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Summer Internship Project Report on STRATEGY OF OPERATIONS OF MUTUAL FUNDS WITH SPECIAL EMPHASIS ON DEBT FUNDS

By Sudhanshu Gupta A0101910253

MBA (Class of 2012)


Under the Supervision of Ms. Lakhwinder Kaur Dhillon Department of Finance In Partial Fulfillment of the Requirements for the Degree of Master of Business Administration General
At

AMITY BUSINESS SCHOOL AMITY UNIVERSITY UTTAR PRADESH SECTOR 125, NOIDA - 201303, UTTAR PRADESH, INDIA 2012

Reliance Mutual Funds

Sudhanshu Gupta

DECLARATION

Title of Project Report Strategy of Operations of Mutual Funds with Special Emphasis on Debt Funds

I declare

(a) That the work presented for assessment in this Summer Internship Report is my own, that it has not previously been presented for another assessment and that my debts (for words, data, arguments and ideas) have been appropriately acknowledged.

(b) That the work conforms to the guidelines for presentation and style set out in the relevant documentation.

Date: 25th July, 2011

Sudhanshu Gupta A0101910253 MBA Class of 2012

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Sudhanshu Gupta

CERTIFICATE

I Ms. Lakhwinder Kaur Dhillon hereby certify that Sudhanshu Gupta student of Masters of Business Administration General at Amity Business School, Amity University Uttar Pradesh has completed the Project Report on Strategy of Operations of Mutual Funds With Special Emphasis on Debt Funds, under my guidance.

Ms. Lakhwinder Kaur Dhillon Department of Finance

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Sudhanshu Gupta

ACKNOWLEDGEMENTS
An undertaking of work life - this is never an outcome of a single person; rather it bears the imprints of a number of people who directly or indirectly helped me in completing the present study. I would be failing in my duties if I dont say a word of thanks to all those who made my training period educative and pleasurable one. I am thankful to RELIANCE MUTUAL FUND, NOIDA for giving me an opportunity to do summer training in the company.

First of all, I am extremely grateful to Mr. Saurabh Kapoor (Relationship Manager) for his guidance, encouragement and tutelage during the course of the internship despite his extremely busy schedule. My very special thanks to him for giving me the opportunity to do this project and for his support throughout as a mentor. My thanks to Mr. Harsh Chaturvedi (Opulence Services Ltd) and the whole staff of Reliance Mutual Funds who gave me continuous support in every possible manner to gain practical knowledge in the Industry. I would also like to thank all the respondents for giving their precious time and relevant information incomplete. Finally I would like to thank all lecturers, friends and my family for their kind support and to all who have directly or indirectly helped me in preparing this project report. And at last I am thankful to all divine light and my parents, who kept my motivation and zest for knowledge always high through the tides of time. and experience, I required, without which the Project would have been

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TABLE OF CONTENTS
DECLARATION .............................................................................................................................................. . ii CERTIFICATE ................................................................................................................................................ . iii ACKNOWLEDGEMENTS ................................................................................................................................ iv TABLE OF CONTENTS..................................................................................................................................... v ABSTRACT.................................................................................................................................................... . vi CHAPTER 1: INTRODUCTION TO THE COMPANY RELIANCE MUTUAL FUND ............................................. 1 CHAPTER 2: INTRODUCTION TO MUTUAL FUNDS ........................................................................................ 6 CHAPTER 3: INDUSTRY ANALYSIS MUTUAL FUNDS IN INDIA................................................................... 16 CHAPTER 4: INTRODUCTION TO THE STUDY............................................................................................... 25 CHAPTER 5: INVESTMENT AVENUES FOR MUTUAL FUNDS ........................................................................ 27 CHAPTER 6: FIXED INCOME FUNDS ............................................................................................................ 34 CHAPTER 7: REVIEW OF LITERATURE .......................................................................................................... 40 CHAPTER 8: RESEARCH METHODOLOGY .................................................................................................... 43 CHAPTER 9: DATA ANALYSIS AND INTERPRETATIONS ................................................................................ 45 CHAPTER 10: CONCLUSIONS AND RECOMMENDATIONS ........................................................................... 63 REFERENCES ............................................................................................................................................... . 65 ANNEXURES ................................................................................................................................................ 67 Annexure 1 Copy of Questionnaire ..................................................................................................... 67 Annexure 2 Demographic Profile of Respondents............................................................................... 71

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Sudhanshu Gupta

ABSTRACT

A mutual fund is a professionally managed type of collective investment that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. Reliance Mutual Fund ('RMF'/ 'Mutual Fund') is one of Indias leading Mutual Funds, with Average Assets under Management (AAUM) of Rs. 101259 Crores and an investor count of over 66.90 Lakh folios. Mutual funds have become an invaluable tool for a wide range of investors, from individuals seeking to save for retirement to sophisticated socialites focused on preserving their assets and businessman determined to create wealth. Mutual funds have opened new vistas to millions of small investors by virtually taking investment to their very doorstep. The scientific investment approach and investor oriented benefits has made the industry grow to over ` 6500 trillion by current estimates. This report aims at studying the Mutual Fund industry in the Indian economy, understand its operations and study the regulations and other legal requirements of the industry. The study also comprises of a survey of retail investors to study their fund selection behavior and extract the factors affecting their behavior using Principal Component Extraction Method of Factor Analysis. As per the study, the most important fund related qualities are Intrinsic Fund Qualities, Flexibility and Consistency, and Brand Image. Similarly, the most important Investor Related Services are Transparency in Disclosures, Customer Comfort and Accessibility, and After Sale Benefits and Services.

MF industry in India has a large untapped market in urban areas besides the virgin markets in semi-urban and rural areas. This market potential can be tapped by scrutinizing investor behavior to identify their expectations and articulate investor's own situation and risk preference and then apply to an investment strategy that combines the usual four: cash and equivalents, Government-backed bonds, debt, and equity.

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CHAPTER 1: INTRODUCTION TO THE COMPANY RELIANCE MUTUAL FUND

Reliance Mutual Fund ('RMF'/ 'Mutual Fund') is one of Indias leading Mutual Funds, with Average Assets under Management (AAUM) of Rs. 101259 Crores and an investor count of over 66.90 Lakh folios. Reliance Mutual Fund, a part of the Reliance Group, is one of the fastest growing mutual funds in India. RMF offers investors a well-rounded portfolio of products to meet varying investor requirements and has presence in 159 cities across the country. Reliance Mutual Fund constantly endeavors to launch innovative products and customer service initiatives to increase value to investors. Reliance Capital Asset Management Limited (RCAM) is the asset manager of Reliance Mutual Fund. RCAM a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance paid up capital being held by minority shareholders.

Reliance Capital Ltd. is one of Indias leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital Ltd. has interests in asset management, life and general insurance, private equity and proprietary investments, stock broking and other financial services. The main objectives of the Reliance Mutual Fund are:

To carry on the activity of a Mutual Fund as may be permitted at law and formulate and devise various collective Schemes of savings and investments for people in India and abroad and also ensure liquidity of investments for the Unit holders;

To deploy Funds thus raised so as to help the Unit holders earn reasonable returns on their savings and

To take such steps as may be necessary from time to time to realize the effects without any limitation.

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Vision Statement To be a globally respected wealth creator with an emphasis on customer care and a culture of good corporate governance

Mission Statement To create and nurture a world-class, high performance environment aimed at delighting our customers.

The Sponsor: Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited, a subsidiary of Reliance Capital Limited, which holds 92.93% of the paid-up capital of Reliance Capital Asset Management Limited, the balance paid up capital being held by minority shareholders. Reliance Mutual Fund (RMF) has been sponsored by Reliance Capital Ltd (RCL). The promoter of RCL is AAA Enterprises Private Limited. Reliance Capital Limited is a Non-Banking Finance Company and is one of the Indias leading and fastest growing financial services companies, and ranks among the top three private sector financial services and banking companies in India, in terms of net worth.

SCHEMES OF RELIANCE MUTUAL FUND The aim of growth funds is to provide capital appreciation over the medium to longterm. 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

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Equity/growth schemes The aim of growth funds is to provide capital appreciation over the medium to longterm. 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. Diversified large cap Diversified multi cap Diversified mid cap and small cap Index Balanced Tax saver

Debt/Income Schemes 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. Ultra short term Short term funds Monthly income plans

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Money market funds Long term funds

Gold Schemes Gold is seen as a symbol of security and a sign of prosperity. Indian consumers consider gold jewelry as an investment and are well aware of golds benefits as a store of value. Gold is also recognized as a form of money in India, a tradable liquid asset. It is one of the foundation assets for Indian households and a means to accumulate wealth from a long term perspective. Gold investment has been in the culture of Indian tradition and has been on rise amongst the modern investors as well due to the financial uncertainty and inflationary pressures. Gold exchange traded funds Gold saving funds

THE CORPORATE GOVERNANCE The Corporate Governance Policy: Reliance Capital Asset Management Limited has a vision of being a leading player in the mutual fund business and has achieved significant success and visibility in the market. However, an imperative part of growth and visibility is adherence to good conduct in the marketplace. At Reliance Capital Asset Management Limited, the implementation and observance of ethical processes and policies has helped it in standing up to the scrutiny of its domestic and international investors.

Management: The management at Reliance Capital Asset Management Limited is committed to good corporate governance, which includes transparency and timely dissemination of information to its investors and unit holders. The Board of Directors of RCAM is a professional body constituting inter-alia of, well-experienced and knowledgeable independent members. Regular audit committee meetings are conducted to review the operations and performance of the company.

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Employees: Reliance Capital Asset Management Limited has at present, a code of conduct for all its officers. It has a clearly defined prohibition on insider trading policy and regulations. The management believes in the principles of propriety and utmost care is taken while handling public money, making proper and adequate disclosures.

All personnel at RCAM are made aware of their rights, obligations and duties as part of the Dealing Policy laid down in terms of SEBI guidelines. They are taken through a welldesigned HR program, conducted to impart work ethics, the Code of Conduct, information security, Internet and e-mail usage and a host of other issues.

One of the core objectives of RCAM is to identify issues considered sensitive by global corporate standards, and implement policies/guidelines in conformity with the best practices as an ongoing process.

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CHAPTER 2: INTRODUCTION TO MUTUAL FUNDS

Mutual funds have become an invaluable tool for a wide range of investors, from individuals seeking to save for retirement to sophisticated socialites focused on preserving their assets and businessman determined to create wealth. In its most basic form, a mutual fund is a company that pool money from a group of people with common investment goals to buy securities such as stocks, bonds, money market instruments, a combination of these investments, or even other funds. It is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments and other securities. Mutual funds have a fund manager who invests the money on behalf of the investors by buying / selling stocks, bonds etc. Currently, the worldwide value of all mutual funds totals more than $US 26 trillion.

There are various investment avenues available to an investor such as real estate, bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more type of Investment Avenue available to investors.

Mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. This pool of money is invested in accordance with a stated objective. The joint ownership of the fund is thus Mutual, i.e. the fund belongs to all investors. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. A Mutual Fund is an investment tool that allows small investors access to a well- diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The funds Net Asset value (NAV) is determined each day.

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Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.

CONCEPT OF MUTUAL FUNDS

Many investors with common financial objectives pool their money.

Investors, on a proportinate basis , get mutual fund units for the sum contributed to the pool The money collected from investors is invested into shares, debentures and other securities by the fund manager. The fund manager realizes gains or losses, and collects dividend or interest income. Any capital gains or losses from such investments are passed on to the investors in proportion of the number of units held by them.

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When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder. Any change in the value of the investments made into capital market instruments (such as shares debentures etc.) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.

ADVANTAGES OF MUTUAL FUNDS: If mutual funds are emerging as the favorite investment vehicle, it is because of the many advantages they have over other forms and the avenues of investing, particularly for the investor who has limited resources available in terms of capital and the ability to carry out detailed research and market monitoring. The following are the major advantages offered by mutual funds to all investors:

1. Portfolio Diversification: Each investor in the fund is a part owner of all the funds assets, thus enabling him to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital.

2. Professional Management: Even if an investor has a big amount of capital available to him, he benefits from the professional management skills brought in by the fund in the management of the investors portfolio. The investment management skills, along with the needed research into available investment options, ensure a much better return than what an investor can manage on his own.

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3. Reduction/Diversification of Risk:

When an investor invests directly, all the risk of

potential loss is his own, whether he places a deposit with a company or a bank, or he buys a share or debenture on his own or in any other from. While investing in the pool of funds with investors, the potential losses are also shared with other investors. The risk reduction is one of the most important benefits of a collective investment vehicle like the mutual fund.

4. Reduction of Transaction Costs: What is true of risk as also true of the transaction costs. The investor bears all the costs of investing such as brokerage or custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit passed on to its investors.

5. Liquidity: Often, investors hold shares or bonds they cannot directly, easily and quickly sell. When they invest in the units of a fund, they can generally cash their investments any time, by selling their units to the fund if open-ended, or selling them in the market if the fund is close-end. Liquidity of investment is clearly a big benefit.

6. Convenience and Flexibility: Mutual fund management companies offer many investor services that a direct market investor cannot get. Investors can easily transfer their holding from one scheme to the other; get updated market information and so on.

7. Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime

8. Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.

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9. Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

DISADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS: 1. No Control over Costs: An investor in a mutual fund has no control of the overall costs of investing. The investor pays investment management fees as long as he remains with the fund, albeit in return for the professional management and research. Fees are payable even if the value of his investments is declining.

2. No Tailor-Made Portfolio: Investors who invest on their own can build their own portfolios of shares and bonds and other securities. Investing through fund means he delegates this decision to the fund managers. The very-high-net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives.

3. Managing A Portfolio of Funds: Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund to achieve his objectives, quite similar to the situation when he has individual shares or bonds to select.

4. The Wisdom of Professional Management: That's right, this is not an advantage. The average mutual fund manager is no better at picking stocks than the average nonprofessional, but charges fees.

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5. No Control: Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of somebody else's car

6. Dilution: Mutual funds generally have such small holdings of so many different stocks that insanely great performance by a fund's top holdings still doesn't make much of a difference in a mutual fund's total performance.

7. Buried Costs: Many mutual funds specialize in burying their costs and in hiring salesmen who do not make those costs clear to their clients

FUNDS TYPES 1- Based on structure:

By Structure

Open-Ended Funds

Closed-Ended Funds

Interval Funds

Mutual funds, or unit trusts, are called open-end funds because they are required to buy back shares, or units, from the shareholders at any time at a price based on the current value of the funds net assets. They are available for subscription all throughout the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

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Closed-end funds, or investment trusts, are another type of fund that issues a fixed number of shares, as in the case of open-end funds. If the shareholders want to exit the fund they must sell their shares on the market. A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. 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 they 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.

Interval funds are funds that issue or redeem units at pre-specified periods at regular intervals. These combine the features of both open ended and closed ended funds providing an optimum mix between stability and flexibility. However, interval funds are not very common in the Indian mutual fund industry and are not much preferred by investors mainly due to lack of awareness.

2- Based on nature

By Nature
Equity funds Debt funds Balanced funds Gold Funds

1. Equity Funds: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

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Diversified Equity Funds Mid-Cap Funds Small Cap Funds Sector Specific Funds Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

2. Debt Funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors.

3. Balanced Funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Further the mutual funds can be broadly classified on the basis of investment parameter viz, each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

4. Gold Funds: A recent addition to the portfolio of the Mutual funds, Gold funds primarily invest in Physical Gold and related articles like jewelry, gold-bars, coins etc. A common practice in todays industry is to make FoFs (Fund of Funds) of Gold ETFs so as to open the Gold funds to retail investors.

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3- Based on investment objective

Type of fund Money market Growth or equity Balanced Index

Main Investments Short-term fixed income securities like treasury bills Equities like stocks or income trust units A mix of equities and fixed income securities Equities or fixed income securities chosen to mimic a specific index, such as the S&P/TSX Composite Index

Income Tax Saving Schemes

Fixed income securities like government bonds and corporate bonds Equity Linked Savings Scheme (ELSS)

1. Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. 2. Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

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3. Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). 4. Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index. 5. Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. 6. Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

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CHAPTER 3: INDUSTRY ANALYSIS MUTUAL FUNDS IN INDIA

The economic development model adopted by India in the post-independence era has been characterized by mixed economy with the public sector playing a dominating role and the activities in private industrial sector control measures emaciated from time to time. The industrial policy resolution was introduced by the government in the 1948, immediately after the independence. This outlined the approach to industrial growth and development. The last two decades have seen a phenomenal expansion in the geographical coverage and financial spread of our financial system. The spread of the banking system has been a major factor in promoting financial intermediation in the economy and in the growth of financial savings. With this evolution of the financial sector, the mutual fund industry has also come to occupy an important place.

Origin

By the early - 1930s quite a large number of close - ended mutual funds were in operation in the U.S.A. Much latter in 1954, the committee on finance for the private sector recommended mobilization of savings of the middle class investors through unit trusts. Finally in July 1964, the concept took root in India when Unit Trust of India was set up with the twin objective of mobilizing household savings and investing the funds in the capital market for industrial growth. Household sector accounted for about 80 percent of nations savings and only about one third of such savings was available to the corporate sector; it was felt that UTI could be an effective vehicle for channelizing progressively larger shares of household savings to productive investments in the corporate sector. The process of economic liberalization in the eighties not only brought in dramatic changes in the environment for Indian industries, corporate sector and the capital market but also led to the emergence of demand for newer financial services such as issue management, corporate counseling, capital restructuring and loan syndication. After two decades of UTI monopoly, recently some other public sector organizations like LIC (1989), GIC (1991), SBI (1987), Can Bank (1987), Indian Bank (1990), Bank of India (1990), Punjab National Bank (1990) were permitted to set up mutual funds.

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Current state: Indian Mutual Fund Industry

The Indian mutual fund industry has evolved from a single player monopoly in 1964 to a fast growing, Competitive market on the back of a strong regulatory framework.

AUM Growth

The Assets under Management (AUM) have grown at a rapid pace over the past few years, at a CAGR of 35 percent for the five-year period from 31 March 2005 to 31 March 2009

1. Over the 10-year period from 1999 to 2009 encompassing varied economic cycles, the industry grew at 22 percent CAGR

2. This growth was despite two falls in the AUM-the first being after the year 2001 due to the dotcom bubble burst, and the second in 2008 consequent to the global economic crisis (the first fall in AUM in March 2003 arising from The UTI split).

AUM to GDP Ratio The ratio of AUM to Indias GDP gradually increased from 6 percent in 2005 to 11 percent in 2009. Despite this however, this continues to be significantly lower than the ratio in developed countries, where the AUM Accounts for 20-70 percent of the GDP.

Share of Mutual Funds in Household Financial Savings

Investment in mutual funds in India comprised 7.7 Percent of the gross household financial savings in FY 2008, a significant increase from 1.2 percent in FY 2004. The households in India continue to hold 55 Percent of their savings in fixed deposits with banks, 18 percent in

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insurance and 10 percent in currency as of FY 2008. In 2008, the UK had more than thrice the investments into mutual funds as a factor of total household savings (26 percent), than India had in the same time period. As of December 2008, UK households held 61 percent of the total savings in bank deposits, 11.6 percent in equities and 1 percent in bonds.

The Indian Mutual Fund Industry Key Characteristics

Customers

The Indian mutual fund industry has significantly high Ownership from the institutional investors. Retail investors comprising 96.86 percent in number terms held approximately 37 percent of the total industry AUM as at the end of March 2008, significantly lower than the retail participation in the US at 82 percent of AUM as at December 2008.

As per the Invest India Incomes and Savings Survey 2007 of individual wage earners in the age group 18 to 59 years conducted by IIMS Dataworks, only 1.6 percent invested in mutual funds. Ninety percent of the savers interviewed were not aware of mutual funds or of investing in mutual funds through a Systematic Investment Plan (SIP). The mutual fund penetration among the paid Indian workforce with annual household income less than INR 90,000 was 0.1 percent. In the last few years, the retail investor participation, in particular, in Tier 2 and Tier 3 towns, has been on the rise aided by the buoyant equity markets.

Products

The Indian mutual fund industry is in a relatively nascent stage in terms of its product offerings, and tends to compete with products offered by the Government providing fixed guaranteed returns. As of December 2010, the total number of mutual fund schemes was 1,182 in comparison to 11,369 funds in the US. Debt products dominate the product mix and comprised 49 percent of the total industry AUM as of FY 2009, while the equity and liquid funds comprised 26 percent and 22 percent

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respectively. Open-ended funds comprised 99 percent of the total industry AUM as of March 2009. As of December 2008, the US mutual fund market comprised money market funds, equity funds, debt/bond funds and hybrid funds at 40, 39, 16 and 5 percent of the total AUM respectively.

Markets

While the mutual fund industry in India continues to be metro and urban centric, the mutual funds are beginning to tap Tier 2 and Tier 3 towns as a vital component of their growth strategy. The contribution of the Top 10 cities to total AUM has gradually declined from approximately 92 percent in 2005 to approximately 80 percent currently.

Industry Structure

The Indian mutual fund industry currently consists of 38 players that have been given regulatory approval by SEBI. The industry has witnessed a shift has changed drastically in favor of private sector players, as the number of public sector players reduced from 11 in 2001 to 5 in 2009. The public sector has gradually ceded market share to the private sector. Public sector mutual funds comprised 21 percent of the AUM in 2009 as against 72 percent AUM share in 200122.

The industry concentration has been stagnant in the four-year period from 2005 to 2008; the top 5 players comprising 50-52 percent of industry AUM. However, as of March 2009, the share of Top 5 players increased to 58 percent, as against 38 percent in the US. The AUM share of the Top 10 players has consistently been in the vicinity of 75 percent.

The mutual fund houses based on product portfolio and distribution strategy, the key elements of competitive strategy, can be segmented into three categories:

The market leaders having presence across all product segments

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Players having dominant focus on a single product segment - debt or equity Players having niche focus on an emerging product category or distribution channels.

The market leaders have focused across product categories for a more diversified AUM base with an equitable product mix that helps maintain a consistent AUM size. Although the Indian market has relatively low entry barriers given the low minimum net worth required to venture into mutual fund business, existence of a strong local brand and a wide and deep distribution footprint are the key differentiators.

Operations

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

1) Raising of Money The asset management companies (AMCs) that manage the mutual funds define avenues where they think profitable opportunities exist. For example, currently many AMCs believe that small and medium cap stocks will yield significant

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return over the medium to long term. Hence, they launch a 'fund' (called a new fund offer: NFO) which seeks to bring all those investors together who believe similarly. The AMC releases a prospectus wherein it details the objective of the fund, the credentials of the company and the fund manager and the avenues where the money will be invested. Based on this information, the investor needs to decide whether this fund meets his objective or not. If the investor (or his advisor) believes that the new fund fits his required risk-return profile, the investor invests in the fund.

2) Investing Mutual funds, unlike companies do not take the risk of a business directly. For example, Reliance faces the risk of change in refining margins and Hindalco faces the risk of fall in aluminum prices. Companies take the risk head-on and craft strategies to maximize their competitive position and profits. Mutual funds, however, take one step back and invest in the companies which take on business risks. Funds which invest in the shares (or equity) of the company are called 'equity mutual funds.' Funds like PruICICI Power or Reliance Growth are examples of such funds. Similarly, funds can invest in government securities (bonds issued by central or state governments, PSUs or other government entities) or corporate debt (issued by companies and banks). These funds are called 'debt funds.' Funds like Reliance Income Fund invest primarily in medium and long-tenor debt. Again, there are funds that invest in very short term loans (typically overnight to up to three months): these funds are called money market mutual funds. Examples include HDFC Cash Management - savings plan. Funds may also invest in Precious metals like gold or silver and also commodities like copper or magnesium for instance.

While the above four are the basic avenues for the funds to invest, many funds combine the three types in various proportions and produce 'hybrid or balanced funds.' HDFC Prudence and SBI Magnum Balanced are examples.

3) Performance and Disclosures - Based on where the funds invest, they expect returns and have corresponding risks. Equity funds are the most risky followed by gold funds and

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then debt funds; cash funds are considered almost risk less. Based on the standard theory of finance, the riskiest funds are expected to deliver the highest returns over the long run.

Based on the current value of the investments of the fund, the daily NAV (Net Asset Value) is declared by most of the AMCs now-a-days. The NAV is calculated on a per unit basis (i.e. total value of the investment portfolio divided by the total number of units).

4) Distribution of Returns Based on the option the investor chooses (growth or dividend), the profits or surplus cash is used to declare dividends on regular intervals (monthly, weekly or even daily as specified by the fund). These dividends are then distributed to the investors by either electronic transmission (direct credit to bank accounts) or shipping of cheques. The investors may also liquidate their capital appreciations without any exit load once the mandatory lock-in period (defined in the fund-prospectus) has matured.

The Indian mutual fund industry while on a high growth path needs to address efficiency and customer centricity. AMCs have successfully been using outsourced service providers such as custodians, Registrar and Transfer Agents (R&T) and more recently, fund accountants, so that mutual funds can focus on core aspects of their business such as product development and distribution. Functions that have been outsourced are custody services, fund services, registrar and transfer services aimed at investor servicing and cash management. Managing costs and ensuring investor satisfaction continue to be the key goals for all mutual funds today. However, there is likely to be scope for optimizing operations costs given the trend of rising administrative and associated costs as a percentage of AUM.

Regulations Mutual Funds in India are governed by the SEBI (Mutual Fund) Regulations 1996 as amended from time to time. The most recent Master Circular regarding the same was issued by SEBI on January 07, 2011. The Indian mutual fund industry is undergoing a transformation,

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adapting to the various regulatory changes that are coming about. Some of the key ones which have undergone an amendment, impacting the industry as a whole are highlighted here. However, all of them primarily would seem to have the interest of the investor in mind.

1) Entry Load In recent years, the industry regulator, Securities and Exchange Board of India (SEBI) has focused more on investor protection, introducing a number of regulations to empower retail investors in Mutual Funds (MFs). SEBI began by prohibiting the charging of initial issue expenses, which were permitted for closed-ended schemes, and mandating that such MF schemes shall recover sales and distribution expenses through entry load only. These steps aimed at creating more transparency in fees paid by investors and helping make informed investment decisions. Subsequently, w.e.f. August 1, 2009, SEBI banned the entry load that was deducted from the invested amount, and instead allowed customers the right to negotiate and decide commissions directly with distributors based on investors assessment of various factors and related services to be rendered. The objective was to bring about more transparency in commissions and encourage long-term investment. Though the intent of the amendment was to benefit the investor, it has hit the margins of the Asset Management Companies (AMCs). Further, higher distributor commission on Unit Linked Insurance Products (issued by Insurance companies) is giving tough competition to the business of mutual funds. 2) No Additional Management Fees on schemes launched on no load basis SEBI has scrapped the additional management fee of 1% charged by AMCs on schemes launched on a no load basis leading to a further squeeze in margins earned by the AMC.

3) Direct Tax Code With the Direct Tax Code (DTC) on the anvil, taxability of income from mutual funds, at the hands of investors will also have a bearing on the growth of the mutual fund industry. Unlike the extant tax provisions, DTC does not provide for any benefit for investment in equity linked savings scheme, and also proposes to increase the compliance in the hands of MFs by widening the scope of deduction of tax to include payments made to residents. The code has also

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created an anomaly on the taxability of the MF investors. It is unclear whether the income earned will be exempt or taxed in the hands of the investors on accrual basis, as stated in the Discussion Paper on the DTC.

4) Documentation In December 2009, SEBI had made it mandatory for all AMCs to maintain a copy of full investor documentation including Know Your Customer i.e. KYC details. Such documentation was earlier maintained by the respective MF distributors who have now been asked to give a copy of the same to the fund houses.

5) Disclosure of Investor Complaints in the Annual Report In order to improve the transparency in the grievance redressal mechanism, SEBI has recently issued a Circular that requires MFs to include details of investor complaints in their Annual Report as part of the Report of the Trustees, beginning with the annual report for the year 2009-10. MFs provide abridged booklets of the Annual Reports to all the unitholders.

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CHAPTER 4: INTRODUCTION TO THE STUDY

Objectives of the Study 1) To study the concept of Mutual Funds and its operation and functioning. 2) To analyze the Mutual Fund Industry in India and the competitive position of Reliance Mutual Funds 3) To understand the importance of Debt Funds and study the functional concerns, issues and specific management of the same 4) To study the fund selection behavior of individual investors with special reference to Delhi NCR a. To assess the savings objectives among individual investors. b. To identify the preferred savings avenue among individual investors c. To understand the preferential feature in the savings instrument among individual investors. d. To evaluate fund qualities that would affect the selection of Mutual funds. e. To evaluate investor related services that would affect the selection of Mutual funds 5) To study the various mutual funds managed by Reliance Mutual Funds with special reference to FAST.

Context of the study In India, though the MF industry has been in existence since 1964, (with the establishment of UTI), very few major studies have been done regarding the investor behavioral aspect with specific reference to MFs, in India. It should be noted that the expectations of investors play a vital role in the financial markets. They influence the price of the securities, the volume traded and various other financial operations in actual practice. These expectations of investors are influenced by their perception and humans generally relate perception to action. The beliefs and actions of many investors are influenced by the dissonance effect and endowment effect.

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In general, rules for investment, the analysis of investment and discussion of financial behavior tend to assume behavior, which is logical and internally consistent in various ways. Investor behavior does not; however, always appear to conform to such expectational norms. Quite the reverse often appears to be the case; Kahneman and Riepe speak of Cognitive Illusion the mental equivalent of optical illusion, the assumption being that just as an optical illusion might lead to inconsistent physical performance relative to the world outside the individual, so too cognitive illusion will result in inconsistent decision making with respect to the outside world. Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision making process. However, in the financial literature, there are no clear models, which explain the influence of perception and beliefs on expectations and decision making.

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CHAPTER 5: INVESTMENT AVENUES FOR MUTUAL FUNDS


Equity and Equity Related Investments

Shares

In equity share, the shareholders of a company are its owners. As owners, they participate in the management of the company by appointing its board of directors and voicing their opinions, and voting in the general meetings of the company. At its incorporation, every company is authorized to issue a fixed number of shares, each priced at par value, or face value in India. The face value of shares is usually set at nominal levels (Rs. 10 or Re. 1 in India for the most part). Corporations generally retain portions of their authorized stock as reserved stock, for future issuance at any point in time.

Shares are usually valued much higher than the face value and this initial investment in the company by shareholders represents their paid-in capital in the company. The company then generates earnings from its operating, investing and other activities. A portion of these earnings are distributed back to the shareholders as dividend, the rest retained for future investments. The sum total of the paid-in capital and retained earnings is called the book value of equity of the company.

In India, shares are mainly of two types: equity shares and preference shares. In addition to the most common type of shares, the equity share, each representing a unit of the overall ownership of the company, there is another category, called preference shares. These preferred shares have precedence over common stock in terms of dividend payments and the residual claim to its assets in the event of liquidation. However, preference shareholders are generally not entitled to equivalent voting rights as the common stockholders.

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Fixed Income (Debt) Investments

Bonds

Bonds are debt instruments that are issued by companies and governments to raise funds for financing their capital expenditure. By purchasing a bond, an investor loans money for a fixed period of time at a predetermined interest rate. While the interest is paid to the bond holder at regular intervals, the principal amount is repaid at a later date, known as the maturity date. While both bonds and stocks are securities, the principle difference between the two is that bond holders are lenders, while stockholders are the owners of the organization.

The main types of bonds are:

Government Bonds: These are fixed-income debt securities issued by the government. Government bonds are further categorized on the basis of the term (maturity duration). (a) Government Bills: These are government bonds with a maturity period of less than one year. (b) Government Notes: These are government bonds with a maturity period from one year to ten years. (c) Government Bonds: These are government bonds with a maturity period that exceeds ten years.

Corporate Bonds: These are debt instruments issued by a company and backed by its ability to generate profits or by the current value of its physical assets.

Non-Convertible Debentures

NCDs are secured debt instruments with longer maturity. Non-Convertible simply means that the bond cant be converted into equity of the company. There still could be other options (call/put) attached to the bond. A callable bond could be called or redeemed by the issuer before

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the maturity of the bond. Issuer will call away the bond when the bond was issued in a high interest rate environment and interest rates fall subsequently. Investor will lose the high interest or coupon payments and will be left with redemption proceeds to be invested in a lower interest rate environment. A putable bond works in an exactly opposite way where the investor can sell the bond to the issuer at a specified price before the maturity of the bond if the interest rates go up after the issuance and investor has higher yielding investment options available.

Treasury Bills

T-Bills or treasury bills are largely risk-free (guaranteed by the Government and hence carry only sovereign risk - risk that the government of a country or an agency backed by the government, will refuse to comply with the terms of a loan agreement), short-term, very liquid instruments that are issued by the central bank of a country. The maturity period for T-bills ranges from 3-12 months. T-bills are circulated both in primary as well as in secondary markets.

T-bills are usually issued at a discount to the face value and the investor gets the face value upon maturity. The issue price (and thus rate of interest) of T-bills is generally decided at an auction, which individuals can also access. Once issued, T-bills are also traded in the secondary markets. In India, T-bills are issued by the Reserve Bank of India for maturities of 91days, 182 days and 364 days. They are issued weekly (91-days maturity) and fortnightly (182days and 364-days maturity).

Pass through certificates

A PASS through certificate (PTC) is a certificate that is given to an investor against certain mortgaged-backed securities that lie with the issuer. The certificate can be compared to securities (like bonds and debentures) that may be issued by banks and other companies to investors. The only difference being that they are issued against underlying securities. The interest that is paid to the issuer on these securities comes to the investor in the form of a

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fixed income. Investors in such instruments are usually financial institutions like banks, mutual funds and insurance companies. In a pass through certificate, interest earned on the receivable is directly passed to the holders, whereas, in a pay through certificate, interest received from the receivables is not passed to the holder of the unit. All the PTCs in the market are rated by agencies like Crisil or Fitch ratings, among others. The ratings tell the investor about the quality of the underlying securities.

Commercial papers

Commercial papers (CP) are unsecured money market instruments issued in the form of a promissory note by large corporate houses in order to diversify their sources of short-term borrowings and to provide additional investment avenues to investors. Issuing companies are required to obtain investment-grade credit ratings from approved rating agencies and in some cases, these papers are also backed by a bank line of credit. CPs is also issued at a discount to their face value. In India, CPs can be issued by companies, primary dealers (PDs), satellite dealers (SD) and other large financial institutions, for maturities ranging from 15 days period to 1-year period from the date of issue. CP denominations can be Rs. 500,000 or multiples thereof. Further, CPs can be issued either in the form of a promissory note or in dematerialized form through any of the approved depositories

Certificates of Deposit

A certificate of deposit (CD) is a term deposit with a bank with a specified interest rate. The duration is also pre-specified and the deposit cannot be withdrawn on demand. Unlike other bank term deposits, CDs are freely negotiable and may be issued in dematerialized form or as a Usance Promissory Note. CDs are rated (sometimes mandatory) by approved credit rating agencies and normally carry a higher return than the normal term deposits in banks (primarily due to a relatively large principal amount and the low cost of raising funds for banks). Normal term deposits are of smaller ticket-sizes and time period, have the flexibility of premature

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withdrawal and carry a lower interest rate than CDs. In many countries, the central bank provides insurance (e.g. Federal Deposit Insurance Corporation (FDIC) in the U.S., and the Deposit Insurance and Credit Guarantee Corporation (DICGC) in India) to bank depositors up to a certain amount (Rs. 100000 in India). CDs are also treated as bank deposit for this purpose. In India, scheduled banks can issue CDs with maturity ranging from 7 days 1 year and financial institutions can issue CDs with maturity ranging from 1 year 3 years. CD is issued for denominations of Rs. 1, 00,000 and in multiples thereof.

Gold

Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is subject to speculation as are other markets, especially through the use of futures contracts and derivatives. The history of the gold standard, the role of gold reserves in central banking, gold's low correlation with other commodity prices, and its pricing in relation to fiat currencies during the financial crisis of 20072010, suggest that gold behaves more like a currency than a commodity.

In the final analysis, gold is a financial asset. It also is a commodity: The price of gold rises and falls based on its role as a financial asset, like a currency, a stock or a bond, that investors buy and sell based on a complex web of factors. More importantly, gold has been a financial asset, a store of value and an investment that has held its own for five millennia. Gold has stood the test of time repeatedly and has outlasted all other financial and monetary assets. Throughout history, gold has served three functions. It has been a financial asset, held by individual investors as a store of wealth and a portfolio diversifier. It has been a commodity, used primarily in jewelry but also in electronics, dentistry, and many other applications. Finally, it has been a monetary asset, used by governments as a reserve asset, as a form of money, and as a backing for their own currencies.

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Risks associated with Mutual Funds


Most mutual funds are not guaranteedyou could lose money on your investment. The level of risk in a mutual fund depends on what it invests in. For example, stocks are usually riskier than bonds, so you would expect an equity fund to be riskier than a fixed income fund.

Different types of investments generally come with different types of risk. This table shows some of the common types of risk and how they could affect a funds performance:

Type of risk

Type of investment affected

How the fund could lose money The value of a foreign investment declines because of political changes or instability in the country where the investment was issued. If a bond issuer cant repay a bond, it may end up being a worthless investment.

Country risk

Foreign investments

Credit risk

Fixed income securities Investments denominated in a

Currency risk

currency other than the Canadian dollar

If the other currency declines against the Canadian dollar, the investment will lose value. The value of fixed income securities generally falls when interest rates rise. The fund cant sell an investment thats declining in value because there are no buyers. The value of its investments decline because of unavoidable risks that affect the entire market

Interest rate risk

Fixed income securities

Liquidity risk

All types

Market risk

All types

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1. Country risk: Changes in government policy and political decision can change the investment environment. They can create a favorable environment for investment or vice versa. 2. Credit Risk: The debt servicing ability (May it be interest payments or repayment of principal) of a company through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. An AAA rating is considered the safest whereas a D rating is considered poor credit quality. A well-diversified portfolio might help mitigate this risk. 3. Currency risk: The risk that a business' operations or an investment's value will be affected by changes in exchange rates. For example, if money must be converted into a different currency to make a certain investment, changes in the value of the currency relative to the American dollar will affect the total loss or gain on the investment when the money is converted back. 4. Interest Rate Risk: In a free market economy interest rates are difficult if not impossible to predict. Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified portfolio might help mitigate this risk. 5. Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities. 6. Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works on the concept of Rupee Cost Averaging (RCA) might help mitigate this risk.

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CHAPTER 6: FIXED INCOME FUNDS


Debt funds are funds which invest money in debt instruments such as short and long term bonds, government securities, T-bills, corporate paper, commercial paper, call money etc. The fees in debt funds are lower, on average, than equity funds because the overall management costs are lower. The main investing objectives of a debt fund are usually preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration. Investments in the equity markets are considered to be fraught with uncertainties and volatility. These factors may have an impact on constant flow of returns. This is why debt schemes, which are considered to be safer and less volatile, have attracted investors. Debt markets in India are wholesale in nature and hence retail investors generally find it difficult to directly participate in the debt markets. Not many understand the relationship between interest rates and bond prices or difference between Coupon and Yield. Therefore venturing into debt market investments is not common among investors. Investors can however participate in the debt markets through debt mutual funds.

Debt paper is issued by Government, corporates and financial institutions to meet funding requirements. A debt paper is essentially a contract which says that the borrower is taking some money on loan and after sometime the lender will get the money back as well as some interest on the money lent.

seen

Before discussing more about debt fund schemes, a few terms and concepts need to be

1) Yield to Maturity

The yield to maturity (YTM) of a bond is the IRR that a buyer would receive if they purchased the bond at the current market price. This is also called the redemption yield.

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As an IRR measure, YTM suffers from the same flaws. The flaws are less serious in this case, because of the characteristics of bonds: cash flows are always positive, and the variation in the rates at which income can be re-invested is lower. YTM is, nonetheless, generally a much better measure than flat yield, and is probably the most accurate of the commonly used measures of bond yield. A full evaluation of a bond needs to consider whether the yield spread is sufficient compensation for risk, and how it compares with alternatives over the same term.

2) Average duration

The sensitivity of a portfolio of bonds such as a bond mutual fund to changes in interest rates can also be important. The average duration of the bonds in the portfolio is often reported. The duration of a portfolio equals the weighted average maturity of all of the cash flows in the portfolio. If each bond has the same yield to maturity, this equals the weighted average of the portfolio's bond's durations, with weights proportional to the bond prices. Otherwise the weighted average of the bond's durations is just a good approximation, but it can still be used to infer how the value of the portfolio would change in response to changes in interest rates.

3) Modified duration

Modified duration is a modified version of the Macaulay model that accounts for changing interest rates. Because they affect yield, fluctuating interest rates will affect duration, so this modified formula shows how much the duration changes for each percentage change in yield. For bonds without any embedded features, bond price and interest rate move in opposite directions, so there is an inverse relationship between modified duration and an approximate 1% change in yield.

Modified duration = D (1+r)

Where D is the duration and r is the interest rate paid per period: coupon payment divided by price.

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The percentage change in the price is equal to the change in interest rates multiplied by the modified duration. This is an approximation and becomes less accurate for larger interest rate changes. Interest rate changes are usually small and the approximation is more than good enough.

4) Credit Rating and Credit Rating Agencies

A credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrowers overall credit history. A credit rating is also known as an evaluation of a potential borrower's ability to repay debt. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, as a factor considered in obtaining security clearances and establish the amount of a utility or leasing deposit.

The Credit ratings for corporation are assigned by credit rating agencies. In India, commercial credit rating agencies include CRISIL, CARE, ICRA and Brickwork Ratings. The credit bureaus for individuals in India are Credit Information Bureau (India) Limited (CIBIL) and Credit Registration Office (CRO). These Ratings help an investor assess the credit quality of a particular scheme before making an investment. Just like IPO grading, mutual fund grading looks at the past performance of the scheme.

Credit rating agencies (CRAs) assign ratings to all Bonds, NCDs, and other debt instruments (excluding Public Deposits). The ratings are based on the overall exposure to default risk, with regard to timely receipt of payments from the investments the scheme has made. CRAs such as CRISIL, ICRA and CARE have been rating long-term as well as short-term instruments. So far, the ratings have been based on in-house parameters.

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For long term rating scale (with original maturity exceeding one year) ICRA uses the grade LAAA, LAA, LA, LBBB, LBB, LB, LC, and LD whereas CRISIL grade them as AAA, AA, A , BBB, BB, B , C, D and NM.

For short term rating scale ( All instruments with original maturity within one year.) ICRA use the grade A1, A2, A3, A4 and A5 while CRISIL use P1, P2, P3, P4, P5 and NM. Credit rating agencies (CRAs) also assign ratings to mutual fund (MF) schemes which invest entirely, or mostly, in debt. The ratings are based on the overall exposure to default risk, with regard to timely receipt of payments from the investments the scheme has made. CRAs such as Crisil, ICRA and CARE have been rating long-term as well as short-term debt mutual fund schemes. So far, the ratings have been based on in-house parameters. CRISIL rates MF schemes on a scale of 1 to 5, with 1 considered the best. ICRA uses the grades AAA, AA, BBB and C, among others, to rate the same schemes.

In July 2011, SEBI asked CRAs to use standardized rating symbols. So now long-term debt schemes with the highest degree of safety will be rated as AAAmfs. AAmf and Amf mean they have high and adequate levels of safety, respectively. BBBmfs and BBmfs-rated schemes carry moderate risk. A Bmf-rated scheme has high degree of risk. A scheme with Cmf rating has a very high level of risk. Rating companies can use the + or - symbol, along with the rating, to reflect the comparative standing within the category. For a short-term debt fund scheme, a rating of A1mfs will be the highest. A2mfs and A3mfs-rated schemes reflect a strong and moderate degree of safety, respectively. A4mfs-rated schemes have the least degree of safety.

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Debt Mutual Fund Schemes

1. Fixed Maturity Plans FMPs have become very popular in the past few years. FMPs are essentially close ended debt schemes. The money received by the scheme is used by the fund managers to buy debt securities with maturities coinciding with the maturity of the scheme. There is no rule which stops the fund manager from selling these securities earlier, but typically fund managers avoid it and hold on to the debt papers till maturity. Investors must look at the portfolio of FMPs before investing. If an FMP is giving a relatively higher indicative yield, it may be investing in slightly riskier securities. Thus investors must assess the risk level of the portfolio by looking at the credit ratings of the securities. Indicative yield is the return which investors can expect from the FMP. Regulations do not allow mutual funds to guarantee returns, hence mutual funds give investors an idea of what returns can they expect from the fund. An important point to note here is that indicative yields are pre-tax. Investors will get lesser returns after they include the tax liability.

2. Capital Protection Funds These are close ended funds which invest in debt as well as equity or derivatives. The scheme invests some portion of investors money in debt instruments, with the objective of capital protection. The remaining portion gets invested in equities or derivatives instruments like options. This component of investment provides the higher return potential. It is important to note here that although the name suggests Capital Protection, there is no guarantee that at all times the investors capital will be fully protected.

3. Gilt Funds These are those funds which invest only in securities issued by the Government. This can be the Central Govt. or even State Govts. Gilt funds are safe to the extent that they do not carry any Credit Risk. However, it must be noted that even if one invests in Government Securities, interest rate risk always remains.

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4. Balanced Funds These are funds which invest in debt as well as equity instruments. These are also known as hybrid funds. Balanced does not necessarily mean 50:50 ratio between debt and equity. There can be schemes like MIPs or Children benefit plans which are predominantly debt oriented but have some equity exposure as well. From taxation point of view, it is important to note how much portion of money is invested in equities and how much in debt.

5. MIPs Monthly Income Plans (MIPs) are hybrid funds; i.e. they invest in debt papers as well as equities. Investors who want a regular income stream invest in these schemes. The objective of these schemes is to provide regular income to the investor by paying dividends; however, there is no guarantee that these schemes will pay dividends every month. Investment in the debt portion provides for the monthly income whereas investment in the equities provides for the extra return which is helpful in minimizing the impact of inflation.

6. Child Benefit Plans These are debt oriented funds, with very little component invested into equities. The objective here is to capital protection and steady appreciation as well. Parents can invest in these schemes with a 5 15 year horizon, so that they have adequate money when their children need it for meeting expenses related to higher education.

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CHAPTER 7: REVIEW OF LITERATURE


MFs have attracted a lot of attention and kindled the interest of both academic and practitioner communities. Compared to the developed markets, very few studies on MFs are done in India. The literature review reveals Investor behavior studies which can be grouped under two themes 1) Studies relating to General Financial Behavior of Investors 2) Fund Selection Behavior Studies

1) General Financial Behavior Studies: Daniel Kahneman and Amos Tversky (1979) originally described Prospect Theory and found that individuals were much more distressed by prospective losses than they were happy by equivalent gains. Some economists have concluded that investors typically consider the loss of $1 twice as painful as the pleasure received from a $ gain. Individuals will respond differently to equivalent situations depending on whether it is presented in the context of losses or gains.

Langer (1983) suggests that when these preferences are based on choices, there is more ego involvement and attachment to the preferences, suggesting heightened level of preference bias. This phenomenon is consistent with the prediction from Cognitive Dissonance theory of Festinger (1957).

Robert J. Shiller (1993) reported that many investors do not have data analysis and interpretation skills. This is because, data from the market supports the merits of index investing, passive investors are more likely to base their investment choices on information received from objective or scientific sources.

Phillip (1995) reported that there is a change in financial decision-making and investor behavior as a result of participating in investor education programmes sponsored by employees.

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Hirshleifer (2001) categorized different types of cognitive errors that investors make i.e. self-deception, occur because people tend to think that they are better than they really are; heuristic simplification, which occurs because individuals have limited attention, memory and processing capabilities; disposition effect, individuals are prone to sell their winners too quickly and hold on to their losers too long (http://www.investorhome.com/psych.htm).

2) Fund Selection Behavior Studies: Investor fund selection Behavior influences marketing decisions of fund management and has captured the attention of researchers. The findings are reported below:

Ippolito (1992) and Bogle (1992) reported that fund selection by investors is based on past performance of the funds and money flows into winning funds more rapidly than they flow out of losing funds.

Vidyashankar (1990), Agarwal G.D. (1992), Gupta L.C. (1993) Atmaramani (1996), Madhusudan (1996) and Ajay Srinivasan (1999) and others have conducted extensive research regarding investor expectations, protection, awareness and fund selection behavior. Few striking ones among the other studies are given below.

Gupta L.C. (1993) conducted a household investor survey with the objective to provide data on investor preferences on MFs and other financial assets.

Madhusudhan V. Jambodekar (1996) conducted a study to assess the awareness of MFs among investors, to identify the information sources influencing the buyer decision and the factors influencing the choice of a particular fund. The study revealed that income schemes and open-ended schemes are preferred over growth schemes and close-ended schemes during the prevalent market conditions. Investors look for Safety of Principal, Liquidity and Capital Appreciation in order of importance; Newspapers and Magazines are the first source of information through which investors get to know about MFs / Schemes and the investor service is the major differentiating factor in the selection of MFs.

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An attempt was made by the NCAER in 1964 to understand the attitude and motivation for the savings of individuals, for which a survey of households was undertaken. Another NCAER study in 1996 analyzed the structure of the capital market and presented the views and attitudes of individual shareholders. SEBI-NCAER survey (2000) was carried out to estimate the number of households and the population of individual investors, their economic and demographic profile, portfolio size, and investment preference for equity as well as other savings instruments. This is a unique and comprehensive study of individual investors, for, data was collected from 3, 00,000 geographically dispersed rural and urban households. Some of the relevant findings of the study are: Households preference for instruments match their risk perception; Bank Deposit has an appeal across all income class; 43% of the non-investor households (estimated around 60 million households) apparently lack awareness about stock markets; and, compared with low income groups, the higher income groups have a higher share of investments in MFs signifying that MFs have not truly become the investment vehicle for small investors; the number of households owning units of mutual funds is more (9%) than the investor households owning investments in shares and debentures (8%).

The Review of Literature reveals that in developed markets lot of study has been done, but developing markets also deserve an extensive research.

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CHAPTER 8: RESEARCH METHODOLOGY


1) Research Design Exploratory Research

2) Data Collection Method Most of the data has been collected secondarily from published sources. The primary survey was conducted through a structured closed ended questionnaire. 3) Sampling The study mainly deals with the financial behavior of Individual Investors towards Mutual funds in Mumbai city. The required data was collected through a pretested questionnaire administered on a combination of convenience and judgment sample of 100 educated individual investors. Judgment sample selection is due to the time and financial constraints. . Respondents were screened and inclusion was purely on the basis of their knowledge about Financial Markets, MFs in particular. This was necessary, because the questionnaire presumed awareness of some basic terminology about Mutual Funds. The purpose of the survey was to understand the behavioral aspects of individual investors, mainly their fund selection behavior, various factors influencing this behavior and also the conceptual awareness level among individual investors. Sample of the questionnaire is given in Annex. A. The unit of observation and analysis of survey is only among Individual Investors whose definition is An Individual who has currently invested (i.e. as on May or June 2011) in any Mutual Funds and this does not include high net worth individuals (i.e., those who earn above Rs. 10,00,000/- per annum) and institutions. Since it is an exploratory study no specific hypothesis is formulated.

4) Fieldwork and Data Collection The field work associated with the survey was conducted accordingly and data was collected on field.

5) Instruments Used Questionnaire

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6) Analysis and Interpretation The analysis of the data collected has been performed appropriately and inferences have been drawn. The data collected has been presented in forms of line graphs and thus the trend arising therefrom has been analyzed. Also for finding out factors that affect the fund selection behavior of investors, factor analysis using principal component extraction has been performed. This tool of SPSS was extensively used to classify a large number of variables into smaller number of factors. Factor Analysis was used to determine whether there was any common constructs that represented investor concerns. 25 variables were analyzed using the Varimax Algorithm of Orthogonal Rotation, the most commonly used method. Evaluation of the resulting constructs and naming of the factors is largely subjective. Hence, to identify investors underlying Fund/Scheme selection criteria, so as to group them into specific factors, which would further identify Investor types, to enable the designing of appropriate marketing strategies, Factor Analysis was done using Principal Component Analysis.

7) Limitations of the study a. Sample size is limited to 100 educated individual investors in the city of Delhi NCR. The sample size may not adequately represent the national market. b. Simple Random and judgment sampling techniques is due to time constraints. c. This study has not been conducted over an extended period of time having both ups and downs of stock market conditions which a significant influence on investor s buying pattern and preferences. d. The research is only exploratory, no conclusion may finally be drawn from it, but only direction may be sought. e. This is an independent study and the observations may not comply with those would have been made by an experienced professional.

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CHAPTER 9: DATA ANALYSIS AND INTERPRETATIONS

1) Analysis of Various Fixed Income Mutual Funds managed by Reliance Capital Asset Management Limited

Money Market Instruments includes Commercial Papers, Certificate of Deposits & Treasury Bills. Equity includes index, stock futures & equity shares. Corporate Debt includes Debenture. Source: Reliance Mutual Fund

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2) Analysis of investors preferences The survey conducted to capture investor behavior pattern in selection of MFs, reveals the following. a. Savings Objective of Individual Investors

Objective of Savings
Others For purchase of assets For childrens education To meet contingencies For tax reduction To provide for Retirement 0 10 20 29 30 40 50 60 49 24 59 2 55

Savings Objective of the majority of Individual Investors is To meet contingencies or For Purchase of Assets, thus throwing light on the need of capital appreciation and flexibility. AMC can attract a pool of investors by designing products with flexible investment plans.

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b. Savings Instrument Preference among Individual Investors


100% 15 8 1 5 5 11 8 80% 19 70% 20 60% 20 15 16 13 12 9 10 8 17 5 6 20% 3 6 10% 2 10 0% 11 14 15 10 15 8 6 2 Currency BankLifePension Shares Deposit Insurance& Provident Funds Units of UTI & Mutual funds 23 6 6 2 2 Postal Savings 19 19 7 14 10 3 2 1 Chits 16 11 18 16 8 15 9 16 21 16 16 12 12 20 21 9 7 12 6 7 6 10 15 6 8 20 43 3 11 5 7 10 10 9 8 7 6 5 4 3 2 1 1 4 3 2

2 4

4 3

5 3 9

5 13 13 8 11

90%

50% 14 40% 11 15

16

30%

12

Real Estate

Gold

Asset preference pattern of investors provides an insight into the investment attitude of investors, which will influence the policy formation for garnering the individual savings. The study reveals that Units of UTI and Mutual Funds are the most popular savings instrument among individual investors of Delhi followed by Real Estate, as it is one of the few financial products, which provide high returns along with safety of capital.

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c. Current Attitude of Individual Investors towards the Following Financial Instruments, In the Indian Capital Market

Average Preference of Financial Instruments


5 4 3 2 1 0 Shares Debentures Mutual Funds Bonds 3.63 3.17 4.09 3.19

Every asset class has different characteristics. Stocks have the potential to provide high total returns with proportionate level of risk, while bonds may provide lower risks along with regular income. The attitude of every individual investor may be influenced by their investment goals, risk tolerance, time horizon, personal circumstances or performance aspect of the asset class. The Financial instruments i.e. Shares, mutual Funds, Bonds and debentures were rated on a 5point scale. MFs were rated as Highly Favorable at 4.09 and Shares, Bonds and Debentures were rated in the Favorable category at 3.63, 3.19 and 3.17 respectively.

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d. Mutual Fund Scheme Preference among Individual Investor

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

4 6 9

5 8 17

10 19

19

12 11 12 17 50 6 5 4

19 29 32 29

25

11 23 37 15 Growth Schemes Income Schemes 19 12

22

23

27

3 2 1

13 11 13 4 25 8 4 0 Index Schemes

Balanced Schemes

Money Market Schemes

Tax saving Schemes

Investors have a plethora of options ranging from Growth schemes to Fixed Income schemes. Now-a-days investors are not offered just plain vanilla schemes but an assorted basket to tune with their risk appetite. MF scheme preference for majority of investors is Growth Scheme. The preference for growth or any other scheme is also influenced by stock market conditions prevailing at the time of investment decision. The prevailing market conditions have prompted investors to look for growth schemes and income schemes have become unattractive due to dropping interest rates. This further indicates the growing alertness of investors.

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e. Scheme Preference by Operation among Individual Investors

MF Type Preference
12% 9% Open Ended Schemes Close Ended Schemes Interval Schemes

79%

Analysis of scheme preference by nature of operation reveals the popularity of OpenEnded scheme. In India majority of schemes are Open- Ended as investors can buy or sell units at NAV related prices. The preference to Open- Ended scheme has also given due importance to Liquidity. On the other hand, only 12% of the respondents have voted for Interval Schemes which shows lack of awareness with regard to this feature.

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f. Preferential Feature in Mutual Funds among Individual Investors

100% 6 13 90% 17 80% 10 19 70% 13 8 9 5

5 6 7

2 3 3 24 16

33 29

29 15 11 14

16

16 8 11 14 7 6 25 5 5 14 5 4 3 6 8 17 8 14 2 1

60%

11 50% 7 10 20 14 30% 7 20 20% 28 10% 5 Safety Liquidity 10 3 Flexibility 10 3 25 13 28 3 7 16 10 27 21 4 7

40%

11

0%

CapitalGood Return Professional Tax Benefit Diversification AppreciationManagementBenefit

Mr. M. Damodaran, Chairman of UTI, has summed the psyche of a typical Indian Investor in three words; Yield, Security and Liquidity. The study also shows the investors need for Good Return is highest among other features, followed by Safety, Tax Benefit, Liquidity, Diversification Benefits, Capital Appreciation, and Professional Management.

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g. Preferable Route to Mutual Fund Investing Among Individual Investors

Source of Awareness about MFs


Hoardings / Banners Stores Display Internet Brokers / Agents Television Financial Magazines Newspapers (business) Newspapers (general) Reference Groups 0 10 20 30 40 33 48 50 60 35 56 49 46 2 58 9

Investors may use some sources to gain awareness regarding investing in Mutual Funds. The sources in the present study are confined to Reference groups, Newspapers General and Business, Financial Magazines, Television, Brokers/ Agents, Internet and Stores Display. Findings of the study reveal that investors attach high priority to self-reachable information, thereby preferring Internet and Business Newspapers. This throws light on the possibility that MF investors spend time analyzing and examining relevant information before taking any crucial decision.

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h. Preferred Mode of Communication in Mutual Fund Investing Among Individual Investors

Response Preference

No Preferences 7% Automated Response 19%

Online Response 33%

Personal Visit to Office 22%

Telephone the Office 19%

The survey reveals that, 33% of the respondents of Delhi NCR use Internet facility to know more about MFs. Another 22% of respondents prefer to get routine or special information like NAV, dividend, bonus, change in asset mix etc. by personally visiting the office. While 19% of the respondents prefer to telephone the office and 7% in the survey have no preferences. The results of the study show that almost equal importance is given to all modes of communication. This gives the message of catapulting improvement in Internet and telecommunication services in India. Now-a-days financial services are just a phone call away. There is also possibility of more usage of automated services if made more user friendly. This study was conducted in a cosmopolitan city, Delhi, hence, the choice of the rural population can be guessed in favor of Personal Mode.

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i. Preference of Mutual Fund Investing Over Equity Investing

MF Best Alternative to Equity Investment


No 16%

Do Not Know 9%

Yes 75%

The emergence of an array of savings and investment options and the dramatic increase in the popularity of Mutual Funds, in the recent years in India, has opened up an entirely new area for value creation and management. A house-holder investor with few rupees left over after paying for housing and two-wheeler installments, is puzzled as to where he must park his funds safely, given the volatility of the market. The truth of the matter is that average Indian investor is a greenhorn when it comes to financial markets. The causes are many; lack of opportunity, lack of conceptual understanding and the influence of fixed income orientation in the Indian culture. The study too revealed that 75% of the small investors of Delhi preferred to invest in MFs .The theory behind this is that, by pooling together a huge aggregation of individual savings and investing them, using the professional judgment of the fund manager, one spreads risk, takes advantage of volume buying and scientific data analysis, expertise and so on. This seems to be an ideal option for the individual who does not have the time, knowledge and expertise to make a succession of judgments involving hard earned savings. This also shows the growing popularity of MFs.

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j. Online trading of MFs beneficial or not

Online Trading of MFs Beneficial


No 5%

Do Not Know 16%

Yes 79%

With the advancement of technological integrations with various offerings, the digitization of all financial products is an ongoing trend. BSE recently came up with a proposal of online trading of MF scrips through the exchange in a dematerialized form. 79% of investors also think it would be a good idea. However, taking into account that Delhi is a cosmopolitan city, the usage of internet here is much higher. However, the growing reach of the internet cannot be ignored.

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k. Factors affecting fund selection behavior of investors

The output of factor analysis is obtained by requesting principal component analysis and specifying the rotation. There are two stages in factor analysis. Stage one being the factor extraction process, wherein the objective is to identify how many factors are to be extracted from the data. The most powerful method is called principal component analysis method. There is also a rule-of thumb based on the computation of an Eigen value, to determine how many factors to extract. The higher the Eigen value of a factor, the higher is the variance explained by the factor. i. Fund Related Qualities

In the Fund related qualities analysis, 11 variables were analyzed. Bartlett's test of sphericity and Kaiser Meyer Olkin (KMO) measure of sampling adequacy were used to examine the appropriateness of factor analysis. The approximate chi-square statistic is 234.084 with 55 degrees of freedom, which is significant at .000 levels. The KMO statistic (0.543) is also large enough (>0.5) Hence factor analysis is considered an appropriate technique for further analysis of data.

KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartlett's Test of Sphericity Approx. Chi-Square df Sig. .543 234.084 55 .000

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Total Variance Explained Initial Eigenvalues % of Component 1 2 3 4 5 6 7 8 9 10 11 Total 2.550 1.910 1.364 1.087 .902 .873 .767 .556 .392 .332 .266 Variance 23.183 17.367 12.401 9.883 8.200 7.938 6.974 5.056 3.560 3.019 2.418 Cumulative % 23.183 40.550 52.951 62.834 71.035 78.973 85.947 91.003 94.563 97.582 100.000 Total 2.550 1.910 1.364 Extraction Sums of Squared Loadings Rotation Sums of Squared Loadings % of Variance 23.183 17.367 12.401 Cumulative % Total % of Variance 20.884 17.633 14.434 Cumulative % 20.884 38.517 52.951

23.183 2.297 40.550 1.940 52.951 1.588

Extraction Method: Principal Component Analysis.

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Rotated Component Matrix Component 1 2.6Ia 2.6Ib 2.6Ic 2.6Id 2.6Ie 2.6If 2.6Ig 2.6Ih 2.6Ii 2.6Ij 2.6Ik .083 .100 .573 .310 -.013 .185 -.212 .733 -.109 .788 .779 2 .711 -.280 .072 .598 .097 .753 .334 .057 .520 .161 -.075

3 -.144 .551 .206 .329 .865 .028 .580 -.091 .058 -.021 -.126

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 5 iterations.

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As evident from the tables, it is found that the three factors extracted together account for a large percentage of total variance. Based on Eigenvalues, 3 principal components are extracted.

Looking at Rotated factor Matrix table we see entry and exit loads; minimum initial investment; and Innovativeness of the scheme have loadings of 0.788, 0.779, and 0.733 on component 1. This suggests that component 1 is a combination of these variables. Therefore this factor can be interpreted as Intrinsic Fund Qualities. The component explains 20% of the variations.

Now for component 2, we see that withdrawal facilities; and Fund Performance Record have high loadings of 0.753 and 0.711 respectively, indicating that component 2 is a combination of these variables. These variables can be clubbed into a single component called Flexibility and Consistency. The component explains 18% of variations. As for component 3, it is evident that Fund Managers Reputation having loading of 0.861 is the most significant factor. So this component may be called as Brand Image. This component explains 14% of the variations in the data.

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ii. Investor Related Services

In the Investor Related Services analysis, 9 variables were analyzed. Bartlett's test of sphericity and Kaiser Meyer Olkin (KMO) measure of sampling adequacy were used to examine the appropriateness of factor analysis. The approximate chi-square statistic is 185.012 with 36 degrees of freedom, which is significant at .000 levels. The KMO statistic (0.651) is also large enough (>0.5) Hence factor analysis is considered an appropriate technique for further analysis of data.

KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartlett's Test of Sphericity Approx. Chi-Square df Sig. .651 185.012 36 .000

Total Variance Explained Initial Eigenvalues % of Component 1 2 3 4 5 6 7 8 9 Total 2.531 1.875 1.187 .822 .735 .599 .504 .387 .360 Variance 28.124 20.836 13.191 9.132 8.162 6.652 5.600 4.305 3.998 Cumulative % 28.124 48.960 62.151 71.283 79.445 86.096 91.697 96.002 100.000 Total 2.531 1.875 1.187 Extraction Sums of Squared Loadings Rotation Sums of Squared Loadings % of Variance 28.124 20.836 13.191 Cumulative % 28.124 48.960 62.151 Total 2.103 2.064 1.427 % of Variance 23.366 22.932 15.853 Cumulative % 23.366 46.298 62.151

Extraction Method: Principal Component Analysis.

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Rotated Component Matrix Component 1 2.6IIa 2.6IIb 2.6IIc 2.6IId 2.6IIe 2.6IIf 2.6IIg 2.6IIh 2.6Iii .712 .798 .566 .041 .638 .187 -.280 .273 -.204 2 -.149 -.033 .473 .806 .386 .046 .173 .595 .795

3 -.125 .077 -.255 .223 .176 .792 .743 .272 -.079

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 4 iterations.

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Again, based on Eigenvalues, 3 principal components are extracted. Looking at Rotated factor Matrix table we see Disclosures of Periodicity and Investment Objective have loadings of 0.798, 0.712 on component 1. This suggests that component 1 is a combination of these variables. Therefore this factor can be interpreted as Transparency in Disclosures. The component explains 23% of the variations.

Now for component 2, we see that Daily Disclosures of NAV and Ease of Access have high loadings of 0.806 and 0.795 respectively, indicating that component 2 is a combination of these variables. These variables can be clubbed into a single component called Customer Comfort and Accessibility. The component also explains 23% of variations.

As for component 3, it is evident that Grievance Redressal and Fringe Benefits having loadings of 0.792 and 0.743 are the most significant factors. So this component may be called as After Sale Benefits and Services. This component explains 16% of the variations in the data.

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CHAPTER 10: CONCLUSIONS AND RECOMMENDATIONS


THE emergence of an array of savings and investment options and the dramatic increase in the secondary market for financial assets in the recent years in India has opened up an entirely new area of value creation and management. An average Indian investor is a greenhorn when it comes to financial markets, the causes may be many: the lack of opportunity, lack of conceptual understanding and the influence of a fixed-income orientation in the Indian culture. Salaried person's savings are most often deposited in mutual funds; the theory behind this is that by pooling together a huge aggregation of individual savings and investing them, using the professional judgment of the fund manager, one spreads risk, takes advantage of volume buying and scientific data analysis, expertise and so on. Therefore it is seen as the ideal option for an individual who does not have the time, knowledge or experience to make a succession of judgments involving his hard-earned savings. MF industry in India has a large untapped market in urban areas besides the virgin markets in semi-urban and rural areas. This market potential can be tapped by scrutinizing investor behavior to identify their expectations and articulate investor's own situation and risk preference and then apply to an investment strategy that combines the usual four: cash and equivalents, Government-backed bonds, debt, and equity.

Presently, more and more funds are entering the industry and their survival depends on strategic marketing choices of mutual fund companies, to survive and thrive in this highly promising industry, in the face of such cutthroat competition. In addition, the availability of more savings instruments with varied risk-return combination would make the investors more alert and choosy. Running a successful MF requires complete understanding of the peculiarities of the Indian Stock Market and also the psyche of the small investor. Under such a situation, the present exploratory study is an attempt to understand the financial behavior of MF investors in connection with scheme preference and selection.

Studies similar to this, if conducted on a large scale at regular intervals by organizations like AMFI/SEBI, will help capture the changing perceptions and responses of these groups, and thus provide early warning signals to enable implementation of timely corrective measures. It is hoped that the survey findings of the study will have some useful managerial implications for the

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AMCs in their product designing, marketing and management of the fund. Results of the study may help in making cost effective strategic decisions and hence would be of interest to both existing and new MFs; Fund managers; and individual investors. Suggestions for Further Research i) The MF operational environment is becoming more competitive. Hence, the impact of emerging competition on investor behavior/behavioral changes needs to be studied further. ii) Developments in technology influence the behavior of investors. Hence, the impact of technology on financial behavior is another potential area for close study. iii) Since the industry is still struggling to win the investors confidence, an in-depth analysis into investor s expectations from MF products, its performance, management, service and other related areas could be done. iv) This study reveals that MF investors feel that currently the two major benefits, which MFs purport to offer, namely, diversification benefits and professional management are not satisfactorily delivered. In spite of this, MF industry is growing and we attribute this to investor behavior and other macroeconomic factors. Further research can be done to understand the reasons for growing popularity on one side and the struggle to win investors confidence on the other side.

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REFERENCES

A. BOOKS: Gupta, L.C., Mutual Funds and Asset Preference, Society for Capital Market Research and Development, Delhi, 1994. Kiran D. and Rao U.S., Identifying Investor Group Segments Based on Demographic and Psychographic Characteristics, MBA Project Report, Sri Sathya Sai Institute of Higher Learning, 2004. Naresh K. Malhotra., Marketing Research An Applied Orientation, Prentice Hall International, USA, 1999, 585 597. Rajeshwari T.R and Rama Moorthy V.E., Performance Evaluation Of selected Mutual Funds and Investor Behavior, PhD Thesis, Sri Sathya Sai Institute of Higher Learning, Prasanthinilayam, 2002. Sadhak, H., Mutual Funds in India Marketing Strategies and Investment Practices, Response Books, New Delhi,1997, 3 64. SEBI NCAER, Survey of Indian Investors, SEBI, Mumbai, 2000. Vidya Shankar, S., Mutual Funds Emerging Trends in India, Chartered Secretary, Vol.20, No.8, 1990, 639-640. Nisith Desai Associates, Mutual Funds in India: An Overview, Nisith Desai Associates, 2003 Ms. Kavitha Ranganathan, A Study of Fund Selection Behavior of Individual Investors Towards Mutual Funds - With Reference To Mumbai City, Madurai Kamraj University, 2003 KPMG, Indian Mutual Fund Industry The Future in a Dynamic Environment: Outlook for 2015, The Mutual Fund Conference, Confederation of Indian Industries, New Delhi, 2009

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B. JOURNALS AND PERIODICALS: Bhatt, M. Narayana, Setting standards for investor services, Economic Times, 27 Dec.1993. Ferris, S.P., and D.M.Chance, The effect of 12b-1 fees on Mutual Fund expense ratio: A Note, The Journal of Finance, 42, 1987, 1077-82. Kahneman, Daniel and Amos Tversky, "Prospect Theory: An Analysis of Decision Making Under Risk," Econometrica, 1979. Kahneman, Daniel and Mark Riepe, Aspects of Investor Psychology , Journal of Portfolio Management, Summer 1998. Raja Rajan V Investment size based segmentation of individual investors , Management Researcher, 1997b, 21-28; Stages in life cycle and investment pattern, The Indian Journal of Commerce, 51 (2 & 3), 1998, 27 36; Investors demographics and risk bearing capacity , Finance India, 17(2), June 2003, pp.565 576; Chennai Investor is conservative, Business Line, 23 Feb.1997a. Shankar, V., Retailing Mutual Funds: A consumer product model , The Hindu, 24 July 1996, 26.

C. WEBSITES: AMFI-Mutual fund industry, < http://www.amfiindia.com/mutualind.html 12/12/2004. Investor Home- Psychology and Behavioural Finance , 17/5/99, Investor Home Online <http://www.investorhome.com/psych.htm , 21/12/2004. http://www.mutualfundsindia.com http://www.reliancemutual.com Nofsinger John R., Does Investor Sophistication Influence Investing Behavior and Trading Performance? Evidence from China, John_nofsinger@wsu.edu , 23/11/2004. The SEBI-NCAER investor survey, 28/8/2000, The Rediff Money Special <http://www.rediff.com/money/2000/aug/28spec.htm, 2/11/2004.

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ANNEXURES
Annexure 1 Copy of Questionnaire

QUESTIONNAIRE TO PRESENT INVESTORS IN MUTUAL FUNDS


Dear Sir / Madam, Mutual funds have opened new vistas to millions of small investors by virtually taking investment to their very doorstep. The scientific investment approach and investor oriented benefits has made the industry grow to over ` 6500 trillion by current estimates. I am currently engaged in a study on Investors attitude towards Mutual Funds. In this connection I request you to read the following items carefully and answer them. The answers you give will be held confidential and used purely for academic purpose. Please put a tick mark in the square corresponding your choice. I thank you for your time.

PART A: Personal Data 1.1) Name: 1.2) Sex: Male Female 1.3) Age in completed years: Below 30 31 40 41 50 Above 50 1.4) Phone No (Optional): _______________________ 1.5) e-Mail Id: _______________________@_____________ 1.6) Academic Qualifications: School Final Post Graduate

Graduate Professional Degree

1.7) Marital Status: Married Unmarried Widow Widower Divorced 1.8) Occupation: Professional Business Salaried Retired 1.9) Annual Income in Rs: Below ` 100000 ` 300001500000 1.10) How much do you save annually (in ` Approx.)? Less than ` 50000 ` 50001 to ` 100000 Above ` 100000 1.11) Objectives of your savings are: To provide for Retirement To meet contingencies For purchase of assets

` 100001 300000 Above ` 500000

For tax reduction For childrens education

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1.12) What is your current preference of savings avenue? (Rank from 1 first preference to 10 last preference) Currency Life Insurance Shares Postal Savings Real Estate Bank Deposit Pension & Provident Fund Units of UTI & Mutual funds Chits Gold

PART B: Please read the following and give your views: 2.1) What is your current attitude towards the following Financial Instruments, in the Indian Capital Market?
Highly Favorable Favorable Some what Favorable Not very Favorable Not at all Favorable

a) Shares b) Debentures c) Mutual Funds d) Bonds

2.2) Do you prefer investment in Mutual funds to other savings avenue in future? Yes No Not Sure

2.3) Generally you prefer (Please Rank from 1 first preference to 6 last preference) Growth schemes Income Schemes Balanced Schemes Money Market Schemes Tax saving Schemes Index Schemes

2.4) You prefer: Open ended Schemes Interval Schemes

Close Ended Schemes

2.5) You prefer investment in Mutual funds due to (Rank from 1 to 8 down) Safety Flexibility Good Return Tax Benefit Liquidity Capital Appreciation Professional Management Diversification Benefit

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2.6) There are many qualities that could affect your selection of Mutual funds and Specific Schemes. Please indicate importance of the following in your decision.
Highly Important Some what Important Not very Important Not at all Important

Important

I. Fund Related Qualities a) Fund performance record b) Funds reputation or brand name c) Schemes expense ratio d) Schemes portfolio of investment e) Reputation of the Fund Manager/ Scheme f) Withdrawal facilities g) Favorable rating by a rating agency h) Innovativeness of the scheme i) Products with tax benefits j) Entry & Exit load k) Minimum initial investment II. Investor Related Services a) Disclosure of investment objective in the advertisement b) Disclosure of periodicity of valuation in the advertisement c) Disclosure of the method and the periodicity of the schemes sales and repurchases in the offer documents d) Disclosure of NAV on every trading day e)Disclosureofdeviationof investments from the original pattern f) MF s Investor s grievance redressal machinery g)Fringebenefitsi.e.,free insurance, credit cards, loans on collateral, tax benefits etc. h) Preferred MF to avoid problems, i.e., bad deliveries, and unnecessary followupwithbrokersand companies. i) Ease of Access and Transaction Services like Online Transactions, EDividends, Location of Vendor etc.

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2.7) How did you come to know about Mutual fund investment schemes? Reference Groups Newspapers (business) Television Internet Hoardings / Banners Newspapers (general) Financial Magazines Brokers / Agents Stores Display Others (Please Specify) __________

2.8) While contacting the fund or trying to get routine / special information would you rather communicate with a computerized automated response system or a person. (Please tick one response). I prefer automated response I prefer to personally visit the office I prefer to telephone the office I prefer online information service I have no preferences 2.9) Do you think Mutual fund investing is a best alternative to equity investing? Yes No Do not know 2.10) Do you think listing and trading of Mutual Fund Units on Stock Exchanges can enhance customer ease of use without unnecessary complications? Yes No Do not know

Thank you very much for your kind co-operation and for taking time to complete this Questionnaire!

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Annexure 2 Demographic Profile of Respondents

Gender
Femal e 31% Male 69%

Age

41-50 12%

Above 50 1%

31-40 17% Below 30 70%

Academic Qualifications
50 50 40 30 20 10 0 40

Marital Status
Divorced Widower Widow 1 0 1 59 39 0 20 40 60

10 0 Unmarried Married

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Occupation
0% Salaried 44%

Retired

Professio nal 31%

Business 25%

Annual Income
Above 500000 32%

Below 100000 12%

100000300000 26%

Above 100000 34%

Annual Savings
Less than 50000 37%

300000500000 30%

50000100000 29%