A Study On Investor Preferences Towards Various Mutual Funds

“A Study on Investor Preferences towards Various Mutual Funds”
A report submitted towards the partial fulfilment of the requirements of
the two years full time Post Graduate Diploma in Management
Submitted by: Vikas Gaba
Post Graduate Diploma in Management
2K7/PGPM/D52
(2007-09)
Asia Pacific Institute of Management Studies
New Delhi
ACKNOWLEDGEMENT
1
I Thank Asia Pacific Institute of management Studies for giving me an
opportunity to undertake my project work and for giving me knowledge
in the field of finance during my two months summer internship
I express my sincere and humble gratitude to Mr. Sumit Rastogi, for
being my project and Industry guide and educating me to make this
project a great success.
I would like to thank Mr. Purshottam Sharna for his valuable guidance
and support in completion of my project. I would express my sincere
thanks to all the staff members of Religare Securities ( Mr. Santosh
Kumar, Mr. Parbash, Mr. Fariyaad Hussain, Mr. Muniraj Singh and Many
more... without their support this project would not have been a
success.
Last but not the Least i would like to thank those person whose
encouragement and ideas enriched my project.
Vikas Gaba
TABLE OF CONTENT
2
ACKOWLEDGEMENT
OBJECTIVE OF STUDY
INTRODUCTION
MUTUAL FUND INDUSTRY
COMPANY’S PROFILE
CONCEPT OF MUTUAL FUNDS
EVOLUTION OF MUTUAL FUNDS
BENEFITS OF INVESTING IN MFs
MAJOR MUTUAL FUND COMPANIES INDIA
VARIOUS TYPES OF MFs
RESEARCH METHODOLOGY
RESEARCH HYPOTHESIS
OBSERVATIONS
RESULTS
ANALYSIS
CONCLUSION
RECOMMENDATIONS
ABSTRACT
ANNEXURE
BIBLIOGRAPHY / WEBLIOGRAPHY
3
OBJECTIVE
Starting out as an industry with a single player, the UTI, in 1963, the
mutual fund industry in India has come a long way since then. Today,
close to 32 players, offering over 756 schemes, dot the industry
landscape. The industry has gained enormously in size as reflected in its
assets under management which now:
Asset Under
Managemen
Category t
as on May
31 , 2008
A Bank Sponsored 90719

B Institutions 18649
Private Sector & Joint Venture :
Indian 190170
Predominantly Foreign 73525

Predominantly Indian 192744
C Grand Total (B+C+D) 565807
So today, there is large no. of options for an investor to invest in Mutual
Funds.
So, my objective here is:
TO STUDY INVESTORS’ NEEDS i.e. how much risk can they afford, how
much returns they expect on their investment, for what time can they
4
invest and based on their profile, to study, what kind of funds should
they invest in.
To analyze different funds on the basis of their of their risk, returns they
give over different time periods & their return-risk ratio, so as to find
out which kind of funds (Equity, debt or sectoral funds) are suitable to
investors during volatile or normal times.
INTRODUCTION
5
Definition: Mutual Fund
A mutual fund is a trust that pools savings of investors who share a
common financial goal and then invests in market instruments such as
shares, debentures and other securities. The income earned through
these investments are shared by its unit holders in proportion to the
number of units owned by them making it highly suitable investment
option for the common man. A mutual fund provides for an opportunity
to invest in a diversified, professionally managed basket of securities at
a relatively low cost.
Acc to SEBI guidelines
Mutual fund is a mechanism for pooling the resources by issuing units to
the investors and investing in securities in accordance with the
objectives as disclosed in offer document. The profits or losses are
share by investors in proportion to their investments.
6
Structure of Mutual Funds
7
Sponsor
Sponsor is the person who acting alone or in combination with another
body corporate establishes a mutual fund. Sponsor must contribute at
least 40% of the net worth of the Investment Managed and meet the
eligibility criteria prescribed under the Securities and Exchange Board of
India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible
or liable for any loss or shortfall resulting from the operation of the
Schemes beyond the initial contribution made by it towards setting up
of the Mutual Fund.
8
Trust
Trustee is usually a company (corporate body) or a Board of Trustees
(body of individuals). The main responsibility of the Trustee is to
safeguard the interest of the unit holders and inter alia ensure that the
AMC functions in the interest of investors and in accordance with the
Securities and Exchange Board of India (Mutual Funds) Regulations,
1996, the provisions of the Trust Deed and the Offer Documents of the
respective Schemes. At least 2/3rd directors of the Trustee are
independent directors who are not associated with the Sponsor in any
manner.
Asset Management Company
The AMC is appointed by the Trustee as the Investment Manager of the
Mutual Fund. The AMC is required to be approved by the Securities and
Exchange Board of India (SEBI) to act as an asset management
company of the Mutual Fund. At least 50% of the directors of the AMC
are independent directors who are not associated with the Sponsor in
any manner. The AMC must have a net worth of at least 10 crore at all
times.
Registrars and Transfer Agents
9
The AMC if so authorized by the Trust Deed appoints the Registrar and
Transfer Agent to the Mutual Fund. The Registrar processes the
application form, redemption requests and dispatches account
statements to the unit holders. The Registrar and Transfer agent also
handles communications with investors and updates investor records.
Mutual funds have been around for more than half a century but they
remain a marginal investment vehicle in India until the beginning of the
90's. Ever since, we have observed a real boom in their development
and academics have begun to pay great attention to them. Mutual
Funds fascinate because of the high return provided by them along
with the benefits of Professional management and risk diversification.
Various researches have been conducted to explore the different facets
of Mutual Funds such as returns and risk factors and the Drivers of
Performance. Now there exist several powerful Brands in mutual fund
industry such as Fidelty, Franklin Templeton and S.B.I Mutual Funds.
assets under management which now
10
assets under management which now
Asset Under
Category Management
as on May 31 ,
2008
A Bank Sponsored 90719

B Institutions 18649
Private Sector & Joint Venture :
Indian 190170
Predominantly Foreign 73525

Predominantly Indian 192744
C Grand Total (B+C+D) 565807
The journey of the industry has been nothing less than spectacular,
particularly in the last 5 years or so. A host of factors has contributed to
the phenomenal growth of the industry. First and foremost, as a result
of the increased competition, industry players have focused on product
innovation to drive growth. This has not only helped the industry players
to tap the latent needs of the investors, but also enabled them to
expand markets as more and more investors, including retail investors,
have begun to look at mutual funds as a suitable investment avenue.
Second, the need for greater market penetration has forced industry
players to devise innovative channels of delivery to gain and strengthen
11
their market share. Today, we see new channels and models of
distribution emerging as the race among the fund houses heats up to
enhance reach to potential investors. Third, a slew of tax incentives,
which include rationalizing of capital gains tax, aiming to boost equity
investing coupled with a benign interest rate regime have helped
mutual funds gain popularity with investors. Finally, a slew of regulatory
measures taken by SEBI have played a crucial role in instilling
confidence among investors, especially retail investors. No doubt these
factors have attributed significantly to the growth of the mutual fund
industry in the country, particularly in recent times.
Further, the emergence of India as a major investment destination has
done a world of good to the mutual fund industry in the country as it is
witnessing entry of many big names in the global investment
management business. The entry of major global players like Morgan
Stanley, Principal, Sunlife, and Fidelity, while Vanguard is mulling over
its India debut, augurs well for the industry as not only these global
investment management firms bring with them the expertise gained
internationally but also bring the best international practices in terms of
performances and investor services which will benefit the industry and
will go a long way in helping it catch up with its counter parts in
developed markets like the US and the UK.
12
A host of things suggests that the industry is all set to enter a period of
high growth. A robust economy, fledgling stock market, increasing
awareness and acceptance of mutual funds among investors, strong
domestic currency, and healthy corporate performances are among
some of the major factors which suggest that the industry's future is
bright. However, to gain size, and catch up with developed markets like
the US, the industry has to remove certain obstacles which pose
significant challenges.
The Flow Chart below describes broadly the working of a Mutual Fund
13
REVIEW
OF
LITERATURE
14
Research in mutual fund industry has grown to a considerable extent. A
number of key papers has been written exploring the different aspects
but still some areas are under study such as how to rate the different
Asset Management Companies, how to design assured return products,
how the investors making investment in Mutual Funds. What are the
factors which affects customer’s decision during investment in Mutual
fund? This part reviews preceding works attempting to answer these
issues.
Most research on mutual funds has employed two explanatory
variables, namely, risk and return. This approach implicitly places no
value on other potentially important attributes of the mutual fund
investment decision. In keeping with this strictly economic frame,
several scholars have investigated whether or not mutual funds
outperform the market.
The existing “Behavioural Finance” studies are very few and very little
information is available about investor perceptions, preferences,
attitudes and behaviour. All efforts in this direction are fragmented.
15
Ippolito (1992) says that fund/scheme selection by investors is based
on past performance of the funds and money flows into winning funds
more rapidly than they flow out of losing funds.
Goetzman (1997) states that there is evidence that investor
psychology affects fund/scheme selection and switching.
De Bondt and Thaler (1985) while investigating the possible
psychological basis for investor behaviour, argue that mean reversion in
stock prices is an evidence of investor over reaction where investors
overemphasise recent firm performance in forming future expectations.
In India, one of the earliest attempts was made by NCAER in 1964 when
a survey of households was undertaken to understand the attitude
towards and motivation for saving of individuals. Another NCAER study
in 1996 analysed the structure of the capital market and presented the
views and attitudes of individual shareholders.
SEBI – NCAER Survey (2000) was carried out to estimate the number
of households and the population of individual investors, their economic
and demographic profile, portfolio size, and investment preference for
equity as well as other savings instruments. Behaviour is a reaction to a
situation. So as situation changes, behaviour gets modified. Hence,
findings and predictions of behaviour studies should be viewed
accordingly).
16
Kulshreshta (1994) offers certain guidelines to the investors in
selecting the mutual fund schemes.
Shanmugham (2000) conducted a survey of 201 individual investors
to study the information sourcing by investors, their perceptions of
various investment strategy dimensions and the factors motivating
share investment decisions, and reports that among the various factors,
psychological and sociological factors dominated the economic factors
in share investment decisions.
Madhusudhan V Jambodekar (1996) conducted a study to assess
the awareness of MFs among investors, to identify the information
sources influencing the buying decision and the factors influencing the
choice of a particular fund. The study reveals among other things that
Income Schemes and Open Ended Schemes are more preferred than
Growth Schemes and Close Ended Schemes during the then prevalent
market conditions. Investors look for safety of Principal, Liquidity and
Capital appreciation in the order of importance; Newspapers and
Magazines are the first source of information through which investors
get to know about MFs/Schemes and investor service is a major
differentiating factor in the selection of Mutual Fund Schemes.
Sujit Sikidar and Amrit Pal Singh (1996) carried out a survey with
an objective to understand the behavioural aspects of the investors of
the North Eastern region towards equity and mutual funds investment
portfolio. The survey revealed that the salaried and self employed
17
formed the major investors in mutural fund primarily due to tax
concessions. UTI and SBI schemes were popular in that part of the
country then and other funds had not proved to be a big hit during the
time when survey was done.
Anjan Chakarabarti and Harsh Rungta (2000) stressed the
importance of brand effect in determining the competitive position of
the AMCs. Their study reveals that brand image factor, though cannot
be easily captured by computable performance measures, influences
the investor’s perception and hence his fund/scheme slection.
Since 1986, a number of articles and brief essays have been published
in financial dailies, periodicals, professional and research journals,
explaining the basic concept of Mutual Funds and highlight their
importance in the Indian capital market environment. They touch upon
varied aspects like Regulation of Mutual Funds, Investor expectations,
Investor protection, Trend in growth of Mutual Funds and some are
critical views on the performance and functioning of Mutual Funds.
Segmentation of investors on the basis of their characteristics was
highlighted by Raja Rajan (1997).
Investor’s characteristics on the basis of their investment size Raja
Rajan (1997), and the relationship between stage in life cycle of the
investors and their investment pattern was studied Raja Rajan (1998).
18
From the above review it can be inferred that Mutual Fund as an
investment vehicle is capturing the attention of various segments of the
society, like academicians, industrialists, financial intermediaries,
investors and regulators or varied reasons and deserves an indepth
study.
In this paper, an attempt is made by the author, mainly to study the
factors which influence the investors in their selection of the
fund/scheme.
19
COMPANY
PROFILE
Group Overview
Pharmaceutical Financia
Health Care IT
s l
20
Religare, a Ranbaxy promoter group company, is one of India’s largest and fastest
growing is one of the leading integrated financial services institutions of India.
6 Regional offices
25 Zonal Offices
Present in 1300 location all over India
Present in 400 Cities & Towns
Total group employees 6,500 plus
Present in Retail, Wealth and Institutional Spectrum
Among the largest Retail brokerage branch network, present beyond Tier-I and Tier-II
cities in India
Overseas presence established in London, with aggressive plans of straddling other parts of
the globe in this financial year.
Vision - To build Religare as a globally trusted brand in the financial services domain
and present it as the ‘Investment Gateway of India’
Mission - To provide financial care driven by the core values of diligence &
transparency
Brand Essence - Our Core essence is diligence and we are driven by ethical and
dynamic processes for wealth creation.
Name
Religare is a Latin word that translates as 'to bind together'.
The Religare name is paired with the symbol of a four-leaf clover. The four-leaf clover is
used to define the rare quality of good fortune that is the aim of every financial plan.
21
The first leaf of the clover represents Hope. The aspirations to succeed. The dream
of becoming. Of new possibilities. It is the beginning of every step and the
foundations on which a person reaches for the stars.
The second leaf of the clover represents Trust. The ability to place ones own faith
in another. To have a relationship as partners in a team. To accomplish a given
goal with the balance that brings satisfaction to all not in the binding but in the
bond that is built.
The third leaf of the clover represents Care. The secret ingredient that is the
cement in every relationship. The truth of feeling that undeJrlines sincerity and the
triumph of diligence in every aspect. From it springs true warmth of service and
the ability to adapt to evolving environments with consideration to all.
The fourth and final leaf of the clover represents Good Fortune. Signifying that rare
ability to meld opportunity and planning with circumstance to generate those often
looked for remunerative moments of success.
Hope. Trust. Care. Good fortune. All elements perfectly combine in the
emblematic and rare, four-leaf clover to visually symbolize the values that bind
together and form the core of the Religare vision.
22
Religare
Religare Religare Wealth
Securities Finvest Ltd Management
Ltd Religare
Services Ltd
Religare
Capital
Commodities Religare Enterprises
Markets Ltd
Ltd Ltd
Religare Religare
Insurance Finance Ltd

Religare
Broking Ltd
Venture Religare
Capital Pvt Realty Ltd
Ltd
Most of the subsidiaries have come into existence after 2005.
Religare Enterprises Limited
Religare Securities Limited -
Equity Broking
Portfolio Management Services
Depository
Online Investment Portal
Institutional Equity Broking

Religare Finvest Limited -
Lending and Distribution business

Religare Commodities Limited -
23
Commodity Business
Religare Insurance Broking Limited -
Life and Non Life Insurance
Reinsurance
Religare Capital Markets Limited -
Investment Banking
SEBI Registered Merchant Banker
Acquisition in UK through an international arm

Religare Arts Initiative Limited -
Art Fund and other businesses of Art
Gallery to be launched soon

Religare Realty Limited -
Real Estate Management Company

Religare Venture Capital Private Limited -
Private Equity and Investment Manager
24
New Initiatives
Religare Enterprises Limited and Vistaar Entertainment Ventures
Private Limited launched India’s first ever film fund - Vistaar Religare
Film Fund (VRFF) for the Film/Media business.
Religare Macquarie Wealth Management Limited -
50: 50 joint venture with Macquarie for wealth management business
Religare AEGON AMC -
50:50 Joint Venture between REL and Aegon for Asset Management
business in India.
25
AEGON Religare Life Insurance -
Life Insurance Company, Joint Venture between REL, Aegon and BCCL
for Life insurance business in India .
Products
Equity
Arts Commodit
Initiative y
Investmen
Mutual
t
REL
Fund
Banking
Wealth
Advisory Insurance
Personal
Services
Credit
26
Religare Securities Limited (RSL) is a leading equity and securities firm in India.
The major activities and offerings of the company today are Equity broking, Depository
Participant Services, Portfolio Management Services, Institutional Brokerage & Research,
Investment Banking and Corporate Finance.
Client Interface
Retail Spectrum- To cater to a large number of retail clients by offering all products
under one roof through the Branch Network and Online mode
Equity and Commodity Trading
Personal Financial Services
Mutual Funds
Insurance
Saving Products
Personal Credit
Personal Loans
Loans against Shares
Online Investment Portal
27
Institutional Spectrum- To Forge & build strong relationships with Corporate Client
and Institutions
Institutional Equity Broking
Investment Banking
Merchant Banking
Transaction Advisory
Corporate Finance
Wealth Spectrum - To provide customized wealth advisory services to
High Net worth Individuals
Wealth Advisory Services
Portfolio Management Services
International Advisory Fund Management Services
Priority Client Equity Services
Arts Initiative
Retail Spectrum
28
Wide Reach Present in more than 1200 locations
all over India
Present in 400 Cities & Towns
More than 150% increase in
penetration in the current fiscal

Large Client Base 2.75 Lac + Clients
More than 150% increase in client
base in 2006-07
Market Share Equity Broking: 4.5% - 5.5% of the
Market Turnover
Commodity Broking: 3-4% of the
Market Turnover
Online Investment: 8% of the Market
Turnover
Almost 100% increase in Market
Share since last fiscal

Dedicated Sales Force Equity and Commodity: 2400
Online Investment: 900
PFS: 300
Insurance: 140
29
Personal Credit: 120
More than 250% increase in retail
sales work force over the last
financial year
Key Facts
Official Launch of E-broking in August 2006
Aggressive growth has been observed in the client base for online
trading
Acquired market share of 8% in internet trading volumes *
Recently launched a revamped, unique 360 degrees customer centric
online trading portal
To increase team strength to 3000 employees purely for internet
trading
Targeting 300,000 online clients by the end of this financial year
30
Rising Number of online clients
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Oct-06
Sep-06
Aug-06
0 5000 10000 15000 20000 25000 30000 35000
31
In $ mn Rising Turnover
Personal Financial Services
PFS caters to the financial needs of individuals by advising them on
various financial plans
Financial planning for retail investment is not widespread in India
PFS was started to target the rapidly expanding middle net worth
individuals (MNI’s) in India
Rapid rollout of PFS Products offering, such as mutual funds, life and
general insurance, fixed income, small savings instruments, capital
bonds and equity IPOs
Expert group of Religare’s PFS advisors provide high quality customized
solutions
Dedicated Team of more than 200 advisors, to be expanded to 800 by
March 2008
Rising MF Collections for both Debt & Equity
32
Product –Wise Clients
33
Concept Of
Mutual Funds
34
History (Global) of Mutual Funds
The first open-end mutual fund, Massachusetts Investor Trust was
founded on March 21, 1924, and after one year had 200 shareholders
and $392,000 in assets. The entire industry, which included a few close-
end funds, represented less than $10 million in 1924.
The stock market crash of 1929 slowed the growth of mutual funds. In
response to the stock market crash, Congress passed the Securities Act
of 1933 and the Securities Exchange Act of 1934. These laws require
that a fund be registered with the SEC and provide prospective
investors with a prospectus. The SEC (U.S. Securities and Exchange
Commission) helped create the Investment Company Act of 1940 which
provides the guidelines that all funds must comply with today.
In 1951, the number of funds surpassed 100 and the number
shareholders exceeded 1 million. Only in 1954 did the stock market
finally rise above its 1929 peak and by the end of the fifties there were
155 mutual funds with $15.8 billion in assets. In 1967 funds hit their
best year, one quarter earning at least 50 % with an average return of
35
67 %, but it was done by cheating using borrowed money, risky options,
and pumping up returns with privately traded “letter stock. By the end
of the 60’s there were 269 funds with a total of $48.3 billion.
With renewed confidence in the stock market, mutual funds began to
blossom. By the end of the 1960’s there were around 270 funds with
$48 billion in assets. The first retail index fund was released in 1976,
called the First Index Investment Trust. It is now called the Vanguard
500 Index fund and is one of the largest mutual funds ever with the in
excess of $100 billion in assets.
As of April 2006, there are 8606 mutual funds that belong to the
Investment Company Institute (ICI), the national association of
Investment Companies in the United States.
PHASES OF MUTUAL FUNDS (in India)
The Mutual Fund industry started in India with the setting up of UTI in
1964 by R.B.I. Its development can be described into four Phases as
follows:
First Phase-1964-87
Unit Trust of India 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. In
1978 UTI was de-linked from RBI and the Industrial Development Bank
36
of India (IDBI) took over the regulatory and administrative control in
place of RBI. The first scheme launched by UTI was Unit Scheme 1964.
At the end of 1998 UTI had Rs 6700 crore of assets under management.
Second Phase-1987-1993 (Entry of public sector funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India. SBI Mutual fund was the first
non-UTI Mutual Fund established in June 1987 followed by Canbank
Mutual Fund (Dec87). At the end of 1993, the mutual fund industry had
assets under management of Rs. 47,004 crores.
Third Phase-1993-2003 (Entry of Private Sector Funds):
The third phase saw the entry of private and foreign sectors in mutual
fund industry in 1993 with Kothari pioneer mutual fund (now merged
with Franklin Templeton) being set up as the first private sector fund.
With the entry of private sector funds in 1993, a new era started in the
Indian Mutual Fund industry, giving the Indian investor 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 opening up of the asset
management business to private sector in 1993 saw international
players like Morgan Stanley and Jardine Fleming etc.
37
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund
Regulation in 1996.
The number of mutual fund houses went
on increasing, with many foreign mutual
funds setting up funds in India and also
the industry has witnessed several
mergers and acquisitions. As at the end
of January 2003, there were 33 mutual
funds with total assets of Rs. 1,21,805
crores. The Unit Trust of India with Rs.
44,541 crores of assets under management was way ahead of other
mutual funds.
Fourth Phase-since February 2003:
In February 2003, following the repeal of the Unit Trust of India Act 1963
UTI was bifurcated into 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 and certain other schemes. The specified
Undertaking of Unit Trust of India, functioning under an administrator
38
and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in
March 2000 more than 76,000 Crores of Assets under Management and
with the setting up of a UTI Mutual Fund, confirming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth, as at the end of September,
2004, there were 29 funds, which manage assets of Rs.153108 crores
under 421 schemes.
Benefits of Mutual Fund investment
39
Professional Management: Mutual Funds provide the services of
experienced and skilled professionals, backed by a dedicated
investment research team that analyses the performance and prospects
of companies and selects suitable investments to achieve the objectives
of the scheme.
Diversification: Mutual Funds invest in a number of companies across
a broad cross-section of industries and sectors. This diversification
reduces the risk because seldom do all stocks decline at the same time
and in the same proportion. You achieve this diversification through a
Mutual Fund with far less money than you can do on your own.
Convenient Administration: Investing in a Mutual Fund reduces
paperwork and helps you avoid many problems such as bad deliveries,
delayed payments and follow up with brokers and companies. Mutual
Funds save your time and make investing easy and convenient.
Return Potential: Over a medium to long-term, Mutual Funds have the
potential to provide a higher return as they invest in a diversified basket
of selected securities.
Low Costs: Mutual Funds are a relatively less expensive way to invest
compared to directly investing in the capital markets because the
benefits of scale in brokerage, custodial and other fees translate into
lower costs for investors.
40
Liquidity: In open-end schemes, the investor gets the money back
promptly at net asset value related prices from the Mutual Fund. In
closed-end schemes, the units can be sold on a stock exchange at the
prevailing market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund.
Transparency: Investors get regular information on the value of your
investment in addition to disclosure on the specific investments made
by the scheme, the proportion invested in each class of assets and the
fund manager's investment strategy and outlook.
Flexibility: Through features such as regular investment plans, regular
withdrawal plans and dividend reinvestment plans, one can
systematically invest or withdraw funds according to your needs and
convenience.
Affordability: Investors individually may lack sufficient funds to invest
in high-grade stocks. A mutual fund because of its large corpus allows
even a small investor to take the benefit of its investment strategy.
Choice of Schemes: Mutual Fund offers a family of schemes to suit
your varying needs over a lifetime. This offers investors to further
diversify their investments.
41
Well Regulated: All Mutual Funds are registered with SEBI and they
function within the provisions of strict regulations designed to protect
the interests of investors. The operations of Mutual Funds are regularly
monitored by SEBI.
Limitation of Mutual Fund Investment
No Control Over Cost: An Investor in mutual fund has no control over
the overall costs of investing. He pays an investment management fee
(which is a percentage of his investments) as long as he remains
invested in fund, whether the fund value is rising or declining. He also
has to pay fund distribution costs, which he would not incur in direct
investing.
However this only means that there is a cost to obtain the benefits of
mutual fund services. This cost is often less than the cost of direct
investing.
42
No Tailor-Made Portfolios: Investing through mutual funds means
delegation of the decision of portfolio composition to the fund
managers. The very high net worth individuals or large corporate
investors may find this to be a constraint in achieving their objectives.
However, most mutual fund help investors overcome this constraint by
offering large no. of schemes within the same fund.
Managing A Portfolio Of Funds: Availability of large no. of funds can
actually mean too much choice for the investors. He may again need
advice on how to select a fund to achieve his objectives.
AMFI has taken initiative in this regard by starting a training and
certification program for prospective Mutual Fund Advisors. SEBI
has made this certification compulsory for every mutual fund advisor
interested in selling mutual fund.
Taxes: During a typical year, most actively managed mutual funds sell
anywhere from 20 to 70 percent of the securities in their portfolios. If
your fund makes a profit on its sales, you will pay taxes on the income
you receive, even if you reinvest the money you made.
Cost of Churn: The portfolio of fund does not remain constant. The
extent to which the portfolio changes is a function of the style of the
individual fund manager i.e. whether he is a buy and hold type of
manager or one who aggressively churns the fund. It is also dependent
on the volatility of the fund size i.e. whether the fund constantly
43
receives fresh subscriptions and redemptions. Such portfolio changes
have associated costs of brokerage, custody fees etc. which lowers the
portfolio return commensurately.
Major Mutual Fund Companies in India
ABN AMRO Mutual Fund
ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO
Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO
Asset Management (India) Ltd. was incorporated on November 4, 2003.
Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund. As of
may 2008, the fund has assets of Rs.6066.30 crores under
management.
Birla Sun Life Mutual Fund
Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and
Sun Life Financial. Sun Life Financial is a global organisation evolved in
1871 and is being represented in Canada, the US, the Philippines, Japan,
Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund
follows a conservative long-term approach to investment. As of may
2008, the fund has assets of Rs. 41,426.64 crores under management.
44
Bank of Baroda Mutual Fund
Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October
30, 1992 under the sponsorship of Bank of Baroda. BOB Asset
Management Company Limited is the AMC of BOB Mutual Fund and was
incorporated on November 5, 1992. Deutsche Bank AG is the custodian
of Bank of Baroda Mutual Fund. As of May 2008, the fund has assets of
Rs. 64.83 crores under management.
HDFC Mutual Fund
AMC is a joint venture between housing finance giant HDFC and British
investment firm Standard Life Investments Limited was setup on June
30, 2000. It conducts the operations of the Mutual Fund and manages
assets of the schemes, including the schemes launched from time to
time. As of Feb 2008, the fund has assets of Rs.46,291.97 crores under
management.
In 2003, following a decision by the Zurich Insurance Company (ZIC),
the Sponsor of Zurich India Mutual Fund, to divest its asset
management business in India, AMC had entered into an agreement
with ZIC to acquire the asset management business. Consequently, all
the schemes of Zurich Mutual Fund in India had been transferred to
HDFC Mutual Fund and renamed as HDFC schemes.
45
HSBC Mutual Fund
HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and
Capital Markets (India) Private Limited as the sponsor. Board of
Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC
Mutual Fund. As of may 2008, the fund has assets of Rs. 17,617.11
crores under management.
ING Vysya Mutual Fund
ING Vysya Mutual Fund was setup on February 11, 1999 with the same
named Trustee Company. It is a joint venture of Vysya and ING. The
AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on
April 6, 1998. As of May 2008, the fund has assets of Rs. 8,608.29
crores under management.
Prudential ICICI Mutual Fund
The mutual fund of ICICI is a joint venture with Prudential Plc. of
America; one of the largest life insurance companies in the USA.
Prudential ICICI Mutual Fund was setup on 13th of October 1993 with
two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company
formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI
Asset Management Company Limited incorporated on 22nd of June,
46
1993. As of May 2008, the fund has assets of Rs.59,573.08 crores
under management.
Sahara Mutual Fund
Sahara Mutual Fund was set up on July 18, 1996 with Sahara India
Financial Corporation Ltd. as the sponsor. Sahara Asset Management
Company Private Limited incorporated on August 31, 1995 works as the
AMC of Sahara Mutual Fund. As of May 2008, the fund has assets of Rs.
180.64 crores under management.
State Bank of India Mutual Fund
State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund
to launch offshore fund, the India Magnum Fund with a corpus of Rs.
225 cr. approximately. Today it is the largest Bank sponsored Mutual
Fund in India. They have already launched 52 Schemes out of which 15
have already yielded handsome returns to investors. State Bank of India
Mutual Fund has more than Rs. 29,492.97 Crores as AUM. Now it has an
investor base of over 38 Lakhs spread over 52 schemes.
Tata Mutual Fund
Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The
sponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment
Corporation Ltd. The investment manager is Tata Asset Management
Limited and its Tata Trustee Company Pvt. Limited. Tata Asset
47
Management Limited's is one of the fastest in the country with more
than Rs. 24,478.45 crores as on may, 2008 of AUM.
Kotak Mahindra Mutual Fund
Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of
KMBL. KMAMC started its operations in December 1998. Kotak Mahindra
Mutual Fund offers schemes catering to investors with varying risk -
return profiles. It was the first company to launch dedicated gilt scheme
investing only in government securities. As of May 2008, the fund has
assets of Rs.21,580.62 crores under management.
Unit Trust of India Mutual Fund
UTI Asset Management Company Private Limited, established in Jan 14,
2003, manages the UTI Mutual Fund with the support of UTI Trustee
Company Private Limited. UTI Asset Management Company presently
manages a corpus of over Rs. 48,347.60 Crore. The sponsors of UTI
Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB),
State Bank of India (SBI), and Life Insurance Corporation of India (LIC).
The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset
Management Funds, Index Funds, Equity Funds and Balance Funds.
Reliance Mutual Fund
Reliance Mutual Fund (RMF) was established as trust under Indian
Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and
48
Reliance Capital Trustee Co. Limited is the Trustee. It was registered on
June 30, 1995 as Reliance Capital Mutual Fund, which was changed on
March 11, 2004. Reliance Mutual Fund was formed for launching of
various schemes under which units are issued to the Public with a view
to contribute to the capital market and to provide investors the
opportunities to make investments in diversified securities. As of May
2008, the fund has assets of Rs.93,531.68 crores under management.
IDFC MUTUAL FUND
Standard Chartered Mutual Fund was set up on March 13, 2000
sponsored by Standard Chartered Bank. The Trustee is Standard
Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset
Management Company Pvt. Ltd. is the AMC which was incorporated with
SEBI on December 20,1999. As of May 2008, the fund has assets of
Rs.12,513.40 crores under management.
Franklin Templeton India Mutual Fund
The group, Frnaklin Templeton Investments is a California (USA) based
company. It is one of the largest financial services groups in the world.
Investors can buy or sell the Mutual Fund through their financial advisor
or through mail or through their website. They have Open end
Diversified Equity schemes, Open end Sector Equity schemes, Open end
Hybrid schemes, Open end Tax Saving schemes, Open end Income and
Liquid schemes, Closed end Income schemes and Open end Fund of
49
Funds schemes to offer. As of May 2008, the fund has assets of Rs.
25,621.97 crores under management.
Morgan Stanley Mutual Fund India
Morgan Stanley is a worldwide financial services company and its
leading in the market in securities, investment management and credit
services. Morgan Stanley Investment Management (MISM) was
established in the year 1975. It provides customized asset management
services and products to governments, corporations, pension funds and
non-profit organisations. 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. As of May 2008, the fund
has assets of Rs. 3,416.93crores under management.
Escorts Mutual Fund
Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance
Limited as its sponsor. The Trustee Company is Escorts Investment
Trust Limited. Its AMC was incorporated on December 1, 1995 with the
name Escorts Asset Management Limited. As of May 2008, the fund has
assets of Rs. 173.42 crores under management.
50
Alliance Capital Mutual Fund
Alliance Capital Mutual Fund was setup on December 30, 1994 with
Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The
Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital
Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.
Benchmark Mutual Fund
Benchmark Mutual Fund was setup on June 12, 2001 with Niche
Financial Services Pvt. Ltd. as the sponsor and Benchmark Trustee
Company Pvt. Ltd. as the Trustee Company. Incorporated on October
16, 2000 and headquartered in Mumbai, Benchmark Asset Management
Company Pvt. Ltd. is the AMC. As of May 2008, the fund has assets of
Rs. 4954.42 crores under management.
Canbank Mutual Fund
Canbank Mutual Fund was setup on December 19, 1987 with Canara
Bank acting as the sponsor. Canbank Investment Management Services
Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of
the AMC is in Mumbai. As of May 2008, the fund has assets of Rs.
4122.37 crores under management.
LIC Mutual Fund
Life Insurance Corporation of India set up LIC Mutual Fund on 19th June
1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC
51
Mutual Fund was constituted as a Trust in accordance with the
provisions of the Indian Trust Act, 1882.The Company started its
business on 29th April 1994. The Trustees of LIC Mutual Fund have
appointed Jeevan Bima Sahayog Asset Management Company Ltd as
the Investment Managers for LIC Mutual Fund. As of May 2008, the fund
has assets of Rs. 15,103 crores under management.
52
Assets under Management:
53
TYPES OF MUTUAL FUNDS
General Classification of Mutual Funds
Open end funds/ closed end funds
Open-end
Funds that can sell and purchase units at any point in time are classified
as Open-end Funds. The fund size (corpus) of an open-end fund is
variable (keeps changing) because of continuous selling (to investors)
and repurchases (from the investors) by the fund. An open-end fund is
not required to keep selling new units to the investors at all times but is
required to always repurchase, when an investor wants to sell his units.
The NAV of an open-end fund is calculated every day.
Closed-end Funds
Funds that can sell a fixed number of units only during the New Fund
Offer (NFO) period are known as Closed-end Funds. The corpus of a
Closed-end Fund remains unchanged at all times. After the closure of
the offer, buying and redemption of units by the investors directly from
the Funds is not allowed. However, to protect the interests of the
investors, SEBI provides investors with two avenues to liquidate their
positions:
Closed-end Funds are listed on the stock exchanges where investors
can buy/sell units from/to each other. The trading is generally done at a
54
discount to the NAV of the scheme. The NAV of a closed-end fund is
computed on a weekly basis (updated every Thursday).
Closed-end Funds may also offer "buy-back of units" to the unit holders.
In this case, the corpus of the Fund and its outstanding units do get
changed.
Load Funds/ No load Funds
Load funds-Mutual Funds incur various expenses on marketing,
distribution, advertising, portfolio churning, fund manager's salary etc.
Many funds recover these expenses from the investors in the form of
load. These funds are known as Load Funds. A load fund may impose
following types of loads on the investors:
Entry Load - Also known as Front-end load, it refers to the load
charged to an investor at the time of his entry into a scheme. Entry load
is deducted from the investor's contribution amount to the fund.
Exit Load - Also known as Back-end load, these charges are imposed
on an investor when he redeems his units (exits from the scheme). Exit
load is deducted from the redemption proceeds to an outgoing investor.
Deferred Load - Deferred load is charged to the scheme over a period
of time.
55
Contingent Deferred Sales Charge (CDSC) - In some schemes, the
percentage of exit load reduces as the investor stays longer with the
fund. This type of load is known as Contingent Deferred Sales Charge.
No-load Funds
All those funds that do not charge any of the above mentioned loads are
known as No-load Funds.
Tax Exempt/ Non Tax Exempt Funds
Tax-exempt Funds- Funds that invest in securities free from tax are
known as Tax-exempt Funds. All open-end equity oriented funds are
exempt from distribution tax (tax for distributing income to investors).
Long term capital gains and dividend income in the hands of investors
are tax-free.
Non-Tax-exempt Funds- Funds that invest in taxable securities are
known as Non-Tax-exempt Funds. In India, all funds, except open-end
equity oriented funds are liable to pay tax on distribution income. Profits
arising out of sale of units by an investor within 12 months of purchase
are categorized as short-term capital gains, which are taxable. Sale of
56
units of an equity oriented fund is subject to Securities Transaction Tax
(STT). STT is deducted from the redemption proceeds to an investor.
BROAD MUTUAL FUND TYPES
57
58
1. Equity Funds - Equity funds are considered to be the more risky
funds as compared to other fund types, but they also provide higher
returns than other funds. It is advisable that an investor looking to
invest in an equity fund should invest for long term i.e. for 3 years or
more. There are different types of equity funds each falling into
different risk bracket. In the order of decreasing risk level, there are
following types of equity funds:
 Aggressive Growth Funds - In Aggressive Growth Funds, fund
managers aspire for maximum capital appreciation and invest in
less researched shares of speculative nature. Because of these
speculative investments Aggressive Growth Funds become more
volatile and thus, are prone to higher risk than other equity funds.
 Growth Funds - Growth Funds also invest for capital appreciation
(with time horizon of 3 to 5 years) but they are different from
Aggressive Growth Funds in the sense that they invest in
companies that are expected to outperform the market in the
future. Without entirely adopting speculative strategies, Growth
Funds invest in those companies that are expected to post above
average earnings in the future.
 Speciality Funds - Speciality Funds have stated criteria for
investments and their portfolio comprises of only those companies
that meet their criteria. Criteria for some speciality funds could be
to invest/not to invest in particular regions/companies. Speciality
funds are concentrated and thus, are comparatively riskier than

59
diversified funds.. There are following types of speciality funds:
 Sector Funds: Equity funds that invest in a particular
sector/industry of the market are known as Sector Funds. The
exposure of these funds is limited to a particular sector (say
Information Technology, Auto, Banking, Pharmaceuticals or Fast
Moving Consumer Goods) which is why they are more risky than
equity funds that invest in multiple sectors.
 Foreign Securities Funds: Foreign Securities Equity Funds have
the option to invest in one or more foreign companies. Foreign
securities funds achieve international diversification and hence
they are less risky than sector funds. However, foreign securities
funds are exposed to foreign exchange rate risk and country risk.
 Mid-Cap or Small-Cap Funds: Funds that invest in companies
having lower market capitalization than large capitalization
companies are called Mid-Cap or Small-Cap Funds. Market
capitalization of Mid-Cap companies is less than that of big, blue
chip companies (less than Rs. 2500 crores but more than Rs. 500
crores) and Small-Cap companies have market capitalization of
less than Rs. 500 crores. Market Capitalization of a company can
be calculated by multiplying the market price of the company's
share by the total number of its outstanding shares in the market.
The shares of Mid-Cap or Small-Cap Companies are not as liquid as
of Large-Cap Companies which gives rise to volatility in share
prices of these companies and consequently, investment gets
60
risky.
 Option Income Funds: While not yet available in India, Option
Income Funds write options on a large fraction of their portfolio.
Proper use of options can help to reduce volatility, which is
otherwise considered as a risky instrument. These funds invest in
big, high dividend yielding companies, and then sell options
against their stock positions, which generate stable income for
investors.
 Diversified Equity Funds - Except for a small portion of
investment in liquid money market, diversified equity funds invest
mainly in equities without any concentration on a particular
sector(s). These funds are well diversified and reduce sector-
specific or company-specific risk. However, like all other funds
diversified equity funds too are exposed to equity market risk. One
prominent type of diversified equity fund in India is Equity Linked
Savings Schemes (ELSS). As per the mandate, a minimum of 90%
of investments by ELSS should be in equities at all times. ELSS
investors are eligible to claim deduction from taxable income (up
to Rs 1 lakh) at the time of filing the income tax return. ELSS
usually has a lock-in period and in case of any redemption by the
investor before the expiry of the lock-in period makes him liable to
pay income tax on such income(s) for which he may have received
any tax exemption(s) in the past.
 Equity Index Funds - Equity Index Funds have the objective to
61
match the performance of a specific stock market index. The
portfolio of these funds comprises of the same companies that
form the index and is constituted in the same proportion as the
index. Equity index funds that follow broad indices (like S&P CNX
Nifty, Sensex) are less risky than equity index funds that follow
narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc).
Narrow indices are less diversified and therefore, are more risky.
 Value Funds - Value Funds invest in those companies that have
sound fundamentals and whose share prices are currently under-
valued. The portfolio of these funds comprises of shares that are
trading at a low Price to Earning Ratio (Market Price per Share /
Earning per Share) and a low Market to Book Value (Fundamental
Value) Ratio. Value Funds may select companies from diversified
sectors and are exposed to lower risk level as compared to growth
funds or speciality funds. Value stocks are generally from cyclical
industries (such as cement, steel, sugar etc.) which make them
volatile in the short-term. Therefore, it is advisable to invest in
Value funds with a long-term time horizon as risk in the long term,
to a large extent, is reduced.
 Equity Income or Dividend Yield Funds - The objective of
Equity Income or Dividend Yield Equity Funds is to generate high
recurring income and steady capital appreciation for investors by
investing in those companies which issue high dividends (such as
Power or Utility companies whose share prices fluctuate

62
comparatively lesser than other companies' share prices). Equity
Income or Dividend Yield Equity Funds are generally exposed to
the lowest risk level as compared to other equity funds.
2. Debt / Income Funds- Funds that invest in medium to long-term
debt instruments issued by private companies, banks, financial
institutions, governments and other entities belonging to various
sectors (like infrastructure companies etc.) are known as Debt / Income
Funds. Debt funds are low risk profile funds that seek to generate fixed
current income (and not capital appreciation) to investors. In order to
ensure regular income to investors, debt (or income) funds distribute
large fraction of their surplus to investors. Although debt securities are
generally less risky than equities, they are subject to credit risk (risk of
default) by the issuer at the time of interest or principal payment. To
minimize the risk of default, debt funds usually invest in securities from
issuers who are rated by credit rating agencies and are considered to be
of "Investment Grade". Debt funds that target high returns are more
risky. Based on different investment objectives, there can be following
types of debt funds:
 Diversified Debt Funds - Debt funds that invest in all securities
issued by entities belonging to all sectors of the market are known
as diversified debt funds. The best feature of diversified debt
funds is that investments are properly diversified into all sectors
which results in risk reduction. Any loss incurred, on account of
63
default by a debt issuer, is shared by all investors which further
reduces risk for an individual investor.
 Focused Debt Funds* - Unlike diversified debt funds, focused
debt funds are narrow focus funds that are confined to
investments in selective debt securities, issued by companies of a
specific sector or industry or origin. Some examples of focused
debt funds are sector, specialized and offshore debt funds, funds
that invest only in Tax Free Infrastructure or Municipal Bonds.
Because of their narrow orientation, focused debt funds are more
risky as compared to diversified debt funds. Although not yet
available in India, these funds are conceivable and may be offered
to investors very soon.
 High Yield Debt funds - As we now understand that risk of
default is present in all debt funds, and therefore, debt funds
generally try to minimize the risk of default by investing in
securities issued by only those borrowers who are considered to
be of "investment grade". But, High Yield Debt Funds adopt a
different strategy and prefer securities issued by those issuers
who are considered to be of "below investment grade". The motive
behind adopting this sort of risky strategy is to earn higher
interest returns from these issuers. These funds are more volatile
and bear higher default risk, although they may earn at times
higher returns for investors.
 Assured Return Funds - Although it is not necessary that a fund
64
will meet its objectives or provide assured returns to investors, but
there can be funds that come with a lock-in period and offer
assurance of annual returns to investors during the lock-in period.
Any shortfall in returns is suffered by the sponsors or the Asset
Management Companies (AMCs). These funds are generally debt
funds and provide investors with a low-risk investment
opportunity. However, the security of investments depends upon
the net worth of the guarantor (whose name is specified in
advance on the offer document). To safeguard the interests of
investors, SEBI permits only those funds to offer assured return
schemes whose sponsors have adequate net-worth to guarantee
returns in the future. In the past, UTI had offered assured return
schemes (i.e. Monthly Income Plans of UTI) that assured specified
returns to investors in the future. UTI was not able to fulfill its
promises and faced large shortfalls in returns. Eventually,
government had to intervene and took over UTI's payment
obligations on itself. Currently, no AMC in India offers assured
return schemes to investors, though possible.
 Fixed Term Plan Series - Fixed Term Plan Series usually are
closed-end schemes having short term maturity period (of less
than one year) that offer a series of plans and issue units to
investors at regular intervals. Unlike closed-end funds, fixed term
plans are not listed on the exchanges. Fixed term plan series
usually invest in debt / income schemes and target short-term

65
investors. The objective of fixed term plan schemes is to gratify
investors by generating some expected returns in a short period.
3. Gilt Funds - Also known as Government Securities in India, Gilt
Funds invest in government papers (named dated securities) having
medium to long term maturity period. Issued by the Government of
India, these investments have little credit risk (risk of default) and
provide safety of principal to the investors. However, like all debt funds,
gilt funds too are exposed to interest rate risk. Interest rates and prices
of debt securities are inversely related and any change in the interest
rates results in a change in the NAV of debt/gilt funds in an opposite
direction.
4. Money Market / Liquid Funds - Money market / liquid funds invest
in short-term (maturing within one year) interest bearing debt
instruments. These securities are highly liquid and provide safety of
investment, thus making money market / liquid funds the safest
investment option when compared with other mutual fund types.
However, even money market / liquid funds are exposed to the interest
rate risk. The typical investment options for liquid funds include
Treasury Bills (issued by governments), Commercial papers (issued by
companies) and Certificates of Deposit (issued by banks).
66
5. Hybrid Funds - As the name suggests, hybrid funds are those funds
whose portfolio includes a blend of equities, debts and money market
securities. Hybrid funds have an equal proportion of debt and equity in
their portfolio. There are following types of hybrid funds in India:
 Balanced Funds - The portfolio of balanced funds include assets
like debt securities, convertible securities, and equity and
preference shares held in a relatively equal proportion. The
objectives of balanced funds are to reward investors with a
regular income, moderate capital appreciation and at the same
time minimizing the risk of capital erosion. Balanced funds are
appropriate for conservative investors having a long term
investment horizon.
 Growth-and-Income Funds - Funds that combine features of
growth funds and income funds are known as Growth-and-Income
Funds. These funds invest in companies having potential for
capital appreciation and those known for issuing high dividends.
The level of risks involved in these funds is lower than growth
funds and higher than income funds.
 Asset Allocation Funds - Mutual funds may invest in financial
assets like equity, debt, money market or non-financial (physical)
assets like real estate, commodities etc.. Asset allocation funds
adopt a variable asset allocation strategy that allows fund
managers to switch over from one asset class to another at any
time depending upon their outlook for specific markets. In other

67
words, fund managers may switch over to equity if they expect
equity market to provide good returns and switch over to debt if
they expect debt market to provide better returns. It should be
noted that switching over from one asset class to another is a
decision taken by the fund manager on the basis of his own
judgment and understanding of specific markets, and therefore,
the success of these funds depends upon the skill of a fund
manager in anticipating market trends.
6. Commodity Funds-Those funds that focus on investing in different
commodities (like metals, food grains, crude oil etc.) or commodity
companies or commodity futures contracts are termed as Commodity
Funds. A commodity fund that invests in a single commodity or a group
of commodities is a specialized commodity fund and a commodity fund
that invests in all available commodities is a diversified commodity fund
and bears less risk than a specialized commodity fund. "Precious Metals
Fund" and Gold Funds (that invest in gold, gold futures or shares of gold
mines) are common examples of commodity funds.
7. Real Estate Funds- Funds that invest directly in real estate or lend
to real estate developers or invest in shares/securitized assets of
housing finance companies, are known as Specialized Real Estate
68
Funds. The objective of these funds may be to generate regular income
for investors or capital appreciation.
8. Exchange Traded Funds (ETF) - Exchange Traded Funds provide
investors with combined benefits of a closed-end and an open-end
mutual fund. Exchange Traded Funds follow stock market indices and
are traded on stock exchanges like a single stock at index linked prices.
The biggest advantage offered by these funds is that they offer
diversification, flexibility of holding a single share at the same time.
Recently introduced in India, these funds are quite popular abroad.
9. Fund of Funds- Mutual funds that do not invest in financial or
physical assets, but do invest in other mutual fund schemes offered by
different AMCs, are known as Fund of Funds. Fund of Funds maintain a
portfolio comprising of units of other mutual fund schemes, just like
conventional mutual funds maintain a portfolio comprising of
equity/debt/money market instruments or non financial assets. Fund of
Funds provide investors with an added advantage of diversifying into
different mutual fund schemes with even a small amount of investment,
which further helps in diversification of risks. However, the expenses of
Fund of Funds are quite high on account of compounding expenses of
investments into different mutual fund schemes.
69
Risk Heirarchy of Different Mutual Funds - Thus, different mutual
fund schemes are exposed to different levels of risk and investors
should know the level of risks associated with these schemes before
investing. The graphical representation hereunder provides a clearer
picture of the relationship between mutual funds and levels of risk
associated with these funds:
70
Research Methodology
In this report two methods of research have been followed:
Primary research
Secondary research
71
Primary research:
A sample of 100 people from Religare’s clientele base, who had already invested in mutual
funds and those who were interested for investment in mutual funds, was taken from Delhi
& NCR region and they were asked to fill the questionnaire containing 10 questions which
indicated the factors affecting the investors’ decisions while investing in mutual funds.
Due to response error, responses of 20 respondents could not be taken into account. So the
final sample size is 80.
The data collection method used was personal interview.
b) Secondary research:
A samples of top 15 mutual funds from each category of funds was taken and their 3
month, 6 month, 1 year returns were taken for the analysis of return as a factor and
similarly Beta ratio and Sharpe ratio’s were taken for the analysis of other factors.
Now, 10 factors indicated in the questionnaire according to which investors invest in

mutual funds are:
Age
Source of income
Plans to retire
Returns expected
Number of dependents
Level of knowledge
Level of acceptable risk
Time of investment
Willingness to stay during volatile times
Dependence on funds
So I applied Factor Analysis on the data collected, so as to find out which of these factors
are most critical and which are less critical.
72
Then as a result of factor analysis, the factor which came out to be mostly critical is risk
taking ability (as indicated from Age, Level of knowledge, Level of acceptable risk &
Willingness to stay during volatile times) and second most critical factor is return over a
given period of time (as indicated from plans to retire, returns expected & time of
investment) and third is future requirement of funds (as indicated from source of income
and no. of dependents).
Research
Hypothesis
73
Since risk taking ability (as indicated from Age, Level of knowledge, Level of acceptable
risk & Willingness to stay during volatile times) came out be the most critical factor and in
case of mutual funds it is indicated by Beta Factor, So for comparing risk in Equity and
Debt funds we assume the null hypothesis:
H1: Beta Factor of Equity funds is same as that Debt funds
Now, second most critical Factor came out to be the returns over a given period of time (as
indicated from plans to retire, returns expected & time of investment). So we will compare
on the basis of their 3 month, 6 month, 1 year returns.
Therefore, we assume the following three hypotheses:
H2 (a): 3 month return of Equity funds is same as that Debt funds
H2 (b): 6 month return of Equity funds is same as that Debt funds
H2 (c): 1 year return of Equity funds is same as that Debt funds
Finally, third most critical Factor came out to be the future requirement of funds (as
indicated from source of income and no. of dependents). For that matter Sharp Ratio of
Equity and Debt funds can be compared because it indicates the average returns given by
the fund over the risk-free rate per unit of market risk (standard deviation).
Therefore, we assume the hypothesis:
H3: Sharp Ratio of Equity funds is same as that Debt funds
Observations
74
Beta factor of Equity and Debt funds are as shown below:
Top 10 equity funds as on 23/06/2008 are:
Ran Scheme Name Beta
k
Reliance Diversified Power Sector Fund -
1 Growth 0.44
2 Taurus Libra Taxshield - Growth 0.33
3 DWS Investment Opportunity Fund – G 0.35
4 Reliance Regular Savings Fund – Growth 0.36
5 IDFC premier equity fund-Growth 0.41
6 ICICI Pru Infrastructure fund-Growth 0.36
Sundram BNP Paribasselect focus fund-
7 G 0.28
8 BOB Grpwth Fund- Growth 0.29
9 SBI magnum comma fund Growth 0.34
10 DWS Alpha Equity Fund- Growth 0.28
Top 10 debt funds as on 23/06/2008 are:
75
Ran Scheme Name Beta
k
1 DBS Chola Monthly Income Plan - Growth 0.79
2 PRINCIPAL Monthly Income Plan Plus – G 0.93
3 Birla Sun Life Income Plus - Growth 1.38
4 Birla Sun Life Income Fund - 54EA - G 1.05
5 Birla Sun Life Income Fund - 54EB - G 1.05
6 Birla Sun Life Income Fund - Growth 1.05
7 ING Income Fund - Regular Plan - Growth 0.31
Birla Sun Life Dynamic Bond Fund - Retail
8 - Growth 0.27
9 PRINCIPAL Monthly Income Plan - G 0.64
10 IDFC Dynamic Bond Fund - Plan A - G 1
3 month returns of Equity and Debt funds are as shown below:
Rank Scheme Name Last 3
Month
s%
1 Franklin Infotech Fund - Growth 19.44
2 UTI Growth Sector Fund - Pharma and 16.19
Healthcare - Growth
3 JM Healthcare Sector Fund - Growth 15.27
4 SBI Magnum Sector Umbrella - Pharma Fund-G 13.62
5 UTI Growth Sector Fund - Software - Growth 13.36
6 Reliance Pharma Fund - Growth 13.29
7 Franklin Pharma Fund - Growth 13.01
8 Tata Life Sciences and Technology Fund 11.75
9 PRINCIPAL Global Opportunities Fund – G 11.42
10 SBI Magnum Sector Umbrella - Infotech Fund 10.2
12 Birla Sun Life International Equity Fund-G 8.13
13 ICICI Prudential Technology Fund - Growth 7.29
76
14 Franklin Asian Equity Fund - Growth 5.31
15 JM Emerging Leaders Fund - Growth 5.26
Ran Scheme Name Last 3
k Month
s%
1 Tata Fixed Income Portfolio Fund - Series B3 - 9.75
Retail - G
2 UTI Fixed Term Income Fund - Series II-Plan 16G 7.56
3 Franklin India International Fund 3.76
4 UTI Fixed Maturity Plan - Mar 08 - Harlf Yearly 2.81
Series - Retail – G
5 Reliance Fixed Horizon Fund 7 Series 4 Retail-G 2.75
6 Sundaram BNP Paribas Interval Fund - QS - Plan B 2.73
- Ret - G
7 ING Long Term Fixed Maturity Plan - I - Retail - G 2.72
8 Canara Robeco Income Scheme - Growth 2.71
9 DWS Money Plus Advantage Fund - Regular - 2.71
Growth
10 Lotus India Quarterly Interval Fund - Plan F - 2.69
Growth
11 UTI Fixed Income Interval Fund - Quarterly Plan I – 2.68
Regular-G
12 Tata Floating Rate Fund - Long Term - Growth 2.68
13 Tata Fixed Investment Plan 1 - Series A - Regular - 2.66
Growth
14 Lotus India Quarterly Interval Fund - Plan D - 2.65
Growth
15 Reliance Fixed Horizon Fund 7 - Series 3 - Retail - 2.65
77
Growth
6 month returns of Equity and Debt funds are as shown below:
Rank Scheme Name Last 6
Month
s%
1 UTI Spread Fund - Growth 4.83
2 HDFC Arbitrage Fund - Institutional - Growth 4.51
3 HDFC Arbitrage Fund - Retail - Growth 4.38
4 Lotus India Arbitrage Fund - Growth 4.37
5 JM Arbitrage Advantage Fund - Growth 4.3
6 ICICI Prudential Blended Plan - Option A - 4.15
Growth
7 Kotak Equity Arbitrage Fund - Growth 4.05
8 Benchmark Equity And Derivative 4.05
Opportunities Fund-G
9 IDFC Arbitrage Fund - Plan B (Institutional) - 4.03
Growth
10 SBI Arbitrage Opportunities Fund - Growth 3.98
11 IDFC Arbitrage Fund - Plan A (Regular) - 3.77
Growth
12 IDFC Fixed Maturity Arbitrage Fund - S1 - Plan 3.66
A-G
13 IDFC Fixed Maturity Arbitrage Fund - S1 - Plan 3.66
B-G
14 PRINCIPAL Global Opportunities Fund - Growth 2.31
78
15 Birla Sun Life International Equity Fund - Plan -1.16
A - Growth
Ran Scheme Name Last 6
k Month
s%
2 UTI Fixed Term Income Fund - Series II - Plan 16 8.22
(Feb 07) -G
3 Franklin India International Fund 7.83
4 ABN AMRO Interval Fund - Monthly Plan A - 6.39
Growth-Red
5 Birla Sun Life Dynamic Bond Fund - Retail - 5.88
Growth
6 Kotak Wealth Builder Series I - Growth 5.66
8 ICICI Prudential Interval Fund II - Quarterly 5.45
Interval Plan E-G

9 HDFC Fixed Maturity Plan - 367D - Sep 2007 (6) 5.24
Retail – G
10 LIC MF Fixed Maturity Plan - Series 22 - Growth 5.18
11 Sundaram BNP Paribas Interval Fund - QS - Plan 5.16
B - Ret - G
12 HDFC Fixed Maturity Plan - 367D (2) - Sep 2007 5.06
(6) Retail – G
13 LIC MF Fixed Maturity Plan - Series 32 ( 13 5.05
Months) – G
14 Lotus India Quarterly Interval Fund - Plan D - 5.05
79
Growth
15 UTI Fixed Income Interval Fund - Quarterly Plan I 5.02
- Regular - G
1year returns of Equity and Debt funds are as shown below:
Ran Scheme Name Last
k 12
Month
s%
1 Reliance Diversified Power Sector Fund - 30.52
Growth
3 DWS Investment Opportunity Fund - 20.18
Growth
4 Reliance Regular Savings Fund - Equity - 15.01
Growth
5 ICICI Prudential Infrastructure Fund - FII 14.41
Growth
6 IDFC Premier Equity Fund - Growth 13.78
7 ICICI Prudential Infrastructure Fund - 13.41
Growth
8 Sundaram BNP Paribas Select Focus - 13.14
Growth
9 BOB Growth Fund - Growth 12.61
10 SBI Magnum COMMA Fund - Growth 12.57
11 DWS Alpha Equity Fund - Growth 11.32
12 HSBC Equity Fund - Growth 10.51
13 PRINCIPAL Global Opportunities Fund - 10.48
Growth
80
14 Templeton India Equity Income Fund - 9.54
Growth
15 UTI Spread Fund - Growth 9.09
Ran Scheme Name Last
k 12
Month
s%
2 PRINCIPAL Monthly Income Plan Plus - Growth 12.63
4 Birla Sun Life Income Fund - 54EA - Growth 11.8
5 Birla Sun Life Income Fund - 54EB - Growth 11.8
8 Birla Sun Life Dynamic Bond Fund - Retail - Growth 11.06
9 PRINCIPAL Monthly Income Plan - Growth 10.99
10 Sundaram BNP Paribas FTP - Series XIII - (30 10.89
Months) - Growth
11 LIC MF Fixed Maturity Plan - Series 22 - Growth 10.79
12 Sundaram BNP Paribas FTP - Series XII - (18 Months) 10.71
- Growth
13 IDFC Dynamic Bond Fund - Plan A - Growth 10.63
14 HDFC Fixed Maturity Plan - 24M - May 2007 (5) 10.47
Retail - Growth
15 JM Fixed Maturity Fund - Series IV - 15 Months Plan 2 10.28
- Growth
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Sharpe ratio of Equity and Debt funds is as shown below:
Sharp
Rank Scheme Name ratio

Reliance Diversified Power Sector Fund - 0.85
1 Growth
3 DWS Investment Opportunity Fund - Growth 0.96
4 Reliance Regular Savings Fund - Growth 0.83
5 IDFC premeir equity fund-Growth 0.76
6 ICICI Pru Infrastructure fund-Growth 0.93
Sundram BNP Paribasselect focus fund- 1.13
7 Growth
8 BOB Grpwth Fund- Growth 0.91
9 SBI magnum comma fund Growth 0.92
10 DWS Alpha Equity Fund- Growth 0.96
Sharp
Rank Scheme Name ratio

2 PRINCIPAL Monthly Income Plan Plus - 0.47
82
Growth
Birla Sun Life Income Fund - 54EA -
4 Growth 0.39
Birla Sun Life Income Fund - 54EB -
5 Growth 0.39
Birla Sun Life Dynamic Bond Fund - Retail
8 - Growth 0.44
9 PRINCIPAL Monthly Income Plan - Growth 0.49
IDFC Dynamic Bond Fund - Plan A -
10 Growth 0.27
RESULTS
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Testing of H1:
Ho: Beta (Equity funds) = Beta (Debt funds)
H1: Beta (Equity funds) > Beta (Debt funds)
t-Test: Two-Sample Assuming Unequal Variances
Variable 1 Variable 2
Mean 0.344 0.847
Variance 0.00283 0.122823
Observations 10 10
Hypothesized Mean Difference 0
df 9
t Stat -4.48732
P(T<=t) one-tail 0.00076
t Critical one-tail 1.83311
Here, calculated t18(0.05) = -4.48732
and, tabulated t18(0.05) = 1.83311
Now since, t calculated < t tabulated
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Therefore, null hypothesis is accepted i.e. beta of Equity funds is not greater than Debt
funds, which means Equity funds are more volatile than Debt funds.
Therefore, Equity funds are more risky as compared to Debt funds.
Testing of H2 (a):
Ho: 3 month Average Returns (Equity funds) = 3 month Average Returns (Debt funds)
H1: 3 month Average Returns (Equity funds) > 3 month Average Returns (Debt funds)
Proof: Now applying t-test,
11.5333333 3.56733333
Mean 3 3
16.0663809 4.51323523
Variance 5 8
Observations 15 15
df 21
6.80091420
t Stat 5
P(T<=t) one-tail 5.01266E-07
1.72074287
t Critical one-tail 1
Here, calculated t = 6.8009
and tabulated t= 1.7207
Now since, calculated t28(0.05) > tabulated t28(0.05)
85
Therefore, null hypothesis is not accepted i.e. 3 month average Returns of Equity funds are
greater than Debt funds.
Testing of H2 (b):
Ho: 6 month Average Returns (Debt funds) = 6 month Average Returns (Equity funds)
H1: 6 month Average Returns (Debt funds) > 6 month Average Returns (Equity funds)
6.17933333 3.65933333
Mean 3 3
3.46984952 2.09814952
Variance 4 4
Observations 15 15
Df 26
4.13615298
t Stat 9
0.00016376
P(T<=t) one-tail 1
1.70561790
and tabulated t = 1.70561
Now since, calculated t28(0.05)> tabulated t28(0.05)
Therefore, null hypothesis is not accepted i.e. 6 month average Returns of Debt funds are
greater than Equity funds.
86
Testing of H2 (c):
Ho: 1 year Average Returns (Equity funds) = 1 year Average Returns (Debt funds)
H1: 1 year Average Returns (Equity funds) > 1 year Average Returns (Debt funds)
T-Test: Two-Sample Assuming Unequal
Variances
14.588666
Mean 67 12.12066667
32.584740
Variance 95 11.96939238
Observations 15 15
Hypothesized Mean
Difference 0
df 23
1.4320124
t Stat 2
0.0827955
P(T<=t) one-tail 47
1.7138715
Now since, t28(0.05) calculated < t28(0.05) tabulated
87
Therefore, null hypothesis is accepted i.e. 1 year average Returns of Equity funds are equal
to Debt funds.
Testing of H3:
Ho: Sharpe Ratio (Equity funds) = Sharpe Ratio (Debt funds)
H1: Sharpe Ratio (Equity funds) > Sharpe Ratio (Debt funds)
t-Test: Two-Sample Assuming Unequal
Variances
Mean 0.921 0.358
0.009743 0.00990666
Variance 333 7
Observations 10 10
Hypothesized Mean
Difference 0
Df 18
12.70068
t Stat 42
1.00668E-
P(T<=t) one-tail 10
1.734063
Now since, calculated t18(0.05) > tabulated t18(0.05)
Therefore, null hypothesis is rejected i.e. on an average Sharpe Ratio of Equity funds is
greater than Debt funds.
88
ANALYSIS
Analysis of Hypothesis H1
From the Results of hypothesis H(1) it was found that Risk is more in
Equity funds as compared to Debt funds.
Risk is one of the important factor during investments. Each investor
has great importance for it.
89
Risk is also considered as more in equity funds as compared to debt
funds due to many reasons. One of the major reason is that most of
these funds invest a big portion of investments in equity and equity
market is always more volatile as compared to risk in debt funds. But in
equity Sector funds, Thematic funds and aggervisely managed funds
are considered as more risky as compared to Balanced funds and Tax
Planning funds because these funds concentrate more on return for a
particular level of risk.
Risk in Equity funds
Sector funds or sector-specific funds have a mandate to invest in just
one sector. In the past, particularly during the TMT
(technology/media/telecom) boom in 1999-early 2000, there was a flood
of sector funds targeting the technology/software sector. Apart from
this, there were already some sector funds in place with the mandate to
invest in the FMCG (fast moving consumer goods) and pharma sectors.
avoid sector funds, unless you have a view on the sector and know
exactly when to invest in it and exit from it. Sector funds are high risk
investment avenues and over the long term (3-5 years) they rarely
outperform well-managed diversified equity funds.
Thematic funds invest in a theme rather than in a single sector. So while the fund
manager’s investment options remained restricted to the theme, he still has several sectors
to choose from within that theme. A theme like infrastructure for instance, has several
related sectors like cement, steel, capital goods/engineering as also unrelated sectors like
banking and finance. When it comes to stock-picking, this gives the fund manager more
flexibility when he is managing a thematic fund as compared to a sector fund. We can’t
think of a single theme that is so enduring that it will make the fund manager forget every
other theme till the time that fund is in existence
90
A well-managed diversified equity which usually never invests more than 5% in a single
stock, compared to other which has even 31.9% in its leading stock . So these types of
funds which invest aggressively for higher returns are more risky as compared to the
equity diversified funds
The benchmark for evaluating the diversification of an equity fund’s stock portfolio is to
assess the concentration of assets in the top 10 stocks. If the top 10 stocks account for less
than 40% of net assets (which is also a global benchmark), the fund is well-diversified in
our view.
Risk in Debt funds
Such misconceptions that debt funds carry low risk catch out the investors. Consider a
situation when the oil price is galloping past $30 a barrel. The demand for dollars to pay
for oil imports pulls down the rupee value. The RBI, in all likelihood, will step in to
defend the rupee, and that means hiking short-term interest rates. Now, a hike in rates
means lower bond prices because of the inverse price-yield relationship (bond prices fall
when rates rise and prices rise when rates fall). A consequent drop in the NAV will hit the
unwary unit-holder where he sits.
Debt funds primarily face two types of risk. First of a fall in market price
due to demand-supply factor. And, second, of a fall in market price due
to rise in interest rates.
Market risk
Consider the market risk. Bond prices, like all instruments, are
predicated on the principle of demand and supply. This means that
bond prices will fall when supply is relatively more than demand. This
typically happens when the rupee is falling sharply against the dollar, or
when the call rates are very high. At such times, banks, the biggest
investors in the bond market, sell to generate rupee resources. The
excess supply of bonds in the market pulls down bond prices and,
consequently, the NAVs of debt funds.
Interest-rate risk
91
Debt funds also carry interest rate risk. This is the risk that bond prices
will fall because of a change in the interest rates. Interest rates have an
inverse relationship on the price of debt securities. If the rates rise, their
prices fall to adjust for the current yield, and vice versa.
If a fund holds a large portfolio with securities of longer maturities, the
impact on NAV is usually negative when rat As interest rates harden,
short-term debt funds have the least impact on NAV es rise, and vice
versa. So the risk associated with investments in debt funds is lower
than that in equity funds but the absolute risk is certainly not modest.
Analysis of hypothesis H2(A):
From the Results of hypothesis H2(A) it was found that On an Average 3
month returns are more for Equity as compared to Debt funds.
There are very few funds that have managed to buck the trend. ICICI
Prudential FMCG Fund stands out as a rare, hard-to-find exception, the
returns from which not only beat the market but also the Bombay Stock
Exchange’s index tracking the fast moving consumer goods stock over
the last three years. While the BSE FMCG Index climbed only 29 per
cent, the fund rose over 41 per cent over the same period. Rival funds
— Franklin FMCG and Magnum FMCG — posted returns of barely 26 per
cent and 15 per cent, respectively.
The information and technology sector funds are the only sets that have beaten both the
Sensex and the BSE IT Index over the last five years. This is not really hard to explain
given that the Indian stock market has all along been rather fond of tech stocks, barring a
few short intervals of indifference or rejection.
92
According to data on the performance of mutual funds and the sector indices sourced from
Value Research for the last three years, the two auto funds — from JM and UTI — on
offer, for instance, have not quite outperformed the BSE Auto index or the broader market
spectacularly. While, JM Auto Fund has yielded returns of 20 per cent over the last three
years, the UTI Auto Fund has barely given gains of 9 per cent to its investors. In sharp
comparison, the BSE Auto Index grew 20 per cent during the same period.
The Sensex, on the other hand, climbed almost 40 per cent in the last three years.
The story remains the same in the case of bank funds. The BSE Bankex rose 43 per cent in
the last three years. The only two bank funds available in the mutual fund market —
Reliance Banking and UTI Banking Sector — have underperformed the BSE Bankex.
While Reliance Banking grew by 38 per cent, UTI banking Sector fared only marginally
better with gains of 40 per cent. The mutual fund schemes built around the
pharmaceuticals sector too have failed to outdo either the broad market or the Bombay
Stock Exchange’s index for the pharmaceuticals sector over the last three years.
Funds dedicated to banking, automobiles and pharmaceuticals have generally taken big
hits, with FMCG and technology funds managing to scrape through relatively easily.
The figures speak for themselves. As on June 26, the three-month performance charts put
banking funds at a negative 19.6 per cent. Pharma and auto funds have delivered minus
17.89 per cent and minus 16.56 per cent respectively during this period.
In comparison, index funds have done decidedly better, with their average score being
minus 9.56 per cent. The `normal' broad-based funds, typically benchmarked against the
Nifty, are relatively worse off with minus 14.81 per cent. These numbers have been
collated by Value Research.
A small section in the sectoral category has turned in uninspiring performance even if
longer time-frame is considered, MF circles agree. Reliance Banking Fund, for instance,
has provided a negative 5.25 per cent on a one-year basis. This, when even the most
pedestrian performers among the diversified schemes have given at least 10 per cent -
except odd names such as Reliance Regular Savings Equity and Taurus Discovery Stock.
The latter, currently among the worst cases, has provided a meager 2.02 per cent on a one-
year basis.
93
Analysis Of Hypothesis H2 (B)
From the Results of hypothesis H2(A) it was found that On an Average 6
month returns are more for Debt as compared to Equity funds.
In the last 6 months Indian securities market faced a lot of shocks and
that is major reason that in the last six months equity funds
performance is very bad.
One another reason was that January- march 2008 quarter was the
worst quarter for equity funds in the last decade since January 2001.
94
Wrost Quarter for the Equity funds in a decade
On March 31, 2008, Indian mutual funds ended their worst quarter of the
decade. The average returns of almost all categories of equity funds had
their worst three months since January 2001, according to the quarterly
review of fund performance released by Value Research.
Funds in the key ‘Diversified Equity' category, which has the largest number
of funds (194) as well as the highest investor interest, lost an average of
28.3 per cent. This was far worse than the previous worst of the decade,
when these funds lost 16.9 per cent in Q1 of 2001.
Individual funds in the category lost between 16.2 per cent and 40.6 per cent
between January and March this year, during which BSE Sensex and the NSE
Nifty both lost 22.9 per cent.
95
While equity funds registered staggering losses on an absolute basis, they
did substantially worse than their benchmark indices too. Of the 277 equity
funds (which includes diversified equity as well as other categories) that
were part of this study, only 35 outperformed their benchmarks while 242
failed to do so.
What's worse, of the 35 which beat the benchmark, a mere seven managed
to do so by a margin greater than five per cent. At the other end of the scale,
as many as 142 funds underperformed their benchmarks by more than five
per cent.
Funds in the ‘diversified equity' category gained an average of 21.4 per cent
over the four quarters, with individual schemes' returns ranging from a gain
of 53.7 per cent to a loss of 7.9 per cent.
FUNDS ON LIQUID DIET
Once overweight on equities and neutral on cash, mutual funds seem to
have reversed that position. Welcome to the new world of cash stash.
A look at the equity portfolios of March 2008 reveals that funds are on a
strict liquid diet. As on March 31, Sundaram BNP Paribas Capex had 30 per
cent of its assets in cash, followed by LICMF Growth with 29.47 per cent.
The cash position of these two schemes during the peak of bull run (January
2008) was 9 per cent for LICMF Growth and 7 per cent for that of Sundaram
96
BNP Paribas Capex.
As on March 2008, diversified equity funds were sitting on a cash pile of Rs
7,859 crore, as against Rs 4,773 crore in January 2008. A total of 108 funds
increased their cash allocation expressed as percentage of net assets, while
33 saw a decline.
While sitting on cash protects the investor from a sharp downfall, it also
implies that you miss out on sudden upward spurt; a phenomenon which has
now become a part and parcel of Indian equity markets.
Increase in Inflation due to Commodity and Oil prices
Soaring food prices are also stoking inflation in India, where more than half
the population of 1.1 billion survive on less than $2 a day. Food product
costs, including bread, salt, cooking oil and tea, jumped 14 percent in the
week to June 14 from a year earlier, according to today's report. Fuel price
inflation rose 16.4 percent in the week ended June 14 from a year earlier.
India on June 4 raised retail prices of fuels for the second time this year.
Higher fuel prices led to higher transportation costs, making manufactured
products and food items more expensive.
97
The index of manufactured products, which has a 64 percent weight in the
inflation basket, rose 9.7 percent.
The FAO food price index, which includes national prices as well as those in
cross-border trade, suggests that the average index for 2007 was nearly 25
per cent above the average for 2006. Apart from sugar, nearly every other
food crop has shown very significant increases in price in world trade over
2007, and the latest evidence suggests that this trend has continued and
even accelerated in the first few months of 2008. The net result is that
globally the prices of many basic commodities have been rising faster than
they ever did during the last three decades.
Others reasons for the rise of commodities price
1. There are more than just demand forces at work, although it is certainly
true that rising incomes in Asia and other parts of the developing world have
led to increased demand for food.
There is the impact of high oil prices, which affect agricultural costs directly
because of the significance of energy as an input in the cultivation process
itself (through fertiliser and irrigation costs) as well as in transporting food.
There is the impact of both oil prices and government policies in the US,
Europe, Brazil and elsewhere that have promoted bio-fuels as an alternative
to petroleum. This has led to significant shifts in acreage as well as use of
certain grains. , in 2006 the US diverted more than 20 per cent of its maize
98
production to the production of ethanol; Brazil used half of its sugarcane
production to make bio-fuel, and the European Union used the greater part
of its vegetable oil production as well as imported vegetable oils, to make
bio-fuel. This has naturally reduced the available land for producing food.
Increased investment in Commodity an oil market
It is known that energy markets have attracted substantial financial investor
interest since 2004, but especially after the recent decline in stock markets
and in the value of the dollar. Investors in search of new investment targets
have moved into speculative investments in commodities in general and oil
in particular. The Organisation of the Petroleum Exporting Countries (OPEC),
which is normally held responsible for all oil price increases, has repeatedly
asserted that oil has crossed the $100-a-barrel mark not because of a
shortage of supply but because of financial speculation.
since the past few years, the US financial sector has begun to turn its attention from currency and
stock markets to commodity markets. According to The Economist, about $260 billion has been
invested into the commodity market -- up nearly 20 times from what it was in 2003.
Coinciding with a weak dollar and this speculative interest of the US financial sector, prices of
commodities have soared globally.
And most of these investments are bets placed by hedge and pension funds, always on the
lookout for risky but high-yielding investments. What is indeed interesting to note here is that
unlike margin requirements for stocks which are as high as 50 per cent in many markets, the
margin requirements for commodities is a mere 5-7 per cent.
This implies that with an outlay of a mere $260 billion these speculators would be able to take
positions of approximately $5 trillion -- yes, $5 trillion! -- in the futures markets. It is estimated
that half of these are bets placed on oil.
99
Analysis for hypothesis H2(C):
From the Results of hypothesis H2(C) it was found that On an Average 12
month returns are same both for Equity and Debt funds.
In the last 12 months Indian securities market were very volatile. There were
many reasons for this volatility but the main impact was due to global cues.
Some of them are:
1) Foreign investors are exiting from market because of US recession.
2) Indian MFs are sitting on huge cash and waiting with patience to enter
once the market stabilizes.
3) Retail investors are out of market in fear of more down trends.
A)Sub Prime Crisis - One of the major reasons for that was the impact of
Sub Prime crisis in the United States w The main channels through which a
global credit crunch and a recession in the US can affect India are: (i) a
decline in capital inflows and lower corporate access to credit in international
markets; (ii) slowdown in exports of goods and services from India to the US;
Which not only impact the Indian markets as well as others in the Global
100
market.
When crisis (has) moved from the subprime mortgage market to the housing market, and now
the housing market to the credit market, there is impact upon India. There is impact in terms of
credit flows and financial flows.
ICICI Bank has lost as much as $264 million up until January due to its
exposure in the overseas credit derivatives markets, other banks are also
facing significant losses. The total global write-downs are expected to be
around $1 trillion (IMF estimates) of which the banks have so far written
down around $200 billion.
Analysts note that the total mark-to-market losses of corporate India’s exposure in the foreign
exchange derivatives market could be in the region of $5 billion.
One possible impact of US subprime crisis on global markets would be
certain unforeseen losses pertaining to securities. If such a situation arises, it
would further make credit conditions stringent. Consequently, loss incurred
on securities would increase.
The Indian companies engaged in business processes such as mortgage
documentation have seen a decline in work orders and loss of revenues as
U.S. lenders have tightened their exposure to credit market. The Indian IT
industry, which derives about 65% of its revenues from the U.S. market, will
also be adversely affected. The National Association of Software and
Services Companies (NASSCOM) has assumed that Indian information
technology (IT) and business process outsourcing (BPO) industries may slip
down to 3-4 percent in growth rate in the current fiscal as against that of last
year. The major cause behind the slowdown would be uncertainty in the
101
global economy and frequent fluctuation in Dollar that play a major role in IT
and related industries.
B) Turmoil in the global financial currency markets has started affecting
Indian companies and the stock market..
C) Inflation and Oil Price
The Indian economy showed signs of overheating in mid-2007, with inflation
rising above 6%. Although the central bank has pursued a tight monetary
policy, inflation has recently risen above 7%.
India's inflation accelerated again in the week ended 14 June, hitting the
fastest pace in 13 years, and suggesting there may well be more interest
rate increases to come from the central bank. Wholesale prices rose 11.42
percent in the week to June 14, following an 11.05 percent rate in the
previous week.
102
South Asian countries are facing more serious problems associated with
global external shocks such as increasing oil and food prices, as well as
country-specific “shocks” such as escalating conflicts or political turmoil.
D) Slowdown in Manufacturing Factor
Recent domestic economic data in Feb 2008 clearly indicates that there are
signs of slowdown in the manufacturing sector, significantly in automobile
and consumer durables.
During the last year, one of the major factors responsible for the negative
growth in the automotive sector is the high interest rate.
103
the adverse impact of high interest rate has brought down the growth of
consumer durables sector which has restricted the manufacturing sector’s
growth.
FICCI observed that for the last two quarters of July-September and October-
December 2007, manufacturing sector witnessed a slowdown and the main
reason behind the slowdown is the negative growth of consumer durable
sector for the period April-Jan 2007-08. The slowdown in electricity
generation and the capital good sector in the month of January 2008 is also a
cause for worry for the manufacturing sector. The slowdown in power
generation could constrain the growth of manufacturing sector in the coming
months, FICCI said. The current slowdown would make it difficult to increase
the share of manufacturing in our economy from the current 16% to 25%.
Analysis of Hypothesis H3:
From the Results of hypothesis H(3) it was found that sharpe ratio is more in
104
Equity funds as compared to Debt funds.
SHARPE RATIO- The Sharpe ratio is a portfolio performance measure used to
evaluate the return of a fund with respect to risk. The calculation is the
return of the fund minus the "risk-free" rate divided by the fund's standard
deviation. The Sharpe ratio provides you with a return for unit of risk
measure.
By using the risk return relationship, we try to access the competitive
strength of the mutual funds vis-à-vis one another in a better way. A mutual
fund may be ranked high both in terms of returns and risk-adjusted returns,
but the important thing is that the investor should be aware of the level of
risk. Also, performance in the scale of returns alone may not tally with the
performance in terms of risk adjusted returns. Therefore, we can say that
without taking into account the risk aspect it is not possible to find out the
actual performance of any mutual fund. The risk return relationship proves
that the funds taking higher (lower) amount of risk should give higher (lower)
returns, if fund managers' skills are the same.
Generally the primary objective of the investors of equity funds is to
maximize returns at a particular level of risk. His expected returns from the
funds that are taking different level of risk are different. So, the fund
manager's efficiency should be governed by the return given by the funds
over and above the expected return of the funds at the level of risk
associated with it
105
Sharpe ratio takes into account total risk (market risk plus sector/stock risk).
The Sharpe ratio tells us whether a portfolio’s returns are due to smart
investment decisions or a result of excess risk. Essentially, use this to figure
out if higher returns come with additional risk. The higher the ratio, the
better the portfolio’s risk-adjusted performance has been.
106
Conclusion
Conclusion
From the factor analysis i found that risk ability including level of
knowledge, Age and investment during volatile times is the most important
factor during investment decisions.
During investment in mutual funds risk can be of any kind, in the case of
Equity funds risk can be of two types (i) Market Risk (ii) Sector risk. In equity
107
funds if we take the example of sector funds, thematic funds and
aggressively managed funds and on the other hand balanced funds and
Equity diversified funds, then the risk is more in the former type of equity
funds.
Similarly in case of Debt funds there are also two types of risk (i) Market risk
(ii) Interest rate risk. Market risk is due to the increase or decrease in
demand and supply of bonds in the debt market which affects the NAV of the
fund and Interest rate risk is due to the fluctuation of the interest rate in the
market because of inverse relationship with the yield. The interest rate risk
affects more to long term bonds as compared to short term bonds.
From the results of hypothesis H2(b) and H2(c) it is found that in the volatile
conditions in the global and domestic market debt funds done well in last six
months as compared to equity funds but in three months their performance
was not up to the mark because of a lot of fluctuation in interest rates to
curb the inflation which was as high as 11.42%.
In last six months equity funds did not perform well as compared to returns
in last three months equity funds, the major reason was that in last three
months the performance was little good due to some sector funds such as
Pharma and technology and other reason was that valuations are very high
before six months as compared to last three months.
From the results of hypothesis i can conclude that in a volatile period Debt
short term funds such as fixed term maturity plans and Floating rate funds
108
are better as compared Debt long term funds because these short term
funds focused on generating expected return in short term by investing
regularly in short term securities such as short term bonds and money
market instruments.
It is being analysed that in the bullish market many of the investors get
influenced by the higher returns of the equity funds and invests in such
funds at higher level of risk.
If i compare the three year returns of the Equity and Debt funds, it is being
analysed that equity funds perform very well as compared to debt funds. But
if i compare the volatility of equity and debt funds with their benchmarks
(Beta ratio), the equity funds are more volatile as compared to debt funds.
Recommendation
109
In Equity funds, Sector funds are suitable for those aggressive customers
who have the knowledge for that sector and can understand when to enter
and exit from these funds.
As far as Equity diversified and tax planning are concerned, they can be
preferred by those aggressive customers who want to invest for long term
because these kind of funds invest in different sectors. So even during
volatile times, even if a particular sector doesn’t perform well, others can
compensate for that. Moreover, since aggressive customers take more risk,
they get good returns for that since in long term equity funds give good
returns.
Balanced Funds can be preferred by moderate customers with medium to
long term investment because these funds invest in equity and some portion
in debt and other instruments but it will be good for moderate customers if
asset allocation in equity funds is not more than 65% of the total portfolio.
In debt funds, income funds and Monthly income funds are preferred by
those conservative customers who need regular income on a monthly or
Quarterly basis to fulfil their needs because these funds provide regular
income and invest in fixed government securities, bonds and a small portion
110
in equity.
In volatile times, short term debt funds such as fixed term maturity funds
and floating rate funds can be preferred by conservative and moderate
customers for short to medium term investment because investment in
these funds gets adjusted according to market fluctuation( change in interest
rates).
Abstract
Mutual Fund industry has witnessed a boom since 1990s. The Asset Under Management has
multiplied many times. Still there exist a lot of potential for the growth of industry. The income
level of urban & middle class people is increasing these days and these people are saving part of
their income to invest in profitable instruments. There are various number of ways in which you
can invest your money, including mutual funds, stocks, bonds. But no other investment vehicle
can offer you as wide an array of advantage as mutual funds.
In this project I have tried to find the most critical factors affecting the investors’ decisions while
investing in mutual funds and analyze various types of mutual funds so as to find out which type
of funds better serve the needs of investors.
111
Bibliography
Online Websites
WWW.Mutualfundina.com
www.thefinancialexpress.com
www.moneycontrol.com
www.valueresearchonline.com
www.religare.in
www.religaresecurities.com
WWW.thehindubusinessonline.com
WWW.businessstandard.com
112
WWW.capitalmarket.com
WWW.businessworld.in
WWW.hinduonnet.com
WWW.personalfn.com
WWW.businessgyan.com
WWW.indianrealtynews.com
WWW.siliconindia.com
Newspaper
The Financial Express
The Economic Times
Magzines
The Mutual Fund Insight
113
114
Appendices
Questionnaire
115
116
117
SPSS Results
118
Communalities
Initial Extraction
Age 1.000 .427
Income 1.000 .815
Retirement 1.000 .767
Returns 1.000 .834
Dependents 1.000 .692
Knowledge 1.000 .714
Risk 1.000 .828
Time 1.000 .608
Volatility 1.000 .731
Dependence 1.000 .806
Extraction Method: Principal Component Analysis.
119
Communalities
Initial Extraction
Age 1.000 .427
Income 1.000 .815
Retirement 1.000 .767
Returns 1.000 .834
Dependents 1.000 .692
Knowledge 1.000 .714
Risk 1.000 .828
Time 1.000 .608
Volatility 1.000 .731
Dependence 1.000 .806
Rotated Component Matrixa
Component
1 2 3 4
Age .409 .352 .247 -.275
Income .039 .073 .880 -.182
Retirement .332 .800 .102 -.077
Returns .464 .689 .295 .238
Dependents -.094 -.441 .503 .486
Knowledge .772 .055 -.339 .023
Risk .765 .314 .149 .347
Time -.064 .755 -.159 .090
Volatility .840 .077 .116 -.076
Dependence .088 .137 -.179 .864
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.

a. Rotation converged in 8 iterations.
120
121
122

A Study On Investor Preferences Towards Various Mutual Funds

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“A Study on Investor Preferences towards Various Mutual Funds”

A report submitted towards the partial fulfilment of the requirements of

the two years full time Post Graduate Diploma in Management

Submitted by: Vikas Gaba

Post Graduate Diploma in Management

Asia Pacific Institute of Management Studies

opportunity to undertake my project work and for giving me knowledge

in the field of finance during my two months summer internship

I express my sincere and humble gratitude to Mr. Sumit Rastogi, for

being my project and Industry guide and educating me to make this

project a great success.

and support in completion of my project. I would express my sincere

thanks to all the staff members of Religare Securities ( Mr. Santosh

encouragement and ideas enriched my project.

MUTUAL FUND INDUSTRY

CONCEPT OF MUTUAL FUNDS

EVOLUTION OF MUTUAL FUNDS

BENEFITS OF INVESTING IN MFs

MAJOR MUTUAL FUND COMPANIES INDIA

VARIOUS TYPES OF MFs

close to 32 players, offering over 756 schemes, dot the industry

landscape. The industry has gained enormously in size as reflected in its

assets under management which now:

A Bank Sponsored 90719

Predominantly Foreign 73525

So today, there is large no. of options for an investor to invest in Mutual

So, my objective here is:

they invest in.

investors during volatile or normal times.

A mutual fund is a trust that pools savings of investors who share a

common financial goal and then invests in market instruments such as

shares, debentures and other securities. The income earned through

these investments are shared by its unit holders in proportion to the

number of units owned by them making it highly suitable investment

to invest in a diversified, professionally managed basket of securities at

a relatively low cost.

Acc to SEBI guidelines

Mutual fund is a mechanism for pooling the resources by issuing units to

the investors and investing in securities in accordance with the

objectives as disclosed in offer document. The profits or losses are

share by investors in proportion to their investments.

Sponsor is the person who acting alone or in combination with another

body corporate establishes a mutual fund. Sponsor must contribute at

eligibility criteria prescribed under the Securities and Exchange Board of

India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible

Schemes beyond the initial contribution made by it towards setting up

of the Mutual Fund.

Trustee is usually a company (corporate body) or a Board of Trustees

(body of individuals). The main responsibility of the Trustee is to

AMC functions in the interest of investors and in accordance with the

Securities and Exchange Board of India (Mutual Funds) Regulations,

respective Schemes. At least 2/3rd directors of the Trustee are

Asset Management Company

The AMC is appointed by the Trustee as the Investment Manager of the

Mutual Fund. The AMC is required to be approved by the Securities and

Exchange Board of India (SEBI) to act as an asset management

Registrars and Transfer Agents

Transfer Agent to the Mutual Fund. The Registrar processes the

application form, redemption requests and dispatches account

handles communications with investors and updates investor records.

remain a marginal investment vehicle in India until the beginning of the

90's. Ever since, we have observed a real boom in their development