Chapter-1

INTRODUCTION

Mutual fund is the most suitable investment (or the common man as it offers

an opportunity to invest in a diversified, professionally managed portfolio relatively

at a low cost. Anybody with an inventible surplus of as little as a few thousand

rupees can be invested in mutual funds. Change in the economic scenario, falling

interest rates of bank deposits, volatile nature of capital market and recent hitter

experience of investors in making direct investment emphasis the increasing

importance of the intermediaries like mutual funds.

Mutual funds help the small and medium size investors to participate in

today's complex and modern financial scenario. Investors can participate in the

mutual fund by buying the units of the fund. The income earned through these

investments and capital appreciation realized by the schemes is shared by its unit

holders in proportion to the number of units owned by them. Mutual funds play vital

role in mobilization of resources and their efficient al1ocation. These funds played a

significant role in financial inter-mediation, development of capital markets and growth

of the financial sector as a whole. The active involvement of mutual funds in economic

development can be seen by their dominant presence in the money and capital market. In

early 19th century, mutual funds have proved to he an important institutional arrangement of

risk pooling. These institutions have come to assume so much of significance them they

now completely dominate the entire financial market.

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1.1 Mutual fund

Mutual Fund is an investment company that pools money from shareholders and

invests in a variety of securities, such as stocks, bonds and money market instruments.

Most open-end mutual funds stand ready to buy back (redeem) its shares at their current

net asset value, which depends on the total market value of the fund's investment

portfolio at the time of redemption. Most open-end mutual funds continuously offer new

shares to investors.

Also known as an open-end investment company, to differentiate it from a closed-

end investment company. Mutual funds invest pooled cash of many investors to meet the

fund's stated investment objective. Mutual funds stand ready to sell and redeem their

shares at any time at the fund's current net asset value: total fund assets divided by shares

outstanding.

In Simple Words, Mutual fund is a mechanism for pooling the resources by

issuing units to the investors and investing funds in securities in accordance with

objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and

sectors and thus the risk is reduced. Diversification reduces the risk because all stocks

may not move in the same direction in the same proportion at the same time. Mutual fund

issues units to the investors in accordance with quantum of money invested by them.

Investors of mutual funds are known as unit holders.

The profits or losses are shared by the investors in proportion to their investments.

The mutual funds normally come out with a number of schemes with different investment

objectives which are launched from time to time. In India , A mutual fund is required to

be registered with Securities and Exchange Board of India (SEBI) which regulates

securities markets before it can collect funds from the public.

In Short, a mutual fund is a common pool of money in to which investors with

common investment objective place their contributions that are to be invested in

accordance with the stated investment objective of the scheme. The investment manager

would invest the money collected from the investor in to assets that are defined/

permitted by the stated objective of the scheme. For example, an equity fund would

invest equity and equity related instruments and a debt fund would invest in bonds,

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debentures, gilts etc. Mutual Fund is a suitable investment for the common man as it

offers an opportunity to invest in a diversified, professionally managed basket of

securities at a relatively low cost.

1.2 History of Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the formation of Unit Trust

of India, at the initiative of the Government of India and Reserve Bank the. The history of

mutual funds in India can be broadly divided into four distinct phases.

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was

set up by the Reserve Bank of India and functioned under the Regulatory and

administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the

RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and

administrative control in place of RBI. The first scheme launched by UTI was Unit

Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds):

1987 marked the entry of non- UTI, public sector mutual funds set up by public

sector banks and Life Insurance Corporation of India (LIC) and General Insurance

Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund

established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National

Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90),

Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989

while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual

fund industry had assets under management of Rs.47,004 crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

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With the entry of private sector funds in 1993, a new era started in the Indian

mutual fund industry, giving the Indian investors a wider choice of fund families. Also,

1993 was the year in which the first Mutual Fund Regulations came into being, under

which all mutual funds, except UTI were to be registered and governed. The erstwhile

Kothari Pioneer (now merged with Franklin Templeton) was the first private sector

mutual fund registered in July 1993

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996. The industry now

functions under the SEBI (Mutual Fund) Regulations 1996.The number of mutual fund

houses went on increasing, with many foreign mutual funds setting up funds in India and

also the industry has witnessed several mergers and acquisitions. As at the end of January

2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust

of India with Rs.44, 541 crores of assets under management was way ahead of other

mutual funds.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI

was bifurcated into two separate entities. One is the Specified Undertaking of the Unit

Trust of India with assets under management of Rs.29, 835 crores as at the end of January

2003, representing broadly, the assets of US 64 scheme, assured return and certain other

schemes. The Specified Undertaking of Unit Trust of India, functioning under an

administrator and under the rules framed by Government of India and does not come

under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd., sponsored by SBI, PNB, BOB and LIC.

It is registered with SEBI and functions under the Mutual Fund Regulations. With the

bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of

assets under management and with the setting up of a UTI Mutual Fund, conforming to

the SEBI Mutual Fund Regulations, and with recent mergers taking place among

different private sector funds, the mutual fund industry has entered its current phase of

consolidation and growth.

The graph indicates the growth of assets over the years.

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GROWTH IN ASSETS UNDER MANAGEMENT

1.3 Objectives of Mutual Funds

1. Income. Income funds focus on dividends and interest that provide income to

investors. This is a relatively steady source of money, but the fund’s NAV can

still go up and down.

2. Growth. Growth funds focus on increasing the value of the principal or amount

invested through capital gains and net asset values. Growth funds are usually

more risky but offer greater potential return.

3. Stability. Stability funds focus on protecting the amount invested from loss so the

fund’s NAV does not go down. This is the least risky type of fund but may make

the least amount of money.

1.4 Types of Mutual Funds

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A mutual fund may float several schemes which may be classified on the basis of

its structure, its investment objectives and other objectives.

A. Mutual fund schemes by structure

Open ended schemes:

Open –ended fund scheme is open for subscription all through year. An investor

can buy or sell the units at “NAV” (net asset value) related price at any time.

Close-Ended funds:

A close-ended fund is open for subscription only during specified period,

generally at the time of initial public issue. The close ended fund scheme is listed on the

some stock exchange where an investor can buy or sell the units of this type of scheme.

Interval fund:

Interval funds combine both the features of open-ended fund and close-ended

funds.

B. Mutual Fund schemes by investment objectives:

1. Growth Funds:

The objective of growth fund scheme is to provide capital appreciation over the

medium to long term. This type of scheme is an ideal scheme for the investors seeking

capital appreciation for long period.

2. Income Funds:

The income fund schemes objective is to provide regular and steady income to

investors.

3. Balanced Funds:

The objective of balanced fund schemes is to provide both growth and regular

income to investors.

4. Money Market Funds:

The objective of money market funds is to provide easy liquidity, regular income

and preservation of income.

C. Geographical Classification:

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1. Domestic Funds:

Funds which mobilize resources from a particular geographical locality like a

country or a region are domestic funds. The market is limited and confined to the

boundaries of a nation in which the fund operates. They can invest only in the securities,

which are issued and traded in the domestic financial market.

2. Offshore Funds;

Offshore funds attract foreign capital for investment in the country of the issuing

company. They facilities cross-border fund flow which leads to an increase in foreign

currency and foreign exchange reserves. Such mutual funds can invest in securities of

foreign companies. They open domestic capital market to international investors. Many

mutual funds in India have launched a number of offshore funds, either independently or

jointly with foreign investment management companies.

D. Other Funds:

1. Tax Saving Schemes:

The objective of Tax Saving Schemes is to offer tax rebates to the investors under

specific provisions of the Indian Income Tax Laws. Investment made under some

schemes is allowed as deduction u/s 88 of the Income Tax Act.

2. Industry Specific Schemes:

Industry specific schemes invest only in the industries specific in the offer

document of the schemes.

3. Sectoral Schemes:

The schemes invest particularly in specific industries or initial public offering.

4. Index Schemes:

Such schemes link with the performance of BSE sensex or NSE.

5. Load Funds:

A loan fund charges a commission each time when you buy or sale units in the

fund.

6. No-Load Funds:

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A No-Loan fund does not charge a commission on purchase or sale of the unit in

the fund.

7. Equity-Linked Saving Sheme(Elss):

In order to encourage investor to invest in equity market, the government has

given tax-concessions through special schemes. Investment in these schemes entitles the

investor to claim an income tax rebate, but these schemes carry a lock in period before

the end of which funds cannot be withdrawn.

8. Special Schemes;

Mutual fund has launched special schemes to cater to the special needs of

investors. Uti has launched special schemes such as Children’s Gift Growth, 1986,

Housing Unit schemes, 1992, and Venture Capital Funds.

9. Gilt Fund:

Mutual fund, which deals exclusively in gilt are, called gilt fund. With a view to

creating a wider investor base for government securities, the Reserve Bank of India

encouraged setting up of gilt. The fund these funds are provided liquidity support by the

Reserve Bank.

10. P/E Ratio Fund;

P/E Ratio Fund is another mutual fund variant that is offered by pioneer ITI

Mutual Fund. The P/E (Price Earning) ratio of the price of the stock of a company to its

earning per share (EPS). The P/E ratio of the index is the weighted average price-earning

ratio of all its constituent stock.

11. Exchange Traded Funds:

Exchange traded funds (ETFs) are a hybride of open-ended mutual fund and listed

individual stocks. They are listed on stock exchanges and trade like individual stock

exchage. However, trading at the stock exchanges does not affect their portfolio. ETFs do

not sell their share are offered to investors over the stock exchange. ETFs are basically

passively managed funds that track a particular index such as S&P CNX Nifty since they

are listed on stock-exchanges, it is possible to buy and sell them throughout the day and

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their price is determined by the demand-supply forces in the market. In practice, they

trade in a small range around the value of the assets (NAV) held by them.

1.5 Advantages Of Mutual Funds

If mutual funds are emerging as the favorite investment vehicle, it is because of the

many advantages they have over other forms and avenues of investing, particularly for

the investor who has limited resources available in terms of capital and ability to carry

out detailed research and market monitoring. The following are the major advantages

offered by mutual funds to all investors:

1) Portfolio Diversification:

Mutual funds normally invest in a well-diversification portfolio or securities.

Each investor in a fund is a part owner of all of the fund’s assets. This enables him to

hold a diversified investment portfolio even with a small amount of investment that

would otherwise require big capital.

2) Professional Management :

Even if an investor has a big amount of capital available to him, he benefits from

the professional management skills brought in by the management of the investor’s

portfolio. The investment management skills, along with the needed research into

available investment option, ensure a much better return than what n investor can manage

on his own. Few investors have the skills and resources of there own to succeed in

today’s fast-moving, global and sophisticated markets.

3) Reduction/Diversification Of Risk :

An investor in a mutual fund acquires a diversified portfolio, no matter how small

his investment. Diversification reduces the risk of loss, as compared to investing directly

in one or two share or debentures or other investments. When an investor invests directly,

all the risk of potential loss is his own. A fund investor also reduces his risk in another

way. While investing in the pool of funds with other investors, any loss on one-two

securities is also shared with other investor. This risk reduction is one of the most

important benefits of a collective investment vehicle like the mutual fund.

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4) Reduction Of Transaction Costs :

What is true of risk is also true of the transaction costs. A direct investor bears all

the costs of investing such as brokerage or custody of securities. When going through a

fund, he has the benefits of economies of scale: the fund pays lesser costs because of

larger volumes, a benefit passed on to its investors.

5) Liquidity:

Often, investors hold shares or bonds they cannot directly, easily and quickly sell.

Investment in a mutual fund, on the other hand, is more liquid. An investor can liquidate

the investment, by selling the units to the fund if open-end, or selling them in the market

if the fund is close-end and collect funds at the end of a period specified by the mutual

fund or the stock market.

6) Convenience And Flexibility:

Mutual fund management companies offer many investor services that a direct

market investor cannot get. Investors can easily transfer their holding from one scheme to

the other, get updated market information, and so on.

1.6 Disadvantages of Mutual Funds

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While the benefits of investing through mutual funds far outweigh the

disadvantages, an investors and his advisor will do well to be aware few shortcomings of

using the mutual funds as investment vehicles.

1. No Control Over Costs:

An investor in a mutual fund has no control over the overall cost of investing. He

pays investment management fees as long as he remains with the fund, albeit in return for

the professional management and research. Fees are usually payable as a percentage of

the value of his investment, whether the fund value is rising or declining. A mutual fund

investor also pays fund distribution costs, which he would not incur in direct investing.

However, this shortcoming only means that there is a cost to obtain the benefits of mutual

fund services. However, this cost is often less then the cost of direct investing by the

investors.

2. No Tailor-Made Portfolios:

Investors who invest on their own can build their own portfolios of shares, bonds

and other securities. Investing through funds means he delegates this decision to the fund

managers. The very high-net-worth individuals or large corporate investors may find this

to be a constraint in achieving their objectives their objectives. However, most mutual

fund help investors overcome this constraint by offering families of schemes- a large

number of different schemes- within the same fund. An investor can choose from

different investment plans and construct a portfolio of his choice.

3. Managing A Portfolio of Funds:

Availability of a large number of funds can actually mean too much choice for the

investor. He may again need advice on how to select a fund to achieve his objectives,

quite similar to the situation when he has to select individual shares or bonds to invest in.

4. Risk Factors:

Mutual fund and securities investments are subject to market risk and there is no

assurance or guarantee that the objective of the schemes will be achieved. As with any

security investment, he Net Asset Value (NAV) of the units issued under the schemes can

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go up or down depending on the factors affecting the capital market. Past performance of

the sponsors, the AMC / Fund does not indicate the future performance of the fund.

5. Net Asset Value (NAV):

It is the common practice for the mutual fund to compute the share of each

investor on the basis of the value of net asset per share/unit, commonly known as the Net

Asset Value. It is the market value of the assets minus the liabilities on the day of

valuation. In other words it is the amount which the shareholder will collectively get if

the fund is dissolved or liquidation.

NAV={Market price of securities + other assets – Total liabilities}/Units outstanding at

the NAV date.

NAV={Net asset of the scheme + Number of units outstanding, Market value of

investment + Receivables + Other accrued income + other assets –Accrued expenses-

other payable liabilities}/Number of units outstanding at the date of NAV.

1.7 Organisation of Mutual Funds

A mutual fund in India is constituted in the form of trust under public trust act,

1882. The key players namely sponsors, mutual fund trust, and Asset Management

Company (AMC) are involved in setting up a mutual fund. They are assisted by other

independent administrative entities like banks, registrars, transfer agents, and custodians

(Depository participants).

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There are many entities involved and the diagram below illustrates the organizational set

up of a mutual fund:

Trustees

The trust of mutual finds may be managed by a board of trustees, or a trust company,

corporate body. Most of the funds in India are managed by Board of Trustees.

Sponsors

Means any person who acting alone or with another body corporate establishes a mutual

fund. He creates the AMC and the trustee company and appoints the Board of both these

companies with SEBI approval.

Asset Management Company

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The trustees appoint the AMC with the prior approval of SEBI. The AMC is a company

formed and registered under the companies act,1956 to manage the affairs of the mutual

fund and operate the schemes of such mutual funds. It charges a fee for the services it

renders to the mutual fund trust.

1.8 Regulations of Mutual Funds In India

In India SEBI and RBI act as regulators of mutual fund.

SEBI (Mutual Fund) REGULATIONS,1996

The provisions of this regulations pertaining to AMC are:

All the schemes to be launched by the AMC need to be approved by the trustees and

copies of offer document of such schemes are to be filed with SEBI.

The offer document shall contain adequate disclosure to enables the investor to make

informed decision.

Advertisement in respect of schemes should be in conformity with the SEBI

prescribed advertisement code, and discloses the method and periodicity of the

valuation of investment sales and repurchase in addition to the investment

objectives.

The listing of close ended schemes is mandatory and every close ended scheme

should be listed on a recognized stock exchange with in six months from the closure

of subscription. However, listing is not mandatory in case the scheme provides for

monthly income or caters to the special classes of persons like senior citizen,

women, children, and physically handicapped. If the scheme discloses detail of

repurchase in the offer document: if the schemes opens for repurchase with in six

months of closure of subscription.

Units of a close ended scheme can be opened for sale or redemption at a

predetermined fixed interval if the minimum and maximum amount of sale,

redemption, and periodicity is disclosed in the offer document.

Units of a close ended scheme can also be converted into an open ended scheme

with the consent of majority of the unit holder and disclosure is made in the offer

document about the option and period of conversion.

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Units of a close ended scheme may be rolled over by passing resolution by a

majority of the shareholders.

No scheme other than unit linked schemes can be opened for more than 45 days.

The AMC must specify in the offer document about the minimum subscription and

the extent of over subscription, which is intended to be retained. In the case of over

subscription, all applicants applying up to 500 units must be given full allotment

subjected to over subscription.

The AMC must refund the application money if minimum subscription is not

received and also the excess over subscription with in the six weeks of closure of

subscription.

Guaranteed returns can be provided in a scheme if such returns are fully guaranteed

by the AMC or sponsor. In such cases, there should be a statement indicating the

name of the person, and the manner in which the guarantee is to be made must be

stated in the offer document.

A close ended scheme shall be wound up on redemption date, unless it is rolled over,

or if 75% of the unit holders of a scheme pass a resolution of winding up of the

scheme : if the trustee on happening of any event, requires the scheme to be wound

up: or if SEBI, so directed in the interest of investors.

Investment objectives and valuation policies :-

The price at which the units may be subscribed or sold and the price at which such units

may at any time repurchase by mutual fund shall be made available to the investor.

General obligation

Every asset management company for each scheme shall keep and maintain proper

books of account, records and document, for each scheme so as to explain its

transaction and to disclose at any point of time the financial position of each scheme

and in particular give true and fair view of state of affairs of the fund and intimate to

board the place where such books of account, record, and document are maintained.

The financial year for all the schemes shall end as on march 31 of each year. Every

mutual fund or the asset management company shall prepare in respect of scheme

and the fund as specific in eleventh schedule.

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Every mutual fund shall have the annual statement of account audited by an auditor

who is nor in any way associated with the auditor of the asset management company.

Procedure in case of default

On and from the date of suspension of the certificate or the approval as the may be, the

mutual fund trustees or asset management company, shall cease to carry on any activity

as a mutual fund, trustee or asset management company, during the period of suspension,

and shall be subjected to the directions of the board with regard to any records,

documents, or securities that may be in its custody or control, relating to its activities as

mutual fund, trustee, or asset management company.

1.9 SEBI Guidelines (2001-02) Relating to Mutual Fund:-

A common format is prescribed for all mutual fund schemes to disclosed their entire

portfolio of half yearly basis so that the investors can get meaningful information on

the deployment of funds. Mutual funds are also required to disclose the investment

in various types of instruments and percentage of in each script to the total NAV

illiquid and non performing assets, investments in derivatives and in ADRs and

GDR’s.

To enable the investor to make informed investment decision, mutual funds have

been directed to fully revise and update offer document and memorandum at least

once in two years.

Mutual funds are also require to:-

i. Bring uniformity in disclosure of various categories of advertisements, with a

view to ensuring consistency and comparability across schemes of various mutual

funds.

ii. Reduce initial offer period from a maximum of 45 days to 30 days.

iii. Dispatch statement of account once the minimum subscription amount specified

in offer document is received even before the closure of the issue.

iv. Invest in mortgaged backed securities of investment grade given by credit rating

agency.

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v. Identify and make a provision for non performing asset (NPAs) according to

criteria for classification of n NPAs and treatment of income accrued on NPAs to

disclose NPAs in half yearly portfolio reports.

vi. Disclose information in a revised format on unit capital, reserves, performance in

terms of dividend and rise/fall in NAV during the half year period annualized yield

over the last 1, 3, 5 years in addition to percentage of management fee, percentage of

recurring expenses to net asset, investment made in associate companies, payment

made to associate companies, payment made to associate companies for their services,

and detail of large holding, since their operation.

vii. Declare their NAVs and sale/repurchase prices of all schemes updated on regular

basis on the AMFI website by 8.00 PM and declare NAVs of their close ended

schemes on every Wednesday.

The format for unaudited half yearly result for the mutual funds has been

revised by SEBI. These results are to be published before the expiry of one

month from the close of each half-year as against two month period provided

earlier. These results shall also be put in their websites by mutual fond.

All the schemes by mutual fund shall be launched with in six months from the

date of the letter containing observation from SEBI on the scheme offer

document. Otherwise, a fresh offer document along with filing fee shall be

filled with SEBI.

Mutual funds are required to disclose large unit-holding in the scheme, which

are over 25% of the NAV.

RBI as supervisor of bank owned Mutual Funds

The first non-UTI mutual funds were started by public sector banks. Banks come under

the regulatory jurisdiction of RBI. So Bank owned mutual funds are regulated by RBI,

but it has been clarified that all the mutual funds, being primarily capital market players

come under the regulatory framework of SEBI. Thus, the bank owned fund continue to be

under the joint supervision of both RBI and SEBI. It is generally understood that all

market related and investor related activities of the fund are to be supervised by SEBI,

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while any issue concerning the ownership of the AMC by bank fall under the regulatory

ambit of RBI. But RBI on bank fund should not conflict with SEBI guidelines.

RBI as supervisor of money market mutual funds

RBI is the only Government agency that is charged with the sole responsibility of overall

entities that operates in money market. So money market mutual funds were regulated by

RBI guidelines till 23.11.1995. Recently it has been decided that money market mutual

funds of registered mutual fund will be regulated by SEBI through the same guidelines

issued for other mutual funds, i.e. SEBI (MF) regulations, 1996. However RBI does

retain the right to decide whether mutual funds will be allowed to access inter-call money

market. Accordingly, RBI has placed certain restrictions through latest credit policy, with

the intention of moving toward a pure inter bank money market.

1.10 Need & Importance of The Study

As mutual funds are instrumental in bringing out the household savings in

circulation in the market, therefore there is a great need for indepth analysis to ascertain

whether the investors are aware about the mutual fund schemes or not and weather these

schemes are performing according to the expectations of the ordinary investors of not.

During recent years, this important institution has shown poor performance. Its position

has been made dismissal by sudden collapse of US-64 fund of Unit Trust of India. This

decelerating performance calls for a research to study how any investors have made the

investments in these schemes and the key persons for the same.

So far not much research has been conducted on the mutual fund predominance

in India. This research is important and unique in the sense that it analyses the

predominance of the market vis-a-vis the performance of the mutual fund industry. This

study take into account the various schemes started by almost all the players in the

Indian market in order to know whether they are better than the market or not, whether

the mutual fund managers are able to minimize and diversify the various kinds of risk

through planning their respective portfolios with the expertise and talent they have.

1.11 OBJECTIVES OF THE STUDY

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The present research problem is taken to study the “Analysis of Investments in mutual

funds” with the following objectives:-

1. To study the investor knowledge and awareness about various Mutual Fund

schemes present in the market.

2. To study the factors considered while selecting the various mutual funds scheme .

3. To know about sources from where investors get information about mutual funds.

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Chapter-2

REVIEW OF LITERATURE

A. Vijay Kumar

Mutual Funds have opened salutary avenues for development of capital market and

mobilising savings. For their orderly growth, it is pertinent that he investors interest

should be protected. After investment, services of a high order and quality should be

guaranteed. The encouraging public response to the Mutual Funds reveals the potential of

mobilising the savings of the masses for industrial finance. The securities scam and the

subsequent fall in the share prices have made the public reluctant to invest their savings

in the stock market and Mutual Funds can make use of this opportunity to mobilise the

savings of the economy.

The managers of the mutual funds have to accept the challenge to analyse the

needs and investment preference of the investors and device schemes to suit their needs.

Indeed, with the entry of private sector mutual funds, this industry is posed for a

tremendous growth. No doubt, mutual funds will have a major role in mobilising the

savings of the household sector, in the years to come.

B. Monika Dua

The mutual fund industry in India is at the stage of infancy but is slowly and

steadily progressing towards the stage of growth. And from the passage from growth to

popularity it will be obvious to the investor in India that the industry has maximum

potential and benefits to the investor. This combined with the ever-increasing players in

the MF market promises to make it one of most exciting areas in the field of finance.

However, in the fact of intensive competition success will come only to those

MF’s who prove their mettle in the market. This will include:

- Reliability of investment performance

- Understanding Investor needs while designing investment schemes.

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C. Paramjit Singh

The encouraging public response to the mutual funds reveals the potential of

mobilising the savings of the masses for industrial finance. The mutual fund need

amendments and modifications with respect to have a uniform rules and regulations for

governing mutual funds, disclosure of information, listing of mutual funds in stock

exchanges, disallowing private sector in entering mutual fund business, removing urban

biasness, limit of investment of a mutual fund company should be lowered.

D. Mahesh Nayak

The typical equity investor in India is a seasonal investor, who tends to rush into a

bull market and gets carried away with the good returns from diversified schemes,” says

Hemant Rustagi, CEO, Wiseinvest Advisors. This is a perfect description. And when the

market gets volatile, like now, or when it slides, the retail investor, trapped without an

exit route, pulls out of equity altogether, opting to go with small savings, debt

instruments and other assured return, low-risk avenues.

Is there no middle path? For the conservative investor who would like to start flirting

with equity, there are index funds. However, this option has been largely out of favour

with Indian investors. And for obvious reasons. Returns generated by diversified funds

have consistently beaten those by index funds. In the past year, diversified funds have

given an average return of 49 per cent compared to 37 per cent by index funds.

E. Sandesh Kirkire

Over the last few years, the Indian financial system has undergone sea changes. The most

remarkable of them is the evolution of investor preference in favour of market-linked

investment vehicles, as compared to conventional assured return instruments. The same is

evident from the fact that the asset under management with mutual funds (excluding UTI)

have grown from about Rs.35,000 crore in March 2000 to over Rs.2,07,000 crore in

January 2006.

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Chapter-3

3.1 RESEARCH METHODOLOGY

POPULATIONS AND SAMPLE PLAN

The population consists of investors in Ludhiana. For present study a sample of

100 investors were taken. Convenience sampling technique was used to select the

sample units.

DATA COLLECTION

The collection, of data regarding the awareness was both from primary and

secondary source of infonnation. Primary data was collected by using the interview

method and questionnaire method for investors. Secondary data was collected from

newspapers- The Economic Times; Business Today, Journal of Finance, pamphlets and

booklets. The questions included were open-ended and multiple choice.

ANALYSIS OF DATA

For analyzing the data collected firstly a master table was prepared to note down

the responses in a tabular form.

The statistical techniques used include tally marks, mean score, percentage method and

rank method.

22

Chapter-4

MUTUAL FUND AS AN INVESTMENT TOOL

4.1 Profile of Mutual Funds

Mutual funds now represent perhaps the most appropriate investment opportunity

for the most investors. As financial markets become more sophisticated and complex,

investors need a financial intermediary who provides the required knowledge and

professional expertise on successful investing. It is no wonder then that in the birthplace

of mutual fund-the U.S.A. - the fund industry has already overtaken the banking industry,

more funds being under mutual fund management than deposited with banks.

The Indian mutual fund industry has already started opening up many of the

exciting investment opportunities to Indian investors. We have started witnessing the

phenomenon of more saving now being entrusted to the funds than to the banks. Despite

the expected continuing growth in the industry, mutual funds are still a new financial

intermediary in India. Hence, it is important that the investors, the mutual fund

agents/distributors the investment advisors and even fund employees acquire better

knowledge of what mutual funds are, what they can do for investors and what they

cannot, and how they function differently from other intermediaries such as the banks.

4.2 Place of Mutual Fund In Financial Markets

Indian household started allocating more of their saving to the capital markets in

1980s, with investments flowing into equity and debt instruments, besides the

conventional mode of bank deposits.

Until1992 primary market investors were effectively assured good return as the

issue price of new equity issue was controlled and low. After introduction of free pricing

of shares, new issue prices were higher and with greater volatility in the stock markets,

many investors who bought highly priced shares lost money, and withdraw money from

the market altogether. Even those investors, who continued as direct investors in stock

markets, realized that the key to successful investing in the capital markets lay in building

23

a diversified portfolio, which in turn required substantial capital. Besides, selecting

securities with growth and income potential from the capital market involved careful

research and monitoring of the market, which was not possible for all investors. Under

similar circumstances in other countries, mutual funds had emerged as professional

intermediaries. Besides providing the expertise in stock market investing these fund allow

investing in small amounts and yet holding a diversified portfolio to limit risk, while

providing the potential for income and growth that is associated with the debt and equity

instruments. In India, Unit Trust of India occupied this place as the only capital markets

intermediary from 1964 until late 1987, when the government started allowing other

sponsors also to set up mutual funds. With some ups and downs, this new class of

intermediary institution has emerged, in India as elsewhere, as a good alternative to direct

investing in capital markets.

Mutual fund serves as a link between the saving public and the capital market, as

they mobilize savings from investor and bring them to borrowers in the capital markets.

By the very nature of their activities, and by virtue of being knowledgeable and informed

investors, they influence the stock markets and play an active role in promoting good

corporate governance, investor protection and the health of capital market. Mutual funds

have imparted much needed liquidity into the financial system and challenged the

hitherto dominant role of banking and financial institution in the capital markets.

4.3 The Concept of a Mutual Fund

A mutual fund is a common pool of money into which investors place their

contributions that are to be invested in accordance with a stated objective. The ownership

of the fund is thus joint or “mutual”; the fund belongs to all investors. A single investor’s

ownership of the fund is in the same proportion as the amount of the contribution made

by him or her bears to the6 total amount of the fund.

A mutual fund uses the money collected from investors to buy those assets which

are specifically permitted by its stated investment objective. Thus, an equity fund would

buy mainly equity assets-ordinary shares, preference shares, warrants etc. a bond fund

would mainly buy debt instruments such as debentures, bonds, or government securities.

24

It is these assets which are owned by the investors in the same proportion as their

contribution bears to the total contribution of all investors put together.

When investors subscribes to a mutual fund, he or she buys a part of the assets or

the pool of funds that are outstanding at that time. It is no different from buying “shares”

of a joint stock company, in which case the purchase makes the investors a part owner of

the company and its assets. In fact, in the U.S.A., a mutual fund is constituted as an

investor “buys into the fund”, meaning he buys the shares of the fund. In India, a mutual

fund is constituted as a trust and the investor subscribes to the “units” issued by the fund,

which is where the term Unit Trust comes from. However, whether the investors get fund

shares or units is only a matter of legal distinction. In any case, a mutual fund shareholder

or unit-holder is a part owner of the fund’s assets. In this project, used the term unit-

holder includes the mutual fund account-holder or close-end fund shareholder. A unit-

holder in unit trust of India US-64scheme is the same as a UTI Master share-holder or

investors in an Alliance or DSP Merrill Lynch or Prudential-ICICI or Tata or Templeton

or SBI or any other fund manager’s open-end or close-end scheme.

Since each owner is a part owner of a mutual fund, it is necessary to establish the

value of his part. In other words, each share or unit that investors hold needs to be

assigned a value. Since the units held by-an investor’s evidence the ownership of the

fund’s assets the value of the total assets of the fund when divided by the total number of

units issued by the mutual fund gives us the value of one unit. This is generally called the

Net Asset Value (NAV) of one unit or share. The value of an investor’s part ownership is

thus determined by NAV of the number of units held number of units held

25

4.4 Structure of Mutual Fund Industry In India

Mutual Fund Industry

SEBI Association of mutual fund

MF’s

Sponsor Board of Trustees AMC Custodian Investors

Public sector Private Sector

UTI Bank sponsored FI sponsored

Schemes

Domestic Off shore

Growth Income Income& Sectoral Special Tax saving Others Growth Purpose

Equity Bonds Metals Realestate MoneyMarket SecurityPrice OthersIndices

26

How to Invest In Mutual Fund 

In Mutual Funds, Assured Return Schemes are those schemes that assure a specific

return to the unit holders irrespective of performance of the scheme. A scheme cannot

promise returns unless such returns are fully guaranteed by the sponsor or AMC and this

is required to be disclosed in the offer document. Investors should carefully read the offer

document whether return is assured for the entire period of the scheme or only for a

certain period. Some schemes assure returns one year at a time and they review and

change it at the beginning of the next year.

How To Fill Mutual Fund Application Form

 An investor must mention clearly his name, address, number of units applied for and

such other information as required in the application form. He must give his bank account

number so as to avoid any fraudulent encashment of any cheque/draft issued by the

mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the

address, bank account number, etc at a later date should be informed to the mutual fund

immediately.

Mutual Fund Offer Document

An abridged offer document, which contains very useful information, is required to be

given to the prospective investor by the mutual fund. The application form for

subscription to a Mutual Fund is an integral part of the offer document. SEBI has

prescribed minimum disclosures in the offer document. An investor, before investing in a

Mutual Fund scheme, should carefully read the offer document. Due care must be given

to portions relating to main features of the Mutual Fund, risk factors, initial issue

expenses and recurring expenses to be charged to the Mutual Fund entry or exit loads,

sponsor’s track record, educational qualification and work experience of key personnel

including fund managers, performance of other Mutual Fund schemes launched by the

mutual fund in the past, pending litigations and penalties imposed, etc.

27

Can Mutual Fund Change Scheme

Yes. They Can However, no change in the nature or terms of the scheme, known as

fundamental attributes of the Mutual Fund e.g. structure, investment pattern, etc. can be

carried out unless a written communication is sent to each unit holder and an

advertisement is given in one English daily having nationwide circulation and in a

newspaper published in the language of the region where the head office of the mutual

fund is situated. The unit holders have the right to exit the Mutual Fund at the prevailing

NAV without any exit load if they do not want to continue with the scheme. The mutual

funds are also required to follow similar procedure while converting the scheme form

close-ended to open-ended scheme and in case of change in sponsor.

The mutual funds are required to inform any material changes to their unit holders. Apart

from it, many mutual funds send quarterly newsletters to their investors.

At present, offer documents are required to be revised and updated at least once in two

years. In the meantime, new investors are informed about the material changes by way of

addendum to the offer document till the time offer document is revised and reprinted.

MUTUAL FUNDS PERFORMANCE

The performance of a Mutual Fund is reflected in its net asset value (NAV) which is

disclosed on daily basis in case of open-ended schemes and on weekly basis in case of

close-ended schemes. The NAVs of mutual funds are required to be published in

newspapers. The NAVs are also available on the web sites of mutual funds. All mutual

funds are also required to put their NAVs on the web site of Association of Mutual Funds

in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all

mutual funds at one place

The mutual funds are also required to publish their performance in the form of half-yearly

results which also include their returns/yields over a period of time i.e. last six months, 1

year, 3 years, 5 years and since inception of schemes. Investors can also look into other

details like percentage of expenses of total assets as these have an affect on the yield and

other useful information in the same half-yearly format.

28

The mutual funds are also required to send annual report or abridged annual report to the

unit holders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes are being

published by the financial newspapers on a weekly basis. Apart from these, many

research agencies also publish research reports on performance of mutual funds including

the ranking of various schemes in terms of their performance. Investors should study

these reports and keep themselves informed about the performance of various schemes of

different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds

under the same category. They can also compare the performance of equity oriented

schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.

On the basis of performance of the mutual funds, the investors should decide when to

enter or exit from a mutual fund scheme

WHERE DOES MUTUAL FUNDS INVEST

The mutual funds are required to disclose full portfolios of all of their schemes on half-

yearly basis which are published in the newspapers. Some mutual funds send the

portfolios to their unitholders.

The scheme portfolio shows investment made in each security i.e. equity, debentures,

money market instruments, government securities, etc. and their quantity, market value

and % to NAV. These portfolio statements also required to disclose illiquid securities in

the portfolio, investment made in rated and unrated debt securities, non-performing assets

( NPAs), etc.

Some of the mutual funds send newsletters to the unit holders on quarterly basis which

also contain portfolios of the schemes.

Where can an investor look out for information on mutual funds?

Almost all the mutual funds have their own web sites. Investors can also access the

NAVs, half-yearly results and portfolios of all mutual funds at the web site of

Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also

published useful literature for the investors.

Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds"

section for information on SEBI regulations and guidelines, data on mutual funds, draft

29

offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual

reports of SEBI available on the web site, a lot of information on mutual funds is given.

There are a number of other web sites which give a lot of information of various schemes

of mutual funds including yields over a period of time. Many newspapers also publish

useful information on mutual funds on daily and weekly basis. Investors may approach

their agents and distributors to guide them in this regard.

SOME IMPORTANT TERMS

Net Asset Value (NAV)

The performance of a particular scheme of a mutual fund is denoted by Net Asset

Value (NA V).

Mutual funds invest the money collected from the investors in securities markets.

In simple words, Net Asset Value is the market value of the securities held by the

scheme. Since market value of securities changes every day, NA V of a scheme also

varies on day to day basis. The NA V per unit is the market value of securities of a

scheme divided by the total number of units of the scheme on any particular date. For

example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and

the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NA V

per unit of the fund is Rs.20. NA V is required to be disclosed by the mutual funds on a

regular basis - daily or weekly depending on the type of scheme.

Sales or repurchase/redemption price

The price or NA V a unit holder is charged while investing in an open ended

scheme is called sales price. It may include sales load, if applicable.

Repurchase or redemption price is the price or NA V at which an open -

ended scheme purchases or redeems its units from the unit holders. It may include exit

load, if applicable.

Load or no-load Fund

A Load Fund is one that charges a percentage of NA V for entry or exit. That is,

30

each time one buys or sells units in the fund, a charge will be payable. This charge is used

by -the mutual fund for marketing and distribution expenses. Suppose the NA V per unit

is Rs.l'p. If the entry as well as exit load charged is 10/0, then the investors who buy would

be required to pay Rs.0.1 0 and those who offer their units for repurchase to the mutual

fund will get only Rs.9.90 per unit. The investors should take the loads into consideration

while making investment as these affect their yields/returns. However, the investors

should also consider the performance track record and service standards of the mutual

fund which are more important. Efficient funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the

investors can enter the fund/scheme at NA V and no additional charges are payable on

purchase or sale of units.

Sales Load

It is a charge collected by a scheme when it sells the units? It is also called 'Front-

end' Load.

Repurchase or 'Back-end' Load

It is a charge collected by a scheme when it buys back the units from the unit holders.

Mutual funds cannot increase the load beyond the level mentioned in the offer

document. Any change in the load will be applicable only to prospective investments and

not to the original investments. In case of imposition of fresh loads or increase in existing

loads, the mutual funds are required to amend their offer document so that the new

investors are aware of loads at the time of investment.

31

Chapter-5 ANALYSIS

The present chapter includes the analysis of the primary and secondary data

collected from the investors through the questionnaires.

A total of 100 investors were taken and were personally interviewed with the help

of structured questionnaire to get the information regarding the awareness level of

Mutual Fund schemes.

According to the first objective, "To study the investor knowledge and

awareness about various mutual fund schemes present in the market", the following

results are:

1. Awareness of Mutual Fund schemes present in India

Table: Awareness of Mutual Fund schemes present in India

OPTIONS NO. OF INVESTORS

YES 72%

NO 28%

From the above table, it is clear that 72% of the investors are aware of Mutual Fund

schemes present in India and 28% investors are not aware about Mutual Fund schemes.

32

This shows that more than half of the investors are aware about Mutual Fund schemes.

2. Investments in the schemes of Mutual Fund

Table : Investments in the schemes of Mutual Fund

SCHEMES NO. OF INVESTORS

Equity Fund 8

Morgan Stanley 11

Debt Fund 4

Balanced Fund 7

Franklin Templeton Blue Chip Fund 10

Franklin Templeton Flexi Cap Fund 10

Franklin Templeton Prima Mid Cap11

Fund

ICICI Prudential 12

Never made investment 3

Others 23

From the above table. it is clear that 8% of investors have invested in Equty Fund

Scheme, 11 % of investors have never invested in either schemes, 4% of investors have

invested in Morgan Stanley scheme, 7% of investors have invested in Debt Fund scheme,

10% of investors have invested in Balanced Fund scheme, 10% of investors have

invested in ICICl Prudential scheme, 11 % of investors have invested in Franklin

Templeton Blue Chip Fund, 12% of investors have invested in Franklin Templeton Flexi

Cap Fund, 3% in Franklin Templeton Prima Mid Cap Fund(SIP) and 23% of investors

have invested in other schemes. It shows that the percentage of investors who have

invested in Franklin Templeton Prima Mid Cap Fund is greater than the investment in all

33

other schemes of Mutual Fund.

34

3. Factors considered while selecting the scheme

Table : Factors considered while selecting the scheme

FACTORS NO. OF INVESTORS

Regular Proceeds 17

Capital Appreciation 11

Risk 16

Profitability 36

Any Other 2

Factors considered while selecting the scheme

From the above table, it is clear that 17% of investors considered regular proceeds factor,

11% of investors considered capital appreciation factor, 16% of investors considered

profitability factor, 36% of investors considered risk factor and 2% of investors

considered other factors like liquidity. It shows that the factors which were considered

while selecting the scheme i.e. regular proceeds, capital appreciation and profitability get

equal weightage by the investors and these were five times more than the factor i.e.

liquidity.

35

4. Occupation of the investors

Table: Occupation of the investors

OCCUPATION NO. OF INVESTORS

Businessman 14

Salaried 80

Any other 6

From the above table, it is clear that 14% of investors belong to salaried class, 80% of

investors are businessman and 6% of investors are from' other class like Pensioners,

Retired. So, it is clear that the no. of salaried class people is greater than the other class

people. It's also clear that they have keen interest especially in investing in mutual fund

schemes so as to avail various benefits

Provided under these schemes such as regular income which is more important for the

salaried class people and other benefits like tax benefits, for saving purpose etc.

36

5. Schemes suit to the investors

Table :(a) Schemes suit to the investors

SCHEMES NO. OF INVESTORS

Open-ended Scheme 55

Close-ended Scheme 28

Balanced Fund 2

Money Market Mutual Fund 14

Leverage Funds NIL

From the above table, it is clear that 55% of investors are preferring Open-ended

scheme, 28% of investors are preferring Balanced Fund schemes, 2% of investors

Close-ended schemes, 14% of investors money market mutual fund scheme and no

investor is preferring leverage funds. It also shows that the open-ended schemes suit to

the investors approximately two times more than the balanced fund schemes whereas

the money market mutual fund schemes suit to the investors seven times more than the

closed fund schemes. It reflects that investors prefer open-ended schemes more because

they want to sustain the regular income.

According to the second objective of the study, "To know reasons about

investing in mutual funds ", the following results are:

37

(b) Reasons behind the purchase of Mutual Fund scheme

Research shows that investors purchased Open-ended scheme in order to

maximize the profits, to sustain their regular income, for avoidance of risk and for

liquidity purpose. Close-ended-scheme in order to gain benefits in tenl1S of capital

appreciation and to earn fix income. Balanced fund scheme to balance the risk and

reward ratio and Money market mutual fund scheme for liquidity purpose, due to

growing capital market and its redemption can been done at any time. All the schemes

are purchased for saving purpose also. It shows that investors purchased these schemes

for availing the benefits in different forms either for saving purpose or for tax benefits.

Because the salaried class requires regular income and higher profits and on the other

side, businessman class requires capital appreciation, so all these requirements are met

with these schemes and retired class investors get regular income by investing in these

schemes.

38

6. The attributes, which influences the investment decision

Table : The attributes, which influences the investment decision

Through the statistical method of mean score following analysis is undertaken: -

SCALING

ATTRIBUTES

GREAT

EXTENT

SOME

EXTENT

NOT AT ALL TOTAL

Advertisement 1.5 .5 .2 2.2

Friend .6 1 .2 1.8

Sales Person .6 .5 .4 1.5

Any other .3 - .2 .5

From the above table, it is clear that investors decision was int1uenced by advertisement

i.e. 2.2 score is given and it is considered to be an extremely important factor, 1.8 rate

score is given to the attribute i.e. friend which is almost above the satisfactory level, 1.5

rate score is given to the attribute i.e. sales person which is also important for investment

decision and .5 rate score is somewhat important. It shows that first rank is given to the

advertisement which helps in taking the decision regarding the investment and it is one-

fourth more than the attribute i.e. friend and more than half from the sales person

attribute and second rank is given to the attribute i.e. friend which helps in investment'

decision.

39

7. Satisfaction level of investors with Mutual Fund schemes

Table : Satisfaction level of investors with Mutual Fund schemes

OPTIONS NO. OF RESPONDENTS

Yes 56

No 8

From the above table, it is clear that 56% investors invested in Mutual Fund schemes and

8% o investors are satisfied with the investment in the schemes and remaining investors

reported negative response. This shows that investors who are satisfied with the

investment are seven times more than the unsatisfied investors. It is clear that these

Mutual Fund schemes

are performing better and are giving better results to the investors, who have invested in

these schemes and all the requirements of the investors are fully met by these schemes

i.e. regular income or capital appreciation or for saving purpose.

8. Scheme, which is more profitable and has less risk

40

Table (a) Scheme, which is more profitable and has less risk

SCHEMES NO. OF INVESTORS

Balanced Fund 24

Open-ended Scheme 8

Short-term Debt Funds 3

Franklin Templeton Mid Cap Fund 8

UTI Master Value 4

Other 25

From the above table, it is clear that 24%of investors are satisfied with balanced fund

schemes, 8% of investors with open-ended schemes, 3% of investors with short-term

Debt Funds, 8% of investors with Franklin Templeton Mid Cap Fund, another 4% of

investors are satisfied with UTI Master Value and the rest 25% are satisfied with other

mutual fund schemes. It shows that investors who are satisfied with the Balanced fund

schemes are three times than the investors who are satisfied with the Open-ended

scheme and Franklin Templeton Mid Cap Fund and are also eight times more than the

41

investors who are satisfied with the short-term debt funds. This clearly reflects that

investors want to maintain a balance between their reward and risk ratio due to which

they ate satisfied more with the balanced fund schemes.

(b) Reasons for the above stated analysis:

According to the survey conducted, it is clear that investors prefeued balanced

fund schemes because of its lucrative character and it helps in balancing the risk and

reward ratio because on the one side they get regular. income and on the other side they

get capital appreciation, which is a two-way benefit for the investors, whereas open-

ended schemes which gives only regular income are preferred second most by the

investors who are mostly from the salaried class and the rest other schemes are preferred

for saving purpose and for tax benefits also.

According to the third objective, "To know about sources where respondent get

information about mutual funds", the following results are:

42

9. Effectiveness of advertisement for providing information

Table: Effectiveness of advertisement for providing information

OPTIONS NO. OF INVESTORS

YES 43

NO 21

From the above graph, it is clear that out of 43% investors who have invested in

Mutual Fund schemes, 670/0 of investors are satisfied that the advertisement provides

them the proper infom1ation and 21% investors show negative response. So it shows that

investors who are satisfied with the advertisement are twice than other investors. This

results that the advertisement is an effective media for providing the information to the

investors while making the investment decision and advertisement is the only media

which helps in providing the complete infoDllation to the investors regarding the

schemes.

43

10. Information, which is required for selection of the scheme

Table: Information, which is required for selection of the scheme

Attributes No. of Investors

Rate of Return/Yield 28

Maturity Period 18

Risk Attached 22

Profitability 27

Any Other 5

From the above figure, it is clear that 28% of investors required the rate; of return/yield

information, another 18% investors required the information related to maturity period,

still another 27% investors required profitability information, 22% investors required risk

attached information and 5% investors required other information like liquidity or

investment portfolio etc. This shows that the investors are greatly concen1ed with the

information regarding rate of return and profitability. To some extent, investors are also

concerned with the risk attached factor also and then with the maturity period. Investors

are least concerned with the other factors such as market conditions, liquidity, investment

portfolio, investment strategy and company profile etc. According to the fourth objective,

“To see the performance of selected mutual fund schemes", the following results are: -

44

PERFORMANCE OF MUTUAL FUNDS

There aren't too many mutual fund schemes in the country that have come a long

way, at least not 1 0 years long. That's understandable when you consider that the

mutual fund industry itself has had not much of an existence minus the Unit Trust of

India (UTI). We have highlighted the performances of, some of the leading diversified

equity funds that have completed a decade long existence.

Last year we had at least two fund houses, proudly proclaiming completion of

10 years of existence. Recently we chanced upon another fund fact sheet announcing

completion of a decade-long history in February 2005. There 'is nothing wrong with

fund houses broadcasting their 'long' existence in the mutual fund industry. But time

spent in the industry itself is not too consequential, as much as the performance of the

fund, the number of market phases it has witnessed and if it managed to come out tops

in most, if not all, of them.

First and foremost, you must understand whether the fund's long existence is its

own. In case of two fund houses - Franklin Templeton Mutual Fund and HDFC Mutual

Fund its actually borrowed. Franklin Templeton Mutual Fund (launched in 1996)

bought over Pioneer ITI Mutual Fund (launched in 1994). Apart from buying its assets,

Franklin Templeton Mutual Fund bought two years of existence that helped it complete

a decade in 2004, instead of 2006. Likewise, HDFC Mutual Fund (launched in 2001)

bought over Zurich India Mutual Fund and in the process acquired seven years of

existence. Both these fund houses also benefited from the fact that the chief architects -

fund managers and chief investment officers, of the impressive decade long

performances are still around. So in a way, their claim to a 10-Yr long existence is not

totally off the mark.

Nonetheless, for the investor, who has been managing the fund since inception is

a mere technicality. The investor does not want to bother himself with such 'frivolous'

details, he only understands one language - performance. If the fund performs, the

investor is willing to ignore a lot of things. And that is what we have done to help

investors determine the funds that have added value over a minimum 10- Yr time frame.

45

Admittedly 10 years is a long time and not many funds have redeemed

thems'elves over this long a period. Nonetheless, some funds that have put in a

performance that should warm the cockles of their investors' hearts. Notable amongst

them are the trio of Franklin funds - Franklin Bluechip (28.4% CAGR since inception in

December 1993), Franklin Prima Fund (24.2% CAGR) and Franklin Prima Plus (20.8%

CAGR). HDFC Equity, (erstwhile Zurich india Equity Fund) with 21.2% CAGR since

1993 is the other significant performer. Both these groups of funds (HDFC and Franklin

Templeton) put in a good show across market phases. Franklin Bluechip and HDFC

Equity in particular pursued very aggressive investment strategies by maintaining a

portfolio of less than 25 stocks. Despite the higher risks of maintaining a concentrated

portfolio, these funds still managed to generate returns that far outweighed the risks.

On the other hand, Franklin Prima Fund's amazing run can be attributed to a

well-diversified portfono including more than 50 stocks. At a time in 1994, when the

mutual fund industry was finding its feet, for Pioneer ITI to launch a mid cap fund

shows remarkable foresight. This is more so considering some of its peers are launching

their mid cap offerings only now, more than 10 years later!

Investors in Birla Advantage Fund have mixed reactions on the fund's

performance. During the tech rally in 1999-early 2000, Birla Advantage could do no

wrong. It was the 'hottest' fund that a lot of investors held in their portfolios. The

trailblazing performance sustained till March 2000. After that, maintaining a portfolio

dominated by technology and illiquid stocks took a toll on the fund's performance. Little

wonder then that Birla Advantage was among the hardest equity funds to fall during the

tech meltdown.

It is evident from the table that investors who have been invested in UTI and

S81 Mutual Fund for 10 years may not be particularly thrilled with their equity fund

investments. At best, they might be pleased with the brief spurts during which their

equity funds performed well. Apart from that, they have had to live with mediocrity as

its painful best.

However, there seems to be light at the end of the tunnel. UTI has shed its 'babu'

culture and its fund management team is now a lot more professional in its investment

46

approach. Likewise, S8l Mutual Fund has had a significant makeover and some of its

equity and balanced schemes now figure among the foremost in their respective

categories.

This leads us to believe that mutual funds are getting increasingly conscious

about their performance and gone are the days when a brand or the government's

backing was enough to mobilise support and monies. Today investors demand

performance and that day is not very far, when like their counterparts in the US, Indian

equity fund investors choose funds based on the 10, or even 15- Yr performance

criterion.

In the present day the capital market both individual and institutional investors

are mostly equally likely interested to invest their money in various mutual funds. The

importance of primary market has gained momentum with the increasing magnitude of

various financial institutions, corporates, public and private banks. The investors may be

interested in knowing the prospects of returns on their investments in various portfolios

viz equity shares, mutual funds, deposits, bonds and debentures etc. The present study

focuses attention on the performance evaluation of the recently introduced and second to

attractive mutual funds in the capital market in India.

47

RELATIONSHIP BETWEEN NET ASSET VALUE AND

MARKET PRICE OF MUTUAL FUND SCHEMES:

Amongst a variety of factors, the Net Asset Value (NA V) and Market Price

(MP) of the Mutual Funds are the two main factors, which can be considered responsible

for the overall performance of the mutual funds, the market price is primarily determined

by NAV of the Unit. Therefore, it would be interesting to examining the nature and the

extent of relationship between these two factors for various mutual funds under this

investigation. These funds have been classified into two categories- (1) closed or listed

Mutual Funds; and (2) Open ended Mutual Fund.

(i) Listed Mutual Funds:

It seen from the table the NAV and MP for ICICI Power, Margan Stanley Growth Fund,

UTI Master Growth, UTI UGS 2000, UTI Ui3S 5000 were all found to be positively

and highly related, their coefficients of correlation bearing 0.939, 0.739, 0.821, 0.755,

0.740 respectively. The correlation coefficient in case of BOB Growth 95, IDBI-Nit 95,

UTI Master share, Tauras Genshare, UTI Index Equity Fund were also found to be

positively but highly inter-related, their correlation coefficient bearing 0.655, 0.572,

0.681, 0.574 respectively. A few other mutual funds viz, ICICI Premier and UTI Equity

Opportunity Fund though has experienced much lower degree of positiva relationship

between their NAV's and MP's, their r-values being 0.438, 0.220 respectively. The

NAV's and MP's of CRB Arihant Mangal, Escort Income Bond and Sundnim Growth

Fund' 97 were found not correlated, which indicated that their market performance was

not satisfactory in the competitive capital market.

Amongst all the closed mutual fund, the performance of ICICl Power and UTI

Master Growth were found to be the most satisfactory. The investment in these funds

could be regarded as rewarding as compared with most other funds. Since other funds

such as Margan Stanley Growth Fund, UTI, UGS 2000 and UTI UGS 50.00 shares also

exhibited their market performance as fairly good.

48

(ii) Open-ended Mutual Funds

The coefficients of correlation between NA V's and MP's of Canganga, JM

Balance Dividend Plan, JM Balance Growth Plan, JM Dividend Plan, JM Liquid

Growth Plan, JM Debt Fund Grovvih, JM Equity Fund Dividend Plan, Kothari Pioneer

Blue Chip, Kothari Pioneer Prima, Kothari Pioneer Prima Plus, LIe Dhansahayog-B,

UTI Grand Master and UTI Primary Equity Fund-95 were worked out to 0.999, 0.997,

0.997, 0.996, 1.000, 0.988, 0.990, 1.000, 1.000, 1.000, 0.978, 0.993, 0.999 respectively,

which indicated that these two factors 'Of market performance has a positive and highly

significant relationship for these two open-ended funds.

The correlation coefficient in case of UTI Unit Scheme's 95, UTI Master Gain,

92 and L1C Dhanvidyaya come out to 0.762, 0.644, 0.591 respectively which were

though moderate in magnitude, yet positive. The degree of interdependence between

NA V and MP for L1C Dhanraksha-89 (Cap) UTI Unit Scheme, 64 and JM Debt Fund

dividend being 0.468, 0.136, 0.221 respectively though had experienced much lower

degree of positive correlation between NAV and MP of UTI Money Market Fund 97

was found not correlated, which indicated that their market performance was not

satisfactory in the competitive capital market.

According to fifth objective, "To study techniques used by mutual fund

companies for marketing ", the following results are: -

49

MARKETING STRATEGIES ADOPTED BY THE MUTUAL

FUNDS

The present marketing strategies of mutual funds can be divided into two main

headings:

a) Direct Marketing

b) Selling through Intermediaries

A. DIRECT MARKETING

This constitutes 20% of the total sales of mutual funds. Some of the mportant

tools used in this type of selling are:

Personal Selling: - In this case the customer support officer of the fund at a

particular branch takes appointment from the potential prospect. Once the

appointment is fixed, the branch officer, also called Business Development

Associate (BDA) in some funds, then meets the prospect and gives him all details

about the various schemes being offered by his fund. The conversion rate in this

mode of selling is in between 30% - 40%.

Telemarketing: - In this.case the emphasis is to inform the people about the

fund. The names and phone numbers of the people are picked at random from

telephone directory. Sometimes people belonging to a particular profession are

also contacted through phone and are then informed about the fund. Generally the

conversion rate in this form of marketing is 15% - 20%.

Direct Mail: - This is one of the most common method followed by all mutual

funds. Addresses of people offer (CSO), then mails the literature of the schemes

offered by the fund. The follow up starts after 3-4 days of mailing the literature.

The CSO calls on the people to whom the literature was mailed, answers their

queries and is generally successful in taking appointments with those people. It is

then the job of BDA to try his best to convert that prospect into a customer.

Advertisement in Newspapers and Magazines: - The funds regularly advertise

50

in business newspapers and magazines besides in leading national dailies. The

purpose is to keep investors aware about the schemes offered by the fund and

their performance in recent past.

Hoarding and fanners: - In this case, the hoarding and banners of the fund are

put at important locations of the city where the movement of the people is very

high. Generally, such hoarding are put near UTI offices in order to tap people

who are at present investing~in UTI schemes. The hoarding and banner generally

contains information either about one particular scheme or brief information

about all schemes of fund.

B. SELLING THROUGH INTERMEDIARIES

Intermediaries’ contribute towards 80% of the total sales of mutual funds. These

are the people/distributors who are in direct touch with the investors. They

perform an important role in attracting new customers. Most of these

intermediaries are also involved in selling shares and other investment

instruments. They do a commendable job in convincing investors to invest in

mutual funds. A lot depends on the after sale services offered by the intermediary

to the customer. Customers prefer to work with those intermediaries who give

them right information about the fund and keep them abreast with the latest

changes taking place in the market especially if they have any bearing on the fund

in which they have invested.

Regular Meetings with Distributors: - Most of the funds conduct monthly/bi-

monthly meetings with their distributors. The objective is to hear their complaints

regarding service aspects from funds side and other queries related to the market

situation. Sometimes, special training programs are also conducted for the new

agents/distributors. Training involves giving details about the products of the

fund, their present performance in the market, what the competitors are doing and

what they can do to increase the sales of the fund.

51

Chapter-6FINDINGS & SUGGESTIONS

6.1 Findings

Today almost every investor is aware about mutual funds and its schemes. As per

report and analysis most of the investor had invested in Franklin Templeton Flexi Cap

Fund.

Salaried class people are more keen investor in mutual fund then other to earn

regular income through different schemes.

Investor preferences as per scheme.

Open ended scheme to earn regular income and for liquidity purpose.

Close ended to get capital appreciation by investing in these funds.

Balanced funds are also been popular to diversify risk and reward.

Investors need more returns, so they invest in mutual fund.

Mutual funds are more preferred then other investments.

Mutual funds provide more profit then any other investment.

It help in diversification of risk and can be more rewarding.

Investor are earning high profits and increasing there investments in mutual funds

Investor get information through different media such as TV, Radio, Magazines &

Journals and help them in taking decision of what to purchase.

Balanced fund scheme is more preferred among the investors as they provide

balance between risk and reward.

Advertisement in newspaper, magazine & pamphlets provide a make an effective

media to take decision among customers.

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SUGGESTIONS

Awareness among investor by providing the information regarding mutual fund

and their benefits.

Media can provide more information by giving proper advertisement of schemes.

Other categories then salaried class should be motivated to purchase mutual funds

for investments.

To attract more investor’s mutual fund company should provide motive and

objective of scheme in advertisements.

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6.2 LIMITATIONS OF REPORT

An analysis has been done as per the objectives and attempt has been done to

study each and every parameter to make it more useful and to the mark. Effort has been

done so that information collected is correct for the subject studied but there are some

limitations which are as follow.

Study has been undertaken only on 100 investors of Ludhiana. This cannot

provide the information of general public.

Information provided may not he true as same of them closed want to tell exact

figures.

Data collected is from different sources. Mainly secondary data which might have

changed or fluctuated.

Analysis in done on 100 investors only. So the same cannot be imposed on whole

population.

54

BIBLIOGRAPHY

Batra G.S. & Dangwal R.C., (2001) Financial Services, Deep and Deep Publications

Pvt. Ltd., page 7-8, 36-37 & 53.

Chandel Kulbhushan (October 2005) The ICFAI Journal of applied finance, page 56-58.

Gorden E & Natragan D (2003) Financial market and services, Himalaya Publications,

page 275-280.

Joshi Preeti (2004) Awareness about mutual funds and its performance, Report.

Kirkire Sandesh, (April 9 2006). Business India, A vehicle to wealth growth, page 84-

87.

Nayek Mahesh, (December 5, 2005). Business Today, page 230-235

WEBSITES

www.amfiindia.com

www.investors.sebi.gov.in

www.mutualfundindia.com

www.ohioline.osu.edu

www.personalfn.com

55

QUESTIONNAIRE

1. Is Awareness of Mutual Fund schemes present in India?

YES NO

2. How many Investments in the schemes of Mutual Fund?

Equity Debt FranklinFund Fund

Morgan Balanced othersStanley Fund

3. What Factors are considered while selecting the scheme?

Regular Risk other Proceeds

Capital ProfitabilityAppreciation

4. What is the Occupation of the investors?

Businessman Salaried Other

5. Which Schemes suit to the investors?

Open-ended Balanced Fund Leverage Scheme Money Funds

Close-ended Market Mutual Scheme Fund

6. The attributes, which influences the investment decision?

Advertisement Friend Sales Person Any Other

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7. Are Investors Satisfies with Mutual Fund schemes?

Yes No

8. Which Scheme is more profitable and has less risk?

Balanced Short-term UTI Fund Debt Master Mid Cap Fund

Open-ended Franklin Other ValueScheme Templeton Funds

9. Is advertisement effective for providing information?

Yes No

10. Which Information is required for selection of the scheme?

Rate of Risk OtherReturn/Yield Attached

Maturity ProfitabilityPeriod

Thanks for precious time you spend for filling up the questionnaire. And

providing us valuable information. Please provide us your some personal

details also.

Name:Date of birth:Education:Qualification:Gender:Address and contact no. :

57