INTRODUCTION TO INVESTMENT

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What is an 'Investment'?

To invest is to allocate money (or sometimes another resource, such as time) in the
expectation of some benefit in the future, for example, investment on durable good such
as real estate for service industry and factory for manufacturing product development,
which are two common types for micro-economic output in modern economy. Investment
on Research and Development occurs mainly on the innovation of consumer products

An investment is an asset or item that is purchased with the hope that it will generate
income or will appreciate in the future. In an economic sense, an investment is the
purchase of goods that are not consumed today but are used in the future to create wealth.

The term "investment" can be used to refer to any mechanism used for the purpose of
generating future income. In the financial sense, this includes the purchase of bonds,
stocks or real estate property. Additionally, the constructed building or other facility used
to produce goods can be seen as an investment.

In financial market, the benefit from investment is called a return. The return may
consist of capital gain or investment income, including dividends, interest, rental income
etc., or a combination of the two.

Investment generally results in acquiring an asset. If the asset is available at a price

worth investing, it is normally expected either to generate income, or to appreciate in
value, so that it can be sold at a higher price.

Investors generally expect higher returns from riskier investments. Financial assets
range from low-risk, low-return investments, such as high-grade government bonds, to
those with higher risk and higher expected commensurate reward, such as emerging
markets stock investments.

Investors famous for their success include Warren Buffett.

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What is investing?

Investing : The act of committing money or capital to an endeavour with the

expectation of obtaining an additional income or profit.
Legendary investor Warren Buffett defines investing as “… the process of laying out
money now to receive more money in the future.” The goal of investing is to put your
money to work in one or more types of investment vehicles in the hopes of growing your
money over time.

“Investing is really about “working smarter and not harder.”

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 Types of Investments.

1. Bank Products:

Banks and credit unions can provide a safe and convenient way to accumulate savings—
and some banks offer services that can help you manage your money. the interest you
earn from bank products—including certificates of deposit (CDs)—tends to be lower than
potential returns from other investments.

Savings Account:

These insured deposit accounts, which pay interest, give you the flexibility to
make as many deposits as you like, whenever you like. They tend to have more
withdrawal restrictions than checking accounts and higher minimum deposits.

Certificate of deposits (CD’s):

CDs offer predictable returns at higher interest rates than savings accounts. The
trade off is that cannot withdraw your money without penalty for a set period of time.
Most CDs are insured.

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Bonds:

A bond is a loan an investor makes to a corporation, government, federal agency

or other organization in exchange for interest payments over a specified term plus
repayment of principal at the bond’s maturity date. There are a wide variety of
bonds including Treasuries, agency bonds, corporate bonds, municipal bonds and more.
When you invest in bonds and bond mutual funds, you face the risk that your investment
might lose money, especially if you bought an individual bond and want or need to sell it
before it matures.

Stocks:

When you invest in a stock, you become one of the owners of a corporation.
Stocks represent ownership shares, also known as equity shares. Whether you make or
lose money on a stock depends on the success or failure of the company, which type of
stock you own, and what’s going on in the stock market overall and other factors.

Stocks and stock mutual funds often can be an important component of a

diversified investment portfolio.

Mutual Funds:

A mutual fund is an "open-end" investment company that continually offers its

shares to the public. Investors purchase and "redeem" shares directly from the mutual
fund (or through a broker for the fund)—and not on an exchange. Learn about the various
types of mutual funds, active and passive fund management, and how mutual funds are
priced, purchased and redeemed.

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Exchange Traded Funds (ETF’s)

Exchange-traded funds (ETFs) combine aspects of mutual funds and conventional

stocks. Like a mutual fund, an ETF is a pooled investment fund that offers an investor an
interest in a professionally managed, diversified portfolio of investments. But unlike
mutual funds, ETF shares trade like stocks on stock exchanges and can be bought or sold
throughout the trading day at fluctuating prices.

Options

Options are contracts that give the purchaser the right, but not the obligation, to
buy or sell a security, such as a stock or exchange-traded fund, at a fixed price within a
specific period of time. Options can help investors manage risk. But buying and selling
options also involves risk, and it is possible to lose money. It pays to learn about different
types of options, trading strategies and the risks involved.

Commodity Futures

Commodity futures contracts are agreements to buy or sell a specific quantity of a

commodity at a specified price on a particular date in the future. Commodities include
metals, oil, grains and animal products, as well as financial instruments and currencies.
With limited exceptions, trading in futures contracts must be executed on the floor of a
commodity exchange.

Real Estate

Real estate investments can be made by buying a commercial or residential

property directly. Real estate investment trusts (REITs) pool investor’s money and
purchase properties. REITS are traded like stocks. There are mutual funds and ETFs that
invest in REITs as well.

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Private equity

Private equity consists of large-scale private investments into unlisted companies

in return for equity. Private funds are typically formed by combining funds from
institutional investors such as high-net-worth individuals, insurance companies, pension
funds etc. Funds are used alongside borrowed money and the money of the private equity
firm itself to invest in businesses they believe to have high growth potential. In Europe,
venture capital, buy-ins and buy-outs are considered private equity.

Life Insurance

Life insurance products are often a part of an overall financial plan. They come in
various forms, including term life, whole life and universal life policies Insurance
products often are developed to meet specific objectives. For example, long-term care
insurance is designed to help manage health care expenses as you age. As with other
financial products, insurance products can be complex and come with fees, so it pays to
do your homework before you buy.

Hedge Funds

A hedge fund is an investment fund that pools capital from accredited

individuals or institutional investors and invests in a variety of assets, often with complex
portfolio-construction and risk-management techniques. It is administered by a
professional investment management firm, and often structured as a limited
partnership, limited liability company, or similar vehicle.

Art

Art as a form of alternative investment in coming up all over the world. It said that
most of the HNI’s have at least 10% of their investment in alternates like Art, Wine,
Franchising, and many more…

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 Mutual Fund as an Investment.

There are a lot of investment avenues available today in the financial market for an
investor with an investable surplus. He can invest in Bank Deposits, Corporate
Debentures, and Bonds where there is low risk but low return. He may invest in Stock of
companies where the risk is high and the returns are also proportionately high. The recent
trends in the Stock Market have shown that an average retail investor always lost with
periodic bearish tends. People began opting for portfolio managers with expertise in stock
markets who would invest on their behalf. Thus we had wealth management services
provided by many institutions. However they proved too costly for a small investor.
These investors have found a good shelter with the mutual funds.

A mutual fund is a common pool of money into which investors place their
contributions that are to be invested in accordance with a stated objective. The ownership
of the fund is thus joint or “mutual”; the fund belongs to all investors. A single investor’s
ownership of the fund is in the same proportion as the amount of the contribution made
by him or her bears to the total amount of the fund.

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 A mutual fund is a professionally managed investment fund that pools money from
many investors to purchase securities. Mutual funds have advantages and disadvantages
compared to direct investing in individual securities. The primary advantages of mutual
funds are that they provide a higher level of diversification, they provide liquidity, and
they are managed by professional investors. A mutual fund is an investment vehicle made
up of a pool of moneys 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 investments 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.

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DEFINITION:

“Mutual funds are collective savings and investment vehicles where savings of
small (or sometimes big) investors are pooled together to invest for their mutual benefit
and returns distributed proportionately”.

“A mutual fund is an investment that pools your money with the money of an
unlimited number of other investors. In return, you and the other investors each own
shares of the fund. The fund's assets are invested according to an investment objective
into the fund's portfolio of investments. Aggressive growth funds seek long-term capital
growth by investing primarily in stocks of fast-growing smaller companies or market
segments. Aggressive growth funds are also called capital appreciation funds”.

“A mutual fund is a company that brings together money from many people and
invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or
other assets the fund owns are known as its portfolio. Each investor in the fund owns
shares, which represent a part of these holdings”.

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Why Select Mutual Fund?

The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vise versa if he pertains to lower risk
instruments, which would be satisfied by lower returns. For example, if an investors opt
for bank FD, which provide moderate return with minimal risk. But as he moves ahead to
invest in capital protected funds and the profit-bonds that give out more return which is
slightly higher as compared to the bank deposits but the risk involved also increases in the
same proportion.

Thus investors choose mutual funds as their primary means of investing, as

Mutual funds provide professional management, diversification, convenience and
liquidity. That doesn’t mean mutual fund investments risk free.

This is because the money that is pooled in are not invested only in debts funds
which are less riskier but are also invested in the stock markets which involves a higher
risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly
traded in the derivatives market which is considered very volatile.

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History of Mutual Funds

The first modern investment funds (the precursor of today's mutual

funds) were established in the Dutch Republic. In response to the financial
crisis of 1772–1773, Amsterdam-based businessman Abraham (or Adriaan)
van Ketwich formed a trust named Eendragt Maakt Magt – meaning “unity
creates strength". His aim was to provide small investors with an opportunity
to diversify.

The next wave of near-mutual funds included an investment trust

launched in Switzerland in 1849, followed by similar vehicles created
in Scotland in the 1880s. Mutual funds were introduced to the United States in
the 1890s. Early U.S. funds were generally closed-end funds with a fixed
number of shares that often traded at prices above the portfolio net asset value.

The first open-end mutual fund with redeemable shares was established
on March 21, 1924 as the Massachusetts Investors Trust. Saltonstall was also
affiliated with Scudder, Stevens and Clark, an outfit that would launch the
first no-load fund in 1928. A momentous year in the history of the mutual
fund, 1928 also saw the launch of the Wellington Fund, which was the first
mutual fund to include stocks and bonds, as opposed to direct merchant
bank style of investments in business and trade.

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 By 1929, there were 19 open-ended mutual funds competing with
nearly 700 closed-end funds. The mutual fund industry continued to expand.
At the beginning of the 1950s, the number of open-end funds topped 100. In
1954, the financial markets overcame their 1929 peak, and the mutual fund
industry began to grow in earnest, adding some 50 new funds over the course
of the decade.

The 1960s saw the rise of aggressive growth funds, with more than
100 new funds established and billions of dollars in new asset inflows. In
1971, William Fouse and John McQuown of Wells Fargo Bank established the
first index fund, a concept that John Bogle would use as a foundation on
which to build The Vanguard Group, a mutual fund powerhouse renowned for
low-cost index funds. The 1970s also saw the rise of the no-load fund.

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HISTORY OF MUTUAL FUNDS IN INDIA:

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

FIRST PHASE – 1964-87:

Unit Trust of India (UTI) was established on 1963 by an Act of

Parliament. It was set up by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI
was de-linked from the RBI and the Industrial Development Bank of India (IDBI)
took over the 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.

Later in the 1970s and 80s, UTI started innovating and offering
different schemes to suit the needs of different classes of investors. Unit
Linked Insurance Plan (ULIP) was launched in 1971. The first Indian offshore
fund, India Fund was launched in August 1986. In absolute terms, the
investible funds corpus of UTI was about Rs 600 crores in 1984. By 1987-88,
the assets under management (AUM) of UTI had grown 10 times to Rs 6,700
crores.

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

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(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. During this period, investors showed a
marked interest in mutual funds, allocating a larger part of their savings to
investments in the funds.

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 private funds have brought in with them latest product
innovations, investment management techniques and investor-servicing
technologies. During the year 1993-94, five private sector fund houses
launched their schemes followed by six others in 1994-95.

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.

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Phase IV (1996-99): Growth and SEBI Regulation:

Since 1996, the mutual fund industry scaled newer heights in terms of
mobilization of funds and number of players. Deregulation and liberalization
of the Indian economy had introduced competition and provided impetus to
the growth of the industry.

A comprehensive set of regulations for all mutual funds operating in

India was introduced with SEBI (Mutual Fund) Regulations, 1996. These
regulations set uniform standards for all funds. Erstwhile UTI voluntarily
adopted SEBI guidelines for its new schemes. Similarly, the budget of the
Union government in 1999 took a big step in exempting all mutual fund
dividends from income tax in the hands of the investors. During this phase,
both SEBI and Association of Mutual Funds of India (AMFI) launched
Investor Awareness Programme aimed at educating the investors about
investing through MFs.

Phase V (1999-2004): Emergence of a Large and Uniform

Industry:

The year 1999 marked the beginning of a new phase in the history of
the mutual fund industry in India, a phase of significant growth in terms of
both amount mobilized from investors and assets under management. In
February 2003, the UTI Act was repealed. UTI no longer has a special legal
status as a trust established by an act of Parliament. Instead it has adopted the
same structure as any other fund in India - a trust and an AMC.

UTI Mutual Fund is the present name of the erstwhile Unit Trust of
India (UTI). While UTI functioned under a separate law of the Indian
Parliament earlier, UTI Mutual Fund is now under the SEBI's (Mutual Funds)
Regulations, 1996 like all other mutual funds in India.

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 The emergence of a uniform industry with the same structure,
operations and regulations make it easier for distributors and investors to deal
with any fund house. Between 1999 and 2005 the size of the industry has
doubled in terms of AUM which have gone from above Rs 68,000crores to
over Rs 1,50,000crores.

Phase VI – 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.29,835crores as at the end of January 2003, representing broadly, the assets
of US 64 scheme, assured return and certain other schemes. The Specified
Undertaking of Unit Trust of India, functioning under an administrator and
under the rules framed by Government of India and does not come under the
purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB
and LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March
2000 more than Rs.76,000crores of assets under management and with the
setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund
Regulations, and with recent mergers taking place among different private
sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of September, 2004, there were 29
funds, which manage assets of Rs.153108 crores under 421 schemes.

Consolidation and Growth:

The industry has lately witnessed a spate of mergers and acquisitions,

most recent ones being the acquisition of schemes of Allianz Mutual Fund by
Birla Sun Life, PNB Mutual Fund by Principal, among others. At the same
time, more international players continue to enter India including Fidelity, one
of the largest funds in the world.

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Working of Mutual Funds

The mutual fund collects money directly or through brokers from investors. The
money is invested in various instruments depending on the objective of the scheme. The
income generated by selling securities or capital appreciation of these securities is passed
on to the investors in proportion to their investment in the scheme. The investments are
divided into units and the value of the units will be reflected in Net Asset Value or NAV
of the unit. NAV is the market value of the assets of the scheme minus its liabilities. The
per unit NAV is the net asset value of the scheme divided by the number of units
outstanding on the valuation date. Mutual fund companies provide daily net asset value of
their schemes to their investors. NAV is important, as it will determine the price at which
you buy or redeem the units of a scheme. Depending on the load structure of the scheme,
you have to pay entry or exit load.

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Structure of Mutual Fund

The Fund Sponsor:

Sponsor is defined under SEBI regulations as any person who, acting alone or in
combination of another corporate body establishes a Mutual Fund. The sponsor of the
fund is akin to the promoter of a company as he gets the fund registered with SEBI. The
sponsor forms a trust and appoints a Board of Trustees. The sponsor also appoints the
Asset Management Company as fund managers. The sponsor either directly or acting
through the trustees will also appoint a custodian to hold funds assets. All these are made
in accordance with the regulation and guidelines of SEBI.

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 As per the SEBI regulations, for the person to qualify as a sponsor, he must
contribute at least 40% of the net worth of the Asset Management Company and
possesses a sound financial track record over 5 years prior to registration.

Mutual Funds as Trusts:

A Mutual Fund in India is constituted in the form of Public trust Act, 1882. The
Fund sponsor acts as a settler of the Trust, contributing to its initial capital and appoints a
trustee to hold the assets of the trust for the benefit of the unit-holders, who are the
beneficiaries of the trust. The fund then invites investors to contribute their money in
common pool, by scribing to “units” issued by various schemes established by the Trusts
as evidence of their beneficial interest in the fund.

It should be understood that the fund should be just a “pass through” vehicle.
Under the Indian Trusts Act, the trust of the fund has no independent legal capacity itself,
rather it is the Trustee or the Trustees who have the legal capacity and therefore all acts in
relation to the trusts are taken on its behalf by the Trustees. In legal parlance the investors
or the unit-holders are the beneficial owners of the investment held by the Trusts, even as
these investments are held in the name of the Trustees on a day-to-day basis. Being public
trusts, Mutual Fund can invite any number of investors as beneficial owners in their
investment schemes.

Trustees:

A Trust is created through a document called the Trust Deed that is executed by
the fund sponsor in favour of the trustees. The Trust- the Mutual Fund – may be managed
by a board of trustees- a body of individuals, or a trust company- a corporate body. Most
of the funds in India are managed by Boards of Trustees. While the boards of trustees are
governed by the Indian Trusts Act, where the trusts are a corporate body, it would also
require to comply with the Companies Act, 1956. The Board or the Trust company as an
independent body, acts as a protector of the of the unit-holders interests. The Trustees do
not directly manage the portfolio of securities. For this specialist function, to appoint an
Asset Management Company. They ensure that the Fund is managed by ht AMC as per
the defined objectives and in accordance with the trusts deeds and SEBI regulations.

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The Asset Management Companies:

The role of an Asset Management Company (AMC) is to act as the investment

manager of the Trust under the board supervision and the guidance of the Trustees. The
AMC is required to be approved and registered with SEBI as an AMC. The AMC of a
Mutual Fund must have a net worth of at least Rs. 10 Crores at all times. Directors of the
AMC, both independent and non independent, should have adequate professional
expertise in financial services and should be individuals of high morale standing, a
condition also applicable to other key personnel of the AMC. The AMC cannot act as a
Trustee of any other Mutual Fund. Besides its role as a fund manager, it may undertake
specified activities such as advisory services and financial consulting, provided these
activities are run independent of one another and the AMC’s resources (such as
personnel, systems etc.) are properly segregated by the activity. The AMC must always
act in the interest of the unit-holders and reports to the trustees with respect to its
activities.

Custodian and Depositories:

Mutual Fund is in the business of buying and selling of securities in large

volumes. Handling these securities in terms of physical delivery and eventual safekeeping
is a specialized activity. The custodian is appointed by the Board of Trustees for
safekeeping of securities or participating in any clearance system through approved
depository companies on behalf of the Mutual Fund and it must fulfill its responsibilities
in accordance with its agreement with the Mutual Fund. The custodian should be an entity
independent of the sponsors and is required to be registered with SEBI. With the
introduction of the concept of dematerialization of shares the dematerialized shares are
kept with the Depository participant while the custodian holds the physical securities.
Thus, deliveries of a fund’s securities are given or received by a custodian or a depository
participant, at the instructions of the AMC, although under the overall direction and
responsibilities of the Trustees.

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Bankers:

A Fund’s activities involve dealing in money on a continuous basis primarily with

respect to buying and selling units, paying for investment made, receiving the proceeds
from sale of the investments and discharging its obligations towards operating expenses.
Thus the Fund’s banker plays an important role to determine quality of service that the
fund gives in timely delivery of remittances etc.

Transfer Agents:

Transfer agents are responsible for issuing and redeeming units of the Mutual
Fund and provide other related services such as preparation of transfer documents and
updating investor records. A fund may choose to carry out its activity in-house and charge
the scheme for the service at a competitive market rate. Where an outside Transfer agent
is used, the fund investor will find the agent to be an important interface to deal with,
since all of the investor services that a fund provides are going to be dependent on the
transfer agent.

The RTA maintains and updates all the investors records. The main function is
investor servicing through its office and various other branches. Its functions includes
processing of investor application, purchase and redemption transactions by investors in
various schemes and plans.

The auditors are responsible for auditing of the AMC’s accounts while ensuring
that the accounts of schemes are maintained independently from that of AMC. The fund
accountants are responsible for calculating the NAV of the schemes based on the
information regarding the assets and liabilities of each scheme.

Thus we can note that the mutual funds in India are a well regulated entity with
clearly defined structure comprising of several components whose roles and
responsibilities are properly defined under the preview of SEBI.

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 The benefit of such a structure, especially the trust form, ensures that nobody,
other than the sponsor or the AMC can mishandle your money. In the event of a fund
house closing down, your money is safely returned to you. In many other cases, where a
fund house does not want to run the business, it sells out to another AMC and investors
are given a choice to exit or to stay with the new AMC. Thus, while your money does
undergo market risks, there is no risk of losing money to the AMCs.

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ADVANTAGES OF MUTUAL FUNDS:

If mutual funds are emerging as the favorite investment vehicle, it is because of

the many advantages they have over other forms and the avenues of investing,
particularly for the investor who has limited resources available in terms of capital and
the ability to carry out detailed research and market monitoring. The following are the
major advantages offered by mutual funds to all investors:

1. Portfolio Diversification:

Each investor in the fund is a part owner of all the fund’s assets, thus enabling him
to hold a diversified investment portfolio even with a small amount of investment that
would otherwise require big capital.

2. Professional Management:

Even if an investor has a big amount of capital available to him, he benefits from
the professional management skills brought in by the fund in the management of the
investor’s portfolio. The investment management skills, along with the needed research
into available investment options, ensure a much better return than what an investor can
manage on his own. Few investors have the skill and resources of their own to succeed in
today’s fast moving, global and sophisticated markets.

3. Reduction/Diversification of Risk:

When an investor invests directly, all the risk of potential loss is his own, whether
he places a deposit with a company or a bank, or he buys a share or debenture on his own
or in any other from. While investing in the pool of funds with investors, the potential
losses are also shared with other investors. The risk reduction is one of the most important
benefits of a collective investment vehicle like the mutual fund.

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4. Reduction of Transaction Costs:

What is true of risk as also true of the transaction costs. The investor bears all the
costs of investing such as brokerage or custody of securities. When going through a fund,
he has the benefit of economies of scale; the funds pay lesser costs because of larger
volumes, a benefit passed on to its investors.

5. Liquidity:

Often, investors hold shares or bonds they cannot directly, easily and quickly sell.
When they invest in the units of a fund, they can generally cash their investments any
time, by selling their units to the fund if open-ended, or selling them in the market if the
fund is close-end. Liquidity of investment is clearly a big benefit.

6. Convenience and Flexibility:

Mutual fund management companies offer many investor services that a direct
market investor cannot get. Investors can easily transfer their holding from one scheme to
the other; get updated market information and so on.

7. Tax Benefits:

Any income distributed after March 31, 2002 will be subject to tax in the
assessment of all Unit holders. However, as a measure of concession to Unit holders of
open-ended equity oriented funds, income distributions for the year ending March 31,
2003, will be taxed at a concessional rate of 10.5%.

In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000
from the Total Income will be admissible in respect of income from investments specified
in Section 80L, including income from Units of the Mutual Fund. Units of the schemes
are not subject to Wealth-Tax and Gift-Tax.

8. Choice of Schemes:

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

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9. Well Regulated:

All Mutual Funds are registered with SEBI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations of
Mutual Funds are regularly monitored by SEBI.

10. Transparency:

You get regular information on the value of your investment in addition to

disclosure on the specific investments made by your scheme, the proportion invested in
each class of assets and the fund manager's investment strategy and outlook.

11. Tax Benefits

Investments in Equity Linked Savings Scheme (ELSS) qualify for tax deduction of
up to R1.5 lakhs under Section 80C of the Income Tax Act. Equity funds offer you other
tax benefits, too. For example, you can get tax-free dividends from equity mutual funds.
If you sell your equity mutual funds after a year, the returns will qualify for long-term
capital gains tax. Long-term capital gains tax is nil on equity. If you sell your equity
mutual funds before a year, you will have to pay short-term capital gains tax of 15 per
cent on your returns.

12. 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.

13. Beat Inflation

Mutual Funds help investors generate better inflation-adjusted returns, without

spending a lot of time and energy on it. While most people consider letting their savings
'grow' in a bank, they don't consider that inflation may be nibbling away its value.

Suppose you have Rs. 100 as savings in your bank today. These can buy about 10
bottles of water. Your bank offers 5% interest per annum, so by next year you will have
Rs. 105 in your bank.

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 However, inflation that year rose by 10%. Therefore, one bottle of water costs Rs.
11. By the end of the year, with Rs. 105, you will not be able to afford 10 bottles of water
anymore. Mutual Funds provide an ideal investment option to place your savings for a
long-term inflation adjusted growth, so that the purchasing power of your hard earned
money does not plummet over the years.

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DISADVANTAGES OF INVESTING THROUGH MUTUAL

FUNDS:

1. No Control over Costs:

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

2. No Tailor-Made Portfolio:

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

3. Managing A Portfolio Of Funds:

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

4. The Wisdom of Professional Management:

That's right, this is not an advantage. The average mutual fund manager is no
better at picking stocks than the average nonprofessional, but charges fees.

28
5. No Control:

Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else's car

6. Dilution:

Mutual funds generally have such small holdings of so many different stocks that
insanely great performance by a fund's top holdings still doesn't make much of a
difference in a mutual fund's total performance.

7. Buried Costs:

Many mutual funds specialize in burying their costs and in hiring salesmen who
do not make those costs clear to their clients.

8. Cost of Churn:

The portfolio of fund does not remain constant. The extent to which the portfolio
changes is a function of the style of the individual fund manager i.e. whether he is a buy
and hold type of manager or one who aggressively churns the fund. It is also dependent
on the volatility of the fund size i.e. whether the fund constantly receives fresh
subscriptions and redemptions. Such portfolio changes have associated costs of
brokerage, custody fees etc. which lowers the portfolio return commensurately.

9. Delay in Redemption:

The redemption of the funds though has liquidity in 24-hours to 3 days takes
formal application as well as needs time for redemption. This becomes cumbersome for
the investors.

10. Non-availability of loans:

Mutual funds are not accepted as security against loan. The investor cannot
deposit the mutual funds against taking any kind of bank loans though they may be his
assets.

29
TYPES OF MUTUAL FUNDS

30
Types of Mutual Funds:

Mutual fund schemes may be classified on the basis of its structure and its
investment objective.

By Structure:

Open-ended Funds:

An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units at Net
Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

Closed-ended Funds:

A closed-end fund has a stipulated maturity period which generally ranging from 3
to 15 years. The fund is open for subscription only during a specified period. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can buy
or sell the units of the scheme on the stock exchanges where they are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling
back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the
investor.

Interval Funds:

Interval funds combine the features of open-ended and close-ended schemes. They
are open for sale or redemption during pre-determined intervals at NAV related prices.
The units may be traded on the stock exchange or may be open for sale or redemption
during pre-determined intervals at NAV related prices.

31
BY INVESTMENT OBJECTIVE:

Growth Schemes:

Growth Schemes are also known as equity schemes. The aim of these schemes is
to provide capital appreciation over medium to long term. These schemes normally invest
a major part of their fund in equities and are willing to bear short-term decline in value
for possible future appreciation. It has been proven that returns from stocks, have
outperformed most other kind of investments held over the long term. Growth schemes
are ideal for investors having a long-term outlook seeking growth over a period of time.

Income Schemes:

Income Schemes are also known as debt schemes. The aim of these schemes is to
provide regular and steady income to investors. These schemes generally invest in fixed
income securities such as bonds and corporate debentures. Capital appreciation in such
schemes may be limited. Income Funds are ideal for capital stability and regular income.

Balanced Schemes:

Balanced Schemes aim to provide both growth and income by periodically

distributing a part of the income and capital gains they earn. These schemes invest in both
shares and fixed income securities, in the proportion indicated in their offer documents
(normally 50:50). In a rising stock market, the NAV of these schemes may not normally
keep pace, or fall equally when the market falls. These are ideal for investors looking for
a combination of income and moderate growth.

Money Market Schemes:

Money Market Schemes aim to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer, short-term instruments, such
as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Returns on these schemes may fluctuate depending upon the interest rates prevailing in
the market. These are ideal for Corporate and individual investors as a means to park their
surplus funds for short periods.

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Load Funds:

A Load Fund is one that charges a commission for entry or exit. That is, each time
you buy or sell units in the fund, a commission will be payable. Typically entry and exit
loads range from 1% to 2%. It could be worth paying the load, if the fund has a good
performance history.

No-Load Funds:

A No-Load Fund is one that does not charge a commission for entry or exit. That
is, no commission is payable on purchase or sale of units in the fund. The advantage of a
no load fund is that the entire corpus is put to work.

BY NATURE

1. Equity Fund:

These funds invest a maximum part of their corpus into equities holdings. The
structure of the fund may vary different for different schemes and the fund manager’s
outlook on different stocks. The Equity Funds are sub-classified depending upon their
investment objective, as follows:

· Diversified Equity Funds

· Mid-Cap Funds

· Sector Specific Funds

· Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank
high on the risk-return matrix.

2. Debt Funds:

The objective of these Funds is to invest in debt papers. Government authorities,

private companies, banks and financial institutions are some of the major issuers of debt
papers. By investing in debt instruments, these funds ensure low risk and provide stable
income to the investors. Debt funds are further classified as:
33
Gilt Funds:

Invest their corpus in securities issued by Government, popularly known as

Government of India debt papers. These Funds carry zero Default risk but are associated
with Interest Rate risk. These schemes are safer as they invest in papers backed by
Government.

Income Funds:

Invest a major portion into various debt instruments such as bonds, corporate
debentures and Government securities.

MIPs:

Invests maximum of their total corpus in debt instruments while they take
minimum exposure in equities. It gets benefit of both equity and debt market. These
scheme ranks slightly high on the risk-return matrix when compared with other debt
schemes.

Short Term Plans (STPs):

Meant for investment horizon for three to six months. These funds primarily
invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers
(CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds:

Also known as Money Market Schemes, These funds provides easy liquidity and
preservation of capital. These schemes invest in short-term instruments like Treasury
Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term
cash management of corporate houses and are meant for an investment horizon of 1day to
3 months. These schemes rank low on risk-return matrix and are considered to be the
safest amongst all categories of mutual funds.

34
3. Balanced Funds:

As the name suggest they, are a mix of both equity and debt funds. They invest in
both equities and fixed income securities, which are in line with pre-defined investment
objective of the scheme. These schemes aim to provide investors with the best of both the
worlds. Equity part provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment
parameter viz, Each category of funds is backed by an investment philosophy, which is
pre-defined in the objectives of the fund. The investor can align his own investment needs
with the funds objective and invest accordingly.

OTHER SCHEMES

Tax Saving Schemes:

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed
from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity
Linked Savings Scheme (ELSS) are eligible for rebate. These schemes offer tax rebates to
the investors under specific provisions of the Indian Income Tax laws as the Government
offers tax incentives for investment in specified avenues.

Index Schemes:

Index schemes attempt to replicate the performance of a particular index such as

the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those
stocks that constitute the index. The percentage of each stock to the total holding will be
identical to the stocks index weight age. And hence, the returns from such schemes would
be more or less equivalent to those of the Index.

35
Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast
Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are
dependent on the performance of the respective sectors/industries. While these funds may
give higher returns, they are more risky compared to diversified funds. Investors need to
keep a watch on the performance of those sectors/industries and must exit at an
appropriate time.

Industry Specific Schemes:

Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like InfoTech,
FMCG, and Pharmaceuticals etc.

Commodities Funds:

Commodities funds specialize in investing in different commodities directly or

through commodities future contracts. Specialized funds may invest in a single
commodity or a commodity group such as edible oil or rains, while diversified
commodity funds will spread their assets over many commodities

Large cap funds:

Money collected under this fund is invested in large sized companies. The size of
the company is defined based on the market capitalization (Market Capitalization = no of
shares issued by the company X market price per share) of the company. There is no
standard definition to categorize the companies based on the size. However, one way of
categorizing the companies could be top 50 stocks listed in BSE/NSE are called as “Large
Cap”. The other way of categorizing large cap stocks could be, any stock with amarket
capitalization beyond Rs. 10,000crs.

Some of the large cap companies are Tata Consultancy Service, Reliance
Industries, Sun Pharma, ONGC, Infosys, ICICI Bank etc. Large cap stocks are generally
considered as a safe bet because of that fact that they are less volatile.

36
Mid Cap Funds:

The stocks selected by the fund manager for this category of funds are generally
considered as future leaders. One way of identifying mid cap stocks could be 150 stocks
beyond large cap stocks are considered as mid cap. Other school of thought defines Mid-
cap stocks with a market capitalization between Rs. 2000 – Rs. 10,000crs. Since the mid-
sized companies are not fully grown into large sized companies, these stocks have higher
growth potential when compared to large cap stocks. Because of this, mid-cap stocks tend
to outperform in bullish markets and vice versa.

Small Cap Funds:

Stocks with market capitalization of less than Rs. 2000crs is considered as small
cap. They are in the large numbers compared to large and mid-cap, hence making the life
of a fund manager difficult in choosing the right set of the stocks for the portfolio.

“Catch them young”: Small cap stocks carry great potential for multi bagger
returns in the long run; it’s like identifying Infosys stock at the initial stages of the
company life cycle. But small cap stocks tend to be more volatile compared to Large and
Mid-cap stocks and perform only at specific market cycles. Because of this nature, small
cap stocks are considered to be riskiest among the three categories.

Specialty funds:

These funds focus on specialized mandates such as real estate, commodities or

socially responsible investing. For example, a socially responsible fund may invest in
companies that support environmental stewardship, human rights and diversity, and may
avoid companies involved in alcohol, tobacco, gambling, weapons and the military.

37
Regulation of mutual funds

Mutual funds are regulated primarily by Securities and Exchange Board of India
(SEBI). In 1996, SEBI formulated the Mutual Fund Regulation. SEBI is also the apex
regulator of capital markets and its intermediaries. Issuance and trading of capital market
instruments also comes under the purview of SEBI. Along with SEBI, mutual funds are
regulated by RBI, Companies Act, Stock exchange, Indian Trust Act and Ministry of
Finance. RBI acts as a regulator of Sponsors of bank-sponsored mutual funds, especially
in case of funds offering guaranteed returns. In order to provide a guaranteed returns
scheme, mutual fund needs to take approval from RBI. The Ministry of Finance acts as
supervisor of RBI and SEBI and appellate authority under SEBI regulations. Mutual
funds can appeal to Ministry of finance on the SEBI rulings.

Some SEBI regulations for mutual funds

Mutual funds must set up AMC with 50% independent directors, a separate board
of trustee companies with minimum 50% of independent trustees and independent
custodians to ensure an arm’s length relationship between trustees, fund managers, and
custodians. As the funds are managed by AMCs and the custody of assets are with
trustees, a counter balancing of risks exists as both can keep tabs on each other.

SEBI takes care of the track record of a Sponsor, integrity in business transactions
and financial soundness while granting permission. The particulars of schemes are
required to be vetted by SEBI. Mutual funds must adhere to a code of advertisement.

As per the current SEBI guidelines, mutual funds must have a minimum of Rs.
50crore for an open-ended scheme, and Rs. 20crore corpus for the closed-ended scheme.
Within nine months, mutual funds must invest money raised from the saving schemes.
This protects the mutual funds from the disadvantage of investing funds in the bullish
market and suffering from poor NAV after that. Mutual funds can invest a maximum of
25% in money market instruments in the first six months after closing the funds and a
maximum of 15% of the corpus after six months to meet short-term liquidity
requirements.

SEBI inspects mutual funds every year to ensure compliance with the regulations.

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REGULATORY STRUCTURE OF MUTUAL FUNDS IN
INDIA:

The structure of mutual funds in India is guided by the SEBI. Regulations,

1996.These regulations make it mandatory for mutual fund to have three structures of
sponsor trustee and asset Management Company. The sponsor of the mutual fund and
appoints the trustees. The trustees are responsible to the investors in mutual fund and
appoint the AMC for managing the investment portfolio. The AMC is the business face of
the mutual fund, as it manages all the affairs of the mutual fund. The AMC and the
mutual fund have to be registered with SEBI.

SEBI REGULATIONS:

 As far as mutual funds are concerned, SEBI formulates policies and regulates the
mutual funds to protect the interest of the investors.
 SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds
sponsored by private sector entities were allowed to enter the capital market.
 The regulations were fully revised in 1996 and have been amended thereafter from
time to time.
 SEBI has also issued guidelines to the mutual funds from time to time to protect
the interests of investors.
 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. The risks associated with the schemes launched by the mutual funds
sponsored by these entities are of similar type. There is no distinction in regulatory
requirements for these mutual funds and all are subject to monitoring and
inspections by SEBI.

39
 SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be
associated with the sponsors.
 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.
 Further SEBI Regulations, inter-alia, stipulate that MFs cannot guarantee returns
in any scheme and that each scheme is subject to 20 : 25 condition [I.e. minimum
20 investors per scheme and one investor can hold more than 25% stake in the
corpus in that one scheme].
 Also SEBI has permitted MFs to launch schemes overseas subject various
restrictions and also to launch schemes linked to Real Estate, Options and Futures,
Commodities, etc.

40
ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI):

With the increase in mutual fund players in India, a need for mutual fund
association in India was generated to function as a non-profit organisation. Association of
Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995. As of April
2015, there are 44 members.

AMFI is an apex body of all Asset Management Companies (AMC) which has
been registered with SEBI. Till date all the AMCs are that have launched mutual fund
schemes are its members. It functions under the supervision and guidelines of its Board of
Directors.

Association of Mutual Funds India has brought down the Indian Mutual Fund
Industry to a professional and healthy market with ethical lines enhancing and
maintaining standards. It follows the principle of both protecting and promoting the
interests of mutual funds as well as their unit holders.

The Objectives of Association of Mutual Funds in India:

The Association of Mutual Funds of India works with 30 registered AMCs of the
country. It has certain defined objectives which juxtaposes the guidelines of its Board of
Directors.

The objectives are as follows:

 This mutual fund association of India maintains high professional and ethical
standards in all areas of operation of the industry.
 It also recommends and promotes the top class business practices and code of
conduct which is followed by members and related people engaged in the
activities of mutual fund and asset management. The agencies who are by any
means connected or involved in the field of capital markets and financial services
also involved in this code of conduct of the association.

41
  AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual
fund industry.
 Association of Mutual Fund of India do represent the Government of India, the
Reserve Bank of India and other related bodies on matters relating to the Mutual
Fund Industry.
 It develops a team of well qualified and trained Agent distributors. It implements a
programme of training and certification for all intermediaries and other engaged in
the mutual fund industry.
 AMFI undertakes all India awareness programme for investors in order to promote
proper understanding of the concept and working of mutual funds.
 At last but not the least association of mutual fund of India also disseminate
information on Mutual Fund Industry and undertakes studies and research either
directly or in association with other bodies.

AMFI Publications:

AMFI publish mainly two types of bulletin. One is on the monthly basis and the
other is quarterly. These publications are of great support for the investors to get
intimation of the knowhow of their parked money.

42
NET ASSET VALUE (NAV):

Since each owner is a part owner of a mutual fund, it is necessary to establish the
value of his part. In other words, each share or unit that an investor holds needs to be
assigned a value. Since the units held by investor evidence the ownership of the fund’s
assets, the value of the total assets of the fund when divided by the total number of units
issued by the mutual fund gives us the value of one unit. This is generally called the Net
Asset Value (NAV) of one unit or one share. The value of an investor’s part ownership is
thus determined by the NAV of the number of units held.

Calculation of NAV:

Let us see an example. If the value of a fund’s assets stands at Rs. 100 and it has
10 investors who have bought 10 units each, the total numbers of units issued are 100,
and the value of one unit is Rs. 10.00 (1000/100). If a single investor in fact owns 3 units,
the value of his ownership of the fund will be Rs. 30.00(1000/100*3). Note that the value
of the fund’s investments will keep fluctuating with the market-price movements, causing
the Net Asset Value also to fluctuate. For example, if the value of our fund’s asset
increased from Rs. 1000 to 1200, the value of our investors holding of 3 units will now be
(1200/100*3) Rs. 36. The investment value can go up or down, depending on the markets
value of the fund’s assets.

43
MUTUAL FUNDS IN INDIA

In 1963, the day the concept of Mutual Fund took birth in India. Unit Trust of
India invited investors or rather to those who believed in savings, to park their money in
UTI Mutual Fund.

For 30 years it goaled without a single second player. Though the 1988 year saw
some new mutual fund companies, but UTI remained in a monopoly position. The
performance of mutual funds in India in the initial phase was not even closer to
satisfactory level. People rarely understood, and of course investing was out of question.
But yes, some 24 million shareholders were accustomed with guaranteed high returns by
the beginning of liberalization of the industry in 1992. This good record of UTI became
marketing tool for new entrants. The expectations of investors touched the sky in
profitability factor. However, people were miles away from the preparedness of risks
factor after the liberalization.

The net asset value (NAV) of mutual funds in India declined when stock prices
started falling in the year 1992. Those days, the market regulations did not allow portfolio
shifts into alternative investments. There was rather no choice apart from holding the cash
or to further continue investing in shares. One more thing to be noted, since only closed-
end funds were floated in the market, the investors disinvested by selling at a loss in the
secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock
market scandal, the losses by disinvestments and of course the lack of transparent rules in
the whereabouts rocked confidence among the investors. Partly owing to a relatively
weak stock market performance, mutual funds have not yet recovered, with funds trading
at an average discount of 1020 percent of their net asset value.

The securities and Exchange Board of India (SEBI) came out with comprehensive
regulation in 1993 which defined the structure of Mutual Fund and Asset Management
Companies for the first time.

44
 The supervisory authority adopted a set of measures to create a transparent and
competitive environment in mutual funds. Some of them were like relaxing investment
restrictions into the market, introduction of open-ended funds, and paving the gateway for
mutual funds to launch pension schemes.

The measure was taken to make mutual funds the key instrument for long-term
saving. The more the variety offered, the quantitative will be investors.

Several private sectors Mutual Funds were launched in 1993 and 1994. The share
of the private players has risen rapidly since then. Currently there are 34 Mutual Fund
organizations in India managing 1,02,000crores.

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 until and unless they are fully educated with the dos and don’ts of
mutual funds.

Mutual fund industry has seen a lot of changes in past few years with
multinational companies coming into the country, bringing in their professional expertise
in managing funds worldwide. In the past few months there has been a consolidation
phase going on in the mutual fund industry in India. Now investors have a wide range of
Schemes to choose from depending on their individual profiles.

45
MUTUAL FUND COMPANIES IN INDIA:

The concept of mutual funds in India dates back to the year 1963. The era between
1963 and 1987 marked the existence of only one mutual fund company in India with Rs.
67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of
India (UTI). By the end of the 80s decade, few other mutual fund companies in India took
their position in mutual fund market.

The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank
Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India
Mutual Fund.

The succeeding decade showed a new horizon in Indian mutual fund industry. By the
end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds
started penetrating the fund families. In the same year the first Mutual Fund Regulations
came into existence with re-registering all mutual funds except UTI. The regulations were
further given a revised shape in 1996.

Kothari Pioneer was the first private sector mutual fund company in India which has
now merged with Franklin Templeton. Just after ten years with private sector player
penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund
companies in India.

Major Mutual Fund Companies in India

 ABN AMRO Mutual Fund

 Birla Sun Life Mutual Fund
 Bank of Baroda Mutual Fund
 HDFC Mutual Fund
 HSBC Mutual Fund
 ING Vysya Mutual Fund
 Prudential ICICI Mutual Fund
 State Bank of India Mutual Fund
 Tata Mutual Fund
 Unit Trust of India Mutual Fund
 Reliance Mutual Fund

46
  Standard Chartered Mutual Fund
 Franklin Templeton India Mutual Fund
 Morgan Stanley Mutual Fund India
 Escorts Mutual Fund
 Alliance Capital Mutual Fund
 Benchmark Mutual Fund
 Canara Robeco Mutual Fund
 Chola Mutual Fund
 LIC Mutual Fund
 GIC Mutual Fund

For the first time in the history of Indian mutual fund industry, Unit Trust of India Mutual
Fund has slipped from the first slot. Earlier, in May 2006, the Prudential ICICI Mutual Fund
was ranked at the number one slot in terms of total assets. In the very next month, the UTIMF
had regained its top position as the largest fund house in India.

Now, according to the current pegging order and the data released by Association of
Mutual Funds in India (AMFI), the Reliance Mutual Fund, with a January-end AUM of Rs
39,020crore has become the largest mutual fund in India

On the other hand, UTIMF, with an AUM of Rs 37,535crore, has gone to second position.
The Prudential ICICI MF has slipped to the third position with an AUM of Rs 34,746crore. It
happened for the first time in last one year that a private sector mutual fund house has
reached to the top slot in terms of asset under management (AUM). In the last one year to
January, AUM of the Indian fund industry has risen by 64% to Rs 3.39lakh crore.

According to the data released by Association of Mutual Funds in India (AMFI), the
combined average AUM of the 35 fund houses in the country increased to Rs 5,512.99 billion
in April compared to Rs 4,932.86 billion in March.

Reliance MF maintained its top position as the largest fund house in the country with Rs
74.25 billion jump in AUM to Rs 883.87 billion at April-end. The second-largest fund house
HDFC MF gained Rs 59.24 billion in its AUM at Rs 638.80 billion. ICICI Prudential and
state-run UTI MF added Rs 46.16 billion and Rs 57.35 billion re respectively to their assets
last month. ICICI Prudential`s AUM stood at Rs 560.49 billion at the end of April, while UTI
MF had assets worth Rs 544.89 billion.

47
 RELIANCE MUTUAL FUND Vs UTI MUTUAL FUND

RELIANCE MUTUAL FUND

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882.
The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is
the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was
changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various
schemes under which units are issued to the Public with a view to contribute to the capital
market and to provide investors the opportunities to make investments in diversified
securities.RMF is one of India’s leading Mutual Funds, with Average Assets Under
Management (AAUM) of Rs. 88,388 Cr (AAUM for 30th Apr 09) and an investor base of
over 71.53 Lac.

Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, is one of
the fastest growing mutual funds in the country. RMF offers investors a well-rounded
portfolio of products to meet varying investor requirements and has presence in 118 cities
across the country. Reliance Mutual Fund constantly endeavours to launch innovative
products and customer service initiatives to increase value to investors. “Reliance Mutual
Fund schemes are managed by Reliance Capital Asset Management Limited, a subsidiary of
Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance
paid up capital being held by minority shareholders.”

Sponsor: Reliance Capital Limited.

Trustee: Reliance Capital Trustee Co. Limited.

Investment Manager: Reliance Capital Asset Management Limited.

The Sponsor, the Trustee and the Investment Manager are incorporated under the
Companies Act 1956.

Vision Statement

“To be a globally respected wealth creator with an emphasis on customer care and a
culture of good corporate governance.”

48
 Mission Statement

To create and nurture a world-class, high performance environment aimed at

delighting our customers.

The Main Objectives of the Trust:

 To carry on the activity of a Mutual Fund as may be permitted at law and formulate and
devise various collective Schemes of savings and investments for people in India and abroad
and also ensure liquidity of investments for the Unit holders;
 To deploy Funds thus raised so as to help the Unit holders earn reasonable returns on their
savings and
 To take such steps as may be necessary from time to time to realize the effects without any
limitation.

SCHEMES

A). EQUITY / GROWTH SCHEMES:

The aim of growth funds is to provide capital appreciation over the medium to long-term.
Such schemes normally invest a major part of their corpus in equities. Such funds have
comparatively high risks. Growth schemes are good for investors having a long term outlook
seeking appreciation over a period of time.

Reliance Infrastructure Fund (Open-Ended Equity):

The primary investment objective of the scheme is to generate long term capital
appreciation by investing predominantly in equity and equity related instruments of
companies engaged in infrastructure (Airports, Construction, Telecommunication,
Transportation) and infrastructure related sectors and which are incorporated or have their
area of primary activity, in India and the secondary objective is to generate consistent returns
by investing in debt and money market securities.

Investment Strategy:

The investment focus would be guided by the growth potential and other economic
factors of the country. The Fund aims to maximize long-term total return by investing
inequity and equity-related securities which have their area of primary activity in India.

49
 B). DEBT / INCOME SCHEMES:

The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky compared to
equity schemes. These funds are not affected because of fluctuations in equity markets.
However, opportunities of capital appreciation are also limited in such funds. The NAVs of
such funds are affected because of change in interest rates in the country. If the interest rates
fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long
term investors may not bother about these fluctuations.

1. Reliance Monthly Income Plan :

(An Open Ended Fund, Monthly Income is not assured & is subject to the availability
of distributable surplus) The Primary investment objective of the Scheme is to generate
regular income in order to make regular dividend payments to unit holders and the secondary
objective is growth of capital.
2. Reliance Gilt Securities Fund-Short Term Gilt Plan & Long Term Gilt
Plan :
(Open-ended Government Securities Scheme) The primary objective of the Scheme
is to generate optimal credit risk-free returns by investing in a portfolio of securities issued
and guaranteed by the central Government and State Government.

3. Reliance Income Fund :

(An Open-ended Income Scheme) The primary objective of the scheme is to generate
optimal returns consistent with moderate levels of risk. This income may be complemented
by capital appreciation of the portfolio. Accordingly, investments shall predominantly be
made in Debt & Money market Instruments.

4. Reliance Medium Term Fund :

(An Open End Income Scheme with no assured returns) The primary investment
objective of the Scheme is to generate regular income in order to make regular dividend
payments to unit holders and the secondary objective is growth of capital.

50
5. Reliance Short Term Fund :
(An Open End Income Scheme) The primary investment objective of the scheme is to
generate stable returns for investors with a short investment horizon by investing in Fixed
Income Securities of short term maturity.

Reliance Pharma Fund :

Reliance Pharma Fund is an Open-ended Pharma Sector Scheme. The primary

investment objective of the Scheme is to generate consistent returns by investing in equity
/equity related or fixed income securities of Pharma and other associated companies.

51
 UNIT TRUST OF INDIA MUTUAL FUND
Unit Trust of India
UTI was created by the UTI Act passed by the Parliament in 1963. For more than two
decades it remained the sole vehicle for investment in the capital market by the Indian
citizens. In mid- 1980s public sector banks were allowed to open mutual funds. The real
vibrancy and competition in the MF industry came with the setting up of the Regulator SEBI
and its laying down the MF Regulations in 1993.UTI maintained its pre-eminent place till
2001, when a massive decline in the market indices and negative investor sentiments after
Ketan Parekh scam created doubts about the capacity of UTI to meet its obligations to the
investors.
In order to distance Government from running a mutual fund the ownership was
transferred to four institutions; namely SBI, LIC, BOB and PNB, each owning 25%. UTI lost
its market dominance rapidly and by end of 2005, when the new share-holders actually paid
the consideration money to Government its market share had come down to close to 10%.A
new board was constituted and a new management inducted. Systematic study of its problems
role and functions was carried out with the help of a reputed international consultant. Once
again UTI has emerged as a serious player in the industry. Some of the funds have won
famous awards, including the Best Infra Fund globally from Lipper. UTI has been able to
benchmark its employee compensation to the best in the market. Besides running domestic
MF Schemes UTI AMC is also a registered portfolio manager under the SEBI (Portfolio
Managers) Regulations.

This company runs two successful funds with large international investors being
active participants. UTI has also launched a Private Equity Infrastructure Fund along with
HSH Nord Bank of Germany and Shinsei Bank of Japan.

Vision:

To be the most Preferred Mutual Fund.

52
Mission:

• The most trusted brand, admired by all stakeholders.

• The largest and most efficient money manager with global presence

• The best in class customer service provider

• The most preferred employer

• The most innovative and best wealth creator

• A socially responsible organisation known for best corporate governance

Assets under Management: UTI Asset Management Co. Ltd

Sponsor:

i. State Bank of India

ii. Bank of Baroda
iii. Punjab National Bank
iv. Life Insurance Corporation of India

SCHEMES

UTI Transportation And Logistics Fund (Auto Sector Fund) (Open Ended
Fund):

Investment Objective is “capital appreciation” through investments in stocks of the

companies engaged in the transportation and logistics sector. At least 90% of the funds will
be invested in equity and equity related instruments. At least 80% of the funds will be
invested in equity and equity related instruments of the companies principally engaged in
providing transportation services, companies principally engaged in the design, manufacture,
distribution, or sale of transportation equipment and companies in the logistics sector.
Upto10% of the funds will be invested in cash/money market instruments.

53
UTI Banking Sector Fund (Open Ended Fund):

An open-ended equity fund with the objective to provide capital appreciation through
investments in the stocks of the companies/institutions engaged in the banking and financial
services activities.

UTI Infrastructure Fund (Open Ended Fund):

An open-ended equity fund with the objective to provide Capital appreciation

through investing in the stocks of the companies engaged in the sectors like Metals, Building
materials, oil and gas, power, chemicals, engineering etc. The fund will invest in the stocks of
the companies which form part of Infrastructure Industries.

UTI Equity Tax Savings Plan (Open Ended Fund):

An open-ended equity fund investing a minimum of 80% in equity and equity related
instruments. It aims at enabling members to avail tax rebate under Section 80C of the IT Act
and provide them with the benefits of growth.

UTI Growth Sector Fund – Pharma (Open Ended Fund):

An open-ended fund which exclusively invests in the equities of the Pharma &
Healthcare sector companies. This fund is one of the growth sector funds aiming to invest in
companies engaged in business of manufacturing and marketing of bulk drug, formulations
and healthcare products and services.

OPEN ENDED FUNDS:

UTI Master Plus Unit Scheme (Open Ended Fund):

An open-ended equity fund with an objective of long term capital appreciation

through investments in equities and equity related instruments, convertible debentures,
derivatives in India and also in overseas markets.

UTI Balanced Fund (Open Ended Fund):

An open-ended balanced fund investing between 40% to 75% in equity/equity related

securities and the balance in debt (fixed income securities) with a view to generate regular
income together with capital appreciation

54
UTI Retirement Benefit Pension Fund (Open Ended Fund):

The objective of the scheme is to provide pension to investors particularly self-

employed persons after they attain the age of 58 years, in the form of periodical cash flow up
to the extent of repurchase value of their holding through a systematic withdrawal plan.

UTI Unit Link Insurance Plan (Open Ended Fund):

To provide return through growth in the NAV or through dividend distribution and
reinvestment thereof.

LIQUID FUND (DEBT FUND)

UTI Liquid Cash Plan (Open Ended Fund):

The scheme seeks to generate steady & reasonable income with low risk & high level
of liquidity from a portfolio of money market securities & high quality debt.

UTI Money Market Fund (Open Ended Fund):

An open-ended pure debt liquid plan seeking to provide highest possible current
income by investing in a diversified portfolio of short-term money market securities.

55
 RELIANCE MUTUAL UTI MUTUAL FUND
FUND
When Started? Established in 1995, Established in 1964.
Currently, number one First mutual fund company in
company in India. India
How they came into Registered with SEBI as trust By the UTI Act passed by the
business under Indian Trusts Act, Parliament in 1963.
1882
Minimum investment. Rs. 500 Rs. 500
Investment. Equity Equity
Bank: 8-15% Financial Service: 16-22%
Software: 8-19% Energy: 12-18%
Petroleum Products: 4-8% Consumer goods: 08-14%
Pharmaceuticals: 6-10% invest in 7-15 sectors which
invest in 12-20 sectors include:
which include: IT, Telecom, Automobile,
Auto , Auto Ancillaries, Cement Products,
Finance, Industrial Capital Derivatives, Textile, Metals
Goods, Telecom-Services, etc
Power, Construction Project,
Hotels, Retailing, Media &
Entertainment,
Transportation etc
Main Funds. Reliance Diversified Fund, UTI Dividend yield Fund,
Reliance Equity Opportunity UTI Opportunity Fund,
Fund, Reliance Regular
Saving Funds
Type of fund offered Equity Fund, Debt Fund, Equity Fund, Index Fund,
Sector Specific Fund and Asset Fund, Balanced Fund,
Gold Exchange Traded Fund. Debt Fund (Income, Liquid)
Numbers of schemes 106 107
offered
Distribution Online and internet based Tie-up with Post offices
distribution. branches.
Reliance outlets and UTI outlets and branches.
branches.
Is any other venture? Life Insurance UTI Bank
General Insurance Pan card
Broking & Distribution Bank Recruitment
Consumer Finance ULIP
Private Equity
Assets Reconstruction.

56
SELECTION PARAMETERS FOR MUTUAL FUND

Your objective:

The first point to note before investing in a fund is to find out whether your
objective matches with the scheme. It is necessary, as any conflict would directly affect
your prospective returns. Similarly, you should pick schemes that meet your specific
needs. Examples: pension plans, children’s plans, sector-specific schemes, etc.

Your risk capacity and capability:

This dictates the choice of schemes. Those with no risk tolerance should go for
debt schemes, as they are relatively safer. Aggressive investors can go for equity
investments. Investors that are even more aggressive can try schemes that invest in
specific industry or sectors.

Fund Manager’s and scheme track record:

Since you are giving your hard earned money to someone to manage it, it is
imperative that he manages it well. It is also essential that the fund house you choose has
excellent track record. It also should be professional and maintain high transparency in
operations. Look at the performance of the scheme against relevant market benchmarks
and its competitors. Look at the performance of a longer period, as it will give you how
the scheme fared in different market conditions.

Cost factor:

Though the AMC fee is regulated, you should look at the expense ratio of the fund
before investing. This is because the money is deducted from your investments. A higher
entry load or exit load also will eat into your returns. A higher expense ratio can be
justified only by superlative returns. It is very crucial in a debt fund, as it will devour a
few percentages from your modest returns.

57
 Also, Morningstar rates mutual funds. Each year end, many financial publications
list the year’s best performing mutual funds. Naturally, very eager investors will rush out
to purchase shares of last year's top performers. That's a big mistake. Remember,
changing market conditions make it rare that last year's top performer repeats that ranking
for the current year. Mutual fund investors would be well advised to consider the fund
prospectus, the fund manager, and the current market conditions. Never rely on last year's
top performers.

Types of Returns on Mutual Fund:

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

 Income is earned from dividends on stocks and interest on bonds. A fund pays out
nearly all income it receives over the year to fund owners in the form of a
distribution.
 If the fund sells securities that have increased in price, the fund has a capital gain.
Most funds also pass on these gains to investors in a distribution.

If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit. Funds will
also usually give you a choice either to receive a check for distributions or to reinvest the
earnings and get more shares.

58
Change in Funds for AMC from September 2017- December 2017

Mutual Funds Sept 2017 Dec 2017 Change Change

%

ICICI Prudential Mutual Fund 279,066 293,338 14,271 5.11

HDFC Mutual Fund 269,781 289,168 19,387 7.19

Reliance Mutual Fund 231,425 243,594 12,169 5.26

Aditya Birla Sun Life Mutual Fund 224,650 241,107 16,457 7.33

SBI Mutual Fund 188,030 205,273 17,243 9.17

UTI Mutual Fund 150,669 153,364 2,695 1.79

Kotak Mahindra Mutual Fund 110,630 119,800 9,170 8.29

Franklin Templeton Mutual Fund 94,747 99,804 5,057 5.34

DSP BlackRock Mutual Fund 77,819 86,255 8,435 10.84

Axis Mutual Fund 69,088 73,372 4,284 6.20

IDFC Mutual Fund 66,361 71,388 5,027 7.58

L&T Mutual Fund 52,749 60,314 7,564 14.34

Tata Mutual Fund 44,897 48,907 4,009 8.93

Sundaram Mutual Fund 33,150 36,267 3,117 9.40

Invesco Mutual Fund 25,167 24,122 -1,045 -4.15

59
DHFL Pramerica Mutual Fund 25,191 23,493 -1,698 -6.74

LIC Mutual Fund 22,871 22,114 -756 -3.31

JM Financial Mutual Fund 13,952 16,633 2,681 19.22

Motilal Oswal Mutual Fund 12,967 15,762 2,795 21.55

Mirae Asset Mutual Fund 11,044 13,467 2,423 21.94

Canara Robeco Mutual Fund 11,845 12,256 411 3.47

HSBC Mutual Fund 10,179 11,252 1,073 10.54

Indiabulls Mutual Fund 10,577 11,100 523 4.94

Baroda Pioneer Mutual Fund 11,138 11,085 -54 -0.48

IDBI Mutual Fund 9,531 10,653 1,123 11.78

Edelweiss Mutual Fund 8,129 10,000 1,871 23.01

BNP Paribas Mutual Fund 6,680 7,499 819 12.26

PRINCIPAL Mutual Fund 5,826 6,625 799 13.71

BOI AXA Mutual Fund 4,325 5,255 930 21.51

Union Mutual Fund 3,811 3,938 127 3.33

Mahindra Mutual Fund 2,241 2,821 579 25.84

Quantum Mutual Fund 1,124 1,182 58 5.16

60
Essel Mutual Fund 980 1,147 167 17.03

PPFAS Mutual Fund 821 925 104 12.64

IIFL Mutual Fund 754 731 -23 -3.04

Taurus Mutual Fund 575 597 22 3.85

Escorts Mutual Fund 247 245 -2 -0.85

Sahara Mutual Fund 66 67 1 1.86

Shriram Mutual Fund 43 43 0 0.52

Total 2,093,145 2,234,961 141,816 6.35

61
MUTUAL FUNDS VS. OTHER INVESTMENTS

From investors’ viewpoint mutual funds have several advantages such as:

 Professional management and research to select quality securities.

 Spreading risk over a larger quantity of stock whereas the investor has limited to buy
only a hand full of stocks. The investor is not putting all his eggs in one basket.
 Ability to add funds at set amounts and smaller quantities such as $100 per month
 Ability to take advantage of the stock market which has generally outperformed other
investment in the long run.
 Fund manager are able to buy securities in large quantities thus reducing brokerage
fees.

However there are some disadvantages with mutual funds such as:

 The investor must rely on the integrity of the professional fund manager.
 Fund management fees may be unreasonable for the services rendered.
 The fund manager may not pass transaction savings to the investor.
 The fund manager is not liable for poor judgment when the investor's fund loses
value.
 There may be too many transactions in the fund resulting in higher fee/cost to the
investor - This is sometimes call "Churn and Earn".
 Prospectus and Annual report are hard to understand.
 Investor may feel a lost of control of his investment dollars.

There may be restrictions on when and how an investor sells/redeems his mutual fund
shares.

62
Company Fixed Deposits versus Mutual Funds

Fixed deposits are unsecured borrowings by the company accepting the deposit.
Credit rating of the fixed deposit program is an indication of the inherent default risk in the
investment.

The moneys of investors in a mutual fund scheme are invested by the AMC in
specific investments under that scheme. These investments are held and managed in-trust for
the benefit of scheme’s investors. On the other hand, there is no such direct correlation
between a company’s fixed deposit mobilisation, and the avenues where these resources are
deployed.

A corollary of such linkage between mobilisation and investment is that the gains and
losses from the mutual fund scheme entirely flow through to the investors. Therefore, there
can be no certainty of yield, unless a named guarantor assures a return or, to a lesser extent, if
the investment is in a serial gilt scheme. On the other hand, the return under a fixed deposit is
certain, subject only to the default risk of the borrower.

Both fixed deposits and mutual funds offer liquidity, but subject to some differences:

The provider of liquidity in the case of fixed deposits is the borrowing company. In
mutual funds, the liquidity provider is the scheme itself (for open-end schemes) or the market
(in the case of closed-end schemes).

The basic value at which fixed deposits are encashed is not subject to a market risk.
However, the value at which units of a scheme are redeemed depends on the market. If
securities have gained in value during the period, then the investor can even earn a return that
is higher than what he anticipated when he invested. But he could also end up with a loss.

Early encashment of fixed deposits is always subject to a penalty charged by the

company that accepted the fixed deposit. Mutual fund schemes also have the option of
charging a penalty on “early” redemption of units (through by way of an ‘exit load’,) If the
NAV has appreciated adequately, then even after the exit load, the investor could earn a
capital gain on his investment.

63
Bonds and Debentures versus Mutual Funds

As in the case of fixed deposits, credit rating of the bond / debenture is an indication
of the inherent default risk in the investment. However, unlike FD, bonds and debentures are
transferable securities.

While an investor may have an early encashment option from the issuer (for instance
through a “put” option), generally liquidity is through a listing in the market.

Implications of this are:

 If the security does not get traded in the market, then the liquidity remains on paper.
In this respect, an open-end scheme offering continuous sale / re-purchase option is
superior.
 The value that the investor would realise in an early exit is subject to market risk. The
investor could have a capital gain or a capital loss. This aspect is similar to a MF
scheme.

It is possible for a professional investor to earn attractive returns by directly investing

in the debt market, and actively managing the positions. Given the market realities in India, it
is difficult for most investors to actively manage their debt portfolio. Further, at times, it is
difficult to execute trades in the debt market even when the transaction size is as high as Rs
1crore. In this respect, investment in a debt scheme would be beneficial.

Debt securities could be backed by a hypothecation or mortgage of identified fixed

and / or current assets (secured bonds / debentures). In such a case, if there is a default, the
identified assets become available for meeting redemption requirements. An unsecured bond /
debenture is for all practical purposes like a fixed deposit, as far as access to assets is
concerned.

The investments of a mutual fund scheme are held by a custodian for the benefit of
investors in the scheme. Thus, the securities that relate to a scheme are ring-fenced for the
benefit of its investors.

64
Equity versus Mutual Funds

Investment in both equity and mutual funds are subject to market risk.

An investor holding an equity security that is not traded in the market place has a
problem in realising value from it. But investment in an open-end mutual fund eliminates this
direct risk of not being able to sell the investment in the market. An indirect risk remains,
because the scheme has to realise its investments to pay investors. The AMC is however in a
better position to handle the situation

Another benefit of equity mutual fund schemes is that they give investors the benefit
of portfolio diversification through a small investment. For instance, an investor can take an
exposure to the index by investing a mere Rs 5,000 in an index fund.

Advantages Of Mutual Funds Over Stocks?

· A mutual fund offers a great deal of diversification starting with the very first dollar
invested, because a mutual fund may own tens or hundreds of different securities. This
diversification helps reduce the risk of loss because even if any one holding tanks, the overall
value doesn't drop by much. If you're buying individual stocks, you can't get much diversity
unless you have $10K or so.

Small sums of money get you much further in mutual funds than in stocks. First, you can set
up an automatic investment plan with many fund companies that lets you put in as little as
$50 per month. Second, the commissions for stock purchases will be higher than the cost of
buying no-load fund (Of course, the fund's various expenses like commissions are already
taken out of the NAV). Smaller sized purchases of stocks will have relatively high
commissions on a percentage basis, although with the $10 trade becoming common, this is a
bit less of a concern than it once was.

· You can exit a fund without getting caught on the bid/ask spread.

· Funds provide a cheap and easy method for reinvesting dividends.

· Last but most certainly not least, when you buy a fund you're in essence hiring a
professional to manage your money for you. That professional is (presumably) monitoring
the economy and the markets to adjust the fund's holdings appropriately.

65
Advantages of Stock over Mutual Funds?

 The opposite of the diversification issue: If you own just one stock and it doubles, you
are up 100%. If a mutual fund owns 50 stocks and one doubles, it is up 2%. On the
other hand, if you own just one stock and it drops in half, you are down 50% but the
mutual fund is down 1%.Cuts both ways. If you hold your stocks several years, you
aren't nicked a 1% or so management fee every year (although some brokerage firms
charge if there aren't enough trades).
 You can take your profits when you want to and won't inadvertently buy a tax
liability. (This refers to the common practice among funds of distributing capital gains
around November or December of each year. See the article elsewhere in this FAQ for
more details.)
 You can do a covered write option strategy. (See the article on options on stocks for
more details.)
 You can structure your portfolio differently from any existing mutual fund portfolio.
(Although with the current universe of funds I'm not certain what could possibly be
missing out there!)
 You can buy smaller cap stocks which aren't suitable for mutual funds to invest in.
 You have a potential profit opportunity by shorting stocks. (You cannot, in general,
short mutual funds.)
 The argument is offered that the funds have a "herd" mentality and they all end up
owning the same stocks. You may be able to pick stocks better.

Life Insurance versus Mutual Fund

Life insurance is a hedge against risk – and not really an investment option. So, it
would be wrong to compare life insurance against any other financial product.

Occasionally on account of market inefficiencies or mis-pricing of products in India,

life insurance products have offered a return that is higher than a comparable “safe” fixed
return security – thus, you are effectively paid for getting insured! Such opportunities are not
sustainable in the long run.

66
 Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive expansion
of the foreign owned mutual fund companies and the decline of the companies floated by
nationalized banks and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties
and got off to a good start due to the stock market boom prevailing then. These banks did
not really understand the mutual fund business and they just viewed it as another kind of
banking activity.

Few hired specialized staff and generally chose to transfer staff from the parent
organizations. The performance of most of the schemes floated by these funds was not
good. Some schemes had offered guaranteed returns and their parent organizations had to
bail out these AMCs by paying large amounts of money as the difference between the
guaranteed and actual returns.

The service levels were also very bad. Most of these AMCs have not been able to
retain staff, float new schemes etc. and it is doubtful whether, barring a few exceptions,
they have serious plans of continuing the activity in a major way. The experience of some
of the AMCs floated by private sector Indian companies was also very similar. They
quickly realized that the AMC business is a business, which makes money in the long
term and requires deep-pocketed support in the intermediate years. Some have sold out to
foreign owned companies, some have merged with others and there is general
restructuring going on.

The foreign owned companies have deep pockets and have come in here with the
expectation of a long haul. They can be credited with introducing many new practices
such as new product innovation, sharp improvement in service standards and disclosure,
usage of technology, broker education and support etc. In fact, they have forced the
industry to upgrade itself and service levels of organizations like UTI have improved
dramatically in the last few years in response to the competition provided by these.

67
 Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for
the month of February 2018 stood at ₹23.17lakh crore. Assets Under Management
(AUM) as on February 28, 2018 stood at ₹22.20lakh crore.

The AUM of the Indian MF Industry has grown from ₹ 5.05 trillion as on 31st March
2008 to ₹22.20 trillion as on 28th February 2018, more than fourfold increase in a span of
about 10 years!!

The MF Industry’s AUM has grown from ₹7.01 trillion as on 31st March, 2013 to
₹22.20trillion as on 28th February 2018, more than threefold increase in a span of about
5years!!

The Industry’s AUM had crossed the milestone of ₹10 Trillion (₹10Lakh Crore) for
the first time in May 2014 and in a short span of less than four years, the AUM size has
increased more than two folds and stood at ₹22.20Trillion (₹ 22.20Lakh Crore) as on 28th
February 2018.

The total number of accounts (or folios as per mutual fund parlance) as on February
28, 2018 stood at 6.99crore (69.9 million), while the number of folios under Equity, ELSS
and Balanced schemes, wherein the maximum investment is from retail segment stood at
5.80crore (58 million).

68
Survey

Survey Report of almost 65 candidates on the question regarding the choice of

investment and investor prefers to invest his/her money for development and growth of
their money for future aspect of their life. This was done to understand the mentality of
the people towards different asset class in available in the market and the use of such
asset class for their investment purpose.

The results regarding the survey are mentioned below with graphical
representation of the response found and studied about it.

69
Interpretation

This is a survey collected with around 65 people which depicts the various
alternative channels available for investment to the public that is real estate, stock market,
fixed deposit, savings account, PPF, post office and mutual funds.

As per the data collected this pie chart interprets that a large number of people
around 33% tend to invest in stock market rather than other investment alternatives the
next most used investment medium by the public is savings account I guess due to the
benefits provided by stock market there is a hike in the choice of customers whereas in
savings account there is no risk but the benefits are comparatively less then as per the
survey collected mutual funds and fixed deposits are marginally on the same line and the
least chosen investment alternative by the people is PPF that is public provident fund.

More than 50% of the people invest their first investment in Stock markets or
Savings bank A/c which shows the intensity of its exposure compared to other things in
the market.

The change that can be seen is people are slowly moving towards mutual funds as
their investment option and now have abolished fixed deposits as primary source of
investment compared to the past belief in India.

70
 This pie chart depicts that 60.3% of the people don't tend to invest their money in
mutual funds this may be because of the high risk associated with mutual funds and also
there is no guarantee about the stability of money. If we consider foreign market there is
more investment in mutual funds but since in the Indian financial market there is less
knowledge and awareness among the people about the benefits of mutual funds because
of which they tend to depend on mutual fund advisors and may not seem to have proper
knowledge of where to invest and at what time to invest. So according to me this less
interest of the society in mutual funds is partially because of lack of knowledge about
mutual funds.

71
 This is a survey conducted with around 65 people and with this i got to know
about different opinions of the society on mutual funds and stock market still 7% of the
citizens think that mutual funds and stock market are one and the same but there are lot of
differences mutual funds is just a part of stock markets and stock market operations is
generally a wide concept compared to mutual funds.

So it is not same but is a part of stock markets.

The awareness in the mind of the people still it is not considered as a source for
investing and generating wealth questions the importance and existence of the security
begin safe or not in the minds of the investors.

72
This pie chart depicts the changes suggested by the people during my survey for the
mutual fund sector suggestions given are

● That there is lesser return in long term and also there is no awareness among the
people about different types of mutual funds.
● Some suggested strong need of awareness and accessibility
● Then few people were of the opinion that mutual fund sector should be more
dynamic in its operations in India.
● Mutual fund advisors should charge lower cost
● Fee structure and returns structure in mutual funds should be cleared.
So after understanding all the opinions of the people i conclude that most of the people
have one common important suggestion which is that mutual fund sector should have
more sessions to make awareness among the people about different types of mutual
funds,its advantages etc, its structure etc.

73
MF JARGON

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by the number
of units outstanding on the Valuation Date.

Sale Price

Sale 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

It 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

It is a charge collected by a scheme when it sells the units. Also called as ‘Front-
end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’ Load

It is a charge collected by a scheme when it buys back the units from the unit
holders.

74
Conclusion

Mutual Funds now represent perhaps most appropriate investment opportunity for
most investors. As financial markets become more sophisticated and complex, investors
need a financial intermediary who provides the required knowledge and professional
expertise on successful investing. As the investor always try to maximize the returns and
minimize the risk.

Mutual fund satisfies these requirements by providing attractive returns with

affordable risks. The fund industry has already overtaken the banking industry, more
funds being under mutual fund management than deposited with banks. With the
emergence of tough competition in this sector mutual funds are launching a variety of
schemes which caters to the requirement of the particular class of investors. Risk takers
for getting capital appreciation should invest in growth, equity schemes. Investors who
are in need of regular income should invest in income plans.

The stock market has been rising for over three years now. This in turn has not
only protected the money invested in funds but has also to helped grow these investments.

This has also instilled greater confidence among fund investors who are investing
more into the market through the MF route than ever before.

Reliance India mutual funds provide major benefits to a common man who wants to make
his life better than previous.

India's largest mutual fund, UTI, still controls nearly 80 per cent of the market.
Also, the mutual fund industry as a whole gets less than 2 per cent of household savings
against the 46 per cent that go into bank deposits. Some fund managers say this only
indicates the sector's potential.

"If mutual funds succeed in chipping away at bank deposits, even a triple digit
growth is possible over the next few years.

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Reference
Webliography:

www.amfiindia.com

www.moneycontrol.com

www.wikipedia.org

www.getsmartaboutmoney.ca

www.investopedia.com

www.valueresearchonline.com

www.allbankingsolutions.com

Bibliography:

 FINANCIAL MARKET AND SERVICES

-Gordon and Natarajan

 AMFI COURSE BOOK

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