Project report

On

Comparison of Mutual funds with other Investment

options

KARVY STOCK BROKING LIMITED

Submitted By
Ankit Das

Under the guidance of

Miss Sweta Tiwari

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 CERTIFICATE

Certified that this project report titled Comparison of Mutual funds with other
Investment option is the bonafied work of Mr. Ankit Das who carried out the research under my
supervision certified further, that to best to my knowledge the work reported herein doesn’t form
any part of other project report or dissertation on the basis of which a degree or award was
conferred on an earlier occasion on this or any other candidate.

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 INDEX

INDEX TOPIC PAGE NO.

NO.
1 Executive Summary 1
2 Introduction 2
3 Importance of the topic selected 3

4 Objectives of the project study 4

5 Investments ( Theory related to the topic) 5-8
6 Concept of Mutual funds 9 - 13
7 Types of Mutual Funds
General classification of mutual fund 14 – 16
Board classification of mutual funds 17 - 26
8 Process of Mutual funds 27
9 Portfolio management 30
10 Portfolio management process 31 - 32
11 Analysis & Interpretation of data 32
12 Portfolio of Mutual fund investment
HDFC Balanced Advantage Fund – 34
Growth
NET ASSET VALUE 35
RETURNS 36
PORTFOLIO SUMMARY 37 – 38
Top 10 Stocks in Portfolio 39
Sector Allocation v/s Category Average 40
Asset Allocation (%) 41
13 Findings & Suggestions 42 - 46

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 ACKNOWLEDGEMENT

With limitless humility, I would like to praise and thank God, the Supreme and the merciful, who
blessed me with all the favorable circumstances to go through this project.

I am highly grateful to my project coordinator, Miss. Sweta Tiwari for all his guidance and
support during the course of this training. I am indebted to all the staff members of KARVY
STOCK BROKING LIMITED who were always ready to help me.

I wish to express my profound gratitude to Prof. Joy Chakraborty Faculty Mentor for his learned
guidance, constant encouragement and valuable suggestions.

I am highly obliged to my parents, brother and sister. I am also indebted to my venerable

relatives and friends whose love and affection has played a vital role during the course of this
training.

-Ankit Das

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 EXECUTIVE SUMMARY

As a part of my study curriculum it is necessary to conduct a project. This

project provides us an opportunity to understand particular topic in depth and get exposure
towards the emerging scenario. My topic for the project is titled as “Comparison of Mutual funds
with other Investment options” in which the emphasis is given to the study of different
investment options which are available and how mutual funds can prove a better option.

Since mutual funds are a relatively recent phenomenon in India, general public or investors don’t
have clarity about this concept. As we have started witnessing the concept of more saving now
being entrusted to the funds than to keeping it in banks. So it is very important to manage the
savings efficiently to earn good and high returns. By efficient we mean which reduces the risk of
investor and increases returns on the other hand.

This project is all about how Mutual fund can be a better option for investment’s as compared
other investment options which really diversify our risk and can offer a better return as compared
to other investment options. A Portfolio of Mutual fund is presented and shown how the risk has
been diversified in different sectors so as to diversify the risk factor and also compared with
other investment options so as to show how the returns are affected.

At last, the report concludes the suggestions how Mutual funds can act as better investment
options than other investment options by taking a bit risky nature so as to increase the rate of
returns. If the investment is diversified then it can yield higher returns but should be managed
properly or efficiently.

This report actually gives a review about certain short term and long term investments options
and comparatively how Mutual funds acts as a better option to gain good returns with a
diversified risk.

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 INTRODUCTION

Economic liberalization and globalization of the Indian markets began in1991.

This meant that the Indian consumers had access to imported goods which resulted in fall in
prices of domestic goods due to high competition. This means that meant lower the interest rates
and more importantly transfer of risk from government to the individuals, forcing them to protect
their investments themselves.

Investors have plenty of option for investments. Some of them are providing fixed rate
of returns and some of them provide variable rate of return. Many of them have their investments
in Bank investments, Companies fixed deposits and UTI that were offering high returns that now
they are starting falling after globalization and liberalization.

There are some investors who are active. They are the ones who act promptly and make
informed decisions about market. They had done their own research and understood the factors
which may affect their investments in future.

As every individual is different their objective behind investments also differs from
person to person. Their objective can be of different types like fixed return, capital appreciation,
tax planning or current income. But the investment decision mainly depends upon the objective
of the investors. Therefore, it is necessary to understand the nature of the investor and his ability
to take risk.

Mutual funds can act here as a better option for investments for an individual the risk factor can
be minimized in this. It not only offers good returns but the management of the portfolio of
mutual funds is diversified due to which it offers high returns compared to other investment
options.

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 IMPORTANCE OF THE TOPIC SELECTED

The money we earn is partly spent and the rest is saved for meeting future
expenses. Instead of keeping the saving idle we may like to earn some returns on it. So, we try to
invest the money to earn good returns along with to generate a specified some of money for a
specific goal in life and also make a provision for uncertain future.

Their a number of options for investing one’s saving which can give better returns for their
investments made in physical assets or financial assets which may be further divided into short
or long term options.

Investing money where the risk is less has always been risky to decide. The first factor, which an
investor would like to see before investing, is risk factor, which can be reduced through
diversification of the risk. Diversification of risk gave birth to the phenomenon called Mutual
Fund.

Mutual fund is a vehicle for investing in stocks and bonds. It is not an alternative investment
option to stocks and bonds, rather it pools the money of several investor’s and invest their
savings in stocks, bonds, money market instruments and other type of securities.

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 OBJECTIVES OF THE PROJECT

To provide basic about investments.

To know the information about various investment options.

To study the nature of investment.

To study about Mutual funds.

To study how Mutual funds can be a better option.

To study how diversification can help in risk reduction.

To study managing efficiently cal lead to generate or yield higher returns.

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 INVESTMENTS
What is an Investment?

In Finance, the purchase of a financial product, or other item of value

with an expectation of favorable future returns is termed as investment. In general terms
investment means the use of money to gain higher rate of returns against savings or the
investments.

In business, the purchase made by a producer of a physical goods, such

as durable equipment or inventory, in the hope of generating a back up for future business or
maintaining a balance position for future business is termed as Investment.

“An investment is the use of capital to create more money through the
acquisition of a security that promises the safety of the principal and generates a reasonable
return”.

Various Investment options:-

Saving plays an important role in every nation’s economy. The

money which is collected through savings acts as a driver for growth of the country. The saving
can be invested into two ways that is short term or long term investment options.

Short term Long term

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1. Short term investment option:-

Short term financial option is where the holding of the asset is

for a shorter period of time or where an asset is expected to be converted into cash in the next
year.

Broadly speaking, savings bank account, money market and fixed deposits can be considered as
short term financial investments options.

Savings bank account Company's Fixed deposit Money market

1.1 Savings Bank account:-

It is often the first option or the banking product which is preferred,

which offers low interest (4%- 5% p.a.), making them only marginally better than fixed deposits.

1.2. Money market or Liquid funds:-

They are specialized form of mutual funds that invest in

extremely short term fixed income instruments and thereby provide easy liquidity. Unlike most
mutual funds, money market funds are primarily oriented towards protecting the capital and then,
aim to maximize returns. Money market funds usually yield better returns than savings accounts,
but lower than bank fixed deposits.

1.3 Fixed deposits with banks:-

They are also referred to as term deposits and minimum investment

period for bank FD’s is 30 days. Fixed be considered for 6 – 12 months investments period as
normally interest on less than 6 months bank FD’s is likely to be lower than money market fund
returns.

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2. Long term investment option:-

Long term investment can be referred as the holding an asset for

an extended period of time, depending upon the type of security. A long term asset can be held
for one year minimum or as long as for 30 years or more.

Post office savings schemes, Public provident fund, Company fixed deposits, bonds and
debentures, Mutual funds etc.

2.1 Post office savings;-

It is a monthly income scheme which is low risk saving instrument, which

can be availed through any post office. It provides an investment rate of 8% per annum, which is
paid monthly. Minimum amount which can be invested is Rs. 1,000 and additional investments
in multiples of 1,000. Maximum amount is Rs. 3,00,000/- ( if single)or Rs. 6,00,000 (if held
jointly ) during a year. It has a maturity period of 6 years. Premature withdrawal is permitted if
deposit is more than one year old. A deduction of 5% is levied from the principal amount if
withdrawal prematurely.

2.2 Public Provident fund:-

A long term savings instrument with a maturity of 15 years and interest

payable at 8% per annum compounded annually. A PPF account can be opened through a
nationalized bank at anytime during the year and is open all through the year for depositing
money. Tax benefits can be availed for the amount invested and interest accrued is tax free. A
withdrawal is permissible every year from the seventh financial year of the date of to 50% of the
balance at credit at the end of the 4th year immediately preceding year whichever is lower the
amount of loan if any.

2.3 Company fixed deposit:-

These are short term to medium term borrowings by companies at a fixed

rate of interest which is payable monthly, quarterly, semi-annually, annually. They can also be
cumulative fixed deposits where the entire principal along with the interest is paid at the end of

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the loan period. The rate of interest varies between 6-9% per annum for company FD’s. The
interest received is after deduction of taxes.

2.4 Bonds:-

It is a fixed income instrument issued for a period of more than one year with the
purpose of raising capital. The central or state government, corporations and similar institutions
sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest
on a specified date, called the Maturity date.

2.5 Mutual funds:-

These are funds operated by an investment company which raises money from the
public and invests in a group of assets (shares, debentures etc). In accordance with a stated set of
objectives. It is a substitute for those who are unable to invest directly in equities or debt because
of resource, time or knowledge constraints.

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 CONCEPT OF MUTUAL FUNDS

A mutual fund is just the connecting bridge or a financial intermediary that allows a
group of investors to pool their money together with a predetermined investment objective. The
mutual fund will have a fund manager who is responsible for investing the gathered money into
specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or
portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the
fund.

Mutual funds are considered as one of the best available investments as compare to others they
are very cost efficient and also easy to invest in, thus by pooling money together in a mutual
fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to
do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing
risk & maximizing returns.

Mutual fund is a vehicle for investing in stocks and bonds. It is not an alternative investment
option to stocks and bonds; rather it pools the money of several investors and invests this in
stocks, bonds, money market instruments and other types of securities.

Stocks represent shares of ownership in a public company. Examples of public companies

include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned
investment traded on the market.

Bonds are basically the money which you lend to the government or a company, and in return
you can receive interest on your invested amount, which is back over predetermined amounts of
time. Bonds are considered to be the most common lending investment traded on the market.
There are many other types of investments other than stocks and bonds (including annuities, real
estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.

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Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit
gets a proportional share of the fund’s gains, losses, income and expenses.

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11
The above diagram gives an idea on the structure of an Indian mutual fund.

Sponsor is basically a promoter of the fund. For example Bank of Baroda, Punjab National
Bank, State Bank of India and Life Insurance Corporation of India (LIC) are the sponsors of UTI
Mutual Funds. Housing Development Finance Corporation Limited (HDFC) and Standard Life
Investments Limited are the sponsors of HDFC mutual funds. The fund sponsor raises money
from public, who become fund shareholders. The pooled money is invested in the securities.
Sponsor appoints trustees.

Trustees: Two third of the trustees are independent professionals who own the fund and
supervises the activities of the AMC. It has the authority to sack AMC employees for non-
adherence to the rules of the regulator. It safeguards the interests of the investors. They are
legally appointed i.e. approved by SEBI.

AMC: Asset Management Company (AMC) is a set of financial professionals who manage the
fund. It takes decisions on when and where to invest the money. It doesn’t own the money. AMC
is only a fee-for-service provider.

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The above 3 tier structure of Indian mutual funds is very strong and virtually no chance for fraud.

Custodian: A Custodian keeps safe custody of the investments (related documents of securities
invested). A custodian should be a registered entity with SEBI. If the promoter holds 50% voting
rights in the custodian company it can’t be appointed as custodian for the fund. This is to avoid
influence of the promoter on the custodian. It may also provide fund accounting services and
transfer agent services. JP Morgan Chase is one of the leading custodians.

Transfer Agents:

Transfer Agent Company interfaces with the customers, issue

a fund’s units, help investors while redeeming units. Provides balance statements and fund
performance fact sheets to the investors. CAMS is a leading Transfer Agent in India.

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 TYPES OF MUTUAL FUNDS

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk
tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a
collection of many stocks, an investors can go for picking a mutual fund might be easy. There
are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in
categories:-

General Broad
classification Classification

1. General Classification of Mutual Funds:-

1.1. Open-end Funds:-

Funds that can sell and purchase units at any point in time are classified as Open-end
Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of
continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end
fund is not required to keep selling new units to the investors at all times but is required to
always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is
calculated every day.

1.2. Closed-end Funds:-

Funds that can sell a fixed number of units only during the New Fund Offer
(NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains
unchanged at all times. After the closure of the offer, buying and redemption of units by the

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investors directly from the Funds is not allowed. However, to protect the interests of the
investors, SEBI provides investors with two avenues to liquidate their positions:

Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to
each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a
closed-end fund is computed on a weekly basis (updated every Thursday).

Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus
of the Fund and its outstanding units do get changed.

1.3. Load Funds:-

Mutual Funds incur various expenses on marketing, distribution, advertising,

portfolio churning, fund manager's salary etc. Many funds recover these expenses from the
investors in the form of load. These funds are known as Load Funds. A load fund may impose
following types of loads on the investors:

1.3.1 Entry Load Funds:-

Also known as Front-end load, it refers to the load charged to an investor at the
time of his entry into a scheme. Entry load is deducted from the investor's contribution amount to
the fund.

1.3.2 Exit Load Funds:-

Also known as Back-end load, these charges are imposed on an investor when
he redeems his units (exits from the scheme). Exit load is deducted from the redemption
proceeds to an outgoing investor.

1.3.3 Deferred Load:-

Deferred load is charged to the scheme over a period of time.

1.3.4 Contingent Deferred Sales Charge (CDSC): -

In some schemes, the percentage of exit load reduces as the investor

stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge.

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1.4. No-load Funds:-

All those funds that do not charge any of the above mentioned loads are known as
No-load Funds.

1.5. Tax-exempt Funds:-

Funds that invest in securities free from tax are known as Tax-exempt Funds. All
open-end equity oriented funds are exempt from distribution tax (tax for distributing income to
investors). Long term capital gains and dividend income in the hands of investors are tax-free.

1.6. Non-Tax-exempt Funds:-

Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In

India, all funds, except open-end equity oriented funds are liable to pay tax on distribution
income. Profits arising out of sale of units by an investor within 12 months of purchase are
categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented
fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption
proceeds to an investor.

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2. Broad Classification of Mutual funds:-

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2.1 Equity Funds:-

Equity funds are considered to be the more risky funds as compared to other fund
types, but they also provide higher returns than other funds. It is advisable that an investor
looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are
different types of equity funds each falling into different risk bracket. In the order of decreasing
risk level, there are following types of equity funds:

2.1.1 Aggressive Growth Funds:-

In Aggressive Growth Funds, fund managers aspire for maximum

capital appreciation and invest in less researched shares of speculative nature. Because of these
speculative investments Aggressive Growth Funds become more volatile and thus, are prone to
higher risk than other equity funds.

2.1.2 Growth Funds:-

Growth Funds also invest for capital appreciation (with time horizon of 3 to 5
years) but they are different from Aggressive Growth Funds in the sense that they invest in
companies that are expected to outperform the market in the future. Without entirely adopting
speculative strategies, Growth Funds invest in those companies that are expected to post above
average earnings in the future.

2.1.3 Specialty Funds: -

Specialty Funds have stated criteria for investments and their portfolio comprises
of only those companies that meet their criteria. Criteria for some specialty funds could be to
invest/not to invest in particular regions/companies. Specialty funds are concentrated and thus,
are comparatively riskier than diversified funds.. There are following types of specialty funds:

a. Sector Funds:-

Equity funds that invest in a particular sector/industry of the market are known as
Sector Funds. The exposure of these funds is limited to a particular sector (say Information
Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why

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they are more risky than equity funds that invest in multiple sectors.

b. Foreign Securities Funds:-

Foreign Securities Equity Funds have the option to invest in one or more
foreign companies. Foreign securities funds achieve international diversification and hence they
are less risky than sector funds. However, foreign securities funds are exposed to foreign
exchange rate risk and country risk.

c. Mid-Cap or Small-Cap Funds:-

Funds that invest in companies having lower market capitalization than

large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of
Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but
more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs.
500 crores. Market Capitalization of a company can be calculated by multiplying the market
price of the company's share by the total number of its outstanding shares in the market. The
shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which
gives rise to volatility in share prices of these companies and consequently, investment gets
risky.

d. Option Income Funds:-

While not yet available in India, Option Income Funds write options on a large
fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise
considered as a risky instrument. These funds invest in big, high dividend yielding companies,
and then sell options against their stock positions, which generate stable income for investors.

2.1.4 Diversified Equity Funds:-

Except for a small portion of investment in liquid money market,

diversified equity funds invest mainly in equities without any concentration on a particular
sector(s). These funds are well diversified and reduce sector-specific or company-specific risk.

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However, like all other funds diversified equity funds too are exposed to equity market risk. One
prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As
per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times.
ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time
of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption
by the investor before the expiry of the lock-in period makes him liable to pay income tax on
such income(s) for which he may have received any tax exemption(s) in the past.

2.1.5 Equity Index Funds:-

Equity Index Funds have the objective to match the performance of a specific
stock market index. The portfolio of these funds comprises of the same companies that form the
index and is constituted in the same proportion as the index. Equity index funds that follow
broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow
narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less
diversified and therefore, are more risky.

2.1.6 Value Funds:-

Value Funds invest in those companies that have sound fundamentals and whose
share prices are currently under-valued. The portfolio of these funds comprises of shares that are
trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low
Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from
diversified sectors and are exposed to lower risk level as compared to growth funds or specialty
funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.)
which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds
with a long-term time horizon as risk in the long term, to a large extent, is reduced.

2.1.7 Equity Income or Dividend Yield Funds:-

The objective of Equity Income or Dividend Yield Equity Funds is

to generate high recurring income and steady capital appreciation for investors by investing in
those companies which issue high dividends (such as Power or Utility companies whose share
prices fluctuate comparatively lesser than other companies' share prices). Equity Income or

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Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other
equity funds.

2.2 Debt Income Funds:-

Funds that invest in medium to long-term debt instruments issued by private

companies, banks, financial institutions, governments and other entities belonging to various
sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are
low risk profile funds that seek to generate fixed current income (and not capital appreciation) to
investors. In order to ensure regular income to investors, debt (or income) funds distribute large
fraction of their surplus to investors. Although debt securities are generally less risky than
equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or
principal payment. To minimize the risk of default, debt funds usually invest in securities from
issuers who are rated by credit rating agencies and are considered to be of "Investment Grade".
Debt funds that target high returns are more risky. Based on different investment objectives,
there can be following types of debt funds:

2.2.1 Diversified Debt Funds –

Debt funds that invest in all securities issued by entities belonging to all
sectors of the market are known as diversified debt funds. The best feature of diversified debt
funds is that investments are properly diversified into all sectors which results in risk reduction.
Any loss incurred, on account of default by a debt issuer, is shared by all investors which further
reduces risk for an individual investor.

2.2.2 Focused Debt Funds –

Unlike diversified debt funds, focused debt funds are narrow focus funds
that are confined to investments in selective debt securities, issued by companies of a specific
sector or industry or origin. Some examples of focused debt funds are sector, specialized and
offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds.
Because of their narrow orientation, focused debt funds are more risky as compared to

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diversified debt funds. Although not yet available in India, these funds are conceivable and may
be offered to investors very soon.

2.2.3 High Yield Debt funds –

As we now understand that risk of default is present in all debt funds, and
therefore, debt funds generally try to minimize the risk of default by investing in securities issued
by only those borrowers who are considered to be of "investment grade". But, High Yield Debt
Funds adopt a different strategy and prefer securities issued by those issuers who are considered
to be of "below investment grade". The motive behind adopting this sort of risky strategy is to
earn higher interest returns from these issuers. These funds are more volatile and bear higher
default risk, although they may earn at times higher returns for investors.

2.2.4 Fixed Term Plan Series –

Fixed Term Plan Series usually are closed-end schemes having short term
maturity period (of less than one year) that offer a series of plans and issue units to investors at
regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges.
Fixed term plan series usually invest in debt / income schemes and target short-term investors.
The objective of fixed term plan schemes is to gratify investors by generating some expected
returns in a short period.

2.3 Gilt Funds:-

Also known as Government Securities in India, Gilt Funds invest in government

papers (named dated securities) having medium to long term maturity period. Issued by the
Government of India, these investments have little credit risk (risk of default) and provide safety
of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest
rate risk. Interest rates and prices of debt securities are inversely related and any change in the
interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

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2.4 Money Market / Liquid Funds:-

Money market / liquid funds invest in short-term (maturing within one year)
interest bearing debt instruments. These securities are highly liquid and provide safety of
investment, thus making money market / liquid funds the safest investment option when
compared with other mutual fund types. However, even money market / liquid funds are exposed
to the interest rate risk. The typical investment options for liquid funds include Treasury Bills
(issued by governments), Commercial papers (issued by companies) and Certificates of Deposit
(issued by banks).

2.5 Hybrid Funds:-

As the name suggests, hybrid funds are those funds whose portfolio includes a
blend of equities, debts and money market securities. Hybrid funds have an equal proportion of
debt and equity in their portfolio. There are following types of hybrid funds in India:

2.5.1 Balanced Funds:-

The portfolio of balanced funds include assets like debt securities, convertible
securities, and equity and preference shares held in a relatively equal proportion. The objectives
of balanced funds are to reward investors with a regular income, moderate capital appreciation
and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for
conservative investors having a long term investment horizon.

2.5.2 Growth-and-Income Funds:-

Funds that combine features of growth funds and income funds are known
as Growth-and-Income Funds. These funds invest in companies having potential for capital
appreciation and those known for issuing high dividends. The level of risks involved in these
funds is lower than growth funds and higher than income funds.

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2.5.3 Asset Allocation Funds:-

Mutual funds may invest in financial assets like equity, debt, money
market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation
funds adopt a variable asset allocation strategy that allows fund managers to switch over from
one asset class to another at any time depending upon their outlook for specific markets. In other
words, fund managers may switch over to equity if they expect equity market to provide good
returns and switch over to debt if they expect debt market to provide better returns. It should be
noted that switching over from one asset class to another is a decision taken by the fund manager
on the basis of his own judgment and understanding of specific markets, and therefore, the
success of these funds depends upon the skill of a fund manager in anticipating market trends.

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2.6 Commodity Funds:-

Those funds that focus on investing in different commodities (like metals, food grains,
crude oil etc.) or commodity companies or commodity futures contracts are termed as
Commodity Funds. A commodity fund that invests in a single commodity or a group of
commodities is a specialized commodity fund and a commodity fund that invests in all available
commodities is a diversified commodity fund and bears less risk than a specialized commodity
fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold
mines) are common examples of commodity funds.

2.7.RealEstateFunds:- :-
Funds that invest directly in real estate or lend to real estate developers or invest in
shares/securitized assets of housing finance companies, are known as Specialized Real Estate
Funds. The objective of these funds may be to generate regular income for investors or capital
appreciation.

8.ExchangeTradedFunds(ETF):-
Exchange Traded Funds provide investors with combined benefits of a closed-
end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are
traded on stock exchanges like a single stock at index linked prices. The biggest advantage
offered by these funds is that they offer diversification, flexibility of holding a single share
(tradable at index linked prices) at the same time. Recently introduced in India, these funds are
quite popular abroad.

9.FundofFunds:-
Mutual funds that do not invest in financial or physical assets, but do invest in
other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of
Funds maintain a portfolio comprising of units of other mutual fund schemes, just like

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conventional mutual funds maintain a portfolio comprising of equity/debt/money market
instruments or non financial assets. Fund of Funds provide investors with an added advantage of
diversifying into different mutual fund schemes with even a small amount of investment, which
further helps in diversification of risks. However, the expenses of Fund of Funds are quite high
on account of compounding expenses of investments into different mutual fund schemes.

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 Process of Mutual Fund

In the above graph shows how Mutual Fund works and how investor earns money by investing in
the Mutual Fund. Investors put their saving as an investment in Mutual Fund. The Fund Manager
who is a person who takes the decisions where the money should be invested in securities
according to the scheme’s objective. Securities include Equities, Debentures, Govt. Securities

Bonds, and Commercial Paper etc. These Securities generates returns to the Fund Manager. The
Fund Manager passes back return to the investor.

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 MUTUAL FUNDS COMPANIES IN INDIA
•

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29
 PORTFOLIO MANAGEMENT

People have different investment objective and risk appetite so to get the highest
returns asset allocation through active portfolio management is the key element.

Asset allocation is a method that determines how you divide your portfolio among different
investment instruments and provides you with the proper blend of various asset classes.

It is based on the theory that the type or class of security you own equity, debt or money market-
is more important than the particular security itself. In other words asset allocation is way to
control risk in your portfolio. Different asset class will react differently to market conditions like
inflation, rising or falling interest rates or a market segment coming into or falling out of favor.

Asset allocation is different from simple diversification. Suppose you diversify your equity
portfolio by investing in five or ten equity funds. You really have not done much to control risk
in your portfolio if all these funds come from only one particular segment of the market say large
cap stocks or mid cap stocks. In case of an adverse reaction for that segment, all the funds will
react similarly means they will go down.

If you build your portfolio with various top performing growth funds without really bothering to
analyze their portfolio allocation, you may end up with over-exposure to a particular segment.
Another point you need to remember is that growth funds are highly correlated- they tend to
move in the same direction in response to a given market force.

The advantage of asset allocation lies in achieves superior returns when markets are down while
minimizing the exposure of the portfolio to volatility. In fact, asset allocation is based on certain
dimensions that, when combined tend to control the volatility while achieving targeted returns.

30
 Portfolio Management Process

Portfolio management is a complex activity, which may be broken down into the following
steps:

1. Specification of investment objectives and constraints:

The typical objectives sought by an investor are current income, capital appreciation, safety,
fixed returns on principal investment.

2. Choice of asset mix:

The most important decision in portfolio management is the asset mix decision. This is
concerned with the proportions of “Stock” or “Units” of mutual fund or “Bond” in the
portfolio. The appropriate mix of Stock and Bonds will depend upon the risk tolerance and
investment horizon of the investor.

3. Formulation of portfolio strategy:

Once the certain asset mix has been chosen an appropriate portfolio strategy has to be
decided out. Two broad portfolio choices are available An active portfolio management: it
strive to earn superior risk adjusted returns by resorting to market timing, or sector rotation or
security selection or some combination of these.

A passive portfolio management involves holding a broadly diversified portfolio and

maintaining a pre-determined level of risk exposure.

Designing a model Portfolio

31
There are certain objectives that should keep in mind while designing a portfolio these
are:

· Higher absolute rate of return and high real rate of return

· Maximization current income

· High post tax returns

· Positive real return

· Preservation of capital

· Growth in capital

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 Analysis & Interpretation of data

“An investment is the use of capital to create more money through the acquisition
of a security that promises the safety of the principal and generates a reasonable return”.

As savings have become an initial part of the economy’s growth through which not only the
investor benefits but also the economy of a country can be raised which really helps to achieve a
growth rate or to meet the cost of Inflation. Inflation is the rate at which the cost of living
increases. The cost of living is simply what it costs to buy the goods and services you need to
live. Inflation causes money to lose value because it will not buy the same amount of good or a
service in the future as it does now or did in the past.

Therefore, it is important to consider inflation as a factor in any long term investment strategy.
The real rate of return on the investment is when the rate of returns achieved after inflation. The
aim of investments should be to provide a return above the inflation rate to ensure that the
investment does not decrease in value. So, there are financial options provided for investment
into two terms i.e. short and long term investment options.

MUTUAL FUNDS:-

Mutual fund is a divided investment where there is a risk diversification is

been done, some are pure equity schemes; others are a mix of equity and bonds. Investors are
also given the option of getting dividends, which are declared periodically by the mutual fund, or
to participate only in the capital appreciation of the scheme.

33
 Portfolio of Mutual fund investment

HDFC Balanced Advantage Fund - Growth

Fund Features
Type of Scheme Open Ended Fund Prashant Jain
Manager
Nature Equity & Debt
Option Growth SIP
Inception Date 11-Sep-2000 STP
SWP
NAV (RS) 203.5914 (-0.47%)
Expense 1.73%
Fund Size in Rs. 42592.25 as on ratio(%)
Cr. June, 14 2019
Turnover 11.62 %
Ratio(%)

As open ended is a scheme where the funds sell and purchase units at any point of time.
The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous
selling (to investors) and repurchases (from the investors) by the fund.

Last Investment as on Jun 214, 2019

Declared
Minimum Investment 5000
(Rs)

Purchase Redemptions Daily

NAV Calculation Daily
Entry Load Entry Load is 0
Exit Load If redeemed bet. 0 Year to 1 Year; Exit load is 15%.

An open-end fund is not required to keep selling new units to the investors at all times but is
required to always repurchase, when an investor wants to sell his units. The NAV of an open-end
fund is calculated every day.

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NET ASSET VALUE

Latest NAV 204.55 as on Oct 1,

2010

52 - Week High 198.26 as on Jun 14,

2019

52 - Week Low 174.63 as on Jun 14,

2019

As there is a daily NAV calculations so there is a change in the graph.

35
RETURNS
Scheme performance as on 14, June 2019

Expecting investment is Rs 10,000/-

The calculation of the returns is been dependent on the Net asset value which keeps changing on
daily basis and it is most probably affected by the Sensex too. Due to which the nature of mutual
funds differ and the risk is been diversified. The returns are divided periodically.

36
PORTFOLIO SUMMARY
EQUITY (83%)
Equity Holding : 83.00% | F&O Holdings : 0.00%| Foreign Equity Holdings : 0.00%| Total :
83.00%

No of Stocks : 68 (Category Avg - 75.26) | Large Cap Investments : 67.54%| Mid Cap
Investments : 7.76% | Small Cap Investments : 7.69% | Other : 0.01%

DEBT (13.61%)
No of Debt Holding 15 (Category Avg - 13.21) | Modified Duration 1.92 Years (Category Avg -
1.09)| Yield to Maturity 8.59% (Category Avg - 7.81%)

OTHERS(3.39%)

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Large caps:
A term used by the investment community to refer to companies with a market
capitalization value of more than $10 billion. Large cap is an abbreviation of the term "large
market capitalization". Market capitalization is calculated by multiplying the number of a
company's shares outstanding by its stock price per share.

Mid caps:

A type of stock fund that invests in mid-sized companies. A company's size is

determined by its market capitalization, with mid-sized firms generally ranging from $2 billion
to $10 billion in market cap. Most stocks held in a mid-cap fund are firms with established
businesses that are still considered developing companies. These funds tend to offer more growth
than large-cap stocks and less volatility than the small-cap segment.

Small cap:
Generally it is a company with a market capitalization of between $300 million and
$2 billion. One of the biggest advantages of investing in small-cap stocks is the opportunity to
beat institutional investors. Because mutual funds have restrictions that limit them from buying
large portions of any one issuer's outstanding shares, some mutual funds would not be able to
give the small cap a meaningful position in the fund

38
Top 10 Stocks in Portfolio

39
Sector Allocation v/s Category Average

The market share keeps on changing as there is a change in the Sensex the valuation changes so
the sector which yields in that duration is given more preference.

40
Asset Allocation (%)

Domestic Cash & Cash Debt Equity

MFs Equivalent

0.03 3.38 13.6 82.98

41
 FINDINGS & SUGGESTIONS
Mutual funds are conglomerations of stocks and bonds and therefore their
prospectus depends on how well the individual investments are doing. Fees can of course also
make a difference and all related charges associated with a mutual fund must also be considered.
Fees for mutual funds are classified as end load, front load and no load. Through proper research,
you will become informed of what types of fees are involved and whether or not they are worth
what you can expect out of the investment.

At the very minim, when investing in a mutual fund you should know the category of
investments it focuses on, the asset value, the management strategy, the risk level of the assets
involved, and the funds relationship with the overall stock market outlook. As long as you are
well versed in these areas, the rest is just icing on the cake as long as you have chosen a well
managed fund.

Considerations for mutual fund categories include goals and objectives, classification of
securities in the fund and likely return expected for each category. Of all the important factors
when choosing a mutual fund, category is likely the most important.

Research should be conducted using as long a history as is available. All financial instruments
fluctuate greatly from one day to another but the important thing is how they perform over the
long term. Try to couple this history with the time period you plan on investing since trends seem
to run ii n cycles. Just because a fund isn’t currently in the top 10% of earners doesn’t mean that
it’s not an extremely lucrative fund over the long term. Don’t forget to also check the individual
histories of the stocks or other instruments in which the fund is invested.

Like any investment, mutual funds require careful planning. Overall, the strategy is pretty much
the same regardless of what type of investment you are making, but due to their nature mutual
funds require a slightly different form of research.

Metrics such as price/earnings ratio and dividend yield on the S&P 500 index, a commonly used
proxy for the U.S. stock market, are hardly at bargain levels. This has lead several market

42
pundits to predict single digit annual returns for domestic mutual funds over the next decade.

While pursuing the search for the best mutual fund, some mutual fund investors tend to
predominantly focus on fees and expense ratios. The rationale is that by choosing mutual funds
with low fees, investors will have more of their capital invested. Also, no load mutual funds with
low expense ratios will pass on more of the returns they earn to their shareholders.

Is shopping for the lowest fees and expense ratios a smart way to select mutual funds? Not
always. The answer depends on the type of mutual fund you are evaluating, the time you can
devote to evaluating and managing your mutual funds investments, and the type of cost incurred.

Investing in the Best No Load Index Mutual Funds.

If you believe markets are generally efficient and prefer to invest in an index mutual fund to
achieve an index-like return, shopping for the best index mutual fund based on low fees and a
low expense ratio makes good sense. The portfolio manager of an index mutual fund endeavors
to invest the fund’s assets to track the index as closely and cost-effectively as possible. Larger
index funds have an advantage in that they can spread their operating costs over a larger asset
base.

Some of the interesting index mutual fund options currently available include no load index
mutual funds like E*Trade S&P 500 Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index
Fund (Nasdaq: FSMKX), and Vanguard 500 Index Fund (Nasdaq: VFINX) with expense ratios
of 0.09%, 0.10%, and 0.18%, respectively.

Investing in Actively Managed Mutual Funds and Strategies.

Mutual fund fees and expenses are just one of several important factors to consider if you believe
portfolio managers can add value and out-perform the index through active management. The
portfolio manager’s ability and investing style are just as important. Therefore, seeking out the
best mutual fund based on just low fees and a low expense ratio may not always be the right

43
approach. It may just be a case of being ‘penny-wise and pound-foolish’.

Legendary investor Peter Lynch, who managed the Fidelity Magellan Fund (Nasdaq: FMAGX)
from 1977 to 1990, achieved returns well in excess of the market averages even after accounting
for the fund’s fees and expenses.

So too has Bill Miller who currently manages the Legg Mason Value Trust (Nasdaq: LMVTX).
Even after accounting for its relatively high 1.7% expense ratio, this no load mutual fund has
achieved compound annual returns of 18.6% for the 10 year period ending in 2004, well in
excess of 12.0% for the Vanguard 500 Index mutual fund.

Alpha Profit, an investment research firm that specializes in active sector investing, uses the no
load Fidelity Select Funds to implement its investing strategy through its Core™ and Focus™
model portfolios. Although not the lowest, the expense ratio of the no load Fidelity Select Funds
compares favorably with that of other sector fund offerings. Alpha Profit prefers Fidelity Selects
for their comprehensive coverage of sectors and industry groups. The Alpha Profit model
portfolios have significantly outperformed the market averages over time.

Ensuring Your Mutual Fund Puts Your Interest First.

Whether you prefer to index or take an active approach to managing your investments, ensuring
that your mutual fund is putting your interests first is good investing practice.

Mutual funds charge different types of fees. By looking at some key factors pertaining to fees,
you can get a sense of whether the mutual fund puts your interests first or merely seeks to line
the mutual fund company’s pockets.

Serving the Interests of Long-Term Shareholders. Some mutual funds impose short-term
trading fees to discourage frequent trading of mutual fund shares. Frequent trading disrupts
efficient management of the mutual fund and increases operating expenses. A short-term trading
fee can therefore actually be beneficial to long-term shareholders if the fee is rightly treated by

44
the mutual fund company.

Fidelity Spartan Total Market Index Fund (Nasdaq: FSTMX), for example, follows the practice
of returning short-term trading fees collected on shares held less than 90 days to the mutual fund
itself rather than passing on the benefit to the mutual fund company. By having this short-term
trading fee structure, this no load mutual fund seeks to contain its operating expenses. Such fees
are therefore aligned with the interests of long-term shareholders of this mutual fund.

Passing on Savings from Scale Economies. The operating expenses incurred by a mutual fund
are a combination of fixed and variable costs. As the assets of a mutual fund increase, the fixed
cost gets spread over a larger asset base. Therefore, the expenses incurred to operate the mutual
fund as a percentage of the fund’s assets should trend lower.

A mutual fund that places the interest of shareholders first must pass on the savings from scale
economies to shareholders. The trend in a mutual fund’s expense ratio therefore serves as a
metric of how seriously a fund takes its fiduciary responsibility.

Key Points.

• If you are searching for the best no load index mutual fund, shopping for one with low fees and
expenses makes perfect sense.
• If active management of investments appeals to you, fees and expenses are just one of several
important factors to consider. The ability and investing style of the portfolio manager are at least
just as important as fees.
• The types of fees a mutual fund charges and how the fund uses the fees provides clues as to
how seriously a mutual fund takes its fiduciary responsibility. Mutual funds that impose fees to
contain operating expenses and return fees to the mutual fund help protect the interests of long-
term shareholders.
• Mutual funds that put the shareholders’ interests first typically pass on savings from scale
economies to the shareholders.

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Notes: This report is for information purposes only. Nothing herein should be construed as an
offer to buy or sell securities or to give individual investment advice. This report does not have
regard to the specific investment objectives, financial situation, and particular needs of any
specific person who may receive this report. The information contained in this report is obtained
from various sources believed to be accurate and is provided without warranties of any kind.
Alpha Profit Investments, LLC does not represent that this information, including any third party
information, is accurate or complete and it should not be relied upon as such. Alpha Profit
Investments, LLC is not responsible for any errors or omissions herein. Opinions expressed
herein reflect the opinion of Alpha Profit Investments, LLC and are subject to change without
notice. Alpha Profit Investments, LLC disclaims any liability for any direct or incidental loss
incurred by applying any of the information in this report. The third-party trademarks or service
marks appearing within this report are the property of their respective owners. All other
trademarks appearing herein are the property of Alpha Profit Investments, LLC. Owners and
employees of Alpha Profit Investments, LLC for their own accounts invest in the Fidelity Mutual
Funds included in the Alpha Profit Core and Focus model portfolios. Alpha Profit Investments,
LLC neither is associated with nor receives any compensation from Fidelity Investments or other
mutual fund companies mentioned in this report. Past performance is neither an indication of nor
a guarantee for future results. No part of this document may be reproduced in any manner
without written permission of Alpha Profit Investments, LLC. Copyright © 2005 Alpha Profit
Investments, LLC. All rights reserved.

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THANK YOU

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