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THE ICSI JAIPUR CHAPTER PROJECT REPORT

on

MUTUAL FUND

(IN REQUIREMENT OF MSOP SCHEDULED FROM 23-Nov-2014 to 08-DEC-2014)

UNDER GUIDANCE OF DR. GIRISH GOYAL, CHAIRMAN, ICSI JAIPUR CHAPTER

SUBMITTED BY: VIDISHA KHANDELWAL

REG NO: 220837291/02/2010 DEC-2014

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DECLARATION CERTIFICATE

I declare that the project titled Mutual Fund submitted to The Institute of Company Secretaries of India is an original project done by me. No part of the project is taken from any other project or materials published or otherwise or submitted earlier to any other College or University.

Date: 02-Dec-2014 Vidisha Khandelwal Place: Jaipur Registration No.: 220837291/02/2010

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ACKNOWLEDGEMENT

I would like to acknowledge and thank from the deepest portion of my heart to all the people who were always behind me, whenever I needed any help for successful completion of this report. To start with I would like to thank The Institute of Company Secretaries of India for providing me with this opportunity.

I wish to express my indebted gratitude and special thanks to my mentor Dr. Girish Goyal, the Chairman of ICSI, Jaipur who in spite of being busy with his duties, took time out to hear, guide and keep me on the correct path. Without her active guidance, help, cooperation & encouragement, I would not have made headway in the project. Along with him I would like to thank all concerned Managing Committee Members and the staff of ICSI, Jaipur Chapter for always being helpful and cooperative whenever I was stuck with any problem. Id also like this opportunity to show my special gratitude to my mentor Mr. C.P. Vaid, Anil Special Steel Industries Limited, Jaipur whose guidance in 15 months CS training has given me tremendous exposure to CS and helped me increase my knowledge. At last but not least gratitude goes to all of my friends who directly or indirectly helped me to complete this project report.

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OBJECTIVES OF STUDY

To increase the awareness level of investors towards mutual fund.

To reduce the fear that came in the minds of investors while investing in mutual

fund.

Analyze the factors that influence the investment decision.

To find out the investment needs of customer.

To find out the best option for different investors according to their different

investment needs.

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RESEARCH METHODOLOGY The literature study is our main method. This is used in order to fulfill the purpose, i.e. to give a short,

but full overview of the existing theoretical definitions for mutual funds. A detailed description on

mutual funds and other investment opportunities available in market place is given in order to help or

aid the readers in assessing a better investment avenue.

The center point of our study is a Mutual fund, about which a detailed description is given which

includes history, development stages and current scenario of mutual funds in Indian financial market.

Examples of various mutual funds are also given with their classification and respective features.

The organization of mutual funds and three tier structure is also a part of the study which gives a

overview of the working of mutual funds. Benefits and disadvantages of the mutual funds are also

mentioned in order to help in deciding the scope of investment in mutual funds.

The main objective of this study is to deal with factors considered before investing in mutual funds and the various steps which should be followed while investing funds. The study is a part of analyzing investors mind towards Mutual Funds and how Mutual Fund is a better option for investment. The underlying objective of the research is to provide the student with practical aspect of the organization working environment. Such type of research helps the student to visualize and realize about the congruencies between the theoretical learning and the practical aspect followed by the organization.

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Table of Contents

DECLARATION CERTIFICATE ................................................................................................................ 1 ACKNOWLEDGEMENT ............................................................................................................................ 3 OBJECTIVES OF STUDY ........................................................................................................................... 4 RESEARCH METHODOLOGY ................................................................................................................... 5

1. MUTUAL FUNDS AS AN INVESTMENT AVENUE ....................................................................... 7

2. HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY ............................................................. 8

3. CONCEPT OF MUTUAL FUND .................................................................................................... 10

4. ORGANISATION OF A MUTUAL FUND ...................................................................................... 11

5. VALUATION OF MUTUAL FUNDS .............................................................................................. 14

6. TYPES OF MUTUAL FUND SCHEMES ........................................................................................ 15

6.1. Differentiation on the basis of structure of schemes............................................................... 15

6.2. Differentiation on the basis of investment objectives ............................................................. 16

6.3. Other Schemes: ........................................................................................................................... 18

7. OTHER INVESTMENT OPTIONS ................................................................................................ 20

8. CURRENT SCENARIO OF MUTUAL FUNDS IN INDIA .............................................................. 23

9. REGULATORY CHANGES ............................................................................................................ 25

10. BENEFITS OF MUTUAL FUNDS ................................................................................................. 26

11. LIMITATIONS OF MUTUAL FUNDS ........................................................................................... 28

12. FACTORS TO BE CONSIDERED BEFORE SELECTING A MUTUAL FUND ............................... 29

13. RISK VS REWARD ....................................................................................................................... 30

13.1. Types of risks ....................................................................................................................... 31

13.2. Managing Risk: .................................................................................................................... 32

14. REASONS FOR INVESTING IN MUTUAL FUNDS ...................................................................... 33

15. 5 EASY STEPS TO INVEST IN MUTUAL FUND .......................................................................... 34

16. MEASUREMENT OF FUND PERFORMANCE ............................................................................. 37

17. SWOT ANALYSIS: ........................................................................................................................ 38

18. MUTUAL FUND DATA ANALYSIS SURVEY ............................................................................... 39

19. RECOMMENDATIONS & CONCLUSION ..................................................................................... 43

20. BIBLIOGRAPHY: .......................................................................................................................... 44

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1. MUTUAL FUNDS AS AN INVESTMENT AVENUE The significant outcome of the government policy of liberalization in industrial and financial sector has

been the development of new financial instruments. These new instruments are expected to impart

greater competitiveness flexibility and efficiency to the financial sector. With the frequent

fluctuations in the secondary market and the inherent attitude of Indian small investors to avoid risk,

it is important on the part of Indian financial sector to provide instruments that fits the investment

requirement of various financial market contributors whose investment goals, risk and reward

priorities, access to financial instruments are different.

It has been a little over 20 years since the asset management industry was opened up to the entry of

new players. The objective was to expand the business by widening and deepening the market for

asset management products. The inclusion of asset management products in the basket of traditional

investment avenues such as cash-in-hand, corporate and fixed deposits (FDs), savings accounts, stocks

and gold was expected to occur over time. Growth and development of various Mutual Fund products

in Indian capital market has proved to be one of the most catalytic instruments in generating

momentous investment growth in the capital market.

A Mutual Fund is a trust that pools the savings of a number of investors who share a common

financial goal. People who buy shares of a Mutual Fund are its owners or shareholders. Their

investments provide the money for a Mutual Fund to buy securities such as stocks and bonds. A

Mutual Fund can make money from its securities in two ways: a security can pay dividends or interest

to the fund or a security can rise in value. A fund can also lose money and drop in value.

The money thus collected is then invested by the fund manager in different types of securities. These

could range from shares to debentures to money market instruments, depending upon the scheme's

stated objectives. The income earned through these investments and the capital appreciations

realized by the schemes 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 growth of Mutual funds in any economy is an indicator of the development of financial sector and

the extent to which investors have faith in the regulatory environment. Though still at a nascent

stage, Indian Mutual Fund industry offers an Extreme excess of schemes and serves broadly all type of

investors. The range of products includes equity funds, debt, liquid, gilt and balanced funds in MFs.

Since the inception of Mutual funds, they have proved to be a valuable instrument to safe guard

amateur investors against fluctuations in the financial markets and provide opportunity in making

good returns on their investment.

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2. HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the

initiative of the Government of India and the Reserve Bank of India. The history of mutual funds in

India can be broadly divided into four distinct phases

First Phase 1964-1987

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve

Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of

India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took

over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was

Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life

Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual

Fund was the first non- UTI Mutual Fund established in June 1987 followed by 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 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry,

giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first

Mutual Fund Regulations came into being, 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 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other

mutual funds.

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Fourth Phase since February 2003

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

separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under

management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US

64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of

India, functioning under an administrator and under the rules framed by Government of India and

does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund

Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual

Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than

Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund,

conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among

different private sector funds, the mutual fund industry has entered its current phase of consolidation

and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.1,53,108 crores under 421 schemes. The graph indicates the growth of assets over the years.

GROWTH IN ASSETS UNDER MANAGEMENT

The AuM of the asset management industry grew from 470 billion INR in 1993 to 1396 billion INR in

2004 and to 8252 billion INR in 2014.

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3. CONCEPT OF MUTUAL FUND

A Mutual Fund is a trust that pools the savings of a number of investors who share a common

financial goal. The money thus collected is then invested in capital market instruments such as shares,

debentures and other securities. The income earned through these investments and the capital

appreciations realized are shared by its unit holders in proportion to the number of units owned by

them. Thus 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:

IMPORTANT CHARACTERISTICS OF MUTUAL FUND

A mutual fund actually belongs to the investors who have pooled their funds is in the hands of

the investors.

Investment professionals and other service providers, who earn a free for their services, from

the fund, manage a mutual fund.

The pool of funds invested in a portfolio of marketable investments. The value of the portfolio

is updated every day.

The investors share in the fund is denominated by units. The value of the units changes in

the portfolios value, every day. The value of one unit of investment is called as the net asset

value of NAV.

The investment portfolio of the mutual fund is created according to the stated investment

objectives of the fund.

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4. ORGANISATION OF A MUTUAL FUND

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

mutual fund:

If we compile the above two description of structure of mutual funds and how they operate, the overall

picture of the functioning of mutual funds looks like:

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THREE-TIER STRUCTURE OF MUTUAL FUNDS

The structure of Mutual Funds in India is governed by the SEBI (Mutual Fund) Regulations, 1996

(hereinafter referred to as SEBI Regulations). These regulations make it mandatory for Mutual Funds

to have a Three-tier Structure of Sponsor ,Trustee & Asset Management Company (AMC).

Sponsor

The sponsor is the promoter of the mutual fund. The sponsor establishes the mutual fund and

registers same with SEBI. It appoints the trustees, Custodians and the AMC with prior approval of

SEBI, and in accordance with SEBI Regulations. Sponsor is required to contribute at least 40% of the

capital of the AMC.

Trustees

The Mutual Fund, which is a trust, is managed by a Trust Company or a Board of Trustees. Board of

trustees and trust companies are governed by the provisions of the Indian Trust Act. The appointment

of all the trustees has to be done with the prior approval of SEBI. There must be at least 4 members in

the board of Trustees and at least 213 of the members of the board of trustees must be independent.

One of the major tasks of the Trustees is to appoint AMC, in consultation with the Sponsor and SEBI

regulations.

Asset Management Company (AMC)

Asset Management Company, registered with SEBI, can be appointed as investment managers of

mutual funds. AMC must have a minimum net worth of 10 crore at all times. An AMC cannot be an

AMC or Trustee of another Mutual Fund. AMC appoints the Fund Managers in consultation with

trustees.

Other participants in Mutual Funds:

Custodian:

A trust company, bank or similar financial institution responsible for holding and safeguarding the

securities owned within a mutual fund. A mutual fund's custodian may also act as the mutual fund's

transfer agent, maintaining records of shareholder transactions and balances. It is also referred to as a

"mutual fund corporation".

Since a mutual fund is essentially a large pool of funds from many different investors, it requires a

third-party custodian to hold and safeguard the securities that are mutually owned by all the fund's

investors. This structure mitigates the risk of dishonest activity by separating the fund managers from

the physical securities and investor records.

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Transfer Agent:

A trust company, bank or similar financial institution assigned by a corporation to maintain records of

investors and account balances and transactions, to cancel and issue certificates, to process investor

mailings and to deal with any associated problems (i.e. lost or stolen certificates).

Because publicly-traded companies, mutual funds and similar entities often have many investors who

own a small portion of the organization, require accurate records and have rights regarding

information provision, the role of the transfer agent is an important one. Some corporations choose

to act as their own transfer agents, but most choose a third-party financial institution to fill the role.

Regulators:

Regulators frame rules and regulate industry. Mutual funds are highly regulated as they have been set

up for small investors. SEBI has strict regulations on fees, reporting standards and frequent audits. The

Association of Mutual Funds of India (AMFI) is a self-governing association of Indian Mutual Funds

that regulates its members' sales, distribution and communication practices.

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5. VALUATION OF MUTUAL FUNDS

Since owner is a part owner of a Mutual Fund, it is necessary to establish the value of his part i.e. each

share or unit that an investor holds need to be assigned a value. These units held by investor evidence

the ownership of the funds assets; the value of the total assets of the fund when divided by the total

number of units issued by mutual funds gives us the value of one unit. This is generally called the Net

Assets Value (NAV) of one unit or one share. The value of investors part ownership is thus

determined by the NAV of the numbers of units held.

A Mutual Fund is a common investment vehicle to where the assets of the fund belong directly to the

investors. Investors subscriptions are accounted for by the fund not as liabilities or deposits but as

Unit Capital. The investments made on behalf of the investors are reflected on the assets side which

are the main constituent of the balance sheet and the liabilities of strictly in short term nature may

also be part of the balance sheet. The funds net assets are therefore defined as the assets- minus

liabilities.

As there are many investors in a fund, it is common practice for mutual fund to complete the share of

each investor on the basis of the value of Net Assets per Share/Unit, commonly known as the Net

Asset Value (NAV).

NAV = Net Assets of the scheme /Number of units outstanding, i.e.

Market Value of investment + receivables + other accrued income + other asset accrued expenses other payables other liabilities/ No. Of units outstanding as at the NAV date Thus, NAV is the value of a mutual fund's assets (securities plus cash net of expenses) at the end of

each trading day divided by the number of shares outstanding. For the purpose of the NAV

calculations, the day on which NAV is calculated by a fund is known as the Valuation Date.

NAV of all the schemes must be calculated and published at least weekly for closed end schemes and

daily for open-ended schemes. NAV s for a day must also be posted on AMFTs website by 8:00pm on

that day.

A funds NAV is affected by four sets of factors:

1. Purchase and sale of investment securities.

2. Valuation of all investments securities held

3. Other assets and liabilities, and

4. Units sold or redeemed

Other Assets include any income due to the fund but not received as on the valuation date (for

example, dividend announced by the company yet to be received)

Other Liabilities includes expenses payable by the fund, for example Custodian fees or even the

management fees payable to the AMC.

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6. TYPES OF MUTUAL FUND SCHEMES

Wide varieties of Mutual Fund Schemes exist to cater to the needs such as financial position, risk

tolerance and return expectations etc. Since the needs and aspirations of different individuals vary

from person to person, there are absolutely different kinds of mutual funds for investment. There

could be various categories of mutual funds in India. The governing body for these funds being the

Securities Exchange Board of India (SEBI). All varieties of mutual funds are governed by it in an all-

pervasive manner.

Below is an overview of the existing types of schemes in the industry.

I. By Structure a. Open-ended Schemes b. Close-ended Schemes c. Interval Schemes

II. By Investment Objective a. Growth Schemes b. Balanced Schemes c. Income Schemes d. Money Market Schemes

III. Other Schemes a. Tax Saving Schemes b. Index Schemes c. Sector Specific Schemes

Schemes can be differentiated by two broad parameters:

(a) Their constitution or structure.

(b) Their stated investment objective.

6.1. Differentiation on the basis of structure of schemes

Schemes are classified as Close-ended or Open-ended depending upon whether they give the investor

the option to redeem at any time (open-ended) or whether the investor has to wait till maturity of the

scheme.

Open-Ended-Schemes

The units offered by these schemes are available for sale and repurchase on any business day at NAV

based prices. Hence, the unit capital of the schemes keeps changing each day. Such schemes thus

offer very high liquidity to investors and are becoming increasingly popular in India. Please note that

an open-ended fund is not obliged to keep selling/issuing new units at all times, and may stop issuing

further subscription to new investors. On the other hand, an open-ended fund rarely denies to its

investor the facility to redeem existing units.

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Close-Ended-Schemes

The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units.

These schemes are launched with an initial public offer (IPO) with a stated maturity period after which

the units are fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the

stock exchanges where they are generally listed. Unlike open-ended schemes, the unit capital in

Close-ended schemes usually remains unchanged. After an initial closed period, the scheme may offer

direct compared to open-ended schemes and hence trade at a discount to the NAV. This discount

tends towards the NAV closer to the maturity date of the scheme.

Interval-Schemes

These schemes combine the features of Open-ended and Close-ended schemes. They may be traded

on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV

based prices.

6.2. Differentiation on the basis of investment objectives

Schemes can be classified by way of their stated investment objective such as Growth Fund, Balanced

Fund, and Income Fund etc.

Equity/Growth Schemes

These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in

equities and a small portion in money market instruments. Such schemes have the potential to deliver

superior returns over the long term. However, because they invest in equities, these schemes are

exposed to fluctuations in value especially in the short term.

Equity schemes are hence not suitable for investors seeking regular income or needing to use their

investments in the short-term. They are ideal for investors who have a long-term investment horizon.

The NAV prices of equity fund fluctuates with market value of the underlying stock which are

influenced by external factors such as social, political as well as economic. HDFC Equity Fund and

HDFC Top200 Fund are examples of equity schemes.

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Income/Debt-Schemes

These schemes invest in money markets, bonds and debentures of corporate companies with medium

and long-term maturities. These schemes primarily target current income instead of capital

appreciation. Hence, a substantial part of the distributable surplus is given back to the investor by

way of dividend distribution. These schemes usually declare quarterly dividends and are suitable for

conservative investors who have medium to long term investment horizon and are looking for regular

income through dividend or steady capital appreciation.

These schemes, also commonly known as Income Schemes, invest in debt securities such as corporate

bonds, debentures and government securities. The prices of these schemes tend to be more stable

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compared with equity schemes and most of the returns to the investors are generated through

dividends or steady capital appreciation. These schemes are ideal for conservative investors or those

who are not in a position to take higher equity risks. However, as compared to the money market

schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher

credit risk. HDFC Income Fund is an example of bond schemes.

Money-Market-Schemes

These schemes invest in short term instruments such as commercial paper ("CP"), certificates of

deposit ("CD"), treasury bills ("T-Bill") and overnight money ("Call"). The schemes are the least volatile

of all the types of schemes because of their investments in money market instrument with short-term

maturities. These schemes have become popular with institutional investors and high net-worth

individuals having short-term surplus funds.

Hybrid/Balanced Schemes

These schemes are also commonly called balanced schemes. These invest in both equities as well as

debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income

and moderate capital appreciation. Such schemes are ideal for investors with a conservative, long-

term orientation. HDFC Prudence Fund and HDFC Balance Fund are perfect examples of such hybrid

schemes.

6.3. Other Schemes:

Tax-Saving-Schemes

Investors (individuals and Hindu Undivided Families ("HUFs")) are being encouraged to invest in

equity markets through Equity Linked Savings Scheme ("ELSS") by offering them a tax rebate. Units

purchased cannot be assigned / transferred/ pledged / redeemed / switched - out until completion of

3 years from the date of allotment of the respective Units. The Scheme is subject to Securities &

Exchange Board of India (Mutual Funds) Regulations, 1996 and the notifications issued by the Ministry

of Finance (Department of Economic Affairs), Government of India regarding ELSS. Subject to such

conditions and limitations, as prescribed under Section 88 of the Income-tax Act, 1961, subscriptions

to the Units not exceeding Rs.10, 000 would be eligible to a deduction, from income tax, of an amount

equal to 20% of the amount subscribed.

Sector-Specific-Equity-Schemes

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These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector.

They depend upon the performance of these select sectors only and are hence inherently more risky

than general purpose equity schemes. Ideally suited for informed investors who wish to take a view

and risk on the concerned sector.

Index-Schemes

An Index is too used as a measure of the performance of the market as a whole, or a specific sector of

the market. It also serves as a relevant benchmark to evaluate the performance of mutual funds.

Some investors are interested in investing in the market in general rather than investing in any

specific fund. Such investors are happy to receive the returns posted by the markets. As it is not

practical to invest in each and every stock in the market in proportion to its size, these investors are

comfortable investing in a fund that they believe is a good representative of the entire market. Index

Funds are launched and managed for such investors.

Table showing the various funds and their investment objectives:

Scheme type Time Horizon

Risk profile

Investment pattern

Objective Open Close Equity (%)

Debt (%)

Money Market Inst./Others (%)

Money Market Yes No Short-

Term Low 0 0-20 80-100

Income Yes Yes Medium Long Term

Low to Medium

0 80-100 0-20

Growth Yes Yes Long Term

High 80-100 0-20 0-20

Balanced Yes Yes Long term Medium to high

0-60 0-40 0-20

Tax Saving Yes Yes Long term High 80-100 80-100 0-20

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7. OTHER INVESTMENT OPTIONS

Savings form an important part of the economy of any nation. With the savings invested in various

options available to the people, the money acts as the driver for growth of the country. Indian

financial scene too presents a plethora of avenues to the investors. Though certainly not the best or

deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings.

The possible avenues for investment can be divided into following categories:

EQUITIES: Options available are secondary market (buying or selling shares in the stock exchanges) or

the primary market (IPOs). These are generally classified as high risk high return asset.

FIXED INCOME INSTRUMENTS: This product class includes options such as Fixed Deposits,

Debentures, Bonds, Preference shares etc. These investments are relatively safer but limited upside

on returns.

FOREIGN CURRENCY INVESTMENTS: Wherever allowed by the govt. regulations, investors particularly

in developing countries will prefer to keep their assets in foreign currency. Hard currencies like US

Dollars or pound or Euro are relatively stable. The risk of currency depreciation in case of economic

/political turmoil is high.

COMMODITIES: Investing in commodities on a large scale is typically done traders or speculators who

generally are skilled. Normally in commodities high risk investors would invest for high returns in a

short period. A proxy for this is the way retail households stock up commodities in anticipation of

price increase, such as stocking sugar or wheat requirements for the full year.

ART/ANTIQUES etc: Art has proved to be an important investment avenue, particularly for the rich

and wealthy. However, one has to be an expert in evaluating the value of art. Investment in paintings

is illiquid and has a long gestation period, entails high risk but high rewards too.

PROPERTY: This offers a limited option to investors as in India most people buy a house to live in. only

the very rich buy property as an investment. Real estate is very illiquid investment option.

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BULLION MARKET(GOLD): This is one avenue which has been a major area for investing in the Indian

society. The importance of gold and silver has been prevalent through historic time. The importance

of this market is due to the liquidity it provides.

BANKS: Considered as the safest of all options, banks have been the roots of the financial systems in

India. Promoted as the means to social development, banks in India have indeed played an important

role in the rural up-liftment. For an ordinary person though, they have acted as the safest investment

avenue wherein a person deposits money and earns interest on it. The two main modes of investment

in banks, Savings accounts and Fixed deposits have been effectively used by one and all. However,

today the interest rate structure in the country is headed southwards, keeping in line with global

trends. With the banks offering 9 percent in their fixed deposits for one year, the yields have come

down substantially in recent times. Add to this, the inflationary pressures in economy and people

have a position where the savings are not earning. The inflation is creeping up, to almost 8 percent at

times, and this means that the value of money saved goes down instead of going up. This effectively

mars any chance of gaining from the investments in banks.

POST OFFICE SCHEMES: Just like banks, post offices in India have a wide network. Spread across the

nation, they offer financial assistance as well as serving the basic requirements of communication.

Among all saving options, Post office schemes have been offering the highest rates. Added to it is the

fact that the investments are safe with the department being a Government of India entity. The two

basic and most sought for features, those of return safety and quantum of returns were being

handsomely taken care of. Though certainly not the most efficient systems in terms of service

standards and liquidity, these have still managed to attract the attention of small, retail investors.

However, with the government announcing its intention of reducing the interest rates in small savings

options, this avenue is expected to lose some of the investors.

PUBLIC PROVIDENT FUNDS: Public Provident Funds act as options to save for the post retirement

period for most people and have been considered good option largely due to the fact that returns

were higher than most other options and also helped people gain from tax benefits under various

sections. This option too is likely to lose some of its sheen on account of reduction in the rates

offered.

The options discussed above are essentially for the risk-averse, people who think of safety and then

quantum of return, in that order. For the brave, it is dabbling in the stock market. Stock markets

provide an option to invest in a

high risk, high return game. While the potential return is much more than 10-11 percent any of the

options discussed above can generally generate, the risk is undoubtedly of the highest order. But

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then, the general principle of encountering greater risks and uncertainty when one seeks higher

returns holds true. However, as enticing as it might appear, people generally are clueless as to how

the stock market functions and in the process can endanger the hard-earned money.

For those who are not adept at understanding the stock market, the task of generating superior

returns at similar levels of risk is arduous to say the least. This is where Mutual Funds come into

picture.

Mutual Funds are essentially investment vehicles where people with similar investment objective

come together to pool their money.

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8. CURRENT SCENARIO OF MUTUAL FUNDS IN INDIA

Since private players were allowed in 1993, the Indian Mutual fund industry has witnessed a sea

change in the way it operates, in the regulatory and investor attitude towards Mutual fund products.

From a single player in 1987 today there are 33 mutual funds offering more than 477 schemes. There

is rich diversity in the sector as the asset management industry offers a mix of traditional mutual fund

products and alternatives (real estate and hedge funds). The investor universe that the industry taps

covers insurance funds, pension funds, sovereign wealth funds (SWFs) and high net worth individuals

(HNWIs) /mass affluent/retail investors.

Here are certain statistics that reflect that Indian Mutual fund industry still has a long way to go when

compared to global standards:

Comparison with Markets: While the AuM has grown from approximately 470 billion INR as on 31

March 1993 to approximately 8,250 billion INR as on 31 March 2014 (reflecting a CAGR of 14.6% over

the last 21 years), the Sensex has grown from approximately 2280.52 as on 31 March 1993 to

22,386.27 as on 31 March 2014 (reflecting a CAGR of approximately 11.5%). Quite naturally, the

growth of the Sensex

and the AuM feed off one another and thus a portion of the AuM growth can be attributed to the

growth of underlying stocks and indices.

AUM Distribution: The industry has seen net flows of approximately 4900 billion INR from 2001 to

2014 (an average of 352 billion INR per annum). The change in the financial assets (gross financial

savings) of the household sector in FY2012-13 was approximately 109,69 billion INR, of which mutual

funds attracted 274 billion INR (approximately 2.5%). Compared to this, the amount held in currencies

was approximately 10%, the amount invested in deposits approximately 56%, life insurance gathered

approximately 16% and pensions and provident funds gathered approximately 14.5%.

AUM as a Percentage of GDP: Mutual fund penetration in India is low as compared to global and peer

benchmarks. The AuM to GDP ratio stands at 7 to 8% as compared to a

global average of 37%. Even the SAAAME economy of Brazil, considered a peer emerging economy, is

significantly ahead, with an AuM to GDP ratio of 45%.

Penetration of Mutual funds: In India it is estimated that 6.7% of the households hold mutual funds.

This figure is close to 50% in case of the US and 17% in case of UK. Mutual funds account for only

24

0.73% of total financial assets in India (11% of bank deposits). AUM for Mutual funds had exceeded

the bank deposits in US in as early as 1998.

Investor Mix: The asset management industry held 39.5 million folios as on 31 March 2014, which has

declined from around 47.6 million as on 31 March 2009. The industry has not managed to improve

the share of retail and individual investors in the AuM of the industry over the last decade from 2000

to 2014.

Product Basket: Over the years the industry has developed an extensive product basket covering

various investment opportunities. However, the 80-20 rule applies. Over 80% of the AuM is in less

than 20% of the product categories. Income based instrument are 56% while Money market based

products are 21%.

Sales and Marketing: The industry has been operating on what we know as the open architecture

distribution model, with no tied agents. Although the ability to invest directly now exists, the industry

is largely reliant on the distributor fraternity at the front end.

Over the years, the distribution economics have been changed to correct a few anomalies such as

churn, etc. However, as things stand, the number of AMFI registration numbers (ARNs) has declined

from around 82,015 as on 31 March 2011 to 58,167 as on 31 December 2013. The industry needs to

analyse this trend in all its aspects. Unfortunately, there may not be a one-size-fits-all solution that

will work.

25

9. REGULATORY CHANGES

Long-term policy on mutual funds

The Securities and Exchange Board of India (SEBI) has framed a long-term policy for mutual funds. The

policy covers aspects including enhancing the reach of mutual fund products, promoting financial

inclusion, tax treatment, obligation of various stakeholders, increasing transparency, etc. Its

recommendations have been separated into non-tax proposals and tax-related proposals. Most of the

non-tax proposals have been notified by the SEBI by way of notifications. The salient features are:

Increase in net worth requirement to 500 million INR

The SEBI has recently notified regulations enhancing the net worth requirement of asset management

companies (AMCs) from 100 million INR to 500 million INR. AMCs have been provided a period of

three years to comply with the increased net worth requirement. They shall be permitted to launch

new schemes only after they comply with the new net-worth requirement. For AMCs eligible to

launch only infrastructure debt schemes, the minimum net- worth requirement has been retained at

100 million INR.

Introduction of the concept of seed capital

The sponsor or the AMC is now required to invest at least 1% or 5 million INR, whichever is less, (in

new open-ended Regulatory updates fund offerings) of the amount raised in the growth option.

Furthermore, such investments cannot be redeemed until the scheme is wound up. For existing open-

ended schemes, the sponsor or the AMC needs to comply with the above stipulation within a period

of one year.

Disclosures of assets under management (AuM)

In order to enhance transparency and increase the quality of the disclosures for investors, mutual

funds are required to disclose on their websites, on a monthly basis, different types of AuMs, and also

to share these with the Association of Mutual Funds of India (AMFI).

Disclosure of votes cast by mutual funds

To improve transparency and to encourage mutual funds, AMCs will be required to diligently exercise

their voting rights by Recording and disclosing the specific reasons supporting the voting decision with

respect to each voting proposal.

Financial inclusion

Towards the aspect of financial inclusion, the SEBI vide its circular requires mutual funds to ensure

that it Mandatorily make available printed literature on mutual funds in regional languages to ensure

investor awareness and education. Also Introduce investor awareness campaign in regional

languages, both in print and electronic media.

26

10. BENEFITS OF MUTUAL FUNDS

Mutual Funds offer a whole variety of benefits for their investors. These benefits have helped mutual

funds achieve such outstanding success in developed markets like UK and US. This section explains

the key benefits offered by mutual funds.

Affordability

A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment

objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be

extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as

modest as Rs.500/-. Thus it would be affordable for an investor to build a portfolio of investments

through a mutual fund rather than investing directly in the stock market.

Reduction in Risk

Mutual funds invest in a portfolio of securities. This means that all funds are not invested in the same

Investment Avenue. Holding a portfolio that is diversified across investment avenues is a wise way to

manage risk. When such a portfolio is liquid and marked to market, it enables investors to

continuously evaluate the portfolio and manage their risks more efficiently.

Diversification

Diversification simply means that you must spread your investment across different securities (money

market instruments, bonds, stocks, real estate, fixed deposits etc.) and different sectors (banking,

textile, IT, etc.). It allows you to minimize the risks associated with any investment. However, it is very

difficult for individuals to have the requisite diversification for your investment given smaller

portfolios and transaction costs. Mutual Funds can pool in the investments of thousands of investors

and achieve the desired level of diversification for each. This kind of a diversification may add to the

stability of your returns, so as to offset any underperformance by any one sector or instrument and

help you meet your investment objective.

Variety

Mutual funds offer a whole variety of schemes. This variety is beneficial in two ways: first, it offers

different types of schemes to investors with different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For

example, an investor can invest his money in a debt scheme and equity scheme depending on his risk

appetite to create a balanced portfolio easily or simply just buy a Balanced Scheme.

27

Professional-Management

Qualified investment professionals seek to maximize returns and minimize risk monitor investor's

money. In a mutual fund, investors are handing their money to an investment professional who has

experience in making investment decisions. It is then the Fund Manager's job to (a) find the best

securities for the fund, given the fund's stated investment objectives; and (b) keep track of

investments and changes in market conditions and adjust the mix of the portfolio, as and when

required.

Liquidity

Investors are free to take their money out of open-ended mutual funds whenever you want, no

questions asked. Most open-ended funds mail your redemption proceeds, which are linked to the

fund's prevailing NAV (net asset value), within three to five working days of investor putting in his

request.

Transparency

The performance of a mutual fund is reviewed by various publications and rating agencies, making it

easy for investors to compare fund to another. As a unit holder, you are provided with regular

updates, for example daily NAVs, as well as information on the fund's holdings and the fund

manager's strategy.

Tax efficiencies

Mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands

of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond

one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase

cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to

account for rising inflation), thereby reducing the gap between your actual purchase costs and selling

price. This reduces your tax liability.

Convenience and Flexibility

Investing in mutual funds has its own convenience. While you own just one security rather than many,

you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers

decide what securities to trade collect the interest payments and see that your dividends on portfolio

securities are received and your rights exercised. It also uses the services of a high quality custodian

and registrar. Another big advantage is that you can move your funds easily from one fund to another

within a mutual fund family. This allows you to easily rebalance your portfolio to respond to

significant fund management or economic changes.

28

11. LIMITATIONS OF MUTUAL FUNDS

Professional Management

Did you notice how we qualified the advantage of professional management with the word

"theoretically"? Many investors debate over whether or not the so-called professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund

loses money, the manager still takes his/her cut. We'll talk about this in detail in a later section.

Costs

Mutual funds don't exist solely to make your life easier--all funds are in it for a profit. The mutual

fund industry is masterful at burying costs under layers of jargon. These costs are so complicated

that in this tutorial we have devoted an entire section to the subject.

Dilution

It's possible to have too much diversification (this is explained in our article entitled "Are You

Over-Diversified?"). Because funds have small holdings in so many different companies, high

returns from a few investments often don't make much difference on the overall return. Dilution

is also the result of a successful fund getting too big. When money pours into funds that have had

strong success, the manager often has trouble finding a good investment for all the new money.

No tailor made portfolio of funds

Investors who invest on their own can build their own portfolios of share, bonds, and other

securities. Investing through funds means he delegates this decision to the fund manager.

No assured returns and no protection of capital

Mutual funds do not offer assured returns and carry risk. Unlike bank deposits, your investment in

a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by any

government body Funds are not risk-free. It is possible that you could lose money since mutual

fund shares are usually shares in stock and/or bond portfolios and are not guaranteed.

Taxes

When making decisions about your money, fund managers don't consider your personal tax

situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which

affects how profitable the individual is from the sale. It might have been more advantageous for

the individual to defer the capital gains liability.

29

12. FACTORS TO BE CONSIDERED BEFORE SELECTING A MUTUAL FUND

Making Risk- adjusted returns comparison. By doing this the investor will know whether the

returns generated by the scheme have been adequately compensated for the extra risk

undertaken by the scheme.

The investor depending upon his risk appetite and preferences should sub-classify the

schemes on the basis of the characteristics of the schemes, which may be defensive or

aggressive in nature.

Portfolio concentration is also an important factor to be considered. It is always advisable to

choose a scheme, which has a well-diversified portfolio rather than a concentrated portfolio,

as it carries lesser risk.

Liquidity of the portfolio is also one of the critical parameters.

The corpus size of the scheme is also of importance. A large corpus size firstly denotes

investors confidence in the scheme and its fund manger abilities over the years and, secondly

it allows the fund manager to diversify the portfolio, which reduces the overall market risk.

Other factors like turnover rates, low expense ratio, load structure etc of the schemes etc

should also be considered before finally zeroing down on a scheme of your choice.

The rankings undertaken by ICRA are an initiative to inform the investors- who does not have

the time or the expertise to undertake the analysis on their own- about the relative

performance of the schemes. It considers all important parameters to arrive at a

comprehensive rank with a view to help investors decide the scheme which may suit their

investment profile.

Although much neglected, the due diligence in selection of the right mutual fund scheme is of

utmost importance as an investor cannot move in and out of a particular scheme on a regular

basis, because of the high costs involved, and investments made into a particular scheme

should be looked on a long-term basis as a wealth creation tool.

30

13. RISK VS REWARD

Having understood the basics of mutual funds the next step is to build a successful investment

portfolio. Before you can begin to build a portfolio, one should understand some other elements of

mutual fund investing and how they can affect the potential value of your investments over the years.

The first thing that has to be kept in mind is that when you invest in mutual funds, there is no

guarantee that you will end up with more money when you withdraw your investment than what you

started out with. That is the potential of loss is always there. The loss of value in your investment is

what is considered risk in investing.

Even so, the opportunity for investment growth that is possible through investments in mutual funds

far exceeds that concern for most investors. Heres why.

At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the

potential reward. Or stated in another way, you get what you pay for and you get paid a higher return

only when you're willing to accept more volatility.

Risk then, refers to the volatility -- the up and down activity in the markets and individual issues that

occurs constantly over time. This volatility can be caused by a number of factors -- interest rate

changes, inflation or general economic conditions. It is this variability, uncertainty and potential for

loss, that causes investors to worry. We all fear the possibility that a stock we invest in will fall

substantially. But it is this very volatility that is the exact reason that you can expect to earn a higher

long-term return from these investments than from a savings account.

Different types of mutual funds have different levels of volatility or potential price change, and those

with the greater chance of losing value are also the funds that can produce the greater returns for you

over time. So risk has two sides: it causes the value of your investments to fluctuate, but it is precisely

the reason you can expect to earn higher returns.

31

13.1. Types of risks All investments involve some form of risk. Consider these common types of risk and evaluate them

against potential rewards when you select an investment.

Market Risk

At times the prices or yields of all the securities in a particular market rise or fall due to broad

outside influences. When this happens, the stock prices of both an outstanding, highly profitable

company and a fledgling corporation may be affected. This change in price is due to "market risk".

Inflation Risk

It is sometimes referred to as "loss of purchasing power." Whenever inflation rises forward faster

than the earnings on your investment, you run the risk that you'll actually be able to buy less, not

more. Inflation risk also occurs when prices rise faster than your returns.

Credit Risk

In short, how stable is the company or entity to which you lend your money when you invest?

How certain are you that it will be able to pay the interest you are promised, or repay your

principal when the investment matures?

Exchange risk

A number of companies generate revenues in foreign currencies and may have investments or

expenses also denominated in foreign currencies. Changes in exchange rates may, therefore, have

a positive or negative impact on companies which in turn would have an effect on the investment

of the fund.

Investment Risks

The sectorial fund schemes, investments will be predominantly in equities of select companies in

the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance

of such companies and may be more volatile than a more diversified portfolio of equities.

Interest Rate Risk

Changing interest rates affect both equities and bonds in many ways. Investors are reminded that

"predicting" which way rates will go is rarely successful. A diversified portfolio can help in

offsetting these changes.

32

Changes in Government Policy

Changes in Government policy especially in regard to the tax benefits may impact the business

prospects of the companies leading to an impact on the investments made by the fund.

13.2. Managing Risk:

Mutual funds offer incredible flexibility in managing investment risk. Diversification and Automatic

Investing (SIP) are two key techniques you can use to reduce your investment risk considerably

and reach your long-term financial goals.

Diversification

When you invest in one mutual fund, you instantly spread your risk over a number of different

companies. You can also diversify over several different kinds of securities by investing in different

mutual funds, further reducing your potential risk. Diversification is a basic risk management tool

that you will want to use throughout your lifetime as you rebalance your portfolio to meet your

changing needs and goals. Investors, who are willing to maintain a mix of equity shares, bonds and

money market securities, have a greater chance of earning significantly higher returns over time

than those who invest in only the most conservative investments. Additionally, a diversified

approach to investing -- combining the growth potential of equities with the higher income of

bonds and the stability of money markets -- helps moderate your risk and enhance your potential

return.

Systematic Investment Plan (SIP)

The Unit holders of the Scheme can benefit by investing specific Rupee amounts periodically, for a

continuous period. Mutual fund SIP allows the investors to invest a fixed amount of Rupees every

month or quarter for purchasing additional units of the Scheme at NAV based prices.

Suppose an investor would like to invest Rs.1,000 under the Systematic Investment Plan on a quarterly basis. Average unit cost Rs 12,000/1,435.9 = Rs 8.36 Average unit price 109.6/12 = Rs 9.13 Unit price at beginning of next quarter Rs 14.90 Market value of investment 1435.9 * 14.90= Rs 21,395/- The investor liquidates his units and gets back Rs 21,395/-

Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the

advantage of getting more units when the market is turned down.

33

14. REASONS FOR INVESTING IN MUTUAL FUNDS Despite being available in the market for over two decades now with assets under management, less than 10% of Indian households have invested in mutual funds. A recent report on Mutual Fund Investments in India published by research and analytics firm, Boston Analytics, suggests investors are holding back from putting their money into mutual funds due to their perceived high risk and a lack of information on how mutual funds work. The primary reason for not investing appears to be correlated with city size. Among respondents with a high savings rate, close to 40% of those who live in metros and Tier I cities considered such investments to be very risky, whereas 33% of those in Tier II cities said they did not know how or where to invest in such assets. On the other hand, among those who invested, close to nine out of ten respondents did so because they felt these assets were more professionally managed than other asset classes.

Figure 1: Reasons for not investing in mutual funds in India

Figure 2: Reasons for investing in mutual funds in India

34

15. 5 EASY STEPS TO INVEST IN MUTUAL FUND

Where to look for if you want to begin savings in Mutual Funds

Mutual funds are much like any other product, in that there are manufacturers who provide the

product and there are dealers who sell them.

Large banks to organized brokerage houses to Individual Financial agents get empanelled with Mutual

Funds to provide advice and assistance to customers who want to buy units. Mutual funds units can

now also be bought over the Internet.

Contacting an Investment advisor in a bank or a brokerage house or an Independent Financial Advisor

is the first step to gathering information.

I. Evaluation: choosing the right mutual fund for you

Each Mutual fund offers a variety of schemes to suit differing needs of investors. The Bank/

Brokerage house/ Individual Financial Advisor help you make the choice based on your needs.

As an investor one may

a) For the short term or long term want to invest.

b) Want regular income or growth.

c) Want to target lower risk or higher returns.

d) Be convinced of a particular sector and want to invest in it.

35

Remember, just like a salesman in a gift shop, your investment advisor can help you the most if he

knows what you are looking for.

II. Purchase

After you have decided to save, you may have to decide among the various investment and

withdrawal options that any fund offers to its investors.

Most of these schemes also offer various options to customize your operation of the fund to your

needs:

Systematic Investment Plan (SIP): Allows you to save a part of your income regularly. Also used to

reduce risk when investing in schemes targeting aggressive growth.

Systematic Withdrawal Plan (SWP): Allows you to withdraw a part of your investment regularly.

Used when you want to withdraw your investment for a specific regular payment, like insurance

premium payments of monthly/quarterly frequency.

Automatic debit: Saves the hassle of writing a cheque when making an investment. Your account

is debited automatically for the amount invested.

Automatic credit: The reverse of Automatic Debit. Saves the hassle of enchasing a cheque when

withdrawing an investment. Your account is credited automatically with the amount withdrawn.

Dividend plan: Allows you to get Tax-free dividends from your investment. (As per current Tax

laws).

Growth plan: Allows the income generated from investment to be ploughed back into the scheme.

Used by investor targeting growth in their investment.

Some funds carry an entry load, which is a percentage fee deducted from the amount invested before

investment. Thus a 2.5% entry load will mean that if you invest Rs. 1 lakh in a Rs. 10 per unit IPO,

instead of getting 10,000 units, you will be allotted 9,750 units. Check for presence of such loads and

other conditions before investing.

After deciding the choice of mutual fund, investment and withdrawal, you are ready to begin your

savings. You need to now fill up an application form and attach a cheque of the value of your

investment or mention your account number to have it automatically debited from your account.

III. Post Purchase Monitoring

36

Once you have invested in an ongoing fund, expect a period of two to three days before you

receive an account statement on the address mentioned by you in your application form.

Your account statement indicates your current holding in the scheme that you have invested.

Please ensure that all your details have been correctly captured in account statement. Please

point out any discrepancies to your nearest CAMS investor Service Centre or the Mutual Fund

office. You can request an account statement any time by calling up your nearest CAMS/ Mutual

fund offices usually mentioned on the back of the account statement.

The transaction slip at the end of the account statement can be used for additional purchases,

redemptions or to intimate the mutual fund on any change in bank mandates/address.

IV. Exit

While you should periodically monitor the performance of your investments, we recommend you

do not get swayed by short term considerations in deciding your exit. If you have invested in a

long term fund, you can spare yourself undue worries by not monitoring the NAV every day or

week. Checking the performance once in a while along with your advisor should be fine. Most

mutual funds will provide you with a toll free number that works from 9 am to 5 am and a

website. For specific assistance you can also use your financial advisors help.

V. Redemption/ Withdrawal

Just submit your completed transaction within the transacted time for the scheme that you are

invested in and deposit the same at the nearest CAMS Investor Service Centre or the office of the

fund. You can either get a direct credit to your bank account or you can generally collect the

cheque at the CAMS Investor Service Centre/ AMC offices. If you fail to do so then the cheque is

couriered to the address mentioned in your account statement. Most funds take 1-3 days to credit

your account with your redemption proceeds.

In case an exit load is applicable to your withdrawal and you have redeemed a fixed amount, an

additional number of units equivalent to the exit load amount will be liquidated from your

investment. You can check this amount with the mentioned exit load when you get the account

statement using a simple calculator.

37

16. MEASUREMENT OF FUND PERFORMANCE

The NAV serves as a basic material for evaluating the performance of a fund. Some of the methods

that are used are:

Relative to benchmark method

Under this method a comparison is made between the returns given by a market index, and the fund

over a given period of time. If the returns generated by the fund as measured by changes in NAV over

that given period of time are greater than those generated by the benchmark then the fund is

deemed to have outperformed the market portfolio.

Risk-Return Method

The Relative-to-Benchmark measure is very simplistic, as it does not incorporate any measure of risk

in its calculation. An investor would naturally be interested in finding out the return generated for the

risk undertaken, as, in a bid to generate super normal return, the fund may go overboard on the risk

parameter. Therefore, risk adjusted measures of return are needed to measure the performance of

funds. There are several such measures prominent among which are the Sharpe ratio, the Treynor

ratio, and Alpha:

Sharpe ratio

This measure uses standard deviation as a measure to evaluate a fund's risk-adjusted returns. The

higher a fund's Sharpe ratio, the better it is i.e a fund's returns would be regarded good if the fund

returns a high level of Sharpe ratio. Mathematically, it is arrived at by deducting the risk free returns

from the returns generated by the fund and dividing the residual figure by the standard deviation of

the fund's returns. One thing that has to be kept in mind while using this measure is that the ratio is

not an absolute figure. Its real utility lies in inter scheme comparison.

Treynor's ratio

The other measure Treynor's ratio also has the same attributes with the difference that the residual

figure in this case is divided by beta rather than the standard deviation, thus reflecting only the

systematic risk. Beta of the fund is a volatility measure that quantifies sensitivity of the fund's return

to the benchmark index's returns i.e. given the movements of the benchmark how much the fund will

move.

Alpha Basically, alpha is the difference between the return that would be warranted by its beta (expected

return) and the return that is actually generated by the fund. If a fund returns more than what is

anticipated by beta, it has a positive and favorable alpha, and if it returns less than the amount

predicted by beta, the fund has a negative alpha. Mathematically, Alpha= fund return - [Risk free rate

+ Beta of fund (Benchmark return - Risk free return)]

38

17. SWOT ANALYSIS:

Strengths:

The strengths of the mutual fund industry lie in the professional management of assets under management.

Relative less risky investments as the portfolio of the fund is quite huge and thus diversified.

It is a safe haven for all the conservative investors who want to participate in the market but also want a cushion as a back-up plan.

Weaknesses:

The weaknesses lie in the high entry and exit load of almost all mutual funds .

Erosion of investors capital base in equity based funds is a hurdle in the growth and popularity of Mutual Funds.

Prone to Market Risk:

Mutual Funds depend on overall macro-economic condition and market scenario.

Opportunities:

Opportunities lie in successful introduction of regulatory norms in the mutual fund industry.

Attracting more investors would be possible if charges are alleviated to a certain extent. Tailor Made Products: We have tailor made products like sector specified schemes & even diversified

schemes in mutual funds.

Branch Expansion: Large no. of branches are opening day by day and even we are trapping the countries

having almost same type of socio-economic condition & even same culture etc.

Threats:

Other more attractive investment options such as futures and forwards, with a higher upside participation in market are a threat to this industry.

Structured products like Blended debt-Plus hybrid series, introduced by various investment banks, having features of both equity and debt are an added threat.

The relative poor performance of the stock market also acts as a hindrance to prospective

investors in Mutual Funds.

39

18. MUTUAL FUND DATA ANALYSIS SURVEY

As per our research methodology, we have done survey from market participants to analyse the

mutual fund awareness and market statistics of the mutual funds markets in India. We have analysed

response from 100 participants in the survey who belong to a diversified group of professionals. The

results of the survey are below.

Q1.How do you view the present financial market?

14

74

15

5 4

10

2 4

29

15

0

5

10

15

20

25

30

35

Uncertain Decline Growth

Govt. Employee

Private

Professional

Business

Q2. Are you familiar with the term mutual fund?

17

8

15

910

6 7

28

0

5

10

15

20

25

30

Yes No

Govt. Employee

Private

Professional

Business

Q3. What are the sources of information to you?

5

810

2

8 9

6

1

6

3 4 3

19

10

6

00

5

10

15

20

Electronic

Media

Print Media Colleagues Others

Govt. Employee

Private

Professional

Business

40

Q4. Are you aware about products of ICICI Prudential?

11

1413

11

5

11

16

19

0

5

10

15

20

Yes No

Govt. Employee

Private

Professional

Business

Q5. Whom do you think that affects the working of mutual funds?

86

4

75

8

3

8

5 4

1

68

6

2

19

0

5

10

15

20

SEBI AMC Fin. Minister Market

Condition

Govt. Employee

Private

Professional

Business

Q6. Do you think that big player/investors affects in the working of mutual fund?

17

8

15

98 8

25

10

0

5

10

15

20

25

30

Yes No

Govt. Employee

Private

Professional

Business

41

Q7. Prior to your investment of funds?

10 10

32

89

5

2

6 6

31

15

98

3

02468

10121416

Evaluate

Option

Expert

Advice

Influence by

brand

Others

Govt. Employee

Private

Professional

Business

Q8. What do you expect from your investment?

911

57

9 88

1 2

5

16

4 3

12

0 00

5

10

15

20

High Return Regular

Return

Stable

Return

Liquidity

Govt. Employee

Private

Professional

Business

Q9. For how long period do you invest?

46

12

33 3

14

43

65

2

9

15

9

2

02468

10121416

Upto 6

Months

6 Months to

1 Yr.

1 Yr. to 3 Yr. Above 3 Yr.

Govt. Employee

Private

Professional

Business

42

Q10. Which kind of fear do you see in present financial market?

5

108

2

7 85 4

6 63

1

7

21

4 3

0

5

10

15

20

25

De-valuation

of Money

Risk

regarding

returns

Govt.

Policies

Corruption

Govt. Employee

Private

Professional

Business

43

19. RECOMMENDATIONS & CONCLUSION

Though India enjoys a good savings rate, the mutual fund industry gets very little out of this .if this

money gets channelized into mutual fund it will help India match other well developed market.

Another issue facing the industry is that till now the mutual funds have focused on the A cities and

havent made much impact on the B and C class cities and the rural areas, which have also seen a

marked increase in income levels and spending power.

Following are the major recommendation:

Improve in channel and distribution network

Lack of deeper distribution networks and channels is hurting the growth of the industry. This is an

area of the concern for the mutual fund industry, which has not been able to penetrate deeper

into the country and has been limited to the metros and a class cities. the mutual fund company

should come up with better distribution models and increase its reach, it could tap into a huge

potential investor markets of the rural and other B and C class cities.

Personalized advice to investors

The lack of investment advisors, especially to give personalized investment advice to the investors

is creating roadblocks for the growth in mutual funds. Mutual fund companies should appoint

advisors to provide personalized advice to investors.

Increase operational Efficiency

Operational inefficiencies are still hampering the growth prospects of the industry. Lengthy

transaction cycles and old-fashioned returns distribution models like cheque based returns are

preventing the industry to grow at good rates. Mutual fund should adopt new technologies

regarding payment of returns.

Advertisement

Poor advertisement of products could not inspire the persons to invest in mutual fund. Mutual

fund should advertise their products through various media. They should advertise their products

through newspapers, magazines and television etc.

To come up with more innovative schemes and products so as to expand over the largest customer

base as possible

44

20. BIBLIOGRAPHY: Books

Avadhani V. A, Marketing of Financial Services, Himalaya Publishing house, 2006 Khan M. Y, Financial Services, Tata McGraw Hill,2006 Gordon Natrajan, Financial markets and Services, Himalaya Publishing house, 2006 Kothari C. R., Research Methodology, 2007

Magazines and Journals

Business world YEAR- 2007 Business today YEAR-2007 Journal of Finance Financial Services Reviews

Websites

www.icicipruamc.com www.bestwaytoinvest.com www.amfiindia.com www.google.com