REPORT

ON

MUTUAL FUND:

A TOOL FOR WEALTH CREATION

BY:

ANAND RATHI FINANCIAL 

SERVICES LTD.

A REPORT ON MUTUAL FUND: A TOOL FOR WEALTH CREATION

BY:
ACKNOWLEDGEMENT

I extend my sincere gratitude towards the under mentioned dignitaries whose

valuable guidance and support made possible grounding of this dissertation.

This entire work has been completed under the kind and competent supervision
of -----------------. I express my deep gratitude to her for all her sustained interest
and willing help. 

The most difficult task was to collect the reliable data and information regarding
different Mutual Funds. In this connection, I am greatly thankful to --------------------
whose knowledge, valuable suggestions and guidance has help me a lot in
completing my project.

I am also grateful to ---------------------------- for giving me inspiration and mental

support. In spite of being fraught with unending engagements in office, he kept
me motivating to try best at all times.

I also would extend a special thanks to the colleagues in office for assisting me in
compiling this Dissertation and enhancing my knowledge.

Lastly, I would like to thank IIAS School Of Informatics, Kolkata and Anand Rathi
Financial Services Ltd., Jaipur for providing me an opportunity to gain hands-on
experience by working in a corporate environment. I believe that it is going to
prove beneficial for my career.
TABLE OF CONTENTS

Acknowledgments                                                                                   3

Abstract                                                                                                   5

1.     Introduction                                                                                     6

1.1   Literature Survey                                                                      7

1.2   Need for the study                                                                     8

1.3   Objective of the Study                                                              9

1.4   Sources of data                                                                         9

1.5   Methodology                                                                          10

1.6   Limitations                                                                             10

2.     Investment Options                                                                       11

3.     Mutual Fund

3.1   Introduction                                                                           12

3.2   History of Mutual Fund in India                                            13

3.3   How a Mutual Fund is Organized                                          14

3.4   Classification of Mutual Fund                                                15

3.5   Building Wealth in EMI‘s                                                      19

3.6   Investors Clientele                                                                 22

3.7   Investors‘ Rights and Obligations                                         22

3.8   Legal Framework and SEBI Guidelines                                23

4.     Financial Analysis                                                                         25

4.1   Analysis of Primary Data                                                       26

4.2   Reliability and Validity                                                          26

4.3    Priority in Decision Making                                                  27

4.5    Why not Mutual Fund                                                           30

4.6    Age decides Mutual Fund                                                     31

5.      Other Analysis

5.1    Mutual Fund v/s Sensex                                                      33

5.2    Tax Implication of Mutual Fund                                         35

5.3    Rupee Cost Averaging                                                        37

6.      Advantages of Mutual Fund                                                      39

7.      Disadvantages of Mutual Fund                                                 41

8.      Trends in Mutual Fund Industry                                               42

9.      India in Global market                                                              43

10.    Conclusion                                                                                44

11.    Suggestion                                                                                46

12.    Appendices           48

12.1   Company Profile                                                              49

12.2   Questionnaire                                                                   50

3. Difference between Mutual Fund and Equity

Investment             53

12.5   Frequently Used Terms                                                   54

13.     References                                                                              55

14.     Glossary                                                                                 56
ABSTRACT

The Indian capital market has been increasing tremendously during last few years.
With the reforms of economy, industrial policy, public sector and financial sector,
the economy has been opened up and many developments have been taking
place in the Indian money market and capital market. The significant outcome of
the government policy of liberalization in industrial and financial sector has been
the development of new financial instruments that are expected to impart
greater competitiveness, flexibility and efficiency to the financial sector. In order
to help the small investors, mutual fund industry has come to occupy an
important place by imparting greater competitiveness, flexibility, liquidity,
growth, return and efficiency to the financial sector. Development of various
mutual fund products in Indian capital market has proved to be one of the most
helpful instruments in generating significant investment growth.

In this context, prioritization, preference building and close monitoring of mutual

funds are essentials for fund managers to make this the strongest and most
preferred instrument in Indian capital market for the coming years. With the
changes in the bank interest rates, frequent fluctuations in the secondary market
and the inherent attitude of Indian small investors to avoid risk, it is important on
the part of fund managers and mutual fund product designers to combine various
elements of liquidity, return and security in making mutual fund products the best
possible alternative for the small investors in Indian market.

MF is a retail product designed to target small investors, salaried people and

others who are intimidated by the mysteries of stock market but, nevertheless,
like to reap the benefits of stock market investing. At the retail level, investors are
unique and are a highly heterogeneous group. Hence, their fund/scheme
selection also widely differs. Researcher have attempted to study various need
expectations of small investors from different types of mutual funds available in
Indian market and identify the risk return perception with the purchase of mutual
funds. With this background an attempt is made in this report to study the factors
influencing preference of consumers regarding mutual fund in India.

INTRODUCTION
This dissertation is assigned to me as a part of the partial fulfillment of the
requirement of BBA Program. The aim of the study is to analyze the Mutual Fund
Industry in India and evaluate the substantial effect of Mutual Fund tool.

The Indian financial system in general and the mutual fund industry in particular
continue to take turnaround from early 1990s. During this period mutual funds
have pooled huge investments for the corporate sector. The investment habit of
the small investors particularly has undergone a sea change. Increasing number
of players from public as well as private sectors has entered in to the market with
innovative schemes to cater to the requirements of the investors in India and
abroad. The reason for launching of these large number of mutual fund products
is the distributed pattern of investment behavior of Indian small investor .The
purchase decision of a mutual fund is largely dependent upon investors level of
savings, investment pattern and the risk profile.

Private and foreign mutual funds are operating in the Indian market and
constitute a substantial portion of the mutual fund industry. Today the industry
consists of Unit Trust of India, mutual funds sponsored by public sector banks and
insurance corporations, private and foreign mutual funds. Investors are constantly
being bombarded by questions concerning their risk profile. This report helps to
find answers to all these questions and judge investors preference regarding
investment option and factors affecting their selection of mutual fund.

The objective of the study was to gather the statistics about the prominent
mutual funds of all the categories and thereby analyze its impact on wealth
creation. The investor's preference is also judged by getting a questionnaire filled
by them and finding out the factors that play a significant role in the inclination
towards a fund. This will also help in analyzing the preference that mutual fund
hold in an individual's saving criterion. I have also tried to put forth the current
trends in the Mutual Fund Industry along with the changing environment as well
as future scenario of the industry. It also weighs the Indian mutual fund industry
against the global market.

LITERATURE SURVEY
In past a range of studies have been done by various organizations, financial
institutions, rating agencies, distribution houses, government agencies etc to
judge the importance and benefits of mutual fund in India. Some of them are: -

              1. SEBI (Securities Exchange Board of India)

              2. RBI (Reserve Bank of India)

              3. Finance Ministry of India

              4. CRISIL

              5. IIMs (Indian Institute of Management)

              6. UTI (Unit Trust of India)

              7. NSE (National Stock Exchange)

              8. BSE (Bombay Stock Exchange)

              9. Association of Financial Planners

             10. FICCI

Shanmugham (2000) conducted a survey of 201 individual investors to study the

information sourcing by investors, their perceptions of various investment
strategy dimensions and the factors motivating share investment decisions, and
reports that among the various factors, psychological and sociological factors
dominated the economic factors in share investment decisions. Using their
results, suggestions and criticisms I have endeavored to make this project report
and learn about this investment avenue.

The information is collected from a wide variety of sources including the AMCs
fact sheets and websites, ANAND RATHI intelligence reports, internet, AMFI, daily
news on mutual fund, etc.

NEED FOR THE STUDY

It is widely believed that MF is a retail product designed to target small investors,
salaried people and others who are intimidated by the stock market but,
nevertheless, like to reap the benefits of stock market investing.

The investors are unique and are a highly heterogeneous group. Currently there
are around 1200 schemes with varied objectives and AMCs compete against one
another by launching new products or repositioning old ones. MF industry is not
only facing competition from within the industry but also from other financial
products that may provide many of the same economic functions as mutual funds
but are not strictly MFs. This product is structured as a certificate of deposit but it
could have been set up as a Mutual Fund. All this, in aggregate, heightens the
consumer confusion in his selection of the product. Unless the MF schemes are
tailored to his changing needs and unless the AMCs understand the fund
selection/switching behavior of the consumers, survival of funds will be difficult in
future.

With this background an attempt is made in this report to study the factors
influencing preference of consumers regarding mutual fund in India.

OBJECTIVE OF THE STUDY

The investors do not evaluate all possible product attributes while making a
choice, but the marketers' search is for identification of "The key buying criteria"
or "The key choice criteria" which are defined as certain features of a product
offering that are closely associated with preferences. The objective of the study is
to understand the growth of Mutual Fund Industry in India and to analyze
whether this investment tool has substantial effect on wealth creation or not.

In order to examine the issues, this dissertation has the following objectives
before it: 

 To understand the savings avenue preference among investors 

 To analyze the substantial effect of mutual fund on wealth creation 

 To find factors influencing on a consumer investing behavior 

 To identify the features the investors look for in Mutual Fund products 

 To identify the investment preference of investors 

 To identify the information sources for mutual fund

SOURCES OF DATA
❖ Qualitative Data and or Primary Data 

 Use of primary data collected through interviews and questionnaire.

❖ Quantitative or Secondary Data 

 Print/Electronic Data Sources 

 Monthly reviews of AMCs Magazines and Journals, Website of the Mutual

fund companies 

 Other websites related to mutual funds as amfi.com, moneycontrol.com,

valueresearch.com etc.

  Other Data Sources Fact sheets

METHODOLOGY
Research Methodology is a way to systematically solve the research problem. It
will assist me in achieving the main objective of the study in an effective and
efficient manner. The study will be based on a survey of around 200 respondents
through a questionnaire covering different groups of investors out of which an
effective sample will be taken. Respondents will be both new clients and existing
investors. The data obtained will be analyzed by using frequency analysis, factor
analysis and correlation for identification of the key features preferred by the
respondents in a mutual fund product. These analysis methods are used because
of a number of reasons like:

 They will help us to know which investment option is the most favored by
the investors, What is the income group, age group and occupation of
people who are interested in investing,

 What is the cause of people investing or not investing in mutual funds, 

 What holds a priority in financial decision making i.e. Whether risk or return
or both, 

 For people who are investing in mutual fund what factors play an important
role while judging a fund and investing in it.

LIMITATIONS OF THE STUDY 

 Sample size is limited to 200 investors in Jaipur only. The sample size may
not adequately represent the universe as a whole. 

 This study has not been conducted over an extended period of time having
both market ups and downs. The market state has a significant influence on
the buying patterns and preferences of investors. For example, the July
2001 UTI fall has sent violent shock waves across the MF investor
community and is bound to influence the scheme preference/selection of
the investors. The study has not captured such situations.
INVESTMENT OPTIONS
Savings form an important part of the economy of any nation. With the savings
invested in various options available to the people, the money acts as the driver
for growth of the country. Indian financial scene too presents a plethora of
avenues to the investors. Though certainly not the best or deepest of markets in
the world, it has reasonable options for an ordinary man to invest his savings. Let
us examine several of them:

SAFETY/ LIQUIDITY
RETURN VOLATILITY
INVESTMENTS CONVENIENCE

High High or
Low High
EQUITY Moderate Low

Moderate
High Moderate Moderate
FI BONDS High

CORPORATE Moderate
Moderate Moderate Low
DEBENTURES Low

COMPANY FIXED
Moderate Low Low Low
DEPOSIT

BANK DEPOSITS Low High High Low High

PPF Moderate
High Low Moderate
High

Low
LIFE INSURANCE High Low Low
Moderate

Moderate
GOLD High Moderate Moderate
Low
REAL ESTATE High Low Moderate High Low

MUTUAL FUNDS High High Moderate High

INTRODUCTION
The liberalization of the financial sector has sent signals to a wave of changes in
savings and investment behavior adding a new dimension to the growth of
financial sector. The Indian financial system in general and the mutual fund
industry in particular continue to take turnaround from early 1990s. During this
period mutual funds have pooled huge investments for the corporate sector. The
investment habit of the small investors particularly has undergone a sea change.
Increasing number of players from public as well as private sectors has entered in
to the market with innovative schemes to cater to the requirements of the
investors in India and abroad. For all investors, particularly the small investors,
mutual funds have provided a better alternative to obtain benefits of expertise-
based equity investments to all types of investors.

MUTUAL FUNDS play a significant role in the development of the financial market
and this has been proved in the developed countries like United States, United
Kingdom and Japan. India is at the first stage of a revolution that has already
peaked in the United States. Mutual Funds have been around for a long time,
dating back to the early 19th century. The first modern American Mutual Fund
opened in 1924, while India's mutual fund industry began in 1963 with the state
– owned Unit Trust of India, now the single largest mutual fund in the country,
with assets under management of more than $5.5 billion, with 6.77 million
accounts in its 55 domestic schemes.

A mutual fund is a type of Investment Company that gathers assets from

investors and collectively invests those assets in stocks, bonds, or money
market instruments. Through the collective investments of the mutual fund, each
investor shares in the returns from the fund‘s portfolio while benefiting from
professional investment management, diversification, liquidity, and other
services.

HISTORY OF MUTUAL FUNDS OF INDIA

The Mutual fund industry has been in operation in India since 1964 when the Unit
Trust of India (UTI) was set up under a special Act of parliament. For about 23
years, the various schemes of UTI were the only options available to Indian
investors. However the monolithic structure of the industry changed in 1987 with
the establishment of mutual funds by public sector banks and investment
institutions like the Life Insurance Corporation of India (LIC) and the General
Insurance Corporation of India (GIC). Finally, in 1993 the field was opened to
private sector as well, to make the industry more competitive. The mutual
industry has grown manifold in terms of size and operations during the three
decades of its existence. From Rs.24.67 crores in 1964-64, the cumulative
resources mobilized by the mutual funds industry had risen to about Rs. 231862
crores by March 2006. Currently, the industry has 34 players which are engaged in
mutual fund business in India. The number of mutual fund schemes rose to 592 in
2006 from 451 in 2005.

All mutual funds whether promoted by public sector or private sector entities
including those promoted by foreign entities are governed by the same set of
Regulations. There is no distinction in regulatory requirements for these mutual
funds and all are subject to monitoring and inspections by SEBI. The risks
associated with the schemes launched by the mutual funds sponsored by these
entities are of similar type.

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. It 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 and
any income earned through these investments and the capital appreciation are
shared by its unit holders in proportion to the number of units owned by them.

CONCEPT OF MUTUAL FUND

             

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
Management Company (AMC) and custodian. The trust is established by one or
more sponsors who are like promoters of a company who hold its property for
the benefit of the unit holders. AMC approved by SEBI manages the funds by
making investments in various types of securities. SEBI registered custodian holds
the securities of various schemes of the fund in its custody. They monitor the
performance and compliance of SEBI Regulations by the mutual fund. Also, 50% of
the directors of AMC must be independent. All mutual funds are required to be
registered with SEBI before they launch any scheme. Mutual Funds diversify their
risk by holding a portfolio of asset instead of only one asset. This is because if
money is hold only in one asset, the entire fortunes of our portfolio depend on
this one asset. So by creating a portfolio of a variety of assets, this risk is
substantially reduced. Mutual Fund investments are not totally risk free. In fact,
investing in Mutual Funds contains the same risk as investing in the markets, the
only difference being that due to professional management of funds the
controllable risks are substantially reduced.

CLASSIFICATION OF MUTUAL FUNDS

With an increase in interest and awareness about mutual funds amongst
investors, there has also been a steady increase in the number of mutual fund
schemes offered in India by as many as 35 Asset Management Companies (as on
1st January 2007).

Different schemes are introduced to suit different needs of investors. Mutual

funds schemes may have different investment objectives which can be to earn
recurring income for investors or growth of their invested capital or both. So
investors should choose a scheme whose investment objective matches their
personal objectives. To achieve the scheme's investment objectives, the fund
manager, as per his own understanding, invests in a portfolio of asset classes
which he thinks may provide the best returns to investors in the future. Different
assets are exposed to a different level of risk. For example, investing in equities is
riskier than investing in debt and investing in debt is slightly riskier than investing
in money-market instruments. However, riskier investment options have a higher
potential to provide higher returns.

MUTUAL FUND SCHEME TYPES

Equity Diversified Schemes: These schemes mainly invest in equity. They seek to
achieve long-term capital appreciation by responding to the dynamically changing
Indian economy by moving across sectors such as Lifestyle, Pharma, Cyclical,
Technology, etc.

Sector Schemes: These schemes focus on particular sector as IT, Banking, etc.
They seek to generate long term capital appreciation by investing in equity and
related securities of companies in that particular sector.
Index Schemes: These schemes aim to provide returns that closely correspond to
the return of a particular stock market index such as BSE Sensex, NSE Nifty, etc.
Such schemes invest in all the stocks comprising the index in approximately the
same weightage as they are given in that index.

Exchange Traded Funds (ETFs): ETFs invest in stocks underlying a particular stock
index like NSE Nifty or BSE Sensex. They are similar to an index fund with one
crucial difference. ETFs are listed and traded on a stock exchange. In contrast, an
index fund is bought and sold by the fund and its distributors.

Equity Tax Saving Schemes: These work on similar lines as diversified equity funds
and seek to achieve long-term capital appreciation by investing in the entire
universe of stocks. The only difference between these funds and equity-
diversified funds is that they demand a lock-in of 3 years to gain tax benefits.

Dynamic Funds: These schemes alter their exposure to different asset classes
based on the market scenario. Such funds typically try to book profits when the
markets are overvalued and remain fully invested in equities when the markets
are undervalued. This is suitable for investors who find it difficult to decide when
to quit from equity.

Balanced Schemes: These schemes seek to achieve long-term capital appreciation

with stability of investment and current income from a balanced portfolio of high
quality equity and fixed-income securities.

Medium-Term Debt Schemes: These schemes have a portfolio of debt and money
market instruments where the average maturity of the underlying portfolio is in
the range of five to seven years.

Short-Term Debt Schemes: These schemes have a portfolio of debt and money
market instruments where the average maturity of the underlying portfolio is in
the range of one to two years.

Money Market Debt Schemes: These schemes invest in debt securities of a short-
term nature, which generally means securities of less than one-year maturity. The
typical short-term interest-bearing instruments these funds invest in Treasury
Bills, Certificates of Deposit, Commercial Paper and Inter- Bank Call Money
Market.
Medium-Term Gilt Schemes: These schemes invest in government securities. The
average maturity of the securities in the scheme is over three years.

Short-Term Gilt Schemes: These schemes invest in government securities. The

securities invested are of short to medium term maturities.

Floating Rate Funds: They invest in debt securities with floating interest rates,
which are generally linked to some benchmark rate like MIBOR. Floating rate
funds have a high relevance when interest rates are on the rise helping investors
to ride the interest rate rise.

Monthly Income Plans (MIPS): These are basically debt schemes, which make
marginal investments in the range of 10-25% in equity to boost the scheme‘s
returns. MIP schemes are ideal for investors who seek slightly higher return that
pure long-term debt schemes at marginally higher risk.

MUTUAL FUND TYPES

Here the investors money is pooled in and then managed by professionals to
maximize diversification within a set strategy. It has 2 types: open ended and
close ended. The difference is in how the fund is structured in terms of
ownership.

Open-Ended Schemes: - These do not have a fixed maturity. An investor can deal
directly with the Mutual Fund for their investments and redemptions. The key
feature of this scheme is liquidity. An investor can conveniently buy and sell their
units at Net Asset Value ("NAV") related prices.

Close-Ended Scheme: - These schemes have a stipulated maturity period. An

investor can directly invest at the time of initial issue but thereafter they can buy
or sale the units on the stock exchanges when they are listed. The market price at
the stock exchange could vary from the scheme‘s NAV on account of demand and
supply situation, Unit holders‘ expectations and other market factors. One of the
characteristics of the close-ended Schemes is that they are generally traded at a
Discount to NAV; but closer to maturity, the discount Narrows.
DIFFERENT MODES OF RECEIVING INCOME

Growth Plan: In this plan, dividend is neither declared nor paid out to the investor
but is built into the value of the NAV. In other words, the NAV increases over time
due to such incomes and the investor realizes only the capital appreciation on
redemption of his investment.

Income Plan: In this plan, dividends are paid-out to the investor. In other words,
the NAV only reflects the capital appreciation or depreciation in market price of
the underlying portfolio.

Dividend Re-investment Plan: In this case, dividend is declared but not paid out
to the investor, instead, it is reinvested back into the scheme at the then
prevailing NAV. In other words, the investor is given additional units and not cash
as dividend.

BUILDING WEALTH IN EMI’S

Every mutual fund advertisement you come across has that statuary warning:
“Mutual Fund Investments are subject to Market risks, please read the offer
document carefully before investing”. The risk being mentioned in this warning is
with reference to the volatility in the equity market. While investing in equities is
considered risky, the fact remains that higher risk generates higher returns.
Therefore instead of shying away from the market, we should in fact use these
fluctuations to our advantage as they give us an opportunity to increase our
wealth.

SYSTEMATIC INVESTMENT PLANS (SIPS) are the intelligent and affordable way of
investing in mutual funds. The magic of SIPs lies in their convenience. These are
best suited for young people who have started their careers and need to build
their wealth. SIPs entail an investor to invest a fixed sum of money at regular
intervals in the Mutual fund scheme the investor has chosen, an investor opting
for SIP in xyz Mutual Fund scheme will need to invest a certain sum on money
every month/quarter/half-year in the scheme, and this will help them acquire the
power of compounding.

SYSTEMATIC WITHDRAWAL PLANS is the opposite of an SIP. A fixed amount is

redeemed on a predetermined day of the month and paid to the investor. SWPs
are especially useful for retirees who need a steady stream of income. In this plan,
an investor invests in a mutual fund scheme and is allowed to withdraw a fixed
sum of money at regular intervals to take care of his expenses.

A monthly dividend option can also do the same but there is a steep 14-28%
dividend distribution tax (DDT) on dividend paid on debt and debt-oriented
mutual funds. DDT is compulsorily deducted by the mutual fund regardless of the
person‘s tax status. To avoid DDT, go for the cumulative option and start an SWP.
SWPs allow investors to customize the cash flow to their needs.

For example: Imagine a pensioner who needs Rs 10,000 a month for expenses but
gets a monthly dividend of only Rs 7,000. He would be better off with an SWP of
Rs 10,000. Of course, that would deplete the corpus by around Rs 3,000 a month.
Profits from the sale of units being redeemed by every withdrawal are taxable. In
the first year of investment, the profits are taxed at normal rates. But after a year,
the profit is treated as long term capital gains and taxed at a lower rate.

SYSTEMATIC TRANSFER PLANS is an SWP-SIP combo that allows the investor to

transfer on a periodic basis a specified amount from one scheme to another
within the same fund family – meaning two schemes belonging to the same
mutual fund. A transfer will be treated as redemption of units from the scheme
from which the transfer is made. Such redemption or investment will be at the
applicable NAV. This service allows the investor to manage his investments
actively to achieve his objectives. Many funds do not even charge any transaction
fees for his service – an added advantage for the active investor.

Suppose you invest Rs 5 lakh lump sum in a bond fund with an STP of Rs 10,000
into the equity fund. You would be transferring about 2% of the invested amount
into the equity fund every month. The amount to be transferred can be
customized to suit the risk appetite of the investor. If you can take risks, raise the
STP amount to Rs 15,000-20,000 a month. The principal scheme itself can be one
with a tinge of equity—such as a monthly income plan. If market volatility makes
your stomach churn, go for a capital appreciation STP. The mutual fund will
transfer only what the principal fund has earned during the month. That way,
your invested amount remains untouched. If the principal scheme is a debt fund,
the profits are treated as capital gains and taxed at a lower rate.

BUT HERE FEW THINGS TO WATCH OUT FOR ARE- 

  Make sure you take an SWP or STP that does not attract an exit load. If your
mutual fund slaps an exit load for early withdrawal, start withdrawals after
the stipulated period. 

 Work out the tax implications of the arrangement before you jump in. If
you are in the higher income bracket, start withdrawals (or transfers) after
one year of investment so that the profits are treated as long-term capital
gains for tax purposes.

  Switching is possible only within a fund family, which may not always offer
the best bond and equity fund options. 

 To avoid a suboptimal choice, you may have to open an SWP with a good
debt fund and a concurrent SIP with an equity fund.

Also early investment has its own advantage. Consider the following example…

Suppose one start investing in a diversified

35 40
Equity MF through SIP at age

Monthly Investment 5000 6250

Stop investing at age 60 60

Total contribution 15 Lacs 15 Lacs

Assuming CAGR from the fund of 15% , ones Rs.1, 37, Rs.66,
saving grows to 82,803.88 35,367.20

It is evident in the present economic circumstances that inflation is a reality and

has to be tracked. Mutual Funds and especially SIP may be an ideal mix for an
investor to overcome inflationary consequences and further create wealth.

INVESTORS CLIENTELE
Mutual Funds in India are open to investment by Residents including: Resident
Indian Individuals/HUF, Indian Companies/Partnership Firms, Indian
Trusts/Charitable Institutions, Banks/Financial Institutions, Non-Banking Finance
Companies, Insurance Companies, Provident Funds, and Mutual Funds, Non
Residents including: Non-Resident Indians, and Persons of Indian Origin, Overseas
Corporate Bodies (OCBs) and Foreign entities, viz. Foreign Institutional Investors
(FIIs) registered with SEBI.

INVESTORS’ RIGHTS AND OBLIGATIONS

The offer document of a scheme lays down the investors‟ rights. Investors are
the owners of the scheme‘s assets, and it is, therefore, very important that they
are aware of their rights with respect to scheme‘s assets, its management, and
recourse to the trustees, the AMC and the other constituents. The important
rights of the unit-holders are to proportionate ―beneficial Ownership‖, to get
timely service and information, wind up a Scheme and to terminate the AMC

LEGAL LIMITATIONS TO INVESTORS‟ RIGHTS: 

 Except in certain circumstances the sponsors of a mutual fund do not have

any legal obligation to meet the shortfall in case the assured return is not
achieved.

  Only if the offer document has specifically provided such a guarantee by a

named sponsor, the investor will have the right to sue the sponsors to
make good any shortfall in promised returns 

 Any prospective investor does not enjoy any standing or rights with respect
to the fund, AMC or any other constituents.

LEGAL FRAMEWORK AND SEBI GUIDELINES

To manage the smooth working and functioning of AMC‘s and the mutual funds
there are various regulatory bodies present like SEBI, RBI, AMFI, SRO etc. . A brief
description about them is as follows:

SEBI – the Capital Market Regulator registers all the mutual funds, issues
guidelines for all operations as where they can invest, investment limits and
restrictions, how they should account for income and expenses, disclosures of
information to the investors and generally act in the interest of investor
protection.

RBI – The Money Market Regulator reviews the capital adequacy and financial
implications of the guaranteeing bank. Any fund mergers of bank-sponsored
funds with others will also involve RBI approvals. However, the RBI no longer
issues guidelines on bank-owned funds' operations. Recently, the RBI has decided
to disallow all non-banking entities access to the inter-bank call money market.
This means that liquid funds can no longer invest in the call money market.

Stock Exchanges are self-regulatory organizations supervised by SEBI. Many

closed-end schemes of mutual funds are listed on one or more stock exchanges,
subject to regulations like trading, clearing, transfer and settlement of buying and
selling of mutual fund units in the markets through a listing agreement.

Self-Regulatory Organizations represent a group of market participants, who are

specially empowered to exercise pre-defined authority over the regulation of
their members. They have powers to regulate the criteria and procedures for
admission of its members, set of code of conduct for their members‟ market
activities, determine the professional rules and bylaws of the association, involve
the market players in the regulatory process and ensure that the regulatory
policies and procedures do not ignore market realities or become unmanageable
for the apex regulatory body.
Association of Mutual Funds in India (AMFI) is an apex body of all Asset
Management Companies (AMC) which has been registered with SEBI. It functions
under the supervision and guidelines of its Board of Directors. Its principle
objectives are to promote the interest of mutual fund and unit-holders, and
interact with SEBI/RBI/Govt./regulators, to set and maintain ethical, commercial
and professional standards in the industry and to recommend and promote best
business practices and code of conduct to be followed by members and others
engaged in the activities of mutual fund and asset management, to undertake
investor awareness programmes, and to disseminate information on the mutual
fund industry etc.

FINANCIAL ANALYSIS

All said and done but until and unless a practical revelation is made no learning is
complete. For the same I have chosen MUTUAL FUND: A TOOL OF WEALTH
CREATION as my study area, wherein I have compared mutual fund with other
investment options and now will survey investors‘preference in this regard. It will
involve both practical and theoretical analysis. This study will help me in
classifying the investors in groups of conservative, moderate and aggressive and
thus help us to identify their needs and provide them solution accordingly.

This study will involve filling a questionnaire by the clients which will help in
profiling the investors on the basis of answers provided by them. This will help to
judge the popularity of mutual fund among the various investment options
available to the investors nowadays.

QUESTIONNAIRE
The questionnaire designed to get the investors viewpoint on mutual fund and
surveying their preference of investment avenues is given in the annexure.

ANALYSIS OF PRIMARY DATA

On the basis of outputs (which are shown in the annexure) the various factors
which are taken into consideration while deciding about buying of a mutual fund
can be interpreted. These ranges of factors begin with investor perception, the
promised return, the attractiveness of the offer, etc. With references to earlier
studies, all the relevant variables in the purchase of a mutual fund were included
in the study.

RELIABILITY AND VALIDITY

In order to check the reliability and validity of the data, I had kept some similar
kind of variables in the questionnaire like security and attitude towards risk. This
would help in judging the accuracy of answers and will also help in making the
interpretations. Also I have got the questionnaire verified by the company guide
several times before starting to use it in the survey.

In order to increase the reliability and validity, I have excluded the questionnaires
filled by those respondents who had a varied opinion on the similar kind of
variables. For example someone who‘s most important criterion for financial
decision making is security and his answer for investment option is shares then
that is sure a fake answer and who thus should not be included in analyzing or
else it would lead to wrong interpretations.

Thus out of a total of 200 samples covered, only 168 is taken to be the effective
respondents who are been evaluated. The forms were rejected due to
incompleteness, inaccuracy of data, mismatched answers, etc.
PRIORITY IN DECISION MAKING

The tables shown below provide details of ranks allocated to the factors that hold
priority in the financial decision making for an individual. The factors considered
are RISK, RETURN, SECURITY and LIQUIDITY. They are been given ranks from 1 to
4. Every individual consider them and gives them importance on the basis of their
investment objective, risk-return attitude, age, income level, amount invested etc.
An analysis of them is given below:-

Priority Of Decision Risk

Frequency Percent Valid Percent Cumulative Percent

valid1 84 50.0 50.0 50.0

 2 18 10.7 10.7 60.7

 3 12 7.1 7.1 67.9

 4 54 32.1 32.1 100.0

 total 168 100.0 100.0

This frequency table shows the priority that RISK carries in making the financial
decision. 1-4 are the ranks allocated to this factor. Here we see that 50% of the
investors have chosen risk as the most important factor of their decision making.
This means that investors consider the risk involved in the investment option
before making any investment in it. But for 32.1% people it is also the last thing to
be considered i.e. they are aggressive investors who give importance to returns
and liquidity.

Priority of Decision Return

Frequency Percent Valid Percent Cumulative Percent

 valid1 18 10.7 10.7 10.7

 2 33 19.6 19.6 30.4

 3 28 16.7 16.7 47.0

 4 89 53.0 53.0 100.0

 total 168 100.0 100.0

This frequency table shows the priority that RETURN carries in making the
financial decision. 1-4 are the ranks allocated to this factor. Here we see that
53.0% of the investors have chosen return as the least important factor of their
decision making. This means that people invest their money not only looking at
the return given by investment option but they may also look at the security and
liquidity been provided by investing in it. Rank 1, which signifies that it is most
important factor, is given by only 10.7% of the investors.

Priority of Decision Security

Frequency Percent Valid Percent Cumulative Percent

valid1 24 14.3 14.3 14.3

 2 78 46.4 46.4 60.7

 3 48 28.6 28.6 89.3

 4 18 10.7 10.7 100.0

 total 168 100.0 100.0

This frequency table shows the priority that SECURITY carries in making the
financial decision. 1-4 are the ranks allocated to this factor. Here we see that out
of 168 respondents, 48 i.e. 46.4% of the investors have chosen security as the
second most important factor of their decision making. They count security
provided by an investment option just after considering the risk associated with it.
28.7% people have considered it the third most important factor also. This factor
is given more importance by either a retired person or a middle income group
earning individual.

Priority of Decision Liquidity

Frequency Percent Valid Percent Cumulative Percent

valid1 12 7.1 7.1 7.1

 2 24 14.3 14.3 21.4

 3 68 46.4 46.4 67.9

 4 54 32.1 32.1 100.0

 total 168 100.0 100.0

This frequency table shows the priority that LIQUIDITY carries in making the
financial decision. 1-4 are the ranks allocated to this factor. Liquidity means the
ease provided by the fund in depositing and withdrawing money as and when
required. Its importance depends on an individual‘s requirement of fund and time
duration of investment because if a retired person invests money in any of the
investment option then he would pay importance to liquidity factor. Out of 168
investors 78, i.e. 46.4% people give it 3rd rank. This is because of the fact that the
investors comprises of majorly people of age group 25-35 who want to make long
term investments so they rarely think about the liquidity involved in the
investment option.

A collective result of these factors that hold priority in financial decision making
for an investor is as follows:
WHY NOT MUTUAL FUND

The above pie graph shows the reasons for not holding mutual funds by certain
investors. Some of the reasons that came up while learning about mutual funds
where lack of awareness, too technical, perceived as unsafe investment, volatile
market, not interested, extra expenses involved, not meant for low earning
people, etc. out of them only lack of awareness, too technical, perceived as
unsafe investment, volatile market were taken into consideration and rest were
clubbed into other reasons. Here we see that out of 168 respondents only 18 do
not know about mutual funds.

The reason that holds top priority for not investing is perceived as unsafe
investment/volatile market, this may be because of the current fluctuations in the
stock market as well as the change in market conditions due to hike in inflation
rate. Even 5 out of 28 respondents gave lack of awareness as their answer. This
means that still mutual funds are in their initial stage and the Asset Management
Companies (AMC‘s) really need to promote themselves harder to come into the
investment purview of people and prove mutual fund as a tool of wealth creation.

Mutual funds normally come out with an advertisement in newspapers publishing

the date of launch of the new schemes. Investors can also contact the agents and
distributors of mutual funds who are spread all over the country for necessary
information and application forms. Forms can be deposited with mutual funds
through the agents and distributors who provide such services. Now a day, the
post offices and banks also distribute the units of mutual funds .However, the
investors should please note that the mutual funds schemes being marketed by
banks and post offices should not be taken as their own schemes and no
assurance of returns is given by them. The only role of banks and post offices is to
help in distribution of mutual funds schemes to the investors.

Investors should not be carried away by commission / gifts given by agents /

distributors for investing in a particular scheme. On the other hand they must
consider the track record of the mutual fund and should take objective decisions.

AGE DECIDES MUTUAL FUND

To decide which funds would be most appropriate for one to invest the hard
earned money one must first decide on what he/she would like to accomplish
with the investments.
These are the questions you must answer that are unique to your situation:
Where are you now? Are you in your twenties just starting out in your chosen
career? Perhaps you're in your fifties approaching the peak of your career. Maybe
you're preparing to send your oldest child off to their first day of school and you
want to make sure he or she will be able to attend college. Maybe you want to
save and invest for that house or vacation hideaway you've been dreaming about
for years. What do you want to accomplish? What are your goals?

Investing in mutual funds is not some sort of get-rich-quick scheme. Investments

in mutual funds are generally for the longer term - they should be measured in
years, not weeks or months. One should not be investing money in mutual funds
if one will need that money next month.

Generally twenties and thirties are a time of beginnings: career, marriage,

children, first home, etc. It is also a good time to begin investing in mutual funds.
With time on your side, growth and aggressive growth funds may be a good
choice to begin mutual fund investing. These funds could be used for future
college costs, a new home, or to get a head start on your retirement. Ones forties
and fifties are likely to be their peak earning years. Perhaps a time when one
should have less of his mutual fund assets in growth funds and more in income
and tax-free income funds. In ones sixties and beyond, most of his biggest
expenses are behind him, i.e., college expenses, housing, etc., and one will have
more time to enjoy oneself. Perhaps a time to shift more of one‘s assets into fixed
income funds to increase income for living expenses or leisure activities.

MUTUAL FUNDS v/s SENSEX

Mutual funds on an average give an annualized return of 30-35% (without

considering inflation) while a return of 25-30% if inflation is also considered. Even
after so many up and downs in the stock market since last 5 years, Mutual Funds
gave excellent returns, which no other financial avenue has given.

Since Inflation is one of the most important factor in the economy. So while
calculating the returns we cannot ignore this important aspect. Inflation is the
rate at which the general level of prices for goods and services is rising, and
subsequently, purchasing power is falling. Keeping a close eye on inflation is most
important for fixed income investors as future income streams must be
discounted by inflation to determine how much value today money will has in the
future.

For stock investors, inflation, whether real or anticipated, is what motivates us to

take on the increased risk of investing in the stock market, in the hope of
generating the highest real rates of return. Real returns are the returns on
investment that are left standing after commissions, taxes, inflation and all other
frictional costs are taken into account. As long as inflation is moderate, the stock
market provides the best opportunity in comparison to fixed income and cash.

The following table shows the comparison of mutual fund return with returns of
bank fixed deposit.

BANK FDS MUTUAL FUND

Growth
Investor's tax Plan
30% 20% Dividend Plan
bracket

Pre-tax return 10% 10% 10% 10%

Post-tax return 7% 8% 9% 8.75%

Inflation 6.5% 6.5% 6.5% 6.5%

This is just for illustrative purposes only. However the actual returns may vary.
Under the growth plan, long term capital gains tax @ 10% (without surcharge) has
been considered assuming a one year plus horizon. Under the dividend plan, it is
assumed that the entire gains are distributed. Surcharge has not been taken into
consideration.

The results give a clear picture that the returns of mutual fund are high above the
returns of bank FD‘s even after considering the inflation, although the returns in
growth and dividend option comes out to be different. Also the returns under
bank FD‘s vary according to the investors tax bracket he lie in.

Now let us take an example of current scenario. An average inflation rate of 5.5%
as being considered and then the calculations of returns have being done.
Considering the performance of Mutual Funds over the last 10 years, as on May
16, 2008, the average return of top 5 diversified equity Mutual Fund schemes is
23% to 46% CAGR, whereas the BSE Sensex has grown only 20% CAGR. It implies
that Rs. 100000 invested in Mutual Funds 10 years back only would have grown to
Rs. 20.04 lakhs, whereas the same amount invested in BSE Sensex companies
would have grown to only Rs. 4.30 lakhs. This is power of active management of
our wealth.

This tells that mutual funds are far better than the fixed return instruments like
FD, PF, Gratuity, Bonds, Traditional tools like KVP etc.

TAX IMPLICATION OF MUTUAL FUND

FOR DOMESTIC CORPORATE INVESTORS

TAX EQUITY DEBT

Short Term
15% 30%
Capital Gains

No capital gains taxable. 20% with the cost inflation index

Long Term However, securities benefit or 10% without the cost
Capital Gains transaction tax payable at inflation index benefit, whichever
0.25% of redemption price. is beneficial;

Dividend Nil Nil

Income

Dividend 22.66% (including surcharge of

Distribution Nil 10% and education cess of 3% on
Tax the amount of tax plus surcharge)
on dividend distributed.

TDS Nil Nil

FOR RESIDENT INDIVIDUAL INVESTORS

TAX EQUITY DEBT

Added to Individuals Income,

Short Term therefore as per Individuals tax
15% bracket
Capital Gains

No capital gains taxable. 20% with the cost inflation index

Long Term However, securities benefit or 10% without the cost
Capital Gains transaction tax payable at inflation index benefit, whichever
0.25% of redemption price. is beneficial;

Dividend
Nil Nil
Income

Dividend 14.1625% (Including a surcharge

Distribution NA of 10% & an additional surcharge
Tax by way of education cess of 3% on
the amount of tax + surcharge)

Tax Deducted
Nil Nil
at Source

FOR NON RESIDENT INDIANS (NRI‘S)

TAX EQUITY DEBT

 Added to Individuals Income,
Short Term
15% therefore as per Individuals tax
Capital Gains
bracket

No capital gains taxable. 20% with the cost inflation index

Long Term However, securities benefit or 10% without the cost
Capital Gains transaction tax payable at inflation index benefit, whichever
0.25% of redemption price. is beneficial;

Dividend
Nil Nil
Income

Dividend 14.1625% (Including a surcharge

Distribution of 10% & an additional surcharge
Tax Nil
by way of education cess of 3% on
the amount of tax + surcharge)

Short Term Capital Gain-30% ;

Tax Deducted Short Term Capital Gain-30%
Long Term Capital Gain -20% with
at Source ; Long Term Capital Gain -Nil
indexation benefit

From the above 3 tables we could make out that the dividend received under the
mutual funds is tax-free. This is the biggest advantage of mutual funds. Difference
could be clearly seen in dividend distribution tax, debt funds, which is highest for
the corporate investors of 22.66%. However, in dividend distribution tax, an
equity fund, there is not tax applicable. The tax deducted at source is also nil for
corporate investors and individual investors but for NRI‘s is charged for both
equity and debt schemes. NRI‘s are charged for both short term capital gain as
well as long term capital gain. The long term capital gain is also tax free under all
three categories except that there is a 0.25% security transaction charge
applicable.
RUPEE COST AVERAGING

Rupee Cost Averaging is a strategy involving investing a fixed amount of money at

regular intervals, irrespective of market conditions. It enables investors to buy
less when prices are high and buy more when prices are low.

It involves the concept of FV = PV (1 + r) n

FV = Future Value

PV = Present Value (the more you save, makes a difference)

r = Rate of Return/ Coupon Rate (The more you earn, makes a difference)

n = No. of compounding periods (The sooner you start, makes a difference)

AMOUN
MONTH NAV UNITS
T

1 1000 12.00 83.333

2 1000 11.00 90.909

3 1000 13.00 76.923

4 1000 15.00 66.667

5 1000 14.00 71.429

6 1000 12.00 83.333

7 1000 10.00 100.000

8 1000 9.00 111.111

9 1000 11.00 90.909

10 1000 8.00 125.000

11 1000 10.00 100.000

12 1000 12.00 83.333

Making Volatility Work for you

Average Sales Price of Units: Rs. 11.42

Average Purchase Cost of Units: Rs. 11.08

This is the benefit of averaging that we get the benefit of buying more units when
price is low and get low units when price is high, and also average our funds
irrespective of volatile market conditions.

Let us take a practical example of a fund and find out its return since the date of
its inception if investment is made on monthly basis.

Bluechip Fund v/s        Sensex

Scheme Name  Date NAV

Franklin India Bluechip - Monday, July 28,

133.4355
Growth 2008

* Franklin India Blue-chip Fund was launched as a close-end fund and became
open-ended in Jan-1997. Let us assume, a systematic investment of Rs. 1000 per
month is made since June 1998: 

Total investment made till July 31, 2008: Rs. 1, 20,000

Value of investment as on July 31, 2008: Rs. 9, 28,941

Annualized return on investment: 33.28% p.a.

This example is provided for illustrative purposes only. Calculations are based on
NAV of Growth Plan. Load is taken into consideration in the calculations. Thus
Wealth creation is nothing but enhancement of future value. When chasing a
financial goal, the simplest form of planning is to invest regularly and start early.

ADVANTAGES OF MUTUAL FUND

 PROFESSIONAL MANAGEMENT: Mutual Funds provide the services of

experienced and skilled professionals, backed by a dedicated investment
research team that analyses the performance and prospects of companies
and selects suitable investments to achieve the objectives of the scheme.
Presumably, professionals have more experience, knowledge, and ability to
focus on just a single area of expertise than the average investor when it
comes to deciding which securities to buy and sell.

 DIVERSIFICATION: Mutual Funds invest in a number of companies across a

broad cross-section of industries and sectors which reduces the risk
because seldom do all stocks decline at the same time and in the same
 proportion. One achieves this diversification through a Mutual Fund with
far less money than one can do on his own.

 CONVENIENT ADMINISTRATION: Investing in a Mutual Fund reduces

paperwork and helps an individual avoid many problems such as bad
deliveries, delayed payments and follow up with brokers and companies.
Mutual Funds save time and make investing easy and convenient.

 RETURN POTENTIAL: Over a medium to long-term, Mutual Funds have the

potential to provide a higher return as they invest in a diversified basket of
selected securities.

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

 LIQUIDITY: In open-end schemes, the investor gets the money back

promptly at net asset value related prices from the Mutual Fund. In closed-
end schemes, the units can be sold on a stock exchange at the prevailing
market price or the investor can avail of the facility of direct repurchase at
NAV related prices by the Mutual Fund.

  TRANSPARENCY: Individual get regular information on the value of

investment in addition to disclosure on the specific investments made by
scheme, the proportion invested in each class of assets and the fund
manager's investment strategy and outlook.
  FLEXIBILTY: Through features such as regular investment plans, regular
withdrawal plans and dividend reinvestment plans, one can systematically
invest or withdraw funds according to your needs and convenience.

 AFFORDABILITY: Investors individually may lack sufficient funds to invest in

high-grade stocks. A mutual fund because of its large corpus allows even a
small investor to take the benefit of its investment strategy.

 WELL REGULATED: All Mutual Funds are registered with SEBI and they
function within the provisions of strict regulations designed to protect the
interests of investors. The operations of Mutual Funds are regularly
monitored by SEBI. It notified regulations in 1993 (fully revised in 1996) and
issues guidelines from time to time. Mutual Funds either promoted by
public or by private sector entities including one promoted by foreign
entities are governed by these Regulations.

 ADDITIONAL SERVICES: Some mutual funds offer additional services to

their shareholders, such as tax reports, reinvestment programs, and
automatic withdrawal and contribution plans.

DISADVANTAGES OF MUTUAL FUND

 NO GUARANTEES: No investment is risk free. If the entire stock market

declines in value, the value of mutual fund shares will go down as well, no
matter how balanced the portfolio. Investors encounter fewer risks when
they invest in mutual funds than when they buy and sell stocks on their
own. However, anyone who invests through a mutual fund runs the risk of
losing money.
  FEES AND COMMISSIONS: All funds charge administrative fees to cover
their day-to-day expenses. Some funds also charge sales commissions or
"loads" to compensate brokers, financial consultants, or financial planners.
Even if an investor doesn't use a broker or other financial adviser, he will
pay a sales commission if he buys shares in a Load Fund.

 TAXES: During a typical year, most actively managed mutual funds sell
anywhere from 20 to 70 percent of the securities in their portfolios. If the
fund makes a profit on its sales, the investor will pay taxes on the income
he receives, even if he reinvests the money he makes.

 \MANAGEMENT RISK: When an investor invests in a mutual fund, he

depends on the fund's manager to make the right decisions regarding the
fund's portfolio. If the manager does not perform as well as hoped, the
customer might not make as much money on his investments as expected.
Of course, if he invests in Index Funds, he foregoes management risk,
because these funds do not employ managers.

TRENDS OF MUTUAL FUND INDUSTRY

 HOST OF SECTOR SPECIFIC & THEMATIC FUNDS:

The Indian mutual funds are now allowed to invest in foreign securities. On the
anvil are gold-funds, real estate funds & capital protection funds. Fund of funds,
exchange traded funds; mid-cap funds, fixed maturity plans & arbitrage funds
have all made their appearance.

 RETURN OF CLOSE ENDED FUNDS:

Until SEBI changed the rules for amortizing initial issue expenses, funds could
charge 6% & amortize it over a 5-year period which allowed AMCs to push their
new funds by offering commission as high as 5-6%. While the short-term investors
went in and out of schemes, long-terms investors had to bear a large share of
initial issue expenses. By allowing only close-ended funds to amortize their
expense, SEBI paved the way for the return of close-ended funds.
  SYSTEMATIC INVESTMENT PLANS (SIP):

The most encouraging trend has been the growing popularity of SIPs, where
investors put aside a fixed amount every month for investment in a fund. The
investors learned that the secret of successful investing is to invest for the long-
term, diversify their assets & average out one‘s cost. The number of SIPs
estimated in the industry is currently pegged at around a million.

INDIA IN GLOBAL MARKET

Since private players were allowed in 1993, the Indian Mutual fund industry has
witnessed a sea change in the way it operates, in the regulatory and investor
attitude towards Mutual fund products. From a single player in 1987 today there
are 34 mutual funds offering as many as 477 schemes. The total assets under
management have risen to $67.1 billion in year 2006.

However, the accolades regarding the growth of the MF industry should be

reserved until this growth is analyzed taking the MF industry in other developed
countries in consideration. Here are certain statistics that reflect that Indian
Mutual fund industry still has a long way to go when compared to global
standards:

 AUM AS A PERCENTAGE OF GDP                                                                 In

most of the developed countries the total assets under management
ranges from               30% -60% of the GDP. Total assets under management
are only 9.5% of the GDP in case of India.

 PENETRATION OF MUTUAL FUND:

In India it is estimated that 6.7% of the households hold mutual funds. This figure
is close to 50% in case of the US and 17% in case of UK. Mutual funds account for
only 0.73% of total financial assets in India (11% of bank deposits). AUM for
Mutual funds had exceeded the bank deposits in US in as early as 1998.

 EXISTING TYPES OF FUNDS:

In India commodity mutual funds, gold mutual funds, real estate – fund and
exchange traded fund are still under process to come while in countries like US
and UK the major chunk of investment goes into these funds. Moreover the
number of funds operational in India is about 34 where as in USA it is about 800.

CONCLUSION

Customer orientation is necessary in a market like India where the market is

turning competitive due to large number of players with varied financial
instruments. This study has made an attempt to understand the financial behavior
of MF investors in connection with the scheme preference and selection.

Running a successful MF requires complete understanding of the peculiarities of

the Indian Stock Market and also the psyche of the small investor. This study has
made an attempt to understand the investment behavior of an individual. Hence,
surveys similar to the present one need to be conducted at intervals to develop
useful models. Nevertheless, it is hoped that the survey findings will have some
useful managerial implication for the AMCs as well as for the distributing firms in
their product designing and marketing.

We see that an investment reward is a function of risk. But mutual funds help to
reduce risk through diversification and professional management. The experience
and expertise of mutual fund managers in selecting fundamentally sound
securities and timing their purchases and sales help them to build a diversified
portfolio that minimizes the risk and maximizes the returns.

After analyzing all the data I have come to a conclusion that Mutual funds have
substantial positive impact on the wealth creation of an individual which is
reflected by the huge number of purchases made by them with the increase in
the years of their inception and thus the increase in the size of Asset Under
Management (AUM).

Also every fund has its unique time of selling and redemptions thus a cycle is
meant to be followed and this leads to growth of the Asset Management
Companies. The change in equity market, economic conditions, stock movements,
weather, rupee appreciation, and various other factors do form a point of concern
but still the effect of all of them combined is very little so as to hamper their
performance.

Mutual Funds, a pool of like-minded people allow investors to reap the benefits of
a diversified, well researched and an actively managed portfolio, without having
to worry about liquidity.

An investor avails an annualized return of 25-30% after considering the inflation.

The beauty of the return is that these returns are tax-free. Any income from
redemption of Mutual Fund after one year forms part of long term capital gain
and thereby income is completely tax free. In fact, the ELSS (Equity linked Saving
Schemes) is giving on an average an annualized return of 30-35%, which is tax-
free return.

With the structural liberalization policies no doubt Indian economy is likely to

return to a high grow path in few years. Hence mutual fund organizations are
needed to upgrade their skills and technology. Success of mutual fund however
would highly depend upon the implementation of changes and adjusting itself to
the fluctuations in the external environment.

At last to mention, as long as mutual fund companies are performing with lower
risks and higher profitability within a short span of time more and more people
will be inclined to invest.

SUGGESTIONS

It is important to study the present industry scenario to gain a better

understanding of the impediments to the growth of the industry:

 LACK OF INVESTOR AWARENESS:

Retail investors had a wrong notion about mutual funds as an investment avenue.
The         benefits of risk diversification, professional management and ease of
administration involved while investing in mutual funds are not clearly
understood. Knowledge of financial products is inbuilt in school and college
curriculum in countries like UK, US and France and the same should be followed in
the Indian context too.

 INVESTOR RISK APPETITE:

Equity funds account for 30% of the total AUM in India. This figure is more than
50% in most developed countries. Frequent stock market scams and the bust of
technology sector specific MFs have contributed to this worry. The growth in
mutual funds has come through the growth in investments in short term
instrument like Money Market Mutual Funds which account for 40% of AUM.

 HIGHER RETURNS OF ALTERNATIVE DEBT INSTRUMENTS:

Government guaranteed schemes provide risk free returns at competitive rates of

returns. This is why mutual funds are facing difficulty in competing with the retail
business. So the companies should compete on this factor and try to overcome it.

 CONCENTRATION OF CORPORATE INVESTORS:

Mutual funds have become overly attractive to corporate investors because of

higher returns than bank deposits and ability to distribute capital gains tax.
Corporate investors account for 57% of the AUM (by value). Though the turnover
rates have increased the average fund in management has grown by only 25% in
the past 4 years which shows the lack of growth in funds under management in
India because of the absence of long term investors. Thus it should also be
promoted as a retail product for everyone who wants to invest.

 DISTRIBUTION:

One of the major factors impacting the growth of mutual fund industry is the
absence of any regulation in distribution of mutual funds. Mutual fund investors
need distributors who are able to inform them about the efficacy of distribution
product for a particular risk profile and stage in life cycle. Lack of distributor
awareness and the absence of any disclosures from distributors make wrong
selling of MF products commonplace. Also penetration in rural areas is a problem.
Only 3% of rural households own mutual funds. So the companies so work on this
aspect also and try to penetrate this investment option to every village and city to
earn revenues and profits along with providing a better investment option to
people.

APPENDICES

ANAND RATHI

Anand Rathi is a leading full service securities firm providing the entire gamut of
financial services. The firm, founded in 1994 by Mr. Anand Rathi, today has a pan
India presence as well as an international presence through offices in Dubai and
Bangkok. AR provides a breadth of financial and advisory services including wealth
management, investment banking, corporate advisory, brokerage & distribution
of equities, commodities, mutual funds and insurance - all of which are supported
by powerful research teams.

The firm's philosophy is entirely client centric, with a clear focus on providing long
term value addition to clients, while maintaining the highest standards of
excellence, ethics and professionalism. The entire firm activities are divided across
distinct client groups: Individuals, Private Clients, Corporate and Institutions and
was recently ranked by Asia Money 2006 poll amongst South Asia's top 5 wealth
managers for the ultra-rich.

ABOUT LOGO   

           Anand Rathi is written in gold lettering with a green background. It stands

for turning your money to gold. Green is the colour of money and growth. The
gold lettering indicates wealth and prosperity. The font is classy and serious. It
gives a personal feel, a sense of security of your money being in safe hands. The
baseline 'behind every successful investor‘is understated.'

That‘s keeping in line with our philosophy of being client centric. The focus is on
client. We just work behind the scenes to make money for client.

MILESTONES

 1994: Started activities in consulting and Institutional equity sales with staff
of 15

 1995: Set up a research desk and empanelled with major institutional

investors

 1997: Introduced investment banking businesses Retail brokerage services

launched
  1999: Lead managed first IPO and executed first M & A deal

 2001: Initiated Wealth Management Services

 2002: Retail business expansion recommences with ownership model

 2003: Wealth Management assets cross Rs1500 crores Insurance broking

launched. Launch of Wealth Management services in Dubai Retail Branch
network exceeds 50      

 2004: Commodities brokerage and real estate services introduced, Wealth

Management assets cross Rs3000 crores, Institutional equities business
relaunched and senior research team put in place. Retail Branch network
expands across 100 locations within India.

 2005: Real Estate Private Equity Fund Launched, Retail Branch network
expands across 200 locations within India.

 2006: AR Middle East, WOS acquires membership of Dubai Gold &

Commodity Exchange (DGCX). Ranked amongst South Asia's top 5 wealth
managers for the ultra-rich by Asia Money 2006 poll, Ranked 6th in FY2006
for All India Broker Performance in equity distribution in the High Net
worth Individuals (HNI) Category, Ranked 9th in the Retail Category having
more than 5% market share Completes its presence in all States across the
country with offices at 300+ locations within India

 2007: Citigroup Venture Capital International picks up 19.9% equity stake.

Retail customer crosses 200 thousand Establishes presences in over 450
locations.

QUESTIONNAIRE FOR SURVEYING CONSUMERS PREFERENCE REGARDING

MUTUAL FUND IN INDIA

NAME: DATE:

MARITAL STATUS: GENDER:

ACADEMIC QUALIFICATION:
1. What is your age?

Below 25        25 to 35    35 to 45        45 to 55                55 and above

2. What is your occupation?

 Govt. Employee

 Self Employed

Student

 Professional (Doctor, CA, Engineer etc.)

 Other

3. How much is your average annual income?

 Below Rs.300000

 Rs.300, 000 to Rs.800, 000

Rs.800, 000 to Rs.1300, 000

 Rs.1, 300, 000 to Rs.2, 000, 000

Rs.2, 000, 000 and above

4. How much do you save annually?

 0% to 5%

 5% to 15% 

15% to 30%

 30% to 45%

 45% or more

5. In the next five years, you expect that your income will:

 Decrease slightly
 Remain about the same

 Increase slightly

 Increase dramatically

6. What is your primary objective for investment?

 Saving the Principal Amount

 Current Income

 Growth and Income

 Low Growth

 High Growth

7. Which of these investment options are you most comfortable with?

 Equity Shares, Preference Shares, Debentures, Public Sector Bonds, Savings

Certificates,     Gilt-Edged Securities and Money Market Securities 

 Bank Deposits, Post Office Deposits, Company Fixed Deposits, Provident Fund
Schemes,        National Savings Schemes and Life Insurance.

 Real Estate, Gold & Silver, Precious Stones, Rare Coins & Stamps and Art
Objects.

 If mix of above, Please

specify______________________________________________

___________________________________________________________________
____

8. Are you satisfied with the returns from your investments?

 Unsatisfied

 Somewhat Satisfied 

Indifferent Satisfied 
Very Satisfied

9. What is your appetite for risk and return?

 High risk high return 

Low risk low return

 High risk low return

 Low risk high return

10. Rank them according to the priority they hold in your financial decision
making:

(1 being most important and 4 being least important) 

Risk Return Security Liquidity

11. You would prefer to have:

 Minor rise and fall in the value of your account, but regularly earn a lower
return on your investments.

Some rise and fall in the value of your account, but earn a normal return. 

Noticeable monthly rise and fall in the value of your account, but earn a higher
return. Noticeable daily rise and fall in the value of your account, but earn the
highest possible return.

12. What is the time horizon for your investment? 

Very short (2- 4weeks)

 Moderate (around 1 year)

 Long (1 – 5 years) 

Very long (more than 5 years)

13. Have you ever used mutual funds as an investment tool?

 Yes

 No

If 'yes' then move to next question or else please move to Q 17

14. How did you come to know about Mutual Fund?

 Print Media (Newspapers / Magazines)

 Electronic media (TV / Internet)

 Brokers / Agents

 Word of Mouth

15. For how long have you been investing in mutual funds? 

Less than 1 year 

1 to 3 years 

3 to 5 years 

5 years or more

16. What is the reason for not holding Mutual Fund?  Lack of awareness Too
technical Perceived as an unsafe investment/ volatile market Others, please
specify______________________________________________________

Suggestions:________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
____________________________________________

Thank you

EQUITY V/S MUTUAL FUNDS

 EQUITY INVESTMENT MUTUAL FUND

IDENTIFYING THE Detail research and Experts carry out the research,
STOCK monitoring of the which is beyond individual 
market

DIVERSIFICATION Very difficult for an Easy as diversified funds are

investor available 

PROFESSIONAL No such specialization is They employ people who

MANAGEMENT available. specialize in wealth
management 

INVESTMENT Income or growth Income, growth or tax saving 

OBJECTIVES

LIQUIDITY Highly liquid Open and close ended option 

TRANSACTION COSTS High (Brokerage, stamp Moderate (only charges a

duty, commissions, etc.) management fees

CONVENIENCE Cannot switch to other Switch over to the other

equity stock. scheme within the family of
fund house.

FREQUENTLY USED TERMS

 NET ASSET VALUE: The performance of a particular scheme of mutual fund

is denoted by the Net Asset Value (NAV). Net Asset Value is the market
value of the assets of the scheme minus its liabilities. Per unit NAV is the
 net asset value of the scheme divided by the number of units outstanding
on the Valuation Date. For Example Mutual Fund X owns a portfolio of
stocks worth Rs. 60, 00,000; its liabilities are Rs.60, 000; and its
shareholders own 500,000 shares. Then

Net Asset Value (NAV) = Market Value in Dollars of a Fund‘s Securities Minus

  It‘s Liabilities (Rs.60, 00,000 – Rs.60, 000)

  ---------------------------------------------------------------

  Number of Investor Shares Outstanding (500,000)

  = Rs. 11.88

Since market values of securities changes every day, NAV of a scheme also varies
on a day to day basis. NAV is required to be disclosed by the mutual funds on a
regular basis – daily or weekly – depending on the nature of the scheme.

 SALES PRICE: Is the price you pay when you invest in a scheme, also called
Offer Price. It may include a sales load.

 REPURCHASE PRICE: Is the price at which a close-ended scheme

repurchases its units and it may include a back-end load. This is also called
Bid Price.

 REDEMPTION PRICE: Is the price at which open-ended schemes repurchase

their units and close-ended schemes redeem their units on maturity. Such
prices are NAV related.

 SALES LOAD: Is a charge collected by a scheme when it sells the units. Also
called, ‗Front-end‘load. Schemes that do not charge a load are called ‗No
Load' schemes.
  REPURCHASE OR “BACK – END” LOAD: Is a charge collected by a scheme
when it buys back the units from the unit holders.

REFERENCES

• www.amfiindia.com

• www.moneycontrol.com 

• finance.indiamart.com 

• finance.yahoo.com

• www.fool.com

• www.articlesbase.com

• www.hsbcinvestments.co.in

• www.hedgeweek.com

• www.investorwords.com

• www.mutualfundsindia.com

• www.outlookmoney.com

• www.riversource.com/rvsc/global/docs/qw/floating-rate.pdf 

• www.sec.gov/investor/pubs/inwsmf.htm

• www.smartmoney.com 

• www.standardcharteredmf.com/learningcenter/undfloat.asp - 35k

• www.thehindubusinessline.com  

GLOSSARY
It is very hard to understand a new subject unless we know the basic vocabulary
used when talking about that subject. Here I have provided a glossary of words
and terms used in the mutual fund industry.

 Adviser - The organization employed by a mutual fund to give professional

advice on the fund's investments and to administer its assets.

 Balanced Funds - Generally have a three-part investment objective: 1) to

conserve the investors' principal, 2) to pay current income, and 3) to
promote long-term growth of both principal and income. Balanced funds
have a portfolio mix of bonds, preferred stocks, and common stocks.

 Bear Market - A sustained period in which prices of stocks or bonds drop.

Usually indicates a period of poor economic activity. The opposite of a bull
market.

 Blue Chip - The common stock of a well-known national company with a

history of earnings growth and dividend increases, e.g., IBM, General
Motors, AT&T, etc.

 Broker - A person in the business of effecting securities transactions for

others. Generally paid by commission.

 Bull Market - A sustained period in which prices of stocks or bonds are

advancing (going up). Usually indicates a period of economic growth. The
opposite of a bear market.

 Capital Gains Distribution - When a mutual fund sells an investment for a

profit, it realizes a capital gain. Most mutual funds distribute these capital
gains once a year.

 Capital Growth - An increase in the market value of a mutual fund's

securities, as reflected in the net asset value of the fund shares.
  Closed-End Fund - Investment Company that issues a fixed number of
shares which are then bought and sold on a stock exchange or over the
counter. The price of a closed-end share is determined by supply and
demand - it may be more or less than the fund's net asset value.

 Compound Interest - When you deposit money in the bank, it earns

interest. When that interest also begins to earn interest, the result is
compound interest. Compounding also occurs if income or dividends from
mutual funds are reinvested. Because of compounding, money is able to
grow much faster if an investment's earnings are left in the account

 Diversification - The spreading of one's investment risk by putting assets in

a wide-ranging portfolio of securities. Most mutual funds are highly
diversified; most containing dozens, or even hundreds of individual stocks

 Dividend - When companies pay part of their profits to shareholders, those

profits are called dividends.

 Net Asset Value Per Share (NAV) - This is the market value of a mutual
fund's total net assets, divided by the number of shares outstanding.

 Open-End Mutual Fund - The more technical description of a mutual fund.

The term open-end refers to the fact that this type of mutual fund is
continuously offering new shares to investors as well as redeeming, or
buying, them back.

Prospectus - The official booklet that describes a mutual fund. The prospectus
contains information as required by the Securities and Exchange Commission on
such subjects as the fund's investment objectives and policies, services, fees,
restrictions, officers and directors, how shares are bought and redeemed, and the
fund's financial statements.