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                                             A DISSERTATION ON 

   MUTUAL FUND AND INVESTOR’S BEHAVIOUR

       Submitted for partial fulfillment of award of

          Post Graduate Diploma in Management

                                   (PGDM)

                                         By

         

                             Name of Guide

           

                        nlogo

                     

                                                                    Abstract

The mutual fund industry is still in growth stage and retail investors have not really warmed up to the idea of investing in the stock market owing to the volatility which jeopardizes the continuous above average returns starting from a very short period which a retail customer wants & also there is a plethora of choices which as many as 35 AMCs in India & every one with almost all types of funds. In the debt market people still feel comfortable excepting a lower post tax return from bank FDs, post office saving & bonds rather than going for a debt fund which indicate a higher yield.

                                                         This reports talks about classification of mutual funds schemes according to different objective & later on performance evaluation is done using NAV and finally questionnaire has been prepared to know the consumer behavior towards mutual fund.

                                     

                              ACKNOWLEDGEMENT

Any accomplishment requires the effort of many people and this work is no difference. I have been fortunate enough to get help and guidance from many people. It is a pleasure to acknowledge them, though it is still an inadequate appreciation for their contribution.

I would not have completed this journey without the help, guidance & support of certain people who acted as guides and friends along the way. I would like to express my deepest and sincere thanks to my faculty guide ………………… for his invaluable guidance and help. The project could not be completed without their support and guidance.

He acted as a continuous source of inspiration and motivated me throughout the duration of the project.

Again I sincerely thanks of him.

Submitted with regards:

 

Abstract

Acknowledgement

                                                    Table of contents

Chapter1. Introduction

Chapter2. Mutual Fund Industry

Chapter3. Performance Measures

Chapter4. Investor’s point of view

Chapter5. Analysis

Appendices

Annexure

  

                 MUTUAL FUNDS

Introduction:

Mutual fund is a pool of money collected from investors and is invested according to certain investment options. A mutual fund is a trust that pools the saving of a no. of investors who share a common financial goal. A mutual fund is created when investors put their money together. It is, therefore, a pool of investor’s fund. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the no. of units owned by them.

The most important characteristics of a fund are that the contributors and the beneficiaries of the fund are the same class of people namely the investors. The term mutual fund means the investors contribute to the pool and also benefit from the pool. The pool of funds held mutually by investors is the mutual fund.

A mutual fund business is to invest the funds thus collected according to the wishes of the investors who created the pool. Usually the investors appoint professional investment managers create a product and offer it for investment to the investors. This project represents a share in the pool and pre status investment objectives.

Thus, a mutual fund is the most suitable investment for a common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at relatively low cost.

                                         flowchart.jpg (7169 bytes)

                           

                     ORGANIZATION OF MUTUAL FUNDS

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

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FEATURES THOSE INVESTORS LIKE IN MUTUAL FUND:

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 parties for the investors who has limited resources available in terms of capital and ability to carry out detailed reserves and market monitoring. These are the major advantages offered by mutual fund to all investors:

DISADVANTAGES OF MUTUAL FUNDS:

Above I have mentioned the various advantages of Mutual Funds but it also suffers from a lot of drawbacks as the market is volatile and it is ever affected by national as well as international factors, these days we can see that crude oil prices in International market has become an important  factor in determining the market movement. Here are some disadvantages as cited by me and by survey:

The shareholder fees, in the forms of loads and redemption fees are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money, these fees only magnify losses.

                              OBJECTIVE

The main objective of this study is:

  1. To know various factors considered by the customers while going to invest in the mutual fund.
  2. To study the working of mutual fund.
  3. To study the characteristics of mutual fund this attracts the customers.
  4. What an investors consider for safe investment and better returns.

                             SCOPE

  1. The project will provide us the better platform to understand the history, growth and various aspects of mutual fund.
  2. It will also help to understand the behavior of Indian investment towards mutual fund.
  3. Also with the help of this project one can better understand the different types of mutual funds working in India.

                      RESEARCH METHODOLOGY 

Methodology:

Marketing research is the process of collecting and analyzing marketing information and ultimately arrived at certain conclusion. Management in any organization needs information about potential marketing plans and to change the market place. Marketing Research includes all the activities that enable an organization to obtain the information. This research is very important in strategy formulation and feedback of any organizational plan.

Research Design:

1. DATA:  

Primary data: Personal interaction with the respondent through questionnaire.

Secondary data: Information through websites, books, fact sheet of various funds etc.

2. SOURCES:

  Books, Magazines, articles, Journals.

3. AREA OF STUDY:

    NCR region.

4. SAMPLING PROCEDURE:

    Random sampling method.

5. TOOLS & TECHNIQUES:

     Simple statistical methods.

               LIMITATIONS

  1. This project is limited in scope as the survey is conducted with a shortage of time constraint and also based on secondary data.
  2. The answer given by the respondents may be biased due to several reasons or could be attachment to a particular bank.
  3. Due to ignorance factor some of the respondents were not able to give correct answer.
  4. The respondent were not disclosing their exact portfolio because they have a fear in their mind that they can come under tax slab.

HISTORY OF MUTUAL FUNDS

               Phase 1- 1964-1987 (Unit Trust of India)

Phase 2- 1987-1993(entry of public sector)

Phase 3- 1993-1996(emergence of private funds)

Phase 4-1996(SEBI regulation for mutual funds)

             Major Mutual Fund Companies in India

ABN AMRO Mutual Fund

ABN 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 ABN AMRO Mutual Fund.

Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely

Housing Development Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund

HSBC 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 the Trustee Company of HSBC Mutual Fund.

State Bank of India Mutual Fund

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

Unit Trust of India Mutual Fund

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

Franklin Templeton India Mutual Fund

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

                                     Association of Mutual Funds in India (AMFI)

With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organization. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders.

The objectives of Association of Mutual Funds (AMFI) in India

The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows: This mutual fund association of India maintains a high professional and ethical standard in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management.

The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.

Association of Mutual Fund of India does represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry.

It develops a team of well qualified and trained Agent distributors. It implements a program of training and certification for all intermediaries and other engaged in the mutual fund industry.

AMFI undertakes all India awareness programme for investors in order to promote proper understanding of the concept and working of mutual funds. At last but not the least association of mutual fund of India also disseminate information’s on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.

                         Regulatory Framework

Regulatory Jurisdictions of SEBI:

SEBI is the apex regulatory of capital markets. SEBI has enacted the SEBI (Mutual Fund) regulation 1996 which provides the scope of regulation of Mutual Fund in India. All mutual funds are required to be mandatory registered with SEBI. The structure and formation of Mutual Funds, appointment of key functionaries, operations of Mutual Funds, accounting and disclosure norms, rights and obligations of functionaries and investors, investment restrictions, compliance and penalties all are defined under the SEBI registration. Mutual Fund has to be sending half yearly compliance reports to SEBI and promote all information about their operations.

Regulatory Jurisdiction of RBI:

RBI is the monetary authority of the country and is also the regulatory of banking system. Earlier bank sponsored mutual fund were under the dual regulatory control of RBI and SEBI. These provisions are no longer in vogue. SEBI is the regulator of all mutual funds. The present position is that RBI is involved with the mutual fund industry only to the limited extent of being the regulator of the sponsor of bank sponsored mutual funds.

Role of Ministry of Finance in Mutual Fund:

The finance ministry is the supervisor of both RBI and SEBI. The ministry of finance is also the appellate authority under SEBI Regulation. Aggrieved parties can make appeal to the Ministry of Finance on the SEBI ruling relating the Mutual Fund.

Role of Companies Act in Mutual Fund:

The AMC and the Trustee Company may be structured as limited companies, which may come under the regulatory purview of the Company Law Board (CLB). The provisions of the Companies Act 1956, is applicable to these forms of organization. The company law Board is the apex regulatory authority for company. Any grievance agency the AMC or the trustee can be addressed to the company law board for redresses.

Role of Stock Exchange:  

If a mutual fund is listed its scheme on stock exchange such listing are subject to the listing regulation of Stock Exchange. Mutual Funds have to sign the listing agreement and abide by its provisions which primarily deal with the periodic notification and disclosure of information that may impart the trading of listed units.

                                   Legal Structure    

Mutual Fund has a unique structure not shared with other entities such as companies or the firms. It is important for the employees and agents to be aware of the special nature of the structure  because it determines the rights and responsibilities of the fund’s constitutes viz. sponsor trustee, custodian, transfer agents and of course the AMC. The legal structure also drives the inter relationship between these constituents.

Like other countries India has a legal framework within which Mutual Funds must be constituted along one unique structure as unit trust. A mutual fund in India is allowed to issue open ended and a close ended under a common legal structure. Therefore, a mutual fund may have several different schemes under it at any point of time.

THE FUND SPONSOR:   Sponsor is defined by the SEBI regulation as any person who acting alone or in combination with another body corporate establishes a mutual fund. The sponsor of a fund is taken as he gets the fund registered with the SEBI.

The sponsor will form a trust and appoints the Board of trustee. The sponsor will also generally appoint the AMC as the fund managers. The sponsor, either directly or acting through the trustee will also appoints a custodian to hold the fund asset. All these appointments are made in accordance with the guidelines of SEBI.

As per the existing SEBI regulations for a person to quantify as the sponsor he must contribute at least 40% of the net worth of the AMC and possess a second final track over a period of 5 years prior to registration.

MUTUAL FUND AS A TRUST: A mutual fund is constituted in form of a public trust created under the INDIA TRUST ACT, 1882. The fund sponsor act as the settlers of the trust contributing to its initial capital and appoints a Trustee to hold the asset of the trust for the benefits of the unit holders who are the beneficiaries of the trust. The fund then invites investors to contribute their money in a common pool by subscribing to units issued by various schemes established by the trust unit being the evidence of their beneficial interest in the fund.

TRUSTEE: The trust – the mutual fund may be managed by a board of trustee – a body of individuals or a trust company- a corporate body. Most of the funds in India are managed by the board of trustee while the board is governed by the provisions of the Indian Trust Act where the trustee is a corporate body, it would also be required to comply the provisions of the Companies Act 1956 the board as an independent body act as the protector of the interest of the unit holders. The trustees do not directly manage the portfolio of securities. For this specialist function, they appoint the AMC. They ensure that the fund is managed by the AMC as per the defined objective in accordance with the trust deed and regulations of SEBI. The trust is created through a document called the Trust Deed and is executed by the fund sponsor in favor of the trustee. The trust deed is required to be stamped as registered under the provisions of the Indian Regulatory Act and regulation with SEBI clause in the trust deed, inter alias, deal with the establishment of the trust, the appointment of the trustee , their powers and duties and the obligation of the trustee  towards the unit holders and the AMC. These clauses also specify activity that the fund / AMC can’t undertake. The third schedule of the SEBI (Mutual Fund) Regulatory Act,1996 specifies the content of the Trust Deed.

                     ASSET MANAGEMENT COMPANY  

Its appointment and function:

The role of AMC is to act as the investment manager of the trust. The sponsor, or the trustee, if so authorized by the trust deed appoints the AMC. The AMC so appointed is required to be approved by the SEBI. Once approved, the AMC functions under the supervision of its own directors and also under the direction of the trustee and the SEBI. The trustees are empowered to terminate the appointment of the AMC by majority and appoint a new one with the prior approval of the SEBI and the unit holders.

The AMC would, in the name of the trust, float and then manage the direct investment schemes as per regulations of the SEBI and as per Investment Management Agreement it signs with the trustee. Chapter IV of SEBI (MF) Regulations, 1996 describes the issue relevant to appointment, eligibility criteria and the restrictions on the business activities and obligations of the AMC.

The AMC of the mutual fund have a net worth of at least Rs. 10 crores at all the time. Directors of the AMC, both independent and non independent should have adequate professional experience in the financial services and should be individuals of high moral standing, a condition also applicable to other key personnel of the AMC. The AMC cannot act as a trustee of any other mutual fund. Besides it’s role as advisory services and consulting, provided these activities are run independently of one another rand the AMC resources ( such as personnel, system etc.) are properly segregated by activity. The AMC must always act in the interest of the unit holders and report to the trustee with respect to its activities.

TYPES OF MUTUAL FUNDS

Schemes according to Maturity Period

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

Open-ended Fund/ Scheme:

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

Close-ended Fund/ Scheme:

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open 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. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective

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

Growth / Equity Oriented Scheme:

The 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 have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date.

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 compared to 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 of such funds are affected because of change in interest rates in the country. If the interest rates 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.

Balanced Fund:

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

Money Market or Liquid Fund:

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

Gilt Fund:

These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds

Index 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 with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

Sector specific funds/schemes:

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

Tax Saving 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 mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

 Load or no-load Fund

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, 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 NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 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 NAV and no additional charges are payable on purchase or sale of units.

                             INVESTMENT PLANS

 

The term investment plans generally refers to the services that the funds provide to the investors offering different ways to invest. The different investment plans are important consideration in the investment decisions because they determine the level of flexibility available to the investors. Alternate investment plans offered by the fund allow the investor freedom with respect to investing at one time or at regular intervals, making transfers to different schemes within the same fund family or receiving income at specified intervals or accumulating distributions. Some of the investment plans offered are as follows:

Automatic Reinvestment Plans (ARP):  

 In India many funds offered two options under the same scheme the dividend option and growth option. The dividend option or the automatic reinvestment plan a (ARP) allows the investors to reinvest in additional units the amount of dividend or other distribution made by the fund, instead of receiving them in cash. Reinvestment takes place at the ex-dividend NAV. The ARP ensures that the investors reap the benefits of compounding in his investments. Some fund allows reinvestments into reinvestments into other schemes in the fund family.

By using an automatic reinvestment plan, an investor is able to easily make use of his or her investment gains to produce further gains, taking advantage of compounding. Over a period of years, the added value produced by automatic reinvestment can turn out to be worth a substantial sum.

Automatic Investment Plans (AIP):

These requires the investor to invest a fixed sum periodically, thereby lettering the investor save in a disciplined and phased manner. The mode of investment could be through debit to the investor’s salary or bank account.

Such plans are also known as Systematic Investment Plans. But mutual funds do not offer this facility on all schemes. Typically they restrict it to their plain vanilla scheme like diversified equity funds, income funds and balanced funds. SIP works best in equity funds. It enforces saving discipline and helps you profit from market volatility – you buy more units when the market is down and fewer when the market is up.

This is one of the best ways to save money. By "paying themselves first" many people find they invest more in the long run. Their investments are treated as another part of their regular budget. It also forces a person to pay for investments automatically, which prevents them from being able to spend all of their disposable income.

Systematic Withdrawal Plan:

Such plans allow the investors to make systematic withdrawal from his fund investment account on a periodic basis, thereby providing the same benefit as regular income. The investor must withdraw a specific minimum amount with the facility to have withdrawal amounts sent to his residence by cheque or credited directly into his bank account. The amount withdrawn is treated as redemption of units at the applicable NAV as specified in the offer document. For example: the withdrawal could be at NAV on the first day of the month of payment. The investor is usually required to maintain a minimum balance in his bank account under this plan. Agents and the investors should understand that the systematic withdrawal plans are different from the monthly income plans, as the former allow investors to get back the principal amount invested while the latter only pay the income part on a regular basis.

In short we can say that a systematic withdrawal plan is a financial plan that allows a shareholder to withdraw money from an existing mutual fund portfolio at predetermined intervals. The money withdrawn through a systematic withdrawal plan can be reinvested in another portfolio or used to pay for something else. Often, a systematic withdrawal plan is used to fund expenses during retirement. However, this type of plan may be used for other purposes as well.

Systematic Transfer Plans (STP):
These plans allow the customers to transfer on a periodic basis a specified amount from one scheme to another within the same fund family- meaning two schemes by the same AMC and belonging to the same fund. A transfer will be treated as the redemption of the units from the scheme from which the transfer is made. Such redemption or investment will be at the applicable NAV for the respective schemes as specified in the offer document.

It is necessary for the investor to maintain a minimum balance in the scheme from which the transfer is made. Both UTI and other private funds now generally offer these services to the investors in India. The service allows the investors to maintain his investment actively to achieve his objectives. Many funds do not even change any transaction fees for this service.

EQUITY FUND

An open ended Equity scheme:

Fund features:

Who should invest?

The scheme is suitable for investors seeking effective diversification by spreading the risks without compromising the return.

Investment objective

The objective is to provide investors long term capital appreciation.

Liquidity

Sale and repurchase on all business days.

NAV calculation

All business days.

Redemption proceeds

Will be dispatched within three business days.

Tax benefits

Indexation benefits, No Gift tax, No wealth tax.

Minimum applicable amount

New investors: Rs. 5000

Existing investors: Rs. 500

INDEX FUND

An open ended Index scheme:

Fund features:

Who should invest?

The scheme is suitable for investors seeking capital appreciation commensurate with that of market.

Investment objective

The objective is to invest in the securities that comprise S&P CNX Nifty in the same proportion so as to attain results commensurate with the Nifty.

Investment option

  1. Growth    b. Dividend

Liquidity

Sale and repurchase on all business days.

NAV calculation

All business days.

Redemption proceeds

Will be dispatched within three business days.

Tax benefits

Indexation benefits, No Gift tax, No wealth tax

Minimum applicable amount

New investors: Rs. 5000

BALANCED FUND

An open ended balanced scheme:

Fund features:

Who should invest?

The scheme is suitable for investors who seek long term growth and wish to avoid the risk if investing solely in equities. It provides a balanced exposure to both growth and income producing assets.

Investment objective

The objective is to provide periodic return and capital appreciation through a judicious equity and debt instruments, while simultaneously aiming to minimize capital erosion.

Liquidity

Sale and repurchase on all business days.

NAV calculation

All business days.

Redemption proceeds

Will be dispatched within three business days.

Tax benefits

Indexation benefits, No Gift tax, No wealth tax

Minimum applicable amount

New investors: Rs. 5000

Existing investors: Rs. 500

TAX SAVING FUND

Open- ended linked saving scheme:

Fund features:

Who should invest?

The scheme is suitable for investors seeking income tax rebate under section 88(2) of Income Tax Act along with long term appreciation from investment in equities.

Investment objective

The objective is of the scheme is to build a high quality growth oriented portfolio to provide long term capital gains to investors. The scheme aims at providing return through capital appreciation over the file of the scheme.

 Liquidity

Sale and repurchase on all business days.

NAV calculation

All business days.

Redemption proceeds

Will be dispatched within three business days.

Tax benefits

Tax –rebate under section 88, indexation benefits, No Gift tax, No wealth tax.

Special features

Personal accident insurance.

Lock –in period

3 years

 Minimum applicable amount: Rs. 500

The importance of accounting knowledge

The balance sheet of a mutual fund is different from the normal balance sheet of a bank or a company. All the fund assets belong to the investors and are held in the fiduciary capacity for them. Mutual fund employees need to be aware of the special requirement concerning accounting for the fund’s assets, liabilities and transactions with investors and the outsiders like banks, custodians and registrars. This knowledge will help them better understand their responsibilities and their place in the organization, by getting an overview of the functioning of the fund.

Even the mutual fund agents need to understand the accounting for the funds transaction with investors and how the fund accounts for its assets and liabilities, as the knowledge is essential for them to perform their basic role in explaining the mutual fund performance to the investor.

For example, unless the agent knows how the NAV is computed, he cannot use even simple measures such as NAV change to assess the fund performance. He also should understand the impact of dividends paid out by the fund or entry/exit loads paid by the investors on the calculation of the NAV and therefore the fund performance.

The mutual funds in India are required to follow the accounting policies as laid down by the SEBI (Mutual Fund) Regulations 1996 and amendments in 1998.

                       NET ASSET VALUE

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). 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, 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 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 NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention.

Calculation of NAV:

The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below.

Asset value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued

Amount due on unpaid assets

Expenses accrued but not paid

For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the principal For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares, this could be the book value per share or an estimated market price if suitable benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing securities moves in a direction opposite to interest rate changes. Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation exchange where the security is traded.

Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic interest payment with the number of days in each period. Thus, accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date.

Usually, dividends are proposed at the time of the Annual General meeting and become due on the record date. There is a gap between the dates on which it becomes due and the actual payment date. In the intermediate period, it is deemed to be "accrued".

Expenses including management fees, custody charges etc. are calculated on a daily basis.

             MUTUAL FUND PERFORMANCE

THE INVESTORS PROSPECTIVE:

The investor would actually be interested in tracking the value of investment, whether he invests directly in the market or indirectly through the mutual funds. He would have to make intelligent decisions on whether he gets an acceptable return on his investment in the fund selected by him or if he needs to switch to the fund. He, therefore, needs to understand the basis of appropriate performance measurement for the funds and acquire the basic knowledge of the different measures of evaluating the performance of a fund. Only then would he be in the position to judge correctly whether his fund is performing well or not.

THE ADVISOR’S PROSPECTIVE:

If you are an intermediary recommending a mutual fund to a potential investor, he would expect you to give him proper advice on which funds have a good performance track record. If you want to be an effective investment advisor, then you too have to know how to measure and evaluate the performance of the different funds available to the investors. The need to compare the performance of the different funds requires the advisors to have knowledge of the correct and appropriate measures of evaluating the fund performance.

             Different Performance Measures

Remember that there are many ways to evaluate the performance of the fund. One must find the most suitable measure, depending upon the type of fund one is looking at, the stated investment objective of the fund and even depending on the current financial market condition. Let us discuss few common measures.

Change in NAV: The most common measure.

Purpose: If the investor wants to compute the return on investment between two dates, he can simply use the Per Unit Net Asset Value at the beginning and the end periods and calculate the change in the value of the NAV between the two dates in absolute and percentage terms.

Formula: For NAV change in absolute terms:

(NAV at the end of the period)- (NAV at the beginning of the period)

For NAV change in percentage terms:

(Absolute change in NAV/NAV at the beginning)*100

If period covered is less/more than one year: for annualized NAV change

[{(absolute change in NAV/NAV at the beginning)/months covered)*12}*100]

Suitability

NAV change is the most commonly used by the investors to evaluate fund performance and so is also most commonly published by the mutual fund managers. The advantage of this measure is that it is easily understood and applies to virtually any type of fund.

Interpretation

Whether the return in term of NAV growth is sufficient or not should be interpreted in light of the investment objective of the fund, current market condition and alternative investment returns. Thus, a long term growth fund or infrastructure fund will give lower returns when the market is in bearish phase.

Limitation:

However, this measure does not always give the correct picture, in case where the fund has distributed to the investors a significant amount of the dividends in the interim period.

If in the above example, year end NAV was Rs.22 after declaration and payment of dividend of Re.1, the NAV change of 10% gives an incomplete picture.

Therefore, it is suitable for evaluating growth funds and accumulation plans of debt and equity funds, but should be avoided for income funds and funds with withdrawal plans.

Return on investment:

Purpose:

The short coming of the simple total return is overcome by the total return with reinvestment of the dividends in the funds itself at the NAV on the date of distribution. The appropriate measure of the growth of the investor’s mutual fund holding is therefore, the return on investment.

Formula

[(units held dividend/ex-dividend NAV)*end NAV]- begin NAV*100

Suitability

Total return with distribution s reinvested at NAV is a measure accepted by mutual fund tracking agencies such as Cresedence in MUMBAI and value research in New Delhi. It is appropriate for measuring performance of accumulation plans, monthly/quarterly income schemes that distribute interim dividends.

The income ratio:

Formula:

 A fund’s income ratio is defined as its net investment income dividend by its net assets for this period.

Purpose/suitability:

This ratio is useful measure for evaluating income-oriented funds, particularly debt funds. It is not recommended for the funds that concentrate on capital appreciation.

Limitation:

The income ratio can not considered in isolation, it should be used only to supplement the analysis based on the expense ratio and total return.

Tracking mutual fund performance

Having identified appropriate measures and benchmarks for the mutual fund available in the market, the challenge is to track the fund performance on a regular basis.

This is indeed the key towards maximizing wealth through mutual fund investing. Proper tracking allow the investor to make informed & timely decisions regarding his fund portfolio whether to acquire attractive funds, dispose off poor performers or switch between funds /plans.

To be able to track fund performance, the first step is to find the relevant information on NAV, expenses cash flow, appropriate indices and so on. The following are the sources information in India.

Mutual Funds Annual and Periodic Reports

These include data on the funds financial performance, so indicators such as income/expense ratios & total return can be computed on the basis of this data. The annual report includes a listing of the funds portfolios holding at market value, statement of revenue & expenses, unrealized appreciation/depreciation at year end and the change in the net assets. On the basis of the annual report, the investors can develop a perspective on the quality of the fund’s assets and portfolio concentration and risk profile, besides computing returns. He can also assess the quality of the fund management company by reviewing their entire scheme’s performance. The profit and loss account part of the annual report will also give details of transaction costs such as brokerage paid, custodian/registrar fees and stamp duties.

Mutual Fund’s Website

With the increasing spread of the interest as a medium, all mutual funds have their own websites. SEBI even require funds to disclose certain types of the information on these sites- for example, the Portfolio Composition. Similarly, AMFI itself has a websites, which displays its member’s entire fund NAV information.

Financial papers:

Daily newspaper such as Economic Times provides daily NAV figures for the open end schemes and share prices of the close ended listed schemes. Besides, weekly supplement of the economic newspaper give more analytical information on the fund performance.

For example- Business Standard – the smart investor gives total returns over 3 months, 1 year and 3 years periods besides the fund size and ranking with the other funds separately for Equity, Balanced, Debt, Money Market, short  term debt and tax planning funds.

Similarly, Economic Times weekly supplement gives additional data on open end schemes such as Loads and Dividends besides the NAV and other information and performance data on closed end scheme.

Fund Tracking Agencies: 

In India, agencies such as Credence and value research are a source of information for the mutual fund performance data and evaluation. This data is available only on request and payment.

Newsletters: 

Many stockbrokers, mutual fund agent and banks and non-ranking firms catering to retail investors publish their own newsletters, sometimes free or else for their subscribes, giving fund performance data and recommendations.

Prospectus:

SEBI regulations for mutual fund require the fund sponsors to disclose performance data relating to schemes being managed by the concerned AMC such as beginning and end of the year.

                                             LIFE CYCLE STAGES

Life cycle guide to financial planning

Financial goal and plans depends to a large extent on the expenses and cash flow requirements of individuals. It is well known that the age of the investors is an important determinant of financial goals. Therefore, financial planners have segmented investors according to certain stages.

LIFE CYCLE STAGE

FINANCIAL NEEDS

ABILITY TO INVEST

CHOICE OF INVESTNENT

Childhood Stage

Taken care of by parents

Investment of gifts

Long term

Young unmarried

Immediate and short term

Limited due to higher spending

Liquid plans and short term investment some exposure to equity and pension products

Young married stage

Short & intermediate term. Housing and insurance needs consumer finance needs

Limited due to higher spending cash flow requirement also limited

Medium –long term investment.

Ability to take risks

Fixed income insurance & equity

Young Married with children

Medium-long term children’s education. Holodays & consumer finance Housing  

Limited Financial planning needs are highest at this stage is deal for discipline spending and saving regularly

Medium-long term investments. Ability to take risks Portfolio of products for growth and long term

Married with older children

Medium term needs for children

Higher saving rations recommended for intermittent for intermittent cash flows higher

Medium term investment with high liquidity needs Portfolio of products including equity debt and pension plans

Retirement stage

Short to medium term

Lower saving ratios , Higher requirement for regular cash flows

Medium term investment preference for liquid and income generating products low appetite for risky investment

CHARACTERISSTION OF THE LIFE CYCLE OF INVESTORS

Life cycle can be broadly classified into phases:

On an average, the first stage lasts for 22 years, the second for 38 years and the last for 25-30 years.

The earning year is when income and expenses are highest. The retirement stage is when incomes are low and expenses are high.

CLASSIFICATION OF INVESTORS NEEDS 

Needs are generically classified into protection needs and investment needs. Protection needs refer to needs that have to be primarily taken care of to protect the living standards, current requirements and survival requirement of investors. Need for retirement income and need for insurance cover are protection needs. Investment needs are additional financial needs that can be served through saving and investments. These are needs for children’s professional growth.

   

                                    Analysis of Questionnaire

I visited to 45 people with my questionnaire related to awareness of mutual fund out of them 40 responds me. I have analyzed in my survey on the basis of these respondents feedback. Once the questionnaire were filled then the next work that comes up is the analysis of the data arrived.

We find out that more businessmen were inclined towards investing in current account. The ladies were inclined to invest their money in Gold and jewelleries. Service class people and retired class people prefer more saving and fixed deposits. People with high income prefer to take risk for higher return. They want to invest in the mutual fund.

Similarly, people are interested in knowing what the returns of their investment are. Similar large numbers of people are equally interested in the safety of their funds. There are the people  who want easy liquidity of money and these are basically business people who have a deal in the ready cash all the time. Surprisingly, while a large number of people are aware of the tax benefit a very small number of them only 9 are interested in it.

While a large number of people are area of mutual fund comparing a very less number invests into it. On asking how they get knowledge of mutual fund a large number of them attributed to print media. Even banks today follow the role of the investment advisors. Very few get any information from the e-media or

Hence, AMCs must increase the awareness about their product through Electronic media (TVs, Cables, Radios etc.) as well as and should not just constrained itself to the print advertisement. Those who do not read newspaper.  

                                    CONCLUSION

The mutual fund industry is growing at a tremendous pace. A large number of plans have come up from different financial resources. With the stock market soaring the investors are attracted towards these schemes.

Only a small segment of the investors still in Mutual Funds and the main source sources of information still are the financial advisors followed by advertisements in different media. The Indian investors generally invest over a period of 2-3 years. Also there is a tendency to invest in fixed deposits due to the security attached to it.

In order to excel and make mutual funds a success, companies still need to create awareness and understand the psyche of the Indian customer.

                                   SUGGESTIONS     

Investor’s point of view:

The question that entire customer, irrespective of the age group and financial status, think of is- Are mutual funds are a safe option? What makes them safe? The basis of mutual fund industry’s safety is the way the business is defined and regulation of law. Since the mutual fund invests in the capital market instruments, so proper knowledge is essential.

Hence the essential requirement is well informed seller and equally informed buyer who understands and helped them to understand the product (here we can say the capital market and the money market instruments) is the essential pre-conditions.

Being prudent investor one should:

Company’s point of view:

Following measures can be taken by the company for getting higher investments in the mutual fund schemes:

Appendices:

Marketing of Mutual Funds.

The present marketing strategies of mutual find can be divided into main knowledge into main headings-

Direct Marketing: This constitutes 20% of the total sales of mutual funds. Some of the important 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 prospects. Once the appointment is fixed, the branch officer (also called Business Development Associate) then meet the prospect and gives him all details about the various schemes being offered by his fund. This conversion rate in this month of selling is in between 30-40%.

Tele Marketing: In this case the emphasis is the people about the fund. The names and phone number of people are picked at random from telephone directory. Sometimes people belonging to a particular profession are also contacted through phone and their informed about the fund. Generally the conversion rate in form of marketing is 15-20%.

Direct Mail: This is one common methods followed by all Mutual Funds. Addresses of people are picked at random from telephone directory. The customer support office then mails the literature of the scheme 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. Answer their queries and is generally successful in taking appointment with these people. It is then job of BDA to try his best to convert that prospect into customer.

Advertisement in Newspaper & Magazines: The funds regularly advertise in business newspaper and magazines besides in leading national dailies. The purpose is to keep investors aware the schemes offered by the fund and their performance in recent part.

Hoarding and Banners: 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 hoardings are put near UTI offices in order to tap people who are at present investing in UTI schemes. The hoarding and banners generally contain information either about one particular scheme or brief information about all schemes of the fund.

Selling Through Intermediaries: Intermediaries contribute towards 80% of total sales of mutual fund. 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 commendable jobs in convincing investors to invest in mutual funds. A lot depends on after sales services offered by the intermediaries to the customer. Customer prefer to work with those intermediaries who give them right information about the fund and keep them abreast with the latest change taking place in the market especially if they have any bearing on the fund in which they have invested.

Regular Meeting with Distributors: Most of the funds conduct monthly/bimonthly meeting with their distributors. The objective is to hear their complaint regarding services aspect from fund side and other queries related to market situation. Sometimes special training programmes are also conducted for the new agent/distributor. 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.

Joint calls: This is generally done when the prospect seems to be a high net worth investors. The BDA and the agent (who is located close to HNI’s residence or area of operation) together visit the prospect and brief them about the fund. The conversion rate is very high in this situation (Generally around 60%). Both the funds and the agent provide even after sale services in the particular case.

Frequently Used Terms

NAV:  It is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by number of units. Outstanding on valuation date

Sales Price: it is the price you pay when you invest in a scheme. It is also called offer price. It may include sales load

Repurchase Price: Price at which a close – ended scheme repurchase its units & it may include a back- end load.

Redemption price: Price at which open ended scheme repurchase their units & close- ended redeem their unit on maturity. Their prices are NAV related.

Sales Load: charge collected by a scheme when it sells the units also keep as front end load. Schemes that do not change a load-No Load Schemes

     

                                           Questionnaire

  1. Name of the customer

Mr. / Mrs. / Ms.

  1. Address/ Contact
  2. What is the age group you face in?
  1. 20-30
  2. 30-40
  3. 40-50
  4. 50-60
  5. Above 60
  1. What is your occupation?
  1. Service
  2. Business
  3. Professional
  4. Dependent
  5. Retired
  1. What is the per month income of your family?
  1. < 10,000
  2. 10-30,000
  3. 30-50,000
  4. > 50,000
  1. Which type of investment you prefer?
  1. Current saving
  2. Fixed deposits
  3. Shares
  4. Bonds/debentures
  5. Mutual fund
  6. Gold/real estates

  1. What is your objective for investing?
  1. Income generation
  2. Tax saving
  3. Others
  1. What is your priority while investing your money?
  1. Safety
  2. Higher returns
  3. Liquidity
  4. Tax benefits
  1. Are you aware of mutual fund?
  1. Yes
  2. No
  1. Have you ever invested in mutual fund?
  1. Yes
  2. No
  1. From where you get information about mutual fund?
  1. Print media
  2. Electronic media
  3. Friends/relatives
  4. Broker/investment
  5. Banks
  1. What has been the reason of your not investing into the mutual fund?
  1. Lack of confidence
  2. Imperfect knowledge
  3. Find Govt. Securities/bonds better
  4. Other reasons

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