A PROJECT ON

“ COMPARATIVE STUDY BETWEEN INVESTMENT IN

EQUITY SHARES AND MUTUAL FUNDS.”

A PROJECT SUBMITTED
TO THE UNIVERSITY OF MUMBAI FOR THE DEGREE OF
BACHELORS OF MANAGEMENT STUDIES

IN PARTIAL FULFILLMENT OF REQUIREMENT OF THE

COURSE TY BMS SEM V

SUBMITTED BY
SAURABH SHRIKRUSHNA CHAVAN

UNDER THE SUPRVISION OF

PROF. PRACHI PURO

D.G. RUPAREL COLLEGE

MUMBAI-16

STATEMENT BY THE CANDIDATE

I, SAURABH SHRIKRUSHNA CHAVAN, wish to state the work
embodied in this project entitled, “COMPARATIVE STUDY
BETWEEN INVESTMENT MADE IN EQUITY SHARES AND
MUTUAL FUNDS” is carried out under the supervision of Prof.
PRACHI PURO, Department of management studies, D.G. RUPAREL
COLLEGE, MUMBAI.

This work is not submitted for any other degree of this or any other
universities.

__________________ ________________

Prof. PRACHI PURO SAURABH CHAVAN

(INTERNAL

EXAMINER)

___________________ __________________

EXTERNAL Prof. MANDAR BHAVE

EXAMINER (CO-ORDINATOR)

DECLARATION
I, Mr. Saurabh Chavan, student of D.G. RUPAREL COLLEGE OF ARTS SCENCE
AND COMMERCE from TY BMS (FINANCE, SEM V) hereby declare that I have
completed the project on “ COMPARATIVE STUDY BETWEEN INVESTMENT IN
EQUITY SHARES AND MUTUAL FUNDS” in the academic year(2018-19) and the
information is true and best to my knowledge.

___________________________

SAURABH SHRIKRUSHNA CHAVAN

ACKNOWLEDGEMENT
I feel deeply indebted towards people who have guided me in this project. It would
have not been possible to make such an extensive report without their support and
guidance.

I would firstly like to express my gratitude towards Prof. PRACHI PURO for having
shown so much trust and optimum guiding and encouraging me. She has shown a lot of
openness in her approach and would like to thank her for her support in a way that has
lead to proper and effective learning.

I would like to thank all the faculty members of the BMS department for their guidance
and motivation.

I express my gratitude towards our BMS Co-ordinator, Prof. MANDAR BHAVE sir
and our Principal, Prof. TUSHAR DESAI sir, for all the support I needed to complete
the project report.

Last but not the least I am grateful to my family members and my friends for being on
my side always, without their help and motivation it would have not been possible to
complete my project.
 TABLE OF CONTENT

Chapter no. Sr.no. Title Page

no.
A LIST OF HEADS

1 INTRODUCTION

1.1 SUMMARY

1.2 OBJECTIVES OF THE STUDY

1.3 RESEARCH METHODOLOGY

1.4 SAMPLING TECHNIQUES

1.5 LITERATURE REVIEW

2 WHAT ARE EQUITY SHARES?

2.1 MEANING AND DEFINITION

2.2 HISTORY

2.3 EVOLUTION

3 3.1 TRADING PROCESS

3.2 TYPES OF EQUITY SHARES

 3.3 HOW EQUITY SHARES WORK?

4 WHAT ARE MUTUAL FUNDS?

4.1 MEANING AND DEFINITION

4.2 HISTORY

4.3 EVOLUTION

5 5.1 TRADING PROCESS

5.2 TYPES OF MUTUAL FUNDS

5.3 HOW MUTUAL FUNDS WORK?

6 ADVANTAGES AND DISADVANTAGES

6.1 ADVANTAGES OF EQUITY SHARES

6.2 DISADVANTAGES OF EQUITY SHARES

6.3 ADVANTAGES OF MUTUAL FUND

6.4 DISADVANTAGES OF MUTUAL FUNDS

7 COMPARITIVE STUDY BETWEEN
EQUITY SHARES AND MUTUAL
FUNDS

8 QUESTIONNAIRE

8.1 ANALYSIS ( RESPONSE )

8.2 BAR DIAGRAM

9 CONCLUSION

10 BIBLOGRAPHY

11 LIMITATION OF STUDY

12 CERTIFICATES
 CHAPTER 1.1 SUMMARY OF EQUITY SHARE MARKET

Over the last few decades, the average person's interest in the equity market has
grown exponentially. This demand coupled with advances in trading technology has
opened up the markets so that nowadays nearly anybody can own equity. Despite their
popularity, however, most people don't fully understand equity. Equity can (and do)
create massive amounts of wealth, but they aren't without risks. The only solution to
this is education. The key to protecting investorsrself in the equity market is to
understand where investors are putting investorsr money.

Most of the trading in the Indian stock market takes place on its two stock exchanges:
the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The
BSE has been in existence since 1875. The NSE, on the other hand, was founded in
1992 and started trading in 1994. However, both exchanges follow the same trading
mechanism, trading hours, settlement process.

These shares are a type of Equity Finance: this means people who buy shares then
own part of the company. Each new shareholder who purchases stock will own part of
the company. If the company does well, shareholders will also get payments called
dividends.

The price of a security represents a consensus. It is the price at which one person
agrees to buy and another agrees to sell. The price at which an investor is willing to
buy or sell depends primarily on his expectations. If he expects the security's price to
rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple
statements are the cause of a major challenge in forecasting security prices, because
they refer to human expectations.

Ordinary shares give the highest financial gains, but have the highest risk. They are
the last to be paid if the company is wound up. People who buy shares then own part
of the company. Shares can be issued by both private limited companies and public
companies.
If a private limited company gets into difficulty, the shareholders can lose their
investment in the company. The shares of private limited companies cannot be traded
on a stock exchange or offered to the general public. When a company moves from
being private to public, anyone can buy shares in it.

Becoming a public company is a big step for a business; companies often do it to raise
fresh capital for expansion. Each new shareholder who purchases stock will own part
of the company.

The first issue of shares is called an Initial Public Offering and also known as being
listed or floating the company. A company floats, lists or becomes public on a stock
exchange known as a public market. The most common type is ordinary shares which
give shareholders a vote at the Annual General Meetings (AGM) or Extraordinary
General Meetings (EGM).

In the future, the Company can raise further funds by issuing more equity (shares). It’s
called a secondary offer or rights issue. Those not taken up can be sold on the open
market.

The study of equity securities is important for many reasons. First, the decision on
how much of a client's portfolio to allocate to equities affects the risk and return
characteristics of the entire portfolio. Second, different types of equity securities have
different ownership claims on a company's net assets, which affect their risk and
return characteristics in different ways. Finally, variations in the features of equity
securities are reflected in their market prices, so it is important to understand the
valuation implications of these features.
 SUMMARY OF MUTUAL FUNDS

Mutual funds are the starting point for many individual investors because they offer a
balanced portfolio in a single investment.

A mutual fund is the answer to all these situations. It appoints professionally qualified
and experienced staff that manages each of these functions on a full time basis. The
large pool of money collected in the fund allows it to hire such staff at a very low cost
to each investor. In effect, the mutual fund vehicle exploits economies of scale in all
three areas - research, investments and transaction processing. While the concept of
individuals coming together to invest money collectively is not new, the mutual fund
in its present form is a 20th century phenomenon. In fact, mutual funds gained
popularity only after the Second World War. Globally, there are thousands of firms
offering tens of thousands of mutual funds with different investment objectives.
Today, mutual funds collectively manage almost as much as or more money as
compared to banks.

Mutual funds pool money from the investing public and use that money to buy other
securities, usually stocks and bonds. The value of the mutual fund company depends
on the performance of the securities it decides to buy. So when investors buy a share
of a mutual fund, investors are actually buying the performance of its portfolio.

A mutual fund offers shareholders an opportunity to invest in stocks, bonds and other
investments. Consumers who purchase mutual fund shares rely on the fund's
management to choose buy investments that will earn the highest possible returns.

A mutual fund is an investment vehicle made up of a pool of money collected from

many investors for the purpose of investing in securities such as stocks, bonds, money
market instruments and other assets. Mutual funds are operated by professional
money managers, who allocate the fund's investments and attempt to produce capital
gains and/or income for the fund's investors. A mutual fund's portfolio is structured
and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed
portfolios of equities, bonds and other securities. Each shareholder, therefore,
participates proportionally in the gains or losses of the fund. Mutual funds invest in a
wide amount of securities, and performance is usually tracked as the change in the
total market cap of the fund, derived by aggregating performance of the underlying
investments.

Mutual fund units, or shares, can typically be purchased or redeemed as needed at the
fund's current net asset value (NAV) per share, which is sometimes expressed

as NAVPS. A fund's NAV is derived by dividing the total value of the securities in the
portfolio by the total amount of shares outstanding.

The average mutual fund holds hundreds of different securities, which means mutual
fund shareholders gain important diversification at a very low price.

The Indian mutual fund industry is dominated by the Unit Trust of India, which has a
total corpus of Rs700bn collected from more than 20 million investors. The UTI has
many funds/schemes in all categories i.e. equity, balanced, income etc. with some
being open-ended and some being closed-ended. The Unit Scheme 1964 commonly
referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of
about Rs200bn. Most of its investors believe that the UTI is government owned and
controlled, which, while legally incorrect, is true for all practical purposes.

The second largest category of mutual funds is the ones floated by nationalized banks.
Can bank Asset Management floated by Canara Bank and SBI Funds Management
floated by the State Bank of India are the largest of these. GIC AMC floated by
General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC
are some of the other prominent ones.
 CHAPTER 1.2 OBJECTIVES OF THE STUDY

1)To act as a better source of investment for the investor at a certain level of risk.

2)The main purpose is to find whether mutual fund is investor’s best choice or not.

3)To examine mutual funds investment with equity shares.

4)To assist the community at large in deciding which investment will provide best
returns considering various points at a time.

5)To reveal the current situation of mutual funds and equities in India.

6)To make a direct comparison between investment in equity and investment through
mutual funds.
 CHAPTER 1.3 RESEARCH METHODOLOGY

Scope of the Research:

The main objective of the project is to get to know more about investment in equity
share and in mutual funds and to determine which among them acts as a better source
of investment from the investor’s point of view.

Primary Data:

The primary data has been collected through a survey of 100 investors who invest in
equity shares and mutual funds as investment avenues.

Secondary Data:

The secondary data has been collected from various reference books and websites
which have been mentioned in the bibliography at the end of the project.
 CHAPTER 1.5 SAMPLING TECHNIQUES

The Sampling Technique for this use for the study was Probability Sampling here in a
simple random survey was conducted by questioning random people who had a brief
idea about Internet Banking.

SAMPLE SIZE

To analyse the situation of Scope of Internet Banking in Mumbai was taken of

Approximately 100 Customers
 CHAPTER 1.5 LITERATURE REVIEW

Literature on mutual fund performance evaluation is enormous. A few research studies

that haveinfluenced the preparation of this paper substantially are discussed in this
section.

Sharpe, William F. (1966) suggested a measure for the evaluation of

portfolio performance.Drawing on results obtained in the field of portfolio
analysis, economist Jack L. Treynor hassuggested a new predictor of mutual
fund performance, one that differs from virtually all thoseused previously by
incorporating the volatility of a fund's return in a simple yet
meaningfulmanner.

Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio

performance (Jensen’salpha) that estimates how much a manager’s forecasting
ability contributes to fund’s returns. Asindicated by Statman (2000), the e SDAR of a
fund portfolio is the excess return of the portfolioover the return of the benchmark
index, where the portfolio is leveraged to have the benchmark index’s standard
deviation.S.Narayan Rao , et. al., evaluated performance of Indian mutual funds in a
bearmarket through Jensen’s measure, and Fama’s measure. The study used 269 open-
ended schemes (outof total schemes of 433) for computing relative performance
index. Then after excluding fundswhose returns are less than risk-free returns,
58 schemes are finally used for further analysis. Theresults of performance measures
suggest that most of mutual fund schemes in the sample of 58 were able to satisfy
investor’s expectations by giving excess returns over expected returns basedon both
premium for systematic risk and total risk.This paper uses a technique
calledconditional performance evaluation on a sample of eighty-nine Indian mutual
fund schemes .This paper measures the performance of various mutual funds with
both unconditional The results suggest that the use of conditioninglagged information
variables improves the performance of mutual fund schemes, causing alphasto shift
towards right and reducing the number of negative timing coefficients.
 Mishra, et al.,(2002) measured mutual fund performance using lower partial
moment. In this paper, measuresof evaluating portfolio performance based on lower
partial moment are developed. Risk from thelower partial moment is measured
by taking into account only those states in which return is below a pre-
specified “target rate” like risk-free rate.

Kshama Fernandes(2003) evaluated indexfund implementation in India. In this

paper, tracking error of index funds in India is measured .The consistency and
level of tracking errors obtained by some well-run index fund suggests thatit is
possible to attain low levels of tracking error under Indian conditions. At
the same time,there do seem to be periods where certain index funds
appear to depart from the discipline of indexation. T h e methodology is based
on the combination of discrete and continuous multi-criteria decision aidmethods for
mutual fund selection and composition. UTADIS multi-criteria decision aid methodis
employed in order to develop mutual fund’s performance models. Goal programming
model isemployed to determine proportion of selected mutual funds in the final
 CHAPTER 2

2.1 INTRODUCTION TO EQUITY SHARES

The Definition of Equity is plain and simple, equity is a share in the ownership of a
company. Equity represents a claim on the company's assets and earnings. As
investors acquire more equity, investorsr ownership stake in the company becomes
greater. Whether investors say shares, equity, it all means the same thing. Being an
Owner Holding a company's equity means that investors are one of the many owners
(shareholders) of a company and, as such, investors have a claim to everything the
company owns. As an owner, investors are entitled to investorsr share of the
company's earnings as well as any voting rights attached to the equity.

A company’s equity capital is that part of its capital which reflects the residual value
of its assets after taking account of all third party liabilities. The equity capital in a
company in liquidation is the property of the holders of ordinary shares hence these
shares are often referred to as equities.

Equity shareholders have a right to share in the profits of the company or any surplus
assets on winding up. In accordance with legislation and accounting standards, shares
in a company’s share capital may usually be either equity shares or non-equity shares.
Broadly what distinguishes an equity shareholder from a non-equity shareholder is
his/her right as regards dividends and as regards capital. An equity shareholder has the
right to participate in a distribution and share in any surplus assets on a winding-up
beyond a specified amount.
An equity share also represents the form of fractional or part ownership in which a
shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk
associated with business venture. The holders of such shares are members of the
company and have voting rights.

The holders of such shares are members of the company and have voting rights. A
company may issue such shares with differential rights as to voting, payment of
dividend, etc.

Equity shares are the main source of finance of a firm. It is issued to the general
public. Equity share-holders do not enjoy any preferential rights with regard to
repayment of capital and dividend. They are entitled to residual income of the
company, but they enjoy the right to control the affairs of the business and all the
shareholders collectively are the owners of the company.

Equity shares are also known as ordinary shares. They are the form of fractional or
part ownership in which the shareholder, as a fractional owner, takes the maximum
business risk. The holders of Equity shares are members of the company and have
voting rights. Equity shares are the vital source for raising long-term capital.

Generally a company’s ordinary shares are those with which it is incorporated and
where a company has only one class of shares that class will be ordinary shares.
Ordinary shares typically carry rights to vote on all matters put to a general meeting of
a company, rights to dividends and rights to participate in a surplus on a winding-up.

A company may, however, create different classes of ordinary shares with different
rights as to voting or dividend or other rights such as the right to appoint a person to
the board of directors. Once ordinary shares are fully paid, a shareholder has no
further liability on his/her shares. In a winding up of the company, an ordinary
shareholder will rank behind secured creditors and behind holders of any other class
of share to which his/her rights have been subordinated in the articles of association.
 Features of equity shares

• Ownership: The shareholder of the equity share holds the right of controlling the
affairs of the organization.

• Transferability: It has transferable nature which means ownership of the share can be
easily transferred to another person. This can be done with or without any
consideration unless specified in the business documentation.

• Permanent in nature: Equity shares are permanent in nature and shareholders of

equity shares do not get a fixed rate of dividend.

• Liability: Equity shareholder’s liability is limited to the extent of the investment.

• Dividend: In the company the equity shares are attributed in terms of dividend. The
dividend which is payable to the shareholders of the equity is an appropriation of
profit.

• The maturity of the shares: Equity shares have persistent nature of capital, which
does not have any period of maturity. The equity shares cannot be redeemed during
the life span of the company.

• Remaining claim on income: Equity shareholders have the right to obtain the just out
income after doing the payment of the fixed rate of dividend to the preference
shareholders. The income accessible to the shareholders is equal to the profit after tax
subtracted by the preference dividend.

• Remaining claims on assets: If the company gets harm, the equity shareholders have
the right to obtain the remaining claims on assets. These rights are just accessible to
the equity shareholders.

• Right to control: Equity shareholders are the actual owners of the company and
that’s the reason that they have the authority to command the management of the
 company and they have authority to take all the decisions about the operations of the
business.

• Voting rights: Equity shareholders have voting rights in the meeting of the company
as they have the authority to vote. They can also make differences in any decision of
the business concern. Equity shareholders just have the voting rights in the company
meeting and also they have the power to suggest proxy for the participation and vote
in the meeting instead of the shareholder.

• Pre-emptive right: Equity shareholder has pre-emptive rights too. The preemptive
right is the legal right of the present shareholders. It is attached by the company in the
primary opportunity to purchase extra equity shares in proportion to the current
holding capacity of them.
2.2 HISTORY OF EQUITY SHARE MARKET

Stock markets were started when countries in the New World began trading with each
other. While many pioneer merchants wanted to start huge businesses, this required
substantial amounts of capital that no single merchant could raise alone. As a result,
groups of investors pooled their savings and became business partners and co-owners
with individual shares in their businesses to form joint-stock companies. Originated
by the Dutch, joint-stock companies became a viable business model for many
struggling businesses. In 1602, the Dutch East India Co. issued the first paper shares.
This exchangeable medium allowed shareholders to conveniently buy, sell and trade
their stock with other shareholders and investors.

The idea was so successful that the selling of shares spread to other maritime powers
such as Portugal, Spain and France. Eventually, the practice found its way to England.
Trade with the New World was big business so trading ventures were initiated. Other
industries during the Industrial Revolution began using the idea as a way to generate
start up capital. This influx of capital allowed for the discovery and development of
the New World and for the growth of modern industrialized manufacturing.

As the volume of shares increased, the need for an organized marketplace to exchange
these shares became necessary. As a result, stock traders decided to meet at a London
coffeehouse, which they used as a marketplace. Eventually, they took over the
coffeehouse and, in 1773, changed its name to the "stock exchange." Thus, the first
exchange, the London Stock Exchange, was founded. The idea made its way to the
American colonies with an exchange started in Philadelphia in 1790.

The history of the Indian equity market goes back to the 18th century when securities
of the East India Company were traded. Till the end of the 19th century, the trading of
securities was unorganized and the main trading centres were Calcutta (now Kolkata)
and Bombay (now Mumbai).
Trade activities prospered with an increase in share price in India with Bombay
becoming the main source of cotton supply during the American Civil War (1860-61).
In 1865, there was drop in share prices. The stockbroker association established the
Native Shares and Stock Brokers Association in 1875 to organize their activities. In
1927, the BSE recognized this association, under the Bombay Securities Contracts
Control Act, 1925.

The Indian Equity Market was not well organized or developed before independence.
After independence, new issues were supervised. The timing, floatation costs, pricing,
interest rates were strictly controlled by the Controller of Capital Issue (CII). For four
and half decades, companies were demoralized and not motivated from going public
due to the rigid rules of the Government.

In the 1950s, there was uncontrollable speculation and the market was known as 'Satta
Bazaar'. Speculators aimed at companies like Tata Steel, Kohinoor Mills, Century
Textiles, Bombay Dyeing and National Rayon. The Securities Contracts (Regulation)
Act, 1956 was enacted by the Government of India. Financial institutions and state
financial corporation were developed through an established network.

In the 60s, the market was bearish due to massive wars and drought. Forward trading
transactions and 'Contracts for Clearing' or 'badla' were banned by the Government.
With financial institutions such as LIC, GIC, some revival in the markets could be
seen. Then in 1964, UTI, the first mutual fund of India was formed.

In the 70's, the trading of 'badla' resumed in a different form of 'hand delivery
contract'. But the Government of India passed the Dividend Restriction Ordinance on
6th July, 1974. According to the ordinance, the dividend was fixed to 12% of Face
Value or 1/3rd of the profit under Section 369 of The Companies Act, 1956 whichever
is lower.

This resulted in a drop by 20% in market capitalization at BSE (Bombay Stock

Exchange) overnight. The stock market was closed for nearly a fortnight. Numerous
multinational companies were pulled out of India as they had to dissolve their
majority stocks in India ventures for the Indian public under FERA, 1973.
The 80's saw a growth in the Indian Equity Market. With liberalized policies of the
government, it became lucrative for investors. The market saw an increase of stock
exchanges, there was a surge in market capitalization rate and the paid up capital of
the listed companies.

The 90s was the most crucial in the stock market's history. Indians became aware of
'liberalization' and 'globalization'. In May 1992, the Capital Issues (Control) Act, 1947
was abolished. SEBI which was the Indian Capital Market's regulator was given the
power and overlook new trading policies, entry of private sector mutual funds and
private sector banks, free prices, new stock exchanges, foreign institutional investors,
and market boom and bust.

In 1990, there was a major capital market scam where bankers and brokers were
involved. With this, many investors left the market. Later there was a securities scam
in 1991-92 which revealed the inefficiencies and inadequacies of the Indian financial
system and called for reforms in the Indian Equity Market.
Two new stock exchanges, NSE (National Stock Exchange of India) established in
1994 and OTCEI (Over the Counter Exchange of India) established in 1992 gave BSE
a nationwide competition. In 1995-96, an amendment was made to the Securities
Contracts (Regulation) Act, 1956 for introducing options trading. In April 1995, the
National Securities Clearing Corporation (NSCC) and in November 1996, the
National Securities Depository Limited (NSDL) were set up for demutualised trading,
clearing and settlement. Information Technology scrips were the major players in the
late 90s with companies like Wipro, Satyam, and Infosys.
 2.3 EVOLUTION OF EQUITY SHARE MARKET IN INDIA

Indian stock market marks to be one of the oldest stock market in Asia. It dates back
to the close of 18th century when the East India Company used to transact loan
securities.

In 1956, the Government of India recognized the Bombay Stock Exchange as the first
stock exchange in the country under the Securities Contracts (Regulation) Act. The
most decisive period in the history of the BSE took place after 1992.

In the aftermath of a major scandal with market manipulation involving a BSE

member named Harshad Mehta, BSE responded to calls for reform with intransigence.
The foot-dragging by the BSE helped radicalise the position of the government, which
encouraged the creation of the National Stock Exchange (NSE), which created an
electronic marketplace.

NSE started trading on 4 November 1994. Within less than a year, NSE turnover
exceeded the BSE. BSE rapidly automated, but it never caught up with NSE market
turnover. The second strategic failure at BSE came in the following two years. BSE
responded by political effort, with a friendly SEBI chairman.

NSE scored nearly 100% market share in the runaway success of equity derivatives
trading, thus consigning BSE into clearly second place.

Today, NSE has roughly 66% of equity spot turnover and roughly 100% of equity
derivatives turnover.

Stock Exchange provides a trading platform, where buyers and sellers can meet to
transact in securities.

The turnover of the country's stock exchanges -- BSE and NSE-- surged to nearly Rs
70 trillion for the equity segment in the first 10 months of the current financial year.

Economic Times estimated that as of April 2018, 60 million (6 crore) retail investors
had invested their savings in stocks in India, either through direct purchases of
equities or through mutual funds.
Major Shift
Technology, and the subsequent shift to program trading by computers, has been a
major market shift. This has allowed trading volume to skyrocket. The Stock Market
Crash of 1987, which saw the Dow plummet 507.99 points, or 22.61% on Oct. 19,
1987, was blamed on program trading that caused investors to rush for the exits in an
extreme example of herd behaviour. Currently, there has been speculation that flash
traders, or investment shops that employ high frequency trading to buy and sell huge
amounts of stocks, are creating unusually heavy market volatility. (For additional
reading related to investors acting in the market, read Understanding Investor
Behaviour.

In the 1990s and 1980s, it was much more common for markets to fluctuate less, or
closer to 1%.
Technology has allowed a wider array of individuals and market participants, such as
flash traders, to influence the markets. Technology has also made it possible for
leveraged ETFs to be created. In previous years, institutions, including banks and
brokerage firms that offered a full-service approach to individuals, had more of a lock
on the market. The advent of the internet, and digital information exchange, has
replaced analysts and brokerage houses that could better control the flow of
information, such as analyst reports, Securities and Exchange Commission filings, and
communicating with company management teams.

Exchange provides a trading front-end ‘NEAT’ for trading members of the Exchange.
Trading Members are also offered a customized trading front-end according to their
requirements. The Exchange provides a facility to software vendors providing CTCL /
Internet based trading software to trading members of the Exchange to be empanelled
with the Exchange.

Market-capitalisation (market-cap) of Indian equities is likely to hit $6.1 trillion by

2027, up from $2.3 trillion in 2017, predicts Morgan Stanley in its recent Asian equity
Strategy Report. “Within the Asian region, India's equity market is expected to grow
the fastest of the major markets at 10.1 per cent compounded annual growth rate
(CAGR), reaching $6.1 trillion by 2027.
 CHAPTER 3

3.1 TRADING PROCESS

One of the benefits of trading in the share market is that investors can become partial
owners of a company. These shares, offered by companies in return for money, are
called equities. In the Indian stock market, equities are available for trading at the
National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Trading and Settlement Procedure

1] Selecting a Broker or Sub-broker

When a person wishes to trade in the stock market, it cannot do so in his/her

individual capacity. The transactions can only occur through a broker or a sub-broker.
So according to one’s requirement, a broker must be appointed.

Now such a broker can be an individual or a partnership or a company or a financial

institution (like banks). They must be registered under SEBI. Once such a broker is
appointed investors can buy/sell shares on the stock exchange.
2] Opening a Demat Account

Since the reforms, all securities are now in electronic format. There are no issues of
physical shares/securities anymore. So an investor must open a dematerialized
account, i.e. a demat account to hold and trade in such electronic securities.

So investors or investorsr broker will open a demat account with the depository
participant. Currently, in India, there are two depository participants, namely Central
Depository Services Ltd. (CDSL) and National Depository Services Ltd. (NDSL).

3] Placing Orders

And then the investor will actually place an order to buy or sell shares. The order will
be placed with his broker, or the individual can transact online if the broker provides
such services. One thing of essential importance is that the order /instructions should
be very clear. Example: Buy a 100 shares of XYZ Co. for a price of Rs. 140/- or less.

Then the broker will act according to investorsr transactions and place an order for the
shares at the price mentioned or an even better price if available. The broker will issue
an order confirmation slip to the investor.

4] Execution of the Order

Once the broker receives the order from the investor, he executes it. Within 24 hours
of this, the broker must issue a Contract Note. This document contains all the
information about the transactions, like the number of shares transacted, the price,
date and time of the transaction, brokerage amount etc.

Contract Note is an important document. In case of a legal dispute, it is evidence of

the transaction. It also contains the Unique Order Code assigned to it by the stock
exchange.
5] Settlement

Here the actual securities are transferred from the buyer to the seller. And the funds
will also be transferred. Here too the broker will deal with the transfer. There are two
types of settlements,

• On the Spot settlement: Here we exchange the funds immediately and the
settlement follows the T+2 pattern. So a transaction occurring on Monday will
be settled by Wednesday (by the second working day)

• Forward Settlement: Simply means both parties have decided the settlement
will take place on some future date. Can be T+% or T+9 etc.
 3.2 TYPES OF EQUITY SHARES

The equity shares can be classified on the basis of their issue price, returns, type of
issue and voting rights.

1. On the basis of issue price:-

• PAR OR FACE VALUE

Par or face value is the value of shares which we record in the books of
accounts.

• ISSUE PRICE
This price is the price which a company actually offers to the investors.
Normally, the issue price and face value of a share are the same in the case of
new companies.

• SHARE/SECURITY PREMIUM AND SHARE AT DISCOUNT

 When issuance of shares is at a price higher than face value, we shall call this
excess amount to be premium. Contrary to it, when the issuance of shares is at
a price lower than face value, we shall call this deficit amount to be discount.

2. On the basis of return:-

• Blue Chip Shares

These are the shares of the companies which are well established and reputed in all
fields.

These shares normally pay dividends and have a track record of performance and
earnings.

Blue chip companies also have no large amounts of liabilities. Blue chip shares are
usually the cream of the crop and are sought after. These types of shares are generally
considered stable and safe as an investment.

The blue chip companies include Microsoft, Coca- Cola, Reliance, ONGC, NTPC,
SBI, ICICI, Tata Steels, Wipro and few others.

• Penny stocks

These are another share classification and these shares are low in price and high in
risk.

Penny shares are not traded on the regular stock markets and exchanges and are
instead traded on over the counter markets.

Penny shares offer a significant opportunity for reward if investors choose wisely, but
there is a high level of risk involved because many penny shares come from
companies without an extensive history available.

• Income shares

These companies have a stable share value and always pay high dividends.
 Since they have high dividend painvestorst ratio, the profits of the companies saved
are less and so their growth opportunities are very less.

• Growth shares

These are shares of companies which are on top in their industry like Wipro in
computers, Tata’s in steel, Bajaj in automobiles, etc.

The shares here have less dividend pay out and so their growth rate is high.

• Cyclical Shares

Some company’s performance keeps fluctuating like a business cycle, meaning the
share prices are affected with any variations in the economy.

Sugar and fertiliser are two such industries.

• Defensive Shares
 The shares of these companies are not affected by the economical changes.

• Speculative Shares

The shares here are traded on speculations. These shares are high risk in nature but
also give very high returns in short terms.

The scrips fall sharply suddenly so investors should always keep an eye on it always.

• Value shares

These are shares which investors believe have been undervalued and these shares are
believed to be worth more than the current market value.

3. On the basis of type of issue

• Initial public offering (IPO)

Initial public offering is the process by which a private company can go public by sale
of its stocks to general public. It could be a new, investorsng company or an old
company which decides to be listed on an exchange and hence goes public.

• Preferential allotment

Preferential Allotment is the process by which allotment of securities/shares is done

on a preferential basis to a select group of investors. In this Company makes bulk
allotment of Shares/ Securities to individuals, companies, venture capitalists or any
other person through a fresh issue of shares.
• Right issue

A rights issue is a way by which a listed company can raise additional capital.
However, instead of going to the public, the company gives its existing shareholders
the right to subscribe to newly issued shares in proportion to their existing holdings.

• Bonus shares

Bonus shares are the additional shares given to the current shareholders without any
additional costs, based upon the number of shares that shareholder owns. These are
company’s accumulated earnings which are not given out in the form of dividends,
but are converted into free shares.

• Sweat equity shares

Sweat equity shares means such equity shares as are issued by a company to its
directors or employees at a discount or for consideration, other than cash, for
providing their know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.

4. On the basis of voting rights:-

All share capital which is NOT preferential share capital is Equity Share Capital.
Equity shares are of two types:

1. With voting rights

2. With differential rights to voting, dividends, etc., in accordance with the rules.

In 2008, Tata Motors introduced equity shares with differential voting rights –
the ‘A’ equity shares. According to the issue,

• Every 10 ‘A’ equity shares have one voting right

• ‘A’ equity shares get 5 percentage points more dividend than the ordinary
shares.
 Due to the difference in voting rights, the ‘A’ equity shares traded at a
discount to ordinary shares with complete voting rights.

3.3 HOW EQUITY SHARE WORK?

Equity share is a main source of finance for any company giving investors rights to
vote, share profits and claim on assets. In the world of finance and investment
management, ‘equity share’ is a big word and we frequently use it in every next
discussion. We call it stock, ordinary share, or shares, all are one and the same.

Normally, a company is started with equity finance as its first source of capital from
the owners or promoters of that company. After a certain level of growth, there is a
requirement for more capital for further growth. The company then finds an investor
in the form of friends, relatives, venture capitalists, mutual funds, or any such small
group of investors and issue fresh equity shares to these investors.

A point comes where the company reaches a very big level and requires huge capital
investment for business growth. Initial Public Offer (IPO) is the offer of shares which
the company makes to the general public for the first time. And Follow on Public
Offer (FPO) are more such offers in future to the public.

They fall under long-term sources of finance- category because legally they are
irredeemable in nature. For an investor, these shares are a certificate of ownership in
the company by virtue of which investors are entitled to share the net profits and have
a residual claim over the assets of the company in the event of liquidation. Investors
have voting rights in the company and their liability to the company limits to the
amount of issue price of the equity stock.

There are various class of shares (equity) dependent on various things:-

AUTHORIZED SHARE CAPITAL

It is the maximum amount of capital which a company can issue. The companies can
increase it from time to time. For that we need to comply with some formalities also
have to pay some fees to the legal bodies.

ISSUED SHARE CAPITAL

It is that part of authorized capital which the company offers to the investors.

SUBSCRIBED SHARE CAPITAL

It is that part of issued capital which an investor accepts and agrees upon.

PAID UP CAPITAL

It is the part of the subscribed capital, which the investors pay. Normally, all
companies accept complete money in one shot and therefore issued, subscribed and
paid capital becomes one and the same. Conceptually, paid-up capital is the amount of
money which a company actually invests in the business.
When investors buy a share of a stock, investors automatically own a percentage of
the firm, and an ownership stake of its assets. If investors paid Rs100 for a share of
stock, and the stock appreciates in value by, say, 10% during the period investors own
it, investors've earned Rs10 on investorsr stock investment.

That's the idea behind buying stocks -- to invest in solid, well-managed companies
that turn a profit. A company that succeeds on those fronts stands a good chance of its
stock price growing in value, while the company, in going public, makes use of the
proceeds of the original stock sale to reach growth goals and manage operating
expenses.

The company can use the cash to invest in new markets, research new products, hire
more workers and better advertise their products and services, among other things.

In most cases, it doesn't take much effort to buy stock shares and own a piece of a
company. Investors would simply pay what the market is demanding (market price)
for a particular stock, via a stockbroker either over the phone or via a digital device,
and investors're good to go. Investors'll receive confirmation of investorsr purchase
and can sell the stock whenever investors like, hopefully for a profit.

As a partial company owner, being a stockholder presents perks --including sharing

in company profits, voting on a company's board of directors and approving major
changes at a firm, like a merger or an acquisition. A fair, open and efficient stock
market is vital to the proper trading of stocks around the world -- to the publiclytraded
companies whose stocks are traded, and to the investors who buy and sell stocks.
Companies gain access to capital by issuing stocks, and investors have a place to
safely and accurately trade securities. Investors buy stocks primarily to make a profit.
But that said, it's not the only reason to buy stocks. Let's look at the most common
reasons people buy stocks in the stock market:

• To make money. When stocks appreciate in value and are worth more than
the investor paid to buy the stock, that's a positive outcome for investors.

• To earn dividend payments. When a publicly-traded company pays out

dividends to shareholders, that adds value (and income) for the shareholder.
 • To gain influence at a company. Stock market shareholders have the ability
to vote on company matters and key issues.

• To outflank inflation. Inflation eats into income. Thus, making money on

stocks helps investors stay ahead of inflation.

• To save for retirement and other long-term financial objectives. Since

stocks appreciate over time, much more so than bonds or bank deposits, they
are a great tool for investors looking to save for the long-haul, especially for
retirement.

CHAPTER 4

4.1 INTRODUCTION TO MUTUAL FUNDS

Mutual Funds are financial intermediaries which collect the savings of investors and
invest them in primary and secondary securities, like money market instruments,
corporate and government bonds, and equity shares of joint stock companies.

THE SECURITY AND EXCHANGE BOARD OF INDIA (Mutual Funds)

REGULATIONS,1996 defines a mutual fund as a " a fund establishment in the form
of a trust to raise money through the sale of units to the public or a section of the
public under one or more schemes for investing in securities, including money market
instruments."

A mutual fund is an investment security that enables investors to pool their money
together into one professionally managed investment. Mutual funds can invest in
stocks, bonds, cash or a combination of those assets. The underlying security types,
called holdings, combine to form one mutual fund, also called a portfolio.

In simpler terms, mutual funds are like baskets. Each basket holds certain types of
stocks, bonds or a blend of stocks and bonds to combine for one mutual fund
portfolio.

For example, an investor who buys a fund called XYZ International Stock is buying
one investment security — the basket — that holds dozens or hundreds of stocks from
all around the globe, hence the "international" moniker.

It's also important to understand that the investor does not actually own the underlying
securities — the holdings — but rather a representation of those securities; investors
own shares of the mutual fund, not shares of the holdings. For example, if a particular
mutual fund includes shares of stock in Apple, Inc. (AAPL) among other portfolio
holdings, the mutual fund investor does not directly own Apple stock.

Instead, the mutual fund investor owns shares of the mutual fund. However, the
investor can still benefit by the appreciation of shares in Apple.

Since mutual funds can hold hundreds or even thousands of stocks or bonds, they are
described as diversified investments. The concept of diversification is similar to the
idea of strength in numbers. Diversification helps the investor because it can reduce
market risk compared to buying individual securities. Investments spread across a
wide cross-section of industries and sectors and so the risk is reduced. Diversification
reduces the risk because not all stocks move in the same direction at the same time.
One can achieve this diversification through a Mutual Fund with far less money than
one can on his own.
Stocks, bonds, and mutual funds all involve some level of market risk, which is the
possibility of fluctuation in value or even the loss of principal (the amount investors
originally invested).

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money collected & 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 its unit holders in proportion to the number of units
owned by them (pro rata) shares the capital appreciation realized by the scheme. Thus,
a Mutual Fund is the most suitable investment for the common person as it offers an
opportunity to invest in a diversified, professionally managed portfolio at a relatively
low cost. 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

A mutual fund is the answer to all these situations. It appoints professionally qualified
and experienced staff that manages each of these functions on a full time basis. The
large pool of money collected in the fund allows it to hire such staff at a very low cost
to each investor. In effect, the mutual fund vehicle exploits economies of scale in all

three areas - research, investments and transaction processing. While the concept of
individuals coming together to invest money collectively is not new, the mutual fund
in its present form is a 20 th century phenomenon. In fact, mutual funds gained
popularity only after the Second World War. Globally, there are thousands of firms
offering tens of thousands of mutual funds with different investment objectives.
Today, mutual funds collectively manage almost as much as or more money as
compared to banks.
 4.2 HISTORY OF MUTUAL FUND MARKET

The first introduction of a mutual fund in India occurred in 1963, when the
Government of India launched Unit Trust of India (UTI). UTI enjoyed a
monopoly in the Indian mutual fund market until 1987, when a host of other
government-controlled Indian financial companies established their own funds,
including State Bank of India, Canara Bank and by Punjab National Bank.

Prof K Geert Rouwenhorst in 'The Origins of Mutual Funds', states that the origin of
pooled investing concept dates back to the late 1700s in Europe, when "a Dutch
merchant and broker invited subscriptions from investors to form a trust to provide an
opportunity to diversify for small investors with limited means." The emergence of
"investment pooling" in England in the 1800s brought the concept closer to the US
shores.

The enactment of two British laws, the Joint Stock Companies Acts of 1862 and 1867,
permitted investors to share in the profits of an investment enterprise and limited
investor liability to the amount of investment capital devoted to the enterprise. Shortly
thereafter, in 1868, the Foreign and Colonial Government Trust was formed in
London.

It resembled the US fund model in basic structure, providing "the investor of

moderate means the same advantages as the large capitalists by spreading the
investment over a number of different stocks." More importantly, the British fund
model established a direct link with the US securities markets, helping finance the
development of the post-Civil War US economy.

The Scottish American Investment Trust, formed in February 1873, by fund pioneer
Robert Fleming, invested in the economic potential of the US, chiefly through
American railroad bonds. Many other trusts followed them, who not only targeted
investment in America, but led to the introduction of the fund investing concept on the
US shores in the late 1800s and the early 1900s. The first mutual or 'open-ended' fund
was introduced in Boston in March 1924.
The Massachusetts Investors Trust, which was formed as a common law trust,
introduced important innovations to the investment company concept by establishing
a simplified capital structure, continuous offering of shares, and the ability to redeem
shares rather than holding them until dissolution of the fund and a set of clear
investment restrictions as well as policies.

The stock market crash of 1929 and the Great Depression that followed greatly
hampered the growth of pooled investments until a succession of landmark securities
laws, beginning with the Securities Act, 1933 and concluded with the Investment
Company Act, 1940, reinvigorated investor confidence. Renewed investor confidence
and many innovations led to relatively steady growth in industry assets and number of
accounts.

Let us start the discussion of the performance of mutual funds in India from the day
the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India
invited investors or rather to those who believed in savings, to park their money in
UTI Mutual Fund. The performance of mutual funds in India in the initial phase was
not even closer to satisfactory level. People rarely understood, and of course investing
was out of question. But yes, some 24 million shareholders were accustomed with
guaranteed high returns by the beginning of liberalization of the industry in 1992.
This good record of UTI became marketing tool for new entrants. The expectations of
investors touched the sky in profitability factor. However, people were miles away
from the preparedness of risks factor after the liberalization.

The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let me
concentrate about the performance of mutual funds in India through figures. From Rs.
67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure
had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.
The net asset value (NAV) of mutual funds in India declined when stock prices started
falling in the year 1992. Those days, the market regulations did not allow portfolio
shifts into alternative investments. There was rather no choice apart from holding the
cash or to further continue investing in shares. One more thing to be noted, since only
closed-end funds were floated in the market, the investors disinvested by selling at a
loss in the secondary market.
The performance of mutual funds in India suffered qualitatively. The 1992 stock
market scandal, the losses by disinvestments and of course the lack of transparent
rules in the whereabouts rocked confidence among the investors. Partly owing to a
relatively weak stock market performance, mutual funds have not yet recovered, with
funds trading at an average discount of 1020% of their net asset value. The measure
was taken to make mutual funds the key instrument for long-term saving. The more
the variety offered, the quantitative will be investors. At last to mention, as long as
mutual fund companies are performing with lower risks and higher profitability within
a short span of time, more and more people will be inclined to invest until and unless
they are fully educated with the dos and don'ts of mutual funds.
 4.3 EVOLUTION OF MUTUAL FUND IN INDIA

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank of India. The
history of mutual funds in India can be broadly divided into four distinct phases.

First Phase - 1964-1987

Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set
up by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from
the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory
and administrative control in place of RBI. The first scheme launched by UTI was
Unit Scheme 1964. At the end of 1988 UTI had Rs. 6,700 crores of assets under
management.
Second Phase - 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non-UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non-UTI Mutual Fund
established in June 1987 followed by Canara bank Mutual Fund (Dec 87), Punjab
National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of
India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund
in June 1989 while GIC had set up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.
47,004 crores.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

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

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996. The industry now
functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual
funds setting up funds in India and also the industry has witnessed several mergers
and acquisitions. As at the end of January 2003, there were 33 mutual funds with total
assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs. 44,541 crores of assets
under management was way ahead of other mutual funds.
Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit
Trust of India with assets under management of Rs. 29,835 crores as at the end of
January 2003, representing broadly, the assets of US 64 scheme, assured return and
certain other schemes. The Specified Undertaking of Unit Trust of India, functioning
under an administrator and under the rules framed by Government of India and does
not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76,000
crores of assets under management and with the setting up of a UTI Mutual Fund,
conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking
place among different private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth.

Assets managed by the Indian mutual fund industry grew to ₹ 23.96 trillion in July
this year, up 17.33% from the previous year. “Around the same time last year, there
was a rising equity market, low rates on traditional investment products like deposits,
a high decibel investor awareness campaign from Amfi and a fine job from the retail
distribution community in bringing investors through the SIP route, all of which
contributed towards the growth of the industry," said Ajit Menon, executive director
and chief business officer, DHFL Pramerica Asset Managers Pvt. Ltd.

The growth in MFs also points to various trends domestically. The share of MFs in the
amount flowing into the capital markets through portfolio investments rose to 18.4%
in March 2018 from 8.5% in 2014. On the other hand, the share of foreign portfolio
investors or FPIs (of the total institutional holding) fell to 56.4% from 61.8% of
market capitalisation during the same period.
“During the period, domestic investors became bigger than before, particularly after
demonetisation. Due to fall in interest rates, investors moved to equities from
fixedincome assets. So the impact or mix of FPIs lowered," said S. Krishnakumkar,
chief investment officer, Sundaram Mutual.
 CHAPTER 5

5.1 TRADING PROCESS OF MUTUAL FUNDS

Mutual funds have been around in India for nearly three decades now, but the number
of people who actively buy and sell mutual funds in the country remains abysmally
low as a percentage of the population.

The fundamental reason for poor participation in the mutual fund market is the lack of
awareness; not just about the benefits of mutual funds, but also the knowledge of how
to buy and sell them.
Once investors have decided which way investors want go and which mutual fund
scheme(s) investors want to invest in, investors will have to place the order.
Here’s the step-by-step procedure of buying a mutual fund:

• Get a demat account.

• Go to the Mutual Funds section of Securities webpage. Or, investors can call
investorsr broker.

• Select the name of the mutual fund or the AMC’s name that investors wish to
invest in.

• Then select the correct scheme as many fund houses offer multiple schemes.
• Specify the amount investors wish to invest in the scheme.

• In case of a dividend scheme, select one of the two dividend options -

painvestorst or reinvestment. If investors select the painvestorst option, the
mutual fund’s dividends will be credited to investorsr bank account. The
reinvestment option allows the amount to be used to buy additional units of
the scheme. Investors thus won’t get the dividends credited to investorsr bank
account. Select the former if investors want a secondary source of income. The
reinvestment option, however, helps investors increase the size of investorsr
holdings and increase returns.

To start investing in a fund scheme investors need a PAN, bank account and be KYC
(know investorsr client) compliant. The bank account should be in the name of the
investor with the Magnetic Ink Character Recognition (MICR) and Indian Financial
System Code (IFSC) details. These details are mentioned on every cheque leaf and it
is common for an agent or distributor to seek a cancelled bank cheque leaf.

Most mutual funds only set a share price once per day at the close of market trading.
In order to prevent mutual fund traders from gaining an unfair advantage, purchases
and sales of mutual fund shares are accepted only once daily, with trade requests
received before a set deadline all occurring at the same time at the end of the trading
day.
However, the clearing process differs depending on the type of mutual fund.
Moneymarket mutual funds give investors a liquid investment vehicle that's similar to
holding cash. In order to reflect the need for liquidity, money market mutual fund
trades generally clear and settle on the same day that the investor makes a trade. The
speed with which these trades clear makes money market mutual funds a viable
choice for financial institutions to use them as cash equivalents for purposes of trading
other types of securities.

Most other mutual funds follow a procedure that's lengthier than for mutual funds but
which still happens more quickly than stock trades. Mutual funds typically settle
transactions on the next business day after the trade is executed. Occasionally, certain
specialty funds that deal in illiquid securities might provide for longer periods to clear
and settle a fund trade, and the prospectus and shareholder agreement will specify the
maximum waiting period if this is the case.
The upshot of the clearing and settling process for mutual funds is that fund buyers
need to have cash available to settle their purchase more quickly than the three-day
period that prevails for most stock transactions. Sellers, on the other hand, get access
to their cash more quickly with a fund sale than with a stock sale, but they'll still have
to wait a day to use the money for other purposes.

Closed-end funds and exchange-traded funds that trade on exchanges throughout the
day typically have different rules, and many follow the same three-day clearing and
settlement process that applies to stocks. Mutual funds can be bought and sold daily.
However, unlike equities and other types of securities that trade on the secondary market
throughout each trading day, share transactions in a fund are carried out once each day after
the close of market at 4 p.m. EST (Eastern Standard Time). With the exception of money
market mutual funds, the clearing of a trade transaction is executed over the following one
to three business days, depending on the fund company and the type of fund.

Clearing the Trade

Once an investor places an order to purchase or redeem shares of a mutual fund

(directly or through a broker or advisor), the transaction is carried out at the next
available net asset value (NAV), which is calculated daily after market close.
Depending on the type of fund (e.g., equity versus commodity) and the mutual fund
family, the trade is cleared – trade orders are matched up and share ownership is
registered and transferred – through a third-party custodian or clearing house. Equity
and bond funds tend to clear within one day of the trade, while commodity and other
types of funds take up to three days after the trade date. Money market mutual fund
shares are the exception, as they are cleared on the day of the trade transaction.

Settlement Date

The settlement date for a mutual fund trade is the date on which the transaction is
considered to be finalized and closed. Money that a customer owes must be available
in his account to cover the shares purchased by the trade settlement date. Likewise,
the proceeds from the redemption of fund shares must be deposited into the
customer's fund account by the trade settlement date. Money market funds close and
settle on the same day as the trade date.
 5.2 TYPES OF MUTUAL FUNDS

1. Money market funds

These funds invest in short-term fixed income securities such as government bonds,
treasury bills, bankers’ acceptances, commercial paper and certificates of deposit.
They are generally a safer investment, but with a lower potential return then other
types of mutual funds. Canadian money market funds try to keep their net asset value
(NAV) stable at $10 per security.

2. Fixed income funds

These funds buy investments that pay a fixed rate of return like government bonds,
investment-grade corporate bonds and high-yield corporate bonds. They aim to have
money coming into the fund on a regular basis, mostly through interest that the fund
earns. High-yield corporate bond funds are generally riskier than funds that hold
government and investment-grade bonds.

3. Equity funds

These funds invest in stocks. These funds aim to grow faster than money market or
fixed income funds, so there is usually a higher risk that investors could lose money.
Investors can choose from different types of equity funds including those that
specialize in growth stocks (which don’t usually pay dividends), income funds (which
hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks,
small-cap stocks, or combinations of these.

4. Balanced funds

These funds invest in a mix of equities and fixed income securities. They try to
balance the aim of achieving higher returns against the risk of losing money. Most of
these funds follow a formula to split money among the different types of investments.
They tend to have more risk than fixed income funds, but less risk than pure equity
funds. Aggressive funds hold more equities and fewer bonds, while conservative
funds hold fewer equities relative to bonds.
5. Index funds

These funds aim to track the performance of a specific index such as the S&P/TSX
Composite Index. The value of the mutual fund will go up or down as the index goes
up or down. Index funds typically have lower costs than actively managed mutual
funds because the portfolio manager doesn’t have to do as much research or make as
many investment decisions.

ACTIVE VS PASSIVE MANAGEMENT

Active management means that the portfolio manager buys and sells investments,
attempting to outperform the return of the overall market or another identified
benchmark. Passive management involves buying a portfolio of securities designed to
track the performance of a benchmark index. The fund’s holdings are only adjusted if
there is an adjustment in the components of the index.

6. Specialty funds

These funds focus on specialized mandates such as real estate, commodities or

socially responsible investing. For example, a socially responsible fund may invest in
companies that support environmental stewardship, human rights and diversity, and
may avoid companies involved in alcohol, tobacco, gambling, weapons and the
military.

7. Fund-of-funds

These funds invest in other funds. Similar to balanced funds, they try to make asset
allocation and diversification easier for the investor. The MER for fund-of-funds tend
to be higher than stand-alone mutual funds.

Before investors invest, understand the fund’s investment goals and make sure
investors are comfortable with the level of risk. Even if two funds are of the same
type, their risk and return characteristics may not be identical. Learn more about how
mutual funds work. Investor may also want to speak with a financial advisor to help
investors decide which types of funds best meet investorsr needs.
8. Tax saving funds

These funds make investment majorly in the equity shares. Tax- saving funds make an
investor eligible to claim tax deductions under the income tax act. Risk factor
involved in these funds is generally high. At the same time, higher returns are offered
if the fund’s performance is at par.
 TYPES OF MUTUAL FUNDS SCHEMES

Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended

scheme depending on its maturity period.

Open-ended Fund/ Scheme:

An open-ended fund or scheme is one that is available for subscription and repurchase
on a continuous basis. These schemes do not have a fixed maturity period. Investors
can conveniently buy and sell units at Net Asset Value (NAV) related prices which
are declared on a daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme:

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The
fund is open for subscription only during a specified period at the time of launch of
the scheme. Investors can invest in the scheme at the time of the initial public issue
and thereafter they can buy or sell the units of the scheme on the stock exchanges
where the units are listed. In order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units to the mutual fund through
periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least
one of the two exit routes is provided to the investor i.e. either repurchase facility or
through listing on stock exchanges. These mutual funds schemes disclose NAV
generally on weekly basis.
Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced

scheme considering its investment objective. Such schemes may be open-ended or
close-ended schemes as described earlier. Such schemes may be classified mainly as
follows:

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such
funds have comparatively high risks. These schemes provide different options to the
investors like dividend option, capital appreciation, etc. and the investors may choose
an option depending on their preferences. The investors must indicate the option in
the application form. The mutual funds also allow the investors to change the options
at a later date. Growth schemes are good for investors having a long-term outlook
seeking appreciation over a period of time.

Income / Debt Oriented Scheme:

The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments. Such funds are
less risky compared to equity schemes. These funds are not affected because of
fluctuations in equity markets. However, opportunities of capital appreciation are also
limited in such funds. The NAVs of such funds are affected because of change in
interest rates in the country. If the interest rates fall, NAVs of such funds are likely to
increase in the short run and vice versa. However, long term investors may not bother
about these fluctuations.

Balanced Fund:

The aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion indicated
in their offer documents. These are appropriate for investors looking for moderate
growth. They generally invest 40-60% in equity and debt instruments. These funds are
also affected because of fluctuations in share prices in the stock markets. However,
NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund:

These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in
safer short-term instruments such as treasury bills, certificates of deposit, commercial
paper and inter-bank call money, government securities, etc. Returns on these
schemes fluctuate much less compared to other funds. These funds are appropriate for
corporate and individual investors as a means to park their surplus funds for short
periods.

Gilt Fund:

These funds invest exclusively in government securities. Government securities have

no default risk. NAVs of these schemes also fluctuate due to change in interest rates
and other economic factors as is the case with income or debt oriented schemes.

Index Funds:

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive
index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in the
same weightage comprising of an index. NAVs of such schemes would rise or fall in
accordance with the rise or fall in the index, though not exactly by the same
percentage due to some factors known as "tracking error" in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual
fund scheme.

There are also exchange traded index funds launched by the mutual funds which are
traded on the stock exchanges
 5.3 HOW MUTUAL FUNDS WORK

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
management company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unitholders. Asset Management Company
(AMC) approved by SEBI manages the funds by making investments in various types
of securities. Custodian, who is registered with SEBI, holds the securities of various
schemes of the fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance and
compliance of SEBI Regulations by the mutual fund.
 SEBI Regulations require that at least two thirds of the directors of trustee company or
board of trustees must be independent i.e. they should not be associated with the
sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds
are required to be registered with SEBI before they launch any scheme.

1. Trust :-

Mutual Fund (MF) is a trust comprising like-minded investors who pool in their
money into a corpus that is invested by the MF's Asset Management
Company(AMC) in different types of investments such as stocks, government and
corporate bonds, and more.

2. Sponsor:-

The sponsor is the promoter of the mutual fund. The sponsor brings in capital and
creates a mutual fund trust and sets up the AMC.

The sponsor makes an application for registration of the mutual fund and contributes
at least 40% of the net worth of the AMC. In other words, every MF needs a sponsor
before it can commence operations.

Among other requirements, the sponsor should also have a 5-year track record in the
financial services business and should have made profit in at least 3 out of the 5 years.
The sponsors could be a bank, a corporate or a financial institution.

3. Board of trustees:-

The primary objective of the trustees of the mutual fund is to hold its property for the
benefit of the unit-holders. The board acts as a protector of unit-holders’ interests: it
appoints a custodian for safe-keeping of assets and closely monitors the AMC.

The trustees also have to spell out the responsibilities of the AMC, monitor any new
scheme introduced and ensure full compliance with regulatory guidelines.
After SEBI approval, the sponsor has to appoint the board of trustees. Every fund
house must have at least four trustees. If a trustee company has been appointed, then
that company would need to have at least four directors on the board. Two-thirds of
the trustees should be independent.

A fund sponsor organizes a mutual fund as a corporation; however, it is not an

operating company with employees and a physical place of business in the traditional
sense. A fund is a "virtual" company, which is typically externally managed. It relies
on third parties or service providers, either fund sponsor affiliates or independent
contractors, to manage the fund's portfolio and carry out other operational and
administrative activities.

The fund sponsor raises money from the investing public, who become fund
shareholders. It then invests the proceeds in securities (stocks, bonds and money
market instruments) related to the fund's investment objective. The fund provides
shareholders with professional investment management, diversification, liquidity and
investing convenience. For these services, the fund sponsor charges fees and incurs
expenses for operating the fund, all of which are charged proportionately against a
shareholder's assets in the fund.

The most prevalent and well-known type of mutual fund operates on an openended
basis. This means that it continually issues (sells) shares on demand to new
investors and existing shareholders who are buying. It redeems (buys back) shares
from shareholders who are selling.
Mutual fund shares are bought and sold on the basis of a fund's net asset value
(NAV). Unlike a stock price, which changes constantly according to the forces of
supply and demand, NAV is determined by the daily closing value of the underlying
securities in a fund's portfolio (total net assets) on a per share basis.

In some instances, investors can purchase shares directly from the fund, but most
funds are sold through an investment intermediary: a broker, investment advisor,
financial planner, bank or insurance company. These intermediaries are compensated
for their services through a variety of sales charge options. The former come directly
out of the investor's pocket (deducted from the amount to be invested) and the latter as
a proportionate deduction of the shareholder's fund assets.
The other parties include:-
 Investment advisor
 Principal underwriter
 Administrator
 Transfer agent
 Custodian
 Independent public accountant
 CHAPTER 6

ADVANTAGES AND DISADVANTAGES

6.1 ADVANTAGES OF TRADING IN EQUITY SHARES

Benefits of equity share investment are dividend entitlement, capital gains, limited
liability, control, claim over income and assets, right shares, bonus share, liquidity etc.
Equity share is looked at from different perspectives by different stakeholders.
Broadly, there are two major angles of looking at it – Company and Investor Angle.
So, any statement about equity capital would have a different meaning for a company
and an investor. We will look at the investor angle of equity share investment.
 ADVANTAGES OF INVESTMENT IN EQUITY SHARE CAPITAL

• Dividend

An investor is entitled to receive a dividend from the company. It is one of the two
main sources of return on his investment.

• Capital gains

The other source of return on investment apart from dividend is the capital gains.
Gains which arise due to rise in market price of the share.

• Limited liability
 Liability of shareholder or investor is limited to the extent of the investment made. If
the company goes into losses, the share of loss over and above the capital investment
would not be borne by the investor.

• Exercise control

By investing in the company, the shareholder gets ownership in the company and
thereby he can exercise control. In official terms, he gets voting rights in the
company.

• Claim over income

An investor of equity share is the owner of the company. The investor enjoys a share
of the incomes of the company. He will receive some part of that income in cash in
the form of dividend and remaining capital is reinvested in the company.

• Rights shares

Whenever companies require further capital for expansion etc., they tend to issue
‘rights shares’. By issuing such shares, ownership and control of
existing shareholders are preserved and the investor receives investment priority over
other general investors. Right Shares are issued at a price lower than current market
price of the equity share. So, existing investor can take that advantage or otherwise
can renounce right in some one’s favour to get value of right.

• Bonus shares

At times, companies decide to issue bonus shares to its shareholders. It is also a type
of dividend. Bonus shares are free shares given to existing shareholders and many
times they are given in lieu of dividends.

• Liquidity

The shares of the company which is listed on stock exchanges have the benefit of any
time liquidity. The shares can very easily transfer ownership.

• Stock split
 Stock split means splitting a share into parts. How should an investor be benefited by
this? By splitting of share, the per-share price reduces in the market which eventually
increases the readability of share. At the end, stock split results in higher volumes
with a number of investors leading to high liquidity of the share.

• Rate of Return

Perhaps the main advantage stock market trading brings to the table is its inherent
ability to deliver significant rates of returns. Contrasted with an interest-bearing bank
account which might pay 5% per annum if investors’re lucky (without factoring in
applicable taxes and the impact of inflation on the value of capital), stock market
trading can see a 5% return over the course of one day, and oftentimes even more for
the shrewd investor.

• Acquisition of Assets

Unlike speculating on index movements, trading on the stock markets sees the
acquisition of real, valuable assets in the form of the shares that are bought. Unless
something goes disastrously wrong with the underlying business, any shares investors
acquire will retain some value that can be extracted at a later stage, making it a more
secure investment with life-long value locked in.

• No Fixed Dividend

Equity shares do not hold any responsibility to pay a fixed rate of dividend. If the
profit is earned by the company, equity shareholders are entitled to profit or else they
are entitled to get the dividend, but they cannot hold any dividend from the company.

• Repay

Equity Shares are the persistent source of capital. The company has to pay equity
shares back while excluding the liquidation period.

• Right to vote

Equity shareholders are the actual owners of the company who are eligible for all
voting rights. This kind of authority is only accessible to the equity shareholders.

• Actual Gainer
 Whenever the profits are earned, the equity shareholder becomes actual gainers of
profit in the form of increased dividends and realization in the value of shares.

• Persistent sources of finance

Equity share capital belongs to the source of finance which is long-term permanent in
nature, therefore, it can be utilized for the long-term or requirement of fixed capital of
the business concern.

• Less Capital Cost

Cost of capital is one of the vital factors, make a difference in the value of the
company. In the case where the company is willing to increase its value, they have to
utilize more share capital as it has less cost of capital (ke) as compared to the other
source of finance.

• Retained earnings

In the situation in which a company has the extra share capital, the retained earnings
will get benefit which is the fewer cost sources of finance, as compared to other
sources of finance.

• Tax benefits

This is one of the major advantages which are associated with the equity shares. If
there’s larger yield of equity shares from an increase in capital gains then the taxes are
charged at a lower rate than the income.

• Creditworthiness

From company’s point of view, equity shares are highly beneficial in terms of
creditworthiness. If there is a larger equity capital base then it will increase the
creditworthiness of the organisation among the investors as well as the creditors.

• Ease of transferability
 The shares owners can easily transfer his interest to someone else either to the new or
existing shareholders. Due to this reason, in several small business the shares are
nonliquid which makes it difficult to market.

• Safeguarding from inflation

The equity shares offer an excellent hedge against inflation. It does not completely
compensate or the declining purchasing power but works best for inflation. But if the
rates of the interest are high, the price of the share tends to be a bit depressed.

• They are easy to sell.

The stock market allows investors to sell investorsr stock at any time. Economists use
the term "liquid" to describe that fact that investors can turn investorsr shares into cash
quickly and with low transaction costs. That's important if investors suddenly need
investorsr money in a hurry. Since prices are volatile, investors run the risk of being
forced to take a loss.

These are the few important advantages of the shares that ensure maximum benefit to
the shareholders and the company. Along with this, these shares are considered as the
permanent source of capital, thus does not get involved in any repayment liability.
Also, the company is not legally bound regarding payment of dividend.
 6.2 DISADVANTAGES OF EQUITY SHARES

The following are the disadvantages of trading in equity shares:-

• Investors could lose investorsr entire investment

If a company does poorly, investors will sell, sending the stock price plummeting.
When investors sell, investors will lose investorsr initial investment. If investors can't
afford to lose investorsr initial investment, then investors should buy bonds. Investors
get an income tax break if investors lose money on investorsr stock loss.
Unfortunately, investors also have to pay taxes if investors make money. Investors
pay the capital gains tax.

• Dividend

The dividend which a shareholder receives is neither fixed nor controllable by

investor. The management of the company decides how much dividend should be
given. If there is a loss, there is no question of dividend. If there is a profit, unless
Board of Directors propose dividend, investors will not receive dividend.

• High risk

Equity share investment is a risky investment as compared to any other investment

like debts etc. The money is invested based on the faith an investor has in the
company. There is no collateral security attached with it.
• Fluctuations in market price

The market price of any equity share has a wide variation. It is always very difficult to
book profits from the market. On the contrary, there are equal chances of losses.

• Limited control

An equity investor is a small investor in the company, therefore, it is hardly possible to

impact the decision of the company using the voting rights.

• Residual claim

An equity shareholder has a residual claim over both the assets and the income.
Income which is available to equity shareholders is after the payment of all other
stakeholders’ viz. debenture holders etc.
• Volatile Investments

Investment in BSE is subjected to many risks since the market is volatile. The shares
of a company go up and come down so many times in just a single day. These price
fluctuations are unpredictable most of the times and the investor sometimes have to
face severe loss due to such uncertainty.

• Brokerage Commissions Kill Profit Margin

Every time an investor buys or sells his shares, he has to pay some amount as a
brokerage commission to the broker, which kills the profit margin.

• Subject to Higher Risk

When investing in the stock market, the higher the return the greater the risk of losing
money. Stock market prices are linked to the issuing company’s earnings. When a
company is experiencing financial difficulties, the price of the stock can decline
rapidly. Stock market volatility can lead to a substantial loss of investment. If the
majority of the market is experiencing loss and leaving the market because of
economic factors, investors may find it difficult to sell investorsr shares to someone
else.

• Time-Consuming Investment

Investing in the stock market is not like playing the lottery. Investors need to perform
research and investment analysis to find potentially profitable stock. For many
individuals, investing in the stock market is a time-consuming, complex task. Even
after investors find a stock to buy, investors must monitor the movement of the
stock’s price. Although many investors implement a long-term buy and hold strategy,
it is important to know when to exit a stock position if it turns out to be a bad
investment choice.

• Redemption of shares

There is no redemption of equity shares. Redemption means the Company pays the
shareholder a prefixed value for the shares at a prefixed time in the future. This is not
allowed in case of equity shares. It is available only to preference shareholders. As
equity capital cannot be redeemed, there is a danger of over capitalisation.
• Difficulty in management

Equity shareholders can put obstacles for management by manipulation and

organising themselves.

• Undue speculation

During prosperous periods higher dividends have to be paid leading to increase in the
value of shares in the market and it leads to speculation. Speculation refers to the act
of conducting a financial transaction that has substantial risk of losing value but also
holds the expectation of a significant gain or other major value. With speculation, the
risk of loss is more than offset by the possibility of a substantial gain or other
recompense.

• Lack of stability in returns

Returns in equity share market are unstable and highly volatile in nature. Higher the
risk in the investment, higher would be the returns. Similarly lower the risk, lower
will be the returns. Due to such instability in returns, investors who desire to invest in
fixed income have no attraction for equity shares.

• No trading on equity

When the company raises capital only with the help of equity, the company cannot
take the advantage of trading on equity.

• Fixed obligations

In order to be able to pay handsome dividends and attract share capital, a company
must earn more than what it has to pay as interest on bonds (debentures) or fixed
dividend on preference shares. In our example, if profit is Rs 30 lakhs instead of Rs
120 lakhs, i.e., a modest 7% return on net investment, hardly anything will be left
over for distribution among shareholders as dividends. In this context, the entire profit
of Rs 30 lakhs will have to be utilised for interest payment.
• Earning fluctuations:

Trading on equity carries good sense only when proper allowance is made for
fluctuations in earnings. If a company is to make any real gain from trading on equity
its ratio of net income to fixed charges has to be greater than 2:1 ratio. Since during a
deep depression or a prolonged recession a company is likely to face considerable
financial difficulties, it is in the Tightness of things to maintain a safe ratio.

In the financial literature this is called the safety factor, which ensures the payment of
fixed charges, i.e., interest on debentures and dividend on preference shares even
though profits have dropped down by 50% (i.e., profits have been halved). In our
example, since the ratio of net profit to fixed charges is 3: 2, the company is in a
position to pay interest even though profit falls from Rs 60 lakhs to Rs 30 lakhs. It
should not be missed that both profits and losses get inflated due to trading on equity.

• Liquidity position:

Trading on equity is profitable only under the following circumstances:

(i) When a company is a well-established one,

(ii) When a company is engaged in non-speculative business and

(iii) When sales volume and earnings (profits) of a company are more or
less stable, regular and fairly certain.

In reality, we observe that when a company is well-established, as is the case with

public utility concerns, trading on equity are found to be profitable.

Since such companies have maximum liquidity, they can undertake the risk of
borrowing on a large scale and paying a huge sum in the form of interest and fixed
dividends. Such companies may have equity capital of about 40% and debt capital of
60% in their capital structure.

However, in most manufacturing enterprises and commercial concerns we find

modest trading on equity. In such companies borrowed funds may constitute even less
 than 40% due to lack of sufficient liquidity which is attributable to fluctuating sales,
changing profits and, above all, narrow profit margins.

• Diminishing returns:

Trading on equity also suffers from diminishing returns. In fact, any increase in
borrowing will raise the rate of interest in an imperfectly competitive capital market.
This means that further borrowing will be more and more costly.

• Huge fixed asset investment:

To adopt this practice an enterprise will have to make a huge investment in fixed
assets just to make its creditors (the lenders of funds) feel safe and secure.
 6.3 ADVANTAGES OF TRADING IN MUTUAL FUNDS

Mutual funds are a popular and easily understood investment vehicle for many
investors. For investors with limited knowledge, time or money, mutual funds can
provide simplicity and other benefits.

The Advantages of Mutual Funds

• Diversification
One perennial rule of investing, for both large and small investors, is asset
diversification. Diversification involves the mixing of different types of investments
and asset classes within a portfolio and is used to manage risk. For example, choosing
to buy stocks in the retail sector and offsetting them with stocks in the industrial
sector can reduce the impact of the performance of any one security on investorsr
entire portfolio. To achieve a truly diversified portfolio, investors may have to buy
stocks with different capitalization from different industries and bonds with varying
maturities from different issuers. For the individual investor, this can be quite costly.

By purchasing mutual funds, investors are provided with the immediate benefit of
instant diversification and asset allocation without the large amounts of cash needed
to create individual portfolios. One caveat, however, is that simply purchasing one
mutual fund might not give investors adequate diversification. It's important to check
if the fund is sector or industry-specific. For example, investing only in an oil and
energy mutual fund might spread investorsr money over 50 companies, but if energy
prices fall, investor’s portfolio will likely suffer.

01:40
• Economies of Scale
The easiest way to understand economies of scale is by thinking about volume
discounts; in many stores, the more of one product investors buy, the cheaper that
product becomes. For example, when investors buy a dozen donuts, the price per
donut is usually cheaper than buying a single one. This also occurs in the purchase
and sale of securities. If investors buy only one security at a time, the transaction fees
will be relatively large.

Mutual funds are able to take advantage of their buying and selling volume to reduce
transaction cost for investors. When investors buy a mutual fund, investors are able to
diversify without the numerous commission charges. Imagine if investors had to buy
each of the 10-20 stocks needed for diversification. The commission charges alone
would eat up a good chunk of investorsr investment. Take into account additional
transaction fees for every time investors want to modify investorsr portfolio, and as
investors can see the costs start to add up. With mutual funds, investors can make
transactions on much larger scale for less money.

• Divisibility
Many investors don't have the exact sums of money to buy round lots of securities.
One or two hundred dollars is usually not enough to buy a round lot of a stock,
especially after deducting commissions. Investors can purchase mutual funds in
smaller denominations, usually ranging from $100 to $1,000 minimums, although
some funds will have a $2,500 minimum. Smaller denominations of mutual funds
give investors the ability to make periodic investments through monthly purchase
plans while taking advantage of dollar cost averaging. So, rather than having to wait
until investors have enough money to buy higher-cost investments, investors can get
in right away with mutual funds. This provides an additional advantage: liquidity.
• Liquidity
Another advantage of mutual funds is that investors can get in and out with relative
ease. In general, investors are able to sell investorsr mutual funds in a short period of
time without there being much difference between the sale price and the most current
market value. However, it is important to watch out for any fees associated with
selling, including back-end load fees. Also, unlike stocks and exchange traded funds
(ETFs), which trade any time during market hours, mutual funds transact only once
per day after the fund's net asset value (NAV) is calculated.

• Professional Management
When investors buy a mutual fund, investors are also choosing a professional money
manager. This manager will use the money that investors invest to buy and sell stocks
that he or she has carefully researched. Therefore, rather than having to thoroughly
research every investment before investors decide to buy or sell, investors have a
mutual fund's money manager to handle it for investor.

• The Bottom Line

As with any investment, there are risks involved in buying mutual funds. These
investment vehicles can experience market fluctuations and sometimes provide
returns below the overall market. Also, the advantages gained from mutual funds are
not free: Many of them carry loads, annual expense fees and penalties for early
withdrawal

• Affordability

An investor can began buying units or shares with a relatively small amount of money
(e.g. Rs. 500 for the initial purchase). Some mutual funds also permits investors to
buy more units on a regular basis with even smaller instalments.

• Flexibility

Many mutual fund companies manage several different funds (e.g. money market,
fixed income, growth, balanced, sector index and global funds) and allow investors to
switch between these funds at little or no change. This enables investor to change
his/her portfolio balance as and when investorsr personal needs, financial goals or
market conditions change.
• Dividend Reinvestment

As dividends and other interest income is declared for the fund, it can be used to
purchase additional shares in the mutual fund, therefore helping investorsr investment
grow.

• Convenience and Fair Pricing

Mutual funds are easy to buy and easy to understand. They typically have low
minimum investments (some around $2,500) and they are traded only once per day at
the closing net asset value (NAV). This eliminates price fluctuation throughout the
day and various arbitrage opportunities that day traders practice.

• Simplicity

Mutual Funds are easy to understand. Anything can be made into something more
complex than it needs to be and mutual funds are no exception to this truth. However,
mutual funds require no experience or knowledge of economics, financial statements,
or financial markets to be a successful investor.

A mutual fund is an investment security type that enables investors to pool their
money together into one professionally managed investment. Mutual funds can invest
in stocks, bonds, cash and/or other assets. These underlying security types, called
holdings combine to form one mutual fund, also called a portfolio.

In different words, Mutual funds can be considered baskets of investments. Each

basket holds dozens or hundreds of security types, such as stocks or bonds. Therefore,
when an investor buys a mutual fund, they are buying a basket of investment
securities.

• Accessibility

Mutual Funds are easy to buy. Mutual funds are offered at brokerage firms, discount
brokers online, mutual fund companies, banks, and insurance companies. Even
beginning investors can easily open an account at a no-load mutual fund company,
such as Vanguard Investments, and open an account within minutes.
• Variety

Mutual Funds come in many different categories and types. As investors grow
investors portfolio of mutual funds, investors will want to diversify into various
mutual fund categories and types. Investors can invest in mutual funds that cover
the main asset classes (stocks, bonds, cash) and various sub-categories or investors
can even venture into specialized areas, such as sector funds or precious metals
funds.

• Cost

Mutual funds are one of the best investment options considering the costs involved. If
investors hire a portfolio management service, investors’ll typically be charged 2% to
3% of the total investment per year. They will also deduct a share from investorsr
profit.

Mutual funds are relatively cheaper and deduct only 1% to 2% of the expense ratio.
Debt mutual funds usually deduct even lesser.
• Tax Efficiency

Mutual funds are relatively more tax-efficient than other types of investments.
Longterm capital gain tax on equity mutual fund is zero, which means, if investors
sell investorsr investment one year after purchase, investors don’t have to pay tax.

For debt funds, long-term capital gains apply when investors hold them for 3 years.
To understand tax on mutual funds:

Apart from this, there are certain classes of funds, called ELSS funds, that are exempt
under section 80 C up to a limit of Rs 1.5 lakhs. Some important features of taxsaving
funds are:

It is a surrogate route to the direct stock market

The minimum investment is Rs 500 per month

It has a lock-in-period of only 3-years

The returns are tax-free as well

• Disciplined investing

Share prices are highly volatile and can induce the investor to buy or sell in short time
periods due to fear or greed. Frequent trading often leads the investor to incur losses.
Mutual funds encourage investors to invest over a long time horizon, which is
essential to creating wealth. Furthermore, systematic investment plans encourage
investors to invest in a disciplined manner to meet their long term financial objectives.

Many investors fail to build a substantial investment corpus because they are not able
to invest in a disciplined way. Savings not invested regularly often gets spent on
discretionary lifestyle related expenses. Systematic investment plans (SIPs) in mutual
funds help investors to maintain a disciplined approach to savings and investment.
SIPs also help investors take emotions out of the investment process.

Very often investors get very enthusiastic in bull market conditions, but get nervous in
bear markets. It is an established fact that investments made in bear markets help
investors get high returns in the long term. By investing through SIPs in a mechanical
way, investors can stay disciplined, which is critical to achieving their financial
objectives.
• Variety of products

Mutual funds offer investors a variety of products to suit their risk profiles and
investment objectives. Apart from equity funds, there are also balanced funds,
monthly income plans, income funds and liquid funds to suit different investment
requirements.

• Variety of modes of investments

Mutual funds also offer investors flexibility in terms of modes of investment and
withdrawal.

Investors can opt for different investment modes like lump sum (or one time),
systematic investment plans, systematic transfer plans (from other mutual fund
schemes), systematic withdrawal plans, switches from one scheme to another etc.

Investor can invest in growth option of mutual funds if investors want to take
advantage of compounded returns over a long investment period.

Investor can invest in dividend option if investors want regular income from investorsr
investment. No other investment product offers such wide array of investment modes.
 6.4 DISADVANTAGES OF TRADING IN MUTUA FUNDS

There are a few catastrophic events that could cause investors to lose all investorsr
money in a mutual fund. Because funds invest in a wide variety of stocks, bonds and
commodities, it's unlikely that every single company the fund invests in would fail.
However, the economy could fail. That could make every investment worthless.
However, there are also disadvantages to being an investor in mutual funds. Here's a
more detailed look at some of those concerns.

• High Expense Ratios and Sales Charges

If investors're not paying attention to mutual fund expense ratios and sales charges,
they can get out of hand. Be very cautious when investing in funds with expense
ratios higher than 1.20%, as they are considered to be on the higher cost end. Be wary
of 12b-1 advertising fees and sales charges in general. There are several good fund
companies out there that have no sales charges. Fees reduce overall investment
returns.

• Management Abuses
 Churning, turnover, and window dressing may happen if investorsr manager is
abusing his or her authority. This includes unnecessary trading, excessive
replacement, and selling the losers prior to quarter-end to fix the books.

• Tax Inefficiency

Like it or not, investors do not have a choice when it comes to capital gains
painvestorsts in mutual funds. Due to the turnover, redemptions, gains, and losses in
security holdings throughout the year, investors typically receive distributions from
the fund that are an uncontrollable tax event.

• Poor Trade Execution

If investors place investorsr mutual fund trade anytime before the cut-off time for
same-day NAV, investors'll receive the same closing price NAV for investorsr buy or
sell on the mutual fund. For investors looking for faster execution times, maybe
because of short investment horizons, day trading, or timing the market, mutual funds
provide a weak execution strategy.

• Costs to manage the mutual fund

The salary of the market analysts and fund manager basically comes from the
investors. Total fund management charge is one of the main parameters to consider
when choosing a mutual fund. Greater management fees do not guarantee better fund
performance.

• Lock-in periods

Many mutual funds have long-term lock-in periods, ranging from 5 to 8 years. Exiting
such funds before maturity can be an expensive affair. A certain portion of the fund is
always kept in cash to pay out an investor who wants to exit the fund. This portion in
cash cannot earn interest for investors.

• Dilution
 While diversification averages investorsr risks of loss, it can also dilute investorsr
profits. Hence, investors should not invest in more than 7-9 mutual funds at a time.

• Fluctuating returns

Mutual funds do not offer fixed guaranteed returns in that investors should always be
prepared for any eventuality including depreciation in the value of investorsr mutual
fund. In other words, mutual funds entail a wide range of price fluctuations.
Professional management of a fund by a team of experts does not insulate investors
from bad performance of investorsr fund.

• No Control

All types of mutual funds are managed by fund managers. In many cases, the fund
manager may be supported by a team of analysts. Consequently, as an investor,
investors do not have any control over investorsr investment. All major decisions
concerning investorsr fund are taken by investorsr fund manager. However, investors
can examine some important parameters such as disclosure norms, corpus and overall
investment strategy followed by an Asset Management Company (AMC).

• Diversification

Diversification is often cited as one of the main advantages of a mutual fund.

However, there is always the risk of over diversification, which may increase the
operating cost of a fund, demands greater due diligence and dilutes the relative
advantages of diversification.

• Fund Evaluation

Many investors may find it difficult to extensively research and evaluate the value of
different funds. A mutual fund's net asset value (NAV) provides investors the value of
a fund's portfolio. However, investors have to study various parameters such as
sharpe ratio and standard deviation among others to ascertain how one fund has fared
compared to another which can be complicated to some extent.
• Past performance

Ratings and advertisements issued by companies are only an indicator of the past
performance of a fund. It is important to note that robust past performance of a fund is
not a guarantee of a similar performance in the future. As an investor, investors
should analyse the investment philosophy, transparency, ethics, compliance and
overall performance of a fund house across different phases in the market over a
period of time. Ratings can be taken as a reference point.

• Costs

The value of a mutual fund may fluctuate depending on the changing market
conditions. Furthermore, there are fees and expenses involved towards professional
management of a mutual fund which is not the case for buying stocks or securities
directly in the market. There is an entry load which has to be borne by an investor
when buying a mutual fund. Furthermore, some companies charge an exit cost as well
when an investor chooses to exit from a mutual fund.

• CAGR

The performance of a mutual fund vis-a-vis the compounded annualised growth rate
(CAGR) neither provides investors adequate information about the amount of risk
facing a mutual fund nor the process of investment involved. It is therefore, only one
of the indicators to gauge the performance of a fund but is far from being
comprehensive.

• Fund managers

According to experts, as an investor, investors would do well not to be carried away

by the so-called ‘star fund managers’. Even a highly skilled manager can make a
positive difference in the short-term but cannot dramatically change the performance
of a fund in the long-term. Also, there is always the likelihood of a star fund manager
 joining another company. It is, therefore, more prudent to examine the processes
which are followed by a fund house rather than the star appeal of just one individual.

• Evaluating Funds

Another disadvantage of mutual funds is the difficulty they pose for investors
interested in researching and evaluating the different funds. Unlike stocks, mutual
funds do not offer investors the opportunity to compare the P/E ratio, sales growth,
earnings per share, etc. A mutual fund's net asset value gives investors the total value
of the fund's portfolio less liabilities, but how do investors know if one fund is better
than another?

Furthermore, advertisements, rankings and ratings issued by fund companies only

describe past performance. Always note that mutual fund descriptions/advertisements
always include the tagline "past results are not indicative of future returns". Be sure
not to pick funds only because they have performed well in the past - yesterday's big
winners may be today's big losers.

The benefits and potential of mutual funds can certainly override the disadvantages, if
investors make informed choices. However, investors may not have the time,
knowledge or patience to research and analyse different mutual funds.
 CHAPTER 7

COMPARATIVE STUDY BETWEEN EQUITY SHARES AND

MUTUAL FUNDS

Whether investors invest in mutual funds or stocks depends on three factors. First, investors
must decide how much risk investors can tolerate versus how much return investors want
or need. If investors want a higher return, then investors must accept a higher risk.

It also depends on how much time investors have to research investorsr investments. That
includes how much investors enjoy researching financial statements or fund
prospectuses.

The third factor is what type of fees and expenses investors are willing to endure. If
investors plan to buy and hold, investors don't want annual fees. Investors've also got to
consider the tax implications.
The Difference Between Stocks and Mutual Funds

When investors buy a stock, investors are owning a share of the corporation. Investors
make money in two ways. Stocks that offer dividends will pay investors something every
quarter or year. That provides an annual stream of taxable income.

Investors also make money from stocks when investors sell them. Investorsr profit is the
difference between the selling price and investorsr purchase price, minus fees. Stocks
trade continuously, and the prices change throughout the day. If the market crashes,
investors can get out anytime during the trading session.

Mutual funds pool a lot of stocks in a stock fund or bonds in a bond fund. Investors own
a share of the mutual fund. The price of each mutual fund share is called its net asset
value. That's the total value of all the securities it owns divided by the number of the

mutual fund's shares. Mutual fund shares are traded continuously, but their prices adjust
at the end of each business day. That's not good if the market is crashing.
There are two types of funds: managed and exchange traded. Actively-managed funds have
a manager who seeks to outperform the market. As a result, their fees are higher.
Exchange-traded funds match an index so their costs are lower.

There are many categories of stock funds. This allows investors to focus on a particular
type of company, such as small or large. Investors can also focus on a specific industry
or geographic location. Investors can even pick a trading strategy, such as bear market
or short fund.

Bonds funds invest in securities that return a fixed income. They are safe but provide a
low return. They vary by bond duration, with money market funds being the shortest
duration and the safest. They also vary by type of bond, such as corporate or
municipal. Some also vary by level of interest rate. The highest rates are the riskiest.

Risk-Return Trade off

Stocks are riskier than mutual funds. By pooling a lot of stocks in a stock fund or
bonds in a bond fund, mutual funds reduce the risk of investing. That reduces risk
because, if one company in the fund has a poor manager, a losing strategy, or even
just bad luck, its loss is balanced by other businesses that perform well. This lowers
the risk, thanks to diversification. For that reason, many investors feel that mutual
funds provide the benefits of stock investing without the risks.

For example, any fund in 2008 that held Lehman Brothers stock would have declined
with the bank’s demise. But investors who held only Lehman Brothers stocks would have
lost their entire investment.

The trade off is that most mutual funds won’t increase as much as the best stock
performers. For example, Amazon’s stock price has risen 61,600% since 1997. The best
performing mutual fund was Vanguard Health Care. It only rose 2,247% over the last
20 years. Even so, it’s better than super-performer Whole Foods stock which rose to
1,000% since 1998. So, even though there is a trade-off, the best mutual funds do very
well when compared to many stocks.
Time Available

The second factor is how much time investors want to spend on research. To learn
about investing in stocks, investors need to research each individual company.
Investors must learn how to read financial reports. They tell investors how much
money the company is making and what strategies it is using to grow earnings.
Investors also must stay on top of how the economy is doing and how that will affect
the company and its industry. Unless investors do this, investors won't be able to pick
successful companies. Investors'll miss the industries or sectors that are on the upswing.

As investors can imagine, investors'll need to do a lot of research to build investorsr

own diversified portfolio. Investors'll need to pick companies with different sizes,
strategies, and industries. Investors might investigate dozens of companies to find a few
good ones. This takes too much time for most people with full-time jobs and families.

Mutual funds don't require as much time to research because the manager does that for
investors. But investors still need to research the past performance of the mutual
funds. Investors also need to decide which sectors seem most promising. Of course,
investors still need to know how the economy is doing.

Mutual fund research has its own set of challenges. The managers constantly change the
companies they own in their portfolio. The prospectus could be from an earlier period,
so investors don't really know what investors are getting today. Investors can look at
past performance. But if a manager changes the portfolio, the performance won't be the
same.

Costs and Fees

Brokers charge investors when investors buy or sell the stock. But those fees can vary
depending on the services investors receive. If investors are savvy enough to select
investorsr own stocks, investors will pay less. If investors want advice so investors can
outperform the market, investors will need a full-service broker. That costs more. If
investors're a buy-and-hold investor, this might work best for investors. Once
investors own the stock, the broker won't charge investors until investors sell it.
Mutual funds charge annual management fees. Some charge when investors buy the
fund, others when investors sell the fund, and others don't charge at all if investors
hold for a certain length of time. A few, called no-load funds, charge no fees. All funds
also charge annual management fees. Some funds require a minimum investment.

Most actively-managed funds buy and sell stocks throughout the year. If they incur
capital gains on those stocks, investors may have to pay taxes on it. That's true even if the
overall value of the mutual fund declines. For that reason, many people prefer holding
mutual funds in a tax-advantaged account like an IRA or 401 (k).

Exchange-traded funds charge lower fees. Like stocks, they only charge when
investors buy or sell shares of the fund.

Equity-based mutual funds solve all these problems quite simply. A major advantage
of investing in equity through mutual funds is disciplined diversification. Fund
managers operate within an institutional framework which enforces certain ground
rules of investing. These could be a set of rules defining the investments, such as
there must be at least 15 or 20 stocks with no less than a certain percentage of the
total portfolio.
The stocks must be spread over at least five sectors with no less than a set amount
from each sector. A certain percentage must be held only in large companies because
they tend to be more stable in difficult times. Such rules define a framework which
ensures that the portfolio stays diversified and safe from shocks that may hit
individual stocks or sectors. Individuals who manage their own stock investing rarely
have the knowledge or the discipline to do these things.

The stocks must be spread over at least five sectors with no less than a set amount
from each sector. A certain percentage must be held only in large companies because
they tend to be more stable in difficult times. Such rules define a framework which
ensures that the portfolio stays diversified and safe from shocks that may hit
individual stocks or sectors. Individuals who manage their own stock investing rarely
have the knowledge or the discipline to do these things.
Being able to start investing in small and flexible chunks is another big advantage. If
investors try to build a diversified portfolio with stocks by buying them directly,
investors’ll need a relatively large sum of money—at least a few lakhs —to begin
with. In mutual funds, investors can start off by owning the same with a few thousand
rupees. Investors can invest regularly and automatically with a fixed amount every
month, and investors can actually save tax under Section 80C by investing up to Rs
1.5 lakh a year in designated mutual funds.

There’s one final advantage that results in much higher returns from equity mutual
funds in the long term. All equity portfolios need some buying or selling as individual
stocks become more or less desirable. If investors are trading stocks investorsrself
then these transactions will attract a tax liability. However, in an equity mutual fund,
this trading is done by the fund manager inside the fund. Investors don’t incur a tax
liability because investors haven’t made transactions investorsrself. There’s a further
multiplier to the tax saved, because the money becomes part of the investment, thus
gaining even more. For long term investments that compound over the years, this can
make a huge difference.

Many experts agree that almost all of the advantages of stock portfolio diversification
(the benefits derived from buying a number of different stocks of companies
operating in dissimilar sectors) are fully realized when a portfolio holds around 20
stocks. At the point that a portfolio holds 20 stocks from 20 companies operating in
different industries, almost all of the diversifiable risk associated with investing has
been diversified away. The remaining risk is deemed to be systematic risk, or
marketwide risk, which cannot be diversified away. Since most brokerage firms
having a minimum share purchase requirement, it's hard for many investors to afford
20 different stocks.
A brokerage firm that imposes a minimum share buy of 100 shares requires investors
to buy 100 shares of each stock they wish to purchase. If the average price of a share
is $20, then investors buying through that brokerage firm are required to invest a
minimum of $40,000 ($20/share*100 shares*20 different stocks). Most investors just
don't have $40,000 sitting around to invest, so mutual funds allow investors to get the
maximum benefits of diversification without having to meet any minimum required
share purchases.

The convenience of mutual funds is undeniable and is surely one of the main reasons
investors choose them to provide the equity portion of their portfolio, rather than
buying individual shares themselves. Determining a portfolio's asset allocation,
researching individual stocks to find companies well positioned for growth as well as
keeping an eye on the markets is all very time consuming. People devote entire
careers to the stock market, and many still end up losing on their investments.

Though investing in a mutual fund is certainly no guarantee that investorsr

investments will increase in value over time, it's a way to avoid some of the
complicated decisionmaking involved in investing in stocks.

Many mutual funds like a sector fund offer investors the chance to buy into a specific
industry, or buy stocks with a specific growth strategy such as aggressive growth
fund, or value investing in a value fund. People find that buying a few shares of a
mutual fund that meets their basic investment criteria easier than finding out what the
companies the fund invests in actually do, and if they are good quality investments.
They'd prefer to leave the research and decision-making up to someone else.

Finally, the trading costs of buying and selling stocks are often prohibitively high for
individual investors. So high-priced in fact, that gains made from the stock's price
appreciation can easily be cancelled out by the costs of completing a single sale of an
investor's shares of a given company. With a mutual fund, the cost of trades are
spread over all investors in the fund, thereby lowering the cost per individual. Many
brokerage firms make their money off of these trading costs, and the brokers working
for them are encouraged to trade their clients' shares on a regular basis. Though the
advice given by a broker may help clients make wise investment decisions, many
investors find that the financial benefit of having a broker just doesn't justify the
costs.

Before we start comparing investing in direct equity stocks and mutual funds, one
important thing to remember is that both investment avenues have a risk element.
However, mutual funds are considered less risky compared with investment in stocks.
Mutual funds provide investors with diversification across stocks and sectors. This
ensures that investors risk is well-spread. When it comes to direct stocks, investors
might face certain limitations simply because investors may not have the required
research or familiarity with certain companies or sectors.

Mutual funds are a passive investment for the investor, which are actively managed
by a professional fund manager. However, direct equity investment requires active
management from the investor. From a cost of investment perspective, investing in
stocks works out cheaper than investing in mutual funds. The brokerage that investors
pay when investors buy a stock is much lesser than the fund management fees that
investors would pay while investing in a mutual fund.

Direct equity investment is well-suited to investors who have skills and knowledge to
pick stocks. Moreover, these investors will often tend to have access to stock market
research and data, which will help in taking stock calls. More importantly, investors
in direct equity must ensure that they have the time to manage their equity
investments on a daily basis.

Most first time investors or people who are not familiar with the stock markets
generally prefer mutual funds. That said, irrespective of whether investors want to
invest in mutual funds or direct equity stocks, investors can always appoint a
professional stock broking agency. Some of the major benefits of having a
professional broker handle investorsr investment include proper financial planning,
diversification strategy, timely stock market tips, recommendations, advisory,
research, and much more.

Investing in equity market can be rewarding for those who have adequate knowledge
of the stock markets and have the ability and appetite to take risks. But more often
than not, retail investors lack the knowledge and even the time to research and
educate themselves about the nitty gritties of stock market movements. In such case,
it is best to leave investorsr hard earned money in the hands of the professional
money management experts or fund managers of mutual funds.

Investing in equities can be complex

When investing in equity an investor have a lot of factors to consider such as industry
sector, size and management track record.

All these factors must then be juxtaposed against the overall macro economic
condition to assess the potential of the stock investors wish to invest in. This is as far
as fundamental analysis is concerned. There are other tools for technical analysis
available for the investor who who has the acumen to use such tools.

Investing in mutual funds is therefore a more suitable route to participate in the stock
markets without specialised knowledge or experience.

Opting for professionally managed equity investment funds

A mutual fund scheme is a large pool of savings that is managed by a fund manager
who is a market expert. Fund managers who are in charge of running mutual funds
scheme have years of experience (often decades) behind them and receive constant
support for a well formed research department that is at the core of every successful
fund house.

Each mutual fund scheme has its objective stated upfront which determines whether it
is conservative or aggressive in its style of fund management. The performance of
mutual funds is also widely tracked and analysed daily. Such analysis is easily
available in public domain.

Over and above mutual funds are regulated by the capital market regulator Securities
and Exchange Board of India (SEBI). Therefore , when an investor invest in mutual
funds scheme of fund schemes of fund houses with established tracked records, they
are well positioned to receive good returns over a period of time.

Let us take a look at the differences and similarities between investing in mutual
funds vis-a-vis direct investment in equity.

SIMILARITIES

FEATURES EQUITY SHARES MUTUAL FUNDS

Sectoral picks Possible Possible

Systematic Investment Yes Yes

Tax deduction Yes (limited) Yes ( 80C )

It's important to remember there's disadvantages of mutual fund investment as well,
so as with any decision, educating investorsrself and learning about the bulk of
available options is the best way to proceed.

Taken together, this is a persuasive list of reasons to choose mutual funds over equity.
Of course, if investors are not convinced, they can still go ahead and invest in stocks
directly. It’ll be a tougher task, but they could well be among those who find success.
 CHAPTER 9

CONCLUSION

Mutual Funds or Equity – Which is a Better Option for investors?

Whether investors wish to invest in mutual funds or equity shares will depend upon
investorsr knowledge of the market. Common investors have two options to invest in
equities. They can either choose to purchase shares directly from listed companies
using a demat account, or they could hold shares indirectly by making investments in
equity mutual funds. The right choice for investors will depend a lot on investorsr
investment needs. Mutual funds, however, have been preferred over equities by a
large number of people for the following reasons:

• Instant and relatively cheap diversification

• Efficient risk management

• Active management of portfolio

• Innovative models for investment and withdrawal

• Lower transaction costs

Ina nutshell it would be safe to conclude that an investor can consider investing
directly in equities. If investors are skilled enough to do so and can dedicate the time
and research such investment requires. If investors do not have either, it is best to opt
for the mutual fund route to make the most of the professional fund management to
enhance the value of investorsr investment. It is however recommended that whatever
route of investment investors choose, investors have to take a look at regular intervals
and assess whether the financial goals are met as a result of the investment.
 CHAPTER 10

BIBLOGRAPHY & REFERENCES

WEBSITES

• www.google.com

• www.wikipedia.in

• www.slideshare.net

• www.scribed.in

• www.investopedia.com

• www.yahoo.com

• www.sbionline.com

• www.sbi.co.in

• www.linkedin.com

• www.rbi.org.in

• www.rbi.in
 CHAPTER 11

LIMITATION OF STUDY

The major limitations of the study are:

• A small sample size of 100 respondents are taken to primary data

analysis. So I cannot draw proper inferences about the respondents from
this sample size.

• I have not used modern statistical tools to analysis the data.

• Due to shortage of time I have not been able to make a depth study.

• I could not collect data from out site of MUMBAI.

• This study is based on the prevailing respondents’ satisfaction. But their

satisfaction may change according to time, fashion, need etc.