project report on comparitive analysis of mutual funds

7/29/2019 Project report on Comparitive Analysis of mutual funds

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CHAPTER 1

INTRODUCTION

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INTRODUCTION TO CAPITAL MARKET

The capital market is the market for securities, where Companies & governments can

raise long-term funds. It is a market in which money is lent for periods longer than a year.

A nation's capital market includes such financial institutions as banks, insurance

companies, & stock exchanges that channel long-term investment funds to commercial &

industrial borrowers. Unlike the money market, on which lending is ordinarily short term,

the capital market typically finances fixed investments like those in buildings &

machinery.

Nature & Constituents:

The capital market consists of number of individuals & institutions (including the

government) that canalize the supply & demand for long term capital & claims on capital.

The stock exchange, commercial banks, co-operative banks, saving banks, development

banks, insurance companies, investment trust or companies, etc., are important

constituents of the capital markets.

The capital market, like the money market, has three important Components, namely thesuppliers of loan able funds, the borrowers & the Intermediaries who deal with the

leaders on the one hand & the Borrowers on the other.The demand for capital comes

mostly from agriculture, industry, trade the government. The predominant form of

industrial organization developed Capital Market becomes a necessary infrastructure for

industrialization. Capital market not concerned solely with the issue of new claims on

capital, But also with dealing in existing claims.

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HISTORY

Established in 1875, the Bombay Stock Exchange (BSE) is Asia's first stock exchange. In

12th century France the courratiers de change were concerned with managing &regulating the debts of agricultural communities on behalf of the banks. Because these

men also traded with debts, they could be called the first brokers. A common misbelief is

that in late 13th century Bruges commodity traders gathered inside the house of a man

called Van der Beurze, & in 1309 they became the "Brugse Beurse", institutionalizing

what had been, until then, an informal meeting, but actually, the family Van der Beurze

had a building in Antwerp where those gatherings occurred; the Van der Beurze had

Antwerp, as most of the merchants of that period, as their primary place for trading. The

idea quickly spread around Flanders & neighboring counties & "Beurzen" soon opened in

Ghent & Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government

securities. In 1351 the Venetian government outlawed spreading rumors intended to

lower the price of government funds. Bankers in Pisa, Verona, Genoa & Florence also

began trading in government securities during the 14th century. This was only possible

because these were independent city states not ruled by a duke but a council of influential

citizens. The Dutch later started joint stock companies, which let shareholders invest in

business ventures & get a share of their profits - or losses. In 1602, the Dutch East India

Company issued the first share on the Amsterdam Stock Exchange. It was the first

company to issue stocks & bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first

stock exchange to introduce continuous trade in the early 17th century. The Dutch

"pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts

& other speculative instruments, much as we know them" There are now stock markets in

virtually every developed & most developing economies, with the world's biggest

markets being in the United States, United Kingdom, Japan, India, China, Canada,

Germany, France, South Korea & the Netherlands.

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IMPORTANCE OF STOCK MARKET

Function and purposeThe main trading room of the Tokyo Stock Exchange, where trading is currently

completed through computers. The stock market is one of the most important sources for

companies to raise money. This allows businesses to be publicly traded, or raise

additional capital for expansion by selling shares of ownership of the company in a public

market. The liquidity that an exchange provides affords investors the ability to quickly &

easily sell securities. This is an attractive feature of investing in stocks, compared to other

less liquid investments such as real estate.

History has shown that the price of shares & other assets is an important part of the

dynamics of economic activity, & can influence or be an indicator of social mood. An

economy where the stock market is on the rise is considered to be an up-and-coming

economy. In fact, the stock market is often considered the primary indicator of a

country's economic strength & development. Rising share prices, for instance, tend to be

associated with increased business investment & vice versa. Share prices also affect the

wealth of households & their consumption. Therefore, central banks tend to keep an eye

on the control & behavior of the stock market &, in general, on the smooth operation of

financial system functions. Financial stability is the raison d'tre of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect &

deliver the shares, & guarantee payment to the seller of a security. This eliminates the

risk to an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower

costs & enterprise risks promote the production of goods & services as well as

employment. In this way the financial system contributes to increased prosperity. An

important aspect of modern financial markets, however, including the stock markets, is

absolute discretion.

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For example, American stock markets see more unrestrained acceptance of any firm than

in smaller markets. For example, Chinese firms that possess little or no perceived value to

American society profit American bankers on Wall Street, as they reap large

commissions from the placement, as well as the Chinese company which yields funds to

invest in China. However, these companies accrue no intrinsic value to the long-term

stability of the American economy, but rather only short-term profits to American

business men & the Chinese; although, when the foreign company has a presence in the

new market, this can benefit the market's citizens. Conversely, there are very few large

foreign corporations listed on the Toronto Stock Exchange TSX, Canada's largest stock

exchange. This discretion has insulated Canada to some degree to worldwide financial

conditions. In order for the stock markets to truly facilitate economic growth via lower

costs & better employment, great attention must be given to the foreign participants being

allowed in.

Relation of the stock market to the modern financial system

The financial systems in most western countries has undergone a remarkable

transformation. One feature of this development is disintermediation. A portion of the

funds involved in saving & financing, flows directly to the financial markets instead of

being routed via the traditional bank lending & deposit operations. The general public's

heightened interest in investing in the stock market, either directly or through mutual

funds, has been an important component of this process.

Statistics show that in recent decades shares have made up an increasingly large

proportion of households' financial assets in many countries. In the 1970s, in Sweden,

deposit accounts & other very liquid assets with little risk made up almost 60 percent of

households' financial wealth, compared to less than 20 percent in the 2000s. The major

part of this adjustment in financial portfolios has gone directly to shares but a good deal

now takes the form of various kinds of institutional investment for groups of individuals,

e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc.

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The trend towards forms of saving with a higher risk has been accentuated by new rules

for most funds & insurance, permitting a higher proportion of shares to bonds. Similar

tendencies are to be found in other industrialized countries. In all developed economic

systems, such as the European Union, the United States, Japan & other developed

nations, the trend has been the same: saving has moved away from traditional

(government insured) bank deposits to more risky securities of one sort or another.

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage the

associated increased risks. Stock prices fluctuate widely, in marked contrast to the

stability of (government insured) bank deposits or bonds. This is something that could

affect not only the individual investor or household, but also the economy on a large

scale. The following deals with some of the risks of the financial sector in general and the

stock market in particular. This is certainly more important now that so many newcomers

have entered the stock market, or have acquired other 'risky' investments (such as

'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television

commentators, financial writers, analysts, & market strategists are all overtaking each

other to get investors' attention. At the same time, individual investors, immersed in chat

rooms & message boards, are exchanging questionable & often misleading tips. Yet,

despite all this available information, investors find it increasingly difficult to profit.

Stock prices skyrocket with little reason, then plummet just as quickly, & people who

have turned to investing for their children's education & their own retirement become

frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the long-term value-

oriented stock investor Warren Buffett. Buffett began his career with $100, and $100,000

from seven limited partners consisting of Buffett's family and friends. Over the years he

has built himself a multi-billion-dollar fortune.

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Role of Capital Market

The primary role of the capital market is to raise long-term funds for governments, banks,

& corporations while providing a platform for the trading of securities. This fundraising

is regulated by the performance of the stock & bond markets within the capital market.The member organizations of the capital market may issue stocks & bonds in order to

raise funds. Investors can then invest in the capital market by purchasing those stocks &

bonds.

The capital market, however, is not without risk. It is important for investors to

understand market trends before fully investing in the capital market. To that end, there

are various market indices available to investors that reflect the present performance of

the market.

Regulation of the Capital Market

Every capital market in the world is monitored by financial regulators & their respective

governance organization. The purpose of such regulation is to protect investors from

fraud & deception. Financial regulatory bodies are also charged with minimizing

financial losses, issuing licenses to financial service providers, and enforcing applicable

laws.

The Capital Markets Influence on International Trade

Capital market investment is no longer confined to the boundaries of a single nation.

Todays corporations and individuals are able, under some regulation, to invest in the

capital market of any country in the world. Investment in foreign capital markets has

caused substantial enhancement to the business of international trade

The Primary and Secondary Markets

The capital market is also dependent on two sub-markets the primary market & thesecondary market. The primary market deals with newly issued securities & is

responsible for generating new long-term capital. The secondary market handles the

trading of previously-issued securities, & must remain highly liquid in nature because

most of the securities are sold by investors. A capital market with high liquidity & high

transparency is predicated upon a secondary market with the same qualities.

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List of Stock Exchanges in India

Table1.1

About the organization

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The Ludhiana Stock Exchange Association Ltd National Stock Exchange of India Ltd

The Gauhati Stock Exchange Association Ltd Inter-Connected Stock Exchange of India

Ltd

Bhubaneswar Stock Exchange Association Ltd Vadodara Stock Exchange Ltd

The Uttar Pradesh Stock Exchange Ltd. Jaipur Stock Exchange Ltd

Saurashtra Kutch Stock Exchange Association

Ltd.

Bombay Stock Exchange Ltd

Over The Counter Stock Exchange Of India Ahmedabad Stock Exchange Ltd

The Pune Stock Exchange Ltd Bangalore Stock Exchange Ltd

Coimbatore Stock Exchange Ltd The Calcutta Stock Exchange Association

Ltd

The Cochin Stock Exchange Ltd The Delhi Stock Exchange Association Ltd.

Magadh Stock Exchange Association The Hyderabad Stock Exchange Ltd

Madhya Pradesh Stock Exchange Ltd Madras Stock Exchange Ltd


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The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd

(NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of Indias premier

providers of financial services.

IIFL offers advice and execution platform for the entire range of financial services

covering products ranging from Equities and derivatives, Commodities, Wealth

management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking,

Gold bonds and other small savings instruments.

We have a presence in:

Equities our core offering, gives us a leading market share in both retail and institutional

segments. Over a million retail customers rely on our research, as do leading FIIs and

MFs that invest billions.

Private Wealth Management services cater to over 2500 families who have trusted us

with close to Rs 25,000 crores ($ 5bn) of assets for advice.

Investment Banking services are for corporates looking to raise capital. Our forte is

Equity Capital Markets, where we have executed several marquee transactions.

Credit & Finance focuses on secured mortgages and consumer loans. Our high quality

loan book of over Rs. 6,200 crores ($ 1.2bn) is backed by strong capital adequacy of

approximately 20%.

IIFL Mutual Fund made an impressive beginning in FY12, with lowest charge Nifty

ETF. Other products include Fixed Maturity Plans.

Life Insurance, Pension and other Financial Products, on open architecture complete

our product suite to help customers build a balanced portfolio.

IIFL has received membership of the Colombo Stock Exchange becoming the first

foreign broker to enter Sri Lanka. IIFL owns and manages the

website, www.indiainfoline.com, which is one of Indias leading online destinations for

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personal finance, stock markets, economy and business. IIFL has been awarded the Best

Broker, India by FinanceAsiaand the Most improved brokerage, India in

the Asia Moneypolls. India Infoline was also adjudged as Fastest Growing EquityBroking House - Large firms byDun & Bradstreet. A forerunner in the field of equityresearch, IIFLs research is acknowledged by none other than Forbes as Best of the

Web and a must read for investors in Asia.

Our research is available not just over the Internet but also on international wire services

like Bloomberg, Thomson First Call and Internet Securities besides others where it is

amongst one of the most read Indian brokers.

IIFL is a listed company with a consolidated group net worth of about Rs 1,800 crores.

The income and net profit during FY2010-11 were Rs. 14.7 bn and Rs. 2.1 bn

respectively.

The Group has a consistent and uninterrupted track record of profits and dividends since

its listing in 2005. The company is listed on both Exchanges and also trades in the

derivatives segment.

IIFLs Crisil and ICRA Rating for short term is top rated as CRISIL A1+ and ICRA

(A1+) respectively. For long term, IIFL has been rated ICRA (AA-) by ICRA and

CRISIL AA-/Stable by CRISIL indicating high degree of safety for timely servicing of

financial obligations.

IIFL is near you physically: we are present in every nook and cranny of the country, with

over 3,000 business locations across 500 cities in India. You can reach us in a variety of

ways, online, over the phone and through our branches. All our offices are connected

with the corporate office in Mumbai with cutting edge networking technology. The group

caters to a customer base of about a million customers.

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Our physical presence in key global markets includes subsidiaries in Colombo, Dubai,

New York, Mauritius, London, Singapore and Hong Kong.

The company has a network of 596 branches spread across 345 cities and towns. It has

more than 500000 customers.

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock

Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both the

exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and

Portfolio Management Services. It offers broking services in the Cash and Derivatives segments of

the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL as a

depository participant, providing a one-stop solution for clients trading in the equities market. It has

recently launched its Investment banking and Institutional Broking business.

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Fig 1.1

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients. These

services are offered to clients as different schemes, which are based on differing investmen

strategies made to reflect the varied risk-return preferences of clients.

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India Infoline Media and Research Services Limited

The content services represent a strong support that drives the broking, commodities,

mutual fund and portfolio management services businesses. Revenue generation is

through the sale of content to financial and media houses, Indian as well as global.

It undertakes equities research which is acknowledged by none other than Forbes as Best

of the Web and a must read for investors in Asia. India Infolines research is

available not just over the internet but also on international wire services like Bloomberg

(Code: IILL), Thomson First Call and Internet Securities where India Infoline is amongst

the most read Indian brokers.

India Infoline Commodities Limited.

India Infoline Commodities Pvt Limited is engaged in the business of commodities

broking. Our experience in securities broking empowered us with the requisite skills and

technologies to allow us offer commodities broking as a contra-cyclical alternative to

equities broking. We enjoy memberships with the MCX and NCDEX, two leading Indian

commodities exchanges, and recently acquired membership of DGCX. We have a multi-

channel delivery model, making it among the select few to offer online as well as offline

trading facilities.

India Infoline Marketing & Services

India Infoline Marketing and Services Limited is the holding company of India Infoline

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Insurance Services Limited and India Infoline Insurance Brokers Limited.

(a) India Infoline Insurance Services Limited is a registered Corporate Agent with the

Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate

Agent for ICICI Prudential Life Insurance Co Limited, which is Indias largest private

Life Insurance Company. India Infoline was the first corporate agent to get licensed by

IRDA in early 2001.

(b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is

a newly formed subsidiary which will carry out the business of Insurance broking. We

have applied to IRDA for the insurance broking licence and the clearance for the same is

awaited. Post the grant of license, we propose to also commence the general insurance

distribution business.

India Infoline Investment Services Limited

Consolidated shareholdings of all the subsidiary companies engaged in loans and

financing activities under one subsidiary. Recently, Orient Global, a Singapore-based

investment institution invested USD 76.7 million for a 22.5% stake in India Infoline

Investment Services. This will help focused expansion and capital raising in the saidsubsidiaries for various lending businesses like loans against securities, SME financing,

distribution of retail loan products, consumer finance business and housing finance

business. India Infoline Investment Services Private Limited consists of the following

step-down subsidiaries.

(a) India Infoline Distribution Company Limited (distribution of retail loan products)

(b) Moneyline Credit Limited (consumer finance)

India Infoline Housing Finance Limited (housing finance)

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IIFL (Asia) Private Limited

IIFL (Asia) Private Limited is wholly owned subsidiary which has been incorporated in

Singapore to pursue financial sector activities in other Asian markets. Further to

obtaining the necessary regulatory approvals, the company has been initially capitalized

at 1 million Singapore dollars.

India Infoline Investment Services Ltd:

India Infoline Investment Service Ltd is also a 100% subsidiary of India Infoline Ltd. It

has an NBFC license from the Reserve Bank of India (RBI) and offers margin fundingfacility to the broking customers.

MANAGEMENT OF INDIA INFOLINE

Mr. Nirmal Jain

Nirmal Jain is the founder and Chairman of India Info line Ltd. He holds an MBA

degree from IIM Ahmedabad, and is a Chartered Accountant and a Cost Accountant. He

has had an impeccable professional and academic track record. He then joined hands with

two local brokers to set up their equity research division Inquire, in 1994. His work set

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new standards for equity research in India. In 1995, he founded his own independent

financial research company, now known as India Info line Ltd.

Mr. R VenkataramanVenkataraman is the co-promoter and Executive Director of India Infoline Ltd.

He holds a B.Tech degree in Electronics and Electrical Communications Engineering

from IIT Kharagpur and an MBA degree from IIM Bangalore. He has held senior

managerial positions in various divisions of ICICI Limited, including ICICI Securities

Limited, their investment banking joint venture with J P Morgan of USA and with BZW

and Taib Capital Corporation Limited. He has also held the position of Assistant Vice

President with G E Capital Services India Limited in their private equity division.

The Board of Directors

Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India

Infoline comprises:

Mr. Sat Pal Khattar (Non Executive Director)

Mr. Sanjiv Ahuja (Independent Director)

Mr. Nilesh Vikamsey (Independent Director)Mr. Kranti Sinha (Independent Director)

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ABOUT THE TOPIC

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SWOT ANALYSIS India Infoline (IIFL)

Parent Company India Infoline Ltd.

Category Brokerage Houses, Consumer Financial Services

Sector Banking and Financial Services

Tagline/ Slogan Knowledge is the edge; Its all about money, honey

USP One of the leading players in the Indian financial services space

STP

Segment Brokerage

Target Group Urban and Rural Investors

Positioning Complete Investment and Stock trading Solutions

SWOT Analysis

Strength

1. Wide range of financial products

2. Successful implementation of Insurance broking model

3. Online portals successful branding as 5paisa.com

4. Have over 2500 offices in India in over 500 cities

5. First Indian brokerage house to get membership of Singapore

Exchange

6. IIFL has been awarded the Best Broker, India , Most improved

brokerage, India , Fastest Growing Equity Broking House

Weakness

1. High risk exposure as seen by conservative population

2. Less emphasis on advertising causes lack of brand visibility

Opportunity

1. High income Urban families

2. More penetration into the growing cities

Threats1. Stringent Economic measures by Government and RBI2. Entry of foreign finance firms in Indian Market

Competition

Competitors

1. Share khan

2. Indiabulls

3. Angel Broking


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Mutual fund is a trust that pools the savings of a number of investors who share a

common financial goal. This pool of money is invested in accordance with a stated

objective. The joint ownership of the fund is thus Mutual, i.e. the fund belongs to

all investors. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned

through these investments and the capital appreciations realized are shared by its

unit holders in proportion the number of units owned by them. Thus a Mutual Fund

is the most suitable investment for the common man as it offers an opportunity to

invest in a diversified, professionally managed basket of securities at a relatively

low cost. A Mutual Fund is an investment tool that allows small investors access to

a well-diversified portfolio of equities, bonds and other securities. Each shareholderparticipates in the gain or loss of the fund. Units are issued and can be redeemed as

needed. The funds Net Asset value (NAV) is determined each day.

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.

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Fig: 1.2

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When an investor subscribes for the units of a mutual fund, he becomes part owner

of the assets of the fund in the same proportion as his contribution amount put up

with the corpus (the total amount of the fund). Mutual Fund investor is also known

as a mutual fund shareholder or a unit holder. Any change in the value of the

investments made into capital market instruments (such as shares, debentures etc) is

reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the

market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a

scheme is calculated by dividing the market value of scheme's assets by the total

number of units issued to the investors.

ADVANTAGES OF MUTUAL FUND

Portfolio Diversification

Professional management

Reduction / Diversification of Risk

Liquidity

Flexibility & Convenience

Reduction in Transaction cost

Safety of regulated environment

Choice of schemes

Transparency

DISADVANTAGE OF MUTUAL FUND

No control over Cost in the Hands of an Investor

No tailor-made Portfolios

Managing a Portfolio Funds

Difficulty in selecting a Suitable Fund Scheme

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HISTORY OF THE 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. Though the

growth was slow, but it accelerated from the year 1987 when non-UTI players

entered the Industry.

In the past decade, Indian mutual fund industry had seen a dramatic improvement,

both qualities wise as well as quantity wise. Before, the monopoly of the market

had seen an ending phase; the Assets Under Management (AUM) was Rs67 billion.

The private sector entry to the fund family raised the A sum to Rs. 470 billion in

March 1993 and till April 2004; it reached the height if Rs. 1540 billion.

The Mutual Fund Industry is obviously growing at a tremendous space with the

mutual fund industry can be broadly put into four phases according to the

development of the sector. Each phase is briefly described as under.

First Phase 1964-87

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

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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)

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. As at the end of

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

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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 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.

consolidation and growth. As at the end of September, 2004, there were 29 funds,

which manage assets of Rs.153108 crores under 421 schemes.

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CATEGORIES OF MUTUAL FUND:

Fig 1.3

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Mutual funds can be classified as follow :

Based on their structure:

Open-ended funds: Investors can buy and sell the units from the fund,

at any point of time.

Close-ended funds: These funds raise money from investors only once.

Therefore, after the offer period, fresh investments can not be made into the fund. If

the fund is listed on a stocks exchange the units can be traded like stocks (E.g.,

Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-

ended funds provided liquidity window on a periodic basis such as monthly or

weekly. Redemption of units can be made during specified intervals. Therefore,

such funds have relatively low liquidity

Based on their investment objective:

Equity funds: These funds invest in equities and equity related instruments.

With fluctuating share prices, such funds show volatile performance, even losses.However, short term fluctuations in the market, generally smoothens out in the long

term, thereby offering higher returns at relatively lower volatility. At the same time,

such funds can yield great capital appreciation as, historically, equities have

outperformed all asset classes in the long term. Hence, investment in equity funds

should be considered for a period of at least 3-5 years. It can be further classified

as:

i) Index funds- In this case a key stock market index, like BSE Sensex or Nifty

is tracked. Their portfolio mirrors the benchmark index both in terms of

composition and individual stock weightages.

ii) Equity diversified funds- 100% of the capital is invested in equities

spreading across different sectors and stocks.

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iii|) Dividend yield funds- it is similar to the equity diversified funds except

that they invest in companies offering high dividend yields.

iv)Thematic funds- Invest 100% of the assets in sectors which are relatedthrough some theme.

e.g. -An infrastructure fund invests in power, construction, cements sectors etc.

v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking

sector fund will invest in banking stocks.

vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

Balanced fund:Their investment portfolio includes both debt and equity. As a

result, on the risk-return ladder, they fall between equity and debt funds. Balanced

funds are the ideal mutual funds vehicle for investors who prefer spreading their

risk across various instruments. Following are balanced funds classes:

i) Debt-oriented funds -Investment below 65% in equities.

ii) Equity-oriented funds -Invest at least 65% in equities, remaining in debt.

Debt fund: They invest only in debt instruments, and are a good option for

investors averse to idea of taking risk associated with equities. Therefore, they

invest exclusively in fixed-income instruments like bonds, debentures, Governmentof India securities; and money market instruments such as certificates of deposit

(CD), commercial paper (CP) and call money. Put your money into any of these

debt funds depending on your investment horizon and needs.

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i) Liquid funds- These funds invest 100% in money market instruments, a large

portion being invested in call money market.

ii) Gilt funds ST- They invest 100% of their portfolio in government securitiesof and T-bills.

iii) Floating rate funds - Invest in short-term debt papers. Floaters invest in

debt instruments which have variable coupon rate.

iv)Arbitrage fund- They generate income through arbitrage opportunities due to

mis-pricing between cash market and derivatives market. Funds are allocated to

equities, derivatives and money markets. Higher proportion (around 75%) is put in

money markets, in the absence of arbitrage opportunities.

v) Gilt funds LT- They invest 100% of their portfolio in long-term

government securities.

vi) Income funds LT- Typically, such funds invest a major portion of the

portfolio in long-term debt papers.

vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an

exposure of 10%-30% to equities.

viii) FMPs- fixed monthly plans invest in debt papers whose maturity is in line

with that of the fund.

INVESTMENT STRATEGIES

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1. Systematic Investment Plan: under this a fixed sum is invested each

month on a fixed date of a month. Payment is made through post dated cheques or

direct debit facilities. The investor gets fewer units when the NAV is high and more

units when the NAV is low. This is called as the benefit of Rupee Cost Averaging

(RCA)

2. Systematic Transfer Plan: under this an investor invest in debt oriented

fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity

scheme of the same mutual fund.

3. Systematic Withdrawal Plan: if someone wishes to withdraw from a

mutual fund then he can withdraw a fixed amount each month.

MUTUAL FUND FEES AND EXPENSES

Mutual fund fees and expenses are charges that may be incurred by investors who hold

mutual funds. Running a mutual fund involves costs, including shareholder transaction

costs, investment advisory fees, and marketing and distribution expenses. Funds passalong these cost to investors in a number of ways.

1. TRANSACTION FEES

i) Purchase Fee: It is a type of fee that some funds charge their shareholders when they

buy shares. Unlike a front-end sales load, a purchase fee is paid to the fund (not to a

broker) and is typically imposed to defray some of the funds costs associated with the

purchase.

ii) Redemption Fee: It is another type of fee that some funds charge their shareholders

when they sell or redeem shares. Unlike a deferred sales load, a redemption fee is paid to

the fund (not to a broker) and is typically used to defray fund costs associated with

shareholders redemption.

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iii) Exchange Fee: Exchange fee that some funds impose on shareholders if they

exchange (transfer) to another fund within the same fund group or "family of funds."

2. PERIODIC FEES

i) Management Fee: Management fees are fees that are paid out of fund assets to the

funds investment adviser for investment portfolio management, any other management

fees payable to the funds investment adviser or its affiliates, and administrative fees

payable to the investment adviser that are not included in the "Other Expenses" category.

They are also called maintenance fees.

ii) Account Fee: Account fees are fees that some funds separately impose on investors in

connection with the maintenance of their accounts. For example, some funds impose an

account maintenance fee on accounts whose value is less than a certain dollar amount.

3. OTHER OPERATING EXPENSES

Transaction Costs: These costs are incurred in the trading of the funds assets. Funds with

a high turnover ratio, or investing in illiquid or exotic markets usually face higher

transaction costs. Unlike the Total Expense Ratio these costs are usually not reported.

LOADS

Definition of a load

Load funds exhibit a "Sales Load" with a percentage charge levied on purchase or sale of

shares. A load is a type of Commission (remuneration). Depending on the type of load a

mutual fund exhibits, charges may be incurred at time of purchase, time of sale, or a mix

of both. The different types of loads are outlined below.

Front-end load:

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Also known as Sales Charge, this is a fee paid when shares are purchased. Also known

asa "front-end load," this fee typically goes to the brokers that sell the funds shares.

Front-end loads reduce the amount of your investment. For example, lets say you have

Rs.10,000 and want to invest it in a mutual fund with a 5% front-end load. The Rs.500

sales load you must pay comes off the top, and the remaining Rs.9500 will be invested in

the fund. According to NASD rules, a front-end load cannot be higher than 8.5% of your

investment.

Back-end load: Also known as Deferred Sales Charge, this is a fee paid when shares

are sold. Also known as a "back-end load," this fee typically goes to the brokers that sell

the funds shares. The amount of this type of load will depend on how long the investor

holds his or her shares and typically decreases to zero if the investor holds his or her

shares long enough.

Level load / Low load:

Its similar to a back-end load in that no sales charges are paid when buying the fund.

Instead a back-end load may be charged if the shares purchased are sold within a given

timeframe. The distinction between level loads and low loads as opposed to back-end

loads, is that this time frame where charges are levied is shorter.

No-load Fund:

As the name implies, this means that the fund does not charge any type of sales load. But,

as outlined above, not every type of shareholder fee is a "sales load." A no-load fund may

charge fees that are not sales loads, such as purchase fees, redemption fees, exchange

fees, and account fees.

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RISK V/S. RETURN:

Fig 1.4

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ORGANIZATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates the

Organizational set up of a mutual fund

Fig 1.5

A Mutual Fund is set up in the form of trust, which has sponsor, trustees, asset

management company (AMC), and custodian. The trust is established by sponsor or more

than one sponsor who is like a promoter of company. The trustee of mutual fund holds its

property for the benefit of unit holders. Asset Management Company (AMC) approved

by SEBI manages the funds by making investments in various types of securities.

Custodian, who registered with SEBI, holds the securities of the fund in its custody. The

trustees are vested with the general power of superintendence and direction over AMC.

They monitor the performance and compliance of SEBI regulations by mutual fund.

SEBI regulations required that at least two thirds of the directors of trustee company or

board of trustees must be independent i.e. they should not be associated with sponsors.

Also, 50% of the directors of the AMC must be independent. All mutual funds are

required to be registered with SEBI before they launch their schemes.

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MAJOR MUTUAL FUND COMPANIES IN INDIA

ABN AMRO MUTUAL FUND

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO

Trustee(India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset

Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is

the custodian of ABN AMRO Mutual Fund.

BIRLA SUN LIFE MUTUAL FUND

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun

Life Financial. Sun Life Financial is a global organization evolved in 1871 and is being

represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from

India. Birla Sun life Mutual Fund follows a conservative long-term approach to

investment. Recently it crossed a AUM of Rs.10, 000 crores.

BANK OF BARODA MUTUAL FUND

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30,

1992 under the sponsorship of Bank of Baroda. BOB Assets Management Company

Limited is the AUM of BOB Mutual Fund and was incorporated on November 5, 1992.

Deutsche Bank AG is the custodian.

HDFC MUTUAL FUND

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

Housing Development Finance Corporation Limited and Standard Life Investments

Limited.

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ING VYSYA MUTUAL FUND

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee

Company. It is a joint venture of Vysya and ING. The AMC, ING InvestmentManagement (India) Pvt. Ltd. was on incorporated on April 6, 1998.

PRUDENTIAL ICICI MUTUAL FUND

The mutual fund of ICICI is a joint venture with Prudential Plc. Of America, one of the

largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup

on 13 October, 1993 with two sponsors, Prudential Plc. and the AMC is Prudential ICICI

Asset Management Company Limited incorporated on 22 June, 1993.

SAHARA MUTUAL FUND

Sahara Mutual Fund was setup on July 18, 1996 with Sahara India financial Corporation

Ltd. as the sponsor. Sahara Assets Management Company Private Limited incorporated

on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid up capital of the

AMC stands at Rs.25.8 crore

.

STATE BANK OF INDIA MUTUAL FUND

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch

offshore fund, the India Magnum Fund with a corpus of Rs.225 crore Approximately.

Today it is the largest Bank sponsored Mutual Fund in India. They already launched 35

schemes out of which 15 have already yield handsome returns to investors. State Bank of

India Mutual Fund has more than Rs.5, 500 crores as AUM. Now it has an investor base

of over 8 lakhs spread over 18 schemes.

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TATA MUTUAL FUND

TATA Mutual Fund is a Trust under the Indian Trust Act, 1882. The sponsors for Tata

Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment

manger is Tata management Limited is one of the fastest in the country with more thanRs.7,703 Crore(as on 2005) of AUM.

KOTAK MAHINDRA ASSTE MANAGEMENT COMPANY

Kotak Mahindra Asset Management Company is a subsidiary of KMBL. It is presently

having more than 1, 99,818 investors in its various schemes. KMAMC stared its

operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to

investors with varying risk return profiles. It was the first company to launch to dedicatedgilt scheme investing only in government securities.

UNIT TRUST OF INDIA MUTUAL FUND

UTI Asset Management Company Private Limited, established in Jan 24, 2003 manages

the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI

Asset Management Company presently manages a corpus of over Rs.20, 000 crore. The

sponsors of UTI Mutual Fund are Bank of Baroda, Punjab National Bank, State Bank ofIndia, and Life Insurance Corporation of India. The schemes of UTI Mutual Fund are

Liquid Funds, assets Management Funds, Index Funds and Balanced Funds.

RELIANCE MUTUAL FUND

Reliance Mutual Fund was established as trust under Indian Trusts Act, 1882.The

sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is

the Trustee. It was registered on June 30, 1995 as Reliance Mutual Fund which was

changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various

schemes under which, units are issued to the public with a view to contribute to the

capital market and to provide investors the opportunities to make investments in

diversified securities.

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STANDARD CHARTERED MUTUAL FUND

Standard Chartered Mutual Fund was setup on March 13, 2000 sponsored by Standard

Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. StandardChartered Asset Management Company Pvt. Ltd is the AMC which was incorporated

with SEBI on December 20, 1999.

FRANKLIN TEMPLETON MUTUAL FUND

The group, Franklin Templeton investment is a California based company with a global

AUM of US $409.2(as on 2005). It is one of the largest financial service group in the

world. Investors can buy or sell the Mutual Fund through their financial advisor orthrough mail or through their website. They have open end Diversified Equity schemes,

Open end Sector Equity schemes, Open end Hybrid schemes, Open end tax saving

schemes, Open end income and liquid schemes, Closed end Income schemes and Open

end Fund of Funds schemes to offer.

MORGAN STANLEY MUTUAL FUND

Morgan Stanley is a world wide financial services company and its leading in the marketin securities, investment management and credit services. Morgan Stanley investment

management was established in the year 1975. it provides customized asset management

services and products to governments, corporations, pension funds and non profit

organizations. Its services are also extending to high net worth individuals and retail

investors. In India it is known as Morgan Stanley investment management Private Ltd.

and its AMC is Morgan Stanley Mutual Fund. This is the first closed end diversified

equity scheme serving the needs of Indian retail investors focusing on the long term

capital appreciation.

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ESCORT MUTUAL FUNDS

Escort Mutual Funds was set up on April 15th, 1996 with Escorts Finance Ltd. as its

sponsor. The Trustee Company is Escorts Investments Trust Ltd.. Its AMC was

incorporated on Dec1st, 95 with the name Escorts Asset Management Ltd. ALLAINCECAPITAL MUTUAL FUND Alliance Capital Mutual Fund was set up on December 30,

1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsor. The

Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset

Management India Pvt. Ltd. with the corporate office in Mumbai.

BENCHMARK MUTUAL FUND

Benchmark Mutual Fund was setup on June 12, 2001 with Niche FinancialServices Pvt. Ltd. as the sponsor and Benchmark Trustee Company Pvt. Ltd. as the

trustee Company. incorporated on October 16, 2000 and headquartered in Mumbai,

Benchmark Assets Management Company Pvt. Ltd. is the AMC.

CAN BANK MUTUAL FUND

Can Bank Mutual Fund was setup on December 19, 1987 with Canara Bank

acting as the sponsor. Canara bank investment Management Service Ltd. incorporated on

March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai.

CHOLA MUTUAL FUND

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance

Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the

Trustee Company and AMC is Cholamandalam AMC Limited.

LIC MUTUAL FUND

Life Insurance Corporation on India setup LIC Mutual Fund on 19th June 1989. It

contributed Rs.2 crore towards the corpus of the Fund. LIC Mutual Fund was constituted

as a trust in accordance with the provisions of the Indian trust Act, 1882. The Company

started its bsiness on 29th April 1994. The Trustees of LIC Mutual Fund have appointed

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Jeevan Bima Sahayog Asset Management Company Ltd. as the Investment Managers for

mutual fund.

GIC MUTUAL FUNDGIC Mutual Fund, sponsored by General Insurance Corporation of India, a government

of India undertaking and the four Public Sector General Insurance Companies, viz.

National Insurance Co. Ltd, the New India Assurance Co. Ltd. the Oriental Insurance Co.

Ltd and United India Insurance Co. Ltd and is constituted as a Trust in Accordance with

the provisions of the Indian Trusts Act, 1882.

IIFL MUTUAL FUND

India Infoline Asset Management Company Ltd. ("AMC") was incorporated under the

Companies Act, 1956 on March 22, 2010, having its Registered Office at IIFL Centre,

3rd Floor Annex, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai 400 013.

AMC has been appointed as the Investment Manager to IIFL Mutual Fund by the Trustee

vide Investment Management Agreement (IMA) April 29, 2010, executed between India

Infoline Trustee Company Ltd. and India Infoline Asset Management Company Ltd.

Sponsor: India Infoline Limited (IIFL)

Trustee: India Infoline Trustee Company Limited

Investment Manager: India Infoline Asset Management Company Limited

Statutory Details: IIFL Mutual Fund has been set up as a Trust under the Indian Trust

Act, 1882.

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PARAMETERS OF MUTUAL FUND EVALUATION:

Risk

Returns

Liquidity

Expense Ratio

Composition of Portfolio Risks

Risk Associated With Mutual Funds

Investing in mutual funds as with any security, does not come without risk. One of the

most basic economic principles is that risk and reward are directly correlated. In other

words, the greater the potential risk, the greater the potential return. The types of risk

commonly associated with mutual funds are:

Market Risk:

Market risk relate to the market value of a security in the future. Market prices fluctuate

and are susceptible to economic and financial trends, supply and demand, and many other

factors that cannot be precisely predicted or controlled.

Political Risk:

Changes in the tax laws, trade regulations, administered prices etc. is some of the many

political factors that create market risk. Although collectively, as citizens, we have

indirect control through the power of our vote, individually as investors, we have

virtually no control.

Inflation Risk:

Inflation or purchasing power risk, relates to the uncertainty of the future purchasing

power of the invested rupees. The risk is the increase in cost of the goods and services, as

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measured by the Consumer Price Index. Interest Rate Risk: Interest Rate risk relates to

the future changes in interest rates. For instance, if an investor invests in a long term debt

mutual fund scheme and interest rate increase, the NAV of the scheme will fall because

the scheme will be end up holding debt offering lowest interest rates.

Business Risk

Business Risk is the uncertainty concerning the future existence, stability and

profitability of the issuer of the security. Business Risk is inherent in all business

ventures. The future financial stability of a company can not be predicted or guaranteed,

nor can the price of its securities. Adverse changes in business circumstances will reduce

the market price of the companys equity resulting in proportionate fall in the NAV of

mutual fund scheme, which has invested in the equity of such a company.

Economic Risk :

Economic Risk involves uncertainty in the economy, which, in turn can have an adverse

effect on a companys business. For instance, if monsoons fall in a year, equity stocks of

agriculture bases companies will fall and NAVs of mutual funds, which have invested in

such stocks, will fall proportionately. There are 3 different methods with the help of

which we can measure the risk.

Measurement of risk

I. Beta Coefficient Measure Of Risk

Beta relates a funds return with a market index. It basically measures the sensitivity

of funds return to changes in market index.If Beta = 1Fund moves with the market i.e. Passive fund

If Beta < 1Fund is less volatile than the market i.e. Defensive Fund

If Beta > 1Funds will give higher returns when market rises & higher losses when

market falls i.e. Aggressive Fund

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II. Ex Marks or R-squared

Ex Marks represents co relation with markets. Higher the Ex-marks lower the risk of

the fund because a fund with higher Ex-marks is better diversified than a fund with lower

Ex-marks.

Standard Deviation Measure of Risk:

It is a statistical concept, which measures volatility. It measures the fluctuations of

funds returns around a mean level. Basically it gives you an idea of how volatile your

earnings are. It is broader concept than BETA. It also helps in measuring total risk and

not just the market risk of the portfolio.

How to Calculate the Value of a Mutual Fund:

The investors funds are deployed in a portfolio of securities by the fund manager. The

value of these investments keeps changing as the market price of the securities change.

Since investors are free to enter and exit the fund at any time, it is essential that the

market value of their investments is used to determine the price at which such entry and

exit will take place. The net assets represent the market value of assets, which belong to

the investors, on a given date.

Net Asset Value or NAV of a mutual fund is the value of one unit of investment in the

fund, in net asset terms.

NAV = Net Assets of the scheme / Number of Units Outstanding Where Net Assets are

calculated as:-(Market value of investments + current assets and other assets + Accrued

income current liabilities and other liabilities less accrued expenses) / No. of Units

Outstanding as at the NAV date NAV of all schemes must be calculated and published at

least weekly for closed-end schemes and daily for open-end schemes.

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The major factors affecting the NAV of a fund are.

Sale and purchase of securities

Sale and repurchase of units

Valuation of assets

Accrual of income and expenses

SEBI requires that the fund must ensure that repurchase price is not lower than

93% of NAV (95% in the case of a closed-fund). On the other side, a fund may

sell new units at a price that is different from the NAV, but the sale price cannot

be higher than 107 % of NAV. Also the difference between the repurchase price

and the sale price of the unit is not permitted to exceed 7% of the sale price.

Measuring Mutual Fund Performance:

We can measure mutual funds performance by different method:

Absolute Return Method:

Percentage change in NAV is an absolute measure of return, which finds the NAV

appreciation between two points of time, as a percentage

.e .g: If NAV of one fund changes from Rs.20 to Rs.22 in 12 months then Absolute

return = (22 20)/20 X 100 =10%

Simple Annual Return Method :

Converting a return value for a period other than one year, into a value for one year, is

called as annualisation In order to annualize a rate, we find out what the return would be

for a year, if the return behaved for a year, in the same manner it did, for any other

fractional period .E .g: If NAV of one fund changes from Rs.20 to Rs.22 in 6 months

then Annual Return = (22 20) /20 X 12/6 X 100 = 20%

Total Return Method :

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The total return method takes into account the dividends distributed by the mutual fund,

and adds it to the NAV appreciation, to arrive at returns .Total Return =(Dividend

distributed + Change in NAV)/ NAV at the start X 100

e .g: If NAV of one fund changes from Rs.20 to Rs.22 in 6 months if in between dividend

of Rs 4 has then Total Return = {4 + (22 20)}/20 X 100 = 30%

Total Return when dividend is reinvested

This method is also called the return on investment (ROI) method. In this method, the

dividends are reinvested into the scheme as soon as they are received at the then

prevailing NAV (ex-dividend NAV).= ((Value of holdings at the end of the period/ value

of the holdings at the beginning) 1)*100

E.g. An investor buys 100 units of a fund at Rs. 10.5 on January 1, 2007. On June 30,

2007 he receives dividends at the rate of 10%. The ex-dividend NAV was Rs. 10.25. On

December 31, 2007, the funds NAV was Rs. 12.25. Value of holdings at the beginning

period= 10.5*100= 1050 Number of units re-invested = 100/10.25 = 9.756 End period

value of investment = 109.756*12.25 = 1344.51 Rs. Return on Investment =

((1344.51/1050)-1)*100 = 28.05%

Compounded Average Annual Return Method:

This method is basically used for calculating the return for more than 1 year. In this

method return is calculated with the following formula: A = P X (1 + R / 100) N Where P

= Principal invested A = maturity value N = period of investment in years R =

Annualized compounded interest rate in %R = {(Nth root of A / P) 1} X 100E. g: If

amount invested is Rs. 100 & in the end we get return of Rs. 200 & period of investment

is 10 years then annualized compounded return is 200 = 100 (1 + R / 100) 10Rate = 7.2

%

RETURNS:

Returns have to be studied along with the risk. A fund could have earned higher return

than the benchmark. But such higher return may be accompanied by high risk. Therefore,

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we have to compare funds with the bench marks, on a risk adjusted basis. William Sharpe

created a metric for fund performance, which enables the ranking of funds on a risk

adjusted basis.

Sharpe Ratio = Risk Premium

Funds Standard Deviation

Trey nor Ratio = Risk Premium

Funds Beta

Risk Premium = Difference between the Funds Average return and Risk free return on

government security or treasury bill over a given period .

LIQUIDITY:

Most of the funds being sold today are open-ended. That is, investors can sell their

existing units, or buy new units, at any point of time, at prices that are related to the NAV

of the fund on the date of the transaction. Since investors continuously enter and exitfunds, funds are actually able to provide liquidity to investors, even if the underlying

markets, in which the portfolio is invested, may not have the liquidity that the investor

seeks.

EXPENSE RATIO:

Expense ratio is defined as the ratio of total expenses of the fund to the average net assets

of the fund. Expense ratio can actually understate the total expenses, because brokeragepaid on transactions of a fund are not included in the expenses. According to the current

SEBI norms, brokerage commissions are capitalized and included in the cost of the

transactions.

Expense ratio = Total Expenses

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Average Net Assets

COMPOSITION OF THE PORTFOLIO:

Credit quality of the portfolio is measured by looking at the credit ratings of the

investments in the portfolio .Mutual Fund fact sheets show the composition of the

portfolio and the investments in various asset classes overtime.

Portfolio turnover rate is the ratio of lesser of asset purchased or sold by funds in the

market to the net assets of the fund.

If Portfolio ratio is 100% means portfolio has been changed fully. When Portfolio ratio is

high means expense ratio is high.

Portfolio Ratio = Total Sales & PurchaseNet Assets of fund

In order to meaningfully compare funds some level of similarity in the following factors

has to be ensured.

Size of the funds

Investment objective

Risk profile

Portfolio composition

Expense ratios

Fund evaluation against benchmark:

Funds can be evaluated against some performance indicators which are known as

benchmarks. There are 3 types of benchmarks:

Relative to market as whole

Relative to other comparable financial products

Relative to other mutual funds

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Relative to market as whole:

There are different ways to measure the performance of fund w.r.t market as

Equity Funds

Index Fund An Index fund invests in the stock comprising of the index in the same

ratio. This is a passive management style.

For example,

Market Index Fund - BSE Sensex

Nifty Index Fund NIFTY

The difference between the return of this fund and its index benchmark can be explained

by TRACKINGERROR.

Active Equity Funds:

The fund manager actively manages this fund. To evaluate performance in such case we

have to select an appropriate benchmark.

Large diversified equity fund - BSE 100

Sector fund - Sectoral Indices

Debt Funds :

Debt fund can also be judged against a debt market index e.g. I-BEX

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Table 1.3

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Table 1.4

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TREATMENT FOR THE INVESTORS (UNITHOLDERS)

Tax benefits of investing in the Mutual Fund

As per the taxation laws in force as at the date of the Offer Document, some broad

income tax implications of investing in the units of the Scheme are stated below. The

information so stated is based on the Mutual Funds understanding of the tax laws in force

as of the date of the Offer Document, which have been confirmed by its auditors. The

information stated below is only for the purposes of providing general information to the

investors and is neither designed nor intended to be a substitute for professional tax

advice. As the tax consequences are specific to each investor and in view of the changing

tax laws, each investor is advised to consult his or her or its own tax consultant with

respect to the specific tax implications arising out of his or her or its participation in the

Scheme .Implications of the Income-tax Act, 1961 as amended by the Finance Act, 2006

To the Unit holders

(a.) Tax on Income In accordance with the provisions of section 10(35)(a) of the Act,

income received by all categories of unit holders in respect of units of the Fund will be

exempt from income-tax in their hands. Exemption from income tax under section 10(35)

of the Act would, however, not apply to any income arising from the transfer of these

units.

(b.) Tax on capital gains: As per the provisions of section 2(42A) of the Act, a unit of a

Mutual Fund, held by the investor as a capital asset, is considered to be a short-term

capital asset, if it is held for 12 months or less from the date of its acquisition by the unit

holder. Accordingly, if the unit is held for a period of more than 12 months, it is treated

as a long-term capital asset

Computation of capital gain Capital gains on transfer of units will be computed after

taking into account the cost of their acquisition. While calculating long-term capital

gains, such cost will be indexed by using the cost inflation index notified by theGovernment of India. Individuals and HUFs, are granted a deduction from total income,

under section 80C of the Act upto Rs. 100,000, in respect of specified investments made

during the year (please also refer paragraph d).

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Long-term capital gains

As per Section 10(38) of the Act, long-term capital gains arising from the sale of unit of

an equity oriented fund entered into in a recognized stock exchange or sale of such unit of

an equity oriented fund to the mutual fund would be exempt from income-tax, providedsuch transaction of sale is chargeable to securities transaction tax.

Pursuant to an amendment made in the Finance Act, 2006, effective 1April 2006,

companies would be required to include such long term capital gains in computing the

book profits and minimum alternated tax liability under section 115JB of the Act.

Short -term capital gains

As per Section 111A of the Act, short-term capital gains from the sale of unit of anequity oriented fund entered into in a recognized stock exchange or sale of such unit of an

equity oriented fund to the mutual fund would be taxed at 10 per cent, provided such

transaction of sale is chargeable to securities transaction tax.

The said tax rate would be increased by a surcharge of:

- 10 per cent in case of non-corporate Unit holders, where the total income exceeds

Rs.1,000,000,

- 10 per cent in case of resident corporate Unit holders, and

- 2.5 per cent in case of non-resident corporate unit holders irrespective of the amount of

taxable income.

Further, an additional surcharge of 2 per cent by way of education cess would be charged

on amount of tax inclusive of surcharge.

In case of resident individual, if the income from short term capital gains is less than the

maximum amount not chargeable to tax, then there will be no tax payable.

Further, in case of individuals/ HUFs, being residents, where the total income excluding

short-term capital gains is below the maximum amount not chargeable to tax1, then the

difference between the current maximum amount not chargeable to tax and total income

excluding short-term capital gains, shall be adjusted from short-term capital gains.

Therefore only the balance short term capital gains will be liable to income tax at the rate

of 10 percent plus surcharge, if applicable and education cess.

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Non-residents

In case of non-resident unit holder who is a resident of a country with which India has

signed a Double Taxation Avoidance Agreement (which is in force) income tax ispayable at the rates provided in the Act, as discussed above, or the rates provided in the

such agreement, if any, whichever is more beneficial to such non-resident unit holder.

Investment by Minors

Where sale / repurchase is made during the minority of the child, tax will be levied on

either of the parents, whose income is greater, where the said income is not covered by

the exception in the proviso to section 64(1A) of the Act. When the child attains majority,such tax liability will be on the child.

Losses arising from sale of units

As per the provisions of section 94(7) of the Act, loss arising on transfer of units, which

are acquired within a period of three months prior to the record date (date fixed by the

Fund for the purpose of entitlement of the unit holder to receive income from units) and

sold within a period of nine months after the record date, shall not be allowed to theextent of income distributed by funds in respect of such units.

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SEBI REGULATIONS:

As far as mutual funds are concerned, SEBI formulates policies and regulates the

mutual funds to protect the interest of the investors.

SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds

sponsored by private sector entities were allowed to enter the capital market.

The regulations were fully revised in 1996 and have been amended thereafter

from time to time.

SEBI has also issued guidelines to the mutual funds from time to time to protect

the interests of investors.

All mutual funds whether promoted by public sector or private sector entities

including those promoted by foreign entities are governed by the same set of

Regulations. The risks associated with the schemes launched by the mutual funds

sponsored by these entities are of similar type. There is no distinction in

regulatory requirements for these mutual funds and all are subject to monitoring

and inspections by SEBI.

SEBI Regulations require that at least two thirds of the directors of trustee

company or board of trustees must be independent i.e. they should not be

associated with the sponsors.

Also, 50% of the directors of AMC must be independent. All mutual funds are

required to be registered with SEBI before they launch any scheme.

Further SEBI Regulations, inter-alia, stipulate that MFs cannot guarantee returns

in any scheme and that each scheme is subject to 20 : 25 condition [i.e. minimum

20 investors per scheme and one investor can hold more than 25% stake in the

corpus in that one scheme].

Also SEBI has permitted MFs to launch schemes overseas subject various

restrictions and also to launch schemes linked to Real Estate, Options and Futures,

Commodities, etc

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ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI):

With the increase in mutual fund players in India, a need for mutual fund association in

India was generated to function as a non-profit organization. Association of Mutual

Funds in India (AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body

of all Asset Management Companies (AMC) which has been registered with SEBI. Till

date all the AMCs are that have launched mutual fund schemes are its members. It

functions under the supervision and guidelines of its Board of Directors. Association of

Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional

and healthy market with ethical lines enhancing and maintaining standards. It follows the

principle of both protecting and promoting the interests of mutual funds as well as their

unit holders.

The Objectives of Association of Mutual Funds in India:

The Association of Mutual Funds of India works with 30 registered AMCs of the

country. It has certain defined objectives which juxtaposes the guidelines of its

Board of Directors. The objectives are as follows:

This mutual fund association of India maintains high professional and ethical

standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of

conduct which is followed by members and related people engaged in the

activities of mutual fund and asset management. The agencies who are by any

means connected or involved in the field of capital markets and financial services

also involved in this code of conduct of the association.

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

fund industry.

Associations of Mutual Fund of India do represent the Government of India, the

Reserve Bank of India and other related bodies on matters relating to the Mutual

Fund Industry.

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It develops a team of well qualified and trained Agent distributors. It implements

a programme of training and certification for all intermediaries and other engaged

in the mutual fund industry.

AMFI undertakes all India awareness programme for investors in order to

promote proper understanding of the concept and working of mutual funds.

At last but not the least association of mutual fund of India also disseminate

informations on Mutual Fund Industry and undertakes studies and research either

directly or in association with other bodies.

AMFI Publications: AMFI publish mainly two types of bulletin. One is on the monthly

basis and the other is quarterly. These publications are of great support for the investors

to get intimation of the knowhow of their parked money.

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CHAPTER 2

RESEARCH

METHODOLOGY

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OBJECTIVES

To study the benefits available from Mutual Fund investment.

To give an idea of the types of schemes available.

To analyze about the market trends of Mutual Fund investment.

To study some popular mutual fund schemes.

Observe the fund management process of mutual funds.

Explore the recent developments in the mutual funds in India.

To give an idea about the regulations of mutual funds

Methodology

The technique deployed to analyze and interpret the data for the purpose of hitting the

target objectives plays a crucial role. The effective research technique has a significant

contribution for effective objective achievement. Throughout this project I have blanked

some of the questions placed in the questionnaire and the secondary data gathered

Developing a Research plan:

A proper plan was developed and finalized and decision regarding data sources, research

sampling plan was designed. The research was exploratory as well as conclusive in nature

and the database was gathered through secondary and primary sources in order to achieve

the objective of the study.

Type of Research methods:

The research technique used for the study involve following two methods:

1.) Exploratory Research: The exploratory research was used to search the secondary and

primary database in form of survey of the customers dealing with various mutual fund

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companies with the help of questionnaire. The hypothesis for the research has been

generated in the following manner:

- Survey of Individuals

2.) Conclusive research: The database for the research has been conductedsystematically; and its observations and analysis has been done as per the research

objectives.

Sample Design:-

Sample Size: The Total sample size was 30

Sampling Method: -

The study is based on the non-probability sampling and whereinconvenience sampling was used to collect the data by picking out people in the most

convenient and fastest way to immediately get their reactions.

Research Type:

The research types used for the above mentioned research methods are as follows:

Analytical

The analytical research instruments include surveys and fact-findings and enquire of

different kinds. As it is a data base project, analytical research is done to make facts and

information already available, analyze these to make critical evaluation.

Empirical

Empirical research relies on experience/observation. This is a data base research, coming

up with conclusion.

Data Sources:

Database serves as a base for concluding any type of research. It is necessary to know

which type of data is relevant for the present research. As the present study is a literature

survey, secondary data plays a crucial role in concluding the project. While secondary

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data are easy to measure and quantify, relatively easy to assign money value, objectively

based, a common measure of organizational performance and very credible, the primary

data on the other hand are difficult to measure or quantify directly, difficult to assign

money value in absolute term, subjective, less creditable as a performance measure and

usually behaviorally oriented.

Primary data source

Secondary data source

1.)Sources of primary data were feedback of the questionnaire from the investors as well

as non-investors in various mutual funds, the person authorize for selling of mutual funds

and managers of various banks having their mutual fund schemes.

2.) Secondary data sources are those which have already been passed through the

statistical process. In the present study secondary data is used to from the literature

reviews of various banks.

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CHAPTER 3FINDINGS

&

ANALYSIS

Ques 1.) Are you conventional of making investments?

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Graph 3.1

INTERPRETATION:

According to this chart out of 30 investors of Delhi mostly conventional of makinginvestment i.e. 53% and others are not i.e. 47%.

Ques 2.) Are you planning to invest in future?

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Graph 3.2

INTERPRETATION

According to this chart out of 30 investors of Delhi majority of the investors are planningto invest in near future i.e. 87% and very few are not eager in investments i.e. 13%.

Ques 3.) What kind of investment you prefer the most?

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Graph 3.3

INTERPRETATION

From above graph it can be inferred that of 30, people have invested in fixed deposit19%, 9% in insurance, 16% in mutual funds, 19% in real estate, 12% in commodity, 12%in equity, and 13% in gold.

Ques 4.) From the following, which Investment option do you think has good All-

round capacity performing ability?

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Graph 3.4

INTERPRETATION

Out of 30 investors, they found that stock has the most all round investment performingability i.e. 40%, than mutual funds 27%, than real estate 20% and finally money market13%.

Ques 5.)While investing your money factor you prefer the most?

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Graph 3.5

INTERPRETATION

Out of 30 investors, 7 people prefer to invest where there is low risk, 15 prefer to investwhere there is high return and remaining 8 prefer easy liquidity.

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Ques 6.) Have you ever invested in mutual fund or are you aware about mutual

funds?

Graph 3.6

INTERPRETATION

From the above chart it is inferred that 63% of the people are aware of mutual funds andits operations and 37% are not aware of mutual funds and its operations.

Ques 7.) Where do you find yourself as mutual fund investor?

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Graph 3.7

INTERPRETATION

From the above chart it can be inferred that 60% of the investors have partial knowledgeof mutual funds and its operations, whereas 13% are fully aware, 20% are totally ignorantand 7% are aware of only specific scheme of the 30 respondents.

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Ques 8.) What are the factors that attract you to invest in mutual fund?

Graph 3.8

INTERPRETATION

Out of the 30 investors, 33% invested to get tax benefit, 46% invested to get goodreturns, 8% invested to get the professional management of the fund managers and 13%invested because of other specific reasons.

Ques 9.) What is your expected rate of return on Investments in a year?

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Graph 3.9

INTERPRETATION

Out of the 30 investors the expected rate of return upto 10% were 9, 10-15% were of 10,15-20% were of 5 and above 20% were of 6 investors.

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Ques 10.) How do you rate the risk taking ability?

project report on comparitive analysis of mutual funds

Documents