CONTENTS

Sr no. Name of the concept Page No.

Introduction

Need of the study

Objectives of the study

I
Scope of the study

Methodology of the study

Limitations of the study

II Review of Literature

III Industry Profile

IV Findings, Suggestions and Conclusion

V Survey form

VI Bibliography

VII

I - INTRODUCTION
INTRODUCTION

A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciations realized are shared by its unit
holders in proportion to the number of units owned by them. Thus a Mutual Fund is the
most suitable investment for the common man as it offers an opportunity to invest in a
diversified, -professionally managed basket of securities at a relatively low cost.

The project idea is to project mutual funds as the better avenue for investment. Mutual
fund is productive package for a lay-investor with limited finances. Mutual fund is a
very old practice in U.S., and it has made a recent entry into India. Common man in
India still finds ‘Bank’ as a safe door for investment. This shows that mutual funds have
not gained a strong foot-hold in his life.

The project creates an awareness that the mutual fund is worthy investment practice.
The various schemes of mutual funds provide the investor with a wide range of
investment options according to his risk-bearing capacities and interest. Besides, they
also give a handy return to the investor. The project analyses various schemes of mutual
fund by taking different mutual fund schemes from different AMC’S. The future
challenges for mutual funds in India are also considered.
Mutual Fund Definition

A mutual fund is an investment security that enables investors to pool their money
together into one professionally managed investment. Mutual funds can invest in
stocks, bonds, cash or a combination of those assets. The underlying security types,
called holdings, combine to form one mutual fund, also called a portfolio.

In simpler terms, mutual funds are like baskets. Each basket holds certain types of
stocks, bonds or a blend of stocks and bonds to combine for one mutual fund portfolio.

For example, an investor who buys a fund called XYZ International Stock is buying
one investment security — the basket — that holds dozens or hundreds of stocks from
all around the globe, hence the "international" moniker.

It's also important to understand that the investor does not actually own the underlying
securities — the holdings — but rather a representation of those securities; investors
own shares of the mutual fund, not shares of the holdings. For example, if a particular
mutual fund includes shares of stock in Apple, Inc. (AAPL) among other portfolio
holdings, the mutual fund investor does not directly own Apple stock.

Instead, the mutual fund investor owns shares of the mutual fund. However, the
investor can still benefit by the appreciation of shares in AAPL.
Since mutual funds can hold hundreds or even thousands of stocks or bonds, they are
described as diversified investments. The concept of diversification is similar to the
idea of strength in numbers. Diversification helps the investor because it can reduce
market risk compared to buying individual securities.

What is a Mutual Fund?

You've heard of mutual funds and you've heard that they can be smart investments for
almost any investor. But what exactly are mutual funds and how do they work?
Mutual funds are the most popular investment types for the everyday investor. Why?
Because they are simple investments to understand and they are easy to use -- in many
ways, it's "investing for dummies." In fact, if you're not already one of the millions of
shareholders of mutual funds, you'll only need to take about two or three minutes out of
your day to read this article and you'll be ready to get started investing.

Furthermore the simplicity of investing in mutual funds is not just an attractive feature
for beginning investors; the accessibility, versatility and easy-to-understand structure of
mutual funds makes for powerful investing vehicles for all kinds of investors, including
the pros, and can be appropriate for a variety of savings and investing objectives,
including college and retirement.

So without further ado, here's what to know about mutual funds to get you started
investing. And if you're already investing, this can be a good refresher course on this
powerful yet simple security type:

The Advantages of Mutual Funds

Simplicity: Most investors do not have the knowledge, time or resources to build their
own portfolio of stocks and bonds. Stock investors often have extensive knowledge of
fundamental analysis or technical analysis. However, buying shares of a mutual fund
enables an investor to own a professionally managed, diverse portfolio, although the
investor may have little or no knowledge of investing concepts and strategies. Mutual
funds are professionally managed, which means the investor does not need knowledge
of investing in capital markets to be successful with them.

Diversity: All investors, beginners and pros alike, know that putting all of their eggs
into one basket is not wise. This speaks to the wisdom of diversification with mutual
funds. To diversify with stocks, an investor may need to buy 20 or more securities to
reach sufficient diversification. However, many mutual funds offer complete
diversification in just one security that can be easily purchased. Therefore, a mutual
fund investor can break the eggs-in-one-basket rule with mutual funds, at least when
getting started, and then add more mutual funds later to increase diversity in the mutual
funds portfolio. For more on this idea, be sure to read our article on how to get started
investing with just one mutual fund.

Versatility: There are so many types of mutual funds that investors can gain access to
almost any segment of the market imaginable. For example, sector funds make it
possible for investors to buy into focused areas of the market, such as healthcare,
technology, financials, and even social media. Beyond sector funds, investors can also
access other asset types, such as gold, oil and other natural resources. This versatility
can be used for further diversification as an investor's portfolio grows. Professional
money managers often use sector funds for this purpose in building client portfolios.

Accessibility: With as little as $100 an investor can get started investing with mutual
funds. And the fact that mutual funds hold dozens, hundreds, or even thousands of other
securities, an investor can gain access to an entire market of investable securities. For
example, an investor buying shares in one of the total stock market index funds, gains
exposure to over 3,000 stocks in just one fund. This returns to the simplicity and
diversification of mutual funds. Although investing concepts and strategies are rarely
taught in schools, the beginning investor can find easy tips about how to buy mutual
funds online or in bookstores and get started investing within minutes or just a few
hours.

Professional management. Mutual Fund managers are professionally trained and

experienced, constantly watching and managing their fund. Remember, though: the guy
on the other side is not Warren Buffett. He might come close, but he’s not Warren.

Instant diversification. Since one of the primary rules of investment is to diversify

portfolios, a mutual fund can be a simple and successful way to accomplish this goal.
With one investment, you will own shares of stock in many corporations. A mutual
fund portfolio combines a variety of stocks, bonds, commodities and cash, mutual funds
are, by nature, diversified. If one stock or asset goes down, there will be others that
compensate for it. This just means that the potential for losses is spread out
conservatively.

Liquidity: If you ever want to get out of a mutual fund, all you have to do is instruct
your broker or financial advisor. They can sell it immediately. Normally, the funds take
a day to come back into your account, but that’s not so bad. Comparatively, individual
stocks would take much longer to liquidate.

Match your style. You can find a mutual fund that matches almost exactly what you are
looking for from an investment. This could be related to both your risk tolerance and
your investment horizon.
Disadvantages of Mutual Funds

Management Fees. Mutual fund companies have to pay salaries and marketing expenses
and they always get paid FIRST before the investors/owners get paid! Management
fees are one of the key metrics to watch out for as an investor because they can quickly
and devilishly eat into your profits over time. Do higher management fees correlate to
higher returns and better performance? As it turns out, the answer is NO. In fact, many
studies have been done that show higher fees generally correlate to lower performance.

Locked in Clause. There are two different mutual fund structures - one allows you to go
in and out at any time. The other one is locked in for 5-7 years. With this one, if you try
to take your money out earlier, you’ll get charged for it. Make sure to ask your financial
advisor which type you are investing in.

Wasted Cash. Because people occasionally want to withdraw their mutual funds, there
must always be funds available - in cash - for payouts. When money’s in cash, it’s not
collecting interest. Since this comes from a portion of the investment funds, it means it
doesn’t collect any interest for you. That amount of cash is better off sitting in your
bank account.

Mutual Fund Charges.

Mutual funds charge fees when you redeem your money. There are also “operating
expense” fees. This is a percentage of what it costs to run the fund. Let’s say you
invested $10,000, and the operating fees are 2%. This means that you are effectively
paying $200 every year in operating charges.
Buying Individual Stocks Versus Investing in Mutual Funds

As a newer investor, you should also be aware that you can save some research time by
investing in mutual funds instead of individual stocks. Mutual funds contain a mix and
diversity of stocks in which you will spread out one investment into many small blocks
of shares.

Mutual funds and ETFs (exchange traded funds) have been available since the mid-
1970s (mutual funds) and early 1990s (ETFs), attracting billions of investment dollars.
An easy way for investors to diversify their portfolio without doing extensive research
on individual companies and stocks, they are attractive to the casual or, perish the
thought, lazy investor. Over time, mutual funds, ETFs, and Index ETFs (funds
specializing in and tied to an industry index) have performed quite well.

You should understand, however, that few of these funds have outperformed the market
in general. More than 90% of mutual funds fail to beat the S&P 500 index (a
compilation of the 500 biggest U.S. stocks) every year, making mutual funds an
expensive way to pay for diversification and risk management.

One of the many reasons that funds cannot beat the markets is because of the obvious
expenses that they have. They buy ads in magazines and on TV. They have large legal
and accounting expenses. And they have to mail you your statements every month.
Some mutual funds charge rather large fees for trades and/or management. Always
learn about these fees before you decide which mutual fund is best for you. In most
cases, these fees reduce your return by 0.50-2.00% and make investing in individual
stocks by yourself the logical choice.

One of the myths about the stock market is that you get what you pay for and that by
paying big fees, you’ll get a big return on your return. That simply isn’t true and, in
fact, the opposite is more often true: low fees and no expenses usually lead to the
biggest returns on your money.

The Bottom Line: Why Invest in Mutual Funds?

As with anything in the stock market: there are no guarantees. There are certainly pros
and cons when it comes to mutual funds. Mutual funds are based on stocks and other
investments that can go up or down. Contrary to what the ads seem to suggest,
performance is not guaranteed with a mutual fund. All we have is past performance to
make our decisions.

On the other hand, just because a mutual fund loses money one year does not mean it
will lose money every year. If you have absolutely no stomach for risk, then maybe stay
away from mutual funds. But - if you believe in the financial system, there’s not much
harm in trying it out. After all, investing in a mutual fund is way less risky than going
for a single stock.

The stock markets of the world are a wonderful opportunity to increase your wealth.
However, you must bring your brain and knowledge with you when you enter these
waters. It’s important that you learn all that you can about the market: how it works,
market cycles, how it faces roadblocks and problems, and how you should react to the
highs and lows that eventually occur. Our Putting Your Money in the Market course
will help you with that.

Be strong, be confident, be smart, hopefully be lucky – and be profitable!

Basic Types of Mutual Funds

There are thousands of mutual funds in the investment universe but they can be divided
into a few basic types and categories of funds. The two primary types of mutual funds
are stock funds and bond funds. From there, the categories of funds get more
specialized and diverse.

For example, stock funds can be further broken into three sub-categories of
capitalization — small-cap, mid-cap, and large-cap. They are then categorized further
as either growth, value, or growth and income. Stocks can also be classified as
international, global or foreign, all of which have similar objectives.

Bond funds are primarily categorized by the duration of the bonds, which are described
as short-term, intermediate-term, or long-term. They are then broken into sub-
categories of corporate bonds, municipal bonds, and U.S. Treasury bonds.

Most mutual fund categories can be purchased as index funds, which can be described
as passively-managed funds. This means that the portfolio manager does not actively
buy and sell securities but rather matches the holdings of a benchmark index, such as
the S&P 500 index or the Dow Jones Industrial Average. Beginners often start with one
of the best S&P 500 Index funds.

From there, investors can learn more about the various types of mutual funds, such as
those mentioned here, and how to build a portfolio of mutual funds around that core
investment. Index funds often have hundreds of holdings and offer investors the
greatest features of mutual funds — simplicity, diversity and low-cost.

Understanding the Risks of Investing in Mutual Funds

Stocks, bonds, and mutual funds all involve some level of market risk, which is the
possibility of fluctuation in value or even the loss of principal (the amount you
originally invested).

For example, you could invest $1,000 for 10 years and end up with $950. Although
receiving a negative return like this over a 10-year period is extremely rare, it is
possible. It is more reasonable to expect an average of return of somewhere between 7
and 10 percent for stock investments, including stock mutual funds, for periods of 10
years or more. However, there are short periods, such as 1 year, where your stock
mutual fund can decline in value by as much as 30 to 40 percent. Similarly, you could
have gains of more than 50% in one year.

So whether you're investing in individual stocks or a stock mutual fund, you need to
have some reasonable expectations about how the stock market behaves. And more
importantly, how you will react in the brief but inevitable extremes? Will you sell your
mutual funds if they lose 10% in 3 months? Before you begin investing, it's best to get
an idea of your risk tolerance.
NEED OF THE STUDY

The study basically made to educate the investors about Mutual Funds. Analyze the
various schemes to highlight the risk and return of diversity of investment that mutual
funds offer. Thus, through the study one would understand how a common man could
fruitfully convert a pittance into great penny by wisely investing into the right scheme
according to his risk- taking abilities.

A small investor is the one who is able to correctly plan & decide in which profitable &
safe instrument to invest. To lock up one’s hard earned money in a savings bank’s
account is not enough to counter the monster of inflation. Using simple concepts of
diversification, power of compound interest, stable returns & limited exposure to equity
investment, one can maximize his returns on investments & multiply one’s savings.

Investment is a serious proposition one has to look into various factors before deciding
on the instruments in which to invest. To save is not enough. One must invest wisely &
get maximum returns. One must plan investment in such a way that his investment
objectives are satisfied. A sound investment is one which gives the investor reasonable
returns with a proper profitable management

This report gives the details about various investment objectives desired by an investor,
details about the concept & working of mutual fund.
OBJECTIVES OF THE STUDY

• To understand the concept of Mutual Funds.

• To study the different Sectoral Mutual Funds in India.

• To analyse the performance of different sectoral mutual funds.

• To identify the best Sectoral Mutual Funds to invest in India.

• To suggest the best mutual funds for investors.

SCOPE OF THE STUDY

Now a days, there is a lot of scope for the mutual funds. The Financial managers
have to decide whether to invest in the Shares, bonds, debentures, real estate, gold and
other Commodities to get the maximum benefits for funds. The financial managers
should also reduce the risk from the Investments. The scope of the study is confirmed to
the sectoral funds available in Indian mutual funds.

RESEARCH METHODOLOGY

In the present project work the data as been collected from available source that is
secondary data like websites, Newspapers and magazines. The sample size taken is of 7
different sectoral funds
Sampling Design
Sampling method use is non probabilistic judgmental sampling. The Mutual Fund
Scheme for the study have been selected based on following 3 criteria
1 Type of the scheme Open-ended Sectoral Funds(growth)

2 Minimum Assets Under Mgmt. Rs. 500 Crore

3 Inception Date Prior to 1st April, 2006
Growth option for the entire selected scheme has been considered.

Research Design

1.Benchmark Index: For this study the 50 shares market index S&P CNX
NIFTY has been used as the market index.

2. Period of study: Period of study has been taken as 5 years starting from 1st
April, 2006 to 10th July 2010.

3.Risk Free Rate Of Return: Risk free rate of return refers to that minimum
return on an investment that has no risk of loosing the investment over
which it is earned. For this purpose of this study risk free rate of return is
represented by 91 days Treasury bill.

LIMITATIONS

1. The analysis is based on historical data and thus indicates the past performance
which may not always be indicative of the future performance.

2. Different schemes consider different market indices as their benchmarks, but for
the purpose of uniformity in the study all schemes have to be compared against
same benchmark index.
3. Sharpe ratio (in its simplest forms) that the relationship between risk and return
is linear and remain linear throughout its entire range. Various research works
conducted in this regard show that the relationship is not as simple as Capital
Market theory would suggest. This is an inherent weakness of capital Asset
Pricing Model.

4. The time period considered by the study is only three years; a larger period
could have ensured coverage of a full market cycle, thus giving a more real
picture of the performance of the schemes.
 II - REVIEW OF LITERATURE

Mutual Funds: An overview

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments. The income earned
through these investments and the capital appreciations realized by the scheme are
shared by its unit holders in proportion to the number of units owned by them (pro
rata). Thus a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed portfolio at a
relatively low cost. Anybody with an investible surplus of as little as a few thousand
rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment
objective and strategy.

A mutual fund is the ideal investment vehicle for today’s complex and modern financial
scenario. Markets for equity shares, bonds and other fixed income instruments, real
estate, derivatives and other assets have become mature and information driven. Price
changes in these assets are driven by global events occurring in faraway places. A
typical individual is unlikely to have the knowledge, skills, inclination and time to keep
track of events, understand their implications and act speedily. An individual also finds
it difficult to keep track of ownership of his assets, investments, brokerage dues and
bank transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally qualified
and experienced staff that manages each of these functions on a full time basis. The
large pool of money collected in the fund allows it to hire such staff at a very low cost
to each investor.
In effect, the mutual fund vehicle exploits economies of scale in all three areas -
research, investments and transaction processing. While the concept of individuals
coming together to invest money collectively is not new, the mutual fund in its present
form is a 20th century phenomenon.

In fact, mutual funds gained popularity only after the Second World War. Globally,
there are thousands of firms offering tens of thousands of mutual funds with different
investment objectives. Today, mutual funds collectively manage almost as much as or
more money as compared to banks.

A draft offer document is to be prepared at the time of launching the fund. Typically, it
pre specifies the investment objectives of the fund, the risk associated, the costs
involved in the process and the broad rules for entry into and exit from the fund and
other areas of operation. In India, as in most countries, these sponsors need approval
from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI looks at
track records of the sponsor and its financial strength in granting approval to the fund
for commencing operations.

A sponsor then hires an asset management company to invest the funds according to the
investment objective. It also hires another entity to be the custodian of the assets of the
fund and perhaps a third one to handle registry work for the unit holders (subscribers)
of the fund.

In the Indian context, the sponsors promote the Asset Management Company also, in
which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the
Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the
Birla Sun Life Asset Management Company Ltd., which has floated different mutual
funds schemes and also acts as an asset manager for the funds collected under the
schemes
History of Mutual Fund in India:
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 has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total
assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets
under management was way ahead of other mutual funds.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29,835 crores as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores
of assets under management and with the setting up of a UTI Mutual Fund, conforming
to the SEBI Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of March, 2006, there were 29 funds.

Future Scenario

The asset base will continue to grow at an annual rate of about 30 to 35 % over the next
few years as investor’s shift their assets from banks and other traditional avenues. Some
of the older public and private sector players will either close shop or be taken over.

Out of ten public sector players five will sell out, close down or merge with stronger
players in three to four years. In the private sector this trend has already
Started with two mergers and one takeover. Here too some of them will down their
shutters in the near future to come.

But this does not mean there is no room for other players. The market will witness a
flurry of new players entering the arena. There will be a large number of offers from
various asset management companies in the time to come. Some big names like
Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously. One
important reason for it is that most major players already have presence here and hence
these big names would hardly like to get left behind.

The mutual fund industry is awaiting the introduction of derivatives in India as this
would enable it to hedge its risk and this in turn would be reflected in its Net Asset
Value (NAV).

SEBI is working out the norms for enabling the existing mutual fund schemes to trade
in derivatives. Importantly, many market players have called on the Regulator to initiate
the process immediately, so that the mutual funds can implement the changes that are
required to trade in Derivatives.
Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive expansion of the
foreign owned mutual fund companies and the decline of the companies floated by
nationalized banks and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties and got
off to a good start due to the stock market boom prevailing then. These banks did not
really understand the mutual fund business and they just viewed it as another kind of
banking activity.
Few hired specialized staff and generally chose to transfer staff from the parent
organizations. The performance of most of the schemes floated by these funds was not
good. Some schemes had offered guaranteed returns and their parent organizations had
to bail out these AMCs by paying large amounts of money as the difference between
the guaranteed and actual returns.

The service levels were also very bad. Most of these AMCs have not been able to retain
staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they
have serious plans of continuing the activity in a major way. The experience of some of
the AMCs floated by private sector Indian companies was also very similar. They
quickly realized that the AMC business is a business, which makes money in the long
term and requires deep-pocketed support in the intermediate years. Some have sold out
to foreign owned companies, some have merged with others and there is general
restructuring going on.

The foreign owned companies have deep pockets and have come in here with the
expectation of a long haul. They can be credited with introducing many new practices
such as new product innovation, sharp improvement in service standards and
disclosure, usage of technology, broker education and support etc. In fact, they have
forced
The industry to upgrade itself and service levels of organizations like UTI have
improved dramatically in the last few years in response to the competition provided by
these.

Types of Mutual Funds

Mutual fund schemes may be classified on the basis of its structure and its investment
objective.

By Structure:

Open-ended Funds
An open-end fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset
Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

Closed-ended Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to
15 years. The fund is open for subscription only during a specified period. Investors can
invest in the scheme at the time of the initial public issue and thereafter they can buy or
sell the units of the scheme on the stock exchanges where they are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling
back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the
investor.

Interval Funds
Interval funds combine the features of open-ended and close-ended schemes. They are
open for sale or redemption during pre-determined intervals at NAV related prices.
By Investment Objective:-

Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to
longterm. Such schemes normally invest a majority of their corpus in equities. It has
been proven that returns from stocks, have outperformed most other kind of
investments held over the long term. Growth schemes are ideal for investors having a
long-term outlook seeking growth over a period of time.

Income Funds
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures
and Government securities. Income Funds are ideal for capital stability and regular
income.

Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and invest both in equities and fixed
income securities in the proportion indicated in their offer documents. In a rising stock
market, the NAV of these schemes may not normally keep pace, or fall equally when
the market falls. These are ideal for investors looking for a combination of income and
moderate growth.

Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer short-term instruments such
as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Returns on these schemes may fluctuate depending upon the interest rates prevailing in
the market. These are ideal for Corporate and individual investors as a means to park
their surplus funds for short periods.

Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each time you
buy or sell units in the fund, a commission will be payable. Typically entry and exit
loads range from 1% to 2%. It could be worth paying the load, if the fund has a good
performance history.

No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no
commission is payable on purchase or sale of units in the fund. The advantage of a no
load fund is that the entire corpus is put to work.

Other Schemes:-

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian
Income Tax laws as the Government offers tax incentives for investment in specified
avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension
Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also
provides opportunities to investors to save capital gains u/s 54EA and 54EB by
investing in Mutual Funds, provided the capital asset has been sold prior to April 1,
2000 and the amount is invested before September 30, 2000.
Special Schemes

• Industry Specific Schemes

• Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like
InfoTech, FMCG, and Pharmaceuticals etc.

• Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE
Sensex or the NSE 50

• Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a group of
industries or various segments such as 'A' Group shares or initial public offerings.

• Commodities Funds
Commodities funds specialize in investing in different commodities directly or through
commodities future contracts. Specialized funds may invest in a single commodity or a
commodity group such as edible oil or rains, while diversified commodity funds will
spread their assets over many commodities
 RISK HIERARCHY OF MUTUAL FUNDS

Money Equity
Mark Funds
Funds Debt
Gilt Funds Hybrid
Funds Funds
Aggressive
Growth
Flexible
allocation
Asset
Funds Growth fund
Funds
High Yield
Risk Debt Funds
Level Diversified
Equity Funds

Index Funds

Value Funds
Focused
Debt Funds Growth and
Income
funds
Equity Income
Funds
Balanced
Diversified Funds
Debt Funds
Money Gilt Funds
Market Funds

Type of Fund

TABLE 2

Snapshot of Mutual Fund Schemes

 Mutual Who
Investment Investment
Fund Objective Risk should
Portfolio Horizon
Type invest
Those who
Treasury Bills,
Liquidity + park their
Certificate of
Moderate funds in
Money Deposits,
Income + Negligible current 2 days - 3 weeks
Market Commercial
Reservation of accounts or
Papers, Call
Capital short-term
Money
bank deposits

Shortterm Call Money,

Commercial
Funds Those with
Liquidity + Papers,
(Floating Little Interest surplus 3 weeks - 3
Moderate Treasury Bills,
Rate short-term months
- Income CDs, Shortterm
funds
shortterm) Government
securities.

Bond Predominantly
Debentures,
Funds
Credit Risk Government Salaried &
More than 9 - 12
Regular Income & Interest securities, conservative
(Floating months
Rate Risk Corporate investors
- Bonds
Longterm)
Salaried &
Gilt Security & Interest Rate Government
conservative 12 months & more
Funds Income Risk securities
investors
Aggressive
Long-term investors
Equity
Capital High Risk Stocks with long 3 years plus
Funds Appreciation term out
look.
 To generate
returns that are NAV varies Portfolio
Index commensurate with index indices like Aggressive
3 years plus
Funds with returns of BSE, NIFTY investors.
respective performance etc
indices
Balanced ratio
Capital of equity and
Growth &
Balanced Market Risk debt funds to Moderate &
Regular 2 years plus
Funds and Interest ensure higher Aggressive
Income
Rate Risk returns at lower
risk

Benefits of Mutual Fund investment

1. Professional Management:

Mutual Funds provide the services of experienced and skilled professionals,

backed by a dedicated investment research team that analyses the performance and
prospects of companies and selects suitable investments to achieve the objectives of
the scheme.

2. Diversification:

Mutual Funds invest in a number of companies across a broad cross-section of

industries and sectors. This diversification reduces the risk because seldom do all
stocks decline at the same time and in the same proportion. You achieve this
diversification through a Mutual Fund with far less money than you can do on your
own.
3. Convenient Administration:
Investing in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and follow up with brokers and
companies. Mutual Funds save your time and make investing easy and convenient.

4. Return Potential:
Over a medium to long-term, Mutual Funds have the potential to provide a
higher return as they invest in a diversified basket of selected securities.

5. Low Costs:
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial
and other fees translate into lower costs for investors.

6. Liquidity:

In open-end schemes, the investor gets the money back promptly at net asset
value related prices from the Mutual Fund. In closed-end schemes, the units can be
sold on a stock exchange at the prevailing market price or the investor can avail of
the facility of direct repurchase at NAV related prices by the Mutual Fund.

7. Transparency:
Investors get regular information on the value of your investment in addition to
disclosure on the specific investments made by the scheme, the proportion invested
in each class of assets and the fund manager's investment strategy and outlook.

8. Flexibility:
 Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans, one can systematically invest or withdraw funds
according to your needs and convenience.

9. Affordability:
Investors individually may lack sufficient funds to invest in high-grade stocks. A
mutual fund because of its large corpus allows even a small investor to take the
benefit of its investment strategy

10.Well Regulated:

All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The
operations of Mutual Funds are regularly monitored by SEBI.

Limitation of Mutual Fund Investment

1. No Control Over Cost:

An Investor in mutual fund has no control over the overall costs of investing. He
pays an investment management fee (which is a percentage of his investments) as
long as he remains invested in fund, whether the fund value is rising or declining.
He also has to pay fund distribution costs, which he would not incur in direct
investing.

However this only means that there is a cost to obtain the benefits of mutual fund
services. This cost is often less than the cost of direct investing.

2. No Tailor-Made Portfolios:
Investing through mutual funds means delegation of the decision of portfolio
composition to the fund managers. The very high net worth individuals or large
corporate investors may find this to be a constraint in achieving their objectives.

However, most mutual funds help investors overcome this constraint by offering
large no. of schemes within the same fund.

3. Managing A Portfolio Of Funds:

Availability of large no. of funds can actually mean too much choice for the
investors. He may again need advice on how to select a fund to achieve his
objectives.
AMFI has taken initiative in this regard by starting a training and certification
program for prospective Mutual Fund Advisors. SEBI has made this certification
compulsory for every mutual fund advisor interested in selling mutual fund.

4. Taxes:

During a typical year, most actively managed mutual funds sell anywhere from 20
to 70 percent of the securities in their portfolios. If your fund makes a profit on its
sales, you will pay taxes on the income you receive, even if you reinvest the money
you made.

5. Cost of Churn:

The portfolio of fund does not remain constant. The extent to which the portfolio
changes is a function of the style of the individual fund manager i.e. whether he is a
buy and hold type of manager or one who aggressively churns the fund. It is also
dependent on the volatility of the fund size i.e. whether the fund constantly receives
fresh subscriptions and redemptions. Such portfolio changes have associated costs
of brokerage, custody fees etc. which lowers the portfolio return commensurately.
Conceptual background of the study:-

With a plethora of schemes to choose from, the retail investor faces problems in
selecting funds. Factors such as investment strategy and management style are
qualitative, but the funds record is an important indicator too. Though past performance
alone can not be indicative of future performance, it is, frankly, the only quantitative
way to judge how good a fund is at present.

Therefore, there is a need to correctly assess the past performance of different mutual
funds. Worldwide, good mutual fund companies over are known by their AMCs and
this fame is directly linked to their superior stock selection skills. For mutual funds to
grow, AMCs must be held accountable for their selection of stocks. In other words,
there must be some performance indicator that will reveal the quality of stock selection
of various AMCs.

Return alone should not be considered as the basis of measurement of the performance
of a mutual fund scheme, it should also include the risk taken by the fund manager
because different funds will have different levels of risk attached to them. For
evaluating the performance of selected Sectoral Mutual Fund schemes risk-return
relation models have been used like:

Ø The Treynor Measure

Ø The Sharpe Measure

Ø Jenson Model

Ø Fama Model
The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index. This Index is a ratio of return generated by the fund over and above
risk free rate of return (generally taken to be the return on securities backed by the
government, as there is no credit risk associated), during a given period and systematic
risk associated with it (beta). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the
fund.

All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and
negative Treynor's Index is an indi

cation of unfavorable performance.

The Sharpe Measure

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is
a ratio of returns generated by the fund over and above risk free rate of return and the
total risk associated with it. According to Sharpe, it is the total risk of the fund that the
investors are concerned about. So, the model evaluates funds on the basis of reward per
unit of total risk. Symbolically, it can be written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where, Si is standard deviation of the fund.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.
Comparison of Sharpe and Treynor
Sharpe and Treynor measures are similar in a way, since they both divide the risk
premium by a numerical risk measure. The total risk is appropriate when we are
evaluating the risk return relationship for well-diversified portfolios. On the other hand,
the systematic risk is the relevant measure of risk when we are evaluating less than
fully diversified portfolios or individual stocks. For a well-diversified portfolio the total
risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and
systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as
the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that
ranks higher on Treynor measure, compared with another fund that is highly
diversified, will rank lower on Sharpe Measure.

Jenson Model
Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the Differential Return
Method. This measure involves evaluation of the returns that the fund has generated vs.
the returns actually expected out of the fund given the level of its systematic risk. The
surplus between the two returns is called Alpha, which measures the performance of a
fund compared with the actual returns over the period. Required return of a fund at a
given level of risk (Ri) can be calculated as:-

Ri = Rf + Bi (Rm - Rf)

Where, Rm is average market return during the given period. After calculating it, alpha
can be obtained by subtracting required return from the actual return of the fund.
Higher alpha represents superior performance of the fund and vice versa. Limitation of
this model is that it considers only systematic risk not the entire risk associated with the
fund and an ordinary investor can not mitigate unsystematic risk, as his knowledge of
market is primitive.
Fama Model
Th1e Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these two is
taken as a measure of the performance of the fund and is called net selectivity.

The net selectivity represents the stock selection skill of the fund manager, as it is the
excess return over and above the return required to compensate for the total risk taken
by the fund manager. Higher value of which indicates that fund manager has earned
returns well above the return commensurate with the level of risk taken by him.

Required return can be calculated as:-

Ri = Rf + Si/Sm*(Rm - Rf)

Where, Sm is standard deviation of market returns. The net selectivity is then calculated
by subtracting this required return from the actual return of the fund.

Among the above performance measures, two models namely, Treynor measure and
Jenson model use systematic risk based on the premise that the unsystematic risk is
diversifiable.

These models are suitable for large investors like institutional investors with high risk
taking capacities as they do not face paucity of funds and can invest in a number of
options to dilute some risks.

For them, a portfolio can be spread across a number of stocks and sectors. However,
Sharpe measure and Fama model that consider the entire risk associated with fund are
suitable for small investors, as the ordinary investor lacks the necessary skill and
resources to diversified.
Moreover, the selection of the fund on the basis of superior stock selection ability of the
fund manager will also help in safeguarding the money invested to a great extent. The
investment in funds that have generated big returns at higher levels of risks leaves the
money all the more prone to risks of all kinds that may exceed the individual investors'
risk appetite.

BETA

Beta measures a stock's volatility, the degree to which its price fluctuates in relation to
the overall market. In other words, it gives a sense of the stock's market risk compared
to the greater market. Beta is used also to compare a stock's market risk to that of other
stocks. Investment analysts use the Greek letter 'ß' to represent beta.

This measure is calculated usingregressionanalysis. A beta of 1 indicates that the

security's price tends to move with the market. A beta greater than 1 indicates that the
security's price tends to be more volatile than the market, and a beta less than 1 means it
tends to be less volatile than the market.

β = rim × σi× σm
________________________
σm2 rim is correlation coefficient between market returns and fund
returns. σi is standard deviation of fund returns.(Si) σm is standard

deviation of market returns.(Sm) σm2 is market variance.

Coefficient of Determination (R2)--- a measure of reliability of Beta

Beta depends on the index used to calculate it. It can happen that the index bears no
correlation with the movements in the fund. Due to this reason, it is essential to take a
look at statistical value called Coefficient of Determination along with Beta. It shows
how reliable the beta number is. It varies between zero and one.
Value of 1 indicates perfect correlation with the indx. Thus, an If (R2) =0.64 it implies
that 64% of the variation in the portfolio returns is due to variations in the market
returns. Mathematically it is the square of correlation coefficient(R).

n∑ { x(− x )× (y − y )
mean mea
R= -----------------------------------------------
∑(x−xmean)2 ×∑(y−ymean)2

Where X and Y are returns on the portfolio and returns on the market respectively.
Beta and (R2) should thus be used together when examining a fund’s risk profile.

NET ASSET VALUE (NAV)

NAV per unit of a scheme on a day is the net market value of the securities held by the
total no. of the units of the scheme on the particular day. It is actually the value of of
net asset per unit. Since the market value of securities changes everyday, NAV of a
fund also varies on a day to day basis. NAV’s for open ended schemes are required to
be disclosed a daily basis(business day).

Net Assets of the scheme

NAV = ___________________

No. of units outstanding

Where,
Numerator= Market value of investment+receivables+other Accrued Income +Other
Assets- Accrued Expenses-Other Payables-Other Liabilities.
Standard Deviation- a measure of Total Risk

Standard Deviation is the most common statistical measure of judging a fund’s

volatility and risk. It measures a fund’s total risk i.e. sum of systematic risk and
unsystematic risk. Mathematically it gives a ‘quality rating’ of an avg. The SD of an
avg. is the amt. By which the no. that go in to an avg. deviate from that avg. It tells us
how closely an avg. represents the underlying avg. But one thing to be kept in mind is
that a high Standard Deviation may be a measure of volatility, but it does not
necessarily mean that such a fund is worse than one with a low Standard Deviation. If
the first fund is a much higher performer than the second one, the deviation will not
matter much.

1
∑ (x
2
i − x mean )
n
SD=

∑(xi −xmean)2 gives the square of the sum of differences of each value in the sample
from the mean of the sample of ‘n’ element.

Note: - For this project following tools have been used:-

• Standard Deviation
• Beta
• Sharp Ratio
• R-Square
III - INDUSTRY PROFILE

FINANCIAL MARKETS

Finance is the pre-requisite for modern business and financial institutions play a vital
role in the economic system. It is through financial markets and institutions that the
financial system of an economy works. Financial markets refer to the institutional
arrangements for dealing in financial assets and credit instruments of different types
such as currency, cheques, bank deposits, bills, bonds, equities, etc.

Financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives.
They are typically defined by having transparent pricing, basic regulations on trading,
costs and fees and market forces determining the prices of securities that trade.

Generally, there is no specific place or location to indicate a financial market. Wherever

a financial transaction takes place, it is deemed to have taken place in the financial
market. Hence financial markets are pervasive in nature since financial transactions are
themselves very pervasive throughout the economic system. For instance, issue of
equity shares, granting of loan by term lending institutions, deposit of money into a
bank, purchase of debentures, sale of shares and so on.

In a nutshell, financial markets are the credit markets catering to the various needs of
the individuals, firms and institutions by facilitating buying and selling of financial
assets, claims and services.
CLASSIFICATION OF FINANCIAL MARKETS

Capital Market

The capital market is a market for financial assets which have a long or indefinite
maturity. Generally, it deals with long term securities which have a period of above one
year. In the widest sense, it consists of a series of channels through which the savings
of the community are made available for industrial and commercial enterprises and
public authorities. As a whole, capital market facilitates raising of capital.

The major functions performed by a capital market are:

 1. Mobilization of financial resources on a nation-wide scale.

2. Securing the foreign capital and know-how to fill up deficit in the required
resources for economic growth at a faster rate.
3. Effective allocation of the mobilized financial resources, by directing the same
to projects yielding highest yield or to the projects needed to promote balanced
economic development.

Capital market consists of primary market and secondary market .

Primary market:

Primary market is a market for new issues or new financial claims. Hence it is also
called as New Issue Market. It basically deals with those securities which are issued to
the public for the first time. The market, therefore, makes available a new block of
securities for public subscription. In other words, it deals with raising of fresh capital
by companies either for cash or for consideration other than cash. The best example
could be Initial Public Offering (IPO) where a firm offers shares to the public for the
first time.

Secondary market:

Secondary market is a market where existing securities are traded. In other words,
securities which have already passed through new issue market are traded in this
market. Generally, such securities are quoted in the stock exchange and it provides a
continuous and regular market for buying and selling of securities. This market consists
of all stock exchanges recognized by the government of India.
Money Market

Money markets are the markets for short-term, highly liquid debt securities. Money
market securities are generally very safe investments which return relatively low
interest rate that is most appropriate for temporary cash storage or short term time
needs. It consists of a number of sub-markets which collectively constitute the money
market namely call money market, commercial bills market, acceptance market, and
Treasury bill market.

Derivatives Market

The derivatives market is the financial market for derivatives,financial instruments like
futures contracts or options, which are derived from other forms of assets. A derivative
is a security whose price is dependent upon or derived from one or more underlying
assets. The derivative itself is merely a contract between two or more parties. Its value
is determined by fluctuations in the underlying asset. The most common underlying
assets include stocks, bonds, commodities, currencies, interest rates and market
indexes. The important financial derivatives are the following:

• Forwards: Forwards are the oldest of all the derivatives. A forward contract
refers to an agreement between two parties to exchange an agreed quantity of an
asset for cash at a certain date in future at a predetermined price specified in that
agreement. The promised asset may be currency, commodity, instrument etc.
• Futures: Future contract is very similar to a forward contract in all respects
excepting the fact that it is completely a standardized one. It is nothing but a
standardized forward contract which is legally enforceable and always traded on
an organized exchange.
• Options: A financial derivative that represents a contract sold by one party
(option writer) to another party (option holder). The contract offers the buyer
the right, but not the obligation, to buy (call) or sell (put) a security or other
financial asset at an agreed-upon price (the strike price) during a certain period
of time or on a specific date (exercise date). Call options give the option to buy
 at certain price, so the buyer would want the stock to go up. Put options give the
option to sell at a certain price, so the buyer would want the stock to go down.
• Swaps: It is yet another exciting trading instrument. Infact, it is the combination
of forwards by two counterparties. It is arranged to reap the benefits arising
from the fluctuations in the market – either currency market or interest rate
market or any other market for that matter.
Foreign Exchange Market

It is a market in which participants are able to buy, sell, exchange and speculate on
currencies. Foreign exchange markets are made up of banks, commercial companies,
central banks, investment management firms, hedge funds, and retail forex brokers and
investors. The forex market is considered to be the largest financial market in the
world. It is a worldwide decentralized over-the-counter financial market for the trading
of currencies. Because the currency markets are large and liquid, they are believed to be
the most efficient financial markets. It is important to realize that the foreign exchange
market is not a single exchange, but is constructed of a global network of computers
that connects participants from all parts of the world.

Commodities Market

It is a physical or virtual marketplace for buying, selling and trading raw or primary
products. For investors' purposes there are currently about 50 major commodity
markets worldwide that facilitate investment trade in nearly 100 primary commodities.
Commodities are split into two types: hard and soft commodities. Hard commodities
are typically natural resources that must be mined or extracted (gold, rubber, oil, etc.),
whereas soft commodities are agricultural products or livestock (corn, wheat, coffee,
sugar, soybeans, pork, etc.)

INDIAN FINANCIAL MARKETS

India Financial market is one of the oldest in the world and is considered to be the
fastest growing and best among all the markets of the emerging economies.
 The history of Indian capital markets dates back 200 years toward the end of the
18th century when India was under the rule of the East India Company. The
development of the capital market in India concentrated around Mumbai where
no less than 200 to 250 securities brokers were active during the second half of
the 19th century.

The financial market in India today is more developed than many other sectors because
it was organized long before with the securities exchanges of Mumbai,
Ahmadabad and Kolkata were established as early as the 19th century.

By the early 1960s the total number of securities exchanges in India rose to eight,
including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi,
Bangalore and Pune. Today there are 21 regional securities exchanges in India
in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over
the Counter Exchange of India).

However the stock markets in India remained stagnant due to stringent controls on the
market economy that allowed only a handful of monopolies to dominate their
respective sectors. The corporate sector wasn't allowed into many industry segments,
which were dominated by the state controlled public sector resulting in stagnation of
the economy right up to the early 1990s.

Thereafter when the Indian economy began liberalizing and the controls began to be
dismantled or eased out; the securities markets witnessed a flurry of IPO’s that were
launched. This resulted in many new companies across different industry segments to
come up with newer products and services. A remarkable feature of the growth of the
Indian economy in recent years has been the role played by its securities markets in
assisting and fuelling that growth with money rose within the economy. This was in
marked contrast to the initial phase of growth in many of the fast growing economies of
East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring
growth in their initial days of market decontrol. During this phase in India much of the
organized sector has been affected by high growth as the financial markets played an
all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public
Sector Undertakings) that decided to offload part of their equity were also helped by the
well-organized securities market in India. The launch of the NSE (National Stock
Exchange) and the OTCEI (Over the Counter Exchange of India) during the mid 1990s
by the government of India was meant to usher in an easier and more transparent form
of trading in securities. The NSE was conceived as the market for trading in the
securities of companies from the large-scale sector and the OTCEI for those from the
small-scale sector. While the NSE has not just done well to grow and evolve into the
virtual backbone of capital markets in India the OTCEI struggled and is yet to show any
sign of growth and development. The integration of IT into the capital market
infrastructure has been particularly smooth in India due to the country’s world class IT
industry. This has pushed up the operational efficiency of the Indian stock market to
global standards and as a result the country has been able to capitalize on its high
growth and attract foreign capital like never before. The regulating authority for capital
markets in India is the SEBI (Securities and Exchange Board of India). SEBI came into
prominence in the 1990s after the capital markets experienced some turbulence. It had
to take drastic measures to plug many loopholes that were exploited by certain market
forces to advance their vested interests. After this initial phase of struggle SEBI has
grown in strength as the regulator of India’s capital markets and as one of the country’s
most important institutions.
FINANCIAL MARKET REGULATIONS

Regulations are an absolute necessity in the face of the growing importance of capital
markets throughout the world. The development of a market economy is dependent on
the development of the capital market. The regulation of a capital market involves the
regulation of securities; these rules enable the capital market to function more
efficiently and impartially.

A well regulated market has the potential to encourage additional investors to partake,
and contribute in, furthering the development of the economy. The chief capital market
regulatory authority is Securities and Exchange Board of India (SEBI).

SEBI is the regulator for the securities market in India. It is the apex body to develop
and regulate the stock market in India It was formed officially by the Government
ofIndia in 1992 with SEBI Act 1992 being passed by the Indian Parliament. Chaired by
CB Bhave, SEBI is headquartered in the popular business district of Bandra-
Kurlacomplex in Mumbai, and has Northern, Eastern, Southern and Western regional
offices in New Delhi,Kolkata,Chennai and Ahmedabad. In place of Government
Control, a statutory and autonomous regulatory board with defined responsibilities, to
cover both development & regulation of the market, and independent powers has been
set up.
The basic objectives of the Board were identified as:

• to protect the interests of investors in securities;

• to promote the development of Securities Market;

• to regulate the securities market and

• For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is attending to
the fulfillment of its objectives with commendable zeal and dexterity. The
improvements in the securities markets like capitalization requirements, margining,
establishment of clearing corporations etc. reduced the risk of credit and also reduced
the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration

norms, the eligibility criteria, the code of obligations and the code of conduct for
different intermediaries like, bankers to issue, merchant bankers, brokers and
subbrokers, registrars, portfolio managers, credit rating agencies, underwriters and
others. It has framed bye-laws, risk identification and risk management systems for
Clearing houses of stock exchanges, surveillance system etc. which has made dealing in
securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like S&P CNX
Nifty & Sensex) in 2000. A market Indexis a convenient and effective product because
of the following reasons:

• It acts as a barometer for market behavior;

• It is used to benchmark portfolio performance;

• It is used in derivative instruments like index futures and index options;

• It can be used for passive fund managementas in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level,
and also to diversify the trading products, so that there is an increase in number of
traders including banks, financial institutions, insurance companies, mutual funds,
primary dealers etc. to transact through the Exchanges. In this context the introduction
of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD
is a real landmark.

SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and
successively (e.g. the quick movement towards making the markets electronic and
paperless rolling settlement on T+2 bases). SEBI has been active in setting up the
regulations as required under law.

STOCK EXCHANGES IN INDIA

Stock Exchanges are an organized marketplace, either corporation or mutual

organization, where members of the organization gather to trade company stocks or
other securities. The members may act either as agents for their customers, or as
principals for their own accounts.

As per the Securities Contracts Regulation Act, 1956 a stock exchange is an

association, organization or body of individuals whether incorporated or not,
established for the purpose of assisting, regulating and controlling business in buying,
selling and dealing in securities.

Stock exchanges facilitate for the issue and redemption of securities and other financial
instruments including the payment of income and dividends. The record keeping is
central but trade is linked to such physical place because modern markets are
computerized. The trade on an exchange is only by members and stock broker do have
a seat on the exchange.

List of Stock Exchanges in India

Bombay Stock Exchange

National Stock Exchange OTC 5. Cochin
Exchange of India
6. Coimbatore
Regional Stock Exchanges
7. Delhi
1. Ahmedabad
8. Guwahati
2. Bangalore
9. Hyderabad
3. Bhubaneswar
10. Jaipur
4. Calcutta
11. Ludhiana
12. Madhya Pradesh

13. Madras

14. Magadh

15. Mangalore

16. Meerut

17. Pune

18. Saurashtra Kutch

19. Uttar Pradesh

20. Vadodara
 BOMBAY STOCK EXCHANGE

A very common name for all traders in the stock market, BSE, stands for Bombay Stock
Exchange. It is the oldest market not only in the country, but also in Asia. In the early days,
BSE was known as "The Native Share & Stock Brokers Association." It was established in
the year 1875 and became the first stock exchange in the country to be recognized by the
government. In 1956, BSE obtained a permanent recognition from the Government of India
under the Securities Contracts (Regulation) Act, 1956.

In the past and even now, it plays a pivotal role in the development of the country's capital
market. This is recognized worldwide and its index, SENSEX, is also tracked worldwide.
Earlier it was an Association of Persons (AOP), but now it is a demutualised and corporatised
entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE
(Corporatisation and Demutualization) Scheme, 2005 notified by the Securities and Exchange
Board of India (SEBI).

BSE Vision

The vision of the Bombay Stock Exchange is to "Emerge as the premier Indian stock
exchange by establishing global benchmarks."

BSE Management

Bombay Stock Exchange is managed professionally by Board of Directors. It comprises of

eminent professionals, representatives of Trading Members and the Managing Director. The
Board is an inclusive one and is shaped to benefit from the market intermediaries
participation.

The Board exercises complete control and formulates larger policy issues. The dayto-day
operations of BSE are managed by the Managing Director and its school of professional as a
management team.
BSE Network

The Exchange reaches physically to 417 cities and towns in the country. The framework of it
has been designed to safeguard market integrity and to operate with transparency. It provides
an efficient market for the trading in equity, debt instruments and derivatives. Its online
trading system, popularly known as BOLT, is a proprietary system and it is BS 7799-2-2002
certified. The BOLT network was expanded, nationwide, in 1997. The surveillance and
clearing & settlement functions of the Exchange are ISO 9001:2000 certified.

BSE Facts

BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the
benchmark equity index that reflects the robustness of the economy and finance. It was the –

• First in India to introduce Equity Derivatives

• First in India to launch a Free Float Index

• First in India to launch US$ version of BSE Sensex

• First in India to launch Exchange Enabled Internet Trading Platform

• First in India to obtain ISO certification for Surveillance, Clearing &

Settlement

• 'BSE On-Line Trading System’ (BOLT) has been awarded the globally recognized
the Information Security Management System standard
BS7799-2:2002.

• First to have an exclusive facility for financial training

• Moved from Open Outcry to Electronic Trading within just 50 days

BSE with its long history of capital market development is fully geared to continue its
contributions to further the growth of the securities markets of the country, thus helping India
increases its sphere of influence in international financial markets.
 NATIONAL STOCK EXCHANGE OF INDIA LIMITED

The National Stock Exchange of India Limited has genesis in the report of the High Powered
Study Group on Establishment of New Stock Exchanges, which
recommended promotion of a National Stock Exchange by financial institutions (FI’s) to
provide access to investors from all across the country on an equal footing. Based on the
recommendations, NSE was promoted by leading Financial Institutions at the behest of the
Government of India and was incorporated in November 1992 as a taxpaying company unlike
other stock Exchange in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation)

Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital Market (Equities) segment commenced operations in
November 1994 and operations in Derivatives segment commenced in
June 2000.

NSE GROUP

National Securities Clearing Corporation Ltd. (NSCCL)

It is a wholly owned subsidiary, which was incorporated in August 1995 and commenced
clearing operations in April 1996. It was formed to build confidence in clearing and
settlement of securities, to promote and maintain the short and consistent settlement cycles, to
provide a counter-party risk guarantee and to operate a tight risk containment system.

NSE.IT Ltd.

It is also a wholly owned subsidiary of NSE and is its IT arm. This arm of the NSE is
uniquely positioned to provide products, services and solutions for the securities industry.
NSE.IT primarily focuses on in the area of trading, broker front-end and back-office, clearing
and settlement, web-based, insurance, etc. Along with this, it also provides consultancy and
implementation services in Data Warehousing, Business Continuity Plans, Site Maintenance
and Backups, Stratus Mainframe
Facility Management, Real Time Market Analysis & Financial News.

India Index Services & Products Ltd. (IISL)

It is a joint venture between NSE and CRISIL Ltd. to provide a variety of indices and index
related services and products for the Indian Capital markets. It was set up in May 1998. IISL
has a consulting and licensing agreement with the Standard and Poor's (S&P), world's leading
provider of investible equity indices, for co-branding equity indices.

National Securities Depository Ltd. (NSDL)

NSE joined hands with IDBI and UTI to promote dematerialization of securities. This step
was taken to solve problems related to trading in physical securities. It commenced
operations in November 1996.

NSE Facts

• It uses satellite communication technology to energize participation from around 400

cities in India.
• NSE can handle up to 1 million trades per day.

• It is one of the largest interactive VSAT based stock exchanges in the world.

• The NSE- network is the largest private wide area network in India and the first
extended C- Band VSAT network in the world.
• Presently more than 9000 users are trading on the real time-online NSE application.

Today, NSE is one of the largest exchanges in the world and still forging ahead. At NSE, we
are constantly working towards creating a more transparent, vibrant and innovative capital
market.
OVER THE COUNTER EXCHANGE OF INDIA

OTCEI was incorporated in 1990 as a section 25 company under the companies Act

1956 and is recognized as a stock exchange under section 4 of the securities Contracts
Regulation Act, 1956. The exchange was set up to aid enterprising promotes in raising
finance for new projects in a cost effective manner and to provide investors with a transparent
and efficient mode of trading Modeled along the lines of the NASDAQ market of USA,
OTCEI introduced many novel concepts to the Indian capital markets such as screen-based
nationwide trading, sponsorship of companies, market making and scrip less trading. As a
measure of success of these efforts, the Exchange today has 115 listings and has assisted in
providing capital for enterprises that have gone on to build successful brands for themselves
like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.

Need for OTCEI:

Studies by NASSCOM, software technology parks of India, the venture capitals funds and the
government’s IT tasks Force, as well as rising interest in IT, Pharmaceutical, Biotechnology
and Media shares have repeatedly emphasized the need for a national stock market for
innovation and high growth companies. Innovative companies are critical to developing
economics like India, which is undergoing a major technological revolution. With their
abilities to generate employment opportunities and contribute to the economy, it is essential
that these companies not only expand existing operations but also set up new units. The key
issue for these companies is raising timely, cost effective and long term capital to sustain
their operations and enhance growth. Such companies, particularly those that have been in
operation for a short time, are unable to raise funds through the traditional financing methods,
because they have not yet been evaluated by the financial world
VI FINDINGS, SUGGESTIONS & CONCLUSION

FINDINGS

Rate of Return: Among the funds selected, UTI Banking Sector fund has given the
maximum rate of returns (39%) in the last one year followed by Franklin FMCG
(33%). Reliance Diversified Power Sector fund with a return of (7.5%) stood last in
the table.
Among the funds selected, Reliance Diversified Power has given the maximum rate
of returns (37%) in the last five years followed by Tata Infrastructure (24%). UTI
Transportation and Logistics with a return of (16.98%) stood last in the table.

Total Risk (Standard Deviation)

UTI Banking Sector fund has the maximum standard deviation of 6.92 while

Franklin FMCG has the least standard deviation of 2.96

Systematic Risk (Beta) and Co - relation

UTI Banking Sector fund has the maximum Beta of 1.08 while UTI

Transportation and Logistics has the least Beta of 0.55.

UTI Banking Sector fund has the maximum co-relation of 1.07 while Franklin

FMCG has the least R-Squared of 0.65

Treynor& Sharpe Ratio:

 UTI Banking Sector Fund has the maximum Treynor ratio of -0.19 while Reliance
Diversified fund has the least Treynor ratio of -0.85.

Franklin Infotech has the least Sharpe Ratio of -0.15 while ICICI Prudential

Services has the maximum sharpe ratio of 0.01

SUGGESTIONS & CONCLUSIONS

1. Banking and FMCG sectors have fared well in the last one year and it is
suggested to invest in these sectors.

2. It is advised to be keep away from infrastructure funds especially Reliance

Infrastructure fund.

3. FMCG has the least risk and Banking has the highest risk among the sectors. It
is better to avoid Banking funds for people who want to avoid the risk.

4. Investors who expect slow and steady returns are advised to for FMCG sector.

5. UTI Banking Sector has a beta of greater than 1 (i.e market beta). This implies
that Banking Sector has a higher risk compared to the market portfolio.

6. FMCG, Services, Transportation and Logistics sector has the least beta and
investors can invest in these funds

ANNEXURE - I

TERMINOLOGY
Mutual Fund: An investment tool that pools in investments made by people and that corpus is
professionally managed by further investing as per the type of fund that’s being operated. The
intention is to float money in the market by owning assets components of many companies at
the same meeting the assurances made to investors. There is no obligation whatsoever for
assured returns.
NAV-A cumulative market value of total assets component of its liabilities. It’s actually the
measure of what each shareholder would aquire if the assets of the company are liquidated.
No-Load funds - there is no commission component present to enter and exit of the
fund ownership. It’s a full involvement of the corpus.
ELSS - Equity linked savings scheme is a scheme with a tax rebate allowed as per the
Sec 88 in the Indian income tax act, 1961.It provides the investors with the opportunity to
save gains on capital through investments made in MFs.
Index Funds - An interesting scheme that tries to replicate the behavior of the
particular stock index, that is of interest. The portfolio of the fund would majorly consist of
equities listed in that index.
Sector Funds - An MF scheme that has its portfolio chart of companies that belong to
a certain sector, say Oil. This is a high-risk fund, as the performance of that sector would
directly reflect in the funds NAV. So, here we are with the diverse market of Mutual Funds.
Each one claiming their USP. While MFs certainly are NOT the safest, but they are relatively
more safe than the direct involvement in the equity market, given that fact that majority of the
investors are either ill-informed or not informed about the way the markets move.

So what exactly makes MFs the right kind of fund management tool, espy in a country
like India? A country like India or for that matter any developing country has some basic
problems which prevent the information to be available freely and that too in an accessible
fashion, so with a situation like that, a professionally managed agency that would monitor the
ups and downs of the market and chart out the best investment strategies would be the best
thing to opt for.
With so many potential investors in India, MFs can go a long way in getting
established, plus with added set of alternatives within the MF schemes each has a scheme
ready for the specific needs.
Just to have a better perspective, there are various options available in the form of
Equity fund, Debt funds, Balance funds and components like Money market funds, Index
funds and the likes of it. Let’s take a peek at the important ones.
Equity Funds: The High risk - High return scheme invests in the equity markets, the
risk involved is comparatively higher than but not as high as that of the sector funds that
focus investments on specific sectors. But the higher the risk component, the higher is the
return rate. However, there is a variant in this type of equity based scheme called the ELSS or
the Equity Linked Savings Schemes, the offer a tax rebate under Sec 88 of I-T act, but the
investment needs to be locked for at least 3 years! Suitable for risk takers .The problem is that
it reacts faster to the market fluctuations, as the NAV would behave the way market behaves.
Alliance AMC is supposed to have a good equity fund expertise.
Debt Funds: Debt funds invest in the debt component or the fixed income models. So
the return is almost certain and the risk is low. However, the returns are also combatively low
compared to the principle amount. Investments in these kinds of funds range from
Govt.Securities to corporate bonds. If you are looking for shortterm safe investment options
then the liquid funds in the category is the answer for you. Several alternatives this category
is now available like the income fund, growth fund or any long-term childcare fund and the
likes of it. More diverse Debt funds are, more the chances of substantial returns.
Balance funds - This type of funds are part equity and part debt funds. The pattern
investment in balance funds is usually pre-determined. You have open-ended and closed-
ended balance funds, where the funds can be traded in an open ended case just like equities
but based on the Net Asset Value (NAV). The closed-ended funds are locked and cannot bet
traded.
Balance funds are good for those who have ascertained the risk-return based on their
needs.
When to say goodbye to your Mutual Fund?
There are some professionals who talk of when to exit from mutual funds like other talk of
when to invest in mutual funds. People who want to invest get more than the fixed deposit
earning (risk free rate), preferred option is mutual funds. It is important to base the decision
on relative performance and not absolute performance. When one fund is down 5% while
other funds or the market in general are up 10%, it is very tempting to switch over to what is
"hot." Chasing Performance is the best way to shoot oneself in the foot as we just discussed
above.
When studying relative performance, one should look at his fund and compare it to its
peers. However, comparisons should be drawn between parallels and so equity funds cannot
and should not be compared with debt funds. When choosing a benchmark, one must select
funds in the same category. If one’s fund was down 2% and the average equity fund was
down 4%, then there is no good enough reason to sell it. One should compare the returns
posted by his fund with that of the peers across various horizons such as 1-year, 3-year and
above. A short-term view can often lead to committing hara-kiri, as it doesn’t present the full
picture. If it has underperformed the average of its peers in all cases, then it sure is one of the
better reasons to exit from the fund.

A change in life stage

Investments are done with a certain objective in mind and life stages are often a determining
factor of what a person needs. A young man can afford to take more risks than a person
nearing his retirement can. In such cases, it pays to withdraw money from the equity
investments made earlier and put them in safer, more conservative debt funds that offer stable
returns without compromising on risk. So a change in life stages would be one such reason to
consider switching into a fund that matches with one’s needs. As one nears retirement, one
might want to consider more conservative funds. If one gets married, one might need to
compromise one’s risk tolerance and desired returns with that of the spouse. This could
trigger off the need to exit. A major change in any basic attribute of the fund when the fund
changes any basic attribute as mentioned by it in its offer documents, the investors have a
choice of getting out of it. Even SEBI has provided for an exit route being made available to
the investors. Changes like a change in Asset Management Company or in investment style
of fund or change of structure say from closed-end to open-end etc. are good enough reasons
for an investor to consider switching or exiting from it as they are certainly likely to affect the
fund in a major way.
Fund doesn’t comply with its objective

One of the important parameters in the selection of the fund is alignment of the risk profiles
of the investor and fund. The objective of the fund says a lot about how the fund plans to
invest. If the objective is not being complied with, it is one of the exit points worth
considering. For example, the three funds discussed above, Alliance Equity, Birla Advantage
and ING Growth all claim to be diversified equity funds yet they had huge exposures to select
ICE sector scripts that not only added volatility than is expected out of diversified funds but
also in a way, went against their stated objective.
The Fund's Expense Ratio Rises
a small rise in an expense ratio is not a big deal, however a significant rise can result in
substantial reduction of yields and so it would be better to exit the fund. In the case of bond
funds or money market funds, it is highly unlikely that the fund can increase its returns
enough to justify an increase in the fund's expenses. The Fund Manager has changed
a simple change of fund managers, in itself, is not enough reason to sell a fund on a short-
term basis. If it is a passively managed fund (index fund), then one has little to no reason to
worry. However, if it is an actively managed fund, then has to keep the eyes open on the new
manager. Observing the styles, stock picking and risks undertaken by the new manager is
important for it discloses a lot about how the fund might fare in the future. If satisfied, one
will have no reason to complain later but the process needs time and so an investor has to
observe the fund manager for some time before one takes a decision.
Enough has been earned

However, nothing is as important as to rein the horses in time. The primary principle behind
safety of investment is to take risks that can be tolerated. The principle also is specific on the
expectations that the investor must have from any investment. Just as it is important to set
realistic targets that one hopes to achieve from the investment, it is also important to exit
when target as expected has been achieved irrespective of the fact that it might be generating
better returns in a short-term.
The above list is certainly not exhaustive and individuals will have other better
reasons to quit as well. It’s just that most don’t know when to apply thought and so these
would come in handy.

TIPS FOR MUTUAL FUND INVESTORS: (SUGGESTIONS)

These are the few exact as regards investment in MF’s taken from the book with “Marketing
for the 90’s” given by the Wall Street.
1. Check your letter of offer of funds prospectus to guard yourselves against any hidden
fees.
2. Ensue that the funds track record is the same as that of the current management

3. Avoid MF’s that charge exit fees at he back end door (fee s charged by MF from the
unit holders at he time to redemption of the units.)
4. Buy the funds with no sale charged loads.(a load is a charge by the fund when investor
buys it is called the entry load or when he sells is called the exit load.)
5. If the charge it’s heavy by the M F to discourage the investors from taking short positions
in the funds units because too many investors sell their units at a time then the fund has to
sell its holdings to meet the obligations that yield into vital of

the fines overall return. Most short funds like guilt funds (these are the funds the invest
only in government securities and treasury bills thus the investors have an opportunities
to buy risk free securities). These funds yield a better return than a money market fund. It
is good for the investors who desire safety of principal amount). Money market funds
(these funds in views in money market instruments such as treasury bills, govt. bonds,
certificates of bank deposits, commercial deposits). They charge no loads, however loads
are limited by SEBI to 7%.
6. Check fund’s performance in bear as well a the bull market.

7. Guard fund risk by checking its portfolio for diversification volatility.

KEY STEPS FOR FINANCIAL PLANNING

INSURE YOURSELF BEFOREYOU INVEST

Insurance is the pre-requisite of all investments the main purpose of insurance is to protect
your current life style after retirement. It acts as a shield against all type of financial risks.
Investor has to realize that insurance is more for safe guarding against risk faced in life rather
than being an investment for profit.
CHOOSE SIMPLE INVESTMENT

Our daily life is full of complications the day-to-day grind leaves us with little energy to keep
track of our financial investments. That is copy an investor should choose simple &
uncomplicated instruments. Therefore he has to invest the hassle free instruments.

UTILIZE THE POWER OF COMPOUNDING

Compounding means payment of interest on accumulated interest. Thus money earned by you
works hard & earns more money for you. This implies that not only the principal earns
income for you but interest generated by you also earns income. One important factor is the
time period. Longer the time higher the benefit

INVEST IN INTRUMENTS THAT KEEP YOU AHEAD OF INFLATION

That silently creeps up from behind & starts eating your hard earned savings even before you
realize the situation. An investor should look at the real return (the rate of return minus the
rate of inflation) while considering an investment. He should invest in instruments, which
provide profitable-post-inflation returns.

REDUCE TAX ON YOUR INVESTMENT

There are two realities in the life. One is death & the other is tax. It is advisable that
investments should be so planned that least possible tax would be required to be paid.
Smart move for the investor is to save every rupee from tax man.

GO FOR STABLE & REALISTIC RETURNS

Stability of returns is more important that increased profit. Usually these are associated with
high volatile investment options like equities & even with government securities or gilts as
they also run high market risk. The asset allocation is suggested according to the risk profile
of an investor. So invest in the best option & get the maximum returns.
BIBLIOGRAPHY

www.njindiainvest.com
www.moneycontrol.com
www.amfiindia.com
www.karvy.com
www.valueresearchonline.com
MUTUAL FUND PRODUCT AND SERVICES---- TAXMAN
AMFI COURSE BOOK