Mutual Funds as an Investment
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Transcript of Mutual Funds as an Investment
Chapter-1
INTRODUCTION
Mutual fund is the most suitable investment (or the common man as it offers
an opportunity to invest in a diversified, professionally managed portfolio relatively
at a low cost. Anybody with an inventible surplus of as little as a few thousand
rupees can be invested in mutual funds. Change in the economic scenario, falling
interest rates of bank deposits, volatile nature of capital market and recent hitter
experience of investors in making direct investment emphasis the increasing
importance of the intermediaries like mutual funds.
Mutual funds help the small and medium size investors to participate in
today's complex and modern financial scenario. Investors can participate in the
mutual fund by buying the units of the fund. The income earned through these
investments and capital appreciation realized by the schemes is shared by its unit
holders in proportion to the number of units owned by them. Mutual funds play vital
role in mobilization of resources and their efficient al1ocation. These funds played a
significant role in financial inter-mediation, development of capital markets and growth
of the financial sector as a whole. The active involvement of mutual funds in economic
development can be seen by their dominant presence in the money and capital market. In
early 19th century, mutual funds have proved to he an important institutional arrangement of
risk pooling. These institutions have come to assume so much of significance them they
now completely dominate the entire financial market.
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1.1 Mutual fund
Mutual Fund is an investment company that pools money from shareholders and
invests in a variety of securities, such as stocks, bonds and money market instruments.
Most open-end mutual funds stand ready to buy back (redeem) its shares at their current
net asset value, which depends on the total market value of the fund's investment
portfolio at the time of redemption. Most open-end mutual funds continuously offer new
shares to investors.
Also known as an open-end investment company, to differentiate it from a closed-
end investment company. Mutual funds invest pooled cash of many investors to meet the
fund's stated investment objective. Mutual funds stand ready to sell and redeem their
shares at any time at the fund's current net asset value: total fund assets divided by shares
outstanding.
In Simple Words, Mutual fund is a mechanism for pooling the resources by
issuing units to the investors and investing funds in securities in accordance with
objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and
sectors and thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at the same time. Mutual fund
issues units to the investors in accordance with quantum of money invested by them.
Investors of mutual funds are known as unit holders.
The profits or losses are shared by the investors in proportion to their investments.
The mutual funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. In India , A mutual fund is required to
be registered with Securities and Exchange Board of India (SEBI) which regulates
securities markets before it can collect funds from the public.
In Short, a mutual fund is a common pool of money in to which investors with
common investment objective place their contributions that are to be invested in
accordance with the stated investment objective of the scheme. The investment manager
would invest the money collected from the investor in to assets that are defined/
permitted by the stated objective of the scheme. For example, an equity fund would
invest equity and equity related instruments and a debt fund would invest in bonds,
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debentures, gilts etc. Mutual Fund is a suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost.
1.2 History of Indian Mutual Fund Industry
The mutual fund industry in India started in 1963 with the formation of Unit Trust
of India, at the initiative of the Government of India and Reserve Bank the. The history of
mutual funds in India can be broadly divided into four distinct phases.
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was
set up by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the
RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI. The first scheme launched by UTI was Unit
Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds):
1987 marked the entry of non- UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund
established in June 1987 followed by 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). LIC established its mutual fund in June 1989
while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual
fund industry had assets under management of Rs.47,004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
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With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund families. Also,
1993 was the year in which the first Mutual Fund Regulations came into being, under
which all mutual funds, except UTI were to be registered and governed. The erstwhile
Kothari Pioneer (now merged with Franklin Templeton) was the first private sector
mutual fund registered in July 1993
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The industry now
functions under the SEBI (Mutual Fund) Regulations 1996.The number of mutual fund
houses went on increasing, with many foreign mutual funds setting up funds in India and
also the industry has witnessed several mergers and acquisitions. As at the end of January
2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust
of India with Rs.44, 541 crores of assets under management was way ahead of other
mutual funds.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI
was bifurcated into two separate entities. One is the Specified Undertaking of the Unit
Trust of India with assets under management of Rs.29, 835 crores as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd., sponsored by SBI, PNB, BOB and LIC.
It is registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of
assets under management and with the setting up of a UTI Mutual Fund, conforming to
the SEBI Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth.
The graph indicates the growth of assets over the years.
4
GROWTH IN ASSETS UNDER MANAGEMENT
1.3 Objectives of Mutual Funds
1. Income. Income funds focus on dividends and interest that provide income to
investors. This is a relatively steady source of money, but the fund’s NAV can
still go up and down.
2. Growth. Growth funds focus on increasing the value of the principal or amount
invested through capital gains and net asset values. Growth funds are usually
more risky but offer greater potential return.
3. Stability. Stability funds focus on protecting the amount invested from loss so the
fund’s NAV does not go down. This is the least risky type of fund but may make
the least amount of money.
1.4 Types of Mutual Funds
5
A mutual fund may float several schemes which may be classified on the basis of
its structure, its investment objectives and other objectives.
A. Mutual fund schemes by structure
Open ended schemes:
Open –ended fund scheme is open for subscription all through year. An investor
can buy or sell the units at “NAV” (net asset value) related price at any time.
Close-Ended funds:
A close-ended fund is open for subscription only during specified period,
generally at the time of initial public issue. The close ended fund scheme is listed on the
some stock exchange where an investor can buy or sell the units of this type of scheme.
Interval fund:
Interval funds combine both the features of open-ended fund and close-ended
funds.
B. Mutual Fund schemes by investment objectives:
1. Growth Funds:
The objective of growth fund scheme is to provide capital appreciation over the
medium to long term. This type of scheme is an ideal scheme for the investors seeking
capital appreciation for long period.
2. Income Funds:
The income fund schemes objective is to provide regular and steady income to
investors.
3. Balanced Funds:
The objective of balanced fund schemes is to provide both growth and regular
income to investors.
4. Money Market Funds:
The objective of money market funds is to provide easy liquidity, regular income
and preservation of income.
C. Geographical Classification:
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1. Domestic Funds:
Funds which mobilize resources from a particular geographical locality like a
country or a region are domestic funds. The market is limited and confined to the
boundaries of a nation in which the fund operates. They can invest only in the securities,
which are issued and traded in the domestic financial market.
2. Offshore Funds;
Offshore funds attract foreign capital for investment in the country of the issuing
company. They facilities cross-border fund flow which leads to an increase in foreign
currency and foreign exchange reserves. Such mutual funds can invest in securities of
foreign companies. They open domestic capital market to international investors. Many
mutual funds in India have launched a number of offshore funds, either independently or
jointly with foreign investment management companies.
D. Other Funds:
1. Tax Saving Schemes:
The objective of Tax Saving Schemes is to offer tax rebates to the investors under
specific provisions of the Indian Income Tax Laws. Investment made under some
schemes is allowed as deduction u/s 88 of the Income Tax Act.
2. Industry Specific Schemes:
Industry specific schemes invest only in the industries specific in the offer
document of the schemes.
3. Sectoral Schemes:
The schemes invest particularly in specific industries or initial public offering.
4. Index Schemes:
Such schemes link with the performance of BSE sensex or NSE.
5. Load Funds:
A loan fund charges a commission each time when you buy or sale units in the
fund.
6. No-Load Funds:
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A No-Loan fund does not charge a commission on purchase or sale of the unit in
the fund.
7. Equity-Linked Saving Sheme(Elss):
In order to encourage investor to invest in equity market, the government has
given tax-concessions through special schemes. Investment in these schemes entitles the
investor to claim an income tax rebate, but these schemes carry a lock in period before
the end of which funds cannot be withdrawn.
8. Special Schemes;
Mutual fund has launched special schemes to cater to the special needs of
investors. Uti has launched special schemes such as Children’s Gift Growth, 1986,
Housing Unit schemes, 1992, and Venture Capital Funds.
9. Gilt Fund:
Mutual fund, which deals exclusively in gilt are, called gilt fund. With a view to
creating a wider investor base for government securities, the Reserve Bank of India
encouraged setting up of gilt. The fund these funds are provided liquidity support by the
Reserve Bank.
10. P/E Ratio Fund;
P/E Ratio Fund is another mutual fund variant that is offered by pioneer ITI
Mutual Fund. The P/E (Price Earning) ratio of the price of the stock of a company to its
earning per share (EPS). The P/E ratio of the index is the weighted average price-earning
ratio of all its constituent stock.
11. Exchange Traded Funds:
Exchange traded funds (ETFs) are a hybride of open-ended mutual fund and listed
individual stocks. They are listed on stock exchanges and trade like individual stock
exchage. However, trading at the stock exchanges does not affect their portfolio. ETFs do
not sell their share are offered to investors over the stock exchange. ETFs are basically
passively managed funds that track a particular index such as S&P CNX Nifty since they
are listed on stock-exchanges, it is possible to buy and sell them throughout the day and
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their price is determined by the demand-supply forces in the market. In practice, they
trade in a small range around the value of the assets (NAV) held by them.
1.5 Advantages Of Mutual Funds
If mutual funds are emerging as the favorite investment vehicle, it is because of the
many advantages they have over other forms and avenues of investing, particularly for
the investor who has limited resources available in terms of capital and ability to carry
out detailed research and market monitoring. The following are the major advantages
offered by mutual funds to all investors:
1) Portfolio Diversification:
Mutual funds normally invest in a well-diversification portfolio or securities.
Each investor in a fund is a part owner of all of the fund’s assets. This enables him to
hold a diversified investment portfolio even with a small amount of investment that
would otherwise require big capital.
2) Professional Management :
Even if an investor has a big amount of capital available to him, he benefits from
the professional management skills brought in by the management of the investor’s
portfolio. The investment management skills, along with the needed research into
available investment option, ensure a much better return than what n investor can manage
on his own. Few investors have the skills and resources of there own to succeed in
today’s fast-moving, global and sophisticated markets.
3) Reduction/Diversification Of Risk :
An investor in a mutual fund acquires a diversified portfolio, no matter how small
his investment. Diversification reduces the risk of loss, as compared to investing directly
in one or two share or debentures or other investments. When an investor invests directly,
all the risk of potential loss is his own. A fund investor also reduces his risk in another
way. While investing in the pool of funds with other investors, any loss on one-two
securities is also shared with other investor. This risk reduction is one of the most
important benefits of a collective investment vehicle like the mutual fund.
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4) Reduction Of Transaction Costs :
What is true of risk is also true of the transaction costs. A direct investor bears all
the costs of investing such as brokerage or custody of securities. When going through a
fund, he has the benefits of economies of scale: the fund pays lesser costs because of
larger volumes, a benefit passed on to its investors.
5) Liquidity:
Often, investors hold shares or bonds they cannot directly, easily and quickly sell.
Investment in a mutual fund, on the other hand, is more liquid. An investor can liquidate
the investment, by selling the units to the fund if open-end, or selling them in the market
if the fund is close-end and collect funds at the end of a period specified by the mutual
fund or the stock market.
6) Convenience And Flexibility:
Mutual fund management companies offer many investor services that a direct
market investor cannot get. Investors can easily transfer their holding from one scheme to
the other, get updated market information, and so on.
1.6 Disadvantages of Mutual Funds
10
While the benefits of investing through mutual funds far outweigh the
disadvantages, an investors and his advisor will do well to be aware few shortcomings of
using the mutual funds as investment vehicles.
1. No Control Over Costs:
An investor in a mutual fund has no control over the overall cost of investing. He
pays investment management fees as long as he remains with the fund, albeit in return for
the professional management and research. Fees are usually payable as a percentage of
the value of his investment, whether the fund value is rising or declining. A mutual fund
investor also pays fund distribution costs, which he would not incur in direct investing.
However, this shortcoming only means that there is a cost to obtain the benefits of mutual
fund services. However, this cost is often less then the cost of direct investing by the
investors.
2. No Tailor-Made Portfolios:
Investors who invest on their own can build their own portfolios of shares, bonds
and other securities. Investing through funds means he delegates this decision to the fund
managers. The very high-net-worth individuals or large corporate investors may find this
to be a constraint in achieving their objectives their objectives. However, most mutual
fund help investors overcome this constraint by offering families of schemes- a large
number of different schemes- within the same fund. An investor can choose from
different investment plans and construct a portfolio of his choice.
3. Managing A Portfolio of Funds:
Availability of a large number of funds can actually mean too much choice for the
investor. He may again need advice on how to select a fund to achieve his objectives,
quite similar to the situation when he has to select individual shares or bonds to invest in.
4. Risk Factors:
Mutual fund and securities investments are subject to market risk and there is no
assurance or guarantee that the objective of the schemes will be achieved. As with any
security investment, he Net Asset Value (NAV) of the units issued under the schemes can
11
go up or down depending on the factors affecting the capital market. Past performance of
the sponsors, the AMC / Fund does not indicate the future performance of the fund.
5. Net Asset Value (NAV):
It is the common practice for the mutual fund to compute the share of each
investor on the basis of the value of net asset per share/unit, commonly known as the Net
Asset Value. It is the market value of the assets minus the liabilities on the day of
valuation. In other words it is the amount which the shareholder will collectively get if
the fund is dissolved or liquidation.
NAV={Market price of securities + other assets – Total liabilities}/Units outstanding at
the NAV date.
NAV={Net asset of the scheme + Number of units outstanding, Market value of
investment + Receivables + Other accrued income + other assets –Accrued expenses-
other payable liabilities}/Number of units outstanding at the date of NAV.
1.7 Organisation of Mutual Funds
A mutual fund in India is constituted in the form of trust under public trust act,
1882. The key players namely sponsors, mutual fund trust, and Asset Management
Company (AMC) are involved in setting up a mutual fund. They are assisted by other
independent administrative entities like banks, registrars, transfer agents, and custodians
(Depository participants).
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There are many entities involved and the diagram below illustrates the organizational set
up of a mutual fund:
Trustees
The trust of mutual finds may be managed by a board of trustees, or a trust company,
corporate body. Most of the funds in India are managed by Board of Trustees.
Sponsors
Means any person who acting alone or with another body corporate establishes a mutual
fund. He creates the AMC and the trustee company and appoints the Board of both these
companies with SEBI approval.
Asset Management Company
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The trustees appoint the AMC with the prior approval of SEBI. The AMC is a company
formed and registered under the companies act,1956 to manage the affairs of the mutual
fund and operate the schemes of such mutual funds. It charges a fee for the services it
renders to the mutual fund trust.
1.8 Regulations of Mutual Funds In India
In India SEBI and RBI act as regulators of mutual fund.
SEBI (Mutual Fund) REGULATIONS,1996
The provisions of this regulations pertaining to AMC are:
All the schemes to be launched by the AMC need to be approved by the trustees and
copies of offer document of such schemes are to be filed with SEBI.
The offer document shall contain adequate disclosure to enables the investor to make
informed decision.
Advertisement in respect of schemes should be in conformity with the SEBI
prescribed advertisement code, and discloses the method and periodicity of the
valuation of investment sales and repurchase in addition to the investment
objectives.
The listing of close ended schemes is mandatory and every close ended scheme
should be listed on a recognized stock exchange with in six months from the closure
of subscription. However, listing is not mandatory in case the scheme provides for
monthly income or caters to the special classes of persons like senior citizen,
women, children, and physically handicapped. If the scheme discloses detail of
repurchase in the offer document: if the schemes opens for repurchase with in six
months of closure of subscription.
Units of a close ended scheme can be opened for sale or redemption at a
predetermined fixed interval if the minimum and maximum amount of sale,
redemption, and periodicity is disclosed in the offer document.
Units of a close ended scheme can also be converted into an open ended scheme
with the consent of majority of the unit holder and disclosure is made in the offer
document about the option and period of conversion.
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Units of a close ended scheme may be rolled over by passing resolution by a
majority of the shareholders.
No scheme other than unit linked schemes can be opened for more than 45 days.
The AMC must specify in the offer document about the minimum subscription and
the extent of over subscription, which is intended to be retained. In the case of over
subscription, all applicants applying up to 500 units must be given full allotment
subjected to over subscription.
The AMC must refund the application money if minimum subscription is not
received and also the excess over subscription with in the six weeks of closure of
subscription.
Guaranteed returns can be provided in a scheme if such returns are fully guaranteed
by the AMC or sponsor. In such cases, there should be a statement indicating the
name of the person, and the manner in which the guarantee is to be made must be
stated in the offer document.
A close ended scheme shall be wound up on redemption date, unless it is rolled over,
or if 75% of the unit holders of a scheme pass a resolution of winding up of the
scheme : if the trustee on happening of any event, requires the scheme to be wound
up: or if SEBI, so directed in the interest of investors.
Investment objectives and valuation policies :-
The price at which the units may be subscribed or sold and the price at which such units
may at any time repurchase by mutual fund shall be made available to the investor.
General obligation
Every asset management company for each scheme shall keep and maintain proper
books of account, records and document, for each scheme so as to explain its
transaction and to disclose at any point of time the financial position of each scheme
and in particular give true and fair view of state of affairs of the fund and intimate to
board the place where such books of account, record, and document are maintained.
The financial year for all the schemes shall end as on march 31 of each year. Every
mutual fund or the asset management company shall prepare in respect of scheme
and the fund as specific in eleventh schedule.
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Every mutual fund shall have the annual statement of account audited by an auditor
who is nor in any way associated with the auditor of the asset management company.
Procedure in case of default
On and from the date of suspension of the certificate or the approval as the may be, the
mutual fund trustees or asset management company, shall cease to carry on any activity
as a mutual fund, trustee or asset management company, during the period of suspension,
and shall be subjected to the directions of the board with regard to any records,
documents, or securities that may be in its custody or control, relating to its activities as
mutual fund, trustee, or asset management company.
1.9 SEBI Guidelines (2001-02) Relating to Mutual Fund:-
A common format is prescribed for all mutual fund schemes to disclosed their entire
portfolio of half yearly basis so that the investors can get meaningful information on
the deployment of funds. Mutual funds are also required to disclose the investment
in various types of instruments and percentage of in each script to the total NAV
illiquid and non performing assets, investments in derivatives and in ADRs and
GDR’s.
To enable the investor to make informed investment decision, mutual funds have
been directed to fully revise and update offer document and memorandum at least
once in two years.
Mutual funds are also require to:-
i. Bring uniformity in disclosure of various categories of advertisements, with a
view to ensuring consistency and comparability across schemes of various mutual
funds.
ii. Reduce initial offer period from a maximum of 45 days to 30 days.
iii. Dispatch statement of account once the minimum subscription amount specified
in offer document is received even before the closure of the issue.
iv. Invest in mortgaged backed securities of investment grade given by credit rating
agency.
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v. Identify and make a provision for non performing asset (NPAs) according to
criteria for classification of n NPAs and treatment of income accrued on NPAs to
disclose NPAs in half yearly portfolio reports.
vi. Disclose information in a revised format on unit capital, reserves, performance in
terms of dividend and rise/fall in NAV during the half year period annualized yield
over the last 1, 3, 5 years in addition to percentage of management fee, percentage of
recurring expenses to net asset, investment made in associate companies, payment
made to associate companies, payment made to associate companies for their services,
and detail of large holding, since their operation.
vii. Declare their NAVs and sale/repurchase prices of all schemes updated on regular
basis on the AMFI website by 8.00 PM and declare NAVs of their close ended
schemes on every Wednesday.
The format for unaudited half yearly result for the mutual funds has been
revised by SEBI. These results are to be published before the expiry of one
month from the close of each half-year as against two month period provided
earlier. These results shall also be put in their websites by mutual fond.
All the schemes by mutual fund shall be launched with in six months from the
date of the letter containing observation from SEBI on the scheme offer
document. Otherwise, a fresh offer document along with filing fee shall be
filled with SEBI.
Mutual funds are required to disclose large unit-holding in the scheme, which
are over 25% of the NAV.
RBI as supervisor of bank owned Mutual Funds
The first non-UTI mutual funds were started by public sector banks. Banks come under
the regulatory jurisdiction of RBI. So Bank owned mutual funds are regulated by RBI,
but it has been clarified that all the mutual funds, being primarily capital market players
come under the regulatory framework of SEBI. Thus, the bank owned fund continue to be
under the joint supervision of both RBI and SEBI. It is generally understood that all
market related and investor related activities of the fund are to be supervised by SEBI,
17
while any issue concerning the ownership of the AMC by bank fall under the regulatory
ambit of RBI. But RBI on bank fund should not conflict with SEBI guidelines.
RBI as supervisor of money market mutual funds
RBI is the only Government agency that is charged with the sole responsibility of overall
entities that operates in money market. So money market mutual funds were regulated by
RBI guidelines till 23.11.1995. Recently it has been decided that money market mutual
funds of registered mutual fund will be regulated by SEBI through the same guidelines
issued for other mutual funds, i.e. SEBI (MF) regulations, 1996. However RBI does
retain the right to decide whether mutual funds will be allowed to access inter-call money
market. Accordingly, RBI has placed certain restrictions through latest credit policy, with
the intention of moving toward a pure inter bank money market.
1.10 Need & Importance of The Study
As mutual funds are instrumental in bringing out the household savings in
circulation in the market, therefore there is a great need for indepth analysis to ascertain
whether the investors are aware about the mutual fund schemes or not and weather these
schemes are performing according to the expectations of the ordinary investors of not.
During recent years, this important institution has shown poor performance. Its position
has been made dismissal by sudden collapse of US-64 fund of Unit Trust of India. This
decelerating performance calls for a research to study how any investors have made the
investments in these schemes and the key persons for the same.
So far not much research has been conducted on the mutual fund predominance
in India. This research is important and unique in the sense that it analyses the
predominance of the market vis-a-vis the performance of the mutual fund industry. This
study take into account the various schemes started by almost all the players in the
Indian market in order to know whether they are better than the market or not, whether
the mutual fund managers are able to minimize and diversify the various kinds of risk
through planning their respective portfolios with the expertise and talent they have.
1.11 OBJECTIVES OF THE STUDY
18
The present research problem is taken to study the “Analysis of Investments in mutual
funds” with the following objectives:-
1. To study the investor knowledge and awareness about various Mutual Fund
schemes present in the market.
2. To study the factors considered while selecting the various mutual funds scheme .
3. To know about sources from where investors get information about mutual funds.
19
Chapter-2
REVIEW OF LITERATURE
A. Vijay Kumar
Mutual Funds have opened salutary avenues for development of capital market and
mobilising savings. For their orderly growth, it is pertinent that he investors interest
should be protected. After investment, services of a high order and quality should be
guaranteed. The encouraging public response to the Mutual Funds reveals the potential of
mobilising the savings of the masses for industrial finance. The securities scam and the
subsequent fall in the share prices have made the public reluctant to invest their savings
in the stock market and Mutual Funds can make use of this opportunity to mobilise the
savings of the economy.
The managers of the mutual funds have to accept the challenge to analyse the
needs and investment preference of the investors and device schemes to suit their needs.
Indeed, with the entry of private sector mutual funds, this industry is posed for a
tremendous growth. No doubt, mutual funds will have a major role in mobilising the
savings of the household sector, in the years to come.
B. Monika Dua
The mutual fund industry in India is at the stage of infancy but is slowly and
steadily progressing towards the stage of growth. And from the passage from growth to
popularity it will be obvious to the investor in India that the industry has maximum
potential and benefits to the investor. This combined with the ever-increasing players in
the MF market promises to make it one of most exciting areas in the field of finance.
However, in the fact of intensive competition success will come only to those
MF’s who prove their mettle in the market. This will include:
- Reliability of investment performance
- Understanding Investor needs while designing investment schemes.
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C. Paramjit Singh
The encouraging public response to the mutual funds reveals the potential of
mobilising the savings of the masses for industrial finance. The mutual fund need
amendments and modifications with respect to have a uniform rules and regulations for
governing mutual funds, disclosure of information, listing of mutual funds in stock
exchanges, disallowing private sector in entering mutual fund business, removing urban
biasness, limit of investment of a mutual fund company should be lowered.
D. Mahesh Nayak
The typical equity investor in India is a seasonal investor, who tends to rush into a
bull market and gets carried away with the good returns from diversified schemes,” says
Hemant Rustagi, CEO, Wiseinvest Advisors. This is a perfect description. And when the
market gets volatile, like now, or when it slides, the retail investor, trapped without an
exit route, pulls out of equity altogether, opting to go with small savings, debt
instruments and other assured return, low-risk avenues.
Is there no middle path? For the conservative investor who would like to start flirting
with equity, there are index funds. However, this option has been largely out of favour
with Indian investors. And for obvious reasons. Returns generated by diversified funds
have consistently beaten those by index funds. In the past year, diversified funds have
given an average return of 49 per cent compared to 37 per cent by index funds.
E. Sandesh Kirkire
Over the last few years, the Indian financial system has undergone sea changes. The most
remarkable of them is the evolution of investor preference in favour of market-linked
investment vehicles, as compared to conventional assured return instruments. The same is
evident from the fact that the asset under management with mutual funds (excluding UTI)
have grown from about Rs.35,000 crore in March 2000 to over Rs.2,07,000 crore in
January 2006.
21
Chapter-3
3.1 RESEARCH METHODOLOGY
POPULATIONS AND SAMPLE PLAN
The population consists of investors in Ludhiana. For present study a sample of
100 investors were taken. Convenience sampling technique was used to select the
sample units.
DATA COLLECTION
The collection, of data regarding the awareness was both from primary and
secondary source of infonnation. Primary data was collected by using the interview
method and questionnaire method for investors. Secondary data was collected from
newspapers- The Economic Times; Business Today, Journal of Finance, pamphlets and
booklets. The questions included were open-ended and multiple choice.
ANALYSIS OF DATA
For analyzing the data collected firstly a master table was prepared to note down
the responses in a tabular form.
The statistical techniques used include tally marks, mean score, percentage method and
rank method.
22
Chapter-4
MUTUAL FUND AS AN INVESTMENT TOOL
4.1 Profile of Mutual Funds
Mutual funds now represent perhaps the most appropriate investment opportunity
for the most investors. As financial markets become more sophisticated and complex,
investors need a financial intermediary who provides the required knowledge and
professional expertise on successful investing. It is no wonder then that in the birthplace
of mutual fund-the U.S.A. - the fund industry has already overtaken the banking industry,
more funds being under mutual fund management than deposited with banks.
The Indian mutual fund industry has already started opening up many of the
exciting investment opportunities to Indian investors. We have started witnessing the
phenomenon of more saving now being entrusted to the funds than to the banks. Despite
the expected continuing growth in the industry, mutual funds are still a new financial
intermediary in India. Hence, it is important that the investors, the mutual fund
agents/distributors the investment advisors and even fund employees acquire better
knowledge of what mutual funds are, what they can do for investors and what they
cannot, and how they function differently from other intermediaries such as the banks.
4.2 Place of Mutual Fund In Financial Markets
Indian household started allocating more of their saving to the capital markets in
1980s, with investments flowing into equity and debt instruments, besides the
conventional mode of bank deposits.
Until1992 primary market investors were effectively assured good return as the
issue price of new equity issue was controlled and low. After introduction of free pricing
of shares, new issue prices were higher and with greater volatility in the stock markets,
many investors who bought highly priced shares lost money, and withdraw money from
the market altogether. Even those investors, who continued as direct investors in stock
markets, realized that the key to successful investing in the capital markets lay in building
23
a diversified portfolio, which in turn required substantial capital. Besides, selecting
securities with growth and income potential from the capital market involved careful
research and monitoring of the market, which was not possible for all investors. Under
similar circumstances in other countries, mutual funds had emerged as professional
intermediaries. Besides providing the expertise in stock market investing these fund allow
investing in small amounts and yet holding a diversified portfolio to limit risk, while
providing the potential for income and growth that is associated with the debt and equity
instruments. In India, Unit Trust of India occupied this place as the only capital markets
intermediary from 1964 until late 1987, when the government started allowing other
sponsors also to set up mutual funds. With some ups and downs, this new class of
intermediary institution has emerged, in India as elsewhere, as a good alternative to direct
investing in capital markets.
Mutual fund serves as a link between the saving public and the capital market, as
they mobilize savings from investor and bring them to borrowers in the capital markets.
By the very nature of their activities, and by virtue of being knowledgeable and informed
investors, they influence the stock markets and play an active role in promoting good
corporate governance, investor protection and the health of capital market. Mutual funds
have imparted much needed liquidity into the financial system and challenged the
hitherto dominant role of banking and financial institution in the capital markets.
4.3 The Concept of a Mutual Fund
A mutual fund is a common pool of money into which investors place their
contributions that are to be invested in accordance with a stated objective. The ownership
of the fund is thus joint or “mutual”; the fund belongs to all investors. A single investor’s
ownership of the fund is in the same proportion as the amount of the contribution made
by him or her bears to the6 total amount of the fund.
A mutual fund uses the money collected from investors to buy those assets which
are specifically permitted by its stated investment objective. Thus, an equity fund would
buy mainly equity assets-ordinary shares, preference shares, warrants etc. a bond fund
would mainly buy debt instruments such as debentures, bonds, or government securities.
24
It is these assets which are owned by the investors in the same proportion as their
contribution bears to the total contribution of all investors put together.
When investors subscribes to a mutual fund, he or she buys a part of the assets or
the pool of funds that are outstanding at that time. It is no different from buying “shares”
of a joint stock company, in which case the purchase makes the investors a part owner of
the company and its assets. In fact, in the U.S.A., a mutual fund is constituted as an
investor “buys into the fund”, meaning he buys the shares of the fund. In India, a mutual
fund is constituted as a trust and the investor subscribes to the “units” issued by the fund,
which is where the term Unit Trust comes from. However, whether the investors get fund
shares or units is only a matter of legal distinction. In any case, a mutual fund shareholder
or unit-holder is a part owner of the fund’s assets. In this project, used the term unit-
holder includes the mutual fund account-holder or close-end fund shareholder. A unit-
holder in unit trust of India US-64scheme is the same as a UTI Master share-holder or
investors in an Alliance or DSP Merrill Lynch or Prudential-ICICI or Tata or Templeton
or SBI or any other fund manager’s open-end or close-end scheme.
Since each owner is a part owner of a mutual fund, it is necessary to establish the
value of his part. In other words, each share or unit that investors hold needs to be
assigned a value. Since the units held by-an investor’s evidence the ownership of the
fund’s assets the value of the total assets of the fund when divided by the total number of
units issued by the mutual fund gives us the value of one unit. This is generally called the
Net Asset Value (NAV) of one unit or share. The value of an investor’s part ownership is
thus determined by NAV of the number of units held number of units held
25
4.4 Structure of Mutual Fund Industry In India
Mutual Fund Industry
SEBI Association of mutual fund
MF’s
Sponsor Board of Trustees AMC Custodian Investors
Public sector Private Sector
UTI Bank sponsored FI sponsored
Schemes
Domestic Off shore
Growth Income Income& Sectoral Special Tax saving Others Growth Purpose
Equity Bonds Metals Realestate MoneyMarket SecurityPrice OthersIndices
26
How to Invest In Mutual Fund
In Mutual Funds, Assured Return Schemes are those schemes that assure a specific
return to the unit holders irrespective of performance of the scheme. A scheme cannot
promise returns unless such returns are fully guaranteed by the sponsor or AMC and this
is required to be disclosed in the offer document. Investors should carefully read the offer
document whether return is assured for the entire period of the scheme or only for a
certain period. Some schemes assure returns one year at a time and they review and
change it at the beginning of the next year.
How To Fill Mutual Fund Application Form
An investor must mention clearly his name, address, number of units applied for and
such other information as required in the application form. He must give his bank account
number so as to avoid any fraudulent encashment of any cheque/draft issued by the
mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the
address, bank account number, etc at a later date should be informed to the mutual fund
immediately.
Mutual Fund Offer Document
An abridged offer document, which contains very useful information, is required to be
given to the prospective investor by the mutual fund. The application form for
subscription to a Mutual Fund is an integral part of the offer document. SEBI has
prescribed minimum disclosures in the offer document. An investor, before investing in a
Mutual Fund scheme, should carefully read the offer document. Due care must be given
to portions relating to main features of the Mutual Fund, risk factors, initial issue
expenses and recurring expenses to be charged to the Mutual Fund entry or exit loads,
sponsor’s track record, educational qualification and work experience of key personnel
including fund managers, performance of other Mutual Fund schemes launched by the
mutual fund in the past, pending litigations and penalties imposed, etc.
27
Can Mutual Fund Change Scheme
Yes. They Can However, no change in the nature or terms of the scheme, known as
fundamental attributes of the Mutual Fund e.g. structure, investment pattern, etc. can be
carried out unless a written communication is sent to each unit holder and an
advertisement is given in one English daily having nationwide circulation and in a
newspaper published in the language of the region where the head office of the mutual
fund is situated. The unit holders have the right to exit the Mutual Fund at the prevailing
NAV without any exit load if they do not want to continue with the scheme. The mutual
funds are also required to follow similar procedure while converting the scheme form
close-ended to open-ended scheme and in case of change in sponsor.
The mutual funds are required to inform any material changes to their unit holders. Apart
from it, many mutual funds send quarterly newsletters to their investors.
At present, offer documents are required to be revised and updated at least once in two
years. In the meantime, new investors are informed about the material changes by way of
addendum to the offer document till the time offer document is revised and reprinted.
MUTUAL FUNDS PERFORMANCE
The performance of a Mutual Fund is reflected in its net asset value (NAV) which is
disclosed on daily basis in case of open-ended schemes and on weekly basis in case of
close-ended schemes. The NAVs of mutual funds are required to be published in
newspapers. The NAVs are also available on the web sites of mutual funds. All mutual
funds are also required to put their NAVs on the web site of Association of Mutual Funds
in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all
mutual funds at one place
The mutual funds are also required to publish their performance in the form of half-yearly
results which also include their returns/yields over a period of time i.e. last six months, 1
year, 3 years, 5 years and since inception of schemes. Investors can also look into other
details like percentage of expenses of total assets as these have an affect on the yield and
other useful information in the same half-yearly format.
28
The mutual funds are also required to send annual report or abridged annual report to the
unit holders at the end of the year.
Various studies on mutual fund schemes including yields of different schemes are being
published by the financial newspapers on a weekly basis. Apart from these, many
research agencies also publish research reports on performance of mutual funds including
the ranking of various schemes in terms of their performance. Investors should study
these reports and keep themselves informed about the performance of various schemes of
different mutual funds.
Investors can compare the performance of their schemes with those of other mutual funds
under the same category. They can also compare the performance of equity oriented
schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.
On the basis of performance of the mutual funds, the investors should decide when to
enter or exit from a mutual fund scheme
WHERE DOES MUTUAL FUNDS INVEST
The mutual funds are required to disclose full portfolios of all of their schemes on half-
yearly basis which are published in the newspapers. Some mutual funds send the
portfolios to their unitholders.
The scheme portfolio shows investment made in each security i.e. equity, debentures,
money market instruments, government securities, etc. and their quantity, market value
and % to NAV. These portfolio statements also required to disclose illiquid securities in
the portfolio, investment made in rated and unrated debt securities, non-performing assets
( NPAs), etc.
Some of the mutual funds send newsletters to the unit holders on quarterly basis which
also contain portfolios of the schemes.
Where can an investor look out for information on mutual funds?
Almost all the mutual funds have their own web sites. Investors can also access the
NAVs, half-yearly results and portfolios of all mutual funds at the web site of
Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also
published useful literature for the investors.
Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds"
section for information on SEBI regulations and guidelines, data on mutual funds, draft
29
offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual
reports of SEBI available on the web site, a lot of information on mutual funds is given.
There are a number of other web sites which give a lot of information of various schemes
of mutual funds including yields over a period of time. Many newspapers also publish
useful information on mutual funds on daily and weekly basis. Investors may approach
their agents and distributors to guide them in this regard.
SOME IMPORTANT TERMS
Net Asset Value (NAV)
The performance of a particular scheme of a mutual fund is denoted by Net Asset
Value (NA V).
Mutual funds invest the money collected from the investors in securities markets.
In simple words, Net Asset Value is the market value of the securities held by the
scheme. Since market value of securities changes every day, NA V of a scheme also
varies on day to day basis. The NA V per unit is the market value of securities of a
scheme divided by the total number of units of the scheme on any particular date. For
example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and
the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NA V
per unit of the fund is Rs.20. NA V is required to be disclosed by the mutual funds on a
regular basis - daily or weekly depending on the type of scheme.
Sales or repurchase/redemption price
The price or NA V a unit holder is charged while investing in an open ended
scheme is called sales price. It may include sales load, if applicable.
Repurchase or redemption price is the price or NA V at which an open -
ended scheme purchases or redeems its units from the unit holders. It may include exit
load, if applicable.
Load or no-load Fund
A Load Fund is one that charges a percentage of NA V for entry or exit. That is,
30
each time one buys or sells units in the fund, a charge will be payable. This charge is used
by -the mutual fund for marketing and distribution expenses. Suppose the NA V per unit
is Rs.l'p. If the entry as well as exit load charged is 10/0, then the investors who buy would
be required to pay Rs.0.1 0 and those who offer their units for repurchase to the mutual
fund will get only Rs.9.90 per unit. The investors should take the loads into consideration
while making investment as these affect their yields/returns. However, the investors
should also consider the performance track record and service standards of the mutual
fund which are more important. Efficient funds may give higher returns in spite of loads.
A no-load fund is one that does not charge for entry or exit. It means the
investors can enter the fund/scheme at NA V and no additional charges are payable on
purchase or sale of units.
Sales Load
It is a charge collected by a scheme when it sells the units? It is also called 'Front-
end' Load.
Repurchase or 'Back-end' Load
It is a charge collected by a scheme when it buys back the units from the unit holders.
Mutual funds cannot increase the load beyond the level mentioned in the offer
document. Any change in the load will be applicable only to prospective investments and
not to the original investments. In case of imposition of fresh loads or increase in existing
loads, the mutual funds are required to amend their offer document so that the new
investors are aware of loads at the time of investment.
31
Chapter-5 ANALYSIS
The present chapter includes the analysis of the primary and secondary data
collected from the investors through the questionnaires.
A total of 100 investors were taken and were personally interviewed with the help
of structured questionnaire to get the information regarding the awareness level of
Mutual Fund schemes.
According to the first objective, "To study the investor knowledge and
awareness about various mutual fund schemes present in the market", the following
results are:
1. Awareness of Mutual Fund schemes present in India
Table: Awareness of Mutual Fund schemes present in India
OPTIONS NO. OF INVESTORS
YES 72%
NO 28%
From the above table, it is clear that 72% of the investors are aware of Mutual Fund
schemes present in India and 28% investors are not aware about Mutual Fund schemes.
32
This shows that more than half of the investors are aware about Mutual Fund schemes.
2. Investments in the schemes of Mutual Fund
Table : Investments in the schemes of Mutual Fund
SCHEMES NO. OF INVESTORS
Equity Fund 8
Morgan Stanley 11
Debt Fund 4
Balanced Fund 7
Franklin Templeton Blue Chip Fund 10
Franklin Templeton Flexi Cap Fund 10
Franklin Templeton Prima Mid Cap11
Fund
ICICI Prudential 12
Never made investment 3
Others 23
From the above table. it is clear that 8% of investors have invested in Equty Fund
Scheme, 11 % of investors have never invested in either schemes, 4% of investors have
invested in Morgan Stanley scheme, 7% of investors have invested in Debt Fund scheme,
10% of investors have invested in Balanced Fund scheme, 10% of investors have
invested in ICICl Prudential scheme, 11 % of investors have invested in Franklin
Templeton Blue Chip Fund, 12% of investors have invested in Franklin Templeton Flexi
Cap Fund, 3% in Franklin Templeton Prima Mid Cap Fund(SIP) and 23% of investors
have invested in other schemes. It shows that the percentage of investors who have
invested in Franklin Templeton Prima Mid Cap Fund is greater than the investment in all
33
other schemes of Mutual Fund.
34
3. Factors considered while selecting the scheme
Table : Factors considered while selecting the scheme
FACTORS NO. OF INVESTORS
Regular Proceeds 17
Capital Appreciation 11
Risk 16
Profitability 36
Any Other 2
Factors considered while selecting the scheme
From the above table, it is clear that 17% of investors considered regular proceeds factor,
11% of investors considered capital appreciation factor, 16% of investors considered
profitability factor, 36% of investors considered risk factor and 2% of investors
considered other factors like liquidity. It shows that the factors which were considered
while selecting the scheme i.e. regular proceeds, capital appreciation and profitability get
equal weightage by the investors and these were five times more than the factor i.e.
liquidity.
35
4. Occupation of the investors
Table: Occupation of the investors
OCCUPATION NO. OF INVESTORS
Businessman 14
Salaried 80
Any other 6
From the above table, it is clear that 14% of investors belong to salaried class, 80% of
investors are businessman and 6% of investors are from' other class like Pensioners,
Retired. So, it is clear that the no. of salaried class people is greater than the other class
people. It's also clear that they have keen interest especially in investing in mutual fund
schemes so as to avail various benefits
Provided under these schemes such as regular income which is more important for the
salaried class people and other benefits like tax benefits, for saving purpose etc.
36
5. Schemes suit to the investors
Table :(a) Schemes suit to the investors
SCHEMES NO. OF INVESTORS
Open-ended Scheme 55
Close-ended Scheme 28
Balanced Fund 2
Money Market Mutual Fund 14
Leverage Funds NIL
From the above table, it is clear that 55% of investors are preferring Open-ended
scheme, 28% of investors are preferring Balanced Fund schemes, 2% of investors
Close-ended schemes, 14% of investors money market mutual fund scheme and no
investor is preferring leverage funds. It also shows that the open-ended schemes suit to
the investors approximately two times more than the balanced fund schemes whereas
the money market mutual fund schemes suit to the investors seven times more than the
closed fund schemes. It reflects that investors prefer open-ended schemes more because
they want to sustain the regular income.
According to the second objective of the study, "To know reasons about
investing in mutual funds ", the following results are:
37
(b) Reasons behind the purchase of Mutual Fund scheme
Research shows that investors purchased Open-ended scheme in order to
maximize the profits, to sustain their regular income, for avoidance of risk and for
liquidity purpose. Close-ended-scheme in order to gain benefits in tenl1S of capital
appreciation and to earn fix income. Balanced fund scheme to balance the risk and
reward ratio and Money market mutual fund scheme for liquidity purpose, due to
growing capital market and its redemption can been done at any time. All the schemes
are purchased for saving purpose also. It shows that investors purchased these schemes
for availing the benefits in different forms either for saving purpose or for tax benefits.
Because the salaried class requires regular income and higher profits and on the other
side, businessman class requires capital appreciation, so all these requirements are met
with these schemes and retired class investors get regular income by investing in these
schemes.
38
6. The attributes, which influences the investment decision
Table : The attributes, which influences the investment decision
Through the statistical method of mean score following analysis is undertaken: -
SCALING
ATTRIBUTES
GREAT
EXTENT
SOME
EXTENT
NOT AT ALL TOTAL
Advertisement 1.5 .5 .2 2.2
Friend .6 1 .2 1.8
Sales Person .6 .5 .4 1.5
Any other .3 - .2 .5
From the above table, it is clear that investors decision was int1uenced by advertisement
i.e. 2.2 score is given and it is considered to be an extremely important factor, 1.8 rate
score is given to the attribute i.e. friend which is almost above the satisfactory level, 1.5
rate score is given to the attribute i.e. sales person which is also important for investment
decision and .5 rate score is somewhat important. It shows that first rank is given to the
advertisement which helps in taking the decision regarding the investment and it is one-
fourth more than the attribute i.e. friend and more than half from the sales person
attribute and second rank is given to the attribute i.e. friend which helps in investment'
decision.
39
7. Satisfaction level of investors with Mutual Fund schemes
Table : Satisfaction level of investors with Mutual Fund schemes
OPTIONS NO. OF RESPONDENTS
Yes 56
No 8
From the above table, it is clear that 56% investors invested in Mutual Fund schemes and
8% o investors are satisfied with the investment in the schemes and remaining investors
reported negative response. This shows that investors who are satisfied with the
investment are seven times more than the unsatisfied investors. It is clear that these
Mutual Fund schemes
are performing better and are giving better results to the investors, who have invested in
these schemes and all the requirements of the investors are fully met by these schemes
i.e. regular income or capital appreciation or for saving purpose.
8. Scheme, which is more profitable and has less risk
40
Table (a) Scheme, which is more profitable and has less risk
SCHEMES NO. OF INVESTORS
Balanced Fund 24
Open-ended Scheme 8
Short-term Debt Funds 3
Franklin Templeton Mid Cap Fund 8
UTI Master Value 4
Other 25
From the above table, it is clear that 24%of investors are satisfied with balanced fund
schemes, 8% of investors with open-ended schemes, 3% of investors with short-term
Debt Funds, 8% of investors with Franklin Templeton Mid Cap Fund, another 4% of
investors are satisfied with UTI Master Value and the rest 25% are satisfied with other
mutual fund schemes. It shows that investors who are satisfied with the Balanced fund
schemes are three times than the investors who are satisfied with the Open-ended
scheme and Franklin Templeton Mid Cap Fund and are also eight times more than the
41
investors who are satisfied with the short-term debt funds. This clearly reflects that
investors want to maintain a balance between their reward and risk ratio due to which
they ate satisfied more with the balanced fund schemes.
(b) Reasons for the above stated analysis:
According to the survey conducted, it is clear that investors prefeued balanced
fund schemes because of its lucrative character and it helps in balancing the risk and
reward ratio because on the one side they get regular. income and on the other side they
get capital appreciation, which is a two-way benefit for the investors, whereas open-
ended schemes which gives only regular income are preferred second most by the
investors who are mostly from the salaried class and the rest other schemes are preferred
for saving purpose and for tax benefits also.
According to the third objective, "To know about sources where respondent get
information about mutual funds", the following results are:
42
9. Effectiveness of advertisement for providing information
Table: Effectiveness of advertisement for providing information
OPTIONS NO. OF INVESTORS
YES 43
NO 21
From the above graph, it is clear that out of 43% investors who have invested in
Mutual Fund schemes, 670/0 of investors are satisfied that the advertisement provides
them the proper infom1ation and 21% investors show negative response. So it shows that
investors who are satisfied with the advertisement are twice than other investors. This
results that the advertisement is an effective media for providing the information to the
investors while making the investment decision and advertisement is the only media
which helps in providing the complete infoDllation to the investors regarding the
schemes.
43
10. Information, which is required for selection of the scheme
Table: Information, which is required for selection of the scheme
Attributes No. of Investors
Rate of Return/Yield 28
Maturity Period 18
Risk Attached 22
Profitability 27
Any Other 5
From the above figure, it is clear that 28% of investors required the rate; of return/yield
information, another 18% investors required the information related to maturity period,
still another 27% investors required profitability information, 22% investors required risk
attached information and 5% investors required other information like liquidity or
investment portfolio etc. This shows that the investors are greatly concen1ed with the
information regarding rate of return and profitability. To some extent, investors are also
concerned with the risk attached factor also and then with the maturity period. Investors
are least concerned with the other factors such as market conditions, liquidity, investment
portfolio, investment strategy and company profile etc. According to the fourth objective,
“To see the performance of selected mutual fund schemes", the following results are: -
44
PERFORMANCE OF MUTUAL FUNDS
There aren't too many mutual fund schemes in the country that have come a long
way, at least not 1 0 years long. That's understandable when you consider that the
mutual fund industry itself has had not much of an existence minus the Unit Trust of
India (UTI). We have highlighted the performances of, some of the leading diversified
equity funds that have completed a decade long existence.
Last year we had at least two fund houses, proudly proclaiming completion of
10 years of existence. Recently we chanced upon another fund fact sheet announcing
completion of a decade-long history in February 2005. There 'is nothing wrong with
fund houses broadcasting their 'long' existence in the mutual fund industry. But time
spent in the industry itself is not too consequential, as much as the performance of the
fund, the number of market phases it has witnessed and if it managed to come out tops
in most, if not all, of them.
First and foremost, you must understand whether the fund's long existence is its
own. In case of two fund houses - Franklin Templeton Mutual Fund and HDFC Mutual
Fund its actually borrowed. Franklin Templeton Mutual Fund (launched in 1996)
bought over Pioneer ITI Mutual Fund (launched in 1994). Apart from buying its assets,
Franklin Templeton Mutual Fund bought two years of existence that helped it complete
a decade in 2004, instead of 2006. Likewise, HDFC Mutual Fund (launched in 2001)
bought over Zurich India Mutual Fund and in the process acquired seven years of
existence. Both these fund houses also benefited from the fact that the chief architects -
fund managers and chief investment officers, of the impressive decade long
performances are still around. So in a way, their claim to a 10-Yr long existence is not
totally off the mark.
Nonetheless, for the investor, who has been managing the fund since inception is
a mere technicality. The investor does not want to bother himself with such 'frivolous'
details, he only understands one language - performance. If the fund performs, the
investor is willing to ignore a lot of things. And that is what we have done to help
investors determine the funds that have added value over a minimum 10- Yr time frame.
45
Admittedly 10 years is a long time and not many funds have redeemed
thems'elves over this long a period. Nonetheless, some funds that have put in a
performance that should warm the cockles of their investors' hearts. Notable amongst
them are the trio of Franklin funds - Franklin Bluechip (28.4% CAGR since inception in
December 1993), Franklin Prima Fund (24.2% CAGR) and Franklin Prima Plus (20.8%
CAGR). HDFC Equity, (erstwhile Zurich india Equity Fund) with 21.2% CAGR since
1993 is the other significant performer. Both these groups of funds (HDFC and Franklin
Templeton) put in a good show across market phases. Franklin Bluechip and HDFC
Equity in particular pursued very aggressive investment strategies by maintaining a
portfolio of less than 25 stocks. Despite the higher risks of maintaining a concentrated
portfolio, these funds still managed to generate returns that far outweighed the risks.
On the other hand, Franklin Prima Fund's amazing run can be attributed to a
well-diversified portfono including more than 50 stocks. At a time in 1994, when the
mutual fund industry was finding its feet, for Pioneer ITI to launch a mid cap fund
shows remarkable foresight. This is more so considering some of its peers are launching
their mid cap offerings only now, more than 10 years later!
Investors in Birla Advantage Fund have mixed reactions on the fund's
performance. During the tech rally in 1999-early 2000, Birla Advantage could do no
wrong. It was the 'hottest' fund that a lot of investors held in their portfolios. The
trailblazing performance sustained till March 2000. After that, maintaining a portfolio
dominated by technology and illiquid stocks took a toll on the fund's performance. Little
wonder then that Birla Advantage was among the hardest equity funds to fall during the
tech meltdown.
It is evident from the table that investors who have been invested in UTI and
S81 Mutual Fund for 10 years may not be particularly thrilled with their equity fund
investments. At best, they might be pleased with the brief spurts during which their
equity funds performed well. Apart from that, they have had to live with mediocrity as
its painful best.
However, there seems to be light at the end of the tunnel. UTI has shed its 'babu'
culture and its fund management team is now a lot more professional in its investment
46
approach. Likewise, S8l Mutual Fund has had a significant makeover and some of its
equity and balanced schemes now figure among the foremost in their respective
categories.
This leads us to believe that mutual funds are getting increasingly conscious
about their performance and gone are the days when a brand or the government's
backing was enough to mobilise support and monies. Today investors demand
performance and that day is not very far, when like their counterparts in the US, Indian
equity fund investors choose funds based on the 10, or even 15- Yr performance
criterion.
In the present day the capital market both individual and institutional investors
are mostly equally likely interested to invest their money in various mutual funds. The
importance of primary market has gained momentum with the increasing magnitude of
various financial institutions, corporates, public and private banks. The investors may be
interested in knowing the prospects of returns on their investments in various portfolios
viz equity shares, mutual funds, deposits, bonds and debentures etc. The present study
focuses attention on the performance evaluation of the recently introduced and second to
attractive mutual funds in the capital market in India.
47
RELATIONSHIP BETWEEN NET ASSET VALUE AND
MARKET PRICE OF MUTUAL FUND SCHEMES:
Amongst a variety of factors, the Net Asset Value (NA V) and Market Price
(MP) of the Mutual Funds are the two main factors, which can be considered responsible
for the overall performance of the mutual funds, the market price is primarily determined
by NAV of the Unit. Therefore, it would be interesting to examining the nature and the
extent of relationship between these two factors for various mutual funds under this
investigation. These funds have been classified into two categories- (1) closed or listed
Mutual Funds; and (2) Open ended Mutual Fund.
(i) Listed Mutual Funds:
It seen from the table the NAV and MP for ICICI Power, Margan Stanley Growth Fund,
UTI Master Growth, UTI UGS 2000, UTI Ui3S 5000 were all found to be positively
and highly related, their coefficients of correlation bearing 0.939, 0.739, 0.821, 0.755,
0.740 respectively. The correlation coefficient in case of BOB Growth 95, IDBI-Nit 95,
UTI Master share, Tauras Genshare, UTI Index Equity Fund were also found to be
positively but highly inter-related, their correlation coefficient bearing 0.655, 0.572,
0.681, 0.574 respectively. A few other mutual funds viz, ICICI Premier and UTI Equity
Opportunity Fund though has experienced much lower degree of positiva relationship
between their NAV's and MP's, their r-values being 0.438, 0.220 respectively. The
NAV's and MP's of CRB Arihant Mangal, Escort Income Bond and Sundnim Growth
Fund' 97 were found not correlated, which indicated that their market performance was
not satisfactory in the competitive capital market.
Amongst all the closed mutual fund, the performance of ICICl Power and UTI
Master Growth were found to be the most satisfactory. The investment in these funds
could be regarded as rewarding as compared with most other funds. Since other funds
such as Margan Stanley Growth Fund, UTI, UGS 2000 and UTI UGS 50.00 shares also
exhibited their market performance as fairly good.
48
(ii) Open-ended Mutual Funds
The coefficients of correlation between NA V's and MP's of Canganga, JM
Balance Dividend Plan, JM Balance Growth Plan, JM Dividend Plan, JM Liquid
Growth Plan, JM Debt Fund Grovvih, JM Equity Fund Dividend Plan, Kothari Pioneer
Blue Chip, Kothari Pioneer Prima, Kothari Pioneer Prima Plus, LIe Dhansahayog-B,
UTI Grand Master and UTI Primary Equity Fund-95 were worked out to 0.999, 0.997,
0.997, 0.996, 1.000, 0.988, 0.990, 1.000, 1.000, 1.000, 0.978, 0.993, 0.999 respectively,
which indicated that these two factors 'Of market performance has a positive and highly
significant relationship for these two open-ended funds.
The correlation coefficient in case of UTI Unit Scheme's 95, UTI Master Gain,
92 and L1C Dhanvidyaya come out to 0.762, 0.644, 0.591 respectively which were
though moderate in magnitude, yet positive. The degree of interdependence between
NA V and MP for L1C Dhanraksha-89 (Cap) UTI Unit Scheme, 64 and JM Debt Fund
dividend being 0.468, 0.136, 0.221 respectively though had experienced much lower
degree of positive correlation between NAV and MP of UTI Money Market Fund 97
was found not correlated, which indicated that their market performance was not
satisfactory in the competitive capital market.
According to fifth objective, "To study techniques used by mutual fund
companies for marketing ", the following results are: -
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MARKETING STRATEGIES ADOPTED BY THE MUTUAL
FUNDS
The present marketing strategies of mutual funds can be divided into two main
headings:
a) Direct Marketing
b) Selling through Intermediaries
A. DIRECT MARKETING
This constitutes 20% of the total sales of mutual funds. Some of the mportant
tools used in this type of selling are:
Personal Selling: - In this case the customer support officer of the fund at a
particular branch takes appointment from the potential prospect. Once the
appointment is fixed, the branch officer, also called Business Development
Associate (BDA) in some funds, then meets the prospect and gives him all details
about the various schemes being offered by his fund. The conversion rate in this
mode of selling is in between 30% - 40%.
Telemarketing: - In this.case the emphasis is to inform the people about the
fund. The names and phone numbers of the people are picked at random from
telephone directory. Sometimes people belonging to a particular profession are
also contacted through phone and are then informed about the fund. Generally the
conversion rate in this form of marketing is 15% - 20%.
Direct Mail: - This is one of the most common method followed by all mutual
funds. Addresses of people offer (CSO), then mails the literature of the schemes
offered by the fund. The follow up starts after 3-4 days of mailing the literature.
The CSO calls on the people to whom the literature was mailed, answers their
queries and is generally successful in taking appointments with those people. It is
then the job of BDA to try his best to convert that prospect into a customer.
Advertisement in Newspapers and Magazines: - The funds regularly advertise
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in business newspapers and magazines besides in leading national dailies. The
purpose is to keep investors aware about the schemes offered by the fund and
their performance in recent past.
Hoarding and fanners: - In this case, the hoarding and banners of the fund are
put at important locations of the city where the movement of the people is very
high. Generally, such hoarding are put near UTI offices in order to tap people
who are at present investing~in UTI schemes. The hoarding and banner generally
contains information either about one particular scheme or brief information
about all schemes of fund.
B. SELLING THROUGH INTERMEDIARIES
Intermediaries’ contribute towards 80% of the total sales of mutual funds. These
are the people/distributors who are in direct touch with the investors. They
perform an important role in attracting new customers. Most of these
intermediaries are also involved in selling shares and other investment
instruments. They do a commendable job in convincing investors to invest in
mutual funds. A lot depends on the after sale services offered by the intermediary
to the customer. Customers prefer to work with those intermediaries who give
them right information about the fund and keep them abreast with the latest
changes taking place in the market especially if they have any bearing on the fund
in which they have invested.
Regular Meetings with Distributors: - Most of the funds conduct monthly/bi-
monthly meetings with their distributors. The objective is to hear their complaints
regarding service aspects from funds side and other queries related to the market
situation. Sometimes, special training programs are also conducted for the new
agents/distributors. Training involves giving details about the products of the
fund, their present performance in the market, what the competitors are doing and
what they can do to increase the sales of the fund.
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Chapter-6FINDINGS & SUGGESTIONS
6.1 Findings
Today almost every investor is aware about mutual funds and its schemes. As per
report and analysis most of the investor had invested in Franklin Templeton Flexi Cap
Fund.
Salaried class people are more keen investor in mutual fund then other to earn
regular income through different schemes.
Investor preferences as per scheme.
Open ended scheme to earn regular income and for liquidity purpose.
Close ended to get capital appreciation by investing in these funds.
Balanced funds are also been popular to diversify risk and reward.
Investors need more returns, so they invest in mutual fund.
Mutual funds are more preferred then other investments.
Mutual funds provide more profit then any other investment.
It help in diversification of risk and can be more rewarding.
Investor are earning high profits and increasing there investments in mutual funds
Investor get information through different media such as TV, Radio, Magazines &
Journals and help them in taking decision of what to purchase.
Balanced fund scheme is more preferred among the investors as they provide
balance between risk and reward.
Advertisement in newspaper, magazine & pamphlets provide a make an effective
media to take decision among customers.
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SUGGESTIONS
Awareness among investor by providing the information regarding mutual fund
and their benefits.
Media can provide more information by giving proper advertisement of schemes.
Other categories then salaried class should be motivated to purchase mutual funds
for investments.
To attract more investor’s mutual fund company should provide motive and
objective of scheme in advertisements.
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6.2 LIMITATIONS OF REPORT
An analysis has been done as per the objectives and attempt has been done to
study each and every parameter to make it more useful and to the mark. Effort has been
done so that information collected is correct for the subject studied but there are some
limitations which are as follow.
Study has been undertaken only on 100 investors of Ludhiana. This cannot
provide the information of general public.
Information provided may not he true as same of them closed want to tell exact
figures.
Data collected is from different sources. Mainly secondary data which might have
changed or fluctuated.
Analysis in done on 100 investors only. So the same cannot be imposed on whole
population.
54
BIBLIOGRAPHY
Batra G.S. & Dangwal R.C., (2001) Financial Services, Deep and Deep Publications
Pvt. Ltd., page 7-8, 36-37 & 53.
Chandel Kulbhushan (October 2005) The ICFAI Journal of applied finance, page 56-58.
Gorden E & Natragan D (2003) Financial market and services, Himalaya Publications,
page 275-280.
Joshi Preeti (2004) Awareness about mutual funds and its performance, Report.
Kirkire Sandesh, (April 9 2006). Business India, A vehicle to wealth growth, page 84-
87.
Nayek Mahesh, (December 5, 2005). Business Today, page 230-235
WEBSITES
www.amfiindia.com
www.investors.sebi.gov.in
www.mutualfundindia.com
www.ohioline.osu.edu
www.personalfn.com
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QUESTIONNAIRE
1. Is Awareness of Mutual Fund schemes present in India?
YES NO
2. How many Investments in the schemes of Mutual Fund?
Equity Debt FranklinFund Fund
Morgan Balanced othersStanley Fund
3. What Factors are considered while selecting the scheme?
Regular Risk other Proceeds
Capital ProfitabilityAppreciation
4. What is the Occupation of the investors?
Businessman Salaried Other
5. Which Schemes suit to the investors?
Open-ended Balanced Fund Leverage Scheme Money Funds
Close-ended Market Mutual Scheme Fund
6. The attributes, which influences the investment decision?
Advertisement Friend Sales Person Any Other
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7. Are Investors Satisfies with Mutual Fund schemes?
Yes No
8. Which Scheme is more profitable and has less risk?
Balanced Short-term UTI Fund Debt Master Mid Cap Fund
Open-ended Franklin Other ValueScheme Templeton Funds
9. Is advertisement effective for providing information?
Yes No
10. Which Information is required for selection of the scheme?
Rate of Risk OtherReturn/Yield Attached
Maturity ProfitabilityPeriod
Thanks for precious time you spend for filling up the questionnaire. And
providing us valuable information. Please provide us your some personal
details also.
Name:Date of birth:Education:Qualification:Gender:Address and contact no. :
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