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A DISSERTATION ONMUTUAL FUND AND INVESTOR’S BEHAVIOUR Submitted for partial fulfillment of award of  Post Graduate Diploma...
AbstractThe mutual fund industry is still in growth stage and retail investors have notreally warmed up to the idea of inv...
ACKNOWLEDGEMENTAny accomplishment requires the effort of many people and this work is nodifference. I have been fortunate ...
AbstractAcknowledgement                            Table of contentsChapter1. Introduction   • Introduction of Mutual Fund...
• Stages of Life Cycle   • Classification of Life cycleChapter5. Analysis   • Analysis of Questionnaire   • Suggestions   ...
MUTUAL FUNDSIntroduction:Mutual fund is a pool of money collected from investors and is invested accordingto certain inves...
term mutual fund means the investors contribute to the pool and also benefitfrom the pool. The pool of funds held mutually...
ORGANIZATION OF MUTUAL FUNDSThere are many entities involved and the diagram below illustrates theorganizational set up of...
FEATURES THOSE INVESTORS LIKE IN MUTUAL FUND:If mutual funds are emerging as the favorite investment vehicle it is because...
benefits of scale in brokerage, custodial and other fees translate into    lower costs for investors.•   Liquidity: In ope...
DISADVANTAGES OF MUTUAL FUNDS:Above I have mentioned the various advantages of Mutual Funds but italso suffers from a lot ...
mean you are automatically diversified. For example, a fund that    invests only in a particular industry or region is sti...
OBJECTIVEThe main objective of this study is:   1. To know various factors considered by the customers while going to inve...
SCOPE1. The project will provide us the better platform to understand the history,   growth and various aspects of mutual ...
RESEARCH METHODOLOGYMethodology:Marketing research is the process of collecting and analyzing marketinginformation and ult...
Simple statistical methods.                LIMITATIONS1. This project is limited in scope as the survey is conducted with ...
HISTORY OF MUTUAL FUNDS • The mutual fund industry in India started in 1963 with the formation of   Unit Trust of India, a...
• In the year 1992, Securities and exchange Board of India (SEBI) Act was    passed. The objectives of SEBI are – to prote...
• 1987 marked the entry of non- UTI, public sector mutual funds set up by    public sector banks and Life Insurance Corpor...
industry now functions under the SEBI (Mutual Fund) Regulations  1996.• The number of mutual fund houses went on increasin...
industry in India, a phase of significant in terms of both amounts   mobilized from investor and asset under management.• ...
Major Mutual Fund Companies in IndiaABN AMRO Mutual FundABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Tru...
Housing Development Finance Corporation Limited and Standard LifeInvestments Limited.HSBC Mutual FundHSBC Mutual Fund was ...
Liquid Funds, Income Funds, Asset Management Funds, Index Funds, EquityFunds and Balance Funds.Franklin Templeton India Mu...
The objectives of Association of Mutual Funds (AMFI) in IndiaThe Association of Mutual Funds of India works with 30 regist...
information’s on Mutual Fund Industry and undertakes studies and researcheither directly or in association with other bodi...
The finance ministry is the supervisor of both RBI and SEBI. The ministry offinance is also the appellate authority under ...
Legal StructureMutual Fund has a unique structure not shared with other entities such ascompanies or the firms. It is impo...
As per the existing SEBI regulations for a person to quantify as the sponsor hemust contribute at least 40% of the net wor...
ASSET MANAGEMENT COMPANYIts appointment and function:The role of AMC is to act as the investment manager of the trust. The...
TYPES OF MUTUAL FUNDS
Schemes according to Maturity PeriodA mutual fund scheme can be classified into open-ended scheme or close-ended scheme de...
A scheme can also be classified as growth scheme, income scheme, orbalanced scheme considering its investment objective. S...
investors looking for moderate growth. They generally invest 40-60% inequity and debt instruments. These funds are also af...
Sector specific funds/schemes:These are the funds/schemes which invest in the securities of only thosesectors or industrie...
Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is1%, then the investors who buy would be req...
INVESTMENT PLANSThe term investment plans generally refers to the services that the funds provide tothe investors offering...
Reinvestment takes place at the ex-dividend NAV. The ARP ensures that theinvestors reap the benefits of compounding in his...
investors should understand that the systematic withdrawal plans aredifferent from the monthly income plans, as the former...
EQUITY FUNDAn open ended Equity scheme:Fund features:Who should invest?The scheme is suitable for investors seeking effect...
All business days.Redemption proceedsWill be dispatched within three business days.Tax benefitsIndexation benefits, No Gif...
Sale and repurchase on all business days.NAV calculationAll business days.Redemption proceedsWill be dispatched within thr...
NAV calculationAll business days.Redemption proceedsWill be dispatched within three business days.Tax benefitsIndexation b...
All business days.Redemption proceedsWill be dispatched within three business days.Tax benefitsTax –rebate under section 8...
The mutual funds in India are required to follow the accounting policies as laiddown by the SEBI (Mutual Fund) Regulations...
unit, which is the value, represented by the ownership of one unit in the fund.It is calculated simply by dividing the net...
Valuation of debentures and bonds is a big problem since most ofthem are unlisted and thinly traded. This gives considerab...
MUTUAL FUND PERFORMANCETHE INVESTORS PROSPECTIVE:The investor would actually be interested in tracking the value of invest...
you too have to know how to measure and evaluate the performance of thedifferent funds available to the investors. The nee...
For NAV change in percentage terms:(Absolute change in NAV/NAV at the beginning)*100If period covered is less/more than on...
distribution. The appropriate measure of the growth of the investor’s mutual fundholding is therefore, the return on inves...
Tracking mutual fund performanceHaving identified appropriate measures and benchmarks for the mutual fundavailable in the ...
Mutual Funds Annual and Periodic ReportsThese include data on the funds financial performance, so indicators such asincome...
In India, agencies such as Credence and value research are a source of informationfor the mutual fund performance data and...
LIFE CYCLE STAGESLife cycle guide to financial planningFinancial goal and plans depends to a large extent on the expenses ...
LIFE CYCLE STAGE   FINANCIAL NEEDS      ABILITY TO INVEST CHOICE OF                                                       ...
investmentCHARACTERISSTION OF THE LIFE CYCLE OF INVESTORSLife cycle can be broadly classified into phases:   • Birth and e...
The earning year is when income and expenses are highest. The retirement stageis when incomes are low and expenses are hig...
Analysis of QuestionnaireI visited to 45 people with my questionnaire related to awareness of mutualfund out of them 40 re...
these respondents feedback. Once the questionnaire were filled then the nextwork that comes up is the analysis of the data...
CONCLUSIONThe mutual fund industry is growing at a tremendous pace. A large number ofplans have come up from different fin...
SUGGESTIONSInvestor’s point of view:The question that entire customer, irrespective of the age group and financialstatus, ...
guidelines of SEBI, the AMCs are bound to disclose all the relevant data  that is necessary for the investment purpose of ...
Appendices:Marketing of Mutual Funds.The present marketing strategies of mutual find can be divided into mainknowledge int...
contacted through phone and their informed about the fund. Generally theconversion rate in form of marketing is 15-20%.Dir...
offered by the intermediaries to the customer. Customer prefer to work withthose intermediaries who give them right inform...
Frequently Used TermsNAV:    It is the market value of the assets of the scheme minus its liabilities.The per unit NAV is ...
Questionnaire1. Name of the customer   Mr. / Mrs. / Ms.2. Address/ Contact3. What is the age group you face in?     i.   2...
v.    Retired5. What is the per month income of your family?     i.    < 10,000     ii.   10-30,000    iii.   30-50,000   ...
iv.     Tax benefits9. Are you aware of mutual fund?     i.    Yes    ii.    No10.Have you ever invested in mutual fund?  ...
A dissertation on mutual fund and investor’s behaviour
A dissertation on mutual fund and investor’s behaviour
A dissertation on mutual fund and investor’s behaviour
A dissertation on mutual fund and investor’s behaviour
A dissertation on mutual fund and investor’s behaviour
A dissertation on mutual fund and investor’s behaviour
A dissertation on mutual fund and investor’s behaviour
A dissertation on mutual fund and investor’s behaviour
A dissertation on mutual fund and investor’s behaviour
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  1. 1. A DISSERTATION ONMUTUAL FUND AND INVESTOR’S BEHAVIOUR Submitted for partial fulfillment of award of Post Graduate Diploma in Management (PGDM) By Gunjan Tripathi Name of Guide Prof. Manoj Kumar Dash
  2. 2. AbstractThe mutual fund industry is still in growth stage and retail investors have notreally warmed up to the idea of investing in the stock market owing to thevolatility which jeopardizes the continuous above average returns starting from avery short period which a retail customer wants & also there is a plethora ofchoices which as many as 35 AMCs in India & every one with almost all types offunds. In the debt market people still feel comfortable excepting a lower post taxreturn from bank FDs, post office saving & bonds rather than going for a debtfund which indicate a higher yield. This reports talks about classification of mutualfunds schemes according to different objective & later on performance evaluationis done using NAV and finally questionnaire has been prepared to know theconsumer behavior towards mutual fund.
  3. 3. ACKNOWLEDGEMENTAny accomplishment requires the effort of many people and this work is nodifference. I have been fortunate enough to get help and guidance from manypeople. It is a pleasure to acknowledge them, though it is still an inadequateappreciation for their contribution.I would not have completed this journey without the help, guidance & support ofcertain people who acted as guides and friends along the way. I would like toexpress my deepest and sincere thanks to my faculty guide Prof. Manoj KumarDash for his invaluable guidance and help. The project could not be completedwithout their support and guidance.He acted as a continuous source of inspiration and motivated me throughout theduration of the project.Again I sincerely thanks of him.Submitted with regards:GUNJAN TRIPATHI
  4. 4. AbstractAcknowledgement Table of contentsChapter1. Introduction • Introduction of Mutual Fund • Objective of Study • Scope • Methodology • LimitationsChapter2. Mutual Fund Industry • History of Mutual Fund • Regulatory Framework • Legal Structure • Classification • TypesChapter3. Performance Measures • Investment Plans • Different features of various funds • Net Asset Value • Performance measures of Mutual FundsChapter4. Investor’s point of view
  5. 5. • Stages of Life Cycle • Classification of Life cycleChapter5. Analysis • Analysis of Questionnaire • Suggestions • ConclusionAppendicesAnnexure
  6. 6. MUTUAL FUNDSIntroduction:Mutual fund is a pool of money collected from investors and is invested accordingto certain investment options. A mutual fund is a trust that pools the saving of ano. of investors who share a common financial goal. A mutual fund is createdwhen investors put their money together. It is, therefore, a pool of investor’sfund. The money thus collected is then invested in capital market instrumentssuch as shares, debentures and other securities. The income earned throughthese investments and the capital appreciations realized are shared by its unitholders in proportion to the no. of units owned by them.The most important characteristics of a fund are that the contributors and thebeneficiaries of the fund are the same class of people namely the investors. The
  7. 7. term mutual fund means the investors contribute to the pool and also benefitfrom the pool. The pool of funds held mutually by investors is the mutual fund.A mutual fund business is to invest the funds thus collected according to thewishes of the investors who created the pool. Usually the investors appointprofessional investment managers create a product and offer it for investment tothe investors. This project represents a share in the pool and pre statusinvestment objectives.Thus, a mutual fund is the most suitable investment for a common man as itoffers an opportunity to invest in a diversified, professionally managed basket ofsecurities at relatively low cost.
  8. 8. ORGANIZATION OF MUTUAL FUNDSThere are many entities involved and the diagram below illustrates theorganizational set up of a mutual fund:
  9. 9. FEATURES THOSE INVESTORS LIKE IN MUTUAL FUND:If mutual funds are emerging as the favorite investment vehicle it is because ofthe many advantages. They have over other forms and avenues of investingparties for the investors who has limited resources available in terms of capitaland ability to carry out detailed reserves and market monitoring. These are themajor advantages offered by mutual fund to all investors: • Professional Management: Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. • Diversification: Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. • Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. • Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. • Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the
  10. 10. benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.• Liquidity: In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund.• Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund managers investment strategy and outlook.• Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.• Affordability: Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.• Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
  11. 11. DISADVANTAGES OF MUTUAL FUNDS:Above I have mentioned the various advantages of Mutual Funds but italso suffers from a lot of drawbacks as the market is volatile and it isever affected by national as well as international factors, these days wecan see that crude oil prices in International market has become animportant factor in determining the market movement. Here are somedisadvantages as cited by me and by survey:• Fluctuating Returns: Mutual funds are like many other investments without a guaranteed return: there is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesnt mean the performance will be always good.• Diversification: Although diversification is one of the keys to successful investing, many mutual fund investors tend to over diversify. The idea of diversification is to reduce the risks associated with holding a single security; over diversification (also known as diversification) occurs when investors acquire many funds that are highly related and, as a result, dont get the risk reducing benefits of diversification. At the other extreme, just because you own mutual funds doesnt
  12. 12. mean you are automatically diversified. For example, a fund that invests only in a particular industry or region is still relatively risky. For example: Sectoral Funds• Cash, Cash and More Cash: As you know already, mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolios as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous.• Costs: Mutual funds provide investors with professional management, but it comes at a cost. Funds will typically have a range of different fees that reduce the overall payout. In mutual funds, the fees are classified into two categories: shareholder fees and annual operating fees. The shareholder fees, in the forms of loads and redemption fees are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesnt make money, these fees only magnify losses.
  13. 13. OBJECTIVEThe main objective of this study is: 1. To know various factors considered by the customers while going to invest in the mutual fund. 2. To study the working of mutual fund. 3. To study the characteristics of mutual fund this attracts the customers. 4. What an investors consider for safe investment and better returns.
  14. 14. SCOPE1. The project will provide us the better platform to understand the history, growth and various aspects of mutual fund.2. It will also help to understand the behavior of Indian investment towards mutual fund.3. Also with the help of this project one can better understand the different types of mutual funds working in India.
  15. 15. RESEARCH METHODOLOGYMethodology:Marketing research is the process of collecting and analyzing marketinginformation and ultimately arrived at certain conclusion. Management in anyorganization needs information about potential marketing plans and to changethe market place. Marketing Research includes all the activities that enable anorganization to obtain the information. This research is very important in strategyformulation and feedback of any organizational plan.Research Design: 1. DATA: Primary data: Personal interaction with the respondent through questionnaire. Secondary data: Information through websites, books, fact sheet of various funds etc. 2. SOURCES: Books, Magazines, articles, Journals. 3. AREA OF STUDY: NCR region. 4. SAMPLING PROCEDURE: Random sampling method. 5. TOOLS & TECHNIQUES:
  16. 16. Simple statistical methods. LIMITATIONS1. This project is limited in scope as the survey is conducted with a shortage of time constraint and also based on secondary data.2. The answer given by the respondents may be biased due to several reasons or could be attachment to a particular bank.3. Due to ignorance factor some of the respondents were not able to give correct answer.4. The respondent were not disclosing their exact portfolio because they have a fear in their mind that they can come under tax slab.
  17. 17. HISTORY OF MUTUAL FUNDS • The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Reserve Bank and the Government of India. The objective was to attract small investors and introduce them to market investments. Since the, the history of mutual fund in India can be broadly divided into three distinct phases. Phase 1- 1964-1987 (Unit Trust of India) • An Act of Parliament established Unit Trust of India (UTI) on 1963. 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, followed by ULIP in 1971, CGGA 1986 Mastershare 1987. UTI was the only player in the market enjoying the monopoly. At the end of 1988 UTI had Rs.6, 700 crores of assets under management .It was huge mobilization on funds. • So, Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.
  18. 18. • In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market.• 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. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002). The total amount mobilized was 2175 crores and assets under management were 6700 crores. Phase 2- 1987-1993(entry of public sector)
  19. 19. • 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 Can bank 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.In phase 2 also UTI was the undisputed leader.• At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores. It was the time when mindset of the consumer changed to some extent. Phase 3- 1993-1996(emergence of private funds)• 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
  20. 20. 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. Indian mutual fund industry also saw many joint venture of foreign fund management companies with Indian promoters. Competition increased the investor servicing technique. Investor started becoming selective. 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. Phase 4-1996(SEBI regulation for mutual funds)• 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. 1999 marks the beginning of a new phase in the history of the mutual fund
  21. 21. industry in India, a phase of significant in terms of both amounts mobilized from investor and asset under management.• The size of the industry is growing rapidly, as seen by the figure of asset under management that has gone from over Rs. 113,005 crores, a growth of nearly 60%in just one year. Within the growing industry, by March 2000, the relative market shares of different players in terms of amount mobilized and assets management having undergone a change.• 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. As at the end of June 2007 there are 33 players in the mutual fund industry.
  22. 22. Major Mutual Fund Companies in IndiaABN AMRO Mutual FundABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee(India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO AssetManagement (India) Ltd. was incorporated on November 4, 2003. DeutscheBank A G is the custodian of ABN AMRO Mutual Fund.Bank of Baroda Mutual Fund (BOB Mutual Fund)Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30,1992 under the sponsorship of Bank of Baroda. BOB Asset ManagementCompany Limited is the AMC of BOB Mutual Fund and was incorporated onNovember 5, 1992. Deutsche Bank AG is the custodian.HDFC Mutual FundHDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely
  23. 23. Housing Development Finance Corporation Limited and Standard LifeInvestments Limited.HSBC Mutual FundHSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities andCapital Markets (India) Private Limited as the sponsor. Board of Trustees,HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund.State Bank of India Mutual FundState Bank of India Mutual Fund is the first Bank sponsored Mutual Fund tolaunch offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr.approximately. Today it is the largest Bank sponsored Mutual Fund in India.They have already launched 35 Schemes out of which 15 have already yieldedhandsome returns to investors. State Bank of India Mutual Fund has morethan Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhsspread over 18 schemes.Unit Trust of India Mutual FundUTI Asset Management Company Private Limited, established in Jan 14, 2003,manages the UTI Mutual Fund with the support of UTI Trustee CompanyPrivate Limited. UTI Asset Management Company presently manages a corpusof over Rs.20000 Crore. The sponsors of UTI Mutual Fund are Bank of Baroda(BOB), Punjab National Bank (PNB), State Bank of India (SBI), and LifeInsurance Corporation of India (LIC). The schemes of UTI Mutual Fund are
  24. 24. Liquid Funds, Income Funds, Asset Management Funds, Index Funds, EquityFunds and Balance Funds.Franklin Templeton India Mutual FundThe group, Franklin Templeton Investments is a California (USA) basedcompany with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one ofthe largest financial services groups in the world. Investors can buy or sell theMutual Fund through their financial advisor or through mail or through theirwebsite. They have Open end Diversified Equity schemes, Open end SectorEquity schemes, Open end Hybrid schemes, Open end Tax Saving schemes,Open end Income and Liquid schemes, closed end Income schemes and Openend Fund of Funds schemes to offer. Association of Mutual Funds in India (AMFI)With the increase in mutual fund players in India, a need for mutual fundassociation in India was generated to function as a non-profit organization.Association of Mutual Funds in India (AMFI) was incorporated on 22ndAugust, 1995.AMFI is an apex body of all Asset Management Companies (AMC) which hasbeen registered with SEBI. Till date all the AMCs are that have launchedmutual fund schemes are its members. It functions under the supervision andguidelines of its Board of Directors.Association of Mutual Funds India has brought down the Indian Mutual FundIndustry to a professional and healthy market with ethical lines enhancingand maintaining standards. It follows the principle of both protecting andpromoting the interests of mutual funds as well as their unit holders.
  25. 25. The objectives of Association of Mutual Funds (AMFI) in IndiaThe Association of Mutual Funds of India works with 30 registered AMCs ofthe country. It has certain defined objectives which juxtaposes the guidelinesof its Board of Directors. The objectives are as follows: This mutual fundassociation of India maintains a high professional and ethical standard in allareas of operation of the industry.It also recommends and promotes the top class business practices and code ofconduct which is followed by members and related people engaged in theactivities of mutual fund and asset management.The agencies who are by any means connected or involved in the field ofcapital markets and financial services also involved in this code of conduct ofthe association.AMFI interacts with SEBI and works according to SEBIs guidelines in themutual fund industry.Association of Mutual Fund of India does represent the Government of India,the Reserve Bank of India and other related bodies on matters relating to theMutual Fund Industry.It develops a team of well qualified and trained Agent distributors. Itimplements a program of training and certification for all intermediaries andother engaged in the mutual fund industry.AMFI undertakes all India awareness programme for investors in order topromote proper understanding of the concept and working of mutual funds.At last but not the least association of mutual fund of India also disseminate
  26. 26. information’s on Mutual Fund Industry and undertakes studies and researcheither directly or in association with other bodies. Regulatory FrameworkRegulatory Jurisdictions of SEBI:SEBI is the apex regulatory of capital markets. SEBI has enacted the SEBI (MutualFund) regulation 1996 which provides the scope of regulation of Mutual Fund inIndia. All mutual funds are required to be mandatory registered with SEBI. Thestructure and formation of Mutual Funds, appointment of key functionaries,operations of Mutual Funds, accounting and disclosure norms, rights andobligations of functionaries and investors, investment restrictions, compliance andpenalties all are defined under the SEBI registration. Mutual Fund has to besending half yearly compliance reports to SEBI and promote all information abouttheir operations.Regulatory Jurisdiction of RBI:RBI is the monetary authority of the country and is also the regulatory of bankingsystem. Earlier bank sponsored mutual fund were under the dual regulatory controlof RBI and SEBI. These provisions are no longer in vogue. SEBI is the regulator ofall mutual funds. The present position is that RBI is involved with the mutual fundindustry only to the limited extent of being the regulator of the sponsor of banksponsored mutual funds.Role of Ministry of Finance in Mutual Fund:
  27. 27. The finance ministry is the supervisor of both RBI and SEBI. The ministry offinance is also the appellate authority under SEBI Regulation. Aggrieved partiescan make appeal to the Ministry of Finance on the SEBI ruling relating the MutualFund.Role of Companies Act in Mutual Fund:The AMC and the Trustee Company may be structured as limited companies,which may come under the regulatory purview of the Company Law Board (CLB).The provisions of the Companies Act 1956, is applicable to these forms oforganization. The company law Board is the apex regulatory authority forcompany. Any grievance agency the AMC or the trustee can be addressed to thecompany law board for redresses.Role of Stock Exchange:If a mutual fund is listed its scheme on stock exchange such listing are subject tothe listing regulation of Stock Exchange. Mutual Funds have to sign the listingagreement and abide by its provisions which primarily deal with the periodicnotification and disclosure of information that may impart the trading of listedunits.
  28. 28. Legal StructureMutual Fund has a unique structure not shared with other entities such ascompanies or the firms. It is important for the employees and agents to be aware ofthe special nature of the structure because it determines the rights andresponsibilities of the fund’s constitutes viz. sponsor trustee, custodian, transferagents and of course the AMC. The legal structure also drives the inter relationshipbetween these constituents.Like other countries India has a legal framework within which Mutual Funds mustbe constituted along one unique structure as unit trust. A mutual fund in India isallowed to issue open ended and a close ended under a common legal structure.Therefore, a mutual fund may have several different schemes under it at any pointof time.THE FUND SPONSOR: Sponsor is defined by the SEBI regulation as anyperson who acting alone or in combination with another body corporate establishesa mutual fund. The sponsor of a fund is taken as he gets the fund registered withthe SEBI.The sponsor will form a trust and appoints the Board of trustee. The sponsor willalso generally appoint the AMC as the fund managers. The sponsor, either directlyor acting through the trustee will also appoints a custodian to hold the fund asset.All these appointments are made in accordance with the guidelines of SEBI.
  29. 29. As per the existing SEBI regulations for a person to quantify as the sponsor hemust contribute at least 40% of the net worth of the AMC and possess a secondfinal track over a period of 5 years prior to registration.MUTUAL FUND AS A TRUST: A mutual fund is constituted in form of a publictrust created under the INDIA TRUST ACT, 1882. The fund sponsor act as thesettlers of the trust contributing to its initial capital and appoints a Trustee to holdthe asset of the trust for the benefits of the unit holders who are the beneficiaries ofthe trust. The fund then invites investors to contribute their money in a commonpool by subscribing to units issued by various schemes established by the trust unitbeing the evidence of their beneficial interest in the fund.TRUSTEE: The trust – the mutual fund may be managed by a board of trustee – abody of individuals or a trust company- a corporate body. Most of the funds inIndia are managed by the board of trustee while the board is governed by theprovisions of the Indian Trust Act where the trustee is a corporate body, it wouldalso be required to comply the provisions of the Companies Act 1956 the board asan independent body act as the protector of the interest of the unit holders. Thetrustees do not directly manage the portfolio of securities. For this specialistfunction, they appoint the AMC. They ensure that the fund is managed by theAMC as per the defined objective in accordance with the trust deed and regulationsof SEBI. The trust is created through a document called the Trust Deed and isexecuted by the fund sponsor in favor of the trustee. The trust deed is required tobe stamped as registered under the provisions of the Indian Regulatory Act andregulation with SEBI clause in the trust deed, inter alias, deal with theestablishment of the trust, the appointment of the trustee , their powers and dutiesand the obligation of the trustee towards the unit holders and the AMC. Theseclauses also specify activity that the fund / AMC can’t undertake. The thirdschedule of the SEBI (Mutual Fund) Regulatory Act,1996 specifies the content ofthe Trust Deed.
  30. 30. ASSET MANAGEMENT COMPANYIts appointment and function:The role of AMC is to act as the investment manager of the trust. The sponsor, orthe trustee, if so authorized by the trust deed appoints the AMC. The AMC soappointed is required to be approved by the SEBI. Once approved, the AMCfunctions under the supervision of its own directors and also under the direction ofthe trustee and the SEBI. The trustees are empowered to terminate the appointmentof the AMC by majority and appoint a new one with the prior approval of the SEBIand the unit holders.The AMC would, in the name of the trust, float and then manage the directinvestment schemes as per regulations of the SEBI and as per InvestmentManagement Agreement it signs with the trustee. Chapter IV of SEBI (MF)Regulations, 1996 describes the issue relevant to appointment, eligibility criteriaand the restrictions on the business activities and obligations of the AMC.The AMC of the mutual fund have a net worth of at least Rs. 10 crores at all thetime. Directors of the AMC, both independent and non independent should haveadequate professional experience in the financial services and should beindividuals of high moral standing, a condition also applicable to other keypersonnel of the AMC. The AMC cannot act as a trustee of any other mutual fund.Besides it’s role as advisory services and consulting, provided these activities arerun independently of one another rand the AMC resources ( such as personnel,system etc.) are properly segregated by activity. The AMC must always act in theinterest of the unit holders and report to the trustee with respect to its activities.
  31. 31. TYPES OF MUTUAL FUNDS
  32. 32. Schemes according to Maturity PeriodA mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.Open-ended Fund/ Scheme:An open-ended fund or scheme is one that is available for subscription andrepurchase on a continuous basis. These schemes do not have a fixed maturityperiod. Investors can conveniently buy and sell units at Net Asset Value (NAV)related prices which are declared on a daily basis. The key feature of open-endschemes is liquidity.Close-ended Fund/ Scheme:A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years.The fund is open for subscription only during a specified period at the time oflaunch of the scheme. Investors can invest in the scheme at the time of theinitial public issue and thereafter they can buy or sell the units of the schemeon the stock exchanges where the units are listed. In order to provide an exitroute to the investors, some close-ended funds give an option of selling backthe units to the mutual fund through periodic repurchase at NAV relatedprices. SEBI Regulations stipulate that at least one of the two exit routes isprovided to the investor i.e. either repurchase facility or through listing onstock exchanges. These mutual funds schemes disclose NAV generally onweekly basis.Schemes according to Investment Objective
  33. 33. A scheme can also be classified as growth scheme, income scheme, orbalanced scheme considering its investment objective. Such schemes may beopen-ended or close-ended schemes as described earlier. Such schemes maybe classified mainly as follows:Growth / Equity Oriented Scheme:The aim of growth funds is to provide capital appreciation over the medium tolong- term. Such schemes normally invest a major part of their corpus inequities. Such funds have comparatively high risks. These schemes providedifferent options to the investors like dividend option, capital appreciation,etc. and the investors may choose an option depending on their preferences.The investors must indicate the option in the application form. The mutualfunds also allow the investors to change the options at a later date.Income / Debt Oriented Scheme:The aim of income funds is to provide regular and steady income to investors.Such schemes generally invest in fixed income securities such as bonds,corporate debentures, Government securities and money market instruments.Such funds are less risky compared to equity schemes. These funds are notaffected because of fluctuations in equity markets. However, opportunities ofcapital appreciation are also limited in such funds. The NAVs of such funds areaffected because of change in interest rates in the country. If the interest ratesfall, NAVs of such funds are likely to increase in the short run and vice versa.However, long term investors may not bother about these fluctuations.Balanced Fund:The aim of balanced funds is to provide both growth and regular income assuch schemes invest both in equities and fixed income securities in theproportion indicated in their offer documents. These are appropriate for
  34. 34. investors looking for moderate growth. They generally invest 40-60% inequity and debt instruments. These funds are also affected because offluctuations in share prices in the stock markets. However, NAVs of such fundsare likely to be less volatile compared to pure equity funds.Money Market or Liquid Fund:These funds are also income funds and their aim is to provide easy liquidity,preservation of capital and moderate income. These schemes investexclusively in safer short-term instruments such as treasury bills, certificatesof deposit, commercial paper and inter-bank call money, governmentsecurities, etc. Returns on these schemes fluctuate much less compared toother funds. These funds are appropriate for corporate and individualinvestors as a means to park their surplus funds for short periods.Gilt Fund:These funds invest exclusively in government securities. Governmentsecurities have no default risk. NAVs of these schemes also fluctuate due tochange in interest rates and other economic factors as is the case with incomeor debt oriented schemes.Index FundsIndex Funds replicate the portfolio of a particular index such as the BSESensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in thesecurities in the same weightage comprising of an index. NAVs of suchschemes would rise or fall in accordance with the rise or fall in the index,though not exactly by the same percentage due to some factors known as"tracking error" in technical terms. Necessary disclosures in this regard aremade in the offer document of the mutual fund scheme.
  35. 35. Sector specific funds/schemes:These are the funds/schemes which invest in the securities of only thosesectors or industries as specified in the offer documents. e.g. Pharmaceuticals,Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. Thereturns in these funds are dependent on the performance of the respectivesectors/industries. While these funds may give higher returns, they are morerisky compared to diversified funds. Investors need to keep a watch on theperformance of those sectors/industries and must exit at an appropriate time.They may also seek advice of an expert.Tax Saving SchemesThese schemes offer tax rebates to the investors under specific provisions ofthe Income Tax Act, 1961 as the Government offers tax incentives forinvestment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS).Pension schemes launched by the mutual funds also offer tax benefits. Theseschemes are growth oriented and invest pre-dominantly in equities. Theirgrowth opportunities and risks associated are like any equity-orientedscheme.Load or no-load FundA Load Fund is one that charges a percentage of NAV for entry or exit. That is,each time one buys or sells units in the fund, a charge will be payable. Thischarge is used by the mutual fund for marketing and distribution expenses.
  36. 36. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is1%, then the investors who buy would be required to pay Rs.10.10 and thosewho offer their units for repurchase to the mutual fund will get only Rs.9.90per unit. The investors should take the loads into consideration while makinginvestment as these affect their yields/returns. However, the investors shouldalso consider the performance track record and service standards of themutual fund which are more important. Efficient funds may give higherreturns in spite of loads.A no-load fund is one that does not charge for entry or exit. It means theinvestors can enter the fund/scheme at NAV and no additional charges arepayable on purchase or sale of units.
  37. 37. INVESTMENT PLANSThe term investment plans generally refers to the services that the funds provide tothe investors offering different ways to invest. The different investment plans areimportant consideration in the investment decisions because they determine thelevel of flexibility available to the investors. Alternate investment plans offered bythe fund allow the investor freedom with respect to investing at one time or atregular intervals, making transfers to different schemes within the same fundfamily or receiving income at specified intervals or accumulating distributions.Some of the investment plans offered are as follows:Automatic Reinvestment Plans (ARP): In India many funds offered two options under the same scheme the dividendoption and growth option. The dividend option or the automatic reinvestment plana (ARP) allows the investors to reinvest in additional units the amount of dividendor other distribution made by the fund, instead of receiving them in cash.
  38. 38. Reinvestment takes place at the ex-dividend NAV. The ARP ensures that theinvestors reap the benefits of compounding in his investments. Some fund allowsreinvestments into reinvestments into other schemes in the fund family.By using an automatic reinvestment plan, an investor is able to easily makeuse of his or her investment gains to produce further gains, takingadvantage of compounding. Over a period of years, the added valueproduced by automatic reinvestment can turn out to be worth a substantialsum.Automatic Investment Plans (AIP):These requires the investor to invest a fixed sum periodically, therebylettering the investor save in a disciplined and phased manner. The modeof investment could be through debit to the investor’s salary or bankaccount.Such plans are also known as Systematic Investment Plans. But mutualfunds do not offer this facility on all schemes. Typically they restrict it totheir plain vanilla scheme like diversified equity funds, income funds andbalanced funds. SIP works best in equity funds. It enforces savingdiscipline and helps you profit from market volatility – you buy more unitswhen the market is down and fewer when the market is up.This is one of the best ways to save money. By "paying themselves first"many people find they invest more in the long run. Their investments aretreated as another part of their regular budget. It also forces a personto pay for investments automatically, which prevents them from being ableto spend all of their disposable income.Systematic Withdrawal Plan:Such plans allow the investors to make systematic withdrawal from his fundinvestment account on a periodic basis, thereby providing the same benefitas regular income. The investor must withdraw a specific minimum amountwith the facility to have withdrawal amounts sent to his residence bycheque or credited directly into his bank account. The amount withdrawn istreated as redemption of units at the applicable NAV as specified in theoffer document. For example: the withdrawal could be at NAV on the firstday of the month of payment. The investor is usually required to maintain aminimum balance in his bank account under this plan. Agents and the
  39. 39. investors should understand that the systematic withdrawal plans aredifferent from the monthly income plans, as the former allow investors toget back the principal amount invested while the latter only pay the incomepart on a regular basis.In short we can say that a systematic withdrawal plan is a financial planthat allows a shareholder to withdraw money from an existing mutual fundportfolio at predetermined intervals. The money withdrawn through asystematic withdrawal plan can be reinvested in another portfolio or used topay for something else. Often, a systematic withdrawal plan is used to fundexpenses during retirement. However, this type of plan may be used forother purposes as well.Systematic Transfer Plans (STP):These plans allow the customers to transfer on a periodic basis a specifiedamount from one scheme to another within the same fund family- meaningtwo schemes by the same AMC and belonging to the same fund. A transferwill be treated as the redemption of the units from the scheme from whichthe transfer is made. Such redemption or investment will be at theapplicable NAV for the respective schemes as specified in the offerdocument.It is necessary for the investor to maintain a minimum balance in thescheme from which the transfer is made. Both UTI and other private fundsnow generally offer these services to the investors in India. The serviceallows the investors to maintain his investment actively to achieve hisobjectives. Many funds do not even change any transaction fees for thisservice.
  40. 40. EQUITY FUNDAn open ended Equity scheme:Fund features:Who should invest?The scheme is suitable for investors seeking effective diversification by spreadingthe risks without compromising the return.Investment objectiveThe objective is to provide investors long term capital appreciation.LiquiditySale and repurchase on all business days.NAV calculation
  41. 41. All business days.Redemption proceedsWill be dispatched within three business days.Tax benefitsIndexation benefits, No Gift tax, No wealth tax.Minimum applicable amountNew investors: Rs. 5000Existing investors: Rs. 500INDEX FUNDAn open ended Index scheme:Fund features:Who should invest?The scheme is suitable for investors seeking capital appreciation commensuratewith that of market.Investment objectiveThe objective is to invest in the securities that comprise S&P CNX Nifty in thesame proportion so as to attain results commensurate with the Nifty.Investment option a. Growth b. DividendLiquidity
  42. 42. Sale and repurchase on all business days.NAV calculationAll business days.Redemption proceedsWill be dispatched within three business days.Tax benefitsIndexation benefits, No Gift tax, No wealth taxMinimum applicable amountNew investors: Rs. 5000BALANCED FUNDAn open ended balanced scheme:Fund features:Who should invest?The scheme is suitable for investors who seek long term growth and wish to avoidthe risk if investing solely in equities. It provides a balanced exposure to bothgrowth and income producing assets.Investment objectiveThe objective is to provide periodic return and capital appreciation through ajudicious equity and debt instruments, while simultaneously aiming to minimizecapital erosion.LiquiditySale and repurchase on all business days.
  43. 43. NAV calculationAll business days.Redemption proceedsWill be dispatched within three business days.Tax benefitsIndexation benefits, No Gift tax, No wealth taxMinimum applicable amountNew investors: Rs. 5000Existing investors: Rs. 500TAX SAVING FUNDOpen- ended linked saving scheme:Fund features:Who should invest?The scheme is suitable for investors seeking income tax rebate under section 88(2)of Income Tax Act along with long term appreciation from investment in equities.Investment objectiveThe objective is of the scheme is to build a high quality growth oriented portfolioto provide long term capital gains to investors. The scheme aims at providingreturn through capital appreciation over the file of the scheme.LiquiditySale and repurchase on all business days.NAV calculation
  44. 44. All business days.Redemption proceedsWill be dispatched within three business days.Tax benefitsTax –rebate under section 88, indexation benefits, No Gift tax, No wealth tax.Special featuresPersonal accident insurance.Lock –in period3 yearsMinimum applicable amount: Rs. 500The importance of accounting knowledgeThe balance sheet of a mutual fund is different from the normal balance sheet of abank or a company. All the fund assets belong to the investors and are held in thefiduciary capacity for them. Mutual fund employees need to be aware of thespecial requirement concerning accounting for the fund’s assets, liabilities andtransactions with investors and the outsiders like banks, custodians and registrars.This knowledge will help them better understand their responsibilities and theirplace in the organization, by getting an overview of the functioning of the fund.Even the mutual fund agents need to understand the accounting for the fundstransaction with investors and how the fund accounts for its assets and liabilities,as the knowledge is essential for them to perform their basic role in explaining themutual fund performance to the investor.For example, unless the agent knows how the NAV is computed, he cannot useeven simple measures such as NAV change to assess the fund performance. Healso should understand the impact of dividends paid out by the fund or entry/exitloads paid by the investors on the calculation of the NAV and therefore the fundperformance.
  45. 45. The mutual funds in India are required to follow the accounting policies as laiddown by the SEBI (Mutual Fund) Regulations 1996 and amendments in 1998. NET ASSET VALUEThe performance of a particular scheme of a mutual fund is denoted by NetAsset Value (NAV). Mutual funds invest the money collected from theinvestors in securities markets. In simple words, Net Asset Value is the marketvalue of the securities held by the scheme. Since market value of securitieschanges every day, NAV of a scheme also varies on day to day basis. The NAVper unit is the market value of securities of a scheme divided by the totalnumber of units of the scheme on any particular date. For example, if themarket value of securities of a mutual fund scheme is Rs 200 lakhs and themutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then theNAV per unit of the fund is Rs.20. NAV is required to be disclosed by themutual funds on a regular basis - daily or weekly - depending on the type ofscheme.The net asset value of the fund is the cumulative market value of the assetsfund net of its liabilities. In other words, if the fund is dissolved or liquidated,by selling off all the assets in the fund, this is the amount that the shareholderswould collectively own. This gives rise to the concept of net asset value per
  46. 46. unit, which is the value, represented by the ownership of one unit in the fund.It is calculated simply by dividing the net asset value of the fund by thenumber of units. However, most people refer loosely to the NAV per unit asNAV, ignoring the "per unit". We also abide by the same convention.Calculation of NAV:The most important part of the calculation is the valuation of the assetsowned by the fund. Once it is calculated, the NAV is simply the net value ofassets divided by the number of units outstanding. The detailed methodologyfor the calculation of the asset value is given below.Asset value is equal toSum of market value of shares/debentures+ Liquid assets/cash held, if any+ Dividends/interest accruedAmount due on unpaid assetsExpenses accrued but not paidFor liquid shares/debentures, valuation is done on the basis of the last orclosing market price on the principal For illiquid and unlisted and/or thinlytraded shares/debentures, the value has to be estimated. For shares, thiscould be the book value per share or an estimated market price if suitablebenchmarks are available. For debentures and bonds, value isestimated on the basis of yields of comparable liquid securitiesafter adjusting for illiquidity. The value of fixed interest bearingsecurities moves in a direction opposite to interest rate changes.
  47. 47. Valuation of debentures and bonds is a big problem since most ofthem are unlisted and thinly traded. This gives considerableleeway to the AMCs on valuation and some of the AMCs arebelieved to take advantage of this and adopt flexible valuationpolicies depending on the situation exchange where the security istraded.Interest is payable on debentures/bonds on a periodic basis say every 6months. But, with every passing day, interest is said to be accrued, at the dailyinterest rate, which is calculated by dividing the periodic interest paymentwith the number of days in each period. Thus, accrued interest on a particularday is equal to the daily interest rate multiplied by the number of days sincethe last interest payment date.Usually, dividends are proposed at the time of the Annual General meetingand become due on the record date. There is a gap between the dates onwhich it becomes due and the actual payment date. In the intermediateperiod, it is deemed to be "accrued".Expenses including management fees, custody charges etc. are calculated on adaily basis.
  48. 48. MUTUAL FUND PERFORMANCETHE INVESTORS PROSPECTIVE:The investor would actually be interested in tracking the value of investment,whether he invests directly in the market or indirectly through the mutual funds.He would have to make intelligent decisions on whether he gets an acceptablereturn on his investment in the fund selected by him or if he needs to switch to thefund. He, therefore, needs to understand the basis of appropriate performancemeasurement for the funds and acquire the basic knowledge of the differentmeasures of evaluating the performance of a fund. Only then would he be in theposition to judge correctly whether his fund is performing well or not.THE ADVISOR’S PROSPECTIVE:If you are an intermediary recommending a mutual fund to a potential investor, hewould expect you to give him proper advice on which funds have a goodperformance track record. If you want to be an effective investment advisor, then
  49. 49. you too have to know how to measure and evaluate the performance of thedifferent funds available to the investors. The need to compare the performance ofthe different funds requires the advisors to have knowledge of the correct andappropriate measures of evaluating the fund performance. Different Performance MeasuresRemember that there are many ways to evaluate the performance of the fund. Onemust find the most suitable measure, depending upon the type of fund one islooking at, the stated investment objective of the fund and even depending on thecurrent financial market condition. Let us discuss few common measures.Change in NAV: The most common measure.Purpose: If the investor wants to compute the return on investment between twodates, he can simply use the Per Unit Net Asset Value at the beginning and the endperiods and calculate the change in the value of the NAV between the two dates inabsolute and percentage terms.Formula: For NAV change in absolute terms:(NAV at the end of the period)- (NAV at the beginning of the period)
  50. 50. For NAV change in percentage terms:(Absolute change in NAV/NAV at the beginning)*100If period covered is less/more than one year: for annualized NAV change[{(absolute change in NAV/NAV at the beginning)/months covered)*12}*100]SuitabilityNAV change is the most commonly used by the investors to evaluate fundperformance and so is also most commonly published by the mutual fundmanagers. The advantage of this measure is that it is easily understood and appliesto virtually any type of fund.InterpretationWhether the return in term of NAV growth is sufficient or not should beinterpreted in light of the investment objective of the fund, current marketcondition and alternative investment returns. Thus, a long term growth fund orinfrastructure fund will give lower returns when the market is in bearish phase.Limitation:However, this measure does not always give the correct picture, in case where thefund has distributed to the investors a significant amount of the dividends in theinterim period.If in the above example, year end NAV was Rs.22 after declaration and payment ofdividend of Re.1, the NAV change of 10% gives an incomplete picture.Therefore, it is suitable for evaluating growth funds and accumulation plans of debtand equity funds, but should be avoided for income funds and funds withwithdrawal plans.Return on investment:Purpose:The short coming of the simple total return is overcome by the total return withreinvestment of the dividends in the funds itself at the NAV on the date of
  51. 51. distribution. The appropriate measure of the growth of the investor’s mutual fundholding is therefore, the return on investment.Formula[(units held dividend/ex-dividend NAV)*end NAV]- begin NAV*100SuitabilityTotal return with distribution s reinvested at NAV is a measure accepted by mutualfund tracking agencies such as Cresedence in MUMBAI and value research inNew Delhi. It is appropriate for measuring performance of accumulation plans,monthly/quarterly income schemes that distribute interim dividends.The income ratio:Formula: A fund’s income ratio is defined as its net investment income dividend by its netassets for this period.Purpose/suitability:This ratio is useful measure for evaluating income-oriented funds, particularly debtfunds. It is not recommended for the funds that concentrate on capital appreciation.Limitation:The income ratio can not considered in isolation, it should be used only tosupplement the analysis based on the expense ratio and total return.
  52. 52. Tracking mutual fund performanceHaving identified appropriate measures and benchmarks for the mutual fundavailable in the market, the challenge is to track the fund performance on a regularbasis.This is indeed the key towards maximizing wealth through mutual fund investing.Proper tracking allow the investor to make informed & timely decisions regardinghis fund portfolio whether to acquire attractive funds, dispose off poor performersor switch between funds /plans.To be able to track fund performance, the first step is to find the relevantinformation on NAV, expenses cash flow, appropriate indices and so on. Thefollowing are the sources information in India.
  53. 53. Mutual Funds Annual and Periodic ReportsThese include data on the funds financial performance, so indicators such asincome/expense ratios & total return can be computed on the basis of this data. Theannual report includes a listing of the funds portfolios holding at market value,statement of revenue & expenses, unrealized appreciation/depreciation at year endand the change in the net assets. On the basis of the annual report, the investors candevelop a perspective on the quality of the fund’s assets and portfolioconcentration and risk profile, besides computing returns. He can also assess thequality of the fund management company by reviewing their entire scheme’sperformance. The profit and loss account part of the annual report will also givedetails of transaction costs such as brokerage paid, custodian/registrar fees andstamp duties.Mutual Fund’s WebsiteWith the increasing spread of the interest as a medium, all mutual funds have theirown websites. SEBI even require funds to disclose certain types of the informationon these sites- for example, the Portfolio Composition. Similarly, AMFI itself has awebsites, which displays its member’s entire fund NAV information.Financial papers:Daily newspaper such as Economic Times provides daily NAV figures for theopen end schemes and share prices of the close ended listed schemes. Besides,weekly supplement of the economic newspaper give more analytical informationon the fund performance.For example- Business Standard – the smart investor gives total returns over 3months, 1 year and 3 years periods besides the fund size and ranking with the otherfunds separately for Equity, Balanced, Debt, Money Market, short term debt andtax planning funds.Similarly, Economic Times weekly supplement gives additional data on open endschemes such as Loads and Dividends besides the NAV and other information andperformance data on closed end scheme.Fund Tracking Agencies:
  54. 54. In India, agencies such as Credence and value research are a source of informationfor the mutual fund performance data and evaluation. This data is available only onrequest and payment.Newsletters:Many stockbrokers, mutual fund agent and banks and non-ranking firms cateringto retail investors publish their own newsletters, sometimes free or else for theirsubscribes, giving fund performance data and recommendations.Prospectus:SEBI regulations for mutual fund require the fund sponsors to discloseperformance data relating to schemes being managed by the concerned AMC suchas beginning and end of the year.
  55. 55. LIFE CYCLE STAGESLife cycle guide to financial planningFinancial goal and plans depends to a large extent on the expenses and cash flowrequirements of individuals. It is well known that the age of the investors is animportant determinant of financial goals. Therefore, financial planners havesegmented investors according to certain stages.
  56. 56. LIFE CYCLE STAGE FINANCIAL NEEDS ABILITY TO INVEST CHOICE OF INVESTNENTChildhood Stage Taken care of by Investment of gifts Long term parentsYoung unmarried Immediate and Limited due to Liquid plans and short term higher spending short term investment some exposure to equity and pension productsYoung married Short & Limited due to Medium –longstage intermediate term. higher spending term investment. Housing and cash flow Ability to take risks insurance needs requirement also Fixed income consumer finance limited insurance & equity needsYoung Married Medium-long term Limited Financial Medium-long termwith children children’s planning needs are investments. education. highest at this Ability to take risks Holodays & stage is deal for Portfolio of consumer finance discipline spending products for Housing and saving growth and long regularly termMarried with older Medium term Higher saving Medium termchildren needs for children rations investment with recommended for high liquidity intermittent for needs Portfolio of intermittent cash products including flows higher equity debt and pension plansRetirement stage Short to medium Lower saving Medium term term ratios , Higher investment requirement for preference for regular cash flows liquid and income generating products low appetite for risky
  57. 57. investmentCHARACTERISSTION OF THE LIFE CYCLE OF INVESTORSLife cycle can be broadly classified into phases: • Birth and education • Earning Years • RetirementOn an average, the first stage lasts for 22 years, the second for 38 years and thelast for 25-30 years.
  58. 58. The earning year is when income and expenses are highest. The retirement stageis when incomes are low and expenses are high.CLASSIFICATION OF INVESTORS NEEDSNeeds are generically classified into protection needs and investment needs.Protection needs refer to needs that have to be primarily taken care of to protectthe living standards, current requirements and survival requirement of investors.Need for retirement income and need for insurance cover are protection needs.Investment needs are additional financial needs that can be served throughsaving and investments. These are needs for children’s professional growth.
  59. 59. Analysis of QuestionnaireI visited to 45 people with my questionnaire related to awareness of mutualfund out of them 40 responds me. I have analyzed in my survey on the basis of
  60. 60. these respondents feedback. Once the questionnaire were filled then the nextwork that comes up is the analysis of the data arrived.We find out that more businessmen were inclined towards investing incurrent account. The ladies were inclined to invest their money in Gold andjewelleries. Service class people and retired class people prefer more savingand fixed deposits. People with high income prefer to take risk for higherreturn. They want to invest in the mutual fund.Similarly, people are interested in knowing what the returns of theirinvestment are. Similar large numbers of people are equally interested in thesafety of their funds. There are the people who want easy liquidity of moneyand these are basically business people who have a deal in the ready cash allthe time. Surprisingly, while a large number of people are aware of the taxbenefit a very small number of them only 9 are interested in it.While a large number of people are area of mutual fund comparing a very lessnumber invests into it. On asking how they get knowledge of mutual fund alarge number of them attributed to print media. Even banks today follow therole of the investment advisors. Very few get any information from the e-media orHence, AMCs must increase the awareness about their product throughElectronic media (TVs, Cables, Radios etc.) as well as and should not justconstrained itself to the print advertisement. Those who do not readnewspaper.
  61. 61. CONCLUSIONThe mutual fund industry is growing at a tremendous pace. A large number ofplans have come up from different financial resources. With the stock marketsoaring the investors are attracted towards these schemes.Only a small segment of the investors still in Mutual Funds and the mainsource sources of information still are the financial advisors followed byadvertisements in different media. The Indian investors generally invest overa period of 2-3 years. Also there is a tendency to invest in fixed deposits due tothe security attached to it.In order to excel and make mutual funds a success, companies still need tocreate awareness and understand the psyche of the Indian customer.
  62. 62. SUGGESTIONSInvestor’s point of view:The question that entire customer, irrespective of the age group and financialstatus, think of is- Are mutual funds are a safe option? What makes them safe?The basis of mutual fund industry’s safety is the way the business is definedand regulation of law. Since the mutual fund invests in the capital marketinstruments, so proper knowledge is essential.Hence the essential requirement is well informed seller and equally informedbuyer who understands and helped them to understand the product (here wecan say the capital market and the money market instruments) is the essentialpre-conditions.Being prudent investor one should: • Ask one’s agent to give details of different schemes and match the appropriate ones. • Go to the company records or the fund house regarding any queries if one is not satisfied by the agents. • Investors should always keep an eye on the performance of the scheme and other good schemes as well which are available in the market for the closed comparison. • Never invest blindly in the investments before going through the fact sheets, annual reports etc. of the company. Since, according to the
  63. 63. guidelines of SEBI, the AMCs are bound to disclose all the relevant data that is necessary for the investment purpose of investors.Company’s point of view:Following measures can be taken by the company for getting higherinvestments in the mutual fund schemes: • Educate the agents or the salesmen properly so that they can take up the queries of the customer effectively. • Set up separate customer care divisions where the customers can anytime pose their query, regarding the scheme or the current NAV etc. These customer care units can work out in accordance with the requirements of the customer and facilitates them to choose the scheme that suits their financial status. • Conduct seminars or programs about mutual fund where each and every minute information about the product is outlined including the risk factor associated with the different classes of assets.
  64. 64. Appendices:Marketing of Mutual Funds.The present marketing strategies of mutual find can be divided into mainknowledge into main headings- • Direct Marketing. • Selling Through Intermediaries. • Joint Calls.Direct Marketing: This constitutes 20% of the total sales of mutual funds.Some of the important tools used in this type of selling are:Personal Selling: In this case the customer support officer of the fund at aparticular branch takes appointment from the potential prospects. Once theappointment is fixed, the branch officer (also called Business DevelopmentAssociate) then meet the prospect and gives him all details about the variousschemes being offered by his fund. This conversion rate in this month ofselling is in between 30-40%.Tele Marketing: In this case the emphasis is the people about the fund. Thenames and phone number of people are picked at random from telephonedirectory. Sometimes people belonging to a particular profession are also
  65. 65. contacted through phone and their informed about the fund. Generally theconversion rate in form of marketing is 15-20%.Direct Mail: This is one common methods followed by all Mutual Funds.Addresses of people are picked at random from telephone directory. Thecustomer support office then mails the literature of the scheme offered by thefund. The follow up starts after 3-4 days of mailing the literature. The CSOcalls on the people to whom the literature was mailed. Answer their queriesand is generally successful in taking appointment with these people. It is thenjob of BDA to try his best to convert that prospect into customer.Advertisement in Newspaper & Magazines: The funds regularly advertisein business newspaper and magazines besides in leading national dailies. Thepurpose is to keep investors aware the schemes offered by the fund and theirperformance in recent part.Hoarding and Banners: In this case the hoarding and banners of the fund areput at important locations of the city where the movement of the people isvery high. Generally such hoardings are put near UTI offices in order to tappeople who are at present investing in UTI schemes. The hoarding andbanners generally contain information either about one particular scheme orbrief information about all schemes of the fund.Selling Through Intermediaries: Intermediaries contribute towards 80% oftotal sales of mutual fund. These are the people/distributors who are in directtouch with the investors. They perform an important role in attracting newcustomers. Most of these intermediaries are also involved in selling sharesand other investment instruments. They do commendable jobs in convincinginvestors to invest in mutual funds. A lot depends on after sales services
  66. 66. offered by the intermediaries to the customer. Customer prefer to work withthose intermediaries who give them right information about the fund andkeep them abreast with the latest change taking place in the market especiallyif they have any bearing on the fund in which they have invested.Regular Meeting with Distributors: Most of the funds conductmonthly/bimonthly meeting with their distributors. The objective is to heartheir complaint regarding services aspect from fund side and other queriesrelated to market situation. Sometimes special training programmes are alsoconducted for the new agent/distributor. Training involves giving detailsabout the products of the fund, their present performance in the market, whatthe competitors are doing and what they can do to increase the sales of thefund.Joint calls: This is generally done when the prospect seems to be a high networth investors. The BDA and the agent (who is located close to HNI’sresidence or area of operation) together visit the prospect and brief themabout the fund. The conversion rate is very high in this situation (Generallyaround 60%). Both the funds and the agent provide even after sale services inthe particular case.
  67. 67. Frequently Used TermsNAV: It is the market value of the assets of the scheme minus its liabilities.The per unit NAV is the net asset value of the scheme divided by number ofunits. Outstanding on valuation dateSales Price: it is the price you pay when you invest in a scheme. It is alsocalled offer price. It may include sales loadRepurchase Price: Price at which a close – ended scheme repurchase its units& it may include a back- end load.Redemption price: Price at which open ended scheme repurchase their units& close- ended redeem their unit on maturity. Their prices are NAV related.Sales Load: charge collected by a scheme when it sells the units also keep asfront end load. Schemes that do not change a load-No Load Schemes
  68. 68. Questionnaire1. Name of the customer Mr. / Mrs. / Ms.2. Address/ Contact3. What is the age group you face in? i. 20-30 ii. 30-40 iii. 40-50 iv. 50-60 v. Above 604. What is your occupation? i. Service ii. Business iii. Professional iv. Dependent
  69. 69. v. Retired5. What is the per month income of your family? i. < 10,000 ii. 10-30,000 iii. 30-50,000 iv. > 50,0006. Which type of investment you prefer? i. Current saving ii. Fixed deposits iii. Shares iv. Bonds/debentures v. Mutual fund vi. Gold/real estates7. What is your objective for investing? i. Income generation ii. Tax saving iii. Others8. What is your priority while investing your money? i. Safety ii. Higher returns iii. Liquidity
  70. 70. iv. Tax benefits9. Are you aware of mutual fund? i. Yes ii. No10.Have you ever invested in mutual fund? i. Yes ii. No11.From where you get information about mutual fund? i. Print media ii. Electronic media iii. Friends/relatives iv. Broker/investment v. Banks12.What has been the reason of your not investing into the mutual fund? i. Lack of confidence ii. Imperfect knowledge iii. Find Govt. Securities/bonds better iv. Other reasons

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