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Investment in mutual fund pabita1

  1. 1. Summer Internship Project Report On“INVESTORS PERCEPTION TOWARDS INVESTMENT IN MUTUAL FUND IN ODISA MARKET WITH SPECIAL REFERENCE TO BAJAJ CAPITAL” By Pabita Mishra Registration No: BIM0611BM021 work carried at BhubaneswarBhavan’s Centre for Communication & Management , Bharatiya Vidya Bhavan Bhubaneswar 1
  3. 3. FINDINGS AND SUGGESTIONS 57-58 CONCLUSION 59 BIBLIOGRAPHY 60 MY EXPERIENCE AT SIP QUESTIONNAIRE DECLARATIONI hereby declare that this project report titled “Investor Perceptions towards Mutual FundInvestments in the Odisha Market with special reference to Bajaj Capital”, submitted byme under the direct supervision and guidance of Prof. Siddharth Shankar Kanungo,Bharatiya Vidya Bhavan, Bhubaneswar and Mr. Anupam Mohanty, Marketing Manager,Bajaj Capital, Bhubaneswar is my own work and has not been submitted to any otheruniversity or institution or published earlier.Pabita MishraRegistration. No.: BIM0611BM021 Date: ............................ 3
  4. 4. CERTIFICATE FROM THE INTERNAL GUIDEThis is to certify that the report titled “Investor Perceptions towards Mutual FundInvestments in the Odisha Market with special reference to Bajaj Capital”, submitted byMs. Pabita Mishra bearing Registration. No. BIM0611BM020, of Bhavan’s Centre forCommunication & Management, Bharatiya Vidya Bhavan, Bhubaneswar, towards partialfulfillment of the requirements for the award of Post Graduate Diploma in Management(PGDM) is a bonafide work carried out by her under my direct supervision and guidance.Prof. Siddharth S Kanungo Bharatiya Vidya Bhavan, Bhubaneswar Date: ............................ 4
  5. 5. CERTIFICATE FROM THE EXTERNAL GUIDEThis is to certify that the report “Investor Perceptions towards Mutual Fund Investmentsin the Odisha Market with special reference to Bajaj Capital”,, submitted by Ms. PabitaMishra bearing Registration. No. BIM0611BM021, of Bhavan’s Centre forCommunication & Management, Bharatiya Vidya Bhavan, Bhubaneswar, towards partialfulfilment of the requirements for the award of Post Graduate Diploma in Management(PGDM) is a bonafide work carried out by her under my direct supervision and guidance.Mr Annupam MohantyBajaj Capital Date: ............................ 5
  6. 6. CERTIFICATE OF APPROVALThis is to certify that the report titled “Investor Perceptions towards Mutual FundInvestments in the Odisha Market with special reference to Bajaj Capital”, Submitted byPabita Mishra bearing Registration. No. BIM0611BM021 of Bhavan’s Centre forCommunication & Management, Bharatiya Vidya Bhavan, Bhubaneswar Kendra, Orissa,towards partial fulfillment of the requirements for the award of Post Graduate Diploma inManagement (PGDM) is a bonafide record of the work carried out by her under theguidance Prof. Siddharth S. Kanungo.Vice Principal Director (Academics) 6
  7. 7. ACKNOWLEDGEMENT Before I going to the thick of I would like to add someheartfelt words. I owe a huge debt of thank and deep senseof gratitude to my learned guide Mr. ANUPAMMOHANTY[MANAGER] and Mr. SAMBIT MOHANTY[BRANCH HEAD] at BAJAJ CAPITAL, Bhubaneswar branchunder whose guidance, supervision and encouragement thepresent study was undertaken and completed. Theirsympathetic, accommodating and constructive natureremained a constant source of inspiration for me through theduration of this summer project. I am thankful to all personnel in BAJAJ CAPITAL forutmost co-operation and timely help extended by them forthe completion of the project. My overriding debt is Prof. Sidharth Sankar Kanungo forproviding me the opportunity to take up this project withBAJAJ CAPITAL. (Pabita mishra) 7
  9. 9. EXECUTIVE SUMMARY A Mutual Fund is common pool of money into which investor’s places their contributions that are to be invested in accordance with a started objective. The ownership of the mutual fund is thus join or “MUTUAL”; the fund is in the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund. A mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objective. Thus, an equity fund would mainly buy debt instruments such as debentures, bonds, or government securities. It is these assets which are owned by the investors in the same proportion as their contribution bears to the total contribution of all investors put together. Regulatory Body for Mutual Funds? Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All themutual funds must get registered with SEBI.What are the benefits of investing in Mutual FundsThere are several benefits from investing in a Mutual Fund:Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across awide spectrum of companies with small investments.Professional Fund Management: Professionals having considerable expertise, experience and resourcesmanage the pool of money collected by a mutual fund. They thoroughly analyse the markets andeconomy to pick good investment opportunities.Spreading Risk: An investor with limited funds 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 ofsound stocks or bonds. A fund normally invests in companies across a wide range of industries, so therisk is diversified.Transparency Mutual Funds regularly provide investors with information on the value of their investments. MutualFunds also provide complete portfolio disclosure of the investments made by various schemes and alsothe proportion invested in each asset type.Choice: The large amount of Mutual Funds offer the investor a wide variety to choose from. An investorcan 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 ofstrict regulation designed to protect the interests of the investor 9
  10. 10. What is NAV?NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of itsliabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding.Buying and selling into funds is done on the basis of NAV-related prices. The NAV of a mutual fund arerequired to be published in newspapers. The NAV of an open end scheme should be disclosed on a dailybasis and the NAV of a close end scheme should be disclosed at least on a weekly basisWhat is Entry/Exit Load?A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is leviedto cover the up-front cost incurred by the mutual fund for selling the fund. It also covers one timeprocessing costs. Some funds do not charge any entry or exit load. These funds are referred to as ‘NoLoad Fund’. Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads varybetween 0.25% and 2.00%.For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry loadlevied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor receives10000/13.13 = 761.6146units. (Note that units are allotted to an investor based on the amountinvested and not on the basis of no. of units purchased).Let us now assume that the same investor decidesto redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%.Therefore the redemption price per unit works out to Rs. 14.925. The investor therefore receives761.6146 x 14.925 = Rs.11367.10.Are there any risks involved in investing in Mutual Funds?Mutual Funds do not provide assured returns. Their returns are linked to their performance. They investin shares, debentures, bonds etc. All these investments involve an element of risk. The unit value mayvary depending upon the performance of the company and if a company defaults in payment ofinterest/principal on their debentures/bonds the performance of the fund may get affected. Besides in casethere is a sudden downturn in an industry or the government comes up with new a regulation whichaffects a particular industry or company the fund can again be adversely affected. All these factorsinfluence the performance of Mutual Funds. Some of the Risk to which Mutual Funds are exposed to isgiven below:Market risk If the overall stock or bond markets fall on account of overall economic factors, the value of stock orbond holdings in the funds portfolio can drop, thereby impacting the fund performance.Non-market risk Bad news about an individual company can pull down its stock price, which can negatively affect fundholdings. This risk can be reduce by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries.Interest rate risk Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices falland this decline in underlying securities affects the fund negatively.Credit risk Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of thecorporate defaulting on their interest and principal payment obligations and when that risk crystallizes, itleads to a fall in the value of the bond causing the NAV of the fund to take a beating. 10
  11. 11. Regulation of Mutual fund in India The Reserve Bank of India (RBI) has issued a set of guidelines in 1987 for bank sponsored Mutualfunds. This was followed, in 1990, by stipulations for mutual funds from the ministry of finance,Government of India. In 1991, the government of India initiated the process of creating a commonregulation for all mutual funds in 1991. In October 1991, the Securities and Exchange Board Of India(SEBI) issued guidelines for the formation of Asset Management Companies (AMCs) for Mutual funds Acomprehensive set of guidelines was issued by the ministry of finance in February 1992. In 1993, theSEBI issued comprehensive mutual funds regulations. These frame work in 1996, which have beenamended from time to time. The main Clements of the SBI regulatory mechanism of Mutual funds, otherthan the Unit trust of India, are: 1. Registration of mutual funds with SEBI. 2. Constitution and Management of mutual funds and operation of trusts. 3. Constitution and management of asset management company and custodian. 4. Schemes of mutual funds. 5. Investment objectives and valuation policies. 6. Inspection and audit. 7. Procedure for action in case of default. Some of the provisions of the SEBI (mutual fund) Regulations, 1996 (as amended from time to time)have been summarized here under: 1. The sponsor, who wants to establish a mutual fund, should have a sound track record and a general reputation of fairness and integrity, I.e., must be in business of financial services for 5 years, and must have contributed at least 40% of the net worth of the asset management company. 2. A mutual funds is constituted in form of trust. The trust shall incorporate an Asset Management Company (AMC). The trustees shall ensure that the AMC has been managing the schemes independently of other activities. 3. Two-thirds of the trustees shall be independent persons and not be associated with the sponser. 4. The trustees shall ensure that activities of the AMC are in accordance with the Regulations, 1996. 5. The trust shall periodically review the investors’ complaints recived and shall be redressed by the AMC. 11
  12. 12. 6. The mutual fund shall appoint a custodian to carry out the custodial services for the schemes. The sponser or its associates shall not have 50% or more of the share capital of the custodian.7. No schemes shall be launched by the AMC unless the offer document contains disclosures which are adequate in order to enable the investors to make informed investors to make informed investment decisions.8. Advertisement in respect of every scheme shall be in conformity with the Advertisement code.9. Every close-ended scheme shall be listed at a recognized stock exchange, or there will be a repurchase facility.10. The close-ended schemes may be converted in to open-ended schemes under certain conditions. A close-ended schemes may be allowed to be rolled over if necessary disclosures about NAV, etc, are made to the unit holders.11. In case of over-subscription for a new scheme, the applicants applying for upto 5,000 units shall be allotted full. The refund to applicants, ii any made within 6 weeks from the date of closure of the list.12. No guaranteed return shall be provided in a scheme, unless such return is fully guaranteed by the sponcer or the AMC.13. An open-ended scheme shall be wound up after the expiration of the fixed period, or in case, 75% of the unit holders decide so, after repaying the amount due to the unit holders.14. The money collected under any scheme shall be invest only in transferable securities debts.15. The mutual fund shall not borrow any money except to meet temporary liquidity needs and borrowing, if any, need not be more than 20% of NAV of the scheme, and for period of less than 6 months.16. The funds of a scheme shall not be used in option trading or a carry forward transaction. However, derivatives can be traded by a mutual fund a recognised stock exchange for portfolio balancing.17. A mutual fund can enter in to underwriting agreement. 12
  13. 13. OBJECTIVE:-  To know the advantages of Mutual Fund for different age of people.  To know the performance of funds in the market in comparison of BSE – 100 and BSE – 30.  To knows the advantages of Systematic Investment Plan and advantages in comparison of lump-sum investments.  To know about all those calculations of Fund and BSE benchmark returns & risk and show the chart of performance of vis-à-vis benchmark . 13
  15. 15. COMPANY PROFILEBajaj Capital is one of India’s leading Financial Services companies offering Free Advice onInvestments, Insurance, Tax Saving, Retirement Planning, Financial Planning, Children’s FuturePlanning and other services. We also have a wide range of products and services for Corporate, High Networth Individuals, and NRIs… all under one roof.At Bajaj Capital, we believe in dreaming big. Dreams inspire us to excel. They ignite hope and kindle inus the passion to stretch our limits. We also believe that nothing can or should stop us from realising ourdreams… and financial constraints should be the last thing to stop anyone.Four decades of excellenceFor over four decades, we have been helping people realise their aspirations by helping them make theirwealth grow, and plan their financial lives.Today, we are a one of the largest financial planning and investment advisory companies in India,with a strong presence all over the country. We take pride in serving our customers – both individual andinstitutional – and are known for our strong professionalism and work ethics.Wide range of servicesWe offer a comprehensive range of services including financial planning and investment advice, and theentire gamut of financial instruments andinvestment products of almost all major companies, both public and private. In addition, we alsoprovide investment assistance by helping you complete all the formalities, and help you keep regulartrack of your investments.These services and products are delivered through our network of 134 Bajaj Capital Investment Centreslocated all over the country.We are also a SEBI-approved Category I Merchant Banker. We raiseResources for over 1,000 top institutions and corporate houses every year, and offer specialised servicesto Non-Resident Indian (NRIs) and High Net worth Clients.THE HISTORY OF BAJAJ CAPITALBajaj Capital has contributed to the growth of the Indian Capital Market at every step.In 1965, we were the first to innovate the Companies Fixed Deposit. Today, we are playing an active rolein the growth of the Indian Mutual Fund industry.We are also working closely with private insurance companies to deepen India’s insurance market.What you can expect from us  Sound, research-based advice  Unbiased, independent and need-based advice  Prompt, courteous service 15
  16. 16.  Honest, ethical dealings  AccessibilityHere is a brief gist of our journey through the years.1964Bajaj Capital sets up its first Investment Centre™ in New Delhi to guideIndividual investors on where, when and how to invest.Indias first Mutual Fund, Unit Trust of India (UTI) is incorporated in the same year.1965Bajaj Capital is incorporated as a Company. In the same year, the company introduces an innovativefinancial instrument – the Company Fixed Deposit. EIL Ltd. (Oberoi Hotels, then known as AssociatedHotels of India Ltd.) becomes the first company to raise resources through Company Fixed Deposits.1966Bajaj Capital expands its product range to include all UTI schemes and Government saving schemes inaddition to Company Fixed Deposits.1969Bajaj Capital manages its first Equity issue (through an associate company) of Grauer & Wells IndiaLtd.; right from drafting the prospectus to marketing the issue.1975Bajaj Capital starts offering need-based investment advice to investors, which would later be known asFinancial Planning in the investment world.1981SAIL becomes the first government company to accept deposits, followed by IOC, BHEL, BPCL, HPCLand others; thus opening the floodgates for growth of retail investment market in India. Bajaj Capitalplays an active role in all the schemes as Principal Brokers1986Public Sector Undertakings (PSUs) begin making public issues of bonds MTNL, NHPC, IRFC offer aseries of Bond Issues. Bajaj Capital is among the top ranks of resource mobilisers. 16
  17. 17. 1987SBI leads the launch of Public Sector Mutual Funds in India. Bajaj Capital plays a significant role in fundmobilisation for all these players.1991SBI issues India Development Bonds for NRIs. Bajaj Capital becomes the top mobiliser with collectionsof over US $20 million.1993The first private sector Mutual Fund – Kothari Pioneer – is launched, followed by Birla and Alliance inthe following years. Bajaj Capital plays an active role and is ranked among the top mobilisers for allthese schemes.1995IDBI and ICICI begin issuing their series of Bonds for retail investors. Bajaj Capital is the co-manager inall these offerings and consistently ranks among the top five mobilisers on an all-India basis.1997Private sector players lead the revival of Mutual Funds in India through Openended Debt schemes. BajajCapital consolidates its position as Indias largest retail distributor of Mutual Funds.1999Bajaj Capital begins marketing Life and General Insurance products of LIC and GIC (through associatefirms) in anticipation of opening up of the Insurance Sector. Bajaj Capital achieves the milestone ofbecoming the top Pension Scheme seller in India and launches marketing of GICs Health Insuranceschemes.2000Bajaj Capital implements its vision of being a One-stop Financial Supermarket. The Company offers allkinds of financial products, including the entire range of investment and insurance products through itsInvestment Centre. Bajaj Capital offers full-service merchant banking including structuring,management and marketing of Capital issues. Bajaj Capital reinvents Financial Planning in itsinternational sense and upgrades its entire team of Investment Experts into Financial Planners.2002The company focuses on creating investor awareness for Financial Planning and need-based investing.To achieve this goal, the company introduced the International College of Financial Planning. Thegraduates of this institute become Certified Financial Planners (CFPs), a coveted professionalqualification.2004 17
  18. 18. Bajaj Capital obtains the All India Insurance Broking Licence. Simultaneously, a series of wealthcreation seminars are launched all over the country, making Bajaj Capital a household name.2005Bajaj Capital launches 360° Financial Planning, a software-based programme aimed at encouragingscientific and holistic investing.2007Bajaj Capital launches Stock Broking and Depository (Demat) Services.2008Bajaj Capital launches Just Trade, an online Platform for investing in Equities, Mutual Funds, IPOs.MISSION, AIMS & OBJECTIVESBajaj Capitals Mission StatementThe focus of our organisation is to be the most useful, reliable and efficient provider of FinancialServices. It is our continuous endeavour to be a trustworthy advisor to our clients, helping them achievetheir financial goals. Aims  To serve our clients with utmost dedication and integrity so that we exceed their expectations and build enduring relationships.  To offer unparalleled quality of service through complete knowledge of products, constant innovation in services and use of the latest technology.  To always give honest and unbiased financial advice and earn our clients everlasting trust.  To serve the community by educating individuals on the merits of Financial Planning and in turn help shape a financially strong society  To create value for all stake holders by ensuring profitable growth.  To build an amicable environment that accords respect to every individual and permits their personal growth.  To utilise the power of teamwork to function as a family and build a seamless organisation.Why Invest Through Bajaj Capital  Wide range of products and services  41 years experience as Investment Advisors and Financial Planners. 18
  19. 19.  More than eight lakh satisfied clients all over India  Countrywide network of 134 branches  Over 12,000 NRI clients across the globe  Personalised wealth management advice  24 x 7 online accessibility through  Strong team of qualified and experienced professionals including CAs, MBAs, MBEs, CFPs, CSs, Insurance experts, Legal experts and others.  SEBI-Approved Category I Merchant Bankers.  Group Co BCIBL is an IRDA-licensed Direct Insurance Broker.WHO’S WHO AT BAJAJ CAPITALMr. K.K. Bajaj (Chairman)A visionary par excellence, a pioneer and a leader, Mr K.K. Bajaj has been instrumental in shaping BajajCapital’s emergence as one of India’s largest Investment Advisory companies.He is a highly respected figure in the field of institutional and personal finance and Company FDs. Hisemphasis on honesty, ethics and values are the guiding principles of the organisation.Mr Bajaj is also a prolific writer and has written over 200 articles on diverse issues such as PersonalFinance, Economic Affairs, and Health.Mr. Rajiv Deep Bajaj (Vice Chairman & Managing Director)A qualified Financial Planner, Mr Rajiv Deep Bajaj was the first to introduce the concept of FinancialPlanning in India. In fact, he is the Founding Chairman of the Association of Financial Planners (AFP).He is also amongst the first batch of 25 Certified Financial Planners (CFP tm) designation holders inIndia. A Post-graduate in Management and holder of an International Certificate for Financial Advisorsfrom the Chartered Insurance Institute, London, Mr Rajiv Deep Bajaj has played a pivotal role inexpanding Bajaj Capitals reach across the country. He has recently pursued an Executive MBA inInternational Wealth Management under an exchange program between University of Geneva,Switzerland and Carnegie Mellon University, Pittsburgh, USA.His youthful energy, dynamic leadership, vision and 16 years strategicmanagement experience in Banking, Financial Advisory, Insurance Broking and Financial Planning havestrengthened Bajaj Capital.The Media and Industry honchos have regularly acclaimed Mr. Rajiv Deep Bajaj for his strengths as apowerful orator and writer. His views on various Investment Strategy and Financial Planning-relatedissues are regularly flashed in some of the leading media entities like The Economic Times, BusinessToday, Star TV, CNBC and Aaj Tak. His personal life goal is to spread ‘Financial Education’ amongst 19
  20. 20. the Indian masses in order to increase their knowledge base and shift their perspective from ‘Saving toInvesting’.Mr. Sanjiv Bajaj (Joint Managing Director)Mr. Sanjiv Bajaj started his career in 1995 as managerial trainee, worked on various projects whichincluded developments at alternate channel ofdistribution like Brokers associations...etc. From here, he moved on toInvestment Advisory services, which included understanding the clients needs, and by using varioustools of financial planning to offer them a solution to meet his requirements. Mr Sanjiv Bajaj is versatilepersonality with diverse areas of interest. He is a Post-graduate in Business Management withspecialisation in Finance, and holds an International Certificate for Financial Advisors from the CharteredInsurance Institute, London. Thanks to him, Bajaj Capital is today the largest individual agent for LIC.Mr Sanjiv Bajaj has a keen interest in IT, and has played a major role in implementing the ERP softwareand Ecommerce activities in the company.Mr. Anil Chopra (CEO & Director)Mr. Anil Chopra is the Chief Executive Officer & Director of Bajaj Capital Limited, He joined theCompany in 1984. Mr. Chopra has been instrumental in expanding the branch network of Bajaj CapitalLtd. all over India. A Chartered Accountant and a Certified Financial Planner, Mr Chopra is credited withintroducing international accounting and HR practices in the organisation. His most valuablecontribution, however, has been in building up a financially literate society and making Bajaj Capital astrong retail brand. He is considered an authority, and is widely sought after by the media for quotes onkey developments in the industry. THE SIGNIFICANCE OF OUR LOGO Our logo depicts Lord Ganesha who is the source of all our values and ethics in business.  The large ears of Lord Ganesha remind us to hear more. We listen carefully to our clients to understand their needs.  The weight of the trunk on the mouth symbolises silence. We work silently, without blowing our own trumpet.  The long trunk symbolises continuous exploration. We explore all avenues to provide the best investment opportunities for our clients.  The heavy posture of Ganesha symbolises stability. We help our clients to attain financial stability through wise investments. 20
  21. 21.  Lord Ganesha is known as the remover of obstacles and bestower of prosperity. We emulate His example and try our best to help our clients attain prosperity by proper financial planning.  Our logo has a yellow background. Yellow is the colour of gold, which symbolises wealth. According to Vedic lore, it is also the colour associated with Brihaspati, the guru and counsellor of the Gods. We offer our clients sage counsel to make their wealth grow.  The letters are in red. Red is the colour rajas – symbolising power and incessant activity. It symbolises our aggressive quest for your well-being and happiness.  The white streak represents the trunk of Lord Ganesha. White is the colour of satva guna, and implies our selfless commitment to your lifelong happiness. SWOT ANALYSISStrength • Having a huge of financial products. • Having expert financial planning scenario so that the goals and dreams of a client is properly visualised. • Having transparent business strategies. • Having a trust of more than 40 years. • Having large number of branches across the country with a large number of employee and clients.Weakness Lack of knowledge among the employees • Lack of branches in small cities. • Lack of publicity. • Lack of awareness among the mindset of the people in small towns.Opportunity • To introduce more segments of financial products. • To penetrate in the rural market and create awareness in the mind set of the people of rural area. • To create more forms of publicity. • To upgrade the process of financial planningThreat • Entry of new competitors. • The market risk that a client have in investing. 21
  22. 22. REVIEW OF THE LITRETUREALL FUNDS:- A mutual fund is a common pool of money into which investors places their contributions that are tobe invested in accordance with a stated objective. The ownership of the fund is thus joint or “mutual”,the fund belongs to all investors. A single investor’s ownership of the fund is in the same proportionas the amount of the contribution made by him or her bears to the total amount of the fund. A mutualfund uses the money collected from investors to buy those assets which are specifically permitted byits stated investment objective. Thus, an equity fund would buy mainly equity assets ordinary shares,preference shares, warrants etc. A bond fund would mainly buy debt instruments such as debentures,bonds, or government securities. It is these assets which are owned by the investors in the sameproportion as their contribution bears to the total contributions of all investors put together.ADVANTAGES OF MUTUAL FUNDIf mutual funds are emerging as the favourite investment vehicle, it is because of the many advantagesthey have over other forms and avenues of investing, particularly for the investor who has limitedresources available in terms of capital and ability to carry out detailed research and market monitoring.The following are the major advantages offered by mutual funds to all investors:• Portfolio diversification: Mutual funds normally invest in a well-diversified portfolio or securities.Each investor in a fund is a part owner of all of the fund’s assets. This enables him to hold adiversified investment portfolio even with a small amount of investment that would otherwise requirebig capital.• Professional Management: Even if an investor has a big amount of capital available to him, hebenefits from the professional management skills brought in by the fund in the management of theinvestor’s portfolio. The investment management skills, along with the needed research into availableinvestment options, ensure a much better return than what an investor can manage on his own. Fewinvestors have the skills and resources of their own to succeed in today’s fast moving, global andsophisticated markets. 22
  23. 23. • Reduction / Diversification of risk: An investor in a mutual fund acquires a diversified portfolio,no matter how small his investment. Diversification reduces the risk of loss, as compared to investingdirectly in one or two shares or debentures or other instruments. When an investor invests directly, allthe risk of potential loss is his own. Fund investors also reduce his risk in another way. Whileinvesting in the pool of funds with other investors, any loss on one or two securities is also shared withother investors. This risk reduction is one of the most important benefits of a collective investmentvehicle like the mutual fund.• Reduction of transaction costs: What is true of risk is also true of the transaction costs. A directinvestor bears all the costs of investing such as brokerage or custody of securities. When goingthrough a fund, he has the benefit of economies of scale; the fund pay lesser costs because of largevolumes, a benefit passed on to its investors.• Liquidity: Often, investors hold shares or bonds they cannot directly, easily and quickly sell.Investment in a mutual fund, on the other hand, is more liquid. An investor can liquidate theinvestment, by selling the units to the fund if open end, or selling them in the market if the fund isclosed end, and collect funds at the end of a period specified by the mutual fund or the stock market.• Convenience and flexibility: Mutual fund management companies offer many investor services thata direct market investor cannot get. Investors can easily transfer their holdings from one scheme to theother; get updated market information, and so on. DISADVANTGES OF INVESTING THROUGH MUTUAL FUNDS:While the benefits of investing through mutual funds far outweigh the disadvanges, an investor and hisadvisor will do well to be aware of a few shortcomings of using the mutual funds as investmentvehicles.• No control over costs:- An investor in a mutual fund has any control over the overall cost ofinvesting. He pays investment management fees as long as he remains with the fund, albeit in returnfor the professional management and research. Fees are usually payable as a percentage of the valueof his investments, whether the fund value is rising or declining. A mutual fund investor also paysfund distribution costs, which he would not incur in direct investing. However, this shortcoming onlymeans that there is a cost to obtain benefits of a mutual fund services. However, this cost is often lessthan the cost of direct investing by the investors.• No tailor-made portfolios:- Investors who invest on their own can build their own portfolios ofshares, bonds and other securities. Investing through funds means he delegates this decision to thefund managers. The very high net worth individuals or large corporate investors may find this to be aconstraint in achieving their objectives. However, most mutual funds help investors overcome thisconstraint by offering families of schemes-a large member of different schemes-within the same fund.An investor can choose from different investment plans and construct a portfolio of his choice.• Managing a portfolio of funds: Availability of a large number of funds can actually mean toomuch choice for the investor. He may again need advice on how to select a fund to achieve hisobjectives, quite similar to the situation when he has to select individual shares or bonds to invest in.TYPES OF FUND 23
  24. 24. There are many types of mutual fund available to the investors. However, these different types offunds can be grouped into certain classifications for better understanding. From the investor’sperspective, we would follow three basic classifications.Firstly, funds are usually classified in terms of their constitution-as-closed-end or open-end. Thedistinction depends upon whether they give the investors the option to redeem and buy units at anytime from the fund itself (open end) or whether the investors have to await a given maturity beforethey can redeem their units to the funds( close end).Funds can also be grouped in terms of whether they collect from investors any charges at the time ofentry or exit or both, thus reducing the investible amount or the redemption proceeds. Funds thatmake these charges are classified as load funds, and funds that do not make any of these charges aretermed no-loan funds.Finally, funds can also be classified as being tax-exempt or non-tax-exempt, depending on whetherthey invest in securities that tive tax-exempt returns or not. Currently in India, this classification maybe somewhat less important, given the recent tax exemptions given to investors receiving anydividends from all mutual funds.Under each board classification, we may then distinguish between several types of funds on the basisof the nature of their portfolios, meaning whether they invest in equities or fixed income securities orsome combination of both. Every type of fund has a unique risk profile that is determined by itsportfolio, for which reason funds are often separated into more or less risk bearing. We first look atthe fund classifications and then understand the various types of funds under them.1 MUTUAL FUND CLASSIFICATIONS 1.1. Open-end Vs. Closed –end Funds:An open-end fund is one that has units available for sale and repurchase at all times. An investor canbuy or redeem units from the fund itself at a price based on the net asset value (NAV) per unit. NAVper unit is obtained by dividing the amount of the market value of the fund’s assets (plus accruedincome minus the fund’s liabilities) by the number of units outstanding. The number of unitsoutstanding goes up or down every time the fund issues new units or repurchases existing units. Inother words, the ‘unit capital’ of an open and mutual fund is not fixed but variable. The fund size andits total investment amount go up if more new subscriptions come in from new investors thanredemptions by existing investors, the fund shrinks when redemptions of units exceed freshsubscriptions.An open-end fund is not obliged to keep selling/issuing new units at all times, and many successfulfunds stop issuing further subscriptions from new investors after they reach a certain size and thinkthey cannot manage larger fund without adversely affecting profitability. On the other hand, an open-end fund rarely denies to its investors the facility to redeem existing units, subject to certain obviousconditions. For example, redemption is only possible after the investor’s cheque for initialsubscription has cleared, or until after any “lock-in period” specified by the fund is over, or only afterthe specified redemption period for collection of funds.Unlike an open-end fund, the “unit capital” of a closed-end fund is fixed, as it makes a onetime sale ofa fixed number of units. Later on, unlike open-end funds, closed-end funds do not allow investors tobuy or redeem units directly from the funds. However, to provide the much needed liquidity toinvestors, many closed-end funds get themselves listed on a stock exchange(s). Trading through astock exchange enables investors to buy or sell units of a closed-end mutual fund from each other,through a stockbroker, in the same fashion as buying or selling shares of a company. The fund’s units 24
  25. 25. may be traded at a discount or premium to NAV based on investors’ perceptions about the fund’sfuture performance and other market factors affecting the demand for or supply of the fund’s units.Note that the number of outstanding units of a closed-end fund does not vary on account of trading inthe fund’s units at the stock exchange. On the other hand, funds often do offer” buy-back of fundshares/units”. Thus offering another avenue for liquidity to closed-end fund investors. In this case,the mutual fund actually reduces the number of units outstanding with investors.LOAN AND NO LOAD FUNDS :Marketing of a new mutual fund scheme involves initial expenses. These expenses may be recoveredfrom the investors in different ways at different times. Three usual ways in which a fund’s salesexpenses may be recovered from the investors are:1. At the time of investor’s entry into the fund/scheme, by deducting a specific amount from his initialcontribution, or2. By charging the fund/scheme with a fixed amount each year, during the stated number of years, or3. At the time of the investor’s exit from the fund/scheme, by deducting a specified amount from theredemption proceeds payable to the investor.These charges made by the fund managers to the investors to cover distribution/sales/marketingexpenses are often called “loads”. The loan charges to the investor at the time of his entry into ascheme is called a “front-end or entry load”. This is the first case above. The load amount charged tothe scheme over a period of time is called a “deferred load”. This is the second case above.The load that the investor pays at the time of his exit is called a “back-end or exit load”. This is thethird case above. Some funds may also charge different amount of loads to the investors, dependingupon how many years the investor has stayed with the fund; the longer the investor stays with thefund, less the amount of “exit load” he is charged. This is called “contingent deferred sales charge”.Note that the front-end load amount is deducted from the initial contribution/purchase amount paid bythe incoming investor, thus reducing his initial investment amount. Similarly exit loads would reducethe redemption proceeds paid out to the outgoing investor. If the sales charge is made on a deferredbasis directly to the scheme, the amount of the load may not be apparent to the investor, as thescheme’s NAV would reflect the net amount after the deferred load.Funds that charge front-end, back-end or deferred loads are called load funds. Funds that make nosuch charges or loads for sales expenses are called no-load funds.In India SEBI has defined a “load” as the onetime fee payable by the investor to allow the fund tomeet initial issue expenses including brokers’/ agents’/distributors’ commissions, advertising andmarketing expenses. SEBI definition of a load fund would include all funds that charge a front-endload, which is in line with the internationally used definition. However, SEBI would consider a fundto be” a no-load” fund, if an AMC absorbs these initial marketing expenses and does not charge thefund-a situation that is somewhat special to India and not widely prevalent elsewhere. Internationally,a fund, even when it does not make a front-end load, would still be considered a load fund, if itcharges an exit load or a deferred sales load.The reason for this slightly different definition of a load by SEBI is to be found in the nature of itsregulations. Front-end load, or load as defined by SEBI, is meant to cover the marketing expensesassociate with the first issue of a scheme. Other expenses are defined as “recurring expenses”, ratherthan as “loads”. SEBI regulations allow AMCs to recover loads from the investors for the purpose ofpaying for the initial issue expenses, subject however to a limit on the maximum amount that can be 25
  26. 26. charged by the AMC. This limit currently stands at 6%, meaning that initial issue expenses should notexceed 6% of the initial corpus mobilized during the initial offer period. Similarly SEBI has alsoimposed a limit on the maximum “recurring expenses” including investment management andadvisory fees that can be charged to a scheme. The limits have been related to the level of the weeklynet assets. Thus the AMC can charge a scheme 2.50% of the average net assets of the scheme asrecurring expenses, if the net assets do not exceed Rs 100 cores, 2.25% on the next 300 cores, 2.0% onthe next 300 cores and 1.75% over Rs 700 cores. In case the scheme intends to invest in bonds, themaximum percentage limits are less by 0.25%. Further, if the AMC had absorbed the initial issueexpenses, it can charge an additional 1% of net assets as investment management fees.From the investors’ perspective, it is important to note that loads are not charged only by open-endfunds; even a closed-end fund can charge load to cover the initial issue expenses. It is also important tonote that there are other expenses such as the fund manager’s fees, which are charged to the investorson an on-going basis, thus reducing the net asset value of the fund. If the investor’s objective is to getthe benefit of compounding his initial investment by reinvesting and holding his investment for a verylong term, then, a no-front –load fund is preferable to a load fund; the initial amount of investment bythe fund gets reduced by the entry load, thus depriving the investor of the benefit of compounding hisreturns on the amount invested to the extent of the load.Some fund charge only an entry load, and some only an exit load. Such funds may be thought of aspartial load funds. Sometime back, a fund started a new scheme with deferred load over future years.Some funds in India waive the initial issue expenses that are borne by the Asset ManagementCompany or the sponsors, so the entire amount paid in by the investor gets invested without entry loaddeduction. At the same time, some of these no-front-load funds may charge exit loads from time totime. In other words, from time to time, a no-load fund may become a load fund. Note that a no-loadfund only means a fund that does not charge sales expenses. All funds still charge the schemes formanagement fees and other recurring expenses; it is only that an investor in a no-load fund enters orexits at the net NAV of the fund, calculated after accounting for these expenses, but without anyfurther adjustment for sales expenses from the NAV. 1.2 Tax exempt Vs. Non Tax exempt Funds:Generally, when a fund invests in tax-exempt securities, it is called a tax exempt fund. In the USA forexample, municipal bonds pay interest that is tax free, while interest on corporate and other bonds istaxable. In India, after the 1999 Union Government Budget, all of the dividend income receipt fromany of the mutual funds is tax free in the hands of the investor. However, funds other than equityfunds have to pay a distribution tax, before distributing income to investors. In other words, equitymutual fund schemes are tax-exempt investment avenues, while other funds are taxable fordistributable income.While Indian mutual funds currently offer tax free income, any capital gains arising out of sale of fundunits are taxable. All the tax considerations are important in the decision on where to invest as the tax-exemptions or concessions alter the returns obtained from these investments. Hence, classification ofmutual funds from the taxability perspective has great significance for investors. 1.3 Mutual Fund Types.All mutual funds would be either closed-end or open-end, and either load or no-load. Theseclassifications are general. For example all open-end funds operate the same way; or in case of a loadfund deduction are made from investors’ subscription or redemption and only the net amount used todetermine his number of shares purchased or sold. 26
  27. 27. A) Board Fund Types by Nature of Investments. Mutual funds may invest in equities, bonds or other fixed income securities, or short termmoney market securities. So we have Equity, bond and money market funds. All of them invest infinancial assets. But there are funds that invest in physical assets. For example, we may have gold orother precious metal funds, or Real estate funds. B) Board Fund Types by Investment objective. Investors and hence the mutual funds pursue different objectives while investing. Thus, Growthfund invests form medium to long term capital appreciation. Income funds invest to generate regularincome, and les for capital appreciation. Value funds invest in equities that are considered undervaluedtoday, those value will be unlocked in the future. C) Board Fund Types by Risk Profile: The nature of a fund’s portfolio and its investment objective imply different levels of riskundertaken. Funds are therefore often grouped in order of risk. Thus Equity funds have a greater riskof capital loss than a Debt fund that seeks to protect the capital while looking for income. Moneymarket funds are exposed to less risk than even the Bond funds, since they invest in short term fixedincome securities, as compared to longer term portfolios of bond funds. Fund managers often try toalter the risk profile of funds by suitably changing the investment objective. For example, a fundhouse may structure an “Equity income fund” investing in shares that do not fluctuate much in valueand offer steady dividends-say Power sector companies, or a Real estate income fund that invests onlythe in income producing assets. Balanced funds seek to produce a lower risk portfolio by mixingequity investments with debt investments. Investors and their advisors need to understand both theinvestment objective and risk level of the different types of funds. 1.4 Money Market Funds :Often considered to be at the lowest rung in the order of the risk level, money market funds invest insecurities of a short term nature, which generally means securities of less than one year maturity. Thetypical, short term, interest bearing instruments these funds invest in include Treasury bills issued bygovt. Certificate of deposit issued by banks and commercial paper issued by companies. In IndiaMoney Market Mutual Funds also invest in the interbank call money market. UTI variant in thiscategory UTI Money Market Mutual Fund.The major strength of money market funds is the liquidity and safety of principal that the investors cannormally expect form short term investors. 1.5 Gilt Funds:Gilts are government securities with medium to long term maturities, typically of over one year (underone year instruments being money market securities). In India, we have now seen the emergence ofGovernment Securities or Gilt Funds that invest in government paper called dated securities (unlikeTreasury Bills that mature in less than one year). Since the issuer is the Government/s of India/States,these funds have little risk of default and hence offer better protection of principal. However,investors have to recognize the potential changes in values of debt securities held by the funds that arecaused by changes in the market price of debt securities quoted on the stock exchanges ( just like theequities). Debt securities prices fall when interest rate level increase and vice versa. 27
  28. 28. 1.6 Debt Funds or Income Funds: Next in order of the risk level we have the general category debt funds. Debt funds invest in debt instruments issued not only by governments but also by private companies, banks and financial institutions and other entities such as infrastructure companies/utilities. By investing in debt, this funds target low risk and stable income for the investor as their key objectives. However as compared to the money market funds, they do have a higher price fluctuation risk, since they invest in longer term securities. Similarly, as compared to gilt funds, general debt funds do have a higher risk of default by their borrowers. Debt funds are largely considered as income funds as they do not target capital appreciation, look for high current income, and therefore distribute a substantial part of their surplus to investors. Income funds that target returns substantially above market levels can face more risk. While we have an earlier described the equity income funds, the income funds fall largely in the category of debt funds as they invest primarily in fixed income generating debt instruments’. Again, different investment objectives set by the fund managers would result in different risk profiles. A) DIVERSIFIED DEBT FUNDS:- A debt fund that invests in all available types of debt securities issued by entities across all industries and sector is a properly diversified debt fund. While debt funds offer high income and less risk than equity funds, investors need to recognize that debt securities are subject to risk of default by the issuer on payment of interest or principals. A diversified debt fund has the benefit of risk reduction through diversification and sharing of any default-related losses by a large number of investors. Hence a diversified debt fund is less risky than a narrow focus fund that invests in debt securities of a particular sector or industry. B) FOCUSED DEBT FUNDS:- Some debt funds have a narrow focus, with less diversification in its investments. Examples includes sector, specialized and offshore debt funds. The debt funds have a substantial part of their portfolio invested in debt instruments and are therefore more income oriented and inherently less risky than equity funds. However the Indian financial markets have demonstrated that debt funds should not be automatically considered to be less risky than equity funds, as there have been relatively large defaults by issuer of debt and many funds have non-performing assets in their debt portfolios. It should also be recognized that the market values of debt securities will also fluctuate more as Indian debt markets witnessed more trading and interest rate volatility in the future. The central point to note is that all these narrow focused funds have greater risk than diversified debt funds. Other examples of focused funds include those that invest only in corporate debentures and bonds or only in tax free infrastructure or municipal bonds. While these funds are entirely conceivable now, they may take some time to appear as a real choice for the Indian investor. One category of specialized funds that invests in the housing sector, but offers greater security and safety that other debt instruments, is the mortgage backed bond funds that invest in special securities created after securitization of (and thus secured by) loan receivable of housing finance companies. As the Indian finance markets witnessed the growth of securitization, such funds may appear on the mutual fund scene sooner rather than later. C) HIGH YIELD DEBT FUNDS:- Usually, debt funds control the borrower default risk by investing in securities issued byborrowers who are rated by credit rating agencies ad are considered to be of “investment grade”. Thereare, whoever, high yield debt funds that seek to obtain higher interest returns by investing in debt 28
  29. 29. instruments that are considered “below investment grade”. Clearly these funds are exposed to higher risk,funds that invest in debt instruments that are too backed by tangible assets and rated below investmentgrade (popularly known as junk bonds) are called junk bond funds. These funds tend to be more volatilethan other debt funds, although they may earn higher returns as a result of the higher risk taken. D) ASSURED RETURN FUNDS-A INDIAN VARIANT:- Fundamentally, mutual funds hold assets in trust for investors. All return is for account of the investor. The roll of the fund manager is to provide the professional management service and to ensure the highest possible return consistent with the investment objective of the fund. The fund manager or the trustees or the sponsors do not give any guarantee on the minimum return to the investors. Returns re indicated in advance for all of the future years of these closed-end schemes. If there is a short fall, it is born by the sponsors. Assured return or guaranteed monthly income plans are essentially Debt/Income funds. Assured return debt funds certainly reduced the risk level considerably, as compared to all other debt or equity funds, but only to the extent that the guarantor has the required financial strength. Hence, the market regulator of SEBI permits only hose funds whose sponsors have adequate net worth to offer assurance of returns, if occurred explicit guarantee is required from a guarantor whose name has to be specified in advance in the offer document in the scheme. While assured return funds may certainly considered being the lowest risk type within the debt funds category, they are still not entirely risk free, as investors have to normally lock I their funds for the term of the scheme or at least a specified period such as 3 years. During this period, changes in the financial markets may result in the investor losing the opportunity to obtain higher returns later in other debt or equity fund. Besides, the investor does carry some credit a risk on the guarantor who must remain solvent enough to honour its guarantee during the lock in period. E) FIXED TERM PLAN-AN INDIAN VARIANT:- A mutual fund scheme would normally be either open-end or closed-end. However, in India mutual funds have involved on innovative middle option between the two, in response to the investor needs. If a scheme is open-end, the fund issues new units and redeems them at any time. The fund does not have a steed maturity or fixed term of investment as such. Fixed term plan series offers a combination of both these features to investors, as a series of plans are offered and units are issued at a frequent inverted for short plan duration. Fixed term plans are essentially closed-end in nature in that the mutual fund AMC issues a fixed number of units for each series only once ad close the issue after an initial offering period, like a closed end scheme offering. However, a closed-end scheme would normally make a onetime initial offering of units for a fixed duration generally exceeding one year. Investors have to hold the units until the end of the stated duration, or sell them on stock exchange if listed. Fixed term plans are closed-end, but usually for shorter term-less than a year. Being of a short direction they are not listed on a stock exchange. Of course, like any closed-end fund, is plan series can be wound up earlier, under certain regulatory conditions. It is also important to bear in mind that the actual structure of the umbrella scheme under which a fixed term plan series is offered can be either closed-end or open-end., some funds in India use a closed-end structure, while others the open end structure, to offer term plans. In any case, you can think of fixed term plans as a series of closed end plans within a scheme. Like the closed-end funds, fixed term plans also make only a one time offering of units, but such offering 29
  30. 30. are made in a series of plans under one scheme prospectus or offered documents. No separate offerdocument is issued each time a new series is launched.The scheme under which such fixed term plans are offered is likely to be an income scheme, since theobjective is clearly of the AMC to attempt to reward investors with an expected return within a shortperiod. Mutual fund AMCs in India usually offering such plans do not guarantee any returns, but theproduct has clearly been designed to attract the short term investor who would otherwise place themoney as fixed term bank deposits or inter corporate deposit. 1.7Equity Funds:-As investors move from debt fund category to equity funds, they face increased risk levels. However,there is a large variety of equity funds and all of them are not equally risk prone. Inventors and theiradvisor need to short out and select the right equity fund that suits their risk appetite. In the followingsection, we have presented the equity fund types, going from the highest risk level to the lowest levelwithin this category.Before we look at the equity fund type in terms of the risk level, we must understand where the risksof equity funds came from and how they are different from debt funds. Equity fund invest a majorportion of their corpus in equity shares issued by companies, accrued directly in initial public offeringor through the secondary market. Equity funds would be exposed to the equity price fluctuation risk atthe market level, at the industry or sector level and at the company specific level. Equity funds netasset values fluctuate with all these price movements. These price movements are caused by all kindsof external factors, political and social as well as economic. The issues of equity shares offer noguaranteed repayment as in case of debt instruments. Hence, equity funds are generally considered atthe higher end of the risk spectrum among all funds available in the market. On the other hand, on likedebt instruments are that offer fixed amounts of repayments equity can appreciate in value in line withthe issuer’s earnings potential, and so offer the greatest potential for growth in capital.Equity funds adopt different investment strategies resulting in different levels of risk. Hence, they aregenerally separated in to different types in terms of their investment style. A) AGGRESSIVE GROWTH FUNDS:- There are many types of stocks/shares available in the market; blue chips that are recognizedmarket leaders, less researched stocks that are considered to have future growth potential, and evensome speculative stocks that are considered to have future growth potential, and even some speculativestocks of somewhat unknown or unproven issuers. Fund managers seek out and investment indifferent types of stocks in line with their own perception of potential returns and appetite for risk. Asthe name suggests, aggressive growth funds target maximum capital appreciation, invest in lessresearched or speculative shares and may adopt speculative investment strategies to attain theirobjective of high returns for the investor. Consequently, they tend to be more volatile and riskier thanother funds. B) GROWTH FUNDS: Growth funds invest in companies whose earnings are expected to rise at an above average rate.These companies may be operating in sectors like technology considered having a growth potential,but not entirely unproven and speculative. The primary objective of growth funds is capitalappreciation over a three to five year span. Growth funds are therefore less volatile than funds thattarget aggressive growth. UTI Master Share 86, UTI Equity Fund, UTI Index Select Fund and UTIMaster plus are few funds under UTI basket fall under this category. 30
  31. 31. C) SPECIALITY FUNDS: These funds have a narrow portfolio orientation and invest in only companies that meet pre-defined criteria. For example, some funds may build portfolios that will exclude Tobacco companies.Funds that invest in particular regions such as the Middle East or the ASEAN countries are also anexample of specialty funds. Within the specialty fund category, some funds may be broad based interms of the types of investments in the portfolio. However, most specialty funds tend to beconcentrated funds, since diversification is limited of one type of investment. Clearly concentratespecialty funds tend to be more volatile than diversified funds. UTI leadership Equity Fund as anexample having invested 65% in leaders of a sector. C. i. Sector Funds: Sector funds’ portfolios consist of investment I only one industry or sector of the market suchas information technology, pharmaceuticals or fast moving consumer goods that have recently beenlaunched I India. Since sector funds do not diversified into multiple sectors, they carry a higher levelof sector and company specific risk than diversified equity funds, UTI Pharms & Healthcare fund, UTIBanking sector fund are few examples of the sector fund. C. ii. Thematic Funds: These fund’s asset-allocati9n and investment-universe are structured on a “theme”. Not asrestrictive as sector funds, the theme could run well across sectors, such UTI infrastructure Fund andUTI Services Fund. C. iii. Offshore funds: These funds, invest in equity in one or foreign countries there by achieving diversificationacross the country’s borders. However they also have additional risks-such as foreign exchange, raterisk-and their performance depends on the economic conditions of the countries they invest in offshoreequity funds may invest in a single country ( hence riskier) or many countries ( hence morediversified). India Fund, India Growth Fund, Columbus India Fund are varieties of Offshore FundsUTI MF launched in different times. C. iv. Small –Cap equity Funds: These funds invest in shares of companies with relatively lower market capitalization than thatof big, blue chip companies. They may thus be more volatile than other funds, as smaller companiesshares are not very liquid in the markets. We can think of these funds as a segment of specialty funds.In terms of risk characteristics, small company funds may be aggressive growth or just growth type.In terms of investment style, some of these funds may also be “value investors”. C. v. Option Income-Funds : These funds do not yet exit in India, but option income funds write options on a significant partof their portfolio. While options are viewed as risky instruments, they may actually help to controlvolatility. If properly used. Conservative option funds invest in age, dividend paying companies.And then sell options against their stock positions. This ensures a stable income stream in the form ofpremium income through selling options and dividend. Now that options on individual shares havebecome available in India, such funds may be introduced. 31
  32. 32. D) DIVERSIFIED EQUITY FUNDS: A fund that seeks to invest only on equities, except for a very small portion in liquid moneymarket securities, but is not focused on any one or few sectors or shares, may be termed a diversifiedequity fund. While exposed to all equity price risk diversified equity fund seek to reduce the sector orstock specific risk through diversification. They have mainly market risk expose. Such generalproposal proposes but diversified funds are clearly at the lower risk level than the growth funds . D. i. Equity Linked Saving Schemes: an Indian variant In India, the investors have been given tax concessions to encourage them to invest in equitymarkets through these special schemes. Investment in these shames entitles the investor to claim anincome tax rebate, but usually has a lock-in period before the end of which funds cannot bewithdrawn. These funds are subject to the general SEBI investment guidelines for any ‘equity’ funds,and would be in the diversified equity fund category. However, as there are no specific restrictions onwhich sectors these funds ought to invest in, investors should clearly look for where the fundmanagement company proposes to invest and accordingly judge the level of risk involved. UTI ishaving UTI Equity Tax Savings Plan in this category. This scheme provides tax benefit under sec 80©of Income Tax Act 1961. The investments are locked for three years. Generally these schemes arehighly diversified equity funds invested across the sectors of the economy. E. EQUITY INDEXES FUND:- An index fund tracks the performance of a specific stock market index. The objective is to matchthe performance of the stock market by tracking and index that represents the overall market. Thefund invests in shares that constitute the index and in the same proportion as the index. Since theygenerally invest in a diversified market index portfolio, these funds stake only the overall market risk,while reducing the sector and stock specific risks through diversification. In India the index fundsgenerally track NIFTY ad BSE Sensex. UTI Master Index Fund is a variety of equity Index Fundwhich tracks BSE Sensex. UTI Nifty Index fund is a variant of such fund tracks NIFTY. These twofunds are best of the Index funds in the Indian Mutual Industry. F. VALUE FUNDS: The growth funds too reviewed above hold shares of companies with good or improving profitprospects, and aim primarily at capital appreciation. They concentrate on the future growth prospects,may be willing to pay high price/earnings multiples for companies considered to have good potential.In contrast to the growth investing, other fund follow value investing approach. Value funds try toseek out fundamentally sound companies whose shares are currently under priced in the market.Value funds will add only those shares to their portfolios that are soloing at low price earnings ratios,low market to book value ratios are undervalued by other yardsticks.Value funds have the equity market price fluctuation risk, but stand often at a lower end of the riskspectrum in comparison with the growth funds. Value stocks may be form a large number of sectorsand therefore diversified. However, value stocks often come from cyclical industries. Price of suchshares may fluctuate more than the overall market in both bull and bear markets, making such valuefunds more risky than diversified funds in the short term. However, proponents of value investingrecommend it as a long term approach. In the long term, value funds ought to be less risky thangrowth funds or even equity diversified funds.It picks up the stock considering its future potentials butundervalued today to their intrinsic value and which will create wealth for the various stake holders in 32
  33. 33. the medium to long term, Investment tools like low P/E, Low P/Book, value and positive EVA(Economic Value Added) will be used to identify these types of stocks. G) EQUITY INCOME FUNDS: Usually income funds are in the debt funds category as they target fixed income investment.However, there are equity funds that can be designed to give the investor a high level of currentincome along with some steady capital appreciation, investing mainly in shares of companies withhigh dividend yields.As an example an equity income fund would invest largely in power/utility companies shares ofestablished companies that pay higher dividends and whose prices do not fluctuate as much as othershares. These equity funds should therefore be less volatile and less risky than nearly all other equityfunds. 1.8 Hybrid Fund-Quasi Equity/ Quasi Debt:-We have seen that in terms of the nature of financial securities held, there are 3 major mutual fundtypes: money market, debt and equity. Many mutual funds mix these different types of securities intheir portfolios. Thus, most funds, equity and debt, always have some money market securities in theirportfolios as these securities offer the much needed liquidity. However, money market holdings withconstitute a lower proportion in the overall portfolios of debt or equity funds. There are funds that,however, seek to hold a relatively balanced a holding of debt and equity securities in their portfolios.Such funds are timed “hybrid funds” as they have dual equity/ bond focus. Some of the funds in thiscategory are described below. a) Balanced Funds: A balanced fund is one that has portfolio comprising debt instruments, convertible securities, andpreference and equity shares. Their assets are generally held in more or less equal proportion betweendebt/money market securities and equities. By investing in mix of this nature, balanced funds seek toattain the objectives of income moderate capital appreciation on preservation of capital, and are idealfor investors with a conservative and long term orientation. b) Growth –and-income Funds: Unlike income focused or growth focused funds, these funds seek to strike a balance betweencapital appreciation and income for the investors. Their portfolios are a mix between companies withgood dividend paying record as and those with potential for capital appreciation. These funds wouldbe less risky than pure growth funds, though more risky than income funds. c) Asset allocation Funds: Normally, an equity fund would have its primary portfolio in equities most of the time. Similarly, adebt fund would not have measure equity holdings/ In other words their “asset allocation” ispredetermined within certain parameter.However, there do exist funds that follow variable asset allocation policies and move in and out of anasset class (equity, debt, money market, or even non-financial asset) depending upon their outlook forspecific markets. In many ways these funds have objective similar to balanced funds and may seek todiversify into foreign equities, gold and real estate backed securities in addition to debt instruments,convertible securities, and preference and equity shares. Asset allocation funds that follow more staleallocation policies (which hold relatively fixed proportion of specific categories) are more like 33
  34. 34. balanced funds. On the other hand, funds that follow more flexible allocation policies (which varytheir waiting depending upon the fund manager’s outlook) are more akin to aggressive growth orspeculative funds. The former are for investors who prefer low risk and stable return. The later carryhigher risk and potential for higher return because of the flexibility enjoyed by the fund managers.1.9 Commodity Fund:While all of the debt /equity/ money market funds invest in financial assets, the mutual fund vehicle insuited for investment in any other for example-physical asset. Commodity funds specialize ininvesting in different commodities directly or through share or commodity companies or throughcommodity future contracts. Specialized funds may invest in a single commodity or a commoditygroup such as edible oils or grains, while diversified commodities funds will spread their assets overmany commodities.A most common example of commodity funds is the so-called precious metal funds. Gold fundsinvest in gold, gold futures or shares of gold mines. Other precious metals funds such as platinum orsilver are also available in other countries. They may take expose to more than one metal to get somebenefit of diversification. In India a gold fund may hold potential, given a large public holdings andinterest in gold. However, commodity funds have not yet developed.1.10 Beat Estate Funds:-Specialized real estate funds would invest in real estate directly, or may fund real estate developers, orlend to them or buy shares of housing finance companies or may even buy their securities assets. Thefunds may have a growth orientation or seek to give investors regular income. There has recently beenan initiative to offer such an income fund by the HDFC.The most important question that arises in the time of investment is that where to invest, or which kindof asset to invest in, here arises the needs of allocation of investment approach suggested by BoggleBogie starts with the fundamental asset allocation advice given by one of the stalwarts of investmentplanning, Benjamin Graham, who advocate 50/50 split between equities and bond, the common senseapproach to start.With when value of equities goes up, balance can be restored by liquidating past of equity portfolio,and vice versa. This is the basic defensive or conservative approach. Benefits include not beingdrawn into investing more and more into equities in raising market. Bothy the gains and losses will belimited. But it got to get about half of the returns of a rising market and to avoid the full losses of afalling market.Graham’s approach can be translated into reality by holding different kinds of portfolios of funds.Boggle suggests the following combination;1 A basic managed portfolio 50% in diversified equity ‘value’ funds2 A basic indexed portfolio funds 25% in a government security funds 50% in total stock market /index 50% in total bond market portfolio 34
  35. 35. 3 A simple managed portfolio 85% in a balanced 60/40 fund 15% in medium term bond fund4 A complex managed portfolio 20% in diversified equity funds 20% in aggressive growth funds 10% in specialty funds 30% in long-term bond funds 20% in short –term bond funds5 A readymade portfolio Single index fund with 60/40 equity/bond holding.AWARENESS OF RISKS IN MUTUAL FUND INVESTINGThe right level of risk tolerance of any investor depends upon his age, the amount of investible fundsavailable, and his financial circumstances including income level, job securities, family size etc.EVALUTATING THE RISK OF A MUTUAL FUND:-In generic sense, risk means the possibility of financial loss, in the investment world, the possibility ofloss is considered to arise from the variability of earning from time to time, in mutual fund case itrefers to the return of a fund. A fund with stable and positive earnings is less risky than a fund withfluctuating total return. “Risk” is thus with volatility of earning, a statistical measurable concept.Measurement of a specific fund’s risk is by now a highly evolved though somewhat Technical andquantitative exercise. It is neither possible nor necessary for a fund distributor to learn or get involvedwith sophisticated statistical techniques used to measure fund risks.EQUITY FUNDSVolatility of an equity mutual fund portfolio comes from:a) The kind of stocks in the portfolio (growth or value, sell or big)b) The number of stocks in, or degree of diversification of, the portfolio (smaller portfolio may bemore volatile than large, diversified ones)c) Fund manager’s success t market timing (adjusting the asset allocation in response to asset classprice movement)A. Equity Price risks1. Company specific2. Sector specific3. Market level.Company specific risks have to researched and assessed by the fund’s analyst and portfolio managers,holding a large, say 15/20 –share portfolio, generally balanced out and diversified the company risks.Sectors or industries have risk too. Funds research and track the sector with good potential, again, themore the number of sectors is a portfolio sector risk. Specific sector funds clearly have more risk.Then comes the market risk which is not diversifiable, as it arises from broad economic other factor.Managers try to anticipate bear or bull phases and try to adjust their portfolio asset allocation. If equityindex futures and options are available, managers try to ‘hedge’ their portfolio with these instruments. 35
  36. 36. B. MARKET CYCLE:Market cycle are extensively researched and analysed in the U.S by agencies. Such as Lipper. InIndia independent agencies, broker and newspapers are doing some of this analysis. It is important tosee how a portfolio or a share performs over a well-defined cycle than over some arbitrary, calendarperiod. It is also important to understand that equity investment is basically more rewarding in thelong-term. Any equity fund can be more risky as a short-term investment, sticking to a good fundhelps.C. RISK MEASURES:Risk, define as volatility, is measured by the statistical concept of standard deviation. SD measuresthe fluctuation of a fund’s returns around mean level. Use monthly results of an equity fund. Tabulatereturns, calculate mean returns. Calculate variances of each month’s returns from the mean. Squarethis number. Sum up. Divide by the number of period of observation. Compute the overall variancesor the standard deviation. Another measure of fund’s risk is BETA COFFICIENT. Beta relates a fund’s returns with a marketindex and measure the sensitivity of the fund’s returns to change in the market index. A beta of 1means the fund move with the market, typically in case of conservative portfolio. Higher betaportfolio gives greater returns in rising market and is riskier in falling market. A good measure offund risk level. But, remember beta is based on past performance.Boggle’s EXMARK or a number known as “R-SQUARED” is used to help spot questionable betas. R-Squared measures how much of a fund’s fluctuations is attributes to movement in the overall market,from 0 to 100 percent. Overall, standard deviation is the best of risk, even though it is also based onpast returns. It is the broader concept than beta that measures the total risk, not just market risk. It isan independent number. Risk of both specialized and diversified funds, and both equity and debt fundare measurable with standard deviation.One can see that risk and return are inextricably related. So it make sense to measure what is calledRISK ADJUTMENT PERFORMANCE, SARPE AND TREYNOR ratio do that, both of whichcompute the ‘risk premium’ o a funds difference between the funds average and the return of a riskGovernment security or treasure bill over a given period. A simple way of getting a fund’s risk levelis to see tis PRICE/EARNING MULTIPULE. This is simply the weighted average of the price/earnings ratio of all the stocks held in its portfolio. Higher the fund P/E as compared to the market orother funds, the higher the probability of its fall in future.Increasingly one can see these numbers being presented in the published analysis of fund performanceand their risk level. In India, three sources of such information are the fund tracking agencies, researchreport from broker another, and funds’ own report.DEBT FUNDS:-Debt fund are expressed to credit risk. Risk of loss through borrower defaults, and interest rate riskthat comes from the average maturity of the fund’s portfolio. Look at two simple measures of risk.First, what has been the default experience of the in the pat and it’s non-performing –asset at present?Second, look t the average maturity or duration of a portfolio. To ensure that it matched with the riskappetite of an investor. The longer the maturity of a portfolio, the greater the risk it has from interestrate fluctuation. 36
  37. 37. Once one has broadly understood the investor’s risk appetite, arrived at an asset allocation plan forhim, and devised a mutual fund action plan by choosing the funds with the risk level that suit theinvestor.RECOMMENDING MODEL PORTFOLIO AND SELECTING THE RIGHT FUNDSA. DEVELOPING A MODEL PORTFOLIOI. Avoid Ad-hoc investment advice or decision:There was a time when Indian investor did not have many investment schemes.To choose from, it was then for the agent to simply point out the benefits of any currently availablescheme to a prospective investor. The investor then decides whether the scheme was suited to hisneeds or not. Now the Indian mutual fund industry a wide choice if investment scheme, unlike everbefore.Different schemes suited to different investor needs. In this scenario, an investor not only needsadvice on how to choose from this variety of investment options available, but also a properinvestment strategy that is suitable to his situation and needs. The role of the gent in this scenario is tohelp investor develop the approach to investing, not just offer ad-hoc advice or simply point out thefeatures and benefits of different options. Recommending.A suitable investment to an investor can mean loss of customers for the agent.II. Jacob’s four step program: developing a model portfolio: Work with investor to develop long-term goals:As Jacobs puts it, mutual fund inviting is a “get-rich –quick scheme”. Investors must have aninvestment programme and ought to set their own sight on long-term objective. In other words,investment decisions ought to be taken in terms of clear, long-term goals, not on an ado basis.Each investor should be advised expect only realistic wealth accumulation goals, no dramatic resultovernight. For example, in the current Indian market conditions, investors can expect 18-20% pluslong term result in equity investment, 10-12% returns in debt investment and 7-8% in money market.Investment. “This expectation can change over time. Specific investment of funds can give greaterreturn, but higher returns will be in most cases achieved by investors or their fund mangers’ takingsgreater risks. Determine the asset allocation of the investment portfolio:So how can decide what level of risk to assume? One practical answer to that question is risk dependupon the nature of investment: equity debt or money market securities and the proportion if these threetypes of securities in any portfolio. This is called asset allocation.Each investor ought to be advised to allocate his total investment fund three classes in proportion thatsuit is personal and financial conditions. There is no such thing as an ideal asset allocation valid forall investor. That is why, the mutual fund agent need to act as investment advisor and: • Must first get know their investors, They ought to understand each investor’s availability of fund, the size of his portfolio, beside his personal situation as expressed by the size of his family, his own age, the nature of his work, etc. • Only after understanding the investor’s need, go on to recommend an asset allocation plan that would be appropriate to his need. 37
  38. 38. III. Determination the sector distribution:Once the liquidity, income and growth asset distribution is determined, the Advisor can determine howmuch allocation to make sector of the mutual fund, liquidity needs are generally satisfied with MoneyMutual funds. Income needs are to be satisfied with debt funds or Equity income funds and growthasset can be built up with equity funds, either conservative or aggressive growth.IV. Select specific fund manager’s ad schemesThis step is required to translate the amounts to be invested in each mutual fund sector into actualdecision on which scheme on which fund manager to select for investments, as the investor wouldhave a choice of many debt funds or money market mutual funds or even balanced fund.MODEL PORTFOLIOSIn preparing an investment program, the investor or the advisor would have to deal with investors atdifferent stage of their life cycle and therefore with different needs. Each type of investor may beadvised to have some typically suitable model portfolio, Jacobs gives four different portfolios,summarized below.A good exercise will have be to find out the Indian mutual fund equivalent recommendations forIndian investors, using the above guide below is one set of recommendation on the suggested assetallocation and model portfolio for investors categorized by wealth cycle stages, and using types ofmutual funds available in India.TYPES OF INVESTORS AND RECOMMENDED INVESTMENT STRATEGIES1. INVESTOR IN THE ACCUMULATION PHASE:During this phase, clients are looking to build wealth because their financial goals are quite some timeaway ad investment can be made for the long-term. For such client, the following asset allocation maybe appropriate. ASSET ALLOCATION Diversified equity, sector and balance fund 60% to 80% Income and gilt fund 15% to 30% Liquid funds and bank deposits 5%2. INVESTORS IN THE TRANSITION PHASE:During this phase, one or more of the client’s goals are approaching and clearly in sight. If a salariedexecutive is planning to retire at 60 years of age, he should start preparing about 3 years in advance bygradually transitioning from growth to income generating investment. Likewise, a couple in theirmid-40s who have children approaching the age of higher education marriage, should gradually startconverting some of their equity investment into income and cash fund to prepare for these financialcommitment.3. INVESTOR IN DISTRIBUTION OR REPAPING PHASE:This is the chasing out stage. For example if the client has retired, investment need to generate incomefor a comfortable post-retirement life. Hence the financial planner has to ensure there is enoughinvestment in fixed income fund to support the client. If the post-tax return expected are 8% perannum, then the client need to set aside about 150 times their monthly requirement in income fund, 38
  39. 39. and opt for a dividend plan or systematic withdrawal plan. Some investment should certainly be left ingrowth asset like equities, because only this can provide a hedge against inflation. This is becausewhile expenses will ASSET ALLOCATION DIVERSIFIED EQUITY 35% TO 30% ANDBALANCED FUNDS INCOME FUNDS 65% TO 80% CASH FUNDS 5%Rise over the year, the inflow from fixed income investment may not, all other thing being constant, atypical asset allocation for client in the requirement stage could be: If the cash inflow from income fund is not sufficient to meet the monthly requirement, a retiredcouple can adopt a couple of strategies. • Sell some of their fixed and hard asset, this will release fresh cash flow into system which can help fund the gap, and • Make small monthly withdrawal from the principle of both their equity and fixed income investment to bridge the gap. There is no rule that client should not gradually draw down on principle, as long as they don’t outlive all their source of money. • In the case of a client who want to buy a home or fund a children’s education, the financial planner can advise the client to liquidate a combination of equity and income investment to come up with what’s required.4. INVESTOR IN INTER-GENERATION TRANSFER PHASE :Younger client up to their early 50’s would depend on life insurance policies to take care of the next generation in event of death, for older investors, who want to transfer their wealth, the recommended investment strategy will depend upon the beneficiaries : • Children: if the children are grown up, then leaving behind a balanced combination of growth and income funds may be appropriate for them. • Grandchildren: If the grandchildren are young, then the growth fund may be best, as this group has a log of time available for the investment to grow in value. • Charitable causes: Typically income funds are bet to support such endeavors, as they have the capacity to provide current income.5. INVESTOR IN THE SUDDEN WEALTH STAGE:The financial planner should advice client who acquire sudden wealth. • To take into account the effect of taxes, because this onetime windfall may be greatly reduced after taxes have taken bite. • To keep the money in safe, liquid investment while they take their time on deciding what to do with the money. This advice is very useful because client tend to spend the money immediately, or just give it away recklessly in the first flush of getting a big amount. By giving them time, client will act more rationally and hey can then be advised to make the appropriate investment at a later stage.6. FINANCIAL PLANNING FOR AFFLUENT INVESTOR:• Wealth creating individuals : For such investors, a 70% to 80% allocation to diversified equity and sector funds would provide the kind of aggressive plan that they may be looking for. It should be kept in mind that wealthy 39
  40. 40. investor have a higher risk bearing capacity as even the incurrence of losses may not seriously impair their lifestyle or ability to fund their normal routine expense.• Wealth preserving individuals : For such investor, a conservative portfolio with a 70% to 80% exposure to income, gilt and liquid fund would be appropriate, with the remaining in low-risk diversified equity or balanced funds. The financial planner should recommend a low-risk investment strategy for such client, because these investors have enough already, do not need to bear any risk, and are likely to go through unnecessary trauma if their investment decline in value. FINANCIAL PLANNINGEach one of us needs “finance” at various stages of line, and to ensure that one should have the moneyavailable at the right time, when needed. Usually, personal financial needs are of two types-protection and investment. An earning member providing for his family to have continued incomeafter his death is an example of a protection need. Providing for the marriage expenses of a daughteris an example of an investment need. “Financial planning is an exercise aimed at identifying all the financial needs of an individual,translating the need into monetarily measurable the future, and goals at different times in planning thefinancial investments that will allow the individual to provide for and satisfy his future financial needsand achieve his life’s goals”. The objective of financial planning is to ensure that the right amount ofmoney is available in the right hands at the right point in the future to achieve an individual’s financialgoals. BENEFITS OF FINANCIAL PLANNING:It may be necessary for a person to save for money years to create adequate income in the retirementphase. Certain financial product and technique can help to reduce the amount of tax one has to pay. Itis important that financial plans are tax sufficient. The simplest financial plans will involve detailknowledge of law, taxation and investment principles. Amidst this complex environment for aninvestor, financial planning provides direction and meaning to financial decisions. It allows one tounderstand how each financial decisions one makes affect other areas of one’s finances. For example,buying a particular investment product might help one save adequately to finance his/her children’shigher education or it may provide enough for a comfortable retirement. By viewing each financialdecision as part of a whole, one can consider its short and long term effects on one’s life goals. Onecan also adapt more easily to changes in life and feel more secure that one’s goals are on track.Mutual fund distributors, who become a well-trained financial planner, also have many benefits:A. Ability to establish long term relationship : A financial planner is not just selling products, but is instead taking responsibility for the financial wellbeing of his client. With such an approach, it is easy to build lasting relationship, unlike a transaction oriented, where customer has to be found a new for every new investment. Also the financial planner ideally links his reward and fees to the client financial success and the achievement of their financial goals. On the other hand, a seller of a product makes the commission regardless of how well or not the client fares, so the client may find it difficult to consider such a product sales person as his guide. 40