PART 1: GENERAL INFORMATION

1.0 Definition of Mutual Fund :

Mutual fund is a common pool of money in to which investor place their contributions to be
invested in accordance with stated objectives. The ownership of mutual Fund is joint and mutual.
The fund belongs to all the investor. Ownership is proportionate to the contribution made by the
investors.

A mutual fund may be either an actively managed fund or an indexed mutual fund. Actively
managed funds are on a regular basis by a fund manager in the attempt to maximize their
profitability. The fund manager looks at the market and the sectors a fund invest in and
redistributes the fund accordingly. An indexed fund simply takes one of the major indexes and
buys according to that index. Indexed funds change much less frequently than actively managed
funds, but in the theory an active fund has more potential or profit.

The Basics of Mutual Fund:

Mutual funds are often a great way for the average investor to earn high return and to gain
experience in dealing with money in the stock market. Although mutual funds are of difficult to
learn how to deal with, it is important for people who are planning to pursue investing in a mutual
fund to find out all they can before investing their money.

Mutual Funds offer people the chance to combine their money in order to reach a common
goal. In most cases, that goal is to earn a high return on their initial investment. In fact, there is
usually a person in control of the money wisely into the predetermined stocks, bonds, or whatever
kind of mutual fund the investors have agreed upon. The fund manager will take the combined
money and place it into specified securities, which can be the stocks or bonds listed.In this way,
people who invested in mutual funds are actually becoming the shareholders, as they are in effect
buying into the shares of the fund.

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Mutual funds are money-managing institutions set up to professionally invest the money pooled in
from the public. Asset management Companies (AMC) manages these schemes, which are
sponsored by different financial institutions or companies.

Each unit of these schemes reflects the share of investor in the respective fund and the Net
Asset Value (NAV) of the scheme judges its appreciation. The NAV is directly linked to the bullish
and bearish trends of the markets as the pooled money is invested either inequity shares or in
debentures or treasury bills.

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market instruments
such as shares, debentures and other securities. The income earned through this investment and
the capital appreciations realized are shared by its unit holders in proportion to the number of units
owned by them. Thus a Mutual fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket of securities at a
relatively low cost.

Figure: 1 Mutual fund operation chart

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 1.1 Industry Profile

The mutual fund industry is a lot like the film star of the finance business. Though it is
perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young
industry where there are changes in the rules of the game everyday, and there are constant shifts
and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk
through the spreading of investments across multiple entities, which is achieved by the pooling of a
number of small investments into a large bucket. Yet it has been the subject of perhaps the most
elaborate and prolonged regulatory effort in the history of the country.

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. Over a period of 25 years this grew fairly
successfully and gave investors a good return, and therefore in 1989, as the next 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 initial years of the industry also saw the emerging years of the Indian equity market,
when a number of mistakes were made and hence the mutual fund schemes, which invested in
lesser-known stocks and at very high levels, became loss leaders for retail investors. From those
days to today the retail investor, for whom the mutual fund is actually intended, has not yet
returned to the industry in a big way. But to be fair, the industry too has focused on brining in the
large investor, so that it can create a significant base corpus, which can make the retail investor
feel more secure.

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 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 history of mutual funds in India can be
broadly divided in to four distinct phases.

First Phase 1964-87:

An Act of Parliament established Unit Trust of India (UTI) on 1963. 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 Can
bank 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):

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.

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 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

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. As at the end of September
2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

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1.3 Growth of the Industry

While the Indian mutual fund industry has grown in size by about 320% from March, 1993
(Rs. 470 billion) to December, 2004 (Rs. 1505 billion) in terms of AUM, the AUM of the sector
excluding UTI has grown over 8 times from Rs. 152 billion in March 1999 to $ 148 billion as at
March 2008.

Though India is a minor player in the global mutual fund industry, its AUM as a proportion of
the global AUM has steadily increased and has doubled over its levels in 1999.The growth rate of
Indian mutual fund industry has been increasing for the last few years. It was approximately 0.12%
in the year of 1999 and it is noticed 0.25% in 2004 in terms of AUM as percentage of global AUM.
& 0.75% in 2010 of global AUM .

Some facts for the growth of mutual funds in India

75% growth in the last 6 years.

Number of foreign AMCs is in the queue to enter the Indian markets.
Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual
funds sector is required.
We have approximately 42 mutual funds which is much less than US having more than 800.
There is a big scope for expansion.
Mutual fund can penetrate rural area like the Indian insurance industry with simple and
limited products.
SEBI allowing the MF's to launch commodity mutual funds.
Emphasis on better corporate governance.
Trying to curb the late trading practices.

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Structure of Mutual Fund:

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

Figure: 2 Structure of mutual fund

Unit Holders:

Unit holders are Investors. Any Individual or Non- individuals who have invest their money in
Mutual Fund; they will get some Units against their Investment according to the NAV of that fund.

Sponsor:

Sponsor is the promoter of the mutual fund. He himself of with other body corporate
establishes the mutual fund. However to became a sponsor one has to have following
qualifications?

Sponsor should have sound track record and general reputation of fairness and integrity in
all business transactions. He must have carrying business in financial services for a period of not
less than five years. And continuously derives the profit after providing for depreciation, interest
and tax. Sponsor has to contribute at least 40 per cent to the net worth of the AMC.

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Trustee:

There are some straight disqualifications provided by the SEBI for a trustee. However the
appointment for a trustee must be take prior approval of SEBI. Trustee is a person having ability,
integrity and has not been found guilty of moral turpitude and also has not been convicted for any
economic offence.

Trustee has to play very critical role in the mutual fund organization. He has work in a way
to continuously protect the interest of the investors are properly taken care of. Any mutual fund
has a minimum of four trustees. Two thirds of the trustees must be an independent person and
shall not be associated with sponsor. No officer of employee of an AMC can became a trustee.

Investors:

MF is a solution for investors who lack the time, and the skills to actively manage their
investment risk in individual securities. They can delegate this role to the MF, while retaining the
right and the obligation to monitor their investments in the scheme having some specific objects.

Asset Management Company (AMC):

AMC can be appointed by the sponsor or by the trustees if authorized by the trust deed. But
it is obligatory for all the mutual fund to have an AMC to manage and operate its schemes.
Appointment of AMC can be terminated by majority of trustee of 75 per cent of unit holders
(investors).

AMC manages the investment portfolio of schemes. An AMCs income comes from the
management fees it charges to the schemes. The management fee is calculated as a percentage
of net assets managed. Some countries provide for performance based management fees as well.

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 In order to earn the management fee, any AMC has to employ people and bear all the
establishment costs that are related to its activity, such as for premises, furniture, computers and
other assets, software development, communication costs etc. These are to be met out of the
management fee earned.

Expenses such as on trustee fees, marketing etc. can be directly borne by the mutual fund
scheme. However, in some cases, competition in the marketplace could force an AMC to bear
some of these costs, which would otherwise have been borne by investors in the schemes.

Distributors:

Distributors earn a commission for bringing investors into the schemes of a MF. This
commission is an expense for the scheme, although there are occasions when an AMC chooses to
bear the cost, wholly or partly. Distributors are the key persons of the mutual funds. They are the
only link between the mutual fund house and the investors. The main role of the distributors is to
analysis the risk appetite of investors. They have to play their role such a way to keep interest of
the investors in the mutual fund. However they are not directly responsible of any loss sustained by
the investors. To become a distributor one has to pass the exam conducted by AMFI association
of mutual funds in India.

Registrars:

Holdings of units by unit holders in schemes are tracked by the schemes Registrar and
Transfer agent (R&T). Some AMC prefer to handle this role in house. The registrar/AMC maintains
an account of the investors investments in and disinvestments (redemptions) from the scheme.
Requests to invest more money into a scheme or to switch in another scheme run by the same
mutual fund or to recover moneys against existing investments in the scheme are processed by
the R&T.

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Custodian / depository:

The custodian maintains custody of the securities in which the scheme invests. This
ensures an ongoing independent record of the investments of the scheme. The custodian also
follows up on various corporate actions, such as rights, bonus and dividends declared by investors
companies

1.4 Types of mutual fund schemes:

Mutual fund schemes may be classified on the basis of its structure and its investment
objective.

Investment Types of Constitution

Objective Schemes

Equity Debt Open Closed

Hybrid Interval
Oriented Based Ended Ended

Figure: 3 Types of mutual fund schemes

By Structure:

Open-ended Funds

An open-end fund is one that is available for subscription all through the year. These do not
have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices. The key feature of open-end schemes is liquidity.

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Close-ended Funds

A close-end has a stipulated maturity period which generally ranging from 3 to 15 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 there after they can buy o sell the units of the scheme on
the stock exchanges where they are listed. In order to provide as exit route to the investors, some
close-ended funds give an option of selling back the units to the mutual fund through periodic
repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit
routes is provided to the investor.

Interval Funds

Interval funds combine the features of open-ended and close-ended schemes. They are
open for sale or redemption during pre-determined intervals at NAV related prices.

By Investment objective:

Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long-term.
Such schemes normally invest a majority of their corpus in equities, it has been proven that returns
from socks, have outperformed most other kind of investment held over the long term. Growth
schemes are ideal for investors having a long-term outlook seeking growth over a period of time.

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Income Funds

The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures and
Government securities. Income Funds are ideal for capital stability and regular income.

Balanced Funds

The aim of balanced funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and invest both in equities and fixed income securities
in the proportion indicated in their offer documents. In a rising stock market, the NAV of these
schemes may not normally keep pace, or fall equally when the market falls. These are ideal for
investors looking for a combination of income and moderate growth.

Short Term Plans (STPs):

Mean for investors with an investment horizon of 3-6 months. These funds primarily invest
in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some
portion of the corpus is also invested in corporate debentures.

Money Market Funds:

The aim of money market funds is to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer short-term instruments such as
treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on
these schemes may fluctuate depending upon the interest rates prevailing in the market. These
are ideal for Corporate and individual investors as a means to park their surplus funds for short
periods.

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Load Funds

A Load Fund is one that charges a commission for entry or exit. That is, each time you buy
or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1%
to 2%. It could be worth paying the load, if the fund has a good performance history.

No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit. 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.

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian
Income laws as the Government offers tax incentives for investment in specified avenues.
Investment made in Equity Linked Saving Schemes (ELSS) and Pension Schemes are allowed as
deduction u/s 88 of the Income Tax Act, 1961. The act also provides opportunities to investors to
save capital gains u/s 54EA and 54EB by investing in Mutual Funds.

Industry Specific Schemes

Industry specific schemes invest only in the industries specified in the offer document.
The investment of these funds is limited to specific industries like Info Tech, FMCG, and
Pharmaceuticals etc.

Index Schemes:

Index Funds attempt to replicate the performance of a particular index such as the BSE
Sensex or the NSE 50.

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Sectorial Schemes

Sectorial Funds are those, which invest exclusively in a specified industry or a group of
industries or various segments such as A Group shares or initial public offerings.

Some frequently used Terms

NAV (Net Asset Value):

Net Asset Value is a market value of the assets of the schemes minus its liabilities. Per unit
NAV is the net asset value of the scheme divided by number of units outstanding on the valuation
date.

Sale Price:

NAV that charged from a unit-holder while investing in an open-ended scheme is called sale
price. It is also called offer price, which may include sales load.

Purchase Price:

It is the price at which close-ended scheme repurchases its units and it may include back-
end load. This is also called Bid price.

Redemption Price:

NAV at which the units of open-ended schemes are purchase back redeemed to unit
holders that may include exit load is known as redemption price.

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Offer Document:

It contains useful information to be provided to investor for careful reading before investing,
investor should see funds investment objective and its portfolio asset allocation strategy.

Benchmark:

It is a frame or reference, a context and a standard that allows checking whether the
performance has been good or bad.

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 1.5 Benefits of Mutual Funds

Diversification
Affordability

Regulations
Variety

Tax Benefits
Professional Mgmt.

Figure: 4 Benefits of mutual fund

Affordability: -

A mutual fund invests in a portfolio of asset, i.e. bonds, shares, etc. depending upon the
investment objective of the scheme. An investor can buy in to a portfolio of equities, which would
otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with
an investment as modest as Rs.500/-. This amount today would get you less than quarter of an
Infosys share! Thus it would be affordable for an investor to build a portfolio of investment through
a mutual fund rather than investing directly in the stock market.

Diversification: -

It simply means that you must spread your investment across different securities (stocks,
bonds, money market, instruments, real estate, fixed deposits etc.) and different sectors (auto,
textile, information technology etc.). This kind of diversification may add to the stability of your
returns, for example during one period of time equities might underperform but bonds and money
market instruments might do well enough to offset of a slump in the equity markets. Similarly the

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information technology sector might be faring poorly but the auto and textile sectors might do well
and may protect your principal investment as well as help you meet your return objectives.

Different Scheme: -

Mutual Funds offer a tremendous variety of schemes. This variety is beneficial in two ways:
first, it offers different types of schemes needs and risk appetites: secondly, it offers an opportunity
to an investor to invest a variety of schemes, both debt and equity. For example, an investor can
invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending
on his risk appetite and thus create a balanced portfolio easily or simply just buy a Balanced
Scheme.

Professional management: -

Qualified investment professionals who seek to maximize returns and minimize risk monitor
investors money. When you buy in to a mutual fund, you are handing your money to an
investment professional that has experience in making investment decisions. It is the fund
Managers job to (a) find the best securities for the fund, given the funds stated investment
objectives: and (b) keep track of investment and changes in market conditions and adjust the mix
of the portfolio, as and when required.

Tax Benefits: -

Any income distributed after March 31, 2002 will be subject to tax in the assessment of all
Unit holders. However, as a measure of concession to Unit holders of open-ended equity-oriented
funds, income distributions for the year ending March 31, 2003, will be taxed at a confessional rate
of 10.5%. In case of Individuals and Hindu Undivided Families a deduction up to Rs. 9,000 from
the Total income will be admissible in respect of income from investment specified in Section 80L,
including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-
Tax and Gift-tax.

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Regulations: -

Securities Exchange Board of India (SEBI), the mutual funds regulator has clearly defined
rules, which govern mutual funds. These rules relate to the information, administration and
management of the mutual funds and also prescribe disclosure and accounting requirements.
Such a high level of regulations seeks to protect the interest of investors.

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 1.6 Limitations of Mutual Fund

No control over cost: -

Investors do not directly monitor the funds operations; they cannot control the costs
effectively. Regulations therefore usually limit the expenses of mutual funds.

No tailor-made portfolio: -

Mutual Fund portfolio are created and marketed by AMCs, in to which investors invest. They
cannot make tailor made portfolio.

No Guarantees: -

No investment is risk free. If the entire stock market declines in value, the value if mutual
fund will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks
when they invest in mutual funds than when they buy and sell stocks on their own. However,
anyone who invests through a mutual fund runs the risk of losing money.

Fees and commissions: -

All funds charge administrative fees to cover their day-to-day expenses. Some funds also
charge sales commissions or loads to compensate brokers, financial consultants, or financial
planners. Even if you dont use a broker or other financial adviser, you will pay a sales commission
if you buy shares in a load fund.

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Management risk: -

When you invest in mutual fund, you depend on the funds manager to make the right
decisions regarding the funds portfolio. If the manager does not perform as well as you had
hoped, you might not make as much money on your investment as you expected. Of course, if you
invest in Index funds, you have forgotten management risk, because these funds do not employ
manager.

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 1.7 Distribution network of mutual fund:

ASSET MANGMENT COMPANY

DISTRIBUTIONS

NON-BANKING
BANKS BROKERS FINANCIAL INSTITUTIONS

CUSTOMERS CUSTOMERS CUSTOMERS

Figure: 5 Distribution networks of mutual funds

Banks as intermediaries

In India the trend is towards universal banking. Increasingly banks will turn towards retailing
other financial services like mutual funds, capital market product, insurance and other debt
products. This movement towards fee-based activities of banks will be propelled by need to shore
up profits due to declining spreads and the forces of disinter mediation where borrowers and
lenders are increasingly circumventing banks.

Mutual funds are now also competing with commercial banks in the race for retail investors
savings and corporate float money. The power shift towards mutual funds has become obvious.
The coming few years will show that the traditional saving avenues are losing out in the current
scenario. Many investors are realizing that investments in savings accounts are as good as locking
up deposits in a closet. The fund mobilization trend by mutual funds in the current year indicates
that money is going to mutual funds in a big way.

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 India is at first stage of a revolution that has already peaked in the U.S. The U.S. boasts of
an assets base that is much higher than its bank deposits. In India, mutual fund assets are not
even 10% of the bank deposits, but this trend is beginning to change. This is forcing a large
number of bans to adopt the concept of narrow banking where in the deposits are kept in Gilts and
some other assets, which improves liquidity and reduces risk. This brings in to focus their need to
provide non-banking products like mutual funds, insurance to boost customer base as well as to
increase profits. For the mutual fund organizations, the banks customer base is like an ocean full
of opportunities to direct their products in to the investors home. The banks role as intermediaries
cannot be ignored. It is just that Mutual Funds are going to change the way banks do business in
the future.
Banks v/s Mutual Funds
Banks Mutual Funds
Returns Low Better
Administrative Expenses High Low
Risk Low Moderate
Investment Options Less More
Network High Penetration Low but Improving
Liquidity At a cost Better
Quality of Assets Not transparent Transparent
Interest Calculation Min. balance between 10th Everyday
& 30th of every month
Table: 1 Banks v/s Mutual Funds

The Broker Network

Introducing new schemes and product innovation for increasing the asset base has long
been the focus of all mutual fund companies. Product focus continued for 2-3 years even after the
entry of private sector players in 1993. Initially, the private sector companies introduced the same
products available from the public sector players and promised superior performance. When they
realized that they needed to differentiate on some other parameter as well, they focused on

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distribution. As it was difficult and time consuming to replicate the widespread distribution
companies to distribute their products all over India.

But everything is not simple in the world of distributors. Indirect tax authorities have served
notice to them to pay up service tax on the commission income earned through distributing and
marketing mutual fund units. The brokerages that the AMC pays distributors have come down
drastically and as a result, distributor margins have come down by 75 percent over the past year,
as claimed by the many distributors visited.

The distributors claim that the service tax should ideally be passed on to the consumers.
For debt funds, distributors get margins between 0.2 percent and 0.5 percent and for equity
schemes the margins vary between 1 percent and 1.75 percent. Absorbing the service tax will dent
their profitability severely. For the time being the court has ordered for a standby on the service tax
issue.

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 The risk return chart:

Risk Focus Suitable Products Benefits

Tolerance/ offered by Mfs
Return
Expected
Low Debt Bank/company FD, Liquidity
Debt based Funds Better Post-
Tax returns
Medium Partially Debt, Balanced Funds, Liquidity,
Partially Equity some Diversified better post-tax
Equity Funds and returns , better
some debt funds, mix management,
of shares and Fixed Diversification
Deposits
High Equity Capital Market, Diversification,
Equity Funds Expertise in
(Diversified as well as stock picking,
Sector) Liquidity, Tax
free dividends
Table: 2 Risk return comparison

Risk Return Graph

Hedge Funds
Potential
For Return Growth Funds
Aggressive, Value, Growth
Sect oral Funds

Debt Funds Balanced Funds

Gilts Funds, Bond Funds, Ratio of Debt, Equity
High Yield Funds

Liquid Funds

Risk
Figure: 6 Risk return graph

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 Risk associated with mutual fund

Figure: 7 Risk associated with mutual fund

The Risk-Return Trade-off

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

Market Risk

There are two types of market risk SYSTEMATIC & UNSYSTEMATIC. Systematic risk is a
macro risk that would impact all the firms & unsystematic risk is micro that is limit upto the
individual firm.

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Credit Risk

The debt servicing ability (may it be interest payments or repayment of principal) of a

company through its cash flows determines the Credit Risk faced by you. This credit risk is
measured by independent rating agencies like CRISIL who rate companies and their paper. An
AAA rating is considered the safest whereas a D rating is considered poor credit quality. A well-
diversified portfolio might help mitigate this risk.

Inflation Risk

. Inflation is the loss of purchasing power over time. A lot of times people make conservative
investment decisions to protect their capital but end up with a sum of money that can buy less than
what the principal could at the time of the investment. This happens when inflation grows faster
than the return on your investment. A well-diversified portfolio with some investment in equities
might help mitigate this risk.

Interest Rate Risk

In a free market economy interest rates are difficult if not impossible to predict. Changes in
interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds
fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment.
A well-diversified portfolio might help mitigate this risk.

Political/Government Policy Risk

Changes in government policy and political decision can change the investment
environment. They can create a favorable environment for investment or vice versa.

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Liquidity Risk

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

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2.0 List of SEBI Registered Mutual fund

1. AEGON Mutual Fund

2. Alliance Capital Mutual Fund
3. AIG Global Investment Group Mutual Fund
4. Axis Mutual Fund,
5. Benchmark Mutual Fund,
6. Baroda Pioneer Mutual Fund
7. Birla Sunlife Mutual Fund
8. Bharti AXA Mutual Fund
9. BNP Paribas Mutual Fund
10. Canara Robeco Mutual Fund
12. Daiwa Mutual Fund
13. Deutsche Mutual Fund
14. DSP BlackRock Mutual Fund
15. Edelweiss Mutual Fund
16. Escorts Mutual Fund
17. Franklin Templeton Mutual Fund
18. Fidelity Mutual Fund
19. Goldman Sachs Mutual Fund
20. HDFC Mutual Fund
21. HSBC Mutual Fund
22. ICICI Securities Fund
23. IIFL Mutual Fund
24. Indiabulls Mutual Fund
25. ING Mutual Fund,
26. ICICI Prudential Mutual Fund
27. IDBI Mutual Fund
28. IDFC Mutual Fund

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29. JM Financial Mutual Fund
30. JP Morgan Mutual Fund
31. Kotak Mahindra Mutual Fund
32. LIC Mutual Fund
33. L&T Mutual Fund
34. Morgan Stanley Mutual Fund
35. Motilal Oswal Mutual Fund
36. Principal Mutual Fund
37. Quantum Mutual Fund
38. Reliance Mutual Fund
39. Religare Mutual Fund
40. SBI Mutual Fund
41.Sundaram Mutual Fund
42.Tata Mutual Fund
43.UTI Mutual Fund

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 Part II
Primary study

Introduction of the study

3.1 LITERATURE REVIEW

Review of Literature:
The existing Behavioral Finance studies are very few and very little information is available about
investor perceptions, preferences, attitudes and behavior. All efforts in this direction are
fragmented.

Gupta (1994) made a household investor survey with the objective to provide Data on the investor
preferences on MFs and other financial assets. The findings of the study were more appropriate, at
that time, to the policy makers and mutual funds to design the financial products for the future.

Shanmugham (2000) conducted a survey of 201 individual investors to study the information
sourcing by investors, their perceptions of various investment strategy dimensions and the factors
motivating share investment decisions, and reports that among the various factors, psychological
and sociological factors dominated the economic factors in share investment decisions.

30
 3.2 Problem statement & importance of the study

Wealth creation over the years has changed its avenues and area of interest for the investors in
India. The prototype investment where the post offices and typically the scheduled banks through
savings and fixed deposits have changed and with the awareness of finance, Mutual fund has
became an excellent route to create wealth for the public at large.
Mutual fund is a pool of money is invested in accordance with the common objective stated before
the investment to the investors.

Generally people are aware about mutual fund but the problem is that they think that why should
we cannot invest directly instead of going for invest in mutual fund. So our research is to identify
the people perception towards invest in mutual fund.

Here is the concept of mutual fund which is a suitable for the common man as it offers an
opportunity to invest and diversified, professionally managed basket of securities comparatively at
low cost. The investors pool their money to the fund manager and the fund manager invest the
money in the securities and after generating returns passed back to the investors.
The mutual fund has a structure which is regulated by SEBI and the Association of mutual funds of
India (AMFI) plays an advisory role for the mutual funds. There are lot of entities involved in
between Unit Holders and SEBI which includes Sponsors, Trustees, Asset Management Company
(AMC), mutual fund, Transfer agent and custodian. Basically there are only two types of mutual
fund in the industry:

31
 3.3 Objective of the study

Primary Objectives
To check perception of Investors regarding Mutual Fund.

Secondary objective

1) To understand the savings avenue preference among MF investors

2) To identify the features the investors look for in Mutual Fund products
3) To identify the scheme preference of investors
4) To identify the factors that influences the investors fund/scheme selection
5) To identify the information sources influencing the scheme selection

32
 4: RESEARCH METHODOLOGY

4.1 Research Design:

I have used the Descriptive Research Design for the purpose of survey, as it will enable
me to describe the characteristics of a particular individual rural customer regarding investment
tools and Mutual Fund.

4.2 Sampling Method:

I have used the sampling method simple probability random sampling in different , as it
would give better idea about the different investment tools and Mutual Fund.

4.3 Data Collection Method:

Data has been collected both from primary as well as secondary sources as described
below:

Primary sources
Primary data was obtained through questionnaires filled by people and through direct
communication with respondents in the form of Interview.

Secondary sources
The secondary sources of data were taken from the various websites, books, journals
reports, articles etc. This mainly provided information about the mutual fund industry in India.

33
4.4 Research Instrument:
For us research instrument is the questionnaires. We had prepared a set of questions and
presented it to the customers for their answer. We had prepared the questions in very flexible
manners such that the respondent have wide choice before them the form of question were mainly
close-ended questions which gives all possible outcomes.

4.5 Sample Size:

It would be better to have a sample of 100 people to have better idea and representative of
the population being surveyed.

34
 5: DATA ANALYSIS

Table: 3 Occupations

Frequency Percent

SService
Professional
32
14
32.0
14.0
Business 44 44.0
Others 10 10.0
Total 100 100.0

Occupation
50
45
40
35
30
25
20 44%
32%
15 Frequency
10
5 14% 10%
0
Service Professional Business Others

Figure: 8 Occupation chart

Interpretation: -

We have done survey of 32 service customers, 14 professional customers, 44 business

customers, and 10 other customers.

35
 Table: 4 Age

Frequency Percent
18-24 13 13.0
25-30 27 27.0
31-45 29 29.0
46-55 18 18.0
56-65 8 8.0
Above 65 5 5.0
Total 100 100.0

Age
35

30

25

20

15 29%
27%
10 18%
13%
5 8%
5%
0

Figure: 9 Age chart

Interpretation: -

We have done survey of 13 customers are 18-24 age, 27 customers are 25-30 age, 29
customers are 31-45, 18 customers are 46-55 age, 8 customers are 56-65 age, 5
customers are above 65 age.

36
 Table: 5 Genders

Frequency Percent
Male 79 79.0
Female 21 21.0
Total 100 100.0

Gender
90
80
70
60
50
40 79%
30 Frequency
20
10 21%
0
Male Female

Figure: 10 Gender chart

Interpretation: -

We have done survey of 79 male respondents and 21 female respondents.

37
 Table: 6 Annual Income

Frequency Percent
0-100000 19 19.0
100001-250000 30 30.0
250001-500000 32 32.0
Above 500000 19 19.0
Total 100 100.0

Annual Income
Frequency

32
30

19 19

0-100000 100001-250000 250001-500000 Above 500000

Figure: 11 Annual income chart

Interpretation: -

We have done survey of 19 respondents income 0-100000, 30 respondents income 100001-

250000, 32 respondents income 250001-500000, and 19 respondents income above 500000.

38
1. In this highly volatile market, do you think Mutual Funds are a destination for
Investments?

Response Frequency Percentage

Yes 68 68%
No 31 32%
total 100 100

Table: 7 how many people invest in mutual fund

32%
No
Yes
68%

Figure: 12 chart show how many people invest in mutual fund

Interpretation:-

Form the above data we can see that Majority (68%) of the sample is investing in
mutual fund.

39
2. How do you come to know about mutual fund?

No. of Respondents Percentage

Advertisement 19 28%

Financial Advisor 23 34%

Banks 5 07%

Peer Group 12 18%

Other 9 13%

Total 68 100

Table: 8 through which source people came to know about mutual fund

No. of Respondents

Other
13%

Advertisement
Peer Group 28%
18%

Financial
Advisor
Banks
34%
7%

Figure: 13 through which source people came to know about mutual fund

Interpretation:-

34% people came to know about mutual fund by financial advisor and than followed by the
advertisement than peer groups and so on.

40
3. Through which medium do you prefer to invest in mutual fund?

No. of Respondent Percentage

Bank 12 18%

Broker 23 34%

Direct AMC 09 13%

Financial Advisor 21 31%

Others 03 04%

Total 68 100%

Table: 9 medium for investment in mutual fund

Medium for Investment

Others
4%

Bank
18%
Financial
Advisor
31%

Broker
Direct
34%
AMC
13%

Figure: 14 medium for investment in mutual fund

Interpretation:-

34% of Respondents invest in mutual fund through broker and financial advisor (31%) &
remaining through Bank, Direct AMC.

41
 4. Which Feature of Mutual Fund makes you to invest in Mutual fund?

No. Of respondents Percentage

Diversification 25 37%

Better Return & Safety 22 32%

Lower Risk 13 19%

Tax Benefit 08 12%

Total 68 100%

Table: 10 feature of mutual fund preferred by respondent

No. Of respondents

Tax
Benefit
12%

Lower Risk Diversification

19% 37%

Better Return &

Safety
32%

Figure: 15 feature of mutual fund preferred by respondent

Interpretation:-

From the above we find that 37% of the respondents invest in mutual fund because of risk
diversification and 32% safe & handsome return.

42
 5. Which Mutual Fund Plan do you consider the best?

Plans No. of respondents Percentage

Balanced plan 26 38%
Equity plan 21 31%
Income plan 13 19%
Others 08 12%
Total 68 100%
Table: 11 different mutual fund plans

No. of respondents

Others
12%

Income plan Balanced plan

19% 38%

Equity plan
31%

Figure: 16 different mutual fund plans

Interpretation:

From the above we can see that 38% respondents invest in balanced plan and 31% of the
respondents invest in equity plan and remaining prefer income plan and other plan of mutual fund.

43
 6. How much percentage of your annual income would you like to invest in mutual
funds?

No. of Respondents Percentage

0 5% 26 38%

06 - 10% 21 31%

11 - 15% 14 21%

Above 15% 07 10%

68 100%

Table: 12 percentage of annual income invested

Percentage of Annual Income

invested
0 5% 06 - 10% 11 - 15% Above 15%

10%

38%
21%

31%

Figure: 17 percentage of annual income invested

Interpretation:

70% of the respondents like to invest up to 10% of their total annual income in mutual funds.

44
 7. How long would you like to hold your Mutual Funds' Investments?

No. of years No. of respondents Percentage

1 to 3 years 31 46%
4 to 6 years 19 28%
7 to 10 years 11 16%
> 10 years 07 10%
Total 68 100%
Table: 13 time horizon for investment

No. of respondents

> 10
years
7 to 10 10%
years
16% 1 to 3 years
46%

4 to 6 years
28%

Figure: 18 time horizon for investment

Interpretation:

46% of the respondents hold their investment for 1to 3 years and 28% respondents hold their
investment for 28%. Remaining 16% and 10% respondents hold their investment for 7 to10
years and more than 10 years respectively.

45
 8. How do you rate the risks associated with Mutual Funds?

Risk level No. of respondents Percentage

Low 25 37%

Moderate 29 43%

High 14 20%

Total 68 100%

Table: 14 risks associated with Mutual Funds

No. of respondents

High Low
20% 37%

Moderate
43%

Figure: 19 risks associated with Mutual Funds

Interpretation:

From the above we can see respondents feels that risk associated with mutual funds are 43%
moderate to 37% low level. Only 20% feels mutual funds are risky investment.

46
 9. Which among the following principles do you consider while selecting a Mutual
Fund?

No. of respondents Percentage

Enquiring about Fund Manager 17 25%
Finding about Its past performance 27 40%
Your own objective 21 31%
Other 03 04%
Total 68 100%
Table: 15 principal for selecting mutual fund

No. of respondents
Enquiring about Fund Manager Finding about Its past performance
Your own objective Other

4%

25%
31%

40%

Figure: 20 principal for selecting mutual fund

Interpretation:

40% of the respondents invest in mutual funds after considering past performance, 31% invest
after knowing their own objective, and 25% invest after enquiring about the fund manager.

47
 10. When you invest in mutual fund which mode of investment will you prefer?

No. of respondent Percentage

One time Investment 27 40%
SIP 41 60%
Total 68 100%
Table: 16 mode of investment

Mode of Investment

One time
Investment
40%
SIP
60%

Figure: 21 mode of investment

Interpretation:

60% of the respondents invest in SIP and 40% prefer lump sum investment.

48
 11. Which factors prevent you to invest in mutual fund?

No. of respondents Percentage

Bitter Past Experience 09 13%
Lack of Knowledge 21 31%
Difficulty in selection of scheme 27 40%
Other 11 16%
Total 68 100%

Table: 17 factors restrict to invest in mutual fund

Factors
Bitter Past
Experience
13%
Other
16%

Lack of
Difficulty in Knowledge
selection of 31%
scheme
40%

Figure: 22 factors restrict to invest in mutual fund

Interpretation:

40% Respondents find difficulty in selection of scheme and 31% because lack of
knowledge.

49
 6: FINDINGS

34% people came to know about mutual fund by financial advisor and than followed by the
advertisement than peer groups and so on.

We find that 37% of the respondents invest in mutual fund because of risk diversification
and 32% safe & handsome return.

70% of the respondents like to invest up to 10% of their total annual income in mutual funds.

We can see respondents feels that risk associated with mutual funds are 43% moderate to
37% low level. Only 20% feels mutual funds are risky investment.

40% of the respondents invest in mutual funds after considering past performance, 31%
invest after knowing their own objective, and 25% invest after enquiring about the fund
manager.

60% of the respondents invest in SIP and 40% prefer lump sum investment.

50
 7: RECOMMENDATION

The performance of the mutual fund depends on the previous years Net Asset Value of the fund.
All schemes are doing well. But the future is uncertain. So, the AMC (Asset under Management
Companies) should take the following steps: -

1. The people do not want to take risk. The AMC should launch more diversified funds
so that the risk becomes minimum. This will result into more and more people to
invest in mutual funds.
2. Mutual funds should concentrate on more come with SIP rather than rather than
lumsum investment plan.
3. Companies should give handsome Incentive to brokers because majority people
came to known about mutual fund through broker & they invest mainly through
broker only.
4. About 70% of respondent want to invest 10% of their annual income to mutual fund
so industry have good opportunity to launch plan with min Rs10000/-.
5. Generally people want to block money up to three years in mutual fund so company
should launch flexible plans.
6. Company past performance is important to decide the new investor whether invest
or not to invest in that mutual fund scheme.
7. Investor faces difficulty in understanding the different plans so companies should
explain them each & every plans properly.

51
 8: LIMITATIONS:

No study is free from limitations. The limitations of this study can be:

Sample size taken is small and may not be sufficient to predict the results with 100%
accuracy.

The result is based on primary and secondary data that has its own limitations.

The study only covers the area of Vadodara that may not be applicable to other areas.

52
 9: CONCLUSION

A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario.
Markets for equity shares, bonds and other fixes income instruments, real estate, derivatives and
other assets have become mature and information driven. Today each and every person is fully
aware of every kind of investment proposal. Everybody wants to invest money, which entitled of
low risk, high returns and easy redemption. In my opinion before investing in mutual funds, one
should be fully aware of each and everything.

53
 BIBLIOGRAPHY

Website: -

Dian Vujovich & Michael Lippu, "Straight Talk about Mutual Fund", -McGraw Hill Gordon &
Natrajan, "Financial Markets and Services", Himalaya Publishing House, 2003 Huji Mehndi Raja,

www.amfiindia.com

www.sebi.govt.in

www.mutualfundindia.com

www.financeindiamart.com

54
 Annexure

Questionnaire for customers

Dear Respondent,

This survey is to know about your awareness towards mutual funds as an investment
opportunity. We would be grateful if you give your honest and true opinion regarding the
following question asked. Please note that your opinion would be treated as confidential and
would be used for academic purpose only.

Please fill in your personal details:

Name:

Contact No.:

Address:

Occupation:

Service Professional Business Others

Age: -
18-24 25-30 31-45

46-55 56-65 Above 65

Gender:

Male Female

Income:

0-100000 100001-250000 250001- 50000

Above 500000

55
01) In this highly volatile market, do you think Mutual Funds are a destination for
Investments?

[ ] Yes [ ] No

02) How do you come to know about mutual fund?

[ ] Advertisement [ ] Financial Advisor

[ ] Banks [ ] Peer group

[ ] Other

03) Through which medium do you prefer to invest in mutual fund?

[ ] Bank [ ] Broker
[ ] Direct AMC [ ] Insurance Co.
[ ] Financial advisor

04) Which Feature of Mutual Fund makes you to invest in MF?

[ ] Diversification [ ] Better return & Safety

[ ] Lower Risk [ ] Tax Benefit

05) Which Mutual Fund Plan do you consider the best? *

[ ] Balanced Plan [ ] Equity Plans

[ ] Income Plans [ ] Other:

06) How much percentage of your annual income would you like to invest in mutual
funds?

[ ] 0 to 5% [ ] 6 to 10% [ ] 11 to 15%

[ ] above 16%

56
07) How long would you like to hold your Mutual Funds Investments? *

[ ] 1 to 3 Years [ ] 4 to 6 Years
[ ] 7 to 10 Years [ ] More than 10 Years

08) How do you rate the risks associated with Mutual Funds? *

[ ] Low [ ] Moderate [ ] High

09) Which among the following principles do you consider while selecting a Mutual
Fund? *

[ ] Enquiring about the Fund Manager

[ ] Finding about its past performance
[ ] Your own objectives
[ ] Other:

10) When you invest in mutual fund which mode of investment will you prefer?

[ ] One time investment [ ] Systemic investment plan (SIP)

11) Which factors prevent you to invest in mutual fund ?

[ ] Bitter Past Experience

[ ] Lack of Knowledge
[ ] Difficulty in selection of schemes
[ ] Other:

Thank you
57