Project Report On Mutual Fund

Submitted To, Charanpreet Singh Submitted By, Baldeep Kaur Roll no.-1162606 Class-MBA 2nd Sem.

Under the guidance of Dr. Kashmir Singh (Head of Dept.) in Sri Guru Granth Sahib World University, Fatehgarh Sahib.(punjab)

Index
Title and purpose of the project. History of mutual funds. Meaning of mutual fund. Types of mutual fund. How mutual fund works. Advantages & disadvantages of mutual fund. Companies who issue mutual funds in India. Comparative study of mutual funds. Tax on income of mutual funds. Questionnaire. Solutions .

Mutual fund
A mutual fund is a professionally managed investment company that combines the money of many individuals and invests this pooled money in a wide variety of different securities. It is by pooling the money of many individuals that mutual funds are able to provide the diversification and money management (along with many other advantages) that were once reserved only for the wealthy. Mutual funds are a popular investment for many types of investors because they offer a convenient, cost-effective and easy way to invest in the financial markets.

History of the Indian Mutual Fund

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases. First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India .

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 , Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.

Third Phase 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

Meaning of Mutual Fund

"Mutual Fund is a collective fund that belongs to and made available by those interested investors who opt for (choose) a Systematic Investment Plan (SIP). This fund is supervised and managed under the guidance of a qualified and experienced finance professional. The profits generated from such a fund (MF) are later distributed among its investors. These earned profits (returns) on mutual funds are finally distributed among its investors based on their individual contribution made in the earmarked scheme. A mutual funds can invest money in different type of instruments ranging from shares , debentures , gold , FD and some cash also.

It is a relationship..
Mutual means to have a reciprocal relationship. This relationship is between two or more individuals and/or entities on some agreed grounds, i.e. terms and conditions of actions (agreement) that are expected to be either followed, executed, adhered or delivered by parties involved in it. Any such actions must be taken in accordance with terms and conditions as specified or mentioned or stipulated in that agreement.

Types of mutual fund

It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments. Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds: 1) Equity funds (stocks) 2) Fixed-income funds (bonds) 3) Money market funds

Description of types
Money Market Funds
It is an investment fund that holds the objective to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. Mutual funds, brokerage firms and banks offer these funds. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments. The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD)

Bond/Income Funds
Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors. As such, the audience for these funds consists of conservative investors. The income bond is a somewhat rare financial instrument which generally serves a corporate purpose similar to that of preferred shares. It may be structured so that unpaid interest payments accumulate and become due upon maturity of the bond issue..

Cont
It can be a useful tool to help a corporation avoid bankruptcy during times of poor financial health or ongoing reorganization Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in highyield junk bonds is much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.

 Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class. A balanced fund is geared toward investors who are looking for a mixture of safety, income and modest capital appreciation. The amounts that such a mutual fund invests into each asset class usually must remain within a set minimum and maximum.

 Equity Funds
Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which is below.

Cont.
The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term value refers to a style of investing that looks for high quality companies that are out of favor with the market. These companies are characterized by low P/E and price-to-book ratios and high dividend yields. The opposite of value is growth, which refers to companies that have had (and are expected to continue to have) strong growth in earnings, sales and cash flow. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle. Example, a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value).

Cont..
Example, a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant.

Global/International Funds
An international fund invests only outside your home country. Global funds invest anywhere around the world, including your home country. It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile and have unique country or political risk. But, on the flip side, they can, as part of a wellbalanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of your home country.

 Specialty Funds
This classification of mutual funds is more of an allencompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. Specialty funds have a narrower range than other mutual fund investments. Instead of diversifying and targeting specific end-term goals, they narrow in on stocks from a single sector. Gold stocks, technology stocks, and many foreign country stocks often fall into this category.

Donor Advised Mutual Funds

Donor Advised Funds are those which are established through the charitable giving by people with philanthropic interests. These are called donor advised because they allow the giver, the donor to recommend/advise the funds on how they can use their portion of the fund and on which charity the money may be used and how much. Most of the donor advised funds operate in much the same way as other funds but require contributions of at least $10,000 (except Vanguard, with a minimum $25,000 contribution). The subsequent contributions can be $1,000. The funds invest the money in various instruments spread in proportions decided by trustees and are professionally managed.

Cont
In simply terms, Donor Advised Funds are those which are established through the charitable giving by people with philanthropic interests. These are called donor advised because they allow the giver, the donor to recommend/advise the funds on how they can use their portion of the fund and on which charity the money may be used and how much. They in addition to helping you claim a tax deduction from the gains you made but also give you that great feeling of sharing your fortunes with those in need. Donor advised mutual funds have come of age since 9/11, 2001 like never before. These are simply like establishing your own charitable funds.

Small Cap Mutual Funds

Small cap mutual funds are essentially stock funds devised at maximizing returns or growth. The term small cap refers to the capitalization of a corporation in the stock market which is any where between $ 300 and $ 2 billion. The term small cap refers to the capitalization of a corporation in the stock market which is any where between $ 300 and $ 2 billion. The figure is debatable among brokerages. Also the classification is for convenience and broking purposes and hence is an approximation. Small cap stocks and thus small cap mutual funds generate a lot of demand driven sales at the counters in bullish market pushing up the prices. The converse is also true for a bad day.

Sector funds are targeted at specific sectors of the

economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank.

Regional funds make it easier to focus on a specific

area of the world. This may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession.

Socially-responsible funds:- Invest only in

companies that meet the criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive performance while still maintaining a healthy conscience.

Index fund:-The last but certainly not the least

important are index funds. This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). An investor in an index fund figures that most managers can't beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees.

How a mutual fund works?

Now let's understand the flow, functioning or working of a mutual fund by taking reference of a cyclic diagram given above. In short, let's figure out, how a mutual fund works? 1. A Mutual Fund (MF) acts as a link that allows interested investors to pool (gather) their money to buy the units of mutual funds. The funds are contributed by the investors through opting a pre-defined Systematic Investment Plan (SIP). 2. This fund is then supervised, managed and led by a fund manager who is appointed by a mutual fund organization. The fund manager uses his expertise to channel and invest these collective funds in different financial securities of the market.

3.

Financial securities include; stocks, bonds, shares, short-term money market instruments and other securities. Now let's assume that investments made in these securities have generated profits. 4. These generated profits also called as returns and made from financial securities are afterwards passed back to the investors. These profits or returns are distributed to the investors only after charging (deducting) the managerial and administrative expenses. 5. After receiving profits, investors may decide to continue their investment in mutual fund. This is known as reinvestment. The main objective of reinvestment is to generate further income from the units of the MF.

Benefits of mutual funds

Mutual funds have been a popular investment vehicle for investors. Their simplicity along with other attributes provide great benefit to investors with limited knowledge, time or money. Following are the benefits of mutual funds:1. Diversification One rule of investing, for both large and small investors, is asset diversification. Diversification involves the mixing of investments within a portfolio and is used to manage risk. For example, by choosing to buy stocks in the retail sector and offsetting them with stocks in the industrial sector, you can reduce the impact of the performance of any one security on your entire portfolio.

Cont..
To achieve a truly diversified portfolio, you may have to buy stocks with different capitalizations from different industries and bonds with varying maturities from different issuers. For the individual investor, this can be quite costly. By purchasing mutual funds, you are provided with the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. One caveat, however, is that simply purchasing one mutual fund might not give you adequate diversification - check to see if the fund is sector or industry specific. For example, investing in an oil and energy mutual fund might spread your money over fifty companies, but if energy prices fall, your portfolio will likely suffer.

2. Economies of Scale
The easiest way to understand economies of scale is by thinking about volume discounts; in many stores, the more of one product you buy, the cheaper that product becomes. For example, when you buy a dozen donuts, the price per donut is usually cheaper than buying a single one. This also occurs in the purchase and sale of securities. If you buy only one security at a time, the transaction fees will be relatively large. Mutual funds are able to take advantage of their buying and selling size and thereby reduce transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges. Imagine if you had to buy the 10-20 stocks needed for diversification. The commission charges alone would eat up a good chunk of your savings. Add to this the fact that you would have to pay more transaction fees every time you wanted to modify your portfolio - as you can see the costs begin to add up.

3. Divisibility
Many investors don't have the exact sums of money to buy round lots of securities. One to two hundred dollars is usually not enough to buy a round lot of a stock, especially after deducting commissions. Investors can purchase mutual funds in smaller denominations, ranging from $100 to $1,000 minimums. Smaller denominations of mutual funds provide mutual fund investors the ability to make periodic investments through monthly purchase plans while taking advantage of dollar-cost averaging. So, rather than having to wait until you have enough money to buy highercost investments you can get in right away with mutual funds. This provides an additional advantage- liquidity.

4. Professional management:- When you buy a

mutual fund, you are also choosing a professional money manager. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to thoroughly research every investment before you decide to buy or sell, you have a mutual fund's money manager to handle it for you.

5. Bottom line:- As with any investment, there are risks

involved in buying mutual funds. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. Also, the advantages gained from mutual funds are not free: many of them carry loads, annual expense fees and penalties for early withdrawal.

Disadvantages of M.F
1.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 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 insured by the Federal Deposit Insurance Corporation.

2. Diversification:Although diversification is one of the keys to successful investing, many mutual fund investors tend to over diversify. The idea of diversification is to reduce the risks associated with holding a single security; over diversification occurs when investors acquire many funds that are highly related and, as a result, 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.

3. Cash,cash and more cash:As we know already, mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolios as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous.

COMPANIES WHO ISSUE MUTUAL FUNDS IN INDIA

1. 2. 3. 4. 5. 6. 7. 8. 9. Axis Baroda Pioneer Bharti AXA Birla Sun Life BNP Paribas Canara Robecco Dalwa Deutsche DSP Blackrock

Cont
10. Edelweiss 11. Escorts 12. Fidelity 13. Franklin Temp. 14. HDFC 15. HSBC 16.ICICI Prudential 17.IDBI 18.IDFC 19.ING

Cont.
20. JM Financial 21. JP Morgan 22. Kotak Mahindra 23. L&T 24. LIC Nomura 25. Mirae Asset 26. Morgan Stanley 27. Motilal Oswal 28.Peerless 29. Pramerica

Cont
30. Principal 31. Quantum 32. Reliance Capital 33. Religare 34. Sahara 35. SBI 36. Sundaram 37. Tata 38. Taurus 39. UTI

COMPARATIVE STUDY OF MUTUAL FUNDS

1. 2. Reliance Capital 104 Mutual Funds Schemes SBI - 73 Mutual Funds Schemes

a)

Reliance Capital
Equity 1) Diversified Large Capital Theme Based 2) Diversified Multi Capital 3) Diversified Mid capital & small Capital 4) Index 5) Banking

6) Diversified
7) Sector 8) Tax Saver 9) Arbitrage 10) Balanced

Cont
b) Debt
1) Ultra Short Term funds) 2) Short Term Funds 3) Monthly Income Plans 4) Money Market Funds (Liquid
5) Long Term Funds

c) Gold
1) Gold Exchange Traded Funds 2) Gold Savings Plan

Tax on income from mutual funds

The tax implications can have a significant impact on the return earned, it is necessary to understand the tax implications for both these heads of income. (1) Let's take income earned under the head of dividends first. As per existing tax provisions, income from dividends is tax free in the hands of the investor. However, this is not to say that there is no tax levied at all. On the contrary, there is a levy of 12.5 per cent of the dividend declared as distribution tax. This tax is paid out of the profits/reserves of the mutual fund scheme declaring the dividend.

Cont.
The application of the distribution tax in case of mutual funds is, however, not universal. The dividend distribution tax has to be paid only in case of debt schemes of mutual funds. Equity schemes are exempt from tax. So, if you were to receive Rs 100 as dividend from a debt mutual fund, it is equivalent to Rs 112.5 being paid out, the incremental Rs 12.5 having been paid to the government as distribution tax. In case of equity funds, however, as mentioned, there will be no such implication.Investors who fall in the highest tax bracket should opt for the dividend option in mutual fund schemes. But they should consider the fact that the tax on dividend paid to them has been paid by the mutual fund company itself in so far as debt schemes are concerned

Cont.
(2). Let's now consider the second head of income from mutual funds: capital gain. Capital gains from mutual funds are of two types: shortterm and long-term. This classification is based upon the period of holding. If the investment is sold within 365 days from the date of purchase, any capital gain made would be treated as a short term nature. Such a capital gain will be treated as a part of the total income and chargeable to tax at the normal rate of tax. If the mutual fund investment is sold after 365 days from the date of purchase, any capital gain made during that period will be treated as a long-term capital gain.

Cont.
Tax on long term capital gains is computed as follows: Step I: Compute Capital gains with indexation Sale Proceeds xxx Less: Indexed Cost of Acquisition xxx ---Long-term Capital Gains xxx ---Tax payable will be 20 per cent of capital gains as computed above. Formula for calculation of indexed cost of acquisition: Cost of acquisition / Cost inflation index for the year in which asset is acquired x Cost inflation index for the year in which asset is transferred.

Cont.
Step II: Compute Capital Gains without indexation Sale Proceeds xxx Less: Cost of Acquisition xxx ---Long-term Capital Gains xxx ---Tax payable will be 10 per cent of capital gains as computed above Compare the tax payable under both the options. Lower of the two will be tax payable.

Cont.
Example: Mr A purchased 5,000 units of a mutual fund on 20-6-1999. The price per unit is Rs 10. He sells all the 5,000 units on 15-9-2000 for Rs 12 per unit. Since the investment is held for more than 365 days the capital gain will be long-term capital gain. The capital gains will be calculated as follows: Step I: Compute Capital gains with indexation Sale Proceeds (5,000 units x Rs 12) = 60,000 Less:Indexed Cost of Acquisition** = 52,185 -----------Long-term Capital Gains = 7,815 Tax payable will be 20 per cent of Rs 7,815, i.e. Rs 1,563. Indexed cost of acquisition: 50,000 x 406 / 389 = Rs 52,185 ------------

QUESTIONNAIRE
A study of preferences of the investors for investment in mutual funds.
Q.1) Growth Fund is a mutual fund that a) Assures growth in income b) Invests in fixed income securities c) Gives fixed return d) Invests primarily in equities Q.2) While investing your money, which factor is prefer most? a) Liquidity b) Low Risk c) High return d) Company reputation

Q.3) A transaction where financial securities are issued against the cash flow generated from a pool of assets is called a) Securitization b) Credit Default Swaps c) Credit Linked Notes d) Total Return Swaps Q.4) Bank expects fall in price of a security if it sells it in the market. What is the risk that the bank is facing ? a) Market risk b) Operational risk c) Asset Liquidation risk d) Market liquidity risk

Q.5) Mutual fund mobilization has bearish influence on the stock market. a) True b) False

Q.6) Mutual fund mobilization has bearish influence on the stock market. a) False b) True c) Difficult to say
Q.7) Equity oriented mutual funds a) Assure income b) Assure growth c) Invest in debentures d) Invest in shares

Q.8)Balanced fund is a mutual fund that a) Assures income b) Invests in debt and equity c) Assure growth d) Gives fixed returns
Q.9) Convertible debentures carry an element of equity shares. a) False b) True c) Difficult to say Q.10) Credit Rating agencies fix interest rates on bonds or debentures issued by companies. a) False b) True c) Difficult to say

Q.11)Mutual Funds invest only in equity shares? a) False b) True c) Difficult to say
Q.12)Favorable monsoon brightens the prospects for stock market? a) False b) True c) Difficult to say Q.13)Large Government borrowings cause debt securities prices to rise? a) False b) True c) Difficult to say

Q.14) SEBI gives credit rating to securities issued in the capital market? a) False b) True c) Difficult to say Q.15) A mutual fund scheme; with a entry load will have its sale price higher than its NAV? a) False b) True c) Difficult to say Q.16) Which AMC will you prefer to invest? a) SBIMF b) UTI c) Reliance d) HDFC e) ICICI

Q.17) Interest rate risk is a type of a) Credit risk b) Market risk c) Operational risk d) All the above Q.18) Which of the following is not a type of credit risk ? a) Default risk b) Credit spread risk c) Intrinsic risk d) Basis risk Q.19) What is the funds investment objective? a) Capital gains b) Income investing.

Q.20) A bank holds a security that is rated A+. The rating of the security migrates to A. What is the risk that the bank has faced ? a) Market risk b) Operational risk c) Market liquidation risk d) Credit risk Q.21) Which feature of the mutual funds allure most? (a) Diversification (b) Better return and safety (c) Reduction in risk (d) Regular Income (e) Tax benefit Q.22)Mutual funds can offer guaranteed returns? a) False b) True c) Difficult to say

Q.23) Interest rate risk is a type of a) Credit risk b) Market risk c) Operational risk d) All the above Q.24)Which of the following is not a type of credit risk ? a) Default risk b) Credit spread risk c) Intrinsic risk d) Basis risk Q.25)A bank holds a security that is rated A+. The rating of the security migrates to A.What is the risk that bank has faced ? a) Market risk b) Operational risk c) Market liquidation risk d) Credit risk

Q.26) Fall in interest rate cause the rate causes the bond prices also to fall? a) False b) True c) Difficult to say
Q.27)Growth Funds assure growth in return? a) False b) True c) Difficult to say Q.28)Closed end mutual funds are trading at discount to NAV? a) False b) True c) Difficult to say

Q.29) A fall in interest rates reduces the demand for bonds in the secondary market a) False b) True c) Difficult to say Q.30) Dematerialization of stocks has increased turnover on the stock market. a) False b) True c) Difficult to say Q.31)Increasing Government borrowing will raise interest rates. a) False b) True c) Difficult to say

Answers
1. 2. 3. 4. 5. 6. 7. 8. (d) (d) (a) (c) (a) (a) (d) (c) 9. 10. 11. 12. 13. 14. 15. 16. (b) (a) (a) (b) (a) (a) (b) (a)

Cont.
17. 18. 19. 20. 21. 22. 23. 24. (b) (b) (a) (d) (c) (a) (b) (b) 25. 26. 27. 28. 29. 30. 31. (d) (a) (a) (b) (b) (b) (b)