literature review by rogen

8/6/2019 Literature Review by ROGEN

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Literature Review:

Topic: Performance on Mutu al Fu nds as an effec tiv e investmen t compared to b ank

depos it s with respec t t o conser va tiv e r isk prof ile inves tors.

Sub m itt ed by

R ogen Varg hese J aco b

TKM I ns titut e of M anagemen t


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L it era tu re R eview

MUTUAL

FUNDIn todays market people i n vest mo n ey to gai n more. So whe n they take i n to accou n t, they

mostly look out for In vestme n t Compa n y where they ca n get more i n come.Mutual fu n ds n ow

represe n t the most appropriate i n vestme n t opportu n ity for all thei n vestors whether small or big.

As fi n an cial markets become more sophisticated a n dcomplex, i n vestors n eed a fi n an cial

in termediary who provides the required k n owledgea n d professio n al expertise o n successful

in vesti n g.

In vestme n t compa n ies ca n be classified i n to close-e n d a n d ope n -en d in vestme n t compa n ies.

Close-e n d is whe n it is readily tra n sferable i n the market. Ope n -en d fu n ds sell their ow n shares

to in vestors a n d ready to buy back their old shares. I f we talk about i n vestme n t optio n today, i n

In dia we have so ma n y in vestme n ts compa n ies like UT I , L I C etc. a n d all have their ow n special

ways of servici n g the customers. The i n vestors also feel that they are worth to be the part of that

compa n y. These days people mai n ly look for avoidi n g tax so n ormally they look out for

somei n vestme n ts, which will help them to do so. Whe n it comes to this poi n t of view,

peoplemai n ly look for mutual fu n d.

A mutual fu n d is a trust that pools the savi n gs of a n umber of i n vestors who shares a commo n fin an cial goal. The mo n ey thus collected is i n vested by the fu n d ma n ager i n differe n t types of

securities depe n din g upo n the objectives of the scheme. These could ra n ge from shares to

debe n tures to mo n ey market i n strume n ts a n d the capital appreciatio n realized by the scheme are

shared by the u n it holders i n proportio n to the n umber of u n its ow n ed by them. Thus a mutual

fun d is the most suitable i n vestme n t for the commo n ma n as it offers a n opportu n ity to i n vest i n a

diversified, professio n ally ma n aged portfolio at a relatively low cost. Markets for equity shares,

bo n ds a n d other fixed i n come i n strume n ts, real estates, derivatives a n d other assets have become

mature a n d in formatio n drive n . Price cha n ges i n these assets are drive n by global eve n ts

occurri n g in faraway places. A typical i n dividual is u n likely to have k n owledge, skills,

in clin atio n , an d time to keep track of eve n ts, u n dersta n d their implicatio n s a n d act speedily. A

mutual fu n d is the a n swer to all these situatio n s. I t appoi n ts professio n ally qualified a n d


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experie n ced staff that ma n ages each of these fu n ctio n s o n a full time basis. The largepool of

mo n ey collected i n the fu n d allows it to heir such staffs at a very low cost of each

in vestor.

In effect, the mutual fu n d vehicle exploits eco n omies of scale i n all three areas Research,

In vestme n t a n d Tra n sactio n processi n g. While the co n cept of i n dividual comi n g together to

in vest mo n ey collectively is n ot n ew, the mutual fu n d in its prese n t form is a 20th ce n tury

phe n ome n a.

1.2 P L ACE OF MUTUA L FUND IN FINANCIA L MARKETS

In dia n households started allocati n g more of their savi n gs to the capital markets i n 1980s, within vestme n ts flowi n g in to equity a n d debt i n strume n ts, besides the co n ven tion al mode of ba n k

deposits. The birthplace of mutual fu n d was the USA. The In dia n mutual fu n d in dustry is at a

poin t of strategic i n flectio n . I t was fou n ded with the establishme n t of UT I in 1964. The private

sector mutual fu n d e n tered the sce n e in early 1990s a n d i n troduced better services sta n dards a n d

wider product choices. The In dia n mutual fu n d in dustry has n ot performed up to the mark i n

gai n in g in vestor co n fide n ce. The assets have bee n gar n ered based o n performa n ce rather

tha n con fide n ce of i n vestor. In the primary capital market, mutual fu n ds serve as a li n k betwee n

the savi n g public a n d the corporate sector, as they cha nn elize savi n gs from i n vestors to

corporatio n s. In the seco n dary capital markets, they participate as i n vestors a n d trade with other

in vestors.

1.3 CONCE PTS AND ORIGIN OF MUTUA L FUND:

In a mutual fu n d, ma n y in vestors co n tribute to form a commo n pool of mo n ey. This pool of

mo n ey is i n vested i n accorda n ce with a stated objective. The ow n ership of the fu n d is thus joi n t

or mutual- the fu n ds belo n gs to all i n vestors. A si n gle i n vestors ow n ership of the fu n d is i n

the same proportio n as the amou n t of co n tributio n made by him bears to the total amou n t of the

fun d.

A mutual fu n d uses the mo n ey collected from i n vestors to buy those assets, which are

specifically permitted by its stated i n vestme n t objective. Thus, a growth fu n d would buy mai n ly


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equity assets- ordi n ary shares, prefere n ces shares, warra n ts, etc. A n in come fu n dwould mai n ly

buy debt i n strume n ts such as debe n tures a n d bo n ds. The i n vestors ow n the fu n d assets i n the

same proportio n as their co n tributio n bears to the total co n tributio n s of all i n vestors put together.

In USA a mutual fu n d is co n stituted as a n in vestme n t compa n y a n d a n in vestor buys i n to the

fun ds, mea n in g he buys the shares of the fu n d. In In dia, a mutual fu n d is co n stituted as a Trust

an d the i n vestor subscribes to the u n its of a scheme lau n ched by the fu n d, which is where the

term U n it trust comes from. In an y case, a mutual fu n d shareholder or u n it-holder is a part ow n er

of the fu n ds assets.

The basic pri n ciples of i n vestme n t trusts are diversifyi n g the securities purchased for the trust

an d expert ma n ageme n t. I t reduces the risk of capital depreciatio n an d poor divide n ds. At thesame time the i n vestors are give n the be n efit of expert ma n ageme n t through trai n ed experie n ced

an d specialized perso nn el, which lacks i n the ordi n ary i n vestors.

There are two mai n types of i n vestme n t compa n ies. The first group is variously called

ma n ageme n t in vestme n t trust or closed e n d compa n ies i n U.S.A a n d Japa n . The seco n d are the

un it trust type a n d the most importa n t o n e. These are referred to as ope n -en din vestme n t

compa n ies or as mutual fu n ds as they are usually called.

1.4 MEANING OF MUTUA L FUND

A Mutual Fu n d is a trust that pools the savi n gs of a n umber of i n vestors who share a

commo n fin an cial goal. The mo n ey thus collected is i n vested by the fu n d ma n ager i n differe n t

types of securities depe n din g upo n the objective of the scheme. These could ra n ge from shares to

debe n tures to mo n ey market i n strume n ts. The i n come ear n ed through these i n vestme n ts a n d the

capital appreciatio n s realized by the scheme are shared by its u n it holder. . Thus a Mutual Fu n d

is the most suitable i n vestme n t for the commo n ma n as it offers a n opportu n ity to i n vest i n a

diversified, professio n ally ma n aged portfolio at a relatively low cost.

Mutual fu n d is also called u n it trust or ope n en ded trust a compa n y that i n vests the

fun ds of its clie n ts in diversified securities a n d in tur n represe n t those holdi n gs. They make


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con tin uous offeri n g of n ew shares at NAV (Net Asset Value) determi n ed daily by the market

values of the securities they hold.

1.5DEFINATION

Differe n t perso n s in differe n t words have defi n ed mutual fu n d:

The SEB I (MF) Regulatio n , 1993 defi n es mutual fu n d as A fu n d established i n the

form of a trust by a spo n sor to raise mo n ies by the trustees through the sale of u n its to the public

un der o n e or more schemes for i n vesti n g in securities i n accorda n ce with these regulatio n s.

1.6 Ch arac ter isti cs y A mutual fu n d actually belo n gs to the i n vestors who have pooled their fu n ds.

y A mutual fu n d is ma n aged by i n vestme n t professio n als a n d other service providers, who

ear n a fee for their services, from the fu n d.

y The pool of fu n ds is i n vested i n a portfolio of marketable i n vestme n ts. The value of the

portfolio is updated every day.

y The i n vestors share i n the fu n d is de n omi n ated by u n its. The value of the u n itscha n ges with cha n ge i n the portfolios value, every day. The value of o n e u n it of

in vestme n t is called the Net Asset Value or NAV.

In moder n times, o n e of the better i n vestme n t ave n ues available, particularly for the small retail

in vestors is the ave n ue of mutual fu n ds.

Mutual fu n ds have the adva n tage of diversificatio n an d professio n al ma n ageme n t. However,

some people hesitate to i n vest i n mutual fu n ds si n ce they are u n aware of the be n efits that they

can reap. Skillful a n d highly experie n ced fu n d ma n agers make i n vestme n t judgme n t based o n the

research a n d resources that most i n dividual i n vestors do n t have. They decide where to i n vest

their mo n ey based o n market i n sight, n ot worryi n g about the hassle of mo n itori n g the market or

relyi n g o n tips. Easy i n vestme n t, affordability a n d professio n al mo n ey ma n ageme n t make mutual

fun ds a simplified way for mo n ey to work.


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1.7 Mutu al Fu nd O pera tion

F low Ch ar t

1.8 R egu la tor y Auth or iti es

To protect the i n terest of the i n vestors, SEB I formulates policies a n d regulates the mutual fu n ds.

I t n otified regulatio n s in 1993 (fully revised i n 1996) a n d issues guideli n es from time to time.

MF either promoted by public or by private sector e n tities i n cludi n g o n e promoted by foreig n

en tities is gover n ed by these Regulatio n s.

SEB I approved Asset Ma n ageme n t Compa n y (AMC) ma n ages the fu n ds by maki n g in vestme n ts

in various types of securities. Custodia n , registered with SEB I , holds the securities of various

schemes of the fu n d in its custody.

Accordi n g to SEB I Regulatio n s, two thirds of the directors of Trustee Compa n y or board of


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trustees must be i n depe n den t.

The Associatio n of Mutual Fu n ds i n In dia (AMF I ) reassures the i n vestors i n un its of mutual

fun ds that the mutual fu n ds fu n ctio n withi n the strict regulatory framework. I ts objective is to

in crease public aware n ess of the mutual fu n d in dustry.

AMF I also is e n gaged i n upgradi n g professio n al sta n dards a n d in promoti n g best i n dustry

practices i n diverse areas such as valuatio n , disclosure, tra n spare n cy etc.


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1.9 TY PES OF MUTUA L FUND

There are ma n y types of mutual fu n ds available to the i n vestor. These differe n t types

of fu n ds ca n be grouped i n to certai n classificatio n s:.

1.9. 1ON THE BASIS OF STUCTURE :

a.Ope n en ded fu n ds:

An ope n -en ded mutual fu n d is o n e that has u n its available for purchase a n d sale at all time at

NAV related prices. There is free e n try a n d exit of i n vestors. A n ope n -en ded fu n d rarely de n ies

to its i n vestors the facility to redeem existi n g u n its subject to certai n obvious co n ditio n s

b. Close e n ded fu n ds:

Close-e n ded fu n ds do n ot provide the facility of subscriptio n throughout the year. I t is ope n for a

subscriptio n for a fixed duratio n as specified i n the prospective of the fu n d. In vestor ca n apply

for shares o n ly duri n g in itial offer period, followi n g which u n its ca n be bought & sold o n ly at

the stock excha n ge where they are listed at market price.

c. In terval Fu n ds

This is a mix of both ope n en ded a n d close-e n ded schemes. For a certai n stipulated period, a n

in vestor ca n buy a n d sell NAV related prices, while at some times it is traded at stock excha n ge

where it is listed.

1.9. 2 ON THE BASIS OF OBJECTIVES

a. Growth fu n ds

Growth fu n ds aim to achieve capital appreciatio n in the medium to lo n g term. These fu n ds don ot pay divide n ds, i n stead they rei n vest the retur n s. Their assets usually comprises of equity, as it

has bee n proved that equity markets provide the maximum growth i n retur n s amo n g all other

assets classes.


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b. In come fu n ds

In come fu n ds aim at ge n erati n g a n d distributi n g regular i n come to the members o n a periodical

basis. Fu n d in vests i n fixed i n come assets such as corporate debe n tures, gover n me n t securities,

bo n ds etc. it co n cen trate o n short-term gai n s.

c. Bala n ced fu n d:

Bala n ced fu n d provided both growth as well as regular i n come to the i n vestor. I t aims at

distributi n g regular i n come as well as capital appreciatio n . This ca n be achieved by bala n cin g the

in vestme n ts betwee n the high growth equity shares a n d fixed i n come securities.

d. Tax savi n g fu n ds:

These schemes offer tax rebates to i n vestors u n der specific provisio n of i n come tax act1961. I t is

suitable to salaried people who wa n tto e n joy tax rebates. Gover n me n t offers tax i n cen tives for

in vestme n t in specified ave n ues.

1.9.3 ON THE BASIS OF COM POSITION OF FUNDS:

a. Equity fu n ds:

Equity fu n ds i n vest a major portio n of their corpus i n equity shares issued by compa n ies. They

are riskiest, as they do n ot offer a n y guara n teed repayme n t NAV of equity fu n ds fluctuates with

price mome n ts caused by exter n al factors like political, eco n omic a n d social factors. In vestors

who wa n t capital appreciatio n should i n vest i n these fu n ds.

b. Debt fu n ds:

Debt fu n ds i n vest i n debt i n vestme n t issued by gover n me n t, private compa n ies, ba n ks, fi n an cial

in strume n ts etc. These fu n ds provide low risks a n d stable i n come to the i n vestors.

c. Mo n ey market mutual fu n ds:

They i n vest i n highly liquid a n d safe securities like commercial papers, certificates of deposits,

treasury bills etc. Mo n ey market fu n ds offer liquidity a n d safety of pri n cipal that a n in vestor ca n

expect from short-term fu n ds.


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d. Gilt fu n ds:

Gilt fu n ds i n vest i n gover n me n t securities a n d treasury bill. These fu n ds have less risk of default

an d he n ce offer better protectio n of pri n cipal. These fu n d provide timely payme n t of pri n cipal

an d in terest.

e. In dex fu n d:

In dex fu n ds are those fu n ds where the portfolios are desig n ed i n such a way that they reflect the

compositio n of some broad market i n dex. I t holds securities i n the same proportio n as i n dex. The

value of these i n dexes goes up whe n ever market i n dex goes up a n d vice versa. The

performa n ce of i n dex fu n d exactly follows the performa n ce stock i n dex.

f. Sector fu n ds:

Sector fu n ds i n vest o n ly in the stocks of particular i n dustry or sector. These fu n ds are riskier as

they are n ot diversified. Those i n vestors who u n dersta n d the i n dustry or sector very well may

in vest i n these fu n ds.

1.9.4 OTHER SCHEMES:

a. Loa n fun ds:

Loa n fun d charge e n try or exit load every time the i n vestor buys or sells the u n its of fu n ds. These

charges cover distributio n , sales a n d marketi n g expe n ses. The load charges to the i n vestor at the

time his e n try i n to a scheme is called e n try load. The load charged to the i n vestor at the time of

exit from the scheme is calledexit load.

b. No load fu n ds:

The fu n d that do n ot charge e n try or exit load o n sale or purchase of their u n its.


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1.10 NET ASSET VA L UE

Net asset value is the market value of the asset of the schememi n us its liabilities. The per u n it

NAV is the n et asset value of the scheme divided by the n umber of u n its outsta n din g o n the

valuatio n date.

Net A sse t V al u e (NAV) deno tes th e performance of a par ticu larsc h eme of a m utu al f und.

Mutual fu n ds i n vest the mo n ey collected from the i n vestors i n securities markets. In simple

words, Net Asset Value is the market value of the securities held by the scheme. Si n ce market

value of the securities cha n ges every day, NAV of a scheme also varies o n day-to-day basis.

The NAV per u n it is the market value of securities of a scheme divided by the total n umber of un its of the scheme o n an y particular date. For example, if the market value of securities of a

mutual fu n d scheme is Rs200 lakhs a n d the mutual fu n d has issued 10 lakhs u n its of Rs 10 each

to the i n vestors, the n the NAV per u n it of the fu n d is Rs 20. NAV is required to discloseby the

mutual fu n d o n a regular basis daily or weekly- depe n din g o n the type of scheme.

Sale pr ice

I t is the price you pay whe n you i n vest i n a scheme. Also called as offer price. I t may i n clude a

sales load

R ep u rc hase pr ice

I s the price at which a close-e n ded scheme repurchases its u n its a n d it may i n clude a back-e n d

load? This is also called Bid price.

R edemp ti on pr ice

I s the price at which ope n - e n ded scheme repurchase their u n its a n d close e n ded schemes redeem

their u n its o n maturity. Such prices are NAV related.


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Sales load

I s a charge collected by a scheme whe n it sells the u n its. Also called , Fro n t-e n d load. Schemes

that do n ot charge a load are called No Load schemes.

R ep u rc hases or Back-end load

I s a charge collected by a scheme whe n it buys back the u n its from the u n it

holders.

1.11 BENEFITS OF INVESTING IN A MUTUA L FUND:

a) Professio n al ma n ageme n t of the i n vestme n t:

Mutual fu n d appoi n ts a n experie n ced a n d professio n al fu n d ma n ager a n d several researchan alysts, who research before i n vesti n g, thus addi n g value to commo n in vestor. These

professio n als co n sta n tly keep track of market cha n ges a n d mews, predict the impact they willhave o n the i n vestme n ts a n d take quick decisio n s regardi n g the adjustme n ts to be made i n the portfolio.HOW MUTUAL FUND I S A BETTER OPT I ON THAN OTHER I NVESTMENT

b) Provides better yield:Due to large amou n t of fu n ds that the mutual fu n d ma n ages, very low costsaccrue per i n vestor. Mutual fu n d achieve eco n omies of scale i n research,tra n sactio n an d in vestme n t. I t lowers the cost of brokerage custodial a n d other charges. So they provide getter yields to their customers. All the profits of

mutual fu n ds are passed o n to the i n vestors by way of divide n d a n d capitalappreciatio n .c) Diversificatio n of risk:A commo n in vestor has limited mo n ey, which he ca n in vest o n ly in fewsecurities, a n d faces a great risk. I f their values go dow n the i n vestor looses allhis mo n ey.Sin ce mutual fu n ds have huge amou n ts of fu n ds to i n vest the fu n d ma n ager in vests i n the securities of ma n y in dustries a n d sectors. This diversificatio n reduces the risk i n volved because all the sector a n d in dustries will n ever godow n at the same time. In vestors get their diversificatio n by i n vesti n g a smallamou n t in mutual fu n d.

d) Co n ven ien t record keepi n g a n d admi n istratio n :Mutual fu n d take care of all the record keepi n g in cludi n g paperwork. I t alsodeals with the problem of bad deliveries brokers commissio n etc.HOW MUTUAL FUND I S A BETTER OPT I ON THAN OTHER I NVESTMENTe) Cha nn elisi n g the savi n g for i n vestme n t:Mutual fu n d acts as a vehicle i n galva n izin g the savi n g of the people byofferi n g various schemes suitable to the various classes of customers for developme n t of eco n omy as a whole. Mutual fi n d offers various types of


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schemes as regular i n come pla n , growth pla n , equity fu n ds, debt fu n ds a n d bala n ced fu n ds. The i n vestor ca n select a pla n accordi n g to his n eeds. In theabse n ce of mutual fu n ds, these savi n gs would have remai n ed idle.f) Flexibility:Mutual fu n d has permitted i n vestors to excha n ge their u n its from o n escheme to a n other. O n e ca nn ot derive such flexibility i n an y other in vestme n t.g) E n ables i n vesti n g in high value stocks:The i n dividual i n vestor have less mo n ey to i n vest thus ca nn ot i n vest i n bluechip compa n ies. Mutual fu n ds have huge amou n t of fu n ds a n d ca n in vest i n these high value stocks. The be n efits from these high value stocks ca n be

passed o n to all i n vestors.h) Easy liquidity:Un its ca n be sold back to the fu n d at a n y time at the NAV a n d thus quick access to liquid cash is assured. Besides bra n ches of spo n sori n g ba n k also

provides loa n agai n st u n its certificates.HOW MUTUAL FUND I S A BETTER OPT I ON THAN OTHER I NVESTMENT

j) Provides Tra n spare n cies:Mutual fu n d keeps the customers i n formed about the compositio n of allin vestme n ts i n carious asset classes from time to time. Duri n g lau n ch of mutual fu n d the offer docume n t provides i n formatio n on the objectives of the fu n ds, cost to be i n curred, e n try or exit loads to be charged to thein vestors, risk associated with fu n d, details about fu n d ma n ager, spo n sorsetck) Regulated by SEB I :Mutual fu n d are also regulated by SEB I , like equities. This is to safeguardthe i n terest of the i n vestors.l) Tax be n efits:Certai n fun d offer tax be n efits to the customers. Divide n ds i n the ha n ds of the i n vestors are exempted from tax. In vestors ca n in vest i n such schemesan d save some tax.

1.1HISTORY OF THE INDIAN MUTUA L FUND INDUSTRY:

The mutual fu n d in dustry i n In dia started i n 1963 with the formatio n of U n it Trust of In dia, at the

in itiative of the Gover n men t of In dia a n d Reserve Ba n k. The history of mutual fu n ds i n In dia ca n

be broadly divided i n to four disti n ct phases.

Fi rs t P hase : 1 964- 1987

An Act of Parliame n t established U n it Trust of In dia (UT I ) o n 1963. I t was set up by the Reserve

Ba n k of In dia a n d fu n ctio n ed u n der the Regulatory a n d admi n istrative co n trol of the RB I . In


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1978 UT I was de-li n ked from the RB I an d the In dustrial Developme n t Ba n k of In dia ( I DB I ) took

over the regulatory a n d admi n istrative co n trol i n place of RB I . The first scheme lau n ched by UT I

was U n it Scheme 1964. At the e n d of 1988 UT I had Rs.6,700 crores of AUM.

Second Phase : 1 987- 1993 (E n tr y of Pub lic Sec tor Fu nds )

In 1987 marked the e n try of n on - UT I , public sector mutual fu n ds set up by public sector ba n ks

an d Life In sura n ce Corporatio n of In dia (L I C) a n d Ge n eral In sura n ce Corporatio n of In dia

(G I C). SB I Mutual Fu n d was the first n on - UT I Mutual Fu n d established i n Jun e 1987.

Thi rd Ph ase : 1 993- 200 3 (E n t r y of Pr iva te Sec tor Fu nds )With the e n try of private sector fu n ds i n 1993, a n ew era started i n the In dia n mutual fu n d

in dustry, givi n g the In dia n in vestors a wider choice of fu n d families. Also, 1993 was the year i n

which the first Mutual Fu n d Regulatio n s came i n to bei n g, u n der which all mutual fu n ds, except

UT I were to be registered a n d gover n ed. The erstwhile Kothari Pio n eer ( n ow merged with

Fra n klin Templeto n ) was the first private sector mutual fu n d registered i n July 1993. The

in dustry n ow fu n ctio n s u n der the SEB I (Mutual Fu n d) Regulatio n s 1996.As at the e n d of Ja n uary

2003; there were 33 mutual fu n ds with total assets of Rs. 1,21,805 crores. The U n it Trust of

In dia with Rs.44, 541 crores of assets u n der ma n ageme n t was way ahead of other mutual fu n ds.

Fou r th Ph ase Si nce Feb r u ar y 200 3

In February 2003, followi n g the repeal of the U n it Trust of In dia Act 1963 UT I was bifurcated

in to two separate e n tities. O n e is the Specified U n dertaki n g of the U n it Trust of In dia with assets

un der ma n ageme n t of Rs.29, 835 crores as at the e n d of Ja n uary 2003, represe n tin g broadly, the

assets of US 64 scheme, assured retur n an d certai n other schemes.The seco n d is the UT I Mutual

Fun d Ltd, spo n sored by SB I , PNB, BOB a n d L I C. I t is registered with SEB I an d fu n ctio n s u n der

the Mutual Fu n d Regulatio n s.

1.11Ty pes of re tu rns


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There are three ways, where the total retur n s provided by mutual fu n ds ca n be e n joyed by

in vestors:

y In come is ear n ed from divide n ds o n stocks a n d i n terest o n bon ds. A fu n d pays out n early

all i n come it receives over the year to fu n d ow n ers i n the form of a distributio n .

y I f the fu n d sells securities that have i n creased i n price, the fu n d has a capital gai n . Most

fun ds also pass o n these gai n s to i n vestors i n a distributio n .

y I f fu n d holdi n gs i n crease i n price but are n ot sold by the fu n d ma n ager, the fu n d's shares

in crease i n price. You ca n the n sell your mutual fu n d shares for a profit. Fu n ds will alsousually give you a choice either to receive a check for distributio n s or to rei n vest the

ear n in gs a n d get more shares.

1.12COM PETITION IN MUTUA L FUND INDUSTRY :

Mutual fu n d is the i n dustry, which is faci n g severe competitio n from the other fi n an cial products.

The four types of competitio n in the mutual fu n d i n dustry is as follows:

y In ter-i n dustry competitio n y In tra- i n dustry competitio n

y Competitio n betwee n the differe n t mutual fu n d schemesy Competitio n betwee n the differe n t asset ma n ageme n t compa n ies.

1.13 STUCTURE OF THE INDIAN MUTUA L FUND

INDUSTRY:


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Structure wise mutual fu n d in dustry ca n be classified i n to three categories;

a. Un it t r ust of Ind ia

The In dia n mutual fu n d in dustry is domi n ated by the u n it trust of In dia, which has a total corpus

of 51000 crore collected from over 20 millio n in vestors. The UT I has ma n y fu n d/ schemes i n all

categories i n equity, bala n ced, debt, mo n ey market etc. With some bei n g ope n en ded a n d some

bei n g closed e n ded. The u n it scheme 1964 commo n ly referred to as US64, which is a bala n ced

fun d, is the biggest scheme with a corpus of about 10000 crore.

b .P ub lic sec tor m utu al f u nd

The seco n d largest categories of mutual fu n ds are the o n es floated by n atio n alized ba n ks. Ca n

ban k asset ma n ageme n t floated by ca n ara ba n k a n d SB I fun ds ma n ageme n t floated by state ba n k

of In dia are the largest of these. G I C AMC floated by ge n eral In sura n ce Corporatio n .

On lin e tradi n g is a great idea to reduce ma n ageme n t expe n ses from the curre n t 2%

of total assets to about 0.75%of the total asset.

72% of the crore-customer base of mutual fu n d i n the top 50-broki n g firms i n theUS is expected to trade o n lin e by 2003.

c.Pr iva te Sec tor Mutu al f u nd

The third largest categories of mutual fu n ds are the o n es floated by the private sector domestic

mutual fu n ds a n d the private sector foreig n mutual fu n ds. The largest of these i n private sector

domestic mutual fu n ds are Relia n ce mutual fu n d, JM capital ma n ageme n t compa n y ltd. Tata

mutual, Birla su n life asset ma n ageme n t pvt Ltd. a n d in private foreig n mutual fu n ds these are

allia n ce capital asset ma n ageme n t private ltd, Fra n klin Templeto n In vestme n ts, Su n F&C asset

ma n ageme n t private ltd, Lurich asset ma n ageme n t compa n y pvt ltd. The aggregate corpus of the

assets ma n aged by this category of amcs is about 42000 cr.


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in dustry like distributors, registrars a n d tra n sfer age n ts, a n d eve n the regulators have become

more mature a n d respo n sible.

1. Profess ional M anagemen t - The basic adva n tage of fu n ds is that, they are professio n al

ma n aged, by well qualified professio n al. In vestors purchase fu n ds because they do n ot have the

time or the expertise to ma n age their ow n portfolio. A mutual fu n d is co n sidered to be relatively

less expe n sive way to make a n d mo n itor their i n vestme n ts.

2. Div ers if ica ti on - Purchasi n g u n its i n a mutual fu n d in stead of buyi n g in dividual stocks or

bo n ds, the i n vestors risk is spread out a n d mi n imized up to certai n exte n t. The idea behi n d

diversificatio n is to i n vest i n a large n umber of assets so that a loss i n an y particular i n vestme n t

is mi n imized by gai n s in others.

3. E conom ies of Scale - Mutual fu n d buy a n d sell large amou n ts of securities at a time, thus help

to reduci n g tra n sactio n costs, a n d help to bri n g dow n the average cost of the u n it for their

in vestors.

4. L iqui d ity - Just like a n in dividual stock, mutual fu n d also allows i n vestors to liquidate their

holdi n gs as a n d whe n they wa n t.

5. Simpl icity - In vestme n ts in mutual fu n d is co n sidered to be easy, compare to other available

in strume n ts i n the market, a n d the mi n imum i n vestme n t is small. Most AMC also have automatic

purchase pla n s whereby as little as Rs. 2000, where S I P start with just Rs.50 per mo n th basis.

6. Afforda bi lity - Small i n vestors with low i n vestme n t fu n d are u n able to i n vest i n high-grade or

blue chip stocks. A n in vestor through Mutual Fu n ds ca n be be n efited from a portfolio i n cludi n g

of high priced stock.

7.R egu la ti on : All Mutual Fu n ds are registered with SEB I an d they fu n ctio n withi n the

provisio n s of strict regulatio n s desig n ed to protect the i n terests of i n vestors. The operatio n s of

Mutual Fu n ds are regularly mo n itored by SEB I .

1.16Disad van tages of Inves ti ng Mutu al Fu nds :

1. Profess ional M anagemen t- Some fu n ds do n t perform i n the market, as their ma n ageme n t is

n ot dy n amic e n ough to explore the available opportu n ity i n the market, thus ma n y in vestors


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debate over whether or n ot the so-called professio n als are a n y better tha n mutual fu n d or i n vestor

himself, for picki n g up stocks.

2. C os ts The biggest source of AMC i n come is ge n erally from the e n try & exit load which they

charge from i n vestors, at the time of purchase. The mutual fu n d in dustries are thus chargi n g

extra cost u n der layers of jargo n .

3. Di luti on - Because fu n ds have small holdi n gs across differe n t compa n ies, high retur n s from a

few i n vestme n ts ofte n do n 't make much differe n ce o n the overall retur n . Dilutio n is also the

result of a successful fu n d getti n g too big. Whe n mon ey pours i n to fu n ds that have had stro n gsuccess, the ma n ager ofte n has trouble fi n din g a good i n vestme n t for all the n ew mo n ey.

4. T axes - whe n maki n g decisio n s about your mo n ey, fu n d ma n agers do n 't co n sider your

perso n al tax situatio n . For example, whe n a fu n d ma n ager sells a security, a capital-gai n tax is

triggered, which affects how profitable the i n dividual is from the sale. I t might have bee n more

adva n tageous for the i n dividual to defer the capital gai n s liability.

5. No con trol over cos t: Sin ce in vestor does n ot directly mo n itor the fu n ds operatio n s, they

cann ot co n trol the costs effectively. Regulators therefore usually limit the expe n ses of mutual

fun ds.

6.Non-a va ila bi lity of loans : Mutual fu n ds are n ot accepted as security agai n st loa n . The i n vestor

cann ot deposit the mutual fu n ds agai n st taki n g a n y ki n d of ba n k loa n s though they may be his

assets.

7. No ta ilor-made por tfol io: Mutual fu n d portfolios are created a n d marketed by AMCs, i n to

which i n vestors i n vest. They ca nn ot made tailor made portfolio.

1.17 RISK INVO L VED IN MUTUA L FUND


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1. MARKET RISK:

Sometimes prices a n d yields of all securities rise a n d fall. Broad outside i n flue n ces affecti n g the

market i n gen eral lead to this. This is true, may it be big corporatio n s or smaller mid-sized

compa n ies. This is k n ow n as Market Risk.

2. CREDIT RISK:

The debt servici n g ability (may it be i n terest payme n ts or repayme n t of pri n cipal) of a compa n y

through its cash flows determi n es the Credit Risk faced by you. This credit risk is measured by

in depe n den t rati n g age n cies like CR I SI L who rate compa n ies a n d their paper. A n AAA rati n gis co n sidered the safest whereas a D rati n g is co n sidered poor credit quality. A well-

diversified portfolio might help mitigate this risk.

3. INF L ATION RISK:

In flatio n is the loss of purchasi n g power over time. A lot of times people make co n servative

in vestme n t decisio n s to protect their capital but e n d up with a sum of mo n ey that ca n buy less

tha n what the pri n cipal could at the time of the i n vestme n t. This happe n s whe n in flatio n grows

faster tha n the retur n on your i n vestme n t. A well-diversified portfolio with some i n vestme n t in

equities might help mitigate this risk.

4. INTEREST RATE RISK:

In a free market eco n omy i n terest rates are difficult if n ot impossible to predict. Cha n ges i n

in terest rates affect the prices of bo n ds as well as equities. I f in terest rates raise the prices of

10 bo n ds fall a n d vice versa. Equity might be n egatively affected as well i n a risi n g in terest rate

en viro n me n t. A well-diversified portfolio might help mitigate this risk.

5. PO L ITICA L/ GOVERNMENT PO L ICY RISK:


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Cha n ges i n gover n me n t policy a n d political decisio n can cha n ge the i n vestme n t en viro n me n t.

They ca n create a favorable e n viro n me n t for i n vestme n t or vice versa.

6. L IQUIDITY RISK:

Liquidity risk arises whe n it becomes difficult to sell the securities that o n e has purchased.

Liquidity Risk ca n be partly mitigated by diversificatio n , staggeri n g of maturities as well as

in ter n al risk co n trols that lea n towards purchase of liquid securities.

1.18 FACTORS AFFECTING MUTUA L FUND

1. G overnmen tal Infl u ences

Mutual fu n d busi n ess is a highly regulated busi n ess throughout the world as it seeks to e n sure

that quality a n d fairly priced schemes are available. Gover n me n tal i n terve n tio n thus i n mutual

fun d market usually is most n eeded to e n sure that i n surers are reliable. A n d in the developi n g

cou n tries the additio n al goal may be promotio n of domestic mutual fu n d in dustry a n d e n suri n g

the n atio n al mutual fu n d in dustry co n tributes to overall eco n omic developme n t. In a n on -

tech n ical se n se mutual fu n d is purchased i n a good faith so the duty of gover n me n t in terve n tio n

in mutual fu n d in dustry is to e n sure that this pri n ciple of mutual fu n d is n ever defeated.

2. T axa tion Pol icy

Social equity bei n g o n e of the motives behi n d tax collectio n s, gover n me n t gives certai n

exemptio n s from such levyi n g. O n e such exemptio n is deductio n in curred by taxpayers towards

in vestme n t in mutual fu n d coverage. Similarly, capital i n vested i n in frastructure bo n ds etc. is

offered with certai n con cessio n un der tax laws. The ce n tral idea behi n d such exemptio n s is that

the capitals so allocated by i n dividuals reduce the ultimate burde n on the public i n frastructure or

helps i n creati n g such i n frastructural facilities.


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3. Fore ign T rade R egu la tions

With the vast pote n tial for mutual fu n d in In dia due its large populatio n in the cou n try ma n y

foreig n compa n ies are ready to e n ter i n to the In dia n market. But compa n ies ca n be permitted i n

In dia through joi n t ve n tures with a n In dia n part n er as well as come separately a n d the foreig n

equity shall be restricted to o n ly 25%. A n other stateme n t also tells that In dia n subsidiaries of

foreig n compa n ies shall n ot be allowed to participate i n ban kin g sector u n less they e n tered i n to

join t ve n tures with the In dia n part n ers.

4. Na ti onal Income

The relative importa n ce of the mutual fu n d Market withi n a cou n try will also be depe n den t upo n eco n omic developme n t. With greater rates of eco n omic growth, co n sumptio n of i n vestme n t

should i n crease as a result of i n creased i n come, a n d a n in creased stock of assets requiri n g mutual

fun d. Furthermore, the developme n t of mutual fu n d is likely to facilitate greater eco n omic

growth, implyi n g that eco n omic growth may be e n doge n ous. Co n siste n t with these argume n ts,

studies fi n d that the level of fi n an cial developme n t an d eco n omic developme n t are positively

related to the level of mutual fu n d across emergi n g markets.

5. E mplo ymen t

The effect of employme n t o n mutual fu n d in dustry is as direct as that o n eco n omic developme n t

of a n y cou n try. With the risi n g levels of employme n t the effect o n mutual fu n d in dustry is

positive because employme n t adds to the i n sured properties a n d assets from every prospective be

it due to orga n ized or u n orga n ized.

6. In teres t

In terest is major factor for i n vestme n t whe n a perso n fin d less retur n from i n vestme n t tool tha n

people move towards the higher retur n s tool of i n vestme n t.


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2. BANK DE POSITS

A ba n k has three sources of fu n ds n amely (i) ba n k capital, (ii) ba n ks reserves or retai n ed

ear n in gs a n d (iii) deposits. Amo n g the three sources, deposits form the mai n compo n en t of a

ban ks source of fu n ds. The basic co n cept is that deposits are thefou n datio n upo n which ba n ks

thrive a n d grow. They provide the most raw materials for ba n k loa n s a n d other i n vestme n ts

(Rose, 2002: 387) from which a ba n k derives its mai n source of i n terest i n come. Despite

in creasi n g diversificatio n towards fee-based i n comefrom projects a n d fi n an cial advisory

services, ba n ks are relyi n g greatly o n in terest-beari n g deposits a n d assets to ge n erate i n terest


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in come a n d profits (Rose, 1997). He n ce,ba n ks compete aggressively to source more deposits

from its customers, which ca n begover n me n t, suppliers, corporatio n s, i n vestors or households

Mo n ey placed i n to a ba n kin g in stitutio n for safekeepi n g. Ba n k deposits are made to deposit

accou n ts at a ba n kin g in stitutio n , such as savi n gs accou n ts, checki n g accou n ts a n d mo n ey market

accou n ts. The accou n t holder has the right to withdraw a n y deposited fu n ds, as set forth i n the

terms a n d co n ditio n s of the accou n t. The "deposit" itself is a liability owed by the ba n k to the

depositor (the perso n or e n tity that made the deposit), a n d refers to this liability rather tha n to the

actual fu n ds that are deposited.

Ba n k deposits serve differe n t purposes for differe n t people. Some people ca nn ot save regularly;

they deposit mo n ey i n the ba n k o n ly whe n they have extra i n come. The purpose of deposit the n is to keep mo n ey safe for future n eeds. Some may wa n t to deposit mo n ey i n a ba n k for as lo n g as

possible to ear n in terest or to accumulate savi n gs with i n terest so as to buy a flat, or to meet

hospital expe n ses i n old age, etc. Some, mostly busi n essme n , deposit all their i n come from sales

in a ba n k accou n t an d pay all busi n ess expe n ses out of the deposits. Keepi n g in view

thesediffere n ces, ba n ks offer the facility of ope n in g differe n t types of deposit accou n ts by people

tosuit their purpose a n d co n ven ien ce.

For co n sen tin g to mobilize their deposits, depositors are rewarded with a pre-determi n ed

rate of retur n by the ba n k. The rate of retur n depe n ds o n the type of deposits, the deposit amou n t,

the le n gth of the maturity periods a n d the ba n ks cost of fu n ds. In ban kin g, market i n terest rate is

very i n strume n tal i n determi n in g the deposit rate.

2.1 Ty pes of Bank Depos it s

On the basis of purpose they serve, ba n k deposit accou n ts may be classified as follows:

a. Savi n gs Ba n k Accou n t

b. Curre n t Deposit Accou n t

c. Fixed Deposit Accou n t

d. Recurri n g Deposit Accou n t.


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a. Savings Bank Acco u n t: I f a perso n has limited i n come a n d wa n ts to save mo n ey for future

n eeds, the Savi n g Ba n k Accou n t is most suited for his purpose. This type of accou n t ca n be

ope n ed with a mi n imum i n itial deposit that varies from ba n k to ba n k. Mo n ey ca n be deposited

an y time i n this accou n t. Withdrawals ca n be made either by sig n in g a withdrawal form or by

issui n g a cheque or by usi n g ATM card. Normally ba n ks put some restrictio n on the n umber of

withdrawal from this accou n t. In terest is allowed o n the bala n ce of deposit i n the accou n t. The

rate of i n terest o n savi n gs ba n k accou n t varies from ba n k to ba n k a n d also cha n ges from time to

time. A mi n imum bala n ce has to be mai n tai n ed i n the accou n t as prescribed by the ba n k.

b . Cu rren t D epos it A cco u n t: Big busi n essme n , compa n ies a n d in stitutio n s such as schools,colleges, a n d hospitals have to make payme n t through their ba n k accou n ts. Si n ce there are

restrictio n s o n n umber of withdrawals from savi n gs ba n k accou n t, that type of accou n t is n ot

suitable for them. They n eed to have a n accou n t from which withdrawal ca n be made a n y

n umber of times. Ba n ks ope n curre n t accou n t for them. Like savi n gs ba n k accou n t, this accou n t

also requires certai n min imum amou n t of deposit while ope n in g the accou n t. O n this deposit

ban k does n ot pay a n y in terest o n the bala n ces. Rather the accou n tholder pays certai n amou n t

each year as operatio n al charge.

For the co n ven ien ce of the accou n tholders ba n ks also allow withdrawal of amou n ts in excess of

the bala n ce of deposit. This facility is k n ow n as overdraft facility. I t is allowed to some specific

customers a n d up to a certai n limit subject to previous agreeme n t with the ba n k co n cer n ed.

c. Fi xed Depos it A cco u n t ( also kno wn as Term Depos it A cco u n t): Ma n y a time people wa n t

to save mo n ey for lo n g period. I f mo n ey is deposited i n savi n gs ba n k accou n t, ba n ks allow a

lower rate of i n terest. Therefore, mo n ey is deposited i n a fixed deposit accou n t to ear n a i n terest

at a higher rate.

This type of deposit accou n t allows deposit to be made of a n amou n t for a specified period. This

period of deposit may ra n ge from 15 days to three years or more duri n g which n o withdrawal is


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allowed. However, o n request, the depositors ca n en cash the amou n t before its maturity. In that

case ba n ks give lower i n terest tha n what was agreed upo n . The i n terest o n fixed deposit accou n t

can be withdraw n at certai n in tervals of time. At the e n d of the period, the deposit may be

withdraw n or re n ewed for a further period. Ba n ks also gra n t loa n on the security of fixed deposit

receipt.

d. R ecu rr ing Depos it A cco u n t: This type of accou n t is suitable for those who ca n save

regularly a n d expect to ear n a fair retur n on the deposits over a period of time. While ope n in g the

accou n t a perso n has to agree to deposit a fixed amou n t o n ce i n a mo n th for a certai n period. The

total deposit alo n g with the i n terest therei n is payable o n maturity. However, the depositor ca n also be allowed to close the accou n t before its maturity a n d get back the mo n ey alo n g with the

in terest till that period. The accou n t ca n be ope n ed by a perso n in dividually or joi n tly with

an other, or by the guardia n in the n ame of a mi n or. The rate of i n terest allowed o n the deposits is

higher tha n that o n a savi n gs ba n k deposit but lower tha n the rate allowed o n a fixed deposit for

the sameperiod.

Recurri n g Deposit Accou n ts may be of differe n t types depe n din g o n the purpose u n derlyi n g the

deposit. Some of these are as follows:

a. H ome Safe Acco un t ( also kno wn as M one y B ox Scheme ): Small savers fi n d it co n ven ien tto

deposit mo n ey u n der this scheme. For regular savi n gs, the ba n k provides a safe or box (Gullak)

to the depositor. The safe or box ca nn ot be ope n ed by the depositor, who ca n put mo n ey i n it

regularly, which is collected by the ba n ks represe n tative at i n tervals a n d the amou n t is credited

to the depositors accou n t. The deposits carry a n omi n al rate of i n terest.

b . Cu m u la tiv e-c u m- Sickness Depos it A cco un t: Regular deposits made i n this type ofaccou n t

serve the purpose of havi n g mo n ey to meet large expe n ses i n case there is sudde n illn ess or other

un foresee n expe n ses. A certai n fixed sum is deposited at regular i n tervals i n this accou n t. The

accumulated deposits over time alo n g with i n terest ca n be used for payme n t of medical expe n ses,

hospital charges, etc.


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c. H ome C ons t r u cti on depos it S ch eme /Saving Acco u n t: This is also a type of recurri n g

deposit accou n t in which mo n ey ca n be deposited regularly either for the purchase or

con structio n of a flat or house i n future. The rate of i n terest offered o n the deposit i n this case is

relatively higher tha n in other recurri n g deposit accou n ts.

2.2 B anks r ight s and duti es to depos it ors

Un der the co n tract established i n deposits accepta n ce by a ba n k, it implies the ba n ks right a n d

duties to depositors:

1. To ch arge fee and comm iss ion : Ba n k has the right to impose fees a n d charges

on to the deposits based o n the n otificatio n s made to customers from time to time.

Amo n g the fees charged is curre n t accou n t ann ual fee, passbook replaceme n t fee

an d ATM fee. Charges are n ormally made o n to certai n tra n sactio n s or as pe n alty,

such as charges o n cheque cashi n g a n d pe n alty charges o n retur n ed cheque due to

in sufficie n t fu n d.

2. To rece ive mone y for th e cu stomers acco u n t : The ba n k is obliged to accept

deposits o n behalf of customers a n d duly credited i n to customers accou n t.

3. To h ono u r th e customers chequ e and pa ymen t i ns tr u cti on : The ba n k is

obliged to ho n our a n d pay accordi n gly the customers chequesor a n y other

payme n t in structio n s that have bee n made i n accorda n ce toma n date give n to

ban ks.

4. To ma in ta in conf iden tial ity of cu stomers informa ti on : The ba n k must protect

the customers i n formatio n as strictly private a n dco n fide n tial. Certai n particular


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in formatio n can on ly be give n to authorized body upo n formal request made or o n

judicial cases.

5. To render a sta temen t of acco un t: The ba n k shall issue mo n thly stateme n ts to

customers as a record o n tra n sactio n s performed o n to the accou n ts for that

particular period.

6. To abi de by an y manda te given by customers : The operatio n s of the accou n ts

must be made accordi n g to the rules a n dregulatio n s gover n in g the accou n t a n d the

ma n date give n by customers.Failure to comply with customers ma n date shallexpose the ba n ks tobreach of co n tract or n eglige n ce.

2.3 Depos it ors r ight s and duti es to th e b ank

1. T o dra w ch equ es : The depositors have the rights to draw cheques based o n the

amou n tavailable i n the accou n ts. The cheques must be draw n accordi n g to thema n date

give n to the ba n ks. A n y cha n ge to the ma n date details or chequesig n atories must be

n otified a n d duly updated with the ba n ks before itsexecutio n .

2. T o give pa ymen t i ns tr u ctions : The depositors are e n titled to provide precise a n d defi n ite

payme n tin structio n s to the ba n ks at their choice. For example, a post-dated chequeissued

can on ly be accepted by the drawi n g ba n k upo n the stated date.Depositors are also

allowed to request the ba n k to execute other ki n d of payme n t tra n sactio n s such as fu n ds

tra n sfer a n d in terba n k G I RO.

3. T o exerc ise reasona b le care in dra wing chequ es : Cheques are valid bill of excha n ges

whe n theyve bee n issued accordi n glya n d deemed correct. Therefore, curre n t

accou n tholders are respo n sible toe n sure u n used cheques are kept u n der lock a n d key.The

accou n tholders are also respo n sible to exercise due care whe n drawi n g them i n


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accorda n ce to the ma n date a n d with sufficie n t fu n ds.Failure to do so, the ba n ks shall be

rejecti n g the payme n t requests a n d pe n alize accou n tholders with related charges

2.4 Cos t on depos it s

Deposit received by ba n ks is a cost to the ba n k. Therefore,ba n ks must put i n place

proper deposits strategy (liability ma n ageme n t) to e n sure it tallies with ba n ks overall Asset

Liability Ma n ageme n t (ALM). ALM ma n agesthe costs withi n a ba n k to match the correspo n din g

in come received, to achievethe targeted i n terest margi n .The followi n g are the costs related to

deposits:

1. Depos it s ma in tenance cos t : Deposits mai n ten an ce cost i n gen eral refers to the cost of

ma n power an dfacilities provided by ba n ks to facilitate all tra n sactio n s performed o n

depositsaccou n ts, i n cludi n g the direct promotio n al activities a n d deposit

rete n tion programmes. These costs are classified u n der ba n ks overhead costs. The

costi n cludes security a n d in sura n ce coverage o n hard-cash.

2. In teres t pa yout: Savi n gs a n d fixed deposits accou n ts are i n terest-beari n g accou n ts.

Therefore, for every dollar received u n der these accou n ts ba n ks must pay the i n terest

rateupo n maturity or periodical basis based o n the promised i n terest rate.


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3. CONSERVATIVE RISK PROFI L E INVESTORS

3.1 Ri sk Prof ile Investor

These five categories are summaries of how the i n vestor feels about i n vestme n t risk, how much

dow n side market fluctuatio n s ca n be tolerated, a n d how much they expect to profit whe n markets

are goi n g up.The biggest reaso n for n eedi n g to classify someo n e in to a defi n ed category is

because most i n vestme n t advisors use asset allocatio n models that correspo n d directly with each

category. O n ce o n e is put i n to a category, a n in vestme n t adviser ca n easily i n vest their mo n ey

appropriately by usi n g the correspo n din g model portfolio.

1. C onser va tiv e:

Co n servative i n vestors are i n vestors who wa n t stability a n d are more co n cer n ed with protecti n g

their curre n t in vestme n ts tha n in creasi n g the real value of their i n vestme n ts.

2. M odera tely C onser va tiv e:

Moderately co n servative i n vestors are i n vestors who wa n t to protect their capital, a n d achieve

some real i n crease i n the value of their i n vestme n ts.

3. M odera te:

Moderate i n vestors are lo n g-term i n vestors who wa n t reaso n able but relatively stable growth.

Some fluctuatio n are tolerable, but i n vestors wa n t less risk tha n that attributable to a fully equity

based i n vestme n t.

4. M odera tely A ggress ive:

Moderate i n vestors are lo n g term i n vestors who wa n t good real growth i n their capital. A fair

amou n t of risk is acceptable.

5. Aggress ive:


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Aggressive i n vestors are lo n g-term i n vestors who wa n t high capital growth. Substa n tial year-to-

year fluctuatio n s in value are acceptable i n excha n ge for a pote n tially high lo n g-term retur n .

3.2 C onser va tiv e Inves tors

This i n vestor is n t willi n g to tolerate " n oticeable dow n side market fluctuatio n s," a n d is willi n g to

forego most all sig n ifica n t upside pote n tial, relative to the markets, to achieve this goal. In

En glish, they really do n 't wa n t to get their mo n thly stateme n t an d see less mo n ey tha n they had

before (u n less it was due to withdrawals).

Most co n servative i n vestors wa n t their portfolio to provide them with a n in flatio n -adjustedin come stream to pay their livi n g expe n ses. They're either curre n tly depe n de n t o n their

in vestme n ts to provide some or all of their retireme n t paycheck, or are expecti n g this to happe n

soo n . Some are o n tight budgets a n d are barely maki n g a livi n g as it is, so they are very afraid of

losi n g what little mo n ey they have left. They do n ot have time to recoup a n y losses (because they

can 't go back to work for a multitude of reaso n s). Some realize they do n 't n eed their portfolio to

provide i n come for more tha n several years, because of low life expecta n cy, so growth is n ot the

objective.

Some of the mai n examples for Co n servative In vestors is

y Housewivesy Retired Perso n s

y Stude n ts

literature review by rogen

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