Project on Mutual Fund Industry & impact of exit & entry load on IFA segment.


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Its about how trends in mutual fund industry is changing and post entry load waiver & the resultant Impact On IFA segment.

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Project on Mutual Fund Industry & impact of exit & entry load on IFA segment.

  1. 1. A PROJECT REPORT ONChanging Trends in Mutual Fund Industry Post Entry Load Waiver & The Resultant Impact On IFA Segment SUBMITTED BYPREETI YADAV (M100700040)ORGANISATION: DSP BlackRock MUTUAL FUND COMPANY LTD.LOCATION: CHANDIGARH<br />ACKNOWLEDGEMENT<br />At the ecstatic time of presenting my project on<br />First of all, I bow the almighty God for blessing me with enough patience and strength to go through this challenging face of life.<br /><ul><li>I express my sincere thanks to DSP BlackRock Mutual Fund Company for giving me an opportunity to work with them through this summer project. It gives me a sense of great pride to acknowledge the fact that working on this project has added value to my learning process.
  2. 2. My humble thanks and feigned gratefulness to Mr. Bimal Jeet Singh, my company guide and Mr. Iqbal Bhatti who emitted signals of profound knowledge and deep insight without which it would have been difficult to give a physical shape to the project.
  3. 3. I would also like to thank Ms. Lipika Nangia and Ms. Nishi Kalia who supported me and help me to understand the practical working of the mutual fund industry.</li></ul>I wish to acknowledge with regards the staff and officials of the DSP BlackRock Mutual Fund Company Ltd. for their support during my internship. <br />Table of Content<br /><ul><li>Introduction of the Company
  4. 4. DSP Group Overview
  5. 5. Management of DSP Group
  6. 6. Main competitors
  7. 7. Financial statement analysis
  8. 8. Executive summary
  9. 9. Abstract
  10. 10. Objective of the study
  11. 11. Scope of the study
  12. 12. Introduction to project title
  13. 13. Concept of a Mutual Fund
  14. 14. Conceptual Framework of MF
  15. 15. Advantages & Disadvantages of MF
  16. 16. 10. Types of MF schemes
  17. 17. 11. Modes of Receiving Income Earned From MF Investment
  18. 18. 12. Investment Philosophy of DSP BlackRock MF
  19. 19. 13. Different scheme of BlackRock
  20. 20. 14. Growth of MF Industry in India
  21. 21. 15. Recent trends in MF Industry
  22. 22. 16. How to invest in MF Industry
  23. 23. 17. Fees & commission paid to MF
  24. 24. 18. How Financial Advisers get paid for selling MF?
  25. 25. 19. Changing distribution structure of MF
  26. 26. 20. Why an IFA?
  27. 27. 21. MF with NO distributors
  28. 28. 22. Literature Review
  29. 29. 23. Research Methodology
  30. 30. 1.1 Survey Analysis
  31. 31. 1.2 Objectives
  32. 32. 1.3 Sampling Method
  33. 33. 1.4 Research Instrument
  34. 34. 1.5 Assumption
  35. 35. 1.6 Limitation of study</li></ul>24. Performance Evaluation<br />25. How to calculate the value of a MF<br />26. Measuring MF Performance<br />27. Composition of the portfolio<br />28. Questionnaire Analysis<br />30. Bibliography<br />31. Annexures<br />Figures<br />Fig 1 Concept of MF<br />Fig 2 Structure of MF<br />Fig 3 Types of MF Schemes<br />Fig 4 Aggressive plan<br />Fig 5 Conservative plan<br />Fig 6 Fees paid to shareholders<br />Fig 7 Asset growth & shift in source of adviser’s compensation<br />Fig 8 Investment in MF<br />Fig 9 Decision Influencer<br />Fig 10 Risk appetite<br />Fig 11 safe/ secured returns<br />Fig 12 Income tax Incentives<br />Fig 13 Quality of service of MF agents<br />Fig 14 Selection of Investment Fund<br />Fig 15 Entry and Exit load<br />Introduction <br />DSP Group Overview<br /><ul><li>DSP Group Holds a 60% stake in DSP BlackRock Investment Managers.
  36. 36. The Kothari family of D.S. Purbhoodas and Co. is the promoter and owner of DSP Group.
  37. 37. Track record of over 140 years, one of the oldest financial services firms in India.
  38. 38. One of the founding members and first directors of the Bombay Stock Exchange (BSE).
  39. 39. Each generation of the DSP Group has seen a partner serving as President of the Bombay Stock Exchange, bearing testimony to the long-standing position DSP Group occupies in the Indian Financial arena.
  40. 40. Mr. Hemendra Kothari, Chairman of DSP BlackRock Investment Managers, has an experience of over 40 years in the financial services industry, and also served the Bombay Stock Exchange in the capacity of Vice President for three years after which he was elected as President in 1991-92.</li></ul>BlackRock holds 40% stake in DSP BlackRock Investment Managers Independent firm in ownership and governance.<br /><ul><li>Established in 1988, BlackRock is a public company (NYSE:BLK)
  41. 41. No majority owners
  42. 42. Majority of Board of Directors is independent.
  43. 43. Laurence Fink, Chairman& CEO since firm’s inception.</li></ul>Leader in creating solutions for clients<br /><ul><li>Strategies and services differentiated for clients.
  44. 44. Customizes solutions to meet risk/return objectives.
  45. 45. Innovative strategies and services within and across asset classes.
  46. 46. Client dialogues have resulted in advisory assignments.
  47. 47. Senior level of commitment to client service.
  48. 48. “One BlackRock” approach result in consistency & quality throughout firm.</li></ul>Pioneer in risk management and technology<br /><ul><li>Provides risk management and enterprise investment services for $ 9 trillion in assets.
  49. 49. BlackRock Solutions offers independent risk management products.</li></ul>DSP BlackRock<br />DSP BlackRock Investment Managers is a joint venture between DSP Group and BlackRock<br />With our three – dimensional approach to managing the organization, we seek to:<br /><ul><li>Ensure consistency on a global basis.
  50. 50. Allow for the tailoring of products and services according to client or local needs.
  51. 51. Promote teamwork among our employees worldwide; and
  52. 52. Facilitate operational integrity and efficiency.</li></ul>Our Values <br />Integrity<br /><ul><li>Demonstrate honesty, integrity and professionalism in all internal and external dealings. Maintain the highest standards of ethics.
  53. 53. We are fiduciaries and leaders in our industry. We understand the responsibility we carry.
  54. 54. We respect differences and learn from them. We take time to teach others.
  55. 55. We are open and honest in all our communications. We speak the truth.</li></ul>Values<br />Client focus<br /><ul><li>We listen carefully to our clients.
  56. 56. We put our clients first and at the heart of all we do.
  57. 57. We listen and deeply understand our clients businesses, risk and issues.
  58. 58. We help our clients better meet their investment goals.
  59. 59. We anticipate trends and help clients plot the future course.
  60. 60. Consistently exceed our client’s expectations. Make decisions close to our clients.</li></ul>Management - DSP BlackRock<br />NameDesignationShitin DesaiExecutive Vice ChairmanJennifer TaylorAdditional DirectorNameDesignationPradeep DokaniaDirectorAntonios BiniarisAdditional Director<br />Main Competitors <br />HDFC Mutual Fund<br />Birla Sun Life Mutual Fund<br />Reliance Mutual Fund<br />Prudential ICICI Mutual Fund<br />Kotak Mutual Fund<br />Franklin Templeton Mutual Fund<br />UTI Mutual Fund<br />Competitors Last PriceMarket Cap.( ProfitTotal AssetsRel Capital575.5514,167.741,808.81229.2718,917.21Bajaj Holdings772.058,592.421,074.561,000.094,603.16Bajaj Finserv535.707,750.70119.81188.341,390.16Muthoot Finance185.356,889.70---Religare Enterp464.406,478.08126.714.992,583.28Responsive Ind106.652,790.44724.5047.21452.31Tata Inv Corp480.302,646.23245.95198.591,639.68JM Financial21.801,634.5344.1210.041,617.88Future Ventures9.701,528.9613.12-0.67-JSW Holdings865.20960.3424.0720.70642.64<br />Financial Statement Analysis<br />Balance Sheet<br />Balance Sheet of DSP BlackRock------------------- in Rs. Cr. -------------------<br />Mar '09Mar '08Mar '07Dec '0512mths12mths15mths12mthsSources Of FundsTotal Share Capital697.50697.50697.5022.50Equity Share Capital22.5022.5022.5022.50Share Application Money0. Share Capital675.00675.00675.000.00Reserves1,395.511,322.66912.81529.65Revaluation Reserves0. worth2,093.012,020.161,610.31552.15Secured Loans4.804.961,020.753.12Unsecured Loans0.00151.40839.8812.00Total Debt4.80156.361,860.6315.12Total Liabilities2,097.812,176.523,470.94567.27Mar '09Mar '08Mar '07Dec '0512mths12mths15mths12mthsApplication Of FundsGross Block187.46168.2881.3060.36Less: Accum. Depreciation111.6878.2152.3042.15Net Block75.7890.0729.0018.21Capital Work in Progress0.945.8415.652.75Investments1,676.881,684.79644.7070.49Inventories128.9141.412,206.18303.41Sundry Debtors53.69200.04546.60187.06Cash and Bank Balance274.35610.86115.3356.13Total Current Assets456.95852.312,868.11546.60Loans and Advances339.93315.13298.10645.07Fixed Deposits961.191,996.111,186.19289.24Total CA, Loans & Advances1,758.073,163.554,352.401,480.91Deffered Credit0. Liabilities1,249.312,716.801,562.88658.20Provisions164.5650.927.91346.90Total CL & Provisions1,413.872,767.721,570.791,005.10Net Current Assets344.20395.832,781.61475.81Miscellaneous Expenses0. Assets2,097.802,176.533,470.96567.26Contingent Liabilities33.7636.0156.5615.08Book Value (Rs)630.23597.85415.69245.40<br />Profit & Loss account of DSP BlackRock------------------- in Rs. Cr. -------------------Mar '09Mar '08Mar '07Dec '05Dec '0412mths12mths15mths12mths12mthsIncomeSales Turnover649.631,236.521,160.21480.96363.05Excise Duty0. Sales649.631,236.521,160.21480.96363.05Other Income164.5035.31119.377.126.73Stock Adjustments0. Income814.131,271.831,279.58488.08369.78ExpenditureRaw Materials0. & Fuel Cost0. Cost296.69339.37348.37139.0487.16Other Manufacturing Expenses3.774.322.831.781.57Selling and Admin Expenses129.64178.89145.7249.6546.18Miscellaneous Expenses29.1627.5335.4614.7611.96Preoperative Exp Capitalized0. Expenses459.26550.11532.38205.23146.87Mar'09Mar '08Mar '07Dec '05Dec '0412mths12mths15mths12mths12mthsOperating Profit190.37686.41627.83275.73216.18PBDIT354.87721.72747.20282.85222.91Interest3.8339.23172.2915.2111.54PBDT351.04682.49574.91267.64211.37Depreciation35.4328.1712.706.696.30Other Written Off0. Before Tax315.61654.32562.21260.95205.07Extra-ordinary items11.55-3.030.61-0.01-0.03PBT (Post Extra-ord Items)327.16651.29562.82260.94205.04Tax102.62217.76177.6490.9872.72Reported Net Profit224.53433.54385.19169.98132.33Total Value Addition459.27550.10532.38205.22146.86Preference Dividend20.2520.250.940.000.00Equity Dividend0.000.000.0022.5054.00Corporate Dividend Tax9.933.440.163.167.70Per share data (annualized)Shares in issue (lakhs)225.00225.00225.00225.00225.00Earnings Per Share (Rs)90.79183.68170.7775.5458.82Equity Dividend (%) Value (Rs)630.23597.85415.69245.40181.26<br />Cash Flow of DSP BlackRock------------------- in Rs. Cr. -------------------<br />Mar '09Mar '08Mar '07Dec '0512mths12mths15mths12mthsNet Profit Before Tax229.59654.34456.27276.06Net Cash From Operating Activities-406.741636.10-221.63159.84Net Cash (used in)/fromInvesting Activities94.48-622.70-500.14-54.20Net Cash (used in)/from Financing Activities-24.010.34649.01-61.34Net (decrease)/increase In Cash and Cash Equivalents-336.261013.74-72.7644.30Opening Cash & Cash Equivalents1105.3891.64164.40120.10Closing Cash & Cash Equivalents769.111105.3891.64164.40<br />key Financial Ratios of DSP BlackRock------------------- in Rs. Cr. -------------------<br />Mar '09Mar '08Mar '07Dec '05Dec '04Investment Valuation RatiosFace Value10.0010.0010.0010.0010.00Dividend Per Share------10.0024.00Operating Profit Per Share (Rs)84.61305.08279.03122.5596.08Net Operating Profit Per Share (Rs)288.72549.57515.65213.76161.36Free Reserves Per Share (Rs)620.17587.80308.40172.35123.31Bonus in Equity Capital75.5575.5575.5575.5575.55Profitability RatiosOperating Profit Margin (%)29.3055.5154.1157.3359.54Profit Before Interest And Tax Margin (%)22.8552.5352.5655.2656.82Gross Profit Margin (%)23.8453.2339.7854.7257.11Cash Profit Margin (%)16.5635.5833.9936.2837.53Adjusted Cash Margin (%)16.5635.5824.6036.0337.43Net Profit Margin (%)33.1134.6032.9134.9135.82Adjusted Net Profit Margin (%)33.1134.6023.5234.6535.72Return On Capital Employed (%)8.7330.9918.0148.4630.86Return On Net Worth (%)14.4030.7223.9230.7832.45Adjusted Return on Net Worth (%)3.9929.5429.3330.5532.35Return on Assets Excluding Revaluations630.23597.85415.6910.819.23Return on Assets Including Revaluations630.23597.85415.6910.819.23Return on Long Term Funds (%)8.7333.3118.0148.4630.86Liquidity And Solvency RatiosCurrent Ratio1.241.082.771.471.90Quick Ratio1.131.121.351.171.25Debt Equity Ratio0.480.622.710.030.72Long Term Debt Equity Ratio0.480.512.710.030.72Debt Coverage RatiosInterest Cover47.8317.203.6318.0718.74Total Debt to Owners Fund0.480.622.710.030.72Financial Charges Coverage Ratio57.0717.923.7018.5119.29Financial Charges Coverage Ratio Post Tax68.8212.773.3112.6113.02Management Efficiency RatiosInventory Turnover Ratio----0.531.600.77Debtors Turnover Ratio5.123.313.162.051.66Investments Turnover Ratio----------Fixed Assets Turnover Ratio----49.6341.4532.35Total Assets Turnover Ratio--0.570.340.860.52Asset Turnover Ratio3.817.8516.219.397.16Average Raw Material Holding----------Average Finished Goods Held----------Number of Days In Working Capital190.75115.241,078.88356.15655.21Profit & Loss Account RatiosMaterial Cost Composition----------Imported Composition of Raw Materials Consumed----------Selling Distribution Cost Composition3.383.203.992.753.98Expenses as Composition of Total Sales9.348.206.5913.0010.91Cash Flow Indicator RatiosDividend Payout Ratio Net Profit4.850.830.0415.0946.62Dividend Payout Ratio Cash Profit4.140.770.0414.5244.50Earning Retention Ratio82.4899.1499.9584.8053.26Cash Earning Retention Ratio89.2299.2099.9585.3855.38Adjusted Cash Flow Times0.040.356.460.092.12Dec'04Dec '05Mar '07Mar '08Mar '09Earnings Per Share58.8275.54170.77183.6890.79Book Value181.26245.40415.69597.85630.23<br />Executive Summary<br />I am Preeti Yadav from the batch of 2010-11, Chitkara Business School, Baddi.<br />I did my Summer Internship Project with DSP BlackRock Asset Management Company Ltd. ( from May 2010 to 15th July 2010. <br />Profile- a) Evaluate the performance of DSP BlackRock Funds.<br />b) Distribution Channel Management.<br />c) Investor awareness about mutual funds.<br />Reporting – I reported to Mr. Bimal Jeet Singh, Manager – Sales who kept guiding me during the project as and when required.<br />Learning during training-<br /><ul><li>Learning about the Mutual Fund Industry and their importance in the current scenario.
  61. 61. The nature of project involved the whole survey of how to calculate the value and performance of mutual fund and by comparing these values from different company’s mutual funds.
  62. 62. Know about the risks associated with mutual funds and the difference in the evaluation of debt funds and equity funds.
  63. 63. I learned the difference of investing in mutual fund and other investment (bank/post office) products.
  64. 64. The scope of the project was also to find out that what factors forces the customers to buy a particular mutual fund. I learned what things investor should keep in mind before investing into any fund apart from that I have also seen what Indian investors think about mutual fund and how much they are aware about mutual funds.
  65. 65. Opportunity to learn about the ups and downs in the market and its impact on the performance of various schemes.
  66. 66. The presentations of DSP BlackRock MF that I gave to our alternate distribution channel’s employees helped me to get exposed to various problems that the distributors face during selling of mutual fund schemes and how to tackle with such problems.
  67. 67. I have learned that mutual funds now present perhaps the most appropriate investment opportunity for most investors. As financial markets become more sophisticated and complex, investors need a financial intermediary who provides the required knowledge and professional expertise on successful investing.
  68. 68. Learning about several business operations of the company.
  69. 69. Corporate Exposure during training made me more confident and outgoing.</li></ul>Training provided me an opportunity to interact with employees in the company. This made me used to corporate Environment and also helped me hone my soft skill. Interaction with Relationship Managers and branch heads at various banks boosted my confidence and infused enthusiasm in me.<br />Achievements – The performance evaluation of different mutual fund schemes done by me will help the organization to explore where DSP BlackRock MF stands in the market compared to other mutual funds. I have also tried to check the Indian investor’s awareness about MF investments. My work during the summer training was appreciated a lot which was a constant source of inspiration for me. The Indian MF industry has already started opening up many of the exciting investment opportunity to Indian investors. Despite the expected consulting growth in the industry, mutual funds are still a new financial intermediary in India. Hence, it is important that the investors, the mutual fund agents/ distributors, the investment advisors and even the fund employees acquire better knowledge of what mutual funds are, what they can do for investors and what they cannot and how they function differently from other intermediaries such as banks. This is what I try to achieve by giving training to them as DSP asset management’s representative.<br />I have done my best to make it a genuine study. But there are some chances of mistakes. A critical appraisal of anyone will be heartily welcomed.<br />Abstract<br />Mutual fund industry in India is relatively new with a lot of untapped market. After the opening up of this industry since 1993 there has been no looking back and the ‘Assets under Management’ have only been rising. The industry today is facing stiff competition with each player fighting for a bigger mind share and market size.<br />I have selected this project in order to know the changing trends in mutual fund industry post entry load waiver and the resultant impact on the IFA segment. It is also done in order to know as to how much knowledge the investor has about the mutual funds and their performance and to study in detail the results of investing in this alternate channel of investment. During the course of mu training I have made use of various test and techniques. These techniques were effective to analyze various finding and interpret correct results as required by research objectives. The results are being analyzed through various bar graphs and other similar charts.<br />The first part of the project involves the whole survey of how to calculate the value and performance of mutual fund and by comparing these values from different company’s mutual funds. The project also includes comparison of mutual fund with other bank/post office products. The research also includes what things investor should keep in mind before investing into any fund.<br />In the second part of the project a market research was conducted to determine the level of investor awareness & marketing strategy followed by the organization to promote the fund as well as performance evaluation of the mutual funds offered by DSP Blackrock Mutual Fund in Chandigarh, Panchkula and Mohali region. The scope of the project was also to find out those factors which forces the customers to buy a particular mutual fund and those factors which discourage the investor to buy them. Apart from<br />that I have also tried to find out what investors thinks about mutual fund i.e. how much are they aware about mutual funds.<br />The project also contains about the history of mutual funds, investing strategies, conceptual framework, risk associated and investment philosophy. <br />Objective of the Study<br /><ul><li>To study and evaluate the performance of selected schemes offered by the DSP BlackRock Mutual Fund with respect to other growing Mutual Funds so as to find out the competitive edge of DSP BlackRock MF over others.
  70. 70. To study investor awareness regarding various types of Mutual Funds and various schemes offered by these mutual funds.
  71. 71. To study where DSP MF does stands in the market & what steps they should take to improve their position in the market.
  72. 72. Scope of the Study</li></ul>The study is conducted to understand the investor awareness and the performance of the various schemes offered by DSP MF and managing the inactive alternate distribution channel of DSP AMC Ltd. It also includes studying in the depth this alternate tool of investment (mutual fund).<br /><ul><li>The primary research required going to various employees and speaking to relationship managers of various banks and customers present in Chandigarh, Panchkula and Mohali.
  73. 73. The secondary research required exploring research papers, newspapers, magazines, fact sheets of various funds and their offer documents.</li></ul>It also involved surfing the internet.<br /> Ch. 1- Introduction<br />The one investment vehicle that has truly come of age in India in the past decade is mutual funds. Today, the mutual fund industry in the country manages around Rs 329,162 crore (As of Dec, 2006) of assets, a large part of which comes from retail investors. And this amount is invested not just in equities, but also in the entire gamut of debt instruments. Mutual funds have emerged as a proxy for investing in avenues that are out of reach of most retail investors, particularly government securities and money market instruments. <br />Specialization is the order of the day, be it with regard to a scheme’s investment objective or its targeted investment universe. Given the plethora of options on hand and the hard-sell adopted by mutual funds vying for a piece of your savings, finding the right scheme can sometimes seem a bit daunting. Mind you, it’s not just about going with the fund that gives you the highest returns. It’s also about managing risk–finding funds that suit your risk appetite and investment needs.<br />So, how can you, the retail investor, create wealth for yourself by investing through mutual funds? To answer that, we need to get down to brass tacks–what exactly is a mutual fund?<br />Very simply, a mutual fund is an investment vehicle that pools in the monies of several investors, and collectively invests this amount in either the equity market or the debt market, or both, depending upon the fund’s objective. This means you can access either the equity or the debt market, or both, without investing directly in equity or debt.<br />The essential features of the mutual funds distinguishing from other of the investments are:-<br /><ul><li>The mutual fund is a trust into which many relatively small investors invest their money to form a large pool of cash which is then invested in securities by the manager of the trust.
  74. 74. The price at which units can be bought and sold is governed solely by the value of the underlying securities held by the MF and dealing in units are on the basis of net market value of the investment per unit.
  75. 75. The managers of MF are obliged to redeem any units in issue on demand or certain specified period.
  76. 76. All dividend income that the MF receives on its investments is paid out to unit holders.
  77. 77. Since the unit held by investor evidences the ownership of the fund’s assets, the value of an investors part ownership is determined by the NAV of the number of units held.</li></ul>Concept of a Mutual Fund<br />A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:-<br />Figure 1<br />914400topSavings form an important part of the economy of any nation. With savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents multiple avenues to the investors. Though certainly not the best or deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide reasonable options for an ordinary man to invest his savings. <br />Investment goals vary from person to person. While somebody wants security, others might give more weightage to returns alone. Somebody else might want to plan for his child’s education while somebody might be saving for the proverbial rainy day or even life after retirement. With objectives defying any range, it is obvious that the products required will vary as well. <br />Investors earn from a Mutual Fund in three ways:<br />Income is earned from dividends declared by mutual fund schemes from time to time.<br />If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain. <br />If fund holdings increase in price but are not sold by the fund manager, the fund's unit price increases. You can then sell your mutual fund units for a profit. This is tantamount to a valuation gain.<br />Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt and balanced funds. There are also funds meant exclusively for young and old, small and large investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard investors’ interest, ensures that the investors are not cheated out of their hard-earned money. All in all, benefits provided by them cut across the boundaries of investor category and thus create for them, a universal appeal.<br />Investors of all categories could choose to invest on their own in multiple options but opt for mutual funds for the sole reason that all benefits come in a package. <br /><ul><li>Conceptual Framework of Mutual Fund</li></ul>A mutual fund is constituted as a public trust created under the Indian Trust Act, 1882. SEBI (mutual fund) regulations, 1996 regulate the structure of the mutual funds in India. As per these regulations should have the following three-tier structure:<br /><ul><li>Sponsor
  78. 78. ii) Trust/trustee
  79. 79. iii) Asset Management Company
  80. 80. Apart from this mutual fund consist of
  81. 81. Figure 2
  82. 82. Sponsor</li></ul>Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. The sponsor establishes the mutual fund and registers the same with SEBI. Sponsor appoints the Trustees, custodians and the AMC with prior approval of SEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track record of business interest in the financial markets. Sponsor must have been profit making in at least 3 of the above 5 years. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.<br /><ul><li>Trust</li></ul>The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.<br /><ul><li>Trustee</li></ul>Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.<br /><ul><li>Asset Management Company (AMC)</li></ul>The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times.<br /><ul><li>Registrar and Transfer Agent</li></ul>The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.<br /><ul><li>Custodian</li></ul>A custodian is an agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual funds, or investment company's assets for them.<br />Advantages of Mutual Funds<br />Professional Management <br />Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. This risk of default by any company that one has chosen to invest in, can be minimized by investing in mutual funds as the fund managers analyze the companies’ financials more minutely than an individual can do as they have the expertise to do so. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles.<br />Diversification<br />Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.<br />Convenient Administration<br />Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.<br />Return Potential<br />Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Apart from liquidity, these funds have also provided very good post-tax returns on year to year basis. Even historically, we find that some of the debt funds have generated superior returns at relatively low level of risks. On an average debt funds have posted returns over 10 percent over one-year horizon. The best performing funds have given returns of around 14 percent in the last one-year period. In nutshell we can say that these funds have delivered more than what one expects of debt avenues such as post office schemes or bank fixed deposits. Though they are charged with a dividend distribution tax on dividend payout at 12.5 percent (plus a surcharge of 10 percent), the net income received is still tax free in the hands of investor and is generally much more than all other avenues, on a post-tax basis. <br />Low Costs<br />Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.<br />Liquidity<br />In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and one can benefits from any such price movement. <br />Transparency<br />Investors get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.<br />Flexibility <br />Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans; you can systematically invest or withdraw funds according to your needs and convenience.<br />Affordability<br />A single person cannot invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Here again, investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. <br />Choice of Schemes<br />Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.<br />Well Regulated<br />All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.<br />Tax Benefits<br />Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability. What’s more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. You can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year.<br /> <br />Disadvantages of mutual funds<br />Mutual funds are good investment vehicles to navigate the complex and unpredictable world of investments. However, even mutual funds have some inherent drawbacks. Understand these before you commit your money to a mutual fund.<br />No assured returns and no protection of capital<br />If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India). There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. This is because most closed-end funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch, resulting in losses to investors. A scheme cannot make any guarantee of return, without stating the name of the guarantor, and disclosing the net worth of the guarantor. The past performance of the assured return schemes should also be given.<br />Restrictive gains<br />Diversification helps, if risk minimization is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security. Assume, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation.<br />Taxes<br />During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.<br />Management risk<br />When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.<br />TYPES OF MUTUAL FUND SCHEMES<br />There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectations. Whether as the foundation of your investment programme or as a supplement, Mutual Fund schemes can help you meet your financial goals.<br />TYPES OF MUTUAL FUND SCHEME<br />5486400116205002743200116205004572001162050045720012128500<br />-32385199695By structure00By structure4343400132715Other Schemes00Other Schemes2171700108585By Investment Objectives00By Investment Objectives<br />-2286003492500297180063500049149004318000491490020510500 <br />2524125431800025241253937000514350039370Tax saving fund00Tax saving fund3200400153670Equity Schemes00Equity Schemes1943100153670Debt Schemes00Debt Schemes37719003937000114300153670Open-ended Schemes00Open-ended Schemes<br />49149007556500-22860014859000<br />354330089535005143500229870Sector specific fund00Sector specific fund20574008636000114300248920Close Ended Schemes00Close Ended Schemes<br />491490021844000228600043180MM Mutual fund00MM Mutual fund-228600215265003771900138430Large cap fund00Large cap fund<br />20574003810000354330013335000<br />514350071755Index Schemes00Index Schemes3771900205105Mid cap Fund00Mid cap Fund2286000138430FMP00FMP11430081280Interval Schemes00Interval Schemes<br />491490013017500354330020383500205740011557000-2286001079500<br />2286000219075Other Debt Schemes00Other Debt Schemes<br />354330022923500377190051435Small cap fund00Small cap fund205740022669500<br />35433007112000<br />3771900105410Any Other Equity Fund00Any Other Equity Fund<br />3552825444500<br /> Figure 3<br />(AI) By Structure<br />Open-Ended Schemes<br />These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at Net Asset Value ("NAV") related prices.<br />Close-Ended Schemes<br />Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, Unit holders' expectations and other market factors.<br />One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV but closer to maturity, the discount narrows. Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor.<br />Interval Schemes<br />These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.<br />(B) By Investment Objective<br />Growth Schemes<br />Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation. These schemes are not for investors seeking regular income or needing their money back in the short term.<br />Income Schemes<br />Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.<br />Ideal for<br />Retired people and others with a need for capital Stability and regular income<br />Investor who need some income to supplement their earnings.<br />Balanced Schemes<br />Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market the NAV of these schemes may not normally keep pace, or fall equally when the market falls.<br />Ideal for:<br />Investors looking for a combination of income and moderate growth.<br />Money Market/Liquid Schemes<br />Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.<br />Ideal for:<br />Corporate and individual investors as a means to park their surplus funds for short periods or awaiting a more favorable investment alternative.<br />Other Schemes<br />Tax Saving Schemes<br />These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes. The details of such tax saving schemes are provided in the relevant offer documents.<br />Ideal for:<br />Investors seeking tax rebates.<br />Special Schemes<br />This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or industry specific schemes (which invest in specific industries) or sectorial schemes (which invest exclusively in segments such as A Group shares or initial public offerings)<br />Different Modes of Receiving the Income Earned From Mutual Fund Investments<br /><ul><li>Mutual funds offer three methods of receiving income:
  83. 83. Growth Plan:
  84. 84. In this plan, dividend is neither declared nor paid out to the investors but it is built into the value of the NAV. In the other words, the NAV increases over time due to such incomes and the investor realizes only the capital appreciation on redemption of his investment.
  85. 85. Income plan or Dividend Payout Plan:
  86. 86. In this plan, dividends are paid-out to the investors. In other words, the NAV only reflects the capital appreciation or depreciation in the market price of the underlying portfolio.
  87. 87. Dividend Reinvestment Plan:
  88. 88. In this plan, dividend is declared but not paid out to the investors. Instead, it is reinvested back in to the scheme at the then prevailing NAV. In other words, the investor is given additional units and not cash as dividend.</li></ul>Mutual Fund Investment Strategies<br /><ul><li>Systematic Investment Plan (SIP):</li></ul>SIPs entail an investor to invest a fixed sum of money at regular intervals in MF scheme the investor has chosen. This may help you gain from any appreciation in the event of upside or alternatively, average your cost during downside. Seeing the present volatility in the market SIP is the best option available to the investor due to regular entry into the market which causes rupee cost averaging and hence covers the volatility.<br /><ul><li>Systematic Withdrawal Plan (SWPs):
  89. 89. These plans are best suited for people nearing retirement. In these plans investor invest in a mutual fund scheme and is allowed to withdraw a fixed sum of money at regular intervals to take care of expenses.
  90. 90. Systematic Transfer Plan (STP):
  91. 91. They allow the investor to transfer on a periodic basis a specified amount from one scheme to another with in the same fund family meaning two schemes belonging to the same mutual fund. A transfer will be treated as redemption of units from the scheme from which the transfer is made.</li></ul>Investment Philosophy of DSP BlackRock Mutual Fund<br /><ul><li>Equity
  92. 92. The investment philosophy of DSP revolves around the concept of growth oriented stocks, which are available at relatively attractive valuations.
  93. 93. DSP MF uses a combination of the top down and bottom up approaches for investment.
  94. 94. Top down approach for sector allocation.
  95. 95. Bottom up approach for stock selection.
  96. 96. DSP MF identifies and invests in business that has a sustainable competitive advantage.
  97. 97. It invests with a medium term view, with an investment horizon of at least 18months.
  98. 98. Risk minimization is an important element of their strategy.
  99. 99. DSP MF believes in pro-active fund management to outperform benchmark indices.</li></ul>In determining their investment universe, DSP MF employs a multi-stage filtering the first level filtering, they look at the second level filter, they look at management quality. The third level is the competitive position of the company and the final level is the share price valuation.<br /><ul><li>Debt</li></ul>There are three main types of debt funds and the investment philosophy for each differs due to different investment objectives and type of investors.<br /><ul><li>Liquid Fund</li></ul>The investment philosophy of this scheme is to invest in short term money market debt instruments like T-bills, commercial paper, debentures, certificate of deposits, etc. to provide a higher than average rate of return.<br /><ul><li>Income Fund</li></ul>The income fund invests in all type of debt instruments. The investment philosophy can be broadly defined as consisting of active duration and interest rate management to give optimal returns. The fund is mainly between Government Securities and Corporate Bonds with some residual investments in money market instruments.<br /><ul><li>Gilt Fund</li></ul>Gilt fund invest in the gilt edged government securities, which is predominantly a wholesale market. It allows retail investors to participate in this market. The Gilt Fund aims to maximize returns by active interest rate management, with zero credit risk. Active interest rate management involves studying the domestic and international politico-economic scenario as well as in-depth analysis of the liquidity in the system, the shape of the yield curve and the spreads between various sectors on the curve.<br />To maximize the “risk adjusted returns” for the investors based on their risk tolerance<br /><ul><li>Manage the schemes on a “Portfolio basis”
  100. 100. Active management of interest rate risk.
  101. 101. Credit risk management by following the conservative approach.
  102. 102. Continuous monitoring.</li></ul>Different Schemes of DSP BlackRock Mutual Fund<br /><ul><li>There is different kind of open ended schemes:
  103. 103. Equity fund
  104. 104. Debt fund
  105. 105. Balanced fund
  106. 106. Liquid fund</li></ul>Equity Fund:<br />DSP BLACKROCK EQUITY FUND<br />Investment Strategy: The Investment Manager prefers adopting a top-down approach with regard to investment in equity and equity related securities. This approach encompasses an evaluation of the key economic trends, an analysis of various sectors in the economy leading to an outlook on their future prospects and a diligent study of various investment opportunities within the favored sectors. The Investment Manager will conduct in – house research in order to identify both value and growth stocks. The analysis will focus, among other things, on industry and company fundamentals and valuation metrics. The quality or strength or management would be a key focus area.<br />Date of Inception: 29th April, 1997<br />Minimum Investment<br />Initial: Rs.5000/-<br />Additional: Rs.1000/-<br />Systematic: Rs.1000/-<br />Exit Load: If Holding Period is <12 months: 1%<br /> >=12 months: NIL<br />Entry Load: no entry load shall be charged for<br /><ul><li>For “all direct” applications received br AMC i.e. applications received through internet facility offered (, on application forms that are not routed through any distributor/agent/broker and submitted to AMC office or collection center/investment service center.
  107. 107. Else 2.25%.</li></ul>Options: Growth, Dividend Payout, Dividend RE-Investment.<br /><ul><li>Minimum Redemption Size Rs1000/- or 100units.
  108. 108. Benchmark Index S&P CNX Nifty.</li></ul>DSP BlackRock Tax Saver Fund<br />DSP Tax Saver Scheme is an Open ended Equity Linked Savings Scheme (ELSS) from DSP Mutual fund which offers investors tax benefits on an investment up to 1 Lakh under Section 80C of Indian Income Tax Act 1961. The fund was launched in the year 2007 and is one of the top performers in the ELSS category.<br />Scheme Highlights:<br /><ul><li>Entry Load-NIL
  109. 109. Exit Load-NIL
  110. 110. SIP: Minimum amount Rs.500/month – 12 months Rs.1000/month - months, Rs.1500/Quarter-12 months(subject to completion of the 3year Lock-in Period)
  111. 111. STP: Minimum amount Rs.500/month- 12month Rs.1000/month (subject to completion of the 3year Lock-in Period)
  112. 112. Asset Allocation: 80-100% in Equity, partly convertible debentures and fully convertible debentures and bonds & 0-20% in Money market instruments
  113. 113. Minimum application amount- Rs.500 for purchase & Multiples of Rs. 500 for additional purchase.
  114. 114. Plans and Option: Dividend option with payout and reinvestment facility.
  115. 115. DSP BlackRock Opportunities Fund
  116. 116. DSP Opportunities Fund is diversified equity scheme, with a flexible investing style. It will invest in sectors, which the fund Manager believes would outperform others in the short to medium-term. By virtue of its flexible investment pattern, the fund is uniquely positioned to increase concentration sectors which look promising. As markets evolve and grow, new opportunities for growth keep emerging. DSP Opportunities would endeavor to capture these opportunities to generate wealth for its investors.</li></ul>Date of inception: 16/05/2000<br />Minimum investment: Initial: Rs.5000/-<br /> Additional: Rs1000/-<br /> Systematic: Rs.1000/-<br />Entry Load: no entry load shall be charged for<br /><ul><li>For “all direct” applications received by AMC i.e. applications received through internet facility offered (, on application forms that are not routed through any distributor/agent/broker and submitted to AMC office or collection center/investment service center.
  117. 117. Else 2.25%.</li></ul>Exit Load: If Holding Period is <12 months: 1%<br /> >=12 months: NIL<br />Options: Growth, Dividend Payout, Dividend RE-Investment.<br /><ul><li>Minimum Redemption Size Rs1000/- or 100units.
  118. 118. Benchmark Index S&P CNX Nifty.</li></ul>GROWTH OF MUTUAL FUND INDUSTRY IN INDIA<br />While the Indian mutual fund industry has grown in size by about 320% from March, 1993 (Rs.470 billion) to December, 2010 (Rs.4505 billion) in terms of AUM, the AUM of the sector excluding UTI has grown over times from Rs.152 billion in March 1999 to $ 148 billion as at March 2008. <br />Though India is a minor player in the global mutual fund industry, its AUM as a proportion of the global AUM has steadily increased and has doubled over its levels in 1999. <br />The growth rate of Indian mutual fund industry has been increasing for the last few years. It was approximately 0.12% in the year of 1999 and it is noticed 0.50% in 2010 in terms of AUM as percentage of global AUM. <br /> <br />Some facts for the growth of mutual funds in India <br />•100% growth in the last 6 years. <br />•Number of foreign AMC’s is in the queue to enter the Indian markets. <br />•Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. <br />•We have approximately 29 mutual funds which are much less than US having more than 800. There is a big scope for expansion. <br />•Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products. <br />•SEBI allowing the MF's to launch commodity mutual funds. <br />•Emphasis on better corporate governance. <br />•Trying to curb the late trading practices. <br />•Introduction of Financial Planners who can provide need based advice.<br /> Recent Trends in Mutual Fund industry<br />The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by the nationalized banks and smaller private sector players.<br />The mutual fund industry in India has evolved little over three decades but the real impetus has come after the changes in the mutual fund regulations in early 80s. Private and foreign mutual funds are operating in the Indian market and constitute a substantial portion of the mutual fund industry. Today the industry consists of Unit Trust of India, mutual funds sponsored by public sector banks and insurance corporations, private and foreign mutual funds. Investors are constantly being bombarded by questions concerning their risk profile. Either a money market or guilt fund is targeted for the risk averse or a low graded company offering a high return on its fixed deposits. Banks like Citibank , ANZ Grindlays, Deutsche bank, Hongkong bank, Commerze bank, Banque national de Paris and HDFC bank are not only aggressively marketing funds many are also planning to launch their own. The list of potential entrants includes ABN Amro, ANZ Grindlays, Hongkong bank and Jammu and Kashmir bank.<br />The Reserve Bank’s Currency and Finance report 1997-1998 shows that the investors’ appetite for risk has diminished considerably. As much as 46% of the financial savings of the household sector found its way back to bank deposits; 12% went in to Government savings plans and 18% in to provident funds. Only a miniscule 2% wound up in the capital market and 4% in company deposits. The mutual fund product designers have identified a strategic gap in the product offering in the capital market and now are fighting a loosing battle with government savings plans, bank deposits and provident funds. They are providing cheque facility on money market mutual funds to make them more enticing and guilt funds for the risk averse. Product innovations and new product combinations have started rolling in to the Indian market. <br /> IMPACT OF TECHNOLOGY <br />Mutual fund, during the last one decade brought out several innovations in their products and is offering value added services to their investors. Some of the value added services that are being offered are: <br />•Electronic fund transfer facility. <br />•Investment and re-purchase facility through internet. <br />•Added features like accident insurance cover, med claim etc. <br />•Holding the investment in electronic form, doing away with the traditional form of unit certificates. <br />•Cheque writing facilities. <br />•Systematic withdrawal and deposit facility. <br /> <br /> ONLINE MUTUAL FUND TRADING <br />The innovation the industry saw was in the field of distribution to make it more easily accessible to an ever increasing number of investors across the country. For the first time in India the mutual fund start using the automated trading, clearing and settlement system of stock exchanges for sale and repurchase of open-ended de-materialized mutual fund units. <br />Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) were options introduced which have come in very handy for the investor to maximize their returns from their investments. SIP ensures that there is a regular investment that the investor makes on specified dates making his purchases to spread out reducing the effect of the short term volatility of markets. SWP was designed to ensure that investors who wanted a regular income or cash flow from their investments were able to do so with a pre-defined automated form. Today the SW facility has come in handy for the investors to reduce their taxes. <br />HOW TO INVEST IN MUTUAL FUNDS.<br />Step One - Identify your investment needs. Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore, the first step is to assess your needs.<br />Step Two - Choose the right Mutual Fund. Once you have a clear strategy in mind, you now have to choose which Mutual Fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are:<br />The track record of performance over the last few years in relation to the appropriate yardstick and similar funds in the same category.<br />How well the Mutual Fund is organized to provide efficient, prompt and personalized service.<br />Degree of transparency as reflected in frequency and quality of their communications.<br />Step Three - Select the ideal mix of Schemes. <br />Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals.<br />The following charts could prove useful in selecting a combination of schemes that satisfy your needs.<br />628650615950<br />Figure 4<br />This plan may suit<br />Investor seeking Income & moderate growth.<br />Investor looking for growth & stability with moderate risk<br />Figure 5<br />Step Four - Invest regularly.<br />Step Five - Keep your taxes in mind<br />Step Six- Start early It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return.<br />Step Seven -The final step all you need to do now is to get in touch with a Mutual Fund or your Agent/broker and start investing. Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor-whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.<br />What fees and commissions will you pay when you invest in mutual funds?<br />The fees and commissions you may be charged can vary widely from one fund, and one dealer, to the next. Some of the charges may be negotiable, but you should make sure that you understand all of the costs before you invest. There are two main costs to consider – the management and operating expenses that are charged to the fund each year, and the sales charges (or loads) that you pay when you buy or sell the fund.<br />Management and Operating Expenses are expenses paid each year by the fund and include such things as the manager’s fees, legal and accounting fees, custodial fees and bookkeeping costs. The Management Expense Ratio (MER) is the percentage of the fund’s average net assets that these expenses represent. For example, if a $100 million fund has $2 million in costs for the year its MER will be 2%. MERs can range from under 1% per year for some money market funds to almost 3% for some equity funds. The higher the MER, the greater the impact on the fund’s performance and the return to its investors because these expenses are removed before the value is reported.<br />Sales Charges (Loads) are the commissions that you may have to pay when you buy or redeem units of a fund. Sales charges may be applied when you buy units of the fund<br />(A front-end load), when you redeem your units (a back-end load), or there may be no sales charges at all (no-load). Where front-end loads are charged, the rate can vary from dealer to dealer and may be negotiable. Shop around, and remember that every dollar you pay up-front in commission is a dollar that does not go to work for you in the fund. Many funds are sold on a back-end load basis, meaning generally that the sales charges are applied only when you redeem the fund. Back-end load fees are paid by the fund management company to your mutual fund salesperson – you do not pay this fee. You do, however, pay a ‘redemption fee’ if you redeem your units in the fund before a certain time period, typically 7 years. Redemption fees decline each year that you hold the investment. <br />For example, you might have to pay a 6% fee if you redeem the fund after one year, 4% if you redeem after three years, and no commission if you redeem after seven years. An increasing number of funds are being sold on a no-load basis, in which investors pay no sales charges, but before you decide that a no-load fund is right for you, consider the fund’s performance, its management expense ratio and the level of service and advice you will receive.<br />How do financial advisers get paid for selling mutual funds?<br />Some mutual fund managers employ their own sales force to sell their mutual funds. Most, however, rely on independently operated dealers to sell their funds and pay sales incentives to these dealers to encourage them to do so. These incentives generally take the form of sales commissions, but fund managers can also pay for some of the marketing and educational costs incurred by a dealer. You do not pay these sales incentives directly. The mutual fund manager pays them to dealers out of the management fees it receives from its mutual funds.<br />The compensation paid to the dealer can vary depending on how the mutual fund is acquired. For example, if you buy a mutual fund with a front-end load, the mutual fund firm may allow your dealer to keep the front-end load fees you pay. If you buy a mutual fund on a deferred sales charge basis, the mutual fund manager will still pay your dealer a sales commission at the time of sale (generally 5% of the amount you invest).When you redeem a deferred sales charge fund, you pay any applicable redemption fees directly to the mutual fund manager.<br />Mutual fund managers also pay trailing commissions to dealers. Trailing commissions are paid as long as you hold the fund. They are generally paid quarterly and typically range from 0.25% to 1.0% of the value of the funds held by the dealer’s clients. The amount of trailing commission paid to your dealer can depend on the type of mutual fund you buy and on the load that you pay. Generally, mutual fund firms pay lower trailing commissions on fixed income and money market funds than for equity funds. <br />The sales incentives paid by the fund manager are described in the fund’s prospectus. You can also ask your financial adviser for details. Securities regulations govern the types of incentives that can be paid and the sales practices that must be followed by both mutual fund firms and dealers.<br />The Changing Distribution Structure of Mutual Funds <br />Many mutual fund investors pay for the services of a professional financial adviser. ICI research finds that among investors owning mutual fund shares outside of retirement plans at work, 81 percent own fund shares through professional financial advisers. Financial advisers typically devote time and attention to prospective investors before investors make an initial purchase of funds and other securities. The adviser generally meets with the investor, identifies financial goals, analyzes existing financial portfolios, determines an appropriate asset allocation, and recommends funds to help achieve the investor’s goals. Advisers also provide ongoing services, such as periodically reviewing investors’ portfolios, adjusting asset allocations, and responding to customer inquiries. <br />Thirty years ago, fund shareholders usually compensated financial advisers for their assistance through a front-end load—a one-time, upfront payment for current and future services. After 1980, when the U.S. Securities and Exchange Commission (SEC) adopted Rule 12b-1 under the Investment Company Act of 1940, funds and their shareholders had greater flexibility in compensating financial advisers. Rule 12b-1 and subsequent regulatory action established a framework under which investors can pay indirectly for some or all of the services they receive from financial advisers through 12b-1 fees—asset-based fees that are included in a fund’s expense ratio. <br />Under this framework, 12b-1 fees can also be used to compensate financial intermediaries, such as retirement plan record keepers and discount brokerage firms, for the services they provide to fund shareholders. Although they can be used to pay for advertising and marketing, 12b-1 fees are primarily used to compensate financial advisers and other financial intermediaries for assisting fund investors before (40 percent of fees collected) and after they purchase fund shares (52 percent of fees collected) <br />Most 12b-1 Fees Used to Pay for Shareholder Services<br />Percentage of 12b-1 fees collected, 2010<br />Fig 6<br />No- Load Share Classes<br />No-load share classes have no front-end load or CDSL, and have a 12b-1 fee of 0.25 percent or less. Originally, no-load share classes were offered by mutual fund sponsors that sold directly to investors. Now, investors can purchase no-load funds through employer-sponsored retirement plans, mutual fund supermarkets, discount brokerage firms, and bank trust departments, as well as directly from mutual fund sponsors. Some financial advisers who charge investors separately for their services rather than through a load or 12b-1 fee use no-load share classes. <br /> <br />The introduction of Rule 12b-1 changed the means by which financial advisers were compensated. The maximum front-end load fees that funds might charge declined sharply in the 1980s as funds adopted 12b-1 fees as an alternative way to compensate financial advisers and intermediaries for providing services to fund shareholders. Since 1990, 12b-1 fees paid by shareholders rose from $1.1 billion to $10.6 billion This increase reflects, in part, the roughly tenfold increase in mutual fund assets and the more than twofold increase in the number of households owning funds since 1990. <br />12b-1 Fees Paid Reflect Asset Growth and Shift in Source of Financial Advisers’ Compensation<br />Billions of dollars, selected years*<br />1Data exclude mutual funds available as investment choices in variable annuities and mutual funds that invest primarily in other mutual funds.2Front-end load = 0 percent, CDSL = 0 percent, and 12b-1 fee ≤ 0.25 percent.Sources: Investment Company Institute and Lipper<br /> Figure 7<br />In recent years, the system for compensating financial intermediaries for distributing mutual fund shares and assisting investors has continued to evolve. For example, maximum front-end load fees have stabilized, but front-end load fee payments (as a percentage of assets) have continued to decline. This, in large measure, reflects the discounts from the maximum front-end load that investors often receive when making large share purchases or purchases through 401(k) plans.<br />There has also been a shift by investors toward no-load share classes. No-load share classes have consistently attracted more net new cash than load share classes in recent years (Figure 7). In 2010, for example, no-load share classes of long-term funds garnered $253 billion in net new cash, compared to an outflow of $33 billion for load share classes. Cumulatively, these flows have led to a concentration of long-term fund assets in no-load share classes; by 2010, no-load share classes of long-term funds had $5.1 trillion in total net assets compared to $2.6 trillion in load share classes (figure7). The shift toward no-load funds should not be taken as indicating that investors are eschewing advice from financial advisers. To be sure, some of the flows to no-load funds owe to “do-it-yourself” investors. However, much of the shift represents a change in the way investors compensate their financial advisers, with many investors now paying for financial advice directly out of their pockets instead of indirectly through their mutual funds. Flows from 401(k) plans and other retirement accounts also are often invested in no-load funds. <br />Why use an Independent Financial Advisor - IFA?As with most things in the modern world, the financial services industry moves at a rapid pace. Financial markets change constantly and become increasingly more complex. Regulators review the opportunities to obtain high quality products and control the basis on which advice is given. Financial institutions compete aggressively with each other to bring new and improved products to the market.......... it isn't too difficult to see why so many people find financial services confusing! Choosing the most suitable financial products will often play an essential role in helping to secure your financial future. But with literally thousands of different products on offer, and hundreds of financial services companies, one of the most important decisions you can make about your future is who to seek financial advice from.In essence, the role of an Independent Financial Adviser (IFA) is clearly defined - they work for you, not the product provider as is the case with ‘tied' advisors. Of course, in order to assist you, they will need to know your current position and what it is you want to achieve. Only then can an IFA create a strategy to meet your needs and your budget.IFAs are your guide to the market and will undertake detailed research and comparisons relating to financial products available and then recommend a way forward. An IFA will ‘shop around' on your behalf to ensure your needs are catered for fully and that any product recommended is the most suitable and provides value for money.Whether your needs are simple or complex it pays to ensure you receive the right financial advice at the right time and Independent Financial Advisors will be happy to assist you.<br /> <br />Mutual Fund with NO Distributors<br />          When you own shares in a mutual fund you may get dividends from the fund company that were from the dividends earned by the individual stocks held by the fund. In additional you may get a “distribution” of short term and long term capital gains. These are usually issued in November or December.<br />    Investors don’t like getting distributions from a mutual fund because this means taxes have to be paid. Investors emotionally feel that they should only have to pay tax when they take the initiative to sell an investment. However a mutual fund is a collective investment and when the fund manager sells assets then that may trigger a capital gain which must be paid by the individual shareholders because a mutual fund is a “pass-through” entity where taxable events in the fund are passed through to the individual shareholders.<br />Methods to avoid capital gains distributions:<br />Hold mutual funds (that you suspect will give a distribution) in a traditional IRA. However that causes a worse tax problem: traditional IRA’s wash out the tax treatment of dividends and long term capital gains and convert them to ordinary income. So in most cases it would be very wrong to do this. Of course a Roth IRA is tax free, so that would be different.<br />By mutual funds after the annual distribution has occurred. The problem is that investing (in theory) should be for the long run, so buying a fund in December and selling in October just to avoid distributions is wrong and impractical and would trigger short term gains tax (if it was profitable) on your sale of the mutual fund.<br />Buy ETF’s to avoid capital gains distributions. They obtain shares of stocks through “creation units” which have a different tax consequence when these units are redeemed by an “authorized market maker” from a mutual fund. Unfortunately the goal of pursuing tax savings is trumped by the goal of getting good investments. I don’t recommend passive ETF’s because I believe in actively managed mutual funds. If an investor is trying too hard to chase after tax benefits an investor may not be able to make the right investment decisions.<br />Recognize that distributions often occur for a reason: They may occur at the top of a bubble or just after the top when investors withdraw funds from a mutual fund the manager needs to sell assets to pay the investors who are redeeming mutual fund shares. These sales then trigger a distribution which is assessed on the remaining shareholders. So the best defense against distributions would be to avoid funds that are part of a bubble top because the fund’s assets will go down in value and will be sold to meet redemption requests. Thus you get two benefits by avoiding bubbles. Now the question is how do you spot and avoid bubbles? This is the real question that is far more important than avoiding distributions.<br />Investors should seek independent financial advice.<br />Managing the risk by diversification in terms of Asset Allocation<br />Strings, woodwinds and brass. Stocks, bonds and cash. What do these very different things have in common? They are all parts of a whole and when they work together, they perform the way none could alone. An orchestra without violins wouldn't sound as good. And a portfolio without stocks just wouldn't offer peak performance.<br />Asset allocation is important for portfolio performance. And what exactly is asset allocation? It's a systematic division and risk management of your investment among various asset classes such as fixed income or equities. By having a portfolio that holds different types of investments, you help reduce your risk and portfolio volatility.<br />Markets and asset classes do not move in tandem: What's hot today may be cold tomorrow. Spreading your investment among different types of asset classes and markets—stocks and bonds, domestic and foreign markets—lets you position yourself to seize opportunities as the performance cycle shifts from one market or asset class to another.<br />Depending on your investment style and goals, your asset allocation will vary. One should work with his financial advisor to create a personalized asset allocation for his portfolio.<br />Asset allocation—not stock or mutual fund selection, not market timing—is generally the most important factor in determining the return on your investments. In fact, according to research which earned the Nobel Prize, asset allocation (the types or classes of securities owned) determines approximately 90% of the return. The remaining 10% of the return is determined by which particular investments (stock, bond, mutual fund, etc.) you select and when you decide to buy them.<br />Consequently, buying a "hot" stock or mutual fund recommended by a financial magazine or newsletter, a brokerage firm or mutual fund family, an advertisement or any other source can be downright dangerous. One should note that recommendations in publications may be out-of-date, having been prepared several months prior to the publication date.<br />As for market timing—that is, moving in and out of an investment or an investment class in anticipation of a rise or fall in the market—it’s been proven that the modern market cannot be timed. Market timing strategies, such as moving your money into stocks when the market is rising or out of stocks when it’s falling, just do not work.<br />Asset allocation is the cornerstone of good investing. Each investment must be part of an overall asset allocation plan. And this plan must not be generic (one-size-fits-all), but rather must be tailored to your specific needs.<br />Sound financial advice from a trusted and competent advisor is very important as the investment world is populated by many "advisors" who either are unqualified or don't have your best interests at heart.<br />In a nutshell, following are the basic investment guidelines one should live by:<br />Determine your financial profile, based on your time horizon, risk tolerance, goals and financial situation. For more sophisticated investment analysis, this profile should be translated into a graph or curve by a computer program. <br /><ul><li>Find the right mix of "asset classes" for your portfolio. The asset classes should balance each other in a way that will give the best return for the degree of risk you are willing to take. Financial advisors can determine the proper mix of assets for your financial profile. Over time, the ideal allocation for you will not remain the same; it will change as your situation changes or in response to changes in market conditions.</li></ul>LITERATURE REVIEW<br />Literature on mutual fund performance evaluation is enormous. A few research studies that have influenced the preparation of this paper substantially are discussed in this section.<br />Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner.<br />Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance<br />(Jensen’s alpha) that estimates how much a manager’s forecasting ability contributes to fund’s returns.<br />As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark index’s standard deviation. <br />Narayan Rao, ET. al., evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynor’s ratio, Sharpe’s ratio, Sharpe’s measure , Jensen’s measure, and Fama’s measure. The study used 269 open-ended schemes (out of total schemes of 433) for computing relative performance index. Then after excluding funds whose returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investor’s expectations by giving excess returns over expected returns based on both premiums for systematic risk and total risk.<br />Bijan Roy, ET. al., conducted an empirical study on conditional performance of Indian mutual funds. This paper uses a technique called conditional performance evaluation on a sample of eighty-nine Indian mutual fund schemes .This paper measures the performance of various mutual funds with both unconditional and conditional form of CAPM, Treynor- Mazuy model and Henriksson-Merton model. The effect of incorporating lagged information variables into the evaluation of mutual fund managers’ performance is examined in the Indian context. The results suggest that the use of conditioning lagged information variables improves the performance of mutual fund schemes, causing alphas to shift towards right and reducing the number of negative timing coefficients.<br />Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this paper, measures of evaluating portfolio performance based on lower partial moment are developed.<br />Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified “target rate” like risk-free rate. Kshama Fernandes (2003) evaluated index fund implementation in India. In this paper, tracking error of index funds in India is measured .The consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be periods where certain index funds appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek market of equity mutual funds. The methodology is based on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS multi-criteria decision aid method is employed in order to develop mutual fund’s performance models.<br />Goal programming model is employed to determine proportion of selected mutual funds in the final portfolios.<br />Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to randomly select conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investment performance. The study found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500 during the study period.<br /> Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance <br />(Jensen’s alpha) that estimates how much a manager’s forecasting ability contributes to fund’s returns. <br />As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark index’s standard deviation. S.Narayan Rao, ET. al., evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynor’s ratio, Sharpe’s ratio, Sharpe’s measure , Jensen’s measure, and Fama’s measure. The study used 269 open-ended schemes (out of total schemes of 433) for computing relative performance index. Then after excluding funds whose returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investor’s expectations by giving excess returns over expected returns based on both premiums for systematic risk and total risk. <br />Research Methodology<br />Research Methodology is a systematic method of discovering new facts or verifying old facts, their sequence, inter-relationship, casual explanation and the natural laws which governs them. In it we study the various steps that are generally adopted by a researcher in the studying his research problem along with the logic behind them.<br />Different stages involved in research consists of enacting the problem, formulating a hypothesis, collecting the facts or data, analyzing the facts and reaching certain conclusion either in the form of solution towards the concerned problem or in generalization for some theoretical formulation.<br />Type of Sample Design: Judgment Sampling<br />Sample Size: 80<br />In Research Methodology mainly Data plays an important role.<br />The Data is divided in two parts:<br />a) Primary Data.<br />b) Secondary Data.<br />Primary Data is the data, which is collected directly by direct personal interview,<br />Interview, indirect oral investigation, Information received through local agents, Drafting a schedule, drafting a questionnaire.<br />Secondary Data is the data, which is collected from:<br /><ul><li>Various books.
  119. 119. Magazine and material.
  120. 120. Internet
  121. 121. Fact sheets of various MFs</li></ul>The data which is stored in the organization and provide by the FINANCE people are also secondary data. The various information is taken out regarding that subject as well other subject from various sources and stored. The last years data stored can also be secondary data. This data is kept for the internal use of the organization.<br />The FINANCE manual is for the internal use of the organization they are secondary data which help people to gain information. In this report the data plays a very crucial role. For this report the data was provided to me by FINANCE department and other departmental head in the organization.<br />SURVEY ANALYSIS<br />OBJECTIVES<br />I conducted a survey to assess the popularity and awareness among people about the, mutual funds. For the purpose we chose a random sample of 80 end consumers in the city of Chandigarh, Panchkula and Mohali. The methodology adopted was that of questionnaire. The question addressed the basic questions relating to investment in mutual Funds and for distributors also.<br />Sampling Method<br />The sampling method so as to obtain a representative sample is the Non- Probability Sampling methods. Under non-probability sampling, we selected the respondents to the survey on the basis of Judgment sampling with Convenience taken into account.<br />Research instrument<br />The research instrument used for this survey is a structured questionnaire. The questionnaire contains both open-ended and close ended questions. The questionnaire provides a provision with respect to rating scales.<br />Assumptions<br /><ul><li>The sample selected represents the population fully.</li></ul>The data has been collected by administering an open and close ended questionnaire to sample of end investors and with the assumption that the primary data collected is true and reflects the actual preferences of the investors.<br />The sample selected has thorough knowledge of the subject.<br />Limitations of Study<br />The respondents who have not given any information are not included in the sample but do come under the population.<br />Factors like change in tax and regulatory framework has not been considered.<br /> <br />Performance Evaluation<br />How to Calculate the value of a Mutual Fund:<br />The investor’s funds are deployed in a portfolio of securities by the fund manager. The value of these investments keeps changing as the market price of the securities change. Since investors are free to enter and exit the fund at any time, it is essential that the market value of their investments is used to determine the price at which such entry and exit will take place. The net assets represent the market value of assets, which belong to the investors, on a given date.<br />Net Asset Value or NAV of a mutual fund is the value of one unit of investment in the fund, in net asset terms.<br />NAV= Net Asset of the scheme / Number of Units Outstanding<br />Where Net Assets are calculated as:-<br />(Market value of investment + current assets and other assets + Accrued income – current liabilities and other liabilities – less accrued expenses) / No. of Units Outstanding as at the NAV date.<br />NAV of all schemes must be calculated and published at least weekly for closed – end schemes and daily for open- end schemes.<br />The major factors affecting the NAV of a fund are :<br /><ul><li>Sale and purchase of securities
  122. 122. Sale and repurchase of units
  123. 123. Valuation of assets
  124. 124. Accrual of income and expenses</li></ul>Measuring Mutual Fund Performance :<br />We can measure mutual fund’s performance by different method:<br /><ul><li>Absolute Return Method</li></ul>Percentage change in NAV is an absolute measure of return, which finds the NAV appreciation between two points of time, as a percentage.<br />e.g.: If NAV of one fund changes from Rs. 20 to Rs. 22 in 12 months then<br />Absolute return = (22-20) / 20 X 100 = 10%<br /><ul><li>Simple Annual Return Method : </li></ul>Converting a return value for a period other than one year, into a value for one year, is called as annualisation. In order to annualize a rate, we find out what the return would be for a year, if the return behaved for a year, in the same manner it did, for any other fractional period.<br />e.g.: If NAV of one fund changes from Rs.20 to Rs.22 in 6 months then<br />Annual Return = (22-20) / 20 X 12/6 X 100 = 20%<br /><ul><li>Total Return Method :</li></ul>The total return method takes into account the dividends distributed by the mutual fund, and adds it to the NAV appreciation, to arrive at returns.<br />(Dividend distributed + Change in NAV) / NAV at the start X 100<br />e.g.: If the NAV of one fund changes from Rs.20 to Rs.22 in 6 months if in between dividend of Rs.4 has been distributed then<br />Total Return = {4 + (22 – 20)} / 20 X 100 = 30%<br /><ul><li>Total Return when dividend is reinvested : </li></ul>This method is also called the return on investment (ROI) method. In this method, the dividends are reinvested into the scheme as soon as they are received at the then prevailing NAV (ex-dividend NAV).<br />= {(Value of holdings at the end of the period / value of the holdings at the beginning) – 1} X 100<br />e.g.: An investor buys 100 units of a fund at Rs.10.5 on January 1, 2009. On June 30, 2009 he receives dividends at the rate of 10%. The ex- dividend NAV was Rs.10.25. On December 31, 2009, the fund’s NAV was 12.25.<br />Value of holdings at the beginning period = 10.5 X 100 = 1050<br />Number of units re- invested = 100/10.25 = 9.756<br />End period value of investment = 109.756 X 12.25 = Rs.1344.51<br />Returns on Investment = {(1344.51/1050)-1} X 100<br />28.05%<br /><ul><li>Compound Average Annual Return Method :</li></ul>This method is basically used for calculating the return for more than 1 year. In this method return is calculated with the following formula:<br /> A = P X (1 + R / 100) N<br />Where P = Principal invested.<br />A = Maturity value.<br />N = period of investment in years.<br />R = Annualized compounded interest rate in %.<br />R = {(Nth root of A / P) - 1} X 100<br />e.g.: If amount invested is Rs.100 & in the end we get return of Rs.200 & period of investment is 10 years then annualized compounded return is<br />200 = 100 (1 + R / 100)10<br /> Rate = 7.2%<br />Composition of the Portfolio :<br />Credit quality of the portfolio is measured by looking at the credit ratings of the investment in the portfolio. Mutual Fund fact sheets show the composition of the portfolio and the investments in various asset classes over time.<br />Portfolio turnover ratio is the ratio of lesser of asset purchased or sold by funds in the market to the net assets of the fund.<br />If portfolio ratio is 100% means portfolio has been changed fully. When portfolio ratio is high means expense ratio is high.<br />Portfolio Turnover Ratio = Total Sales & Purchase<br /> Net Assets of fund<br />In order to meaningfully compare funds some level of similarity in the following factors has to be ensured:<br /><ul><li>Size of the funds.
  125. 125. Investment objective.
  126. 126. Risk profile
  127. 127. Portfolio composition.
  128. 128. Expense ratios.</li></ul>Fund evaluation against benchmark :<br />Funds can be evaluated against some performance indicators which are known as benchmarks.<br />There are 3 types of benchmarks:<br /><ul><li>Relative to market as whole
  129. 129. Relative to other comparable financial products.
  130. 130. Relative to other mutual funds.
  131. 131. Relative to market as whole :</li></ul>There are different ways to measure the performance of fund w.r.t market as <br />Equity Funds<br /><ul><li>Index fund – an index fund invests in the stock comprising of the index in the same ratio. This is a passive management style.
  132. 132. For example,
  133. 133. Market Index Fund - BSE Sensex
  134. 134. Nifty Index Fund - NIFTY
  135. 135. The difference between the return of this fund and its index benchmark can be explained by “TRACKING ERROR”.
  136. 136. Active Equity Funds :
  137. 137. The fund manager actively manages this fund. To evaluate performance in such case we have to select an appropriate benchmark.
  138. 138. Large diversified equity fund - BSE 100
  139. 139. Sector fund - Sectoral Indices
  140. 140. Debt Funds :
  141. 141. Debt fund can be judged against a debt market index e.g. I-BEX. In the Indian Context, CRISIL and some private players like I-sec, have tried to develop some indices to which debt funds can benchmark themselves. The market has different indexes for different maturities and composition of debt instruments so that mutual funds can benchmark against a pertinent index. For example there is a CP index, Call index, corporate bond index, MIP blended index and also Composite indices. The presence of such benchmarks has made the scene a little more pragmatic.</li></ul>2. Relative to other comparable financial products:<br />Schemes Return ConvenienceSafety volatilityLiquidity Equity High Moderate Low High High FI BondsModerate HighHigh Moderate Moderate Corporate Moderate Moderate Moderate Low Debenture Low <br />Company FixedDepositsModerate Moderate Low Low Low Bank DepositsLow High High Low High PPFModerate High High Low Moderate Life InsuranceLow Moderate High Low Low Gold Moderate Low High Moderate Moderate Real EstateHigh Low Moderate High Low Mutual FundsHigh High Moderate Moderate High <br />Schemes Investment ObjectiveRisk ToleranceInvestment HorizonEquity TermCapital AppreciationHigh LongFI BondsIncome Low Medium to long termCorporate Debentures Income High Moderate Medium to long termCompany Fixed DepositsIncome Moderate Low Medium Bank DepositsIncome Generally Flexible all termsPPFIncome Low Long Life InsuranceRisk CoverLow Long Gold Inflation hedgeLow Long Real Estate Inflation hedgeLow Long <br />3. Relative to other mutual funds<br />When we compare one company’s mutual fund with other company then we have to see the following things:<br /><ul><li>The performance of fund can be compared with similar scheme of other mutual fund.
  142. 142. We should also see the investment objective and rating profile of portfolios.
  143. 143. Average maturity of debt portfolio should be same.
  144. 144. Size of fund should be same ( Big Small)
  145. 145. The investment objectives and risk profiles
  146. 146. Expense ratio </li></ul>Returns must be calculated on a comparable basis:<br /><ul><li>Compare returns of two funds over the same periods only.
  147. 147. Similarly, only average annualized compound returns are comparable.
  148. 148. Only after- tax returns of two different schemes should be compared.</li></ul>Type of Investors & Recommended Investment Portfolio<br />According to lifecycle Stages:<br />Stages of LifecycleSurplus to saveRisk toleranceOptions Childhood Stage---Young unmarriedHigh High Life Insurance, equityYoung MarriedHigh High Emerging fund equityYoung Married / ChildrenModerate Low/ ModerateInvestment for child educationMarried / Old ChildrenModerate Low Debt service/ pension provisionPost family/ pre-retirement ageLow Low Pension Provision<br />Questionnaire Analysis <br />Investment in Mutual Funds<br />Options Frequency Proportion Yes 6678.75%No 1423.33%Total 80<br />Figure 8<br />Interpretation <br />The study conducted on 80 persons revealed that 78.75% person invests in mutual funds and 21.25% people do not invest in the schemes of the mutual funds.<br />Reason for not investing in Mutual Funds<br />Ranking Scale54321Reasons Strongly AgreeAgree Neutral Strongly disagreeDisagreeRisky 31271165Lack of Awareness181620188Lack of Funds1219142015Afraid of Scams910171529Quality of Management108182123<br />Decision Influencer<br />Options Family Relatives Friends TVInternet MF AgentObserved119204630Percentage13.75%11.25%25%5%7.5%37.5%<br />Figure 9<br />Interpretation:<br />From the above analysis it may be concluded that 38% people’s decision to invest in mutual funds is affected by mutual fund agent. So there is a need to concentrate on updating the skills of the agents to enable them to motivate the potential customers. Second variable i.e. the friend’s circle will also be able to motivate more people for investment in mutual funds rather than traditional investment avenues.<br />More Risky<br />Fund Based SchemesFrequency Proportion Equity 6885%Debt --Balanced 810%Liquid 45%Total 80<br />Figure 10<br />Interpretation:<br />The analysis revealed that 85% people feel that equity schemes are the most risky schemes. Only 10% people think that balanced schemes are risky. Since some proportion under balanced scheme is also invested in the equity, this cannot be termed as more risky. Similarly liquid scheme has also been considered as more risky by 5 % people. Investment under the liquid schemes is a money market instruments which are highly volatile. These are comparatively more risky.<br />Therefore the conclusion is drawn that lack of awareness about the different MF schemes is the main reason for giving proper opinion by the respondents.<br />Safe / Secured Returns<br />Avenues Stock MarketProperty Bank Mutual FundOthers Observed81836162Percentage 10%22.5%45%20%2.5%<br />Figure 11<br />Interpretation:<br />The analysis revealed that people in our country have still the same mind-set of investing in traditional, safer investments even at low returns. Accordingly, 45% people think that bank is safe for investment. But 22.5% people showed their interest in making investment in property even when the investment becomes illiquid. Only 20% people feel comfortable with