PROJECT WORK

MUTUAL FUNDS A BETTER INVESTMENT PLAN

UNDER THE GUIDANCE OF MENTOR: Dr. MANISHA JAISWAL ACADEMIC SESSION: 2010-2011 DAULAT RAM COLLEGE, UNIVERSITY OF DELHI SUBMITTED BY: POOJA AGARWAL COLLEGE ROLL NO. 801 PAPER NO. xxxviii
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DECLARATION

I hereby declare that this Project Report entitled MUTUAL FUNDS:A BETTER INVESTMENT PLAN submitted in the partial fulfillment of the requirement of the B.COM (Honours) III Year, Delhi University is based on data found by me in various departments, books, magazines and websites. It is an original work and has not been used for any other purpose.

(POOJA AGARWAL)

ACKNOWLEDGEMENT
It is a matter of great pleasure for me in submitting the project report on MUTUAL FUNDS IS THE BETTER INVESTMENT PLAN in partial fulfillment of the requirement of my course B.Com (Honours) from Daulat Ram College, Delhi University. First of all, I feel very privileged to express my deep sense of gratitude to God Almighty for showering his choicest blessings and helping me throughout my period of study. Words seem to be inadequate to express my sincere thanks to my project mentor Dr. Manisha Jaiswal, for her valuable guidance, constructive criticism, untiring efforts and immense encouragement during the entire course of study due to which my efforts have been rewarded.

INDEX

Chapter 1: Mutual Funds Brief Introduction Inception of Mutual Funds in India Types of Mutual Funds Schemes Advantages of Mutual Funds

Chapter 2: Investment Avenues in India Introduction Various investment alternatives available in India Brief overview of different investment options Chapter 3: Mutual Funds Vs Other Investments Comparison Conclusion

CHAPTER 2 INVESTMENT AVENUES IN INDIA

INTRODUCTION:
In the economy of any nation, savings forms an important part which acts as the driver for growth of the country. The money earned by the people is partly spent by them and the rest is saved for meeting future expenses. Instead of keeping the savings idle, people generally like to use it in order to get return on it in the future. This is called Investment. One of the important reasons why people need to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. Inflation causes money to lose value because it will not buy the same amount of a good or service in the future as it does now or did in the past. The sooner one starts investing the better. Indian financial scene too presents a plethora of avenues to the investors. Though Indian financial system is not highly developed but it has reasonable options for an ordinary man to invest his savings. VARIOUS INVESTMENT ALTERNATIVES AVAILABLE IN INDIA:
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1) Non marketable financial assets: These are such financial assets which gives moderately high return but can not be traded in market.

Bank Deposits Post Office Schemes Company FDs (Fixed Deposits) PPF (Public Provident Fund) 2) Equity shares: These are shares of company and can be traded in secondary market. Investors get benefit by change in price of share and dividend given by companies. Equity shares represent ownership capital. As an equity shareholder, a person has an ownership stake in the company. This essentially means that the person has a residual interest in income and wealth of the company. These can be classified into following
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broad categories as per stock market:

Blue chip shares Growth shares Income shares Cyclic shares Speculative shares 3) Bonds: Bonds are the instruments that are considered as a relatively safer investment avenues. Bonds can be classified into following: G sec bonds GOI relief funds Govt. agency funds PSU Bonds RBI BOND Debenture of private sector company 4) Money market instrument: By convention, the term "money market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year. They are:
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 Treasury Bills Certificate of Deposit Commercial Paper 5) Mutual Funds: A mutual fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities, ranging from shares, debentures to money market instruments or in a mixture of equity and debt, depending upon the objective of the scheme. The different types of schemes are: Balanced Funds Index Funds Sector Fund Equity Oriented Funds Debt Oriented Funds Gilt Fund Liquid Fund 6) Life insurance: Now-a-days life insurance is also being considered as an investment avenue. Insurance premiums represent the sacrifice and the assured sum represents the benefit. Under it different schemes are:
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 Endowment assurance policy Money back policy Whole life policy Term assurance policy 7) Real estate: One of the most important assets in portfolio of investors is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate:

Agricultural land Semi urban land Farm House 8) Precious objects: Investors can also invest in the objects which have value. These comprises of:

Gold Silver Precious stones Art objects

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9) Financial Derivatives: These are such instruments which derive their value from some other underlying assets. The most important financial derivatives from the point of view of investors are:

Options Futures

BRIEF OVERVIEW OF DIFFERENT INVESTMENT OPTIONS:

BANK DEPOSITS: Banks are considered as the safest of all options, banks have been the roots of the financial systems in India. Promoted as the means to social development, banks in India
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have indeed played an important role in the rural upliftment. For an ordinary person though, they have acted as the safest investment avenue wherein a person deposits money and earns interest on it. The two main modes of investment in banks, savings accounts and fixed deposits have been effectively used by one and all. However, today the interest rate structure in the country is headed southwards, keeping in line with global trends. With the banks offering about 8-9 percent in their fixed deposits for one year, the yields have come down substantially in recent times. Add to this, the inflationary pressures in economy and one has a position where the savings are not earning. The inflation is creeping up, to almost 8 percent at times, and this means that the value of money saved goes down instead of going up. This effectively mars any chance of gaining from the investments in banks. POST OFFICES SCHEMES: Just like banks, post offices in India have a wide network. Spread across the nation, they offer financial assistance as well as serving the basic requirements of communication. Among all saving options, Post office schemes have been offering the highest rates. Added to it is the fact that the investments are safe with the department being a Government of India entity. So, the two basic and most sought after features, such as return safety and quantum of returns was being handsomely taken care of. Though certainly not the most efficient systems in terms of service standards and liquidity, these
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have still managed to attract the attention of small, retail investors. However, with the government announcing its intention of reducing the interest rates in small savings options, this avenue is expected to lose majority of the investors. COMPANY FIXED DEPOSITS Another often-used route to invest has been the fixed deposit schemes floated by companies. Companies have used fixed deposit schemes as a means of mobilizing funds for their operations and have paid interest on them. The safer a company is rated, the lesser the return offered has been the thumb rule. However, there are several potential roadblocks in these. First of all, the danger of financial position of the company not being understood by the investor lurks. The investors rely on intermediaries who more often than not, dont reveal the entire truth. Secondly, liquidity is a major problem with the amount being received months after the due dates. Premature redemption is generally not entertained without cuts in the returns offered and though they present a reasonable option to counter interest rate risk (especially when the economy is headed for a low interest regime), the safety of principal amount has been found lacking. Many cases like the Kuber Group and DCM Group fiascoes have resulted in low confidence in this option.

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PUBLIC PROVIDENT FUNDS: It acts as an option to save for the post retirement period for most people and have been considered good option largely due to the fact that returns were higher than most other options and also helped people gain from tax benefits under various sections. This option too is likely to lose some of its sheen on account of reduction in the rates offered.

EQUITY SHARES: Equity shares provide an option to invest in a high risk, high return game. While the potential return is much more than 10-11 percent any of the other options can generally generate, the risk is undoubtedly of the highest order. But then, the general principle of encountering greater risks and uncertainty when one seeks higher returns holds true. However, as enticing as it might appear, people generally are clueless as to how the stock market functions and in the process can endanger the hard-earned money. For those who are not adept at understanding the stock market, the task of generating
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superior returns at similar levels of risk is unlikely. BONDS: Bonds are considered as a relatively safer investment avenue as compared to shares but it does not offer hedge against inflation because inflation causes interest rates to rise which then causes bond prices to fall. Moreover, bond prices can be quite volatile because market interest rates vary after a bond is issued and it gives lower return in the long term.

This is where mutual funds come into the picture.

Mutual funds are considered as one of the best available investments as compared to others as they are very cost efficient and also easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification due to which risks are minimized and returns are maximized. 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
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relatively low cost.

CHAPTER- 1 MUTUAL FUNDS

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A BRIEF INTRODUCTION:
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 invested by the Fund Manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The investment in securities is spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The income earned through these investments and the capital appreciations realized by the schemes are shared by its unit holders in proportion to the number of units owned by them. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. The Mechanism of mutual Fund working has been shown below:

INCEPTION OF MUTUAL FUNDS IN INDIA

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The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be divided into 5 important phases:

Phase I: Establishment and Growth of Unit Trust of India (1964-87) Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (Indias first equity diversified scheme) in 1987 and
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Monthly Income Schemes (offering assured returns) during 1990s.

Phase II: Entry of Public Sector Funds (1987-1993) The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. Phase III: Emergence of Private Sector Funds (1993-96) The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative
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products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes. Phase IV: Growth and SEBI Regulation (1996-2004) The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Investors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the industry. Phase V: Growth and Consolidation (2004 Onwards) The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.
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TYPES OF MUTUAL FUND SCHEMES: 1) SCHEMES ACCORDING TO MATURITY PERIOD:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at a price called Net Asset Value (NAV) which are declared on a daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic
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repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

2) SCHEMES ACCORDING TO INVESTMENT OBJECTIVE:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. They are as follows:

Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such
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schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

3) SCHEMES ACCORDING TO LOAD:

A scheme can also be classified as load or no load scheme depending upon the fees
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charged when units are bought or sold. Load Fund A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. No-load Fund A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

4) SPECIAL SCHEMES:
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Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms.

Sector Specific Funds

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These are the funds which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.

Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

ADVANTAGES OF A MUTUAL FUND:

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1. Professional Management Qualified professionals manage money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme, so you see that it is a continuous process that takes time and expertise that will add value to investment. These fund managers are in a better position to manage investments and get higher returns. 2. Diversification The clich, "dont put all eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers risk of loss by spreading money across various industries. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds will spread investment across only one industry and it would not be wise for portfolio to be skewed towards these types of funds for obvious reasons. 3. Choice of Schemes Mutual funds offer a variety of schemes that will suit investors needs over a lifetime. When they enter a new stage in life, all needed to do is sit down with investment advisor who will help to rearrange portfolio to suit altered lifestyle. 4. Affordability A small investor may find that it is not possible to buy shares of larger
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corporations. Mutual funds generally buy and sell securities in large volumes that allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. One can invest with a minimum of Rs. 500 in a Systematic Investment Plan on a regular basis. 5. Tax Benefits Investments held by investors for a period of 12 months or more qualify for Capital gains and will be taxed accordingly (10% of the amount by which the investment appreciated, or 20% after factoring in the benefit of cost indexation, whichever is lower). These investments also get the benefit of indexation. 6. Liquidity With open-end funds, you can redeem all or part of investment any time you wish and receive the current value of the shares or the NAV related price. Funds are more liquid than most investments in shares, deposits and bonds and the process is standardized, making it quick and efficient so that you can get cash in hand as soon as possible. 7. Rupee Cost Averaging Through using this concept of investing the same amount regularly, mutual funds give investor the advantage of getting the average unit price over the long-term. This reduces risk and also allows you to discipline self by actually investing every month or quarterly and not making sporadic investments.
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8. The Transparency of Mutual Funds The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare one to the other. Once you are part of a mutual fund scheme, you are provided with regular updates, for example daily NAVs, as well as information on the specific investments made and the fund managers strategy and outlook of the scheme. 9. Easy To Administer Mutual funds units in modern times are not issued in the form of certificates, with a minimum denomination rather they are issued as account statement switch a facility to hold units in fraction upto 4 decimal points. 10. Highly Regulated The governing of mutual funds by SEBI ensures that the fund activities are carried out in the best interest of the investors.

CHAPTER 3

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MUTUAL FUNDS VS OTHER INVESTMENTS

COMPARISON:
Indian financial market these days is flooded with a variety of investment options which includes mutual funds, equities, fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life insurance, gold, real estate etc. All these investment options could be judged on the basis of various parameters such asreturn, safety, convenience, volatility and liquidity. Measuring these investment options on the basis of the mentioned parameters, we get following table:

Investment Bank Deposits PPF 29

Return

Safety

Volatility

Liquidity

Convenie nce

Equity

Low Moderate

High High

Low Low

High Moderate

High High

Gold

We can very well see that mutual funds outperform every other investment option. On four parameters it scores high i.e. it provides high return, high safety, high liquidity and high convenience. Its moderate at one. Comparing it with the other options, we find that equities gives us high returns with high liquidity but its volatility too is high with low safety which doesnt makes it favourite among persons who have low risk- appetite. Even the convenience involved with investing in equities is just moderate. Though Bonds provide high safety and high convenience, it has moderate return and moderate liquidity which does not make it best investment option. Now looking at bank deposits, it scores better than equities at all fronts but lags badly in the parameter of utmost important i.e. it scores low on return , so its not an happening option for person who can afford to take risks for higher return.

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The other option offering high return is real estate but that even comes with high volatility and moderate safety level, even the liquidity and convenience involved are too low. Gold have always been a favourite among Indians but when we look at it as an investment option then it definitely doesnt gives a very bright picture. Although it ensures high safety but the returns generated and liquidity are moderate. Similarly the other investment options are not at par with mutual funds and serve the needs of only a specific customer group. Straightforward, we can say that mutual fund emerges as a clear winner among all the options available. The reasons for this being: I) Mutual funds combine the advantage of each of the investment products: Mutual fund is one such option which can invest in all other investment options. Its principle of diversification allows the investors to taste all the fruits in one plate. Just by investing in it, the investor can enjoy the best investment option as per the investment objective. II) Dispense the shortcomings of the other options: Every other investment option has more or les some shortcomings. Such as if some are good at return then they are not safe, if some are safe then either they have low liquidity or low safety or both. Likewise, there exists no single option which can fit to the need of
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everybody. But mutual funds have definitely sorted out this problem. Now everybody can choose their fund according to their investment objectives. III) Returns get adjusted according to the market movements: As the mutual funds are managed by experts so they are ready to switch to the profitable option along with the market movement. Suppose they predict that market is going to fall then they can sell some of their shares and book profit and can reinvest the amount again in money market instruments. IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists one more reason which has established mutual funds as one of the largest financial intermediary and that is the flexibility that mutual funds offer regarding the investment amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs and even Rs. 100 in some cases.

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CONCLUSION:
A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. Investing in Mutual Fund is convenient because of two basic reasons. All investment carries risks, especially equity investment that bears larger risks. Their returns are more volatile and uneven. To cut down the risk one needs to put money in several instruments rather than in one or two products. A Mutual Fund can effectively spread its investments across various sectors of the economy and amongst several products. Risk diversification is the Key. Secondly where to invest and where not to, is a specialized business. One may not have the expertise, time and resources of a well-managed fund. When any investor invests in any mutual fund all that he is required to do is pay the
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shareholder fees and fund operating fees. The whole work of managing funds, starting from market research and analysis of stock and bond price and recent market trends up to final allocation of funds or assets in various stocks and bonds is completely done by the professional fund managers employed by the mutual fund company.

BIBLIOGRAPHY:
Books:
Securities Laws and Regulations of financial markets By:ICSI Investment Analysis and Portfolio Management By: R.P.Rustagi Indian Financial System By: M.Y.Khan

Magazines and Newspapers:

Fidelity Investment Guide The Economic Times

Websites:
www.amfiindia.com www.moneycontrol.com
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www.investopedia.com www.sebi.gov.in

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