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Project Titile

On
A Comparative Study On Direct Equity And Mutual Fund
Investing
At
Geojit BNP Paribas financial Ltd., Sangli.
CHAPTER 1: INTRODUCTION
INTRODUCTION TO THE INDUSTRY

1.1 Introduction to Financial Market

A financial market is a market in which people and entities can trade financial securities,
commodities, and other fungible items of value at low transaction costs and at prices that reflect
supply and demand. Securities include stocks and bonds, and commodities include precious
metals or agricultural goods.

There are both general markets (where many commodities are traded) and specialized markets
(where only one commodity is traded). Markets work by placing many interested buyers and
sellers, including households, firms, and government agencies, in one "place", thus making it
easier for them to find each other. An economy which relies primarily on interactions between
buyers and sellers to allocate resources is known as a market economy in contrast either to a
command economy or to a non-market economy such as a gift economy.

1.1.1 Indian Financial Market

India Financial market is one of the oldest in the world and is considered to be the fastest
growing and best among all the markets of the emerging economies. The history of Indian
capital markets dates back 200 years toward the end of the 18th century when India was under
the rule of the East India Company. The development of the capital market in India concentrated
around Mumbai where no less than 200 to 250 securities brokers were active during the second
half of the 19th century. The financial market in India today is more developed than many other
sectors because it was organized long before with the securities exchanges of Mumbai,
Ahmedabad and Kolkata were established as early as the 19th century.
By the early 1960s the total number of securities exchanges in India rose to eight, including
Mumbai, Ahmedabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune.
Today there are 21 regional securities exchanges in India in addition to the centralized NSE
(National Stock Exchange) and OTCEI (Over the Counter Exchange of India). However the
stock markets in India remained stagnant due to stringent controls on the market economy that
allowed only a handful of monopolies to dominate their respective sectors.

The corporate sector wasn't allowed into many industry segments, which were dominated by the
state controlled public sector resulting in stagnation of the economy right up to the early 1990s.

Thereafter when the Indian economy began liberalizing and the controls began to be dismantled
or eased out, the securities markets witnessed a flurry of IPOs that were launched. This resulted
in many new companies across different industry segments to come up with newer products and
services.

A remarkable feature of the growth of the Indian economy in recent years has been the role
played by its securities markets in assisting and fuelling that growth with money rose within the
economy. This was in marked contrast to the initial phase of growth in many of the fast growing
economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring
growth in their initial days of market decontrol. During this phase in India much of the organized
sector has been affected by high growth as the financial markets played an all-inclusive role in
sustaining financial resource mobilization. Many PSUs (Public Sector Undertakings) that
decided to offload part of their equity were also helped by the well-organized securities market in
India.

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange
of India) during the mid-1990s by the government of India was meant to usher in an easier and
more transparent form of trading in securities. The NSE was conceived as the market for trading
in the securities of companies from the large-scale sector and the OTCEI for those from the small
-scale sector. While the NSE has not just done well to grow and evolve into the virtual backbone
of capital markets in India the OTCEI struggled and is yet to show any sign of growth and
development. The integration of IT into the capital market infrastructure has been particularly
smooth in India due to the countrys world class IT industry. This has pushed up the operational
efficiency of the Indian stock market to global standards and as a result the country has been able
to capitalize on its high growth and attract foreign capital like never before.

The regulating authority for capital markets in India is the SEBI (Securities and Exchange
Board of India). SEBI came into prominence in the 1990s after the capital markets experienced
some turbulence. It had to take drastic measures to plug many loopholes that were exploited by
certain market forces to advance their vested interests. After this initial phase of struggle SEBI
has grown in strength as the regulator of Indian capital markets and as one of the countrys most
important institutions.

Established in 1875, BSE (formerly known as Bombay Stock Exchange Ltd.), is Asia's first &
the Fastest Stock Exchange in world with the speed of 6 micro seconds and one of India's leading
exchange groups. Over the past 140 years, BSE has facilitated the growth of the Indian corporate
sector by providing it an efficient capital-raising platform. Popularly known as BSE, the bourse
was established as "The Native Share & Stock Brokers' Association" in 1875. BSE is a
corporatized and demutualised entity, with a broad shareholder-base which includes two leading
global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners. BSE provides
an efficient and transparent market for trading in equity, debt instruments, derivatives, mutual
funds. It also has a platform for trading in equities of small-and-medium enterprises (SME).

BSE's popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock
market benchmark index. It is traded internationally on the EUREX as well as leading exchanges
of the BRCS nations (Brazil, Russia, China and South Africa).
CHAPTER 2 COMPANY PROFILE

INTRODUCTION TO THE ORGANIZATION

History And Grouth Of Stock-Broking In India

As economic development proceeds the scope for acquisition and ownership of capital by
private individuals also grows. Along with it, the opportunity for stock exchanges to render the
service of stimulating private savings and channelising such savings into productive investments
exists on a vastly greater scale. In a modem industrial society, which recognises he rights of
private ownership of capital, stock exchanges and stockbrokers play a significant role.
The pace at which the equity cult is growing and the stock market boom of 1985 have
meant not only a phenomenal increase in the number of investors but a so a change in the profile
of the stock- broking community. The stock-broking business is attracting qualified management
graduates and professional accountants in increasing numbers. With the advent of these
professionals, the nature of services rendered by the stock-broking firms are also undergoing
speedy transformation. Stock-broking is essentially a function of the capital market, which offers
the best value proposition for the development of industry.

"The business of brokers consists of searching out buyers when their customers wish to
sell and sellers when their customers wish to buy and arranging transactions in accordance with
their customers' instructions."' Brokers charge a commission on each purchase and sale, which
they execute, but they ordinarily get nothing unless they can complete a transaction.

Origin and Growth of Stock Exchanges in India

The Stock Exchange is an institution of rather recent growth. Historical records show that
there was stock trading in India at Bombay and Calcutta in the first half of the 19th century.
Though there was stock trading even at the time of the East India Company, stock business
started in its organized form only in 1875.

History of the company:

Geojit, a joint venture with Kerala State Industrial Development Corporation Ltd. is a
pioneer in the retail financial services sector. Over two decades, the company has grown to
offering complete management solutions. Today the company has over Rs.20 billion in assets
under its custody.

Geojits shares are listed on the Bombay Stock Exchange. The company is a member of
the National Stock Exchange of India Ltd., the Bombay Stock Exchange and the National
Securities Depository Ltd., and a charter member of the Association of Financial Planners, India.
More than 1000 professionals are operating through over 250 offices across the country provide
services to a growing retail investor base of 200,000. Prominent institutional clients include
banks, mutual funds and other institutions such as UTI and insurance companies. Geojit has a
large pool of certified professionals who plan, execute and manage customized investment
strategies for clientele. Financial literacy programmers are conducted on a regular basis through
the branch network to raise investment awareness. Early application of innovative technology in
the industry led to many national firsts such as internet trading, electronic securities settlement
on the web and an online integrated trading screen for stocks and derivatives.
In 1988, the company, Geojit Securities Limited (GSL), was a partnership firm, with two
partners Mr C.J. George and Mr Ranjit, under the name and style of M/s Geojit & Company
established on 4th November, to act as stock and share brokers with membership on the Cochin
Stock Exchange. The company was incorporated as a Public Limited Company on 24 th
November and obtained its Certificate of commencement of business on 25th January 1995. The
company is at present engaged in the activities of stock and share broking, underwriting,
marketing of initial public offering of companies and mutual funds, corporate advisory services,
investments in shares, participating in Bought Out Deals, syndication of inter-corporate deposits,
debt, bought-outs etc. The company has at present branches at Trichur, Kottayam, Muvattupuzha
and Coimbatore apart from having representative offices at Mumbai. In 1966, the Company had
made a public issue of equity shares aggregating to Rs.95/- lakhs, during the period under report
which received an overwhelming support and was oversubscribed over 14 times. The Company
held 100% of the paid up Capital of Rs.30,00,000/- M/s Geojit Stock & Shares Ltd., a wholly
owned subsidiary of the Company as at 31 st March. Geojit Securities Ltd, a leading retail share
broking firm launched Internet securities trading for the first time in India. The company is
planning to introduce multi-bank, multi-DP interfaces to facilitate and promote Internet trading
in the country. Geojit Securities Ltd, the first company to start online trading services, has signed
a MOU with UTI Bank to enable investors to buy \ sell demat stocks through the company's
website. The Company has signed a deal with Centurion Bank to provide payment gateway for
Internet trading. The Company launched its online interface with HDFC Bank for Internet
trading. Geojit Securities Ltd, a leading stock broking company, has decided to issue bonus
shares at 1:1 ratio, to capitalize part of general reserve.
Geojit BNP Paribas, today, is a leading retail financial services company in India with a
growing presence in the Middle East. The company rides on its rich experience in the capital
market to offer its clients a wide portfolio of savings and investment solutions. The gamut of
value-added products and services offered ranges from equities and derivatives to Mutual Funds,
Life & General Insurance and third party Fixed Deposits. The needs of over 672800 clients are
met via multichannel services - a countrywide network of over 522 offices, phone service,
dedicated customer care centre and the Internet. Geojit BNP Paribas has membership in, and is
listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). In 2007,
global banking major BNP Paribas joined the companys other major shareholders -
Mr.C.J.George, KSIDC (Kerala State Industrial Development Corporation) and Mr.Rakesh
Jhunjhunwala when it bought a stake to become the single largest shareholder. The company
also has a strategic presence in the Middle East Region in the form of joint ventures and
partnerships. Barjeel Geojit Securities, its joint venture with the Al Saud group, is headquartered
in Dubai, in the United Arab Emirates, and has branches in Abu Dhabi, Ras Al Khaimah, Al Ain,
and Sharjah. Aloula Geojit Brokerage Co., the joint venture with the Al Johar group in Saudi
Arabia is headquartered in Riyadh, with branches in Dammam and Jeddah. BBK Geojit
Securities KSC, located in Kuwait, is a joint venture with Bank of Bahrain,Kuwait and JZA.
Geojit Qurum Business Group Financial Services LLC is the joint venture with QBG and
National Securities Co. and based in Oman A strong brand identity and extensive industry
knowledge coupled with BNP Paribas international expertise gives Geojit BNP Paribas a
competitive advantage.

ONLINE PRODUCTS AND SERVICES :

Geojit BNP Paribas has proven expertise in providing online services. In the year 2000,
the company was the first stockbroker in the country to offer Internet Trading, integrating the
first Bank Payment Gateway in the country for Internet Trading, among many other industry
firsts. This experience, along with the BNP Paribas Personal Investors expertise as the leading
online broker in Europe, is helping the company to rapidly expand its business in the Internet
Trading segment. Currently, clients can trade online in equities, derivatives, currency futures,
mutual funds and IPOs, and select from multiple bank payment gateways for online transfer of
funds. Strategic B2B agreements with South Indian Bank, City Union Bank and Federal Bank
enable the respective banks clients to open integrated 3-in-1 accounts to seamlessly trade via a
sophisticated Online Trading platform. Further, deployment of BNP Paribas state-of-the-art
globally accepted systems and processes is already scaling up the sales of Mutual Funds and
Insurance.

About Geojit BNP Paribas

29 Years Experience In The Indian Capital Market


Geojit BNP Paribas has over over 29 years of in-depth experience in the Indian Capital
Market. The company also has more than 7,98,000 clients, a network of over 507 offices and
manages assets worth over Rs. 25 400 crore in Assets Under Management and Custody (as on 31
December 2015). This is a true reflection of the trust reposed in our expertise, transparency and
our cutting edge technology solutions.

A Pioneer In Online Trading Since The Year 2000 -


Geojit BNP Paribas pioneered the simple concept of providing individuals with the
facility to trade online way back in February 2000. The company has since enjoyed a first mover
advantage in online trading. As a creative innovator, Geojit BNP Paribas uses cutting-edge
technology in online trading to meet client requirements such as customized online trading
platforms among other services.

Strong Shareholders -
Geojit BNP Paribas is backed by strong shareholders, such as, majority shareholder -
global banking major BNP Paribas, and other major shareholders such as Mr. C.J.George,
KSIDC (Kerala State Industrial Development Corporation) and Mr. Rakesh Jhunjhunwala.
Wide Range Of Products -
Geojit BNP Paribas offers a wide range of trading and investment products and solutions.
Certified financial advisors help clients to arrive at the right financial solution to meet their
individual financial goals.

Attractive Brokerage Tariffs


We provide excellent value for money by offering low online brokerage charges. 0.03%
for Equity intra-day trades, 0.30% for Equity delivery trades, Rs.75 per lot for options, 0.03% for
futures including Minifty, Rs.10 - Rs.15 range of Currency Brokerage, according to contracts.

Learn The Craft -


You too can develop your trading skills by availing of the effective guidance by our
research department. We offer- Daily mails delivered to our clients mailbox on market
conditions and recommendations .Technical analysis of BSE 200 Index scrips Free monthly
investment magazine Services of professionally qualified executives at all offices across
India.Our strong research ideas have been instrumental in converting our clients into successful
traders.

Multichannel Service- Internet, Phone, Branch Trading


Trade the way that you want to by selecting from multiple channel options- Internet,
Phone or Branch.

Wide Network
We have a wide network of over 507 offices with industry certified executives and a
dedicated Call Centre to provide you with quality services.
Milestones

1986- C. J. George became member of Cochin Stock Exchange.

1987 M/s C. J. George and Co. was set up at Ravipuram, Cochin.

1988 Company was renamed at M/s Geojit & Co.

1994 Becomes a Public Limited Company named Geojit Securities Ltd.

1995 Kerala State Industrial Development Corporation Ltd. (KSIDC) acquires 24 percent
equity stake.Membership in National Stock Exchange (NSE).Public Issue.

1996 Launch of Portfolio Management Services with SEBI registration.

1997 Depository Participant (DP) under National Securities Depository Limited.

1999 Membership in Bombay Stock Exchange (BSE).

2000 BSE Listing.1st broking firm in India to offer online trading facility. Commences
Derivative Trading with NSE. Integrates the 1st Bank Payment Gateway in the country
for Internet Trading.

2001 Becomes India's first DP to launch depository transactions through Internet.


Establishes Joint Venture in the UAE to serve NRI customers.

2002 1st in India to launch an integrated internet trading system for Cash & Derivatives
segments.
2003 Geojit Commodities Limited, wholly owned subsidiary, launched Online Futures
Trading in agri-commodities, precious metals and in energy futures on multiple
commodity exchanges.National launch of online futures trading in Rubber, Pepper, Gold,
Wheat and Rice.Company renamed as Geojit Financial Services Ltd.

2004 National launch of online futures trading in Cardamom.

2005 NSE Listing. Geojit Credits, a subsidiary, registers with RBI as a Non -Banking
Financial Company (NBFC). National launch of online futures trading in Coffee.

2006 Charter member of the Financial Planning Standards Board of India.

2007 BNP Paribas takes a stake in the companys equity, making it the single largest
shareholder. Establishes Joint Venture in Saudi Arabia to serve the Saudi national and the
NRI.

2008 BNP Paribas Securities India (P) Ltd. a Joint Venture with BNP Paribas S.A. for
Institutional Brokerage. 1st brokerage to offer full Direct Market Access execution in
India for institutional clients.

2009 Launch of Property Services division. Launch of online trading in Currency


Derivatives. Consequent to BNP Paribas becoming the largest stakeholder in Geojit BNP
Paribas, company is renamed as Geojit BNP Paribas Financial Services Ltd.

2010 Launch of FLIP(Financial Investment Platform), a new advanced online investment


platform. Launch of state of the art Mobile Trading platform to empower clients to trade
from anywhere, even while on the move through the innovative application FLIP- ME.
Barjeel Geojit Securities, its joint venture with the Al Saud group is headquartered in
Dubai, in the United Arab Emirates, and owns branches in Abu Dhabi, Ras Al Khaimah,
Al Ain, and Sharjah. Aloula Geojit Capital Co., the joint venture with the Al Johar group
in Saudi Arabia is headquartered in Riyadh with branches in Dammam and Jeddah. BBK
Geojit Securities KSC, located in Kuwait, is a joint venture with BBK and JZA. QBG
Geojit Financial Services LLC is the joint venture with Qurum Business Group (QBG)
and National Securities Co. and based in Oman.

2011 Geojit BNP Paribas and JZ Associates LLC, Kuwait signed a JV deal with Bank of
Bahrain and Kuwait to from BBK Geojit Securities KSC. The agreement was signed by
Abdulkarim Bucheery, CEO of BBK, C. J. George and Jassem Hassan Zainal of JZ
Associates LLC. Geojit BNP Paribas joined hands with Qurum Business Group and
National Securities Company in Oman to form QBG Geojit Securities LLC, Oman. The
deal was inked by Sheikh Abdulaziz bin Ahmed Al Hosni, Vice President and Chairman
of Qurum Business Group and C. J. George.

2012 Qualified Foreign Investors (QFI) Investment services launched.

2013 Launches Indias first application to trade through facebook.

2014 Head Office at Kochi, Kerala received the prestigious Leadership in Energy and
Environment Design (LEED) India GOLD rating under New Buildings category. It is
the first and the only building in Corporation of Cochin limits to be awarded this
distinction.

2015 A new advanced trading platform branded Selfie was launched.


CHAPTER 3: THEORETICAL BACKGROUND

3.1 The Equity Shares

Investors owning equity shares of a company are owners of the company. They are issued
equity shares of the company, as evidence of such ownership.

Equity investors are not entitled to any fixed return or repayment of capital. However, they
are entitled to the benefits that arise out of the performance of the company. If the business
fails, they may lose the entire investment. Of all the financiers, they take the most risk.

Total equity capital of a company is divided into equal units of small denominations, each
called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is
divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the
company then is 12 said to have 20, 00,000 equity shares of Rs 10 each. The holders of such
shares are members of the company and have voting rights.

3.1.1 Face Value of a Share

The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the
original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at
maturity. Also known as par value or simply par. For an equity share, the face value is usually a
very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share,
which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt
security, face value is the amount repaid to the investor when the bond matures (usually,
Government securities and corporate bonds have a face value of Rs. 100). The price at which the
security trades depends on the fluctuations in the interest rates in the economy.

When a security is sold above its face value, it is said to be issued at a Premium and if it is sold
at less than its face value, then it is said to be issued at a Discount.

3.1.2 Issue of Shares

Most companies are usually started privately by their promoter(s). However, the promoters
capital and the borrowings from banks and financial institutions may not be sufficient for setting
up or running the business over a long term. So companies invite the public to contribute towards
the equity and issue shares to individual investors. The way to invite share capital from the
public is through a Public Issue. Simply stated, a public issue is an offer to the public to
subscribe to the share capital of a company. Once this is done, the company allots shares to the
applicants as per the prescribed rules and regulations laid down by SEBI.
3.1.3 Advantages of Equity Shares

More Income:- Equity shareholders are the residual claimant of the profits after meeting
all the fixed commitments. The company may add to the profits by trading on equity.
Thus equity capital may get dividend at high in boom period.

Right to participate in the Control and Management:- Equity shareholders have voting
rights and elect competent persons as directors to control and manage the affairs of the
company.

Capital profits:- The market value of equity shares fluctuates directly with the profits of
the company and their real value based on the net worth of the assets of the company. An
appreciation in the net worth of the company's assets will increase the market value of
equity shares. It brings capital appreciation in their investments.

An Attraction of Persons having Limited Income:- Equity shares are mostly of lower
denomination and persons of limited recourses can purchase these shares.

Tax Advantages:- Equity shares also offer tax advantages to the investor. The larger
yield on equity shares results from an increase in principal or capital gains, which are
taxed at lower rate than other incomes in most of the countries.

Other Advantages:- It appeals most to the speculators. Their prices in security market are
more fluctuating.
3.1.4 Disadvantages of Equity Shares

Uncertain and Irregular Income:- The dividend on equity shares is subject to availability
of profits and intention of the Board of Directors and hence the income is quite irregular
and uncertain. They may get no dividend even three are sufficient profits.

Capital loss During Depression Period:- During recession or depression periods, the
profits of the company come down and consequently the rate of dividend also comes
down. Due to low rate of dividend and certain other factors the market value of equity
shares goes down resulting in a capital loss to the investors.

Loss on Liquidation:- In case, the company goes into liquidation, equity shareholders are
the worst suffers. They are paid in the last only if any surplus is available after every
other claim including the claim of preference shareholders is settled. It is evident from
the advantages and disadvantages of equity share capital discussed above that the issue of
equity share capital is a must for a company, yet it should not solely depend on it. In
order to make its capital structure flexible, it should raise funds from other sources also.

Dividend at the boards mercy:- The rate of dividend is recommended by the board. The
shareholders in the AGM cannot declare a higher rate than what is recommended by the
board.

I
lliquid:- Since equity shares are not refundable they are treated as illiquid.
Speculation:- higher dividends during prosperous periods and low dividend during
depression period shall lead to ample speculation.

3.2 Mutual Fund

A mutual fund is a professionally managed type of collective investment scheme that pools
money from many investors and invests it in stocks, bonds, short-term money market
instruments and other securities. Mutual funds have a fund manager who invests
the money on behalf of the investors by buying / selling stocks, bonds etc. Currently, the
worldwide value of all mutual funds totals more than $US 26 trillion.

There are various investment avenues available to an investor such as real estate, bank
deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more
type of Investment Avenue available to investors. There are many reasons why investors
prefer mutual funds. Buying shares directly from the market is one way of investing. But
this requires spending time to find out the performance of the company whose share is
being purchased, understanding the future business prospects of the company, finding out
the track record of the promoters and the dividend, bonus issue history of the company
etc. An informed investor needs to do research before investing. However, many investors
find it cumbersome and time consuming to pore over so much of information, get access
to so much of details before investing in the shares. Investors therefore prefer the mutual
fund route. They invest in a mutual fund scheme which in turn takes the responsibility of
investing in stocks and shares after due analysis and research. The investor need not
bother with researching hundreds of stocks. It leaves it to the mutual fund and its
professional fund management team. Another reason why investors prefer mutual funds
is because mutual funds offer diversification. An investors money is invested by the
mutual fund in a variety of shares, bonds and other securities thus diversifying the investors
portfolio across different companies and sectors. This diversification helps in reducing the
overall risk of the portfolio. It is also less expensive to invest in a mutual fund since the
minimum investment amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an
investor may be able to buy only a few stocks and not get the desired diversification.

3.2.1 NAV (Net Asset Value)

NAV means Net Asset Value. The investments made by a Mutual Fund are marked to market on
daily basis. In other words, we can say that current market value of such investments is
calculated on daily basis. NAV is arrived at after deducting all liabilities (except unit capital) of
the fund from the realisable value of all assets and dividing by number of units outstanding.
Therefore, NAV on a particular day reflects the realisable value that the investor will get for each
unit if the scheme is liquidated on that date. This NAV keeps on changing with the changes in the
market rates of equity and bond markets. Therefore, the investments in Mutual Funds is not risk
free, but a good managed Fund can give you regular and higher returns than when you can get
from fixed deposits of a bank etc.

3.2.2 Various Types of Mutual Funds

A common man is so much confused about the various kinds of Mutual Funds that he is afraid of
investing in these funds as he cannot differentiate between various types of Mutual Funds with
fancy names. Mutual Funds can be classified into various categories under the following heads:-

(A) According to type of investments:- While launching a new scheme, every Mutual Fund is
supposed to declare in the prospectus the kind of instruments in which it will make investments
of the funds collected under that scheme. Thus, the various kinds of Mutual Fund schemes as
categorized according to the type of investments are as follows:-
Equity funds/schemes
Debt funds / schemes (also called Income Funds)
Diversified funds / schemes (also called Balanced Funds)
Gilt funds/ schemes
Money market funds/ schemes
Sector specific funds
Index funds

B) According to the time of closure of the scheme:- While launching new schemes, Mutual
Funds also declare whether this will be an open ended scheme (i.e. there is no specific date when
the scheme will be closed) or there is a closing date when finally the scheme will be wind up.
Thus, according to the time of closure schemes are classified as follows:-

Open ended schemes


Close ended schemes

Open ended funds are allowed to issue and redeem units any time during the life of the scheme,
but close ended funds cannot issue new units except in case of bonus or rights issue. Therefore,
unit capital of open ended funds can fluctuate on daily basis (as new investors may purchase
fresh units), but that is not the case for close ended schemes. In other words we can say that new
investors can join the scheme by directly applying to the mutual fund at applicable net asset
value related prices in case of open ended schemes but not in case of close ended schemes.
In case of close ended schemes, new investors can buy the units only from secondary markets.

C) According to tax incentive schemes:- Mutual Funds are also allowed to float some tax saving
schemes. Therefore, sometimes the schemes are classified according to this also:-

Tax saving funds


Non tax saving funds / Other funds
(D) According to the time of pay-out:- Sometimes Mutual Fund schemes are classified
according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as follows:-
Dividend Paying Schemes
Reinvestment Schemes

3.2.3 Advantages of Mutual Fund

Professional Management:- Mutual funds offer investors the opportunity to earn an


income or build their wealth through professional management of their investible funds.
There are several aspects to such professional management viz. investing in line with the
investment objective, investing based on adequate research, and ensuring that prudent
investment processes are followed.

Affordable Portfolio Diversification:- Units of a scheme give investors exposure to a


range of securities held in the investment portfolio of the scheme. Thus, even a small
investment of Rs 5,000 in a mutual fund scheme can give investors a diversified
investment portfolio.

Economies of Scale:- The pooling of large sums of money from so many investors
makes it possible for the mutual fund to engage professional managers to manage the
investment. Individual investors with small amounts to invest cannot, by themselves,
afford to engage such professional management.

Liquidity:- At times, investors in financial markets are stuck with a security for which
they cant find a buyer worse, at times they cant find the company they invested in!
Such investments, whose value the investor cannot easily realise in the market, are
technically called illiquid investments and may result in losses for the investor. Investors
in a mutual fund scheme can recover the value of the moneys invested, from the mutual
fund itself. Depending on the structure of the mutual fund scheme, this would be
possible, either at any time, or during specific intervals, or only on closure of the scheme.
Schemes where the money can be recovered from the mutual fund only on closure of the
scheme, are listed in a stock exchange. In such schemes, the investor can sell the units in
the stock exchange to recover the prevailing value of the investment.

Tax Deferral:- Mutual funds are not liable to pay tax on the income they earn. If the same
income were to be earned by the investor directly, then tax may have to be paid in the
same financial year. Mutual funds offer options, whereby the investor can let the moneys
grow in the scheme for several years. By selecting such options, it is possible for the
investor to defer the tax liability. This helps investors to legally build their wealth faster
than would have been the case, if they were to pay tax on the income each year.

Tax benefits:- Specific schemes of mutual funds (Equity Linked Savings Schemes) give
investors the benefit of deduction of the amount invested, from their income that is liable
to tax. This reduces their taxable income, and therefore the tax liability. Further, the
dividend that the investor receives from the scheme, is tax-free in his hands.

Convenient Options:- The options offered under a scheme allow investors to structure
their investments in line with their liquidity preference and tax position.

Investment Comfort:- Once an investment is made with a mutual fund, they make it
convenient for the investor to make further purchases with very little documentation. This
simplifies subsequent investment activity.

Regulatory Comfort:- The regulator, Securities & Exchange Board of India (SEBI) has
mandated strict checks and balances in the structure of mutual funds and their activities.
Mutual fund investors benefit from such protection.
Systematic approach to investments:- Mutual funds also offer facilities that help investor
invest amounts regularly through a Systematic Investment Plan (SIP); or withdraw
amounts regularly through a Systematic Withdrawal Plan (SWP); or move moneys
between different kinds of schemes through a Systematic Transfer Plan (STP). Such
systematic approaches promote an investment discipline, which is useful in long term
wealth creation and protection.|
3.2.4 Disadvantages of Mutual Fund

Lack of portfolio customization:- Some securities houses offer Portfolio Management


Schemes (PMS) to large investors. In a PMS, the investor has better control over what
securities are bought and sold on his behalf. On the other hand, a unit-holder is just one
of several thousand investors in a scheme. Once a unit-holder has bought into the scheme,
investment management is left to the fund manager (within the broad parameters of the
investment objective). Thus, the unit-holder cannot influence what securities or
investments the scheme would buy. Large sections of investors lack the time or the
knowledge to be able to make portfolio choices. Therefore, lack of portfolio
customization is not a serious limitation in most cases.

Choice overload:- Over 800 mutual fund schemes offered by 38 mutual funds and
multiple options within those schemes make it difficult for investors to choose between
them. Greater dissemination of industry information through various media and
availability of professional advisors in the market should help investors handle this
overload.

No control over costs:- All the investor's moneys are pooled together in a scheme. Costs
incurred for managing the scheme are shared by all the Unit holders in proportion to their
holding of Units in the scheme. Therefore, an individual investor has no control over the
costs in a scheme. SEBI has however imposed certain limits on the expenses that can be
charged to any scheme. These limits, which vary with the size of assets and the nature of
the scheme.