Amni Project

8/2/2019 Amni Project

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PROJECT REPORT

ON

ANALYSIS OF INVESTORSPERCEPTION & AWARENESS

REGARDING MUTUALFUND

Submitted in partial fulfilment of the requirement of degree of MBASESSION: 2010-2012

Submitted To: - Submitted By:-ITM University, Aman SwamiGurgaon

INSTITUTE OF TECHNOLOGY AND MANAGEMENT,GURGAON


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ACKNOWLEDGEMENT

If you undertake a project like this one then you realize how the massive efforts it is reality,or how much you rely on the selfless efforts and goodwill of others.

I am very thankful to Mr. Rajesh Bagri" for giving me his kind permission to carry outSUMMER TRAINING in the organisation. I feel especially privileged to work under thekind supervision of Mr. Rajesh Bagri, who guided me at every step to make the project areal success.

There are always some people whose guidance proves to be a immense help. So, it becomesmy duty to express my gratitude towards all of them. I want to thank all staff for helpingme in this project.

And I have no words to acknowledge the financial assistance and moral support rendered tomy parents in making this effort a success. All this has become a reality because of theirblessings and by the grace of GOD.

Finally, I place my thanks to all the people who are in one way or the other related to theproject and gave me the much needed moral support during the course of my project.

(Aman Swami)


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PREFACEPractical training constitutes an integral part of the management studies. Training givesopportunities to the students to expose themselves to the industrial environment, which isquite different from the classroom teaching.

One can not rely merely upon theoretical knowledge. It has to be coupled

with practical for it to be fruitful. Classroom lecture make the fundamentals concept ofmanagement clear but not their application in actual practice. Positive and corrective resultsof classroom learning need realities of practical situation. The training also enables themanagement students to themselves see the working condition under which they have towork in future.It thus enables the students to undergo those experiences, which will help them later whenthey join the organisation.

It is in this sense that practical training in the company has a significant role

to play in the subject of management for developing managerial and administrative skills inthe future managers and to enhance their analytical skills.

I received my training in Freesia Investment & Trading Company Ltd.atNew Delhi. It was my fortune to get training in a very healthy atmosphere. I learnt a lot ofnew things which I could never been learnt from theory classes.


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DECLARATION

I, Aman Swami Enrolment No 10-MBA-002 of Institute of Technology and ManagementUniversity, Gurgaon hereby declare that the project entitled Analysis of InvestorsPerception & Awareness Regarding Mutual Fund is an original work and the same has notbeen submitted to any other institution for the award of any other degree.

(Aman Swami)

CONTENTS


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CHAPTER-1: Introduction to Mutual Fund1.1 Emergence/ History1.2 Growth in India1.3 Concept

1.4 Advantages1.5 Disadvantages1.6 Basic Terms1.7 Different Plans1.8 Different Types1.9 Tax Implications1.10Legal Environment1.11Risk Involved1.12Total AMCs in India

CHAPTER-2: Introduction to the topic2.1 Investing2.2 Why do people invest?2.3 Investment strategy2.4 What should an investor invest in?

Investment options available with an investor

Comparison of investment avenues2.5 Where to invest?2.6 Reasons for investing in mutual fund2.7 Reasons for not investing in mutual fund2.8 Criteria on which investment decision is based

2.9 The investment decision2.10What should an investor look into an offer document?2.11Source for information on mutual funds2.12How can the investors redress their complaints?2.13Steps to invest in mutual fund2.14Rights of investors as a mutual fund unit holder2.15What not to evaluate in mutual fund?2.16Five common investment dilemmas2.17Objectives of the study

CHAPTER-3: Literature Review

CHAPTER-4: Reference Company Profile

CHAPTER-5: Research Methodology


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CHAPTER-6: Analysis6.1 Perception of investors6.2 Factors influencing the investors6.3 Awareness about mutual fund

CHAPTER-7: Conclusion7.1 Observations7.2 Questionnaire7.3 Bibliography


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CHAPTER-1INTRODUCTION TO MUTUAL FUND

INTRODUCTION:-A mutual fund is a pool of money contributed by individuals who have similar financialgoals. The money collected is then invested in various securities such as equities,debentures/bonds and/or money market instruments.

Investments in securities are spread across a wide cross-section of industries and sectorsand thus the risk is reduced. Diversification reduces the risk because all stocks may notmove in the same direction in the same proportion at the same time. Mutual fund issuesunits to the investors in accordance with quantum of money invested by them.

A mutual fund is therefore a pool of money, collected from investors, and is investedaccording to certain investment objectives.

Mutual funds really captured the public's attention in the 1980s and '90s when mutual fundinvestment hit record highs and investors saw incredible returns. However, the idea ofpooling assets for investment purposes has been around for a long time. Here we look at theevolution of this investment vehicle, from its beginnings in the Netherlands in theeighteenth century to its present status as a growing, international industry with fundholdings accounting for trillions of dollars in the United States alone.

Savings has become an integral part of life today. It not anymore advantageous of havingyour money locked up in a fixed deposit for years, which is not going to fetch an averageindividual of not more than 6% annually. The percentages offered for a fixed deposit is alsodeclining as years pass by, and this is not doing the investor any good.

What do you do with the hard earned money then? This is a million dollar question whichhas varied answers. Banks and other financial institutions have come up with a big answerto this question in the form of Mutual Funds. Mutual Fund is something which pools theinvestment of various investors and invests the same in different securities. The losses andgains that result from Mutual Funds are being accrued to the investors only.

The investors have the options of investing in various money market instruments likebonds, debentures and government securities. There are high-risk portfolios and low-riskportfolios. The mantra is more the risk, more the gains, however if you want to play safeyou have other options. Institutions like Merryl Lynch, HDFC mutual Funds, Standard

Chartered Mutual Funds etc. offer these kinds of services. These companies often engagethemselves in various market studies and researches and offer precious advice to theinvestors depending upon the types of investment they want to make.

These financial institutions invest the money which the investors invest in various othersources which include securities too to fetch those returns on their investment. A customeris given various choices and sent market updates regularly to let them know about themarket value of the securities they have invested in. Today mutual funds play an important


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role in increasing the savings of the investors. They are clearly given equal preferencerather than the money to lie down in the bank as a fixed deposit for a period without givingthem higher returns.

Choice of any scheme would depend to a large extent on the investor preferences. Equity

Funds would be the most suitable for an investor who is willing to take a fair amount ofrisk as investments in Equity Funds would earn them the maximum returns. Debt funds,otherwise called as debentures are suited for those investors who prefer regular income andsafety. Medium and long term investors can invest in Gilt funds as they involve minimumrisk and their capital is safe and secure.

Balanced funds are ideal for medium- to long-term investors willing to take moderate risks.Corporate, Institutional investors and business houses generally invest their funds for a veryshort period. Liquid funds are the best investment for these investors as they can converttheir securities into liquid cash immediately as and when they require. For those investorswho are seeking Tax benefits, Tax Saving Funds are ideal for these people.

While selecting a portfolio, one important aspect that should be taken into consideration isthe duration of the investment. Based on your time horizon and risk factors you can select aparticular portfolio. Apart from all this, factors like objective of the funds and returns oninvestments given by these funds on different schemes should also be taken intoconsideration while selecting a particular portfolio.

The performances of Mutual funds are not only influenced by the performance of the stockmarket, it is also influenced by the economy as well. Inflation and deflation factors play animportant role in affecting the market prices and thus having an impact on the investments.Equity Funds are influenced to a large extent by the stock market. Apart from the economicfactors the stock market also to a large extent depends upon the performance of thecompanies which in turn affect the prices of the stock. The interest rates and the creditquality influence the Bond Funds. As interest rates fall, bond prices rise, and vice versa. Onthe other hand, bond funds with higher credit ratings are less influenced by changes in theeconomy.

Its a proven fact that it's smarter to own a variety of stocks and bonds than to invest on thesuccess of a few companies. But diversifying is not as easy as investing in a portfolio ofindividual stocks and bonds can prove to be expensive. You have to be updated with theinvestment market and should know as to what to invest in and when to invest in thosesecurities to earn profits on your investments. It requires a lot of experience andconcentration.

Mutual funds have one big advantage: When an investor invests money into a fund, it'spooled with money from other investors to create much greater buying power than hewould have invested. This can be used to invest in stocks of high value and greater returns.Since a portfolio can consist of hundred different securities, its success is not dependent onhow one or two holdings perform. The return on other investments can nullify theunderperformance of a few holding thus making the investment still a very profitable one.


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1.1EMERGENCE/HISTORY OF MUTUAL FUNDS:-

The idea of pooling money together for investing purposes started in Europe in the mid-1800s. The first pooled fund in the U.S. was created in 1893 for the faculty and staff ofHarvard University. On March 21st, 1924 the first official mutual fund was born. It wascalled the Massachusetts Investors Trust.

After one year, the Massachusetts Investors Trust grew from $50,000 in assets in 1924 to$392,000 in assets (with around 200 shareholders). In contrast, there are over 10,000mutual funds in the U.S. today totalling around $7 trillion (with approximately 83 millionindividual investors) according to the Investment Company Institute.

The stock market crash of 1929 slowed the growth of mutual funds. In response to the stockmarket crash, Congress passed the Securities Act of 1933 and the Securities Exchange Actof 1934. These laws require that a fund be registered with the SEC and provide prospectiveinvestors with a prospectus. The SEC (U.S. Securities and Exchange Commission) helpedcreate the Investment Company Act of 1940 which provides the guidelines that all fundsmust comply with today.

With renewed confidence in the stock market, mutual funds began to blossom. By the endof the 1960s there were around 270 funds with $48 billion in assets.

In 1976, John C. Bogle opened the first retail index fund called the First Index Investment

Trust. It is now called the Vanguard 500 Index fund and in November of 2000 it becamethe l Mutual funds are very popular today, known for ease-of-use, liquidity, and uniquediversification capabilities.

Mutual funds are very popular today, known for ease-of-use, liquidity, and uniquediversification capabilities.

1.2GROWTH OF MUTUAL FUNDS IN INDIA:-
http://www.harvard.edu/http://www.mfs.com/products/funds/info/fundProfileComplete.jhtml?classifId=97&portId=158http://www.ici.org/http://www.sec.gov/asec/wwwsec.htmhttp://mutualfunds.about.com/cs/indexfunds/index.htmhttp://mutualfunds.about.com/library/blvanguard.htmhttp://www.harvard.edu/http://www.mfs.com/products/funds/info/fundProfileComplete.jhtml?classifId=97&portId=158http://www.ici.org/http://www.sec.gov/asec/wwwsec.htmhttp://mutualfunds.about.com/cs/indexfunds/index.htmhttp://mutualfunds.about.com/library/blvanguard.htm


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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 mutualfunds in India can be broadly divided into four distinct phases.

First Phase 1964-87:

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up bythe Reserve Bank of India and functioned under the Regulatory and administrative controlof the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the IndustrialDevelopment Bank of India (IDBI) took over the regulatory and administrative control inplace of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988UTI 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 sectorbanks and Life Insurance Corporation of India (LIC) and General Insurance Corporation ofIndia (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June1987 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 BarodaMutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set upits mutual fund in December 1990.

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

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 fundindustry, giving the Indian investors a wider choice of fund families. Also, 1993 was theyear in which the first Mutual Fund Regulations came into being, under which all mutualfunds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (nowmerged with Franklin Templeton) was the first private sector mutual fund registered in July1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive andrevised 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 fundssetting 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 ofRs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets undermanagement was way ahead of other mutual funds.

Fourth Phase since February 2003:


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In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI wasbifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust ofIndia 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 theMutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It isregistered with SEBI and functions under the Mutual Fund Regulations. With thebifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores ofassets under management and with the setting up of a UTI Mutual Fund, conforming to theSEBI Mutual Fund Regulations, and with recent mergers taking place among differentprivate sector funds, the mutual fund industry has entered its current phase of consolidationand growth.

1.3CONCEPT OF MUTUAL FUND:-

A Mutual Fund is a trust that pools the savings of a number of investors who share acommon financial goal. The money thus collected is then invested in capital marketinstruments such as shares, debentures and other securities. The income earned throughthese investments and the capital appreciation realized are shared by its unit holders inproportion to the number of units owned by them. Thus a Mutual Fund is the most suitableinvestment 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:


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MUTUAL FUND OPERATIONS FLOWCHART


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1.4ADVANTAGES OF MUTUAL FUNDS:-

The advantages of investing in a Mutual Fund are:

Diversification: The best mutual funds design their portfolios so individualinvestments will react differently to the same economic conditions. Forexample, economic conditions like a rise in interest rates may cause certainsecurities in a diversified portfolio to decrease in value. Other securities in theportfolio will respond to the same economic conditions by increasing in value.When a portfolio is balanced in this way, the value of the overall portfolioshould gradually increase over time, even if some securities lose value.

Professional Management: Most mutual funds pay topflight

professionals to manage their investments. These managers decide whatsecurities the fund will buy and sell.

Regulatory oversight: Mutual funds are subject to many governmentregulations that protect investors from fraud.

Liquidity: It's easy to get your money out of a mutual fund. Write a check,make a call, and you've got the cash.

Convenience: You can usually buy mutual fund shares by mail, phone, orover the Internet.

Low cost: Mutual fund expenses are often no more than 1.5 percent of yourinvestment. Expenses for Index Funds are less than that, because index fundsare not actively managed. Instead, they automatically buy stock in companiesthat are listed on a specific index

Transparency


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Flexibility

Choice of schemes

Tax benefits

1.5DISADVANTAGES OF MUTUAL FUNDS:-

Mutual funds have their drawbacks and may not be for everyone:

No Guarantees: No investment is risk free. If the entire stock marketdeclines in value, the value of mutual fund shares will go down as well, nomatter how balanced the portfolio. Investors encounter fewer risks when theyinvest in mutual funds than when they buy and sell stocks on their own.However, anyone who invests through a mutual fund runs the risk of losingmoney.

Fees and commissions: All funds charge administrative fees to covertheir day-to-day expenses. Some funds also charge sales commissions or"loads" to compensate brokers, financial consultants, or financial planners. Evenif you don't use a broker or other financial adviser, you will pay a salescommission if you buy shares in a Load Fund.

Taxes: During a typical year, most actively managed mutual funds sellanywhere from 20 to 70 percent of the securities in their portfolios. If your fundmakes a profit on its sales, you will pay taxes on the income you receive, even ifyou reinvest the money you made.

Management risk: When you invest in a mutual fund, you depend on

the fund's manager to make the right decisions regarding the fund's portfolio. Ifthe manager does not perform as well as you had hoped, you might not make asmuch money on your investment as you expected. Of course, if you invest inIndex Funds, you forego management risk, because these funds do not employmanagers.

1.6 BASIC TERMS:-


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1. NAV: The performance of a particular scheme of a mutual fund is denoted by NetAsset Value (NAV).Mutual funds invest the money collected from the investors in securities markets. In simplewords, Net Asset Value is the market value of the securities held by the scheme. Sincemarket value of securities changes every day, NAV of a scheme also varies on day to day

basis. The NAV per unit is the market value of securities of a scheme divided by the totalnumber of units of the scheme on any particular date. NAV is required to be disclosed bythe mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

2. LOAD: It is a charge collected by a mutual fund when it sells units. It can be eitherfront-end load (i.e., the charge is collected when an investor buys the units) or back-endload (i.e., the charge collected when the investor sells back the units). Some schemes do notcharge any load and are called No Load Schemes.

3. PORTFOLIO: A portfolio comprises of investments in a variety of securities andasset classes. This diversification reduces the overall risk. The portfolio risk depends on thenature of each investment in the portfolio and the overall impact (favourable or

unfavourable) of the various risk factors on each security. A mutual fund scheme states thekind of portfolio it seeks to construct as well as the risks involved under each asset class.

4. CUSTODIAN: The custodian, an independent organisation, has the physicalpossession of all securities purchased by the mutual fund, and undertakes responsibility forits handling and safekeeping. For instance, the Stock Holding Corporation of India Ltd(SCHIL) is the custodian for most fund houses in the country.

5. REGISTRAR: A Registrar holds and maintains the details of the transactions carriedout by each Unit holder in a Mutual Fund scheme. He is appointed by the AMC to serve theUnit holder for the purchases, sales or switching of Units that he may carry out. Thedividend distributions, recording of nominations or transfers are some other services

rendered by the Registrar. He may also have Investor Service Centres in various cities,where an investor can get over-the-counter service.

6. ASSET MANAGEMENT COMPANY (AMC): A highly regulatedorganisation that pools money from many people into a portfolio structured to achievecertain objectives. Hence it is termed as an Asset Management Company. Typically anAMC manages several funds - open-end /closed-end across several categories - growth,income, balanced. Every mutual fund has an AMC associated with it.

7. INITIAL PUBLIC OFFER (IPO): The sale of a company's shares or a fundhouses mutual fund to investors for the first time.

8. STOCKS: Stocks represent ownership or equity in a company. This asset class hashistorically outperformed all other asset classes over the long-term but tends to be morevolatile in the short-term.

9. DEBT INSTRUMENTS: This represents debt papers of corporate andgovernment agencies. They provide income in the form of interest payments and principalif held till maturity. There can be price volatility due to interest rate movements as well aseconomic and political instability.


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10. MONEY MARKET INSTRUMENTS: These are inter-bank Call Money,Commercial Paper, Treasury Bills, Certificates of Deposit (CDs), Bill Rediscounting andshort-term bonds. They pay interest and are the least volatile of all the asset classes.

11. SALE OR REPURCHASE/REDEMPTION PRICE: The price or NAV aunit holder is charged while investing in an open-ended scheme is called sales price. It mayinclude sales load, if applicable.Repurchase or redemption price is the price or NAV at which an open-ended schemepurchases or redeems its units from the unit holders. It may include exit load, if applicable.

12. SWITCHING FACILITY: Switching facility provides investors with an optionto transfer the funds amongst different types of schemes or plans.Investors can opt to switch units between Dividend Plan and Growth Plan at NAV basedprices. Switching is also allowed into/from other select open-ended schemes currentlywithin the Fund family or schemes that may be launched in the future at NAV based prices.

1.7DIFFERENT PLANS THAT MUTUAL FUND OFFERS:

Mutual Funds in order to cater to a range of investors have various investment plans. Someof the important investment plans include:

Growth Plan

Under the Growth Plan, the investor realises only the capital appreciation onthe investment (by an increase in NAV) and does not get any income in theform of dividend.

Income Plan

Under the Income Plan, the investor realises income in the form of dividend.However his NAV will fall to the extent of the dividend.

Dividend Re-investment Plan

Here the dividend accrued on mutual funds is automatically re-invested inpurchasing additional units in open-ended funds. In most cases mutual fundsoffer the investor an option of collecting dividends or re-investing the same.

Systematic Investment Plan (SIP)

Here the investor is given the option of preparing a pre-determined numberof post-dated cheques in favour of the fund. He will get units on the date of

the cheque at the existing NAV. For instance, if on 25

th

March, he has givena post-dated cheque for June 25th, he will get units on 25 th June at existingNAV.

Systematic Withdrawal Plan

As opposed to the Systematic Investment Plan, the Systematic WithdrawalPlan allows the investor the facility to withdraw a pre-determined


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amount/units from his fund at a pre-determined interval. The investors unitswill be redeemed at the existing NAV as on that day.

Retirement Pension Plan

Some schemes are linked with retirement pension. Individuals participate in

these plans for themselves and corporate for their employees. Insurance Plan

Some schemes launched by UTI and LIC offer insurance cover to investors.

1.8DIFFERENT TYPES OF MUTUAL FUND SCHEMES:

BY SCHEME TYPE: A mutual fund scheme can be classified into open-ended schemeor close-ended scheme depending on its maturity period.

1. OPEN-ENDED FUND/SCHEME

An open-ended fund or scheme is one that is available for subscription and repurchase on acontinuous basis. These schemes do not have a fixed maturity period. Investors canconveniently buy and sell units at Net Asset Value (NAV) related prices which are declaredon a daily basis. The key feature of open-end schemes is liquidity.

2. CLOSE-ENDED FUND/SCHEME

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund isopen for subscription only during a specified period at the time of launch of the scheme.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 the units are listed. Inorder to provide an exit route to the investors, some close-ended funds give an option ofselling 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 investori.e. either repurchase facility or through listing on stock exchanges. These mutual fundsschemes disclose NAV generally on weekly basis.

BY INVESTMENT OBJECTIVE: A scheme can also be classified as growthscheme, income scheme, or balanced scheme considering its investment objective. Suchschemes may be open-ended or close-ended schemes as described earlier. Such schemesmay be classified mainly as follows:

1. Growth / Equity Oriented SchemeThe aim of growth funds is to provide capital appreciation over the medium to long- term.Such schemes normally invest a major part of their corpus in equities. Such funds havecomparatively high risks. These schemes provide different options to the investors likedividend option, capital appreciation, etc. and the investors may choose an optiondepending on their preferences. The investors must indicate the option in the applicationform. The mutual funds also allow the investors to change the options at a later date.


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Growth schemes are good for investors having a long-term outlook seeking appreciationover a period of time.

2. Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such

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

3. Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemesinvest both in equities and fixed income securities in the proportion indicated in their offerdocuments. These are appropriate for investors looking for moderate growth. Theygenerally invest 40-60% in equity and debt instruments. These funds are also affectedbecause of fluctuations in share prices in the stock markets. However, NAVs of such fundsare likely to be less volatile compared to pure equity funds.

4. Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservationof capital and moderate income. These schemes invest exclusively in safer short-terminstruments such as treasury bills, certificates of deposit, commercial paper and inter-bankcall money, government securities, etc. Returns on these schemes fluctuate much lesscompared to other funds. These funds are appropriate for corporate and individual investorsas a means to park their surplus funds for short periods.

5. Gilt FundThese funds invest exclusively in government securities. Government securities have nodefault risk. NAVs of these schemes also fluctuate due to change in interest rates and othereconomic factors as is the case with income or debt oriented schemes.

6. Index FundsIndex Funds replicate the portfolio of a particular index such as the BSE Sensitive index,S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance withthe rise or fall in the index, though not exactly by the same percentage due to some factorsknown as "tracking error" in technical terms. Necessary disclosures in this regard are madein the offer document of the mutual fund scheme.There are also exchange traded index funds launched by the mutual funds which are tradedon the stock exchanges.

7. Specialised Schemes


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These include Sector Funds that invest in a particular industry like Pharmaceuticals,InfoTech, and Petrochemicals etc. There are also some special funds targeted at a particularclass of investors like women and children.

8. Sector Specific Funds/Schemes:

These are the funds/schemes which invest in the securities of only those sectors orindustries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast MovingConsumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependenton the performance of the respective sectors/industries. While these funds may give higherreturns, they are more risky compared to diversified funds. Investors need to keep a watchon the performance of those sectors/industries and must exit at an appropriate time. Theymay also seek advice of an expert.

9. Tax Savings Schemes:These schemes offer tax rebates to the investors under specific provisions of the Income

Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues.e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutualfunds also offer tax benefits. These schemes are growth oriented and invest pre-dominantlyin equities. Their growth opportunities and risks associated are like any equity-orientedscheme.

1.9TAX IMPLICATIONS OF MUTUAL FUNDS:-


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Securities Transaction Tax (STT) is 0.25%.

Dividend distributed by Mutual Funds is exempt from income tax in the hands of Investors.However, Dividend Distribution Tax is levied on the Mutual Funds at 14.1625 %( including surcharge). The investors get the dividend after accounting for the same.

Basis Investor Category

Equity OrientedFunds

Other than EquityOriented Funds

Money Market &Liquid Funds

Short-term Capitalgains tax

Long-term capitalgains tax

Sale transactions ofsecurities whichattracts STT(Equity

based schemes):-

15% NIL

Sale transaction ofsecurities not attractingSTT(Debt basedschemes):-

Individuals (residentand non-residents)

Progressive slabrates

20% with indexation;

10% withoutindexation (for units/zero coupon bonds)

Partnerships (residentand non-resident)

30%

Individuals (resident

and non-residents)

30%

Overseas financialorganisations specifiedin section 115AB

40% (corporate)30% (non-corporate)

10%

FIIs 30% 10%

Other Foreigncompanies

40% 20% with indexation;

10% withoutindexation (for units/zero coupon bonds)

Local authority 30%

Co-operative society Progressive slabrates


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Long TermCapital Gains

Investors otherthan ForeignInstitutionalInvestors(FIIs)

Nil {subject toSecuritiesTransaction [email protected]%(STT)}

10% without costinflation index benefitwhichever is lower +applicable Surcharge$ + education cess (@

2% on income tax andsurcharge) +secondary and highereducation cess (@ 1%on income tax andsurcharge).

As applicable forother than EquityFunds

FIIs Nil ,subject to STT 10% + applicableSurcharge $ +education cess (@ 2%on income tax andsurcharge) +

secondary and highereducation cess (@ 1%on income tax andsurcharge).


Short TermCapital Gains

Investors otherthan FIIs.

10%* + applicableSurcharge $ +education cess (@2% on income taxand surcharge) +secondary andhigher education

cess (@ 1% onincome tax andsurcharge), subjectto STT.

Normal rates of tax asapplicable to assesses.


FIIs 10%* + applicableSurcharge $ +education cess (@2% on income taxand surcharge) +secondary andhigher education

cess (@ 1% onincome tax andsurcharge), subjectto STT.

10% + applicableSurcharge $ +education cess (@ 2%on income tax andsurcharge) +secondary and highereducation cess (@ 1%

on income tax andsurcharge).


DividendAll Tax Free. Tax Free. Tax Free.


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Dividend

DistributionTax

Individualsand HUFs

Nil 12.5% + Surcharge @10% + applicableSurcharge $ +education cess (@ 2%on income tax and

surcharge) +secondary and highereducation cess (@ 1%on income tax andsurcharge i.e.14.1625%)

25% + Surcharge @10% + applicableSurcharge $ +education cess (@2% on income tax

and surcharge) +secondary andhigher educationcess (@ 1% onincome tax andsurcharge i.e.28.325%)

Others Nil 20% + Surcharge @10% + applicableSurcharge $ +education cess (@ 2%

on income tax andsurcharge) +secondary and highereducation cess (@ 1%on income tax andsurcharge i.e.22.66%)

25%+ Surcharge @10% + applicableSurcharge $ +education cess (@

2% on income taxand surcharge) +secondary andhigher educationcess (@ 1% onincome tax andsurcharge i.e.28.325%)

1.10LEGAL ENVIRONMENT OF MUTUAL FUND:

SEBI has enacted the SEBI (Mutual Funds) Regulations, 1996,(hereinafter referred to asSEBI Regulations) which provides the scope of mutual funds in India. All mutual funds arerequired to be mandatory registered with SEBI. The structure and formation of mutualfunds, appointment of key functionaries, operations of the mutual fund, accounting anddisclosure norms, rights and obligations of functionaries and investors, investmentrestrictions, compliance penalties, all are defined under the SEBI Regulations. Mutualfunds have to send half-yearly compliance reports to SEBI, and also provide all otherinformation about their operations, as SEBI may require. SEBI also is empowered to

periodically inspect mutual fund organizations to ensure compliance with SEBIRegulations. SEBI also regulates other fund constitutes such as AMCs, trustees, custodians,agents and brokers.


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1.11RISK INVOLVED IN MUTUAL FUNDS:-

Market risk

If the overall stock or bond markets fall on account of macro economic factors, thevalue of stock or bond holdings in the fund's portfolio can drop thereby impacting theNAV.

Non-market riskBad news about an individual company can pull down its stock price, which can affect,negatively, funds holding a large quantity of that stock. This risk can be reduced byhaving a diversified portfolio that consists of a wide variety of stocks drawn fromdifferent industries.

Interest rate risk


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Bond prices and interest rates move in opposite directions. When interest rates rise,bond prices fall and this decline in underlying securities affects the NAV negatively.The extent of the negative impact is dependant on factors such as maturity profile,liquidity etc.

Credit risk

Bonds are debt obligations. So when the funds invest in corporate bonds, they run therisk of the corporate defaulting on their interest payment and the principal paymentobligations and when that risk crystallises it leads to a fall in the value of the bondcausing the NAV of the fund to take a beating.

Inflation risk

1.12TOTAL ASSET MANAGEMENT COMPANIES IN INDIA:-Major Mutual Fund Companies in India:

ABN AMRO Mutual FundABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India)Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd.was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABNAMRO Mutual Fund.

Birla Sun Life Mutual FundBirla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun LifeFinancial. Sun Life Financial is a global organisation evolved in 1871 and is beingrepresented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart fromIndia. Birla Sun Life Mutual Fund follows a conservative long-term approach toinvestment. Recently it crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 underthe sponsorship of Bank of Baroda. BOB Asset Management Company Limited is theAMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche BankAG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely HousingDevelopment Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual FundHSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets(India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as theTrustee Company of HSBC Mutual Fund.
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ING Vysya Mutual FundING Vysya Mutual Fund was setup on February 11, 1999 with the same named TrusteeCompany. It is a joint venture of Vysya and ING. The AMC, ING Investment Management(India) Pvt. Ltd. was incorporated on April 6, 1998.

Prudential ICICI Mutual FundThe mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of thelargest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setupon 13th of October, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The TrusteeCompany formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI AssetManagement Company Limited incorporated on 22nd of June, 1993.

Sahara Mutual FundSahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial CorporationLtd. as the sponsor. Sahara Asset Management Company Private Limited incorporated onAugust 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the

AMC stands at Rs 25.8 crores.

State Bank of India Mutual FundState Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launchoffshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today itis the largest Bank sponsored Mutual Fund in India. They have already launched 35Schemes out of which 15 have already yielded handsome returns to investors. State Bank ofIndia Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base ofover 8 Lakhs spread over 18 schemes.

Tata Mutual FundTata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsors for TataMutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investmentmanager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited.Tata Asset Management Limited' is one of the fastest in the country with more than Rs.7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual FundKotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It ispresently having more than 1, 99,818 investors in its various schemes. KMAMC started itsoperations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering toinvestors with varying risk - return profiles. It was the first company to launch dedicatedgilt scheme investing only in government securities.

Unit Trust of India Mutual FundUTI Asset Management Company Private Limited, established in Jan 14, 2003, managesthe UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTIAsset Management Company presently manages a corpus of over Rs.20000 Crores. Thesponsors of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB),
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State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes ofUTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, IndexFunds, Equity Funds and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. Thesponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited isthe Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which waschanged on March 11, 2004. Reliance Mutual Fund was formed for launching of variousschemes under which units are issued to the Public with a view to contribute to the capitalmarket and to provide investors the opportunities to make investments in diversifiedsecurities.

Standard Chartered Mutual FundStandard Chartered Mutual Fund was set up on March 13, 2000 sponsored by StandardChartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard

Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated withSEBI on December 20, 1999.

Franklin Templeton India Mutual FundThe group, Franklin Templeton Investments is a California (USA) based company with aglobal AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financialservices groups in the world. Investors can buy or sell the Mutual Fund through theirfinancial advisor or through mail or through their website. They have Open end DiversifiedEquity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open endTax Saving schemes, Open end Income and Liquid schemes, closed end Income schemesand Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund IndiaMorgan Stanley is a worldwide financial services company and its leading in the market insecurities, investment management and credit services. Morgan Stanley InvestmentManagement (MISM) was established in the year 1975. It provides customized assetmanagement services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retailinvestors. In India it is known as Morgan Stanley Investment Management Private Limited(MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first closeend diversified equity scheme serving the needs of Indian retail investors focussing on along-term capital appreciation.

Escorts Mutual FundEscorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as itssponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC wasincorporated on December 1, 1995 with the name Escorts Asset Management Limited.

Alliance Capital Mutual Fund


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Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance CapitalManagement Corp. of Delaware (USA) as sponsors. The Trustee is ACAM Trust CompanyPvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with thecorporate office in Mumbai.

Benchmark Mutual FundBenchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt.Ltd. as the sponsors and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company.Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark AssetManagement Company Pvt. Ltd. is the AMC.

Can bank Mutual FundCan bank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as thesponsor. Can bank Investment Management Services Ltd. incorporated on March 2, 1993 isthe AMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual FundChola Mutual Fund under the sponsorship of Cholamandalam Investment & FinanceCompany Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is theTrustee Company and AMC is Cholamandalam AMC Limited.

LIC Mutual FundLife Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. Itcontributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constitutedas a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Companystarted its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointedJeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for

LIC Mutual Fund.

GIC Mutual FundGIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), aGovernment of India undertaking and the four Public Sector General Insurance Companies,viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), TheOriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and isconstituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882.

CHAPTER-2INTRODUCTION TO THE TOPIC

2.1 INVESTING:-

Investing is the use of money (capital) to make more money. You can invest by buyingequity investments such as stocks, mutual funds and real estate or debt investmentssuch as bonds and Guaranteed Investment Certificates (GICs) to increase your wealth.


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While most people understand how to save money - spending less than you make - theidea of investing is less well-known. Investing is what you do with that money yousave. The main difference between saving and investing is the amount of risk you takewith your money in the hopes that it will grow faster. More about this later.

"While investing money can help you to maintain and grow the value of your savings,investing does have risks. Investment risk is the possibility that you could lose some orall of your invested money, or that you could earn less from the investment than youexpected."

Investment or investing is a term with several closely-related meanings in businessmanagement, finance and economics, related to saving or deferring consumption. Anasset is usually purchased, or equivalently a deposit is made in a bank, in hopes ofgetting a future return or interest from it. The word originates in the Latin "vestis",meaning garment, and refers to the act of putting things (money or other claims toresources) into others' pockets. The basic meaning of the term being an asset held to

have some recurring or capital gains.

2.2WHY DO PEOPLE INVEST?

People invest to increase their personal wealth in order to meet their financial goalsboth for today and the future. Investing means using money you have saved to makemore money. This is sometimes referred to as putting your money to work for you.

People invest for many reasons: to buy a new house, to save for your childrenseducation, to sponsor a relatives immigration or simply for your own retirement. Somepeople invest for the short term because they will need the money again soon. Others

invest for the long term and do not plan to use the money they invest for a long time.

As the cost of living (inflation) increases making things more expensive each year, themoney you hide under your mattress can buy less and less. Investing is one way toprotect against inflation and maintain your current buying power. People around theworld are very familiar with the effects of inflation on their buying power, and inflationis very big issue in underdeveloped country like India, it can impact our lives.

2.3INVESTMENT STRATEGY:-

A well-planned investment strategy is essential before having any investment decisions. A

business strategy is generally based upon long run period. Formation of business strategylargely dependent upon the factors such as long-term goals and risk on the investment.

As the return on investment is not always clear, so the investors prepare the strategy so asto face the ongoing challenges in investment. A balanced investment strategy is generallyrequired in the process of investment, which possesses long time period and some risktolerance.
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In the case, when a strategy is aggressive the chance of attaining a higher goal is higher. Anefficient strategy can be obtained from portfolio theory, which shows good estimates onrisk and return.

Investment Strategy is usually considered to be more of a branch of finance than

economics. It is defined as set of rules, a definite behaviour or procedure guiding aninvestor to choose his investment portfolio. For example, investing in mutual funds hasrecently emerged as a very favourable investment strategy.

An investment strategy is centred on a risk-return trade off for a potential investor. Highreturn investment instruments such as real estate and mutual funds usually have more risksassociated with it than low return-low risk investment opportunities. Return on investmentcan be calculated on past or current investment or on the estimated return on futureinvestment.

2.4 WHAT SHOULD INVESTOR INVEST IN?

There is no simple answer to this question. For different people, at different times, atdifferent ages, the kinds of investments you might make could be very different. No twoinvestment strategies are the same. Every investment varies by its potential rewards andrisks, and choosing the right one for your situation requires an understanding of each.

INVESTMENT OPTIONS AVAILABLE WITH AN INVESTOR:-Savings form an important part of the economy of any nation. With the savings invested

in various options available to the people, the money acts as the driver for growth of thecountry. Indian financial scene too presents a plethora of avenues to the investors. Thoughcertainly not the best or deepest of markets in the world, it has reasonable options for anordinary man to invest his savings. Let us examine several of them:

1. BANKS:-

Considered as the safest of all options, banks have been the roots of the financial systems inIndia. Promoted as the means to social development, banks in India have indeed played animportant role in the rural upliftment. For an ordinary person though, they have acted as thesafest investment avenue wherein a person deposits money and earns interest on it. The twomain modes of investment in banks, savings accounts and fixed deposits have beeneffectively used by one and all. However, today the interest rate structure in the country isheaded southwards, keeping in line with global trends. With the banks offering little above9 percent in their fixed deposits for one year, the yields have come down substantially inrecent times. Add to this, the inflationary pressures in economy and you have a positionwhere the savings are not earning. The inflation is creeping up, to almost 8 percent at times,and this means that the value of money saved goes down instead of going up. This

effectively mars any chance of gaining from the investments in banks.

2. POST OFFICE SCHEMES:-Just like banks, post offices in India have a wide network. Spread across the nation, theyoffer financial assistance as well as serving the basic requirements of communication.Among all saving options, Post office schemes have been offering the highest rates. Addedto it is the fact that the investments are safe with the department being a Government ofIndia entity. So the two basic and most sought for features, those of return safety and


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quantum of returns were being handsomely taken care of. Though certainly not the mostefficient systems in terms of service standards and liquidity, these have still managed toattract the attention of small, retail investors. However, with the government announcing itsintention of reducing the interest rates in small savings options, this avenue is expected tolose some of the investors. Public Provident Funds act as options to save for the post

retirement period for most people and have been considered good option largely due to thefact that returns were higher than most other options and also helped people gain from taxbenefits under various sections. This option too is likely to lose some of its sheen onaccount of reduction in the rates offered.

3. COMPANY FIXED DEPOSITS:-Another oft-used route to invest has been the fixed deposit schemes floated by companies.Companies have used fixed deposit schemes as a means of mobilizing funds for theiroperations and have paid interest on them. The safer a company is rated, the lesser thereturn offered has been the thumb rule. However, there are several potential roadblocks inthese. First of all, the danger of financial position of the company not being understood by

the investor lurks. The investors rely on intermediaries who more often than not, dontreveal the entire truth. Secondly, liquidity is a major problem with the amount beingreceived months after the due dates. Premature redemption is generally not entertainedwithout cuts in the returns offered and though they present a reasonable option to counterinterest rate risk (especially when the economy is headed for a low interest regime), thesafety of principal amount has been found lacking. Many cases like the Kuber Group andDCM Group fiascoes have resulted in low confidence in this option.

4. NATIONAL SAVING CERTIFICATES (NSCs):-This is also a very safe investment avenue. The certificate has a maturity period of 6 years.

The current interest rate is 8.16% per annum. The interest rate is fixed in a sense thatsubsequent changes to the interest rates do not affect you. That is, any increase/decrease ininterest rates will not have any impact on your investment or interest earned.If you invest Rs 100 in NSC, you will receive Rs 160 after 6 years assuming an interest rateof 8.16% per annum.One major drawback of NSC is that interest is taxable. If you are in the highest tax bracketthen the post-tax return for you can be as less as 5.44% per annum instead of 8.16%.NSCs can be purchased at any post office in your locality.Section 80C also allows deduction on earned interest on NSC during the first five years.However, no deduction on accrued interest is available in the year in which the NSCmatures.

For instance, if you earn Rs 10,000 as interest in the sixth year then it will be taxed. Interestearned during the previous five years will be tax-free.

5. PUBLIC PROVIDENT FUND (PPF):-PPF is considered yet another safe investment avenue. The current interest rate on PPF is8% per annum. Again like EPF the rate of interest is not fixed. The government modifiesthe same from time to time.


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The best part of PPF is that the interest thereon is exempt from tax under section 10(11) ofthe Income Tax Act. Tax deduction can be claimed on contribution made by an individualinto his own PPF account or into the PPF account of his spouse or children.PPF account can be opened in a nationalised bank or a post office. It is a 15-year account.The entire amount including accumulated interest can be withdrawn after 15 years.

Partial withdrawals (which are also tax free) are allowed from the 7

th

year. The minimuminvestment amount is Rs 500 per financial year and the maximum is Rs 70,000 perfinancial year. The amount of investment one can make may vary every year giving you alot of flexibility in planning your investments.Many of you may not like to invest in PPF due to its very long tenure (15 years). However,you may open an account and contribute only small sums initially; after all minimumannual contribution is just Rs 500. In later years, contributions can be increased .

6. Employees Provident Fund:-This is one of the very safe investment avenues. The current interest rate of EPF is 8.5%per annum. However, this rate is not fixed and the government can modify the same from

time to time. The best part of EPF is that the interest earned is exempt from tax undersection 10 (12) of the Income Tax Act. That is the entire interest income earned by yougoes into your pocket. The taxman gets nothing.Investment in EPF can be made by way of a monthly contribution from your salary. Theamount contributed is 12% of the total of your basic salary and dearness allowance.Over and above this 12%, some companies allow their employees, with certain ceilings (acertain amount above which money can't be invested), to contribute an additional amounttowards EPF. This is called voluntary provident fund (VPF). VPF is also eligible for taxdeduction under section 80C.You will be exempt from tax if withdrawals are done after a continuous contribution for 5years or more, through one or more employers.

However if you withdraw money before five years the entire interest portion and theemployer's contribution are taxable in the year of withdrawal. Portion of withdrawal whichpertains to employee's own contribution is not taxable.One of problems with EPF investment is that you cannot make lump sum investment intothe same. The other problem is that at the time of withdrawal it often takes more than a fewmonths to receive the money from the PF trust.

7. EQUITIES:-Various studies have shown that over longer time frames (more than 10 years), equities areequipped to outperform other asset classes like gold, fixed income instruments and propertyamong others. However over shorter time frames, equities can prove to be the riskiest asset

class. Investing in equities would imply buying shares/stock of a listed company. This inturn would involve understanding the future business prospects of the company, beingaware of the various economic, legal and political factors that can have an impact on thecompany's business prospects. Also studying factors like interest rates and competition(domestic and overseas) would be vital.To most, that would seem like a full time job. And it is! That's a job best left to experts likemoney managers and research analysts. Hence, retail investors on their part would be betteroff utilizing the mutual funds route for investing in equities.


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8. INSURANCE:-There are a variety of insurance products available. The traditional plans such as moneyback, cash back, endowment, whole life, children plans are considered relatively safe.However, the returns thereon vary between 4% per annum to 6% per annum. For most of

these plans premium has to be paid monthly, quarterly, semi-annually or annually duringthe term of the policy.The risk categorisation of ULIPs depends on the type of fund you opt for. The fund thatinvests its corpus mainly in equity (stocks) is considered riskier while the one investingchiefly in bonds/debentures (government debt akin to banks' fixed deposits) is consideredrelatively safer.The riskier funds offer potential for high returns while safe funds offer moderate returns.Tax deduction can be claimed on the premium paid in respect of life insurance policy ofself, spouse or children.If the annual life insurance premium were more than 20% of the sum assured then thededuction would be restricted to 20% of the sum assured. For example, if the sum assured

is Rs 1, 00,000 then only Rs 20,000 will be available for tax deduction.The death benefits of the life insurance policy are exempt from tax. If the annual insurancepremium does not exceed 20% of the sum assured, the survival benefits are also exemptfrom tax under section 10(10D) of the Income Tax Act.

9. REAL ASSETS:-Real assets are physical investments, which would include real estate, gold & silver,precious stones, rare coins & stamps and art objects.

10. MUTUAL FUNDS:-The options discussed above are essentially for the risk-averse, people who think of safetyand then quantum of return, in that order. For the brave, it is dabbling in the stock market.Stock markets provide an option to invest in a high risk, high return game. While thepotential return is much more than 10-11 percent any of the options discussed above cangenerally generate, the risk is undoubtedly of the highest order. But then, the generalprinciple of encountering greater risks and uncertainty when one seeks higher returns holdstrue. However, as enticing as it might appear, people generally are clueless as to how thestock market functions and in the process can endanger the hard-earned money.For those who are not adept at understanding the stock market, the task of generating

superior returns at similar levels of risk is arduous to say the least. This is where MutualFunds come into picture.Mutual Funds are essentially investment vehicles where people with similar investmentobjective come together to pool their money and then invest accordingly. Each unit of anyscheme represents the proportion of pool owned by the unit holder (investor). Appreciationor reduction in value of investments is reflected in net asset value (NAV) of the concernedscheme, which is declared by the fund from time to time. Mutual fund schemes aremanaged by respective Asset Management Companies (AMC). Different business groups/
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financial institutions/ banks have sponsored these AMCs, either alone or in collaborationwith reputed international firms. Several international funds like Alliance and Templetonare also operating independently in India. Many more international Mutual Fund giants areexpected to come into Indian markets in the near future.

The benefits on offer are many with good post-tax returns and reasonable safety being thehallmark that we normally associate with them. Some of the other major benefits ofinvesting in them are:

Numbers of available options are:Mutual funds invest according to the underlying investment objective as specified at thetime of launching a scheme. So, we have equity funds, debt funds, gilt funds and manyothers that cater to the different needs of the investor. The availability of these optionsmakes them a good option. While equity funds can be as risky as the stock marketsthemselves, debt funds offer the kind of security that is aimed for at the time of makinginvestments. Money market funds offer the liquidity that is desired by big investors who

wish to park surplus funds for very short-term periods. Balance Funds cater to the investorshaving an appetite for risk greater than the debt funds but less than the equity funds. Theonly pertinent factor here is that the fund has to be selected keeping the risk profile of theinvestor in mind because the products listed above have different risks associated withthem. So, while equity funds are a good bet for a long term, they may not find favors withcorporate or High Net worth Individuals (HNIs) who have short-term needs.

a)Diversification:Investments are spread across a wide cross-section of industries and sectors and so the riskis reduced. Diversification reduces the risk because all stocks dont move in the samedirection at the same time. One can achieve this diversification through a Mutual Fund with

far less money than one can on his own.

b)Professional Management:Mutual Funds employ the services of skilled professionals who have years of experience toback them up. They use intensive research techniques to analyze each investment option forthe potential of returns along with their risk levels to come up with the figures forperformance that determine the suitability of any potential investment.

c) Potential of Returns:Returns in the mutual funds are generally better than any other option in any other avenueover a reasonable period of time. People can pick their investment horizon and stay put in

the chosen fund for the duration. Equity funds can outperform most other investments overlong periods by placing long-term calls on fundamentally good stocks. The debt funds toowill outperform other options such as banks. Though they are affected by the interest raterisk in general, the returns generated are more as they pick securities with different durationthat have different yields and so are able to increase the overall returns from the portfolio.

d) Liquidity:


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Fixed deposits with companies or in banks are usually not withdrawn premature becausethere is a penal clause attached to it. The investors can withdraw or redeem money at theNet Asset Value related prices in the open-end schemes. In closed-end schemes, the unitscan be transacted at the prevailing market price on a stock exchange. Mutual funds alsoprovide the facility of direct repurchase at NAV related prices. The market prices of these

schemes are dependent on the NAVs of funds and may trade at more than NAV (known asPremium) or less than NAV (known as Discount) depending on the expected future trend ofNAV which in turn is linked to general market conditions. Bullish market may result inschemes trading at Premium while in bearish markets the funds usually trade at Discount.This means that the money can be withdrawn anytime, without much reduction in yield.Some mutual funds however, charge exit loads for withdrawal.

Besides these important features, mutual funds also offer several other key traits. Importantamong them are:

e) Well Regulated:

Unlike the company fixed deposits, where there is little control with the investment beingconsidered as unsecured debt from the legal point of view, the Mutual Fund industry is verywell regulated. All investments have to be accounted for, decisions judiciously taken. SEBIacts as a true watchdog in this case and can impose penalties on the AMCs at fault. Theregulations, designed to protect the investors interests are also implemented effectively.

f)Transparency:Being under a regulatory framework, mutual funds have to disclose their holdings,investment pattern and all the information that can be considered as material, before all

investors. This means that the investment strategy, outlooks of the market and schemerelated details are disclosed with reasonable frequency to ensure that transparency exists inthe system. This is unlike any other investment option in India where the investor knowsnothing as nothing is disclosed.

g) Flexible, Affordable and a Low Cost affair:Mutual Funds offer a relatively less expensive way to invest when compared to otheravenues such as capital market operations. The fee in terms of brokerages, custodial feesand other management fees are substantially lower than other options and are directlylinked to the performance of the scheme. Investment in mutual funds also offers a lot of

flexibility with features such as regular investment plans, regular withdrawal plans anddividend reinvestment plans enabling systematic investment or withdrawal of funds. Eventhe investors, who could otherwise not enter stock markets with low investible funds, canbenefit from a portfolio comprising of high-priced stocks because they are purchased frompooled funds.As has been discussed, mutual funds offer several benefits that are unmatched by otherinvestment options. Post liberalization, the industry has been growing at a rapid pace andhas crossed Rs. 100000 crores size in terms of its assets under management. However, due


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Basis Rate of

return

(Annual

Income)

Rate of

return

(Capital

Appreciation)

Risk Marketability Tax

Benefit

Convenience

Financial

Securities: -

Equity

Non-

convertible

Debentures

Low

High

High

Low

High

Low

High

Average

Yes

Nil

High

High

Financial

Securities

(Non -

securitised): -

Bank Deposits

Provident

Fund

Life Insurance

Low

Nil

Nil

High

Nil

Nil

Low

Nil

Nil

High

Average

Average

Yes

Yes

Yes

High

High

High

Mutual

Funds: -

Growth/Equ ity

Income/Debt

Low

High

High

Low

High

Low

High

High

Yes

Yes

High

High

Real Assets: -

Real Estate

Gold/Silver

Low

Nil

High

Average

Low

Average

Low

Average

Limited

Nil

Average

Average

to the low key investor awareness, the inflow under the industry is yet to overtake theinflows in banks. Rising inflation, falling interest rates and a volatile equity market make adeadly cocktail for the investor for whom mutual funds offer a route out of the impasse.The investments in mutual funds are not without risks because the same forces such asregulatory frameworks, government policies, interest rate structures, performance of

companies etc. that rattle the equity and debt markets, act on mutual funds too. But it is theskill of the managing risks that investment managers seek to implement in order to striveand generate superior returns than otherwise possible that makes them a better option thanmany others.

COMPARISON OF INVESTMENT AVENUES:-


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2.5WHERE TO INVEST?

With a wide variety of investment opportunities on offer, investors are often left wonderingwhere they should invest their money. And the fact that a large number of money

magazines, websites and investment advisors are offering advice on what one must do withmoney isn't making investors' cause any easier. Investing, at its core is a rather simpleactivity. If investors stick to the basics, they are likely to do well for themselves over longertime frames. There is a 5-step strategy, adhering to which can help transform investors into"smart" investors:

1. Have an investment objective in place:All individuals have unique sets of needs like providing for children's education/marriage,buying a car/house or travelling abroad, among others. Individuals must prioritise theirgoals and develop portfolios dedicated for achieving the same. Investing in an ad hocmanner could mean that investors fail to achieve their stated objectives. For example, if

building a corpus to go on a holiday is a priority, then make an investment plan to achievethe same and invest in line with the plan in a disciplined manner.

2. Recognise the risk profile and adhere to it:Investors should be unambiguously aware of their risk profile while getting invested. Andmaking investments in line with the same is vital at times. Broadly speaking the ability totake on risk reduces as one ages. Having said that, it should be understood that eachindividual has a unique risk profile and recognising the same should be the first step. Forexample, two individuals with similar age profiles, but with disparate risk profiles is not anuncommon scenario. Investors need to invest in investment avenues in line with theirability to take on risk. Hence, a risk-taking investor is likely to invest mainly in instruments

like equities and equity funds. On the other hand, risk-averse investors should hold aportfolio dominated by assured return instruments like fixed deposits and small savingsschemes.

3. Don't ignore asset allocation:Asset allocation is a crucial exercise to follow while investing. Investing a large portion ofthe portfolio in the same asset class can prove to be a risky proposition. Diversifying yourinvestments across asset classes like equities, fixed income instruments, gold and real estate


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among others is important. A well-diversified portfolio helps investors spread their riskacross various assets so that volatility in any one asset does not put the entire portfolio atrisk because of investments in other assets.

4. Track your investments:

Making investments to achieve one's investment objective does not bring an end to theinvestment process. Investing is an ongoing process; investors need to continuouslymonitor the performance of their investments. This will ensure that they are updated withrespect to their portfolios. It also gives them an opportunity to make necessary alterations totheir portfolio in case some investments have failed to deliver.

5. Select the right investment advisor:Every investment avenue needs to be well-researched before making an investment. But,there are only a few investors who actually research the avenues they wish to invest in; thisis mainly because they either don't have the time or the expertise to do so. Investors woulddo well to associate themselves with a competent investment advisor who can assist them

build a portfolio in line with their investment objectives and risk appetites. The maincriterion for selecting an investment advisor should be his ability to offer quality, unbiasedadvice. Also ensure that he is equipped to provide post-investment services. To establish allthese points, it is advisable to go for an investment advisor on reference.

2.6REASONS FOR INVESTING IN MUTUAL FUND:-

Over the last ten years the mutual fund industry has seen manifold growth. The reasons forthis kind of hyper growth are not very hard to imagine: investors find that mutual funds area great way of multiplying their money.

The five main reasons why one should invest in mutual funds are as under:

1. Professional fund managersAll the mutual funds are managed by professional fund managers. These fund managershave in-depth knowledge about:

The companies they are investing funds in;

The general market conditions;

The macro economic situation, and

What's happening in the global markets?

The holistic view, which these managers take, has an edge over others. They invest fundsinto companies/stocks, based on their assessment of how fundamentally sound a decisionis. They are not usually influenced by the general market sentiment.

2. Diversified riskAll mutual funds, be they equity-oriented or debt-oriented ones, invest in a number ofeither companies stock or bonds. This way the performance of the fund is not depended on


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the performance of any one particular investment decision but depends on the overallperformance of all the decisions.This way the risk is spread over a large number of stocks or bonds. Besides, the number ofunit holders is fairly large, due to which the risk is borne by a large number of investors.

3. Sound investment strategyThe performance of any mutual fund cannot be measured over a short period (i.e. on aweekly or fortnightly basis) of time. This has done over a reasonable length of time (i.e. ona 3-month or 6-month basis).The main reason for this is that the mutual funds do not indulge in speculative transactionsand hence the corpus of the fund remains intact. Their investment decisions are based onsound and fundamental reasoning.

A lot of research and reasoning takes place before any investment is decision is taken.

4. Reshuffling of the portfolioFund managers monitor the markets on a daily basis, which may not be possible for a retailinvestor.This way the managers keep on entering in to new counters (i.e. buying new stocks) whichthey feel are good for the fund and keep on exiting from those counters which they feel areeither now overvalued or due to some other factors because of which staying invested inthat counter may not be desirable for the fund.This way the managers keep on reshuffling their portfolio on a continuous basis because ofwhich they are able to maximise their profits by spotting the right opportunity at the right

time.

5. Ease with which one can enter and exit the fundMost of the schemes launched by the fund houses today are all open-ended schemes. Hencean investor can enter and exit the fund at any time he so wishes.As a result mutual fund becomes a good investment options even for those who have short-term liquidity.Once the investor is sure that his investment through the mutual fund route is relativelymuch safer than he himself investing it elsewhere, the next step for him is to identify theright fund house with an appropriate scheme which suits his investment need.

2.7REASONS FOR NOT INVESTING IN MUTUAL FUND:-

1. Mutual funds don't beat the market:-72% of actively-managed large-cap mutual funds failed to beat the stock market over thepast five years. Trying to beat the market is difficult, and you're better off putting yourmoney in an index fund. An index fund attempts to mirror a particular index (such as theS&P 500 index). It mirrors that index as closely as it can by buying each of that index's


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stocks in amounts equal to the proportions within the index itself. For example, a fund thattracks the S&P 500 index buys each of the 500 stocks in that index in amounts proportionalto the S&P 500 index. Thus, because an index fund matches the stock market (instead oftrying to exceed it), it performs better than the average mutual fund that attempts (and oftenfails) to beat the market.

2. Mutual funds have high expenses:-The stocks in a particular index are not a mystery. They are a known quantity. A companythat runs an index fund does not need to pay analysts to pick the stocks to be held in thefund. This process results in a lower expense ratio for index funds. Thus, if a mutual fundand an index fund both post a 10% return for the next year, once you deduct The expenseratio for the average large cap actively-managed mutual fund is 1.3% to 1.4% (and can beas high as 2.5%). By contrast, the expense ratio of an index fund can be as low as 0.15% forlarge company indexes. Index funds have smaller expenses than mutual funds because itcosts less to run an index fund. Expenses (1.3% for the mutual fund and 0.15% for theindex fund), you are left with an after-expense return of 8.7% for the mutual fund and

9.85% for the index fund. Over a period of time (5 years, 10 years), that differencetranslates into thousands of dollars in savings for the investor.

3. Mutual funds have high turnover:-Turnover is a fund's selling and buying of stocks. When you sell stocks, you have to pay atax on capital gains. This constant buying and selling produces a tax bill that someone hasto pay. Mutual funds don't write off this cost. Instead, they pass it off to you, the investor.Contrast this problem with index funds, which have lower turnover. Because the stocks in aparticular index are known, they are easy to identify. An index fund does not need to buyand sell different stocks constantly; rather, it holds its stocks for a longer period of time,which results in lower turnover costs.

4. The longer you invest, the richer they get:-According to a popular study by John Bogle (of The Vanguard Group), over a 15- or 16-year period, an investor gets to keep only 47% of a cumulative return from an averageactively-managed mutual fund, but he or she gets to keep 87% of the returns in an indexfund. This is due to the higher fees associated with a mutual fund. So, if you invest $10,000in an index fund, that money would grow to $90,000 over that period of time. In an averagemutual fund, however, that figure would only be $49,000. That is a 40% disadvantage byinvesting in a mutual fund. In dollars, that's $41,000 you lose by putting your money in amutual fund. Why do you think these financial institutions tell you to invest for the "longterm"? It means more money in their pocket, not yours.

5. Mutual funds put all the risk on the investor:-If a mutual fund makes money, both you and the mutual fund company make money. But ifa mutual fund loses money, you lose money and the mutual fund company still makesmoney. What?? That's not fair!! Remember: the mutual fund company takes a bite out ofyour returns with that 1.3% expense ratio. But it takes that bite whether you make money orlose money. Think about that. The mutual fund company puts up 0% of the money to investand assumes 0% of the risk. You put up 100% of the money and assume 100% of the risk.


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The mutual fund company makes a guaranteed return (from the fees it charges). You, theinvestor, not only are not guaranteed a return, but you can lose a lot of money. And youhave to pay the mutual fund company for those losses.

6. Mutual Funds are unpredictable:-

The holdings of a mutual fund do not track the stock market exactly. If the market goes up,you might make a lot of money, or you might not. If the market goes down (the way it isnow), you might lose a little bit of money . . . or you might lose A LOT. Because a mutualfund's benchmark isn't a particular market index, its performance can be ratherunpredictable. Index funds, on the other hand, are more predictable because they TRACKthe market. Thus, if the market goes up or down, you know where your money is going andhow much you might make or lose. This transparency gives you more peace of mindinstead of holding your breath with a mutual fund.

2.8CRITERIA ON WHICH INVESTMENT DECISION IS BASED:-

Investment decisions are highly personal, and are based on many factors that include yourindividual financial goals, your time horizon, your tolerance for risk and your financialcircumstances.

Financial Goals: It is particularly important to give your financial advisor anaccurate picture of what you would like to achieve financially, and what types ofissues are important to you. Do you need to generate income in the present, or areyou concerned with growing your assets to fund your retirement? Do you have achilds college education to prepare for? Would you like to purchase a secondhome? These are all important issues to be considered. Generally, the longer yourinvestment horizon, or the time until you will need to realize income from yourportfolio, the larger your allocation can be to growth-oriented stock investments. If

you need your money in the near future, you will want to make a larger allocation toless volatile securities like bonds. If you need liquidity in the nearest term, you willwant to consider money market instruments.

Risk tolerance: Understanding your relationship to risk is an essentialcomponent in successful investing, and it is critical to understand how risk andreturn are related in order to develop appropriate expectations. If you are highlyuncomfortable with sharp fluctuations in value, for example, an aggressive growthfund is likely not right for you. If you hope to achieve a return in excess of 10% andhave a long time horizon, you should develop a willingness to assume more risk inyour portfolio. Over the long term, security prices are typically determined by

corporate earnings. However, in the short term emotion can influence the market. Ina bull market investors tend to ignore risk, while in a bear market long termopportunities are often ignored.

Financial circumstances: Your personal situation, income, assets, taxstatus and family structure, as well as many other factors, all influence yourinvestment choices. Be sure that you thoroughly discuss these circumstances withyour financial advisor.


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2.9THE INVESTMENT DECISION:-

With a huge number of mutual funds operating in the market, a thoro

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