A

SMMER TRAINING REPORT

ON
MUTUAL FUNDS INDUSTRY IN
INDIA
Submitted to in partial fulfillment for
the award of the degree of
Master of Business Administration (MBA)
(2010- 2012)
From Mahamaya Technical University,Noida.

Submitted to:Dr BHUPENDRA GAUTAM

(FACULTY GUIDE)

Submitted by:TANVEER AHMED KHAN

Roll No.1009770056
MBA 4TH SEM

GALGOTIA COLLEGE OF ENGINEERING AND TECHNOLOGY

1,KNOWLEDGE PARK PHASE II,GREATER NOIDA

ii

ACKNOWLEDGEMENT
Completing a task is never a one man effort. It is often the result of valuable
contributors of individuals in a direct or indirect manner ,which in shaping and
achieving an objective . Here we cannot resist the temptation of expressing our
thanks to those who have contributed greatly in accomplishing this task.
I would like to pay my gratitude to Dr.BHUPENDRA GAUTAM for his kind
attention support and giving an opportunity to research work on STUDY OF
MUTUAL FUNDS INDUSTRY IN INDIA. I, also greatly appreciate the diligent
support provided by all the faculty of GALGOTIA COLLEGE OF ENGINEERING
AND TECHNOLOGY and my friends for their whole support and co operation.

TANVEER AHMED KHAN

ROLL NO-1009770056
M.B.A- IV Sem

iii

STUDENT DECLARATION
I hereby declare that the research report entitled STUDY OF MUTUAL FUNDS
INDUSTRY IN INDIA submitted by me in partial fulfillment of the requirements
for the MBA (FM/IT), is my original work and that it has not previously formed the
basis for the award of Degree.

Date: 22-3-2012

TANVEER AHMED KHAN

Student Name

iv

CERTIFICATE
Date:22-3-2012
TO WHOM SO EVER IT MAY CONCERN
This is to certify that MR TANVEER AHMED KHAN is a bonafide student of MBA
2nd Year of this Institute for the session 2010-12 and He has prepared Research
Report titled STUDY OF MUTUAL FUNDS INDUSTRY IN INDIA for partial
fulfillment of Master of Business Administration (MBA) affiliated to Mahamaya
Technical University, Noida. He has worked under my supervision and performance
during the project has been satisfactory.
I wish him all the best for her future endeavors

Dr. BHUPENDRA GAUTAM

(Faculty guide)

TABLE OF CONTENTS

1) Executive summary.1
2) Objective.3
3) Mutual Funds..4

Introduction

History of MF

Types of MF

Load

NAV

Where do mutual funds invest?

Benefits of MF to Investors

SEBI

Ranking of MF

Risk

AMFI

Marketing aspect of MF

Major mutual funds

4) Research Methodology...77

Data analysis

Limitation

Conclusion

Recommendation

Questionnaire

5) Bibliography..100

vi

EXECUTIVE SUMMARY

Project includes thoroughly understanding the

requirements

of different

categories

of investors

categorized on the basis of age, risk bearing capacity,

returns demanded, status etc and accordingly developing
their portfolio.

With a large number of investment products

available in capital market and with high variance in the
requirement of different investors; it is becoming
difficult for the investors to select funds from this
plethora of investment opportunities and their changing
demand.

A retired investor would prefer security of his

capital invested than high returns, a young investor
would prefer high return than security of capital invested
and yet another investor would have his own
preferences.

Mutual funds are one of the investments

opportunities available to investors which provide them a

vii
wide variety of schemes. As requirements of different
investors vary, it is essential to choose the schemes
which suits their different investments needs. Hence a
detailed understanding of all the schemes is required.

The project starts with understanding thoroughly

the concept of Mutual Funds, then learning how to
develop portfolio of different types of investors by
understanding their requirements. Finally, concluding by
providing guidelines to help investors to choose the
investment products as per their requirements.

RESEARCH OBJECTIVES

To analyse the position of mutual fund

industry in India.
To study the extent of variations of mutual
funds in market.
To study the interst of investors in mutual
fund.

viii

To anlyse the market aspect and current

scenario of mutual fund.

INTRODUCTION

Markets for equity shares, bonds and other fixed

income instruments, real estates, derivatives and other
assets have become mature and information driven. Price
changes in these assets are driven by global dynamics.

ix
Atypical individual is unlikely to have the knowledge,
skills, inclinations and time to keep track of events,
understand their implications and act speedily. An
individual also finds it difficult to keep track of
ownership of the assets, investments, brokerage dues and
bank transactions etc.

A mutual fund is the answer to all these

situations. It appoints professionally qualified and
experienced staff that manages each of these functions
on a full time basis. The large pool of money collected in
the fund allows it to hire such staff at a very low cost to
each investor. In effect the mutual fund vehicle exploits
economies of scale in all three areas - Research,
investments and transaction processing. While the
concept of individuals coming together to invest money
collectively is not new, the mutual fund in its present
form is a 21st century phenomenon.

CONCEPT OF MUTUAL FUND

A mutual fund is an investment vehicle which

allows investors with similar (one could say mutual)
investment objectives, to pool their resources and
thereby achieve economies of scale and diversification in
their investing. Economies of Scale mean lower costs on
a per unit basis by doing things "in bulk" which spreads
fixed costs over greater volume. A mutual fund achieves
lower per unit costs for professional money management
and for transaction charges, than small investors could
achieve on their own. This can increase return to the
investor. Diversification is just another way of saying
"Dont put all your eggs in one basket." A mutual fund
allows its investors to a small percentage of many
different investments. So in a well-diversified mutual
fund no one particular investment dominates its
performance. Poor results from some investments are
likely to be offset by good results from other
investments. Therefore, the unit value of a mutual fund
will not fluctuate as sharply as the value of any one of its
investments. This can reduce risk to the investor.

A mutual fund is the ideal investment vehicle for

todays complex and modern financial scenario. Markets
for equity shares, bonds and other fixed income

xi
instruments, real estate, derivatives and other assets have
become mature and information driven. Price changes in
these assets are driven by global events occurring in
faraway places. A typical individual is unlikely to have
the knowledge, skills, inclination and time to keep track
of events, understand their implications and act speedily.
An individual also finds it difficult to keep track of
ownership of his assets, investments, brokerage dues and
bank transactions etc.

A mutual fund is the answer to all these

situations. It appoints professionally qualified and
experienced staff that manages each of these functions
on a full time basis. The large pool of money collected in
the fund allows it to hire such Staff at a very low cost to
each investor. In effect, the mutual fund vehicle exploits
economies of scale in all three areas - research,
investments and transaction processing. While the
concept of individuals coming together to invest money
collectively is not new, the mutual fund in its present
form is a 20th century phenomenon. In fact, mutual funds
gained popularity only after the Second World War.
Globally, there are thousands of firms offering tens of
thousands of mutual funds with different investment

xii
objectives. Today, mutual funds collectively manage
almost as much as or more money as compared to banks.

Despite these advantages mutual funds do not

guarantee return, nor do they eliminate risk to investors.
The return and risk of a mutual fund depend primarily on
the type of securities instruments in which it invests, and
secondarily on how well it is managed by the company
offering it.

Typically a mutual fund scheme is initiated by a

sponsor who recognizes and markets the fund. It pre
specifies the investment objective of the fund and the
risks associated with the costs involved in the process
and broad rules for entry into and exit from the fund and
other areas of operation. In India as in most nations the
sponsors need approval from the regulator viz. SEBI. A
sponsor then hires an asset management company to
invest the funds according to the investment objective. It
also hires another entity to the custodian of the assets of
the funds and perhaps a third one to handle registry
work.
In the Indian context, the sponsors promote the
Asset Management Company also, in which it holds a
majority stake. In many cases a sponsor can hold a 100%

xiii
stake in the Asset Management Company (AMC). E.g.
Birla Global Finance is the sponsor of the Birla Sun Life
Asset Management Company Ltd.(which holds majority
stake in AMC), which has floated different mutual funds
schemes and also acts as an asset manager for the funds
collected under the schemes.

In nutshell, A Mutual Fund is a trust that pools

the savings of a number of investors who share a
common financial goal. The money thus collected is then
invested in capital market instruments such as shares,
debentures and other securities. The income earned
through these investments and the capital appreciations
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. The flow chart below describes
broadly the working of a mutual fund:

xiv

SETUP OF A MUTUAL FUND

A mutual fund is set up in the form of a trust,
which

has

sponsor,

trustees,

Asset

Management

Company (AMC) and custodian. The trust is established

by a sponsor or more than one sponsor who is like
promoter of a company. The trustees of the mutual fund
hold its property for the benefit of the unit holders. Asset
Management Company (AMC) approved by SEBI
manages the funds by making investments in various
types of securities. Custodian, who is registered with
SEBI, holds the securities of various schemes of the fund
in its custody. The trustees are vested with the general
power of superintendence and direction over AMC. They
monitor the performance and compliance of SEBI
Regulations by the mutual fund.

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Units
Savings

TRUST

AMC

Unit Holders

SEBI Regulations require that at least two thirds

of the directors of trustee company or board of trustees
must be independent i.e. they should not be associated
with the sponsors. Also, 50% of the directors of AMC
must be independent. All mutual funds are required to be
registered with SEBI before they launch any scheme.

Trustees review and ensure that net worth of the

AMC is according to stipulated norms, every quarter.
Trustees are also required to furnish a report on the

Investment

xvi
activities of the AMC to SEBI on half yearly basis.
Trustees must ensure that all the activities of the Mutual
fund are in compliance with the SEBI Regulations and
with the Trust Deed.

ASSET MANAGEMENT COMPANY

(AMC)

The company which handles the day-to-day

operations and investment decisions of a unit trust is
called an asset management company. In other words we
can say that it is a firm that, for a management fee,
invests pooled funds of small investors in securities
appropriate for its stated investment objectives. AMCs
are controlled by SEBI

Registrar

SEBI

Trust
Custodian

AMC

xvii

HISTORY OF THE INDIAN MUTUAL

FUND INDUSTRY

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. The
history of mutual funds in India can be broadly divided
into four distinct phases

FIRST PHASE 1964-87:

xviii
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

xix
mutual fund in December 1990. At the end of 1993, the
mutual fund industry had assets under management of
Rs.47, 004 crores.

THIRD PHASE 1993-2003 (ENTRY OF PRIVATE

SECTOR FUNDS):

With the entry of private sector funds in 1993, a

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

The 1993 SEBI (Mutual Fund) Regulations were

substituted by a more comprehensive and revised Mutual
Fund Regulations in 1996. The industry now functions
under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on

increasing, with many foreign mutual funds setting up

xx
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 Ltd,

sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI

xxi
which had in March 2000 more than Rs.76000 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. As at the end of October 31, 2003, there were 31
funds, which manage assets of Rs.126726 crores under
386 schemes.

TYPES OF MUTUAL FUNDS

Investment goals vary from person to person.

While somebody wants security, others might give more
weight age to returns alone. Somebody else might want
to plan for his childs education while somebody might
be saving for the proverbial rainy day or even life after
retirement. With objectives defying any range, it is
obvious that the products required will vary as well

xxii
Mutual Funds can be divided into four categories, which
are on the basis of few parameters, as:

I.

ON THE BASIS OF STRUCTURE:

a) OPEN-END SCHEMES: Open-ended funds do

not have a fixed maturity. The units offered by
these schemes are available for sale (investment)
and repurchase (redemption) on any business day
at NAV based prices. Hence, the unit capital of
the schemes keeps changing each day because the
scheme itself buys and sells units from investors.
Such schemes thus offer very high liquidity to
investors and are becoming increasingly popular
in India.

b) CLOSED END SCHEMES: Close-ended funds

have a stipulated maturity period. You can invest
during the initial issue period and your money is
locked-in for a stipulated period (ranging from 2
to 15 years). After the initial issue, these schemes
can be bought or sold on the stock exchanges
where they are listed. Sometimes, the mutual
fund will buy units of closed end funds at regular

xxiii
intervals. Generally, the closed end schemes are
traded at a discount to their NAV.

c) INTERVAL

SCHEMES:

These

schemes

combine the features of open-ended and closedended schemes. They may be traded on the stock
exchange or may be open for sale or redemption
during pre-determined intervals at NAV linked
prices

II.

ON THE BASIS OF INVESTMENT

OBJECTIVE:-

a) SECTOR SCHEMES: These schemes invest

primarily

in

companies

of

particular

sector/industry such as information technology,

pharmaceuticals
schemes

are

etc.

Investments

subject

to

more

in

these

risk,

as

diversification is reduced. They can give the

highest

returns

when

the

particular

sector/industry is doing well. This sector is

xxiv
essentially meant for the people who enjoy the
high risk, high return game.

b) GROWTH SCHEMES: These schemes invest

in shares of companies. These schemes have the
potential to deliver better returns over the long
term as compared to other mutual fund schemes.
However, keep in mind that greater potential for
return comes with higher risk. These schemes
tend to have higher fluctuation of prices over the
short term. Best suited for investors with long
term (may be 2 years and above) financial goals.

c) INDEX SCHEMES: These schemes invest in

only those stocks, which are part of a particular
index like BSE, Nifty, S&P CNX 500, etc.
Hence, the returns are as good as or as bad as the
underlying index's performance. Index funds
propose to match the performance of the
benchmark index and are managed passively.
These funds are relatively safe investment
avenues for investors who do not want to take
high risk. Index funds invest the funds available
with them in stocks that comprise the index and
with the same weightages. These funds are

xxv
suitable for those who want to realize benefits of
a rising equity market yet do not want to lay all
their eggs in one basket
d) FUND OF FUND SCHEMES (FOF): These
schemes invest in the schemes managed by other
mutual funds so that the investor gets the best
return on a particular class of assets, usually
equities. Such investment cant exceed 5% of the
net assets of the scheme, which invests its funds
in another scheme. Investment management fees
are not paid on such investments.

e) BALANCED SCHEMES: These schemes invest

in both shares and bonds. By investing a portion
of their assets in bonds, these funds receive
income that can moderate the effects of price
fluctuations due to stocks. But, they might not
keep pace with stock markets. Best suited for the
cautious, risk averse investor who is looking for
safety but would prefer better returns than
income products. It is also a good investment for
equity investors, because their downside is
cushioned on account of the debt component. The
ideal investment period is 3 years and above.

xxvi
f) GILT

SCHEMES:

These

schemes

invest

primarily in Government securities. Hence, offer

the highest safety for investments. Best suited for
individuals/institutions looking for a safe place to
park their short-term surpluses up to one year and
above.

g) INCOME SCHEMES: These schemes invest in

fixed income securities such as bonds issued by
corporate and other government agencies. The
NAV of these schemes tend to be more stable in
value. Best suited for regular income. Ideal
period of investment in these schemes is one year
and above.

h) MONEY

MARKET

SCHEMES:

These

schemes invest in short term instruments such as

certificates of deposits and short-term bonds.
These schemes are the least volatile of all the
types of schemes. Best suited for capital
preservation and ideal period of investment is 3-6
months.

i) ELSS

(EQUITY

LINKED

SAVINGS

SCHEME): Also called as tax savings scheme, it

xxvii
allows for investment by an individual or an HUF
investor only. He can invest at any time but the
investment is locked in for a period of 3 years.
Hell get a tax rebate of @20% under section 88
of the Income Tax Act 1961 for investments up to
Rs.10, 000 per year. Some of the ELSS have been
exceptional performers in past and cater to equity
investor with good performances

j) MISCELLANEOUS SCHEMES: A MF may

design a fund to meet the specific needs of
different segments of society like children, senior
citizens, girl child, retired people, etc. Children
funds have found their way in a big way with
many of the fund houses already having launched
a children fund. Essentially debt oriented, these
schemes invite investments, which are locked till
the child attains majority and requires money for
higher education. You can invest today and assure
financial support to your child when he/she
requires them. The schemes have given very
good returns of around 14 percent in the last oneyear period.

xxviii

III.

GEOGRAPHICAL BASIS:

a) DOMESTIC MUTUAL FUNDS: MFs that

operate within a countrys boundaries by
mobilizing savings of its citizens within the
country.
b) OFFSHORE MUTUAL FUNDS: MFs that are
meant for subscription from foreigners or from a
countrys citizens living outside its shores.

IV.

ON THE BASIS OF PATTERN OF

RETURNS/INVESTMENTS:

a) SYSTEMATIC

WITHDRAWAL

PLAN

(SWP): SWP or Automatic Withdrawal Plan

enables investors to receive regular amount from
their mutual fund investment portfolio at fixed
intervals without the need to contact the mutual
fund each time. With SWP, investors have the
facility of receiving a regular cheque on a
monthly, quarterly or half-yearly basis. However,
the investor himself can decide the frequency of
SWP.

xxix
b) SYSTEMATIC INVESTMENT PLAN (SIP):
SIP or Automatic Investment Plan automatically
enables you to invest a pre-set amount of money
into the fund of your choice at regular intervals.
You can decide on how often to invest and how
much to invest, even as little as Rs. 500 can be
invested every month. Here you are required to
give at least 6 post-dated cheques (in case of
monthly SIP) and 4 post-dated cheques (in case
of quarterly SIP).

c) ASSURED

RETURNS

PLAN:

Here

the

investors are assured a minimum return on their

investments and the assurance is necessarily to be
guaranteed by the sponsor or the AMC.

d) GROWTH PLAN: Here the investor realizes a

capital appreciation of his investments as the
returns are added back to his original investment.

e) DIVIDEND PLAN: Here the dividends are

passed on to the unit holders as and when
declared by the fund manger
f) DIVIDEND REINVESTMENT PLAN: Here the
dividends declared are reinvested automatically

xxx
in the scheme. So the investor gets the benefit of
earning tax-free dividends without giving up on
capital appreciation.

LOAD

An important point to be noted is the load

applicable on the funds. A brief description is as follows
it is a charge, collected by a mutual fund when it sells
units. It can be front-end/entry load or back-end/exit load
or it can be a mix of both.

o ENTRY LOAD:
The charge is collected when an investor buys the
units. Its a commission split between a MF salesperson,
an investment firm and a national distributor. As per
SEBI regulations, the maximum entry load applicable is
7%.

o EXIT LOAD:

xxxi
Its a charge collected when the investor sells
back the units. As per SEBI regulations, the maximum
exit load applicable is 7%.

o CONTINGENT

DEFERRED

SALES

CHARGE (CDSC):
It is a charge imposed when the units of a fund
are redeemed during the first few years of ownership.
Under the SEBI Regulations, a fund can charge CDSC to
unit holders exiting from the scheme within the first four
years of entry.

There is a further stipulation by SEBI that the

entry load and exit load put together cannot exceed 7%
of the sale price. However some schemes do not charge
any load and are called "No Load Schemes. Units are
bought and sold at net asset value. But In case of a no
load scheme, the initial issue expenditure shall be borne
by the Asset Management Company.
For schemes launched on a no load basis, the asset
management company shall be entitled to collect an
additional management fee not exceeding 1% of the
weekly average net assets outstanding in each financial
year.

xxxii

NET ASSET VALUE (NAV)

Net Asset Value is the actual value of a share (or

unit) of a scheme on any given business day. NAV
reflects the liquidation value of the funds investments
that day after accounting for all expenses. NAV is
calculated as follows:

Market Value of the fund's investments + Receivables +Accrued Income- Liabilities Accrued Expenses

NAV=

_________________________________________________
Number of shares outstanding

NAV for each mutual fund scheme is computed

and declared daily. NAV calculations utilize the stock
market price quotations published daily (highest price,
lowest price or closing prices as specified in the scheme
prospectus).
The following are the SEBI regulations regarding NAV
computation and disclosure:

xxxiii

Changes in NAV due to the assumptions about

the accruals should not impact NAV by more than
1%

Variation in NAV attributable to the sale and

repurchase of the units cant be more than 2%,
and these transactions should be recorded within
7 days.

All mutual funds have to disclose their NAVs

everyday, by posting it on the AMFI website by
8.00 p. m.

Open-ended funds have to compute and disclose

NAVs everyday; closed end funds can compute
NAVs every week, but disclosures have to be
made everyday.

Closed end schemes not mandatorily listed on

stock exchanges can publish NAV according to
the periodicity of 1 month or 3 months, as
permitted by SEBI.

WHERE DO MUTUAL FUNDS

INVEST?

xxxiv
Mutual Funds invest basically in three types of asset
classes, which are:

STOCKS:
Stocks represent ownership or equity in a company. This
asset class has historically outperformed all other asset
classes over the long term, but tends to be more volatile
in the short term.

BONDS:
This represents debt from companies, financial
companies or government agencies. They provide
income in the form of interest payments and principal if
held till maturity. There can be price volatility because of
the interest rate movements and other events in the
economy/political scenario.

MONEY MARKET INSTRUMENTS:

These are inter-bank call money, commercial paper,
treasury bills, certificate of deposits (CDs) and short-

xxxv
term bonds. They pay interest and are the least volatile of
all asset classes. But, over the long term tend to give
negative real returns (factoring inflation).

The various types of fixed income securities available in

the Indian markets can be tabulated as follows: ISSUER

INSTRUMENT

MATURITY

INVESTORS

RBI, Banks, Insurance Com

Central
Dated securities

2- 30 Years

Provident Funds, Mutual Fund

Government
dealers
Central

RBI, Insurance Companies, P

T-Bills

91/364 days

Government

Funds, Mutual Funds, PD's, In

State

Banks, Insurance Companies,

Dated securities

5-10 Years

Government

Funds

Banks, Insurance companies, C

Bonds, structured
PSUs

5-10 years

Provident Funds, Mutual F

Obligations
Individuals

xxxvi

Banks, Mutual Funds, Corp

Corporate

Debentures

1-12 Years
individuals

Corporate

Commercial papers

3mnths - 1yr

Banks, Corporate, financial In

Mutual Funds, Individuals, P
dealers

Banks

Certificates of deposits

3mnths - 1yr

BENEFITS MUTUAL FUNDS OFFER

TO INVESTORS

PROFESSIONAL MANAGEMENT:

When you invest in a mutual fund, professionals

who have the experience and resources to thoroughly
analyze the economy/markets to spot good investment
opportunities, which might not be easy or feasible for an
individual investor, manage your money.

AFFORDABILITY:

A mutual fund invests in a portfolio of assets, i.e.

bonds, shares, etc. depending upon the investment
objective of the scheme. An investor can buy into a
portfolio of equities, which would otherwise be out of

Banks, Corporate

xxxvii
his reach. Each unit holder thus gets an exposure to such
portfolios with an investment as modest as Rs.2000/-.
This amount today not even would get you a share of a
Blue Chip Company. Thus it would be affordable for an
investor to build a portfolio of investments through a
mutual fund rather than investing directly in the stock
market.

TRANSPARENCY:

Most open-ended mutual funds today disclose

their NAV daily and full portfolio quarterly. This level of
transparency, where the investor himself sees the
underlying assets bought with his money, is unmatched
by any other financial instrument. Thus the investor is in
the know of the quality of the portfolio and can invest
further or redeem depending on the kind of the portfolio
that has been constructed by the Investment manager.

DIVERSIFICATION:

Your investment in a mutual fund reduces the risk

to which you would've been exposed by investing in a
single stock/bond. A mutual fund usually invests in a
broad cross section of industries/companies (Sector

xxxviii
specific funds, as the name suggests, however invest in
specified industries only). Because of this, the negative
performance of one security will not have as much of an
impact on the fund.

LIQUIDITY & CONVENIENCE:

You will be able to get your money back within a

short period (may be within a maximum period of 4
business days) as compared to other securities. Investing
in a mutual fund involves very little paperwork and helps
you avoid many problems such as bad deliveries,
delayed payments and unnecessary follow up with
brokers and companies.

REGULATIONS:

SEBI, the mutual funds regulator has clearly

defined rules, which govern mutual funds. These rules
relate to the formation, administration and management
of mutual funds and also prescribe disclosure and
accounting requirements. Such a high level of regulation
seeks to protect the investors from misuse of their
money.

xxxix
As we know in the wonderful game of finance,
safety and return are two opposite goals and we can not
be nearer to both the goals at the same time. Mutual
funds are pooled resources that get invested in
diversified portfolio. The crux of the mutual funds
investing is averaging the risk when risks are equalized
so is the returns.

RISK RETURN GRID

RISK
TOLERANCE/
RETURN
EXPECTED

FOCUS

SUITABLE PRODUCTS

BENEFITS
OFFERED BY MFS

LOW

Debt

Bank/ Company FD, Debt

based Funds

Liquidity, Better PostTax returns

MEDIUM

HIGH

Partially
Balanced Funds, Some
Liquidity, Better PostDebt, Diversified Equity Funds and Tax returns, Better
Partially
some debt Funds, Mix of
Management,
Equity
shares and Fixed Deposits
Diversification

Equity

Diversification,
Capital Market, Equity Funds Expertise in stock
(Diversified as well as Sector) picking, Liquidity, Tax
free dividends

xl

SEBI
(SECURITIES AND EXCHANGE
BOARD OF INDIA)

The Securities and Exchange Board of India was

constituted on April 12,1988 as a non-statutory body
through an Administrative Resolution of the Government
for dealing with all matters relating to the development
and regulation of the securities market and investor
protection and to advise the Government on all these
matters. SEBI was given statutory status and powers
through an Ordinance promulgated on January 30, 1992.
SEBI was established as a statutory body on February
21, 1992. The Ordinance was replaced by an Act of
Parliament on April 4, 1992. The preamble of the SEBI
Act, 1992 enshrines the objectives of SEBI to protect
the interest of investors in securities market and to
promote the development of and to regulate the
securities market. The statutory powers and functions of
SEBI were strengthened through the promulgation of the
Securities Laws (Amendment) Ordinance on January 25,

xli
1995, which was subsequently replaced by an Act of
Parliament.

SOME IMPORTANT REGULATIONS

OF SEBI ABOUT MUTUAL FUNDS

REGULATORY REQUIREMENTS FOR

TRUSTEES:

The mutual fund, which is a trust, is managed

either by a Trust company or a Board of Trustees. Board
of trustees and trust companies are governed by the
provisions of the INDIAN TRUST ACT. If the trustee is
a company, it is also subject to the provisions of the
INDIAN COMPANIES ACT. It is the responsibility of
the trustees to protect the investors, whose fund is

xlii
managed by the AMC. The AMC and the other
functionaries are functionally accountable to the trustees.

a. The sponsor executes and registers a Trust Deed in

favor of the trustees. The Third schedule of the SEBI
Regulations specifies the contents of the trust deed. The
trust deed has to be stamped and registered according to
the Indian Registration Act.

b. The appointment of all the trustees has to be done with

the prior approval of SEBI.

c. There must be at least 4 members in the board of

trustees and at least 2/3 of the members of the board of
trustees must be independent.

d. Trustees of one mutual fund cannot be a trustee of

another mutual fund, unless he is an independent trustee
in both the cases, and the approval of both the boards.

REGULATORY REQUIREMENTS FOR AN AMC:

Though the Trust is the mutual fund, AMC is its

operational face. The AMC is the first functionary to be

xliii
appointed, and is involved in the appointment of all the
other functionaries. The AMC structures the mutual fund
products, markets them and mobilizes the funds,
manages the funds and services the investors. The
following regulations apply to the AMC:

a. Only SEBI registered AMCs can be appointed as

investment managers of the mutual funds.
b. AMC must have a minimum net worth of Rs.10
crores, at all times.
c. AMC's can't indulge in any other business other than
that of the asset management.
d. An AMC can't be an AMC or Trustee of another
mutual fund.
e. At least half of the members of the Board of an AMC
have to be independent.
f. The investment management agreement entered into
between the trustees and the AMC, spells out the
rights and obligations of

both the parties.

The AMC earns a fee for managing the funds of

the investors, according to the
Mandate they receive from the trustees. The fee is
defined as a percentage of the funds managed by the
AMC. This fee is the income available for the sponsors

xliv
and their associates who have invested in the equity
capital of the AMC. The sponsor's business interest in
forming mutual funds is to enhance the returns on the
capital invested in the AMC, through the strategies that
enable growth and stability in the funds that the AMC
manages.
ELIGIBILITY CRITERIA FOR REGISTRATION
OF A FUND:

For the purpose of grant of a certificate of

registration, the applicant has to fulfill the following,
namely: o Be carrying on business in financial services for a
period of not less than five years; and
o The net worth is positive in all the immediately
preceding five years; and
o The net worth in the immediately preceding year
is more than the capital contribution of the
sponsor in the asset management company; and
o The sponsor has profits after providing for
depreciation, interest and tax in three out of the
immediately preceding five years, including the
fifth year.

xlv
o The sponsor has contributed or contributes at
least 40% to the net worth of the asset
management company;

Provided that any person who holds 40% or more

of the net worth of an asset management company shall
be deemed to be a sponsor and will be required to fulfill
the eligibility criteria specified in these regulations.

PROCEDURE FOR REGISTERING A MUTUAL

FUND WITH SEBI:

An applicant proposing to sponsor a mutual fund

in India must submit an application in Form A along
with a fee of Rs.25, 000. The application is examined
and once the sponsor satisfies certain conditions such as
being in the financial services business and possessing
positive net worth for the last five years, having net

xlvi
profit in three out of the last five years and possessing
the general reputation of fairness and integrity in all
business transactions, it is required to complete the
remaining formalities for setting up a mutual fund. These
include inter alia, executing the trust deed and
investment management agreement, setting up a trustee
company/board of trustees comprising two- thirds
independent

trustees,

incorporating

the

asset

management company (AMC), contributing to at least

40% of the net worth of the AMC and appointing a
custodian.

Upon

satisfying

these

conditions,

the

registration certificate is issued subject to the payment of

registration fees of Rs.25.00 lacs.

The following forms are required to be filled for

the registration of an AMC and the MFs under SEBI
(MF) Regulations Act, 1996:
FORM A -- application for the grant of registration of
mutual fund
FORM C -- registration of trusteeship of the mutual fund
FORM D -- registration of asset Management Company

xlvii
INITIAL EXPENSES OF STARTING A MF:

According to second schedule of SEBI (MF)

Regulations Act, 1996 the following fees are payable at
the time of registration by an AMC:A. Application Fees payable by mutual funds
rupees twenty five thousand
B. Registration Fees payable by mutual funds
rupees twenty-five lacs
C. Service Fees payable by mutual funds rupees two
lacs fifty-thousand
D. Filing Fees for offer document rupees twentyfive

thousand

xlviii

LIMITATIONS ON FEES AND EXPENSES ON

ISSUE OF SCHEMES:
All expenses should be clearly identified and
appropriated in the individual schemes.
The AMC may charge the mutual fund with
investment and advisory fees which are fully
disclosed in the offer document subject to the
following namely:o One and a quarter of one per cent of the
weekly average net assets outstanding in
each accounting year for the scheme
concerned, as long as the net assets do not
exceed Rs. 100 crores, and
o One per cent of the excess amount over
Rs. 100 crores, where net assets so
calculated exceeds Rs. 100 crores.
For schemes launched on a no load basis, the
AMC shall be entitled to collect an additional
management fee not exceeding 1% of the weekly
average net assets outstanding in each financial
year.

xlix
In addition to the fees mentioned above, the
AMC may charge the mutual fund with the
following expenses namely:o Initial expenses of launching schemes.
o Recurring expenses including:

Marketing and selling expenses

including agents' commission, if
any;

Brokerage and transaction cost;

Registrar services for transfer of

units sold or redeemed;

Fees and expenses of trustees;

Audit fees;

Custodian fees; and

costs

related

to

investor

communication;

Costs

of

fund

transfer

from

location to location;

Cost

of

statements

providing

account
and

dividend/redemption cheques and

warrants;

Insurance premium paid by the

fund;

Winding up costs for terminating a

fund or a scheme;

Any expense other than those specified above

shall be borne by the AMC [or trustee or
sponsors].

Provided that initial expenses of floating the

scheme shall not exceed six percent of the initial
resources raised under that scheme and such expenses
shall be accounted in the books of accounts of the
scheme as specified in the Tenth Schedule. [Provided
further that any excess over the 6% initial issue expense
shall be borne by the AMC].
The total expenses of the scheme excluding issue
or redemption expenses, whether initially borne
by the mutual fund or by the asset management
company,

but

including

the

investment

management and advisory fee shall be subject to

the following limits:o On the first Rs. 100 crores of the average
weekly net assets 2.5%
o On the next Rs. 300 crores of the average
weekly net assets 2.25%
o On the next Rs. 300 crores of the average
weekly net assets 2.0%

li
o On the balance on the assets 1.75%
Provided that such recurring expenses shall be
lesser by at least 0.25% of the weekly average net assets
outstanding in each financial year in respect of a scheme
investing in bonds.
Any expenditure in excess of the limits specified
above shall be borne by the asset management
company [or by the trustee or sponsors.

FEES CHARGED BY THE AMC

The AMC receives an investment management

fees for managing the assets of the mutual fund. The fees
are regulated by SEBI as follows:
For the first Rs 100 crore of net assets: 1.25%
For net assets exceeding Rs 100 crore: 1.00%

If the AMC does not charge any of the initial

expenses to the fund, it can charge the scheme a
management fee that is 1% higher than the above rates.
These rates are applicable to the weekly average net
assets of the mutual fund scheme, to determine the
AMCs fees.

lii
REGULATIONS TO MAKE LOANS OR BORROW
FUNDS

A mutual fund cant make any loans, but it can

borrow a sum not exceeding 20% of its net assets, for a
period not exceeding 6 months. This facility is clearly
designed as a stop-gap arrangement, and not a permanent
source of funds for the scheme. If the fund manager
requires

some

funds

to

meet

some

liquidity

requirements, say redemption proceeds, he has the potion

of selling some of the securities from the portfolio, in the
market. However, if he perceives that the market prices
are not right, he has the option of seeking a short term
borrowing. He may decide to sell at an appropriate time
later, in order to repay the borrowing.

REGULATIONS GOVERNING
INVESTMENT MANAGEMENT
DECISIONS

SEBI regulations provide prudential guidelines

regarding the investment management function of the
mutual fund. The following are some of the significant
regulatory requirements:

Mutual fund can invest only in marketable securities.

liii

All investments by the mutual fund have to be on

delivery basis, that is, a mutual fund has to pay for
each buy transaction, and delivery securities for
every sell transaction.

A mutual fund under all its schemes can't hold more

than 10% of the paid-up capital of a company.

Except in the case of sectoral funds and index funds,

a mutual fund scheme can't invest more than 10% of
its NAV in a single company.

Investments in rated investment grade issues of a

single issuer can't exceed 15% of the net assets and
can be extended to 20%

with the approval of the

trustees.

Investment in the unrated securities can't exceed 10%

of the net assets of one scheme and 25% of net assets
of all the schemes.

Investment in unlisted shares can't exceed 5% of the

net assets for an open-ended scheme, and 10% of net
assets for a closed end scheme.

Mutual funds can invest in ADRs/GDRs up to a

maximum limit of 10% of net assets or $50 million,
whichever is lower. The limit for

mutual fund

industry as a whole is $500 million.

Mutual funds can also invest in a limited manner in

treasury bonds and AAA rated corporate debt issued

liv
outside India.

GUARANTEED RETURNS (FOR

SCHEMES PROVIDING ASSURED
RETURNS)

No guaranteed return shall be provided in a scheme, Unless such returns are fully guaranteed by the
sponsor or the asset management company;
Unless a statement indicating the name of the
person who will guarantee the return, is made in
the offer document;
The manner in which the guarantee to be met has
been stated in the offer document.

REGULATORY

NORMS

FOR

ILLIQUID

SECURITIES:

1. Illiquid securities should not exceed 15% of the net

assets of the scheme. Holding above this limited are
to be valued at zero.
2. Schemes having illiquid securities of over 15% of net
assets, as on Sept, 2000 should bring them down to
15% over a period of two years.

lv
3. In the half yearly portfolio disclosures to investors,
illiquid securities should be disclosed with in arsterix
mark, in the list of investments.
4. Illiquid securities cant be transferred in between the
schemes.

REGULATORY NORMS FOR NON

PERFORMING ASSETS FOR
MUTUAL FUNDS

An asset shall be classified as an NPA, if their

and/ or principal amount have not been received or have
remained outstanding for one quarter, from the day such
income/ installment has fallen due. Such assets will be
classified as NPAs, soon after the lapse of a quarter from
the date on which the payments were due.

REGULATORY NORMS FOR UNDERWRITING

PUBLIC ISSUES:

lvi
Mutual funds have to make an application to
SEBI for registration under SEBI (Underwriters) Rules
and Regulations, 1993 for underwriting public issues.
When permission is granted the activity will be subject
to the following underwriting restrictions:

For the purpose of the SEBI underwriters

regulations, the capital adequacy of the mutual
fund shall be the original corpus of any of the
schemes and the undistributed gains lying to the
credit.

The total underwriting obligations of the scheme

shall not exceed the total value of the corpus of
any scheme together with the undistributed
profits lying to the credit of the scheme.

RANKING OF MUTUAL FUNDS ON THE

BASIS OF RISK FACTOR (LEAST TO MOST):

Money Market Fund

Government or Agency Bond Fund

Income Fund

lvii

Monthly Income Plans

Balanced Fund

Index Fund

Equity Linked Saving Scheme

Growth Fund

Specialty / Sector Fund

lviii

Sector fund
Growth fund
ELSS

Index fund

I
S

Balance fund

MIP
Income fund
Gilt fund
Liquid fund

Fund

RISK ASSOCIATED WITH MUTUAL FUNDS:

Mutual funds and securities investment are

subject to various risks and there is no assurance that a
scheme objective will be achieved. These risks should be
properly understood by investors so that they can

lix
understand how much risky their investment avenue is.
Equity and fixed income bearing securities have different
risks associated with them. Various risks associated with
mutual funds can be described as below.

RISK ASSOCIATED TO DEBT MUTUAL FUNDS:

1) INTEREST RATE RISK: As with all the

securities, changes in interest rates may affect the
schemes Net Asset Value as the prices of the
securities generally increase as interest rates
decline and generally decrease as interest rates
rise. Prices of long-term securities generally
fluctuate more in response to interest rates
changes then do short term securities. Indian
Debt markets can be volatile leading to the
possibility of price movements up or down in the
fixed income securities and thereby to the
possible movements in the NAV.

2) LIQUIDITY OR MARKETABLE RISK: This

refers to the ease with which a security can be
sold at near to its valuation yield to maturity. The
primary measure of liquidity risk is the spread

lx
between the bid price and the offer price quoted
by the dealer. Liquidity risk is inherent to the
Indian Debt market.

3) CREDIT RISK: Credit risk or default risk refers

to the risk that an issuer of fixed income security
may default (i.e. will be unable to make timely
principal and interest payments on the security).
Because of those risks corporate debentures are
sold at a yield above those offered on
Government securities, which are sovereign
obligations and free of credit risk. Normally the
value of fixed income security will fluctuate
depending upon the perceived level of credit risks
well as the actual event of default. The greater the
credit risk the greater the yield require for
someone to be compensated for increased risk.

RISK ASSOCIATED TO EQUITY BASED

MUTUAL FUNDS:

1) MARKET RISK: The NAV of the scheme

investing in equity will fluctuate as the daily

lxi
prices of the individual securities in which they
invest fluctuate and the units when redeemed
may be worth more or less than the original cost.

2) TIMING THE MARKET: It is difficult to

identify which is the right time to invest and
which is the right time to take out the money.
There may be situations where stocks may not be
rightly timed according to the market leading to
loss in the value of scheme.

3) LIQUIDITY: Investment made in unlisted

equities or equity related securities might only be
realizable upon the listing of the securities.
Settlement problems could cause the scheme to
miss certain investment opportunities

ASSOCIATION OF MUTUAL FUNDS

IN INDIA (AMFI)

The Association of Mutual Funds in India

(AMFI)

is

dedicated

to

developing

the

Indian

Mutual Fund Industry on professional, healthy and

ethical lines and to enhance and maintain standards

lxii
in all areas with a view to protecting and promoting
the interests of mutual funds and their unit holders.

AMFI, the apex body of all the registered Asset

Management Companies was incorporated on August 22,
1995 as a non-profit organization. The objectives of
AMFI can be stated as follows:

To define and maintain high professional and

ethical standards in all areas of operation of
mutual fund industry.

To recommend and promote best business

practices and code of conduct to be followed by
members and others engaged in the activities of
mutual fund and asset management including
agencies connected or involved in the field of
capital markets and financial services.

To interact with the Securities and Exchange

Board of India (SEBI) and to represent to SEBI
on all matters concerning the mutual fund
industry.

To represent to the Government, Reserve Bank of

India and other bodies on all matters relating to
the Mutual Fund Industry.

To develop a cadre of well trained Agent

distributors and to implement a program of

lxiii
training and certification for all intermediaries
and other engaged in the industry.

To undertake nation wide investor awareness

program so as to promote proper understanding
of the concept and working of mutual funds.

WHO ACTUALLY MANAGES THE

MUTUAL FUND?

The sponsors, acting through the trustees, appoint

all the functionaries required for managing the investor's
money. These functionaries are the following:
a. Investment managers, known as AMC
b. Registrars and transfer agents
c. Brokers
d. Selling agents and distributors
e. Custodians
f. Depository Participants
g. Bankers
h. Legal advisor
i. Auditors

lxiv

ROLES

OF

DIFFERENT

FUNCTIONARIES

INVOLVED:

a) AMC: The Company handles the day-to-day

operations and investment decisions of a unit trust. It
invests pooled funds of small investors in securities
appropriate for its stated investment objectives for a
management fee. It is controlled by SEBI

b) REGISTRARS AND TRANSFER AGENTS: As

they maintain the records of the investors, R&T
agents are responsible for the investor servicing
functions such as processing the applications,
recording details of investors, sending out details
regarding their investment to the fund, sending out
periodical information on the performance of the
fund, processing dividend payout to investors,
incorporating changes as communicated by the
investor, keeping the investor record up to date , by
recording new investors and removing who have
withdrawn their funds.

lxv

c) BROKERS:

Brokers

support

the

investment

function of the mutual fund, by enabling the

investment managers to buy and sell securities by
charging a commission on their services. They are
also an important source of market information to
fund managers.

d) SELLING & DISTRIBUTING AGENTS: Selling

agents are usually individuals who mobilize the
investor's funds and distributors are the institutions
that appoint agents and other mechanisms to
mobilize funds from the investors for a commission.
These commissions are split into initial commission,
which is paid on mobilization of funds; and trail
commissions, which is paid depending on the length
of stay of the investor in the mutual fund. The rates
of commissions are decided by the mutual funds
themselves, and are not subject to regulation by SEBI
or AMFI.

e) CUSTODIANS: Custodians are responsible for the

securities held in the mutual fund's portfolio. They
discharge an important back-office function, by
ensuring that securities that are bought are delivered

lxvi
and transferred to the books of the mutual funds, and
that funds are paid out when a mutual fund buys
securities. They keep the investment account of the
mutual fund, and also collect the dividend and
interest

payments

due

on

the

mutual

fund

investments. Custodians also track corporate actions

like bonus issue, right offers, offer for sale, buy back
and open offers for acquisition.

f) LEGAL ADVISORS

&

AUDITORS:

Legal

advisors advise mutual funds on regulatory and

taxation issues. Each mutual fund scheme created by
an AMC has to maintain a separate book of accounts,
and draw up its annual report. The AMC also has its
accounts and annual reports. These two sets of books
are required to be statutorily audited by two separate
auditing firms.

g) DEPOSITORY PARTICIPANT: DP's hold the

securities of mutual funds in the dematerialized form.
They work with the custodians and handle the
operational aspects of actually making/receiving
delivery of the mutual funds. They also communicate
the custodian's instructions on corporate actions to
the company.

lxvii

FUNCTIONS OF A FUND MANAGER

It is generally, believed that professional fund

managers have expertise in managing investments as
they have access to information that is normally not
available to common investors. In addition they are
supposed to possess superior analytical skills for making
investments decisions. While managing the funds of
investors a funds manager has to take care of the
following factors:

o The performance of a particular scheme is

distinctively superior in comparison to the
relevant benchmark portfolios.

o The mutual fund schemes are reasonably

diversified.

o The investment objectives of the mutual

fund

schemes

are

related

to

their

systematic risk and total variability.

o Innovation: The fund houses try to attract

investment through the "novelty" factor.
First it was Kothari that launched the

lxviii
Blue-chip fund in 1993 to focus on Bluechip

stocks

and

then

Taurus

that

introduced the "IPO fund" in Taurus New

Share. Similarly there is an upcoming
concept of real estate funds by different
mutual funds.

o Considering the market trends, any

prudent fund managers should be capable
of

changing the asset allocation i.e. he

should invest higher or lower percentage

of the fund in equity or debt instruments
compared to what is disclosed in the offer
document. It can be done on a short-term
basis on defensive considerations i.e. to
protect the NAV.

FEW FACTS ABOUT THE FUND

MANGERS AND THEIR WORKINGS

Nobody knows what a fund manager does during a

month, thus making the managers complacent and
unaccountable at times.

In practice fund managers generally play on the

lxix
minimum cash reserves for short term purposes, thus
violating the regulations.

Many a times the fund managers dont go by the

reports of the research analysts and instead prefer to
follow their own instincts.

STYLES OF PORTFOLIO MANAGEMENT:

The different preferences of fund managers for

choosing securities with certain characteristics are called
"styles of portfolio management". There are basically
two types of portfolio management styles:

ACTIVE MANAGEMENT: If a fund manager

tends to look for specific attributes in selecting the
stocks that he wants in his portfolio with the
objective of picking winning stocks for his portfolio,
it is called as active fund management style. There
are two types of active fund management:
o

Growth investing: It involves achieving

superior returns by including growth stocks
with very high capital appreciation potential
into the portfolio. Growth style is considered
to be quite aggressive: higher risk and higher
returns.

lxx
o

Value investing: Value investing involves

trying to see potential that larger segments of
the market are yet to see. It involves
searching for "undervalued" stocks that could
be undervalued for a variety of reasons
including temporary factors impacting profits,
anticipated macro economic changes that
would benefit certain companies, and the
anticipation of changes in the management or
technology.

PASSIVE MANAGEMENT: If a fund manager

does not choose either select specific stocks or time
the markets, but generally believes that holding a
well diversified portfolio is the cost efficient way to
better returns, and tends to mimic a market index, it
is called passive investment style. Passive fund
management

requires

limited

research

and

monitoring costs, and is therefore cheaper than active

fund management.

The various strategies used by the management for debt

portfolio are as under:

A. Buy and hold: Fund managers who invest in high

lxxi
yielding securities and hold these to maturity with a
view to earning the coupon interest on them, follow a
buy and hold strategy.

B. Duration management: Fund managers may take an

interest rate view, and accordingly alter the duration
of the portfolio, for maximizing gains. If a fund
manager expects interest rate to fall, he may increase
the duration of the portfolio. When rates do fall, the
gains in his portfolio value will be higher because of
the higher duration.
C. Credit selection: Fund managers may create
strategies that hinge on expected changes in the
credit quality of borrowers. If the credit upgrades are
expected, investing into the lower grade bonds at
lower prices will provide scope for appreciation and
better credit quality, if the credit ranting is upgraded.

Pre-payment and option features: Fund managers may

take positions in bonds based on the expectations of a
put or call option for a bond being exercised

lxxii

MUTUAL FUND RANKING

Mutual fund ranking involves the comparison of

the mutual fund performance over a period of time, using
several criteria to judge for consistency in performance.
In order to meaningfully compare funds some level of
similarity in the following factors has to be ensured:o Size of the funds
o Investment objective
o Risk profile
o Portfolio composition
o Credit profile and average maturity
o Expense ratios

The above said ratings are given by various credit

ratings agencies such as ICRA, CRISIL and S&P which
undertake such study and analysis, and publish their
assessment. It is mandatory, under the regulations, for
issuers of fixed income securities to obtain ratings, and
publicize these ratings, when they raise money.

lxxiii
A high rating like AAA means that the credit
quality of the borrower is high, and that the probability
of default is very low. A low credit rating like "c" means
that the chances of default on interest and the principal
payments are higher. The different types of ratings given
can be classified as follows:-

CREDIT RISK GRADING SCALE:

AAA Indicates highest quality. The investment quality is
of highest grade and is similar to that of fixed income
obligations of highest safety.
AA Indicates high quality. The investment quality is of
high grade and is similar to that of fixed income
obligations of high safety.
An Indicates adequate quality. The investment quality is
of upper medium grade and is similar to that of fixed
income obligations of adequate safety.
BBB Indicates moderate quality. The investment quality
is of medium grade and is similar to that of fixed income
obligations of moderate safety.
BB Indicates inadequate quality. The investment quality
is of low grade and is similar to that of fixed income
obligations of inadequate safety.

lxxiv
B Indicates poor quality. The investment quality is of
lowest grade and is similar to that of fixed income
obligations that are risk prone.

PERFORMANCE GRADING SCALE:

Indicates highest category based on a composite

measure of Risk Adjusted Returns and sensitivity
to associated risks.

Indicates above Average category based on a

composite measure of Risk Adjusted Returns and
sensitivity to associated risks.

Indicates Average category based on a composite

measure of Risk Adjusted Returns and sensitivity
to associated risks

Indicates below Average category based on a

composite measure of Risk Adjusted Returns and
sensitivity to associated risks.

Indicates lowest category based on a composite

measure of Risk Adjusted Returns and sensitivity
to associated risks.
The above said rankings are conducted by the

agencies on the basis of few parameters such as:o Return Analysis

o Portfolio Concentration Analysis

lxxv
o Liquidity
o Corpus Size
o Average Maturity
o Portfolio Turnover

INCOME (DEBT) FUND

The mutual fund industry, world over, is known

for intense competition between fund managers to beat
the market and the peer group. Relative performance is
the norm on the street with fund managers competing for
the same pie of investors money. In such a scenario,
performance measurement and appropriate performance
evaluation is critical to ascertain superiority of
performance among mutual funds.
Debt mutual funds, which are comprised of fixed income
securities spreading over various tenors, depending upon
the objective and philosophy of the fund. While
comparing, these cannot be squarely compared to a
diversified or equity mutual fund. The reason is that the
dominant objective of a debt fund is capital preservation
rather than capital appreciation Also it would be
inappropriate to use some of the parameters used for
equity mutual funds would be inappropriate.

lxxvi

PECULIAR

ISSUES

IN

DEBT

FUND

EVALUATION:
When comparing equity funds, generally two
classes of parameters are used. Firstly, a comparison
against a market benchmark and secondly, risk adjusted
return and various ratios like Sharpe, Teynor etc.
regarding the first approach, we find it difficult to
identify

meaningful

benchmarks

to

evaluate

the

performance of diversified bond portfolios. The choice

of particular benchmark indexes is therefore more
arbitrary than in the case of stock portfolios, for which
stock index returns of say Sensex /Nifty can be used.
Also bond markets are difficult to characterize by single
indexes because market segments are varied according to
instruments, maturities, and issuers. Regarding the
second set of parameters, the traditional Sharpe and
Teynor Ratios have no intuitive appeal in case of debt
funds, because they focus on excess return over risk free
rate for a given unit of risk. Now bond portfolios are
inherently more or less risk free, especially when they
comprise of mainly G-secs. Also the use of standard
deviation as a measure of risk of bond portfolio can be
questioned on grounds of normal distribution of returns.
The above issues bring out the fact that traditional

lxxvii
performance valuation in case of debt funds is improper,
and they require peculiar treatment.

RELEVANT BENCHMARK:

In order to address the issue pointed above, some

attempts have been made to come up with a relevant
benchmark index to compare the performance of debt
funds. In the Indian Context, CRISIL and some private
players like I-sec, have tried to develop some indexes to
which debt funds can benchmark themselves.

The market has different indexes for different

maturities and composition of debt instruments so that
mutual funds can benchmark against a pertinent index.
For example there is a CP index, Call index, corporate
bond index, MIP blended index and also Composite
indexes. The presence of such benchmarks has made the
scene a little more pragmatic. But in terms of market
practice, it is still noticed that debt funds are sometimes
compared against stock indexes.

lxxviii

RELEVANT PARAMETERS/ RATIOS:

In order to ensure that bond portfolios are

evaluated objectively and in light of their greater
objective of capital preservation, most advanced markets
have started to use non-conventional parameters. The
practice and parameters vary, and this paper talks about
only three such parameters that are slowly finding their
place in the jargon speak of funds mangers in India.

DOWNSIDE RISK PROBABILITY: It measures the

probability of number of times daily / weekly returns
falling below risk free rate over several time.

POINTS: This measure shows the capital erosion risk of

a debt fund and is a highly relevant ratio.

SORTINO RISK Unlike the Sharpe ratio, the Sorting

ratio does not penalize a fund for its tupside volatility. It
is defined as, portfolio return minus an investors target
rate of return per unit of downside volatility. So the ratio
Penalizes for every extra unit of downside volatility and
is based on the logic that bond fund investors are risk
averse.

lxxix

INFORMATION RATIO This ratio is derived from

statistical parameters of modern portfolio theory. It can
be calculated as:

MARKETING ASPECT OF MUTUAL

FUNDS

Marketing is a big challenge in business

especially for mutual funds. Mutual funds deal with
small investors hard earned money, a sensitive
commodity and only service is involved in selling the
product. The main challenge of the marketing of the
mutual funds is that with same product, customers with
diversified profile viz. demographics, socio- economic
background, life style and psychographic are to be
served. Since mutual funds are to interact with lakhs of
the investors who are likely to be associated for a longer
tenure, post issue services play an important role in
customer satisfaction.

lxxx
It is the marketing division, which complies with
the formalities to market the product i.e. a new scheme.
It seeks permission from the agencies like Ministry of
Finance, Reserve Bank of India, SEBI etc. Gazette
notification of the scheme is also its assignment.
Marketing division is to pursue the appointment of
Registrar to the issue. Bankers authorized to accept the
applications are also finalized by the marketing division.
It is this division that appoints lead managers and
managers to the issue. Apart from appointment of
solicitors, this division also takes care of auditors,
custodians and transfer agents.

Once a scheme is approved, the elated printing

assignment is to be taken care of by it like printing of
application forms, offer document, bankers statement
forms, stationary for unit certificates, commission
cheques, refund order, etc. This stationary is to be
distributed at appropriate time to the concerned agencies.
Marketing people also evolve the target amount of a
scheme. The most crucial marketing strategy is evolved
to the best advantage of the fund. Advertisement strategy
is also designed by it.

lxxxi
Marketing division has to evaluate the market
potentials, strengths and the weaknesses. For each
scheme, what is its market share is a very crucial
question to design its future strategies. To identify which
section of the society is under serviced, is another
important assignment of the marketing division.

Marketing a scheme is to be taken as marketing a

consumer product. Marketing for mutual fund is not
deal-based but is relation-based. The psychology of the
investors needs deep insight. There are potential
investors in the present investor of the scheme. So the
understanding and responding to their needs obviously
will bring mutual funds new investors besides retaining
the present. The four channels that are currently used for
distribution of the products of MF companies are as
follows:
o Individual agents
o Distribution companies
o Banks and NBFCs
o Direct marketing channels

lxxxii

CURRENT SCENARIO OF MUTUAL

FUNDS INDUSTRY

Worldwide there are thousands of firms offering

tens of thousands of mutual funds with different
investment objectives. Today, mutual funds collectively
manage almost as much as or more money as compared
to banks.

Though still at a nascent stage, Indian MF

industry offers a plethora of schemes and serves broadly
all type of investors. The range of products includes
equity funds, debt, liquid, gilt and balanced funds. There
are also funds meant exclusively for young and old,
small and large investors. Moreover, the setup of a legal
structure, which has enough teeth to safeguard investors
interest, ensures that the investors are not cheated out of
their hard-earned money. All in all, benefits provided by
them cut across the boundaries of investor category and
thus create for them, a universal appeal.

lxxxiii
The mutual funds industry in India is in its initial
stage with total assets under the management worth Rs.
1, 50,000 crores at the end of 2004. The recent trend in
the industry has shown negative growth and unhealthy
results mainly due to two major reasons global
slowdown of world economy as a whole and the political
ups and down in Indian politics recently (please refer to
annexure 1 & 2).

As of now there are around 33 players in the

industry with ABN Amro AMC as the latest entrant to
the band. Some players (like HSBC, Alliance, etc) have
shown above average returns in the last fiscal mainly
because of the performance of the fund managers in
terms of market timings and investment decisions.
The AMCs or the fund houses have to incur the
following expenses for managing the business of mutual
funds involving a number of activities:

Investment management fees to AMC

Custodians fees

Trustees fees

Registrar and transfer agent fees

Marketing and distribution expenses

Operating expenses

lxxxiv

Audit fees

Legal expenses

Costs

of

mandatory

advertisements

and

communications

All these expenses are charged against the

income of the mutual fund. So the sources of income of a
fund are to be known so as to understand how the
expenses are financed from a fund. The sources of
income for a mutual fund are as follows:

Dividend from equity investment

Interest income from debt instruments

Profit from sale of securities

Income

arising from commitment

underwriting commissions, etc.

OPTIONS AVAILABLE TO
INVESTORS

charges,

lxxxv
Each plan of every mutual fund has three options
Growth, Dividend and dividend reinvestment. Separate
NAV are calculated for each scheme.

DIVIDEND OPTION: Under the dividend plan

dividend are usually declared on quarterly or
annual basis. Mutual fund reserves the right to
change the frequency of dividend declared.

DIVIDEND REINVESTMENT OPTION: Instead of

remittances of units through payouts, Units
holder may choose to invest the entire
dividend in additional units of the scheme at
NAV related prices of the next working day
after the record date. No sales or entry load is
levied on dividend reinvest.

GROWTH OPTION: Under this plan returns accrue to

the investor in the form of capital appreciation
as reflected in the NAV. The scheme will not
declare the dividend under the Growth plan
and investors who opt for this plan will not
receive any income from the scheme. Instead
of income earned on their units will remain

lxxxvi
invested within the scheme and will be
reflected in the NAV.

ADDITIONAL OPTIONS

SYSTEMATIC SWITCHING PLAN: The unit holder

may set up a Systematic Switching plan on a monthly,
quarterly, semi-annual or annual basis to exchange a
fixed number of units and/or amount in one scheme to
another scheme within the Fund Family or one
plan/option to another. The redemption or investment
will be at the applicable NAV for the respective schemes
as specified in the offer document

lxxxvii
SYSTEMATIC INVESTMENT PLAN: Systematic
Investment Plan is available for planned and
regular investments, under this plan unit holders
can benefit by investing specified rupee
amounts periodically for a continuous period.
This concept is called Rupee Cost Averaging.
This program allows Unit holders to save a
fixed amount of rupees every month/ quarter by
purchasing additional units of the Scheme(s).
Rupee cost averaging does not guarantee a
profit or protect against a loss. Rupee cost
averaging can smooth out the markets ups and
downs and reduce the risk of investing in
volatile markets.

For as little as Rs. 250 each month for 12 months

or Rs. 500 every month for 6 months, you can purchase
mutual fund units and avoid larger minimum investment
amounts of over Rs. 1,000. Fixed amounts can be
invested in Mutual Funds each month using funds drawn
automatically from your savings account regularly.
Investing in Systematic Investment Plan (SIP) offer the
benefit of "Rupee-cost averaging", i.e., by purchasing
Mutual Fund units over a period of time, you
automatically buy more units when prices are low and

lxxxviii
fewer units when prices are high, resulting in lower "per
unit acquiring cost" as a result of averaging.
SYSTEMATIC WITHDRAWAL PLAN: Systematic
Withdrawal Plan (SWP) lets you automatically redeem a
prearranged amount of your mutual fund holdings each
month. SWPs are an ideal way to supplement your
monthly

cash

flow,

meet

minimum

withdrawal

requirements, or move assets between the funds. SWP is

a no-charge service. When you set up your SWP, cash
proceeds from each redemption (minimum balance
maintained @ 25% of the holding at any given point of
time) are given to you in the form of post-dated cheques
(six monthly cheques at par, which enables you to get the
funds lodged).

lxxxix

OBSERVATIONS
HOW DOES NAV CHANGES?
Suppose the IPO price of
a scheme was Rs. 10 and today its NAV is Rs. 15.35. The
increment of Rs. 5.35 is the total return on the scheme,
which has been generated due to some factors. These
factors can be explained as below.

a) TRADING GAINS: These are the gains generated

from buying and selling of securities. Any security
bought at a lower price and sold at a higher price leads to
trading gains.

b)

MARK ON MARKET: Mark to market means

valuing the securities at their market value in the

portfolio. Mark on market is also called unbooked gains.
Because these are gains that could have been generated if
securities would have been sold instead of being retained
in

the

portfolio

as

per

the

SEBI

guidelines

- For securities less than 6 months there is no mark to

xc
market because there is generally no interest rate impact
on

securities

less

than

months

- Securities greater than 6 months period are always

mark to market.

c) ACCRUED INTEREST It is the amount accrued as

interest by keeping the securities in the portfolio. The
ratio of these three components keeps varying. Increment
of NAV consists primarily of accrued interest .The
proportion of these factors moves in the following
manner.
Accrued interest 75%
Mark on market 20%

WHICH IS BETTER OPTION FOR

INVESTORS?
In any scheme of a mutual fund investors are
given three options. These options are:
1. Dividend- payout option
2.Dividend Re-invest option
3.Growth option.
To choose between the options as to which option
will be better for investors will depend upon the
circumstances of the case.

xci
In case of equity schemes there is no dividend tax
but long term and short-term capital gains tax is
there so one should opt for dividend option.
Whether it should be dividend payout or dividend
re-invest will depend totally upon the preference
of the investor. There is no difference as such in
both the cases.
In case of debt schemes dividend distribution tax
of 12.5% is applicable. Also the long term and
short term capital gains tax is applicable. So in
this case to choose between the dividend and
growth option one should look at the horizon of
the investment.

If the investment is made for a short

period of time like liquid schemes one should

go for dividend option as it will attract the
dividend distribution tax of 12.5% and
growth option attract the short term capital
gains according to tax bracket.

If the investment is required to be made

for longer duration i.e., more than one year

than its better to go for growth option because
it will attract a long term capital gains tax of
10% only. But if the investor is not sure about

xcii
the horizon of the investment then he should
preferably go for dividend option.

IMPACT OF BUDGET ON MF
INDUSTRY

Budget has come to represent an event of

expected surprise both pleasant and unpleasant for
mutual fund (MF) industry. The current budget is no
exception. The core principle that drives the structure of
MFs is that it is a pass through entity. An MF is exempt
from tax on its income, not because of explicit
benevolence to the industry, but out of sheer logic. A
fund simply earns an income, charges a fee for doing so
and passes it on to the investors, who in turns pay the tax
as applicable. It is relative attractiveness of the mutual
funds that has attracted repeated tinkering of the
advantage that flow out of its pass through status. But the
present budget seems to move away some of the
attractiveness. Let us see how the budget is affecting
mutual fund industry.

1) Current budget continue to exempt equity mutual

funds form tax. However in case of Debt oriented
mutual funds, individuals will continue to enjoy the
same 12.5% as dividend distribution tax. However in

xciii
case of corporate unit holders, a rate of 20% will be
applicable.
2)

The biggest concern is the capital gains tax, which

hurts the industry in two ways. Long term capital
gains tax from securities transactions have been
abolished on the other hand a transaction tax of .15%
has been levied on the value of security traded on
stock exchange in order to balance the revenue
targets by forgoing capital gains tax. As a mutual
fund is a pass through entity, it does not pay any
capital gains tax on investment transactions but now
it will be subject to securities transaction tax.

3) Since MFS offer liquidity and are open ended they

have buy and sell securities on a continuous basis.
Most of the debt funds will become unattractive if
the transaction tax applies to mutual funds. For e.g.
in case of Liquid funds with a maturity of , say, 30
days, will buy and sell assets, assuming it did not
trade in the interim at all about 12 times in a year.
Therefore on the net asset of Rs 100, the turnover is
1200. At .15% the tax works out to be 1.8%. Given
the average return of 4.8% for a liquid fund this is a
37.5% reduction in return.

xciv
4) Even the higher damage is the proposed treatment of
capital gains of the investor. Since investor is not
directly entering into securities market he will
continue to pay the capital gains at the older rates.

EVEN GRANTING THAT THE MUTUAL FUND

INDUSTRY DOES NOT ENJOY A
PREFERENTIAL TAX REGIME, THERE HAS
BEEN A POSITIVE PAY- OFF. LETS SEE HOW?

xcv
A) MFs have made investing easy, safe and flexible and
reduced transaction time to three days, or lower.
B) MFs have enable millions of individuals and
institutions to benefit from the capital gains that
come along with the reduction in interest rates. If
there were no mark to market product like Debt
funds, the benefit of debt market would have
remained restricted to banks and wholesale players
C) Even as the corporate sector began to see treasury
management as a separate profit center function, but
had limited investment opportunities beyond the
risky ICD markets and low volume CP markets, MFs
enabled efficient deployment of short-term funds of
the sector, in liquid funds.
There will be damage to mutual fund industry if
Government remains on the same stance. But in
order to protect the MF industry there will surely be
rebates given to mutual funds or else some new
measures will be developed to save the damage.

xcvi

MF INDUSTRY HAILS BUDGET

(EXPERTS VIEW)

"From the Mutual Fund industry's perspective,

the fact that dividend tax regime hasn't been changed, is
a positive. Continuity has its advantages and I am sure
that as an industry we will benefit from it. The
announcements, regarding a gold-based fund is positive,
as it opens up another large market segment for the
industry. However, my feeling is that the ETF format
may prove to be too restrictive, given the potential size
of the market. In general, one gets a positive feel from
the Budget and I am confident that the measures
announced with regard to taxation and reforms will
prove to be beneficial for the economy."
Mr. Rajiv Shastri,
CEO, Sahara Mutual Fund

"There are many positives for the capital markets,

the most important being the commitment to develop the

corporate debt markets. What stand out in the Budget are
the Finance Minister's progressives moves towards
rationalization of the tax structure in both direct and

xcvii
indirect taxes, widening the tax base and simplification
of processes for tax administration. These changes
should result in greater tax compliance and an increase in
disposable incomes on an aggregate level and spur
consumption spending by consumers. Rationalization of
personal income tax slabs along with scrapping the
deductions under Sections 88 and 80L, and bringing all
deductions under one overall ceiling of the new Section
80C with Rs 1 lakh limit is a significant step forward.
These measures will bring in long-term money into the
capital market with a greater participation by domestic
retail investors as well."
Mr. A.K. Sridhar, Chief Investment
Officer, UTI Mutual Fund

INVESTMENT MANAGEMENT

In todays complex environment when the needs

of the investors vary, there are various investments
avenues available for investments. We have seen above
various mutual funds scheme have been designed
keeping in mind the need of different kinds of investors.
But as the needs and objectives of an investor vary there
is no single investment option which can cater to needs
of a particular investor.

xcviii

In order to satisfy all his investment needs an

investor should choose a variety of schemes from the
diversified investment options.

For the purpose of

achieving investment goals of an investor properly, it is

required to effectively manage his portfolio.

FACTORS FOR PORTFOLIO

MANAGEMENT
i) Risk and Return

Low Risk Bearing Capacity

Medium Risk Bearing Capacity

xcix

High Risk Bearing Capacity

ii) Age

Young Age (20-35 years)

Middle Age (35-50 years)

Old Age (50 and above)

iii) Liquidity requirement

Less Liquidity

Medium Liquidity

More Liquidity

iv) Tenure of investment

Short Term

Medium Term

Long Term

v) Others

Avail tax benefits

Contingency Requirement

On the basis of the advisory paradigm (deciding

factors) mentioned above, various categories of investor
could be made which is a deciding factor as to where an
investor with a particular requirement must invest.

TIPS FOR A PROPER AND WELL

MANAGED PORTFOLIO

A) Whatever is the profile of an investor, for a properly

managed and balanced portfolio it is always required to
first park the investments in fixed income and safer
products so as to get sure about earning some regular and
safe income and also about the safety of the capital. After
parking your investments in safer avenues one should go
for other investments like Mutual Funds and Equities
depending upon the risk bearing capacity and various
other factors mentioned above.

B) Although an investor should invest according to the

category he belongs. But he should keep churning his
portfolio according to the need of the hour.

(NOTE: Purpose of this exercise is to learn managing

the portfolio of an investor out of the Mutual funds
available in the market.)

ci

CATEGORIES OF CUSTOMERS

From the analysis done above we can see that it

is basically the risk & return and the age of the investor
which determine the portfolio of an investor. So the
above analysis can be summarized in the following way.
Following are the various profile of investors based on
the advisory paradigm followed by investment avenues
where they can park their money:

Fig: INVESTMENT ANALYSIS

Risk-Return
Age

High

Moderate to High

Modera

20%-Eq
90% - Equity & E.R.F.

70%- Equity & E.R.F.

20-35

20%-MIP
10% - F.I.P.

30% - F.I.P.

60%-F.I
15%-Eq
80% - Equity & E.R.F.

60%- Equity & E.R.F.

20% - F.I.P.

40% - F.I.P.

35-50

20%-MIP
70% - Equity & E.R.F.

30%- Equity & E.R.F.

65%-F.I
90%-F.I

30% - F.I.P.

70% - F.I.P.

10%-MIP

50 & above

E.R.F. Equity Related Funds

F.I.P. Pure Debt or Gilt funds
MIP Monthly Income Plan

cii
FL Floating Rate Fund

NOTE: The percentages mentioned above can

fluctuate up to 10-20% depending on market
situations

and

particular

requirements

of

the

investor.

From the table we can see how the portfolio of

various categories of investors should be managed.
Although these are the broad based categories but
usually we come across four major types of investors
who some of them have very peculiar need and some
have very particular nature. Let us see what the four
major types of investors are:

ciii

TYPES OF INVESTORS

High Net worth Individual(HNI)

Retailers

Corporate

Trusts

civ

a) HIGH NETWORTH INDIVIDUALS: HNI as the

name suggests have large amount if money to invest.
They invest in lakhs and crores. As they have large
amount of money to invest in they are not averse of
loosing some of their money for good opportunities

b) RETAILERS: Retailers are the investors who invest

their money in small amounts. Retailers can be high risk
takers as well as no risk takers. In this case it very much
depends upon their nature. But in case of retailers as the
age increases the risk bearing capacity decreases.

c) CORPORATES: Corporate are the business houses

who want to deploy their surplus money in some funds
which can provide them good returns along with
maintaining liquidity of their investments.

cv
d) TRUST: These are the bodies that are made for the
benefit of society or the employees of some organization.
They are conservative in nature and like to park their
money in the safest options.

INVESTMENT PATTERN OF
DIFFERENT TYPES OF INVESTORS
Investment pattern

HNI (high risk

bearing appetite)

Priorities
-Return
-Safety
Liquidity

Retailers (Risk
appetite depends
on age)

Age <50

Priorities
-Return
-Safety
-Liquidity

Corporate (wantTrusts (want

return with safety)
safety with
return)

Age >50

Priorities
-Safety
&Return
-Liquidity

Priorities
-Safety
-Liquidity
-Return

Priorities
-Safety
-Return
-Liquidity

80% in
Equity

90% in
Liquid

95% in
debt

20% in
debt

10% in
others

Very
rarely
in
Equity

cvi

80% in
Equity

80% in
debt

20% in
debt

20% in
Equity

RESEARCH METHODOLOGY
Research methodology connects the various
tools, techniques, methods, instruments, sources, and
approach used for collection, tabulation, analysis and
interpretation of row data for the problems under study.
The problem of research methodology is to
descry the research procedure. This includes overall
research

design,

preparation

of

questionnaire,

interviewing bank employees, persons working in

insurance sectors, authorities of companys and other
information sources as the method used for data
collection.

DATA COLLECTION METHOD:

cvii
For the purpose of project work, I have studied
mainly the primary methods of data collection. In that I
have

given

my

concentration

to

filling

up

of

questionnaire regarding what are the major problems an

investor faced during dealing with Mutual Funds? And
what are the major criteria which force investors to select
Mutual Funds? Asking questions, observing behavior
and filling up the questionnaire by the respondents helps
me to collect the primary data for project report.

INSTRUMENTS USED FOR DATA COLLECTION:

The main data collection instrument used for this
project report is questionnaire. In this report I have used
structured (both close ended as well as open ended)
questions. Which are of multiple choice answers?
The questions were designed in simple language.
The type of questionnaire is not so lengthy so that the
interest of respondent can be maintained and not so small
that it gets diverted from its goal.

cviii

SAMPLE DESIGN:
For this project I have concentrated my sample
design on the following categories of respondents. These
are:

Bank employees

Insurance sectors employees

Big jewelers

Big showrooms

Small Investors

Private sector employees

Others

SAMPLE SIZE:
Keeping in mind the constraints like time and
cost associated with it I decide to take an overall sample
of 280 respondents, who are as below:

Bank employees

Insurance sectors employees =40

=90

cix

Big jewelers

=20

Big showrooms

=20

Small Investors

=60

Private sector employees

=30

Others

=20

AREA COVERED
The area was mainly Delhi & NCR. In order to
collect the relevant information for the project report I
visited to the following areas of Delhi/NCR:

NEHRU PLACE

LAXMI NAGAR

CANNAUGHT PLACE

SHAHDARA

KALKA JI

NOIDA/GREATER NOIDA

CHANDNI CHAUK

DATA ANALYSIS

cx
Data analysis part of this project report is based on study
of

questionnaire.

For

the

better

understanding

questionnaire is divided into two parts:1. Analysis of the very general information collected by
questionnaire.
2. Analysis of specific questions which are based upon
the factual collection and analysis of data.

cxi

1. GENERAL ANALYSIS
This part of analysis comes from the general
information given by respondents in the questionnaire.
These are:

1) Average monthly salary is not a single deciding

factor for the respondent to invest in Mutual
Funds. There are some more factors, which are
responsible to force an investor to invest in any
Mutual Funds. These factors are like:i. Their self interest
ii. Their saving tendency
iii. Their self speculative mentality
iv. Risk taking attitude
v. Want to play like lottery

2) The fact that the investors are since how long

been in Delhi does not have much effect. I met
few persons who have just shifted to Delhi; still
they are interested in Mutual Funds. In the time
of internet no body bother about his/her original
place of living.

cxii

2. SPECIFIC ANALYSIS
In this part of study the analysis of questions of
the questionnaire are studied.

1. WHICH SAVING/INVESTMENT
INSTRUMENT DO YOU PREFER TO INVEST
IN?
a) Equity
b) Bond/Other debt instruments
c) Precious Metals
d) Real Estates
e) Mutual Funds
f) Bank/Post office saving schemes
g) Any others
With respect to this particular question, the
response which I have got from the public, gives a
picture that Mutual Funds are the instruments, which are
trusted most by the investors. Few other segments like

cxiii
real estates, bank/post office investments and equity
investments are also investors choice.

Mutual Funds and real estates investment

dominates the chart where the combination of these two
covers almost 50% of the investment by the people. The
given chart shows the preference of the Indian investors
as there are several options to choose from. These wide
ranges of options create the problem of selection of the
investment segment as different segments have their
respective risk and return ratios, which is the main
consideration for the investor.

Nobody wants to lose his/her money in a risky

venture so everyone wants security, like that found in a
certificate of deposit or other fixed income investment.
But one also wants to make the most money one can, so
everyone wants the prospect for growth potential, too.
Finally, since everyone doesn't have the time or
knowledge to actively manage ones money, one wants
professional

money

management

diversifying

investments

into

occasionally

promising

new

opportunities. Certificates of deposit and other fixed

income investments offer security, but often with low
rates of interest and a fixed potential for growth.

cxiv
Individual stocks may carry greater potential for growth,
but anyone put it all in one stock, he/she risks everything
if it performs poorly. And, brokers and investment
advisors can offer advice and money management, but at
a price one pay for their services, which reduces further
the amount.

2. WHAT

DO

YOU

THINK

ABOUT

THE

PROSPECT OF MUTUAL FUNDS IN INDIA?

WHAT

ARE

THE

CURRENT

MARKET

TRENDS IN THE INDIAN MUTUAL FUNDS

MARKET?
The response the people consists of various facts,
which has made the questionnaire very exclusive. Today
Indian economy is in the booming part. In fact it is one

cxv
of the fastest growing economies of the world. The
salaries and the consumption power of Indians are
getting higher. The people are also saving and investing
their money in the different segments such as equity,
bonds, real estate, precious metals, mutual funds, bank
deposits etc.
But with investments risk factor is also
associated. As higher the risk so will be the returns. But
the people always want to be on the safer side when the
question comes about their hard earned money. And this
is the main reason by which mutual funds industry is
growing because the funds from the public are handled
by the experts of the investment field and the risk is
diversified. Today people have no time to manage their
own portfolio and up to a great extant lack of expertise
are also there. So the Indian mutual funds industry is
taking the Indians into its grip.

cxvi
3. HOW YOU COME TO KNOW ABOUT THE
UPCOMING MUTUAL FUNDS?
a) T.V &Radio
b) Internet
c) Advisor
d) Print media
e) Anything else,
specify__________________________________
_______

As far as the promotional schemes of Mutual

Funds are concerned the important role of media weather
it is print media or electronic media is prime, but the
other conventional advertisement strategies such as

cxvii
hoardings, shine boards and pamphlets distribution etc.
play a deciding part as well. The above bar diagram
reveals these facts.
4. WHAT ARE THE MAIN REASONS BEHIND
INVESTING IN MUTUAL FUNDS?
a) Lack of time to manage own portfolio
b) Lack of expertise/knowledge
c) Diversified risk/investments
d) Small investment possibility
e) Any other
The question arises in the minds, why mutual
funds? So the are several reasons behind it. The various
reasons/benefits of investing in mutual Funds, which are
derived from the questionnaire, are narrated below:
1. Professional Investment Management
2. Diversification
3. Low Cost
4. Convenience and Flexibility
5. Quick, Personalized Service
6. Ease of Investing
7. Total Liquidity, Easy Withdrawal
8. Life Cycle Planning
9. Market Cycle Planning

cxviii
10. Investor Information
11. Periodic Withdrawals
12. Dividend Options
13. Automatic Direct Deposit
14. Recordkeeping Service
15. Safekeeping
16. Retirement and College Plans
17. Online Services
18. Sweep Accounts

cxix

5. WHAT PROBLEMS YOU FACE WHILE

DEALING IN MUTUAL FUNDS?
a) Sector selection
b) Company selection
c) Portfolio selection
d) Calculation of risk-return trade-off
e) Documentary requirements
f) Any other,
specify_______________________________
_________

cxx

The investors have the number of problems to face.

When the point of investments arises. The investors find
it very difficult to select sector, company, portfolio, risk
return calculation etc. The major problem for most of the
investors is sector selection, as shown above.

6. HOW DO YOU DECIDE A BETTER

OPPORTUNITY IN ANY MUTUAL FUND?
a. Peer group advice
b. Financial advisors advice
c. Own speculation
d. Advertisement

cxxi
e. Any other,
specify____________________________
_________

The decisions of investment are derived from many

factors but the persuasion for the selection of mutual
funds greatly depends on advertisement and advices
from the financial advisors and friend group.

7. HOW YOU SELECT A COMPANY TO INVEST

IN?
a) Past record of company

cxxii
b) Future plans of company
c) Product category
d) Current market performance
e) Any other,
specify____________________
___________

The company selection is the main question for

the investor. There are few factors such as past record of
the company, future plans, its category and current
market positions. This is premierly dominated by all
these facts.

cxxiii

8. IN WHICH CATEGORY YOU PREFER TO

INVEST?
a) Sector investment
a. Real Estates
b. Pharmaceutical/Chemica
l
c. IT/Communication
d. Finance
e. Automobile
f. Any other
b) Index investments
c) Growth investment
d) Hybrid Funds
e) Commodity Funds
f) Exchange traded Funds
g) Others

cxxiv

The main problem for the individual investor is

selection of the segment to invest in. There are various
options available for the investor such as sector
investment, index investment, growth investment, hybrid
fund etc.

cxxv
The

scenario

which

results

from

the

questionnaire is that most of the people are interested in

the sector, index and growth investments. The sectoral
investment also a diversified aspect, which is segmented
as real estate, pharmaceutical, IT and automobile etc.
consist the most of it.

LIMITATIONS
Every work/process/activity/project is always
surrounded by some limitations, which may be
considered due to either by human cause or natural
cause. This report is not the exception one. During the
collection of data and summer training period I came
across the following problems that may be counted as
limitation to the report. These problems may be:

cxxvi

The very first limitation of this report is lack of

expertise.

Very limited time period for training.

Less number of respondents is interviewed.

CONCLUSIONS

cxxvii

A mutual fund brings together a group of people

and invests their money in stocks, bonds, and other

securities.

The advantages of mutual funds are professional

management, diversification, economy of scale,

simplicity and liquidity.

The disadvantages of mutual funds are high

costs,

over-diversification,

possible

tax

consequences, and the inability of management to

guarantee a superior return.

There are many, many types of mutual funds. You

can classify funds based on asset class, investing

strategy, region, etc.

Mutual funds have lots of costs.

Costs can be broken down into ongoing fees

(represented by the expense ratio) and transaction

fees (loads).

The biggest problems with mutual funds are their

costs and fees.

Mutual funds are easy to buy and sell. You can

either buy them directly from the fund company or

through a third party.

cxxviii

Mutual fund ads can be very deceiving.

RECOMMENDATIONS
Recommendations are my advice to the different
company . Nothing is perfect in this world. To survive
and stay in the competition for long time every thing
need to improve constantly and at a regular interval of
time. Following are some room of improvement which I
think should be executed for better functioning of
Mutual Funds department of the company:

They should maintain the proper data base of

its existing clients and new ones. Inform them
properly about the upcoming Mutual Funds
and suggest them which one may be
beneficial for them.

Some full time employees should be recruited

for telemarketing of Mutual Funds.

A specific Mutual Funds icon should be made

on its website for quick information.

Some employees should be hired for the

Mutual Funds department to reduce the
burden at the time of excessive Mutual
Funds.

cxxix

Organize its franchises well in better

coordinated way.

Make separate sections which can help to

reduce the problems of investors.

Work on the medium which are most

preferable by an investor.

Proper feedback and information system is

required.

QUESTIONNAIRE
Name of investor:
Age:
Profession:
Average monthly income:
Since how long in Delhi:

1. Which saving/investment instrument do you prefer

to invest in?

cxxx
a) Equity
b) Bond/Other debt instruments
c) Precious Metals
d) Real Estates
e) Mutual Funds
f) Bank/Post office saving schemes
g) Any others
2. What do you think about the prospect of Mutual
Funds in India? What are the current market
trends in the Indian Mutual Funds market?
_____________________________________________
_____________________________________________
_____________________________________________
___
3. How you come to know about the upcoming
Mutual Funds?
a)

T.V &Radio

b)

Internet

c)

Advisor

d)

Print media

e)

Anything else,

specify_____________________________________
____

cxxxi

4. What are the main reasons behind investing in

Mutual Funds?
a) Lack of time to manage own portfolio
b) Lack of expertise/knowledge
c) Diversified risk/investments
d) Small investment possibility
e) Any other

5. What problems you face while dealing in Mutual

Funds?
a) Sector selection
b) Company selection
c) Portfolio selection
d) Calculation of risk-return trade-off
e) Documentary requirements
f) Any other,
specify____________________
____________________
6. How do you decide a better opportunity in any
Mutual Fund?
a) Peer group advice

cxxxii
b) Financial advisors advice
c) Own speculation
d) News channel
e) Any other,
specify____________________
_________________

7. How you select a company to invest in?

a) Past record of company
b) Future plans of company
c) Product category
d) Current market performance
e) Any other,
specify____________________
___________

8. In which category you prefer to invest?

a)

Sector investment
a. Real Estates
b. Pharmaceutical/Chemical
c. IT/Communication
d. Finance

cxxxiii
e. Automobile
f. Any other
b) Index investments
c) Growth investment
d) Hybrid Funds
e) Commodity Funds
f) Exchange traded Funds
g) Others

9. Comment/suggestion about our services (MSFL) in

Mutual Funds sector.
_____________________________________________
_____________________________________________
_____________________________________________
___

cxxxiv

BIBLIOGRAPHY

Bhoj, B.K., and Dhal, S.C.(1998), "Integration of Financial

Markets in India: An Empirical Evaluation", RBI Occasional
Papers, Vol. XXIX No. 4, December.
Gopinath, S. (2005), Recent Developments in Forex, Money
and G-Sec Markets: Account and Outlook, RBI Bulletin,
September.
Mishra, A.K. (2002), International Financial Integration of
Domestic Financial Markets A Study on India, Journal of
Applied Finance, Vol.8, No.2, March.
Mohan, R.(2004) A Decade of Reforms in Government
Securities Market in India and the Road Ahead,RBI Bulliten,
November.

Reddy, Y.V. (1998), Development of Debt Markets in

India Address at Conference on Private Investment in
Infrastructure in India, at Paris, in November
Report of the Technical Group on Money Market (2005), RBI
Bulletin, May.

INTERNET SITES:

cxxxv
WWW.MONEYSUKH.COM
WWW.MONEYCONTROL.COM
WWW.WIKIPEDIA.ORG
WWW.NSEINDIA.COM