Indian Capital Market

INDIAN CAPITAL MARKET
PROJECT REPORT
Submitted in partial fulfillment of the
Requirements for the award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
2009
NAME : S. MADAN KUMAR

ENROLMENT NO : A7101PBA0144
Under the Supervision of

PROF. M. GOWRISANKAR, M.B.A., M.Phil., PGDCA,
H.O.D. IN BUSINESS MANAGEMENT,
MAHARAJA ARTS AND SCIENCE COLLEGE,
COIMBATORE
INSTITUTE OF DISTANCE EDUCATION

UNIVERSITY OF MADRAS
BONAFIDE CERTIFICATE
INSTITUTE OF DISTANCE EDUCATION

UNIVERSITY OF MADRAS
Certified that this is the bonafide project work done by

R. MUTHUVEL with Enrolment Number C8101PBA4461 of
Final year of M.B.A. Degree course in the Institute of Distance
Education, University of Madras, Chennai – 600 005 during the
year 2009.
Date : Supervisor
(Signature with seal)
Examiner : 1.
Examiner : 2.
ATTENDANCE CERTIFICATE
Certified that R. MUTHUVEL with Enrolment Number
C8101PBA4461 a student M.B.A. Degree Course in the Institute of
Distance Education, University of Madras has undergone the project
work in the INDIAN CAPITAL MARKET from October 2009
to November 2009. During the period of study and observation
in our organisation his/her conduct was good.
Date : 30.11.09 Signature
1. Name of the Head : Mr. Bala Kumar
2. Name of the Industrial Unit/ : Eclat Innovatire Services

Business Organisation
3. Place : Chennai
Office Seal with date

DECLARATION
I ________, here by declares that this project work titled “____________” is based on
the original work conducted by me under the guidance of Prof.__________.
This has not been submitted earlier for the award of any other Degree from Madras
University or any other University.
Place: Chennai
Date:
ACKNOWLEDGEMENT
This project work titled “_________________” was successfully completed and made
possible due to the cooperation; assistance and suggestion of many persons whom I would like to
express my sincere gratitude and thanks.
I express my sincere gratitude to my guide Prof.Rajesh Pillai for the valuable advice
and guidance extended to me for the completion of the dissertation.
Last but not the least, I express my gratitude to my adorable Parents, encouraging
Friends and all those who have been directly or indirectly responsible for the successful
completion of this project.
Above all, I thank God Almighty for his blessings showered on me to complete this
work successfully.
Content
Page
Chapter – 1
INTRODUCTION 8
1.1 Organization Profile 10
1.2 Concepts 15
1.3 Need for this study 20
1.4 Problem 22
1.5 Objectives 23
1.6 Procedure methodology 23
Chapter – 2
2.1 Analysis of the situation 26

2.2 Existing of the system 34
2.3 Need for the change in system 50
2.4 Proposed system 53
Chapter – 3
3.1 Present conditions with special reference to the organization 57
Chapter – 4
Summary, Conclusion and Suggestion

4.1 summary of the system 95
4.2 scope of the system 95
4.3 Suggestion 97
Questionnaire to Investors in Mutual Funds 99

CHAPTER 1
Introduction
Introduction
The Indian capital market has been growing tremendously with the reforms in industrial
policy, reforms in public and financial sector, and new economic policies of liberalization,
deregulation and restructuring. The Indian economy has opened up and many developments
have been taking place in the Indian capital market and money market with the help of financial
system and financial institutions or intermediaries which foster savings and channel them to their
most efficient use. One such financial intermediary who has played a significant role in the
development and growth of capital markets is Mutual Fund (MF).
The concept of MF’s has been on the financial landscape for long, though in a primitive
form. The story of mutual fund industry in India started in 1963 with the formation of the Unit
Trust of India, an initiative of the Government of India and Reserve Bank. The launching of
innovative schemes in India has been rather slow due to the prevailing investment psychology
and infrastructural inadequacies; risk-averse investors are interested in schemes which involve
tolerable capital risk and return over bank deposit. This fact has restricted the launching of more
risky products in the Indian capital market. But this objective of the MF industry has changed
over the decades. For many years, funds were more of a service than a product, the service being
professional money management. However, in the last 15 years, MF’s have evolved to be a
product. The term ‘product’ is used because MF is not merely to park investor’s savings but its
schemes are ‘tailor-made’ to cater to investors needs, whatever their age, financial position, risk
tolerance and return expectations might be. This issue of combing service and product will be
important one for the next decade.
There are more than 30 mutual funds in India offering 550 schemes, managed by various
types of institutions like banks, the Unit Trust of India and international investment banking
firms. More than 10 million mutual fund investors are there in India. However, there is a very
limited knowledge of investment decision-making processes and consumer behavior, as applied
to financial assets and service.
There is an obvious link between financial investment choices and consumer behavior,
suggesting that research on consumer behavior types may prove useful in increasing our
understanding of what is an extremely complex financial marketplace in which significant
‘purchase’ decisions are made. An investment is a significant purchase decision in a market
where choice is expanding. Despite this, there has been very little application of both consumer
behavior theory and research techniques in the finance area.
Presently more and more funds are entering the industry and their survival depends on
strategic marketing choices of mutual funds companies, to survive and thrive in this highly
promising industry, in the face of such cut throat competition. In addition, the availability of
more savings instruments with varied risk-return combination would make the investors more
alert and choosy. Running a successful MF requires complete understanding of the peculiarities
of the Indian Stock Market and also the psyche of the small investor. Under such a situation, the
present exploratory study is an attempt to understand the financial behavior of investors in
connection with scheme preference and selection.
India has a large untapped market in urban areas besides the virgin markets in semi-urban
and rural areas. This market potential can be trapped by scrutinizing investor behavior to
identify their expectations and articulate investor’s own situation and risk preference and then
apply to an investment strategy that combines the usual four: cash and equivalents, Government-
backed bonds, debt, and equity.
The present study adds to this area of study by an investigation using techniques from
consumer behavior research. However, in the financial literature there is no clear model, this
explains the influence of “perception” and “beliefs” on “expectations” and “decision making”.
Though the MF industry has been in existence since 1964, the aspect of investor behavior with
specific reference to MF’s has not been given much importance. The expectations of investor
play a vital role in the financial markets. They influence the price of the securities, the volume
traded and various other financial operations in actual practice.
The study was conducted among the investing public in the city of Bangalore to identify
the factors considered in the choice of mutual funds. While there are so many factors that can
drive an investor’s choice of a specific scheme, some major factors like brand name, liquidity,
past performance etc, were taken into consideration for the purpose of the study.
1.1 Organization Profile

Organization Profile
What is a Mutual Fund?
Mutual fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in offer document.
Investments in securities are spread across a wide cross-section of industries and sectors
and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in
the same direction in the same proportion at the same time. Mutual fund issues units to the
investors in accordance with quantum of money invested by them. Investors of mutual funds are
known as unit holders.
The working of MF is illustrated in the form of a diagram

Investors
Passed back to Pool their money with
Returns Fund Manger
Generate Invests in
Securities
Source: www.amfiindia.com
Evolution and Growth of Mutual Funds
The Mutual Funds (MF) originated in UK and thereafter they crossed the border to reach
other destinations.. The concept of MF was indianized only in the later part of the twentieth
century in the year 1964 with its roots embedded into Unit Trust of India. The UTI was the lone
concern in the field of mutual fund till 1987, when two financial behemoths like SBI and Canara
Bank came with a big bang with an intention to nurture the concept. The present status of the MF
industry is mainly due to the major effort by these three progenitor musketeers. In April 1992 the
Government announced the setting of Money Market Mutual Funds (MMMF) with the purpose
of bringing money market instruments within the reach of individuals. Scheduled commercial
banks and public financial institutions are permitted to set up MMMFs. The units of MMMF are
specifically meant for individuals. With the ushering in of financial sector reforms and
Narasimham Committee recommendations, the private banks were allowed to enter MF business
in the year 1993. Narasimham Committee in their report on financial sector reforms made the
following recommendations:
• Creation of an appropriate regulatory framework to promote sound, orderly and

competitive growth of MF business.
• Creation of proper legal framework to govern the establishment and operation of mutual
funds.
• Equality treatment between various mutual funds including UTI in the area of tax
concessions.
Securities and Exchange Board of India (SEBI), which was formed after security scam in
1992 was given regulatory powers to lay down guidelines, supervise, and regulate the working of
MF. The MF is formed by way of trusts I India. Since inception, they have shown significant
progress. MF function with the basic theory of trust They have been transparent in their financial
statements and almost all funds are technology driven.
Association of Mutual Funds of India (AMFI) plays a pivotal role with much proactive
ness in promoting the MF sector. AMFI keeping in view the unethical practices and cut-throat
competition among the existing funds framed a code of ethics in 1997 which are to be followed
by the industry. AMFI has been instrumental in rendering investor education and highlighting
pros and cons o~ the investment decisions. Very often the MF’s influence the volatile
movements in stock market. They outperform the FIl’s and lead the market. In recent days their
record collection through new fund offers has entered the stock market, which has been one of
the major factors for the sky rocketing northward movement of major indices.
Industry Profile
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 Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in December
1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993
SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual
Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund)
Regulations 1996. The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry have witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs.1,
21,805crores. The Unit Trust of India with Rs.44, 541crores of assets under management was
way ahead of other mutual funds.
Fourth Phase
Following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two
separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under
management of Rs.29, 835crores as at the end of January 2003, representing broadly, the assets
of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit
Trust of India, functioning under an administrator and under the rules does not come under the
purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by
SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than
Rs.76, 000 crores of assets under management and with the setting mutual fund industry has
entered its current phase of consolidation and growth. As at the end of October 31, 2003, there
were 31 funds, which manage assets of Rs.126726 crores under 386 schemes.
There has been a tremendous growth in the mutual fund industry in India, attracting huge
investments from investors within the country and abroad, however, there is still a long way to
go.
Graph 1
Growth in assets under management
The graph indicates the growth of assets over the years.

Source: www.amfiindia.com
Note:-
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit
Trust of India effective from February 2003. The Assets under management of the Specified
Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the
industry as a whole from February 2003 onwards.
1.2 Concept
Mutual Fund Set up
A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset
Management Company (AMC) and custodian. The trust is established by a sponsor or more than
one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property
for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI
manages the funds by making investments in various types of securities. Custodian, who is
registered with SEBI, holds the securities of various schemes of the fund in its custody. The
trustees are vested with the general power of superintendence and direction over AMC. They
monitor the performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or
board of trustees must be independent i.e. they should not be associated with the sponsors. Also,
50% of the directors of AMC must be independent. All mutual funds are required to be
registered with SEBI before they launch any scheme.
Net Asset Value (NAV) of a scheme
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).
Mutual funds invest the money collected from the investors in securities markets. In simple
words, Net Asset Value is the market value of the securities held by the scheme. Since market
value of securities changes every day, NAV of a scheme also varies on day to day basis. The
NAV per unit is the market value of securities of a scheme divided by the total number of units
of the scheme on any particular date. For example, if the market value of securities of a mutual
fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the
investors, then the NAV per unit of the fund is Rs.20. NAV is required to be disclosed by the
mutual funds on a regular basis - daily or weekly - depending on the type of scheme.
Different types of mutual fund schemes
Schemes according to Maturity Period
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on
a continuous basis. These schemes do not have a fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a
daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is
open for subscription only during a specified period at the time of launch of the scheme.
Investors can invest in the scheme at the time of the initial public issue and thereafter they can
buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling back the
units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations
stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase
facility or through listing on stock exchanges. These mutual funds schemes disclose NAV
generally on weekly basis.
Interval Fund/Scheme
These funds combine the features of both open ended and close-ended funds wherein the
fund is close-ended for the first couple of years and open-ended thereafter. Some funds allow
fresh subscriptions and redemption at fixed times every year (say every six months) in order to
reduce the administrative aspects of daily entry or exit, yet providing reasonable liquidity.
Schemes according to Investment Objective
A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended schemes
as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such funds have
comparatively high risks. These schemes provide different options to the investors like dividend
option, capital appreciation, etc. and the investors may choose an option depending on their
preferences. The investors must indicate the option in the application form. The mutual funds
also allow the investors to change the options at a later date. Growth schemes are good for
investors having a long-term outlook seeking appreciation over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky compared to
equity schemes. These funds are not affected because of fluctuations in equity markets.
However, opportunities of capital appreciation are also limited in such funds. The NAVs of such
funds are affected because of change in interest rates in the country. If the interest rates fall,
NAV’s of such funds are likely to increase in the short run and vice versa. However, long term
investors may not bother about these fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes
invest both in equities and fixed income securities in the proportion indicated in their offer
documents. These are appropriate for investors looking for moderate growth. They generally
invest 40-60% in equity and debt instruments. These funds are also affected because of
fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be
less volatile compared to pure equity funds.
Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation
of capital and moderate income. These schemes invest exclusively in safer short-term
instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call
money, government securities, etc. Returns on these schemes fluctuate much less compared to
other funds. These funds are appropriate for corporate and individual investors as a means to
park their surplus funds for short periods.
Tax saving schemes
These schemes offer tax rebates to the investors under specific provisions of the Income
Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. E.g.
Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also
offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities.
Their growth opportunities and risks associated are like any equity-oriented scheme
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index,
S&P NSE 50 index (Nifty), etc these schemes invest in the securities in the same weight age
comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or
fall in the index, though not exactly by the same percentage due to some factors known as
"tracking error" in technical terms. Necessary disclosures in this regard are made in the offer
document of the mutual fund scheme.
Performance evaluation of MF
The performance evaluation of MF can be done through various parameters such as:
1. Portfolio Quality
2. Portfolio Concentration
3. Expenses Ratio
4. Portfolio Turnover Ratio
5. Size of the Fund
6. Cash Holding and Management
7. Investor Servicing.
Strengths of MF
Mutual Funds provide several benefits to investors. Some of them are:

1. Benefits retail investors as a source of saving with higher return.
2. The concept is based on ‘Drops make an Ocean’. So, it is a mutual act for common
benefit.
3. It is ‘Professionally Managed’.
4. There is flexibility of portfolio diversification.
5. There is diversification of risk as it contains small investors in one hand and investment
in basket of blue chip companies, gilt-edged securities, bonds, debt instruments or
indices.
6. There is a relative liquidity.
7. It is a small investor savvy, so it attracts investors in large numbers.
8. The entry and exit load is nominal. The administration expenses are also economical.
9. The MF is tax efficient, as in the year 19999 the government has fully exempted the
dividends of MF units in the hands of investors from tax obligations.
10. Various investment options are available in the hands of investors which may cater to
their specific needs, reinvestment option, dividend option, investment pattern such as
equity, debt, or balanced funds etc.
Weaknesses of MF
As it is the case with other investment vehicles, MF’s too are not free from certain
shortcomings. Some of them are:
1. It has no tailor-made schemes to suit to each individual retail investor.

2. No guarantee of returns.
3. No control over costs.
4. It has the drawback of the problem of managing large corpus.
5. Volatility of return depends on market conditions, which is subject to frequent market
volatility.
6. Most investment period is medium-term to long-term where expected return is more.
Money Market Mutual Funds scheme is for short period where return is not lucrative
and the instruments are less in number.
1.3 Need for the study
The study has the following objectives:

1. To identify the preferred savings avenue among the investors
2. To assess Mutual Fund selection behavior among the investors.
3. To assess the fund / scheme preference of the investors.
4. To perceive the preferred communication mode of the investors.
5. To identify the sources influencing the selection decision of the investors.
6. To understand the fund qualities that influences the selection of Mutual Funds.
Review of literature
The following studies were conducted earlier:
Foreign Studies:
Ippolito (1992) and Bogle (1992) reported that fund selection by investors is based on
past performance of the funds, and money flows into winning funds more rapidly than they flow
out of losing funds.
Goetzman (1993) and Grubber (1996) studied the ability of the investors to select funds
and found evidence to support selection ability among active fund investors.
Malhotra and Robert (1997) reported that the preoccupation of MF investors using
performance evaluation as selection criteria is misguided because of volatility of returns.
This may be due to superior management or just good luck; it is difficult to determine. The
findings of Ferris and Chance (1987 and 1991) are consistent with the findings of Malhotra and
Robert (1997).
Lu Zheng (1998) examined the fund selection ability of MF investors and found that the
investor’s decisions are based on short-term future performance and investors use fund-specific
information in their selection decision.
Source:www.google.com/researchstudies/behavioral financeforeignstudies
Indian studies
Vidyashankar (1990), Agrawal GD (1992), Gupta LC (1993) Atmaramani (1996),

Madhusudan (1996) and others have conducted extensive research regarding investor
expectations, protection awareness and fund selection behavior.
Gupta LC (19193) conducted a household investor survey with the objective to provide
data on investor preferences of MF’s and other financial assets.
Madhusudhan V Jambodekar (`1996) conducted a study to assess the awareness of MF’s
among investors, to identify the information sources influencing the buyer decision and the
factors influencing the choice of a particular fund.
Sujit Sikdar and Amrit Pal Singh (1996) carried out a survey with a objective to
understand the behavioral aspects of the investors of the North Eastern region towards equity and
MF’s investment portfolio. The survey revealed that the salaried and self-employed formed the
major investors in MF’s primarily due to tax concessions.. UTI and SBI schemes were popular in
that part of the country then and other funds had not proved to be a big hit during the time when
the survey was done.
Raja Rajan (1997, 1998) high lightened segmentation of investors on the basis of their
characteristics, investment size, and the relationship between stage in life cycle of the investors
and their investment pattern.
Syama Sunder (1998) conducted a survey to get an insight into the MF operations of
private institutions with special reference to Khothari Pioneer. The survey revealed that the
awareness about MF concept was poor during that time in small cities like Vishakapatnam.
Agents play a vital role in spreading the MF culture: open-end schemes were much preferred
then; age and income are the two important determinants in the selection of fund/scheme; brand
image and return are their prime considerations.
1.4 Statement of the problem
In India, though the Mutual Fund industry has been in existence for a long time, no major
study has been done regarding the aspect of investor behavior with respect to Mutual Funds. The
expectations of investors are influenced by their perception and humans generally relate
perception to action. While there are so many factors that can drive an investor’s choice of a
specific scheme, some major factors like brand name, liquidity, past performance etc, were taken
into consideration for the purpose of the study. Much of economic and financial theory is based
on the notion that individuals act rationally and consider all available information in the decision
making process. Since the competition in the market is very high, it is the responsibility of the
fund manager to analyze investor behavior and understand their needs and expectations to gear
up the performance to meet investor requirements and also to fight competition. Therefore, this
study helps to find out the different aspects of investor behavior.
1.5 Objective
The Indian economy has opened up and many developments have taken place in the
Indian capital market and money market. Mutual Funds have played a significant role in the
development and growth of capital markets.
The story of Mutual Funds started in India in 1963. For many years, funds were more of a
service, however, in the last 15 years; Mutual Funds have evolved to be a product. Mutual Funds
have opened up new vistas to millions of small investors by taking investment to their doorsteps.
Mutual Funds are looked upon by individual investors as financial intermediaries wherein
portfolio managers process information, identify investment opportunities, invest funds and
monitor progress at a very low cost.
1.6 Procedure Methodology
The study mainly deals with the financial behavior of investors towards Mutual Funds in
Bangalore. The required data would be collected through a questionnaire administered on a
simple random and judgment sample of 100 educated investors in mutual funds.
Limitations of the study
1. The sample size of 100 may not adequately represent the national market.
2. Simple random and judgment sampling is due to time and financial constraints.
Scope of the study
1. To understand the perception of the investors towards Mutual Funds.

2. To study the selection behavior of investors with respect to Mutual Funds.
CHAPTER 2
Analysis
2.1 Analysis of the situation
Profile of the respondents

The study was conducted by distributing questionnaires to 100 investors in Bangalore
city.
Table 1
The gender of the respondents
Gender Frequency
Male 63
Female 37
Total 100
Source: Primary Data
Analysis
This table shows that 63% of the respondents are males and only 37% are females.
Inference
Men are more interested in investing in the financial markets than women.
Table 2
The age in completed years of the respondents
Age Frequency
Below 30 44
31-40 32
41-50 8
Above 50 16
Total 100
Analysis
This table shows that 44% of the respondents are below the age of 35, 32% are between
31 and 40, 16% are above 50 and only 8% are between the age group of 41-50.
Inference
The analysis gives a clear picture that the younger generations are keener in investing in
the recent upcoming debt instruments than the older ones. The respondents below the age of 30
are more aware of the financial markets and are more interested in following the recent trends in
the financial markets.
Table 3
The academic Qualification of the respondents
Qualification Frequency
School Final 6
Graduate 37
Post Graduate 41
Professional Degree 16
Total 100
Analysis
This table shows that 37% of the respondents are graduates, 41% are post-graduates,
16% are professional degree holders and only 6% are school finals.
Inference
The analysis explains that most of the respondents are post-graduates followed by
graduates. This is so because the graduates and post-graduates are more aware of the financial
markets than the school final or professional degree holders as they are from the commerce
background. They keep in touch with the financial markets and are more aware of the changing
trends than those from the science background.
Table 4
The table showing the annual income of the respondents
Annual Income in Rs Frequency

Below 1,00,000 10
1,00,000-3,00,000 59
3,00,000-5,00,000 27
Above 5,00,000 4
Total 100
Analysis
The above table shows that 59% of the respondents have an annual income of 1,00,000-
3,00,000, 27% have income between 3,00,000-5,00,000, 10% are below 1,00,000 and only 4%
have income above 5,00,000.
Inference
The analysis shows that the maximum percent of respondents who invests have an
income of 1, 00,000-3, 00,000. This is because they are cautious investors and they want to
invest in such a way that they are able to get maximum returns from their investments.
Table 5
The media through which the respondents know about the MF’s
Media Frequency
Reference Groups 8
Newspapers 36
TV 45
Brokers 11
Total 100
Analysis
This table shows that 45% of the respondents know about the mutual funds through TV,
36% through newspapers and the rest through reference groups and brokers.
Inference
It can be observed from the analysis that most of the respondents know about the mutual
funds through TV as it is the most attractive media of spreading information. The rest of the
respondents are aware of MF’s through newspapers because it is a media which reaches out to
every common man.
Table 6
The reason for selecting a specific type of scheme by investors
Schemes Frequency Percentage

Growth schemes 49 49
Income schemes 37 37
Money market schemes 8 8
Tax Savings schemes 6 6
Total 100 100
Analysis
From the above table 49% of the investors like to go for growth schemes, 37% for
income schemes and the rest 14% for money market and tax-savings schemes.
Inference
The analysis indicates that most of the investors prefer growth schemes as it gives them
capital appreciation over a long period of time. Income schemes are preferred as they give steady
and regular income to the investors.
Graph 1
Graph showing the reason for selecting a specific type of scheme by investors
60
50
40 G row th s c hem es
No.of Respondents
Inc om e s c hem es
30
M oney m ark et s c hem es
20 Tax S avings s c hem es
10
0
1
T h e sch e m e s in M F 's
Table 7
The type of schemes generally preferred by investors
Schemes Frequency Percentage

Open ended schemes 42 42
Close ended schemes 16 16
Interval schemes 42 42
Total 100 100
Analysis
This table shows that 42% of the respondents prefer open-ended as well as interval
schemes and only 16% prefer close ended schemes.
Inference
The analysis explains that most of the investors prefer open ended schemes as they have
no maturity period and gives liquidity. Interval schemes are equally preferred as it is a
combination of both open ended and close ended schemes.
Graph 2
Chart showing the type of schemes generally preferred by the investors
O pen ended s c hem es

C los e ended s c hem es
Interval s c hem es
Table 8
The reason for investing in mutual funds
Reasons Frequency Percentage
Safety 17 17
Liquidity 6 6
Good return 65 65
Capital appreciation 10 10
Professional Management 2 2
Total 100 100
Analysis and Inference
The above table shows that 65% of the respondents invest in Mutual Funds in order to
earn good returns. 17% prefer MF’s as they ensure the safety of the investors, 10% prefer to
invest so that it helps them to earn capital appreciation over a period of time and the rest 8%
invests in MF’s in order to ensure liquidity and also for professional management.
Graph 3
Graph showing the reason for investing in Mutual Funds
No.of Respondents
70
Safety
60
50 Liquidity
40 Good return
30
Capital
20 appreciation
10 Professional
Management
0
1
Reason for investing in MF
Table 9
The importance of fund related qualities in selection behavior.
Fund related qualities HI I SWI NVI NAAI Total

Fund performance record 12 57 28 3 0 100
Fund brand name 61 36 1 2 0 100
Fund withdrawal facilities 10 59 29 2 0 100
Favorable ratings 31 54 15 0 0 100
Scheme innovativeness 55 45 0 0 0 100
Minimum initial investment 39 30 25 4 2 100
(HI- Highly Important, I- Important, SWI- Some what Important, NVI- Not very Important,
NAAI- Not at all Important)
Fund Performance record

The above table shows that 57% of the investors consider that the fund performance
record is important, 28% feel it is some what important and only 12% consider it highly
important.
This is because the fund performance record helps the investor to have a clear idea about
the performance of the record and helps him to decide whether to invest in it or not.
Fund Brand name

61% of the investors which forms a majority feel fund brand name is highly important in
selecting the mutual funds because funds with brand name can always be trusted and returns can
be fully assured.
2.2 Existing of the system
Fund Withdrawal facilities

59% of the investors feel that withdrawal facilities are important because it helps them to
switch on to a better option when the chosen fund is not performing well. In case the withdrawal
facilities are not in favor of the investors they refrain from selecting that particular fund.
Favorable ratings
54% of the investors feel favorable ratings is important whereas 31% feel it is highly
important and only 15% feel it is some what important. This is because ratings help the investors
in identifying the performance and the rankings given to the funds.
Scheme Innovativeness
55% feel it is highly important as innovativeness in the schemes helps in bringing out
more attractive schemes for the investors and helps them to switch on to different options at
different times.
Minimum Initial Investment

39% feel initial investment is highly important, 30% feel it is important and the others
feel it is not very important. Initial investment is a matter of concern for investors who was a
lesser amount of income whereas for those who have high income do not consider it important.
Since Bangalore city consists of middle class income groups, initial investment should be
considered as well.
Graph 4
Chart showing the importance of fund performance record.
0%
3% 12%
28%
HI
I
SWI
NVI
NAAI
57%
Graph.5
Chart showing the importance of fund brand name.
2%
1% 0%
HI
36% I
SWI
NVI
61%
NAAI
Graph 6
Chart showing the importance of fund withdrawal facilities.
0%
2% 10%
29%
HI
I
SWI
NVI
NAAI
59%
Graph 7
Chart showing the importance of favorable ratings.
0%
15% 0%
31%
HI
I
SWI
NVI
NAAI
54%
Graph 8
Chart showing the importance of scheme innovativeness.
0%
HI
45% I
SWI
55% NVI
NAAI
Graph 9
Chart showing the importance of minimum initial investment.
4% 2%
25% HI
39%
I
SWI
NVI
NAAI
30%
Table 10
The importance of fund sponsor qualities in selection behavior
Fund sponsor qualities HI I SWI NVI NAAI Total
Reputation of sponsoring firm 18 56 20 4 2 100
Recognized brand name 66 22 6 4 2 100
Agency and network 4 23 65 16 2 100
Expertise 18 24 50 8 0 100
Research and infrastructure 13 15 34 32 6 100
Past performance 14 52 30 4 0 100
Reputation of the sponsoring firm

The table shows that 56% of the investors consider it important, 20% consider it some
what important and 18% feel it is highly important. This is due to the fact that a good reputation
and fame helps the investors to trust in the sponsor.
Recognized brand name

The table shows that 66% of the investors consider brand name as highly important and
22% consider it important. A branded sponsor can be blindly trusted and they always remain
faithful to their customers to keep up the name.
Agency and network

65% of the investors feel a well developed agency and network is some what important
because it does not matter much if the sponsor has a big agency or not. The performance matters
more so this criteria is of lesser importance.\
Expertise in managing money

50% feel this criterion is some what important whereas the rest feel it is important.
This is due to the fact that the sponsor should be an expert in placing the investor’s money in the
right place at the right time.
Research and infrastructure
34% of the investors feel it is some what important , 13% feel it is highly important, 15%
feel it is important, 32% feel it is not very important and 6% feel it is not at all important. There
is a diverse opinion in this matter as research and development criteria depend on the type of
investors investing in the mutual finds.
Past performance
The table shows 52% consider it important, 30% some what important, 14% highly
important and the rest not important. The majority feel it is important due to the fact that it
guarantees the future performance of the sponsor to a certain extend.
Graph 9
Chart showing the importance of the reputation of the sponsoring firm.
60
50
40
Frequency
30
20
10
0
HI I SWI NVI NAAI
Satifaction level
Graph 10
Chart showing the importance of a recognized brand name.
70
60
No.of Respondents
50
40
30
20
10
0
HI I SWI NVI NAAI
Sactisfaction Level
Graph 11
Chart showing the importance of a well developed agency and network.
70
60
No.of Respondents
50
40
30
20
10
0
HI I SWI NVI NAAI
Satisfaction Level
Graph 12
Chart showing the importance of sponsor’s expertise in managing money.
60
50
No.of Respondents
40
30
20
10
0
HI I SWI NVI NAAI
Satisfaction Level
Graph 13
Chart showing the importance of a well developed research infrastructure.
40
35
No.of Respondents
30
25
20
15
10
5
0
HI I SWI NVI NAAI
Satisfaction Level
Graph 14
Chart showing the importance of sponsors past performance
60
50
No.of Respondents
40
30
20
10
0
HI I SWI NVI NAAI
Satisfaction Level
Table7
The importance of investor related services in selection behavior.
Investor related services HI I SWI NVI NAAI Total

Disclosure in advertisement 2 15 23 32 28 100
Periodicity of valuation 2 17 33 38 10 100
Disclosure of NAV 2 23 59 16 0 100
Grievance redressal machinery 8 10 16 50 16 100
Fringe benefits 6 84 8 2 0 100
Preferred MF 5 73 20 2 0 100
Disclosure of investment objective

32% feel it is not very important, 28% feel it is not at all important, and a very few
percent of investors feel it is important. This is due to the fact the investors would not like their
information and objectives being made public through advertisements.
Periodicity of valuation
The table shows 38% feel it is not very important, and an equal proportion of 33% feel it
is some what important. The disclosure of periodicity of valuation also depends on the investors
whether they like it to be disclosed or not. Therefore, it is difficult to reach at a definite
conclusion.
Disclosure of NAV
The table shows that a majority of 59% of investors feel that it is some what important to
disclose NAV whereas a few feel it is important. This is necessary as it helps the investors to
keep in track the performance of the funds.
Grievance redressal machinery

The table shows 50% of the investors feel it is not important. The other opinions vary
among investors because a grievance redressal machinery is not of much importance because
the funds do not have much issues related to them that has to be addressed through a channel.
Fringe Benefits
Majority of the investors about 84% of them feel fringe benefits is very important
because fringe benefits help the investors to earn extra benefits with the scheme. The benefits
earn additional income for the investors and so it is of due importance.
Preferred MF to avoid problems

73% of the investors feel already preferred mutual funds help in avoiding problems and
20% feel it is some what important. They feel it is better so that by investing in already preferred
MF’s, the investors can avoid a lot of problems that may arise if he invests in a new mutual fund.
Graph 14
Chart showing the importance disclosure of investment objective in ads.
2%
15%
28%
HI
I
SWI
23% NVI
NAAI
32%
Graph 15
Chart showing the importance of disclosure of periodicity of valuation.
10% 2%
17%
HI
I
SWI
38% NVI
NAAI
33%
Graph 16
Chart showing the importance of disclosure of NAV.
0%
16% 2%
23%
HI
I
SWI
NVI
NAAI
59%
Graph 17
Chart showing the importance of MF’s investor Grievance Redressal machinery.
8%
16%
10%
HI
I
16% SWI
NVI
NAAI
50%
Graph 18
Chart showing the importance of fringe benefits.
2% 0%
8% 6%
HI
I
SWI
NVI
NAAI
84%
Graph 14
Chart showing the importance of preferred MF’s to avoid problems.
0%
2%
5%
20%
HI
I
SWI
NVI
NAAI
73%
Table 8
The annual income of the respondent v/s the current preference of Savings Avenue
Annual
income of
the The current preference of savings avenue
respondents
Currency Bank Life Gold Shares Pension Postal Real Total
deposits insurance & PF savings estate
Below 2 (20) 0 (0) 4 (40) 0 (0) 0 (0) 2 (20) 0 (0) 2 (20) 10
1,00,000 (100)
1,00,000- 2 (3.4) 6 (10.2) 33 (55.9) 12 0 (0) 2 (3.4) 0 (0) 4 59

3,00,000 (20.3 (6.8) (100)
)
3,00,000- 0 (0) 4 (14.8) 6 (22.2) 7 2 (7.4) 0 (0) 2 (7.4) 6 27
5,00,000 (25.9 (22.2) (100)
)
Above 0 (0) 0 (0) 0 (0) 0 (0) 0 (0) 0 (0) 0 (0) 4 4
5,00,000 (100) (100)
Total 4 (4.0) 10 (10) 43 (43) 19 2 (2) 4 (4) 2 (2) 16 100
(19) (16) (100)
The current preference of Savings Avenue is maximum among investors with an annual
income of Rs. 1, 00,000-3, 00,000. They feel it is essential to invest in life insurance than any
other savings avenue. 55.9% of the investors with an income of 1, 00,000-3, 00,000 have
invested in life insurance.
Table 9
The academic qualification of the respondent v/s the current preference of Savings Avenue
Qualification The current preference of savings avenue

Currency Bank Life Gold Shares Pension Postal Real Total
deposits insurance & PF savings estate
School final 0 (0) 4 (66.7) 0 (0) 0 (0) 0 (0) 0 (0) 0 (0) 2 6
(33.3) (100)
Graduate 4 (10.8) 0 (0) 17 (45.9) 6 2 (5.4) 0 (0) 2 (5.4) 6 37
(16.2 (16.2) (100)
)
Post 0 (0) 4 (9.8) 20 (48.8) 11 0 (0) 4 (9.8) 0 (0) 6 41
graduate (26.8 (4.9) (100)
)
Professional 0 (0) 2 (12.5) 6 (37.5) 2 0 (0) 0 (0) 0 (0) 6 16
Degree (12.5 (37.5) (100)
)
Total 4 (4) 10 (10) 43 (43) 19 2 (2) 4 (4) 2 (2) 16 100
(19) (16) (100)
From the above cross tabulation it is clear that the post graduates have invested in life
insurance as a current preference of Savings Avenue. Most of the investors feel it is essential to
invest in life insurance first than before exercising any other option.
Table 10
The age of the respondent v/s the media to know about MF
Age of the
respondent The media to know about MF
Reference Newspapers TV Brokers Total
Groups
Below 30 1 (2.3) 8 (18.2) 29 (65.9) 6 (13.6) 44 (100)
31 – 40 0 (0) 12 (37.5) 8 (25) 12 (37.5) 32 (100)
41 – 50 0 (0) 2 (25) 2 (25) 4 (50) 8 (100)
Above 50 6 (37.5) 4 (25) 2 (12.5) 4 (25) 16 (100)
Total 7 (7) 26 (26) 41 (41) 26 (26) 100 (100)
The above cross tabulation table shows that 65.9% of the respondents below the age of 30 have
the awareness of mutual funds through television. This age group is more fascinated in watching
television and it is an attractive media which the youngsters are fonder of.
Table 11
The academic qualification of the respondent v/s the media to know about MF
Qualification The media to know about MF

Reference Newspapers TV Brokers Total
Groups
School final 0 (0) 0 (0) 4 (66.7) 2 (33.3) 6 (100)
Graduate 2 (5.4) 6 (16.2) 19 (51.4) 10 (27) 37 (100)
Post 3 (7.3) 10 (22.4) 16 (39) 12 (29.3) 41(100)
graduate
Professional 2 (12.7) 10 (62.50) 2 (12.5) 2 (12.5) 16 (100)
Degree
Total 7(7) 26 (26) 41 (41) 26 (26) 100 (100)
The table shows that 62.50% of the respondents with professional degree are aware of
mutual funds through newspapers. This is due to the fact that the professionals do not have much
time to spend watching television or keeping in touch with other sources. The only media that
they are opened to are newspapers.
2.3 Need for the change in system
SHARES/DEBENTURES (NEW ISSUE MARKET)

New issue market deals with ‘new’ Securities, ie, securities which where not previously
available and are offered to the investing public for the first time. The market, therefore, derives
its name from the fact that it makes available a new block of securities for the public
subscription. The stock market on the other hand, is a market for ‘old securities’ i.e., those which
have already been issued and have been granted stock exchange listing.
Secondary Market
Stock Exchange is an organized market place where securities are traded. These securities are
issued by the Government, semi-Government Bodies, Public sector undertakings and companies
for borrowing funds and raising resources. Securities are defined as any monetary claims
(promissory notes or I.O.U) and include stock, shares, debentures, bonds etc. If these securities
are marketable as in the case of Government stock, they are transferable by endorsement and are
like movable property. They are tradable on the stock Exchange.
Benefits of Investment in Shares

Investors may be entitled to bonus issue that may be made by the company out of the free
reserves accumulated through retained earnings over years.
Rights: The equity shareholders may be entitled to any further issue of Capital, either as
debentures, fully or partly convertible debentures or equity shares, as may be made by the
company, depending on its requirements.
The equity shareholders being the owners of the company have the right to get the interim
dividend within a period of 42 days from the date of declaration of dividends.
In addition to all the above benefits, the investor in equities enjoys some unique advantages of
safety, liquidity and marketability. The investor can readily find a market for selling the equity
shares in the Stock Market and encasing the investments at short notice.
TABLE 1 PERFORMANCE OF NIFTY FOR THE YEARS

DATE OPEN HIGH LOW CLOSE
1267.30 1284.15 1264.40 1271.65

29-Sep-2000
1249.00 1265.90 1242.25 1263.55

29-Dec-2000
1195.05 1195.25 1144.65 1148.20

30-Mar-2001
1094.05 1114.35 1091.05 1107.90

29-Jun-2001
891.75 922.55 891.00 913.85

28-Sep-2001
1033.90 1062.30 1033.90 1059.05

31-Dec-2001
1123.60 1138.45 1123.60 1129.55

28-Mar-2002
1049.40 1068.90 1049.40 1057.80

28-Jun-2002
976.15 976.15 961.55 963.15

30-Sep-2002
1091.85 1100.10 1091.70 1093.50

31-Dec-2002
1000.60 1000.60 974.10 978.20

31-Mar-2003
1125.60 1141.30 1125.50 1134.15

30-Jun-2003
1400.70 1418.10 1399.80 1417.10

30-Sep-2003
FIXED DEPOSIT
The term "fixed" in fixed deposits denotes the period of maturity or tenor. Fixed
Deposits, therefore, presupposes a certain length of time for which the depositor decides to keep
the money with the bank and the rate of interest payable to the depositor is decided by this tenor.
The rate of interest differs from bank to bank and is generally higher for private sector and co-
operative banks. This, however, does not mean that the depositor loses all his rights over the
money for the duration of the tenor decided. The deposits can be withdrawn before the period is
over. However, the amount of interest payable to the depositor, in such cases goes down (usually
1% to 2% less than the original rate). Moreover, as per RBI regulations there will be no interest
paid for any premature withdrawals for the period 15 days to 29 or 15 to 45 days as the case may
be.
2.4 Proposed system
Investment Planning
Introduction Simply stated an investment is any vehicle into which funds can be placed with the
expectation that they will be preserved or increase in value and/or generate positive returns. The
various types of investments can be differentiated based on a number of factors such as whether
the investment is a security or property; direct or indirect; debt or equity or options; low or high
risk and short or long term.
The investments that represent the evidence of ownership of a business or a liability or even
the legal right to acquire or sell an ownership interest in a business are called securities. The
most commonly accepted types of securities are stocks, bonds, debentures, and options.
Property on the other hand is investments in real property or tangible personal property. This
would include land, buildings, and tangible personal property, which include gold, antiques,
and art. A direct investment is one in which an investor directly acquires a claim on a
security or property such as investment in equity, bonds or even gold. An indirect investment
is an investment made in a portfolio or group of securities or properties such as the purchase
of a mutual fund.
Broadly speaking an investment will be either in equity or in debt. An investment in debt implies
loan of funds for a certain period in exchange for the receipt of interest at regular intervals of
time and the repayment of principal at a particular future date.
Investment in equity on the other hands represents a type of ownership of a business or property
and is represented by a security showing title to a property.
Options also called derivatives simply securities that are backed by an opportunity to buy or sell
another security and its value is derived on the basis of the underlying asset.
Finally an investment can be distinguished by its risk nature, i.e. whether it carries higher or
lower risk. In that sense the nature of risk would depend on the nature of cash flows, the type of
ownership and the potential degree of loss of value of the asset. Equity therefore is considered
more risky than debt simply because the returns are not certain and its value is determined by the
company fortunes.
Similarly, an investment can also be demarcated by the tenure of the investment i.e. whether the
investment is of long duration or of short duration.
Investment Planning
Investment Planning lies at the base of marketing an investment product. Till the time, an
appropriate amount of investment planning is not done; finding the right fit of the investment
product with the individual would be an impossible task.
Simply understood investment is nothing but postponed consumption. Not all incomes earned are
consumed immediately; some of the surplus left over is set aside
to be used at various future dates. The moment one is postponing consumption, the concept of
time value of money comes into place. Money has time value due to three primary reasons.
a. Present consumption is more preferable to future consumption and therefore a price must be
paid to balance the utility from both
b. The future is uncertain and therefore to compensate for the uncertainty
element of perhaps not receiving the money either totally or partly
c. There will be some inflation present and therefore simply to keep the value of money constant
certain inflation adjusted minimum return needs to be built in while factoring in future returns.
Therefore three factors are important that determine the return investors require in order to forgo
current consumption to invest.
a. The time preference for consumption that is measured by the risk free real rate of return
b. The expected rate of inflation
c. The possible risk that is associated with the investment.
It is therefore not surprising that the required return that an investor would need would be the
sum total of the above three components.
Required return= risk free real rate + expected inflation + risk premium
The risk free real rate can be reasonably approximated by default free government treasury bills
while the expected inflation is a matter of a scanning the economic environment including past
figures and future estimates by various formal and informal sources. Though there can not be a
total finality on the issue, reasonable consensus estimates can be arrived at over shorter
investment horizons. It is the third element of risk premium that is the most difficult to estimate
since it varies across from products to products all of which may not remain at the same risk
level across different time periods even for the same investment product. Moreover the
assessment of risk premium and the returns required to compensate for the same varies from
person to person. This represents a challenge to understand the risk return profile of the client for
the financial planner. Only a complete understanding of the same can enable the financial
planner to suggest and implement the right proportion of investment products.
An investment product is usually denominated as a security. A security represents a type of

ownership of an asset. In other words, a security represents a claim on an asset and any future
cash flows the asset may generate. Thus, a security can cover a wide array of assets right from
stocks and shares to even real estate.
Each of the various types of securities has a different risk and return profile. In investment
analysis, return and risk is represented by specific definitions and is measured in a certain
manner.
Chapter 3
Present conditions with special reference to the organization
3.1 Present Condition of Investment
Simply stated an investment is any vehicle into which funds can be placed with the expectation
that they will be preserved or increase in value and/or generate positive returns. The various
types of investments can be differentiated based on a number of factors such as whether the
investment is a security or property; direct or indirect; debt or equity or options; low or high risk
and short or long term. The investments that represent the evidence of ownership of a business or
a liability or even the legal right to acquire or sell an ownership interest in a business are called
securities. The most commonly accepted types of securities are stocks, bonds, debentures, and
options. Property on the other hand is investments in real property or tangible personal property.
This would include land, buildings, and tangible personal property, which include gold, antiques,
and art.
A direct investment is one in which an investor directly acquires a claim on a security or

property such as investment in equity, bonds or even gold. An indirect investment is an
investment made in a portfolio or group of securities or properties such as the purchase of a
mutual fund.
Broadly speaking an investment will be either in equity or in debt. An investment in debt implies
loan of funds for a certain period in exchange for the receipt of interest at regular intervals of
time and the repayment of principal at a particular future date.
Investment in equity on the other hands represents a type of ownership of a business or property
and is represented by a security showing title to a property. Options also called derivatives
simply securities that are backed by an opportunity to buy or sell another security and its value is
derived on the basis of the underlying asset.
Finally an investment can be distinguished by its risk nature, i.e. whether it carries higher or
lower risk. In that sense the nature of risk would depend on the nature of cash flows, the type of
ownership and the potential degree of loss of value of the asset. Equity therefore is considered
more risky than debt simply because the returns are not certain and its value is determined by the
company fortunes.
Similarly, an investment can also be demarcated by the tenure of the investment i.e. whether the
investment is of long duration or of short duration.
The wealth ratio is nothing but the Return earned in % divided by 100 plus 1. For calculating the
geometric mean each of the wealth ratio is multiplied and the square root is taken according to
the number of years. Subtract 1 from the result and after multiplying by 100, the geometric return
in percentage is obtained.
= 5_ (1.30x 1.03x 1.56X 1.07x 1.15) = 2.561/5 = 1.2068
= 1.2068-1 = .2068x100= 20.68%
RISK
Risk in common parlance is usually understood as loss. Loss of course can extend from loss of
life to loss of property, job, personal relationships to even self-esteem and respect. In investment
analysis however risk is understood more as variability of rate of return. The more variable the
rate of return is, the more risky the investment is considered as.
The most commonly accepted measure of risk in investment analysis is standard deviation
denoted as @ (pronounced as sigma).
The other measure of variability that is directly related to the standard deviation is the variance.
The variance is nothing else but the standard deviation squared or the standard deviation is the
square root of the variance. Both the standard deviation and the variance are critical to
construction of the individuals risk return matrix both with regard to individual securities as well
as with portfolios.
Standard deviation & Variance

Standard Deviation =. Variance =. 2 n _2 = 1 0 (rit –rt) 2........ n-1 t=1 n _ @ = /__ 1___ _ (rit –
rt) 2 _ n-1 t=1
In the table below, standard deviation is calculated using the same example as above for
calculating returns.
To calculate standard deviation the following steps need to be taken

a. Calculate returns for each of the years for the security
b. Find the average return using the arithmetic mean
c. Take out the deviation of each return from the average return
d. Square each of the deviations
e. Find out the sum of the squared deviations
f. Divide the above sum by n-1 to get the variance
g. Find the square root of the variance to get the standard deviation.
Continuing from the same example:

Total returns 110.48 Sum of deviations 1840.71
Average returns 22.10 Variance= Sum of deviations/n-1 460.18
Standard deviation = 21.46
Types of Risk
The variability of returns or the presence of risk can be due to numerous reasons. Though none
of the risks can be independently measured, yet each of these risks can be differentiated on
account of specific factors. Some of the popular measures of risk are as follows:
Business risk
Business risk is the risk associated with the unique circumstances of a particular company, as
they might affect the price of that company's securities. It is the risk associated with the
underlying operations of a business. The variability of the firms operating income, before interest
income: this dispersion is caused purely by business-related factors and not by the debt burden
Country Risk
Country risk stems from country specific factors and is defined as the The risk of adverse effects
on the net cash flows of a MNC due to political and economic factors peculiar to the country of
location of FDI. Political risk is very much similar to country risk. It can be considered as the
financial risk that a country's government will suddenly change its policies. It is also known as
"Geopolitical risk
Interest Rate Risk

Interest rate risk is more widespread and affects both persons and organizations. It stems from
the potential for losses arising from changes in interest rates. Consider the investment in a certain
security at a particular interest rate let say 8% for duration of 5 years. However within a year the
level of interest rate rises to 10%. In that case the person is locked into a low interest rate
security for another 4 years as against the possibility of earning higher interest rates. Similarly
organizations and specially banks are exposed to the variations in interest rates that can cause
significant decline in their profitability and cash flows.
Exchange Rate Risk

Exchange Rate Risk The potential loss that could be incurred from a movement in exchange rates.
Though it affects indirectly all of us, it directly affects all those who have transactions in the
international markets. This can be either due to export and import of goods and services as well as
investments made either in some sort of financial securities, projects and real estate.
Market Risk
Market risk is defined as the day-to-day potential for an investor to experience losses from
fluctuations in securities prices. This risk cannot be diversified away. It is also referred to as
"systematic risk". In investment analysis the beta of a stock (discussed later) is the measure of
how much market risk a stock faces.
4.6 Liquidity Risk
Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be
bought or sold quickly enough to prevent or minimize a loss.
Price risk/Purchasing power risk

Price risk is simply the risk that the value of a security or portfolio of securities will decline in
the future. Basically, it's the risk that you will lose money due to a fall in the market price of a
security that you own. Purchasing power risk also stems from the fact that money invested or
received from an investment today will purchase fewer goods and services in the future.
Reinvestment Risk
The risk that future proceeds will have to be reinvested at a lower potential interest rate. This
term is usually heard in the context of bonds. This "reinvestment risk" is especially evident
during periods of falling interest rates where the coupon payments are reinvested at less than the
yield to maturity at the time of purchase.
Systematic Risk
Systematic risk is the risk inherent to the entire market or entire market segment. Also known as
"un-diversifiable risk" or "market risk." Interest rates, recession and wars all represent sources of
systematic risk because they will affect the entire market and cannot be avoided through
diversification. Whereas this type of risk affects a broad range of securities, unsystematic risk
affects a very specific group of securities or an individual security. Even a portfolio of well
diversified assets cannot escape all risk.
Unsystematic Risk
This is the risk that affects a very small number of assets. Sometimes it is referred to as specific
risk or as undiversifiable risk. For example, news that is specific to a small number of stocks,
such as a sudden strike by the employees of a company you have shares in.
RETURN AND RISK

Return and risk have a direct relationship with each other. Higher is the return expected on a
security, higher the risk inherent in the security. It is no wonder that the returns on fixed income
instruments such as post-office savings deposits, bank deposits, and employee provident fund
have far lower returns than on equities. This is because they are virtually risk free securities. A
study of returns from 1979 to 2003 shows that the average annual return of equities is 17.05%,
debt 10.8% and gold 5.33% . The volatility of equity has naturally been far more vis-à-vis that of
other investment options.
It is therefore not surprising that all finance planning professionals try to gauge the risk tolerance
of their clients so that they can assess the right quantum of risk that their clients can bear in their
investment portfolios.
A very high risk adverse investor would prefer investments that are more secure and thus would
have higher portfolio allocations to debt and fixed income instruments. On the other hand an
investor which is less risk averse would like to have greater exposure to equity and risky
investments.
Risk Tolerance
Financial risk tolerance involves perceptions about how confident people are in their ability to
make good financial decisions, their views about borrowing money, and how much of a risk in
terms of financial loss they believe they could accept in achieving financial gains in the longer
term. There is need to study risk tolerance for a variety of reasons some of which are enumerated
below:
a. Achievement of a level of financial independence that allows them to meet not only their basic
human needs, but also higher level needs for self development and self improvement.
b. Willing to accept a certain small return rather than a larger, but uncertain profit, from their
financial decisions
c. Individuals’ evaluations of their self-worth and their levels of self-esteem are related to their
levels of satisfaction with their financial situation
d. Individuals need to appreciate their personal comfort zone when they tradeoff what they are
willing to accept in terms of possible losses versus possible gains
e. Clients’ goals and objectives are often poorly developed and unrealistic.
f. It is often difficult for clients to describe in their own words their attitude about risk.
g. There is a good chance that new clients in particular will not understand many of the financial
and risk concepts presented by advisers.
h. Having the client complete a measure of risk tolerance allows any discussion or
communication.
i. Communication is focused around an explicit and understandable score or profile.
j. Difficult for the planner to arrive at an accurate risk profile
k. One size fits all- lifecycle approach does not work.
Normally so far as assessing risk tolerance, there are three common techniques. The first is
gaining biographical data from clients, the second is conducting an interview and the third is
Using a scientifically validated test. Some of the key parameters on which one’s risk tolerance
can depend is Age, Personal Income, Combined family income, Sex, No of dependents,
Occupation, Marital status, Education, Access to other inherited sources of wealth. As described
earlier, return is nothing but the sum of capital appreciation and the periodic sums of money
given to the investor either in the form of dividends or interest. Risk on the other hand is simply
the volatility of returns. As shown earlier the two measures of risk popularly used are variance
and standard deviation. The earlier calculations illustrated the concept of historical return and
risk. However, historical returns or risk would give only an incomplete indication of future
returns and risk. It is therefore important to calculate the expected return and risk on a security.
In actual practice, the calculation of future returns can only be an approximation.
Quantifying Ex-Ante (Expected Risk and Return) Chapter- 6
Expected Risk and Return

If one were to assume that there are four scenarios which would describe the possible situations
that the economy would face. For example one could have situations wherein
a. The economy was growing at more than 8% growth rate, inflation was under control and
interest rates were low. Moreover monsoons were also expected to be good
b. The economy was growing between 6-8%. Inflation was a little high due to burgeoning
foreign exchange reserves. Consequently the government also had to take certain steps to control
inflation which had the impact of increasing interest rates. Monsoons were average but the
agriculture sector growth due to a number of reasons was expected to be below average.
c. The economy was growing a sluggish pace of 5%. Both inflation and interest rates were high.
The manufacturing sector as well as the agricultural sector was both expected to fare poorly both
due to high interest burden and infrastructural rigidities.
d. The economy is in the throes of deep recession. On top of that there is political instability.
There is also an impending oil shortage. The world markets are also in a downswing. As such the
growth rate of the economy is not likely to be more than 2%. The stock markets are expected to
be on a downward phase.
Each of the scenarios is real life situations. However not all scenarios are equally probable and
one can assign different probabilities to each of these situations. The expected return of the stock
in the coming year can thus be calculated by multiplying the expected return of the stock in that
scenario by the probability of that scenario and summing all the results. The expected return of
the stock in the particular scenario Multiply the probability with the expected return taking the
square of the deviations of expected mean from the return of the particular scenario multiplying
the squared deviations with the probability of that occurrence
Sum of probabilities must equal to 1

1.00 Expected return 15.00 Variance 105.00
Standard deviation 10.25
The expected risk or the ex-ante risk can be then calculated in the following manner.
a. Take out the deviations of the returns in a scenario from the expected mean
b. Find the square of deviations
c. Multiply by the probability of the scenario.
d. The sum of the above would constitute the variance
e. The square root of the variance would be the standard deviation.
Return and Risk in A Portfolio Context

As individuals one does not hold only single securities but a number of them. In that case while
it may be essential to find the return and risk of an individual security at the time of purchase to
gauge its risk –return profile but that would not be able to give a clear indication of either the
total returns of our portfolio and nor the risk exposure of the same.
In that case it is imperative to be able to clearly find out the risk and return of one’s entire
portfolio. In the case of returns, the matter is relatively simple since it is nothing but the
weighted average of the returns on individual securities in a portfolio; the risk is definitely not
the weighted average.
To understand how the risk profile of a portfolio changes while combining securities, let us take
an example:
An investor would like to hedge his returns and therefore he decides to buy two stocks. One is of
a sugar company and the other that of an automobile company. He has chosen these two stock
purely because of the fact that if interest rates are low and inflation is also low, the stock of the
automobile company would do well but in case interest rates are high and so is inflation, sugar
company stocks are expected to do comparatively better. He also decides to hold 50% of his
portfolio in sugar and 50% in automobiles.
As one can see the returns on his portfolio are a weighed average of the individual returns of
each stock.
Return on a portfolio
Rp = X1R1 + X2R2
Where X1 and X2 are the proportions invested in each of the securities and R1 and
R2 are the returns of the two securities.
0.5X 10+0.5X 10 = 10%
Risk of the portfolio

The individual standard deviations of sugar and automobiles are 15% and 11.14.
What is surprising that the standard deviation of the portfolio comes out to be only 2.18% far
below the standard deviation of either of the two stocks? Actually it is not so surprising. A
analysis of the figures would tell you that when the stocks are combined the variability of the
returns are actually reducing. This is specially so if the co-relation coefficient between the two
stocks is low. If the volatility of the portfolio reduces, then of course the standard deviation
would automatically be low.
In this case the investor has been wise by choosing these two stocks. While getting the same
return, he has been able to reduce his risk exposure to a great extent.
The following is the risk and return of his portfolio

Returns on Returns on Return on the portfolio
These points to the fact that if one is able to construct a portfolio wherein the correlation
coefficient is less than one, it is possible to reduce risk by diversification. In the above example
the correlation coefficient between the stocks was approximately -.99 and therefore one could
reduce risk drastically. Only when the co-relation becomes +1 between two stocks there is no
positive impact due to diversification In that case the standard deviation of the portfolio is only a
weighted average of the individual standard deviation of the portfolios.
For any two security case the return and risk of a portfolio can be calculated by usingthe
following formula: Rp = x1R1 + X2R2
Correlation coefficient
To measure portfolio risk, it is required first to calculate correlation coefficient. This correlation
coefficient between two securities will give information about their relative movements. A
positive correlation coefficient indicates similar movement between securities whereas a
negative correlation coefficient indicates inverse movement. A correlation coefficient of zero
indicates that the two securities move randomly without correlation.
The formula used for the calculation of Correlation coefficient (r) between returns on security x
and security y is
_XY = _(X-X)(Y-Y) = Covariance (X,Y) (n-1) _x _y _x _y
Where
LXY = correlation coefficient between two random variables X and Y
@X = standard deviation of X
@Y = standard deviation of Y
Applying the above formula we can calculate the Correlation coefficient.
Year X X-X(XX)2Y Y-Y (Y-Y )2 (X-X)(Y-Y)
Risk of a portfolio
Risk of a portfolio is equal to Standard Deviation
Variance = _2p = X12_12 + X22_22 + 2X1X2_12
Standard deviation = _ p =_ X12_12 + X22_22 + 2X1X2_12
X1 and X2 continue to be the respective proportions or weights invested in each of the two
securities respectively whereas @1 and @2 are the standard deviations of the two securities. The
symbol @12 represent the covariance between the two securities.
The covariance between the two securities can also be taken as the product of the individual
standard deviations and the co-relation coefficient between the two securities
Covariance= _12 = _1 x _2 x _12
The correlation coefficient between the two securities is represented by L12

In case one were to find the standard deviation of a portfolio consisting of n securities then in
that case one would need the following calculations
a. The standard deviations of each of the securities

b. The proportions invested in each of the securities
c. The correlation coefficient between each of the securities
In the example given below the risk and return of two securities is given. The return on equity is
14% and that on debt is 8%. The standard deviation on equity is 6%and on debt is 3%.
Depending on the correlation, the risk of the portfolio changes for a particular portfolio
composition. The sum of the weights of the two securities totals
1. As is evident the return is a weighted sum. However the risk of the portfolio changes as
per the co-relation coefficient. The risk is lowest if the correlation coefficient is -1 and is
the highest if the correlation coefficient is +1. In the second case there would be no
benefit of diversification and the standard deviation would simply be the weighted
average of the standard deviation of the two securities.
Weights
Return of portfolio
Risk of portfolio
Risk of portfolio
Risk of portfolio
Risk of portfolio
ABR
LED = co-relation coefficient between Debt and Equity
The variance of the portfolio with n assets is the sum of the expressions given below
_2p = X12 _12 + X22 _22 + ……… Xn2 _n2 + 2X1X2 _12 + 2X1X3 _13 + …… +
2Xn-1Xn _n-1,n
Obviously there would be no investor who would be holding only 2 securities. The moment the
number of securities goes up the difficulty of calculating the variance of the portfolio goes up in
direct proportion to the number of securities in the portfolio. For example, if there were 50
securities one would require-
50estimatesofreturns
50estimatesofstandarddeviations
(50X49)/2 =1225 estimates of correlation coefficients.
Over and above that one would have numerous permutations and combinations with the
proportions that were to be invested in each security. This would require extremely superior
computing facilities that would be out of the reach of even sophisticated investors.
The Market Model
The Capital Asset Pricing Model also known as the Market Model came out as solution to the
above complexity. Not only was it much simpler but also much easier to comprehend. It required
far fewer assumptions and calculations and came up with results that were if not more were as
reasonably efficient as the Markowich model. It is also popularly known as the Market Model.
Instead of finding out the relationship of each security with the other, it would be far simpler to
find out the relationship of each security with a common benchmark. In this case the benchmark
used would be a stock market index. In that case the return relationship can simply be captured in
the following manner.
ri=_iI + _iIrm + _iI

NiI=interceptterm
ri=returnonsecurity
rm=returnonmarketindexI
OiI=slopeterm
P iI = random error term
This relationship simply states that the returns of the security can be related to the market return
represented by rm. Alpha is the intercept term and epsilon is the error term. The term P is known
as the random error term and simply shows that the market model does not explain security
returns perfectly. The random error term can be viewed as a random variable that has a
probability distribution with a mean of zero and a standard deviation denoted by @ei.
Graphical representation of the market model

As already mentioned the intercept term measures the return on the security even when the
market index is zero. However the slope in a security’s market model measures the sensitivity of
the security’s return to the market index’s returns. Since the slope is positive, it means that
higher the market returns, higher the security’s returns.
The slope also called the beta is nothing but the covariance of the security returns with that of the
market returns divided by the variance of the market returns. It can be denoted as
_iI =_im/_m2
A stock that has a return that mirrors the return on the market index will have a beta equal to 1
and an intercept of zero. Any security that has a beta over 1 can be classified as an aggressive
security and a security that has a beta of less than 1 is called a defensive security. According to
the market model the total risk can be broken into diversifiable risk and non-diversifiable risk
a. Market or systematic risk: risk related to the macro economic factor or market index
b. Unsystematic or firm specific risk: risk not related to the macro factor or market index
c. Total risk = Systematic + Unsystematic
@2=O2@M2+@2(ei) where;
@2=total variance
O2@M2=systematic variance
@2(ei) = unsystematic variance
Systematic Risk can be measured by using Beta. Following is the formula for calculating
Beta:
_ = n_XY -_X_Y
n_X2 – (_X)2
where
X=Return on Index
Y=Return on Stock
n = number of stocks
This model obviously has a great many advantages since this reduces the number of estimates of
finding portfolio risk and return
In effect one would need to find out only the estimates of only the return of the security, the
covariance of the security with that of the market, the standard deviation of the security, the
returns on the market and the variance of the market.
No more does one need to figure out the covariance of the security with another and so on. All
one needs to do is find out the beta of the security. The square of the beta multiplied by the
variance of the market would give the systematic risk of the security. If the systematic risk of the
security were subtracted from the total variance or the total risk, then one can figure out the
unsystematic risk of the security.
The above result was detailed for an individual security wherein the total risk could be
subdivided into systematic and unsystematic portions. If one were to find the risk for a portfolio
a similar procedure can be used, except in this case a portfolio beta needed to be calculated.
While using portfolios, it is hoped that diversification would be able to reduce the unsystematic
risk to nil and that the only risk that the portfolio would bear would be that of systematic risk
which cannot be diversified away. In that case the latter terming the equation would be equal to
zero and that the risk of the portfolio can be approximated by only O2@M2
Using Beta
The portfolio beta is nothing but the individual betas of different securities multiplied by the
respective weight of the proportion of investment in the particular security.
_p=W1_1+W2_2+W3_3+W4_4+……….+Wn_n
Security Beta Proportions
Proportion multiplied by the beta of the security
Returns on the security
In the above table assuming one has taken a basket of 10 securities, and then the portfolio beta
would be nothing but the proportion that has been invested in the particular security multiplied
by the beta of the security. In this case the portfolio beta works out to be 0.90.
If one were to assume that the standard deviation of the market was let say 25, then
in that case the total risk of the portfolio would be equal to
=0.9 x 0.9 x 25 x 25= 506.25
The standard deviation would be 22.5
The returns of course would simply be a weighted average of the returns on individual securities.
In this case the returns are 10.40%.
The above discussion regarding finding out the risk of a security or a portfolio using beta
however has a catch. While using it for a portfolio, the systematic risk is more or less
synonymous with the total risk simply because one has diversified the unsystematic portion. In
reality, this may not be so and in that case the systematic risk cannot be used as a proxy for the
total risk. The problem becomes more pronounced in case of an individual security. Since the
unsystematic element would be higher, using beta to calculate risk would not give the entire risk
profile of the security.
Using Beta to select securities

In the above discussion, beta was used as a means to calculate the risk of either an individual
security or a portfolio. Beta can also be used to select a particular security for investment. As
earlier explained that a security that has a beta of more than 1 is an aggressive security and a
security having a beta of less than 1 is known as a defensive security. What this implies is that if
the market goes up by lets say 10%, then if the beta is 1.5, in that case the returns expected out of
the security should be 15%. In case of market downswing, a similar result would be expected. In
this case the returns on the security should go down by 15% if the market falls by 10%. In a
defensive security having a beta of less than 1, the returns of the security would be less than the
returns of the market in case of an upswing and the fall would also be less pronounced than that
of the market in case the market falls.
To understand the above relationship of the security with that of the market, the market model
equation is simplified
The above form of the market model is normally simplified to
ri-rf =_iI + _iI(rm-rf) + _iI
Ri = _iI + _iI(rm-rf) + _iI
If the alpha is 0, in that case the above equation reduces to:-
ri = rf + _(Rm-rf)
What this practically translates into is that the returns on a security should be at least equal to the
risk free rate of return plus beta multiplied by the risk premium on the market. Rm-Rf is known
as the risk premium that is due to the fact that there is an additional risk associated with investing
in the market.
Example:
If the risk free rate of return is 7%, the returns on the market is 12% and that the beta of the
security is 1.2, what is the minimum return that should be expected on the security.?
= 7% + 1.2 (12%-7%)
= 7% +6%= 13%
Only if the returns from the purchase of a security are expected to be greater than or equal to
13%, only then should the investor purchase the particular security. The logic behind is this is
fairly simple. More the risk borne, more should be the return expected. So in this case if the
systematic risk represented by beta is more, then the return that is expected should obviously be
more.
In fact most portfolio managers are always looking at mis priced securities for the simple reason
is that they would be able to give returns more than what their return risk profile would indicate.
As and when the security is able to generate better results than what is expected after factoring in
the risk factor of Beta, in that case there would be a positive alpha. Again while using this to
select securities, it must be represented that the risk from the security while using beta gets
factored in only to the tune of the unsystematic risk. In the actual world especially while
selecting securities the return expected must take into account both systematic and unsystematic
portions. Therefore using beta to find out the expected returns does not take into account the
other relevant risks that one is exposed to besides the systematic portion.
Introduction to Financial Market

A financial market can be defined as the market in which financial assets are created or
transferred. It consists of investors or buyers of securities, borrowers or sellers of securities,
intermediaries and regulatory bodies. Formal trading rules, relationships and communication
networks for originating and trading financial securities link the participants in the market
Financial markets are classified as:
•Money Markets
• Capital Markets
MONEY MARKET
Money market deals with all transactions in short term instruments with a period of maturity of
one year or less like treasury bills, bills of exchange, etc. The important function of money
market is to channel savings into short term productive investments like working capital.
The money market is classified as the following:-
ORGANIZED MONEY MARKET: Indian financial system consists of money market and
capital market. The organized market is dominated by commercial banks. The major participants
are the Reserve Bank of India, Life Insurance Corporation, General Insurance Corporation, Unit
Trust of India, commercial banks and mutual funds. The Reserve Bank of India occupies a
strategic position of managing market liquidity through open market operations of government
securities, access to its accommodation, cost (interest rates), availability of credit and other
monetary management tools.
UN-ORGANIZED MONEY MARKET: Despite rapid expansion of the organized money

market through a large network of banking institutions that have extended their reach even to the
rural areas, there is still an active unorganized market. It consists of indigenous bankers and
moneylenders. In the unorganized market, there is no clear demarcation between short-term and
long-term finance and even between the purposes of finance. The unorganized sector continues
to provide finance for trade as well as personal consumption.
CAPITAL MARKET
The capital market deals with transactions related to long term instruments with a period of
maturity of above one year like corporate debentures, government bonds, etc. and stocks.
The capital market functions as an institutional mechanism to channel long term funds from
those who save to those who need them for productive purposes. It serves as a medium to bring
together entrepreneurs, initiating activity involving huge financial resources & savers,
individuals or institutions, seeking outlets for investment.
The capital market consists of primary and secondary markets.

PRIMARY MARKET deals with the issue of new instruments by the corporate sector such as
equity shares, preference shares and debt instruments. The primary market in which public issue
of securities is made through a prospectus is a retail market and there is no physical location.
Offer for subscription to securities is made to investing community. : There are several major
players in the primary market.
These include the merchant bankers, mutual funds, financial institutions, foreign institutional
investors (FII) and individual investors.
SECONDARY MARKET OR STOCK EXCHANGE is a market for trading and settlement of

securities that have already been issued. The investors holding securities sell securities through
registered brokers/sub-brokers of the stock exchange. The secondary market provides a trading
place for the securities already issued, to be bought and sold. In the secondary market, there are
the stock brokers (who are members of the stock exchanges), the mutual funds, financial
institutions, foreign institutional investors FIIs), and individual investors.
Regulatory Guidelines
The financial market in India was highly segmented until the initiation of reforms in 1992-93 on
account of a variety of regulations and administered prices including barriers to entry. The
reform process was initiated with the establishment of Securities and Exchange Board of India
(SEBI). The legislative framework before
SEBI came into being consisted of three major Acts governing the capital markets
a. The Capital Issues Control Act 1947, which restricted access to the securities market and
controlled the pricing of issues.
b. The Companies Act, 1956, which sets out the code of conduct for the corporate sector in
relation to issue, allotment and transfer of securities, and disclosures to be made in public issues.
c. The Securities Contracts (Regulation) Act, 1956, which regulates transactions in securities
through control over stock exchanges. In addition, a number of other Acts, e.g., the Public Debt
Act, 1942, the Income Tax Act, 1961, the
Banking Regulation Act, 1949, have substantial bearing on the working of the securities market
CAPITAL ISSUES (CONTROL) ACT, 1947
The Act had its origin during the Second World War in 1943 when the objective of the
Government was to pre-empt resources to support the War effort. Companies were required to
take the Government's approval for tapping household savings.
The Act was retained with some modifications as a means of controlling the raising of capital by
companies and to ensure that national resources were channeled into proper lines, i.e., for
desirable purposes to serve goals and priorities of the government, and to protect the interests of
investors. Under the Act, any firm wishing to issue securities had to obtain approval from the
Central Government, which also determined the amount, type and price of the issue. This Act
was repealed and replaced by SEBI Act in 1992.
SECURITIES CONTRACTS (REGULATION) ACT, 1956

The previously self-regulated stock exchanges were brought under statutory regulation through
the passage of the SC(R)A, which provides for direct and in direct control of virtually all aspects
of securities trading and the running of stock exchanges. This gives the Central Government
regulatory jurisdiction over
(a) Stock exchanges, through a process of recognition and continued supervision,
(b) Contracts in securities, and
(c) Listing of securities on stock exchanges.
As a condition of recognition, a stock exchange complies with conditions prescribed by Central
Government. Organized trading activity in securities in an area takes place on a specified
recognized stock exchange. The stock exchanges determine their own listing regulations which
have to conform to the minimum listing criteria set out in the Rules. The regulatory jurisdiction
on stock exchanges was passed over to SEBI on enactment of SEBI Act in 1992 from Central
Government by amending SC(R) Act.
COMPANIES ACT, 1956

Companies Act, 1956 is a comprehensive legislation covering all aspects of company form of
business entity from formation to winding-up. This legislation (amongst other aspects) deals with
issue, allotment and transfer of securities and various aspects relating to company management.
It provides for standards of disclosure in public issues of capital, particularly in the fields of
company management and projects, information about other listed companies under the same
management, and management perception of risk factors. It also regulates underwriting, the use
of premium and discounts on issues, rights and bonus issues, substantial acquisitions of shares,
payment of interest and dividends, supply of annual report and other information.
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

With the objectives of improving market efficiency, enhancing transparency, checking unfair
trade practices and bringing the Indian market up to international standards, a package of reforms
consisting of measures to liberalize, regulate and develop the securities market was introduced
during the 1990s. This has changed corporate securities market beyond recognition in this
decade. The practice of allocation of resources among different competing entities as well as its
terms by central authority was discontinued. The secondary market overcame the geographical
barriers by moving to screen-based trading. Trades enjoy counterparty guarantee. Physical
security certificates have almost disappeared. The settlement period has shortened to three days.
The following paragraphs discuss the principal reform measures undertaken since 1992. A major
step in the liberalization process was the repeal of the Capital Issues (Control) Act, 1947 in May
1992. With this, Government's control over issue of capital, pricing of the issues, fixing of
premium and rates of interest, on debentures, etc., ceased. The office, which administered the
Act, was abolished and the market was allowed to allocate resources to competing uses and
users. Indian companies were allowed access to international capital market through issue of
American Depository Receipts and Global Depository Receipts. However, to ensure effective
regulation of the market, SEBI Act, 1992 was enacted to empower SEBI with statutory powers
for
a. protecting the interests of investors in securities,

b. promoting the development of the securities market, and
c. regulating the securities market.
Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated wit securities market. SEBI
can specify the matters to be disclosed and the standards of disclosure required for the protection
of investors in respect of issues. It can issue directions to all intermediaries and other persons
associated with the securities market in the interest of investors or of orderly development of the
securities market; and can conduct inquiries, audits and inspection of all concerned and
adjudicate offences under the Act. In short, it has been given necessary autonomy and authority
to regulate and develop an orderly securities market.
In the interest of investors, SEBI issued Disclosure and Investor Protection (DIP) Guidelines.
Issuers are now required to comply with these Guidelines before accessing the market. The
guidelines contain a substantial body of requirements for issuers/intermediaries. The main
objective is to ensure that all concerned observe high standards of integrity and fair dealing,
comply with all the requirements with due skill, diligence and care, and disclose the truth, the
whole truth and nothing but the truth. The Guidelines aim to secure fuller disclosure of relevant
information about the issuer and the nature of the securities to be issued so that investor can take
an informed decision. For example, issuers are required to disclose any material 'risk factors' in
their prospectus and the justification for the pricing of the securities has to be given. SEBI has
placed a responsibility on the lead managers to give a due diligence certificate, stating that they
have examined the prospectus, that they find it in order and that it brings out all the facts and
does not contain anything wrong or misleading. Though the requirement of vetting has now been
dispensed with, SEBI has raised standards of disclosures in public issues to enhance the level of
investor protection. SEBI has recently started a system for Electronic Data Information Filing
and Retrieval System (EDIFAR) to facilitate electronic filing of public domain information by
companies.
Equity
As the name suggests, Equity represents ownership interest in a company. This particular
instrument is an outcome of the formation of the joint stock company. Accompanies grew in
size, there arose a need for far more capital than the promoters of the company could raise from
their own resources. As a result, the Equity share is an instrument wherein millions of investors
can invest in the company even though they are spread far apart.
Common stock represents Equity, or an ownership interest in a corporation. It is a residual claim

in the sense that creditors and preferred shareholders must be paid as scheduled before common
stockholders can receive any payments. . It also implies that in the event of bankruptcy, the rest
of the creditors and preferred shareholders are entitled to their dues before the Equity
shareholders can lay claim to their investments. This ensures that the Equity investment is the
most risky of all investments. Correspondingly they are entitled to all surpluses generated by the
company and therefore are in a position to earn far greater returns depending upon the
performance of the company than the other stakeholders.
Companies that are allowed to raise capital through Equity must abide by the legislation of the
Companies Act 1956.Some of the terminology that is associated with Equity is as follows:-
• Authorized capital is the amount of capital that a company can issue as per its memorandum
• Issued capital is the amount that has been offered by the company to its investors
• Paid up Capital is the portion of issued capital that has actually been subscribed to by the
investors
Par value is typically stated in the memorandum and usually ranges from Rs 1000 to Rs 1. The
most popular denominations are Rs 10 and Rs 1. Dividends are quoted as a percentage to the par
value. That is if the company states that it is giving 200%dividend, it simply means that if the par
value of the share is Rs 1, it is giving dividend of Rs 2 per share. Issue price is the price at which
the company issuesshares to the public. It can be equal to the par value but not lower than that.
Inmost cases it is more than the par value. In this case the difference is the share premium per
share.
Book Value of the share is nothing but the sum total of the paid up capital of the company and
the reserves and surplus divided by the number of shares. Market price is the price at which the
share is traded in the stock market. This is function of market dynamics and varies during trading
as per the demand and supply situation. As a result during trading hours the market price may be
different even from minute to minute. The market price may be below or greater than the issue
price or even the book value of the share.
Price-Earning multiple is popularly used to indicate the popularity of the scrip.

The higher the price earning multiple, the greater the favor of the stock
The PE multiple is simply the market price of the share divided by the earnings per share of the
stock. The earnings per share is the net profit of the company divided by the number of shares
that a company owns.
Bonus shares are given by the company to reward its shareholders for their continued holding in
the company in case the company has been doing well. The bonus is usually given in terms of
shares. For example if an Equity shareholder holds 100shares in a company and the company
announces a bonus in the ratio of 1:5. In that case for every 5 shares that an individual holds in
the company he is entitled to 1share. In this case the investor would get 20 additional shares and
his holding would increase to 120 shares. In terms of immediate impact, there would be no
change since in terms of the balance sheet all that would happen is that there would be decline in
the reserves and surplus and a corresponding increase in the paid up capital. The book value of
the share would remain the same. In the long term however he would be entitled to greater cash
flow from dividends since now he would be getting dividends on not 100 shares but 120 shares.
So if he was earlier getting Rs 5 per share as dividend, he would now receive Rs 600 as total
dividends instead of Rs 500 earlier. Stock Split is affected by companies to increase the liquidity
in the company’s shares. Many a time if the market price of the share has increased to such high
levels that it is beyond the ability of the investor to buy a single share also then the trading
interest in the particular share gets affected.
In that case the company goes in for a stock split wherein the par value of the share gets
truncated. Taking an example in case a company’s market price of the shares is Rs 4000/- and
the par value of the share is Rs 50. The company can announce a stock split in the ratio of5:1. In
that case the par value will become 1/5th that is Rs 10. The price of the share would come down
approximately by 1/5th and the investor who holds 10shares of the company would now hold 50
shares.
Rights issue is made by the company to raise money by first opting to ask existing shareholders
if they would further like to invest money in the company. It is a privilege allowing existing
shareholders to buy shares of an issue of common stock shortly before it is offered to the public,
at a specified and usually discounted price, and usually in proportion to the number of shares
already owned also called subscription right. A rights issue is offered to all existing shareholders
individually and may be rejected, accepted in full or (in a typical rights issue) accepted in part by
each shareholder. To make the rights share attractive, they are always issued at a price lower than
the market price. While making a rights issue the manager has to consider: Subscription price per
new share, Number of new shares to be sold, the value of rights , the effect of rights on the value
of the current share , the effect of rights to existing and new shareholders.
Dividend is the cash payments made by the company to its shareholders. These are typically
declared quarterly by the board of directors and paid to the stockholders of record at a date
specified by the board known as the date of record. Earnings yield is nothing but the earnings per
share divided by the market price of the share. This measure simply denotes the earnings that is
there if one were to buy the share today. Dividend yield like the earnings yield has its base the
market price of the share. The numerator in this case is the dividends per share.
Return on Equity is the net profits of the company divided by the net worth of the company. The
net worth of the company is equal to the paid up capital + reserves and surplus.
Valuation of Equity shares

In general the value of any asset is derived from the cash flows associated with that asset. The
asset in question may be a financial asset or a real asset. The cash flows are those the expected
cash flows occurring in future. Therefore the value of the asset would be the present value of the
same. The general form can be expressed as follows:-
V0 C1 C2+..Cn
where:
= _____ + _____ + _____ V0 = Value at time 0(1 + i) 1(1 +i)2(1 +i)n
C = Year's cash flow
i = Annual interest rate
n = Number of years
For instance, a three-year asset with cash flows of Rs2000 in year one, Rs 3000 in year two and
Rs 5000 in year three would be valued at Rs 9144 if interest is 4%.
Year Cash Flow x PVIF@4% = Discounted Cash Flow
1 2000 × .962 = Rs 1924
2 3000 × .925 = Rs 2775
3 5000 × .889 = Rs 4445
Rs 9144
A similar valuation philosophy is also adopted for Equity shares. The return from an
Equity share is made up of two parts one the dividends that are received from the company and
the second the capital gain that is earned by selling the stock in the future a price that is
hopefully higher than what one paid for it.
If one were to assume that the stock was held permanently and therefore there was no question of
capital gains, in that case the cash flows would consist of only dividends. This is not an
unreasonable assumption to make since Equity is a permanent source of capital and if one sold
an Equity share, there would be another investor to buy it. The Equity share is therefore not
extinguished. The three valuation models that are associated with this particular model are.
a. Constant dividend model

b. Constant growth dividend model
c. Uneven stream of dividends
2.2 Constant dividend model
D1
P0 = ______Ks
In the above equation D1 stands for the dividends that are to be received in the coming year and
the Ks stand for the required return. The Ks can be calculated using the capital asset model i.e.
Ks = Rf + O (Rm-Rf).
In this case the assumption is that the dividends received are going to be constant throughout the
life of the company. This model is normally not used.
Constant growth model (Also called the Gordon model)

D1 where:
P0 = _______ D1 = Dividends Year 1
Ks - g Ks = Investors' required rate of return
g = Growth rate in dividends
D1 would be calculated by multiplying current dividends by (1 + g).
For example, price a share of common stock with current dividends of Rs 5, a dividend growth
rate of 3% if the investors' required rate of return is 15%.
P0 = _______ = Rs42.92
.15 – .03
D1 was found by multiplying the current dividends of Rs5 by 1.03 (1 + .03).
In case the prevailing price was more than Rs42.92, in that case the investor should not be
buying it since the intrinsic value of the share comes out to be Rs42.92. In case the investor
would like to make a decision on the valuation of the share not on the basis of price but on the
basis of the return, it can be done in the following manner.
By manipulating the Gordon formula, the investors' required rate of return may be estimated.
D1 Ks = _____ + gP0
For example, find the investors' required rate of return on a share of common stock selling for
Rs100, current dividends of Rs3 and a dividend growth rate of 4%.
Ks = _______ + .04 = 7.12%100
This can be compared again with the required rate of return. If the actual rate of return is less
than the required rate of return, in that case the investor would obviously not like to purchase the
share.
Unequal stream of dividends In this case the valuation of the Equity share would be divided into
two parts. The first would represent the known cash flows and the second part would represent
the valuation for an indefinite period.
Taking an example of a share that is expected to grow in the following manner.
a. 15% growth for next 3 years

b. 10% growth for the then next 3 years
c. 5% growth for the then next 3 years d) 2% growth indefinitely
The required rate of return by the investor is 12%. The last paid dividend was Rs 3.
What should be the price paid for the share?
Method:
a. For the first 9 years find out the dividends for each of the years and discount
it to the present using the appropriate discount factor for that year
b. After the end of the explicit period, find out the price at the end of 9th year using the constant
growth model
c. Discount the price at the end of the 9th year to the base year
d. Add up all the present value sums. The intrinsic value of the share is the total of the present
values.
Year Growth rate Dividends

Required rate of return
Present value factor
Present value of dividends
Present value of dividends and price
The above methods are based on the discounted method. There are other methods that are based
on the basis of the relative valuation i.e. on the basis of PE multiple of similar companies in the
same z. Those methods are called the relative valuation methods.
Preferred shares
Preferred shares are stock in a company which have a defined dividend, and a prior claim on
income to the common stock holder.
Should the company wind up operations, preferred shareholders are paid any obligations owed to
them. Should a dividend be suspended by the Board of Directors, for what ever reason, the
preferred share usually has a cumulative clause in it allowing that any unpaid dividends must be
paid fully before any dividends may be declared and paid to holders of common stock. This
means that the preferred share is a relatively more secure investment.
The corporate issuing preferred shares may add differing features to the share in order to make it
more attractive. These features are similar to those used in the fixed income market and include
convertibility into common shares, call provisions, etc. Many have equated preferred shares with
a form of fixed income security due to its defined dividend stream.
However, with the added security offered by the guaranteed dividend stream, the holder of
preferred shares gives up the right to vote on issues related to corporate governance. Therefore,
the preferred holder has little input into corporate policy.
There are two types of preference shares in three categories:

a. Cumulative or Non Cumulative preference shares.
b. Redeemable or Perpetual preference shares.
c. Convertible or Non-Convertible preference shares.
For cumulative preference shares, the dividends will be paid on a cumulative basis, in case they
remain unpaid in any financial year due to insufficient profits. The company will have to pay up
all the arrears of preference dividends before declaring any Equity dividends. While on the other
hand, the non-cumulative shares do not enjoy such right to dividend payment on cumulative
basis. Redeemable preference shares will be redeemed after a given maturity period while the
perpetual preference share capital will remain with the company forever.
Warrants
Warrants are a form of option which is usually added to a corporate bond issue or preferred stock
in order to sweeten the deal.
A warrant is a long dated option which allows the owner to participate in the capital gains
(losses) of a firm without buying the common stock. In effect, the holder of a warrant has a
leveraged play on the corporate common stock. As a form of option, a warrant has an exercise
price and an expiry date. The exercise price is the price at which the holder may convert the
warrant into common shares of the issuer. The expiry date is the last date on which the warrant
may be converted into common shares. Given that a warrant is generally issued to reduce the
cost of a debt issuer, the expiry date is usually more than two years from issuance. This allows
warrants to trade separately from the bond with which they were issued.
Thereby providing the investor with a long dated option on a firm's common stock
There is a draw back to warrants for those investors concerned with income. As an option, a
warrant does not pay a dividend, and is subject to a certain amount of price compression as the
underlying stock approaches or surpasses the exercise price. These are only a factor if the
investor is purchasing the warrants when the common stock is trading near the exercise price.
Warrant holders have no voting rights until the warrants are converted into common shares.
Upon conversion an active role may be taken in corporate governance. If the warrants provide
for conversion into preferred shares, it is unlikely the holder will gain any influence into
corporate governance upon conversion.
Fixed Income Securities

A fixed income security refers to any type of investment that offers or yields are gular and fixed
return.
A fixed income security can be contrasted with variable return securities such asbonds in as
much that equity shareholders share in both the return as well as the risk whereas fixed income
shareholders are only entitled to a fixed income in the form of interest on the capital lent. The
principal that they have lent is repaid after some time.
There is some terminology that is associated with Fixed Income Securities:

Principal refers to the amount that is lent.
Coupon is the rate of interest that is to be paid on the security and is calculated on the face value
of the bond that is if the face value of the bond is Rs 1000 and the coupon is 12% per year. In
that case the interest will be Rs 120 yearly.
Maturity is the period for which the amount has been borrowed.
Indenture is the contract that states all the terms of the bonds.
Yield is the actual return that is given by the bond which includes the interest as well as the
capital gain/loss as the case may be. This is also called the Yield to Maturity (YTM). The YTM
is the rate of return earned on a bond held until maturity (also called the “promised yield”).Bond
rating: The bond rating system helps investors determine a company's credit risk. Think of a
bond rating as the report card for a company's credit rating. Blue chip firms, which are safer
investments, have a high rating, while risky companies have a low rating.
The chart below illustrates the different bond rating scales from the major rating agencies:
Moody's, Standard and Poor's and ICRA and CRISIL Ratings. It is to be noted that the credit
agency ICRA and CRISIL are promoted by Moody’s and standard and Poor (S&P) respectively.
Bond Rating Grade Risk

Moody's/ ICRA S&P/ CRISIL
Aaa AAA(20Companies) Investment Highest Quality
Aa AA+, AA Investment High Quality
A A, A+ Investment Strong
Baa BBB-, BBB, BBB+ Investment Medium Grade
Ba, B BB+, BB Junk Speculative
Caa/Ca/C B+, B, B- Junk Highly Speculative
C C, D Junk In Default
Since bonds pay a fixed income, most people that invest in them are those that are looking for a
fixed and constant return on their investment. However it is not necessary that bonds are totally
risk free. Bonds are subject to certain risks such as Interest rate risk, Default risk and Re-
investment risk. The major factor is the interest rate risk. To understand the nature of interest rate
risk, it is important to understand how bonds and debentures are valued.
In general the value of a bond is the present value of the interest payments and the principal
payment at maturity.
To take an example:
Par value of the bond = Rs 1000
Maturity of the bond = 6 years
Principal payment = at the end of 6 years at par
Required rate of interest = 10%
In that case the value of a bond will be equal to120 PVIFA10%, 6 years + 1000 PVIFA10%. 6
year
PVIFA = Present Value Interest Factor of an Annuity0
Interest payment
Principal payment
Present value interest factor
Present value of interest payments
Present value of principal
(Total present value of interest payments)
(Total present value of principal payment)
Total value of debenture
In this case one can see that the value of the bond is more than the par value. Incase the required
rate of return was more than the coupon rate, in that case the value of the bond would be less
than that of par value. This is evident from the next example. This example shows that if the
required rate of return is 15%, with all other things constant the value of the bond would now be
Rs 886.47 compared to the earlier Rs 1087.11 with 10% required rate of return.
0 Interest payments
Principal payment
(Total present value of Interest payments)
A logical question in this case would be to ask that why the required rate of return is different
from that of the coupon rate.
A company may have issued a bond on a particular date given the prevailing interest rates. A
year later the interest rates might have changed due to changes in the monetary policy or
inflation etc. For an investor who had originally bought the bond and plans to hold it to maturity
would not be bothered much about valuation.
However he might be losing out if in the meantime the interest rates have moved up and he is
locked in a lesser interest rate investment. On the other hand had the interest rates reduced, in
that case the investor would have gained but the company would have correspondingly lost out
since they have to pay higher interest rates than prevailing interest rates. These situations are
common and happen in case of Fixed Income Securities having fixed interest rates. The
valuation of the bond assumes importance if the security has to be sold. In that case the buyer of
the security would obviously be expecting a market determined yield. So in case the required
return is more than that of the coupon rate the balance yield would have to make up by the
capital appreciation. Conversely if the required rate of return is less than that of the coupon rate,
in that case there will be capital loss to balance out the difference in interest rates.
In general the discount rate (ki) is the opportunity cost of capital, and is the rate that could be
earned on alternative investments of equal risk. It can be calculated as the sum total of
a. risk free rate

b. Inflation premium
c. Market risk premium
d. Default risk premium
e. Liquidity premium
ki = k* + IP + MRP + DRP + LP
Secondly
If required rate of return > coupon rate the Price of bond < par value of bond
If required rate of return < coupon rate the Price of bond > par value of the bond
If required rate of return = coupon rate the Price of bond = par value of the bond
That is why there is an inverse relationship between the interest rates and the price of the bond.
Yield to Maturity
A very important concept with regard to bond valuation is the yield to maturity.
The yield to maturity is nothing but the yield that equates the present value of all future interest
payments and present value of the future repayment of principal to the present value of the bond.
V = I X PVIFA, n, k%, + P X PVIFA, n, k%
PVIFA = Present Value Interest Factor of an Annuity
k = effective discount rate per payment period
n = number of payments.
Example:
If the present value of the bond is given as Rs 125, the coupon payments as Rs 12 (12% coupon
rate), the maturity as 7 years and the principal repayment at par at the end of 7 years, what would
be the yield to maturity?
0 Interest payments
Principal payment
In the above example the YTM works out to be 7%. As the value of the bond is more than that of
the par value, it is evident that the YTM would be less than of the coupon rate. If on the other
hand one were to take the value of the bond as Rs 90then the YTM would work out to be 14%
more than that of the coupon rate.
0 Interest payments
Principal payment
From the above discussion it is evident that the YTM consists of two parts. One the current yield
and the other the capital gains yield
Current Yield (CL) = ANNUAL COUPON PAYMENT
CURRENT PRICE
Capital Gains Yield (CGY) = CHANGE IN PRICE
BEGINING PRICE
Expected Total Return (YTM) = Expected + Expected
CL CGY
A bond’s computed YTM will only actually be earned if:
• The bond is held to maturity
• The bond issuer does not default in the timing or amount of scheduled payments
• All the cash flows are immediately reinvested to earn the bond’s YTM
Bond Pricing Theorems
• Bond prices and yields are inversely related as yields increase, bond prices fall; as yields fall,
bond prices rise
• An increase in a bond’s yield to maturity results in a small price change than
a decrease in yield of equal magnitude
• Prices of long term bonds tend to more sensitive to interest rate changes than prices of short
term bonds
• Interest rate risk is inversely related to the bond’s coupon rate. Prices of high coupon bonds are
less sensitive to changes in interest rates than prices of low coupon bonds
• The sensitivity of a bond’s price to a change in its yield is inversely related to the yield to
maturity at which the bond currently is selling
• As maturity increases, price sensitivity increases at a decreasing rate.
• Price sensitivity is inversely related to a bond’s coupon rate.
• Price sensitivity is inversely related to the yield to maturity at which the bond is selling.
Government Securities
1. Government securities can be bifurcated into five types depending upon the issuing body.
These are as follows:-

2. Central government securities
3. State government securities
4. Securities guaranteed by Central government for All India Financial
Institutions like IDBI, ICICI, IFCI etc.
5. Securities guaranteed by State Government for State Institutions like State electricity boards
and housing boards.
6. Treasury bills issued by RBI.
Central Government securities are all bonds and treasury bills issued by central government,
state government and other entities like corporations, municipal authorities and companies
wholly owned by the government for the purpose of raising funds from the public. These
securities are normally referred as gilt-edged securities as repayments of principal as well as
interest are totally secured by sovereign guarantee. Hence government securities are considered
as safest securities. State Government securities are the securities issued by the respective state
governments but the RBI coordinates the actual process of selling these securities. Each state is
allowed to issue securities up to a certain limit each year.
CHAPTER 4
Summary of Findings, Conclusions and Recommendations
4.1 SUMMARY
This study was conducted to find out the investor perception and selection behavior
towards Mutual Funds. The respondents were from the city of Bangalore. A questionnaire was
designed and distributed to 100 respondents. The findings, conclusions and recommendations of
the study are as follows:
Findings
1. The media through which the respondents became aware about the MF’s is television and
newspapers.
2. Most of the investors prefer open-ended and interval schemes in order to earn more
returns and foe liquidity.
3. The main reason behind investing in MF’s is to earn good returns and for safety and
liquidity.
4. The fund related qualities like fund performance record, brand name, withdrawal
facilities, ratings, etc are generally considered to be important by the investors.
5. Among the sponsor related qualities, the reputation, brand name and expertise of the
sponsors were considered important.
6. Among the investor related qualities, the disclosure of NAV and fringe benefits are
considered important.
4.2 scope of the system
Mutual Funds provide several benefits to investors. Some of them are:

11. Benefits retail investors as a source of saving with higher return.
12. The concept is based on ‘Drops make an Ocean’. So, it is a mutual act for common
benefit.
13. It is ‘Professionally Managed’.
14. There is flexibility of portfolio diversification.
15. There is diversification of risk as it contains small investors in one hand and investment
in basket of blue chip companies, gilt-edged securities, bonds, debt instruments or
indices.
16. There is a relative liquidity.
17. It is a small investor savvy, so it attracts investors in large numbers.
18. The entry and exit load is nominal. The administration expenses are also economical.
Conclusions
The emergence of an array of savings and investment options and the dramatic increase
in the secondary market for financial assets in the recent years in India has opened up an entirely
new area of value creation and management. . MF industry in India has a large untapped market
in urban areas besides the virgin markets in the semi-urban and rural areas. This market potential
can be tapped by scrutinizing investor behavior to identify their expectations and articulate
investor’s own situation and risk preference.
Presently more and more funds are entering the industry and their survival depends on
strategic marketing choices of mutual funds companies, to survive and thrive in this highly
promising industry, in the face of such cut throat competition. In addition, the availability of
more savings instruments with varied risk-return combination would make the investors more
alert and choosy. Running a successful MF requires complete understanding of the peculiarities
of the Indian Stock Market and also the psyche of the small investor. Under such a situation, the
present exploratory study is an attempt to understand the financial behavior of investors in
connection with scheme preference and selection.
Investor’s choice of a MF scheme is influenced by the offer or’s brand popularity, which
reduces the perceived risk of an investor. Indian investors trend to rate good returns and liquidity
factor very high in their choice of schemes. Hence, we find more of open-ended schemes. The
past performance or the track record of a fund, as publicized and discussed by various MF
trackers, certainly is an important driver for choosing MF scheme.
The results suggested that there were distinct investor segments that value different
attributes. The results have implications for the marketing of financial products and for the
providers of financial advice. Those providing advice to the growing market of individual
investors need to have an accurate understanding of clients’ attitudes to investment. If they do
not; it will be extremely difficult for them to provide appropriate advice that will satisfy a client
in the long-term.
The present study was an attempt to determine which mutual fund attributes are valued
by individual investors. Given our limited knowledge of investment decision-making processes
and consumer behavior as it applies to financial assets and services, the possibilities for future
research in this area are extensive. As has already been noted, the range of attributes used in this
study was not exhaustive. There is a scope for further investigation into attributes that were not
included in the present study, including the influence that a company’s environmental and social
credentials might have on investors’ choices. Additionally, a larger sample size covering more
centers can improve the reliability and validity of the results.
4.3 Suggestion
Recommendations
Since the investor’s need for liquidity and returns is found to be high, more of the new schemes
opening for subscription be open-ended.
AMC’s should continuously design suitable schemes to meet the triple needs of adequate returns,
safety and liquidity in a balanced proportion and develop infrastructure to reach to the investors.
The MF operational environment is becoming more competitive. Hence, the impact of emerging
competition on investor behavior/behavioral changes needs to be studies further. Developments
in technology influence the behavior of investors. Hence, the impact of technology on financial
behavior is another potential area for close study. Since the industry is still struggling to win the
investor’s confidence, an in-depth analysis into investor’ expectations from MF products, its
performance, management, service and other related areas could be done.
This study reveals that MF investors feel that currently the two major benefits, which MF’s
purport to offer, namely, diversification benefits and professional management are not
satisfactorily delivered. In spite of this, MF industry is growing and we attribute this to investor
behaviour and other macroeconomic factors. Further research can be done to understand the
reasons for growing popularity on one side and the struggle to win investor’s confidence on the
other side.
By proper segmentation and by targeting the right product to the right customer, MF companies
can cope to win the confidence of their customers and own them for a life time.
Questionnaire to Investors in Mutual Funds
I. Personal Data
1.1 Name (Optional) :
1.2 Sex : Male Female
1.3 Age in completed years:
Below 30 31 – 40 41-50 Above 50
1.4 Academic Qualifications:
School Final Graduate Post-Graduate Professional Degree
1.5 Occupation:
Professional Business Salaried Retired
1.6 Annual Income in Rs :
Below Rs.1, 00,000 Rs.1, 00,000 – 3, 00,000
Rs.3, 00,000 – 5, 00,000 above Rs.5, 00,000
1.7 Annual Savings:
Less than Rs.50, 000 Rs.50, 001 to 1, 00,000 above Rs.1, 00,000
1.8 Objectives of your savings:
To provide for retirement For tax reduction
To meet contingencies For children’s education
1.9 What is your current preference of Savings Avenue?
Currency Bank Deposits Life Insurance Gold Chits
Shares Pension & PF MF Postal Savings Real Estate
1.10 How do you know about Mutual Fund Investment Schemes?
Reference groups Newspapers TV Brokers
II. General Data
2.1 Do you prefer investment in Mutual Funds to other savings avenue in future?
Yes No Not Sure
2.3 Generally you prefer

Growth Schemes Income Schemes
Balanced Schemes Money Market Schemes
Tax Savings Schemes Index Schemes
2.4 You prefer:
Open Ended Schemes Close Ended Schemes Interval Schemes
2.5 You prefer investment in Mutual Funds due to
Safety Liquidity
Flexibility Good Return
Capital appreciation Professional Management
Tax Benefit Diversification Benefit
III. Selection Criteria

Highly Important Some Not Very Not at all
Important What Important Important
Important
3.1. Fund Related Qualities
a) Fund performance record

b) Fund Brand name
c) Withdrawal facilities
d) Favorable ratings
e) Scheme Innovativeness
f) Minimum initial investment
3.2. Fund Sponsor Qualities

a) Reputation of sponsoring
firm
b) Sponsor has a recognized
brand name
c) Sponsor has a well
developed
agency and network
d) Sponsor’s expertise in
managing money
e) Sponsor has a well
developed
f) Sponsor’s past performance
in
terms of risk and return
3.3. Investor Related Services
a) Disclosure of investment
objective in advertisement
b) Disclosure of periodicity of
valuation
c) Disclosure of NAV
d) MF’s Investor grievance
redressal machinery
e) Fringe benefits
f) Preferred MF to avoid
problems
Thank you very much for your kind co-operation and for taking time to complete this
Questionnaire.

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INDIAN CAPITAL MARKET

NAME : S. MADAN KUMAR

Under the Supervision of

INSTITUTE OF DISTANCE EDUCATION

INSTITUTE OF DISTANCE EDUCATION

Certified that this is the bonafide project work done by

Final year of M.B.A. Degree course in the Institute of Distance

Education, University of Madras, Chennai – 600 005 during the

Certified that R. MUTHUVEL with Enrolment Number

C8101PBA4461 a student M.B.A. Degree Course in the Institute of

Distance Education, University of Madras has undergone the project

work in the INDIAN CAPITAL MARKET from October 2009

to November 2009. During the period of study and observation

in our organisation his/her conduct was good.

Date : 30.11.09 Signature

1. Name of the Head : Mr. Bala Kumar

2. Name of the Industrial Unit/ : Eclat Innovatire Services

Office Seal with date

2.1 Analysis of the situation 26

3.1 Present conditions with special reference to the organization 57

Summary, Conclusion and Suggestion

Questionnaire to Investors in Mutual Funds 99

1.1 Organization Profile

What is a Mutual Fund?

The working of MF is illustrated in the form of a diagram

Passed back to Pool their money with

Returns Fund Manger

• Creation of an appropriate regulatory framework to promote sound, orderly and

First Phase – 1964-87

Second Phase – 1987-1993 (Entry of Public Sector Funds)

The graph indicates the growth of assets over the years.

Mutual Fund Set up

Net Asset Value (NAV) of a scheme

Schemes according to Maturity Period

Open-ended Fund/ Scheme

Close-ended Fund/ Scheme

Growth / Equity Oriented Scheme

Income / Debt Oriented Scheme

Money Market or Liquid Fund

Tax saving schemes

Mutual Funds provide several benefits to investors. Some of them are:

1. It has no tailor-made schemes to suit to each individual retail investor.

1.3 Need for the study

The study has the following objectives:

Vidyashankar (1990), Agrawal GD (1992), Gupta LC (1993) Atmaramani (1996),

1.4 Statement of the problem

1.6 Procedure Methodology

Limitations of the study

1. To understand the perception of the investors towards Mutual Funds.

Profile of the respondents

Annual Income in Rs Frequency

Schemes Frequency Percentage

Schemes Frequency Percentage

O pen ended s c hem es

Analysis and Inference

Fund related qualities HI I SWI NVI NAAI Total

Analysis and Inference

Fund Performance record

Fund Brand name

2.2 Existing of the system

Fund Withdrawal facilities

Minimum Initial Investment

Analysis and Inference