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Project report submitted in partial fulfillment of the requirement of Pondicherry University for the award of the degree of MASTER OF BUSINESS ADMINISTRATION Submitted By BRIJESH PULAIYA (Reg.No. 1095514) Under the Guidance of Dr. B.CHARUMATHI Reader, Department of Management Studies, Pondicherry University. Mr. ALOK KUMAR SINGH Relationship Manager, Reliance Mutual Fund, Gwalior (M.P.)
DEPARTMENT OF MANAGEMENT STUDIES SCHOOLS OF MANAGEMENT PONDICHERRY UNIVERSITY PUDUCHERRY 605014 MAY-JUNE 2010
DEPARTMENT OF MANAGEMENT STUDIES SCHOOL OF MANAGEMENT PONDICHERRY UNIVERSITY PUDUCHERRY-605014
This is to certify that this project entitled “A STUDY ON INVESTORS’ AWARENESS LEVEL ON MUTUAL FUND & PROMOTION OF SIP PLAN” done for Reliance Mutual Fund is submitted by Brijesh Pulaiya, MBA II year (Reg. No. 1095514) to the Department of Management Studies, School of Management, Pondicherry University in partial fulfillment of the degree requirement for the award of the degree Master of Business Administration and is certified to be an original and bonafide work.
Dr. R.P.RAYA Professor & Head of the Department, Department of Management Studies, Pondicherry University.
Dr. B.CHARUMATHI Reader, Department of Management Studies, Pondicherry University.
Place: Puducherry Date:
I, Brijesh Pulaiya, hereby declare that this Project Report entitled “ A STUDY ON INVESTORS’ AWARENESS LEVEL ON MUTUAL FUND & PROMOTION OF SIP PLAN” in Reliance Mutual Fund, Gwalior (M.P.) submitted in the partial fulfillment of the requirement of Master of Business Administration (MBA) of Department of Management Studies-School of Management, Pondicherry University, Puducherry-605014 is based on primary & secondary data found by me in various departments, books, magazines and websites & Collected by me in under guidance of Mr. Alok Kumar Singh , Customer Relationship Manager, Reliance Mutual Fund, Gwalior (M.P.).
BRIJESH PULAIYA MBA (Second Year) Reg. No. 1095514 DMS, PU.
ACKNOWLEDGEMENT I am indebted to the all powerful Almighty God for all the blessings he showered on me and for being with me throughout the study. I place on record my sincere gratitude and appreciation to my project guide Dr.B.CHARUMATHI, Reader, Department of Management Studies, for her kind cooperation and guidance which enabled me to complete this project. I express my sincere thanks to Dr.R.P.RAYA, HOD, Department of Management Studies, School of Management, Pondicherry University, who provided me an opportunity to do this project. I am deeply obliged to Mr. ALOK KUMAR SINGH, Customer Relationship Manager, Reliance Mutual Fund, Gwalior (M.P.) for taking the role as my external guide and guiding and supporting continuously in shaping my project, correcting errors, clearing doubts throughout the project. I would also like to extend my thanks to other members for their support especially Mr. VAIBHAV DESHPANDEY, Branch Manager, Reliance Mutual Fund, Gwalior (M.P.) and entire Reliance Mutual Fund Sales Team and Other Private Banks’ Sales Team for their constant guidance and support.
Lastly, I would like to express my gratefulness to the parent’s for seeing me through it all.
BRIJESH PULAIYA (Signature of the Candidate)
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EXECUTIVE SUMMARY In few years Mutual Fund has emerged as a tool for ensuring one’s financial wellbeing. Mutual Funds have not only contributed to the India’s growth story but have also helped families tap into the success of Indian Industry. As information and awareness is rising more and more people are enjoying the benefits of investing in mutual funds. The main reason the number of retail mutual fund investors remains small is that nine in ten people with income in India do not know the benefits of mutual funds. But once, people are aware of mutual fund investment opportunities and benefits, the number of people who decide to invest in mutual funds increase to as many as one in five people. The trick for converting a person with no knowledge of mutual funds to a new mutual fund customer is to understand which of the potential investors are more likely to buy mutual funds and to use the right arguments in the sales process that customers will accept as important and relevant to their decision. This Project gave me a great learning experience and at the same time it gave me enough scope to implement my analytical ability. The analysis and advice presented in this Project Report is based on market research on the saving and investment practices of the investors and preferences of the investors for investment in Mutual Funds. This Report will help to know about the investors’ Preferences in Mutual Fund means Are they prefer any particular Asset Management Company (AMC), Which type of Product they prefer, Which Option (Growth or Dividend) they prefer or Which Investment Strategy they follow (Systematic Investment Plan or One time Plan). This Project as a whole can be divided into two parts. The first part gives an insight about Mutual Fund and its various aspects, the Company Profile, Objectives of the study, Research Methodology. One can have a brief knowledge about Mutual Fund and its basics through the Project. The second part of the Project consists of data and its analysis collected through survey done on 100 people. For the collection of Primary data I made a
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questionnaire and surveyed of 100 people. I also taken interview of many People those who were coming at the Reliance Mutual Fund Gwalior (M.P.) Branch where I done my Project. I visited other AMCs and several Private and Government Banks in Gwalior (M.P.) to get some knowledge related to my topic. I studied about the products and strategies of other AMCs in Gwalior (M.P.) to know why people prefer to invest in those AMCs. This Project covers the topic “A STUDY ON INVESTORS’ AWARENESS LEVEL ON MUTUAL FUND & PROMOTION OF SIP PLAN”. The data collected has been well organized and presented. I hope the research findings and conclusion will be of use.
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TABLE OF CONTENTS
DESCRIPTION ACKNOWLEDGEMENT EXECUTIVE SUMMARY LIST OF TABLES LIST OF CHARTS
Page No. 1 2 5 7 8 9 9 11 11 12 12 13 14 15 28 36 82 108 112 114
3 4 5
INTRODUCTION 1.1 Introduction to the topic 1.2 Need for the study 1.3 Statement of the problem 1.4 Objectives of the study 1.5 Research methodology 1.6 Limitations of the study 1.7 Chapterization PROFILE OF THE MUTUAL FUND INDUSTRY AND THE COMPANY 2.1 Profile of the mutual fund industry 2.2 Profile of the Reliance Mutual Fund FUNCTIONING OF MUTUAL FUND ANALYSIS & INTERPRETATION SUMMARY OF FINDINGS, SUGGESTIONS & RECOMMENDATIONS BIBLIOGRAPHY QUESTIONNAIRE
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LIST OF TABLES Table No. 2.1 2.2 2.3 2.4 2.5 2.6 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 Title Total net asset in U.S. Dollars Phase II. Entry of Public Sector Funds Phase IV. Growth and SEBI Regulation Latest AUM & Ranking for mutual funds Reliance Capital Ltd financials Reliance Capital Asset Management Ltd. Schemes summary Snapshot of mutual fund schemes Tax rules for mutual fund investors R-squared SIP returns Investor type 1 Investor type 2 Investor type 3 Compare percentage change in returns of Reliance Growth Fund & BSE-Sensex Profile of the respondents Primary objective for investment Knowledge about mutual fund Relationship between mutual fund & Share market Have you ever invested in mutual funds Reason not to invest in mutual funds Which mutual fund company Reason for selecting Reliance mutual fund Reason for investments in mutual fund Rank primary sources of your knowledge about Mutual Funds Prioritize reason for investment Rank the various investments that you would invest Rank factors affect your decision for investment in Mutual Fund What kind of investment schemes you prefer in Mutual Fund What is your Primary objective? *Age Cross-tab Page No. 17 21 23 24 29 30 53 60 68 76 77 78 79 80 83 84 85 86 87 88 89 91 92 93 94 95 96 97 98
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4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 4.29 4.30 4.31
What is your primary objective for your investment? * Occupation Cross-tab What is your primary objective for your investment? * Income level Cross-tab What is your primary objective for your investment? * Marital Status Cross-tab Do you know about the Mutual Funds? * Age Cross-tab Do you know about the Mutual Funds? * Occupation Cross-tab Do you know about the Mutual Funds? * Income level Cross-tab Have you ever invested in mutual fund? * Age Cross-tab Have you ever invested in mutual fund? * Occupation Cross-tab Have you ever invested in mutual fund? * Income level Cross-tab If no: What is/are the reason? * Age Cross-tab If no: What is/are the reason? * Occupation Cross-tab If no: What is/are the reason? * Income level Cross-tab If invested in Reliance Mutual Fund; what are the reasons? If Reliance Mutual Fund; what are the reasons?* Income level Cross tab Why do you prefer investment in mutual fund to other investment avenue? * Occupation Cross-tab What kind of investment schemes you prefer in Mutual Fund? * Occupation Cross-tab
98 99 100 100 101 101 102 102 103 103 104 104 105 105 106 107
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LIST OF CHARTS Chart No. 2.1 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Title Asset under Management till 30 April, 2010 Mutual fund operation flow chart Mutual fund structure Classification of mutual fund Risk V/s Returns Pass through certificate SIP benefits chart Primary objective for investment Knowledge about mutual fund Relationship between mutual fund & Share market Have you ever invested in mutual funds? Reason not to invest in mutual funds Which mutual fund company Reason for selecting Reliance mutual fund Reason for investments in mutual fund What kind of investment schemes you prefer in Mutual Fund Page No. 20 38 40 42 64 73 81 84 85 86 87 88 89 91 92 97
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CHAPTER 1 INTRODUCTION
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INTRODUCTION TO THE TOPIC In the last decade we have seen enormous growth in the size of mutual fund industry in India. Especially the private sector has shown tremendous growth. With unmatched advances on the information technology, increased role of the institutional investors in the stock market and the SEBI still in its infancy, the mutual fund industry players gained unparalleled and unchecked power. To ensure the safety of investment of small investors against whims and fancies of professional fund managers have become the need of the hour. WHAT IS INVESTMENT? Trade off between risk and reward while aiming for incremental gain and preservation of the invested amount (principal). In contrast, speculation aims at 'high gain or heavy loss,' and gambling at 'out of proportion gain or total loss.' Two main classes of investment are Fixed income investment such as bonds, fixed deposits, preference shares Variable income investment such as business ownership (equities), property ownership. In economics, investment means creation of capital or goods capable of producing other goods or services. Expenditure on education and health is recognized as an investment inhuman capital, and research and development in intellectual capital. Return on investment (ROI) is a key measure of firm’s performance.
1.2 NEED FOR THE STUDY 100% growth in the last 6 years. Numbers of foreign AMC’s are in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. We have approximately 37 mutual funds which are much less than US having more than 800. There is a big scope for expansion.
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'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities. Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products. SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices. Introduction of Financial Planners who can provide need based advice.
The Indian mutual funds business is expected to grow significantly in the coming years due to a high degree of transparency and disclosure standards comparable to anywhere in the world, though there are many challenges that need to be addressed to increase net mobilization of funds in this sector, as said by Mr. A.P. Kurian, Chairman of the Association of Mutual Funds of India (AMFI). Indian Mutual fund industry exhibited 200% growth in the last 10 yrs from Rs.470 billion to Rs1400 billion in terms of assets under management (AUM). The Mutual Funds industry is expected to jump sharply from its present share of 6% of GDP to 40% in the next 10yrs provided the country’s growth rate is consistently above 6%. The growing investor preference for mutual funds has resulted in the assets under management of mutual funds growing 8-folds in last 5 yrs. Number of foreign AMC's are in the queue to enter the Indian markets like US based Fidelity Investments, with over US$1trillion assets under management worldwide. Our saving rate is over 23%, highest in the world. Only channeling these savings in mutual funds sector is required. There is a big scope for expansion as we have 37 mutual funds which are much less than US having more than 800.
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1.3 STATEMENT OF THE PROBLEM One of the lucrative investment avenues available for investors is mutual fund nowadays. The problem at hand was to study and measure the awareness level of people regarding mutual funds in the city. To find out Investors’ awareness about Mutual funds and Promotion of SIP plan. The study includes analysis of the investors on the basis of their investment objectives, age etc. It also examined the position of MF among investment avenues available for the investors and the past performances of various schemes from the active AMCs in Indian market on the basis of NAV & time. So that it can help the advisors as well as investors to choose the correct portfolio.
1.4 OBJECTIVES OF THE STUDY The major objective of the study was to determine the awareness about benefits of Mutual funds and to impart information, knowledge and the functioning of mutual funds among financial advisors. Following are the specific objectives: To know the awareness of mutual funds among Indian investors. To evaluate the position of Mutual Fund among investment avenues available for the investors in Indian market. To promote the SIP Scheme (Systematic Investment Plan). To come up with recommendations for investors and mutual fund companies in India based on the above study.
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1.5 RESEARCH METHODOLOGY This is a descriptive study. Two types of data were taken into consideration i.e. Secondary data & primary data. My major emphasis was on gathering the primary data. The secondary data has been used to make things more clear. (i) (ii) Primary Data: Direct collection of data from the source of information, Secondary Data: Indirect collection of data from sources containing past or
technology including personal interviewing, survey etc. recent past information like Bank’s Brochures, Annual publications, Books, Fact sheets of mutual funds, Newspaper & Magazines etc. The secondary data was collected to know the theoretical aspect of the mutual funds and also for the performance evaluation of various mutual fund schemes.
A questionnaire was constructed for survey. Questionnaire consisting of a set of questions made to be filled by various respondents. My area of the study was Gwalior (M.P.). The sample consisted of 100 respondents. The sample was drawn from walk in customers of Reliance Mutual Fund, Some private & government banks and offices, College students. The selection of the respondents was done on the basis of convenient sampling. The responses were taken through personal interviews, telephonic interview.
The next step is to extract the pertinent findings from the collected data. I have tabulated the collected data & developed frequency distributions. Thus the whole data was grouped aspect wise and was presented in tabular form. Thus, cross-tabulations, frequencies & percentages were prepared to render impact of the study.
1.6 LIMITATIONS OF THE STUDY Every research is incomplete without its own limitations. In this research too there were some limitations. They are:
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Results are just an indication of the present scenario and may not be applicable in the future. As the study was conducted only in Gwalior (M.P.) only, so it can be said that the study was regionally biased. Since sampling was done under the simple random sampling method, where easily approachable respondents were picked up. So this may not represent the whole universe. Lack of time on the part of respondents for filling up the questionnaire. Respondents may fill the partially correct information in questionnaire.
1.7 CHAPTERIZATION Chapter 1 deals with the crisp introduction of topic. Along with this it deals with the need for the study, statement of the study, objective of the study, period of the study, research methodology used and limitations of the study. Chapter 2 portrays the profiles of the mutual fund industry with history and Reliance Mutual Fund. Chapter 3 contains a detailed study of functioning of Mutual Fund and regulatory authorities, tax planning for investors, SIP promotion and benefits of its. Chapter 4 gives the analysis and interpretation of the data. Chapter 5 suggests some suggestions and recommendation based on the study done.
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CHAPTER 2 Profile of Mutual fund industry & company
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PROFILE OF THE MUTUAL FUND INDUSTRY
2.1.1. BEGINNING OF THE MUTUAL FUND INDUSTRY Historians are uncertain of the origins of investment funds; some cite the closed-end investment companies launched in the Netherlands in 1822 by King William I as the first mutual funds, while others point to a Dutch merchant named Adrian van Ketwich whose investment trust created in 1774 may have given the king the idea. Van Ketwich probably theorized that diversification would increase the appeal of investments to smaller investors with minimal capital. The name of van Ketwich's fund, EENDRAGT MAAKT MAGT, translates to "unity creates strength". The next wave of near-mutual funds included an investment trust launched in Switzerland in 1849, followed by similar vehicles which is followed by many kind of companies created in Scotland in the 1880s. The idea of pooling resources and spreading risk using closed-end investments soon took root in Great Britain and France, making its way to the United States in the 1890s. The Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S. The creation of the Alexander Fund in Philadelphia, Pennsylvania, in 1907 was an important step in the evolution toward what we know as the modern mutual fund. The Alexander Fund featured semi-annual issues and allowed investors to make withdrawals on demand.
2.1.2. THE ARRIVAL OF THE MODERN FUND The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today as MFS Investment Management. State Street Investors' Trust was the custodian of the Massachusetts Investors' Trust. Later, State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and
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Clark, an outfit that would launch the first no-load fund in 1928. A momentous year in the history of the mutual fund, 1928 also saw the launch of the Wellington Fund, which was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank style of investments in business and trade.
2.1.3. REGULATIONS AND EXPANSION By 1929, there were 19 open-end mutual funds competing with nearly 700 closed-end funds. With the stock market crash of 1929, the dynamic began to change as highlyleveraged closed-end funds were wiped out and small open-end funds managed to survive. Government regulators also began to take notice of the fledgling mutual fund industry. The creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934 put in place safeguards to protect investors: mutual funds were required to register with the SEC and to provide disclosure in the form of a prospectus. The Investment Company Act of 1940 put in place additional regulations that required more disclosures and sought to minimize grievance of investor of different categories conflicts of interest. The mutual fund industry continued to expand. At the beginning of the 1950s, the number of open-end funds topped 100. In 1954, the financial markets overcame their 1929 peak, and the mutual fund industry began to grow in earnest, adding some 50 new funds over the course of the decade. The 1960s saw the rise of aggressive growth funds, with more than 100 new funds established and billions of dollars in new asset inflows.
Hundreds of new funds were launched throughout the 1960s until the bear market of 1969 cooled the public appetite for mutual funds. Money flowed out of mutual funds as quickly as investors could redeem their shares, but the industry's growth later resumed.
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Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924. The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Security Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the SEC.
2.1.4. Introduction of Mutual Fund Industry – Global Perspective The U.S. mutual fund market, with $9.6 trillion in assets under management as of yearend 2008, remained the largest in the world, accounting for 55 percent of the $19.0 trillion in mutual fund assets worldwide. Table 2.1 TOTAL NET ASSETS IN U.S. DOLLARS (Millions, end of period)
2006 21,823,455 11,485,012 7,803,906 2,456,511 864,254
2007 26,150,936 1 3,442,521 8,934,864 3,678,330 1,192,992 434,063
2008 18,917,499 1 0,579,430 6,231,116 2,037,536 841,133 276,303
2009 22,882,716 1 2,515,691 7,545,531 2,715,233 1,198,838 381,207
AMERICA 9 ,763,921 EUROPE ASIA & PACIFIC Australia China Hong Kong India Japan
6,002,261 1,939,251 700,068
460,517 40,546 470,044
631,055 58,219 578,883
818,421 108,582 713,998 62,805 575,327 130,284 660,666
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Korea New Zealand Pakistan Philippines Taiwan AFRICA (South Africa)
251,930 12,892 2,164
329,979 14,924 4,956 2,090 58,323 95,221
221,992 10,612 1,985 1,263 46,116 69,417
264,573 17,657 2,224 1,488 58,297 106,261
1,449 57,301 65,594
1,544 55,571 78,026
Note: Components may not sum to total because of rounding. Source: National mutual fund associations; European Fund and Asset Management Association (EFAMA) provide data for all European countries except Russia. 1 Funds of funds are not included, except for France, Germany, Italy, and Luxembourg. Home-domiciled funds, except for Hong Kong, New Zealand and Trinidad & Tobago, which include home and foreigndomiciled funds.
Mutual fund assets worldwide increased 2.3 percent to $22.88 trillion at the end of 2009. Net cash flow to all funds was $77 billion in the fourth quarter, marking the fifth consecutive quarter with positive net flows. Net inflows to long-term funds slowed to $283 billion in the fourth quarter of 2009, from $351 billion in the third quarter. Net outflows from money market funds also decelerated, with $206 billion of net outflows, from $283 billion in outflows in the previous quarter. For the year as a whole, net cash flows into all mutual funds worldwide were $275 billion, on par with the $280 billion of net inflows experienced in 2008. However, the composition of flows was considerably different. Long-term funds had net inflows of $912 billion in 2009, compared to net outflows of $610 billion in 2008. Money market funds had net outflows of $638 billion in 2009, compared to net inflows of $891 billion in 2008. The Investment Company Institute compiles worldwide statistics on behalf of the International Investment Funds Association, an organization of national mutual fund associations. The collection for the fourth quarter of 2009 contains statistics from 44 countries.
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2.1.5 INDIAN MUTUAL FUND INDUSTRY- AN INSIGHT The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existence of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market. The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund. The succeeding decade showed a new horizon in Indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund Regulations came into existence with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996. Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector players’ penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 37 mutual fund companies in India.
2.1.6 AT THE BEGINNING The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. Though the growth was slow, but it accelerated from the year 1987 when Non-UTI players entered into the Industry. In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. In March 1987, the
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Asset under Management (AUM) was Rs.4564 crores. The private sector entry to the fund family raised the AUM to Rs. 47000 crores in March 1993 and till April 30, 2010; it has reached the height of Rs. 7, 19,133 crores.
Asset Under Management (In Rs. Crores)
800000 700000 600000 500000 400000 300000 200000 100000 0 25 4564 47000 79464 326388 505152 417300 719133
1965 Phase I 1987 Phase 1993 Phase 2003 Phase II III IV
Asset Under Management (In Rs. Crores)
Source: www.amfiindia.com The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. Phase I. Establishment and Growth of Unit Trust of India - 1964-87 Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of
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different investors. It launched ULIP in 1971, six more schemes between 1981 and 1984, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (India’s first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs. 6700 crores. Phase II. Entry of Public Sector Funds - 1987-1993 The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share. Table 2.2 Amount 1992-93 Mobilized (In Rs. crores) UTI Public Sector Total 11,057 1,964 13,021 Mobilization Assets Under Management (In Rs. crores) as % of Gross Domestic Savings 38,247 8,757 47,004 5.2% 0.9% 6.1%
Phase III. Emergence of Private Sector Funds - 1993-96 The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more
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competition in the industry. Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes. Phase IV. Growth and SEBI Regulation - 1996-2004 The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Investors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programs were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry. In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual fund players on the same level. UTI was re-organized into two parts: 1. The Specified Undertaking 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilizations of funds from investors and assets under management which is supported by the following data:
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Table 2.3 ASSETS UNDER MANAGEMENT (Rs. CRORES) AS ON 31March99 53,320 8,292 6,860 68,472 UTI PUBLIC SECTOR PRIVATE SECTOR TOTAL
Phase V. Growth and Consolidation - 2004 Onwards The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 38 funds as at the end of April 2010. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.
2.1.7 INDIAN MUTUAL FUND INDUSTRY- TODAY Thirteen out of 37 fund houses witnesses a growth in average AUM in January, 2010, with Reliance Mutual Fund continuing the largest fund house by asset at Rs. 1.17 trillion. HDFC was at the second spot at Rs. 948 billion, followed by ICICI Prudential Mutual Fund at Rs. 784 billion. UTI Mutual Fund and Birla Sun Life Mutual Fund followed with an average AUM of Rs. 745 billion and Rs. 626 billion, respectively. The share of top 5 MF’s in the industry’s asset was at 56% while that of top 10 funds’ asset was close to 80% in January 2010. As per AMFI data, UTI Mutual Fund had the highest number of investor folios at 10 million as of December 2009. The total number of investor folios for the mutual fund industry stood at 48 million as of December 2009.
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The average AUM data analyzed for equity oriented schemes showed that Reliance Growth Fund held the highest corpus of around Rs. 70 billion, followed by HDFC top 200 fund, Reliance diversified Power Sector fund, HDFC equity fund and SBI magnum Tax Gain Scheme1993 with an average AUM Rs. 61billion, Rs.58 billion, Rs. 55 billion, Rs. 54 billion, respectively. Table 2.4 Latest Average Asset Under Management for all Mutual Fund houses & Ranking according to the AAUM
MUTUAL FUND NAME NO. OF ASSET UNDER MANAGEMENT (AMOUNT IN RS. CRORE) SCHEMES* AS ON CORPUS AS ON CORPUS NET INC/DEC IN CORPUS -62.378
AIG GLOBAL INVESTMENT GROUP MUTUAL FUND AXIS MUTUAL FUND BARODA PIONEER MUTUAL FUND BENCHMARK MUTUAL FUND BHARTI AXA MUTUAL FUND BIRLA SUN LIFE MUTUAL FUND (RANK 4) CANARA ROBECO MUTUAL FUND
MAY 31, 2010
APR 30, 2010
MAY 31, 2010 MAY 31, 2010 MAY 31, 2010 MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010 APR 30, 2010 APR 30, 2010 APR 30, 2010
MAY 31, 2010
APR 30, 2010
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DEUTSCHE MUTUAL FUND DSP BLACKROCK MUTUAL FUND EDELWEISS MUTUAL FUND
MAY 31, 2010 MAY 31, 2010 MAY 31, 2010 MAY 31, 2010 MAY 31, 2010 MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010 APR 30, 2010 APR 30, 2010 APR 30, 2010 APR 30, 2010 APR 30, 2010
ESCORTS MUTUAL 30 FUND FIDELITY MUTUAL 61 FUND FORTIS MUTUAL FUND FRANKLIN TEMPLETON MUTUAL FUND HDFC MUTUAL FUND (RANK 2) HSBC MUTUAL FUND 88 472
MAY 31, 2010
101,863.31 APR 30, 2010
MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010
ICICI PRUDENTIAL 317 MUTUAL FUND (RANK 3) IDFC MUTUAL FUND ING MUTUAL FUND JM FINANCIAL MUTUAL FUND 170
MAY 31, 2010 MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010 APR 30, 2010
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JPMORGAN MUTUAL FUND KOTAK MAHINDRA MUTUAL FUND L&T MUTUAL FUND
MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010
MAY 31, 2010 MAY 31, 2010 MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010 APR 30, 2010 APR 30, 2010
LIC MUTUAL FUND 62
MIRAE ASSET MUTUAL FUND
MORGAN 11 STANLEY MUTUAL FUND PEERLESS MUTUAL FUND PRINCIPAL MUTUAL FUND QUANTUM MUTUAL FUND RELIANCE MUTUAL FUND (RANK 1) RELIGARE MUTUAL FUND SAHARA MUTUAL FUND 87 22
MAY 31, 2010 MAY 31, 2010 MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010 APR 30, 2010
118,973.14 APR 30, 2010
MAY 31, 2010 MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010 APR 30, 2010
SBI MUTUAL FUND 116
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SHINSEI MUTUAL FUND SUNDARAM BNP PARIBAS MUTUAL FUND TATA MUTUAL FUND TAURUS MUTUAL FUND
MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010
MAY 31, 2010 MAY 31, 2010 MAY 31, 2010
APR 30, 2010 APR 30, 2010 APR 30, 2010
UTI MUTUAL FUND 203 (RANK 5)
* indicates currently in operation
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2.2 PROFILE OF THE RELIANCE MUTUAL FUND 2.2.1 INTRODUCTION: The Reliance group - one of India's largest business houses with revenues of Rs. 990 billion ($22.6 billion) that is equal to 3.5 percent of the country's gross domestic product was split into two. The group - which claims to contribute nearly 10 per cent of the country's indirect tax revenues and over six percent of India's exports - was divided between Mukesh Ambani and his younger brother Anil on June 18, 2005. Reliance Mutual Fund (RMF) is one of India’s leading Mutual Funds, with Average Assets under Management (AAUM) of Rs. 1, 18,973 Crores and an investor count of over 74 Lakh folios. (AAUM and investor count as of May 2010). Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, is one of the fastest growing mutual funds in the country. RMF offers investors a wellrounded portfolio of products to meet varying investor requirements and has presence in 159 cities across the country. Reliance Mutual Fund constantly endeavors to launch innovative products and customer service initiatives to increase value to investors. "Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance paid up capital being held by minority shareholders." 2.2.2 Sponsor Reliance Capital Limited Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance paid up capital being held by minority shareholders. Reliance Mutual Fund (RMF) has been sponsored by Reliance Capital Ltd (RCL). The promoter of RCL is AAA Enterprises Private Limited. Reliance Capital Limited is a Non Banking Finance Company. Reliance Capital Limited is one of the India’s leading and
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fastest growing financial services companies, and ranks among the top three private sector financial services and banking companies, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, life and non-life insurance, private equity and proprietary investments, stock broking and other activities in the financial services sector. The net worth of RCL is Rs. 6086 crores as on March 31, 2008. Given below is a summary of RCL’s financials: Table 2.5 Particulars (Rs. in crores) Total Income Profit Before Tax Profit After Tax Reserves & Surplus Net Worth Earnings per Share (Rs.) Dividend (%) Paid up Equity Capital 2007-08 2079.79 1171.45 1025.45 5779.06 5927.50 41.75 (Basic + Diluted) 55% 246.16 2006-07 883.86 733.18 646.18 4915.07 5161.23 28.39 (Basic + Diluted) 35% 246.16 2005-06 652.02 550.61 537.61 3849.58 4122.46 29.74 (Basic + Diluted) 30% 223.40
Reliance Capital Ltd. has contributed Rupees One Lac as the initial contribution to the corpus for the setting up of the Mutual Fund. Reliance Capital Ltd. is responsible for discharging its functions and responsibilities towards the Fund in accordance with the Securities and Exchange Board of India (SEBI) Regulations.
2.2.3 The Asset Management Company Reliance Capital Asset Management Ltd. Reliance Capital Asset Management Ltd. (RCAM) is an unlisted Public Limited Company incorporated under the Companies Act, 1956 on February 24, 1995.
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Vision Statement: “To be a globally respected wealth creator, with an emphasis on customer care and a culture of good corporate governance”. Mission Statement: “To create and nurture a world-class, high performance environment aimed at delighting their customers”.
Pursuant to this IMA, RCAM is authorized to act as Investment Manager of the Mutual Fund. The net worth of the Asset Management Company based on audited accounts as on March 31, 2009 is Rs. 841.32 Crore. No. of schemes No. of schemes including options Equity Schemes Debt Schemes Short term debt Schemes Equity & Debt Money Market Gilt Fund 60 100 15 2 0 6 Table 2.6 57 185
Corpus under management Rs. 109485.69 crores as on May 31, 2010
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2.2.4 MANAGEMENT TEAM 1. Sundeep Sikka (CEO), 2. Madhusudan Kela (Hd-Equity), 3. Rajesh Derhgawen (Hd-HRD), 4. Himanshu Vyapak (Sales & Dist), 5. Milind Nesarikar (IRO), 6. Suresh T Viswanathan (Compliance), 7. Muneesh Sud (Legal) 2.2.5 FUND MANAGERS 1. Amit Tripathy, 2. Hiren Chandaria , 3. Krishan Daga , 4. Omprakash Kuckien , 5. Sailesh Raj Bhan , 6. Sunil Singhania
2.2.6 INVESTMENT OBJECTIVES OF THE SCHEMES Reliance Monthly Income Plan aims to generate regular income in order to make regular dividend payments to unit holders and the secondary objective is growth of capital. Reliance Income Fund aims to generate optimal returns consistent with moderate levels of risk. This income may be complemented by capital appreciation of the portfolio. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments. Reliance Medium Term Fund aims to generate regular income in order to make regular dividend payments to unit holders and the secondary objective is growth of capital.
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Reliance Liquid Fund aims to generate optimal returns consistent with moderate levels of risk and high liquidity. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments. Reliance Liquidity Fund aims to generate optimal returns consistent with moderate levels of risk and high liquidity. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments Reliance Short Term Fund aims to generate stable returns for investors with a short term investment horizon by investing in fixed income securities of a short term maturity. Reliance Gilt Securities Fund aims to generate optimal credit risk free returns by investing in a portfolio of securities issued and guaranteed by the Central Government and State Governments Reliance Floating Rate Fund aims to generate regular income through investment in a portfolio comprising substantially of Floating Rate Debt Securities (including floating rate securitized debt and Money Market Instruments and Fixed Rate Debt Instruments swapped for floating rate returns). Reliance Regular Savings Fund Debt Option: The primary investment objective of this plan is to generate optimal returns consistent with moderate level of risk. This income may be complemented by capital appreciation of the portfolio. Accordingly investments shall predominantly be made in Debt & Money Market Instruments. Reliance Regular Savings Fund Equity Option: The primary investment objective is to seek capital appreciation and or consistent returns by actively investing in equity / equity related securities. Reliance Regular Savings Fund Hybrid Option: The primary investment objective is to generate consistent return by investing a major portion in debt & money market securities and a small portion in equity & equity related instruments. Reliance Growth Fund aims to achieve long term growth of capital by investment in equity and equity related securities through a research based investment approach. Reliance Vision Fund aims to achieve long term growth of capital by investment in equity and equity related securities through a research based investment approach.
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Reliance Equity Opportunities Fund aims to generate capital appreciation & provide long term growth opportunities by investing in a portfolio constituted of equity securities & equity related securities Reliance Banking Fund aims to generate continuous returns by actively investing in equity / equity related or fixed income securities of banks. Reliance Diversified Power Sector Fund seek to generate consistent returns by investing in equity / equity related or fixed income securities of Power and other associated companies Reliance Pharma Fund aims generate consistent returns by investing in equity / equity related or fixed income securities of Pharma and other associated companies. Reliance Media & Entertainment Fund to generate consistent returns by investing in equity / equity related or fixed income securities of media & entertainment and other associated companies. Reliance Index Fund-Sensex Plan aims to replicate the composition of the Sensex, with a view to endeavor to generate returns, which could approximately be the same as that of Sensex. Reliance Index Fund-Nifty Plan aims to replicate the composition of the Nifty, with a view to endeavor to generate returns, which could approximately be the same as that of Nifty. Reliance NRI Equity Fund aims to generate optimal returns by investing in equity and equity related instruments primarily drawn from the Companies in the BSE 200 Index. Reliance Equity Fund: The primary investment objective of the scheme is to seek to generate capital appreciation & provide long-term growth opportunities by investing in a portfolio constituted of equity & equity related securities of top 100 companies by market capitalization & of companies which are available in the derivatives segment from time to time and the secondary objective is to generate consistent returns by investing in debt and money market securities.
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2.2.7 CUSTODIAN Deutsche Bank, AG Deutsche Bank AG, the Custodian shall, inter alia: Provide post-trading and custodial services to the Mutual Fund. Keep Securities and other instruments belonging to the Scheme in safe custody. Ensure smooth inflow/outflow of securities and such other instruments as and when necessary, in the best interests of the unit holders. Ensure that the benefits due to the holdings of the Mutual Fund are recovered and Be responsible for loss of or damage to the securities due to negligence on its part on the part of its approved agents. 2.2.8 REGISTRAR M/s. Karvy Computershare Pvt. Limited The Registrar is responsible for carrying out diligently the functions of a Registrar and Transfer Agent and will be paid fees as set out in the agreement entered into with it and as per any modification made thereof from time to time.
2.2.9 TRUSTEE Reliance Capital Trustee Co. Limited Reliance Capital Trustee Co. Limited (RCTC), a company incorporated under the Companies Act, 1956, has been appointed as the Trustee to the Fund vide the Trust Deed dated April 25, 1995 executed between the Sponsor and the Trustee.
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2.2.10 BANKERS TO THE SCHEMES OF RELIANCE CAPITAL ASSET MANAGEMENT
ABN AMRO Bank Axis Bank Citibank N. A. Deutsche Bank AG Development Bank of Singapore - only for online investors HDFC Bank Limited HSBC Bank ICICI Bank Limited IDBI Bank ING Vysya Bank Kotak Mahindra Bank State Bank of India Standard Chartered Bank Yes Bank
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CHAPTER 3 FUNCTIONING OF MUTUAL FUND
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3.1 WHAT IS MUTUAL FUND? Mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. This pool of money is invested in accordance with a stated objective. The joint ownership of the fund is thus “Mutual”, i.e. the fund belongs to all investors. 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 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. A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund’s Net Asset value (NAV) is determined each day. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.
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When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the Corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.
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NAV = Market Value of the scheme / Number of unit-holders Where, Numerator= Market value of investment+receivables+other Accrued Income +Other Assets- Accrued Expenses-Other Payables-Other Liabilities.
3.1.1. SET-UP OF MUTUAL FUNDS: A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset management company (AMC) approved by SEBI managers the fund by making investments in various schemes of the in its custody. The trustees are vested with the general power of superintendence and direction over AMC. performance and compliance of SEBI regulations by the mutual fund. SEBI regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e., they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). 3.1.2. MUTUAL FUND STRUCTURE In India, the following are involved in mutual fund operations: the sponsor, the mutual fund, the trustees, the asset management company, the custodian, and the registrars and transfer agents. They monitor the
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1. Fund Sponsor: The sponsor of a mutual fund is like the promoter of a company. The sponsor may be a bank, a financial institution, or a financial service company. It may be Indian or foreign. The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is the the settler of the mutual fund trust. The sponsor delegates the trustee functions to the trustees. 2. Mutual fund : The mutual funds constituted as a trust under the Indian trust act, 1881, and registered with SEBI.
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3. Trustees: A trust is a notional entity that cannot contract in its own name. so, the trust enters into contracts in the name of the trustees. Appointment by the sponsor, the trustees can be either individuals or a corporate body. Typically it is the latter. The trustees appoint the asset management company (AMC), secure necessary approval, periodically monitor how the AMC functions, and hold the properties of the various schemes in trust for the benefits of investors. 4. Asset Management Company: It also referred to as the investment manager, is a separate company appointed by the trustees to run the mutual fund. The AMC should have a certificate from SEBI to act as portfolio manager under SEBI rules and regulations, 1993. 5. Custodian: The custodian handles the investment back office operations of a mutual fund. It looks after the 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 its custodian. 6. Registrars and Transfer Agents: The registrars and transfer agents handle investor related services such as issuing units, redeeming units, sending fact sheets and annual reports, and so on. Some funds handle such functions in house, while others outsource it to be SEBI approved registrars and transfer agents like Karvy and CAMS. The legal structure and organization of mutual funds as laid down by SEBI guidelines is as follows.
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3.2 CLASSIFICATION OF MUTUAL FUNDS
Market cap funds
Long & short term Debt funds
Exchange traded funds
Real estate funds
Theme based funds
Long & short term Gilt funds
TAX saving schemes
Fund of Funds
Long & short term floating rate funds Fixed maturity funds
Conventional diversified funds
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CLASSIFICATION- I 1. Return based classification:
The investors of the mutual fund schemes are made to enjoy a good return in form of regular dividends or capital appreciation or a combination of these both. a) Income Funds
Income funds are floated for the interest of investors who want to maximize current income. These funds distribute periodically the income earned by them, in the form of either a constant income at relatively low risk or in the form of maximum income possible with higher risk by the use of leverage. b) Growth Funds
These Schemes have the objective to achieve an increase in the value of the underlying investments through capital appreciation, and they invest in growth oriented securities. c) Conservative Funds
These funds offer a blend of good average returns and reasonable capital appreciation. These funds are very popular and are ideal for the investors who want both growth and income from their investment. 2. Investment Based Classification:
Mutual funds may also be classified on the basis of the kind of securities that they invest in. Equity Funds: Equities are a high risk-high return asset class; the same risk profile spills over to equity funds as well. However investors must take note of the fact that a large number of variations exist within the 'high risk' equity funds segment. For example a sector fund would be on the relatively higher scale in the risk-return paradigm when compared to an index fund, which simply tracks the movements in a chosen benchmark index. These funds invest most of their investible shares in equity shares of companies and undertake
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the risk associated with the investment in equity shares. In a developed market, Equity funds can be of different categories. For example, ‘Blue Chip’, FMCG, PSUs, etc. The equity funds category can be further differentiated as follows: i. Market capitalization-based funds Market capitalization is defined as the number of shares issued by a company multiplied by the price of each share. Companies are generally divided into the large cap, mid cap and small cap segments respectively on the basis of their market capitalization. Some diversified equity funds are launched with the mandate to invest in stocks from one or more of the stated segments i.e. the company's market capitalization becomes the governing force. ii. Opportunities funds Fund managers handling opportunities funds have perhaps the most flexible investment mandates. Opportunities funds can invest in stocks across market segments, sectors and some are even permitted to invest a significant portion of their corpus in debt. As the name suggests, the idea is to seek opportunities for clocking gains from any sector/market segment. iii. Theme-based funds
Theme based funds are fairly similar to sector funds, however the differentiating factor is the level of diversification they offer. Instead of concentrating on stocks from a single sector/industry, their focus lies on a specific theme like globally competitive Indian companies or multinational corporations operating in India. In terms of diversification and risk profiles, these companies tread the path between a sector fund and a conventional diversified equity fund. iv. Index funds
Index funds are launched with the mandate of tracking benchmark indices like the BSE Sensex or S&P CNX Nifty. These funds invest in stocks from the index in the same
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proportion as the benchmark, thereby offering investors the opportunity to capture the growth in the chosen index. Index funds are generally more popular in developed markets where actively managed funds find it difficult to outperform the benchmark indices as markets are relatively better researched; also their expenses (fees, charges) tend to be lower vis-à-vis actively managed funds. v. Fund of Funds
A regular mutual fund invests in equities, bonds and fixed income securities depending on its objective. Fund of Funds (FoF) extend this concept by investing in units of other mutual fund schemes. By investing in more than one mutual fund they take diversification to a new level For example an FoF could invest in five top performing equity funds and offer a highly diversified portfolio to the investor. Similarly others could invest in equity and debt funds simultaneously, thereby offering a portfolio that is diversified across asset classes. On the flipside, FoF investors must be wary of higher expenses on account of overlapping of costs. FT India Life Stage Fund is the example of a FoF. vi. Conventional diversified equity funds
We have used the term "conventional" diversified equity funds at various places during the course of this discussion. This is not a variant; instead these are equity funds in their purest form and might seem rather lackluster in the present scenario. Typically, a diversified equity fund invests in a number of equity/ equity related instruments from various sectors thereby enabling investors to benefit from diversification. HDFC Equity Fund and Sundaram Growth Fund can be classified as conventional diversified equity funds.
Debt Funds: These Funds have their portfolio comprising of bonds and debentures (Debt Instruments). These funds are considered to be very secure with a steady income.
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Long-term debt funds Long-term debt funds are conventional debt/bond funds that have been in existence for as long as equity funds. Investors prefer to invest in debt funds for the same reasons they choose to invest in equity funds viz. they get benefits of diversification across debt instruments and the services of a professional fund manager. In fact, for retail investors, debt funds are one of the most important avenues for investing in debt securities like corporate bonds and government securities, chiefly because individual transactions in debt are of a very high value (running in millions of rupees) and beyond most retail investors. This is unlike equities for instance, where retail investors can invest on their own in smaller lots. Debt funds invest across a range of debt/fixed income securities. The corpus of long-term debt funds comprises mainly of corporate bonds and government securities (gilts/G-secs). When these securities have a residual maturity of at least 12 months, they are classified as long-term debt or longer-dated paper. Debt funds also invest in shorter-dated paper like treasury bills, certificate of deposit (CDs) and commercial paper to name a few.
Short-term debt funds There is a category of investors who have two critical needs that short-term debt funds help achieve. One – they want to be invested for the short-term - less than 6 months. Two - over this time frame, they are looking at preserving capital with a return that is superior to that of a fixed deposit of a comparable tenure. The reason why short-term debt funds can preserve capital better than long term debt funds is because they are invested in debt instruments of a shorter tenure. a) Liquid funds
Liquid funds invest in very short-term debt instruments maturing in 30-45 days. Typically this includes Treasury bills and call money. Liquid funds serve needs quite
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similar to that of short-term debt funds, only difference is that liquid fund investors have an even shorter investment time frame, at times as short as one day. If investors are looking at being invested for more than a month, they can consider short-term debt funds for a marginally higher return. b) Gilt Funds
Long-term gilt funds: A long-term government securities and invests primarily in government paper (gilt/GSec) with a residual maturity of over 12 months. Gilt funds have a higher risk profile than conventional debt funds because their investments are limited to a particular segment of the debt market and they cannot diversify across other segments like corporate bonds. Short-term gilt funds: A short-term gilt fund invests primarily gilts of a shorter tenure (less than 12 months). The rationale for investing in short-term gilt funds is similar o that of short-term debt funds. The reason investors choose short-term gilt funds over short-term debt funds is because gilts can provide a higher capital appreciation vis-à-vis bonds. Dynamic debt funds Dynamic debt funds attempt to combine the benefits of debt funds and gilt funds. They can invest across corporate bonds and gilts without any restrictions. They are distinct from conventional debt funds that invest in gilts and corporate bonds because these funds usually maintain a cap on their gilt investments. Dynamic debt funds tend to increase their gilt investments in times of economic stability as gilt prices tend to have a more lucrative spread (i.e. difference between the buy and sell prices). Investments in dynamic debt funds should be made with a time frame of at least 12 months. c) Long-term floating rate funds
Floating rate funds invest in debt instruments that have their coupon rates adjusted at periodic intervals. These instruments are called 'floating rate instruments'. The floating rate paper is benchmarked against a reference point like the MIBOR (Mumbai Inter-bank
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Offered Rate) for instance. Changes in the MIBOR are a cue for the coupon rate on the floating rate paper to be reset accordingly. Short-term floating rate funds Short-term floating rate funds work on the same lines as long-term floating rate funds except that they invest in floating rate paper of shorter tenure (less than 12 months). If investors are looking to be invested across a shorter time frame of 1-6 months, short-term floating rate funds should be preferred over their long-term counterparts. Templeton Floating Rate Fund (Short Term) is an example of a short-term floating rate fund. d) Fixed Maturity Plans (FMP)
Fixed maturity plans (FMPs) are another 'invention' that became a 'necessity' to counter interest rate instability, a problem that has become acute over the last two years. Typically, FMPs are close-ended funds. They invest across debt instruments to arrive at a pre-determined yield, Pre-determined because the yield is announced beforehand to investors. So FMPs have defined investment tenure. The benefit of investing in FMP is that the investor knows in advance the return that he will generate on his investment. FMPs have investment tenures ranging from less than a year to more than 10 years. e) Monthly Income Plan (MIP)
As a mutual fund category, monthly income plans (MIPs) are a relatively recent phenomenon. MIPs are hybrid funds that invest predominantly in debt instruments with a small portion of assets invested in equities. The equity component is expected to act as a 'kicker' that will make the MIP outperform a conventional debt fund. The rationale for a hybrid product like an MIP came to the fore because debt funds weren't adding a lot of value to the risk-averse investor's portfolio. So we had MIPs being launched that gave the fund manager a mandate to invest 5-30% of assets in equities. Conventional MIPs invest about 5- 15% of assets in equities with their aggressive counterparts investing as high as 20-30% in equities. Several fund houses have two distinct MIPs catering to different investor groups
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Balanced Fund: These funds have their portfolio consisting of a balanced mix of equity and bonds. The composition of these funds may vary depending upon the outlook of the market. Balanced funds invest their corpus in both equity and debt instruments in a predetermined ratio, say 60:40. An aggressive balanced fund would typically hold a higher portion of its assets in equities maybe as high as 70% of the total assets. On the other hand, a 'disciplined' balanced fund would maintain a conservative equity allocation during most times. a) Sector Based Funds There are funds that invest in a specified sector of economy and they specialize in the said sector. However, they run the risk of not being able to diversify. Sector based funds are aggressive growth funds which make investments on the basis of assessed bright future for a particular sector. The specialty of sector funds rather oddly lies in the fact that they go against the very grain of mutual fund investing i.e. holding a diversified portfolio. That is why you will find some Asset Management Companies that swear against sector funds. Sector funds are launched with the intention of capitalizing on opportunities in a single sector. b) Commodity Funds
It will invest directly in commodities or through shares of the commodity companies or through commodity futures contract .Most common example of such fund is preciousmetal fund, Gold funds invest in Gold, Gold futures or shares of gold mines c) Exchange Traded Funds
It combines the best features of open end and closed structure. It tracks a market index and trades like a stock on the stock market. ETFs are not the index funds.
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Real Estate Funds
It can invest in real estate, Fund real estate developers, Buy shares of housing finance companies, Buy securitized assets. Classification II A. 1. Based on their investment objective: Growth Schemes – Aim to provide capital appreciation 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. Ideal for: Investors in their prime earning years. Investors seeking growth over the long term.
Income Schemes Aim to provide regular and steady income to investors. These schemes generally
invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Ideal for: 3. Retired people and others with a need for capital stability and regular income. Investors who need some income to supplement their earnings. Balanced Schemes Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls.
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Ideal for: Investors looking for a combination of income and moderate growth.
Money Market / Liquid Schemes – Aim to provide easy liquidity, preservation of capital and moderate income. These
schemes generally invest in safer, short term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. Ideal for: Corporate and individual investors as a means to park their surplus funds for short period or awaiting a more favorable investment alternative.
Other Schemes: Capital Protection Oriented Schemes – Capital Protection Oriented Schemes are the schemes that endeavour to
protect the capital as the primary objective by investing in high quality fixed income securities and generate capital appreciation by investing in equity/equity related instruments as a secondary objective. The first Capital Protection Oriented Fund in India, Franklin Templeton Capital Protection Oriented Fund opened for subscription on October 31, 2006. Gold Exchange Traded Fund (GETF) – Gold Exchange Traded Fund offers investors an innovative, cost efficient and secure way to access the gold market. Gold Exchange Traded Fund are intended to offer investors a means of participating in the gold bullion market by buying and selling units on the Stock Exchanges, without taking physical delivery of gold. The first Gold ETF in India, Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSE on April 17, 2007.
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Quantitative Funds – A quantitative fund is an investment fund that selects securities based on
quantitative analysis. The managers of such funds build computer based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model. The first Quant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription on October 25, 2007. Funds Investing Abroad – With the opening up of the Indian economy, Mutual Funds have been permitted to invest in foreign securities/ American Depository Receipts (ADRs) / Global Depository Receipts (GDRs). Some of such schemes are dedicated funds for investment abroad while others invest partly in foreign securities and partly in domestic securities. While most such schemes invest in securities across the world there are also schemes which are country-specific in their investment approach.
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SNAPSHOT OF MUTUAL FUND SCHEMES Mutual Fund Type Money Market Objective Liquidity + Moderate Income + Reservation of Capital Liquidity + Moderate Income Risk Negligible
(Table 3.1) Investment Portfolio Treasury Bills, Certificate of Deposits, Commercial Papers, Call Money Call Money, Commercial Papers, Treasury Bills, CDs, Shortterm Government securities. Predominantly Debentures, Government securities, Corporate Bonds Government securities Stocks Who should invest Those who park their funds in current accounts or short-term bank deposits Those with surplus short-term funds Investment horizon 2 days - 3 weeks
Short-term Funds (Floating short-term)
Little Interest Rate
3 weeks 3 months
Bond Funds (Floating Long-term) Gilt Funds Equity Funds Index Funds
Credit Risk & Interest Rate Risk
Salaried & conservative investors
More than 9 - 12 months
Security & Income Long-term Capital Appreciation
Interest Rate Risk High Risk
To generate NAV varies returns that are with index commensurate performance with returns of respective indices Growth & Capital Regular Market Risk Income and Interest Rate Risk
Portfolio indices like BSE, NIFTY etc Balanced ratio of equity and debt funds to ensure higher returns at lower risk
Salaried & conservative investors Aggressive investors with long term outlook. Aggressive investors.
12 months & more 3 years plus
3 years plus
Moderate & Aggressive
2 years plus
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ADVANTAGES OF MUTUAL FUND Portfolio Diversification Professional management Reduction / Diversification of Risk Liquidity Flexibility & Convenience Reduction in Transaction cost Safety of regulated environment Choice of schemes Transparency
DISADVANTAGE OF MUTUAL FUND No control over Cost in the Hands of an Investor No tailor-made Portfolios Managing a Portfolio Funds Difficulty in selecting a Suitable Fund Scheme
3.3 COST INVOLVED IN MUTUAL FUNDS As with any business, running a mutual fund involves costs — including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses. It is important that you understand these charges because they lower your returns. Some funds impose "shareholder fees" directly on investors whenever they buy or sell shares. In addition, every fund has regular, recurring, fund-wide "operating expenses." Funds typically pay their operating expenses out of fund assets — which mean that investors indirectly pay these costs.
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An investor must know that there are certain costs involved while investing in mutual funds. 1. OPERATING EXPENSES/EXPENSE RATIO
These refer to cost incurred to operate a mutual fund. Advisory fee is paid to investment managers, audit fees to charted accountant, custodial fees, register and transfer agent fees, trustee fees, agent commission. Operating expenses also known as expenses ratio which is annual expenses expressed as a percentage of these expenses is required to be reported in the schemes offer document or prospectus.
Operating expenses Average net assets
Expenses ratio =
For instant, if funds Rs. 100 crores and expenses Rs. 20 Lakh. Then expenses ratio is 2% expenses ratio is available in the offer document and fro historical per unit statistics included in the financial results of the fund which are published by annually, un audited for the half year ending September 30th and audited for the physically year end 1st March 30th . Depending upon scheme and net asset, operating expenses are determined by limits mandated by SEBI mutual funds regulation act. Any excess over specified limits as to borne by Management Company, the trustees or sponsors. 2. SALES CHARGES:
These are known commonly sale loads; these are charged directly to investor. Sales loads are used by mutual fund for the payment of agent’s commission, distribution and marketing expenses. These charges have no effect on the performance of the scheme. Sales loads are usually expression percentage and or of two types1. 2. Front-end load Back-end load
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FRONT-END LOAD: It is a onetime fixed fee paid by an investor when buying a Mutual funds scheme.
It determines public offer price which intern decides how much of your initial investment actually get invested the standard practice of arriving a public offer price is as follows.
Net asset value
Public offer price =
(1-front end load)
Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2% front end load at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs. 10,20. So only 980 units are allowed to the investor.
Number of units allotted =
Amount invested Public offer price
10,000/10.20= 980 units at a NAV of Rs. 10. This means units worth 9800 are allotted to him an initial investment Rs.10,000 front end loads tend to decrease as initial investment amount increase.
BACK END LOAD: May be fixed fee redemption or a contingent differed sales charged a redemption
so load continues so long as the redeeming or selling of the units of a fund does not take place in the event of a back end load is applied. The redemption price is arrive or using following formula.
Net asset value
Redemption price =
(1+back end load)
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Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a 2% back, end load at a NAV per units of Rs. 10 using the formula Redemption price 10/(1+0.02)= Rs. 9.8 s, what the investor gets in hand is 9800(9.8*1000).
CONTINGENT DEFERRED SALES CHARGES (CDSC): Contingent differed sales charges of a structured back end load. It is paid when
the units are reading during the initial years of ownership. It is for a predetermined period only and reduced over the time you invested for a fund, the longer remains in a fund the lower the CDSC. The SEBI stipulate the a CDSC may be charge only for first four years after purchase of units and also stipulate the maximum CDSC that can we charge every year. This is the SEBI mutual funds regulations 1996 do not allow either the front end load or back end load to any combination is higher than 7%.
TRANSACTION COST: Some funds may also impose a switch over fee which is charge on transfer of
investment from one scheme to another within a same mutual funds family and also to switch from one plan to another within same scheme. The real estate mutual funds sector is now being considered as the engine of economic growth. The AMC reports to the trustees who safeguard the interests of investors in the mutual fund and also ensure compliance of the operations of the und with SEBI guidelines. They not only monitor performance of the AMC but also oversee operations of the custodian and transfer agent. The AMC receives a fee for its services. Currently, SEBI permits a maximum fee of 1.25%p.a. of the asset value of the fund size less than Rs.1bn. As the asset size of the fund increases, this falls progressively to 0.75%p.a. of the incremental asset value. In addition, SEBI also permits AMCs to charge expense related to the management of the fund up to certain limits. These are of two kinds of as follows:
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Up front expenses related to fund marketing and initial account opening – up to maximum of 6%of the investment amount (termed as “load”). Recurring expenses, which together with the management fees should not exceed certain limits. The maximum is 2.5% per year for equity funds and 2.25% per year for debt funds. As the asset size increases, the maximum limit falls progressively to 1.75% of the incremental assets First 1bn. 2.5% Next 3 bn. 2.25% Next 3 bn. 2.00% Over 7 bn. 1.75%
Both the management fee and the expenses are charged directly to the mutual fund scheme. 3.4 TAX SAVING ON MUTUAL FUND There are two types of Tax-saving funds, 1. 2. Equity-linked savings schemes (ELSS) Pension funds
Equity-linked savings schemes (ELSS) ELSS schemes are basically diversified equity schemes, which have a three-year lock-in. Investments here—subject to a maximum of Rs 10,000—receive a tax rebate of 0 to 20 per cent depending on the income slab. As these are equity instruments they have the maximum risk-return potential among all asset classes. What this means is that return has a propensity to vary with great intensity. Although an average tax-saving mutual fund delivered 16.36 per cent in 2002, the range of returns was extreme. Thus, in that year, the best tax-saving fund delivered 42.61 per cent and the worst was down 3.16 per cent. The best way to overcome the vagaries of stock markets is to diversify. Diversification can be across funds and, more importantly, across time periods. By investing regularly every year in these funds one can set up a long-term systematic investment plan.
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Pension funds The other route for saving taxes is pension funds, even though there are currently only two such funds in operation, Franklin Templeton's Templeton India Pension Fund and UTI's Retirement Benefit Plan. Introduced for the first time in 1997, pension funds are hybrid schemes, which have a debt orientation, and carry the same tax benefit as ELSS. From the tax point of view, bonus units are conceptually similar to dividend stripping, but somewhat more complex. Bonus units that a fund issue is deemed to have been acquired at zero cost. Thus, whenever they are sold, the entire sale price is treated as capital gains. However, at the time of issue of bonus, the NAV of the fund drops in a proportion that is identical to the ratio at which bonus funds are issued. This fall in the NAV is a capital loss as far as the original units are concerned and it is here that tax benefits can be realized. The original units can be sold off with a capital loss, which can be used to set off other capital gains. The bonus units carry a high tax liability though since you will pay taxes on the entire sale price. Here's an example. Suppose you hold 10,000 units of a fund whose NAV is Rs 15. You made the purchase less than a year ago at an NAV of Rs 12. If today you decide to sell these units, you will fetch Rs 1.5 Lakh, out of which Rs 30,000 will be short-term capital gain. On this, you are likely to pay a tax of Rs 9,000—30 per cent of gains. Tax Benefits of Mutual Fund ELSS ( Equity linked saving scheme ) 3 year lock in period Minimum investment of 90% in equity markets at all times So ELSS investment automatically leads to investment in equity shares Open or closed ended Eligible under Section 80 C up to Rs.1 Lakh allowed Dividends are tax free Benefit of Long term Capital gain taxation
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3.5 TAX RULES FOR MUTUAL FUND INVESTORS (Table 3.2) PARTICULARS INDIVIDUALS CORPORATES NRI*
DIVIDEND (In the hands of investors) Equity Schemes Tax Free Debt Schemes Tax Free
Tax Free Tax Free
Tax Free Tax Free
DIVIDEND DISTRIBUTION TAX (by the scheme) Equity Schemes** Nil Nil Debt Schemes 12.5% + 10% 20% + 10% surcharge surcharge + 3% cess + 3% cess =14.163% =22.66% Money Market & Liquid 25% + 10% surcharge + 3% cess = 28.325% Schemes
Nil 12.5% + 10% surcharge + 3% cess =14.163%
LONG TERM CAPITAL GAINS Equity Schemes** Nil Debt Schemes 10% Without Indexation Or 20% With Indexation, Whichever is lower + 10% surcharge + 3% cess Without Indexation 11.33% With Indexation 22.66% SHORT TERM CAPITAL GAINS Equity Schemes** 15% Flat + 10% surcharge + 3% cess = 16.995% Debt Schemes^^ 30% + 10% + 3% = 33.99%
Note: The short term/long term capital gain tax will be deducted at the time of redemption of units in case of NRI investors only. **STT @ 0.25% will be deducted on equity funds at the time of redemption and switch to the other schemes. ^^ assuming highest tax slab rate
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3.6 VARIOUS INVESTMENT OPTIONS IN MUTUAL FUNDS OFFER To cater to different investment needs; Mutual Funds offer various investment options. Some of the important investment options include:
1. Growth Option: Dividend is not paid-out under a Growth Option and the investor realizes only the capital appreciation on the investment (by an increase in NAV). 2. Dividend Payout Option: Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout. 3. Dividend Re-investment Option: Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same. 4. Retirement Pension Option: Some schemes are linked with retirement pension. Individuals participate in these options for themselves, and corporate participate for their employees. 5. Insurance Option: Certain Mutual Funds offer schemes that provide insurance cover to investors as an added benefit.
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3.7 RISKS ASSOCIATED WITH MUTUAL FUNDS 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 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 welldiversified portfolio with some investment in equities might help mitigate this risk.
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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 rise 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 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. You have been reading about diversification above, but what is it? Diversification the nuclear weapon in your arsenal for your fight against Risk. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of your returns, for example during one period of time equities might underperform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology sector might be faring poorly but the auto and textile sectors might do well and may protect you principal investment as well as help you meet your return objectives.
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RISK V/S RETURN
3.8 INVESTMENT STRATEGIES IN MUTUAL FUNDS 1. Systematic Investment Plan (SIP): under this a fixed sum is invested each month on a fixed date of a month. Payments are made through post dated cheques or direct/auto debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA) 2. Systematic Transfer Plan (STP): under this an investor invests in debt oriented fund and gives instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund. 3. Systematic Withdrawal Plan (SWP): if someone wishes to withdraw from a mutual fund then he can withdraw a fixed amount each month.
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3.9 VOLATILITY MEASURES FOR EQUITY RELATED FUNDS With the increasing number of mutual fund schemes, it becomes very difficult for an investor to choose the type of funds for investment. By using some of the portfolio analysis tools, he can become more equipped to make a well informed choice. There are many financial tools to analyze mutual funds. Each has their unique strengths and limitations as well. Therefore, one needs to use a combination of these tools to make a thorough analysis of the funds. One can make a judgment on the quality of a fund from various ratios such as standard deviation, Sharpe ratio, beta, Treynor measure, R-squared, alpha, portfolio turnover ratio, total expense ratio etc.
PORTFOLIO TURNOVER A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold - whichever is less - over a particular period, divided by the total net asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period. The portfolio turnover measurement should be considered by an investor before deciding to purchase a given mutual fund or similar financial instrument. After all, a firm with a high turnover rate will incur more transaction costs than a fund with a lower rate. Unless the superior asset selection renders benefits that offset the added transaction costs they cause, a less active trading posture may generate higher fund returns.
SHARPE RATIO A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio formula is:
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The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is only a good investment if returns those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk adjusted performance has been. A negative Sharpe ratio risk-adjusted indicates that a risk-less asset would perform better than the security being analyzed. less TREYNOR RATIO A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless investment per each unit of market risk. The Treynor ratio is calculated as: = (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the Free Portfolio In other words, the Treynor ratio is a risk adjusted measure of return based on systematic risk-adjusted risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses ratio, beta as the measurement of volatility.
JENSEN'S MEASURE A risk-adjusted performance measure that represents the average return on a portfolio adjusted over and above that predicted by the capital asset pricing model (CAPM), given the pricing portfolio's beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimes referred to as "Jensen's alpha."
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If the definition above makes your head spin, don't worry: you aren't alone! This is a very technical term that has its roots in financial theory. The basic idea is that to analyze the performance of an investment manager you must look not only at the overall return of a portfolio, but also at the risk of that portfolio. For example, if there are two mutual funds that both have a 12% return, a rational investor will want the fund that is less risky. Jensen's measure is one of the ways to help determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen's alpha means a fund manager has "beat the market" with his or her stock picking skills.
ALPHA (α) A measure of performance on a risk risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The adjusted excess return of the fund relative to the return of the benchmark index is a fund's alpha. A positive alpha of 1.0 means th fund has outperformed its benchmark index by 1%. the Correspondingly, a similar negative alpha would indicate an underperformance of 1%. BETA (β) A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.
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Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
R-SQUARED R squared is the square of ‘R’ (i.e.; Coefficient of Correlation). It describes the level of association between the fun’s market volatility and market risk. The value of R- squared ranges from0 to1. A high R- squared (more than 0.80) indicates that beta can be used as a reliable measure to analyze the performance of a fund. Beta should be ignored when the r-squared is low as it indicates that the fund performance is affected by factors other than the markets. R-squared values range from 0 to 100. An R-squared of 100 means that all movements of a security are completely explained by movements in the index. A high R-squared (between 85 and 100) indicates the fund's performance patterns have been in line with the index. A fund with a low R-squared (70 or less) doesn't act much like the index.
Table 3.3 For Example Case 1 R2 B 0.65 1.2 Case 2 0.88 0.9
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In the above tableR2 is less than 0.80 in case 1 implies that it would be wrong to mention that the fund is aggressive on account of high beta. In case 2, the R- squared is more than 0.85 and beta value is 0.9. It means that this fund is less aggressive than the market. A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an R-squared value of close to 100 but has a beta below 1, it is most likely offering higher risk-adjusted returns. A low R-squared means you should ignore the beta.
STANDARD DEVIATION In simple terms standard deviation is one of the commonly used statistical parameter to measure risk, which determines the volatility of a fund. Deviation is defined as any variation from a mean value (upward & downward). Since the markets are volatile, the returns fluctuate every day. High standard deviation of a fund implies high volatility and a low standard deviation implies low volatility. TOTAL EXPENSE RATIO A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER: Total Expense Ratio = (Total Fund Costs/ Total Fund Assets)
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3.10 MEASURES FOR DEBT FUNDS
YIELD TO MATURITY - YTM The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short. An approximate YTM can be found by using a bond yield table. However, because calculating a bond's YTM is complex and involves trial and error, it is usually done by using a programmable business calculator.
WEIGHTED AVERAGE MATURITY (WAM) The weighted average of the time until all maturities on mortgages in a mortgage-backed security (MBS). The higher the weighted average to maturity, the longer the mortgages in the security have until maturity. Also known as "average effective maturity". The measure is calculated by totaling each mortgage value represented by the MBS. The weights of each mortgage are found by dividing the value of each into the total of all. To arrive at the WAM number the weight of each security is multiplied by the time until maturity of each mortgage, and then all the values are added together. For example say an MBS has three mortgages valued at $1,000, $2,000 and $3,000 (a total of $6,000) and mature in one, two and three years respectively. The weights of these are 1/6 (1,000/6,000), 1/3 (2,000/6,000) and 1/2 (3,000/6,000). The WAM is 2 1/3 years (1/6 x 1 year + 1/3 x 2 years + 1/2 x 3 years).
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3.11 DEBT OPTIONS CERTIFICATE OF DEPOSIT (CD) A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years. A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty.
COMMERCIAL PAPER An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates. Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. DEBENTURE In law, a debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. Debentures are generally freely transferable by the debenture holder. Debenture holders have no voting rights and the interest paid to them is a charge against profit in the company's financial statements.
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CONVERTIBLE DEBENTURES A type of loan issued by a company that can be converted into stock by the holder and, under certain circumstances, the issuer of the bond. By adding the convertibility option the issuer pays a lower interest rate on the loan compared to if there was no option to convert. These instruments are used by companies to obtain the capital they need to grow or maintain the business. Convertible debentures are different from convertible bonds because debentures are unsecured; in the event of bankruptcy the debentures would be paid after other fixed income holders. The convertible feature is factored into the calculation of the diluted pershare metrics as if the debentures had been converted. Therefore, a higher share count reduces metrics such as earnings per share, which is referred to as dilution.
NON CONVERTIBLE DEBENTURES Non-convertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts.
ZERO-COUPON BOND A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. Also known as an "accrual bond". Some zero-coupon bonds are issued as such, while others are bonds that have been stripped of their coupons by a financial institution and then repackaged as zerocoupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price much more than coupon bonds.
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PASS THROUGH CERTIFICATE Pass-Through Certificates (PTCs) are instruments that evidence the ownership of two or Through more Equipment Trust Certificates In other words, Equipment Trust Certificates may be Certificates. pment bundled into a pass-through structure as a means of diversifying the asset pool and/or through increasing the size of the offering. The principal and interest payments on the Equipment Trust Certificates are "passed through" to certificate holders.
TREASURY BILL Treasury bills (or T-Bills mature in one year or less. Like zero-coupon bonds, they do Bills) coupon bonds not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity maturity. Regular weekly T-Bills are commonly issued with maturity dates of 28 days (or 4 -Bills weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26 weeks, about 6 months), and 364 days (or 52 weeks, about 1 year). Treasury bills are sold by auctions held weekly.
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3.11 REGULATION OF MUTUAL FUNDS IN INDIA The Indian mutual fund industry witnessed robust growth and stricter regulation from SEBI since 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Safeguarding the interest of investors is one of the duties of SEBI. Consequently SEBI (Mutual Fund) Regulations, 1996 and certain other guidelines have been issued by SEBI that sets uniform standards for all mutual funds in India. ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI) The mutual fund industry has a trade association called Association of Mutual Funds in India (AMFI) modeled on the lines of a Self Regulating Organization (SRO) with a view to 'promoting and protecting the interest of mutual funds and their unit-holders, increasing public awareness of mutual funds, and serving the investor’s interest by defining and maintaining high ethical and professional standards in the mutual funds industry'. AMFI plays an important role in disciplining members and assist the regulatory authority in protecting investors' interest. AMFI works through a number of committees, some of which are standing committees to address areas where there is a need for constant vigil and improvements and other which are ad-hoc committees constituted to address specific issues. These committees consist of industry professionals from among the member mutual funds. AMFI has now decided to become a self-regulatory organization since it has worked very effectively as an industry body. 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.
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3.12 PROMOTION OF SIP SCHEME (Systematic Investment Plan) Periodic investments are referred to as a SIP. That means that, every month, you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund. Let's say the NAV on the day you invest in the first month is Rs 20; you will get 50 units.
The next month, the NAV is Rs 25. You will get 40 units. The following month, the NAV is Rs 18. You will get 55.56 units.
So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.
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6.2 SIP CASE STUDY Market hit a high of 5450 in Mar 2000. 2004. Let’s see how the SIP investors fared in that scenario. INVESTOR 1 – PANIC INVESTORS (Table 3.5) These investors had started their SIP of Rs. 2000 in Mar 2000 peak. With the decline in the market they panicked & stopped their SIP in a span of 13 months. SIP Start Date SIP End Date No. of installments Mar-00 Mar-01 Market crashed to lows of 2600. It took almost 4.5 years for the market to scale back the level of 5400 in Sep
Scheme Name Reliance Growth HDFC Equity Fund ICICI Technology Fund Birla New Millennium
Investment 26,000 26,000
Value in Mar 01 18,846 20,870
Returns -46.1% -33.9%
These investors actually made a loss on their SIPs by stopping it in the downturn.
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INVESTOR 2 – SMART INVESTORS (Table 3.6) These investors had started their SIP of Rs. 2000 in Mar 2000 peak. They continued their SIP and kept on investing in the SIPs.
SIP Start Date No. of installments
Scheme Name Reliance Growth HDFC Equity Fund ICICI Technology Fund Birla New Millennium
Investment 1,10,000 1,10,000
Value in Sep 04 3,25,736 2,53,337
Returns 50.5% 38.1%
These investors have made phenomenal returns even though market has delivered no return (From 5400 level in Mar 2000 to 5400 level in Sep 2004)
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INVESTOR 3 – NEW INVESTORS (Table 3.7)
These investors started their SIP of Rs. 2000 in Mar 2001, 1 year after the fall in the market
SIP Start Date No. of installments
Scheme Name Reliance Growth HDFC Equity Fund ICICI Technology Fund Birla New Millennium
Investment 86,000 86,000
Value in Sep 04 2,48,528 1,90,341
Returns 66.8% 48.3%
Investors who have started SIP in lean period have made fantastic returns
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6.3 DO WE REALLY NEED TO BE AFRAID WHILE INVESTING IN SIP? (Table 3.8)
Investments of Rs.10000/ becomes Rs.276947/- even after several falls in the NAV Rs.10000/during the period of 13 Years. And finally, with the current correction, its NAV has fallen by 50% 3 times over the period of past 14 years. Even after the current fall, the fund is still delivering a CAGR of 29% widely beating the index which has given 8.3% returns. The Absolute returns from the fund even after the current fall are staggering 3529.72%. urns Equity investments through Mutual Funds deliver 15 20% of returns over Long term. 15-20% Bull and bear market cycles are nature of Equity markets and are going to continue in future also.
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CHAPTER 4 ANALYSIS AND INTERPRETATION
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PROFILE OF THE RESPONDENTS (Table 4.1)
Male Female <30 Years 30-40 Years 40-50 Years 50-60 Years >60 Years Service Business Student Professional Retired <2 Lakhs 2-5 Lakhs 5-8 Lakhs 8-12 Lakhs >12 Lakhs 5% 5%-10% 10%-15% 15%-20% >20% <=8 Standards <=12 Standards Graduate Post Graduate Doctorate & Others Married Single
75 25 25 28 15 20 12 60 10 15 5 10 20 60 13 5 2 36 24 26 11 3 5 15 55 20 5 65 35
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What is your primary objective for your investment? (Table 4.2) Frequency Preservation of Principal Regular Income Growth and Income Conservative Growth Aggressive Growth Tax Benefit Total 10 15 35 10 15 15 100 Percent 10.0 15.0 35.0 10.0 15.0 15.0 100.0 Valid Percent 10.0 15.0 35.0 10.0 15.0 15.0 100.0 Cumulative Percent 10.0 25.0 60.0 70.0 85.0 100.0
Primary Objective for Investment
Tax Benefit Aggressive Growth Conservative Growth Growth and Income Regular Income Preservation of Principal 0 10 10 20 30 40 15 10 35 Primary Objective for Investment 15 15
15% investors are more interested in tax benefit in their primary objective for investment 15% investors look for aggressive growth in their primary objective for investment 10% investors look for conservative growth in their primary objective for investment 35% investors look for growth & income both in their primary objective for investment primary 15% investors look for regular income in their primary objective for investment 10% investors look for preservation of principal in their primary objective for investment
So the majority of respondents look for growth & income as a primary objective for me investment.
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Do you know about the Mutual Funds? (Table 4.3) Frequency Yes No Total 33 67 100 Percent 33.0 67.0 100.0 Valid Percent 33.0 67.0 100.0 Cumulative Percent 33.0 100.0
Knowledge about MF
There are 33% investors have knowledge about MFs There are 67% investors don’t have knowledge about MFs
So the majority of respondents don’t know about MFs.
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Do you know that mutual fund is related to share market? (Table 4.4) Frequency Yes No Don’t Know Total 50 30 20 100 Percent 50.0 30.0 20.0 100.0 Valid Percent 50.0 30.0 20.0 100.0 Cumulative Percent 50.0 80.0 100.0
Relationship between MF & Stock Exchange
50 50 45 40 35 30 25 20 15 10 5 0 Yes
30 20 Relationship between MF & Stock Exchange
50% investors have knowledge about the relationship of MFs & Stock Exchange 30% investors don’t have knowledge about the relationship of MFs & Stock Exchange 20% investors ticked no idea.
So the majority of respondents know about the relationship of MFs & Stock Exchange y
Page | 86
Have you ever invested in mutual fund? (Table 4.5) Frequency Yes no Total 30 70 100 Percent 30.0 70.0 100.0 Valid Percent 30.0 70.0 100.0 Cumulative Percent 30.0 100.0
Have you ever invested in MFs
30% investors invested in MFs 70% investors never invested in MFs
So the majority of respondents never invested in MFs.
Page | 87
If no: What is (are) the reason? (Table 4.6)
Frequency Never Thought about it Lack of Knowledge Risky Do not have enough savings Total 5 45 35 15 100
Percent 5.0 45.0 35.0 15.0 100.0
Valid Percent 5.0 45.0 35.0 15.0 100.0
Cumulative Percent 5.0 50.0 85.0 100.0
Reason not to invested in MFs
15 35 5 45
Never Thought about it Lack of Knowledge Risky Do not have enough savings
5% investors say that they never thought about investing in MFs 45% investors say that they have very less knowledge about MFs 35% investors say that it’s very risky to invest in MFs 15% investors don’t have enough savings for investing in MF
So the majority of respondents have very less knowledge about MFs
Page | 88
If yes, which company/companies? (Table 4.7) Frequency Franklin Templeton Reliance M.F Birla sun life ICICI M.F. Sundaram Finance LIC mutual fund UTI mutual fund SBI M.F. Kotak Mahindra Tata mutual fund Others Total 10 30 6 3 2 5 6 8 8 10 12 100 Percent 10.0 30.0 6.0 3.0 2.0 5.0 6.0 8.0 8.0 10.0 12.0 100.0 Valid Percent 10.0 30.0 6.0 3.0 2.0 5.0 6.0 8.0 8.0 10.0 12.0 100.0 Cumulative Percent 10.0 40.0 46.0 49.0 51.0 56.0 62.0 70.0 78.0 88.0 100.0
Which MF company
Others Tata mutual fund Kotak Mahindra SBI M.F. UTI mutual fund LIC mutual fund Sundaram Finance ICICI M.F. Birla sun life Reliance M.F Franklin Templeton 0 5 10 10 15 20 25 30 35 2 3 6 30 5 6 Which MF company 8 8 10 12
Page | 89
10% investors invested in Franklin Templeton 30% investors invested in Reliance Mutual Fund 6% investors invested in Birla Sun Life Mutual Fund 3% investors invested in ICICI Mutual Fund 2% investors invested in Sundaram Finance Mutual Fund 5% investors invested in LIC Mutual Fund 6% investors invested in UTI Mutual Fund 8% investors invested in SBI Mutual Fund 8% investors invested in Kotak Mahindra Mutual Fund 10% investors invested in TATA Mutual Fund 12% investors invested in Other Mutual Funds
So the majority of respondents have invested in Reliance Mutual Fund
Page | 90
If Reliance Mutual Fund; what are the reasons? (Table 4.8) al Frequency Brand name Varieties Availability Good Service Past Performance of fund Total 20 15 10 10 45 100 Percent 20.0 15.0 10.0 10.0 45.0 100.0 Valid Percent 20.0 15.0 10.0 10.0 45.0 100.0 Cumulative Percent 20.0 35.0 45.0 55.0 100.0
Reason for selecting Reliance MF
Reason for selecting Reliance MF 45 20
20% investors say that they invested because of Brand Name 15% investors say that they invested because of Varieties of schemes 10% investors say that availability is the main reason to invest 10% investors say that good service is the main reason to invest in Reliance MF 45% investors say that past performance of fund is the main reason to invest in Reliance
So the majority of respondents believe that Past Performance is the main & the most ority important reason to invest in Reliance MF
Page | 91
Why do you prefer investment in mutual fund to other investment avenue? (Table 4.9) Frequency Lack of expertise in stock market Better return over a long period of time Liquidity Tax efficiency Transparency Total 20 25 18 25 12 100 Percent 20.0 25.0 18.0 25.0 12.0 100.0 Valid Percent 20.0 25.0 18.0 25.0 12.0 100.0 Cumulative Percent 20.0 45.0 63.0 88.0 100.0
Reason for investment in MFs
Lack of expertise in stock market Better return over a long period of time Liquidity Tax efficiency Transparency
20% investors prefer MF because of Lack of expertise in Stock Market 25% investors prefer MF because of Better returns over a long period of time 18% investors prefer MF because of Liquidity 25% investors prefer MF because of Tax efficiency of MF 12% investors prefer MF because of Transparency in MF
So the majority of respondents prefer MF because of Better returns over a long period of time & its Tax efficiency
Page | 92
Which are the primary sources of your knowledge about Mutual Funds as an investment option? Corresponding to your choices how would you rate their influence on your final Mutual Fund purchase decision? (Table 4.10)
Total out of 500
TV Internet Newspaper Scholarly Journals/Article Friends/Relative Financial Advisor/CA
27 40 10 31 10 13
66 44 58 64 30 62
63 48 87 48 33 42
40 44 80 48 172 104
45 55 60 45 105 80
241 231 295 236 350 301
4 6 3 5 1 2
Table-1 is clearly showing that friends & relatives have greater impact on the decision of investment after that financial advisors & CA make the difference in investment decision. Hence it is concluded that the majority of the respondents prefer suggestions from friends/relatives while selecting any investment in mutual funds.
Page | 93
How do you prioritize the reason for investment?
Total out of 500
Savings for Future Tax incentives Returns Future Outlook Brand Value Risk Factor
10 18 6 8 14 17
40 34 28 24 24 30
69 48 78 48 51 57
76 100 64 148 116 100
140 120 190 135 140 120
335 320 366 363 345 324
4 6 1 2 3 5
Table-2 clearly portrays ranking for the reasons for investment by respondents. Majority of respondents prioritize their investment according to the returns of investment avenues then after the second reason behind the investment is future outlook about the needs & wants of individual.
Page | 94
Rank the various investments that you would invest your sum in? (Table 4.12) Source
Least Influential Less Influential Neutral More Influential Most Influential Total out of 500 Rank
Stocks RBI Bonds Company Debentures Mutual Funds Insurance Products Fixed Deposits Post Office Scheme
22 23 18 30 19 5 15
28 18 14 24 20 30 8
54 141 168 48 36 42 72
84 48 48 80 160 100 156
125 45 35 110 95 205 90
313 275 283 292 330 382 341
4 7 6 5 3 1 2
Table-3 is clearly showing ranking for the various investment avenues. Majority of respondents prefer fixed deposits as the most preferred investment avenue because of the less risk & more security in nationalized banks and the second most preferred avenue is post office schemes.
Page | 95
What factors affect your decision for investment in Mutual Fund? (Table 4.13) Source
Least Influential Less Influential Neutral More Influential Most Influential Total out of 500 Rank
Economic Scenario Company Image Fund Manager’s Image Tax Incentive Fund Performance
20 8 20 9 2
26 22 26 52 6
66 48 75 30 39
132 116 84 60 116
60 180 105 200 265
304 374 310 351 428
5 2 4 3 1
Table-4 shows that ranking for the factors affect the decision for investment in mutual fund. Majority of respondents see fund performance as the first & foremost factor while investing in mutual fund.
Page | 96
What kind of investment schemes you prefer in Mutual Fund? (Table 4.14) Frequency Growth schemes Balanced schemes ELSS Sector specific schemes Income schemes Total 51 10 12 17 10 100 Percent 51.0 10.0 12.0 17.0 10.0 100.0 Valid Cumulative Percent Percent 51.0 51.0 10.0 61.0 12.0 73.0 17.0 90.0 10.0 100.0 100.0
MF Schemes Preference
60 50 40 30 20 10 0 51 17
10 MF Schemes Preference
51% investors prefer growth schemes 10% investors prefer balanced schemes 12% investors prefer ELSS schemes 17% investors prefer sector specific schemes 10% investors prefer income schemes
So the majority of respondents prefer growth schemes.
Page | 97
(Table 4.15): what is your Primary objective? *Age Cross-tab
S.No. What is your primary objective for your investment?/ Age 1. Preservation of Principal 2 Regular Income 3. Growth and Income 4. Conservative Growth 5. Aggressive Growth 6. Tax Benefit Total Interpretation
<30 years 10.0% 15.0%
4050>60years 3040years 50years 60years
2.0% 15.0% 3.0% 20.0%
10.0% 15.0% 35.0% 10.0% 15.0% 12.0% 15.0% 12.0% 100.0%
35% respondents prefer Growth & Income option and that group belong to the age group 25% respondents belong to the age group of less than 30 years and those respondents
of 30-40 years. prefer two kind of objective in their investment i.e. preservation of principle and regular income.
(Table 4.16): What is your primary objective for your investment? * Occupation Cross-tab S.No. What is your primary objective for your investment ?/ Occupation 1. Preservation of Principal 2. Regular Income 3. Growth and Income 4. Conservative Growth 5. Aggressive Growth 6. Tax Benefit Total Service Business Student Professional Retired Total
10.0% 15.0% 35.0% 10.0% 15.0% 60.0% 10.0% 15.0% 5.0% 5.0%
10.0% 15.0% 35.0% 10.0% 15.0% 10.0% 15.0% 10.0% 100.0%
Page | 98
Interpretation 35% respondents prefer growth & income as their primary objective of investment and Service sector based respondents prefer only preservation of principle, regular income
that falls under service sector based respondents. and growth & income as their primary objective for their investment.
(Table 4.17): What is your primary objective for your investment? * Income level Crosstab
S.No. What is your primary objective for your investment?/ Income level 1. Preservation of Principal 2 Regular Income 3. Growth and Income 4. Conservative Growth 5. Aggressive Growth 6. Tax Benefit Total
<2 Lacs 10.0% 10.0%
8>12Lacs Total 12Lacs 10.0% 15.0% 35.0% 10.0% 15.0% 2.0% 15.0% 2.0% 100.0%
5.0% 8.0% 20.0% 60.0% 13.0%
5.0% 35.0% 10.0% 10.0%
Interpretation60% of the investment comes from the 2-5 lakhs per annum income level group of respondents. These respondents prefer regular income, growth & income, conservative growth and also aggressive growth as their primary objective for investment.
Page | 99
(Table 4.18): What is your primary objective for your investment? * Marital Status Cross-tab
What is your primary objective for your investment ?/ Marital Status Preservation of Principal Regular Income Growth and Income Conservative Growth Aggressive Growth Tax Benefit
1. 2 3. 4. 5. 6. Total
10.0% 15.0% 10.0%
25.0% 10.0% 15.0% 15.0% 65.0%
10.0% 15.0% 35.0% 10.0% 15.0% 15.0% 100.0%
Interpretation65% respondents are married and they prefer growth & income, conservative growth, aggressive growth and tax benefits also as their primary objective for investment.
(Table 4.19): Do you know about the Mutual Funds? * Age Cross-tab S.No. >60years Total
Do you know about the Mutual Funds?/ Age Yes No
<30 years 25.0% 25.0%
3040years 8.0% 20.0% 28.0%
1. 2 Total
33.0% 12.0% 67.0% 12.0% 100.0%
Interpretation67% of respondents are not aware about the mutual funds, functioning of it and the benefits of it. Most of them fall under the 30-40 years and in this age group out of 28% respondents 20% are not aware about mutual fund’s benefits.
Page | 100
(Table 4.20): Do you know about the Mutual Funds? * Occupation Cross-tab
S.No. Do you know about the Mutual Funds?/ Occupation 1. 2 Total Yes No
Service Business Student Professional Retired
33.0% 27.0% 60.0%
33.0% 10.0% 67.0% 10.0% 100.0%
InterpretationOut of 60% service sector based respondents 27% respondents are not aware about the mutual funds, functioning of it and the benefits of it.
(Table 4.21): Do you know about the Mutual Funds? * Income level Cross-tab
S.No. Do you know about the Mutual Funds? / Income level 1. 2. Total InterpretationYes No
13.0% 47.0% 60.0%
33.0% 67.0% 100.0%
Out of 60% 2-5 lakhs per annum income level respondents 47% respondents are not aware about the mutual funds, functioning of it and the benefits of it.
Page | 101
(Table 4.22): Have you ever invested in mutual fund? * Age Cross-tab
S.No. Have you ever invested in mutual fund?/ Age 1. 2. Total InterpretationYes no
<30 years 25.0% 25.0%
3040years 5.0% 23.0% 28.0%
30.0% 12.0% 70.0% 12.0% 100.0%
Young generation is quick in response and investing in mutual fund in very early age as they get a job but the main age group of 30-40 years, out of 28% respondents 23% respondents never invested their money in mutual fund.
(Table 4.23): Have you ever invested in mutual fund? * Occupation Cross-tab
Have you ever invested in mutual fund?/ Occupation Yes no
Service Business Student Professional Retired
1. 2. Total
30.0% 30.0% 60.0%
30.0% 10.0% 70.0% 10.0% 100.0%
InterpretationService sector based respondents; out of 60% respondents 30% respondents never invested their money in mutual fund.
Page | 102
(Table 4.24): Have you ever invested in mutual fund? * Income level Cross-tab
S.No. Have you ever invested in mutual fund?/ Income level 1. 2. Total Yes no
10.0% 50.0% 60.0%
30.0% 2.0% 70.0% 2.0% 100.0%
InterpretationIn the 2-5 Lakhs per annum income level group; Out of 60% respondents 50% respondents never invested their money in mutual fund.
(Table 4.25): If no: What is/are the reason? * Age Cross-tab
S.No. If no: What is/are the reason?/ Age 1. 2. 3. 4. Total InterpretationNever Thought about it Lack of Knowledge Risky Do not have enough savings
<30 years 5.0% 20.0%
304050>60years 40years 50years 60years 25.0% 3.0% 28.0%
17.0% 3.0% 20.0%
5.0% 45.0% 35.0% 12.0% 15.0% 12.0% 100.0%
The main age group 30-40 years say that lack of knowledge about mutual fund and its benefits is the main reason of not to invest in mutual fund. Lack of the knowledge is the most important reason of not to invest in mutual fund.
Page | 103
(Table 4.26): If no: What is/are the reason? * Occupation Cross-tab S.No. If no: What is/are the reason?/ Occupation 1. 2. 3. 4. Total InterpretationThe main group of service sector based respondents also believe that lack of knowledge about mutual fund and its benefits is the main reason of not to invest in mutual fund. Lack of the knowledge is the most important reason of not to invest in mutual fund. (Table 4.27): If no: What is/are the reason? * Income level Cross-tab Never Thought about it Lack of Knowledge Risky Do not have enough savings Service Business 5.0% 45.0% 10.0% Student Professional Retired Total 5.0% 45.0% 35.0% 15.0%
15.0% 5.0% 10.0%
If no: What is/are the reason? / Income level Never Thought about it Lack of Knowledge Risky Do not have enough savings
<2 Lacs 5.0% 15.0%
1. 2. 3. 4. Total
30.0% 30.0% 60.0%
5.0% 8.0% 13.0%
5.0% 45.0% 35.0% 15.0% 100.0 %
InterpretationThe main group of 2-5 lakhs per annum income level respondents also believe that lack of knowledge about mutual fund and its benefits & risk involved in mutual funds are the main reason of not to invest in mutual fund. Lack of the knowledge and Risk associated with mutual fund are the most important reason of not to invest in mutual fund.
Page | 104
(Table 4.28): If invested in Reliance Mutual Fund; what are the reasons? * Occupation Cross-tab
If Reliance Mutual Fund; What are the reasons?/ Occupation Brand name Varieties Availability Good Service Past Performance of fund
Business Student Professional Retired
1. 2. 3. 4. 5. Total
20.0% 15.0% 10.0% 10.0% 5.0% 60.0%
20.0% 15.0% 10.0% 10.0% 45.0%
InterpretationThe main service based respondents believe brand name is the most important factor/reason to invest in RMF but the second most important reason to invest in RMF is varieties of product provided by RMF. (Table 4.29): If Reliance Mutual Fund; what are the reasons? * Income level Cross-tab
S.No. If Reliance Mutual Fund; What are the reasons?/ Income level 1. 2. 3. 4. 5. Total Brand name Varieties Availability Good Service Past Performance of fund
<2 Lacs 20.0%
25Lacs 15.0% 10.0% 10.0% 25.0% 60.0%
20.0% 15.0% 10.0% 10.0% 2.0% 45.0% 2.0% 100.0%
Page | 105
InterpretationThe main 2-5 lakhs per annum income level respondents believe past performance of the fund is the most important factor/reason to invest in RMF but the second most important reason to invest in RMF is varieties of product provided by RMF.
(Table 4.30): Why do you prefer investment in mutual fund to other investment avenue? * Occupation Cross-tab
Why do you prefer investment in mutual fund to other investment avenue? / Occupation Lack of expertise in stock market Better return over a long period of time Liquidity Tax efficiency Transparency
1. 2. 3. 4. 5. Total
20.0% 25.0% 15.0% 3.0% 7.0% 10.0%
20% 25% 18% 25% 12% 100%
3.0% 2.0% 5.0%
InterpretationThe main reason to invest in mutual fund are lack of expertise in stock market, better returns over a long period of time and liquidity believed by the service sector based respondents.
Page | 106
(Table 4.31): What kind of investment schemes you prefer in Mutual Fund? * Occupation Cross-tab
What kind of investment schemes you prefer in Mutual Fund?/ Occupation Growth schemes Balanced schemes ELSS Sector specific schemes Income schemes
1. 2. 3. 4. 5. Total
5.0% 10.0% 10.0%
51.0% 10.0% 12.0% 17.0% 10.0% 100.0 %
InterpretationService sector based respondents prefer growth schemes. Businessmen prefer ELSS schemes.
Page | 107
CHAPTER 5 SUMMARY OF FINDINGS, SUGGESTIONS AND RECOMMENDATIONS
Page | 108
GENERAL FINDINGS Financial advisors know less about benefits of MF and its business. They are not much able to tell the investors about the potential earning in MF business. Investors of younger age invest generally in equity funds whereas older age investors invest in debt funds. Investing through MF is best way for capital appreciation within protection in comparison to investing directly in equity market and other investment avenues. Some schemes of each AMC perform well which have a good Fund Manager and well designed Portfolio.
SPECIFIC FINDINGS Majority of respondents look for growth & income as a primary objective for investment. Majority of respondents don’t know about MFs. Majority of respondents know about the relationship of MFs & Stock Exchange. Majority of respondents never invested in MFs. Majority of respondents have very less knowledge about MFs. Majority of respondents have invested in Reliance Mutual Fund. Majority of respondents believe that Past Performance is the main & the most important reason to invest in Reliance MF. Majority of respondents prefer MF because of Better returns over a long period of time & its Tax efficiency. Majority of the respondents prefer suggestions from friends/relatives while selecting any investment in mutual funds. Majority of respondents prioritize their investment according to the returns of investment avenues. Majority of respondents prefer fixed deposits as the most preferred investment avenue because of the less risk & more security in nationalized banks.
Page | 109
Majority of respondents see fund performance as the first & foremost factor while investing in mutual fund. Majority of respondents prefer growth schemes.
GENERAL RECOMMENDATIONS AND SUGGESTIONS Customer education of the salaried class individuals is far below standard. Thus Asset Management Company’s need to create awareness so that the salaried class people become the prospective customer of the future. Early and mid earners bring most of the business for the Asset Management Company’s. Asset Management Company’s thus needed to educate and develop schemes for the person’s who are at the late earning or retirement stage to gain the market share. Return’s record must be focused by the sales executives while explaining the schemes to the customer. Pointing out the brand name of the company repeatedly may not too fruitful. The target market of salaried class individual has a lot of scope to gain business, as they are more fascinated to Mutual Funds than the self employed. Schemes with high equity level need to be targeted towards self employed and professionals as they require high returns and are ready to bear risk. Salary class individuals are risk averse and thus they must be assured of the advantage of “risk – diversification” in Mutual Funds. There should be given more time & concentration on the Tier-3 distributors. The resolution of the queries should be fast enough to satisfy the distributors Time to time presentation/training classes about the products should be there. There should be more number of Relationship Managers (RM) in different regions because one RM can handle a maximum of 100 distributors efficiently and also to cover untapped market. Regular activities like canopy should be done so as to get more interaction with the distributors.
Page | 110
SPECIFIC RECOMMENDATIONS AND SUGGESTIONS Company should focus on 35-40 years age group most. Company should focus on service sector based clients and focus on 2-5 lakhs per annum income level group of clients because they contribute more mutual fund investment. Company should focus more on married clients because they have more liabilities than single individuals. Though people are becoming aware about mutual funds because of media and due to excess use of IT but company needs to educate and aware them and focus on 30-40 years age group, service sector based clients, 2-5 lakhs per annum income level group because India still has a huge opportunity in mutual fund investment area. Still it has to grow rapidly.
Page | 111
Page | 112
PRIME REFFERENCE Fact Sheet of the Reliance Mutual Fund Mutual Fund Mentor Pocket books of Reliance Mutual Fund Company Website- www.reliancemutual.com “EDGE”- The Learning Academy of Reliance Mutual Fund OTHER WEBSITES www.ici.org www.google.co.in www.amfiindia.com www.books.global-investor.com www.moneycontrol.com www.nseindia.com www.jmfinancial.com www.valueresearchonline.com www.bseindia.com www.rbi.org.in www.economictimes.indiatimes.com www.yahoofinance.com www.mutualfundsindia.com www.investopedia.com www.wikipedia.org www.thehindu.com www.indiastudychannel.com www.oppapers.com www.sebi.gov.in www.managemetparadise.com www.scribd.com www.ssrn.com www.citehr.com
Page | 113
1. Name 2. Gender: 3. Age: : MALE < 30 Years 50-60 4. Occupation: Service Professional 5. Your Income Level: < 2 Lacs 8-12 Lacs 6. How much do you save annually? 15-20% 7. Education Level: ≤ 8 Standard Post Graduate 8. Marital Status: Single 5% > 20% ≤ 12 Standard Doctorate & Others Married Graduate FEMALE 30-40 > 60 Years Business Retired 2-5 Lacs > 12 Lacs 5-10% 10-15% Student Others 5-8 Lacs 40-50
9. What is your primary objective for your investment? Preservation of Principal Conservative Growth Regular Income Aggressive Growth Yes Growth and Income Tax Benefit No
10. Do you know about the Mutual Funds?
11. Do you know that mutual fund is related to share market? Yes 12. Have you ever invested in mutual fund? Yes If no: 13.What is/are the reason? Never Thought about it Lack of Knowledge Page | 114 No No Don’t Know
Do not have enough savings
If others (please specify)_____________________________________________________ If yes: (please tick all applicable options) 14. Which company/companies? Franklin Templeton Sundaram Finance Kotak Mahindra Reliance M.F LIC mutual fund Tata mutual fund Birla sun life UTI mutual fund ICICI M.F. SBI M.F.
Any other (please specify)____________ If Reliance Mutual Fund: 15. What are the reasons? Brand name Good service ____________ Variety Past performance of funds Availability Other (Please specify)
16. Why do you prefer investment in mutual fund to other investment avenue? Lack of expertise in stock market Liquidity Transparency __________________________ Better return over a long period of time Tax efficiency Other (Please Specify)
17. Which are the primary sources of your knowledge about Mutual Funds as an investment option? Corresponding to your choices how would you rate their influence on your final Mutual Fund purchase decision? Please rank them on a scale of 1-5 with 1 representing minimal influence and 5 representing Strong influence.
Source: Television Source: Internet Source: Newspaper
Least Influential Least Influential Least Influential
1 1 1 1 1
2 2 2 2 2
3 3 3 3 3
4 4 4 4 4
5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential Page | 115
Source: Scholarly Journals / Articles Least Influential Source: Friends / Relations Least Influential
Source: Financial Advisor /CA
5 Most Influential
18. How do you prioritize the reason for investment? Saving for future Tax incentives Returns Future outlook Brand value Risk factor Least Influential Least Influential Least Influential Least Influential Least Influential Least Influential 1 1 1 1 1 1 2 2 2 2 2 2 3 3 3 3 3 3 4 4 4 4 4 4 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential
19. Rank the various investments that you would invest your sum in Stocks RBI Bonds Company Debentures Mutual Funds Insurance products Fixed Deposits Post Office Schemes Least Influential Least Influential Least Influential Least Influential Least Influential Least Influential Least Influential 1 1 1 1 1 1 1 2 2 2 2 2 2 2 3 3 3 3 3 3 3 4 4 4 4 4 4 4 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential
20. What factors affect your decision for investment in Mutual Fund? Economic scenario Company image Fund performance Fund manager’s image Tax incentive Least Influential Least Influential Least Influential Least Influential Least Influential 1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential 5 Most Influential
21. What kind of investment schemes you prefer in Mutual Fund? Growth schemes Sector specific schemes Balanced schemes Income schemes ELSS Liquid schemes Page | 116
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