INTRODUCTION

Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net asset value. Mutual funds posses shares of several companies and receive dividends in lieu of them and the earnings are distributed among the share holders. Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares. Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values).Basically, 1. Collect money from investors. 2. Invest through well diversified portfolio according to investors requirement. 3. Earning as dividend, or assets appreciation. 4. Redeem whenever investor want in open ended and at certain time in close ended.

MUTUAL FUND OPERATION FLOW CHART

ORGANIZATIONAL SET UP OF A MUTUAL FUND

HISTORY OF MUTUAL FUNDS IN INDIA

The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in the rules of the game every day, and there are constant shifts and upheavals.

The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. The mutual fund industry started in India in a small way with the UTI Act creating what was effectively a small savings division

within the RBI. Over a period of 25 years this grew fairly successfully and gave investors a good return, and therefore in 1989, as the next logical step, public sector banks and financial institutions were allowed to float mutual funds and their success emboldened the government to allow the private sector to foray into this area.

The initial years of the industry also saw the emerging years of the Indian equity market, when a number of mistakes were made and hence the mutual fund schemes, which invested in lesserknown stocks and at very high levels, became loss leaders for retail investors. From those days to today the retail investor, for whom the mutual fund is actually intended, has not yet returned to the industry in a big way. But to be fair, the industry too has focused on brining in the large investor, so that it can create a significant base corpus, which can make the retail investor feel more secure.

A Retrospect:
The last year was extremely eventful for mutual funds. The aggressive competition in the business took its toll and two more mutual funds bit the dust. Alliance decided to remain in the ring after a highly public bidding war did not yield an acceptable price, while Zurich has been sold to HDFC Mutual. The growth of the industry continued to be corporate focused barring a few initiatives by mutual funds to expand the retail base. Large money brought with it the problems of low retention and consequently low profitability, which is one of the problems plaguing the business. But at the same time, the industry did see spectacular growth in assets, particularly among the private sector players, on the back of the continuing debt bull run.

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 of India. 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.

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, 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.

AMFI AND ITS ROLE

One of the most effective industry bodies today is probably the Association of Mutual Funds in India (AMFI). It has been a forum where mutual funds have been able to present their views, debate and participate in creating their own regulatory framework. The association was created originally as a body that would lobby with the regulator to ensure that the fund viewpoint was heard. Today, it is usually the body that is consulted on matters long before regulations are framed, and it often initiates many regulatory changes that prevent malpractices that emerge from time to time. This year some of the major initiatives were the framing of the risk management structure, a code of conduct and registration structure for mutual fund intermediaries, which were subsequently mandated by SEBI. In addition, this year AMFI was involved in a number of developments and enhancements to the regulatory framework. AMFI works through a number of committees, some of which are standing committees to address areas

where there is a need for constant vigil and improvements and other which are ad hoc committees constituted to address specific issues. These committees consist of industry professionals from among the member mutual funds. There is now some thought that AMFI should become a self-regulatory organization since it has worked so effectively as an industry body.

Objectives of AMFI To define and maintain high professional and ethical standards in all areas of of mutual fund industry. To recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management including agencies connected or involved in the field of capital markets and financial services. To interact with the Securities and Exchange Board of India (SEBI) and to represent to SEBI on all matters concerning the mutual fund industry. To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the Mutual Fund Industry. To develop a cadre of well-trained Agent distributors and to implement a programme of training and certification for all intermediaries and other engaged in the industry. To undertake nation wide investor awareness programme so as to promote proper understanding of the concept and working of mutual funds. operation

CHARACTERISTICS OF A MUTUAL FUND

The following are the characteristics of the mutual funds: A mutual fund belongs to the investors who have pooled their funds. The ownership of the mutual fund is in the hands of the investors.

 Investment professionals and other service providers, who earn a fee for their services, from the fund, manage the mutual fund. The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day. The investors share in the fund is denominated by units. The value of the units changes with change in the portfolios value, every day. The value of one unit of investment is called as the Net Asset Value or NAV.

TYPES OF MUTUAL FUND SCHEMES

By Structure:
o o o

Open - Ended Schemes Close - Ended Schemes Interval Schemes

By Investment Objective:
o o o o

Growth Schemes Income Schemes Balanced Schemes Money Market Schemes

Other Schemes:
o o o o

Tax Saving Schemes Special Schemes Index Schemes Sector Specific Schemes

INVESTMENT OBJECTIVE
Schemes can be classified by way of their stated investment objective such as Growth Fund, Balanced Fund, and Income Fund etc 1. By Structure:

Open-endFunds: 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. Close -end 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. 2. Interval Funds: Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined 3. BY INVESTMENT OBJECTIVE

Growth Fund:

The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. It has been proved 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 Fund: 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 Fund:

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.

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.

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, 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 sector. This could be an industry or a group of industries or various segments such as 'A' Group shares or initial public offerings.

ADVANTAGES OF MUTUAL FUNDS

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. This risk of default by any company that one has chosen to invest in, can be minimized by investing in mutual funds as the fund managers analyze the companies financials more minutely than an individual can do as

they have the expertise to do so. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. 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. Apart from liquidity, these funds have also provided very good post-tax returns on year to year basis. Even historically, we find that some of the debt funds have generated superior returns at relatively low level of risks. On an average debt funds have posted returns over 10 percent over one-year horizon. The best performing funds have given returns of around 14 percent in the last one-year period. In nutshell we can say that these funds have delivered more than what one expects of debt avenues such as post office schemes or bank fixed deposits. Though they are charged with a dividend distribution tax on dividend payout at 12.5 percent (plus a surcharge of 10 percent), the net income received is still tax free in the hands of investor and is generally much more than all other avenues, on a post tax basis. 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. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and one can benefits from any such price movement. 7. Transparency: Investors get regular information on the value of your investment in addition to disclosure on the specific investments made by your 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; you can systematically invest or withdraw funds according to your needs and convenience.

9. Affordability: A single person cannot invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Here again, investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. 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. Tax Benefits: Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability.

DISADVANTAGES OF MUTUAL FUNDS

Mutual funds are good investment vehicles to navigate the complex and unpredictable world of investments. However, even mutual funds have some inherent drawbacks. Understand these before you commit your money to a mutual fund. 1. No assured returns and no protection of capital: If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India). There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. This is because most closed-end funds that assured returns in the earlynineties failed to stick to their assurances made at the time of launch, resulting in losses to investors. A scheme cannot make any guarantee of return, without stating the name of the guarantor, and disclosing the net worth of the guarantor. The past performance of the assured return schemes should also be given.

2. Restrictive gains: Diversification helps, if risk minimization is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security. Assume, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation. 3. 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. 4. Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers

INDUSTRY PROFILE
HDFC Mutual Funds HDFC mutual fund was set up on June 30, 2000 with two sponsors namely Housing Development Finance Corporation ltd. and Standard Life Insurance ltd. HDFC mutual fund came into existence on 10 Dec. 1999 and got approval from the SEBI on 3rd July 2000. HDFC Mutual Fund has witnessed significant growth in the past few years. It is regulated by HDFC Asset Management Company Limited (AMC) which works as an Asset Management Company (AMC) for HDFC Mutual Fund. HDFC Asset Management Company Limited (AMC) is a Joint Venture concern between the large scale housing finance company HDFC and British investment firm Standard Life Investments Limited. The HDFC Asset Management Company Limited conducts the activities carried out by the HDFC Mutual Fund and manages the assets of various mutual fund schemes. The August 2006 report states that the fund has assets of Rs. 25,892 crores under Asset Management Company (AMC).

 Prudential ICICI Mutual Fund: The mutual fund of ICICI is a joint venture with Prudential PLC. Of America, one of the largest life insurance companies in the USA. Prudential ICICI mutual fund was set up on 13th of Oct. 1993 with two sponsors. Today, in a span of just over 12 years, the company has forged a position of preeminence as one of the largest Asset Management Companys in the country, contributing significantly towards the growth Of the Indian mutual fund industry. They are currently managing a corpus of Rs. 73551.95 Crores of Assets under Management (AUM - as on Mar 2011 Month-end) in Mutual Fund Schemes, in addition to our Portfolio Managements Services, inclusive of EPFO*, and International Advisory Mandates for clients across international markets in asset classes like Debt, Equity and Real Estate with primary focus on risk adjusted returns. As an Asset Management Company, they have over 15 years of experience and are currently managing a comprehensive range of schemes of more than 46 Mutual funds and a wide range of PMS Products for our investors, spread across the country. They service this investor base with our own branch network of over 160 branches and a distribution reach of over 42,000 channel partners

LITERATURE REVIEW: Sapar & Narayan(2003) examines the performance of Indian mutual funds in a bear market through relative performance index, Sharp's ratio, Sharp's measure. The results of performance measures suggest that most of the mutual fund schemes . Rao D. N (2006) studied the financial performance of select open-ended equity mutual fund schemes for the period 1st April 2005 31st March 2006 pertaining to the two dominant investment styles and tested the hypothesis whether the differences in performance are statistically significant. The analysis indicated that growth plans have generated higher returns than that of dividend plans . Agrawal Deepak & Patidar Deepak (2009) studied the empirically testing on the basis of fund manager performance and analyzing data at the fund-manager and fund-investor levels. The study revealed that the performance is affected by the saving and investment habits of the people and at the second side

the confidence and loyalty of the fund Manager and rewards- affects the performance of the MF industry in India. http://www.researchersworld.com/vol3/issue3/vol3_issue3_3/Paper_07.pdf

(2 ) Dr.R.Narayanasamy, V. Rathnamani,

(2002) In India capital market provide various investment avenues to the investors, to help them to invest in various industries and to ensure the profitable return . Among various financial products, mutual fund ensures the minimum risks and maximum return to the investors, Growth and developments of various mutual funds products in the Indian capital market has proved to be one of the most catalytic instruments in generating momentous investment growth in the capital market. In this context, close monitoring and evaluation of mutual funds has become essential. Therefore, choosing profitable mutual funds for investment is a very important issue. This study, basically, deals with the equity mutual funds that are offered for investment by the various fund houses in India, This study mainly focused on the performance of selected equity large cap mutual fund schemes in terms of risk- return relation ship . The main objectives of this research work is to analysis financial performance of selected mutual fund schemes through the statistical parameters such as (beta, standard deviation, Sharpe ratio) . The findings of this research study will be help full to investors for his future investment decisions.

http://www.ijbmi.org/papers/Vol(2)4/version-2/C241824.pdf

(3) Journal of Political Economy 1997 The University of Chicago Press Abstract: This paper examines a potential agency conflict between mutual fund investors and mutual fund companies. Investors would like the fund company to use its judgment to maximize riskadjusted fund returns. A fund company, however, in its desire to maximize its value as a concern, has an incentive to take actions that increase the inflow of investments. to estimate the shape of the flowperformance relationship for a sample of growth and growth and income funds observed . The shape of the flowperformance relationship creates incentives for fund managers to increase

or decrease the riskiness of the fund that are dependent on the fund's yeartodate return. We examine portfolio holdings of mutual funds and show that mutual funds do alter the riskiness of their portfolios at the end of the year in a manner consistent with these incentives. http://www.jstor.org/discover/10.1086/516389?uid=3738256&uid=2&uid=4&sid=21103512884 103 (4) Dr. Sandeep Bansal, Deepak Garg and Sanjeev K Saini (2004) This paper examines the performance of selected mutual fund schemes, that the risk profile of the aggregate mutual fund universe can be accurately compared by a simple market index that offers comparative monthly liquidity, returns, systematic & unsystematic risk and complete fund analysis by using the special reference of Sharpe ratio . The benchmark portfolio allows us to evaluate appropriate required rates of return and switch it as of market returns. This simple analysis produces a number of unique predictions about the cost of capital of different mutual fund schemes . http://gimt.edu.in/clientFiles/FILE_REPO/2012/NOV/23/1353646303667/90.pdf