“A STUDY ON COMPARATIVE ANALYSIS OF MUTUAL

FUNDS, IIFL Ltd at Hyderabad”

1.1 INTRODUCTION:

A mutual fund is a scheme in which several people invest their money for a common
financial cause. The collected money invests in the capital market and the money, which they
earned, is divided based on the number of units, which they hold. The mutual fund industry
started in India in a small way with the UTI Act creating what was effectively a small savings
division within the RBI. Over a period of 25 years this grew fairly successfully and gave
investors a good return, and therefore in 1989, as the next logical step, public sector banks
and financial institutions were allowed to float mutual funds and their success emboldened
the government to allow the private sector to foray into this area. The advantages of mutual
fund are professional management, diversification, economies of scale, simplicity, and
liquidity. The disadvantages of mutual fund are high costs, over-diversification, possible tax
consequences, and the inability of management to guarantee a superior return. The biggest
problems with mutual funds are their costs and fees it include Purchase fee, Redemption fee,
Exchange fee, Management fee, Account fee & Transaction Costs. There are some loads
which add to the cost of mutual fund. Load is a type of commission depending on the type of
funds.

Mutual funds are easy to buy and sell. You can either buy them directly from the fund
company or through a third party. Before investing in any funds one should consider some
factor like objective, risk, Fund Manager’s and scheme track record, Cost factor etc. There
are many, many types of mutual funds. You can classify funds based Structure (open-ended
& close-ended), Nature (equity, debt, balanced), Investment objective (growth, income,
money market) etc. A code of conduct and registration structure for mutual fund
intermediaries, which were subsequently mandated by SEBI. In addition, this year AMFI was
involved in a number of developments and enhancements to the regulatory framework. The
most important trend in the mutual fund industry is the aggressive expansion of the foreign
owned mutual fund companies and the decline of the companies floated by nationalized
banks and smaller private sector players.

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 1.2 NEED OF THE STUDY:

The primary objective of doing this project is to know about mutual funds and its
functioning with special reference debt and equity funds SBI Mutual Funds. This project
helps us to know in detail about mutual fund industry right from its inception stage, growth
and future prospects. It also helps in understanding different schemes of mutual funds. The
study is focused on SBI mutual funds and their schemes like equity, income, balance as well
as the returns associated with those schemes.

The project study tries to ascertain the asset allocation, entry load, exit load, associated with
the mutual funds. Ultimately this would help in understanding the benefits of mutual funds to
investors.

1.3 OBJECTIVES OF THE STUDY:

a) To know about the concept of mutual funds and their functioning

b) To understand the advantages and disadvantages and types of mutual funds.

c) To analyze different debt and equity funds being offered by SBI MAGNUM mutual fund.

d) To advise the potential investors on whether to invest or not in these funds.

e) To draw conclusions and to find out the attractiveness of mutual funds.

1.4 SCOPE OF THE STUDY:

(1) The Study presents basic concept and trends in the Mutual fund Industry.

(2) The Study enables a fresh investor to understand easily the various benefits offered by
Mutual Funds and their working in the Market.

(3) The Study provides a clear idea on growth of Mutual Funds from past to the present
scenario and its scope in the future.

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(4) The Study gives a overview of debt and equity funds of SBI Magnum.

(5) At the end of the study, one can conclude what type of investments would be ideal
with reference to the risk taking abilities of the investors and which type of
investments would suit their financial needs and goals.

1.5 RESEARCH METHODOLOGY:

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

The Method employed in the investigation depends on the purpose and scope of the study.

1.5.1 Research Design:-

Research design is some statement or specification of procedures for collecting and analyzing
the information required for the solution of some specific problem. Here, the exploratory
research is used as investigation and is mainly concerned with determining the trends and
returns in Mutual Funds and Bank returns.

1.5.2 Data Collection Methods:-

The key for creating useful system is selectivity in collection of data and linking that
selectivity to the analysis and decision issue of the action to be taken. The accuracy of
collected data is of great significance for drawing correct and valid conclusions from the
research

1.5.3 Sources of Information:-

Data available in marketing research are either primary or secondary. Primary Data is not
included in this study, only secondary data is taken in to account since, it is a comparative
analysis. Secondary data can be defined as - “data collected by some one else for purpose
other than solving the problem being investigated”. Secondary data is collected from external

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sources which include information from published material of SEBI and some of the
information is collected online. The data sources also include various books, magazines,
newspapers, websites etc.

1.6 CHAPTERIZATION:
The entire research work carried out in IIFL Ltd, Hyderabad. It is categorized into 5
chapters, Chapter – 1 gives a brief idea about Introduction, scope, Objectives, need and
limitations with this Funds. Chapter – 2 provides the general information about the Industry
profile i.e., how the analysis took place in India, how it with stranded in the market, what are
their duties etc., and Company profile provides an idea about, when the organization was
established, what are products they are offering to the public, responsibilities and the awards
they won for their services. Chapter – 3 provides general theoretical information about
Mutual Funds, its types, advantages and limitations. Chapter – 4 provides the data analysis,
showing the performance of PSU Fund (Mutual Funds) from past 5 years and interpretations
for the results. Chapter – 5 gives the information about findings observed through the results,
suggestions to the findings and finally conclusions.

1.7 LIMITATIONS:

 The data that is considered for the Comparative analysis of various Mutual Funds
returns of debt and equity fund are only for a short period of one year and performance
during this period may not be same in future.
 As the project period is limited, the long-term data of Mutual Funds are not taken into
consideration in analysis section.
 Mutual Funds of only SBI funds are taken into account for analyzing their performance,
because the time duration of the project is short and limited. The performance of these
funds since inception are not considered.
 The data taken into account for analysis is very general. Confidential data is ignored as
it is highly sensitive. As a result the information presented in the research report is
limited.

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2.1 Industry Profile:

GROWTH AND HISTORY OF MUTUAL FUNDS

The First investment trust (now called Mutual Fund) began in the Netherlands in the
early 1800s. The first in the U.S. was the New York Stock Trust, which started in 1889. Since
Boston was the economic center of the nation until the turn of the century, the majority of
funds started there—Fidelity, Pioneer and Putnum Fund, to name a few. A Fund that was
comprised of both stocks and bonds (the Wellington Fund) started in 1928 and is still part of
Vanguard. As the 20's crashed to a close, there were 10 Mutual Funds in the nation.

Foundation for the Mutual Fund in India was laid by the parliament in 1963. With the
enactment of Unit Trust of India (UTI) Act the then Finance Minister Mr. T.T.
Krishnamacharya who initiated the act made it clear to the parliament act “UTI would
provide an opportunity for the middle and lower income groups to acquire property in
the form of share.” Thus UTI came out with the mission of catering to the needs of
individuals investors whose means are small, with its maiden fund, an open ended fund in
1964.
The Indian Mutual Fund Industry can be studied in four phases:-

FIRST PHASE BETWEEN 1964 – 1987

The genesis of the Mutual Fund industry in India can be traced back to 1964 with the
setting up of the Unit Trust of India (UTI) by the Government of India. Since then UTI has
grown to be a dominant player in the industry. UTI is governed by a special legislation, the
Unit Trust of India Act, 1963. It was setup by the Reserve Bank of India and functioned
under the regulatory and administrative control of RBI. In 1978, UTI was de-linked from the
RBI and the administrative control in place of RBI. The first scheme launched by UTI was
unit Scheme 1964. At the end of 1988, UTI had Rs. 6700 crores of assets under the
management.

SECOND PHASE 1987-1993 (Entry of Public Sector Funds)

Till 1986, UTI was the only mutual player in India. The industry was opened up for
wider participation in 1987 when public sector banks and insurance companies were
permitted to setup Mutual Funds.

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 Since then, many public sector banks have setup Mutual Funds. SBI Mutual Fund was
the first non-UTI Mutual Funds established in June 1987 followed by can bank Mutual
Funds, Punjab National Bank Mutual Fund, India bank Mutual Funds, Bank of India, Bank of
Boroda Mutual Funds. Also the two Insurance companies LIC (June 1987) and GIC
(December 1990) have established Mutual Funds. At the end of 1993, the Mutual Fund
industry had assets under management of Rs. 47004 crores. This phase changed the mind set
of the investors.

THIRD PHASE 1993-2003

With the entry of private sector funds in 1993, a new era started in the Indian Mutual
Fund Industry, giving the Indian investors a wider choice of fund families. Also, 1993 was
the year in which the first Mutual Funds regulations came into being, under which all Mutual
Funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now
merged with Franklin Templeton) was the first sector Mutual Fund registered in July 1993.

Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation)
1993, which for the first time established a comprehensive regulatory framework for the
Mutual Fund Industry. Since then several Mutual Funds have been setup by the private and
joint sectors.

FOURTH PHASE - Since February 2003

In February 2003, following the repeal of the Unit Trust of India act 1963, UTI was
bifurcated into separate entities. One is the specified undertaking of the UTI with asset under
management of Rs. 29835 crores as at the end of January 2003, representing broadly, the
assets of US 64 schemes, assured return and certain other schemes.

The second is UTI Mutual Fund ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered in SEBI and functions under the Mutual Fund regulations. With the bifurcation of
the erstwhile UTI which had in March 2000 more than Rs. 76000 crores of assets under
management and with the setting up of the UTI Mutual Fund.

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ASSOCIATION OF MUTUAL FUNDS OF INDIA

With the increase in Mutual Fund players in India, a need for mutual fund association in India
was generated to function as a non-profit organization. Association of Mutual Funds in India
(AMFI) was incorporated on 22nd August 1995.

AMFI is an APEX body of all Asset Management Companies (AMC), which has been
registered with SEBI. Till date all the AMC’s are that have launched mutual fund schemes
are its members. It functions under the supervision and guidelines of its Board of Directors.

Association of Mutual Funds of India has brought down the Indian Mutual Fund
Industry to a professional and healthy market with ethical lines enhancing and maintaining
standards. It follows the principle of both protecting and promoting the interests of mutual
funds as well as their unit holders.

Objectives :
The AMFI works with 30 registered AMC’s of the country. It has certain defined objectives,
which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:

 This mutual fund association of India maintains high professional and ethical standards in
all areas of operation of the industry.
 It also recommends and promotes the top class business practices and code of conduct
which is followed by members and related people engaged in the activities of MF and
asset management. The agencies who are by any means connected or involved in the field
of capital markets and financial services also involved in this code of conduct of the
association.
 AMFI interacts with SEBI and works according to SEBI’s guidelines in the mutual fund
industry.
 AMFI do represent the Government of India, the Reserve Bank of India and other related
bodies on matters relating to the Mutual Fund Industry.
 It develops a term of well-qualified and trained Agent distributors. It implements a
programmed of training and certification for all intermediaries and other engaged in the
mutual fund industry.

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 AMFI undertakes all India awareness programmed for investors in order to promote
proper understanding of the concept and working of mutual funds.
 At last but not the least association of mutual fund of India also disseminate information
on Mutual funds Industry and undertakes studies and research either directly or in
association with other bodies.

BEFORE INVESTING IN MUTUAL FUNDS:

1) First choose a scheme (equity/debt/balanced) according to your returns/risk profile.

2) Select the scheme which is giving income according to your requirements. (Short term
returns like income fund, long term returns like growth fund).
3) Select the fund which gives maximum returns and high security and liquidity and low
risk.
4) Then compare similar schemed offered by various MF’s and their track record. Examine
the track record of the mutual fund and its sponsors.
5) Study the track record of the fund manager.
6) Examine the investment strategy of the scheme.
7) Check the load (entry/exit).
8) Check out on special facilities like switching options, account statements,
sale/repurchases policy etc.
9) Do not buy in to new schemes that are deceptively being offered at par.

RIGHTS AND OBLIGATIONS OF INVESTORS:

1) Right to proportionate “beneficial ownership”.
2) Right to timely service.
3) Right to information.
4) Right to approve changes in fundamental attributes.
5) Rights to wind up a scheme.
6) Right to terminate the AMC.

LEGAL LIMITATIONS TO INVESTORS RIGHTS:

1) Investors cannot sue the trust.
2) Investors can initiate legal proceedings against the trustees.

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3) Sponsors of mutual funds have no obligations to meet the shortfall in non-assured
schemes.
4) Only if the OD has specifically provided such guarantee by a named sponsor, the
investors have the right to sue the sponsor.
5) Prospective investors cannot sue the trust/the AMC or any other constituent.
Companies act cannot protect investors as fund investors are neither share holders in the
AMC nor depositors.

2.2 IIFL Ltd:

The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd and its

subsidiaries, is one of the leading players in the Indian financial services space. IIFL offers

advice and execution platform for the entire range of financial services covering products

ranging from Equities and derivatives, Commodities, Wealth management, Asset

management, Insurance, Fixed deposits, Loans, Investment Banking, Gold bonds and other

small savings instruments. IIFL recently received an in-principle approval for Securities

Trading and Clearing memberships from Singapore Exchange (SGX) paving the way for IIFL

to become the first Indian brokerage to get a membership of the SGX. IIFL also received

membership of the Colombo Stock Exchange becoming the first foreign broker to enter Sri

Lanka. IIFL owns and manages the website, www.indiainfoline.com, which is one of India’s

leading online destinations for personal finance, stock markets, economy and business.

IIFL has been awarded the ‘Best Broker, India’ by Finance Asia and the ‘Most improved

brokerage, India’ in the Asia Money polls. India Infoline was also adjudged as ‘Fastest

Growing Equity Broking House - Large firms’ by Dun & Bradstreet. A forerunner in the field

of equity research, IIFL’s research is acknowledged by none other than Forbes as ‘Best of the

Web’ and ‘…a must read for investors in Asia’.

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The company’s research is available not just over the Internet but also on international wire

services like Bloomberg, Thomson First Call and Internet Securities where it is amongst one

of the most read Indian brokers.

A network of over 2,500 business locations spread over more than 500 cities and towns

across India facilitates the smooth acquisition and servicing of a large customer base. All our

offices are connected with the corporate office in Mumbai with cutting edge networking

technology. The group caters to a customer base of about a million customers, over a variety

of mediums viz. online, over the phone and at our branches.

VISION

The company’s vision is to be the most respected company in the financial services space.

COMPANY STRUCTURE:

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India Infoline Limited:

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock

Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of

both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory

Services and Portfolio Management Services. It offers broking services in the Cash and

Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with

NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients

trading in the equities market. It has recently launched its Investment banking and

Institutional Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients.

These services are offered to clients as different schemes, which are based on differing

investment strategies made to reflect the varied risk-return preferences of clients.

India Infoline Media and Research Services Limited:

The services represent a strong support that drives the broking, commodities, mutual fund

and portfolio management services businesses. It undertakes equities research which is

acknowledged by none other than Forbes as 'Best of the Web' and '…a must read for

investors in Asia'. India Infoline's research is available not just over the internet but also on

international wire services like Bloomberg (Code: IILL), Thomson First Call and Internet

Securities where India Infoline is amongst the most read Indian brokers.

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India Infoline Commodities Limited:

India Infoline Commodities Pvt Limited is engaged in the business of commodities broking.

Their experience in securities broking empowered them with the requisite skills and

technologies to allow them to offer commodities broking as a contra-cyclical alternative to

equities broking. It enjoys memberships with the MCX and NCDEX, two leading Indian

commodities exchanges, and recently acquired membership of DGCX. It has a multi-channel

delivery model, making it among the select few to offer online as well as offline trading

facilities.

India Infoline Marketing & Services:

India Infoline Marketing and Services Limited is the holding company of India Infoline

Insurance Services Limited and India Infoline Insurance Brokers Limited.

 India Infoline Insurance Services Limited is a registered Corporate Agent with the

Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate

Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest private

Life Insurance Company. India Infoline was the first corporate agent to get licensed

by IRDA in early 2001.

 India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is

a newly formed subsidiary which will carry out the business of Insurance broking.

India Infoline Investment Services Limited:

Consolidated shareholdings of all the subsidiary companies engaged in loans and financing

activities under one subsidiary. Recently, Orient Global, a Singapore-based investment

institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services.

This will help focused expansion and capital raising in the said subsidiaries for various

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lending businesses like loans against securities, SME financing, distribution of retail loan

products, consumer finance business and housing finance business. India Infoline Investment

Services Private Limited consists of the following step-down subsidiaries.

 India Infoline Distribution Company Limited (distribution of retail loan products)

 Moneyline Credit Limited (consumer finance)

 India Infoline Housing Finance Limited (housing finance)

IIFL (Asia) Private Limited:

IIFL (Asia) Private Limited is wholly owned subsidiary which has been incorporated in

Singapore to pursue financial sector activities in other Asian markets. Further to obtaining the

necessary regulatory approvals, the company has been initially capitalized at 1 million

Singapore dollars.

IIFL MANAGEMENT

 THE MANAGEMENT TEAM

Mr. Nirmal Jain, Chairman & Managing Director

Nirmal Jain, MBA (IIM, Ahmadabad) and a Chartered and Cost Accountant, founded India’s

leading financial services company India Infoline Ltd. in 1995, providing globally acclaimed

financial services in equities and commodities broking, life insurance and mutual funds

distribution, among others.

Mr. R Venkataraman, Executive Director

R Venkataraman, co-promoter and Executive Director of India Infoline Ltd., is a B. Tech

(Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA (IIM

Bangalore). He joined India Infoline board in July 1999.

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THE BOARD OF DIRECTORS

Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline Ltd.

comprises:

Mr. Nilesh Vikamsey, Independent Director

Mr. Vikamsey, Board member since February 2005 - a practicing Chartered Accountant and

partner (Khimji Kunverji & Co., Chartered Accountants), a member firm of HLB

International, headed the audit department till 1990 and thereafter also handles financial

services, consultancy, investigations, mergers and acquisitions, valuations etc

Mr Kranti Sinha, Independent Director

Mr. Kranti Sinha — Board member since January 2005 — completedhis his masters from

the Agra University and started his career as a Class I officer with Life Insurance Corporation

of India.

Mr Arun K. Purvar, Independent Director

Mr. A.K. Purvar – Board member since March 2008 – completed his Masters degree in

commerce from Allahabad University in 1966 and a diploma in Business Administration in

1967.

PRODUCTS & SERVICES:

Equities:-

India Infoline provided the prospect of researched investing to its clients, which was hitherto

restricted only to the institutions. Research for the retail investor did not exist prior to India

Infoline. India Infoline leveraged technology to bring the convenience of trading to the

investor’s location of preference (residence or office) through computerized access. India

14
Infoline made it possible for clients to view transaction costs and ledger updates in real time.

The Company is among the few financial intermediaries in India to offer a complement of

online and offline broking. The Companies network of branches also allows customers to

place orders on phone or visit our branches for trading.

Commodities:-

India Infoline’s extension into commodities trading reconciles its strategic intent to emerge as

a one stop solutions financial intermediary. Its experience in securities broking has

empowered it with requisite skills and technologies. The Companies commodities business

provides a contra-cyclical alternative to equities broking. The Company was among the first

to offer the facility of commodities trading in India’s young commodities market (the MCX

commenced operations in 2003). Average monthly turnover on the commodity exchanges

increased from Rs 0.34 bn to Rs 20.02 bn.

Insurance:-

An entry into this segment helped complete the client's product basket; concurrently, it

graduated the Company into a one stop retail financial solutions provider. To ensure

maximum reach to customers across India, it has employed a multi pronged approach and

reaches out to customers via our Network, Direct and Affiliate channels. India Infoline was

the first corporate in India to get the agency license in early 2001.

Invest Online:-

India Infoline has made investing in Mutual funds and primary market so effortless. Only

registration is needed. No paperwork no queues and No registration charges. India Infoline

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offers a host of mutual fund choices under one roof, backed by in-depth research and advice

from research house and tools configured as investor friendly.

Wealth Management:-

The key to achieving a successful Investment Portfolio is to have a carefully planned

financial strategy based on a thorough understanding of the client's investment needs and risk

appetite. The IIFL Private Wealth Management Team of financial experts will recommend an

appropriate financial strategy to effectively meet customer’s investment requirements.

Asset Management:-

India Infoline is a leading pan-India mutual fund distribution house associated with leading

asset management companies. It operates primarily in the retail segment leveraging its

existing distribution network to reach prospective clients. It has received the in-principle

approval to set up a mutual fund.

Portfolio Management:-

IIFL Portfolio Management Service is a product wherein an equity investment portfolio is

created to suit the investment objectives of a client. India Infoline invests the client’s

resources into stocks from different sectors, depending on client’s risk-return profile. This

service is particularly advisable for investors who cannot afford to give time or don't have

that expertise for day-to-day management of their equity portfolio.

Newsletters:-

As a subscriber to the Daily Market Strategy, client’s get research reports of India Infoline
research team on a priority basis. The India infoline Weekly Newsletter is the flashback for
the week gone by. A weekly outlook coupled with the best of the web stories from India

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Infoline and links to important investment ideas, Leader Speak and features is delivered in
the client’s inbox every Friday evening.

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3.1 Theoretical Perspective:

A Mutual Fund is a financial intermediary which acts as an instrument of investment. It

collects the funds from different investors to a common pool of investible funds and then
invest these funds in a wide variety of investment opportunities in diversified portfolios of
securities such as Money Markets instrument, corporate and government bonds and equity
shares of joint stock companies.
The investment may be diversified to spread risk and to ensure good return to the investors.
The Mutual Funds employ professional, experts and investment consultants to conduct
investment analysis and then to select the portfolio of securities where the funds are to be
invested.
Each investor owns units, which represent a portion of the holdings of the fund. You can
make money from a MF in three ways:-

1. Income is earned from dividends on stocks and interest on bonds. A Fund pays out nearly
all income it receives over the year to fund owners in the form of a distribution.
2. If the fund sells securities that have increased in price, the fund has a capital gain. Most
funds also pass on these gains to investors in the form of dividends.
3. If fund holdings increase in price but are not sold by the fund manager, the fund’s shares
increase in price. You can then sell your Mutual Fund units for a profit. Funds will also
usually give you a choice either to receive a cheque for dividends or to re-invest the same
and get more units.

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 FIGURE SHOWING THE WORKING OF MUTUAL FUND

STRUCTURE AND CONSTITUENTS OF FUND

MUTUAL
FUND

Sponsor Trustee AMC Custodian

SPONSOR:
 Establishes the MUTUAL FUND
→ Need to have sound financial track record.
→ Appoints TRUSTEES.
→ Appoints Asset Management Company.
→ Must contribute 40% of the net worth of the AMC.
 Sometimes this power is given by the sponsor to the trustees through the trust deed.
 At least 50% of directors on the board of Asset Management Company should be
independent of the sponsor.
 Asset Management Company shall not deal with any broker or firm associated with
sponsor beyond 5% of daily gross business of the Mutual Fund.

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 All securities transactions of the Asset Management Company with its associates should
be disclosed.

TRUSTEE:
 Manages the Mutual Fund and look after the operation of the appointed AMC.
 The investments are held by the Trustees, in a fiduciary responsibility.
 Trustees approve each Mutual Fund Scheme floated by AMC.
 Furnish report to SEBI on half yearly basis on AMC and Fund Functioning.

ASSET MANAGEMENT COMPANY:

 AMC acts as investment manager of the trust under the board supervision and direction of
the trustees.
 AMC floats the different Mutual Fund schemes.
 Submits report to the Trustees on quarterly basis, mentioning activity and compliance
factor.
 AMC is responsible to the trustees.
 AMC fees have a ceiling, decided by SEBI.
 Should have a net worth of at least Rs.10 crores at all the times.

CUSTODIAN:
 Appointed by board of trustees for safekeeping of securities.
 It’s an entity independent of sponsors.

SEBI regulates the securities market in India. According to SEBI every Mutual Fund 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 Fund are required to be registered with SEBI
before they launch any Scheme.

ORGANISATION OF MUTUAL FUND:

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CHARACTERISTICS OF MUTUAL FUNDS:
 A Mutual Fund actually belongs to the investors who have pooled their funds. The
ownership of the Mutual Fund is in the hands of the investors.
 Mutual funds are trusts or registered associations managed by investment professionals
and other service providers, who earn a fee for their services from the fund.
 The pools of the funds are invested in a portfolio of marketable investments (Shares and
Securities). The value of the portfolio is updated everyday.
 Mutual funds collect money from small investors and in return, they will issue a
certificate in units.
 The investor’s share in the fund is denoted by “UNITS". The value of the units changes
with the change in the portfolio’s value every day.
 The profits of investments will be distributed to the unit holders. The unit holders can sell
their units in the open market at ‘Net Asset Value’ (NAV).

NET ASSET VALUE (NAV):

Mutual Funds invest the money collected from the investors in securities markets. In
simple words, Net Asset Value is the market value of the securities scheme also varies on day
to day basis. The NAV per unit is the market value of securities of a scheme divided by the
total number of units of the scheme on any particular date. The performance of a particular
scheme of a Mutual Fund is denoted by “Net Asset Value”.

For example; if the market value of securities of a MF Scheme is Rs. 200 lakhs and
the Mutual Fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per
unit of the fund is Rs. 20. NAV is required to be disclosed by the MF on a regular basis –
daily or weekly – depending on the type of scheme.

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NAV = Market value of the fund’s investments + Receivables + Accrued Income –
Liabilities – Accrued Expenses
Number of Outstanding units
OBJECTIVES OF MUTUAL FUNDS:
The objectives sought to be achieved by Mutual funds are as follows :-

 To provide an opportunity for lower income groups to acquire without much difficulty
property in the form of shares.
 To cater mainly to the need of individual investors whose means are small?
 To Manage investor’s portfolio’s in a manner that provides regular income, growth,
safety, liquidity and diversification.

SCHEMES OF MUTUAL FUNDS:

Mutual fund schemes are usually open-ended (Perpetually open for investors and
redemption) or close-ended (with a fixed term). A Mutual Fund scheme issues units that are
normally priced at Rs.10/- during the initial offer. The number of units you own against the
total number of units issued by a Mutual Fund scheme determines your share in the profits or
losses in the scheme.

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TYPES OF MUTUAL FUND SCHEMES

The Mutual Funds can be classified under the following types:

ACCORDING TO STRUCTURE:

STRUCTURE

OPEN-ENDED CLOSED-ENDED
INTERVAL SCHEME
SCHEME SCHEME

OPEN - ENDED SCHEME

An open-ended scheme is a scheme in which an investor can buy and sell units on a
daily basis. The scheme has a perpetual existence and flexible, ever changing corpus. Open-
Ended schemes do not have a fixed maturity period. The investors are free to buy and sell
any number of units, at any point of time, at prices that are linked to the NAV of the units.

In these schemes the investor can invest and disinvest any amount, any time after a short
initial lock – in period. This scheme gives investors with instant liquidity and fund announces
sale and repurchase price from time to time. The units can be bought from and sold to any
Mutual Fund.
Advantages of Open-ended funds over Close-ended funds:
 Any time Entry Option.
 This provides ready liquidity to the investors and avoids reliance on transfer deeds,
signature verifications and bad deliveries.
 Allows to enter the fund at any time and even to invest at regular intervals.
 Any time Exit Option.

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CLOSE – ENDED SCHEME
A Close-ended scheme has a stipulated maturity period. E.g. 5-7 years. A Close-ended
scheme is one in which the subscription period for the Mutual Fund remains open only for a
specific period, called the ‘redemption period’. At the end of this period, the entire corpus is
disinvested and the proceeds distributed to unit holders. After final distribution the scheme
ceases to exist. Such schemes can be rolled over by approval of unit holders.

Reason’s for fluctuations in NAV

 Investor’s doubts about the abilities of the fund’s management.
 Lack of sales effort (Brokers earn less commission on closed end schemes than on open
ended schemes).
 Riskiness of the fund.
 Lack of marketability of the fund’s units.
INTERVAL SCHEMES
Interval schemes are those that combine both the features of both open-ended and close-
ended schemes. The units may be traded on the stock exchange or may be open for sale
redemption during during pre–determined intervals at NAV related prices.

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 ACCORDING TO INVESTMENT OBJECTIVE

EQUITY SCHEME

DEBT OR BOND SCHEME

BALANCED SCHEME

INVESTMENT
OBJECTIVE
MONEY MARKET SCHEME

GROWTH & INCOME FUND

OTHER SCHEMES

ADVANTAGES OF MUTUAL FUNDS

The key advantages of both open and close-end Mutual Funds is that they put professional
managers with experience and access to sophisticated financial research to work for you this,
and other wide range of key benefits are as follows :-

1) Professional Management
Experienced portfolio managers carefully select a fund’s holdings according to the fund’s
seated investment objective. The portfolio management team continuously monitors and
evaluates the fund’s holdings to help make sure it keeps pace with changing market
conditions. The team decides when to buy and sell securities. There is a fee associated
with this professional management.

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2) Diversification
A Single diversified Mutual Fund may invest in dozens – even hundreds – of different
holdings. This approach may reduce the impact on your return if any one investment held
by the fund declines. Diversification spreads your assets among different types of
holdings and may be one of the best ways to protect yourself amid the complexity and
uncertainty of the financial markets.

3) Compounding
In a Mutual Fund, you may choose to reinvest your earnings automatically to buy more
shares. When you reinvest, not only do you have the potential to earn money on your
initial investment, you may also have the opportunity to earn money on the dividends and
capital gains you accumulate. Compounding may increase the impact of what you
contribute and can help your money grow faster. And the longer you invest, the greater
the potential growth.

4) Systematic Investing
You can invest in most mutual funds automatically through regular payments directly
from your bank account; you can start building a long-term investment program. With
systematic investing you invest a fixed amount of money at regular intervals regardless of
market conditions, helping out market fluctuations.

5) Hassle-free operations
With most Mutual Funds, buying and selling shares, changing distribution options, and
obtaining information can be accomplished conveniently by telephone, by mail, or online.
Although a fund’s shareholder is relieved of the day-to-day tasks involved in researching,
buying and selling securities, an investor will still need to evaluate a Mutual Fund based
on investment goals and risk tolerance before making a purchase decision. Investors
should always read the prospectus carefully before investing in any Mutual Fund.

6) Buying Power
When you invest in a mutual fund, you join the other investors in a pool of investment
money. The result is that you have a “partial stake” in each company the fund holds for a
relatively small amount of principal invested, while potentially offsetting some of the risk
associated with holding individual securities.
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7) Choice
There is an incredible array of mutual funds – more than 10,000 – available to meet your
specific Investment objective. Funds have different investment objectives and degrees of
investment risk – often indicated through asset classes and sub-classes, such as money
market funds, fixed income funds, balanced funds, growth and income funds, growth
funds and aggressive growth funds.

8) Liquidity
Mutual fund shares are liquid and orders to buy or sell are placed during market hours.
However, orders are not executed until the close of business when the NAV (Net Asset
Value) of the fund can be determined. Fees or commissions may or may not be
applicable. Fees and commissions are determined by the specific fund and the Institution
that executes the order.

DISADVANTAGE OF MUTUAL FUNDS:

1) Over Diversification
Diversification is usually a good thing because it reduces risk, but Mutual Funds
sometimes make small investments in so many securities that they become over
diversified. In other words, the Mutual Fund’s holdings in each security may be so small
that it is difficult to realize substantial return from any of those holdings, which in turn
means that the overall return for each investor is small.

2) Unused Cash
Your cash may occasionally serve as liquidity insurance rather than work for you as an
investment. The constant availability of shares is certainly convenient for investors in a
mutual fund, but it can also operate as a disadvantage. A Mutual Fund manager must
always prepare for the possibility than an investor will cash in his or her shares. As a
result Mutual Funds must maintain a ready cash supply at all times.
3) Fluctuating Returns
Mutual funds are like many other investments without a guaranteed return. There is
always the possibility that the value of your mutual fund will depreciate. Unlike fixed-

27
 income products, such as Bonds and Treasury Bills, mutual funds experience price
fluctuations along with stocks that make up the fund.

4) Costs Despite Negative Returns

Investors must pay sales charges, annual fees, service charges and other expenses
regardless of how the fund performs. In addition, depending on the timing of their
investment, investors may also have to pay taxes on any capital gains distribution they
receive – even if the fund went on to perform poorly after they bought shares.

5) Misleading Advertisements
The misleading advertisements of different funds can guide investors down the wrong
path. Some funds may be incorrectly labeled as growth funds, while others are classified
as small-cap or income.

6) Evaluating Funds
Not offer investors the opportunity to compare the P/E ratio, sales growth, earnings share,
etc. A Mutual Fund’s Net Asset Value gives the investors the total value of the Another
limitation of mutual fund is the difficulty they pose for investors interested in researching
and evaluating the different funds. Unlike stocks, mutual funds do fund’s portfolio less
liabilities.

7) Poor Transparency
Technology used for servicing of investors and for portfolio management and investment
decision making is poor and general efficiency and timeliness are lacking as a result of
antiquated methods of operation. Telex, telephone and communication systems are poor
and antiquated.

RISK ASSOCIATED WITH MUTUAL FUND INVESTMENT

The Principal that the greater risk you take, the greater the potential reward.
Typically, risk is defined as short – term price variability. But on a long – term basis, risk is
the possibility that your accumulated real capital will be insufficient to meet your financial
goals. And if you want to reach your financial goals, you must start with an honest.

28
 At the cornerstone or investing is the basic appraisal of your own personal comfort
zone with regard to risk. Individual tolerance for risk varies, creating a distinct ‘investment
personality’ for each investor. Some investors can accept short-term volatility with ease,
others with near panic. So whether you consider you investment temperament to be
conservative, moderate or aggressive, you need to focus on how comfortable or
uncomfortable you will be as the value of your investment moves up or down

TYPES OF RISK
All investments involve some form of risk. Even an insured band account is subject to the
possibility that inflation will rise faster than your earnings, leaving you with less real
purchasing power than when you started (Rs.1000 gets you less than it got your father when
he was your age). Consider these common types of risks and evaluate them against potential
rewards when you select an investment.

1) Market Risk: At times the prices or yields of the all the securities in a particular
market rise or fall due to broad outside influences. When this happens, the stock prices of
both an outstanding, highly profitable company and a fledging corporation may be
affected. This change in price is due to “Market Risk”.

2) Inflation Risk: Some times referred to as “loss of purchasing power”. Whenever

inflation sprints forward faster than the earnings on your investment, you run the risk that
you’ll actually be able to buy less, not more. Inflation risk also occurs when prices rise
faster than your return.

3) Credit Risk: In short, how stable is the company or entity to which you lend your
money when you invest. How certain are you that it will be able to pay the interest you
are promised, or repay your principal when the investment matures.

29
 Market

Inflation

Credit

Interest Rate

TYPE OF
RISKS
Employees

Exchange Rate

Investment

Government Policies

4) Interest Risk: Changing interest rates affect both equities and bonds in many ways.
Investors are minded that “predicting” which way rates Effect of loss rev professionals
and inability to adapt:
An industries key asset is often the personnel who run the business i.e. intellectual
properties or the key employees of the respective companies. Given the ever-changing
complexion of few industries and the high obsolescence levels, availability of qualified,
trained and motivated personnel is very critical for the success of industries in few
sectors. It is, therefore, necessary to attract key personnel and also to retain them to meet
the changing environment and challenges the sector offers. Failure or inability to
attract/retain such qualified key personnel may impact the prospects of the companies in
the particular sector in which fund invests.

30
5) Exchange risk: A number of companies generate revenues in foreign currencies and
may have investments or expenses also denominated in foreign currencies. Changes in
exchange rates may, therefore, have a positive negative impact on companies which in
turn would have an effect on the investment of the fund.

6). Changes in government policy: Changes in government policy especially in regard to

the tax benefits may impact business prospects of the companies leading to an impact on
the investments made by the fund.

RISK RETURN GRID

RISK
TOLERANCE/ SUITABLE BENEFITS
FOCUS
RETURN PRODUCTS OFFERED BY
EXPECTED MF’S
Bank/company FD, Debt Liquidity, Better
Low Debt
based Funds Post-Tax return
Balanced Funds, some Liquidity, Better
Diversified Equity Post-Tax returns,
Partially Debt,
Medium Funds are some debt Better Management,
Partially Equity
Funds, Mix of share and Diversification
Fixed Deposits
Capital Market, Equity Diversification,
Funds (Diversified as Expertise in stock
High Equity well as Sector) picking, Liquidity,
Tax free dividends

COST INVOLVED IN MUTUAL FUNDS

An investor must know that there are certain costs can be classified into 2 broad categories:

 Operating expenses - Which are paid out of the funds earnings

 Sales charges - That are directly deducted from your investment. It is not

31
 compulsory that every mutual fund levy sales charges but
they certainly have operating expenses. No doubt they
influence returns on investment in a fund.
 Operating expenses
These referred to cost incurred to operate a mutual fund. Advisory fees paid to
investment mangers, Audit fees to chartered accountant, custodial fees, register and transfer
agent fees, trustee fee, agent commission. Operating expenses also known as expenses ratio
which is annual expenses expressed as a percentage of the funds average daily net assets
mutual funds. The break up of these expenses is required to be reported in the schemes offer
document (or) prospectus

Operating expenses
Expenses Ratio = -----------------------------
Average Net Assets

For instant, if funds Rs. 100 Crores and expenses 20 lakhs. Then expenses ratio is 2%
expenses ratio is available in the offer document and from historical per unit statistics
included in the financial results of the fund which are published by annually. UN audited for
the half year ending Sep’30 and audited for the physically year end in March 30.
Depending upon schemes and net asset, operating expenses are determined by limits
mandated by SEBI Mutual fund regulation Act. Any excess over specified limits as to be
born by Asset Management Company, the trustees or sponsors.

 Sales charges:
These are known commonly sales loads; these are charged directly to investor. Sales
loads are used by mutual fund for the payment of agent’s commission, distribution and
marketing expensed. These charges have not effect on the performance of the scheme. Sales
loads are usually express in percentage and or of two type’s front-end and back end.

 Front-end load: It is a one time fixed fee paid by an investor when buying a mutual
fund scheme. It determines public offer price which intern decides how much of your initial

32
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 a
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 allotted to the investor
Amount invested
Number of units allotted = --------------------------
Public offer price

10,000/10..20= 980 units at a NAV of Rs. 10

This means units worth 9800 are allotted to him on an initial investment of Rs. 10,000. Front
end loads tent to decrease as initial investment amount increase.

 Back end load:

May be a fixed fee redemption (or) a contingent deferred sales charges-a redemption
load continues so long as the redeeming or selling of the units of the units of a fund does not
take place in the event of back end load is applied. The redemption price is arriving at using
following formula.

Net Asset Value

Redemption price = ------------------------------
(1+ back end load)

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 unit of Rs. 10. Using the formula redemption price 10/ (1+0.02)
= Rs. 9.8
So, what the investor gets in hand is 9800(908*1000)

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 Contingent Deferred Sales Charges (CDSC):
Contingent deferred sales charges are a structured back end load. It is paid when the
units are redeemed during the initial years of ownership. It is for a pre determined period only
and reduced over the time you’re invested for a fund. The longer the investor remains in fund
the lower the CDSC. The SEBI (mutual fund Regulation 1996) stipulate that a CDSC may be
charge only for first 4 years after purchase of units and also stipulate the maximum CDSC
that can we charge every year. The SEBI Mutual funds Regulation 1996 do not allow either
the front end load or back end load to any combination is higher that 7%.

 Transaction cost:
Some funds may also impose a switch over fee which is a charge on transfer of
investment from one scheme to another with in a same mutual fund family and also to switch
from on plan (short term) to another (long term) within same scheme.

SYSTEMATIC INVESTING PLANS (SIPs)

It is an investment vehicle, where you need to deposit a fixed amount at regular

intervals (monthly, quarterly, etc.) in a MF scheme; just like you do in a recurring deposit
account with a bank or the post office. Regular Investing is not easy. Owing to lack of time,
most people invest sporadically. The result? The returns are rarely optimal. However, there is
a foolproof way of investing a fixed amount of money at regular intervals: Chola Mutual
Fund’s “Systematic Investment Plan” (SIP). SIP uses the concept of rupee cost averaging,
ensuring investors buy more when prices are low; and fewer units when prices are high.

Benefits of Systematic Investment Plans:

Discipline Saving:-

Inculcating discipline in your investment has been easier. Your investment is done on
a regular basis by the mutual fund without any intervention required by you. The best part is
that you will not feel the pain of having to save since the money will move from your bank
account automatically.

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Rupee Cost Averaging:-

The SIP helps you take advantage of the fluctuation in the stocks market by rupee
cost averaging. The investor buys more units when the prices are low and fewer units
cost. Assume you are investing Rs.1000/- each for next four months.

Month Amount Invested Purchase Price No of Units Purchased

1 1000 10 100

2 1000 09 111.11

3 1000 10 100

4 1000 11 90.9
Table 2 (b)
Total Investment = Rs. 4000; No of units purchased is 402.21. The average cost per units
work out to be Rs9.95.
As illustrated, over time you have a lower average cost per unit. By investing a fixed
amount of money at regular intervals, you as an investor stand to gain reasonable returns and
create significantly wealth-over time.

Lower Cost of Investing:-

Getting into SIP program does not required large investment amounts at regular
intervals. Even as small as Rs. 1000 can be invested at regular intervals.

Builds Investment Kitty:-

You have to give Post-Dated cheque (PDCs) to the mutual fund for deposit on
specific dates, for the amount you want to invest. These cheques are presented to your bank
account on these dates and the funds are withdrawn from your account for investment in the
mutual fund scheme at the prevailing NAV. Other than making the initial investment and
issuing the cheques at the beginning, no further efforts are required from you.

35
Overcoming market volatility:-
SIPs help you avoid missing market falls because of lack of time to track the market.
You don’t have the responsibility of actively monitoring market movement to be able to enter
during falls.

Market timing doesn’t work:-

Trying to time the markets, i.e. entering when the markets fall and exiting when the
markets rise, usually does not work. It is best to take the systematic investment approach to
stay above market
Redemption of Units:-
The units can be redeemed (i.e. sold back to the mutual fund) or switched-out subject
to completion of lock in period, on every business day at the redemption price. The
redemption/switch out request can be made by way of a written request, on a pre printed form
or by using the relevant tear off section of the transaction slip enclosed with the account
statement, which should be submitted at/may be sent by mail to any of the ISC’s.

Redemption price:-
Redemption price will be calculated on the basis of the loads of different plans/options. The
redemption price per unit will be calculated using the following formula:

Redemption Price = Application NAV * (1 – exit Load, if any)

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37