CONTENTS

CHAPTER I
1.
2.
3.
4.
5.
6.
7.

INTRODUCTION
Introduction on mutual funds
Objectives of the study
Scope of the study
Application of the study
Methodology of the study
Tools used for analysis
Limitations of the study

CHAPTER II

INTRADUCTION TO MUTUAL FUNDS

1. Introduction on Mutual fund

2. Introduction on Equity shares
3. Introduction on Index
4. Introduction on Derivatives

CHAPTER III
1.
2.
3.
4.
5.
6.
7.

COMPANY PROFILE

Karvy Overview
Karvy Early days
Karvy Alliances
Milestone
Achievements
Quality policy & objectives
Karvy stock broking limited

CHAPTER IV

ANALYSIS & INTERPRETATION

CHAPTER V

CONCLUSIONS & SUGGESTIONS

1. Conclusions
2. Suggestions

CHAPTER VI

BIBILOGRAPHY

CHAPTER 1
INTRODUCTION

INTRODUCTION ON MUTUAL FUNDS

Last two decades have witnessed a phenomenal growth in trade

and industry the world over. The days are passed when capital used to
remain within the boundaries of nations. In this era of globalization and
liberalization, technology, capital and other resources are not only
crossing the borders of nation but also increasing the volume of
international trade. The rapidity with which the concept of corporate
finance, bank finance and investment finance have changed in recent
years have given birth to new financial products known as Mutual funds.

As the name suggests, this is financial instrument that pools the

savings of number of investors who share a common financial goal. The
money thus collected is invested by the funds manager in different types
of securities depending on the objective of the scheme.

Mutual funds have become increasingly importance in the world of

finance. Mutual funds legally known as open-ended companies are
subject to regulations set forth by the Investment Company Act 1940,
when deciding how to invest. Mutual funds are attractive because they

require less of investors, as they offer diversification, experts talk and

bond selection, low cost and preferential tax treatment. Additionally
Mutual funds do not have a predetermined number of stocks to sell;
rather stocks are added to the fund as required by the demand.

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. This 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.

Thus mutual fund is the most suitable investment for the common
man as it offers the opportunity to invest in a diversified professionally
managed portfolio at a relatively low cost. Any body with an investible
surplus of as little as a few thousand rupees can invest in mutual funds.

A mutual fund is the ideal investment vehicle for todays 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. A typical individual is
4

unlikely to have the knowledge, skills, inclination and time to keep track
of events, understand their implications and act speedily. Thus a mutual
fund is the sum total of many parts, each of which is designated to
perform a specific function. SEBI, the market regulator has outlined
clearly the role and responsibilities of each entity. How well they function
determines, in part, the quality of your experience with the mutual fund.

As investment vehicles go, mutual funds are unique being the only
ones to operate on the principle of pooling resources. The element of
novelty extends to their working also in the kind of investment exposures
they offer, the terms they use, the norms for pricing they follow, and lots
more. These character traits will unravel through the course of this book.

Life makes many demands of us. Theres so much to indulge in and

deal with. At work or at home. With family, friends or self. Woven into
these threats is the inescapable truth that money is a means to many an
end. A house in the sub-urbs, good education for the kids, a set of four
wheels to zip around and early retirement. The ends might differ but the
means at least one of them to reach them remain the same: money.
Earned wisely, saved regularly, and invested smartly.

People say that they dont have the discipline, they dont
understand investing, especially the stock market. They dont have time
and dont really care. Well they should, even if just a little. After all its
their money and their life and it helps to have their saving working for
you. They dont need to get neck deep in to their personal finances, but
the least they can do, and should do, is get a fix on the big picture.
Explore and understand what they want from their investments, and
5

leave the rest to the money managers: mutual funds. These investment
vehicles dont demand them to have a deep understanding of financial
matters; they dont even demand oodles of your time.

OBJECTIVES OF THE STUDY

1) The main purpose is to study whether mutual fund is investors best
choice or not.

2) The objective of doing this project is to make a study of various

investment schemes in the secondary market.

3) To ascertain the various fluctuation in different sectoral schemes of

mutual funds

4) To examine mutual funds investment with equity shares and also

relative to Nifty and Sensex.

5) To assist the community at large in deciding which investment

provides best return considering various points at a time.

6) To know how various schemes effect mutual fund investment and its
performance taking past records.

7) To study the performance of selected mutual fund companies and

equity companies and their performance in 1 year.

8) To reveal the current situation of mutual funds and equities as well

as index in last one year in India .

SCOPE OF THE STUDY

1) The study covers the concept and details of mutual funds and
introduction on equity, derivatives and index.

2) The study also includes returns of equity, mutual funds and relative
index of different sectors.

3) Equities year high and low is also included in the study.

4) The project report covers the study of Net Asset Value (NAV) of mutual
funds in different sectors.

5) The analysis part includes the Net Asset Value (NAV) charts which
gives the clear picture of the present value of the mutual fund
company.

6) The study includes the information regarding the selection of portfolio

for different funds in theory part.

7) The theory part also includes following information related to mutual

fund :

History of mutual funds

Concept of mutual funds

Why mutual funds

Net Asset Value (NAV)

Types and benefits of mutual funds

Trends in mutual funds

Future scenario

Problem of mutual fund industry in India.

APPLICATION OF THE STUDY

1) The study helps the investor to compare various investment schemes

and the returns from those investments.

2) The reader can have thorough knowledge on concepts and trends of

mutual funds.

3) The study helps to have the knowledge of various schemes and

working of mutual funds.

4) User can make proper analysis of returns in different schemes

comparing the performance of the study period.

5) The study enables the readers to assess the Net Asset Value (NAV) by
seeing the charts.

6) Researchers can think of further study by including the data of large

period.

7) The study also enables us to understand the fluctuations related to

Sensex and Nifty

METHODOLOGY OF THE STUDY

All information related to the topic needs to be carefully scrutinized
to avoid the risk of biased analysis. Having once identified which
information is relevant and need to be collected, we will have to define
how this will be done.

The method employed in the investigation depends on the purpose

and scope of the study. Let us try to understand methodology.

1)

RESEARCH

specification of

DESIGN:

Research design is some statement or

procedures for collecting and analyzing the information

required for the solution of some specific problem.

Here the exploratory research is used as investigation is mainly

concerned with determining the trends and positive and negative returns
in different sectors of mutual funds and equities. Exploratory research is
generally carried out by three sources of information

A) Study of secondary sources

B) Discussion with individuals
C) Analyzing some specific areas

2) DATA COLLECTION METHODS: The key for creating useful system

are selectivity in collection of data and linking that selectivity to the
analysis and decision issue of the action to be taken. The accuracy of

10

collected data is of great significance for drawing correct and valid

conclusions from the investigation.

The following are the main steps in data collection process

a) Type of information required in the investigation
b)

Establishing the facts that are available at present and additional

facts required.

c)

Identification of sources from where the information can be

available.

d) Selection of appropriate information i.e. collection method.

3) SOURCES OF INFORMATION: Data available in marketing research

are either primary or secondary.

Primary data: primary data are generated in an investigation

according to the needs of problem in head. Primary data is collected
using case study methods. There are some set of Qualitative techniques
used for collection of some socio economic information about some
phenomenon.

Secondary data: Secondary data can be defined as data collected by

some one else for purpose other than solving the problem being
investigated. Secondary data is collected from external sources which
include information from published material of SEBI and some of the
information is collected online.

The data sources also include various

books, journals, magazines, news papers, etc. The organization profile is

collected from Branch Manager.

11

TOOLS USED FOR ANALYSIS

TABULATION
A Table is a systematic arrangement of statistical data in rows and
columns. Rows are horizontal arrangements whereas columns are
vertical. Tabulation is a systematic presentation of data in a form suitable
for analysis and interpretation. The tables used are as follows:

1) One way table: It presents only one characteristic and hence in

answering one or

more independent questions with regard to those

characteristics.

2) Two-way table: It contains sub divisions of a total and is able to answer

two

12

mutually dependent questions.

3) Three-way table: It sub-divides the total in to three distinct categories

It is capable of answering three mutually dependent questions

GRAPHICAL REPRESENTATION OF DATA

A picture is worth a thousand words. The impression created by a
picture has much greater impact than any amount of detailed
explanation. Statistical data can be effectively presented in the form of
diagrams and graphs. Graphs and Diagrams make complex data simple
and easily understandable. They help to compare related data and bring
out subtle data with amazing clarity. The Diagram used is as follows:

1) Bar diagrams: Bar diagrams are used specifically for categorical data
or series. They consist of the group of equidistant rectangles, one for
each group or category of data in which the values of magnitudes are
represented by length or height of rectangles.

2) Sample Bar diagram: It is used of comparative study of two or more

aspects of a single variable or single category of data.

3) Percentage bar diagram: If sub-divided bar diagrams are presented on

a percentage basis i.e. each component as a percentage of whole, it is
said to be a percentage bar diagram.

13

COMPARATIVE STUDY
Comparative study is made by comparing the different investment
schemes including mutual funds, equity and relative indexes. The
returns of mutual funds and equity are compared for different sectors.
The Net Asset Value of different mutual fund companies is also shown in
the study. Overall the study is done by comparing different investment
schemes and what returns they give in the period of 1 year.

LIMITATIONS
1) Equity return is not taken from NSE stock exchange.

2) The data of mutual fund companies and equity companies is taken

only for 3& 6 months and 1 year due to non availability of data.

14

3) Due to limitation of time all sectors are not studied, only selected
sectors have been studied.

4) Data for mutual funds available on website is day to day basis data.
Data is updated

daily. Hence the data is available as on 31 march

2006.

5) only growth funds are taken.

6) Due to non availability of data NSE scrip Tata consultancy
information has not taken.

15

CHAPTER 2
COMPARATIVE STUDY ON MUTUAL FUNDS
AND OTHER INVESTMENT SCHEMES

16

INTRODUCTION ON MUTUAL FUND

The concept of Mutual fund is a new feature in the cap of Indian

capital market but not to international market. The concept of mutual
fund spread to USA in the beginning of 20 th century and three mutual
fund companies were started in 1924. Mutual funds have been
successfully working in the USA and some western countries. These
funds have been useful in filling the gap between the demand and supply
of capital in the market. A mutual fund motivates small and big investors
to entrust their savings to it so that these are professionally employed in
sharing good return. A large number of investors have small savings with
them. They can at the most buy shares of one or two companies. When
small savings are pooled and entrusted to mutual fund then these can be
used to buy blue chips where regular returns and capital appreciation
are ensured.

Fund is an American concept. The terms like investment company,

money

fund

investment

trust

and

mutual

funds

are

used

interchangeably and used to describe the same thing in American

literature. In British literature mutual funds has not been explained but
is considered as a synonym of investment trust of USA.

DEFINITION & MEANING

17

A mutual fund is an investment vehicle for investors, who pool their

savings for investing in diversified portfolio of securities with the aim of
attractive yields and appreciation in their value.

As per mutual fund book published by investment company institute of

US,Mutual fund is a financial service organization that receives money
from shareholders, invest it, earns return on it, attempt to make it grow and
agree to pay the shareholder cash on demand for the current value of
investment

SEBI (mutual fund) regulations, 1996 defines mutual funds as

A fund established in the form of a trust to raise monies through the

sale of units to the public or a section of public under one or more schemes
for investing in securities including money market instruments

A mutual fund is a special type of institution a trust or an

investment company which acts as an investment intermediary and
channelises the savings of large number of people to the corporate
securities in such a way that investors get a steady return, capital
appreciation and low risk

A mutual fund is a trust that pools the savings of a number of

investors who wish to start investing but do not have a large amount of
18

capital to work with or who want to take hands of approach and let the
professional take all decisions. Mutual funds are basically large funds
operated by investment companies and pull money from many
different people and then invest according to a certain goal for the fund.
This allows for greater diversification than would be possible for a single
person with less-than-generous assets and also removes the burden of
researching market conditions and constantly adjusting investments
accordingly from the individual.

HISTORY OF MUTUAL FUND INDUSTRY

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.

19

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 Canara
Bank 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.
20

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 September,
2004, there were 29 funds, which manage assets of Rs.153108 crores

21

under 421 schemes. The graph indicates the growth of assets over the
years.

22

GROWTH IN ASSETS UNDER MANAGEMENT

ZZZ

Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified
Undertaking of the Unit Trust of India effective from February 2003. The
Assets under management of the Specified Undertaking of the Unit Trust
of India has therefore been excluded from the total assets of the industry
as a whole from February 2003 onwards.

23

CONCEPT OF MUTUAL FUND

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 appreciation realised 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 flow chart below
describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

24

ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates
the organisational set up of a mutual fund:

WHY MUTUAL FUNDS

Let's suppose you're just getting started as an investor and have
$5,000 to invest and you have three important goals you want to achieve.
First, you don't want to lose your money in a risky venture so you want
security, like that found in a certificate of deposit or other fixed income
investment. But you also want to make the most money you can, so you
want the prospect for growth potential, too. Finally, since you don't have
the time or knowledge to actively manage your money, you want

25

professional

money

management

--

occasionally

diversifying

your

investments into promising new opportunities. That sounds like a very

good plan, but where can you invest your money and have a chance to
meet all three criteria? Certificates of deposit and other fixed income
investments offer security, but often with low rates of interest and a fixed
potential for growth.

Individual stocks may carry greater potential for growth, but

$5,000 isn't a lot to invest and if you put it all in one stock, you risk
everything if it performs poorly. And, brokers and investment advisors
can offer you advice and money management, but at a price -- you pay
for their services, which reduces further the amount you have available
to invest.
More than 80 million people, or one out of every two households
in America, invest in mutual funds. Currently, over $6 trillion is invested
in mutual funds. While funds have been around since the 1920's, their
popularity over the past 25 years has soared. The reasons:
Mutual

funds make it easy and less costly for

investors to satisfy their need for capital growth,
income and/or income preservation

Mutual

funds
bring
diversification
and
professional money management to the individual
investor

A mutual fund is a company that pools the money of many

investors -- its shareholders -- to invest in a variety of different securities.
Investments may be in stocks, bonds, money market securities or some
combination of these. Those securities are professionally managed on

26

behalf of the shareholders, and each investor holds a pro rata share of
the portfolio -- entitled to any profits when the securities are sold, but
subject to any losses in value as well.
For the individual investor, mutual funds provide the benefit of
having someone else manage your investments, take care of record
keeping for your account, and diversify your dollars over many different
securities that may not be available or affordable to you otherwise. Today,
minimum investment requirements on many funds are low enough that
even the smallest investor can get started in mutual funds.

A mutual fund, by its very nature, is diversified -- its assets are

invested in many different securities. Beyond that, there are many
different types of mutual funds with different objectives and levels of
growth potential, furthering your chances to diversify.

NET ASSET VALUE

The net asset value of the fund is the cumulative market value of
the assets fund net of its liabilities. In other words, if the fund is
dissolved or liquidated, by selling off all the assets in the fund, this is the
amount that the shareholders would collectively own. This gives rise to
the concept of net asset value per unit, which is the value, represented by
the ownership of one unit in the fund. It is calculated simply by dividing
the net asset value of the fund by the number of units. However, most
people refer loosely to the NAV per unit as NAV, ignoring the "per unit".
We also abide by the same convention.
The price measured per unit is called the Net asset value NAV of
the unit. Just as a share or a bond is brought at a price, a mutual fund

27

is bought and sold at its NAV. If for example u were to invest Rs.10000 in
a scheme when its NAV is Rs.10 you will be
allotted 1000 units (10000/10) roughly the fund charges a nominal
processing fee. The NAV of any scheme tells how much each unit of it is
worth at any point in time, and is therefore the simplest measure of how
it is performing. A schemes NAV is its Net assets (market value of the
securities is owns minus whatever it owes) divided by the number of
units it has issued.

A schemes NAV is a dynamic figure. The market value of the

schemes portfolio changes from day to day as prices of shares and bonds
move up or down. The number of units outstanding also changes, as new
investors come into the scheme and old ones leave. If the NAV of your
schemes rises from Rs.10 to Rs.11 over a period of time, your scheme is
said to have generated a return of 10 percent. Similarly if its Net NAV falls
form Rs.10 to Rs. 9, it is said to have lost 10 percent. Fund houses have
to calculate and disclose, the NAVs of their schemes daily. Fund NAVs
can be easily looked up. While the general dailies give a random listing of
schemes, the financial papers are more exhaustive in their coverage.
When invested in a scheme, its NAV is the figure to track, as it quantifies
your returns, and your purchase price will be based on it. Random listing
of schemes, the financial papers random listing

28

TYPES OF MUTUAL FUNDS

This section provides descriptions of the characteristics -- such as
investment objective and potential for volatility of your investment -- of
various categories of funds. These descriptions are organized by the type
of securities purchased by each fund: equities, fixed-income, money
market

instruments,

or

some

combination

of

these.

This table organizes these fund types by how aggressive or

conservative they are and by investment objective. Because mutual funds
have specific investment objectives such as growth of capital, safety of
principal, current income or tax-exempt income, you can select one fund
or any number of different funds to help you meet your specific goals.

In general mutual funds fall into these general categories:

Equity Funds invest in shares of common stocks.

Fixed-Income Funds invest in government or corporate securities

which offer fixed rates of return.

Balanced Funds invest in a combination of both stocks and bonds.

Money Market Funds for high stability of principal, liquidity and

income.

29

Bond Funds, both tax-exempt and taxable funds to generate

income.

Specialty/Sector Funds to diversify holdings within an industry.

Equity Funds

Aggressive Growth Funds

What they invest in:

These funds seek maximum growth of

capital

with

secondary

emphasis

on

dividend or interest income. They invest in

common stocks with a high potential for
rapid growth and capital appreciation.

Because they invest in stocks which can

experience wide swings up or down, these
funds have a relatively low stability of
principal. They often invest in the stocks of
small emerging growth companies and
generally

provide

low

current

income

because these companies usually reinvest

their profits in their businesses and pay
small dividends, if any. Aggressive growth
funds generally incur higher risks than
growth funds in an effort to secure more
pronounced

growth.

These

funds

may

invest in a broad range of industries or

concentrate

on

one

or

more

industry

sectors. Some use borrowing, short-selling,

options and other speculative strategies to
leverage their results.

30

Suitable for:

Investors who can assume the risk of

potential loss in value of their investment
in the hope of achieving substantial and
rapid gains. They are not suitable for
investors

who

must

conserve

their

principal or who must maximize current

income.

Growth Funds
What they invest Generally invest in stocks for growth rather than
in:
current income.
Growth funds are more likely to invest in wellestablished companies where the company itself and
the industry in which it operates are thought to have
good long-term growth potential.
Growth funds provide low current income, but the
investor's principal is more stable than it would be in
an aggressive growth fund. While the growth potential
may be less over the short term, many growth funds
have superior long-term performance records. They
are less likely than aggressive growth funds to invest
in smaller companies which may provide short-term
substantial gains at the risk of substantial declines.
Suitable for:

Although growth funds are more conservative than

aggressive growth funds, they are still relatively
volatile.

They

are

suitable

for

growth-oriented

investors but not investors who are unable to assume

risk or who are dependent on maximizing current

31

income from their investments.

International/Global Funds
What they invest International funds seek growth through investments
in:
in companies outside the United States. Global funds
seek growth by investing in securities around the
world, including the United States. Both provide
investors with another opportunity to diversify their
mutual fund portfolio, since foreign markets do not
always move in the same direction as the U.S.

The best way to invest abroad is through mutual

funds, rather than direct investment in a foreign
security. Most investors are unfamiliar with foreign
investment practices and currencies and may not
have a clear understanding of how economic or
political events can affect foreign securities. An
investor in an international mutual fund doesn't have
to worry about trading practices, recordkeeping, time
zones or other laws and customs of a foreign country
-- that is all handled by the fund's money manager.

International and global funds can invest in common

stocks or bonds of foreign firms and governments.
Many international funds invest in a particular
country or region of the world.
Suitable for:

While

international

and

global

funds

offer

opportunities for growth and diversification, these

types of funds do carry some additional risks over

32

domestic funds and should be carefully evaluated and

selected

according

timeframe

and

to
risk

the

investor's

profile.

objectives,

Because

most

international and global funds are considered to be

aggressive growth funds or growth funds, investors
must be willing to assume the risk of potential loss in
value in the hope of achieving substantial gains. They
are not suitable for investors who must conserve their
principal or maximize current income.
Growth and Income Funds
What they invest in:

Growth and income funds seek long-term

growth of capital as well as current income.
The investment strategies used to reach
these goals vary among funds

Some invest in a dual portfolio consisting of

growth stocks and income stocks, or a
combination of growth stocks, stocks paying
high dividends, preferred stocks, convertible
securities or fixed-income securities such as
corporate

bonds

and

money

market

instruments. Others may invest in growth

stocks and earn current income by selling
covered call options on their portfolio stocks.
Suitable for:

Growth and income funds have low to

moderate stability of principal and moderate
potential for current income and growth.
They are suitable for investors who can
assume some risk to achieve growth of
capital but who also want to maintain a

33

moderate level of current income.

Fixed-Income Funds
What they invest The goal of fixed income funds is to provide high
in:
current income consistent with the preservation of
capital. Growth of capital is of secondary importance
Income funds that invest primarily in common stocks
are classified as equity income funds (see next listing).
Those that invest primarily in bonds and preferred
stocks are classified as fixed-income funds. These
funds invest in corporate bonds or governmentbacked mortgage securities that have a fixed rate of
return.
Since bond prices fluctuate with changing interest
rates, there is some risk involved despite the fund's
conservative nature. When interest rates rise, the
market price of fixed-income securities declines and
so will the value of the income funds' investments.
Conversely, in periods of declining interest rates, the
value of fixed-income funds will rise and investors will
enjoy capital appreciation as well as income
Fixed-income funds offer a higher level of current
income than money market funds, but a lower
stability of principal. They are generally more stable
in price than funds that invest in stocks. Within the
fixed-income category, funds vary greatly in their
stability of principal and in their dividend yields.
High-yield funds, which seek to maximize yield by
investing in lower-rated bonds of longer maturities,
entail less stability of principal than fixed-income

34

funds that invest in higher-rated but lower-yielding

securities.
Some fixed-income funds seek to minimize risk by
investing

exclusively

in

securities

whose

timely

payment of interest and principal is backed by the full

faith and credit of the U.S. Government. These
include securities issued by the U.S. Treasury, the
Government National Mortgage Association ("Ginnie
Mae"

securities),

the

Federal

National

Mortgage

Association ("Fannie Maes") and Federal Home Loan

Mortgage Corporation ("Freddie Macs"). All are backed
by pools of mortgages.
Suitable for:

Fixed-income funds are suitable for investors who

want to maximize current income and who can
assume a degree of capital risk in order to do so.
Again, carefully read the prospectus to learn if a
fund's investment policy with respect to yield and risk
coincides with your own objectives.

Balanced/Equity Income funds

What they invest Equity income funds seek high current yield by
in:
investing primarily in equity securities of companies
which pay high dividends. Unlike interest payments
on bonds, dividends on equity securities can change
as companies raise or lower their dividends. Since
yield-oriented
comparably

stocks
rated

are

more

fixed-income

volatile

securities,

than
equity

income funds offer less stability of principal than

35

fixed-income funds. Balanced funds are more evenly

invested in equities and income securities.
Suitable for:

Balanced and equity income funds are suitable for

conservative investors who want high current yield
with some growth.

Money Market Funds

What they invest For the cautious investor, these funds provide a very
in:
high stability of principal while seeking a moderate to
high current income. They invest in highly-liquid,
virtually

risk-free,

agencies

of

the

short-term
U.S.

debt

Government,

securities
banks

of
and

corporations and U.S. Treasury Bills. They have no

potential for capital appreciation.
Tax-exempt money market funds invest in securities
that provide safety of principal, liquidity and income
exempt from federal income taxes by investing in
short-term,

high-rated

municipal

obligations.

Because of their short-term investments, money

market mutual funds are able to keep a constant
share price; only the yield fluctuates. Therefore, they
are an attractive alternative to bank accounts. With
yields that are generally competitive with -- and
usually somewhat higher than -- yields on bank
certificates
advantages:

36

of

deposit

(CDs),

they

offer

several

Money can be withdrawn any time without

penalty. Money market funds also offer check
writing privileges.

Although not insured by the FDIC or FSLIC,

money market funds invest only in highlyliquid, short-term, top-rated money market
instruments.

Money

market

funds

are

suitable

for

conservative investors who want high stability

of principal and moderate current income with
immediate liquidity.

Suitable for:

Money market funds are suitable for conservative

investors who want high stability of principal and
moderate current income with immediate liquidity.

Municipal Bond Funds

What they invest "Muni" bond funds provide higher tax-exempt income
in:

than tax-exempt money market funds by investing in

longer-maturity (and often lower-rated) securities,
which generally offer higher yields than the shortterm,

high-rated securities

in which tax-exempt

money market funds invest

Municipal bond funds vary greatly in the quality and
maturity of the municipal bonds they invest in. The
longer the maturity, the higher the yield. Also, the

37

lower the credit rating of the issuer, the greater the

risk and the higher the yield
While municipal bond funds generally provide lower
yields than income funds with debt obligations of
similar maturities and ratings, for an investor in a
high marginal tax bracket the after-tax yields of
municipal bond funds will be higher. The price and
yield

of

municipal

bond

funds

will

fluctuate

moderately with interest rates. As interest rates

decline, the value of principal increases while yield
decreases; as rates increase, bond prices decline but
yields increase.
Suitable for:

Suitable for investors in medium to higher tax

brackets who want current income free from federal
income tax.

Double & Triple Tax-Exempt Bond Funds

What they invest These bond funds provide the investor with an even
in:

greater tax advantage by investing in municipal bonds

of a single state. Triple tax-exempt funds are exempt
from income tax in a specific city. Thus they generate
income exempt from not only federal income tax but
also from state and/or city income tax for residents of
those jurisdictions. Like all bond funds, the value of
the shares will fluctuate with interest rates, as will
the current yield. Also, the stability of principal and
yield levels vary with the quality and maturity length

38

of the bonds in which the funds invest. Lack of

geographic diversification increases credit risk of
these funds compared with national funds.
Suitable for:

These funds are suitable for investors in medium to

high tax brackets in high tax states who want income
with maximum exemption from taxes.

Specialty/Sector Funds
What they invest These funds invest in securities of a specific industry
in:
or sector of the economy such as health care, high
technology, leisure, utilities or precious metals
Because such funds invest primarily in one sector,
they do not offer the element of downside risk
protection found in mutual funds that invest in a
broad range of industries. However, the funds do
enable investors to diversify holdings among many
companies within an industry, a more conservative
approach than investing directly in one particular
company

Sector funds offer the opportunity for sharp capital

gains in cases where the fund's industry is "in favor"
but also entail the risk of capital losses when the
industry is out of favor
While sector funds restrict holdings to a particular

39

industry, other specialty funds such as index funds

give investors a broadly-diversified portfolio and
attempt to mirror the performance of various market
averages. Index funds generally buy shares in all the
companies composing the S&P 500 Stock Index or
other broad stock market indices
Asset allocation funds move funds among a variety of
markets and instruments in response to the fund
manager's view of relative market prospects. They are
broadly

diversified

and

sometimes

have

higher

management fees since there may be a variety of

securities in the portfolio. These funds are suitable
for investors who can tolerate a moderate to high
degree of risk, are seeking capital appreciation and to
whom dividend income is secondary in importance.
And whatever the instruments, social responsibility
funds apply moral and ethical as well as economic
principles in the selection of securities.
Suitable for:

Specialty funds are suitable for investors seeking to

invest in a particular industry who can monitor
industry performance regularly and alter investment
strategies accordingly. Investors must be willing to
assume the risk of potential loss in value of their
investment in the hope of achieving substantial gains.
They are not suitable for investors who must conserve
their principal or maximize current income.

BENEFITS OF MUTUAL FUNDS

40

1) Professional Investment Management: By pooling the funds of

thousands of investors, mutual funds provide full-time, high-level
professional management that few individual investors can afford to
obtain independently. Such management is vital to achieving results
in today's complex markets. Your fund managers' interests are tied to
yours, because their compensation is based not on sales commissions,
but

on

how

well

the

fund

performs.

These

managers

have

instantaneous access to crucial market information and are able to

execute trades on the largest and most cost-effective scale. In short,
managing investments is a full-time job for professionals.
2) Diversification: Mutual funds invest in a broad range of securities.
This limits investment risk by reducing the effect of a possible decline
in the value of any one security. Mutual fund shareowners can benefit
from diversification techniques usually available only to investors
wealthy enough to buy significant positions in a wide variety of
securities.
3) Low Cost: If you tried to create your own diversified portfolio of 50
stocks, you'd need at least $100,000 and you'd pay thousands of
dollars in commissions to assemble your portfolio. A mutual fund lets
you participate in a diversified portfolio for as little as $1,000, and
sometimes less. And if you buy a no-load fund, you pay or no sale
charges to own them.
4) Convenience and Flexibility: You own just one security rather than
many, yet enjoy the benefits of a diversified portfolio and a wide range
of services. Fund managers decide what securities to trade, clip the
bond coupons, collect the interest payments and see that your
dividends on portfolio securities are received and your rights

41

exercised. It's easy to purchase and redeem mutual fund shares,

either directly online or with a phone call.
5)

Quick, Personalized Service: Most funds now offer extensive

websites with a host of shareholder services for immediate access to
information about your fund account. Or a phone call puts you in
touch with a trained investment specialist at a mutual fund company
who can provide information you can use to make your own
investment choices, assist you with buying and selling your fund
shares, and answer questions about your account status.

6)

Ease of Investing: You may open or add to your account and

conduct transactions or business with the fund by mail, telephone or
bank wire. You can even arrange for automatic monthly investments
by authorizing electronic fund transfers from your checking account in
any amount and on a date you choose. Also, many of the companies
featured at this site allow account transactions online.

7) Total Liquidity, Easy Withdrawal: You can easily redeem your shares
anytime you need cash by letter, telephone, bank wire or check,
depending on the fund. Your proceeds are usually available within a
day or two.
8) Life Cycle Planning: With no-load mutual funds, you can link your
investment plans to future individual and family needs -- and make
changes as your life cycles change. You can invest in growth funds for
future college tuition needs, then move to income funds for retirement,
and adjust your investments as your needs change throughout your
life. With no-load funds, there are no commissions to pay when you
change your investments.

42

9) Market Cycle Planning: For investors who understand how to actively

manage their portfolio, mutual fund investments can be moved as
market conditions change. You can place your funds in equities when
the market is on the upswing and move into money market funds on
the downswing or take any number of steps to ensure that your
investments are meeting your needs in changing market climates. A
word of caution: since it is impossible to predict what the market will
do at any point in time, staying on course with a long-term, diversified
investment view is recommended for most investors.
10) Investor Information: Shareholders receive regular reports from the
funds, including details of transactions on a year-to-date basis. The
current net asset value of your shares (the price at which you may
purchase or redeem them) appears in the mutual fund price listings of
daily newspapers. You can also obtain pricing and performance
results for the all mutual funds at this site, or it can be obtained by
phone from the fund.
11) Periodic Withdrawals: If you want steady monthly income, many
funds allow you to arrange for monthly fixed checks to be sent to you,
first by distributing some or all of the income and then, if necessary,
by dipping into your principal.
12) Dividend Options: You can receive all dividend payments in cash. Or
you can have them reinvested in the fund free of charge, in which case
the dividends are automatically compounded. This can make a
significant contribution to your long-term investment results. With
some funds you can elect to have your dividends from income paid in
cash and your capital gains distributions reinvested.

43

13) Automatic Direct Deposit: You can usually arrange to have regular,
third-party payments -- such as Social Security or pension checks -deposited directly into your fund account. This puts your money to
work immediately, without waiting to clear your checking account, and
it saves you from worrying about checks being lost in the mail.
14) Recordkeeping Service: With your own portfolio of stocks and
bonds, you would have to do your own recordkeeping of purchases,
sales, dividends, interest, short-term and long-term gains and losses.
15) Safekeeping: When you own shares in a mutual fund, you own
securities in many companies without having to worry about keeping
stock certificates in safe deposit boxes or sending them by registered
mail. You don't even have to worry about handling the mutual fund
stock certificates; the fund maintains your account on its books and
sends you periodic statements keeping track of all your transactions.
16) Retirement and College Plans: Mutual funds are well suited to
Individual Retirement Accounts and most funds offer IRA-approved
prototype and master plans for individual retirement accounts (IRAs)
and Keogh, 403(b), SEP-IRA and 401(k) retirement plans. Funds also
make it easy to invest -- for college, children or other long-term goals.
Many

offer

special

investment

products

or

programs

tailored

specifically for investments for children and college.

17) Online Services: The internet provides a fast, convenient way for
investors to access financial information. A host of services are
available to the online investor including direct access to no-load
companies.

44

18) Sweep Accounts: With many funds, if you choose not to reinvest
your stock or bond fund dividends, you can arrange to have them
swept into your money market fund automatically. You get all the
advantages of both accounts with no extra effort.
19) Asset Management Accounts: These master accounts, available
from many of the larger fund groups, enable you to manage all your
financial service needs under a single umbrella from unlimited check
writing and automatic bill paying to discount brokerage and credit
card accounts.
20) Margin: Some mutual fund shares are marginable. You may buy
them on margin or use them as collateral to borrow money from your
bank or broker. Call your fund company for details.

MARKET TRENDS
Alone UTI with just one scheme in 1964, now competes with as
many as 400 odd products and 34 players in the market. In spite of the
stiff competition and losing market share, UTI still remains a formidable
force to reckon with.
Last six years have been the most turbulent as well as exiting ones
for the industry. New players have come in, while others have decided to
close shop by either selling off or merging with others. Product
innovation is now pass with the game shifting to performance delivery in
fund management as well as service. Those directly associated with the
fund management industry like distributors, registrars and transfer
agents, and even the regulators have become more mature and
responsible.

45

The industry is also having a profound impact on financial

markets. While UTI has always been a dominant player on the bourses as
well as the debt markets, the new generation of private funds which have
gained substantial mass are now seen flexing their muscles. Fund
managers, by their selection criteria for stocks have forced corporate
governance on the industry. By rewarding honest and transparent
management with higher valuations, a system of risk-reward has been
created where the corporate sector is more transparent then before.
Funds have shifted their focus to the recession free sectors like
pharmaceuticals, FMCG and technology sector. Funds performances are
improving. Funds collection, which averaged at less than Rs100bn per
annum over five-year period spanning 1993-98 doubled to Rs210bn in
1998-99. In the current year mobilization till now have exceeded
Rs300bn. Total collection for the current financial year ending March
2000 is expected to reach Rs450bn.

What is particularly noteworthy is that bulk of the mobilization has

been by the private sector mutual funds rather than public sector mutual
funds. Indeed private MFs saw a net inflow of Rs. 7819.34 crore during
the first nine months of the year as against a net inflow of Rs.604.40
crore in the case of public sector funds.
Mutual funds are now also competing with commercial banks in
the race for retail investors savings and corporate float money. The power
shift towards mutual funds has become obvious. The coming few years

46

will show that the traditional saving avenues are losing out in the current
scenario. Many investors are realizing that investments in savings
accounts are as good as locking up their deposits in a closet. The fund
mobilization trend by mutual funds in the current
year indicates that money is going to mutual funds in a big way. The
collection in the first half of the financial year 1999-2000 matches the
whole of 1998-99.
India is at the first stage of a revolution that has already peaked in
the U.S. The U.S. boasts of an Asset base that is much higher than its
bank deposits. In India, mutual fund assets are not even 10% of the bank
deposits, but this trend is beginning to change. Recent figures indicate
that in the first quarter of the current fiscal year mutual fund assets
went up by 115% whereas bank deposits rose by only 17%. (Source:
Thinktank, The Financial Express September, 99)

This is forcing a large

number of banks to adopt the concept of narrow banking wherein the

deposits are kept in Gilts and some other assets which improves liquidity
and reduces risk. The basic fact lies that banks cannot be ignored and
they will not close down completely. Their role as intermediaries cannot
be ignored. It is just that Mutual Funds are going to change the way
banks do business in the future.

47

COMPARISON OF BANKS, MUTUAL FUNDS, EQUITY & DERIVATIVES

BANKS

MUTUAL
FUNDS

EQUITY

DERIVATIVES

Returns

Low

Better

Better

Better

Administr
ative exp.

High

Low

Low

Low

Risk

Low

Moderate

High

High

Investmen
t options

Less

More

More

Less

Network

High penetration

Low but
improving

High
penetration

High
penetration

Liquidity

At a cost

Better

Better

Better

Quality of
assets

Not transparent

Transparent

Transparent

Everyday

NA

NA

None

NA

NA

Minimum balance
Interest between 10th. &
calculatio 30th. Of every
n
month

Guarantee Maximum Rs.1

lakh on deposits

48

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

49

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.

SELECTING FUNDS FOR YOUR PORTFOLIO

The chart below can be used to identify the types of funds best suited to
your particular investment objectives. Refer to it as you begin to
formulate your portfolio.
If Your
Basic
Objective
Is

You Want
The
Following
Fund Type

These Funds Potential

Potential Potential
Invest
Capital
Current Risk
Primarily In Appreciation Income

Common
stocks with
potential for
Aggressive
Maximum
very rapid
Growth
Capital
growth. May
Growth
employ
International
certain
aggressive
strategies
High
Capital
Growth

50

Growth
Specialty/

Common
stocks with
long-term

Very High

Very Low

High to
Very High

High to Very Very Low High

High

Sector
International

growth
potential
Common
stocks with
potential for
high
Moderate
dividends and
capital
appreciation

Current
Income &
Capital
Growth

Growth &
Income

High
Current
Income

Fixed Income Both highdividendVery Low

Equity
paying stocks
Income
and bonds

High to
Low to
Very High Moderate

Current
Income &
Protection
of
Principal

General
Money
Market
Funds

Money market
None
instruments

Moderate
Very Low
to High

Short-term
municipal
notes and
bonds

None

Moderate
Low
to High

U.S.Treasury
U.S.
and agency
Government issues
None
Money
guaranteed
Market
by the U.S.
Government

Moderate
Low
to High

Tax-Free
Income & Tax-Exempt
Protection Money
of
Market
Principal
Current
Income &
Maximum
Safety of
Principal

Moderate

Moderate
to High

FUTURE SCENARIO
The asset base will continue to grow at an annual rate of about 30
to 35 % over the next few years as investors 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.

51

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, and 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.

PROBLEMS & PROSPECTS OF MUTUAL FUNDS

1)

Wrong positioning : The mutual funds in India have been quite

wrongly promoted as an alternative to equity industry. Thus creating
very high expectations in the minds of the investors. In a falling
market, these expectations have been belied. Only the pure equity

52

schemes can be compared with the stock market index. However pure
equity schemes are few in India, further, investment is not purely
linked to a particular index. Therefore returns form mutual funds
cannot really be compared with stock market index.
2)

Limited product range: Indian mutual funds have remained

centered around a limited product range basically income, incomecum-growth and tax saving schemes. Efforts to develop and expand
the market through innovative new products have been negligible.
These have happened due to the tendency to avoid risk, inability to
understand future market developments, and change in investor
preference. Therefore the extent of mutual funds market has remained
limited.

3)

Confused market situation: probably the introduction and

implementation of new regulatory norms has contributed in some
measure to market sluggishness, as the emerging market was,
initially, not able to respond to the regulatory objectives.

4) Absence of Innovative Marketing Network: The absence of product

diversification and a confused market situation has been made worse
by the absence of an innovative marketing network for mutual funds.
The agent oriented network has largely been failure because most of
the agents have not been specifically trained to sell mutual funds
products,

53

5) Lack of adequate research infrastructure: the passive approach of

some mutual funds in managing investors funds is compounded by
the lack of adequate research infrastructure. Consequently, returns
commensurate with the market movement could not be realized by
many schemes, which has tended to show up Indian mutual funds in
a bad light.
6) Inefficient management: Management is considered to be a key
factor for the operational efficiency of any business venture. This
factor becomes even more crucial for service ventures such as mutual
funds. What mutual funds require are managers who have a clear
understanding of prevailing and emerging market potential, investor
preference and macro economic fundamentals.
7)

Lack of investors education: The market success of any new

product particularly a financial product depends largely on its
acceptance by consumers, in this case investors. Mutual funds must
undertake a well design and comprehensive program of investor
education especially aimed at investors in rural and semi-urban areas.
However this has been mostly neglected in India.

8) Lack of media support: investors understanding about mutual funds

product and it feature must be increased as it was found to be very
low so far. This problem requires quick and structured attention. This
can be solved with effective use of media. A positive media support is
also required and mutual funds need to be media friendly. A very
closer coordination between AMFI, mutual funds and the media to
promote investor education in India.

54

9)

Ignorance of liquidity management: over emphasis on asset

management has often ignored the crucial importance of liability
management in mutual funds, leading many Indian funds into a
liquidity trap at the time of redemption. A more scientific approach
needs to be adopted by the funds.

10) Risk management ignored: Derivatives have been widely used by

the mutual funds as a measure of risk management as a complex and
competitive market place. Further the practice of stock lending, used
widely in the western market has induced efficiency in funds
management a regulatory environment for mutual funds need to
encouraged this practices in India.

INTRODUCTION ON EQUITY SHARES

Equity is a term commonly used to describe the ordinary share
capital of the business. Ordinary share in the equity capital of the

55

business entitle the holders to all distributed profits after the holders of
debentures and preference shares have been paid. Ordinary shares are
issued to the owners of the company. It is important to understand the
market values of companys shares have little relationship to their
nominal or face value. The market value of the company share is
determined by the price another investor is prepared to pay for them. In
the case of publicly quoted companied, this is reflected in the market
value of the ordinary shares traded on the stock exchange. In case of
privately owned companies, where there is unlikely to be much trading in
shares, market value is often determined when the business is sold or
when the minority share holding is valued for taxation purpose.
Differed ordinary shares are a form of ordinary shares which are
entitled to a dividend only after a certain date or only if profits rise above
a certain amount. Voting rights might also differ from those attach to
other ordinary shares. Financing a company through the sale of stock in
accompany is known as equity financing. Alternatively debt financing can
be done to avoid giving up shares of ownership of the company. Equity
financing are usually used for longer term investment projects such as
investment in a new factory or a new foreign market.
Equity investment generally refers to the buying and holding of
shares of stock on a stock market by individuals and funds in
anticipation of income from dividends and capital gain as the value of
stock rises. It also sometimes refers to the acquisition of equity
(ownership) participation in a private (unlisted) company or a start up. (A
company being created or newly created). When the investment is in
infant companies it is refer to as venture capital investing and is generally
understood to be higher risk than investment in listing, going concern
situations.

56

ON INDEX INTRODUCTION
Stock market talk is everywhere, from T.V and radio, to the
newspapers and the web. But what does it mean? When people say that
the market turned a great performance today. What is the market
anyway?
As it turns out, when most people talk about the market they are
actually referring to an index. With the growing importance of the stock
market in our society the names of indexes such as S & P 500, NIFTY,
and SENSEX have become part of our every vocabulary.
Index can be defined as a statistical measure of changes in the
portfolio of stocks representing the portion of the overall market. It
would be difficult to track every single security trading in the country. To
get around this we take a smaller sample of the market that is
representative of the whole. Thus, just a pollsters use a political survey
to gauge the sentiment of population, the investors use indexes to track
the performance of the stock market. Ideally change in price of an index
would represent and exactly proportionate change in the stocks included
in the index.
Indexes are great tools for telling us what direction the market is
taking, what trends are prevailing. An index is a number use to
represent the changes in a set of values between a base time period and
another time period A stock index is number that helps you measure the
levels of the market. Most stock indexes attempt to be proxies for the
market they exist in. returns on the index are thus supposed to represent
the returns on the market i.e the returns that u could get if u had the
entire market in your portfolio.

57

CHAPTER 3
COMPANY PROFILE

58

COMPANY PROFILE
OVERVIEW
Karvy is a premier integrated financial services provider, and
ranked among the top five in the country in all its business segments,
services over 16 million individual investors in various capacities, and
provides investor services to over 300 corporate, comprising the who is
who of Corporate India. Karvy covers the entire spectrum of financial
services such as Stock broking, Depository Participants, Distribution of
financial products - mutual funds, bonds, fixed deposit, equities,
Insurance Broking, Commodities Broking, Personal Finance Advisory
Services, Merchant Banking & Corporate Finance, placement of equity,
IPOs, among others. Karvy has a professional management team and
ranks among the best in technology, operations and research of various
industrial segments.

KARVY -IN EARLY DAYS

The birth of Karvy was on a modest scale in 1981. It began with
the vision and enterprise of a small group of practicing Chartered

59

Accountants who founded the flagship company Karvy Consultants

Limited. We started with consulting and financial accounting automation,
and carved inroads into the field of registry and share accounting by
1985. Since then, we have utilized our experience and superlative
expertise to go from strength to strengthto better our services, to
provide new ones, to innovate, diversify and in the process, evolved Karvy
as one of Indias premier integrated financial service enterprise.

Thus over the last 20 years Karvy has traveled the success route,
towards building a reputation as an integrated financial services provider,
offering a wide spectrum of services. And we have made this journey by
taking the route of quality service, path Breaking innovations in service,
versatility

in

service

and

finallytotality

in

service.

Our highly qualified manpower, cutting-edge technology, comprehensive

infrastructure and total customer-focus has secured for us the position of
an emerging financial services giant enjoying the confidence and support
of an enviable clientele across diverse fields in the financial world.
Our values and vision of attaining total competence in our
servicing has served as the building block for creating a great financial
enterprise, which stands solid on our fortresses of financial strength our various companies. With the experience of years of holistic financial
servicing behind us and years of complete expertise in the industry to
look forward to, we have now emerged as a premier integrated financial
services provider. And today, we can look with pride at the fruits of our
mastery and experience comprehensive financial services that are

60

competently segregated to service and manage a diverse range of

customer requirements

KARVY - CREDO
OUR FOCUS OUR CLIENTS
Clients are the reason for our being.
Personalized service, professional care; pro-activeness are the values
that help us nurture enduring relationships with our clients.

RESPECT FOR INDIVIDUAL

Each and every individual is an essential building block of our
organization.
We are the kiln that hones individuals to perfection. Be they our
employees, shareholders or investors. We do so by upholding their
dignity & pride, inculcating trust and achieving a sensitive balance of
their professional and personal lives.
TEAM WORK
None of us is more important than all of us.
Each team member is the face of Karvy. Together we offer diverse
services with speed, accuracy and quality to deliver only one product:
excellence.

61

Transparency,

co-operation,

invaluable

individual

contributions

for

collective

goal,

and

respecting

individual

uniqueness within a corporate whole, are how we deliver again and

again.
RESPONSIBLE CITIZENSHIP
A social balance sheet is as rewarding as a business one.
As a responsible corporate citizen, our duty is to foster a better
environment in the society where we live and work. Abiding by its
norms, and behaving responsibly towards the environment, are some
of our growing initiatives towards realizing it.

INEGRITY
Everything else is secondary.
Professional and personal ethics are our bedrock. We take pride in an
environment that encourages honesty and the opportunity to learn
from failures than camouflage them. We insist on consistency between
works and actions.

KARVY ALLIANCES
Karvy Computer share Private Limited is a 50:50 joint venture of
Karvy Consultants Limited and Computer share Limited, Australia.
Computer share Limited is world's largest -- and only global -- share

62

registry, and a leading financial market services provider to the global

securities industry.
The joint venture with Computer share, reckoned as the largest
registrar in the world, servicing over 60 million shareholder accounts for
over 7,000 corporations across eleven countries spread across five
continents. Computer share manages more than 70 million shareholder
accounts for over 13,000 corporations around the world. Karvy Computer
share Private Limited, today, is India's largest Registrar and Share
Transfer Agent servicing over 300 corporate and mutual funds and 16
million investors.

MILESTONE

63

ACHIEVEMENTS
Among the top 5 stock brokers in India (4% of NSE volumes)
India's No. 1 Registrar & Securities Transfer Agents

Among the to top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

64

 Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

QUALITY POLICY
To achieve and retain leadership, Karvy shall aim for complete
customer satisfaction, by combining its human and technological
resources, to provide superior quality financial services. In the process,
Karvy will strive to exceed Customer's expectations.

QUALITY OBJECTIVES
As per the Quality Policy, Karvy will:

Build

in-house

processes

that

will

ensure

transparent

and

harmonious relationships with its clients and investors to provide high

quality of services.

Establish a partner relationship with its investor service agents and

vendors that will help in keeping up its commitments to the
customers.

Provide high quality of work life for all its employees and equip them
with adequate knowledge & skills so as to respond to customer's
needs.

65

Continue to uphold the values of honesty & integrity and strive to

establish unparalleled standards in business ethics.

Use state-of-the art information technology in developing new and

innovative financial products and services to meet the changing needs
of investors and clients.

Strive to be a reliable source of value-added financial products and

services and constantly guide the individuals and institutions in
making a judicious choice of same.

Strive to keep all stake-holders (shareholders, clients, investors,

employees, suppliers and regulatory authorities) proud and satisfied.

KARVY STOCK BROKING LIMITED

Member - National Stock Exchange (NSE), The Bombay Stock
Exchange (BSE), and The Hyderabad Stock Exchange (HSE).
Karvy Stock Broking Limited, one of the cornerstones of the Karvy
edifice, flows freely towards attaining diverse goals of the customer
through varied services. Creating a plethora of opportunities for the
customer by opening up investment vistas backed by research-based

66

advisory services. Here, growth knows no limits and success recognizes

no boundaries. Helping the customer create waves in his portfolio and
empowering the investor completely is the ultimate goal.

STOCK BROKING SERVICES

It is an undisputed fact that the stock market is unpredictable and
yet enjoys a high success rate as a wealth management and wealth
accumulation option. The difference between unpredictability and a
safety anchor in the market is provided by in-depth knowledge of market
functioning and changing trends, planning with foresight and choosing
one option with care. This is what we provide in our Stock Broking
services.

We offer services that are beyond just a medium for buying and
selling stocks and shares. Instead we provide services which are multi
dimensional and multi-focused in their scope. There are several
advantages in utilizing our Stock Broking services, which are the reasons
why it is one of the best in the country.
We offer trading on a vast platform; National Stock Exchange,
Bombay

Stock

Exchange

and

Hyderabad

Stock

Exchange.

More

importantly, we make trading safe to the maximum possible extent, by

accounting for several risk factors and planning accordingly. We are
assisted in this task by our in-depth research, constant feedback and
Sound advisory facilities. Our highly skilled research team, comprising of
technical analysts as well as fundamental specialists, secure resultoriented information on market trends, market analysis and market
predictions.

67

This crucial information is given as a constant feedback to our

customers, through daily reports delivered thrice daily; The Pre-session
Report, where market scenario for the day is predicted, The Mid-session
Report, timed to arrive during lunch break, where the market forecast for
the rest of the day is given and The Post-session Report, the final report
for the day, where the market and the report itself is reviewed. To add to
this repository of information, we publish a monthly magazine & ldquo;
Karvy;

The Finapolis & rdquo;, which analyzes the latest stock market
trends and takes a close look at the various investment options, and
products available in the market, while a weekly report, called & ldquo;
Karvy Bazaar Baatein & rdquo;, keeps you more informed on the
immediate trends in the stock market. In addition, our specific industry
reports give comprehensive information on various industries. Besides
this, we also offer special portfolio analysis packages that provide daily
technical advice on scrip for successful portfolio management and
provide customized advisory services to help you make the right financial
moves that are specifically suited to your portfolio.

68

Our Stock Broking services are widely networked across India, with
the number of our trading terminals providing retail stock broking
facilities. Our services have increasingly offered customer oriented
convenience, which we provide to a spectrum of investors, high-net worth
or otherwise, with equal dedication and competence. But true to our
spirit, this success is not our final destination, but just a platform to
launch further enhanced quality services to provide you the latest in
convenient, customer-friendly stock management.
Over the years we have ensured that the trust of our customers is
our biggest returns. Factors such as our success in the Electronic
custody business has helped build on our tradition of trust even more.
Consequentially our retail client base expanded very fast.
To empower the investor further we have made serious efforts to
ensure that our research calls are disseminated systematically to all our
stock broking clients through various delivery channels like email, chat,
SMS, phone calls etc.

Our foray into commodities broking has been path breaking and we
are in the process of converting existing traders in commodities into the
more organized mainstream of trading in commodity futures, both as a
trading and risk hedging mechanism.
In the future, our focus will be on the emerging businesses and to
meet this objective, we have enhanced our manpower and revitalized our

69

knowledge base with enhances focus on Futures and Options as well as

the commodities business.

DEPOSITORY SERVICES
The onset of the technology revolution in financial services
Industry saw the emergence of Karvy as an electronic custodian
registered with National Securities Depository Ltd (NSDL) and Central
Securities Depository Ltd (CSDL) in 1998. Karvy set standards enabling
further comfort to the investor by promoting paperless trading across the
country and emerged as the top 3 Depository Participants in the country
in terms of customer serviced.
Offering a wide trading platform with a dual membership at both
NSDL and CDSL, we are a powerful medium for trading and settlement of
dematerialized shares. We have established live DPMs, Internet access to
accounts and an easier transaction process in order to offer more
convenience to individual and corporate investors. A team of professional
and the latest technological expertise allocated exclusively to our demat
division including technological enhancements like SPEED-e; make our
response time quick and our delivery impeccable. A wide national
network makes our efficiencies accessible to all.

DISTRIBUTION OF FINANCIAL PRODUCTS

70

The paradigm shift from pure selling to knowledge based selling

drives the business today. With our wide portfolio offerings, we occupy all
segments in the retail financial services industry.
A 1600 team of highly qualified and dedicated professionals drawn
from the best of academic and professional backgrounds are committed
to maintaining high levels of client service delivery. This has propelled us
to a position among the top distributors for equity and debt issues with
an estimated market share of 15% in terms of applications mobilized,
besides being established as the leading procurer in all public issues.
To further tap the immense growth potential in the capital markets
we enhanced the scope of our retail brand, Karvy the Finapolis, thereby
providing planning and advisory services to the mass affluent. Here we
understand the customer needs and lifestyle in the context of present
earnings and provide adequate advisory services that will necessarily
help in creating wealth. Judicious planning that is customized to meet
the future needs of the customer deliver a service that is exemplary. The
market-savvy and the ignorant investors, both find this service very
satisfactory. The edge that we have over competition is our portfolio of
offerings and our professional expertise. The investment planning for
each customer is done with an unbiased attitude so that the service is
truly customized.
Our monthly magazine, Finapolis, provides up-dated market
information on market trends, investment options, opinions etc. Thus
empowering the investor to base every financial move on rational thought
and prudent analysis and embark on the path to wealth creation.

71

ADVISORY SERVICES
Under our retail brand Karvy the Finapolis', we deliver advisory
services to a cross-section of customers. The service is backed by a team
of dedicated and expert professionals with varied experience and
background in handling investment portfolios. They are continually
engaged in designing the right investment portfolio for each customer
according to individual needs and budget considerations with a
comprehensive support system that focuses on trading customers'
portfolios and providing valuable inputs, monitoring and managing the
portfolio through varied technological initiatives.
This is made possible by the expertise we have gained in the business
over the years. Another venture towards being investor-friendly is the
circulation of a monthly magazine called Karvy - the Finapolis'.
Covering the latest of market news, trends, investment schemes and
research-based opinions from experts in various financial fields.

PRIVATE CLIENT GROUP

This specialized division was set up to cater to the high net worth
individuals and institutional clients keeping in mind that they require a
different kind of financial planning and management that will augment
not just existing finances but their life-style as well. Here we follow a
hard-nosed business approach with the soft touch of dedicated customer
care and personalized attention.
For this purpose we offer a comprehensive and personalized service
that encompasses planning and protection of finances, planning of
72

business needs and retirement needs and a host of other services, all
provided on a one-to-one basis.

CHAPTER 4
ANALYSIS & INTERPRETATION

73

ANALYSIS & INTERPRETATION

PREFACE
The analysis is done to know whether, Mutual fund, is it investors
best choice.

The information is collected of different sectors which

include FMCG Sector, , Pharma Sector and Index sector.

The returns of selected Mutual funds and selected Equities are

calculated for 3&6 months and 1year period. Equities closing price are
also given for half year and annually. The information collected is shown
in graphical form to make it more simple and easy to understand by the
Reader.

The information regarding all Mutual Funds and Equities is

given in the Table.

The Analysis is done by comparing the Particular Sector Mutual

Funds with Equities and also with Relative Sensex and Nifty, index of
BSE and NSE. The average of Particular Sector Mutual Funds and
Equities is taken and returns are calculated. Let us take for example, In
74

FMCG Sector the Returns of ICICI Prudential FMCG Fund, Franklin

FMCG fund and Magnum FMCG Fund are added and then divided by 3
hence the average is taken as returns of FMCG Mutual Funds in the
same way Returns of HLL Equity, Dabur Equity, Colgate Equity, Tata tea
Equity and Britannia Equity are also added and divided by 5 and the
average is taken as the returns of FMCG sector Equities. The Returns of
Relative Sensex and Nifty is Calculated and then the Analysis is done to
know the position of Mutual Funds in the market in long term and short
term period. The period of 3 months and 6 months is taken as short term
and period of 1 year is taken as long term period. The comparison of
aggregate Mutual Funds and Equities is shown in Table.

FMCG SECTOR MUTUAL FUNDS & EQUITIES

(TABLE :4.1)
RETURNS OF FMCG SECTOR EQUITIES & MUTUAL FUNDS
NAME
Franklin FMCG Fund
Pru ICICI FMCG
Fund
Magnum FMCG Fund
Hind Lever ltd Equity
Dabur equity
Colgate Equity
Britannia Equity
Tata tea Equity

75

Absolute returns %
3
MONTHS
15.12
0.57

6 MONTHS

1 YEAR

-9.9
0.30

55.20
0.12

0.21
0.84
-0.82
0.72
0.0019
0.014

0.04
0.95
0.38
0.48
0.08
0.05

0.10
0.84
0.01
0.79
0.0013
0.06

RETURNS OF EQUITIES
(BAR DIAGRAM 4.1)
RETURNS OF MUTUAL FUNDS & EQUITIES

76

77

(TABLE :4.1A)

FMCG MUTUAL FUNDS VS EQUITIES & RELATIVE INDEX

NAME

78

ABSOLUTE RETURNS IN %
3 MONTHS 6 MONTHS

1 YEAR

FMCG SECTOR
MUTUAL
FUNDS

0.15

0.10

0.55

FMCG SECTOR
EQUITIES

0.023

0.019

0.017

RELATIVE TO
SENSEX

594.13

1476.18

1725.89

RELATIVE TO

6561.00

9965.46

9830.72

NIFTY

FMCG Mutual Funds includes Franklin FMCG Fund, Prudential ICICI

FMCG Fund and Magnum FMCG fund.

FMCG Equities includes Hindustan lever ltd, Dabur, Colgate, Tata Tea
and Britannia

ABSOLUTE RETURNS OF MUTUAL FUNDS AND EQUITIES

(LINE DIAGRAM 4.1)

ABSOLUTE RETURNS OF INDEX

79

ABSOLUTE RETURNS OF INDEX

80

(ANALYSIS)
As observed from the Table, we can say that ICICI Prudential
FMCG Fund, Franklin FMCG Fund and Magnum FMCG Fund
Gives good Return. The Bar diagram representation makes it very
clear.

In FMCG Equities from Table and Bar Diagram we can see that
Hindlever gives maximum Returns then any other Equities. The
next comes Colgate and TataTea which gives almost the same
Returns. Tata tea Equities shows good Returns only in long term
period Whereas Dabur gives Negative Returns in short term
period..

The Returns of individual Mutual Fund of FMCG Sector in

particular period is summed up and then average is taken as the
Returns of FMCG Mutual Funds. In the same manner individual
Equity is summed up and the average is taken as FMCG Equities.
These aggregated Mutual funds and Equities are now compared in
Table with the Nifty and Sensex, the Index of NSE and BSE.

FMCG Mutual funds, as observed from the Table and

Line

Diagram grows rapidly. FMCG Equities show very good Returns in

long term and short term period i.e. in 3 & 6 months and 1 years
period . But Dabur shows negative returns in 3 months from the
Table .

81

 When comparison is made between Mutual Funds and Equities,

Returns are not similar in both short term and long term period as
we can see clearly from the Line Diagram .

As Sensex and Nifty grows in the Market, FMCG Mutual Funds

shows upward trend where as equities shows down ward. Both
Sensex and Nifty is

going at

different level having different

Exchanges. We can see Mutual Funds , Equities , Nifty and Sensex

all together in the line Diagram .

Overall Performance of Equities and Mutual Funds is not

satisfactory, mutual funds shows better yieldings compare to
equities. Equities shows negative returns. If investor dont want to
take

risk then he must go for Mutual funds as we can observe

form the Table that in individual Equity sometimes returns are

negative for example in Dabur Equity, but in Mutual Funds we can
see negative Returns but compare to equities mutual funds are risk
minimising.

PHARMA-SECTOR MUTUAL FUNDS & EQUITIES

(TABLE :4.4)
HIGH/LOW & RETURNS OF PHARMA SECTOR EQUITIES & MFS
ABSOLUTE RETURS %
NAME
Franklin Pharma Fund
Magnum Pharma Fund
UTI Pharma & health fund

82

3MONTHS
0.07
0.29
0.08

6MONTH
S
0.05
-0.74
0.01

1 YEAR
0.46
-0.02
0.27

Dr Reddys Equity
Ranbaxy Equity
Orchid equity
Cipla equity
Sun Pharma Equity

0.083
0.027
0.013
0.025
0.022

0.072
0.027
-0.012
0.029
0.024

(BAR DIAGRAM)
RETURNS OF MUTUAL FUNDS

(BAR DIAGRAM)
RETURNS OF MUTUAL FUNDS

83

0.062
0.042
0.010
0.26
0.030

(BAR DIAGRAM 4.8)

RETURNS OF EQUITIES

84

(TABLE :4.4A)
PHARMA SECTOR MUTUAL FUNDS VS EQUITIES & RELATIVE INDEX

85

NAME

ABSOLUTE RETURNS IN %
3 MONTHS 6 MONTHS

1 YEAR

PHARMA
MUTUAL
FUNDS

0.44

0.80

0.75

PHARMA
EQUITIES

0.17

0.16

0.40

RELATIVE TO
SENSEX

594.13

1476.18

1725.89

RELATIVE TO
NIFTY

6561.00

9965.46

9830.72

Pharma Sector Mutual Funds include UTI Pharma & Healthcare

Fund, Franklin Pharma Fund, Magnum Pharma Fund.

Pharma Sector Equities includes Dr Reddy Labs, Ranbaxy, orchid and

cipla Sun Pharma.

(LINE DIAGRAM 4.4)

86

87

ABSOLUTE RETURNS OF MUTUAL FUNDS, EQUITIES & INDEX

(ANALYSIS)
Pharma Sector fund, as, we can see clearly that all Mutual Funds
performance in long term period and
good.

88

short term period is very

 From Table we can also see that Dr Reddys Equity, Sun Pharma
Equity and Ranbaxy & cipla equit also performs well. But we can
also notice that Pharma Sector Equity such as

orchid gives

negative Returns in the period of 6months . In the same way equity

also gives very poor Returns during the study period.

The Returns of individual Mutual Fund of Pharma-sector in

particular period is summed up and then average is taken as the
Returns of Pharma Sector Mutual Funds. In the same way
individual Equity are summed up and average is taken as Pharma
Sector Equities. These aggregated Mutual funds and Equities are
now compared in Table with the Nifty and Sensex . Pharma Sector
Mutual Funds performs well in both short term and long term
period as noticed form the Table. But sbi pharma sector shows
negetive returns

in 6months and 1 year. equities gives good

Returns in short term but in short term Orchid Equity shows

negative returns in 6 months.

When Both Pharma Sector Mutual Funds and Equities are

compared, Mutual Funds perform better than Equities in long term
period. In short term Equities gives good result but in lone term
the performance shows downward trend as we can observe from
the Line Diagram .

As relative Sensex and Nifty grows in the Market, Pharma Sector

Mutual Funds also shows upward trend but Equities does not
show any upward trend in long term period as we can clearly

89

observe in the Line Diagram showing Comparison between Mutual

Funds, Equities, Sensex and Nifty.

In long and short Pharma Sector Mutual Funds performs better

than Pharma Sector Equities. It is advisable to invest in Pharma
Sector Mutual Fund rather than Equity, because we can notice
from the Line Diagram that Equities does not show any upward
trend with the growth in Mutual Funds, Sensex, and Nifty as we
have seen from Table that Individual Pharma Equity gives negative
Returns whereas the case is never done with Mutual Funds.

90

CHAPTER - 5
CONCLUSIONS & SUGGESTIONS

CONCLUSIONS & SUGGESTIONS

91

The Mutual funds shows better yields compare to equities.

Even though mutual funds shows in short term negative returns

but it is better to invest in mutual funds.

in fmcg sector franklin fmcg fund shows negative returns in 6

months.

In pharma sector sbi mutual fund shows negative returns both in

short & long term.

In fmcg sector in short term dabur gives negative returns in 3

months.

92

In pharma sector orchid shows negative returns in 6 months.

CHAPTER - 6
BIBILIOGRAPHY

93

I. TEXT BOOK
1.

Security Analysis Portfolio Management

Donald Fisher
Ronald A Jordan

2.

Mutual Fund In India

H.Sadhak

II.

WEB SITES
www.mutualfundsindia.com
www.amfiindia.com
www.utimf.com
www.bseindia.com

III. MAGAINES
Business India
Business World

IV. NEWS PAPERS

Economic Times
Business Standard.

94