments portfolio :( in Rs.)

Stocks: ______ Mutual Funds: _______

Options: ______ Govt. Securities: _______

Bank Deposits: _______

(1) Over the next 3-5 years, do you expect your annual income to change?

 Increase  Decrease  Remain the same.

(2) Do you invest in Mutual Funds?

 Yes  No  Earlier, now Stooped

(3) What is your Experience in the market?

 Less than a year  1-4 years  More than 4 years

(4) What is your Trading Preference?

 Speculation  Investment  Both

(5) What is your Average investment period?

 Less than 3 months.  3 to 9 months.

 9 months to 2 year.  More than 2 year.

(6) How much Risk are you willing to take?

 High  Low  Moderate

(7) What is your preference in Mutual Funds?

A. Equity. B. Income

C. Money Market Funds D. ELSS

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E. Balanced Funds F. SIP

G. Others

(8) Which type of Mutual funds scheme do you prefer?

 Open Ended Schemes  Closed Ended Schemes

(9) Do you get influenced by the name of Company promoting Mutual Funds?

 No  Yes

(10) Do you get influenced by the returns given by a fund or by the current NAV of a
fund?

 By NAV  By Returns  Both

(11) Any suggestions:

……………………………………………………………........………………………….

…………………………………........……………………………………………..

17) BIBLIOGRAPHY

Sites visited
1. www.mutualfundsindia.com

2. www.indiainfoline.com

3. www.amfiindia.com

4. www.sebi.gov.in

5. www.bseindia.com

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6. www.theeconomictimes.com

7. www.investopedia.com

8. www.moneycontrol.com

Books & Journals Referred

a) Money Outlook’s Guide to Mutual Funds
b) The Economic Times
c) Business Standard
d) ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI) Workbook, Third Edition.

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