INTRODUCTION TO MUTUAL FUND

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

STRUCTURE OF MUTUAL FUNDS

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Sponsor:
The sponsor of a mutual fund is like the promoter of a company. The
sponsor may be a bank, a financial institution, or a financial serice company.
The sponsor is responsible for setting up and establishing of a mutual fund .
the sponsor is the settler of the mutual funds trust. The sponsor delegates the
trustee function to the trustees.

Trustees:
The mutual fund which is a trust is manage either by a trust company or
board of trustees and are governed by provision of the Indian trust act. It is
the responsibility of trustees to protect the interest of the investor , whose
fund is managed by amc trustees are appointed by the sponsorer.

Assets Management Company:

The trustee, on advice of the sponsor, usually appoints the amc. The amc
manages the fund by making investments in various types of securities in
accordance with the provision of the trust deed and regulation

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 Custodian:
The custodian handles the back office operations of a mutual fund. It looks
after the receipts and delivery of securities, collection of income, distribution
of dividends, and segregation of the assets between schemes

Registrars and transfer agent

The registrars and transfer agents handle investor related services such as
issuing units, redeeming units, sending facts sheets and annual reports and
so on.

Advantages of mutual funds

 Diversification
Diversification involves holding a wide variety of investments in a portfolio
so as to mitigate risks. Mutual funds usually spread investments across
various industries and asset classes, constrained only by the stated
investment objective. Thus, by investing in mutual fund, you can avail of the
benefits of diversification and asset allocation, without investing the large
amount of money that would be required to create an individual portfolio.

 Professional management
Mutual funds employ experienced and skilled professionals, who conduct
investment research, and analyze the performance and prospects of
various instruments before selecting a particular investment. Thus, by
investing in mutual funds, you can avail of the services of professional
fund managers, which would otherwise be costly for an individual
investor.

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Department of MBA, Gulbarga
  Liquidity
In an open-ended scheme, unit holders can redeem their units from the fund
house anytime, by paying a small fee called an exit load, in some cases.
Even with close-ended schemes, one can sell the units on a stock exchange
at the prevailing market price. Besides, some close-ended and interval
schemes allow direct repurchase of units at NAV related prices from time to
time.

 Flexibility
Mutual funds offer a variety of plans, such as regular investment, regular
withdrawal and dividend reinvestment plans. Depending upon one’s
preferences and convenience, one can invest or withdraw funds, accordingly.

 Cost Effective
Since mutual funds have a number of investors, the fund’s transaction costs,
commissions and other fees get reduced to a considerable extent. Thus,
owing to the benefits of larger scale, mutual funds are comparatively less
expensive than direct investment in the capital markets.

 Well Regulated
Mutual funds in India are regulated and monitored by the Securities and
Exchange Board of India (SEBI), which strives to protect the interests of
investors. Mutual funds are required to provide investors with regular
information about their investments, in addition to other disclosures like
specific investments made by the scheme and the proportion of investment
in each asset class.

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Department of MBA, Gulbarga
 Disadvantages of mutual funds

 Trading limitations

Although mutual funds are highly liquid in general, most mutual funds
(called open-ended funds) cannot be bought or sold in the middle of the
trading day. You can only buy and sell them at the end of the day, after
they've calculated the current value of their holdings.

 Management risk
The investment pertaining to the Mutual Funds depends on the fund
manager and his selection of the mutual fund portfolio, which is based on
speculation. If things do not go as expected, the investments may not earn
enough money.

 Inefficiency of Cash Reserves

The Mutual Funds maintain big cash reserves, for situations such as a
number of large withdrawals. The investors are provided with liquidity, and
a major portion of the financial resources is maintained as cash, and it is not
invested in some assets.

 Management risk
The investment pertaining to the Mutual Funds depends on the fund
manager and his selection of the mutual fund portfolio, which is based on
speculation. If things do not go as expected, the investments may not earn
enough money.

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Department of MBA, Gulbarga
 Fees and commissions
The Mutual funds charge administrative fees to meet the daily expenses.
Many funds charge brokerage or 'loads' to pay financial planners or financial
consultants, brokers. In case a shareholder does not use the services of
financial adviser, he still has to pay a sales commission.

 No Guarantees
All investments bear risk factors. The Mutual Funds are no different. It
depends on the stock market. A fall in the stock market would trigger a fall
in the value of the mutual fund shares. Although the risk factor pertaining to
Mutual funds are much lower compared to Mutual Funds.

 Taxes
The proceeds from the sale of mutual funds are taxable, even if the same is
reinvested in mutual funds.

 No Insurance
The Mutual funds are regulated by the central government. However mutual
funds are still not insured against losses.

History of mutual funds

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 The history of Mutual Fund in India can be broadly divided into 4 phases:

1. First phase (1964-1987)

 The Unit Trust of India (UTI) was established in the year 1963 by
passing an act in the parliament.

 The UTI was setup by the Reserve Bank of India (RBI) and functional
under the Regulatory and Administrative control of the RBI.

 The First scheme in the history of mutual fund was UNIT SCHEME-64,
which is popularly known as US-64.

 In 1978, UTI was de-linked from RBI. The Industrial Development Bank
of India (IDBI) took over the Regulatory and Administrative control.

 At the end of the year 1988, UTI had Rs.6700/-Crores of Assets under
Management.

2. Second phase (1987-1993)

 Entry of public sector funds.

 In the year 1987, public sector Mutual Funds set up by public sector
banks, Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC) and came into existence.

 State Bank of India Mutual Fund was the first non-UTI mutual fund.

 The following are the non-UTI Mutual Funds at initial stages.

 SBI Mutual Fund in June 1987.

 Can Bank Mutual Fund in 1987.

 LIC Mutual Fund in June 1989.

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  Punjab National Bank Mutual Fund in August 1989.

 Indian Bank Mutual Fund in November 1989.

 Bank of India Mutual Fund in June 1990

 GIC Mutual Fund in December 1990.

 Bank of Baroda Mutual Fund in October 1992.

At the end of 1993, the entire mutual fund industry had assets under the
management of Rs.47, 004/-Crores.

3. Third phase (1993-2003)

 Entry of Private Sector Funds – a wide choice of Indian Mutual Funds

investors.

 In 1993, he first Mutual Funds Regulations came into existence, under

which all mutual funds except UTI were to be registered and governed.

 The Erstwhile Kothari Pioneer (now merged with Franklin Templeton)

was the fist private sector Mutual Funds Registered in July 1993.

 In 1996, the 1993 Securities Exchange Board of India (SEBI) Mutual

Funds Regulations were substituted by a more comprehensive and
revised Mutual Funds Regulations.

 The number of Mutual Funds houses went on increasing, with many

foreign mutual funds setting up funds in India.

 In this time, the Mutual Funds industry has witnessed several Mergers
and Acquisitions.

 The UTI with Rs.44, 541/-Crores. Of Assets Under the management was
way ahead of all others Mutual Funds.

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4. Fourth phase (since 2003 February)

 Following the repeal of the UTI Act in February 2003, it was (UTI)
bifurcated into 2 separate entities.

 One is the specified undertaking of the UTI with asset under management
of Rs.29, 835/- Cores as at the end o January 2003.

 The second is the UTI Mutual Funds Limited, sponsored by State Bank
of India, Punjab National Bank, Bank of Baroda and Life Insurance
Corporation of India.

 UTI is functioning under an administrator and under the Rules frame by

the Government of India and does not come under the purview of the
Mutual Funds Regulations.

 The UTI Mutual Funds Limited is registered with SEBI and functions
under the Mutual Funds Regulations.

 With the bifurcation of the Erstwhile UTI, with the setting up of a UTI
Mutual Funds, confirming to the SEBI Mutual Fund Regulations and
with recent mergers taking place among different private sectors funds,
the Mutual Funds Industry has entered its current phases of consolidation
and growth.

 At the end of September 2004, there were 29 funds, which manage assets
of Rs.153108/-Crores under 421 different schemes.

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Associations of mutual funds in India

The Association of Mutual Funds of India works with 30 registered AMCs

of the country. It has certain defined objectives which juxtaposes the
guidelines of its Board of Directors. The objectives are as follows:

• This mutual fund association of India maintains high professional and

ethical standards in all areas of operation of the industry.

• It also recommends and promotes the top class business practices and
code of conduct which is followed by members and related people
engaged in the activities of mutual fund and asset management. The
agencies who are by any means connected or involved in the field of
capital markets and financial services also involved in this code of
conduct of the association.

• AMFI interacts with SEBI and works according to SEBIs guidelines

in the mutual fund industry.

• Association of Mutual Fund of India does represent the Government

of India, the Reserve Bank of India and other related bodies on
matters relating to the Mutual Fund Industry.

• It develops a team of well qualified and trained Agent distributors. It

implements a programmed of training and certification for all
intermediaries and other engaged in the mutual fund industry.

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Department of MBA, Gulbarga
 • At last but not the least association of mutual fund of India also
disseminate information on Mutual Fund Industry and undertakes
studies and research either directly or in association with other bodies.

The sponsor of Associations of mutual funds in India

Bank Sponsored
• SBI Fund Management Ltd.
• BOB Asset Management Co. Ltd.
• Can bank Investment Management Services Ltd.
• UTI Asset Management Company Pvt. Ltd.

Institutions
• GIC Asset Management Co. Ltd.
• Jeevan Bima Sahayog Asset Management Co. Ltd.

Private sector

Indian

• Benchmark Asset Management Co. Pvt. Ltd.

• Cholamandalam Asset Management Co. Ltd.
• Credit Capital Asset Management Co. Ltd.
• Escorts Asset Management Ltd.
• JM Financial Mutual Fund

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 • Kotak Mahindra Asset Management Co. Ltd.
• Reliance Capital Asset Management Ltd.
• Sahara Asset Management Co. Pvt. Ltd
• Sundaram Asset Management Company Ltd.
• Tata Asset Management Private Ltd.

Predominantly India Joint Ventures:-

• Birla Sun Life Asset Management Co. Ltd.
• DSP Merrill Lynch Fund Managers Limited
• HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:-

• ABN AMRO Asset Management (I) Ltd.
• Alliance Capital Asset Management (India) Pvt. Ltd.
• Deutsche Asset Management (India) Pvt. Ltd.
• Fidelity Fund Management Private Limited
• Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.
• HSBC Asset Management (India) Private Ltd.
• ING Investment Management (India) Pvt. Ltd.
• Morgan Stanley Investment Management Pvt. Ltd.
• Principal Asset Management Co. Pvt. Ltd.
• Prudential ICICI Asset Management Co. Ltd.
• Standard Chartered Asset Mgmt Co. Pvt. Ltd.

Types of mutual fund schemes

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Mutual funds are classified on the basis of their

• Structure
• Investment objective

Open-ended schemes

These funds do not have a fixed maturity and one can invest in such funds
on any working day, during business hours. Investors can buy or sell units of
open-ended schemes directly from the fund house at NAV related prices.

Close-ended schemes

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Such funds have a fixed maturity period and are open for subscription only
for a specified period. After the expiry of this period, investors can buy or
sell the units on the stock exchanges where such funds are listed. Some
funds also have the option of periodic repurchase, whereby investors can sell
back their units to the fund at NAV related prices.

Interval schemes

Interval schemes are a combination of both open and close-ended schemes.

Investors can purchase or redeem their shares from the fund house at pre-
determined intervals at NAV related prices

Growth schemes

Such funds are aimed at capital appreciation over the medium to long term.
Usually, such funds invest a major portion of the portfolio in equities.

Balanced schemes

Such funds have a balanced portfolio and invest in equity and preference
shares in addition to fixed income securities. The aim of such funds is to
provide both income and capital appreciation over a long-term.

Income schemes

These schemes invest primarily in fixed income instruments issued by the

government, banks, financial institutions and private companies. The main
objective of income schemes is preservation of capital and to provide fixed
income over the medium to long term.

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Department of MBA, Gulbarga
Money market schemes

Money market schemes invest in short-term debt instruments, which earn

interest and have high liquidity. Though these are considered to be the safest
investment option, such funds are subject to fluctuations in the rates of
interest.

Tax saving schemes

Such schemes are aimed at offering tax rebates to investors under specific
provisions of the Income Tax Act, 1961. For instance, investors of Equity
Linked Savings Schemes (ELSS) and Pension Schemes are applicable for
deduction u/s 88 of the Income Tax Act, 1961.

Index schemes

Such funds strive to mirror the performance of specific market indices, such
as the BSE SENSEX, CNX Nifty, etc which are called the base index.
Investments in such funds are made in the same stocks as the base index and
in similar proportion.

Sector-specific schemes

Such funds invest in a specific industry or sector. The investments could be

in a particular industry (Banking, Pharmaceuticals, Infrastructure, etc) or a
group of industries, or various segments (like ‘A’ Group shares).

Exchange-traded funds

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Such funds are listed and traded on the stock exchange in a similar manner
as stocks. Such funds invest in a basket of stocks and aim at replicating an
index (S&P CNX Nifty, BSE Sensex) or a particular industry (banking,
information technology) or commodity (gold, crude oil, petroleum).

Capital protection funds

These funds are designed to safeguard the capital invested therein, by

investing in suitable securities..

Importance/Role of Mutual Fund

Small investors face a lot of problems in the share market, limited resources,
lack of professional advice, lack of information etc. Mutual funds have come
as a much needed help to these investors. It is a special type of institutional
device or an investment vehicle through which the investors pool their
savings which are to be invested under the guidance of a team of experts in
wide variety of portfolios of corporate securities in such a way, so as to
minimize risk, while ensuring safety and steady return on investment. It
forms an important part of the capital market, providing the benefits, of a
diversified portfolio and expert fund management to a large number,
particularly small investors. Now days, mutual fund is gaining its popularity
due to the following reasons:

l. With the emphasis on increase in domestic savings and improvement in

deployment of investment through markets, the need and scope for
mutual fund operation has increased tremendously. The basic purpose of

Appa institute of Engineering and Technology

Department of MBA, Gulbarga
reforms in the financial sector was to enhance the generation of domestic
resources by reducing the dependence on outside funds. This calls for a
market based institution which can tap the vast potential of domestic savings
and chanalise them for profitable investments. Mutual funds are not only
best suited for the purpose but also capable of meeting this challenge.

2. An ordinary investor who applies for share in a public issue of any

company is not assured of any firm allotment. But mutual funds who
subscribe to the capital issue made by companies get firm allotment of
shares. Mutual fund latter sell these shares in the same market and to the
Promoters of the company at a much higher price. Hence, mutual fund
creates the investors confidence.

3. The psyche of the typical Indian investor has been summed up by Mr.
S.A. Dave, Chairman of UTI, in three words; yield, Liquidity and Security.
The mutual funds, being set up in the public sector, have given the
impression of being as safe a conduit for investment as bank deposits.
Besides, the assured returns promised by them have investors had great
appeal for the typical Indian investor.

4. As mutual funds are managed by professionals, they are considered to

have a better knowledge of market behaviors. Besides, they bring a certain
competence to their job. They also maximize gains by proper selection and
timing of investment.

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Department of MBA, Gulbarga
5. Another important thing is that the dividends and capital gains are
reinvested automatically in mutual funds and hence are not fritted away.
The automatic reinvestment feature of a mutual fund is a form of forced
saving and can make a big difference in the long run.

6. The mutual fund operation provides a reasonable protection to

investors. Besides, presently all Schemes of mutual funds provide tax relief
under Section 80 L of the Income Tax Act and in addition, some schemes
provide tax relief under Section 88 of the Income Tax Act lead to the growth
of importance of mutual fund in the minds of the investors.

7. As mutual funds creates awareness among urban and rural middle

class people about the benefits of investment in capital market, through
profitable and safe avenues, mutual fund could be able to make up a large
amount of the surplus funds available with these people.

8. The mutual fund attracts foreign capital flow in the country and secures
profitable investment avenues abroad for domestic savings through the
opening of off shore funds in various foreign investors. Lastly another
notable thing is that mutual funds are controlled and regulated by S E B I
and hence are considered safe. Due to all these benefits the importance of
mutual fund has been increasing.

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Department of MBA, Gulbarga
 STATEMENT OF THE PROBLEM

In this project we are study about the mutual fund role in financial
sources. Therefore we are captivating and observe mutual funds all
encircled opportunities and problems. We can say that mutual fund is
one the best investment option for investors. At the same time mutual
fund have some depressing aspects or problems. So those we are
taking into consideration.

Problems may be mutual fund consciousness, investment strategies;

professional’s needs, Guidelines, Recommendation. It‘s rules and
regulations and policies for investors and companies.

Small investors face a lot of problems in the share market, limited

resources, lack of professional advice, lack of information etc. Mutual
funds have come as a much needed help to these investors. It is a
special type of institutional device or an investment vehicle through
which the investors pool their savings which are to be invested under
the guidance of a team of experts in wide variety of portfolios of
corporate securities in such a way, so as to minimize risk, while
ensuring safety and steady return on investment.

Therefore in the cram, study problems are

• Risk factors in Mutual funds.

• How it is different from equity shares.
• It is a secured investment or not.
• Investors acknowledged about the Mutual funds.
• What are special futures included in Mutual funds.
• How much return and risks included in Mutual funds.
• Who take the investment decisions?
• It is long term or short term investment. Etc.

Appa institute of Engineering and Technology

Department of MBA, Gulbarga
 LIMITATIONS OF STUDY

• Most of the people unaware of the mutual funds.

• Town and rural people they don’t know about the Mutual
Funds.
• Only it is limited to Gulbarga city.
• Time span was short in gathering data.

Objectives
• To study the investor awareness level towards mutual funds.
• To identify the investor perception towards mutual funds
• To study mutual fund industry in India.
• To study the factors which affect investment in mutual funds?
• To analyze the promotional strategy of mutual fund companies
to generate the investment of investor in mutual funds

Scope of mutual funds

Mutual funds have a dynamic scope in financial product. It gives less risk to
investment option to all level of investors. It has an efficient scope as
investment decision are taken by professionals of mutual funds organization
seems last 5-6 years all financial companies providing mutual funds to
investor ex- UTI, LIC SBI etc.

Appa institute of Engineering and Technology

Department of MBA, Gulbarga
 Methodology

SOURCES OF DATA:

Primary Data

The primary data has been collected from discussions with the officials of the
company and through questionnaire.

Secondary Data

The secondary data for this study was collected from News Papers,
Magazines, Internet, and Text Books etc.

Appa institute of Engineering and Technology

Department of MBA, Gulbarga