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  1. 1. Chapter 1 1.1 Introduction A Mutual Fund is a trust that pools the savings of a number of Investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units held by them. Thus a mutual fund is most suitable for a common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investable surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. A Mutual Fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for equities, bonds and other fixed income instruments, real estate, derivatives and other assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and the time to keep track of events, understand their implications and act speedily. An Individual also finds it difficult to keep track of ownership of his assets, brokerage, dues and bank transactions etc. A Mutual Fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on full time basis. The large pool of money collected in the fund allows it to hire such a staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all the three areas- research, investments and transaction processing. While the concept of coming together to invest money collectively is not new, the mutual funds in their present form are a 20th century. In fact, mutual funds gained popularity only after the Second World War. Globally there are thousands of mutual funds with different investment objectives. 1
  2. 2. Today, mutual funds, collectively manage almost as much as or more money as compared to banks. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre-specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most of the countries, these sponsors need approval from the regulator, SEBI. SEBI looks at he records of the sponsor and its financial strength in granting approval to the fund for commencing operations. A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires equity to the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders of the fund. In the Indian concept, the sponsors promote the AMC also, in which it holds a majority stake. In many cases a Sponsor can hold a 100% stake in the AMC e.g. IL&FS is the sponsor of IL&FS AMC, which has floated different Mutual fund schemes and also acts as an asset manager or the funds collected under the schemes. 1.2 The Concept of Mutual Fund Mutual Funds are financial intermediaries. They are companies set up to receive your money from individuals and then having received it, make investments with the money via an AMC. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own part of the overall fund. The beauty of mutual funds is that anyone with an investable surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments. A Mutual Fund is an investment tool that allows small investors access to a well diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. 2
  3. 3. Units are issued and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day. In simple words, a mutual fund is a trust, which collects the savings from small investors, invest them in government securities and earn through interest, dividends and capital gains. The SEBI (1993) defines a Mutual Fund as a fund established in the form of a trust by a sponsor, to raise money by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations. According to Weston J. Fred and Brigham, Eugene, unit trusts are. “Corporations which accept dollars from savers and then use these dollars to buy stocks, long term bonds and short term debt instruments issued by business or government units; these corporations pool funds and thus reduce the risk of diversification”. 1.3 Operation of a Fund A mutual fund invites the prospective investors to join the fund by offering various schemes so as to suit to the requirements diverse of investors. The resources of individual investors are pooled together and the investors are issued units/shares for the money invested. The amount so collected is invested in capital market instruments like treasury bills, commercial papers, etc. For managing the fund, a mutual fund gets an annual fee of 1.25% of funds managed that is the maximum fee fixed by SEBI (MF) Regulations, 1993 and if the funds exceed Rs. 100 cores, the fee is only 1%. The fee cannot exceed 1%. Of course, regular expenses like custodial fee, cost of dividend warrants, fee for registration, the asset management fee etc are debited to the respective schemes. These expenses cannot exceed 3% of the assets in the respective schemes. These expenses cannot exceed 3% of the assets in the respective schemes each year. The remaining amount is given back to the investors in full. 3
  4. 4. 1.4 Organization of a Mutual Fund The formation and operations of Mutual Funds in India is solely guided by SEBI (Mutual Funds) Regulations, 1993, which came into force on January 20, 1996, through a notification on December 9, 1996. These regulations make it mandatory for mutual funds to have a three-tier structure as shown below. Sponsoring Institution: The Company, which sets up the mutual fund, is called the Sponsor. SEBI has laid down certain criteria to be met by the sponsor. The criterion mainly deals with adequate experience, good past track record, net worth etc.  Sponsor appoints the Trustees, Custodian and the AMC with the prior approval of SEBI, and in accordance with SEBI Regulations.  Sponsor must have at least 5-year track record of business interest in the Financial Markets. Trustees: Trustees are the people with long experience and good integrity in the respective fields carry the crucial responsibility in safeguarding the interests of the investors. For this purpose, they monitor the operations of the different schemes. They have wide ranging powers and they can even dismiss AMC with the approval of SEBI. The Indian Trust Act governs them. Rules regarding appointment of the Trustees as under:  Appointment of Trustees has to be done with the prior approval of SEBI. 4
  5. 5.  There must be at least 4 members in the Board of Trustees and at least 2/3rd of the members of the Board of Trustees must be independent.  Trustees of one Mutual Fund cannot be a Trustee of another Mutual Fund, unless he is an independent trustee in both cases, and has the approval of both the Boards. Rights of Trustees are as under: • Trustees appoint the AMC, in consultation with the sponsor and according to SEBI Regulations. • All mutual Fund Schemes floated by the AMC have to be approved by the Trustees. • Trustees can seek information from the AMC on the operations and compliance of the Mutual Fund, with the provisions of the trust Deed, investment management agreement and the SEBI Regulations. • Trustees can review and ensure that Net worth of the AMC is according to stipulated norms and regulations. Asset Management Company: The AMC actually manages the funds of the various schemes. The AMC employs a large number of professionals to make investments, carry out research &to do agent and investor servicing. Infact, the success of any Mutual Fund depends upon the efficiency of this AMC. The AMC submits a quarterly report on the functioning of the mutual fund to the trustees who will guide and control the AMC. The AMC is usually a private limited company, in which the sponsors and their associations or joint venture partners are shareholders. The AMC has to be registered by SEBI and should have a minimum Net worth of Rs.10 cores all times. The role of the AMC is to act as the Investment Manager of the Trust along with the following functions: It manages the funds by making investments in accordance with the provision of the 5
  6. 6. Trust Deed and Regulations  The AMC shall disclose the basis of calculation of NAV and Repurchase price of the schemes and disclose the same to the investors.  Funds shall be invested as per Trust Deed and Regulations. Following are the Restrictions on the AMC’s  AMC’s cannot launch a fund scheme without the prior approval of Trustees.  AMC’s have to provide full details of Employees and Board Members, in all cases where such investments exceed Rs. 1 lakh.  AMC’s cannot take up any activity that is in conflict with the activities of the mutual funds. Registrars and Transfer Agents The Registrars and Transfer Agents are responsible for the investor servicing functions, as they maintain the records of investors in the mutual funds. They process investor applications , record details provided by the investors on application forms, send out periodical information on the performance of the mutual fund; process dividend pay-out to the investors; incorporate changes in information as communicated by investors; and keep the investor record up to date, by recording new investors and removing investors who have withdrawn their funds. Custodian: Custodians are responsible for the securities held in the mutual fund’s portfolio. They discharge an important back-office function, by ensuring that securities that are bought are delivered and transferred to the books of mutual funds, and that funds are paid-out when mutual fund buys securities. They keep the investment account of the mutual fund, and also collect the dividends and interest payments due on the mutual fund investments. Custodians also track corporate actions like bonus, issues, right offers, offer for sale, buy back and open offers for acquisition. 6
  7. 7. 1.5 The objectives of Association of Mutual Funds in India The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:  This Mutual Fund Association of India maintains high professional and ethical standards in all areas of operation of the industry.  It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of Mutual Fund and Asset Management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.  AMFI interacts with SEBI and works according to SEBIs guidelines in the Mutual Fund industry. Associations of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry. 1.6 Types of Mutual Funds Broadly Mutual Funds are classified into open ended and close ended schemes. Open-ended schemes: The open-ended schemes do not have a fixed maturity and are open for subscription the whole year. One can buy and sell units at the NAV related prices to the Mutual funds. These schemes are normally not listed on the stock exchanges and can be redeemed directly to the Mutual Fund. 7
  8. 8. Close-ended Schemes: The closed ended schemes can be bought and sold on the stock exchange subsequent to the initial subscription through the public offer. One can stay invested in the scheme for a stipulated period ranging from 2 to 15 years. Generally, the close-ended schemes are traded at a discount to their NAV in the stock exchange. On the basis of investments objective, there are five different types of schemes Growth/Equity Scheme: Majority of the corpus of such a scheme is invested in equities and equity related instruments. This kind of scheme is for those investors who are not risk averse and are willing to hold on to their investment for a long period of time, caring little for volatility. In such schemes, dividend may or may not be declared. Income /Debt Scheme: The Fund Manager of such schemes invests a substantial portion of their fund in fixed income securities like debentures, bonds and money market instruments. This kind of scheme is ideal for risk averse investors who are interested in steady income. Balanced Schemes: Fund Manager of such funds invests in both equity as well as debt markets in the proportion as that highlighted in the prospectus. The objective of such a scheme is to provide both growth and income by distributing a part of the income and capital gains they earn. Such a scheme is suitable for investors who want long-term returns without taking the entire risk of the equity market. Money Market/Liquid Schemes: These are schemes with very low risks. They invest in Zero risk or safer, short term instruments like treasury bills, certificates of deposit, Commercial Paper and inter-bank call money. The objective of these schemes is to provide liquidity and moderate income and also preserve the capital. Tax Saving Schemes: The objective of such a scheme is to provide tax benefits to the investors. Two types of schemes fall under this head. 8
  9. 9. 1. ELSS (Equity Linked Savings Schemes): A Fund Manager of such a scheme invests primarily in stocks. An important feature of this scheme is that there is a lock-in period of three years from the date of investment. During this period unit holders are prohibited from trading, pledging and transferring the units. Repurchase is permitted only after three years. 2. Pension Schemes: A unit holder in a Pension Scheme can avail of a tax rebate of 20 per cent for investments up to Rs 60,000 (tax saving of Rs 12,000). 1.7 Benefits of Investing in Mutual Funds  Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Such a spread would not have been possible without their assistance.  Professional Fund Management: Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyze the markets and economy to pick good investment opportunities.  Spreading Risk: An investor with a limited amount of fund might be able to invest in only one or two stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified at the same time taking advantage of the position it holds. Also in cases of liquidity crisis where stocks are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs.  Transparency and interactivity: Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Mutual Funds clearly layout their investment strategy to the investor. 9
  10. 10. Liquidity: Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at their market value. Over and above this the units can be directly redeemed to the Mutual Fund as and when they announce the repurchase.  Choice: The large amounts of Mutual Funds offer the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk / return profile.  Regulations: All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.  Flexibility: Investors can exchange their units from one scheme to another, which cannot be done in other kinds of investments. Income units can be exchanged for growth units depending upon the performance of the funds.  Potential yields: The pooling of funds from a large number of customers enables the fund to have large funds at its disposal. Due to these large funds, mutual funds are able to buy cheaper and sell dearer than the small & medium investors. Thus, they are able to get better market rates and lower rates of brokerage. So, they provide better yields to their customers. They also enjoy the economies of scale and reduce the cost of capital market participation. The transaction costs of large investments are quite lower than that of small investments. All the profits are passed on to the investor in the form of dividends and capital appreciation. Mutual funds have a return ranging from 12-17% p.a.  Renders expertise service at lower costs: The management of the fund is generally assigned to professionals who are well trained and have adequate experience in the field of investment. The investment decisions of these professionals are backed by informed judgment and experience. Thus, investors 10
  11. 11. are assured of quality services in their best interest. The fee charged by the mutual funds is 1%. 1.8 Risks of Investment in Mutual Funds Mutual funds are not free from risks as the funds so collected are invested in stock markets, which are volatile in nature and are not risk free. The following risks are generally involved in mutual funds- Market risks In general, there are many kinds of risks associated with every kind of investment on shares. They are called market risks. These market risks can be reduced, but not completely eliminated even by a good investment management. The prices of shares are subject to wide price fluctuations depending upon market conditions over which nobody has control. The various phases of business cycle such as Boom, Recession, Slump and Recovery affects the market conditions to a larger extent. Scheme risks There are certain risks inherent in the scheme itself. For instance, in a pure growth scheme, risks are greater. It is obvious because if one expects more returns as in the case of a growth scheme, one has to take more risks. Investment risk Whether the mutual fund makes money in shares or loses depends upon the investment expertise of the Asset Management Company (AMC). If the investment advice goes wrong, the fund has to suffer a lot. The investment expertise’s of various funds are different and it is reflected on the returns, which they offer to the investors. 11
  12. 12. Business Risk The corpus of a mutual fund might have been invested in a company.s shares. If the business of that company suffers any set back, it cannot declare any dividend. It may even go to the extent of winding up its business. Though the mutual funds can withstand such a risk, its income paying capacity is affected. 1.9 Advantages and Disadvantages of Mutual Fund Advantages of Mutual Fund 1. Professional Investment Management: By pooling the funds of thousands of investors, mutual funds provide full-time, high-level professional management that few individual investors can afford to obtain independently. Such management is vital to achieving results in today's complex markets. Your fund managers' interests are tied to yours, because their compensation is based not on sales commissions, but on how well the fund performs. 2. Diversification: Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund shareowners can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities. 3. Low Cost: If you tried to create your own diversified portfolio of 50 stocks, you'd need at least Rs.1,00,000 and you'd pay thousands of rupees in commissions to assemble your portfolio. A mutual fund lets you participate in a diversified portfolio for as little as Rs.10,000, and sometimes less. And if you buy a no-load fund, you pay or no sale charges to own them. 12
  13. 13. 4. Convenience and Flexibility: You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, clip the bond coupons, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. 5. Quick, Personalized Service: Most funds now offer extensive websites with a host of shareholder services for immediate access to information about your fund account. Or a phone call puts you in touch with a trained investment specialist at a mutual fund company who can provide information you can use to make your own investment choices, assist you with buying and selling your fund shares. 6. Ease of Investing: You may open or add to your account and conduct transactions or business with the fund by mail, telephone or bank wire. You can even arrange for automatic monthly investments by authorizing electronic fund transfers from your checking account in any amount and on a date you choose. 7. Total Liquidity, Easy Withdrawal: You can easily redeem your shares anytime you need cash by letter, telephone, bank wire or check, depending on the fund. Your proceeds are usually available within a day or two. 8. Life Cycle Planning: With no-load mutual funds, you can link your investment plans to future individual and family needs -- and make changes as your life cycles change. You can invest in growth funds for future college tuition needs, then move to income funds for retirement, and adjust your investments as your needs change throughout your life. 9. Market Cycle Planning: For investors who understand how to actively manage their portfolio, mutual fund investments can be moved as market conditions change. You can place your funds in equities when the market is on the upswing and move into money market funds on the downswing or take any number of steps to ensure that your investments are meeting your needs in changing market climates. 13
  14. 14. 10. Investor Information: Shareholders receive regular reports from the funds, including details of transactions on a year-to-date basis. The current net asset value of your shares (the price at which you may purchase or redeem them) appears in the mutual fund price listings of daily newspapers. You can also obtain pricing and performance results for the all mutual funds at this site, or it can be obtained by phone from the fund. 11. Periodic Withdrawals: If you want steady monthly income, many funds allow you to arrange for monthly fixed checks to be sent to you, first by distributing some or all of the income and then, if necessary, by dipping into your principal. 12. Dividend Options: You can receive all dividend payments in cash. Or you can have them reinvested in the fund free of charge, in which case the dividends are automatically compounded. This can make a significant contribution to your long-term investment results. 13. Automatic Direct Deposit: You can usually arrange to have regular, third-party payments -- such as Social Security or pension checks -- deposited directly into your fund account. This puts your money to work immediately, without waiting to clear your checking account, and it saves you from worrying about checks being lost in the mail. 14. Recordkeeping Service: With your own portfolio of stocks and bonds, you would have to do your own recordkeeping of purchases, sales, dividends, interest, short-term and long-term gains and losses. Mutual funds provide confirmation of your transactions and necessary tax forms to help you keep track of your investments and tax reporting. 15. Safekeeping: When you own shares in a mutual fund, you own securities in many companies without having to worry about keeping stock certificates in safe deposit boxes or sending them by registered mail. You don't even have to worry about handling the mutual fund stock certificates; the fund maintains your account on its books and sends you periodic statements keeping track of all your transactions. 14
  15. 15. 16. Retirement and College Plans: Mutual funds are well suited to Individual Retirement Accounts and most funds offer IRA-approved prototype and master plans for individual retirement accounts (IRAs) and Keogh, 403(b), SEP-IRA and 401(k) retirement plans. 17. Online Services: The internet provides a fast, convenient way for investors to access financial information. A host of services are available to the online investor including direct access to no-load companies. Visit Company Links to access these Companies. 18. Sweep Accounts: With many funds, if you choose not to reinvest your stock or bond fund dividends, you can arrange to have them swept into your money market fund automatically. You get all the advantages of both accounts with no extra effort. 19. Asset Management Accounts: These master accounts, available from many of the larger fund groups, enable you to manage all your financial service needs under a single umbrella from unlimited check writing and automatic bill paying to discount brokerage and credit card accounts. Disadvantages of Mutual Fund There are certainly some benefits to mutual fund investing, but you should also be aware of the drawbacks associated with mutual funds. 1. No Insurance: Mutual funds, although regulated by the government, are not insured against losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible (although extremely unlikely) that you could even lose your entire investment. 15
  16. 16. 2. Dilution: Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly. 3. Fees and Expenses: Most mutual funds charge management and operating fees that pay for the fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell (see Investor Guide University: Fees and Expenses). 4. Poor Performance: Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of critics now question whether or not professional money managers have better stock-picking capabilities than the average investor. 5. Loss of Control: The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for you when trying to manage your portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for you. You also should remember that you trust someone else with your money when you invest in a mutual fund. 6. Trading Limitations: Although mutual funds are highly liquid in general, most mutual funds (called open-ended funds) cannot be bought or sold in the middle of the trading day. You can only buy and sell them at the end of the day, after they've calculated the current value of their holdings. 16
  17. 17. 7. Size: Some mutual funds are too big to find enough good investments. This is especially true of funds that focus on small companies, given that there are strict rules about how much of a single company a fund may own. If a mutual fund has $5 billion to invest and is only able to invest an average of $50 million in each, then it needs to find at least 100 such companies to invest in; as a result, the fund might be forced to lower its standards when selecting companies to invest in. 8. Inefficiency of Cash Reserves: Mutual funds usually maintain large cash reserves as protection against a large number of simultaneous withdrawals. Although this provides investors with liquidity, it means that some of the fund's money is invested in cash instead of assets, which tends to lower the investor's potential return. 9. Different Types: The advantages and disadvantages listed above apply to mutual funds in general. However, there are over 10,000 mutual funds in operation, and these funds vary greatly according to investment objective, size, strategy, and style. Mutual funds are available for virtually every investment strategy (e.g. value, growth), every sector (e.g. biotech, internet), and every country or region of the world. So even the process of selecting a fund can be tedious. . 1.10 Definition of customer profiling Customer profiling is the process of using relevant and available information to describe the characteristics of a group of customers and to identify their discriminators from other customers or ordinary consumers and drivers for their purchasing decisions. Customer profiling is about collecting relevant and available customer details such as address, age, gender, education, housing, lifestyle behaviors, purchase preferences, travel preferences, buying patterns and so on and so forth. In short a complete address investigation and financial health-check is performed. 17
  18. 18. These factors or characteristics help discriminate and categorize customers into groups and enable analysis of their paying capacity of services or products or future purchasing decisions. Customer profiles are of two types- demographical and behavioral. A demographically based profile is organized on a set of characteristics, such as his marital status, whether or not he has children, the neighborhood he resides etc.. On the other hand a behavior-based profile is one that is prepared after scrutinizing the behavioral pattern of a customer such as, his/her payment patterns of products or services, how often he/she visits a website etc. While a demographic profile helps define the market for sales, the second profile is about action, and helps determine whether a customer will make payments of bought products and services, regularly or not. The Customer profiling services at Almondz global securities extensive customer profiling experience behind us, the information you get is comprehensive, accurate, reliable and up-to-date. 1.11Advantages of customer profiling  Accurate customer profiles, including major demographic attributes of your customers  Ability to handle all customer surveys  Cost effectiveness  Helps find out why customers purchase your goods and services  Helps differentiate the needs and values of your customers  Enables you to define a better targeting strategy  Discover new business prospects and grow the base of your valuable customers by extracting people and businesses that match the profile of your current customers  Multi-lingual survey & reporting capabilities 18
  19. 19. Chapter 2 2.1 Introduction to Research A mutual fund is a professionally-managed firm of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding. Almondz Global Securities Limited is one of the leading Investment Banks in India. The company was incorporated in 1994 and is listed on the Bombay Stock Exchange. It has three main divisions: Corporate Finance, Debt Portfolio Management, Distribution of Financial Products and Portfolio Management Services. Almondz Global Securities' client base in the Corporate Finance segment covers all leading Public Sector Undertakings ( PSUs), large Corporate and the vast and increasingly important segment of SMEs. In the Debt markets, the company has relationships with over 3500 leading Provident Funds. In the Distribution of third party financial products, it has built a large base of retail customers along with an franchisee network of 1500 across the country. The Company has also set up a Private Clients business to advise and manage Strategic and Private clients. The company has a strong presence across 17 major cities and is manned by teams of qualified and seasoned professionals. 19
  20. 20. Almondz Group is one of India’s leading Financial Services providers with interest across Merchant Banking, Infrastructure Advisory, Debt Portfolio Management, Retail & Distribution, Insurance, Equity and Commodity Broking. Almondz Group is one of the fastest growing Integrated Financial Service Providers with a nationwide presence and a committed team of skilled professionals. The Group provides customized services to a diversified client base and its activities include Distribution, Advisory Services, Debt Market, and Corporate Finance & Investment Banking. Under its business expansion plans, the Group invites business associates with good entrepreneurial skills to partner us on the best revenue sharing terms in the industry. Customer profiling is the process of using relevant and available information to describe the characteristics of a group of customers and to identify their discriminators from other customers or ordinary consumers and drivers for their purchasing decisions. 2.2 Objectives of Study  To study the demographic segmentation of customers  To study the customer behavior according to market fluctuations  To analyze the customer preferences on investments. 2.3 Research Design Research design is plan of what data to gather, from whom, how and when to collect the data, and how to analyze the data obtained. The researcher has choose the descriptive research for the study. Sample size Sample size of 100 was chosen for the present study. 20
  21. 21. Sampling technique Simple random sampling technique was chosen for the study. Data collection The data was collected using the primary and secondary sources Primary data Primary data was collected by administration of Questionnaires. Secondary source Journals , magazine , internet sources were studied for secondary data collection. 2.4 Tools of analysis The data was collected from employees by administration of Questionnaire. Questionnaire was framed by taking the parameters like sebi regulations, Amfi, market timing, policies and procedures, types of schemes and so on. The respondents were selected by simple random sampling process who invested in different types of schemes.. Once the data was collected the analysis of study was taken care by using SPSS. 2.5 Limitations of study  The study is limited to Almondz global securities.  The study is limited to the customer’s opinion on industry.  There may be the difference on the data accuracy. 21
  22. 22. 2.6 Review of Literature Two important research streams in the finance literature focus on predicting fund performance and understanding investor behavior. The academic literature on mutual funds has mostly focused on fund performance and management style (e.g., Grinblatt and Titman, 1992; Brown and Goetzman, 1997; Lunde et al., 1999; Chevalier and Ellison, 1999; Kothari and Warner, 2001), although others have focused on the risk-return characteristics of bond mutual funds (Philpot et al., 2000; Blake et al., 1993). Some studies (Indro et al., 1999; Morey and Morey, 1999; Sirri and Tufano, 1998) have also investigated the different methods of predicting fund performance by using tools, such as neural networks or benchmarking. Recent literature, however, proposes the use of integrated or hybrid models for predicting fund performance. Tsaih et al. (1998), for example, develop a hybrid artificial intelligence technique to implement trading strategies in the S & P 500 stock index futures market. Their empirical results show that their system outperformed the passive buy-and-hold investment strategy during the six-year testing period. The authors suggest that the hybrid approach facilitates the development of more reliable intelligent systems than standalone expert systems models. Some recent studies have begun to address the issue of understanding investor behavior (e.g., Zheng, 1999; Harliss and Peterson, 1998; Goetzmann and Peles, 1997; Alexander et al. 1997, 1998; Bogle, 1992). These studies have aroused scholarly interest in understanding how investors make investment decisions. A study by Alexander et al. (1998) examines responses of randomly selected mutual fund investors. Their findings show that employees investing in mutual funds through their employer-sponsored pension plans [e.g., 401(k)] are generally younger, more likely to own stock funds, and less likely to own certificate of deposits and money market accounts. In addition, individuals investing in mutual funds via non employer channels are significantly more experienced than individuals investing in employer-sponsored pension plans. Both types of mutual fund holders (those investing through employers and those investing in non employer plans) are well educated, with 55% having at least a college degree, and do not consider the operating expenses of the mutual fund to be an important factor in their purchasing decision. 22
  23. 23. Chapter 3 3.1 Industry Profile Mutual funds can give investors access to emerging markets. A mutual fund is a professionally-managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities. Usually the fund manager trades the fund's underlying securities, realizing capital gains or losses, the investment proceeds are then passed along to the individual investors. In recent decades, mutual funds have become increasingly popular, the worldwide value is more than $26 trillion in assets. Since 1940, a mutual fund is one of three basic types of investment companies available in the United States. Similar funds also operate in Canada. However, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles, such as unit trusts, open-ended investment companies (OEICs), and unitized insurance funds. Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, it had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924. The stock market crash of 1929 hindered the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the Securities and Exchange Commission (SEC) and provide prospective investors with a prospectus that contains required disclosures about the fund, the securities themselves, and fund manager. The SEC helped draft the Investment Company Act of 1940, which sets forth the guidelines with which all SEC-registered funds today must comply. 23
  24. 24. With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s, there were approximately 270 funds with $48 billion in assets. The first retail index fund, the First Index Investment Trust, was formed in 1976 and headed by John Bogle, who conceptualized many of the key tenets of the industry in his 1951 senior thesis at Princeton University. It is now called the Vanguard 500 Index Fund and is one of the largest mutual funds ever with over $100 billion in assets. One of the largest contributors of mutual fund growth was individual retirement account (IRA) provisions added to the Internal Revenue Code in 1975, allowing individuals (including those already in corporate pension plans) to contribute $2,000 a year. Mutual funds are now popular in employer-sponsored defined contribution retirement plans (401(k)s), IRAs and Roth IRAs. As of October 2007, there are 8,015 mutual funds that belong to the Investment Company Institute (ICI), the national association of investment companies in the United States, with combined assets of $12.356 trillion. Mutual funds provide an economical way by which an investor of modest means can obtain the same professional advice and diversification of investments as a wealthy individual or institution. A wealthy person can retain an investment adviser to select and manage his or her investments and, by investing in a number of different securities, can achieve diversification of risk. Mutual funds are designed to permit thousands of investors to pool their resources as shareholders in a fund that, in turn, invests in a large number of securities selected by a professional investment adviser. The shareholders of a mutual fund are its owners and are entitled to all of the fund's income and gain from its investments, net of fees and other operating expenses. There are mutual funds designed for many different investment objectives, ranging from maximizing total return to providing the highest level of income consistent with the preservation of investors' principal. 24
  25. 25. To achieve their objectives, funds invest in a wide variety of securities, some funds invest primarily in common stocks, some invest primarily in bonds issued by corporations or the federal government; some invest mainly in obligations of state and local governments; and some, known as money market funds, invest in short-term money market instruments like certificates of deposit, commercial paper and United States Treasury bills. Mutual funds are organized under state laws as corporations or business trusts. However, mutual funds differ from other companies in a number of important respects. First, almost all mutual funds are externally managed; they do not have employees of their own, and all their operations are carried out by third parties such as investment managers, broker- dealers, and banks. Second, virtually all mutual funds continuously offer new shares to the public. Third, mutual funds are required by law to redeem (buy back) their outstanding shares at any time upon a shareholder's request, at a price based on the current value of the fund's assets. Fourth, federal laws impose detailed requirements on the structure and operations of mutual funds and impose special responsibilities on their independent directors or trustees. Role of Mutual Funds in the Financial Markets Indian financial institutions have played a dominant role in assets formation and intermediation, and contributed substantially in macroeconomic development. In this process of development Indian mutual funds have emerged as strong financial intermediaries and are playing a very important role in bringing stability to the financial system and efficiency to resource allocation. Mutual funds play a crucial role in an economy by mobilizing savings and investing them in the capital market, thus establishing a link between savings and the capital market. The activities of mutual funds have both short-and long-term impact on the savings and capital markets and the national economy. Mutual funds, assist the process of financial deepening and intermediation. 25
  26. 26. They mobilize funds in the savings market and act as complementary to banking, at the same time they also compete with banks and other financial institutions. In the process stock market activities are also significantly influenced by mutual funds. Almost all the segment of the financial market, influenced by the existence and operation of mutual funds. However, the scope and efficiency of mutual funds are influenced by overall economic fundamentals: the interrelationship between the financial and real sector, the nature of development of the savings and capital markets, market structure, institutional arrangements and overall policy regime. Regulations for Mutual Funds Schemes of mutual fund  The Asset Management Company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board.  Every mutual fund shall along with the offer document of each scheme pay filing fees.  The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor.  No one shall issue any form of application for units of a mutual fund unless the form is accompanied by the memorandum containing such information as may be specified by the Board.  Every close ended scheme shall be listed in a recognized stock exchange within six months from the closure of the subscription.  The asset management company may at its option repurchase or reissue the repurchased units of a close-ended scheme. 26
  27. 27.  A close-ended scheme shall be fully redeemed at the end of the maturity period. "Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution".  The mutual fund and asset management company shall be liable to refund the application money to the applicants- • (i)If the mutual fund fails to receive the minimum subscription amount referred to of sub-regulation • (ii) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation.  The asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme. The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases First Phase – Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. 1964-87. 27
  28. 28. Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores. Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. 28
  29. 29. Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. 29
  30. 30. 3.2 Company Profile Almondz Global Securities Limited (AGSL) is one of the leading Investment Banks in India. The company was incorporated in 1994 and is listed on the Bombay Stock Exchange. Its main business lines are: Corporate Finance, Distribution of Financial Products, Private Clients, Portfolio Management Services, and Equity Broking. AGSL’s client base in the Corporate Finance segment covers all leading Public Sector Undertakings (PSUs), large Corporates and the vast and increasingly important segment of SMEs. In the Debt markets, the company has relationships with over 4000 leading Provident Funds. In the Distribution of Third-party financial products, AGSL has built a large base of retail customers as well as country-wide network of 1500 franchisees. In Equity Broking, AGSL is serving both the Retail and the Institutional Investors. 30
  31. 31. Corporate Finance  Investment Banking  IPOs, FPOs & Rights Issues  Private Placement of Equity  Substantial Acquisitions & Takeovers  Delisting, ESOPs  Debt Issuances  Debt Restructuring  Financial Advisors to infrastucture projects  Ongoing projects in SEZ, Road and Power sectors.  Infrastructure Advisory Debt Portfolio Management  Debt PMS  Fixed Income portfolio advisory  Provident fund advisory Retail and Distribution  Mutual Funds  Tax Saving Instruments  Fixed Deposits and other Fixed Income Products  Equity IPOs  Debt IPOs  Insurance Products 31
  32. 32. Almondz Private Clients • Holistic model based around the uniqueness of a client’s situation and aspiration • Multi manager approach to generate optimal returns and manage risk • Structured investment advisory across asset classes • ‘Platinum’ services to our Private Clients • Focused approach of a ‘family office’ for Private Clients Almondz Private Clients business offers advisory services to select clients who seek specific and targeted strategy for investing across asset classes. The company believes that investment strategies are not about simulating data but interpreting it, based on the detailed discussions that we have with clients at the start of our engagement. Then use this interpretation, and our expertise in investments, to develop a strategy that is far superior, both in the medium and long term, than mere ad-hoc investment decisions. The company review this strategy from time to time to adapt it to an ever changing and dynamic investment world that we live in. The company also believe that no single manager has the expertise to provide outstanding investment performance across all asset classes and markets, which is why we create a multi-manager approach for our clients. These managers are then monitored continuously for performance, and replaced if they do not meet performance standards. Blending these managers and their different investment styles helps us to obtain the best returns for our clients, at acceptable levels of risk. Risk is actively managed by diversifying across different investment classes and markets. 32
  33. 33. Clients seek not only sophisticated products but also targeted and appropriate client service. This is why they offer truly differentiated services. The company also ensure that extend an “enhancing” experience in our interaction with clients in order to uphold our claim of providing ‘platinum’ services to our Private Clients. Company believe that every client and his situation and aspiration is unique, and cannot be ‘proto typed’. Hence, internal processes capture this uniqueness and build an optimal solution around it. Investment decisions are seldom limited only to the individual’s interest – they invariably cover his / her concerns for immediate family also. Which is why when they advise clients, they do it from the perspective of their family and bring together individual and family goals? The experience tells that for most of clients it become a family office since they advise on investments, preliminary taxation and estate planning. The company perspective is to always ensure that to safeguard client and his family’s interests. Client relationships are managed at four levels in the organization; which implies that client interest will never be compromised, even when there is absence of individual(s) at one, or the other level of client management and support. company clearly recognize that confidentiality is paramount in our business, and our Practice maintains the utmost confidentiality of our client affairs. Key features of Compounding Growth Portfolio:  Portfolio of Large cap, Blue chip liquid stocks only.  Unique style of compounding the portfolio by increasing the number of shares over a period of time.  A fund that is designed to cope with bear market cycles and capture the volatility to its advantage over a period of time. 33
  34. 34.  A disciplined approach towards portfolio management with strong risk management rules and processes.  An approach understand by the investor. Vision of the company To provide a comprehensive range of financial services for the business and individual investors, so as to demonstrably create value for them as also for our employees and shareholders, simultaneously evolve as a stringently compliant organization. Recognitions • All India 6th rank in Domestic Bond Placement for FY 2005 • All India 11th rank in Domestic Bond Placement FY 2006. Services 34
  35. 35. Almondz Almondz Almondz Almondz Products Global Insurance Reinsurance Commodities Securities Brokers Brokers Equity IPOs Private Equity Equity Broking – Retail Equity Broking – Institutional Equity Research Portfolio Management Services Private Placement of Debt Debt Debt Market Portfolio Management (PMS) Project Finance Advisory Infrastucture Advisory Private Clients Distibution Mutual Fund Equity Tax Saving Instruments Fixed Deposits Insurance Products Commodities Brokerage Insurance Life Insurance Products General Insurance Products Almondz Group  Incorporated in 1991  LISTED 35
  36. 36.  Holding Company of Almondz Group  Incorporated in 1994  LISTED  Investment Banking, Corporate Finance and Distribution  Trading & Clearing Member for Equities on the National Stock Exchange (NSE) & Bombay Stock Exchange (BSE)  Trading & Clearing Member for both Cash & Derivative Segment  Depository participant with central depository services Ltd(CDSL).  Incorporated in 2006  UNLISTED  Subsidiary of Almondz Capital Markets Pvt. Ltd.  Memberships of the Multi Commodity Exchange of India Ltd. (MCX) and the National Commodity & Derivatives Exchange (NCDEX)  Incorporated in 2003  UNLISTED  Registered with IRDA as Insurance Broker  Risk Management  Insurance Broking 36
  37. 37.  Employee Benefits Consulting  Claims Management  Incorporated in 2006  UNLISTED  Subsidiary of Almondz Insurance Brokers Pvt. Ltd. Corporate Finance Investment Banking  IPOs, FPOs & Rights Issues  Private Placement of Equity  Delisting, Takeover, Substantial Acquisitions & ESOPs  Private Placement of Debt  Project Finance Infrastructure Advisory  Road  Power 37
  38. 38. Debt Portfolio Management  Secondary Debt Trading  Debt Portfolio Advisory Retail & Distribution  Equity IPOs  Public Issue of Debt  Mutual Funds  Tax Saving Instruments  Fixed Deposits & Other Fixed Income Products  Portfolio Management Services  Insurance Products Equity Broking  Retail Equity Broking  Institutional Equity Broking  DP services Partner With Almondz Almondz Group is one of the fastest growing Integrated Financial Service Providers with a nationwide presence and a committed team of skilled professionals. The Group provides customized services to a diversified client base and its activities include Distribution, Advisory Services, Debt Market, and Corporate Finance & Investment Banking. Under its business expansion plans, the Group invites business associates with good 38
  39. 39. entrepreneurial skills to partner us on the best revenue sharing terms in the industry. We value the synergy that would emanate when your expertise combines with our experience to result in win win situation. Almondz has launched first of its kind Compounding Growth Portfolio which offers a diversified, risk managed equity portfolio of Indian Companies. The portfolio consists of large cap, liquid stocks which have been chosen based on their market cap and the free float available in the market. The strong selection criteria enable the portfolio to overcome illiquidity during volatile times. The portfolio through its risk management process makes the volatility work in its favor over a period of time. Through the model it increases the number of shares in the portfolio during volatile times and thus increases the scope of compounding growth. The portfolio has been launched with Commander Asset Management Limited as its Portfolio advisors. Commander is incorporated in the UK and is authorized and regulated by Financial Services Authority. Our value added services besides managing the portfolio will include Weekly portfolio update, Market commentary, Annual audited financials of your PMS account, Short term and long term gains report interaction with investment team at periodic intervals. Organization Structure Virtually all mutual funds are externally managed. They do not have employees of their own; instead, their operations are conducted by various affiliated organizations and by independent contractors. The following diagram depicts a typical mutual fund complex and its principal service providers. 39
  40. 40. Directors/Trustees The directors or trustees of a mutual fund, as in the case of other types of companies, have oversight responsibility for the management of the fund's business affairs. When established as a corporation, a mutual fund is governed by a board of directors, while a mutual fund established as a business trust is governed by a board of trustees. The duties of directors and trustees are essentially identical. Under state law, directors generally must perform their responsibilities with the care expected of a "prudent person" - i.e., they must exercise the care that a reasonably prudent person would take with his or her own business. They are expected to exercise sound business judgment, establish procedures and perform oversight and review functions, including evaluating the performance of the investment adviser, principal underwriter, and other parties that perform services for the fund. Directors also owe a duty of undivided loyalty to the fund. Overlaying state law duties is the fundamental concept of the 1940 Act that independent fund directors serve as watchdogs for the shareholders' interests and provide a check on the adviser and other persons closely affiliated with the fund. The 1940 Act requires that 40
  41. 41. a specified percentage of the fund's board of directors be persons who are entirely independent of the fund's investment adviser or principal underwriter. The 1940 Act rigorously defines independence through the concepts of "affiliated person" and "interested person" so as to ensure that the fund's affairs are supervised by independent directors who have no other business or family relationships with the fund's investment adviser, principal underwriter, officers or employees. The 1940 Act and SEC rules give independent directors of a mutual fund special responsibilities with respect to a large number of matters, including initial approval and periodic renewal of investment advisory and distribution contracts. Specifically, the 1940 Act requires that these contracts be renewed annually after the first two years following initial approval. Both initially and when renewed, the contracts must be approved by a majority of a fund's independent directors. During the annual renewal process, directors typically request and review detailed information about the advisory and underwriting organizations and the quality of service they provide to the fund. Shareholders Like shareholders of other companies, mutual fund shareholders have certain voting rights. These voting rights are defined by the laws of the state in which the fund was formed, by the fund's own charter and by-laws, and by the 1940 Act. While most mutual funds no longer have annual shareholder meetings, there are situations in which state law or the 1940 Act requires funds to call special meetings. For example, the 1940 Act requires that directors be elected by shareholders at a meeting called for that purpose (with a limited exception for filling vacancies); changes in the terms of a fund's investment advisory contract must be approved by a shareholder vote; and funds that wish to change investment objectives or policies deemed "fundamental" must also obtain shareholder approval. 41
  42. 42. Under the 1940 Act, all shares issued by a mutual fund must be voting stock and have equal voting rights. The solicitation of proxies, the form and content of proxy statements and the treatment of shareholder proposals are governed by proxy rules adopted under the 1934 Act and the 1940 Act. Proxy materials are subject to prior review by the SEC unless they are limited to certain routine matters. The fund must take steps to insure that banks, brokers, and nominees having shares registered in their names forward copies of the proxy materials to the beneficial owners. Investment Adviser The investment adviser is responsible for selecting portfolio investments in accordance with the objectives and policies set forth in the fund's prospectus and statement of additional information. Investment advisers also place portfolio orders with broker- dealers and are responsible for obtaining the best overall execution of those orders. The investment adviser performs these services pursuant to a written contract with the fund. Most advisory contracts provide for the adviser to receive an annual fee based on a percentage of the fund's average net assets during the year. A few contracts provide for performance-based fees, subject to fairness requirements specified by the Advisers Act. The adviser is subject to many legal restrictions, especially regarding transactions between itself and the fund it advises and joint transactions with that fund. Under Section 36(a) of the 1940 Act, a legal action may be brought against a mutual fund adviser based on an alleged "breach of fiduciary duty involving personal misconduct." Section 36(b) of the 1940 Act provides that the investment adviser has a specific fiduciary duty with 42
  43. 43. respect to compensation paid by the fund. The adviser also owes the fund a general fiduciary duty under the Advisers Act. The 1940 Act provides for automatic termination of any advisory contract that is assigned, and deems transfer of control of the adviser to be an assignment of the contract. Reapproval of the contract requires a vote of fund shareholders. Administrator Administrative services may be provided to a fund by an affiliate of the fund, typically the investment adviser, or by an unaffiliated third party. Administrative services include overseeing the performance of other companies that provide services to the fund, as well as assuring that the fund's operations comply with applicable federal requirements. Fund administrators typically pay for office space, equipment, personnel, and facilities; provide general accounting services; and help establish and maintain compliance procedures and internal controls. Often, they also assume responsibility for preparing and filing SEC, tax, shareholder and other reports. Principal Underwriter Most mutual funds continuously offer new shares to the public at a price based on the current value of fund assets (plus, if applicable, a sales charge). Mutual funds typically distribute their shares through separate organizations, designated as the funds' principal underwriters. Principal underwriters are regulated as broker-dealers by the SEC under the 1934 Act. Most are also members of the National Association of Securities Dealers, Inc. (NASD), and are subject to NASD rules governing mutual fund sales practices. Custodian The 1940 Act requires mutual funds to keep their portfolio securities in the custody of a qualified bank or otherwise protect them pursuant to SEC rules. Nearly all funds use bank 43
  44. 44. custodians. The standard mutual fund bank custody agreement is far more elaborate and specific than the typical bank custody agreement for other clients. The SEC requires mutual fund custodians to protect the funds by segregating their portfolio securities from the rest of the bank's assets. Fund custodians must refuse to deliver cash or securities except for specified types of transactions or upon receipt of proper instructions from officers of the fund. The selection of custodians for foreign securities involves consideration of foreign laws governing access by accountants to the custodian's records, treatment of lost securities, and insolvency by the custodian, among other factors. Transfer Agent Fund transfer agents maintain records of shareholder accounts, which reflect daily investor purchases, redemptions, and account balances. Transfer agents typically serve as dividend disbursing agents, and their duties as such involve calculating dividends, authorizing payment by the custodian, and maintaining dividend payment records. They prepare and mail to shareholders periodic account statements, federal income tax information, and other shareholder notices. In many cases, transfer agents also prepare and mail on behalf of the fund and its principal underwriter statements confirming transactions and reflecting share balances. In addition, transfer agents maintain customer service departments that respond to telephone and mail inquiries concerning the status of shareholder accounts. Distribution Investors may purchase mutual fund shares from a variety of sources, including full- service brokers, discount brokers, banks, insurance companies, or the mutual fund companies themselves. Fund shares are distributed to investors primarily in two ways. In some cases, funds distribute shares through a sales force, which may be employed by the fund's principal underwriter or by independent broker-dealers. The registered representatives of these broker-dealers actively solicit customer interest and typically provide investors with ongoing advice and information regarding their fund investments. In other cases, 44
  45. 45. investors purchase shares directly from the fund or its underwriter, typically in response to newspaper or magazine advertising. These investors generally receive no advice regarding their investments. Fund distributors incur costs related to advertising, distribution of prospectuses, compensation of sales personnel, and general overhead. Some distributors bear these costs out of their own assets. Others offset the costs by collecting a distribution fee from the fund or a sales load from the fund's investors. A sales load can take several different forms. A front-end load is one that investors pay when they purchase fund shares. A back-end load is charged when shares are redeemed and may be reduced progressively the longer the investor has held the shares. A fund may also expend a small portion of its assets to pay distribution expenses (commonly called a 12b-1 fee). Funds may employ these methods in combination, e.g., a small front-end sales load and an ongoing 12b-1 fee. NASD regulations govern the maximum amount of sales loads and 12b-1 fees. Different groups of investors (e.g., individuals and various types of institutions) have different service needs and, accordingly, may require different fee structures. To accommodate these differences, mutual funds may offer different classes of shares or offer differently structured funds through a master/feeder structure. Funds that offer multiple classes typically offer several retail classes, with different combinations of front- and back-end sales charges and 12b-1 fees. Other classes may be available to institutional investors, such as banks and trust companies, designed specifically to accommodate the needs of their individual beneficiaries. The different classes of shares represent ownership in the same portfolio of securities. IRS positions limit the size of the differences between the expenses paid by the different classes. Under a master/feeder structure, several different funds are offered, each of which has a fee structure and other attributes appropriate to its particular market. Each of these "feeder" funds invests its assets in another mutual fund, termed the "master" fund. The master fund, in turn, invests those assets in the securities markets. 45
  46. 46. Mutual funds are subject to special advertising rules adopted by the SEC. Funds can run only two types of advertisements - "tombstone advertisements," which are permitted to contain limited information about the fund, and "omitting prospectuses," which may contain more information, including fund performance information. An advertisement cannot include an investment application or invite prospective investors to send money; it can only attract investor interest in requesting the full statutory prospectus, which may be accompanied by the application. Funds also are permitted to distribute more extensive sales literature, so long as it is accompanied or preceded by the full prospectus. NASD rules require mutual fund distributors and dealers to file all advertising and sales literature for staff review. Through this process, a principal underwriter can get NASD assistance in assuring that sales literature complies with federal requirements and NASD guidelines. Moreover, the SEC does not require the filing of sales literature that has been cleared by the NASD. Chapter 4 Analysis and Interpretation Table 1: qualification Cumulative Frequency Percent Valid Percent Percent Valid Under Graduate 21 20.4 21.0 21.0 Graduate 37 35.9 37.0 58.0 PG 22 21.4 22.0 80.0 Proff Degree 20 19.4 20.0 100.0 Total 100 97.1 100.0 Missing System 3 2.9 Total 103 100.0 Table 2: 46
  47. 47. Occupation Cumulative Frequency Percent Valid Percent Percent Valid Service 23 22.3 23.0 23.0 Business 43 41.7 43.0 66.0 Proffession 34 33.0 34.0 100.0 Total 100 97.1 100.0 Missing System 3 2.9 Total 103 100.0 Occupation 50 40 30 20 Frequency 10 0 Service Business Proffession Occupation Table 3: Income Cumulative Frequency Percent Valid Percent Percent Valid below 3.5 lakhs 4 3.9 4.0 4.0 3.5 to 6 27 26.2 27.0 31.0 6.5 to 10 lakhs 30 29.1 30.0 61.0 10 to 15 lakhs 23 22.3 23.0 84.0 above 15 lakhs 16 15.5 16.0 100.0 Total 100 97.1 100.0 Missing System 3 2.9 Total 103 100.0 47
  48. 48. Income 40 30 20 10 Frequency 0 below 3.5 lakhs 6.5 to 10 lakhs above 15 lakhs 3.5 to 6 10 to 15 lakhs Income Inference: It is evident from table 1,table 2 and table 3 that there are respondents from different qualifications with different occupations and earning different income. Most of the respondents are with graduation and business profession and earning an income in between 6.5 lakhs to 10 lakhs. Table 4: 48
  49. 49. qualification * rating of MF by rating agencies Crosstabulation rating of MF by rating agencies extremely highly important important neutral unimportant unimportant Total Under Graduate Count 0 3 3 12 3 21 Expected Count .8 3.6 7.1 7.1 2.3 21.0 % of Total .0% 3.0% 3.0% 12.0% 3.0% 21.0% Graduate Count 2 8 13 13 1 37 Expected Count 1.5 6.3 12.6 12.6 4.1 37.0 % of Total 2.0% 8.0% 13.0% 13.0% 1.0% 37.0% PG Count 2 5 11 4 0 22 Expected Count .9 3.7 7.5 7.5 2.4 22.0 % of Total 2.0% 5.0% 11.0% 4.0% .0% 22.0% Proff Degree Count 0 1 7 5 7 20 Expected Count .8 3.4 6.8 6.8 2.2 20.0 % of Total .0% 1.0% 7.0% 5.0% 7.0% 20.0% Total Count 4 17 34 34 11 100 Expected Count 4.0 17.0 34.0 34.0 11.0 100.0 % of Total 4.0% 17.0% 34.0% 34.0% 11.0% 100.0% Chi-Square Tests Asymp. Sig. Value df (2-sided) Pearson Chi-Square 30.832a 12 .002 Likelihood Ratio 32.487 12 .001 Linear-by-Linear .100 1 .752 Association N of Valid Cases 100 a. 11 cells (55.0%) have expected count less than 5. The minimum expected count is .80. Inference: It is evident from table 4 that majority of the people are not preferring the rating of mutual funds based on their qualification level. Majority of the respondents don’t know much idea on the rating of mutual funds before the investment. H0: There is no significant association between the qualification and rating of mutual funds. H1: There is significant association between the qualification and rating of mutual funds. Further, as the P value (0.002) is less than the critical value 0.05, then the Null hypothesis can be rejected and hence it can be said that there is significant association between the qualification and rating of mutual funds. 49
  50. 50. rating of MF by rating agencies 40 30 20 10 Frequency 0 extremely important neutral highly unimportant important unimportant rating of MF by rating agencies Table 5: Occupation * tax benefit Crosstabulation tax benefit extermely relevant relevant neutral irrelavant Total Occupation Service Count 4 8 11 0 23 Expected Count 3.5 9.4 8.3 1.8 23.0 % of Total 4.0% 8.0% 11.0% .0% 23.0% Business Count 6 15 15 7 43 Expected Count 6.5 17.6 15.5 3.4 43.0 % of Total 6.0% 15.0% 15.0% 7.0% 43.0% Proffession Count 5 18 10 1 34 Expected Count 5.1 13.9 12.2 2.7 34.0 % of Total 5.0% 18.0% 10.0% 1.0% 34.0% Total Count 15 41 36 8 100 Expected Count 15.0 41.0 36.0 8.0 100.0 % of Total 15.0% 41.0% 36.0% 8.0% 100.0% 50
  51. 51. tax benefit 50 40 30 20 Frequency 10 0 extermely relevant relevant neutral irrelavant tax benefit Inference: It is evident from table5 that the respondents working in professional occupation responded that the tax benefit is related to the occupation of the work and the investment in mutual funds mainly leads to the benefit in the tax. Table 6: qualification * Amfi Crosstabulation Amfi moderately somewhat highly aware aware aware unaware qualification Under Graduate Count 5 10 5 1 Expected Count 3.8 9.9 5.9 1.5 % of Total 5.0% 10.0% 5.0% 1.0% Graduate Count 6 10 17 4 Expected Count 6.7 17.4 10.4 2.6 % of Total 6.0% 10.0% 17.0% 4.0% PG Count 5 15 1 1 Expected Count 4.0 10.3 6.2 1.5 % of Total 5.0% 15.0% 1.0% 1.0% Proff Degree Count 2 12 5 1 Expected Count 3.6 9.4 5.6 1.4 % of Total 2.0% 12.0% 5.0% 1.0% Total Count 18 47 28 7 Expected Count 18.0 47.0 28.0 7.0 % of Total 18.0% 47.0% 28.0% 7.0% 51
  52. 52. Chi-Square Tests Asymp. Sig. Value df (2-sided) Pearson Chi-Square 17.400a 9 .043 Likelihood Ratio 19.361 9 .022 Linear-by-Linear .201 1 .654 Association N of Valid Cases 100 a. 7 cells (43.8%) have expected count less than 5. The minimum expected count is 1.40. Amfi 50 40 30 20 Frequency 10 0 highly aware somewhat aware moderately aware unaware Amfi Inference: It is evident from table 6 that majority of the respondents are moderately aware of the amfi regulations of the mutual fund investments. H0: There is no significant association between the qualification of respondents and amfi. H1: There is significant association between the qualification and amfi. Further, as the P value (0.043) is less than the critical value 0.05, then the Null hypothesis can be rejected and hence it can be said that there is significant association between the qualification of respondents and amfi rules and regulations. 52
  53. 53. Table 7: Income * dividend yield Crosstabulation dividend yield moderately somewhat highly aware aware aware unaware Income below 3.5 lakhs Count 0 4 0 0 Expected Count .2 1.1 1.4 1.3 % of Total .0% 4.0% .0% .0% 3.5 to 6 Count 0 5 12 10 Expected Count 1.1 7.6 9.7 8.6 % of Total .0% 5.0% 12.0% 10.0% 6.5 to 10 lakhs Count 3 5 12 10 Expected Count 1.2 8.4 10.8 9.6 % of Total 3.0% 5.0% 12.0% 10.0% 10 to 15 lakhs Count 1 8 5 9 Expected Count .9 6.4 8.3 7.4 % of Total 1.0% 8.0% 5.0% 9.0% above 15 lakhs Count 0 6 7 3 Expected Count .6 4.5 5.8 5.1 % of Total .0% 6.0% 7.0% 3.0% Total Count 4 28 36 32 Expected Count 4.0 28.0 36.0 32.0 % of Total 4.0% 28.0% 36.0% 32.0% dividend yield 40 30 20 Frequency 10 0 highly aware somewhat aware moderately aware unaware dividend yield Inference: 53
  54. 54. It is evident from table that based on the income level the respondents are not completely aware of the different dividend yields pertaining to the investments in mutual funds. So the respondents before investing need to have certain knowledge on the dividend yield process available in the company. Table 8: Income * types of schemes Crosstabulation types of schemes moderately somewhat highly aware aware aware unaware Total Income below 3.5 lakhs Count 1 3 0 0 4 Expected Count .8 2.2 .9 .1 4.0 % of Total 1.0% 3.0% .0% .0% 4.0% 3.5 to 6 Count 7 10 10 0 27 Expected Count 5.4 15.1 5.9 .5 27.0 % of Total 7.0% 10.0% 10.0% .0% 27.0% 6.5 to 10 lakhs Count 5 17 8 0 30 Expected Count 6.0 16.8 6.6 .6 30.0 % of Total 5.0% 17.0% 8.0% .0% 30.0% 10 to 15 lakhs Count 4 16 1 2 23 Expected Count 4.6 12.9 5.1 .5 23.0 % of Total 4.0% 16.0% 1.0% 2.0% 23.0% above 15 lakhs Count 3 10 3 0 16 Expected Count 3.2 9.0 3.5 .3 16.0 % of Total 3.0% 10.0% 3.0% .0% 16.0% Total Count 20 56 22 2 100 Expected Count 20.0 56.0 22.0 2.0 100.0 % of Total 20.0% 56.0% 22.0% 2.0% 100.0% Inference: It is evident from above table that the majority of respondents having different income levels are moderately aware to the different types of schemes available in the company for investing in mutual funds. 54