Mutual Fund in India and its Impact on Investors

Mutual Fund in India and its impact on Investors

Table of Contents

Sr. No. Chapters Page No.

1 Introduction 2

2 Mutual Fund in India 10

3 Types of Mutual Funds Schemes in India 20

4 Research Methodology 30

5 Data Analysis and Interpretation 32

6 Findings & Conclusions 47

7 Suggestions 49

Bibliography 50

Annexure 51

KDKCE/Dpt. of Management Studies/MBA/2015-16


Chapter 1Introduction

Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund. This money is then managed by a professional Fund Manager, who uses his investment management skills to invest it in various financial instruments.

As an investor you own units, which basically represent the portion of the fund that you hold, based on the amount invested by you. Therefore, an investor can also be known as a unit holder. The increase in value of the investments along with other incomes earned from it is then passed on to the investors / unit holders in proportion with the number of units owned after deducting applicable expenses, load and taxes.

Saving is the surplus of income over expenditure and when such savings are invested to generate more money, it is called investment. Livestock, land and precious metals are some of the traditional investment options. During 19th century, revolution in investment took place through the banking system as it provide many investment options like Fixed deposits (FDs), government bonds, Public Provident Fund (PPF) to its investors. With the development of capital market, investment in stocks became a good option for generating higher returns. However, greater risk and lack of knowledge about the movement of stock prices were also associated with them. Therefore, mutual funds emerged as an ultra modern method of investment to lessen the risk at low cost with experts’ knowledge.

According to Association of Mutual Funds in India (AMFI), “a Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal and invest it in capital market instruments such as shares, debentures and other securities. The income earned and capital appreciation thus realised are shared by its unit holders in proportion to the number of units owned by them. Thus, it offers to common man an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.”

In India, Mutual Fund industry started in 1963 with the formation of Unit Trust of India (UTI). It was the first phase (1964–1987) of Indian mutual fund industry during which UTI enjoyed a complete monopoly. In the second phase (1987–1993), Government of India allowed public sector banks and financial institutions to set up mutual funds. Third phase (1993–2003) started with the entry of private sector and foreign funds. The fourth phase (since February 2003 till date), is the age of consolidation and growth. As on 31 March 2012, there are 44 mutual fund companies with 1309 schemes and the average asset under management as Rs 66,47,920 million with a wide variety such as Open-Ended, Close-Ended, Interval, Growth,



Income, Balanced, Equity Linked Savings Scheme (ELSS) and so on that caters to the investors’ needs, risk tolerance and return expectations.

Because of the large number of mutual fund companies and schemes, retail investors are facing problems in selecting right funds. Also, it is of paramount importance for policy makers, governing bodies and mutual fund companies to analyse as which schemes are efficient performers. Therefore, to study the performance of mutual funds in terms of 2 efficiency and the methods of improving it is of crucial importance. In general, Net Asset Value (NAV) is taken as criteria for the performance measurement and it is based on the risk return trade off . Apart from risk, mutual fund schemes possess several characteristics or attributes that might affect their performance. It is essential to know which attribute results in efficient performance and which deteriorates it. Indian mutual fund industry is still lacking far behind in terms of total assets with respect to other developed nations. One of the main reasons for poor growth is the lack of awareness and investors’ trust on companies and policy makers. Therefore, for promoting the growth of Indian mutual fund industry, it is very crucial to understand the investors’ behaviour towards different investment options and for mutual funds. For motivating investors towards the investment in mutual funds, companies must know the factors in which these are lacking in comparison to other investment options. From the above discussion, it can be concluded that Indian mutual fund industry is in its growth phase and possesses a tremendous scope for development. Some crucial issues which need to be investigated are the analysis of mutual funds’ performance in terms of their efficiency, impact of various attributes on performance and behaviour of investors towards mutual funds and other investment options.

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. 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 in 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.

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, 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.

The graph indicates the growth of assets over the years.

Why Select Mutual Fund?

The risk return trade-off indicates that if investor is willing to take higher risk then

correspondingly he can expect higher returns and vise versa if he pertains to lower risk

instruments, which would be satisfied by lower returns. For example, if an investors opt for

bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in

capital protected funds and the profit-bonds that give out more return which is slightly higher as

compared to the bank deposits but the risk involved also increases in the same proportion.

Thus investors choose mutual funds as their primary means of investing, as Mutual funds

provide professional management, diversification, convenience and liquidity. That doesn’t mean

mutual fund investments risk free.

This is because the money that is pooled in are not invested only in debts funds which are

less riskier but are also invested in the stock markets which involves a higher risk but can expect KDKCE/Dpt. of Management Studies/MBA/2015-16

Mutual Funds

Equity

Bank FD

Postal Savings

Venture Capital

HIGHER RISKHIGHIER RETURNS

LOWER RISKHIGIER RETURNS

LOWER RISKLOWER RETURNS

HIGHIER RISKMODERATE RETURNS


higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives

market which is considered very volatile.

Return Risk Matrix

Advantages of Mutual Funds:

If mutual funds are emerging as the favorite investment vehicle, it is because of the many

advantages they have over other forms and the avenues of investing, particularly for the investor

who has limited resources available in terms of capital and the ability to carry out detailed

research and market monitoring. The following are the major advantages offered by mutual

funds to all investors:



1. Portfolio Diversification:

Each investor in the fund is a part owner of all the fund’s assets, thus enabling him to hold a

diversified investment portfolio even with a small amount of investment that would otherwise

require big capital.

2. Professional Management:

Even if an investor has a big amount of capital available to him, he benefits from the

professional management skills brought in by the fund in the management of the investor’s

portfolio. The investment management skills, along with the needed research into available

investment options, ensure a much better return than what an investor can manage on his own.

Few investors have the skill and resources of their own to succeed in today’s fast moving, global

and sophisticated markets.

3. Reduction/Diversification Of Risk:

When an investor invests directly, all the risk of potential loss is his own, whether he places a

deposit with a company or a bank, or he buys a share or debenture on his own or in any other

from. While investing in the pool of funds with investors, the potential losses are also shared

with other investors. The risk reduction is one of the most important benefits of a collective

investment vehicle like the mutual fund.

4. Reduction Of Transaction Costs:

What is true of risk as also true of the transaction costs. The investor bears all the costs of

investing such as brokerage or custody of securities. When going through a fund, he has the

benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit

passed on to its investors.

5. Liquidity:

Often, investors hold shares or bonds they cannot directly, easily and quickly sell. When they

invest in the units of a fund, they can generally cash their investments any time, by selling their



units to the fund if open-ended, or selling them in the market if the fund is close-end. Liquidity

of investment is clearly a big benefit.

6. Convenience And Flexibility:

Mutual fund management companies offer many investor services that a direct market

investor cannot get. Investors can easily transfer their holding from one scheme to the other; get

updated market information and so on.

7. Tax Benefits:

Any income distributed after March 31, 2002 will be subject to tax in the assessment of all

Unit holders. However, as a measure of concession to Unit holders of open-ended equity-

oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a

concessional rate of 10.5%.

In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the

Total Income will be admissible in respect of income from investments specified in Section 80L,

including income from Units of the Mutual Fund. Units of the schemes are not subject to

Wealth-Tax and Gift-Tax.

8. Choice of Schemes:

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

9. Well Regulated:

All Mutual Funds are registered with SEBI and they function within the provisions of strict

regulations designed to protect the interests of investors. The operations of Mutual Funds are

regularly monitored by SEBI.

10. 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.



Disadvantages of Investing Through Mutual Funds:

1. No Control Over Costs:

An investor in a mutual fund has no control of the overall costs of investing. The investor

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 if the value of his investments is

declining. A mutual fund investor also pays fund distribution costs, which he would not incur in

direct investing. However, this shortcoming only means that there is a cost to obtain the mutual

fund services.

2. No Tailor-Made Portfolio:

Investors who invest on their own can build their own portfolios of shares and bonds and

other securities. Investing through fund 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 constructs a

portfolio to his choice.

3. 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 individual shares or bonds to select.

4. The Wisdom Of Professional Management:

That's right, this is not an advantage. The average mutual fund manager is no better at

picking stocks than the average nonprofessional, but charges fees.



5. No Control:

Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of

somebody else's car

6. Dilution:

Mutual funds generally have such small holdings of so many different stocks that insanely

great performance by a fund's top holdings still doesn't make much of a difference in a mutual

fund's total performance.

7. Buried Costs:

Many mutual funds specialize in burying their costs and in hiring salesmen who do not make

those costs clear to their clients.



Chapter 2Mutual Fund in India

Working of Mutual Funds

The mutual fund collects money directly or through brokers from investors. The money is

invested in various instruments depending on the objective of the scheme. The income generated

by selling securities or capital appreciation of these securities is passed on to the investors in

proportion to their investment in the scheme. The investments are divided into units and the

value of the units will be reflected in Net Asset Value or NAV of the unit. NAV 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. Mutual fund

companies provide daily net asset value of their schemes to their investors. NAV is important, as

it will determine the price at which you buy or redeem the units of a scheme. Depending on the

load structure of the scheme, you have to pay entry or exit load.



Structure of a Mutual Fund

India has a legal framework within which Mutual Fund have to be constituted. In India

open and close-end funds operate under the same regulatory structure i.e. as unit Trusts. A

Mutual Fund in India is allowed to issue open-end and close-end schemes under a common legal

structure. The structure that is required to be followed by any Mutual Fund in India is laid down

under SEBI (Mutual Fund) Regulations, 1996.

The Fund Sponsor:

Sponsor is defined under SEBI regulations as any person who, acting alone or in

combination of another corporate body establishes a Mutual Fund. The sponsor of the fund is

akin to the promoter of a company as he gets the fund registered with SEBI. The sponsor forms a

trust and appoints a Board of Trustees. The sponsor also appoints the Asset Management

Company as fund managers. The sponsor either directly or acting through the trustees will also

appoint a custodian to hold funds assets. All these are made in accordance with the regulation

and guidelines of SEBI.



As per the SEBI regulations, for the person to qualify as a sponsor, he must contribute at

least 40% of the net worth of the Asset Management Company and possesses a sound financial

track record over 5 years prior to registration.

Mutual Funds as Trusts:

A Mutual Fund in India is constituted in the form of Public trust Act, 1882. The Fund

sponsor acts as a settler of the Trust, contributing to its initial capital and appoints a trustee to

hold the assets of the trust for the benefit of the unit-holders, who are the beneficiaries of the

trust. The fund then invites investors to contribute their money in common pool, by scribing to

“units” issued by various schemes established by the Trusts as evidence of their beneficial

interest in the fund.

It should be understood that the fund should be just a “pass through” vehicle. Under the

Indian Trusts Act, the trust of the fund has no independent legal capacity itself, rather it is the

Trustee or the Trustees who have the legal capacity and therefore all acts in relation to the trusts

are taken on its behalf by the Trustees. In legal parlance the investors or the unit-holders are the

beneficial owners of the investment held by the Trusts, even as these investments are held in the

name of the Trustees on a day-to-day basis. Being public trusts, Mutual Fund can invite any

number of investors as beneficial owners in their investment schemes.

Trustees:

A Trust is created through a document called the Trust Deed that is executed by the fund

sponsor in favour of the trustees. The Trust- the Mutual Fund – may be managed by a board of

trustees- a body of individuals, or a trust company- a corporate body. Most of the funds in India

are managed by Boards of Trustees. While the boards of trustees are governed by the Indian

Trusts Act, where the trusts are a corporate body, it would also require to comply with the

Companies Act, 1956. The Board or the Trust company as an independent body, acts as a

protector of the of the unit-holders interests. The Trustees do not directly manage the portfolio of

securities. For this specialist function, the appoint an Asset Management Company. They ensure



that the Fund is managed by ht AMC as per the defined objectives and in accordance with the

trusts deeds and SEBI regulations.

The Asset Management Companies:

The role of an Asset Management Company (AMC) is to act as the investment manager

of the Trust under the board supervision and the guidance of the Trustees. The AMC is required

to be approved and registered with SEBI as an AMC. The AMC of a Mutual Fund must have a

net worth of at least Rs. 10 Crores at all times. Directors of the AMC, both independent and non-

independent, should have adequate professional expertise in financial services and should be

individuals of high morale standing, a condition also applicable to other key personnel of the

AMC. The AMC cannot act as a Trustee of any other Mutual Fund. Besides its role as a fund

manager, it may undertake specified activities such as advisory services and financial consulting,

provided these activities are run independent of one another and the AMC’s resources (such as

personnel, systems etc.) are properly segregated by the activity. The AMC must always act in the

interest of the unit-holders and reports to the trustees with respect to its activities.

Custodian and Depositories:

Mutual Fund is in the business of buying and selling of securities in large volumes.

Handling these securities in terms of physical delivery and eventual safekeeping is a specialized

activity. The custodian is appointed by the Board of Trustees for safekeeping of securities or

participating in any clearance system through approved depository companies on behalf of the

Mutual Fund and it must fulfill its responsibilities in accordance with its agreement with the

Mutual Fund. The custodian should be an entity independent of the sponsors and is required to

be registered with SEBI. With the introduction of the concept of dematerialization of shares the

dematerialized shares are kept with the Depository participant while the custodian holds the

physical securities. Thus, deliveries of a fund’s securities are given or received by a custodian or

a depository participant, at the instructions of the AMC, although under the overall direction and

responsibilities of the Trustees.



Bankers:

A Fund’s activities involve dealing in money on a continuous basis primarily with respect

to buying and selling units, paying for investment made, receiving the proceeds from sale of the

investments and discharging its obligations towards operating expenses. Thus the Fund’s banker

plays an important role to determine quality of service that the fund gives in timely delivery of

remittances etc.

Transfer Agents:

Transfer agents are responsible for issuing and redeeming units of the Mutual Fund and

provide other related services such as preparation of transfer documents and updating investor

records. A fund may choose to carry out its activity in-house and charge the scheme for the

service at a competitive market rate. Where an outside Transfer agent is used, the fund investor

will find the agent to be an important interface to deal with, since all of the investor services that

a fund provides are going to be dependent on the transfer agent.

Regulatory Structure of Mutual Funds in India:

The structure of mutual funds in India is guided by the SEBI. Regulations, 1996.These

regulations make it mandatory for mutual fund to have three structures of sponsor trustee and

asset Management Company. The sponsor of the mutual fund and appoints the trustees. The

trustees are responsible to the investors in mutual fund and appoint the AMC for managing the

investment portfolio. The AMC is the business face of the mutual fund, as it manages all the

affairs of the mutual fund. The AMC and the mutual fund have to be registered with SEBI.



Mutual Funds in India

In 1963, the day the concept of Mutual Fund took birth in India. Unit Trust of India

invited investors or rather to those who believed in savings, to park their money in UTI Mutual

Fund.

For 30 years, it goaled without a single player. Though the 1988 year saw some new

mutual fund companies, but UTI remained in a monopoly position.

The performance of mutual funds in India in the initial phase was not even closer to

satisfactory level. People rarely understood, and of course investing was out of question. But yes,

some 24 million shareholders were accustomed with guaranteed high returns by the beginning of

liberalization of the industry in 1992. This good record of UTI became marketing tool for new

entrants. The expectations of investors touched the sky in profitability factor. However, people

were miles away from the preparedness of risks factor after the liberalization.

The net asset value (NAV) of mutual funds in India declined when stock prices started

falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into

alternative investments. There was rather no choice apart from holding the cash or to further

continue investing in shares. One more thing to be noted, since only closed-end funds were

floated in the market, the investors disinvested by selling at a loss in the secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market

scandal, the losses by disinvestments and of course the lack of transparent rules in the

whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock

market performance, mutual funds have not yet recovered, with funds trading at an average

discount of 1020 percent of their net asset value.

The securities and Exchange Board of India (SEBI) came out with comprehensive

regulation in 1993 which defined the structure of Mutual Fund and Asset Management

Companies for the first time.

The supervisory authority adopted a set of measures to create a transparent and

competitive environment in mutual funds. Some of them were like relaxing investment

restrictions into the market, introduction of open-ended funds, and paving the gateway for

mutual funds to launch pension schemes.



The measure was taken to make mutual funds the key instrument for long-term saving.

The more the variety offered, the quantitative will be investors.

Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the

private players has risen rapidly since then. Currently there are 34 Mutual Fund organizations in

India managing 1,02,000 crores.

At last to mention, as long as mutual fund companies are performing with lower risks and

higher profitability within a short span of time, more and more people will be inclined to invest

until and unless they are fully educated with the dos and don’ts of mutual funds.

Mutual fund industry has seen a lot of changes in past few years with multinational

companies coming into the country, bringing in their professional expertise in managing funds

worldwide. In the past few months there has been a consolidation phase going on in the mutual

fund industry in India. Now investors have a wide range of Schemes to choose from depending

on their individual profiles.

Mutual Fund Companies in India:

The concept of mutual funds in India dates back to the year 1963. The era between 1963 and

1987 marked the existance of only one mutual fund company in India with Rs. 67bn assets under

management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end

of the 80s decade, few other mutual fund companies in India took their position in mutual fund

market.

The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank

Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India

Mutual Fund.

The succeeding decade showed a new horizon in Indian mutual fund industry. By the end

of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started

penetrating the fund families. In the same year the first Mutual Fund Regulations came into

existance with re-registering all mutual funds except UTI. The regulations were further given a

revised shape in 1996.



Kothari Pioneer was the first private sector mutual fund company in India which has now

merged with Franklin Templeton. Just after ten years with private sector players penetration, the

total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India.

Major Mutual Fund Companies in India

ABN AMRO Mutual Fund Reliance Mutual Fund

Birla Sun Life Mutual Fund Standard Chartered Mutual Fund

Bank of Baroda Mutual Fund Franklin Templeton India Mutual Fund

HDFC Mutual Fund Morgan Stanley Mutual Fund India

HSBC Mutual Fund Escorts Mutual Fund

ING Vysya Mutual Fund Alliance Capital Mutual Fund

Prudential ICICI Mutual Fund Benchmark Mutual Fund

State Bank of India Mutual Fund Canbank Mutual Fund

Tata Mutual Fund Chola Mutual Fund

Unit Trust of India Mutual Fund LIC Mutual Fund



15%

20%

9%9%4%9%

5%

5%

3%

3%

4%3% 14%

Reliance Mutual Fund HDFC Mutual Fund Birla Sun Life Mutual FundICICI Prudential Mutual Fund Kotak Mahindra Mutual Fund UTI Mutual FundLIC Mutual Fund SBI Mutual Fund IDFC Mutual FundTATA Mutual Fund Franklin templeton Mutual Fund DSP Black Mutual Fund23 others players


Mutual Fund in India and its Impact on Investors

Future Prospect of Mutual Funds in India

Financial experts believe that the future of Mutual Funds in India will be very bright. It

has been estimated that by March-end of 2010, the mutual fund industry of India will reach Rs

40,90,000 crore, taking into account the total assets of the Indian commercial banks. In the

coming 10 years the annual composite growth rate is expected to go up by 13.4%.

100% growth in the last 6 years.

Number of foreign AMC's are in the queue 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 channelizing 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 rurals like the Indian insurance industry with simple and

limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Looking at the past developments and combining it with the current trends it can be

concluded that the future of Mutual Funds in India has lot of positive things to offer to its

investors.


TYPES OF MUTUAL FUNDSBY STRUCTUREOpen - Ended SchemesClose - Ended SchemesInterval SchemesBY NATUREEquity FundDebt FundsBalanced FundsBY INVESTMENT OBJECTIVEGrowth SchemesIncome SchemesBalanced SchemesMoney Market SchemesOTHER SCHEMES Tax Saving SchemesIndex SchemesSector Specific SchemesMutual Fund in India and its Impact on Investors

Chapter 3

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial

position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors,

Being a collection of many stocks, an investors can go for picking a mutual fund might be easy.

There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual

funds in categories, mentioned below.



A). By Structure

1. Open - Ended Schemes:

An open-end fund is one that is available for subscription all through the year. These do

not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value

("NAV") related prices. The key feature of open-end schemes is liquidity.

2. Close - Ended Schemes:

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15

years. The fund is open for subscription only during a specified period. Investors can invest in

the scheme at the time of the initial public issue and thereafter they can buy or sell the units of

the scheme on the stock exchanges where they are listed. In order to provide an exit route to the

investors, some close-ended funds give an option of selling back the units to the Mutual Fund

through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one

of the two exit routes is provided to the investor.

3. Interval Schemes:

Interval Schemes are that scheme, which combines the features of open-ended and close-

ended schemes. The units may be traded on the stock exchange or may be open for sale or

redemption during pre-determined intervals at NAV related prices.



B). By Nature

1. Equity Fund:

These funds invest a maximum part of their corpus into equities holdings. The structure of

the fund may vary different for different schemes and the fund manager’s outlook on different

stocks. The Equity Funds are sub-classified depending upon their investment objective, as

follows:

Diversified Equity Funds

Mid-Cap Funds

Sector Specific Funds

Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the

risk-return matrix.

2. Debt Funds:

The objective of these Funds is to invest in debt papers. Government authorities, private

companies, banks and financial institutions are some of the major issuers of debt papers. By

investing in debt instruments, these funds ensure low risk and provide stable income to the

investors. Debt funds are further classified as:

Gilt Funds: Invest their corpus in securities issued by Government, popularly known as

Government of India debt papers. These Funds carry zero Default risk but are associated

with Interest Rate risk. These schemes are safer as they invest in papers backed by

Government.

Income Funds: Invest a major portion into various debt instruments such as bonds,

corporate debentures and Government securities.

MIPs: Invests maximum of their total corpus in debt instruments while they take

minimum exposure in equities. It gets benefit of both equity and debt market. These



scheme ranks slightly high on the risk-return matrix when compared with other debt

schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six months. These

funds primarily invest in short term papers like Certificate of Deposits (CDs) and

Commercial Papers (CPs). Some portion of the corpus is also invested in corporate

debentures.

Liquid Funds: Also known as Money Market Schemes, These funds provides easy

liquidity and preservation of capital. These schemes invest in short-term instruments like

Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for

short-term cash management of corporate houses and are meant for an investment

horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are

considered to be the safest amongst all categories of mutual funds.

3. Balanced Funds:

As the name suggest they, are a mix of both equity and debt funds. They invest in both

equities and fixed income securities, which are in line with pre-defined investment objective of

the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part

provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter viz,

Each category of funds is backed by an investment philosophy, which is pre-defined in the

objectives of the fund. The investor can align his own investment needs with the funds objective

and invest accordingly.



C). By Investment Objective:

1) Growth Schemes:

Growth Schemes are also known as equity schemes. The aim of these schemes is to provide

capital appreciation over medium to long term. These schemes normally invest a major part of

their fund in equities and are willing to bear short-term decline in value for possible future

appreciation.

2) Income Schemes:

Income Schemes are also known as debt schemes. The aim of these schemes is to provide

regular and steady income to investors. These schemes generally invest in fixed income

securities such as bonds and corporate debentures. Capital appreciation in such schemes may be

limited.

3) Balanced Schemes:

Balanced Schemes aim to provide both growth and income by periodically distributing a part

of the income and capital gains they earn. These schemes invest in both shares and fixed income

securities, in the proportion indicated in their offer documents (normally 50:50).

4) Money Market Schemes:

Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate

income. These schemes generally invest in safer, short-term instruments, such as treasury bills,

certificates of deposit, commercial paper and inter-bank call money.

Load Funds:

A Load Fund is one that charges a commission for entry or exit. That is, each time you

buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range

from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.



No-Load Funds:

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no

commission is payable on purchase or sale of units in the fund. The advantage of a no load fund

is that the entire corpus is put to work.

D). Other Schemes

1) Tax Saving Schemes:

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to

time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings

Scheme (ELSS) are eligible for rebate.

2) Index Schemes:

Index schemes attempt to replicate the performance of a particular index such as the BSE

Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that

constitute the index. The percentage of each stock to the total holding will be identical to the

stocks index weightage. And hence, the returns from such schemes would be more or less

equivalent to those of the Index.

3) Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors or industries

as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer

Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the

performance of the respective sectors/industries. While these funds may give higher returns, they

are more risky compared to diversified funds. Investors need to keep a watch on the performance

of those sectors/industries and must exit at an appropriate time.



Net Asset Value (Nav):

Since each owner is a part owner of a mutual fund, it is necessary to establish the value of

his part. In other words, each share or unit that an investor holds needs to be assigned a value.

Since the units held by investor evidence the ownership of the fund’s assets, the value of the total

assets of the fund when divided by the total number of units issued by the mutual fund gives us

the value of one unit. This is generally called the Net Asset Value (NAV) of one unit or one

share. The value of an investor’s part ownership is thus determined by the NAV of the number of

units held.

Calculation of NAV:

Let us see an example. If the value of a fund’s assets stands at Rs. 100 and it has 10

investors who have bought 10 units each, the total numbers of units issued are 100, and the value

of one unit is Rs. 10.00 (1000/100). If a single investor in fact owns 3 units, the value of his

ownership of the fund will be Rs. 30.00(1000/100*3). Note that the value of the fund’s

investments will keep fluctuating with the market-price movements, causing the Net Asset Value

also to fluctuate. For example, if the value of our fund’s asset increased from Rs. 1000 to 1200,

the value of our investors holding of 3 units will now be (1200/100*3) Rs. 36. The investment

value can go up or down, depending on the markets value of the fund’s assets.



Selection Parameters for Mutual Fund

The first point to note before investing in a fund is to find out whether your objective

matches with the scheme. It is necessary, as any conflict would directly affect your prospective

returns. Similarly, you should pick schemes that meet your specific needs. Examples: pension

plans, children’s plans, sector-specific schemes, etc.

Your risk capacity and capability:

This dictates the choice of schemes. Those with no risk tolerance should go for debt

schemes, as they are relatively safer. Aggressive investors can go for equity investments.

Investors that are even more aggressive can try schemes that invest in specific industry or

sectors.

Fund Manager’s and scheme track record:

Since you are giving your hard earned money to someone to manage it, it is imperative

that he manages it well. It is also essential that the fund house you choose has excellent track

record. It also should be professional and maintain high transparency in operations. Look at the

performance of the scheme against relevant market benchmarks and its competitors. Look at the

performance of a longer period, as it will give you how the scheme fared in different market

conditions.

Cost factor:

Though the AMC fee is regulated, you should look at the expense ratio of the fund before

investing. This is because the money is deducted from your investments. A higher entry load or

exit load also will eat into your returns. A higher expense ratio can be justified only by

superlative returns. It is very crucial in a debt fund, as it will devour a few percentages from your

modest returns.

Also, Morningstar rates mutual funds. Each year end, many financial publications list the

year's best performing mutual funds. Naturally, very eager investors will rush out to purchase

shares of last year's top performers. That's a big mistake. Remember, changing market conditions



make it rare that last year's top performer repeats that ranking for the current year. Mutual fund

investors would be well advised to consider the fund prospectus, the fund manager, and the

current market conditions. Never rely on last year's top performers.

Types of Returns on Mutual Fund:

There are three ways, where the total returns provided by mutual funds can be enjoyed by

investors:

Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all

income it receives over the year to fund owners in the form of a distribution.

If the fund sells securities that have increased in price, the fund has a capital gain. Most funds

also pass on these gains to investors in a distribution.

If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase

in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you

a choice either to receive a check for distributions or to reinvest the earnings and get more

shares.



Chapter 4

Research Methodology

Research Methodology

Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in a studying his research problem along with the logic behind them.

This Report is based on primary as well as secondary data, however primary data collection was given more important since it is overhearing factor in attitude studies.

One of the most important users of Research Methodology is that it helps in identifying the problem, collecting, analyzing the required indformation or data and providing an alternative solution to the problem. It also helps in collecting the vital information that is required by the Top Management to assist them for the better decision making both day to day decisions and critical ones.

Objective of the Study

To study the awareness of mutual fund among peoples.

To study the impact of mutual fund on investors.

To study the interest of investors in different schemes.

To study preference of investment to investors.

To study the preference of investment company to investors.

To study the duration of investment by investors.

Limitations

The study is limited to the Investors of Nagpur city only.



The secondary data provided may or may not be correct.

The sample size taken may be too small to analyze.

a) Research Design: Descriptive Design

b) Data Collection Method: Survey Method

c) Universe: Nagpur

d) Sampling Method: The sample was collected through filling up the Questionnaire prepared. The data has been analyzed by using mathematical or statistical tools.

e) Sample Size: 100 respondents

f) Sampling Unit: Businessmen, Government Servant, Retired Individuals, Students

g) Data Source: 1) Primary data:-

Primary data is the data which is collected from directly contact with the people. The primary data was collected through questionnaire. In this method the data was collected by filling questionnaire. Questions were asked from investors and got the response.

2) Secondary data:-

Secondary data is the data which is collected from website, Annual Reports, Journals and Book Sections.

h) Data Collection Instrument: Structured Questionnaire

i) Sample Design: Data has been presented with the help of Bar Graph, Pie Chart, and Line Graph etc.

j) Hypothesis:

a) It is to be assumed that the more peoples are aware about mutual fund.b) Mutual fund is best investment than others.c) Mutual fund provide higher return than any other investment facilities available in the

marketd) Mutual fund has high return and low rate of risk than other investment schemes.e) Mutual fund is highly liquidity than other schemes available in the market.



Chapter 5

Data Analysis and Interpretation

1. Analyzing according to Qualification

Undergraduates Grauadtes Post graduation Others0

10

20

30

40

50

60

70

Qualification of Investors

Qualification

No.

of I

nves

tors

Interpretation - Out of my survey of 100 people, 71% of the investors are Graduates and Post Graduates and 16.67% are Under Graduates and Others, around 12.5%, which may include persons who have passed their 10th standard or 12th standard invests in Mutual Funds.



2. Analyzing according to Occupation

Government24%

Private46%

Business25%

Others5%

Investor's Proffession

Interpretation - Here it is amazed to see that around 46% of the investment is been invested by the persons working in Private sectors, according to them investing in Mutual Funds is more safer as well as more gainer.

Then we find that the businessmen of around 25%gives more preference in investing in mutual funds, they think that investing in mutual fund is better than investing in shares as well as Post office.

Next we see that the persons working in Government sectors of around 24% only invests in Mutual Fund.



3. Analyzing according to Monthly Family Income

18%

39%

43%

Income of Investors<=10000 10001-20000 20001-30000 >30000

Interpretation - Here, we find that investors of around 43% with the monthly income of Rs. >30000 are the most likely to invest in Mutual fund , than any other income group.



4. Analyzing data according to awareness about Mutual Fund

Yes No0

20

40

60

80

100

Awarness about Mutual Fund

Knowledge about Mutual Fund

No.

of I

nves

tors

Interpretation- From The total lot of 100 people, 96 people are actually aware of the fact of Mutual fund and are regular investors of Mutual Funds.

4 People were there who have just heard the name or rather are just aware of the fact of existence of the word called Mutual Fund, but doesn’t know anything else about Mutual Funds.



5. Analyzing data according to from where they came to know about Mutual Fund.

AdvertisementPeer Group

BankFinancial Advisors

0

10

20

30

40

50

Knowledge about Mutual Fund

Intimated about Mutual Fund

No.

of I

nves

tors

Interpretation - Here from the Line Graph it can be clearly stated that around 46% of the investors came to know the benefits of Mutual Fund from Financial Advisors. According to the suggestions given by the financial advisors, people use to choose Mutual Funds Scheme.

Then Secondly,24% and 21% of the people used to know from Advertisement and Peer group respectively.

Lastly 9% of the investors do invests after being intimated by the Banks about the benefits of Mutual Funds.



6. Analyzing data according to preference to the investment by investor

30%

5%

40%

20% 5%

Preference of InvestmentSavings FD Mutual Fund Insurance Others

Interpretation - Here from the Pie chart it can be clearly stated that 40% of the investors prefer to invest in Mutual Fund.

Then 30% and 20% of the investors prefer to invest in Savings and Insurance respectively.

Lastly 5% and 5% of the investors prefer to invest in FD and Other Schemes respectively.



7. Analyzing data according to return in mutual fund

Yes

No

020406080

70

30

High return in Mutual Fund

Interpretation - Here from the Bar graph it can be clearly stated that 70% of the investors feels that Mutual Fund has higher returns than other investment options.

And 30% of the investors feel that Mutual Fund has lower returns than other investment options..



8. Analyzing data according to factors seen before investing

Liquidity Low-risk High-return Trust0

10

20

30

40

50

60

Preference of Investment


No.

of I

nves

tors

Interpretation - As it can be clearly stated from the above Diagram that investors before investing, the main criteria that they used to give more Preference is Low Risk. According to them, if a scheme is low risk, it may or may not give a very good return, but still 56% of the investors choose low risk as the option while investing in Mutual Funds.

Then we see that 27% of the investors take High return as one of their most important criteria. According to them, if there is no high return then we should opt for Post office and not mutual fund.

11% of the investors take trust as one of their important factors

Only 4% of the Investors think liquidity as their most preferable options.



9. Analyzing data according to investors choice of investing in different Mutual Fund Companies.

Reliance45%

SBI17%

HDFC15%

UTI 10%

Others13%

Different Mutual Fund Company

Interpretation - From this above Pie Chart it can be clearly stated that 45% , 17%of the people like to invest in large cap companies where return is comparatively less but risk is low thus they invest in Reliance, SBI respectively.

15%, 10% of the people like to invest in Mutual Fund Companies like HDFC, UTI, etc. where risk is slightly higher than the above two mentioned companies as well as return is also slightly high.

13% of the investors like to invest in the Small Cap’s and Mid Cap’s companies.



10. Analyzing data according to mode of investment

82%

18%Mode of Investment

Short termLong term

Interpretation - It can be clearly stated from the above Figure that 82% of the investors like to invest in SIP, as the investor feels that they are more comfortable to save via SIP than the Long term.

While 18% of the investors find SIP as very burdensome, and they are more reluctant to save in Long term investment.



11. Analyzing data according to the best scheme to invest by investor

Balanced Equity Income Others0

5

10

15

20

25

30

35

40

45

Preference Mutual Fund Scheme

No.

of P

eopl

es

Interpretation - From this above Bar graph it can be clearly stated that 45% , 15%of the people like to invest Balanced Scheme and income where return is consistent and risk is also low.

15%, 10% of the people like to invest in Mutual Fund Schemes like Equity and others like tax benefits etc. where risk is slightly higher than the above two mentioned companies as well as return is also slightly high.



12. Analyzing data according to the duration of investment in Mutual Fund

45%

30%

15%10%

Duration of Investment in Mutual Fund

1 to 3 Years4 to 6 Years7 to 10 Yearsmore than 10 Years

Interpretation - From this above Pie Chart it can be clearly stated that 45%, 30%of the people like to invest for 1 to 3 years duration and 4 to 6 years duration respectively because of market fluctuations.

15%, 10% of the invest for 7 to 10 years duration and more than 10 years duration respectively because of their preference of higher returns.



13. Analyzing data according to the mode of investment in different schemes

50%

20%

18%

12%


GrowthIncomeDebtTax Saving

Interpretation - Here from the Pie chart it can be clearly stated that 50% of the investors prefer to invest in Growth Fund.

Then 20% and 18% of the investors prefer to invest in Income and Debt Schemes respectively. Lastly 12% of the investors prefer to invest in tax saving Schemes respectively.



14. Analyzing data according to the liquidity of schemes

Open-Ended Close-Ended0

10

20

30

40

50

60

70

Investors choice of Investment

No.

of I

nves

tors

Interpretation - Here from the Bar graph it can be clearly stated that 70% of the investors feels that Open-Ended Mutual Fund has flexible and easily liquidity than other investment options.

And 30% of the investors feel that Close-Ended Mutual Fund has higher returns and than other investment options.



15. Analyzing data according to objective of investment

Preservation Current Income Conservation Growth

Aggressive Growth05

10152025303540

Objective of Investment

Objective

No.

of I

nves

tors

Interpretation - Here we see that 36% of the investor’s objectives are to preserve the principal amount, so that it can be used as a savings for the future period.

While 22% investors invest to get derive their current income through investing in Mutual Funds.

While 15% and 17% of the investors invest to get a conservative as well as aggressive growth.



Chapter 6

Findings & Conclusions

Findings-

Generally, People employed in Private sectors and Businessman are more likely to invest in Mutual Funds, than other people working in other professions.

Generally investors whose monthly income is above Rs. 20001-30000 are more likely to invest their income in Mutual Fund, to preserve their savings of at least more than 20%.

People generally like to save their savings in Mutual Fund, Fixed Deposits and Savings Account.

Many people came to know about Mutual Fund from Financial Advisors, Advertisement as well as from their Peer group, and they generally invest in the Mutual Fund by taking advices from their Legal Advisors.

Investors generally like to invest in Large Cap Companies like Reliance, SBI, etc. to minimize their risk.

The most popular medium of investing in Mutual Fund is through SIP and moreover people like to invest in Balanced Fund.

Investors more likely to hold Mutual Funds’ investments for the period of 1 to 3 years and 4 to 6 years.

Investors more likely to invest in open-ended schemes of Mutual Fund.

Investors more likely to invest in growth schemes of Mutual Fund.

The main objective of most of the Investors is to preserve their Income.



Conclusions

According to survey most of the people are aware about mutual fund hence it is proved.

Investors are largely prefer to invest in Mutual Fund.

Nowadays people are moving from investing in traditional approach to mutual fund, that is

the impact of mutual fund from past 3 years that there is high rate of investment in mutual

fund.

Investors feels that the Mutual Fund is highly liquid than the other investment available in

the market.

Investors are investing in different schemes like SIP, Equity, Debt and other schemes.

Most of the investors prefer to invest in mutual fund because of low risk and high return.

Investors most likely to invest in large and public companies like SBI and Reliance.

Investors generally like to invest for short period as per their convenience.

This has also instilled greater confidence among fund investors who are investing more into

the market through the MF route than ever before.

Reliance India mutual funds provide major benefits to a common man who wants to make his

life better than previous.



Chapter 7Suggestions

There should provide more awareness to the age group of 25-35 about Mutual Fund.

Mutual Fund investment is subject to market risk so it is necessary to read all schemes related

documents clearly by investors.

The duration of investment should be more than 6 years so that the return percentage will be

higher.

Investment in Mutual Fund should be started from the age of 25-28 so the investor will get

more return than expected.

Mutual Fund is the best platform to invest in the market with minimum risk and maximum

return.

At the present scenario, the balanced scheme is best way to invest in Mutual Fund like SIP,

MIP.



Bibliography

1) (4 September 2013). Association of Mutual Funds in India , 40-55.

2) Average AUM. (8 December 2013). Association of Mutual Funds in India .

3) Average AUM-Fund-wise. (June 2015).

4) Bostan Ananalytics-India Watch. ($ September 2013).

5) Jain, P. (n.d.). Mutual Funds in India. Mutual Fund Income LegalRasta .

6) MF History. (2014). Association of Mutual Funds of India , 22-99.

7) Mutual Fund. (2016, February 12). Retrieved February 11, 2016, from www.mutualfundindia.com

8) Mutual Fund in India. (2011, March 11). Retrieved January 16, 2016, from Wikipedia, the free encylopedia: www.en.m.wikipedia.org

9) Mutual Fund in India. (April-2015). Kotak Securities.

10) Mutual Funds India. (2008, August 22). Retrieved February 19, 2016, from Investment Plans: www.amfiindia.com

11) Pozen, R., & Hamacher, T. (2014). The Fund Industry:How Your Money is Managed. John Wiley & Sons.

12) (27 October 2012). SEBI makes it mandatory for companies to disclose promoters' shares. Delhi: Economic Times.



Annexure

Ques.1 What is your Qualification?

(a) Under-graduation (b) Graduation (c) Post Graduation (d) Others

Ques.2 What is your Occupation?

(a) Government (b) Private (c) Business (d) Others

Ques.3 What is your monthly family income?

(a) <=10000 (b) 10001-20000 (c) 20001-30000 (d) >30000

Ques.4 Do you have any idea about Mutual Fund?

(a) Yes (b) No

Ques.5 From where you came to know about Mutual Fund?

(a) Advertisement (b) Peer Group (c) Banks (d) Financial Advisors

Ques.6 Where will you prefer to invest?

(a) Savings (b) FD (c) Insurance (d) Mutual Fund (e) Others

Ques. 7 Is investment in mutual fund have higher return than others?

a) Yes (b) No

Ques.8 Which is your preference while investing?

(a) High Return (b) Low Risk (c) Liquidity (d) Trust

Ques.9 Which Mutual Fund Company you will prefer to invest?

(a) Reliance (b) SBI (c) UTI (d) HDFC (e) Others

Ques.10 Which mode of investment will you prefer?

(a) Long Term (b) Short Term

Ques.11 Which mutual fund plan do you consider the best?

(a) Balanced Plan (b) Equity Plans (c) Income Plans (d) Others

Ques.12 How long would you like to hold your mutual funds’ investments?

(a) 1 to 3 years (b) 4 to 6 years (c) ) 7 to 10 years (d) more than 10 years



Ques.13 Which scheme would you prefer?

(a) Growth (b) Income (c) Tax Saving (d) Debt

Ques.14 Which end-scheme do you feel is good?

a) Open End (b) Closed End

Ques.15 What is the objective of your investment?

(a) Preservation (b) Current Income (c) Conservative Growth (d) Aggressive Growth


Mutual Fund in India and its Impact on Investors

Investor Relations

Transcript of Mutual Fund in India and its Impact on Investors