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TRANSCRIPT
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REPORT
ON
MUTUAL FUND:
A TOOL FOR WEALTH CREATION
BY:
BHARAT BHUSHAN KHATRI
ANAND RATHI FINANCIAL
SERVICES LTD.
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A REPORT
ON
MUTUAL FUND: A TOOL FOR WEALTH
CREATION
BY:
BHARAT BHUSHAN KHATRI
A report submtte! " p#rt#$ %u$&$$me"t o%
T'e re(ureme"ts o%
BBA Pro)r#m
*rs. Soum+#sree N#"! *r. S'+#m A,mer#
F#-u$t+ u!e Comp#"+ u!e
IIAS S-'oo$ o% I"%orm#t-s/ Ko$0#t# ANAND RATHI
SECURITIES Lt!.
ACKNOWLEDGEMENT
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I extend my sincere gratitude towards the under mentioned dignitaries whose
valuable guidance and support made possible grounding of this dissertation.
This entire work has been completed under the kind and competent supervision
of Mrs. Soumyasree Nandi (Placement oordinator! II"# #chool $f
Informatics! %olkata&. I express my deep gratitude to her for all her sustained
interest and willing help.
The most difficult task was to collect the reliable data and information
regarding different 'utual unds. In this connection! I am greatly thankful to
Mr. Shyam Ajmera (ompany )uide! "nand *athi inancial #ervices +td.!
,aipur& whose knowledge! valuable suggestions and guidance has help me a lot
in completing my pro-ect.
I am also grateful to Mr. Vinod Pandey (* 'anager! "nand *athi inancial
#ervices +td.! ,aipur& for giving me inspiration and mental support. In spite of
being fraught with unending engagements in office! he kept me motivating to
try best at all times.
I also would extend a special thanks to the colleagues in office for assisting me
in compiling this /issertation and enhancing my knowledge.
+astly! I would like to thank II"# #chool $f Informatics! %olkata and "nand
*athi inancial #ervices +td.! ,aipur for providing me an opportunity to gain
handson experience by working in a corporate environment. I believe that it is
going to prove beneficial for my career.
TABLE OF CONTENTS
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"cknowledgments 2
"bstract 3
1. Introduction 4
1.1 +iterature #urvey 5
1. 6eed for the study 7
1.2 $b-ective of the #tudy 8
1.9 #ources of data 8
1.3 'ethodology 10
1.4 +imitations 10
. Investment $ptions 11
2. 'utual und2.1 Introduction 1
2. istory of 'utual und in India 12
2.2 ow a 'utual und is $rgani:ed 19
2.9 lassification of 'utual und 13
2.3 ;uilding
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3. Tax Implication of 'utual und 23
3.2 *upee ost "veraging 25
4. "dvantages of 'utual und 28
5. /isadvantages of 'utual und 91
7. Trends in 'utual und Industry 9
8. India in )lobal market 92
10. onclusion 99
11. #uggestion 94
1. "ppendices 97
1.1 ompany Profile 98
1. Auestionnaire 30
1.2 /ifference between 'utual und and =Buity
Investment 32
1.3 reBuently Csed Terms 39
12. *eferences 33
19. )lossary 34
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ABSTRACT
The Indian capital market has been increasing tremendously during last few years.
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INTRODUCTION
This dissertation is assigned to me as a part of the partial fulfillment of the reBuirement of
;;" Program. The aim of the study is to analy:e the 'utual und Industry in India and
evaluate the substantial effect of 'utual und tool.
The Indian financial system in general and the mutual fund industry in particular continue to
take turnaround from early 1880s. /uring this period mutual funds have pooled huge
investments for the corporate sector. The investment habit of the small investors
particularly has undergone a sea change. Increasing number of players from public as well
as private sectors has entered in to the market with innovative schemes to cater to the
reBuirements of the investors in India and abroad. The reason for launching of these large
number of mutual fund products is the distributed pattern of investment behavior of Indian
small investor .The purchase decision of a mutual fund is largely dependent upon investors
level of savings! investment pattern and the risk profile.
Private and foreign mutual funds are operating in the Indian market and constitute a
substantial portion of the mutual fund industry. Today the industry consists of Cnit Trust of
India! mutual funds sponsored by public sector banks and insurance corporations! private and
foreign mutual funds. Investors are constantly being bombarded by Buestions concerning
their risk profile. This report helps to find answers to all these Buestions and -udge investors
preference regarding investment option and factors affecting their selection of mutual fund.
The ob-ective of the study was to gather the statistics about the prominent mutual funds of all
the categories and thereby analy:e its impact on wealth creation. The investorDs preference is
also -udged by getting a Buestionnaire filled by them and finding out the factors that play a
significant role in the inclination towards a fund. This will also help in analy:ing the
preference that mutual fund hold in an individualDs saving criterion. I have also tried to put
forth the current trends in the 'utual und Industry along with the changing environment as
well as future scenario of the industry. It also weighs the Indian mutual fund industry against
the global market.
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LITERATURE SURVEY
In past a range of studies have been done by various organi:ations! financial institutions!
rating agencies! distribution houses! government agencies etc to -udge the importance and
benefits of mutual fund in India. #ome of them areE
1. #=;I (#ecurities =xchange ;oard of India&
. *;I (*eserve ;ank of India&
2. inance 'inistry of India
9. *I#I+
3. II's (Indian Institute of 'anagement&
4. CTI (Cnit Trust of India&
5. 6#= (6ational #tock =xchange&
7. ;#= (;ombay #tock =xchange&
8. "ssociation of inancial Planners
10. II
Shanmugham (000& conducted a survey of 01 individual investors to study the
information sourcing by investors! their perceptions of various investment strategy
dimensions and the factors motivating share investment decisions! and reports that among the
various factors! psychological and sociological factors dominated the economic factors in
share investment decisions. Csing their results! suggestions and criticisms I have endeavored
to make this pro-ect report and learn about this investment avenue.
The information is collected from a wide variety of sources including the "'s fact sheets
and websites! "6"6/ *"TI intelligence reports! internet! "'I! daily news on mutual
fund! etc.
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NEED FOR THE STUDY
It is widely believed that ' is a retail product designed to target small investors! salaried
people and others who are intimidated by the stock market but! nevertheless! like to reap the
benefits of stock market investing.
The investors are uniBue and are a highly heterogeneous group. urrently there are around
100 schemes with varied ob-ectives and "'s compete against one another by launching
new products or repositioning old ones. ' industry is not only facing competition from
within the industry but also from other financial products that may provide many of the same
economic functions as mutual funds but are not strictly 's. This product is structured as a
certificate of deposit but it could have been set up as a 'utual und. "ll this! in aggregate!
heightens the consumer confusion in his selection of the product. Cnless the ' schemes are
tailored to his changing needs and unless the "'s understand the fund selection@switching
behavior of the consumers! survival of funds will be difficult in future.
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OBJECTIVE OF THE STUDY
The investors do not evaluate all possible product attributes while making a choice! but the
marketersD search is for identification of FThe key buying criteriaF or FThe key choice
criteriaF which are defined as certain features of a product offering that are closely associated
with preferences. The ob-ective of the study is to understand the growth of 'utual und
Industry in India and to analy:e whether this investment tool has substantial effect on wealth
creation or not.
In order to examine the issues! this dissertation has the following ob-ectives before itE
To understand the savings avenue preference among investors
To analy:e the substantial effect of mutual fund on wealth creation
To find factors influencing on a consumer investing behavior
To identify the features the investors look for in 'utual und products
To identify the investment preference of investors
To identify the information sources for mutual fund
SOURCES OF DATA
ualitative !ata and or Primary !ata
Cse of primary data collected through interviews and Buestionnaire.
uantitative or Secondary !ata
Print@=lectronic /ata #ources
'onthly reviews of "'s 'aga:ines and ,ournals!
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$ther websites related to mutual funds as amfi.com! moneycontrol.com!
valueresearch.com etc.
$ther /ata #ources act sheets
METHODOLOGY
*esearch 'ethodology is a way to systematically solve the research problem. It will assist
me in achieving the main ob-ective of the study in an effective and efficient manner. The
study will be based on a survey of around 00 respondents through a Buestionnaire covering
different groups of investors out of which an effective sample will be taken. *espondents will
be both new clients and existing investors. The data obtained will be analy:ed by using
freBuency analysis! factor analysis and correlation for identification of the key features
preferred by the respondents in a mutual fund product. These analysis methods are used
because of a number of reasons likeE
They will help us to know which investment option is the most favored by the
investors!
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This study has not been conducted over an extended period of time having both
market ups and downs. The market state has a significant influence on the buying
patterns and preferences of investors. or example! the ,uly 001 CTI fall has sent
violent shock waves across the ' investor community and is bound to influence the
scheme preference@selection of the investors. The study has not captured such
situations.
INVESTMENT OPTIONS
Savings form an important part of the economy of any nation.
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$#A+ #STAT# igh +ow 'oderate igh +ow
M%T%A+ &%N!S igh igh 'oderate igh
INTRODUCTION
The liberali:ation of the financial sector has sent signals to a wave of changes in savings and
investment behavior adding a new dimension to the growth of financial sector. The Indian
financial system in general and the mutual fund industry in particular continue to take
turnaround from early 1880s. /uring this period mutual funds have pooled huge investments
for the corporate sector. The investment habit of the small investors particularly has
undergone a sea change. Increasing number of players from public as well as private sectors
has entered in to the market with innovative schemes to cater to the reBuirements of the
investors in India and abroad. or all investors! particularly the small investors! mutual funds
have provided a better alternative to obtain benefits of expertise based eBuity investments to
all types of investors.
M%T%A+ &%N!Splay a significant role in the development of the financial market and
this has been proved in the developed countries like Cnited #tates! Cnited %ingdom and
,apan. India is at the first stage of a revolution that has already peaked in the Cnited #tates.
'utual unds have been around for a long time! dating back to the early 18thcentury. The
first modern American Mutual &und opened in 01234 while "ndia1s mutual fund
industry began in 0156 with the state 7 owned %nit Trust of "ndia ! now the single largest
mutual fund in the country! with assets under management of more than G3.3 billion! with
4.55 million accounts in its 33 domestic schemes.
A mutual fund is a type of "nvestment )ompany that gathers assets from investors and
collectively invests those assets in stoc8s4 bonds4 or money mar8et instruments. Through
the collective investments of the mutual fund! each investor shares in the returns from the
fund>s portfolio while benefiting from professional investment management! diversification!
liBuidity! and other services.
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HISTORY OF MUTUAL FUNDS OF INDIAThe 'utual fund industry has been in operation in India since 1849 when the Cnit Trust of
India (CTI& was set up under a special "ct of parliament. or about 2 years! the various
schemes of CTI were the only options available to Indian investors. owever the monolithic
structure of the industry changed in 1875 with the establishment of mutual funds by public
sector banks and investment institutions like the +ife Insurance orporation of India (+I&
and the )eneral Insurance orporation of India ()I&. inally! in 1882 the field was opened
to private sector as well! to make the industry more competitive. The mutual industry has
grown manifold in terms of si:e and operations during the three decades of its existence.
rom *s.9.45 crores in 184949! the cumulative resources mobili:ed by the mutual funds
industry had risen to about *s. 2174 crores by 'arch 004. urrently! the industry has 29
players which are engaged in mutual fund business in India. The number of mutual fund
schemes rose to 38 in 004 from 931 in 003.
"ll mutual funds whether promoted by public sector or private sector entities including those
promoted by foreign entities are governed by the same set of $egulations. There is no
distinction in regulatory reBuirements for these mutual funds and all are sub-ect to
monitoring and inspections by #=;I. The risks associated with the schemes launched by the
mutual funds sponsored by these entities are of similar type.
'utual und is the most suitable investment for the common man as it offers an opportunity
to invest in a diversified! professionally managed basket of securities at a relatively low cost.
It is a trust that pools the savings of a number of investors who share a common financial
goal. The money thus collected is then invested in capital market instruments such as shares!
debentures and other securities and any income earned through these investments and the
capital appreciation are shared by its unit holders in proportion to the number of units owned
by them.
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CONCEPT OF MUTUAL FUND
" mutual fund is set
up in the form of a
trust! which has
sponsor! trustees! asset
'anagement
ompany ("'& and
custodian. The trust is
established by one or
more sponsors who
are like promoters of a
company who hold its property for the benefit of the unit holders. "' approved by #=;Imanages the funds by making investments in various types of securities. #=;I registered
custodian holds the securities of various schemes of the fund in its custody. They monitor the
performance and compliance of #=;I *egulations by the mutual fund. "lso! 30H of the
directors of "' must be independent. "ll mutual funds are reBuired to be registered with
#=;I before they launch any scheme. 'utual unds diversify their risk by holding a
portfolio of asset instead of only one asset. This is because if money is hold only in one asset!
the entire fortunes of our portfolio depend on this one asset. #o by creating a portfolio of a
variety of assets! this risk is substantially reduced. 'utual und investments are not totally
risk free. In fact! investing in 'utual unds contains the same risk as investing in the
markets! the only difference being that due to professional management of funds the
controllable risks are substantially reduced.
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CLASSIFICATION OF MUTUAL FUNDS
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#Bchange Traded &unds :#T&s> =Ts invest in stocks underlying a particular stock index
like 6#= 6ifty or ;#= #ensex. They are similar to an index fund with one crucial difference.
=Ts are listed and traded on a stock exchange. In contrast! an index fund is bought and sold
by the fund and its distributors.
#@uity TaB Saving Schemes These work on similar lines as diversified eBuity funds and
seek to achieve longterm capital appreciation by investing in the entire universe of stocks.
The only difference between these funds and eBuitydiversified funds is that they demand a
lockin of 2 years to gain tax benefits.
!ynamic &unds These schemes alter their exposure to different asset classes based on the
market scenario. #uch funds typically try to book profits when the markets are overvalued
and remain fully invested in eBuities when the markets are undervalued. This is suitable for
investors who find it difficult to decide when to Buit from eBuity.
,alanced Schemes These schemes seek to achieve longterm capital appreciation with
stability of investment and current income from a balanced portfolio of high Buality eBuity
and fixedincome securities.
MediumCTerm !ebt Schemes These schemes have a portfolio of debt and money market
instruments where the average maturity of the underlying portfolio is in the range of five to
seven years.
ShortCTerm !ebt Schemes These schemes have a portfolio of debt and money market
instruments where the average maturity of the underlying portfolio is in the range of one to
two years.
Money Mar8et !ebt Schemes These schemes invest in debt securities of a shortterm
nature! which generally means securities of less than oneyear maturity. The typical short
term interestbearing instruments these funds invest in Treasury ;ills! ertificates of /eposit!
ommercial Paper and Inter ;ank all 'oney 'arket.
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MediumCTerm /ilt Schemes These schemes invest in government securities. The average
maturity of the securities in the scheme is over three years.
ShortCTerm /ilt Schemes These schemes invest in government securities. The securities
invested are of short to medium term maturities.
&loating $ate &unds They invest in debt securities with floating interest rates! which are
generally linked to some benchmark rate like 'I;$*. loating rate funds have a high
relevance when interest rates are on the rise helping investors to ride the interest rate rise.
Monthly "ncome Plans :M"PS> These are basically debt schemes! which make marginal
investments in the range of 103H in eBuity to boost the scheme>s returns. 'IP schemes are
ideal for investors who seek slightly higher return that pure longterm debt schemes at
marginally higher risk.
M%T%A+ &%N! T'P#S
ere the investors money is pooled in and then managed by professionals to maximi:e
diversification within a set strategy. It has typesE open ended and close ended. The
difference is in how the fund is structured in terms of ownership.
*penC#nded Schemes C These do not have a fixed maturity. "n investor can deal directly
with the 'utual und for their investments and redemptions. The key feature of this scheme
is liBuidity. "n investor can conveniently buy and sell their units at 6et "sset ?alue (F6"?F&
related prices.
)loseC#nded SchemeE These schemes have a stipulated maturity period. "n investor can
directly invest at the time of initial issue but thereafter they can buy or sale the units on the
stock exchanges when they are listed. The market price at the stock exchange could vary
from the scheme>s 6"? on account of demand and supply situation! Cnit holders>
expectations and other market factors. $ne of the characteristics of the closeended #chemes
is that they are generally traded at a /iscount to 6"? but closer to maturity! the discount
6arrows.
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!"&$#NT M*!#S *& $#)#"V"N/ "N)*M#
/rowth Plan In this plan! dividend is neither declared nor paid out to the investor but is
built into the value of the 6"?. In other words! the 6"? increases over time due to such
incomes and the investor reali:es only the capital appreciation on redemption of his
investment.
"ncome Plan In this plan! dividends are paidout to the investor. In other words! the 6"?
only reflects the capital appreciation or depreciation in market price of the underlying
portfolio.
!ividend $eCinvestment Plan In this case! dividend is declared but not paid out to the
investor! instead! it is reinvested back into the scheme at the then prevailing 6"?. In other
words! the investor is given additional units and not cash as dividend.
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BUILDING WEALTH IN EMIS
=very mutual fund advertisement you come across has that statuary warningE Mutual Fund
Investments are subject to Market risks, please read the offer document carefully before
investing. The risk being mentioned in this warning is with reference to the volatility in the
eBuity market.
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&or eBample Imagine a pensioner who needs *s 10!000 a month for expenses but gets a
monthly dividend of only *s 5!000. e would be better off with an #
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,%T ?#$# D T?"N/S T* DAT)? *%T &*$ A$#C
'ake sure you take an #
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'utual unds in India are open to investment by $esidents including *esident Indian
Individuals@C! Indian ompanies@Partnership irms! Indian Trusts@haritable Institutions!
;anks@inancial Institutions! 6on;anking inance ompanies! Insurance ompanies!
Provident unds! and 'utual unds! Non $esidents including6on*esident Indians! and
Persons of Indian $rigin! $verseas orporate ;odies ($;s& and &oreign entities4 viE.
oreign Institutional Investors (IIs& registered with #=;I.
INVESTORS RIGHTS AND OBLIGATIONS
The offer document of a scheme lays down the investors2rights. Investors are the owners
of the scheme>s assets! and it is! therefore! very important that they are aware of their rights
with respect to scheme>s assets! its management! and recourse to the trustees! the "' and
the other constituents. The important rights of the unitholders are to proportionate
Nbeneficial $wnership ! to get timely service and information! wind up a #cheme and to
terminate the "'
+#/A+ +"M"TAT"*NS T* "NV#ST*$S2$"/?TS
=xcept in certain circumstances the sponsors of a mutual fund do not have any legal
obligation to meet the shortfall in case the assured return is not achieved.
$nly if the offer document has specifically provided such a guarantee by a named
sponsor! the investor will have the right to sue the sponsors to make good any
shortfall in promised returns
"ny prospective investor does not en-oy any standing or rights with respect to the
fund! "' or any other constituents.
LEGAL FRAMEWORK AND SEBI GUIDELINES
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To manage the smooth working and functioning of "'>s and the mutual funds there are
various regulatory bodies present like #=;I! *;I! "'I! #*$ etc. . " brief description about
them is as followsE
S#," 7 the )apital Mar8et
$egulator registers all the mutual
funds! issues guidelines for alloperations as where they can
invest! investment limits and restrictions! how they should account for income and expenses!
disclosures of information to the investors and generally act in the interest of investor
protection.
$," 7 The Money Mar8et $egulator reviews the capital adeBuacy and financial
implications of the guaranteeing bank. "ny fund mergers of banksponsored funds with
others will also involve *;I approvals. owever! the *;I no longer issues guidelines on
bankowned fundsD operations. *ecently! the *;I has decided to disallow all nonCban8ing
entities access to the interCban8 call money mar8et. This means that liBuid funds can no
longer invest in the call money market.
Stoc8 #Bchanges are selfregulatory organi:ations supervised by #=;I. 'any closedend
schemes of mutual funds are listed on one or more stock exchanges! sub-ect to regulations
like trading! clearing! transfer and settlement of buying and selling of mutual fund units in
the markets through a listing agreement.
SelfC$egulatory *rganiEations represent a group of market participants! who are specially
empowered to exercise predefined authority over the regulation of their members. They
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have powers to regulate the criteria and procedures for admission of its members! set of code
of conduct for their members2mar8et activities4 determine the professional rules and
bylaws of the association! involve the market players in the regulatory process and ensure
that the regulatory policies and procedures do not ignore market realities or become
unmanageable for the apex regulatory body.
Association of Mutual &unds in "ndia :AM&"> is an apex body of all "sset 'anagement
ompanies ("'& which has been registered with #=;I. It functions under the supervision
and guidelines of its ;oard of /irectors. Its principle objectives are to promote the interest
of mutual fund and unitholders! and interact with #=;I@*;I@)ovt.@regulators! to set and
maintain ethical! commercial and professional standards in the industry and to recommend
and promote best business practices and code of conduct to be followed by members and
others engaged in the activities of mutual fund and asset management! to undertake investor
awareness programmes! and to disseminate information on the mutual fund industry etc.
FINANCIAL ANALYSIS
"ll said and done but until and unless a practical revelation is made no learning is complete.
or the same I have chosen 'CTC"+ C6/E " T$$+ $ preference in this regard. It will involve both practical and theoretical
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analysis. This study will help me in classifying the investors in groups of conservative!
moderate and aggressive and thus help us to identify their needs and provide them solution
accordingly.
This study will involve filling a Buestionnaire by the clients which will help in profiling the
investors on the basis of answers provided by them. This will help to -udge the popularity of
mutual fund among the various investment options available to the investors nowadays.
QUESTIONNAIRE
The Buestionnaire designed to get the investors viewpoint on mutual fund and surveying their
preference of investment avenues is given in the annexure.
ANALYSIS OF PRIMARY DATA
$n the basis of outputs (which are shown in the annexure& the various factors which are
taken into consideration while deciding about buying of a mutual fund can be interpreted.
These ranges of factors begin with investor perception! the promised return! the attractiveness
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of the offer! etc.
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#=C*ITK and +IACI/ITK. They are been given ranks from 1 to 9. =very individual
consider them and gives them importance on the basis of their investment ob-ective! risk
return attitude! age! income level! amount invested etc. "n analysis of them is given belowE
Priority Of Decision Risk
Frequency Percent Valid Percent Cumulative
Percent
valid1
2
3
4
total
F3
0F
02
93
05F
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valid1
2
3
4
total
0F
66
2F
F1
05F
0
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valid1
2
3
4
total
02
23
5F
93
05F
=.0
03.6
35.3
62.0
0
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The above pie graph shows the reasons for not holding mutual funds by certain investors.
#ome of the reasons that came up while learning about mutual funds where lack of
awareness! too technical! perceived as unsafe investment! volatile market! not interested!
extra expenses involved! not meant for low earning people! etc. out of them only lack ofawareness! too technical! perceived as unsafe investment! volatile market were taken into
consideration and rest were clubbed into other reasons. ere we see that out of 147
respondents only 17 do not know about mutual funds.
The reason that holds top priority for not investing is perceived as unsafe investment@volatile
market! this may be because of the current fluctuations in the stock market as well as the
change in market conditions due to hike in inflation rate. =ven 3 out of 7 respondents gave
lack of awareness as their answer. This means that still mutual funds are in their initial stage
and the "sset 'anagement ompanies ("'>s& really need to promote themselves harder to
come into the investment purview of people and prove mutual fund as a tool of wealth
creation.
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'utual funds normally come out with an advertisement in newspapers publishing the date of
launch of the new schemes. Investors can also contact the agents and distributors of mutual
funds who are spread all over the country for necessary information and application forms.
orms can be deposited with mutual funds through the agents and distributors who provide
such services. 6ow a day! the post offices and banks also distribute the units of mutual
funds .owever! the investors should please note that the mutual funds schemes being
marketed by banks and post offices should not be taken as their own schemes and no
assurance of returns is given by them. The only role of banks and post offices is to help in
distribution of mutual funds schemes to the investors.
Investors should not be carried away by commission @ gifts given by agents @ distributors for
investing in a particular scheme. $n the other hand they must consider the track record of the
mutual fund and should take ob-ective decisions.
AGE DECIDES MUTUAL FUND
To decide which funds would be most appropriate for one to invest the hard earned money
one must first decide on what he@she would like to accomplish with the investments.
These are the Buestions you must answer that are uniBue to your situationE
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)enerally twenties and thirties are a time of beginningsE career! marriage! children! first
home! etc. It is also a good time to begin investing in mutual funds. s assets into fixed income funds to increase income for
living expenses or leisure activities.
MUTUAL FUNDS v/s SENSEX
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'utual funds on an average give an annuali:ed return of 2023H (without considering
inflation& while a return of 320H if inflation is also considered. =ven after so many up and
downs in the stock market since last 3 years! 'utual unds gave excellent returns! which no
other financial avenue has given.
#ince Inflation is one of the most important factor in the economy. #o while calculating the
returns we cannot ignore this important aspect. "nflation is the rate at which the general level
of prices for goods and services is rising! and subseBuently! purchasing power is falling.
%eeping a close eye on inflation is most important for fixed income investors as future
income streams must be discounted by inflation to determine how much value today money
will has in the future.
or stock investors! inflation! whether real or anticipated! is what motivates us to take on the
increased risk of investing in the stock market! in the hope of generating the highest real rates
of return. *eal returns are the returns on investment that are left standing after commissions!
taxes! inflation and all other frictional costs are taken into account. "s long as inflation is
moderate! the stock market provides the best opportunity in comparison to fixed income and
cash.
The following table shows the comparison of mutual fund return with returns of bank fixed
deposit.
,AN &!S M%T%A+ &%N!
"nvestor1s taB brac8et 20H 0H)rowth Plan /ividend
Plan
PreCtaB return 10H 10H 10H 10H
PostCtaB return 5H 7H 8H 7.53H
"nflation 4.3H 4.3H 4.3H 4.3H
This is -ust for illustrative purposes only. owever the actual returns may vary. Cnder the
growth plan! long term capital gains tax 10H (without surcharge& has been considered
assuming a one year plus hori:on. Cnder the dividend plan! it is assumed that the entire gains
are distributed. #urcharge has not been taken into consideration.
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The results give a clear picture that the returns of mutual fund are high above the returns of
bank />s even after considering the inflation! although the returns in growth and dividend
option comes out to be different. "lso the returns under bank />s vary according to the
investors tax bracket he lie in.
6ow let us take an example of current scenario. "n average inflation rate of 3.3H as being
considered and then the calculations of returns have being done. onsidering the
performance of 'utual unds over the last 10 years! as on 'ay 14! 007! the average return
of top 3 diversified eBuity 'utual und schemes is 2H to 94H ")*! whereas the ;#=
#ensex has grown only 0H ")*. It implies that *s. 100000 invested in 'utual unds 10
years back only would have grown to *s. 0.09 lakhs! whereas the same amount invested in
;#= #ensex companies would have grown to only *s. 9.20 lakhs. This is power of active
management of our wealth.
This tells that mutual funds are far better than the fixed return instruments like /! P!
)ratuity! ;onds! Traditional tools like %?P etc.
TAX IMPLICATION OF MUTUAL FUND
$* /$'=#TI $*P$*"T= I6?=#T$*#
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TA- #%"T' !#,T
Short Term )apital /ains 13H 20H
+ong Term )apital /ains
No capital gains taBable.
owever! securities transaction tax
payable at 0.3H of redemption
price.
0H with the cost inflation index
benefit or 10H without the cost
inflation index benefit! whichever
isbeneficial!ividend "ncome Nil Nil
!ividend !istribution TaB 6il
.44H (including surcharge of
10H and education cess of 2H on
the amount of tax plus surcharge&
on dividend distributed.
T!S 6il 6il
$* *=#I/=6T I6/I?I/C"+ I6?=#T$*#
TA- #%"T' !#,T
Short Term )apital /ains 13H
"dded to Individuals Income!
therefore as per Individuals tax
bracket
+ong Term )apital /ains
No capital gains taBable.
owever! securities transaction tax
payable at 0.3H of redemption
price.
0H with the cost inflation index
benefit or 10H without the cost
inflation index benefit! whichever
isbeneficial!ividend "ncome Nil Nil
!ividend !istribution TaB 6"
19.143H (Including a surcharge
of 10H Q an additional surcharge
by way of education cess of 2H on
the amount of tax R surcharge&
TaB !educted at Source 6il 6il
$* 6$6 *=#I/=6T I6/I"6# (6*I>#&
TA- #%"T' !#,T
Short Term )apital /ains 13H
"dded to Individuals Income!
therefore as per Individuals tax
bracket
+ong Term )apital /ains
No capital gains taBable.
owever! securities transaction tax
payable at 0.3H of redemption
price.
0H with the cost inflation index
benefit or 10H without the cost
inflation index benefit! whichever
isbeneficial
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!ividend "ncome Nil Nil
!ividend !istribution TaBNil
19.143H (Including a surcharge
of 10H Q an additional surcharge
by way of education cess of 2H on
the amount of tax R surcharge&
TaB !educted at Source#hort Term apital )ain20H
+ong Term apital )ain 6il
#hort Term apital )ain20H
+ong Term apital )ain 0H
with indexation benefit
rom the above 2 tables we could make out that the dividend received under the mutual
funds is taxfree. This is the biggest advantage of mutual funds. /ifference could be clearly
seen in dividend distribution tax! debt funds! which is highest for the corporate investors of
.44H. owever! in dividend distribution tax! an eBuity fund! there is not tax applicable.
The tax deducted at source is also nil for corporate investors and individual investors but for
6*I>s is charged for both eBuity and debt schemes. 6*I>s are charged for both short term
capital gain as well as long term capital gain. The long term capital gain is also tax free under
all three categories except that there is a 0.3H security transaction charge applicable.
RUPEE COST AVERAGING
$upee )ost Averaging is a strategy involving investing a fixed amount of money at regular
intervals! irrespective of market conditions. It enables investors to buy less when prices are
high and buy more when prices are low.
It involves the concept of &V G PV :0 H r> n
&V S uture ?alue
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PV S Present ?alue (the more you save! makes a difference&
r S *ate of *eturn@ oupon *ate (The more you earn! makes a difference&
n S 6o. of compounding periods (The sooner you start! makes a difference&
M*NT? AM*%NT NAV %N"TS
1 1000 1.00 72.222
1000 11.00 80.808
2 1000 12.00 54.82
9 1000 13.00 44.445
3 1000 19.00 51.98
4 1000 1.00 72.222
5 1000 10.00 100.000
7 1000 8.00 111.111
8 1000 11.00 80.808
10 1000 7.00 13.00011 1000 10.00 100.000
1 1000 1.00 72.222
Ma8ing Volatility Dor8 for you
"verage #ales Price of CnitsE *s. 11.9
"verage Purchase ost of CnitsE *s. 11.07
This is the benefit of averaging that we get the benefit of buying more units when price is
low and get low units when price is high! and also average our funds irrespective of volatilemarket conditions.
+et us take a practical example of a fund and find out its return since the date of its inception
if investment is made on monthly basis.
;luechip und v@s #ensex
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Sc!eme "ame Date "#V
Franklin India Bluechip - Growth Monday, July 28, 2008 133.3!!
ranklin India ;luechip und was launched as a closeend fund and became openended in
,an1885. +et us assume! a systematic investment of *s. 1000 per month is made since ,une
1887E
Total investment made till ;uly 604 2
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more experience! knowledge! and ability to focus on -ust a single area of expertise than
the average investor when it comes to deciding which securities to buy and sell.
!"V#$S"&")AT"*N 'utual unds invest in a number of companies across a broad
crosssection of industries and sectors which reduces the risk because seldom do all
stocks decline at the same time and in the same proportion. $ne achieves this
diversification through a 'utual und with far less money than one can do on his own.
)*NV#N"#NT A!M"N"ST$AT"*N Investing in a 'utual und reduces paperwork
and helps an individual avoid many problems such as bad deliveries! delayed payments
and follow up with brokers and companies. 'utual unds save time and make investing
easy and convenient.
$#T%$N P*T#NT"A+ $ver a medium to longterm! 'utual unds have the potential
to provide a higher return as they invest in a diversified basket of selected securities.
+*D )*STS 'utual unds are a relatively less expensive way to invest compared to
directly investing in the capital markets because the benefits of scale in brokerage!
custodial and other fees translate into lower costs for investors.
+"%"!"T' In openend schemes! the investor gets the money back promptly at net
asset value related prices from the 'utual und. In closedend schemes! the units can be
sold on a stock exchange at the prevailing market price or the investor can avail of the
facility of direct repurchase at 6"? related prices by the 'utual und.
T$ANSPA$#N)' Individual get regular information on the value of investment in
addition to disclosure on the specific investments made by scheme! the proportion
invested in each class of assets and the fund managerDs investment strategy and outlook.
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&+#-","+T' Through features such as regular investment plans! regular withdrawal
plans and dividend reinvestment plans! one can systematically invest or withdraw funds
according to your needs and convenience.
A&&*$!A,"+"T' Investors individually may lack sufficient funds to invest in high
grade stocks. " mutual fund because of its large corpus allows even a small investor to
take the benefit of its investment strategy.
D#++ $#/%+AT#! "ll 'utual unds are registered with #=;I and they function
within the provisions of strict regulations designed to protect the interests of investors.
The operations of 'utual unds are regularly monitored by #=;I. It notified regulations
in 1882 (fully revised in 1884& and issues guidelines from time to time. 'utual unds
either promoted by public or by private sector entities including one promoted by foreign
entities are governed by these *egulations.
A!!"T"*NA+ S#$V")#S #ome mutual funds offer additional services to their
shareholders! such as tax reports! reinvestment programs! and automatic withdrawal and
contribution plans.
DISADVANTAGES OF MUTUAL FUND N* /%A$ANT##S6o investment is risk free. If the entire stock market declines in
value! the value of mutual fund shares will go down as well! no matter how balanced the
portfolio. Investors encounter fewer risks when they invest in mutual funds than when
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they buy and sell stocks on their own. owever! anyone who invests through a mutual
fund runs the risk of losing money.
#S AN! )*MM"SS"*NS "ll funds charge administrative fees to cover their day
today expenses. #ome funds also charge sales commissions or FloadsF to compensate
brokers! financial consultants! or financial planners. =ven if an investor doesnDt use a
broker or other financial adviser! he will pay a sales commission if he buys shares in a
+oad und.
TA-#S /uring a typical year! most actively managed mutual funds sell anywhere from
0 to 50 percent of the securities in their portfolios. If the fund makes a profit on its sales!
the investor will pay taxes on the income he receives! even if he reinvests the money he
makes.
MANA/#M#NT $"S
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?*ST *& S#)T*$ SP#)"&") J T?#MAT") &%N!S
The Indian mutual funds are now allowed to invest in foreign securities. $n the anvil are
goldfunds! real estate funds Q capital protection funds. und of funds! exchange traded
funds midcap funds! fixed maturity plans Q arbitrage funds have all made their
appearance.
$#T%$N *& )+*S# #N!#! &%N!S
Cntil #=;I changed the rules for amorti:ing initial issue expenses! funds could charge
4H Q amorti:e it over a 3year period which allowed "'s to push their new funds by
offering commission as high as 34H.
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#ince private players were allowed in 1882! the Indian 'utual fund industry has witnessed a
sea change in the way it operates! in the regulatory and investor attitude towards 'utual fund
products. rom a single player in 1875 today there are 29 mutual funds offering as many as
955 schemes. The total assets under management have risen to G45.1 billion in year 004.
owever! the accolades regarding the growth of the ' industry should be reserved until this
growth is analy:ed taking the ' industry in other developed countries in consideration.
ere are certain statistics that reflect that Indian 'utual fund industry still has a long way to
go when compared to global standardsE
A%M AS A P#$)#NTA/# *& /!P Inmost of the developed countries the total assets under management ranges from
20H 40H of the )/P. Total assets under management are only 8.3H of the )/P
in case of India.
P#N#T$AT"*N *& M%T%A+ &%N!
In India it is estimated that 4.5H of the households hold mutual funds. This figure
is close to 30H in case of the C# and 15H in case of C%. 'utual funds account
for only 0.52H of total financial assets in India (11H of bank deposits&. "C' for
'utual funds had exceeded the bank deposits in C# in as early as 1887.
#-"ST"N/ T'P#S *& &%N!S
In India commodity mutual funds! gold mutual funds! real estate J fund and
exchange traded fund are still under process to come while in countries like C#
and C% the ma-or chunk of investment goes into these funds. 'oreover the
number of funds operational in India is about 29 where as in C#" it is about 700.
CONCLUSION
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ustomer orientation is necessary in a market like India where the market is turning
competitive due to large number of players with varied financial instruments. This study has
made an attempt to understand the financial behavior of ' investors in connection with the
scheme preference and selection.
*unning a successful ' reBuires complete understanding of the peculiarities of the Indian
#tock 'arket and also the psyche of the small investor. This study has made an attempt to
understand the investment behavior of an individual. ence! surveys similar to the present
one need to be conducted at intervals to develop useful models. 6evertheless! it is hoped that
the survey findings will have some useful managerial implication for the "'s as well as for
the distributing firms in their product designing and marketing.
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"n investor avails an annuali:ed return of 320H after considering the inflation. The beauty
of the return is that these returns are taxfree. "ny income from redemption of 'utual und
after one year forms part of long term capital gain and thereby income is completely tax free.
In fact! the =+## (=Buity linked #aving #chemes& is giving on an average an annuali:ed
return of 2023H! which is taxfree return.
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It is important to study the present industry scenario to gain a better understanding of the
impediments to the growth of the industryE
+A) *& "NV#ST*$ ADA$#N#SS
*etail investors had a wrong notion about mutual funds as an investment avenue. The
benefits of risk diversification! professional management and ease of administration involved
while investing in mutual funds are not clearly understood. %nowledge of financial products
is inbuilt in school and college curriculum in countries like C%! C# and rance and the same
should be followed in the Indian context too.
"NV#ST*$ $"S APP#T"T#
=Buity funds account for 20H of the total "C' in India. This figure is more than 30H in
most developed countries. reBuent stock market scams and the bust of technology sector
specific 's have contributed to this worry. The growth in mutual funds has come through
the growth in investments in short term instrument like 'oney 'arket 'utual unds which
account for 90H of "C'.
?"/?#$ $#T%$NS *& A+T#$NAT"V# !#,T "NST$%M#NTS
)overnment guaranteed schemes provide risk free returns at competitive rates of returns.
This is why mutual funds are facing difficulty in competing with the retail business. #o the
companies should compete on this factor and try to overcome it.
)*N)#NT$AT"*N *& )*$P*$AT# "NV#ST*$S
'utual funds have become overly attractive to corporate investors because of higher returns
than bank deposits and ability to distribute capital gains tax. orporate investors account for
35H of the "C' (by value&. Though the turnover rates have increased the average fund in
management has grown by only 3H in the past 9 years which shows the lack of growth in
funds under management in India because of the absence of long term investors. Thus it
should also be promoted as a retail product for everyone who wants to invest.
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!"ST$",%T"*N
$ne of the ma-or factors impacting the growth of mutual fund industry is the absence of any
regulation in distribution of mutual funds. 'utual fund investors need distributors who are
able to inform them about the efficacy of distribution product for a particular risk profile and
stage in life cycle. +ack of distributor awareness and the absence of any disclosures from
distributors make wrong selling of ' products commonplace. "lso penetration in rural
areas is a problem. $nly 2H of rural households own mutual funds. #o the companies so
work on this aspect also and try to penetrate this investment option to every village and city
to earn revenues and profits along with providing a better investment option to people.
APPENDICES
ANAND RATHI
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"nand *athi is a leading full service securities
firm providing the entire gamut of financial
services. The firm! founded in 1889 by 'r.
"nand *athi! today has a pan India presence as
well as an international presence through offices
in /ubai and ;angkok. "* provides a breadth
of financial and advisory services including
wealth management! investment banking!
corporate advisory! brokerage Q distribution of
eBuities! commodities! mutual funds and
insurance all of which are supported by
powerful research teams.
The firmDs philosophy is entirely client centric!
with a clear focus on providing long term value addition to clients! while maintaining the
highest standards of excellence! ethics and professionalism. The entire firm activities are
divided across distinct client groupsE Individuals! Private lients! orporate and Institutions
and was recently ranked by "sia 'oney 004 poll amongst #outh "siaDs top 3 wealth
managers for the ultrarich.
ABOUT LOO
"nand *athi is written in gold lettering with a green
background. It stands for turning your money to gold.
)reen is the colour of money and growth. The gold
lettering indicates wealth and prosperity. The font is
classy and serious. It gives a personal feel! a sense of security of your money being in safe
hands. The baseline Dbehind every successful investor>is understated.D
That>s keeping in line with our philosophy of being client centric. The focus is on client.
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*ILESTONES
0113 #tarted activities in consulting and Institutional eBuity sales with staff of 13
0119 #et up a research desk and empanelled with ma-or institutional investors
011= Introduced investment banking businesses *etail brokerage services launched
0111 +ead managed first IP$ and executed first ' Q " deal
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MA$"TA+ STAT%S /#N!#$
A)A!#M") %A+"&")AT"*N
0. Dhat is your ageK
;elow 3 3 to 23 23 to 93 93 to 33 33 and above
2. Dhat is your occupationK
)ovt. =mployee
#elf =mployed
#tudent
Professional (/octor! "! =ngineer etc.&
$ther
6. ?ow much is your average annual incomeK
;elow *s.200000
*s.200! 000 to *s.700! 000
*s.700! 000 to *s.1200! 000
*s.1! 200! 000 to *s.! 000! 000
*s.! 000! 000 and above
3. ?ow much do you save annuallyK
0H to 3H
3H to 13H
13H to 20H
20H to 93H
93H or more
9. "n the neBt five years4 you eBpect that your income will
/ecrease slightly
*emain about the same
Increase slightly
Increase dramatically
5. Dhat is your primary objective for investmentK
#aving the Principal "mount
urrent Income
)rowth and Income
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+ow )rowth
igh )rowth
=. Dhich of these investment options are you most comfortable withK
=Buity #hares! Preference #hares! /ebentures! Public #ector ;onds! #avings ertificates!
)ilt=dged #ecurities and 'oney 'arket #ecurities
;ank /eposits! Post $ffice /eposits! ompany ixed /eposits! Provident und #chemes!
6ational #avings #chemes and +ife Insurance.
*eal =state! )old Q #ilver! Precious #tones! *are oins Q #tamps and "rt $b-ects.
If mix of above! Please specifyVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV
F. Are you satisfied with the returns from your investmentsK
Cnsatisfied
#omewhat #atisfied
Indifferent #atisfied
?ery #atisfied
1. Dhat is your appetite for ris8 and returnK
igh risk high return
+ow risk low return
igh risk low return
+ow risk high return
0
*isk *eturn #ecurity +iBuidity
00. 'ou would prefer to have
M!"%$rise and fall in the value of your account! but regularly earn a lower return on your
investments.
#ome rise and fall in the value of your account! but earn a normal return.
6oticeable monthly rise and fall in the value of your account! but earn a higher return.
6oticeable daily rise and fall in the value of your account! but earn the highest possible
return.
02. Dhat is the time horiEon for your investmentK
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?ery short ( 9weeks&
'oderate (around 1 year&
+ong (1 J 3 years&
?ery long (more than 3 years&
06. ?ave you ever used mutual funds as an investment toolK
Kes
6o
If Dyes5then move to next Buestion or else please move to A 15
03. ?ow did you come to 8now about Mutual &undK
Print 'edia (6ewspapers @ 'aga:ines&
=lectronic media (T? @ Internet&
;rokers @ "gents
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ST*) monitoring of the market research! which is beyond
individual
!"V#$S"&")AT"*N ?ery difficult for an investor =asy as diversified funds are
available
P$*SS"*NA+MANA/#M#NT
6o such speciali:ation isavailable.
They employ people whospeciali:e in wealth
management
"NV#STM#NT
*,;#)T"V#S
Income or growth Income! growth or tax saving
+"%"!"T' ighly liBuid $pen and close ended option
T$ANSA)T"*N )*STS igh (;rokerage! stamp duty!
commissions! etc.&
'oderate (only charges a
management fees
)*NV#N"#N)# annot switch to other eBuitystock.
#witch over to the otherscheme within the family of
fund house.
FREQUENTLY USED TERMS
N#T ASS#T VA+%# The performance of a particular scheme of mutual fund is
denoted by the 6et "sset ?alue (6"?&. 6et "sset ?alue is the market value of the assets
of the scheme minus its liabilities. Per unit 6"? is the net asset value of the scheme
divided by the number of units outstanding on the ?aluation /ate. or =xample 'utual
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und U owns a portfolio of stocks worth *s. 40! 00!000 its liabilities are *s.40! 000 and
its shareholders own 300!000 shares. Then
Net Asset Value :NAV> G 'arket ?alue in /ollars of a und>s #ecurities 'inus
It>s +iabilities (*s.40! 00!000 J *s.40! 000&
6umber of Investor #hares $utstanding (300!000&
S *s. 11.77
#ince market values of securities changes every day! 6"? of a scheme also varies on a day to
day basis. 6"? is reBuired to be disclosed by the mutual funds on a regular basis J daily or
weekly J depending on the nature of the scheme.
SA+#S P$")# Is the price you pay when you invest in a scheme! also called $fferPrice. It may include a sales load.
$#P%$)?AS# P$")# Is the price at which a closeended scheme repurchases its
units and it may include a backend load. This is also called ;id Price.
$#!#MPT"*N P$")# Is the price at which openended schemes repurchase their
units and closeended schemes redeem their units on maturity. #uch prices are 6"?
related.
SA+#S +*A! Is a charge collected by a scheme when it sells the units. "lso called!
Wrontend>load. #chemes that do not charge a load are called W6o +oadD schemes.
$#P%$)?AS# *$ L,A) 7 #N! +*A! Is a charge collected by a scheme when
it buys back the units from the unit holders.
REFERENCES
X www.amfiindia.com
X www.moneycontrol.com
X finance.indiamart.com
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X finance.yahoo.com
X www.fool.com
X www.articlesbase.com
X www.hsbcinvestments.co.in
X www.hedgeweek.com
X www.investorwords.com
X www.mutualfundsindia.com
X www.outlookmoney.com
X www.riversource.com@rvsc@global@docs@[email protected]
X www.sec.gov@investor@[email protected]
X www.smartmoney.com
X www.standardcharteredmf.com@[email protected] 23k
X www.thehindubusinessline.com
GLOSSARY
It is very hard to understand a new sub-ect unless we know the basic vocabulary used when
talking about that sub-ect. ere I have provided a glossary of words and terms used in the
mutual fund industry.
Adviser C The organi:ation employed by a mutual fund to give professional advice on
the fundDs investments and to administer its assets.
,alanced &unds )enerally have a threepart investment ob-ectiveE 1& to conserve
the investorsD principal! & to pay current income! and 2& to promote longterm growth
of both principal and income. ;alanced funds have a portfolio mix of bonds!
preferred stocks! and common stocks.
,ear Mar8et C " sustained period in which prices of stocks or bonds drop. Csually
indicates a period of poor economic activity. The opposite of a bull market.
33
http://www.fool.com/http://www.articlesbase.com/http://www.hsbcinvestments.co.in/http://www.hedgeweek.com/http://www.investorwords.com/http://www.outlookmoney.com/http://www.riversource.com/rvsc/global/docs/qw/floating-rate.pdfhttp://www.sec.gov/investor/pubs/inwsmf.htmhttp://www.smartmoney.com/http://www.standardcharteredmf.com/learningcenter/undfloat.asp%20-%2035http://www.fool.com/http://www.articlesbase.com/http://www.hsbcinvestments.co.in/http://www.hedgeweek.com/http://www.investorwords.com/http://www.outlookmoney.com/http://www.riversource.com/rvsc/global/docs/qw/floating-rate.pdfhttp://www.sec.gov/investor/pubs/inwsmf.htmhttp://www.smartmoney.com/http://www.standardcharteredmf.com/learningcenter/undfloat.asp%20-%2035 -
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,lue )hip C The common stock of a wellknown national company with a history of
earnings growth and dividend increases! e.g.! I;'! )eneral 'otors! "TQT! etc.
,ro8er C " person in the business of effecting securities transactions for others.
)enerally paid by commission.
,ull Mar8et C " sustained period in which prices of stocks or bonds are advancing
(going up&. Csually indicates a period of economic growth. The opposite of a bear
market.
)apital /ains !istribution C
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Net Asset Value Per Share :NAV> C This is the market value of a mutual fundDs total
net assets! divided by the number of shares outstanding.
*penC#nd Mutual &und C The more technical description of a mutual fund. The
term openend refers to the fact that this type of mutual fund is continuously offering
new shares to investors as well as redeeming! or buying! them back.
Prospectus C The official booklet that describes a mutual fund. The prospectus
contains information as reBuired by the #ecurities and =xchange ommission on such
sub-ects as the fundDs investment ob-ectives and policies! services! fees! restrictions!
officers and directors! how shares are bought and redeemed! and the fundDs financial
statements.