A PROJECT REPORT ON MUTUAL FUNDS

SUBMITTED BY REENAL GALA ROLL NO: 12 M.COM (BANKING & FIANANCE)

SEMESTER I (2013-2014)

SUBMITTED TO UNIVERSITY OF MUMBAI ACADEMIC YEAR (2013-2014) S.K.SOMAIYA COLLEGE OF ARTS, COMMERCE & SCIENCE VIDYANAGAR, VIDYAVIHAR MUMBAI-400077.

DECLARATION BY THE STUDENT

I,

REENAL GALA 12

student

of

M.com

part-I

Roll

Number

hereby declare that the project for the

paper Financial Service titled, MUTUAL FUNDS submitted by me for semester-I during the academic year 2013-14, is based on actual work carried out by me under the guidance and

supervision of Shivshankar Panigrahi I further state that this work is original and not submitted anywhere else for any examination.

( REENAL GALA)
Signature of Student

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on MUTUAL FUNDS submitted by GALA

REENAL JAYESH student of M.com part-I.

This project is original to the best of our knowledge and has been accepted for Internal Assessment.

Shivshankar Panigrahi

Dr. Sangeeta Kohli

Internal Examiner

External Examiner

Principal

ACKNOWLEDGEMENT

First of all, I would like to take this opportunity to thank the Mumbai University for having projects as a part of the M.com- Part- 1 curriculum.

I want express my sincere gratitude to PROF. Shivshankar Panigrahi for assigning the responsibility to prepare MUTUAL FUNDS.

I would also like to say that subject was learning, interesting, and exhaustive. I would like to thank my parents, friends and teachers who have helped and encouraged me throughout the working of the project.

(REENAL GALA)

INDEX
Sr.No
1 2 3 4 5 6 7 8 9 10 11 12 13 14

PARTICULARS
Introduction Mutual Funds History of Mutual Funds in India Phases of Mutual Funds in India Structure of Indian Mutual Funds Classification of Mutual Funds Types of Mutual Funds Advantages and Dis advantages of MF Performance of Mutual Funds in India The CRISIL-AMFI MF Performance Index Mutual Fund Companies in India Why do people invests in Mutual Funds ? Summary Bibliography

Pg. No,
6 9 13 15 19 27 41 46 51 53 55 56 57 57

INTRODUCTION

Indian financial service is one of the most complex, yet one of the most robust service segments, of the Indian economy. Spanning from insurance to capital markets, banking to foreign direct investments (FDI) and from mutual to private equity (PE) in investments; the financial service covers all related segments under its umbrella. Today it is at par with the international financial frameworks and promises to surpass them in terms of performance in the year to come. This is very much evident from the fact that IFS industry was amongst the least affected during the crisis the world faced in 2010-2011. Major developments pertaining industry are discussed hereafter; -Insurance Sector -Banking Sector -Mutual Funds industry in India. -Private Equity, Mergers and Acquisition in India. -Foreign Institutional Investors(FIIs) in India. to the sub-segments of IFS

Insurance Sector

Indian life insurance sector collected new business premiums worth Rs 11,742.7 crore(US$ 1.96 billion) for April-May 2013, according to data from the Insurance Regulatory and Development Authority (IRDA). Life insurers collectedRs 1, 07, 010.7 crore (US$ 17.84 billion) worth of new premiums for the financial year ended March 31, 2013

Meanwhile, the general insurance industry grew by 19.6 per cent in April-May period of FY14, wherein the non-life insurers collected premium worthRs 13,552.46 crore (US$ 2.26 billion)

Banking Services

According to the Reserve Bank of India (RBI)s Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks, September 2012, Nationalized Banks accounted for 52.0 per cent of the aggregate deposits, while the State Bank of India (SBI) and its Associates accounted for 22.3 percent. The share of New Private Sector Banks, Old Private Sector Banks, Foreign Banks, and Regional Rural Banks in aggregate deposits was 13.6 per cent, 4.8 per cent, 4.3 per cent and 2.9 per cent, respectively Nationalized Banks accounted for the highest share of 50.9 per cent in gross bank credit followed by State Bank of India and its Associates (22.1 per cent) and New Private Sector Banks (14.7 per cent). Foreign Banks, Old Private Sector Banks and Regional Rural Banks had shares of around 4.9 per cent, 4.9 per cent and 2.6 per cent, respectively

India's foreign exchange (forex) reserves stood at US$ 280.167 billion for the week ended July 5, 2013, according to data released by the central bank. The value of foreign currency assets (FCA) - the

biggest component of the forex reserves stood at US$ 252.103 billion, according to the weekly statistical supplement released by the RBI

Mutual Funds Industry in India

Indias asset management companies (AMCs) have witnessed growth for the fifth consecutive quarter wherein their average assets under management (AUM) during April-June 2013 increased by 3.68 per cent. The AUMs value touched a new high of Rs 8.47 lakh cror e (US$ 141.17 billion), according to the latest statistics available from industry body Association of Mutual Funds in India (AMFI). Financial services provided by finance companies include insurance, housing finance, mutual funds, credit reporting, debt collection, stock broking, portfolio management and investment advisory.

Private Equity, Mergers & Acquisitions in India

Private equity (PE) firms upped their investments in IndiaInc by a hefty 42 per cent to US$ 5.4 billion through 197 deals during the first half of 2013; major deal being the US$ 1.2 billion-BhartiAirtel deal, according to a report by EY India (formerly Ernst&Young).

Meanwhile, Merger and acquisition (M&A) activity in India was also quite intense in April-June 2013 period. The deal tally stood at US$ 10.9 billion across 130 transactions, according to global deal tracking firm Mergermarket.

Foreign Institutional Investors (FIIs) in India

Foreign investors have immense faith in Indian financial markets. The fact is substantiated through statistics which show that they

pumped massive US$ 10 billion in Indian markets in January-March 2013 quarter. Moreover, FII ownership in top 500 companies is highest at 21.2 per cent for the reported quarter. It increased by 1.28 per cent in the January-March quarter alone and 2.87 per cent in 2012-13. The number of registered FIIs in India stood at 1,757 in FY 2012-13 while the number of FII sub-accounts rose to 6,335, from 6,322 at the end of 2011-12.

MUTUAL FUNDS Definitions

Mutual Fund - A mutual fund brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal. Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies

As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. More than 80 million people, or one half of the households in America, invest in mutual funds. That means that, in the United States alone, trillions of dollars are invested in mutual funds.

In fact, too many people, investing means buying mutual funds. After all, it's common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don't understand. Each shareholder in the mutual fund participates proportionally (based upon the number of shares owned) in the gain or loss of the fund. Mutual Fund are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual fund is diversification, by minimizing risk and maximizing returns. A mutual fund follows the principle of dont put all the eggs in the same basket-Diversification of Risk. A mutual fund is a special type of investment institution which collects or pools the savings of the community and invests large funds in a variety of blue chip companies which are selected from a wide range of industries with the objects of maximizing returns/incomes on investment. E.g. Unit Trust of India (UTI), Sri Ram mutual fund, Morgan Stanley Growth Fund (foreign mutual fund), etc. The flow chart below describes broadly the working of a mutual fund:

10

Mutual Fund operation Flow Chart

Money collected by the investors are invested in various issues of primary and secondary market in order to gain profits on such investment. Mutual fund also pay attractive dividends. The share (units) of mutual fund (close-ended) may also be traded in stock exchanges. Mutual fund sell their units to public and redeem them t the current Net Asset Value (NAV) of units which is computed as under:

NAV= Total market value of all mutual fund holdings liabilities Number of funds outstanding units.

11

NAV is affected on a day-to-day basis due to factors such as daily investment transaction, daily fund share (units) transaction, market value fluctuation, expenses and income recognition and declaration of fund dividend. Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't always delivered. Not all mutual funds are created equal, and investing in mutuals isn't as easy as throwing your money at the first salesperson who solicits your business. (Learn about the pros and cons in Mutual Funds Are Awesome - Except When theyre Not.)

12

HISTORY OF MUTUAL FUNDS IN INDIA

The Mutual Fund industry in India started in 1963 with the formation of UTI at the initiative of the Shri T. T .Krishnamchry the then Union Finance minister-government of India and RBI. In the early 1990s Government allowed public sector banks and institution to set up Mutual Fund. In the year 1992, SEBI Act was passed. The objective of SEBI are to protect the interest of investors in securities and to promote the development of n to regulate the securities market. As far as Mutual Fund are concerned, SEBI formulates policies and regulates the Mutual fund to protect the interest of the investors. SEBI notified regulation for the Mutual Fund in 1993. Thereafter, Mutual Fund sponsored by private sector entities were allowed to enter the capital market. The regulation were fully revised in 1996 and have been amended thereafter from time-to-time. SEBI has also issued guidelines to the Mutual fund from time-to-time to protect the interest of investors. The history of mutual fund in India can be broadly divided into four distinct phases: 1.First Phase 1964-1987: Monopoly of UTI. 2.Second Phase 1987-1993: Entry of public Sector Funds. 3. Third Phase 1993-2003: Entry of Private Sector Funds. 4.Fourth Phase since Feb 2003 till date: consolidation and Growth.

13

14

PHASES OF MUTUAL FUNDS IN INDIA

FIRST PHASE-1964-1987:

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 de-linked 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.6,700crores 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 1987followed by Canbank Mutual Fund (December 1987), Punjab National Bank Mutual Fund (Aug 1989), Indian Bank Mutual Fund (November 1989), Bank of India (June 1990), Bank of Baroda Mutual Fund (October 1992). LIC established its mutual fund in June 1989 while GIC had set uo its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004crores. However, UTI remained to be a leader with about 80% market share.
1992-93 UTI Public Sector Total Amount Mobilized 11,057 1,964 13,021 Assets Under Mobilization as % of Management gross Domestic Savings 38,247 8,757 47,004 5.2% 0.9% 6.1%

15

 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 fund 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. 1,21,805crores. The Unit Trust of India with Rs. 44,541 crores of assets under management was way ahead of other mutual funds. By 1994-1995, about 11 Private Sector funds had launched their schemes.

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.29,835crores 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 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 Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund

16

Regulations. As at the end of September, 2004 there were 29 funds, which manage assets of Rs.1,53,108crores under 421 schemes. Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilisation of funds from investors and assets under management which is supported by the following data:
GROSS FUND MOBILISATION (RS. CRORES) FROM 01-April-98 01-April-99 01-April-00 01-April-01 01-April-02 01-Feb.-03 01-April-03 01-April-04 01-April-05 TO 31-March-99 31-March-00 31-March-01 31-March-02 31-Jan-03 31-March-03 31-March-04 31-March-05 31-March-06 UTI 11,679 13,536 12,413 4,643 5,505 * PUBLIC SECTOR 1,732 4,039 6,192 13,613 22,923 7,259* 68,558 1,03,246 1,83,446 PRIVATE SECTOR 7,966 42,173 74,352 1,46,267 2,20,551 58,435 5,21,632 7,36,416 9,14,712 TOTAL 21,377 59,748 92,957 1,64,523 2,48,979 65,694 5,90,190 8,39,662 10,98,158

ASSETS UNDER MANAGEMENT (RS. CRORES) AS ON 31-March-99 UTI 53,320 PUBLIC SECTOR 8,292 PRIVATE SECTOR 6,860 TOTAL 68,472

17

 FIFTH PHASE-2004 onwards (Growth and Consolidation):

The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

18

STRUCTURE OF THE INDIAN MUTUAL FUNDS

In developed countries like the UK and the US, the mutual funds industry is highly regulated with a view of imparting operational transparency and protecting investors interest. Since there is a clear distinction between open ended schemes and close ended schemes, usually two different types of structural and management approaches are followed. Open-ended funds (unit-trusts) in the UK follow the trust approach, while close-ended schemes follow (investment trusts) follow the corporate approach. The management and operations of the two types of funds, are, therefore, guided by separate regulatory mechanisms, and the rules are laid down by separate controlling authorities. However, no such distinctions exist in India and both approaches (Trust and Corporate) have been integrated by SEBI. The formation and operations of mutual funds in India are guided solely by the SEBI regulations. The below figure gives an idea of the structure of the Indian mutual funds. A mutual fund consists of four separate entities sponsor, mutual fund trust, AMC and custodian. These are, of course, assisted by other independent administrative entities, such as banks, registrars and transfer agents.

19

Sponsor Company Managed by a Board of Trustees Appointed by BOT

Appointed by Trustees

Establishes MF as a Trust

Mutual Fund

Holds unit holders fund in MF Ensures compliance to SEBI

Asset Management Company Custodian

Floats MF funds Manages funds as per SEBI guidelines and

Provides necessary custodian services

Appointed by AMC Bankers Appointed by AMC Registrars and Transfer Agents

Provide registrar services and act as transfer agents Provide Banking Services

STRUCTURE OF THE INDIAN MUTUAL FUNDS

The sponsor for a mutual fund can be any person who, acting alone or in combination with another corporate body, establishes the mutual fund and gets it registered with SEBI. The sponsor is required to contribute at least 40% of the minimum net worth (Rs 10 crore) of the AMC. He must have a sound track record and a reputation for fairness and integrity in all his business transactions.

As per the 1996 regulations, A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908, executed by the sponsor in favour of trustees named in such an instrument. The mutual fund is managed by the board of trustees or

20

Trustee Company, and the sponsor executes the trust deeds in favour of the trustees. The mutual fund raises money through the sale of units under one or more schemes for investment in securities, in accordance with SEBI guidelines. The trustees must see to it that the schemes floated and managed by the AMC are in accordance with the trust deeds and SEBI guidelines. It is also their responsibility to control the capital property of the mutual fund schemes. The trustees have the right to obtain relevant information from the AMC, as well as a quarterly report on its activities. They can also dismiss the AMC under certain conditions, as per SEBI regulations. At least half the trustees have the right to obtain relevant information from the AMC or its employees cannot act as trustees. The trustee of a particular mutual fund cannot be appointed as a trustee of any other mutual fund unless he is an independent trustee and obtains prior permission from the mutual fund in which he is a trustee. The trustees are required to submit half-yearly reports to SEBI on the activities of the mutual fund. They appoint a custodian, whose activities they supervise. A trustee can be removed only with the prior approval of SEBI The trustees appoint the AMC, which must act as per the SEBI guidelines, the trust deeds, and the management agreement it has made with the trustees.

The AMC should be registered with SEBI. Its net worth should be in the form of cash and all assets should be held in its name. In case it wants to carry out other fund management business, it should satisfy the capital adequacy requirement for each such business independently. The AMC cannot give or guarantee loans, and is prohibited from acquiring any assets (out of the scheme property) which would involve the assumption of unlimited liability. It is required to disclose the scheme particulars and the base calculation of the NAV. It must submit quarterly reports to the mutual fund. The director of the AMC should be a person of repute and high standing, with at least five years experience in the relevant field. The

21

appointment of the AMC can be terminated by a decision of 75% of unitholders or a majority of trustees. The SEBI regulations provide for the appointment of a custodian by the trustees for carrying on the activity of safekeeping of the securities or participating in the clearing system on behalf of the mutual fund. The custodian must have a sound track record and adequate relevant experience. At the time of appointment, he should not be associated with the AMC, or act as a sponsor or trustee to any mutual fund. The revised regulations of 1996 define a mutual fund as a fund established in the form of a trust to raise moneys through the sale of units to the public, or a section of the public, under one or more schemes for investment in securities, including money market instruments.

Mutual funds are also allowed to diversify their activities in the following areas.

Portfolio management services Management of offshore funds Providing advice to offshore funds Management of pension or provident funds Management of venture capital funds Management of money market funds Management of real estate funds

22

The regulations deal with various issues relating to launching, advertising and listing of mutual funds schemes. All the schemes to be launched by an AMC need to be approved by the trustees. Copies of the offer document of such schemes are to be filed with SEBI, and should contain adequate disclosures to enable investors to make informed decisions. Advertisements in respect of schemes should be in conformity with the prescribed advertisement code of SEBI. The listing of close-ended schemes is mandatory and they should be listed in a recognized stock exchange within six months of the closure of subscription. However, listing is not mandatory if the scheme provides for periodic repurchase facilities to all unit-holders, or provides for monthly income or caters to special classes of persons, or discloses details of repurchase in the offer document, or opens for repurchase within six months of the closure of subscription The units of a close-ended scheme can be repurchased or reissued by an AMC. They can also be converted into an open ended scheme or may be rolled over if the majority of shareholders pass a resolution to that effect. No scheme other than unit linked schemes can be opened for subscription for more than 45 days. In the offer document, the AMC must specify the minimum subscription and the extent of over-subscription which it intends to retain. In the case of oversubscription, all those applying for up to 5000 units must be given full allotment subject to oversubscription. The AMC must refund the application money if the minimum subscription is not received, and also, the excess oversubscription within six weeks of the closure of subscription. Guaranteed returns can be provided for in a scheme only if they are fully guaranteed by the AMC or sponsor. In such cases, there should be a statement indicating the name of the person and the manner in which the guarantee to be made must be made in the offer document.

23

The regulations provide procedure for the manner in which closeended scheme is to be wound up. It should be would up on the redemption date, unless it is rolled over. It can be would up if 75% of the unit-holders pass a resolution in favour of winding it up, or if the trustees so require for ay reason, or if SEBI so directs in the interest of the investors. The regulations of 1996 and the subsequent amendments attempted to enhance transparency and accountability, and improve the mechanism of investor protection. They contained several provisions: They demanded the provision of stringent disclosure norms in the offer document to facilitate informed decision-making by the investors. Standardisation of accounting policies, computation of NAV and valuation of assets. Prudential supervision replaced the quantitative investment restrictions and the AMC was given complete freedom to structure schemes. Stringent restrictions were imposed on the launching of guaranteed return schemes. A code of ethics was introduced for AMCs Transfer agents were entrusted for higher responsibilities to ensure better management of funds.

Considering the various irregularities and sharp deterioration in the performance of many mutual funds, it was decided to fix certain responsibilities for the trustees to ensure that they remained vigilant and played a more active role. The SEBI appointed a committee under the chairmanship of P.K. Kaul to examine the issue of responsibilities of trustees. The committees report was accepted by SEBI and the following measures were decided upon, among others.

24

The manner in which the trustees are to fulfil their responsibilities has been spelt out. They are required to meet at least once in three months. Trustees can appoint independent auditors. Several other measures, like revision of the codes of conduct, were taken to promote integrity, diligence, and fairness among the trustees as well as the AMCs. All this, together with the standardization of several provisions relating to operations, has increased the level of transparency and strengthened the mechanism of investor protection. Diagrammatic Representation of Fund Structure and its Constituents

25

Asset Holding Pattern and Resource Mobilization Mutual Funds in India: Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time. One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue. A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification. Diversification means spreading out money across many different types of investments. When one investment is down another might be up. Diversification of investment holdings reduces the risk tremendously.

26

CLASSIFICATION OF MUTUAL FUNDS

Mutual fund schemes also classified on the basis of its structure and its investment objective. By Structure: Open-ended Funds/Schemes: (Tenor based) An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Open-ended Mutual Funds are those funds in which the company can issue always more outstanding shares. It can help to add on the net assets of the company. These types of funds do not have a fixed maturity period. Investors can buy and sell units of these funds at Net Asset Value (NAV) related prices which are published on a daily basis. Open-end schemes are more liquid in nature. Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value. Most of the open-end funds are actively managed and the fund manager picks the stocks as per the objective of the fund. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.

27

Some of the benefits of open-end funds include diversification, professional money management, liquidity and convenience. But open-end funds have one negative as compared to closed-end funds. Since open-end funds are constantly under redemption pressure, they always have to keep a certain amount of money in cash, which they otherwise would have invested. This lowers the potential returns.

Fees There may be a percentage charge levied on the purchase of shares or units. Some of these fees are called an initial charge (UK) or 'front-end load' (US). Some fees are charged by a fund on the sale of these units, called a 'close-end load,' that may be waived after several years of owning the fund. Some of the fees cover the cost or distributing the fund by paying commission to the adviser or broker that arranged the purchase. These fees are commonly referred to as 12b-1 fees in U.S. Not all fund have initial charges; if there are no such charges levied, the fund is "no-load" (US). These charges may represent profit for the fund manager or go back into the fund.

Active management Most open-end funds are actively managed, meaning that a portfolio manager picks the securities to buy, although index funds are now growing in popularity. Index funds are open-end funds that attempt to replicate an index, such as the S&P 500, and therefore do not allow the manager to actively choose securities to buy. Buying and Selling: Open funds sell and redeem shares at any time directly to shareholders. To make an investment, you purchase a number of shares through a representative, or if you have an account with the investment firm, you can buy online, or send a check. The price you pay per share will be based on the funds net asset value as determined by the mutual fund company.

28

Open funds have no time duration, and can be purchased or redeemed at any time, but not on the stock market. An open fund issues and redeems shares on demand, whenever investors put money into the fund or take it out. Since this happens routinely every day, total assets of the fund grow and shrink as money flows in and out daily. The more investors buy a fund, the more shares there will be. There's no limit to the number of shares the fund can issue. Nor is the value of each individual share affected by the number outstanding, because net asset value is determined solely by the change in prices of the stocks or bonds the fund owns, not the size of the fund itself. Some open-ended funds charge an entry load (i.e., a sales charge), usually a percentage of the net asset value, which is deducted from the amount invested. Advantages: Open funds are much more flexible and provide instant liquidity as funds sell shares daily. You will generally get a redemption request processed promptly, and receive your proceeds by check in 3-4 days. A majority of open mutual funds also allow transferring among various funds of the same family without charging any fees. Open funds range in risk depending on their investment strategies and objectives, but still provide flexibility and the benefit of diversified investments, allowing your assets to be allocated among many different types of holdings. Diversifying your investment is key because your assets are not impacted by the fluctuation price of only one stock. If a stock in the fund drops in value, it may not impact your total investment as another holding in the fund may be up. But, if you have all of your assets in that one stock, and it takes a dive, youre likely to feel a more considerable loss.

29

 Closed-ended Funds/schemes: (Tenor based)

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor. This fund has a fixed number of shares. The value of the shares fluctuates with the market, but fund manager has less influence because the price of the underlining owned securities has greater influence. Close Ended mutual fund or generally termed as traded mutual fund is the one that can be brought and sold like a normal share. In it, the number of shares always stays fixed. These funds also have commission which brokers get since the shares of these funds are traded over the counter, like the shares are traded. Close-ended funds have a stipulated maturity period like 5-7 years. It is open for subscription only during the time of launch. Investors can invest in the close ended mutual funds at the time of the initial public issue and thereafter can be brought or sold units of the scheme on the exchanges where the units are listed. Close-ended funds give an option for the investor of selling back the units to the mutual fund through periodic repurchase at NAV related prices. But the commissions will incur for this selling and buying. Distinct Features of Closed-end Funds: These funds are closed to new capital after they begin operating Closed-end funds trade on stock exchanges rather than being redeemed directly by the fund Unlike open-end funds, the closed-end funds can be traded during the market day at any time. Open-end funds are generally traded at the closing price at the end of the market day.

30

 Closed-end funds are usually traded at a premium or discount whereas open-end funds are traded at NAV. Advantages of Closed-end Funds: Closed-end funds don't have to worry about the redemption of shares, hence they tend to keep less cash in their portfolios and cam invest more capital in the market. Therefore, they have the potential to generate greater returns as compared to open-end funds. In case of market panic and mass-selling by investors, open-end funds need to raise money for redemptions. To cope with the liquidity concerns, the manager of an open-ended fund may be forced to sell stocks he would rather keep, and keep stocks he would rather sell. In such as scenario the quality of the portfolio may be affected .Advantages: The prospect of buying closed funds at a discount makes them appealing to experienced investors. The discount is the difference between the market price of the closed-end fund and its total net asset value. As the stocks in the fund increase in value, the discount usually decreases and becomes a premium instead. Savvy investors search for closed-end funds with solid returns that are trading at large discounts and then bet that the gap between the discount and the underlying asset value will close. So one advantage to closed-end funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks, with the ability to buy at a discount.

Availability Closed end funds are typically traded on the major global stock exchanges. In the U.S. the New York Stock Exchange is dominant although the NASDAQ is in competition; in the UK the London Stock Exchange's main market is home to the mainstream funds although AIM supports many small funds especially the Venture Capital Trusts; in Canada, the Toronto Stock Exchange lists many closed-end funds.

31

Like their better-known open-ended cousins, closed-end funds are usually sponsored by a funds management company which will control how the money is invested. They begin by soliciting money from investors in an initial offering, which may be public or limited. The investors are given shares corresponding to their initial investment. The fund managers pool the money and purchase securities. What exactly the fund manager can invest depends on the fund's charter. Some funds invest in stocks, others in bonds, and some in very specific things. Buying and Selling: Unlike standard mutual funds, you cannot simply mail a check and buy closed fund shares at the calculated net asset value price. Shares are purchased in the open market similar to stocks. Information regarding prices and net asset values are listed on stock exchanges; however, liquidity is very poor. The time to buy closed funds is immediately after they are issued. Often the share price drops below the net asset value, thus selling at a discount. A minimum investment of as much as $5000 may apply, and unlike the more common open funds discussed below, there is typically a fiveyear commitment. Distinguishing features Some characteristics that distinguish a closed-end fund from an ordinary open-end mutual fund are that: It is closed to new capital after it begins operating, and Its shares trade on stock exchanges rather than being redeemed directly by the fund. Its shares can therefore be traded during the market day at any time. An open-end fund can usually be traded only at the closing price at the end of the market day. A CEF usually has a premium or discount. An open-end fund sells at its NAV. A closed-end company can own unlisted securities. Another distinguishing feature of a closed-end fund is the common use of leverage or gearing to enhance returns. CEFs can raise additional investment capital by issuing auction rate securities, preferred stock, long-term debt, and/or reverse-repurchase

32

agreements. In doing so, the fund hopes to earn a higher return with this excess invested capital. When a fund leverages through the issuance of preferred stock, two types of shareholders are created: preferred stock shareholders and common stock shareholders. Preferred stock shareholders benefit from expenses based on the total managed assets of the fund. Total managed assets include both the assets attributable to the purchase of stock by common shareholders and those attributable to the purchase of stock by preferred shareholders. The expenses charged to the common shareholder are based on the common assets of the fund, rather than the total managed assets of the fund. The common shareholder's returns are reduced more significantly than those of the preferred shareholders due to the expenses being spread among a smaller asset base. For the most part, closed-end fund companies report expenses ratios based on the fund's common assets only. However, the contractual management fees charged to the closed-end funds may be based on the common asset base or the total managed asset base. The entry into long-term debt arrangements and reverse-repurchase agreements are two additional ways to raise additional capital for the fund. Funds may use a combination of leveraging tactics or each individually. However, it is more common that the fund will use only one leveraging technique. Since closed-end funds are traded like stock, a customer trading them will pay a brokerage commission similar to one paid when trading stock (as opposed to commissions on open-ended mutual funds where the commission will vary based on the share class chosen and the method of purchasing the fund). In other words, closed-end funds typically do not have sales-based share classes where the commission and annual fees vary between them. The main exception is loan-participation funds.

33

Exchange-traded Closed-end fund shares trade continually at whatever price the market will support. They also qualify for advanced types of orders such as limit orders and stop orders. This is in contrast to some open-end funds which are only available for buying and selling at the close of business each day, at the calculated NAV, and for which orders must be placed in advance, before the NAV is known, and by simple buy or sell orders. Some funds require that orders be placed hours or days in advance.

Closed-end funds trade on exchanges and in that respect they are like exchange-traded funds (ETFs), but there are important differences between these two kinds of security. The price of a closed-end fund is completely determined by the valuation of the market, and this price often diverges substantially from the NAV of the fund assets. In contrast, the market price of an ETF trades in a narrow range very close to its net asset value, because the structure of ETFs allows major market participants to redeem shares of an ETF for a "basket" of the fund's underlying assets.[1] This feature could lead to potential arbitrage profits if the market price of the ETF were to diverge substantially from its NAV. The market prices of closed-end funds are often ten to twenty percent higher or lower than their NAVs, while the market price of an ETF is typically within one percent of its NAV. Since the market downturn of late 2008 a number of fixed income ETF's have traded at premiums of roughly two or three percent to their NAV's.

Comparison with open-ended funds With open-ended funds, the value is precisely equal to the NAV. So investing $1000 into the fund means buying shares that lay claim to $1000 worth of underlying assets (apart from sales charges). But buying a closed-end fund trading at a premium might mean buying $900 worth of assets for $1000. Some advantages of closed-end funds over their open-ended cousins are financial. CEFs don't have to deal with the expense of creating and redeeming shares, they tend to keep less cash in their portfolio,

34

and they need not worry about market fluctuations to maintain their "performance record". So if a stock drops irrationally, the closed-end fund may snap up a bargain, while open-ended funds might sell too early. Also, if there is a market panic, investors may sell en masse. Faced with a wave of sell orders and needing to raise money for redemptions, the manager of an open-ended fund may be forced to sell stocks he'd rather keep, and keep stocks he'd rather sell, due to liquidity concerns (selling too much of any one stock causes the price to drop disproportionately). Thus it may become overweight in the shares of lower-quality or underperforming companies for which there is little demand. But an investor pulling out of a closed-end fund must sell it on the market to another buyer, so the manager need not sell any of the underlying stock. The CEF's price will likely drop more than the market does (severely punishing those who sell during the panic), but it is more likely to make a recovery when the intrinsically sound stocks rebound. Because a closed-end fund is on the market, it must obey certain rules, such as filing reports with the listing authority and holding annual stockholder meetings. Thus stockholders can more easily find out about their fund and engage in shareholder activism, such as protest against poor management. Examples Among the biggest, long-running CEFs are: Adams Express Company Foreign & Colonial Investment Trust plc Witan Investment Trust plc Tri-Continental Corporation Gabelli Equity Trust General American Investors Company, Inc.

Newer CEFs include: Alpine Total Dynamic Dividend Fund

35

 Morgan Stanley China A-Share Fund John Hancock PATRIOT Fund Teucrium Natural Gas Fund Interval Funds/schemes: Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

By Investment Objective: Growth Funds/schemes: (Asset class based) The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time. These type funds are those which invest in the stocks of well-established, blue chip companies. Dividends and steady income are not only goal of these types of funds. But, they are focussed on increasing in capital gains. Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing companies in the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a portfolio of companies with above-average earnings momentum or price appreciation. In India, growth funds became popular after the tremendous growth of the Indian companies during the post economic reforms period. The rapid growth of Indian industry attracted investors money to sectors of high growth and as a result growth funds came into being.

36

Objective of Growth Funds: The objective of growth funds is to achieve capital appreciation by in stocks of those companies, which are registering significant earnings or revenue growth. Growth funds offer tremendous opportunities for growth, when the financial market is bullish. In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets. Only aggressive investors, or those with enough time to make up for shortterm market losses, should buy these funds Growth and Income funds/schemes (Asset class based) : These types of mutual funds are focussed on increased capital gains and steady income. Less volatile than Aggressive Growth funds. Aggressive Growth Funds /schemes(Asset class based) : These are stock funds that primarily have one objective of maximum capital gains. Capital gains are the increase in the value of investment. This type of mutual fund invest in many different kind of shares which includes risk industry stocks, small company stocks and uses certain investment techniques like short selling of stocks, futures & options. These type of mutual funds are most volatile also. Bond /Income Funds/schemes: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cash flow to investors. As such, the audience for these funds consists of conservative investors and retirees.

37

Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in highyield junk bonds is much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down. Balanced Funds/schemes: The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class. A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle. The investor may wish to balance his risk between various sectors such as asset size, income or growth. Therefore the fund is a balance between various attributes desired. Balanced mutual funds have a portfolio mix of bonds, preferred stocks and common stocks. Balanced mutual funds aim to conserve investors initial investment, to pay an income and to aid in the long-term growth of both the principle and the income.

38

Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. But on the flip side, balanced funds will usually increase less than an all-stock fund during a bull market. Advantages of Balanced Fund: Generally, balanced funds maintain a 60:40 equity debt ratio. This means that 60% of their total investment is in equity and the balance 40% in debt and cash equivalents. Balance funds combine the power of equities (shares) and the stability of debt market instruments (fixed return investments like bonds) and provide both income and capital appreciation while avoiding excessive risk. Balanced funds continuously rebalance their portfolios to ensure that the broad asset allocation is not disturbed. Therefore, the profits earned from the stock markets are encashed and invested in low risk instruments. This helps the investor in maintaining the appropriate asset mix, without getting into the hassles of rebalancing the portfolio on their own. Money Market Funds/schemes:(Asset Class Based) The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods. The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A

39

typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD). These are generally the safest and most secure of mutual fund investments. They invest in the largest, most stable securities, including Treasury bills. The chances of your capital being eroded are very minimal. Money-market funds are risk-free. If you invest a thousand rupees, you will get that money back. It is simply a matter of when you get it back. When investing in a money-market fund, you should pay attention to the interest rate that is being offered, along with the rules regarding check-writing. Moneymarkets have allowed investors to reap high yields on their deposits, and have made the entire investment process more accessible to people. The interest rates on money-market funds are changing nearly day to day. In times of inflation, these funds have had high yields. A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free. Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.

40

TYPES OF MUTUAL FUNDS

Most funds have a particular strategy they focus on when investing. For instance, some invest only in Blue Chip companies that are more established and are relatively low risk. On the other hand, some focus on high-risk startup companies that have the potential for double and triple digit growth. Finding a mutual fund that fits your investment criteria and style is important.

Types of mutual funds are: Value stocks : Stocks from firms with relative low Price to Earning (P/E) Ratio, usually pay good dividends. The investor is looking for income rather than capital gains. Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. They invest in companies that the market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry. Investing in value fund involves identifying fundamentally sound stocks that are trading at a discount to their fair value. The fund manager buys these stocks and holds them until the stock bounce backs to its fair value. The fund managers identify undervalued stocks in the market on the basis of fundamental analysis techniques. In this process stocks with low price to earnings ratios are tagged. These stocks are then closely reviewed to see which ones have the greatest growth potential and are paying high dividends.

41

Suitability of Value Funds: Value style of investing works particularly well during a bear phase in the stock markets. During this time, the fund manager has more opportunities to invest in stocks trading at a discount to their fair value. By buying low and selling high, value funds take on lower risk than growth funds, which tend to buy high and sell higher. Thus value funds are particularly suitable for investors with a moderate risk profile. As value funds react slowly to market movements, they can be a good instrument of investment for those investors who are due to retire shortly.

Growth stock : Stocks from firms with higher low Price to Earning (P/E) Ratio, usually pay small dividends. The investor is looking for capital gains rather than income. Based on company size, large, mid, and small cap Stocks from firms with various asset levels such as over $2 Billion for large; in between $2 and $1 Billion for mid and below $1 Billion for small.

Income stock : The investor is looking for income which usually comes from dividends or interest. These stocks are from firms which pay relative high dividends. This fund may include bonds which pay high dividends. This fund is much like the value stock fund, but accepts a little more risk and is not limited to stocks.

Enhanced index : This is an index fund which has been modified by either adding value or reducing volatility through selective stock-picking.

42

Stock market sector : The securities in this fund are chosen from a particular marked sector such as Aerospace, retail, utilities, etc.

Defensive stock : The securities in this fund are chosen from a stock which usually is not impacted by economic down turns.

Real estate : Stocks from firms involved in real estate such as builder, supplier, architects and engineers, financial lenders, etc.

Socially responsible : This fund would invest according to non-economic guidelines. Funds may make investments based on such issues as environmental responsibility, human rights, or religious views. For example, socially responsible funds may take a proactive stance by selectively investing in environmentally-friendly companies or firms with good employee relations. Therefore the fund would avoid securities from firms who profit from alcohol, tobacco, gambling, pornography etc.

Tax efficient : Aims to minimize tax bills, such as keeping turnover levels low or shying away from companies that provide dividends, which are regular payouts in cash or stock that, are taxable in the year that they are received. These funds still shoot for solid returns; they just want less of them showing up on the tax returns.

43

Convertible : Bonds or Preferred stock which may be converted into common stock.

Junk bond : Bonds which pay higher that market interest but carry higher risk for failure and are rated below AAA.

Mutual funds of mutual funds : This funds that specializes in buying shares in other mutual funds rather than individual securities.

Exchange traded funds (ETFs) : Baskets of securities (stocks or bonds) that track highly recognized indexes. Similar to mutual funds, except that they trade the same way that a stock trades, on a stock exchange. Exchange Traded Funds (ETFs) represent a basket of securities that is traded on an exchange, similar to a stock. Hence, unlike conventional mutual funds, ETFs are listed on a recognised stock exchange and their units are directly traded on stock exchange during the trading hours. In ETFs, since the trading is largely done over stock exchange, there is minimal interaction between investors and the fund house. ETFs can be categorised into close-ended ETFs or open-ended ETFs. ETFs are either actively or passively managed. Actively managed ETFs try to outperform the benchmark index, whereas passively-managed ETFs attempt to replicate the performance of a designated benchmark index.

44

Difference between ETF and Conventional Mutual Funds: Mutual funds are traded through fund house where as in an ETF, transactions are done through a broker as buying and selling is done on the stock exchange. In conventional mutual funds units can be bought and redeemed only at the relevant NAV, which is declared only once at the end of the day. ETFs can be bought and sold at any time during market hours like a stock. As a result, ETF investors have the benefit of real time pricing and they can take advantage of intra-day volatility. Annual expenses charged to investors in an ETF are considerably less than the vast majority of mutual funds. Most of the mutual funds have an entry or exit load varying between 2.00% and 2.25%. ETFs do not have any such loads. Instead ETF investors have to pay a brokerage to the broker while transacting. This in most cases is not more than 0.5%. ETFs safeguard the interests of long-term investors. This is because ETFs are traded on exchange and fund managers do have to keep cash in hand in order to meet redemption pressures.

45

ADVANTAGES AND DISADVANTAGES OF MUTUAL FUNDS

ADVANTAGES:
The advantages of investing in a mutual fund are professional management, Diversification, convenient administration, return potential, low cost, liquidity, flexibility, etc.

1. EASE: Mutual Fund are the easy way to invest in the capital markets by common man. 2. PROFESSIONAL MANAGEMENT: Mutual Fund ensures that the best brains are managing the investors money. 3. LIQUIDITY: Mutual Fund ensures liquidity sinced investors can get back the money whenever they went. 4. TRANSPARENCY: The investors are informed of their portfolio regularly by way of a published monthly report. 5. EXTREMELY WELL REGULATED: Mutual Funds are subject to control by SEBI. SEBI ensures that the mutual fund follows the laid down procedures. 6. TAX BENE FITS: Investors can reap the tax benefits under Sec 80C of Income Tax Act, 1961 for making fresh investments in mutual funds. 7. DIVERSIFICATION: Investment in mutual fund ensures risk reduction since fund managers invest the mutual fund corpus in a portfolio of securities with different risk-return profiles.

46

ADVANTAGES OF MUTUAL FUND:

(1) TO THE INVESTORS:

Liquidity, reasonable return and safety of investment. Diversified portfolio of investment. Knowledge of soecialists available. Promoting savings habits among the people. Tax reliefs under the Income Tax Act, 1961.

(2)TO THE ECONOMY:

Mobilization of savings of the people and channelizing them into productive investment avenues. Contributing to the developments of capital market. Providing the much needed finance for the industrial and economic development of the country.

47

DISADVANTAGES:
1. Fluctuating Returns: Mutual funds are like many other investments without a guaranteed return: there is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be stellar. Another important thing to know is that mutual funds are not guaranteed by the U.S. government, so in the case of dissolution, you won't get anything back. This is especially important for investors in money market funds. Unlike a bank deposit, a mutual fund will not be insured by the Federal Deposit Insurance Corporation (FDIC).

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

3. Costs: Mutual funds provide investors with professional management, but it comes at a cost. Funds will typically have a range of different fees that reduce the overall payout. In mutual funds, the fees are classified into two categories: shareholder fees and annual operating fees.

48

The shareholder fees, in the forms of loads and redemption fees, are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money, these fees only magnify losses.

4. Misleading Advertisements: The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labelled as growth funds, while others are classified as small cap or income funds. The Securities and Exchange Commission (SEC) requires that funds have at least 80% of assets in the particular type of investment implied in their names. How the remaining assets are invested is up to the fund manager. However, the different categories that qualify for the required 80% of the assets may be vague and wide-ranging. A fund can therefore manipulate prospective investors by using names that are attractive and misleading. Instead of labelling itself a small cap, a fund may be sold as a "growth fund". Or, the "Congo High-Tech Fund" could be sold with the title

"International High-Tech Fund".

49

5. Evaluating Funds: Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how do you know if one fund is better than another?

Furthermore, advertisements, rankings and ratings issued by fund companies only describe past performance. Always note that mutual fund descriptions/advertisements always include the tagline "past results are not indicative of future returns". Be sure not to pick funds only because they have performed well in the past - yesterday's big winners may be today's big losers.

50

PERFORMANCE OF MUTUAL FUNDS IN INDIA

The performance of mutual fund in India commenced from the day the concept of mutual fund took birth in India, the year was 1963. UTI invited investors or rather to those who believed in savings, to park their money in UTI mutual fund. For 30years it goaled without a single second player. For around 25 years UTI was in a monopoly position in the Indian mutual fund market. Though 1988 year saw some new mutual fund companies, but UTI remained in a monopoly position. The performance of mutual fund in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24million shareholders (unit holders) were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1912. This good record of UTI became marketing tool for new entrants. However, people were miles away from the preparedness of risks factor after the liberalization. The asset under management (AUM) of UTI was Rs.67 billion, by the end of 1987. From Rs.67 billion the AUM rose to Rs.470 billion in march 1993 and the figure had a 3 times higher performance by April 2004. It rose as high as Rs. 1540 billion. The Net Asset Value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There was rather no choice apart from holding the cash or to further continue investing in shares. One more thing was that since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market. The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock market performance then, mutual funds had not recovered with funds trading at an average discount of 1,020 % of their net asset value. But in 2007 with the BSE-

51

SENSEX touching 10,000 points mark and a relatively excellent stock market performance mutual funds are performing extremely well. The supervisory authority adopted a set of measures to create a transparent and competitive environment in mutual funds. Some of them were like relaxing investments restriction into the market, introduction of openended funds, and paving the gateway for mutual funds to launch pension schemes. The measure was taken to make mutual funds the key instrument for long-term saving. The more the variety offered, the quantitative will be investors.

52

THE CRISIL-AMFI MUTUAL FUND PERFORMANCE INDEX

For all those mutual fund investmentskeptics, the recently launched CRISIL-AMFI mutual fund indices performance will be proof enough to know that mutual fund as an investment class outperformed broad markets comfortably over the long term and also across various market. The CRISIL-AMFI mutual fund performance indices seek to track the performance of mutual fund across categories and has back-dated performance beginning April 1997. The index had 113 underlying equity schemes as of March 2013.
ACROSS MARKET PHASES: The index performance also proves

that equity mutual fund have done well across bull and bear market phases. Barring the tech bubble when the excessive exposure take by funds in the I.T. Sector hit them badly, equity mutual fund have done well since, both in up and down markets.
PERIOD FROM DATE TO DATE ANNUALIZED RETURNS (%)

Equity MF
Performan ce Index(%)

Large cap MF
Performance Index(%)

Diversif Midcap ied MF Fund

Performance Index(%) Performance Index(%)

CNX NIFTY
Performance Index(%)

CNX Mid cap

Performance Index(%)

CNX 500 INDEX

Performanc e Index(%)

Tech Bubble Bull Phase of 03-07 Sub prime crisis

1-0400 1-0403

30-09-01

-41.40

-38.08

-49.24

-29.05

-41.04

31-12-07

59.54

56.00

63.47

46.97

53.14

1-0108

31-05-09

-47.52

-43.21

47.33

-58.48

-43.42

-55.67

-49.55

53

Bounce back post Sub prime crisis(EU )

1-0409 1-0111

31-12-10

58.93

52.92

58.57

76.77

48.77

71.87

53.83

31-03-13

-2.56

-1.90

-3.54

-0.94

-3.36

-7.70

-4.67

The table is evidence to the multiple options that mutual fund provide to ride the markets. While mid and small-cap funds helped capitalize the market momentum during a bounce back, large-cap funds have largely helped contain declines during falls such as the one seen during the subprime crises.

GREAT FOR LONG-TERM: The index rolling data also points to the fact that mutual fund not only out perform in the long term but also provide consistent returns.

CRISIL AMFI EQUITY PERFORMANCE INDEX (%)

RETURNS CNX NIFTY (%)

CNX 500 INDEX (%)

MIN MAX AVG

0.76 55.01 22.23

-5.65 44.52 13.52

-3.28 48.13 15.43

CRISIL-AMFI Equity Performance Index daily rolling 5-year return between April 1997- March 2013.

The study did a rolling 5-year returns on a daily basis that revealed that the CRISIL-AMFI equity fund index never delivered negative returns for a 5year investment horizon. That means irrespective of when you invested between April 1997 and March 2013, your returns would never have been negative. This, despite that in the said 16 year period, equity markets went through at least 3 major bear phases.

54

MUTUAL FUND COMPANIES IN INDIA

The concept of mutual funds in India dates back to year 1963. The era between 1963 and 1987 marked the existence of only on mutual fund company in India with Rs. 67 bn Assets Under Management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 1980s decade, few other mutual fund companies in India took their position in mutual fund market. The new entries of mutual fund companies in India were SEBI Mutual Fund, Can Bank Mutual Fund, Punjab National Fund, etc. The succeeding decade showed a new horizon in Indian mutual fund industry. By the end of 1993, the total Assets Under Management (AUM) of the industry was Rs.470.04 bn. In the same year the first Mutual Fund Regulations came into existence with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996. Kothari Pioneer was the first private sector mutual fund company in India. India is growing and financial system has a great impact on the economy of the country. The Mutual Fund companies are responsible for the robust economic growth. AMF is professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money instruments, and/or other securities. There are several hundred companies of registered mutual fund in India, some with a single fund and others offering dozens. The following are some of the current mutual fund in India: ABN, AMRO Mutual Fund etc; But the list of top 10 Mutual Fund companies in India are as follows:

55

RANK

MF CO.

CO CREATION DATE 30-06-1995 30-06-2000 25-11-1994 24-08-1998 24-12-1994 29-06-1987 19-02-1996 23-06-1998 16-12-1996 30-06-1995

1 2 3 4 5 6 7 8 9 10

RELIANCE MF HDFC MF ICICI PRUD. MF UTI MF BIRLA SUN LIFE MF SBI MF FRANCKLIN TEMPTON MF KOTAK MF DSP BLACK ROCK MF TATA MF

ASSET UNDER MGMNT (RS. CRORE) 101577 86282 73466 67189 63696 41672 37883 32202 30601 22681

WHY DO PEOPLE INVEST IN MUTUAL FUND?

Mutual Fund offer investors an affordable way to diversify their investment portfolios. Mutual fund allow investors the opportunity to have a financial stake in many different types of investment. These investment includes: stock, bonds, money markets, real estate, commodities, etc; Individually, an investor may be able to own stock in a few companies, a few bonds, and have money in a money market account. Participation in a Mutual Fund, however, allows the investor to have much greater exposure to each of these asset classes. Most Mutual Fund are professionally managed by an investment expert known as a portfolio manager. This individual makes all of the buying and selling decision for the fund. There are thousands of different mutual fund in the United States. This provide investors with many option to help them achieve their investment objective.

56

SUMMARY
The mutual fund industry is growing at a tremendous pace. A large number of plans have come up from different financial resources. With the stock markets soaring the investors are attracted towards these schemes. Only a small segment of the investors still invest in mutual fund and the main sources of information still are the financial advisors allowed by advertisements in different media. An Indian investor generally invests over a period of 2-3 years. Also there is a greater tendency to invest in fixed deposits due to the security attached with it. In order to excel and make mutual fund a success, companies still need to create awareness and understand a psyche of Indian investors. Mutual fund act as gateway to enter into big companies there to inaccessible to ordinary investors with small investments. Mutual fund is the most suitable and preferred investment for the common man today.

BIBLIOGRAPHY
Association of Mutual Funds of India (www.amfiindia.com) Value research (www.valueresearchonline.com) www.indiamutualfunds.com www.marketriser.com

57