1.

1 COMPANY PROFILE

Ambition Financial Planners is a fee-based Professional Financial Planning and investment advisory services firm in India, guiding its clients to fulfil their dreams and achieve financial goals. Company offers advisory and executioner platform for the entire range of financial services ranging from Direct Equity, Insurance, Mutual Funds, Real Estate, Loans and all other small saving instruments. Ambition Financial Planners is set-up with a professional team of dedicated, experienced and highly skilled Certified Financial Planners (CFPCM Certificates) and is spearheading the Financial Planning movement in India. As professionals our Financial Planners are committed to the professional practice standards and code of ethics laid down by Financial Planning Standards Board India. The client-centric Financial Planners are committed to help our clients with diverse backgrounds achieve their financial & life goals through proper management of various components of personal finances. We are dedicated to provide competent Financial Planning services and maintain the necessary knowledge; skill and advice based on established Body of Knowledge and client requirements. Ambition Learning Solutions, a division of Ambition Group is committed to provide quality training and nurture aspiring Financial Planners and is involved in research activities. Ambition Learning Solutions is also an Authorized Education Provider for the Financial Planning Standards Board India (FPSB India). Working closely with Ambition Learning Solutions, Ambition Financial Planners ensures transfer and use of knowledge between advisory practice and training & research. The Financial Planning services are tailored to meet client's needs as determined through the process of Financial Planning. It helps create a financial path to help them meet their life goals based on a deep understanding of their needs and superior implementation. The company follows its unique process to create a financial plan for its clients, conduct a portfolio review and then to ensure asset allocation being maintained through

active review and monitoring of financial plan. We strongly believe that If you Fail to Plan, you are planning to fail. SERVICES OFFERED SINGLE ELEMENT PLANNING Investment planning Tax planning Child future planning Insurance planning Retirement planning Estate planning

SPECIFIC GOAL PLANNING Child education & marriage Buying a dream home Loan & debt management Changes in employment/ starting new business Going to/ returning from Job Abroad Budget & cash flow planning

1.2 How does Ambition Financial Planners select schemes and funds to invest for a particular portfolio?
At Ambition Financial Planners, we look at various factors while selecting schemes for a particular portfolio such as: Your personal goals - If your goals require an aggressive portfolio, the schemes we select will reflect this. Your personal preferences - You may not want to invest in say Tobacco/Shipping/Oil & Gas/Banking companies or because of the company you work for, they may be a conflict in investing in competitor companies and hence we will keep away from funds which are invested in such companies. Your risk appetite - Your willingness to invest in more volatile or aggressive schemes. Diversification - The portfolio needs to be well diversified without heavy exposure to any sector or market cap, unless that is doing well at that particular time. Care will have to be taken to reduce such exposure when this does not hold true. Scheme Attributes - Objectives of the schemes; sectors and companies it plans to invest in, track record over markets ups and downs. Fund Manager - His past track record, views and philosophy Fund House - Philosophy, credibility and track record.

1.3 WHY AMBITION PLANNERS

Financial planning is a never-ending process, and with Ambition Financial Planners, you will get a customized and flexible financial plan to help you improve all aspects of your financial life. You value financial advice and long-term planning If you're committed to working toward your long-term financial goals and if you could use some guidance, we can help. The level of financial advice you receive depends on your needs and preferences. Do you enjoy handling your finances yourself but could use a second opinion or more information? Would you rather turn over most financial matters to an advisor?. You could use help with all your financial needs beyond investing While investing is an important part of any financial strategy, there are many other factors to consider in order to reach your goals. At Ambition, we listen closely and take the time to understand your complete financial picture your cash and liabilities, protection, investments and taxes. From there, we can help show you how to save, spend and invest more effectively while protecting what's important. You want to bridge the gap between today's needs and tomorrow's goals If the path from where you are to where you want to be seems hard to imagine, Ambition Financial Planners may be able to help. We understand that most people have multiple, and sometimes conflicting financial priorities. Ambition is experienced in addressing a broad range of financial needs so wherever you are in life, we can provide the financial planning and advice to help you get where you want to go.

Building a solid financial foundation No matter where you're coming from, we can help you systematically address your financial needs. We look at your entire financial situation from cash and liabilities to protection, investments and taxes to create a living, breathing plan that can help forge a clear path from today's realities to tomorrow's possibilities.

Cash and liabilities. Managing how much you save and how much you spend is key to reaching your financial goals.

Protection. As you move ahead into the future, you want to make sure you protect the things you've worked so hard for.

Investments. Saving more is usually not enough to help you reach your financial goals. You need a long-term investing strategy aligned with your goals and time horizon.

Taxes. Taxes can affect your ability to reach your financial goals. Smart strategies can help control how much you and your heirs will pay in taxes.

1.4 OBJECTIVES OF THE STUDY

The objectives of the study is to analyses, in detail the growth pattern of mutual fund industry in India and to evaluate performance of different schemes floated by most preferred mutual funds in public fund in public and private sector. The main objectives of this project are: To study about the Mutual Funds & various schemes. To discuss about the market trends of mutual fund investment. To study about the risk factors involved in the Mutual Funds and How to analyze it? To study the performance indices that can be used for mutual fund comparison. To study the people in which age and income group prefer mutual funds over other investment options. To know various factors considered by the customers while going to invest in the mutual fund. To study the characteristics of mutual funds that attracts the customers.

1.5 SCOPE

The project will provide us the better platform to understand the history, growth & various aspects of mutual funds. The scope of the study is to inform & guide the investor about the various mutual fund schemes & help them to select the best scheme as per their requirement. The main purpose of doing this project was to know about mutual funds & its functioning. This helps to know in detail about mutual fund right from inceptions, stage, growth & future prospect. Also with the help of this project one can better understand the different types of mutual funds working in India.

1.6 RESEARCH METHODOLOGY

METHODOLOGY:

Marketing research is the process of collecting & analyzing marketing information & ultimately arrives at certain conclusions. Management in any organization needs information about potential marketing plans & to change the market place. Marketing research includes all the activities that enable an organization to obtain information. This research is very important in strategy formulation & feedback of any organizational plan.

RESEARCH PROBLEM: To know investors perceptions about level of satisfaction while investing in mutual funds.

1.7 DATA COLLECTION

Secondary Data: Information collected through websites, fact sheet of various funds etc.

DURATION OF TRAINING: The training was carried out for a period of 2 months from 1st may to 30th June 2012.

1.8 RESEARCH LIMITATIONS

This project is limited in scope as the survey is conducted with the shortage of time constraint & also based on secondary data. Some of the persons were not so responsive.

The respondent were not disclosing their exact portfolio because they have a fear in their mind that they can come under tax slab.

Some respondents were reluctant to divulge personal information which can affect the validity of all responses. The project is unable to analysis each and every scheme of mutual funds to create the ideal portfolio. Being a trainee, I was not given the authority to handle any transaction myself but under the guidance of some superior.

CHAPTER 2: INTRODUCTION TO MUTUAL FUNDS

2.1 Mutual Funds

Definition of mutual fund A Mutual Fund is a trust that pools the savings of a number of investors who share a common or mutual financial goal i.e. who have a similar investment objective, return expectations, risk profile and investment time horizon. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them (pro rata). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

MUTUAL FUND STANDS OUT AS AN INVESTMENT OPTION.

A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staffs that manage each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks.

2.2 Concept
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund.

2.3 INTRODUCTION TO MUTUAL FUNDS AND ITS VARIOUS ASPECTS

The mutual fund industry in India is one of the emerging industries in India. Today, the Indian mutual fund industry has 40 players. The number of public sector players has reduced from 11 to 5. The public sector has gradually receded into the background, passing on a large chunk of market share to private sector players. The Association of Mutual Funds in India (AMFI) is the industry body set up to facilitate the growth of the Indian mutual fund industry. It plays a pro-active role in identifying steps that need to be taken to protect investors and promote the mutual fund sector. A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments & the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro-rata). Thus a mutual fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an inventible surplus of as little as a few thousand rupees can invest in mutual funds. Each mutual fund scheme has a defined investment objective & strategy. A mutual fund is the ideal investment vehicle for todays complex & modern financial scenario. Market for equity shares, bonds & other fixed income instruments, real estate, derivatives & other assets have become mature & information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination & time to keep track of events & understand

their implications & act speedily. An individual also finds difficult to keep track of ownership of his assets, investments, brokerage dues & bank transactions etc. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as Shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.

2.4 ADVANTAGES & DISADVANTAGES OF MUTUAL FUND ADVANTAGES

Professional Management: Even under the best of market conditions, it takes an astute, experienced investor to choose investments correctly, and a further commitment of time to continually monitor those investments. With mutual funds, experienced professionals manage a portfolio of securities for you full-time, and decide which securities to buy and sell based on extensive research. A fund is usually managed by an individual or a team choosing investments that best match the funds objectives. As economic conditions change, the managers often adjust the mix of the funds investments to ensure it continues to meet the funds objectives. Diversification: Successful investors know that diversifying their investments can help reduce the adverse impact of a single investment. Mutual funds introduce diversification to your investment portfolio automatically by holding a wide variety of securities. Moreover, since you pool your assets with those of other investors, a mutual fund allows you to obtain a more diversified portfolio than you would probably be able to comfortably manage on your ownand at a fraction of the cost. In short, funds allow you the opportunity to invest in many markets and sectors. Thats the key benefit of diversification. Variety: Within the broad categories of stock, bond, and money market funds, you can choose among a variety of investment approaches. Today

there are more than 1000 types of mutual fund available for the Indian investors. Low Costs: Mutual funds usually hold dozens or even hundreds of securities like stocks and bonds. The primary way you pay for this service is through a fee that is based on the total value of your account. Because the fund industry consists of hundreds of competing firms and thousands of funds, the actual level of fees can vary. But for most investors, mutual funds provide professional management and diversification at a fraction of the cost of making such investments independently Liquidity: Liquidity is the ability to readily access your money in an investment. Mutual fund shares are liquid investments that can be sold on any business day. Mutual funds are required by law to buy, or redeem, shares each business day. The price per share at which you can redeem shares is known as the funds net asset value (NAV). NAV is the current market value of all the funds assets, minus liabilities, divided by the total number of outstanding shares. Convenience: You can purchase or sell fund shares directly from a fund or through a broker, financial planner, bank or insurance agent, by mail, over the telephone, and increasingly by personal computer. You can also arrange for automatic reinvestment or periodic distribution of the dividends and capital gains paid by the fund. Funds may offer a wide variety of other services, including monthly or quarterly account statements, tax information, and 24-hour phone and computer access to fund and account information.

 Protecting Investors: Not only are mutual funds subject to compliance with their selfimposed restrictions and limitations, they are also highly regulated by the federal government through the U.S. Securities and Exchange Commission (SEC). As part of this government regulation, all funds must meet certain operating standards, observe strict antifraud rules, and disclose complete information to current and potential investors. These laws are strictly enforced and designed to protect investors from fraud and abuse. But these laws obviously cannot help you pick the fund that is right for you or prevent a fund from losing money.

DISADVANTAGES OF MUTUAL FUNDS

No Guarantees There is no guarantee that the mutual fund will always do well and provide good returns to its unit holders, as no investment is risk free. However, risk is minimized to some extent by investing in mutual funds. Fees and Commissions All funds charge administrative fees to cover their operational expenses. Some funds also charge sales commissions or loads to compensate financial consultants or planners, brokers etc. Taxes Most actively managed funds sell anywhere from 20% to 70% of the securities in their portfolio during a typical year. If the fund makes a profit on its sales, the investor has to pay tax on the income he receives even if here invests the money he made. Management risk The risk that an investor is taking here is that someone else is managing his money. He depends on the fund manager to make the right decision regarding the portfolio. If the manager does not perform as one had hoped then the investor may not make as much money as he had expected.

2.5 HISTORY OF MUTUAL FUNDS IN INDIA

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. Though the growth was slow, but it accelerated from the year 1987 when nonUTI players entered the Industry. In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets under Management (AUM) was Rs67 billion. The private sector entry to the fund family raised the Amount to Rs. 470 billion in March 1993 and till April 2004; it reached the height if Rs. 1540 billion. The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under: First phase- 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. 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 delinked from the RBI and the Industrial Development Bank 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 1988 UTI had Rs.6, 700 crores of assets under management.

Second phase 1987-1993(entry of public sector funds): 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non-

UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. 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): With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 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 two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, 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 Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming 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. The graph indicates the growth of assets over the years.

2.6 Organization of Mutual Funds in India

Fund Sponsor: The sponsor of a fund is akin to a promoter of a company as he gets the fund registered with SEBI. The sponsor will form a Trust and appoint a Board of Trustees. The sponsor will also generally appoint an Asset Management Company (AMC) as fund managers. Trustees: The trust-Mutual Fund- may be managed by a board of trustees- a body of individuals, or a Trust Company-a corporate body. AMC: The role of an AMC is to act as the Investor Manager of the trust. Custodian: The custodian is appointed by the Board of Trustees for safekeeping of physical securities or participating in any clearing system through approved depository companies on behalf of the mutual fund in case of dematerialized securities. Transfer agents: Transfer agents are responsible for issuing and redeeming units of mutual fund and provide other related services such as preparation of transfer documents and updating investor records.

2.7 Types of Mutual Fund Schemes

The mutual fund schemes can be classified according to both their investment objective (like income, growth, tax saving) as well as the number of units (if these are unlimited then the fund is an open-ended one while if there are limited units then the fund is close-ended). Classification by structure:

Open ended Fund: Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. These schemes have unlimited capitalization, open-ended schemes do not

have a fixed maturity, there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange. Closed-end Fund: Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. After that such schemes can not issue new units except in case of bonus or rights issue. However, after the initial issue, you can buy or sell units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors expectations and other market factors. Interval Funds: These funds combine the features of both openended and close-ended funds wherein the fund is close-ended for the first couple of years and open-ended thereafter. Some funds allow fresh subscriptions and redemption at fixed times every year (say every six months) in order to reduce the administrative aspects of daily entry or exit, yet providing reasonable liquidity. Classification according to investment objectives

Mutual funds can be further classified based on their specific investment objective such as growth of capital, safety of principal, current income or taxexempt income. Equity Funds are those that invest in shares or equity of companies. Fixed-Income Funds invest in government or corporate securities that offer fixed rates of return While funds that invest in a combination of both stocks and bonds are called Balanced Funds.

Growth funds primarily look for growth of capital with secondary emphasis on dividend. Such funds invest in shares with a potential for growth and capital appreciation. They invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential, and hence growth funds provide low current income. Growth funds generally incur higher risks than income funds in an effort to secure more pronounced growth.

Classification according to geographic location:

Domestic funds These funds mobilize the savings of nationals within the country. Offshore Funds. These funds facilitate cross border fund flow. They invest in securities of foreign companies. They attract foreign capital for investment

Classification by Nature of Investment

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:

a. 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. b. 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. c. Specialty Funds - Specialty Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some specialty funds could be to invest/not to invest in particular regions/companies. Specialty funds are

concentrated and thus, are comparatively riskier than diversified funds.. There are following types of specialty funds: i. 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. ii. 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.

iii.

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 risky. iv. 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.

d. 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 companyspecific 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. e. Equity Index Funds - Equity Index Funds have the objective to 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. f. 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. g. 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 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.

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: a. 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 default by a debt

issuer, is shared by all investors which further reduces risk for an individual investor. b. 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. c. 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. d. Assured Return Funds - Although it is not necessary that a fund 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. e. Fixed Term Plan Series - Fixed Term Plan Series usually are closedend 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 investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. 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.

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).

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: a. 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. b. 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.

c. 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 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. 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.

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 Funds. The objective of these funds may be to generate regular income for investors or capital appreciation.

Exchange Traded Funds (ETF) Exchange Traded Funds provide investors with combined benefits of a closedend 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 (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad.

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.

* Funds not yet available in India

2.8 SELECTION OF A MUTUAL FUND

How to pick an Equity/Growth fund? Now, that you have an idea of the investment profile and objective behind each type of equity fund, lets get down to specifics: what you should look for while evaluating an equity fund. First, narrow down your investment universe by deciding which category of equity fund you would like to invest in. That decided; seek the following four attributes from a prospective fund. 1. Track record. Its always safer to opt for a fund thats been around for

a while, as you can study its track record. You can see how the fund has performed over the years, which will facilitate historical comparison across its peer set. Although past trends are no guarantee of future performance, it does give an indication of how well a fund has capitalized on upturns and weathered downturns in the past. The funds track record also gives an indication of the volatility in its returns. Avoid funds that show a volatile returns patterns. 2. Diversified portfolio. Unless you are willing to take on high risk,

avoid funds that have a high exposure to a few sectors or a handful of stocks. Such funds will give superior returns when the selected sectors are doing well, but if the market crashes or the sector performs badly, the fall in NAV will be equally sharp. Ideally, a diversified equity fund should have an exposure to at least four sectors and seven to 10 scrips. 3. Diversified investor base. Just as the fund needs diversified

investments, it also needs to have a diversified investor base. This ensures that a few investors do not own a significant part of the fund, as it would belie the very principle of a mutual fund. SEBI (Securities and Exchange Board of India) regulations stipulate that a fund must publish, in its half-yearly disclosures, details of the number of investors who hold more than 25 per cent of the schemes corpus. Avoid such funds, as they could well be catering to the interests of the large investorsat your expense.

4.

Transparency in operations. Before investing in a fund, always go

through its offer document and fact sheet. If the fund house doesnt give out such information regularly, avoid that fund. Funds that do not disclose details on a regular basis to their unit holders are better left alone, as you may not be told what will happen to your money once you invest. Fixed income funds primarily look to provide current income consistent with the preservation of capital. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities. Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of the Indian Government. Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so.

How to pick a Debt fund? Its evident there is an element of risk associated with debt funds. Hence, some care and thought has to go into picking a debt fund. Here are some factors you ought to look at while scouting for a debt fund. 1. Investment horizon. The first thing you need to get a fix on is your

investment horizon. If you wish to invest in a debt fund for anything up to one year, opt for a liquid fund. Anything above that, you should be looking at a gilt fund or an income fund. 2. Track record. As with equity funds, a debt fund with a good track

record is always preferable. The longer the track record, the betterto be on the safe side, choose funds that have been in the market for at least a year.

3.

Credit quality. One of the most important factors you need to look for

in an income fund is the credit rating of the debt instruments in its portfolio. A credit rating of AAA denotes the highest safety, while a rating of below BBB is classified as non-investment grade. Although rating agencies classify BBB paper as investment grade, you should budget for downgrades, and set the minimum acceptable rating benchmark at AA. In order to ensure the safety of your investment, opt for a fund that has at least 75 per cent of its corpus in AAA-rated paper, and 90 per cent in AA and AAA paper. 4. Diversification. In order to limit the loss from a possible default, an

income fund should be reasonably diversified across companies. Say, a fund manager invests his entire corpus in debt instruments of just one company. If the company goes under, the fund loses everything. Now, had the fund manager diversified and invested 10 per cent of his corpus in 10 companies, with one-tenth in the troubled company, his loss would be lower. Assuming the other companies meet their debt obligations, the funds loss would be restricted to 10 per cent. 5. Diversified investor base. Similar to the pre-condition for equity

funds, avoid debt funds where a few large investors account for an abnormally high portion of the corpus. The Balanced fund aims to provide both growth and income. These funds invest in both shares and fixed income securities in the proportion indicated in their offer documents. How to pick a Balanced fund? The same criterion that applies to selecting an equity fund holds good when choosing a balanced fund. The one additional factor you should check for a balanced fund is the equity and debt split. The offer document will state the ratio of equity and debt investments the fund plans to have. Mostly, this takes on a range, and varies from time to time depending on the fund managers perception of the financial markets.

Before investing in an existing balanced fund, go through a few of its past fund fact sheets, and look up the equity-debt split. If you are a conservative investor, opt for a fund where equity investments are capped at 60 per cent of corpus. However, if you are the aggressive sort, you could even go along with a higher equity holding.

2.9 DIFFERENT PLANS OFFERED BY A MUTUAL

FUND
Growth Plan and Dividend Plan A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realizes capital appreciation on the investment. This plan appeals to investors in the high income bracket. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income. Dividend Reinvestment Plan Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested on behalf of the investor, thus increasing the number of units held by the investors. Automatic Withdrawal Plan Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan (SWP), a facility is provided to the investor to withdraw a pre-determined amount from his fund at a pre-determined interval. Systematic Encashment Plan (SEP) As opposed to the Systematic Investment Plan, the

Systematic Encashment Plan allows the investor the facility to withdraw a predetermined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day. Retirement Pension Plan Some schemes are linked with retirement pension. Individuals participate in these plans for themselves, and corporate participate for their employees.

Insurance Plan Certain Funds offer some schemes that offer insurance cover to investors. Automatic Investment Plan / Systematic Investment Plan Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan (SIP), the investor is given the option for investing in a specified frequency of months in a specified scheme of the Mutual Fund for a constant sum of investment. AIP allows the investors to plan their savings through a structured regular monthly savings program.

2.10 Types of risks associated with Mutual fund

Identifying individual risk tolerance is one of the basic factors in determining an optimum investment strategy for a mutual fund portfolio. Regardless of the return objectives and time horizon within a portfolio, risk tolerance affects both asset allocation and especially the selection of fund categories (i.e., large value, small growth, international, short-term bond, intermediate-term bond, etc.).

As the level of risk increases, both volatility and total return potential proportionately increase; conversely, as the level of risk decreases, both volatility and total return potential proportionately decrease. This standard risk/reward rule is often illustrated with risk and reward both escalating over a broad spectrum beginning with cash reserves, changing to bonds and then ending with stocks: Risk is an inherent aspect of every form of investment. For mutual fund investments, risks would include variability, or period-by-period fluctuations in total return. The value of the scheme's investments may be affected by factors affecting capital markets such as price and volume volatility in the stock markets, interest rates, currency exchange rates, foreign investment, changes in government policy, political, economic or other developments. Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".

Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you'll actually be able to buy less, not more.

Credit Risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures? Interest Rate Risk: Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in the interest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interest rates drop, the prices increase. Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV. Investment Risks: In the sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities. Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near their real values. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market. Changes in the Government Policy: Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund. The Risk- Return Trade Off The risk-return tradeoff is the balance an investor must decide on between the desire for the lowest possible risk for the highest possible returns. Its a fact that low levels of uncertainty (low risk) are associated with low

potential returns and high levels of uncertainty (high risk) are associated with high potential returns.

The following chart shows an example of the risk/return trade-off for investing. A higher standard deviation means a higher risk:

Risk Return Grid

We can figure out from the above diagram that, Liquid funds are the least risky and hence the expected returns are also the least. Whereas the equity sector funds are the most risky and hence the returns offered are also the maximum.

RESTRICTIONS ON INVESTMENTS A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment grade by a credit rating agency authorized to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset Management Company. A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme. All such investments shall be made with the prior approval of the Board of Trustees and the Board of Asset Management Company. No mutual fund under all its schemes should own more than 10% of any company's paid up capital carrying voting rights. Transfers of investments from one scheme to another scheme in the same mutual fund shall be allowed only if; - Such transfers are done at the prevailing market price for quoted instruments on spot basis. The securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made. A scheme may invest in another scheme under the same asset management company or any other mutual fund without charging any fees, provided that aggregate inter

scheme investment made by all schemes under the same management or in schemes under the management of any other asset management company shall not exceed 5% of the net asset value of the mutual fund. The initial issue expenses in respect of any scheme may not exceed 6% of the funds raised under that scheme. Every mutual fund shall buy and sell securities on the basis of deliveries and shall in all cases of purchases, take delivery of relative securities and in all cases of sale, deliver the securities and shall in no case put itself in a position whereby it has to make short sale or carry forward transaction or engage in badla finance. Every mutual fund shall, get the securities purchased or transferred in the name of the mutual fund on account of the concerned scheme, wherever investments are intended to be of longterm nature. Ending deployment of funds of a scheme in securities in terms of investment objectives of the scheme a mutual fund can invest the funds of the scheme in short term deposits of scheduled commercial banks. No mutual fund scheme shall make any investment in: Any unlisted security of an associate or group company of the sponsor; or Any security issued by way of private placement by an associate or group company of the sponsor; or The listed securities of group companies of the sponsor, which is in excess of 30% of the net assets (of all the schemes of a mutual fund) No mutual fund scheme shall invest more than 10% of its NAV in the equity shares or equity related instruments of any company. Provided that, the limit of 10% shall not be applicable for investments in index fund or sector or industry specific scheme. A mutual fund scheme shall not invest more than 5% of its NAV in the equity shares or equity related investments in case of open-ended scheme and10% of its NAV in case of close-ended scheme.

Performance Measures of Mutual Funds Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one of the most preferred investment avenues in India. However, with a plethora of schemes to choose from, the retail investor faces problems in selecting funds. Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone can not be indicative of future performance, it is, frankly, the only quantitative way to judge how good a fund is at present. Therefore, there is a need to correctly assess the past performance of different mutual funds. Worldwide, good mutual fund companies over are known by their AMCs and this fame is directly linked to their superior stock selection skills. In other words, there must be some performance indicator that will reveal the quality of stock selection of various AMCs. Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. Risk associated with a fund, in a general, can be defined as variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. These fluctuations are resultant of general market fluctuations, which affect all the securities, present in the market, called market risk or systematic risk and, fluctuations due to specific securities present in the portfolio of the fund, called unsystematic risk. The Total Risk of a given fund is sum of these two and is measured in terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis--vis market. The more responsive the NAV of a mutual fund is to the changes in the market; higher will be its beta. Beta is calculated by relating

the returns on a mutual fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk cannot. Accounting And Valuation Of Mutual Funds In India mutual funds are regulated by SEBI, which lays down the Regulations for fund accounting and valuation of securities. The Income Tax Act, 1961 lays down the relevant tax provisions that govern mutual funds. This report outlines the major elements of mutual fund accounting and valuation norms as applicable to mutual funds in India. The Importance of Accounting Knowledge The balance sheet of a mutual fund is different from the normal balance sheet of a bank or a company. All of the funds assets belong to the investors and are held in fiduciary capacity for them. Mutual fund employees need to be aware of the special requirements concerning accounting for the funds assets, liabilities and transactions with investors and other outside constituents such as banks, securities custodians and registrars. Even the mutual fund agents need to understand the accounting for the funds transactions with investors and how the fund accounts for its assets and liabilities, as the knowledge is essential for them to perform their basic role in explaining the mutual fund performance to the investors. For example, unless the agent knows how the NAV is computed, he cannot use even simple measures such as NAV Change to assess the fund performance. Net Asset Value (NAV) A mutual fund is a common investment vehicle where the assets of the fund belong directly to the investors. Investors subscriptions are accounted for by the fund not as liabilities or deposits but as Unit Capital. On the other hand, the investments made on behalf of the investors are reflected on the assets side and are the main constituents of the balance sheet. There are,

however, liabilities of a strictly short-term nature that may be part of the balance sheet. The funds Net Assets are therefore defined as the assets minus the liabilities. As there are many investors in a fund, it is common practice for mutual fund to compute the share of each investor on the basis of the value of Net Assets per Share per Unit, commonly known as the Net Asset Value (NAV). The following are the regulatory requirements and accounting definitions laid down by SEBI. NAV= Net Assets of the scheme/Number of Units Outstanding, i.e. {Market value of investments + Receivables + Other Accrued Income + Other Assets -Accrued Expenses Other Payables Other Liabilities} No. of Units Outstanding as at the NAV date For the purpose of NAV calculation, the day on which NAV is calculated by a fund is known as the valuation date. NAV for all schemes must be calculated and published at least weekly for closed-end schemes and daily for open-end schemes. NAVs for a day must also be posted on AMFIs website by 8:00 p.m. on that day. This applies to both the open-end and closed-end funds. One exception is those closed end schemes which are not mandatorily required to be listed in any stock exchange. These funds may publish NAV monthly or quarterly intervals as permitted by SEBI. An example of such a permitted scheme is the Monthly Income Schemes that are not listed on a stock exchange. A funds NAV is affected by four sets of factors: o purchase and sale of investment securities o valuation of all investment securities held o other assets and liabilities, and o units sold or redeemed

 Nowadays, many funds calculate and announce their NAVs even daily. Such frequent computations of asset values involve valuation of all investment securities at their market prices and inclusion of other assets and liabilities. Other Assets include any income due to the fund but not received as on the valuation date (for example, dividend announced by a company yet to be received). Other liabilities have to include expenses payable by the fund, for example custodian fees or even the management fees payable to the AMC. These income and expense items have to be accrued and included in the computation of the NAV. SEBI requires, therefore, that all expenses and incomes are accrued up to the valuation date and considered for NAV computation. Major fee such as management fees should be accrued on a day to day basis, while others need not be so accrued, if nonaccrual does not affect the NAV by more than 1%. It can be seen from the NAV definition that additions to and sales from the portfolio of securities, and changes in the number of units outstanding will both affect the per unit asset value. Such changes in securities and number of units must be recorded by the next valuation date. If frequency of NAV declaration does not permit this, recording may be done within 7 days of transaction, provided that the non-recording does not affect NAV calculations by more than 2%. F example, if a fund declares NAV every week, with the next declaration date being January 15, except for transactions whose value does not affect the NAV by more than 2%. Such unrecorded transactions have to be included in the next weeks NAV calculation. If a fund calculates NAV daily, it will include all transactions concluded up to today, except for small value transactions which can be reflected in the next days NAV subject to the 2% restriction. Open end funds are required to declare their NAVs daily.

TAX IMPLICATIONS ON MUTUAL FUND GAINS

Different types of Mutual Funds attract different types of taxes. Here is the information about taxes applicable on Mutual Funds in India. Taxation Equity Funds Short Capital Tax Long Capital Tax Dividend Distribution Tax

Liquid funds/Money Debt Market Funds

fund/liquid

plus Funds

Term *16.995% Gain

As per Income Tax As per Income Tax Slab Slab

Term Nil Gain

Less of 10% without Less of 10% without indexation or 20% indexation or 20% with indexation **14.163%

with indexation Nil **28.325%

80C benefits through ELSS: Under the current tax laws, you can get an annual income tax benefit of up to Rs. 1Lakh if you invest in Equity Linked Savings Schemes, ELSS. However, the minimum term for these schemes is 3 years and you cannot withdraw your money before that time

*There would be an additional surcharge of 10% of Short Term Capital Gain Tax if the individuals income is more than 10 lacs per annum. Further, the education cess of 3% shall be levied on all investors. *Short Term Capital Gain Tax indicated above is inclusive of surcharge and education cess **Dividend Distribution Taxes indicated above are inclusive of additional surcharge and cess. With reference to sale/transfer of units of equity funds:

We all invest in mutual funds and get the returns either in the form of dividends or get capital appreciation benefits under growth option. But do we know how is this income taxed in India? What are the tax implications on the income arising out of mutual fund investments? The income from mutual funds can arise out of dividend received from the fund or from the capital gains (short term or long term). DIVIDEND a. On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments): Income in the form of dividend is tax free in the hands of the investor. Moreover such a fund house is exempt from paying Dividend Distribution Tax also. b. On units of funds other than equity oriented fund: Income in the form of dividends is tax free. However, the fund house needs to pay Dividend Distribution Tax (DDT) at the time of distributing the dividend. The rate of dividend distribution tax depends on who is the recipient of the dividend and is calculated as under- Individual and HUF - 14.025%- Others like corporate 22.44%

CAPITAL GAINS Capital gain is classified into 2 categories i.e. Short term and long term capital gains. Short term capital gains arises out of sale of units held for less than 12 months and long term capital gains arises out of sale of units held for more than 12 months. Short Term capital Gains

On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments): The income arising out of short

term capital gains in mutual funds is to be taxed at the rate of 10% plus applicable surcharges. On units of funds other than equity oriented funds: Short term capital gains is added back to your income and then your total income is taxed as per the IT slab i.e. 10% or 20% or 30% for the ones falling in the highest bracket. Long Term capital Gains

On units of equity oriented funds (funds having more than 65% investments in Indian equity instruments): Tax free On units of funds other than equity oriented funds : There are 2 methods for this. The investor can calculate capital gains taking the benefit of indexation and pay tax at the rate of 20% plus surcharge. or The investor can calculate the capital gains without the benefit of indexation and pay tax at 10%.

INVESTMENT STRATEGIES 1. Systematic Investment Plan: Under this a fixed sum is invested each month on a fixed date of a month. Payment is made through post dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA) 2. Systematic Transfer Plan:

Under this an investor invest in debt oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund. 3. Systematic Withdrawal Plan: If someone wishes to withdraw from a mutual fund then he can withdraw a fixed amount each month.

CHAPTER: IV INTERPRETATION & ANALYSIS

Q.1 What is your age?

From the above table we can say that awareness for investment in youngsters has been increased & thats why out of 70, 20 are youngsters who do investment & they come in age group of 20-30, then comes age group of 3040 from which 25 people do investment & other age group are 40-50 where investors are 13, 10 belongs to age group of 50-60 & 2 belongs to the age group of 60-above. We can say that youngsters are more careful for their investments.

Q.2 What is your profession?

Particulars Business Jobs in private sector Jobs in public sector Others Total

No. 4 14 35 17 70

Now 70 people doing investment out of which 35, people are from public sector, 4 are having their business & 17 are others which include retired people & students. Reason for investment by all people was to secure the future & reason given by the people doing the job in private sector was their higher salary & unsecured job.

Q.3 Do you invest in mutual funds?

Investment Yes No Total

No. of respondents 70 30 100

From 100 respondents 70 of them are doing investment in mutual fund & 30 of them are not investing in mutual fund but they do investment in other sectors for which the information is given in next question.

Investors

yes no

Q.4 If you not invest in mutual fund then where do you invest? INVESTMENT EXCEPT MUTUAL FUND? Particulars Insurance Equity market Govt. bond Post office Commodities Total No. 6 15 0 5 4 30

Investment except mutual fund

Insurance Equity market Post office Commodities

People who were not investing in mutual fund they do invest in others like insurance, equity market, govt. bond, commodities. More people invest in equity market due to higher returns available in it.

Q.5 Do you compare the returns or other benefits of mutual fund scheme before investing?

Compare returns
yes No

It is necessary to compare the returns & other benefits because people do invest in for higher returns so they compare with other companies. Here 28 people compare the returns & other benefits of mutual fund scheme before as well as after investing to see how their investments is spread over in different segments.

Q.6 Do you know mutual fund is a good instrument for tax saving? Investment Yes No Total No. of respondents 56 14 70

Investment
Yes No

Out of 70 respondents, 56 knows mutual fund is a good instrument of tax saving & 14 respondents do not know.

Q.7 objectives for investment in mutual fund schemes ( rank them from 1 most preferred to 4 least preferred).

Here in this question the investors have ranked the factors on their basis of their objectives that for what reason they have invested in a particular scheme. 15 of investors had given return/dividend 1st rank because every investor wants benefit for the risk they have taken by investing in that scheme, 13 of investors had given appreciation 1st rank because they want something more including their invested amount, 42 of investors has given tax saving as 1st rank because while investing in some particular scheme their amount invested is appreciated as well as they get the tax benefit.

Q.8 What is your source of information while investing in MF? Source of information Internet Magazine Peer group Financial Advisors No. of respondents 20 5 10 35

Source of information
group Magazine peer

From the above chart it can be inferred that the financial advisor is the most important source of information about mutual fund. Out of 70 respondents 35 people know about mutual fund through financial advisor, 20 people from bank, 5 from magazine & 10 respondents from peer group.

Q.9 Which types of funds would you like to prefer for your investment in mutual fund? Investment preference Equity fund Debt fund Balanced fund Total No. of respondents 37 13 20 70

Investment preference
Equity fund Debt fund Balanced fund

From the above chart most of the respondents prefer investment in equity fund, 20 respondents prefer balanced fund & 13 respondents prefer debt fund.

Q.10 Do you check out the annual reports of your scheme to evaluate the performance of your scheme?

Annual report checking

yes No

In the annual report of the scheme all the information of that particular scheme are given information about the performance of the scheme, position of the scheme in the market, portfolio of scheme that where the investment has been done under this scheme, profile of the fund manager is also given by this the investors can come to know the position & qualification of the fund manager. 61 investors do monitor the annual report & 9 investors do not monitor the annual report.

Q.11 What type of return do you expect? Expected type of return Percentage

Monthly Quarterly Half yearly Annually

8% 12% 10% 40%

Expected type of return

Monthly Quaterly Half yearly Annually

The above study shows that 40% of investors are expect annually returns, 12% expect quarterly returns, 10% expects half yearly returns & 8 % expects monthly returns.

Q.12 How would you like to receive the returns every year? Option Dividend payout Dividend investment No. respondents of 15 10 re- Growth in NAV 45

From the above graph 15 people preferred dividend payout option, 10 preferred dividend re-investment option & 45 people preferred growth option.

Q.13 When you invest in Mutual Funds which mode of investment you prefer? Mode of investment One time investment Systematic plan(SIP) No. of respondents 44 26 investment

Mode of investment
One time investment systematic investment plan

Out of 70 investors 44 preferred one time investment & 26 preferred through systematic investment plan.

FINDINGS From the above analysis i have found that even though certainly not the best or deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide reasonable options for an ordinary man to invest his savings. Around 70% of the investors invest to maximize their returns & they are ready to take the moderate risk in their investment portfolio. Highest number of investors comes from the age group 30-40. Most of the investors give importance to the fact that their investment should grow in value over a period of time.

 Growth scheme is the most preferred for investment. Knowledge about mutual funds & their various schemes is moderate among investors. Most of the investors give importance to return, tax saving etc. Most of the people invest upto 6% of their annual income in mutual funds. Age group of above 30 years concentrates on safety & tax saving & they even take care of liquidity.

CONCLUSION The mutual fund is growing at a tremendous pace. A large number of plans have come up from different financial resources. With the stock market soaring the investors are attracted towards these schemes. The Indian investors generally invest over a period of 2-3 years. Also there is a tendency to invest in FD due to the security attached to it. Running a successful Mutual Fund requires complete understanding of the peculiarities of the Indian Stock Market and also the psyche of the small investors. This study has made an attempt to understand the financial behaviour of Mutual Fund investors in connection with the preferences of Brand, Products, and Channels etc. I observed that many of people have fear of Mutual Fund. They think their money will not be secure in Mutual Fund. They need the knowledge of Mutual Fund and its related terms. Many of people do not have invested in mutual

fund due to lack of awareness although they have money to invest. As the awareness and income is growing the number of mutual fund investors are also growing. The mutual fund investors prefer more of the equity fund as they want more return on their money. They avoid going in the debt fund because they can get same amount of return on their banks that is also without taking any risk. Distribution channels are also important for the investment in mutual fund. Financial Advisors are the most preferred channel for the investment in mutual fund. They can change investors mind from one investment option to others.

RECOMMENDATIONS: Mutual fund offers a lot of benefit which no other single option could offer. But most of the people are not even aware of; they just see it as just another investment option. So the advisors should try to change their mindsets. There is need to build awareness of the new funds among the investors with constantly being in contact with them.

The expectation of the people from the mutual funds is high. So, the portfolio of the fund should be prepared taking into consideration the expectations of the people. Try to reduce fund charges, administration charges and other charges which help to invest more funds in the security market and earn good returns.

 Different campaigns should be launched to educate people regarding mutual funds. Companies should give regular dividends as it depicts profitability.

Mutual funds should concentrate on differentiating the portfolio of their MF than their competitors MF Companies should give handsome brokerage to brokers so that they get attracted towards distribution of the funds Some of investors have asked for periodical market report about stock market so that they can get the knowledge properly.

The company should advertise their tax saving plan more so that they can gain more customers. Systematic investment plan is one of the innovative products. SIP is easy for monthly salaried person as it provides the facility of do the investment in EMI, though most of the prospects & potential investors are not aware about the SIP. There is a large scope of the companies to tap the salaried persons.

ANNEXURE Personal details Name: Qualification:

Marital status:

Annual income: - Rs2, 50,000 -

Q.1 What is your age?

(a) 20-30 (b) 30-40 (c) 40-50 (d) 50-60

(e) 60-above

Q.2 What is your profession?

(a) Business (b) Job in private sector (c) Job in public sector (d) Retired

Q.3 Do you invest in mutual funds?

(a) Yes

(b) No

Q.4 If you not invest in mutual fund then where do you invest? (a) Insurance (c) Govt. bond (e) commodities (b) Equity market (d) post office

Q.5 Do you compare the returns or other benefits of mutual fund scheme before investing? (a) yes (b) No

Q.6 Do you know mutual fund is a good instrument for tax saving?

(a) yes

(b) No

Q.7 objectives for investment in mutual fund schemes ( rank them from 1 most preferred to 4 least preferred).

Q.8 What is your source of information while investing in MF? (a) Internet (c) Peer group (b) Magazine (d) Financial Advisors

Q.9 Which types of funds would you like to prefer for your investment in mutual fund? (a) Equity fund (c) Balanced fund (b) Debt fund

Q.10 Do you check out the annual reports of your scheme to evaluate the performance of your scheme? (a) yes (b) No

Q.11 What type of return do you expect? (a) Monthly (c) Half yearly (b) Quarterly (d) annually

Q.12 How would you like to receive the returns every year? (a) Dividend payout (c) Growth in NAV (b) Dividend re-investment

Q.13 When you invest in Mutual Funds which mode of investment you prefer? (a) One time investment (b) systematic investment plan

BIBLIOGRAPHY

Websites

www.mutualfundsindia.com www.valueresearchonline.com www.dspblackrock.com http://www.ambitionfp.com/ www.mutualfundsearchonline.com

Report Indian Mutual Fund Industry The Future in a Dynamic Environment A report by KPMG The AMFI Mutual Fund Manual

BOOK Chapter 3 from mutual fund in India by Nalini Prava Tripathy, publication house Excel books Thomas, Susan (Ed.) Fund Management in India, Tata McGraw Hill, 1999