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PROJECT REPORT
ON
MUTUAL FUND: AN IDEAL INVESTMENTVENUE FOR COMMON MAN

TECNIA INSTITUTE OF ADVANCED STUDIES


Guru Gobind Singh Indraprastha University

Submitted by
SHAILAV SAH
ROLL NO: 06221303915
MBA II SHIFT,DIV- B

INTRODUCTION
The project contains the brief description of the mutual fund industry in general. Investors
concerns the advisors/ friend and consult the various resources from where they get the help for
investing in the various schemes. Currently there are more than 2500 schemes with varied
objectives and AMCs are competing against each other by launching new products or
repositioning old ones. MF industry today is facing competition not only from within the
industry but also from other financial products like insurance policies product that provide many
of the same economic functions as mutual funds but are not strictly MFs.

Basic Objectives
What are Mutual Funds?
What is the structure of Mutual Funds?
What is the Mutual Funds Scheme?
What are the Advantages of Mutual Funds?
What are Disadvantages of Mutual Funds?
What are the Risks involved in Mutual Funds?
What is NAV?
Basic Concept of Loads?
SWOT Analysis of Mutual Funds.

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

A Mutual fund is the ideal investment vehicle for 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. Price changes in these
assets are driven by global events occurring in faraway places. A typical individual is unlikely to
have the knowledge,skills, inclination and time to keep track of events, understand their
implications and act speedily. An individual also finds it difficult to keep track of ownership of
his assets, investments, brokerage dues and bank transactions etc.
A draft offer document is to be prepared at the time of launching the fund. Typically, it pre
specifies the investment objectives of the fund, the risk associated, the costs involved in the
process and the broad rules for entry into and exit from the fund and other areas of operation. In
India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities
exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial
strength in granting approval to the fund for commencing operations.
A sponsor then hires an asset management company to invest the funds according to the
investment objective. It also hires another entity to be the custodian of the assets of the fund and
perhaps a third one to handle registry work for the unit holders (subscribers) of the fund.

In the Indian context, the sponsors promote the Asset Management Company also, in which it
holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset
Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life
Asset Management Company Ltd., which has floated different mutual funds schemes and also
acts as an asset manager for the funds collected under the schemes.

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

MUTUAL FUND STRUCTURE


The Structure Consists:
The structure of mutual funds in India is governed by the SEBI Regulations, 1996. These
regulations make it mandatory for mutual funds to have a 3-tier structure of Sponsors-TrusteeAMC (Asset Management Company). The Sponsor is the promoter of mutual fund, and appoints
the Trustee. The Trustees are responsible to the investors in the mutual funds, and appoint the
AMC for managing the investment portfolio. The AMC is the business face of the mutual funds,
as it manages all the affairs of mutual funds. The mutual funds and AMC have to be registered by
the SEBI.
Sponsor
Sponsor is the person who acting alone or in combination with another body corporate
establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the
Investment Managed and meet the eligibility criteria prescribed under the Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or
liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial
contribution made by it towards setting up of the Mutual Fund.
Trust

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts
Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.
Trustee
Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The
main responsibility of the Trustee is to safeguard the interest of the unit holders and inter-alia
ensure that the AMC functions in the interest of investors and in accordance with the Securities
and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust
Deed and the Offer Documents of the
respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not
associated with the Sponsor in any manner.
Asset Management Company (AMC)
The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC
is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an
asset management company of the Mutual Fund. At least 50% of the directors of the AMC are
independent directors who are not associated with the Sponsor in any manner. The AMC must
have a net worth of at least 10 crores at all times.
Registrar and Transfer Agent
The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the
Mutual Fund. The Registrar processes the application form, redemption requests and dispatches
account statements to the unit holders.
Custodian
A custodian handles the investment back office of a mutual fund. Its responsibilities include
receipt and delivery of securities, collection of income, distribution of dividends, and segregation
of assets between schemes. The sponsor of a mutual fund cannot act as a custodian to the fund.
For example, Deutsche Bank is a custodian, but it cannot service Deutsche Mutual Fund, its
mutual fund arm.
Depository
Indian capital markets are moving away from having physical certificates for securities, to
ownership of these securities in dematerialized form with a Depository.

DIAGRAM OF MUTUAL FUND STRUCTURE

MUTUAL FUND SCHEMES


A Mutual Fund may float several schemes, which may be classified on the basis of its structure,
its investment objectives and other objectives.

Open Ended Schemes


As the name implies the size of the scheme (fund) is open i.e. not specified or pre-determined.
Entry to the fund is always open, the investor who can subscribe at anytime. Such fund stands
ready to buy or sell its securities at anytime. The key feature of Open-ended schemes is
Liquidity. It implies that the capitalization of the fund is constantly changing as investors sell or
buy their shares. Further, the sharesor units are normally not traded on the stock exchange but are
repurchased by the funds at announced rates. Open-ended schemes have comparatively better
liquidity despite the fact that these are not listed. The reason is that investors can any time
approach mutual fund for sale of such units. No intermediaries are required. Moreover, the
realizable amount is certain since repurchase is at a price based on declared net asset value
(NAV). The portfolio mix of such schemes has to be investments, which are actively
traded in the market. Otherwise it will not be possible to calculate NAV. This is the reason that
generally open-ended schemes are equity based. In Open-ended schemes, the option of dividend
reinvestment is available.

Close-Ended Schemes
A Close ended schemes have a definite period after which their shares/units are redeemed. The
scheme is open for subscription only during a specified period at the time of launch of a scheme.
Investors can invest in the scheme at the time of the initial public issue and thereafter they can
buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling back the
units to the mutual fund through periodic repurchase at NAV related prices. In these types of
schemes, the size of the fund kept to be constant. SEBI regulations stipulate that at least one of
the two exit routes is provided to the investor i.e. either repurchase facility or through listing on
stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Interval schemes

Interval Schemes combine the features of both open-ended and close-ended schemes. They are
open for sale or redemption during pre-determined intervals at NAV based prices.

Mutual Fund schemes by Investment Objectives


EQUITY FUNDS
These funds invest a major part of their corpus in equities. The composition of the fund may vary
fromscheme to scheme and the fund managers outlook on various scrips.The Equity Funds are
sub-classified depending upon their investment objective, as follows:
1.Growth Fund: Aim to provide capital appreciations over the medium to long term. These
schemes normally invest a majority of their funds in equities and are willing to bear short term
decline in value for possible future appreciation. These schemes are not for investors seeking
regular income or needing their money back in the short-term.
2.Diversified Equity Fund: Diversified equity funds are the most popular among investors.
They invest in many stocks across many sectors, and because they have the freedom to chop and
churn their portfolios as they like, diversified equity funds are a good proxy to the stock market.
If a general exposure to equities is what you want, they are a good option. They can invest in all
listed stocks, and even in unlisted stocks. They can invest in which ever sector they like, in what
ever ratio they like.
1.Equity Linked Savings Schemes (ELSS): Equity linked savings schemes (ELSS) are
diversified equity funds that additionally offer income tax benefits to individuals. ELSS is one of
the many section 80c instruments, along with the more popular debt options like the PPF, NSC
and infrastructure bonds. In this Section 80c grouping. ELSS is unique. Being the only
instrument to offer a total equity exposure.
1. 1.Index Fund: An index fund is a diversified equity fund; with a difference- a fund manager

has absolutely no say in stock selection. At all times, the portfolio of an index fund mirrors an
index, both in its choice of stocks and their percentage holding. As of March 2004, equity index
funds tracked either the Sensex or the Nifty. So, an index fund that mirrors the Sensex will invest
only in the 30 Sensex stocks, which too in the same proportion as their weight age in the index.
2.Sector Fund: Sector funds invest in stocks from only one sector, or a handful of sectors. The
objective is to capitalize on the story in the sectors, and offer investors a window to profit from
such opportunities. Its a very narrow focus, because of which sector funds are considered the
riskiest among all equity funds.
2. Mid Cap Fund: These are diversified funds that target companies on the fast growth

trajectory.In the long run, share prices are driven by growth in a companys turnover and profits.
Market players refer to them as mid-sized companies and mid-cap stocks with size in this
context being benchmarked to a companys market value. So, while a typical large cap stock
would have a market capitalization of over Rs 1,000 crores, a mid-cap stock would have a
market value of Rs 250-2,000 crores.

DEBT FUNDS
These Funds invest a major portion of their corpus in debt papers. Government authorities,
privatecompanies, banks and financial institutions are some of the major issuers of debt papers.
By investing in debt instruments, these funds ensure low risk and provide stable income to the
investors.
Debt funds are further classified as:
1.Gilt Funds: Invest their corpus in securities issued by Government, popularly known as GOI
debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These
schemes are safer as they invest in papers backed by Government.
2.Income Funds: Income funds aim to maximize debt returns for the medium to longer term.
Invest a major portion into various debt instruments such as bonds, corporate debentures and
Government securities.
2.MIPs: Invests around 80% of their total corpus in debt instruments while the rest of the
portion is invested in equities. It gets benefit of both equity and debt market. These scheme ranks
slightly high on the risk-return matrix when compared with other debt schemes.
1. Short Term Plans (STPs): Meant for investors with an investment horizon of 3-6 months.
Thesefunds primarily invest in short term papers like Certificate of Deposits (CDs) and
Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
2. Liquid Funds: Also known as Money Market Schemes, These funds are meant to provide

easy liquidity and preservation of capital. These schemes invest in short-term instruments like
Treasury Bills, inter-bank call money market etc. These funds are meant for short-term cash
management of corporate houses and are meant for an investment horizon of 1day to 3 months.
These schemes rank low on risk-return matrix and are considered to be the safest amongst all
categories of mutual funds.
3. Floating Rate Funds: These income funds are more insulated from interest rate than

theirconventional peers. In other words, interest rate changes, which cause the NAV of a
conventional debt fund to go up or down, have little, or no, impact on NAVs of floating rate
funds.
BALANCED FUNDS
These funds, as the name suggests, are a mix of both equity and debt funds. They invest in both
equities and fixed income securities, which are in line with pre-defined investment objective of
the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part
provides growth and the debt part provides stability in returns. Each category of fund is backed
by an investment philosophy, which is predefined in the in the objective of the fund. The investor
can align his own investment need with the fund objectives and invest accordingly.

HYBRID FUNDS
Growth and Income Fund: Strike a balance capital appreciation and income for the investors.
In these funds portfolio is a mix between companies with good dividend paying record and those
with potential capital appreciation. These funds are less risky than growth funds bit more than
income funds.
Asset Allocation Fund: These funds follow variable asset allocation policy. These move in an
out of an asset class (equity, debt, money market or even non-financial assets). Asset allocation
funds are those, which follow more stable allocation policies like balanced funds. Those, which
flexible allocation policies, are like aggressive speculative funds

ADVANTAGES OF MUTUAL FUND


Mutual Funds offer several benefits to an investor that are unmatched by the other investment
options.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.
1. Affordability :
Small investors with low investment fund are unable to invest in high-grade or blue chip stocks.
An investor through Mutual Funds can be benefited from a portfolio including of high priced
stock.
2. Diversification : Investors investment is spread across different securities (stocks,
bonds,money market, real estate, fixed deposits etc.) and different sectors (auto, textile, IT etc.).
Thiskind of a diversification add to the stability of returns, reduces the risk for example during
one period of time equities might under perform but bonds and money market instruments might
do well do well and may protect principal investment as well as help to meet return objectives.
3. Variety : Mutual funds offer a tremendous variety of schemes. This variety is beneficial in
two ways: first, it offers different types of schemes to investors
4. Professional Management: Mutual Funds employ the services of experienced and skilled
professionals and dedicated investment research team. The whole team analyses the performance
and balance sheet of companies and selects them to achieve the objectives of the scheme.
5. Tax Benefits: Depending on the scheme of mutual funds, tax shelter is also available. As per
the Union Budget-99, income earned through dividends from mutual funds is 100% tax free.
Under ELSS of open-ended equity-oriented funds an exemption is provided up to Rs. 100,000/under section 80C.

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

DISADVANTAGES OF MUTUAL FUND


The following are the disadvantages of investing through mutual fund:
No control over cost: Since investors do not directly monitor the funds operations, they
cannot control the costs effectively. Regulators therefore usually limit the expenses of
mutual funds.
No tailor-made portfolio: Mutual fund portfolios are created and marketed by AMCs, into

which investors invest. They cannot made tailor made portfolio.


Managing a portfolio of funds: As the number of funds increase, in order to tailor a portfolio

for himself, an investor may be holding portfolio funds, with the costs of monitoring them and
using hem, being incurred by him.
Delay in Redemption: The redemption of the funds though has liquidity in 24-hours to 3 days

takes formal application as well as needs time for redemption. This becomes cumbersome for the
investors.
Non-availability of loans: Mutual funds are not accepted as security against loan. The

investor cannot deposit the mutual funds against taking any kind of bank loans though they may
be his assets.

RISK INVOLVED IN MUTUAL FUNDS


THE RISK-RETURN TRADE-OFF
The most important relationship to understand is the risk-return trade-off. Higher the risk greater
the returns/loss and lower the risk lesser the returns/loss. Hence it is up to you, the investor to
decide how much risk you are willing to take. In order to do this you must first be aware of the
different types of risks involved with your investment decision.
MARKET RISK
Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the
market in general lead to this. This is true, may it be big corporations or smaller mid-sized
companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works on
the concept of Rupee Cost Averaging (RCA) might help mitigate this risk.

CREDIT RISK
The debt servicing ability (may it be interest payments or repayment of principal) of a company
through its cash flows determines the Credit Risk faced by you. This credit risk is measured by
independent rating agencies like CRISIL who rate companies and their paper. An AAA rating is
considered the safest whereas a D rating is considered poor credit quality. A well-diversified
portfolio might help mitigate this risk.
INFLATION RISK
The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times
people make conservative investment decisions to protect their capital but end up with a sum of
money that can buy less than what the principal could at the time of the investment. This happens
when inflation grows faster than the return on your investment. A well-diversified portfolio with
some investment in equities might help mitigate this risk.
INTEREST RATE RISK
In a free market economy interest rates are difficult if not impossible to predict. Changes in
interest rates affect the prices of bonds as well as equities. If interest rates raise the prices of
bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate this risk.
POLITICAL/GOVERNMENT POLICY RISK
Changes in government policy and political decision can change the investment environment.
They can create a favorable environment for investment or vice versa.
LIQUIDITY RISK
Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.
Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as
internal risk controls that lean towards purchase of liquid securities.

Net Asset Value (NAV)


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.

Definition of NAV
Net Asset Value, or NAV, is the sum total of the market value of all the shares held in the
portfolio including cash, less the liabilities, divided by the total number of units outstanding.
Thus, NAV of amutual fund unit is nothing but the 'book value.'

BASIC CONCEPTS OF LOADS


1.Entry Load: The load charged at the time of investment is known as entry load. Its meant to
cover the cost that the AMC spends in the process of acquiring subscribers commission payable
to brokers, advertisements, register expenses etc. The load is recovered by way of charging a sale
price higher than the prevailing NAV.
2.Exit Load: Some AMC do not charge an entry load but they charged an exist load i.e., they
deduct a load before paying out the redemption proceeds. Psychologically, investors are much
more willing to pay exist loads as compared to entry loads.
3. Unit: Units mean the investment of the unit holders in a scheme. Each unit represents one
undivided share in the assets of a scheme. The value of each unit changes, depending on
theperformance of the fund

Some Market Players of MUTUAL FUND


The Indian mutual fund industry is mainly divided into three kinds of categories. These
categories include public sector players, nationalized banks and private sector and foreign
players.UTI Mutual Fund was one of the leading Mutual Fund companies in India till May 2006
with a corpus of more than Rs.31, 000 Crore and it is the public sector mutual fund. Bank of
Baroda, Punjab National Bank, Can Bank and SBI are the major nationalized banks mutual fund.
At present mutual fund industry is mainly dominated by private and foreign sector players which
include major players 17
like Prudential ICICI Mutual Fund, HDFC Mutual Fund, Reliance Mutual Fund etc. are private
sector mutual funds players while Franklin Templeton etc. are major foreign mutual fund players.
At present there are more than 33 players operating in Indian. The brief introduction of major
players is given as follows
ABN AMRO Bank Mutual Fund Birla Sun Life Mutual Fund
HSBC Mutual Fund HDFC Mutual Fund
ING Vysya Mutual Fund Prudential ICICI Mutual Fund
Sahara Mutual Fund State Bank of India Mutual Fund
Tata Mutual Fund Kotak Mahindra Mutual Fund
Reliance Mutual Fund Standard Chartered Mutual Fund

Franklin Templeton India Mutual Fund Morgan Stanley Mutual


Fund
Escorts Mutual Fund Benchmark Mutual Fund
Can bank Mutual Fund Chola Mutual Fund
LIC Mutual Fund GIC Mutual Fund

SWOT ANALYSIS OF MUTUAL FUNDS


Mutual Funds are among the financial products that benefit from conducting a SWOT analysis.
By reviewing their strengths, weaknesses, opportunities and threats, an individual investor can be
better informed on where to invest their money, and be positioned to shift gears along with the
market.

Strengths
The most critical strength for a mutual fund is its performance. If a fund is outperforming the
market, and particularly if it is at the top of its benchmark, that is a big selling point. If the fund
is part of a well-established company with a track record of success and a family of highperforming products, that brand name and historical record may also be a strength. A best-inclass research department or methodology that has a track record of picking winners is a huge
asset as well. Different financial metrics may be key depending on your investment style and the
fund involved: dividend yield may be the key for one investor, total return over a 10-year period
for another.

Weakness
One weakness to look at are your funds fees. A high expense ratio is a weakness even if it pays
for an active management currently beating the market with its returns. Even in good times,
expenses are a drag on investor return, and they will be more difficult to accept if the
performance declines. Size can be a weakness as well, since bigger isnt always better. As a
small-cap fund gets bigger, for example, it will have a hard time finding growth opportunities for
all of its assets and may have to close or expand outside of its stated objective. Risk may be a
weakness for some investors looking for a smaller beta or standard deviation.

Opportunities
It's not enough to look at the current numbers when evaluating prospective mutual funds. You
also need to look at the overall market and consider whether the fund is best positioned to take
advantage of trends. A lagging fund may offer the best opportunity for growth if the combination
of a management change and economic trends prove beneficial. A change in the government
regulatory environment not only affects different industries, but the funds that concentrate in
those sectors as well.

Threats
To some extent, many funds move along with general economic news. Some types of funds do
better in a recession while others track well in boom times -- those funds are particularly
threatened by a sudden change in the unemployment rate that undermines consumer confidence
or a stimulus plan that gets people spending again. In addition, if a fund is dependent on a
superstar manager, make sure you have a plan in place if that manager suddenly decides to leave.