Chapter I Introduction

COMPANY PROFILE

Company Profile
SBI Mutual Fund is Indias largest bank sponsored mutual fund and has an enviable track record in judicious investments and consistent wealth creation. The fund traces its lineage to SBI - Indias largest banking enterprise. The institution has grown immensely since its inception and today it is India's largest bank, patronized by over 80% of the top corporate houses of the country. SBI Mutual Fund is a joint venture between the State Bank of India and Socit Gnrale Asset Management, one of the worlds leading fund management companies that manages over US$ 500 Billion worldwide. In twenty years of operation, the fund has launched 38 schemes and successfully redeemed 15 of them. In the process it has rewarded its investors handsomely with consistent returns. A total of over 5.4 million investors have reposed their faith in the wealth generation expertise of the Mutual Fund. Schemes of the Mutual fund have consistently outperformed benchmark indices and have emerged as the preferred investment for millions of investors and HNIs. Today, the fund manages over Rs. 27,076.63 crores of assets and has a diverse profile of investors actively parking their investments across 36 active schemes.

The fund serves this vast family of investors by reaching out to them through network of over 130 points of acceptance, 28 investor service centres, 46 investor service desks and 56 district organizers. SBI Mutual is the first Bank-sponsored fund to launch an offshore fund Resurgent India Opportunities Fund. Growth through innovation and stable investment policies is the SBI MF credo.

Corporate Office: SBI Mutual Fund 191, Maker Tower 'E', Cuffe Parade, Mumbai - 400 005 Tel: 022-22180221 Fax: 022-22189663 Email: partnerforlife@sbimf.com

Details SBI Mutual Fund Name of the Mutual Fund Date of setup of Mutual Fund Name of Sponsor Name of Trustee Company Name of the Asset Management Company Date of Incorporation of AMC Address of AMC SBI Mutual Fund June 29, 1987 State Bank of India SBI Mutual Fund Trustee Company Private Limited SBI Funds Management Private Limited February 7, 1992 191, Maker Tower E, Cuffe Parade, Telephone Number Fax Number Website Email Names of Custodian Mumbai 400005 022 - 22180221-27 022 22189663 www.sbimf.com partnerforlife@sbimf.com Citi Bank HDFC Bank Ltd. Names of Registrar and Transfer Agent Stock Holding Corporation of India Computer Age Management Services Pvt. Ltd Computronics Financial Services India Ltd Datamatics Financial Software Services Ltd

GROWTH IN ASSET UNDER MANAGEMENT

Investors Service Centres

INTRODUCTION
The most important factor shaping in today's global economy is the process of globalization. Indian companies are moving in search of low-cost markets, technology is driving growth in production and competition is becoming more intense. A second factor is the fastest growth in private capital flows, mainly short-term flows by banks and financial institutions, portfolio flows by mutual funds and pension funds and foreign direct investment into India. A third factor is the increasing share of India and other emerging market economies in world trade. The outburst in communication technology has led to greater integration of Indian financial markets across the world. The impact of these changes could be felt from the extremely buoyant activity in Indian stock markets. A number of foreign financial service providers have entered into the Indian financial market like Morgan Stanley, Templeton, and Goldman Sachs. The stock market is booming with Sensex hovering around 16000-17000. SEBI has put in place appropriate guidelines and controls to regulate the markets in tune with the changing environment and attendant risks. All this is happening because of large amounts of investment in the country. People often invest in various asset classes to: * To beat Inflation * To fund future needs * To meet contingencies * To maintain same standard of living after retirement All these factors matters a lot to the investors and the mutual fund route is one way through which people can meet these needs.

OBJECTIVE OF THE STUDY

To help investors to design their financial portfolio with the best investment option

To increase awareness about Mutual Funds among people.

To give a brief idea about the benefits available from Mutual Fund investment. To discuss about the market trends of Mutual Fund investment.

Observe the fund management process of mutual funds

Explore the recent developments in the mutual funds in India To give an idea about the regulations of mutual funds

Chapter - II Research Methodology

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RESEARCH METHODOLOGY
(A) DEFINITION OF RESEARCH Research in common parlance refers to a search for knowledge. It is a systematized effort to gain new knowledge. Research is defined as human activity based on the intellectual application in the investigation of matter. Research can also be defined as the search for knowledge or any systematic investigation to establish facts. According to Clifford Woody research comprises defining and redefining problems, formulating hypothesis or suggested solutions, collecting, organizing and evaluating data, making deductions and reaching conclusions and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. Research needs valuable resources such as money, time, materials, manpower and machines to get the work done effectively to minimize input value for a unit value of output and the return-on-investment. (B) OBJECTIVES OF RESEARCH The purpose of research is to discover answers to questions through the applications of scientific procedures. The main aim of research is to find out the truth which is hidden and which has not been discovered as yet. To gain familiarity with a phenomenon or to achieve new insights into it. To portray accurately the characteristics of a particular individual, situation or a group. To determine the frequency with which something occurs or with which it is associated with something else. To test a hypothesis of a casual relationship between variables. (C) TYPES OF RESEARCH The basic types of research are as follows: 1. DESCRIPTIVE RESEARCH

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It includes surveys and fact finding inquires of different kinds. The researcher has no control over the variables; he can only report what has happened or what is happening. The researcher seeks to measure such items as frequency of shopping, preferences of people, etc. 2. ANALYTICAL RESEARCH The researcher has to use facts or information already available, and analyze these to make a critical evaluation of the material. 3. APPLIED RESEARCH Applied research aims to finding a solution for an immediate problem facing a society or an industrial organization. Research to identify social, economic or political trends that may affect a particular institution or the copy research or the marketing research or evaluation research are examples of applied research. 4. FUNDAMENTAL RESEARCH Fundamental research is mainly concerned with generalizations and with the formulation of theory. Research concerning some natural phenomenon or relating to pure mathematics are examples of fundamental research. 5. EXPLORATORY RESEARCH The objective of this research is the development of hypothesis rather than its testing. 6. EMPIRICAL RESEARCH Empirical research relies on experience or observation alone. It is data based research, coming up with conclusions which are capable of being verified by observation or experiment.

(D) DIFFERENT METHODS OF DATA COLLECTION

Data collection is a term used to describe a process of preparing and collecting data for example as part of a process improvement or similar project. The purpose of data collection is to obtain information to keep on record, to make decisions about important issues, to pass information on to others. Primarily, data is collected to provide information
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regarding a specific topic. Data collection usually takes place early on in an improvement project, and is often formalized through a data collection plan which often contains the following activity.

TYPES OF DATA COLLECTION 1) PRIMARY DATA

The primary data are those which are collected afresh and for first time and thus happened to be original in character.

Methods of collecting Primary Data

Questionnaires A questionnaire is sent by post to the persons concerned with a request to answer the questions and return the questionnaire. The method is less costly and large number of respondents can be covered. Interviews This method of collecting data involves presentation or oral-verbal stimuli and reply in terms of oral-verbal responses. There are different types of interviews such as personal interview, telephone interviews, structured interview, unstructured interview, focused interview and clinical interview. Observation Under this method, the information is sought by way of investigators own direct observation without asking from the respondent. The information obtained under this method relates to what is currently happening and it is independent of respondents willingness to respond. Schedule In this method the proforma containing a set of questions known as schedules are being filled in by enumerators who are specially appointed for the purpose. In certain
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situations, schedules may be handed over to respondents and enumerators help them in recording their answers.

2) SECONDARY DATA: Secondary data are those data, which is secondary in nature. Means the data is already collected by someone other but not by researcher and the purpose is different from the research itself. (E) RESEARCH METHODOLOGY FOR THE PROJECT: The main objective of this project report is to spread the awareness about the mutual funds and design the portfolio for investors to maximize their returns. For this purpose I have gone through the fact sheets of various mutual fund companies and visited few invest companies to understand the funda of designing the portfolio for investors keeping in mind their risk Secondary Data: Secondary data is collected from: 1. Company Fact Sheets 2. Company Brochures 3. Website of the company
4. Mutual Fund books

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14

Chapter - III Data Processing and Analysis

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INTRODUCTION
Economic liberalization and globalization of the Indian markets began in 1991. This meant that the Indian consumers had access to imported goods which resulted in fall of prices of domestic goods due to high competition. This also meant that lower interest rates and more importantly transfer of risk from government to the individuals, forcing them to protect their investments them self. Investors have variety of options for investments. Some of them are providing fixed rate of returns are some of them provide variable rate of returns. Many had investments with UTI, Company fixed deposits, and Bank fixed deposits that were offering high returns that now they are starting falling after globalization and liberalization. There are some investors who are active. They are the ones who act promptly and make educated, informed decisions about market. They done their own research and understand the factors which may have effect on their investments in future. On the other hand some investors who are apprehensive and will take action only when they can see tangible merits on the change. As every individual is different, their objectives behind investments also differ from person to person. Their objectives can for fixed return, capital appreciation, tax planning or current income. The investment decision will mainly depend upon the objective of investor. He or she needs to design their portfolio according to their risk and return profile. The individual should start by specifying investment goals. Once these goals are established, the individual should be aware of the mechanics of investing and the environment in which investment decision are made. These include the process by which securities are issued and subsequently bought and sold, the regulations and tax laws that have been enacted by various levels of government, and the sources of information concerning investment that are available to the individuals. Designing a portfolio is not simple task. Ones individual has decided about the type of investment then he or she needs to decide portfolio in that category. There are various ways of maintaining portfolio of individual.

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WORKING OF MUTUAL FUND

The entire mutual fund industry operates in a very organized way. The investors, known as unit holders, handover their savings to the AMCs under various schemes The objective of the investment should match with the objective of the fund to best suit the investors needs. The AMCs further invest the funds into various securities according to the investment objective. The return generated from the investments is passed on to the investors or reinvested as mentioned in the offer document.

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ORGANIZATION OF MUTUAL FUNDS

There are many entities involved and the diagram below illustrates the organizational set up of a Mutual fund:

The structure consists of Unit Holders or Investors

An investor is any party that makes an investment and who handover their savings to the AMCs under various schemes.

Sponsor
Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. 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.

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 Trust
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.

Trustee
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 alias 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.

Asset Management Company (AMC)

The Trustee as the Investment Manager of the Mutual Fund appoints the AMC. 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. Atlas 50% of the directors of the AMC is an independent director who is not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times.

Registrar and Transfer Agent

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.

Custodian
Custodian registered with SEBI, holds the securities of various schemes of the fund in its custody.
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 SEBI (Regulatory Authorities):

To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody. According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent. The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc.

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ADVANTAGES OF MUTUAL FUNDS

There are numerous benefits of investing in mutual funds and one of the key reasons for its phenomenal success in the developed markets like US and UK is the range of benefits they offer, which are unmatched by most other investment avenues. We have explained the key benefits in this section. The benefits have been broadly split into universal benefits, applicable to all schemes and benefits applicable specifically to open-ended schemes. Universal Benefits Affordability: A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.500/-. This amount today would get you less than quarter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directly in the stock market. Diversification: The nuclear weapon in your arsenal for your fight against Risk. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of your returns, for example during one period of time equities might under perform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology sector might be faring poorly but the auto and textile sectors might do well and may protect your principal investment as well as help you meet your return objectives. Variety Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For example, an investor can invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk appetite and thus create a balanced portfolio easily or simply just buy a Balanced Scheme.

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Professional Management: Qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money. When you buy in to a mutual fund, you are handing your money to an investment professional who has experience in making investment decisions. It is the Fund Manager's job to (a) find the best securities for the fund, given the fund's stated investment objectives; and (b) keep track of investments and changes in market conditions and adjust the mix of the portfolio, as and when required. Tax Benefits: Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit holders. However, as a measure of concession to Unit holders of openended equity-oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10.5%. In case of Individuals and Hindu Undivided Families a deduction up to Rs. 9,000 from the Total Income will be admissible in respect of income from investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax. Regulations: Securities Exchange Board of India (SEBI), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors Benefits of Open-ended Schemes: Liquidity: In open-ended mutual funds, you can redeem all or part of your units any time you wish. Some schemes do have a lock-in period where an investor cannot return the units until the completion of such a lock-in period. Convenience: An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic Investment Plan (SIP) or a Systematic Withdrawal Advantage Plan (SWAP). In addition to this an investor receives account statements and portfolios of the schemes.

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Flexibility: Mutual Funds offering multiple schemes allow investors to switch easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time. Transparency: Open-ended mutual funds disclose their Net Asset Value (NAV) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any other financial instrument. Thus the investor is in the know of the quality of the portfolio and can invest further or redeem depending on the kind of the portfolio that has been constructed by the investment manager.

RISK FACTORS OF MUTUAL FUNDS

The Risk-Return Trade-off: The most important relationship to understand is the risk-return trade-off. Higher the risk greater the returns/loss and lower the risk lesser the returns/loss. Hence it is up to you, the investor to decide how much risk you are willing to take. In order to do this you must first be aware of the different types of risks involved with your investment decision.

Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works on the concept of Rupee Cost Averaging (RCA) might help mitigate this risk.

Credit Risk:
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The debt servicing ability (may it be interest payments or repayment of principal) of a company through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. An AAA rating is considered the safest whereas a D rating is considered poor credit quality. A well-diversified portfolio might help mitigate this risk. Inflation Risk: Things you hear people talk about: "Rs. 100 today is worth more than Rs. 100 tomorrow." "Remember the time when a bus ride costed 50 paise?" "Mehangai Ka Jamana Hai." The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principal could at the time of the investment. This happens when inflation grows faster than the return on your investment. A well-diversified portfolio with some investment in equities might help mitigate this risk. Interest Rate Risk: In a free market economy interest rates are difficult if not impossible to predict. Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified portfolio might help mitigate this risk.

Political/Government Policy Risk: Changes in government policy and political decision can change the investment environment. They can create a favorable environment for investment or vice versa.

Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities.

VARIOUS INVESTMENT OPTIONS IN MUTUAL FUNDS

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To cater to different investment needs, Mutual Funds offer various investment options. Some of the important investment options include:

Growth Option: Dividend is not paid-out under a Growth Option and the investor realizes only the capital appreciation on the investment (by an increase in NAV).

Dividend Payout Option: Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout. Dividend Re-investment Option: Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same. Insurance Option: Certain Mutual Funds offer schemes that provide insurance cover to investors as an added benefit. Systematic Investment Plan (SIP): Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favor of the fund. The investor is allotted units on a predetermined date specified in the offer document at the applicable NAV. Systematic Withdrawal Plan (SWP): As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a predetermined interval. The investor's units will be redeemed at the applicable NAV as on that day.

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MUTUAL FUNDS AND OTHER INVESTMENT OPTIONS

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Summarized below are the short-term and long-term financial investment options available for Indian investors

SHORT-TERM

INVESTING

Savings Bank Account Often the first banking product people use, savings accounts offer low interest (4%-5% p.a.), making them only marginally better than safe deposit lockers. Use only for shortterm (less than 30 days) surpluses Money Market Funds (also known as Liquid funds) Money market funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximize returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. With the flexibility to issue cheques from a money market fund account now available, explore this option before putting your money in a savings account. Offer better returns than savings account without compromising liquidity.
Bank Fixed Deposit (Bank FDs)

Bank Fixed Deposit or FD is the most preferred investment option today. It yields up to 8.5% annual return depends on the Bank and period. Minimum period is 15 days and maximum is 5 years and above. Senior citizens get special interest rates for Fixed Deposits. This is considered to be a safe investment because all banks operated under the guidelines of Reserve Bank of India.

LONG -TERM INVESTING Post Office Savings Schemes (POSS)

POSS are popular because they typically yield a higher return than bank FDs. The monthly income plan could suit you if you are a retired individual or have regular income needs. Besides the low (Government) risk, the fact that there is no tax deducted at source (TDS) in a POSS is amongst the key attractive features. The Post Office offers various schemes that include National Savings Certificates (NSC), National Savings Scheme (NSS), Kisan Vikas Patra, Monthly Income Scheme and Recurring Deposit Scheme. National Saving Certificate (NSC)
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NSC is backed by Govt. of India so it is a safe investment method. Lock in period is 6 years. Minimum amount is Rs100 and no upper limit. You get 8% interest calculated twice a year. NSC comes under Section 80C so you will get an income tax deduction up to Rs 1,00,000. From FY 2005-'06 onwards interest accrued on NSC is taxable.

Public Provident Fund (PPF)

PPF is a form of investment backed by Govt. of India. Minimum amount is Rs500 and maximum is Rs70,000 in a financial year. A PPF account can be opened in a head post office, GPO and selected branches of nationalized banks. PPF also comes under Section 80C so individuals could avail income tax deduction up to Rs 1, 00,000. Lock in period for PPF is 15 years and interest rate is 8%. PPF is considered to be best investment option as it is backed by Government of India. Company Fixed Deposits (FDs) FDs are instruments used by companies to borrow from small investors. Typically FDs are open throughout the year. Option to maximize returns within a fixed-income portfolio. Invest in FDs only if you have surplus funds for more than 12 months. Select your investment period carefully as most FDs are not encashable prior to their maturity. Just as in any other instrument, risk is an embedded feature of FDs, more so because it is not mandatory for non-finance companies to get a credit rating for this instrument. Investors should consciously (either though a credit rating or through an expert) select the companies they invest in.

Bonds and Debentures

Besides company FDs, bonds and debentures are the other fixed-income instruments issued by companies. As a result of an illiquid secondary market and a lack-lustre primary market, investment in these instruments is largely skewed towards issues from financial institutions. While you might find some high-yielding options in the secondary market, if you do not want the problems associated with bad deliveries and the transfer process or you want to invest a large sum of money, the primary market is the better option.

Mutual Funds

Mutual Fund companies collect money from investors and invest in share market. Investing in mutual funds is also subject to market risks but return is good Investing through mutual funds allows an investor to 1. Avail the services of a professional money manager

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2. Access a diversified portfolio despite making a limited investment.

Life Insurance Policies

Life insurance premiums, depending upon the policy selected include the costs of 1) death-benefit coverage 2) built-in investment returns (average 8.0% to 9.5% post-tax) 3) significant overheads, including commissions. This implies that if you buy insurance solely as an investment, you are incurring costs that you would not incur in alternate investment options. It is, however, important to insure your life if your financial needs and profile so require.

Equity Shares Through the primary market (by applying for shares that are offered to the public) Through the secondary market (by buying shares that are listed on the stock

There are two ways in which you can invest in equities1. 2.

exchanges) Over the long term, equity shares have offered the maximum return to investors. As an investment option, investing in equity shares is also perceived to carry a high level of risk. Gold Low long-term risk but volatile in short term. It has High Liquidity. Returns could be around inflation levels. No tax advantages for investors. It is not an attractive investment option. It can be used for portfolio diversification to partly hedge against inflation. Gold MFs are better than buying physical gold. Real Estate It has variable risk and variable liquidity depending on the type and location of property. It gives market linked returns. Also it has good potential but no tax advantages. It requires high initial investment which could make ones portfolio lopsided; high transactions costs like title-search, registration brokerage etc and cannot be partly liquidated.

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EVALUATING THE FINANCIAL PRODUTS

PRODUCT SAFETY LIQUIDTY RETURN VOLATILITY Equity FI Bonds Low High High \ Low HighHigh Moderate Moderate Moderate- Moderate High Moderate- Moderate Low Moderate Low

Debenture Moderate Low s Corporate FD PPF Life Ins Gold Real Estate Mutual Funds Bank deposits Low High High High Low

Moderate Moderate Low Low LowLow Moderate

Moderate Moderate- Moderate Low High-Low High High-Low High Low-High Low

Moderate Low High High High High

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Investors perspectives: Mutual Funds and Other Products

PRODUC INVESTMENT RISK TIME HORIZON T OBJECTIVE OLERANC E Equity Capital appr High Low Low Low Low Low Low Long Term Med-Long Med- Long Medium Flex-All Terms Long Long FI Bonds Income Debentur Income es Comp. Income Bank Income Deposits PPF Income Life Risk cover insuranc e Gold Real Estate Mutual Funds

Inflation Hedge Low Inflation Hedge Low Capital growth, H-M-Low income

Long Long Flex All Terms

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PORTFOLIO MANAGEMENT
People have different investment objective and risk appetite so to get the highest returns asset allocation through active portfolio management is the key element. Asset allocation is a method that determines how you divide your portfolio among different investment instruments and provides you with the proper blend of various asset classes. It is based on the theory that the type or class of security you own equity, debt or money market- is more important than the particular security itself. In other words asset allocation is way to control risk in your portfolio. Different asset class will react differently to market conditions like inflation, rising or falling interest rates or a market segment coming into or falling out of favour. Asset allocation is different from simple diversification. Suppose you diversify your equity portfolio by investing in five or ten equity funds. You really have not done much to control risk in your portfolio if all these funds come from only one particular segment of the market say large cap stocks or mid cap stocks. In case of an adverse reaction for that segment, all the funds will react similarly means they will go down. If you build your portfolio with various top performing growth funds without really bothering to analyze their portfolio allocation, you may end up with overexposure to a particular segment. Another point you need to remember is that growth funds are highly correlatedthey tend to move in the same direction in response to a given market force. The advantage of asset allocation lies in achieves superior returns when markets are down while minimizing the exposure of the portfolio to volatility. In fact, asset allocation is based on certain dimensions that, when combined tend to control the volatility while achieving targeted returns.

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PORTFOLIO MANAGEMENT PROCESS

Portfolio management is a complex activity, which may be broken down into the following steps: 1. Specification of investment objectives and constraints: The typical objectives sought by an investor are current income, capital appreciation, safety, fixed returns on principal investment. 2. Choice of asset mix: The most important decision in portfolio management is the asset mix decision. This is concerned with the proportions of Stock or Units of mutual fund or Bond in the portfolio. The appropriate mix of Stock and Bonds will depend upon the risk tolerance and investment horizon of the investor. 3. Formulation of portfolio strategy: Once the certain asset mix has been chosen an appropriate portfolio strategy has to be decided out. Two broad portfolio choices are available An active portfolio management: it strive to earn superior risk adjusted returns by resorting to market timing, or sector rotation or security selection or some combination of these. A passive portfolio management involves holding a broadly diversified portfolio and maintaining a pre-determined level of risk exposure.

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DESIGNING A MODEL PORTFOLIO

There are certain objectives that should keep in mind while designing a portfolio these are: Higher absolute rate of return and high real rate of return Maximization current income High post tax returns Positive real return Preservation of capital Growth in capital

For my study I am making three dummy portfolios for three different kinds of investors. TYPES OF INVESTOR: 1. CAUTIOUS INVESTOR: Its kind of investor who is less bothers about high returns. He wants to lower down his risk profile and demand for fixed income on his investment. His main objective of investment is fixed returns with less risk. 2. BALANCED INVESTOR: Its a kind of investor who is bothers about returns as well as risk. He wants moderate returns with moderate risk. 3. AGGRESIVE INVESTOR: Its a kind of investor who is ready to take risk. He believes in high risk and high returns. So he only wants to invest in equity schemes. I have made an assumption that each investor want to invest Rs 5 lacs.

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Portfolio for Cautious Investor Investment Instrument Kisan Vikas Patra PPF Bank Fixed Deposits NSC Post office monthly MIP TOTAL Amount 150000 Rs. 70000 Rs. 100000 Rs. 80000 Rs. 100000 Rs. 500000 Rs. Returns 8.4% p.a. 8.5% p.a. 6.5% p.a. 8.16% p.a. 8% p.a.

Logic behind selection of particular Instrument: As investor does not want to take risk, he is satisfied with fixed return rather they are less than equity investments returns. So I took thus instrument which provides good return as well as secure also. All of these instruments will give him return around 8% annually.

Portfolio for Balance Investor Investment Instrument Amount Returns

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SBI Multiplier Fund Reliance Vision Fund Bank Fixed Deposits PPF Kisan Vikas Patra TOTAL

130000 Rs. 100000 Rs. 100000 Rs. 70000 Rs. 100000 Rs. 500000 Rs.

54.2% p.a. 78.3% p.a. 6.5% p.a. 8.5% p.a. 8.4% p.a.

Logic behind selection of particular Instrument: As investor does not want to take high risk, he is satisfied with fixed return plus some equity exposure. But he wants some safety in equity exposure also. So I took thus instrument which provides good return as well as safety also. Fixed return instruments like PPF, Bank FD and kisan viaks patra will give him return around 8% annually and I suggest Balance kind of funds to him where he will have exposure of both equity as well as debts. HDFC prudence fund is best performing fund under balance scheme. To increase the ratio of equity in portfolio I suggested Reliance vision fund which is mainly based on large and mid cap companies.

Portfolio for Aggressive Investor Investment Instrument SBI Contra Fund Prudential ICICI Emerging Star Fund Amount 1,30,000 Rs. 90,000 Rs.
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Returns 83.56% p.a. 93.3% p.a.

Franklin Flexi Cap Fund Fidelity Equity Fund DSP Top 100 TOTAL

1,10,000 Rs. 80,000 Rs. 90,000 Rs. 5,00,000 Rs.

86.25% p.a. 82.4% p.a. 79.28% p.a.

Logic behind selection of particular Instrument: As investor ready to take high risk, he is looking for high returns on his investment. I took thus instrument which provides good return. All of these instruments will give him return around 80% annually. Currently Mid cap companies will perform better than large cap companies so, I select more funds which are focusing on mid cap companies like HDFC, Franklins funds. To take the benefit of increasing Sensex I took DSP top 100.

MEASUREMENT OF RETURNS ON PORTFOLIOS

The realized rate of return will be calculated by 1. Time Weighted Rate of Return (TWROR)
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It is calculated by using Dietz Algorithm Ri Po Pi Ci Ri = [(Pi-0.5Ci)/ (Po+0.5Ci)-1}*100 = Portfolio value at the beginning of the period = Portfolio value at the end of the period = Net contributions during time interval = Rate of Return for the time interval

a) Rate of return for cautious investor Investment Instrument Kisan Vikas Patra PPF Bank Fixed Deposits NSC Post office monthly MIP TOTAL Amount 1,50,000 Rs. 70,000 Rs. 1,00,000 Rs. 80,000 Rs. 1,00,000 Rs. 5,00,000 Rs. Returns 8.4% p.a. 8.5% p.a. 6.5% p.a. 8.16% p.a. 8% p.a. Current Value 162600 75,950 1,06,500 86,528 1,08,000 5,39,578

Time Weighted Rate of Return (TWROR) Ri = [(Pi-0.5Ci)/ (Po+0.5Ci)-1}*100 = {(539578-0.5(0))/ (500000+0.5(0))-1}*100 = 7.91% p.a.

b) Rate of return for balance investor Investment Instrument Amount Returns Current Value HDFC Prudence Fund Reliance Vision Fund Bank Fixed Deposits PPF Kisan Vikas Patra 130000 Rs. 100000 Rs. 100000 Rs. 70000 Rs. 100000 Rs.
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54.2% p.a. 78.3% p.a. 6.5% p.a. 8.5% p.a. 8.4% p.a.

200460 178300 106500 75950 108400

TOTAL

500000 Rs.

669610

Time Weighted Rate of Return (TWROR) Ri = [(Pi-0.5Ci)/ (Po+0.5Ci)-1}*100 = {(669610-0.5(0))/ (500000+0.5(0))-1}*100 = 33.92%p.a.

c) Rate of return for aggressive investor Investment Instrument Amount HDFC Core & Satellite Fund 1,30,000 Rs. Prudential ICICI Emerging 90,000 Rs. Star Fund Franklin Flexi Cap Fund Fidelity Equity Fund DSP Top 100 TOTAL 1,10,000 Rs. 80,000 Rs. 90,000 Rs. 5,00,000 Rs. 86.25% p.a. 82.4% p.a. 79.28% p.a. 204875 145920 161352 924565 Returns 83.56% p.a. 93.3% p.a. Current Value 238628 173790

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Time Weighted Rate of Return (TWROR) Ri = [(Pi-0.5Ci)/ (Po+0.5Ci)-1}*100 = {(924565-0.5(0))/ (500000+0.5(0))-1}*100 = 84.91%p.a.

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Chapter - IV Findings

FACTS ABOUT MUTUAL FUNDS

100% growth in the last 6 years. Numbers of foreign AMCs are in the queue to enter the Indian markets. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. We have approximately 36 mutual funds which are much less than US having more than 800. There is a big scope for expansion.

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 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities. Mutual fund can penetrate rural areas like the Indian Insurance Industry with Simple and Limited Products. SEBI allowing the MF's to launch Commodity Mutual Funds. Emphasis on better Corporate Governance. Trying to curb the late trading practices.

LIMITATIONS
Mutual funds are subjected to the market risk. Risk cannot be eliminated Different people have different risk appetite The time constraint was one of the major problems The study is limited to the different schemes available under the mutual funds selected

for that period.

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Chapter - V Recommendations

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RECOMMENDATIONS
The expectation of the people from the mutual funds is high. So, the portfolio of the fund should be prepared taking into consideration the expectations of the people. Four sequential steps will enable investor to decide effectively. 1. Divide the spectrum of Mutual Funds depending on major asset classes invested in. Presently there are only two. Equity Funds investing in stocks. Debt Funds investing in interest paying securities issued by government, semi-government bodies, public sector units and corporate.

2. a) Categorizing equities Diversified invest in large capitalized stocks belonging to multiple sectors. Sectorial Invest in specific sectors like technology, FMCG, Pharma, etc. b) Categorized Debt. Gilt Invest only in government securities, long maturity securities with average of 9 to 13 years, very sensitive to interest rate movement. Medium Term Debt (Income Funds) Invest in corporate debt, government securities and PSU bonds. Average maturity is 5 to 7 years. Short Term Debt Average maturity is 1 year. Interest rate sensitivity is very low with steady returns. Liquid Invest in money market, other short term paper, and cash. Highly liquid. Average maturity is three months. 3. Review Categories Diversified equity has done very well while sectorial categories have fared poorly in Indian market. Index Funds have delivered much less compared to actively managed Funds. Gilt and Income Funds have performed very well during the last three years. They perform best in a falling interest environment. Since interest rates are now much lower, short term Funds are preferable.
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4. Specific scheme selection Rankings are based on criteria including past performance, risk and resilience in unfavourable conditions, stability and investment style of Fund management, cost and service levels. Some recommended schemes are: Diversified equity Zurich Equity, Franklin India Bluechip, Sundaram Growth. These Funds show good resilience giving positive results. Gilt Funds DSP Merrill Lynch, Tata GSF, HDFC Gilt have done well. Income Fund HDFC, Alliance, Escorts and Zurich are top performers Short Term Funds Pru ICICI, Franklin Templeton are recommended Within debt class, presently more is allocated towards short term Funds, because of low prevailing interest rates. However if interest rates go up investor can allocate more to income Funds or gilt Funds.

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Chapter - VI Conclusions

CONCLUSION

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The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization. The annual composite rate of growth is expected 13.4% during the rest of the decades. In the last 5 years we have seen annual growth rate of 9%According to the current growth rate, by year 2010, mutual fund assets will be double. The government is also helping in boosting mutual fund industry. Government is emphasizing a lot on infrastructure development and social spending and yet targeting a lower fiscal deficit. FIIs continued to be positive on emerging markets in general and the Indian markets in particular. FIIs buying have considerable portion in mutual funds buying A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixes income instruments, real estate, derivatives and other assets have become mature and information driven. Today each and every person is fully aware of every kind of investment proposal. Everybody wants to invest money, which entitled of low risk, high returns and easy redemption. In my opinion before investing in mutual funds, one should be fully aware of each and everything. At the same time Mutual Fund gives more Liquidity to the investors with good Returns therefore Mutual Fund is one of the best ways to invest your money and earn better Returns. The investment decision will mainly depend upon the objective of investor. He or she needs to design their portfolio according to their risk and return profile. Thus analyzing the entire scenario of investments with respect to risk and returns I conclude HIGHER THE RISK, HIGHER IS THE PERCEIVED /EXPECTED RETURN.

MY LEARNING FROM PROJECT

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I have learnt many things which I might not be able to learn under class room training like looking at the stock market terminal and analyzing the stocks and thereby deducing about their performance and thus designing the portfolio on the basis of their performances. First and the most important I learnt about Mutual Fund Industry. Before this project I didnt have much knowledge about Mutual funds. But now I have good knowledge about Mutual Funds. I learnt about marketing elements also. How the companies, banks and brokerage houses market their products in front of customer in presence of competitors products. I learnt about mutual funds as well as other products like insurance, DMAT account, IPO, some of banking product and transactions and some financial services offered by SBI MUTUAL FUND. I also learnt about the risk factor calculation of the mutual funds, how the various broking firms calculate the risk factors of various mutual funds.

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Bibliography

BIBLIOGRAPHY
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Websites:
www.sbimf.com www.nseindia.com www.amfiindia.com www.icicidirect.com

Reference books:
Financial Institutions And Markets - L.M.Bhole Investment Management - V.K.Bhallaanalysis Of Mutual Funds Schemes

To study the currently available schemes I have taken the fact sheets available with the AMCs. The fact sheet provides the historical data about the various schemes offered by the AMC, investment pattern, dividend history, ratings given, Fund Managers Credentials, etc.

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