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Research report on mutual fund in india at mahindra finance Research report on mutual fund in india at mahindra finance Document Transcript

  • Projectsformba.blogspot.com A RESEARCH REPORT ON MUTUAL FUND IN INDIA AT MAHINDRA FINANCEIn the partial Fulfillment of the Degree Master of BusinessAdministrationSubmitted to:- Submitted by:-DEPTT OF BUSINESS ANIL KUMARADMINISTRATION MBA 3RD SEM ROLL NO -80802317004 RIMT-Institute of Engineering &Technology (Mandi Gobindgarh)Projectsformba.blogspot.com 1
  • Projectsformba.blogspot.com DECLARATIONI, “Anil Kumar” declare that the Research report entitled “MUTUAL FUNDS ININDIA” being submitted to the PUNJAB TECHNICAL UNIVERSITY forthe partial fulfillment of the summer training of six to eight weeks report.Place: (Anil Kumar)Date:Projectsformba.blogspot.com 2
  • Projectsformba.blogspot.com ACKNOWLEDGEMENT The work on this summer report has been an inspiring, often exciting, sometimeschallenging, but always interesting experience for me because for the first time Iexperience how the corporate world works .I am very grateful to my supervisor “Mr.Mohd Waris” who has given me the chance toparticipate in interesting research projects on “MUTUAL FUNDS IN INDIA” . He hassupported me with his encouragement and many fruitful discussions. I would also like toexpress my sincere thanks to “MAHINDRA & MAHINDRA FINANCIAL SERVICESLtd” for chosing me. The close cooperation with my friends other colleagues ofmahindra and mahindra,and many other researchers fellowers, without their co-operationit was impossible for me to complete this project. I would also like to thank my parentsthat they allowed me to go to Delhi for this project and their continous support.Finally, I wish to thank my sincere gratitude to Dr. Bimal Anjum (HOD) MBADEPTT. RIMT-IET for giving me opportunity to do research under his profoundguidance. Because of his inspiring guidance, motivation, positive criticism, continuousencouragement and untiring supervision this work could be brought to its present shape.I would like to thank all of them who in one way or the other helped me. Anil KumarProjectsformba.blogspot.com 3
  • Projectsformba.blogspot.com PREFACEThe success of any business entity solely depends on how effectively does it utilizes itsoptimum resources and how soon does it make arrangements for the removal of thecustomer’s grievances. Moreover, the company should always be ready to makenecessary changes according to the requirement in order to attract more customers so asto maintain a substantial growth in the market. The topic given to me is :MUTUALFUNDS IN INDIA “MUTUAL FUNDS IN INDIA”I have tried to put my best efforts to complete this task on the basis of skill that I haveachieved during my management studies at RIMTIET.I have tried to put my maximum effort to get the accurate statistical data. If there is anyerror or any mistake in collecting the data, please overcome it.Projectsformba.blogspot.com 4
  • Projectsformba.blogspot.com CONTENTS Page No.CHAPTER 1 – INTRODUCITON 7 • PURPOSE OF THE STUDY • EXECUTIVE SUMMARY • INTRODUCTION TO THE CONCEPTCHAPTER 2 - REVIEW OF LITERATURE 14 • A BRIEF HISTORY OF MUTUAL FUNDS. • PERFORMANCE OF MUTUAL FUNDS IN INDIACHAPTER 3 - PRESENT STUDY 20 • MARKET TRENDS • BANKS V/S MUTUAL FUN • TYPES OF MUTUAL FUNDS • ADVANTAGES & DISADVANTAGES OF MUTUAL FUNDS • MUTUAL FUND CONSTITUENTS • CALCULATION OF NAVProjectsformba.blogspot.com 5
  • Projectsformba.blogspot.com • MARKETING STRATEGIES ADOPTED BY THE MUTUAL FUNDS • CHALLENGES AND OPPORTUNITIES • REASONS FOR BAD PERFORMANCE OF MUTUAL FUNDS • MARKET SHARE OF MUTUAL FUNDS IN INDIACAPTER 4 – METHOD 51 • SURVEY METHODCHAPTER 5 – RESULT 54CHAPTER 6 – RECOMMENDATIONS 67CHAPTER 7 – SUMMARY & CONCLUSION 69CHAPTER 8 – REFRENCES 71ANNEXURE 73Projectsformba.blogspot.com 6
  • Projectsformba.blogspot.com CHAPTER 1 – INTRODUCTIONProjectsformba.blogspot.com 7
  • Projectsformba.blogspot.comPurpose of the StudyIndian households started allocating more of their savings to the capital markets in1980’s, with investments flowing into equity and debt instruments, besides theconventional mode of bank deposits.Until 1992, primary market investors were effectively assured good returns as the issueprice of new equity issues was controlled and low. After introduction of free pricing ofshares, new issues prices were higher and with greater volatility in the stock markets,many investors who bought highly priced shares lost money, and withdrew from themarkets altogether. Even those investors who continued as direct investors in the stockmarkets realized that the key to successful investing in the capital markets lay in buildinga diversified portfolio, which in turn required substantial capital. Besides, selectingsecurities with growth and income potential from the capital market involved carefulresearch and monitoring of the market, which was not possible for all investors. Undersimilar circumstances in other countries, mutual funds had emerged as professionalintermediaries. Besides providing the expertise in stock market investing, these fundsallow investing in small amounts and yet holding a diversified portfolio to limit risk,while providing the potential for income and growth that is associated with the debt andequity instruments. In India, Unit Trust of India occupied this place as the only capitalmarkets intermediary from 1964 until late 1987, when the Government started allowingother sponsors also to set up mutual funds. With some ups and downs, this new class ofintermediary institutions has emerged, in India as elsewhere, as a good alternative todirect investing in capital markets.Mutual funds units are investment vehicles that help small investors to take a big ridethrough capital market, which is not possible individually with small amount ofProjectsformba.blogspot.com 8
  • Projectsformba.blogspot.cominvestment. It provides a means of participation in the stock market for people who donot have the time not perhaps the expertise to take direct investment decisions in equitiessuccessfully.Mutual funds serve as a link between the saving public and the capital markets, as theymobilize savings from investors and bring them to borrowers in the capital markets. Bythe very nature of their activities, and by virtue of being knowledgeable and informedinvestors, they influenced the stock markets and play an active role in promoting goodcorporate governance, investor protection and the health of capital markets. Mutual fundshave imparted much needed liquidity into the financial system and challenged thehitherto dominant role of banking and financial institutions in the capital markets.The present study was undertaken to • Understand the perception of small investors, who are the most exploited in Indian capital Market. • Analyze the type of funds available for the investor • Understand the investment pattern of a common investor. • Analyze factors which are considered before investing in mutual funds. • Understand the trends in mutual fund industry. • Importance of Marketing Strategies in mutual funds.Projectsformba.blogspot.com 9
  • Projectsformba.blogspot.comExecutive SummaryIndian mutual fund industry now represents perhaps the most appropriate investmentopportunity for most investors. As financial markets become more sophisticated andcomplex, investors need a financial intermediary who provides the required knowledgeand professional expertise on successful investing. There are various choices available tothe investor of today. One however needs to invest carefully, and work out variousinvestment options and decide on how to make best of the investment in terms ofmonetary benefits.A mutual fund is a common pool of money into which investors place their contributionsthat are to be invested in accordance with a stated objective. The ownership of the fund isthus join or mutual; the fund belongs to all investors. A single investor’s ownership ofthe fund is in the same proportion as the amount of the contribution made by him or herbears to the total amount of fund.A mutual fund uses the money collected from investors to buy those assets which arespecifically permitted by its stated investment objective. Thus, an equity fund would buymainly equity assets- ordinary shares, preference shares, warrants etc. It is these assetswhich are owned by the investors in the same proportion as their contribution bears to thetotal contributions of all investors put together.Since each owner is a part owner of a mutual fund, it is necessary to establish the valueof his part. In other words, each share or unit that an investor holds needs to be assigneda value. Since the units held by an investor evidence the ownership of the fund’s assets,Projectsformba.blogspot.com 10
  • Projectsformba.blogspot.comthe value of the total assets of the fund when divided by the total number of units issuedby the mutual fund gives us the value of one unit. This is generally called the Net AssetValue (NAV) of one unit or one share. The value of an investor’s part ownership is thisdetermined by the NAV of the number of units held.Introduction to the conceptWhat is a Mutual fund?A Mutual Fund is a trust that pools the savings of a number of investors who share acommon financial goal. The money thus collected is invested by the fund manager indifferent types of securities depending upon the objective of the scheme. These couldrange from shares to debentures to money market instruments. The income earnedthrough these investments and the capital appreciations realized by the scheme are sharedby its unit holders in proportion to the number of units owned by them (pro rata). Thus aMutual Fund is the most suitable investment for the common man as it offers anopportunity to invest in a diversified, professionally managed portfolio at a relatively lowcost. Anybody with an inventible surplus of as little as a few thousand rupees can investin Mutual Funds. Each Mutual Fund scheme has a defined investment objective andstrategy.Projectsformba.blogspot.com 11
  • Projectsformba.blogspot.comMutual Fund Operation Flow ChartA mutual fund is the ideal investment vehicle for today’s complex and modern financialscenario. Markets for equity shares, bonds and other fixed income instruments, realestate, derivatives and other assets have become mature and information driven. Pricechanges in these assets are driven by global events occurring in faraway places. A typicalindividual is unlikely to have the knowledge, skills, inclination and time to keep track ofevents, understand their implications and act speedily. An individual also finds it difficultto keep track of ownership of his assets, investments, brokerage dues and banktransactions etc.A mutual fund is the answer to all these situations. It appoints professionally qualifiedand experienced staff that manages each of these functions on a full time basis. The largeProjectsformba.blogspot.com 12
  • Projectsformba.blogspot.compool of money collected in the fund allows it to hire such staff at a very low cost to eachinvestor. In effect, the mutual fund vehicle exploits economies of scale in all three areas -research, investments and transaction processing. While the concept of individualscoming together to invest money collectively is not new, the mutual fund in its presentform is a 20th century phenomenon. In fact, mutual funds gained popularity only afterthe Second World War. Globally, there are thousands of firms offering tens of thousandsof mutual funds with different investment objectives. Today, mutual funds collectivelymanage almost as much as or more money as compared to banks.Mutual funds for whom?These funds can survive and thrive only if they can live upto the hopes and trusts of theirindividual members. These hopes and trusts echo the peculiarities which support theemergence and growth of such in rescue of such investors who come to the rescue ofsuch investors who face following constraints while making direct investments:(a) Limited resources in the hands of investors quite often take them away from stockmarket transactions.(b) Lack of funds forbids investors to have a balanced and diversified portfolio.(c) Lack of professional knowledge associated with investment business unable investorsto operate gainfully in the market. Small investors can hardly afford to have ex-pensiveinvestment consultations.(d) To buy shares, investors have to engage share brokers who are the members of stockexchange and have to pay their brokerage.(e) They hardly have access to price sensitive information in time.(f) It is difficult for them to know the development taking place in share market andcorporate sector.Projectsformba.blogspot.com 13
  • Projectsformba.blogspot.com(g) Firm allotments are not possible for small investors on when there is a trend ofover subscription to public issues.Projectsformba.blogspot.com 14
  • Projectsformba.blogspot.com CHAPTER 2 – REVIEW OF LITERATUREA brief history of Mutual funds in IndiaThe origin of mutual fund industry in India is with the introduction of the concept ofmutual fund by UTI in the year 1963. Though the growth was slow, but it acceleratedfrom the year 1987 when non-UTI players entered theindustry.In the past decade, Indian mutual fund industry had seen dramatic improvements, bothquality wise as well as quantity wise. Before, the monopoly of the market had seen anProjectsformba.blogspot.com 15
  • Projectsformba.blogspot.comending phase; the Assets under Management (AUM) were Rs. 67bn. The private sectorentry to the fund family raised the AUM to Rs. 470 bn in March 1993 and till April 2004;it reached the height of 1,540 bn.Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it isless than the deposits of SBI alone, constitute less than 11% of the total deposits held bythe Indian banking industry.The main reason of its poor growth is that the mutual fund industry in India is new in thecountry. Large sections of Indian investors are yet to be intellectuated with the concept.Hence, it is the prime responsibility of all mutual fund companies, to market the productcorrectly abreast of selling.The mutual fund industry can be broadly put into four phases according to thedevelopment of the sector. Each phase is briefly described as under.First Phase - 1964-87Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set upby the Reserve Bank of India and functioned under the Regulatory and administrativecontrol of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and theIndustrial Development Bank of India (IDBI) took over the regulatory and administrativecontrol in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At theendof 1988 UTI had Rs.6,700 crores of assets under management.Projectsformba.blogspot.com 16
  • Projectsformba.blogspot.comSecond Phase - 1987-1993 (Entry of Public Sector Funds)Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by CanbankMutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian BankMutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47, 004 as assets undermanagement.Third Phase - 1993-2003 (Entry of Private Sector Funds)With the entry of private sector funds in 1993, a new era started in the Indian mutualfund industry, giving the Indian investors a wider choice of fund families. Also, 1993was the year in which the first Mutual Fund Regulations came into being, under which allmutual funds, except UTI were to be registered and governed. The erstwhile KothariPioneer (now merged with Franklin Templeton) was the first private sector mutual fundregistered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensiveand revised Mutual Fund Regulations in 1996. The industry now functions under theSEBI (Mutual Fund) Regulations 1996.The number of mutual fund houses went on increasing, with many foreign mutual fundssetting up funds in India and also the industry has witnessed several mergers andacquisitions. As at the end of January 2003, there were 33 mutual funds with total assetsof Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets undermanagement was way ahead of other mutual funds.Projectsformba.blogspot.com 17
  • Projectsformba.blogspot.comFourthPhase - since February 2003This phase had bitter experience for UTI. It was bifurcated into two separate entities. Oneis the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (ason January 2003). The Specified Undertaking of Unit Trust of India, functioning underan administrator and under the rules framed by Government of India and does not comeunder the purview of the Mutual Fund Regulations.The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It isregistered with SEBI and functions under the Mutual Fund Regulations. With thebifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores ofAUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI MutualFund Regulations, and with recent mergers taking place among different private sectorfunds, the mutual fund industry has entered its current phase of consolidation and growth.Performance of Mutual Funds in IndiaLet us start the discussion of the performance of mutual funds in India from the day theconcept of mutual fund took birth in India. The year was 1963. Unit Trust of Indiainvited investors or rather to those who believed in savings, to park their money in UTIMutual Fund.For 30 years it goaled without a single second player. Though the 1988 year saw someProjectsformba.blogspot.com 18
  • Projectsformba.blogspot.comnew mutual fund companies, but UTI remained in a monopoly position.The performance of mutual funds in India in the initial phase was not even closer tosatisfactory level. People rarely understood, and of course investing was out of question.But yes, some 24 million shareholders was accustomed with guaranteed high returns bythe beginning of liberalization of the industry in 1992. This good record of UTI becamemarketing tool for new entrants. The expectations of investors touched the sky inprofitability factor. However, people were miles away from the preparedness of risksfactor after the liberalization.The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let meconcentrate about the performance of mutual funds in India through figures. From Rs.67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figurehad a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.The net asset value (NAV) of mutual funds in India declined when stock prices startedfalling in the year 1992. Those days, the market regulations did not allow portfolio shiftsinto alternative investments. There were rather no choices apart from holding the cash orto further continue investing in shares. One more thing to be noted, since only closed-endfunds were floated in market, the investors disinvested by selling at a loss the in thesecondary market.The performance of mutual funds in India suffered qualitatively. The 1992 stock marketscandal, the losses by disinvestments and of course the lack of transparent rules in thewhereabouts rocked confidence among the investors. Partly owing to a relatively weakstock market performance, mutual funds have not yet recovered, with funds trading at anaverage discount of 1020 percent of their net asset value.The supervisory authority adopted a set of measures to create a transparent andcompetitive environment in mutual funds. Some of them were like relaxing investmentrestrictions into the market, introduction of open-ended funds, and paving the gatewayProjectsformba.blogspot.com 19
  • Projectsformba.blogspot.comfor mutual funds to launch pension schemes.The measure was taken to make mutual funds the key instrument for long-term saving.The more the variety offered, the quantitative will be investors.At last to mention, as long as mutual fund companies are performing with lower risks andhigher profitability within a short span of time, more and more people will be inclined toinvest until and unless they are fully educated with the dos and don’ts of mutual fundsProjectsformba.blogspot.com 20
  • Projectsformba.blogspot.com CHAPTER 3 – PRESENT STUDYMarket TrendsProjectsformba.blogspot.com 21
  • Projectsformba.blogspot.comA lone UTI with just one scheme in 1964, now competes with as many as 400 oddproducts and 34 players in the market. In spite of the stiff competition and losing marketshare, UTI still remains a formidable force to reckon with.Last six years have been the most turbulent as well as exiting ones for the industry. Newplayers have come in, while others have decided to close shop by either selling off ormerging with others. Product innovation is now passé with the game shifting toperformance delivery in fund management as well as service. Those directly associatedwith the fund management industry like distributors, registrars and transfer agents, andeven the regulators have become more mature and responsible.The industry is also having a profound impact on financial markets. While UTI hasalways been a dominant player on the bourses as well as the debt markets, the newgeneration of private funds which have gained substantial mass are now seen flexingtheir muscles. Fund managers, by their selection criteria for stocks have forced corporategovernance on the industry. By rewarding honest and transparent management withhigher valuations, a system of risk-reward has been created where the corporate sector isRs100bn per annum over five-year period spanning 1993-98 doubled to Rs210bn in 1998more transparent then before.Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCGand technology sector. Funds performances are improving. Funds collection, whichaveraged at less than -99. In the current year mobilization till now have exceededRs300bn. Total collection for the current financial year ending March 2000 is expected toreach Rs450bn.What is particularly noteworthy is that bulk of the mobilization has been by the privatesector mutual funds rather than public sector mutual funds. Indeed private MFs saw a netinflow of Rs. 7819.34 crore during the first nine months of the year as against a netinflow of Rs.604.40 crore in the case of public sector funds.Mutual funds are now also competing with commercial banks in the race for retailinvestor’s savings and corporate float money. The power shift towards mutual funds hasProjectsformba.blogspot.com 22
  • Projectsformba.blogspot.combecome obvious. The coming few years will show that the traditional saving avenues arelosing out in the current scenario. Many investors are realizing that investments insavings accounts are as good as locking up their deposits in a closet. The fundmobilization trend by mutual funds in the current year indicates that money is going tomutual funds in a big way. The collection in the first half of the financial year 1999-2000matches the whole of 1998-99.India is at the first stage of a revolution that has already peaked in the U.S. The U.S.boasts of an Asset base that is much higher than its bank deposits. In India, mutual fundassets are not even 10% of the bank deposits, but this trend is beginning to change.Recent figures indicate that in the first quarter of the current fiscal year mutual fundassets went up by 115% whereas bank deposits rose by only 17%. (Source: Think-tank,The Financial Express September, 99) This is forcing a large number of banks to adoptthe concept of narrow banking wherein the deposits are kept in Gilts and some otherassets which improves liquidity and reduces risk. The basic fact lies that banks cannot beignored and they will not close down completely. Their role as intermediaries cannot beignored. It is just that Mutual Funds are going to change the way banks do business in thefuture. Banks VS Mutual Funds BANKS MUTUAL FUNDSReturns Low BetterAdministrative High Lowexp.Projectsformba.blogspot.com 23
  • Projectsformba.blogspot.comRisk Low ModerateInvestment Less MoreoptionsNetwork High penetration Low but improvingLiquidity At a cost BetterQuality of assets Not transparent TransparentInterest Minimum balance between 10th. & 30th. Of everyEverydaycalculation monthGuarantee Maximum Rs.1 lakh on deposits NoneBankers better watch out! The Indian mutual fund industry will soon start relieving thebanking system of its prized deposits.Innovative distribution, marketing and aggressive concept selling will drive savings intothe lap of the Indian Mutual Fund industry in the next millennium, fund managerspredicted at the Second Economic Times Roundtable on mutual funds held last week.Fund chiefs predicted that ease of transactions, thanks to technology and increasedawareness, would lead to more investors putting their money into mutual funds. The daywas not far, they said , when small savings account s too began moving into mutualfunds.Types of Mutual FundsAny mutual fund has an objective of earning income for the investors and/ or gettingincreased value of their investments. To achieve these objectives mutual funds adoptdifferent strategies and accordingly offer different schemes of investments. On this basisProjectsformba.blogspot.com 24
  • Projectsformba.blogspot.comthe simplest way to categorize schemes would be to group these into two broadclassifications: Operational Classification and Portfolio Classification.Operational classification highlights the two main types of schemes, i.e., open-ended andclose-ended which are offered by the mutual funds.Portfolio classification projects the combination of investment instruments andinvestment avenues available to mutual funds to manage their funds. Any portfolioscheme can be either open ended or close ended.A. OPERATIONAL CLASSIFICATION(a) Open Ended Schemes: As the name implies the size of the scheme (Fund) isopen – i.e., not specified or pre-determined. Entry to the fund is always open to theinvestor who can subscribe at any time. Such fund stands ready to buy or sell itssecurities at any time. It implies that the capitalization of the fund is constantly changingas investors sell or buy their shares. Further, the shares or units are normally not tradedon the stock exchange but are repurchased by the fund at announced rates. Open-endedschemes have comparatively better liquidity despite the fact that these are not listed. Thereason is that investor can any time approach mutual fund for sale of such units. Nointermediaries are required. Moreover, the realizable amount is certain since repurchaseis at a price based on declared net asset value (NAV). No minute to minute fluctuationsin rates haunt the investors. The portfolio mix of such schemes has to be investments,which are actively traded in the market. Otherwise, it will not be possible to calculateNAV. This is the reason that generally open-ended schemes are equity based. Moreover,desiring frequently traded securities, open-ended schemes hardly have in their portfolioshares of comparatively new and smaller companies since these are not generally traded.In such funds, option to reinvest its dividend is also available. Since there is always apossibility of withdrawals, the management of such funds becomes more tedious asProjectsformba.blogspot.com 25
  • Projectsformba.blogspot.commanagers have to work from crisis to crisis. Crisis may be on two fronts, one is, thatunexpected withdrawals require funds to maintain a high level of cash available everytime implying thereby idle cash. Fund managers have to face questions like ‘what tosell’. He could very well have to sell his most liquid assets. Second, by virtue of thissituation such funds may fail to grab favorable opportunities. Further, to match quickcash payments, funds cannot have matching realization from their portfolio due tointricacies of the stock market. Thus, success of the open-ended schemes to a great extentdepends on the efficiency of the capital market.(b) Close Ended Schemes: Such schemes have a definite period after which theirshares/ units are redeemed. Unlike open-ended funds, these funds have fixedcapitalization, i.e., their corpus normally does not change throughout its life period. Closeended fund units trade among the investors in the secondary market since these are to bequoted on the stock exchanges. Their price is determined on the basis of demand andsupply in the market. Their liquidity depends on the efficiency and understanding of theengaged broker. Their price is free to deviate from NAV, i.e., there is every possibilitythat the market price may be above or below its NAV. If one takes into account the issueexpenses, conceptually close ended fund units cannot be traded at a premium or overNAV because the price of a package of investments, i.e., cannot exceed the sum of theprices of the investments constituting the package. Whatever premium exists that mayexist only on account of speculative activities. In India as per SEBI (MF) Regulationsevery mutual fund is free to launch any or both types of schemes. B. PORTFOLIO CLASSIFICATION OF FUNDS: Following are the portfolio classification of funds, which may be offered. This classification may be on the basis of (a) Return, (b) Investment Pattern,Projectsformba.blogspot.com 26
  • Projectsformba.blogspot.com (c) Specialized sector of investment, (d) Leverage and (e) Others.(a) Return based classification: To meet the diversified needs of the investors, themutual fund schemes are made to enjoy a good return. Returns expected are in form ofregular dividends or capital appreciation or a combination of these two. i. Income Funds: For investors who are more curious for returns,Income funds are floated. Their objective is to maximize current income. Such fundsdistribute periodically the income earned by them. These funds can further be splitted upinto categories: those that stress constant income at relatively low risk and those thatattempt to achieve maximum income possible, even with the use of leverage. Obviously,the higher the expected returns, the higher the potential risk of the investment. ii. Growth Funds: Such funds aim to achieve increase in the value of theunderlying investments through capital appreciation. Such funds invest in growthoriented securities which can appreciate through the expansion production facilities inlong run. An investor who selects such funds should be able to assume a higher thannormal degree of risk. iii. Conservative Funds: The fund with a philosophy of “all things to all”issue offer document announcing objectives as: (i) To provide a reasonable rate of return,(ii) To protect the value of investment and, (iii) To achieve capital appreciationconsistent with the fulfillment of the first two objectives. Such funds which offer a blendof immediate average return and reasonable capital appreciation are known as “middle ofProjectsformba.blogspot.com 27
  • Projectsformba.blogspot.comthe road” funds. Such funds divide their portfolio in common stocks and bonds in a wayto achieve the desired objectives. Such funds have been most popular and appeal to theinvestors who want both growth and income.(b) Investment Based Classification: Mutual funds may also be classified onthe basis of securities in which they invest. Basically, it is renaming the subcategories ofreturn based classification. i. Equity Fund: Such funds, as the name implies, invest most of theirinvestible shares in equity shares of companies and undertake the risk associated with theinvestment in equity shares. Such funds are clearly expected to outdo other funds inrising market, because these have almost all their capital in equity. Equity funds againcan be of different categories varying from those that invest exclusively in high quality‘blue chip’ companies to those that invest solely in the new, unestablished companies.The strength of these funds is the expected capital appreciation. Naturally, they have ahigher degree of risk. ii. Bond Funds: such funds have their portfolio consisted of bonds,debentures, etc. this type of fund is expected to be very secure with a steady income andlittle or no chance of capital appreciation. Obviously risk is low in such funds. In thiscategory we may come across the funds called ‘Liquid Funds’ which specialize ininvesting short-term money market instruments. The emphasis is on liquidity and isassociated with lower risks and low returns. iii. Balanced Fund: The funds, which have in their portfolio a reasonable mixof equity and bonds, are known as balanced funds. Such funds will put more emphasis onequity share investments when the outlook is bright and will tend to switch to debentureswhen the future is expected to be poor for shares.Projectsformba.blogspot.com 28
  • Projectsformba.blogspot.com(c) Sector Based Funds: There are number of funds that invest in a specified sectorof economy. While such funds do have the disadvantage of low diversification by puttingall their all eggs in one basket, the policy of specializing has the advantage of developingin the fund managers an intensive knowledge of the specific sector in which they areinvesting. Sector based funds are aggressive growth funds which make investments onthe basis of assessed bright future for a particular sector. These funds are characterizedby high viability, hence more risky.Advantages & Disadvantages of Mutual FundsAdvantages of Mutual FundsThe advantages of investing in a Mutual Fund are: • Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value. • Professional Management: Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell. • Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.Projectsformba.blogspot.com 29
  • Projectsformba.blogspot.com • Liquidity: Its easy to get your money out of a mutual fund. Write a check, make a call, and youve got the cash. • Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet. • Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index • Transparency • Flexibility • Choice of schemes • Tax benefits • Well regulatedDrawbacks of Mutual Funds:Mutual funds have their drawbacks and may not be for everyone: • No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutualProjectsformba.blogspot.com 30
  • Projectsformba.blogspot.com funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money. • Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you dont use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund. • Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made. • Management risk: When you invest in a mutual fund, you depend on the funds manager to make the right decisions regarding the funds portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.Mutual fund constituentsAll mutual funds comprise four constituents – Sponsors,Projectsformba.blogspot.com 31
  • Projectsformba.blogspot.com Trustees, Asset Management Company (AMC) and Custodians.Sponsors: The sponsors initiate the idea to set up a mutual fund. It could be a registeredcompany, scheduled bank or financial institution. A sponsor has to satisfy certainconditions, such as capital, record (at least five year’s operation in financial services), de-fault free dealings and general reputation of fairness. The sponsors appoint the Trustee,AMC and Custodian. Once the AMC is formed, the sponsor is just a stakeholder.Trust/ Board of Trustees: Trustees hold a fiduciary responsibility towards unitholders by protecting their interests. Trustees float and market schemes, and securenecessary approvals. They check if the AMC’s investments are within well-definedlimits, whether the fund’s assets are protected, and also ensure that unit holders get theirdue returns. They also review any due diligence by the AMC. For major decisionsconcerning the fund, they have to take the unit holders’ consent. They submit reportsevery six months to SEBI; investors get an annual report. Trustees are paid annually outof the fund’s assets – 0.5 percent of the weekly net asset value.Fund Managers/ AMC: They are the ones who manage money of the investors. AnAMC takes decisions, compensates investors through dividends, maintains properaccounting and information for pricing of units, calculates the NAV, and providesinformation on listed schemes. It also exercises due diligence on investments, andsubmits quarterly reports to the trustees. A fund’s AMC can neither act for any otherfund nor undertake any business other than asset management. Its net worth should notfall below Rs. 10 crore. And, its fee should not exceed 1.25 percent if collections arebelow Rs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can pullup an AMC if it deviates from its prescribed role.Projectsformba.blogspot.com 32
  • Projectsformba.blogspot.comCustodian: Often an independent organisation, it takes custody of securities and otherassets of mutual fund. Its responsibilities include receipt and delivery of securities,collecting income-distributing dividends, safekeeping of the units and segregating assetsand settlements between schemes. Their charges range between 0.15-0.2 percent of thenet value of the holding. Custodians can service more than one fund.Calculation of NAVThe net asset value of the fund is the cumulative market value of the assets fund net of itsliabilities. In other words, if the fund is dissolved or liquidated, by selling off all theassets in the fund, this is the amount that the shareholders would collectively own. Thisgives rise to the concept of net asset value per unit, which is the value, represented by theownership of one unit in the fund. It is calculated simply by dividing the net asset valueof the fund by the number of units. However, most people refer loosely to the NAV perunit as NAV, ignoring the "per unit". We also abide by the same convention.The most important part of the calculation is the valuation of the assets owned by thefund. Once it is calculated, the NAV is simply the net value of assets divided by thenumber of units outstanding. The detailed methodology for the calculation of the assetvalue 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 assetsProjectsformba.blogspot.com 33
  • Projectsformba.blogspot.comExpenses accrued but not paidDetails on the above itemsFor liquid shares/debentures, valuation is done on the basis of the last or closing marketprice on the principal exchange where the security is traded.For illiquid and unlisted and/or thinly traded shares/debentures, the value has to beestimated. For shares, this could be the book value per share or an estimated market priceif suitable benchmarks are available. For debentures and bonds, value is estimated on thebasis of yields of comparable liquid securities after adjusting for illiquidity. The value offixed interest bearing securities moves in a direction opposite to interest rate changesValuation of debentures and bonds is a big problem since most of them are unlisted andthinly traded. This gives considerable leeway to the AMCs on valuation and some of theAMCs are believed to take advantage of this and adopt flexible valuation policiesdepending on the situation.Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, withevery passing day, interest is said to be accrued, at the daily interest rate, which iscalculated by dividing the periodic interest payment with the number of days in eachperiod. Thus, accrued interest on a particular day is equal to the daily interest ratemultiplied by the number of days since the last interest payment date.Usually, dividends are proposed at the time of the Annual General meeting and becomedue on the record date. There is a gap between the dates on which it becomes due and theactual payment date. In the intermediate period, it is deemed to be "accrued".Expenses including management fees, custody charges etc. are calculated on a dailybasis.Marketing strategies adopted by the Mutual fundsProjectsformba.blogspot.com 34
  • Projectsformba.blogspot.comThe present marketing strategies of mutual funds can be divided into three mainheadings: • Direct marketing • Selling through intermediaries. • Joint CallsDirect Marketing: This constitutes 20 percent of the total sales of mutual funds. Someof the important tools used in this type of selling are:Personal Selling: In this case the customer support officer of the fund at a particularbranch takes appointment from the potential prospect. Once the appointment is fixed, thebranch officer also called Business Development Associate (BDA) in some funds thenmeets the prospect and gives him all details about the various schemes being offered byhis fund. The conversion rate in this mode of selling is in between 30% - 40%.Telemarketing: In this case the emphasis is to inform the people about the fund. Thenames and phone numbers of the people are picked at random from telephone directory.Sometimes people belonging to a particular profession are also contacted through phoneand are then informed about the fund. Generally the conversion rate in this form ofmarketing is 15% - 20%.Direct mail: This one of the most common method followed by all mutual funds.Addresses of people are picked at random from telephone directory. The customersupport officer (CSO) then mails the literature of the schemes offered by the fund. Thefollow up starts after 3 – 4 days of mailing the literature. The CSO calls on the people towhom the literature was mailed. Answers their queries and is generally successful intaking appointments with those people. It is then the job of BDA to try his best to convertthat prospect into a customer.Advertisements in newspapers and magazines: The funds regularly advertise in businessnewspapers and magazines besides in leading national dailies. The purpose to keepinvestors aware about the schemes offered by the fund and their performance in recentpast.Projectsformba.blogspot.com 35
  • Projectsformba.blogspot.comHoardings and Banners: In this case the hoardings and banners of the fund are put atimportant locations of the city where the movement of the people is very high. Generallysuch hoardings are put near UTI offices in order to tap people who are at presentinvesting in UTI schemes. The hoarding and banner generally contains information eitherabout one particular scheme or brief information about all schemes of fund.Selling through intermediaries: Intermediaries contribute towards 80% of the totalsales of mutual funds. These are the people/ distributors who are in direct touch with theinvestors. They perform an important role in attracting new customers. Most of theseintermediaries are also involved in selling shares and other investment instruments. Theydo a commendable job in convincing investors to invest in mutual funds. A lot dependson the after sale services offered by the intermediary to the customer. Customers prefer towork with those intermediaries who give them right information about the fund and keepthem abreast with the latest changes taking place in the market especially if they haveany bearing on the fund in which they have invested.Regular Meetings with distributors: Most of the funds conduct monthly/bi-monthlymeetings with their distributors. The objective is to hear their complaints regardingservice aspects from funds side and other queries related to the market situation.Sometimes, special training programmes are also conducted for the new agents/distributors. Training involves giving details about the products of the fund, their presentperformance in the market, what the competitors are doing and what they can do toincrease the sales of the fund.Joint Calls: This is generally done when the prospect seems to be a high net worthinvestor. The BDA and the agent (who is located close to the HNI’s residence or area ofoperation) together visit the prospect and brief him about the fund. The conversion rate isvery high in this situation, generally, around 60%. Both the fund and the agent provideeven after sale services in this particular case.Meetings with HNI’s: This is a special feature of all the funds. Whenever a top officialvisits a particular branch office, he devotes atleast one to two hours in meting with theHNI’s of that particular area. This generally develops a faith among the HNI’s towardsthe fund.Projectsformba.blogspot.com 36
  • Projectsformba.blogspot.comMarketing of funds: Challenges and OpportunitiesWhen we consider marketing, we have to see the issues in totality, because we cannotjudge an elephant by its trunk or by its tail but we have to see it in its totality. When wesay marketing of mutual funds, it means, includes and encompasses the followingaspects: • Assessing of investors needs and market research; • Responding to investors needs; • Product designing; • Studying the macro environment; • Timing of the launch of the product; • Choosing the distribution network; • Finalizing strategies for publicity and advertisement; • Preparing offer documents and other literature; • Getting feedback about sales; • Studying performance indicators about fund performance like NAV; • Sending certificates in time and other after sales activities; • Honoring the commitments made for redemptions and repurchase; • Paying dividends and other entitlements; • Creating positive image about the fund and changing the nature of the market itself.Projectsformba.blogspot.com 37
  • Projectsformba.blogspot.comThe above are the aspects of marketing of mutual funds, in totality. Even if there is asingle weak-link among the factors which are mentioned above, no mutual fund cansuccessfully market its funds.WIDENING, BROADENING AND DEEPENING THE MARKETSThere are certain issues that are directly linked with the marketing of mutual funds, thefirst of which is widening, broadening and deepening of the market for the mutual fundproducts. Consider the geographical spread of the investors in the mutual fund industry.Almost 80% of the funds are mobilized from less than 10 centers in the country. In factthere are only around 35 centers in the country, which account for almost 95% of thefunds mobilized. Considering the vast nature of this country, the first priority is that thegeographic spread has to be widened and the market has to be deepened. Secondly, themutual funds must try to spread their wings not only within the country, but also outsidethe country.A. Markets in Rural and Semi-Urban AreasThere exists a large investor base in rural and semi-urban areas, having a population ofabout one lakh, which normally has access to only post office savings and bank deposits.This is the single largest untapped market for mutual funds in India.Rural marketing, unlike the marketing of mutual funds in the metros and urban areas,would require a completely different strategy, and different means of communication tothe target customer. Typically, investors in the rural and semi-urban areas are not welleducated and are inadequately exposed to the capital market mechanisms. Therefore,more emphasis has to be given to the electronic media and other forms of publicity suchas wall paintings, hoardings, and educational films. It is also important to utilize theservices of local intermediaries like gram sevaks, postmasters, school teachers,Projectsformba.blogspot.com 38
  • Projectsformba.blogspot.comagricultural co-operative societies and rural banks. It would therefore be more expensiveto market mutual funds in such markets than marketing in the cities.The mutual fund industry can collectively undertake this job of creating awarenessamong the rural population about the mutual funds as a new form of savings; translatethat awareness into increased fund mobilsation. The retail distribution network,comprising of the district representatives and the collection centers can be best utilized tocreate such awareness and expand the market. Simplification of literature in regionallanguages, group meetings in these semi-urban and rural areas, visits by mobile vans withsome audio visual aids and the like, should help develop these markets. In other words,the untapped markets in the country should ideally be the first thing that the mutual fundsin India should endeavour to tap, not entirely relying upon the investors in the 35 oddcities of the country. By concentrating on these areas, the investor base will get broaderbased. Once the semi urban population gets acquainted with the concept of mutual funds,it will naturally give the much needed stability to the market.B. Overseas MarketsThe second aspect with respect to the widening and deepening the market is expandingthe overseas investor base. A target group with large potential, which can be tapped isnon-resident Indians. If offered after sales services of international standard, reasonablereturn and easy access to information, NRI’s are willing to invest in Indian mutual funds.The expansion of the distribution network and quick dissemination of information,coupled with prompt and timely service, efficient collection and remittance mechanism,will play an important role in mobilizing and retaining these funds. NRI’s will alsorequire a continuous presence in their market, because that generates trust andconfidence, which translates into sustained mobilization of funds.PRODUCT INNOVATION AND VARIETYA. Investor PreferencesThe challenge for the mutual funds is in the tailoring the right products that will helpmobilizing savings by targeting investors’ needs. It is necessary that the commonProjectsformba.blogspot.com 39
  • Projectsformba.blogspot.cominvestor understands very clearly and loudly the salient features of funds, anddistinguishes one fund from another. The funds that are being launched today are more orless look-alikes, or plain vanilla funds, and not necessarily designed to take into accountthe investors’ varying needs.The Indian investor is essentially risk averse and is more passive than active. He is notinterested in frequently changing his portfolio, but is satisfied with safety and reasonablereturns. Importantly, he understands more by emotions and sentiments rather than aquantitative comparison of funds’ performance with respect to an index. Mere growthprospects, in an uncertain market, are not attractive to him. He prefers one bird in thehand to two in bush, and is happy if assured a rate of reasonable return that he will get onhis investment. The expectations of a typical investor, in order of preference are thesafety of funds, reasonable return and liquidity.The investor is ready to invest his money over a long periods, provided there is a purposeattached to it which is linked to his social needs and therefore appeals to his sentimentsand emotions. That purpose may be his child’s education and career development,medical expenses, health care after retirement, or the need for steady and sure incomeafter retirement. In a country where social security and social insurance are conspicuousmore by their absence, mutual funds can pool their resources together and try to mobilizefunds to meet some of the social needs of the society.B. Product InnovationsWith the debt market now getting developed, mutual funds are tapping the investors whorequire steady income with safety, by floating funds that are designed to primarily havedebt instruments in their portfolio. The other area where mutual funds are concentratingis the money market mutual funds, sectoral funds, index funds, gilt funds besides equityfunds.The industry can also design separate funds to attract semi-urban and rural investors,keeping their seasonal requirements in mind for harvest seasons, festival seasons, sowingseasons, etc.Projectsformba.blogspot.com 40
  • Projectsformba.blogspot.comDISTRIBUTION NETWORKAmong the competitors to the mutual fund industry, Life Insurance Corporation with itsdedicated sales force is offering insurance products; banks with their friendlyneighborhood presence offer the advantage of extensive network; finance companieswith their hefty upfront incentives offer higher returns; shares – provided the market ismoving favorably – also attract direct investments from retail investors. It is against thisbackground that the merits and demerits of the alternative methods of distribution have tobe studied.Retail through agentsThe alternative distribution channels that are available are selling, or using lead managersand brokers along with sub-brokers, for selling units. The experience of UTI has beenthat, if necessary motivation and incentive is provided to the retailer agents, they arelikely to be more successful than the lead managers. This is because, there is a sense ofloyalty amongst agents, in anticipation of getting continuous business throughout theyear, and the trust and credibility that has been generated or will be generated by beingloyal to one institution. Statistics reveal that the wastage ratio of application forms in thelead manager concept, is much higher than in the retail agency system. Savings inadvertisement and publicity expenses is also affected, as the target of communication isrestricted to a few group of individuals, since the agent will function as a facilitator,informer and educator. The reduced cost benefit will ultimately accrue to the investor inthe form of higher returns.In such a system, one achieves brand loyalty through continuous interaction betweenagents and investors. Building a team of agents and other distribution network such asdistribution and collecting agents and franchise offices, will provide the investor theopportunity of having continuous interaction and contact with the mutual fund.Therefore, retail distribution through the agents is a preferred alternative for distributingmutual fund products.Projectsformba.blogspot.com 41
  • Projectsformba.blogspot.comADVERTISING AND SALES PROMOTIONBy their very nature, mutual funds require higher advertisement and sales promotionexpenses than any consumer product offering measurable performance. Different kindsof advertising and sales promotion exercises are required to serve the needs of differentclasses of investors. For instance, an aggressive ‘push’ marketing strategy is required forretail markets, where investors are not adequately aware of the product and do not havespecialized skill in financial market, in contrast with ‘pull’ marketing strategies for thewholesale market.There are certain issues with reference to advertisement, publicity literature and offerdocuments, which deserve attention. Most of the mutual fund advertisements looksimilar, focusing on scheme features, returns and incentives. An investor exposed to theincreasing number of mutual fund products finds that all the available brands are ratheridentical, and cannot appreciate any distinction.The present form of application, brochures and other literature is generally lengthy,cumbersome and at times complicated leading to higher emphasis on advertisement. Oneof the limiting factors is the regulatory framework governing advertisements of mutualfund products. For instance, in the offer documents, mutual funds are required to mentionthe fund objectives in clear terms. Immediately thereafter, the first risk factor that has tobe mentioned is that there is no certainty whether the objectives of the fund will beachieved or not. Some more relaxation in these may facilitate bringing more novelty inadvertisements, within a broad framework, without luring investors through falsepromises, and will certainly improve the situation.Another hurdle is the statutory disclaimer required to be carried along with everyadvertisement. Mutual funds have to provide risk factors.Under the present mutual fund regulations, a prior approval by SEBI is a must before amutual fund can launch its fund. In the regulation itself, a period of one month has beenprovided. But in a month’s time, perhaps the situation may so change, that the timing ofProjectsformba.blogspot.com 42
  • Projectsformba.blogspot.comlaunch gets affected. The requirement for getting approval, which normally takes about 2months’ time, defeats the purpose for which the fund was designed also.QUALITY OF SERVICEThis industry primarily sells quality of services, given that the performance cannot bepromised. It is with this attribute along with procedural simplicity, that the fundgradually builds its brand and its class of loyal investors. The qualities of services arebroadly categorized as: • Timely services after the sale of the units; and • Continuous reporting of investment performance.Mutual fund managers must give due attention and evaluate their performance on eachfront. They may also consider an option of conducting a service audit for controlling andimproving the quality of service.MARKET RESEARCHInvestment in mutual fund is not a one-time activity. It is a continuous activity. The sameinvestor, if satisfied, will come to the fund again and again. When the investor sends hisapplication, it is not only an application, but it also contains vital information. Most ofthis information if tabulated and analyzed, would provide important insights into investorneeds, preferences and behavior and enables us to target customers need more accurately,to achieve better penetration, deeper loyalty and reduced costs. It is in this context thatdirect marketing will assume increased importance. Knowing the customer thoroughly isof utmost importance. Unlike the consumer goods industry, it is not possible for mutualfund industry to test market and have pilot projects before launch. At the same time,focusing and concentrating on a particular geographic area where the fund has a strongpresence and proven marketing network, can help reduce network, can help reduce issueexpenses and ultimately translate into higher returns for the investor. Very little researchProjectsformba.blogspot.com 43
  • Projectsformba.blogspot.comon investor preference is available, but the industry can collectively have a data bank,and share the information for appropriate use.Market Segmentation Different segments of the market have different risk-return criteria,on the basis of which they take investment decisions. Not only that, in a particularsegment also there could be different sub-segments asking for yet different risk-returnattributes, and differential preference for various investments attributes of financialproduct. Different investment attributes an investor expects in a financial product are: • Liquidity, • Capital appreciation, • Safety of principal, • Tax treatment, • Dividend or interest income, • Regulatory restrictions, • Time period for investment, etc.On the basis of these attributes the mutual fund market may be broadly segmented intofive main segments as under.1) Retail SegmentThis segment characterizes large number of participants but low individual volumes. Itconsists of individuals, Hindu Undivided Families, and firms. It may be further sub-divided into: i. Salaried class people; ii. Retired people; iii. Businessmen and firms having occasional surpluses; iv. HUF’s for long term investment purpose.Projectsformba.blogspot.com 44
  • Projectsformba.blogspot.comThese may be further classified on the basis of their income levels. It has been observedthat prospects in different classes of income levels have different patterns of preferencesof investment. Similarly, the investment preferences for urban and rural prospects woulddiffer and therefore the strategies for tapping this segment would differ on the basis ofdifferential life style, value and ethics, social environment, media habits, and nature ofwork. Broadly, this class requires security of the principal, liquidity, and regular incomemore than capital appreciation. It lacks specialised investment skills in financial marketsand highly susceptible to mob behaviour. The marketing strategy involving indirectselling through agency network and creating awareness through appropriate media wouldbe more effective in this segment.2) Institutional SegmentThis segment characterizes less number of participants, and large individual volumes. Itconsists of banks, public sector units, financial institutions, foreign institutional investors,insurance corporations, provident and pension funds. This class normally looks for morespecialized professional investment skills of the fund managers and expects a structuredproduct than a ready-made product. The tax features and regulatory restrictions are thevital considerations in their investment decisions. Each class of participants, such asbanks, provides a niche to the fund managers in this segment. It requires more of apersonalized and direct marketing to sustain and increase volumes.3) TrustsThis is a highly regulated, high volumes segment. It consists of various types of trusts,namely, charitable trusts, religious trust, educational trust, family trust, social trust, etc.each with different objectives. Its basic investment need would be safety of the principal,regular income and hedge against inflation rather than liquidity and capital appreciation.This class offers vast potential to the fund managers, if the regulators relax guidelinesand allow the trusts to invest freely in mutual funds.Projectsformba.blogspot.com 45
  • Projectsformba.blogspot.com4) Non-Resident IndiansThis segment consists of very risk sensitive participants, at times referred as ‘fair weatherfriends.’ They need the highest cover against political and exchange risk. They normallyprefer easy exit with repatriation of income and principal. They also hold a strategicimportance as they bring in crucial foreign exchange – a crucial input for developingcountry like ours. Marketing to this segment requires special kind of products for groupsof foreign countries depending upon the provisions of tax treaties. The range of suitableproducts are required to design to divert the funds flowing into bank accounts.5) CorporatesGenerally, the investment need of this segment is to park their occasional surplus fundsthat earn return more than what they have to pay on account of holding them.Alternatively, they also get surplus fund due to the seasonality of the business, whichtypically become due for the payment within a year or quarter or even a month. Theyneed short term parking place for their fund,. This segment offers a vast potential tospecialized money market managers. Given the relaxation in the regulatory guidelines,fund managers are expected design products to this segment.Thus, each segment and sub-segment have their own risk return preferences formingniches in the market. Mutual funds managers have to analyze in detail the intrinsic needsof the prospects and design a variety of suitable products for them. Not only is that, theproducts also required to be marketed through appropriately different marketingstrategies.Changes that have taken place since the advent of the NetProjectsformba.blogspot.com 46
  • Projectsformba.blogspot.com • Lower Costs: Distribution of funds will fall in the online trading regime by 2003. Mutual funds could bring down their administrative costs to 0.75% if trading is done on- line. As per SEBI regulations, bond funds can charge a maximum of 2.25% and equity funds can charge 2.5% as administrative fees. Therefore if the administrative costs are low, the benefits are passed down and hence Mutual Funds are able to attract mire investors and increase their asset base. • Better advice: Mutual funds could provide better advice to their investors through the Net rather than through the traditional investment routes where there is an additional channel to deal with the Brokers. Direct dealing with the fund could help the investor with their financial planning. • In India, brokers could get more Net savvy than investors and could help the investors with the knowledge through get from the Net. • New investors would prefer online: Mutual funds can target investors who are young individuals and who are Net savvy, since servicing them would be easier on the Net. • India has around 1.6 million net users who are prime target for these funds and this could just be the beginning. The Internet users are going to increase dramatically and mutual funds are going to be the best beneficiary. With smaller administrative costs more funds would be mobilized .A fund manager must be ready to tackle the volatility and will have to maintain sufficient amount of investments which are high liquidity and low yielding investments to honor redemption. • Net based advertisements: There will be more sites involved in ads and promotion of mutual funds. In the U.S. sites like AOL offer detailed research and financial details about the functioning of different funds and their performance statistics. a is witnessing a genesis in this area . There are many sites such asProjectsformba.blogspot.com 47
  • Projectsformba.blogspot.com indiainfoline.com and indiafn.com that are doing something similar and providing advice to investors regarding their investments. Reasons for bad performance of Mutual fundsMost investors associate mutual funds with Master gain, Monthly Equity Plans of SBIMutual Fund, UTI and Canbank Mutual Fund and of course Morgan Stanley GrowthFund. This is so because these funds truly had participation from masses, with a fund likeMorgan Stanley having more than 1 million investors. Investors feel that after 5 years,Morgan Stanley Growth Fund units still trade below the original IPO price of Rs 10.It is incorrect to think that all mutual funds have performed poorly. If one looks at someincome funds, they have come with reasonable returns. It is only the performance ofequity funds, which has been poor. Their poor performance has been amplified by theclosed end discounts i.e. units of these funds quoting at sharp discounts to their NAVresulting in an even poorer return to the investor.One must remember that a Mutual Fund does not provide assured returns and neither canit "manufacture" returns out of thin air. Returns provided by mutual funds are a functionof the returns in the underlying asset class in which the fund invests. Good funds can beatreturns in their asset class to some extent but that’s all. E.g. take the case of a sectorspecific fund like a pharma fund which invests only in shares of pharmaceuticalcompanies. If the Govt. comes with new regulation that severely restricts the pricingfreedom of these companies resulting in negative outlook for the sector, the prices of allstocks in the sector could fall substantially resulting in severe erosion in the NAV of thefund. No one can do anything about it. A good fund manager would probably sell part ofthe fund before prices fall too much and wait for an opportune time to reinvest at lowerlevels once the dust has settled. In that case, the NAV of the fund would fall to a lesserextent – but fall it will. If the investor in the fund has invested in some stocks in theProjectsformba.blogspot.com 48
  • Projectsformba.blogspot.comsector on his own, in all probability, his personal investments may have depreciated to alarger extent.Most mutual fund managers took some time to realize the changed circumstanceswherein the open economy ushered in by the liberalization took the full impact of theglobal deflation in commodity prices. This problem was compounded further by theAsian crisis after which cheap imports from Asia caused severe pressure on profits.One more issue is that the fund managers in many funds were not "professionallyqualified and experienced". This is especially true of some of the funds floated bynationalized banks. Some of these individuals were transferred from the parentorganization and did not really know much about investment management.Lastly, investors would do well to have a look at the investments, which they made ontheir own. In most cases, they would have done much worse than the mutual funds. Wehave received numerous requests for advice from individual investors on what to doabout their own investments. If that were any indicator, investors would have done reallybadly.Market Share of Mutual funds in IndiaS.No. Asset Management AUM Market Share Company (Rs. In Crore) ( in %)1. ABN Amro 1572.1 0.942 Alliance Capital 1341.91 0.803. Benchmark 495.85 0.304. Birla Sun Life 10722.37 6.385. BoB 124.85 0.07Projectsformba.blogspot.com 49
  • Projectsformba.blogspot.com6. CanBank 1895.46 1.137. Cholamandalam 910.79 0.548. Deutsche 2317.65 1.389. DSP ML 7074.2 4.2110. Escorts 122.62 0.0711. Fidelity 1495.4 0.8912. Franklin Templeton 17079.3 10.1713. Global Insurance Co. 122.09 0.0714. HDFC 15709.86 9.3515. HSBC 7569.61 4.5116. ING Vysya 1925.17 1.1517. JM Financial 3975.26 2.3718. Kotak Mahindra 7296.86 4.3419. LIC 2872.26 1.7120. Morgan Stanely 1640.47 0.9821. Principal 611.5 3.6422. Pru ICICI 17196.43 10.2423. Reliance 10129.89 6.0324. Sahara 300 0.1825. SBI 7182.29 4.2826. Standard Chartered 8143 4.8527. Sundram 1871.42 1.1128. TATA 8164.23 4.8629. Taurus 176.27 0.10Projectsformba.blogspot.com 50
  • Projectsformba.blogspot.com30. UTI MF 22443.74 13.36 Total AUM 167986.85 100.00 CAPTER 4 – METHODProjectsformba.blogspot.com 51
  • Projectsformba.blogspot.comResearch MethodologyInvestment in mutual fund is not a one-time activity. It is a continuous activity. The sameinvestor, if satisfied, will come to the fund again and again. When the investor sends hisapplication, it is not only an application, but it also contains vital information. Most ofthis information if tabulated and analyzed, would provide important insights into investorneeds, preferences and behavior and enables us to target customers need more accurately,to achieve better penetration, deeper loyalty and reduced costs. It is in this context thatdirect marketing will assume increased importance. Knowing the customer thoroughly isof utmost importance. Unlike the consumer goods industry, it is not possible for mutualfund industry to test market and have pilot projects before launch. At the same time,focusing and concentrating on a particular geographic area where the fund has a strongpresence and proven marketing network, can help reduce network, can help reduce issueexpenses and ultimately translate into higher returns for the investor. Very little researchon investor preference is available, but the industry can collectively have a data bank,and share the information for appropriate use.This study on Mutual funds in India has been based on primary as well as secondary datasources.The primary data is collected by the getting the questionnaire filled from the commoninvestor above the age of 25.Projectsformba.blogspot.com 52
  • Projectsformba.blogspot.comFor this research, I have made use of a questionnaire for ascertaining the investmentpattern of a common investor.The questionnaire consisted of 13 questions in total, each question having variousmultiple choices. Depending upon the choice selected by the respondent, each respondentgets a total score which represents his degree of favorability towards the kind ofinvestment he makes and his knowledge about the investments.The main aim of conducting the survey using a questionnaire was tounderstand the perception of small investors, who are the most exploited in Indian capitalMarket, analyze the type of funds available for the investor,understand the investment pattern of a common investor, importance of marketingStrategies in mutual funds.This was done by ascertaining the average response of all the samples for the total 13questions asked in the questionnaire. The results for the 13 questions asked were furthergraphically represented, showing the favorability towards different parameters.The secondary resources used in the study are: • Books • Journals • Magazine Articles • Internet Websites.Projectsformba.blogspot.com 53
  • Projectsformba.blogspot.com CHAPTER 5 – RESULTProjectsformba.blogspot.com 54
  • Projectsformba.blogspot.comQUESTIONNAIRE ANALYSIS (Sample Size: 100)Q1. How would you rate your familiarity and experience with investments? a) Familiar and experienced b) Familiar but not experienced c) Not familiar and inexperienced C 7% A 20% B 73%Projectsformba.blogspot.com 55
  • Projectsformba.blogspot.comQ2. How would you describe your investment knowledge? a) You rarely have financial discussions, because you do not understand any of the concepts. b) You understand how different types of mutual funds work and are confident in selecting the right ones for you. c) You understand investment basics such as stocks, bonds, and money markets and could explain how they work. a) You are a knowledgeable investor and understand concepts such as standard deviation and beta. 60% 52% 50% 40% 33% 30% 20% 12% 10% 3% 0% A B C DProjectsformba.blogspot.com 56
  • Projectsformba.blogspot.comQ3. Which of the following are possible investment motives for you with regard to a portfolio. a) Keeping aside money generated from business / profession, to specifically generate alternate source of income / wealth b) Wealth creation, with no alternative uses for the money in the foreseeable future c) Preserving wealth, after accounting for inflation and taxes d) Regular income to meet present commitments and expenses e) Building a corpus to meet specific future requirements 45% 41% 40% 35% 30% 25% 21% 20% 18% 15% 11% 9% 10% 5% 0% A B C D EProjectsformba.blogspot.com 57
  • Projectsformba.blogspot.comQ4. What is your anticipated Investment time frame? a) Long term - more than 7 years b) Medium term - 4 to 7 years c) Short-medium term - 1 to 3 years d) Short term - less than 1 year 8% 16% 31% 45% A B C DProjectsformba.blogspot.com 58
  • Projectsformba.blogspot.comQ5. How would you like to classify your investment style? a) Conservative b) Moderate c) Aggressive 70% 61% 60% 50% 40% 30% 30% 20% 9% 10% 0% A B CProjectsformba.blogspot.com 59
  • Projectsformba.blogspot.comQ6. My experience with investing so far has been a) Mainly low-risk debt investments - cant remember anything adverse b) Mainly debt investments - some discomfort with interest rate risk c) Mainly debt investments - comfortable experience so far d) I am wary of equity investing - it has been a losing experience e) I want to be in equities - have not got it right so far f) I invest in equities - I know what it takes 3% 5% 19% 13% 21% 39% A B C D E FProjectsformba.blogspot.com 60
  • Projectsformba.blogspot.comQ7. Assume that you have invested Rs. 10,000 in a mutual fund and the value of theinvestment dropped to Rs. 8,500 after six months. What would you be most likely todo? a) I would move the money to a bank fixed deposit. b) I would wait till the value reached 10,000 and then move to another fund. c) I would not do anything. d) I would invest more in the fund to bring down my average cost of acquisition 5% 15% 42% 38% A B C DProjectsformba.blogspot.com 61
  • Projectsformba.blogspot.comQ8. Your existing portfolio consists most of? a) Cash only (time deposits and savings accounts) b) Mainly cash (as above plus some blue chip stocks, bonds or equivalent investments) c) A blend (blue chip and other speculative stocks/mutual funds, property and cash) d) Speculative (Technology/Biomedical stocks, high risk funds, derivative based investments) 8% 21% 20% 51% A B C DProjectsformba.blogspot.com 62
  • Projectsformba.blogspot.comQ9. Your key objective when considering an investment vehicle is? a) Income only b) Income and some Capital Growth c) Balance of Capital Growth and Income d) Capital Growth and some Income e) Capital Growth Only 8% 17% 9% 27% 39% A B C D EProjectsformba.blogspot.com 63
  • Projectsformba.blogspot.comQ10. You would like to invest in? a) Bank accounts, Debt and Debt Mutual Funds b) Equities and Mutual Funds c) Real Estate and Real Estate Funds d) Commodities and Commodity Funds 35% 31% 30% 28% 27% 25% 20% 14% 15% 10% 5% 0% A B C DProjectsformba.blogspot.com 64
  • Projectsformba.blogspot.comQ11. Which type of mutual funds do you prefer?a) By Structure: i. Open-ended Funds ii. Closed-ended Fundsb) By Investment Objective: i. Growth Funds ii. Income Funds iii. Balanced Funds iv. Money Market Fundsc) Other Schemes: i. Tax Saving Schemes ii. Industry Specific Schemes iii. Index Schemes iv. Sectoral Schemes 27% 32% 41%Projectsformba.blogspot.com 65 A B C
  • Projectsformba.blogspot.comQ12. Are you aware of the tax saving benefits available in investment of mutualfunds? a) Yes b) No No 18% Yes 82%Q13. Do you think that advertising plays an important role in spreading theawareness amongst investors for investing in mutual funds? a) Yes b) No No 11% YesProjectsformba.blogspot.com 66 89%
  • Projectsformba.blogspot.com CHAPTER 6 – RECOMMENDATIONSProjectsformba.blogspot.com 67
  • Projectsformba.blogspot.comRecommendations  More awareness is required regarding the differences in various schemes.  Insider trading should be prohibited.  Promote distributor for expansion of the Industry  Less government involvement as far as management is concerned.  Schemes to be made more investor friendly.  Fund houses should increase tie ups with more banks for direct credit facility of the dividends.Projectsformba.blogspot.com 68
  • Projectsformba.blogspot.com CHAPTER 7 – SUMMARY & CONCLUSIONProjectsformba.blogspot.com 69
  • Projectsformba.blogspot.comConclusionThe Indian corporate scene is gradually transforming to cope with globalization andliberalization of the Indian economy. Indian shareholders are getting restless to preventcorporate board from offering them inferior deals. Mutual funds need to devise differentstrategies for companies with different types of ownerships. In an effort to realignownership with control, the company should not develop a too comfortable relationshipwith the stakeholders. This may also work against the interests of the minorityshareholders.Mutual funds will have to do what the market fails to do- take initiative to make themarket for corporate control more efficient to counter the abuse of the separation ofownership from control and the lack of contestability in the corporate boards, which arethe root causes of existing corporate governance practices.The initiatives as suggested will help mutual funds not only release value for theshareholders in many inefficient companies but also in the process promote bettercorporate governance practices in the Indian corporate sector.Projectsformba.blogspot.com 70
  • Projectsformba.blogspot.com CHAPTER 8 – REFRENCESProjectsformba.blogspot.com 71
  • Projectsformba.blogspot.comReferencesBooks • AMFI workbook • SEBI note on investor Grievances- Rights & Remedies • Annual Investment Planner- A.N. Shanbhag • Investor’s Handbook- P. Nandagopal • Mutual Fund Business- Robert C. PozenWebsites • www.amfiindia.com • www.moneycontrol.com • www.indiainfoline.com • www.equitymaster.comProjectsformba.blogspot.com 72
  • Projectsformba.blogspot.com • www.google.com • www.nse-india.com ANNEXURE -Projectsformba.blogspot.com 73
  • Projectsformba.blogspot.comQuestionnaire“Please complete the following questions. Look for the closest reasonable answer(your first response is usually best, dont try to read too much into the questions).Couples could pick a consensus response. Remember that there are no right orwrong answers, only those answers that best describe you as you are most of thetime.”Q1. How would you rate your familiarity and experience with investments? a) Familiar and experienced b) Familiar but not experienced c) Not familiar and inexperiencedQ2. How would you describe your investment knowledge? a) You rarely have financial discussions, because you do not understand any of the concepts. b) You understand how different types of mutual funds work and are confident in selecting the right ones for you.Projectsformba.blogspot.com 74
  • Projectsformba.blogspot.com c) You understand investment basics such as stocks, bonds, and money markets and could explain how they work. d) You are a knowledgeable investor and understand concepts such as standard deviation and beta.Q3. Which of the following are possible investment motives for you with regard to aportfolio. a) Keeping aside money generated from business / profession, to specifically generate alternate source of income / wealth b) Wealth creation, with no alternative uses for the money in the foreseeable future c) Preserving wealth, after accounting for inflation and taxes d) Regular income to meet present commitments and expenses e) Building a corpus to meet specific future requirementsQ4. What is your anticipated Investment time frame? a) Long term - more than 7 years b) Medium term - 4 to 7 years c) Short-medium term - 1 to 3 years d) Short term - less than 1 yearQ5. How would you like to classify your investment style? a) Conservative b) Moderate c) AggressiveQ6. My experience with investing so far has beenProjectsformba.blogspot.com 75
  • Projectsformba.blogspot.com a) Mainly low-risk debt investments - cant remember anything adverse b) Mainly debt investments - some discomfort with interest rate risk c) Mainly debt investments - comfortable experience so far d) I am wary of equity investing - it has been a losing experience e) I want to be in equities - have not got it right so far f) I invest in equities - I know what it takesQ7. Assume that you have invested Rs. 10,000 in a mutual fund and the value of theinvestment dropped to Rs. 8,500 after six months. What would you be most likely todo? a) I would move the money to a bank fixed deposit. b) I would wait till the value reached 10,000 and then move to another fund. c) I would not do anything. d) I would invest more in the fund to bring down my average cost of acquisitionQ8. Your existing portfolio consists most of? a) Cash only (time deposits and savings accounts) b) Mainly cash (as above plus some blue chip stocks, bonds or equivalent investments) c) A blend (blue chip and other speculative stocks/mutual funds, property and cash) d) Speculative (Technology/Biomedical stocks, high risk funds, derivative based investments)Q9. Your key objective when considering an investment vehicle is?Projectsformba.blogspot.com 76
  • Projectsformba.blogspot.com a) Income only b) Income and some Capital Growth c) Balance of Capital Growth and Income d) Capital Growth and some Income e) Capital Growth OnlyQ10. You would like to invest in? b) Bank accounts, Debt and Debt Mutual Funds c) Equities and Mutual Funds d) Real Estate and Real Estate Funds e) Commodities and Commodity FundsQ11. Which type of mutual funds do you prefer?a) By Structure: i. Open-ended Funds ii. Closed-ended Fundsb) By Investment Objective: i. Growth Funds ii. Income Funds iii. Balanced FundsProjectsformba.blogspot.com 77
  • Projectsformba.blogspot.com iv. Money Market Fundsc) Other Schemes: i. Tax Saving Schemes ii. Industry Specific Schemesiii. Index Schemes iv. Sectoral SchemesQ12. Are you aware of the tax saving benefits available in investment of mutualfunds? a) Yes b) NoQ13. Do you think that advertising plays an important role in spreading theawareness amongst investors for investing in mutual funds? a) Yes b) NoOther Information:Name: ___________________Projectsformba.blogspot.com 78
  • Projectsformba.blogspot.comAge: _____________________Occupation: _______________Gender: ___________________Projectsformba.blogspot.com 79