ACKNOWLEDGEMENT

It is my privilege to express my deep sense of gratitude and indebtedness to Mr.Uttam Shukla, RPEC Sec 78 M hal! for allowing me to undergo training at Karvy Stock Broking Company, Mohali, and un!ab and for helping me finding the solution to my problems" I heart fully thank my company guide Mr. Muke"h G #al for his expert and inspiring guidance, constructive criticism and constant encouragement" I would also like to thanks all staff members of Karvy Stock Broking Company and all others who took keen interest and helped me at any step of my work in this pro!ect"

Ra$%!r S!&'h

TA(LE O) CONTENTS Sr no" % Item #escription &cknowledgement &bstract Introduction of the organi)ation Scope of study - ob!ective Introduction of mutual funds Structure of Indian mutual fund industry &dvantages - #isadvantages of mutual funds 2ypes of mutual funds Comparison of mutual fund scheme with other scheme 2he ground rules of mutual funds investing 2op funds Conclusion 4uestionnaire % ( *+, . %%+%0 %, %.+'% ''+(* *'+*1 *0+/3 /%+/( /. 13+1' age $o

'
( * / 1 0 , . %3 %' %( %*

A(STRACT

2he brief review in the preceding section of financial system and structural change in the market suggests that Indian financial institutions have played a dominant role in assets formation and intermediation, and contributed substantially in macroeconomic development" In this process of development, Indian mutual funds have emerged as strong financial intermediaries and are playing a very important role in bringing stability

to the financial system and efficiency to resource allocation" Mutual funds have opened new vistas to investors and imparted much+needed li5uidity to the system" Mutual funds are the fastest growing institutions in the household saving sector" 6rowing complications and risk in the stock market, rising tax rates and increasing inflation have pushed household towards mutual funds" 2he active involvement of mutual funds in promoting economic development can be seen not only in terms of their participation in the savings market but also in their dominant presence in the money market and capital market" 2his pro!ect deals with the study of different mutual funds" It studies the awareness level of people about mutual funds" It also helps us to know the motivating factors for the people investing in mutual funds with the help of a 5uestionnaire"

*NTRODUCT*ON O) T+E ORGAN*SAT*ON

A% ut Kar,# "t ck %r k!&'

K&789 group was formed in %.,( at :yderabad, I$#I&" Karvy ranks among the top player in almost all the field it operates" Karvy Computershare is limited is India;s largest register agent with a client base of nearly /33 blue chip corporate, managing over ' crore accounts" Karvy stock brokers, member of national stock exchange of India and Bombay stock exchange, ranks among the top / brokers in India" <ith over 1, 33,333 active accounts, it ranks among the top / depository participant in India, registered with $S#= and C#S=" Karvy comtrade, member of $C#>? and MC?, ranks among the top ( commodity brokers in the country" Karvy insurance brokers are registered as a broker with I7#& and ranks among the top / insurance agent in the country" 7egistered with &M@I as a corporate agent, karvy is also among the top mutual fund mobili)e with over 7s /,333 crore under management" Karvy has /0/ offices over (0/ locations across India and overseas at #ubai and $ew 9ork" Aver .,333 highly 5ualified staff"

Or'a&!-at! &
Karvy was started by a group of five chartered accountants in %.0. and the name K&789 has been derived from the first letter of their names K + KB2BMB 7&A & + &C&9 KBM&7 7 + 7&M&K7IS:$& 8 D 8&I#9&$&2:&$ 9 D 9B6&$#:&7 2he partner decided to offer, other than audit services, value added services like corporate advisory services to their clients" 2he first firm in the group, karvy consultants limited was incorporated on '(rd Culy %.,(" In a very short period it become the largest registrar and transfer agent in India" 2his business was spun off to from a separate !oint venture with Computershare of &ustralia in '33/" Karvy;s foray into stock broking began with market I A;S in %..(" <ithin a few years, karvy began topping the I A procurement league tables and it has consistently maintained its top position the top /" Karvy was among the first few member of national stock exchange in %..* and become a member of the stock exchange, Mumbai in '33%" <hile the registry business is a /3E/3 !oint venture with Computershare of &ustralia, we have e5uity participation by ICICI venture and limited and Barings &sia limited, in Karvy stock broking limited"
6

Karvy has always believed in adding value to services it offers to client, a top notch research team based in Mumbai and :yderabad supports its employees to advise client on their investment needs with the information overload today, karvy;s team of analyst help make the right calls, be it e5uities, M@, insurance"

Ser,!ce" .r ,!/e/ %# Kar,#

o Commodities treading F$C#>? - MC?G o ersonal finance advisory services

o Corporate finance and merchant banking o @inancial products distribution FinvestmentHloan productsG o Mutual funds services o Stock broking F$S> - BS>, @-AG o Insurance Flife - generalG o It enabled services

Kar,# 'r u. 0 c m.a&!e"

Karvy consultants limited Karvy stock broking limited Karvy investor services limited Karvy Computer share vt" =td Karvy global services limited Karvy insurance broking vt" =td Karvy commodities broking vt" =td

Kar,# a" mutual 0u&/ !&,e"tme&t a/,!" r

Investment is the stepping stone to achieving one;s financial dreams" Mutual funds offer an opportune way to long+term wealth creation" :owever with more and more funds flooding the market, the task of selecting the most suitable scheme gets even more complicated" Mutual funds advisory services at Karvy guides you through this ma)e and ensures that your investment is backed by our 5uality research" <e, at Karvy help you to reach your goals by offeringE+ roduct of many &MCs 7esearch reports Fexisting funds - $@AsI strategy reports etcG Customi)ed mutual fund portfolios

ortfolio revision Fdepending on changing market outlook and evolving trendsG

Sc .e 0 "tu/#
2he scope of any study should be to cover as large a population as possible to cover without any errors but due to time and money constraints" 2his study is limited to Chandigarh and Mohali region only"

O%$ect!,e
>very research is carried out keeping some ob!ective in mind" 2he following research has been done for the fulfillment of the following ob!ectiveE+ 2o have the basic knowledge of different mutual funds available in the market 2o know the awareness of the people about mutual funds 2o find out the motivating factors for people while investing in mutual funds 2o find out the comparison between mutual fund schemes with other schemes

L!m!tat! &" 0 the "tu/#

=ack of sufficient time" 2he sample taken was very small to lack of time" Bnwillingness of respondents to reveal the information"

=ack of primary data" =ack of experience can also be a hurdle in this pro!ect"

10

Meth / l '# 0 ll 1e/ a&/ " urce" Re"earch /e"!'&23

7esearch design for pro!ect is descriptive research, in which detailed study of customer preference will be studied by collecting data through a 5uestionnaire"

Data c llect! &23

#ata collections through both by primary and secondary sources"

Pr!mar# /ataE + primary data is collected through a structured and disguised

5uestionnaire, being up filled by customer investors"

Sec &/ar# /ataE+secondary data is collected through website of the company and
from the others websites and !ournals"

11

*&tr /uct! & t mutual 0u&/"

& mutual fund is a trust that pools the savings of a number of investors who share a common financial goal" 2he money thus collected is invested by the fund manager in different types of securities depending upon the ob!ective of the scheme" 2hese could range from shares to debentures to money market instrument" 2he income earned through these investments and the capital appreciation reali)ed by the scheme is shared by its unit holders in proportion to the number of units owned by them" 2hus 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" &nybody with an investible surplus of as a few thousand rupees can invest in mutual funds" >ach mutual fund scheme has a defined investment ob!ective and strategy"

12

2he flow chart below describes broadly the working of a mutual fundE

Mutual @und Aperation @low Chart

13

Or'a&!-at! & 0 a mutual 0u&/

2he mutual fund industry in India began with the setting up of the Bnit 2rust in India FB2IG in %.1* by the 6overnment of India" 2he B2I is governed by a special legislation, the Bnit 2rust of India &ct %.1(" In %.,0 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since %.,0, 1 public sector banks have set up mutual funds" &lso the two Insurance companies =IC and 6IC established mutual funds" Securities and exchange board of India FS>BIG formulated the Mutual fund F7egulationG %..(, which for the first time established a comprehensive regulatory framework for the mutual fund industry" Since then several mutual funds have been set by the private and !oint sectors"

14

Re'ulat r# a".ect 0 mutual 0u&/" Scheme 0 mutual 0u&/"

2he asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the board"

>very mutual fund shall along with the offer document of each scheme pay filling fees"

2he offer document shall contain disclosures which are ade5uate in order to enable the investors to make informed decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor"

2he mutual fund and asset management company shall be liable to refund the application money to the applicants E+ FaG If the mutual fund fails to receive the minimum subscription amount referred to in clause" FbG If the moneys received from the applicants for units are in excess of subscription as referred to in clause"

2he asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units

15

allotted to the applicant as soon as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of the re5uest from the unit holders in any open ended scheme"

Rule" re'ar/!&' a/,ert!"eme&t2

2he offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false"

*&,e"tme&t %$ect!,e" a&/ ,aluat! & . l!c!e"

2he price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors,

Ge&eral %l!'at! &2

>very asset management company for each scheme shall keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its transaction and to disclose at any point of time the financial position of each scheme and in particular give a true fair view of the state of affairs of the fund and intimate to the board the place where such books of accounts records and documents are maintained" 2he financial year for all the schemes shall be March (% of each year"

16

>very mutual fund shall have the annual statement of a audited by an auditor who is not in any way associated with the auditor of the asset management company"

Re"tr!ct! & & !&,e"tme&t"4

& mutual fund scheme shall not invest more than %/J if it;s $&8 in debt instruments issued by a single issuer, which are rated not below investment grade by a credit rating agency authori)ed to carry out such activity under the act" Such investment limit may be extended to '3J of the $&8 of the scheme with the prior approval of the board of trustees and the board of asset Management Company" & mutual fund scheme shall not invest more than %3J of its $&8 in unrated debt instruments issued by a single issuer and the total investment in such instrument shall not exceed '/J of the $&8 of the scheme" &ll such investment shall be made with the prior approval of the board of trustees and the board of asset Management Company" $o mutual fund under its entire scheme should own more than %3J of any company;s paid up capital carrying voting rights" Such transfers are done at the prevailing market price for 5uoted instruments on spot basis" 2he initial issue expanses in respect of any scheme may not exceed 1J of the fund raised under that scheme" >very mutual fund shall buy and sell securities on the basis of deliveries and shall ion all cases of purchases" 2ake delivery of relative securities and in all cases of

17

sale, deliver the securities and shall in no case in a position whereby it has to make short sale or carry forward transaction or engage in badla finance" >very mutual fund shall, get the securities purchased or transferred in the name of the mutual fund on account of the concerned scheme" <herever investment are intended to be of long+term nature" ending deployment of fund of a scheme in securities in term of investment ob!ectives of the scheme a mutual fund can invest the funds of the scheme in short term deposits of scheduled commercial banks" $o mutual fund scheme shall invest more than %3J of its $&8 in the e5uity shares or e5uity related instruments of any company" rovided that, the limit of %3J shall not be applicable for investments in index fund or sector or industry specific scheme" & mutual fund scheme shall not invest more than /J of its $&8 in the e5uity shares pr e5uity related investment in case of open ended scheme and %3J of its $&8 in case of close ended scheme"

18

Structure 0 the *&/!a& mutual 0u&/ !&/u"tr#

2he Indian mutual fund industry is dominated by the Bnit trust of India which has a total corpus of 7s 033bn collected from more than '3 million investors" 2he B2I has many fundsHscheme in all categories like, e5uity, balanced, income etc with some being open ended and some closed ended" B2I was floated by financial institutions and is governed by a special act of arliament" Most of its investors believe that the B2I is 6overnment owned and controlled, which, while legally incorrect, is true for all practical purposes" 2he second largest category of mutual funds is the ones floated by nationali)ed banks" Bank asset management floated by Canara Bank and SBI funds management floated by the State Bank of India are the largest of theses" 6IC &MC floated by 6eneral Corporation and Ceevan Bima Sahayog &MC floated by the =IC are some of the other prominent ones" 2he aggregate corpus of funds managed by this category of &MC is about 7s %/3bn" 2he third largest category of mutual fund is ones floated by the private sector and by foreign asset management companies" 2he largest of these are rudential ICICI &MC and

19

Birla Sun =ife &MC" 2he aggregate corpus of assets managed by this category of &MC is in excess of 7s '/3bn"

A/,a&ta'e 0 mutual 0u&/"

Mutual funds provide following benefit to investors P rt0 l! D!,er"!0!cat! & Mutual @unds invest in a well+diversified portfolio of securities which enables investor to hold a diversified investment portfolio Fwhether the amount of investment is big or smallG" Pr 0e""! &al Ma&a'eme&t @und manager undergoes through various research works and has better investment management skills which ensure higher returns to the investor than what he can manage on his own Le"" R!"k Investors ac5uire a diversified portfolio of securities even with a small investment in a Mutual @und" 2he risk in a diversified portfolio is lesser than investing in merely ' or ( securities"

20

L 1 Tra&"act! & C "t" #ue to the economies of scale Fbenefits of larger volumesG, mutual funds pay lesser transaction costs" 2hese benefits are passed on to the investors"

L!5u!/!t# &n investor may not be able to sell some of the shares held by him very easily and 5uickly, whereas units of a mutual fund are far more li5uid" Ch !ce 0 Scheme" Mutual funds provide investors with various schemes with different investment ob!ectives" Investors have the option of investing in a scheme having a correlation between its investment ob!ectives and their own financial goals" 2hese schemes further have different plansHoptions Tra&".are&c# @unds provide investors with updated information pertaining to the markets and the schemes" &ll material facts are disclosed to investors as re5uired by the regulator" )le6!%!l!t# Investors also benefit from the convenience and flexibility offered by Mutual @unds" Investors can switch their holdings from a debt scheme to an e5uity scheme and vice+

21

versa" Aption of systematic Fat regular intervalsG investment and withdrawal is also offered to the investors in most open+end schemes"

Sa0et# Mutual @und industry is part of a well+regulated investment environment where the interests of the investors are protected by the regulator" &ll funds are registered with S>BI and complete transparency is forced"

D!"a/,a&ta'e" 0 !&,e"t!&' thr u'h mutual 0u&/"

C "t" C &tr l N t !& the +a&/" 0 a& *&,e"t r Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments Fas long as he holds the unitsG, irrespective of the performance of the fund" N Cu"t m!-e/ P rt0 l! "

22

2he portfolio of securities in which a fund invests is a decision taken by the fund manager" Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial ob!ectives" D!00!cult# !& Select!&' a Su!ta%le )u&/ Scheme Many investors find it difficult to select one option from the plethora of fundsHschemesHplans available" @or this, they may have to take advice from financial planners in order to invest in the right fund to achieve their ob!ectives"

T#.e" 0 mutual 0u&/"

6eneral Classification of Mutual @unds O.e& e&/e/ a&/ cl "e e&/e/ O.e& e&/e/ 0u&/" @unds that can sell and purchase units at any point in time are classified as Apen+end @unds" 2he fund si)e FcorpusG of an open+end fund is variable Fkeeps changingG because of continuous selling Fto investorsG and repurchases Ffrom the investorsG by the fund" &n open+end fund is not re5uired to keep selling new units to the investors at all times but is re5uired to always repurchase, when an investor wants to sell his units" 2he $&8 of an open+end fund is calculated every day" Cl "e e&/e/ 0u&/"

23

@unds that can sell a fixed number of units only during the $ew @und Affer F$@AG period are known as Closed+end @unds" 2he corpus of a Closed+end @und remains unchanged at all times" &fter the closure of the offer, buying and redemption of units by the investors directly from the @unds is not allowed" :owever, to protect the interests of the investors, S>BI provides investors with two avenues to li5uidate their positionsE Closed+end @unds are listed on the stock exchanges where investors can buyHsell units fromHto each other" 2he trading is generally done at a discount to the $&8 of the scheme" 2he $&8 of a closed+end fund is computed on a weekly basis Fupdated every 2hursdayG" Closed+end @unds may also offer Kbuy+back of unitsK to the unit holders" In this case, the corpus of the @und and its outstanding units do get changed" L a/ 0u&/" a&/ N l a/ 0u&/" L a/ 0u&/ Mutual @unds incur various expenses on marketing, distribution, advertising, portfolio churning, fund managerLs salary etc" Many funds recover these expenses from the investors in the form of load" 2hese funds are known as =oad @unds" & load fund may impose following types of loads on the investorsE

E&tr# L a/ 3 &lso known as @ront+end load, it refers to the load charged to an investor at the time of his entry into a scheme" >ntry load is deducted from the investorLs contribution amount to the fund"

24

E6!t L a/ 3 &lso known as Back+end load, these charges are imposed on an investor when he redeems his units Fexits from the schemeG" >xit load is deducted from the redemption proceeds to an outgoing investor"

De0erre/ L a/ 3 #eferred load is charged to the scheme over a period of time" C &t!&'e&t De0erre/ Sale" Char'e 7CDSC8 3 In some schemes, the percentage of exit load reduces as the investor stays longer with the fund" 2his type of load is known as Contingent #eferred Sales Charge"

N L a/ 0u&/ &ll those funds that do not charge any of the above mentioned loads are known as $o+ load @unds or make no such charges or load for sales expanses are called as Mno load fundsN Ta6 e6em.t 0u&/" a&/ N & Ta6 e6em.t 0u&/" Ta6 e6em.t 0u&/ @unds that invest in securities free from tax are known as 2ax+exempt @unds" &ll open+ end e5uity oriented funds are exempt from distribution tax Ftax for distributing income to investorsG" =ong term capital gains and dividend income in the hands of investors are tax+ free" N & ta6 e6em.t 0u&/"

25

@unds that invest in taxable securities are known as $on+2ax+exempt @unds" In India, all funds, except open+end e5uity oriented funds are liable to pay tax on distribution income" rofits arising out of sale of units by an investor within %' months of purchase are categori)ed as short+term capital gains, which are taxable" Sale of units of an e5uity oriented fund is sub!ect to Securities 2ransaction 2ax FS22G" S22 is deducted from the redemption proceeds to an investor"

(r a/ mutual 0u&/ t#.e"

9. E5u!t# 0u&/" >5uity 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 e5uity fund should invest for long term i"e" for ( years or more" 2here are different types of e5uity funds each falling into different risk bracket" In the order of decreasing risk level, there are following types of e5uity fundsE

a" A''re""!,e Gr 1th )u&/" 3 In &ggressive 6rowth @unds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature" Because of these speculative investments &ggressive 6rowth @unds become more volatile and thus, are prone to higher risk than other e5uity
26

funds" b" Gr 1th )u&/" 3 6rowth @unds also invest for capital appreciation Fwith time hori)on of ( to / yearsG but they are different from &ggressive 6rowth @unds in the sense that they invest in companies that are expected to outperform the market in the future" <ithout entirely adopting speculative strategies, 6rowth @unds invest in those companies that are expected to post above average earnings in the future" c" S.ec!alt# )u&/" 3 Specialty @unds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria" Criteria for some speciality funds could be to investHnot to invest in particular regionsHcompanies" Speciality funds are concentrated and thus, are comparatively riskier than diversified funds"" 2here are following types of specialty fundsE i" Sect r )u&/"2 >5uity funds that invest in a particular sectorHindustry of the market are known as Sector @unds" 2he exposure of these funds is limited to a particular sector Fsay Information 2echnology, &uto, Banking, harmaceuticals or @ast Moving Consumer 6oodsG which is why they are more risky than e5uity funds that invest in multiple sectors" ii" ) re!'& Secur!t!e" )u&/"2 @oreign Securities >5uity @unds have the option to invest in one or more foreign companies" @oreign securities funds achieve international diversification and hence they are less risky than sector funds" :owever, foreign securities funds are exposed to foreign
27

exchange rate risk and country risk" iii" M!/3Ca. r Small3Ca. )u&/"2 @unds that invest in companies having lower market capitali)ation than large capitali)ation companies are called Mid+Cap or Small+Cap @unds" Market capitali)ation of Mid+Cap companies is less than that of big, blue chip companies Fless than 7s" '/33 crores but more than 7s" /33 croresG and Small+Cap companies have market capitali)ation of less than 7s" /33 crores" Market Capitali)ation of a company can be calculated by multiplying the market price of the companyLs share by the total number of its outstanding shares in the market" 2he shares of Mid+Cap or Small+Cap Companies are not as li5uid as of =arge+Cap Companies which gives rise to volatility in share prices of these companies and conse5uently, investment gets risky" iv" O.t! & *&c me )u&/"2 <hile not yet available in India, Aption Income @unds write options on a large fraction of their portfolio" roper use of options can help to reduce volatility, which is otherwise considered as a risky instrument" 2hese funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors" d" D!,er"!0!e/ E5u!t# )u&/" 3 >xcept for a small portion of investment in li5uid money market, diversified e5uity funds invest mainly in e5uities without any concentration on a particular sectorFsG" 2hese funds are well diversified and reduce

28

sector+specific or company+specific risk" :owever, like all other funds diversified e5uity funds too are exposed to e5uity market risk" Ane prominent type of diversified e5uity fund in India is >5uity =inked Savings Schemes F>=SSG" &s per the mandate, a minimum of .3J of investments by >=SS should be in e5uities at all times" >=SS investors are eligible to claim deduction from taxable income Fup to 7s % lakhG at the time of filing the income tax return" >=SS 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 incomeFsG for which he may have received any tax exemptionFsG in the past" e" E5u!t# *&/e6 )u&/" 3 >5uity Index @unds have the ob!ective to match the performance of a specific stock market index" 2he portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index" >5uity index funds that follow broad indices Flike S- C$? $ifty, SensexG are less risky than e5uity index funds that follow narrow sectoral indices Flike BS>B&$K>? or C$? Bank Index etcG" $arrow indices are less diversified and therefore, are more risky" f" :alue )u&/" 3 8alue @unds invest in those companies that have sound fundamentals and whose share prices are currently under+valued" 2he portfolio of these funds comprises of shares that are trading at a low rice to >arnings 7atio FMarket rice per Share H >arning per ShareG and a low Market to Book 8alue F@undamental 8alueG 7atio" 8alue @unds may select companies from diversified

29

sectors and are exposed to lower risk level as compared to growth funds or specialty funds" 8alue stocks are generally from cyclical industries Fsuch as cement, steel, sugar etc"G which make them volatile in the short+term" 2herefore, it is advisable to invest in 8alue funds with a long+term time hori)on as risk in the long term, to a large extent, is reduced" g" E5u!t# *&c me r D!,!/e&/ ;!el/ )u&/" 3 2he ob!ective of >5uity Income or #ividend 9ield >5uity @unds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends Fsuch as ower or Btility companies whose share prices fluctuate

comparatively lesser than other companiesL share pricesG" >5uity Income or #ividend 9ield >5uity @unds are generally exposed to the lowest risk level as compared to other e5uity funds" <. De%t = *&c me 0u&/" @unds that invest in medium to long+term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors Flike infrastructure companies etc"G are known as #ebt H Income @unds" #ebt funds are low risk profile funds that seek to generate fixed current income Fand not capital appreciationG to investors" In order to ensure regular income to investors, debt For incomeG funds distribute large fraction of their surplus to investors" &lthough debt securities are generally less risky than e5uities, they are sub!ect to credit risk Frisk of defaultG by the issuer at the time of interest or principal payment" 2o minimi)e the risk of default, debt funds usually invest in securities from
30

issuers who are rated by credit rating agencies and are considered to be of KInvestment 6radeK" #ebt funds that target high returns are more risky" Based on different investment ob!ectives, there can be following types of debt fundsE a" D!,er"!0!e/ De%t )u&/" 3 #ebt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds" 2he best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction" &ny loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor" b" ) cu"e/ De%t )u&/" 3 Bnlike 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, speciali)ed and offshore debt funds, funds that invest only in 2ax @ree Infrastructure or Municipal Bonds" Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds" &lthough not yet available in India, these funds are conceivable and may be offered to investors very soon" c" +!'h ;!el/ De%t 0u&/" 3 &s we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimi)e the risk of default by investing in securities issued by only those borrowers who are considered to be of Kinvestment gradeK" But, :igh 9ield #ebt @unds adopt a

31

different strategy and prefer securities issued by those issuers who are considered to be of Kbelow investment gradeK" 2he motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers" 2hese funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors" d" A""ure/ Retur& )u&/" 3 &lthough it is not necessary that a fund will meet its ob!ectives 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" &ny shortfall in returns is suffered by the sponsors or the &sset Management Companies F&MCsG" 2hese funds are generally debt funds and provide investors with a low+risk investment opportunity" :owever, the security of investments depends upon the net worth of the guarantor Fwhose name is specified in advance on the offer documentG" 2o safeguard the interests of investors, S>BI permits only those funds to offer assured return schemes whose sponsors have ade5uate net+worth to guarantee returns in the future" In the past, B2I had offered assured return schemes Fi"e" Monthly Income lans of B2IG that assured specified returns to investors in the future" B2I was not able to fulfill its promises and faced large shortfalls in returns" >ventually, government had to intervene and took over B2ILs payment obligations on itself" Currently, no &MC in India offers assured return schemes to investors, though possible" e" )!6e/ Term Pla& Ser!e" 3 @ixed 2erm lan Series usually are closed+end schemes

32

having short term maturity period Fof less than one yearG that offer a series of plans and issue units to investors at regular intervals" Bnlike closed+end funds, fixed term plans are not listed on the exchanges" @ixed term plan series usually invest in debt H income schemes and target short+term investors" 2he ob!ective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period" >. G!lt 0u&/" &lso known as 6overnment Securities in India, 6ilt @unds invest in government papers Fnamed dated securitiesG having medium to long term maturity period" Issued by the 6overnment of India, these investments have little credit risk Frisk of defaultG and provide safety of principal to the investors" :owever, 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 $&8 of debtHgilt funds in an opposite direction" ?. M &e# market = l!5u!/ 0u&/" Money market H li5uid funds invest in short+term Fmaturing within one yearG interest bearing debt instruments" 2hese securities are highly li5uid and provide safety of investment, thus making money market H li5uid funds the safest investment option when compared with other mutual fund types" :owever, even money market H li5uid funds are exposed to the interest rate risk" 2he typical investment options for li5uid funds include

33

2reasury Bills Fissued by governmentsG, Commercial papers Fissued by companiesG and Certificates of #eposit Fissued by banksG" @. +#%r!/ 0u&/" &s the name suggests, hybrid funds are those funds whose portfolio includes a blend of e5uities, debts and money market securities" :ybrid funds have an e5ual proportion of debt and e5uity in their portfolio" 2here are following types of hybrid funds in IndiaE a" (ala&ce/ )u&/" 3 2he portfolio of balanced funds include assets like debt securities, convertible securities, and e5uity and preference shares held in a relatively e5ual proportion" 2he ob!ectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimi)ing the risk of capital erosion" Balanced funds are appropriate for conservative investors having a long term investment hori)on" b" Gr 1th3a&/3*&c me )u&/" 3 @unds that combine features of growth funds and income funds are known as 6rowth+and+Income @unds" 2hese funds invest in companies having potential for capital appreciation and those known for issuing high dividends" 2he level of risks involved in these funds is lower than growth funds and higher than income funds" c" A""et All cat! & )u&/" 3 Mutual funds may invest in financial assets like e5uity, debt, money market or non+financial FphysicalG assets like real estate, commodities etc"" &sset allocation funds adopt a variable asset allocation strategy that allows

34

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 e5uity if they expect e5uity 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 !udgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends" A. C mm /!t# 0u&/" 2hose funds that focus on investing in different commodities Flike metals, food grains, crude oil etc"G or commodity companies or commodity futures contracts are termed as Commodity @unds" & commodity fund that invests in a single commodity or a group of commodities is a speciali)ed commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a speciali)ed commodity fund" K recious Metals @undK and 6old @unds Fthat invest in gold, gold futures or shares of gold minesG are common examples of commodity funds" 7. Real e"tate 0u&/" @unds that invest directly in real estate or lend to real estate developers or invest in sharesHsecuriti)ed assets of housing finance companies, are known as Speciali)ed 7eal >state @unds" 2he ob!ective of these funds may be to generate regular income for investors or capital appreciation" 8. E6cha&'e tra/e 0u&/" 7ET)8
35

>xchange 2raded @unds provide investors with combined benefits of a closed+end and an open+end mutual fund" >xchange 2raded @unds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices" 2he biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share Ftradable at index linked pricesG at the same time" 7ecently introduced in India, these funds are 5uite popular abroad" B. )u&/" 0 0u&/" Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different &MCs, are known as @und of @unds" @und of @unds maintain a portfolio comprising of units of other mutual fund schemes, !ust like conventional mutual funds maintain a portfolio comprising of e5uityHdebtHmoney market instruments or non financial assets" @und of @unds 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" :owever, the expenses of @und of @unds are 5uite high on account of compounding expenses of investments into different mutual fund scheme"

R!"k a"" c!ate/ 1!th mutual 0u&/"

Mutual funds and securities investment are sub!ect to various risks and there is no assurance that a scheme ob!ective will be achieved" 2hese risks should be properly

36

understood by investors so that they can understood how much risky their investment avenue is" >5uity and fixed income bearing securities have different risks associated with them" 8arious risks associated with mutual funds can be described as belowE R!"k a"" c!ate/ t 0!6e/ !&c me %ear!&' "ecur!t!e"2 *&tere"t rate r!"k2 3 &s with all the securities change in interest rate may affect the scheme $et &sset 8alue as the prices of the securities generally increase as interest rates decline and generally decrease as interest rate rise" rices of long+term securities

generally fluctuate more in response to interest rates change then do short term securities" Indian #ebt markets can be volatile leading to the possibility of price movements or down in the fixed income securities and thereby to the possible movements in the $&8" L!5u!/!t# r marketa%le r!"k2 3 2his refers to the ease with which a security can be sold at near to its valuation yield to maturity" 2he primary measure of li5uidity risk is the spread between the bid price and the offer price 5uoted by the dealer" =i5uidity risk is inherent to the Indian #ebt market Cre/!t r!"k2 3 Credit risk or default risk to the risk that of fixed income security may default because of those risks corporate debenture are sold at a yield above those offered on 6overnment securities which are sovereign obligation and free of credit risk" $ormally the value of fixed security will fluctuate depending upon the perceived level of credit risks well as the actual event of default" 2he greater the credit risk the greater the yield re5uire for someone to be compensated for increased risk"

37

R!"k a"" c!ate/ t e5u!t!e" Market r!"k2 3 2he $&8 of the scheme investing in e5uity will fluctuate as the daily prices of the individual securities on which they invest fluctuate and the units when redeemed may be worth more or less than the original cost" T!m!&' the market2 3 It is difficult to identify which is right time to invest and which is the right time to take out money" 2here may be situation where stock may not be rightly timed according to the market leading to loss the value of scheme" L!5u!/!t#2 3 Investment made in unlisted e5uity or e5uity related securities might only be reali)able upon the securities" Settlement problems could cause the scheme to miss certain investment opportunities"

O.t! &" a,a!la%le t !&,e"t r"

>ach plan of every mutual fund has three options D 6rowth, #ividend and dividend reinvestment" Separate $&8 are calculated for each scheme" D!,!/e&/ O.t! & Bnder the dividend plan dividend are usually on 5uarterly or annually basis" Mutual fund reserve the right to change the fre5uency of dividend declared" D!,!/e&/ re!&,e"tme&t O.t! &
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Instead of remittances of units through payout, unit;s holder may choose to invest the entire dividend in additional units of the scheme at $&8 related prices of the next working day after the record date" $o sales or entry load is levied on dividend reinvest" Gr 1th O.t! & Bnder this plan return accrue to the investor in the form of capital appreciation as reflected in the $&8" 2he scheme will not declare the dividend under the 6rowth plan and investor who opt for this plan will not receive any income from the scheme" Instead of income earned on their units will remain invested within the scheme and will be reflected in the $&8"

*&,e"tme&t ma&a'eme&t
&fter learning the concept of mutual funds and various schemes of mutual funds available for investment it is re5uired to effectively manage the portfolio of an investor which depends upon the ob!ective of investor" 2he most important ob!ective of any investor is to generate returns" 7e5uirement for return for every investor varies which depends upon many factors and these factors determine the category to which an investor belongs" #epending upon the category to which an investor belongs portfolio of any customer is managed" Investor can be categori)ed on the basis of certain factors which can be described as belowE + 9. O& the %a"!" 0 r!"k a&/ retur&
39

=ow risk bearing capacity Medium risk bearing capacity :igh risk bearing capacity

7isk and return goes hand to hand" :igher return means higher risk" =ow risk means moderate return"

<. O& the %a"!" 0 a'e 0 !&,e"t r 9oung age F'/+(/ yearsG Middle age F(/+/3 yearsG Ald age F/3 and aboveG

>. O& the %a"!" 0 l!5u!/!t# re5u!re/ %# !&,e"t r =ess li5uidity Medium li5uidity More li5uidity

?. O& the %a"!" 0 te&ure 0 !&,e"tme&t Short term

40

Medium term =ong term

@. *&,e"tme&t ca& al" %e ma/e t ark the idle funds Make a full time investment &vail tax benefits Meet re5uirement for contingencies

An the basis of the advisory paradigm Fdeciding factorsG mentioned above, various categories of investor can be made which is deciding factor as to where an investor with a particular re5uirement must invest" Ge&erall# !&,e"t r" are cate' r!-e/ & the %a"!" 023 7isk and return &ge =i5uidity re5uired

41

Ne1 /e,el .me&t !& the 1a#" 0 mutual 0u&/" !&,e"tme&t

S#"temat!c !&,e"tme&t .la& 7S*P8 Systematic in investment plan is available for planned and regular investments, under this plan unit holder can benefit by investing specified rupee amounts periodically for a continuous period" 2his concept is called 7upee cast averaging" 2his program allows unit holder to save a fixed amount of rupee every monthH5uarter by purchasing additional units of the scheme" 7upee cost averaging does not guarantee a profit or protect against a loss" 7upee cost averaging can smooth out the market;s ups and downs and reduce the risk of investing in volatile markets"

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@or as little as 7s /33 each month for %' months, you can purchase mutual fund units and avoid large minimum investment amount of over %333" @ixed amounts can be invested in mutual funds each month using funds drown automatically from your savings account regularly" Investing in SI offer the benefit of M7upee cost averagingN by purchasing mutual fund units over a period of time, you automatically buy more units when prices are low and fewer units when prices are high, resulting in lower Mper unit ac5uiring costN as a result of a averaging"

C m.ar!" & 0 mutual 0u&/ "cheme 1!th ther "cheme

C m.a&# 0!6e/ /e. "!t" ,er"u" mutual 0u&/" @ixed deposits are unsecured borrowings by the company accepting the depositO Credit rating of the fixed deposit programmers is an indication of the inherent default risk in the investment" 2he risks of investor in a mutual fund scheme are invested by the &MC in specific under that scheme" 2hese investments are held and managed in trust for the benefit of the scheme;s invertors" An the other hand there is no such direct correlation between a company;s fixed deposit mobili)ation and the avenues where it deploys these resources"

43

& corollary of such linkage between mobili)ation and investment is that the gains and losses from the mutual fund scheme entirely flow through to the investors" 2herefore there can be no certainty of yield unless a named guarantor assures a return or to a lesser extent, if the investment is in serial gilt scheme" An the other hand the return under a fixed deposit is certain sub!ect only to the default risk of the borrower" Both fixed deposit and mutual funds offer li5uidity but sub!ect to some differenceE+ 2he provider of li5uidity in the case of fixed deposits is the borrowing company" In mutual funds, the li5uidity provider is the scheme itself for open ended scheme or the market in the case of close ended schemes" 2he basic values at fixed deposits are encashable is not sub!ect to market risk" :owever values at which units of a scheme are a scheme are redeemed entirely depends on the market" If securities have gained in value during the period then the investor can even earn a return that is higher than what he anticipated when he invested" Conversely she could also end up with a loss" >arly encashment of fixed deposits is always sub!ect to a penalty charged by the company that accepted the fixed deposits" Mutual fund scheme also have the option of charging a penalty on MearlyN redemption of units" Fby way of Mexit loadNG" If the $&8 has appreciated ade5uately" 2hen despite the exit load, the investor could a capital gain on his investment"

44

(a&k 0!6e/ /e. "!t" :" mutual 0u&/" Bank fixed deposits are similar to company fixed deposits" 2he ma!or difference is that bank is more stringently regulated than are companies" 2hey even operate under stricter re5uirement regarding Statutory =i5uidity 7atio FS=7G and Cash 7eserve 7atio FC77G mandated by 7BI" <hile the above are causes for comfort, bank deposits too are sub!ect to default risk" :owever given the political and economic impact of bank defaults, the 6overnment as well as 7eserve Bank of India F7BIG tries to ensure that banks do not fail"

( &/", De%e&ture :" Mutual 0u&/" &s in the case of fixed deposits, credit rating of a bond or debenture is an indication of the inherent default risk in the investment" :owever, unlike fixed deposits, bonds and debenture are transferable securities" <hile an investor may have an early encashment option from the issuer Ffor instance through a MputN optionG li5uidity is generally through a listing in the market" Implications if this areE

45

If securities does not get traded in the market" 2hen li5uidity remains on paper" In this respect an open ended scheme offering continuous saleHre+purchase option is superior"

2he value that the investor would reali)e in an early is sub!ect to market risk" 2he investor could have a capital gain or a capital loss" 2his aspect is similar to a mutual fund scheme"

It is possible for an astute investor to earn attractive returns by directly investing in the debt market and actively managing the positions" 6iven the market realities in India" :owever it is difficult for most investor to actively manage their debt portfolio" @urther at times it is difficult to execute trades in the debt market even when the transaction si)e is as high as 7s % crore" In this respect investment in a debt scheme would be beneficial"

E5u!t# :" Mutual 0u&/" Investment in both e5uity and mutual funds are sub!ect to market risk &n investor holding an e5uity security that is not treaded in the market place has a problem in reali)ing value from it" But investment in an open end mutual fund eliminates this direct risk of not being able to sell the investment in market" &n indirect risk remains because the scheme has to reali)e its investments to pay investors" 2he &MC is however

46

in a better position to handle the situation" @urther on account of various S>BI regulations such illi5uid securities are likely to be only a part of the scheme;s portfolio" &nother benefit of e5uity mutual fund scheme is that they give investors the benefit of portfolio diversification through a small investment" @or instance an investor can take an exposure to the index by investing a mere 7s /,333 in an index fund"

L!0e !&"ura&ce :" Mutual 0u&/"

=ife insurance is a hedge against risk and not really an investment option, so it life would be wrong to compare life insurance against any financial product" 8arious insurance policies are available to meet different need of investors" Broadly there are policies that offer only risk cover and other which have an element of savings accumulation" :igh front+end costs, largely on account of distribution expenses, impact the net return on the savings component of endowment policies" Accasionally on account of market inefficiencies or miss+pricing of products in India, life insurance products have offered a return that is higher than a comparable MsafeN fixed return security thusI you are effectively paid for getting insured" Such opportunities are, however not sustainable in the long run" ELSS :S UL*P PLAN 2alk of life insurance nowadays and B=I s immediately spring to mind" B=I ;s popularity for life insurance companies has surged to such an extent that they have

47

become the talk of the town" But have individuals also evaluated the option of investing in tax saving fundsHe5uity linked saving scheme F>=SSG which offer similar tax benefitsO <e do not think so" B=I ;s basically work like a mutual fund with a life cover thrown in" they invest the premium in market linked instruments like stocks, corporate bonds and government securities" Investment in B=I attract tax benefits under section ,3c & tax saving fund is a diversified e5uity fund" It works like an open ended diversified e5uity fund that invests predominantly in the stock market to generate growth by way of capital appreciation for investors" 2he only difference between an >=SS and B=I is B=I has / years lock in period and tax saving benefit under sec ,3c"

The 'r u&/ rule" 0 mutual 0u&/" !&,e"t!&'

Moses gave his followers %3 commandments that were to be followed till eternity" 2he world of investments too has several ground rules meant for investors who are novices in their own right and wish to enter the myriad world of investments" 2hese come in handy for there is every possibility of losing what one has if due care is not taken" 9. A""e" # ur"el02 3 Self assessment of one;s needs, expectations and risk profile is of prime importance failing which one will make more mistakes in putting money in right

48

places than otherwise" Ane should identify the degree of risk bearing capacity one has also clearly state the expectation from the investments" Irrational expectation will bring pain" <. Tr# t u&/er"ta&/ 1here the m &e# !" ' !&'2 3 It is important to identify the nature of investment and to know if one is compatible with the investment" Ane can lose substantially if one picks the wrong kind of mutual fund" In order to avoid any confusion it is better to go through the literature such as offer document and fact sheets that mutual fund companies provide on their funds" >. D &Ct ru"h .!ck!&' 0u&/", th!&k 0!r"t2 3 Ane first has to decide what he want the money for and it is this investment goal that should be the guiding light for all investments done" It is thus important to know the risks associated with the fund and align it with the 5uantum of risk one is willing to take" Ane should take a look at the portfolio of the funds for the purpose" >xcessive exposure to any specific sector should be avoided, as it will only add to the risk of the entire portfolio" Mutual funds invest with a certain ideology such as the M8alue hilosophyN" Both have their share of critics but both philosophy of the fund will give an insight into the kind of risks of that it shall be taking in future" ?. *&,e"t. D &Ct ".eculate2 3 & common investor is limited in the degree of risk that he is willing to take" It is thus of key importance that there is though given to the process of investment and to the time hori)on of the intended investment" Ane should abstain from speculating which in other words would mean getting out of one fund and investing in

49

another with the intention of making 5uick money" Ane would do well to remember that nobody can perfectly time the market so staying invested is the best option unless there are compelling reasons" @. D &Ct .ut all the e''" !& &e %a"ket2 3 2his old age adage is of utmost importance" $o matter what the risk profile of a person is, it is always advisable to diversify the risks associated" So putting one;s money in different asset classes is generally the best option as it averages the risks in each category" 2hus, even investor of e5uity should be !udicious and invest some portion of the investment in debt" #iversification even in any particular asset class Fsuch as e5uity, debtG is good" $ot all fund managers have the same acumen of fund management and with identification of the best man being a tough taskI it is good to place money in the hands of several fund managers" 2his might reduce the maximum return possible, but will also reduce the risks" A. (e re'ular2 3 Investing should be a habit and not an exercise undertaken at one;s wishes, if one has to really from them" &s we said earlier, since it is extremely difficult to know when to enter or exit the market, it is important to beat market by being systematic" 2he basic philosophy of 7upee cost averaging would suggest that if one invests regularly through the ups and downs of the market, he would stand a better chance of generating more returns of the market for the entire duration" 2he SI offered by all funds helps in being systematic" &ll that one needs to do is to give post dated che5ues to the fund and thereafter one will not be harried later" 2he automatic investment plan offered by some

50

funds goes a step further" &s the amount can be directly H electronically transferred from account of the investor" 7. D # ur h me1 rk2 3 It is important for all investors to research the avenues

available to them irrespective of the investor category they belong to" 2his is important because an informed investor is in a better to make right decisions" :aving identified the risks associated with the investment is important and so one should try to know all aspects associated with it" &sking the intermediaries is one of the ways to take care of the problem" 8. )!&/ the r!'ht 0u&/"2 3 finding funds that do not charge many fees is of importance, as the fee charged ultimately goes from the pocket of the investor" 2his is even more important for debt funds as the return from these funds are not much" @unds that charge more will reduce the yield to the investor" @inding the right funds is important and one should also use these funds for tax efficiency" Investor of e5uity should keep in mind that all dividends are currently tax free in India and so their tax liabilities can be reduce if the dividend payout option is used" Investor of debt will be charged a tax dividend distribution and so can easily avoid the payout options" B. Kee. track 0 # ur !&,e"tme&t2 3 finding the right fund is important but even more important is to keep track of the way they are performing in the market" If the market is beginning to enter switching to debt funds as the losses can be minimi)ed" Ane can always switch back to e5uity if the e5uity market starts to show some buoyancy"

51

9D. K& 1 1he& t "ell # ur mutual 0u&/"2 3 Knowing when to exit a fund too is of utmost importance" Ane should book profits immediately when enough has been earnedI the initial expectation from the fund has been met with" Ather factor like non performing, hike in fee charged and change in any basic attribute of the fund etc are some of the reasons for to exit" Investment in mutual funds too is not risk free and so investment warrants some caution and careful attention of the investor" &fter learning the concept of mutual funds and various schemes of mutual funds available for investment it is re5uired to effectively manage the portfolio of an investor which depends upon the ob!ective of investor" 2he most important ob!ective of any investor is to generate return" 7e5uirement for return for every investor varies which depends upon many factors and these factors determine the category to which an investor belongs" #epending upon the category to which an investors belongs portfolio of any customer is managed"

52