WHAT IS FINANCIAL PLANNING?

Financial planning means identifying the varying needs for money. For example, needs such as
buying one’s own houses, educating ones children or planning for retirement.

Planning one’s saving and investment in a manner that enables one to achieve the pre-specified
goal. For example, deciding to save Rs.4000 a month, and investing it in an index fund with
reinvestment option, towards the child’s education, is one the example of saving and investing
for a financial goal.

The objectives of financial planning is to ensure that investment are driven by pre-determined
and well thought out financial goals , and that the investment are suitable and adequate to meet
these goals.

TYPES OF INVESTORS

Normally all categories of investors, except for foreign nationals and entities are eligible to
apply. Since there is separate regulation on the investment of foreign nationals and entities in the
Indian markets, called the SEBI regulations, 1994, such entities have to first register as FIIs,
before being eligible to invest in mutual funds. There are special schemes for specific categories
of investors, which are not available for other categories of investors, like trust and charitable
organizations. The minimum investment limit is very high in such schemes to attract institutional
and large investors.

Following are some of the categories of investors’ eligible for investment.

1. Resident individuals
2. Indian companies
3. Indian trusts and charitable institutions
4. Banks
5. Non-banking finance companies
6. Insurance companies
7. Provident funds
8. Non-resident Indians
9. Overseas corporate bodies
10. SEBI registered foreign institutional investors.

CLASSIFICATION OF NEEDS OF THE INVESTORS

Needs are generically classified into protection needs and investment needs. Protection needs
refer to needs that have to be primarily taken care of, to protect the living standards, current
requirements and survival requirements of investors. Need for regular income, need for
retirement income, and need for insurance cover are protection needs. Investment needs are
additional financial needs that have to be served through saving and investment. These are needs
for children’s education, housing and children’s professional growth.

LIFE CYCLE OF THE INVESTORS

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Life cycle can be broadly divided into phases: birth and education, earning years and retirement.
On an average, the first stage lasts for 22 years, the second for 38 years and the last for 25-30
years. The earning years is when income and expenses are the highest. The retirement stage is
when incomes are low and expenses are high.

LIFE-CYCLE STAGE GUIDE FOR FINANCIAL PLANNING

Financial goals and plans depend to a large extent on the income, expenses and cash flow
requirement of individuals. It is well known that the age of the investor is an important
determinant of financial goals. Therefore financial planners have segmented investors according
to certain stage in their life-cycle as follows:

Life cycle Financial needs Ability to invest Choice of investment

stage products
Childhood Take care of by parents Investment of gifts Long term
stage
Young Immediate andshort Limited due to higher Liquid plans and short term
unmarried term spending investments. some
exposure to equity and
pension products
Young Short and intermediate Limited due to higher Medium to long term
married term spending. cash flow investment. Ability to take
stage Housing and insurance requirements are also risks. Fixed income,
needs limited insurance and equity
Consumer finance needs products
Young Medium term need for Limited. financial Medium to long term
married children’s education planning needs are investment. Ability to
with Holidays and consumer highest as this stage is take risks. portfolio of
children finance ideal for disciplining products, for growth and
Housing spending and saving long term
regularly
Married Medium term need for Higher saving ratios Medium term investment
with older children’s education and recommended. with high liquidity needs.
children marriage requirement for Portfolio of product
Need for pension, intermittent cash flows including equity, debt and
insurance and medical higher pension plans
cover higher.
Retirement Short to medium term Lower saving ratios. Medium term investments.
stage High requirement for Preference for liquid and
regular cash flows. income generating
products. Low appetite for
risky investments.

TYPES OF INVESTMENT

1. Stock

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2. Mutual Fund

3. Foreign Currency

4. Savings and Interest

– Certificate of Deposit – Issued by scheduled commercial banks and maturity of 91 days

to 1 year.
– Commercial Paper – Issued by corporate bodies for short term working capital finance
and maturity varies between 3 months to 1 year
– Corporate Debentures – Secured by the physical assets
– Floating Rate Bonds
– Govt. Securities
– Treasury Bills – Issued through RBI by GOI. Tenure is 91 days and 364 days.
– Bonds
– Bank deposits
– Public Provident Fund
– Post office schemes: Indira and Kisan Vikas Patra
– RBI Relief Bonds
– Other Government Securities

5. Private Ventures

6. Private Funds (Venture capital)

7. Real Estate

8. Commodities

WHAT IS MUTUAL FUND?

A mutual Fund is a pool of money, collected from investors, and is invested according to certain
investment objectives.

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A Mutual Fund is created when investors put their money together; it is therefore a pool of the
investors’ fund. The most important characteristics of mutual funds are that the contributors and
the beneficiaries of the fund are same class of people, namely the investor. The term mutual
means the investor contribute to the pool, and also benefit from the pool. There are no other
claimants to the fund. The pool of funds held mutually buy investor is the mutual fund.

A mutual fund business is to invest the funds thus collected, according to the wishes of the
investor the created the pool. In many market this wishes are articulated as “investment
mandates.” Usually the investor appoints professional investment managers, to manage their
funds. The same object is achieve when professional investment manager create a “product,” and
offer it for investment to the investor. This product represents a share in the pool, and pre-state
investment objectives. For example a mutual fund, which sells “money market mutual fund,” is
actually seeking investor willing to invest in a pool that would invest predominantly in money
market invest.

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.

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PARTIES & THEIR WORKINGS

Sponsor:

Sponsor is the promoter of the mutual fund. It establishes the mutual fund and registers the same
with SEBI. It appoints the trustees, custodian and the AMC with the approval of SEBI. Sponsor
must have at least 5 years track record of business interest in the financial markets. It must have
been profit making and contribute at least 40% of the capital of the AMC.

Trustees:

Trustee manages the entire mutual fund trust. It is governed by the provisions of the Indian Trust
Act. It is the responsibility of the trustees to protect the interest of the investors. SEBI approves
the appointment of trustee.

Asset Management Company:

AMC is appointed by trustees on the advice of sponsors. It is a private limited company. The
AMC is the first functionary to be appointed, and is involved in the appointment of the other
functionaries. It structures the mutual fund products, markets them and mobilizes the funds,
manages the funds and services the investors.

Types of AMCs:
1. AMCs owned by banks
2. AMCs owned by financial institutions

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 3. AMCs owned by the Indian private sector companies
4. AMCs owned by foreign institutional investors
5. AMCs owned jointly by Indian and foreign sponsors.

Transfer agent (R&T agent):

The transfer agent is responsible for investor servicing functions, as they maintain the record of
investors in mutual fund. They process investor applications, record details provided by the
investors on application forms, send out to investor’s details regarding their investments,
periodical information on the performance, process dividend payout to investors, incorporate
changes in information as communicated by investor, and keep the investor record up to date, by
recording new investors and removing investors who have withdrawn their funds. They also
provide additional services by tracking investor behavior, tracking the performance of selling
and distributing agents; and creating database for use in marketing.

The functions of custodians:

Custodians are responsible for the securities held in the mutual fund’s portfolio .They keep the
investment account, and also collect the dividends and interest payment due on the mutual fund
investment. It also tracks corporate actions like bonus issues, right offers, offer for sale, buy back
and open offers for acquisition.

FUNCTIONS OF MUTUAL FUND

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 1. Diversification:
A single mutual fund can hold securities from hundreds or even thousands of issuers, far
more than most investors could afford on their own. This diversification sharply reduces
the risk of a serious loss due to problems in a particular company or industry.

2. Professional management:
Few investors have the time or expertise to manage their personal investments every day,
to efficiently reinvest interest or dividend income, or to investigate the thousands of
securities available in the financial markets. They prefer to rely on a mutual fund's
investment adviser.

3. Liquidity:
Shares in a mutual fund can be bought and sold any business day, so investors have easy
access to their money.

4. Convenience:
Mutual fund shares can be bought via phone, mail, or even over Internet.

5. Transparency:
The SEBI (Securities Exchange Board of India) regulates the India mutual funds for the
security and convenience of the investors. SEBI ensures that a transparency is maintained
by keeping a strict vigilance on the mutual funds.

PROS & CONS OF INVESTING IN MUTUAL FUNDS:

For investments in mutual fund, one must keep in mind about the Pros and cons of investments
in mutual fund.

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Advantages of investing mutual funds:

1. Professional Management:-

The basic advantage of funds is that, they are professional managed, by well qualified
professional. Investors purchase funds because they do not have the time or the expertise
to manage their own portfolio. A mutual fund is considered to be relatively less
expensive way to make and monitor their investments.

2. Diversification:-

Purchasing units in a mutual fund instead of buying individual stocks or bonds, the
investors risk is spread out and minimized up to certain extent. The idea behind
diversification is to invest in a large number of assets so that a loss in any particular
investment is minimized by gains in others.

3. Economies of Scale:-

Mutual fund buy and sell large amounts of securities at a time, thus help to reducing
transaction costs, and help to bring down the average cost of the unit for their investors.

4. Liquidity:-

Just like an individual stock, mutual fund also allows investors to liquidate their holdings
as and when they want.

5. Simplicity:-

Investments in mutual fund are considered to be easy, compare to other available

instruments in the market, and the minimum investment is small. Most AMC also have
automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50
per month basis.

Disadvantages of investing mutual funds:

1. Professional Management:-

Some funds doesn’t perform in neither the market, as their management is not dynamic
enough to explore the available opportunity in the market, thus many investors debate

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 over whether or not the so-called professionals are any better than mutual fund or
investor himself, for picking up stocks.

2. Costs:-

The biggest source of AMC income is generally from the entry & exit load which they
charge from investors, at the time of purchase. The mutual fund industries are thus
charging extra cost under layers of jargon.

3. Dilution:-
Because funds have small holdings across different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is also the
result of a successful fund getting too big. When money pours into funds that have had
strong success, the manager often has trouble finding a good investment for all the new
money.

4. Taxes:-
When making decisions about your money, fund managers don't consider your personal
tax situation. For example, when a fund manager sells a security, a capital-gain tax is
triggered, which affects how profitable the individual is from the sale. It might have been
more advantageous for the individual to defer the capital gains liability.

TYPES OF MUTUAL FUNDS

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 1. Equity fund:

Equity funds are considered to be more risky funds as compared to other funds type, but they
also provide higher returns than other funds. It’s advisable that an investor looking to invest in
equity funds should invest for long term that is for 3 years or more. There are different types of
equity fund falling in to different risk bracket. In order of decreasing risk level, there are
following type of equity funds.

a. Aggressive growth fund:

In aggressive growth fund, fund managers aspire for maximum capital appreciation in invest in
less recourse share of speculative nature. Because of this, speculative aggressive growth fund
became more volatile and does, is porn to higher risk then other equity funds.

b. Growth funds:

Growth funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are
different from aggressive growth fund in the sense that they invest in companies that are
expected to outperform the market in future. Without entirely adopting speculative strategies
growth funds invest in those companies that are expected to post about average earnings in the
future.

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 c. Specialty funds:

Have stated criteria for investments and their portfolio comprises only those company that mitt
their criteria. Criteria for some specialty fund could be invest/not to invest in particular region/ or
companies. Specialty fund or concentrated and thus, are comparatively riskier then diversified
funds. Their following type of specialty funds.

Sector fund: Equity fund that invest in a particular sector/industry of the market are known as
sector fund. The exposure of these funds is limited to a particular sector (say information
technology, auto, banking, pharmaceuticals or fast moving consumer goods) which is why they
are more risky than equity funds that invest in multiple sectors.

Foreign securities funds: Foreign securities equity funds have the option to invest in one
foreign company. Foreign securities funds achieve international diversification and hence they
are less risky than sector funds. However, foreign securities funds are exposed to foreign
exchange rate risk and country risk.

d. Mid-cap or small-cap funds:

Funds that invest in companies having lower market capitalization than large capitalization
companies are called mid-cap companies it is less than that of big, blue chip companies (less
than Rs.2500 crores but more than Rs.500 crores) and small-cap companies have market
capitalization of the less than Rs.500 crores. Market capitalization of a company can be
calculated by multiplying the market price of the company’s share by the total number of its
outstanding shares in the market. The shares of mid-cap or small-cap companies are not as liquid
as of large-cap companies which give rise to volatility in share prices of these companies and
consequently, investment gets risky.

e. Option income funds:

Option income funds write options on a large fraction of their portfolio. Proper use of options
can help to reduce volatility, which is otherwise considered as a risky instrument. These funds
invest in big, high dividend yielding companies, and then sell options against their stock
position, which generate stable income for investor. However these funds are not yet available in
India.

f. Diversified equity funds:

Except for a small portion of investment in liquid money market, diversified equity funds invest
mainly in equities without any concentration on particular sectors. These funds are well
diversified and reduce sector-specific or company-specific risk. However, like all other funds
diversified equity funds to are exposed to equity market risk. One prominent type of diversified
equity fund in India is Equity Linked Saving Scheme (ELSS). As per the mandate, a minimum
of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to
claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return.
ELSS usually has a lock-in period and in case of any redemption by the investor before the

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expiry of the lock-in period makes him liable to pay income tax on such incomes for which he
may have received any tax exemptions in the past. The other prominent type fund is Equity
Index Funds; equity index funds have the objectives to match the performance of a specific
stock market index. The portfolio of these funds comprises of the same company that forms the
index and is constituted in the same proportion as the index. Equity index funds that follow
board indices (like S&P CNX Nifty, Sensex) are less risky then equity index funds that follow
narrow sector indices (like BSEBANKES or CNX bank index etc). Narrow indices are less
diversified and therefore, are more risky.

g. Value Funds:

Value fund invest in those companies that have sound fundamentals and whose share price are
currently under-valued. The portfolio of these funds comprises share that are trading low price to
earnings ratio (market price per share/earnings per share) and a low market to book value
(fundamental value) Ratio. Value fund may select companies from diversified sectors and are
exposed to lower risk level as compared to growth funds or specialty funds. Value stoke are
generally from cyclical industries (such as cement, steel, sugar etc). Which make them volatile in
the short-term. Therefore, it is advisable to invest in value funds with a long-term time horizon as
risk in the long term, to a large extent, is reduced.

There are three ways, where the total returns provided by mutual funds can be enjoyed by
investors:
✔ Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly
all income it receives over the year to fund owners in the form of a distribution.
✔ If the fund sells securities that have increased in price, the fund has a capital gain. Most
funds also pass on these gains to investors in a distribution.
✔ If fund holdings increase in price but are not sold by the fund manager, the fund's shares
increase in price. You can then sell your mutual fund shares for a profit. Funds will also
usually give you a choice either to receive a check for distributions or to reinvest the
earnings and get more shares.

The object of equity income or dividend yield equity funds is to generate high recurring income
and steady capital appreciation for investors by investing in those companies which issue high
dividend (such as power or utility companies whose share price fluctuate comparatively lesser
than other companies share prices). Equity dividend yield equity funds are generally exposed to
the lowest risk level as compared to other equity funds.

2. Debt / Income Funds:

Funds that invest in medium to long- term debt instruments issued by private companies, banks,
financial institutions, governments and other entities belonging to various sectors (like
infrastructure companies etc.) are known as debt/income funds. Debt funds low risk profile funds
that seek to generate fixed current income (and not capital appreciation) to investors. In order to
ensure regular income to investors, debt (or income) funds distribute large function of their
surplus to investors. Although debt securities are generally less risky than equities, they are
subject to credit risk (risk of default) by the issuer at the time of interest or principle payment. To
minimize the risk of default, debt funds usually invest in securities from issuer who are rated by
credit rating agencies and are consider being of “Investment Grade”. Debt funds that target high

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returns are more risky. Based on different investment objectives, there can be following types of
debt funds:

a. Diversified Debt Funds:

Debt funds that invest in all securities issued by entities belonging to all sectors of the market are
known as diversified debt funds. The best feature of diversified debt funds is that investments are
properly diversified in it all sectors which results in risk reduction. Any loss incurred, on account
of default by a debt issuer, is shared by all investors which further reduce risk for an individual
investor.

b. High Yield Debt Funds:

As risk of default is present in all debt funds, therefore, debt funds generally try to minimize the
risk of default by investing in securities issued by only borrowers who are considered to be of
“Investment grade”. But, high yield debt fund adopt a different strategy and prefer security issue
by those issuer who are consider being of “below investment grade”. The motive behind
adopting this sort of risky strategy is to earn higher interest returns from these issuers. These
funds are more volatile and bear higher default risk, although they may earn at times higher
returns for investors.

c. Assured Return Funds:

Also it is not necessary that a fund will meet its objective or provide assured return to investors,
but there can be fund that comes with a lock-in period and offer assurance of annual returns to
investors during lock-in period. Any shortfall in return is suffered by the sponsor or the asset
management company (AMCs). These funds are generally debt funds and provide investors with
a low-risk investment opportunity. However, the security of investment depends upon the net
worth of the guarantor (whose name is specified in advance on the offer document). To
safeguard the interest of investors, SEBI permits only those funds to offer assured return scheme
whose sponsors have adequate net-worth to guarantee return in the future. In the past, UTI had
offered return scheme (i.e. monthly income plan of UTI) that assured specified return to investor
in the future. UTI was not able to fulfill its promises’ and faced large shortfall in returns.
Eventually, government had to intervene and took over UTI’s payment obligations on itself.
Currently, no AMC in India offer assured return scheme to investor, through possible.

d. Fixed Term Plan Series:

Fixed term plan series usually are closed-ended scheme having short term maturity period (of
less than one year) that offer a series of plan and issue units to investors at regular interval.
Unlike closed-ended funds, fixed term plan are not listed on the exchanges. Fixed term plan
series usually invest in debt/income scheme and target short term investors. The objective of
fixed term plan scheme is to gratify investors by generating some expected return on short
period.

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3. Gilt Funds:

Gilt fund is also known as government securities in India, gilt funds invest in government paper
(name dated securities) having medium to long term maturity period. Issued by the government
of India, these investments have little credit risk (risk of default) and provide safety of principle
to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk.
Interest rate and price of debt securities are inversely related and any change in the interest rates
results in a change in the NAV of debt/ gilt funds in an opposite direction.

4. Money market / liquid funds:-

Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt
instrument. These securities are highly liquid and provide safety of investment, thus making
/liquid funds the safest investment option when compared with other mutual fund types.
However, even money market / liquid funds are exposed to the interest rate risk. The typical
investment option for liquid funds includes treasury bills (issued by governments), commercial
papers (issued by companies) and certificates of deposit (issued by banks).

5. Hybrid funds:-

As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities,
debts and money market securities. Hybrid funds have an equal proportion of debt and equity in
their portfolio.

6. Balanced funds:-

The portfolio of balanced funds includes assets like debt securities, convertible securities, and
equity and preference shares held in a relatively equal preparation. The objectives of balanced
funds are to reward investor with a regular income, moderate capital appreciation and at the same
time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative
investors having a long term investment horizon.

7. Growth and income funds:-

Funds that combine features of growth funds and income funds are known as growth and income
funds. These funds invest in companies having potential for capital appreciation and those
known for issuing high dividends. The level of risks involved in these funds is lower than growth
funds and higher than income funds.

8. Asset allocation funds:-

Mutual funds may invest in financial assets like equity, debt, money market or nonfinancial
((physical) assets like real estate, commodities etc. Asset allocation funds adopt a variable asset
allocation strategy that allows fund managers to switch over from one asset class to another at
any time depending upon their outlook for specific markets. In other words, fund managers may
switch over to equity if they expect equity market to provide good returns. It should be noted that
switching over from one asset class to another is a decision taken by the fund manager on the

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basis of his own judgment and understanding of specific markets, and therefore, the success of
these funds depends upon the skill of a fund manager in anticipating market trends.

9. Commodity funds:-

Those funds that focus on investing in different commodities (like metals, food, grains, crude oil
etc.) or commodity companies or commodity futures contracts are termed as commodity funds.
A commodity fund that invests in a single commodity or a group of commodity is a specialized
commodity fund and a commodity fund that invests in all available commodities is a diversified
commodity fund bears less risk than a specialized commodity fund. “Precious metals fund” and
gold funds (that invest in gold, gold futures or shares of gold mines) are common examples of
commodity funds.

10. Real estate funds:-

Funds that invest directly in real estate or lend to real estate developer or invest in shares
/securitized assets of housing finance companies are known as specialized real estate funds. The
objective of these funds may be to generate regular income for investors or capital appreciation.

11. Exchange traded funds:-

It provide investors with combined benefits of a closed-end and open-end mutual fund. Exchange
traded funds follow stock market indices and are traded on stock exchanges like a single stock at
index linked prices. The biggest advantage offered by these funds is that they offer
diversification, flexibility of holding a single share (tradable at index linked prices) at the same
time. Recently introduced in India, these funds are quite popular abroad.

12. The fund of funds:-

Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund
schemes offered by different AMCs, are known as fund of funds. Fund of funds maintain a
portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds
maintain a portfolio comprising of equity/debt/money market instruments or non financial assets.
Fund of funds provide investors with an added advantage of diversifying into different mutual
fund schemes with even a small amount of investment, which further helps in diversification of
risks. However, the expense of fund of funds is quit high on account of compounding expenses
of investment into different mutual fund schemes.

GUIDELINES FOR INVESTING IN MUTUAL FUND

Source of information:

The mutual fund is required to file with SEBI a detailed information memorandum, which is also
called as the prospectors or the offer document. It provides all the information about the fund and
the scheme in detail in a prescribed format. An abridged version of the offer document, which is
called as key information memorandum, is appended to the application form. Investors have the
right to ask for a free copy of the offer document.

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Minimum amount:

All mutual fund schemes specify the minimum amount that has to be invested, and the multiples
thereof. E.g. if a mutual fund may specify that minimum investment is Rs. 1000, and subsequent
investments have to be in multiples of 500. These restrictions are usually not applicable to inter-
scheme and inter-option switches and reinvestments.

Where to buy mutual fund:

Mutual funds have a distribution network, made up of distributing agents, investor service center,
and a branch networks. An investor can buy units of the fund from any of these agencies, who
sell units on behalf of the mutual fund.

When to buy mutual fund:

If the scheme is open-ended, the investor can invest on any given day, at the price quoted by the
mutual fund. If the scheme is close-ended the mutual fund has an initial offer period. During this
period, the investors can buy units at a price that is fixed, for the whole period. After the closure
of the initial offer, the mutual fund closes further direct sell to investors. After the initial offer
period they have to by units from the stock markets.

Distribution channels:

A distribution company has several agents and distributors working for it, and is the
organizational interface with the mutual fund. It is an institutional agent for a mutual fund. They
leverage their branch network and regional presence to obtain business from their existing
clients. Banks are able to offer collection services and also sell mutual funds to their clients as a
value added proposition. Mutual fund uses four channels they are;
✔ Individual agents
✔ Distribution companies
✔ Banks and NBFCs
✔ Direct marketing channels
Mutual funds have their own internal guidelines on the appointment and terms of these
distributing agencies. There are no mandatory registrations for distributors. There is no
regulatory requirement regarding who can be an agent, or the fees and commissions payable to
them.

Proof of purchase of units to investors:

The practice of giving certificates to investors, in their open-ended schemes is now replaced by
an account statement, which shows their holdings and the price at which they were bought.
Investors are identified by the account number or a folio number. Investors can consolidate their
holdings across various schemes, and can receive a consolidated account statement. The account
statement is computer generated which is a safe way of holding mutual fund units. The account
shows the holding details, the number of units outstanding and the value of the holdings. All
transactions relating to purchase of units, redemption of units, dividends, re-investments, etc. are
shown in the account statement. Along with the account statements, mutual funds also provide
transaction slips, which enable investors to buy more units, or sell whole or a part of their
holdings. In a closed end fund, investor’s usually receive certificates as proof of purchase.

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Documents enforcing the rights of investors:

The signed application form by an investor is a proof of acceptance of the offer of the mutual
fund, and is a legal document of the transaction.

Periodic account stalemate:

The frequency of the account statement is stated in the offer document. Investors receive an
annual statement, if there are no transactions in a year. Transaction during the year like sale or
purchase of units, re-investment of dividends etc, and the updated account statement is sent to
the investor.

Multiple holders of Mutual Fund units

Every holding in a mutual fund can have up to three joint holders. The first holder is entitled to
receive all information and notifications, as also the dividend payments and the redemption
proceeds. Investors can specify the nature of the joint ownership, which can be on joint basis or
on either or survivor basis. If ownership is on “joint” basis, redemption requisition has to be
signed by all holders. In the case of “either or survivor” basis, it is sufficient if one of the holders
sings the redemption requisite. The redemption proceeds however, are payable only to the first
holder, in both cases.

Precautions to be taken while investing in mutual fund:

An investor should always keep a photo copy of the application form. This will help the investor
to know the manner in which application was made and the choice they have exercised. The
investors have to preserve the counter folio issued by the collecting agency. If account statement
or certificate is not received, the acknowledgement will act as a proof of purchase. On event of
death of the first holder ownership will transfer to the joint owner. It is important to fill up
nomination details in the application. This will enable legal heirs to claim the holdings without
procedural delays. Cheques should be crossed and application number and name should be
written on the back of the cheque.

Minimum period for which an investor has to stay invested in mutual fund:

Mutual funds can be issued with or without lock-in periods. In case of lock-in period the
investors cannot exit the fund any time where as in case of without lock-in period the investors
can repurchase any time. Repurchase information is given in offer document.

Repurchase procedure:

If the fund is open-ended, the investor has to send the repurchase requisition slip, duly completed
and signed, to the registrars and transfer agents. If the fund is closed end, the investor has to send
the original certificate, discharged by signing on the reverse, to the registrar and transfer agent.
Investors have to provide bank details for all repurchase requirements, so that the amount can be
directly credited.

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Scheme switching:

Buying units of one scheme by repurchasing the units of another scheme is called switching. The
switching option to an investor depends on how his account is serviced. If the account is serviced
through a bank, which specifically offers the services of inter-fund switch, investors can buy
units of another mutual fund. In all other situations, repurchase is routed through the register and
transfer agent.

Way to know the NAV of the fund:

NAV is provided on every day basis. The investors can get the NAV over phone using 24-hour
voice mail facility. It is also made available on the websites of the funds, and on the AMFI
website. Business newspapers also publish the NAVs in the security prices pages.

What is the sale and repurchase price? Why are these two prices different?

The sale price is the price at which a mutual fund is willing to sell to investors additional units.
An investor, who buys or invests in mutual fund, pays the sale price. The repurchase price
represents the price at which the mutual fund is willing to buy the units back from the investor.
That is, the price at which the investors can sell his holdings to the mutual fund. The mutual fund
decides the sale and repurchases price based on the NAV of the scheme. However, mutual funds
need make units available for sale and repurchase at the NAV of the scheme. They can alter the
NAV, by a factor called the “load” and charge different sale and repurchase prices.

INVESTMENT STRATEGIES

✔ Systematic Investment Plan (SIP)

SIP generally starts at minimum amounts of Rs.1000/- per month and upper limit for
using an ECS is Rs.25000/- per instruction. For instance, if one wishes to invest Rs.1,
00,000/- per month, then they need to do it on four different dates.

✔ Systematic Transfer Plan (STP)

There is another facility called STP i.e. systematic transfer plan. Using this facility the
investor can transfer a fixed amount from one type of fund into another type of fund of
the same fund house. For example, an investor can transfer a fixed amount periodically
from a debt fund into an equity fund or vice a versa. This is a very useful strategy from
the investors overall financial planning.

✔ Systematic Withdrawal Plan (SWP)

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 A service offered by a mutual fund that provides a specific payout amount to the
shareholder at predetermined intervals, generally monthly, quarterly, semiannually or
annually.

TYPES OF RISK

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RISK-RETURN TRADE OFF

✔ It indicates investor’s higher risk exceed expectations of investor’s for higher returns and
vice versa.
✔ For example, if an investors opt for bank FD, which provide moderate return with
minimal risk. But as he moves ahead to invest in capital protected funds and the profit-
bonds that give out more return which is slightly higher as compared to the bank deposits
but the risk involved also increases in the same proportion.
✔ Mutual funds provide professional management, diversification, convenience and
liquidity to Investors. That doesn’t mean mutual fund investments risk free.
✔ Because the money that is pooled in are not invested only in debts funds which are less
riskier but are also invested in the stock markets which involves a higher risk but can
expect higher returns. Hedge fund involves a very high risk since it is mostly traded in
the derivatives market which is considered very volatile.

TYPES OF RETURN

There are three ways, where the total returns provided by mutual funds can be enjoyed by
investors:
✔ Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly
all income it receives over the year to fund owners in the form of a distribution.
✔ If the fund sells securities that have increased in price, the fund has a capital gain. Most
funds also pass on these gains to investors in a distribution.
✔ If fund holdings increase in price but are not sold by the fund manager, the fund's shares
increase in price. You can then sell your mutual fund shares for a profit. Funds will also
usually give you a choice either to receive a check for distributions or to reinvest the
earnings and get more shares.

MUTUAL FUND INDUSTRY IN INDIA

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The origin of mutual fund industry in India is with the introduction of the concept of mutual fund
by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987
when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities
wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the
Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family
rose the AUM to Rs. 470 in March 1993 and till April 2004, it reached the height of 1,540 bn.
Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than
the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian
banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the
country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it
is the prime responsibility of all mutual fund companies, to market the product correctly abreast
of selling.

The mutual fund industry can be broadly put into four phases according to the development of
the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The
first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700
crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual
Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov
89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in
1990. The end of 1993 marked Rs.47,004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.

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The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The
Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other
mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the
Specified Undertaking of the Unit Trust of India with AUM of Rs.29, 835 crores (as on January
2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and
under the rules framed by Government of India and does not come under the purview of the
Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of AUM and with the
setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with
recent mergers taking place among different private sector funds, the mutual fund industry has
entered its current phase of consolidation and growth. As at the end of September, 2004, there
were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

PEST ANALYSIS

Political analysis:-

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  In India, SEBI (Mutual Fund) Regulations, 1996 regulates the structure of mutual funds.
 Mutual funds in India are constituted in the form of a Public Trust created under The
Indian Trusts Act, 1882.
 The stability of the government and people faith into it acts as an important return factor.
 The impact of foreign investment.
• Forced renegotiation of contracts
• A requirement that a minimum percentage of supervisory positions be held by
locals.

Economic analysis:-

 India's population is young, with 54% under the age of 25 and 80% under 45 and the
percentage of working population is rising rapidly.
 If we see the position of BSE Senex as compared to other major indexes in the world then
we find that BSE has been the best performer.
 India – Potential 'Services Capital' of the World-With services becoming increasingly
tradable, India is well placed in terms of costs and skill sets and over the past 13 years.
 Inflation affects the Return-Inflation has always lowered the actual return from bank
savings except the year 2002
 Impact of Various Changes-With the increase in global trade and finance, there is a need
for level playing field as the WTO has laid down common rules to facilitate smooth trade
among member countries irrespective of their size.

Socio-cultural analysis:-

 The most important factor shaping in today's global economy is the process of
globalization.
 The increasing share of India and other emerging market economies in world trade.
 To fund future needs, to meet contingencies, To maintain same standard of living after
retirement.
 Standard of living of population tends to improve.

Technological analysis:-

 Indian companies are moving in search of low-cost markets, technology is driving growth
in production and competition is becoming more intense.
 The outburst in communication technology has led to greater integration of Indian
financial markets across the world.
 The outburst of technology has made it possible for the foreign companies to look for
Indian market and returns associated with it.
 All the legal framework and associated work has become easy to handle

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 SWOT ANALYSIS

Strengths:

✔ SEBI/AMFI has taken an active role in protecting investor interests through

regulations, certifications, code of conduct.
✔ Open product Architecture i.e. distributors offer a range of mutual fund product to
choose from.
✔ Has often acted as a counterbalance to equity market volatility, market liquidity.
✔ Corporate memberships
✔ Wider product offerings
✔ Greater reliance on research
✔ Accessing equity capital markets
✔ Foreign collaborations and joint ventures
✔ Specialized services/niche broking
✔ Online broking

Weakness:

✔ Limited channels of distribution i.e. banks and agents account for more than 70%
of distribution of mutual funds. E-channels have not evolved as a source for
acquiring customers.
✔ Lack of adequate effort on the part of the wealth managers/distributors in
educating the market about mutual products has resulted in low levels of
penetration.
✔ Absence of such global product policy on overseas mutual fund products to be
offered in the Indian market.
✔ Shortage of skilled and competent financial advisors.

Opportunity:

✔ Mutual fund investment as a % of household savings invested in financial assets

less than 1%.
✔ Robust performance of Indian capital markets vis-avis their counterparts abroad.
✔ HNWI/Mass affluent growing at a CAGR of 22%. Estimated that there are 15.4
million on Indian household.
✔ Proportion of new money increasing as a result of economic growth. Investor is
taking a more active part in their financial affairs.
✔ Resident individuals permitted to invest up to $.25,000 in asset abroad attractive
for overseas mutual fund.
✔ Mutual funds in India permitted to invest up to 10% of their net assets abroad in
foreign securities subject to a maximum of $50 million.

Threats:

✔ Large number of substitutes available to the Indian investor-deposits, equities,

real estate.

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 ✔ In India low risks investment products like PPF offer higher returns.
✔ Investment abroad will need to be closely tracked to ensure that the source of fund
is legitimate and to protect against money laundering-onus on banks to ensure the
same.
✔ As the mutual fund industry opens up it will be more difficult for regulators to
keep vigilance of schemes offered by a large number of Indian and foreign
players.
✔ As more foreign players enter India through the JV route, investors in India will
need to educate themselves about risks inherent in investing abroad like foreign
exchange risks, tax implications etc.

MAJOR PLAYERS OF MUTUAL FUNDS IN INDIA:

1. Reliance Mutual Funds

2. HDFC
3. Fidelity
4. Franklin Templeton
5. ABN Amro
6. AIG
7. Bank of Baroda
8. Birla Sun Life

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9. Canara Bank
10. DBS Chola Mandalam AMC
11. DSP Merrill Lynch
12. Deutsche Bank
13. Escorts Mutual
14. HSBC
15. ICICI Prudential
16. ING
17. JM Financial
18. JP Morgan
19. Kotak Mahindra
20. LIC
21. Lotus India
22. Morgan Stanley
23. Principal
24. Quantum
25. State Bank of India (SBI)
26. Sahara Mutual Funds
27. Standard Chartered
28. Sundaram BNP Paribas
29. TATA
30. UTI

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