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Project report On Comparison of Mutual funds with other Investment options Of Trinity Institute of Management and Research

Mahindra & Mahindra Finance Limited

Submitted By Divya Gaikwad Under the guidance of Prof. Vijay Dixit


Certified that this project report titled Comparison of Mutual funds with other Investment option is the bonafied work of Ms Divya Gaikwad who carried out the research under my supervision certified further, that to best to my knowledge the work reported herein doesnt form any part of other project report or dissertation on the basis of which a degree or award was conferred on an earlier occasion on this or any other candidate.


Chapter I 1.1 1.2 1.3 1.4

Introduction Importance of the topic selected Selection of the organization Objectives of the project study Research Methodology

II 2.1 2.2 2.3 2.4

Theory related to the topic Investments ( Investors Portfolio) Concept of Mutual funds and its types Process of Mutual funds Portfolio management and its process

III 3.1 3.2 3.3

Organization History Structure Organizational Chart


Analysis & Interpretation of data

Findings & Suggestions

I, hereby, declare that the project titled Comparison of Mutual funds with other Investment options. Is original to my best knowledge and has not published elsewhere. This is for the purpose of partial fulfillment of Trinity Institute of management required for the award of the degree of Master of Business Administration.


As a part of my study curriculum it is necessary to conduct a project. This project provides us an opportunity to understand particular topic in depth and get exposure towards the emerging scenario. My topic for the project is titled as Comparison of Mutual funds with other Investment options in which the emphasis is given to the study of different investment options which are available and how mutual funds can prove a better option. Since mutual funds are a relatively recent phenomenon in India, general public or investors dont have clarity about this concept. As we have started witnessing the concept of more saving now being entrusted to the funds than to keeping it in banks. So it is very important to manage the savings efficiently to earn good and high returns. By efficient we mean which reduces the risk of investor and increases returns on the other hand.

This project is all about how Mutual fund can be a better option for investments as compared other investment options which really diversify our risk and can offer a better return as compared to other investment options. A Portfolio of Mutual fund is presented and shown how the risk has been diversified in different sectors so as to diversify the risk factor and also compared with other investment options so as to show how the returns are affected.

At last, the report concludes the suggestions how Mutual funds can act as better investment options than other investment options by taking a bit risky nature so as to increase the rate of returns. If the investment is diversified then it can yield higher returns but should be managed properly or efficiently.

This report actually gives a review about certain short term and long term investments options and comparatively how Mutual funds acts as a better option to gain good returns with a diversified risk.

Economic liberalization and globalization of the Indian markets began in1991. This meant that the Indian consumers had access to imported goods which resulted in fall in prices of domestic goods due to high competition. This means that meant lower the interest rates and more importantly transfer of risk from government to the individuals, forcing them to protect their investments themselves. Investors have plenty of option for investments. Some of them are providing fixed rate of returns and some of them provide variable rate of return. Many of them have their investments in Bank investments, Companies fixed deposits and UTI that were offering high returns that now they are starting falling after globalization and liberalization. There are some investors who are active. They are the ones who act promptly and make informed decisions about market. They had done their own research and understood the factors which may affect their investments in future. As every individual is different their objective behind investments also differs from person to person. Their objective can be of different types like fixed return, capital appreciation, tax planning or current income. But the investment decision mainly depends upon the objective of the investors. Therefore, it is necessary to understand the nature of the investor and his ability to take risk. Mutual funds can act here as a better option for investments for an individual the risk factor can be minimized in this. It not only offers good returns but the management of the portfolio of mutual funds is diversified due to which it offers high returns compared to other investment options.


The money we earn is partly spent and the rest is saved for meeting future expenses. Instead of keeping the saving idle we may like to earn some returns on it. So, we try to invest the money to earn good returns along with to generate a specified some of money for a specific goal in life and also make a provision for uncertain future. Their a number of options for investing ones saving which can give better returns for their investments made in physical assets or financial assets which may be further divided into short or long term options. Investing money where the risk is less has always been risky to decide. The first factor, which an investor would like to see before investing, is risk factor, which can be reduced through diversification of the risk. Diversification of risk gave birth to the phenomenon called Mutual Fund. Mutual fund is a vehicle for investing in stocks and bonds. It is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invest their savings in stocks, bonds, money market instruments and other type of securities.


To provide basic about investments. To know the information about various investment options. To study the nature of investment. To study about Mutual funds. To study how Mutual funds can be a better option. To study how diversification can help in risk reduction. To study managing efficiently cal lead to generate or yield higher returns.

What is an Investment? In Finance, the purchase of a financial product, or other item of value with an expectation of favorable future returns is termed as investment. In general terms investment means the use of money to gain higher rate of returns against savings or the investments. In business, the purchase made by a producer of a physical goods, such as durable equipment or inventory, in the hope of generating a back up for future business or maintaining a balance position for future business is termed as Investment.

An investment is the use of capital to create more money through the acquisition of a security that promises the safety of the principal and generates a reasonable return.

Various Investment options:Saving plays an important role in every nations economy. The money which is collected through savings acts as a driver for growth of the country. The saving can be invested into two ways that is short term or long term investment options.

Short term

Long term

1. Short term investment option:Short term financial option is where the holding of the asset is for a shorter period of time or where an asset is expected to be converted into cash in the next year. Broadly speaking, savings bank account, money market and fixed deposits can be considered as short term financial investments options.

Savings bank account

Company's Fixed deposit

Money market

1.1 Savings Bank account:It is often the first option or the banking product which is preferred, which offers low interest (4%- 5% p.a.), making them only marginally better than fixed deposits. 1.2. Money market or Liquid funds:They are specialized form of mutual funds that invest in extremely short term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting the capital and then, aim to maximize returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. 1.3 Fixed deposits with banks:They are also referred to as term deposits and minimum investment period for bank FDs is 30 days. Fixed be considered for 6 12 months investments period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns.

2. Long term investment option:Long term investment can be referred as the holding an asset for an extended period of time, depending upon the type of security. A long term asset can be held for one year minimum or as long as for 30 years or more. Post office savings schemes, Public provident fund, Company fixed deposits, bonds and debentures, Mutual funds etc. 2.1 Post office savings;It is a monthly income scheme which is low risk saving instrument, which can be availed through any post office. It provides an investment rate of 8% per annum, which is paid monthly. Minimum amount which can be invested is Rs. 1,000 and additional investments in multiples of 1,000. Maximum amount is Rs. 3,00,000/- ( if single)or Rs. 6,00,000 (if held jointly ) during a year. It has a maturity period of 6 years. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawal prematurely. 2.2 Public Provident fund:A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at anytime during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax free. A withdrawal is permissible every year from the seventh financial year of the date of to 50% of the balance at credit at the end of the 4th year immediately preceding year whichever is lower the amount of loan if any. 2.3 Company fixed deposit:These are short term to medium term borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semi-annually, annually. They can also be cumulative fixed deposits where the entire principal along with the interest is paid at the end of

the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes. 2.4 Bonds:It is a fixed income instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called the Maturity date.

2.5 Mutual funds:These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares, debentures etc). In accordance with a stated set of objectives. It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints.


A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. Mutual fund is a vehicle for investing in stocks and bonds. It is not an alternative investment option to stocks and bonds; rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities. Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market. Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.

Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the funds gains, losses, income and expenses.

The above diagram gives an idea on the structure of an Indian mutual fund.

Sponsor is basically a promoter of the fund. For example Bank of Baroda, Punjab National Bank, State Bank of India and Life Insurance Corporation of India (LIC) are the sponsors of UTI Mutual Funds. Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited are the sponsors of HDFC mutual funds. The fund sponsor raises money from public, who become fund shareholders. The pooled money is invested in the securities. Sponsor appoints trustees.

Trustees: Two third of the trustees are independent professionals who own the fund and supervises the activities of the AMC. It has the authority to sack AMC employees for nonadherence to the rules of the regulator. It safeguards the interests of the investors. They are legally appointed i.e. approved by SEBI. AMC: Asset Management Company (AMC) is a set of financial professionals who manage the fund. It takes decisions on when and where to invest the money. It doesnt own the money. AMC is only a fee-for-service provider.

The above 3 tier structure of Indian mutual funds is very strong and virtually no chance for fraud. Custodian: A Custodian keeps safe custody of the investments (related documents of securities invested). A custodian should be a registered entity with SEBI. If the promoter holds 50% voting rights in the custodian company it cant be appointed as custodian for the fund. This is to avoid influence of the promoter on the custodian. It may also provide fund accounting services and transfer agent services. JP Morgan Chase is one of the leading custodians. Transfer Agents: Transfer Agent Company interfaces with the customers, issue a funds units, help investors while redeeming units. Provides balance statements and fund performance fact sheets to the investors. CAMS is a leading Transfer Agent in India.


Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories:-

General classification

Broad Classification

1. General Classification of Mutual Funds:1.1. Open-end Funds:Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day.

1.2. Closed-end Funds:Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions: Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a closed-end fund is computed on a weekly basis (updated every Thursday). Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed. 1.3. Load Funds:-

Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning, fund manager's salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds. A load fund may impose following types of loads on the investors: 1.3.1 Entry Load Funds:Also known as Front-end load, it refers to the load charged to an investor at the time of his entry into a scheme. Entry load is deducted from the investor's contribution amount to the fund. 1.3.2 Exit Load Funds:Also known as Back-end load, these charges are imposed on an investor when he redeems his units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor. 1.3.3 Deferred Load:Deferred load is charged to the scheme over a period of time. 1.3.4 Contingent Deferred Sales Charge (CDSC): In some schemes, the percentage of exit load reduces as the investor stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge. 1.4. No-load Funds:All those funds that do not charge any of the above mentioned loads are known as No-load Funds. 1.5. Tax-exempt Funds:Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are tax-free.

1.6. Non-Tax-exempt Funds:Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor.

2. Broad Classification of Mutual funds:-

2.1 Equity Funds:Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds: 2.1.1 Aggressive Growth Funds:In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds. 2.1.2 Growth Funds:Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future. 2.1.3 Specialty Funds: Specialty Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some specialty funds could be to invest/not to invest in particular regions/companies. Specialty funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of specialty funds: a. Sector Funds:Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why

they are more risky than equity funds that invest in multiple sectors. b. Foreign Securities Funds:Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk. c. Mid-Cap or Small-Cap Funds:Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky.

d. Option Income Funds:While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors. 2.1.4 Diversified Equity Funds:Except for a small portion of investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk.

However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past. 2.1.5 Equity Index Funds:Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky. 2.1.6 Value Funds:Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or specialty funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced. 2.1.7 Equity Income or Dividend Yield Funds:The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or

Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.

2.2 Debt Income Funds:Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds: 2.2.1 Diversified Debt Funds Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor. 2.2.2 Focused Debt Funds Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to

diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon. 2.2.3 High Yield Debt funds As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors. 2.2.4 Fixed Term Plan Series Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. 2.3 Gilt Funds:Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

2.4 Money Market / Liquid Funds:-

Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).

2.5 Hybrid Funds:As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India: 2.5.1 Balanced Funds:The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon. 2.5.2 Growth-and-Income Funds:Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.

2.5.3 Asset Allocation Funds:Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.

2.6 Commodity Funds:-

Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds.



Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation.

8.ExchangeTradedFunds(ETF):Exchange Traded Funds provide investors with combined benefits of a closedend and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad.

9.FundofFunds:Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like

conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.

Process of Mutual Fund

In the above graph shows how Mutual Fund works and how investor earns money by investing in the Mutual Fund. Investors put their saving as an investment in Mutual Fund. The Fund Manager who is a person who takes the decisions where the money should be invested in securities according to the schemes objective. Securities include Equities, Debentures, Govt. Securities Bonds, and Commercial Paper etc. These Securities generates returns to the Fund Manager. The Fund Manager passes back return to the investor.


People have different investment objective and risk appetite so to get the highest returns asset allocation through active portfolio management is the key element.

Asset allocation is a method that determines how you divide your portfolio among different investment instruments and provides you with the proper blend of various asset classes.

It is based on the theory that the type or class of security you own equity, debt or money marketis more important than the particular security itself. In other words asset allocation is way to control risk in your portfolio. Different asset class will react differently to market conditions like inflation, rising or falling interest rates or a market segment coming into or falling out of favor.

Asset allocation is different from simple diversification. Suppose you diversify your equity portfolio by investing in five or ten equity funds. You really have not done much to control risk in your portfolio if all these funds come from only one particular segment of the market say large cap stocks or mid cap stocks. In case of an adverse reaction for that segment, all the funds will react similarly means they will go down.

If you build your portfolio with various top performing growth funds without really bothering to analyze their portfolio allocation, you may end up with over-exposure to a particular segment. Another point you need to remember is that growth funds are highly correlated- they tend to move in the same direction in response to a given market force.

The advantage of asset allocation lies in achieves superior returns when markets are down while minimizing the exposure of the portfolio to volatility. In fact, asset allocation is based on certain dimensions that, when combined tend to control the volatility while achieving targeted returns.

Portfolio Management Process

Portfolio management is a complex activity, which may be broken down into the following steps:

1. Specification of investment objectives and constraints:

The typical objectives sought by an investor are current income, capital appreciation, safety, fixed returns on principal investment.

2. Choice of asset mix:

The most important decision in portfolio management is the asset mix decision. This is concerned with the proportions of Stock or Units of mutual fund or Bond in the portfolio. The appropriate mix of Stock and Bonds will depend upon the risk tolerance and investment horizon of the investor.

3. Formulation of portfolio strategy:

Once the certain asset mix has been chosen an appropriate portfolio strategy has to be decided out. Two broad portfolio choices are available An active portfolio management: it strive to earn superior risk adjusted returns by resorting to market timing, or sector rotation or security selection or some combination of these.

A passive portfolio management involves holding a broadly diversified portfolio and maintaining a pre-determined level of risk exposure.

Designing a model Portfolio

There are certain objectives that should keep in mind while designing a portfolio these are:

Higher absolute rate of return and high real rate of return

Maximization current income

High post tax returns

Positive real return

Preservation of capital

Growth in capital

Analysis & Interpretation of data

An investment is the use of capital to create more money through the acquisition of a security that promises the safety of the principal and generates a reasonable return. As savings have become an initial part of the economys growth through which not only the investor benefits but also the economy of a country can be raised which really helps to achieve a growth rate or to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of good or a service in the future as it does now or did in the past. Therefore, it is important to consider inflation as a factor in any long term investment strategy. The real rate of return on the investment is when the rate of returns achieved after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. So, there are financial options provided for investment into two terms i.e. short and long term investment options. MUTUAL FUNDS:Mutual fund is a divided investment where there is a risk diversification is been done, some are pure equity schemes; others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.

Portfolio of Mutual fund investment


Fund Features

Type of Scheme Nature Option Inception Date Face Value (Rs/Unit) Fund Size in Rs. Cr.

Open Ended Equity & Debt Growth Feb 1, 1994 10 5078.31 as on Aug 31, 2010

Fund Manager SIP STP SWP Expense ratio(%) Portfolio Turnover Ratio(%)

Prashant Jain, Anand Laddha .

1.84 33.1

As open ended is a scheme where the funds sell and purchase units at any point of time. The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund.

Fund size
As on 31st Aug 2010 As on 30th Sep 2010

Amount ( in crores) 5078.31


Last Dividend Declared 12 % as on Sep 28, 1998 5000 Minimum Investment (Rs) Purchase Redemptions NAV Calculation Entry Load Exit Load Daily Daily Entry Load is 0%. If redeemed bet. 0 Year to 1 Year; Exit load is 1%.

An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day.


Latest NAV Benchmark Index Crisil Balanced Fund Index 52 - Week High 52 - Week Low

221.70 as on Oct 1, 2010 3,633.64 as on Sep 30, 2010 221.70 as on Oct 1, 2010 157.27 as on Nov 3, 2009

Latest NAV Benchmark Index Crisil Balanced Fund Index 52 - Week High 52 - Week Low

222.67 as on Oct 7, 2010 3,669.36 as on Oct 7, 2010 222.84 as on Oct 6 157.27 as on Nov 3, 2009

As there is a daily NAV calculations so there is a change in the graph.

RISK & RETURNS Scheme performance as on October 2010 1 Month 5.71 3 Months 6 Months 1 yr 13.54 20.52 3 yrs 5 yrs 23.20 Since Inception 20.52

37.73 17.34

The calculation of the returns is been dependent on the Net asset value which keeps changing on daily basis and it is most probably affected by the Sensex too. Due to which the nature of mutual funds differ and the risk is been diversified. The returns are divided periodically.


P/E P/B Dividend Yield Market Cap (Rs. in crores) Large Mid Small Top 5 Holding (%) No. of Stocks Expense Ratio (%)

24.61 as on Aug - 2010 5.95 as on Aug - 2010 1.22 as on Aug - 2010 53,321.78 as on Aug - 2010 37.20 as on Aug - 2010 28.21 as on Aug - 2010 5.78 as on Aug - 2010 20.16 as on Aug - 2010 103 1.84

Large caps:
A term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. Large cap is an abbreviation of the term "large market capitalization". Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share.

Mid caps:
A type of stock fund that invests in mid-sized companies. A company's size is determined by its market capitalization, with mid-sized firms generally ranging from $2 billion to $10 billion in market cap. Most stocks held in a mid-cap fund are firms with established businesses that are still considered developing companies. These funds tend to offer more growth than large-cap stocks and less volatility than the small-cap segment.

Small cap:
Generally it is a company with a market capitalization of between $300 million and $2 billion. One of the biggest advantages of investing in small-cap stocks is the opportunity to

beat institutional investors. Because mutual funds have restrictions that limit them from buying large portions of any one issuer's outstanding shares, some mutual funds would not be able to give the small cap a meaningful position in the fund. To overcome these limitations, the fund would usually have to file with the SEC, which means tipping its hand and inflating the previously attractive price.




Percentage of Net Assets 4.74 4.70 3.49


State Bank of India Cash Oil & Natural Gas Corps Ltd

Banks Current Assets Petroleum, Gas and petrochemical products Banks Consumer Durables and Electronics FI

21.06 NA 19.24

870,000 NA 1,325,000

Percentage of Change with last month 240.68 274.38 239.59 177.23 -1.79 21.57


Bank of Baroda Titan Industries Ltd Indian Railway Finance Corporation Ltd Tata Consultancy Services Ltd. 3M India Ltd. ICICI BANK LTD. GOI

10.09 50.97

3.18 2.79

2,003,290 483,424

161.25 141.72

6.99 4.48






Software and Consultancy Services Industrial Products Banks Sovereign






47.87 30.55 NA

2.13 2.12 1.99

326,225 1,098,900

108.15 107.44

-4.95 1,251.51 164.31

10,000,000 100.86

Airliners Auto & Auto Ancillaries Banks Chemicals Construction and Infrastructure Consumer Durables and Electronics Current Assets Custodial, Depository, Exchanges and rating agencies Engineering and Capital Goods FI FMCG Food & Food Processing, Beverages Garments, Fashion wear, Lifestyle Green Transportation Healthcare and related equipment manufacturers HFC Industrial Products Leather & Leather Products Media and Entertainment NBFC Paper and Natural fibre Petroleum, Gas and petrochemical products Pharmaceuticals & Biotechnology Power & Control equipment Manufacturer Power Generation Power Transmission Realty Retailers Software and Consultancy Services Sovereign Steel and Ferrous Metal Telecom Services Textiles

0.08 4.92 16.30 2.55 1.23 3.68 4.70 0.45 1.60 4.97 1.87 3.05 1.92 0.20 1.48 2.24 2.71 1.39 4.25 0.72 1.13 10.26 5.28 1.30 1.52 0.89 0.29 0.20 3.44 11.72 1.04 1.93 0.69

The market share of the stocks, bonds etc keeps on changing as there is a change in the Sensex the valuation changes so the sector which yields in that duration is given more preference

Equity 71.60

Debt 23.70

Cash & Equivalent 4.70

Balance fund like HDFC Prudence Fund This Mutual Fund invests in both equity (71%) , debt (27%) instruments and cash instrument (4%). This is one of the safest funds with a great track record of over 14 years, and has been giving a compounding return of around 20-25% per year. This fund has one important virtue: it manages to lose less than the category average in periods of downside. Couple this with its tendency to top charts & you get a safe & sure fund in HDFC Prudence. Invest 30% of the funds in HDFC Prudence. This was an example of Systematic Investment Planning (SIP). Public Provident fund:It is a long term investment savings with a maturity of 15 years and interest payable at 8% per annum compounded annually. In case of PPFs where the returns are fixed and most probably guaranteed but it is been for a longer duration then the returns are enjoyed but in case of Mutual funds offer different time

periods as well as it is also important to know that it has a diversified portfolio which has a better potential.

Example:a. If you play completely safe and say invest all your money in PPF @8% compounding, your Rs 2000 invested every month or RS. 24,000 invested annually will grow to 11, 86, 150. This amount is guaranteed by the way, unless the government tinkers with the PPF rate. You can do this calc simply in excel by multiplying 24k * 1.08, and adding 24K to the previous years value and again multiplying by 1.08. Do this for 20 yrs and you will see the above value of Rs. 11, 86, 150.

2. If you can take slightly higher risk and split the available 24,000 equally between PPF and a reputed mutual fund like HDFC Prudence for example. You will get 8% compounding with your PPF and say 15% compounding with HDFC Prudence. PPF will grow to Rs.5, 93,075 and HDFC Prudence may grow to Rs.14, 13,721; totally, a nice sounding Rs. 20, 06,796!! Most of us leave a good amount of our income in the savings account. According to a RBI report, the savings deposits comprise almost 20-25% of total deposits in scheduled commercial banks. Clearly, the savings account works well as a vehicle for personal fiscal management especially, as our utility bill payments, household expenses and impulsive shopping depends on it. Also, an emergency fund equivalent to 3-6 months of earnings protects you from any unforeseen and immediate requirement. In this article, we look at some of the short-term savings instrument and how wise allocation to different assets can grow your money. Interest from savings account The savings rate currently stands at 3.5%. Good news is that from 1 April 2010, the interest on your savings account will be calculated on daily basis. So, you may wonder how it was calculated in first place.

In 1997, the interest rates on banks were de-regulated which means different banks could then fix rates depending the size and tenure of deposits. As a result, banks became more competitive in terms of deposit rates and services rendered to consumers. However, the savings account rate being the only rate pre-decided by the central bank was calculated on the basis of minimum balance of the account holder for the period between 10th and end of the month. Even if your account balance reflected thousands during the month, if the balance in your account was zero, even for a single day between the tenth and last day of the month, you would earn no interest. Due to this method, the effective yield is lower than 3.5%. Interestingly, banks follow the method of daily calculation of interest against loans extended to you. Going ahead, the money lying in your savings account will earn interest using the daily method of computation wherein the average of the account balance at the end of the day will be taken. So, the closing balance every day will be added up and divided by no. of days and thereafter, multiplied with savings rate. calculation. Mutual funds Considering that the savings account forms an important part of your finances, we intend to evaluate it along side some of the debt mutual fund products. Liquid, liquid plus, short term income funds, floater funds are the different types of mutual funds which cater to a short-term investment horizon. These funds typically invest in short maturity fixed income instruments whose returns depend on prevailing as well as anticipated rise/fall in interest rates and supply of money in the banking system. Also, the extent of government borrowing determines the demand for the stated fixed income instruments in the market. Large borrowing programme of the government means huge issuances of debt paper in the market, thereby restricting increase in bond prices and hence, reduced returns. Apart from fixed coupon papers, there are also floating rate papers which have a facility to reset the coupon rate periodically. So these papers are protected against hike in interest rates but also, when interest rates fall, such papers are more likely to be affected. An ultra short-term or liquid fund invests in Treasury Bills issued by the government as well as money market instruments issued by financial institutions and corporate such as certificates of deposits and commercial Thus, this practice is expected to remove the anomaly in

papers. The treasury bills and most money market instruments are not linked to the market and hence, have low volatility. The taxation for non-equity schemes of mutual funds if the period of holding is less than a year is as per your income slab. In case of long-term, the tax is 10% without indexation and 20% with indexation so the net yield works out better than a fixed deposit. Table 1 shows the historical performance of recommended funds. Table 1: Annualized Performance of Recommended Funds Fund Name Fund Class 1 year 2 3 5 years

years years HDFC FLOATING RATE INCOME Debt - Floater FUND LONG TERM PLAN7.09 8.47 8.54 7.52

GROWTH BSL FLOATING RATE LONG Debt - Floater 7.69 8.29 8.41 6.73 7.58


JM SHORT TERM FUND- GROWTH Debt - Short Term 5.04 Plan RELIANCE SHORT TERM FUND- Debt - Short Term 5.80 GROWTH Plan

10.69 10.35 8.61

10.16 10.06 8.71

Inflation erodes Cash During the crisis of 2008, investors moved out of equity into cash as they feared massive losses. Cash as a part of overall asset allocation is good but biggest threat to cash holding is inflation. RBI has termed the period of low inflation and robust growth - an almost nirvana like situation. Table 2 shows that the inflation in India has been quite high over years. WPI stands for Wholesale Price Index and CPI represents Consumer Price Index. Both indices are used as a measure to understand the level of price rise in the economy. For investors who are approaching retirement or a big expense such as marriage or home purchase, rebalancing from equity to cash or fixed income is a prudent approach. However, if you are unlikely to use the cash in the near future, then it is better to invest in one or the other instrument. Or else, inflation will end up drastically reducing the value of money held as cash. The actual return on your investment should be considered after taking into account the effect of inflation. On an average inflation rate of 7.5%, the impact of inflation can be negated only by ensuring that your returns from investments give an average growth greater than 7.5%.

This article tries to share some trends which can impact your financial goals. Since a good cash position is very comforting, you can invest wisely so that the investments mature in time to supplement your financial needs. Also, one can en-cash the portfolio to book profits or rebalance it for better yield. The ideal scenario would be managing your short-term savings and aligning it with your long-term investments.

Table 2: Inflation in India: Medium to Long-term (%) Decades 1951-52 to 1960-61 1961-62 to 1970-71 1971-72 to 1980-81 1981-82 to 1990-91 1991-92 to 2000-01 2001-02 to 2008-09 WPI 1.9 6.2 10.3 7.1 7.8 5.2 CPI 2.1 6.5 8.3 9 8.7 5.3 8.0

Long-term Trend (1971-72 to 2008-09) 7.7


Mutual funds are conglomerations of stocks and bonds and therefore their prospectus depends on how well the individual investments are doing. Fees can of course also make a difference and all related charges associated with a mutual fund must also be considered. Fees for mutual funds are classified as end load, front load and no load. Through proper research, you will become informed of what types of fees are involved and whether or not they are worth what you can expect out of the investment.

At the very minim, when investing in a mutual fund you should know the category of investments it focuses on, the asset value, the management strategy, the risk level of the assets involved, and the funds relationship with the overall stock market outlook. As long as you are well versed in these areas, the rest is just icing on the cake as long as you have chosen a well managed fund.

Considerations for mutual fund categories include goals and objectives, classification of securities in the fund and likely return expected for each category. Of all the important factors when choosing a mutual fund, category is likely the most important.

Research should be conducted using as long a history as is available. All financial instruments fluctuate greatly from one day to another but the important thing is how they perform over the long term. Try to couple this history with the time period you plan on investing since trends seem to run ii n cycles. Just because a fund isnt currently in the top 10% of earners doesnt mean that its not an extremely lucrative fund over the long term. Dont forget to also check the individual histories of the stocks or other instruments in which the fund is invested.

Like any investment, mutual funds require careful planning. Overall, the strategy is pretty much the same regardless of what type of investment you are making, but due to their nature mutual funds require a slightly different form of research.
Metrics such as price/earnings ratio and dividend yield on the S&P 500 index, a commonly used proxy for the U.S. stock market, are hardly at bargain levels. This has lead several market pundits to predict













While pursuing the search for the best mutual fund, some mutual fund investors tend to predominantly focus on fees and expense ratios. The rationale is that by choosing mutual funds with low fees, investors will have more of their capital invested. Also, no load mutual funds with low expense ratios will pass on more of the returns they earn to their shareholders.

Is shopping for the lowest fees and expense ratios a smart way to select mutual funds? Not always. The answer depends on the type of mutual fund you are evaluating, the time you can devote to evaluating and managing your mutual funds investments, and the type of cost incurred.










If you believe markets are generally efficient and prefer to invest in an index mutual fund to achieve an index-like return, shopping for the best index mutual fund based on low fees and a low expense ratio makes good sense. The portfolio manager of an index mutual fund endeavors to invest the funds assets to track the index as closely and cost-effectively as possible. Larger index funds have an advantage in that they can spread their operating costs over a larger asset base.

Some of the interesting index mutual fund options currently available include no load index mutual funds like E*Trade S&P 500 Index Fund (Nasdaq: ETSPX), Fidelity Spartan 500 Index Fund (Nasdaq: FSMKX), and Vanguard 500 Index Fund (Nasdaq: VFINX) with expense ratios of 0.09%, 0.10%, and 0.18%, respectively.









Mutual fund fees and expenses are just one of several important factors to consider if you believe portfolio managers can add value and out-perform the index through active management. The portfolio managers ability and investing style are just as important. Therefore, seeking out the best mutual fund based on just low fees and a low expense ratio may not always be the right approach. It may just be a case of being penny-wise and pound-foolish.

Legendary investor Peter Lynch, who managed the Fidelity Magellan Fund (Nasdaq: FMAGX) from 1977 to 1990, achieved returns well in excess of the market averages even after accounting for the funds fees and expenses.

So too has Bill Miller who currently manages the Legg Mason Value Trust (Nasdaq: LMVTX). Even after accounting for its relatively high 1.7% expense ratio, this no load mutual fund has achieved compound annual returns of 18.6% for the 10 year period ending in 2004, well in excess of 12.0% for the Vanguard 500 Index mutual fund.

AlphaProfit, an investment research firm that specializes in active sector investing, uses the no load Fidelity Select Funds to implement its investing strategy through its Core and Focus model portfolios. Although not the lowest, the expense ratio of the no load Fidelity Select Funds compares favorably with that of other sector fund offerings. AlphaProfit prefers Fidelity Selects for their comprehensive coverage of sectors and industry groups. The AlphaProfit model portfolios have significantly outperformed the market averages over time.









Whether you prefer to index or take an active approach to managing your investments, ensuring that your mutual fund is putting your interests first is good investing practice.

Mutual funds charge different types of fees. By looking at some key factors pertaining to fees, you can get a sense of whether the mutual fund puts your interests first or merely seeks to line the mutual fund companys pockets.

Serving the Interests of Long-Term Shareholders. Some mutual funds impose short-term trading fees to discourage frequent trading of mutual fund shares. Frequent trading disrupts efficient management of the mutual fund and increases operating expenses. A short-term trading fee can therefore actually be beneficial to long-term shareholders if the fee is rightly treated by the mutual fund company.

Fidelity Spartan Total Market Index Fund (Nasdaq: FSTMX), for example, follows the practice of returning short-term trading fees collected on shares held less than 90 days to the mutual fund itself

rather than passing on the benefit to the mutual fund company. By having this short-term trading fee structure, this no load mutual fund seeks to contain its operating expenses. Such fees are therefore aligned with the interests of long-term shareholders of this mutual fund.

Passing on Savings from Scale Economies. The operating expenses incurred by a mutual fund are a combination of fixed and variable costs. As the assets of a mutual fund increase, the fixed cost gets spread over a larger asset base. Therefore, the expenses incurred to operate the mutual fund as a percentage of the funds assets should trend lower.

A mutual fund that places the interest of shareholders first must pass on the savings from scale economies to shareholders. The trend in a mutual funds expense ratio therefore serves as a metric of how seriously a fund takes its fiduciary responsibility.



If you are searching for the best no load index mutual fund, shopping for one with low fees and expenses makes perfect sense.

If active management of investments appeals to you, fees and expenses are just one of several important factors to consider. The ability and investing style of the portfolio manager are at least just as important as fees.

The types of fees a mutual fund charges and how the fund uses the fees provides clues as to how seriously a mutual fund takes its fiduciary responsibility. Mutual funds that impose fees to contain operating expenses and return fees to the mutual fund help protect the interests of long-term shareholders. Mutual funds that put the shareholders interests first typically pass on savings from scale economies to the shareholders.

Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not

represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein. Opinions expressed herein reflect the opinion of AlphaProfit Investments, LLC and are subject to change without notice. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Owners and employees of AlphaProfit Investments, LLC for their own accounts invest in the Fidelity Mutual Funds included in the AlphaProfit Core and Focus model portfolios. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from Fidelity Investments or other mutual fund companies mentioned in this report. Past performance is neither an indication of nor a guarantee for future results. No part of this document may be reproduced in any manner without written permission of AlphaProfit Investments, LLC. Copyright 2005 AlphaProfit Investments, LLC. All rights reserved.