INTRODUCTION

In the current economic scenario interest rate are falling and fluctuating in the share market has put
investor in confusion. One finds it difficult to take decision on investment. This is primarily, because
of investments are risky in nature and investor have to consider various factors before investing in
investment avenues.

The factors include risk, return, volatility of shares and liquidity. The main objective of comparing
investment in equity shares with mutual fund schemes is to analyze the performance of mutual funds
with their benchmark parameter.

Historical data were taken for calculating risk, return, alpha and beta. To compare how equities and
mutual funds are less risky on the basis of returns. Those who have well knowledge in equity market
they can go for equity investment rather that investing in mutual funds because no control on the
expenses made by the fund’s manager.

The study will guide the new investor who wants to invest in equity and mutual fund schemes by
providing knowledge about how to measure the risk and return of particular scrip or mutual fund
scheme. Hence this study has a scope to conduct research on mutual fund and equity investment.

Savings form an important part of the economy of any nation. With the savings invested in various
options available to the people, the money acts as the driver for growth of the country. Indian financial
scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of
markets in the world, it has reasonable options for an ordinary man to invest his savings. Banks are
considered as the safest of all options, banks have been the roots of the financial systems in India.
Promoted as the means to social development, banks in India have indeed played an important role in
the rural upliftment. For an ordinary person though, they have acted as the safest investment avenue
wherein a person deposits money and earns interest on it. The two main modes of investment in banks,
savings accounts and fixed deposits have been effectively used by one and all.

However, today the interest rate structure in the country is headed southwards, keeping in line with
global trends. With the banks offering little above 9 percent in their fixed deposits for one year, the
yields have come down substantially in recent times. Add to this, the inflationary pressures in
economy and one has a position where the savings are not earning. The inflation is creeping up, to
almost 8 percent at times, and this means that the value of money saved goes down instead of going
up. This effectively mars any chance of gaining from the investments in banks. Just like banks, post
offices in India have a wide network. Spread across the nation, they offer financial assistance as well
as serving the basic requirements of communication. Among all saving options, Post office schemes
have been offering the highest rates. Added to it is the fact that the investments are safe with the
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department being a Government of India entity. So, the two basic and most sought after features, such
as - return safety and quantum of returns was being handsomely taken care of. Though certainly not
the most efficient systems in terms of service standards and liquidity, these have still managed to
attract the attention of small, retail investors. However, with the government announcing its intention
of reducing the interest rates in small savings options, this avenue is expected to lose some of the
investors.

Public Provident Funds act as options to save for the post retirement period for most people and have
been considered good option largely due to the fact that returns were higher than most other options
and also helped people gain from tax benefits under various sections. This option too is likely to lose
some of its sheen on account of reduction in the rates offered. Another often-used route to invest has
been the fixed deposit schemes floated by companies. Companies have used fixed deposit schemes as a
means of mobilizing funds for their operations and have paid interest on them. The safer a company is
rated, the lesser the return offered has been the thumb rule. However, there are several potential
roadblocks in these. First of all, the danger of financial position of the company not being understood
by the investor lurks. The investors rely on intermediaries who more often than not, don't reveal the
entire truth. Secondly, liquidity is a major problem with the amount being received months after the
due dates. Premature redemption is generally not entertained without cuts in the returns offered and
though they present a reasonable option to counter interest rate risk (especially when the economy is
headed for a low interest regime), the safety of principal amount has been found lacking. Many cases
like the Kuber Group and DCM Group fiascos have resulted in low confidence in this option. The
options discussed above are essentially for the risk-averse, people who think of safety and then
quantum of return, in that order. For the brave, it is dabbling in the stock market.

Stock markets provide an option to invest in a high risk, high return game. While the potential return is
much more than 10-11 percent any of the options discussed above can generally generate, the risk is
undoubtedly of the highest order. But then, the general principle of encountering greater risks and
uncertainty when one seeks higher returns holds true. However, as enticing as it might appear, people
generally are clueless as to how the stock market functions and in the process can endanger the hard-
earned money.

For those who are not adept at understanding the stock market, the task of generating superior returns
at similar levels of risk is arduous to say the least. This is where Mutual Funds come into picture.

Mutual Funds are essentially investment vehicles where people with similar investment objective come
together to pool their money and then invest accordingly. Each unit of any scheme represents the
proportion of pool owned by the unit holder (investor). Appreciation or reduction in value of

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investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by the
fund from time to time. Mutual fund schemes are managed by respective Asset Management
Companies (AMC). Different business groups/ financial institutions/ banks have sponsored these
AMCs, either alone or in collaboration with reputed international firms.

Several international funds like Alliance and Templeton are also operating independently in India.
Many more international Mutual Fund giants are expected to come into Indian markets in the near
future.

Investment alternatives in India

 Non marketable financial assets: These are such financial assets which gives moderately high
return but cannot be traded in market

1. Bank deposit
2. Post office scheme
3. Company FD’S
4. PPF
 Equity shares: These are shares of company and can be traded in secondary market. Investors
get benefit by change in price of share and dividend given by companies. Equity shares
represent ownership capital. As an equity shareholder, a person has an ownership stake in the
company. This essentially means that the person has a residual interest in income and wealth of
the company. These can be classified into following broad categories as per stock market:
1. Blue chip shares
2. Growth shares
3. Income shares
4. Cyclic shares
5. Speculative shares
 Bonds: Bonds are the instruments that are considered as a relatively safer investment avenues.
1. G sec bonds
2. GOI Relief Fund
3. Government agency fund
4. PSU bonds
5. RBI bond
6. Debenture of private sector company

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 Money market instrument: By convention, the term "money market" refers to the market for
short-term requirement and deployment of funds. Money market instruments are those
instruments, which have a maturity period of less than one year.
1. Treasury bills
2. Certificate of deposit
3. Commercial paper
 Mutual Funds- A mutual fund is a trust that pools together the savings of a number of
investors who share a common financial goal. The fund manager invests this pool of money in
securities, ranging from shares, debentures to money market instruments or in a mixture of
equity and debt, depending upon the objective of the scheme. The different types of schemes
are
1. Balanced Fund
2. Index Fund
3. Sector Fund
4. Equity Oriented Fund
 Life insurance: Now-a-days life insurance is also being considered as an investment avenue.
Insurance premiums represent the sacrifice and the assured sum the benefit. Under it different
schemes are:
1. Endowment Assurance Policy
2. Money back Policy
3. Whole Life Policy
4. Term Assurance Policy
 Real estate: One of the most important assets in portfolio of investors is a residential house. In
addition to a residential house, the more affluent investors are likely to be interested in the
following types of real estate:
1. Agriculture Land
2. Semi urban land
3. Farm House
 Precious objects: Investors can also invest in the objects which have value. These comprises
of:
1. Gold
2. Silver
3. Precious stones
4. Art objects

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  Financial Derivatives: These are such instruments which derive their value from some other
underlying assets. It may be viewed as a side bet on the asset. The most important financial
derivatives from the point of view of investors are:
1. Options
2. Future
INTRODUCTION TO EQUITY

History

The Indian Equity Market is more popularly known as the Indian Stock Market. The Indian equity
market has become the third biggest after China and Hong Kong in the Asian region. According to the
latest report by ADB, it has a market capitalization of nearly $600 billion. As of March 2009, the
market capitalization was around $598.3 billion (Rs 30.13 lakhcrore) which is one-tenth of the
combined valuation of the Asia region. The market was slow since early 2007 and continued till the
first quarter of 2009. A stock exchange has been defined by the Securities Contract (Regulation) Act,
1956 as an organization, association or body of individuals established for regulating, and controlling
of securities.

The Indian equity market depends on three factors –

 Funding into equity from all over the world

 Corporate houses performance
 Monsoons

The stock market in India does business with two types of fund namely private equity fund and venture
capital fund. It also deals in transactions which are based on the two major indices - Bombay Stock
Exchange (BSE) and National Stock Exchange of India Ltd. (NSE).

The market also includes the debt market which is controlled by wholesale dealers, primary dealers
and banks. The equity indexes are allied to countries beyond the border as common calamities affect
markets. E.g. Indian and Bangladesh stock markets are affected by monsoons.

The equity market is also affected through trade integration policy. The country has advanced both in
foreign institutional investment (FII) and trade integration since 1995. This is a very attractive field for
making profit for medium and long term investors, short-term swing and position traders and very
intraday traders. The Indian market has 22 stock exchanges. The larger companies are enlisted with
BSE and NSE. The smaller and medium companies are listed with OTCEI (Over The counter
Exchange of India). The functions of the Equity Market in India are supervised by SEBI (Securities
Exchange Board of India).
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History of Indian Equity Market The history of the Indian equity market goes back to the 18th century
when securities of the East India Company were traded. Till the end of the 19th century, the trading of
securities was unorganized and the main trading centers were Calcutta (now Kolkata) and Bombay
(now Mumbai).

Trade activities prospered with an increase in share price in India with Bombay becoming the main
source of cotton supply during the American Civil War (1860-61). In 1865, there was drop in share
prices. The stockbroker association established the Native Shares and Stock Brokers Association in
1875 to organize their activities. In 1927, the BSE recognized this association, under the Bombay
Securities Contracts Control Act, 1925.

The Indian Equity Market was not well organized or developed before independence. After
independence, new issues were supervised. The timing, floatation costs, pricing, interest rates were
strictly controlled by the Controller of Capital Issue (CII). For four and half decades, companies were
demoralized and not motivated from going public due to the rigid rules of the Government.

In the 1950s, there was uncontrollable speculation and the market was known as 'Satta Bazaar'.
Speculators aimed at companies like Tata Steel, Kohinoor Mills, Century Textiles, Bombay Dyeing
and National Rayon. The Securities Contracts (Regulation) Act, 1956 was enacted by the Government
of India. Financial institutions and state financial corporation were developed through an established
network.

In the 60s, the market was bearish due to massive wars and drought. Forward trading transactions and
'Contracts for Clearing' or 'badla' were banned by the Government. With financial institutions such as
LIC, GIC, some revival in the markets could be seen. Then in 1964, UTI, the first mutual fund of India
was formed.

In the 70's, the trading of 'badla' resumed in a different form of 'hand delivery contract'. But the
Government of India passed the Dividend Restriction Ordinance on 6th July, 1974. According to the
ordinance, the dividend was fixed to 12% of Face Value or 1/3 rd of the profit under Section 369 of
The Companies Act, 1956 whichever is lower.

This resulted in a drop by 20% in market capitalization at BSE (Bombay Stock Exchange) overnight.
The stock market was closed for nearly a fortnight. Numerous multinational companies were pulled
out of India as they had to dissolve their majority stocks in India ventures for the Indian public under
FERA, 1973.

The 80's saw a growth in the Indian Equity Market. With liberalized policies of the government, it
became lucrative for investors. The market saw an increase of stock exchanges, there was a surge in
market capitalization rate and the paid up capital of the listed companies.
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The 90s was the most crucial in the stock market's history. Indians became aware of 'liberalization' and
'globalization'. In May 1992, the Capital Issues (Control) Act, 1947 was abolished. SEBI which was
the Indian Capital Market's regulator was given the power and overlook new trading policies, entry of
private sector mutual funds and private sector banks, free prices, new stock exchanges, foreign
institutional investors, and market boom and bust.

In 1990, there was a major capital market scam where bankers and brokers were involved. With this,
many investors left the market. Later there was a securities scam in 1991-92 which revealed the
inefficiencies and inadequacies of the Indian financial system and called for reforms in the Indian
Equity Market.

Two new stock exchanges, NSE (National Stock Exchange of India) established in 1994 and OTCEI
(Over the Counter Exchange of India) established in 1992 gave BSE a nationwide competition. In
1995-96, an amendment was made to the Securities Contracts (Regulation) Act, 1956 for introducing
options trading. In April 1995, the National Securities Clearing Corporation (NSCC) and in November
1996, the National Securities Depository Limited (NSDL) were set up for demutualised trading,
clearing and settlement. Information Technology scrips were the major players in the late 90s with
companies like Wipro, Satyam, and Infosys.

In the 21st century, there was the Ketan Parekh Scam. From 1st July 2001, 'Badla' was discontinued
and there was introduction of rolling settlement in all scrips. In February 2000, permission was given
for internet trading and from June, 2000, futures trading started.

Meaning

One of the benefits of trading in the share market is that investors can become partial owners of a
company. These shares, offered by companies in return for money, are called equities. In the
Indian stock market, equities are available for trading at the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE).An equity market, also known as the stock market, is a platform for
trading in company shares. It is the place where buyers and sellers meet to trade in listed companies.
Listed companies are those entities that have offered some part of their equity to public investors.
Equity consists of funds that shareholders invest in a company plus a certain amount of profit earned
by them that is retained by the company for further growth and expansion.Equity is a primary asset
class when it comes to investing and diversifying one’s portfolio. Trading in equity needs in-depth
analysis and research of the share market, services that Angel Broking offers to all of its investors.
Additionally, derivatives allow equity to diversify beyond just shares into securities such as bonds,
commodities and currencies.

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Trading Equity

Equity may be traded in the primary market, when a company makes an Initial Public Offering (IPO)
and new securities may be bought. Shares that have already been issued are bought and sold in the
secondary market. Investors may also own private equity, that is, shares of a company that is still
private and not listed on the bourses. In order to trade in equities, investors must have a demat
account and trading account, and Angel Broking offers both of these.

Equity for a Shareholder

of personal share of equity, which may be calculated by subtracting total liabilities owed from total
Apart from knowing the value of equities in which one has invested, it is also important to know the
value assets owned.

Equity = value of assets – value of liabilities

Equity investment returns

Return on equity measures a company’s ability to use its investors’ funds to increase its profit and
earnings. It is important to keep track of equity returns to understand if there are long-term benefits
from investing in a particular company.

Types of Equity Markets

Primary Market:

Every company that proposes to go public must come out with an initial public offering (IPO). During
the IPO, the company offers a certain portion of its equity to the public. After the closing of the IPO,
the shares are listed on one of the stock exchanges, which are an important component of the stock
market. The primary exchanges in India are the National Stock Exchange (NSE) and the Bombay
Stock Exchange (BSE).Secondary Market:

After the listing of the IPO shares, these are traded on the secondary market. This platform offers the
initial investors an option to exit their investments. In addition, investors who failed to procure shares
during the IPO can purchase these from the secondary market. Trading in the Indian stock market is
commonly done through brokers. The brokers act as intermediaries between the stock exchanges and
the investors.

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Equity Market Procedures

Trading: The stock exchanges provide an automated screen-based trading platform that is fully
automated and computerized. The platform is an open trade system where buyers and sellers can see
all the trades and place their orders to suit their personal requirements.

Clearing and Settlement: The exchanges clear and settle all the trades that are executed during the
trading day. These exchanges operate well-defined settlement cycles without any deviations and/or
deferments from the procedures. The trades during the trading session are aggregated and positions are
netted off with the objective of determining the liabilities of the trading members. These procedures
also ensure movements of the funds and shares are completed in the right manner. The settlement
cycle adopted by the exchanges operating in the Indian stock market is T+2. This means that all
securities and funds movements are completed two days after Day 1 (which is the day on which the
trades are executed). Under the T+2 cycle, buyers receive credits of the shares in their demat account,
and sellers receive the sale proceeds in the bank accounts that are linked to the trading account within
two days.

Risk Management: A widely known stock market basic is that investing in the equity market has
several risks. The stock exchanges have developed a comprehensive system for risk management. This
system ensures the investors’ interests and prevents fraudulent activities by the companies. The stock
exchanges constantly upgrade the risk management system to pre-empt market failures and stay
abreast of the changing mechanisms. Some components of the risk management system include margin
requirements, pay-ins, and voluntary close-out facilities, and liquid assets.Equity market investing can
help investors meet their future financial requirements by beating the rising prices due to inflationary
pressures. Understanding the stock market basics and learning more about the market and its
regulation, and following a disciplined approach to share market investment can provide huge returns
in the long run.

The different types of equity issues have been discussed below:

1. New Issue: A company issues a prospectus inviting the general public to subscribe its shares.
Generally, in case of new issues, money is collected by the company in more than one instalment
known as allotment and calls. The prospectus contains details regarding the date of payment and
amount of money payable on such allotment and calls. A company can offer to the public up to its
authorized capital. Right issue requires the filing of prospectus with the Registrar of Companies and
with the Securities and Exchange Board of India (SEBI) through eligible registered merchant bankers.
2. Bonus Issue:
Bonus in the general sense means getting something extra in addition to normal. In business, bonus
shares are the shares issued free of cost, by a company to its existing shareholders. As per SEBI
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guidelines, if a company has sufficient profits/reserves it can issue bonus shares to its existing
shareholders in proportion to the number of equity shares held out of accumulated profits/ reserves in
order to capitalize the profit/reserves. Bonus shares can be issued only if the Articles of Association of
the company permits it to do so.

iii. Rights Issue:According to Section 81 of The Company’s Act, 1956, rights issue is the subsequent
issue of shares by an existing company to its existing shareholders in proportion to their holding. Right
shares can be issued by a company only if the Articles of Association of the company permits. Rights
shares are generally offered to the existing shareholders at a price below the current market price, i.e.
at a concessional rate, and they have the options either to exercise the right or to sell the right to
another person. Issue of rights shares is governed by the guidelines of SEBI and the central
government.

iv. Sweat Issue:According to Section 79A of The Company’s Act, 1956, shares issued by a company
to its employees or directors at a discount or for consideration other than cash are known as sweat
issue. The purpose of sweat issue is to retain the intellectual property and knowhow of the company.
Sweat issue can be made if it is authorized in a general meeting by special resolution. It is also
governed by Issue of Sweet Equity Regulations, 2002, of the SEBI.

Advantages of Equity Shares

The returns earned on Equity Shares are high, so is the risk involved.
 Dividends received are directly proportional to the number of Equity Shares held by an
investor.
 Equity Shares are liquid in nature, and can be easily traded over stock exchanges.
 Equity Shareholders claim ownership rights over the Company and its assets.
Disadvantages of Equity Shares

 Receiving dividends is subject to funds remaining post payment of tax, debentures and so on.
Receiving dividends is not a certainty each year.
 Equity Shareholders are scattered, hence they are often not able to exercise their voting rights
and have almost no power over crucial management decisions.
 Equity Share value fluctuates often in the market, thereby the risk of investment is high.
 Issuing fresh shares depreciates the value of the equity shares held by existing investors
Importance of equity shaers.
Growth
As the value of your home increases, so does the price, thereby, increasing equity in the property.
Similarly, as your business sales increase, the equity increases as well. Foryour business and personal
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lives, the importance of equity is in the growth of your assets, by sales or by property value. The more
equity you have, the less debt to be repaid, hence, the more comfortable your life will be today and in
the future.

Value

The importance of having your own equity in your business is to attract equity investors for cash flow.
Your repayment to an equity investor is based on the company's growth and profit, rather than
immediate repayment of debt as with a bank loan. According to Ernst & Young, the value private
equity investors create in businesses is seen at the time they exit their investment showing: a track
record of improved profits, growth and cash flow from growth in contracts.

Opportunities

The growth and equity potential in a company are important in securing an equity investor. An
investor looks for opportunities to build equity in a company for private equity investments. Projects
are limited compared with the higher demand for equity financing, which makes investors selective
about their investment choices. The investor's knowledge of the business, an existing relationship with
the owners, and a management team and business model in place, are attractive for investment for an
equity investor than those at a planning stage.

Sources

Friends, relatives and investors are sources of equity investments, important in helping you build
equity. An equity investor seeks opportunities to invest in homes or companies with increasing value
which reduces your debt. He may also provide counselling services for the growth of your business.
Friends and relatives are sources of personal loans, which are not expected to be repaid immediately
thereby, reducing your personal debt.

Warning

Building equity for personal or business growth is important to reducing your debt. Be committed to
avoiding debt financing through bank loans as an option available for raising capital. Debt financing
reduces equity by imposing a repayment burden and subjects you to penalties on payment defaults.
Funds raised through equity financing do not entail any immediate repayment obligation.

Limitations of equity shaers

(a) From Company’s Point of View:
(i) Equity shares being irredeemable; make the capital structure of the company rigid.

(ii) Equity shareholders interfere in company management.

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(iii) Equity shares do not provide any tax advantage to the company; as equity dividend is payable only
after payment of tax.

(b) From Investors’ Point of View:

(i) There is no guarantee of a fixed dividend income.

(ii) At the time of the winding up of the company, equity shareholders are the last to be repaid their
capital back.

INTRODUCTION OF MUTUAL FUND

Mutual Fund Industry in India

The Indian mutual fund industry started in 1963 with the formation of Unit Trust of India. It was a
joint initiative by the Government of India and Reserve Bank of India.

The history of mutual funds in India segregated into four distinct phases: -

• First phase (1964-1987)

Unit Trust of India (UTI) was established in 1963.It was set up by the Reserve Bank of India and
functioned under its Regulatory and administrative control. In 1978 UTI was de-linked from the RBI
and the Industrial Development Bank of India (IDBI) took over. The first scheme launched by UTI
was the Unit Scheme 1964.

• Second Phase (1987-1993)

Non-UTI, public sector mutual funds entered the market in 1987. These were set up by public sector
banks, LIC and GIC.SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987 It
was followed by Canara bank Mutual Fund in Dec ’87.

By 1993, the mutual fund industry increases its assets under management to Rs 47,004 crores.

• Third Phase (1993-2003)

1993 ushered in private sector mutual funds for the first time.

This phase also gave Indian investors a wider choice of funds.

Kothari Pioneer (currently merged with Franklin Templeton) was the first private player registered in
1993. The SEBI (Mutual Fund) Regulations of 1993 were replaced by a comprehensive set of
regulations in 1996

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 • Fourth Phase (since 2003)

UTI was bifurcated into two separate entities

The specified undertaking of the Unit Trust of India representing, the assets of US 64 scheme, assured
return and certain others.

The UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC.

The mutual fund industry has, now, entered a phase of consolidation and growth.

Allianz Mutual Fund by Birla Sun Life Insurance and PNB Mutual Fund by Principal are some of the
major private players in the market now.

The way ahead

Despite the global crisis of 2008-09, mutual funds have kept growing at a steady pace. Even though
separate accounts, exchange-traded funds, ULIP’s and other competitors have raised their heads, the
future looks bright for mutual funds.

Invest in one today!

Meaning

A mutual fund is a professionally managed investment fund that pools money from many investors to
purchase securities. These investors may be retail or institutional in nature. Mutual funds have
advantages and disadvantages compared to direct investing in individual securities. The primary
advantages of mutual funds are that they provide economies of scale, a higher level of diversification,
they provide liquidity, and they are managed by professional investors. On the negative side, investors
in a mutual fund must pay various fees and expenses.

Primary structures of mutual funds include open-end funds, unit investment trusts, and closed-end
funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an
exchange. Mutual funds are also classified by their principal investments as money market funds, bond
or fixed income funds, stock or equity funds, hybrid funds or other. Funds may also be categorized as
index funds, which are passively managed funds that match the performance of an index, or actively
managed funds. Hedge funds are not mutual funds; hedge funds cannot be sold to the general public
and are subject to different government Regulation.

Types of Mutual Funds based on structure

 Open-Ended Funds: These are funds in which units are open for purchase or redemption through
the year. All purchases/redemption of these fund units are done at prevailing NAVs. Basically these

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 funds will allow investors to keep invest as long as they want. There are no limits on how much can
be invested in the fund. They also tend to be actively managed which means that there is a fund
manager who picks the places where investments will be made. These funds also charge a fee which
can be higher than passively managed funds because of the active management. THey are an ideal
investment for those who want investment along with liquidity because they are not bound to any
specific maturity periods. This means that investors can withdraw their funds at any time they want
thus giving them the liquidity they need.
 Close-Ended Funds: These are funds in which units can be purchased only during the initial offer
period. Units can be redeemed at a specified maturity date. To provide for liquidity, these schemes
are often listed for trade on a stock exchange. Unlike open ended mutual funds, once the units or
stocks are bought, they cannot be sold back to the mutual fund, instead they need to be sold through
the stock market at the prevailing price of the shares.
 Interval Funds: These are funds that have the features of open-ended and close-ended funds in that
they are opened for repurchase of shares at different intervals during the fund tenure. The fund
management company offers to repurchase units from existing unitholders during these intervals. If
unit holders wish to they can offload shares in favour of the fund.

Types of Mutual Funds based on asset class

 Equity Funds: These are funds that invest in equity stocks/shares of companies. These are
considered high-risk funds but also tend to provide high returns. Equity funds can include specialty
funds like infrastructure, fast moving consumer goods and banking to name a few. THey are linked
to the markets and tend to
 Debt Funds: These are funds that invest in debt instruments e.g. company debentures, government
bonds and other fixed income assets. They are considered safe investments and provide fixed
returns. These funds do not deduct tax at source so if the earning from the investment is more than
Rs. 10,000 then the investor is liable to pay the tax on it himself.
 Money Market Funds: These are funds that invest in liquid instruments e.g. T-Bills, CPs etc. They
are considered safe investments for those looking to park surplus funds for immediate but moderate
returns. Money markets are also referred to as cash markets and come with risks in terms of interest
risk, reinvestment risk and credit risks.
 Balanced or Hybrid Funds: These are funds that invest in a mix of asset classes. In some cases, the
proportion of equity is higher than debt while in others it is the other way round. Risk and returns
are balanced out this way. An example of a hybrid fund would be Franklin India Balanced Fund-DP
(G) because in this fund, 65% to 80% of the investment is made in equities and the remaining 20%
to 35% is invested in the debt market. This is so because the debt markets offer a lower risk than the
equity market.

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 Types of Mutual Funds based on investment objective

 Growth funds: Under these schemes, money is invested primarily in equity stocks with the purpose
of providing capital appreciation. They are considered to be risky funds ideal for investors with a
long-term investment timeline. Since they are risky funds they are also ideal for those who are
looking for higher returns on their investments.
 Income funds: Under these schemes, money is invested primarily in fixed-income instruments e.g.
bonds, debentures etc. with the purpose of providing capital protection and regular income to
investors.
 Liquid funds: Under these schemes, money is invested primarily in short-term or very short-term
instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity. They are considered to be
low on risk with moderate returns and are ideal for investors with short-term investment timelines.
 Tax-Saving Funds (ELSS): These are funds that invest primarily in equity shares. Investments
made in these funds qualify for deductions under the Income Tax Act. They are considered high on
risk but also offer high returns if the fund performs well.
 Capital Protection Funds: These are funds where funds are are split between investment in fixed
income instruments and equity markets. This is done to ensure protection of the principal that has
been invested.
 Fixed Maturity Funds: Fixed maturity funds are those in which the assets are invested in debt and
money market instruments where the maturity date is either the same as that of the fund or earlier
than it.
 Pension Funds: Pension funds are mutual funds that are invested in with a really long term goal in
mind. They are primarily meant to provide regular returns around the time that the investor is ready
to retire. The investments in such a fund may be split between equities and debt markets where
equities act as the risky part of the investment providing higher return and debt markets balance the
risk and provide lower but steady returns. The returns from these funds can be taken in lump sums,
as a pension or a combination of the two.

Types of Mutual Funds based on specialty

 Sector Funds: These are funds that invest in a particular sector of the market e.g. Infrastructure
funds invest only in those instruments or companies that relate to the infrastructure sector. Returns
are tied to the performance of the chosen sector. The risk involved in these schemes depends on the
nature of the sector.
 Index Funds: These are funds that invest in instruments that represent a particular index on an
exchange so as to mirror the movement and returns of the index e.g. buying shares representative of
the BSE Sensex.

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 Fund of funds: These are funds that invest in other mutual funds and returns depend on the
performance of the target fund. These funds can also be referred to as multi manager funds. These
investments can be considered relatively safe because the funds that investors invest in actually hold
other funds under them thereby adjusting for risk from any one fund.
 Emerging market funds: These are funds where investments are made in developing countries that
show good prospects for the future. They do come with higher risks as a result of the dynamic
political and economic situations prevailing in the country.
 International funds: These are also known as foreign funds and offer investments in companies
located in other parts of the world. These companies could also be located in emerging economies.
The only companies that won’t be invested in will be those located in the investor’s own country.
 Global funds: These are funds where the investment made by the fund can be in a company in any
part of the world. They are different from international/foreign funds because in global funds,
investments can be made even the investor's own country.
 Real estate funds: These are the funds that invest in companies that operate in the real estate
sectors. These funds can invest in realtors, builders, property management companies and even in
companies providing loans. The investment in the real estate can be made at any stage, including
projects that are in the planning phase, partially completed and are actually completed.
 Commodity focused stock funds: These funds don’t invest directly in the commodities. They
invest in companies that are working in the commodities market, such as mining companies or
producers of commodities. These funds can, at times, perform the same way the commodity is as a
result of their association with their production.
 Market neutral funds: The reason that these funds are called market neutral is that they don’t
invest in the markets directly. They invest in treasury bills, ETFs and securities and try to target a
fixed and steady growth.
 Inverse/leveraged funds: These are funds that operate unlike traditional mutual funds. The earnings
from these funds happen when the markets fall and when markets do well these funds tend to go into
loss. These are generally meant only for those who are willing to incur massive losses but at the
same time can provide huge returns as well, as a result of the higher risk they carry.
 Asset allocation funds: The asset allocation fund comes in two variants, the target date fund and the
target allocation funds. In these funds, the portfolio managers can adjust the allocated assets to
achieve results. These funds split the invested amounts and invest it in various instruments like
bonds and equity.
 Gilt Funds: Gilt funds are mutual funds where the funds are invested in government securities for a
long term. Since they are invested in government securities, they are virtually risk free and can be
the ideal investment to those who don’t want to take risks.

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 Exchange traded funds: These are funds that are a mix of both open and close ended mutual funds
and are traded on the stock markets. These funds are not actively managed, they are managed
passively and can offer a lot of liquidity. As a result of their being managed passively, they tend to
have lower service charges (entry/exit load) associated with them.

Types of Mutual Funds based on risk

 Low risk: These are the mutual funds where the investments made are by those who do not want to
take a risk with their money. The investments in such cases are made in places like the debt market
and tend to be long term investments. As a result of them being low risk, the returns on these
investments are also low. One example of a low risk fund would be gilt funds where investments are
made in government securities.
 Medium risk: These are the investments that come with a medium amount of risk to the investor.
They are ideal for those who are willing to take some risk with the investment and tend to offer
higher returns. These funds can be used as an investment to build wealth over a longer period of
time.
 High risk: These are those mutual funds that are ideal for those who are willing to take higher risks
with their money and are looking to build their wealth. One example of high risk funds would be
inverse mutual funds. Even though the risks are high with these funds, they also offer higher returns.
Advantages of Mutual Funds

Professional management: Mutual Fund managers are professionally trained and experienced,
constantly watching and managing their fund. Remember, though: the guy on the other side is not
Warren Buffett. He might come close, but he’s not Warren.

Instant diversification: Since one of the primary rules of investment is to diversify portfolios, a
mutual fund can be a simple and successful way to accomplish this goal. With one investment, you
will own shares of stock in many corporations. A mutual fund portfolio combines a variety of stocks,
bonds, commodities and cash, mutual funds are, by nature, diversified. If one stock or asset goes down,
there will be others that compensate for it. This just means that the potential for losses is spread out
conservatively.

Liquidity: If you ever want to get out of a mutual fund, all you have to do is instruct your broker or
financial advisor. They can sell it immediately. Normally, the funds take a day to come back into your
account, but that’s not so bad. Comparatively, individual stocks would take much longer to liquidate.

Match your style: You can find a mutual fund that matches almost exactly what you are looking for
from an investment. This could be related to both your risk tolerance and your investment horizon.

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Disadvantages of Mutual Funds

Management Fees: Mutual fund companies have to pay salaries and marketing expenses and they
always get paid FIRST before the investors/owners get paid! Management fees are one of the key
metrics to watch out for as an investor because they can quickly and devilishly eat into your profits
over time. Do higher management fees correlate to higher returns and better performance? As it turns
out, the answer is NO. In fact, many studies have been done that show higher fees generally correlate
to lower performance.

Locked in Clause: There are two different mutual fund structures – one allows you to go in and out at
any time. The other one is locked in for 5-7 years. With this one, if you try to take your money out
earlier, you’ll get charged for it. Make sure to ask your financial advisor which type you are investing
in.

Wasted Cash: Because people occasionally want to withdraw their mutual funds, there must always
be funds available – in cash – for payouts. When money’s in cash, it’s not collecting interest. Since
this comes from a portion of the investment funds, it means it doesn’t collect any interest for you. That
amount of cash is better off sitting in your bank account.

Mutual Fund Charges: Mutual funds charge fees when you redeem your money. There are also
“operating expense” fees. This is a percentage of what it costs to run the fund. Let’s say you invested
$10,000, and the operating fees are 2%. This means that you are effectively paying $200 every year in
operating charges.

Importance of mutual fun

Convenience:

For investors, one of the most prominent benefits that mutual funds provide is convenience. By
investing in a single fund, they can gain access to a broad range of the financial market. A typical
diversified equity fund can spread out the money across tens of stocks with some portion invested in
fixed income securities as well.

Diversification:
Further, if an investor wants to focus on one segment of the market, for instance, large-cap stocks,
funds focused on this segment can spread out the investment across multiple large-cap stocks in just
one transaction of purchasing the fund. If the investor were to try to do that themselves, it would take a
lot of effort, transaction cost, and time to create an individual large-cap stock portfolio. The situation
with investing in bonds is even more difficult if one tries to do it individually rather than taking the
fund route.

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Ease of Investment:
Apart from this, mutual funds are easy to buy and sell. One can either engage the services of a
distributor or agent to transact in funds or do it over the internet themselves. In the case of latter, the
transaction amount is debited from or comes directly to the bank account linked to the mutual fund
account depending on whether a fund has been bought or sold.

Spoilt For Choice:

This feature follows from the convenience aspect discussed above. Investors have several choices
when it comes to mutual funds. And given their investment objectives, funds provide access to a wide
range of financial instruments, sectors, and strategies.

Professional Management:
This is one of the factors, which is a key highlight of the importance of mutual funds. Due to lack of
expertise several investors don’t have the confidence in taking the financial market route to grow their
wealth. They feel they have limited or no capability to invest in stocks and bonds on their own and do
not have the time to keep tracking their investments even if they manage to invest on their own.Mutual
funds take care of this issue by providing the expertise of the fund manager and their team of analysts,
which perform the analysis of financial markets and instruments on a daily basis. They charge a fee for
their professional services, which are bundled into the expense ratio of a mutual fund.Some fund
managers also invest in the same fund(s) that they manage, thus making them accountable for their
performance; they have a stake in the fund doing well. This expertise and experience in money
management make mutual funds a great vehicle for investors.

This assumes a lot of importance for investors as by investing minimal time and energy, they can add a
variety of instruments to their investment portfolio.

Limitation of mutual fund

Decisions: Since mutual funds are professionally managed, you do not have any control in how the
money in the mutual fund is invested. Money managers are responsible for researching and
interpreting data related to the investments that make up the mutual fund. As a result, you have no way
of influencing what investments are bought and sold by the money manager.

Costs: The returns you generate by investing in a mutual fund are limited in part by the cost of
maintaining the mutual fund. According to the U.S. Securities and Exchange Commission, a mutual
fund is similar to a business. The mutual fund incurs costs to buy and sell investments on the open
financial market place. Some of these fees may include advising fees, transaction costs, and fees for

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marketing and distribution. These fees reduce the returns you make from the investments in your
mutual fund.

Projections: A prospectus for a mutual fund is one of the most common sources of information for
investors. A key consideration when you examine a prospectus is that projections of future earnings
are only estimates of how the mutual fund may perform in the future. Projections are commonly based
on past performance, but there is no guarantee that a mutual fund will generate the same level of
returns as past years.

Insurance: The money you invest in a mutual fund is not insured by the Federal Deposit Insurance
Corporation. If your bank participates in FDIC insurance, your deposits are repaid to you if your bank
fails, but the money you invest in mutual funds is not protected against investment losses or bank
closure.

Risk: Mutual funds are exposed to risk like any other investment in the financial markets. Mutual
funds try to minimize risk by investing in an assortment of securities like stocks and short- and long-
term bonds. This strategy is commonly called diversification, and it protects you from losses in one
area of the portfolio with gains in another. While mutual funds invest in several sectors, some
specialize in certain investments like money market funds, bond funds and stock funds, which carry
additional risk of loss.

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