PROJECT REPORT ON

MUTUAL FUND

FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

AWARD OF

BACHELOR OF BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF SUBMITTED BY

PROF . NEHA ZAIDI VANSHIKA
JUNEJA
SCHOOL OF BUSINESS

BBA 2012-2015

SCHOOL OF BUSINESS
GALGOTIAS UNIVERSITY
 PROJECT REPORT ON

MUTUAL FUND

FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR

THE AWARD OF

BACHELOR OF BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF SUBMITTED BY

PROF . NEHA ZAIDI VANSHIKA JUNEJA
SCHOOL OF BUSINESS

BBA 2012-2015

SCHOOL OF BUSINESS
 GALGOTIAS UNIVERSITY
CERTIFICATE FROM FACULTY GUIDES

This is to certify that the project report on MUTUAL FUND has been prepared by
MS. VANSHIKA JUNEJA under my supervision and guidance. The project report
is submitted towards the partial fulfillment of 3 years, full time Bachelor Of
Business Administration.

Name PROF. NEHA ZAIDI

Signature
Date
 DECLARATION

I , VANSHIKA JUNEJA , enrollment no -1203101139, student of BBA of School

Of Business Galgotias University, Greater Noida, hereby declared that the project
report on MUTUAL FUND is an original authenticated work done by me.

I further declare that it has not been submitted elsewhere by any other person in
any of the Institutes for the award of any degree or diploma.

Name VANSHIKA JUNEJA

Date 2ND MAY , 2015
 ACKNOWLEDGEMENT

Learning and acquiring knowledge has no boundaries. It is one resource that

never gets exhausted, the more you preach, the better it gets and the more it lives
down through ages. From the day since man set his foot on earth, learning
process had begun and is still evolving making life happier and memorable. One
can only lead a person to things he needs to know, but never can teach him how
to learn. Experience through failures and hardship makes a man perfect.

I extend heartiest thanks to Prof. Neha Zaidi who initiated this interesting
project. She helped me to solve all the difficulties confronted at various stages.
 CONTENTS

1. Introduction

o History of Mutual Fund 2

o An overview on Mutual Fund 4

2. Literature Review 10

3. Research Methodology 52

4. Conclusion and Findings 57

5. Recommendations 58

6. Bibliography 60

7. Annexure 62
 INTRODUCTION

HISTORY OF INDIAN MUTUAL FUND INDUSTRY

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

First Phase – 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by the Reserve
Bank of India and functioned under the Regulatory and administrative control of the Reserve
Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of
India (IDBI) took over the regulatory and administrative control in place of RBI. The first
scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of
assets under management.

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in December
1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.

Third Phase – 1993-2007 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993
SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual
Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)
Regulations 1996. The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2007, there were 33 mutual funds with total assets of Rs.
1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was
way ahead of other mutual funds.

Fourth Phase – since February 2007

In February 2007, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets
under management of Rs.29,835 crores as at the end of January 2007, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations. The
second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with
SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile
UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with
the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and
with recent mergers taking place among different private sector funds, the mutual fund industry
has entered its current phase of consolidation and growth. As at the end of October 31, 2007,
there were 31 funds, which manage assets of Rs.126726 crores under 386 schemes.
Note:

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit

Trust of India effective from February 2007. The Assets under management of the Specified

Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the

industry as a whole from February 2007 onwards.

 CONCEPT OF MUTUAL FUND

A mutual fund is an investment vehicle which allows investors with similar (one could say
mutual) investment objectives, to pool their resources and thereby achieve economies of scale
and diversification in their investing. Economies of Scale means lower costs on a per unit basis
by doing things "in bulk" which spreads fixed costs over greater volume. A mutual fund achieves
lower per unit costs for professional money management and for transaction charges, than small
investors could achieve on their own. This can increase return to the investor. Diversification is
just another way of saying "Don’t put all your eggs in one basket." A mutual fund allows its
investors to a small percentage of many different investments. So in a well-diversified mutual
fund no one particular investment dominates its performance. Poor results from some
investments are likely to be offset by good results from other investments. Therefore, the unit
value of a mutual fund will not fluctuate as sharply as the value of any one of its investments.
This can reduce risk to the investor.

A mutual fund is the ideal investment vehicle for today’s complex and modern financial
scenario. Markets for equity shares, bonds and other fixed income instruments, real estate,
derivatives and other assets have become mature and information driven. Price changes in these
assets are driven by global events occurring in faraway places. A typical individual is unlikely to
have the knowledge, skills, inclination and time to keep track of events, understand their
implications and act speedily. An individual also finds it difficult to keep track of ownership of
his assets, investments, brokerage dues and bank transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally qualified and
experienced staff that manages each of these functions on a full time basis. The large pool of
money collected in the fund allows it to hire such staff at a very low cost to each investor. In
effect, the mutual fund vehicle exploits economies of scale in all three areas - research,
investments and transaction processing. While the concept of individuals coming together to
invest money collectively is not new, the mutual fund in its present form is a 20 th century
phenomenon. In fact, mutual funds gained popularity only after the Second World War.
Globally, there are thousands of firms offering tens of thousands of mutual funds with different
investment objectives. Today, mutual funds collectively manage almost as much as or more
money as compared to banks.

Despite these advantages mutual funds do not guarantee do not return, nor do they eliminate risk
to investors. The return and risk of a mutual fund depend primarily on the type of securities
instruments in which it invests, and secondarily on how well it is managed by the company
offering it.

Typically a mutual fund scheme is initiated by a sponsor who recognizes and markets the fund. It
pre specifies the investment objective of the fund and the risks associated with the costs involved
in the process and broad rules for entry into and exit from the fund and other areas of operation.
In India as in most nations the sponsors need approval from the regulator viz. SEBI. A sponsor
then hires an asset management company to invest the funds according to the investment
objective. It also hires another entity to the custodian of the assets of the funds and perhaps a
third one to handle registry work.

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

There are many entities involved and the diagram below illustrates the organizational set
up of a mutual fund:

ADVANTAGES OF MUTUAL FUNDS

Mutual funds provide following benefit to investors :

PROFESSIONAL MANAGEMENT

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

DIVERSIFICATION
Mutual Funds invest in a number of companies across a broad cross-section of industries and
sectors. This diversification reduces the risk because seldom do all stocks decline at the same

time and in the same proportion. You achieve this diversification through a Mutual Fund with far
less money than you can do on your own.
CONVENIENT ADMINISTRATION

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

RETURN POTENTIAL

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

LOW COSTS

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

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

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

FLEXIBILITY
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans, you can systematically invest or withdraw funds according to your needs and
convenience.
 DISADVANTAGES OF INVESTING
THROUGH MUTUAL FUNDS

While the benefits of investing through mutual funds far outweigh the disadvantages, an investor
and his advisor will do well to be aware of a few shortcomings of using the mutual funds as
investment vehicles.

No control over costs: an investor in a mutual fund has no control over the overall cost of
investing. He pays investment management fees as long as he remains with the fund, albeit in
return for the professional management and research. Fees are payable even while the value of
his investments may be declining. a mutual fund investor also pays fund distribution cost, which
he would not incur in direct investing.however,this shortcoming only means that there is a cost to
obtain the benefits of mutual fund services.

No tailor made portfolios: investor who invests on their own can build their own portfolios of
shares and bonds and other securities. Investing through funds means he delegates this decision
to the fund managers. The very high net worth individuals or large corporate investors may find
this to be a constraint in achieving their objectives. However, most mutual fund managers help
investors overcome this constraint by offering families of funds-----a large number of different
schemes---within their own management company. An investor can choose from different
investment plans and construct a portfolio of his choice.

Managing a portfolio of funds: availability of a large number of funds can actually mean too
much choice for the investor. He may again need advice on how to select a fund to achieve his
objectives, quite similar to the situation when he has to select individual shares or bonds to invest
in.
 ROLE OF MUTUAL FUNDS
IN THE FINANCIAL MARKET

The brief review in the preceding section of financial system and structural changes in the
market suggests that Indian Financial institutions have played a dominant role in assets
formation and intermediation, and contributed substantially in macroeconomic development. In
this process of development, Indian mutual funds have emerged as strong financial
intermediaries and are playing a very important role in bringing stability to the financial system
and efficiency to resource allocation. Mutual funds have opened new vistas to investors and
imparted much-needed liquidity to the system.

Mutual funds are the fastest growing institutions in the household saving sector. Growing
complications and risk in the stock market, rising tax rates and increasing inflation have pushed
household towards mutual funds. The active involvement of mutual funds in promoting
economic development can be seen not only in terms of their participation in the savings market
but also in their dominant presence in the money and capital market.

A developed financial market is critical to overall development and mutual funds play an active
role in promoting a healthy capital market. We have also noted that Indian investors have moved
towards more liquid, growth-oriented tradable instrument like share/ debentures, and units of
mutual funds. This shift in asset holding pattern of investors has been significantly influenced by
the ‘equity’ and ‘unit’ culture.

Mutual funds in India have emerged as a critical institutional linkage among various financial
segments like saving, capital market and the corporate sector. They provide much needed
impetus to the money market and stock market, in addition to direct and indirect support to the
corporate sector. Above all, mutual funds have given a new direction to the flow of personal
saving and enabled small and medium investors in remote, rural and semi urban areas to reap the
benefit of stock market investment. Indian mutual funds are thus playing a very crucial
developmental role in allocating resource in the emerging market economy.
 CLASSIFICATION OF MUTUAL FUNDS

There are varied ways in which funds can be classified. From the investors perspective funds are
usually classified in terms:

Constitution Structure Collection entry or exit

charges from investors
Close – ended Load funds
Open – ended No-Load funds

Under each broad classification, there are several types of funds, depending on the basis of the
nature of their portfolio. Even fund has unique risk-profiles that are determined by its portfolio.

OPEN ENDED AND CLOSE ENDED FUNDS

OPEN-ENDED FUNDS

An open-end fund is one that has units available for sale and repurchase at all the times at a price
based on the NAV per unit. Such funds are open for subscription the whole year.
Capitalization/corpus is continuously changing. Fund size and the total investment amount goes
up if more new subscription comes in from new investors than redemption by exiting investors,
the fund shrinks when redemption of units exceeds fresh subscription. There’s no fixed maturity.
Shares or units of such funds are normally not traded on the stock exchange but are repurchased
by the fund at announced rates. They provide better liquidity even though not listed as investors
can any time approach mutual funds for sale of such units.
Dividend reinvestment option is also available in case of such funds. Since there is always a
possibility of withdrawals, management of such funds becomes more tedious as managers have
to work from crises to crises. Crises may be two fronts:

Unexpected withdrawals require funds to maintain a high level of cash available every time
implying thereby idle cash.

By virtue of this situation such funds may fail to grab favorable opportunities. Further to match
quick cash payments, funds cannot have matching realization from their portfolio due to
intricacies of the stock market.

CLOSE-ENDED FUNDS

Close end funds can be subscribed to, only during the initial public offer. Thereafter the units of
such funds can be bought and sold on the stock exchange on which they are listed through a
broker. Such funds have a stipulated maturity period. The duration of such funds is generally 2 to
15 years.

The funds units may be traded at the discount or premium to NAV based on the investors’
perception about the funds future performance and other market factors affecting the demand for
a supply of the funds units. An important point to note here is that the number of outstanding
units of such fund doesn’t vary on account of trading in the funds units at the stock exchange.
From management point of view, managing close ended schemes is comparatively easy since
fund managers can evolve and adopt long term investment strategies depending on the life of the
scheme.
DEBT FUNDS

Debt funds are particularly attractive to investors who would otherwise invest in banks or
company fixed deposits. But the deposits are subject to tax deduction at source, whereas the
dividends received from debt funds are totally tax free in the hands of investors. There are
various types of debt funds designed for parking your short-term surpluses to medium term
savings. Money market funds or liquid or cash funds are designed as an alternative to your
savings bank account. They offer you 1.5 to 2 per cent higher returns on an average than your
savings bank account which typically yields 4.50 per cent per annum. Some funds even offer a
cheque writing facility on your investments in such funds which can be used to issue cheques to
others. Income funds are aimed at slightly longer-term investments, say about six months to one
year. These are low risk funds which offer you a steady return better than that of a bank fixed
deposit.

Gilt funds or government securities funds are aimed at long-term investments. These funds invest
in debt instruments that carry no risk of non-payment of interest as the Reserve Bank of India
manages the payment of interest and principal on these instruments. However, their prices tend
to vary quite a bit so there is a possibility of loss of principal invested on this count if used as a
short-term investment opportunity.

Banking on Debt Markets - Debt funds invest in the government securities, Corporate Bonds,
Treasury Bills, etc. Who should invest - The conservative investors like to go for capital safety.

How they performed - From Last 12 months in the declining interest rate scenario debt funds
remained flat. In 3 years debt funds have given average returns of 12%. As equity market is
looking volatile its better to invest part of your money in these funds.

GILT FUNDS

Government Sec. - Gilt funds invest in government securities. Who should invest - The investors
who like to avail the benefits of capital safety with government security?
How they performed - From Last 6-12 months Gilt funds have given average returns. As equity
market is looking volatile its better to invest part of your money in these funds as they provide
adequate security to your investments. The average returns for 1-year period are 10.41%
compare to the NSE G Sec Composite Index has given 12.60% returns.

BALANCE FUNDS

Balanced funds invest in a combination of debt and equity to balance the risks of investing in
equity. Balanced funds are theoretically designed to hedge the risk of loss on equity investments
by the income generated by debt instruments. The ideal mix of debt to equity investments in a
balanced fund is 50:50. But as funds which invest a majority of their money in equity are exempt
from paying tax on their income up to the year 2002, in India most funds have a debt to equity
ratio of 49:51. A ratio higher than 51 for equity investments could actually work against the
every purpose of balanced schemes.

Balanced fund - Balanced funds gives you the stability with the potential to grow with the
equity help of equity investments. These funds invest in both Equity & Debt markets.

Who should invest - The balanced funds are for those, who want to enjoy the appreciation
effects of equity market but at the same time like to play safe with less volatile debt market. In
this volatile market it is good to invest in balanced funds as they carries less risk compare to
equity funds.

MONEY MARKET OR LIQUID FUNDS

These funds are income funds and their aim is to provide easy liquidity, preservation of capital
and moderate income. These schemes invest exclusively in safer short-term instruments such as
treasury bills, certificates of deposits, commercial paper and inter-bank call money, government
securities, etc. Returns on these schemes fluctuate much less compared to other funds. These
funds are appropriate for corporate and individual investors as a means to park their surplus
funds for short periods.
 HOW RISKY YOUR MUTUAL FUND IS ?

Investors always judge a fund by the return it gives, never by the risk it took. In any historical
analysis of a mutual fund, the return is remembered but the risk is quickly forgotten. So a fund
manager may have used very high-risk strategies (that are bound to fail disastrously in the long
run), hoping that his wins will be remembered (as they often are), but the risk he took will soon
be forgotten.

WHAT IS RISK?

Risk can be defined as the potential for harm. But when anyone analyzing mutual funds uses this
term, what is actually being talked about is volatility. Volatility is nothing but the fluctuation of
the Net Asset Value (price of a unit of a fund). The higher the volatility, the greater the
fluctuations of the NAV. Generally, past volatility is taken as an indicator of future risk and for
the task of evaluating mutual fund, this is an adequate (even if not ideal) approximation.

Following is a glossary of some risks to consider when investing in mutual funds:

CALL RISK:-

The possibility that falling interest rates will cause a bond issuer to redeem or call its high-
yielding bond before the bond’s maturity date.

COUNTRY RISK:-

The possibility that political events (a war, national elections), financial problems (rising
inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a
country’s economy and cause investments in that country to decline.

CREDIT RISK:-

The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also
called default risk.
CURRENCY RISK:-

The possibility that returns could be reduced for Americans investing in foreign securities
because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-
rate risk.

INCOME RISK:-

The possibility that a fixed-income fund's dividends will decline as a result of falling overall
interest rates.

INDUSTRY RISK:-

The possibility that a group of stocks in a single industry will decline in price due to
developments in that industry.

INFLATION RISK:-

The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-
adjusted returns.

INTEREST RATE RISK:-

The possibility that a bond fund will decline in value because of an increase in interest rates.

MANAGER RISK:-

The possibility that an actively managed mutual fund's investment adviser will fail to execute the
fund's investment strategy effectively resulting in the failure of stated objectives.

MARKET RISK:-

The possibility that stock fund or bond fund prices overall will decline over short or even
extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise
and other periods when prices fall.
 THINGS TO BE SEE WHILE INVESTING IN MUTUAL FUNDS:-

1. Don't just look at the NAV, also look at the risk:

Alliance Buy India and Alliance Equity both have 3 stars. That does mean their NAV is
identical. In fact, the NAV of Alliance Equity is 91.66 while that of Buy India is 16.05.
However, Alliance Buy India took an average risk and delivered an average return, while
Alliance Equity took an above average risk to get the above average returns. Hence their stars are
identical, despite one having a higher NAV.

2. Higher rating does not mean better returns:

A fund with more stars does not indicate a higher return when compared with the rest. All it
means is that you will get a good return without putting your money at too much risk.Birla
Equity Plan has a 4-star rating while Alliance Tax Relief '96 has a 2-star rating. However, the
fund with the 2-star rating has a higher NAV (131.96) than the one with the 4-star rating (39.37).

3. Higher rating does not mean more risk:

Birla Advantage has an NAV of 67.09 while Franklin India Prima has an NAV of 122.92. This
does not necessarily mean that Franklin India Prima is offering a higher risk since the return is
higher. In fact, according to our ratings, Franklin India Prima is a 5-star fund while (risk is below
average) while Birla Advantage is a 2-star fund (risk is above average).
 FREQUENTLY USED TERMS
IN THE MUTUAL FUND INDUSTRY

NET ASSETS VALUE:-

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit
NAV is the net asset value of the scheme divided by the number of units outstanding on the
Valuation Date. The most important part of the calculation is the valuation of the assets owned
by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the
number of units outstanding. The detailed methodology for the calculation of the asset value is
given below.

Asset value is : Sum of market value of shares/debentures + Liquid assets/cash held, if any +
Dividends/interest accrued LOAD FUNDS Vs NO LOAD FUNDS

SALE PRICE:-

Is the price you pay when you invest in a scheme. also called offer price. it may include a sales
load.

REPURCHASE PRICE:-

Is the price at which a close-ended scheme repurchases its units and it may include a back-end
load. This is also called bid price.

REDEMPTION PRICE:-

Is the price at which open-ended schemes repurchase their units and close-ended schemes
redeem their units on maturity. Such prices are nav related.
TURNOVER:-

Turnover is a measure of the fund's securities transactions, usually calculated over a year's time,
and usually expressed as a percentage of net asset value. This value is usually calculated as the
value of all transactions (buying, selling) divided by 2 divided by the fund's total holdings; the
fund counts one security sold and another one bought as one "turnover". Thus turnover measures
the replacement of holdings. Is the price you pay when you invest in a scheme., also called offer
price. It may include a sales load.

BROKERAGE/COMMISSIONS:-

An additional expense which does not pass through the statement of operations and cannot be
controlled by the investor is brokerage commissions. Brokerage commissions are incorporated
into the price of the fund and are reported usually 3 months after the fund's annual report in the
statement of additional information. Brokerage commissions are directly related to portfolio
turnover (portfolio turnover refers to the number of times the fund's assets are bought and sold
over the course of a year). Usually the higher the rate of the portfolio turnover, the higher the
brokerage commissions. The advisors of mutual fund companies are required to achieve "best
execution" through brokerage arrangements so that the commissions charged to the fund will not
be excessive and buys back shares from investors wishing to leave the fund.
COMPARISON BETWEEN MUTUAL FUND & OTHER INVESTMENTS

Mutual funds offer several advantages over investing in individual stocks. For example, the
transaction costs are divided among all the mutual fund shareholders, which allows for cost-
effective diversification. investors may also benefit by having a third party (professional fund
managers) apply expertise and dedicate time to manage and research investment options,
although there is dispute over whether professional fund managers can, on average, outperform
simple index funds that mimic public indexes whether actively managed or passively indexed,
mutual funds are not immune to risks. They share the same risks associated with the investments
made. if the fund invests primarily in stocks, it is usually subject to the same ups and downs and
risks as the stock market.

SHARE CLASSES:-

Many mutual funds offer more than one class of shares. For example, you may have seen a fund
that offers "class a" and "class b" shares. Each class will invest in the same pool (or investment
portfolio) of securities and will have the same investment objectives and policies. But each class
will have different shareholder services and/or distribution arrangements with different fees and
expenses. These differences are supposed to reflect different costs involved in servicing investors
in various classes; for example, one class may be sold through brokers with a front-end load, and
another class may be sold.

INDEX FUNDS VS. ACTIVE MANAGEMENT:-

An index fund maintains investments in companies that are part of major stock (or bond) indices,
such as the s&p 500, while an actively managed fund attempts to outperform a relevant index
through superior stock-picking techniques. The assets of an index fund are managed to closely
approximate the performance of a particular published index. Since the composition of an index
changes infrequently, an index fund manager makes fewer trades, on average, than does an
active fund manager. for this reason, index funds generally have lower trading expenses than
actively managed funds, and typically incur fewer short-term capital gains which must be passed
on to shareholders.

BONDS FUNDS:-

Bond funds account for 18% of mutual fund assets. Types of bond funds include termfunds,
which have a fixed set of time (short-, medium-, or long-term) before they mature. Municipal
bond funds generally have lower returns, but have tax advantages and lower risk. High-yield
bond funds invest in corporate bonds, including high-yield or junk bonds. With the potential for
high yield, these bonds also come with greater risk.

MONEY MARKET FUNDS:-

Money market funds hold 26% of mutual fund assets in the United States. Money market funds
entail the least risk, as well as lower rates of return. Unlike certificates of deposit (cds), money
market shares are liquid and redeemable atany time. The interest rate quoted by money market
funds is known as the 7 day sec yield.

EQUITY FUNDS:-

Equity funds, which consist mainly of stock investments, are the most common type of mutual
fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the United States.
Often equity funds focus investments on particular strategies and certain types of issuers.
LOAD AND EXPENSES:

A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares
are purchased, taken as a percentage of funds invested. The value of the investment is reduced by
the amount of the load. Some funds have a deferred sales charge or back-end load. in this type of
fund an investor pays no sales charge when purchasing shares, but will pay a commission out of
the proceeds when shares are redeemed depending on how long they are held. another derivative
structure is a level '" load fund, in which no sales charge is paid when buying the fund, but a
back-end load may be charged if the shares purchased are sold within a year.
 TYPES OF FUNDS

Funds are generally distinguished from each other by their investment objectives and types of
securities they invest in. Currently, mutual funds in India are allowed to invest either in equity or
debt or a combination of these two. While moves are on to float funds that invest in gold or real
estate etc, as of date, mutual funds are not permitted to currently hold physical assets. Thus, a
fund can invest in shares or debt instruments of a gold mining company, but cannot buy gold
itself.

BY OBJECTIVE

Here the funds are classified on the basis of the investment objective where objective reflects the
purpose for which the investor is investing his money. By law each mutual fund must declare an
investment objective which tells an investor what the fund concentrates on and allows the
investor to integrate a particular fund with his or her own needs. The main objective of any
investor is to generate returns on his investments but investors have different needs depending
upon which the returns and the portfolio for any investor vary.

Investors can have one particular objective or can have a mix of various objectives. On the basis
of objective and asset allocation mutual funds can be categorized as follows.

EQUITY FUNDS

These are funds which invest in equity shares of companies. Equities, as an asset class, have
historically delivered higher returns compared to debt funds over a long term. Equity funds, by
their very nature, tend to be volatile, that is, in the short term their value can go up or down.
Therefore, they are not meant for those investors who need a regular and stable stream of easily
predictable income.
Broad-based, diversified equity funds vary their investments across companies and sectors to
give a return comparable to the market indices. For instance, if the BSE sensex appreciates 50
per cent in a one-year, then a broad-based fund would try to give returns of about 40-60 per cent.
Aggressive growth funds take sector bets, that is, they invest more in particular sectors like
infotech and pharma. Here, the fund managers believe that companies in a particular sector will
outperform the general market. Sector funds invest their money exclusively in companies
belonging to one sector.

Here the investor risks his entire investments on the fortunes of that sector. If the sector does
well, he will get above market returns, but if his bet goes wrong, then the entire capital could get
eroded. Hence, fund managers recommend that sector funds should form only a very small part
of your overall equity investment portfolio.

EQUITY DIVERSIFIED FUNDS

Diversification - Mutual Funds reduces the risk by investing in all the sectors. Instead of putting
all your money in one sector or company it's better to invest in various good performing sectors
as you reduces the risk of getting involved in a particular sector/company which may perform or
may not.

Who should invest - This is an ideal category for those who want to participate in stock market &
knows the risk involved in stock market but have few rupees to invest in bluechip stocks.

How they performed - Though the short term out look is volatile in long-term equity diversified
funds have outperformed other categories & stock markets will lesser amount of risk than stock
markets. The average returns of equity diversified funds are 102%.

INDEX FUNDS

Follow the index - These are the index-based funds, which move with the likes of Sensex &
Nifty. These fund charges NIL or very low entry/exit loads.

Who should invest - As you have seen in last few months Nifty & Sensex have almost come
down 500points from their tops, it is a good time to invest in Index funds with the principal of
"Investing at the lower levels".

How they performed - Though the short term out look is volatile in long-term Sensex & Nifty
could do well with improving economic conditions. It has been seen that these Index funds have
outperformed the indices making them more attractive.
SECTOR FUND

Sector - Sector Schemes follow particular sector.

Who should invest - You have to be selective while investing in these funds, as you need to
select particular sector, which will perform better in the future. Investing in these funds carries
some amount of risk but also give you more returns.

How they performed - Sector funds have given average returns of 73% for 1 year period. Auto,
Steel, Cement have done well the year '03 & the trend will continue in year '04 but IT, FMCG
sectors are experiencing downward trend due to $ depreciation, price war in FMCG respectively.
Though short-term trend for pharma sector looks down in long term we look forward to lot more
action in the sector, as there exists a long-term, strong fundamental story backed by immense
growth potential for the Indian pharmaceutical companies.

Amount due on unpaid assets

Sale Price: Is the price you pay when you invest in a scheme. Also called Offer Price. It may
include a sales load.

Repurchase Price: Is the price at which a close-ended scheme repurchases its units and it may
include a back-end load. This is also called Bid Price.

Redemption Price: Is the price at which open-ended schemes repurchase their units and close-
ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load: Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’
load. Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’ Load: Is a charge collected by a scheme when it buys back the units
from the unit-holders
EQUITY INVESTING

“Equities are unique assets that investors feel more comfortable buying at higher prices and
selling at lower prices”

What are the deciding factors which should be considered while buying equities?

1. Political environment and Macro Economic Policies: & industry trends?

The government lays down economic policies from time to time. We should assess what impact
these policies will have on the private and public sector. We must also assess how government
policies can affect a particular company whose shares we are interested in buying.

For example: to give a boost to the electronic industry the government may come out with a
series of tax exemptions on color television sets and government policies in certain sectors might
affect the growth of companies in those sectors.

Your decision has to be right not only at the micro level (telecom companies) but also at the
micro level- which particular company is the best bet?

2. Which company to go for?

Once you have chosen the right sector or industry the stage is set to choose the right company.
Take note of the three important factors ---

 The past track record of the company.

 The management and the existing culture of the company.
 The ability of the management to lead the company in the future given its track record.

If the company has been consistently making profits for five or six consecutive years, it is likely
that it will continue to make profits in the future too.

But what if the company has been making losses for seven consecutive years and the
management promises a huge profit next year?
 OPTIONS AVAILABLE TO INVESTORS

Each plan of every mutual fund has three options – Growth, Dividend and dividend
reinvestment. Separate NAV are calculated for each scheme.

Dividend Option

Under the dividend plan dividend are usually declared on quarterly or annual basis. Mutual fund
reserves the right to change the frequency of dividend declared.

Dividend reinvestment option

Instead of remittances of units through payouts, Units holder may choose to invest the entire
dividend in additional units of the scheme at NAV related prices of the next working day after
the record date. No sales or entry load is levied on dividend reinvest.

Growth Option

Under this plan returns accrue to the investor in the form of capital appreciation as reflected in
the NAV. The scheme will not declare the dividend under the Growth plan and investors who opt
for this plan will not receive any income from the scheme. Instead of income earned on their
units will remain invested within the scheme and will be reflected in the NAV

INVESTMENT MANAGEMENT

After learning the concept of mutual funds and various schemes of mutual funds available for
investment it is required to effectively manage the portfolio of an investor which depends upon
the objective of investor. The most important objective of any investor is to generate returns.
Requirement for return for every investor varies which depends upon many factors and these
factors determine the category to which an investor belongs. Depending upon the category to
which an investors belongs portfolio of any customer is managed.

Investors can be categorized on the basis of certain factors which can be described as below.
1. On the basis of Risk and Return

 Low Risk Bearing Capacity

 Medium Risk Bearing Capacity
 High Risk Bearing Capacity

Risk and return goes hand to hand. Higher return means higher risk. Low risk means
moderate return.

2. On the basis of Age of Investor:

 Young Age (20-35 years)

 Middle Age (35-50 years)
 Old Age (50 and above)

3. On the basis of Liquidity required by Investor:

 Less Liquidity
 Medium Liquidity
 More Liquidity

4. On the basis of tenure of investment:

 Short Term
 Medium Term
 Long Term

5. Investment can also be made to

 Park the Idle Funds

 Make a full time investment
 Avail tax benefits
 Meet requirement for Contingencies
On the basis of the advisory paradigm (deciding factors) mentioned above, various categories of
investor can be made which is deciding factor as to where an investor with a particular
requirement must invest.

Generally investors are categorized on the basis of

 Risk and return

 Age
 Liquidity Required

For other factors the portfolio of the customer is adjusted accordingly depending upon the
category of the customer. Following are the various profile of investors based on the advisory
paradigm followed by investment avenues where they can park their money:

TIPS FOR EQUITY INVESTMENT

1. START EARLY

The sooner you invest the more time your money will have to grow. If you delay, you will
almost certainly have to invest much more to achieve a similar result.

The difference time can make: an example

If you started investing Rs. 5,000 a month on your 40th B’Day, in 20 yrs time you would have
put aside Rs. 12 Lakhs. If that investment grew by an average of 7%a year, it would be worth Rs.
25, 52,994 when you reach 60.

If you started investing ten years earlier, your Rs. 5000 each month would add up to 18 Lakhs
over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 58,825,454
on your 60th Birthday – more than double the amount you would have received if you’d started
ten years later! the bottom line – your investments gain most from compounding interests when
you have time on your side
2. Keep some cash aside-

It is always a good idea to have some money in a deposit account in case of emergencies.
Enough to cover three months’ living expenses is often a rough guide to how much you need.
And make sure you can withdraw it when you need to, without penalties.

3. Ask yourself how much risk you can take-

There is no point having a stock market investment if you are going to lose sleep every time
share price go through a rough patch. It’s vital that you are realistic about your appetite for risk –
an Investment Advisor may be able to help you decide how much risk you can tolerate.

4. Bear in mind that inflation will eat into your savings-

Returns on risk free cash investments may should respectable, but when you subtract the current
rate of inflation you may not be so impressed. For significant long-term growth you need to
make your money a little harder.

Inflation --- the tickling time bomb

If you have Rs 10,000 in a savings account earning 3% interest each year, in 20 yrs time, your
savings would be worth Rs 18,061. That’s a return of just 80%. However, if inflation is about
7%, Rs. 18,061 would only be worth Rs. 4668 in today’s terms!

5. Think carefully about how long you will be investing for -

Only look at the stock market if you are prepared to put your money away for five or ten years,
or perhaps even longer. If you are likely to need your money any sooner, keep it in a lower-risk
investment so there is less chance of a fall in value just before you make a withdrawal.
6. Spread your money across arrange of investments-

It’s really a good idea to have all your eggs in one basket. Depending on your goals and your
risk, you will probably want to spread your money across different types of investments –
equities, bonds and cash. You may also want to diversify within each of these categories. With
equities, for example, a mutual fund will invest your money in a variety of companies but you
may want to ensure you have a range of industry sectors too.

7. Invest regularly-

Investing regularly can be a great way to build up a significant lump sum. You will also benefit
from what is known as rupee cost averaging. This means that, if you are investing in a mutual
fund, over the years you will pay the average price for units. If the market goes up, the units you
already own will increase in value. If it goes down, you will buy more units.

8. Choose your funds carefully-

You should select investment on the basis of what is right for your personal circumstances and
goals. If you are deciding on a mutual fund to invest in, don’t opt for the one that is the favor of
the mouth, unless you are sure it will be right for your needs in the years to come. And don’t
assume that all funds investing in Indian equities are essentially the same – look at the details of
what a fund invest in and check if you are comfortable with its investment style and objective.

9. Remember that time not timing is the key to successful investing-

When you are planning an investment, it can be tempting to wait for the market to reach a low
point. But how will you know when this happens? You run the risk of missing out on the
significant rises that often occur in the early trends of a upward trend.

10. Review your investments-

A portfolio that is right for you at one point in your life may not be quite so suitable a few years
later. Your investments need to adapt to changes in your circumstances, such as getting married,
having children or starting a business.

NEW DEVELOPMENT IN THE WAYS OF MUTUAL FUNDS INVESTMENTS

I. Systematic Switching Plan

The unit holder may set up a Systematic Switching plan on a monthly, quarterly, semi-annual or
annual basis to exchange a fixed number of units and/or amount in one scheme to another
scheme within the Fund Family or one plan/option to another. The redemption or investment will
be at the applicable NAV for the respective schemes as specified in the offer document

II. Systematic Investment Plan

Systematic Investment Plan is available for planned and regular investments, under this plan unit
holders can benefit by investing specified rupee amounts periodically for a continuous period.
This concept is called Rupee Cost Averaging. This program allows Unit holders to save a fixed
amount of rupees every month/ quarter by purchasing additional units of the Scheme(s). Rupee
cost averaging does not guarantee a profit or protect against a loss. Rupee cost averaging can
smooth out the market’s ups and downs and reduce the risk of investing in volatile markets

For as little as Rs. 250* each month for 12 months or Rs. 500 every month for 6 months, you can
purchase mutual fund units and avoid larger minimum investment amounts of over Rs. 1,000.
Fixed amounts can be invested in Mutual Funds each month using funds drawn automatically
from your savings account regularly.

Investing in Systematic Investment Plan (SIP) offer the benefit of "Rupee-cost averaging", i.e.,
by purchasing Mutual Fund units over a period of time, you automatically buy more units when
prices are low and fewer units when prices are high, resulting in lower "per unit acquiring cost"
as a result of averaging.
Understanding SIP – How does cost averaging benefits you? (Taking an example of few schemes
of Prudential ICICI mutual fund)

Many investors think that they should invest only when an opportunity to invest – like an IPO
(Initial Public Offering) – is available. However, \hen doing this, one runs the risk of mistiming
the market. For example, many times investors are attracted by the price in the market only to
subsequently find out that they had invested at a peak. Sometimes investors buy when they think
the market has bottomed out only to find the prices falling further. SIP through cost averaging
helps you avoid the risk of mistiming by spreading your risk.

To illustrate this point, let us look at the contrast in returns that a hypothetical investor would
have gained by using an SIP in some schemes of Prudential ICICI versus doing an one time
investment in the same fund at IPO stage.

40 36.55

35

28.87
30

22.88 23.05 23.33

25

20 ONE TIME
13.6 13.58 INVESTMENT AT
15 IPO
10
MONTHLY SIP
5
SINCE IPO

-5
-8.3

-10
POWER TECHNOLOGY CHILD CARE - Gift BALANCED

Let us compare SIP’s of top Players and the kind of returns they give in one year, also compare
the returns with Recurring deposit and fixed deposit returns:
 SYSTEMATIC WITHDRAWAL PLAN

Systematic Withdrawal Plan (SWP) lets you automatically redeem a prearranged amount of your
mutual fund holdings each month. SWPs are an ideal way to supplement your monthly cash
flow, meet minimum withdrawal requirements, or move assets between the funds.

SWP is a no-charge service. When you set up your SWP, cash proceeds from each redemption
(minimum balance maintained @ 25% of the holding at any given point of time) are given to you
in the form of post-dated cheques (six monthly cheques at par, which enables you to get the
funds lodged).

PERFORMANCE MEASURES OF MUTUAL FUNDS

Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one
of the most preferred investment avenues in India. However, with a plethora of schemes to
choose from, the retail investor faces problems in selecting funds. Factors such as investment
strategy and management style are qualitative, but the funds record is an important indicator too.
Though past performance alone can not be indicative of future performance, it is, frankly, the
only quantitative way to judge how good a fund is at present. Therefore, there is a need to
correctly assess the past performance of different mutual funds.

Worldwide, good mutual fund companies over are known by their AMCs and this fame is
directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must be
held accountable for their selection of stocks. In other words, there must be some performance
indicator that will reveal the quality of stock selection of various AMCs.

Return alone should not be considered as the basis of measurement of the performance of a
mutual fund scheme, it should also include the risk taken by the fund manager because different
funds will have different

levels of risk attached to them. Risk associated with a fund, in a general, can be defined as
variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns
of a fund during a given period, higher will be the risk associated with it. These fluctuations in
the returns generated by a fund are resultant of two guiding forces.

First, general market fluctuations, which affect all the securities, present in the market, called
market risk or systematic risk and second, fluctuations due to specific securities present in the
portfolio of the fund, called unsystematic risk. The Total Risk of a given fund is sum of these
two and is measured in terms of standard deviation of returns of the fund. Systematic risk, on the
other hand, is measured in terms of Beta, which represents fluctuations in the NAV of the fund
vis-à-vis market. The more responsive the NAV of a mutual fund is to the changes in the market;
higher will be its beta. Beta is calculated by relating the returns on a mutual fund with the returns
in the market. While unsystematic risk can be diversified through investments in a number of
instruments, systematic risk can not. By using the risk return relationship, we try to assess the
competitive strength of the mutual funds vis-à-vis one another in a better way.

When considering a fund's volatility, an investor may find it difficult to decide which fund will
provide the optimal risk-reward combination. Many websites provide various volatility measures
for mutual funds free of charge; however, it can be hard to know not only what the figures mean
but also how to analyze them. Furthermore, the relationship between these figures is not always
obvious. Read on to learn about the four most common volatility measures and how they're
applied in the type of risk analysis that is based on modern portfolio theory. Optimal Portfolio
Theory and Mutual Funds .

One examination of the relationship between portfolio returns and risk is the efficient frontier, a
curve that is a part of the modern portfolio theory. The curve forms from a graph plotting return
and risk indicated by volatility, which is represented by standard deviation. According to the
modern portfolio theory, funds lying on the curve are yielding the maximum return possible
given the amount of volatility.
Notice that as standard deviation increases, so does the return. In the above chart, once expected
returns of a portfolio reach a certain level, an investor must take on a large amount of volatility
for a small increase in return. Obviously portfolios that have a risk/return relationship plotted far
below the curve are not optimal as the investor is taking on a large amount of instability for a
small return.

To determine if the proposed fund has an optimal return for the amount of volatility acquired, an
investor needs to do an analysis of the fund's standard deviation.

Note that the modern portfolio theory and volatility are not the only means investors use to
determine and analyze risk, which may be caused by many different factors in the market

Standard Deviation

As with many statistical measures, the calculation for standard deviation can be intimidating, but,
as the number is extremely useful for those who know how to use it, there are many free mutual
fund screening services that provide the standard deviations of funds.
The standard deviation essentially reports a fund's volatility, which indicates the tendency of the
returns to rise or fall drastically in a short period of time. A security that is volatile is also
considered higher risk because its performance may change quickly in either direction at any
moment. The standard deviation of a fund measures this risk by measuring the degree to which
the fund fluctuates in relation to its mean return, the average return of a fund over a period of
time.

A fund that has a consistent four-year return of 3%, for example, would have a mean, or average,
of 3%. The standard deviation for this fund would then be zero because the fund's return in any
given year does not differ from its four-year mean of 3%. On the other hand, a fund that in each
of the last four years returned -5%, 17%, 2% and 30% will have a mean return of 11%. The fund
will also exhibit a high standard deviation because each year the return of the fund differs from
the mean return. This fund is therefore more risky because it fluctuates widely between negative
and positive returns within a short period.

A note to remember is that, because volatility is only one indicator of the risk affecting a
security, a stable past performance of a fund is not necessarily a guarantee of future stability.
Since unforeseen market factors can influence volatility, a fund that this year has a standard
deviation close or equal to zero may behave differently in the following year.

To determine how well a fund is maximizing the return received for its volatility, you can
compare the fund to another with a similar investment strategy and similar returns. The fund with
the lower standard deviation would be more optimal because it is maximizing the return received
for the amount of risk acquired. Consider the following graph:
With the S&P 500 Fund B, the investor would be acquiring a larger amount of volatility risk than
necessary to achieve the same returns as Fund A. Fund A would provide the investor with the
optimal risk/ return relationship.

Beta

While standard deviation determines the volatility of a fund according to the disparity of its
returns over a period of time, beta, another useful statistical measure, determines the volatility, or
risk, of a fund in comparison to that of its index or benchmark. A fund with a beta very close to 1
means the fund's performance closely matches the index or benchmark. A beta greater than 1
indicates greater volatility than the overall market, and a beta less than 1 indicates less volatility
than the benchmark.
If, for example, a fund has a beta of 1.05 in relation to the S&P 500, the fund has been moving
5% more than the index. Therefore, if the S&P 500 increased 15%, the fund would be expected
to increase 15.75%. On the other hand, a fund with a beta of 2.4 would be expected to move 2.4
times more than its corresponding index. So if the S&P 500 moved 10%, the fund would be
expected to rise 24%, and, if the S&P 500 declined 10%, the fund would be expected to lose
24%.

Investors expecting the market to be bullish may choose funds exhibiting high betas, which
increase investors' chances of beating the market. If an investor expects the market to be bearish
in the near future, the funds that have betas less than 1 are a good choice because they would be
expected to decline less in value than the index. For example, if a fund had a beta of 0.5 and the
S&P 500 declined 6%, the fund would be expected to decline only 3%.
Be aware of the fact that beta by itself is limited and can be skewed due to factors other than the
market risk affecting the fund's volatility.

R-Squared

The R-squared of a fund advises investors if the beta of a mutual fund is measured against an
appropriate benchmark. Measuring the correlation of a fund's movements to that of an index, R-
squared describes the level of association between the fund's volatility and market risk, or more
specifically, the degree to which a fund's volatility is a result of the day-to-day fluctuations
experienced by the overall market.

R-squared values range between 0 and 100, where 0 represents the least correlation and 100
represents full correlation. If a fund's beta has an R-squared value that is close to 100, the beta of
the fund should be trusted. On the other hand, an R-squared value that is close to 0 indicates that
the beta is not particularly useful because the fund is being compared against an inappropriate
benchmark.
If, for example, a bond fund was judged against the S&P 500, the R-squared value would be very
low. A bond index such as the Lehman Brothers Aggregate Bond Index would be a much more
appropriate benchmark for a bond fund, so the resulting R-squared value would be higher.
Obviously the risks apparent in the stock market are different than the risks associated with the
bond market. Therefore, if the beta for a bond were calculated using a stock index, the beta
would not be trustworthy.
An inappropriate benchmark will skew more than just beta. Alpha is calculated using beta, so if
the R-squared value of a fund is low, it is also wise not to trust the figure given for alpha. We'll
go through an example in the next section.

Alpha

Up to this point, we have learned how to examine figures that measure risk posed by volatility,
but how do we measure the extra return rewarded to you for taking on risk posed by factors other
than market volatility? Enter alpha, which measures how much if any of this extra risk helped the
fund outperform its corresponding benchmark. Using beta, alpha's computation compares the
fund's performance to that of the benchmark's risk-adjusted returns and establishes if the fund's
returns outperformed the market's, given the same amount of risk.

For example, if a fund has an alpha of 1, it means that the fund outperformed the benchmark by
1%. Negative alphas are bad in that they indicate that the fund underperformed for the amount of
extra, fund-specific risk that the fund's investors undertook.

USING ALL FOUR INDICATORS

Ranking few schemes on the basis of the above 4 statistical measures

 8

6
Standard Deviation

Sharpe Ratio
5

Beta
4
R Square

Alfa
3

Comprehensive Ranking
2

0
Reliance Reliance Franklin Franklin HDFC HDFC top Pru ICICI Pru ICICI
growth fund vision fund India Prima India Blue growth fund 200 growthv power fund
Fund chip Fund fund

This explanation of these four statistical measures provides you with the basic knowledge on
using them to apply the premise of the optimal portfolio theory, which uses volatility to establish
risk and states a guideline for determining how much of a fund's volatility carries a higher
potential for return. As you may have noticed, these figures may be difficult and complicated to
understand, but if you do use them, it is important you know what they mean. Do keep in mind
that these calculations only work within one type of risk analysis. When you are deciding on
buying mutual funds it is important that you be aware of factors other than volatility that affect
and indicate the risk posed by mutual funds.

In order to determine the risk-adjusted returns of investment portfolios, several eminent authors
have worked since 1960s to develop composite performance indices to evaluate a portfolio by
comparing alternative portfolios within a particular risk class. The most important and widely
used measures of performance are:

 The Treynor Measure

 The Sharpe Measure
 Jenson Model
  Fama Model
 The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's
Index. This Index is a ratio of return generated by the fund over and above risk free rate of return
(generally taken to be the return on securities backed by the government, as there is no credit risk
associated), during a given period and systematic risk associated with it (beta). Symbolically, it
can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi where,

Ri represents return on fund,

Rf is risk free rate of return and
Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive Treynor's
Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index
is an indication of unfavorable performance.

THE SHARPE MEASURE

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of
returns generated by the fund over and above risk free rate of return and the total risk associated
with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about.
So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be
written as:

Sharpe Index (Si) = (Ri - Rf)/Si where,

SI is standard deviation of the fund.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a
low and negative Sharpe Ratio is an indication of unfavorable performance.
COMPARISON OF SHARPE AND TREYNOR

Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a
numerical risk measure. The total risk is appropriate when we are evaluating the risk return
relationship for well-diversified portfolios.

On the other hand, the systematic risk is the relevant measure of risk when we are evaluating less
than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk
is equal to systematic risk. Rankings based on total risk (Sharpe measure) and systematic risk
(Treynor measure) should be identical for a well-diversified portfolio, as the total risk is reduced
to systematic risk. Therefore, a poorly diversified fund that ranks higher on Treynor measure,
compared with another fund that is highly diversified, will rank lower on Sharpe Measure.

JENSON MODEL

Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the Differential Return Method.
This measure involves evaluation of the returns that the fund has generated vs. the returns
actually expected out of the fund given the level of its systematic risk. The surplus between the
two returns is called Alpha, which measures the performance of a fund compared with the actual
returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated
as:

Ri = Rf + Bi (Rm - Rf) where,

Rm is average market return during the given period.

After calculating it, alpha can be obtained by subtracting required return from the actual return of
the fund. Higher alpha represents superior performance of the fund and vice versa. Limitation of
this model is that it considers only systematic risk not the entire risk associated with the fund and
an ordinary investor can not mitigate unsystematic risk, as his knowledge of market is primitive.
FAMA MODEL

The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return commensurate with
the total risk associated with it. The difference between these two is taken as a measure of the
performance of the fund and is called net selectivity.

The net selectivity represents the stock selection skill of the fund manager, as it is the excess
return over and above the return required to compensate for the total risk taken by the fund
manager. Higher value of which indicates that fund manager has earned returns well above the
return commensurate with the level of risk taken by him.

Required return can be calculated as:

Ri = Rf + Si/Sm*(Rm - Rf) where,

Sm is standard deviation of market returns.

The net selectivity is then calculated by subtracting this required return from the actual return of
the fund.

Dividend paid by mutual funds is fully tax-exempt at the hands of the investor, although, debt
funds have to pay a 12.81 per cent dividend distribution tax. On redemption of any units held for
more than a year, your realization will attract long-term capital gains tax of 20 per cent plus
surcharge after indexing for inflation, or at a flat rate of 10 per cent. If redeemed before a year it
will be termed as short term capital gain and taxed along with your other income. However, you
can save tax by investing in Equity-Linked Savings Scheme (ELSS) under Section 88 of the
Income Tax Act, 1961, according to which 20 per cent of the amount invested

in ELSS could be deducted from your tax liability subject to a maximum investment of Rs
10,000 per year but now under section 80C the complete 100000 can be invested in ELSS
schemes and which can be deducted from your gross salary thereby leaving your taxable salary
thinner by Rs.100000.
her ,in case of resident individuals and Hindu undivided families, where taxable income as
reduced to the extent of the shortfall and only the balance short term capital gains will be
subjected to the flat rate of income tax(plus applicable surcharge and education cess)

MUTUAL GAINS

Mutual funds are of various types, depending on what they invest in. For example, bond funds
invest in bonds, equity funds invest in equities and balanced funds invest in both equities and
debt. Then there are sector funds that invest in one particular sector of the economy. Index funds,
on the other hand, invest in only the indices.

We have identified the best equity-oriented schemes available in the market today based on the
following parameters: the past performance as indicated by returns, the Sharpe ratio and FAMA
(net selectivity).The Past performance is measured by returns generated by the scheme. For
aggressive, conservative and tax planning funds, we have used two-year point-to-point return in
assessing performance, while for thematic and balanced funds one-year point-to-point returns
have been considered.

Sharpe indicates risk-adjusted return, giving the returns earned in excess of the risk-free rate for
each unit of the risk taken. The Sharpe ratio is a standard figure and helps us compare the
performance across funds. The higher the ratio, the better a scheme's historical risk-adjusted
return. For aggressive, Aggressive Funds conservative and tax planning funds, we have used
two-year monthly rolling Sharpe ratio, while for thematic and balanced funds one-year
monthly rolling Sharpe ratio has been considered.

There are three components involved in the returns generated by a scheme, namely risk-free
returns, returns due to market sentiments and selectivity returns. FAMA measures the return
generated through selectivity, i.e. the return generated because of the fund manager's ability
to pick the right stocks. A higher value of net selectivity is always preferred as it reflects
the stock picking ability of the fund manager. For aggressive, conservative and tax
planning funds, we have used two-year monthly rolling FAMA, while for thematic and
balanced funds one-year monthly rolling FAMA has been considered.For our selection of
funds, we have given 50% weightage to past performance as indicated by the returns, 25%
weightage to the Sharpe ratio of the fund and the remaining 25% to the FAMA of the fund.
All returns stated below, for less than one year are absolute and for more than one year are
annualized.

FUTURE OF MUTUAL FUNDS IN INDIA

SOME FACTS FOR THE GROWTH OF MUTUAL FUNDS IN INDIA

 100% growth in the last 6 years.

 Number of foreign AMC's are in the que to enter the Indian markets like Fidelity
Investments, US based, with over US$1trillion assets under management worldwide.

 Our saving rate is over 23%, highest in the world. Only canalizing these savings in
mutual funds sector is required.
  We have approximately 29 mutual funds which is much less than US having more than
800. There is a big scope for expansion.

 '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.

RESEARCH METHODOLOGY

INTRODUCTION:

In this i have covered almost all the places. Being constraints by data availability (both primary
and secondary)

The objectives of the study are as following:

 awareness of mutual funds in indian market.

 to identify the consumer behavior while selecting a fund.

 to identify the consumer perception about mutual funds.

RESEARCH IS DIVIDED IN TWO PARTS:

TYPE OF RESEARCH:

DESCRIPTIVE: Description of the conditions as it exists presently. Includes survey & fact-
finding enquiries of different kinds.

RESEARCH METHOD: Research methods are understood as all those methods and techniques
that are used for conduction of research. Research methods or techniques refer to methods the
researchers use in performing research operation. in other words, all those methods which are
used by the researchers during the course of studying his research problems are termed as
research methods. Since the object of research, particularly the applied research, is to arrive at a
solution for a given problem, the available data and the unknown aspects of the problem have to
be related to each other to make a solution possible. Keeping this in view i took the following
two methods :

 Analysis of documents
 Interviews

COLLECTION OF DATA:

PRIMARY DATA:- SURVEY METHODS:

his method was adopted because it helps to procuring data and detail information from the
respondents. Here I collected data by filling questionnaires, directly talking to the respondents

SECONDARY DATA:

I have also used the secondary data which include various written documents and other related
information about the mutual fund industry in India.
SAMPLING:

The sample comprised 120 respondents. All the respondents were first surveyed, interviewed and
asked various questions regarding the three broad objectives of my research work and then their
feed backs ere taken. Then the analysis of each and every question was done and finally
incorporated into research result.

As there is no such popular model or technique available for this kind of research, I have done
the analysis part of my project on my own, without using any model or scientific technique.

Ques 1. Age of the investors

o 18-24
o 24-30
o 30 & above
 30

25

20

15

10

0
o 18-24 o 24-30 o 30 & above

Ques 2. Mention your annual income

o Below 100000
o 100000-500000
o 500000 above

40
35
30
25
20
15
10
5
0
o Below 100000 o 100000- 500000 above
500000

Ques 3. Do you invest in mutual funds

o Yes
o No
 40
35
30
25
20
15
10
5
0
yes no

Ques 4. Which among these are the safest investment options

o Mutual funds
o Stock market
o Band deposits
o others

16

14

12

10

0
mutual funds stock market bank deposits others

Ques5. Which factors prevent you from investing in mutual funds?

o Bitter past experience

o Lack of knowledge
 o Insufficient investment advisors
o others

Bitter past experience

Lack of knowledge
Insufficient investment
advisors
others

Ques6. Which scheme do you feel is acceptable ?

o Open ended scheme

o Close ended scheme

25

20

15

10

0
Open ended scheme Close ended scheme

Ques 7. Investment objective

o Return
o Risk hedging
 o Tax benefits
o Other reasons

80
70
60
50
40
30
20
10
0
Return Risk hedging Tax benefits Other reasons

Ques 8. Reasons of not investing in mutual funds

o Risky affair
o Do not aware a
o Other
o Not so popular

Risky affair
Do not aware a
Others
not so polpular

FINDINGS
  Many of the investors are aware of mutual funds but most of their perception is not
positive due to lack of information about the mutual funds schemes.
 Investors are concerned with the risk factors of mutual funds.
 The investors who have invested in mutual funds mainly go for it because of liquidity.
 There are numerous schemes of mutual funds which people are not aware of it.
 Average savings of the people vary between 35% - 40%.

CONCLUSION

The mutual fund industry is a lot like the film star of the finance business.

Though it is perhaps the smallest segment of the industry, it is also the most glamorous – in that
it is a young industry where there are changes in the rules of the game everyday, and there are
constant shifts and upheavals.

The mutual fund is structured around a fairly simple concept, the mitigation of risk through the
spreading of investments across multiple entities, which is achieved by the pooling of a number
of small investments into a large bucket.

Yet it has been the subject of perhaps the most elaborate and prolonged Regulatory effort in the
history of the country. As because many companies exist in this market,competition is cut to
throat. Mindsets of the investors are not towards mutual funds. They still think of investing in
traditional investment alternatives. Customers are not properly educated about the mutual funds.
Few private sectors banks like ICICI, HDFC, UTI, ING VYSYA etc. sell mutual funds through
their branches only. Specialized agents of mutual funds are rarely seen. Financial advisors are
not seen there who can educate the investors.Posters, banners or other promotional activities are
rarely seen in this market.Mutual fund companies do not have aggressive strategies insurance
products are and can be the main competitors of mutual funds. Mutual fund investors are
confined to the upper-middle and upper social class in this market. Upper-lower class and lower-
upper class people are still untouched.

RECOMMENDATIONS
MARKET DEVELOPMENT

AWARENESS

 Conference or seminars on ―mutual funds‖ can be conducted on regular basis. This will no
doubt increase the awareness of mutual fund in the minds of the investors.

 All the companies must join hands and work together for this.

CUSTOMER EDUCATION

As the awareness of mutual funds is still improving in this market, companies should give focus
on ―customer education‖. For this purpose again the conference and seminars can be the best
way towards educating the customers. Again free training programme to the agents can be
fruitful.

GOVERNMENT INTERMEDIATION

Government must also work together with the mutual fund companies in promoting the concept
of mutual fund .

CONFIDENCE BUILDING ACTIVITIES

People in this city are not confident in investing their money in mutual funds. Hence there is a
need to do something which will build the confidence in the minds of the investors.

BIBLIOGRAPHY
  www.amfiindia.com
 www.crisil.com
 www.business_standard.com
 www.indiainfoline.com
 www.india_business_informal
 www.indiabudget.nic.in
 www.valuereasearch.com
 www.equityresearch.com
 www.utibank.com

JOURNALS / MAGAZINES / NEWSPAPERS

 World
 Business Today
 The Times of India
 The Financial Express
 Karvy finapolis
 UTI bulletin
 Business

ANNEXURE
Ques 1. Age of the investors

o 18-24
o 24-30
o 30 & above

Ques 2. Mention your annual income

o Below 100000
o 100000-500000
o 500000 above

Ques 3. Do you invest in mutual funds

o Yes
o No

Ques 4. Which among these are the safest investment options

o Mutual funds
o Stock market
o Band deposits
o Others

Ques5. Which factors prevent you from investing in mutual funds?

o Bitter past experience

o Lack of knowledge
o Insufficient investment advisors
o Others
Ques6. Which scheme do you feel is acceptable ?

o Open ended scheme

o Close ended scheme

Ques 7. Investment objective

o Return
o Risk hedging
o Tax benefits
o Other reasons

Ques 8. Reasons of not investing in mutual funds

o Risky affair
o Do not aware a
o Other
o Not so popular