A PROJECT REPORT ON “MUTUAL FUNDS IS THE BETTER INVESTMENTS PLAN”.. by Sanjay Gupta

A PROJECT REPORT ON

“MUTUAL FUNDS IS THE BETTER INVESTMENTS PLAN” Submitted in partial fulfillment for

MASTER OF BUSINESS ADMIMISTRATION Programme of

SAS

INSTITUTE

INFORMATION

TECHNOLOGY &RESEARCH, MOHALI

Batch2008-10

Under the Guidance of: External Supervisor: Mr.Sandeep kaura

Submitted By: Divya kaushal Enrollment no -81010317102

( Senior Relationship Manager) ICICI DIRECT,Sec. 9,chd.

Internal Supervisor: Mrs Jasminal kaur

ACKNOWLEDGEMENT The success behind the completion of any good job is the support and the joint team effort of a number of people. There are many persons, whose help & cooperation, made this project successful. My deepest sense of gratitude, profound respect and sincere thanks to Mrs jasminal(faculty

member

SAS

INSTITUTE

INFORMATION

TECHNOLOGY& RESEARCH , MOHALI) my project guide, for her valuable assistance, keen interest and constant motivation at each step of the project. It would not have been possible for me to reach this stage without his support & guidance. My special thanks to Mr. SANDEEP KAURA( Senior Relationship ManagerICICI DIRECT , SECTOR 9 ,CHANDIGARH), my company guide who has been there with me throughout the entire project. He always had the answers to my queries, be it regarding any concept related to mutual funds. His warmth support, practical guidance and easy explanations not only regarding the project matters but others too add to the success of my project. His continuous interaction and support made it possible for the successful completion of the project. I would also like to thank my parents and my friends for all their time-to-time assistance. Last but not the least I would like to thank God because without his divine grace nothing would have been possible. DIVYA KAUSHAL

DECLERATION

I hereby declare that this Project Report entitled “THE MUTUAL FUND IS BETTER INVESTMENTS PLAN” submitted in the partial fulfillment of the requirement of Master of Business Administration (MBA) of SAS RESEARCH &TECHNOLOGY , MOHALI is based on primary & secondary data found by me in books, magazines and websites & Collected by me in under guidance of Mr Sandeep kaura. DATE:

DIVYA KAUSHAL MBA (3rd semester) ENROLLMENT -81010317102

EXECUTIVE SUMMARY In few years Mutual Fund has emerged as a tool for ensuring one’s financial well being. Mutual Funds have not only contributed to the India growth story but have also helped families tap into the success of Indian Industry. As information and awareness is rising more and more people are enjoying the benefits of investing in mutual funds. The main reason the number of retail mutual fund investors remains small is that nine in ten people with incomes in India do not know that mutual funds exist. But once people are aware of mutual fund investment opportunities, the number who decide to invest in mutual funds increases to as many as one in five people. The trick for converting a person with no knowledge of mutual funds to a new Mutual Fund customer is to understand which of the potential investors are more likely to buy mutual funds and to use the right arguments in the sales process that customers will accept as important and relevant to their decision. This Project gave me a great learning experience and at the same time it gave me enough scope to implement my analytical ability. The analysis and advice presented in this Project Report is based on market research on the saving and investment practices of the investors and preferences of the investors for investment in Mutual Funds. This Report will help to know about the investors’ Preferences in Mutual Fund means Are they prefer any particular Asset Management Company (AMC), Which type of Product they prefer, Which Option (Growth or Dividend) they prefer or Which

Investment Strategy they follow (Systematic Investment Plan or One time Plan). This Project as a whole can be divided into two parts. The first part gives an insight about Mutual Fund and its various aspects, the Company Profile, Objectives of the study, Research Methodology. One can have a brief knowledge about Mutual Fund and its basics through the Project. The second part of the Project consists of data and its analysis collected through survey done on 120 people. For the collection of Primary data I made a questionnaire and surveyed of 120 people. I also taken interview of many People those who were coming at the ICICIDIRECT Branch where I done my Project. .

This Project

covers the topic “THE MUTUAL FUND IS BETTER INVESTMENT PLAN.” The data collected has been well organized and presented. I hope the research findings and conclusion will be of use.

CONTENTS

Chapter - 1

COMPANY PROFILE

Chapter - 2

INTRODUCTION

ALL ABOUT MUTUAL FUNDS WHAT IS MUTUAL FUND  ADVANTAGES OF INVESTING MUTUAL FUNDS  DISADVANTAGES OF INVESTING MUTUAL FUNDS  HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY  CATEGORIES OF MUTUAL FUNDS BY STRUCTURE



•

BY NATURE

•

EQUITY FUND

•

DEBT FUNDS

•

BY INVESTMENT OBJECTIVE

•

OTHER SCHEMES

INVESTMENT STRATEGIES

 WORKING OF A MUTUAL FUND  TYPES OF FUNDS AND OBJECTIVES  MEASURING AND EVALUATING MUTUAL FUNDS PERFORMANCE  PERFORMANCE MEASURES  WHY HAS IT BECOME ONE OF THE LARGEST FINANCIAL INSTRUMENTS?  HOW DO INVESTORS CHOOSE BETWEEN FUNDS  MOST POPULAR STOCKS AMONG FINANCIAL ADVISORS  PORTFOLIO ANALYSIS TOOLS  PERFORMANCE OF MF IN INDIA

Chapter - 3

OBJECTIVES AND SCOPE

Chapter - 4

RESEARCH METHODOLOGY RESEARCH REPORT  OBJECTIVE OF RESEARCH  SCOPE OF THE STUDY  DATA SOURCES  SAMPLING  DATA ANALYSIS  QUESTIONNAIRE

Chapter - 5

DATA ANALYSIS AND

INTERPRETATION

Chapter - 6 Chapter - 7

SUGGESTIONS & RECOMMENDATIONS FINDINGS AND CONCLUSIONS

ANNEXTURE:

BIBLIOGRAPHY

Chapter - 1 Company Profile

ABOUT ICICI GROUP

ICICI Group offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized group companies, subsidiaries and affiliates in the areas of personal banking, investment banking, life and general insurance, venture capital and asset management. With a strong customer focus, the ICICI Group Companies have maintained and enhanced their leadership position in their respective sectors. 10

ICICI Bank is India's second-largest bank with total assets of Rs. 3,793.01 billion (US$ 75 billion) at March 31, 2009 and profit after tax Rs. 37.58 billion for the year ended March 31, 2009. The Bank has a network of 1,451 branches and about 4,721 ATM in India and presence in 18 countries.

ICICI Prudential Life Insurance Company is a 74:26 joint venture with Prudential plc (UK). It is the largest private sector life insurance company offering a comprehensive suite of life, health and pensions products. It is also the pioneer in launching innovative health care products like Diabetes Care Active and health Saver. The company operates on a multi-channel platform and has a distribution strength of over 2,76,000 financial advisors operating from more than 2000 branches spread across 1800 locations across the country. In addition to the agency force, it also has tie-ups with various banks, corporate agents and brokers. In fiscal 2009, ICICI Prudential attained a market share of 10.9% based on retail weighted premium and garnered a total premium of Rs 153.56 billion registering a growth of 13% and held assets of Rs. 327.88 billion as on March 31, 2009.

ICICI Lombard General Insurance Company, a joint venture with the Canada based Fairfax Financial Holdings, is the largest private sector general insurance company. It has a comprehensive product portfolio catering to all corporate and retail insurance needs and is present in over 300 locations across the country. ICICI Lombard General Insurance has achieved a market share of 27.2% among private sector general insurance companies and an overall market share of 11.2% during fiscal 2009. The gross return premium grew by 2.2% from Rs. 33.45 billion

fiscal

2008

34.20

billion

fiscal

2009.

ICICI Securities Ltd is the largest equity house in the country providing end-toend solutions (including web-based services) through the largest non-banking distribution channel so as to fulfill all the diverse needs of retail and corporate 11

customers. ICICI Securities (I-Sec) has a dominant position in its core segments of its operations - Corporate Finance including Equity Capital Markets Advisory Services, Institutional Equities, Retail and Financial Product Distribution.

ICICI Securities Primary Dealership Limited is the largest Primary Dealer in Government Securities. It is an acknowledged leader in the Indian fixed income and money markets, with a strong franchise across the spectrum of interest rate products and services - institutional sales and trading, resource mobilization, portfolio management services and research. One of the first entities to be granted Primary Dealership license by RBI, I-Sec PD has made pioneering contributions since inception to debt market development in India. I-Sec PD is also credited with pioneering debt market research in India. I-Sec PD has been recognized as the 'Best Domestic Bond House in India' by Asia money every year from 2002 to 2007 and selected as 'Best Bond House' by Financeasia.com for the years - 2001, 2004 to 2007 and

2009."

ICICI Prudential Asset Management is the second largest mutual fund with asset under management of Rs. 547.74 billion and a market share of 10.2% as on March 31, 2008. The Company manages a comprehensive range of mutual fund schemes and portfolio management services to meet the varying investment needs of

its

investors

through

235

branches

spread

across

the

country.

Incorporated in 1987, ICICI Venture is the oldest and the largest private equity firm in India. The funds under management of ICICI Venture have increased at a 5 year CAGR of 49% to Rs.95.50 billion as on March 31, 2008.

PRODUCTS & SERVICES OFFERED BY ICICI DIRECT 1. DEMAT ACCOUNT A unique 3-in-1 On-line Trading Account Seamless, Secure and Integrated 3-in-1 trading platform... Our 3-in-1 trading platform links your banking, trading and demat accounts, ensuring unmatched convenience for customers. With an ICICIdirect.com account, you get the following benefits:

a) Seamless Trading : You can trade in shares without going through the hassle of tracking settlement cycles, writing cheques and transfer instructions.

b) Security: Instead of transferring monies to a broker's pool or towards deposits, you can manage your own demat and bank accounts when you trade through ICICIdirect.com. It provides you the flexibility to pay only when you trade.

c) Wide range of products: Share trading in both NSE and BSE, innovative offerings like - Margin, MarginPlus, BTST, SPOT. Derivatives trading, overseas trading, mutual funds, IPOs and on-line life insurance.

We also offer a wide array of services:

ICICIdirect.com On- The - Move : An innovative low bandwidth site which helps you trade at high speeds even through low bandwidth connections like data card and GPRS.

Call N Trade : In situations when you are unable to log in to icicidirect.com website, you can place orders securely over the telephone with the Call N Trade service.

ICICIdirect.com Equity Advisory Group: A premium service for privileged customers with an assigned equity advisor who will guide you in placing trades.

ICICI Securities ATS (Active Trader Services): A service for the born trader, who lives in and breathes the stock market with specialized research and dedicated relationship managers.

ICICIdirect Knowledge Program: ICICIdirect Knowledge Programs provide you with an insight into a wide range of financial products like derivatives, shares, mutual funds, IPOs, small savings and insurance to grow your money and cater to your varying needs across different stages of life. More than just products these programs help you make informed investment decisions and manage your money better.

2. MUTUAL FUND INVESTMENTS Investing in Mutual funds: ICICIdirect.com brings you the same convenience while investing in Mutual funds also - Hassle free and Paperless Investing. With the inclusion of Fidelity MF, you can now invest on-line in 19 mutual Funds through ICICIdirect.com. Prudential ICICI MF, JM

MF, Alliance MF, Franklin Templeton MF, Sundaram MF, Birla Sun Life MF, HDFC MF, Principal MF, UTI MF,Reliance MF,Kotak MF,Tata

MF,DSP

Merrill

Lynch

MF,

ING

MF,CHOLA

MF,Deutsche MF,HSBC MF and Standard Chartered MF are the Mutual Funds available for investment. You can invest in mutual funds without the hassles of filling application forms or any other paperwork. You need no signatures or proof of identity for investing. Once you place a request for investing in a particular fund, there are no manual processes involved. Your bank funds are automatically debited or credited while simultaneously crediting or debiting your unit holdings. You also get control over your investments with online order confirmations and order status tracking. Get to know the performance of your investments through online updation of MF portfolio with current NAV.

ICICIdirect.com offers you various options while investing in Mutual Funds: Purchase: You may invest/purchase Prudential ICICI MF, JM MF, Alliance MF, Franklin Templeton MF, Sundaram MF, Birla Sun Life MF, HDFC MF, Principal MF, UTI MF ,Standard Chartered MF ,Reliance MF,Kotak MF, Tata MF,DSP merrill lynch MF,ING MF,CHOLA MF,Deutsche MF,HSBC MF and Fidelity MF without the hassles of filling application forms. Redemption:In addition to giving hassle-free paperless redemption, ICICIdirect.com offers faster liquidity. You can redeem the mutual fund units through ICICIdirect.com. The money will be credited to your bank account automatically 3 days after the order placement date.

Switch: To suit your changing needs you may wish to shift monies between different schemes. You can switch your monies online from one scheme to another in the same fund family without any hassles. Systematic Investment plans (SIP): SIP allows you to invest a certain sum of money over a period of time periodically. Just fill in the investment amount, the period of investment and the frequency of investing and submit. ICICIdirect.com will do the rest for you automatically investing periodically for you. Systematic withdrawal plan: This allows you to withdraw a certain sum of money over a period of time periodically. Transfer-in: You can convert your existing Mutual funds into electronic mode through a transfer-in request.

3.OVERSEAS TRADING Rationale of overseas trading facility offered by ICICIdirect Under Liberalized Remittance Scheme of Reserve Bank of India, Resident Individuals are allowed to remit up to USD 2,00,000 in a financial year (April to March) for any current or capital account transaction or combination of both. Under this scheme ICICIdirect has facilitated its customers to invest in various Stocks and Options that are traded on the exchanges in United States of America.

Products offered under overseas trading facility •

Equities

•

Exchange Traded Funds

•

Stock Options

•

Index Options

4..IPOs and Bonds Online: You could also invest in Initial Public Offers (IPOs) and Bonds online without going through the hassles of filling ANY application form/ paperwork. Get in-depth analyses of new IPOs issues (Initial Public Offerings) which are about to hit the market and analysis on these. IPO calendar, recent IPO listings, prospectus/offer documents, and IPO analysis are few of the features, which help you, keep on top of the IPO markets.

5. .FINANCIAL PLANNING Financial Planning is a process that •

Reviews your current financial position

•

Sets goals for the future and

•

Creates a plan to achieve those goals

ICICIdirect recently launched its Wealth G.R.I.P. (Goals, Retirement, Investment & Protection) that enables you to articulate your needs, convert them into financial goals and effectively plan for the same. The final output for you will be a comprehensive and easy-to-read financial plan report containing various sections that give you a complete snapshot of: •

Where you are currently

•

What you need to do to achieve your goals

•

How you need to go about

•

Managing your savings and investments

•

Your risk profile and risk-taking ability

•

A recommended asset allocation model

Chapter – 2

Introduction

INTRODUCTION TO MUTUAL FUND AND ITS VARIOUS

ASPECTS.

Mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. This pool of money is invested in accordance with a stated objective. The joint ownership of the fund is thus “Mutual”, i.e. the fund belongs to all investors. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The funds Net Asset value (NAV) is determined each day. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.

Net Asset Value Net Asset Value (NAV) represents a fund's per share market value. This is the price at which investors buy (bid price) fund shares from a fund company and sell them (redemption price) to a fund company. Dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding, derives it. The NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities. NAV: Net Assets of the Scheme/ Number of Units Outstanding Or (Market Value of Investment + Receivables + Other Accrued Income + Other Assets – Accrued Expenses – Other Payables – Other Liabilities)/Number of Units Outstanding on the Valuation Date

For the purpose of NAV calculation, the day on which NAV is calculated by a fund is known as the Valuation Date. NAV of all schemes must be calculated and published at least every Wednesday for Closed-end schemes and daily for Open-end schemes. The day’s NAV must be posted on AMFI website by 8:00 p.m. that day. This applies to both Open-end & Closed-end schemes. The fund’s NAV is affected by these 4 factors: • Purchase & Sale of investment securities • Valuation of all investment securities held • Other assets & liabilities • Units sold or redeemed

Advantages of Investing Mutual Funds:

1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.

2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.

3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. 5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the socalled professionals are any better than mutual fund or investor him self, for picking up stocks.

2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon. 3. Dilution - Because funds have small holdings across 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. 4. 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.

THE MUTUAL FUNDS INDUSTRY(HISTORY) The mutual fund industry in India started in 1963 with the formation of unit trust of India, at the initiative of the government of India and reserve bank the. the history of mutual funds in India can be broadly divided into four distinct phases

First phase – 1964-87 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 25

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), India bank mutual fund (nov 89), bank of India (June 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. 121,805crores. The unit trust of India with rs.44, 541 crores of assets under management was way ahead of other mutual funds.

Fourth phase – since February 2003 In February 2003, following the repeal of the unit trust of India act 1963 uti was bifurcated into two separate entities. one is the specified undertaking of the unit trust of India with assets under management of rs.29,835 crores as at the end of January 2003, representing broadly, the assets of us 64 scheme, assured return and certain other schemes. the specified undertaking of unit trust of India, functioning under an administrator and under the rules framed by government of India and does not come under the purview of the mutual fund regulations. The second is the uti mutual fund ltd, sponsored by SBI, PNB, bob and lic. it is registered with SEBI and functions under the mutual fund regulations. with the bifurcation of the erstwhile uti which had in march 2000 more than rs.76,000 crores of assets under management and with the setting up of a uti mutual fund, conforming to the SEBI mutual fund regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. as at the end of September, 2004, there were 29 funds, which manage assets of rs.153108 crores under 421 schemes.

The graph indicates the growth of assets over the years

CATEGORIES OF MUTUAL FUND:

Mutual funds can be classified as follow :

 Based on their structure: •

Open-ended funds: Investors can buy and sell the units from the fund, at any point of time.

•

Close-ended funds: These funds raise money from investors only once. Therefore, after the offer period, fresh investments can not be made into the fund. If the fund is listed on a stocks exchange the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified intervals. Therefore, such funds have relatively low liquidity.

 Based on their investment objective: Equity funds: These funds invest in equities and equity related instruments. With fluctuating share prices, such funds show volatile performance, even losses. However, short term fluctuations in the market, generally smoothens out in the long term, thereby offering higher returns at relatively lower volatility. At the same time, such funds can yield great capital appreciation as, historically, equities have outperformed all asset classes in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as: i) Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked. Their

portfolio mirrors the benchmark

index both in terms of composition and individual stock weightages. ii) Equity diversified funds- 100% of the capital is invested in equities spreading across different sectors and stocks.

iii|) Dividend yield funds- it is similar to the equity diversified funds except that they invest in companies offering high dividend yields. iv) Thematic funds- Invest 100% of the assets in sectors which are related through some theme. e.g. -An infrastructure fund invests in power, construction, cements sectors etc. v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund will invest in banking stocks. vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

Balanced fund:

Their investment portfolio includes both debt and

equity. As a result, on the risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Following are balanced funds classes:

i) Debt-oriented funds -Investment below 65% in equities. ii) Equity-oriented funds -Invest at least 65% in equities, remaining in debt.

Debt fund: They invest only in debt instruments, and are a good option for investors averse to idea of taking risk associated with equities.

Therefore,

they

invest

exclusively

fixed-income

instruments like bonds, debentures, Government of India securities;

and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put your money into any of these debt funds depending on your investment horizon and needs. i) Liquid funds- These funds invest 100% in money market instruments, a large portion being invested in call money market. ii) Gilt funds ST- They invest 100% of their portfolio in government securities of and T-bills. iii) Floating rate funds - Invest in short-term debt papers. Floaters invest in debt instruments which have variable coupon rate. iv) Arbitrage fund- They generate income through arbitrage opportunities due to mis-pricing between cash market and derivatives market. Funds are allocated to equities, derivatives and money markets. Higher proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities. v) Gilt funds LT- They invest 100% of their portfolio in long-term government securities vi) Income funds LT- Typically, such funds invest a major portion of the portfolio in long-term debt papers. vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure of 10%-30% to equities. viii) FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that of the fund.

INVESTMENT STRATEGIES

1. Systematic Investment Plan: under this a fixed sum is invested each month on a fixed date of a month. Payment is made through post dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA)

2. Systematic Transfer Plan: under this an investor invest in debt oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.

3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then he can withdraw a fixed amount each month.

RISK V/S. RETURN:

Working Of Mutual Fund

Working of a Mutual fund:

The entire mutual fund industry operates in a very organized way. The investors, known as unit holders,handover their savings to the AMCs under various schemes. The objective of the investment should match with the objective of the fund to best suit the investors’ needs. The AMCs further invest

the funds into various

securities according to the investment objective. The return generated from the investments is passed on to the investors or reinvested as mentioned in the offer document.

Mutual Funds

Before we understand what is mutual fund, it’s very important to know the area in which mutual funds works, the basic understanding of stocks and bonds.

Stocks : Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.

Bonds : Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.

What Is Mutual Fund A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.

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

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 shortterm 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 41

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.

BY INVESTMENT OBJECTIVE •

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.

•

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.

•

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).

•

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.

OTHER SCHEMES •

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.

•

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.

•

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.

Types of returns: There are three ways, where the total returns provided by mutual funds can be enjoyed by investors: 43

•

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.

Measuring and evaluating mutual funds performance:

Every investor investing in the mutual funds is driven by the motto of either wealth creation or wealth increment or both. Therefore it’s very necessary to continuously evaluate the funds’ performance with the help of factsheets and newsletters, websites, newspapers and professional advisors like ICICI mutual fund services. If the investors ignore the evaluation of funds’ performance then he can loose hold of it any time. In this ever-changing industry, he can face any of the following problems: 1. Variation in the funds’ performance due to change in its management/ objective. 2. The funds’ performance can slip in comparison to similar funds. 3. There may be an increase in the various costs associated with the fund. 4 .Beta, a technical measure of the risk associated may also surge. 5. The funds’ ratings may go down in the various lists published by independent rating agencies. 6 .It can merge into another fund or could be acquired by another fund house.

Performance measures: Equity funds: the performance of equity funds can be measured on the basis of: NAV Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and Distributions, Computing Total Return (Per Share Income and

Expenses, Per Share Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund Size, Transaction Costs, Cash Flow, Leverage. Debt fund: likewise the performance of debt funds can be measured on the basis of: Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs, besides NAV Growth, Total Return and Expense Ratio. Liquid funds: the performance of the highly volatile liquid funds can be measured on the basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio. Concept of benchmarking for performance evaluation: Every fund sets its benchmark according to its investment objective. The funds performance is measured in comparison with the benchmark. If the fund generates a greater return than the benchmark then it is said that the fund has outperformed benchmark , if it is equal to benchmark then the correlation between them is exactly 1. And if in case the return is lower than the benchmark then the fund is said to be underperformed.

Some of the benchmarks are : 1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSEPSU, BSE 500 index, BSE bankex, and other sectoral indices. 2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total Return Index, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds. 3.

Liquid funds: Short Term Government Instruments’ Interest Rates as

Benchmarks, JPM TBill Index

To measure the fund’s performance, the comparisons are usually done with: I)with a market index. ii) Funds from the same peer group. iii) Other similar products in which investors invest their funds.

Financial planning for investors( ref. to mutual funds): Investors are required to go for financial planning before making investments in any mutual fund. The objective of financial planning is to ensure that the right amount of money is available at the right time to the investor to be able to meet his financial goals. It is more than mere tax planning. Steps in financial planning are: Asset allocation. Selection of fund. Studying the features of a scheme. In case of mutual funds, financial planning is concerned only with broad asset allocation, leaving the actual allocation of securities and their management to fund managers. A fund manager has to closely follow the objectives stated in the offer document, because financial plans of users are chosen using these objectives.

Why has it become one of the largest financial instruments?

If we take a look at the recent scenario in the Indian financial market then we can find the market flooded with a variety of investment options which includes mutual funds, equities, fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life insurance, gold, real estate etc. all these investment options could be judged on the basis of various parameters such as- return, safety convenience, volatility and liquidity. measuring these

investment options on the

basis of the mentioned parameters, we get this in a tabular form

Return

Safety

Volatility

Liquidity

Convenience

Equity

High

Low

High

Moderate

Bonds

Moderate

High

Moderate

High

Co.

Moderate

Low

Debentures Co. FDs

Moderate

Low

Moderate

Bank

Low

High

Low

High

Deposits PPF

Moderate

High

Low

Moderate

High

Life

Low

High

Low

Moderate

Insurance Gold

Moderate

High

Moderate

Gold

Real Estate

High

Moderate

High

Low

Mutual

High

Moderate

High

Funds

We can very well see that mutual funds outperform every other investment option. On three parameters it scores high whereas it’s moderate at one. comparing it with the other options, we find that equities gives us high returns with high liquidity but its volatility too is high with low safety which doesn’t makes it favourite among persons who have low risk- appetite. Even the convenience involved with investing in equities is just moderate. Now looking at bank deposits, it scores better than equities at all fronts but lags badly in the parameter of utmost important ie; it scores low on return , so it’s not an happening option for person who can afford to take risks for higher return. The other option offering high return is real estate but that even comes with high volatility and moderate safety level, even the liquidity and convenience involved are too low. Gold have always been a favourite among Indians but when we look at it as an investment option then it definitely doesn’t gives a very bright picture. Although it ensures high safety but the returns generated and liquidity are moderate. Similarly the other investment options are not at par with mutual funds and serve the needs of only a specific customer group. Straightforward, we can say that mutual fund emerges as a clear winner among all the options available. The reasons for this being:

I)Mutual funds combine the advantage of each of the investment products: mutual fund is one such option which can invest in all other investment options. Its principle of diversification allows the investors to taste all the fruits in one plate. just by investing in it, the investor can enjoy the best investment option as per the investment objective.

II)dispense the shortcomings of the other options: every other investment option has more or les some shortcomings. Such as if some are good at return then they are not safe, if some are safe then either they have low liquidity or low safety or both….likewise, there exists no single option which can fit to the need of everybody. But mutual funds have definitely sorted out this problem. Now everybody can choose their fund according to their investment objectives.

III) Returns get adjusted for the market movements : as the mutual funds are managed by experts so they are ready to switch to the profitable option along with the market movement. Suppose they predict that market is going to fall then they can sell some of their shares and book profit and can reinvest the amount again in money market instruments.

IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists one more reason which has established mutual funds as one of the largest financial intermediary and that is the flexibility that mutual funds offer regarding the investment amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs and even Rs. 100 in some cases.

How do investors choose between funds? When the market is flooded with mutual funds, it’s a very tough job for the investors to choose the best fund for them. Whenever an investor thinks of investing in mutual funds, he must look at the investment objective of the fund. Then the investors sort out the funds whose investment objective matches with that of the investor’s. Now the tough task for investors start, they may carry on the further 50

process themselves or can go for advisors . Of course the investors can save their money by going the direct route i.e. through the AMCs directly but it will only save 1-2.25% (entry load) but could cost the investors in terms of returns if the investor is not an expert. So it is always advisable to go for MF advisors. The mf advisors’ thoughts go beyond just investment objectives and rate of return. Some of the basic tools which an investor may ignore but an mf advisor will always look for are as follows.

1. Rupee cost averaging: The investors going for Systematic Investment Plans(SIP) and Systematic Transfer Plans(STP) may enjoy the benefits of RCA (Rupee Cost Averaging). Rupee cost averaging allows an investor to bring down the average cost of buying a scheme by making a fixed investment periodically, like Rs 5,000 a month and nowadays even as low as Rs. 500 or Rs. 100. In this case, the investor is always at a profit, even if the market falls. In case if the NAV of fund falls, the investors can get more number of units and vice-versa. This results in the average cost per unit for the investor being lower than the average price per unit over time. The investor needs to decide on the investment amount and the frequency. More frequent the investment interval, greater the chances of benefiting from lower prices. Investors can also benefit by increasing the SIP amount during market downturns, which will result in reducing the average cost and enhancing returns. Whereas STP allows investors who have lump sums to park the funds in a low-risk fund like liquid funds and make periodic transfers to another fund to take advantage of rupee cost averaging.

2. Rebalancing: Rebalancing involves booking profit in the fund class that has gone up and investing in the asset class that is down. Trigger and switching are tools that can be used to rebalance a portfolio. Trigger facilities allow automatic redemption or 51

switch if a specified event occurs. The trigger could be the value of the investment, the net asset value of the scheme, level of capital appreciation, level of the market indices or even a date. The funds redeemed can be switched to other specified schemes within the same fund house. Some fund houses allow such switches without charging an entry load. To use the trigger and switch facility, the investor needs to specify the event, the amount or the number of units to be redeemed and the scheme into which the switch has to be made. This ensures that the investor books some profits and maintains the asset allocation in the portfolio.

3. Diversification: Diversification involves investing the amount into different options. In case of mutual funds, the investor may enjoy it afterwards also through dividend transfer option. Under this, the dividend is reinvested not into the same scheme but into another scheme of the investor's choice. For example, the dividends from debt funds may be transferred to equity schemes. This gives the investor a small exposure to a new asset class without risk to the principal amount. Such transfers may be done with or without entry loads, depending on the MF's policy.

4. Tax efficiency: Tax factor acts as the “x-factor” for mutual funds. Tax efficiency affects the final decision of any investor before investing. The investors gain through either dividends or capital appreciation but if they haven’t considered the tax factor then they may end loosing. Debt funds have to pay a dividend distribution tax of 12.50 per cent (plus surcharge and education cess) on dividends paid out. Investors who need a regular stream of income have to choose between the dividend option and a systematic withdrawal

plan that allows them to redeem units periodically. SWP implies capital gains for the investor. If it is short-term, then the SWP is suitable only for investors in the 10-per-cent-tax bracket. Investors in higher tax brackets will end up paying a higher rate as shortterm capital gains and should choose the dividend option. If the capital gain is long-term (where the investment has been held for more than one year), the growth option is more tax efficient for all investors. This is because investors can redeem units using the SWP where they will have to pay 10 per cent as long-term capital gains tax against the 12.50 per cent DDT paid by the MF on dividends. All the tools discussed over here are used by all the advisors and have helped investors in reducing risk, simplicity and affordability. Even then an investor needs to examine costs, tax implications and minimum applicable investment amounts before committing to a service.

Most popular stocks among fund managers

Company Name Reliance industries limited Larsen & toubro limited ICICI bank limited State bank of India

no. of funds 244 206 202 188 53

Bharti airtel limited Bharat heavy electricals limited Reliance communication ventures ltd Infosys technologies ltd Oil& Natural gas corporation ltd. ITC ltd.

Sector name automotive banking & financial services cement & construction

184 200 169 159 153 143

No. of MFs betting on it 255 196 237

consumer durables conglomerates chemicals consumer non durables engineering & capital goods food & beverages information technology media & entertainment Manufacturing metals& mining Miscellaneous oil & gas Pharmaceuticals Services Telecom Tobacco Utility

51 218 259 146 317 175 284 218 259 275 250 290 250 200 264 150 225

From the above data collected we can say that engineering & capital goods sector has emerged as the hottest as most of the funds are betting on it. We can say that this sector is on boom and presents a bright picture. Other than it other sectors on height are oil & gas, telecom, metals & mining and information technology. Sectors performing average are automotive, cement & construction, chemicals, media & entertainment, manufacturing, miscellaneous, pharmaceuticals and utility. The sectors which are not so favourite are banking & financial services, conglomerates, consumer non- durables, food & beverages, services and tobacco. And the sector which failed to attract the fund managers is consumer durables with just 51 funds betting on it. Thus this analysis not only gives a picture of the mindset of fund managers rather it also reflects the liquidity existing in each of the sectors. It is not only useful for investors of mutual funds rather the investors of equity and debt too could take a hint from it. Asset allocation by fund managers are based on several researches

carried on so, it is always advisable for other investors too take a look on it. It can be further presented in the form of a graph as follow:

Portfolio analysis tools: With the increasing number of mutual fund schemes, it becomes very difficult for an investor to choose the type of funds for investment. By using some of the portfolio analysis tools, he can become more equipped to make a well informed choice. There are many financial tools to analyze mutual funds. Each has their 56

unique strengths and limitations as well. Therefore, one needs to use a combination of these tools to make a thorough analysis of the funds. The present market has become very volatile and buoyant, so it is getting difficult for the investors to take right investing decision. so the easiest available option for investors is to choose the best performing funds in terms of “returns” which have yielded maximum returns. But if we look deeply to it, we can find that the returns are important but it is also important to look at the ‘quality’ of the returns. ‘Quality’ determines how much risk a fund is taking to generate those returns. One can make a judgment on the quality of a fund from various ratios such as standard deviation, sharpe ratio, beta, treynor measure, R-squared, alpha, portfolio turnover ratio, total expense ratio etc. Now I have compared two funds of SBI on the basis of standard deviation, beta, Rsquared, sharpe ratio, portfolio turnover ratio and total expense ratio. So before going into details, lets have a look at these ratios:

Standard deviation: in simple terms standard deviation is one of the commonly used statistical parameter to measure risk, which determines the volatility of a fund. Deviation is defined as any variation from a mean value (upward & downward). Since the markets are volatile, the returns fluctuate everyday. High standard deviation of a fund implies high volatility and a low standard deviation implies low volatility.

Beta analysis: beta is used to measure the risk. It basically indicates the level of volatility associated with the fund as compared to the market. In case of funds, as compared to the market. In case of funds, beta would indicate the volatility against the

benchmark index. It is used as a short term decision making tool. A beta that is greater than 1 means that the fund is more volatile than the benchmark index, while a beta of less than 1 means that the fund is more volatile than the benchmark index. A fund with a beta very close to 1 means the fund’s performance closely matches the index or benchmark. The success of beta is heavily dependent on the correlation between correlation between a fund and its benchmark. Thus, if the fund’s portfolio doesn’t have a relevant benchmark index then a beta would be grossly inappropriate. For example if we are considering a banking fund, we should look at the beta against a bank index.

R-Squared (R2): R squared is the square of ‘R’ (i.e.; coefficient of correlation). It describes the level of association between the fun’s market volatility and market risk. The value of Rsquared ranges from0 to1. A high R- squared (more than 0.80) indicates that beta can be used as a reliable measure to analyze the performance of a fund. Beta should be ignored when the r-squared is low as it indicates that the fund performance is affected by factors other than the markets. For example: R2 B

Case 1 0.65 1.2

Case 2 0.88 0.9

In the above tableR2 is less than 0.80 in case 1, implies that it would be wrong to mention that the fund is aggressive on account of high beta. In case 2, the rsquared is more than 0.85 and beta value is 0.9. it means that this fund is less aggressive than the market. Sharpe ratio: sharpe ratio is a risk to reward ratio, which helps in comparing the returns given by a fund with the risk that the fund has taken. A fund with a higher

sharpe ratio means that these returns have been generated taking lesser risk. In other words, the fund is less volatile and yet generating good returns. Thus, given similar returns, the fund with a higher sharpe ratio offers a better avenue for investing. The ratio is calculated as: Sharpe ratio = (Average return- risk free rate) / standard deviation Portfolio turnover ratio: Portfolio turnover is a measure of a fund's trading activity and is calculated by dividing the lesser of purchases or sales (excluding securities with maturities of less than one year) by the average monthly net assets of the fund. Turnover is simply a measure of the percentage of portfolio value that has been transacted, not an indication of the percentage of a fund's holdings that have been changed. Portfolio turnover is the purchase and sale of securities in a fund's portfolio. A ratio of 100%, then, means the fund has bought and sold all its positions within the last year. Turnover is important when investing in any mutual fund, since the amount of turnover affects the fees and costs within the mutual fund. Total expenses ratio: A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER: Total expense ratio = (Total fund Costs/ Total fund Assets)

Performance of Mutual Funds in India

Let us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. 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 second 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 was 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 Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.

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 were 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 where about 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 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.

PERFORMANCE OF EQUITY MUTUAL FUND

1.ICICI Prudential infrastructure fund

ICICI Prudential Infrastructure Fund seeks to optimize the risk adjusted return by a mix of top-down macro and bottom-up micro research to pick up stocks providing long term potential. It is a multi-sector fund and therefore has a much lesser concentration risk than a typical sector fund. ICICI Prudential Infrastructure Fund offers the following key benefits:

Multi-sector fund with much lesser concentration risks. The sector provides an attractive investment opportunity based on its long term growth potential.

Key Features

Type Investment Pattern

ICICI Prudential Infrastructure Fund

Equity and Equity related instruments in

infrastructure sector 70% to 100% & Debt, Money Market Instruments and Investment Objective

Call money 0% to 30%. To generate capital appreciation and income distribution to unit holders by investing predominantly in equity/equity related securities of the companies belonging

the

infrastructure

industries and balance in debt securities and Options Application Amount Systematic Investment Plan

money

market

instruments

including call money. Growth and Dividend Option. Rs.5000 (plus in multiple of Re.1). Monthly: Minimum Rs. 1000 + 5 postdated cheques for a minimum of Rs. 1000 each. Quarterly: Minimum Rs.5000

Recurring Expenses

+ 4 post-dated cheques of Rs. 5000 each. 2.5%

2.Birla Sun Life Frontline Equity Fund

Birla Sun Life Frontline Equity Fund is an open-ended diversified equity fund, which invests in handpicked frontline stocks (i.e. stocks which have the potential of providing superior growth opportunities) such that it is representative of all leading sectors of its chosen benchmark. The scheme targets the same sectoral weights (+/5%) within its portfolio as the benchmark, the BSE 200. However, the choice of stocks is not limited to the benchmark, thus providing a wider universe of investible stocks. Investing across sectors ensures diversification and at the same time investing in frontline stocks provides for a possibility of higher returns. Birla Sun Life Frontline Equity Fund is ideal for investors looking at investing in quality stocks across the leading sectors of the economy.

BIRLA SUN LIFE FRONTLINE EQUITY FUND - GROWTH

Investment Period

Total

Value (Rs.) of SIP in Birla Sun

Investment (Rs.)

Since Inception Last 5 years Last 3 years Last 1 year

82000 60000 36000 12000

Returns (%) Birla Sun

Life BSE 200

Frontline

Life BSE 200

Equity 170259.34 87235.88 40754.4 16315.17

Fund * 207726.85 103567.46 44641.4 16521.83

Frontline Equity

21.08 14.99 8.26 74.06

Fund * 27.6 22.04 14.54 77.65

Returns as on 29-Jun-2009. Inception Date: 30-Aug-2002.

3. HDFC TOP 200 FUND Returns HDFC Top 200 Fund Date

(NAV as at evaluation date 29-May-09, Rs.139.341 Per unit) Period

March 30, 2007 Last 791 days November 28, Last Six months 2008 May 29, 2008 May 29, 2006

(182 days) Last 1 Year (365 days) Last 3 Years (1096 days)

NAV Per Unit Returns

Benchmark Returns

(Rs.) 104.504

(%) ^ 14.2**

(%) # 6.18**

86.546

61*~

66.88*~

136.82

1.84*

-12.67*

90.415

15.49**

9.72**

May 28, 2004 May 28, 1999

Last 5 Years (1827 days) Last 10 Years (3654

October 11,

days) Since Inception

1996

(4613 days)

* Absolute Returns

35.922

31.1**

23.05**

17.239

25.68**

16.85**

10.000

25.12**

14.69**

** Compounded Annualized Returns

# BSE 200 ^ Past performance may or may not be sustained in the future $$ Adjusted for the dividends declared under the scheme prior to its splitting into the Dividend and Growth Plans Investment Objective To generate long term capital appreciation from a portfolio of equity and equitylinked instruments primarily drawn from the companies in BSE 200 index. Basic Scheme Information Nature of Scheme Inception Date

Open Ended Growth Scheme October 11, 1996 Dividend Option, Growth Option. The Dividend

Option/Plan

Option offers Dividend Payout and Reinvestment

Entry Load

Facility. Application routed through any

(as a % of the Applicable

distributor/agent/broker :

NAV)

•

In respect of each purchase / switch-in of units

(Other than Systematic

less than Rs. 5 crore in value, an Entry Load

Investment Plan (SIP)/

of 2.25% is payable.

Systematic Transfer Plan (STP))

•

In respect of each purchase / switch-in of Units equal to or greater than Rs. 5 crore in value, no Entry Load is payable.

Application not routed through any

distributor/agent/broker : Nil No Entry Load shall be levied on bonus units and units allotted on dividend reinvestment. • In respect of each purchase / switch-in of Units less than Rs. 5 crore in value, an Exit Load of Exit Load

1.00% is payable if Units are

(as a % of the Applicable

redeemed/switched-out within 1 year from the

NAV)

date of allotment.

(Other than Systematic Investment Plan (SIP)/

•

In respect of each purchase / switch-in of Units

Systematic Transfer Plan

equal to or greater than Rs. 5 crore in value,

(STP))

no Exit Load is payable. No Exit Load shall be levied on bonus units and units allotted on dividend reinvestment.

Minimum Application Amount

For new investors :Rs.5000 and any amount

(Other than Systematic

thereafter.

Investment Plan (SIP)/

For existing investors : Rs. 1000 and any amount

Systematic Transfer Plan

thereafter.

(STP)) Lock-In-Period Net Asset Value Periodicity Redemption Proceeds

Nil Every Business Day. Normally dispatched within 3 Business days On the first 100 crores average weekly net assets 2.50%

Current Expense Ratio (#)

On the next 300 crores average weekly net assets

(Effective Date 22nd May

2.25%

2009)

On the next 300 crores average weekly net assets 2.00%

On the balance of the assets 1.75% (#) Any change in the expense ratio will be updated within two working days.

4. ICICI Prudential Dynamic Plan

lCICI Prudential Dynamic Plan is a diversified equity plan that follows the growth investment philosophy to invest in a portfolio of large, mid and small-cap stocks. It has the ability to move gradually into cash as the market gets over-valued. It offers a portfolio of stocks selected through rigorous bottom-up fundamental analysis across market capitalizations on a diversified basis for long-term capital appreciation.

5. KOTAK 30 RETURNS Kotak 30

S&P CNX NIFT

Last 6 months

42.47

60.80

Last 1 year

-12.42

-7.99

Last 3 years

9.46

11.43

Last 5 years

27.31

24.13

Since Inception ( Dec. 29, 1998) 21.55

16.92

Kotak 30 NAV:Rs.26.772 * Returns assumed reinvestment of the tax free dividend declared. Returns <= 1 year : Absolute; Returns > 1 year : CAGR (Compounded Annualized Growth Rate) Past performance may or may not be sustained in future. # May 30th and 31st 2009 being non-working days

6. RELIANCE BANKING FUND

6 months 1 Year

3Years

5 Yrs

Since

Inception Reliance Banking Fund

67.22

18.77

26.32

28.66

35.19

S&P CNX Bank Index

72.37

10.31

19.43

26.98

29.36

Returns in %

Investment

Objective:

The primary investment objective of the Scheme is to seek to generate continuous returns by actively investing in equity / equity related or fixed income securities of banks.

Chapter – 3 Research Methodology

OBJECTIVES OF THE STUDY

1. To know the Preferences for the portfolios. 2. Awareness about mutual fund . 3. To find out the most preferred channel. 4. To find out what should do to boost Mutual Fund Industry.

Scope of the study

A big boom has been witnessed in Mutual Fund Industry in resent times. A large number of new players have entered the market and trying to gain market share in this rapidly improving market. The research was carried on in chandigarh. I had been sent at one of the branch of State Bank of India chandigarh where I completed my Project work. I surveyed on my Project Topic “A study of preferences of the Investors for investment in Mutual Fund” on the visiting customers of the icicidirect sector 9, Branch. The study will help to know the preferences of the customers, which company, portfolio, mode of investment, option for getting return and so on they prefer. This project report may help the company to make further planning and strategy.

RESEARCH METHODOLOGY

This report is based on primary as well secondary data, however primary data collection was given more importance 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 information 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 decision and critical ones.

Data sources: Research is totally based on primary data. Secondary data can be used only for the reference. Research has been done by primary data collection, and primary data has been collected by interacting with various people. The secondary data has been collected through various journals and websites.

Sampling: 

Sampling procedure:

The sample was selected of them who are the customers/visitors of icicdirect sector 9 chandigarh, irrespective of them being investors or not or availing the services or not. It was also collected through personal visits to persons, by formal and informal talks and through

filling up the questionnaire prepared. The data has been analyzed by using mathematical/Statistical tool.



Sample size:

The sample size of my project is limited to 200 people only. Out of which only 120 people had invested in Mutual Fund. Other 80 people did not have invested in Mutual Fund. 

Sample design:

Data has been presented with the help of bar graph, pie charts, line graphs etc.

Limitation: 

Some of the persons were not so responsive.



Possibility of error in data collection because many of investors

may

have

not

given actual answers of my

questionnaire. 

Sample size is limited to 200 visitors of , icicidirect sec 9

,chandigarh out of these only 120 had invested in Mutual Fund. The sample 

size may not adequately represent the whole market. Some respondents were reluctant to divulge personal

information which

affect the validity of all responses.

Chapter – 4 Data

Analysis &

Interpretation

ANALYSIS & INTERPRETATION OF THE DATA 1. (a) Age distribution of the Investors of chandigarh

Age Group

<= 30

31-35

36-40

41-45

46-50

>50

No. of

Investors invested in Mutual Fund

Investors

35 30 25 20 15

30 24

10 5

0 <=30

31-35

36-40

41-45

46-50

>50

Age group of the Investors

Interpretation: According to this chart out of 120 Mutual Fund investors of chandigarh the most are in the age group of 36-40 yrs. i.e. 25%, the second most investors are in the age group of 41-45yrs i.e. 20% and the least investors are in the age group of below 30 yrs. 77

(b). Educational Qualification of investors of chandigarh

Educational Qualification

Number of Investors

Graduate/ Post Graduate

Under Graduate

Others

Total

120

6% 23%

71%

Graduate/Post Graduate

Under Graduate

Others

Interpretation: Out of 120 Mutual Fund investors 71% of the investors in chandigarh are Graduate/Post Graduate, 23% are Under Graduate and 6% are others (under HSC).

(d). Monthly Family Income of the Investors of chandigarh. Income Group

No. of Investors 79

No. of Investors

<=10,000 10,001-15,000 15,001-20,000 20,001-30,000 >30,000 50 45 40 35 30 25 20 15 10 5 0

12 28 43 32

43 32

28 12

5 <=10

10-15

15-20

20-30

>30

Income Group of the Investorsn (Rs. in Th.)

Interpretation: In the Income Group of the investors of chandigarh, out of 120 investors, 36% investors that is the maximum investors are in the monthly income group Rs. 20,001 to Rs. 30,000, Second one i.e. 27% investors are in the monthly income group of more than Rs30,000 and the minimum investors i.e. 4% are in the monthly income group of below Rs. 10,000

(2) Investors invested in different kind of investments. Kind of Investments

No. of Respondents 80

Saving A/C

195 148 152 120 75 50 30 65

Po st O G Sa In ffi su vi ce old ng /S ra ( ilv nc NS A/ C) er e c

Kinds of Investment

Fixed deposits Insurance Mutual Fund Post office (NSC) Shares/Debentures Gold/Silver Real Estate

65 30 50 75 120 152 148 195 0

100

150

200

250

No.of Respondents

Interpretation: From the above graph it can be inferred that out of 200 people, 97.5% people have invested in Saving A/c, 76% in Insurance, 74% in Fixed Deposits, 60% in Mutual Fund, 37.5% in Post Office, 25% in Shares or Debentures, 15% in Gold/Silver and 32.5% in Real Estate.

3. Preference of factors while investing 81

Factors

No. of

(a)

(b) Low

Liquidity

Risk

Return

(d) Trust

Respondents

18%

20%

32%

30%

Liquidity

Low Risk

High Return

Trust

Interpretation: Out of 200 People, 32% People prefer to invest where there is High Return, 30% prefer to invest where there is Low Risk, 20% prefer easy Liquidity and 18% prefer Trust

4. Awareness about Mutual Fund and its Operations

Response No. of Respondents

Yes 135

No 65

33%

67%

Yes

Interpretation: From the above chart it is inferred that 67% People are aware of Mutual Fund and its operations and 33% are not aware of Mutual Fund and its operations.

5. Source of information for customers about Mutual Fund

No. of Respondents

Source of information Advertisement Peer Group Bank Financial Advisors

70 60 50 40 30 20 10 0

No. of Respondents 18 25 30 62

62 18

Advertisement Peer Group

Bank

Financial Advisors

Source of Information

Interpretation: From the above chart it can be inferred that the Financial Advisor is the most important source of information about Mutual Fund. Out of 135 Respondents, 46% know about Mutual fund Through Financial Advisor, 22% through Bank, 19% through Peer Group and 13% through Advertisement.

6. Investors invested in Mutual Fund Response YES

No. of Respondents 120

Total

200

No 40%

Yes 60%

Interpretation: Out of 200 People, 60% have invested in Mutual Fund and 40% do not have invested in Mutual Fund.

7. Reason for not invested in Mutual Fund Reason Not Aware Higher Risk Not any Specific Reason

No. of Respondents

65 5 10

13%

81% Not Aware

Higher Risk

Not Any

Interpretation: Out of 80 people, who have not invested in Mutual Fund, 81% are not aware of Mutual Fund, 13% said there is likely to be higher risk and 6% do not have any specific reason.

8. Investors invested in different Assets Management Co. (AMC) Name of AMC SBIMF UTI HDFC Reliance ICICI Prudential Kotak Others

No. of Investors 55 75 30 75 56 45 70

Others

Name of AMC

HDFC

Kotak

SBIMF

ICICI

Reliance

UTI

75 0

No. of Investors

Interpretation: In Chandigarh most of the Investors preferred UTI and Reliance Mutual Fund. Out of 120 Investors 62.5% have invested in each of them, only 46% have invested in SBIMF, 47% in ICICI Prudential, 37.5% in Kotak and 25% in HDFC.

9. Preference of Investors for future investment in Mutual Fund Name of AMC SBIMF UTI HDFC Reliance ICICI Prudential Kotak Others

No. of Investors 76 45 35 82 80 60 75

Others 60

Name of AMC

Kotak ICICI Prudential

Reliance

82 35

HDFC UTI

SBIMF

76 0

100

No. of Investors

Interpretation: Out of 120 investors, 68% prefer to invest in Reliance, 67% in ICICI Prudential, 63% in SBIMF, 62.5% in Others, 50% in Kotak, 37.5% in UTI and 29% in HDFC Mutual Fund.

10. Mode of Investment Preferred by the Investors Mode of Investment No. of Respondents

One time Investment 78

Systematic Investment Plan (SIP) 42

35%

65%

One time Investment

SIP

Interpretation: Out of 120 Investors 65% preferred One time Investment and 35 % Preferred through Systematic Investment Plan.

11. Preferred Portfolios by the Investors Portfolio

No. of Investors

Equity Debt Balanced

56 20 44

37%

46%

17%

Equity

Debt

Balance

Interpretation: From the above graph 46% preferred Equity Portfolio, 37% preferred Balance and 17% preferred Debt portfolio

12. Option for getting Return Preferred by the Investors Option

Dividend Payout

Dividend

Growth

Reinvestment No. of

Respondents

21%

8% 71% Dividend Payout

Dividend Reinvestment

Growth

Interpretation: From the above graph 71% preferred Growth Option, 21% preferred Dividend Payout and 8% preferred Dividend Reinvestment Option.

13. Preference of Investors whether to invest in Sectoral Funds Response Yes No

No. of Respondents 25 95

21%

79%

Yes

Interpretation: Out of 120 investors, 79% investors do not prefer to invest in Sectoral Fund because there is maximum risk and 21% prefer to invest in Sectoral Fund.

Chapter – 5 FINDINGS AND CONCLUSION

Findings  In chandigarh in the Age Group of 36-40 years were more in numbers. The second most Investors were in the age group of 41-45 years and the least were in the age group of below 30 years.  In chandigarh most of the Investors were Graduate or Post Graduate and below HSC there were very few in numbers.  In family Income group, between Rs. 20,001- 30,000 were more in numbers, the second most were in the Income group of more than Rs.30,000 and the least were in the group of below Rs. 10,000.  About all the Respondents had a Saving A/c in Bank, 76% Invested in Fixed Deposits, Only 60% Respondents invested in Mutual fund.  Mostly Respondents preferred High Return while investment, the second most preferred Low Risk then liquidity and the least preferred Trust.  Only 67% Respondents were aware about Mutual fund and its operations and 33% were not.  Among 200 Respondents only 60% had invested in Mutual Fund and 40% did not have invested in Mutual fund.  Out of 80 Respondents 81% were not aware of Mutual Fund, 13% told there is not any specific reason for not invested in Mutual Fund and 6% told there is likely to be higher risk in Mutual Fund.  Most of the Investors had invested in Reliance or UTI Mutual Fund, ICICI Prudential has also good Brand Position among investors, SBIMF places after ICICI Prudential according to the Respondents.

. 

For Future investment the maximum Respondents preferred Reliance Mutual Fund, the second most preferred ICICI Prudential, SBIMF has been preferred after them.

 60% Investors preferred to Invest through Financial Advisors, 25% through AMC (means Direct Investment) and 15% through Bank.  65% preferred One Time Investment and 35% preferred SIP out of both type of Mode of Investment.  The most preferred Portfolio was Equity, the second most was Balance (mixture of both equity and debt), and the least preferred Portfolio was Debt portfolio.  Maximum Number of Investors Preferred Growth Option for returns, the second most preferred Dividend Payout and then Dividend Reinvestment.  Most of the Investors did not want to invest in Sectoral Fund, only 21% wanted to invest in Sectoral Fund.

Conclusion Running a successful Mutual Fund requires complete understanding of the peculiarities of the Indian Stock Market and also the psyche of the small investors. This study has made an attempt to understand the financial behavior of Mutual Fund investors in connection with the preferences of Brand (AMC), Products, Channels etc. I observed that many of people have fear of Mutual Fund. They think their money will not be secure in Mutual Fund. They need the knowledge of Mutual Fund and its related terms. Many of people do not have invested in mutual fund due to lack of awareness although they have money to invest. As the awareness and income is growing the number of mutual fund investors are also growing. “Brand” plays important role for the investment. People invest in those Companies where they have faith or they are well known with them. Some AMCs are not performing well although some of the schemes of them are giving good return because of not awareness about Brand. Reliance, UTI, SBIMF, ICICI Prudential etc. they are well known Brand, they are performing well and their Assets Under Management is larger than others whose Brand name are not well known like Principle, Sunderam, etc. Distribution channels are also important for the investment in mutual fund. Financial Advisors are the most preferred channel for the investment in mutual fund. They can change investors’ mind from one investment option to others. Many of investors directly invest their money through AMC because they do not have to pay entry

load. Only those people invest directly who know well about mutual fund and its operations and those have time.

Chapter – 7 Suggestions And Recommendations 97

Suggestions and Recommendations 

The most vital problem spotted is of ignorance. Investors should be made aware of the benefits. Nobody will invest until and unless he is fully convinced. Investors should be made to realize that ignorance is no longer bliss and what they are losing by not investing.

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



Mutual Fund Company needs to give the training of the Individual Financial Advisors about the Fund/Scheme and its objective, because they are the main source to influence the investors.

 Before making any investment Financial Advisors should first enquire about the risk tolerance of the investors/customers, their need and time (how long they want to invest). By considering these three things they can take the customers into consideration. 

Younger people aged under 35 will be a key new customer group into the future, so making greater efforts with younger customers who show some interest in investing should pay off.



Customers with graduate level education are easier to sell to and there is a large untapped market there. To succeed however, advisors must provide sound advice and high quality.



Systematic Investment Plan (SIP) is one the innovative products launched by Assets Management companies very recently in the industry. SIP is easy for monthly salaried person as it provides the facility of do the investment in EMI. Though most of the prospects and potential investors are not aware about the SIP. There is a large scope for the companies to tap the salaried persons.

BIBLIOGRAPHY •

NEWS PAPERS

•

OUTLOOK MONEY

•

TELEVISION CHANNEL (CNBC AAWAJ)

•

MUTUAL FUND HAND BOOK

•

FACT SHEET AND STATEMENT

•

WWW.SBIMF.COM

•

WWW.MONEYCONTROL.COM

•

WWW.AMFIINDIA.COM

•

WWW.ONLINERESEARCHONLINE.COM

•

WWW. MUTUALFUNDSINDIA.COM

100

QUESTIONNAIRE A study of preferences of the investors for investment in mutual funds. 1. Personal Details: (a). Name:(b). Add: -

Phone:-

(c). Age:-

(d). Qualification:Graduation/PG

Under Graduate

Others

(e). Occupation. Pl tick (√) Govt. Ser

Pvt. Ser

Business

Agriculture

Others

(g). What is your monthly family income approximately? Pl tick (√). Up to

Rs. 10,001 to

Rs. 15,001 to

Rs. 20,001 to

Rs. 30,001

101

Rs.10,000

15000

20,000

30,000

and above

2. What kind of investments you have made so far? Pl tick (√). All applicable. a. Saving account e. Post Office-NSC,

b. Fixed deposits f.

etc

Shares/Debentures

c. Insurance g. Gold/ Silver

d. Mutual Fund h. Real Estate

3. While investing your money, which factor will you prefer? . (a) Liquidity

(b) Low Risk

(d) Trust

4. Are you aware about Mutual Funds and their operations? Pl tick (√).

Yes

5. If yes, how did you know about Mutual Fund? a. Advertisement

b. Peer Group

c. Banks

d. Financial Advisors

6. Have you ever invested in Mutual Fund? Pl tick (√).

Yes

7. If not invested in Mutual Fund then why? (a) Not aware of MF (b) Higher risk (c) Not any specific reason

8. If yes, in which Mutual Fund you have invested? Pl. tick (√). All applicable.

102

a. SBIMF

b. UTI

c. HDFC

d. Reliance

e. Kotak

f. Other. specify

12. Which Channel will you prefer while investing in Mutual Fund? (a) Financial Advisor

(b) Bank

13. When you invest in Mutual Funds which mode of investment will you prefer? Pl. tick (√). a. One Time Investment

b. Systematic Investment Plan (SIP)

14. When you want to invest which type of funds would you choose? a. Having only debt

b. Having debt & equity

portfolio

portfolio.

c. Only equity portfolio.

15. How would you like to receive the returns every year? Pl. tick (√). a. Dividend payout

b. Dividend re-investment

c. Growth in NAV

16. Instead of general Mutual Funds, would you like to invest in sectorial funds? Please tick (√).

Yes

103

104