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SUMMER TRAINING REPORT

On

“Mutual Funds as an Investment


option”

For

SHAREKHAN ltd.
(In partial fulfillment of Degree of Master of Business Administration, Finance)

Submitted By: Submitted To:

Deepak Dhiman Mr. Atul


Gauri

MBA (Finance) (Asst.


Manager)
Roll. No. 7032221160 SHAREKHAN
LIMITED
Swami Vivekanand Institute Of Engineering &
Technology
Ramnagar ,Banur(Patiala)

DECLARATION

I hereby declare that the project work entitled “MUTUAL FUND AS AN


INVESTMENT OPTION ” is an authentic record carried out at SHAREKHAN,
Chandigarh as requirements of 2 month summer internship for the award of MBA
degree, SVIET, under the guidance of Mr. Atul Gauri, the deputy Asst. manager of
SHAREKHAN ltd., Chandigarh.

Date-25-july-2008

SIGNATURE OF THE STUDENT

DEEPAK DHIMAN
7032221160
MBA(finance)
SECTION A
SVIET,
BANUR.

CERTIFICATE

This is to certify that Deepak Dhiman studying in Third Semester of Masters Of


Business Administration in the Academic Year 2007-2009 at SVIET, BANUR, has
completed project on “MUTUAL FUNDS AS AN INVESTMENT OPTION”, under
my guidance for two months i.e. 01.05.2008 to 30.06.2008

The information presented in this project is true and original to the best of my
knowledge.

Date:

Place: (Ms.PARINEETA )
ACKNOWLEDGEMENT

Words are often to be a mode of expression for one’s deep feelings. I take this
opportunity to express my deepest gratitude to those who have generously helped
me in providing the valuable knowledge and expertise during my training.

At the very outset, I bow my head to thank the God Almighty, whose kind grace has
made it possible for me to bring this report.

I, hereby express my sincere gratitude to my Company Guide, Asst. Mgr. Mr. ATUL
GAURI for the valuable guidance and immense cooperation right from the day 1 st
till the end of the training without which this project would not have become a
successful one. I shall also like to specially thank Mrs. Parineeta (Faculty Guide) for
giving me the required guidance and removing any difficulties faced by me during
training.
Last but not the least I would like to thank Company staff to help me write this
report by providing full cooperation and continuous support during the course of this
assignment.

Thanks to my parents and SVIET , Faculty Members for their belief and constant
support. And finally, I would like to thank each and every person who has
contributed in any of the ways in my training.

Date-25-07-2008
Deepak
Dhiman

PREFACE

The Summer Internship Program forms an important component of education


SVIET. It is an attempt to bridge the gap between the academic institution and the
corporate world. It provides us an opportunity to apply the concepts learnt in real
life situations.
The perfect combination of Project and OJT help us in exploring our skills and
capabilities. This internship program makes a mark of hard work, sincerity,
knowledge and ethics on the host organization. It would also be a great learning
experience since it enables us to apply theory to practice and observe and learn the
current trends in the market.
It provides an opportunity for us to satisfy our inquisitiveness about corporate,
provides exposure to technical skills, and helps us to acquire social skills by being in
constant interaction with the professionals of other organizations.
It helps us in developing a network, which will be useful in enhancing in career
prospects. This will help to gain a deeper understanding of the work, culture,
deadlines, pressures etc. of an organization.

Thus, it helps to develop the qualities of a Manager by involving teamwork, goal


orientation and managing interpersonal relationships and by creating awareness
about strengths and weaknesses in the work environment.

ABSTRACT

In the corporate world of today customer is considered as the king and is placed at
the top and if you have won the customer then the gold coin is in your pocket. For
those two rules are to be followed they are:

Rule 1- customer is always right.

Rule 2- if not, refer to rule 1.


If these two rules are followed then the customers will always be happy and would
be having a better relation with the market. In business, building long term
relationship is very important. Relationship management plays a vital role while
dealing with financial instruments.

The project also is an endeavor towards unearthing the psyche of the end-users of
these financial products

For completion of this respective task, personal interaction with the executives was
done so as to get the first hand information.
TABLE OF CONTENTS

SERIAL NO. PARTICULARS PAGE NO.

1 COMPANY PROFILE 4

INTRODUCTION TO MUTUAL
2 FUNS V/S OTHER INVESTMENT 5
OPTIONS
MUTUAL FUNS V/S OTHER
3 7
INVESTMENT OPTIONS
PEOPLE PERCEPTION ABOUT
4 8
MUTUAL FUNDS
SUGGESTIONS AND
5 10
RECOMMENDATIONS

5.1 QUESTIONAIRRE 14

RETURNS OF VARIOUS
5.2 16
MUTUAL FUNDS

5.3 BIBLIOGRAPHY 20

5.4 INVESTMENT CHECK STYLE 23


SHAREKHAN BACKGROUND

Sharekhan is one of the leading retail brokerage of SSKI Group which is running
successfully since 1922 in the country. It is the retail broking arm of the Mumbai -based
SSKI Group, which has over eight decades of experience in the stock broking business.
Sharekhan offers its customers a wide range of equity related services including trade
execution on BSE, NSE, Derivatives, depository services, online trading, investment
advice etc.

The firm’s online trading and investment site - www.sharekhan.com - was


launched on Feb 8, 2000 . The site gives access to superior content and transaction
facility to retail customers across the country. Known for its jargon -free, investor friendly
language and high quality research, the site has a registered base of over 2 lacs
customers. The number of trading members currently stands at over 5 Lacs . While
online trading currently accounts for just over 2 per cent of the daily trading in stocks in
India, Sharekhan alone accounts for 27 per cent o f the volumes traded online .

The content -rich and research oriented portal has stood out among its
contemporaries because of its steadfast dedication to offering customers best -of-breed
technology and superior market information. The objective has been to let customers
make informed decisions and to simplify the process of investing in stocks.
On April 17, 2002 Sharekhan launched Speed Trade and Trade Tiger , are net-
based executable application that emulates the broker terminals along with host of
other information relevant to the Day Traders. This was for the first time that a net -
based trading station of this caliber was offered to the traders. In the last six months
SpeedTrade has become a de facto standard for the Day Trading community over the
net.

Sharekhan’s ground network includes over 700+ Shareshops in 130+ cities in


India.
Sharekhan has always believed in investing in technology to build its business.
The company has used some of the best -known names in the IT industry, like Sun
Microsystems , Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette,
Verisign Financial Technologies India Ltd, Spider Software Pvt Ltd. to build its trading
engine and content. The Citi Venture holds a majority stake in the company. HSBC,
The Citi Venture holds a majority stake in the company. HSBC, Intel & Carlyle are
the other investors.

With a legacy of more than 80 years in the stock markets, the SSKI group
ventured into institutional broking and corporate finance 18 years ago. Presently
SSKI is one of the leading players in institutional broking and corporate finance
activities. SSKI holds a sizeable portion of the market in each of these segments.
SSKI’s institutional broking arm accounts for 7% of the market for Foreign
Institutional portfolio investment and 5% of all Domestic Institutional portfolio
investment in the country. It has 60 institutional clients spread over India, Far East,
UK and US. Foreign Institutional Investors generate about 65% of the organization’s
revenue, with a daily turnover of over US$ 2 million. The Corporate Finance section
has a list of very prestigious clients and has many ‘firsts’ to its credit, in terms of the
size of deal, sector tapped etc. The group has placed over US$ 5 billion in private
equity deals. Some of the clients include BPL Cellular Holding, Gujarat Pipavav,
Essar, Hutchison, Planetasia, and Shopper’s Stop.

PRODUCTS OFFERED BY SHAREKHAN

1- Equity Trading Platform (Online/Offline).

2- Commodities Trading Platform (Online/Offline).

3- Portfolio Management Service.

4- Mutual Fund Advisory and Distribution.

5- Insurance Distribution.
REASONS TO CHOOSE SHAREKHAN LIMITED

Experience

SSKI has more than eight decades of trust and credibility in the Indian stock market. In the
Asia Money broker's poll held recently, SSKI won the 'India's best broking house for
2004' award. Ever since it launched Sharekhan as its retail broking division in February
2000, it has been providing institutional-level research and broking services to individual
investors.

Technology

With our online trading account you can buy and sell shares in an instant from any PC with
an internet connection. You will get access to our powerful online trading tools that will
help you take complete control over your investment in shares.

Accessibility

Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for


investors. These services are accessible through our centers across the country (Over 650
locations in 150 cities) over the Internet (through the website www.sharekhan.com) as well
as over the Voice Tool.

Knowledge

In a business where the right information at the right time can translate into direct profits,
you get access to a wide range of information on our content-rich portal,
www.sharekhan.com. You will also get a useful set of knowledge-based tools that will
empower you to take informed decisions.
Convenience

One can call our Dial-N-Trade number to get investment advice and execute your
transactions. We have a dedicated call-center to provide this service via a Toll Free Number
1800-22-7500 & 39707500 from anywhere in India.

Customer Service

Our customer service team will assist you for any help that you need relating to transactions,
billing, demat and other queries. Our customer service can be contracted via a toll-free
number, email or live chat on www.sharekhan.com.

Investment Advice

Sharekhan has dedicated research teams of more than 30 people for fundamental and
technical research. Our analysts constantly track the pulse of the market and provide timely
investment advice to you in the form of daily research emails, online chat, printed reports
and SMS on your mobile phone.
Benefits

1. Free Depository A/c


2. Instant Cash Tranfer
3. Multiple Bank Option.
4. Secure Order by Voice Tool Dial-n-Trade.
5. Automated Portfolio to keep track of the value of your actual purchases.
6. 24x7 Voice Tool acess to your trading account.
7. Personalised Price and Account Alerts delivered instantly to your Mobile Phone &
E-mail address.
8. Live Chat facility with Relationship Manager onYahoo Messenger
9. Special Personal Inbox for order and trade confirmations.
10. On-line Customer Service via Web Chat.
11. Enjoy Automated Portfolio.
12. Buy or sell even single share
13. Anytime Ordering.

We offer you the following products:-

CLASSIC ACCOUNT

This is an User Friendly Product which allows the client to trade through website
www.sharekhan.com and is suitable for the retail investor who is risk-averse and hence
prefers to invest in stocks or who do not trade too frequently.

Features

1. Online trading account for investing in Equity and Derivatives via


www.sharekhan.com
2. Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE.
3. Integration of On-line trading, Saving Bank and Demat Account.
4. Instant cash transfer facility against purchase & sale of shares.
5. Competative transaction charges.
6. Instant order and trade confirmation by E-mail.
7. Streaming Quotes (Cash & Derivatives).
8. Personlized market watch.
9. Single screen interface for Cash and derivatives and more.
10. Provision to enter price trigger and view the same online in market watch.

SPEEDTRADE

SPEEDTRADE is an internet-based software application, that enables you to buy and


sell in an instant.

It is ideal for active traders and jobbers who transact frequently during day’s session to
capitalise on intra-day price movement.

Features

1. Instant order Execution and Confirmation.


2. Single screen trading terminal for NSE Cash, NSE F&O & BSE.
3. Technical Studies.
4. Multiple Charting.
5. Real-time streaming quotes, tic-by-tic charts.
6. Market summary (Cost traded scrip, highest calue etc.)
7. Hot keys similar to broakers terminal.
8. Alerts and reminders.
9. Back-up facility to place trades on Direct Phone lines.
10. Live market debts.
DIAL-N-TRADE

Along with enabling access for your trade online, the CLASSIC and SPEEDTRADE
ACCOUNT also gives you our Dial-n-trade serives. With this service, all you have to do is
dial our dedicated phone lines 1-800-22-7500, 3970-7500.

Beside this, Relationship Managers are always available on Offic Phone and Mobile to
Resolve your querries.

ShareMobile*

Now Track the Market Anywhere..! Sharekhan had introduced ShareMobile, A mobile
based software where you can watch Stock Prices, Intra Day Charts, Reasearch & Advice
and Trading Calls live on the Mobile.

Stay updated with ShareMobile, Sharekhan's new service that lets you to catch the pulse of
the stock market on your mobile phone. All you need is a Sharekhan account and a GPRS
enabled Mobile handset.

* As per SEBI regulations, buying-selling shares through a mobile phone is not yet permitted. So when you place
a buy-sell order on ShareMobile, our Dial-n-Trade executive will call you back and place the order on your
behalf. This service is free and has NO extra fees.

PREPAID Account

Now you can buy Prepaid Account of Sharekhan. Pay Advance Brokerage on your Account
and enjoy uniterrupted trading in your Account. Beside this, get great discount (upto 50%)
on

Brokerage.

Prepaid Classic Account : - Rs. 2000

Prepaid Speedtrade Account : - Rs. 6000


IPO ON-LINE

You can apply to all the forthcoming IPO online hasselfree, paperless and time saving.
Simply allocate fund to IPO Account, Apply for the IPO and Sit Back & Relax.

Mutual Fund Online

You can apply to Mutual Funds of Reliance, Franklin Templeton Investments, ICICI
Prudential, SBI, Birla, Sundaram, HDFC, DSP Merrill Lynch, PRINCIPAL, TATA with
Sharekhan hasselfree, paperless and time saving.
Zero Balance ICICI Saving Account *

Sharekhan had tied-up with ICICI bank for Zero Balance Account for Sharekhan’s Clients.
Now you can have a Zero Balance Saving Account with ICICI Bank after your demat
Account creation with Sharekhan.

• Subject to Approval of Account

CHARGE STRUCTURE

Fee Structrue for General Individuals : -

Charge Classic Account Speed Trade Account


Account Opening Rs. 750/= Rs. 1000/=
Monthly Rs. NIL Rs. 500/=

Commitment
Broakerage Intra-day – 0.10 %** Intra-day - 0.10%**

Delivery - 0.50 %** Delivery - 0.50%**

* Refundable in case the broakerage is more than Rs. 500/= p.m.

** Condition Apply.

*** Taxes as per govt.


Depository Charges

Account Opening Charges Rs. NIL


Annual Maintanance Charges Rs. NIL first year Rs. 300/= p.a. from
second celender year onward

PRODUCT DETAILS

Online Trading:

(a) CLASSIC ACCOUNT: A/C Opening charges: Rs. NIL

Special Discount in A/c Opening Charges

Rs.300 from 2nd year onwards (Annual Maintenance charges). Trading through website
Live terminal. No brokerage commitment required. NSE and BSE online. Both Cash &
F&O.

(b) SPEED TRADE : Account Opening Fee: Rs. 1000/- Both Cash & F&O.

Monthly Recurring Fee: Rs 500/- per month, which is very nominal if you consider the
benefits of the product. This access charges will be debited to all the new customers signed
up after Sept 15, 2004. And at the end of the month if the client has contributed more than
Rs. 500/- as brokerage the access charges of Rs. 500/- will be credited back to the clients
account. Please note - this credit of Rs. 500/- will be given only to customers who have
contributed more than Rs. 500/- as brokerage during the months.

Brokerage :
0.05 % Plus Taxes for Each leg of Intra-day trade

0.50 % Plus Taxes for trades resulting in delivery

EXPOSURE : 4 TO 6.7 TIMES (ON MARGIN MONEY)

Online IPO's available

We have tie up with Twelve Banks for online fund transfering i.e. HDFC, ICICI, IDBI,
CITI, Union Bank of India, Oriental Bank of Commerce, INDUSIND, Yes Bank, Bank
of India, Centurion Bank of Punjab, Bank of Punjab and UTI bank for online money
transfer.

FOLLOWING DOCUMENTS REQUIRED TO OPEN AN A/c WITH SHAREKHAN


LTD.:

Photo ID Proof Residence Proof (Permanent)


· Passport (valid)

· Pan Card (Mandetory) · Voter's ID

· Passport · Driving Licence (valid)


· Bank Statement (latest)
· Driving Licence
· Telephone Bill (latest)
· Voter's ID
· Electricity Bill (lates)
· MAPIN UIN Card
· Ration Card

· Flat Maintanance Bill (latest)

· Insurance Policy (latest)

· Leave-Licence/Purchase Agreement
2 (Two no.) Colour Photographs (Passport size & front face)

For Classic Account:- 1 cancelled cheque

For Speed Trade:- 1 Account Opening Cheque of Rs. 1000/- in the favour of M/s
Sharekhan Limited

THANKS

So we look forward to your joining in the Sharekhan family and benefitting from the
evergreen posibilities of the stock market.
SYNOPSIS

Title: “Mutual fund – As an investment Option”.

Objective: Experts generally says that mutual says that mutual fund is the best
investment option. My objective is to

 Study the people perception about the mutual fund


 To study mutual funds in comparison to other investment options.
 Suggestions will be given that how to invest in mutual funds.

Scope: Scope of my study in Chandigarh only. I have only studied people perception
of Chandigarh people.

Research Methodology: Convenience research methodology is used and chose


samples on random sampling basis, & also used a questionnaire to collect date from
people.

Data Analysis: Analysis is done by using various statistical tools such as graphs,
averages, charts, etc. From the data collected, analysis & conclusion have been
made.
INTRODUCTION TO MUTUAL FUNDS

Introduction to mutual funds

For decades, the middle class had an ideological bias against having too much
wealth. Money was seen only as a means for meeting basic needs. The risk and
low returns provided by other investment schemes accompanied by high
inflation and decreasing interest rates gave birth to Mutual Funds.

Meaning of Mutual Funds

A ‘mutual Fund’ is an investment vehicle for investors who pool their savings
for investing in diversified portfolio of securities with the aim of attractive yields
and appreciation in their value. A mutual fund is a trust that pools together the
savings of a number of investors who share a common financial goal.

As per Mutual Fund Book, published by Investment Company Institute of U.S.,


“ A Mutual Fund is a financial service organization that received money from
shareholders, invests it, earns returns on it, attempts to make it grow and agrees
to pay the shareholders cash on demand for the current value of his investment.”
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996
defines ‘Mutual Funds’ as “ a fund established in the form of a trust to raise
monies through the sale of units to the public or section the public under one or
more schemes for investing in securities, including money market instruments.”
So, a mutual fund is a special type of institution, a trust or an investment
company which acts as an investment intermediary and channelizes the savings
or large number of people to the corporate securities in such a way that investors
get steady returns, capital appreciation and a low risk.

Pooling is the key to mutual fund investing. Through pooling the financial
resources of thousand of investors, each with a different amount to invest,
investors gain access to the expertise of the qualified and experienced fund
managers, wide diversification of ownership in securities market and a variety of
services, otherwise available only to institutions. Through diversification in
portfolio, mutual funds spread out inherent risks in securities and can earn a
more stable return. Individuals are free from the time consuming mechanics
involved in the direct purchase of securities in their portfolio. Professional fund
managers take pool of money and invest in a variety of securities selected from a
broad range of industries. They select securities that best meet their funds
investment objectives. They make decision when to buy, when to sell and when
to hold based on their extensive research and experience. The investment
objective set forth by the fund is important both to managers and investors.
These objectives guide the manager to plan the portfolio of the schemes. On the
other hand investors are guided by these objectives to select most suitable
scheme. A scheme is most suitable whose objectives are compatible to investor’s
targets. The concepts is explained in Fig. 1
Investors
Passed Pool their
back to money with

Returns Fund Manager

Generates invest in

Securities

Source: Making Mutual Funds work for you AMFI

CLASSIFICATION OF MUTUAL FUNDS


There are various types of Mutual Funds. Broadly, they can be classified

A) According to Scheme of Operation


B) According to Portfolio
C) According to Location
D) Other Types

ACCORDING TO SCHEME OF OPERATION: According to scheme


of Operation, Mutual Funds can be classified as:

1) Open-Ended Funds: Open Ended Funded means a scheme of mutual funds


which
offers unit of ale without specifying any duration for redemption. These schemes
do
not have a fixed maturity and entry to the funds is always open to investors
having an
option to get their holdings redeemed at any time. The repurchase rates are based
upon
the Net Asses Value (NAV) of the fund. The open-ended funds provide better
liquidity to the investor. These days open ended schemes are more popular.

2) Close-Ended Funds: A close ended fund means any scheme of mutual fund
in which the period of maturity of the scheme is specified . The corpus of the
close-ended scheme is fixed and an investor can subscribe directly to the scheme
only at the time of initial issue. These schemes are listed at the secondary market
i.e. stock exchanges. The price in the secondary market is determined on the
bases of demand & supply.

3) Interval Funds: scheme is a scheme of mutual funds which is kept open for
specific interval and after that it operates as close scheme. Thus it combines the
features of both ended & close-ended funds. The scheme is open for sale or
repurchase at fixed predetermined interval, which are disclosed in the offer
document. The units of the scheme are also traded in the stock exchange.

ACCORING TO PORTFOLIO: Mutual Fund can also be classified


according to
portfolio or the objective of the fund. Some of these funds are:

1) Equity funds: These funds mainly invest in shares of the companies. The
investments may vary from ‘blue-chip’ companies to newly established
companies. They undertake risk associated with investment in equity shares of
companies. Equity funds may have further sub-divisions such as income fund &
growth fund.

2) Debt Funds: These funds employee their resources in bonds. These


investments ensure fixed and regular income. Come times bonds are available in
the market at lower than the face value, the net income on these bonds goes
higher because interest will be received on the face value of the bond.

3) Balanced Funds: Balanced funds spend both on common stock and preferred
stock. Some part of the funds is pent on buying equity which other part is used in
acquiring interest bearing debentures and preference shares ensuring certain
amount of dividend. Some funds generally spend half the funds on equity stock
while the other half is pent on preferred stock. Balanced Funds ensure both
appreciation in stock as well as regular return in the shape of interest &
dividend. The investors have advantages of regular income and appreciation in
value of securities. These funds are also known as ‘ Conservative Funds’ or’
Income & Growth Funds’.

4) Sectoral Funds: These funds invest in a particular type of securities. The


funds may specialize in securities of companies dealing in a particular product or
firms in a particular industry. Any investor wanting to invest in a particular
security will prefer a fund dealing in such securities. These funds are amore
risky.

5) Leverage Funds: The primary aim of leverage funds is to maximize capital


appreciation. These funds may use even borrowed funds for buying speculative
stocks which ensures a profit in the future/.the cost of raising loaned funds and
the gain form holding shares is the profit of the leveraged fund. The leverage is
used to the benefit of the shareholders. Leverage funds indulge in speculative
activities to earn more and more profits.

6) Taxation Funds: Mutual Funds may be designed to suit the taxpayers. The
contributors to such funds get some concession in income tax. These schemes
are also known as Equity linked Saving Schemes (ELSS). The investors are
required to keep the money with the fund for a period of 3 years. The Amount
collected by these funds is used to acquire shares and interest bearing securities.

7) Money, Market Mutual Funds: Money Market Mutual Fund means a


scheme of a Mutual Fund which has been setup with the objective of investing
exclusively in money market instruments. These instruments include treasury
bills, dated Government Securities with an unexpired maturity of upto one year,
call and notice money, commercial paper, commercial bills accepted by banks
and certificate of deposits.

ACCORDING TO LOCATION: Mutual Fund can also be classified


on the
basis of location form where they mobilize funds; as

1) Domestic Funds: These are the funds which mobilizes savings of people with
in the country where investments are made.
2) Off-Shore Funds: Off-Shore mutual funds are those funds which raise or
mobilize funds in those countries other than where investments are to be made.
These funds attract foreign savings for investments in India.

Other Types: There can be some other types of Mutual Fund also, such as ‘Loan
Funds’ and Non-Loan Funds’ based on the expense / fees to be charged. “ Hub &
Spoke
funds’ which are basically fund of funds invests in other mutual funds.

WHY MUTUAL FUNDS?

A mutual fund is a special type of institution which acts as an investment


intermediary &
Channelizes the savings of large number of the people in the corporate securities in
such
a way that investors get steady returns, capital appreciation and allow risk. Mutual
funds
are becoming very popular world wide because of the following important
advantages:

1) Diversification: A proven principle of sound investment is that of


diversification which is the idea of not putting all your eggs in one basket. By
investing in many companies, Mutual Funds have cushioned themselves from
unexpected drop in value of some shares.

2) Expert Supervision & Management: Other advantage of Mutual Fund is


of expert supervision and management, which mutual fund can afford because of
large
resources at their disposal. The funds can be professionally employed through
the mutual funds ensuring good returns. Fund Managers can analyze the
performance and prospects of various companies and take better decisions in
making investments.

3) Liquidity: A peculiar advantage of a mutual fund is that investments made in its


schemes can be converted back into cash promptly without heavy expenditure on
brokerage, delays, etc. According to the regulation of SEBI, a mutual fund in
India is required to ensure liquidity.

4) Reduced risk: As mutual fund invests in large number of companies and is


managed professionally, the risk factor of the investor is reduced.

5) Tax Advantage: There are certain schemes of mutual funds which provide tax
advantage under the Income Tax Act liability of an investor is also reduced
when he invests in these schemes of the mutual funds.

6) Low Operating Costs: Mutual Funds Have large investible funds at their
disposal and thus can avail economies of large scale. This reduces their
operating costs by way of brokerage, fees, commission, etc. Thus a small
investor also gets the benefits of large scale economies and low operating costs.

7) Flexibility: Mutual Funds provide flexible investment plans to its subscriber


such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans etc. Thus, an investor can invest or withdraw funds according
to his own requirements.
8) Higher Returns: Mutual funds are expected to provide higher returns to the
investors as compared to direct investment because of professional management,
economies of scale, reduced risks, etc.

9) Investor Protection: Mutual Funds are regulated and monitored by SEBI.


SEBI ( Mutual Fund) Regulation Act, 1996, which have replaced the regulations
of 1993, provide better protection to the investors, impart a great degree of
flexibility and facilitate completion.

10) Transparency: You will always have access to up-to-date information on the
value of your investment in addition to the complete portfolio of investments,
the proportion allocated to different assets and the fund managers investment
strategy.

DISADVANTAGES:

Mutual funds are good investment vehicles to navigate the complex & unpredictable
world of investments. However, even mutual funds have some inherent drawbacks.
These
are:

1) No assured returns and no protection of capital: Mutual funds do not


offer assured returns and carry risk. For instance, unlike bank deposits,
investment in a mutual fund can fall in value. In addition, mutual funds are not
insured or guaranteed by any government body.
2) Restrictive Gains: Diversification helps, if risk minimization is objective.
However, the lack of investment focus also means you gain less than if you had
invested directly in a single security.

For example, say, Reliance appreciated 50 percent. A direct investment in the stock
would appreciate by 50 percent, But your investment in the mutual fund, which had
invested 10 percent of its corpus in Reliance, will see only a 5 per cent appreciation.

History of Mutual Funds

Although the Massachussets Investors Trust, formed on 21 March 1924 by three


Boston financial executives, is recognized as the first mutual fund, the ideas of
pooling money for investment purposes is not a twentieth century phenomenon. By
various historical accounts, investment entities that resembled what we know as
mutual funds had been around in Europe since the eighteenth century.

In 1774, a Dutch merchant invited subscriptions from investors to set up an


investment trust by the name of Eendragt Maakt Magt (translated) into English, it
means ‘ Unity creates Strength’, with the objective of diversification at low cost to
investors. Its success caught on, and more investment trusts were launched, with
verbose and quicky names that, when translated, read, ‘Profitable and Prudent’ or
‘Small Matters Grow by Consent’. The formal origin of Mutual Funds can be traced
to Belgium where Society ‘ Generale de Belgique’ was established in 1822 as an
investment company to finance investment in national industries with high
associated risks. The Foreign and Colonial government Trust, formed in London in
1868, promised “ the investor of modest means and same advantages as the large
capitalists by spreading the investment over a number of stocks”.
The Birth of the Massachusetts Investors Trust in the U.S., in 1924, started a chain
of events that would bring mutual funds to American homes for good. There was an
initial euphoria among American investors over a new investment vehicle, but much
of this died with the onset of the Great Depression in 1929. It took a series of
confidence building measures – the birth of a powerful market regulator, laying
down of rules for all industry participants, enactment of legislation – for the mutual
fund juggernaut to start rolling again More and more financial entities got into the
act, The schemes and total assets keeps on increasing from year to year.

The Indian Time line

1963 UTI is India’s first mutual fund.

1964 UTI launches US-64.

1986 UTI Mastershare India’s first true ‘mutual fund’ scheme, launched.

1987 PSU banks and insurers allowed to float mutual funds; State Bank of India
first
off the blocks.

1992 The Harshad Mehta fuelled bull market arouses middle-class interest in
shares
and mutual funds.

1993 Private sector and foreign players allowed; Kothari Pioneer first private
fund
house to start operations; SEBI set up to regulate industry.
1994 Morgan Stanley is the first foreign player.

1996 SEBI’s mutual fund rules and regulation, which form the basis of the most
current laws, came into force.

1998 UTI Master Index Fund is the country’s first index fund.

1999 The takeover of 20 Century AMC by Zurich Mutual Fund is the first
acquisition
in the mutual fund industry.

2000 The industry assets under management crosses Rs. 1,00,000 crore.

2001 US-64 scam leads to UTI overhaul.

2002 UTI bifurcated, comes under SEBI purview; Mutual fund distributors
banned
form giving commissions to investors; floating rate funds and foreign
debt
funds debut.

2003 AMFI certification made compulsory for new agents; fund of funds
launched.

2004 33 Mutual Funds exits; Loads on schemes increased.


Mutual Funds Vs. Other Investment Options

In today’s world, every individual is trying to accumulate lots and lots of wealth.
The objective of average Indian changed from ‘finding a good job’ to become a
crorepati. But to become a crorepati one has to plan his investments carefully. The
basic step for creating wealth revolve around the concept of asset allocation,
systematic investments and taking a long term approach towards investments.
These days their are many investment option available like Post Office Schemes,
Mutual Funds. Bank Fixed Deposits. Share. Etc. Before investing one has to be very
clear about his financial goals and pros & cons of each investment option.

Study of some investment options on the basis of following parameters:

1. Risk
2. Returns
3. Liquidity
4. Inflation Protection
5. Option of Borrowing
6. Tax Implications

Various investment options :

<> Open Ended Mutual Funds


<> Close Ended Mutual Funds
<> Shares

<> Bank Fixed Deposits


<> Bonds
<> Public Providend Fund
<> National Saving Certificates
<> Post Office Monthly Income Scheme
<> Post Office Time Deposits
OPEN-ENDED MUTUAL FUNDS

An open-ended mutual fund is the one whose units can be freely sold and
repurchased by the investors. Such funds are not listed on bourses since the Asset
Management Companies (AMCs) provide the facility for buyback of units form
unit-holders either at the NAV, or NAV-linked prices. Open Ended Mutual Funds
are of many types and the returns form them are also different: The major types
being:

1. Equity Diversified Funds


2. Equity Sectoral Funds
3. Equity Tax Relief Funds (ELSS)
4. Balanced Funds
5. Monthly Income Plans
6. Gilt Funds
7. Debt Funds
8. Fund of Funds

Open-ended mutual funds are indeed suitable for an appreciation in investment.


Choice of mutual funds can vary depending on one’s appetite to take risks e.g.
person who can take risk can go for equity funds while who don’t take risks goes for
debt fund. For Open-ended mutual fund, we can go by saying “higher the risk,
higher the return.” There is no guarantee of returns as NAV of mutual funds depends
on market. Therefore, it is stated that ‘Mutual Funds are subject to market risk’. Fig
2 shows risk and return relationship of various mutual funds. There is a direct
relationship between risk and return i.e. schemes with higher risk also have potential
to provide higher returns.
Equity Sectoral Fund

Equity Diversified Fund

Equity Tax Relief Fund

Balanced Funds

RISK Monthly Income Plans

Gilt funds

Debt Funds

RETURN

Fig.2

Returns given by various mutual funds schemes are shown in annexure 2.

LIQUIDITY: Instant Liquidity is the USP of open ended funds. Units of open-
ended mutual funds can be redeemed on weekdays (Monday-Friday) at NAV or at
NAV plus a small exit load. There is a concept of Contingent Deferred Sales
Charge where the exit load is charged only if the redemption takes place before a
specified time period or above a specified amount. A majority of open-ended mutual
funds allow switching among the various funds of the same AMC without any load.
You generally get your redemption requests processed promptly, and received the
cheque in 3-4 days. However, in case of Equity Linked Savings Schemes (ELSS)
there is a lock in period of three years.

INFLATION PROTECTION: - Open – ended Mutual Funds provide a fair


amount of protection against inflation. But funds with an equity portfolio provide
better protection than debt funds because equities, over the long term, provide the
best means of beating inflation. Moreover, long-term capital gains are taxed after
indexing for inflation.

OPTION OF BORROWING: - There are some banks that offer loans against
mutual funds. Different banks have their own criteria on which they approve the
loans.

TAX BENEFITS:- Divided paid by mutual funds is fully tax-exempt at the


hands of the investors, although, debt funds have to pay a 12.5 per cent dividend
distribution tax. On redemption of an unit held for more than a year, realization will
attract long-term capital gains tax of 20 percent plus surcharge after indexing for
inflation, or at a flat rate of 10 percent. If redeemed before a year it will be termed as
short term capital gain and taxed along with your other income. However, one can
cave tax by investing in Equity-Linked Savings Scheme (ELSS) under Section 88 of
the Income Tax Act, 1961, according to which 20 per cent of the amount invested in
ELSS can be deducted from tax liability subject to a maximum investment of Rs.
10,000 per year.

CLOSE – ENDED MUTUAL FUND

Closed-ended mutual funds have a fixed umber of units, and a fixed tenure (3, 5, 10
or 15 years), after which their units are redeemed or they are made open-ended.
These funds have various objectives: generating steady income by investing in debt
instruments, capital appreciation by investing in equities, or both by making an
equal allocation of the corpus in debt and equity instruments.
Since units of closed-ended funds rise and fall in the market like any other stock,
they are well suited for an increase in your investment. How ever, a mutual fund is
more influenced by the value of its own portfolio than any other factor. Units of an
equity fund are more frequently traded than a debt fund. Also, the NAV of an equity
fund rises and falls at a much faster pace. One the other hand, equity provided
healthy appreciation in NAV in the long term. Closed-ended debt funds, with their
conservative investment approach are best suited for income. These funds declare
dividend annually or semi-annually.

One cannot be completely sure of getting your full investment back. Depending on
their investment objective and under laying portfolio, closed-ended funds can be
very volatile or be fairly stable. Hence, principal is not assured.

LIQUIDITY: The Indian stock markets lack depth and, thus, the closed-ended
mutual funds are illiquid where they are listed and trade with heavy discount to their
NAVs. Besides listing, some mutual funds also offer repurchase option in there
closed-ended funds at an NAV-linked price after a certain lock-in period.

INFLATION PROTECTION: with stocks being better than bonds in


providing returns on a long term basis, an equity closed-ended fund is better
equipped to guard investment against inflation in the long run.

OPTION OF BORROWING: Closed end funds are treated as shares for the
purpose of raising loans in which the market value of the fund is considered.
However, there are few listed closed-ended fund that may be acceptable by banks.

TAX IMPLICATIONS: While divided paid on open-ended mutual funds is


fully tax-exempt, on redemption or sale of units, realization will attract long-term
capital gains tax of 20-per cent –plus surcharge after indexing for inflation, or at a
flat rate of 10 per cent . However, you can save tax by investing in Equity-Linked
Savings Scheme (ELSS) under Section 88 of the Income Tax Act, 1961, according
to which 20 percent of the amount invested in ELSS-which have a lock-in period of
3 years-can be deducted from your tax liability subject to a maximum investment of
Rs 10,000 per year.

SHARES

Shares, also called scrips, are the basic building blocks of a company. A company’s
ownership is determined on the basis of its shareholding,. Shares are, by far, the
most glamorous investment option for the simple reason that, over the long term,
they offer the highest returns. Predictably, they’re also the riskiest investment
option.

Shares are meant to be long-term investments. Three golden rules for investment in
equity- Diversity, Average out & most importantly stay invested. Shares do generate
income form dividend as well as capital appreciation and have a strong potential to
increase value of investment. But shares are risky – share prices are affected by
factors beyond anyone’s control and hence one needs to have an appetite for that
kind of risk.

LIQUIDITY: Shares are the most liquid financial instruments as long as there is
a buyer for shares on the stock exchange. Most shares belonging to the A Group on
the BSE are among the most liquid. However, shares of some companies may not
witness any trading for many days altogether. In such a case, you will not be able to
sell your shares. So, the liquidity factor varies to a large extent.
INFLATION PROTECTION: Shares do provide for some protection
although share prices have no relation to inflation. The price may crash or rise far
beyond the inflation rate.

OPTION OF BORROWING: You can pledge shares with a bank for raising a
loan. The banks have their list of approved shares that they accept as a security.
Generally, shares of well known and respectable companies are accepted a security.

TAX IMPLICATION: While dividend is not taxable at the hands of the


investor, capital gains are. When your sell your shares at a profit, it attracts a capital
gains tax. Gains realised within one year of purchase of shares come under the short-
term capital gains tax, and are included in gross taxable income. If the duration is
more than one year, it attracts long-term capital gains tax. The rate is 20 per cent
with indexation benefit, or a flat 10 percent. However, capital gains tax can be saved
if the gains are invested in an IPO of a company with a lock-in period of 1 year.
Alternatively, they can also be invested in capital gains bonds of the NHAI,
NABARD, or Rural Electrification Corporation (REC). However, listed shares
acquired after March 1, 2003, will not be subject to long-term capital gains tax.

BANK FIXED DEPOSITS

When you deposit a certain sum in a bank with a fixed rate of interest and a
specified time period, it is called a Bank Fixed Deposit (FD). At maturity, you are
entitled to receive the principle amount as well as the interest earned at the pre-
specified rate during that period. The rate of interest for Bank Fixed Deposits varies
between 4 and 6 per cent, depending on the maturity period of the FD and the
amount invested. The interest can be calculated monthly, quarterly, half-yearly, or
annually, and varies form bank to bank. They are one the most common savings
avenue, and account for a substantial portion of an average investor’s savings. The
facilities vary form bank to bank. Some services offered are withdrawal through
cheques on maturity, break deposit through premature withdrawal, and overdraft
facility etc. Fig 2.1 shows the return on FD’s

INTEREST RATES PAYABLE ON DEPOSITS


Interest Rates ( % p.a.) effective 9 Aug, 04
Duration
15 days to 45 days 3.75
46 days to 179 days 4.25
180 days to less than 1 year 4.75
1 year to less than 3 years 5.00
3 years & above 5.25
Source: State Bank of India
Fig.2.1
While a Bank FD does provide for an increase in your initial investment, it may be
at a lower rate than other comparable fixed-return instruments. Since capital
appreciation in any investment option depending on the safety of that option, and
banks being among the safest avenues, the increase in investment is modest.

Bank Deposits are the safest investment option after post-office schemes since the
banks function according to the parameters set by the Reserve Bank of India (RBI),
which frames regulations keeping in mind the interest of the investors.

LIQUIDITY: Bank FDs are liquid to the extent that premature withdrawal of a
bank FD is allowed. However, that involves a loss of interest.
INFLATION PROTECTION: With a fixed return, which is lower than other
assured return options, banks cannot guard against inflation. In fact, this is the main
problem with Bank FDs as any return has to be calculated keeping inflation in mind.

OPTION OF BORROWING: Yes, in some cases, loans upto 90 per cent of


the deposit amount can be taken form the bank against fixed deposit receipts.

TAX IMPLICATIONS: Interest income form a Bank FD qualifies for


exemption under section 80L, which means that interest income upto Rs. 12,000 is
tax- exempt.

BONDS

Bond is a loan given by the buyers to the issuer of the instrument. Bonds can be
issued by companies, financial institutions, or even the government. Over and above
the scheduled interest payments as and when applicable, the holder of a bond is
entitled to received the par value of the instrument at the specified maturity date.

Bonds can be broadly classified into


(a) Tax-Saving Bonds
(b) Regular Income Bonds

Tax-Savings Bonds offer tax exemption up to a specified amount of investment.


Examples are:
a) ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961.
b) NAABARD/ NHAI/ REC Bonds under Section 54EC of Income Tax Act, 1961.
c) RBI Tax Relief Bonds
Bonds are usually not suitable for an increase in your investment. However, in the
rare situation where an investor buys bonds at a lower price just before a decline in
interest rates, the resultant drop in rates leads to an increase in the price of the bond,
hereby facilitating an increase in your investment. This is called capital appreciation.
There is low risk involved in bonds.

LIQUIDITY: Investors can subscribe to primary issues of Corporates and


Financial Institutions (FIs). It is common practice for FIs and corporates to raise
funds for asset financing or capital expenditure through primary bond issues. Some
bonds are also available in the secondary market. The duration of a bond issue
usually varies between 5 and 7 years. If the bond is listed, it can be sold in the
secondary debt market.

Selling in the debt market is an obvious option. Some issues also offer what is
known as ‘Put and Call option.’ Under the Put option, the investor has the option to
approach the issuing entity, after a specified period (say, three years), and sell back
the bond to the issuer. In the Call option, the company has the right to recall its debt
obligation after a particular time frame. For instance, a company issues a bond at an
interest rate of 12 per cent . After 2 years, it finds it can raise the same amount at 10
per cent. The company can now exercise the Call option and recall its debt
obligation provided it has declared so in the offer document. Similarly, an investor
can exercise his Put option if interest rates have moved up and there are better
options available in the market.

INFLATION PROTECTION: This depends on the rate of inflation. In times


of falling inflation, the real rate of return remains high, but bonds do not offer any
protection if prices are rising. This is because they offer a pre-determined rate of
interest.
OPTION OF BORROWING: One can borrow against bonds by pledging the
same with a bank. However, borrowings depend on the credit rating of the
instrument. For instance, it is easier to borrow against government bonds than
against bonds issued by a company with a low credit rating.

TAX IMPLICATIONS: There are specific tax saving bonds in the market that
offer various concessions and tax-breaks. Tax free bonds offer tax relief under
Section 88 of the Income Tax Act, 1961. Interest income form bonds, upto a limit of
Rs. 12000, are exempt under section 80 L of the Income tax Act, plus Rs. 3,000
exclusively for interest from government securities. However, if you sell bonds in
the secondary market, any capital appreciation is subject to the Capital Gains Tax.

PUBLIC PROVIDEND FUND

A public Providend Fund (PPF) is a long-term savings plan with powerful tax
benefits. Your money grows @ 8 per cent per annum, and this is guaranteed by the
Government of India (GOI). You may consider this option if you are not looking for
short-term liquidity or regular income. Normal maturity period is 15 years from the
close of the financial year in which the initial subscription was made.

A PPF account is not aimed at generating capital appreciation since it has no


secondary market. It is mainly suitable for long-term saving and for availing of tax
incentives. This lump-sum amount that you received on maturity ( at the end of 15
year) is completely tax- free. The PPF Scheme has the backing of the GOI, and is
considered completely risk-free. Since the PPF Scheme is backed by the GOI, Your
interest income is assured.

You can safety put your money in a PPF Scheme as it is risk-free. Although factors
like inflation and interest rate fluctuations may determine whether you opt for a PPF
Account or not, the decision to invest in a PPF account is based on the twin benefits
of long-term savings and tax incentives. But if the interest rates will be applicable to
your account.
Subsequent interest calculations will be on the new rate of interest.

LIQUIDITY: PPF certainly lacks liquidity. The duration of a PPF account is


15 years, i.e., 15 complete financial years. On expiry or five financial years form the
end of the financial year in which the initial subscription was made, you have the
facility of one withdrawal every year. The maximum amount available for
withdrawal is 50 per cent of the balance at the end of the year immediately
preceding the year of withdrawal or the fourth year immediately preceding the year
of withdrawal, whichever is lower. For instance, if you have Rs. 50,000 at the end of
the fifth financial year, and Rs. 90,000 at the end of the eighth financial year, you
can withdraw upto Rs. 25,000 (50 per cent of Rs. 50,000). Importantly, there are no
penalties for availing of the withdrawal facility.

INFLATION PROTECTION: A PPF account does not provide protection


against high inflation. In certain years when the inflation rate is high, the real rate of
return on your PPF may be marginal. This depends on the prevailing rate of interest
on your PPF at any given time. These rate are notified by the GOI in the Official
Gazette form time to time, and are calculated in such manner as in specified in the
scheme.

OPTION OR BORROWING: Loans can be availed of form the third to sixth


year @ 1 per cent per annum if repaid within 36 months. Else, interest on loan is et
at 6 per cent per annum. Amount of such loans will not exceed 25 per cent of the
amount that stood to your credit at the end of the second year immediately preceding
the year in which the loan is applied for. You will continue to earn interest at the
specified rate on your balance in the PPF Account after availing of the loan facility.
TAX IMPLICATIONS: besides long-term savings, the most attractive feature
PPF is the tax incentives it offers. The interest income earned in PPF and the lump-
sum amount received on maturity or premature withdrawal is completely tax-free as
per the pro-visions of the Income Tax Act, 1961. The scheme also offers tax benefits
under Section 88 of the Income tax Act, 1961 as indicated below:
Gross Total Income (Rs) Rebate
0 – 150,000 20%
150,001 – 500,000 15%
500,001 & Above Nil
Rebate is calculated @ 30 per cent if your gross annual salary is upto Rs 1,00,000.
This also helps to reduce the actual amount invested over a 15-year period. You can
also open an account in the name of your spouse or children including married
daughters and claim the tax rebate if the contribution is made out of your personal
taxable income.

NATIONAL SAVING CERTIFICATES

National Savings Certificates (NSC) are an assured return scheme, armed with
powerful tax rebates under Section 88 of the Income Tax Act, 1961. Interest is
payable at 8 per cent, compounded half-yearly for a duration of 6 years. NSC
combines growth in money with reductions in tax liability as per the provisions of
the Income Tax Act, 1961. The scheme offers a coupon of 8 per cent, compounded
semi-annually. So, Rs 1,000 invested in NSCs become Rs. 1,601 on maturity after 6
years.

The NSC has the backing of the Government of India. Since the NSC has the
backing of the Government of India, your income at the prescribed rate of interest is
assured. This is a safe long-term savings option. There are no risks associated with
your investment in the NSC.

LIQUIDITY: The maturity period (duration) of a NSC scheme is 6 years. NSCs


do not offer any scope of premature withdrawal except on death or forfeiture by
pledgee or by court order. However, NSCs can be transferred from one person to
another through the post office on the payment of a prescribed fee. They can also be
transferred form one post office to another. If a certificate a lost, destroyed, stolen or
mutilated, a duplicate can be issued by the post-office on payment of the prescribed
fee.

INFLATION PROTECTION: With a Fixed rate of return, the NSC cannot


provide adequate safeguards against the risk of a high inflation rate.

OPTION OF BORROWING: You can borrow against your NSC by pledging


it after the permission of the concerned post-master.

You can pledge you NSC to any of the following:

> The President of India or Governor of a State is his official capacity.


> The RBI or a scheduled bank or a co-operative society ( including a co-operative
bank).
> A Corporation or a government company.
> A local authority.
> A Housing Finance Company approved by the National Housing Bank and
notified by the Central Government.

TAX IMPLICATIONS: NSCs offer tad benefits as per the provisions of the
Income Tax Act, 1961. Rebates are available under Section 88 of the Income Tax
Act, 1961 on both the principal as well as the interest income. Under the provisions
of this Section, an investor can reduce his tax liability by Rs. 12,000 by investing the
maximum permissible sum of Rs. 60,000 in one financial year. Moreover, the annual
interest income ( till five years) is deemed reinvested under Section 88, and is
eligible for tax rebate.

Moreover, the annual interest income ( till five years) is deemed reinvested under
Section 88, and is eligible for a 20 per cent tax rebate. The rebate is calculated @ per
cent if your gross annual salary is upto Rs. 1,00,000. However, the interest income
at the end of the sixth year is not eligible for tax breaks. The interest income every
year also qualifies for exemption under Section 80L of the Income Tax act, which
means that interest income upto Rs. 12,000 is tax-exempt. Thus, while you can
claim 20 percent tax rebate on reinvested interest income, the entire interest income
will be tax-free if it is lower than Rs. 9,000. An added advantage is that TDS ( Tax
Deductible at Source) is not applicable on the NSC.

POST OFFICE MONTHLY INCOME SCHEMES

The post-office monthly income scheme (MIS) provides for monthly payment of
interest income to investors. It is meant for investors who want to invest a lump-sum
amount initially and earn interest on a monthly basis for their livelihood. The
scheme is,

therefore, a boon for retired persons. The post-office MIS gives a return of 8 per
cent plus a bonus of 10 per cent on maturity. However, this 10 per cent bonus is not
available in case of premature withdrawals.

Like all post-office schemes, the MIS has the backing of the Government of India,
and is, therefore, a safe investment. You can be assured of getting your full
investment back. Your monthly interest income is assured at the specified rate of
interest. Since this scheme ha the backing of the Government of India, it is a sage
investment channel.

LIQUIDITY: You can buy a post office MIS at any post-office in India. The
duration of the MIS is six years. Investors can withdraw money before three years,
but at a discount of 5 percent. No such deduction will be made if an account is
closed after three years. Premature closure of the account is permitted any time after
the expire of a period of one year of opening the account. Deduction of an amount
equal to5 per cent of the deposit is to be made when the account is prematurely
closed.

INFLATION PROTECTION: With a fixed rate of return, the MIS does not
provide adequate safeguards against high inflation rates.

OPTION OF BORROWING: Depends if the banker accepts it as a security..

TAX IMPLICATIONS: The interest income accruing from a post office MIS
is exempt for tax under Section 80L of the Income Tax Act, 1961. Moreover, no
TDS is deductible on the interest income. The balance is exempt form Wealth Tax.

POST OFFICE TIME DEPOSITS


A Time Deposit is an investment option that pays annual interest rates between 6.25
and 7.5 per cent, compounded quarterly, and is available through post-office across
the country. Time Deposits are suitable for capital appreciation in the sense that your
money grows at a pre-determined rate. Unlike certain other investment options,
where returns are commensurate with the risk, the rate of growth is also high, Time
Deposits return a lower, but safer, growth in investment, Therefore, Time Deposits
are one of the better ways to get a relatively high interest rate for your savings. The
only condition is that they are bound for some specific period of time.
With a Government of India-baking , your principal is as assured as it is in any other
post office account. With backing form the Government of India, your interest
income form Time deposits is assured . There are no risks unique to this investment
option.

LIQUIDITY: a time Deposit account can be opened at any post-office. Time


Deposits have a term ranging between 1 and 5 years. The scheme pays annual
interest, but its is compounded quarterly, thus giving a higher yield. Time deposit for
1 year offers a coupon rate of 6.25 per cent, a 2 –years deposit offers an interest of
6.5 per cent, 3 years is 7.25 per cent while 5-year Time Deposit offers 7.5 per cent
return. While 2, 3, and 5-year Time Deposits can be closed after one year, they
entail a loss in the interest accrued for the time the account ha been in operation.

INFLATION PROTECTION: Time Deposits are not the ideal investment


option if the rate of inflation is either too high or is fluctuating beyond a limit. Since
the rate of return in case of a Time Deposit is fixed , they cannot guard you against a
high rate of inflation.
OPTION OF BORROWING: You can borrow against a Time Deposit. The
balance in you account can be pledged a security for a loan.

TAX IMPLICATIONS: Interest income upto Rs. 9,000 from Time Deposits is
exempt under section 80L of the Income Tax Act, 1961, and no tax is deducted at
source, i.e., the interest income form a Time Deposit is also exempt form TDS.

Investments at a glance is shown in Fig. 2.2

INVESTMENT AT A GLANCE

Inflation Option of Tax


Investments Risk Return Liquidity Protection Borrowing Benefits

Open-ended Mutual Funds A H H H A A


Close-ended Mutual Funds A H L H H H
Shares H H H H H A
Bank Fixed Deposits L A A L H A
Bond L H L L H H
Public Providend Fund L A A A H H
National Saving Certificate L A A L H H
Post Office Monthly Income Scheme L A A A H A
Post Office Time Deposits L A A L H A

Fig. 2.2

Here, Character ‘H’ means “High”, ‘L’ “Low” & ‘A’ means “ Adequate”
PEOPLE PERCERTION ABOUT MUTUAL FUND

In today’s market, Customer is the king. It is very important for an industry to


satisfy its customers. To study people perception about Mutual Funds, I have
conducted my research on 40 respondents of Chandigarh from different age /
income group.

Different Age Groups

Age No of Respondents Percentage


1-18 years 2 5%
18-35 years 18 45%
35-45 years 14 35%
45 & above 6 15%
Total 40 100%
Table 3.1

AGE GROUP
15% 5%
1-18 years

18-35 years

35-45 years
45%
45 & above
35%

Fig. 3.1

Different Income Groups


Income No of Respondents Percentage
Below Rs. 50,000 4 10%
Rs. 50,000 – Rs. 1 Lakh 8 20%
Rs. 1 Lakh – Rs. 3 Lakh 22 55%
Rs. 3 Lakh & Above 6 15%
Total 40 100%
Table 3.2
Income Groups
Below Rs. 50,000
10 %
15%

Rs. 50,000 – Rs. 1 Lakh


20 %

Rs. 1 Lakh – Rs. 3 Lakh


55%

Rs. 3 Lakh & Above

Fig. 3.2

Male / Female
Sex No. of Respondents Percentage
Male 26 65%
Female 14 35%
Total 40 100%
Table .3.3

SEX

100%
65%
50%
35%
0%
Male
Female

Fig. 3.3

Marital Status
Married No of Respondents Percentage
Married 28 70%
Single 12 30%
Total 40 100%
Table 3.4

Marital Status

80%
70%
60%
40%
20%
30%
0%

Married Single

Fig 3.4

PEOPLE AWARENESS ABOUT MUTUAL FUNDS

Answer No.of Respondents Percentage


Yes 34
No 6 15%
Total 40 100%
Table 3.5
100% 85%
80%
60%
Ser i es1

40%
15%
20%
0%

Yes No
Fig. 3.5
I conducted my research on 40 respondents, out of which 34 respondents are aware
about mutual funds i.e. 85%. Only 15 % of the respondents are not at all aware
about mutual funds. It suggests that there is awareness amount people about mutual
funds which is good for the mutual funds industry.

UNDERSTADING MUTUAL FUNDS

Answer No. of Respondents Percentage


A 3 8.82%
B 8 23.53%
C 23 67.65%
Total 34 100%
Table 3.6

Uderstanding Mutual Fund


8.82%
23.53
% a
b
c

67.65
%
Fig 3.6

When it actually comes to understanding mutual funds, 67.65% respondents actually


knows mutual funds as an trust that pools the saving of investors, invests it is
different securities and generate returns. 23.53% respondents understands it as an
organization providing financial services. 8.82% of respondents thinks that mutual
fund units are just similar to share. From this, we can interpret that people
understands about mutual funds, what they are, how they work.

POPULARITY OF VARIOUS MUTUAL FUNDS AMS’s

Answer No of Respondents Percentage


UTI 30 88.23%
Pru ICICI 30 88.23%
Franklin Templeton 28 82.35%
Birla Sunlife 24 70.59%
HSBC 21 61.76%
SBI Magnum 11 32.35%
Popularity Chart
UTI

100.00% Pru ICICI


80.00%
Franklin Templeton
60.00%
40.00% Birla Sunlife

20.00% HSBC
0.00% 1
SBI Magnum

Fig 3.7

Only 5.88 % of respondents knows only one AMC i.e. UTI. Majority of AMC’s
knows about 4-5 AMC’s. Moving onto which AMC is known to people, most of the
respondents knows about UTI & Pru ICICI, expressed in percentage as 88.23%.
88.35% of the respondents knows about Franklin Templeton shares 70.59% of
respondents are aware of Birla Sunlife. HSBC & SBI are also popular. This clearly
shows that UTI & Pru ICICI are the most popular AMC’s.

INVESTMENTS IN MUTUAL FUNDS


Answer No. of Respondents Percentage
Yes 23 67.64%
No 11 32.36%
Total 34 100%
Table 3.8
80.00% 67.64%
70.00%
60.00%
50.00%
40.00% 32.36% Percentage
30.00%
20.00%
10.00%
0.00%
Yes No

Fig 3.8

Answer No of respondents Percentage


0 – 10% 0 0%
10% - 25% 15 65.22%
25% - 50% 4 17.39%
50% & above 4 17.39%
Total 23 100%
Table 3.9

Percentage of Savings

0 – 10%
17.39% 0.00%
10% - 25%

25% - 50%
17.39%
65.22% 50% & above

Fig 3.9
67.64% of respondents have invested their savings in mutual funds. Only 32.36% of
respondents are there who have not invested in mutual funds. 67.22% People have
invested 10-25% of their savings while 17.39% of respondents have invested
25.50% & 50 % and above in mutual funds.
This suggests that lots of people of Chandigarh have invested in mutual funds.
POPULARITY OF OPEN-ENDED MUTUAL FUND SCHEMES

Answer No. of Respondents Percentage


Equity 16 69.56%
Debt 7 30.43%
Balanced funds 19 82.60%
Fund of Funds 5 21.74%

82.60%
Equity
90.00% 69.56%
80.00%
Debt
70.00%
60.00%
50.00% 30.43% Balanced funds
21.74%
40.00%
30.00% Fund of Funds
20.00%
10.00%
0.00%
1

Percentage
Fig 3.10

Balanced funds are more popular as 82.60% of people have invested in these
schemes followed by equity funds where 69.56% of respondents have invested.
People have also invested their savings in debt funds expressed in percentage as
30.43%. Popularity of funds of fund is really low as only 21.74% of respondents
have invested in them. Thus we can say, Balanced Funds are the most popular as
they have both equity and debt portfolio.

RETURNS FROM INVESTMENT IN MUTUAL FUNDS


Answer No. of Percentage Percentage
High 7 30.43%
Good 13 56.52%
Low 3 13.05%
Total 23 100%
Table 3.11
Percentage

Low
13.05% High
30.43%

Good
56.52%

Fig. 3.11

56.52% of people have enjoyed good returns from their investments in mutual funds
whereas 30.43% have earned handsome high return. 13.05% of respondents got low
returns. By looking at the above figures, we can predict that returns form mutual
funds are good.

RISK ASSOCIATED WITH MUTUAL FUNDS


Answer No. of Respondents Percentage
High 5 17.39%
Low 4 21.74%
Adequate 14 60.87%
Total 23 100%
Table 3.12
Risk

70.00%
60.87%
60.00%

50.00%

40.00%

30.00%
21.74%
20.00% 17.39%

10.00%

0.00%
High Low Adequate

Fig. 3.12

People of Chandigarh (60.87%) who have invested in mutual funds see adequate
risk in mutual funds. 17.39% of respondents perceives mutual funds as very risky
option where as 21.74% of respondents think that there is low risk associated with
mutual funds.
MAIN REASON FOR INVESTMENT IN MUTUAL
FUNDS

Answer No. of Respondents Percentage


Tax Benefits 8 34.78%
Higher Returns 11 47.83%
Liquidity 4 17.39%
Total 23 100%
Table 3.13

Reasons for investments


50.00%
45.00% 47.83%
40.00%
35.00% 34.78%
30.00%
25.00%
20.00%
15.00%
10.00% 17.39%
5.00%
0.00%

Tax Benefits S1
Higher
Returns Liquidity

Fig. 3.13

47.83% of respondents invests in mutual funds because of higher returns whereas


34.78% of respondents invests in mutual funds for tax benefits. Only 17.39% of
investors invests in mutual funds for liquidity advantage.
RANKING OF MUTUAL FUNDS VS OTHER
INVESTMENT OPTION

Answer No. of Respondents Percentage


1st 5 14.70%
2nd 17 50%
3rd 7 20.60%
4th & above 5 14.70%
Total 34 100%
Table 3.14
60.00%
50% 1st
50.00%

40.00% 2nd

30.00%
20.60% 3rd
20.00% 14.70% 14.70%
10.00%
4th & above
0.00%
1

Percentage
Fig.3.14

The above data clearly indicates that mutual funds standing vs. other option is good.

EXPERIENCE OF INVESTORS ABOUT MUTUAL


FUND

Answer No. of Respondents Percentage


Good 14 60.87%
Bad 9 39.13%
Total 23 100%
Table 3.15

The experience of investors about mutual funds industry is quite good. 60.87% of
respondents agrees with it whereas 39.13% have bad experience in mutual fund.

EXPECTATIONS FROM INVESTMENT OPTIONS

People of Chandigarh expects high returns, low risks professional management,


transparency, easy availability, after sales service and liquidity form an investment.

Conclusion: From above data, we can conclude that people that people of
Chandigarh are aware of mutual funds and understands what mutual funds are. They
have also invested their savings in various mutual funds schemes. AMCs like Pru
ICICI, UTI & Franklin Templeton are popular amongst the people of Chandigarh.
People’s experience about mutual funds is good. They have also earned a very
handsome return which is more than other investment options. But risk associated
with mutual funds is one the higher side, but people invests because of various
reasons like tax benefits, liquidity, higher returns better returns. People of
Chandigarh invests about 10-50% of their savings in mutual funds. They think that
mutual funds provide better returns over a longer period of time. People of
Chandigarh expects high returns, low risks, professional management, transparency,
easy availability, after sales service and liquidity, from an investment option
As an investment options, Mutual Funds provide high returns with risk associated
with it, better liquidity, tax benefits, inflation protection, option of borrowing,
professional management, power of diversification etc. All these qualities are not
generally present in single investment option, which is present in mutual funds.

So, we can say “Mutual Fund is the smart way to invest”.

DO YOU EXPECT THESE FROM YOUR


INVESTMENTS?

IDEAL RETURNS

TAX EFFICIENCY THE ANSWER IS

ANYTIME LIQUIDITY MUTUAL


FUNDS
FLEXIBILITY

TRANCPARENCY

SAFETY
CONTROL OF MONEY

SUGGESTION & RECOMMENDATIONS

Investment Planning is necessary for all individuals to achieve their financial goals.
One has to plan his limited resources to avail maximum benefit about of them.
People should plan their investments to fulfill major needs like:

 Financial Protection
 Career Building
 Assets Purchase
 Marriage
 Children’ Education
 Retirement Funding

There is no way to do it without investing surplus money in right kings of


instruments.
Choosing the best investment option one depends in his personal circumstances as
well as general market conditions. In each case, the right investment is a balance of
three things: Liquidity, Safety and Return.

So, before investing one has to be vary sure about his financial goals and risk taking
capacity. To do this, one should check his risk taking capacity with ‘ Investment
Style Check’ enclosed in Annexure IV. After checking his score, one can know what
kind of investor he or she is.

The recommended asset allocation for different kind of investors is given below in
graphical form:

1) Very Conservative Investor:

Equity Cash
0% 20%

Debt
80%

2) Conservative Investor:
Equity
10%

Cash
10%
Debt
80%

3) Moderate Investor:

Equity
30%

Debt
60% Cash
10%

4) Aggressive Investor:
Equity
40%
Debt
50%

Cash
10%

5) Very Aggressive Investor:

Debt
10%

Equity
Cash 50%
40%

It is not difficult to become a crorepati with mutual funds, provided one invest
according to the above portfolio.

Don’ts for Mutual Funds:

 Do not speculate: always evaluate risk taking capacity


 Do not chase returns: because what goes up must come down
 Do not put all eggs in one basket
 Do not stop working on mutual funds
 Do not time the market . Every time is good for investments.

Remember:

 Mutual funds are subject to market risk and there is no assurance that fund
objective will be achieved.
 NAV fluctuates depending on forces affecting capital markets.
 Past performance do not indicate future performance.
 Returns are not guaranteed and assured
 Take long term approach towards investments.
 Create an ideal portfolio

By following the above suggestions, one has to plan his investments and as proved
by studies that:

“MUTUAL FUNDS IS A BEST LONG TERM INVESTMENT OPTION”


Annexure I

QUESTIONAIRE

Personal Information:

Name :_________________________
Age:___________________________
Address:________________________
_______________________________

Income :
 Below Rs. 50,000
 Rs. 50,000 – Rs. 1 Lakh
 Rs. 1 Lakh – Rs. 3 Lakh
 Rs. 3 Lakh & Above

Sex:
 Male
 Female

Marital Status:
 Married
 Un- Married
Q-1) Are you aware of Mutual Funds?
a) Yes
b) No

Q-2) What do you understand by Mutual Funds?


a) They are units just similar to share.
b) It is an organization providing financial services.
c) It is an trust that pools the savings of investors, invests it in different
securities and generate return.

Q-3) Which major Mutual Funds do you Know?


a) ____________________________
b) ____________________________
c) ____________________________
d) ____________________________

Q-4) Have you invested in Mutual Funds?


a) Yes
b) No

Q-5) How much (%) of your savings have you invested in Mutual Funds?
a) 0 - 10%
b) 10% - 25%
c) 25% - 50%
d) 50% & above

Q-6) In which Mutual Fund schemes have you invested?


a) Equity
b) Debt
c) Balanced Funds
d) Fund of Funds

Q-7) What kind of returns have you got from your earlier investments in
Mutual
Funds?
a) High
b) Good
c) Low

Q-8) What kind of risk do you associate with Mutual Funds?


a) High
b) Low
c) Adequate

Q-9) What is the main reason for your investments in Mutual Funds?
a) Tax Benefits
b) Higher Returns
c) Liquidity

Q-10) What Ranking you give to Mutual Funds in comparisons with other
investment options?
a) 1st
b) 2nd
c) 3rd
d) 4th & More

Q-11) What is your experience about Mutual Fund Industry?


a) Good
b) Bad

Q-12) What do you expect from you Investments?


a) High Returns
b) Low Risk
c) Professional Management
d) Transparency
e) Easy Availability
f) After Sales Service
g) Liquidity
h) All of above
Annexure II

Return of Various Mutual Fund Schemes

EQUITY DIVERSIFIED FUNDS


Scheme Fund
Corpu Return % as on 21.12.2004
s in Rs. 7 15 1 3 6 1 2 Since
Crores
days days month month months years year Inception
Birla Advantage Fund 437.10 3.57 6.74 12.96 23.58 51.99 29.81 62.76 23.89
HSBC Equity Fund 1519.94 3.19 4.52 12.60 17.97 47.96 41.90 N.A 88.56
FT India Bluechip 1938.71 2.36 3.14 9.04 15.09 35.61 28.14 64.77 2257
Pru ICICI Power Fund 477.24 3.08 4.83 10.50 19.33 46.96 24.89 64.90 13.29
Reliance Vision Fund 736.14 4.34 7.15 12.23 19.48 50.70 24.47 75.87 25.54

EQUITY SECTORAL FUNDS


Scheme Fund
Corpu Return % as on 21.12.2004
s in Rs. 7 15 1 3 6 1 2 Since
Crores
days days month month months years year Inception
Franklin Infotech 203.28 3.15 4.02 4.24 16.49 44.14 36.24 36.14 30.64
UTI Growth Sector – IT 208.43 3.45 4.63 5.94 14.02 40.58 23.95 32.07 4.17
Reliance Pharma Fund 154.77 5.68 9.29 10.82 20.96 32.95 N.A 59.48
Alliance Buy India 29.29 6.37 9.91 17.52 34.76 58.62 50.30 68.35 6.36
Birla MNC 133.85 3.59 6.04 8.12 17.85 39.24 22.73 54.05 13.15

EQUITY TAX RELIEF FUNDS


Scheme Fund
Corpu Return % as on 21.12.2004
s in Rs. 7 15 1 3 6 1 2 Since
Crores
days days month month months years year Inception
Birla Equity Plan 43.33 3.11 5.88 11.73 23.22 47.03 32.31 81.25 30.43
Franklin India Taxshield 126.15 2.41 3.55 8.41 17.04 40.03 32.04 61.49 38.55
Pru ICICI Tax 40.67 2.88 6.36 9.83 28.10 73.83 37.55 83.44 27.42
Tate Tax Saving 48.71 2.95 4.43 9.62 19.24 41.82 25.72 71.43 28.40
HDFC Tax Saver 32.64 2.04 6.02 12.32 23.36 65.44 48.13 79.72 32.11

BALANCED FUNDS
Scheme Fund
Corpu Return % as on 21.12.2004
s in Rs. 7 15 1 3 6 1 2 Since
Crores
days days month month months years year Inception
Alliance 95 fund 137.83 3.59 5.61 10.77 17.95 36.47 27.79 46.76 27.66
Birla Balance Fund 158.37 2.27 4.02 8.54 14.01 28.13 19.08 40.97 11.46
HDFC Prudence Fund 683.34 1.23 3.18 8.02 14.10 34.01 25.28 54.81 27.62
UTI Balanced Fund 459 1.80 2.87 4.78 9.76 29.33 15.47 36.12 13.30
Tata Balanced Fund 93.58 1.62 2.74 6.16 13.51 35.41 17.50 41.10 12.10

MONTHLY INCOME FUNDS


Scheme Fund
Corpu Return % as on 21.12.2004
s in Rs. 7 15 1 3 6 1 2 Since
Crores
days days month month months years year Inception
Birla MIP 752.14 0.63 1.08 2.30 3.26 6.05 6.13 10.74 12.37
FT India MIP 1161.24 0.71 1.02 2.51 3.66 7.99 8.38 13.20 13.28
Tata MIP 283 -0.04 0.04 0.75 1.54 3.66 2.64 10.47 10.17
Reliance MIP 575.34 0.28 0.46 0.91 1.55 4.69 N.A N.A 4.39
UTI MIP 549.10 0.38 0.50 1.56 0.99 1.62 2.92 6.22 6.97

GILT FUNDS
Scheme Fund
Corpu Return % as on 21.12.2004
s in Rs. 7 15 1 3 6 1 2 Since
Crores days days month month months years year Inception
Birla Gilt Plus 20.64 0.32 0.41 0.80 1.49 2.30 4.21 6.65 9.50
HSBC Gilt STP 1.24 0.07 0.15 0.32 1.07 1.26 1.63 N.A 1.82
Sahara Gilt Fund 29.50 0.18 0.42 1.16 0.51 -0.93 -1.44 2.51 4.59
Reliance G-Sec Fund 31.02 0.08 0.11 0.52 1.18 0.55 1.98 N.A 3.84
Pru ICICI Gilt Fund 33.98 0.13 0.26 0.55 0.99 1.70 3.67 6.33 9.25

DEBT FUNDS
Scheme Fund
Corpu Return % as on 21.12.2004
s in Rs. 7 15 1 3 6 1 2 Since
Crores
days days month month months years year Inception
Birla Bond Plus 113.29 0.11 0.19 0.65 0.88 2.19 4.25 N.A 5.18
Reliance STP 103.48 0.14 0.28 0.60 1.08 2.35 4.95 6.13 6.13
HDFC STP 263.40 0.12 0.17 0.47 0.72 1.63 3.29 4.61 5.99
SBI Magnum STP 1265.87 0.10 0.21 0.42 1.20 2.36 4.67 N.A 4.65
Templeton India STP 250.61 0.10 0.19 0.62 0.74 1.89 4.01 5.17 6.44

Annexure III

BIBLIOGRAPHY

Books Referred:

Financial Management By Shashi K. Gupta , R.K. Sharma


Merchant Banking & Financial Services By Lalit K. Bansal

Magazines Cited:

Outlook
Layman’s Guide to Mutual Fund
Top Performer
Investors India

Net Watch:
www.moneycontrol.com
www.mutualfundsindia.com

Conference Attended:
Bajaj Capital Investor’s Meet

Annexure IV

Investment Style Check

Risk and return always go hand in hand. Higher the Risk, Greater the Return & Vice
Versa. To evaluate one’s risk bearing capacity, Investment Style Check is a very
common tool. It is an follows:

1. My age is
a) above 50
b) Between 30-50
c) Between 24-30

2. I have following dependents


a) More than 2 dependents
b) 1-2 dependents
c) None
3. My job is
a) Secured
b) Not secured
c) Does not affect me whether it secured or not

4. My approach in making an investment


a) I take educated view of the investment
b) I take friendly advice and make decisions
c) I rely on my guess

5. While investing in my funds, I am most concerned about:


a) Safety of my principal
b) Earning returns above the inflation rate
c) Earning Returns

6. My current portfolio includes majority of :


a) Govt. Securities and Bonds
b) Mutual Funds and Company FDs.
c) Equity Share

7. I would likely my investment to grow


a) Steadily
b) At an average rate
c) Fast

8. Imagine that the stock market drops immediately after you invest in it
a) I would withdraw my money
b) I would wait and watch
c) I would invest more in it

9. How long have you been investing ?


a) For the last 1-5 yrs.
b) For the lat 5-10 yrs.
c) For over 10 yrs and above

10. What percentage of you income do you invest?


a) Upto - 5%
b) 5% - 10%
c) Above 10%

11. My knowledge about various investment schemes is


a) Nil
b) Average
c) Good

12. How has your portfolio allocation changed over time .


a) My portfolio allocation has remained consistent over long time
b) My portfolio allocation has changed some what over time
c) My portfolio allocation has changed significantly over time

13. Which of the following statements truly describe you


a) I am very much concerned with short-term volatility
b) I am concerned if my investment does not give me return which is higher
than inflation
c) I am very much concerned with long-term volatility
14. How easily could you replace the loss suffered on an investment with future
income
a) Impossible
b) Not easy but possible
c) Very easily

15. Which statement best describes you investment objective


a) I just need regular income
b) I need regular income but would like some growth as well
c) I need only growth in my investment

16. How often do you monitor you investments


a) Daily
b) Monthly
c) Occasionally

17. What kind of return would you like on your investments


a) You may gain a return upto25% but there is a chance of losing 10% of your
principal
b) You may gain a return upto 10 % eith a little chance of losing your principal
c) You are assured to gain 5% return without any chance of losing your
principal

Evaluate Yourself

Give 10 points for answer ‘a’ , 20 points for answer ‘b’ , 30 points for answer ‘c’

Between 170 - 238 - Very Conservative Investor


Between 239 - 306 - Conservative Investor
Between 307 - 374 - Moderate Investor
Between 375 - 442 - Aggressive Investor
Between 443 - 510 - Very Aggressive Investor