SRI SHARADA INSTITUTE OF INDIAN MANAGEMENT-RESEARCH (A unit of Sri SringeriSharadaPeetham, Sringeri) Approved by AICTE Plot No.

7, Phase-II, Institutional Area, Behind the Grand Hotel, Vasantkunj, New Delhi 110070 Tel.: 2612409090 / 91; Fax: 26124092 E-mail: administration@srisim.org; Website: www.srisim.org

THE PROJECT REPORT ON Analysis of factors Influencing the Choice of Mutual Funds in India

SUBMITTED TO:Prof. Dr. RitwikDubey

SUBMITTED BY KavitaamitPrasad 20100138

Page 1 of 62

PGDM-2nd YEAR

DECLARATION
I hereby declare that the project on Analysis of factors Influencing the Choice of Mutual Funds in India of PGDM to Sri Sharada Institute of Indian Management Research is my own original work for the fulfillment of the requirement for nay course of the study. I also declare that no chapter of the manuscript in whole or part is lifted and incorporated in this report from any other work done by me or others.

Place: Date:

Page 2 of 62

Acknowledgement
It is said, the most important single word is WE and the zero important single word is I. This true even in todays modern era .It is absolutely impossible for a single individual to complete the assigned job without help and assistance from others. I take this opportunity to express my deepest gratitude to all those people, without those spontaneous support, guidance, encouragement and understanding, this project would never had reached completion. I would like to acknowledge to my sincere gratitude to our CMT& MD Rev. Swami ji (Dr.) Parthasarathy and my project guide Prof. Dr Ritwik Dubey for helping me in this project work. I am thankful to all my friends and batch metes for their help in completing this project work. Finally, I acknowledge the timely help extended by all my colleagues and all the unmentioned names from the concerned field . Kavitaamit Prasad (20100138) PGDM (2010-2012) Sri Sharada Institute Of Indian Management- Research

Page 3 of 62

Page 4 of 62

CONTENTS
Abstract Objective Limitation Introduction of Investments Investment Needs Choosing the Right Investment Option Investment Options in India Mutual Funds Organization Regulatory Authorities Types Of Mutual Funds Advantages / Disadvantages of Mutual Funds History Analysis of a fund/scheme. Further Scope of StudyAnalysis of a fund/scheme with examples Comparative analysis of different investment Options Market Survey Research Methodology Sample Selection
Page 5 of 62

Demographic analysis of Investment patterns Further Scope of the study Factors(Intrinsic and Environmental) affecting selection of a scheme 43 Further Scope of Study 44 Influence of Product Qualities on Scheme Selection 45 Further Scope of Study 47 Influence of Fund Sponsor Qualities on Scheme Selection Influence of Investor Services on Scheme Selection Suggestions Conclusion Annexure I 48 References 52

Page 6 of 62

ABSTRACT
The project contains the brief description of the mutual fund industry ingeneral. It also includes the study and comparison of other investment products available in the market like Insurance plans, ULIP, Mutual Funds,Savings account, Provident funds, Postal savings and Fixed Deposits andStocks available in the market.A survey was conducted to gather primary data to judge the factors thatinfluence investors before they invest in any of the investment tools andthus the first part of the paper scrutinizes the investors perception andanalyzes the relation between the features of the products and the investorsrequirements. With this back ground an attempt has been made in thispaper to categorize investors based on various demographic factors such asage, sex, income level and occupation. The second part of the paper deals exclusively in Mutual Funds. It is widelybelieved that MF is a retail product designed to target small investors,salaried people and others who are intimidated by the stock market but,nevertheless, like to reap the benefits of stock market investing. At the retaillevel, investors are unique and are a highly heterogeneous group. Hence,designing products that are customer tailored to the different needs isimportant. Currently (as on 23/3/2009) there are more than 2500 schemeswith varied objectives and AMCs are competing against each other bylaunching new products or repositioning old ones. MF industry today is facingcompetition not only from within the industry but also from other financialproducts that provide many of the same economic functions as mutual fundsbut are not strictly MFs. Thus the second part of the paper attempts to studythe factors influencing the fund/scheme selection behavior of RetailInvestors who invest in Mutual funds.

Page 7 of 62

OBJECTIVE
To categorize investors as being inclined towards investment productsbased on certain characteristic such as sex, age, academic qualifications,marital status, occupation, annual income etc. In order to examine the issues raised above following are objectives of it : 1) To understand the savings avenue preference among MF investors 2) To identify the features the investors look for in Mutual Fund products 3) To identify the scheme preference of investors 4) To identify the factors that influences the investors fund/schemeselection 5) To identify the information sources influencing the scheme selection decision. It shall also provide a comparative analysis between differenttypes of mutual funds in India and between mutual funds and otherinvestment products.

LIMITATIONS
i) Sample size was limited to 100 investors who have invested throughMahindra only. The sample size may not adequately represent thenational market. ii) This study shall not been conducted over an extended period of time considering both market ups and downs. The market state has a significant influence on the buying patterns and preferences of investors.. The study cannot capture such situations. iii) The study shall take into account the preferences of investors who have invested in schemes offered by the distributor services of Mahindra only. As such there will be a element of biasness in the study.

Page 8 of 62

INVESTMENTS Introduction of Investment

Savings form an important part of the economy of any nation. With thesavings invested in various options available to the people, the money actsas the driver for growth of the country. Indian financial scene too presents aplethora of avenues to the investors. Though certainly not the best ordeepest of markets in the world, it has reasonable options for an ordinaryman to invest his savings.An investment can be described as perfect if it satisfies all the needs of allinvestors. So, the starting point in searching for the perfect investmentwould be to examine investor needs. If all those needs are met by theinvestment, then that investment can be termed the perfect investment. Most investors and advisors spend a great deal of time understanding themerits of the thousands of investments available in India. Little time,however, is spent understanding the needs of the investor and ensuring thatthe most appropriate investments are selected for him.

The Investment Needs of an Investor

By and large, most investors have eight common needs from theirinvestments: 1. Security of Original Capital; 2. Wealth Accumulation; 3.Comfort Factor; 4. Tax Efficiency; 5. Life Cover; 6. Income; 7. Simplicity; 8.Ease of Withdrawal; 9. Communication.
Page 9 of 62

Security of original capital: The chance of losing some capital hasbeen a primary need. This is perhaps the strongest need amonginvestors in India, who have suffered regularly due to failures of thefinancial system. Wealth accumulation: This is largely a factor of investmentperformance, including both short-term performance of an investmentand long-term performance of a portfolio. Wealth accumulation is theultimate measure of the success of an investment decision. Comfort factor: This refers to the peace of mind associated with aninvestment. Avoiding discomfort is probably a greater need thanreceiving comfort. Reputation plays an important part in delivering thecomfort factor. Tax efficiency: Legitimate reduction in the amount of tax payable isan important part of the Indian psyche. Every rupee saved in taxesgoes towards wealth accumulation. Life Cover: Many investors look for investments that offer good returnwith adequate life cover to manage the situations in case of anyeventualities. Income: This refers to money distributed at intervals by aninvestment, which are usually used by the investor for meeting regularexpenses. Income needs tend to be fairly constant because they arerelated to lifestyle and are well understood by investors. Simplicity: Investment instruments are complex, but investors needto understand what is being done with their money. A planner shouldalso deliver simplicity to investors. Ease of withdrawal: This refers to the ability to invest long term butwithdraw funds when desired. This is strongly linked to a sense ownership. It is normally triggered by a need to spend capital, changeinvestments or cater to changes in other needs. Access to a longterminvestment at short notice can only be had at a substantial cost. Communication: This refers to informing and educating investorsabout the purpose and progress of their investments. The need tocommunicate increases when investments are threatened. Security of original capital is more important when performance falls. Performance is more important when investments are performingwell. Failures engender a desire for an increase in the comfort factor.
Page 10 of 62

Perfect investment would have been achieved if all the above-mentionedneeds had been met to satisfaction. But there is always a trade-off involvedin making investments. As long as the investment strategy matches theneeds of investor according to the priority assigned to them, he should behappy. The Ideal Investment strategy should be a customized one for each investordepending on his risk-return profile, his satisfaction level, his income, andhis expectations. Accurate planning gives accurate results. And for that theremust be an efficient and trustworthy roadmap to achieve the ultimate goal ofwealth maximization.

Page 11 of 62

Choosing the Right Investment Options

After understanding the concept of investment, the investors would like toknow how to go about the task of investment, how much to invest at anymoment and when to buy or sell the securities, This depends on investmentprocess as investment policy, investment analysis, valuation of securities,portfolio construction and portfolio evaluation and revision. Every investortries to derive maximum economic advantage from his investment activity.For evaluating an investment avenues are based upon the rate of return,risk and uncertainty, capital appreciation, marketability, tax advantage andconvenience of investment. The following Table should give the clear picturerelating to the investors investment decisions in various financial marketinstruments. The choice of the best investment options will depend onpersonal circumstances as well as general market conditions. For example, agood investment for a long-term retirement plan may not be a goodinvestment for higher education expenses. In most cases, the rightinvestment is a balance of three things: Liquidity, Safety and Return. Investment options Return yield Returns Capital Appreciation Risk Liquidity Market Ability Tax Shelter ( from Tax Act) Equity Share Non Convertible Debenture Equity Schemes Debt Schemes Bank Moderates Nil Negligible High High Low Low High Low High High High Sec 80 C Benefit No Tax on Dividends Sec 80 C Very High Very High Very High High Negligible Low Low High High Fairly High High Sec 80 C benefit Nil High High Convenience

Page 12 of 62

Deposits Public Provident Fund Life Insurances Policies Residential House Gold & Silver Nil Moderate Average Average Moderate Moderate Negligible Low Nil Moderate Nil average Nil High Nil Average

Benefits Sec 88 benefits Very High

Sec 88 Benefit

Very High

High

Fair

Nil

Average

Investment Options in India

Equity posits 2. Post Office Deposits 3.Co Operative Deposits 4.Public Provident Fund Deposits Non 1.Blue Chip Shares 2. Growth Share 3.Income Share 4.cyclical Share 5. Speculative shares Mark Financi etabl al e Assets Fina ncial Asse

es 2. GOI Relief Bonds 3.Govt Agency Securities 4.PSU Bonds 5.Debenture of private Sector Company 1.Treasury Bill 2.Commerical purpose 3. Certificate of deposits Bond Money s Markets investme nts

1.Equity Shares 2.Debt Schemes 3.Balanced Schemes LIC Policies 4. Premium Back 1.Endowment assurance Policy 2.Money Back Policy 3. Whole Life Policy Financial Assets As Mutual Fund Schem es Page 13 of 62

1.Ariculture land 2.Semi Urban Land 3.TimeShares in a Holiday Resort Balanced Schemes 1.Equity Share 2.Debt Schemes 3. Preci ous objec ts Real Estate

Financial Derivatives

Option Futures

Fixed Deposits They cover the fixed deposits of varied tenors offered bythe commercial
banks and other non-banking financial institutions. Theseare generally a low risk prepositions as the commercial banks are believed toreturn the amount due without default. By and large these FDs are thepreferred choice of risk-averse Indian investors who rate safety of capital &ease of investment above all parameters. Largely, these investments earn amarginal rate of return of 6-8% per annum. Government Bonds The Central and State Governments raise moneyfrom the market through a variety of Small Saving Schemes like national saving certificates, Kisan Vikas Patra, Post Office Deposits, Provident Funds,etc. These schemes are risk free as the government does not default inpayments. But the interest rates offered by them are in the range of 7% -9%.

Money-back insurance - Insurance in India is mostly sold and bought asinvestment

products. They are preferred because of their add-on benefitslike financial life-cover, taxsavings and satisfactory returns. Even if onedoes not manage to save money and invest regularly in financialinstruments, with insurance, the policyholder has no choice. If he does notpay his premiums on time, his insurance cover will lapse. Money-backInsurance schemes

Page 14 of 62

are used as investment avenues as they offer partialcash-back at certain intervals. This money can be utilized for childrenseducation, marriage, etc.

Endowment Insurance These policies are term policies. Investors haveto pay the
premiums for a particular term, and at maturity the accruedbonus and other benefits are returned to the policyholder if he survives atmaturity.

Bullion Market Precious metals like gold and silver had been a safeheaven for Indian
investors since ages. Besides jewellery these metals areused for investment purposes also. Since last 1 year, both Gold and Silverhave highly appreciated in value both in the domestic as well as theinternational markets. In addition to its attributes as a store of value, thecase for investing in gold revolves around the role it can play as a portfoliodiversifier.

Stock Market Indian stock markets particularly the BSE and the NSE, hadbeen a
preferred destination not only for the Indian investors but also for theForeign investors.. Although Indian Markets had been through tough timesdue to various scams, but history shows that they recovered very fast. Manytypes of scrip had been value creators for the investors. People have earnedfortunes from the stock markets, but there are people who have losteverything due to incorrect timings or selection of fundamentally weakcompanies.

Real Estate- Returns are almost guaranteed because property values arealways on the rise
due to a growing world population. Residential real estateis more than just an investment. There are more ways than ever before toprofit from real estate investment.

Mutual Funds - There is a collection of investors in Mutual funds that haveprofessional

fund managers that invest in the stock market collectively onbehalf of investors. Mutual funds offer a better route to investing in equitiesfor lay investors. A mutual fund acts like a professional fund manager,investing the money and passing the returns to its investors. All it deducts isa management fee and its expenses, which are declared in its offerdocument.

Unit Linked Insurance Plans - ULIPs are remarkably alike to mutual fundsin terms of
their structure and functioning; premium payments made areconverted into units and a net asset value (NAV) is declared for the same. Intraditional insurance products, the sum assured is the corner stone; in ULIPspremium payments is the key component.

Page 15 of 62

A BRIEF OF MUTUAL FUNDS

INTRODUCTION
Mutual Funds over the years have gained immensely in their popularity.Apart from the many advantages that investing in mutual funds provide likediversification, professional management, the ease of investment processhas proved to be a major enabling factor. However, with the introduction ofinnovative products, the world of mutual funds nowadays has a lot to offerto its investors. With the introduction of diverse options, investors needs tochoose a mutual fund that meets his risk acceptance and his risk capacitylevels and has similar investment objectives as the investor.With the plethora of schemes available in the Indian markets, an investorsneeds to evaluate and consider various factors before making an investmentdecision. Since not everyone has the time or inclination to invest and do theanalysis himself, the job is best left to a professional. Since Indian economyis no more a closed market, and has started integrating with the worldmarkets, external factors which are complex in nature affect us too. Factorssuch as an increase in short-term US interest rates, the hike in crude prices,or any major happening in Asian market have a deep impact on the Indianstock market. Although it is not possible for an individual investor tounderstand Indian companies and investing in such an environment, theprocess can become fairly time consuming. Mutual funds (whose fundmanagers are paid to understand these issues and whose Asset ManagementCompany invests in research) provide an option of investing without gettinglost in the complexities. Most importantly, mutual funds provide risk diversification: diversification ofa portfolio is amongst the primary tenets of portfolio structuring, and anecessary one to reduce the level of risk assumed by the portfolio holder.Most of the investors are not necessarily well qualified to apply the theoriesof portfolio structuring to their holdings and hence would be better offleaving that to a professional. Mutual funds represent one such option.Definition- A Mutual Fund is a trust that pools the savings of a number ofinvestors who share a common financial goal. The money thus collected isthen invested in capital market instruments such as shares, debentures andother securities. The income earned through these investments and thecapital appreciation realized are shared by its unit holders in proportion tothe number of
Page 16 of 62

units owned by them. Thus a Mutual Fund is the most suitableinvestment for the common man as it offers an opportunity to invest in adiversified, professionally managed basket of securities at a relatively lowcost. The flow chart below describes broadly the working of a mutual fund:

Above cycle show the process of invest in Mutual Fund Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies.

The flow chart below describes broadly the working of a mutual fund:

Page 17 of 62

A Mutual Fund is a trust that pools the savings of a number of investors who share common financial goal, investments may be in shares, debt securities, money market securities or a combination of these. Those securities are professionally managed on behalf of the unitholders, and each investor holds a pro-rata share of the portfolio i.e. entitled to any profits when the securities are sold, but subject to any losses in value as well. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Page 18 of 62

How does a Mutual fund work?

HISTORY
The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept,
Page 19 of 62

the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. The mutual fund industry started in India in a small way with the UTI Act creating what was effectively a small savings division within the RBI. Over a period of 25 years this grew fairly successfully and gave investors a good return, and therefore in 1989, as the next logical step, public sector banks and financial institutions were allowed to float mutual funds and their success emboldened the government to allow the private sector to foray into this area. The initial years of the industry also saw the emerging years of the Indian equity market, when a number of mistakes were made and hence the mutual fund schemes, which invested in lesserknown stocks and at very high levels, became loss leaders for retail investors. From those days to today the retail investor, for whom the mutual fund is actually intended, has not yet returned to the industry in a big way. But to be fair, the industry too has focused on brining in the large investor, so that it can create a significant base corpus, which can make the retail investor feel more secure.

A Retrospect:
The last year was extremely eventful for mutual funds. The aggressive competition in the business took its toll and two more mutual funds bit the dust. Alliance decided to remain in the ring after a highly public bidding war did not yield an acceptable price, while Zurich has been sold to HDFC Mutual. The growth of the industry continued to be corporate focused barring a few initiatives by mutual funds to expand the retail base. Large money brought with it the problems of low retention and consequently low profitability, which is one of the problems plaguing the business. But at the same time, the industry did see spectacular growth in assets, particularly among the private sector players, on the back of the continuing debt bull run. Equity did not find favor with investors since the market was lack-luster and performances of funds, barring a few, were quite disappointing for investors. The other aspect of this issue is that institutional investors do not usually favor equity. It is largely a retail segment product and without retail depth, most mutual funds have been unable to tap this market. The tables given below are a snapshot of the AUM story, for the industry as a whole and for debt and equity separately. The mutual fund industry in India started in 1963
Page 20 of 62

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

First phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets under management.

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores.

Third Phase 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI
Page 21 of 62

(Mutual Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase since February 2003

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

MUTUAL FUND A GLOBALLY PROVEN

Page 22 of 62

INVESTMENT AVENUE
Worldwide, Mutual Fund or Unit Trust as it is referred to in some parts of the world, has a long and successful history. The popularity of Mutual Funds has increased manifold in developed financial markets, like the United States. As at the end of March 2008, in the US alone there were 8,064 mutual funds with total assets of about US$ 11.734 trillion (Rs.470 lakh crores)*.In India, the mutual fund industry started with the setting up of the erstwhile Unit Trust of India in 1963. Public sector banks and financial institutions were allowed to establish mutual funds in 1987. Since 1993, private sector and foreign institutions were permitted to set up mutual funds. In February 2003, following the repeal of the Unit Trust of India Act 1963 the erstwhile UTI was bifurcated into two separate entities viz. The Specified Undertaking of the Unit Trust of India, representing broadly, the assets of US 64 scheme, schemes with assured returns and certain other schemes and UTI Mutual Fund conforming to SEBI Mutual Fund Regulations. As at the end of March 2008, there were 33 mutual funds, which managed assets of Rs. 5,05,152 crores (US $ 126 Billion)* under 956 schemes. This fast growing industry is regulated by the Securities and Exchange Board of India (SEBI).

Mutual Fund Operation Flow Chart

The flow chart below describes broadly the working of a mutual fund:

ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates theorganizational set up of a mutual fund

Page 23 of 62

Mutual funds
Mutual fund is vehicle that facilitates a number of investors to pool theirmoney and have it jointly managed by a professional money manager

Sponsor
Sponsor is the person who acting alone or in combination with another bodycorporate establishes a mutual fund. The Sponsor is not responsible or liablefor any loss or shortfall resulting from the operation of the Schemes beyondthe initial contribution made by it towards setting up of the Mutual Fund.

Trustee
Trustee is usually a company (corporate body) or a Board of Trustees (bodyof individuals). The main responsibility of the Trustee is to safeguard theinterest of the unit holders and ensure that the AMC functions in the interestof investors and in accordance with the Securities and Exchange Board ofIndia (Mutual Funds) Regulations, 1996.

Asset Management Company (AMC)

Page 24 of 62

The AMC is appointed by the Trustee as the Investment Manager of theMutual Fund. At least 50% of the directors of the AMC are independentdirectors who are not associated with the Sponsor in any manner. The AMCmust have a net worth of at least 10 crores at all times.

Transfer Agent
The AMC if so authorised by the Trust Deed appoints the Registrar andTransfer Agent to the Mutual Fund. The Registrar processes the applicationform, redemption requests and dispatches account statements to the unitholders. The Registrar and Transfer agent also handles communications withinvestors and updates investor records.

Page 25 of 62

Terms associated with a Mutual Fund

Net Asset Value (NAV) - Net Asset Value is the market value of the assetsof the
scheme minus its liabilities. The per unit NAV is the net asset value ofthe scheme divided by the number of units outstanding on the ValuationDate. Sale Price- Is the price you pay when you invest in a scheme. Also calledOffer Price. It may include a sales load. Repurchase Price- Is the price at which a close-ended scheme repurchasesits units and it may include a back-end load. This is also called Bid Price. Redemption Price- Is the price at which open-ended schemes repurchasetheir units and close-ended schemes redeem their units on maturity. Suchprices are NAV related.Repurchase or Back-end Load / Exit load - Is a charge collected by ascheme when it buys back the units from the unit holders. Entry load- Entry load is the commission that an investor has to pay whilepurchasing units of a mutual fund. This is a certain percentage that themutual fund charges to meet its expenses. Credit Rating- Credit ratings measure a borrowers creditworthiness andhelps in comparison of credit quality, this is true within a country and across countries. Issuer credit rating measures the creditworthiness of theborrower including its capacity and willingness to meet financial needs. Redemption price- Redemption price is the price received on selling units of open-ended scheme. If the fund does not levy an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the NAV in case the fund levies an exit load. Repurchasing price- Repurchase price is the price at which a close-ended scheme repurchases its units. Repurchase can either be at NAV or can have an exit load. Switch- Some Mutual Funds provide the investor with an option to shift his investment from one scheme to another within that fund. For this option the fund may levy a switching fee.
Page 26 of 62

Switching allows the Investor to alter the allocation of their investment among the schemes in order to meet their changed investment needs, risk profiles or changing circumstances during their lifetime. Shut-Out Period- After the closure of the Initial Offer Period, on an ongoing basis, the Trustee reserves a right to declare Shut-Out period not exceeding 5 days at the end of each month/quarter/half-year, as the case may be, for the investors opting for payment of dividend under the respective Dividends Plans. The declaration of the Shut-Out period is envisaged to facilitate the AMC/the Registrar to determine the Units of the unit holders eligible for receipt of dividend under the various Dividend Options. Further, the Shut-Out period will also help in expeditious processing and dispatch of dividend warrants. The Shut-Out period applies to new investors in the Scheme as well as to Unit holders making additional purchases of Units into an existing folio. The Trustee reserves the right to change the Shut-Out period and prescribe new Shut- Out period, from time to time.

Who are the issuers of Mutual funds in India?

Unit Trust of India was the first mutual fund which began operations in 1964. Other issuers of Mutual funds are Public sector banks like SBI, Canara Bank, Bank of India, Institutions like IDBI, ICICI, GIC, LIC, and Foreign Institutions like Alliance, Morgan Stanley, Templeton and Private financial companies like Kothari Pioneer, DSP Merrill Lynch, Sundaram, Kotak Mahindra, and Cholamandalam etc. there are many new upcoming fund houses like Edelweiss, J.P. Morgan, Axis, SYSTEMATIC INVESTMENT PLAN SIP is an investment option that is presently available only with mutual funds. The other investment option comparable to SIPs is the recurring deposit schemes from Post office and banks. Basically, under an SIP option an investor commits making a regular (monthly/quarterly) investment in a particular mutual fund/deposit. Investor can now use auto debit (ECS) facility from Banks to automatically debit SIP amount from your account. There is no need to give bulk of cheques for SIP. For that you should have account in nationalized banks. For SIP through ECS, you have to provide bank details like account no., branch name, MICR no. etc.

Page 27 of 62

TAX BENEFITS IN MUTUAL FUNDS

When we talk about a mutual fund for taxation purposes, we mean the legally constituted trust that holds the investors money. It is trust that earns and receives income from investments it makes on behalf of the investors. Most countries do not impose any tax on this entity the trust because the income it earns is meant for the investors. The trust is considered to be only a pass-through vehicle. It would amount to double taxation if the trust first pays a tax and then investor also is made to pay. Generally, the trust that is exempted and the investor pay the taxes on his share of the income. After the 1999-2000 Budget, the investors are totally exempt from paying any tax on the dividend income they receive from the mutual funds, while certain types of schemes pay some taxes. This section explains what the fund or the trust pays by way of tax. Tax Provision Generally, income earned by mutual fund registered with SEBI is exempt from tax.
However, income distributed to unit-holders by a closed-end debt fund is liable to a

dividend distribution tax at a rate stipulated by the Government. This tax is not applicable to distributions made by open-end equity-oriented funds. Impact on the Fund and the Investor
It should be noted that although this tax is payable by the fund on its

distributions and out of its income, the investor are indirectly since the funds NAV, and therefore the value of his investment will come down by the amount of tax paid by the fund. For example, if a closed-end or debt fund declares a dividend distribution of Rs. 100, Rs. 10.20, if tax rate is 10.20%) will be the tax in the hands of the fund. While the investor will get Rs. 100, the fund will have Rs. 10.20 less to invest. The funds current cash flow will diminish by Rs. 10.20 paid as tax, and its impact will be reflected in the lower value of the funds NAV and hence investors investment on a compounded basis in future periods.
Also, the tax bears no relationship to the investors tax bracket and is payable by the

fund even if the investors income does not exceed the taxable limit prescribed by the
Page 28 of 62

Income Tax Act. In fact, since the tax is on distributions, it makes income schemes less attractive in comparison to growth schemes, because the objective of income schemes is to pay regular dividends.
The fund cannot avoid the tax eve if the investor chooses to reinvest the distribution

back into the fund. For example, the fund will still pay Rs. 10.20 tax on the announced distribution, even if the investor chooses to reinvest his dividends in the concerned scheme.

Tax benefits to the Investor

Dividends Received From Mutual Funds Income distributed by a fund is exempted in the hands of investors No TDS on any income distribution by mutual fund Capital Gains on Sale of Units However, if the investor sells his units and earns Capital Gains, the investor is subject to the Capital Gains Tax as under: If units are held for not more than 12 months, they will be treated as short term capital asset, otherwise as long term capital asset.
Tax law definition of Capital Gains = Sale consideration (Cost of

Acquisition + Cost of Improvements + Cost of transfer)

If the units were held for over one year, the investor gets the benefit of

Indexation, which means his purchase price is marked up by an inflation index, so his capital gains amount is less than otherwise. Purchase Price of a long term capital asset after Indexation is computed as, Cost of acquisition or improvement = actual cost of acquisition or improvement * cost inflation index for year of transfer / cost inflation index for year of acquisition or improvement or for 1981, whichever is less. Since, April 1, 2003, all dividends, declared by debt-oriented mutual funds (i.e. mutual funds with less than 50% of assets in equities), are tax-free in the hands of the investor .A dividend distribution tax of 12.5% (including surcharge) is to be paid by the mutual fund on the dividends declared by the fund. Long-term debt funds, government securities funds (Gsec/gilt funds), monthly income plans (MIPs) are examples of debt-oriented funds.
Page 29 of 62

Dividends declared by equity-oriented funds (i.e. mutual funds with more than 50% of assets in equities) are tax-free in the hands of investor. There is also no dividend distribution tax applicable on these funds under section 115R. Diversified equity funds, sector funds ,balanced funds are examples of equity-oriented funds. Amount invested in tax-saving funds (ELSS) would be eligible for deduction under Section 80C, however the aggregate amount deductible under the said section cannot exceed Rs 100,000. Section 2(42A): Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short term capital asset if the same is held for less than 12 months. The units held for more than twelve months are treated as long-term capital asset. Section 10(38): Under Section 10(38) of the Act, long term capital gains arising from transfer of a unit of mutual fund is exempt from tax if the said transaction is undertaken after October 1, 2004 and the securities transaction tax is paid to the appropriate authority. This makes long-term capital gains on equity-oriented funds exempt from tax from assessment year 2005-06. Short-term capital gains on equity-oriented funds are chargeable to tax @10% (plus education cess, applicable surcharge). However, such securities transaction tax will be allowed as rebate under Section 88E of the Act, if the transaction constitutes business income. Long-term capital gains on debt-oriented funds are subject to tax @20% of capital gain after allowing indexation benefit or at 10% flat without indexation benefit, whichever is less. Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket applicable (marginal tax rate) to the investor. Section 112: Under Section 112 of the Act, capital gains, not covered by the exemption under Section 10(38), chargeable on transfer of long-term capital assets are subject to following rates of tax:
Resident Individual & HUF -- 20% plus surcharge, education cess.

Partnership firms & Indian companies -- 20% plus surcharge. Foreign companies -- 20% (no surcharge). Capital gains will be computed after taking into account the cost of acquisition as adjusted by Cost Inflation Index, notified by the central government.

Page 30 of 62

'Units' are included in the proviso to the sub-section (1) to Section 112 of the Act and hence, unit holders can opt for being taxed at 10% (plus applicable surcharge, education cess) without the cost inflation index benefit or 20% (plus applicable surcharge) with the cost inflation index benefit, whichever is beneficial. Under Section 115AB of the Income Tax Act, 1961, long term capital gains in respect of units, purchased in foreign currency by an overseas financial, held for a period of more than 12 months, will be chargeable at the rate of 10%. Such gains will be calculated without indexation of cost of acquisition. No surcharge is applicable for taxes under section 115AB, in respect of corporate bodies. Offset the capital loss on a mutual fund investment after a dividend declaration This is a practice that is popularly referred to as 'dividend stripping.' The capital loss from a dividend declaration can be offset if you have remained invested in the mutual fund 3 months before and 9 months after the dividend declaration. If you haven't adhered to this guideline then you cannot offset the capital loss arising from a dividend declaration. Avoid payment of capital gains on mutual fund investments The capital gain, which is not exempt from tax as explained above, can be invested in the specified asset, mentioned below, within 6 months of the sale. Specified asset means any bond redeemable after 3 years: Issued on or after April 1, 2000 by NABARD (National Bank for Agriculture and Rural Development or NHA (National Highways Authority of India Issued on or after April 1, 2001 by the Rural Electrification Corporation Ltd. Issued on or after April 1, 2002 by the National Housing Bank or by the Small Industries Development Bank of India. Such capital gains can also be invested in any residential house property in accordance with Section 54F of the Act and one can claim exemption from capital gains.

Page 31 of 62

Regulatory Authorities
To protect the interest of the investors, SEBI formulates policies andregulates the mutual funds. It notified regulations in 1993 (fully revised in1996) and issues guidelines from time to time. MF either promoted by publicor by private sector entities including one promoted by foreign entities isgoverned by these Regulations. SEBI approved Asset Management Company (AMC) manages the funds bymaking investments in various types of securities. Custodian, registered withSEBI, holds the securities of various schemes of the fund in its custody.According to SEBI Regulations, two thirds of the directors of TrusteeCompany or board of trustees must be independent.The Association of Mutual Funds in India (AMFI) reassures the investors inunits of mutual funds that the mutual funds function within the strictregulatory framework. Its objective is to increase public awareness of themutual fund industry.AMFI also is engaged in upgrading professional standards and in promotingbest industry practices in diverse areas such as valuation, disclosure ,transparency etc. THE RIGHTS OF INVESTORS As per SEBI Regulations on Mutual Funds, an investor is entitled to 1. Receive Unit certificates or statements of accounts confirming your title within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. 2. Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme; 3. Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase 4. The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep them informed about any information which may have an adverse bearing on their investments 5. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund.
Page 32 of 62

6. 75% of the unit holders can pass a resolution to wind-up the scheme.

TYPES OF MUTUAL FUND SCHEMES

Types of Mutual

Structur e
Open Ended

Investm ent
Growth

Special schemes
Industry specific

Income Close Balanced

Index schemes

Internal Money Market

Sector schemes

BY STRUCTURE
1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through theyear. These do not have a fixed maturity. Investors can conveniently buyand sell units at Net Asset Value ("NAV") related prices. The key feature ofopen-end schemes is liquidity. 2. Close - Ended Schemes: A closed-end fund has a stipulated maturity period which generally rangingfrom 3 to 15 years. The fund is open for subscription only during a specifiedperiod. Investors can invest in
Page 33 of 62

the scheme at the time of the initial publicissue and thereafter they can buy or sell the units of the scheme on thestock exchanges where they are listed. In order to provide an exit route tothe investors, some close-ended funds give an option of selling back theunits to the Mutual Fund through periodic repurchase at NAV related prices.SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. 3. Interval Schemes: Interval Schemes are that scheme, which combines the features of openedand close-ended schemes. The units may be traded on the stockexchange or may be open for sale or redemption during pre-determinedintervals at NAV related prices.

By investment objective:
Growth Schemes: Growth Schemes are also known as equity schemes. Theaim of these schemes is to provide capital appreciation over medium to longterm. These schemes normally invest a major part of their fund in equitiesand are willing to bear short-term decline in value for possible futureappreciation. Income Schemes: Income Schemes are also known as debt schemes. Theaim of these schemes is to provide regular and steady income to investors.These schemes generally invest in fixed income securities such as bonds andcorporate debentures. Capital appreciation in such schemes may be limited. Balanced Schemes: Balanced Schemes aim to provide both growth andincome by periodically distributing a part of the income and capital gainsthey earn. These schemes invest in both shares and fixed income securities,in the proportion indicated in their offer documents (normally 50:50). Money Market Schemes: Money Market Schemes aim to provide easyliquidity, preservation of capital and moderate income. These schemesgenerally invest in safer, shortterm instruments, such as treasury bills,certificates of deposit, commercial paper and interbank call money.The risk return trade-off indicates that if investor is willing to take higherrisk then correspondingly he can expect higher returns and vise versa if hepertains to lower risk instruments, which would be satisfied by lowerreturns. For example, if an investors opt for bank FD, which providemoderate return with minimal risk. But as he moves
Page 34 of 62

ahead to invest incapital protected funds and the profit-bonds that give out more return whichis slightly higher as compared to the bank deposits but the risk involved alsoincreases in the same proportion. Thus investors choose mutual funds as their primary means of investing, asMutual funds provide professional management, diversification, convenienceand liquidity. That doesnt mean mutual fund investments risk free. This isbecause the money that is pooled in are not invested only in debts fundswhich are less riskier but are also invested in the stock markets whichinvolves a higher risk but can expect higher returns. Hedge fund involves avery high risk since it is mostly traded in the derivatives market which isconsidered very volatile.

BY NATURE
1. Equity fund: These funds invest a maximum part of their corpus into equities holdings.The structure of the fund may vary different for different schemes and thefund managers outlook on different stocks. The Equity Funds are subclassifieddepending upon their investment objective, as follows: Diversified Equity Funds. Mid-Cap Funds. Sector Specific Funds. Tax Savings Funds (ELSS). Equity investments are meant for a longer time horizon, thus Equityfunds rank high on the risk-return matrix. 2. Debt funds: The objective of these Funds is to invest in debt papers. Governmentauthorities, private companies, banks and financial institutions are some ofthe major issuers of debt papers. By investing in debt instruments, thesefunds ensure low risk and provide stable income to the investors. Debt fundsare further classified as:

Page 35 of 62

Gilt Funds: Invest their corpus in securities issued by Government,popularly known as Government of India debt papers. These Funds carryzero Default risk but are associated with Interest Rate risk. These schemesare safer as they invest in papers backed by Government. Income Funds: Invest a major portion into various debt instruments suchas bonds, corporate debentures and Government securities. They provide afixed return over each period of time. MIPs: Invests maximum of their total corpus in debt instruments while theytake minimum exposure in equities. It gets benefit of both equity and debtmarket. These scheme ranks slightly high on the risk-return matrix whencompared with other debt schemes. Short Term Plans (STPs): Meant for investment horizon for three to sixmonths. These funds primarily invest in short term papers like Certificate ofDeposits (CDs) and Commercial Papers (CPs). Some portion of the corpus isalso invested in corporate debentures. Liquid Funds: Also known as Money Market Schemes, These funds provideseasy liquidity and preservation of capital. These schemes invest in shortterminstruments like Treasury Bills, inter-bank call money market, CPs andCDs. These funds are meant for short-term cash management of corporatehouses and are meant for an investment horizon of 1day to 3 months. Theseschemes rank low on risk-return matrix and are considered to be the safestamongst all categories of mutual funds.

3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. Theyinvest in both equities and fixed income securities, which are in line withpre-defined investment objective of the scheme. These schemes aim toprovide investors with the best of both the worlds. Equity part providesgrowth and the debt part provides stability in returns.

Types of returns
There are three ways, where the total returns provided by mutual funds canbe enjoyed by investors.Income is earned from dividends on stocks and interest on bonds. A fundpays out nearly all income it receives over the year to fund owners in theform of a distribution.If the fund sells securities that have increased in price, the fund has a capitalgain. Most funds also
Page 36 of 62

pass on these gains to investors in a distribution.If fund holdings increase in price but are not sold by the fund manager, thefund's shares increase in price. You can then sell your mutual fund shares fora profit. Funds will also usually give you a choice either to receive a checkfor distributions or to reinvest the earnings and get more shares.

Page 37 of 62

SELECTION OF BEST MUTUAL FUND

Choice of any scheme would depend to a large extent on the investor preferences. For an investor willing to undertake risks, equity funds would be the most suitable as they offer the maximum returns. Debt funds are suited for those investors who prefer regular income and safety. Gilt funds are best suited for the medium to long-term investors who are averse to risk. Balanced funds are ideal for medium- to long-term investors willing to take moderate risks. Liquid funds are ideal for Corporates, institutional investors and business houses who invest their funds for very short periods. Tax Saving Funds are ideal for those investors who want to avail tax benefits. An important aspect while selecting a particular scheme is the duration of the investment. Depending on your time horizon you can select a particular scheme. Besides all this, factors like promoter's image, objective of the fund and returns given by the funds on different schemes should also be taken into account while selecting a particular scheme. When your investment purpose is for saving for retirement, then risk minimization should be your mantra. And one of the best avenues for you to invest now is mutual funds as they have an average of 50 stocks in each portfolio for diversification and cushioning the risks. Selecting best mutual funds mean a lot more than deciding by indices and their past performances. However, you need to remember one thing that there is no quick gratification in investments of any kind. Let us discuss the dos and don'ts of selecting the best mutual funds. These points should serve as guidelines for making decision on whether your pick is among the best in the industry or not.

Dos In Selecting the Best Mutual Fund

1. Draw down your investment objective. There are various schemes suitable for different needs. For example retirement plan, capital growth etc. Also get clear about your time frame for investment and returns. Equity funds are not advisable for short term because of their long term nature. You can consider money market and floating rate funds for short term gains. This equals asking - What kind of mutual fund is right for me?
Page 38 of 62

2. Once you have decided on a plan or a couple of them, collect as much information as possible on them from different sources offering them. Funds' prospectus and advisors may help you in this. 3. Pick out companies consistently performing above average. Mutual funds industry indices are helpful in comparing different funds as well as different plans offered by them. Some of the industry standard fund indices are Sensex, Nifty, BSE 500 etc. with the latter rating the Socially Responsible Funds only. Also best mutual funds draw good results despite market volatility. 4. Get a clear picture of fees & associated cost, taxes (for non-tax free funds) for all your short listed funds and how they affect your returns. Best mutual funds have lower cost out go. 5. Best mutual funds maximize returns and minimize risks. A number called as Sharpe Ratio explains whether a fund is risk free based on its expected returns compared against a risk free money market fund. 6. Some funds have the advantage of low minimum initial investments. You can start investing even with Rs. 1000 a month. This is advisable for building asset bases over a long period with small regular investment

Don'ts In Selecting Best Mutual Funds

Like there are pit falls in every investment sphere you must be careful about even while investing in mutual funds. Here is a list of don'ts you must consider for selecting best performing mutual funds
Don't go by the past performance alone. For, an average of performance over a period

will not tell you whether the performance is growing or at least maintained in the recent years.
Don't go by hearsay about the reputations of a fund. There are various rating agencies

which index the mutual funds regularly based on multiple factors. It forms your first step in finding the best performing mutual funds.

Page 39 of 62

 Don't invest huge sums of money in a single fund or all the money in one go. Spread

out your investments rationally. For example: Index funds for high returns, bond funds for lower risks, 401 (k) retirement plans and so on.
Don't ignore absolute returns. NAVs and percentage growths don't factor-in the taxes

and charges. Higher loads can diminish you in absolute returns. Some of the funds load you at both buying as well as selling. Even no load funds have fees such as Rule 12-b fees.
Don't chase a mutual fund because it is performing great in a bull run in the stock

market. Once the market stagnates or the trend reverses these funds will follow suit.
Don't compare a mutual fund across the category. This means a diversified fund

should not be compared with index fund. While choosing a best one compare funds from the same category regardless of the promoting companies. It is definitely not easy to pick a few best mutual funds from those in the market. It is like searching for the proverbial needle in the stack of hay. However, a best mutual fund is one that charges low fees, that sticks to principles and investment styles, which puts your interest on top of everything else. The most important character of best mutual funds is they don't just know how to ride a bull run but also a bear market.

Page 40 of 62

UNDERSTANDING AND MANAGING RISK

All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy; generally, however, longer the term, lesser the risk; companies may default in payment of interest/principal on their debentures /bonds/ deposits; the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillful management can minimise risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that minimises risk and maximises returns.

Risks involved in investing in Mutual Funds

Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures and deposits. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and companies may default in payment of interest/principal on their debentures/bonds/deposits. Besides this, the government may come up with new regulation which may affect a particular industry or class of industries. All these factors influence the performance of Mutual Funds.

Page 41 of 62

Advantages of Investing Mutual Funds:

1. Professional Management - The basic advantage of funds is that, theyare
professional managed, by well qualified professional. Investors purchasefunds because they do not have the time or the expertise to manage theirown portfolio. A mutual fund is considered to be relatively less expensiveway to make and monitor their investments. The professional fund managerswho supervise funds portfolio take desirable decisions viz., what scripts areto be bought, what investments are to be sold and more appropriatedecisions

2. Diversification of Risk - Purchasing units in a mutual fund instead ofbuying

individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.

3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time,
thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.

4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate
their holdings as and when they want. Mutual funds units can either be sold in the share market as SEBI has made it obligatory for closed ended schemes to list themselves on stock exchanges. For open-ended schemes investors can always approach the fund for repurchase at net asset value (NAV) of the scheme. Such repurchase price and NAV is advertised in newspaper for the convenience of investors as to timings of such buy and sell. They have
Page 42 of 62

extensive research facilities at their disposal, can spend full time to investigate and can give the fund a constant supervision.

5. Simplicity - Investments in mutual fund is considered to be easy, compare to other

available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

6 Safety of Investments- Besides depending on the expert supervision of fund

managers, the legislation in a country (like SEBI in India) also provides for the safety of investments. Mutual funds have to broadly follow the laid down provisions for their regulations, SEBI acts as a watchdog and attempts whole heatedly to safeguard investors interests.

7. Tax Shelter: Depending on the scheme of mutual funds, tax shelter is also available. As
per the Union Budget-2003, income earned through dividends from mutual funds is 100% tax-free at the hands of the investors.

8.Close ended schemes: ELSS schemes with a minimum of 3 years lock in period also
provide tax exemption to the investor. Long term Capital gains are also exempted from tax for equity funds. The concept of Systematic Investment plan and Rupee cost averaging- Unlike other equity linked product and shares or stocks Mutual funds provide the added benefit of Systematic Investment plan. Here the money may be invested over a longer horizon of time in equal installments. Our natural instinct might be to stop investing if the price starts to dropbut history suggests that the best time to invest may be when you are getting good value. Rupeecost averaging can be an effective strategy with funds or stocks that can have sharp ups and downs, because it gives you more opportunities to purchase shares less expensively. The benefit of this approach is that, over time, you may reduce the risk of having bought shares when their cost was highest.

Page 43 of 62

Disadvantages of Investing Mutual Funds:

1. Professional Management- Some funds dont perform as their management is not
dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor himself, for picking up stocks.

2. Costs The biggest source of AMC income is generally from the entry & exit load
which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.

3. Dilution - Because funds have small holdings across different companies, high returns
from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

4. Taxes - when making decisions, fund managers don't consider investors personal tax
situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Page 44 of 62

Analysis
Mutual funds also carry a risk profile with them. Some of the tools available to assess a schemes riskiness are-

Beta
This common measure compares a mutual fund's volatility with that of a benchmark and is supposed to give some sense of how far you can expect a fund to fall when the market takes a dive, or how high it might climb if the bull is running hard. A fund with a beta greater than 1 is considered more volatile than the market; less than 1 means less volatile. So say your fund gets a beta of 1.15 -- it has a history of fluctuating 15% more than the benchmark If the market is up, the fund should outperform by 15%. If the market heads lower, the fund should fall by 15% more. But beta, though a useful guide, is far from perfect, especially when used as a proxy for "risk." The problem here, as with many risk measures, is the benchmark. The benchmark has to be a correct measure of comparison only then will the beta hold any indicative value.

Alpha
Alpha was designed to take beta one step further. It looks at the relationship between a fund's historical beta and its current performance, or the difference between the return beta would lead you to expect and the return a fund actually gets. An alpha of 0 simply means that the fund did as well as expected, considering the risks it took. So if that fund with the beta of 1.15 beat the market by 15% (or underperformed it by 15% when the market was down), it would have a 0 alpha. If your fund has a positive alpha, that means it returned more than its beta predicted. A negative alpha means it returned less. The trouble with alpha is that it's only as good as its beta. If the benchmark isn't appropriate to a fund in deriving its beta, then alpha, too, will be imprecise.

Standard Deviation
Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by
Page 45 of 62

investors as a gauge for the amount of expected volatility. Standard deviation is a statistical measurement that sheds light on historical volatility. For example, a volatile stock will have a high standard deviation while the deviation of a stable blue chip stock will be lower. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns.

Sharpe Ratio
The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

Page 46 of 62

HOW TO INVEST IN MUTUAL FUNDS Step One:- Identify your investment needs.
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore, the first step is to assess your needs. Begin by asking yourself these questions: Probable Answers: I need regular income or need to buy a home or finance a wedding or educate my children or a combination of all these needs. Probable Answers: I can only take a minimum amount of risk or I am willing to accept the fact that my investment value may fluctuate or that there may be a short term loss in order to achieve a long term potential gain. Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a specific need after a certain period or I dont require a current cash flow but I want to build my assets for the future. By going through such an exercise, you will know what you want out of your investment and can set the foundation for a sound Mutual Fund Investment strategy.

Step Two
1. What are my investment objectives and needs? 2.How much risk amI willing to take? 3.What are my cash flow requirements?

StepThree
- Choose the right Mutual Fund. Once you have a clear strategy in mind, you now have to choose which Mutual Fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed the same
Page 47 of 62

Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are: the track record of performance over the last few years in relation to the appropriate yardstick and similar funds in the same category. How well the Mutual Fund is organized to provide efficient, prompt and personalized service. Degree of transparency as reflected in frequency and quality of their communications.

Step Four
- Select the ideal mix of Schemes. Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals.

Step Five
Invest regularly For most of us, the approach that works best is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, you get fewer units when the price is high and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. With many open-ended schemes offering systematic investment plans, this regular investing habit is made easy for you. Keep your taxes in mind As per the current tax laws, Dividend/Income Distribution made by mutual funds is exempt from Income Tax in the hands of investor. However, in case of debt schemes Dividend/ Income Distribution is subject to Dividend Distribution Tax. Further, there are other benefits

Step Six Start early

It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return.

Step Seven
The final step

Page 48 of 62

All you need to do now is to get in touch with a Mutual Fund or your advisor and start investing. Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.

FURTHER SCOPE OF THE STUDY

The study will further try to1. Analyze a few fund/schemes. 2. Comparative analysis of different investment Options with Mutual Funds

MARKET SURVEY
INTRODUCTION
In financial markets, expectations of the investors play a vital role. They influence the price of the securities; the volume traded and determines quite a lot of things in actual practice. These expectations of the investors are influenced by their perception and humans generally relate perception to action. The objective of the survey was to categorize investors as being inclined towards investment products based on certain characteristic such as sex, age, occupation, annual income etc. In addition the time horizon of investment and the the real need/purpose of investment were studied and categorized based on the above demographic factors. It was also intended to examine the different intrinsic factors of a mutual fund scheme and different environmental forces that motivate a investor to choose a particular mutual fund scheme.

RESEARCH METHODOLOGY
Research refers to search for knowledge. One can also define research as a scientific and systematic search for pertinent information on a specific topic. It is an art of scientific investigation. DESIGNING A QUESTIONAIRE
Page 49 of 62

To understand the savings avenue preference, scheme preference, time horizon for investment and objectives for investment in MFs, and to identify the information sources influencing scheme selection, and the preferred mode of communication, a questionnaire (ANNEXURE I) was designed and the respondents were asked to rank their preferences on a ranking scale. The ranks were ascertained by obtaining the weighted mean value of the responses. To identify the factors that influence the investors fund/scheme selection, 23 variables were identified through evidence from past research. Based on theory, past research, and personal judgment, the factors that could influence the investors in their selection of Mutual funds/schemes was first grouped into 3 major groups Fund/Scheme qualities, fund sponsor qualities and the expected investor services. Then the 23 identified variables were classified under the appropriate group as follows: SCHEMES QUALITIES 1. Funds/Schemes performance record 2. Funds/Schemes brand name 3. Schemes expense ratio 4. Schemes portfolio constituents 5. Reputation of scheme(s), portfolio manager(s) 6. Withdrawal facilities 7. Rating by a rating agency 8. Innovativeness of the Scheme 9. Products with tax benefits 10.Entry and Exit load FUND SPONSORS QUALITIES 1. Reputation of the sponsoring firm

Page 50 of 62

2. Sponsor offers a wide range of schemes with different investment objectives 3. Brand name of Sponsor 4. Sponsor has a well developed Agency Net work/Infrastructure 5. Sponsor has an efficient research wing 6. Sponsors expertise in managing money INVESTOR SERVICES 1. Disclosure of investment objectives, method and periodicity of valuation in advertisement 2. Disclosure of method, periodicity of schemes sales and repurchase in offer documents 3. Announcement of NAV on every trading day 4. Disclosure of deviation of the investments from the expected pattern 5. Disclosure of schemes investments on every trading day 6. Mutual Fund Investors grievance redressal machinery_ 7. Additional Services like free insurance, free credit card, loans on collateral, tax benefits etc In the survey, the respondents were asked to rate the importance of the 23 specified variables on a 5 point scale ranging from Highly Important (1) to Not at all Important (5). The data for each of the 3 sub -groups were factor analyzed using Principal Component Analysis with the objective of identifying the factor in the sub -group which turns out to be significant in the fund/scheme selection. FURTHER SCOPE OF THE STUDY The study shall further include the comparative analysis of other demographic factors (Income, Occupation and Gender) with types and horizon of investment. 1. Income VS Type of Investment 2. Income VS Horizon of Investment
Page 51 of 62

3. Occupation VS Type of Investment 4. Occupation VS Horizon of Investment 5. Gender VS Type of Investment 6. Gender VS Horizon of Investment FACTORS AFFECTING SCHEME SELECTION IN MUTUAL FUNDS Ranking of the Investment Objective in Sample OBJECTIVE Safety Liquidity Tax Benefit Dividend Capital Appreciation RANK 1 4 3 2 5

The investors look for safety first in MF products, followed by good returns, Tax Benefits, liquidity and capital appreciation. The survey further reveals that the scheme selection decision is made by respondents on their own, and the other sources influencing their selection decision are News papers and Magazines, Brokers and Agents, Television, Friends suggestions and Direct Mail in that order Preferable Route to Mutual Fund Investing as indicated below. ROUTE Friends Suggestions Newspaper/Magazines Self Decision Television Brokers/Agents Email/Direct mail RANK 5 2 1 4 3 6

Page 52 of 62

Since the survey reveals priority to Self decision in scheme selection. Information dissemination through all possible routes which will reach the investors should be tapped in a cost-effective manner by AMCs. Diagnostically looking, the fact that the investors prefer to make their own scheme selection decision, in spite of their lack of knowledge about the sophisticated market environment, reflects their reluctance to believe the available quality of service provided by the agents, financial consultants and investment advisers. These agencies and persons engaged in giving investment advice should gear up now to win the confidence of the investors. In the long run, it will help both the investors and the investment advisers, thus strengthening the link between the individual investors and the Mutual Funds.

Page 53 of 62

Scheme Preference of Mutual Fund Investors SCHEME Growth Income Balanced RANK 1 2 3

FURTHER SCOPE OF THE STUDY Although it has been observed that safety is the number one motive behind investment in any mutual funds, the effect of demographics cannot be neglected while observing the scheme selection behavior of Mutual Fund investors. Thus this study will further include a analysis of the perception of different individuals belonging to different demographics on various objectives of investment offered by mutual funds (Tax benefit, Dividend, Safety, Capital Appreciation, Liquidity). This will help in finding out what product to offer to which type of individual. Influence of Product Qualities on Scheme Selection OBSERVATION The 10 fund related variables were analyzed for their importance. The analysis reveals that the investor considers all the 10 variables as important in his selection of the fund/scheme. The mean values of the readings were obtained and the factors were ranked according to their importance. VARIABLES Schemes Performance Records Schemes Brand Name Portfolio of Investment Withdrawal facility Reputation of Schemes Managers RANKING 1 2 3 4 5
Page 54 of 62

Products with Tax Benefits Ratings Entry and Exit Load Expense Ratio Innovativeness of Scheme

6 7 8 9 10

To identify the investors underlying fund/scheme selection criteria, so as to group them into specific market segment to enable the designing of the appropriate marketing strategy, Factor Analysis was done using Principal Component Analysis. The readings obtained are given below.

Page 55 of 62

CONCLUSION
Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money .Mutual funds are one of the most highly growing products in financial services market. Mutual funds are suitable for all types of investors from risk adverse to risk bearer. Mutual funds have many options of return, risk free return, constant return, market associated return, etc. mutual funds are suitable to all age of investors, businessmen, salary person, etc. Investors need not to be expert in equity market; mutual funds can satisfy their need. Fund managers are expert in this area and invest fund in well diversified portfolio, high return with low risk is possible inn mutual fund. Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). In todays world, investors are showing more trust in mutual fund than any other financial product. There is no need of a financial consultant, if you have good knowledge of mutual funds and their type to invest. Mutual fund is subject to market risk, despite of that it have low risk than stock market. This is proved in performance evaluation section of this report. Performance evaluation measurement ratios i.e. Treynors, Sharpes and Jensens are used by fund managers to take decision of investment and to diversify portfolio.
Page 56 of 62

RECOMMENDATION
Mutual Fund is subject to market risk, analyzing particular fund before investing. Study historical return of funds, risk measurement ratios to evaluate fund.
There should be similarity in your and funds objective.

For high return invest in diversified funds, for tax saving invest in ELSS equity funds, for moderate risk and return invest in balance funds, for assure return invest in debt
and liquid funds.

As per my opinion, investor should invest around 30% in mutual fund.

LEARNING
Performance measurement of funds How to choose best funds How to convince investors
Upto some extend I realize life as an employee

How to recommend suitable fund to investors

Page 57 of 62

ANNEXURE 1
This survey is for the sole purpose of collecting data for a survey. Information in this survey would not be disclosed for any other purpose. We are very much grateful to you for your cooperation and time. NAME______________________________________________ Email Id_______________________________________Mobile_____________________ Please tick mark I.SEX: Male II.AGE: Below 30 Female 30 40 40 - 50 50 an above 300000-400000 4000000<

III.INCOME:< 150000

150000-30000

IV. OCCUPATION Salaried Please fill in SAVINGS = Rs ____________ / Year

Businessman

Retired

What % of your savings are invested for 5 years and above __________________ (approx.) What % of your savings are invested for 3-5 years__________________ (approx.) What % of your savings are invested for 1-3 years___________________ (approx) What % of your savings are invested for less than one year________________ (approx) Please rank the choices according to your preferences as indicated in example. Give Rank 1 to the most preferred option. Give Rank 2 to the next best option and so on. EXAMPLE: What season do you like most?
Page 58 of 62

Rainy

2 Winter

1 Summer

In which schemes have you invested most till date? (Rank 1-6) Mutual Funds Fixed Deposits Life Insurance Postal Savings Stocks Provident Funds

What were the most important factors while selecting a mutual fund scheme? (Rank 1 to 6) Tax Benefit Capital Appreciation Dividend Liquidity Safety

Which environmental forces influenced you the most to invest in mutual fund? Rank in order of preference from 1 to 6. Friends Suggestions Newspapers / Magazines Television and commercials Brokers and Agents Self evaluation and decision Direct mail / E mail Which mode of communication do you prefer most for receiving updates and performance of your scheme / portfolio of mutual fund investment? Rank 1 to 4. Telephone E mail / Internet Direct mail Personal contact / visit.

Page 59 of 62

GIVE MARKS OUT OF 5 TO EACH OF THE ATTRIBUTES FOR THEIR IMPORTANCE WHILE MAKING A INVESTMENT DECISION. Please Refer Example. Give: 1 for Highly Important Factor Please feel free to leave any Give: 2 for Important question that you cant understand Give: 3 for Moderately Important Unmarked Give: 4 for Less Important Give: 5 for Not at all Important. EXAMPLE: Grade Funds Popularity? ________________________ SL NO. SCHEMES QUALITIES MARKS A1 Funds/Schemes performance record_______________ A2 Funds/Schemes brand name_____________________ A3 Schemes expense ratio__________________________ A4 Schemes portfolio constituents____________________ A5 Reputation of scheme(s), portfolio manager(s)________ A6 Withdrawal facilities____________________________ A7 Rating by a rating agency________________________ A8 Innovativeness of the Scheme_____________________ A9 Products with tax benefits________________________ A10 Entry and Exit load_____________________________
3

SL NO. FUND SPONSORS QUALITIES B1 Reputation of the sponsoring firm_________________

MARKS

Page 60 of 62

B2 Sponsor offers a wide range of schemes with different investment objectives___________________________ B3 Brand name of Sponsor__________ ______________ B4 Sponsor has a well developed Agency Net work/Infrastructure_____________________________ B5 Sponsor has an efficient research wing______________ B6 Sponsors expertise in managing money_____________ SL NO. INVESTOR SERVICES C1 Disclosure of investment objectives, method and periodicity of valuation in advertisement____________ C2 Disclosure of method, periodicity of schemes sales and repurchase in offer documents_____________________ C3 Announcement of NAV on every trading day____________ C4 Disclosure of deviation of the investments from the expected pattern_________________________________ C5 Disclosure of schemes investments on every trading day__________________________________________ C6 Mutual Fund Investors grievance redressal machinery_ C7 Additional Services like free insurance, free credit card, loans on collateral, tax benefits etc.________________ MARKS

Page 61 of 62

REFERENCES
www.moneycontrol.com www.amfiindia.com www.wikepedia.com www.moneycontrol.com www.valueresearchonline.com www.mutualfundindia.com www.bseindia.com www.rediff.com

Page 62 of 62