Mutual funds v/s other stocks

Bachelor of management studies

Semester VI

(2018-2019)

Submitted

In partial fulfilment of the requirements

For the award degree of bachelor of management studies

By

Srishti R galani

Smt. M.m.k college of commerce and economics

Bandra (w)

Mumbai-50
 Declaration

Date:

I, miss Srishti Galani student of bachelor of management studies semester VI (2018-2019) hereby
declare that I have completed the project on mutual funds v/s other stocks successfully

The information submitted is true and original to the best of my knowledge

Thankyou.

Yours faithfully

Srishti r galani
 CERTIFICATE

(2018-2019)

This is to certify that “SRISHTI R GALANI” of BMS (marketing)

Semester VI (2018-2019) has successfully completed the project on

“mutual funds v/s other stocks” under the

guidance of Vinayak sir.

DATE: -

PLACE: -

Dr.SHEETAL. CHADDHA Draco. VANJANI

(Course Coordinator) (Principal)

 ACKNOWLEDGMENT

At the beginning, I would like to thank almighty god for his shower of blessings. The desire of
completing this dissertation was given a way by my guide Prof. VINAYAK . I am very much thankful
for his guidance, support and sparing his sparing his precious time from a busy and hectic schedule.

I am thankful to DR. ASHOK VANJANI, principal of Smt. M.M.K college.

My sincere thanks to DR. SHEETAL CHHADA who always motivated and provided a helpful hand for
conceiving higher education.

I would fail in my duty if I don’t thank my parents who are pillars of my life.

Finally, I would express my gratitude to all those persons who directly and indirectly helped me in
completing dissertation.
 Executive summary

A mutual fund is a trust that pools the savings of 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. Mutual fund offers shareholders an opportunity to invest in stocks, bonds and
other investments. Consumers who purchase mutual fund shares rely on the fund's management to
choose buy investments that will earn the highest possible returns. Securities laws regulate mutual
funds’ organization and management as well as the purchase and sale of securities.

Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul.
Investors willing to stick with stocks over long periods of time, say 15 years, generally have been
rewarded with strong, positive returns.

But stock prices move down as well as up. There’s no guarantee that the company whose stock you
hold will grow and do well, so you can lose money you invest in stocks.

Direct investment, more commonly referred to as foreign direct investment (FDI), refers to an
investment in a foreign business enterprise designed to acquire a controlling interest in this
enterprise. Direct investment provides capital funding in exchange for an equity interest without the
purchase of regular shares of a company's stock.

The main purpose of doing this project was to know about mutual funds and its functioning. This
helps to know in details about mutual fund industry right from its inception stage growth and future
prospects. It also helps in understanding different schemes of mutual funds. My study depends upon
prominent funds in India and their schemes like equity, income, balance as well as the returns
associated with those schemes. The project study was done to ascertain the asset allocation, entry
load, exit load, associated with the mutual funds.

Ultimately this would help in understanding the benefits of mutual funds to investors
 Contents

About the Indian economy

Introduction

History of mutual funds

What are mutual funds

Pros/cons of mutual funds

Types of mutual funds

Structure of mutual funds

Risk areas of mutual funds

Introduction to other investments

Investments other than mutual funds

Pros/cons of other investments

Risk areas of each investment option

Analysis between mutual funds and other investment based on the survey

conclusion
 About the Indian economy:

The economy of India is a developing mixed economy. It is the world's seventh-largest economy by
nominal GDP and the third-largest by purchasing power parity.

Purchasing power parity (PPP) is a way of measuring economic variables in different countries so
that irrelevant exchange rate variations do not distort comparisons. Purchasing power exchange
rates are such that it would cost exactly the same number of, for example, US dollars to buy euros
and then buy a basket of goods in the market as it would cost to purchase the same goods directly
with dollars. The purchasing power exchange rate used in this conversion equals the ratio of the
currencies' respective purchasing powers

The country ranks 139th in per capita GDP (nominal) with $2,134 and 122nd in per capita GDP (PPP)
with $7,783 as of 2018. After the 1991 economic liberalisation, India achieved 6-7% average GDP
growth annually. Since 2014 with the exception of 2017, India's economy has been the world's
fastest growing major economy, surpassing China.

India has one of the fastest growing service sectors in the world with an annual growth rate above
9% since 2001, which contributed to 57% of GDP in 2012–13. India has become a major exporter of
IT services, Business Process Outsourcing (BPO) services, and software services with $154 billion
revenue in FY 2017. This is the fastest-growing part of the economy. The IT industry continues to be
the largest private-sector employer in India. India is the second-largest start-up hub in the world
with over 3,100 technology start-ups in 2018–19. The agricultural sector is the largest employer in
India's economy but contributes to a declining share of its GDP (17% in 2013–14). India ranks second
worldwide in farm output. The industry (manufacturing) sector has held a steady share of its
economic contribution (26% of GDP in 2013–14). The Indian automobile industry is one of the
largest in the world with an annual production of 21.48 million vehicles (mostly two and three-
wheelers) in 2013–14. [51] India had $600 billion worth of retail market in 2015 and one of world's
fastest growing e-commerce markets.

Indian economy in financial service:

The financial services industry contributed $809 billion (37% of GDP) and employed 14.17 million
people (3% of the workforce) in 2016, and the banking sector contributed $407 billion (19% of GDP)
and employed 5.5 million people (1% of the workforce) in 2016. The Indian money market is
classified into the organised sector, comprising private, public and foreign-owned commercial banks
and cooperative banks, together known as 'scheduled banks'; and the unorganised sector, which
includes individual or family-owned indigenous bankers or money lenders and non-banking financial
companies. The unorganised sector and microcredit are preferred over traditional banks in rural and
sub-urban areas, especially for non-productive purposes such as short-term loans for ceremonies.
Mutual funds investing: contribution to the economy.

Mutual fund Investing has a significant contribution when it comes to the development of the Indian
economy. The Indian financial market has seen a great upheaval in the early eighties and nineties.
Mutual Funds investment has acted as a bridge connecting the gap between the supply and demand
for funds in the financial markets. Since 2003, the financial sector has been on a constant rise. The
mutual fund industry has acted on the forefront to contribute to the Indian economy.

Development of Financial Sector

Development of financial sector enhances the four pillars of the financial system: efficiency, stability,
transparency, and inclusion. Mutual fund investing plays an important role in this development.
They pool the resources from the small investors together, thus increasing participation in the
financial markets. Next, mutual funds provide services to small investors to make informed
decisions. Such detailed services and analysis help lighten the risk factor for these small investors.
Thus, it helps investors to reinvest in mutual funds. Our mutual fund industry has been growing at a
healthy speed of nearly 20% per annum over the last decade.

Mutual Funds as a Source of Investment

Mutual funds have gained an unprecedented thrust since 2003. Indians generally save up to 30% of
our salaried income which is very high. Mutual funds have been a good option for investing money
of the salaried class. Diversification of mutual fund schemes has allowed more investors to come in
and pool their assets. The total amount of savings in the financial saving showed a whopping 18%
increase in 2014. Investors are now more inclined towards putting money in mutual funds than
compared to physical assets. This has significantly increased the assets under management (AUM) in
the last 4-5 years. The AUM has increased a staggering 29% from August 2014 to August 2015 for
fresh mutual fund mobilisation. Mutual funds have had a positive impact on the finance sector in
terms of consistent investment. The pooled money is providing a helping hand in the development
of the industry.

Household Savings Breakdown

Mutual funds have been the front-runners in the investment sector since last year. The household
savings funnelled a good amount of money into mutual funds. Of the total household savings, more
than INR 50,000 crores were put in shares and debentures. The household financial savings rose
above 7.5% of national income in 2014-15. Over 15 lakh new individual investment folios were
created last year. The net inflows into Equity Mutual Funds are touching the degree previously
observed in 2008. Investors are gradually moving away from the physical asset market. With real
estate prices falling as well as the Inflation protection asset class like gold also descending, people
are shifting to mutual funds. This will lead to an increased investment in financial savings. Such rise
in domestic inflows in mutual funds will support the equity prices.
Market Development due to Mutual Funds

The money markets in India have been significantly impacted by the arrival of mutual funds. It has
even strengthened the Government Securities market to some extent. The introduction of money
market Mutual Funds (MMMF) in 1991 provided investors with an additional channel for short-term
investments. As a result, the money market tools are now within the reach of individuals or retail
investors. The MMMFs are a trend today because of the revised SEBI regulations and permission to
invest in rated corporate Bonds and debentures. The money markets have been hugely benefitted
by increased mutual funds investment. It has now seen an addition of around 22 lakh new investors
during 2014-15. The total number of investors was calculated to be around 4.17 crore in MMMF
marking a 6% growth over previous year. This large growth is a sign of healthy domestic investor
sentiment. Indian consumers are willing to take risks with brands that have a strong goodwill and
positive past record.

Conclusion

Mutual fund investing has certainly played a great role in shaping the economy. But there is still a
lot of work to be done. Fund houses have to strive for more innovative schemes and a better
approach to attract investors. Mutual Fund investing has the ability to satisfy a diverse range of
investors with the help of various risk-return preferences. Industry AUM of over Rs. 20,00,000 crores
are expected by 2018 with an investor support of around 10 crore accounts. The account base (No.
of unique folios) currently is still below 1% of the total domestic population. Thus, if a focused and a
targeted approach is adopted by government and market regulators, the Mutual Fund industry has
the potential to be an integral part of our developing economy.
Introduction:

The Mutual Fund Industry in India was started with a humble beginning by establishing the Unit
Trust of India in the year 1963, by the Government of India. “The main aim of the UTI was to enable
the common investors to participate in the prosperity of capital market through portfolio
management aimed at reasonable return, liquidity and safety and to contribute to India’s industrial
development by channelizing household savings into corporate investment”. By the year 1993, UTI
occupied nearly 80 per cent of the market share and developed manifold in terms of number of
investors, investable funds, reserves with wide marketing network and efficient leadership. The
Chartered Financial Analyst had commented that, “Mutual Funds today form 1/10th of the banking
industry’s size. If we compare this an indication in the current interest rate scenario, Mutual Fund
has ample shelf-space to grow into an industry like the banking industry in India”

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal the money thus collected is then invested in capital market
instruments such as shares debentures and other securities. The income earned through these
investments and the capital appreciations reali1ed are shared by its unitholders 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.

Mutual funds are a productive package for a lay investor with limited finances. Mutual
fund is a very old practice in US and it has made a recent entry into India. common
man in India still finds bank as a safe door for investment. This shows that mutual
funds have not gained a strong foot-hold in life.

The project creates an awareness that the mutual fund is worthy investment practice
the various schemes of mutual funds provide the investor with a wide range
o f i nvestment options according to his risk bearing capacities and interest besides
they also give a handy return to the investor the project analyses various schemes of mutual funds
by taking different m u t u a l f u n d s c h e m e s f r o m d i f f e r e n t A M C ’ S t h e f u t u r e
c h a l l e n g e s o f m u t u a l f u n d s in India are also considered.
 NEED OF THE STUDY

The study basically made to educate the investors about Mutual Funds Analyse the
various schemes to highlight the risk and return o diversity of investment that mutual funds offer
Thus through the study one would understand how a common man could fruitfully
convert a pittance into great penny by wisely investing into the right scheme according to his Risk-
taking abilities.

A small investor is the one who is able to correctly plan and decide in which profitable and sa f e
instrument to invest to lock up one’s hard earned money in a savings bank
account is not enough to counter the monster of inflation Using simple concepts of
diversification power of compound interest stable returns and limited exposure to equity
investment one can maximise his returns on investments a multiply one’s savings.

Investment is a serious proposition one has to look into various factors before deciding on the
instruments in which to invest to save is not enough one must invest wisely and get maximum
returns one must plan investment in such a way that his investment objectives are
satisfied. A sound investment is one which gives the investor reasonable returns with a proper
profitable management.

OBJECTIVES OF THE STUDY:

1. To understand the concept of Mutual Funds.

2. To study the different Sectoral Mutual Funds in India.

3. To analyse the performance of different sectoral mutual funds.

4. To identify the best Sectoral Mutual Funds to invest in India.

5. To suggest the best mutual funds for investors.

Characteristics of Mutual Funds

The specific characteristics of Indian Mutual Fund Schemes, can be narrated as listed below. 

 Assurance of minimum returns:

In general, mutual funds do not assure any minimum returns to their investors. However,
Indian Mutual Fund Schemes launched during 1987 to 1990 assured specific returns till
1991, when the SEBI and Union Ministry of Finance order the mutual funds not to assure
minimum returns. Recently, SEBI has formulated a policy that, mutual funds with a track
record of five years will be allowed to offer fixed returns not exceeding one-year period.

 Multiple Options:
Most of the mutual fund schemes are offering different options to the investors under one
scheme. For example, a growth-oriented scheme may offer option of either regular income
or re-investment of income. Under the regular income plan, dividend shall be distributed to
investors and under the second dividend will be reinvested and total amount shall be paid at
time of redemption.

 Lock in Period:
Mutual Fund Schemes offer documents that contain a clause of lock-in period ranging from
one year to three years. Till the completion of the minimum period the investors are to
trade neither the units on the stock exchange nor to avail themselves of repurchase facility.

 Liquidity: Generally open-ended funds offer the facility of repurchase and the close ended
are traded at stock exchange offering repurchase after a minimum lock in period of two to
three years. Mutual funds also have a facility to pledge or mortgage at banks to obtain loan
and can be transferred in favour of any individual.

 Incentives to early subscribers: Most of the close-ended mutual fund schemes are offering
incentives to encourage early subscription to investors. This is more often in the tax planning
schemes. For instance, if the scheme is open for a period of three months, the investor may
be allowed a deduction from the amount to be invested at a certain specified rate, if the
subscriptions were during the specified time limits.
What are mutual funds

A mutual fund collects money from investors and invests the money on their behalf. It charges a
small fee for managing the money. Mutual funds are an ideal investment vehicle for regular
investors who do not know much about investing. Investors can choose a mutual fund scheme based
on their financial goal and start investing to achieve the goal.

It is a type of financial vehicle made up of a pool of money collected from many investors for the
purpose of investing in securities such as stocks, bonds, money market instruments, and other
assets. Mutual funds are operated by professional money managers, who allocate the fund's assets
and attempt to produce capital gains and/or income for the fund's investors. A mutual
fund's portfolio is structured and maintained to match the investment objectives stated in
its prospectus.

Mutual funds give small or individual investors access to professionally managed portfolios
of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in
the gains or losses of the fund. Mutual funds invest in a wide amount of securities, and performance
is usually tracked as the change in the total market cap of the fund, derived by the aggregating
performance of the underlying investments.

Basics of a Mutual Fund

Mutual funds pool money from the investing public and use that money to buy other securities,
usually stocks and bonds. The value of the mutual fund company depends on the performance of the
securities it decides to buy. So when you buy a unit or share of a mutual fund, you are actually
buying the performance of its portfolio or more precisely, a part of the portfolio's value.

That's why the price of a mutual fund share is referred to as the net asset value (NAV) per share,
sometimes expressed as NAVPS. A fund's NAV is derived by dividing the total value of the securities
in the portfolio by the total amount of shares outstanding. Mutual fund shares can typically be
purchased or redeemed as needed at the fund's current NAV, which—unlike a stock price—doesn't
fluctuate during market hours, but is settled at the end of each trading day.

The average mutual fund holds hundreds of different securities, which means mutual fund
shareholders gain important diversification at a very low price. Consider an investor who just buys
Google stock before the company has a bad quarter. He stands to lose a great deal of value because
all of his dollars are tied to one company. On the other hand, a different investor may buy shares of
a mutual fund that happens to own some Google stock. When Google has a bad quarter, she only
loses a fraction as much because Google is just a small part of the fund's portfolio.
How Mutual Funds Work

A mutual fund is both an investment and an actual company. This may seem strange, but it is
actually no different than how a share of AAPL is a representation of Apple, Inc. When an investor
buys Apple stock, he is buying part ownership of the company and its assets. Similarly, a mutual fund
investor is buying part ownership of the mutual fund company and its assets. The difference is Apple
is in the business of making smartphones and tablets, while a mutual fund company is in the
business of making investments.

If a mutual fund is a virtual company, its CEO is the fund manager, sometimes called its investment
adviser. The fund manager is hired by a board of directorsand is legally obligated to work in the best
interest of mutual fund shareholders. Most fund managers are also owners of the fund.

There are very few other employees in a mutual fund company. The investment adviser or fund
manager may employ some analysts to help pick investments or perform market research. A
fund accountant is kept on staff to calculate the fund's NAV, the daily value of the portfolio that
determines if share prices go up or down. Mutual funds need to have a compliance officer or two,
and probably an attorney, to keep up with government regulations.

Most mutual funds are part of a much larger investment company; the biggest have hundreds of
separate mutual funds.

Why Do People Buy Mutual Funds?

Mutual funds are a popular choice among investors because they generally offer the following
features:

 Professional Management. The fund managers do the research for you. They select the
securities and monitor the performance.

 Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a
range of companies and industries. This helps to lower your risk if one company fails.

 Affordability. Most mutual funds set a relatively low dollar amount for initial investment and
subsequent purchases.

 Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current
net asset value (NAV) plus any redemption fees.
History of mutual funds:

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India
can be broadly divided into four distinct phases
First Phase - 1964-1987

Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by the Reserve
Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of
India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI)
took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI
was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets under management.
Second Phase - 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks and Life
Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual
Fund was the first non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund
(Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of
India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989
while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores.
Third Phase - 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry,
giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first
Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be
registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was
the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised
Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)
Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting up
funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of
January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of
India with Rs. 44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two
separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under
management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the assets of
US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of
India, functioning under an administrator and under the rules framed by Government of India and
does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI
and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which
had in March 2000 more than Rs. 76,000 crores of assets under management and with the setting up
of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers
taking place among different private sector funds, the mutual fund industry has entered its current
phase of consolidation and growth.
The graph indicates the growth of assets over the years.
Growth of mutual fund industry:

The Indian Mutual Fund Industry is witnessing a rapid growth as a result of infrastructure
development, increase in personal financial assets, rise in foreign participation, growing risk
appetite, rising income, and increasing awareness mutual funds are becoming a preferred
investment option compared to other investment vehicles such as bank fixed deposits and post
office savings.

 After deregulation of India’s mutual fund industry in the early 1990s, significant changes
have been witnessed both in the structure and the content. For example, the number of
players in the industry has gone up significantly and also there was a sharp shift from the
closed ended schemes to the open-ended schemes as the phase of deregulation is getting
advanced. Similarly there were so many other developments in the industry in recent years.

 After deregulation in 1994, the Indian mutual fund industry had only 11 players with an
Assets Under Management of Rs. 62,430 crore. Out of this, 82.8 per cent was contributed by
the UTI and public sector with close-ended funds as favourites. Now the priorities of the
investors have changed. As on 31 March, 2009 the number of players in the industry rose up
to 35 with an Assets Under Management of Rs. 4,17,300 crore. Out of this 80 per cent has
been contributed by the 30 private sector players (including foreign players). At present the
open-ended schemes are the favourite schemes of investors

 Of the total Assets Under Management as on 31 March 2009, an amount of Rs. 3,25,161
(78%) was contributed by the open-ended schemes and the rest was by close-ended
schemes. Scheme wise, major share has been occupied by the growth schemes and income
schemes. Out of the total Assets Under Management as on 31 March 2009, Rs.1,97,343
(47%) and Rs. 95,817 (23%) are belonging to growth and income schemes respectively11.

 The mutual fund industry in India has come a long way since the formation of Unit Trust of
India in 1963. During the past 45 years, the industry has seen many significant structural
changes. The entry of private sector, foreign players and bifurcation of the UTI, which helped
expand the market. After deregulation, many Indian and foreign companies formed as Joint
Ventures to get the benefit of large scale economies and contributed major share of 42 per
cent of Assets Under Management on 31st March 2009 from 20.1 per cent on 31 March
2000. The share of Assets Under Management of Joint venture predominantly Indian has
also increased from 8.6 per cent to 37 per cent for the above period.
 Factors contributing for the Growth of Mutual Funds:

A slew of factors have contributed for the growth of mutual fund industry in India during the past
two decades.

The first and foremost reason is delivering of substantial returns by equity and debt-oriented funds.
Different periods of outstanding performance aided by strong bull runs in the late 1990s, which saw
the stock prices shooting through the roof, as well as the current bullish fervour which has helped
equity- oriented funds deliver substantial returns.

Debt funds too have been benefited by the soft bias in the interest rates. The volatility in the bond
prices has also helped debt-oriented funds deliver handsome returns.

Significant changes in the investment environment such as increased competition, on going reforms
which allow mutual funds to invest abroad as well as in derivative instruments helped for growth of
the industry.

Unlike monopoly of UTI in the past, mutual fund industry now-a-days has been backed by FIIs and
domestic market. “As per the ASSOCHAM estimates, the cumulative FII investments in the country
had already touched a high of $ 40 billion by the end of October 2005. And domestic mutual funds
emerged as a strong counter balance to FIIs during 2005. During the year they pumped in an
unbelievable Rs. 13,190 crore into the stock market”15

The transparency in operations and disclosure practices related to the NAV, stock selection
strategies, portfolio churning costs, rationale for expense charges and investment related risks also
fueled the growth of the industry.

Stringent regulatory environment of the SEBI, investor awareness programmes offered by the AMFI,
entry of foreign players with strong financial and research capabilities, potential entry of employee
pension and provident funds and a slew of innovative schemes to cater to the different needs have
attracted the investors.

Other Factors

Other factors influencing the growth of mutual fund industry are

Standardization of operations : Mutual fund operations like maintenance of investment accounts

and the scheme accounts by outsourcing is restricted. Marketing strategies in consultation with
marketing advisors have been established by the AMCs. The SEBI regulations with respect to offer
documents, NAV computation, NAV reporting, valuation of investments, accounting standards,
performance reports etc., have tended to create a certain level of homogenization of the Indian
mutual fund products. 

Technology: Majority of the mutual funds have their own websites providing basic information
relating to the schemes and enable purchase and redemption of units online for clients in select
locations. Most significant influence of technology is seen in servicing investors through agencies.
The advantages of technology resulted in lower distribution costs through online transactions, more
customized and personal advice to customers and reaching out to the growing young and net-savvy
population of India.
Product Innovation: The tailor-made innovative schemes launched by the mutual fund houses have
given investors option to choose funds which choose his investment needs. Schemes with systematic
investment plan, automatic redemption plan, linking current accounts to money market mutual
funds, cheque writing facility etc. are attempts to create homogeneity. Products such as Index funds,
International funds, Ethical funds, Sectoral funds, Exchange traded funds, Pension funds, Children
funds, Reality funds have galvanized the industry growth

Competition and Efficiency: Early in the reforms process, it is recognized that greater competition
and innovation would be required so that the public received better financial services. It is true that
some steps have been taken to increase competition between financial intermediaries both within
and across categories. Banks and financial institutions have been allowed to enter each other
territories. Fields like mutual funds, leasing and merchant banking have been thrown open to the
banks and their subsidiaries. The private sector has been allowed into fields like banking and mutual
funds.
Pros And Cons about Mutual Funds:

Pros:

There are a variety of reasons that mutual funds have been the retail investor's vehicle of choice for
decades. In fact, the overwhelming majority of money in employer-sponsored retirement plans goes
into mutual funds.

Diversification
Diversification, or the mixing of investments and assets within a portfolio to reduce risk, is one of the
advantages of investing in mutual funds. Buying individual company stocks in retail and offsetting
them with industrial sector stocks, for example, offers some diversification. But a truly diversified
portfolio has securities with different capitalizations and industries and bonds with
varying maturities and issuers. Buying a mutual fund can achieve diversification cheaper and faster
than by buying individual securities.

Easy Access
Trading on the major stock exchanges, mutual funds can be bought and sold with relative ease,
making them highly liquid investments. And, when it comes to certain types of assets, like foreign
equities or exotic commodities, mutual funds are often the most feasible way—in fact, sometimes
the only way—for individual investors to participate.

Economies of Scale
Mutual funds also provide economies of scale. Buying one spares the investor of the numerous
commission charges needed to create a diversified portfolio. Buying only one security at a time leads
to large transaction fees, which will eat up a good chunk of the investment. Also, the $100 to $200
an individual investor might be able to afford is usually not enough to buy a round lot of a stock, but
it will buy many mutual fund shares. The smaller denominations of mutual funds allow investors to
take advantage of dollar cost averaging.

Professional Management
Most private, non-institutional money managers deal only with high net worth individuals – people
with six figures (at least) to invest. But mutual funds, as noted above, require much lower
investment minimums. So these funds provide a low-cost way for individual investors to experience
(and hopefully benefit from) professional money management.

Freedom of Choice
Investors have the freedom to research and select from managers with a variety of styles and
management goals. For instance, a fund manager may focus on value investing, growth
investing, developed markets, emerging markets, income or macroeconomic investing, among many
other styles. One manager may also oversee funds that employ several different styles.
Cons:

Liquidity, diversification, professional management: All these factors make mutual funds attractive
options for younger, novice and other individual investors who don't want to actively manage their
money. But no asset is perfect, and mutual funds have drawbacks too.

Fluctuating Returns
Like many other investments without a guaranteed return, there is always the possibility that the
value of your mutual fund will depreciate. Equity mutual funds experience price fluctuations, along
with the stocks that make up the fund. The Federal Deposit Insurance Corporation (FDIC) does not
back up mutual fund investments, and there is no guarantee of performance with any fund. Of
course, almost every investment carries risk. But it's especially important for investors in money
market funds to know that, unlike their bank counterparts, these will not be insured by the FDIC.

Heavy Cash Supplies

Mutual funds pool money from thousands of investors, so every day people are putting money into
the fund as well as withdrawing it. To maintain the capacity to accommodate withdrawals, funds
typically have to keep a large portion of their portfolios in cash. Having ample cash is great for
liquidity, but money sitting around as cash is not working for you and thus is not very advantageous.

High Costs
Mutual funds provide investors with professional management, but it comes at a cost—those
expense ratios mentioned earlier. These fees reduce the fund's overall payout, and they're assessed
to mutual fund investors regardless of the performance of the fund. As you can imagine, in years
when the fund doesn't make money, these fees only magnify losses.

Diversification
Many mutual fund investors tend to overcomplicate matters—that is, they acquire too many funds
that are highly related and, as a result, don't get the risk-reducing benefits of diversification; in fact,
they have made their portfolio more exposed, a syndrome called diversification. At the other
extreme, just because you own mutual funds doesn't mean you are automatically diversified. For
example, a fund that invests only in a particular industry sector or region is still relatively risky.

Lack of Transparency
One thing that can lead to diversification is the fact that a fund's purpose or makeup isn't always
clear. Fund advertisements can guide investors down the wrong path. The Securities and Exchange
Commission (SEC) requires that funds have at least 80% of assets in the particular type of investment
implied in their names; how the remaining assets are invested is up to the fund manager. However,
the different categories that qualify for the required 80% of the assets may be vague and wide-
ranging. A fund can, therefore, manipulate prospective investors via its title: A fund that focuses
narrowly on Congo stocks, for example, could be sold with a far-ranging title "International High-
Tech Fund."

Evaluating Funds
Researching and comparing funds can be difficult. Unlike stocks, mutual funds do not offer investors
the opportunity to juxtapose the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net
asset value can offer some basis for comparison, but given the diversity of portfolios, comparing the
proverbial apples to apples can be difficult, even among funds with similar names or stated
objectives. Only index funds tracking the same markets tend to be truly comparable.
Types of mutual funds:

Mutual funds are divided into several kinds of categories, representing the kinds of securities they
have targeted for their portfolios.

Mutual Fund Types Based on Asset Class

a. Equity Funds
Primarily investing in stocks, they also go by the name stock funds. They invest the money amassed
from investors from diverse backgrounds into shares of different companies. The returns or losses
are determined by how these shares perform (price-hikes or price-drops) in the stock market.
As equity funds come with a quick growth, the risk of losing money is comparatively higher.

b. Debt Funds
Debt funds invest in fixed-income securities like bonds, securities and treasury bills – Fixed Maturity
Plans (FMPs), Gilt Fund, Liquid Funds, Short Term Plans, Long Term Bonds and Monthly Income Plans
among others – with fixed interest rate and maturity date. Go for it, only if you are a passive investor
looking for a small but regular income (interest and capital appreciation) with minimal risks.

c. Money Market Funds

Just as some investors trade stocks in the stock market, some trade money in the money market,

also known as capital market or cash market. It is usually run by the government, banks or
corporations by issuing money market securities like bonds, T-bills, dated securities and certificate of
deposits among others. The fund manager invests your money and disburses regular dividends to
you in return. If you opt for a short-term plan (13 months max), the risk is relatively less.

d. Hybrid Funds
As the name implies, Hybrid Funds (also go by the name Balanced Funds) is an optimum mix of
bonds and stocks, thereby bridging the gap between equity funds and debt funds. The ratio can be
variable or fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of assets in
stocks and the rest in bonds or vice versa. This is suitable for investors willing to take more risks for
‘debt plus returns’ benefit rather than sticking to lower but steady income schemes.
Mutual Fund Types Based On Structure
Mutual funds can be categorized based on different attributes (like risk profile, asset class etc.).
Structural classification – open-ended funds, close-ended funds, and interval funds – is broad in
nature and the difference depends on how flexible is the purchase and sales of individual mutual
fund units.

a. Open-Ended Funds
These funds don’t have any constraints in a time period or number of units – an investor can trade
funds at their convenience and exit when they like at the current NAV (Net Asset Value). This is why
its unit capital changes constantly with new entries and exits. An open-ended fund may also decide
to stop taking in new investors if they do not want to (or cannot manage large funds).

b. Closed-Ended Funds
Here, the unit capital to invest is fixed beforehand, and hence they cannot sell a more than a pre-
agreed number of units. Some funds also come with an NFO period, wherein there is a deadline to
buy units. It has a specific maturity tenure and fund managers are open to any fund size, however
large. SEBI mandates investors to be given either repurchase option or listing on stock exchanges to
exit the scheme.

c. Interval Funds
This has traits of both open-ended and closed-ended funds. Interval funds can be purchased or
exited only at specific intervals (decided by the fund house) and are closed the rest of the time. No
transactions will be permitted for at least 2 years. This is suitable for those who want to save a lump
sum for an immediate goal (3-12 months).
Mutual Fund Types Based on Investment Goals

a. Growth Funds
Growth funds usually put a huge portion in shares and growth sectors, suitable for investors (mostly
Millennials) who have a surplus of idle money to be distributed in riskier plans (albeit with possibly
high returns) or are positive about the scheme.

b. Income Funds
This belongs to the family of debt mutual funds that distribute their money in a mix of bonds,
certificate of deposits and securities among others. Helmed by skilled fund managers who keep the
portfolio in tandem with the rate fluctuations without compromising on the portfolio’s
creditworthiness, Income Funds have historically earned investors better returns than deposits and
are best suited for risk-averse individuals from a 2-3 years perspective.

c. Liquid Funds
Like Income Funds, this too belongs to the debt fund category as they invest in debt instruments and
money market with a tenure of up to 91 days. The maximum sum allowed to invest is Rs 10 lakhs.
One feature that differentiates Liquid Funds from other debt funds is how the Net Asset Value is
calculated – NAV of liquid funds are calculated for 365 days (including Sundays) while for others,
only business days are calculated.

d. Tax-Saving Funds
ELSS or Equity Linked Saving Scheme is gaining popularity as it serves investors the double benefit of
building wealth as well as save on taxes – all in the lowest lock-in period of only 3 years. Investing
predominantly in equity (and related products), it has been known to earn you non-taxed returns
from 14-16%. This is best-suited for long-term and salaried investors.

e. Aggressive Growth Funds

Slightly on the riskier side when choosing where to invest in, Aggressive Growth Fund is designed to
make steep monetary gains. Though susceptible to market volatility, you may choose one as per the
beta (the tool to gauge the fund’s movement in comparison with the market). Example, if the market
shows a beta of 1, an aggressive growth fund will reflect a higher beta, say, 1.10 or above.

f. Capital Protection Funds

If protecting your principal is your priority, Capital Protection Funds can serve the purpose while
earning relatively smaller returns (12% at best). The fund manager invests a portion of your money
in bonds or CDs and the rest in equities. You will not incur any loss. However, you need a least 3
years (closed-ended) to safeguard your money and the returns are taxable.

g. Fixed Maturity Funds

Investors choose as the FY ends to take advantage of triple indexation, thereby bringing down tax
burden. If uncomfortable with the debt market trends and related risks, Fixed Maturity Plans
(FMP) – investing in bonds, securities, money market etc. – present a great opportunity. As a close-
ended plan, FMP functions on a fixed maturity period, which could range from 1 month to
5years(like FDs). The Fund Manager makes sure to put the money in an investment with the same
tenure, to reap accrual interest at the time of FMP maturity.
h. Pension Funds
Putting away a portion of your income in a chosen Pension Fund to accrue over a long period to
secure you and your family’s financial future after retiring from regular employment – it can take
care of most contingencies (like a medical emergency or children’s wedding). Relying solely on
savings to get through your golden years is not recommended as savings (no matter how big) get
used up. EPF is an example, but there are many lucrative schemes offered by banks, insurance firms
etc.

4. Mutual Fund Types Based on Risks

a. Very Low-Risk Funds

Liquid Funds and Ultra Short-term Funds (1 month to 1 year) are not risky at all, and understandably
their returns are low (6% at best). Investors choose this to fulfill their short-term financial goals and
to keep their money safe until then.

b. Low-Risk Funds
In the event of rupee depreciation or unexpected national crisis, investors are unsure about
investing in riskier funds. In such cases, fund managers recommend putting money in either one or a
combination of liquid, ultra short-term or arbitrage funds. Returns could be 6-8%, but the investors
are free to switch when valuations become more stable.

c. Medium-risk Funds
Here, the risk factor is of medium level as the fund manager invests a portion in debt and the rest in
equity funds. The NAV is not that volatile, and the average returns could be 9-12%.

d. High-risk Funds
Suitable for investors with no risk aversion and aiming for huge returns in the form of interest and
dividends, High-risk Mutual Funds need active fund management. Regular performance reviews are
mandatory as they are susceptible market volatility. You can expect 15% returns, though most high-
risk funds generally provide 20% returns (and up to 30% at best).

5 . Specialized Mutual Fund Types

a. Sector Funds
Investing solely in one specific sector, theme-based mutual funds. As these funds invest only in
specific sectors with only a few stocks, the risk factor is on the higher side. One must be constantly
aware of the various sector-related trends, and in case of any decline, just exit immediately.
However, sector funds also deliver great returns. Some areas of banking, IT and pharma have
witnessed huge and consistent growth in recent past and are predicted to be promising in future as
well.

b. Index Funds
Suited best for passive investors, index funds put money in an index. It is not managed by a fund
manager. An index fund simply identifies stocks and their corresponding ratio in the market index
and put the money in similar proportion in similar stocks. Even if they cannot outdo the market
(which is the reason why they are not popular in India), they play it safe by mimicking the index
performance.

c. Funds of Funds
A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’ aka
multi-manager mutual funds are made to exploit this to the tilt – by putting their money in diverse
fund categories. In short, buying one fund that invests in many funds rather than investing in several
achieves diversification as well as saves on costs.

d. Emerging market Funds

To invest in developing markets is considered a steep bet and it has undergone negative returns too.
India itself a dynamic and emerging market and investors to earn high returns from the domestic
stock market, they are prone to fall prey to market volatilities. However, in a longer-term
perspective, it is evident that emerging economies will contribute to the majority of global growth in
the coming decade as their economic growth rate is way superior to that of the US or the UK.

e. International/ Foreign Funds

Favored by investors looking to spread their investment to other countries, Foreign Mutual Funds
can get investors good returns even when the Indian Stock Markets do fare well. An investor can
employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a feeder
approach (getting local funds to place them in foreign stocks) or a theme-based allocation (eg, Gold
Mining).

f. Global Funds
Aside from the same lexical meaning, Global Funds are quite different from International Funds.
While a global fund chiefly invests in markets worldwide, it also includes investment in your home
country. The International Funds concentrate solely on foreign markets. Diverse and universal in
approach, Global Funds can be quite risky to owing to different policies, market and currency
variations, though it does work as a break against inflation and long-term returns have been
historically high.

g. Real Estate Funds

In spite of the real estate boom in India, many are wary about investing in such projects due to
multiple risks. Real Estate Fund can be a perfect alternative as the investor is only an indirect
participant by putting their money in established real estate companies/trusts rather than projects.
A long-term investment, it negates risks and legal hassles when it comes to purchasing a property as
well as provide liquidity to some extent.

h. Commodity-focused Stock Funds

Ideal for investors with sufficient risk-appetite and looking to diversify their portfolio, commodity-
focused stock funds give a chance to dabble in multiple and diverse trades. Returns are not periodic
and are either based on the performance of the stock company or the commodity itself. Gold is the
only commodity in which mutual funds can invest directly in India. The rest purchase fund units or
shares from commodity businesses.

i. Market Neutral Funds

For investors seeking protection from unfavorable market tendencies while sustaining good returns,
Market-neutral Funds meet the purpose (like a hedge fund). With better risk-adaptability, these
funds give high returns and even small investors can outstrip the market without stretching the
portfolio limits.

j. Inverse/leveraged Funds
While a regular index fund moves in tandem with the benchmark index, the returns of an inverse
index fund shift in the opposite direction. Simply put, it is nothing but selling your shares when the
stock goes down, only to buy them back at an even lesser cost (to hold until the price goes up again).

k. Asset Allocation Funds

Combining debt, equity and even gold in an optimum ratio, this is a greatly flexible fund. Based on a
pre-set formula or fund manager’s inferences on the basis of the current market trends, Asset
Allocation Funds can regulate the equity-debt distribution. It is almost like Hybrid Funds but requires
great expertise in choosing and allocation of the bonds and stocks from the fund manager.

l. Gift Funds
Yes, you can gift a mutual fund or a SIP to your loved ones to secure their financial future.

m. Exchange-traded Funds
It belongs to the Index Funds family and is bought and sold on exchanges. Exchange-traded
Funds have unlocked a world of investment prospects, enabling investors to gain comprehensive
exposure to stock markets abroad as well as specialized sectors. An ETF is like a Mutual Fund that
can be traded in real-time at a price that may rise or fall many times in a day.

STRUCTURE OF MUTUAL FUNDS IN INDIA:

In India, the mutual fund industry is highly regulated with a view to imparting operational
transparency and protecting the investor's interest. The structure of a mutual fund is determined by
SEBI regulations. These regulations require a fund to be established in the form of a trust under the
Indian Trust Act, 1882. A mutual fund is typically externally managed. It is now an operating
company with employees in the traditional sense.

Instead, a fund relies upon third parties that are either affiliated organizations or independent
contractors to carry out its business activities such as investing in securities. A mutual fund operates
through a four-tier structure. The four parties that are required to be involved are a sponsor, Board
of Trustees, an asset management company and a custodian.

the structure of Mutual Funds in India is a three-tier one. There are three distinct entities involved in
the process – the sponsor (who creates a Mutual Fund), trustees and the asset management
company (which oversees the fund management). The structure of Mutual Funds has come into
existence due to SEBI (Securities and Exchange Board of India) Mutual Fund Regulations, 1996.
Under these regulations, a Mutual Fund is created as a Public Trust. We will look into the structure
of Mutual Funds in a detailed manner.

The Structure of Mutual Fund

The Fund Sponsor

The Fund Sponsor is the first layer in the three-tier structure of Mutual Funds in India. SEBI
regulations say that a fund sponsor is any person or any entity that can set up a Mutual Fund to earn
money by fund management. This fund management is done through an associate company which
manages the investment of the fund. A sponsor can be seen as the promoter of the associate
company. A sponsor has to approach SEBI to seek permission for a setting up a Mutual Fund. Once
SEBI agrees to the inception, a Public Trust is formed under the Indian Trust Act, 1882 and is
registered with SEBI. Trustees are appointed to manage the trust and an asset management
company is created complying with the Companies Act, 1956.

There are eligibility criteria given by SEBI for the fund sponsor:

 The sponsor must have experience in financial services for a minimum of five years with a
positive Net worth for all the previous five years.
 The net worth of the sponsor in the immediate last year has to be greater than the capital
contribution of the AMC.
 The sponsor must show profits in at least three out of five years which includes the last year
as well.
 The sponsor must have at least 40% share in the net worth of the asset management
company. Any entity that fulfills the above criteria can be termed as a sponsor of the Mutual
Fund.

Trust and Trustees

Trust and trustees form the second layer of the structure of Mutual Funds in India. A trust is created
by the fund sponsor in favour of the trustees, through a document called a trust deed. The trust is
managed by the trustees and they are answerable to investors. They can be seen as primary
guardians of fund and assets. Trustees can be formed by two ways – a Trustee Company or a Board
of Trustees. The trustees work to monitor the activities of the Mutual Fund and check its compliance
with SEBI (Mutual Fund) regulations. They also monitor the systems, procedures, and overall
working of the asset management company. Without the trustees’ approval, AMC cannot float any
scheme in the market. The trustees have to report to SEBI every six months about the activities of
the AMC.

Asset Management Companies

Asset Management Companies are the third layer in the structure of Mutual Funds. The asset
management company acts as the fund manager or as an investment manager for the trust. A small
fee is paid to the AMC for managing the fund. The AMC is responsible for all the fund-related
activities. It initiates various schemes and launches the same. The AMC is bound to manage funds
and provide services to the investor. It solicits these services with other elements like brokers,
auditors, bankers, registrars, lawyers, etc. and works with them. To ensure that there is no conflict
between the AMCs, there are certain restrictions imposed on the business activities of the
companies.

Other Components in the Structure of Mutual Funds

Custodian
 A custodian is responsible for the safekeeping of the securities of the Mutual Fund. They manage
the investment account of the Mutual Fund, ensure the delivery and transfer of the securities. They
also collect and track the dividends & interests received on the Mutual Fund investment.

Registrar and Transfer Agents (RTAS)

These are the entities who provide services to Mutual Funds. RTAs are more like the operational
arm of Mutual Funds. Since the operations of all Mutual Fund companies are similar, it is economical
in scale and cost effective for all the 44 AMCs to seek the services of RTAs. CAMS, Karvy, Sundaram,
Principal, Templeton, etc are some of the well-known RTAs in India.
Their services include.

 Processing investors’ application

 Keeping a record of investors’ details
 Sending out account statements to the investors
 Sending out periodic reports Processing the payouts of the dividends
 Updating the investor details i.e. adding new members and removing those who have
withdrawn from the fund.

Auditor

Auditors audit and scrutinise record books of accounts and annual reports of various schemes. Each
AMC hires an independent auditor to analyse the books so as to keep their transparency and
integrity intact.

Brokers

AMC uses the services of brokers to buy and sell securities on the stock market. The AMCs uses
research reports and recommendations from many brokers to plan their market moves. The three-
tier structure of the Mutual Funds is in place keeping the fiduciary nature of the Mutual Funds in
mind. It ensures that each element of the system works independently and efficiently. This structure
of Mutual Funds is in line with the international standards and thus there is a proper separation of
responsibilities and functioning of each constituent of the structure.

Risk areas of investing in mutual funds:

Why is mutual fund investment risky?
Risk arises in mutual funds owing to the reason that mutual funds invest in a variety of financial
instruments like equities, debt, corporate bonds, government securities and many more. Moreover,
the price of these instruments keeps fluctuating owing to a lot of factors like supply-demand, change
in interest rate, inflation, etc.
Due to price fluctuation or volatility, a person’s Net Asset Value comes down resulting in a loss. In
simple terms, NAV is basically the market value of all the schemes a person has invested in per unit
after negating the liabilities.
Hence, it becomes essential to identify the risk profile and invest in the most appropriate fund.

Types of risks associated with mutual funds

a. Market Risk
We all would have seen that one-liner in all advertisements that Mutual Funds are subject to Market
Risk.
Market risk is basically a risk which may result in losses for any investor due to a poor performance
of the market. There are a lot of factors which affect the market. A few examples are a natural
disaster, inflation, recession, political unrest, fluctuation of interest rates. Market risk is also known
as systematic risk. Diversifying a person’s portfolio won’t help in these scenarios. The only thing
which the investor can do is wait for the storm to calm.

b. Concentration Risk
Concentration generally means focusing on one thing. Concentrating a huge amount of a person’s
investment in one particular scheme is not a good option. Profits will be huge if lucky, but losses will
be more. Best way to minimize this risk is by diversifying your portfolio. Concentrating and investing
heavily in one sector is also very risky. The more diverse the portfolio, the lesser the risk is.

c. Interest Rate Risk

Interest rate changes depending upon the credit available with lenders and the demand from
borrowers. They are inversely related to each other. Increase in the interest rates during the
investment period may result in a reduction of the price of securities
For example, an individual decides to invest Rs 100 with a rate of 5% for a period of x years. If the
interest rate changes due to changes in the economy and it become 6%, the individual will no longer
be able to get back the Rs 100 he invested owing to the fact that the rate is fixed. The only option
here is reducing the market value of the bond. If the interest rate reduces to 4% on the other hand,
the investor can sell it at a price above the invested amount.

d. Liquidity Risk
Liquidity risk refers to the difficulty to redeem an investment without incurring a loss in the value of
the instrument. It can also occur when a seller is unable to find a buyer for the security.
In mutual funds, like ELSS, the lock-in period may result in liquidity risk. Nothing can be done during
the lock-in period. In yet another case, Exchange traded funds (ETFs) might suffer from liquidity risk.
As you may know, ETFs can be bought and sold on the stock exchange like shares.
Sometimes due to lack of buyers in the market, you might be unable to redeem your investments
when you need them the most. The best way to avoid this is to have a very diverse portfolio and
making fund selection diligently.

e. Credit Risk
Credit risk basically means that the issuer of the scheme is unable to pay what was promised as
interest. Usually, agencies which handle investments are rated by rating agencies on this criteria. So,
a person will always see that a firm with a high rating will pay less and vice-versa.
Mutual Funds, particularly debt funds, also suffer from credit risk. In debt funds, the fund
manager has to incorporate only investment-grade securities. But sometimes it might happen that
to earn higher returns, the fund manager may include lower credit-rated securities.
This would increase the credit risk of the portfolio. Before investing in a debt fund, have a look at the
credit ratings of the portfolio composition.
So, right now you are aware of the risks that are linked with mutual funds. Head to ClearTax Invest
where you can invest in mutual funds. You can either grow your wealth or save taxes.
Only 30% investors hold equity mutual fund schemes for over two years
According to an AMFI report, most investors still look at mutual funds only as a short-term bet.

Mutual funds may have gained currency after demonetisation, but most investors still look at mutual
funds only as a short-term bet. According to an AMFI report, only 30.40 per cent investors in equity
mutual funds stay invested for more than two years. This data is as on March 31, 2018. AMFI
releases this report every quarter.

This data clearly shows that most investors do not understand that they should invest in equity
schemes for a longer term horizon to achieve their long-term financial goals. Mutual fund advisors
say investors should invest in equity mutual funds only if they have an investment horizon of at least
five years.

The report also shows that 10.1 per cent investors invest in equities for up to one month, 10.5 per
cent invest for one to three months, 11.3 per cent remain invested for three to six months, 18.7 per
cent invest for six months up to an year and 19 per cent invest for a term between one and two
years.
There are countless studies which show that investing in equity mutual funds with a short
investment horizon can result in loss of money.

This is why equity schemes are not recommended for short-term investors. Taking out money from
equity schemes in a short period may be the reason why many novice investors complain of not
making satisfactory returns from their equity mutual funds.

Investors should also know that getting in and out of equity mutual fund schemes involves exit load
and capital gains tax. If equity mutual fund schemes are sold before a year, short-term capital gains
will be taxed at 15 per cent. If equity investments are sold after a year, long-term capital gains of
over Rs 1 lakh will be taxed at 10 per cent without providing for indexation benefit.

- THE ECONOMIC TIMES

INVESTMENT STRATEGIES

1. Systematic Investment Plan:

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

2. Systematic Transfer Plan:

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

3. Systematic Withdrawal Plan:

if someone wishes to withdraw from a mutual fund then he can withdraw a fixed amount each
month
 Introduction to Other Investments:

Savings and Investments form an integral part of one’s life. Investments refer to the employment of
funds with an objective of earning a favourable return on it. In other words, investment is a process,
where money is being utilized with a hope of making more money. Investment is the commitment of
money that have been saved by deferring the consumption and purchasing an asset, either real or
financial with an expectation that it could yield some positive future returns. There is a plethora of
investment avenues, each associated with varied risk-return trade-offs. Every investment avenue is
distinct in its characteristic, which makes the investment decision fascinating. The investor thus
needs to carefully analyse each of its characteristics and build a basket of assets that suits his risk
profile and complies with his objectives and goals. Hence, investment decision making is a
fascinating task to the investor.

There are different categories of investors. The investment strategies differ from each other, with
regard to size of the investment, time-period, objectives, risk appetite etc.

The investors can be classified into,

 Individual investors

 Corporate

 Institutional investors – Domestic and Foreign

 Pension Funds

 Government

The Indian economy is growing at a faster pace, which has resulted in higher disposable income level
and a plethora of investment avenues. There are numerous options like, Government savings
deposits, banks, NBFCs and mutual fund houses are vying for a share in the savings of investors.
Investors now have wide-ranging options for making investments like equity, debt, mutual funds,
gold etc.

Investment is defined as a commitment of funds made in the expectations of some favourable rate
of return. If the investment exercise is properly undertaken, the return will be corresponding with
the risk the investor assumes.

Investment is an acquisition of a financial product or other item of value with an anticipation of

favourable future returns. Investing is a serious subject that can have a major impact on investors’
future well-being. Investors have series of investment avenues and each of them differ in terms of
risk, return, safety, security, regular income and various other parameters. The investor has to
choose proper investment avenue, depending upon his specific need, risk preference and expected
returns.

Investment has got two attributes – time and risk. The sacrifice takes place in the present and is
certain. The reward to be received in future is generally uncertain. In some cases, the time element
dominates, as in case of government securities. Either time or risk or both are important.
 Investment decision-making process is concerned with how an investor should proceed in making a
decision about what marketable securities to invest in, how extensive an investment should be and
when the investment should be made. Investment is a sacrifice of current rupees for future rupees.
Investors’ investment pattern has witnessed a metamorphic change and this change can be
attributed to changing scenario of investment alternatives available. Investors have started investing
more in modern financial products like equity, mutual funds, ULIPs than the ordinary financial
product like term deposits, post office deposits, etc.

INTRODUCTION TO SAVINGS:

Savings are of great importance in a developing country like India. The quantum of these savings has
a direct bearing on the level of economic activity of the nation. The degree of progress attained in a
country largely depends on what the households do with the additional income generated every
year. There is a certain need for adequate integration of savings and investment programmes into
development strategies that are capable of improving resource allocation, promotion of equitable
distribution of income and reducing vulnerability. There are various challenges in the savings
behaviour of the Indian households. The sluggish economy, steep market declines, deteriorating
revenues, alarming reports of scandals, insider trading, illegal corporate accounting practices etc
have posed few challenges in savings pattern. In an emerging economy like India, majority of the
savings are parked in financial assets rather than real or physical assets.

SAVINGS AND ECONOMIC GROWTH

The role of savings and investments and its impact on macro-economic factors have raised
controversies amongst economists. While few economists argued that excess savings could lead to
depression, other economists were against this argument. Adam Smith refuted the opinion and
argued that savings could lead to economic growth. In the wealth of nations, Smith maintained that,
“As the capital of an individual can be increased only by what he saves from his annual revenue or
annual gains, so the capital of society, which is the same with that of all individuals who compose it,
can be increased in the same manner. what is annual saved is as regularly consumed as what is
annually spent, and nearly at the same time too; but it is consumed by a different set of people”
INTRODUCTION TO INVESTMENTS

Investments and portfolio decisions are taken within the framework provided by a complex of
financial institutions and intermediaries which together comprise the capital market. It is this market
which provides the mechanism for channelizing current savings into investment in productive
facilities, i.e., for allocating the country’s capital resources among alternative uses. In effect the
financial market provides an economy’s link with the future, since current decisions regarding the
allocation of capital resources are a major determining factor of tomorrow’s output. The crucial role
played by the financial markets in shaping the pattern and growth of real output imparts a social
significance to individual investment and portfolio decisions.

Investment strategy is so different from the hundreds or perhaps thousands of other strategies. The
reason for differentiation is its unique blend of both traditional and modern investment concepts,
and its focus on the individual investor. It is equally important to understand the criteria used by the
investors to evaluate any investment and make decision.

Today, the investor lives in a more complex and contradictory world than before. Making money is
not easier. At the same time, holding on to it, has never required more ingenuity. Taxes, inflation, a
stop-and-go economy, a mind-boggling array of investments, the high cost of “expert” advice, all
create a formidable obstacle course to investment success.

To make matters still more perplexing, technology has finally begun to turn investing into a science.
Research Centres are continuing to pile up important new findings about investments. But, because
of the limited mathematical expertise, few investors or professionals can benefit from these results.
Indeed, faculties at many business schools remain unaware of the results.

Investment strategy reaches out to the individual investor and explains how these new findings can
be used to develop successful investment strategies.

The investment strategies basically depend upon the following factors,

 Investment Environment
 Risk, Inflation and Rates of Return
 Taxes
 Institutions
 Cost of Investing
 Applications
 Risk taking propensity
 Portfolio selection
 Risk-Return preferences o Consumption – Investment decisions
 Rationality
The study of investments is of growing importance to every individual. In recent years, the field of
investments has seen a variety of new opportunities and philosophies. While, these new approaches
have aroused considerable debate among the members of the investment community, and have
added a much-needed quantitative aspect to investment management, some are nevertheless too
hypothetical and unrealistic to be of much aid to a sound investment management program.
Investing still remains primarily an art and cannot totally be reduced to a buy, hold and sell statistical
equation.

Investments can be a fascinating and stimulating field of study for those who are interested in
gaining knowledge and expertise in investment decision making. The same basic investment
principles and procedures apply to both the individual investor and the institutional investor. The
study of investments prepares the individual to operate in the securities markets either on his own
behalf or on behalf of other investors through pension funds, mutual funds, and trust departments
of banks, insurance companies or other indirect investing by the individual.
Foreign Exchange

What is Foreign Exchange

Foreign exchange is the exchange of one currency for another or the conversion of one currency into
another currency. Foreign exchange also refers to the global market where currencies are traded
virtually around the clock.

The Basics of Foreign Exchange

The global foreign exchange market is the largest and the most liquid financial market in the world,
with average daily volumes in the trillions of dollars. Foreign exchange transactions can be done for
spot or forward delivery. There is no centralized market for forex transactions, which are executed
over the counter and around the clock.

Trading in the Foreign Exchange Market

The market is open 24 hours a day, five days a week across major financial centers across the
globe. This means that you can buy or sell currencies at any time during the day.

The foreign exchange market isn't exactly a one-stop shop. There are a whole variety of different
avenues that an investor can go through in order to execute forex trades. You can go through
different dealers or through different financial centers which use a host of electronic networks.

From a historic standpoint, foreign exchange was once a concept for governments, large companies
and hedge funds. But in today's world, trading currencies is as easy as a click of a mouse —
accessibility is not an issue, which means anyone can do it. In fact, many investment firms offer the
chance for individuals to open accounts and to trade currencies however and whenever they
choose.

benefits of Using the Forex Market

There are some key factors that differentiate the forex market from others like the stock market.
There are fewer rules, which means investors aren't held to strict standards or regulations as those
in other markets. There are no clearing houses and no central bodies that oversee the forex market.
Most investors won't have to pay the traditional fees or commissions that you would on another
market. Because the market is open 24 hours a day, you can trade at any time of day, which means
there's no cut off time to be able to participate in the market. Finally, if you're worried about risk
and reward, you can get in and out whenever you want and you can buy as much currency as you
can afford.
 Forex markets:

spot Market
Spot for most currencies is two business days; the major exception is the U.S. dollar versus the
Canadian dollar, which settles on the next business day. Other pairs settle in two business days.
During periods that have multiple holidays, such as Easter or Christmas, spot transactions can take as
long as six days to settle. The price is established on the trade date, but money is exchanged on
the value date.

The U.S. dollar is the most actively traded currency. The most common pairs are the USD versus
the euro, Japanese yen, British pound and Swiss franc. Trading pairs that do not include the dollar
are referred to as crosses. The most common crosses are the euro versus the pound and yen.

The spot market can be very volatile. Movement in the short term is dominated by technical trading,
which focuses on direction and speed of movement. People who focus on technicals are often
referred to as chartists. Long-term currency moves are driven by fundamental factors such as
relative interest rates and economic growth.

Forward Market
A forward trade is any trade that settles further in the future than spot. The forward price is a
combination of the spot rate plus or minus forward points that represent the interest rate
differential between the two currencies. Most have a maturity less than a year in the future but
longer is possible. Like with a spot, the price is set on the transaction date, but money is exchanged
on the maturity date.

A forward contract is tailor-made to the requirements of the counterparties. They can be for any
amount and settle on any date that is not a weekend or holiday in one of the countries.

Futures Market
A futures transaction is similar to a forward in that it settles later than a spot deal, but is for a
standard size and settlement date and is traded on a commodities market. The exchange acts as
the counterparty.

SWAP TRANSACTIONS
A simultaneous lending and borrowing of two different currencies between two investors are
referred to as swap transaction. One investor borrows a currency and repays in the form of a second
currency to the second investor. Swap transactions are done to pay off obligations without suffering
a foreign exchange risk.

OPTION TRANSACTIONS
The exchange of currency from one denomination to another at an agreed rate on a specific date is
an option for an investor. Every investor owns the right to convert the currency but is not obligated
to do so.
 Functions of foreign exchange market:

the foreign exchange market is commonly known as FOREX, a worldwide network, that enables the
exchanges around the globe. The following are the main functions of foreign exchange market,
which are actually the outcome of its working:

1. Transfer Function: The basic and the most visible function of foreign exchange market is the transfer
of funds (foreign currency) from one country to another for the settlement of payments. It basically
includes the conversion of one currency to another, wherein the role of FOREX is to transfer the
purchasing power from one country to another.

For example, If the exporter of India import goods from the USA and the payment is to be made in
dollars, then the conversion of the rupee to the dollar will be facilitated by FOREX. The transfer
function is performed through a use of credit instruments, such as bank drafts, bills of foreign
exchange, and telephone transfers.

2. Credit Function: FOREX provides a short-term credit to the importers so as to facilitate the smooth
flow of goods and services from country to country. An importer can use credit to finance the
foreign purchases. Such as an Indian company wants to purchase the machinery from the USA, can
pay for the purchase by issuing a bill of exchange in the foreign exchange market, essentially with a
three-month maturity.
3. Hedging Function: The third function of a foreign exchange market is to hedge foreign exchange
risks. The parties to the foreign exchange are often afraid of the fluctuations in the exchange rates,
i.e., the price of one currency in terms of another. The change in the exchange rate may result in a
gain or loss to the party concerned.

Thus, due to this reason the FOREX provides the services for hedging the anticipated or actual
claims/liabilities in exchange for the forward contracts. A forward contract is usually a three month
contract to buy or sell the foreign exchange for another currency at a fixed date in the future at a
price agreed upon today. Thus, no money is exchanged at the time of the contract.
Participants in the foreign exchange market:
Unlike the stock market - where investors often only trade with institutional investors (such as
mutual funds) or other individual investors - there are more parties that trade currencies spanning
many completely different reasons than those in the stock market. Therefore, it is very important to
identify and understand the functions and motivations of these main players in the forex market.

Governments and Central Banks

Probably the most influential participants involved in the forex market are the central banks and
federal governments. In most countries, the central bank is an extension of the government and
conducts its policy in unison with the government. However, some governments feel that a more
independent central bank is more effective in balancing the goals of managing inflation and keeping
interest rates low, which usually increases economic growth. No matter the degree of independence
that a central bank may have, government representatives usually have regular meetings with
central bank representatives to discuss monetary policy. Thus, central banks and governments are
usually on the same page when it comes to monetary policy.

Banks and Other Financial Institutions

Along with central banks and governments, some of the largest participants involved
with forex transactions are banks. Most people who need foreign currency for small-scale
transactions, like money for traveling, deal with neighbourhood banks. However, individual
transactions pale in comparison to the dollars that are traded between banks, better known as
the interbank market. Banks make currency transactions with each other on electronic brokering
systems that are based on credit. Only banks that have credit relationships with each other can
engage in transactions. The larger banks tend to have more credit relationships, which allow those
banks to receive better foreign exchange prices. The smaller the bank, the fewer credit relationships
it has and the lower the priority it has on the pricing scale.

Banks, in general, act as dealers in the sense that they are willing to buy/sell a currency at the
bid/ask price. One way that banks make money on the forex market is by exchanging currency at a
higher price than they paid to obtain it. Since the forex market is a world-wide market, it is common
to see different banks with slightly different exchange rates for the same currency.

Hedgers
Some of the biggest clients of these banks are international businesses. Whether a business is selling
to an international client or buying from an international supplier, it will inevitably need to deal with
the volatility of fluctuating exchange rates.

One choice that a business can make to reduce the uncertainty of foreign-exchange risk is to go into
the spot market and make an immediate transaction for the foreign currency that they need.

Unfortunately, businesses may not have enough cash on hand to make such transactions in the spot
market or may not want to hold large amounts of foreign currency for long periods of time.
Therefore, businesses quite often employ hedging strategies in order to lock in a specific exchange
rate for the future, or to simply remove all exchange-rate risk for a transaction.
Speculators

Another class of participants in forex is speculators. Instead of hedging against changes in exchange
rates or exchanging currency to fund international transactions, speculators attempt to make money
by taking advantage of fluctuating exchange-rate levels.

The largest and most controversial speculators on the forex market are hedge funds, which are
essentially unregulated funds that use unconventional and often very risky investment strategies to
make very large returns. Think of them as mutual funds Without the same level of regulation. Given
that they can take such large positions, they can have a major effect on a country's currency and
economy.
Foreign exchange Risks:

Banks have to face exchange risks because of their activities relating to currency trading, control
management of risk on behalf of their clients and risks of their own balance sheet and operations.
We can classify these risks into four different categories −

 Exchange rate risk

 Credit risk

 Liquidity risk

 Operational risk

Exchange Rate Risk

This relates to the appreciation or depreciation of one currency (for example, the USD) to another
currency (base currency like INR). Every bank has a long or short position in a currency, depreciation
(in case of long position) or appreciation (in case of short position), runs the risk of loss to the bank.

This risk mainly affects the businesses but it can also affect individual traders or investors who make
investment exposure.

For example, if an Indian has a CD in the United States of America worth 1 million US Dollar and the
exchange rate is 65 INR: 1 USD, then the Indian effectively has 6,50,00,000 INR in the CD. However,
if the exchange rate changes significantly to 50 INR: 1 USD, then the Indian only has 5,00,00,000 INR
in the CD, even though he still has 1 million dollars.

Credit Risk
Credit risk or default risk is associated with an investment where the borrower is not able to pay back
the amount to the bank or lender. This may be because of poor financial condition of the borrower
and this kind of risk is always there with the borrower. This risk may appear either during the period
of contract or at the maturity date.

Credit risk management is the practice of avoiding losses by understanding the sufficiency of a bank’s
capital and loan loss reserves at any given time. Credit risk can be reduced by fixing the limits of
operations per client, based on the client’s creditworthiness, by incorporating the clauses for
overturning the contract if the rating of a counterparty goes down.

The Basel committee recommends the following recommendations for containment of risk −

 Constant follow up on risk, their supervision, measurement and control

 Effective information system

 Procedures of audit and control

Liquidity Risk
Liquidity refers to how active (buyers and sellers) a market is. Liquidity risk refers to risk of
refinancing.

Liquidity risk is the probability of loss arising from a situation where −

 there is not enough cash to meet the needs of depositors and borrowers.

 the sale of illiquid assets will yield less than their fair value

 the sale of illiquid asset is not possible at the desired time due to lack of buyers.

Operational Risk
The operational risk is related to the operations of the bank.

It is the probability of loss occurring due to internal inadequacies of a bank or a breakdown in its
control, operations or procedures

Interest Rate Risk

The interest rate risk is the possibility that the value of an investment (for example, of a bank) will
decline as a result of an unexpected change in interest rate.

Generally, this risk arises on investment in a fixed-rate bond. When the interest rate rises, the market
value of the bond declines, since the rate being paid on the bond is now lower than the current
market rate. Therefore, the investor will be less inclined to buy the bond as the market price of the
bond goes down with a demand decline in the market. The loss is only realized once the bond is sold
or reaches its maturity date.

Higher interest rate risk is associated with long-term bonds, as there may be many years within which
an adverse interest rate fluctuation can occur.

Interest rate risk can be minimized either by diversifying the investment across a broad mix of
security types or by hedging. In case of hedging, an investor can enter into an interest rate swap.

Country Risk
Country risk refers to the risk of investing or lending possibly due to economic and/or political
environment in the buyer’s country, which may result in an inability to pay for imports.
advantages of Forex Market

the biggest financial market in the world is the biggest market because it provides some advantages
to its participants. Some of the major advantages offered are as follows:

Flexibility
Forex exchange markets provide traders with a lot of flexibility. This is because there is no restriction
on the amount of money that can be used for trading. Also, there is almost no regulation of the
markets. This combined with the fact that the market operates on a 24 by 7 basis creates a very
flexible scenario for traders. People with regular jobs can also indulge in Forex trading on the
weekends or in the nights. However, they cannot do the same if they are trading in the stock or
bond markets or their own countries! It is for this reason that Forex trading is the trading of choice
for part time traders since it provides a flexible schedule with least interference in their full time
jobs.

Transparency: The Forex market is huge in size and operates across several time zones! Despite this,
information regarding Forex markets is easily available. Also, no country or Central Bank has the
ability to single handily corner the market or rig prices for an extended period of time. Short term
advantages may occ

ur to some entities because of the time lag in passing information. However, this advantage cannot
be sustained over time. The size of the Forex market also makes it fair and efficient

1. Trading Options

Forex markets provide traders with a wide variety of trading options. Traders can trade in
hundreds of currency pairs. They also have the choice of entering into spot trade or they
could enter into a future agreement. Futures agreements are also available in different sizes
and with different maturities to meet the needs of the Forex traders. Therefore, Forex
market provides an option for every budget and every investor with a different appetite for
risk taking.

Also, one needs to take into account the fact that Forex markets have a massive trading
volume. More trading occurs in the Forex market than anywhere else in the world. It is for
this reason that Forex provides unmatched liquidity to its traders who can enter and exit the
market in a matter of seconds any time they feel like

2. Transaction Costs

Forex market provides an environment with low transaction costs as compared to other
markets. When compared on a percentage point basis, the transaction costs of trading in
Forex are extremely low as compared to trading in other markets. This is primarily because
 Forex market is largely operated by dealers who provide a two way quote after reserving a
spread for themselves to cover the risks. Pure play brokerage is very low in Forex markets.

3. Leverage

Forex markets provide the most leverage amongst all financial asset markets. The
arrangements in the Forex markets provide investors to lever their original investment by as
many as 20 to 30 times and trade in the market! This magnifies both profits and gains.
Therefore, even though the movements in the Forex market are usually small, traders end
up gaining or losing a significant amount of money thanks to leverage

Disadvantages of Forex Market

It would be a biased evaluation of the Forex markets if attention was paid only to the advantages
while ignoring the disadvantages. Therefore, in the interest of full disclosure, some of the
disadvantages have been listed below:

1. Counterparty Risks

Forex market is an international market. Therefore, regulation of the Forex market is a

difficult issue because it pertains to the sovereignty of the currencies of many countries. This
creates a scenario wherein the Forex market is largely unregulated. Therefore, there is no
centralized exchange which guarantees the risk free execution of trades. Therefore, when
investors or traders enter into trades, they also have to be cognizant of the default risk that
they are facing i.e. the risk that the counterparty may not have the intention or the ability to
honor the contracts. Forex trading therefore involves careful assessment of counterparty
risks as well as creation of plans to mitigate them.

2. Leverage Risks

Forex markets provide the maximum leverage. The word leverage automatically implies risk
and a gearing ratio of 20 to 30 times implies a lot of risk! Given the fact that there are no
limits to the amount of movement that could happen in the Forex market in a given day, it is
possible that a person may lose all of their investment in a matter of minutes if they placed
highly leveraged bets. Novice investors are more prone to making such mistakes because
they do not understand the amount of risk that leverage brings along!

3. Operational Risks

Forex trading operations are difficult to manage operationally. This is because the Forex
market works all the time whereas humans do not! Therefore, traders have to resort to
algorithms to protect the value of their investments when they are away. Alternatively,
multinational firms have trading desks spread all across the world. However, that can only
be done if trading is conducted on a very large scale.

Therefore, if a person does not have the capital or the know how to manage their positions
when they are away, Forex markets could cause a significant loss of value in the nights or on
weekends.