PROJECT REPORT

ON
INVESTMENTS AND FINANCIAL PLANNING
AT ICICI BANK

SUBMITTED TO SUBMITTED
BY

1
(PROJECT GUIDE) B.B.A

ACKNOWLEDGEMENT

I take this opportunity to express my profound sense of gratitude and respect

to all those who helped me through out the duration of this project.

A first and foremost thanks to Dr. N.K. KAKKAR (Director,MAIMS) for his
inspiration and experienced words in making this project.

It gives me immense pleasure to acknowledge my indebtedness and sense of

gratitude to -(Project guide) for the project under taken.

I also immensely thank the other faculty members of the institute under who
continuous support and guidance I completed the project.

Name of the student

SHIVANI MOHAN

Signature

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 CERTIFICATE

It is to certify that SHIVANI MOHAN studying in our institute of management

has successfully completed it under my guidance and upto my fullest
satisfaction.

(SENIOR LECTURER)

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 INDEX
CHAPTER PLAN

1 Company Overview 5-7

2 ICICI Bank Service 8
3 Company Overview 10
4 Services Provided by
ICICI Bank 16
5 Modern Investment Options 18
6 Traditional Investment Options 20
7 Comparison – Modern & Traditional
Methods of Investments 23
8 Mutual Funds – Introduction 24
9 Findings 44
10 Investment Management-
Case Studies 47
11 Bibliography 50

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 ABSTRACT

The project involves in depth study and analysis of various financial

instruments and to counsel and advise the retail as well as corporate
investors about the best investment options available in the market; and
to also make them aware about the risk and return parameters of those
investment instruments.
The project also involves designing a portfolio for the investors and to
compare the Traditional Investment Products with the Modern Investment
Products.
The Project also analyses the Tax Implications on the Traditional
Investment Options like FD’s (Fixed Deposits), RD’s (Recurring Deposits)
and how modern investment options are different from them in Tax
treatment.

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1 AN OVERVIEW OF THE BANKING INDUSTRY

If there is one industry that has the stigma of being old and boring, it
would have to be banking; however, a global trend of deregulation has
opened up many new businesses to the banks. Coupling that with
technological developments like Internet banking and ATMs, the banking
industry is obviously trying its hardest to shed its lackluster image.
Could you imagine a world without banks? At first this might sound like a
great thought! Banks (and financial institutions) have, however, for
several reasons, become cornerstones of our economy. They transfer risk,
provide liquidity, facilitate both major and minor transactions, and provide
financial information for both individuals and businesses.
Banks safeguard money and valuables and provide loans, credit, and
payment services, such as checking accounts, money orders, and
cashier’s checks. With the passage of the Financial Modernization Act in
1999, banks also may offer investment and insurance products, which
they were once prohibited from selling. As a variety of models for
cooperation and integration between the financial services industries
have emerged, some of the traditional distinctions between banks,
insurance companies, and securities firms have diminished. In spite of
these changes, banks continue to maintain and perform their primary role
in the financial system—accepting deposits and lending funds from these
deposits.

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There are several types of banks, which differ in the number of services
they provide and the clientele they serve. Although some of the
differences between these types of banks have lessened as they begin to
expand the range of products and services they offer, there are still key
distinguishing traits.
Commercial banks, which dominate this industry, offer a full range of
services for individuals, businesses, and governments. These banks come
in a wide range of sizes, from large global banks to regional and
community banks. Global banks are involved in international lending and
foreign currency trading, in addition to the more typical banking services.
Regional banks have numerous branches and automated teller machine
(ATM) locations throughout a multi-state area that provide banking
services to individuals. Community banks are based locally and offer more
personal attention, which many individuals and small businesses prefer.
In recent years, online banks—which provide all services entirely over the
Internet—have entered the market, with some success. However, many
traditional banks have also expanded to offer online banking, and some
formerly Internet-only banks are opting to open branches.
Savings banks and savings and loan associations, sometimes called thrift
institutions, are the second largest group of depository institutions. They
were first established as community-based institutions to finance
mortgages for people to buy homes and still cater mostly to the savings
and lending needs of individuals.
Credit unions are another kind of depository institution. Most credit unions
are formed by people with a common bond, such as those who work for
the same company or belong to the same labor union or church. Members
pool their savings and, when they need money, they may borrow from the
credit union, often at a lower interest rate than that demanded by other
financial institutions.

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Federal Reserve banks are Government agencies that perform many
financial services for the Government. Their chief responsibilities are to
regulate the banking industry and to control the Nation’s money supply—
the total quantity of money in the country, including cash and bank
deposits. Federal Reserve banks also perform a variety of services for
other banks. For example, they make emergency loans to banks that are
short of cash and clear checks that are drawn and paid out by different
banks.
Interest on loans is the principal source of revenue for most banks,
making their various lending departments critical to their success. The
Commercial Lending department loans money to companies to start or
expand a business or to purchase inventory and capital equipment. The
consumer lending department handles student loans, credit cards, and
loans for home improvements, debt consolidation, and automobile
purchases. Finally, the mortgage lending department loans money to
individuals and businesses to purchase real estate.
The money to lend comes primarily from deposits in checking and savings
accounts, certificates of deposit, money market accounts, and other
deposit accounts that consumers and businesses set up with the bank.
These deposits often earn interest for the owner, and accounts that offer
checking provides an easy method for making payments safely without
using cash. Deposits in many banks are insured by the Federal Deposit
Insurance Corporation, which ensures that depositors will get their money
back, up to a stated limit, if a bank should fail.
Technology is having a major impact on the banking industry. For
example, many routine bank services that once required a teller, such as
making a withdrawal or deposit, are now available through ATMs that
allow people to access their accounts 24 hours a day. Also, direct deposit
allows companies and governments to electronically transfer payments

8
into various accounts. Further, debit cards, which oftentimes double as
ATM cards, instantaneously deduct money from an account when the card
is swiped across a machine at a store’s cash register. Electronic banking
by phone or computer allows customers to pay bills and transfer money
from one account to another. Through these channels, bank customers
can also access information such as account balances and statement
history. Some banks have begun offering online account aggregation,
which makes available in one place detailed and up-to date information
on a customer’s accounts held at various different institutions.
Advancements in technology have also led to improvements in the ways
in which banks process information. Use of check imaging, which allows
banks to store photographed checks on the computer, is one such
example that has recently been implemented by some banks. Other types
of technology have greatly impacted the lending side of banking., For
example, the availability and growing use of credit scoring software
allows loans to be approved in minutes—rather than days—making
lending departments more efficient.
Other fundamental changes are occurring in the industry as banks
diversify their services to become more competitive. Many banks now
offer their customers financial planning and asset management services,
as well as brokerage and insurance services, often through a subsidiary or
third party. Others are beginning to provide investment banking services
that help companies and governments raise money through the issuance
of stocks and bonds, also usually through a subsidiary. As banks respond
to deregulation and as competition in this sector grows, the nature of the
banking industry will continue to undergo significant change.

9
 2 STRUCTURE OF THE INDIAN FINANCIAL MARKET

MINISTRY OF
FINANCE

Financial Reserve SEBI

Institutions Bank of
India
Commercial Non- Bank Mutual Venture
Banks Finance Funds Capital Capital
Companies Funds Markets

Term
Lending Investment Sectoral State-level
Institutions Institutions Finance Financial
IDBI UTI EXIM Institutions
IFCI LIC TFCI SFCs
ICICI GIC NABARD SIDCs • Stock Exchange
• Merchant Bankers
• Underwriters
• Stock Brokers
• Retail Investors
• FIIs

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UTI and Mutual Funds: there are 35mutual funds in India. The three
categories of mutual funds are public sector mutual funds, domestic
private sector mutual funds, and foreign mutual funds. They have
emerged as dynamic financial intermediaries and are very important
institutional investors in India. In the savings market, mutual funds
compete with banks and in the capital market they are the most
influential players to influence market movements.

2.1 The Capital Market

An analysis of structural changes in the savings market indicates the
growing importance of capital markets instruments like shares,
debentures and units in household financial assets. Growth and stability
in the capital market are vital for efficient resource allocation, i.e., the
transfer of resource from the saving market to the real sector of the
economy.
Two important constituents of the capital market are primary market and
secondary market. Figure (b) shows the structure of the securities market
in India. The primary market helps both corporates and the government
raises funds by issuing securities. The secondary market, through
continuous trading activities, provides liquidity in the system. The
secondary market is also a reflection of the changing mood and
perception of investors. As can be imagined, stability and growth in the
capital market depend on the efficient functioning of both the markets

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since they are closely interdependent. Mutual funds play an all-important
role in both the markets and strengthen the transfer mechanism.
Household Equity Debentures/b UTI and Othe Tota
Particulars shares onds other MFs rs l
All India 1.15 0.35 1.32 97.1 100
8
Urban 2.93 0.96 2.97 93.1 100
4
Rural 0.44 0.10 0.67 98.7 100
9

Source: SEBI NCAER Survey of Indian Investors.

Asset wise breakup (total-Rs.16098.51 Crores)

Equity

money market
instruments
debt, 5203.77
Equity, 7970.36 gsecs
gsecs, 2075.81
money market debt
instruments,
848.57

Investment Pattern (as on 11th August, 2003)

3 COMPANY OVERVIEW

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3.1 ICICI Bank Limited

ICICI Bank is India's second-largest bank with total assets of about

Rs.146,214 crores as on December 31, 2004 and profit after tax of Rs.
1,391 crores in the nine months ended December 31, 2004 (Rs. 1,637
crores in fiscal 2004). ICICI Bank has a network of about 505 branches
and extension counters and about 1,850 ATMs. ICICI Bank offers a wide
range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its
specialised subsidiaries and affiliates in the areas of investment banking,
life and non-life insurance, venture capital and asset management. ICICI
Bank set up its international banking group in fiscal 2002 to cater to the
cross-border needs of clients and leverage on its domestic banking
strengths to offer products internationally. ICICI Bank currently has
subsidiaries in the United Kingdom and Canada, branches in

13
Singapore and Bahrain and representative offices in the United
States, China, United Arab Emirates and Bangladesh.
ICICI Bank's equity shares are listed in India on the Bombay Stock
Exchange(BSE), and the National Stock Exchange of India
Limited(NSE) and its American Depositary Receipts (ADRs) are listed on
the New York Stock Exchange (NYSE).
At October 31, 2004, ICICI Bank, with free float market capitalisation* of
about Rs. 220.00 billion (US$ 5.00 billion) ranked third amongst all the
companies listed on the Indian stock exchanges.
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian
financial institution, and was its wholly-owned subsidiary. ICICI's
shareholding in ICICI Bank was reduced to 46% through a public offering
of shares in India in fiscal 1998, an equity offering in the form of ADRs
listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of
Madura Limited in an all-stock amalgamation in fiscal 2001, and
secondary market sales by ICICI to institutional investors in fiscal 2001
and fiscal 2002. ICICI was formed in 1955 at the initiative of the World
Bank, the Government of India and representatives of Indian industry.
The principal objective was to create a development financial institution
for providing medium-term and long-term project financing to Indian
businesses. In the 1990s, ICICI transformed its business from a
development financial institution offering only project finance to a
diversified financial services group offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates
like ICICI Bank. In 1999, ICICI become the first Indian company and the
first bank or financial institution from non-Japan Asia to be listed on the
NYSE.
After consideration of various corporate structuring alternatives in the
context of the emerging competitive scenario in the Indian banking

14
industry, and the move towards universal banking, the managements of
ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI
Bank would be the optimal strategic alternative for both entities, and
would create the optimal legal structure for the ICICI Group's universal
banking strategy. The merger would enhance value for ICICI shareholders
through the merged entity's access to low-cost deposits, greater
opportunities for earning fee-based income and the ability to participate
in the payments system and provide transaction-banking services. The
merger would enhance value for ICICI Bank shareholders through a large
capital base and scale of operations, seamless access to ICICI's strong
corporate relationships built up over five decades, entry into new
business segments, higher market share in various business segments,
particularly fee-based services, and access to the vast talent pool of ICICI
and its subsidiaries. In October 2001, the Boards of Directors of ICICI and
ICICI Bank approved the merger of ICICI and two of its wholly-owned
retail finance subsidiaries, ICICI Personal Financial Services Limited
and ICICI Capital Services Limited, with ICICI Bank. The merger was
approved by shareholders of ICICI and ICICI Bank in January 2002, by
the High Court of Gujarat at Ahmedabad in March 2002, and by the High
Court of Judicature at Mumbai and the Reserve Bank of India in April
2002. Consequent to the merger, the ICICI Group's financing and
banking operations, both wholesale and retail, have been integrated in a
single entity.
*Free float holding excludes all promoter holdings, strategic investments
and cross holdings among public sector entities

3.2 ICICI Securities

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ICICI Securities Limited (i-SEC) is a wholly owned investment-banking
subsidiary of ICICI Limited (ICICI). ICICI is the only non-Japanese Asian
financial institution to be listed on the New York Stock Exchange
(NYSE symbols: IC, IC.D). ICICI Securities was formed on February
22nd 1993, when ICICI's Merchant Banking Division was spun off into a
new company; ICICI Securities today is India's leading Investment Bank
and one of the most significant players in the Indian capital markets.
ICICI Securities Research Reports , Compendia, Updates, I-BEX and
Sovereign Bond Index, have become industry standards, sought after by
finance, business and reputed publications alike.
The range of products offered by ICICI Securities includes:
1. Investment Banking : Mergers and Acquisitions, Equity,
Bidding
2. Fixed Income : Primary Dealership, Debt Research
3. Equities : Lead Management, Underwriting, Syndication,
Private Equity Placement, Sales, Trading, Broking, Sectoral and
Company Research.
ICICI Securities continues to sustain a steady rate of growth by offering
the most extensive range of services combined with unrivalled standards
of professionalism.
ICICI Brokerage Services Limited (IBSL) set up in March 1995; IBSL is
a 100% subsidiary of I-SEC. It commenced its securities brokerage
activities in February 1996 and is registered with the National Stock
Exchange of India Limited and The Stock Exchange, Mumbai.
The U.S. subsidiary of I-Sec, ICICI Securities Inc., has been recently
granted membership of the National Association of Securities
Dealers, Inc. (NASD). With this registration, ICICI Securities Inc.
(ICICI Securities Inc.) can engage in permitted activities in the U.S.
securities markets. These activities include dealing in securities markets

16
transactions in the United States and providing research and investment
advice to U.S. investors. ICICI Securities Inc. has opened its office in
New York.

3.3 ICICI Venture

ICICI Venture, incorporated in 1988, is the most experienced and largest

private equity and venture fund management company in India with
funds currently under management in excess of Rs.20 billion (USD 400
million).
Over the last 15 years, ICICI Venture has been successful in identifying
trends well ahead of the curve; be it retail, media and entertainment,
information technology, real estate or pharmaceuticals and
biotechnology. During this period ICICI Venture launched and managed
8 funds with a corpus exceeding Rs. 20billion (USD 400 million). Each
fund had a distinct investment theme and ICICI Venture today has some
of the best known and managed companies in India in its portfolio. Herein
ICICI Venture has followed the philosophy of being a multi-sector player
ensuring an optimum balance of risk and return to its investors.
ICICI Venture has the distinction of managing a large number of exits in
the country. With over 100 liquidity events, the organisation has reaped
rich experience and is well positioned to handle IPOs, strategic sale and/or
mergers.
ICICI Venture has a wide network of third party investors, which include
domestic investors such as public sector banks, financial institutions and
insurance companies. A significant portion of the fund's corpus is also
from international development financial institutions and international
funds. .

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ICICI Venture has now launched the India Advantage Fund, with a
corpus of Rs.10 Billion (USD 225 million). The Fund will invest in mid-sized
growth companies for funding through expansions, acquisitions and
restructuring. The Fund will also focus on mezzanine funding and buyouts.

3.4 ICICI Prudential Life Insurance Company

ICICI Prudential Life Insurance Company is a joint venture between
ICICI Bank, a premier financial powerhouse and Prudential Plc, a
leading international financial services group headquartered in the United
Kingdom. ICICI Prudential was amongst the first private sector
insurance companies to begin operations in December 2000 after
receiving approval from Insurance Regulatory Development
Authority (IRDA).
ICICI Prudential's equity base stands at Rs. 9.25 billion with ICICI Bank
and Prudential Plc holding 74% and 26% stake respectively. In the
period April-December 2004, the company garnered Rs 8.6 billion of new
business premium for a total sum assured of over Rs 73.6 billion and
wrote nearly 345,000 policies. The company has a network of over 50,000
advisors; as well as 7 banc assurance tie-ups. Today, ICICI Prudential
has emerged as the No. 1 private life insurer in the country, with a wide
range of flexible products that meet the needs of the Indian customer at
every step in life.

3.5 ICICI Lombard General Insurance Company

ICICI Lombard General Insurance Company Limited is a 74:26 joint
venture between ICICI Bank Limited and the US-based $ 26 billion
Fairfax Financial Holdings Limited. ICICI Bank is India's second
largest bank; while Fairfax Financial Holdings is a diversified financial
corporate engaged in general insurance, reinsurance, insurance claims

18
management and investment management. Lombard Canada Ltd., a
group company of Fairfax Financial Holdings Limited, is one of
Canada's oldest property and casualty insurers.
ICICI Lombard General Insurance Company received regulatory
approvals to commence general insurance business in August 2001.

Why ICICI Lombard

 India 's number one private general insurance company.
 First general insurance company in India to be ISO 9001:2000
certified.
 Highest brand recall.
 Simple and fast documentation.
 Lightning fast claims settlement.
 Instant online policy issuance.
 Comprehensive product line.
 Highest security level offered through 128-bit encryption in case of
online data exchange.
 First company to provide digitally signed documents through an
online interface.
 Achieved financial breakeven in first full year of operations.
 Achieved underwriting breakeven in second year of operations.

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 4 SERVICES PROVIDED BY ICICI BANK

4.1 DEPOSITS:

 SAVING BANK
 SPECIAL SAVING ACCOUNT
 SENIOR CITIZEN SERVICE
 ROAMING CURRENT ACCOUNT
 PRIVATE BANK
 SALARY ACCOUNT
 WOMEN’S ACCOUNT
 FIXED DEPOSITS
 EASY FIXED DEPOSIT
 RECURING DEPOSIT
 YOUNG STAR
 EEFC ACCOUNT
 RFC ACCOUT

4.2 LOAN:

 HOME LOAN
 CAR LOAN
 PERSONAL LOAN
 TWO WHEELERS LOAN
 LOAN AGAINST SECURITY
 FARM EQUIPMENTS LOAN
 COMMERCIAL VEHICLE LOAN

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  CONSTRUCTION EQUIPMENTS LOAN
 OFFICE EQUIPMENTS LOAN
 MEDICAL EQUIPMENTS LOAN

4.3 INVESTMENTS:

 ICICI BANK BONDS

 MUTUAL FUNDS
 PURE GOLD
 INITIAL PUBLIC OFFER
 GOVERNMENT OF INDIA BOND

4.4 CARDS:

 CREDIT CARD
 DEBIT CARD
 TRAVEL CARD

4.5 ONLINE SERVICES

 BILL PAY
 SHOPPING
 TICKETING
 CHARITY
 SHARE TRADING

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4.6 NRI SERVICES:

 NRI HOME
 BANKING PRODUCTS
 MONEY TO INDIA

5 MODERN INVESTMENT OPTIONS

Along with Deposit products and Loan offerings, ICICI Bank assists you to
manage your finances by providing various investment options ranging
from ICICI Bank Tax Saving Bonds to Equity Investments through
Initial Public Offers and Investment in Pure Gold. ICICI Bank facilitates
following investment products:
 ICICI Bank Tax Saving Bonds
 Government of India Bonds
 Investment in Mutual Funds
 Initial Public Offers by Corporate
 Investment in "Pure Gold"

5.1 ICICI BANK BONDS

Bonds are similar to Fixed Deposits. Like Bonds, fixed deposit receipts are
normally issued by a bank, a financial institution or a company, for a fixed
period. A specified rate of interest is payable to the investor at regular
intervals. However, unlike Bonds, Fixed Deposits are not transferable.

22
Also, while Bonds may be secured or unsecured, Fixed Deposits are
always unsecured.

5.2 GOI BONDS:

 Low risk
 Reasonable investment tenure
 Nomination facility available
 Cannot be traded in secondary market
 Interest income taxable

5.3 INVESTMENT IN IPO'S:

Investors can invest in IPO’s through ICICI Bank which offers hassle-free &
convenient investing in equities. ICICI Bank helps in gathering in-depth
analysis of new IPO’s issues (Initial Public Offerings) which are about to hit
the market.

5.4 ICICI BANK PURE GOLD:

Gold has been traditionally the most favored form of investment for
Indians. In fact, India, even today is amongst the highest consumers of
Gold in the world. However, the Gold market remains largely unorganized
with reliability and convenience remaining the key issues for gold buyers
in the country.
ICICI Bank with its ‘Pure Gold’ offer attempts to bridge the gap between
the need of the customers for buying gold and availability of an organized
avenue to satisfy that need, by taking care of the two key components –
Reliability and Convenience.

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 6 TRADITIONAL INVESTMENT OPTIONS
ICICI Bank offers wide variety of Deposit Products to suit Investors
requirements. Coupled with convenience of networked branches/ over
1800 ATMs and facility of E-channels like Internet and Mobile Banking,
ICICI Bank brings banking at Customers doorstep.
There are four Options available to the investors:

 Fixed Deposits
 Savings Account
 Recurring Deposit

Safety, Flexibility, Liquidity and Returns!!!!

A combination of unbeatable features of the Fixed Deposit from ICICI
Bank.
 Fixed Deposit3
 Wide range of tenures
 Choice of investment plans
 Partial withdrawal permitted
 Safe custody of fixed deposit receipts
 Auto renewal possible
 Loan facility available
 Easy Deposit
 Free Debit/ATM card
 No need to open a Savings account.
 Options of Easy Withdrawal and Easy Loan
 Wide range of tenures
 Auto renewal possible
 Loan facility available

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6.1 Benefits of Fixed Deposits:
• A wide range of tenures, ranging from 15 days to 10 years, to suit
your investment plan.
• Partial withdrawal is permitted in units of Rs 1,000. The balance
amount earns the original rate of interest.
• Safe custody of your fixed deposit receipts.
• Auto renewal is provided.
• Loan facility is available up to 90% of principal and accrued interest.
• Choice of two investment plans: Traditional or Reinvestment.

6.2 Savings Account:

ICICI Bank offers Savings Account with a host of convenient features and
banking channels to transact through.
 Savings Account
 Debit-cum-ATM card
 Auto Invest Account
 Internet Banking
 Phone Banking
 Anywhere Banking
 Standing instructions
 Nomination facility

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  Doorstep service

6.2.1 Special Savings Account:

 Comprehensive Banking
 Solutions with added features
 Supplementary Savings
 Ideal for tax-exempt entities
 Internet Banking
 Anywhere Banking
 Doorstep Service
6.2.2 Features:
The ICICI Bank N-cash debit card is a debit-cum-ATM card providing you
with the convenience of acceptance at merchant establishments and cash
withdrawals at ATMs. z
 Auto Invest Account
 Internet Banking is offered free of cost.
 Anywhere Banking - This facility entitles the account holder to
withdraw or deposit cash up to a limit of Rs.50, 000 across all ICICI
Bank branches.
 You can give us various types of standing instructions like
transferring to fixed deposit accounts at regular intervals.
 An average quarterly balance of Rs 5,000 only.
 Nomination facility is available.
 Interest is payable half-yearly.

6.2.3 Senior Citizen Services:

26
ICICI Bank offers an ideal Banking Service for those who are 60 years
and above. The Senior Citizen Services from ICICI Bank has several
advantages that are tailored to bring convenience.
 Senior Citizen Services
 Higher Interest Rates
 Special Demand Loans against deposit
 Free collection of outstation cheques drawn on our locations
 Debit-cum-ATM card
 Auto Invest Account
 Internet Banking
 Phone Banking
 Anywhere Banking
 Standing instructions
6.2.4 Young Stars:
ICICI Bank helps children learn the value of finances and money
management at an early age. Banking is a serious business and ICICI
Bank aims to teach the young crowd how to manage their personal
finances.

6.3 Recurring Deposits:

When expenses are high, one might not be having adequate funds to
make big investments. Through ICICI Bank Recurring Deposit one can
invest small amounts of money every month that ends up with a large
saving on maturity.
So you enjoy twin advantages- affordability and higher earnings.
 Recurring Deposit
 Encourages savings
 High interest rates of interest

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  Loans against deposits available
 Non-applicability of Tax Deduction at Source (TDS)
 Encourages savings without stress on your finances
 High rates of interest (identical to the fixed deposit rates)
 Non-applicability of Tax Deduction at Source (TDS)

7 COMPARISON BETWEEN TRADITIONAL AND

MODERN METHODS OF INVESTMENTS:

S.No. Options Risk Return Tax

1 Fixed LOW Less Taxable

Deposit Than 6%
TRADITIONAL p.a
2 Recurring LOW Less Taxable
METHODS
Deposit than 6%
p.a
3 LOW 3.5% p.a Taxable
Savings
4 ICICI Bank LOW 8% Deductib
Tax le From
Saving Taxable
Bonds Income

5 Governme No 8% Tax Free

nt of India R i s k
Bonds

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6 MODERN Investmen Moderat Average Funds
METHODS t in Mutual e returns Under
Funds Depend ELSS
On Market D e d u c t i b
Fluctuation l e From
s Taxable
Income
7 Initial High High or R e t u r n s
Public Low After
Offers by Depends One Year
Corporate on Market a r e Tax
Conditions Free
8 Investmen Low Depends Taxable
t in “Pure on the
Gold” Growth in
the Market

8 MUTUAL FUNDS:
“….Mutual funds are popular among all income levels. With a
mutual fund, we get a diversified basket of stocks managed by
a professional……”
Barbara Stanny, author of Prince Charming Isn’t
Coming:
How Women Get Smart About Money
“…A mutual fund is a company that brings together money from
many people and invests it in stocks, bonds or other assets. The
combined holdings of stocks, bonds or other assets the fund
owns are known as its portfolio. Each investor in the fund owns
shares, which represent a part of these holdings……..”

29
-The U.S. Securities and Exchange Commission

8.1 HISTORY OF INDIAN MUTUAL FUND INDUSTRY:

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

First Phase – 1964-87

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

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

1987 marked the entry of Non- UTI, Public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC). SBI Mutual Fund
was the first Non- UTI Mutual Fund established in June 1987 followed
by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual
Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun
90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual

30
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

31
administrator and under the rules framed by Government of India and
does not come under the purview of the Mutual Fund Regulations. The
second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March
2000 more than Rs.76,000 crores of assets under management and with
the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth. As at the end of October 31,
2003, there were 31 funds, which manage assets of Rs.126726 crores
under 386 schemes.

8.2 CONCEPT OF MUTUAL FUND:

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

32
A mutual fund is the ideal investment vehicle for today’s complex and
modern financial scenario. Markets for equity shares, bonds and other
fixed income instruments, real estate, derivatives and other assets have
become mature and information driven. Price changes in these assets are
driven by global events occurring in faraway places. A typical individual is
unlikely to have the knowledge, skills, inclination and time to keep track
of events, understand their implications and act speedily. An individual
also finds it difficult to keep track of ownership of his assets, investments,
brokerage dues and bank transactions etc.
A mutual fund is the answer to all these situations. It appoints
professionally qualified and experienced staff that manages each of these
functions on a full time basis. The large pool of money collected in the
fund allows it to hire such staff at a very low cost to each investor. In
effect, the mutual fund vehicle exploits economies of scale in all three
areas - research, investments and transaction processing. While the
concept of individuals coming together to invest money collectively is not
new, the mutual fund in its present form is a 20th century phenomenon. In
fact, mutual funds gained popularity only after the Second World War.
Globally, there are thousands of firms offering tens of thousands of
mutual funds with different investment objectives. Today, mutual funds
collectively manage almost as much as or more money as compared to
banks.
Despite these advantages mutual funds do not guarantee do not return,
nor do they eliminate risk to investors. The return and risk of a mutual
fund depend primarily on the type of securities instruments in which it
invests, and secondarily on how well it is managed by the company
offering it.
Typically a mutual fund scheme is initiated by a sponsor who recognizes
and markets the fund. It pre specifies the investment objective of the fund

33
and the risks associated with the costs involved in the process and broad
rules for entry into and exit from the fund and other areas of operation. In
India as in most nations the sponsors need approval from the regulator
viz. SEBI. A sponsor then hires an asset management company to invest
the funds according to the investment objective. It also hires another
entity to the custodian of the assets of the funds and perhaps a third one
to handle registry work.
In the Indian context, the sponsors promote the Asset Management
Company also, in which it holds a majority stake. In many cases a sponsor
can hold a 100% stake in the Asset Management Company (AMC). E.g.
Birla Global Finance is the sponsor of the Birla Sun Life Asset
Management Company Ltd., which has floated different mutual funds
schemes and also acts as an asset manager for the funds collected under
the schemes.
In nutshell, A Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial goal. The money thus
collected is then invested in capital market instruments such as shares,
debentures and other securities. The income earned through these
investments and the capital appreciation realized are shared by its unit
holders in proportion to the number of units owned by them. Thus a
Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed
basket of securities at a relatively low cost. The flow chart below
describes broadly the working of a mutual fund:

8.3 ORGANISATION OF A MUTUAL FUND:

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

34
35
8.4 ADVANTAGES OF MUTUAL FUNDS:
Mutual funds provide following benefit to investors:
• Professional Management
Mutual Funds provide the services of experienced and skilled
professionals, backed by a dedicated investment research team that
analyses the performance and prospects of companies and selects
suitable investments to achieve the objectives of the scheme.
• Diversification
Mutual Funds invest in a number of companies across a broad cross-
section of industries and sectors. This diversification reduces the risk
because seldom do all stocks decline at the same time and in the
same proportion. You achieve this diversification through a Mutual
Fund with far less money than you can do on your own.
• Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid
many problems such as bad deliveries, delayed payments and follow
up with brokers and companies. Mutual Funds save your time and
make investing easy and convenient.
• Return Potential
Over a medium to long-term, Mutual Funds have the potential to
provide a higher return as they invest in a diversified basket of
selected securities.

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

36
• Liquidity
In open-end schemes, the investor gets the money back promptly at
net asset value related prices from the Mutual Fund. In closed-end
schemes, the units can be sold on a stock exchange at the
prevailing market price or the investor can avail of the facility of
direct repurchase at NAV related prices by the Mutual Fund.
• Transparency
you get regular information on the value of your investment in
addition to disclosure on the specific investments made by your
scheme, the proportion invested in each class of assets and the fund
manager's investment strategy and outlook.
• Flexibility
Through features such as regular investment plans, regular
withdrawal plans and dividend reinvestment plans, you can
systematically invest or withdraw funds according to your needs and
convenience.
• Affordability
Investors individually may lack sufficient funds to invest in high-
grade stocks. A mutual fund because of its large corpus allows even
a small investor to take the benefit of its investment strategy.
• .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.

37
8.5 Disadvantages of investing through mutual funds:
While the benefits of investing through mutual funds far outweigh the
disadvantages, an investor and his advisor will do well to be aware of a
few shortcomings of using the mutual funds as investment vehicles.

• No control over costs:

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

• No tailor made portfolios:

Investor who invests on their own can build their own portfolios of
shares and bonds and other securities. Investing through funds means
he delegates this decision to the fund managers. The very high net
worth individuals or large corporate investors may find this to be a
constraint in achieving their objectives. However, most mutual fund
managers help investors overcome this constraint by offering families
of funds-----a large number of different schemes---within their own
management company. An investor can choose from different
investment plans and construct a portfolio of his choice.

• Managing a portfolio of funds:

38
 Availability of a large number of funds can actually mean too much
choice for the investor. He may again need advice on how to select a
fund to achieve his objectives, quite similar to the situation when he
has to select individual shares or bonds to invest in.

8.6 Role of Mutual Funds in the Financial Market:

The brief review in the preceding section of financial system and
structural changes in the market suggests that Indian Financial
institutions have played a dominant role in assets formation and
intermediation, and contributed substantially in macroeconomic
development. In this process of development, Indian mutual funds have
emerged as strong financial intermediaries and are playing a very
important role in bringing stability to the financial system and efficiency
to resource allocation. Mutual funds have opened new vistas to investors
and imparted much-needed liquidity to the system.
Mutual funds are the fastest growing institutions in the household saving
sector. Growing complications and risk in the stock market, rising tax
rates and increasing inflation have pushed household towards mutual
funds. The active involvement of mutual funds in promoting economic
development can be seen not only in terms of their participation in the
savings market but also in their dominant presence in the money and
capital market. A developed financial market is critical to overall
development and mutual funds play an active role in promoting a healthy
capital market. We have also noted that Indian investors have moved
towards more liquid, growth-oriented tradable instrument like share/

39
debentures, and units of mutual funds. This shift in asset holding pattern
of investors has been significantly influenced by the ‘equity’ and ‘unit’
culture.
Mutual funds in India have emerged as a critical institutional linkage
among various financial segments like saving, capital market and the
corporate sector. They provide much needed impetus to the money
market and stock market, in addition to direct and indirect support to the
corporate sector. Above all, mutual funds have given a new direction to
the flow of personal saving and enabled small and medium investors in
remote, rural and semi urban areas to reap the benefit of stock market
investment. Indian mutual funds are thus playing a very crucial
developmental role in allocating resource in the emerging market
economy.

8.7 TAX STATUS:

Dividend paid by mutual funds is fully tax-exempt at the hands of the
investor, although, debt funds have to pay a 12.81 per cent dividend
distribution tax. On redemption of any units held for more than a year,

40
your realization will attract long-term capital gains tax of 20 per cent plus
surcharge after indexing for inflation, or at a flat rate of 10 per cent. If
redeemed before a year it will be termed as short term capital gain and
taxed along with your other income. However, you can save tax by
investing in Equity-Linked Savings Scheme (ELSS) under Section 88 of the
Income Tax Act, 1961, according to which 20 per cent of the amount
invested in ELSS can be deducted from your tax liability subject to a
maximum investment of Rs 10,000 per year

8.8 RISK ASSOCITED WITH MUTUAL FUNDS:

Mutual funds and securities investment are subject to various risks and there is no assurance
that a scheme objective will be achieved. These risks should be properly understood by
investors so that they can understand how much risky their investment avenue is. Equity and
fixed income bearing securities have different risks associated with them. Various risks
associated with mutual funds can be described as below.

Risk associated to fixed income bearing securities

 Interest rate risk –

As with all the securities, changes in interest rates may affect the
schemes Net Asset Value as the prices of the securities generally
increase as interest rates decline and generally decrease as interest
rates rise. Prices of long-term securities generally fluctuate more in
response to interest rates changes then do short term securities.
Indian Debt markets can be volatile leading to the possibility of price
movements p or down in the fixed income securities and thereby to the
possible movements in the NAV.

41
  Liquidity or marketable risk –

This refers to the ease with which an security can be sold at near to its
valuation yield to maturity. The primary measure of liquidity risk is the
spread between the bid price and the offer price quoted by the dealer.
Liquidity risk is inherent to the Indian Debt market.

 Credit risk –

Credit risk or default risk refers to the risk that an issuer of fixed
income security may default (i.e, will be unable to make timely
principal and interest payments on the security). Because of those risk
corporate debentures are sold at a yield above those offered on
Government securities, which are sovereign obligations and free of
credit risk. Normally the value of fixed income security will fluctuate
depending upon the perceived level of credit risks well as the actual
event of default. The greater the credit risk the greater the yield
require for someone to be compensated for increased risk.

8.9 RISK ASSOCIATED TO EQUITIES:

 Market risk –

The NAV of the scheme investing in equity will fluctuate as the daily
prices of the individual securities in which they invest fluctuate and the
units when redeemed may be worth more or less than the original
cost.

 Timing the market –

42
 It is difficult to identify which is the right time to invest and which is the
right time to take out the money. There may be situations where
stocks may not be rightly timed according to the market leading to loss
in the value of scheme.

 Liquidity –

Investment made in unlisted equities or equity related securities might

only be realizable upon the listing of the securities. Settlement
problems could cause the scheme to miss certain investment
opportunities.

8.10 THE KEY ROLE OF FINANCIAL CONSULTANTS IN THE

DISTRIBUTION OF FINANCIAL PRODUCTS:
The world of financial product distribution is somewhat similar though
there is no physical and the patent processes are more complicated.
The first major similarity is the layered approach to the customer. As with
an FMCG, here is a distributor and an agent who form the layer between
the financial product supplier and the customer. In the FMCG space, the
distributors are often competiting category exclusive, which means they
may not distribute other non- products. Retailers of course carry a wide
range of products. In financial products, however, the distributors are not
necessarily exclusive (except for insurance) and agents are almost never
exclusive to one principal.
The next major similarity is in the nature of intermediary compensation.
As with an fmcg, intermediary compensation is often paid as a percentage
of the sale value. Namely the investment. An exception is the mutual
funds. Where compensation is largely paid in the form of trailer fees,
explained below.

Trailer fees

43
Open ended mutual funds allow withdrawal of amounts deposited at any
time. Many investors can and do deposit for as short a term as one week,
and use the mutual fund as a proxy for a bank account. The management
fee revenue stream for an asset management company is linked not to a
transaction, but rather to the time the money is in the fund. For example,
if an investor were to deposit Rs. 10000 in a mutual fund, the AMC will
earn a fee, typically one percent per annum’s, on this amount, only; as
long as it remains in the fund. In some sense it is like a reverse interest
.in the above example, if the money stayed for a full year, the AMC would
charge rs.100 as fee. If it stayed for one month, it would charge only Rs.
8.33
Suppose the AMC paid brokerage as a percentage of the transaction
value, as is usual in the FMCG world, in the case, a typical brokerage
amount would be 0.75%of Rs.10000 or Rs.75. this amount is paid by the
amc in the expectation that it will earn a fee that exceeds Rs, 75. This
amount is paid by the AMC in the expectation that it will earn a fee; that
exceeds Rs. 75. Being an open ended fund, this is not necessarily true. In
this example, the investor needs to stay put for at least nine months
before the AMC even recovers the brokerage paid.
Hence, the concept of trailer fee or revenue sharing was introduced. The
trailer fee implies that the brokerage, instead of being an upfront lump
sum amount, will be a share of the revenue stream arising to the AMC out
of the money being in the fund. The trailer fee will be paid also at a rate
of say 0.75% p.a. But only so long as the money stays in the fund. In the
event the leaves in a months, the A, C will receive say rs.8.33 and the
broker will receive ,say Rs. 6.25 on the other hand ,if the money; stays
for five years, the AMC will receive an aggregate of rs.500 while the
broker will receive an aggregate of ts.375 over this period.

44
The example presents a highly simplified version of the process, but
serves to illustrate the concept of course mutual funds also pay upfront
.in doing so they either take a calculated risk, or alternatively recover a
load or entry fee from the investor, which is used to pay the brokerage.
Trailer fees today represent over 75 percent of all brokerages paid by
mutual funds, and are a phenomenon peculiar to them. Practically every
other financial product pays upfront lump sum brokerages, because they
are term products (the investment cannot be withdrawn for a certain
period)
Life insurance commissions are also often paid as annuities, based upon
the premiums received .because a policy holder may let the policy lapse
at any time it is usual to link the commission installments received. This
also provides a motivation for the agent to follow up on premium
installments.

Differences from FMCG distribution

In FMCG distribution, the ownership of the cake of soap changes hands as
one moves along. That is why the consumer pays cash to the retailer for
the soap instead of writing a cheque favoring the manufacturer. Financial
product distribution however normally requires payment direct to the
manufacturer. For example, a company fixed deposit or a mutual fund
unit has to be purchased by writing a cheque favoring the company or the
mutual fund, not the intermediary or agent. This means that every
manufacturer; of a financial product must have a means of accepting
payment at every retail outlet. This is a challenging task. And one of the
key reasons that soaps are available in every pan shop in every village
while mutual fun units and deposits are not.
The next major difference is that a financial product is normally an
investment product unlike a soap which is consumed; a financial product

45
is a returnable product. For instance, fixed deposit pays periodic interest
and returns the principal on maturity. A mutual fund pays periodic
dividends and returns the principal on request. This means that unlike a
soap manufacturer, the financial product manufacturer has to keep track
of the investor. Bu investors are notoriously forgetful of their assets, and
one often funds that after a 3-5 year period 10-30 percent of all investors
are not traceable at their original addresses. Why is that? Because they
have retired, married, been transferred, emigrated or even passed away
and did not care to keep their investment record updated.
Another major difference is embedded in the fact that the FMCG
manufacturer typically sells consumable goods of low unit value. A wrong
purchase based on an incorrect retailer recommendation has only a small
impact on the consumer. However, a financial product is relatively of a
large unit value. This is not a sum that most would like to risk based on
bad advice. In some sense this is like buying a white good-a fridge,
washing machine or TV, in any of these cases, the consumer will rather
spend some time researching the features and go to a reputed shop
where he can expect a proper comparison of the features of various
options .also he may decide to buy am more expensive product if he feels
it gives greater value. He does not mind going to a high street retail shop
and paying the full price as he knows that he will get post sales warranty
support in the case; of many financial products the investor needs good
advice he may not know everything about the product –the background of
the issuer, the past track record of returns and quality of service and the
risk involved. Often the investor may be blinded by the upfront incentive
(gold coin being offered). Good advice from a reputed financial
intermediary will alone helps in good product selection. Therefore
financial intermediary unlike an fmcg intermediary must be well trained in
product features.

46
An emerging issue is one of investor ownership; financial products are
often purchased periodically by investors to invest their incremental
savings, or to reinvest matured investments.

Emerging trends
Any distributor or agent will obviously; like to keep track of an investor’s
investment so that he may suggest suitable reinvestments upon maturity.
Also along association will tell the agent at what intervals he may expect
incremental investment from an investor. This will normally be a function
of the saving and of any bonuses. This process of keeping tab on an
investor is called investor ownership. Where the offer is a single product
say a fixed deposit the company; will be content to leave the investor
ownership with the agent. This is because the particular company cannot
address all the investment requirements of the investor. however where
it offers a full suite of products of mutual funds in a bank -it would like to
take over the ownership of its investors and try to cross sell other
products.
In most overseas markets investor ownership is with the agent or
distributor. They go beyond the basic concept of investment advice, to
provide the investor with such things as comprehensive account
statements, return calculations and account maintenance of the account
portfolio. Thus the investor need no longer be dependent on a varied set
of manufacturers to provide him with these information and that too
separately. This is called wealth management and is normally available
with the higher bracket of investor
In India too some banks and national distributors have started offering
wealth management services. Their proposition is that the investor should
indicate their risk profile and then leave it to them to choose the
appropriate investment that provides the right mix of security and

47
returns. In return it will be a single point service –that the investor will get
all his investment statements, returns, advice from a single source. This
as time passes will become more attractive.

Payment practices
Earlier a reference was made to the need for payments for the financial
products to be made directly favoring the manufacturer. It was explained
how that imposed a requirement to have banking facilities available at
100’s of cities. It is obviously inefficient for 100’s of manufacturers to
have banking facilities in 100’s of cities. This historic model has been
followed because of the absence of well capitalized regulated and trust
worthy intermediaries in the financial distribution sector.
When one buys a soap or toothpaste the money is paid against delivery of
the product. In financial products the product is delivered after the money
is realized by the manufacturer and after some administrative delay.
Paying the manufacturer directly gives the investor assurance and legal
basis to establish that he has a claim on the product.
In most overseas markets financial products are purchased just like
physical products by writing a cheque to the agent. Agent is normally of
the high reputation, well capitalized and well regulated giving the investor
the necessary confidence that the money will indeed be passed on to the
manufacturer and the product obtained on his behalf.
India too will soon see the emergence of this class of intermediaries.
Already banks which enjoy the trust of the investor anyway, are
leveraging on this trust to offer such single point investment facilities. It is
a matter of time before non-bank corporate entities offer this level of
comfort to the investor.

Investment Principles

48
The first and the most important principle is to decide what ones risk
appetites.
Most of us have a definite view on equities. Mostly a middle class
person perceives it as very risky. At the same time it’s a well established
fact that equities have always provided better returns over a long time
frame. Establishing an appropriate ratio between equities (higher return
but higher risk) and fixed income (lower return lower risk) is the challenge
for most of us.

Intermediaries Role
Good financial intermediaries have a practice of risk profiling their
investors. They will spend some time with the investor understanding his
future financial needs and future retirement income expectation. Then
they would advice a suitable mix of investment. That is expected to meet
their expectations and objectives. A well paid software professional can
be expected to have a better risk appetite than an elderly soon to ret\ire
manager. Accordingly the software professional will have a greater share
of equities in his portfolio.
The most important principle of sound investing is to get a good
intermediary or advisor. A good advisor is not necessarily one who gives a
discount or rebate. Infact the good ones will not give a rebate because
they need to make a decent living themselves. The level of commitment
shown by the advisor in understanding the investor needs and goals is a
clear sign of his competence.
It is advisable to stick to one intermediary in respect of all ones
investments. One of the key pieces of advice that one will need is when to
sell a security. That advice will only come when one has a long standing
and continuous relationship with his intermediary. Rooting all ones
investments through one intermediary also gives a complete view of

49
client’s investments and therefore the risk that the client is exposed to.
These alone will give proper investment and disinvestmemt advice.
The intermediary is also human and can make mistakes in judgment
.however too many mistakes will be a sign that it is time to change. One
should remember it is ultimately ones money and so should never
hesitate to ask for a reason for an investment recommendation. Also one
should keep an eye on the news that offers an opportunity.
Thus financial product distribution is in the process of change. Regulators
and indeed the industry itself are trying to change themselves for the
better. Meanwhile there is no substitute to having a trustworthy advisor
and to keeping your eyes and ears open.

50
8.11 THE GROUND RULES OF MUTUAL FUND INVESTING:
Moses gave to his followers 10 commandments that were to be followed
till eternity. The world of investments too has several ground rules meant
for investors who are novices in their own right and wish to enter the
myriad world of investments. These come in handy for there is every
possibility of losing what one has if due care is not taken.
1. Assess yourself: Self-assessment of one’s needs; expectations and
risk profile is of prime importance failing which; one will make more
mistakes in putting money in right places than otherwise. One
should identify the degree of risk bearing capacity one has and also
clearly state the expectations from the investments. Irrational
expectations will only bring pain.
2. Try to understand where the money is going: It is important to
identify the nature of investment and to know if one is compatible
with the investment. One can lose substantially if one picks the
wrong kind of mutual fund. In order to avoid any confusion it is
better to go through the literature such as offer document and fact
sheets that mutual fund companies provide on their funds.
3. Don't rush in picking funds, think first: One first has to decide
what he wants the money for and it is this investment goal that
should be the guiding light for all investments done. It is thus
important to know the risks associated with the fund and align it
with the quantum of risk one is willing to take. One should take a
look at the portfolio of the funds for the purpose. Excessive
exposure to any specific sector should be avoided, as it will only add
to the risk of the entire portfolio. Mutual funds invest with a certain
ideology such as the "Value Principle" or "Growth Philosophy". Both
have their share of critics but both philosophies work for investors of

51
 different kinds. Identifying the proposed investment philosophy of
the fund will give an insight into the kind of risks that it shall be
taking in future.
4. Invest. Don’t speculate: A common investor is limited in the
degree of risk that he is willing to take. It is thus of key importance
that there is thought given to the process of investment and to the
time horizon of the intended investment. One should abstain from
speculating which in other words would mean getting out of one
fund and investing in another with the intention of making quick
money. One would do well to remember that nobody can perfectly
time the market so staying invested is the best option unless there
are compelling reasons to exit.
5. Don’t put all the eggs in one basket: This old age adage is of
utmost importance. No matter what the risk profile of a person is, it
is always advisable to diversify the risks associated. So putting one’s
money in different asset classes is generally the best option as it
averages the risks in each category. Thus, even investors of equity
should be judicious and invest some portion of the investment in
debt. Diversification even in any particular asset class (such as
equity, debt) is good. Not all fund managers have the same acumen
of fund management and with identification of the best man being a
tough task; it is good to place money in the hands of several fund
managers. This might reduce the maximum return possible, but will
also reduce the risks.
6. Be regular: Investing should be a habit and not an exercise
undertaken at one’s wishes, if one has to really benefit from them.
As we said earlier, since it is extremely difficult to know when to
enter or exit the market, it is important to beat the market by being
systematic. The basic philosophy of Rupee cost averaging would

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 suggest that if one invests regularly through the ups and downs of
the market, he would stand a better chance of generating more
returns than the market for the entire duration. The SIPs (Systematic
Investment Plans) offered by all funds helps in being systematic. All
that one needs to do is to give post-dated cheques to the fund and
thereafter one will not be harried later. The Automatic investment
Plans offered by some funds goes a step further, as the amount can
be directly/electronically transferred from the account of the
investor.
7. Do your homework: It is important for all investors to research the
avenues available to them irrespective of the investor category they
belong to. This is important because an informed investor is in a
better decision to make right decisions. Having identified the risks
associated with the investment is important and so one should try to
know all aspects associated with it. Asking the intermediaries is one
of the ways to take care of the problem.
8. Find the right funds: Finding funds that do not charge much fees
is of importance, as the fee charged ultimately goes from the pocket
of the investor. This is even more important for debt funds as the
returns from these funds are not much. Funds that charge more will
reduce the yield to the investor. Finding the right funds is important
and one should also use these funds for tax efficiency. Investors of
equity should keep in mind that all dividends are currently tax-free
in India and so their tax liabilities can be reduced if the dividend
payout option is used. Investors of debt will be charged a tax on
dividend distribution and so can easily avoid the payout options.
9. Keep track of your investments: Finding the right fund is
important but even more important is to keep track of the way they
are performing in the market. If the market is beginning to enter a

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 bearish phase, then investors of equity too will benefit by switching
to debt funds as the losses can be minimized. One can always
switch back to equity if the equity market starts to show some
buoyancy.
10. Know when to sell your mutual funds: Knowing when to
exit a fund too is of utmost importance. One should book profits
immediately when enough has been earned i.e. the initial
expectation from the fund has been met with. Other factors like non-
performance, hike in fee charged and change in any basic attribute
of the fund etc. are some of the reasons for to exit. For more on it,
read "When to say goodbye to your mutual fund."
Investments in mutual funds too are not risk-free and so investments
warrant some caution and careful attention of the investor.
After learning the concept of mutual funds and various schemes of mutual
funds available for investment it is required to effectively manage the
portfolio of an investor which depends upon the objective of investor. The
most important objective of any investor is to generate returns.
Requirement for return for every investor varies which depends upon
many factors and these factors determine the category to which an
investor belongs. Depending upon the category to which an investors
belongs portfolio of any customer is managed.

9 FINDINGS:

9.1 How does changes in NAV benefit investors?

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Suppose the IPO price of a scheme was Rs. 10 and today its NAV is Rs. 15.35.

The increment of Rs. 5.35 is the total return on the scheme, which has been
generated due to some factors. These factors can be explained as below.

Trading Gains-

These are the gains generated from buying and selling of securities. Any
security bought at a lower price and sold at a higher price leads to trading
gains.

Mark on market-

Mark on market is also called unbooked gains. Because these are gains
that could have been generated if securities would have been sold
instead of being retained in the portfolio.

Accrued interest-

It is the amount accrued as interest by keeping the securities in the

portfolio.

The ratio of these three components keeps varying. Increment of NAV

consists primarily of accrued interest .The proportion of these factors
moves in the following manner.

 Accrued interest – 75%

 Mark on market – 20%

 Trading gains – 5%

This is the proportion in which returns are generated. But fund manager’s capability
lies in generating trading gains because interest can be generated by anyone by keeping same
securities in his portfolio. It is only due to the expertise of fund managers in generating
trading gains that people invest through mutual funds.

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9.2 NAV calculation for different options:

Growth-

For growth option NAV will be calculated in the same manner as

discussed above

Dividend and Dividend reinvested– For dividend option the dividend

declared per unit will be deducted from the NAV under growth scheme to
arrive at the NAV for dividend option. Similarly for dividend reinvestment
option the NAV will remain the same. The only difference is that Investors
under dividend reinvestment option will have more units that with
dividend option for the same amount of money invested.

9.3 Investment Management:

After learning the concept of mutual funds and various schemes of mutual
funds available for investment it is required to effectively manage the
portfolio of an investor which depends upon the objective of investor. The
most important objective of any investor is to generate returns.
Requirement for return for every investor varies which depends upon
many factors and these factors determine the category to which an
investor belongs. Depending upon the category to which an investors
belongs portfolio of any customer is managed.
Investors can be categorized on the basis of certain factors which can be
described as below.
1. On the basis of Risk and Return
• Low Risk Bearing Capacity

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 • Medium Risk Bearing Capacity

• High Risk Bearing Capacity

Risk and return goes hand to hand. Higher return means

higher risk. Low risk means moderate return.

2. On the basis of Age of Investor:

• Young Age (20-35 years)

• Middle Age (35-50 years)

• Old Age (50 and above)

3. On the basis of Liquidity required by Investor:

• Less Liquidity

• Medium Liquidity

• More Liquidity

4. On the basis of tenure of investment:

• Short Term

• Medium Term

• Long Term

5. Investment can also be made to

• Park the Idle Funds

• Make a full time investment

• Avail tax benefits

• Meet requirement for Contingencies

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 On the basis of the advisory paradigm (deciding factors) mentioned
above, various categories of investor can be made which is deciding
factor as to where an investor with a particular requirement must
invest.

Generally investors are categorized on the basis of

• Risk and return
• Age
• Liquidity Required

For other factors the portfolio of the customer is adjusted accordingly

depending upon the category of the customer. Following are the various
profile of investors based on the advisory paradigm followed by
investment avenues where they can park their money:

10 INVESTMENT MANAGEMENT – CASE STUDIES:

HIGH NETWORTH INDIVIDUALS

CASE 1: MR. A

Profile of the Investor: MR. A a HNI is a aggressive player in market

with direct investment in equities as well as through mutual fund route.
He demands higher return on his investment so he is ready to take higher
risk. He already had diversified his investment so he is not averse of
loosing some of his capital for better returns.

Recommendations:
1) As Mr. A was overweight on equity side both directly as well as through
mutual fund route, He was advised MIP plans so as to provide him a
cushion. As MIP plans generally go for 80% debt and 20% equity they
provide a good monthly returns along with safety of capital.

2) On 21/ 04/04 MR. A was advised investment in cash plus which was
shifted to MIP –II plan of Birla Mutual fund. The reason being that the IPO
of MIP –II which was coming on 29/04/04. In order to ensure that his
money does not remain Idle for 10 days he was advised investment in
cash plus so that he can easily shift to MIP –II plan without any load and
some return for 9 days.

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3) In order to provide a good opportunity in equity funds he was advised
investment in Birla Dividend Yield Plus( which invest in high dividend yield
companies). He was advised to enter into BDYP at this point of time
because some good dividends were expected to be declared by the
companies in the month of June ehich could have further enriched his
returns.

CASE II: Mr. B

Profile of the Investor: MR. B a HNI is also a aggressive player in

market. HE likes to play directly both in equity as well as Debt market.
Though he is overweight on equity he is not convinced with the idea of
MIP as he believes that he himself can manage his portfolio the way it is
managed I MIP’s. He has already parked his investments in safer avenues
so he wants to play in equity market. At this point of time he required
money to construct his house and for his son’s marriage.

Recommendations:
1) We can see in the portfolio he has been given recommendation in
liquid funds. As he require money to construct his house and for
son’s marriage, invest in liquid funds is a wise decision because
liquid funds provide the opportunity to earn moderate returns of
around 4- 4.5% a better return than savings and current account
with maintaining liquidity and safety.

2) In order to avail Tax benefit he had invested in various avenues. HE

was also advised investment in equity Plan which would not only
provide him tax benefit but also high returns with long term growth
of capital.

3) He was also advised Reliance power sector fund as at that point of

time Govt. was bringing certain reforms in power sector. So this
investment would fetch him a good returns. What reforms

CORPARATES

CASE III: Company X.

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Profile of the Company: X Ltd. A photocopier company has collection
on daily basis throughout India. They want to park their money in an
investment option which can bring them some returns along with
maintaining liquidity. They have a resolution form their board that they
cannot park their money whole money in one single investment avenue.

Recommendations:
1) They have been advised investment in various liquid schemes of
mutual funds. As all the liquid schemes provide more or less the
same return schemes have been chosen on the basis of consistency
of return and their expense ratio.

2) It has been advised dividend Reinvestment option in order to save

short term capital gins tax.

CASE IV: Company Y.

Profile of the Company: Y Ltd. wants to park their money in an

investment option which can bring them some returns along with
maintaining liquidity. They want to continuously churn their portfolio.
They also demand a avenue where they can get better returns then
savings and current account.

Recommendations:
1) They have been advised investment in various liquid schemes of
mutual funds. As all the liquid schemes provide more or less the
same return schemes have been chosen on the basis of consistency
of return and their expense ratio.

2) It has been advised dividend Reinvestment option in order to save

short term capital gins tax.

RETAILERS

CASE V: Mr. P

Profile of the Company: Mr. P is a NRI. He is a aggressive equity player

in market. He likes to invest small amounts in full range of diversified

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equities. He has a long term horizon. He is bullish about Indian Equity
market he wanted to enter through mutual funds route.

Recommendations:
1) He has been advised various sector funds as well other equity
schemes running successfully in the market which associate high
risks along with providing handsome returns.

2) As he is overweight with equity market he has been advised to take

exposure in MIP plan os Franklin Templeton so that he can get some
good returns along with maintaining safety of his capital.

CASE VI: Mrs. Q

Profile of the Company: Mrs. Q is an old lady, a widow. She has a

capital of around 15- 20 lakhs. She wants to keep invested for long term
and earn regular return on her investments along with maintaining safety
of capital.

Recommendations:
3) They have been advised investment in various liquid schemes of
mutual funds. As all the liquid schemes provide more or less the
same return schemes have been choosen on the basis of
consistency of return and their expense ratio.

4) It has been advised dividend Reinvestment option in order to save

short term capital gins tax.

One of the need to invest in mutual fund is for the provident fund
investors, who are required to generate around 9.5% return on their
provident fund investments.

Provident fund interest– Provident funds are required to invest their

money in securities issued by government or in the mutual funds with the
portfolio containing government securities only. So the investors who are
required to generate provident fund return can also invest in mutual
funds.

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

11 BIBLIOGRAPHY:

• http://www.iciciprulife.com/public/default.htm
• http://www.iciciprulife.com/online/index.jsp
• http://www.google.co.in/search?
hl=en&q=iciciprudential+life+insurance&meta=
• http://www.indiahousing.com/insurance-companies/icici-life-
insurance-company.html
• http://www.icicibank.com/

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