Professional Documents
Culture Documents
Study of Mutual Fund As An
Study of Mutual Fund As An
Study of Mutual Fund As An
On
“Study of mutual fund as an
Investment option”
Submitted in partial fulfillment of
MASTER OF BUSINESS ADMINISTRATION (MBA)
Conducted by
APJ AK TECHNICAL UNIVERSITY, LUCKNOW
1
ACKNOWLEDGEMENT
The work done under the title " A RESEARCH REPORT ON A study of mutual Funds as an
investment option " represents not just my efforts to realize the goal of learning & training in fact
people.
my mentor Dr. RaginiJoharifor giving me this golden opportunity to do this wonderful project.
It helped me in doing a lot of research and I came to know about so many new things I am really
thankful to them.
I am thankful to all the people who have shared their knowledge and cooperation towards my
project.
Jyoti
M.B.A. 4th semester
Roll No. 1674870013
2
DECLARATION
I JYOTI hereby declare that this project report entitled “A study of mutual Funds as an
investment option”, submitted by me, under the guidance of Dr. RaginiJohari, HOD, of
ManagementDepartment, of AnsalTechnical Campus,Lucknow is my own and has not been
submitted to any other institute.
Jyoti
M.B.A. 4th semester
Roll No. 1674870013
3
TABLE OF CONTENT
13 Riskometer 65-66
16 Annexure 79-81
Conclusion
17 82-83
18 Bibliography 84
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EXECUTIVE SUMMERY
A mutual fund is a scheme in which several people invest their money for a common
financial cause. The collected money invests in the capital market and the money, which they
The mutual fund industry started in India in a small way with the UTI Act creating what
was effectively a small savings division within the RBI. Over a period of 25 years this grew
fairly successfully and gave investors a good return, and therefore in 1989, as the next logical
step, public sector banks and financial institutions were allowed to float mutual funds and their
success emboldened the government to allow the private sector to foray into this area.
The disadvantages of mutual fund are high costs, over-diversification, possible tax
The biggest problems with mutual funds are their costs and fees it include Purchase fee,
Redemption fee, Exchange fee, Management fee, Account fee & Transaction Costs. There are
some loads which add to the cost of mutual fund. Load is a type of commission depending on the
type of funds.
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Mutual funds are easy to buy and sell. You can either buy them directly from the fund
company or through a third party. Before investing in any funds one should consider some factor
like objective, risk, Fund Manager’s and scheme track record, Cost factor etc.
There are many, many types of mutual funds. You can classify funds based Structure
A code of conduct and registration structure for mutual fund intermediaries, which were
subsequently mandated by SEBI. In addition, this year AMFI was involved in a number of
The most important trend in the mutual fund industry is the aggressiveexpansion of the foreign
owned mutual fund companies and the decline of the companies floated by nationalized banks
Reliance Mutual Fund, UTI Mutual Fund,ICICI Prudential Mutual Fund, HDFC Mutual
Fund and Birla Sun Life Mutual Fund are the top five mutual fund company in India.
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INTRODUCTION OF MUTUAL FUND
Mutual fund were introduced in Indiain year 1963, when the Government of
India launched Unit Trust of India (UTI). Until 1987, UTI enjoyed a monopoly in the Indian
mutual fund market. Then a host of other government-controlled Indian financial companies
came up with their own funds. These included State Bank of India, Canara Bank, and Punjab
National Bank. This market was made open to private players in 1993, as a result of the
historic constitutional amendments brought forward by the then Congress-led government under
the existing regime of Liberalization, Privatization and Globalization (LPG). The first private
sector fund to operate in India was Kothari Pioneer, which later merged with Franklin
Templeton.
A mutual fund is a common pool of money into which investors place their contributions
that are to be invested in accordance with a stated objective. The ownership of the fund is thus
joint or “mutual”; the fund belongs to all investors. A single investor’s ownership of the fund is
in the same proportion as the amount of the contribution made by him or her bears to the total
Mutual Funds are trusts, which accept savings from investors and invest the same in
diversified financial instruments in terms of objectives set out in the trusts deed with the view to
reduce the risk and maximize the income and capital appreciation for distribution for the embers.
A Mutual Fund is a corporation and the fund manager’s interest is to professionally manage the
funds provided by the investors and provide a return on them after deducting reasonable
management fees.
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DEFINITION:
“A mutual fund is an investment that pools your money with the money of an unlimited
number of other investors. In return, you and the other investors each own shares of the fund.
The fund's assets are invested according to an investment objective into the fund's portfolio of
investments. Aggressive growth funds seek long-term capital growth by investing primarily in
stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also
The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vice versa if he pertains to lower risk
instruments, which would be satisfied by lower returns. For example, if an investors opt for
bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in
capital protected funds and the profit-bonds that give out more return which is slightly higher as
compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds
provide professional management, diversification, convenience and liquidity. That doesn’t mean
This is because the money that is pooled in are not invested only in debts funds which are
less riskier but are also invested in the stock markets which involves a higher risk but can expect
higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives
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Legal Structure of Mutual Funds in India
SEBI (Mutual Fund) Regulations, 1996 as amended till date define “mutual fund” as a
fund established in the form of a trust to raise moneys through the sale of units to the
public or a section of the public under one or more schemes for investing in securities
assets.
Key features of a mutual fund that flows from the definition above are:
o It is established as a trust
o It raises moneys through sale of units to the public or a section of the public
SEBI has stipulated the legal structure under which mutual funds in India need to be
constituted. The structure, which has inherent checks and balances to protect the interests
o Mutual funds are constituted as Trusts. Therefore, they are governed by the Indian
o The mutual fund trust is created by one or more Sponsors, who are the main
o Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust,
are the investors who invest in various schemes of the mutual fund.
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o The operations of the mutual fund trust are governed by a Trust Deed, which is
executed between the sponsors and the trustees. SEBI has laid down various
o The Trust acts through its trustees. Therefore, the role of protecting the interests
of the beneficiaries (investors) is that of the Trustees. The first trustees are named
in the Trust Deed, which also prescribes the procedure for change in Trustees.
o The trustees execute an investment management agreement with the AMC, setting
o Although the AMC manages the schemes, custody of the assets of the scheme
o Investors invest in various schemes of the mutual fund. The record of investors
and their unit-holding may be maintained by the AMC itself, or it can appoint a
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Key Constituents of a Mutual Fund
1) Sponsors:-
The application to SEBI for registration of a mutual fund is made by the sponsor/s.
Since sponsors are the main people behind the mutual fund operation, eligibility criteria
The sponsor should have a sound track record and reputation of fairness and integrity in
Sponsor should have positive net worth (share capital plus reserves minus accumulated
Latest net worth should be more than the amount that the sponsor contributes to the
The sponsor should have earned profits, after providing for depreciation and interest, in
The sponsor should be a fit and proper person for this kind of operation.
The sponsor needs to have a minimum 40% share-holding in the capital of the AMC.
Further, anyone who has more than 40% share-holding in the AMC is considered to be a
sponsor, and should therefore fulfill the eligibility criteria mentioned above.
In the example of SBI Mutual Fund cited above, the sponsor is State Bank of India, an
Indian public sector bank. Sponsorship may be institutional (LIC Nomura Mutual Fund),
entirely foreign (like Franklin Templeton Mutual Fund and Goldman Sachs Mutual
Fund), predominantly foreign joint venture (like JP Morgan Mutual Fund & HSBC
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Mutual Fund)or predominantly Indian joint venture (like Birla Sun Life Mutual Fund &
2) Trustee:-
The trustees have a critical role in ensuring that the mutual fund complies with all the
A person convicted of any economic offence or violation of any securities laws cannot be
appointed as trustee
The sponsor will have to appoint at least 4 trustees. If a trustee company has been
appointed, then that company would need to have at least 4 directors on the Board.
Further, at least two-thirds of the trustees / directors on the Board of the trustee company
would need to be independent trustees i.e. not associated with the sponsor in any way.
SEBI expects Trustees to perform a key role in ensuring legal compliances and protecting
the interest of investors. Accordingly, various General Due Diligence and Special Due
The strict provisions go a long way in promoting the independence of the role of
3) AMC:-
Day to day operations of asset management is handled by the AMC. It therefore arranges
for the requisite offices and infrastructure, engages employees, provides for the requisite
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software, handles advertising and sales promotion, and interacts with regulators and
The AMC has to take all reasonable steps and exercise due diligence to ensure that the
investment of funds pertaining to any scheme is not contrary to the provisions of the
SEBI regulations and the trust deed. Further, it has to exercise due diligence and care in
The directors of the asset management company need to be persons having adequate
The directors as well as key personnel of the AMC should not have been found guilty of
moral turpitude or convicted of any economic offence or violation of any securities laws
Key personnel of the AMC should not have worked for any asset management company
or mutual fund or any intermediary during the period when its registration was suspended
Prior approval of the trustees is required, before a person is appointed as director on the
Further, at least 50% of the directors should be independent directors i.e. not associate of
The AMC needs to have a minimum net worth of Rs. 50 crore. This is immediately
applicable to new AMCs. AMCs in existence in May 2014 have been given 3 years to
raise their net worth to Rs. 50 crore. However, they cannot launch new schemes until they
An AMC cannot invest in its own schemes, unless the intention to invest is disclosed in
the Offer Document. Further, the AMC cannot charge any fees for its own investment in
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The appointment of an AMC can be terminated by a majority of the trustees, or by 75%
of the Unit-holders. However, any change in the AMC is subject to prior approval of
Chief Investment Officer (CIO), who is responsible for overall investments of the fund.
Fund managers assist the CIO. As per SEBI regulations, every scheme requires a fund
manager, though the same fund manager may manage multiple schemes.
Securities Analysts support the fund managers through their research inputs. As will be
discussed in Chapter8, these analysts come from two streams, Fundamental Analysis and
Technical Analysis. Some mutual funds also have an economist to analyse the economy.
Securities Dealers help in putting the transactions through in the market. The mutual
fund schemes’ sale and purchase of investments are executed by the dealers in the
secondary market.
Chief Marketing Officer (CMO), who is responsible for mobilizing money under the
various schemes. Direct Sales Team (who generally focus on large investors), Channel
Managers (who manage the distributors) and Advertising & Sales Promotion Team
Compliance Officer needs to ensure all the legal compliances. In Offer Documents of
new issues, he signs a due-diligence certificate to the effect that all regulations have been
complied with, and that all the intermediaries mentioned in the offer document have the
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In order to ensure independence, the Compliance Officer reports directly to the head of
the AMC. Further, he works closely with the Trustees on various compliance and
regulatory issues.
1) Custodian:-
The custodian has custody of the assets of the fund. As part of this role, the custodian
needs to accept and give delivery of securities for the purchase and sale transactions of the
various schemes of the fund. Thus, the custodian settles all the transactions on behalf of the
All custodians need to register with SEBI. The Custodian is appointed by the trustees. A
custodial agreement is entered into between the trustees and the custodian.
The SEBI regulations provide that if the sponsor or its associates control 50% or more of
the shares of a custodian, or if 50% or more of the directors of a custodian represent the interest
of the sponsor or its associates, then, unless certain specific conditions are fulfilled, that
custodian cannot be appointed for the mutual fund operation of the sponsor or its associate or
subsidiary company.
An independent custodian ensures that the securities are indeed held in the scheme for the
The custodian also tracks corporate actions such as dividends, bonus and rights in
2) RTA:-
The RTA maintains investor records. Their offices in various centres serve as Investor
Service Centres (ISCs), which perform a useful role in handling the documentation of investors.
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The appointment of RTA is done by the AMC. It is not compulsory to appoint a RTA.
The AMC can choose to handle this activity in-house. All RTAs need to register with SEBI.
3) Auditors:-
Accounts of the schemes need to be maintained independent of the accounts of the AMC.
The auditor appointed to audit the scheme accounts needs to be different from the auditor
of the AMC.
While the scheme auditor is appointed by the Trustees, the AMC auditor is appointed by
the AMC.
4) Fund Accountants:-
The fund accountant performs the role of calculating the NAV, by collecting information
about the assets and liabilities of each scheme. The AMC can either handle this activity in-house,
or engage a service provider. There is no need for a registration with SEBI to perform this
function.
5) Distributors:-
Distributors have a key role in selling suitable types of units to their clients i.e. the
Distributors need to pass the prescribed certification test, and register with AMFI.
Regulatory aspects of their role are discussed in Chapter3, while some of the distribution and
6) Collecting Bankers:-
The investors’ moneys go into the bank account of the scheme they have invested in.
These bank accounts are maintained with collection bankers who are appointed by the AMC.
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Leading collection bankers make it convenient to invest in the schemes by accepting
handed over to branches of the AMC or the RTA need to be banked with the collecting bankers,
so that the moneys are available for investment by the scheme. Thus, the banks enable collection
Through this kind of a mix of constituents and specialized service providers, most mutual
To do away with multiple KYC formalities with various intermediaries, SEBI has
mandated a unified KYC for the securities market through KYC Registration Agencies registered
with SEBI. Any new investor, Joint holders, Power of Attorney holders, Donors and Guardian
(in case of minors) have to comply with the KYC formalities. In-Person Verification (IPV) by a
SEBI-registered intermediary is compulsory for all investors. However, the investor needs to get
IPV done by only one SEBI-registered intermediary (broker, depository, mutual fund distributor
etc.). This IPV will be valid for transactions with other SEBI-registered intermediaries too.
and a valid ARN can carry out the In-person verification if they have completed the KYD
process.
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RETURN RISK MATRIX
Venture
Equity
capital
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ADVANTAGES OF MUTUAL FUNDS
If mutual funds are emerging as the favorite investment vehicle, it is because of the many
advantages they have over other forms and the avenues of investing, particularly for the investor
who has limited resources available in terms of capital and the ability to carry out detailed
research and market monitoring. The following are the major advantages offered by mutual
1. Portfolio Diversification:
Each investor in the fund is a part owner of all the fund’s assets, thus enabling him to
hold a diversified investment portfolio even with a small amount of investment that would
2. Professional Management:
Even if an investor has a big amount of capital available to him, he benefits from the
professional management skills brought in by the fund in the management of the investor’s
portfolio. The investment management skills, along with the needed research into available
investment options, ensure a much better return than what an investor can manage on his own.
Few investors have the skill and resources of their own to succeed in today’s fast moving, global
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3. Reduction/Diversification Of Risk:
When an investor invests directly, all the risk of potential loss is his own, whether he
places a deposit with a company or a bank, or he buys a share or debenture on his own or in any
other from. While investing in the pool of funds with investors, the potential losses are also
shared with other investors. The risk reduction is one of the most important benefits of a
What is true of risk as also true of the transaction costs. The investor bears all the costs of
investing such as brokerage or custody of securities. When going through a fund, he has the
benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit
5. Liquidity:
Often, investors hold shares or bonds they cannot directly, easily and quickly sell. When
they invest in the units of a fund, they can generally cash their investments any time, by selling
their units to the fund if open-ended, or selling them in the market if the fund is close-end.
Mutual fund management companies offer many investor services that a direct market
investor cannot get. Investors can easily transfer their holding from one scheme to the other; get
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7. Tax Benefits:
Any income distributed after March 31, 2002 will be subject to tax in the assessment of
all Unit holders. However, as a measure of concession to Unit holders of open-ended equity-
oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a
In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the
Total Income will be admissible in respect of income from investments specified in Section 80L,
including income from Units of the Mutual Fund. Units of the schemes are not subject to
8. Choice of Schemes:
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
9. Well Regulated:
All Mutual Funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of Mutual Funds are
10. Transparency:
You get regular information on the value of your investment in addition to disclosure on the
specific investments made by your scheme, the proportion invested in each class of assets
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DISADVANTAGES OF INVESTING THROUGH
MUTUAL FUNDS
An investor in a mutual fund has no control of the overall costs of investing. The investor
pays investment management fees as long as he remains with the fund, albeit in return for the
professional management and research. Fees are payable even if the value of his investments is
declining. A mutual fund investor also pays fund distribution costs, which he would not incur in
direct investing. However, this shortcoming only means that there is a cost to obtain the mutual
fund services.
2. No Tailor-Made Portfolio:
Investors who invest on their own can build their own portfolios of shares and bonds and
other securities. Investing through fund means he delegates this decision to the fund managers.
The very-high-net-worth individuals or large corporate investors may find this to be a constraint
in achieving their objectives. However, most mutual fund managers help investors overcome this
constraint by offering families of funds- a large number of different schemes- within their own
management company. An investor can choose from different investment plans and constructs a
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3. Managing A Portfolio Of Funds:
Availability of a large number of funds can actually mean too much choice for the
investor. He may again need advice on how to select a fund to achieve his objectives, quite
That's right, this is not an advantage. The average mutual fund manager is no better at
5. No Control:
Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat
6. Dilution:
Mutual funds generally have such small holdings of so many different stocks that
insanely great performance by a fund's top holdings still doesn't make much of a difference in a
7. Buried Costs:
Many mutual funds specialize in burying their costs and in hiring salesmen who do not
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TYPES OF MUTUAL FUNDS SCHEMES IN INDIA
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations etc. thus mutual funds has Assortment of flavors,
Being a collection of many stocks, an investors can go for picking a mutual fund might be easy.
There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual
TYPES OF MUTUAL
FUNDS
BY INVESTMENT
BY STRUCTURE BY NATURE OTHER SCHEMES
OBJECTIVE
Close - Ended
Debt Funds Income Schemes Index Schemes
Schemes
Money Market
Schemes
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A). BY STRUCTURE
An open-end fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15
years. The fund is open for subscription only during a specified period. Investors can invest in
the scheme at the time of the initial public issue and thereafter they can buy or sell the units of
the scheme on the stock exchanges where they are listed. In order to provide an exit route to the
investors, some close-ended funds give an option of selling back the units to the Mutual Fund
through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-
ended schemes. The units may be traded on the stock exchange or may be open for sale or
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B). BY NATURE
1. Equity Fund:
These funds invest a maximum part of their corpus into equities holdings. The structure
of the fund may vary different for different schemes and the fund manager’s outlook on different
stocks. The Equity Funds are sub-classified depending upon their investment objective, as
follows:
Mid-Cap Funds
Equity investments are meant for a longer time horizon, thus Equity funds rank high on
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
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.
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Income Funds: Invest a major portion into various debt instruments such as bonds,
MIPs: Invests maximum of their total corpus in debt instruments while they take
minimum exposure in equities. It gets benefit of both equity and debt market. These
scheme ranks slightly high on the risk-return matrix when compared with other debt
schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months.
These funds primarily invest in short term papers like Certificate of Deposits (CDs) and
Commercial Papers (CPs). Some portion of the corpus is also invested in corporate
debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provides easy
liquidity and preservation of capital. These schemes invest in short-term instruments like
Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for
short-term cash management of corporate houses and are meant for an investment
horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are
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
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the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
objectives of the fund. The investor can align his own investment needs with the funds objective
C) 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.
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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 aim to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer, short-term instruments, such as
treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Load Funds:
A Load Fund is one that charges a commission for entry or exit. That is, each time you
buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range
from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.
No-Load Funds:
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no
commission is payable on purchase or sale of units in the fund. The advantage of a no load fund
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OTHER 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
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
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
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Systematic Investment Planning (SIP)
SIP is similar to a Recurring Deposit. Every month on a specified date an amount you choose is
invested in a mutual fund scheme of your choice. The dates currently available for SIPs are the
5th, 10th, 15th, 20th and the 25th of a month. There are many benefits of investing through
SIP.
Advantages of SIP
•Compounding Benefits
•Choose one Day of the month (5th / 10th /15th / 20th / 25th/ 30th )
•Make First Investment by Cheque drawn in favor of the scheme. E.g. SBIMF -Magnum Tax
Gain Scheme
And Relax…….. Every month the said amount will be debited from your bank account and units
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NET ASSET VALUE (NAV):
Since each owner is a part owner of a mutual fund, it is necessary to establish the value of
his part. In other words, each share or unit that an investor holds needs to be assigned a value.
Since the units held by investor evidence the ownership of the fund’s assets, the value of the total
assets of the fund when divided by the total number of units issued by the mutual fund gives us
the value of one unit. This is generally called the Net Asset Value (NAV) of one unit or one
share. The value of an investor’s part ownership is thus determined by the NAV of the number of
units held.
Calculation of NAV:
Let us see an example. If the value of a fund’s assets stands at Rs. 100 and it has 10
investors who have bought 10 units each, the total numbers of units issued are 100, and the value
of one unit is Rs. 10.00 (1000/100). If a single investor in fact owns 3 units, the value of his
ownership of the fund will be Rs. 30.00(1000/100*3). Note that the value of the fund’s
investments will keep fluctuating with the market-price movements, causing the Net Asset Value
also to fluctuate. For example, if the value of our fund’s asset increased from Rs. 1000 to 1200,
the value of our investors holding of 3 units will now be (1200/100*3) Rs. 36. The investment
value can go up or down, depending on the markets value of the fund’s assets.
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SELECTION PARAMETERS FOR MUTUAL FUND
Your objective:
The first point to note before investing in a fund is to find out whether your objective
matches with the scheme. It is necessary, as any conflict would directly affect your prospective
returns. Similarly, you should pick schemes that meet your specific needs. Examples: pension
This dictates the choice of schemes. Those with no risk tolerance should go for debt
schemes, as they are relatively safer. Aggressive investors can go for equity investments.
Investors that are even more aggressive can try schemes that invest in specific industry or
sectors.
Since you are giving your hard earned money to someone to manage it, it is imperative
that he manages it well. It is also essential that the fund house you choose has excellent track
record. It also should be professional and maintain high transparency in operations. Look at the
performance of the scheme against relevant market benchmarks and its competitors. Look at the
performance of a longer period, as it will give you how the scheme fared in different market
conditions.
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Cost factor:
Though the AMC fee is regulated, you should look at the expense ratio of the fund before
investing. This is because the money is deducted from your investments. A higher entry load or
exit load also will eat into your returns. A higher expense ratio can be justified only by
superlative returns. It is very crucial in a debt fund, as it will devour a few percentages from your
modest returns.
Also, Morningstar rates mutual funds. Each year end, many financial publications list the
year's best performing mutual funds. Naturally, very eager investors will rush out to purchase
shares of last year's top performers. That's a big mistake. Remember, changing market conditions
make it rare that last year's top performer repeats that ranking for the current year. Mutual fund
investors would be well advised to consider the fund prospectus, the fund manager, and the
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Types of Returns on Mutual Fund:
Absolute Return:
Absolute return is the growth in your investment expressed in percentage terms. It can be
understood with the help of a simple example. Suppose you invested Rs 1 Lakh in a mutual fund
scheme. Three years later the value of your investment is Rs 1.4 Lakhs; you can know the value
of your investment from the account statement sent to you by the AMC or the registrar (e.g.
CAMS or Karvy). The total profit made by you is Rs 40,000. The absolute return earned by you
in percentage terms is 40%. Absolute return ignores the time over which the growth was
achieved; if your Rs 1 Lakh investment grew to Rs 1.4 Lakhs in 5 years (instead of 3), the
Annualized Return:
Annualized return, as the name suggests, measures how much your investment grew in value on
a yearly basis. An important thing to note in annualized returns is that, the effect of compounding
is included. Compounding is, very simply, profits made on profits. If you invested Rs 1 Lakh in a
mutual fund scheme and the value of your investment after 3 years is Rs 1.4 Lakhs, then
annualized returns will be 11.9%. Notice that annualized return of 11.9% is less than the absolute
return (40%) divided by the investment period (3 years); this is due to compounding effect. If
you invested Rs 1 Lakh in a mutual fund scheme and the value of your investment after 5 years
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Total Return:
Total return is the actual rate of return earned from the investment and includes both capital
gains and dividends. Let us assume that, you invested Rs 1 Lakh in a mutual fund scheme at a
NAV of Rs 20. The number of units of the scheme purchased by you is 5,000 (1 Lakh divided by
20). The NAV of the scheme after 1 year is Rs 22. The value of your units after 1 year will,
therefore, be Rs 1.1 Lakhs (22 X 5,000). The capital gains made by you will be Rs 10,000. Let us
also assume that, during the year, the scheme declared Rs 2 per unit as dividend. Total dividend
paid to you by the AMC would be Rs 10,000 (2 X 5,000). The total return earned by you will be
Rs 10,000 capital gains + Rs 10,000 dividends = Rs 20,000. The total return in percentage terms
will be 20%.
Trailing Return:
Trailing return is the annualized return over a certain trailing period ending today. Let us
understand this with the help of an example. Suppose the NAV of a scheme today (March 10,
2017) is Rs 100. 3 years back (i.e. March 10, 2014), the NAV of the scheme was Rs 60. The 3
year trailing return of the fund is 18.6%. Suppose the NAV of the scheme 5 years back (i.e.
March 10, 2012) was Rs 50. The 5 year trailing return of the fund is 14.9%.
= (Today’s NAV / NAV at the start of the trailing period) ^ (1/Trailing Period) – 1
The trailing period can be 1 year, 2 years, 3 years, 5 years, 10 years etc; basically any period.
Trailing return is the most popular mutual performance measure. The returns that you see on
most mutual fund websites are actually trailing returns. If you go to our Mutual Fund Research
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section, Top Performing Funds, the returns that you see are, in fact, trailing returns. Investors
should note that, trailing returns are biased by current market conditions relative to market
conditions prevailing at the start of the trailing period. Trailing returns are high in bull markets
As the name suggests, point to point returns measures annualized returns between two points of
time. For example, if you are interested in how a mutual fund scheme performed during a
particular period, say 2012 to 2014, you will look at point to point returns. To calculate point to
point returns of a mutual fund scheme, you necessarily need to have a start date and end date.
You will look up the NAVs of the scheme on start and end dates, and then calculate the
annualized returns.
Annual Return:
Annual return of a mutual fund scheme is the return given by the scheme from January 1 (or the
earliest business day of the year) to December 31 (last business day of the year) of any calendar
year. For example, if the NAVs of a scheme on January 1 and December 31 are Rs 100 and 110
respectively, the annual return for that year will be 10%. Most mutual fund research portals,
including our portal, show annual returns of a scheme in the scheme details page. Annual returns
valueresearchonline.com and Morningstar.in, you will find annual returns in the performance
tabs within the scheme details page. Mutual funds are market linked investments and the market
conditions in a particular year will have a significant impact on annual returns. However,
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comparing annual returns across years relative to benchmark or fund category, can give you a
Rolling Returns:
Rolling returns are the annualized returns of the scheme taken for a specified period (rolling
returns period) on every day/week/month and taken till the last day of the duration compared to
the scheme benchmark (e.g. Nifty, BSE – 100, BSE – 200, BSE – 500, CNX – 500, BSE –
Midcap, CNX – Midcap etc.) or fund category (e.g. large cap funds, diversified equity funds,
midcap funds, balanced funds etc.). Rolling returns are usually shown in a chart format. A rolling
returns chart shows the annualized returns of the scheme over the rolling returns period on every
Rolling returns is not widely used in India, but is widely accepted globally as the best measure of
a fund’s performance. Trailing returns have a regency bias (as explained earlier) and point to
point returns are specific to the period in consideration (and therefore, may not be relevant for
the present time). Rolling returns, on the other hand, measures the fund’s absolute and relative
performance across all timescales, without any bias. Rolling return is also the best tool to
Quartile Ranking:
Which is more important, absolute return or relative return? It differs from individual to
individual and we can debate this till the cows come home, but the reality is that, in this
competitive age, there is emphasis on relative performance, both in our work-place and also for
our kids in school. Quartile ranking is a measure of relative performance of mutual fund scheme.
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Investors should note that, quartile ranking is not a measure of returns, but is actually a rank
The rankings range from “Top Quartile” to “Bottom Quartile” for different time periods. Mutual
funds with the highest percent returns in the chosen time period are assigned to “Top Quartile”,
whereas those with the lowest returns are assigned to “Bottom Quartile”. Quartile rankings are
compiled by sorting the funds based on trailing returns over a period chosen by the user. Funds
in the top 25% are assigned the ranking of “Top Quartile”, the next 25% are assigned a ranking
of “Upper Middle Quartile”, the next 25% after that are assigned a ranking of “Lower Middle
Quartile” and the lowest 25% are assigned the ranking of “Bottom Quartile”. While, the current
quartile ranking of a mutual fund scheme is important, even more important is the consistency of
All the returns measures that we have discussed thus far, relate to lump sum or one-time
investments. Lump sum investment returns are relatively simpler to measure because, essentially
you are measuring growth in investment value between two points of time (in the case of total
returns, dividends, if any, also need to be factored). However, systematic investment plan (SIP)
represents a series of cash-flows and so computing SIP returns is more complicated. The
financial metric used to calculate the returns from a series of cash-flows (e.g. SIP, SWP, STP
etc.) is known as the Internal Rate of Return (IRR). The formula of IRR is outside the scope of
this post. If cashflows are not an exact regular time intervals, then a modification of IRR, known
39
MUTUAL FUNDS DISTRIBUTION CHANNELS
Investors have varied investment objectives and can be classified as aggressive, moderate and
conservative, depending on their risk profile. For each of these categories, asset management
companies (AMCs) devise different types of fund schemes, and it is important for investors to
Funds are bought and sold through distribution channels, which play a significant role in
explaining to the investors the various schemes available, their investment style, costs and
expenses. There are two types of distribution channels-direct and indirect. In case of the former,
the investors buy units directly from the fund AMC, whereas indirect channels include the
Direct channel
This is good for investors who do not need the advisory services of agents and are well-versed
with the fundamentals of the fund industry. The channel provides the benefit of low cost, which
Indirect channel
This channel is widely prevalent in the fund industry. It involves the use of agents, who act as
intermediaries between the fund and the investor. These agents are not exclusive for mutual
funds and can deal in multiple financial instruments. They have an in-depth knowledge about the
functioning of financial instruments and are in a position to act as financial advisers. Here are
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a) Independent financial advisers (IFA): These are individuals trained by AMCs for
selling their products. Some IFAs are professionally qualified CFPs (certified financial planners).
They help investors in choosing the right fund schemes and assist them in financial planning.
IFAs manage their costs through the commissions that they earn by selling funds.
b) Organized distributors: They are the backbone of the indirect distribution channel.
They have the infrastructure and resources for managing administrative paperwork, purchases
and redemptions. These distributors cater to the diverse nature of the investor community and the
c) Banks: They use their network to sell mutual funds. Their existing customer base serves as a
captive prospective investor base for marketing funds. Banks also handle wealth management for
their clients and manage portfolios where mutual funds are one of the asset classes. The players
in the indirect channel assist investors in buying and redeeming fund units.
They try to understand the risk profile of investors and suggest fund schemes that best suits their
objectives. The indirect channel should be preferred over the direct channel when investors want
to seek expert advice on the risk-return mix or need help in understanding the features of the
financial securities in which the fund invests as well as other important attributes of mutual
41
WORKING OF MUTUAL FUNDS
The mutual fund collects money directly or through brokers from investors. The money is
invested in various instruments depending on the objective of the scheme. The income generated
proportion to their investment in the scheme. The investments are divided into units and the
value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is the market
value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of
the scheme divided by the number of units outstanding on the valuation date. Mutual fund
companies provide daily net asset value of their schemes to their investors. NAV is important, as
it will determine the price at which you buy or redeem the units of a scheme. Depending on the
load structure of the scheme, you have to pay entry or exit load.
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STRUCTURE OF A MUTUAL FUND:
India has a legal framework within which Mutual Fund have to be constituted. In India
open and close-end funds operate under the same regulatory structure i.e. as unit Trusts. A
Mutual Fund in India is allowed to issue open-end and close-end schemes under a common legal
structure. The structure that is required to be followed by any Mutual Fund in India is laid down
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The Fund Sponsor:
Sponsor is defined under SEBI regulations as any person who, acting alone or in
combination of another corporate body establishes a Mutual Fund. The sponsor of the fund is
akin to the promoter of a company as he gets the fund registered with SEBI. The sponsor forms a
trust and appoints a Board of Trustees. The sponsor also appoints the Asset Management
Company as fund managers. The sponsor either directly or acting through the trustees will also
appoint a custodian to hold funds assets. All these are made in accordance with the regulation
As per the SEBI regulations, for the person to qualify as a sponsor, he must contribute at
least 40% of the net worth of the Asset Management Company and possesses a sound financial
A Mutual Fund in India is constituted in the form of Public trust Act, 1882. The Fund
sponsor acts as a settlor of the Trust, contributing to its initial capital and appoints a trustee to
hold the assets of the trust for the benefit of the unit-holders, who are the beneficiaries of the
trust. The fund then invites investors to contribute their money in common pool, by scribing to
“units” issued by various schemes established by the Trusts as evidence of their beneficial
It should be understood that the fund should be just a “pass through” vehicle. Under the
Indian Trusts Act, the trust of the fund has no independent legal capacity itself, rather it is the
Trustee or the Trustees who have the legal capacity and therefore all acts in relation to the trusts
are taken on its behalf by the Trustees. In legal parlance the investors or the unit-holders are the
44
beneficial owners of the investment held by the Trusts, even as these investments are held in the
name of the Trustees on a day-to-day basis. Being public trusts, Mutual Fund can invite any
Trustees:
A Trust is created through a document called the Trust Deed that is executed by the fund
sponsor in favour of the trustees. The Trust- the Mutual Fund – may be managed by a board of
trustees- a body of individuals, or a trust company- a corporate body. Most of the funds in India
are managed by Boards of Trustees. While the boards of trustees are governed by the Indian
Trusts Act, where the trusts are a corporate body, it would also require to comply with the
Companies Act, 1956. The Board or the Trust company as an independent body, acts as a
protector of the of the unit-holders interests. The Trustees do not directly manage the portfolio of
securities. For this specialist function, the appoint an Asset Management Company. They ensure
that the Fund is managed by ht AMC as per the defined objectives and in accordance with the
The role of an Asset Management Company (AMC) is to act as the investment manager
of the Trust under the board supervision and the guidance of the Trustees. The AMC is required
to be approved and registered with SEBI as an AMC. The AMC of a Mutual Fund must have a
net worth of at least Rs. 10 Crores at all times. Directors of the AMC, both independent and non-
independent, should have adequate professional expertise in financial services and should be
individuals of high morale standing, a condition also applicable to other key personnel of the
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AMC. The AMC cannot act as a Trustee of any other Mutual Fund. Besides its role as a fund
manager, it may undertake specified activities such as advisory services and financial consulting,
provided these activities are run independent of one another and the AMC’s resources (such as
personnel, systems etc.) are properly segregated by the activity. The AMC must always act in the
interest of the unit-holders and reports to the trustees with respect to its activities.
Mutual Fund is in the business of buying and selling of securities in large volumes.
Handling these securities in terms of physical delivery and eventual safekeeping is a specialized
activity. The custodian is appointed by the Board of Trustees for safekeeping of securities or
participating in any clearance system through approved depository companies on behalf of the
Mutual Fund and it must fulfill its responsibilities in accordance with its agreement with the
Mutual Fund. The custodian should be an entity independent of the sponsors and is required to
be registered with SEBI. With the introduction of the concept of dematerialization of shares the
dematerialized shares are kept with the Depository participant while the custodian holds the
physical securities. Thus, deliveries of a fund’s securities are given or received by a custodian or
a depository participant, at the instructions of the AMC, although under the overall direction and
Bankers:
A Fund’s activities involve dealing in money on a continuous basis primarily with respect
to buying and selling units, paying for investment made, receiving the proceeds from sale of the
46
investments and discharging its obligations towards operating expenses. Thus the Fund’s banker
plays an important role to determine quality of service that the fund gives in timely delivery of
remittances etc.
Transfer Agents:
Transfer agents are responsible for issuing and redeeming units of the Mutual Fund and
provide other related services such as preparation of transfer documents and updating investor
records. A fund may choose to carry out its activity in-house and charge the scheme for the
service at a competitive market rate. Where an outside Transfer agent is used, the fund investor
will find the agent to be an important interface to deal with, since all of the investor services that
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REGULATORY STRUCTURE OF MUTUAL FUNDS IN INDIA:
The structure of mutual funds in India is guided by the SEBI. Regulations, 1996.These
regulations make it mandatory for mutual fund to have three structures of sponsor trustee and
asset Management Company. The sponsor of the mutual fund and appoints the trustees. The
trustees are responsible to the investors in mutual fund and appoint the AMC for managing the
investment portfolio. The AMC is the business face of the mutual fund, as it manages all the
affairs of the mutual fund. The AMC and the mutual fund have to be registered with SEBI.
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EQUITY – GLOBAL
Global equity markets ended negative as investors continued to pare back risk positions,
walking away with their profits from a strong year as geopolitical tensions rise between US and
North Korea. On MoM basis, European markets (-3%), US markets (-1%) and Japanese markets
(-3%) were the majorlosers among the key global equity markets.
recovery and improvements in global trade. Despite of sustained rally in equities, valuations
appear to be at reasonable levels, with earnings yield of S&P 500 remains much higher than the
US 10-year Treasuries. Also,the risk premium of US equities appears to be higher than that of
US corporate bonds.These pointers suggest that still more steam left in global and US equity
markets.
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EQUITY - INDIA
Nifty and Midcap100 Index ended negative1% and 2% respectively. Rising geo-political
tensions,elevated valuations and concerns about near-term earnings disruption due to GST
weighed on investors’ sentiment. RBI has announced a 25bps repo rate cut in its recent meeting,
acknowledging the muted inflation trends and normal monsoons. Politically, NDA got a major
boost in July, with Bihar Chief Minister, Mr. Nitish Kumar breaking alliance with RJD and
forming a new government in alliance with BJP. This augurs well from the RajyaSabha
arithmetic perspective, as it bolsters the government’s numbers in the Upper House to drive
Earnings continue to disappoint with Q1FY18 net profits of the Nifty 50 index declining
8.4% , and came in 2% lower than consensus estimates. Results suggest that the underlying
conditions in several sectors and the broader economy continue to remain weak. GST led
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While rural consumption likely to be healthy, with monsoon has commenced on time, and is
with farm loan waivers and multiyear high MSP price hikes bodes well from rural
consumption perspective.
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Out of 50 Nifty stocks, 20 stocks have reported negative to flat earnings growth in FY16 and
FY17, these companies contribute to ~35% of Nifty Mcap weight age. While Nifty has
reported flat earnings growth in FY16 and 7% growth in FY17. However, there were more
than 20 companies which have reported earnings growth of +15% CAGR over FY15-17
contributing to ~45-50% of Nifty Mcap weight age. Fund managers have delivered
outperformance to indices over last 2 years, through constant focus on individual high growth
companies within Nifty. Currently the Nifty index might look expensive on valuations due to
compressed aggregate earnings of the index constituents; while individual high growth
companies within index will continue to outperform, basis through demand momentum in
consumer segments.
While, we remain positive on the markets from a medium to long term perspective led by
structural growth drivers like favorable demographics and improving macro fundamentals.
Elevated valuations, potential near-term earnings disruption due to GST, potential state fiscal
slippages due to widespread farm loan waivers and bankruptcy proceedings against large
corporates could weigh on investors sentiment and market momentum in the short term.
Large caps continue to offer value and margin of safety compared to midcap peers. The key
sectorial players are autos, private banks, consumer focused NBFCs and materials. We re-
iterate our investment strategy of being stock specific and focus on high growth, well-
managed companies with strong cash flows and credible management teams.
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RECOMMENDED FUNDS – EQUITY
53
54
55
56
57
58
59
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Performance as on August 14, 2017
Up/Down Caption ratio with respect to the category benchmark Index (3 Years)
Standard Deviation (%) is considered for Portfolio Volatility
Turnover ratio is considered for Risk Adjustment Return
Risk free rate: 6.38%
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RISKOMETER
62
63
Research Methodology
Research Objective:-
Main objective-
To identify the level of risk/ security involved in investing in various equity diversified mutual
fund schemes.
Sub objectives-
c) To get an in-depth knowledge about regulatory firm body of mutual funds in India.
d) To know the best mutual funds investment plan like Systematic investment plan.
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ThisReport is based on primary as well assecondary data, however primary data collection was
One of the most important uses of Research Methodology is that it helps in identifying the
problem, collecting, analyzing the required information or data and providing an alternative
solution to the problem. It also helps in collecting the vital information that is required by the
Top Management to assist them for the better decision making both day to day decisions and
critical ones.
d) Sampling Method: The sample was collected through personal visits, formal and informal talks
and through filling up the Questionnaire prepared. The data has been analyzed by using
g) Data Source:
etc.
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Data Analysis & Interpretation
16% 16%
Under Graduation
Graduation
18%
Post Graduation
Others
50%
Interpretation - Out of my survey of 50 people, 50% of the investors are Graduates and
18%Post Graduates and 16% are Under Graduates and others, around 16%, which may
include persons who have passed their 10th standard or 12th standard invests in Mutual
Funds.
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2. Analysison the basisof Occupation
Investors' Profession
24%
Private Sector
46%
Businessmen
Government Sector
30%
Interpretation –Amazing fact come to light is that around 46% of the investment is been made
by people working in Private sectors, according to them investing in Mutual Funds is more safer
This is followed by the businessmen of around 24%gives more preference in investing in mutual
funds, they think that investing in mutual fund is better than investing in shares as well as Post
office.
Next we see that the persons working in Government sectors of around 30% only invests in
Mutual Fund.
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3. Analysison the basisof Monthly Family Income
Income(%)
10%
30%
Interpretation - Here, we find that investors of around 40% with the monthly income of Rs.
>30000 are the most likely to invest in Mutual fund, than any other income group.
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4. Analysison the basisof factors seen before investing
Risk
10%
Low Risk
20%
High Return
50%
Liquidity
Trust
20%
Interpretation - As it can be clearly Stated from the above Diagram that investors before
investing, the main criteria that they used to give more Preference is Low Risk. According to
them, if a scheme is low risk, it may or may not give a very good return , but still 50% of the
investors choose low risk as the option while investing in Mutual Funds.
Then we see that 20% of the investors take High return as one of their most important criteria.
According to them, if there is no high return then we should opt for Post office and not mutual
fund.
10% of the investors take trust as one of their important factors
Only 20% of the Investors think liquidity as their most preferable options.
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5. Analysison the basisof mode of investment
18%
SIP
LUM SUM
82%
Interpretation - It can be clearly stated from the above Figure that 82% of the investors like
to invest in SIP, as the investor feels that they are more comfortable to save via SIP than the
Long term.
While 18% of the investors find SIP as very burdensome, and they are more reluctant to save in
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6. Analysison the basisof awarness about Mutual Fund
Awareness
10%
Aware
Unaware
90%
Interpretation -. From a total of 50 people, 45 people are actually aware of the fact of Mutual
5 People were there who have just heard the name or rather are just aware of the fact of existence
of the word called Mutual Fund, but doesn’t know anything else about Mutual Funds.
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7. Analysison the basisfrom where they came to know about Mutual
Fund.
8%
24%
Interpretation -Here from the Line Graph it can be clearly stated that around 46% of the
investors came to know the benefits of Mutual Fund from Financial Advisors. According to the
suggestions given by the financial advisors, people use to choose Mutual Funds Scheme.
Then Secondly, 24% and 22% of the people used to know from Advertisement and Peer group
respectively.
Lastly 8% of the investors do invests after being intimated by the Banks about the benefits of
Mutual Funds.
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Findings and Suggestions
Findings:-
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Suggestions:-
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CONCLUSION:-
Mutual Funds now represent perhaps most appropriate investment opportunity for most
investors. As financial markets become more sophisticated and complex, investors need a
financial intermediary who provides the required knowledge and professional expertise on
successful investing. As the investor always try to maximize the returns and minimize the risk.
Mutual fund satisfies these requirements by providing attractive returns with affordable risks.
The fund industry has already overtaken the banking industry, more funds being under mutual
fund management than deposited with banks. With the emergence of tough competition in this
sector mutual funds are launching a variety of schemes which caters to the requirement of the
particular class of investors. Risk takers for getting capital appreciation should invest in growth,
equity schemes. Investors who are in need of regular income should invest in income plans.
The stock market has been rising for over three years now. This in turn has not only
protected the money invested in funds but has also helped grow these investments.
This has also instilled greater confidence among fund investors who are investing more
Reliance India mutual funds, Franklin India Prime fund, indiabulls liquid fund, etc.
provide major benefits to a common man who wants to make his life better than previous.
The mutual fund industry as a whole gets less than 2 per cent of household savings against the 46
per cent that go into bank deposits. Some fund managers say this only indicates the sector's
potential. "If mutual funds succeed in chipping away at bank deposits, even a triple digit growth
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Bibliography:-
Web sites:-
www.mutualfundindia.com
www.amfi.com
Books:-
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ANNEXURE
Sample Questionnaire
Name:................... Age: …………….. Mob. ……………
Advisors
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(a) Savings (b) FD (c) Insurance (d) Mutual Fund (e)PO (f) Shares (g) Gold (h) Real
Estate
(a) Low Return (b) High Risk (c) Liquidity (d) Trust
(a) Reliance (b) SBI (c) UTI (d) HDFC (e) Others
(a) Preservation (b) Current Income (c) Conservative Growth (d) Aggressive Growth
78