This action might not be possible to undo. Are you sure you want to continue?
The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial System;
The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below;
A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe. Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals. Financial system overview A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.
Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, shortterm instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.
Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year.
Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across theglobe.
Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.
Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate information of the issue, issuer and the security should be passed on to take place. There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, financial intermediaries came into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few Page 3
intermediaries offering their services in move than one market e.g. underwriter. However, the services offered by them vary from one market to another. Introduction to Indian Financial Sector and it’s Reforms The Indian financial system of the pre-reform period, before 1991, essentially catered to the needs of planned development in a mixed-economy framework, where the Government sector had a predominant role in economic activity. Interest rates on Government securities were artificially pegged at low levels, which were unrelated to the market conditions. The system of administered interest rates was characterized by detailed prescriptions on the lending and the deposit side, leading to multiplicity and complexity of interest rates. Consequently, by the end of the eighties, directed and concessional availability of bank credit to certain sectors adversely affected the viability and profitability of banks. Thus, the transactions of the Government, the Reserve Bank and the commercial banks were governed by fiscal priorities rather than sound principles of financial management and commercial viability. It was then recognized that this approach, which, conceptually, sought to enhance efficiency through a co-ordinate approach, actually led to loss of transparency, accountability and incentive to seek efficiency. Need and importance of financial sector The New Economic Policy (NEP) of structural adjustments and stabilization programme was given a big thrust in India in June 1991. The financial system reforms have received special attention as a part of this policy because of the perceived interdependent relationship between the real and financial sectors of the modern economy. The need for financial reforms had arisen because the financial institution and markets were in a bad shape. The banking sector suffered from lack of competition, low capital base, low productivity, and high intermediation costs. The role of technology was minimal, and the quality of service did not receive adequate attention. Proper risk management system was not followed, and prudential norms were weak. All these resulted in poor assets quality. Development financial institutions operated in an over – protected environment with most of the funding Page 4
coming from assured sources. There was little competition in insurance and mutual funds industries. Financial markets were characterized by control over pricing of financial assets, barriers to entry, and high transactions costs. The banks were running either at a loss or on very low profits, and, consequently were unable to provide adequately for loan defaults, and build their capital. There had been organizational inadequacies, the weakening of management and control functions, the growth of restrictive practices, the erosion of work culture, and flaws in credit management. The strain on the performance of the banks had emanated partly from the imposition of high Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and directed credit programmes for the priority sectors – all at below market or concessional or subsidized interest rates. This, apart from affecting bank profitability adversely, had resulted in the low or repressed or depressed interest rates on deposits and in higher interest rates on loans to the larger borrowers from business and industry. Further, the functioning of the financial system, and the credit delivery as well as recovery process had become politicized, which damaged the quality of lending and the culture of repaying loans. The widespread write-offs of the loans had seriously jeopardized the viability of banks. As the closure of sick industrial units was discouraged by the government, banks had to continue to finance non-viable sick units, which further compromised their own viability. The legal system was not of much help in recovering loans. There was a lack of transparency in preparing statements of accounts by banks. In other words, the reforms had become imperative on account of the facts that despite its impressive quantitative growth and achievements, the financial health, integrity, autonomy, flexibility, and vibrancy in the financial sector had deteriorated over the past many years. The allocation of resources had become severely distorted, the portfolio quality had deteriorated, and productivity, efficiency and profitability had been eroded in the system. Customer service was poor, work technology remained outdated, and transaction costs were high.
RESERVE BANK OF INDIA
The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.
Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenousbanks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:
To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.
Functions of Reserve Bank of India
The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India.
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters. Page 7
Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. Controller of Credit The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. Page 8
As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: a) It holds the cash reserves of all the scheduled banks. b) It controls the credit operations of banks through quantitative and qualitative controls. c) It controls the banking system through the system of licensing, inspection and calling for information. d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.
Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. though there were periods of extreme pressure in favour of or against
the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.
In addition to its traditional central banking functions, the Reserve bank has certain nonmonetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.
With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs varietyof developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialised financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Page 10
Agricultural Refinance and Development Corporation to provide long-term finance to farmers.
Classification of RBIs functions
The monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country. Equally important, however, are the non-monetary functions of the RBI in the context of India's economic backwardness. The supervisory function of the RBI may be regarded as a nonmonetary function (though many consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licencing of banks, branch expansion, liquidity of their assets, management and methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has greatly improved. Commercial banks have developed into financially and operationally sound and viable units. The RBI's powers of supervision have now been extended to non-banking financial intermediaries. Since independence, particularly after its nationalisation 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country. RESERVE BANK OF INDIA ADDRESS Reserve Bank of India, Central Office, Shaheed Bhagat Singh Road, Mumbai - 400 001.
FINANCIAL INSTRUMENTS IN INDIA
We took a look at the players in the financial markets earlier. Let us now look at the Financial Instruments these players have. They van be braodly classified into Government securities and Industrial securities.
Government Securities( G-Sec ) :
In India G- Secs are issued by the Central Government, State Governments and Semi Government Authorities such as municipalities, port trusts, state electricity boards and public sector corporations. The Central and State Governments raise money through these securities to finance the creation of new infrastructure as well as to meet their current cash needs. Since these are issued by the government, the risk of default is minimal. Therefore, interest rates on these securities often serve as a benchmark for the level of interest rates in the economy. Other issuers may price their offerings by `marking up‟ this benchmark rate to reflect the credit risk specific to them. These securities may have maturities ranging from five to twenty years. These are fixed income securities, which pay interest every six months. The Reserve Bank of India manages the issues of the securities. These securities are sold in the primary market mainly through the auction mechanism. The RBI notifies issue of a new tranche of securities. Prospective buyers submit their bids. The RBI decides to accept bids based on a cut off price. The G -secs are primarily bought by the institutional investors. The biggest investors are commercial banks who invest in G-secs to meet the regulatory requirement to maintain a certain percentage of Statutory Liquidity Ratio (SLR) as well as an investment vehicle. Insurance companies, provident funds, and mutual funds are the other large investors. The Primary Dealers perform the function of market makers through buying and selling activities.
The Government of India also borrows short term funds for up to one year. This is through the issue of Treasury Bills which are sold at a discount to the face value and redeemed at the full face value.
These are securities issued by the corporate sector to finance their long term and working capital requirements. The Major Instruments that fall under Industrial Securities are Debentures, Preference Shares And Equity Shares.
Debentures Debentures have a fixed maturity and pay a fixed or a floating rate of interest during their lifetime. The company has an obligation to pay interest and the principal amount on the due dates regardless of its profitability position. The debenture holders are not members of the company and do not have any say in the management of the company. Since these carry a predefined rate of return, there is no scope for any major capital appreciation. However, in case of fixed rate debentures, their market price moves inversely with the direction of interest rates. The debenture issues are rated by the professional credit rating agencies regarding the payment of interest and the repayment of the capital amount. Apart from the `plain vanilla‟ variety of debentures (periodic payment of interest during their currency and repayment of capital on maturity), a number of variations have been devised. For example, zero coupon bonds are issued at a discount to their face value and redeemed at the full face value. The difference constitutes return for the investor.
Preference Shares Preference Shares carry a fixed rate of dividends. These carry a preferential right to dividends over the equity shareholders. This means that equity share holders cannot be paid any dividends unless the preference dividend has been paid in full. Similarly on the winding up of the company, the preference share holders get back their capital before the equity share holders. In case of cumulative preference shares, any dividend unpaid in past years accumulates and is paid later when the company has sufficient profits. Now all preference shares in India are `redeemable‟, i.e. they have a fixed maturity period. Thus, preference shares are sometimes called a `hybrid variety‟ – incorporating features of debt as well as equity. Equity Shares Equity Shares are regarded as high return high risk instruments. These do not carry any fixed rate of return and there is no maturity period. The company may or may not declare dividend on equity shares. Equity shares of major companies are traded on the stock exchanges. The major component of return to equity holders usually consists of market appreciation. Call Money Market: The loans made in this market are of a short term nature – overnight to a fortnight . This is mostly inter-bank market. Those banks which are facing a short term cash deficit, borrow funds from the cash surplus banks. The rate of interest is market driven and depends on the liquidity position in the banking system. Commercial Paper (CP) and Certificate of Deposits (CD) : CPs are issued by the corporates to finance their working capital needs. These are issued for short term maturities. These are issued at a discount and redeemed at face value. These are unsecured and therefore only those companies who have a good credit standing are able to access funds through this instrument. The rate of interest is market driven and depends on the current liquidity position and the creditworthiness of the issuing company.
The characteristics of CDs are similar to those of CPs except that CDs are issued by the commercial banks.
Primary investment objective of any individual or organisation is to maximize the returns and minimizing Market risk and Credit risk through diversification. Mutual Funds (MF) have become one of the most attractive ways for the average person to invest their money. It is said that Bank investment is the first priority of people to invest their savings and the second place is for investment in Mutual Funds and other avenues. A Mutual Fund pools resources from thousands of investors and then diversifies its investment into many different holdings such as stocks, bonds, or Government securities in order to provide high relative safety and returns. The Project is a “FINANCE PROJECT” which tries to explain in layman‟s language about the history, growth, & pros and cons of investing in Mutual Funds and the second part of it deals with the analysis of risk and returns of Equity scheme, Tax saver fund scheme, Balanced fund, Liquid fund, Capital builder fund, Gilt fund, Floating rate income fund, Prudence fund and short term plan fund provided by HDFC Mutual Fund in comparison with the benchmark of S&P CNX indices. The main objective of the project was to get an Overview of Mutual Fund Industry, its set up, its working and to find out the risks and returns of selected HDFC Mutual Fund Schemes comparison with the benchmark of S&P CNX indices”. The project includes a brief idea about the growth of MF industry (History), the broad idea about the organization and concept of MF and SEBI Guidelines on Mutual Funds. There are many improvements pending in the field and it has to happen as soon as possible so as to call the MF industry as an Organized and well-developed sector.The past performance of MF
is not necessarily indicative of future performance of the scheme and no AMC guarantees Returns and or safety of Principal. Analysis is done by calculating standard deviation, beta calculation. Findings: The HDFC Balanced Fund has not given stable returns to the investors. The beta of the fund is 0.47546. The Standard Deviation of the fund is 0.85433. The HDFC Floating rate Income Fund has given stable returns for the investors. The beta of the fund is 0.00187. The Standard Deviation of the fund is 0.02186. The HDFC Equity Fund has not given stable returns to the investors. The beta of the fund is 0.69971. The Standard Deviation of the fund is 1.1237. The Liquid Fund has given below average returns for the investors in this period. It is moderate riskier because the beta of the fund is 0.00148. The Standard Deviation of the fund is 0.01953. Recommendations: HDFC Floating rate Income Fund has a beta of 0.00187 hence the scheme is less volatile than the market. The scheme should generate reasonable returns while maintaining safety and providing investor superior liquidity. The standard deviation of the HDFC Liquid Fund Short Term Plan Funds is high, so the company should try to reduce the risk involved by reducing the standard deviation of the fund. The HDFC Liquid Fund & Short Term Plan Funds beta is 0.00148, 0.00383 so it means these schemes are less volatile. So the companies should harness on it by excessively advertising its benefits and in turn invite investors to invest whose risk appetite is less. Conclusions: In the above selected schemes of HDFC Mutual Fund all nine Schemes are defensive assets and the Gift Fund has negative beta. The scheme which contains beta is less than one is called defensive asset.
A. INTRODUCTION TO MUTUAL FUNDS
Mutual Funds - The Concept A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:
The following simple diagram clearly shows the working of a mutual fund:
Funds – Organization There Mutual are many entities involved and the diagrams illustrate the organizational set up of a mutual fund:
Advantages of Mutual Funds
1. Affordability:A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.500/-. Thus it would be affordable for an investor Page 19
to build a portfolio of investments through a mutual fund rather than investing directly in the stock market. 2. Diversification:It means that investor must spread his investment across different securities (money market instruments, bonds, stocks, real estate, fixed deposits etc.) and different sectors (banking, textile, IT, etc.). This kind of a diversification may add to the stability of investor‟s returns, so as to offset any underperformance by any one sector or instrument and help investor meet his investment objective. 3. Variety:Mutual funds offer a whole variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For example, an investor can invest his money in a debt scheme and a equity scheme depending on his risk appetite to create a balanced portfolio easily or simply just buy a Balanced Scheme.
4. Professional Management:Qualified investment professionals seek to maximize returns and minimize risk monitor investor's money. In a mutual fund, investor‟s are handing their money with an investment professional who has experience in making investment decisions. It is then the Fund Manager's job to (a) find the best securities for the fund, given the fund's stated investment objectives; and (b) keep track of investments and changes in market conditions and adjust the mix of the portfolio, as and when required. 5. Liquidity:-
Investor‟s are free to take their money out of open-ended mutual funds whenever they want, no questions asked. Most open-ended funds mail investor redemption proceeds, which are linked to the fund's prevailing NAV (net asset value), within three to five working days of investor putting their request. 6. Regulations:Securities and Exchange Board of India ("SEBI"), the Capital Markets regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors. 7. Other advantages: Return Potential Low Costs Transparency Flexibility Tax benefits
Disadvantages of Mutual Funds
There are certainly some benefits to mutual fund investing, but investor should also be aware of the drawbacks associated with mutual funds.
1. No Insurance:Mutual funds, although regulated by the government, are not insured against losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible (although extremely unlikely) that investor‟s could even lose their entire investment.
Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly.
3. Fees and Expenses:Most mutual funds charge management and operating fees that pay for the fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell.
4. Poor Performance:Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of critics now question whether or not professional money managers have better stock-picking capabilities than the average investor.
5. Loss of Control:The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for investor‟s when they trying to manage their portfolio. For example, the tax consequences of a decision by the manager to buy or sell an asset at a certain time might not be optimal for investor‟s. Investor‟s also should remember that investor‟s are trusting someone else with their money when they invest in a mutual fund. 6. Trading Limitations:-
Although mutual funds are highly liquid in general, most mutual funds (called openended funds) cannot be bought or sold in the middle of the trading day. Investor‟s can only buy and sell them at the end of the day, after they've calculated the current value of their holdings.
7. Size:Some mutual funds are too big to find enough good investments. This is especially true of funds that focus on small companies, given that there are strict rules about how much of a single company a fund may own. If a mutual fund has $5 billion to invest and is only able to invest an average of $50 million in each, then it needs to find at least 100 such companies to invest in; as a result, the fund might be forced to lower its standards when selecting companies to invest in.
8. Inefficiency of Cash Reserves:Mutual funds usually maintain large cash reserves as protection against a large number of simultaneous withdrawals. Although this provides investors with liquidity, it means that some of the fund's money is invested in cash instead of assets, which tends to lower the investor's potential return.
Title Of The Project “A study on management of Risk & Return analysis on HDFC Mutual funds HDFC Mutual Funds Ltd, ” Introduction
. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:
Statement of the problem
Customer‟s Perception with Mutual Funds option varies and differs to a great extent. So in order to give a constructive study on various investment opportunities available in Mutual Funds companies and to give a detail analysis of the different schemes available in the said company, this study is initiated.
Objectives of the study:.
To study Mutual Fund Industry in India. To study the different Schemes provided by the origination. To study the performance of different schemes. To study the Risk involved in different Schemes. To study the Scheme returns with respect to Benchmark of S&P CNX Nifty index Page 24
Methodology of Research Survey
Survey method has been used in this research. The methodology here refers to systematic method. Which is been used to collect data for the purpose of research.
Out of the large population available a sample size of 100 numbers will be chosen for the project. This sample size will represent the population and the sample size is chosen on the basis of convenience and randomness for the study
Sources of data collection
Primary data is collected by designing an appropriate questionnaire and data is also collected by observation and panel discussions. Secondary data has been collected through various books, journals, publication, magazines, articles.
Limitations of the study
The study is not out of certain limitations as the study is need based and suitable for today‟s context only and it is not standard one. Certain important factors like time limit and financial constraints are also binding the study.
Plan Of Analysis
The collected data will be tabulated, correlated and analysed.The analyzed data will be separated in form of graphs, diagrams. Further statistical tool like chi-square, t-test is proposed to be used for the study.
I) GENERAL INTRODUCTION • •
INTRODUCTION THEORETICAL BACKGROUND
II) RESEARCH DESIGN
• • • • • • TITLE OF THE STUDY STATEMENT OF THE PROBLEM OBJECTIVES OF THE STUDY SCOPE OF THE STUDY METHODOLOGY LIMITATION OF THE STUDY
III) COMPANY PROFILE
• • • • INDUSTRIAL BACKGROUND PROFILE OF THE SAMPLE UNIT ORGANISATION PROFILE FUNCTIONAL DEPARTMENT OF THE ORGANISATION
IV) DATA ANALYSIS AND INTREPRETATION V) SUMMARY OF FINDINGS SUGGESTIONS AND CONCLUSION BIBLIOGRAPHY AND ANNEXURES
History: HDFC was incorporated in 1977 with the primary objective of meeting a social need – that of promoting home ownership by providing long-term finance to households for their housing needs. HDFC was promoted with an initial share capital of Rs.100 million. HDFC has „AAA‟ rating by CRISIL and ICRA for seven consecutive years. These reflects the efficiency by which HDFC manage their asset bases of Rs.21450 Cr. Billion. HDFC‟s 120 offices have serviced customers in over 2400 cities/towns. Subsidiaries and Associates HDFC Bank HDFC Mutual Fund HDFC Standard Life Insurance Company HDFC Realty HDFC Chubb General Insurance Company Ltd. Intelenet Global Services Ltd. Credit Information Bureau (India) Limited Other Companies Co-Promoted by HDFC:
HDFC Trustee Company Ltd. GRUH Finance Ltd. HDFC Developers Ltd. HDFC Ventures Trustee Company Ltd. HDFC Investments Ltd. HDFC Holdings Ltd. Home Loan Services India Pvt. Ltd.
HDFC is known to its large customer and with its strong brand name. The service provided by the company is better than any other finance corporation. The company is rated nine times “AAA” by CRISIL & ICRA. The company is also rated the second best employer after INFOSYS.
HDFC Asset Management Company Ltd (AMC) / HDFC Mutual Fund:
HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI vide its letter dated June 30, 2000.The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169, Backbay Reclamation, Churchgate, Mumbai - 400 020.As per the terms of the Investment Management Agreement, the AMC will conduct the operations of the Mutual Fund and manage assets of the schemes, including the schemes launched from time to time. The present equity shareholding pattern of the AMC is as follows:
Particulars Housing Development Finance Corporation Limited Standard Life Investments Limited
% of the paid up equity capital 60 40
Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, following a review of its overall strategy, had decided to divest its Asset Management business in India. The AMC had entered into an agreement with ZIC to acquire the said business, subject to necessary regulatory approvals.
On obtaining the regulatory approvals, the following Schemes of Zurich India Mutual Fund have migrated to HDFC Mutual Fund on June 19, 2003. These Schemes have been renamed as follows:
Former Name Zurich India Equity Fund Zurich India Prudence Fund Zurich India Capital Builder Fund Zurich India TaxSaver Fund Zurich India Top 200 Fund Zurich India High Interest Fund Zurich India Liquidity Fund Zurich India Sovereign Gilt Fund
New Name HDFC Equity Fund HDFC Prudence Fund HDFC Capital Builder Fund HDFC TaxSaver HDFC Top 200 Fund HDFC High Interest Fund HDFC Cash Management Fund HDFC Sovereign Gilt Fund*
*HDFC Sovereign Gilt Fund has been wound up in March 2006
The AMC is managing 24 open-ended schemes of the Mutual Fund viz. HDFC Growth Fund (HGF), HDFC Balanced Fund (HBF), HDFC Income Fund (HIF), HDFC Liquid Fund (HLF), HDFC Long Term Advantage Fund (HLTAF), HDFC Children's Gift Fund (HDFC CGF), HDFC Gilt Fund (HGILT), HDFC Short Term Plan (HSTP), HDFC Index Fund, HDFC Floating Rate Income Fund (HFRIF), HDFC Equity Fund (HEF), HDFC Top 200 Fund (HT200), HDFC Capital Builder Fund (HCBF), HDFC TaxSaver (HTS), HDFC Prudence Fund (HPF), HDFC High Interest Fund (HHIF), HDFC Cash Management Fund (HCMF), HDFC MF Monthly Income Plan (HMIP), HDFC Core & Satellite Fund (HCSF), HDFC Multiple Yield Fund Page 29
(HMYF), HDFC Premier Multi-Cap Fund (HPMCF), HDFC Multiple Yield Fund . Plan 2005 (HMYF-Plan 2005), HDFC Quarterly Interval Fund (HQIF) and HDFC Arbitrage Fund (HAF).
The AMC is also managing 8 closed ended Schemes of the HDFC Mutual Fund viz. HDFC Long Term Equity Fund, HDFC Mid-Cap Opportunities Fund, HDFC Fixed Maturity Plans, HDFC Fixed Maturity Plans - Series II, HDFC Fixed Maturity Plans - Series III, HDFC Fixed Maturity Plans - Series IV, HDFC Fixed Maturity Plans - Series V and HDFC Fixed Maturity Plans Series VI.
The AMC is also providing portfolio management / advisory services and such activities are not in conflict with the activities of the Mutual Fund. The AMC has renewed its registration from SEBI vide Registration No. - PM / INP000000506 dated December 8, 2006 to act as a Portfolio Manager under the SEBI (Portfolio Managers) Regulations, 1993. The Certificate of Registration is valid from January 1, 2007 to December 31, 2009.
HDFC Mutual Fund is one of the largest mutual funds in India with an investor base of over 25 lakh which is serviced primarily by our vide network of distributors. We at HDFC Mutual Fund recognize our distributors as the most important link between our investors and us. To help distributors to advise and service their clients better, we, together with our registrar (CAMS) offer a range of facilities to them.
Study of the mutual funds industry in India
HISTORY OF MUTUAL FUNDS:
When three Boston securities executives pooled their money together in 1924 to create the first mutual fund, they had no idea how popular mutual funds would become. The idea of pooling money together for investing purposes started in Europe in the mid -1800s. The first pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard University. On March 21st, 1924 the first official mutual fund was born. It was called the “Massachusetts Investors Trust”.
After one year, the Massachusetts Investors Trust grew from $50,000 in assets in 1924 to $392,000 in assets (with around 200 shareholders). In contrast, there are over 10,000 mutual funds in the U.S. today totaling around $7 trillion (with a pproximately 83 million individual investors) according to the Investment Company Institute. The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securit ies Exchange Act of 1934. These laws require that a fund be registered with the SEC and provide prospective investors with a prospectus. The SEC (U.S. Securities and Exchange Commission) helped create the Investment Company Act of 1940, which provides the guidelines that all funds must comply with today. With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s there were around 270 funds with $48 billion in assets.
In 1976, John C. Bogle opened the first retail in dex fund called the First Index Investment Trust. It is now called the Vanguard 500 Index fund . In November of 2000 it became the largest mutual fund ever with $100 billion in assets. Page 31
The history of Mutual Funds in India can be broadly divided into 4 Phases: 1. First phase (1964-1987) The Unit Trust of India (UTI) was established in the year 1963 by passing an Act in the Parliament. The UTI was setup by the Reserve Bank of India (RBI) and functioned under the Regulatory and Administrative control of the RBI. The First scheme in the history of mutual funds was UNIT SCHEME-64, which is popularly known as US-64. In 1978, UTI was de-linked from RBI. The Industrial Development Bank of India (IDBI) took over the Regulatory and Administrative control. At the end of the year 1988, UTI had Rs.6700/- Crores of Assets Under Management.
2. Second phase (1987-1993) Entry of Public Sector Funds. In the year 1987, public sector Mutual Funds setup by public sector banks, Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) are came in to existence. State Bank of India Mutual Fund was the first non-UTI Mutual Fund. The following are the non-UTI Mutual Funds at initial stages. SBI Mutual Fund in June 1987. Can Bank Mutual Fund in December 1987. LIC Mutual Fund in June 1989. Punjab National Bank Mutual Fund in August 1989. Indian Bank Mutual Fund in November 1989. Bank of India Mutual Fund in June 1990. GIC Mutual Fund in December 1990. Bank of Baroda Mutual Fund in October 1992.
At the end of 1993, the entire Mutual Fund Industry had Assets Under Management of 004/- Crores.
3. Third phase (1993-2003) Entry of Private Sector Funds - a wide choice to Indian Mutual Fund investors. In 1993, the first Mutual Fund Regulations came into existence, 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. In 1996, the 1993 Securities Exchange Board of India (SEBI) Mutual Funds Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations. The number of Mutual Fund houses went on increasing, with many foreign mutual funds setting up funds in India. In this time, the Mutual Fund industry has witnessed several Mergers &Acquisitions. The UTI with Rs.44, 541/- Crores. Of Assets Under management was way ahead of all other Mutual Funds. The following was the status at end of February 2003: Number of schemes Open-ended schemes Close-ended schemes TOTAL (Source – AMFI website) 321 51 372 Amount (in Crores) 82,693 4497 87,190
The diagram below shows the three segments and some players in each segment:
4. Fourth phase (since 2003 February) Following the repeal of the UTI Act in February 2003, it was (UTI) bifurcated into 2 separate entities. One is the specified undertaking of the UTI with asset under management of Rs.29, 835/Crores as at the end of January 2003. The second is the UTI Mutual Funds Limited, sponsored by State Bank of India, Punjab National Bank, Bank of Baroda and Life Insurance Corporation of India. UTI is functioning under an Administrator and under the Rules framed by the Government of India and does not come under the purview of the Mutual Fund Regulations. The UTI Mutual Funds Limited is registered with SEBI and functions under the Mutual Funds Regulations.
With the bifurcation of the Erstwhile UTI, with the setting up of a UTI Mutual Fund, confirming 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 phases of consolidation and growth. At the end of September 2004, there were 29 funds, which manage assets of Rs.153108/Crores under 421 different schemes. At the end of July 2005, the status of Mutual fund Industry was: No. of schemes Open-ended schemes Close-ended schemes TOTAL (Source – AMFI website) At the end of March 2006, the status of Mutual fund Industry was: 414 46 460 Amount (in crores) 1,64,998 10,920 1,75,918
No. of schemes Open-ended schemes Close-ended schemes TOTAL (Source – AMFI website) 414 46 460
Amount (in crores) 1,85,999 71,500 2,57,499
ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)
With the increase in Mutual Fund players in India, a need for Mutual Fund Association in India was generated to function as a non-profit organization. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August 1995. AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with Securities Exchange Board of India (SEBI). Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its Board of Directors. Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principal of both protecting and promoting the interest of mutual funds as well as their unit holders.
The objectives of Association of Mutual Funds in India
The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:
This Mutual Fund Association of India maintains high professional and ethical standards in all areas of operation of the industry It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of Mutual Fund and Asset Management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association. AMFI interacts with SEBI and works according to SEBIs guidelines in the Mutual Fund industry. Associations of Mutual Fund of India do represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry. It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry. AMFI undertakes all India awareness programme for investors in order to promote proper understanding of the concept and working of Mutual Funds. At last but not the least Association of Mutual Fund of India also disseminate information on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.
The sponsors of Association of Mutual Funds in India
Bank Sponsored SBI Fund Management Ltd. BOB Asset Management Co. Ltd. Canbank Investment Management Services Ltd. UTI Asset Management Company Pvt. Ltd. Institutions GIC Asset Management Co. Ltd. Jeevan Bima Sahayog Asset Management Co. Ltd. PrivateSector Indian:Page 37
Benchmark Asset Management Co. Pvt. Ltd. Cholamandalam Asset Management Co. Ltd. Credit Capital Asset Management Co. Ltd. Escorts Asset Management Ltd. JM Financial Mutual Fund Kotak Mahindra Asset Management Co. Ltd. Reliance Capital Asset Management Ltd. Sahara Asset Management Co. Pvt. Ltd Sundaram Asset Management Company Ltd. Tata Asset Management Private Ltd. Predominantly India Joint Ventures: Birla Sun Life Asset Management Co. Ltd. DSP Merrill Lynch Fund Managers Limited HDFC Asset Management Company Ltd. Predominantly Foreign Joint Ventures: ABN AMRO Asset Management (I) Ltd. Alliance Capital Asset Management (India) Pvt. Ltd. Deutsche Asset Management (India) Pvt. Ltd. Fidelity Fund Management Private Limited Franklin Templeton Asset Mgmt. (India) Pvt. Ltd. HSBC Asset Management (India) Private Ltd. ING Investment Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Principal Asset Management Co. Pvt. Ltd.
Association of Mutual Funds in India Publications: AMFI publishes mainly two
types of bulletin. One is on the monthly basis and the other is quarterly. These publications are of great support for the investors to get intimation of the know how of their parked money.
SEBI REGULATIONS ON MUTUAL FUNDS
The Government brought Mutual Funds in the Securities market under the regulatory framework of the Securities and Exchange board of India (SEBI) in the year 1993. SEBI issued guidelines in the year 1991 and comprehensive set of regulations relating to the organization and management of Mutual Funds in 1993.
SEBI REGULATIONS 1993 (20.1.1993)
The regulations bar Mutual Funds from options trading, short selling and carrying forward transactions in securities. The Mutual Funds have been permitted to invest only in transferable securities in the money and capital markets or any privately placed debentures or securities debt. Restrictions have also been placed on them to ensure that investments under an individual scheme, do not exceed five per cent and investment in all the schemes put together does not exceed 10 per cent of the corpus. Investments under all the schemes cannot exceed 15 per cent of the funds in the shares and debentures of a single company.
SEBI REGULATIONS, 1996
SEBI announced the amended Mutual Fund Regulations on December 9, 1996 covering Registration of Mutual Funds, Constitution and Management of Mutual funds and Operation of Trustees, Constitution and Management of Asset Management Companies (AMCs) and custodian schemes of MFs, investment objectives and valuation policies, general obligations,inspection and audit. The revision has been carried out with the objective of
improving investor protection, imparting a greater degree of flexibility and promoting innovation.
TYPES OF MUTUAL FUND SCHEMES
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.
Open - Ended Schemes Close - Ended Schemes Interval Schemes
By Investment Objective
Growth/Equity Schemes General Purpose Income/Debt Funds Money Market Guilt Funds Balanced Schemes
Tax Saving Schemes Special Schemes Sector Specific Schemes Index Schemes
.Open Ended Schemes
The units offered by these schemes are available for sale and repurchase on any business day at NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such schemes thus offer very high liquidity to investors and are becoming increasingly popular in India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units at all times, and may stop issuing further subscription to new investors. On the other hand, an openended fund rarely denies to its investor the facility to redeem existing units.
Close Ended Schemes
The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. These schemes are launched with New Fund Offer (NFO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy Page 40
or sell units on the stock exchanges where they are generally listed. Unlike open-ended schemes, the unit capital in Close-ended schemes usually remains unchanged. After an initial closed period, the scheme may offer direct repurchase facility to the investors. Close-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closer to the maturity date of the scheme.
These schemes combine the features of open-ended and Close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV based prices.
These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.
Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic.
General Purpose Equity Schemes
The investment objectives of general-purpose equity schemes do not restrict them to invest in specific industries or sectors. They thus have a diversified portfolio of companies across a large spectrum of industries. While they are exposed to equity price risks, diversified general-purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure.
Income /Debt Schemes These schemes, also commonly known as Income Schemes, invest in debt securities such as corporate bonds, debentures and government securities. The prices of these schemes tend to be more stable compared with equity schemes and most of the returns to the investors are generated through dividends or steady capital appreciation. These schemes are ideal for conservative investors or those who are not in a position to take higher equity risks. However, as compared to the money market schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher credit risk. These schemes invest in money markets, bonds and debentures of corporate companies with medium and long-term maturities. These schemes primarily target current income instead of capital appreciation. Hence, a substantial part of the distributable surplus is given back to the investor by way of dividend distribution. These schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long-term investment horizon and are looking for regular income through dividend or steady capital appreciation.
Money Market Schemes These schemes invest in short term instruments such as commercial paper ("CP"), certificates of deposit ("CD"), treasury bills ("T-Bill") and overnight money ("Call"). The schemes are the least volatile of all the types of schemes because of their investments in money market instrument with short-term maturities. These schemes have become popular with institutional investors and high net-worth individuals having short-term surplus funds Gilt Funds These primarily invest in Government Debt. Hence, the investor usually does not have to worry about credit risk since Government Debt is generally credit risk free. The investor is open to Interest risk, where the value of the securities changes in relation to the market scenario. Balanced Schemes These schemes are also commonly called balanced schemes. These invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation. Such schemes are ideal for investors with a conservative, long-term orientation. Tax Saving Schemes Investors (individuals and Hindu Undivided Families („HUFs‟)) are being encouraged to invest in equity markets through Equity Linked Savings Scheme ("ELSS") by offering them a tax rebate. Units purchased cannot be assigned / transferred/ pledged / redeemed / switched - out until completion of 3 years from the date of allotment of the respective Units. The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs), Government of India regarding ELSS. Subject to such conditions and limitations, as prescribed under Section 80 C of the Income-tax Act, 1961, subscriptions to the Units not exceeding Rs.1, 00, 000 would be fully tax exempt from income tax. The exemption under section 80 C of IT act is also applicable to other eligible schemes.
Sector Specific Equity Schemes: These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. They depend upon the performance of these select sectors only and are hence inherently more risky than general-purpose equity schemes. Ideally suited for informed investors who wish to take a view and risk on the concerned sector.
Index schemes: An Index is used as a measure of performance of the market as a whole, or a specific sector of the market. It also serves as a relevant benchmark to evaluate the performance of mutual funds. Some investors are interested in investing in the market in general rather than investing in any specific fund. Such investors are happy to receive the returns posted by the markets. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund that they believe is a good representative of the entire market. Index Funds are launched and managed for such investors.
Comparison Of Mutual Funds With Other Products/ Investment Opportunities: The mutual fund sector operates under stricter regulations as compared to most other investment avenues. Apart from the tax efficiency and legal comfort how do mutual funds compare with other products? Here the investment in Mutual Funds is compared with: 1. 2. 3. 4. 5. Company Fixed Deposits. Bank Fixed Deposits. Bonds and Debentures. Equity. Life Insurance
1. Company Fixed Deposits versus Mutual Funds Fixed deposits are unsecured borrowings by the company accepting the deposits? Credit rating of the fixed deposit program is an indication of the inherent default risk in the investment. The moneys of investors in a mutual fund scheme are invested by the AMC in specific investments Page 44
under that scheme. These investments are held and managed in-trust for the benefit of scheme‟s investors. On the other hand, there is no such direct correlation between a company‟s fixed deposit mobilization, and the avenues where these resources are deployed. A corollary of such linkage between mobilization and investment is that the gains and losses from the mutual fund scheme entirely flow through to the investors. Therefore, there can be no certainty of yield, unless a named guarantor assures a return or, to a lesser extent, if the investment is in a serial gilt scheme. On the other hand, the return under a fixed deposit is certain, subject only to the default risk of the borrower. Both fixed deposits and mutual funds offer liquidity, but subject to some differences: The provider of liquidity in the case of fixed deposits is the borrowing company. In mutual funds, the liquidity provider is the scheme itself (for open-end schemes) or the market (in the case of closed-end schemes). The basic value at which fixed deposits are encashed is not subject to market risk. However, the value at which units of a scheme are redeemed entirely depends on the market. If securities have gained in value during the period, then the investor can even earn a return that is higher than what she anticipated when she invested. Conversely, she could also end up with a loss. Early encashment of fixed deposits is always subject to a penalty charged by the company that accepted the fixed deposit. Mutual fund schemes also have the option of charging a penalty on “early” redemption of units (by way of an „exit load‟). If the NAV has appreciated adequately, then despite the exit load, the investor could earn a capital gain on her investment.
2. Bank Fixed Deposits versus Mutual Funds Bank fixed deposits are similar to company fixed deposits. The major difference is that banks are more stringently regulated than are companies. They even operate under stricter
requirements regarding Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).While the above are causes for comfort, bank deposits too are subject to default risk. However, given the political and economic impact of bank defaults, the Government as well as Reserve Bank of India (RBI) tries to ensure that banks do not fail.
Further, bank deposits up to Rs 1, 00, 000 are protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), so long as the bank has paid the required insurance premium of 5 paise per annum for every Rs 100 of deposits. The monetary ceiling of Rs 100,000 is for all the deposits in all the branches of a bank, held by the depositor in the same capacity and right.
3. Bonds and Debentures versus Mutual Funds As in the case of fixed deposits, credit rating of the bond / debenture is an indication of the inherent default risk in the investment. However, unlike fixed deposits, bonds and debentures are transferable securities. While an investor may have an early encashment option from the issuer (for instance through a “put” option), generally liquidity is through a listing in the market. Implications of this are: If the security does not get traded in the market, then the liquidity remains on paper. In this respect, an open-end scheme offering continuous sale / re-purchase option is superior. The value that the investor would realize in an early exit is subject to market risk. The investor could have a capital gain or a capital loss. This aspect is similar to a MF scheme. It is possible for an astute investor to earn attractive returns by directly investing in the debt market, and actively managing the positions. Given the market realities in India, it is difficult for most investors to actively manage their debt portfolio. Further, at times, it is difficult to execute trades in the debt market even when the transaction size is as high as Rs 1 crore. In this respect, investment in a debt scheme would be beneficial. Debt securities could be backed by a hypothecation or mortgage of identified fixed and / or current assets (secured bonds / debentures). In such a case, if there is a default, the identified assets become available for meeting redemption requirements. An unsecured bond / debenture are for all practical purposes like a fixed deposit, as far as access to assets is concerned. The investment in mutual fund scheme is held by a Custodian for the benefit of all investors in that scheme. Thus, the securities that relate to a scheme are ring-fenced for the benefit of its investors.
4. Equity versus Mutual Funds Investment in both equity and mutual funds are subject to market risk. An investor holding an equity security that is not traded in the market place has a problem in realizing value from it. But investment in an open-end mutual fund eliminates this direct risk of not being able to sell the investment in the market. An indirect risk remains, because the scheme has to realize its investments to pay investors. The AMC is however in a better position to handle the situation. Another benefit of equity mutual fund schemes is that they give investors the benefit of portfolio diversification through a small investment. For instance, an investor can take an exposure to the index by investing a mere Rs 5,000 in an index fund.
5. Life Insurance versus Mutual Funds Life insurance is a hedge against risk – and not really an investment option. So, it would be wrong to compare life insurance against any other financial product. Occasionally on account of market inefficiencies or mis-pricing of products in India, life insurance products have offered a return that is higher than a comparable “safe” fixed return security – thus, you are effectively paid for getting insured! Such opportunities are not sustainable in the long run.
Table 4.1 Table showing classification of respondents on the basis of Age Group Age Group ( In Year) 20-30 30-40 40-50 50 & Above Total ANALYSIS The above table clearly shows that out of 30 respondents, 24 respondents belong to 20-30 age group, 4 respondents belong to 30-40 and 2 respondents belong to 40-50 age group. No. of Respondents 24 4 2 0 30 Percentage 80 13 7 0 100
Graph showing classification of respondents on the basis of Age Group
No. of Respondents in Percentage
60 50 40 30 20 10 0 20-30 30-40 40-50 50 & Above Age Group ( In Year) Percentage
INTERPRETATION The above table shows that a majority of 80% of respondents fall under the age group of 20-30 year, followed by 13% of respondents fall under the age group of 30-40 years, 7% of the respondents fall under the age group of 40-50 years.
Table 4.2 Table showing classification of respondents on the basis of Qualification Qualification PUC Graduation Post Graduation Total ANANLYSIS No. of Respondents 0 16 14 30 Percentage 0 53 47 100
The above table clearly shows that out of 30 respondents, 16 were Graduates and 14 were Post Graduates. The education level of the respondents serves a major influencing factor for mutual funds.
Graph showing classification of respondents on the basis of Qualification
INTERPRETATION Qualification of a person is considered to be a very important factor, investment changes according to the qualification of the respondents.The above table shows that 53% of the respondents fall under the educational qualification of graduation, followed by 47% of respondents fall under the educational qualification of post graduation.
Table 4.3 Table showing classification of respondents on the basis of Occupation Occupation Employee Business Men Professional House wife Total ANALYSIS Among the 30 respondents, 10 (i.e., 33%) are employee 8 (i.e., 27%) are businessmen and 12 (i.e., 40%) are professional.Thus, among the respondents majority of the persons who invests in MFs were professional people. No. of Respondents 10 8 12 0 30 Percentage 33 27 40 0 100
Graph showing classification of respondents on the basis of Occupation
House w ife
The above table shows that 33% of respondents are fall under the occupation of employee followed by 27% of respondents under the occupation of business men and 40% of respondents under the occupation of professional.
Table 4.4 Table showing classification of respondents on the basis of Monthly Income Monthly Income Below Rs. 10000 Rs. 10000 to Rs. 20000 Rs. 20000 to Rs. 50000 Above Rs. 5000 Total ANALYSIS No. of Respondents 14 12 4 0 30 Percentage 47 40 13 0 100
Among the 30 respondents, 14 (i.e., 47%) have monthly income of below Rs. 10000, 12 (i.e., 40%) have monthly income Rs. 10000 to Rs. 20000 and 4 (i.e., 13%) have an income between Rs. 2000 to Rs. 50000
Graph showing classification of respondents on the basis of Monthly Income
No. of Respondents in Percentage
40 35 30 25 20 15 10 5 0 Below Rs. Rs. 10000 Rs. 20000 Above Rs. 10000 to Rs. to Rs. 5000 20000 50000 Monthly Incom e Percentage
The table shows that 47% of respondents fall under the monthly income of below Rs. 10000, followed by 40% of respondents fall under the monthly income of Rs. 10000 to Rs. 20000 and 13% of respondents fall under the monthly income of Rs. 20000 to Rs. 50000
Table 4.5 Table showing classification of respondents on the basis of Monthly savings Monthly Savings Below Rs. 5000 Rs. 5000 to Rs. 10000 Rs. 10000 to Rs. 20000 Rs. 20000 & above Total ANALYSIS From the above table it is clear that much of the investors saves Rs. 5000 part of their monthly income. No. of Respondents 18 8 4 0 30 Percentage 60 27 13 0 100
Graph showing classification of respondents on the basis of Monthly savings
No. of Respondents in Percentage
50 40 30 20 10 0 Below Rs. 5000 Rs. 5000 to Rs. 10000 to Rs. 20000 & Rs. 10000 Rs. 20000 above Monthly savings Percentage
INTERPRETATION The above table shows that 60% of respondents fall under the monthly savings of below RS. 5000, followed by 27% of respondents fall under the Rs. 5000 to Rs. 10000 & 13.1 of respondents fall under the Rs. 10000 to Rs. 20000
Table 4.6 Table showing Classification duration of investment holding of respondents Period 1 Year 3Year 5 Year Above 5 Years Total No. of Respondents 4 22 4 0 30 Percentage 13.3 73.3 13.3 0 100
From the above table we can analyze that, 22 respondents hold the investment for 3 years and 4 respondents hold their investment for 1 years and 5 years respectively.
Graph showing Classification duration of investment holding of respondents
No. of Respondents in Percentage
60 50 40 30 20 10 0 1 Year 3Year 5 Year Above 5 Years
The company had various short term benefits which are expected by the investors. This 3 years period attract more No. of customers. This table shows that 73.31 of respondents are chosen the duration of 3 year and 13.3 of respondents are chosen the duration of 1 year and 5 year.
Table 4.7 Table showing Source of information about investment opportunities Period Newspapers & Magazines Bankers Friends & Relatives Total No. of Respondents 14 8 8 30 Percentage 46 27 27 100
From the above table shows majority of the respondents seems to get information through newspapers and magazines. But some also rely on information passed through bankers and friends and relatives.
Graph showing Source of information about investment opportunities
New spapers & Magazines
Friends & Relatives
This chart clearly shows that 46% of respondents got information by the newspaper and magazines. Because it is giving clear information to its investors. And 27% of respondents got information by the Bankers and friends and relatives.
Table 4.8 Table showing of kinds of Mutual Fund Investors Prefer Fund Open – Ended Close - Ended Total No. of Respondents 28 2 30 Percentage 93 7 100
From the above table it is clearly shows that 30 respondents, 28 respondents prefer open ended and 2 respondents close ended schemes.
Graph showing kinds of Mutual Fund Investors Prefer
Open – Ended
Close - Ended
INTRPRETATION From the above table shows that 93% of respondents are prefer to open-ended fund because of so many facilities available in this fund and 7% of respondents are prefer to close ended fund.
Table 4.9 Table showing Classification of Respondents based on investment in HDFC Mutual Fund Schemes HDFC Schemes HDFC Growth Fund HDFC Equity Fund HDFC Capital Builder Fund HDFC Balance Fund HDFC Tax Saver Total No. of Respondents 4 10 6 4 4 28 Percentage 14.3 35.7 21.4 14.3 14.3 100
From the above clearly shows that out of thirty respondents, 35.7% prefer HDFC Equity Fund, 21.4% prefer HDFC Capital Builder Fund, and 14.3% prefer HDFC Growth Fund, Balance Fund and Tax Saver.
Graph showing Classification of Respondents based on investment in HDFC Mutual Fund Schemes
HDFC Grow th Fund HDFC Capital Builder Fund HDFC Tax Saver
HDFC Equity Fund HDFC Balance Fund
From the above table shows that 35.7% of respondents have invested in HDFC equity schemes, followed by 21.4% of respondents have invested in HDFC capital builder schemes, and 14.3% of respondents have invested in HDFC Growth schemes, balanced fund and tax saver.
Table 4.10 Table showing Factors considered by investor while investing in HDFC Mutual Fund Factors Return Good Fund Management Past Performance Many Schemes Total No. of Respondents 8 22 0 0 28 Percentage 27 73 0 0 100
Among total respondents, 22 respondents are considered for good fund management and 8 are considered return. So, good fund management is most important factor considered for investment.
Graph showing Factors considered by investor while investing in HDFC Mutual Fund
No. of Respondents in Percentage
70 60 50 40 30 20 10 0 Return Good Fund Past Management Performance Factors Many Schemes
The above table shows that 73% of respondents are invest in HDFC Mutual Fund because of Good fund management and 27% of respondents are invest in HDFC Mutual Fund because of return.
Table 4.11 Table showing Rational behind the investing in HDFC Mutual Fund Objectives Safety Return Capital Appreciation Tax Benefits Total No. of Respondents 6 10 12 2 28 Percentage 33 20 40 7 100
From the above table we can analyze that, 40% of the respondents invest in Mutual Fund because Capital appreciation, 33% of the respondents invest because of return, 20% of the respondents invest because of safety and 7% because of tax benefits.
Rational behind the investing in HDFC Mutual Fund
The above table shows that 40% of respondents invest in mutual fund because of capital appreciation, followed by 33% of respondents invest in mutual fund because of safety, 20% of respondents invest in mutual fund because of return and 7% of respondents invest in mutual fund because of tax benefits.
Table 4.12 Investors Expectations from HDFC Mutual Funds Expected High Return Safety Tax Benefits Innovative Scheme Good Service Total No. of Respondents 20 6 2 2 0 28 Percentage 66 20 7 7 0 100
From the above table it is clearly shows that out of 30 respondents, 20 respondents expect high return, 6 respondents expect safety and 2 respondents expect tax benefit, innovative scheme.
Graph showing Investors Expectations from HDFC Mutual Funds
7% 0% 7%
The above table shows that 53% of respondents are invest in mutual fund because of main invention is to meet future plan, followed by 33% of respondents are invest in mutual fund because of to meet emergencies and 7% of respondents are invest in mutual fund because of enjoyed retired life and children education / marriage.
Table 4.13 Classification of respondents based on Intention of savings Intention Top meet future plan Enjoyed retired life To meet emergencies Children education marriage Total No. of Respondents 16 2 10 / 2 28 Percentage 53 7 33 7 100
Among 30 respondents, 16 respondents made savings with the intention of future plan, 10 respondents to meet their emergencies and 2 respondents have savings for children education / marriage and enjoy retired life.
Graph showing Classification of respondents based on Intention of savings
No. of Respondnts in Percentage
50 40 30 20 10 0 Top meet future plan To meet emergencies Intention Percentage
The above table shows that the most of the respondents is for 66% of respondents invested in mutual fund because of investors expected in high return, followed by 20% of respondents invested in mutual fund because of expected safety and 7% of respondents expect tax benefit and innovative scheme.
Table 4.14 Classification of respondents based on Performance of HDFC Mutual Fund Performance Good Better Best Bad Total No. of Respondents 21 4 4 1 28 Percentage 70 13.3 13.3 3 100
Among 30 respondents, 21 respondents respond about performance of HDFC is good, 4 respondents responded that it is better, 4 respondents respond that it is best and 1 respondents respond that the HDFC performance is bad.
Graph showing Classification of respondents based on Performance of HDFC Mutual Fund
No. of Respondents in Percentage
60 50 40 30 20 10 0 Good Better Best Bad Performance Percentage
The above table show that 70% of respondents are invested in mutual fund because of the HDFC mutual fund performance is good, followed by 13.3% of respondents are invested in Mutual Fund because of HDFC Mutual Fund performance is better and best, and 3% of respondents respond that the performance is bad.
FINDINGS, SUGGESTIONS & CONCLUSION
From the study on investor‟s attitude towards HDFC Mutual Fund the following are the interpretation According to survey 80% of respondents belong to the age group of 20-30 and 30-40 years. 53% of the respondents are graduates and post graduates. They have depth knowledge of mutual funds. It was found that 40% of the respondents are professionals. By this survey it is learnt that 47% of the investors have the monthly income of less then Rs. 10000 53% of the respondents expressed their future needs and to meet emergence purpose as there motivation behind savings. From the survey it is found that 73.3% of respondents hold their investment for minimum 3 of years. 46% of the respondents get information about investment opportunities from newspapers, magazines, friends, relatives and bankers. 35.7% of the investors prefer growth and equity funds. From the survey it is found that 93% of respondents prefer open ended mutual funds. 40% of the investors invest in HDFC Mutual funds, because of capital appreciation. 66% of the investor‟s expectation is to get high rate of return. From the survey it is found that 70% of respondents the HDFC mutual fund performance is good.
The HDFC mutual fund should promote investment schemes in such a way that it should suit for all classes of people.
As most of the investors are not known about mutual fund, promotional measures like advertising should be made by the company.
The HDFC Mutual Fund need to serve that, customer better, they have to develop relationship with customers through regular contact.
Educating the investor by supplying some material regarding mutual fund and its benefits and leading mutual fund research analysis.
They should give better advice to investor through online about mutual and schemes.
Mutual fund industry should give more importance to the distribution because ULIP enjoying the benefit of banc assurance and India has an extensive bank network established over the years. What insurance company doing is they are just taking the advantage of customer long standing relationship with banks. Complete information should be provided regularly to the advisor as well as to the investor. Mutual fund industry should come out with more and more innovation scheme to meet the requirement of the every investor. Mutual Fund Companies should target upon the insurance agents to sell their product which helps them to grow easily.
Investors should evaluate past performance, look for stability and although past performance is no guarantee of future performance, it is a useful way to assess how well or badly a fund has performed in comparison to its stated objectives.
Mutual funds play an important role in an economy by mobilizing savings and investing them in the capital market, thus establish a link between savings and capital market.
Now slowly more and more investor were attracting towards mutual fund investment for high returns, capital appreciation, safety, tax concession etc.,
As Mutual Fund is gaining momentum in the whole country, still the market risk remained a major problem. So companies have to perform well to gain confidence of the investors.
If the organization adopts and used there suggestions it an attract more and more new investors to Mutual Funds and the general growth in the Mutual Fund industry can be seen, which can create a large pool of savings among medium and lower class peoples.
A. Name: B. Address:
.........…………………………………. ………………………………………... ……………………………………….... …………………………………………
C. Sex: D. Age: E. Phone :
Male: [ ………
F. Marital status :
Gender a) Male b) Female
Age a) c) e) Less than 20 years 30 to 40 years Above 50 years Page 80 b) 20 to 30 Years
d) 40 to 50 years
Educational Qualification a) c) Under Gradate Graduate b) Post Graduate d) Others
Occupation a) c) Student Retired d) b) Employment
Your monthly Income a) c) Below Rs. 10000 Rs. 20000 to Rs. 50000 b) Rs. 10000 to Rs. 20000 d) Above Rs. 50000
Your monthly Savings a) c) Below Rs. 5000 Rs. 10000 to Rs. 20000 b) d) Rs. 5000 to Rs. 10000 Above Rs. 20000
Your invention of savings a) c) d) To meet future needs To meet emergencies Children education / marriage b) Enjoy retired life
Other reason __________________________________
What are your investment objectives a) c) e) Safety Income Tax benefits All the above d) b) Return
Period of Investment a) c) 1 Year 3 Year b) d) 5 Years Above 5 Years
How do you get information about investment a) c) e) Newspapers / Magazines Friends & Relatives Brokers / Agent d) b) Bankers
TV / Radio
Have you invested in Mutual Fund? a) Yes b) No
Have you invested in HDFC Mutual Fund? a) Yes b) No
What kind of Mutual Fund you prefer? Page 82
Open – ended
In which HDFC Mutual Fund scheme you have invested? a) c) e) g) h) HDFC Growth Fund HDFC Capital Builder HDFC Index Fund b) HDFC Equity Shares d) f) HDFC Balance Fund HDFC Tax Sever
HDFC Mutual Fund monthly income Plan HDFC Presence Fund
Which factor influenced you to invest in the HDFC Mutual Fund? a) c) Return Good Fund management b) Past Performance d) Many Schemes
What do you expect from HDFC Mutual Fund? a) c) e) High Return Tax Benefit Good Service b) d) Safety Innovative Scheme
Our opinion about the performance of HDFC Mutual Fund? a) c) Good Better b) d) Best Bad
What are the drawbacks you find in HDFC Mutual Fund Scheme? a) c) e) Scheme Risk Transparency Risk Market risk b) Flexibility d) Any other
Your suggestions with respect to improve the performance of HDFC Mutual Funds? ________________________________________________________________________ ____________________________________
Financial Institutional Market
- L.M. Bhole 2) Financial Market and Services 3) E. Gardon & K. Natarajan
- V.A. Avadani
OTHERS: Company Brouchers
WEBSITES 1) 2) www.google.com www.hdfcfund.com
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.