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DISSERTATION REPORT
A STUDY OF INVESTMENT PREFERENCE IN MUTUAL FUNDS
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF
MASTERS OF BUSINESS ADMINSITRATION (MBA)
GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY
PROJECT GUIDE: SUBMITTED
BY:
MS. NEETU BALI KAMRA GURLEEN
KAUR
En!"#$n%
N!. &'&*+*
(MBA,&*-,&)
MANAGEMENT EDUCATION AND RESEARCH INSTITUTE
GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY
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CERTIFICATE
This is to certify that the project entitled A STUDY OF INVESTMENT PREFERENCE IN
MUTUAL FUNDS prepared byG0"$$n K0 has been completed under my guidance
and I am satised with the work carried out by her.
The project was successfully carried out by G0"$$n K0 in partial fulllment of
M1%$1 !2 B013n$11 A4#3n31%%3!n 2!# G00 G!53n4 S3n/6 In471%6
Un38$13%9.
..
M1 N$$%0 B"3 K#
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DECLARATION
I hereby declare that the project titled A S%049 !2 In8$1%#$n% P$2$$n$ 3n M0%0"
F0n41is an original piece of research work carried out by me under the guidance and
supervision of M1 N$$%0 B"3 K#. The information has been collected from genuine
& authentic source. The work has been submitted in partial fulllment of the requirement
of !"T#$ % '("I)#"" !*I)I"T$!TI%) +'!,.
PLACE: NE; DELHI
SIGNATURE:
DATE: GURLEEN KAUR
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ACKNO;LEDGEMENT
-ith profound sense of gratitude and regard I e/press my sincere thanks to my guide
and mentor M1 N$$%0 B"3 K# for h#$ valuable guidance and the condence he
instilled in me that helped me in the successful completion of this dissertation report.
-ithout his help this project would have been a distant a0air.
1#$ thorough understanding of the subject and professional guidance was indeed of
immense help to me.
I am also greatly thankful to the faculty members of our institute who co2operated with
me and gave me their valuable time. Acknowledgement
222222222222222222222222222222222
G0"$$n K0
R!"" n! < &'&*+*
MBA
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TABLE OF CONTENTS
CHAPTER E=$0%38$ S0##9 34235
CHAPTER , In%!40%3!n
1istory of utual und
Types of utual und "chemes in India
$isk actors of utual und
-orking of utual und
$egulatory structure of utual und in India
%bjective of the $esearch
$esearch ethodology36278
CHAPTER * L3%$%0$ R$83$> 79
CHAPTER ' An"9131 n4 3n%$7$%%3!n !2 4% 7:2;6
CHAPTER C!n"013!n
indings
$ecommendations
;
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A mutual fund is a scheme in which several people invest their money for a common financial cause.
The collected money invests in the capital market and the money, which they earned, is divided based
on the numb
er of units, which they hold. The mutual fund industry started in India in a small way with the UTI Act
creating what was effectively a small savings division within the RBI. ver a period of !" years thisgrew fairly successfully and gave investors a good return, and therefore in #$%$, as the ne&t logical
step, public sector banks and financial institutions were allowed to float mutual funds and their success
emboldened the government to allow the private sector to foray into this area. The advantages of
mutual fund are professional management, diversification, and economies of scale, simplicity, and
li'uidity. The disadvantages of mutual fund are high costs, over(diversification, possible ta&
conse'uences, and the inability of management to guarantee a superior return. The biggest problems
with mutual funds are their costs and fees it include )urchase fee, Redemption fee, *&change fee,
+anagement fee, Account fee Transaction -osts. There are some loads which add to the cost of
mutual fund. oad is a type of commission depending on the type of funds. +utual funds are easy to
buy and sell. /ou can either buy them directly from the fund company or through a third party. Before
investing in any funds one should consider some factor like ob0ective, risk, 1und +anager2s and
scheme track record, -ost factor etc. There are many, many types of mutual funds. /ou can classify
funds based 3tructure 4open(ended close(ended5, 6ature 4e'uity, debt, balanced5, Investment
ob0ective 4growth, income, money market5 etc. A code of conduct and registration structure for mutual
fund intermediaries, which were subse'uently mandated by 3*BI. In addition, this year A+1I was
involved in a number of developments and enhancements to the regulatory framework.
The most important trend in the mutual fund industry is the aggressive e&pansion of the foreign owned
mutual fund companies and the decline of the companies floated by nationali7ed banks and smaller
private sector players. Reliance +utual 1und, UTI +utual 1und, I-I-I )rudential +utual 1und, 891-
+utual 1und and Birla 3un ife +utual 1und are the top five mutual fund company in India. Reliance
mutual funding is considered to be most reliable mutual funds in India. )eople want to invest in this
institution because they know that this institution will never dissatisfy the mat any cost. /ou should
always keep this into your mind that if particular mutual funding scheme is on larger scale then ne&t
time, you might not get the same results so being a careful investor you should take your ma0or step
diligently otherwise you will be unable to obtain the higher turns.
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CHAPTER 2
INTRODUCTION OF MUTUAL FUND
There are a lot of investment avenues available today in the financial market for an investor with an
investable surplus. 8e can invest in Bank 9eposits, -orporate 9ebentures, and Bonds where there is
low risk but low return. 8e may invest in 3tock of companies where the risk is high and the returns are
also proportionately high. The recent trends in the 3tock +arket have shown that an average retail
investor always lost with periodic bearish tends. )eople began opting for portfolio managers with
e&pertise in stock markets who would invest on their behalf. Thus we had wealth management services
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provided by many institutions. 8owever they proved too costly for a small investor. These investors
have found a good shelter with the mutual funds.
CONCEPT OF 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 ob0ective. The ownership of the fund is thus 0oint or :mutual;< the
fund belongs to all investors. A single investor2s ownership of the fund is in the same proportion as the
amount of the contribution made by him or her bears to the total amount of the fund. +utual 1unds are
trusts, which accept savings from investors and invest the same in diversified financial instruments in
terms of ob0ectives set out in the trusts deed with the view to reduce the risk and ma&imi7e the income
and capital appreciation for distribution for the members. A +utual 1und is a corporation and the fund
manager2s interest is to professionally manage the funds provided by the investors and provide a return
on them after deducting reasonable management fees. The ob0ective sought to be achieved by +utual
1und is to provide an opportunity for lower income groups to ac'uire without much difficulty financial
assets. They cater mainly to the needs of the individual investor whose means are small and to manage
investors portfolio in a manner that provides a regular income, growth, safety, li'uidity and
diversification opportunities.
DEFINITION::+utual funds are collective savings and investment vehicles where savings of small
4or sometimes big5 investors are pooled together to invest for their mutual benefit and returns
distributed proportionately;. :A mutual fund is an investment that pools your money with the money of
an unlimited number of other investors. In return, you and the other investors each own shares of the
fund. The funds assets are invested according to an investment ob0ective into the funds portfolio of
investments. Aggressive growth funds seek long(term capital growth by investing primarily in stocks of
fast(growing smaller companies or market segments. Aggressive growth funds are also called capital
appreciation funds;.
Why Select Mutul Fu!"#
The risk return trade(off indicates that if investor is willing to take higher risk then correspondingly he
can e&pect higher returns and vice versa if he pertains to lower risk instruments, which would be
satisfied by lower returns. 1or e&le, if an investors opt for bank 19, which provide moderate return
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with minimal risk. But as he moves ahead to invest in capital protected funds and the profit(bonds that
give out more return which is slightly higher as compared to the bank deposits but the risk involved
also increases in the same proportion. Thus investors choose mutual funds as their primary means of
investing, as +utual funds provide professional management, diversification, convenience and
li'uidity. That doesn2t mean mutual fund investments risk free. This is because the money that ispooled in are not invested only in debts funds which are less riskier but are also invested in the stock
markets which involves a higher risk but can e&pect higher returns. 8edge fund involves a very high
risk since it is mostly traded in the derivatives market which is considered very volatile.
HISTORY OF MUTUAL FUNDS IN INDIA:
The mutual fund industry in India started in #$=> with the formation of Unit Trust of India, at the
initiative of the ?overnment of India and Reserve Bank. The history of mutual funds in India can be
broadly divided into four distinct phases
FIRST PHASE$ 1%&'()*:Unit Trust of India 4UTI5 was established on #$=> by an Act of )arliament.
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 #$@% UTI was de(linked from the RBI and the Industrial
9evelopment Bank of India 4I9BI5 took over the regulatory and administrative control in place of RBI.
The first scheme launched by UTI was Unit 3cheme #$=. At the end of #$%% UTI hadRs.=,@ crores
of assets under management.
SECOND PHASE $ 1%)*(1%%+4*6TR/ 1 )UBI- 3*-TR 1U6935C #$%@ marked the entry of
non( UTI, public sector mutual funds set up by public sector banks and ife Insurance -orporation of
India 4I-5 and ?eneral Insurance -orporation of India4?I-5. 3BI +utual 1und was the first non( UTI
+utual 1und established in Dune #$%@ followed by -anbank +utual 1und 49ec %@5, )un0ab 6ational
Bank +utual 1und 4Aug %$5, Indian Bank +utual 1und 46ov %$5, Bank of India 4Dun $5, Bank of
Baroda +utual 1und 4ct $!5. I- established its mutual fund in Dune #$%$ while ?I- had set up its
mutual fund in 9ecember#$$. At the end of #$$>, the mutual fund industry had assets under
management of Rs.@,crores.
THIRD PHASE $ 1%%+(2,,+4*6TR/ 1 )RIEAT* 3*-TR 1U6935C Fith the entry of private
sector funds in #$$>, a new era started in the Indian mutual fund industry, giving the Indian investors a
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wider choice of fund families. Also, #$$> was the year in which the first +utual 1und Regulations
came into being, under which all mutual funds, e&cept UTI were to be registered and governed. The
erstwhile Gothari )ioneer 4now merged with 1ranklin Templeton5 was the first private sector mutual
fund registered in Duly #$$>. The #$$> 3*BI 4+utual 1und5 Regulations were substituted by a more
comprehensive and revised +utual 1und Regulations in #$$=. The industry now functions under the3*BI 4+utual 1und5 Regulations #$$=. 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 ac'uisitions. As at the end of Danuary !>, there were >> mutual funds with total assets of
Rs. #,!#,%" crores. The Unit Trust of India with Rs.,"# crores of assets under management was
way ahead of other mutual funds.
FOURTH PHASE $ SINCE FE-RUARY 2,,+C In 1ebruary !>, following the repeal of the Unit
Trust of India Act #$=> UTI was bifurcated into two separate entities. ne is the 3pecified Undertakingof the Unit Trust of India with assets under management of Rs.!$,%>" crores as at the end of Danuary
!>, representing broadly, the assets of U3 = scheme, assured return and certain other schemes. The
3pecified Undertaking of Unit Trust of India, functioning under an administrator and under the rules
framed by ?overnment of India and does not come under the purview of the +utual 1und Regulations.
The second is the UTI +utual 1und td, sponsored by 3BI, )6B, BB and I-. It is registered with
3*BI and functions under the +utual 1und Regulations. Fith the bifurcation of the erstwhile UTI
which had in +arch ! more than Rs.@=, crores of assets under management and with the setting
up of a UTI +utual 1und, conforming to the 3*BI +utual 1und Regulations, and with recent mergers
taking place among different private sector funds, the mutual fund industry has entered its current
phase of consolidation and growth. As at the end of 3eptember, !, there were !$ funds, which
manage assets of Rs.#">#% crores under !#schemes.
ADVANTA.ES 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 the avenues of investing, particularly for the investor who has limited
resources available in terms of capital and the ability to carry out detailed research and market
monitoring.
The following are the ma0or advantages offered by mutual funds to all investorsC
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#. )ortfolio 9iversificationC *ach investor in the fund is a part owner of all the fund2s assets, thus
enabling him to hold a diversified investment portfolio even with a small amount of investment that
would otherwise re'uire big capital.
!. )rofessional +anagementC *ven if an investor has a big amount of capital available to him, he
benefits from the professional management skills brought in by the fund in the management of the
investor2s portfolio. The investment management skills, along with the needed research into available
investment options, ensure a much better return than what an investor can manage on his own. 1ew
investors have the skill and resources of their own to succeed in today2s fast moving, global and
sophisticated markets.
>. ReductionH9iversification f RiskC Fhen an investor invests directly, all the risk of potential loss is
his own, whether he places a deposit with a company or a bank, or he buys a share or debenture on his
own or in any other from. Fhile investing in the pool of funds with investors, the potential losses are
also shared with other investors. The risk reduction is one of the most important benefits of a collective
investment vehicle like the mutual fund.
. Reduction of Transaction -ostsC Fhat is true of risk as also true of the transaction costs The
investor bears all the costs of investing such as brokerage or custody of securities. Fhen going through
a fund, he has the benefit of economies of scale< the funds pay lesser costs because of larger volumes, a
benefit passed on to its investors.
". i'uidityC ften, investors hold shares or bonds they cannot directly, easily and 'uickly sell. Fhen
they invest in the units of a fund, they can generally cash their investments any time, by selling their
units to the fund if open(ended, or selling them in the market if the fund is close(end. i'uidity of
investment is clearly a big benefit.
=. -onvenience and 1le&ibilityC +utual 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.
@. Ta& BenefitsC Any income distributed after +arch >#, !! will be sub0ect to ta& in the assessment of
all Unit holders. 8owever, as a measure of concession to Unit holders of open(ended e'uity(oriented
funds, income distributions for the year ending +arch >#, !>, will be ta&ed at a concessional rate of
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#."J. In case of Individuals and 8indu Undivided 1amilies a deduction upto Rs. $, from the Total
Income will be admissible in respect of income from investments specified in 3ection %,including
income from Units of the +utual 1und. Units of the schemes are not sub0ect to Fealth(Ta& and ?ift(
Ta&.
%. -hoice of 3chemesC +utual 1unds offer a family of schemes to suit your varying needs over a
lifetime.
$. Fell RegulatedC All +utual 1unds are registered with 3*BI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations of +utual 1unds are
regularly monitored by 3*BI.
#. TransparencyC /ou get regular information on the value of your investment in addition to disclosure
on the specific investments made by your scheme, the proportion invested in each class of assets andthe fund managers investment strategy and outlook.
DISADVANTA.ES OF INVESTIN. THROU.H MUTUAL FUNDS:
#. N/ C/!t0/l /e0 C/t:An investor in a mutual fund has no control of the overall costs of
investing. The investor pays investment management fees as long as he remains with the fund,
albeit in return for the professional management and research. 1ees are payable even if the
value of his investments is declining. A mutual fund investor also pays fund distribution costs,
which he would not incur indirect investing. 8owever, this shortcoming only means that there is
a cost to obtain the mutual fund services.!. N/ T3l/0(M"e P/0t4/l3/:Investors who invest on their own can build their own portfolios of
shares and bonds and other securities. Investing through fund 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 ob0ectives. 8owever, most mutual fund managers help
investors overcome this constraint by offering families of funds( a large number of different
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schemes( within their own management company. An investor can choose from different
investment plans and constructs a portfolio to his choice.>. M!53!5 A P/0t4/l3/ O4 Fu!":Availability of a large number of funds can actually mean
too much choice for the investor. 8e may again need advice on how to select a fund to achieve
his ob0ectives, 'uite similar to the situation when he has individual shares or bonds to select.
. The W3"/6 /4 P0/4e3/!l M!5e6e!t:Thats right, this is not an advantage. The average
mutual fund manager is no better at picking stocks than the average nonprofessional, but
charges fees.". N/ C/!t0/lC Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else2s car=. D3lut3/!:+utual funds generally have such small holdings of so many different stocks that
insanely great performance by a funds top holdings still doesn2t make much of a difference in a
mutual funds total performance.@. -u03e" C/tC +any mutual funds speciali7e in burying their costs and in hiring salesmen who
do not make those costs clear to their clients.
TYPES OF MUTUAL FUNDS SCHEMES IN INDIA
Fide variety of +utual 1und 3chemes e&ists to cater to the needs such as financial position, risk
tolerance and return e&pectations etc. thus mutual funds has Eariety of flavors, Being a collection of
many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds ofmutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned
belowC
-Y STRUCTURE:
#. O7e! ( E!"e" Sche6e:An open(end fund is one that is available for subscription all through the
year. These do not have a fi&ed maturity. Investors can conveniently buy and sell units at 6et Asset
Ealue 4K6AEK5 related prices. The key feature of open(end schemes is li'uidity.
!. Cl/e ( E!"e" Sche6e:A closed(end fund has a stipulated maturity period which generally ranging
from > to #"years. The fund is open for subscription only during a specified period. Investors can
invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of
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the scheme on the stock e&changes where they are listed. In order to provide an e&it route to the
investors, some close(ended funds give an option of selling back the units to the +utual 1und through
periodic repurchase at 6AE related prices. 3*BI Regulations stipulate that at least one of the two e&it
routes is provided to the investor.
>. I!te0l Sche6e: Interval 3chemes are that scheme, which combines the features of open(ended
and close(ended schemes. The units may be traded on the stock e&change or may be open for sale or
redemption during pre(determined intervals at 6AE related prices
-Y NATURE:
#8 E9u3ty Fu!"C These funds invest a ma&imum part of their corpus into e'uities holdings. The
structure of the fund may vary different for different schemes and the fund manager2s outlook on
different stocks. The *'uity 1unds are sub(classified depending upon their investment ob0ective, asfollowsC L 9iversified *'uity 1unds L +id(-ap 1unds L 3ector 3pecific 1unds L Ta& 3avings 1unds
4*335 *'uity investments are meant for a longer time hori7on, thus *'uity funds rank high on the
risk(return matri&.
!. Det Fu!"C The ob0ective of these 1unds is to invest in debt papers. ?overnment authorities,
private companies, banks and financial institutions are some of the ma0or issuers of debt papers. By
investing in debt instruments, these funds ensure low risk and provide stable income to the investors.
9ebt funds are further classified asC L ?ilt 1undsC Invest their corpus in securities issued by?overnment, popularly known as ?overnment of India debt papers. These 1unds carry 7ero 9efault
risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed
by ?overnment. L Income 1undsC Invest a ma0or portion into various debt instruments such as bonds,
corporate debentures and ?overnment securities. L +I)sC Invests ma&imum of their total corpus in debt
instruments while they take minimum e&posure in e'uities. It gets benefit of both e'uity and debt
market. These scheme ranks slightly high on the risk(return matri& when compared with other debt
schemes.
L 3hort Term )lans 43T)s5C +eant for investment hori7on for three to si& months. These funds
primarily invest in short term papers like -ertificate of 9eposits 4-9s5 and -ommercial )apers 4-)s5.
3ome portion of the corpus is also invested in corporate debentures. L i'uid 1undsC Also known as
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+oney +arket 3chemes, These funds provides easy li'uidity and preservation of capital. These
schemes invest in short(term instruments like Treasury Bills, inter(bank call money market, -)s and
-9s. These funds are meant for short(term cash management of corporate houses and are meant for an
investment hori7on of #day to > months. These schemes rank low on risk(return matri& and are
considered to be the safest amongst all categories of mutual funds.
>. -l!ce" Fu!":As the name suggest they, are a mi& of both e'uity and debt funds. They invest in
both e'uities and fi&ed income securities, which are in line with pre(defined investment ob0ective of the
scheme. These schemes aim to provide investors with the best of both the worlds. *'uity part provides
growth and the debt part provides stability in returns. 1urther the mutual funds can be broadly
classified on the basis of investment parameter vi7, *ach category of funds is backed by an investment
philosophy, which is pre(defined in the ob0ectives of the fund. The investor can align his own
investment needs with the funds ob0ective and invest accordingly.
-Y INVESTMENT O-;ECTIVE:
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one that does not charge a commission for entry or e&it. That is, no commission is payable on purchase
or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.
OTHER SCHEMES
T= S3!5 Sche6e:Ta&(saving schemes offer ta& rebates to the investors under ta& laws prescribed
from time to time. Under 3ec.%% of the Income Ta& Act, contributions made to any *'uity inked
3avings 3cheme 4*335 are eligible for rebate. Inde& 3chemesC Inde& schemes attempt to replicate the
performance of a particular inde& such as the B3* 3ense& or the 63* ". The portfolio of these
schemes will consist of only those stocks that constitute the inde&. The percentage of each stock to the
total holding will be identical to the stocks inde& weightage. And hence, the returns from such schemes
would be more or less e'uivalent to those of the Inde&.
Sect/0 S7ec343c Sche6e:These are the fundsHschemes which invest in the securities of only thosesectors or industries as specified in the offer documents. e.g. )harmaceuticals, 3oftware, 1ast +oving
-onsumer ?oods41+-?5, )etroleum stocks, etc. The returns in these funds are dependent on the
performance of the respective sectorsHindustries. Fhile these funds may give higher returns, they are
more risky compared to diversified funds. Investors need to keep a watch on the performance of those
sectorsHindustries and must e&it at an appropriate time.
NET ASSET VALUE >NAV?C 3ince 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 an investor holds needs to beassigned a value. 3ince the units held by investor evidence the ownership of the fund2s 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 6et Asset Ealue 46AE5 of one unit or one share.
The value of an investor2s part ownership is thus determined by the 6AE of the number of units held.
Clcult3/! /4 NAV:et us see an e&le. If the value of a fund2s assets stands at Rs. # and it has
#investors who have bought # units each, the total numbers of units issued are #, and the value of
one unit is Rs. #. 4#H#5. If a single investor in fact owns > units, the value of his ownership of
the fund will be Rs. >.4#H#M>5. 6ote that the value of the fund2s investments will keep
fluctuating with the market(price movements, causing the 6et Asset Ealue also to fluctuate. 1or
e&le, if the value of our fund2s asset increased from Rs. # to #!,the value of our investors
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holding of > units will now be 4#!H#M>5 Rs. >=. The investment value can go up or down,
depending on the markets value of the fund2s assets.
MUTUAL FUND FEES AND EXPENSES
+utual fund fees and e&penses are charges that may be incurred by investors who hold mutual funds.
Running a mutual fund involves costs, including shareholder transaction costs, investment advisory
fees, and marketing and distribution e&penses. 1unds pass along these costs to investors in a number of
ways.
18 TRANSACTION FEES
i5 )urchase 1eeC It is a type of fee that some funds charge their shareholders when they buy shares.
Unlike a front(end sales load, a purchase fee is paid to the fund 4not to a broker5 and is typically
imposed to defray some of the funds costs associated with the purchase.
ii5 Redemption 1eeC It is another type of fee that some funds charge their shareholders when they sell or
redeem shares. Unlike a deferred sales load, a redemption fee is paid to the fund 4not to a broker5 and is
typically used to defray fund costs associated with a shareholders redemption.
iii5 *&change 1eeC *&change fee that some funds impose on shareholders if they e&change 4transfer5 to
another fund within the same fund group or Kfamily of funds.K
28 PERIODIC FEES
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i5 +anagement 1eeC +anagement fees are fees that are paid out of fund assets to the funds investment
adviser for investment portfolio management, any other management fees payable to the funds
investment adviser or its affiliates, and administrative fees payable to the investment adviser that are
not included in the Kther *&pensesK category. They are also called maintenance fees.
ii5 Account 1eeC Account fees are fees that some funds separately impose on investors in connection
with the maintenance of their accounts. 1or e&le, some funds impose an account maintenance fee
on accounts whose value is less than a certain dollar amount.
+8 OTHER OPERATIN. EXPENSES
Transaction -ostsC These costs are incurred in the trading of the funds assets. 1unds with a high
turnover ratio or investing in illi'uid or e&otic markets usually face higher transaction costs. Unlike the
Total *&pense Ratio these costs are usually not reported.
LOADS
9efinition of a oad funds e&hibit a K3ales oadK with a percentage charge levied on purchase or sale
of shares. A load is a type of -ommission 4remuneration5. 9epending on the type of load a mutual fund
e&hibits, charges may be incurred at time of purchase, time of sale, or a mi& of both. The different types
of loads are outlined below.
F0/!t(e!" l/":Also known as 3ales -harge, this is a fee paid when shares are purchased. Also
known as a Kfront(end load,K this fee typically goes to the brokers that sell the funds shares. 1ront(end
loads reduce the amount of your investment. 1or e&le, lets say you have Rs.#, and want to
invest it in a mutual fund with a "J front(end load. The Rs." sales load you must pay comes off the
top, and the remaining Rs.$" will be invested in the fund. According to 6A39 rules, a front(end load
cannot be higher than %."J of your investment.
-c@(e!" l/":Also known as 9eferred 3ales -harge, this is a fee paid when shares are sold. Also
known as a Kback(end load,K this fee typically goes to the brokers that sell the funds shares. The
amount of this type of load will depend on how long the investor holds his or her shares and typically
decreases to 7ero if the investor holds his or her shares long enough.
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Leel l/" L/< l/":It2s similar to a back(end load in that no sales charges are paid when buying the
fund. Instead a back(end load may be charged if the shares purchased are sold within a given
timeframe. The distinction between level loads and low loads as opposed to back(end loads is that this
time frame where charges are levied is shorter.
N/(l/" Fu!":As the name implies, this means that the fund does not charge any type of sales load.
But, as outlined above, not every type of shareholder fee is a Ksales load.K A no(load fund may charge
fees that are not sales loads, such as purchase fees, redemption fees, e&change fees, and account fees.
SELECTION PARAMETERS FOR MUTUALFUND
Y/u0 /Bect3e:The first point to note before investing in a fund is to find out whether your ob0ective
matches with the scheme. It is necessary, as any conflict would directly affect your prospective returns.
3imilarly, you should pick schemes that meet your specific needs. *&lesC pension plans, children2s
plans, sector(specific schemes, etc. /our risk capacity and capabilityC This dictates the choice of
schemes. Those with no risk tolerance should go for debt schemes, as they are relatively safer.
Aggressive investors can go for e'uity investments. Investors that are even more aggressive can try
schemes that invest in specific industry or sectors. 1und +anager2s and scheme track recordC 3ince you
are giving your hard earned money to someone to manage it, it is imperative that he manages it well. It
is also essential that the fund house you choose has e&cellent track record. It also should beprofessional and maintain high transparency in operations. ook at the performance of the scheme
against relevant market benchmarks and its competitors. ook at the performance of a longer period, as
it will give you how the scheme fared in different market conditions.
C/t 4ct/0:Though the A+- fee is regulated, you should look at the e&pense ratio of the fund before
investing. This is because the money is deducted from your investments. A higher entry load or e&it
load also will eat into your returns. A higher e&pense ratio can be 0ustified only by superlative returns.
It is very crucial in a debt fund, as it will devour a few percentages from your modest returns. Also,
+orning star rates mutual funds. *ach year end, many financial publications list the years best
performing mutual funds. 6aturally, very eager investors will rush out to purchase shares of last years
top performers. That2s a big mistake. Remember, changing market conditions make it rare that last
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years top performer repeats that ranking for the current year. +utual fund investors would be well
advised to consider the fund prospectus, the fund manager, and the current market conditions. 6ever
rely on last years top performers.
Ty7e /4 Retu0! /! Mutul Fu!"C
There are three ways, where the total returns provided by mutual funds can be en0oyed by investorsC
L Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it
receives over the year to fund owners in the form of a distribution.
L If the fund sells securities that have increased in price, the fund has a capital gain. +ost funds also
pass on these gains to investors in a distribution. If fund holdings increase in price but are not sold by
the fund manager, the funds shares increase in price. /ou can then sell your mutual fund shares for a
profit. 1unds will also usually give you a choice either to receive a check for distributions or to reinvest
the earnings and get more shares.
RIS FACTORS OF MUTUAL FUNDS:
18 The R3@(Retu0! T0"e(O44:The most important relationship to understand is the risk(return trade(
off. 8igher the risk greater the returns H loss and lower the risk lesser the returnsHloss. 8ence it is upto
you, the investor to decide how much risk you are willing to take. Inorder to do this you must first be
aware of the different types of risks involved with your investment decision.
28 M0@et R3@:3ometimes 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(si7ed
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companies. This is known as +arket Risk. A 3ystematic Investment )lan 4:3I);5 that works on the
concept of Rupee -ost Averaging 4:R-A;5 might help mitigate this risk.
+8 C0e"3t R3@:The debt servicing ability 4may it be interest payments or repayment of principal5 of a
company through its cash flows determines the -redit Risk faced by you. This credit risk is measured
by independent rating agencies like -RI3I who rate companies and their paper. A NAAA2 rating is
considered the safest whereas a N92 rating is considered poor credit 'uality. A well(diversified portfolio
might help mitigate this risk.
'8 I!4lt3/! R3@:Things you hear people talk aboutCKRs. # today is worth more than Rs. #
tomorrow.KKRemember the time when a bus ride costed " paiseKK+ehangai Ga Damana 8ai.KThe 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 e'uities
might help mitigate this risk.
8 I!te0et Rte R3@:In a free market economy interest rates are difficult if not impossible to predict.
-hanges in interest rates affect the prices of bonds as well as e'uities. If interest rates rise the prices of
bonds fall and vice versa. *'uity might be negatively affected as well in a rising interest rate
environment. A well(diversified portfolio might help mitigate this risk.
&8 P/l3t3cl ./e0!6e!t P/l3cy R3@:-hanges in government policy and political decision can
change the investment environment. They can create a favorable environment for investment or vice
versa.
*8 L39u3"3ty R3@:i'uidity risk arises when it becomes difficult to sell the securities that one has
purchased. i'uidity Risk can be partly mitigated by diversification, staggering of maturities as well as
internal risk controls that lean towards purchase of li'uid securities.
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WORIN. OF MUTUAL FUNDS
The mutual fund collects money directly or through brokers from investors. The money is invested in
various instruments depending on the ob0ective of the scheme. The income generated by selling
securities or capital appreciation of these securities is passed on to the investors in proportion to their
investment in the scheme. The investments are divided into units and the value of the units will be
reflected in 6et Asset Ealue or 6AE of the unit. 6AE is the market value of the assets of the scheme
minus its liabilities. The per unit 6AE is the net asset value of the scheme divided by the number of
units outstanding on the valuation date. +utual fund companies provide daily net asset value of their
schemes to their investors. 6AE is important, as it will determine the price at which you buy or redeem
the units of a scheme. 9epending on the load structure of the scheme, you have to pay entry or e&it
load.
STRUCTURE OF A MUTUAL FUND:
India has a legal framework within which +utual 1und have to be constituted. In India open and close(
end funds operate under the same regulatory structure i.e. as unit Trusts. A +utual 1und in India is
allowed to issue open(end and close(end schemes under a common legal structure. The structure that is
re'uired to be followed by any +utual 1und in India is laid down under 3*BI 4+utual 1und5
Regulations, #$$=.The 1und 3ponsorC 3ponsor is defined under 3*BI regulations as any person who,
acting alone or in combination of another corporate body establishes a +utual 1und. The sponsor of the
fund is akin to the promoter of a company as he gets the fund registered with 3*BI. The sponsor forms
a trust and appoints a Board of Trustees. The sponsor also appoints the Asset +anagement -ompany as
fund managers. The sponsor either directly or acting through the trustees will also appoint a custodian
to hold funds assets. All these are made in accordance with the regulation and guidelines of 3*BI. As
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per the 3*BI regulations, for the person to 'ualify as a sponsor, he must contribute atleast J of the
net worth of the Asset +anagement -ompany and possesses a sound financial track record over " years
prior to registration. +utual 1unds as TrustsC A +utual 1und in India is constituted in the form of
)ublic trust Act, #%%!. The 1und sponsor acts as a settlor of the Trust, contributing to its initial capital
and appoints a trustee to hold the assets of the trust for the benefit of the unit(holders, who are thebeneficiaries of the trust. The fund then invites investors to contribute their money in common pool, by
scribing to :units; issued by various schemes established by the Trusts as evidence of their beneficial
interest in the fund. It should be understood that the fund should be 0ust a :pass through; vehicle.
Under the Indian Trusts Act, the trust of the fund has no independent legal capacity itself, rather it is the
Trustee or the Trustees who have the legal capacity and therefore all acts in relation to the trusts are
taken on its behalf by the Trustees. In legal parlance the investors or the unit(holders are the beneficial
owners of the investment held by the Trusts, even as these investments are held in the name of the
Trustees on a day(to(day basis. Being public trusts, +utual 1und can invite any number of investors as
beneficial owners in their investment schemes.
T0utee:A Trust is created through a document called the Trust 9eed that is e&ecuted by the fund
sponsor in favor of the trustees. The Trust( the +utual 1und O may be managed by a board of trustees(
a body of individuals, or a trust company( a corporate body. +ost of the funds in India are managed by
Boards of Trustees. Fhile the boards of trustees are governed by the Indian Trusts Act, where the trusts
are a corporate body, it would also re'uire to comply with the -ompanies Act, #$"=. The Board or the
Trust company as an independent body, acts as a protector of the of the unit(holders interests. The
Trustees do not directly manage the portfolio of securities. 1or this specialist function, they appoint an
Asset +anagement -ompany. They ensure that the 1und is managed by ht A+- as per the defined
ob0ectives and in accordance with the trusts deeds and 3*BI regulations.
The Aet M!5e6e!t C/67!3e:The role of an Asset +anagement -ompany 4A+-5 is to act as
the investment manager of the Trust under the board supervision and the guidance of the Trustees. The
A+- is re'uired to be approved and registered with 3*BI as an A+-. The A+- of a +utual 1und
must have a net worth of at least Rs. # -rores at all times. 9irectors of the A+-, both independent
and non(independent, should have ade'uate professional e&pertise in financial services and should be
individuals of high morale standing, a condition also applicable to other key personnel of the A+-.
The A+- cannot act as a Trustee of any other +utual 1und. Besides its role as a fund manager, it may
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undertake specified activities such as advisory services and financial consulting, provided these
activities are run independent of one another and the A+-2s resources 4such as personnel, systems etc.5
are properly segregated by the activity. The A+- must always act in the interest of the unit(holders and
reports to the trustees with respect to its activities.
Cut/"3! !" De7/3t/03e:+utual 1und is in the business of buying and selling of securities in
large volumes. 8andling these securities in terms of physical delivery and eventual safekeeping is a
speciali7ed activity. The custodian is appointed by the Board of Trustees for safekeeping of securities
or participating in any clearance system through approved depository companies on behalf of the
+utual 1und and it must fulfill its responsibilities in accordance with its agreement with the +utual
1und. The custodian should be an entity independent of the sponsors and is re'uired to be registered
with 3*BI. Fith the introduction of the concept of demateriali7ation of shares the demateriali7ed
shares are kept with the 9epository participant while the custodian holds the physical securities. Thus,deliveries of a fund2s securities are given or received by a custodian or a depository participant, at the
instructions of the A+-, although under the overall direction and responsibilities of the Trustees.
-!@e0:A 1und2s activities involve dealing in money on a continuous basis primarily with respect to
buying and selling units, paying for investment made, receiving the proceeds from sale of the
investments and discharging its obligations towards operating e&penses. Thus the 1und2s banker plays
an important role to determine 'uality of service that the fund gives in timely delivery of remittances
etc.
T0!4e0 A5e!t:Transfer agents are responsible for issuing and redeeming units of the +utual 1und
and provide other related services such as preparation of transfer documents and updating investor
records. A fund may choose to carry out its activity in(house and charge the scheme for the service at a
competitive market rate. Fhere an outside Transfer agent is used, the fund investor will find the agent
to be an important interface to deal with, since all of the investor services that a fund provides are going
to be dependent on the transfer agent.
RE.ULATORY STRUCTURE OF MUTUAL FUNDS IN INDIA:
The structure of mutual funds in India is guided by the 3*BI. Regulations,#$$=. These regulations
make it mandatory for mutual fund to have three structures of sponsor trustee and asset +anagement
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-ompany. The sponsor of the mutual fund and appoints the trustees. The trustees are responsible to the
investors in mutual fund and appoint the A+- for managing the investment portfolio. The A+- is the
business face of the mutual fund, as it manages all the affairs of the mutual fund. The A+- and the
mutual fund have to be registered with 3*BI.
SE-I RE.ULATIONSC
L As far as mutual funds are concerned, 3*BI formulates policies and regulates the mutual funds to
protect the interest of the investors.
L 3*BI notified regulations for the mutual funds in #$$>. Thereafter, mutual funds sponsored by private
sector entities were allowed to enter the capital market.
L The regulations were fully revised in #$$= and have been amended thereafter from time to time.
L 3*BI has also issued guidelines to the mutual funds from time to time to protect the interests of
investors.
L All mutual funds whether promoted by public sector or private sector entities including those
promoted by foreign entities are governed by the same set of Regulations. The risks associated with the
schemes launched by the mutual funds sponsored by these entities are of similar type. There is no
distinction in regulatory re'uirements for these mutual funds and all are sub0ect to monitoring and
inspections by 3*BI.
L 3*BI Regulations re'uire that at least two thirds of the directors of trustee company or board of
trustees must be independent i.e. they should not be associated with the sponsors.
L Also, "J of the directors of A+- must be independent. All mutual funds are re'uired to be
registered with 3*BI before they launch any scheme.L 1urther 3*BI Regualtions, inter(alia, stipulate
that +1s cannot guarantee returns in any scheme and that each scheme is sub0ect to ! C !" condition
PI.e minimum ! investors per scheme and one investor can hold more than !"J stake in the corpus in
that one schemeQ.
L Also 3*BI has permitted +1s to launch schemes overseas sub0ect various restrictions and also to
launch schemes linked to Real *state, ptions and 1utures, -ommodities, etc.
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ASSOCIATION OF MUTUAL FUNDS IN INDIA >AMFI?:
Fith the increase in mutual fund players in India, a need for mutual fund association in India was
generated to function as a non(profit organi7ation. Association of +utual 1unds in India 4A+1I5 was
incorporated on !!nd August, #$$". A+1I is an ape& body of all Asset +anagement -ompanies
4A+-5 which has been registered with 3*BI. Till date all the A+-s are that have launched mutual
fund schemes are its members. It functions under the supervision and guidelines of its Board of
9irectors. Association of +utual 1unds India has brought down the Indian +utual 1und Industry to a
professional and healthy market with ethical lines enhancing and maintaining standards. It follows the
principle of both protecting and promoting the interests of mutual funds as well as their unit holders.
The OBect3e /4 A/c3t3/! /4 Mutul Fu!" 3! I!"3C
The Association of +utual 1unds of India works with > registered A+-s of the country. It has certain
defined ob0ectives which 0u&taposes the guidelines of its Board of 9irectors.
The ob0ectives are as followsC
L This mutual fund association of India maintains high professional and ethical standards in all areas of
operation of the industry.
L It also recommends and promotes the top class business practices and code of conduct which is
followed by members and related people engaged in the activities of mutual fund and asset
management. The agencies who are by any means connected or involved in the field of capital markets
and financial services also involved in this code of conduct of the association.
L A+1I interacts with 3*BI and works according to 3*BIs guidelines in the mutual fund industry.
L Association of +utual 1und of India do represent the ?overnment of India, the Reserve Bank of India
and other related bodies on matters relating to the +utual 1und Industry.
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L It develops a team of well 'ualified and trained Agent distributors. It implements a programme of
training and certification for all intermediaries and other engaged in the mutual fund industry.
L A+1I undertakes all India awareness programme for investors in order to promote proper
understanding of the concept and working of mutual funds.
L At last but not the least association of mutual fund of India also disseminate informations on +utual
1und Industry and undertakes studies and research either directly or in association with other bodies.
AMFI Pul3ct3/!:A+1I publish mainly two types of bulletin. ne is on the monthly basis and the
other is 'uarterly. These publications are of great support for the investors to get intimation of the
knowhow of their parked money.
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MUTUAL FUNDS IN INDIA
In #$=>, the day the concept of +utual 1und took birth in India. Unit Trust of India invited investors or
rather to those who believed in savings, to park their money in UTI +utual 1und. 1or > years it
goaled without a single second player. Though the #$%% year saw some new mutual fund companies,
but UTI remained in a monopoly position. The performance of mutual funds in India in the initial phase
was not even closer to satisfactory level. )eople rarely understood, and of course investing was out of
'uestion. But yes, some ! million shareholders were accustomed with guaranteed high returns by the
beginning of liberali7ation of the industry in #$$!. This good record of UTI became marketing tool for
new entrants. The e&pectations of investors touched the sky in profitability factor. 8owever, people
were miles away from the preparedness of risks factor after the liberali7ation. The net asset value
46AE5 of mutual funds in India declined when stock prices started falling in the year #$$!. Those days,
the market regulations did not allow portfolio shifts into alternative investments. There was rather no
choice apart from holding the cash or to further continue investing in shares. ne more thing to be
noted, since only closed(end funds were floated in the market, the investors disinvested by selling at a
loss in the secondary market. The performance of mutual funds in India suffered 'ualitatively. The
#$$! stock market scandal, the losses by disinvestments and of course the lack of transparent rules inthe where abouts rocked confidence among the investors. )artly owing to a relatively weak stock
market performance, mutual funds have not yet recovered, with funds trading at an average discount of
#! percent of their net asset value. The securities and *&change Board of India 43*BI5 came out with
comprehensive regulation in #$$> which defined the structure of +utual 1und and Asset +anagement
-ompanies for the first time. The supervisory authority adopted a set of measures to create a
transparent and competitive environment in mutual funds. 3ome of them were like rela&ing investment
restrictions into the market, introduction of open(ended funds, and paving the gateway for mutual funds
to launch pension schemes. The measure was taken to make mutual funds the key instrument for long(
term saving. The more the variety offered, the 'uantitative will be investors. 3everal private sectors
+utual 1unds were launched in #$$> and #$$. The share of the private players has risen rapidly since
then. -urrently there are > +utual 1und organi7ations in India managing #,!, crores. At last to
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mention, as long as mutual fund companies are performing with lower risks and higher profitability
within a short span of time, more and more people will be inclined to invest until and unless they are
fully educated with the dos and don2ts of mutual funds. +utual fund industry has seen a lot of changes
in past few years with multinational companies coming into the country, bringing in their professional
e&pertise in managing funds worldwide. In the past few months there has been a consolidation phasegoing on in the mutual fund industry in India. 6ow investors have a wide range of 3chemes to choose
from depending on their individual profiles.
MUTUAL FUND COMPANIES IN INDIA:
The concept of mutual funds in India dates back to the year #$=>. The era between #$=>and #$%@
marked the e&istence of only one mutual fund company in India with Rs. =@bn assets undermanagement 4AU+5, by the end of its monopoly era, the Unit Trust of India 4UTI5. By the end of the
%s decade, few other mutual fund companies in India took their position in mutual fund market. The
new entries of mutual fund companies in India were 3BI +utual 1und, -anbank +utual 1und, )un0ab
6ational Bank +utual 1und, Indian Bank +utual 1und, Bank of India +utual 1und. The succeeding
decade showed a new hori7on in Indian mutual fund industry. By the end of #$$>, the total AU+ of the
industry was Rs. @. bn. The private sector funds started penetrating the fund families. In the same
year the first +utual 1und Regulations came into e&istence with re(registering all mutual funds e&cept
UTI. The regulations were further given a revised shape in #$$=. Gothari )ioneer was the first private
sector mutual fund company in India which has now merged with 1ranklin Templeton. Dust after ten
years with private sector players penetration, the total assets rose up to Rs. #!#%." bn. Today there are
>> mutual fund companies in India.
MB/0 Mutul Fu!" C/67!3e 3! I!"3:
L AB6 A+R +utual 1und
L 3tandard -hartered +utual 1und
L Birla 3un ife +utual 1und
L 1ranklin Templeton India +utual 1und
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L Bank of Baroda +utual 1und
L +organ 3tanley +utual 1und India
L 891- +utual 1und
L *scorts +utual 1und
L 83B- +utual 1und
L Alliance -apital +utual 1und
L I6? Eysya +utual 1und
L Benchmark +utual 1und
L )rudential I-I-I +utual 1und
L -anbank +utual 1und
L 3tate Bank of India +utual 1und
L -hola +utual 1und
L Tata +utual 1und
L I- +utual 1und
L Unit Trust of India +utual 1und
L ?I- +utual 1und
L Reliance +utual 1und
1or the first time in the history of Indian mutual fund industry, Unit Trust of India +utual 1und has
slipped from the first slot. *arlier, in +ay !=, the )rudential I-I-I +utual 1und was ranked at thenumber one slot in terms of total assets. In the very ne&t month, the UTI+1 had regained its top
position as the largest fund house in India. 6ow, according to the current pegging order and the data
released by Association of +utual 1unds in India 4A+1I5, the Reliance +utual 1und, with a Danuary(
end AU+ of Rs>$,! crore has become the largest mutual fund in India n the other hand, UTI+1,P/$*&
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with an AU+ of Rs >@,">" crore, has gone to second position. The )rudential I-I-I +1 has slipped to
the third position with an AU+ of Rs >,@=crore.It happened for the first time in last one year that a
private sector mutual fund house has reached to the top slot in terms of asset under management
4AU+5. In the last one year to Danuary, AU+ of the Indian fund industry has risen by =J to Rs >.>$
lakh crore. According to the data released by Association of +utual 1unds in India 4A+1I5, thecombined average AU+ of the >" fund houses in the country increased to Rs ","#!.$$ billion in April
compared to Rs ,$>!.%= billion in +arch Reliance +1 maintained its top position as the largest fund
house in the country with Rs@.!" billion 0ump in AU+ to Rs %%>.%@ billion at April(end. The second(
largest fund house 891- +1 gained Rs "$.! billion in its AU+ at Rs =>%.%billion. I-I-I )rudential
and state(run UTI +1 added Rs =.#= billion and Rs "@.>" billion respectively to their assets last
month. I-I-I )rudentials AU+ stood at Rs "=.$ billion at the end of April, while UTI +1 had
assets worth Rs ".%$ billion. The other fund houses which saw an increase in their average AU+ in
April include(-anara Robeco +1, I91- +1, 93) BlackRock, 9eutsche +1, Gotak +ahindra +1 and
I-+1.
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MUTUAL FUNDS VS8 OTHER INVESTMENTS
1rom investors2 viewpoint mutual funds have several advantages such asC
L )rofessional management and research to select 'uality securities.
L 3preading risk over a larger 'uantity of stock whereas the investor has limited to buy only a hand full
of stocks. The investor is not putting all his eggs in one basket.
L Ability to add funds at set amounts and smaller 'uantities such as S# per month
L Ability to take advantage of the stock market which has generally outperformed other investment in
the long run.
L 1und manager are able to buy securities in large 'uantities thus reducing brokerage fees.
8owever there are some disadvantages with mutual funds such asC
L The investor must rely on the integrity of the professional fund manager.
L 1und management fees may be unreasonable for the services rendered.
L The fund manager may not pass transaction savings to the investor.
L The fund manager is not liable for poor 0udgment when the investors fund loses value.
L There may be too many transactions in the fund resulting in higher feeHcost to the investor ( This is
sometimes call K-hurn and *arnK.
L )rospectus and Annual report are hard to understand.
L Investor may feel a lost of control of his investment dollars. There may be restrictions on when and
how an investor sellsHredeems his mutual fund shares.
C/67!y F3=e" De7/3t e0u Mutul Fu!"
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1i&ed deposits are unsecured borrowings by the company accepting the deposit. -redit rating of the
fi&ed deposit program is an indication of the inherent default risk in the investment. The moneys of
investors in a mutual fund scheme are invested by the A+- in specific investments under that scheme.
These investments are held and managed in(trust for the benefit of scheme2s investors. n the other
hand, there is no such direct correlation between a company2s fi&ed deposit mobilisation, and theavenues where these resources are deployed. A corollary of such linkage between mobilisation and
investment is that the gains and losses from the mutual fund scheme entirely flow through to the
investors. Therefore, there can be no certainty of yield, unless a named guarantor assures a return or, to
a lesser e&tent, if the investment is in a serial gilt scheme. n the other hand, the return under a fi&ed
deposit is certain, sub0ect only to the default risk of the borrower. Both fi&ed deposits and mutual funds
offer li'uidity, but sub0ect to some differencesC The provider of li'uidity in the case of fi&ed deposits is
the borrowing company. In mutual funds, the li'uidity provider is the scheme itself 4for open(end
schemes5 or the market 4in the case of closed(end schemes5. The basic value at which fi&ed deposits are
encashed is not sub0ect to a market risk. 8owever, the value at which units of a scheme are redeemed
depends on the market. If securities have gained in value during the period, then the investor can even
earn a return that is higher than what he anticipated when he invested. But he could also end up with a
loss. *arly encashment of fi&ed deposits is always sub0ect to a penalty charged by the company that
accepted the fi&ed deposit. +utual fund schemes also have the option of charging a penalty on :early;
redemption of units 4through by way of an Ne&it load2,5 If the 6AE has appreciated ade'uately, then
even after the e&it load, the investor could earn a capital gain on his investment.
-!@ F3=e" De7/3t e0e Mutul Fu!":
Bank fi&ed deposits are similar to company fi&ed deposits. The ma0or difference is that banks are
generally more stringently regulated than companies. They even operate under stricter re'uirements
regarding 3tatutory i'uidity Ratio 43R5 and -ash Reserve Ratio 4-RR5. Fhile the above are causes
for comfort, bank deposits too are sub0ect to default risk. 8owever, given the political and economic
impact of bank defaults, the government as well as Reserve Bank of India 4RBI5 try to ensure that
banks do not fail. 1urther, bank deposits upto Rs #, are protected by the 9eposit Insurance and
-redit ?uarantee -orporation 49I-?-5, so long as the bank has paid the re'uired insurance premium
of " paise per annum for every Rs # of deposits. The monetary ceiling of Rs #, is for all the
deposits in all the branches of a bank, held by the depositor in the same capacity and right. BA6G3
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+UTUA 1U693 Returns ow Better Administrative e&p. 8igh ow Risk ow +oderate Investment
options ess +ore 6etwork 8igh penetration ow but improving i'uidity At a cost Better uality of
assets 6ot transparent uarterly Interest calculation *very +onth i.e. >rd, =th, $th #!th.?uarantor
?uarantor is needed. ?uarantor is not needed. Account 6eeded. 6ot 6eeded.
-/!" !" Dee!tu0e e0u Mutul Fu!"
As in the case of fi&ed deposits, credit rating of the bond H debenture is an indication of the inherent
default risk in the investment. 8owever, unlike 19, bonds and debentures are transferable securities.
Fhile an investor may have an early encashment option from the issuer 4for instance through a :put;
option5, generally li'uidity is through a listing in the market. Implications of this areC
L If the security does not get traded in the market, then the li'uidity remains on paper. In this respect, an
open(end scheme offering continuous sale H re(purchase option is superior. L The value that the investor
would reali7e in an early e&it is sub0ect to market risk. The investor could have a capital gain or a
capital loss. This aspect is similar to a +1 scheme. It is possible for a professional investor to earn
attractive returns by directly investing in the debt market, and actively managing the positions. ?iven
the market realities in India, it is difficult for most investors to actively manage their debt portfolio.
1urther, at times, it is difficult to e&ecute trades in the debt market even when the transaction si7e is as
high as Rs # crore. In this respect, investment in a debt scheme would be beneficial. 9ebt securitiescould be backed by a hypothecation or mortgage of identified fi&ed and Hor current assets 4secured
bonds H debentures5. In such a case, if there is a default, the identified assets become available for
meeting redemption re'uirements. An unsecured bond H debenture is for all practical purposes like a
fi&ed deposit, as far as access to assets is concerned. The investments of a mutual fund scheme are held
by a custodian for the benefit of investors in the scheme. Thus, the securities that relate to a scheme are
ring(fenced for the benefit of its investors.
E9u3ty e0u Mutul Fu!"
Investment in both e'uity and mutual funds are sub0ect to market risk. An investor holding an e'uity
security that is not traded in the market place has a problem in realising value from it. But investment
in an open(end mutual fund eliminates this direct risk of not being able to sell the investment in the
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market. An indirect risk remains, because the scheme has to realise its investments to pay investors.
The A+- is however in a better position to handle the situation Another benefit of e'uity mutual fund
schemes is that they give investors the benefit of portfolio diversification through a small investment.
1or instance, an investor can take an e&posure to the inde& by investing a mere Rs ", in an inde&
fund.
A"!t5e /4 Mutul Fu!" Oe0 St/c@#
L A mutual fund offers a great deal of diversification starting with the very first dollar invested,
because a mutual fund may own tens or hundreds of different securities. This diversification helps
reduce the risk of loss because even if any one holding tanks, the overall value doesn2t drop by much.
If you2re buying individual stocks, you can2t get much diversity unless you have S#G or so.
. L 3mall sums of money get you much further in mutual funds than in stocks. 1irst, you can set up anautomatic investment plan with many fund companies that lets you put in as little as S" per month.
3econd, the commissions for stock purchases will be higher than the cost of buying no(load fund 4f
course, the funds various e&penses like commissions are already taken out of the 6AE5. 3maller si7ed
purchases of stocks will have relatively high commissions on a percentage basis, although with the S#
trade becoming common, this is a bit less of a concern than it once was.
L /ou can e&it a fund without getting caught on the bidHask spread.
L 1unds provide a cheap and easy method for reinvesting dividends.
L ast but most certainly not least, when you buy a fund you2re in essence hiring a professional to
manage your money for you. That professional is 4presumably5 monitoring the economy and the
markets to ad0ust the funds holdings appropriately.
A"!t5e O4 St/c@ Oe0 Mutul Fu!"#
L The opposite of the diversification issueC If you own 0ust one stock and it doubles, you are up #J.
If a mutual fund owns " stocks and one doubles, it is up !J. n the other hand, if you own 0ust one
stock and it drops in half, you are down "J but the mutual fund is down #J. -uts both ways.
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L If you hold your stocks several years, you aren2t nicked a #J or so management fee every year
4although some brokerage firms charge if there aren2t enough trades5.
L /ou can take your profits when you want to and won2t inadvertently buy a ta& liability. 4This refers to
the common practice among funds of distributing capital gains around 6ovember or 9ecember of each
year. 3ee the article elsewhere in this 1A for more details.5
L /ou can do a covered write option strategy. 43ee the article on options on stocks for more details.5
L /ou can structure your portfolio differently from any e&isting mutual fund portfolio. 4Although with
the current universe of funds I m not certain what could possibly be missing out there5
L /ou can buy smaller cap stocks which aren2t suitable for mutual funds to invest in.
L /ou have a potential profit opportunity by shorting stocks. 4/ou cannot, in general, short mutualfunds.5
L The argument is offered that the funds have a KherdK mentality and they all end up owning the same
stocks. /ou may be able to pick stocks better.
L34e I!u0!ce e0u Mutul Fu!"
ife insurance is a hedge against risk O and not really an investment option. 3o, it would be wrong to
compare life insurance against any other financial product. ccasionally on account of marketinefficiencies or mispricing of products in India, life insurance products have offered a return that is
higher than a comparable :safe; fi&ed return security O thus, you are effectively paid for getting
insured 3uch opportunities are not sustainable in the long run.
FUTURE PROSPECT OF MUTUAL FUNDS IN INDIA
1inancial e&perts believe that the future of +utual 1unds in India will be very bright. It has been
estimated that by +arch(end of !#, the mutual fund industry of India will reach Rs,$, crore,
taking into account the total assets of the Indian commercial banks. In the coming # years the annual
composite growth rate is e&pected to go up by #>.J.
L #J growth in the last = years.
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L 6umber of foreign A+-s are in the 'ueue to enter the Indian markets like 1idelity Investments, U3
based, with over U3S#trillion assets under management worldwide
L ur saving rate is over !>J, highest in the world. nly channeli7ing these savings in mutual funds
sector is re'uired.
L Fe have appro&imately !$ mutual funds which is much less than U3 having more than %. There is
a big scope for e&pansion.
L B and - class cities are growing rapidly. Today most of the mutual funds are concentrating on the A
class cities. 3oon they will find scope in the growing cities
. L +utual fund can penetrate rurals like the Indian insurance industry with simple and limited products.
L 3*BI allowing the +1s to launch commodity mutual funds.
L *mphasis on better corporate governance.
L Trying to curb the late trading practices
L Introduction of 1inancial )lanners who can provide need based advice.
ooking at the past developments and combining it with the current trends it can be concluded that the
future of +utual 1unds in India has lot of positive things to offer to its investors.
6et Asset Ealue 46AE5 6et Asset Ealue is the market value of the assets of the scheme minus its
liabilities. The per unit 6AE is the net asset value of the scheme divided by the number of units
outstanding on the Ealuation 9ate. 3ale )rice 3ale price is the price you pay when you invest in a
scheme. Also called ffer )rice. It may include a sales load. Repurchase )rice Is the price at which a
close(ended scheme repurchases its units and it may include a back(end load. This is also called Bid
)rice. Redemption )rice It is the price at which open(ended schemes repurchase their units and close(
ended schemes redeem their units on maturity. 3uch prices are 6AE related. 3ales oad It is a charge
collected by a scheme when it sells the units. Also called as N1ront(end2load. 3chemes that do not
charge a load are called N6o oad2 schemes. Repurchase or NBack(end2 oad It is a charge collected by
a scheme when it buys back the units from the unit holders.
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O-;ECTIVES
#. To give a brief idea about the benefits available from +utual 1und investment.
!. To study the various +utual 1unds schemes in India.
>. bserve the fund management process of mutual funds
. *&plore the recent developments in the mutual funds in India.
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". To assess the risk of investors with reference to diversifiable risk non diversifiable risk.
=. To study various investment alternatives and in particular investors preference towards mutual
funds.
@. To study the people in which age and income group prefer mutual funds over
other investment option
RESEARCH METHODOLO.Y
S/u0ce /4 "t c/llect3/!
Two sources of collecting data has been employed i.e. primary data and secondary data
P0360y "t
A 'uestionnaire is used as a tool for the systematic collection of relevant information. A well
'uestionnaire consisting of simple 'uestions has been prepared directed to the respondents.
The 'uestionnaire prepared consists of closed(ended 'uestions which includeC +ultiple choices
Rating scale.
The 'uestionnaire also consists of open(ended 'uestions.
The first section of 'uestionnaire is prepared mainly for collecting the personal information about the
respondents.
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The second section contains multiple choice 'uestions. It is prepared to collect the information about
customer perception.
The close( ended 'uestions are very easy to answer from the 'uestionnaire responded by the
respondents.
Sec/!"0y Dt
3econdary data is collected from internet.
S67l3!5 P0/ce"u0e
3ample si7eC !
E=7l/0t3e 770/ch: This approach is one of the most popular approaches these days. In this
approach, a problem is described by the researcher using 'uestionnaire or schedule.
This approach enables a researcher to e&plore new areas of investigation.
CHAPTER +
L3te0tu0e Re3eJ, V", is about !@J
the individuals who save less than #,, are #!J, followed by individuals who save more than
#,, is %J.
TA-LE(*:
INVESTORS PREFERENCE FOR VARIOUS INVESTMENT
O-;ECIVES
OPTION RAN SCORE
SECURITY 1
YIELD 2 '*
MATURITY ' +
TAX -ENEFITS 22
LIUIDITY + ',
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;;
75:;
99
73
INVESTMENT OBJECTIVE OF INVESTOR
"#@($ITD
DI#>*
!T($ITDT!E '#)#IT"
>IF(I*ITD
I!te070ett3/!:
9ifferent types of investors look forward to different investment ob0ectives. +ost of he investors
ranked #st to security, !nd rank to yield, >rd rank has been given to li'uidity, th "th ranks for
maturity ta& benefits.
INVESTOR PREFERENCE FOR VARIOUS INVESTMENTS
O-;ECTIVES
ATTRI-UTE 1 2 + ' WEI.HTE
D
AVERA.E
RAN
SECURITY )) &' +2 % * 1
YEILD &+ '' '& 2' 2+ '* 2MATURITY 1% 2' ' ) 2* + '
TAX
-ENEFIT
) 2 '2 12, 22
LIUIDITY 22 '+ *2 ', 2+ ', +
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MODEL CALCULATION:
))J K &'J' K +2J+ K %J2 K *J1 1 K 2 K + K ' K
'', K 2& K %& K1) K * 1
)1*1
8
TA-LE ):
INVESTMENT OPPURTUNITIES USUALLY
PREFERED -Y RESPONDENTS
OPTION NO8 OF RESPONDENTS PERCENTA.E
-AN DEPOSIT &) ++
SHARES +2 1&-ONDSDE-ENTURES +1 1&
MUTUAL FUNDS +, 1
INSURANCE 2& 1+
REAL ESTATE 1+ *
TOTAL 2,, 1,,
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::
8484
8;
8:5
INVESTMENT AVENUES OPTED BY RESPONDENTS
'!)G *#?%"IT
"1!$#"
'%)*"H*#'#)T($#"
(T(!> &()*"
I)"($!)@#
$#!> #"T!T#
I!te070ett3/!:
It is observed from the above chart that >>J of the individuals prefer to bank deposits, #=J of the
individuals prefer to shares, respondents preferring bonds are #=J of with respondents preferring
mutual funds are #"J, followed by insurance and real estate with #>J and @J.
TA-LE(%:
AWARENESS OF MUTUAL FUNDS
OPTIONS NO8 OF RESPONDENTS PERCENTA.E
YES 12' &2
NO *& +)
TOTAL 2,, 1,,
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D#" )%
3
93
73
43
63
833
893
873
897
54
3
49
:6
)% % $#"?%)*#)T"
?#$@#)T!A#
I!te070ett3/!:
According to the survey, most investors are aware of mutual funds. It can be observed from the above
table that =!J of respondents are aware of +utual 1unds and the rest are not aware of +utual 1unds.
TA-LE(1,:
AWARENESS OF MUTUAL FUNDS IS THROU.H
OPTIONS NO8 OF RESPONDENTS PERCENTA.E
ADVERTISMENT 2 2&
FRIENDS +* 1%
FAMILY FRIENDS 1% 1,
FINANCIAL ADVISOR && +2RELATIVES 2& 1+
TOTAL 2,, 1,,
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94
8D !*=I"%$
I)!)@I!> !*=I"%$
$#>!TI=#"
I!te070ett3/!:
According to the survey, the respondents are more aware of mutual funds through 1inancial Advisors
who occupy >!J, followed by Advertisements !=J, 1riends #$J, Relatives #>J 1amily +embers
#J
TA-LE 11:
MUTUAL FUND IS A .OOD INVESTMENT OPTION8
OPTIONS NO8 OF RESPONDENTS PERCENTA.E
YES 1% *%8
NO '1 2,8
TOTAL 2,, 1,,
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D#" )%
3
93
73
43
63
833
893
873
843
863
8;("
'%)* I)*#E ()*
I!te070ett3/!:
Based on the survey, it is found that the respondents prefer dynamic bond fund which occupies >"J,
then follows is the bond Inde& 1und with !#J, thirdly Income )lus is seen with more percentage with
#@, followed by ?ilt 1und, 1loating Rate 1und, i'uid 1und with #!, #, ".
TA-LE 1':
RESPONDENTS PREFFERIN. DIFFERENT -RANDS OF MUTUAL FUNDS
OPTION NO8 OF RESPONDENTS PERCENTA.EFRANLIN TEMPLETON 12 1%
HDFC & 1,
-IRLA SUN LIFE 1) 2%
HS-C 11 1)
OTA MAHINDRA )
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DSP MERYLLICH 1, 1&
TOTAL &2 1,,
8!J, then comes 1und +anager with !>J, 9iversification with #$J, performance I)
with #"J, ##J respectively.
CHAPTER :
F3!"3!5 C/!clu3/!
#. The ma0ority of respondents were of the age group below !$ above =.
!. +a0or part of the respondents belongs to service sector.
>. Annual income of the respondents between #(! lacks prefers more of investments.
. Respondents irrespective of ma0or investment or small are investing in some or other sources of
investments.
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". Investor2s preference when going for an investment in primarily for security.
=. Respondents prefer Bank 9eposits as most secured avenue for investment, then preference is
given to shares, Bonds H 9ebentures then to +utual 1unds.
@. The role of 1inancial Advisors play a key role in making investors educated about mutual fund.
Around >>J of the respondents choose 1inancial advisors for guidance.
%. 1rom the 3urvey conducted it is clear that %J of the respondents feel that +utual fund is a good
investment option.
$. ut of total respondents, many of them prefer the current brand of mutual fund because of
investment strategy.
CONCLUSION
+utual 1unds now represent perhaps most appropriate investment opportunity for most investors. As
financial markets become more sophisticated and comple&, investors need a financial intermediary who
provides the re'uired knowledge and professional e&pertise on successful investing. As the investor
always try to ma&imi7e the returns and minimi7e the risk. +utual fund satisfies these re'uirements by
providing attractive returns with affordable risks. The fund industry has already overtaken the banking
industry, more funds being under mutual fund management than deposited with banks. Fith the
emergence of tough competition in this sector mutual funds are launching a variety of schemes which
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caters to the re'uirement of the particular class of investors. Risk takers for getting capital appreciation
should invest in growth, e'uity schemes. Investors who are in need of regular income should invest in
income plans. The stock market has been rising for over three years now. This in turn has not only
protected the money invested in funds but has also to help grow these investments. This has also
instilled greater confidence among fund investors who are investing more into the market through the+1 route than ever before. Reliance India mutual funds provide ma0or benefits to a common man who
wants to make his life better than previous. India2s largest mutual fund, UTI, still controls nearly % per
cent of the market. Also, the mutual fund industry as a whole gets less than ! per cent of household
savings against the = percent that go into bank deposits. 3ome fund managers say this only indicates
the sectors potential.KIf mutual funds succeed in chipping away at bank deposits, even a triple digit
growth is possible over the ne&t few years.
RECOMMENDATIONS
L The awareness of mutual fund its various schemes should be increased among the people by proper
advertising, promotion and conducting investors meets..
L The fund manager has to be aggressive in portfolio decisions especially +I) I +I) II fund.
LIMITATIONS
The lack of information sources for the analysis part.
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Though I tried to collect some primary data but they were too inade'uate for the purposes of the
study.
Time availability was limiting this study.
The data provided by the prospects may not be #J correct as they too have their limitations.
The study is limited to selected mutual fund scheme
-I-LIO.RAPHY
-OOS:
+utual 1unds in India ( 8. 3adhak,
1inancial +anagement khan Dain
3ecurity Analysis )ortfolio +anagement )reethi singh
We3te V33te":
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www.amfiindia.com
www.mutual funds india.com
www.birla sun life.com
www.moneycontrol.com
www.icicidirect.com
ANNEXURE
I"e!t343ct3/! Dt
18 N6e /4 the 0e7/!"e!t:
28 A5e:
Below !! O !$> O >$ O $" O "$Above =+8 Se=:
+ale1emale'8 A""0e
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&8 A!!ul I!c/6e
V ne akh# O ! akh! O > akhAbove > akhsI!et6e!t P0e4e0e!ce
#. 9o you invest any part of your savings/es6o
!. Fhat amount do you save yearly.V !"V "V #W #I4 Ye
>. Fhat criteria you keep in your mind while selecting an investment opportunity4rank them accordingly53ecurity/ield+aturityTa& Benefitsi'uidity. 6ormally what investment opportunities you prefer to invest your savings
I4 Mutul Fu!"
". 9o you know about the +utual 1unds/es6oI4 Ye
=. 8ow did you come to know of these brands of mutual fundsAdvertisements1riends1amily members1inancial AdvisorsRelatives@. 8ave you invested any amount in the +utual 1unds/es6oI4 Ye
%. In which +utual funds did you invest1ranlin templeton 8dfc 93) +*R/I-8Birla sun life 8sbc kotak mahindra
$. Fhat type of funds you prefer9ebt 1unds*'uity 1unds8ybrid 1undsI4 Det Fu!"
#. Fhich type of schemes you preferi'uid 1und1loating Rate?ilt 1und9ynamic Bond 1undIncome )lusBond Inde& 1und
##. Fhat are the reasons for the preference of present brand of mutual fundsI))erformance9iversificationInvestment 3trategy1und +anager
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