A RESEARCH REPORT ON MUTUAL FUND IN INDIA AT MAHINDRA FINANCE

Submitted to Ms. Aditi Mohan Das

Submitted
Ashish patel

PREFACE

The success of any business entity solely depends on how effectively dose it utilizes its optimum resources and how soon does it make arrangements for the removal of the customer's grievances. Moreover, the company should alweays be ready to make neccssary changes according to the requirmeant in order to attract more customers so as to maintain a substantial growth in the market. the topic given to me is MUTUAL FUNDS IN INDIA

CONTENTS

CHAPTER 1- INTRODUCITON PURPOSE OF THE STUDY EXECUTIVE SUMMARY INTRODUCTION TO THE CONCEPT

CHAPTER 2- REVIEW OF THE LITERATURE

A BRIEF HISTORY OF MUTUAL FUNDS PERFORMANCE OF MUTUAL FUNDS IN INDIA

CHAPTER 3- PRESENT STUDY

MARKET TRENDS BANKS V/S MUTUAL FUNDS TYPES OF MUTUAL FUNDS ADVANTAGES & DISADVANTAGES OF MUTUAL FUNDS MUTUAL FUNDS CONSTITUENTS CALCULATION OF NAV

MARKETING STRATEGIES ADOPTED BY TH MUTUAL FUNDS CHALLENGES AND OPPORTUNITIES REASONS FOR BAD PERFORMANCE OF MUTUAL FUNDS MARKET SHARE OF MUTUAL FUNDS IN INDIA

CHAPTER 4- METHOD
SURVEY METHOD

CHAPTER 5- RESULT

CHAPTER 6- RECOMMENDATIONS

CHAPTER 7- SUMMARY & CONCLUSION

CHAPTER 8- REFRENCES

CHAPTER 1 INTRODUCTION

Purpose of the Study

A mutual fund pools the money of people with similar investment goals. The money in turn is invested in various securities depending on the objectives of the mutual fund schemes, the profits (or loss) are shared among investors in proportion to their investments. These pooled funds provide thousands of investors with proportional ownership of diversified portfolio managed by professional investment managers. The term mutual is used in sense that all its returns, minus its expenses, are shared by the funds unit holders. Indian mutual funds industry is as old as four decades but its growth and awareness has reached the present level only since last five years. It is most suitable investment for the common man who invests his savings at regular intervals. It is an investment tool where the return on investment is high compared with some other investments available in the market. It is a mature, well developed & regulated investment vehicle. However, like any other investment, this, too, caries a certain degree of risk. An investor therefore has to take care of his\her risk taking ability, tax issues, investment period etc. They are the mobilizers of savings particularly from small & house hold sector for investment in stock & money market. Broadly mutual funds are basically in 3 types of asset classes such as stocks, bonds & money market instruments. They are non-depositary or non banking financial intermediary. They are an important segment of the financial system. Mutual funds are not for:

Getting rich quick investments. Risk free investments. Assured return investments. A universal solution to all investment needs.

The present study was undertaken to

Understand the exploited in

perception of small investors, who are the most

India capital Market.

Analyze the type of funds available for the investor

Understand the investmeant pattern of a common investor

Analyze factors which are considered befor investing in mutual funds.

Understand the trends in mutual funds industry.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with thecorpus (the total amount of the fund). Mutual Fund investor is also known as a mutualfund shareholder or a unit holder.Any change in the value of the investments made into capital market instruments. , debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of itsliabilities. NAV of a scheme is calculated by dividing the market value of scheme'sassets by the total number of units issued to the investors.

ADVANTAGES OF MUTUAL FUND

Portfolio Diversification Professional management Reduction / Diversification of Risk Liquidity Flexibility & Convenience Reduction in Transaction cost Safety of regulated environment Choice of schemes Transparency

DISADVANTAGE OF MUTUAL FUND

No control over Cost in the Hands of an Investor No tailor-made Portfolios Managing a Portfolio Funds Difficulty in selecting a Suitable Fund Scheme

CHAPTER 2 REVIEW OF LITERATURE

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of I n d i a , a t t h e i n i t i a t i v e o f t h e G o v e r n m e n t o f I n d i a a n d R e s e r v e B a n k . T h o u g h t h e growth was slow, but it accelerated from the year 1987 when non-UTI players entered the Industry. In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets Under Management (AUM) was Rs67 billion. The private sector entry to the fund family raised the Aum to Rs. 470 billion in March 1993 and till April 2004; it reached the height if Rs. 1540 billion. The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund industry can be broadly put into four phases according to the development of thesector. Each phase is briefly described as under.

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament 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 theIndustrial Development Bank of India (IDBI) took over the regulatory andadministrative control in place of RBI. The first scheme launched by UTI was UnitScheme 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 InsuranceCorporation 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 (Jun90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June1989 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) 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensiveand revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. As at the end of January 2003, there were 33mutual funds with total assets of Rs. 1,21,805 crores.

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 January2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes 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. consolidationand growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

Mutual funds can be classified as follow :-

Based on their structure:-

Open-ended funds : Investors can buy and sell the units from the fund, at any point of time.

Close-ended funds : These funds raise money from investors only once. Therefore,after the offer period, fresh investments can not be made into the fund. If the fund is listed on as t o c k s e x c h a n g e t h e u n i t s c a n b e t r a d e d l i k e s t o c k s ( E . g . , M o r g a n S t a n l e y G r o w t h F u n d ) . Recently, most of the New Fund Offers of close -ended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specifiedintervals. Therefore, such funds have relatively low liquidity.

Based on their investment objective:Equity funds

These funds invest in equities and equity related instruments. Withfluctuating share prices, such funds show volatile performance, even losses. However,short term fluctuations in the market, generally smoothens out in the long term, therebyoffering higher returns at relatively lower volatility. At the same time, such funds canyield great capital appreciation as, historically, equities have outperformed all assetclasses in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as:

i) Index funds - In this case a key stock market index, like BSE Sensex or Nifty istracked. Their portfolio mirrors the benchmark index both in terms of compositionand individual stock weightages. ii) Equity diversified funds100% of the capital is invested in equities spreading across different sectors and stocks. iii|) Dividend yield fundsit is similar to the equity diversified funds except that theyinvest in companies offering high dividend yields. iv) Thematic fundsInvest 100% of the assets in sectors which are related throughsome theme.e.g. -An infrastructure fund invests in power, construction, cements sectors etc. v) Sector fundsInvest 100% of the capital in a specific sector. e.g. - A banking sector fund will invest in banking stocks. vi) ELSS - Equity Linked Saving Scheme provides tax benefit to the investors.

Balanced fund

Their investment portfolio includes both debt and equity. As a result, onthe risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments.Following are balanced funds classes: i) Debt-oriented funds Investment below 65% in equities. ii) Equity-oriented funds Invest at least 65% in equities, remaining in debt.

Debt fund

They invest only in debt instruments, and are a good option for investorsaverse to idea of taking risk associated with equities. Therefore, they invest exclusivelyin fixed-income instruments like bonds, debentures, Government of India securities; and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put your money into any of these debt funds depending on your investment horizon and needs. i) Liquid fundsT h e s e f u n d s i n v e s t 1 0 0 % i n m o n e y m a r k e t i n s t r u m e n t s , a l a r g e portion being invested in call money market. ii) Gilt funds STThey invest 100% of their portfolio in government securities of andT-bills. iii) Floating rate funds Invest in short-term debt papers. Floaters invest in debt instruments which have variable coupon rate. iv) Arbitrage fundThey generate income through arbitrage opportunities due to mis- pricing between cash market and derivatives market. Funds are allocated to equities, d e r i v a t i v e s a n d m o n e y m a r k e t s . H i g h e r p r o p o r t i o n ( a r o u n d 7 5 % ) i s p u t i n m o n e y markets, in the absence of arbitrage opportunities. v) Gilt funds LTT h e y i n v e s t 1 0 0 % o f t h e i r p o r t f o l i o i n l o n g - t e r m g o v e r n m e n t securities.

CHAPTER 3PRESENT STUDY

Market trendes

A lone UTIwith just one scheme in 1964, now competswith as many as 400 odd product and 34 players in the market. In spite of the stiff competition and losing market share, UTI still remains a formisable force to reckon with. Last six years have been the most turbulent as well as exiting one for the industry. New players have come in, while others have decided to close shop by either selling off or merging with others. Product innovation is now passe with the game shifting to performance delivery in fund management as will as service. Those directly associatedwith fund management industry ilke distributors, registrars and transfer agents, and even the regulators have become more mature and responsible.

The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as debt market, the new generation of privat funds which have gained substantial mass are now seen flexing their muscles. Funds managers, by their selecting criteria for stocks have forced corporate governance on the industry. By rewarding honest and transarent management with higher valuateions, a system of risk-reward has been created where the carporate sector is Rs.100bn per annum over five-year period spanning 1993-98 doubles to Rs21bn in 1998 more transparent then before.

Funds have shifted their focus to the reccssion free sectors like pharmaccuticals, FMCG and technology sechnology segtor. Funds performances are improving. Fund collection, with averaged at less then 99 In the current year mobilization till naw have exceeded Rs300bn. Total collection for the current financial year ending March2000 is expected to reach Rs450bn.

What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funs raitherthen public mutual funds. Indeed private MFs saw a net inflow of Rs. 7819.34 crore during the first nine momts of the year as against a net inflow of Rs.604.40 crore in the case of public sector funds.

Mutual funds are now also competing with commercial banks in the race for retail investor's 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 their 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. The collection in the first half of the financial year 1999-2000 matches the whole of 1998-99

India is the first stage of a revoluation that has already peaked in the U.S. boasts of an Assets base that is much higher than its bank deposits. in India, mutual fund assets are non even 10% of the bank deposits, but this trend is begining to change. Recent figures indicate that in the first quarter of the current fiscal year mutual fund assets went up by 115% whereas bank deposits rose by only 17% (Source: Think-tank, the Financial Experess September, 99) This is forcing a large number of banks to adopt the conccpt of narrow banking whereing the deposits are kept in Gilts and some other assets which improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not close down completely. Their role as intermedies cannot be ignored. It is just that MutualFund are going to change the way banks do business is the future

Types of mutual funds

Most funds have a particular strategy they focus on when investing. For instance, some invest only in Blue Chip companies that are more established and are relatively low risk. On the other hand, some focus on high-risk start up companies that have the potential for double and triple digit growth. Finding a mutual fund that fits your investment criteria and style is important.

Types of mutual funds are:-

Value stocks
Stocks from firms with relative low Price to Earning (P/E) Ratio, usually pay good dividends. The investor is looking for income rather than capital gains.

Growth stock
Stocks from firms with higher low Price to Earning (P/E) Ratio, usually pay small dividends. The investor is looking for capital gains rather than income. Based on company size, large, mid, and small cap Stocks from firms with various asset levels such as over $2 Billion for large; in between $2 and $1 Billion for mid and below $1 Billion for small.

Income stock
The investor is looking for income which usually come from dividends or interest. These stocks are from firms which pay relative high dividends. This fund may include bonds which pay high dividends. This fund is much like the value stock fund, but accepts a little more risk and is not limited to stocks.

Index funds
The securities in this fund are the same as in an Index fund such as the Dow Jones Average or Standard and Poor's. The number and ratios or securities are maintained by the fund manager to mimic the Index fund it is following.

Enhanced index
This is an index fund which has been modified by either adding value or reducing volatility through selective stock-picking.

Stock market sector

The securities in this fund are chosen from a particular marked sector such as Aerospace, retail, utilities, etc.

Defensive stock
The securities in this fund are chosen from a stock which usually is not impacted by economic down turns.

International
Stocks from international firms. Real estate Stocks from firms involved in real estate such as builder, supplier, architects and engineers, financial lenders, etc. Socially responsible This fund would invests according to non-economic guidelines. Funds may make investments based on such issues as environmental responsibility, human rights, or religious views. For example, socially responsible funds may take a proactive stance by selectively investing in environmentally-friendly companies or firms with good employee relations. Therefore the fund would avoid securities from firms who profit from alcohol, tobacco, gambling, pornography etc. Balanced funds The investor may wish to balance his risk between various sectors such as asset size, income or growth. Therefore the fund is a balance between various attributes desired. Tax efficient Aims to minimize tax bills, such as keeping turnover levels low or shying away from companies that provide dividends, which are regular payouts in cash or stock that are taxable in the year that they are received. These funds still shoot for solid returns; they just want less of them showing up on the tax returns. Convertible Bonds or Preferred stock which may be converted into common stock. Junk bond Bonds which pay higher that market interest, but carry higher risk for failure and are rated below AAA. Mutual funds of mutual funds

This funds that specializes in buying shares in other mutual funds rather than individual securities. Closed end This fund has a fixed number of shares. The value of the shares fluctuates with the market, but fund manager has less influence because the price of the underlining owned securities has greater influence. Exchange traded funds (ETFs) Baskets of securities (stocks or bonds) that track highly recognized indexes. Similar to mutual funds, except that they trade the same way that a stock trades, on a stock exchange

Drawbacks of Mutual Funds

No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of
mutual fund shares 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 don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.

Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of
the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.

Management risk: When you invest in a mutual fund, you depend on the fund's manager to
make the right decisions regarding the fund's 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 forego management risk, because these funds do not employ managers.

Net Asset Value Calculation

The net asset value is used when associating with mutual funds. To make a good investment choice, one must be able to comprehend the numbers behind the net asset value and able to calculate it. The net asset value stays because of the price of the share of funds. So when you have read that the fund of net asset value is $10, you can expect that you will be able to purchase the share of funds for $10 each. In cases of loaded funds, they are exception from the rule.

The funds net asset value is calculated in daily basis so when the trading day ends, you will be able to determine the price whether you are to buy or sell a particular share as a part of a fund. This is because the mutual funds are holding securities. But the stock prices change every second so when trading stocks, one should be in a careful and constant watch.

Net Asset Value Calculation

1. Current net asset market value (A) = securities liabilities

2. NAV = A divided by the number of outstanding shares

Calculating the net asset value means determining the current market value of net assets. To calculate, subtract the liabilities from the security of funds and divide it by the number of outstanding shares.