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SUMMER TRAINING REPORT

ON 
 
 

IN 

MUTUAL FUNDS

Submitted to

                                       

PUNJAB TECHNICAL UNIVERSITY

JALANDHAR 
 

IN PARTIAL FULFILLMENT OF THE DEGREE OF

MASTERS OF BUSINESS ADMINISTRATION (M.B.A) 

Submitted by      Project Guide

  Kapil Verma   

  Unv. Roll No.   

  MBA

(SESSION  2006-2008)
CT INSTITUTE OF MANAGEMENT & IT
SHAHPUR

 
 ACKNOWLEDGEMENT 
 
 

I express a deep sense of gratitude and respect to my worthy guide and

supervisor for his immense help, valuable suggestions, constant encouragement
and support without which the research work would not have been completed. 

I am also grateful to the faculty guide Mr.Ramandeep Deol Lovely Institute of

Management (phagwara) for his wholehearted cooperation in providing the
required support and inspiration. 

My sincere thanks to our Relationship Manager (RM) Mr.Raghav

Tandon for their help and support in providing me the opportunity to take up
this research project. 
 
 
 

                                      KAPIRL VERMA       

 
 

 
 CONTENTS 
Chapter No. Particulars Page No.
1    
2.    
3. Introduction to Bank  
4. Review of Literature  
5. Research Methodology  
6. Data Analysis & Interpretation  
7. Suggestions & Recommendations  
8. Conclusions  
9. Limitations of Study  
  Bibliography  
  Annexure  

 
 Abstract 
 

The leverage of this project lies in understanding the customer’s knowledge, awareness
and perception of Mutual Funds (MF) and Equity market as an investment tool. It will
help, know and understand the target customer better and how to lure them to invest
more. This would be done, by adopting a research-based approach. It deals with
customer’s awareness and involves direct interviews with questionnaire method for
market research. This study will help to report the scope of such financial instruments as
a product of sale. The project gives an opportunity to understand the changing and varied
customer needs and the strategies adopted by various banks to fulfill them. It also enables
the use of various marketing research instruments such as questionnaires and
methodologies like prototyping and articulate interviewing. The analysis of the collected
data would include use of tools like cluster analysis and multidimensional scaling to
group the customers into different groups and study accordingly. The project also
involves making recommendations, after a comprehensive SWOT analysis that would
help Reliance  mutual funds to provide better service to its existing customers and
improve its reach to potential customers.  Overall the project would be a win-win
situation for both, the company (Reliance mutual funds) as well as for me. 
 

 
 
 
 WHY MUTUAL FUNDS 

Life makes many demands of us. There’s so much to indulge in and deal with. At work or
at home. With family, friends or self. Woven into these threads is the inescapable truth
that money is a means to many an end. A house in the suburbs, good education for the
kids, a set of four wheels to zip around, an early retirement… The ends might differ, but
the means at least one of them-to reach them remain the same: money. Earned wisely,
saved regularly, invested smartly.

More often than not, it’s the second and third steps where control eludes us and
even our best laid plans start to break down. Many reasons are cited for this. I
don’t have the discipline. I don’t understand investing, especially the stock
market, I don’t have the time. I don’t really care. Well, you should, even if just
a little. After all, it’s your money and your life, and it helps  to have your
savings working for you. You don’t need to get neck-deep into your personal
finances, but the least you can do, and should do, is get a fix on the big picture,
explore and understand what you want from your investments, and leave the
rest to the money managers: mutual funds. These investment vehicles don’t
demand your have a deep understanding of financial matters, they don’t even
demand oodles of your time.

Mutual funds are investment products that operate on the principle of ‘strength
in numbers’. They collect money from a large group of investors, pool it
together, and invest it in various securities, in line with their objective. They are
an alternative to investing directly. A more convenient alternative, yet no less
rewarding. Take stocks. Treading into the market by yourself would mean
knowing, at the very least, how to analyze and track companies, the way s of
the market, and the intermediaries who will help your buy and sell shares. A
mutual fund that invests in stocks relieves you of all such hassles, while giving
you’re the same investment exposure. All in all, a handy investment option for
individuals handicapped by a lack of investing acumen or time, or generally
disinclined to take charge of their personal finances.

Mutual funds are not magic investment vehicles that do it all. You’ll have to
come to terms with the fact that they assure neither returns not the value of
your original investment. You’ll have to accept the reality that even they, who
are supposedly experts in investment matters, can go wrong. These are inherent
risks, but these can be man aged. Mutual funds offer several features that make
them a powerful and convenient wealth creation vehicle worthy of your
consideration.
Small investments:- Mutual funds target the small investor. Most schemes
keep their minimum investment at Rs. 1,000-5,000. For an affordable amount
such as this, you get lots more through a mutual fund than what your would
ever manage on your own. On 22 April 2004, for instance, one share of infosys
alone cost Rs 5,400, one share of wipro Rs 1,600. If you wanted to ‘buy the
market that day, by purchasing one share each of the 30 sensex stocks, it would
have cost you around Rs 24,200. By comparison, an index fund that tracks the
sensex gives you ownership of the same investment pie for as little as Rs 1,000

Diversified Portfolio:- Conventional wisdom advises you to spread your risk

while investing. This means diversifying across asset classes investing part of
your portfolio in equities, part in debt, and so on. This also means diversifying
with in asset classes for instance, instead of holding just one stock, holding five
to 10 stocks. That way, even if a part of your portfolio were to go through a
downturn, gains from others can check the erosion in its value.

Say, you have Rs 1 lakh, and you invest it all in equities. If the market, for
some reason, tumbles 50 per cent, assuming a direct correlation, the value of
your portfolio would halve. Now, had you, say, split your portfolio equally
between equity and debt, a 50 per cent drop in the market would value your
portfolio at Rs75,000, not Rs 50,000. By diversifying into debt, you managed
to provide some cushion to your portfolio.

For small investors, it is far easier to diversify through mutual funds than by
way of direct investing. Adequate diversification requires a largish outlay,
something that may not be possible for many of us on our own. But under a
mutual fund umbrella, many small amounts add up to a significant sum, and
deliver the same effect. Typically, an equity fund bolds 25-30stocks, a debt
fund holds 25-30 debt instruments. For just Rs 1,000-5,000, you can get a piece
of each portfolio. The affordable minimum investment allows small investors
to put their savings in various kinds of schemes, and construct portfolios that
suit their needs and are adequately diversified.

Professional Management:- When you invest through mutual funds, you cede
all control to your fund manager. The fund manger, by virtue of understanding
investments and being in the market, is well-placed to assess various options,
and invest accordingly for you. In reality, though, even fund managers get it
wrong, there have even been instances of inept money management. Having
said that, such is the nature of the business, it’s very much in the interest of
fund managers and managers and mutual funds to deliver.
Fund mangers earn performance-based incentives. The higher the returns they
earn for you, the bigger their annual bonus. For a mutual fund too, your trust
and savings are important for its prosperity. Its profits are directly related to the
amount of money investors give it to manage. In this scheme of things, a
mutual fund can ill-afford to antagonize investors, who can vote with their feet
and switch to a rival fund house anytime they want. The competition between
fund houses is stiff-as of March 2004. there were 31 vying for your custom-and
it keeps them on their toes. Plus, there are various checks and balances in the
system to ensure that fund managers stay faithful to their mandate, schemes
have to continuously disclose where they invest your money, which reduces the
possibility of unscrupulous practices.

Liquidity:- When investing by yourself, selling can sometimes be a painful

proposition. Debt instruments like PPF (public provident fund) and tax-free
bonds don’t allow premature withdrawals. Some others like fixed deposits do,
but they penalize you for it, by docking a few percentage points from your
returns for that year. Exit issues cloud equities too. Of the 6,000-odd listed
stocks, only around 1,500 see regular trading that facilitates easy entry and exit.

No such penalties, delays or uncertainty with mutual funds. You can sell your 
investment ever you want. No questions asked. Most funds mail your
redemption proceeds, based on your investment’s market value (in mutual fund
parlance, NAV, or net asset value) within three to five working days of your
putting in your request.

Tax breaks:- Mutual funds offer several tax sweeteners, which add pop to your
take-home returns, especially if you are in the highest income tax bracket. To
give an example, in March 2004, dividends distributed by debt funds were tax-
free in the hands of the investor, though the schemes paid a 12.8 per cent tax on
it, which they passed on to you. Now, if you were in the 30 per cent tax
bracket, consider the tax implications of the two possible debt investing
scenarios: investing directly or through a debt fund.

If you invested directly in a debt instrument, you would earn interest income.
Under section 80L, interest income up to Rs 12,000 in a financial year is
exempt from tax. All interest income over Rs 12.000 is taxed at the personal
income tax rate-in our example, 30 per cent. So of every Rs 100 you earn by
way of interest income over Rs 12.000, Ra 30 will go to the government; you
will get just Rs 70. But had you invested in a debt fund and opted to received
your gains in the form of periodic dividends, your tax outgo would be a
maximum of 12.8 per cent, or a take home of Rs 88.6. so, purely on tax
considerations, there’s a case here for investing in debt funds than directly after
exhausting the annual interest deduction limit of Rs 12,000. Tax laws open up
many such smart saving possibilities with mutual funds.

Investment realities:- Mutual funds are staking their claim as the investment
option for the masses, not just by design, but also by default. The small investor
is being subtly pushed out of the stock market, which has become extremely
volatile and is dominated by institutional players. A similar thing is happening
in the debt market. Rather than come to the public, companies prefer to raise
debt from big-money players like banks and mutual funds, as it means lower
interest rates and mutual funds, as it means lower interest rates and lower issue
costs. Meanwhile, returns from debt instruments are down to mid single-digits,
levels where they barely cover inflation.

The implicit message: settle for low assured returns, or else aim for higher, but
non-assured, returns by going to the market through intermediaries such as
mutual funds. Sooner or later, though, all forms of assured returns will die. You
can exploit them while they are around, but eventually, mutual funds could well
turn out to be the only game in town.

The History of Mutual Funds

Although the Massachusetts Investors Trust, formed on 21 March 1924 by

three Boston financial executives, is recognized as the first mutual funs, the
idea of pooling money for investment purposes is not a twentieth century
phenomenon. By various historical accounts, investment entities that resembled
what we now know of as mutual funds had been around in Europe since the
eighteenth century.

Origins

In 1774, a Dutch merchant invited subscriptions from investors to set up and investment
trust by the name of  Eendragt Maakt Magt (translated into English. It means ‘Unity
Creates Strength’) with the objective of providing diversification at low cost to small
investors. Its success caught on, and more investment trusts were launched, with verbose
and quirky names that, when translated, cad. ‘Profitable and Prudent’ or ‘Small Matters
low by consent. The Foreign and colonial Government Trust, formed in London in 1868,
promised “the investor of modest means the same advantages as the large capitalist…. By
spreading the investment over a number of stocks”.  .   The birth of the Massachusetts
Investors Trust in the U.S in 1924 started a chain of events that would bring mutual funds
to American homes for good. There was an initial euphoria among American investors
over a new investment vehicle but much of this died with the on set of the Great
Depression in 1929 .it took a series of confidence –building measures –the birth of a
powerful market regulator, laying down of rules for all industry participants, enactment
of rules for all industry particiopants,enactment of legislation-for the mutual fund
juggernaut to start rolling again.And once it did ,it never stopped.

More and more financial entities got into the act The 80 schemes and 500 million in
assets the US mutual fund industry had in 1940 multiplied to 160 schemes and 17 billon
assets by 1960 New types of schemes were launched, new services were introduced. The
industry got another visible push in the 1970s, on  all fronts, and really captured the fancy
of the small investor. Mutual funds were allowed access to retirement funds, schemes
offered new investment exposures and higher returns than banks,services like cheque-
writing debuted by the end of the 1970s, 524 schemes were managing 95 billion in the
US

The Indian Timeline

1963 UTI is india’s    first mutual fund

1964 UTI  launches US-64

1971 UTI’s ULIP (Unit-linked insurance plan is second scheme to be launched

  1986 UTI Master share, India ‘s first turn mutual fund scheme, lunched

1987 P SU  banks and insurers allowed to float mutual funds, State Bank of India(SB)
first off the blocks

1992 The Harshad Mehta-fuelled bull market arouses middle-class interest in shares and
mutual funds

1993 private sector and foreign players allowed Kothari Pioneer first private fund house
to start operations: Sebi set up to regulate industry

1994 Morgan Stanley is the first foreign player

1996 sebi’s mutual fund rules and regulations which from the basis of most current laws,
come into force

1998 U T I Master Index fund is the country’s first index fund

1999 U T I The takeover of 20th Century A M C by Zurich Mutual Fund is the first
acquisition in the mutual fund industry

2000 The industry’s assets under management crosses Rs 1,00,000 crore

2001 U-S-64 scam leads to U T I overhaul

2002 U T I bifurcated, comes under Sebi purview: mutual fund distributors banned from
giving com- missions to investors: floating rate funds and foreign debut

2003 A M F I certification made compulsory for new agents: fund of funds launched

The Indian experience

The mutual fund revolution sweeping developed nations nearly bypassed India, which
was then a young nation that had decided to rely on the state for economic development.
The government muzzled private participation in the financial sector and, at the same
time, it showed a sense of inertia and a lack of imagination in developing viable
investment options for households. Which the private sector marginalized by the state in
the economic sphere, the stock market was anything but hip and happening, which in the
first place. Government initiatives were few and far between.

From public control….. one such rare initiative gave birth to the mutual fund industry in
India. In December 1963, Unit Trust of India (UTI)was created by an act of a Parliament.
UTI  launched its first scheme US- 64, and so its name. In the initial sale period of six
weeks, UTI received 126.000 applications ,for Rs 17.4 core ,which was a problem of
plenty for U T I ,as a shallow stock market left U T I searching for worthy investment
avenues to invest this money

UTI and US-64 made up the entire mutual fund industry thought much of the pre-
liberalisation  era. The assets of US-64 crossed Rs 1,000 crore in 1991 .Its annual
dividend increased from 6.1 percent in 1964-65 to 16 per cent in

1996-87 to a high of 26 per cent in 1994 In 1987 PSU banks and insurers were allowed to
float mutual funds. The usual suspects-SEI, Cannra Bank, LIC,GIC- made a foray ,even
cornered some business, but UTI  remained the big daddy.

The early-nineties was a period of excesses for  the Indian capital market. As economic
reform were initiated the stock market and Harshad Mehta introduced themselves as the
ultimate dream weavers to middle-class India, robbing  them of perspective-and savings.
Those frenzied days saw some unusual, and never seen since occurrences . Like snaking
queues for a mutual fund (initial public offering).like mutual  funds being bought and
sold not at their current values, but at a20-30 per cent premium. Investors bought in the
expectation that the bull run would continue. Even pick up pace. They just wanted to be a
part of it ,and were willing to get in at whatever price the market was asking for

….to private enterprise. In mid-1992 ,Mehta fell from grace, the market from its high,
and mutual funds from the pedestal they had been put on overnight, the same funds that
could do no wrong were help up as exemplars of everything that was wrong with the
Indian capital market. As in the Us after the 1929 crash, the need of the hour was to nurse
bruised investor confidence and bring a sense of order in the mutual fund industry.
The government ushered in reforms. Three policy changes captured the sweep of this
overhaul one, sebi (Securities and  Exchange Board fo India) was set up to regulate the
capital market including mutual funds> Two private and foreign players were allowed to
run mutual funds. Ending three decades of government monopoly. Three in 1996, mutual
fund regulations were revamped, to make fund houses more accountable.

The period between 1998 and 2003 saw the industry undergo a quiet. Yet radical,
makeover from a public sector-driven, saw, low-service quality player to a private sector
dominated, vibrant innovative. High-quality service provider. The extraordinary upswing
in debt fund returns, triggered by falling interest rates, and the stock market boom of
1999-2000 also helped. Investor faith in mutual funds has been seen to Ase and fall with
the state of the market. In 1999-2000, a lot of investors boarded mutual funds for the first
time. When the tide turned, many were left embittered, party because their investment
had eroded, party because they had again been hurt by weaknesses in the system.

Us-64, the one anomaly in the industry, fell victim tim to its own vices. Marketed as
virtually an assured returns schemes, the fatal combination of inept management and a 
bearish market left it in no state to declare dividends, leave alone pay back investors their
entire original investment. This debacle prompted a much-needed revamp at UTI .US-64
was bifurcated into two entities. The assured return scheme and US-64 went to UTI-1, to
be seen out by the government. UTI-2 in its new incarnation as UTI Mutual Fund, took
control over the other schemes, and now comes under the purview of sebi, like every
other fund house.

The road ahead. In March 2004,31 fund houses were managing Rs 1,40,000 crore  of
investor money: 0f this, about 80  per cent was being managed by private funds. Some
gleanings on the road ahead can be made from the US experience-a mature financial
market where the small investor has truly  embraced mutual funds. About 91 million
individuals three have invested S 7.4 trillion in mutual funds. Every second household
has entrusted some savings to these ubiquitous money pools: in fact, retail investors have
more money invested in mutual funds than in banks.

By comparison, mutual fund acceptance among retail investors in India remains abysmal
According to a Sebi- NCAER   survey in 2000-01 Just 11.8 million households-13.7 per
cent of urban and 3.8 per cent of rural-were on invested in mutual funds. Retail investors
held nine time more in bank deposits than in mutual funds. But this is expected to change.

Returns from safe debt instruments are barely beating inflation. The changing face of the
capital market means the  small investor finds himself life out of many investment
opportunities. If he is to participate in the sweep of investment opportunities  and earn
returns that top inflation by a fair margin, mutual  funds are the most accessible and
convenient way to do so. It Not too bad an option When harnessed with understanding,
caution and imagination, mutual funds can indeed be powerful wealth creation vehicles. 

Behind the Mutual Fund

A mutual fund is the sum total of many parts, each of which is designated to perform a
specific function. Sbei, the market regulator. Has outlined clearly the role and
responsibilities of each entity. How well they function determines, in part, the quality of 
your experience with the mutual fund.

Sponsor

What a promoter is a company, a sponsor is to a Mutual fund. The sponsor initiates the
idea to set up a mutual fund. It could be a financial services company, a bank or a
financial institution. It could be Indian or foreign. It could do it alone or through a joint
venture. In order run a mutual fund in India, the sponsor has to obtain a licence  from
Sebi, for this it has to satisfy certain conditions, such as on capital and profits, track
record (t least five years in financial services) default free dealings and a general
reputation gor fairness.

Like the company promoter, the sponsor takes big-picture decisions related to the mutual
fund leaving money management and other such nitty-gritty to the other constituents.
Whom it appoints. The sponsor  should inspire confidence in you as a money manager
and preferably, be profitable Financial muscle, so long as it is complemented by is good
find management for the mutual fund-it can hire the best talent, invest in technology and
con -tiuously offer high service standards to investors

In the days of assured return schemes, sponsor also had had to fulfil  return promises
made unitholders. This sometimes meant meeting short falls from their own pockets, as
the government did for UTINow that assured return scheme are passé, such bailouts won’
t be required. All thing mangaers, who have a reputation fair business practices, and who
have deep pockets.

Asset management company(AMC)

AN AMC is the legal entity formed by the sponsor to run a mutual fund. It is the AMC
that employs fund managers and analysts and other personnel it’ s the AMC  that handles
all operational matters of a mutual fund-from launching schemes to managing them to
interacting with investors.

The people in the A MC who should matter the most to you are those who take
investment decisions. There is head of the fund hours, generally referred to as the chief
executive officer (CEO) Under him comes  the chief investment philosophy, and fund
manager. Who manage its schemes. They are assisted by a team of analysts, who track
markets, sectors and companies.

Although these people are employed by the AMC, it’s you, the unitholder, who pays their
salaries, partly or wholly. Each scheme pays the AMC an annual fund management fee.
Which is linked to the scheme size and results in a corre- sponding drop in your return. If
a scheme’s corpus is up to Rs 100 crore, it pays 1.25 per cent of its corpus a year: on over
Rs 100 crore, the fee is 1 percent of corpus of Rs 100 crore and Rs 2oo crore respectively,
the AMC will earn Rs 3.25 crore(1.25+2) as fund management fee that year.

If an AMC’s expenses for the year exceed what it earns as fund management fee from its
scheme, the balance has to be met by the sponsor. Again, financial strength comes into
play: a cash-rich sponsor can easily pump in money to meet short-falls, while a sponsor
less financial clout might fore the AMC to trim costs, which could well turn into an
exercise in cutting corners.

Trustees

Trustees are like internal regulations in a mutual fund, and their job is to protect the
interests of unitholders. Trustees are appointed by sponsor and can be either individuals
or corporate bodies In order to ensure they are impartial and fair, Sbei rules  mandate that
at least two-thirds of the trustees be independent-that is, not have any association with the
sponsor.

Trustees appoint the AMC which, subsequently seeks their approval for the work it does,
and reports periodically to them on how the business is being run. Trustees float and
market scheme, and secure necessary approvals. They check If the AMC’s investment are
within defined limits an whether the fund’s assets are protected. Trustees can be held
accountable or financial irregularities in the mutual fund.

Custodian

A custodian handles the investment back office of a mutual fund Its responsibilities
include receipt and delivery of Securities  collection of income, distribution of dividends,
and segregation of assets between schemes. The sponsor of a mutual fund cannot act as a
custodian to the fund This condition, formutated in the interest of investors, ensures that
the assets of a mutual fund are not in the hands of its sponsor. For example Deutsche
Bank is a custodian, but it cannot service Deutsche Mutual Fund, Its mutual fund arm.

Registrar

Registrars, also known as transfer agents, handle all investor-related services, This
includes issuing and redeeming units sending fact sheets and annual reports some fund
houses handle such functions in house. Other outsource it to registrars : Karvy and
CAMS are the more popular ones. It doesn’t really matter which model your mutual fund
opts for, as long as it is prompt and efficient in registrars also have investor service
centers of their own in some cities.

First Principles

As investment vehicles go, mutual funds are unique, being the only ones to operate on the
principle of pooling resources. The element of novelty exends to their working also, in
the kind of investment exposures they offer, the terms they use, the norms for pricing
they follow, and lots more, These character traits will unravel though the course of this
book, For starters, here are some basic principles on which a fund operates.

Open –ended / closed – and schemes

Based on the accessibility they provide investors mutual fund schemes can be classified
into’ into open ender and closed-end ; open schemes, as their name suggests, don’t have a
fixed tenure and are always open for investment. You can invest in them anytime. Same
for withdrawals. This ease of entry and exit makes them the popular choices among both
mutual funds and investors.

Closed-end schemes, on the other hand are of fixed tenure. Which is stated at the time of
the birth itself. Such schemes invite subscriptions only once during their lifetime, at the
time of launch Further. You can sell your  units in the market( most closed-end schemes
are listed on stock exchanges) but it,is unlikely you will realise a fair price, as most
closed-end schemes trade at prices below their true value and have low a liquidity .
That’s why closed –end schemes are now a dying breed and open-ended ones the
standard . The few closed-end schemes still around offer to redeem units at prices close to
their underlying value

Corpus

Investing in a scheme is a simple process. Just walk into any office of the mutual fund or
that of its representative, fill up a short and simple from , and hand over a cheque. Your
money gets added to the pool already with the scheme, given to it by numerous other
investors like you. The total money available with a scheme, at any point in time, is
referred to as the corps or assets under management’ The mutual fund, on your and other
investors’ behalf invests this corpus in various securities, in line with its stated objectives.

Unit

Your mutual fund issues you’ units’ against your  investment. A unit is the currency of a
fund. what a share is to a company a unit to a fund.

Net asset value(Nav)

You are allotted units on the basis of a scientific pricing mechanism. This price measured
per unit is called the net asset value(Nav) of the unit. Just as a share or bond ios bought
and sold at price, a mutual fund is bought and sold at its NAV. If . for example. You were
to invest Rs 10,000 in a scheme when its NAV  is Rs 10 you wil be allotted 1,000
units(10,000/10) roughly-the fund charges a nominal processing fee( explained later)

The NAV of any scheme tells how much each unit  of it is worth at any point in time, and
is therefore the securities measure of how it is per-forming. A scheme’s NAV is its net
assets( market value of the securities it own  minus whatever it owes) divided by the
number of units it has issued.
A scheme’s NAV is a dynamic figure. The market value of a scheme’s portfolio changes
from day to day. As prices of shares and bonds move up or down. The number of unit
outstanding also changes, as new investors come into the scheme and old ones leave. If
the over NAV  of your scheme rises from Rs 10 to 11 over a period of time, your scheme
is said to have generated a return of 10 percent. Similarly. If its NAV falls from Rs10 to 9
it is said to have lost 10 per cent.

Fund houses have to calculate and disclose the NAVs of their scheme daily. Fund NAVs
can be easily looked up. While the general dailies give a random listing of schemes, the
financial papers are more exhaustive in their coverage. NAV information is also available
on websites, of the mutual fund concerned and of independent data providers. When
invested in a scheme, its NAV is the figure to track, as it quantifies your returns and your
purchase price and sale price will be based on it.

Load

Although the NAV represents a scheme’s current market value. It is not the exact price at
which an investor enters or exits the scheme. Fund houses levy a nominal charge. On
most of their scheme to meet their processing costs and to discourage  investors from
leaving. his charges is referred to a load ; and it is the price you pay over and about the
fund’s NAV when you buy or sell units.

You pay a entry load at the time of buying units and an exit load’ while selling. Loads are
always expressed as a percentage  of thee NAV  and have the effect of reducing your
return. An entry load increases your NAV which places fewer units in your hands. An
exit load decreases your NAV which reduces your sale proceeds. Say a scheme has an
NAV of Rs 10  and it levies an entry  and exit load of 1 per cent(or 1o paise) each. So
when you buy units, you’ ll pay Rs 10.1( 10+0.10) per unit. Not Rs 10. Similarly, if you
sell, you’ll get Rs 9.99 (10-0.10) per unit, not Rs 10 Under Sebi rules, the sum of entry
and exit loads charged by a scheme cannot exceed 7 per cent

Expenses

Another entry that eats into your returns is expenses’ This is what your fund charge you 
for managing your money. Fund managers have to be paid a fee as do the other
constituents involved in managing your. All this entails costs. Its Every year a fund
charges some amount to amount. Sebi rules allow equity scheme to charge a maximum of
2.5 per cent of corpus as expenses every year: the corresponding figure for debt scheme is
2.25 per cent. Sebi also decides what kind of expenses a fund can  charge its unit holders
and what it cannot . for example, the cost of running an ad campaign about a fund having
won an award cannot be charged to investors.

Disclosures

From time to time  your fund house will share with you information relating to your
scheme. It does this in various ways in various degrees. Under Sebi rules, fund houses
have to send to all unitholders annual reports. Disclosing the complete portfolio of all
their scheme and publish half-yearly  results in newspapers. These documents shed light
on your scheme leight on your scheme’s performance over various time periods, and how
it stands up, given market conditions.

Some fund houses go beyond such mandatory information sharing. Whatever information
is relevant to your investment, they send it to you on a quarterly basis, through fact sheets
and newsletters. Most fund houses update their scheme portfolios on their websites even
quicker, the norm being on a monthly basis. Its information you can use to make an
informed decision about your investment in the scheme.

Redemption

Whenever you want, you can sell your units, partly or fully back to your fund. Although
it is a sale from your point of view in mutual fund parlance, it is called repurchase or
redemption . you’ll have to fill up another short and simple from. Your mutual fund will
pay you the scheme’s NAV prevailing on the date minus the exit load and mail you a
cheque within three to five days.

THE FUND FAMILY

Introduction

In February 2004 at the time of writing, there were 31 fund houses managing 1,000-odd
schemes, of many hues. Schemes draw their colour and character, from where they invest
your money. The universe of instruments available them can be split into two: equity and
debt. lf equity is the wild child that causes joy  and heartburn intermittently, debt is the
steady hand that invariably delivers the little it promise.

Risk-return trade-off- Embedded in the descriptions of these two asset classes are two
terms your sure to encounter each time you venture out to invest in a mutual fund: return
and risk.

Return is what you earn on your investment. Risk is a measure of safety of your
investment and is defined as the change of not getting the expected return. The
probability of this happening varies from asset class from instrument to Instrument. For
example, debt is less risky than equity. Within debt, instruments issued by the
government are less risky those issued by companies. The government assures periodic
payment of interest and repayment of principal on all its debt instruments. Bonds issued
by a company don ‘t carry any such assurance, but if the company is in good financial
health, it is likely to honour its commitments. So, bonds are said ti be low-risk-
instruments. Then ,there are stocks, where you might or might. Then not get back your
investment-high risk,
Risk goes hand-in-hand with returns. A higher return a generally comes with a higher
risk: conversely ,a low-risk instrument will generally yield low returns. That ‘s why as on
March 2004, a bank offered an assured return of Just 4.5 per cent on a three-year deposit,
a company 6-6.5 per cent. Stock , meanwhile, had just doubled over a six-month period,
but its anybody’s guess how much they would deliver from there on.

A matter of choice. Mutual funds offer a host of risk-return cocktails. Between them
1.000- add, and counting schemes cover a vast expanse and numerous permutations and
combinations, of investment exposures. The next four chapters dwell on what these
schemes are all about. What levels of risk they expose you to and whom they are meant
for age, risk profile, personal circum-stances or investment needs.

Equity Funds

In the long tern, equities have been known  to outperfrom every other asset class. It’s a
truism all right, but one that merits iteration, such are the wonders equities can work into
your personal finances. That is when picked carefully and managed smarty you can build
and maintain a portfolioby yourself –research stock, buy and  set them through  a broker ,
and follow up regularly Alternatively, if you don’t understand the market, or don’t want
to expend time and energy in this pursuit, you can let equity funds go to work for you.
They can be Just as effective as direct investing and in many ways, a lot more convenient.

Equity funds pool saving of many investors, and nimble fund managers do Just that. But
this broad mandate also spawns fund manager excesses, like committing a
disproportionate amount of its corpus to a particular stock or sector. The intent earn
higher returns-but what such deviations do is increase the risk on your investment .

Such deviations can pay off handsomely or back-fire badly, as is reflected the
performance of actively managed diversified funds, which typically  takes on a wide
range. So for instance even when the Sensex  or the Nifty has short up 50 percent, some
diversified schemes would have returned twice that much, while some would have risen
Just 5 per cent. That’s why it’s important you choose your fund house and scheme well.

Equity-linked savings schemes( ELSS)

Equity- linked savings schemes( ELSS) are diversified equity funds that additionally
offer income tax benefits to individuals> ELSS is one many Section 88 instruments,
along with the more popular debt options like the PPE. NSE and infrastructure bonds. In
this Section 88 grouping, ELSS is unique, being the only instrument to offer a total equity
exposure.

Under Section 88, individuals earning an in come of up Rs 5 lakh in specified

instruments, within limits, and reduce their income tax payable by 15-30 per cent of the
amount invested. Within this Rs 1 lakh investment limit , you can invest up to Rs 10,000
in ELSS in a financial year( April to March) and claim an income tax rebate, as
applicable (see table: Tax Rebate from ELSS) you can invest more than Rs 10,000 in
ELSS in a financial year. But the tax rebate will be applicable only on Rs 10,000 This tax
waiver, thought,comes at  a cost :investments in ELSS are subject to a lock in period of
three years, on similar lines as other Section 88 instruments: none of the other equity fund
impose such a condition

The staple, debt-based Section 88 instrument like PPF< NSC and infrastructure bonds
yield assured returns of 5-8 per cent a year. Although stocks don’t assure returns, they
have the potential 2003 , for instance, infrastructure bonds-which like ELSS, have a lock-
in of three years-were  offering an interest rate of 5.5 per cent a year. This words out to
an annual yield of 5,8 per cent over three. In other words assuming parity in taxation, for
an ELSS to top infrastructure bonds. Its NAV has to appreciate 17.4 per cent in three
years. Realistically, that’s achievable most markets.

In equity investing you have to try or get in near the bottom and stay patient. And when
you route your investment through a tax- saving fund the lock-in perforce  gives you a
holding period of  At least three years-long enough to give yourself decent shot of
making the market work for you.

Index funds

An index fund is a diversified equity fund. With a difference-a fund manager has
absolutely no say in stock selection. At all times, the portfolio fo an in Index fund mirrors
an index, both in its choice of stock and their percentage holding. As of March 2004.
equity index funds tracked either the Sensex will invest only in the 30 Sensex stocks, that
too in the same proportion as their weightage in the index

Because of this correlation, the Nav OF AN index fund moves virtually in line the index
it tracks. For instance, if the Sensex rises 10 per cent in a month, the NAV  of a Sensex-
linked index fund will also roughly appreciate 10 per cent over the same period. If the
sensex drop 10 per cent so, will the NAV of the index fund. Although index funds aim to
mirror market movement. Their returns tend ti be marginally lower than the index they
track. This variation is termed as tracking error’ and occurs due to various costs an Index
fund has to bear such as brokerage, marketing expenses and management fees. So if
during some period , the Sensex  gains 10 per cent, the fund is said to based index fund 9
per cent, the fund is said to have a tracking error of 1 per cent. Obviously, the hoer the
track error ,the better the fund.

If you are content with market returns index funds are the best option. A broad-based
stock index is a barometer of the stock market and, indirectly, of the corporate sector and
the economy. If the economy grows, companies do more business and record greater
profits. This should logically mean rising share prices, which is captured by indices such
as the sensex and the Nifty.

The beauty of an Index fund lies in the convenience it offers. While it continues to track
the market all along. You don’t need to track the fund.  The passive nature of index funds
makes them less risky than actively managed equity funds. The profile also ensures that
several tenets of fund management, like adequate portfolio diversification, are adhered to
at akk times, which might not be a given with the active lot.

Exchange-traded funds(ETFs)-- Exchange-traded funds, are close cousins of index funds.

Like index funds. ETFs too mimic an index – for example, the country’s first ETF Nifty
Benchmark. Exchange Traded Scheme(Nifty BeEs) tracks the Nifty. The similarity with
index funds ends there Unlike an index fund, which can be transacted only through the
fund house at the following day’s NAV, an EFT is listed on the stock exchange and can
be bought an sold from the market at real time prices, through a broker. In other words
through ETFs, you can invest in  the market at real time index values. For instance, each
unit of Nifty BeEs roughly equals one-tenth of the Nifty value So, if the Nifty is trading
at 1,500 at a given time, the NAV of a NiftyBeEs unit will be about Rs 150 and the buy
and sell quotes will be based on this price. ETFs also tend to show a lower tracking error
than index funds. The unique operations mechanism of ETFs means they don’t have to
buy or sell securities, which means they don’t have to pay brokerage. This translates to
lower expenses.

ETFa are extremely popular globally in December 2003, there were Just there equity
ETFs in India. But given their obvious superiority in passive fund management, it’s only
a matter of time before they catch on.

Sector funds

Sector funds invest in stocks from only one sector or a handful of sector. The objective is
to cap-itlise on the story in the sectors(s) and offer investors a window to profit from such
opportunities it’s a very narrow focus, because of which sector funds are considered the
riskiest among all equity funds. As on December 2003 , there were funds dedicated to
sectors such as IT , pharmaceuticals, FMCG and petroleum.

Fund houses tend to chase’ hot sector, So sector funds sprout when a particular sector is
in the news. In the mid-nineties, when the market just wouldn’t go anywhere  pharma 
and FMCG delivered  consistently and were considered safe sectors. Later, the IT boom
saw a deluge of IT  funds. The roller-coaster ride investors in IT funds have had since
sums up the high risk and reward sector funds offer, and why they are an option for only
the savvy investor.

In a diversified fund, even if one sector performs badly. Others can cover up, and pull it
back for you But if the chosen sector of a sector fund performs badly , its entire portfolio
suffers. That’s why sector funds are recommended  for only those who under-stand the
working of the sector they are investing in. This understanding  can take many forms, like
working in the industry or having some kind of interest in it. For example, those in the
Industry would be more clued into its working and be better played to make sense of
what’s happening. Those are the kind of competitive advantages that maximise returns
from sector funds.
Sectors cover a diverse range. There’ the steady variety like pharma. Referred to as
defensive sectors, these have a proven record of delivering 10-20 per cent annual growth
consistently. These are cyclicals like commodities and infrastructure where performances
and share prices swing between extremes. Then there is the happening lot that rides the
crest of a wave, like IT did in sector funds of the latter two categories. Where the swings
are dramatic, timing of entry  and exit is important to maximise   gains. This calls for
having sector knowledge.

Specialty funds

Subscriptions are the lifeline of a mutual fund The more money it gets from investors to
manage, the more money is make. One way and an important one at that by which fund
houses make a pitch for your savings is new scheme are a ment, merit, though, these new
scheme are a mixed bag. Some of these new offerings are genuine attempts to offer value
to you thought new investment exposures, some are pure marketing gimmicks aimed at
raking in subscriptions.

Mid-cap funds. These are diversified funds that target companies on the fast-growth
trajectory. In the long run, share prices are  driven by growth in a company’s turnover 
and profits . Companies at an infant stage are an unknown proposition. The big,
established names have grown to a point where they can grow only so much. The
company nices that can expand briskly, at a reasonable level of risk, lie somewhere in
between signs of graduating to the big league. Market players refer to them as mid-sized
companies’ and mid-cap stock with size in this context being benchmarked to a
company’s market value. So while a typical large –cap stock would have a market
capitalization of over Rs 1,000 crore, a mild-cap stock would have a market value of Rs
250-1,000 crore

Mid-sized companies have more scope to expand than their larger counterparts. Who
have already walked the growth path. The same is the case with share prices. Think of top
companies like Infosys Hero Honda and Dr Ready’ s Laboratories to name a few . Think 
where there as recently as the late-nineties and where they are now. Those who Invested
in them early enough would have seen their money grow many times over. These are the
kind of the big moves mid-cap funds aim to capitalize on. But the danger for them is that
a, for every Hero Honda . there are more than a few Hindustan Motors and PAL-
Peugeots-companies that stagnated or withered away That’s the risk mid-cap funds face.
Most equity funds invest predominantly if not wholly in large –cap stocks, where growth
forecasts are relatively  more predictable and easier to make, and investment is relatively
easy. Mid-cap funds, though, venture into the relative unknown, where both risk and
reward is greater.

The pretenders. The urgency to keep increasing in size has led mutual funds to use
marketing hooks to draw investors. One such hook is launching scheme that are projected
as a never –before they are given fancy names, and their objectives  the designed to
reflect some golden opportunity there for the taking. More often than not, such
makeovers are purely cosmetic . Behind the mask these scheme are noting but diversified
equity funds or sector funds. For example a fund could word its investment objectives as
investing in companies that designinnovative software products and methods’’ In simple
English ,it is a normal IT fund. Be wary of such repackaging jobs.

Debt Funds

Debt funds are scheme that invest only in fixed-income instruments such as company
bonds, debentures and government securities-where you know how much return you are
going to get buy way of interest and when. Their objective is to generate steady returns
while preserving your capital, a feature that makes them worthy investment options for
that portion of your savings on which safety is paramount. 

The risk in debt funds

However, safety even in the context of debt fund, is a relative word. A common myth
about debt funds is that since they invest in debt instruments they are’’ safe. In practical
terms. Unlike in equity funds, investments in  a debt fund can never erode in value and
will always generate some returns/ This Thinking originates from the conventional
experience of a small investor with debt instrument like fixed deposits and bonds- that, if
you hold till maturity. You will get back your investment along with the return. As
promised. In other words. Zero risk. It is a flawed understanding and debt funds.

Although debt funds are far less risky than equity funds. They are never devoid of risk.
Although they invest in fixed-income instruments, they don’t always yield a steady
return: in fact faces sometimes even risks, and how it manages them determines your
returns.

Default risk…. By one of the several classifications, the universe of instruments in which
debt funds invest can be divided into two : those issued by the government and those
issued by companies. All government debt is guaranteed by the exchequer. And there’ s
no risk of its defaulting, Corporate debt, though, doesn’t come with such assurances. A
company’s ability to service its debt depends on its financial health. An ailing company
can default on its payments and hurt investors.

Debt funds that invest in corporate paper can hold up to 10 per cent of their corpus In a
single company, though they seldom cross 5 per cent. With such high levels of exposure
possible to a single company, defaults hurt  them bad. Consider the case of  a debt fund
that holds 10 per cent it in a company bond. If the company defaults. In one shot, 10 per
cent is wiped off the fund’s NAV.

In order to ensure it doesn’t ‘ end up with bad paper a debt fund keeps tabs on the
companies it is invested in .one indicator used to gauge a company’s financial health is
credit rating – those alphabetical combinations such as AAA and BB. The rating scale is
a gradation. With AAA being the highest and D the lowest. AS one goes don’t the rating
scale chances that an issuer will defaults on its debt obliogations  go up- so-the interest
offered by such instrument rise. Good debt fund stick to high-rated debt, of rating AA
and AAA.

Interest rate risk. Although debt funds invest in interest that give fixed interest
income ,these actual returns can fluctuate on either side. Here’s why. A debt fund has two
income streams: interest earnings and capital gains. Interest accrues on debt securities on
a daily basis. For simplicity’s  sake, say, a new debt fund invests its Rs 100 crore cropus
in just one security -  One-year  bond .of a face value of  Rs 100 and a coupon of 10 per
cent so, a year  later ,it will have earned Rs 10 crore as interest income andits NAV will
be Rs 11.

Interest earnings are the staid predictable component of a debt fund’s returns. The kicker
in returns comes from capital gains, the basis of which is the inverse relationship between
interest rates and bond prices. When interest rates fall, bond price rise to realign 
themselves to the new lower yield and vice  versa. Say, the yield falls to 9 per cent. The
10 per centbond our debt fund holds becomes more valuable, and its, will rise. Using a
simplistic  estimate in order to realign to the 9 per cent yield, the bund must be priced at
Rs 111.1 In  on shot, the fund’s portfolio appreciates by Rs 11.1 which translates into an
incremental return of 11.1 per cent.

The inverse relationship between interest rates and security prices can also work against a
debt fund. By the same logic, if interest rates rose. It would cause a fall in bond prices-
and fund NAVs. A majority of debt securities are listed and traded in the market. Their
prices changes every day, so do the NAV of debt funds. Fund managers have to
constantly second- guess such movements, and try and stay on the right side of them. An
inability to do so can result in an erosion in NAV

Liquidity rise

Stock are actively traded Government securities(G-secs) and treasury bills (T-bills) also
record good trading faces  serious liquidity issues. Trading is confined mostly to high-
rated bonds. As one goes down the ratings scale, volumes drop drastically. SO this leads
to situations where a fund might want to sell a security. But is unable to do so because
there are no buyers: or there are buyers, but they want a discount

Direct or proxy

Why invest in a pass-through vehicle like debt funds when you can invest in debt
instruments of your choice? Convenience, for sure. There are many other differences
between investing directly in debt instruments and understand them, you ll know which is
right for, in what measure, and when.

Take a debt instrument bought directly by you say, a bond issued by a company. Under
normal circumstances, the company pays you interest, as promised. Typically you hold
the bond till its maturity, at which point you surrender it to the company and take back
your money. if you stay invested till maturity and the company meets its commitments.
You know beforehand exactly how much return you are going to get.

Not so with debt funds, though, where the value of your investment, represented by the
scheme’s  NAV. Changes every working day. Debt security  are bought and sold in a
market place because of which their prices keep changing. Since a debt fund has to be
valued daily, its NAV sometimes rises, sometimes falls. Theoretically, the value of the
instrument in which you have invested directly should also follow similar patterns.
Practically. It doesn’t as a buy-and-hold till maturity strategy does away with the need to
value it everyday. or  book any capital gain or loss.

In order words, while a debt fund delivers a total return made of interest income and
capital gains a direct investment provides only interest income. If interest rates fall ,
unlike the direct investors a debt fund investor will have the benefit of a higher total
return, earned from capital appreciation. A debt fund thus holds the prospect of delivering
higher return. Though at greater risk, from investing in the bond market. And it offers
more.

Access to debt instruments… you can readily buy and sell the 6,000-odd listed stock.
That’s not  the case with debt instruments, which, by and large, remain outside the
purview of the small investor. You can invest in staple governmers  small saving scheme
(NSC, post office, PPF) bank deposits and the odd company fixed deposit or
infrastructure bonds. But all this is a small section of the debt mart.

You still be saying pass to hug section of corporate bonds and debentures, government
securities and money market instruments, all of  which remain the preserve of large
investors, for reasons of economies of scale. The government and companies prefer
tapping 100 –add large investor than a few lakh small investors- it costs them less and
involves less hassle. Debt funds are among these investors. When you invest in them.
You indirectly get access to this large pool of otherwise largely inaccessible debt
securities.

Diversified portfolio… Your meager monetary resources might enable you to invest a
handful of debt securities. A debt fund, by comparison, can invest in a multiple of that
numbers, and thus spread its risk wider. The chance of a company defaulting on its debt
commitments is low , but the risk is always there. Imagine a scenario where 20 per cent
of your debt portfolio is invested in a fixed deposit of just one company. If the company
default your loss would be huge. Most debt funds are diversified which reduces the effect
of such defaults on your investments. They are also in the know of corporate happenings,
which gives them a chance to get rid off a company’s debt paper before events take a turn
for the worse.

High liquidity… You can exit your debt fund any time you want at NAV- linked prices.
Not so with all debt instruments-some have a lock-in (small savings schemes) while some
are hardly traded.
Tax advantage. In some instances, investing though debt fund is a more –tax-efficient
proposition than investing directly. Under section 80L, interest income up to Rs 12.000 in
a year can be claimed as a tax deduction. Beyond this amount, though, your interest
income is taxed at your normal personal income tax rate (10,20 or 30 per cent, plus
surcharge, as applicable) Had you invested in a debt fund, your maximum tax outgo
would be 12.8 per cent. So if you are in the 20 per cent or 30 cent tax bracket and have
exhausted your Rs 12.00080L deduction entitlement from a tax point of view. You are
better off investing through debt fund than directly.

Income funds

There are various kids of debt funds, each  offering a different exposure and servicing a
specific Investment objective. Income funds aim to maximize  debt  returns for the
medium- to long-term . They are the most inclusive of all debt funds .in that they can
invest in all kinds of  debt securities. (   See table: The Debt Mart) However income fund
invest mostly in bonds issued by companies(because of which they are also referred to as
bond funds)’’ and government securities-both instruments with longish tenures.

As a rule thumb, returns, and risk , from a debt instrument increase with tenure. An
increase in tenure means an issuer will keep your money for a longer period of time. You
can tell with some degree of certainty how much interest rates will be or whether a
company will be in business a year down the line. But every increase in the reference
period reduces the reliability of any forecast> when you buy a long-dated security, you
agree to bear this risk, for which the issued compensates you with a higher return. That’s
why a 91-d T-bill in March 2004 offered a yield of 4.25 per cent per cent, while a 10-year
G-sec, which also carries zero default risk, offered 5.17 per cent.

Another rule of thumb of much relevance to debt funds, is that corporate paper offers
higher returns than government paper. That’s become the government will never default
on its because the government will never default its commitments, but a company may.
Within companies.

Returns take on a range, depending on a company’s credit-worthiness, an indicator of

which is its credit rating. Again, going by the returns for risk logic, returns increase with
a drop in credit rating. On paper and in normal circumstances, income fund , by virtue of
investing mostly in corporate paper and long-dated securities . should generate higher
returns than all other kind of debt funds. In the short run, this sometimes does not hold
true because of the constant interplay between interest rate and bond prices. But in the
long run, over a period of three years and more, the returns advantage of income funds
comes to the fore.

Floating rate funds.. These income funds are more insulated from interest rate risk than
their conventional peers. In other words, interest rate changes, which cause the NAV of a
conventional debt fund to go up or down, have little, or no, impact on NAVs of floating
mostly in floating rate Instruments-debt securities whose coupon adjusts, automatically
and in exact proportion, to changes, its price doesn’t  This imparts greater surety to
returns from such funds, making them suitable for those who seek greater return stability
from there debt fund.

Overseas debt fund… These are income funds that invest in debt paper of foreign
countries. In part or in full. By doing so, they offer a curre play, which, before early-
2003, hand proven to be fairly enticing. In terms of interest rates, foreign debt is
unattractive to Indian investors-interest rates in major developed market are 2-4 personal
age points less than that in India.

However this disadvantage used to get negated . sometimes more than negated, by the
relative weakness of the rupee was depreciating 5-10 per cent  a year against currencies
like the dollar, pound and euro. For an Indian debt fund investing in debt paper of these
countries, this went straight to their NAV. To illustrate, if an Indian debt for invested Rs
100 in US G-secs, it would first convent this rupee amount into dollars. Assume, for
simplicity’s sake, a dollar equals Rs 50. our funds would than get 2 dollars, with which it
buys US G- secs. At the time of selling,it would convert the dollar back into rupees. New
if, the dollar has appreciated( in other words, the rupee has depreciated) to Rs55, our debt
fund wouldget Rs 110 on conversion. So, while it earned less by way interest than it
would it Indian do paper, the rupee’s depreciation made up for it.

Since 2003, though, overseas debt has been a losing proposition for Indian players. The
rupee has been appreciating against major currencies in our example, think of the dollar
at Rs 45 which gives our debt fund Rs 90 at the time when the rupee is holding firm, if
you seek high safety from

Debt Funds: What They offer

Debt Funds: What They offer

INCOME FUNDS

Risk: Medium

Objective: Medium

Objective: Maximising  steady, regular, returns

Legal tenure : 1 year and more

GILT FUNDS

Risk: Medium

Objective: Steady. regular, returns

Ideal tenure: 1 year and more

LIQUID FUNDS

Risk : low

Objective: Earn more than bank deposits

Ideal tenure: 6 months to 1year

SHORT-TERM< FUNDS

Risk: Low

Objective: Earn more to 1 year

Ideal tenure: 6 months to 1 year

 
FLEXIBLE FUNDS

Risk: High

Objective: Maximise returns from debt instruments

Ideal tenure: 1 years and more

Your debt fund. Avoid overseas debt funds and stick to income funds that invest in local
paper.

Gift funds

Gift funds invest only in debt instruments issued the government , namely T-bills (debt
paper with a tenure of less than a year) and G-secs (over ayear). The government
guarantee that comes with them means they carry zero default risk. Which explains the
term’ gill . The zero possibility of default  means they offer slightly lower returns than
corporate paper, which bears an element of risk. That’s why on paper, gill funds offer
marginally lower returns than income  funds. In reality. Though they often outperform
income funds.

Liquidity, or the lack of it corporate paper is a sore point for income funds. Not so for
gills funds. Which stick to government paper, which seen large trading. So gilt funds
don’t have to worry as safety or liquidity. They still have to manage interest rate G-secs
and T-bills worth thousands of crores are traded  every day . Their prices rise and fall.
Often widdly, presenting gilt funds with more opportunities than income funds to make
capital on gains. A gilt fund that manages to capitalize on such opportunities will return
more than what they earn as interest: those that end more up on the wrong side of such
fluctuations will return less.
Gill funds can be categorized into long-tern plans and short-term plans. Between the to
long-tern plans, on paper, offer greater returns but at a higher level of risk. As explained
earlier, in debt instruments, the coupon and interest rate risk increase with tenure. Bond
prices rise (or fall) in reaction to a decrease ( or increase) in interest rates. The quantum
of such price changes, both ways, increases with an increase in tenure.

Debt funds, what matter is the’ average portfolio maturity’ Since most long-term gilt
funds have  an average portfolio maturity of above 10 years, the highest among all kinds
of debt funds they are among the riskiest debt investments.

Serial plans.. Returns volatility, which arises due to interest rate, can be an issue for some
gilt fund investors. Those who would love to do away with such swings, while setting for
the average return, should look at serial plans or fixed maturity plans( FMPs) A serial
plan is an open-ended fund, with a fixed tenure.

Right at the time of launch a serial plan invests in debt instruments whose maturity
matches its tenure and holds them till maturity . Through its tenure, the NAV of the serial
plan will change, like  any debt fund. But iof you stay invested through its tenure these
won’t affect you – on maturity, you will realize  the original yield  on its instruments. To
that extent. You have a fair idea of what your returns are going to be, Serial plans and
FMPs  are announced periodically , to provide investment window to investors. Most
FMPs , though, target Companies and high net worth individuals, and so place high entry
barriers( the minimum investment ranges from Rs 1 lakh to Rs 1 crore 

Liquid funds.. Income funds and gift funds are debt options for the medium-to long-term.
Liquid funds cater to the short term-an investment horizon of up to one year Much as
you/d like to earn some returns on your short-term surpluses, you wouldn’t want to invest
it in avenues where there’s risk of losing your capital. Within mutual funds, this makes
equity funds and be two types of debt funds mentioned above a no-go. Outside of mutual
funds you could park such surpluses in your savings account or make a short-term bank
deposit. The returns are meagre, but at least the money is safe. Liquid funds offer an
alternative to banks. They offer a high degree of safety, plus a chance to earn more than
deposits. Liquid funds invest in high-safety financial instruments whose tenure ranges
from a day to a year., issued by the government (T-bills), banks( certificate of deposits)
and companies (commercial paper and debentures) These are called money market
instruments, which is why liquid funds are also referred to as money markt mutual funds
(MMMFs)  since money market instruments are at the short end of the tenure scale,
returns from liquid funds are relatively stable.

Short-term funds

Short-term funds are open-ended income fund but with a medium-term focus. They
achieve at average maturity of about two years, by investing of predominantly in money
market instruments. Addition, they take some exposure to long-term Gsecs- typically 0-
35 of their corpus- with the intention of earning higher returns without taking in too much
risk.
Flexible funds

Each type of debt fund covered above always gives you a complete and continuous
exposures to the asset class it  invests in for example, a gift fund is bunds to hold a
minimum percentage of its corpus, at all times, in G-secs and T-bills, Ditto for income
funds. Such guidelines ensure your scheme always remains faithful to its objective. The
downside of such stringency is that your fund manager can do only so much to protect
your fund’s NAV from adverse interest rate movements. At such times, much as held like
to temporarily lighten up on long-term debt, maybe even does debt altogether and move
to cash, he cannot .

Dynamic income fund give complete freedom to a fund manager to choose with the asset
mix, even hold 100 per cent cash, with the objective of maximizing returns. If you seek
extra returns from debt funds and have faith in your fund manager’s ability to take the
right calls, consider flexible funds. If not stick to conventional options.

Balanced Funds       

Both equity funds and debt funds have their virtues and vices. Equity funds offer the
promise of top returns, except how much those returns will be and when you will get
them is beset with uncertainty. Debt funds offer ahigh degree of surety, but their returns
hardly match up to those from equity funds at their best.

Somewhere in between these two extremes liebalanced funds- Scheme that invest in both
equity and debt, in varying proportions, and generate some capital appreciation and earn
some regular income. It follows then that their average returns, and risk, will also fall
somewhere in between the respective specs for the two asset classes. In a stable interest
rate environment, returns from debt instruments are predictable, and tend to range within
a few percentage points. Mostly, it’s equity that makes or breaks a portfolio. So when
stocks turn up, So do the NAV of balanced fund but to a smaller degree than the pure
equity breed. At the same time, when stocks fall, the NAVs of  balanced funds all, but not
as much as pure equity funds, as their debt holding offers a cushion.

Many degrees of balance. When balanced funds were first launched, a50-50 equity-debt
mix was considered sacrosanct for them. Overtime, though, fund houses have stretched
the definition and boundaries of balanced funds, to the point that the term balanced fund
is actually a misnomer. Fund managers now have greater flexibility and say in deciding
the asset mix, ostensibly  ot be in a posting to cash in on opportunities and adopt
defensive postures, as need be.

Two noticeable trends characterize balanced funds in the market. One as a group, their
asset mix takes on a wide range. So the equity-debt split could be 80:20, 60:40 50:50
30:70, 20:80… Two, the intended  split is not a single figure, but covers a fair range. For
instance, HDFC prudence Fund says it will hold 40-60 per cent of its corpus in equity,
with the balance in debt. Most balanced fund give themselves such, manoeuvring  room
such looseness in definition means there’s plenty of choice on offer- some obvious and
some not so-obvious. It’’ up to you to pick a balanced fund whose asset allocation suits
your risk profile and investment needs.

Aggressive.. such balance funds invest 50-75 per cent in equity. With the balance in deb.
Their thinking stems from the fact that only equity is capable of delivering top returns.
So, in bullish times. Their equity allocation nears its upper limit. So as to make the most
of a rally. In bearish times. They exercise restraint, and embrace the lower and Timing
this transition, to a nicety is easier said than done, though, Because of their high equity
exposure, returns of equity –loaded balanced funds tend to be volatile, as happened
during the boom and bust in IT stock. NAV of such balanced funds shot up  smartly
during the rise but fell equity sharply when the market tanked. Go for them only if you
have a big appetite for risk

Moderate  .. The majority within the balanced funds family. Such scheme hold 40-60 per
cent in equities. The relatively lower equity exposure makes them less risky than their 
aggressive counterparts. Due to which the swings in their returns are less pronounced.
For instance, for the four annual periods between 1999 and 2002, HDFC prudence Fund
returns 104.4 per cent,- 10.5 per cent-2.9 per cent and 2.55 per cent. Alliance 95, an
aggressive balanced fund, returned 180 per cent –16.2 per cent, 14.4 per cent, and 11.8
per cent during the same periods. The run-up in the stock market saw Alliance 95
bettering HDFC  prudence but it was MDFC prudence that wealthered downturns better.

Conservative..  scuh funds prefer to lean more towards debt, capping their equity
exposure at 40 per cent, and are suitable for those looking for relatively greater safety
from their balanced fund. However as on February 2004 there wasn’t any such scheme
on  offer, Fund houses were averse to this profile, as scheme with an equity holding of
less than 50 per cent of corpus had to pay a dividend distribution tax.

Ultra-conservative: monthly income plans ..(MIPs) when they debuted in the mid-nineties
MIPs were pure debt funds that assured monthly return of a decent 12-14 per cent ,
through their tenure. With interest rates high, they managed  keep their promise in their
early years But as interest rates tumbled. MIP struggled. It is difficult  to generate an
annual return yield 7-9 per cent. At the same time, fund houses couldn’t abandon MIPs,
as there was and still is, good demand for a regular income scheme, and MIPs were the
only mutual fund product that serviced this need. So fund houses started ringing in the
changes

First they stopped assuring returns. Then, they shed their debt-only tag, and started taking
on a small equity exposure of up to 10  per cent. The objective: generate marginally
higher returns than debt over a period of time, while, as far as possible, declare dividends
every month. It is an sprinkling of equity- they have stuck with.

MIPs are positioned as debt funds that give a monthly income Stripped of such
makeovers, though, MIPs can be seen as conservative balanced funds, to further stretch
the definition. Nearly all MIPs have now given themselves the option to invest 10-30 per
cent in equity . Much this equity exposure boots return, it reduces dividends. But when
share prices are on the ascent, it’s likely that the same MIP will more than make up for
the earlier shortfalls. When investing in such MIPs, be prepared for some adsentee 
periods and some shortfalls.

Variants .  Fund houses are constantly working around basis concepts to come up with
new investment exposures. A handful of interesting scheme exist in the balanced fund
space, the theme of which is a passive approach to investing, Like the FT PE  Ratio fund
(formerly, Pioneer  ITI PE Datio Fund) while fund mangers of conventional balanced
funds are at liberty to choose their asset mix and stocks, those of the PE Ratio Fund don’t
have similar discretionary powers.

Instead, the equity- debt split in its portfolio is based on prevailing stock valuations, as
represented by the PE (price –to-earnings) ratio of the 50-share Sp  CNX  Nifty index.
The scheme has outlined an asset allocation matrix. Based on which the scheme’s equity
component will fall and its debt portion will show a corresponding rise as the PE ratio of
the Nifty increases and vice versa. By reducing equity exposure in a rising market and
increasing it in a falling one, the PE Ratio Fund will effectively try and veer towards the
buy low sell high formula. The scheme also eliminates the fund manager’s risk in stock
selection, as its equity portion will always mirror that of the Nifty  both in the choice of
stocks and weightage.

If you prefer the passive approach to fund management and you don’t want to early on
the fund manager of your balanced fund to make the right investment calls, with regard to
the asset mix or the choice of stocks, the PE Ratio Fund is a suitable option, But its
important you stay invested in the scheme for a long period of time, at least a stock
market cycle, so that you let the fund accumulate equity when the market is low and sell
when the market rises.

Other Funds ..  ncreasingly, fund houses are spreading their wings beyond the staid,
conventional kinds of scheme- like the sweep covered in the previous three chapters- and
embracing new investment exposures. They are tinkering with basic themes in order to
break new ground, as well as looking to move into new asset classes.

What’s on offer. Funds of funds(FoF) These are schemes that instead of investing in
shares and debt securities, invest in equity scheme, a debt  FOF in debt scheme, a
composite FOF in the both types of schemes, and so on. The objective of an FOF is to
help you spread your risk across a larger set of scheme- without actually doing so,
Ideally. You should spread your investment across a handful of  scheme that service your
need. That way even if  the scheme were  to falter, there’s a chance that some other will
cover up for it. But this approach requires you to commit a certain amount of money of at
least Rs 5,000- and have the inclination to choose and track a portfolio of schemes.

An FOF enables you to achieve greater diversification  through just one scheme for just
Rs 5,000  it spreads your risk across a greater  universe-one equity scheme might spread
your investment. Across 20-30 stocks , five equity scheme might do  so in a multiple of
that amount. Also ,since an FOF tracks the universe of  mutual fund, it relieves you of the
hassles of scouting around. In theory at least. Practically, though, like all other scheme,
an FOF  can also fall prey to questionable investment practices. One such practive is if an
FOF invests solely or mostly, in scheme from its own stable, more so if its sister scheme
are not among the best in the business. When an FOF adopts such a narrow tack . it
ignores a large set of well-performing scheme.

Dynamics  funds . All scheme have to spell out, in their offer document, where and in
what proportion they intend to invest their corpus. For instance, equity scheme, unless
stated otherwise in their offer document, need to have at least 65 per cent of their corpus
invested in stocks at all  times, regardless equity scheme prefer to stay benchmarked to
the market, and hold 90 per cent in stocks at all times. This regulation is intended to
ensure that scheme always provide investors the promised exposure. The flip side of such
control is that, in an overheated market, equity  scheme can do precious little to soften the
fall. They cannot wholesale and move to debt or cash. It’s up investors to stay, leave or
cut back.

Dynamic funds have more room to maneouvre . They can invest in both debt and equity,
in any ratio. In other words, ideally, in a market situations of the kind described above, a
dynamic  fund could have cushioned Its fall by selling its stock holding lock, stock and
barrel-and re-entering at lower levels. That’s the magnitude of flexibility on offer. It help
avoid sharp falls, the danger being of missing out on market rallies. Their fund
management I aggressive. Characterized by short-term positions and portfolio churning.
It’s a high-risk, high-return proposition, suitable only for those willing to take that high
risk.

What’s to come. Equity funds- There are ample conventional and broad-based scheme in
the market. Going for-ward. specialization will be the name of the game Catching the
investor’s eye and cheque book, will require niche positioning and novel equity
exposures. Like small-cap fund and more sector fund Like scheme that trade solely in
derivatives, and serve as proxy vehicles for speculation.

Debt funds – Here too, with most fund houses having their plain-vanilla offerings in
place, the future points to narrow investment exposures, which are rooted in a desire to
control risk or chase returns rate funds, which carry greater returns surety than their
conventional counterparts. Expect debt index fund, which try to deliver market returns.
Expect more scheme that invest in low-rated paper, which offer the bait of higher returns,
though at relatively higher levels of risk. A deepening of the debt market, with brisk
trading taking place in all kids of papers and issues, will provide an impetus for such
launches.

Real estate fund. Investing in land is a no-go for many of us, as it requires a huge outlay
and is fraught with legal and monetary value on the plot in your local shopping complex,
or dealing with the legalities and paperwork related to buying and selling remain property
. it’s enough to let such investment ideas remain on the ground. But what if all such issue
were taken care of for you?
 It’s what a real estate fund will do. Operating on the lines of a mutual fund, a real estate
fund will invest in financial instruments that represent ownership in real estate-for
example, marketable home loans, rent receipts and bonds of housing finance companies.
For as small an investment as Rs 5.000 you can benefit from investing in real estate
without any of the attendant hassles.

Gold funds.. Investing in gold is no eaxier than buying property. While it is simpler to
buy- you can buy gold bars from your local jeweler- the problems with buying gold are
numerous. For one, you could end up with impure gold-less than 24 carat. Further,
holding gold can be expensive (if you keep it in a locker) or risky( if you stash it at home)
Like a real estate fund. a gold fund handles all such peripheral issues, while you hold
gold as a mere passbook entry .

When to Buy 

Does timing matter? Are your return from a mutual fund influenced by when you invest
on? the face of it, the answer is a resounding’ yes’ but there’s more to this issue. It’s
elementary moths that you will make money from an asset if you self it at a price higher
than you bought. It at. And lower the price you buy it at, the greater your gains. An asset
class like equity, whose prices rise and fall constantly, offers many such price points for
entry. Even if you buy at what’s seemingly a low price you still have to ride the upward
move, which might take their cue from events and happenings that  affect them. A. 
favourable confluence of such factors is a good time to invest, as the gains will be quick-
and sharp. Various kinds of scheme react positively to various signals(see table: Buy
Tariggers) and being on the right side of such changes usually means good returns.

      To time or not to time?

But can you time your buy to such a nicety ? can you identify the point when price start
rising? It is easy to say with the benefit of hindsight that one should have bought at this
low and sold at that high, and so on. But in real tome, where your money is locked into a
market that’s ticking. Thoughts can easily get clouded by sentiment. Take equity
investments. In bearish markets. When  share valuations are low and falling, people tend
to shy away from investing because they  fear prices may drop further. In bullish markets.
When valuations are high and rising, the same people don’t mind jumping in, for they
believe prices will increase further. When it should actually be the other way fund.

It’s difficult, if not impossible, to time the market. It’s difficult to quantify what impact
an even will have on prices. It’s difficult to predict just how soon a market will turn
around. Such is the nature of equity investing that even if you buy at low value

Buy Triggers

SCHEME TYPE TRIGGER

Diversified equity Market rally
Funds, index funds
Sector funds Upturn in sector performance
Debt funds Cut in interest rates
   
 

Uations, you might have to endure a long wait before realizing the true worth of your
investment and in the meantime, maybe even suffer the ignominy of seeing it erode
further.

Think long term.. That’s why in investing matters, time is good ally to have by your side
Studies have shown that every increase in the holding period increase the probability of 
an asset class delivering the king of returns. It is capable of. For instance, it’s often said
that one can  expect an annual return of 15 per cent from equities. This doesn’t mean  that
an investment in an equity fund made at any point in time will appreciate 15 per cent a
year later. It might, it might not. But if your options open and stayed invested for, say 10
year.  your  give self greater chance to earn that 15 per cent annualized return than you
would if you invested with the intent of exiting after a year.

Greater surety in returns is one is of the virtues  of long- term investing, and it does away
with  having to agonise  over when exactly to invest. Another way to achieve the same
objective is to average  your purchase price by investing regularly either by yourself or
through a systematic investment plan ( SIP) ( see Page 132)

Equity funds  No scheme can insulate itself completely from market from conditions.
When the march is going through a bad patch, equity funds tend to languish: when the
market stages a rally, so do equity funds. Such swings distort pricing, and are
unavoidable. But over a period  of 10,15 years. More, the effect of such swing on your
investment tends to even out, and your fund’s performance reflects the strength of its
asset class, its ponfolio and the way it has been managed.

If you are in for the long haul, invest regularly, especially when valuations are tottering
and the market’s epitaph is being written. You can’t go wrong buying into good equity
scheme when valuation are loffw. Provided you are willing to wait  and put up with
phases of non-performance . if the underlying your scheme owns are sound, sooner or
later, this strength will find its way into share prices, and boost your scheme’s NAV

Debt fund Timing your entry is less critical in debt funds. Because of their inherent
nature. Their returns don’t reflect the wild swings that characterize equity  and tend to be
relatively steady Interest is a stable component, and accrues to debt funds on a daily
basis, which guarantees them some return. It’s capital gains- price changes in security
prices as a result of a rise or fall in interest rates- that result or punishes scheme.
The time to invest in debt fund is when a cut in interest rates is around the corner. The
inverse relationship  between interest rates and security prices  up pushes up NAVs of
debt funds. In quick time . Since 1999, interest rates have tumbled quite dramatically.
The five- year bank deposit that earned you 12 per cent five year ago now offers just 6
per cent. The spate of  interest rate cuts made this period a golden one for debt fund
investing in 19 per cent paper returning 20 per cent plus was virtually the norm.

But that was then. Now, other’s little room left to reduce interest rates and those
extraordinary returns are unlikely to be repeated. Interest rates might still fall, but the
reduction is expected to be small and the frequency less. In the foreseeable from experts
see interest rates holding around current levels, perhaps even increasing marginally. In
such circumstance, the question of when to buy’ will matter even less.

New scheme or old scheme ? 

There’s another angle to the’ when to buy question: whether to invest in a new scheme
when it floats an IPO  ( initial public offering) or in an existing scheme. Some investors
believe an IPO is cheaper since it is period at an NAV of Rs 10, while most existing
scheme  have an NAV of over Rs 10. This is one of the biggest mutual fund myths going
and it’s subtly milked by fund houses and distributors to entice investors.

This’ cheaper at 10 thinking originates from a flawed understanding of mutual funds.

Where  they are equated with shares, and their IPOS placed at par. In reality  that’s not
the case. In order to draw  investors, companies do offer new shares through IPOs at a
discount to their intrinsic value, which raises the possibility of quick capital appreciation.
So a share period at as 10 in an  IPO is cheaper than  when it is available for Rs 20 off the
secondary market.

The myth about IPOs ..  But mutual fund IPOs present no such capital opportunity. The
NAV of a scheme makes no difference to your pricing of  appreciation potential. It’s a
myth that a new scheme being sold a par value of Rs 10 is cheaper- and therefore, has
greater returns potential than an existing scheme  whose Nav  is greater lay. You get
more units in the former. But this has absolutely no bearing on your returns. A scheme’s
Nav is the market value its portfolio at a given point in time- and its performance is what
deter-mines your returns.

Say, you invest Rs 1.000 each in Scheme A( a new scheme, with an NAV of Rs 10) and
Scheme B( an old scheme with a NAV of Rs 20). In other worfs. You hold 100 units of
Scheme A and 50 units of Scheme B. Further, assume both scheme have invested their
entire corpus in just one stock, which is currently quoting at Rs 100. if the stock
appreciates 10  per cent the NAV of the two scheme should also rise 10 per cent, to Rs 11
and Rs 22, respectively, in both cases, the value of your investment increases to

Rs 1,100-an identical gain of 10 per cent.

The absolute difference in NAV of the scheme is because the old scheme’s portfolio has
appreciated since inception. IN our example, this means that while scheme A bough the
stock at Rs 100 scheme B invested in  it at Rs 50. White it shows that scheme B has a
good track record, it means nothing for the future. Since the stock is now valued in their
portfolios at the same price, both  scheme offer identical returns potential.

In fact if anything, old scheme score over new scheme, for other reasons. Existing
scheme are easier to evaluate, as they have been around for a while and offer what is
effectively a ready product. Their record gives some insight into the quality of fund
management. All its money is already invested. Which gives you an exact idea of what
you are buying into unlike with new scheme, which begin with a clean slate. When you
have tried and-tested option, as is the case in most categories of funds, why go for
something new? Unless a new scheme offers a unique investment exposure. You are
better off with existing scheme.

Whom to Buy From

  The process for investing in mutual fund IPOs (initial public offerings) is similar to that
for new share issues. You fill up one of those small-print from lined up on market
pavements, make out a cheque, and deposit both at one of the designate collection
centers. The mutual fund, within  a week of issue closing, send you an account statement,
which is proof of your holding in it.

But an IPO is not the only opportunity to buy units, though investors seen to prefer it.
The belief being that units bought at an NAV of greater than Rs 10: this ling of thinking
is flawed( see page 82). Fact is units are sold on a continuous basis by financial service
providers, Including mutual funds them selves. The sweep and quality of service offered
various across intermediaries. Whom you transact through should depend on your
investment needs and your understanding of mutual funds.

Mutual funds

Anyone can walk into a mutual fund’s office and buy/ sell units of its scheme. It is a
simple process, and three are employees of the fund house on hand to guide  you through.
If you are buying units, you will have to fill up an hand over a cheque equivalent to your
investment. The funds house will  give you an acknowledgment of your investment in its
scheme (s) and, subject to your  cheque being cleared. Send you an account statement 
within three to seven  days. Since a fund house markets  only its scheme, and not those of
its competitors, buying  directly means knowing which fund house you want to invest in.

If you are selling units, the relevant document is a redemption from , which sometimes
from part of you’re account statement and can be torn off it, or can be had from house’s
office. The fund house will mail you the cheque within three days.

The problem with transacting through fund houses is that they have a very thin presence.
Most fund houses have just an office or two in big cities moreover, since such offices are
located in the central business district for most investors, this means traveling a fair
distance. It’s worse in small centers- only a few fund houses have a scattered presence.
But as the industry grows and gains greater investor acceptance, mutual funds are bunds
to expand beyond cities.

Intermediaries

Distributors such as agents, a banks and stockbrokere are  present in much greater
number. Which makes them the preferred option among investors. While dealing with
intermediaries , make sure they have the Amfi ( Association of Mutual funds in India)
certification- a Sebi pre-condition, since September 2003, for selling mutual funds.
Intended  to ensure that only qualified distributors dispense mutual fund advice. Amfi
issues photo-identity cards to registered intermediaries. Which is proof of their having
acquired the certification.

Agents . The big agents are oe-stop sellers of financial products. Agents score over
mutual funds on convenience, choice and quality of service. They operate from multiple
locations-for example, a national distributor like Bajaj capital has more  outlets than most
mutual funds- and are supported by an army of registered agents some of whom are
willing to come of your doorstep and sell scheme to you. Further, while a mutual fund
offers only its scheme a big agent has the biggest stock among all mutual fund sell-fund
house, as well as other investment products. For you, this means more choice.

If you know the scheme you want to invest in, go to an agent, fill up the scheme’s from
and give in a cheque. Even if you don’t know which scheme you want to invest in a good
agent will understand your need and help you pick a scheme. The agent should
understand your reasons for investing in a mutual funds and, based on that, offer you
appropriate option, and let you make a choice.

An agent is supposed to be impartial and not show a preference towards a preference

towards a particular fund houses. They very nature of the relationship between an
intermediary and fund houses opens up the possibly of bias. Fund houses pay
intermediaries a commission linked to the business they bring in. if fund house X pays a
higher commission than fund house Y. an intermediary might push scheme of X. as
stands to earn more.

How do tell if an intermediary is indulging in such practices ? The entry load charged buy
a scheme can offer you some clues. The entry load  represents the upfront costs an
investor pays to invest in a scheme and the agent’s commission tend to flow out of it. The
higher the entry load. Chance are, the higher the agent’s commission, if your agent is
pushing a higher- load scheme perhaps he is more interested in maximizing his
commission thab your returns. Hence, always know the entry load being charge by a
scheme .

Till mid-2002 intermediaries passed on a part of their commission to investors, as an

incentive to invest. The amount of cash paid depended largely on how much they got
from a fund house. Obviously the more they got from a fund house. The more passed on
to investors. This often created an unhealthy situation , where cash  incentives, and not
investment- worthiness, determined. Which scheme an agent recommended. In June 2002
to stop such abuse, sebi made it illegal for intermediaries to give money and gift’s to
investors. Although intermediaries can’t lure you with money now (legally speaking, that
is), their commission-based earnings structure means a distributor could still be partial to
a fund house. Which is why, listen to what an agent has to say, but also do your
homework, and use your judgement to make an informed decision.

Banks. A number of banks, especially the private and foreign ones, are into marketing
mutual fund scheme. Many of them market not only their own scheme, but also those of
their rivals. As a point-of-purchase. bank are a good option, because their fantastic reach-
banks can be fund in every neighbourhood. This wide reach has enabled bank to emerge
as a major distributor. In 1999 barely 10 per cent of fresh mutual fund sales were made
through banks: during 2003, various estimates put the share of banks in mutual fund sales
at between 30 per cent and per cent.

In terms of scope of service. Banks are a notch below agents. Whatever your profile or
investment. Amount, an agent will offer you personalized service- he will listen to your
investment needs. Offer you information on various scheme  as asked by you, and
suggest investment options. However typically, a bank won’t give you the same attention,
unless you are a big-money client and subscribe to its wealth management service. What
banks will do, unconditionally is help you through the investment formalities like filling
up a from and offering basis information

Stockbrokers. Big brokers combine the attributes of agents( one-stop shop, personalized
service) and banks( a team of analysts who track  the mutual fund industry) This service,
through usually comes at a cost, and is reserved for their clients, Small brokers, on the
other hand, welcome retail investors, but most of them market scheme of select fund
houses only

Certified financial planners( CFPs)   There are independent professionals trained to

advise you on all personal finance matters. The country’s first CFPs are expected to
graduate in mid-2004. Along with dispensing advise, CFPs will also sell financial
products, as agents currently do. Unlike agents. Though, CFPs might charge you for their
services While dealing with a CFP, you’ll have to watch out for biases, as in the case of
agents. 
 

The internet

At present, around 3 per cent of mutual fund transactions are done online. This figure is
bound or increase, with better Net connectivity and investor acceptance. Fund houses are
also expected to tie up with more banks, which will bring investors into the loop. The
other move that will provide a fillip to online transactions is the authorization of digital
signatures, which will do away with the need for online transactions to be supplemented
by physical documentation . At present, some fund houses enable buying- and in some
instances, selling- on three platforms.

Own websites.  As of December 2003, just two fund houses, Franklin Templeton and
prudential ICIC. Let you buy and sell units of their scheme through their websites. All
you need is a Net banking account with any of the banks the fund houses have tied up
with . you log on to the funds site choose your scheme and investment amount. A link on
the site takes you to the site  of the designated bank, where you make your
payment.Money is transferred from, and units are allotted to you instantaneously. The
transaction is also documented in the physical from- the fund house sends you the
application from to sign, and send back. Once you have done an online transaction with a
funds house, you can open an online account with it, This will enable you to sell  your
holdings, switch between scheme and purchase additional units- at the click of a mouse

Financial portals   You can also buy units of several mutual funds through financial
portals Such as myiris . com timesofmoney: com and indianainfoline .com. The process
and requirements are similar to that for buying through the fund’s site However, most
portals enable only purchases.

Online trading portals Share trading portals like ICCI Direct( iccderect. Com) and
sharekhan al fund scheme on their platforms. Registered users can buy and sell units of
the scheme on their platforms. Registered users can buy and sell units of scheme on offer,
just like a stock- at no extra cost.

Stock exchange  Closed-end scheme are traded on some stock exchanges. Since fund
houses don’t offer an NAV based repurchase during their term, the only way out is
through the stock exchange- that too, usually, not at NAV, but at a discount to NAV 
However open-ended scheme, where the action is have largely stayed away from stock
exchanges.

As of March 2004 just two fund houses, HDFC and principal, allowed transactions in
select open-ended scheme, through the NSE (National Stock Exchange) The process and
paperwork is similar to that for shares. An investor asks  an NSE broker  to buy/ sell
units. The investors doesn’t pay any-thing extra to the broker. Who is instead paid by the
fund house. Units come in or go out from the investor’s demat  account. The exchange
route hasn’t taken off as fund houses don’t want to pay a listing fee and increase the
burden on unithold-ers  barely 5 per cent use the exchange route.

How to Choose Fund 

The first choice to make is which category of scheme to invest in. Each kind of scheme
invests in a particular kind of securities. Which determines how much risk it entails and
how much returns you can expect. Ensure that these match your investment objective and
risk profile. For instance, if you seek  safety of your investment, avoid equity funds and
stick to debt funds. On the other hand, if you want your money to grow over a number of
years and don’t mind temporary setbacks, equity funds should be your choice. Within the
broad asset classes of funds to choose from, which we dwelt upon in the previous section.

Whatever your objective, it’s important to get a fix on it, and then see which king of
scheme services it best. At one stroke, you will have narrowed down your  investment
universe from a scattered few hundred to a close- knit set of 20-30 schemes. Even then,
it’s mammoth, and an unreasonable. Task to assess 20-30 scheme. You don’t need to.

Once you know the kind of scheme you with invest in ask any intermediary to present
you with a handful of options . if you are on your own spend a few minutes on any
category-wise, per formance ranking (our annual survey can be seen at outlook money.
com/ scripts/ mfrankings, a, s d)  and shortlist. three to four good and consistent scheme.
Next ask your agent for the scheme’s offer document’ and latest’ fact-sheet’ or scan
through these at the fund house’s website.

The offer document The offer document of any scheme is the most comprehensive
docket on it. it dwells on important scheme specifics such as objective and asset mix.
First released at the time of the scheme’s launch, and updated as  and when required, the
offer document can be had from any seller of the scheme. Most of what is given in it is 
irrelevant to your ultimate objective- is the scheme investment- worthy or not? Only
some bits scheme are, which are elaborated on later in the chapter.

Fund fact-Sheets  The offer document tells you all that you need to know about a
scheme. Except its latest performance and portfolio, for which you need to go through its
latest fact-sheet. Released generally on a half-yearly basis, quarterly by some fund
houses, a fund’s fact-sheet documents the performance of all its scheme during the
review period. It also shows exactly where each scheme has invested its money.

There are some attributes every scheme is better having. Run each name on your shortlist
through these six filters, using the offer document and fact-sheets as information
resources. Scheme that pass muster are worthy of your savings.

Do the fund’s objectives match yours?

Go through the investment objectives section in the offer document to get a better idea of
what the scheme is about. Also, check out its asset allocation pattern to know where all,
and in what proportion’ the scheme plans to invest is money. Does it service your needs?
Be wary of scheme that word their objective loosely or ambiguously. Although such
subjectivity I intended to give manoeuvring room to the fund manager, it can easily serve
the purpose of legitimizing deviations from the stated objective. For instance, an income
fund, typically, invests only in debt instruments. Some income funds, through, subtly slip
in a provision  in the fine print that lets them invest a small percentage in equity as well .
Such deviations can change the nature of a scheme, and make it an inappropriate for you.

It a good performer?
More than anything else, good returns are what you from a scheme. Although past
performance, both of the fund house and the scheme in question, might not be replicated,
it does shed light on its fund management abilities. If within its peer set. A scheme
consistently figures among the front-runners, it must be doing something right. Likewise,
if a scheme is perennially languishing, it probably is a poor money manager .

A good record speaks well of a fund house. Over time. Fund houses acquire reputations,
of many hoes, which are a fair commentary of the investing experience they provide. Ask
knowledgeable friends and acquaintances about their  experience with the fund house,
recollect and revisit what you read or heard it. Look at performance cards collated by
independent agencies, and see if your fund house feature among the top performers.

Look at the scheme’s performance too, but don’t view it in isolation. Absolute
performance can be misleading, as it doesn’t acknowledge the fact that mutual funds
operate in a market place, where security prices rise and fall, often dramatically. Relative
performance provides a more accurate picture. Compare a scheme’s performance, over
various time periods, to that of its peers, as well as against relevant benchmarks.

Fact-sheets tabulate scheme performance flgures over various time periods. Ranging
from the latest  quarter to the trailing five years. In order to put a scheme’s performance
into perspective, they also give the corresponding return figures for a comparable
benchmark, as specified by Sebi, it speaks well of a scheme if it consistently features
among the best in its category and beats benchmarks.

Does it have a good portfolio?

Your scheme should at all times, stay faithfully to its stated investment objective. That
means staying within its chosen investment space and following some basis fund
management tents. Like spreading its risk actoss many securities, or what is referred to as
portfolio diversification. Adequate ensure that when one security/ sector goes down your
scheme’s NAV doesn’t plunge.

In equity funds, a common deviation is of scheme investing a big chunk of their corpus in
a single stock or a single sector ( sector funds are excluded here) There are checks and
balances in the system intended to ensure this doesn’t happen for instance Sebi prohibits
equity scheme from investing more than 10 per cent of their corpus in a stock. However,
this limit it applicable only at the time of investment: overshooting the ceiling due to
subsequent appreciation in the share price doesn’t invite censure, as a result of which
some scheme do hold more than 10 per cent in a stock.

Similarly there is no regulatory limit on sector holding. An equity fund can hold 30
stocks, but if stocks from just one sector account for 40 per cent of it portfolio. The risk is
high. Such concentration  is not healthy. Look at a scheme’s latest portfolio , given in its 
fact-sheet, for such aberrations. Reasonable benchmarks to go by are 10 per cent in a
stock and 20 per cent in sector, allowing for some margin for error.
In debt funds, portfolio concerns revolve around the safety of your principal. So beside
diversification, an income fund should hold corporate paper that is safe. If safety first,
then return’ is your objective, prefer income funds that hold at least 90 per cent in high-
rated( AA and AAA) This Information can be checked in the fact-sheet. Also get a
measure of a scheme’s interest rate risk, buy looking at its average portfolio maturity,
also stated in its fact-sheet. The higher this number, the higher is the risk of change in the
scheme’s NAV when interest rate change. The third thing to check in a debt fund’s
portfolio is liquidity. If the fund has a large proportion of corporate bonds, returns many
be high, but liquidity limited.

Does it have a diversified investor base ?   

A scheme should also be diversified across investors. This ensures that a large investor
can not use its money music to dictate investment decisions. It can do so, in ways
detrimental to scheme’s other unitholders . if one investors who contributes, say, 50 per
cent to a scheme’s assets wants out the scheme will have to sell half its holdings, and
soon at that, throwing all portfolio planning out of the winfow.

In their offer document annual reports and half-yearly reports. Fund have to disclose the
number of investors holding 25 per cent or more of a scheme’ corpus and cumulative
percent-age held by such investors. Check this statistic to see if there is investor
concentration. In September 2003, one-fourth of scheme in the market had a single-
investors holding of 25 per cent or more. This forced Sebi to tighten regulation. From
December 2004 onwards, all scheme will be required to have at least 20 investors, with
no investors holding more than 25 per cent of corpus.

Are its expenses within limits

Fund house charge you an asset management fee, as well as pass on other expense
incurred in running the fund. All these expenses are deducted from your NAV, within
limits, reducing you returns to that extent. Exactly how much expense your scheme
charge you in a given year is stated in the annual report, in the expense ratio, which is
costs as a percentage of its corpus. So in a given year, if your scheme returns 15 percent
and shows and expense ratio of per cent, it means that it earned 17 per cent, but used up 2
percentage points of that to meet expenses, Obviously, the lower a scheme’s exenpse
ratio, the better.

In order to ensure that mutual funds don’t over charge you. Sebi lays down limits on the
expenses scheme can charge its unitholders. Annual Expenses of equity funds are capped
at 2.5 per cent of their average weekly net assets (52-week average of the scheme’s
corpus). For debt funds the corresponding figure is Rs 2.25 per cent.

Only actively managed equity fund veer towards the limit set by Sebi. Most other kind of
funds stay well within. This variance has much to do fund with the nature of the scheme.
Equity fund management is more expensive than debt fund management and active
management. Also, competition has reduced expense. For instance. Pre-1996. scheme
were charming 4 per cent as annual fees?

Some expenses. Are inevitable. Every scheme has to employ fund managers and analysts.
Pay for buying selling share run offices. On your part. You need to ensure two things.
One, your scheme doesn’t charge you more than its due, a fair measure of which is not
the Sebi limit, but the industry average( See table: Expenes..) Two, the scheme delivers.
It’s all very well to choice an

Expenses: is Your Fund a Spender?  

CATEQRY SEBI LIMIT INDUSTRY STANDARD (%)

Equity funds 2.50 2.2-2-5
Index funds 2.50 0.75-1.0
Income funds 2.25 1.5-1.8
Gilt funds 2.25 1.0-1.1
Liquid funds 2.25 0.7-0.9
     
 

Figure represent a fund’s annual expenses as% of average net weekly assets

Loads: is Your Fund Acting Pricey

      CATEQORY     ( %) INDUSTRY STANDARD

Sebi limit 7% combined  

Diversified equity funds 1-2.25 Nil
Index funds 1-2.25 Nil
ELSS 1-2 Nil
Income funds Nil o.5*
Liquid funds Nil Nil
Gift funds Nil 0.5*
 
 
 

Only if holding period is less than six months

Equity fund with an annual expense ratio of 2 per cent over another whose expense ratio
is 2.5 per cent, but this edge gets blunted if the former, say return 10 per cent and the
latter 20 per cent.

Is its load structure reasonable?

Most fund houses levy a nominal processing. Charge when you enter or exit or exit-
sometimes on both occasions- a scheme. This amount, termed as’ load, is charged as a
percentage of NAV, and has the effect of reducing your returns by that amount. When
levied at the time of  entry. It is termed as an entry load: on exit, an load. If you earn 10
per cent from your scheme, but you have to pay an exit load of 2 per cent. Your effective
returns get whitted down to 8 per cent.

A fund can charge a maximum combined load (entry plus exit) of 7 per cent.  However,
most funds charge less- typically, 0,5-2.5 per cent Scheme charging more than that are
best avoided, simply because you’’ll ind ample good, cheap options. Here too,
competition has helped- most debt funds don’t levy a load ( See table: Loads…) ll

Which plan  to Invest In

After you’ve zeroed in on a scheme, the next decision you need to make is when and in
what from would you like to receive your share of the gains made by it. All funds houses
offer several standard investment plans on their scheme, each intended to service some
financial requirement of your. An investment plan is just that- an investment plan. Your
scheme is managed-not its portfolio, not its fund manager. Not its investment style.

Your choice of plan should primarily be driven by your reasons for investing in a scheme.
This mostly boils down to whether you want to receive. Your gains periodically or as a
lumpsum sometime down the line. If you use returns from your investments to meet
running expenses. You need a plan that pays you something from time to time But  if you
are looking to create wealth, or build a kitty towards financial goals like retirment, you
need to let your investment accumulate.

Tax should be your second consideration. Each change from time to time, often
disturbing the position of party. So, two plans might offer identical benefits, but one
might be more tax-efficient than the other which give it an edge. Having said that, the
revocable nature of tax laws means such an edge can get neutralized, even overturned,
and force you to re-evaluate your options.

Going by the symbols used by fund houses to indicate an investment paln. It would seem
there are a deluge of options to choose from. Rest easy, it’s a just a name thing. There are
basically four invest plan on offer, and you can easily switch across them, any time,
mostly free of cost Two- of them- growth and dividend-are basic plans. The other two-
dividend reinvestment and systematic withdrawal plan (SWP)- are tax-efficient variants
of the two basis plans.
Growth plans

If you are not banking on returns for regular income, opt for a growth plan, which enables
your investment to accumulate. In a growth  plan, the gains made by your scheme remain
with it, and are reinvested by it. The appreciation in value gets reflected in the from if a
rising NAV. Say, you invest Rs 10,000 in an equity fund at an NAV  of  Rs 10 (1,000
units) A year later, if the scheme’s portfolio gains 10 per cent, its NAV would be Rs 11
and the value of your investment Rs 11,000: the gains of Rs 1,000 is reinvested in the
scheme.

Growth plan incorporate the principle of compounding. Reinvestment of gains increases

the size of your investment. Which on an identical return, translates into progressively
bigger gains for you. In our example. You now have more money-your original
investment of Rs 10.000, plus accrued gains of Rs per cent in year two, the same as in
year one, will result in a gain of Rs 1,100 ( 10 per cent of Rs 11,000)- Rs 100 more than
in year one. In year three, you will earn return on Rs 11,000 Compounding is a potent
wealth creation principle and it places  you in a better position of achieve your financial
goals.

In a growth plan, the onus of encashing your investment is on you. Anytime your want to
sell units, partly pr fully, you can do so at your scheme’s NAV. at the time of filing
returns, you’ll have to pay capital gains tax, as applicable.

Dividend plans

A dividend plan distributes periodically the gains made by it to unitholders. The gains are
distributed in the from of dividends, which are beclared as a percentage of the unit par
value. If the parvalue of a unit is Rs 10, as is usually the case a 10 per cent dividend
would mean a payout of Rs 1 per unit. Post-dividend, the scheme’ NAV reduces by the
payout amount. In our example, if our scheme declares a dividend of 10 per cent(or, Re 1 
per unit) when its  NAV is Rs 11, post-dividend , its NAV  will drop to Rs 10, your
wealth remains the same as in a growth plan: Rs 11,000- Rs 1,000 received as dividend
and Rs 10,000 held in unit ( 1,000 units at an NAV of  Rs 10)

Dividend are not assured unless stated. Used normal circumstance, only if a scheme
makes money can it pay a declaring dividends, equity funds tend to get into the act when
the stock market to rising. This variance stems from the inherent nature of two work of
schemes.

Debt funds invest in fixed-income security, and so earn some return at periodic. Which
they can distribute to unitholers. In debt funs your choice of dividend periodicity depends
on your preference and the options offered by your fund. Generally, half-yearly and
yearly payouts. If the frequency of the payout is not indicated, an income fund will
typically attempt to declare quarterly dividends.
Equity funds, on the other hand, invest in shares, the returns from which are neither fixed
nor certain. Their ability to pay dividends, and the amout, increases in good markets and
decreases in bad ones, Some equity scheme that have accumulated gains-represented by
an NAV if greater than Rs 10-dig into this reserve to pay dividend even when the market
is languishing. Thpically, through, the amount will be lower. Either way, weather a
scheme declares diviends or not, your wealth remains the same. What you gain by way 
of NAV.

There are two scenarios when you should  opt for a dividend plan. One if you are banking
on your dividend income to meet day to-day expenses, an objective met better with debt
with debt funds than equity funds. Two if you prefer to encash your gains periodically,
rather than let them return with your fund. This is of relevance to equity funds, which
have been seen to up dividends in a rising market that, way when the fund makes gains, it
passes some that of that to you. If you leave those gains with your funds, as you would
under a growth with your fund, as you would under a growth plan, your gains can get
eroded if the market tanks.

With a dividend plan, you effectively hedge your bets. Dividends encash part of your
gains, lowering your exposure to the scheme. You could achieve the same objective
through a growth plan by selling some units. But if you’d rather not grapple with the
timing of such a decision, a dividend plan is the way to go. Having said that, on receiving
the dividend proceeds, you should put it to productive use as , planned .

Dividend reinvestment plans

Although a dividend reinvestment plan sounds like a variant of the divident plan, it is not.
it actually combines features of  both the dividend plan and the growth plan. And for all
practical purposes, in time when the tax incidence on a growth plan is higher than the
dividend plan, it works as a tax-efficient alternative to the growth plan.

In a dividend reinvestment plan, dividend are declared ad in a dividend plan. But you
don’t receive these dividends. Instead, as a growth plan, these these dividends are
reinvested in the scheme, at the ex-dividend NAV. it’s purely a  tax as applicable on
dividends. Further, since this account is reinvested back in the scheme at the ex-dividend
price, you manage to reduce your acquisition cost-and so, your capital gains- than what it
would be under the growth plan.

To illustrate in our example, a dividend of Rs 1 a unit means a dividend payout of Rs

1,0000 you the pay the tax on this amount, as applicable. Post dividend, the scheme’s
NAV drop from Rs 11 to Rs 10. at which price you are allotted an additional 100 units
(1,000/10) So, now you have 1,100 units, each bought at Rs 10.

Your total investment value remains the same as under the growth plan( Rs 11,000) but
you are carrying zero capital gains. Under a growth plan your investment would also be
valued at Rs 11,000 ( 1,000 units at an NAV of Rs 11) but you’d have to pay tax.
Further, in the subsequent years, the capital gains under the dividend reinvestment plan
will be lower than that payout under the growth plan Continuing with the above example,
post-dividend . your holding in the dividend reinvestment plan are valued at Rs 10 a unit
and in the growth plan at Rs 11 a unit. If scheme’s portfolio gains, say 10 per cent from
this point on, your NAV will be Rs 11 in the dividend reinvestment plan and Rs 12.1 in
the growth plan. If you sell at this point, your capital gains will be Re 1 a unit the
reinvestment plan. Lower than the Rs 2.1 a unit in the growth plan.

If the tax on growth plans is higher than that on dividend plans, it makes sense to choose
dividend reinvestment plan over a growth plan-you meet your objective( capital
appreciation), a while minimizing your tax outgo. At the time of writing in March 2004,
this argument played out in the case of equity funds but of not in debt funds. Having said
that, tax laws keep changing. Which alters the relative tax-efficiency of these plans.

Systematic Withdrawal plans( SWPs)

What dividend reinvestment plan are to growth plan systematic withdrawal plans(SWPs)
are to dividend plans. SWps are an alternative to dividend plans is time when dividend
plan is are more taxing than growth plans. In March 2004, for example for debt funds has
to pay a 12.8 per cent distribution tax on the dividends declared by them, which they
drew out of your NAV. SO if a debt fund earned Rs 100,it could pay only Rs 88.64 as
dividend Rs: 11.36 (12.8 per cent of Rs 88.64) went towards paying the tax.

This made the dividend option inferior to the growth option once the holding period
exceeded one year- long-term capital gains tax were taxed at a maximum 10 per cent.
Such a tax outgo is especially punishing for investors of dividend-based monthly income
plans (MIP) who bank heavily on periodic income.

SWPs offer a way out, by letting you automatically redeem units worth a pre-specified
amount at a pre-specified duration (monthly, quarterly, half-yearly or annually)  So, what
you would ordinarily receive as dividends in an MIP, you pull out as a sale of units, and
pay capital gains tax, short or long-term, as the case might be, if the capital gains tax
payable on each sale in an SWPs is less than the tax payable under the dividends plan,
you end the up with more money in your hands. This was the case in the March 2004, and
it made sense for investors in monthly income plans (MIP) to prefer SWPs to dividend
plans ll

How Many Scheme ?

Five scheme can fish in the same pond of instruments, and yet reel in a different catch.
You would like to hook up with the best performer among the lot, but since you can’t
predict for sure who that’s going to be, do the next best thing-hedge your bets. Spread
your investment of market for a particular category across a handful of scheme, instead of
just on scheme. That way, even if one came up short, you’d still have a shot at top return
with the others
Fact is, a fair number of scheme do come up short, even empty, especially within equity
fund. For instance, for the five-year period to December 2003, the BSE Sensex, a widely
used denchmark to measure equity performance, give an annualized return of 14 percent.
At worst, actively managed diversified equity funds should have matched the Sensex;’ s
returns. At best, they should  have battered it, as they are in a position to pick and choose
their stocks. Did they.

The highest annualized return generated by a diversified equity fund during this five-year
period was an impressive 46 per cent, the lowest an embarrassing 4 per cent> The
remaining 35 equity diversified funds sat scattered somewhere in between these two
distant points. Quite a range, no? Such category, especially equity funds.

Much as a scheme feeds off market conditions prevailing in its chosen asset class the way
it is managed –which securities it buys and sells, when It buys and sells-affects its
performance, especially in the long run.

Fund managers follow different investment styles, they are ruled by different
temperaments they are guided by different principles and pressures. All this influences
your scheme’s performance. In investment parlance, this is called fund manager risk’ and
it represents the possibility that your scheme might underperform the  market and its
peers because your fund manager failed to make the right investment calls. The best way
to counter this risk is to back more than one fund manager. But just how many more?

Not too few….

To start with, the number of scheme you should spread your investment across depends
on how much money have to invest. With meager resources, there’ only so much you can
do. For instance, if you wish to invest Rs 10,000 in diversified equity funds, given the
common minimum investment requirement of Rs 5,000. you can sign up for a maximum
of two scheme. Moreover, on small outlay. You have less to lose in adsolute  terms. For
example, if you invested this Rs Rs10.000 in just one scheme, a 30 per cent erosion in its
NAV would translate into a notional loss of Rs 3,000 for you.

But as your investible resources increase, so do the stakes. And that’s when should really
be looking to diversify across scheme, Say, you now have Rs 1 lakh to invest. If you
invested in one diversified equity fund and ut suffered a 30 per cent drop in NAV, you
would be staring at a notional loss of Rs 30.000 Since you now have more money to lose,
there is a greater need to spread your risk. There is no formula to go by, though we feel
capping your investment in a scheme at 20-25 able diversification. In outlay for the
category is reason-scheme for each category.

Not too many 

Having said that, while choosing your degree of diversification, you ‘ll need to keep your
investing comfort in mind. Increasing the size of your mutual  al fund portfolio places
other demands on you.
You’ll need too track more scheme, keep record of more dividend cheques . if this
increased workload starts to become a pain, and you still don’t want to give up on mutual
funds, consider investing in a fund of funds( see page 70). Much as it is important to
diversify. You still need to choose your  scheme well. Diversification is a lost cause if
many, or all, of them, and up bringing the tail.

How to Track your Fund

The reams of literature that arrive in your mail from your mutual fund aren’t an exercise
in self-indulgence. It documents hardcore information about your scheme. Some of it
directly, some of it indirectly. Some of it useful, some of it useless. Your needn’t read
these reports from cover to cover. Just one long look at a handful of relevant portions
should suffice. It’s an exercise that demands a few minutes of your time. The potential
rewards are far greater: Such monitoring helps you understand  how your money is being
managed, detectundesirable changes and sings of underperformance on your scheme, and
initiate corrective action before things get worse.

Where to track

The best sources of information on your schemes are the reports sent by your fund house.
Going by current practices, good fund houses send out three documents, each  of which
showcases, in value detail. Scheme information of relevance to you

Annual report  This is the most comprehensive document relating to your scheme
released by  your fund house. Each scheme is assigned a few pages. Jump straight to the
section that dwells on your scheme. And ignore the rest. Large parts of the annual report
are technical or verbose. Accounts and balance sheets are for auditors, you can safety 
skip them. Instead, focus on two things your scheme’s performance and portfolio
composition, which are covered in a page or two.

Under Sebi regulations, all fund houses have to send their unitholders an annual report.
The chief drawback of an annual report is that there is a lag of three to four month
between its period of reference and the date it reaches you. For example. If a mutual fund
follows a financial year from April to March, as most do, its annual report is likely to
reach you only by July by which time things might have changed.

Half-yearly report--    All fund houses also have to prepare a half-yearly status report,
on which they have the option to send to unithoders or public in national newspapers.
Half-yearly report are less intimidating and more accessible than the annual report. The
time lag is also less, of about a month or so. Again, skip to your scheme’s performance
and portfolio.

Fact-sheets/ newsletters. Most fund houses, in addition to these two documents, also
send quarterly, which in industry parlance, are referred to as fact-sheets or newsletters.
These are less technical and much easier to read. They give investors views of their fund
managers, portfolio composition of scheme and performance stats.
Newspapers and websites. The NAV of all scheme is updated daily in the newspapers,
in the stock pages. While the general dailies, for reasons of space, adopt a selective
approach towards schemes the financial papers carry NAV information of virtually all
open-ended scheme, even closed-end scheme.

Latest NAVs of scheme can also be had from the website of Amfi ( amfiidia. Com.) and
those of them mutual funds themselves. In addition to NAV information, fund houses
also showcase performance and portfolio composition data on their website, with
monthly updates being the norm. Websites of independent financial service providers in
the mutual fund space are also useful information banks.

When to track. How frequently and closely, you track your scheme should depend on
your reasons for being in the scheme and your inclination towards such matters. If your
investment is of a short-term nature, there’s no getting away from the fact that you need
to look at your NAV daily and keep at least monthly tab on your scheme-fund houses
generally upload their scheme portfolio on their sites in the first week of every month.
But if you have invested with a longer investment horizon in mind, you needn’t live from
day to  day, or even month to month, once in there months or six months, when you get
the fact-sheet or  reports, will do just fine.

What to track

The basis objective behind tracking your scheme is to see whether the reasons you choose
to put your money in this scheme, as opposed to others of its ilk, still hold. Towards this
end, evaluate your scheme continuously on these seven parameters. A good grade means
you are on the right track with your scheme.

Objective.  If your scheme strays from its chosen path. It could jeopardize your goals.
Your fund manager might be doing so to generate more return for you, but this change in
strategy might not  suit you. The best representation of a scheme’s objective is its asset
mix and portfolio. Fact-sheets and reports illustrate each scheme’s portfolio break-up
through a pie chart. Look at your scheme’s graph to make sure it is servicing your
objective. Look for deviations- for instance, an IT fund dabbing in other sector, an
income fund investing in stocks. This is your first cue that your  scheme is straying from
its mandate.

Performance. Your scheme should outperform the market and run with the best of its
peers. Don’t pay too much attention to quarterly performance, focus on the big picture.
Also, don’t analyse performance in isolation. Don’t dump your diversified equity fund
because it returned just per sent over the past year. Also see ho comparative indices- the
Sensex or the Nifty fafed over the same period. If the market has dropped 20 per cent,
your scheme isn’t doing too bad. But if the market has gained 20 per cent, you should be
reviewing your investment. Your scheme needn’t be the best, but it should deliver returns
worthy of its, profile, it should feature at the upper end of the grade curve in its category.
A good time to engage in such comparisons is when indedpendent agencies come out
with such studies. Some random specs and numbers shed light on a fund’s investment
style and its ability to maintain it performance. For example, if your equity fund’s top
picks-say, the top 10- remain largely the same over long stretches of time, your fund
manager is looking to make money from a value perspective: if they are fast-changing,
the fund manager is trading the portfolio  to make money. Similarly, in the annual report ,
look at your at your debt fund’s sources of income. If it made most of its money in a
sources of  income. If it made most of its money in given year by way of capital gains, it
might not sustain that performance in the future.

Portfolio quality. If you are invested in an income fund, and safety of your principal is
high on your agenda, run a safety check on it every three months. Check the credit rating
of the corporate paper held by it. This information is tabulated alongside the portfolio
holding in fact sheets and reports. The greater the percentage of tis portfolio high-rated
paper (rating of AA and AAA for bonds, and PI and PI+ for commercial Paper) the safer
in your investment. Typically an income fund that stands your investment. Typically an
income fund that stand for high safety should hold at least 90 per cent in high-rated
instruments.

In equity fund, there are no such alphabetical symbols  to tell you if your scheme is going
in the right the direction. An equity fund’s portfolio derives its strength from the quality
of companies it holds. It help your cause if you know a bit about corporate India and
which companies are strict no-nos. You can then run through the list of stocks in your
fund’s portfolio to see if it meets minimum benchmarks. Be wary of its taking on a
significant, and growing exposure to dud and dubious companies.

Portfolio diversification . Your schemes should spread its risk across a large pool of
securities. Although there’s no scientific number of scrip a scheme should have, equity
funds generally hold 20-30 stocks: debt fund 20-50 Too few holding make your fund
volatile, while too many make it a slow runner.

The one problem endemic to mutual funds is of scheme placing a disproportionate

amount of money in a single security or sector. That’s risk. Look at your scheme’s top
holding and sectoral break-up for sings of such skewness. Experts differ on a what as
prudent single- security holding is, but the general consensus caps it  at 5 per cent for a
debt fund and 10 per cent for an equity fund, alloeuing for some room for  fund
management.

Single-investor holding.  High single-investor hodling is undesirable, as the entry and

exit of a large investor can impact  your returns Check if your scheme’s investor base is
widely spread or not. This information is given in the annual report, in the section called
notes to accounts appended to your scheme’s financials.

Expenses. Expenses are not avoidable for any scheme but they can be controlled. The
expense ratio’ which also  appears in the notes to accounts’ expresses a scheme’s annual
expenditure a percentage of its corpus. See if you scheme’s spending is in line with
industry standards (see page 97)
Disclosures. It’s your scheme and your fund house should share  all information related
to it with you. That means, at the least , sending regular information on nits website. If it
is cutting corners. it many have something to hide .

When to sell 

Investing in the right scheme, for the right reasons is only half the job done. Equity
important its exiting a scheme, for the right reasons. When it comes to selling, investors
tend to show inertia, usually linking this decision to a need for money-when they need
cash, they sell some. They hold on to well-performing scheme because these are doing
well: they don’t sell the laggards because these offer little value, and instead wait for
them to turn around. Such a random, need-based approach neither service an investor’s
investment objective nor maximizes returns. Instead, you should evaluate your
investment on there counts, which should shape your decision to sell.

Investment objective

The decision of when to sell has its roots at the time of investing itself. It helps to invest
with a reason and a goal in mind. At the time of investing ask yourself two questions:
why am I investing in this scheme? How much return do I want? The answers to these
questions should provide you with a frame of reference within which to continuously
evaluate your investment.

Realisation of objective.  Take the aggressive investor rules and draw boundaries of the
fund manager, leaving the particulars to him. So while an equity fund can be directed to
invest at least 90 per cent of its corpus in stocks, the fund manager is free to choose the
sectors and stocks. This structure lends itself to transgression, which generally get
reflected in the fund taking on more risk.

Recollect the roller-coaster ride of diversified equity funds ( which, in theory, avoid
sector and company concentration) in 2000. Back then, many such fund held 80-90 per
cent in IT stocks alone. Result: when the sector did well, these funds gave excellent
returns, but when the sector crashed, their NAVs tanked. Had they stuck to their
diversified profile, the swings would have been less pronounced. When a product
changes, you need to review whether the makeover is suitable for or not, if it’s not. exit.

Takeover of fund  Things can change when your scheme is acquired by another fund
houses. IN come a new management, possibly even a new investment philosophy. Check
out the credentials of the acquiring fund house, in particular its performance record in the
category your scheme belongs to. If its track record is spotty, switch.

Unithoders of Jardine Fleming personal Tax Saver’ 96, an ELSS, had reason to worry
when it was taken over by Sun F$C mutual fund. At the time of the takeover, Sun F$C
had nothing worth showing in equity management. Also Jardine Fleming’s fund manager
wasn’t going to be part of the new set-up. It turned out to be a case of the worst fears
coming true . In the one-year period after the takeover, the scheme had dubious
distinction of being of worst-performing ELSS.

If your experience with your fund has been good, continuity is what you should seek.
Continuity in investment style, continuity in the fund management team. If the acquiring
fund houses promise, and delivers, a smooth transition, stay on. However if the scheme’s
new objective does not suit your investment need, or if the existing fund manager is
thrown out, especially when his track record is good, watch out.

Tax planning 

Income-tax rules allow losses to be set off against capital gains-short tem against short
term, long term against long term. it’s an easy and effective way to save tax while
weeding out under-performing scheme one’s mutual fund portfolio. This strategy is
effective in a portfolio that has a sizeable numbers of holding ( shares and mutual fund)
with a mix if performers and laggards. Whenever you make capital gains, be it from sale
of units of shares, go over your portfolio  for dubs-bad investment which you are running
a loss and you wouldn’t mind disposing of. Thing of them as tax-driven sales that benefit 
you in another way. The resultant loss can be set off against the capital gains from other
investments. By doing so, you reduce your capital gains liability a strengthen  your
portfolio.

Where to Complain

Investor servicing in India has come a long way. The tardy and unfriendly attitude that
characterized the mutual fund Industry in its infancy has given way to an efficient and
personal face. This transition has ironed out numerous glitches in the system, reduced
turnaround time and generally, given investors a whole lot less reason to carp about.

Still, such is the nature of service that mutual funds provide, problems and complaints do
crop up. Like a missed dividend cheque, issues with a fund’s NAV pricing, non-receipt of
fact-sheet and annual reports.. In case you are caught on the wrong foot, follow this
redress trail. 
 
 
 
 
 
 
 
 
 

ABOUT BANK
Established in 1895 at Lahore, undivided India, Punjab National Bank (PNB)
has the distinction of being the first Indian bank to have been started solely
with Indian capital.The bank was nationalised in July 1969 along with 13 other
banks. From its modest beginning, the bank has grown in size and stature to
become a front-line banking institution in India at present.

A professionally managed bank with a successful track record of over 110

years.

Largest branch network in India - 4525 Offices including 432 Extension

Counters spread throughout the country.

Strategic business area covers the large Indo-Gangetic belt and the metropolitan
centres.

Ranked as 248th biggest bank in the world by Bankers Almanac , London.

Strong correspondent banking relationships with more than 217 international

banks of the world.

More than 50 renowned international banks maintain their Rupee Accounts

with PNB.

Well equipped dealing rooms; 20 different foreign currency accounts are

maintained at major centres all over the globe.

Rupee drawing arrangements with M/s UAE Exchange Centre, UAE, M/s Al
Fardan Exchange Co. Doha, Qatar,M/s Bahrain Exchange Co, Kuwait, M/s
Bahrain Finance Co, Bahrain,M/s Thomas Cook Al Rostamani Exchange Co.
Dubai,UAE, and M/s Musandam Exchange, Ruwi, Sultanate of Oman.

PROFILE 

With its presence virtually in all the important centres of the country, Punjab
National Bank offers a wide variety of banking services which include
corporate and personal banking, industrial finance, agricultural finance,
financing of trade and international banking. Among the clients of the Bank are
Indian conglomerates, medium and small industrial units, exporters, non-
resident Indians and multinational companies. The large presence and vast
resource base have helped the Bank to build strong links with trade and
industry.

Punjab National Bank is serving over 3.5 crore customers through 4540 Offices
including 421 extension counters - largest amongst Nationalized Banks.

Punjab National Bank with 112 year tradition of sound and prudent banking is
one among 300 global companies and seven Indian companies which are
expected to emerge as challengers to World’s leading blue chip companies.
While among top 1000 world banks, “The Banker”, the leading magazine in
London, has placed PNB at the 248th position, the bank features at 1308th
position among Forbe’s Global 2000 list of global giants and fast growing
companies.

At the same time, the bank has been conscious of its social responsibilities by
financing agriculture and allied activities and small scale industries (SSI).
Considering the importance of small scale industries bank has established 31
specialised branches to finance exclusively such industries.

Strong correspondent banking relationship which Punjab National Bank

maintains with over 200 leading international banks all over the world
enhances its capabilities to handle transactions world-wide. Besides, bank has
Rupee Drawing Arrangements with 15 exchange companies in the Gulf and
one in Singapore. Bank is a member of the SWIFT and over 150 branches of
the bank are connected through its computer-based terminal at Mumbai. With
its state-of-art dealing rooms and well-trained dealers, the bank offers efficient
forex dealing operations in India.

The bank has been focussing on expanding its operations outside India and has
identified some of the emerging economies which offer large business
potential. Bank has set up representative offices at Almaty: Kazakhistan,
Shanghai: China and in London. Besides, Bank has opened a full fledged
Branch in Kabul, Afghanistan.

Keeping in tune with changing times and to provide its customers more
efficient and speedy service, the Bank has taken major initiative in the field of
computerization. All the Branches of the Bank have been computerized. The
Bank has also launched aggressively the concept of "Any Time, Any Where
Banking" through the introduction of Centralized Banking Solution (CBS) and
over 2409 offices have already been brought under its ambit.
PNB also offers Internet Banking services in the country for Corporates as well
as individuals. Internet Banking services are available through all Branches of
the Bank networked under CBS. Providing 24 hours, 365 days banking right
from the PC of the user, Internet Banking offers world class banking facilities
like anytime, anywhere access to account, complete details of transactions, and
statement of account, online information of deposits, loans overdraft account
etc. PNB has recently introduced Online Payment Facility for railway
reservation through IRCTC Payment Gateway Project and Online Utility Bill
Payment Services which allows Internet Banking account holders to pay their
telephone, mobile, electricity, insurance and other bills anytime from anywhere
from their desktop.

Another step taken by PNB in meeting the changing aspirations of its clientele
is the launch of its Debit card, which is also an ATM card. It enables the card
holder to buy goods and services at over 99270 merchant establishments across
the country. Besides, the card can be used to withdraw cash at more than 25000
ATMs, where the 'Maestro' logo is displayed, apart from the PNB's over 1094
ATMs and tie up arrangements with other Banks.  

FUNDS OFFERED BY PRINCIPAL PNB  

PRINCIPAL PNB AMC:

Principal Growth Scheme:

Open-ended equity fund with an investment portfolio of stocks diversified

across different sectors of the economy.

Principal balanced Fund:

Open ended fund with an equity (diversified) component of 51% to 70% and
Debt component (including Money Market) 30% to 49%.

Principal Income Fund:

Open-ended fund with up to 100% investment in Debt instruments (including

Money Market instruments and securitized debt)

Principal Income Fund – Short Term Plan:

The scheme is meant for investors seeking stable returns over shorter-term
investment horizons compared to the Principal Income Fund.

Principal Cash management Fund:

An Open-ended fund that invests 100% of its corpus in Money Market

instruments and seeks to provide an excellent avenue to park very short term
cash surpluses and earn returns linked to the call money market rates. 
 

Principal Index Fund:

 
An Open-ended fund that tracks S&P CNX Nifty (NSE) closely. The aim of the
fund is to provide its investors returns commensurate with the Nifty.

Principal Large Cap Fund:

An open-ended scheme to invest in the stocks of the companies having a large

market capitalization. The fund is suitable for investors interested in long term
capital appreciation.

Principal Child Benefit Fund

The scheme is suitable for an investor seeking long-term growth and

accumulation of capital for the beneficiary.

The objective of the scheme is to generate regular returns and/or capital

appreciation / accretion with the aim of giving lump sum capital growth at the
end of the chosen target period or otherwise to the Beneficiary. 
 
Principal Global Opportunities Fund

It is an open-ended growth fund. The fund is suitable for investors who would
like to diversify investments into other markets / securities by taking advantage
of the potential growth in the global markets and thereby reduce the risk of
having a portfolio predominantly invested in India.

The investment objective of the scheme is to build a high quality. International

Equity portfolio out of the permissible investments as defined and permitted
under the regulations from time to time and provide returns and/or capital
appreciation along with regular liquidity to the investors.
Principal Infrastructure & Service Sector Fund:

An open-ended Equity Scheme with an objective to provide capital

appreciation and income distribution by investing predominantly in
Equity/Equity related instruments of Infrastructure & Service Sector
companies..

Principal Tax Savings Fund:

An open-ended Equity linked savings scheme suitable for investors seeking

income tax deductions under section 80C(2) of Income Tax Act along with
long-term equity-market returns from investment in equities.

Principal Personal Tax Saver Fund:

The scheme is suitable for investors seeking income tax deductions under
section 80C(2) of ITA along with long term equity-market returns from
investment in equities.

Principal Monthly Income Plan:

An open-ended income scheme having periodical distribution with no assured

monthly returns. MIP attempts to provide income on a monthly basis and is,
therefore, particularly suited for investors seeking regular source of income. 
 
 
 
 
 

REVIEW OF LITERATURE 
A survey of “ Investor perception by March Marketing Consultancy and
Research” attempts to know the mutual funds investor better. It examines some
interesting choices of the investor including the reason behind investing in
mutual funds and the investor’s knowledge about mutual funds. Its objective
was to measure the investor sensitivity to manage the portfolio to achieve
objective like tax incentives, capital gain, time horizon of investment and risk,
return expectations. Knowing the perception of the customers is very important
in any industry. This provides insights in to the customer behavior and his
expectations from the industry players. A proper understanding of the
perceptions would definitely benefits the players. 
The survey was conducted across seven cities- Delhi, Mumbai, Hyderabad,
Bangalore, Chennai, Kolkata and Ahmedabad. The sample size was 200 per
city. 

Key Findings 

Large number of graduates were found to have invested in mutual fund.

More than 75% of the investors invest to have a secure future through regular
returns.

Around 25% of the investors invest to gain tax benefits.

Print media advertisements have the maximum impact on investors.

Friends and relatives act as the major influencers in purchasing the mutual
fund.

From the micro perspective the company image of AMC acts as a major
deciding factor for buying mutual fund.

Growth scheme is the most preferred for investment. 

The investors’ confidence level in stocks and mutual funds is almost the same.

A study conducted by Associated Chamber of Commerce and Industry of India

(Assocham) and AMFI Indicates that shift in investor preference towards
mutual funds has been facilitated by fiscal incentives, increasing returns from
debt mutual fund investments due to the secular decline in interest rates,
availability of varied choices to investors, gradual change in the risk profile of
the investors. 

A survey report by global consultancy firms KPMG and CREATE identifies

that consumers are mesmerized by the relentless rise in prices and become
undiscerning in evaluating many products. Investor education remains a critical
issue for the industry. 
 
 
 
 
 
 
 
 Research Methodology
Research is common refers to the search for knowledge one can also define
research as a scientific & systematic search for pertinent information on a
specific topic. Research comprises defining & refining problems, formulated,
hypothesis or suggesting solutions, collecting, organizing, evaluating data &
searching the end conclusion.

 Methodology strictly speaking is the study & knowledge of methods but this
term is also used for a method or a set of methods. In other words it is the study
of how we approach problems & seek answers. R.M is the attempt to validate
the rationale behind the selected research design & provide justification of why
it is appropriate in solving the selected research problem. It is the process by
which we produce knowledge 

Objective: 

1.Understanding the customer’s knowledge, awareness and perception

    of Mutual  Funds (MF) and Equity market as an investment tool.

2.Understand the target customer better.

3.To understand & know the requirements of the clients 

 
 
 
 
 
 
 

Scope of the study:

The leverage of this project lies in understanding the customer’s knowledge,
awareness and perception of Mutual Funds (MF) and Equity market as an
investment tool. It will help, know and understand the target customer better
and how to lure them to invest more. This would be done, by adopting a
research-based approach. It deals with customer’s awareness and involves
direct interviews with questionnaire method for market research. This study
will help to report the scope of such financial instruments as a product of sale.
The project gives an opportunity to understand the changing and varied
customer needs and the strategies adopted by various banks to fulfill them. It
also enables the use of various marketing research instruments such as
questionnaires and methodologies like prototyping and articulate interviewing.  
 

Research Purpose
1.To know the market’s awareness of PNB Mutual funds in Jalandhar.

2.To know the customer’s knowledge & awareness in MF

3.To suggest recommendations 

Research Design
This is a Descriptive Research. Research design is the basic framework, which
provides the guidelines for the research process, it acts like a blueprint used to
guide a research study towards its objective.

  Data collection method

  Primary data

  Questionnaire

Secondary data

      Visual media

       Newspaper

       Business magazine 

       Internet  

      Sampling method:  Random Sampling  

     Sampling size: 100 

      Statistical tools used :Tables & pie chart. 

 
Limitations of the study:
1.Sampling size, as greater the sample to be studied, more accurate would be
the findings. But due to time constraints too large a sample cannot be studied

2.Our study concerns only Jalandhar city.

3.Personality differences between respondents

4.Cost effectiveness

                     

DATA ANALYSIS AND INTERPRETATION  

Age:

RESPONSE %AGE OF RESPONDENTS

Below 25 yrs 10%
25-30 yrs 20%
30-40 yrs 40%
40-50 yrs 20%
50-60 yrs 10%
Above 60 yrs 0%
 

Interpretation:

The above data shows that the majority of the respondents invest Mutual Fund
is 30-40 years i.e. 40%, 20% respondents are 25-30 and 40-50years, rest of 50-
60 and Below 25 years.

  
 

o Gender :-
 
RESPONSE %AGE OF RESPONDENTS
Male 80%
Female 20%
 

Interpretation:

The above data shows that the majority of the respondents invest Mutual Fund
is Male i.e. 80%  

o Marital status:-

 
RESPONSE %AGE OF RESPONDENTS
Single 40%
Married 60%
 

Interpretation:

The above data shows that the majority of the respondents invest Mutual Fund
is Married persons i.e. 80%  

o Education / professional qualification:-

 
RESPONSE %AGE OF RESPONDENTS
Post Graduate 20%
Graduate 30%
Diploma 20%
Under Graduate 10%
 Degree 20%
 

Interpretation:

The above data shows that the majority of the respondents 30% are Graduate
and 20% are post graduate, diploma holder and degree holder.  
 
 

Q.  Have you ever invested in Mutual Funds? 

RESPONSE %AGE OF RESPONDENTS

Yes 65%
No 35%
 
 

Interpretation:

 The above data shows that the 65% respondents Invested in Mutual Fund and
35% are not invest in Mutual Fund.  
 
 
 
 

Q. If you have invested in mutual funds then specify the company 

RESPONSE %AGE OF
RESPONDENTS
HDFC Mutual Funds       5%
LIC Mutual Funds 15%
 Kotak Mahindra Mutual 10%
Funds         
PNB Mutual Funds 10%
Reliance Capital Mutual 30%
Funds          
SBI Mutual Funds 10%
UTI Mutual 10%
Funds                               
Prudential ICICI Mutual Funds 10%
 
 

Interpretation:

  The above data shows that the 30% respondents Invested in Reliance Capital
Mutual Funds, and rest of other Mutual Funds.

Q. Please rank various mutual fund companies on the basis of your preference
for investment from 1 to 8, with 1 being the most preferable and 8 being the
least preferable.

RESPONSE %AGE OF
RESPONDENTS
HDFC Mutual 1
Funds                           
LIC Mutual Funds 7
Kotak Mahindra Mutual 5
Funds              
PNB Mutual Funds 2
Reliance Capital Mutual 8
Funds               
SBI Mutual Funds 3
UTI Mutual 4
Funds                                    
 Prudential ICICI Mutual Funds 6
 
 

Interpretation:

    The above data shows that the Majority of respondents prefer Reliance
Capital Mutual Fund, then LIC Mutual funds, Prudential ICICI Mutual Funds 

Q. Which of the following kinds of funds are you invested in? 

RESPONSE %AGE OF RESPONDENTS

Equity 35%
ELSS 20%
Income 30%
Balanced 10%
Others 5%
 

Interpretation:

  The above data shows that the 35% respondents Invested in Equity Funds,
30%  are Income funds and 20% are Elss Funds. 

Q. What degree of risk do you perceive in mutual funds? 

RESPONSE %AGE OF RESPONDENTS

Very low                            10%
Low 20%
Moderate 40%
High 20%
 Very high 10%
 

Interpretation:

  The above data shows that the 40% respondents risk in mutural fund is
Moderate, 20% respondent says risk is Low & High.  

Q. Has your money increased after investing in mutual fund? 

RESPONSE %AGE OF RESPONDENTS

Yes 80%
No 20%

  

 
 

Interpretation:

  The above data shows that the 80% respondents increased the money after
investing the mutual fund, 20% respondents are not increased.

Q. Are you satisfied after investing in mutual fund? 

 

RESPONSE %AGE OF RESPONDENTS

Yes 85%
No 15%
 
 

 
Interpretation:

  The above data shows that the 85% respondents satisfied after investing the
mutual fund, 15% respondents are not satisfied. 

             

Q. Do you want to invest in mutual funds in future?

 
RESPONSE %AGE OF RESPONDENTS
Yes 80%
No 20%
 
 

 
 

Interpretation:

  The above data shows that the 80% respondents invest in mutual funds in
future and 20% are not invest in future  

Q. For how much time do you want to invest in mutual funds? 

RESPONSE %AGE OF
RESPONDENTS
More than 1 yr but > 2 20%
yrs                
2 yrs 50%
More than 2 yrs but > 3 20%
yrs              
3 yrs 10%
 
 
 
 

Interpretation:

  The above data shows that the 50% respondents 2 yrs invest in mutual funds,
20% are more than 1 yr to 3 years and rest of more than three years.

Q. Do you believe in the statement “Take More Risk, Get More Benefit”? 

RESPONSE %AGE OF RESPONDENTS

Yes 70%
No 30%
 
 
 

 
 

Interpretation:

  The above data shows that the 70% respondents believe this statement and
30% are not believe.

Q. Do you consider the investment in mutual funds and share market is the
same thing? 

RESPONSE %AGE OF RESPONDENTS

Yes 60%
No 40%
 
 

Interpretation:
  The above data shows that the 60% respondents investment in mutual funds
and share market is the same things and 40% respondents says not.  
 
 
 
 
 

  

SWOT ANALYSIS OF MARKETABILITY OF

MUTUAL FUNDS 
STRENGHTS 

Convenience in investing in mutual funds

Instant Liquidity

Options available in terms of types of Mutual Funds, depending upon the kind
of investor.

Returns on investment in mutual funds 

WEAKNESSES 

Transparency with regards to the money invested by the financial organizations

to provide returns to the customer

Lack of information delivery to potential investors

Risks associated in terms of professional organization through which an

investor invests as new organizations keep coming up everyday

Various technical aspects and costs such as Exit Load, Entry Load, etc. 

OPPORTUNITIES 

With more and more MNCs coming in, the disposable income with people is
getting increased. Hence opening up the doors for investment in mutual funds. 
 
Due to the systematic investment plan offered by financial organizations, more
and more customers would be coming up in future to invest in mutual funds.

With bullion and real estate rates going high everyday, investment in mutual
funds seems more affordable and feasible.

With mutual funds catering to all kinds of investors viz, aggressive investors,
speculative investors etc. its marketability is bound to increase if information
regarding different funds is provide to potential investors (of different types)
through the right media. 

THREATS 

With more and more banks such as Dutche bank, GE money etc entering Indian
markets, and offering better banking and allied products, the attractiveness of
mutual funds might suffer in the coming days.

With sensex breaking records everyday, investors would prefer trading in

equity market rather investing in mutual funds. Hence companies offering
mutual funds would have to come up with better offerings in terms of returns as
well as risks associated to keep up the pace.

Since more and more companies are offering new mutual funds everyday, its
bound to increase confusion among potential customers. Hence proper channel
and time should be adopted to reach the potential investors. Also the body to
regulate these mutual fund companies should play a more active role. 
 
 

CONCLUSION
Jalandhar where I done our survey. People in this area are very much aware
about the concept of mutual fund. The study shows that they shows their
interest to invest there money in mutual fund. As mutual fund has more
stability, growth, return than share market and its minimum investment is also
low. This attracts more and more peoples to buy the mutual fund of different
companies. Its return on investment is also good.

                                                  

 The past study concludes that, mutual fund is a good source of income.
Peoples are highly satisfied on return of mutual fund. The perception of the
people regarding the mutual fund is good. Customers interest increases day by
day and they invest heavily in the mutual fund.

                                                                     

BIBLIOGRAPHY 
BOOKS: 

 Vasant Desai “The Indian Financila System” Himalaya Publishing

House 1999 Mumbai.
 Gordon Natarajan “Financial Markets and Services” Himalaya
Publishing House 2004 Mumbai.
 Kothari C.R. “Research Methodology” Method and techniques, Wishwa
Prakashan 1990 New Delhi.

WEB SITES:

 www.fundmaster.com/mutualfunds.
 www.google.com.


MARKET SURVEY ONCONSUMER BEHAVIOURTOWARDS MUTUAL

FUNDS 

I am Kapil Verma pursuing MBA from “CT Institute of Engg., Mgt. &
Technology”, Jalandhar. I am conducting a survey on mutual funds to have an
idea about the consumer’s perception towards different mutual funds. The
information collected through the survey would be strictly used for academic
purpose only and the information collected would be confidential. 

1. Personal Details:-

o Name:- _______________________
o Age:-
 a) Below 25 yrs                         b) 25-30 yrs

c) 30-40 yrs                              d) 40-50 yrs

e) 50-60 yrs                              f) Above 60 yrs 

o Date of Birth:- ___/____/_______

 
o Gender :-

a) Male                              b) Female  

o Marital status:-

a) Single                            b) Married 

o If married, number of children:- ______________

Number of male children ______, age ____________(yrs)

Number of female children ______, age ____________(yrs) 

o Education / professional qualification:-

a) Post graduate                    b) Graduate

c) Diploma                            d) Under Graduate

e) Degree                               f) Any other

(specify)_____________ 

o Employment type:-

a) Salaried                             b) Self Employed

c) Retired                               d) Unemployed

e) Student                              f) Other (specify)_____________ 

o Profession:-

a) Architect                 b) Engineer                            c) Housewife

       d) Manufacturer          e) Banker                                f) Journalist

       g) CA                          h). Teacher/ Professor            i) Doctor

       j) Lawyer                     k) Govt. Officer                     l) other

______________

o Number of earning members:-

a) 1                        b) 2-4                          c) >4 

o Monthly income:-

a) Up to 10000                    b) 10001-20000              c) 20001-

40000

d) 40001-60000                  e) 60001-100000            f) >100000 

    2 Queries regarding Mutual Funds:-

o Have you ever invested in Mutual Funds?

a) Yes                              b) No                 

o If you have invested in mutual funds then specify the company:-

a) HDFC Mutual Funds                            b) LIC Mutual Funds

c) Kotak Mahindra Mutual Funds          d) PNB Mutual Funds

e) Reliance Capital Mutual Funds           f) SBI Mutual Funds

g) UTI Mutual Funds                                h) Prudential ICICI

Mutual Funds

i) Any other (specify) _____________ 

o Please rank various mutual fund companies on the basis of your

preference for investment from 1 to 8, with 1 being the most
preferable and 8 being the least preferable.

                a) HDFC Mutual Funds                                 b) LIC Mutual Funds

                 c) Kotak Mahindra Mutual Funds               d) PNB Mutual Funds

                 e) Reliance Capital Mutual Funds               f) SBI Mutual Funds

     g) UTI Mutual Funds                                    h) Prudential ICICI

Mutual Funds 

o Which of the following kinds of funds are you invested in?

a) Equity                              b) ELSS

c) Income                             d) Balanced

e) Others (specify)_____________ 

o What degree of risk do you perceive in mutual funds?

a) Very low                            b) Low

c) Moderate                           d) High

e) Very high 

o Has your money increased after investing in mutual fund?

a) Yes                              b) No                 

o Are you satisfied after investing in mutual fund?

a) Yes                              b) No                 

o Do you want to invest in mutual funds in future?

                  a) Yes                              b) No                 

o For how much time do you want to invest in mutual funds?

a) More than 1 yr but > 2 yrs                 b) 2 yrs

c) More than 2 yrs but > 3 yrs               d) 3 yrs

e) Any other (specify) _______________

 o Do you believe in the statement “Take More Risk, Get More
Benefit”?

a) Yes                   b) No               

o Do you consider the investment in mutual funds and share market

is the same thing?

a) Yes                              b) No               

o Your perception about investments in mutual funds:-

_____________________________________________________
_

_____________________________________________________
_

_____________________________________________________
. 

THANKS.