A REPORT

ON

MUTUAL FUND INVESTORS-THEIR

EXPECTATIONS & STRATEGIES IN
CHANGING SCENARIO

TABLE OF CONTENTS
 Topic Page No.

 Acknowledgement………………………………… 4

 Abstract ………………………………………….... 5

 Introduction
 About the project…………………………….. 6
 Indian mutual fund industry…………………. 7
 About the organization………………………. 10

 Mutual funds
 Concept………………………………………. 12,13
 Characteristics……………………………….. 14
 Advantages…………………………………… 14
 Disadvantages…………………………………. 16
 Types of mutual funds…………………………. 17
 Constitution of mutual funds…………………… 23
 Net asset value…………………………………. 26
 Nature of income distribution………………….. 27
 Why an investor leaves a fund………………….. 29
 Latest AUM …………………………………….. 30

 Study
 Scope of the study………………………………. 38
 Objective of the study…………………………… 38
 Methodology used……………………………….. 39
 Limitations ………………………………………. 40
 Findings of the study…………………………….. 41
  Comparative analysis of mutual funds………………... 57

 Scope of SCB investment products…………………… 61

 Recommendations made to SCB……………………… 65

 References…………………………………………….. 68

ABSTRACT
Mutual funds have been one of the most preferred investment instruments. They are looked upon by
individual investors as financial intermediaries/ portfolio managers who process information, identify
investment opportunities, formulate investment strategies, invest funds and monitor progress at a very
low cost. Thus the success of mutual funds is essentially the result of the combined efforts of
competent fund managers and alert investors. A competent fund manager should analyze investor
behavior and understand their needs and expectations, to gear up the performance in order to meet
investors’ requirements. The project “Mutual fund investors – expectations & strategies in changing
scenario” is to understand the changing sentiments, expectations & strategies of the investor.

The volatility of stock market has affected the mutual funds sales. There has been a plunge in the sales
of mutual funds. The expectations & strategies of the investors have changed. This has become a
challenge for fund houses. Investors’ preference has changed. Now they are not sure about what the
investors want. This project aims at understanding their behavior & thus giving recommendations to
SCB for meeting these challenges. Thus, to analyze the difference between investors’ expectations &
investment managers’ approach.

The project will seek to cover all the fundamental aspects related to mutual funds & investment in
mutual funds. The project will also cover the various problems of the global scenario that has affected
the Indian market. Then it will analyze the behavior of investors in changing scenario.
There will also be a comparative analysis of some of the star ranked mutual funds as per the
expectations of the investors, so as to understand whether the star ranked mutual funds are catering to
the requirements & expectations of the investors or not.

Basically, the project is to understand the investors, behavior & to give recommendations to Standard
Chartered Bank on how to meet these changing expectations of the investors & offer the product
accordingly. There are many other investment products offered by Standard Chartered. This project
also covers that what are the opportunities for such investment products.
 INTRODUCTION
The growth and maturation of mutual fund industry is the greatest investment story of
the twentieth century. With the introduction of innovative products, the world of
mutual funds nowadays has a lot to offer to its investors. With the introduction of
diverse options, investors need to choose a mutual fund that meets his risk acceptance,
his risk capacity levels and has similar investment objectives as the investor. There are
a large number of schemes available in the market to cater to the different needs of the
investor. As on 29th Feb, 2008, there were 5343 mutual fund schemes in the market.

The market has been bullish in past few months & has given huge returns. Even the
retail investors started investing in a big way expecting the rally to continue. But with
change in the global scenario, there has been a sudden & unexpected downfall in the
market which sunk the investors’ expectations, creating a negative sentiment in the
market. This has also affected the mutual fund investments.

Since Indian economy is no more a closed market, and has started integrating with the
world markets, external factors which are complex in nature are also affecting us.
Factors such as Sub-prime problem, expected US recession, an increase in short-
term US interest rates, the hike in crude prices and many other factors have made
Indian market volatile. The market has shown a downfall of --% in past 3 months.
There has been sharp fall in the sales of mutual funds in past 2 months, since January.
The average asset under management (AUM) of the mutual fund industry has declined
sharply by 6.62% in March 2008, according to data released by Association of Mutual
Funds in India (AMFI). This shows that there has been a change in the investors’
sentiments & expectations.
 INDIAN MUTUAL FUND INDUSTRY
The Indian mutual fund industry is dominated by the Unit Trust of India which has a total corpus of
Rs700bn collected from more than 20 million investors. The UTI has many funds/schemes in all
categories i.e. equity, balanced, income etc with some being open-ended and some being closed-
ended. The Unit Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the
biggest scheme with a corpus of about Rs200bn. UTI was floated by financial institutions and is
governed by a special act of Parliament. Most of its investors believe that the UTI is government
owned and controlled, which, while legally incorrect, is true for all practical purposes.

The second largest category of mutual funds is the ones floated by nationalized banks. Canbank Asset
Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India
are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima
Sahayog AMC floated by the LIC are some of the other prominent ones. The aggregate corpus of
funds managed by this category of AMCs is about Rs150bn.

The third largest categories of mutual funds are the ones floated by the private sector and by foreign
asset management companies. The largest of these are Prudential ICICI AMC and Birla Sun Life
AMC. The aggregate corpus of assets managed by this category of AMCs is in excess of Rs250bn

The growth and development of Indian Mutual Fund Industry can be broadly divided into four
phases:-

First Phase (1964-87)

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve
Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of
India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme
launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets under
management.
Second Phase (1987-1993)

Highlight of phase was entry of Public Sector Funds. In 1987 marked the entry of non- UTI, public
sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) in
June 1989 and General Insurance Corporation of India (GIC) In Dec. 1990.

Public Sector Bank also established their own Mutual Funds:-

SBI Mutual Fund (June 1987)

Canbank Mutual Fund (Dec 87)

Punjab National Bank Mutual Fund (Aug 89)

Indian Bank Mutual Fund (Nov 89)

Bank of India (Jun 90)

Bank of Baroda Mutual Fund (Oct 92).

By the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores.

Third Phase (1993 – 2003)

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 number of mutual fund houses went on increasing, with many

foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,
21,805 crores. The Unit Trust of India with Rs. 44,541 crores of assets under management was way
ahead of other mutual funds
Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into
two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under
management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the assets of
US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of
India, functioning under an administrator and under the rules framed by Government of India and
does not come under the purview of the Mutual Fund Regulations

Fund Regulations, and with recent mergers taking place among different private sector funds,
the mutual fund industry has entered its current phase of consolidation and growth. As at the end of
September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes
 MUTUAL FUNDS

Concept
A mutual fund is a pool of money, collected from investors, & is invested according to certain
investment objectives.

A mutual fund is created when investors put their money together. It is therefore a pool of the
investors’ funds. The most important characteristic of a mutual fund is that the contributors & the
beneficiaries of the fund are the same class of people, namely the investors. The term mutual means
that investors contribute to the pool, & also benefit from the pool. There are no other claimants to the
funds. The pool of funds held mutually by investors is the mutual fund.

A mutual fund’s business is to invest the funds thus collected, according to the wishes of the investors
who created the pool. In many market these wishes are articulated as “investment mandates.” Usually,
the investors appoint professional investment managers, to manage their funds. The same objective is
achieved when professional investment managers create a “product,” and offer it for investment to the
investors. This product represents a share in the pool, & pre-states investment objectives.
CONCEPT OF MUTUAL FUNDS
 Characteristics of Mutual Funds

 A mutual fund actually belongs to the investors who have pooled their funds. The ownership
of the mutual fund is in the hands of the investors.

 A mutual fund is managed by the investment professionals & other service providers, who
earn a fee for their services, from the fund.

 The pool of funds is invested in a portfolio of marketable investments. The value of the
portfolio is updated every day.

 The investor’s share in the fund is denominated by “units” the value of the units change with
the change in the portfolio’s value, everyday. The value of one unit of investment is called as
the Net Asset Value or NAV.

 The investment portfolio of the mutual fund is created according to the stated investment
objective of the fund.

Advantages of Mutual Funds

 Portfolio Diversification

By offering readymade diversified portfolios, mutual funds enable investors to hold diversified
portfolio. Though investors can create their own diversified portfolios, the costs of creating
and monitoring such portfolios can be high, apart from the fact that investors may lack the
professional expertise to manage sucha portfolio.
 Professional Management

• Mutual fund are managed by investment managers(AMCs) who are appointed by

trustees & bound by the investment management agreement, on the how’s & whys of
their investment management functions.

• AMCs are also required to be adequately capitalized, & are closely regulated by SEBI.
AMCs competing for funds under management therefore bring in significant
professional expertise & are bound by regulatory & trustee supervision.

• Investment managers & funds are also bound by the AMFI code of ethics, which foster
professional standards in the industry.

 Reduction in risk

Mutual funds invest in a portfolio of securities. This means that all the funds are not invested
in the same investment avenue. It is well known that risk & returns of various investment
options do not move uniformly or in sympathy with one another. Therefore, holding a
portfolio that is diversified across investment avenues is a wise way to manage risk. When
such a portfolio is liquid & marked to market, it enables investors to continuously evaluate the
portfolio & manage their risks more efficiently.

 Reduces Transaction cost

Mutual funds provide the investors the benefit of economies of scale, by virtue of their size.
Though the individual investor’s contribution may be small, the mutual fund is large enough
to be able to reduce costs. These benefits are passed on to the investors.
 Liquidity

• Most of the funds being sold today are open-ended. That is, investors can sell their
existing units, or buy new units, at any point of time, at prices that are related to the
NAV of the fund on the date of the transaction. This enables investors to enjoy a high
level of liquidity on their investments.

• Since investors continuously enter & exit funds, funds are actually able to provide
liquidity to investors, even if the underlying markets, in which the portfolio is invested,
may not have the liquidity that the investor seeks.

Disadvantages

 No control over cost

Since investors do not directly monitor the fund’s operations they cannot control the costs
effectively. Regulators therefore usually limit the expenses of mutual funds.

 No tailor-made portfolio

Mutual fund portfolios are created and marketed by AMCs, into which investors invest. They
cannot create tailor made portfolios.

 Managing a portfolio of funds

As the number of mutual fund increase, in order to tailor a portfolio for himself, an investor
may be holding a portfolio of funds, with the costs of monitoring them & using them, being
incurred by him.
 TYPES OF MUTUAL FUNDS
There are various types of mutual fund schemes available in the market. Currently there are 5373
mutual funds schemes available in the Indian market.

Broadly the various

types of mutual funds are differentiated on the basis of:

On the basis of STRUCTURE, mutual funds can be divided into 3 types:

a) Open Ended Schemes

It is the pool of fund which is open for sales & repurchases. An open-end fund is one that is
available for subscription all through the year. These do not have a fixed maturity. Investors
can conveniently buy and sell units at NAV related prices. Therefore both the amount of
funds that the mutual fund manages & the number of units vary everyday. The key feature of
open-end schemes is liquidity.

Open-ended funds have to balance the interests of investors who come in, investors who go
out & investors who stay invested. Open-ended funds are offered for sale at a pre-specified
price, in the initial offer period. After a pre-specified period, the fund is declared open for
further sales & repurchases. These transactions happen at the computed NAV related price.

b) Closed Ended Schemes

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15
years. The fund is open for subscription only during a specified period. Investors can invest in
the scheme at the time of the initial public issue and thereafter they can buy or sell the units of
the scheme on the stock exchanges where they are listed. Therefore new investors buy from
the existing investors, & existing investors can liquidate their units by selling them to other
willing buyers. In a closed end funds, thus, the pool of funds can technically be kept constant.

The price at which units can be sold or redeemed depends on the market prices, which is
fundamentally linked to the NAV.
 In order to provide an exit route to the investors, some close-ended funds give an option of
selling back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.

c) Interval schemes

Interval Schemes are that scheme, which combines the features of open-ended and close-
ended schemes. The units may be traded on the stock exchange or may be open for sale or
redemption during pre-determined intervals at NAV related prices.

On the basis of INVESTMENT OBJECTIVE, mutual funds can be divided into 4 types:

a) Growth Option

Growth Schemes are also known as equity schemes. The aim of these schemes is to
provide capital appreciation over medium to long term. These schemes normally invest a
major part of their fund in equities and are willing to bear short-term decline in value for
possible future appreciation.

In it incomes earned are retained in the investment portfolio, & allowed to grow, rather
than being distributed to the investors.

The return to the investors is at the rate at which his initial investment has grown over the
period for which he was invested in fund. The NAV will vary with the value of the
investment portfolio while the number of unit held will remain constant.

b) Income Scheme

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

c) Balanced Funds

Funds that invest both in debt & equity markets are called balanced funds. Balanced
Schemes aim to provide both growth and income by periodically distributing a part of the
income and capital gains they earn. A typical balanced fund would be almost equally
invested in both the markets. A balanced fund also tends to provide investors exposure to
both equity & debt markets in one product. Therefore the benefits of diversification get
further enhanced, as equity & debt markets have different risk and return profiles.
 d) Money Market Schemes

Money Market Schemes aim to provide easy liquidity, preservation of capital and
moderate income .These debt funds invest only in instruments with a maturity less than a
year. The investment portfolio is very liquid, & enables investors to hold their investments
for very short horizons of a day or more. These schemes generally invest in safer, short-
term instruments, such as treasury bills, certificates of deposit, commercial paper and
inter-bank call money.

On the basis of NATURE, mutual funds can be of 3 types:

a) Equity Funds

These funds invest a maximum part of their corpus into equities holdings. The structure of
the fund may vary different for different schemes and the fund manager’s outlook on
different stocks. Equity funds can be further divided into 4 types:

• Simple equity funds

These funds invest a pre-dominant portion of the funds mobilized in equity & equity
related products. In most cases about 80-90% of their investments are in equity shares.
These funds have the freedom to invest both in primary & secondary markets for
equity.

• Sector Specific funds

These funds choose to invest in one or more chosen sectors of the equity markets.
These sectors could vary depending on the investor preference & the return-risk
attributes of the sector. Sector specific funds are not as well diversified as simple equity
funds, as they tend to focus on fewer sectors in the equity funds, as they tend to focus
on fewer sectors in the equity markets. They can exhibit very volatile returns.

• Tax Saving Funds(ELSS)

One variation of the simple equity fund is the ELSS (Equity Linked Saving Schemes).
These funds, named variously in the mutual fund industry, are equity funds formed
under a special scheme notified by the Government of India in 1990. According to the
provisions of this notification, investment in a specially formed mutual fund product,
that invest at least 90% of its funds in equity & equity-linked investments is eligible for
a tax rebate, up to a maximum investment of Rs. 10,000, under section88 of the Income
Tax Act. Investors have to hold their units for a minimum lock-in period of 3 years, in
order to avail of the tax rebate.

• Primary market funds

These funds invest in equity shares, but do so only when a primary market offering is
available. The focus is on capturing the opportunity to buy those companies which
issue their equity in primary markets, either through a public offer or through private
placements.

• Index funds

It is an alternative approach to creating an equity portfolio for investors, is to avoid

taking views on the performance of companies, & instead focus on creating a
diversified portfolio, that simply replicates an existing market index. In order to track
the return performance of markets, market indices of a sub-set of trading stocks is
created.

This strategy is also called passive fund management. The costs of this strategy are
lower, & the fund performance virtually tracks the market index. An index fund
provides an ideal exposure to equity markets, without the investors having to bear the
risks & costs arising from the market views that a fund manager may take.

• Other equity funds

Equity funds can also be created to invest in equity shares of companies with specific
attributes. For Example, there are small stock funds, which invest only in equity shares
of small companies; there are PSU funds which specialize in investing only in PSU
stocks; there is a top 200 fund, which invests in companies within the universe of the
top 200 equity stocks; there is a select equity fund, which invests from the universe of
stocks comprising the A group companies of the Bombay Stock Exchange; & there is a
30-stock fund that limits the number of stocks in its portfolio to 30 stocks. All these
 products try to define a subset of the equity market, in terms of size &other attributes,
& tend to focus on that segment.

b) Debt Funds

Debt funds are those that pre-dominantly invest in debt securities. Since most debt
securities pay periodic interest to investors, these funds are also known as income funds.
However, investing in debt products can also offer a growth option to their investors. The
universe of debt securities comprises of long term instruments such as bond issues by
central & state governments, public sector organizations, public financial institutions &
private sector companies; and short term instruments such as call money lending,
commercial papers, certificates of deposit; & treasury bills. Debt funds tend to create a
variety of options for investors by choosing one or more of these segments of the debt
markets in their investment portfolio. Debt funds can be further divided into 5 types:

• Gilt Funds

A gilt fund invests only in securities that are issued by the government, & therefore
does not carry any credit risk. These funds invest in short & long-term securities issued
by the government. These funds are preferred by institutional investors who have to
invest only in government paper. These funds also enable retail investors to participate
in the market for government securities, which is otherwise a large-ticket wholesale
market.

• Income Funds

These funds invest a major portion into various debt instruments such as bonds,
corporate debentures and Government securities

• MIPs

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

• Short Term Plans(STPs)

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

• Liquid funds

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

c) Balanced Funds

As the name suggest they, are a mix of both equity and debt funds. They invest in
both equities and fixed income securities, which are in line with pre-defined
investment objective of the scheme. These schemes aim to provide investors with
the best of both the worlds. Equity part provides growth and the debt part provides
stability in returns. The benefits of diversification get further enhanced, as equity &
debt markets have different risk &return profiles.
 CONSTITUTION OF A MUTUAL FUND

The structure of mutual funds in India is governed by the SEBI (mutual fund)
Regulations, 1996. These regulations make it mandatory for mutual funds to have a
three-tier structure of Sponsor-Trustee-Asset Management Company (AMC). The
sponsor is the promoter of the mutual fund, & appoints the Trustees. The trustees are
responsible to the investors in the mutual fund, & appoint the AMC for managing the
investment portfolio. The AMC is the business face of the mutual fund, as it manages
all the affairs of the mutual fund. The mutual fund & the AMC have to be registered
with SEBI.

SEBI regulations also provide for who can be a sponsor, trustee & AMC, & specify
the format of agreements between these entities. These agreements provide for the
rights, duties & obligations of these three entities. These agreements provide for the
rights, duties & obligations of these three entities.
.

 Sponsor

The sponsor is the promoter of the mutual fund. The sponsor establishes the mutual fund &
registers the same with SEBI.

• Sponsor appoints the trustees, custodians & the AMC with prior approval of
SEBI, & in accordance with SEBI Regulations.

• Sponsor must have at least 5-year track record of business interest in the
financial markets.

• Sponsor must have been profit making in at least 3 of the above 5 years.

• Sponsor must contribute at least 40% of the capital of the AMC.

 Trustee

The mutual fund, which is a trust, is managed either by a Trust company or a board of
Trustees. It is the responsibility of the trustees to protect the interest of investors, whose fund
is managed by the AMC. The AMC & other functionaries are functionally accountable to the
trustees.

 Asset Management Company (AMC)

The mutual fund is operated by a separately established asset management company (AMC).
It manages the funds of the various schemes. It is entrusted with the specific task of
mobilizing funds under the scheme.

The trustee, on the advice of the sponsor, usually appoints the AMC. The trust deed
authorizes the trustee to appoint the AMC. The AMC is usually a private limited company, in
which the sponsors & their associates or joint venture partners are shareholders. The AMC
has to be SBI registered entity, & should have a minimum net worth of Rs. 10 crores.

Following are the various types of AMCs we have in India

• AMCs owned by banks

 • AMCs owned by financial institutions

• AMCs owned by the Indian private sector company

• AMCs owned by foreign institutional investors

• AMCs owned jointly by Indian & foreign sponsors.

 Custodian

Custodians are responsible for the securities held in mutual fund’s portfolio. They discharge
an important back-office function, by ensuring that securities that are bought, delivered &
transferred to the books of the mutual funds, & those funds are paid out when a mutual fund
buys securities. They keep the investment account of the mutual fund, & also collect the
dividends and interest payments due on the mutual fund investments. Custodians also track
corporate actions like bonus issues, right offers, offer for sale, buy back & open offers for
acquisition.

 Registrars & Transfer

Agents (R & T Agents)

The R & T agents are responsible for the investor servicing functions, as they maintain the
records of investors in mutual funds.

• They process investor

applications.

• Record details provided by

the investors on application forms.

• Send out to investor details

regarding their investments in mutual fund.

• Send out periodical

information on the performance of mutual funds.

• Process dividend payout to

investors

• Incorporate changes in
information as communicated by investors.
 • Keep the investment record
up to date, by recording new investors & removing investors who have withdrawn their
money.

NET ASSET VALUE (NAV)

NAV represents the actual value of per unit of a fund. It is calculated as:

(Market value of all investments + Income + Profit – Loss - Expenses)

Number of units in the mutual fund

The above components stand for:

 Market value of all the investments

Every security in the fund’s portfolio has a market value. The value of the entire portfolio is
calculated to reach this figure. It is here that any capital appreciation or depreciation of the
portfolio is reflected.

 Income

This is the interest income earned by debt securities or dividend income earned by stocks in
the portfolio.
 Profit

This is the capital gain realized by selling a security (debt or equity) at a price higher than its
purchase price.

 Loss

This is the capital loss suffered by selling a security (debt or Equity) at a lower price than its
purchase price.

 Expenses

This is the actual expenses incurred by the fund. For example, fees paid to AMC, custodians,
registrars etc., SEBI restricts the expenses that can be paid by the fund.

2 facts emerge from the above:

• All the income, expenses , profits & losses of a mutual fund are reflected in one single
number – its value, i.e. its NAV

• “Market Value of investments” is a major determinant of NAV. Thus, a mutual fund

will reflect market conditions.

NATURE OF INCOME DISTRIBUTION TO INVESTORS

Mutual fund offers a variety of options to investors, in the manner in which the returns
from their investments are structured. At a broad level, the investors have 3 options
which are:

• Dividend Option

Investors, who choose a dividend option on their investments, will receive

dividends from the mutual funds, as & when dividends are declared. Dividends
are paid in the form of warrants, or are directly credited to investors’ bank
account.

• Growth option
 Investors who do not require periodic income distributions can choose the
growth option, where the income earned are retained in the investment portfolio,
& allowed to grow, rather than being distributed to the investors. Investors with
longer-term investment horizons, & limited requirements for income, choose this
option. The return to the investors is at the rate at which his initial investment
has grown over the period for which he was invested in the fund. The NAV of
the investor choosing this option will vary with the value of the investment
portfolio, while the number of units held will remain constant.

• Re-investment Option

Investors re-invest the dividends that are declared by the mutual fund, back into
the fund itself, at NAV that is prevalent at the time of re-investment. In this
option, the number of units held by the investor will change with every re-
investment. The value of the units will be similar to that under the dividend
option.

SELECTION OF FUNDS
Following are the steps recommended by John Bogle, former chairman of Vanguard
Group of Funds in United States:

• For Equity funds

 Classify the equity funds into broad categories that signify their return &
risk characteristics.

 Classify funds further on the basis of fund manager style. Investors may
want to choose between value & growth styles, depending on their risk &
return preferences
  Evaluate the performance of the schemes. This is done both within the
peer group, & comparison with the bench mark

 Under the structural characteristics of the scheme like Size of the fund,
fund age, portfolio manager’s experience, and costs of investing.

 Understanding the portfolio characteristics of the scheme like percentage

of cash in portfolio, market capitalization of the fund, portfolio turnover,
portfolio risk, and statistics-ex marks of the portfolio, beta, and gross
dividend yield.

“The performing fund will have higher ex marks, lower beta, & higher gross
dividend yield.”

• For Debt/Bond funds

 Fund age & size – Newer & smaller fund may not be risky to the investors.

 Relative Yield – the total return on the fund may not be risky to the investors.

 Costs expenses ratio in a bond fund is very important, higher loads &
expenses could lead to a “yield sacrifice.”

 Quality of the portfolio – Better the rating of the bonds in the portfolio,
better the fund.

 Average maturity – the duration of the portfolio, and therefore is related to

the average maturity. Higher the average maturity means higher interest rate
risk in the fund.
 WHY AN INVESTOR LEAVES A FUND
Change in a Fund's Manager
When investors put their money into a fund, they are putting a certain amount of
trust into the fund manager's expertise and knowledge, which they hope will
lead to an outstanding return on an investment that suits their investment goals.
Thus, fund manager plays an important role when investors put in their money
in mutual funds.

Change in Strategy
If investors research their fund before investing in it, they most likely invested
in a fund that accurately reflects their financial goals. If their fund manager
suddenly starts to invest in financial instruments that do not reflect the mutual
fund's original goals, they may want to re-evaluate the fund you are holding. For
example, if a small-cap fund starts investing in a few medium or large-cap
stocks, the risk and direction of the fund may change.

Consistent Underperformance
This can be tricky since the definition of "underperformance" differs from
investor to investor. If the mutual fund returns have been poor over a period of
less than a year, then investors may not liquidate, thinking that liquidating their
holdings in the portfolio may not be the best idea since the mutual fund may
simply be experiencing some short-term fluctuations. However, if they have
noticed significantly poor performance over the last two or more years, they
may liquidate their holdings.

The Fund Becomes Too Big

In many cases a fund's quick growth can hinder performance. The bigger the
fund, the harder it is for a portfolio to move assets effectively. Fund size usually
becomes more of an issue for focused funds or small-cap funds, which either
deal with a smaller number of shares or invest in stock that has low volume and
liquidity.
Latest Asset under Management for all Mutual Fund Houses

Amount in
crores
 MUTUAL FUND NO. OF ASSET UNDER MANAGEMENT
NAME SCHE- As on Mar As on Feb Net Inc/Dec as
MES 31,2008 29,2008 on Mar 31,2008

ABN AMRO Mutual 325 6675.73 6813.54 -137.81

Funds
AIG Global Investment 54 3,148.63 3,303.49 -154.86
Group Mutual Fund
Benchmark Mutual 12 5611.00 4,954.72 656.28
Fund
BIRLA Mutual Funds 330 34750.00 36,391.00 -1641
BOB Mutual Funds 22 70.34 79.69 -9.35
Canara Robeco Mutual 54 2484.28 3,146.58 -662.3
Fund
DBS Chola Mutual 80 1,963.92 2,953.32 -989.4
Fund
Deutsche Mutual Fund 176 11996.00 14,404.85 -2408.85
DSP Merrill Lynch 207 19136.00 19,940.40 -804.4
Mutual Fund
Escorts Mutual Funds 26 175.8 146.93 28.87
Fidelity Mutual Funds 39 8294.05 9,487.17 -1193.12
Franklin Templeton 225 29604.33 29,424.58 179.75
Investments
HDFC Mutual Funds 351 43762.7 46,291.97 -2529.27
HSBC Mutual Funds 212 13953.08 15,530.08 -1577
ICICI Prudential 416 51810.85 62,008.95 -10198.1
Mutual Fund
ING Mutual Funds 251 9844.71 9,844.71 00.00
JM Financial Mutual 171 11,032.93 12,559.79 -1526.853
Fund

JPMorgan Mutual 9 2081.42 2,481.12 -399.7

Funds
Kotak Mahindra 178 16135.52 19,367.84 -3232.32
Mutual Fund
LIC Mutual Funds 112 13387.40 15,103.00 -1715.6
Lotus India Mutual 212 10057.10 9,763.88 293.22
Funds
Morgan Stanley Mutual 3 3172.00 3,599.49 -427.49
Funds
PRINCIPAL Mutual 151 11,780.02 13,318.69 -1538.67
Funds
Quantum Mutual Funds 6 64.22 65.38 -1.16
Reliance Mutual Funds 331 77210.04 93,531.68 -16321.64
Sahara Mutual Funds 43 180.38 211.36 -30.983
SBI Mutual Funds 171 27581.54 29,492.97 -1848.43
Standard Chartered 255 11364.5 13,762.97 -2398.47
Mutual Fund
As per the graph, we can see there has been a sharp increase in the sales of mutual
funds in the month of January. The volatility of the market started in January. When the
market decreased in January, investors thought that it is correction and they put in
money so as to buy mutual funds at lower NAV. But after the market crashed on 21st
January, investors began to panic. In the month of February there has been a sharp
decrease in the sales of mutual funds. This is because of downward motion of market in
February. In March there has been a slight recovery in the sales.

Balanced funds’ sales showed the same trend. There had been a sudden increase in the
sales of balanced funds. As balanced funds is the combination of both equity & debt.
So investors who had less risk taking capacity invested in these funds. But again in
February there has been a sharp decline in the sales of balanced funds & same
continued in the month of March.
Income funds basically invest in debts. There had been a sharp increase in the sales in
month of January. But a slight decrease in the month of February. There has been
increase in the sales of such funds in March. It is because of their returns are assured &
they are less risk averse.
After the volatility of market, investors have developed a negative sentiment. And it is
visible from the sharp increase in the sales of gilt funds. They do not have credit risk.
And they invest in government securities only. Therefore, investors invested more in
the gilt funds. There has been a sharp increase in the month of February, in spite of the
decrease in the mutual funds sales. There has just been a slight decrease in the month of
March. But overall the sales of gilt funds have increased to a very large extend.
Sales of gold funds have increased many folds because people are moving towards
commodities to hedge against inflation or market fall & gold ETF offer the
advantage of not holding physical gold as well as flexibility to sell at any time &
turn to equity or debt because selling instrument is easier rather than physical
quantity & procuring gold is not an easy task plus flexibility is another reason why
gold ETF is preferred against gold
These funds basically aim at liquidity. They invest in short term bonds & securities.
These funds also followed the trend. There has been increase in the sales in the month
of January but a slight decrease in the month of February. Again these funds’ sales
increased in the month of March.
 SCOPE OF THE STUDY
The study is confined to the mutual fund investors of Jaipur city of Rajasthan state of
India. The stated investors of Jaipur are currently working here and they all are
investing in mutual funds for last at least two years and recently in Feb – Mar 2008 .So
the respondents are capable enough to understand the major investment technicalities
and react accordingly.

OBJECTIVE
• To understand the concept of wealth management & various mutual funds and
what they offer to the investors.

• To understand the effect of the changing conditions on the mutual funds

• To understand the expectations & various strategies taken by mutual fund

investors under various conditions. How their investment strategies and expectations
changes with changing scenario.

• To analysis some of the star ranked mutual funds in the market & compare them
with the Standard Chartered’s mutual funds.

• To make recommendations to SCB as to cope with changing sentiments of the

investors.
 METHODOLOGY USED

• Primary data is collected through a questionnaire & collecting answers from

investors to understand the investor’s needs, choice & strategies under various
conditions. The questionnaire is aimed at gathering firsthand knowledge of investor’s
point of view.

• Sample design
Random sampling method is used for collection of data and necessary information for
which sample size of 100 respondents in Jaipur city have been taken for study.

• Analysis & Interpretation

The study mainly deals with changed strategies and expectations of Individual
Investors towards Mutual funds in Jaipur city due to the volatility of the market.
Respondents were screened and inclusion was purely on the basis of their knowledge
about Financial Markets, MFs in particular. This was necessary, because the
questionnaire presumed awareness of some basic terminology about Mutual Funds. The
purpose of the survey was to understand mainly their fund selection behavior, various
factors influencing this behavior, their investment objectives, changing strategies in
changing scenario and also the conceptual awareness level among individual investors.
The survey was conducted during Mar-Apr 2008, among 100 educated, geographically
dispersed individual investors of Jaipur city. Sample of the Questionnaire is given in
Annex I 1. The unit of observation and analysis of survey is only among Individual
Investors whose definition is “An Individual who has currently invested in any Mutual
Funds. Since it is an exploratory study no specific hypothesis is formulated.

Since the study is entirely based on the personal opinion of the respondents, the
collected data is presented in tabular form .Pie charts and diagrams are also used as a
presenting tool for the effective presentation. Percentage and majority method has been
used to analyze the responses given by the respondents. For most important questions
the responses have been accepted according to the most frequently similar responses
given by the respondents of one similar group and after that the whole responses of all
respondents were compiled in order to get a clear snap shot of the investment behavior.
So primarily the direct responses according to majority of sample has been accepted
• Secondary data will be collected through internet, magazines. Various journals,
books, various AMC’s Fund Fact sheets and Standard Chartered Bank study material
so as to collect information about mutual fund market, stock exchange and about
wealth management.

LIMITATIONS OF THE STUDY

1) Geographical constraint - Sample size is limited to 100 educated individual

investors in the city of Jaipur. The sample size may not adequately represent the
national market.

2) Sampling constraints - Simple Random and judgment sampling techniques is

due to time and financial constraints.

3) Time constraint - This study has not been conducted over an extended period of
time having both ups and downs of stock market conditions which a significant
influence on investor’ s buying pattern and preferences.

FINDINGS OF THE STUDY

1) PERSONAL INFORMATION ABOUT INVESTORS

Under this category investors were asked 5 questions:

(a) What is your age?

Basically this question is being asked to study a trend of investment

according to the age of an investor. Age plays an important role in the
investment pattern of a particular person. A person who is younger may
 invest more in equity as he can have higher risk appetite. A person who is in
middle age may prefer to invest in balanced funds. A person who is aged
may prefer to invest in debt funds as his risk appetite will be the lowest. He
would not be looking towards long term investments but he must be looking
towards constant returns, so may want to invest in debt funds.

CATEGORY NO. OF RESPONDENTS

20-30 YRS 30
31-40YRS 30
41-50 YRS 25
550 ABOVE 15

(b) Which investment tool, generally you choose for your investment
purpose.

INVESTMENT TOOL NO. OF RESPONDENTS

Bonds 7
Equity 23
Fixed Deposits 4
Gold 25
Mutual funds 40
Others 1
Analysis:

• Around 11% investors want to invest in secured instruments like bonds &
FDs

• Around 23% are high risk takers. They invest in equity.

• Around 25% people invest in gold. It is the second most popular investment
tool. As it has given huge returns in past few months.

• Around 40% invests in mutual funds, which shows that they want to balance
between risk and returns.

(c) What is your investment expenditure ratio?

INVESTMENT-EXPENDITURE RATIO NO. OF RESPONDENTS

Less than 20% 24
20-80% 36
30-70% 15
40-60% 25
50-50% 0
 Analysis:

• Around 25% of the investors invest less than 20% of their income. This is
a huge potential base.

• The major part lies in the bracket 20-80% ratio.

• 25% investors invest in the ratio of 40-60% which is less.

(d) How stable is your income source?

STABILITY OF INCOME NO. OF RESPONDENTS

Stable 60
Unstable 5
Moderate 25
Fluctuating 10
Analysis:

• As 60% investors have a stable income source. Earlier they had a

psychology of investing in stable investment instruments like bonds & fixed
deposits rather than investing in equity market where returns can be much
higher than present investments but they are showing risk aversion because
of the equity market’s volatility. Based on this it can be said that they do not
believe in the economical condition of the country and market stability. But
no conditions have changed. People with stable income are also ready to
take risk
• 25% has moderate income

• 10% has fluctuating. This basically comprises of business men

• Only 5% state their income to be unstable

d) Which bank/organization is providing you the investment services?

Analysis:

• Only 30% of the investors invest through banks/financial institutes

• Out of 100 investors, who invest in mutual funds, 70% do not take
investment services from the bank or any other institute.

• There are still large part investors who invest on their own.

2) HOW INVESTORS TAKE INVESTMENT DECISION?

 Under this there were 3 different questions asked to the respondents:

(a) Before making an investment decision, how do you conclude that

for which investment instrument you should go for?

REASON FOR INVESTMENT NO. OF RESPONDENTS

According to return analysis 50
According to esteemed group 5
After consultation with financial advisor 15
According to market trend 30

Analysis:
• As the data show that only 25% respondents of the total population
choose their investment medium after consultation or according to their
peer group. They are not anymore dependent on what others have to say.
They decide for their own money.
• 75% of respondents follow the return analysis & market trend
method for arriving at an investment decision. This shows that people
have become educated. They know where there money should go. What
are their requirements?

(b) Do you generally invest in popular mutual funds or analyze the funds &
performance before investment decisions?
REASON FOR CHOOSING MUTUAL NO. OF RESPONDENTS
FUND
Follow the popularity 5
Follow the esteemed group 15
Careful analysis of the fund 50
After consultation with financial advisor 30

Analysis
• Around 50% of people still choose mutual funds after consultation.
These shows that people believe more on what other advisors has to say
rather than making their own decisions

• Another 50% do the return analysis & other analysis of the funds to
decide on which fund to invest in

(c)What factors do you keep in mind before investing in mutual

funds?

FACTOR NO. OF RESPONDENTS

 Brand Name 20
Product features 5
Quality of service 5
Transparency 5
Past performance 65

Analysis:
• While choosing a fund the most important thing that matters to investors is
past performance of the mutual funds

• Next is the brand name. This shows the brand name inculcates trust and
investors want to invest where they feel that their money is safe.

• Other factors like product features & quality services & transparency are
not that important to investors

3) INVESTMENT OBJECTIVE
Simply as the topic may seem, but the investment objective of an investor
forms the base for his investment foray. Investment objective refers to the
expectations & requirements that an investor desires his investment to live
up to. Every investment is followed by an investor’s attempt to attain
some gain out of it. But the GAIN is just not the capital appreciation that
satisfies an investor, its timely attainment is as mandatory as the
realization of gain itself.

The various schemes in the mutual fund industry are designed to suit the
particular investment purpose of the investors. The idea of customization
has penetrated into this industry as well & with the growing diversified
needs of the investors, several schemes are formulated that help the
customer achieving his goal & making his investment valuable.

This customization is the key reason for the spurt in the investment
avenue. Other than this, at times it may be identified that investors may
hold more than one expectation. In such a case he tries to create a portfolio
for himself that lives up to all his expectations. There are many counselors
who provide counseling in the same avenue basing & researching their
decisions on certain parameters which are small things but could have the
biggest of impact on one’s investments.
 Age also plays an important role in the investment objective. The model
portfolio that has been recommended for investors by Jacobs for investors
according to their life cycle stages is

INVESTORS RECOMMENDED MODEL PORTFOLIO

Young 50% in aggressive equity funds
unmarried 25% in high yield bond funds, growth & income funds
professional 25% in conservative money market funds
Young couple 10% in money market funds
with 2 income 30% in aggressive equity funds
& 2 children 25% in high yield bond funds & long term growth funds
35% in municipal bond funds
Older couple 30% in short term municipal funds
single income 35% in long term municipal funds
25% in moderately aggressive equity
10% emerging growth equity
Recently 35% in conservative equity funds for capital
retired couple preservation/income
25% in moderately aggressive equity for modest capital
growth
40% in money market funds

Under this category there were 4 questions asked:

(a) If you have to invest Rs. 100, how will you divide it in the
following categories?
INVESTMENT OBJECTIVE NO. OF RESPONDENTS
Long term(5-6years)/ Capital appreciation
Mid -term(2-3years)/growth appreciation
Short term(monthly)/ Liquidity

Analysis:

• Around 64% investors are interested in long term investments. They

look at both growth & capital appreciation

• Around 25% interested in mid- term returns within the span of 2 to

3 years

• Most of the investors look for growth so there are less people who
invests in short term funds
 (b) What is your investment objective, while investing in mutual funds?

INVESTMENT OBJECTIVE NO. OF RESPONDENTS

Growth 45
Liquidity 5
Income 25
Balanced 25
Others

Analysis:

• As the data show that 45% investors have opted for growth, 25 %
income or the liquidity & 30 % for balanced. Here the liquidity and
balanced can be taken as same because they both show short term object
instead of long term object. We can conclude that a majority of investors
show a short term object nearly about 80 % means they are not investing
in the market with a broader horizon of stability of the economy or the
market. The result also describes that they are not investing in stock
market; they are going for the debt market as they opt for the liquidity or
the balanced returns. A lower proportionate of the growth option show that
they do not want to invest for long term means they may have a view that
the stock market will not be able to perform well in long time. The bull
ride of the

economy is short in nature according to their response. Because for

obtaining growth in future they need to invest for long term in stock
market. So a lower response regarding investment in favor of the growth
shows that they still seek security for their savings & they are risk averse.
 (c) What is your investment strategy?

INVESTMENT STRATEGY NO. OF RESPONDENTS

Low risk, low return 15
Mid risk, mid return 55
High risk, high return 30

Analysis:

• Around 30% investors can take high risk. That shows that they want
high returns

• Most of the investors are risk averse i.e. they want medium risk.
They want to strike a balance between risk and return

• This category is of low risk appetite people who basically invests in

gilts & bonds and have lowest returns
 4) CURRENT SENTIMENTS

Under this category there are 3 questions asked to the customers:

(a) What is your view about stock market?

VIEW ABOUT STOCK MARKET NO. OF RESPONDENTS

It will decrease further 25
This is the bottom 5
Will decrease further but then recover 40
Will recover now 30

Analysis:

• Majority of investors think that market will recover. They think that
it will recover back to its bullish walk

• Only 5% thinks that market will stagnate here.

• There is another major part of investors that thinks that market will
decrease further. This shows a negative sentiment of the investors & thus
impacts the sale of mutual funds
 • Another 30% thinks that market will now recover, it will not fall
further.

(b) With current scenario, how risky do you find investing in mutual funds?

RISK IN INVESTING IN MUTUAL FUND NO. OF RESPONDENTS

Low risk 20
Medium risk 45
High risk 30
Very high risk 5

Mutual Fund Risk

very high
5%

low
20%

high
30%

medium
45%

Analysis:

• 5% investors think that investing in mutual funds is of high risk

• 20% investors think that investing in mutual funds is of low risk

• 30% think that it is high risk to invest in mutual funds

• 45% think that investing in mutual fund is of medium risk and this truly
stands in context of mutual funds because mutual funds diversify the risk
to a large extend as compared to equity.
 (c) As the market is going down, what is your investment strategy?

CHANGED INVESTMENT STRATEGY NO. OF RESPONDENTS

Selling off existing funds 10
Wait & watch 60
Buying more as the NAV is low 30

Analysis:

• 10% people have negative sentiments. They want to sell of their

existing investments.

• 60% people say that their strategy is to wait and watch. They want
to give market more time to recover.

• 30% people take it as an opportunity. They think that market will

recover. This is the time to buy because they are getting a good deal at
very low prices.
 COMPARATIVE ANALYSIS OF MUTUAL FUNDS
There are around 5343 mutual fund schemes currently in market. It is difficult for an
investor to choose from them. That is where wealth management comes into play.
There are certain mutual funds that are star ranked by the wealth managers.

So these mutual funds are analyzed on the basis of the parameters as per the investors’
and to observe the following:

1) Difference between the parameters of the investors & investment managers.

2) Currently star ranked funds catering to the needs of investors

3) Funds

4) Difference between the output of current star ranked funds & expectations of
investors

5) Need for changing the investment strategies.

EQUITY ELSS

Recommendation Recommendation by SCB Recommendation by

Market
Name of the fund Principal Personal Tax Saver Tata tax Advantage fund –1
Last 1 year % 30.3 20.46
Last 3 years % 31.2 28
Since Inception % 31.7 35.1
Total Equity % 121.6 93
Expense Ratio % 2.5 2.22
Corpus (crs.) 360 510
Inception Date 1-Jan-96 10-Apr-99

EQUITY INDEX

Recommendation Recommendation by SCB Recommendation by

Market
Name of the fund ICICI Prudential Index Fund LIC MF Index Fund -
Sensex Plan - Growth
Last 1 year % 26.2 18.1
Last 3 years % 34.9 34.01
Since Inception % 27.1 26.69
Expense Ratio % 1.25 2.05
Corpus (crs.) 37 44.23
Inception date 25-Feb-2002 28-Nov-2002
Sharpe .25 .21
Beta 1 .92
Treynor .89 .77

EQUITY LARGE CAP DIVERSIFIED

Recommendation Recommended by SCB Recommended by Market

Name of the fund DSP Merill Lynch Top 100 Templeton India Growth
Equity Fund Fund- Dividend
Last 1 year % 28.1 33.4
Last 3 years % 37.6 31.8
Since Inception % 48.6 21.3
Total Equity % 85 96.8
Expense Ratio % 2.3 2.32
Corpus (crs.) 802 320

EQUITY SECTOR CONCENTRATED

Recommendation Recommended by SCB Recommended by Market

Name of the fund Kotak Oppportunity Fund DSP Merrill Lynch India
Tiger Fund
Last 1 year % 33.7 29.7
Last 3 years % 42.1 42.8
Since Inception % 44.9 45.1
Total Equity % 89.1 90.2
Expense Ratio % 2.29 1.91
Corpus (crs.) 700 3831

BALANCED FUNDS

Recommendation Recommended by SCB Recommended by Market

Name of the fund HDFC Balanced Fund Benchmark Split capital fund
Last 1 year % 13.18 Na
Last 3 years % 21.11 Na
Since Inception % 18.06 14.28
Expense Ratio % 2.21 0
Sharpe .20 .19
Beta .82 .87
Treynor .52 .44
 FIXED INCOME GILT – LONG TERM

Recommendation Recommended by SCB Recommended by Market

Name of the fund ICICI Prudential Gilt Fund HDFC Gilt Fund Long Term
Investment Plan Plan-growth
Last 1 year % 8.2 6.96
Last 3 years % 6.3 4.17
Since Inception % 10.8 7.88
Expense Ratio % 1.15 1.48
Sharpe .12 .05
Beta .80 .77
Treynor .07 .03

LIQUID FUNDS
Recommendation Recommended by SCB Recommended by Market
Name of the fund HDFC Cash Management Principal Money Manager
Fund- Saving Plan Fund-Regular-growth
Last 1 year % 8.2 Na
Last 3 years % 7.0 Na
Since Inception % 6.5 7.78
Expense Ratio % 0.58 Na
Sharpe 2.24 Na
Beta .15 Na
Treynor .3 Na

INVESTMENT PRODUCTS OFFERED BY SCB

Standard Chartered Bank offers other investment products under wealth management
& SCB is a pioneer in them. These can be other products that can be offered to
investors but many investors are not aware of them. These products include:

 Unit linked insurance plan (ULIP)

A unit linked insurance policy is one in which the customer is provided with a life insurance
cover and the premium paid is invested in either debt or equity products or a combination of
the two. In other words, it enables the buyer to secure some protection for his family in the
event of his untimely death and at the same time provides him an opportunity to earn a return
on his premium paid. In the event of the insured person's untimely death, his nominees would
normally receive an amount that is the higher of the sum assured (insurance cover) or the
value of the units (investments).However, there are some schemes in which the policyholder
receives the sum assured plus the value of the investments.

Every insurance company has four to five ULIPs with varying investment options, charges and
conditions for withdrawals and surrender. Moreover, schemes have been tailored to suit
different customer profiles and, in that sense, offer a great deal of choice. The advantage of
ULIP is that since the investments are made for long periods, the chances of earning a decent
 return are high. Just as in the case of mutual funds, buyers who are risk averse can buy into
debt schemes while those who have an appetite for risk can opt for balanced or equity
schemes. However, the charges paid in these schemes in terms of the entry load,
administrative fees, underwriting fees, buying and selling charges and asset management
charges are fairly high and vary from insurer to insurer in the quantum as also in the manner in
which they are charged.

 Structured notes

A debt obligation that also contains an embedded derivative component with

characteristics that adjust the security's risk/return profile. The return
performance of a structured note will track that of the underlying debt obligation
and the derivative embedded within it. A structured note is a hybrid security that
attempts to change its profile by including additional modifying structures. A
simple example would be a five-year bond tied together with an option contract
for increasing the returns.

 Arbitrage funds

Arbitrage is a strategy, which involves simultaneous purchase and sale of

identical or equivalent instruments in two or more markets in order to benefit
from a discrepancy in pricing. This strategy normally acts as a shield against
 market volatility as the buying and selling transactions offset each other. In an
arbitrage transaction, returns are calculated as the difference between the futures
price and cash price at the time of the transaction. Ideally the positions are held
till the expiry of the futures contract when the offsetting positions cancel each
other and initial price difference is realized. This arbitrage strategy makes the
fund immune to market volatility i.e. the fund will not be affected by market
fluctuations. Since the portfolio of arbitrage funds is completely hedged at all
times to lower the risk of loss/erosion of gains, it also in turn caps the returns that
the fund could have clocked if the portfolio was not hedged i.e. these funds have
a limited upside.

Despite the fact that arbitrage funds offer investors the opportunity to benefit
from investments in equities by making use of derivatives, the fund cannot be
compared to conventional diversified equity funds, especially on the returns
parameter. The returns from arbitrage funds would typically be much lower than
those of equity funds. That could be one reason why despite their equity
holdings, arbitrage funds are benchmarked against indices like CRISIL Liquid
Fund Index for want of a more appropriate index.

 Fixed income funds

An investment that provides a return in the form of fixed periodic payments and
the eventual return of principal at maturity. Unlike a variable-income fund,
where payments change based on some underlying measure such as short-term
interest rates, the payments of a fixed-income security are known in advance. An
example of a fixed-income security would be a 5% fixed-rate government bond
where a $1,000 investment would result in an annual $50 payment until maturity
when the investor would receive the $1,000 back. Generally, these types of
assets offer a lower return on investment because they guarantee income.

 Portfolio management services(PMS)

Professional Investment Management Services are no longer the privilege of only large
institutional investors. Portfolio Management Services (PMS) is one such service that is fast
gaining eminence as an investment avenue of choice for High Net worth Investors l. PMS is a
sophisticated investment vehicle that offers a range of specialized investment strategies to
capitalize on opportunities in the market. The Portfolio Management Service combined with
competent fund management, dedicated research and technology, ensures a rewarding
experience for its clients.

Most portfolio managers allow you to choose between a fixed and a performance-linked
management fee. If you opt for the fixed fee, you may pay between 2-2.5 per cent of portfolio
value; this is usually calculated on a weighted average basis. The structure for the
 performance-linked fee differs across players; usually, this includes a flat fee of 0.5-1.5 per
cent. The portfolio manager also gets to share a percentage of your profit — usually 15-20 per
cent — earned over and above a threshold level, which may range between 8 per cent and 15
per cent. Apart from management fees, separate charges will be levied towards brokerage,
custodial services and towards meeting tax payments.

However, a PMS may only add significant value in the following cases:

Equity bias: Portfolio management services may be ideal for a person who seeks a
substantial investment in the stock markets. An equity portfolio also offers greater scope for a
manager to add value than does a debt portfolio. Several of the established players in the PMS
business focus on equity investments, though some also offer hybrid products.

Large surplus to invest: The minimum portfolio size that portfolio managers accept for a
customized portfolio ranges from Rs 25 lakh to Rs 5 crore.

 Real estate Funds

An REMF is like a mutual fund for real estate assets. In other words the asset
management company (AMC) invests in a range of real estate assets around the
country and creates a fund based on those assets. Investors can buy shares in
those funds which are traded on a daily basis on stock exchanges. The value of
the shares depends on the value of the underlying real estate assets.

REMFs have many advantages over direct investment in real estate.

• It allows investors to invest according to their income and financial

circumstances.
• The portfolio of real estate assets will be a lot more diversified than a
single home with assets ranging from office space to residential properties
all around the country as well as securities based on the real estate sector.
• Investors don't have to deal with the legal and maintenance hassles of
owning property and can instead rely on the professional expertise of the
AMCs. Finally if they need quick money, these funds are liquid assets
which can be sold conveniently and rapidly.
 RECOMMENDATIONS

• Savings Objective of Individual Investors

Savings Objective of the majority of Individual Investors is ‘to invest in moderate risk
’, thus throwing light on the nature of risk averse investors. AMC can attract a pool of
investors by designing products for Risk-Averse investors.
But there is also a pool of investors that are ready to take high risk. Nearly 30% of the
investors are ready to take high risk as they want high returns. These investors can be
of high potential for equity based funds.

• Savings instrument preference among individual investors

Now only 11% investors invest in secured investments like bond & fixed deposits.
Now they prefer mutual funds over other investments. Around 23% of investors invest
in equity. This group shows the highest risk appetite and thus shows a huge potential
Around 25% of the investors invest in gold. This is the second most preferred
investment tool next to mutual funds. It also shows a huge potential as now gold ETF
are available. And the increase in gold price & thus increase in gold ETF is very much
evident.

• Investment expenditure Ratio

Maximum investors show their expenditure ratio of 20-80%. But still around 25% of
investors have income-expenditure ratio of less than 20%. Thus it shows that still many
investors are not investing properly & thus they need professional investment services.

• Stability of income
Around 60% investors have a stable income source. Earlier they had a psychology of
investing in stable investment instruments like bonds & fixed deposits rather than
investing in equity market where returns can be much higher than present investments
but they use to show risk aversion because of the equity market’s volatility. Based on
this it can be said that they did not believe in the economical condition of the country
and market stability. But now conditions have changed. People with stable income are
 also ready to take risk. More people are ready to explore new investment avenues.
They are ready to invest in various types of investment.

• Investment advice
Around 70% of the investors do not take investment advice. They do investments on
their own. This shows that investors have become more educated. They have more
know- how of the market. But this can also be taken as a potential. Because, still there
are investors who need advice. Standard Chartered Bank should target such investors.
Around 25% of the investors make investments after consultation with their peer group
or financial advisors. Still around 75% of the investors make investment decisions on
their own by making return analysis or market research.

• Preferential Feature in mutual funds among individual investors

The study shows the investors’ need for ‘Good Return’ is highest among features,
followed by Safety, Liquidity, Tax Benefit, Capital Appreciation, Professional
Management and Diversification Benefits.

• Reason for choosing a mutual fund

The most preferred reason for choosing the mutual fund is the past returns. Around
65% of the investors choose a mutual fund on the basis of past performance. Thus SCB
should offer more of those mutual funds that have good track record. Next most
preferred feature is the brand name. In case of an NFO brand name plays an important
role.

• Investment strategy
Around 64% of the investors have long term investment strategy. They want to invest
for longer period. For such investors SCB can offer more of equity funds. As though
the market is volatile now but it is going to give huge returns in 3 to 4 years. As these
investors are ready to wait they can be of huge potential.

• Preference of Mutual Fund Investing Over Equity Investing

The emergence of an array of savings and investment options and the dramatic increase
in the popularity of Mutual Funds, in the recent years in India, has opened up an
entirely new area for value creation and management. A house-holder investor with
few rupees left over after paying for housing and two wheeler installments, is puzzled
as to where he must park his funds safely, given the volatility of the market. This
category may include people who either have a low awareness level about MF industry
or still do not completely believe that MFs can get the same return like that of Equity
shares. Around 75% of the investors say that investing in mutual funds, risk ranges
from low to medium. This shows that sentiments of investors have changed towards
mutual funds
• Sentiments towards market
Around 75% of investors believe that the market will recovers again. This shows a
positive sign for mutual funds. So investors can be offered long term investments
which can give returns.
Around 25% of investors believe that market won’t recover. For such investors gilt
funds and money market funds can be offered

• Future strategy of investors

Around 60% of investors want to play safe. With current market volatility they want to
wait and watch. Around 30% of the investors are looking at this as an opportunity to
invest more in mutual funds as mutual funds are available at lower NAVs. This can
prove to be a good potential customer base for SCB

REFERENCES

• www.mutualfundsindia.com

• www.google.com
• www.amfiindia.com

• www.nseindia.com

• www.wikipedia.com

• The Economics Times

• Study materials of NCFM

CATEGORIES OF MUTUAL FUNDS
 Mutual funds can be classified as follow :

 Based on their structure:

• Open-ended funds: Investors can buy and sell the units from the

fund, at any point of time.

• Close-ended funds: These funds raise money from investors only once.

Therefore, after the offer period, fresh investments can not be made into the fund.

If the fund is listed on a stocks exchange the units can be traded like stocks (E.g.,

Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-

ended funds provided liquidity window on a periodic basis such as monthly or

weekly. Redemption of units can be made during specified intervals. Therefore,

such funds have relatively low liquidity.

 Based on their investment objective:

Equity funds: These funds invest in equities and equity related

instruments. With fluctuating share prices, such funds show volatile

performance, even losses. However, short term fluctuations in the

market, generally smoothens out in the long term, thereby offering

higher returns at relatively lower volatility. At the same time, such

funds can yield great capital appreciation as, historically, equities

have outperformed all asset classes in the long term. Hence,

investment in equity funds should be considered for a period of at

least 3-5 years. It can be further classified as :

i) Index funds- In this case a key stock market index, like BSE Sensex or

Nifty is tracked. Their portfolio mirrors the benchmark index both in terms

of composition and individual stock weightages.

ii) Equity diversified funds- 100% of the capital is invested in equities

spreading across different sectors and stocks.

iii|) Dividend yield funds- it is similar to the equity diversified funds

except that they invest in companies offering high dividend yields.

iv) Thematic funds- Invest 100% of the assets in sectors which are

related through some theme.

e.g. -An infrastructure fund invests in power, construction, cements sectors

etc.

v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A

banking sector fund will invest in banking stocks.

vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the

investors.

Balanced fund: Their investment portfolio includes both debt and equity. As a result,

on the risk-return ladder, they fall between equity and debt funds. Balanced funds are

the ideal mutual funds vehicle for investors who prefer spreading their risk across

various instruments. Following are balanced funds classes:

i) Debt-oriented funds -Investment below 65% in equities.

ii) Equity-oriented funds -Invest at least 65% in equities, remaining in

debt.

Debt fund: They invest only in debt instruments, and are a good option
for investors averse to idea of taking risk associated with equities.

Therefore, they invest exclusively in fixed-income instruments like bonds,

debentures, Government of India securities; and money market

instruments such as certificates of deposit (CD), commercial paper (CP) and

call money. Put your money into any of these debt funds depending on your

investment horizon and needs.

i) Liquid funds- These funds invest 100% in money market instruments, a

large portion being invested in call money market.

ii) Gilt funds ST- They invest 100% of their portfolio in government

securities of and T-bills.

iii) Floating rate funds - Invest in short-term debt papers. Floaters invest

in debt instruments which have variable coupon rate.

iv) Arbitrage fund- They generate income through arbitrage opportunities

due to mis-pricing between cash market and derivatives market. Funds are

allocated to equities, derivatives and money markets. Higher proportion

(around 75%) is put in money markets, in the absence of arbitrage

opportunities.

v) Gilt funds LT- They invest 100% of their portfolio in long-term

government securities.

vi) Income funds LT- Typically, such funds invest a major portion of the

portfolio in long-term debt papers.

vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt

and an exposure of 10%-30% to equities.

viii) FMPs- Fixed monthly plans invest in debt papers whose maturity is in

line with that of the fund.

 INVESTMENT STRATEGIES

1. Systematic Investment Plan: under this a fixed sum is invested

each month on a fixed date of a month. Payment is made through post

dated cheques or direct debit facilities. The investor gets fewer units

when the NAV is high and more units when the NAV is low. This is called

as the benefit of Rupee Cost Averaging (RCA)

2. Systematic Transfer Plan: under this an investor invest in debt

oriented fund and give instructions to transfer a fixed sum, at a fixed

interval, to an equity scheme of the same mutual fund.

3. Systematic Withdrawal Plan: if someone wishes to withdraw from

a mutual fund then he can withdraw a fixed amount each month.

 77

RISKS V/S. RETURNS

 78

WHY HAVE MUTUAL FUNDS BECOME ONE OF

THE LARGEST FINANCIAL INSTRUMENTS?

If we take a look at the recent scenario in the Indian financial market then we can

find the market flooded with a variety of investment options which includes mutual

funds, equities, fixed income bonds, corporate debentures, company fixed deposits,

bank deposits, PPF, life insurance, gold, real estate etc. all these investment options

could be judged on the basis of various parameters such as- return, safety

convenience, volatility and liquidity. measuring these investment options on the

basis of the mentioned parameters, we get this in a tabular form

Return Safety Volatilit Liquidit Convenie

y y nce

Equity High Low High High Moderate

Bonds Moderate High Moderate Moderate High

Co. Moderate Moderate Moderate Low Low

Debentur

es
 79

Co. FDs Moderate Low Low Low Moderate

Bank Low High Low High High

Deposits

PPF Moderate High Low Moderate High

Life Low High Low Low Moderate

Insurance

Gold Moderate High Moderate Moderate Gold

Real High Moderate High Low Low

Estate

Mutual High High Moderate High High

Funds
 80

QUESTIONNAIRE

A study of preferences of the investors for investment

in mutual funds.

1. Personal Details:

(a). Name:-

(b). Add: - Phone:-

(c). Age:-

(d). Qualification:-

Graduation/PG Under Graduate Others

(e). Occupation. Pl tick (√)

Govt. Ser Pvt. Ser Business Agriculture Others

 81

(g). What is your monthly family income approximately? Pl tick (√).

Up to Rs. 10,001 to Rs. 15,001 to Rs. 20,001 to Rs. 30,001

Rs.10,000 15000 20,000 30,000 and above

2. What kind of investments you have made so far? Pl tick (√). All applicable.

a. Saving account b. Fixed deposits c. Insurance d. Mutual Fund

e. Post Office-NSC, f. g. Gold/ Silver h. Real Estate

etc Shares/Debentur
es

3. While investing your money, which factor will you prefer?

(a) Liquidity (b) Low Risk (c) High (d) Trust

Return

4. Are you aware about Mutual Funds and their operations? Pl tick (√). Yes
No

5. If yes, how did you know about Mutual Fund?

 82

a. b. Peer Group c. Banks d. Financial

Advertisement Advisors

6. Have you ever invested in Mutual Fund? Pl tick (√). Yes No

7. If not invested in Mutual Fund then why?

(a) Not aware of MF (b) Higher risk (c) Not any specific reason

8. If yes, in which Mutual Fund you have invested? Pl. tick (√). All applicable.

a. SBIMF b. UTI c. d. e. Kotak f. Other. specify

HDFC Reliance

9. If invested in SBIMF, you do so because (Pl. tick (√), all applicable).

a. SBIMF is associated with State Bank of India.

b. They have a record of giving good returns year after year.

c. Agent’ Advice

10. If NOT invested in SBIMF, you do so because (Pl. tick (√) all applicable).
 83

a. You are not aware of SBIMF.

b. SBIMF gives less return compared to the others.

c. Agent’ Advice

11. When you plan to invest your money in asset management co. which AMC will
you prefer?

Assets Management Co.

a. SBIMF

b. UTI

c. Reliance

d. HDFC
 84

e. Kotak

f. ICICI

12. Which Channel will you prefer while investing in Mutual Fund?

(a) Financial Advisor (b) Bank (c) AMC

13. When you invest in Mutual Funds which mode of investment will you prefer? Pl.
tick (√).

a. One Time Investment b. Systematic Investment Plan (SIP)

14. When you want to invest which type of funds would you choose?

a. Having only debt b. Having debt & equity c. Only equity portfolio.
portfolio portfolio.

15. How would you like to receive the returns every year? Pl. tick (√).

a. Dividend payout b. Dividend re- c. Growth in NAV

 85

investment

16. Instead of general Mutual Funds, would you like to invest in sectorial funds?

Please tick (√). Yes No