EQUITY ANALYSIS TO FIND BEST FIT INVESTMENT PLAN FOR A LAYMAN

By

BHARAT KUMAR CHAVVAKULA

Roll No.: 0803MBA0766 Reg. No.: 68108101402

A PROJECT REPORT

Submitted to the

FACULTY OF MANAGEMENT SCIENCES

in partial fulfilment for the award of the degree

of

MASTER OF BUSINESS ADMINISTRATION

CENTRE FOR DISTANCE EDUCATION ANNA UNIVERSITY CHENNAI CHENNAI 600 025

February, 2010

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BONAFIDE CERTIFICATE

Certified that the Project report titled _________________________________ is the bonafide work of Mr. / Ms. ________________________________ who carried out the work under my supervision. Certified further that to the best of my knowledge the work reported herein does not form part of any other project report or dissertation on the basis of which a degree or award was conferred on an earlier occasion on this or any other candidate.

Signature of student Name : Roll No. : Reg. No. :

Signature of Guide Name : Designation : Address :

Signature of Project-in-charge Name : Designation :

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CERTIFICATE FOR VIVA-VOCE EXAMINATION

This is to certify that Thiru/Ms./Tmt. …………………………………................. (Roll No. ……………………; Register No. …………………..……) has been subjected to Viva-voce-Examination on ……………………(Date) at …………….. (Time) at the Study centre……………………………………………………………. ……………………………………………………………………………………….… …….. (Name and Address of the Study centre).

Internal Examiner Name : Designation: Address :

External Examiner Name : Designation : Address :

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Date :

*Note: 1. This Annexure shall be attached to the Project Report to be sent to the Director, Centre for Distance Education, Anna University, Chennai 600 025. 2. A Xerox copy of the signed certificate shall be attached to the project copy retained at the Study centre library.

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ABSTRACT

Indian stock market is semi-efficient by nature and, is considered as one of the most respected stock markets, where information is quickly and widely disseminated, thereby allowing each security’s price to adjust rapidly in an unbiased manner to new information so that, it reflects the nearest investment value. And mainly after the introduction of electronic trading system, the information flow has become much faster. But sometimes, in developing countries like India, sentiments play major role in price movements, or say, fluctuations, where investors find it difficult to predict the future with certainty.

Evaluation of a fund performance is meaningful when a fund has access to an array of investment products in market. An investor can choose from a variety of funds to suit his risk tolerance, investment horizon and objective. Direct investment in equity offers capital growth but at high risk and without the benefit of diversification by professional management offered by mutual funds.

This project is to understand the awareness and acceptance of various investment alternatives and to make a comparative study as which mode of equity investments are preferred by individuals. An analysis of securities and the organization and operation of their markets. The determination of the risk reward structure of equity and debt securities and their valuation. Special emphasis on common stocks. Other topics include options, mutual fluids and technical analysis.

Fundamental analysis and technical analysis can co-exist in peace and complement each other. Since all the investors in the stock market want to make the maximum profits possible, they just cannot afford to ignore either fundamental or technical analysis. And is achieved by doing the research and understand the movement and performance of stocks, justify the current investment in the chosen securities.

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ACKNOWLEDGEMENT

It is with great pleasure I express my sincere thanks and heartfelt gratitude to my guide Mr. Jayakumar MBA., Director, Sun Logistics, Pantheon Road, Egmore, Chennai for his constant encouragement, valuable support, free hand approach, timely suggestions and guidance extended to me throughout my work period. Without his guidance this project would not have been possible. I consider myself to be blessed to have worked under his guidance.

I would like to express my heartfelt thanks to MIT Study center Coordinator and the Finance Department Lecturers, and Faculty members of management sciences, MIT, Anna University, Chromepet, Chennai for their constant encouragement, help, patience and valuable suggestions for completing this project on time as scheduled.

I thank all my well-wishers for their constant support and encouragement and cheer all along in achieving my goal. I wish to express my indebted thanks to my classmates and friends who have helped me directly or indirectly in completion of this project work.

My gratitude and regards are due to my dear family and friends for their boundless love and moral support and encouragement, which formed the inspiration in this endeavors.

BHARAT KUMAR CHAVVAKULA

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CONTENTS

Chapter1 - Introduction  Executive summary  Rationale  Objectives 1 2 3

Chapter 2 - Literature review  Investment Avenues In India  Mutual Funds: A Brief Introduction  Advantages Of A Mutual Fund 4 10 16

Chapter 3 - Methodology  Scope of the study  Target population  Research design  Data collection  Questionnaire design  Sampling  Procedure for data collection 20 20 20 21 21 23 23

Chapter 4 – Fund Analysis  Selection Criteria For Schemes  Equity diversified funds  Direct equity 24 24 31

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Chapter5 –Data analysis and Interpretation  Findings & analysis  Investor survey analysis 34 35

Chapter 6 – Conclusions  Conclusions  Limitations 49 50

Appendix  Questionnaire 51

Bibliography

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CHAPTER 1

1.1 EXECUTIVE SUMMARY

Each investment alternative has its own strengths and weaknesses. Some options seek to achieve superior returns (like equity), but with corresponding higher risk. Other provide safety (like PPF) but at the expense of liquidity and growth. Other options such as FDs offer safety and liquidity, but at the cost of return. Mutual funds seek to combine the advantages of investing in arch of these alternatives while dispensing with the shortcomings.

Indian stock market is semi-efficient by nature and, is considered as one of the most respected stock markets, where information is quickly and widely disseminated, thereby allowing each security’s price to adjust rapidly in an unbiased manner to new information so that, it reflects the nearest investment value. And mainly after the introduction of electronic trading system, the information flow has become much faster. But sometimes, in developing countries like India, sentiments play major role in price movements, or say, fluctuations, where investors find it difficult to predict the future with certainty. Some of the events affect economy as a whole, while some events are sector specific. Even in one particular sector, some companies or major market player are more sensitive to the event. So, the new investors taking exposure in the market should be well aware about the maximum potential loss, i.e. Value at risk. It would be good to diversify one’s portfolio to include equity mutual funds and stocks. The benefit of diversification are that while risk exposure from a particular asset may not be very high, it would also give the opportunity of participating in the party in the equity markets- which may have just begun- in a relatively safe manner(than investing directly into stock markets). Mutual funds are

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one of the best options for investors to choose from. It must be realized that the performance of different funds varies time to time. Evaluation of a fund performance is meaningful when a fund has access to an array of investment products in market. An investor can choose from a variety of funds to suit his risk tolerance, investment horizon and objective. Direct investment in equity offers capital growth but at high risk and without the benefit of diversification by professional management offered by mutual funds.

1.2 RATIONALE

India presents a vast potential for investment and is actively encouraging the players especially entrance of foreign players into the market. India is also one of the few markets in the world which offers high prospects for growth and earning potential in all areas of business. In the current market scenario where there is more expenditure than one’s salary, inflation touching its high and fixed deposits going down day by day, thus net rate of return on the investments being below the inflation rate. To meet these growing requirements, the investors need to invest his disposable income to reap short as well as long term benefits. Those who do make diverse investments are able to squeeze maximum benefits.

The rationale behind undertaking this project is to understand the awareness and acceptance of various investment alternatives and to make a comparative study as which mode of equity investments are preferred by individuals. That is direct equity or the mutual funds.

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1.3 OBJECTIVES:

To make a comparison between direct investment in equity and investment through Mutual funds.

Study of select Mutual Funds schemes with the point of attractiveness to investors.

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CHAPTER 2 - LITERATURE REVIEW

2.1 INVESTMENT AVENUES IN INDIA

Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings. Banks are considered as the safest of all options, banks have been the roots of the financial systems in India. Promoted as the means to social development, banks in India have indeed played an important role in the rural upliftment. For an ordinary person though, they have acted as the safest investment avenue wherein a person deposits money and earns interest on it. The two main modes of investment in banks, savings accounts and fixed deposits have been effectively used by one and all.

However, today the interest rate structure in the country is headed southwards, keeping in line with global trends. With the banks offering little above 9 percent in their fixed deposits for one year, the yields have come down substantially in recent times. Add to this, the inflationary pressures in economy and one has a position where the savings are not earning. The inflation is creeping up, to almost 8 percent at times, and this means that the value of money saved goes down instead of going up. This effectively mars any chance of gaining from the investments in banks. Just like banks, post offices in India have a wide network. Spread across the nation, they offer financial assistance as well as serving the basic requirements of communication. Among all saving options, Post office schemes have been offering the highest rates. Added to it is the fact that the investments are safe with the department being a Government of India entity. So, the two basic and most sought after features, such as - return safety and quantum of returns was being handsomely

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taken care of. Though certainly not the most efficient systems in terms of service standards and liquidity, these have still managed to attract the attention of small, retail investors. However, with the government announcing its intention of reducing the interest rates in small savings options, this avenue is expected to lose some of the investors.

Public Provident Funds act as options to save for the post retirement period for most people and have been considered good option largely due to the fact that returns were higher than most other options and also helped people gain from tax benefits under various sections. This option too is likely to lose some of its sheen on account of reduction in the rates offered. Another often-used route to invest has been the fixed deposit schemes floated by companies. Companies have used fixed deposit schemes as a means of mobilizing funds for their operations and have paid interest on them. The safer a company is rated, the lesser the return offered has been the thumb rule.

However, there are several potential roadblocks in these. First of all, the danger of financial position of the company not being understood by the investor lurks. The investors rely on intermediaries who more often than not, don’t reveal the entire truth. Secondly, liquidity is a major problem with the amount being received months after the due dates. Premature redemption is generally not entertained without cuts in the returns offered and though they present a reasonable option to counter interest rate risk (especially when the economy is headed for a low interest regime), the safety of principal amount has been found lacking. Many cases like the Kuber Group and DCM Group fiascoes have resulted in low confidence in this option. The options discussed above are essentially for the risk-averse, people who think of safety and then quantum of return, in that order. For the brave, it is dabbling in the stock market.

Stock markets provide an option to invest in a high risk, high return game. While the potential return is much more than 10-11 percent any of the options discussed above can generally generate, the risk is undoubtedly of the highest order.

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But then, the general principle of encountering greater risks and uncertainty when one seeks higher returns holds true. However, as enticing as it might appear, people generally are clueless as to how the stock market functions and in the process can endanger the hard-earned money. For those who are not adept at understanding the stock market, the task of generating superior returns at similar levels of risk is arduous to say the least. This is where Mutual Funds come into picture.

Mutual Funds are essentially investment vehicles where people with similar investment objective come together to pool their money and then invest accordingly. Each unit of any scheme represents the proportion of pool owned by the unit holder (investor). Appreciation or reduction in value of investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by the fund from time to time. Mutual fund schemes are managed by respective Asset Management Companies (AMC). Different business groups/ financial institutions/ banks have sponsored these AMCs, either alone or in collaboration with reputed international firms. Several international funds like Alliance and Templeton are also operating independently in India. Many more international Mutual Fund giants are expected to come into Indian markets in the near future.

2.1.1 Investment Alternatives In India 

Non marketable financial assets: These are such financial assets which gives moderately high return but cannot be traded in market.     Bank Deposits Post Office Schemes Company FDs PPF

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Equity shares: These are shares of company and can be traded in secondary market. Investors get benefit by change in price of share and dividend given by companies. Equity shares represent ownership capital. As an equity shareholder, a person has an ownership stake in the company. This essentially means that the person has a residual interest in income and wealth of the company. These can be classified into following broad categories as per stock market:      Blue chip shares Growth shares Income shares Cyclic shares Speculative shares

Bonds: Bonds are the instruments that are considered as a relatively safer investment avenues.       G sec bonds GOI relief funds Govt. agency funds PSU Bonds RBI BOND Debenture of private sector co.

Money market instrument: By convention, the term "money market" refers to the market for short-term requirement and deployment of funds. Money market instruments are those instruments, which have a maturity period of less than one year.    T-Bills Certificate of Deposit Commercial Paper

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Mutual Funds- A mutual fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities, ranging from shares, debentures to money market instruments or in a mixture of equity and debt, depending upon the objective of the scheme. The different types of schemes are     Balanced Funds Index Funds Sector Fund Equity Oriented Funds

Life insurance: Now-a-days life insurance is also being considered as an investment avenue. Insurance premiums represent the sacrifice and the assured sum the benefit. Under it different schemes are:     Endowment assurance policy Money back policy Whole life policy Term assurance policy

Real estate: One of the most important assets in portfolio of investors is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate:    Agricultural land Semi urban land Farm House

Precious objects: Investors can also invest in the objects which have value. These comprises of:     Gold Silver Precious stones Art objects

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Financial Derivatives: These are such instruments which derive their value from some other underlying assets. It may be viewed as a side bet on the asset. The most important financial derivatives from the point of view of investors are:   Options Futures

2.1.2 Direct equity vs. mutual funds

1) Equity share/Direct investment 2) Mutual funds, a brief introduction 3) Equity Fund 4) Difference between direct equity and mutual fund

1) Equity share/Direct investment

Equity shares: These are shares of company and can be traded in secondary market. Investors get benefit by change in price of share or dividend given by companies. Equity shares represent ownership capital. As an equity shareholder, a person has an ownership stake in the company. This essentially means that the person has a residual interest in income and wealth of the company. These can be classified into following broad categories as per stock market:  

Blue chip shares- Shares of large, well established, financially strong companies with an impressive record of earnings and dividends. Growth shares-Shares of companies that have fairly entrenched positions in a growing market and which enjoy an above average rate of growth as well as profitability.

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   

Income shares-Share of companies that have fairly stable operations, relative limited growth opportunities, and high dividend payout ratios. Cyclic shares – Share of companies that have a pronounced cyclicality in their operations. Defensive shares- Shares of companies that are relatively unaffected by the ups and downs in general business conditions. Speculative shares- Shares of companies that tend to fluctuate widely because there is a lot of speculative trading in them.

2.2 MUTUAL FUNDS: A BRIEF INTRODUCTION

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the schemes are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

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2.2.1 INCEPTION OF MUTUAL FUNDS IN INDIA

The history of mutual funds in India can be divided into 5 important phases: 1963-1987 The Unit Trust of India was the sole player in the industry. Created by an Act of Parliament in 1963, UTI launched its first product, the Unit Scheme 1964, which is even today the single largest mutual fund scheme. UTI created a number of products such as monthly income plans, children plans, equity-oriented schemes and off shore funds during this period. UTI managed assets of Rs.6,700 crores at the end of this phase.

1987-1993 In 1987 public sector banks and financial institutions entered the mutual fund industry. SBI mutual fund was the first non- UTI fund to be set up in 1987. Significant shift of investors from deposits to mutual fund industry happened during this period. Most funds were growth-oriented closed-ended funds. By the end of this period, assets under UTI’s management grew to Rs.38,247 crores and public sector funds managed Rs.8,750 crores.

1993-1996 In 1993, the mutual fund industry was open to private sector players, both Indian and foreign. SEBI’s first set of regulations for the industry were formulated in 1993, and substantially revised in 1996.Signifficant innovations in servicing, product design and information disclosure happened in this phase, mostly initiated by private players.

1996-1999 The implementation of the new SEBI regulations and the restructuring of the mutual fund industry led to rapid asset growth. Bank mutual funds were recast according to the SEBI recommended structure, and the UTI came under voluntary SEBI supervision.

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1999-2002 This phase was marked by the rapid growth in the industry, and significant increase in market shares of private sector players. Assets crossed Rs.1,00,000 crore .The tax break offered to mutual fund in 1999 created arbitrage opportunities for a number of institutional players. Bond funds and Liquid funds registered the highest growth in this period, accounting for nearly 60% of the assets. UTI’s share of the industry dropped to nearly 50%.

2.2.2 Types of mutual funds:

Open ended schemes An open-end fund is one that is available for subscription all through the year. This type of Mutual funds does not have a predefined maturity period. The key feature is liquidity. Direct dealing is another noticeable feature. One can easily buy and sell units at Net Asset Value related prices.

Close ended schemes Here maturity period is predefined usually ranging from 2 to 15 years. Investment can be done directly in the scheme at the time of the initial issue and units can be brought and sold whenever units are listed in the stock exchanges.

Types of Schemes

1. Equity/growth oriented Funds: Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate frequently. Equity schemes are more volatile, but offer better returns.

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2. Balanced Funds: The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents.

3. Index Funds: An Index Fund is a mutual fund that tries to mirror a market index, like Nifty or BSE Sensex , as closely as possible by investing in all the stocks that comprise that index in proportions equal to the weight age of those stocks in the index. 4. Income/debt oriented Funds: These schemes invest mainly in incomebearing instruments like bonds, debentures, government securities,

commercial paper, etc. These instruments are much less volatile than equity schemes. Their volatility depends essentially on the health of the economy e.g., rupee depreciation, fiscal deficit, inflationary pressure. Performance of such schemes also depends on bond ratings.

2) Equity Funds

As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes. At present, there are four types of equity funds available in the market. In the increasing order of risk, these are:

a) Index funds These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of composition and the individual stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to near accuracy. Index funds don’t need fund managers, as there is no stock selection involved.

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Investing through index funds is a passive investment strategy, as a fund’s performance will invariably mimic the index concerned, barring a minor "tracking error". Usually, there’s a difference between the total returns given by a stock index and those given by index funds benchmarked to it. Termed as tracking error, it arises because the index fund charges management fees, marketing expenses and transaction costs (impact cost and brokerage) to its unit holders. So, if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent. To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the Sensex on 1 April 1978, when the index was launched (base: 100). In August, when the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to an annualised return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualised return to 16.2 per cent. Obviously, lower the tracking error, the better are the index funds.

b) Diversified funds

Such funds have the mandate to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversified portfolio (spread across industries and companies), the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns; on the other hand, if the fund manager’s picks languish, the returns will be far lower. Returns from a diversified fund depend a lot on the fund manager’s capabilities to make the right investment decisions. A portfolio concentrated in a few sectors or companies is a high risk, high return proposition.

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c) Tax-saving funds

Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, one can claim a tax exemption of 20 per cent from his taxable income. One can invest more than Rs 10,000, but then he won’t get the Section 88 benefits for the amount in excess of Rs 10,000. The only drawback to ELSS is that one has to lock into the scheme for three years. In terms of investment profile, tax-saving funds are like diversified funds. The one difference is that because of the three year lock-in clause, tax-saving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions.

d) Sector funds

The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector fund’s NAV will zoom if the sector performs well; however, if the sector languishes, the scheme’s NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries alternate between periods of strong growth and bouts of slowdowns. The way to make money from sector funds is to catch these cycles–get in when the sector is poised for an upswing and exit before it slips back.

3) Difference between direct equity and mutual funds A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and

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act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.

Investing in Mutual Fund is convenient because of two basic reasons. All investment carry risks, especially equity investment that bears larger risks, their returns are more volatile and uneven. To cut down the risk one needs to put money in several instruments rather than in one or two products. A Mutual Fund can effectively spread its investments across various sectors of the economy and amongst several products. Risk diversification is the Key. Secondly ’where to invest and where not to’, is a specialized business. One may not have the expertise, time and resources of a well-managed fund.

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2.3 ADVANTAGES OF A MUTUAL FUND

1. Professional Management Qualified professionals manage money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme, so you see that it is a continuous process that takes time and expertise that will add value to investment. These fund managers are in a better position to manage investments and get higher returns.

2. Diversification The cliché, "don’t put all eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers risk of loss by spreading money across various industries. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds will spread investment across only one industry and it would not be wise for portfolio to be skewed towards these types of funds for obvious reasons.

3. Choice of Schemes Mutual funds offer a variety of schemes that will suit investors needs over a lifetime. When they enter a new stage in life, all needed to do is sit down with investment advisor who will help to rearrange portfolio to suit altered lifestyle.

4. Affordability A small investor may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes that allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. One can invest with a minimum of Rs. 500 in a Systematic Investment Plan on a regular basis.

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5. Tax Benefits Investments held by investors for a period of 12 months or more qualify for Capital gains and will be taxed accordingly (10% of the amount by which the investment appreciated, or 20% after factoring in the benefit of cost indexation, whichever is lower). These investments also get the benefit of indexation.

6. Liquidity With open-end funds, you can redeem all or part of investment any time you wish and receive the current value of the shares or the NAV related price. Funds are more liquid than most investments in shares, deposits and bonds and the process is standardized, making it quick and efficient so that you can get cash in hand as soon as possible.

7. Rupee Cost Averaging Through using this concept of investing the same amount regularly, mutual funds give investor the advantage of getting the average unit price over the long-term. This reduces risk and also allows you to discipline self by actually investing every month or quarterly and not making sporadic investments.

8. The Transparency of Mutual Funds The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare one to the other. Once you are part of a mutual fund scheme, you are provided with regular updates, for example daily NAVs, as well as information on the specific investments made and the fund manager’s strategy and outlook of the scheme.

9. Easy To Administer Mutual funds units in modern times are not issued in the form of certificates, with a minimum denomination rather they are issued as account statement switch a facility to hold units in fraction upto 4 decimal points.

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10. Highly Regulated The governing of mutual funds by SEBI ensures that the fund activities are carried out in the best interest of the investors.

2.4 DISADVANTAGES OF MUTUAL FUNDS

The following are some of the reasons which are deterrent to mutual fund investment:  Costs despite Negative Returns — Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, 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.  Lack of Control — Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.  Price Uncertainty — with an individual stock, you can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour — or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after you've placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.

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Some mutual fund schemes with the point of attractiveness to investors -

Comparison of best performing mutual funds with index Equity schemes:

Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate frequently. Equity schemes are more volatile, but offer better returns. These can be further classified into three types:

1. Diversified Equity schemes: The aim of diversified equity funds is to provide the investor with capital appreciation over a medium to long period (generally 2 – 5 years). The fund invests in equity shares of companies from a diverse array of industries and balances (or tries to) the portfolio so as to prevent any adverse impact on returns due to a downturn in one or two sectors.

2. Equity Linked Saving Schemes (ELSS): These schemes generally offer tax rebates to the investor under section 88 of the Income Tax law. These schemes generally diversify the equity risk by investing in a wider array of stocks across sectors. ELSS is usually considered a variant of diversified equity scheme but with a tax friendly offer

3. Sectoral Fund/ Industry Specific schemes: Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc. These are ideal for investors who have already decided to invest in particular sector or segment. Sectoral Funds tend to have a very high risk-reward ratio and investors should be careful of putting all their eggs in one basket.

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CHAPTER 3 - METHODOLOGY

3.1 SCOPE OF THE STUDY

Geographical scope The data for the research was collected from Different zones of Chennai, TN and Hyderabad, AP.

Product scope The research was conducted to find out about the preference of the target population for Equity Diversified Mutual Funds and Direct Equity. Besides this the research was conducted to know about reasons for preferring mutual funds and direct equity funds.

3.2 TARGET POPULATION

The target population mainly included service class people. Hence convenient sampling was used in deciding on the target population.

3.3 RESEARCH DESIGN

First an exploratory research was conducted to get some insights about the topic. Secondary data analysis was performed. It was followed by questionnaire filling. Findings of the exploratory research were regarded as input to further research. This research will be followed by descriptive design.

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3.4 DATA COLLECTION

Secondary Data Secondary data was collected from various sources such as internet and financial magazines.

Primary Data In Primary data, structured questionnaire was made and the target respondents were asked to fill the questionnaire.

3.5 QUESTIONNAIRE DESIGN

Objective was to make respondents little familiar with the context of the questions. This was also aimed at collecting data about the sample profile that’ll be subsequently analyzed so that the scope of the project is fully explored. 

Question 1 was aimed to check the awareness level of the respondent about various investment avenues.

Question 2 was an open ended question intended to find out some more factors which people consider important while investing.

 

Question 3 was aimed to understand the most preferred mode of investment.

Question 4 was designed to understand the types of mutual fund where people have invested.

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Question 5 was designed to understand the importance of past returns in making decisions about various investment schemes.

Question 6 was designed to understand if returns were the only criteria for evaluating the performance.

Question 7 was designed to understand the approach of people in making investment.

Question 8 was designed to find out what factors are considered important by people who invest different investments.

Question 9 was formulated to know the period of portfolio review done by people.

 

Question 10 was put to find out the long term and short term investors.

Question 11 was asked to find out how actively investors change their portfolio.

Question 12 was asked to compare the equity diversified mutual funds and direct equity.

Question 13 & 15 were asked to judge the factors why people prefer to invest in Mutual Funds and Direct Equity.

Question 14 was asked to find out the availability of information sources for various schemes.

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3.6 SAMPLING

Sample Framework The sample framework consists of a people who have invested in any funds or investment schemes.

 

Sample Design The sample was taken using convenient sampling. Sample size The sample size was around 200 respondents.

3.7 PROCEDURE FOR DATA COLLECTION

For the purpose of primary data collection the target population was administered with a questionnaire which had both structured as well as unstructured questions.

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CHAPTER4 - FUNDS ANALYSIS

4.1 SELECTION CRITERIA FOR SCHEMES:

Selection of equity diversified funds are done here on the basis of their Return, risk , liquidity, affordability, entry-exit load, and performance over the years. Also,

1. Only open ended funds are considered while choosing best equity related mutual funds. 2. Among growth and dividend schemes, only growth scheme has been taken so as to avoid repetition (as portfolio remains same for both the options) 3. Selection has been done on the basis of last 1 year performance.

4.2 EQUITY DIVERSIFIED FUNDS

The four funds I have chosen after comparing their performance vis-à-vis the other mutual funds in this category of funds are:

Equity Diversified

NAV 1wk 1mth 3mth 6mth 1yr 2yr 3yr Asset Size (Rs./Unit) (Rs. cr.) 158.47 502.13 325.05 1,098.76 27.03 -0.4 39.24 -0.3 67.67 -1.7 25.40 -1.0 3.6 6.6 0.5 1.9 8.9 39.7137.9 ---

Principal Emerging Bluechip(G) ICICI Pru Discovery Fund (G) Birla SL Dividend Yield (G) IDFC Premier Equity - A (G)

8.3 47.9127.712.348.4 6.2 32.7 84.212.267.4 8.9 33.8 92.6 0.298.3

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Principal Emerging Bluechip Fund (G) Rs.27.520 Investment Information Fund Type Investment Plan Asset Size (Rs cr) Min. Investment Last Dividend Bonus Open-Ended Growth 181.27 (Dec-31-2009) Rs 5,000 N.A. N.A. 0.29 (1.04%)

Performance of Principal Emerging Bluechip Fund (G) Absolute Returns (as on Feb 04, 10) Period 1 mth 3 mths 6 mths 1 year 2 year 3 year 5 year Year 2009 2008 Returns (%) -4.0 10.8 24.0 159.4 Rank # 38 26 15 1 Qtr 1 Qtr 2 0.1 65.3 Qtr 3 28.3 Qtr 4 Annual 10.4 142.0 9.7 9.7

Absolute Returns (in %)

Scheme Profile - Principal Emerging Bluechip Fund (G) Fund Type Open-Ended Investment Plan Minimum Investment Fund Manager Growth

Launch Date Oct 20, 2008 Rs 5,000 Pankaj Tibrewal

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Entry Load Exit Load Load Comments

0.00% 1.00% Exit Load 1% if units are redeemed / switched-out within 1 year from the date of allotment. N.A.

Features

ICICI Pru Discovery Fund (G) Rs.40.740 Investment Information Fund Type Investment Plan Asset Size (Rs cr) Min. Investment Last Dividend Bonus Performance of ICICI Pru Discovery Fund (G) Absolute Returns (as on Feb 04, 10) Period 1 mth 3 mths 6 mths 1 year 2 year 3 year 5 year Returns (%) -1.9 13.7 26.1 154.0 29.3 48.0 211.5 Rank # 5 13 10 2 1 11 13 Open-Ended Growth 561.88 (Dec-31-2009) Rs 5,000 N.A. N.A. 0.52 (1.26%)

Absolute Returns (in %) Year 2009 2008 2007 2006 2005 Qtr 1 -5.7 -32.5 -11.0 19.1 1.5 Qtr 2 62.0 -8.5 21.9 -15.2 9.4 Qtr 3 34.5 -4.3 3.2 19.8 28.8 Qtr 4 10.0 -22.6 26.3 3.7 6.8 Annual 128.9 -55.8 38.8 28.1 60.6

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Scheme Profile - ICICI Pru Discovery Fund (G) Fund Type Open-Ended Investment Plan Minimum Investment Fund Manager Entry Load Exit Load Load Comments Growth

Launch Date Jul 23, 2004 Rs 5,000 Sankaran Naren / Mrinal Singh 0.00% 1.00% Exit Load 1% if units are redeemed / switched-out within 1 year from the date of allotment. Exit Load of 1% for SIP/STP if units are redeemed / switchedout within 2 year from the date of allotment. N.A.

Features Birla Sun Life Dividend Yield Plus (G) Rs.68.210 Investment Information Fund Type Investment Plan Asset Size (Rs cr) Min. Investment Last Dividend Bonus 0.67 (0.97%)

Open-Ended Growth 340.33 (Dec-31-2009) Rs 5,000 N.A. N.A.

Performance of Birla Sun Life Dividend Yield Plus (G) Absolute Returns (as on Feb 04, 10) Period 1 mth 3 mths 6 mths 1 year 2 year 3 year 5 year Returns (%) -3.5 5.3 17.6 92.9 25.7 56.8 142.4 Rank # 19 108 49 94 2 6 55

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Absolute Returns (in %) Year 2009 2008 2007 2006 2005 Qtr 1 -3.1 -30.5 -5.4 11.6 -4.8 Qtr 2 43.4 -12.6 21.6 -18.4 3.6 Qtr 3 24.8 5.8 8.8 15.5 17.5 Qtr 4 7.1 -12.6 26.6 2.1 6.7 Annual 87.3 -45.1 55.9 9.7 28.4

Scheme Profile - Birla Sun Life Dividend Yield Plus (G) Fund Type Open-Ended Investment Plan Minimum Investment Fund Manager Entry Load Exit Load Load Comments Features Growth

Launch Date Feb 07, 2003 Rs 5,000 Ankit Sancheti 0.00% 1.00% Exit Load of 1% if redeemed within 365 Days from the date of allotment. N.A.

IDFC Premier Equity Fund - Plan A (G)

Rs.26.491 Investment Information Fund Type Investment Plan Asset Size (Rs cr) Min. Investment Last Dividend Bonus

0.53 (1.96%) Open-Ended Growth 1,145.33 (Dec-31-2009) Rs 25,000 N.A. N.A.

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Performance of IDFC Premier Equity Fund - Plan A (G) Absolute Returns (as on Feb 04, 10) Period 1 mth 3 mths 6 mths 1 year 2 year 3 year 5 year Returns (%) -1.8 12.0 21.1 122.3 7.6 81.7 Rank # 4 18 20 33 13 1 -

Absolute Returns (in %) Year 2009 2008 2007 2006 2005 Qtr 1 -3.3 -28.5 -2.1 27.2 Qtr 2 49.5 -9.3 39.1 -25.0 Qtr 3 20.7 -5.0 11.4 15.8 Qtr 4 11.2 -22.9 40.7 16.4 0.2 Annual 97.8 -53.5 108.9 31.0 0.2

Scheme Profile - IDFC Premier Equity Fund - Plan A (G) Fund Type Open-Ended Investment Plan Minimum Investment Fund Manager Entry Load Exit Load Load Comments Features Growth

Launch Date Sep 26, 2005 Rs 25,000 Kenneth Andrade 0.00% 1.00% Exit Load 1% if redeemed within 365 days from date of allotment. IDFC MF has announced that IDFC Premier Equity Fund shall not accept further subscriptions (other than by way of SIPs / STPs) after the end of business hours on October 14, 2009

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4.3 DIRECT EQUITY The four stocks are chosen on the basis of their past returns and Beta . S&P CNX NIFTY Company Name High Tata Motors 739.95 HCL Tech 367.60 Sun Pharma 1,522.50 Ranbaxy Labs 533.95 Low 711.10 358.25 1,477.00 520.40 Last Price 733.95 365.30 1,504.75 530.35 Prv Close 712.20 358.10 1,488.95 524.95 18 Dec 17:51 Change % Gain 21.75 3.05 7.20 2.01 15.80 1.06 5.40 1.03

Tata Motors BSE: 500570 | NSE: TATAMOTORS | ISIN: INE155A01014 669.00 -21.20 (-3.07%) BSE : Open 680.00 Vol High Low Prev. Close 683.50 52 Wk 650.00 52 Wk 690.20 Bid Price Quantity 669.00 200.00 Offer 670.40 99.00

140,116 842.00 132.90

668.80 NSE : Open High Low

-20.80 (-3.02%) 670.00 Vol 673.00 52 Wk 658.15 52 Wk 689.60 Bid 668.80 361.00 Offer 669.00 100.00 678,303 844.70 128.00

Prev. Close Price Quantity

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HCL Technologies BSE: 532281 | NSE: HCLTECH | ISIN: INE860A01027 340.30 3.40 (1.01%) BSE : Open 330.00 Vol High Low Prev. Close 343.00 52 Wk 324.50 52 Wk 336.90 Bid Price Quantity 340.40 NSE : Open High Low Prev. Close Price Quantity 3.25 (0.96%) 317.55 Vol 342.90 52 Wk 317.55 52 Wk 337.15 Bid 340.35 100.00 340.20 120.00 Offer 340.55 5.00

41,156 388.00 89.10

219,006 388.90 86.65 Offer 340.40 55.00

Sun Pharmaceutical Industries BSE: 524715 | NSE: SUNPHARMA | ISIN: INE044A01028 1,481.00 -13.15 (-0.88%) BSE : Open 1,490.00 Vol High Low Prev. Close 1,490.00 52 Wk 1,465.00 52 Wk 1,494.15 Bid Price Quantity 1,480.20 1.00 Offer 1,483.00 10.00

1,829 1,605.00 953.00

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1,486.25 NSE Open High Low Prev. Close Price Quantity

-12.90 (-0.86%) 1,490.00 Vol 1,490.15 52 Wk 1,471.00 52 Wk 1,499.15 Bid 1,486.10 71.00 Offer 1,486.25 70.00 54,330 1,638.00 954.00

Ranbaxy Laboratories BSE: 500359 | NSE: RANBAXY | ISIN: INE015A01028 413.35 -12.95 (-3.04%) BSE : Open 416.25 Vol High Low Prev. Close 416.25 52 Wk 407.00 52 Wk 426.30 Bid Price Quantity 412.65 NSE : Open High Low Prev. Close Price Quantity -12.85 (-3.02%) 410.00 Vol 415.60 52 Wk 408.00 52 Wk 425.50 Bid 412.45 101.00 413.25 25.00 Offer 413.50 25.00

50,621 538.00 133.15

271,423 538.45 133.10 Offer 412.65 114.00

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CHAPTER 5 - DATA ANALYSIS AND INTERPRETATION

5.1 FINDINGS AND ANALYSIS

In this chapter the findings of the performance evaluation of the various equity diversified mutual funds and direct equity with respect to benchmarks is listed. The mutual funds and stocks have been chosen on the basis of their returns over past three years. The benchmark chosen is BSE Sensex for the comparison.

The mutual funds chosen are: 1. Principal emerging blue chip (G) 2. ICICI Pru Discovery Fund (G) 3. Birla Sun Life Dividend Yield Plus (G) 4. IDFC Premier Equity Fund - Plan A (G)

Direct Equity chosen for purpose are: 1. Tata Motors 2. HCL Tech 3. Sun Pharma 4. Ranbaxy Labs

The average returns for the equity diversified funds was 19.84% while the average return after investing in individual stocks was 21.87%. However, In both cases the returns earned were more than the market/benchmark average of BSE Sensex.

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The average risk for the equity diversified is less than the benchmark’s risk which is 1.75%. This indicates that the funds have taken lower risks than the market. On the other hand, the average risk for individual stocks is much higher than the equity diversified funds and market standard deviation as well. This indicates that investing in direct equity is far more riskier than equity diversified funds.

5.2 INVESTOR SURVEY ANALYSIS To understand the investor’s preference following questions have been asked:

1. Investment avenues you are aware of:

Most of the people are aware of Banks and Direct Equity investments. Mutual Funds are being considered an attractive investment opportunity by the investors. However, awareness about FDs and Gilts is low comparatively.

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2. Factors considered while investing gave several different answers as it was an open ended question. The answers ranged from liquidity, attractiveness, growth of industry (in case of shares), return, risk, etc.

3. Your portfolio includes majority of:

This question gave an insight into the type of investors. Most people prefer to invest in Bullions and Government securities and Bonds due to less risk factor associated with these investments. Equity shares are preferred by people who have knowledge about market and others prefer mutual funds as an investment option.

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4. Types of Mutual funds invested in :

From the above graph we find that most of the investors have invested in equity oriented schemes whether it is diversified; index based or tax saving schemes. The result could be attributed to the higher returns generated by the funds as against debt schemes and in the given market scenario with a highly buoyant market this seems to be a suitable selection.

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5. Past returns as a good measure of performance :

Past returns as a good measure of performance

27%

73%

yes

no

The graph suggests that a majority of the investors consider returns as a good measure of performance evaluation. However, whether the investors consider returns to be a sufficient criterion or not would be shown in the following graph:

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6. Past returns as the only measure of performance:
Past returns as the only measure for performance evaluation

44%

56%

yes

no

From the graph it is indicated that a majority of the individuals consider returns to be the only criteria to judge a funds’ performance. This suggests that most of them do not use any other measures like risk adjusted returns and other considerations while evaluating the performance of a mutual fund.

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7. Approach in making Investment

Out of 200 people surveyed, approximately 39% of investors rely totally on investment advisors, while 38% prefers to take friendly advice and rest (23%) take educated view on investments for investing in the various funds.

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8. While investing, you are more concerned about:

Before investing, one needs to be sure of the safety, risk attached with the particular investments and the returns earned. 42% of the people were more concerned about the safety of principle and 38% people were more interested in earning higher returns.

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9. How often do you monitor your portfolio?

Out of 200 people surveyed, approximately 32% of investors monitor their investment daily; while 24% monitors twice a month and only 8% of the respondents monitor their portfolio after more than a month.

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10. How long do you invest?

It was really a tough choice for investors as many of the respondents were not sure about their investment tenure. About half of them agreed that they like to book the profit as and when they reach the targeted return. Only 4% agreed that they are very long term player and don’t change the portfolio often. Around 12% told, they like to book their portfolio within 3-5 years, whereas 20% were those who were midterm player. Surprisingly, only 16% turned out to be short- term player.

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11. How your portfolio allocation has changed over the time

Out of 200 people surveyed, 70% of the respondents said that they have made significant changes in their portfolio, while 26% have changed their portfolio and rest (4%) didn’t changed their portfolio at all.

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12. You prefer to invest in Equity through?

This answer helped in doing a comparative analysis between Direct Equity and Equity linked Mutual funds. 52% people prefer to invest in equity linked mutual funds because of more diversification and less risk associated with these funds. 33% people prefer to invest in Direct Equity who have the time and knowledge to track the market and predict changes hoping to get higher returns.

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13. You prefer Mutual Funds (Equity) because (as per their first choice)

Major reason for preferring Equity diversified Mutual Funds was Diversification of portfolio and lack of time. This helped to reduce risk with decent returns to the investors.

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14. Sources of information for mutual funds

The graph indicates that the most popular source of information for mutual funds is the relationship managers of the banks or investment agents that the investors rely on for their investments. Another important source is the prospectus of the fund and of other funds, mutual fund websites are another important source of this information.

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15. You prefer direct investment because (as per their first choice)

From the graph it is indicated that a majority of the individuals prefers direct investment in equity because of the higher returns associated with it, while 33% of the respondents prefers it because they wants to manage their portfolio on their own.

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CHAPTER 6 – CONCLUSIONS

CONCLUSION

After the entire analysis of survey and questionnaires, we find that most of the respondents said that they have equity stocks in their portfolio. And among these (who invests in equity) 52%, investors prefer to invest through Mutual funds and only 33% (17 investors) said that they do invest directly in equity market.

According to survey people prefer to invest into Mutual funds than investing directly into stocks. 46% of the respondents feel that mutual funds reduce their risk in investing in the market as it gives diversification to their portfolio. 17% respondents said that it give them the benefit of professional management. Just 14% said it give them liquidity irrespective of market conditions. And also lack of time was cited as the reason by 23% of the respondents. Out of those who said that they prefer to directly invest in stock market, majority (54%) gave high weightage to high risk and high returns game. 33% said that they want to be their own fund managers. Also, over 48% agreed that they prefer to book profit as they reach their profit target. They do believe in churning and enjoy making higher returns.

Some investors told that they like to keep a certain percentage of their portfolio into mutual funds and the rest they want to manage by themselves. It can also be seen from findings that an investor has made higher returns in a long run by investing into direct equities, but if one wants to make a higher returns in the short run and mid term horizon, then definitely mutual funds are the best buy.

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LIMITATIONS

Paucity of time as we have to do this project with our course curriculum doing all other assignments, exams etc.

Indian stock market is semi-efficient market, where sentiments play a major role in price; hence 100% accurate predictions cannot be made about its future path.

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QUESTIONNAIRE Objective: - To find out investor’s preference between mutual fund and direct equity investment.

1. Investment avenues you are aware of:

a) Bonds d) Direct Equity

b) Bank FDs c) Mutual Funds (Equity/Debt) e) Bullion f) Gilts g) Real estate

h) Any other (please specify) ____________________________________

2. Factors considered while investing__________________________

3. Your portfolio includes majority of:

a) Govt. securities and bonds b) equity linked Mutual Funds c) Real estate e) Equity shares g) F.Ds d) Bullion’s f) Commodity

4. Types of Mutual funds invested in:

a) Equity Diversified c) Equity Tax Planning e) Balanced Debt g) Debt

b) Equity Index d) Balanced Equity f) Money Market

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5. Do you consider past returns as a good measure of a funds performance?

YES

NO

6. Do you base your performance evaluation on returns only?

YES

NO

7. Your approach in making Investment is:

a) You take educated view on the Investments b) You take friendly advice and make decision c) You rely totally on your investment advisor d) Others

8. While investing, you are more concerned about:

a) Safety of principal b) Earning interests above the inflation rate c) Earning high returns d) Others

9. How often do you monitor your portfolio?

a) Daily d) Monthly

b) Weekly e) More than a month

c) Twice in a month

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10. How long do you invest:

a) Short term (0-1 yr) c) Long term (3-5yrs)

b) Midterm (1-3 yrs) d) More than 5 years

e) Till you reach your target or returns

11. How your portfolio allocation has changed over the time a) Didn’t Change b) Changed c) Changed significantly

12. You prefer to invest in Equity through: a) Equity –linked Mutual Funds b) Direct investment in stock market c) Both

13. You prefer Mutual Funds (Equity) because ( pls rank in order of preference)

a) Diversification of portfolio b) Liquidity c) Professionally managed d) Lack of time e) Any other (please specify) _______________

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14. What are the various sources from where you get the performance evaluation data/advice for the funds?

Magazines

Financial Newspapers Mutual funds’ Annual and periodic reports

Mutual fund websites

Relationship managers

Fund tracking agencies (value research etc.)

Prospectus for a new fund

Any other please Specify_______________________________________

15. You prefer to invest in Direct Equity because :

a. You make higher returns b. It keeps you busy c. You like to manage your own funds

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BIBLIOGRAPHY:

Magazines:    

Mutual fund Insight Investors India Business World Business India

Websites:       

www.bseindia.com www.moneycontrol.com www.google.co.in www.capitalmarket.com www.indiainfoline.com www.yahoofinance.com www.mutualfundsindia.com

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