AN ANALYSIS OF PERFORMANCE OF MUTUAL

FUNDS
SUBMITTED IN FULFILLMENT FOR DEGREE OF
SAHARA INDIA FINANCIAL CORPORATION LIMITED
CAPITAL MARKET SERVICES DIVISION (CMSD)
SAHARA INDIA PARIWAR

SUBMITTED BY: AJAY VERMA

PGDBA201224254

SYMBIOSIS CENTRE FOR DISTANCE LEARNING

PUNE

Acknowledgement to the company

The opportunity to get practical training in a reputed organization
fulfills the felt gap between the theory and practical. In the case of a
student of FINANCE this aspect assumes an additional dimension
I hereby acknowledge SAHARA INDIA for providing the
constant guidance for encouragement which helped me a lot to be
successful in my efforts. This formal acknowledgement will hardly be
sufficient to express my deep sense of gratitude to all of them. It was a
memorable experience while doing my project at SAHARA
ORGANISATION, Lucknow.
I am highly indebted and thankful to JATIN SINGH NEGI for
his guidance and encouragement, without which the satisfactory
completion of this project would not had been possible. He is a
constant source of inspiration to me, showing all the patience and
abundant encouragement throughout the project duration.
Acknowledgement couldnt end without expressing my gratitude
towards Mr. RAJBIR YADAV who was instrumental in timely
completion of the project.
Words fall short in expressing my sincere regards towards the
members of CMSD Ms Priyanka and Mr Santosh kumar for their expert
advice and invaluable suggestions.
I would also like to thank my brother DINESH VERMA who was
working with me in the same department and was there to help me all
the time.
Lastly thanks to teacher and colleagues who directly or indirectly
helped me in procurement of my goal.
In all SAHARA INDIA provided a wonderful simulating
environment for this very educative and instructive training.

( AJAY VERMA )

DECLARATION

This is the report of the project work entitled AN ANALYSIS OF

PERFORMANCE OF MUTUAL FUNDS undertaken by me during the
two month training at SAHARA INDIA, Lucknow.
I hereby declare that project report is being submitted by me to the
Department of Commerce for the partial fulfillment of the degree of
Master of Finance & Control. A copy of this project has been submitted
to the organization where the project was developed. This project is not
submitted to any other organization or university or college and is the
outcome of my work.

(UTKARSH SRIVASTAVA)

INDEX
Sr No.

Contents

Pg. No.

Introduction

Company Profile

11

Capital Market Services Division

16

Initial Methods Of Investment

19

History Of Mutual Funds

26

Mutual Funds & its classifications

33

Advantages of Mutual Funds

40

Disadvantages Of Mutual Funds

42

Tax Aspect of Mutual Funds

47

10

Terms Related To Mutual Funds

51

11

Steps Involved In Investments Of Mutual Funds

54

12

Growth in Mutual Fund Industry

56

13

Comparision Of Mutual Fund With Other Deposits

62

14

Market Trends Mutual Funds

70

15

Research Objective & Research Design

78

16

Data Analysis

80

17

Recommendations & Conclusion

97

18

Future Scenario

99

19

Global Scenario

100

20

Questionaire

101

21

FAQs

103

22

Glosary

105

23

Bibligraphy

110

Introduction

A Mutual Fund is an ideal investment vehicle where a number of

investors come together to pool their money with common investment
goal. Respective Asset Management Company (AMC) manages each
Mutual Fund with different type of schemes. An investor can invest his
money in one or more schemes of Mutual Fund according to his choice
and becomes the unit holder of the scheme. Fund manager in different
types of suitable stock and securities, bonds and money market
instruments then invests the invested money in a particular scheme of
a Mutual Fund. Each Mutual Fund is managed by qualified professional
men, who use this money to create a portfolio, which includes stock
and shares, bonds, gilt, money-market instruments or combination of
all. Thus Mutual Fund will diversify your portfolio over a variety of
investment vehicles. Mutual Fund offers an investor to invest even a
small amount of money. A security that gives 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. Shares are
issued and can be redeemed as needed. The fund's net asset value
(NAV) is determined each day. Each mutual fund portfolio is invested
to match the objective stated in the prospectus.
Respective Asset Management Companies sponsored by financial
institutions, banks, private companies or international firms manages
Mutual Funds schemes. The biggest Indian AMC is UTI while Alliance,
Franklin Templeton etc are international AMC's.

Mutual Fund offers several benefits to an investor such as potential

return, liquidity, transparency, income growth, good post tax return
and reasonable safety. There are number of options available for an
investor offered by a mutual fund.
A draft offer document is to be prepared at the time of launching the
fund. Typically, it pre specifies the investment objectives of the fund,
the risk associated, the costs involved in the process and the board
rules for entry into and exit from the fund and other areas of
operation. In India, as in most countries, these sponsors need
approvals from a regulator, SEBI (securities Exchange Board of India)
in our case. SEBI looks at track records of the sponsor and its financial
strength in granting approval to the fund for commencing operations.
A sponsor then hires an Asset Management Company to invest the
funds according to the investment objectives. It also hires another
entity to be the custodian of the asset of the fund and perhaps a third
one to handle registry work for the unit holder (subscriber) of the fund,
in the Indian context, the sponsor promote the Asset Management
Company also, in which it holds a majority stake. In many cases a
sponsor can hold a 100% stake in the Asset Management Company
(AMC).
A mutual fund is like a big pizza cut into slices. Each slice is called a
share. The share price is called the Net Asset Value (NAV). Unlike a
stock price that will fluctuate all day long, the mutual fund price
changes only once a day, at the close of the stock market
Each Mutual Fund has a specific stated objective
The funds objective is laid out in the funds prospectus, which is the
legal document that contains information about the fund, its history,
its officers and its performance.

Some popular objectives of a

mutual fund areFUND OBJECTIVE

WHAT THE FUND

WILL INVEST IN

Equity (growth)

Only in stocks

Debt (income)

Only in fixed-income securities

Money Market (including Gilt)

In short-term money market

instrument
(including
government securities)
Partly in stocks and partly in
fixed-income securities, in order
to maintain a 'balance' in return
and risk

Balanced

FLOW CHART OF HOW MUTUAL FUND

WORKS

The company that puts together a mutual fund is called an AMC. An

AMC may have several mutual fund schemes with similar or varied
investment objectives.
The AMC hires a professional money manager, who buys and sells
securities in line with the funds stated objective.
All AMCs regulated by SEBI, funds governed by board of directors.

ORGANISATION OF MUTUAL WORK

The securities and exchange Board of India (SEBI) mutual fund

regulations require that the funds objectives are clearly spelt out in the
prospectus.
In addition, every mutual fund has a board of directors that is
supposed to represent the shareholders interest, rather than the
AMCs
A mutual fund is a company that combines, or pools, investors' money
and, generally, purchases stocks or bonds. Ideally, a fund's size and
resultant efficiency, combined with experienced management, provide
advantages for investors that include diversification, expert stock and
bond selection, low cost, and convenience.
In terms of legal structure, a mutual fund is a corporation that receives
preferential tax treatment under the U.S. Internal Revenue Code. The
assets of a mutual fund consist almost entirely of the securities it holds
in its portfolio. The most common type of mutual fund, called an openend fund, allows investors to buy and sell stock in it on an ongoing
basis.

COMPANY PROFILE

The Mutual Fund Industry is one of the fastest growing sectors in India
with an average CAGR of 20% over the past five years. In this scenario,
Sahara Mutual Funds is all set to revolutionize the India AMC industry,
with a mission to give every class of investors a profitable and prudent
investment option with a perfect balance of
returns, safety and liquidity.
Investment options are:
Debt: Sahara Income Fund, Sahara Gilt Fund, Sahara Liquid Fund, And
Sahara Short Term Plan.
Equity: Sahara Growth Fund, Sahara Tax Gain Fund.
Sahara India Pariwars success story began in 1978. Starting on a
modest scale with a capital of only Rs. 2000 (USD 43), the company has
traversed a long way to become a frontrunner in Indian
entrepreneurship.
Today, Sahara India Pariwar is a major entity on the corporate scene
having an asset base of over Rs. 50,000 crores (USD 10.87 billion) and
diversified business interests that include: Public Deposit Mobilization,
Infrastructure & Housing, Media & Entertainment, Aviation, Consumer
Products, Information Technology, Sundarbans Project, Sahara
Hospital, Araria Jute Project, Life Insurance, Mutual Funds, Housing
Finance, Power Project, Computer Manufacturing, Hotel and Caring
Scheme.

10

SAHARAS CORE COMMITMENTS - OUR

STRENGTH
Emotion
Emotion is in Performance of genuine duties towards the loved ones
primarily in their benefit, from their point of view. EMOTION is THE
KEY that generates the required energy and enthusiasm for desired
quality performance.

Discipline
The enthusiastic obedience of laws and orders, which are given by the
rightful authority.

Duty
The enthusiastic obedience of laws and orders, which are given by our
CONSCIENCE.

No Discrimination
Never should we discriminate in any of our actions, reactions,
attitudes, decisions, conclusions, in any of our expressions while caring
for the six healths of other human beings, namely physical, material,
mental, emotional, social and
professional health.

Quality
Results from honoring Rules, Regulations, Commitments, Values,
Fairness, Performance of Duties by honestly balancing one's own and
others' reasonable point of view in the matters of Material & Emotional
aspects.
Quality is our essence and we, at Sahara India Pariwar, have always
stressed on the Qualitative aspect. Consequently in this run for quality,
quantity has always pursued us. We look forward to reaching the zenith
and reaffirm our commitment to the process of sound nation-building.

11

We

chase Quality,
Quantity chases us
Give Respect
To definitely make others feel important and respected by giving
sincere regard to others' feelings, reasonable wishes & thoughts with
an
open
and
receptive
mind
and
warmth.

Self-respect
To develop a sense of respect for oneself in others' mind, i.e. to
generate genuine & warm feelings for oneself among others on a
continuous basis.

Truth
Means total transparency in action, reaction, attitude and all other
expressions and the conviction to follow the right course.

Collective Materialism
Means to progress and prosper together for collective sharing and
caring and not individually or for a select group.

Religion
There is a religion higher than religion itself - it is NATIONALITY. We
may practice our religions in the confines of our homes, but outside,
we should be Indians and only Indians. 'Bharatiyata' or Nationalism
thus becomes our supreme religion.

Absolute Honesty
We firmly believe that our mind inside knows the truth and we should
be absolutely honest to our mind inside and accordingly our actions,
reactions, directions, decisions and all our expressions should be
present in all human dealings.

12

PHILOSOPHY
SAHARA INDIA PARIWAR'S PHILOSOPHY - "Collective
Materialism"
In any human relationship, it becomes imperative to take into
consideration the materialistic aspect of life - we do so but by giving it
second priority.
The first priority is given to emotional aspect and with perfect blending
of materialism with emotionalism, results in continuous collective
growth for collective sharing and caring, that gives an impetus to our
philosophy - "COLLECTIVE MATERIALISM".

FEELINGS THAT DWELS IN AN

ORGANISATION
Maan-Samman,Atmasamman
Emotions are of two kinds - love and respect. Love is an inferior
emotion which has been given by God to fulfill your reasonable,
unreasonable needs. But in human society since we have the thinking
power, respect for others and sense of self-respect are the most
superior emotions.

"Saharasri"SubrataRoySahara

13

The Man and His Vision

He has talked about problems and proposed the solutions on 5 social
issues namely Population, Education, Political (Election) system,
Media & Religion, besides interacting on various aspects of life and
professional life. According to him if these five issues are taken care of
properly, our beloved country shall be the best in the world
SAHARA INDIA FINANCIAL CORPORATION LIMITED
Sahara India Financial Corporation Limited, (SIFCL) is the flagship
company of Sahara India Group. Incorporated in 1987, SIFCL is the
First Residuary Non-Banking Company (RNBC) in India that has been
granted certificate of registration by RBI and is considered to be a
leading public deposit mobilization company in the Private sector. The
Sahara India Group, has over the years emerged as a multi-service and
multi-product business conglomerate with diverse interests in fields
such as Aviation, Life Insurance, Para banking, Housing,
Infrastructure & Tourism, Consumer Products, Media & Entertainment
Sahara India Financial Corporation Limited is the largest deposit
mobilization company in the private sector with the highest yearly
deposit level in India. It is the first Residuary Non-Banking Company
(RNBC) to be granted a certification of registration by the Reserve
Bank of India. It has over 61 million esteemed depositors (1 out of every
17 Indians) served by 9.1 lakh staff through over 1500 branches

14

Capital Market Services Division

Capital Market Services Division (CMSD) is a Division of Sahara India
Financial Corporation Ltd. (SIFCL) with an objective to provide various
fee based services to the Investors in the Capital Market.
This Division operates through a cluster of Service Centers & collection
centres. It deals in Depository Services with National Securities
Depository Ltd (NSDL) & Central Depository Services (I) Ltd as a
Depository Participant (DP) and has also ventured into other related
activities like Mutual Fund distribution, Financing against Initial
Public Offerings, Distribution of other Financial Products etc.

Our Strong And Strict Fundamentals

Stringent expense control.
Cost of fund (including interest cost) within 8% p.a.
No speculative investment.
Total investment in listed equity shares (less than 1% of the total
assets.)
High class quality investment.
Restricting the non-performing assets ratio within 0.75% only.
No unsecured loans.
Hence no bad debts at all.
Capital adequacy ratio.
24.64% as on 30.09.2004(statutory requirement 12%)

15

Present Activities of CMSD

Depository Services.
Mutual Fund Distribution.
Distribution of RBI Bonds, Infrastructure Bonds, Capital Gain
Tax Bonds.
IPO Financing (Financing for Subscribing New Initial Public
Offerings) etc.

Our Services
Extended Business Hours.
Highly Competitive Rates.
Round the Clock Helpdesk service through IVRS facility and
availability on 24/7/365 basis.
Convenience of anywhere accounts management through SPEEDe (NSDL) / easiest (CDSL).
Personalized and Efficient Service by NCFM qualified staff

Our Offering
Multiple financial products at a very reasonable cost and in a very
convenient manner.
Depository services
Internet Trading of securities
Distribution of Mutual Fund Units

Distribution of Other Products

CMSD is also a Distributor for other financial products like
RBI Relief Bonds (Tax Free)
Infrastructure Bonds
Capital Gain Tax Bonds
Initial Public Offerings etc.

16

Future Plans:
Proposed Activities:
Loan against Shares and Mutual Fund Units.
Funding for Margin Trading
Distribution of Insurance Products.
Facilitating Internet Trading of Securities
Retailing of Debt Instruments.
Geographical Expansion based on potentials of respective
markets.

Initial Product Offering by Capital Market Service

Division

SAHARA INCOME FUND

Depositing your money in a savings account bank or fixed deposit will
only provide you safety, but the opportunity for your money to
appreciate is limited. Sahara Income Fund provides safety, highest
credit quality, plus an opportunity to earn steady and regular income.

SAHARA LIQUID FUND

Sahara Liquid Fund is a good parking place for your idle funds. It
provides an opportunity to generate returns on your idle funds with
minimal risk and high liquidity.

17

SAHARA GILT FUND

When you invest in Gilt Fund, your investment carries no Credit risk.
You can enjoy steady returns at a relatively low risk over a medium to
long-term horizon.

SAHARA SHORT TERM FUND

Every Corporate and High Net worth investors who have treasury
surpluses for a few days can benefit from Sahara Short Term Plans.

SAHARA GROWTH FUND

Make your Investments grow with the benefit of Equities.

SAHARA TAX GAIN FUND

Sahara Tax Gain Fund is an Equity Linked Saving Scheme (ELSS) that
not only helps you save tax under section 88 of the Income Tax Act,
1961 but also has the potential of long-term growth through
investments in equities.

INITIAL METHODS OF INVESTMENT

What is `deposit
The term `deposit has been defined as receipt of any money borrowed
by the company but not including any of the following :Government Borrowings
Borrowings from any financial institutions;
Borrowings from any Banks;
Borrowings from any company
Security deposit;
Advance from purchasing/selling agent
money received in Trust ;
Subscription against application for shares;

18

Subscription against bonds, debentures, etc. secured by a

mortgage with or without option to convert into shares;
Money brought in by issue of any secured bonds/debenture
Money brought in by promoters;
Money received from the shareholders of a private limited
company or a deemed public company.

What are the limits for accepting deposits ?

A company can borrow deposits upto the extent given below :up to 25% of the paid-up capital and free reserves of the company
from the public and
upto 10% of its paid-up capital and free reserves from its
shareholders.
Therefore, maximum deposit a company can accept from
public/shareholders is 35% of its paid up capital and free reserves
as mentioned above.
If the company is a `Government Company, then it can accept or
renew deposits from public upto 35% of its paid up capital and
free reserves.
"Free Reserves" mean the balance in the share premium account,
capital and debenture redemption reserves and any other
reserves shown in the balance-sheet of the company and created
by appropriation out of the profits of the company, but does not
include the balance in any reserve created for repayment of any
future liability or for depreciation in assets or for bad debts;
revaluation of any assets of the company

Period of accepting deposits:A company can invite/accept deposits for a period not less than 6
months and not more than 36 months from the date of acceptance of
such deposits or from the date of its renewal.Therefore, a company can
accept/invite deposits for a period between 6-36 months.

19

However, a company may accept deposits upto 10% of its paid up

capital and free reserves which are repayable after three months, from
the date of such deposits or renewal thereof to meet any of its short
term requirements.

Rate of interest
Maximum rate of interest that a company can offer on fixed deposits is
15%.

FIXED DEPOSITS
Fixed deposits remain the most popular instrument for financial
savings in India. They are the middle path investments with adequate
returns and sufficient liquidity. There are basically three avenues for
parking savings in the form of fixed deposits. The most common are
bank deposits. For nationalized banks, the yield is generally low with a
maximum interest of 10 to 10.5% per annum for a period of three years
or more. As opposed to that, NBFCs and company deposits are more
attractive.
The idea is to select the right company to minimize the risk. Company
deposits as a saving instrument have declined in popularity over the
last three years. The major reasons being the slowdown in economy
resulting in default by some companies. Also, some NBFCs simply
vanished with the depositors' money. All that is likely to change for the
better. Corporate performance is likely to improve and stricter control
by RBI should improve NBFCs record. But one still needs to be
selective. Let us help you in making the right decision.
Post office is a very safe and secure investment avenue. The money is
used in the development of the society as a whole, while it provides
steady returns. The biggest advantage of investing in post office
schemes is the tax benefit that they provide. Thus a lot of savings go
through this channel to dual advantage - tax benefits and steady
returns

Deposit account
A deposit account is an account at a banking institution that alows
money to be held on behalf of the account holder. Some banks charge a
fee for this service, while others may pay the client interest on the
funds deposited.

20

The account holder retains rights to their deposit, although restrictons

placed on access depend upon the terms and conditions of the account
and the provider.
A deposit is a type of asset.

Saving deposit
Savings deposits are accounts maintained by commercial banks,
savings and loan associations, credit unions, and mutual savings banks
that pay interest but can not be used directly as money (by, for
example, writing a check). These accounts let customers set aside a
portion of their liquid assets that could be used to make purchases. But
to make those purchases, savings account balances must be transferred
to "transaction deposits" (or "checkable deposits") or currency.
However, this transference is easy enough that savings accounts are
often termed near money. Savings accounts, as such constitute a
sizeable portion of the M2 monetary aggregate.
With savings accounts you can make withdrawals, but you do not have
the flexibility of using checks to do so. As with an MMDAs (money
market deposit account), the number of withdrawals or transfers you
can make on the account each month is limited

Time deposit
A time deposit (also known as a term deposit, particularly in Australia
and New Zealand) is a money deposit at a bank that cannot be
withdrawn for a certain "term" or period of time. When the term is
over it can be withdrawn or it can be held for another term. Generally
speaking, the longer the term the better the yield on the money. A
certificate of deposit is a time-deposit product.
Note that the M2 money supply includes funds that can be used directly
in payment, such as money market mutual funds and money market
deposit accounts (MMDAs). MMDAs are considered by the United
States Federal Reserve (the Fed) to be savings accounts and are thus
exempt from reserve requirements. These large transaction accounts
not being included in the M1 money supply suggests that the Fed does
not pay much attention to ordinary transaction deposits, and in July
2000, it announced that it was no longer setting target ranges for
growth rates of the monetary aggregates

21

Transaction deposit
Transaction accounts include all deposits against which the account
holder is permitted make withdrawals by negotiable or transferable
instruments, payment orders of withdrawal, or telephone or
preauthorized transfers for the purpose of making payments to third
persons or others. However, accounts subject to the rules that permit
no more than six preauthorized, automatic, or other transfers per
month (of which no more than three may be by check, draft, debit card,
or similar order payable directly to third parties) are savings deposits,
not transaction accounts

Current account
A current account is a deposit account in the UK and countries with a
UK banking heritage offering various flexible payment methods to
allow customers to distribute money directly to others. Most current
accounts have a cheque book, offer the facility to arrange standing
orders, direct debits and payment via a debit card. Current accounts
may also allow borrowing via an overdraft facility.
Current accounts providers include banks, building societies and credit
unions.
Since the internet revolution most retail banking institutions offer
access to current accounts via online banking.

Demand deposit
A demand account (or demand deposit, demand deposit account) is a
deposit account held at a bank or other financial institution, the funds
deposited in which are payable on demand. The primary purpose of
demand accounts is to facilitate cashless payments by means of check,
bank draft, direct debit, electronic funds transfer, etc.
A demand account is commonly known as:
a checking account
a share draft account
a current account
a current account
a cheque account

22

REASON WHY PEOPLE INVEST IN DEPOSITS

There has been an age old concept of people investing in fixed deposits
and other methods of deposits .They follow this concept because again
and again investing in different fields might fetch them loss at different
stages of life and in order to have a secure future people prefer to
invest in one deposit for a particular period of time and withdraw
them whenever they need.
In todays era where people are more concerned about their secure
future and due to their busy life they lack knowledge about other
methods if investment.

REASONS OF INVESTMENTS

23

BASIC INVESTMENT OBJECTIVE

The investment approach will be based on a set of well established but
flexible principles that emphasize the concept of sustainable economic
earnings and cash return on investment as the means of valuation of
companies.
Five basic principles serve as the foundation for this investment
approach. They are as follows:

Focus on the long term

There is substantive empirical evidence to suggest that equities provide
the maximum risk adjusted returns over the long term. In an attempt
to take full advantage of this phenomenon, investments would be made
with a long term perspective.

Investments confer proportionate ownership

The approach to valuing a company is similar to making an investment
in a business. Therefore, there is a need to have a comprehensive
understanding of how the business operates. The key issues to focus on
are growth opportunities, sustainable competitive advantage, industry
structure and margins and quality of the management.

Maintain a margin of safety

The benchmark for determining relative attractiveness
of stocks would be the intrinsic value of the business. The
Investment Manager would endeavor to purchase stocks that represent
a discount to this value, in an effort to preserve capital and generate
superior growth.
Maintain a balanced outlook on the market

The investment portfolio would be regularly monitored to

understand the impact of changes in business and economic trend as
well as investor sentiment. While short-term market volatility would
affect valuations of the portfolio, this is not expected to influence the
decision to own fundamentally strong companies.

24

HISTORY OF MUTUAL FUND

When three Boston securities executives pooled their money together
in 1924 to create the first mutual fund, they had no idea how popular
mutual funds would become.
The idea of pooling money together for investing purposes started in
Europe in the mid-1800s. The first pooled fund in the U.S. was created
in 1893 for the faculty and staff of Harvard University. On March 21st,
1924 the first official mutual fund was born. It was called the
Massachusetts Investors Trust.
After one year, the Massachusetts Investors Trust grew from $50,000
in assets in 1924 to $392,000 in assets (with around 200 shareholders).
In contrast, there are over 10,000 mutual funds in the U.S. today
totaling around $7 trillion (with approximately 83 million individual
investors) according to the Investment Company Institute.
The stock market crash of 1929 slowed the growth of mutual funds. In
response to the stock market crash, Congress passed the Securities Act
of 1933 and the Securities Exchange Act of 1934. These laws require
that a fund be registered with the SEC and provide prospective
investors with a prospectus. The SEC (U.S. Securities and Exchange
Commission) helped create the Investment Company Act of 1940 which
provides the guidelines that all funds must comply with today.
With renewed confidence in the stock market, mutual funds began to
blossom. By the end of the 1960s there were around 270 funds with $48
billion in assets.
In 1976, John C. Bogle opened the first retail index fund called the First
Index Investment Trust. It is now called the Vanguard 500 Index fund
and in November of 2000 it became the largest mutual fund ever with
$100 billion in assets.
One of the largest contributors of mutual fund growth was Individual
Retirement Account (IRA) provisions made in 1981, allowing
individuals (including those already in corporate pension plans) to
contribute $2,000 a year. Mutual funds are now popular in employersponsored defined contribution retirement plans (401k), IRAs and
Roth IRAs.
Mutual funds are very popular today, known for ease-of-use, liquidity,
and unique diversification capabilities

25

Mutual funds are not an American invention.

The first was started in the Netherlands in 1822, and the second in
Scotland in the 1880's.
Originally called investment trusts, the first American one was the New
York Stock Trust, established in 1889. Most that followed were begun
in Boston in the early 1920's, including the State Street Fund,
Massachusetts Investor's Trust (now called MFS), Fidelity, Scudder,
Pioneer, and the Putnum Fund. The Wellington Fund, the first
balanced fund that included both stocks and bonds, was founded in
1928, and today is part of the giant Vanguard Funds Group.
In the 1960's there was a phenomenal rise in aggressive growth funds
(with very high risk). Sometimes called "go-go" or "hot-shot" funds,
they received the majority of the billions of dollars flowing into mutual
funds at that time. In 1968 and 1969, over 100 of these new aggressive
growth funds were established.
A severe bear market began in the autumn of 1969. People became
disillusioned with stocks and mutual funds. "The market's toast will
never get back to where it was!" was echoed by panicked investors.
Unemployment grew; inflation went crazy, and investors pulled
billions back out of the funds. They should have hung in there! Many
funds have risen 9,000% since then.
The 1970's saw a new kind of fund innovation: funds with no sales
commission called "no load" funds. The largest and most successful no
load family of funds is the Vanguard Funds, created by John Bogle in
1977.
At the end of the 1920's there were only 10 mutual funds. At the end of
the 1960's there were 244. Today there are more than 6,500 unique
funds and even thousands more that differ only by their share class
(how they are sold, and how their expenses are charged).
Before we continue with all you need to know about mutual funds, here
is something that merits your attention.

26

Since 1940, no mutual fund

has gone bankrupt. You
sure can't say that about
banks and savings and
loans!
GROWTH OF MUTUAL FUNDS SINCE ITS
INCEPTION
Just 76 years ago the mutual fund industry was born in the United
States. The first open-end mutual fund, Massachusetts Investors Trust
was founded on March 21, 1924 and after one year had 200
shareholders and $392,000 in assets. The entire industry, which
included a few closed-end funds, represented less than $10 million in
1924. At the end of December 1999, the industry's explosive growth
includes more than 8,000 mutual funds with over $6.8 trillion in
assets.

First 27 Years Experienced Slow Growth

Growth for the industry during the first 27 years was slow. In 1951, the
number of funds surpassed 100 and the number of shareholders
exceeded 1 million. It wasn't until 1954 that the stock market finally
rose above its 1929 peak and by the end of the fifties there were 155
mutual funds with $15.8 billion in assets. In 1967 funds hit their best
year, one quarter earning at least 50% with an average return of 67%,
but it was done by cheating using borrowed money, risky options, and
pumping up returns with privately traded "letter stock." By the end of
the 60's there were 269 funds with a total of $48.3 billion.

27

Index Funds are Born in 1970s

In 1976, John C. Bogle opened the first retail index fund - First Index
Investment Trust (now the largest index fund - Vanguard 500 Index)
and the next year Peter Lynch took over at Fidelity Magellan, now the
largest stock mutual fund. The two funds are battling for top spot and
some think the Vanguard 500 Index will surpass Fidelity Magellen by
the year 2000. By the end of the 70s there were 524 funds with $94.5
billion in assets.

Major Growth after IRA Introduced

In 1981, Congress created the Individual Retirement Account and by
the end of the 80s there were 2,917 funds and $982 billion in assets.
The next big change for the industry was in 1991 when Morningstar
introduced its "star ratings." By 1994, 75% of all new investments were
in funds with a rating of four or five stars. In 1992, Charles Schwab
started One Source, the first "fund supermarket."
As of December 1998, stock mutual funds account for $2.981 trillion or
53.9% of total mutual fund industry assets. Money market funds
account for 24.5% ($1.353 trillion), bond funds comprise 15.0% ($830.5
billion), and hybrid funds hold 6.6% ($365.1 billion). Mutual funds held
about 20% of all publicly traded U.S. stocks in 1998. The remaining
80% was held by households, private pension funds, state and local
government retirement funds, insurance companies, private trusts,
residents of foreign countries, and other investors. These numbers are
gathered by the Investment Company Institute.

28

HISTORY OF THE INDIAN MUTUAL FUND

INDUSTRY
The mutual fund industry in India started in 1963 with the formation of
the Unit Trust Of India, at the initiative of the government of India and
Reserve Bank. The history of mutual funds in India can be broadly
divided into four distinct phases, which are as follows:

Phase I (Monopoly of UTI) 1964-87:

This period was marked by the operational of a single institution, UTI,
which prepared ground for the future mutual fund industry.
The first and still most popular, product launched by UTI was unit64.
Due to the immense popularity of unit64, UTI launched was unit64.
Another popular scheme, Unit Linked Insurance Plan (ULIP), was
launched in 1971. By the end of June 1974 there were 6-lakh unit holder
with UTI.
An act of parliament established Unit Trust of India (UTI) in 1963. It
was set up by the Reserve Bank of India and functioned under the
regulatory and administrative control of the Reserve Bank of India. In
1978 UTI was delinked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative
control in place of RBI. The first scheme launched by UTI was Unit
Scheme 1964. At the end of 1988 UTI had Rs 6700 crores of assets
management.

Phase II (Public Sector Competition) 1987-199

This period was marked by the entry of non-UTI public Sector mutual
funds in the market, bringing in competition. With the opening up of
the economy many public sector financial institutions established
mutual funds in India. However, the mutual funds industry remained
the exclusive domain of public sector in this period.

29

1987 marked the entry of non-UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance corporation of India (GIC). SBI mutual fund was the
first non-UTI mutual fund established in June 1987 followed by Can
bank Mutual fund (Dec 87), Punjab National Bank Mutual Fund (Aug
89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jan 90), Bank
of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in
June 1989 while GIC had set up its mutual fund in December 1990. At
the end of 1993, the mutual fund industry had assets under
management of Rs 4700 crores.

Phase III (Entry of Private Sector Fund) 1993-2003:

A new era in the mutual fund industry began with entry of private
sector funds in 1993, posing a serious competition to the existing public
sector funds. The first private sector mutual fund to launch a scheme
was the Madras based Kothari pioneer Mutual fund. It launched the
open-ended prima fund in November 1993.
With the entry of private funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of
fund families. Also,1993 was the year in which the first mutual fund
Regulations came into being, under which all mutual funds, except UTI
were to be registered and governed. The erstwhile Kothari pioneer
(now merged with Franklin templton) was the private sector mutual
fund registered in July 1993. The 1993 SEBI (mutual Fund) Regulations
were substituted by a more comprehensive and revised mutual fund
regulations in 1996. The industry now functions under the SEBI
(Mutual Fund) regulations 1996. The number of mutual fund houses
went on increasing, with many foreign mutual funds setting up funds in
India and also the industry was witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual
funds with total asset of Rs 1, 21,805 crores.

30

Phase IV (Since February 2003):

In February 2003, following the repeal of the Unit Trust of India Act
1963 UTI was bifurcated into two separate entities. One is the specified
undertaking of the Unit Trust of India with assets under management
of Rs 29,835 crores as at the end of January 2003.
The second is the UTI mutual fund LTD, sponsored by SBI, PNB, BOB
and LIC. It is registered with SEBI and functions under the mutual
fund regulations. At the end of October 31,2003, there were 31 funds,
which manage asset of Rs 126726 crores under 386 scheme.

31

MUTUAL FUND AND ITS CLASSIFICATION:

Income Funds
These are also known as debt funds since they invest in debt
instruments issued by the government, private companies banks and
financial institutions. By investing in debt, these funds target low risk
and stable income to the investors. While returns in these funds may be
regular, their scale may fluctuate depending on the prevailing interest
rates and the credit quality of the debt securities.

Liquid Funds
Also know as Money market funds as they invest in securities of short
term nature, typically securities of less than one-year maturity like
Treasury Bills issued by the government, Certificate of Deposits issued
by banks and Commercial Paper issued by companies as well as in the
inter- bank call money market. These funds are considered to be at the
lowest rung in the hierarchy of risks.

Equity Funds
As the name suggests these funds invest in stock market securities.
They are exposed to the equity price fluctuation risk at the market
level, industry level and also the specific company level. These price
movements are caused by external factors, political and social as well
as economic factors. Thus the Net Asset values of these funds fluctuate
with all price movements. Equity investments are for a longer time
horizon and a well managed equity fund can get you higher returns but
also carries higher risks.

Gilt Funds
These funds invest in government paper called dated securities. As the
investments are in government paper these funds have little risk of
default and hence offer better protection of principal. However, one
must recognize the potential changes in values of debt securities held
by the funds that are caused by changes in the market price of these
securities as a result of change in the market price of these debt
securities.

32

Balanced Funds
These funds, as the name suggests, are a mix of both equity and debt
funds. They invest in both equities and fixed income securities in line
with pre-defined investment objectives. The aim at providing a
balanced mix of capital appreciation through investments in equities
coupled with investments in stable instruments like bonds etc.

TYPES OF MUTUAL FUNDS

A Mutual Fund may float several schemes, which may be classified on
the basis of its structure, its investment objectives and other objectives.

Types of Schemes

33

MUTUAL FUND SCHEME BY STRUCTURE:

Open-Ended Funds:

Open-Ended fund scheme is open for subscription all through year. An

investor can buy or sell the units at "NAV" (Net Asset Value) related
price at any time.
The investments of these schemes will predominantly be in the stock
markets and endeavor will be to provide investors the opportunity to
benefit from the higher returns which stock markets can provide.
However they are also exposed to the volatility and attendant risks of
stock markets and hence should be chosen only by such investors who
have high risk taking capacities and are willing to think long term.
Equity Funds include diversified Equity Funds, Sectoral Funds and
Index Funds. Diversified Equity Funds invest in various stocks across
different sectors while sectoral funds which are specialized Equity
Funds restrict their investments only to shares of a particular sector
and hence, are riskier than Diversified Equity Funds. Index Funds
invest passively only in the stocks of a particular index and the
performance of such funds move with the movements of the index

34

Close-Ended Funds:

A Close-Ended fund is open for subscription only during a specified

period, generally at the time of initial public issue that generally ranges
from 3 to 15 years.. The Close-Ended fund scheme is listed on the some
stock exchanges where an investor can buy or sell the units of this type
of scheme.
SEBI Regulations stipulate that at least one of the two exit routes is
provided to the investor.

Interval Funds:
Interval Funds combines both the features of Open-Ended funds and
Close-Ended funds.

35

MUTUAL FUND SCHEME BY INVESTMENT

OBJECTIVES:

Growth Funds:
The objective of Growth Fund scheme is to provide capital appreciation
over the medium to long term. This type of scheme is an ideal scheme
for the investors seeking capital appreciation for a long period.

Income Funds:
The Income Fund schemes objective is to provide regular and steady
income to investors.

Balanced Funds:
The objective of Balanced Fund schemes is to provide both growth and
regular income to investors.

36

Money Market Funds

The objective of Money market funds is to provide easy liquidity,

regular income and preservation of income.
Money market funds also come in two varieties, taxable and tax-free.
Taxable funds buy the best-yielding short-term corporate, agency, or
government issues available, while tax-free funds are limited to buying
primarily municipal debt. Taxable funds pay slightly higher income
than tax-free funds, but you must pay tax on any distributions they
make. In either case, the rate a fund pays is roughly the same as bank
money market accounts or CDs.

Load Funds:
A load fund is one that charges a commission for entry or exit. That is,
each time you buy or sell units in the fund, a commission is payable.
Typically entry and exit loads range from 1% to 2%. It could be worth
paying the load, if the fund has a good performance history.

No Load Funds:
A No Load Fund is one that does not charge a commission for the entry
or exit. That is, no commission is payable on purchase or sale of units
in the fund. The advantage of a no load fund is that the entire corpus is
put to work.

37

OTHER FUNDS:
Tax Saving Schemes:
The objective of Tax Saving schemes is to offer tax rebates to the
investors under specific provisions of the Indian Income Tax Laws.
Investment made under some schemes are allowed as deduction u/s 88
of the Income Tax Act.

Industry specific Schemes:

Industry specific schemes invest only in the industries specified in the
offer document of the schemes.

Sectorial Schemes:
The schemes invest particularly in a specified industries or initial
public offering.

Index schemes:
Such schemes link with the performance of BSE sensex or NSE.

38

Advantages of Investment in Mutual Fund

Mutual Funds offer several benefits to an investor that unmatched by
the other investment options. The major benefits are good post-tax
returns and reasonable safety, the other benefits in investing in Mutual
Funds are

Professional Management:
Mutual Funds employ the services of experienced and skilled
professionals and dedicated investment research team. The whole team
analyses the performance and balance sheet of companies and selects
them to achieve the objectives of the scheme.

Potential Return:
Mutual Funds have the potential to provide a higher return to an
investor than any other option over a reasonable period of time.

Diversification:
Mutual Funds invest in a number of companies across a wide cross
section of industries and sectors.

Liquidity:
The investor can get the money promptly at the net asset value related
prices from the Mutual Funds open-ended schemes. In close-ended
schemes, the units can be sold on a stock exchange at the prevailing
market price.

Low Cost:
Investment in Mutual Funds is a less expensive way in comparison to a
direct investment in capital market.

Transparency:
Mutual Funds have to disclose their holdings, investment pattern and
the necessary information before all investors under a regulation
framework.

39

Flexibility:
Investment in Mutual Funds offers a lot of flexibility with features of
schemes such as regular investment plan, regular withdrawal plans
and dividend reinvestment plans enabling systematic investment or
withdrawal of funds.

Affordability:
Small investors with low investment fund are unable to high-grade or
blue chip stocks. An investor through Mutual Funds can be benefited
from a portfolio including of high priced stock.

Well regulated:
All Mutual Funds are registered with SEBI, and SEBI acts a watchdog,
so the Mutual Funds are well regulated

40

Disadvantages of Mutual Funds

Fluctuating Returns:
Mutual funds are like many other investments without a guaranteed
return. There is always the possibility that the value of your mutual
fund will depreciate. Unlike fixed-income products, such as bonds and
Treasury bills, mutual funds experience price fluctuations along with
the stocks that make up the fund.

Diversification:
Although diversification is one of the keys to successful investing, many
mutual fund investors tend to over diversify. The idea of diversification
is to reduce the risks associated with holding a single security; over
diversification (also known as diworsification) occurs when investors
acquire many funds that are highly related and so don't get the risk
reducing benefits of diversification.

Cash, Cash and More Cash:

Mutual funds pool money from thousands of investors, so everyday
investors are putting money into the fund as well as withdrawing
investments. To maintain liquidity and the capacity to accommodate
withdrawals, funds typically have to keep a large portion of their
portfolio as cash. Having ample cash is great for liquidity, but money
sitting around as cash is not working for you and thus is not very
advantageous.

Costs:
In mutual funds the fees are classified into two categories: shareholder
fees
and
annual
fund-operating
fees.
The shareholder fees, in the forms of loads and redemption fees are
paid directly by shareholders purchasing or selling the funds. The
annual fund operating fees are charged as an annual percentage usually ranging from 1-3%. These fees are assessed to mutual fund
investors regardless of the performance of the fund. When the fund
doesn't
make
money
these
fees
only
magnify
losses.

41

Misleading Advertisements:
The misleading advertisements of different funds can guide
investors down the wrong path. Some funds may be incorrectly
labeled as growth funds, while others are classified as small-cap or
income.

Evaluating Funds:
Another disadvantage of mutual funds is the difficulty they pose for
investors interested in researching and evaluating the different funds.
Unlike stocks, mutual funds do not offer investors the opportunity to
compare the P/E ratio, sales growth, earnings per share, etc.

42

STRUCTURE OF INDIAN MUTUAL FUND

INDUSTRY

43

Mutual Funds in India

Mutual funds have been a significant source of investment in both
government and corporate securities. It has been for decades the
monopoly of the state with UTI being the key player, with invested
funds exceeding Rs.300bn. (US$ 10bn.). The state-owned insurance
companies also hold a portfolio of stocks. Presently, numerous mutual
funds exist, including private and foreign companies. Banks--- mainly
state-owned too have established Mutual Funds (MFs). Foreign
participation in mutual funds and asset management companies is
permitted on a case by case basis.
UTI, the largest mutual fund in the country was set up by the
government in 1964, to encourage small investors in the equity market.
UTI has an extensive marketing network of over 35, 000 agents spread
over the country. The UTI scrips have performed relatively well in the
market, as compared to the Sensex trend. However, the same cannot be
said of all mutual funds.
All MFs are allowed to apply for firm allotment in public issues. SEBI
regulates the functioning of mutual funds, and it requires that all MFs
should be established as trusts under the Indian Trusts Act. The actual
fund management activity shall be conducted from a separate asset
management company (AMC). The minimum net worth of an AMC or
its affiliate must be Rs. 50 million to act as a manager in any other
fund. MFs can be penalized for defaults including non-registration and
failure to observe rules set by their AMCs. MFs dealing exclusively with
money market instruments have to be registered with RBI. All other
schemes floated by MFs are required to be registered with SEBI.
In 1995, the RBI permitted private sector institutions to set up Money
Market Mutual Funds (MMMFs). They can invest in treasury bills, call
and notice money, commercial paper, commercial bills accepted/coaccepted by banks, certificates of deposit and dated government
securities having unexpired maturity upto one year.
Before investing in a Mutual Fund an investor must identify his needs
and preferences. While selecting a Mutual Fund's schemes he should
consider the effect of inflation rate, diversification of investment, the
time period of investment and the risk factors. There are various type
of risk factors as:

44

Market Risk
Credit Risk
Interest Rate Risk
Inflation Risk
Political Environment
CRISIL's composite performance ranking (CPR) measures the
performance for each of the open-ended scheme of Mutual Fund. There
are four parameters considered to measure the performance of a
mutual fund such as Risk-adjusted returns of the scheme's NAV,
Diversification of Portfolio, Liquidity and Asset Size.
By December 2004, Indian mutual fund industry reached Rs 1, 50,537
crore. It is estimated that by 2010 March-end, the total assets of all
scheduled commercial banks should be Rs 40, 90,000 crore.
The annual composite rate of growth is expected 13.4% during the rest
of the decade. In the last 5 years we have seen annual growth rate of
9%. According to the current growth rate, by year 2010, mutual fund
assets will be double.

Some facts for the growth of mutual funds

in India:
100% growth in the last 6 years.
Number of foreign AMC's are in the que to enter the Indian
markets like Fidelity Investments, US based, with over
US$1trillion assets under management worldwide.
Our saving rate is over 23%, highest in the world. Only
channelizing these savings in mutual funds sector is required.
We have approximately 29 mutual funds which is much less than
US having more than 800. There is a big scope for expansion.
'B' and 'C' class cities are growing rapidly. Today most of the
mutual funds are concentrating on the 'A' class cities. Soon they
will find scope in the growing cities.

45

Mutual fund can penetrate rural like the Indian insurance

industry with simple and limited products.
SEBI allowing the Mutual Fund's to launch commodity mutual
funds.
Emphasis on better corporate governance.
Trying to curb the late trading practices.
Introduction of Financial Planners who can provide need based
advice.

Tax aspect of Mutual fund

Dividend Made Tax-free
Dividend received from a domestic company and income distributed by
UTI-I or any MF, to its unit holders has been made tax-free from 1.4.03
onwards. However, dividend declared, distributed or paid by such
sources shall be charged a distribution tax of @12.8125% flat. This
distribution tax is in addition to the normal income tax payable by
them.

Capital Gain Tax:

Capital gains are generated through the sale of stocks, bonds and other
investments, which have appreciated in value, from the funds
portfolio. Net capital gains are taxed at the 15% cap.

LTCG on Equities Exempt

Long-term capital gains arising from transfer of shares purchased
through a recognized stock exchange, on or after 1.3.03 but before
1.3.04 are exempt from income tax. This exemption is restricted to only
those shares figuring in the BSE-500 index as on 1.3.03. If during the
course of the year, any of these shares are replaced with another stock
in the index, investors who had purchased the share prior to its
replacement
will
continue
to
enjoy
the
benefit.
The benefit is also extended to shares of companies making Initial
Public
Offers
during
the
year.

46

Income received from Mutual Fund:

The Internal Revenue Service might depend upon the nature of your
mutual fund investment. Generally, most income generated from a
mutual fund account, with the exception of tax-exempt money market
or municipal bond funds, is subject to federal taxes as ordinary income
or capital gains

Wealth Tax:
Under sec 21(e), Wealth tax is not treated as an asset. Therefore this is
exempted from tax liability.

Gift Tax:
Mutual Fund may be given as a gift and no tax is applicable by donor or
donee.

TDS on Redemption:
No TDS is required to be deducted from capital gain at the time of
redemption in case of mutual fund.

Tax benefits on investment in Mutual

Fund:
100% Income Tax Exemption on all Mutual Fund dividends.

Capital Gains tax to be lower of

10% on the capital gains without factoring indexation benefits and
20% on the capital gains after factoring indexation benefits.
Open-end funds with equity exposure of more than 50% are exempt of
dividend tax for a period of 3 years from 1999-2000.

47

Another Investment Avenue featuring in the list of eligible

instruments is the Equity Linked Saving Scheme or tax saving funds.
Simply put, these are mutual fund schemes wherein investment upto
Rs 10,000 qualify for Section 88 benefits. Investors are given the
unique opportunity to invest in an equity-linked product and still claim
tax benefits on the same; which is quite a departure from conventional
tax saving instruments. Tax saving funds has a mandatory 3-Yr lock in
period, which distinguishes them from conventional equity-oriented
funds, which have no constraints on liquidity.

Tax saving funds: Smart long-term

performers!
Tax Saving Funds
NAV (Rs) 1-Yr
HDFC LONG TERM
41.52
46.63
ADV.
%
19.55
BIRLA EQUITY PLAN 35.50
%
47.12
MAGNUM TAXGAIN 32.45
%
30.89
PRU ICICI TAX
41.91
%
42.46
HDFC TAX SAVER
61.15
%

3-Yr
68.36
%
55.01
%
51.95
%
51.93
%
51.40
%

5-Yr

SD

SR

6.17% 0.76%

12.10
0.62
7.23%
%
%
0.64
0.13% 7.96%
%
15.76
0.59
7.93%
%
%
0.78
5.72%
%

(Source: Credence Analytics. NAV data as on Jan 7, 2005. Growth over

1-Yr is compounded annualized)
(The Sharpe Ratio is a measure of the returns offered by the fund vis-vis those offered by a risk-free instrument) (Standard deviation
highlights the element of risk associated with the fund.)

48

TERMS RELATED TO MUTUAL FUND

Net Asset Value
"Net asset value," or "NAV," of an investment company is the
companys total assets minus its total liabilities. For example, if an
investment company has securities and other assets worth $100
million and has liabilities of $10 million, the investment companys
NAV will be $90 million. Because an investment companys assets and
liabilities change daily, NAV will also change daily. NAV might be $90
million one day, $100 million the next, and $80 million the day after.
Mutual funds and Unit Investment Trusts (UITs) generally must
calculate their NAV at least once every business day, typically after the
major U.S. exchanges close .A closed-end fund, whose shares generally
are not "redeemable"that is, not required to be repurchased by the
fundis not subject to this requirement.
An investment company calculates the NAV of a single share (or the
"per share NAV") by dividing its NAV by the number of shares that are
outstanding. For example, if a mutual fund has an NAV of $100 million,
and investors own 10,000,000 of the funds shares, the funds per share
NAV will be $10. Because per share NAV is based on NAV, which
changes daily, and on the number of shares held by investors, which
also changes daily, per share NAV also will change daily. Most mutual
funds publish their per share NAVs in the daily newspapers.
The share price of mutual funds and traditional UITs is based on their
NAV. That is, the price that investors pay to purchase mutual fund and
most UIT shares is the approximate per share NAV, plus any fees that
the fund imposes at purchase (such as sales loads or purchase fees).
The price that investors receive on redemptions is the approximate per
share NAV at redemption, minus any fees that the fund deducts at that
time (such as deferred sales loads or redemption fees).

49

Example:
You invest $1,000 in a mutual fund with an NAV of $10.00. You will
therefore own 100 shares of the fund. If the NAV drops to $9.00
(because the value of the fund's portfolio has dropped), you will still
own 100 shares, but your investment is now worth $900. If the NAV
goes up to $11.00, your investment is worth $1,100. (This example
assumes no sales charge.)

Sale Price
Is the price you pay when you invest in a scheme.Also called Offer
Price. It may include a sales load.

Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it
may include a back-end load. This is also called Bid Price.

Redemption Price
Is the price at which open-ended schemes repurchase their units and
close-ended schemes redeem their units on maturity. Such prices are
NAV related.

Sales Load
Is a charge collected by a scheme when it sells the units. Also called,
Front-end load. Schemes that do not charge a load are called No Load
schemes.

Repurchase or Back-end Load

Is a charge collected by a scheme when it buys back the units from the
unit holders.

50

ASSET MANAGEMENT COMPANY

In an endeavor to enlarge the range of services available to our
customers, PNB has been distributing the products of Principal PNB
Asset Management Company Pvt. Ltd. from its designated branches.
In recent times Mutual funds have gained rapid popularity as a good
investment vehicle. The variety of schemes and income options offered
by Mutual Funds can suit the financial preferences of all classes of
investors, be it Retail, Corporate or Institutional.
The following benefits, intrinsic to investments in Mutual Funds have
inspired greater confidence amongst the investors:
Transparency
Efficient Performance
Liquidity
Convenience
Tax benefits

Range of schemes:
Mutual Funds offer schemes keeping in view the risk profile and riskreturn preferences of investors. For an aggressive investor with
appetite for risk, Equity oriented schemes are available which have a
higher potential for capital appreciation. For a conservative investor
with expectations of stable returns and low risk, Income Schemes are
available. To suit various type of requirements of the investors,
following is the range of schemes offered by PRINCIPAL PNB AMC:
Principal Growth Scheme: Open-ended equity fund with an investment
portfolio of stocks diversified across different sectors of the economy.

Principal balanced Fund:

Open ended fund with an equity (diversified) component of 51% to 70%
and Debt component (including Money Market) 30% to 49%.
Principal Income Fund: Open-ended fund with up to 100% investment
in Debt instruments (including Money Market instruments and
securitized debt)

51

Principal Income Fund

Short Term Debt: Open-ended short term maturity debt fund aimed at
providing stable returns with lower to negligible risks. Fund invests in
debt securities, predominantly 100% money market instruments and
securitized
debt.

Principal Cash management Fund:

Open-ended fund that invests 100% of its corpus in Money Market
instruments and seeks to provide an excellent avenue to park very
short term cash surpluses and earn returns linked to the call money
market rates.

Principal Index Fund:

Open-ended fund that tracks S&P CNX Nifty (NSE) closely. The aim of
the fund is to provide its investors returns commensurate with the
Nifty.

Principal Government Securities Fund:

Open-ended dedicated Gilt scheme investing in Government Securities.
Innovative options to facilitate greater control over investments:
Mutual Funds have options such as Systematic Investment Plans,
Systematic withdrawal plan, Trigger Option, Automatic Rebalancing,
Dividend Re-investment, etc that enable you to get the most out of your
investment in Mutual Funds.

Distribution Reach
The distribution services of Mutual Fund products are available at
selected branches of all the zones except Bihar, Chhatisgarh and
Jharkhand.

Risk Profile
Mutual Fund investments are subject to market risks. Please read the
offer document of the scheme carefully for details on risk factors
before investment. Punjab National Bank does not guarantee any
assured returns for your investments through Mutual Fund.

52

How to invest in Mutual Fund

Step One - Identify your Investment needs
Your financial goals will vary, based on your age, lifestyle, financial
independence, family commitments, and level of income and expenses
among many other factors. Therefore, the first step is to assess your
needs. You can begin by defining your investment objectives and needs
which could be regular income, buying a home or finance a wedding or
educate your children or a combination of all these needs, the quantum
of risk you are willing to take and your cash flow requirements.
Step Two - Choose the right Mutual Fund
The important thing is to choose the right mutual fund scheme which
suits your requirements. The offer document of the scheme tells you its
objectives and provides supplementary details like the track record of
other schemes managed by the same Fund Manager. Some factors to
evaluate before choosing a particular Mutual Fund are the track record
of the performance of the fund over the last few years in relation to the
appropriate yardstick and similar funds in the same category. Other
factors could be the portfolio allocation, the dividend yield and the
degree of transparency as reflected in the frequency and quality of
their communications.
Step Three - Select the ideal mix of Schemes
Investing in just one Mutual Fund scheme may not meet all your
investment needs. You may consider investing in a combination of
schemes to achieve your specific goals.
Step Four - Invest regularly
The best approach is to invest a fixed amount at specific intervals, say
every month. By investing a fixed sum each month, you buy fewer units
when the price is higher and more units when the price is low, thus
bringing down your average cost per unit. This is called rupee cost
averaging and is a disciplined investment strategy followed by
investors all over the world. You can also avail the systematic
investment plan facility offered by many open end funds.

53

Step Five- Start early

It is desirable to start investing early and stick to a regular investment
plan. If you start now, you will make more than if you wait and invest
later. The power of compounding lets you earn income on income and
your money multiplies at a compounded rate of return.
Step Six - The final step
All you need to do now is to Click here for online application forms of
various mutual fund schemes and start investing. You may reap the
rewards in the years to come. Mutual Funds are suitable for every kind
of investor - whether starting a career or retiring, conservative or risk
taking, growth oriented or income seeking

54

THINGS KEPT IN MIND BEFORE INVESTING

Prospectus
By law, you should receive a prospectus from the fund company before
you invest in it. Many investors ignore the prospectus, but this is a
must read. The mutual fund's objectives are displayed in the
prospectus. It tells you the goals of the fund and how it intends to
achieve them. You will also find information about the fund's past
performance and fees.

Mutual Fund Families

Mutual Fund Glossary
Mutual Fund Fees
The fees are displayed in the prospectus as well as on many mutual
fund research sites. Try to buy funds with low expense ratios and
certainly avoid 12b-fees. I have yet to hear a valid argument on why you
should ever buy a loaded fund. A loaded fund is a fund that carries
front-end loads, back-end loads or deferred loads. These loads are
basically sales charges. There are plenty of no-load funds to meet your
objectives.

GROWTH IN MUTUAL FUNDS SECTOR

Mutual funds are shuddering at the prospect of an economic recovery.
But they have enough time to consolidate their client base.

The Smart Investor Team

Normally a recovery means good news for all, consumers,
manufacturers and service providers. But hold on. Mutual funds aren't
very enthusiastic, though. Why? Because, the biggest investors in the
domestic mutual fund industry today are large corporates and banks.
These investors have put in more than 50 per cent of total assets of the
industry. And, a recovery means that corporates may pull out their
money to invest in their core activities. Similarly, a revival in credit
demand on the back of a recovery means that banks may need to pull
out their investments from mutual funds to meet the demand.

55

That's perhaps why mutual funds are pulling such long faces at the
prospect of a recovery. What if the economy recovers and corporates go
on a spending spree? Capacity expansions, merger and acquisition
activity and better credit demand would require corporates and banks
to encash their existing investments to plough back in their core
business.
Obviously, there is a strong possibility of large scale redemptions.
While fund companies see this issue as a matter of concern, they are
optimistic about guarding their current assets. Says Ved Prakash
Chaturvedi,
chief
executive
officer,
Tata TDW Mutual Fund, "Despite an economic recovery, the fund
industry should be able to retain and in fact, grow its assets."
Is a economic recovery underway? The outlook on the economy is
pretty much positive and economists are predicting a wide-ranging
recovery led by an increase in domestic consumer demand.
According to the latest data released by the Central Statistical
Organization (CSO), the Indian economy grew 4.3 per cent in 2002-03.
With the manufacturing and services sectors growing at 6.0 per cent
and 7.1 per cent respectively, the poor performance of the agriculture
sector dragged down the overall growth. Growth in the agricultural
sector declined 3.2 per cent last fiscal. The growth in manufacturing
industry was led by buoyant exports and a boost to construction
activity.
This year, again, the manufacturing sector is expected to grow at a
faster clip. The overall manufacturing outsourcing story should mean
more business for Indian manufacturing companies too.
Construction is again going to be a key driver. So sectors like steel and
cement have already seen a quantum jump in demand and many lossmaking companies such as Ispat, Essar, and the Jindal group have
turned profitable. Similarly, many other sectors such as consumer
durables and textiles are seeing demand-led growth. Many of these
corporate houses are thus focusing on the longer-term targets.
Some sectors like steel are already talking of capacity expansion and
green field projects. Others like cement have been seeing
consolidation. However, as Sanjeev Bafna, senior vice-president

56

Corporate finance, Grasim Industries says "It will take 1-2 years for the
Indian industry to start committing funds into expansions."
But whenever it happens, will corporates queue up for redemptions?
And secondly, will banks and financial institutions, which have
invested their surplus funds in mutual funds on the back of poor credit
off take in the last couple of years, divert their money into lending?
The latter, of course, is a definite possibility. Last year, lending
behemoth IDBI was among the biggest investors in mutual funds.
Others such as ICICI bank and HDFC also figured in the list of biggest
investors.
While Reliance Industries was one of the largest investors in mutual
funds, mutual fund sources say that some of the other big investors are
from the banking industry. For instance, both IDBI and SIDBI are said
to have a considerable exposure in rolling over surplus funds in mutual
funds. Other big players in the sector include the Finolex Group, ICICI
Bank, Bank of India, Central bank and LIC Housing Finance.
Clearly, a lot depends on the outlook for the economy. Any revival will
result in an increase in credit off take and thus, funds will have to be
redirected from the market to industry. But the probability of that
happening in the near-term is bleak: there is a huge amount of liquidity
in the banking sector, and further rate cuts will only add to it.
But corporate money pulling out may not be that big a threat. Here is
why. Companies typically park their surplus cash in treasury
instruments (liquid fund schemes). And, they deploy money considered
surplus in a slightly longer horizon into medium term funds. Industry
experts feel that the economic recovery will have no impact on the
flows
into
liquid
funds.
As a matter of fact, improved cash flow for corporates will only
increase the popularity of liquid funds. Even more, they say that today
financially healthy corporates will find it less prudent to pull out
money from investments like mutual funds to fund expansions because
borrowed
funds
are
so
cheap.

57

Also, capital expenditure is never lumped together but is spread over a

period of time and prudence requires a judicious mix of debt and
equity depending on the project size, horizon of returns, gestation
period etc. Hence there will not be any sudden withdrawal of funds
from the market. Such expenditure is planned in advance and as result,
a company cannot take the risk of a sudden withdrawal of its
investment.

Opportunity cost of money

To get a feel of this, look at the opportunity cost of money. Currently,
companies have witnessed around a 500-600 basis points reduction in
interest costs on long-term debt from about 16 per cent-plus in 1998-99
to about 10 per cent now, and even lesser for top rated corporates,
which can raise money at around 5.5-6.0 per cent per annum. As a
result, it is much more attractive to fund investments by taking on
additional debt while continuing to earning a higher return from
deploying internal cash into market instruments such as mutual funds.

Arbitrage between debt vs. funds

But the main reason that the companies prefer raising debt is two-fold.
Firstly, debt is available at historically low costs and secondly, tax
considerations favor debt. These include a tax benefit on the interest
costs, a dividend distribution tax on dividend income and capital gains
tax on long-term capital gains. As a result, while effective cost of debt is
less than 4 per cent, the effective tax-adjusted return on mutual fund
investment is around 5-6 per cent.
Grasim's Bafna says "the biggest factor that will determine an outflow
of funds is the any change in the tax status of dividends and capital
gains tax on long-term capital gains". Currently, dividends from mutual
funds are tax-free in the hands of the investors except for a dividend
distribution tax of 12.81 per cent. Long-term capital gains are taxed at
10.25 per cent with indexation benefits, and at 20.5 per cent without
indexation benefits.
The banking sector, with the considerable amount of liquidity in the
system, has also been a significant investor in mutual funds.
For instance, as on March 31, 2003, HDFC had investments of around
Rs 1500 crore in liquid funds. According to MA Ravi Kumar, Regional

58

Head - Global Markets, Stanchart Grindlays "The corporate sector

accounts for a reasonable chunk of the investments in mutual funds.
While there may be some withdrawal of funds, an increase in economic
activity will also increase the surplus funds. Therefore, over a period of
time, the cash surpluses will find their way back into the market"

NEW FUND OFFER

In the last one-year we have seen surge in the number of Equity IPOs &
Mutual Fund NFOs launched. This is because there is a significant jump
in profits of small & medium sized companies & so many loss-making
companies have been restructured and now making profits. These
companies are looking for expansion & to support their future plans
these companies are looking at IPO option. This has created good
opportunity to invest in the new companies, which are growing at fast
rate. New Mutual Fund schemes launched also got the more options to
invest collected money in various old as well as new companies. This
year so many Mutual Fund NFOs have collected money in excess of
Rs1000Cr & some of them had even crossed Rs2000Cr mark. Some of
the existing schemes with highest AUMs are looking small if we look at
these collections by MF NFOs.
Collection of Mutual Fund NFOs launched in 2005

Scheme

NFO Collection (Rs Cr)

SBI Magnum Multi Cap Fund

2102

Franklin India Flexi Cap Fund

1950

Reliance Equity Opportunities Fund

1761

Fidelity Equity Fund

1495

Prudential ICICI Infrastructure Fund

1418

HDFC Premier Multi - Cap Fund

1328

Standard Chartered Classic Equity Fund

1043

Floating a NFO at the right time when markets are in correction phase
& investing the collected money on correction is proved as very
successful strategy in the last one year. This is evident as newly
launched Mutual Fund NFOs have outperformed various indices & able
to generate good returns. The below table indicates good performance
given by MF NFOs. Therefore Its a good idea to invest in NFOs which
could create wealth for investors like you.

59

Current Scenario of Mutual Fund

India is at the first stage of a revolution that has already peaked in the
U.S. the U.S. boasts if an asset base that are much higher than its
deposits. In India, mutual fund assets are not even 10% of the bank
deposits, but this trend is beginning to change. Recent figures indicate
that in the first quarter of the current fiscal year mutual fund asset
went up by 115% whereas bank deposit rose up only 17%. This is forcing
a large number of banks to adopt the concept of narrow banking
wherein the deposits are kept in Gilts and some other assets. This
improves liquidity and reduces risk. The basic fact lies that banks
cannot be ignored and they will not completely. Their role closes down
as intermediaries cannot be ignored. It is just mutual Funds are going
to change the way banks do business in the future.

COMPARISONS OF MUTUAL FUND WITH

OTHER DEPOSITS
BANKS V/S MUTUAL FUNDS
Banks v/s Mutual Funds
BANKS
Returns
Low
Administrative High
exp.
Risk
Low
Investment
Less
options
Network
High Penetration

MUTUAL FUNDS
Better
Low

Liquidity
Quality
assets
Interest
calculation
Guarantee

Better
Transparent

At a cost
of Not Transparent

Moderate
More
Low put improving

Min. bal. between 10th & 30th Everyday

of every month
Max. Rs. 1Lakh on deposit
None

60

SHARES V/S MUTUAL FUNDS

SHARES

MUTUAL FUNDS

Know-how is needed

Superficial know. Is sufficient

High cost involved

Low Cost

Time needed

one can sleep over

Professional Management.

Insurance Vs Mutual Funds

Both these instruments are designed to serve different purposes and
are not comparable. A unit-linked plan from an insurance company is
an insurance policy designed to pay a lump sum on maturity or on
death if earlier. Premium paid under these plans is eligible for tax
deduction under Section 88 of the Income Tax Act. On the other hand,
mutual funds are investment avenues to participate in the growth of
financial markets and do not provide any tax deduction (except ELSS
and pension funds).
For a unit-linked insurance plan, providing life cover is the most
important function; returns are just an added benefit, which gets
magnified, given the tax rebates. Though unit-linked plans offer
transparency in returns in terms of net asset value and flexibility in
investment options in debt, equity or mixes of both, these advantages
remain secondary, whereas for a mutual fund, the main objective is to
provide returns.
Moreover, unit-linked plans are not as liquid as mutual funds. There is
a lock-in of three years. Even if one redeems after three years, you
would be at a loss because of higher initial administrative charges. For
example, the upfront charges for the first two premium amounts are as
high as 20-27 per cent. Then there is an annual management fee of 0.81.25 per cent and a flat fee of Rs 15-20 per month. Finally, there is a
deduction for risk cover. This goes towards contribution to the sum
assured or the life insurance cover, which is based on mortality rates as
calculated by actuaries. Though mutual funds too have entry and exit
loads (maximum 2 per cent) and expenses (maximum 2.5 per cent),
these costs are lower than unit-linked plans.

61

COMPARISON AMONG DIFFERENT

INVESTMENT AVENUES
INVESTMENT
AVENUES

FD

RETURNS *

5.25% V

POST
TAX 3.63% V
YIELD
INFLATION
6%
RRR
V
2.50%
Pos RRR
LIQUIDIT
Y

Real
Busine Asse MF
Estate ss
t

Pos
LOW

Share RBI
PPF
s
Bonds

NSC

DEP V

8%

Pos
LOW

Pos Pos
HIG HIGH LOW
H

8%

9.50
%
5.60% 66.5%
0.65
0.40% %

Post
Offi
ce
8%

5.60% 5.60
%
0.40% 0.40
%
LOW LOW LO
W

62

PUBLIC PROVIDENT FUND

Scheme:
Tenure:
Issue date:
Closure date:
Interest:
Interest Payment:
Effective interest rate:
Minimum investment:
Maximum Investment:
Tax benefits:

Loan Facility:

Withdrawal:

Public Provident Fund

15 years and then optional extension in blocks
of 5 years
Perpetually Open
At the end of the 15th year
9.5%
Yearly (Computed on monthly balance)
9.9%
Rs.100
Rs.60000 per financial year
Sec.88 and Sec.10
Available. Loans can be obtained upto 25% of
the balance at the end of the 2nd preceding
financial year in the 3rd year of opening at an
interest rate 1% above the prevalent PPF rate.
Thus the repayment rate is now 12%. After the
repayment of the first loan is affected, a second
loan can be taken. This loan facility ceases after
the end of the 6th financial year as after that the
withdrawal facility starts.
Available.
From the 7th year and every year thereafter, the
account holder is allowed to withdraw a
maximum of 50% of the balance that is to his/her
credit at the end of the 4th or the 1st previous
financial year, whichever is lower.

63

Remarks:

1. Benefits are two fold, 20% of the amount paid

each year in the account is available as a tax
rebate and interest earned is tax free.
2. The account can be opened even at any of the
select few nationalized banks also.

64

NATIONAL SAVING CERTIFICATE

Scheme:

National Savings Certificate

Tenure:

6 years

Issue date:

Perpetually Open

Closure date:

End of tenure

Interest:

9.5%

Interest Payment:

Half-Yearly

Effective interest rate:

9.7%

Minimum investment:

Rs.100

Maximum Investment:

No Limit

Tax benefits:

Sec. 88 and Sec.80L

Loan Facility:

Not available. However can be pledged

in a bank

Withdrawal:

Not available

Remarks:

None

65

KISAN VIKAS PATRA

Scheme:

Kisan Vikas Patra

Tenure:

6.5 years (en cashable after 2.5 years)

Issue date:

Perpetually Open

Closure date:

End of tenure

Interest:

9.5%

Interest Payment:

Cumulative compounding

Effective interest rate:

9.5%

Minimum investment:

Rs.100

Maximum Investment:

No Limit

Tax benefits:

Nil

Loan Facility:

Not Available. However can be

pledged in a bank.

Withdrawal:

Not Available

66

POST OFFICE SCHEME

Scheme:
Tenure:
Issue date:
Closure date:
Interest:
Interest Payment:
Effective interest rate:
Minimum investment:

Monthly Income Scheme

6 years
Perpetually Open
Anytime after 3rd year
11%
Monthly
11.57%
Rs.6000

Maximum Investment:

Rs.300000 - Individual name

Rs.600000 - Joint Name

Tax benefits:

Sec.80L

Loan Facility:

After completion of 1st year, but 5% of

the amount deposited is deducted.

Withdrawal:

After 3rd year full deposit amount can

be withdrawn without any penalties.

Remarks:

At the end of the 6th year, the amount

his repaid with 10% bonus.

67

Current Mutual Fund Schemes:

One can select specific Investment Avenue from among the products
offered by the following fund houses:
Alliance Capital Mutual Fund
Benchmark Mutual Fund
Birla Sun Life Mutual Fund
BOB Mutual Fund
Canbank Mutual Fund
Chola Mutual Fund
Deutsche Mutual Fund
DSP Merrill Lynch Mutual Fund
Escorts Mutual Fund
Fidelity Mutual Fund
GIC Mutual Fund
HDFC Mutual Fund
HSBC Mutual Fund
ING Vysya Mutual Fund
J M Mutual Fund
Kotak Mahindra Mutual Fund
LIC Mutual Fund
Morgan Stanley Mutual Fund
PRINCIPAL Mutual Fund
Prudential ICICI Mutual Fund
Reliance Mutual Fund
Sahara Mutual Fund
SBI Mutual Fund
Standard Chartered Mutual Fund
Sundaram Mutual Fund
Tata Mutual Fund
Taurus Mutual Fund
Templeton Mutual Fund UTI Mutual Fund

68

MARKET TRENDS
Alone UTI with just one scheme in 1964 now competes with as many as
400 odd products and 34 players in the market. Now with increasing
competition and losing market share, UTI no longer remains a
formidable force to reckon with.
Last six years have been the most turbulent as well as exiting ones for
the industry. New players have come in, while others have decided to
close shop by either selling off or merging with others. Product
innovation is now passed with the game shifting to performance
delivery in fund management as well as service. Those directly
associated with the fund management industry like distributors,
registrars and transfer agents, and even the regulator have become
more mature and responsible.
The industry is also having a profound impact on financial market. UTI
has once been a dominant player on the bourses as well as the debt
market, but now, new generations of private funds, has gained
substantial mass, and are flexing their muscles. Fund managers by
their selection criteria for stocks have forced corporate governance on
the industry. By rewarding honest and transparent management with
higher valuations, a system of risk reward has been created where the
corporate sector is more transparent than before.
Funds have shifted their focus to the recession free sector like
pharmaceutical, FMCG and technology sector, funds performances are
improving. Funds collection, which averaged at less than Rs 100 bn per
annum over five-year period spanning 1993-1998 doubled to Rs 210 bn
in 1998-1999. In the financial year ending march2000 was mobilization
was above Rs 300 bn. Total collections for the financial year march
2000 was around Rs 450 bn.
What is particularly noteworthy is that bulk of the mobilization has
been by the private sector mutual funds rather than public sector
mutual funds. Indeed private MFs saw a net inflow of Rs 7819.43 crores
during the first nine months of the year as against a net inflow of Rs
604.40 crores in case of public sector funds.
Mutual funds are now also competing with commercial banks in race
for retail investors savings and corporate float money. The power shift
towards mutual funds has become obvious. The coming few years will
show that the traditional saving avenues are losing out in the current
scenario. Many investors are realizing that investments in saving
account are good as locking up their deposits in a closet. The fund
mobilization trends by mutual funds in the current year indicate that
money is going to mutual funds in a big way.

69

RESEARCH OBJECTIVE
The present study has been undertaken with the object of examining,
analyzing and inferring the performance of the mutual funds, which
addresses the following issues:

To understand what type of mutual fund is most preferred by the

existing customer because performance of these funds is the
criteria for customer selection.

Which mutual fund is the best in its category?

To understand the best way to attract customer investing in

mutual fund by understanding the factors responsible for making
a mutual fund successful.

To find out the reasons behind not investing in mutual fund and
to find out the most important attributes so as to keep the
existing customer & to attract new customers.

To understand which factors govern their choice of investment?

RESEARCH DESIGN
As the focus is on the probable reasons responsible for the low dealer
sales therefore the research design used is Exploratory Research.

METHODOLOGY
The data was collected through both primary & secondary sources.
Primary data was collected from the market by circulating
questionnaires to the respondents.
The secondary data was collected from the Internet site of:

www.amfiindia.com.,www.valueresearch.com,www.capi
talmarket.com, BSEINDIA.COM.

70

My sample size is 100 in number and we are dealing with the

Government Offices and recognized private Offices. Important
secondary data were available to us from the confidential office records
of the department and various magazines and newspaper published by
the concerned authorities.

71

72

ANALYSIS OF PERFORMANCE OF MUTUAL FUNDS

PERFORMANCE COMPARISON OF FOLOWING MUTUAL FUNDS HAS BEEN DONE:

Reliance Growth-G
HDFC Growth Fund
DBS Chola Growth
Escorts Growth
ICICI Prudential Growth
LICMF Growth
Principal Growth
Sahara Growth
Tata Growth
Templeton India Growth.
INDIVIDUAL PERFORMANCE OF EACH FUND
1) RELIANCE GROWTH FUND (GROWTH)
Current Stats & profile
Latest NAV

296.94 (19/06/07)

52-Week High

298.36 (05/06/07)

52-Week Low

183.75 (24/07/06)

Fund Category

Equity: Diversified

Type

Trailing Returns

Open End

Launch Date

October 1995

Risk Grade
Return
Grade
As on 19
Jun 2007
Net
(Cr)
YearAssets
to Date
Benchmark
1-Month
3-Month

Average
Fund

High
Category

11.32 3,775.92 (31/05/07)

6.18
2.84

BSE
100
1.72

18.15

16.59

73

1-Year

55.94

43.68

3-Year

63.43

46.91

5-Year

58.38

41.95

Return Since Launch

33.60

--

Returns upto 1 year are absolute and over 1 year are annualised.

RELATIVE PERFORMANCE (fund vs. category)

2) HDFC GROWTH FUND(GROWTH)

Current Stats & profile
Latest NAV

53.27 (19/06/07)

52-Week High

53.305 (01/06/07)

52-Week Low

33.65 (20/06/06)

Fund Category
Type
Launch Date
Risk Grade
Return Grade
Net Assets (Cr)
Benchmark

Equity: Diversified
Open End
August 2000
Below Average
Average
447.79 (31/05/07)
Sensex

74

Trailing Returns
As on 19 Jun 2007

Fund

Category

10.03

6.18

1-Month

5.09

1.72

3-Month

22.59

16.59

1-Year

56.62

43.68

3-Year

49.50

46.91

5-Year

44.13

41.95

Return Since Launch

27.61

--

Year to Date

Returns upto 1 year are absolute and over 1 year are annualised.

RELATIVE PERFORMANCE (fund vs. category)

3) DBS CHOLA GROWTH FUND

Current Stats & profile
Latest NAV

32.82 (19/06/07)

52-Week High

33.48 (07/02/07)

52-Week Low

22.3 (19/07/06)

75

Fund Category

Equity: Diversified

Type

Open End

Launch Date

September 2001

Risk Grade

Below Average

Return Grade

Below Average

Net Assets (Cr)

32.19 (31/05/07)

Benchmark

S&P CNX Nifty

Trailing Returns
As on 19 Jun 2007

Fund

Category

Year to Date

1.77

6.18

1-Month

1.11

1.72

3-Month

15.93

16.59

1-Year

41.89

43.68

3-Year

43.27

46.91

5-Year

40.54

41.95

Return Since Launch

38.45

--

Returns upto 1 year are absolute and over 1 year are annualised.

RELATIVE PERFORMANCE (fund vs. category)

76

4) ESCORTS GROWTH FUND

Current Stats & profile

Latest NAV

58.4193 (19/06/07)

52-Week High

59.4682 (05/06/07)

52-Week Low

42.5427 (19/07/06)

Fund Category

Equity: Diversified

Type

Open End

Launch Date

March 2001

Risk Grade

High

Return Grade

Average

Net Assets (Cr)

4.26 (31/05/07)

Benchmark

S&P CNX Nifty

Trailing Returns
As on 19 Jun 2007

Fund

Category

Year to Date

7.44

6.18

1-Month

0.93

1.72

3-Month

18.87

16.59

1-Year

33.93

43.68

3-Year

47.03

46.91

5-Year

38.34

41.95

Return Since Launch

32.62

--

Returns upto 1 year are absolute and over 1 year are annualised.

77

RELATIVE PERFORMANCE (fund vs. category)

5) ICICI PRUDENTIAL GROWTH FUND

Current Stats & profile
Latest NAV

97.71 (19/06/07)

52-Week High

99.85 (01/06/07)

52-Week Low

68.89 (20/06/06)

Fund Category

Equity: Diversified

Type

Open End

Launch Date

June 1998

Risk Grade

Average

Return Grade

Average

Net Assets (Cr)

470.64 (31/05/07)

Benchmark

S&P CNX Nifty

Trailing Returns
As on 19 Jun 2007

Fund

Category

Year to Date

4.66

6.18

1-Month

0.17

1.72

78

3-Month

13.95

16.59

1-Year

39.57

43.68

3-Year

48.21

46.91

5-Year

38.55

41.95

Return Since Launch

28.80

--

Returns upto 1 year are absolute and over 1 year are annualised.

RELATIVE PERFORMANCE (fund vs. category)

6) LICMF GROWTH
Current Stats & profile
Latest NAV

10.7098 (19/06/07)

52-Week High

11.3947 (07/02/07)

52-Week Low

8.254 (20/06/06)

Fund Category
Type
Launch Date
Risk Grade
Return Grade
Net Assets (Cr)
Benchmark

Equity: Diversified
Open End
August 1994
Above Average
Low
99.62 (31/05/07)
Sensex

79

Trailing Returns
As on 19 Jun 2007

Fund

Category

Year to Date

-3.12

6.18

1-Month

-0.15

1.72

3-Month

11.90

16.59

1-Year

27.86

43.68

3-Year

31.66

46.91

5-Year

36.19

41.95

0.53

--

Return Since Launch

Returns upto 1 year are absolute and over 1 year are annualised.

RECOMMENDATIONS & CONCLUSIONS

Tapping the up coming market - Semi Urban Market as there is a lot of
opportunity. Most of the Mutual Funds are operating in the metros and
big cities as per their present branch office locations. If they have to
increase their market size they have to open more distribution centers
at the various urban and semi-urban markets.
To create the awareness about the different products of Mutual Fund
and not about the generic product. Various respondents were not
aware of the mutual fund products and the type of mutual fund
schemes and the risk associated with mutual fund products.
To provide some kind of curriculum at the school/college level to create
awareness regarding Mutual Fund.
The shift of preference may change the market leadership in terms of
AUM in years to come. Therefore, the change of strategy and tactics is
required to maintain their market position, those who are holding
today and those who want to hold in future.

80

LACK OF PROPER GUIDANCE MAKE

MUTUAL FUND FALL
From the days of the Unit Trust of India till now when private sector
funds have assumed a dominant position, what do you see as the
industry's greatest achievements? And what are the challenges? The
achievements are manifold. The performance record of both equity and
debt funds have been excellent. Plus, there is a robust riskmanagement system in place and the atmosphere is very vibrant. We
have also seen improvements on the service side. The investor now has
the liberty to switch schemes and redemptions are credited to bank
accounts in less than 24 hours. There are many other facilities
available like monthly fact-sheets, quarterly holding-statements, online
trading, etc. We have done many things, but much more needs to be
done.

The greatest challenge, of course, is to get more retail

participation in funds. We have made tremendous efforts in this
direction. About 250 mutual fund outlets, including branches,
franchisees and collection centers, were opened across the
country in the last two years. Today, in metros and non-metros,
there are more than 1,000 outlets to provide services to
investors.
Mutual Funds are still not the most preferred investment vehicle
in the country. How do you think this could change? In our
country, people want to buy only sacred assets. Unless this
mindset changes, it will be difficult to get investors interested in
mutual
funds. Government
securities
and
post-office
investments offer 8 per cent assured returns, while banks offer 6
per cent. So, competition is very high. Only sustained efforts by a
trained and qualified distributor class can bring success.
Again this is wrong, when it is done regularly. We are discussing
various ways to tackle the same and will take it up with Sebi. But there
is no clear solution as of now.
Why don't you say there should be no additional incentives for new
funds?
You must understand that this is also a business. So, we cannot micromanage everything. There is a cap on expenses that funds can charge.

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Within the existing cap, there should be freedom and creativity for the
managers to work.
Despite the plethora of new funds launched in the past year, there has
been hardly any real innovation... There is a drought in the area of real
innovations. Though funds are packaged differently, all of them invest
in the same companies. But it is not a problem as long as the investor is
not misled. As long as fund companies say what they are going to do
and do not camouflage anything, it should be fine. The fact is that,
people have a mindset to buy at Rs 10. The industry has to cater to that
sentiment. Most mutual funds are launching funds focused on the
flavour of the day or season. Don't you think this is dangerous?
People have a mindset to buy at Rs. 10. The industry has to cater to that
sentiment
There is risk in the market. We can contain it, but can not eliminate it.
Can we have a uniform load structure to attract more retail investors?
There is always a discount for those who buy big. That is one of the
basic laws of business. If you buy one shirt, you pay the full-price. If
you buy two shirts, you get discount. If you buy three, you get one free.
But I feel that an exit-load helps. It will discourage people from moving
out easily.

Amfi has also been an industry lobby. Do you see it developing as one
that is on the side of investors? Amfi was established for protecting and
promoting the industry and investors. We have never done anything
that damaged the interest of investors. Bearing the sole interest of
customers in mind, we have inscribed certification, ensured quicker
payment facilities and set up a committee for the simplification of the
offer-document. There is a congruity of interest between the industry
and the investor.
Have you invested in mutual funds personally? How has been your
experience?
There have made gains and losses. However, I do not have any
remorse. It is common that the preacher seldom follows what he
teaches. Mutual fund investments are about 25 to 30 per cent of the
total investments. And they are mostly on the equity side. I have
recently shifted my debt-investments to the RBI and post-office
investments.
Who is your favourite fund manager?
It's like asking me who is your favourite grandchild. I like all of them
equally

LIMITATIONS
As every aspect of life has its own limitations the same goes with
researches. The few limitations attached to this research are: -

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As time and tide waits for none so is the case with this research. A
much more detailed analysis could be done had there been more
time spent for data collection. Due to lack of Time data from the
all the places could not be collected.
Management of all the activities from one place limited the
research with in it self as appropriate data, which was required,
was not available.
Giving Instruction through telecommunications has caused a
communication gap due to which the cream of data has not been
available.

QUESTIONAIRE TO PRESENT INVESTORS IN MUTUAL FUNDS

Dear Sir/Madam,
I am currently engaged in a study on Investor Perception Of
Mutual Funds. In this connection I request you to read the following
items carefully & answer them .The answers you give will be held
confidential & used purely for academic purposes.
Indicate your response by tick marking when applicable.
1.)

Name:-

2.)

Sex:-

Male

Female

3.)

Age:-

Below 30

31 40 years

41 50 years

Above 50 years.

Academic Qualification (Last Qualification):Which of the following is your source of income?

Government employee
Private employee
Self employed
Annual Income In Rs.

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 Below 1 Lakh
3- 5 Lakhs

1 - 3 Lakhs
Above 5 Lakhs

Have you ever invested in any of the Mutual Funds?

Yes
No
Rank in order of preference of savings avenue (Highest being given 1st
rank & the lowest being given 9th rank)
___ Currency
___ Real Estate
___ Units of UTI
& Mutual Bonds

___ Life Insurance

___ Bank Deposits

___ Shares

___ Postal Savings

___ Pension &

Provident Fund

___ Gold

As a mutual fund investor what is your experience?

Highly satisfied
Satisfied
Somewhat satisfied
Unsatisfied
Highly unsatisfied
Reasons For Preference Of Mutual Funds(Please Tick mark in the box
provided.)
Professional Management Liquidity
Good Return

Capital
Appreciation

Tax Benefit

Diversification

Safety

Flexibility

What Are the Decision Affecting Factors: Economic Scenario

Fund Performance
Tax Incentive

Company's Image
Fund Managers
Image
Minimum Initial
Investment

How did you come to know about Mutual Fund investments schemes?
News Paper
T.V.

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 Financial Magazines

Reference Groups

Brokers/Agents

Mail

What effects your decision regarding of investment in Mutual Funds?

Economic Scenario Companys Image
Fund Performance

Fund Management Image

Tax Incentives

Minimum Initial
Investment

Which Mutual Fund is the best?

ICICI
HDFC
UTI
SBI
KOTAK
TATA
STANDARD CHARTERED
RELLIANCE
FRANKLIN TEMPLETION
OTHERS
Thanks you very much for your kind co-operation & for taking time to
complete this questionnaire.

ANNEXURE: 2

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FAQs ON MUTUAL FUNDS

?
Some banks and savings institutions are now offering uninsured
products such as mutual funds and annuities. These products may
provide you with higher returns, but these investments involve risk.
America's Community Bankers, a national trade association
representing nearly 2,000 savings institutions across the country, has
provided the answers to some commonly asked questions:
Q. Are the mutual fund or annuity investments I buy from a bank or
savings institution insured?
A. No. These investments are not like insured deposits. They are not
guaranteed by the FDIC, they are not guaranteed by the bank or savings
institution, and they are not guaranteed by the U.S. government. You
are not protected against losses on the amount you invest.
Q. Are there risks in investing in mutual funds or annuities?
A. Yes. You may get more or less back than the original amount you
invested. There may also be sales charges for these investments. The
sales representative should thoroughly brief you to make sure you
understand these risks and charges, and you should be asked to sign an
acknowledgement form verifying that you have received the
information and understand it.
Q. Who can sell me these products?

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A. Only properly trained sales personnel can sell these products.

Tellers may not sell or provide advice to you on these products. They
can refer you to the sales desk for these services.
Q. How can I be sure I am investing in the right mutual fund or
annuity?
A. A sales representative should ask you questions about how much
risk you are willing to accept, your investment objectives and your
financial resources and background. You have no obligation to provide
this information, but it would be helpful to the sales representative in
suggesting the most appropriate investment for you.

GLOSSARY
Advisor
The organization employed by a mutual fund to give professional
advice on the funds investment and to supervise the management of its
assets.
Asset Allocation Fund
A fund that spreads its portfolio among a wide variety of investment,
including domestic and foreign stocks and bonds, government
securities, gold bullion and real estate stocks. This gives small
investors far more diversification than they could get allocating money
on their own. Some of these funds keep the proportions allocated
between different sectors relatively constant, while others alter the mix
as market conditions change.
Alpha
A percentage that is a measure of the returns of a fund with its risk
adjusted for. Alpha is calculated from the difference between a fund's
actual returns and its expected returns given its market risk level as
measured by its beta. It is also a measure of the value added or
deducted by the fund's manager. An alpha of 1 means the fund
produced a return 1% higher than what its beta would predict. An alpha
of 1 means the fund produced a return 1% lower. Naturally, higher the
alpha the better it is for the investor. No, not always. For a high alpha
to be better, simultaneously, another number called the R-squared
should be high enough too. Normally, with R-squared anywhere below

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50, never trust the alpha however high. Alpha depends entirely on the
accuracy of beta. And beta again, is calculated by the R-squared. So if
you believe that beta is the definite value for risk then any positive
alpha would be a sufficient condition for a fund's good performance.
Balanced fund
A mutual fund scheme that invest half in corpus in equity and the other
half in debt instruments. A balanced fund is less risky than an equity
fund but at the same time gives better returns than an debt fund.
Beta
It is a measure of a securities risk. Each security has a certain amount
of risk attached to it. Beta tries to measure the risk involved with each
security. Thus an investor should choose a security which gives the
highest return for a given risk level.

Bonds
A debt instrument issued for a period of more than one year with the
purpose of raising capital by borrowing Bond is a promise to pay the
principal along with the interest after a specified period of time.
Capital Gains
It is the profit earned on selling capital assets. Capital gains are
calculated by subtracting from the selling price the following
1. Indexed cost of Acquisition
2. Indexed cost of Improvement
3. And any other holding cost.
Custodian
The bank or trust company that maintains a mutual funds assets,
including its portfolio of securities or some records of them. Provides
safekeeping of securities but has no role in portfolio management.
Corpus
The amount of money available with a scheme for investment.
Debenture
They are bonds issued by a company to raise capital There are
various kinds of debentures. They could be secured or unsecured,
convertible or non-convertible.
Debt/Equity
Determined by dividing long-term debt by common stockholders
equity. It is one of the most useful financial ratios. Creditors use it to

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see whether it is safe to lend money to the particular company. The

ratio should ideally be around 2.
Distributor
The individual or a corporation serving as principal underwriter of a
mutual funds shares, buying shares directly from the fund, and
reselling them to other investor.
Dividends
Income distributed to share holders. Dividends can be received from
the ownership of stock or from mutual funds. Mutual fund
shareholders have the option to reinvest dividends automatically in
order to purchase more shares.

Gilts
Gilts are government-based securities. The name signifies that the
security is very safe and is as sound as gold itself.
Growth and income funds
Growth funds are mutual fund schemes,
which invest in the equity market while income funds invest in fixed
income securities.
Growth fund
Growth funds are Mutual funds that invest in equities market.
Hedging
A strategy designed to reduce investment risk hedging techniques uses
call options, put options, short selling, or futures contracts. A hedge
can help lock in existing profits. Its purpose is to reduce the volatility of
a portfolio, by reducing the risk of loss.
Instrument
Any tradable commodity whose price can be obtained from a Financial
Market is called as an instrument.
Net assets
Net assets are the total amount of money that comprises the mutual
fund's holdings. Small funds have millions of dollars while large funds
may have over 50 billion dollars. Sometimes a manager may close a
fund to new investors if its size is large
P/E ratio

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Ratio of the price of a stock to the total earnings of the company is

called as P/E ratio. Companies with very high ratios of greater than 30
are considered to be overpriced. Company stock with a low ratio is
considered to be undervalued and potentially good investments.
Mutual funds with a value type of investment strategy seek a portfolio
consisting of stocks with low ratios with the expectation that they will
increase in price.
Portfolio
The collection of all the holdings of a mutual fund, such as bonds, and
stocks is called as portfolio. In a mutual fund's annual report, a list of
the fund's current portfolio will usually be contained.
Preferred stock
Preferred stock is a type of shares offered by a company, which pay a
pre-stated dividend, before common stock dividends are issued. The
benefits of owning preferred stock are realized if the company ever

goes bankrupt. If this occurs, preferred stock share holders receive

their money first. Common stock holders may not receive any money, if
none is remaining after paying preferred stock holders.
Prospectus
A document, usually in the form of a booklet, that provides information
about a specific mutual fund; such as the funds investment and
redemption policies. The prospectus, according to law, must always be
accompanied with the application. Prospective investors should always
read the mutual fund's prospectus before sending money.
Volatility
The degree to which a mutual fund's share price will change in value
Withdrawal
To redeem shares of a mutual fund or stock is called as withdrawal. In
a mutual fund, partial or full redemptions may be made over the
phone. Some funds may impose an extra redemption fee to discourage
market timers from pulling their money immediately after investing. If
this is a fund's policy, it will be stated in the prospectus.
Yield
Income or dividends received from a security or mutual fund.

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BIBLIOGRAPHY
AMFI Mutual Fund Testing Programme for Distributors & Employees
of Mutual Funds in India.
Fact Sheets of various Mutual Funds
Economic Times

Web sites:www.mutualfundindia.com
www.mutualfund.com
www.moneycontrol.com
www.saharaindiapariwar.net

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