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Comparision of investment in mutual fund and equity

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Comparision of investment in mutual fund and equity

  1. 1. JAIPURIA INSTITUTE OF MANAGEMENT,LUCKNOW MUTUAL FUND INVESTMENT ROUTE IS SAFER WAY OF INVESTMENT IN EQUITY SHARES THAN DIRECT INVESTMENT IN STOCK MARKET FOR RETAIL INVESTOR. F.M.S. PROJECT TO, Mr.P.K.SRIVASTAVA 12/19/2013 REPORT BY GROUP 1PRAKRITI FS40 PANKAJ KUMAR SINGH FS34 PARITOSH SINGH FS35 ROMANSHU VARSHNEY FS64 RAJNEESH SHARMA FS44
  2. 2. Table of Contents ACKNOWLEDGEMENT ................................................................................................................................... 4 MEANING ............................................................................................................................................ 5 A. B. HERE ARE SOME OF THE ADVANTAGES WHICH MUTUAL FUNDS’ PROVIDES ITS INVESTORS’ VIS-À-VIS THE DIRECT ROUTE TO EQUITY INVESTMENTS: ................................. 5 I. Diversification................................................................................................................................... 5 II. Professional Management ................................................................................................................. 6 III. Lower Entry Level ........................................................................................................................ 6 IV. Economies Of Scale ...................................................................................................................... 6 Innovative Plans For Unit-Holders ................................................................................................... 6 V. VI. Liquidity........................................................................................................................................ 7 VII. Minimizes Loss ............................................................................................................................. 7 C. INVESTING IN EQUITIES HAS A RISK-REWARD ASSOCIATION WITH IT. ................................................ 7 D. CONSIDERATION FOR INVESTMENT IN EQUITIES: .................................................................. 8 Determine Your Risk Taking Capacity:............................................................................................ 8 Align Investments To Overall Financial Plan: .................................................................................. 8 E. DIRECT INVESTMENT VERSUS INVESTMENTS THROUGH MUTUAL FUNDS .................. 9 F. COMPARISION OF TOP THREE MUTUAL FUND OF DIFFERENT EQUITY SECTORS VS DIRECT EQUITY INVESTMENT. ................................................................................................................................................ 9 1) 2) Fund Name- Birla Sun Life Mutual Fund .................................................................................... 12 3) G. Fund Name- ICICI Prudential Mutual Fund ................................................................................... 9 Fund Family- UTI Mutual Fund .................................................................................................... 14 CONCLUSION:...................................................................................................................................... 17 1
  3. 3. TABLE OF TABLE Table 1......................................................................................................................................................... 10 Table 2......................................................................................................................................................... 12 Table 3......................................................................................................................................................... 15 2
  4. 4. TABLE OF FIGURE Figure 1 ....................................................................................................................................................... 10 Figure 2 ....................................................................................................................................................... 11 Figure 3 ....................................................................................................................................................... 11 Figure 4 ....................................................................................................................................................... 12 Figure 5 ....................................................................................................................................................... 13 Figure 6 ....................................................................................................................................................... 14 Figure 7 ....................................................................................................................................................... 15 Figure 8 ....................................................................................................................................................... 16 Figure 9 ....................................................................................................................................................... 16 3
  5. 5. ACKNOWLEDGEMENT We would like to express our special thanks of gratitude to my sirMr.P.K.SRIVASTAVAwho gave us the golden opportunity to do this wonderful project on the topic“Mutual Fund Investment Route Is Safer Way of Investment in Equity Shares than Direct Investment in Stock Market for Retail Investor. Elaborate By Studying The Performance Of Top 3 Equity Mutual funds Over The Last 3 Year Period Vis-A-Vis Performance Of Stock Market Index During The Same Period”which also helped us in doing a lot of research and we come to know about so many new things. I am really thankful to you. We are making this project not only for marks but also to increase our knowledge … Thanking you. 4
  6. 6. A. MEANING Mutual funds are investment vehicles that pool money from many different investors to increase their buying power and diversify their holdings. This allows investors to add a substantial number of securities to their portfolio for a much lower price than purchasing each security individually. A mutual fund is set up in the form of a trust that has a Sponsor, Trustees, Asset Management Company (AMC). The trust is established by a sponsor(s) who is like a promoter of a company and the said Trust is registered with Securities and Exchange Board of India (SEBI) as a Mutual Fund. The Trustees of the mutual fund hold its property for the benefit of unit holders. An Asset Management Company (AMC) approved by SEBI manages the fund by making investments in various types of securities. The trustees are vested with the power of superintendence and direction over the AMC. They monitor the performance and compliance of SEBI regulations by the mutual fund. The trustees are vested with the general power of superintendence and direction over AMC. They manage the performance and compliance of SEBI Regulations by the mutual fund. B. HERE ARE SOME OF THE ADVANTAGES WHICH MUTUAL FUNDS’ PROVIDES ITS INVESTORS’ VIS-À-VIS THE DIRECT ROUTE TO EQUITY INVESTMENTS: I. Diversification Investing in stocks directly has one serious drawback - lack of diversification. By putting all money in just a few stocks, the investor subjects himself to considerable risk should even one of those stocks decline. On the other hand, a mutual fund scheme by investing in several stocks tries to overcome the risk of investing in just 3-4 stocks. By holding say 20 to 30 stocks, the fund avoids the danger that one rotten apple will spoil the whole portfolio. Mutual fund schemes own a couple of dozen to more than a hundred stocks in their portfolio. A diversified portfolio can generally 5
  7. 7. hold its downside even if a few stocks fall dramatically. This helps in containing the overall risks. II. Professional Management No matter how sound an investment sense a stock investor may have, sooner than later he will realize that active portfolio management requires considerably more skill, not to mention a lot of time too. There is an ocean of a difference between part-time stock-picking and full-time fund management. Now compare this to mutual fund investing; the mutual fund investor does not have to track the prospects and potential of companies in the portfolio. Mutual funds are managed by skilled professionals who continuously monitor these companies and take decisions on whether to buy, sell or hold a particular stock in the portfolio. III. Lower Entry Level There are few quality stocks today an investor can enter into, with just Rs 3,000 – Rs 5,000. Investing in stocks can be an expensive affair. Sometimes with as much as Rs 5,000 an investor can buy just a single stock. The minimum investment in a mutual fund may be as low as Rs 500. This implies that with just Rs 500, a mutual fund investor can take exposure in a fund portfolio of 20-30 stocks. The entry barrier in mutual funds is low so as to encourage investor participation. IV. Economies Of Scale By buying a handful of stocks the stock investor loses out on economies of scale. This tends to pull down the profitability of the portfolio. If the investor buys/sells actively, the impact on profitability would be that much higher due to the various charges involved. Due to frequent purchases/sales, mutual funds incur proportionately lower trading costs than individuals. Lower costs translate into significantly better investment performance and returns to the investors. V. Innovative Plans For Unit-Holders By investing in the stock market directly, the investor deprives himself of various innovative plans that are offered by fund houses. Fund houses offer automatic re-investment plans; systematic investment plans (SIPs), systematic withdrawal plans, asset allocation plans, triggers, etc. These 6
  8. 8. features allow investors to enter/exit or switch from funds seamlessly and on the whole facilitate investment ease significantly. This is something the investor can never duplicate individually. VI. Liquidity A stock investor may not always find the liquidity in a stock to his liking. There could be days when the stock is hitting the up / down circuit and buying/selling is curtailed. This does not allow him to enter / exit a stock. Such liquidity problems are not confronted by a mutual fund investor.Sometimes a mutual fund may be more liquid than other investment avenues. For instance, there are days when there are no buyers or sellers for an individual stock. But an open-ended fund can be bought / sold at that day's NAV by simply approaching the fund house or its registrar or a distributor. VII. Minimizes Loss Investing in mutual funds assures more safety of investment than investing directly in stocks. A company may shut shop or may go bankrupt and according to the law, the equity shareholders are paid last, after paying all dues to the creditors of the company. A mutual fund may lose money, but may not go down as easily as a company. The legal structure and stringent regulations that bind a mutual fund safeguard a unit-holder's interests far better. As highlighted above, investing in mutual funds has some unique benefits that the direct stock investor would find it difficult to duplicate. By no means are we are stating that mutual fund investing is a sure-shot way of logging growth. This can be done even by investing directly in stocks. However, mutual funds offer the investor a relatively safer and surer way of picking growth minus the hassle and stress that has become synonymous with stocks over the years. C. INVESTING IN EQUITIES HAS A RISK-REWARD ASSOCIATION WITH IT. Before we take the plunge, here are a few things you need to remember:  Investing in equities is highly risky, but at the same time, can get you attractive returns over the long term. Direct investment in equities is possible by purchasing shares of companies listed on stock exchanges. You can also 7
  9. 9. enter equities by investing in mutual funds, getting into portfolio management schemes or playing through the derivatives market by taking exposure to futures, options and structured products. With such a plethora of options available, it is sometimes confusing as to what is the best mode of entering the equity markets.  The mode of investing in equities depends on your risk tolerance and risk aptitude, in addition to your goals and financial situation. Those with high risk appetite would wish to invest directly in stocks or take an exposure to derivative products. In these methods, although the returns would be high, the risk is also very high, which may sometimes result in erosion of your investment.  The risk-averse would prefer to enter equities by investing through mutual funds. Here, although mutual funds mirror the stockmarket performance, you may get slightly lower returns than if you would have invested directly in high-return stocks.  As a long-term strategy, it is best to invest in mutual funds, especially if you do not have the time and knowledge for direct stockmarket investing. D. CONSIDERATION FOR INVESTMENT IN EQUITIES: Here are a few things you must consider when you invest in equities: Determine Your Risk Taking Capacity: As mentioned earlier, equity investments come with high risks. You may sometimes even lose out on your initial investment amount. Hence, you must think of getting into equities only if you are comfortable with the volatility associated with stock markets, especially over the short term. Equity exposure should be based on your goals, age and risk profile. Align Investments To Overall Financial Plan: The objective and duration of your investment are important determining factors. Your investments should be aligned to your financial goals. Equity mutual funds are best suited for long-term goals, with duration of over five years. 8
  10. 10. E. DIRECT INVESTMENT VERSUS INVESTMENTS THROUGH MUTUAL FUNDS Under RGESS there is a limited flexibility in terms of investment. As per RGESS, investments made in shares which are part of BSE-100 or CNX 100 index are only eligible. Additionally listed shares of Navratna, Maharatna and Miniratna publicsector undertakings, and initial public offers (IPO) of PSUs, whose turnover is more than Rs 4,000 crores, are also eligible for investment. If you decide to invest through mutual funds, you end up paying costs which depend upon the slab and can go as high as 3% of the corpus. This is definitely higher than the investment expense that you will end up incurring. With brokerage charges nose-diving, the cost of charges will be less than 3% for you. Additionally since the mutual funds can invest in limited stocks, benefits arising from skills that mutual funds have will get diluted. In the earlier version of equity linked tax savings scheme i.e. ELSS, mutual funds could not perform exceptionally well. Since mutual funds will redeem RGESS scheme after 3 years, there is limited time available to mutual funds to perform, while as an individual investor you can stock for longer period in the investment. Mutual funds offer one advantage over direct investment since mutual funds are allowed to churn portfolio which individual investors are not allowed for a year under RGESS. Of course, other conventional advantages of investment through mutual fund stay. Since investors in RGESS will be first time investors, it will be better to start investments through mutual funds in spite of all shortcomings that mutual funds have. F. COMPARISION OF TOP THREE MUTUAL FUND OF DIFFERENTEQUITY SECTORS VS DIRECT EQUITY INVESTMENT. 1) Fund Name- ICICI Prudential Mutual Fund Fund Class- Large Cap 9
  11. 11. Comparison of return of this fund and Nifty over 5 years Figure 1 Fund Return over five years Table 1 1 year (%) 12.3 2 year (%) 19.8 3 year (%) 7.3 5 year (%) 20.3 Comparison of return of this MF with some of its holding 10
  12. 12.  Bharti Airtel return over 5 years Figure 2 Price on 13th of April 2009 is 337 Price on 6th of December 2013 is 331 So its return over 5 years of Airtel is -1.8%  Reliance Industries return over 5 years Figure 3 Price on 6th of April 2009 is 836 11
  13. 13. Price on 13th of December 2013 is 860 So its return over 5 years is 2.87% Here return of Large cap equity mutual fund is 20% over five years but stocks have given poor return over 5 years of span. 2) Fund Name- Birla Sun Life Mutual Fund Fund Class- Small & Mid Cap Comparison of return of this fund and Nifty over 5 years Figure 4 Fund Return over five years Table 2 1 year (%) 7.1 2 year (%) 20.2 3 year (%) 9.2 5 year (%) 27.8 Comparison of return of this MF with some of its holding 12
  14. 14.  Jain Irrigation Systems return over 5 years Figure 5 Price on 4th of February 2009 is 65 Price on 10th of December 2013 is 70 So its return over 5 years is 7.6% 13
  15. 15.  Fulford (India) returns over 5 years Figure 6 Price on 27th of April 2009 is 480 Price on 10th of December 2013 is 615 So its return over 5 years is 28.12% Here return of mid and Small cap equity mutual fund is 28% over five years but some stocks have given poor return while some have given good return over 5 years of span. 3) Fund Family- UTI Mutual Fund FUND CLASS Diversified Equity Comparison of return of this fund and Nifty over 5 years 14
  16. 16. Figure 7 Fund Return over five years Table 3 1 year (%) 2 year (%) 3 year (%) 5 year (%) 7.7 18.8 10.6 24.8 Comparison of return of this MF with some of its holding 15
  17. 17.  Ashok Leyland returns over 5 years Figure 8 Price on 8th April 2009 is 10 Price on 10th December is 16 So return of this stock is 6%  Suzlon Energy return over 5 years Figure 9 16
  18. 18. Price on 17th April 2009 is 58. Price on 13th December 2013 is 9. So return of this stock is -84%. Here return of Diversified equity mutual fund is 25% over five years but stocks have given poor return over 5 years of span. G. CONCLUSION: Investments may be in direct equities or mutual funds require a lot of time and energy. Each approach has its own advantages and disadvantages. Direct equity investing is considered more dynamic by the investor community and thus, those who can keep a continuous tab on the equity markets prefer the direct equity route as it gives them much needed zing and excitement. However, the dynamism in the direct equity investment comes with risk. Hence, only those investors who are able to understand the nitty-gritty of the equity markets and who are able to devote time and energy can adopt this route to equity But not all investors are same in their intelligence and understanding levels. And even if someone has the ability to understand the direct equity route, he or she lacks the time to devote to such investment activity and thus prefer taking the indirect route to equity investments which is mutual funds. Mutual funds provide the much needed ease while investing in the equity asset class. As it’s shown above that how equity mutual funds of different categories like large cap, mid cap, small cap and diversified have given average return of almost 23% over 5 years of span and on the other hand some stocks those mutual fund have given return of less than 10% over five years or even some have given negative returns also. So this shows that how risky it could be investing in individual stocks in comparison to investing through mutual fund. Though mutual funds haven’t given much return over 3 years of span but they have outperformed market over 5 years of span. 17
  19. 19. So according to me an individual should firstly decide the purpose of his or her investment than they should select investment plan according to it like if they want to go for short term investment of 1 or 2 years than they should go for some debt instrument or if they have long horizon for investment and they are looking to invest in equity market than rather than investing directly in some selected equities they should go for some top mutual fund schemes as investing directly in stock involves high risk and one may lose his or her money or may get small return and if they will choose the mutual fund scheme than they may get high return over five years of span. As return of some stocks have outperformed badly the return of the mutual fund schemes like some have given return of 400% to 500% but investor cannot be always sure that will get opportunity to pick such stocks as some have given negative return to. So to be on safe side and one should intelligently go for mutual fund scheme. 18
  20. 20. REFERENCES www.moneycontrol.com www.rbi.co www.businesstimes.com www.economicstimes.com 19

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