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A study on
investment in mutual
fund
Chapter-1

INTRODUCTION
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A mutual fund is a kind of investment that uses money from many investors to
invest in stocks, bonds or other types of investment. A fund manager or
"portfolio manager" decides how to invest the money, and for this he is paid a
fee, which comes from the money in the fund.
In fact, too many people, investing means buying mutual funds. After all, its
common knowledge that investing in mutual funds is (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.
There are a lot of investment avenues available today in the financial market
for an investor with an investable surplus. They can invest in Bank Deposits,
Corporate Debentures, and Bonds where there is low risk but low return. They
may invest in Stock of companies where the risk is high and the returns are
also proportionately high. The recent trends in the Stock Market have shown
that an average retail investor always lost with periodic bearish tends.
People began opting for portfolio managers with expertise in stock markets
who would invest on their behalf. Thus wealth management services provided
by many institutions. However they proved too costly for a small investor.
These investors have found a good shelter with the mutual funds.

Mutual funds are usually "open ended", meaning that new investors can join
into the fund at any time. When this happens, new units, which are like shares,
are given to the new investors.
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There are thousands of different kinds of mutual funds, specializing in investing
in different countries, different types of businesses, and different investment
styles. There are even some funds that only invest in other funds.
History of mutual funds
The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India, at the initiative of the Government of India and Reserve Bank
the. The history of mutual funds in India can be broadly divided into four
distinct phases.

First Phase 1964-87: Unit Trust of India (UTI) was established on 1963 by an
Act of Parliament. It was set up by the Reserve Bank of India and functioned
under the Regulatory and administrative control of the Reserve Bank of India.
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.6,700 crores of assets under management.

Second Phase 1987-1993 (Entry of Public Sector Funds): 1987 marked the
entry of non- UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of
India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in
June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank
Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun
90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in
June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of
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Rs.47,004 crores.
Third Phase 1993-2003 (Entry of Private Sector Funds): With the entry of
private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993
was the year in which the first Mutual Fund Regulations came into being,
under which all mutual funds, except UTI were to be registered and governed.
The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the
first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The industry
now functions under the SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions. As at the end of January 2003, there were 33
mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India
with Rs.44,541 crores of assets under management was way ahead of other
mutual funds.

Fourth Phase since February 2003: In February 2003, following the repeal of
the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities.
One is the Specified Undertaking of the Unit Trust of India with assets under
management of Rs.29,835 crores as at the end of January 2003, representing
broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under
an administrator and under the rules framed by Government of India and does
not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It
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is registered with SEBI and functions under the Mutual Fund Regulations. With
the bifurcation of the erstwhile UTI which had in March 2000 more than
Rs.76,000 crores of assets under management and with the setting up of a UTI
Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with
recent mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and growth. As at
the end of September, 2004, there were 29 funds, which manage assets of
Rs.153108 crores under 421 schemes.

Parties to a Mutual fund
There are 4 principal parties to a mutual fund in addition to other parties
rendering specialised services. The parties are listed below:
A. Sponsor
B. Trustee
C. Asset Management Company
D. Custodian
E. Others Functionaries








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Sponsor Trustee AMC Custodian Others


A. Sponsor:
Sponsor of mutual fund is like the promoter of a joint stock
company. He brings the mutual fund into existence. Every mutual fund
bears the name of the sponsor. UTI sponsored the UTI Mutual fund;
HDFC Mutual Fund sponsored HDFC Mutual fund. Canara Bank
sponsored Canara Mutual fund and list goes on...
Activities of the Sponsor:
Promotion: He promotes a mutual fund. He establishes it under Indian
Trust Act and gets it registered with SEBI.
Appointment: The sponsor appoints the Trustees, Custodians and the
Asset Management Company with the approval of SEBI. He should
comply wit h the guidelines of SEBI governing such appointments. The
sponsor also appoints other parties like Brokers, Registrar and Transfer
Agents, Depository Participants, bankers, auditors, selling agents and
distributors.
Track Record: The sponsor must have a track record of operating in the
financial markets at least in the last 5 years.
Parties of mutual fund
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Profit Making: Out of the 5 year track record mentioned above, the
sponsor must have made profit at least in 3 years.
Capital Contribution: The Sponsor should contribute to a minimum of
40%of capital of the Asset Management Company. The income of the
sponsors the return it gets on such capital contribution.
B. Trustees:
The Sponsor appoints a Board of Trustee. Alternatively, a company
registered under the Companies Act can be appointed as the Trustee Company
or Board of Trustees should act according to the provisions of the Indian Trust
Act, 1882. The trustees should protect the interest of the investors. The AMC
and all other functionaries like Brokers, Selling Agents and Custodian etc.., are
accountable to the Trustees. The Trustees get these powers through a Trust
Deed executed by the sponsor in favour of the Trustees as per SEBI Regulation.
In addition the Deed id registered under Indian Trust Act.
The Trustees supervise the activities of the AMC. They also ensure all the
regulation and law are complied with in the operations. The AMC has to obtain
the concurrence of the trustees for floating any scheme to raise funds. They
can also seek any information pertaining to the operation. In the extreme case,
the Trustees can dismiss the AMC.

C. Asset Management Company (AMC):
The operational management of a Mutual fund is in the hands of the
AMC. It is also known as Fund Manager. It designs various schemes of the
Mutual fund, analyse corporate performance and securities, and buys and sells
securities.
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Features of an Asset Management Company:
An AMC is registered as a private limited company.
Every AMC must be registered with SEBI.
The capital of the AMC is provided by the sponsor, its associates or its
joint venture partners.
Every AMC must have a minimum net worth of Rs. 10 crore at all times.
An AMC can not act as AMC of more than one mutual fund.
AMC also cannot undertake any business other than asset management
of a mutual fund.
The AMC signs an investment management agreement with the
Trustees. The provisions of the agreement should be n accordance with
SEBI Regulation.
The AMC charges a fee for the investment management. It is calculated
at a fixed percentage of the funds managed by it. It distributes this, after
meeting its expenses and staff cost, as dividend to the sponsors, its
associates or joint venture partners.
All the investments sale and purchase of securities are done by the AMC.

D. Custodian:
Custodians are responsible for maintaining the securities bought. They
perform the back-office function of acting on the corporate action. Where the
securities are held in the demat form, they ensure that the securities bought
are transferred to the demat a/c. When the shares are sold, delivery
instruction is issued by the custodian. Custodians also receive dividend or
interest on the mutual funds investment. Custodians also do what is necessary
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regarding any corporate action like bonus issues, right offer and offer for sale,
buy-back and such other things on the advice of AMC.

A. Other Functionaries:
The following functionaries are appointed for specialised functions:
Registrar and transfer agents:
When the units are sold by mutual funds to the public. The Registrar and
Transfer Agents open the Register of Unit Holders. Throughout the life of the
Fund, purchase and sale of units by the Fund are entered in the Register
continuously.
Brokers:
Brokers are appointed for purchase and sale of securities by the AMC as apart
of investment. Brokers are members of any recognised stock exchange holding
SEBI registration.
Selling Agents and Distributors:
These are agents appointed to popularise the units of the mutual fund among
the investors. They are marketing agents or salesmen for the units of mutual
funds.
Depository Participants:
AMC purchases corporate and other securities which may have to be held in
the demat form. For this purpose the trustee open a demat account with a
Depository Participant(DP) .DP is any bank or financial service company
opening and operating demat accounts on behalf of clients either with
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National Securities Depository Ltd (NSDL) or Central Depository Service Ltd.
(CDSL).
Bankers:
Bank accounts are opened to carry on the cash transactions of the mutual
fund. They maintain current accounts and other accounts of the mutual fund.
There are many receipts and payments every day made by the mutual fund
through the bank accounts.
Legal Advisors:
Lawyers or advocates are employed to comply with the legal formalities. Any
dispute or litigation arising may also be looked after by the legal advisors.
Auditors:
Like the auditor of any other firm, he inspects the books of accounts
maintained and the transactions carried on. He also audits the accounts and
gives his report every year.

Types of Mutual fund Schemes:
Mutual fund Schemes are divided on the basis of structure or on the basis of
investment objective.
A. Classification on the Basis of Structure: On the basis this schemes are
divided into three types.
1) Open-Ended Schemes:
These are schemes not having any fixed maturity. Initially the units are sold
by way of an offer document at the face value. An entry load may be charged
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at a fixed percentage (management fee) on the face valve. After the issue
closes, the mutual fund buys and sells the units continuously based on the
Net Asset Valve. Selling Agents and Distributors are used for the sale of units
to investors. E.g. US-1964 of UTI, SBI-Magnum Equity Fund, UTI-Master
Plus91.

2) Close-Ended Schemes:
These schemes have a fixed maturity. After the initial offer of the units, the
Mutual fund does not buy or sell the units. Only on the date of Maturity the
Mutual fund buys the units back from the unit-holders. Before that, these
units are listed on stock exchanges. The investors can buy sell the units on the
stock exchange using the services of the brokers. E.g. UTI-Master Equity Plan-
91, LIC-Mutual fund-Dhanavarsha.
3) Interval Schemes:
Under these schemes the units are listed on the stock exchanges. In addition
the mutual fund also sells and repurchases the units at the Net Asset Value
Based price. E.g.UTI-Mastershare..

B. Classification on the Basis of investment Objective:
There is an umpteen number of schemes classified on the basis of the
investment objective. There are plenty of classes of investors with
varied investment objectives. Different schemes have been designed to
suit the requirement of every investor. Most important schemes are
listed below.
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1) Growth Schemes:
The Fund under the scheme is predominantly invested in equity shares of
companies. The main aim is to tap capital gains in the medium to long-term.
Fluctuations in share prices may affect the growth or value of the fund.

2) Income Schemes:
The fund is invested in income yielding securities like Bonds, debentures,
Government Securities, Commercial Paper and other money market
instruments. If allowed, they can also lend in the call-money market.
3) Balanced Schemes (Growth and Income Funds):
These funds invest partially in equity shares and the remaining money in
equity shares and the remaining money in debt related securities. By doing
this, they derive income in the form of interest and capital gains and dividend
on the equity. It balances the risk and return far better than either growth
funds or income funds. E.g. Prudential ICICI Balanced Fund and PNB-Balanced
Growth Fund.
4) Equity Linked Savings Schemes (ELSS):
This Scheme was brought into existence in 1922 by a notification of Ministry
of Finance Investors in this Scheme are eligible for tax benefits. From the
financial year 2005-06 an amount invested in ELSS is eligible to be included in
Sec 80C deduction up to Rs.100000 .There is a lock in period of 3 years. It is
eligible for exemption from capital gains tax. The fund raised in the scheme is
invested in equity shares essentially. E.g. Birla Equity Plan, Sundaram Tax Saver
and HDFC Long Term Advantage Fund.
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5) Index Funds:
These funds are invested in the shares included in a share index Amount is
allocated among the stocks in such a percentage which each stock claims in the
index by way of weight age. The returns are related to the movement in the
index. Indian Index Funds Prefer S&P CNX Nifty Index.
6) Gilt Funds:
These funds aim to invest in totally risk-free securities. Risk management is
total and return is secondary. Therefore the funds are invested in Government
Bonds and Treasury bills issued by the Central Government. If permitted the
funds may also be invested in call money market through lending .E.g. UTI-G-
Sec Fund...
7) Money Market Scheme:
Funds raised under the scheme aim at liquidity of investment. To achieve the
liquidity, investment is made mainly in Treasury Bills, Commercial Paper,
Certificate of Deposit and Call-Monet. E.g. Lng-Vysya Liquid Fund.
8) Theme Funds:
Also known as Focus or Sectoral Funds, these are invested in equity of the
companies failing into a single industry. The industry selected is a high growth
one like software industry, pharmaceutical industry, FMCG industry etc. These
funds have a high risk-return profile.
9) Fund of Funds:
It is a fund that is invested not in the securities of companies, but in the units
of the same mutual fund or in the units of other mutual funds. Mutual fund
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stands for diversification of investment. Fund of Funds carries this
diversification further.
10) Contra Fund:
There are companies whose share prices are far below their real worth. The
stock market has not realised the true worth of other these companies. Contra
Fund is invested in the equity shares of such companies. E.g. HDFC Core
&Satellite Fund...
11) Others:
There are many other funds like Emerging Opportunities Fund, Emerging
Technology Fund, and Inverse Index Fund etc...
12) Systematic Investment Plan:
This is a mode of investment where by the investor invests a fixed amount
every month in a particular scheme. It is similar to a recurring bank deposit. As
a concept, it is revolutionary. When the Net Asset Value is less, the investor
will receive more number of units (as in a declining market). When the market
booming, he gets less number of units. But, the value of total investment until
that date goes up high because of higher Net Asset Value.




On the basis of on the basis of
Structure Investment Objective
Types of mutual funds
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Importance of Mutual Fund:
Small investors face a lot of problems in the share market, limited resources,
lack of professional advice, lack of information etc. Mutual funds have come as
a much needed help to these investors. It is a special type of institutional
device or an investment vehicle through which the investors pool their savings
which are to be invested under the guidance of a team of experts in wide
variety of portfolios of Corporate securities in such a way, so as to minimise
risk, while ensuring safety and steady return on investment. It forms an
important part of the capital market, providing the benefits of a diversified
portfolio and expert fund management to a large number, particularly small
investors. Now a day, mutual fund is gaining its popularity due to the following
reasons:
l. With the emphasis on increase in domestic savings and improvement in
deployment of investment through markets, the need and scope for mutual
fund operation has increased tremendously. The basic purpose of reforms in
the financial sector was to enhance the generation of domestic resources by
reducing the dependence on outside funds. This calls for a market based
institution which can tap the vast potential of domestic savings and chanalise
them for profitable investments. Mutual funds are not only best suited for the
purpose but also capable of meeting this challenge.
2. An ordinary investor who applies for share in a public issue of any company
is not assured of any firm allotment. But mutual funds who subscribe to the
capital issue made by companies get firm allotment of shares. Mutual fund
latter sell these shares in the same market and to the Promoters of the
company at a much higher price. Hence, mutual fund creates the investors
confidence.
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3. The phyche of the typical Indian investor has been summed up by Mr.S.A.
Dave, Chairman of UTI, in three words; Yield, Liquidity and Security. The
mutual funds, being set up in the public sector, have given the impression of
being as safe a conduit for investment as bank deposits. Besides, the assured
returns promised by them have investors had great appeal for the typical
Indian investor.
4. As mutual funds are managed by professionals, they are considered to have
a better knowledge of market behaviours. Besides, they bring a certain
competence to their job. They also maximise gains by proper election and
timing of investment.
5. Another important thing is that the dividends and capital gains are
reinvested automatically in mutual funds and hence are not fritted away.The
automatic reinvestment feature of a mutual fund is a form of forced saving and
can make a big difference in the long run.
6. The mutual fund operation provides a reasonable protection to investors.
Besides, presently all Schemes of mutual funds provide tax relief under Section
80 L of the Income Tax Act and in addition, some schemes provide tax relief
under Section 88 of the Income Tax Act lead to the growth of importance of
mutual fund in the minds of the investors.
7. As mutual funds creates awareness among urban and rural middle class
people about the benefits of investment in capital market, through profitable
and safe avenues, mutual fund could be able to make up a large amount of the
surplus funds available with these people.
8. The mutual fund attracts foreign capital flow in the country and secures
profitable investment avenues abroad for domestic savings through the
opening of off shore funds in various foreign investors. Lastly another notable
thing is that mutual funds are controlled and regulated by S E B I and hence are
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considered safe. Due to all these benefits the importance of mutual fund has
been increasing.
Disadvantages of mutual funds: Mutual funds have disadvantages as well,
which include:
Fees
Less control over timing of recognition of gains
Less predictable income
No opportunity to customize
Need for the study:
The main purpose of doing this project was to know about mutual fund and its
functioning. This helps to know in details about mutual fund investors in
mutual fund. It also helps in understanding different schemes of mutual funds.
Because the study depends upon prominent funds in India and their schemes
like equity, income, balance as well as the returns associated with those
schemes
Objectives:
My objectives of study are:
To check the popularity and growth of mutual fund.
To examine whether mutual funds are really having a better prospect in
MANGALORE.
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To know the needs and wants of clients.
To do the detail study of mutual funds.
To study the financial awareness of the investors regarding mutual fund.
To know the investor approach towards the various mutual fund
company.
Scope of study:
The study is restricted to analyze the investment pattern of investors in
mutual fund in an around Mangalore.
Materials and methodology of the study:
The data in the study is through collection from primary data and secondary
data method.
Data sources:
Research is totally based on primary data. Secondary data can be used only for
the reference. Research has been done by primary data collection, and primary
data has been collected by interacting with various investors.
Sample size:
The sample size was restricted to only 50 investors, which comprised of mainly
peoples from different regions of Mangalore due to time constraints.
Sampling Area:
The area of the research was MANGALORE, India.
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Social relevance:
Mutual fund is a good way of investing especially for middle class people as it
involves less risk. This study on mutual fund investment will helps to know the
financial situation of the investors. It gives the clear picture of the mutual fund
investment, with the help of this those people, who want to invest in mutual
fund in future, they gets ideas and plans.
Chapter Scheme:
The project report begins with the introduction to the various areas the
project is concerned with. It also gives brief description of the entire project
work by providing information on research objectives, need for the study,
research methodology, limitations of the study, social relevance of the study
and chapter wise division of the project work.
The second chapter provides the report on review of literature i.e.
importance of mutual fund. This was done by referring books, newspaper
articles, journals, various information on the study and analysis of mutual fund.
The third chapter deals with the profile of the company. This tells
about companies performance and also all details of the company .companies
history, economic situation etc
The fourth chapter comprehensive concept and techniques which
shows the analysis of data through tabulation, computation and graphical
representation of data collected from survey.
The fifth chapter with the findings, suggestion and conclusion part
which very much important after analysis is made.
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Limitations of the study:
The time period provided for the study is limited..
The research is confined to a certain parts of Mangalore and does not
Necessarily shows a pattern applicable to all of Country.
Research has been done only in Mangalore.
Possibility of Error in analysis of data due to small sample size.
Respondents error.
Limited resources.
The time constraint is one of the major problems.
The study is limited to the different schemes available under the mutual
funds selected.
The study is limited to selected mutual fund schemes.
The lack of information sources for the analysis part.
Bibliography:
For the references different books, journals, and newspapers have been used
and different websites have been used.
Investment analysis and Portfolio management by Rustage
Investment analysis and Portfolio management by Prasanna Chandra
Security analysis and Portfolio management by Punidavathi pandiyan
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Investment management by V.K. Bhaalla
How to invest in mutual fund and earn high rates of return safely by
Alan Northcut
www.google.com
www.wikipedia.com
www.hdfc.com