Professional Documents
Culture Documents
Submitted by:
NIKITA.C.SHETTY
(Roll No: MBA FINANCE-011007)
Research Guide:
PROF. MRS.ROOPALI PATIL
Department of Business Management
Padmashree Dr. D.Y. Patil University
CBD Belapur, Navi Mumbai
JANUARY 2013
DECLARATION
Page | 1
I hereby declare that the dissertation AN ANALYSIS ON
INVESTMENT IN MUTUAL FUND THROUGH SYSTEMATIC
INVESTMENT PLANNING-A SMART INVESTORS
PREFERENCE submitted for the MBA Degree at Padmashree Dr.
D.Y. Patil University Department of Business Management is my original
work and the dissertation has not formed the basis for the award of any
degree, associate ship, fellowship or any other similar titles.
Date:
CERTIFICATE
Page | 2
Nikita Shetty student of MBA, at Padmashree Dr. D.Y. Patil Universitys
Department of Business Management during the year 2011 -2013,
in partial fulfillment of the requirements for the award of the Degree of
Master in Business Management and that the dissertation has not
formed the basis for the award previously of any degree, diploma,
associate ship, fellowship or any other similar title.
Dr. R. Gopal,
Director,
Department of Business Mgmt,
Padmashree Dr. D.Y. Patil University)
ACKNOWLEDGEMENT
Working on this project has presented with many insights and
challenges. This project would not have been the same without the
dedicated guidance of my project guide Mrs.Rooplai Patil, Lecturer,
Department of Business Management, Padmashree Dr. D.Y. Patil
University, Navi Mumbai I thank her for her support and patience.
The project would not been completed without their support and
guidance. Thanking them is a small gesture for the generosity they
showed. It was a great learning experience to work on such a project.
Place: Mumbai
Date:
Signature of the student
PREFACE
In todays corporate and competitive world, I find that Mutual fund has
good growth and potential. Study of Mutul fund has given me the
opportunity to work and get experience in a highly competitive and
enhancing sector.
TABLE OF CONTENTS
1. Executive Summary 9
1.1- Research Methodology 11
13
1.2-Literature Review
16
1.3-Limitations Of The Study
2. Systematic Investment Plan 17
2.1- Introduction 18
2.2- How to invest through SIP 25
29
2.3- Procedure to be followed for investing in SIP
34
2.4- Mode of payment 37
2.5- Different types of SIP
3. Mutual fund 43
3.1- Introduction 44
3.2- Advantages of Investing in a Mutual Fund 47
3.3- Disadvantages of Investing in a Mutual Fund 49
3.4.- Procedure of Mutual Fund 52
3.5.- Mutual Fund Schemes 56
3.6- Major players in the Mutual Fund Industry 61
Page | 5
3.7- ULIPs vs. Mutual fund 82
4. Conceptual Framework 88
4.1- Steps to invest in Equity 89
4.2.- Net Asset Value (NAV) 93
4.3- Chargeable Fees and Expenses 95
4.4- Governance, Management Structure and 104
SEBI regulations
5. Latest Review on Mutual Fund 107
5.1- Mutual Fund Industry Review by CRISIL 109
5.2- Banking, FMCG funds top MF return charts in 111
2012
113
5.3- How to evaluate Mutual Fund portfolio
performance 116
5.4- What is the Mutual Fund Direct NAV all about
6. Data Interpretation and Analysis 119
7. Finding 154
8. Recommendations and Suggestion 156
9. Conclusion 158
Page | 6
Chapter 1
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
SIP is a method of investing a fixed sum, regularly, in a mutual fund. It is
very similar to regular saving schemes like a recurring deposit. An SIP
allows you to buy units on a given date each month, so that you can
implement an investment / saving plan for yourself. Once you have
decided on the amount you want to invest every month and the mutual
fund scheme in which you want to invest, you can either give post-dated
cheques or ECS instruction, and the investment will be made regularly.
SIPs generally start at minimum amounts of Rs 1,000 per month and
theupper limit for using an ECS is Rs 25000 per instruction. Therefore, if
you wish to invest Rs 100,000 per month, you may need to do it on four
different dates.
Page | 7
In few years Mutual Fund has emerged as a tool for ensuring ones
financial well being. Mutual Funds have not only contributed to the India
growth story but have also helped families tap into the success of Indian
Industry. As information and awareness is rising more and more people
are enjoying the benefits of investing in mutual funds. The main reason
the number of retail mutual fund investors remains small is that nine in
ten people with incomes in India do not know that mutual funds exist.
But once people are aware of mutual fund investment opportunities, the
number who decide to invest in mutual funds will increase to as many as
one in five people. The trick for converting a person with no knowledge
of mutual funds to a new Mutual Fund customer is to understand which
of the potential investors are more likely to buy mutual funds and to use
the right arguments in the sales process that customers will accept as
important and relevant to their decision.
To find out what should be done to boost the mutual fund industry.
Page | 8
1.1 RESEARCH METHODOLGY
This project is a study done through primary research and
secondary sources.
The primary data related to the study will be collected by
conducting interviews in the companies and through
questionnaires.
Sampling size will be approximately 100 investors.
Sampling area will be Mumbai and Navi mumbai area.
Secondary data will be collected through websites and from
various books, magazines and journals.
Page | 9
SCOPE OF STUDY
In few years Mutual Fund has emerged as a tool for ensuring ones
financial well being. Mutual Funds have not only contributed to the India
growth story but have also helped families tap into the success of Indian
Industry.
Page | 10
1.2 LITERATURE REVIEW
Any research builds on the research carried out previously on the given
subject. The purpose of the literature review is to review what has
previously been done on the subject and analyse it in the present
context so that an effective understanding can be established.
Before conducting this project I have gone through some work which has
been done previously on the subject which are given below:
1) Research paper-
Analysis of components of investment performance- An empirical
study of Mutual funds in India.
Authors- Dr.S.Anand-Assistant professor, Goa Institute of
Management.
Dr. V.Murugaia- Reader, Kuvempu University.
2) Making Mutual funds work for you-
The investors concise guide
Author- Association of mutual funds in India (AMFI) in assistance
with Ogilvy & Mather
3) Perceptual study of Systematic Investment Plan (SIP) A case study
of service class.
Author-Dr.B.S.Hundal, Saurabh Grover,Professor Department of
commerce and business management GNDU Amritsar
Abstract:
Systematic Investment Plan (SIP) is a disciplined way of investing,
where you make regular investments according to a set calendar
you create. Systematic investing is a time-tested discipline that
makes it easy to invest automatically. This paper is an attempt to
study the perception of service class people towards systematic
investment plan. Factor analysis and cluster analysis have been
Page | 11
used to study the same and found that service class have positive
attitude towards investment in these plans.
Page | 12
India have been at the forefront of what we can term as a
paradigm shift in the economy.
This book speaks that the capital markets are the barometer of
the health of the economy. Indian capital markets have begun to
transform rapidly in order to provide world class services to the
investors. The key to better corporate governance in India today lies
in a more efficient and vibrant capital market. A variety of
developmental measures such as deregulation and economic
reforms, disintermediation and financial sector reforms,
institutionalization of capital markets investors preference for higher
standards of disclosures and corporate governance measures to
those followed in developed markets, globalization and tax reforms,
etc have all contributed to bring a bout the required changes in the
capital market scene. These changes and reforms have been taken
up in the best interest of all stakeholder of capital market. SEBIs aim
is also remarkable to make the Indian financial market a truly world-
class and a respectable institution. To achieve its objectives it has
also drawn strategic action plans.
Most people are aware about mutual funds in general but not
many people know about investing through SIPs so this can be a
constraint.
Page | 13
Many companies do not like to reveal actual data about the
number of people investing through SIPs and how popular the plan
actually is, so the information collected may not be accurate.
Chapter 2
Systematic Investment Plan
Page | 14
2..1 INTRODUCTION
TO
SYSTEMATIC INVESTMENT PLAN
Page | 15
Why invest using SIP?
Investing through SIP in a mutual fund indubitably is the key solution in
order to avoid or prevent the loopholes of equity investment and yet,
continually enjoy the high returns of investment. Isnt it great therefore to
invest using this effective strategy of SIP? Obviously, yes! And not only
that, it makes all the more sense today when the stock markets are
booming and are tempting to really invest.
Page | 16
3. Its all transparent and well-regulated: It is interesting to note that
the mutual fund industry is well regulated both by Sebi (Securities and
Exchange Board of India) and AMFI (Association of Mutual Funds in
India). They have, over the years, introduced regulations, which ensure
smooth and transparent functioning of the mutual funds industry.
Moreover, the mutual fund can be changed time by time, switch in
different mutual fund, this is one of the big profit.
4. Does not affect ones monthly budget: Furthermore, with SIP small
amounts (Rs 500-Rs 1,000) can be invested periodically in Mutual funds
as against larger one-time investment required to buy directly from the
market. In this way, an investment does not appear to be a burden every
month. On the other hand, to prevent losses in volatile markets,
investing in Sips is the best option as every month there may be an
opportunity to buy at lower levels.
Page | 17
People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your
average cost of investing comes down since you will go through all phases of the market, bull or bear
Units Units
Investor Investor Unit
Month Subscribed Subscribed
A B Price
A B
1 10000 1000 1000 100 10
2 0 1000 105.3 9.5
3 0 1000 113.6 8.8
4 0 1000 117.6 8.5
5 0 1000 111.1 9
6 0 1000 105.3 9.5
7 0 1000 103.1 9.7
8 0 1000 98 10.2
9 0 1000 95.2 10.5
10 0 1000 93.5 10.7
Total
10000 1000 10000 1042.7 9.6
Investment
Market
10700 11157.4
Value
Page | 18
Lets assume two people A and B. They both decide to start a SIP of Rs.
1000/- per month and invest in it till the age of 60.
A started investing Rs 1,000 per year at the age of 25 and B started investing the same amount every
month at the age of 35. Below is a table of how much their money grew to when they turned 60.
Page | 19
At 60, A had built a corpus of Rs 148.6 lakh while person B's corpus was
only Rs 32.8lakh. For this example, we have taken a rate of return of
15% compounded. A difference of Rs 1, 20,000 as investment over a 10
year horizon between the two of them results in a huge difference of Rs.
115.8 lakhs in their end-corpus. That difference is due to the effect of
compounding.
Page | 20
The longer the (compounding) period, the higher the returns.
Now, suppose A invested Rs 1,000 per month after every fifteen years,
starting at the age of 45. The total amount invested, thus remains Rs 1.8
lakh. However, when he is 60, his corpus will be Rs 15.2lakh. Again, he
loses the advantage of compounding in the early years.
8. Helps to fulfill ones dreams: Finally and the best part of all is the
fact that with the use of SIP, it will make ones dreams come true. The
investments that are made are ultimately for some objectives such as to
buy a house, childrens education, marriage etc. And many of them
require a huge one-time investment. As it would usually not be possible
to raise such large amounts at short notice, It would be necessary to
build the corpus over a longer period of time, through small but regular
investments. This is what SIP is all about. Small investments, over a
period of time, result in large wealth and help fulfill ones dreams &
aspirations.
Page | 21
Mutual funds through SIP allow to periodically invest in them (lets
say 5 investments of Rs 20 each) on a weekly, monthly or quarterly
basis.
This will avoid the risk of locking in to one single valuation but get
an 'average' of the valuations on the various dates that we invest.
Mutual funds define the dates on which we can make the regular
investments (typically 1st/7th/15th/21st of every month). If we are a
salaried employee, we will realize that we have surplus monthly
savings and hence this can become a preferred option for us. We
receive our salary on the 5th of the month and hence we can make
the investment every 7th of the month.
We can fill the SIP application form and inform the mutual fund that
we want to invest on 7th every month.
Page | 22
I. An SIP allows to take part in the stock market without trying to
second-guess its movements. It is also known as dollar cost
averaging.
II. An SIP means committing yourself to investing a fixed amount
every month.
III. E.g. 1,000 may be invested every month.When the Market price
of shares fall, the investor benefits by purchasing more units; and
is protected by purchasing less when the price rises.
IV. Thus the average cost of units is always closer to the lower end.)
{ NAV : Net Asset Value, or the price of one unit of a fund can be
computed as follows : NAV = [ market value of all the investments
in the fund + current assets + deposits - liabilities ] divided by the
number of units outstanding.}
V.
Jan 1 10 100
Mar 1 11 90.90
May 1 9 111.11
Page | 23
VI. Within six months, the investor would have 589.45 units by
investing just 1,000 every month. Over the long run, he may
make money or lose.
VII. Let's say a person invested in a Mutual Fund unit during the
dotcom and tech boom. Say he began with 1,000 and kept
investing 1,000 every month. This would be the result:
Monthly investment
1,000
61,000
1,09,315
Return on investment
23.87%
IX. Had he bought the units on March 13, 2000 at 10.88 per unit
(that was the NAV then), he would have lost because the NAV
was just 7.04 on March 7, 2005. But because he spaced out his
investment, he won.
X. Conversely if the market had trended higher from the day you
decided to start investing, you would lose out on an opportunity.
Page | 24
This would happen as your subsequent purchases will get you
less number of units for the same amount.
Systematic Investment Plan can help you to be disciplined (if you need
discipline) but not solve your market timing issues. The Investment
advisor or the Mutual Fund has a vested interest in pitching this idea to
you as once you invest all your future investment would also accrue to
them effortlessly.
Page | 25
2.3 PROCEDURE TO BE FOLLOWED FOR
INVESTING IN SIP
Step 1 Visit the SIP Calculator tool to select your SIP amount.
Step 2 Select the mutual fund schemes that suit your investment
objectives.
Step 3 Fill-up the Application form Online or download the same. (One
application form for every scheme)
Step 4 Submit the application form along with the first cheque at any of
the branch locations / CAMS (Computer Age Management Services)
locations or to your nearest distributor.
Page | 27
NAV at the end) paid to the investor for the accumulated units in his/her
account would be less than the total cost. In the opposite case of rising
prices, the SIP would be advantageous.
Example
Consider the following simplified example: Monthly investment is
Rs. 1000 for the next 12 months. The amount is invested each
month immediately in units of an equity scheme at the ruling price
of units.
Assumption-1 (Declining Prices): The price per unit is Rs.16 for
first 8 months and Rs 10 per unit for last 4 months. (This is a
simplification. The price for each month would ordinarily be
different.) Under this assumption, against Rs.1000 per month paid
by the investor, the number of units purchased will be 500 in the
first 8 months and 400 in the last 4 months. Thus the total number
of units purchased over 12 months will be 900 at a cost of Rs.
12000. The redemption of the accumulated units is done always at
the closing NAV. As per our assumptions, the accumulated units
are 900 and will fetch only Rs. 9000 at the closing NAV of Rs. 10
per unit. The investor suffers a loss of Rs.3000 on the total amount
invested (Rs. 12000 9000).
Assumption-2 (Rising Prices): The ruling prices of units are
reversed, being Rs. 10 for first 8 months and Rs. 16 for last 4
months. The number of units bought for the investor will be 800 in
the first 8 months and 250 in the last 4months. The total number of
units accumulated over the 12months will be 1050 for Rs. 12000.
These 1050 units will fetch Rs. 16800 at the closing price of Rs. 16
per unit. There is a total gain of Rs. 4800 for the investor (Rs.
16800 12000).
3. The example given above brings out that the crucial factor show the
ruling price behaves over the period of SIP. In the real world, no one can
Page | 28
predict the pattern of prices which will prevail in the future over the next
12 months or a longer period of some years.
4. The most advantageous situation for the investor is when his/her over-
all buying cost is the least and the realisable price on completion of the
investment plan is the highest.
5. An investor, who joins the SIP at a wrong time (i.e. when the equity
prices are all-time high), will be in an unfortunate situation unless the
prices rise further in the future. Thus, we see that the averaging of price
over the period of SIP does not always insulate the small investors
against the markets volatility.
6. In the case of SIP, the possibility of loss can be avoided by not starting
at the wrong time (i.e. when equity prices are too high). We should bear
in mind the fact that the Indian stock market is far more volatile than the
developed markets, like U.S. and U.K. If we look at the movements of
BSE Sensex, significant fall or rise of 20-25% within a few months is
fairly common. The SIP provides a very imperfect solution to the problem
posed by markets high volatility.
Caution needed
The investor should not take it for granted that SIP is always
advantageous. The price level at the starting point is particularly
important, as illustrated above. The price level at the end of the period
chosen is also critical. The rigidity of most SIP schemes can be both
inconvenient and, disadvantageous to the investors. The investor should
avoid a situation of forced redemption of accumulated units at, unduly
low price by building some flexibility in the choice of redemption date.
Page | 30
2.4 MODE OF PAYMENT
There are two options here
1. Through Electronic Clearance Service (ECS):- In this option,
Mutual Fund will debit the stipulated amount from clients account
on monthly basis.
2. Post dated cheques In this option, Investor can give post dated
cheques. Mutual Fund will deposit the cheques on the mentioned
dates. The cheques should be issued with date mentioned at
regular interval.
Note: - All the mutual fund schemes do not offer SIP. Equity funds, debt
funds and balanced funds belong to this category. Liquid funds, cash
funds and floating rate debt funds also offer SIP.
So, what is the lesson learnt. There are many a slip between returns and
the SIP. As an investor, you need to circumspect while investing through
SIP. Take following steps to ensure that investment made by you through
SIP does not become a failure:
Watch the performance of SIP periodically: Though you can
trust mutual fund managers, you need to be circumspect about the
investments made by you. Watch your investments in SIP atleast
once in six months. This does not mean that you withdraw your
investment from SIP if the fund is not performing. This process will
help you track something going substantially wrong with your fund.
Suppose the benchmark against which your fund operates has
given 10% return, while your SIP return is abysmally less, then it
may be time to change your fund. A recent study by S & P CRISIL
(SPIVA ) shows that more than 50% of large cap funds have failed
to beat the benchmark index against which they operate.
Do not start SIP in two similar types of schemes: Investors put
their money in different schemes of one mutual fund or separate
mutual funds. However, they end up selecting almost same type of
fund. This means that the exposure of the funds is similar type of
stocks. It is very common to find stocks like ITC, HDFC Bank etc.
in various schemes of mutual funds. The reasons are obvious.
Page | 32
These stocks have been star performer for long time. As an
investor, you need to check if your fund has significant exposure in
similar stocks. This increases risk for you especially when the
stocks are not stable performers.
Star funds may not be the star performers always: It is very
common for the mutual fund investors to look at star rating of the
scheme of mutual funds. The star rating generally comes from past
performance and may not always return in good future returns. Do
not get swayed away by star rating. Even star rated schemes need
to be watched.
All my funds must have SIP: After an investor enters into the
world of mutual fund, SIP is recommended to him like Crocin is
recommended for headache. It is important to note that all your
funds should not have SIP. Let some of your fund perform even for
the lump sum investment made by once. This means that for some
of your funds you can allow the investment to grow for one time
investment made by you while for others you can continue with
SIP. Riskier schemes should you SIP route while stable schemes
can follow lump sum investment process. Look at the Sharpe ratio
of the funds to identify the riskiness of mutual funds. Sharpe Ratio
indicates the risk adjusted return of schemes of mutual funds.In
brief as an investor, you need to watchful about your money when
you have given the responsibility of handling it to others.
Page | 33
2.5 DIFFERENT TYPES OF SIP IN MUTUAL FUNDS
Monthly SIP
This is the most traditional way of doing a SIP in an equity mutual fund.
This works well mostly for salaried people, who get a monthly cash flow.
Investors tend to opt for a date between the 1st and 10th of the month,
since for most of the people salaries get credited at the end of the
month. Most investors tend to avoid the last 10 days of the month, on
fear of exhausting their surplus money and not being able to meet their
SIP commitment.
Daily SIP
Compared to traditional investment in which money goes in on a
monthly basis, here money goes daily into the fund. Of late, some
mutual funds have started offering a daily SIP. Essentially, these
products are meant for small traders or for the micro segment.
However, not everyone is a fan of daily SIP. Daily SIP is an overkill and
not really needed. Though it makes averaging consistent, it is
cumbersome.
Flexi-SIP
Page | 34
Traditional SIPs allow us to invest only a fixed amount every month or
daily. However, a flexi SIP enables investors to set up a range of
amounts for the SIP investments and be flexible about how much they
want to invest every month. It is not available in the conventional mode
through mutual funds. It is offered by portals like fundsindia.com. It is
very difficult to alter your SIP using traditional methods. For a particular
SIP, the amount or the date just cannot be changed. Technically, an
ECS mandate is registered for a particular bank account for debiting a
specific amount on a fixed date every month. If any of these three
change, one would have to stop and re-do the SIP. This is what has led
to the concept of flexi SIP. Using this facility, an investor can choose a
range from Rs 1,000 to Rs 10,000 per month and depending on his or
her cash flow, invest that amount every month.
SIP Top-Up
HDFC Mutual Fund, SBI, ICICI Prudential, etc offer a SIP Top-Up. Here
an investor who wishes to enrol for SIP, has an option to increase the
amount of the SIP instalment by a fixed amount at pre-defined intervals.
The SIP top-up amount should be filled in the enrolment form itself.
For example: We choose to invest Rs 2,000 for the first six months and
then prefer to invest Rs 5,000 per month.
Page | 35
month, and then adjusts the subsequent months contribution according
to the relative gain or shortfall made on the original asset base.
Suppose we want to add Rs 1,000 added to our equity mutual fund
every month and we start with investing Rs 1,000. Now at the end of
first month the value of our fund becomes Rs 1,200. So now we need to
invest only Rs 800 (1000-200) to make the investment worth Rs 2,000.
In the following month, the value of investment reduces to Rs 1,900 due
to correction in the market, so we need to invest Rs 1,100 (3,000-1,900)
so that the amount touches the target amount of Rs 3,000. In other
words, we buy more (units) when the prices are low and we end up
investing less (buying less units) when the markets peak.
Page | 36
How to fill a Systematic Investment Plan (SIP) form
Let us see how to fill the SIP part of the Mutual Fund application form.
You can use SIP method of investing in most mutual fund schemes
except the ones that have a short-term focus.
Page | 37
Lump sum investment:
If, for example, the prices were to go down from this point, you would
lose money on the entire investment. Similarly, if you have timed the
investment right, you will see a good rise on your entire investment.
In the above example, if you had a lump sum of money and wanted to
do an SIP, you would have to park your extra money (i.e., Rs 80, which
is Rs 100 minus the first installment of Rs 20) somewhere. Mutual
funds, realizing this issue, offer an STP. Here, you can invest the entire
sum of money (Rs 100) with the fund: you put in Rs 20 in the equity
fund, while putting the extra sum (Rs 80) in cash or debt funds. Over
the next four months, you can request the fund to transfer Rs 20 (plus
the gains/losses) each month to the equity fund. This saves you the
hassle of creating a communication between your mutual fund and
your bank through ECS. Similarly, if you believe that you would
gradually want to move your exposure in IT to lets say, pharma, you
can create an STP between your investments in the IT fund and the
pharma fund. This way you do not suddenly shift exposure in one go,
but do it gradually. If you are approaching a milestone, you can use this
instrument to move your exposure from equity to debt funds so that
you have more certainty around the final figure that you will receive.
Page | 38
Systematic Withdrawal Plan (SWP):
This is, as the name suggests, the reverse of the STP. Here you
gradually withdraw money from the mutual fund. Assume you need Rs
20 over the next 5 months and you have Rs 100 invested in a mutual
fund. You can request the mutual fund to return 1/5th of your money
(including the gains/losses) every month for the next five months. If your
bank account details are provided, the fund will deposit the money
directly in your bank account. This is typically used when you are nearer
to a milestone or during your retirement.
Page | 39
Chapter 3
Mutual Fund
Page | 40
Over a long term horizon, equity investments have given returns which
far exceed those from the debt based instruments. They are probably
the only investment option, which can build large wealth. In short term,
equities exhibit very sharp volatilities, which many of us find difficult to
stomach. Investment in equities requires one to be in constant touch
with the market and a lot of research.
Thus for many of us who do not have the desired expertise and are
too busy with our vocation to devote sufficient time and effort to
investing in equity, Mutual Funds offer an attractive alternative.
Another advantage of investing through mutual funds is that even with
small amounts we are able to enjoy the benefits of diversification.
Huge amounts would be required for an individual to achieve the
desired diversification, which would not be possible for many of us.
Diversification reduces the overall impact on the returns from a
portfolio, on account of a loss in a particular company/sector.
The Mutual Funds industry is well regulated both by SEBI and AMFI.
They have, over the years, introduced regulations, which ensure
smooth and transparent functioning of the mutual funds industry. This
Page | 41
makes it safer and convenient for investors to invest through Mutual
Funds.
One of the biggest difficulties in equity investing is WHEN to invest,
apart from the other big question WHERE to invest. While, investing
in a mutual fund solves the issue of where to invest, SIP helps us to
overcome the problem of when. SIP is a disciplined investing
irrespective of the state of the market. It thus makes the market timing
totally irrelevant.
With the next 2-3 years looking good from Indian Economy point of
view, one can expect handsome returns through regular investing.
Mutual Funds allow us to invest very small amounts (Rs 500 Rs
1000) in SIP, as against larger one-time investment required, if we
were to buy directly from the market. This makes investing easier as it
does not strain our monthly finances. It, therefore, becomes an ideal
investment option for a small-time investor, who would otherwise not
be able to enjoy the benefits of investing in the equity market.
In SIP we are investing a fixed amount regularly. Therefore, we end
up buying more number of units when the markets are down and NAV
is low and less number of units when the markets are up and the NAV
is high. Generally, we would stay away from buying when the markets
are down. We generally tend to invest when the markets are rising.
SIP works as a good discipline as it forces us to buy even when the
markets are low, which actually is the best time to buy.
Mutual funds are investment companies that pool money from investors
at large and offer to sell and buy back its shares on a continuous basis
and use the capital thus raised to invest in securities of different
Page | 42
companies. In this your amount is invested in different companies
according to percentage ratio. A Mutual Fund is not an alternative
investment option to stocks and bond; rather it pools the money of
several investors and invests this in stocks, bonds, money market
instruments and other types of securities.
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 these
investments and the capital appreciation realised 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.
.
Small investments :
Spreading Risk :
Liquidity :
Closed ended funds have their units listed at the stock exchange, thus
they can be bought and sold at their market value. Over and above this
Page | 44
the units can be directly redeemed to the Mutual Fund as and when they
announce the repurchase.
Choice :
The large amount of Mutual Funds offer the investor a wide variety to
choose from. An investor can pick up a scheme depending upon his
risk / return profile.
Regulations :
All the mutual funds are registered with SEBI and they function within
the provisions of strict regulation designed to protect the interests of the
investor.
Fluctuating Returns:
Mutual funds are like many other investments without a guaranteed
return. There is always the possibility that the value of your mutual fund
Page | 45
will depreciate. Unlike fixed-income products, such as bonds and
Treasury bills, mutual funds experience price fluctuations along with the
stocks that make up the fund. When deciding on a particular fund to buy,
you need to research the risks involved - just because a professional
manager is looking after the fund, that doesn't mean the performance
will be stellar. Another important thing to know is that mutual funds are
not guaranteed by the U.S. government, so in the case of dissolution,
you won't get anything back. This is especially important for investors in
money market funds. Unlike a bank deposit, a mutual fund will not be
FDIC insured.
Diversification:
Although diversification is one of the keys to successful investing, many
mutual fund investors tend to overdiversify. The idea of diversification is
to reduce the risks associated with holding a single security;
overdiversification (also known as diworsification) occurs when investors
acquire many funds that are highly related and so don't get the risk
reducing benefits of diversification. At the other extreme, just because
you own mutual funds doesn't mean you are automatically diversified.
For example, a fund that invests only in a particular industry or region is
still relatively risky.
Page | 46
money sitting around as cash is not working for you and thus is not very
advantageous.
Costs:
Mutual funds provide investors with professional management;
however, it comes at a cost. Funds will typically have a range of
different fees that reduce the overall payout. In mutual funds the fees
are classified into two categories: shareholder fees and annual fund-
operating fees.
The shareholder fees, in the forms of loads and redemption fees, are
paid directly by shareholders purchasing or selling the funds. The
annual fund operating fees are charged as an annual percentage -
usually ranging from 1-3%. These fees are assessed to mutual fund
investors regardless of the performance of the fund. As you can
imagine, in years when the fund doesn't make money these fees only
magnify losses.
Misleading Advertisements:
The misleading advertisements of different funds can guide investors
down the wrong path. Some funds may be incorrectly labeled as growth
funds, while others are classified as small-cap or income. The SEC
requires funds to have at least 80% of assets in the particular type of
investment implied in their names. The remaining assets are under the
discretion solely of the fund manager.
The different categories that qualify for the required 80% of the assets,
however, may be vague and wide-ranging. A fund can therefore
manipulate prospective investors by using names that are attractive and
misleading. Instead of labeling itself a small cap, a fund may be sold
under the heading growth fund. Or, the "Congo High-Tech Fund" could
be sold with the title "International High-Tech Fund".
Page | 47
Evaluating Funds:
Another disadvantage of mutual funds is the difficulty they pose for
investors interested in researching and evaluating the different funds.
Unlike stocks, mutual funds do not offer investors the opportunity to
compare the P/E ratio, sales growth, earnings per share, etc. A mutual
fund's net asset value gives investors the total value of the fund's
portfolio less liabilities, but how do you know if one fund is better than
another?
Page | 48
Information Document and Statement of Additional
Information.
A mutual fund scheme information document and statement of
additional information is a legal document that must adhere to
standards set forth by the Securities Exchange Board Of India
(SEBI), the regulatory agency that oversees the Indian Mutual
Fund industry.
The information contained in the prospectus is intended to help
you understand what types of securities a fund invests in and the
investment philosophy that the Investment Manager uses in
selecting individual securities for the fund.
The scheme information document and statement of additional
information will also provide information on the fund's income and
expenses, a review of historical performance, and information
about your ability to purchase or redeem your units.
In addition, the scheme information document and statement of
additional information will also outline any loads/sales charges that
may apply to your investment transactions.
By law, mutual fund companies are required to provide you with an
scheme information document and statement of additional information
before you make an initial investment. Before investing, take the time
to read this important document.
Page | 49
Key Elements of a Mutual Fund Scheme Information Document and
Statement of Additional Information
The information contained in a mutual fund scheme information
document and statement of additional information is presented in several
sections. As you read through these sections, you'll want to evaluate
how well the fund matches your investment objectives. Here's a look at
key elements that are contained in an Scheme Information Document
and Statement of Additional Information.
Date of issue - A prospectus must be updated at least once in two
years.
Minimum investment - Mutual funds differ both in the minimum initial
investment required and the minimum for subsequent investments.
Page | 51
3.5 MUTUAL FUND SCHEMES
There are a wide variety of Mutual Fund schemes that cater to your
needs, whatever your age, financial position, risk tolerance and
return expectations. Whether as the foundation of your investment
programme or as a supplement, Mutual Fund schemes can help you
meet your financial goals?
(A) By Structure. .
Closed-End and Open End schemes
Mutual fund schemes are of two broad types, viz.,
(a) closed-end and
(b) open-end.
A puzzle
In the case of closed-end schemes, it has been observed that their
market price is often significantly lower than the NAV (i.e., at a discount
to NAV, in market parlance). This has always been a puzzle because it
looks illogical. In such a case, the unit holders will be better off if the fund
Page | 52
is liquidated and the money returned to the unit holders. If unit holders
had voting power, they could get the scheme liquidated.
Growth Schemes
Aim to provide capital appreciation over the medium to long term. These
schemes normally invest a majority of their funds in equities and
are willing to bear short term decline in value for possible future
appreciation.
These schemes are not for investors seeking regular income or needing
their money back in the short term.
Ideal for:
Retired people and others with a need for capital stability and
regular income.
Investors who need some income to supplement their earnings.
Balanced schemes
Balanced schemes invest in both equity and bonds. For this purpose,
limits are specified in the form of percentage to be invested in equity and
bonds respectively. The idea is to provide a mix of equity and bonds in a
single scheme to suit the somewhat conservative investor. However,
such schemes are not popular in India, an important reason being that
they dont enjoy the tax advantage which equity schemes have.
Aim to provide both growth and income by periodically distributing a part
of the income and capital gains they earn. They invest in both shares
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.
Ideal for:
Page | 54
Investors looking for a combination of income and moderate
growth.
Ideal for:
Corporates and individual investors as a means to park their
surplus funds for short periods or awaiting a more
favourable investment alternative.
Ideal for:
Page | 55
Special Schemes
This category includes index schemes that attempt to replicate the
performance of a particular index such as the BSE Sensex, the NSE 50
(NIFTY) or sector specific schemes which invest in specific sectors such
as Technology, Infrastructure, Banking, Pharma etc. Besides, there are
also schemes which invest exclusively in certain segments of the
capital market, such as Large Caps, Mid Caps, Small Caps, Micro Caps,
'A' group shares, shares issued through Initial Public Offerings
(IPOs), etc.
Vision
To be the most preferred and the largest fund house for all asset
classes, with a consistent track record of excellent returns and best
standards in customer service, product innovation, technology and HR
practices.
Mission
To make UTI Mutual Fund:
The most trusted brand that is admired by all stakeholders
The largest and most efficient wealth manager with global presence
The best-in-class customer service provider
The most preferred employer
The most innovative and best wealth creator
A socially responsible organisation known for best corporate
governance
Page | 57
Genesis
January 14, 2003 is when UTI Mutual Fund started to pave its path
following the vision of UTI Asset Management Co. Ltd. (UTIAMC), which
was appointed by UTI Trustee Co, Pvt. Ltd. for managing the schemes
of UTI Mutual Fund and the schemes transferred/migrated from the
erstwhile Unit Trust of India.
Reliability
Investment Philosophy
UTI Mutual Funds investment philosophy is to deliver consistent and
stable returns in the medium to long term with a fairly lower volatility of
fund returns compared to the broad market. It believes in having a
balanced and well-diversified portfolio for all the funds and a rigorous in-
house research based approach to all its investments. It is committed to
adopt and maintain good fund management practices and a process
based investment management.
Page | 59
HDFC Asset Management Company Ltd (AMC) was incorporated under
the Companies Act, 1956, on December 10, 1999, and was approved to
act as an Asset Management Company for the HDFC Mutual Fund by
SEBI vide its letter dated July 3, 2000.
The registered office of the AMC is situated at Ramon House, 3rd Floor,
H.T. Parekh Marg, 169, Backbay Reclamation, Churchgate, Mumbai -
400 020.
HDFC Mutual Fund is one of the largest mutual funds and well-
established fund house in the country with consistent fund performance
across categories since its incorporation on December 10, 1999. While
their past experience does make them a veteran, but when it comes to
investments, they have never believed that the experience is enough.
Page | 60
Investment Philosophy
The single most important factor that drives HDFC Mutual Fund is its
belief to give the investor the chance to profitably invest in the financial
market, without constantly worrying about the market swings. To realize
this belief, HDFC Mutual Fund has set up the infrastructure required to
conduct all the fundamental research and back it up with effective
analysis. Their strong emphasis on managing and controlling portfolio
risk avoids chasing the latest "fads" and trends.
Reliance Mutual Fund, a part of the Reliance Group, is one of the fastest
growing mutual funds in India. RMF offers investors a well-rounded
portfolio of products to meet varying investor requirements and has
presence in 179 cities across the country. Reliance Mutual Fund
constantly endeavors to launch innovative products and customer
service initiatives to increase value to investors. Reliance Capital Asset
Management Limited (RCAM) is the asset manager of Reliance Mutual
Page | 61
Fund. RCAM is a subsidiary of Reliance Capital Limited (RCL).
Presently, RCL holds 65.23% of its total issued and paid-up equity share
capital and the balance of its issued and paid up equity share capital is
held by other shareholders which includes Nippon Life Insurance
Company (NLI), holding 26% of RCAMs total issued and paid up
equity share capital. NLI acquired the said 26% share holding in RCAM
on August 17, 2012.
Reliance Capital Ltd. is one of Indias leading and fastest growing private
sector financial services companies, and ranks among the top 3 private
sector financial services and banking companies, in terms of net worth.
Reliance Capital Ltd. has interests in asset management, life and
general insurance, private equity and proprietary investments, stock
broking and other financial services.
Page | 62
ICICI PRUDENTIAL
ICICI Prudential Mutual Fund gained from managing funds as per its
investment objectives and was able to deliver superior risk adjusted
returns. The consistent long term performance was achieved on the
strength of fundamentals, process driven investment approach with
enough flexibility for the fund managers to manage their funds in their
unique style and insight.
The fund house over the last 18 years has garnered trust of its investors
and has emerged as the leading and preferred investment solution
provider in India. The fund house has always aimed to fulfill its fiduciary
responsibility of managing investor's wealth with prudence and due
diligence.
Page | 64
KOTAK MAHINDRA MUTUAL FUND
The group has a net worth of Rs.7,911 crore and employs around 20,000
employees across its various businesses, servicing around 7 million
customer accounts through a distribution network of 1,716 branches,
franchisees and satellite offices across more than 470 cities and towns
in India and offices in New York, California, San Francisco, London,
Dubai, Mauritius and Singapore.
Page | 65
STANDARD CHARTERED MUTUAL FUND
Page | 66
established in the year 1975. It provides customized asset management
services and products to governments, corporations, pension funds and
non-profit organizations. Its services are also extended to high net worth
individuals and retail investors. In India it is known as Morgan Stanley
Investment Management Private Limited (MSIM India) and its AMC is
Morgan Stanley Mutual Fund (MSMF). This is the first close end
diversified equity scheme serving the needs of Indian retail investors
focusing on a long-term capital appreciation.
Page | 67
fundamentals. The fundamentals include the quality of the companys
management, sustainability of its business model and its competitive
position, amongst other factors.
3) Features OF iSIP
Birla Sun Life iSIP is the first of its kind in the Indian mutual fund
industry. The significant features are -
Quick and Paperless
Simple 3 step process
Page | 68
Change the Scheme online
4)
Login to your banks website and register Birla Sun Life as a Biller
5) Availability Of Schemes
This facility is offered for schemes where SIP is currently available. Once
we login, we will be able to see a list of schemes which we can
then choose to register our SIP.
Page | 70
We can avail of an auto debit facility from our bank account only. Units
cannot be purchased using a debit or credit card.
Registered: This means a SIP transaction has been created that will be
active once you have registered Birla as a Biller with the Bank.
Active: The SIP is now active in the system and respective bank will be
debited on the date investor has chosen. (This will only happen after
Birla is registered as a biller with the Bank)
Cancelled: Transaction Cancelled by the Investor.
Page | 71
Expired: Unique Registration Number expired. Therefore, Investor has to
register for a new SIP.
Closed: The SIP term is complete.
What is ULIP?
When we talk about Insurance as an investment option, ULIPs have an
important role as many of the investor nowadays goes for this as a
Page | 72
profitable avenue. ULIP is an abbreviation for Unit Linked Insurance
policy. A ULIP is a Life Insurance policy which provides an arrangement
of risk cover and investment. The dynamics of the capital market have a
direct impact on the performance of the ULIPs. Remember that in a unit
linked insurance policy, the investment risk is generally borne by the
investor/ the holder of the policy.
Under this policy the insurer allocates the total premium into various
units. You are also given the opportunity to choose the option of
investment units. Most of the investors prefer to allocate them in financial
instrument and assets. The number of units you choose on each option
might differ from individual to individual. Some of you may choose to
invest more on Real Estate while the rest prefer to invest more
on financial instruments such as shares, debentures, etc.
Likewise the insurer takes care to allocate a unit of the premium for
insurance maintenance and the related expenses. You are also excused
from paying income tax for the profits received from the investment.
However this policy does not guarantee profits like the traditional plans
and is therefore risky as far as returns are concerned. But the possibility
of making more profit is very high in this policy.
ULIPs fundamentally work like a Mutual Fund with a life cover thrown in.
They invest the premium in market-linked instruments like stocks,
debentures, Corporate Bonds and Government Securities. Investments
in ULIPs help to gain tax benefits under Section 80C.
Depending upon the performance of the unit linked funds chosen; the
policy holder may realize gains or losses on his/her investments. It
should also be noted that the past performance of a fund are not
necessarily indicative of the future returns of the fund.
Page | 73
Types of Funds ULIP Offer
Most insurers offer a wide variety of funds to suit your investment
objectives, risk profile and time horizons. Different funds have different
risk profiles. The possible for returns also varies from fund to fund.
Following are some of the common types of funds accessible along with
an indication of their risk uniqueness.
In configuration ULIPs and mutual funds are similar; in purpose its not
similar. Because of the high first-year charges of ULIPs mutual funds are
an improved option if you have a five-year investment horizon. But if you
have a horizon of 10 years or more then ULIPs have an edge. To explain
this further a ULIP has high first-year charges towards acquisition
including agents commissions. As a result, they discover it difficult to
break mutual funds in the first five years. But in the long-term ULIP
managers have numerous advantages over mutual fund managers.
Since policyholder premiums come at regular intervals investments can
be planned out more evenly. Mutual fund managers cannot take a
comparable long-term view because they have volume investors who
can move money in and out of schemes at short notice.
ULIP investors also have the elasticity to modify the premium amounts
during the policy's residence. For example an individual with access to
surplus funds can improve the payment thereby ensuring that his surplus
Page | 76
funds are profitably invested, conversely an individual faced with a
liquidity crunch has the option of paying a lower amount (the
differentiation being adjusted in the accumulated value of his ULIP). The
liberty to adjust premium payments at one's convenience clearly gives
ULIP investors an edge over their mutual fund counterparts.
2) Expenses
Page | 77
3) Flexibility in altering the asset allocation
On the other hand most insurance companies allow their ULIP inventors
to shift investments crossways various plans/asset classes either at a
nominal or no cost. Usually pair of switches are allowable free of charge
every year and a cost has to be borne for extra switches. Successfully
the ULIP investor is given the choice to invest across asset classes as
per his convenience in a cost-effective manner. This can create to be
very useful for investors for example in a bull market when the ULIP
investor's equity component has appreciated he can book profits by
simply transferring the necessary amount to a debt-oriented plan.
4) Tax benefits
ULIP investments are eligible for deductions under Section 80C of
the Income Tax Act. This holds well, irrespective of the nature of the plan
selected by the investor. On the other hand in the mutual funds area only
investments in tax-saving funds also referred as equity-linked savings
schemes are eligible for Section 80C benefits. Maturity incomes from
ULIPs are tax free. In case of equity-oriented funds for example
diversified equity funds, balanced funds, if the investments are detained
for a period over 12 months; the gains are tax free; conversely
Page | 78
investments sold within a 12-month period attract short-term capital
gains tax @ 10%. Similarly, debt-oriented funds pull towards you a long-
term capital gains tax @ 10% while a short-term capital gain is taxed at
the investor's marginal tax rate.
Even though they are seemingly alike in structure, obviously both mutual
funds and ULIPs have their sole set of advantages to offer. As always it
is vital for investors to be aware of the differences in both offerings and
make learned decisions. Following are the major difference between
ULIPs and Mutual Funds.
Page | 79
saving funds
The mutual fund industry is well regulated and protects the interests of
investors at all times. You can analyze the track record of a fund or
institution before investing.
Returns Offered:
Page | 80
different industries and stocks ensuring the portfolio remains balanced at
all times.
Chapter 4
Conceptual Framework
Page | 81
characterized by a high degree of price volatility in the short term. The
volatility in our markets, particularly in the nineties, reflects significant
shifts in the nature of the Indian economy, with the services sector
gaining increasing importance. This fundamental change in the economy
has resulted in a dramatic change in the nature of our stock markets with
the services sector, including technology, assuming increasing
importance. Investment in equities has dismayed many in the short term,
but if executed in the framework of the steps outlined below, may help in
better choices.
Step 1:
Identify your objective, given your needs, life stage and resources. If you
want to increase the value of your investment in order to have a larger
sum to spend at a later date, your main priority will be capital growth.
Step 2:
Identify your risk tolerance and then invest appropriately Young people
at the start of their working lives will have a greater appetite for taking
financial risk as compared to people at the end of their career who are
looking forward to stable income and preservation of capital. These two
extremes will exemplify the ability to take equity exposure. The young
person is likely to be invested largely in equities for he can afford to take
short term capital loss in anticipation of higher rates of return from
equities. The elderly will be unable to take the risk of capital loss even in
the short term as their ability to make back any losses will be limited by
time and ability to earn.
Step 3:
Categorize your stock: Cyclical, Growth or Defensive Investing in cyclical
stocks, such as those in the cement or steel sector, requires an
Page | 82
understanding of the economic scenario. An active involvement in the
investment is required in order to reap the maximum benefits of swings
in economic cycles over time. The stock prices are likely to move
through extreme highs and lows, and the ability to time entry and exit will
be necessary. Growth investing refers to stocks in sectors where the
future direction is clear for the medium term - such as technology.
However even here, timing is key, for the stock may do nothing for a long
time as momentum builds up and then move sharply thereafter.
Defensive investing is that which is done from a long term viewpoint,
where a stock is held on the premise that it will grow consistently and on
a sustainable basis over time, such as those in the fast moving
consumer goods sector. While the appreciation may, at times, not be as
dramatic as cyclical or growth stocks, stocks that constitute defensive
investments grow steadily over longer time periods.
Step 4:
Check out the technical position. Can you actually sell your investment
when you want to? The liquidity of a stock is very important in taking an
investment decision, for if there is very little free stock available in the
market, buying and selling may well impact the stock price in an adverse
manner. It is interesting to see what the price volume relationship is for a
stock. So if a stock price is moving up or down on high trading volume, it
is more likely that there is real interest in that price movement than if
there is very little volume supporting the price move.
Step 5:
Know what the company does. The fate of each stock is tied inextricably
to the fortune of the underlying business, and the market's perception of
the future prospects for that business. The industry's future potential in
Page | 83
terms of projected demand-supply is key as is the company's
competitive position in the industry. The business model of the company
should be considered, as well as possible future changes, and the ability
of the company to sustain growth and momentum well into the future.
Step 6:
Know who runs the company. The capability and integrity of
management is even more important in determining the future viability of
your investment. A strong, credible, experienced and shareholder
responsive management team is critical for operating and growing a
successful company. In the newer areas of our economy, management
vision is also of significant importance.
Step 7:
Know the company's performance. The price earnings (P/E) ratio is the
often quoted measure of a company's value. This ratio divides the stock
price by the year's earnings, and is useful in arriving at comparative
valuation. But the tool that is quite prevalent in professional evaluations
is the return on equity (ROE), which is the year's earnings divided by the
net worth of the company. This when compared to the cost of capital for
the company allows the investor to gauge the company's wealth creating
ability. Apart from the ratios the investor must also focus on the
sustainability of earnings growth.
Step 8:
Know the company's valuation. Two stocks may have the same EPS but
different P/E's. This is because ROE may be different and its
sustainability may be different. Broadly speaking, the higher the
sustainable ROE, the higher the P/E rating. A high P/E does not
Page | 84
therefore necessarily imply an overvalued stock. Stocks with high
sustainable ROEs are likely to trade at high P/E multiples.
Step 9:
Know the price target. Having selected stocks and built a portfolio, it is
now imperative to track these investments closely. One method of doing
so is to set expectations, by identifying a target price, and to re-evaluate
the stock when this target is reached. Here, it is important to consider
opportunity costs. If there is a loss on a stock, should one realize that
loss and invest in another stock, which has a greater potential, or should
one wait for the loss to turn into a profit. By not selling out of low return
stocks to get into higher return stocks, investors miss out on
opportunities.
Step 10:
Do you want a professional manager? Many investors mistakenly
assume that they can purchase one or two stocks and they will do well.
In the absence of good luck, this can be a dangerous strategy since
there is always a risk of a stock declining in value or the business facing
company specific problems. The more diversified the portfolio, lower is
the risk of one poorly performing stock affecting overall performance of
the portfolio. However, a good way of diversifying the portfolio is to invest
through mutual funds where the professional fund manager and the
rigorous investment process is likely to limit risk while maximizing profit,
depending on the risk profile of the fund invested in.
Page | 85
4.2 NET ASSET VALUE (NAV)
A Very Important Concept
Once a mutual fund scheme has been floated, the buying and selling
prices of its units from day to day are related to the NAV of the units
according to the regulations of SEBI. It is important for investors to
understand the NAV concept.
Daily NAV
A mutual fund is required to compute the NAV once a day based on the
closing market prices by valuing all assets and liabilities at their current
values.
Page | 86
Aggregate NAV
NAV of per unit = ---------------------------------
No. of units outstanding
The over-all limit on advisory fees plus recurring expenses, which the
AMC can charge to the fund, is prescribed as a percentage of average
weekly net assets, indicated below:
Table A
Average Weekly Net Assets Over-all limit on fees and expenses
(1)First Rs 100 crore 2.50%
(2)Next Rs 300 crore 2.25%
(3)Next Rs 300 crore 2.00%
(4)Additional assets 1.75%
Page | 88
Note: The percentages mentioned are applied to the average weekly
net assets.
Within the over-all limit mentioned above, there is a sub-limit for advisory
fees as follows:
Table B
Average Weekly Net Assets Sub-limit on advisory fees
(1) Rs 100 crore 1.25%
(2) Excess over Rs 100 crore 1.00%
Page | 89
recover the launching expenses by increasing the investment
management advisory fee slightly, i.e. by up to 1% of the average weekly
net assets. Some investors may get attracted into a scheme because it
charges no entry fee but this advantage is, more or less, cancelled out
by higher advisory fee and exit fee.
TYPES OF FUNDS
Index Fund
Index fund schemes are ideal for investors who are satisfied with a
return approximately equal to that of an index. Index Funds: Here, the
portfolio composition is not decided by the fund manager but is given by
a particular index, as announced at the time of launching the scheme.
Reasons for index funds:-
Index funds simply mirror a chosen market index. They first emerged in
the U.S. because it was found that many equity fund managers did
worse than the market average as measured by the index. That is, they
earned a lower return than the return which could be earned on portfolio
Page | 90
corresponding to the market index. So, why not hold a portfolio which
simply mirrors the market index?
Page | 91
error, will generally remain but this is unlikely to affect the funds
performance materially.
FMPs are typically passively managed fixed income schemes with the
fund manager locking into investments with maturities
corresponding with the maturity of the plan. FMPs are not guaranteed
products.
Quantitative Funds
A quantitative fund is an investment fund that selects securities based on
quantitative analysis. The managers of such funds build computer
based models to determine whether or not an investment is attractive. In
a pure "quant shop" the final decision to buy or sell is made by
the model. However, there is a middle ground where
the fund manager will use human judgment in addition to a quantitative
model. The first Quant based Mutual Fund Scheme in India, Lotus
Agile Fund opened for subscription on October 25, 2007.
Page | 95
(c) beneficiaries or unit holders, i.e. investors.
The question which arises is: How do we ensure that the mutual fund will
be managed in the best interest of the unit holders? This problem is
taken care of partly by the regulatory system and partly by fairly fierce
competition among the mutual funds for the investors money. There are
as many as 30 mutual fund organisations in India. Each of them has
dozens of mutual fund schemes.
SEBI regulations provide the framework within which mutual funds have
to operate. Maximum limits have been prescribed for management fees
and other chargeable expenses, as detailed a little later. SEBI also
regulates many other aspects of their operations and policies.
Page | 97
Chapter 5
Latest Review on Mutual Fund
Crisil Research analyzing the Mutual Fund industry in the current market
condition. The key highlights of the report are:
Page | 98
June 2012 quarter from Rs 6.65 lakh cr in the previous quarter
(excluding domestic fund of funds or FoFs).
Debt-oriented funds were the key contributors to the rise; assets of
money market or liquid funds grew by Rs 16,864 cr, that of ultra short
term debt funds by Rs 6,888 cr, fixed maturity plans (FMPs) by Rs 2,868
cr and other debt-oriented funds by Rs 5,800 cr over the past quarter.
Equity funds declined Rs 5,265 cr in AUM owing to weak sentiments
prevailing in the asset class in the quarter gone by.
Average AUM of 29 out of 44 fund houses increased in the latest
quarter.
HDFC Mutual Fund maintained its top position by asset size at Rs
92,625 cr in the June quarter; its assets rose by Rs 2,746 cr or 3.05%.
Reliance Mutual Fund was second with assets of Rs 80,694 cr while
ICICI Prudential Mutual fund was third with Rs 73,050 cr of assets.
The share of the top five mutual funds' average assets stood at 54% in
the June quarter while the share of the top 10 funds was 78%; the
bottom 10 fund houses continued to occupy less than 1% of the average
AUM.
In terms of month-end assets, the Indian mutual fund industry's AUM fell
by 1.5% to Rs 6.89 lakh cr in June 2012 primarily due to outflows in
money market funds which witnesses cyclical quarter-end outflows due
to withdrawals by corporates for paying advance taxes.
In the secondary market, mutual funds bought equities worth Rs 296 cr
in June compared to net selling of Rs 398 cr in May, while they were net
buyers of debt to the tune of Rs 78,465 cr in June compared to net
buying of Rs 37,280 cr in April.
On the regulatory front, SEBI plans to talk to fund managers of
mutual fund schemes that have been underperforming their respective
benchmarks for a long time.
Page | 99
5.2 BANKING, FMCG FUNDS TOP MF RETURN
CHARTS IN 2012
Page | 100
The FMCG funds came a close second with average return of 48 per
cent in 2012, followed by midcap schemes (41 per cent), multicap
funds (33 per cent) and pharma funds (32 per cent). Tax funds, a
popular avenue for saving taxes, gained 31 per cent in calendar year
2012.
Some sectors which gave extraordinary returns in this period include
Banking, FMCG and consumer durables. Stocks in sectors such as IT,
Power and Oil & gas didn't do as well in 2012. Largely, investors
currently favour stocks in consumption sector give some of macro
winds.
Infrastructure equity funds rode on the back of market rebound to give
investors 25 per cent average gain in 2012. International equity funds
(14 per cent), arbitrage funds (9 per cent) and IT funds (6 per cent) were
the poorest performers in the year gone by as their chosen themes did
not play out well as the winners.
Gold funds, which saw copious inflows, gave an average 11 per cent
gain in 2012 as the precious metal prices inched up. In the fixed income
fund space, Gilt medium and long term funds walked away with the
honors of best average gains (10.5 per cent), followed by income funds
(10.1 per cent), short-term income schemes (9.8 per cent), liquid funds
(9.2 per cent) and gilt short-term funds (8.3 per cent).
Most short-term debt funds and dynamic bond funds have also
increased duration and exposure to government securities to take
advantage of a fall in yields.
Among the hybrid fund categories, equity-oriented funds gave an
average 27 per cent gains while the debt oriented ones mirrored the
fixed income gains of around 13 per cent.
Page | 101
5.3 HOW TO EVALUATE MF PORTFOLIO
PERFORMANCE
(for investors)
Page | 102
appropriate benchmark which will be a culmination of 2-3 indices by
assigning suitable weights to them. Another metric that can be used is
the evaluation of the relative performance of the funds; i.e. the
performance of a particular fund vis--vis the peer group.
Page | 103
is an informed decision that the investor will have to make so as to make
sure that his portfolio is moving in the right direction.
Page | 104
5.4 WHAT IS THE MF DIRECT NAV ALL ABOUT?
SEBI has directed all fund houses to maintain separate plan called
Direct Plan for all their mutual fund schemes along with the Regular
plan. So let us see what is this Direct plan and how will it impact
investors.
Sebi has directed all fund houses to have separate NAVs for their
schemes, with a direct NAV and a regular NAV. The direct NAV will be
higher than the regular NAV, although the scheme will hold the same
portfolio. The difference is that under the direct NAV plan, there will be
no distribution charges, resulting in higher NAV. It will cost less to hold
funds in the direct plan, as the expense ratio is expected to be cheaper
by about 0.5%-0.75%.
Larger investors including corporates and financial institutions have
been representing with the regulator that they do not get the benefit of
direct investments into funds. Since they have professionals within
their organization, they also do not require the expertise of a financial
advisor. SEBI has opened this up as an option to all investor classes,
allowing even individual investors to use this option.
Page | 105
This plan will benefit only those investors who directly invest with the
fund house without the service of any advisors or distributors. Other
investors who invest through a broker/ agent will bear the normal
expenses in terms of cost structure by the fund house as is currently
prevalent.
Any investor investing directly with the mutual fund house in any open-
ended schemes, interval income schemes or new fund offers will be
eligible to avail the direct NAV plans. However, prior to shifting your
investments into a direct fund scheme, it is essential to note that any
investments done less than twelve months back will attract both an exit
load as well as capital gains tax. Debt fund investors need to weigh the
capital gains tax impact for their long-term investments as well.
The previous time direct investments were allowed, it did not evoke
much response from individual investors as they typically do not have
in-depth knowledge of mutual funds and rely on their financial advisors.
Further, they would not be able to avail of the servicing that advisors
provide. Institutional, large investors, and other savvy investors are
likely to be the ones opting for the direct route & enjoying better
returns.
Currently, mutual funds companies have a lean organization structure
as they have predominantly worked through a distributor model. It
needs to be seen how this impacts their ability to service direct
customers and also could have an impact on their cost structure in the
long term.
Since a greater portion of the mutual fund investors have either time
constraints or are not fully aware of the various investment offerings,
the distributor/ agent will be of immense help, by giving sound advice,
pre-filling certain forms, assisting with redemptions, etc. Most investors
Page | 106
are likely to continue bearing the extra cost for the service and
simplicity of investing via an intermediary.
The key positive of this regulation is that it brings back focus on quality
of advice and quality of service provided by the distributors / advisors.
This is in line with the removal of entry load so that it aligns the goals of
the advisor with that of the investor. It also reduces the cost structure
institutions and hence could have some positive impact for institutional
investors like ULIPs, which eventually benefit the investor. Direct
investments would also eliminate the pass backs.
For investors who have a decent knowledge of the investment options,
do not require servicing and with adequate time to identify and monitor
mutual funds; the direct plan will benefit them with earn higher returns
and can be a good option for them.
Summary:
Mutual funds must have two NAVs per scheme - direct & regular
Direct NAV schemes will have lower expenses - giving better
returns to investors
Direct NAV plans must be purchased directly only from the AMC
Taxation remains the same for both schemes
Individual investors who are capable of choosing schemes,
technology savy and do not require servicing provided by the
advisors can go in for this option
Page | 107
Chapter 6
Data Interpretation and Analysis
INTERPRETATION
Liquidity 42%
High return 30%
Low risk 25%
Table No
Company Reputation 3%
6.2
FACTOR PREFERENCE
Page | 110
INTERPRETATION
The factors preferred the most are liquidity i.e 42% as people want
to be prepared for any crisis which may evolve during their life.
Hence they prefer investing such that they can withdraw the funds
whenever the situation arises.
Around 25% of the respondents are not willing to take any risk in
their investments, they prefer safe investments.
Page | 111
The remaining 3% of the respondents go for reputed companies as
their preference.
YES 63%
NO 28%
Earlier, now stopped 9%
Table No 6.3
Page | 112
INTERPRETATION
The major part of the sample taken has invested in the Mutual
Funds. The percentage of respondents investing in mutual funds
are 63%, though they do prefer investing in fixed deposits more
than mutual funds yet they have agreed to take some risk.
The demand for the mutual funds have increased in the past few
years with many Foreign players entering in the Indian market,
Fidelity, Franklin Templeton, DSP Meryll Lynch to name few.
Still there are few who are not investing in MF.28% of the
respondents do not invest in mutual funds.
Page | 113
4) Which feature of Mutual Fund allure you most?
INTERPRETATION
Page | 114
Majority of the respondents i.e. 33% look for better return and
safety in a mutual fund.
18% invest in mutual fund for regular income and because of the
diversified investment in different stocks by the asset management
company.
16% due to reduction in risk and transaction cost and lastly, 15%
invest in mutual funds because of the tax exemptions and benefits
which come with it.
MONEY INVESTED IN
Page | 115
INTERPRETATION
In investing in mutual fund people mostly preferred 36% in UTI.
Page | 116
6) When you invest in Mutual Funds which mode of investment will you
prefer?
Page | 117
INTERPRETATION
Most of the respondents feel that since they are salaried people
they do not have to worry much about setting aside just a small
portion of their monthly salary for investing in mutual fund.
Page | 118
Table No 6.7
INTERPRETATION
Page | 119
8) How much Risk are you willing to take?
Moderate 45%
Low 31%
High 24%
Table No 6.8
INTERPRETATION
Page | 120
The higher the Risk, the more the Profits. The people need to take the
risk to enjoy the benefits. Some investors were willing to take lower risk
and this was the reason they gave for investing in the MF.
Most of the people would like moderate level of risk in their investments.
AMC PREFERENCE
INTERPRETATION
INTERPRETATION
Page | 122
INVESTMENT SECTORS
INTERPRETATION
Investors mostly prefer the following sector 30% in GOLD FUND , 24%
in GENERAL , 14 % in REAL ESTATE , 10 % in DIVERCIFICATION IN
EQUITY FUNDS and DEBT FUNDS , 2 % in POWER SECTOR, 8% in
OIL AND PETROLEUM and 2% in BANKING FUNDS.
12) Which type of Mutual funds do you prefer?
Table No 6.12
Page | 123
INTERPRETATION
13) How much percentage of your income you trade in Mutual Funds?
Page | 124
INTERPRETATION
From the survey it was found that from their income the
Thus it was found that most of the people prefer making safe
investment and so they prefer investing in mutual fund rather than
equities.
The 9% who did not trade were of the opinion that it was not a
safe option to invest in the market instead they prefer investing in
banks in the form of fixed deposits or post office savings. People
even now are skeptical to take any risks.
Page | 125
14) What is your primary investment purpose in Mutual fund?
Table No 6.14
Retirement Future Building up a Others
Planning education of corpus charity
children
28% 28% 14% 30%
PRIMARY INVESTMENT PURPOSE
Page | 126
INTERPRETATION
15) How would you like to receive the returns every year?
Page | 128
16) What is your Average investment period?
Page | 129
INTERPRETATION
Page | 130
17) How important are tax consideration in your investment
strategy?
Table No 6.17
TAX CONSIDERATION
INTERPRETATION
Page | 131
18) I plan to begin taking money from my investment in..
a) 1 year b) 1-2 years
c) 3-5 years d) more than 5 years
INTERPRETATION
The investor expects returns from his investment as 42% in 1-2 years ,
28% in 1 year ,16% in more than 5 year and 14 % in 3-5 years.
Page | 132
INTERPRETATION
The investors plan to spend over a time period of 42% in period of 2 year
or less, 26% in 3-5 years, 18% in 6-10 years and 14% in more than
10years.
(20) Generally I prefer an investment with little ups and downs in value
and I am willing to accept the lower returns these investments make.
Page | 133
INTERPRETATION
Investors think in following ways 40% says I somewhat agree , 30% says
I agree , 20% says I strongly agree and 10 % says I strongly disagree.
21) When the market goes down I tend to sell some of my riskier
investment and put the money in safer investment?
Table No 6.21
Page | 134
INTERPRETATION
Investors mostly sell their riskier investment and put in safer investment
; 48% of investor Agrees , 22% goes for I strongly disagree , 16% says I
strongly Agree , and 14 % says I somewhat agree.
Yes 75%
No 25%
Table No 6.22
Page | 135
INTERPRETATION
The sample drawn on the probability basis shows that out of 100%
of respondents 75% of the respondents approached were satisfied
with the Mutual Fund investments and 25% are dissatisfied with
the investments
.
As 75% of the respondents are satisfied with the mutual fund
investments, it can be concluded that the company has undertaken
proper R&D in this aspect.
Page | 136
23) According to you which things attracts you more for investment in
Mutual Funds?
Promotion (Ads) 5%
Table No 6.23
INTERPRETATION
From the Survey it was found that the Investors are more attracted
towards Mutual Fund because of Plan benefits. 53% Investors are
attracted due to Plan Benefits whereas 42% investors attracted due to
Brand Name and only 5% investors attracted due to Promotion Strategy
of Company.
7. FINDING
Page | 137
SIP is very helpful in a volatile market. The SIP resolves a dilemma
often facing investors due to ups and downs in the market price.
Most of the respondents feel that since they are salaried people
they do not have to worry much about setting aside just a small
portion of their monthly salary for investing in mutual fund so for
them systematic investment is a safe bet.
It was found that most of the people prefer making safe investment
and so they prefer investing in mutual fund rather than equities.
Page | 138
The investment period is very important to increase the profits. The
timing must be right enough to benefit from fluctuations.
Page | 139
2. The factors that come into play include age of the investor , risk
appetite , time at hand to let investment grow, need for money-
immediate or later and more importantly , the purpose of making
such an investment. Broadly we have Aggressive, moderate
and Conservative portfolios where each of them incorporates a
different genre of mutual fund schemes to suit varying needs.
Page | 140
efficient service, fund management and Reputation of mutual fund
in selection of mutual funds.
9. CONCLUSION
A Questionnaire was given to respondents. People save in Mutual Funds
for different purposes i.e. children education, house construction,
retirement planning and tax planning, investing in gold/silver, shares and
debenture, fixed deposit, banking fund and real estate. it is the need of
hour in India to popularize the pension funds which have greater
potential in the years to come. Mutual funds companies should introduce
new pension funds scheme for investors. In case of the relationship
between monthly income and purpose of savings, a unique trend has
emerged. As the income increases, priority is given to tax planning.
Majority of the respondents gave the first preference to children
education followed by retirement planning.
Page | 141
During the period of study, it was found that the majority of the investors
invest their money through the SIP plan scheme as they found it less
burdensome and easy to keep aside a few amount from their monthly
salary. This indicates that more efforts have to be made by the Mutual
Funds to create awareness among the investors regarding the earnings
potential of other schemes. The influencing factors for selection of
Mutual Fund scheme in India are High Returns, Net Asset Value, Market
Trends, Tax Policy, and Reputation of Mutual Fund in their order of
priority. Most of investors prefer to invest their money in open ended
schemes of Mutual Funds.
Page | 142
10. BIBLIOGRAPHY
Websites:
http://amfiindia.com
http://mutualfundindia.com
http://valueresearchonline.com
http://indianjournals.com
http://www.theequitymarkets.com
http://www.moneycontrol.com
http://www.birlasunlife.com
http://www.kotakmahindra.com
Page | 143
http://www.iciciprudential.com
http://www.hdfcmutualfund.com
11. ANNEXURE
(1) Name:
(2) Gender?
a) Male
b) Female
(3) Age?
a) 18 to 25
b) 25 to 35
c) 35 and above
(4) Have you ever invested your money in Mutual Fund?
a) Yes b) No
(5) When you invest in Mutual Funds which mode of investment will you
prefer?
a) One Time Investment b) Systematic Investment
(6) What is your Average investment period?
a) Less than 3 months b) 3 to 9 months
c) 9 months to 2 year d) more than 2 year
(7) What type of investment you prefer the most?
a) Savings a/c b) Fixed Deposit a/c c) Insurance
d) Mutual Funds e) Post Office f) Shares/ Debentures
g) Gold/ Silver h) Real Estate i) PPF
(8) How much Risk are you willing to take?
a) High b) Low c) Moderate
(9) Over the long term what do you think is a realistic overall return on
your investment?
a) 4%-6% b) 5%-7%
c) 7%-9% d) more than 10%
(10) Which type of Mutual funds do you prefer?
Page | 144
a) Open Ended Schemes b) Closed Ended Schemes
(11) While Investing your money, which factor you prefer the most?
a) Liquidity b) Low Risk c) High Returns d) Company Reputation
(12) Which feature of Mutual Fund allure you most?
a) Diversification b) Better Return and Safety c) Regular Income
d) Reduction in Risk and Transaction Cost e) Tax Benefit
(13) In which Mutual Fund have you invested?
a) SBIMF b) UTI c) HDFC d) Reliance
e) ICICI Prudential f) JM Mutual Funds g) Others
(14) From where do you purchase mutual funds?
a) Directly from the asset management company b) Brokers only
c) Brokers/ Sub Brokers d) Other Sources
(15) Which AMC (Asset Management Company) do you prefer the
most?
a) SBIMF b) UTI c) HDFC d) Reliance
e) ICICI f) JM Finance g) Kotak
(16) Which sector are you investing in Mutual Funds sectors?
a) General b) Oil & Petrolium c) Gold Funds
d) Diversification Equity Funds e) Power Sector f) Debt Funds
g) Banking Funds h) Real Estate
(17) How much percentage of your income you trade in Mutual Funds?
a) Dont Trade b) Less than 5% c) 5-10% d) More than 10%
(18) What is your primary investment purpose in Mutual fund?
a) Retirement Planning b) Building up a corpus charity
c) Future Education of Children d) Others
(19) How would you like to receive the returns every year?
a) Dividend Payout b) Dividend Re-investment c) Growth in NAV
(20) How important are tax consideration in your investment strategy?
a) Not Important at all b) Somewhat Important
c) Very Important d) Extremely important
(21 ) I plan to begin taking money from my investment in..
a) 1 year b) 1-2 years
c) 3-5 years d) more than 5 years
(22) As I withdraw money from this investment I plan to spend it over a
period of .
a) 2 years or less b) 3-5 years
c) 6-10 years d) more than 10 years
(23) Generally I prefer an investment with little ups and downs in value
and I am willing to accept the lower returns these investments make.
Page | 145
a) I Agree b) I Strongly Agree
c) I Somewhat Agree d) I Strongly Disagree
(24) When the market goes down I tend to sell some of my riskier
investment and put the money in safer investment?
a) I Agree b) I Strongly Agree
c) I Somewhat Agree d) I Strongly Disagree
(25) Are you satisfied as a mutual Fund investor?
a) Yes b) No
(26) According to you which things attracts you more for investment in
Mutual Funds?
a) Brand Name b) Plan Benefits c) Promotion (Ads)
Page | 146