Chapter-1 INTRODUCTION

Mutual fund is the most suitable investment (or the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio relatively a low cost. Anybody with an inventible surplus of as little as a few thousand rupees can be invested in mutual funds. Change in the economic scenario, falling interest rates of bank deposits, volatile nature of capital market and recent hitter experience of investors in making direct investment emphasis the increasing importance of the intermediaries like mutual funds. Mutual funds help the small and medium size investors to participate in today's complex and modern financial scenario. Investors can participate in the mutual fund by buying the units of the fund. The income earned through these investments and capital appreciation realized by the schemes is shared by its unit holders in proportion to the number of units owned by them. Mutual funds play vital role in mobilization of resources and their efficient al1ocation. These funds played a significant role in financial inter-mediation, development of capital markets and growth of the financial sector as a whole. The active involvement of mutual funds in economic development can be seen by their dominant presence in the money and capital market. In early 19th c e n tu,r y mutual funds have proved to he an important institutional arrangement of risk pooling. These institutions have come to assume so much of significance them they now completely dominate the entire financial market. at

1.1 Mutual fund

Mutual Fund is an investment company that pools money from shareholders and invests in a variety of securities, such as stocks, bonds and money market instruments. Most open-end mutual funds stand ready to buy back (redeem) its shares at their current net asset value, which depends on the total market value of the fund's investment portfolio at the time of redemption. Most open-end mutual funds continuously offer new shares to investors. Also known as an open-end investment company, to differentiate it from a closedend investment company. Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund's current net asset value: total fund assets divided by shares outstanding. In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. In India , A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. In Short, a mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the stated investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, an equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc. 2

Mutual Fund is a 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.

1.2 History of Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases. 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): 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 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 established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase 1993-2003 (Entry of Private Sector Funds) 3

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.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 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. 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 assets under management 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. The graph indicates the growth of assets over the years. 4

GROWTH IN ASSETS UNDER MANAGEMENT

1.3 Objectives of Mutual Funds

1. Income. Income funds focus on dividends and interest that provide income to investors. This is a relatively steady source of money, but the funds NAV can still go up and down. 2. Growth. Growth funds focus on increasing the value of the principal or amount invested through capital gains and net asset values. Growth funds are usually more risky but offer greater potential return. 3. Stability. Stability funds focus on protecting the amount invested from loss so the funds NAV does not go down. This is the least risky type of fund but may make the least amount of money.

1.4 Types of Mutual Funds

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A mutual fund may float several schemes which may be classified on the basis of its structure, its investment objectives and other objectives.

A. Mutual fund schemes by structure

Open ended schemes: Open ended fund scheme is open for subscription all through year. An investor can buy or sell the units at NAV (net asset value) related price at any time. Close-Ended funds: A close-ended fund is open for subscription only during specified period, generally at the time of initial public issue. The close ended fund scheme is listed on the some stock exchange where an investor can buy or sell the units of this type of scheme. Interval fund: Interval funds combine both the features of open-ended fund and close-ended funds.

B. Mutual Fund schemes by investment objectives:

1. Growth Funds: The objective of growth fund scheme is to provide capital appreciation over the medium to long term. This type of scheme is an ideal scheme for the investors seeking capital appreciation for long period. 2. Income Funds: The income fund schemes objective is to provide regular and steady income to investors. 3. Balanced Funds: The objective of balanced fund schemes is to provide both growth and regular income to investors. 4. Money Market Funds: The objective of money market funds is to provide easy liquidity, regular income and preservation of income.

C. Geographical Classification:
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1.

Domestic Funds: Funds which mobilize resources from a particular geographical locality like a

country or a region are domestic funds. The market is limited and confined to the boundaries of a nation in which the fund operates. They can invest only in the securities, which are issued and traded in the domestic financial market. 2. Offshore Funds; Offshore funds attract foreign capital for investment in the country of the issuing company. They facilities cross-border fund flow which leads to an increase in foreign currency and foreign exchange reserves. Such mutual funds can invest in securities of foreign companies. They open domestic capital market to international investors. Many mutual funds in India have launched a number of offshore funds, either independently or jointly with foreign investment management companies.

D. Other Funds:
1. Tax Saving Schemes: The objective of Tax Saving Schemes is to offer tax rebates to the investors under specific provisions of the Indian Income Tax Laws. Investment made under some schemes is allowed as deduction u/s 88 of the Income Tax Act. 2. Industry Specific Schemes: Industry specific schemes invest only in the industries specific in the offer document of the schemes. 3. Sectoral Schemes: The schemes invest particularly in specific industries or initial public offering. 4. Index Schemes: Such schemes link with the performance of BSE sensex or NSE. 5. Load Funds: A loan fund charges a commission each time when you buy or sale units in the fund. 6. No-Load Funds: 7

A No-Loan fund does not charge a commission on purchase or sale of the unit in the fund. 7. Equity-Linked Saving Sheme(Elss): In order to encourage investor to invest in equity market, the government has given tax-concessions through special schemes. Investment in these schemes entitles the investor to claim an income tax rebate, but these schemes carry a lock in period before the end of which funds cannot be withdrawn. 8. Special Schemes; Mutual fund has launched special schemes to cater to the special needs of investors. Uti has launched special schemes such as Childrens Gift Growth, 1986, Housing Unit schemes, 1992, and Venture Capital Funds. 9. Gilt Fund: Mutual fund, which deals exclusively in gilt are, called gilt fund. With a view to creating a wider investor base for government securities, the Reserve Bank of India encouraged setting up of gilt. The fund these funds are provided liquidity support by the Reserve Bank. 10. P/E Ratio Fund; P/E Ratio Fund is another mutual fund variant that is offered by pioneer ITI Mutual Fund. The P/E (Price Earning) ratio of the price of the stock of a company to its earning per share (EPS). The P/E ratio of the index is the weighted average price-earning ratio of all its constituent stock. 11. Exchange Traded Funds: Exchange traded funds (ETFs) are a hybride of open-ended mutual fund and listed individual stocks. They are listed on stock exchanges and trade like individual stock exchage. However, trading at the stock exchanges does not affect their portfolio. ETFs do not sell their share are offered to investors over the stock exchange. ETFs are basically passively managed funds that track a particular index such as S&P CNX Nifty since they are listed on stock-exchanges, it is possible to buy and sell them throughout the day and 8

their price is determined by the demand-supply forces in the market. In practice, they trade in a small range around the value of the assets (NAV) held by them.

1.5 Advantages Of Mutual Funds

If mutual funds are emerging as the favorite investment vehicle, it is because of the many advantages they have over other forms and avenues of investing, particularly for the investor who has limited resources available in terms of capital and ability to carry out detailed research and market monitoring. The following are the major advantages offered by mutual funds to all investors: 1) Portfolio Diversification: Mutual funds normally invest in a well-diversification portfolio or securities. Each investor in a fund is a part owner of all of the funds assets. This enables him to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital. 2) Professional Management : Even if an investor has a big amount of capital available to him, he benefits from the professional management skills brought in by the management of the investors portfolio. The investment management skills, along with the needed research into available investment option, ensure a much better return than what n investor can manage on his own. Few investors have the skills and resources of there own to succeed in todays fastmoving, global and sophisticated markets.

3) Reduction/Diversification Of Risk :
An investor in a mutual fund acquires a diversified portfolio, no matter how small his investment. Diversification reduces the risk of loss, as compared to investing directly in one or two share or debentures or other investments. When an investor invests directly, all the risk of potential loss is his own. A fund investor also reduces his risk in another way. While investing in the pool of funds with other investors, any loss on one-two securities is also shared with other investor. This risk reduction is one of the most important benefits of a collective investment vehicle like the mutual fund. 9

4) Reduction Of Transaction Costs :

What is true of risk is also true of the transaction costs. A direct investor bears all the costs of investing such as brokerage or custody of securities. When going through a fund, he has the benefits of economies of scale: the fund pays lesser costs because of larger volumes, a benefit passed on to its investors. 5) Liquidity: Often, investors hold shares or bonds they cannot directly, easily and quickly sell. Investment in a mutual fund, on the other hand, is more liquid. An investor can liquidate the investment, by selling the units to the fund if open-end, or selling them in the market if the fund is close-end and collect funds at the end of a period specified by the mutual fund or the stock market. 6) Convenience And Flexibility: Mutual fund management companies offer many investor services that a direct market investor cannot get. Investors can easily transfer their holding from one scheme to the other, get updated market information, and so on.

1.6 Disadvantages of Mutual Funds

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While the benefits of investing through mutual funds far outweigh the disadvantages, an investors and his advisor will do well to be aware few shortcomings of using the mutual funds as investment vehicles.

1. No Control Over Costs:

An investor in a mutual fund has no control over the overall cost of investing. He pays investment management fees as long as he remains with the fund, albeit in return for the professional management and research. Fees are usually payable as a percentage of the value of his investment, whether the fund value is rising or declining. A mutual fund investor also pays fund distribution costs, which he would not incur in direct investing. However, this shortcoming only means that there is a cost to obtain the benefits of mutual fund services. However, this cost is often less then the cost of direct investing by the investors.

2.

No Tailor-Made Portfolios:
Investors who invest on their own can build their own portfolios of shares, bonds and other securities. Investing through funds means he delegates this decision to the fund managers. The very high-net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives their objectives. However, most mutual fund help investors overcome this constraint by offering families of schemes- a large number of different schemes- within the same fund. An investor can choose from different investment plans and construct a portfolio of his choice.

3.

Managing A Portfolio of Funds:

Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund to achieve his objectives, quite similar to the situation when he has to select individual shares or bonds to invest in.

4. Risk Factors:
Mutual fund and securities investments are subject to market risk and there is no assurance or guarantee that the objective of the schemes will be achieved. As with any security investment, he Net Asset Value (NAV) of the units issued under the schemes can

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go up or down depending on the factors affecting the capital market. Past performance of the sponsors, the AMC / Fund does not indicate the future performance of the fund.

5. Net Asset Value (NAV):

It is the common practice for the mutual fund to compute the share of each investor on the basis of the value of net asset per share/unit, commonly known as the Net Asset Value. It is the market value of the assets minus the liabilities on the day of valuation. In other words it is the amount which the shareholder will collectively get if the fund is dissolved or liquidation. NAV={Market price of securities + other assets Total liabilities}/Units outstanding at the NAV date. NAV={Net asset of the scheme + Number of units outstanding, Market value of investment + Receivables + Other accrued income + other assets Accrued expenses-other payable liabilities}/Number of units outstanding at the date of NAV.

1.7 Organisation of Mutual Funds

A mutual fund in India is constituted in the form of trust under public trust act, 1882. The key players namely sponsors, mutual fund trust, and Asset Management Company (AMC) are involved in setting up a mutual fund. They are assisted by other independent administrative entities like banks, registrars, transfer agents, and custodians (Depository participants).

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

Trustees
The trust of mutual finds may be managed by a board of trustees, or a trust company, corporate body. Most of the funds in India are managed by Board of Trustees.

Sponsors
Means any person who acting alone or with another body corporate establishes a mutual fund. He creates the AMC and the trustee company and appoints the Board of both these companies with SEBI approval.

Asset Management Company

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The trustees appoint the AMC with the prior approval of SEBI. The AMC is a company formed and registered under the companies act,1956 to manage the affairs of the mutual fund and operate the schemes of such mutual funds. It charges a fee for the services it renders to the mutual fund trust.

1.8 Regulations of Mutual Funds In India

In India SEBI and RBI act as regulators of mutual fund.

SEBI (Mutual Fund) REGULATIONS,1996

The provisions of this regulations pertaining to AMC are: All the schemes to be launched by the AMC need to be approved by the trustees and copies of offer document of such schemes are to be filed with SEBI. The offer document shall contain adequate disclosure to enables the investor to make informed decision. Advertisement in respect of schemes should be in conformity with the SEBI prescribed advertisement code, and discloses the method and periodicity of the valuation of investment sales and repurchase in addition to the investment objectives. The listing of close ended schemes is mandatory and every close ended scheme should be listed on a recognized stock exchange with in six months from the closure of subscription. However, listing is not mandatory in case the scheme provides for monthly income or caters to the special classes of persons like senior citizen, women, children, and physically handicapped. If the scheme discloses detail of repurchase in the offer document: if the schemes opens for repurchase with in six months of closure of subscription. Units of a close ended scheme can be opened for sale or redemption at a predetermined fixed interval if the minimum and maximum amount of sale, redemption, and periodicity is disclosed in the offer document. Units of a close ended scheme can also be converted into an open ended scheme with the consent of majority of the unit holder and disclosure is made in the offer document about the option and period of conversion. 14

Units of a close ended scheme may be rolled over by passing resolution by a majority of the shareholders. No scheme other than unit linked schemes can be opened for more than 45 days. The AMC must specify in the offer document about the minimum subscription and the extent of over subscription, which is intended to be retained. In the case of over subscription, all applicants applying up to 500 units must be given full allotment subjected to over subscription.

The AMC must refund the application money if minimum subscription is not received and also the excess over subscription with in the six weeks of closure of subscription. Guaranteed returns can be provided in a scheme if such returns are fully guaranteed by the AMC or sponsor. In such cases, there should be a statement indicating the name of the person, and the manner in which the guarantee is to be made must be stated in the offer document.

A close ended scheme shall be wound up on redemption date, unless it is rolled over, or if 75% of the unit holders of a scheme pass a resolution of winding up of the scheme : if the trustee on happening of any event, requires the scheme to be wound up: or if SEBI, so directed in the interest of investors.

Investment objectives and valuation policies :The price at which the units may be subscribed or sold and the price at which such units may at any time repurchase by mutual fund shall be made available to the investor.

General obligation
Every asset management company for each scheme shall keep and maintain proper books of account, records and document, for each scheme so as to explain its transaction and to disclose at any point of time the financial position of each scheme and in particular give true and fair view of state of affairs of the fund and intimate to board the place where such books of account, record, and document are maintained. The financial year for all the schemes shall end as on march 31 of each year. Every mutual fund or the asset management company shall prepare in respect of scheme and the fund as specific in eleventh schedule.

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Every mutual fund shall have the annual statement of account audited by an auditor who is nor in any way associated with the auditor of the asset management company.

Procedure in case of default

On and from the date of suspension of the certificate or the approval as the may be, the mutual fund trustees or asset management company, shall cease to carry on any activity as a mutual fund, trustee or asset management company, during the period of suspension, and shall be subjected to the directions of the board with regard to any records, documents, or securities that may be in its custody or control, relating to its activities as mutual fund, trustee, or asset management company.

1.9 SEBI Guidelines (2001-02) Relating to Mutual Fund: A common format is prescribed for all mutual fund schemes to disclosed their entire portfolio of half yearly basis so that the investors can get meaningful information on the deployment of funds. Mutual funds are also required to disclose the investment in various types of instruments and percentage of in each script to the total NAV illiquid and non performing assets, investments in derivatives and in ADRs and GDRs. To enable the investor to make informed investment decision, mutual funds have been directed to fully revise and update offer document and memorandum at least once in two years.

Mutual funds are also require to:i. Bring uniformity in disclosure of various categories of advertisements, with a view to ensuring consistency and comparability across schemes of various mutual funds. ii. Reduce initial offer period from a maximum of 45 days to 30 days. iii. Dispatch statement of account once the minimum subscription amount specified in offer document is received even before the closure of the issue. iv. Invest in mortgaged backed securities of investment grade given by credit rating agency. v. Identify and make a provision for non performing asset (NPAs) according to criteria for classification of n NPAs and treatment of income accrued on NPAs to disclose NPAs in half yearly portfolio reports.

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vi. Disclose information in a revised format on unit capital, reserves, performance in terms of dividend and rise/fall in NAV during the half year period annualized yield over the last 1, 3, 5 years in addition to percentage of management fee, percentage of recurring expenses to net asset, investment made in associate companies, payment made to associate companies, payment made to associate companies for their services, and detail of large holding, since their operation. vii. Declare their NAVs and sale/repurchase prices of all schemes updated on regular basis on the AMFI website by 8.00 PM and declare NAVs of their close ended schemes on every Wednesday. The format for unaudited half yearly result for the mutual funds has been

revised by SEBI. These results are to be published before the expiry of one month from the close of each half-year as against two month period provided earlier. These results shall also be put in their websites by mutual fond. All the schemes by mutual fund shall be launched with in six months from the date of the letter containing observation from SEBI on the scheme offer document. Otherwise, a fresh offer document along with filing fee shall be filled with SEBI. Mutual funds are required to disclose large unit-holding in the scheme, which are over 25% of the NAV.

RBI as supervisor of bank owned Mutual Funds

The first non-UTI mutual funds were started by public sector banks. Banks come under the regulatory jurisdiction of RBI. So Bank owned mutual funds are regulated by RBI, but it has been clarified that all the mutual funds, being primarily capital market players come under the regulatory framework of SEBI. Thus, the bank owned fund continue to be under the joint supervision of both RBI and SEBI. It is generally understood that all market related and investor related activities of the fund are to be supervised by SEBI, while any issue concerning the ownership of the AMC by bank fall under the regulatory ambit of RBI. But RBI on bank fund should not conflict with SEBI guidelines.

RBI as supervisor of money market mutual funds

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RBI is the only Government agency that is charged with the sole responsibility of overall entities that operates in money market. So money market mutual funds were regulated by RBI guidelines till 23.11.1995. Recently it has been decided that money market mutual funds of registered mutual fund will be regulated by SEBI through the same guidelines issued for other mutual funds, i.e. SEBI (MF) regulations, 1996. However RBI does retain the right to decide whether mutual funds will be allowed to access inter-call money market. Accordingly, RBI has placed certain restrictions through latest credit policy, with the intention of moving toward a pure inter bank money market.

1.10 Need & Importance of The Study

As mutual funds are instrumental in bringing out the household savings in circulation in the market, therefore there is a great need for indepth analysis to ascertain whether the investors are aware about the mutual fund schemes or not and weather these schemes are performing according to the expectations of the ordinary investors of not. During recent years, this important institution has shown poor performance. Its position has been made dismissal by sudden collapse of US-64 fund of Unit Trust of India. This decelerating performance calls for a research to study how any investors have made the investments in these schemes and the key persons for the same. So far not much research has been conducted on the mutual fund predominance in India. This research is important and unique in the sense that it analyses the predominance of the market vis-a-vis the performance of the mutual fund industry. This study take into account the various schemes started by almost all the players in the Indian market in order to know whether they are better than the market or not, whether the mutual fund managers are able to minimize and diversify the various kinds of risk through planning their respective portfolios with the expertise and talent they have.

1.11 OBJECTIVES OF THE STUDY

The present research problem is taken to study the Analysis of Investments in mutual funds with the following objectives:-

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1. To study the investor knowledge and awareness about various Mutual Fund schemes present in the market. 2. To study the factors considered while selecting the various mutual funds scheme . 3. To know about sources from where investors get information about mutual funds.

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Chapter-2 REVIEW OF LITERATURE

A. Vijay Kumar
Mutual Funds have opened salutary avenues for development of capital market and mobilising savings. For their orderly growth, it is pertinent that he investors interest should be protected. After investment, services of a high order and quality should be guaranteed. The encouraging public response to the Mutual Funds reveals the potential of mobilising the savings of the masses for industrial finance. The securities scam and the subsequent fall in the share prices have made the public reluctant to invest their savings in the stock market and Mutual Funds can make use of this opportunity to mobilise the savings of the economy. The managers of the mutual funds have to accept the challenge to analyse the needs and investment preference of the investors and device schemes to suit their needs. Indeed, with the entry of private sector mutual funds, this industry is posed for a tremendous growth. No doubt, mutual funds will have a major role in mobilising the savings of the household sector, in the years to come.

B. Monika Dua
The mutual fund industry in India is at the stage of infancy but is slowly and steadily progressing towards the stage of growth. And from the passage from growth to popularity it will be obvious to the investor in India that the industry has maximum potential and benefits to the investor. This combined with the ever-increasing players in the MF market promises to make it one of most exciting areas in the field of finance. However, in the fact of intensive competition success will come only to those MFs who prove their mettle in the market. This will include: Reliability of investment performance Understanding Investor needs while designing investment schemes. 20

C. Paramjit Singh
The encouraging public response to the mutual funds reveals the potential of mobilising the savings of the masses for industrial finance. The mutual fund need amendments and modifications with respect to have a uniform rules and regulations for governing mutual funds, disclosure of information, listing of mutual funds in stock exchanges, disallowing private sector in entering mutual fund business, removing urban biasness, limit of investment of a mutual fund company should be lowered.

D. Mahesh Nayak
The typical equity investor in India is a seasonal investor, who tends to rush into a bull market and gets carried away with the good returns from diversified schemes, says Hemant Rustagi, CEO, Wiseinvest Advisors. This is a perfect description. And when the market gets volatile, like now, or when it slides, the retail investor, trapped without an exit route, pulls out of equity altogether, opting to go with small savings, debt instruments and other assured return, low-risk avenues. Is there no middle path? For the conservative investor who would like to start flirting with equity, there are index funds. However, this option has been largely out of favour with Indian investors. And for obvious reasons. Returns generated by diversified funds have consistently beaten those by index funds. In the past year, diversified funds have given an average return of 49 per cent compared to 37 per cent by index funds.

E. Sandesh Kirkire
Over the last few years, the Indian financial system has undergone sea changes. The most remarkable of them is the evolution of investor preference in favour of marketlinked investment vehicles, as compared to conventional assured return instruments. The same is evident from the fact that the asset under management with mutual funds (excluding UTI) have grown from about Rs.35,000 crore in March 2000 to over Rs.2,07,000 crore in January 2006.

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Chapter-3
3.1 RESEARCH METHODOLOGY
POPULATIONS AND SAMPLE PLAN
The population consists of investors in Ludhiana. For present study a sample of 100 investors were taken. Convenience sampling technique was used to select the sample units.

DATA COLLECTION
The collection, of data regarding the awareness was both from primary and secondary source of infonnation. Primary data was collected by using the interview method and questionnaire method for investors. Secondary data was collected from newspapers- The Economic Times; Business Today, Journal of Finance, pamphlets and booklets. The questions included were open-ended and multiple choice.

ANALYSIS OF DATA
For analyzing the data collected firstly a master table was prepared to note down the responses in a tabular form. The statistical techniques used include tally marks, mean score, percentage method and rank method.

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Chapter-4 MUTUAL FUND AS AN INVESTMENT TOOL

4.1 Profile of Mutual Funds
Mutual funds now represent perhaps the most appropriate investment opportunity for the most investors. As financial markets become more sophisticated and complex, investors need a financial intermediary who provides the required knowledge and professional expertise on successful investing. It is no wonder then that in the birthplace of mutual fund-the U.S.A. - the fund industry has already overtaken the banking industry, more funds being under mutual fund management than deposited with banks. The Indian mutual fund industry has already started opening up many of the exciting investment opportunities to Indian investors. We have started witnessing the phenomenon of more saving now being entrusted to the funds than to the banks. Despite the expected continuing growth in the industry, mutual funds are still a new financial intermediary in India. Hence, it is important that the investors, the mutual fund agents/distributors the investment advisors and even fund employees acquire better knowledge of what mutual funds are, what they can do for investors and what they cannot, and how they function differently from other intermediaries such as the banks.

4.2 Place of Mutual Fund In Financial Markets

Indian household started allocating more of their saving to the capital markets in 1980s, with investments flowing into equity and debt instruments, besides the conventional mode of bank deposits. Until1992 primary market investors were effectively assured good return as the issue price of new equity issue was controlled and low. After introduction of free pricing of shares, new issue prices were higher and with greater volatility in the stock markets, many investors who bought highly priced shares lost money, and withdraw money from the market altogether. Even those investors, who continued as direct investors in stock markets, realized that the key to successful investing in the capital markets lay in building a 23

diversified portfolio, which in turn required substantial capital. Besides, selecting securities with growth and income potential from the capital market involved careful research and monitoring of the market, which was not possible for all investors. Under similar circumstances in other countries, mutual funds had emerged as professional intermediaries. Besides providing the expertise in stock market investing these fund allow investing in small amounts and yet holding a diversified portfolio to limit risk, while providing the potential for income and growth that is associated with the debt and equity instruments. In India, Unit Trust of India occupied this place as the only capital markets intermediary from 1964 until late 1987, when the government started allowing other sponsors also to set up mutual funds. With some ups and downs, this new class of intermediary institution has emerged, in India as elsewhere, as a good alternative to direct investing in capital markets. Mutual fund serves as a link between the saving public and the capital market, as they mobilize savings from investor and bring them to borrowers in the capital markets. By the very nature of their activities, and by virtue of being knowledgeable and informed investors, they influence the stock markets and play an active role in promoting good corporate governance, investor protection and the health of capital market. Mutual funds have imparted much needed liquidity into the financial system and challenged the hitherto dominant role of banking and financial institution in the capital markets.

4.3 The Concept of a Mutual Fund

A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The ownership of the fund is thus joint or mutual; the fund belongs to all investors. A single investors ownership of the fund is in the same proportion as the amount of the contribution made by him or her bears to the6 total amount of the fund. A mutual fund uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objective. Thus, an equity fund would buy mainly equity assets-ordinary shares, preference shares, warrants etc. a bond fund would mainly buy debt instruments such as debentures, bonds, or government securities. It is these assets which are owned by the investors in the same proportion as their contribution bears to the total contribution of all investors put together. 24

When investors subscribes to a mutual fund, he or she buys a part of the assets or the pool of funds that are outstanding at that time. It is no different from buying shares of a joint stock company, in which case the purchase makes the investors a part owner of the company and its assets. In fact, in the U.S.A., a mutual fund is constituted as an investor buys into the fund, meaning he buys the shares of the fund. In India, a mutual fund is constituted as a trust and the investor subscribes to the units issued by the fund, which is where the term Unit Trust comes from. However, whether the investors get fund shares or units is only a matter of legal distinction. In any case, a mutual fund shareholder or unitholder is a part owner of the funds assets. In this project, used the term unit-holder includes the mutual fund account-holder or close-end fund shareholder. A unit-holder in unit trust of India US-64scheme is the same as a UTI Master share-holder or investors in an Alliance or DSP Merrill Lynch or Prudential-ICICI or Tata or Templeton or SBI or any other fund managers open-end or close-end scheme. Since each owner is a part owner of a mutual fund, it is necessary to establish the value of his part. In other words, each share or unit that investors hold needs to be assigned a value. Since the units held by-an investors evidence the ownership of the funds assets the value of the total assets of the fund when divided by the total number of units issued by the mutual fund gives us the value of one unit. This is generally called the Net Asset Value (NAV) of one unit or share. The value of an investors part ownership is thus determined by NAV of the number of units held number of units held

4.4 Structure of Mutual Fund Industry In India

25

Mutual Fund Industry

SEBI MFs Association of mutual fund

Sponsor

Board of Trustees

AMC

Custodian

Investors

Public sector UTI Bank sponsored FI sponsored

Private Sector

Schemes Domestic Off shore

Growth

Income Growth

Income&

Sectoral Purpose

Special Tax saving Others

Equity Bonds Metals Realestate MoneyMarket SecurityPrice OthersIndices

How to Invest In Mutual Fund

26

In Mutual Funds, Assured Return Schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

How To Fill Mutual Fund Application Form

An investor must mention clearly his name, address, number of units applied for and such other information as required in the application form. He must give his bank account number so as to avoid any fraudulent encashment of any cheque/draft issued by the mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the address, bank account number, etc at a later date should be informed to the mutual fund immediately.

Mutual Fund Offer Document

An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a Mutual Fund is an integral part of the offer document. SEBI has prescribed minimum disclosures in the offer document. An investor, before investing in a Mutual Fund scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the Mutual Fund, risk factors, initial issue expenses and recurring expenses to be charged to the Mutual Fund entry or exit loads, sponsors track record, educational qualification and work experience of key personnel including fund managers, performance of other Mutual Fund schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc.

Can Mutual Fund Change Scheme

27

Yes. They Can However, no change in the nature or terms of the scheme, known as fundamental attributes of the Mutual Fund e.g. structure, investment pattern, etc. can be carried out unless a written communication is sent to each unit holder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unit holders have the right to exit the Mutual Fund at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor. The mutual funds are required to inform any material changes to their unit holders. Apart from it, many mutual funds send quarterly newsletters to their investors. At present, offer documents are required to be revised and updated at least once in two years. In the meantime, new investors are informed about the material changes by way of addendum to the offer document till the time offer document is revised and reprinted.

MUTUAL FUNDS PERFORMANCE

The performance of a Mutual Fund is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unit holders at the end of the year.

28

Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme

WHERE DOES MUTUAL FUNDS INVEST

The mutual funds are required to disclose full portfolios of all of their schemes on halfyearly basis which are published in the newspapers. Some mutual funds send the portfolios to their unitholders. The scheme portfolio shows investment made in each security i.e. equity, debentures, money market instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investment made in rated and unrated debt securities, non-performing assets ( NPAs), etc. Some of the mutual funds send newsletters to the unit holders on quarterly basis which also contain portfolios of the schemes.

Where can an investor look out for information on mutual funds?

Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) www.amfiindia.com. AMFI has also published useful literature for the investors. Investors can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. 29

There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

SOME IMPORTANT TERMS

Net Asset Value (NAV)
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NA V). Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NA V of a scheme also varies on day to day basis. The NA V per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NA V per unit of the fund is Rs.20. NA V is required to be disclosed by the mutual funds on a regular basis - daily or weekly depending on the type of scheme.

Sales or repurchase/redemption price

The price or NA V a unit holder is charged while investing in an open ended scheme is called sales price. It may include sales load, if applicable. Repurchase or redemption price is the price or NA V at which an open ended scheme purchases or redeems its units from the unit holders. It may include exit load, if applicable.

Load or no-load Fund

A Load Fund is one that charges a percentage of NA V for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by -the mutual fund for marketing and distribution expenses. Suppose the NA V per unit is 30

Rs.l'p. If the entry as well as exit load charged is 1 0/0,then the investors who buy would be required to pay Rs.0.1 0 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NA V and no additional charges are payable on purchase or sale of units.

Sales Load
It is a charge collected by a scheme when it sells the units? It is also called 'Frontend' Load.

Repurchase or 'Back-end' Load

It is a charge collected by a scheme when it buys back the units from the unit holders. Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer document so that the new investors are aware of loads at the time of investment.

31

Chapter-5 ANALYSIS
The present chapter includes the analysis of the primary and secondary data collected from the investors through the questionnaires. A total of 100 investors were taken and were personally interviewed with the help of structured questionnaire to get the information regarding the awareness level of Mutual Fund schemes. According to the first objective, "To study the investor knowledge awareness about various mutual fund schemes present in the market", results are: and the following

1. Awareness of Mutual Fund schemes present in India

Table: Awareness of Mutual Fund schemes present in India OPTIONS YES NO NO. OF INVESTORS 72% 28%

Awareness of Mutual Fund Schemes 80% 60% 40% 20% 0%

No. of Investors

NO. OF INVESTORS YES Options NO

From the above table, it is clear that 72% of the investors are aware of Mutual Fund schemes present in India and 28% investors are not aware about Mutual Fund schemes. This shows that more than half of the investors are aware about Mutual Fund schemes.

32

2. Investments in the schemes of Mutual Fund

Table : Investments in the schemes of Mutual Fund SCHEMES Equity Fund Morgan Stanley Debt Fund Balanced Fund Franklin Templeton Blue Chip Fund NO. OF INVESTORS 8 11 4 7 7 10

Franklin Templeton Flexi Cap Fund Franklin Templeton Prima Mid Cap Fund ICICI Prudential Never made investment Others

10

11 12 3 23

From the above table. it is clear that 8% of investors have invested in Equty Fund Scheme, 11 % of investors have never invested in either schemes, 4% of investors have invested in Morgan Stanley scheme, 7% of investors have invested in Debt Fund scheme, 10% of investors have invested in Balanced Fund scheme, 10% of investors have invested in ICICl Prudential scheme, 11 % of investors have invested in Franklin Templeton Blue Chip Fund, 12% of investors have invested in Franklin Templeton Flexi Cap Fund, 3% in Franklin Templeton Prima Mid Cap Fund(SIP) and 23 %of investors have invested in other schemes. It shows that the percentage of investors who have invested in Franklin Templeton Prima Mid Cap Fund is greater than the investment in all other schemes of Mutual Fund.

33

34

3. Factors considered while selecting the scheme

Table : Factors considered while selecting the scheme FACTORS Regular Proceeds Capital Appreciation Risk Profitability Any Other NO. OF INVESTORS 17 11 16 36 2

Factors considered while selecting the scheme FACTORS CONSIDERED WHILE SELECTING THE SCHEME
40 30 20 10 0 . NO. OF INVESTORS

Regu Capit Profit Any Risk lar al ability other 7 11 16 36 2

NO. OF INVESTORS

From the above table, it is clear that 17% of investors considered regular proceeds factor, 11% of investors considered capital appreciation factor, 16% of investors considered profitability factor, 36% of investors considered risk factor and 2% of investors considered other factors like liquidity. It shows that the factors which were considered while selecting the scheme i.e. regular proceeds, capital appreciation and profitability get equal weightage by the investors and these were five times more than the factor i.e. liquidity.

4. Occupation of the investors

35

Table: Occupation of the investors OCCUPATION Businessman Salaried Any other NO. OF INVESTORS 14 80 6

From the above table, it is clear that 14% of investors belong to salaried class, 80% of investors are businessman and 6% of investors are from' other class like Pensioners, Retired. So, it is clear that the no. of salaried class people is greater than the other class people. It's also clear that they have keen interest especially in investing in mutual fund schemes so as to avail various benefits NO. OF INVESTORS
80 60 40 20 0 NO. OF INVESTORS

Busines Salaried sman 14 80

Any other 6

NO. OF INVESTORS

Provided under these schemes such as regular income which is more important for the salaried class people and other benefits like tax benefits, for saving purpose etc.

5. Schemes suit to the investors

36

Table :(a) Schemes suit to the investors SCHEMES Open-ended Scheme Close-ended Scheme Balanced Fund Money Market Mutual Fund Leverage Funds NO. OF INVESTORS 55 28 2 14 NIL

From the above table, it is clear that 55% of investors are preferring Open-ended scheme, 28% of investors are preferring Balanced Fund schemes, 2% of investors Close-ended schemes, 14% of investors money market mutual fund scheme and no investor is preferring leverage funds. It also shows that the open-ended schemes suit to the investors approximately two times more than the balanced fund schemes whereas the money market mutual fund schemes suit to the investors seven times more than the closed fund schemes. It reflects that investors prefer open-ended schemes more because they want to sustain the regular income.
Schemes suit to the investors
60%

No. of Investors

40% 20% 0% NO. OF INVESTORS Op Clo Bal Mo Lev

55% 3% 28% 14% 0% NO. OF INVESTORS

Scheme

According to the second objective of the study, "To know reasons about investing in mutual funds ", the following results are:

(b) Reasons behind the purchase of Mutual Fund scheme Research shows that investors purchased Open-ended scheme in order to maximize 37

the profits, to sustain their regular income, for avoidance of risk and for liquidity purpose. Close-ended-scheme in order to gain benefits in tenl1S of capital appreciation and to earn fix income. Balanced fund scheme to balance the risk and reward ratio and Money market mutual fund scheme for liquidity purpose, due to growing capital market and its redemption can been done at any time. All the schemes are purchased for saving purpose also. It shows that investors purchased these schemes for availing the benefits in different forms either for saving purpose or for tax benefits. Because the salaried class requires regular income and higher profits and on the other side, businessman class requires capital appreciation, so all these requirements are met with these schemes and retired class investors get regular income by investing in these schemes.

38

6. The attributes, which influences the investment decision

Table : The attributes, which influences the investment decision Through the statistical method of mean score following analysis is undertaken: SCALING ATTRIBUTES Advertisement Friend Sales Person Any other GREAT EXTENT 1.5 .6 .6 .3 SOME EXTENT .5 1 .5 NOT AT ALL .2 .2 .4 .2 TOTAL 2.2 1.8 1.5 .5

From the above table, it is clear that investors decision was int1uenced by advertisement i.e. 2.2 score is given and it is considered to be an extremely important factor, 1.8 rate score is given to the attribute i.e. friend which is almost above the satisfactory level, 1.5 rate score is given to the attribute i.e. sales person which is also important for investment decision and .5 rate score is somewhat important. It shows that first rank is given to the advertisement which helps in taking the decision regarding the investment and it is onefourth more than the attribute i.e. friend and more than half from the sales person attribute and second rank is given to the attribute i.e. friend which helps in investment' decision. Attributes which influence investment decision
2.5 2

Attributes

1.5 1 0.5 0 Advertis 2.2 Friend 1.8 Sales 1.5 Any 0.5 TOTAL

TOTAL

7. Satisfaction level of investors with Mutual Fund schemes

Table : Satisfaction level of investors with Mutual Fund schemes 39

Score

OPTIONS Yes No

NO. OF RESPONDENTS 56 8

From the above table, it is clear that 56% investors invested in Mutual Fund schemes and 8% o investors are satisfied with the investment in the schemes and remaining investors reported negative response. This shows that investors who are satisfied with the investment are seven times more than the unsatisfied investors. It is clear that these Mutual Fund schemes

Satisfaction level of Investors with the Investment

60
No. of 40 Respondent s 20

0 NO. OF RESPONDENTS

YES 56 Options

NO 8

are performing better and are giving better results to the investors, who have invested in these schemes and all the requirements of the investors are fully met by these schemes i.e. regular income or capital appreciation or for saving purpose.

8. Scheme, which is more profitable and has less risk

Table (a) Scheme, which is more profitable and has less risk SCHEMES NO. OF INVESTORS 40

Balanced Fund Open-ended Scheme Short-term Debt Funds Franklin Templeton Mid Cap Fund UTI Master Value Other

24 8 3 8 4 25

NO. OF INVESTORS
25 20 15 %age of Investors 10 5 0 Balanced Fund Franklin Templeton Mid Cap Fund Schemes NO. OF INVESTORS

From the above table, it is clear that 24%of investors are satisfied with balanced fund schemes, 8% of investors with open-ended schemes, 3% of investors with short-term Debt Funds, 8% of investors with Franklin Templeton Mid Cap Fund, another 4% of investors are satisfied with UTI Master Value and the rest 25% are satisfied with other mutual fund schemes. It shows that investors who are satisfied with the Balanced fund schemes are three times than the investors who are satisfied with the Open-ended scheme and Franklin Templeton Mid Cap Fund and are also eight times more than the investors who are satisfied with the short-term debt funds. This clearly reflects that investors want to maintain a balance between their reward and risk ratio due to which they ate satisfied more with the balanced fund schemes. (b) Reasons for the above stated analysis: According to the survey conducted, it is clear that investors prefeued balanced fund 41

schemes because of its lucrative character and it helps in balancing the risk and reward ratio because on the one side they get regular. income and on the other side they get capital appreciation, which is a two-way benefit for the investors, whereas open-ended schemes which gives only regular income are preferred second most by the investors who are mostly from the salaried class and the rest other schemes are preferred for saving purpose and for tax benefits also. According to the third objective, "To know about sources where respondent get information about mutual funds", the following results are:

42

9. Effectiveness of advertisement for providing information

Table: Effectiveness of advertisement for providing information

OPTIONS YES NO

NO. OF INVESTORS 43 21

From the above graph, it is clear that out of 43% investors who have invested in Mutual Fund schemes, 670/0of investors are satisfied that the advertisement provides them the proper infom1ation and 21% investors show negative response. So it shows that investors who are satisfied with the advertisement are twice than other investors. This results that the advertisement is an effective media for providing the information to the investors while making the investment decision and advertisement is the only media which helps in providing the complete infoDllation to the investors regarding the schemes. Effectiveness of various media for providing the information
30 25 20 10 5 Rate of Return/Yield 0 Risk Attached Any Other

Rating 15 Scores
Rating Scores

Media

10. Information, which is required for selection of the scheme

Table: Information, which is required for selection of the scheme 43

Attributes Rate of Return/Yield Maturity Period Risk Attached Profitability Any Other

No. of Investors 28 18 22 27 5

From the above figure, it is clear that 28% of investors required the rate; of return/yield information, another 18% investors required the information related to maturity period, still another 27% investors required profitability information, 22% investors required risk attached information and 5% investors required other information like liquidity or investment portfolio etc. This shows that the investors are greatly concen1ed with the information regarding rate of return and profitability. To some extent, investors are also concerned with the risk attached factor also and then with the maturity period. Investors are least concerned with the other factors such as market conditions, liquidity, investment portfolio, investment strategy and company profile etc. According to the fourth objective, To see the performance of selected mutual fund schemes", the following results are: -

44

PERFORMANCE OF MUTUAL FUNDS

There aren't too many mutual fund schemes in the country that have come a long way, at least not 1 0 years long. That's understandable when you consider that the mutual fund industry itself has had not much of an existence minus the Unit Trust of India (UTI). We have highlighted the performances of, some of the leading diversified equity funds that have completed a decade long existence. Last year we had at least two fund houses, proudly proclaiming completion of 10 years of existence. Recently we chanced upon another fund fact sheet announcing completion of a decade-long history in February 2005. There 'is nothing wrong with fund houses broadcasting their 'long' existence in the mutual fund industry. But time spent in the industry itself is not too consequential, as much as the performance of the fund, the number of market phases it has witnessed and if it managed to come out tops in most, if not all, of them. First and foremost, you must understand whether the fund's long existence is its own. In case of two fund houses - Franklin Templeton Mutual Fund and HDFC Mutual Fund its actually borrowed. Franklin Templeton Mutual Fund (launched in 1996) bought over Pioneer ITI Mutual Fund (launched in 1994). Apart from buying its assets, Franklin Templeton Mutual Fund bought two years of existence that helped it complete a decade in 2004, instead of 2006. Likewise, HDFC Mutual Fund (launched in 2001) bought over Zurich India Mutual Fund and in the process acquired seven years of existence. Both these fund houses also benefited from the fact that the chief architects - fund managers and chief investment officers, of the impressive decade long performances are still around. So in a way, their claim to a 10-Yr long existence is not totally off the mark. Nonetheless, for the investor, who has been managing the fund since inception is a mere technicality. The investor does not want to bother himself with such 'frivolous' details, he only understands one language - performance. If the fund performs, the investor is willing to ignore a lot of things. And that is what we have done to help investors determine the funds that have added value over a minimum 10- Yr time frame. Admittedly 10 years is a long time and not many funds have redeemed thems'elves 45

over this long a period. Nonetheless, some funds that have put in a performance that should warm the cockles of their investors' hearts. Notable amongst them are the trio of Franklin funds - Franklin Bluechip (28.4% CAGR since inception in December 1993), Franklin Prima Fund (24.2% CAGR) and Franklin Prima Plus (20.8% CAGR). HDFC Equity, (erstwhile Zurich india Equity Fund) with 21.2% CAGR since 1993 is the other significant performer. Both these groups of funds (HDFC and Franklin Templeton) put in a good show across market phases. Franklin Bluechip and HDFC Equity in particular pursued very aggressive investment strategies by maintaining a portfolio of less than 25 stocks. Despite the higher risks of maintaining a concentrated portfolio, these funds still managed to generate returns that far outweighed the risks. On the other hand, Franklin Prima Fund's amazing run can be attributed to a well-diversified portfono including more than 50 stocks. At a time in 1994, when the mutual fund industry was finding its feet, for Pioneer ITI to launch a mid cap fund shows remarkable foresight. This is more so considering some of its peers are launching their mid cap offerings only now, more than 10 years later! Investors in Birla Advantage Fund have mixed reactions on the fund's performance. During the tech rally in 1999-early 2000, Birla Advantage could do no wrong. It was the 'hottest' fund that a lot of investors held in their portfolios. The trailblazing performance sustained till March 2000. After that, maintaining a portfolio dominated by technology and illiquid stocks took a toll on the fund's performance. Little wonder then that Birla Advantage was among the hardest equity funds to fall during the tech meltdown. It is evident from the table that investors who have been invested in UTI and S81 Mutual Fund for 10 years may not be particularly thrilled with their equity fund investments. At best, they might be pleased with the brief spurts during which their equity funds performed well. Apart from that, they have had to live with mediocrity as its painful best. However, there seems to be light at the end of the tunnel. UTI has shed its 'babu' culture and its fund management team is now a lot more professional in its investment approach. Likewise, S8l Mutual Fund has had a significant makeover and some of its 46

equity and balanced schemes now figure among the foremost in their respective categories. This leads us to believe that mutual funds are getting increasingly conscious about their performance and gone are the days when a brand or the government's backing was enough to mobilise support and monies. Today investors demand performance and that day is not very far, when like their counterparts in the US, Indian equity fund investors choose funds based on the 10, or even 15- Yr performance criterion. In the present day the capital market both individual and institutional investors are mostly equally likely interested to invest their money in various mutual funds. The importance of primary market has gained momentum with the increasing magnitude of various financial institutions, corporates, public and private banks. The investors may be interested in knowing the prospects of returns on their investments in various portfolios viz equity shares, mutual funds, deposits, bonds and debentures etc. The present study focuses attention on the performance evaluation of the recently introduced and second to attractive mutual funds in the capital market in India.

47

RELATIONSHIP BETWEEN NET ASSET VALUE AND MARKET PRICE OF MUTUAL FUND SCHEMES:
Amongst a variety of factors, the Net Asset Value (NA V) and Market Price (MP) of the Mutual Funds are the two main factors, which can be considered responsible for the overall performance of the mutual funds, the market price is primarily determined by NAV of the Unit. Therefore, it would be interesting to examining the nature and the extent of relationship between these two factors for various mutual funds under this investigation. These funds have been classified into two categories- (1) closed or listed Mutual Funds; and (2) Open ended Mutual Fund. (i)

Listed Mutual Funds :

It seen from the table the NAV and MP for ICICI Power, Margan Stanley Growth Fund, UTI Master Growth, UTI UGS 2000, UTI Ui3S 5000 were all found to be positively and highly related, their coefficients of correlation bearing 0.939, 0.739, 0.821, 0.755, 0.740 respectively. The correlation coefficient in case of BOB Growth 95, IDBI-Nit 95, UTI Master share, Tauras Genshare, UTI Index Equity Fund were also found to be positively but highly inter-related, their correlation coefficient bearing 0.655, 0.572, 0.681, 0.574 respectively. A few other mutual funds viz, ICICI Premier and UTI Equity Opportunity Fund though has experienced much lower degree of positiva relationship between their NAV's and MP's, their r-values being 0.438, 0.220 respectively. The NAV's and MP's of CRB Arihant Mangal, Escort Income Bond and Sundnim Growth Fund' 97 were found not correlated, which indicated that their market performance was not satisfactory in the competitive capital market. Amongst all the closed mutual fund, the performance of ICICl Power and UTI

Master Growth were found to be the most satisfactory. The investment in these funds could be regarded as rewarding as compared with most other funds. Since other funds such as Margan Stanley Growth Fund, UTI, UGS 2000 and UTI UGS 50.00 shares also exhibited their market performance as fairly good.

48

(ii)

Open-ended Mutual Funds

The coefficients of correlation between NA V's and MP's of Canganga, JM

Balance Dividend Plan, JM Balance Growth Plan, JM Dividend Plan, JM Liquid Growth Plan, JM Debt Fund Grovvih, JM Equity Fund Dividend Plan, Kothari Pioneer Blue Chip, Kothari Pioneer Prima, Kothari Pioneer Prima Plus, LIe Dhansahayog-B, UTI Grand Master and UTI Primary Equity Fund-95 were worked out to 0.999, 0.997, 0.997, 0.996, 1.000, 0.988, 0.990, 1.000, 1.000, 1.000, 0.978, 0.993, 0.999 respectively, which indicated that these two factors 'O f market performance has a positive and highly significant relationship for these two open-ended funds. The correlation coefficient in case of UTI Unit Scheme's 95, UTI Master Gain, 92 and L1C Dhanvidyaya come out to 0.762, 0.644, 0.591 respectively which were though moderate in magnitude, yet positive. The degree of interdependence between NA V and MP for L1C Dhanraksha-89 (Cap) UTI Unit Scheme, 64 and JM Debt Fund dividend being 0.468, 0.136, 0.221 respectively though had experienced much lower degree of positive correlation between NAV and MP of UTI Money Market Fund 97 was found not correlated, which indicated that their market performance was not satisfactory in the competitive capital market. According to fifth objective, "To study techniques used by mutual fund companies for marketing ", the following results are: -

49

MARKETING STRATEGIES ADOPTED BY THE MUTUAL FUNDS

The present marketing strategies of mutual funds can be divided into two main headings: a) Direct Marketing b) Selling through Intermediaries

A.

DIRECT MARKETING
This constitutes 20% of the total sales of mutual funds. Some of the mportant tools

used in this type of selling are: Personal Selling: - In this case the customer support officer of the fund at a particular branch takes appointment from the potential prospect. Once the appointment is fixed, the branch officer, also called Business Development Associate (BDA) in some funds, then meets the prospect and gives him all details about the various schemes being offered by his fund. The conversion rate in this mode of selling is in between 30% - 40%. Telemarketing: - In this.case the emphasis is to inform the people about the fund.

The names and phone numbers of the people are picked at random from telephone directory. Sometimes people belonging to a particular profession are also contacted through phone and are then informed about the fund. Generally the conversion rate in this form of marketing is 15% - 20%. Direct Mail: - This is one of the most common method followed by all mutual

funds. Addresses of people offer (CSO), then mails the literature of the schemes offered by the fund. The follow up starts after 3-4 days of mailing the literature. The CSO calls on the people to whom the literature was mailed, answers their queries and is generally successful in taking appointments with those people. It is then the job of BDA to try his best to convert that prospect into a customer. Advertisement in Newspapers and Magazines: - The funds regularly advertise in 50

business newspapers and magazines besides in leading national dailies. The purpose is to keep investors aware about the schemes offered by the fund and their performance in recent past. Hoarding and fanners: - In this case, the hoarding and banners of the fund are put

at important locations of the city where the movement of the people is very high. Generally, such hoarding are put near UTI offices in order to tap people who are at present investing~in UTI schemes. The hoarding and banner generally contains information either about one particular scheme or brief information about all schemes of fund.

B. SELLING THROUGH INTERMEDIARIES

Intermediaries contribute towards 80% of the total sales of mutual funds. These are the people/distributors who are in direct touch with the investors. They perform an important role in attracting new customers. Most of these intermediaries are also involved in selling shares and other investment instruments. They do a commendable job in convincing investors to invest in mutual funds. A lot depends on the after sale services offered by the intermediary to the customer. Customers prefer to work with those intermediaries who give them right information about the fund and keep them abreast with the latest changes taking place in the market especially if they have any bearing on the fund in which they have invested. Regular Meetings with Distributors: - Most of the funds conduct monthly/bi-

monthly meetings with their distributors. The objective is to hear their complaints regarding service aspects from funds side and other queries related to the market situation. Sometimes, special training programs are also conducted for the new agents/distributors. Training involves giving details about the products of the fund, their present performance in the market, what the competitors are doing and what they can do to increase the sales of the fund.

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Chapter-6 FINDINGS & SUGGESTIONS

6.1 Findings
Today almost every investor is aware about mutual funds and its schemes. As per report and analysis most of the investor had invested in Franklin Templeton Flexi Cap Fund. Salaried class people are more keen investor in mutual fund then other to earn regular income through different schemes.

Investor preferences as per scheme.

Open ended scheme to earn regular income and for liquidity purpose. Close ended to get capital appreciation by investing in these funds. Balanced funds are also been popular to diversify risk and reward. Investors need more returns, so they invest in mutual fund. Mutual funds are more preferred then other investments. Mutual funds provide more profit then any other investment. It help in diversification of risk and can be more rewarding. Investor are earning high profits and increasing there investments in mutual funds Investor get information through different media such as TV, Radio, Magazines & Journals and help them in taking decision of what to purchase. Balanced fund scheme is more preferred among the investors as they provide balance between risk and reward. Advertisement in newspaper, magazine & pamphlets provide a make an effective media to take decision among customers.

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SUGGESTIONS
Awareness among investor by providing the information regarding mutual fund and their benefits. Media can provide more information by giving proper advertisement of schemes. Other categories then salaried class should be motivated to purchase mutual funds for investments. To attract more investors mutual fund company should provide motive and objective of scheme in advertisements.

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6.2 LIMITATIONS OF REPORT

An analysis has been done as per the objectives and attempt has been done to study each and every parameter to make it more useful and to the mark. Effort has been done so that information collected is correct for the subject studied but there are some limitations which are as follow. Study has been undertaken only on 100 investors of Ludhiana. This cannot provide the information of general public. Information provided may not he true as same of them closed want to tell exact figures. Data collected is from different sources. Mainly secondary data which might have changed or fluctuated. Analysis in done on 100 investors only. So the same cannot be imposed on whole population.

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BIBLIOGRAPHY
Batra G.S. & Dangwal R.C., (2001) Financial Services, Deep and Deep Publications Pvt. Ltd., page 7-8, 36-37 & 53. Chandel Kulbhushan (October 2005) The ICFAI Journal of applied finance, page 56-58. Gorden E & Natragan D (2003) Financial market and services, Himalaya Publications, page 275-280. Joshi Preeti (2004) Awareness about mutual funds and its performance, Report. Kirkire Sandesh, (April 9 2006). Business India, A vehicle to wealth growth, page 84-87. Nayek Mahesh, (December 5, 2005). Business Today, page 230-235

WEBSITES

www.amfiindia.com www.investors.sebi.gov.in www.mutualfundindia.com www.ohioline.osu.edu

www.personalfn.com

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QUESTIONNAIRE
1. Is Awareness of Mutual Fund schemes present in India?
YES NO

2. How many Investments in the schemes of Mutual Fund?

Equity Fund Morgan Stanley Debt Fund Balanced Fund Franklin others

3. What Factors are considered while selecting the scheme?

Regular Proceeds Capital Appreciation Risk Profitability other

4. What is the Occupation of the investors?

Businessman Salaried Other

5. Which Schemes suit to the investors?

Open-ended Scheme Close-ended Scheme Balanced Fund Money Market Mutual Fund Leverage Funds

6. The attributes, which influences the investment decision?

Advertisement Friend Sales Person Any Other

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7. Are Investors Satisfies with Mutual Fund schemes? Yes No

8. Which Scheme is more profitable and has less risk?

Balanced Fund Open-ended Scheme Short-term Debt Franklin Templeton Funds UTI Master Mid Cap Fund Other Value

9. Is advertisement effective for providing information? Yes No

10. Which Information is required for selection of the scheme?

Rate of Return/Yield Maturity Period Risk Attached Profitability Other

Thanks for precious time you spend for filling up the questionnaire. And providing us valuable information. Please provide us your some personal details also. Name: Date of birth: Education: Qualification: Gender: Address and contact no. :
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