A STUDY ON INVESTORS AWARENESS ON LEVEL OF

MUTUAL FUND AND PROMOTION OF S.I.P PLAN

A Project Submitted to
University of Mumbai for partial completion of the degree of
Master in Commerce (Accountancy and Finance)
Under the Faculty of Commerce
.By

PRANAY MAHAPADI

SEAT NO./ROLL NO.:28024

Under The Guidance of

Mr. SANTOSH TIWARI

Ramji Assar Vidyalaya’s

Laxmichand Golwala College of Commerce & Economics,
M.G. Road, Ghatkopar (East),
Mumbai - 400077

December, 2019

I
 A STUDY ON INVESTORS AWARENESS ON LEVEL OF
MUTUAL FUND AND PROMOTION OF S.I.P PLAN

A Project Submitted to
University of Mumbai for partial completion of the degree of
Master in Commerce (Accountancy and Finance)
Under the Faculty of Commerce
.By

PRANAY MAHAPADI

SEAT NO./ROLL NO.:28024

Under The Guidance of

Mr. SANTOSH TIWARI

Ramji Assar Vidyalaya’s

Laxmichand Golwala College of Commerce & Economics,
M.G. Road, Ghatkopar (East),
Mumbai - 400077

December, 2019

II
 LXMICHAND GOLWALA COLLEGE OF
COMMERCE & ECONOMICS

Certificate

This is to certify that Mr. PRANAY PRABHAKAR MAHPADI

has worked and duly completed her/his Project Work for the degree of
Master in Commerce under the Faculty of Commerce in the subject of
Advance Accounting and his project is entitled “A Study On Investors
Awareness On Level Mutual Fund And Promotion Of S.I.P Plan”
under my guidance

I further certify that the entire work has been done by the learner
under my guidance and that no part of it has been submitted previously for
any Degree or Diploma of any University.

It is his own work and facts reported by her/his personal findings

and investigations.

Mr. SANTOSH TIWARI

Date of submission:

III
 Declaration by learner

I the undersigned Mr. PRANAY PRABHAKAR MAHAPADI

here by, declare that the work embodied in this project work titled “ A
Study On Investors Awareness On Level Mutual Fund And Promotion Of
S.I.P Plan”, forms my own contribution to the research work carried out
under the guidance of Mr. SANTOSH TIWARI is a result of my own
research work and has not been previously submitted to any other
University for any other Degree/ Diploma to this or any other University.

Wherever reference has been made to previous works of others, it

has been clearly indicated as such and included in the bibliography.

I, here by further declare that all information of this document has

been obtained and presented in accordance with academic rules and ethical
conduct.

Mr. PRANAY MAHAPADI

Certified by

Mr. SANTOSH TIWARI

IV
 Acknowledgment

To list who all have helped me is difficult because they are so numerous
and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and

fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.

I would like to thank my Principal, Mr. VIJAY MAHIDA for providing

the necessary facilities required for completion of this project.

I take this opportunity to thank our Coordination Mr. VIJAY MAHIDA,

for her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

Mr. SANTOSH TIWARI whose guidance and care made the project
successful.

I would like to thank my College Library, for having provided various

reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion of the project especially my Parents
and Peers who supported me throughout my project.

V
 INDEX

CHAPTER DECSCRIPTION Page

No.

1. INTRODUCTION 01-02

2. LITERATURE REVIEW 03-10

3. RESEARCH METHODOLOGY 11

4. PROFILE OF THE MUTUAL FUND 12-24

INDUSTRY AND THE COMPNY

5. FUNCTION OF THE MUTUAL FUND 25-79

6. ANALYSIS AND INTERPRETION 82-93

7. CONCLUSION
94

8. SUGGESTION AND RECOMMENDATION 95

9. BIBLOGRAPHY 96

10. ANNEXURE 97-99

VI
 INDEX
Figure & Chart List of Figures Page.NO.
Asset Under Management Figure 4.1 19
Mutual Fund Operation Flow Chart Figure 5.1 26
Mutual Fund Structure Figure 5.2 28
Classification of Mutual Fund Figure 5.3 31
Risk V/S Return Graph Figure 5.4 60
Sharpe Ratio Formulae Figure 5.5 63
Jensen’s Measure Formulae Figure 5.6 64
Pass Through Certificate Figure 5.7 72
Systematic Investment Plan Chart Figure 5.8 80
Primary Data Based Pie chart Figure 6.1 83
Primary Data Based Pie chart Figure 6.2 85
Primary Data Based Pie chart Figure 6.3 86
Primary Data Based Pie chart Figure 6.4 87
Primary Data Based Pie chart Figure 6.5 88
Primary Data Based Pie chart Figure 6.6 89
Primary Data Based Pie chart Figure 6.7 90
Primary Data Based Pie chart Figure 6.8 91
Primary Data Based Pie chart Figure 6.9 92
Primary Data Based Pie chart Figure 6.10 93

VII
VIII
 1. INTRODUCTION TO THE TOPIC

In the last decade we have seen enormous growth in the size of mutual fund
industry in India. Especially the private sector has shown tremendous growth. With
unmatched advances on the information technology, increased role of the institutional
investors in the stock market and the SEBI still in its infancy, the mutual fund
industry players gained unparalleled and unchecked power. To ensure the safety of
investment of small investors against whims and fancies of professional fund
managers have become the need of the hour.

1.1. WHAT IS INVESTMENT ?

Trade-off between risk and reward while aiming for incremental gain and
preservation of the invested amount (principal). In contrast, speculation aims at 'high
gain or heavy loss, and gambling at 'out of proportion gain or total loss.' Two main
classes of investment are

 Fixed income investment such as bonds, fixed deposits, preference shares

 Variable income investment such as business ownership (equities), property

ownership

In economics, investment means creation of capital or goods capable of

producing other goods or services. Expenditure on education and health is recognized
as an investment inhuman capital, and research and development in intellectual capital.
Return on investment (ROI) is a key measure of firm's performance.

1
1.2 CHAPTERIZATION

 Chapter 1 : Deals with the crisp Introduction of Topic..

 Chapter 2 : Literature Review

The chapter will provide Information about Studies done
on Respective Issue This Chapter Along with this it deals with the
Need for the Study, Statement of the Study, Objective of the study,
Period of the Study, Research used and Limitations of the study

 Chapter 3 : Research Methodology of the of Data Collected

 Chapter 4 : Portrays the Profiles of the Mutual Fund industry with

History and Mutual Fund.

 Chapter 5 : Contains a Detailed Study of Functioning of Mutual

Fund and Regulatory Authorities, Tax Planning For investors, SIP
Promotion and Benefits of its.

 Chapter 6 : Gives the Analysis and interpretation of the Data

 Chapter 7 : Conclusion of the Research

 Chapter 8 : Suggestion And Recommendation

 Chapter 9 : Bibliography

 Chapter 10 : Annexure

2
 2. Literature Review

1. Ms. Avani Shah and Dr . Narayan Baser (2012) carried out a survey in
Ahmedabad with an objective to study the investor's preference in selection of mutual
funds. They have taken two variables: Age and occupation and tried to find the impact
of these two variables on investors preference towards mutual funds and concluded that
occupation is a variable that affect the investors preference but page does not play any
important role.

2. Soumyasaha and Munmun Day (2011) in their article "Analysis of Factors

affecting investors perception of Mutual fund investment" published in The IUP journal
of Management Research, April 2011 concluded that consumer behaviour is an
important area of research studies, Investors expectation is a very important factor in
this regard that needs to be analysed by all alternative investment avenues. The success
of any mutual fund a popular means of investment depends on how efficiently it has
been able to meet the investor's expectation. MF industry in India has a large untapped
market. Electronic sale of financial products is gaining volumes with the widespread
acceptability of e buying.

3. Chalam G. V. (Dr .) (2003)in his article "Investors Behavioral Pattern of

Investment and Their Preferences of Mutual Funds." Published in SOUTHERN
ECONOMIST, Feb 1, 2003 concluded that of all the sections of the society. the
household group contributes much of the capital, forming the lifeblood for the
economy. According to his analysis, the mutual fund business in India is still in its
embryonic form as they currently account for only 15 % of the market capitalisation.
The success of mutual funds business largely depends on the product innovation,
marketing, customer service, fund management and committed manpower. The
investment pattern of the investors reveals that a majority of the investors prefer real
estate investments followed by mutual fund schemes, gold and other precious metals

3
 4 . Shanmugham (2000) conducted a survey of 201 individual investors to study
the information sourcing by investors, their perceptions of various investment strategy
dimensions and the factors motivating share investment decisions, and reports that
among the various factors. psychological and social factors dominated the economic
factors in share investors decisions.

5 . G.Prathap and Dr . A. Rajamohan have done study on status of awareness

among Mutual Fund Investors in Tamil Nadu And their satisfaction level relating to
various issues like rate of return, liquidity, safety, tax consideration, growth
perspective, capital gain, maturity period etc. The study outlined that mostly the
investors have high level awareness and positive approach toward investing in Mutual
Funds.

4
2.2 NEED FOR THE STUDY

 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are
concentrating on the 'A' class cities. Soon they will find scope in the growing
cities.

 Mutual fund can penetrate rural like the Indian insurance industry with simple
and limited products
.
 SEBI allowing the MF's to launch commodity mutual funds.

 Emphasis on better corporate governance.

 Trying to curb the late trading practices.

 Introduction of Financial Planners who can provide need based advice.

The Indian mutual funds business is expected to grow significantly in the coming
years due to a high degree of transparency and disclosure standards comparable to
anywhere in the world, though there are many challenges that need to be addressed to
increase net mobilization of funds in this sector, as said by Mr. A.P. Kurian, Chairman
of the Association of Mutual Funds of India (AMFI).

5
 Indian Mutual fund industry exhibited 200% growth in the last 10 years from
Rs.470 billion to Rs1400 billion in terms of assets under management (AUM). The
Mutual Funds industry is expected to jump sharply from its present share of 6% of GDP
to 40% in the next 10yrs provided the country's growth rate is consistently above 6%.
The growing investor preference for mutual funds has resulted in the assets under
management of mutual funds growing 8-folds in last 5 years.

Number of foreign MNCs are in the queue to enter the Indian markets like US based
Fidelity Investments, with over US$ trillion assets under management worldwide. Our
saving rate is over 23%, highest in the world. Only channelling these savings in mutual
funds sector is required. There is a big scope for expansion as we have 37 mutual funds
which are much less than US having more than 800.

6
2.3 STATEMENT OF THE PROBLEM

One of the lucrative investment avenues available for investors is mutual fund
nowadays. The problem at hand was to study and measure the awareness level of people
regarding mutual funds in the city. To find out Investors' awareness about Mutual funds
and Promotion of SIP plan. The study includes analysis of the investors on the basis of
their investment objectives, age etc. It also examined the position of MF among
investment avenues available for the investors and the past performances of various
schemes from the active AMCs in Indian market on the basis of NAV & time. So that
it can help the advisors as well as investors to choose the correct portfolio.

7
2.4 OBJECTIVES OF THE STUDY

The major objective of the study was to determine the awareness about benefits
of Mutual funds and to impart information, knowledge and the functioning of mutual
funds among financial advisors.

Following are the specific objectives:

 To know the awareness of mutual funds among Indian investors.

 To evaluate the position of Mutual Fund among investment avenues available

for the investors in Indian market.

 To promote the SIP Scheme (Systematic Investment Plan)

 To come up with recommendations for investors and mutual fund companies in

India based on the above study.

 To know the Investors' awareness level towards Mutual Funds Investment.

 To know the Investors' preference towards Mutual Funds as an Investment

option

 To study the factors responsible for the preference of mutual funds as an

investment option

8
2.5 LIMITATIONS OF THE STUDY

 Every research is incomplete without its own limitations. In this research too
there were some limitations. They are:

 Results are just an indication of the present scenario and may not be applicable
in the future.

 As the study was conducted only in Mulund only. so it can be said that the study
was regionally biased.

 Since sampling was done under the simple random sampling method, where
easily approachable respondents were picked up. So this may not represent the
whole universe.

 Lack of time on the part of respondents for filling up the questionnaire.

 Respondents may fill the partially Incorrect information in questionnaire.

9
2.6 ABSTRACT

The financial securities include ownership securities (like shares, mutual fund
units) and creditorship securities (like debentures, bonds). Ownership securities are
more risky than creditorship securities. Investment decisions relating to ownership
securities involve planning of investment strategies according to the extent of
diversification desired by individuals. Investors can reduce risk and maximize returns
by way of mutual fund investments, enjoying the expertise of professional fund
management. In India, Mutual fund industry is an organised financial system,
accessible to individual investors having varied needs and options. In order to identify
awareness of mutual funds among the investors of Mulund in Mumbai suburban, a
careful collection of primary data through questionnaire was made.

10
 3. RESEARCH METHODOLOGY

This is a descriptive study. Two types of data were taken into consideration i.e.
Secondary data & primary data. My major emphasis was on gathering the primary data.
The secondary data has been used to make things more clear.

 Primary Data: Direct collection of data from the source of information,

technology including personal interviewing, survey etc.

 Secondary Data: Indirect collection of data from sources containing past or

recent past information like Bank's Brochures. Annual publications. Books,
Fact sheets of mutual funds, Newspaper & Magazines etc. The secondary data
was collected to know the theoretical aspect of the mutual funds and also for the
performance evaluation of various mutual fund schemes.

A questionnaire was constructed for survey. Questionnaire consisting of a set of

questions made to be filled by various respondents. My area of the study was Mumbai
(M.H.). The sample consisted of 50 respondents. The sample was drawn from walk in
customers of Mutual Fund, Some private & government banks and offices. College
students. The selection of the respondents was done on the basis of convenient
sampling. The responses were taken through personal interview, telephonic interview

The next step is to extract the pertinent findings from the collected data. I have
tabulated the collected data & developed frequency (Count) distributions. Thus the
whole data was grouped aspect wise and was presented in tabular form. Thus, cross-
tabulation, frequencies & percentages were prepared to render impact of the study.

11
 4. PROFILE OF THE MUTUAL FUND INDUSTRY

4.1.1 BEGINNING OF THE MUTUAL FUND INDUSTRY

Historians are uncertain of the origins of investment funds; some cite the closed-
end investment companies launched in the Netherlands in 1822 by King William I as
the first mutual funds, while others point to a Dutch merchant named Adrian van
Ketwich whose investment trust created in 1774 may have given the king the idea. Van
Ketwich probably theorized that diversification would increase the appeal of
investments to smaller investors with minimal capital. The name of van Ketwich fund,
EENDRAGT MAAKT MAGT, translates to "unity creates strength". The next wave
of near-mutual funds included an investment trust launched in Switzerland in 1849,
followed by similar vehicles which is followed by many kind of companies created in
Scotland in the 1880s. The idea of pooling resources and spreading risk using closed-
end investments soon took root in Great Britain and France, making its way to the
United States in the 1890s. The Boston Personal Property Trust, formed in 1893, was
the first closed-end fund in the U.S. The creation of the Alexander Fund in Philadelphia,
Pennsylvania, in 1907 was an important step in the evolution toward what we know as
the modern mutual fund. The Alexander Fund featured semi-annual issues and allowed
investors to make withdrawals on demand.

12
4.1.2. THE ARRIVAL OF THE MODERN FUND

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts,

heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928,
eventually spawning the mutual fund firm known today as MFS Investment
Management. State Street Investors' Trust was the custodian of the Massachusetts
Investors' Trust. Later, State Street Investors started its own fund in 1924 with Richard
Paine, Richard Saltonstall and Paul Cabot at the helm Saltonstall was also affiliated
with Scudder, Stevens and Clark, an outfit that would launch the first no-load fund in
1928. A momentous year in the history of the mutual fund, 1928 also saw the launch of
the Wellington Fund, which was the first mutual fund to include stocks and bonds, as
opposed to direct merchant bank style of investments in business and trade.

13
4.1.3. REGULATIONS AND EXPANSION

By 1929, there were 19 open-end mutual funds competing with nearly 700
closed-end funds. With the stock market crash of 1929, the dynamic began to change
as highly leveraged closed-end funds were wiped out and small open-end funds
managed to survive.

Government regulators also began to take notice of the fledgling mutual fund
industry. The creation of the Securities and Exchange Commission (SEC), the passage
of the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934
put in place safeguards to protect investors: mutual funds were required to register with
the SEC and to provide disclosure in the form of a prospectus. The Investment
Company Act of 1940 put in place additional regulations that required more disclosures
and sought to minimize grievance of investor of different categories conflicts of
interest.

The mutual fund industry continued to expand. At the beginning of the 1950s,
the number of open-end funds topped 100. In 1954, the financial markets overcame
their 1929 peak, and the mutual fund industry began to grow in earnest, adding some
50 new funds over the course of the decade. The 1960s saw the rise of aggressive
growth funds. with more than 100 new funds established and billions of dollars in new
asset inflows. Hundreds of new funds were launched throughout the 1960s until the
bear market of 1969 cooled the public appetite for mutual funds. Money flowed out of
mutual funds as quickly as investors could redeem their shares, but the industry's
growth later resumed.

14
 Massachusetts Investors Trust (now MFS Investment Management) was
founded on March 21, 1924, and, after one year, had 200 shareholders and $392,000 in
assets. The entire industry, which included a few closed-end funds, represented less
than $10 million in 1924.

The stock market crash of 1929 slowed the growth of mutual funds. In response
to the stock market crash, Congress passed the Security Act of 1933 and the Securities
Exchange Act of 1934. These laws require that a fund be registered with the SEC.

15
4.2. Introduction of Mutual Fund Industry - Global Perspective

The U.S. mutual fund market, with $9.6 trillion in assets under management as
of year- end 2008, remained the largest in the world, accounting for 55 percent of the
$19.0 trillion in mutual fund assets worldwide.

TOTAL NET ASSETS IN U.S. DOLLARS (Millions, end of period)

Table 4.1

COUNTY 2005 2006 2007 2008 2009

WORLD 1,77,71,027 2,18,23,455 261,50,936 18,917,499 2,28,82,716
AMERICA 97,63,921 1,14,85,012 134,42,521 1,05,579,430 1,25,15,691
EUROPE 60,02,261 78,03,906 89,34,864 6,231,116 75,45,531
ASIA 19,39,251 24,56,511 36,78,330 2,037,536 27,15,233
&
PACIFIC
Australia 7,00,068 8,64,254 11,92,992 841,133 11,98,838
China 4,34,063 276,303 3,81,207
Hong Kong 4,60,517 6,31,055 8,18,421
INDIA 40,546 58,219 1,08,582 62,805 1,30,284
Japan 4,70,044 5,78,883 7,13,998 575,327 6,60,666
South Korea 1,98,994 2,51,930 3,29,979 221,992 2,64,573
New 10,332 12,892 14,924 10,612 17,657
Zealand
Pakistan 2,164 4,956 1,985 2,224
Philippines 1,449 1,544 2,090 1,263 1,488
Taiwan 57,301 55,571 58,323 46,116 58,297
AFRICA 65,594 78,026 95,221 69,417 1,06,261
(South
Africa)

16
Note : Components may not sum to total because of rounding.

Source: National mutual fund association; European Fund and Asset Management
Association (EFAMA) provide data for all European countries except Russia.

1 Funds of funds are not included, except for France, Germany. Italy, and
Luxembourg. Home-domiciled funds, except for Hong Kong. New Zealand and
Trinidad & Tobago, which include home and foreign- domiciled funds.

Mutual fund assets worldwide increased 2.3 percent to $22.88 trillion at the end of
2009.

Net cash flow to all funds was $77 billion in the fourth quarter, marking the fifth
consecutive quarter with positive net flows. Net inflows to long-term funds slowed to
$283 billion in the fourth quarter of 2009, from $351 billion in the third quarter. Net
out flows from money market funds also decelerated, with $206 billion of net outflows,
from $283 billion in outflows in the previous quarter. For the year as a whole, net cash
flows into all mutual funds worldwide were $275 billion, on par with the $280 billion
of net inflows experienced in 2008. However, the composition of flows was
considerably different. Long-term funds had net inflows of $912 billion in 2009,
compared to net outflows of $610 billion in 2008. Money market funds had net outflows
of $638 billion in 2009, compared to net inflows of $891 billion in 2008.

The Investment Company Institute compiles worldwide statistics on behalf of

the International Investment Funds Association, and organization of national mutual
fund associations. The collection for the fourth quarter of 2009 contains statistics from
44 countries.

17
4.3.INDIAN MUTUAL FUND INDUSTRY- AN INSIGHT

The concept of mutual funds in India dates back to the year 1963. The era
between 1963 and 1987 marked the existence of only one mutual fund company in India
with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the
Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund
companies in India took their position in mutual fund market. The new entries of mutual
fund companies in India were SBI Mutual Fund. Canara bank Mutual Fund, Punjab
National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund.

The succeeding decade showed a new horizon in Indian mutual fund industry.
By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector
funds started penetrating the fund families. In the same year the first Mutual Fund
Regulations came into existence with re-registering all mutual funds except UTI. The
regulations were further given a revised shape in 1996.

Kothari Pioneer was the first private sector mutual fund company in India which
has now merged with Franklin Templeton. Just after ten years with private sector
players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 37 mutual
fund companies in India.

18
4.4 AT THE BEGINNING

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 of India.
Though the growth was slow, but it accelerated from the year 1987 when Non-UTI
players entered into the Industry.

In the past decade, Indian mutual fund industry had seen a dramatic
improvement, both qualities wise as well as quantity wise. In March 1987, the

Asset under Management (AUM) was Rs.4564 crores. The private sector entry
to the fund family raised the AUM to Rs. 47000 crores in March 1993 and till April
30, 2010; it has reached the height of Rs. 7, 19,133 crores.

Figure 4.1

19
 The Mutual Fund Industry is obviously growing at a tremendous space with the
mutual fund industry can be broadly put into four phases according to the development
of the sector. Each phase is briefly described as under.

 Phase I. Establishment and Growth of Unit Trust of India -

1964-87

Unit Trust of India enjoyed complete monopoly when it was established in the
year 1963 by an act of Parliament, UTI was set up by the Reserve Bank of India and it
continued to operate under the regulatory control of the RBI until the two were de-
linked in 1978 and the entire control was transferred in the hands of Industrial
Development Bank of India

(IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964
(US-64).which attracted the largest number of investors in any single investment
scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit
the needs of different investors. It launched ULIP in 1971, six more schemes between
1981 and 1984, Children's Gift Growth Fund and India Fund (India's first offshore fund)
in 1986, Master share (India's first equity diversified scheme) in 1987 and Monthly
Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's
assets under management grew ten times to Rs. 6700 crores.

 Phase II. Entry of Public Sector Funds – 19871993

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

20
 Table.4.2

Mobilized
Amount Assets Under As % of Gross
1992-93 Mobilized Management Domestic
(In Rs. Crores) (In Rs. Crores) saving
U.T.I 11,057 38,247 5.2%
Public Sector 1,964 8,757 0.9%
Total 1,3021 47,004 6.1%

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

The permission given to private sector funds including foreign fund

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

 Phase IV. Growth and SEBI Regulation - 1996-2004

The mutual fund industry witnessed robust growth and stricter regulation from
the SEBI after the year 1996. The mobilization of funds and the number of players
operating in the industry reached new heights as investors started showing more interest
in mutual funds. Investors' interests are safeguarded by SEBI and the Government
offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds)
Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual
funds in India. The Union

Budget in 1999 exempted all dividend incomes in the hands of investors from
income tax. Various Investor Awareness Programs were launched during this phase,
both by SEBI and AMFI, with an objective to educate investors and make them

21
informed about the mutual fund industry. In February 2003, the UTI Act was repealed
and UTI was stripped of its Special legal status as a trust formed by an Act of
Parliament. The primary objective behind this was to bring all mutual fund players on
the same level.

UTI was reorganized into two parts:

1. The Specified Undertaking

2. The UTI Mutual Fund

Presently Unit Trust of India operates under the name of UTI Mutual Fund and
its past schemes (like US-64, Assured Return Schemes) are being gradually wound up.
However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was
a significant growth in mobilization of funds from investors and assets under
management which is supported by the following data:

Table.4.3

ASSTES UNDER MANAGEMENT (Rs. CRORES)

AS ON U.T.I PUBLIC PRIVATE TOTAL
SECTOR SECTOR
31-March- 53,320 8,292 6,860 68,472
1999

22
  Phase V. Growth and Consolidation - 2004 Onwards

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

Mutual Fund etc. There were 38 funds as at the end of April 2010. This is a
continuing phase of growth of the industry through consolidation and entry of new
international and private sector players.

23
4.5 INDIAN MUTUAL FUND INDUSTRY- TODAY

Thirteen out of 37 fund houses witnesses a growth in average AUM in January,

2010,with Reliance Mutual Fund continuing the largest fund house by asset at Rs. 1.17
trillion. HDFC was at the second spot at Rs. 948 billion, followed by ICICI Prudential
Mutual Fund at Rs. 784 billion. UTI Mutual Fund and Birla Sun Life Mutual Fund
followed with an average AUM of Rs. 745 billion and Rs. 626 billion, respectively. The
share of top 5 MF's in the industry's asset was at 56% while that of top 10 funds' asset
was close to 80% in January 2010

As per AMFI data, UTI Mutual Fund had the highest number of investor folios
at 10 million as of December 2009. The total number of investor folios for the mutual
fund industry stood at 48 million as of December 2009.

The average AUM data analysed for equity oriented schemes showed that
Reliance Growth Fund held the highest corpus of around Rs. 70 billion, followed by
HDFC top 200 fund, Reliance diversified Power Sector fund, HDFC equity fund and
SBI magnum Tax Gain Scheme 993 with an average AUM Rs. 61 billion, Rs.58 billion,
Rs. 55 billion, Rs. 54 billion, respectively.

24
 5. FUNCTION OF THE MUTUAL FUND

What is Mutual Fund?

Mutual fund is a trust that pools the savings of a number of investors who share
a common financial goal. This pool of money is invested in accordance with a stated
objective. The joint ownership of the fund is thus "Mutual", i.e. the fund belongs to all
investors. The money thus collected is then invested in capital market instruments such
as shares, debentures and other securities. The income earned through these investments
and the capital appreciation realized are shared by its unitholders in proportion 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. 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

Investments in securities are spread across a wide cross-section of industries

and sectors and thus the risk is reduced. Diversification reduces the risk because all
stocks may not move in the same direction in the same proportion at the same time.
Mutual fund issues units to the investors in accordance with quantum of money invested
by them. Investors of mutual funds are known as unit holders.

When an investor subscribe for the units of mutual fund, he becomes part owner
of the assets of the fund in the same proportion as his contribution amount put up with
the Corpus (the total amount of the fund). Mutual Fund investor is also known as a
mutual fund shareholder or a unit holder.

25
 Figure 5.1

Any change in the value of the investments made into capital market
instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV)
of the scheme. NAV is defined as the market value of the Mutual Fund assets net of its
liabilities. NAV of a scheme is calculated by dividing the market value of scheme's
assets by the total number of units issued to the investors.

NAV = Market Value of the scheme / Number of unit-holders

Where, Numerator-Market value of investment +receivables + other Accrued Income

+ Other Assets - Accrued Expenses Other Payables Other Liabilities.

26
5.1. SET-UP OF MUTUAL FUNDS:

A mutual fund is set up in the form of a trust, which has sponsor, trustee, Asset
Management Company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unit holders.

Asset management company (AMC) approved by SEBI managers the fund by

making investments in various schemes of the in its custody. The trustees are vested
with the general power of superintendence and direction over AMC. They monitor the
performance and compliance of SEBI regulations by the mutual fund.

SEBI regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e., they should not be associated
with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual
funds are required to be registered with SEBI before they launch any scheme. The
performance of a particular scheme of a mutual fund is denoted by Net Asset Value
(NAV).

27
5.2. MUTUAL FUND STRUCTURE

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
registrar and transfer agents.

Figure 5.2

28
 1. Fund 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 functions to the
trustees.

2. Mutual fund :

The mutual funds constituted as a trust under the Indian trust act, 1881, and
registered with SEBI.

3. 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. Typically it is the latter. 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.

4. 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.

29
 5. 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.

6. Registrars and Transfer Agents :

The registrar and transfer agents handle investor related services such as issuing
units, redeeming units, sending fact sheets and annual reports, and so on. Some funds
handle such functions in house, while others outsource it to be SEBI approved registrar
and transfer agents like Karvy and CAMS. The legal structure and organization of
mutual funds as laid down by SEBI guidelines is as follows.

30
Figure 5.3

31
CLASSIFICATION-I

A. RETURN BASED CLASSIFICATION :

The investors of the mutual fund schemes are made to enjoy a good return in
form of regular dividends or capital appreciation or a combination of these both.

a) Income Funds

Income funds are floated for the interest of investors who want to maximize
current income. These funds distribute periodically the income earned by them, in the
form of either a constant income at relatively low risk or in the form of maximum
income possible with higher risk by the use of leverage.

b) Growth Funds

These Schemes have the objective to achieve an increase in the value of the
underlying investments through capital appreciation, and they invest in growth oriented
securities.

c) Conservative Funds

These funds offer a blend of good average returns and reasonable capital
appreciation. These funds are very popular and are ideal for the investors who want
both growth and income from their investment.

32
B. INVESTMENT BASED CLASSIFICATION

Mutual funds may also be classified on the basis of the kind of securities that
they invest in.

1. Equity Funds:

Equities are a high risk-high return asset class: the same risk profile spills over
to equity funds as well. However investors must take note of the fact that a large number
of variations exist within the 'high risk' equity funds segment. For example a sector fund
would be on the relatively higher scale in the risk-return paradigm when compared to
an index fund, which simply tracks the movements in a chosen benchmark index. These
funds invest most of their investible shares in equity shares of companies and undertake
the risk associated with the investment in equity shares. In a developed market, Equity
funds can be of different categories. For example, "Blue Chip', FMCG, PSUs, etc.

The equity funds category can be further differentiated as follows:

i. Market capitalization-based funds

Market capitalization is defined as the number of shares issued by a company

multiplied by the price of each share. Companies are generally divided into the large
cap, mid cap and small cap segments respectively on the basis of their market
capitalization. Some diversified equity funds are launched with the mandate to invest
in stocks from one or more of the state segment in. the company's market capitalization
becomes the governing force.

33
 ii. Opportunities funds

Fund managers handling opportunities funds have perhaps the most flexible
investment mandates. Opportunities funds can invest in stocks across market segments,
sectors and some are even permitted to invest a significant portion of their corpus in
debt. As the name suggests, the idea is to seek opportunities for clocking gains from
any sector/market segment.

iii. Theme-based funds

Theme based funds are fairly similar to sector funds, however the differentiating
factor is the level of diversification they offer. Instead of concentrating on stocks from
a single sector/industry, their focus lies on a specific theme like globally competitive
Indian companies or multinational corporations operating in India. In terms of
diversification and risk profiles, these companies tread the path between a sector fund
and a conventional diversified equity fund.

iv. Index funds

Index funds are launched with the mandate of tracking benchmark indices like
the BSE Sensex or S&P CNX Nifty. These funds invest in stocks from the index in the
same proportion as the benchmark, thereby offering investors the opportunity to capture
the growth in the chosen index. Index funds are generally more popular in developed
markets where actively managed funds find it difficult to outperform the benchmark
indices as markets are relatively better researched; also their expenses (fees, charges)
tend to be lower vis-à-vis actively managed funds.

34
 v. Fund of Funds

A regular mutual fund invests in equities, bonds and fixed income securities
depending on its objective. Fund of Funds (F.O.F) extend this concept by investing in
units of other mutual fund schemes. By investing in more than one mutual fund they
take diversification to a new level For example an F.O.F could invest in five top
performing equity funds and offer a highly diversified portfolio to the investor.
Similarly others could invest in equity and debt funds simultaneously, thereby offering
a portfolio that is diversified across asset classes. On the flipside. Of investors must be
wary of higher expenses on account of overlapping of costs: FT India Life Stage Fund
is the example of a F.O.F.

vi. Conventional diversified equity funds

We have used the term "conventional diversified equity funds at various places
during the course of this discussion. This is not a variant: instead these are equity funds
in their purest form and might seem rather lack luster in the present scenario. Typically,
a diversified equity fund invests in a number of equity equity related instruments from
various sectors thereby enabling investors to benefit from diversification. HDFC Equity
Fund and Sundaram Growth Fund can be classified as conventional diversified equity
funds.

2. Debt Funds :
These Funds have their portfolio comprising of bonds and debentures (Debt
Instruments). These funds are considered to be very secure with a steady income.

35
 i. Long-term debt funds

Long-term debt funds are conventional debt/bond funds that have been in
existence for as long as equity funds. Investors prefer to invest in debt funds for the
same reasons they choose to invest in equity funds viz. they get benefits of
diversification across debt instruments and the services of a professional fund manager.
In fact, for retail investors. debt funds are one of the most important avenues for
investing in debt securities like corporate bonds and government securities, chiefly
because individual transactions in debt are of a very high value (running in millions of
rupees) and beyond most retail investors. This is unlike equities for instance, where
retail investors can invest on their own in smaller lots.

Debt funds invest across a range of debt/fixed income securities. The corpus of
long-term debt funds comprises mainly of corporate bonds and government securities
(gilts/G-sees).

When these securities have a residual maturity of at least 12 months, they are
classified as long-term debt or longer-dated paper. Debt funds also invest in shorter
dated paper like treasury bills, certificate of deposit (CDs) and commercial paper to
name a few,

ii. Short-term debt funds

There is a category of investors who have two critical needs that short-term debt
funds help achieve. One - they want to be invested for the short-term - less than 6
months. Two over this time frame, they are looking at preserving capital with a return
that is superior to that of a fixed deposit of a comparable tenure. The reason why short-
term debt funds can preserve capital better than long term debt funds is because they
are invested in debt instruments of a shorter tenure.

36
 iii. Liquid funds

Liquid funds invest in very short-term debt instruments maturing in 30-45 days.
Typically this includes Treasury bills and call money. Liquid funds serve needs quite
similar to that of short-term debt funds, only difference is that liquid fund investors
have an even shorter investment time frame, at times as short as one day. If investors
are looking at being invested for more than a month, they can consider short-term debt
funds for a marginally higher return.

iv. Gilt Funds

a. Long-term gilt funds:

A long-term government securities and invests primarily in government paper

(gilt/G Sec) with a residual maturity of over 12 months. Gilt funds have a higher risk
profile than conventional debt funds because their investments are limited to a
particular segment of the debt market and they cannot diversify across other segments
like corporate bonds.

b. Short-term gilt funds:

A short-term gilt fund invests primarily gilts of a shorter tenure (less than 12
months). The rationale for investing in short-term gilt funds is similar o that of short-
term debt funds. The reason investors choose short-term gilt funds over short-term debt
funds is because gilts can provide a higher capital appreciation vis-à-vis bonds.

v. Dynamic debt funds

Dynamic debt funds attempt to combine the benefits of debt funds and gilt
funds. They can invest across corporate bonds and gilts without any restrictions. They
are distinct from conventional debt funds that invest in gilts and corporate bonds

37
because these funds usually maintain a cap on their gilt investments. Dynamic debt
funds tend to increase their gilt investments in times of economic stability as gilt prices
tend to have a more lucrative spread (i.e. difference between the buy and sell prices).
Investments in dynamic debt funds should be made with a time frame of at least 12
months.

vi. Long-term floating rate funds

Floating rate funds invest in debt instruments that have their coupon rates
adjusted at periodic intervals. These instruments are called 'floating rate instruments'.
The floating rate paper is benchmarked against a reference point like the MIBOR
(Mumbai Inter-bank Offered Rate) for instance. Changes in the MIBOR are a cue for
the coupon rate on the floating rate paper to be reset accordingly.

vi .i. Short-term floating rate funds

Short-term floating rate funds work on the same lines as long-term floating rate
funds except that they invest in floating rate paper of shorter tenure (less than 12
months). If investors are looking to be invested across a shorter time frame of 1-6
months, short-term floating rate funds should be preferred over their long-term
counterparts. Templeton Floating Rate Fund (Short Term) is an example of a short-term
floating rate fund.

Vi .ii. Fixed Maturity Plans (FMP)

Fixed maturity plans (FMPs) are another 'invention that became a necessity to
counter interest rate instability, a problem that has become acute over the last two years.
Typically, FMPs are close-ended funds. They invest across debt instruments to arrive
at a pre-determined yield.

38
 Pre-determined because the yield is announced beforehand to investors. So
FMPs have defined investment tenure. The benefit of investing in FMP is that the
investor knows in advance the return that he will generate on his investment. FMPs
have investment tenure ranging from less than a year to more than 10 years.

vii. Monthly Income Plan (MIP)

As a mutual fund category. monthly income plans (MIPs) are a relatively recent
phenomenon. MIPs are hybrid funds that invest predominantly in debt instruments with
a small portion of assets invested in equities. The equity component is expected to act
as a 'kicker' that will make the MIP outperform a conventional debt fund. The rationale
for a hybrid product like an MIP came to the fore because debt funds weren't adding a
lot of value to the risk-averse investor's portfolio. So we had MIPs being launched that
gave the fund manager a mandate to invest 5-30% of assets in equities. Conventional
MIPs invest about 5-15% of assets in equities with their aggressive counterparts
investing as high as 20-30% in equities. Several fund houses have two distinct MIPs
catering to different investor groups

3. Balanced Fund :

These funds have their portfolio consisting of a balanced mix of equity and
bonds. The composition of these funds may vary depending upon the outlook of the
market. Balanced funds invest their corpus in both equity and debt instruments in a
predetermined ratio, say 60:40. An aggressive balanced fund would typically hold a
higher portion of its assets in equities maybe as high as 70% of the total assets. On the
other hand, a 'disciplined' balanced fund would maintain a conservative equity
allocation during most times.

39
 1. Sector Based Funds

There are funds that invest in a specified sector of economy and they specialize
in the said sector. However, they run the risk of not being able to diversify. Sector based
funds are aggressive growth funds which make investments on the basis of assessed
bright future for a particular sector. The specialty of sector funds rather oddly lies in
the fact that they go against the very grain of mutual fund investing i.e. holding a
diversified portfolio. That is why you will find some Asset Management Companies
that swear against sector funds. Sector funds are launched with the intention of
capitalizing on opportunities in a single sector.

C. OTHER FUNDS

1. Commodity Funds

It will invest directly in commodities or through shares the commodity

companies or through commodity futures contract. Most common example of such
fund is precious metal fund, Gold funds invest in Gold, Gold futures or shares of gold
mines

2. Exchange Traded Funds

It combines the best features of open end and closed structure. It tracks a market index
and trade like a stock on the stock market. ETFs are not the index funds.

3. Real Estate Funds

It can invest in real estate, Fund real estate developers, Buy shares of housing finance
companies, Buy securitized assets.

40
CLASSIFICATION II

A. Based on their investment objective:

1. Growth Schemes :

Aim to provide capital appreciation over the medium to long term. These schemes
normally invest a majority of their funds in equities and are willing to bear short term
decline in value for possible future appreciation. These schemes are not for investors
seeking regular income or needing their money back in the short term. Ideal for:

 Investors in their prime earning years.

 Investors seeking growth over the long term.

2. Income Schemes -

Aim 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.

Ideal for :

 Retired people and others with a need for capital stability and regular income.
 Investors who need some income to supplement their earnings.

41
 3. Balanced Schemes -

Aim to provide both growth and income by periodically distributing a part of the
income and capital gains they earn. They invest in both shares and fixed income
securities in the proportion indicated in their offer documents. In a rising stock market,
the NAV of these schemes not normally keep pace or fall equally when the market falls.

Ideal for:

 Investors looking for a combination of income and moderate growth.

4. Money Market / Liquid 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 interbank call money. Returns on these
schemes may fluctuate, depending upon the interest rates prevailing in the market.

Ideal for :

 Corporate and individual investors as a means to park their surplus funds for
short period or awaiting a more favourable investment alternative.

42
B. OTHER SCHEMES:

1. Capital Protection Oriented Schemes :

Capital Protection Oriented Schemes are the schemes that endeavour to protect the
capital as the primary objective by investing in high quality fixed income securities and
generate capital appreciation by investing in equity/equity related instruments as a
secondary objective. The first Capital Protection Oriented Fund in India, Franklin
Templeton Capital Protection Oriented Fund opened for subscription on October 31,
2006

2. Gold Exchange Traded Fund (GETF) :

Gold Exchange Traded Fund offers investors an innovative, cost efficient and
secure way to access the gold market. Gold Exchange Traded Fund are intended to offer
investors a means of participating in the gold bullion market by buying and selling units
on the Stock Exchanges, without taking physical delivery of gold. The first Gold ETF
in India, Benchmark GETF, opened for subscription on February 15, 2007 and listed
on the NSE on April 17, 2007.

3. Quantitative Funds :

A quantitative fund is an investment fund that selects securities based on

quantitative analysis. The managers of such funds build computer based models to
determine whether or not an investment is attractive. In a pure "quant shop" the final
decision to buy or sell is made by the model.

43
 However, there is a middle ground where the fund manager will use human
judgment in addition to a quantitative model. The first Quant based Mutual Fund
Scheme in India, Lotus Agile Fund opened for subscription on October 25, 2007.

4. Funds Investing Abroad :

With the opening up of the Indian economy, Mutual Funds have been permitted
to invest in foreign securities/ American Depository Receipts (ADRs) / Global
Depository Receipts (GDRS). Some of such schemes are dedicated funds for
investment abroad while others invest partly in foreign securities and partly in domestic
securities. While most such schemes invest in securities across the world there are also
schemes which are country-specific in their investment approach.

44
 Table.5.1

Type of Objective Risk Investment Who should Investment

Mutual Portfolio invest horizon

Fund
Money Liquidity+ Negligible Treasury Bills, Those who 2 days-

Market Moderate+ Certificate of park their fund 3weeks

Reservation of Deposits, in current
Capital Commercial accounts or
Papers, Call Money short-term
Bank deposits
Short- Liquidity + Little Call Money, Those with 3 weeks -3
term Moderate Interest Commercial paper surplus short- months

Funds Income Rate ,Treasury Short term funds

Term Government
(Floating
Bills
-sort-
term)
Gilt Security Interest Government Salaries & 12 Month

Funds & Income Rate and Securities Conservative and more

Risk Investors
Equity Long term High Risk Stocks Aggressive 3 years plus

Funds Capital investors.

Appreciation With long
term outlook
Index To generate N.A.V Portfolio indices Aggressive 3 years plus

Funds returns that are varies with investors.

commensurate index
with return of performance
respective
indices
Balance Regular Income Capital Balanced ratio of Moderate & 2 years plus
Funds Market Risk equity and debt aggressive
and Interest fund to ensure
Rate Risk higher return at
lower risk

45
 ADVANTAGES OF MUTUAL FUND

 Portfolio Diversification
 Professional management
 Reduction / Diversification of Risk
 Liquidity
 Flexibility & Convenience
 Reduction in Transaction cost
 Safety of regulated environment
 Choice of schemes
 Transparency

 DISADVANTAGE OF MUTUAL FUND

 No control over Cost in the Hands of an Investor

 No tailor-made Portfolio
 Managing a Portfolio Funds
 Difficulty in selecting a Suitable Fund Scheme

46
5.3 COST INVOLVED IN MUTUAL FUNDS

As with any business, running a mutual fund involves costs – including

shareholder transaction costs, investment advisory fees, and marketing and distribution
expenses. Funds pass along these costs to investors by imposing fees and expenses. It
is important that you understand these charges because they lower your returns. Some
funds impose "shareholder fees" directly on investors whenever they buy or sell shares.
In addition, every fund has regular, recurring. fund-wide operating expenses." Funds
typically pay their operating expenses out of fund assets - which mean that investors
indirectly pay these costs. An investor must know that there are certain costs involved
while investing in mutual funds.

1. OPERATING EXPENSES/EXPENSE RATIO

These refer to cost incurred to operate a mutual fund. Advisory fee is paid to
investment managers, audit fees to chartered 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.

Expenses = Operating expenses / Average Net Assets

For instant, if funds Rs. 100 crores and expenses Rs. 20 Lakh. Then expenses
ratio is 2% expenses ratio is available in the offer document and fro historical per unit
statistics included in the financial results of the fund which are published by annually,
un audited for the half year ending September 30 and audited for the physically year
end 1"March .

47
 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.

2. 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 agent's 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

a) Front-end load

b) Back-end load

a) FRONT-END LOAD :

It is a onetime fixed fee paid by an investor when buying a Mutual funds scheme.
It determines public offer price which intern decides how much of your initial
investment actually get invested the standard practice of arriving a public offer price is
as follows.

Public offer price = Net Asset Value / (1-front end load)

48
 Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2%
front end load at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-
0.02) is Rs. 10,20. So only 980 units are allowed to the investor.

Number Of Units Allotted = Amount Invested / Public Offer Price

10,000/10.20=980 units at a NAV of Rs. 10.

This means units worth 9800 are allotted to him an initial investment Rs.10,000
front end loads tend to decrease as initial investment amount increase.

b) BACK END LOAD :

May be fixed fee redemption or a contingent deferred sales charge a redemption

so load continues so long as the redeeming or selling of the units of a fund does not take
place in the event of a back end load is applied. The redemption price is arrived or using

following formula

Redemption Price = Net Asset Value / (1+back end load)

Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges
a 2% back, end load at a NAV per units of Rs. 10 using the formula Redemption price
10/(1+0.02)=Rs. 9.8 s, what the investor gets in hand is 9800(9.8*1000).

49
 3.CONTINGENT DEFERRED SALES CHARGE (CDSC) :

Contingent deferred sales charge 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%.

4. 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.

The AMC reports to the trustees who safeguard the interests of investors in the
mutual fund and also ensure compliance of the operations of the fund with SEBI
guidelines. They not only monitor performance of the AMC but also oversee operations
of the custodian and transfer agent. The AMC receives a fee for its services. Currently.
SEBI permits a maximum fee of 1.25%p.a. of the asset value of the fund size less than
Rs.1 bn.

50
 As the asset size of the fund increases, this falls progressively to 0.75%p.a. of
the incremental asset value. In addition, SEBI also permits AMCs to charge expense
related to the management of the fund up to certain limits. These are of two kinds of as
follows:

Up front expenses related to fund marketing and initial account opening - up to

maximum of 6%of the investment amount (termed as "load"). Recurring expenses,
which together with the management fees should not exceed certain limits. The
maximum is 2.5% per year for equity funds and 2.25% per year for debt funds. As the
asset size increases, the maximum limit falls progressively to 1.75% of the incremental
assets

Table 5.2

First 1.bn Next 3. bn Next 3. bn Over 7. Bn

2.5% 2.25% 2.00% 1.75%

Both the management fee and the expenses are charged directly to the mutual fund
scheme.

51
5.4 TAX SAVING ON MUTUAL FUND

There are two types of Tax-saving funds,

1. Equity-linked savings schemes (ELSS)

2. Pension funds

1.Equity-linked savings schemes (ELSS)

ELSS schemes are basically diversified equity schemes, which have a three-
year lock-in. Investments are subject to a maximum of Rs 10,000-receive a tax rebate
of 0 to 20 per cent depending on the income slab. As these are equity instruments they
have the maximum risk-return potential among all asset classes. What this means is that
return has a propensity to vary with great intensity. Although an average tax-saving
mutual fund delivered 16.36 per cent in 2002, the range of returns was extreme. Thus,
in that year, the best tax-saving fund delivered 42.61 per cent and the worst was down
3.16 per cent. The best way to overcome the vagaries of stock markets is to diversify.
Diversification can be across funds and, more importantly, across time periods. By
investing regularly ever year in these funds one can set up a long-term systematic
investment plan.

2. Pension funds

The other route for saving taxes is pension funds, even though there are
currently only two such funds in operation, Franklin Templeton's Templeton India
Pension Fund and UTI Retirement Benefit Plan.

52
 Introduced for the first time in 1997. pension funds are hybrid schemes, which
have a debt orientation, and carry the same tax benefit as ELSS, From the tax point of
view, bonus units are conceptually similar to dividend stripping, but somewhat more
complex. Bonus units that a fund issue is deemed to have been acquired at zero cost.
Thus, whenever they are sold, the entire sale price is treated as capital gains.

However, at the time of issue of bonus, the NAV of the fund drops in a
proportion that is identical to the ratio at which bonus funds are issued. This fall in the
NAV is a capital loss as far as the original units are concerned and it is here that tax
benefits can be realized. The original units can be sold off with a capital loss, which
can be used to set off other capital gains. The bonus units carry a high tax liability
though since you will pay taxes on the entire sale price.

Here's an example. Suppose you hold 10,000 units of a fund whose NAV is Rs
15. You made the purchase less than a year ago at an NAV of Rs 12. If today you decide
to sell these units, you will fetch Rs 1.5 Lakh, out of which Rs 30,000 will be short-
term capital gain. On this, you are likely to pay a tax of Rs 9,000-30 per cent of gains.

53
Tax Benefits of Mutual Fund

 ELSS (Equity linked saving scheme)

 3 year lock in period

 Minimum investment of 90% in equity markets at all times

 So ELSS investment automatically leads to investment in equity

shares

 Open or closed ended

 Eligible under Section 80 C up to Rs. 1 Lakh allowed

 Dividends are tax free

 Benefit of Long term Capital gain taxation

54
5.5 TAX RULES FOR MUTUAL FUND INVESTORS

Table 5.3

PARTICULAR INDIVIDUALS CORPORATES N.R.I8

DIVIDEND ( In Hands of Investors )

Equity Schemes** Tax Free Tax Free Tax Free
Debt Schemes Tax Free Tax Free Tax Free

DIVIDEND DISTRIBUTION TAX ( by schemes)

Equity Schemes** Nil Nil Nil
Debt Schemes 12.% + 10% 20% + 10% 12.% + 10%
surcharge + 3% surcharge + 3%cess surcharge + 3%
cess=14.163% =22.66% cess=14.163%
Money Market & 25% + 10% surcharge + 3% cess = 28.325%
Liquid Schemes

LONG TERM CAPITAL GAINS

Equity Schemes** Nil
Debt Schemes 10% Without Indexation Or 20% With Indexation, whichever
Is lower + 10% surcharge +3% cess
Without Indexation 11.33%
With Indexation 22.66%

SHORT TERM CAPITAL GAINS

Equity Schemes** 15% Flat + 10% Surcharge + 3% cess =16.995%
Debt Schemes 30% + 10% + 3% = 33.99%

Note: The short term/long term capital gain tax will be deducted at the time of
redemption of units in case of NRI investors only. **STT @ 0.25% will be deducted
on equity funds at the time of redemption and switch to the other

schemes. ** assuming highest tax slab rate

55
5.6 VARIOUS INVESTMENT OPTIONS IN MUTUAL FUNDS
OFFER

To cater to different investment needs; Mutual Funds offer various investment

options.

Some of the important investment options include:

1. Growth Option :

Dividend is not paid-out under a Growth Option and the investor realizes only
the capital appreciation on the investment (by an increase in NAV).

2. Dividend Pay-out Option :

Dividends are paid-out to investors under the Dividend Pay-out Option.

However, the NAV of the mutual fund scheme falls to the extent of the dividend pay-
out.

3. Dividend Re-investment Option :

Here the dividend accrued on mutual funds is automatically re-invested in

purchasing additional units in open-ended funds. In most cases mutual funds offer the
investor an option of collecting dividends or re-investing the same.

56
 4. Retirement Pension Option :

Some schemes are linked with retirement pension. Individuals participate in

these options for themselves, and corporate participate for their employees.

5. Insurance Option :

Certain Mutual Funds offer schemes that provide insurance cover to investors
as an added benefit

57
5.7 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 is up to you. the investor to decide how much risk you are willing to take.
In order to do this you must first be aware of the different types of risks involved with
your investment decision.

 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.

 CREDIT RISK

The debt servicing ability (may it be interest payment 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.

 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 that can buy less than what the principal could at the time of the investment.

58
 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.

 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.

 POLITICAL RISK

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

 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.

You have been reading about diversification above, but what is it? Diversification
the nuclear weapon in your arsenal for your fight against Risk. It simply means that you
must spread your investment across different securities (stocks, bonds, money market
instruments, real estate, fixed deposits etc.) and different sectors (auto, textile,
information technology etc.).

59
 This kind of a diversification may add to the stability of your returns, for example
during one period of time equities might underperform but bonds and money market
instruments might do well enough to offset the effect of a slump in the equity markets.
Similarly the information technology sector might be faring poorly but the auto and
textile sector might do well and may protect you principal investment as well as help
you meet your return objectives.

RISK V/S RETURN

Figure 5.4

60
5.8 INVESTMENT STRATEGIES IN MUTUAL FUNDS

1. Systematic Investment Plan (S.I.P) :

Under this a fixed sum is invested cash month on a fixed date of a month.
Payments are made through post-dated cheques or direct/auto debit facilities. The
investor gets fewer units when the NAV is high and more units when the NAV is low.
This is called as the benefit of Rupee Cost Averaging (RCA)

2. Systematic Transfer Plan (STP) :

Under this an investor invests in debt oriented fund and gives instructions to
transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.

3. Systematic Withdrawal Plan (SWP) :

If someone wishes to withdraw from a mutual fund then he can withdraw a

fixed amount each month.

61
5.9 VOLATILITY MEASURES FOR EQUITY RELATED FUNDS

With the increasing number of mutual fund schemes, it becomes very difficult
for an investor to choose the type of funds for investment. By using some of the
portfolio analysis tools, he can become more equipped to make a well informed choice.
There are many financial tools to analyse mutual funds. Each has their unique strengths
and limitations as well. Therefore, one needs to use a combination of these tools to
make a thorough analysis of the funds.

One can make a judgment on the quality of a fund from various ratios such as
standard deviation, Sharpe ratio, beta, Treynor measure, R-squared, alpha, portfolio
turnover ratio, total expense ratio etc.

 PORTFOLIO TURNOVER

A measure of how frequently assets within a fund are bought and sold by the
managers. Portfolio turnover is calculated by taking either the total amount of new
securities purchased or the amount of securities sold - whichever is less - over a
particular period, divided by the total net asset value (NAV) of the fund. The
measurement is usually reported for a 12-month time period.

The portfolio turnover measurement should be considered by an investor before

deciding to purchase a given mutual fund or similar financial instrument. After all, a
firm with high turnover rate will incur more transaction costs than a fund with a lower
rate. Unless the superior asset selection renders benefits that offset the added transaction
costs they cause, a less active trading posture may generate higher fund returns.

62
  SHARPE RATIO

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted

performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as
that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and
dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio
formula is:

Figure 5.5

The Sharpe ratio tells us whether a portfolio's returns are due to smart
investment decisions or a result of excess risk. This measurement is very useful because
although one portfolio or fund can reap higher returns than its peers, it is only a good
investment if those higher returns do not come with too much additional risk.

The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance
has been. A negative Sharpe ratio indicates that a risk-less asset would perform better
than the security being analysed.

63
  TREYNOR RATIO

A ratio developed by Jack Treynor that measures returns earned in excess of that
which could have been earned on a riskless investment per each unit of market risk.

The Treynor ratio is calculated as:

= (Average Return of the Portfolio - Average Return of the Risk-Free

Rate) / Beta of the Portfolio

In other words, the Treynor ratio is a risk-adjusted measure of return based on

systematic risk. It is similar to the Sharpe ratio, with the difference being that the
Treynor ratio uses beta as the measurement of volatility.

 JENSEN'S MEASURE

A risk-adjusted performance measure that represents the average return on a

portfolio over and above that predicted by the capital asset pricing model (CAPM),
given the portfolio's beta and the average market return. This is the portfolio's alpha. In
fact, the concept is sometimes referred to as "Jensen's alpha."

Figure 5.6

64
If the definition above makes your head spin, don't worry: you aren't alone! This is a
very technical term that has its roots in financial theory. The basic idea is that to analyse
the performance of an investment manager you must look not only at the overall return
of a portfolio, but also at the risk of that portfolio.

For example, if there are two mutual funds that both have a 12% return, a
rational investor will want the fund that is less risky. Jensen's measure is one of the
ways to help determine if a portfolio is earning the proper return for its level of risk. If
the value is

 positive, then the portfolio is earning excess returns. In other words, a positive
value for
 Jensen's alpha means a fund manager has "beat the market" with his or her stock
picking skills.

 ALPHA (a)

A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price

risk) of a mutual fund and compares its risk-adjusted performance to a benchmark
index. The excess return of the fund relative to the return of the benchmark index is a
fund's alpha.

 A positive alpha of 1.0 means the fund has outperformed its benchmark index
by 1%.
 Correspondingly, a similar negative alpha would indicate an underperformance
of 1%.

65
  BETA (B)

A measure of the volatility, or systematic risk, of a security or a portfolio in

comparison to the market as a whole. Beta is used in the capital asset pricing model
(CAPM), a model that calculates the expected return of an asset based on its beta and
expected market returns.

Beta is calculated using regression analysis, and you can think of beta as the
tendency of a security's returns to respond to swings in the market. A beta of 1 indicates
that the security's price will move with the market. A beta of less than I means that the
security will be less volatile than the market. A beta of greater than 1 indicates that the
security's price will be more volatile than the market. For example, if a stock's beta is
1.2, it's

theoretically 20% more volatile than the market.

 R-SQUARED

R-squared is the square of 'R' (ie. Coefficient of Correlation). It describes the level
of association between the fun's market volatility and market risk. The value of R-
squared ranges from to. A high R-squared (more than 0.80) indicates that beta can be
used as a reliable measure to analyse the performance of a fund. Beta should be ignored
when the r-squared is low as it indicates that the fund performance is affected by factors
other than the markets.

66
 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 the index. A high
R-squared (between 85 and 100) indicates the fund's performance patterns have been
in line with the index. A fund with a low R-squared (70 or less) doesn't act much like
the index.

Table

For Example

Table 5..4

Case 1 Case2

R2 0.65 0.88

B 1.2 0.9

In the above tableR2 is less than 0.80 in case 1 implies that it would be wrong
to mention that the fund is aggressive on account of high beta. In case 2, the R-squared
is more than 0.85 and beta value is 0.9. It means that this fund is less aggressive than
the market.

A higher R-squared value will indicate a more useful beta figure. For example, if a
fund has an R-squared value of close to 100 but has a beta below 1, it is most likely
offering higher risk-adjusted returns. A low R-squared means you should ignore the
beta.

67
  STANDARD DEVIATION

In simple terms standard deviation is one of the commonly used statistical

parameter to measure risk, which determines the volatility of a fund. Deviation is
defined as any variation from a mean value (upward & downward). Since the markets
are volatile, the returns fluctuate every day. High standard deviation of a fund implies
high volatility and a low standard deviation implies low volatility.

 TOTAL EXPENSE RATIO

A measure of the total costs associated with managing and operating an investment
fund such as a mutual fund. These costs consist primarily of management fees and
additional expenses such as trading fees, legal fees, auditor fees and other operational
expenses. The total cost of the fund is divided by the fund's total assets to arrive at a
percentage amount, which represents the TER:

Total Expense Ratio = (Total Fund Costs/Total Fund Assets)

68
5.10 MEASURES FOR DEBT FUNDS

 YIELD TO MATURITY – YTM

The rate of return anticipated on a bond if it is held until maturity date. YTM is
considered a long-term bond yield expressed as an annual rate. The calculation of YTM
takes into account the current market price. par value, coupon interest rate and time to
maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes
this is simply referred to as "yield" for short.

An approximate YTM can be found by using a bond yield table. However, because
calculating a bond's YTM is complex and involves trial and error, it is usually done by
using a programmable business calculator.

 WEIGHTED AVERAGE MATURITY (WAM)

The weighted average of the time until all maturities on mortgages in a mortgage-
backed security (MBS). The higher the weighted average to maturity, the longer the
mortgages in the security have until maturity. Also known as "average effective
maturity". The measure is calculated by totalling each mortgage value represented by
the MBS. The weights of each mortgage are found by dividing the value of each into
the total of all. To arrive at the WAM number the weight of each security is multiplied
by the time until maturity of each mortgage, and then all the values are added together.
For example say an MBS has three mortgages valued at $1,000, $2,000 and $3,000 (a
total of $6,000) and mature in one, two and three years respectively. The weights of
these are 1/6 (1,000/6,000), 1/3 (2,000/6.000) and 1/2 (3,000/6.000). The WAM is 2
1/3 years (1/6 x 1year + 1/3 x 2 years + 1/2 x 3 years).

69
5.11 DEBT OPTIONS

 CERTIFICATE OF DEPOSIT (CD)

A savings certificate entitling the bearer to receive interest. A CD bears a maturity

date, a specified fixed interest rate and can be issued in any denomination. CDs are
generally issued by commercial banks and are insured by the FDIC. The term of a CD
generally ranges from one month to five years.

A certificate of deposit is a promissory note issued by a bank. It is a time deposit

that restricts holders from withdrawing funds on demand. Although it is still possible
to withdraw the money, this action will often incur a penalty.

 COMMERCIAL PAPER

An unsecured, short-term debt instrument issued by a corporation, typically for the

financing of accounts receivable, inventories and meeting short-term liabilities.
Maturities on commercial paper rarely range any longer than 270 days. The debt is
usually issued at a discount, reflecting prevailing market interest rates.

Commercial paper is not usually backed by any form of collateral, so only firms
with high-quality debt ratings will easily find buyers without having to offer a
substantial discount (higher cost) for the debt issue.

 DEBENTURE

In law, a debenture is a document that either creates a debt or acknowledges it. In

corporate finance, the term is used for a medium- to long-term debt instrument used by
large companies to borrow money. In some countries the term is used interchangeably

70
 With bond, loan stock or note. Debentures are generally freely transferable by the
debenture holder. Debenture holders have no voting rights and the interest paid to them
is a charge against profit in the company's financial statements.

 CONVERTIBLE DEBENTURES

A type of loan issued by a company that can be converted into stock by the holder
and. under certain circumstances, the issuer of the bond. By adding the convertibility
option the issuer pays a lower interest rate on the loan compared to if there was no
option to convert. These instruments are used by companies to obtain the capital they
need to grow or maintain the business.

Convertible debentures are different from convertible bonds because debentures are
unsecured; in the event of bankruptcy the debentures would be paid after other fixed
income holders. The convertible feature is factored into the calculation of the diluted
per-share metrics as if the debentures had been converted. Therefore, a higher share
count reduce metres such as earnings per share, which is referred to as dilution.

 NON CONVERTIBLE DEBENTURES

Non-convertible debentures, which are simply regular debentures, cannot be

converted into equity shares of the liable company. They are debentures without the
convertibility feature attached to them. As a result, they usually carry higher interest
rates than their convertible counterparts.

 ZERO-COUPON BOND

A debt security that doesn't pay interest (a coupon) but is traded at a deep discount,
rendering profit at maturity when the bond is redeemed for its full face value. Also
known as an "accrual bond".

71
 Some zero-coupon bonds are issued as such, while others are bonds that have been
stripped of their coupons by a financial institution and then repackaged as zero- coupon
bonds. Because they offer the entire payment at maturity. zero-coupon bonds tend to
fluctuate in price much more than coupon bonds.

 PASS THROUGH CERTIFICATE

Pass-Through Certificates (PTCS) are instruments that evidence the ownership of two
or more Equipment Trust Certificates. In other words, Equipment Trust Certificates
may be bundled into a pass-through structure as a means of diversifying the asset pool
and/or increasing the size of the offering. The principal and interest payments on the
Equipment

Trust Certificates are "passed through" to certificate holders.

Figure 5.7

72
  TREASURY BILL

Treasury bills (or T-Bills) mature in one year or less. Like zero-coupon bonds, they
do not pay interest prior to maturity: instead they are sold at a discount of the par value
to create a positive yield to maturity.

Regular weekly T-Bills are commonly issued with maturity dates of 28 days (or 4
weeks, about a month). 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks,
about 6 months), and 364 days (or 52 weeks, about 1 year). Treasury bills are sold by
auctions held weekly.

73
5.12 REGULATION OF MUTUAL FUNDS IN INDIA

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

Safeguarding the interest of investors is one of the duties of SEBI. Consequently

SEBI (Mutual Fund) Regulations, 1996 and certain other guidelines have been issued
by SEBI that sets uniform standards for all mutual funds in India.

ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

The mutual fund industry has a trade association called Association of Mutual
Funds in India (AMFI) model on the lines of a Self-Regulating Organization (SRO)
with a view to promoting and protecting the interest of mutual funds and their unit-
holders. increasing public awareness of mutual funds, and serving the investor's interest
by defining and maintaining high ethical and professional standards in the mutual funds
industry'. AMFI plays an important role in disciplining members and assist the
regulatory authority in protecting investors' interest.

AMFI works through a number of committees, some of which are standing

committees to address areas where there is a need for constant vigil and improvements
and other which are ad-hoe committees constituted to address specific issues. These
committees consist of industry professionals from among the member mutual funds.
AMFI has now decided to become a self-regulatory organization since it has worked
very effectively as an industry body.

74
 At last but not the least association of mutual fund of India also disseminate
information on Mutual Fund Industry and undertakes studies and research either
directly or in association with other bodies.

5.12 PROMOTION OF SIP SCHEME (Systematic Investment Plan)

What is Systematic Investment Plan SIP?

A Systematic Investment Plan (SIP) is a highly popular facility offered by

mutual funds where you can automatically invest a fixed sum of money in a mutual
fund at pre-specified intervals of time (weekly, monthly, etc.) by giving a one-time
instruction. Similar to a Recurring Deposit (RDs) for mutual funds, SIPs help you invest
regularly and with discipline; they also take away the hassle of having to manually
make multiple investments as the whole process is automated. In simple it is Periodic
Investment

Periodic investments are referred to as a SIP. That means that every month, you
commit to investing, say. Rs 1,000 in your fund. At the end of a year, you would have
invested Rs 12,000 in your fund. Let's say the NAV on the day you invest in the first
month is Rs 20; you will get 50 units. The next month, the NAV is Rs 25. You will get
40 units. The following month, the NAV is Rs 18. You will get 55.5 units.

So, after three months, you would have 145.56 units. On an average, you would
have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer
units per Rs 1,000. When the NAV falls, you get more units per Rs 1.000.

75
5.13 SIP CASE STUDY

 Market hit a high of 5450 in Mar 2000,

 Market crashed to lows of 2600.
 It took almost 4.5 years for the market to scale back the level of 5400 in Sep
2004.

Let's see how the SIP investors fared in that scenario.

INVESTOR 1 - PANIC INVESTORS

These investors had started their SIP of Rs. 2000 in Mar 2000 peak. With the
decline in the market they panicked & stopped their SIP in a span of 13 months.

Table 5.5

SIP Start Date Mar-00

SIP End Date Mar-01
No. of Instalments 13

Scheme Name Instalments Value in Return

march 01
Reliance Growth 26,000 18,846 -46.1%
H.D.F.C. 26,000 20,870 -33.9%
Equity Fund
ICICI Technology 26,000 14,944 -67.3%
Fund
Birla New 26,000 14,596 -69.0%
Millennium

76
* These investors actually made a loss on their SIPs by stopping it in the downturn.

INVESTOR 2- SMART INVESTORS

These investors had started their SIP of Rs. 2000 in Mar 2000 peak. They continued
their

SIP and kept on investing in the SIPs.

Table 5.6

SIP Start Date Mar-00

No. of Instalments 55

Scheme Name Instalments Value in Return

march 01
Reliance Growth 1,10,000 3,25,000 50.5%
H.D.F.C. 1,10,000 2,53,337 38.1%
Equity Fund
ICICI 1,10,000 1,74,300 20.5%
Technology
.Fund
Birla New 1,10,000 1,64,224 17.8%
Millennium

These investors have made phenomenal returns even though market has delivered no
return (From 5400 level in Mar 2000 to 5400 level in Sep 2004)

77
INVESTOR 3 - NEW INVESTORS

These investors started their SIP of Rs. 2000 in Mar 2001, 1 year after the fall in the
market

Table 5.7

SIP Start Date Mar-00

No. of Instalments 43

Scheme Name Instalments Value in Return

march 01
Reliance Growth 86,000 2,48,528 66.8%
H.D.F.C. 86,000 1,90,341 48.3%
Equity Fund
ICICI 86,000 1,50,844 33.2%
Technology
Fund
Birla New 86,000 1,43,954 30.3%
Millennium

 Investors who have Started SIP in Lean Period have Made Fantastic Returns

78
5.14 DO WE REALLY NEED TO BE AFRAID WHILE INVESTING
IN SIP?

Table 5.8

Sr..N0 Date Reliance Sensex % % Particular

Growth Change Change
Fund(Rs) RGF
1 31-mar-96 10,000 3366
2 5-Dec-96 7,630 2812 -23.70% -16.14% Initial Fail
3 22-Feb-00 71,918 5883 842.57% 109.21% Tech rally
4 21-Feb-01 42,061 2600 -41.51% -55.80% 9/11 Attack
5 14-Jan-04 1,28,092 6194 204.53% 138.23% Recovery
6 17-May04 1,07,723 4505 -15.90% -27.27 Govt change
7 14-Day-04 1,74,912 6325 62.37% 40.40% Recovery
8 10-May-06 4,36,782 12612 149.71% 99.40% India Re Rating
9 14-jun-06 2,93,623 8929 -32.78 -29.20% Heavy Selling
10 07-Jan-08 6,17,573 20812 110.33% 133.08% All Time High
11 31-jan-09 2,76,947 9424 -55.16% -54.57 US Sub Prime
Total Absolute Returns 3529.72% 235.14% Inception Of
CAGR(Annual Return) 29% 8.30% Current

 Investments of Rs.10000/- becomes Rs.276947/- even after several falls in the

NAV

 during the period of 13 Years. And finally, with the current correction, its NAV
has

79
  fallen by 50% 3 times over the period of past 14 years.

 Even after the current fall, the fund is still delivering a CAGR of 29% widely
beating the index which has given 8.3% returns.

 The Absolute returns from the fund even after the current fall are staggering
3529.72%

 Equity investments through Mutual Funds deliver 15-20% of returns over Long
term.

 Bull and bear market cycles are nature of Equity markets and are going to
continue in future also

80
5.15 Systematic Investment Plan (SIP):

Systematic Investment Plan is an Investment route offered by Mutual Funds

wherein one can Invest a fixed amount in a Mutual Fund scheme at regular intervals-
say once a month or once a quarter instead of making a lump-sum investment. The
instalment amount could be as little as INR 500 a month and is Similar to a recurring
deposit. It's convenient as you can give your bank standing instructions to debit the
amount every month.

SIP has been gaining popularity among Indian MF investors. Sit helps in
investing in a disciplined manner without worrying about market volatility and timing
the market. Systematic Investment Plans offered by Mutual Funds are easily the best
way to enter the world of investments for the

Figure 5.8

81
 6. ANALYSIS AND INTERPRETATION

PROFILE OF THE RESPONDENTS Table6.1

Gender Male 37
Female 13
Age 18-24 Years 36
25-34 Years 11
35-44 Years 02
45-60 Years 01
More than 60 Years 00
Occupation Service 29
Business 04
Student _
Professional 12
Retired 00
Income Level < 2 Lakhs 10
2-5 Lakhs 30
5-8 Lakhs 06
8-12 Lakhs 03
>12 Lakhs 01
Savings Yearly <5% 18
5-10 % 12
10-15% 13
15-20% 05
> 20% 02
Education H.S.C 11
Graduate 22
Post Graduate 10
professional 06
Other ( Not Answered ) 01
Marital Status Married 34
Single 16
Source : Primary data

82
6.1. What is your primary objective for your investment?

Table6.2

Responses Count Percent Valid Percent Cumulative

Percent
Preservation 04 08.0 08.0 08.0
of Principal
Regular 10 20.0 20.0 28.0
Income
Growth 19 38.0 38.0 66.0
& Income
Conservative 05 10.0 10.0 76.0
Growth
Aggressive 10 20.0 20.0 96.0
Growth
Tax Benefit 2 04.0 04.0 100.0
Total 50 100.00 100.0 _
Source : Primary data

Figure 6.1

83
 04% investors are more interested in tax benefit in their primary objective for
investment
 20% investors look for aggressive growth in their primary objective for
investment
 10% investors look for conservative growth in their primary objective for
investment
 38% investors look for growth & income both in their primary objective for
investment
 20% investors look for regular income in their primary objective for investment
 8 % investors look for preservation of principal in their primary objective for
investment

 So the majority of respondents look for growth & income as a primary objective
for investment.

84
6.2. Do you Have Proper knowledge about the Mutual Funds?

Table6.3

Responses Count Percent Valid Percent Cumulative

Percent
Yes 42 84.0 84.0 84.0
No 08 16.0 16.0 100.0
Total 50 100.0 100.0 _
Source : Primary data

Figure 6.2

 There are 33% investors have knowledge about MFs

 There are 67% investors don't have knowledge about MFs

 So the majority of respondents know about MFs.

85
6.3. Do you know that mutual fund is related to share market?

Table6.4

Responses Count Percent Valid Percent Cumulative

Percent
Yes 38 76.0 76.0 76.0
No 09 18.0 18.0 94.0
Don’t Know 03 06.0 06.0 100.0
Total 50 100.0 100.0 _
Source : Primary data

Figure 6.3

 76% investors have knowledge about the relationship of MFs & Stock
Exchange
 18% investors don't have knowledge about the relationship of MFs & Stock
Exchange
 06 % investors ticked No idea,

 So the majority of respondents know about the relationship of MFs & Stock
Exchange

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6.4. Have you ever invested in mutual fund?

Table6.5

Responses Count Percent Valid Percent Cumulative

Percent
Yes 32 64.0 64.0 64.0
No 18 36.0 36.0 100.0
Total 50 100.0 100.0 _
Source : Primary Data

Figure 6.4

 64% investors invested in MFs

 36% investors never invested in MFs

 So the majority of respondents never invested in MFs

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6.5 .If no: What is (are) the reason?

Table 6.6

Responses Count Percent Valid Cumulative

Percent percent
Never Tough about it 08 16.0 16.0 16.0
Lack of Knowledge 06 12.0 12.0 28.0
Risky 10 20.0 20.0 48.0
Do not have enough 21 42.0 42.0 90.0
savings
Other Reasons 05 10.0 10.0 100.0
Total 50 100.0 100.0 _
Source : Primary Data

Figure 6.5

 16% investors say that they never thought about investing in MFs
 12% investors say that they have very less knowledge about MFs
 20% investors say that it's very risky to invest in MFs
 42% investors don't have enough savings for investing in MF

 So the majority of respondents don’t have enough knowledge about MFs

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6.6. Why do you prefer investment in mutual fund to other investment
avenue? Table 6.7

Responses Count Percent Valid Cumulative

Percent percent
Lack of expertise in stock market 09 18.0 18.0 18.0
Better return over a long period 15 30.0 30.0 48.0
Liquidity 11 22.0 22.0 70.0
Tax efficiency 08 16.0 16.0 86.0
Transparency 05 10.0 10.0 96.0
Other Response 02 04.0 04.0 100.0
Total 50 100.0 100.0 _
Source : Primary Data

Figure 6.6

 20% investors prefer MF because of Lack of expertise in Stock Market

 30 % investors prefer MF because of Better returns over a long period of time
 18% investors prefer MF because of Liquidity
 25% investors prefer MF because of Tax efficiency of MF
 12% investors prefer MF because of Transparency in MF

 So the majority of respondents prefer MF because of Better Returns over a Long

Period of Time & its Liquidity

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6.7. What kind of investment schemes you prefer in Mutual Fund?

Table 6.8

Responses Count Percent Valid Cumulative

Percent percent
Growth schemes 15 30.0 30.0 30.0
Balanced schemes 07 14.0 14.0 44.0
ELSs 10 20.0 20.0 64.0
Sector specific schemes 04 08.0 08.0 72.0
Income schemes 13 26.0 26.0 98.0
Other 01 02.0 02.0 100.0
Total 50 100.0 100.0 _
Source : Primary Data

Figure 6.7

 30% investors prefer growth schemes

 14% investors prefer balanced schemes
 20% investors prefer ELSS schemes
 08% investors prefer sector specific schemes
 26% investors prefer income schemes

 So the majority of respondents prefer growth schemes.

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6.8. Which medium is preferred by you to invest in Mutual fund?

Table 6.9

Responses Count Percent Valid Cumulative

Percent percent
Lump Sum Investment 08 16.0 16.0 16.0
Systematic Investment 26 52.0 52.0 68.0
Both 15 30.0 30.0 98.0
Other 1 02.0 02.0 100.0
Total 50 100.0 100.0 _
Source : Primary Data

Figure 6.8

 52% Respondent preferred Systematic Investment Plan

 16% Respondent preferred Lump Sum Investment
 30% Respondent preferred Both S.I.P & Lump Sum Investment

 Majority of Respondent preferred Systematic Investment Plan

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6.9. What has been your experience with returns expected from an
investment in Mutual Funds?

Table 6.10

Responses Count Percent Valid Cumulative

Percent percent
Very Low 07 14.0 14.0 14.0
Low 06 12.0 12.0 26.0
Medium 22 44.0 44.0 70.0
High 09 18.0 18.0 88.0
Very High 03 06.0 06.0 94.0
Other 03 06.0 06.0 100.0
Total 50 100.0 100.0 _
Source : Primary Data

Figure 6.9

 44% of Respondents expected Medium returns from investment in MF

 18% of Respondents expected High Returns from investment in MF
 14 %of Respondents expected Very Low returns from investment in MF
 12 % of Respondents expected Low returns from investment in MF
 06 % of Respondents expected Very High returns from investment in MF

 Majority of Respondents expect Medium returns from investment in MF

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6.10. Which of the following source of Information Influenced you
most in selection of Mutual funds.

Table 6.11

Responses Count Percent Valid Cumulative

Percent percent
Broker 04 08.0 08.0 08.0
Financial Advisors 10 20.0 20.0 28.0
Friends Advice 12 24.0 24.0 52.0
Newspaper/Financial Journals 07 14.0 14.0 66.0
T.V/ Internet 15 30.0 30.0 96.0
Other 02 04.0 04.0 100.0
Total 50 100.0 100.0 _
Source : Primary Data

Figure 6.10

 30% Respondent Influenced by T.V/Internet where as 24% are Influenced by

Friends advice. 20 % Respondent Influenced by Financial Advisor

 14% are Influenced by Newspapers and Financial journal. 8% Respondent

Influenced by Broker 4% Respondent Influenced by Other Sources

 Majority of Respondent Influenced by T.V/Internet and then followed by

Friends advice

93
 7. CONCLUSION

After making the whole report I am concluding that this project measures the
awareness of Mutual Funds and its service. As Mutual Funds having good options and
schemes, so we can grow it with creating the awareness among the people. It is also
good for those who want to make their future in it. For that the only thing you need is
to give time to your money to grow, they will surely give good returns and the other
thing is the knowledge of the all product and schemes.

As there is lesser no. of people investing in the Mutual Fund in comparison of

the other instruments of the investment like L.I.C. post, savings a/c etc. So there is a
good chance of its growing. Even Mutual Fund is also having the product as substitute
of it. So the industry can get the benefit of it.

The industry cans aware more investors to invest in Mutual Fund. They can do
these through seminars, advertisement etc. They can also increase their sales by
collaborating with many banks. They can also make more advisors by giving them more
commission

94
 8. SUGGESTIONS & RECOMMENDATIONS
After seeing the whole Data analysis and findings my suggestions for the industry are
shown as below.

 The companies should give the knowledge regarding Mutual Fund through
various sources like more advertisement, TV programmes etc. about what it is?
How it works? What is its benefit for us with its advertisement or in
programmes. Because many people have heard about it but don't know what it
is?

 The companies should also attract the low Income people by showing them the
benefits of the liquidity funds for the short Term to attract them.

 As per survey Bank creates higher awareness so the Mutual Fund companies
should more collaborate with the Banks.

 The companies should also attract the customer through different schemes who
having knowledge about the Mutual Funds but not investing in Mutual Funds.

 The companies should also make aware the people about the AMFI exam and
should motivate them to be financial adviser to get more business.

 The companies should give information regarding Tax benefit to Invest into
Mutual Fund.

 The companies should organize seminar to give information about Mutual Fund
and should distribute brochures having detail of schemes of Mutual Fund.

95
 9. BIBLOGRAPHY

 Websites

 www.utimf.com
 www.indiafund.net
 www.amfindia.com
 www.moneycontrol.com

 Books

 Mutual Fund in India (by H .Sadhak )

 Mutual Fund The Money Multiplier
 The Management of Mutual Funds (by G.V Satya Shekhar)

96
 10. ANNEXURE

1. What is your primary objective for your investment?

 Preservation of Principal
 Regular Income
 Growth & Income
 Conservative Growth
 Aggressive Growth

2. Do you know about the Mutual Funds?

 Yes
 No

3. Do you know that mutual fund is related to share market?

 Yes
 No
 Don’t Know

4. Have you ever invested in mutual fund?

 Yes
 No

97
5 .If no: What is (are) the reason?

 Never thought about it

 Lack of Knowledge
 Risky
 Do not have enough saving
 Other

6. Why do you prefer investment in mutual fund to other investment

avenue?

 Lack of expertise in stock Market

 Better return over a long period of time
 Tax Efficiency
 Transparency
 Other

7. What kind of investment schemes you prefer in Mutual Fund?

 Growth Scheme
 Balanced Scheme
 E.L.S.S
 Sector Specific Scheme
 Income Scheme

98
8. Which medium is preferred by you to invest in Mutual fund?

 Lump Sum Investment

 Systematic Investment Plan(S.I.P)
 Both

9. What has been your experience with returns expected from an

investment in Mutual Funds?

 Very Low
 Low
 Medium
 High
 Very High

10. Which of the following source of Information Influenced you

most in selection of Mutual funds

 Broker
 Financial Advisor
 Friend Advice
 Newspaper / Financial Journal
 T.V / Internet
 Other

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