PROJECT REPORT

ON
COMPARATIVE STUDY OF MUTUAL FUNDS
IN INDIA
Submitted to Punjabi university
Patiala
In partial fulfillment of the requirements
For the degree
Of
MASTER OF BUSINESS ADMINISTRATION
(2013-15)

SUBMITTED TO: SUBMITTED BY:

Prof Manjot GURJEET SINGH
MBA 4TH
SEMESTER
UNI.ROLL NO.492
 ACKNOWLEDGEMENT

Before we get into thick of things, I would like to add a few words of appreciation for the
people who have been a part of this project right from its inception. The writing of this project
has been one of the significant academic challenges I have faced and without the support,
patience, and guidance of the people involved, this task would not have been completed. It is to
them I own my deepest gratitude.
It gives me Immense pleasure in presenting this project report on "COMPARATIVE
STUDY OF MUTUAL FUNDS IN INDIA". It has been my privilege to have a team of project
guide who have assisted me from the commencement of this project. The success of this project
is a result of sheer hard work, and determination put in by me with the help of my project guide.
I hereby take this opportunity to add a special note of thanks for Prof Manjot who undertook to
act as my mentor despite her many other academic and professional commitments. Her wisdom,
knowledge, and commitment to the highest standards inspired and motivated me. Without her
insight, support, and energy, this project wouldn't have kick-started and neither would have
reached fruitfulness.
I also feel heartiest sense of obligation to my library staff members & seniors, who
helped me in collection of data & resource material & also in its processing as well as in drafting
manuscript. The project is dedicated to all those people, who helped me while doing this project.
 Guide Certificate
This is to certify that the project entitled COMPARATIVE STUDY OF MUTUAL
FUNDS IN INDIA submitted by GURJEET SINGH in partial fulfillment for the
degree of MASTER OF BUSINESS ADMINISTRATION in UNIVERSITY SCHOOL OF
BUSINESS from PUNJABI UNIVERSITY is a bonafide research work carried out
under my supervision and guidance and on part of this project has been
submitted for any other degree diploma.

The assistance and help received the course of investigation has been fully
acknowledge.

(SUPERVISOR)

PROF. MANJOT

Assitent Prof.
De
partment Of Management

Cha
ndigarh Business College

Gharuan (Mohali)
 DECLARATION

I, GURJEET SINGH,Roll No.492 the student of Chandigarh Business

School studying in MBA 4th semester has submitted a project entitled
COMPARATIVE STUDY OF MUTUAL FUNDS IN INDIA is an original work and
the same has not been submitted to any other institute for award of any
other degree.

The feasible suggestions have any duly in consultation with the guide.

GU
RJEET SINGH
EXECUTIVE SUMMARY

A mutual fund is a scheme in which several people invest their money for a common
financial cause. The collected money invests in the capital market and the money, which they
earned, is divided based on the number of units, which they hold.
The mutual fund industry started in India in a small way with the UTI Act creating what
was effectively a small savings division within the RBI. Over a period of 25 years this grew
fairly successfully and gave investors a good return, and therefore in 1989, as the next logical
step, public sector banks and financial institutions were allowed to float mutual funds and their
success emboldened the government to allow the private sector to foray into this area.
The advantages of mutual fund are professional management, diversification, economies
of scale, simplicity, and liquidity.
The disadvantages of mutual fund are high costs, over-diversification, possible tax
consequences, and the inability of management to guarantee a superior return.

The biggest problems with mutual funds are their costs and fees it include Purchase fee,
Redemption fee, Exchange fee, Management fee, Account fee & Transaction Costs. There are
some loads which add to the cost of mutual fund. Load is a type of commission depending on the
type of funds.

Mutual funds are easy to buy and sell. You can either buy them directly from the fund
company or through a third party. Before investing in any funds one should consider some factor
like objective, risk, Fund Managers and scheme track record, Cost factor etc.
There are many, many types of mutual funds. You can classify funds based Structure
(open-ended & close-ended), Nature (equity, debt, balanced), Investment objective (growth,
income, money market) etc.

A code of conduct and registration structure for mutual fund intermediaries, which were
subsequently mandated by SEBI. In addition, this year AMFI was involved in a number of
developments and enhancements to the regulatory framework.
 The most important trend in the mutual fund industry is the aggressive expansion of the
foreign owned mutual fund companies and the decline of the companies floated by nationalized
banks and smaller private sector players.

Reliance Mutual Fund, UTI Mutual Fund, ICICI Prudential Mutual Fund, HDFC Mutual
Fund and Birla Sun Life Mutual Fund are the top five mutual fund company in India.

Reliance mutual funding is considered to be most reliable mutual funds in India. People
want to invest in this institution because they know that this institution will never dissatisfy them
at any cost. You should always keep this into your mind that if particular mutual funding scheme
is on larger scale then next time, you might not get the same results so being a careful investor
you should take your major step diligently otherwise you will be unable to obtain the high
returns.
 CONTENTS
CHAPTE Particulars
R No.

Acknowledgement

Guide Certificate

Declaration

Executive Summery

I INTROUCTION

1.1 Concept Of Mutual Fund

1.2 History Of Mutual Funds In India

1.3 Advantages Of Mutual Funds

1.4 Limitation Of Mutual Fund

1.5 Types Of Mutual Funds Schemes In India

1.6 Selection Parameters For Mutual Fund

II REVIEW OF LITERATURE

III RESEARCH METHODOLOGY

IV ANALYSIS AND INTERPRETATION

4.1 Mutual Fund v/s Other Investment option

V FINDING and CONCLUSION

VI BIBLIOGRAPHY
 Chapter: 1
INTRODUCTION OF MUTUAL FUND

There are a lot of investment avenues available today in the financial market for an investor with
an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where
there is low risk but low return. He may invest in Stock of companies where the risk is high and
the returns are also proportionately high. The recent trends in the Stock Market have shown that
an average retail investor always lost with periodic bearish tends. People began opting for
portfolio managers with expertise in stock markets who would invest on their behalf. Thus we
had wealth management services provided by many institutions. However they proved too costly
for a small investor. These investors have found a good shelter with the mutual funds.

CONCEPT OF MUTUAL FUND:

A mutual fund is a common pool of money into which investors place their contributions
that are to be invested in accordance with a stated objective. The ownership of the fund is thus
joint or mutual; the fund belongs to all investors. A single investors ownership of the fund is
in the same proportion as the amount of the contribution made by him or her bears to the total
amount of the fund.
 Mutual Funds are trusts, which accept savings from investors and invest the same in
diversified financial instruments in terms of objectives set out in the trusts deed with the view to
reduce the risk and maximize the income and capital appreciation for distribution for the
members. A Mutual Fund is a corporation and the fund managers interest is to professionally
manage the funds provided by the investors and provide a return on them after deducting
reasonable management fees.
The objective sought to be achieved by Mutual Fund is to provide an opportunity for
lower income groups to acquire without much difficulty financial assets. They cater mainly to the
needs of the individual investor whose means are small and to manage investors portfolio in a
manner that provides a regular income, growth, safety, liquidity and diversification opportunities.

DEFINITION:

Mutual funds are collective savings and investment vehicles where savings of small
(or sometimes big) investors are pooled together to invest for their mutual benefit and returns
distributed proportionately.

A mutual fund is an investment that pools your money with the money of an unlimited
number of other investors. In return, you and the other investors each own shares of the fund.
The fund's assets are invested according to an investment objective into the fund's portfolio of
investments. Aggressive growth funds seek long-term capital growth by investing primarily in
stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also
called capital appreciation funds.

1.2.1 Structure of Mutual Funds

There are many entities involved and the diagram below illustrates the structure of
mutual funds: -

SEBI

Trustee Sponsor

Asset under Management

Mutual Fund Schemes

Investors
Why Select Mutual Fund?
The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vise versa if he pertains to lower risk
instruments, which would be satisfied by lower returns. For example, if an investors for bank
FD, which provide moderate return with minimum risk. But as he moves ahead to invest in
capital protected funds and the profit-bonds that give out more return which is slightly higher as
compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds
provide professional management, diversification, convenience and liquidity. That doesnt mean
mutual fund investments risk free.
This is because the money that is pooled in are not invested only in debts funds which are
less riskier but are also invested in the stock markets which involves a higher risk but can expect
higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives
market which is considered very volatile.

RETURN RISK MATRIX

HIGHIER RISK HIGHER RISK

MODERATE RETURNS HIGHIER RETURNS

Ventur
e Equi
Capita ty
l

Bank Mutu
FD
al
Postal Funds
Savings
LOWER RISK LOWER RISK
LOWER RETURNS HIGIER RETURNS
HISTORY OF MUTUAL FUNDS IN INDIA:
The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds
in India can be broadly divided into four distinct phases

FIRST PHASE 1964-87:

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

SECOND PHASE 1987-1993 (ENTRY OF PUBLIC SECTOR FUNDS):

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed
by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in December
1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.

THIRD PHASE 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS):

With the entry of private sector funds in 1993, a new aera started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being, under which all mutual funds,
except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.
 The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI
(Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and acquisitions. As
at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.
The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of
other mutual funds.

FOURTH PHASE SINCE FEBRUARY 2003:

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India
with assets under management of Rs.29,835 crores as at the end of January 2003, representing
broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified
Undertaking of Unit Trust of India, functioning under an administrator and under the rules
framed by Government of India and does not come under the purview of the Mutual Fund
Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of
the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector funds, the
mutual fund industry has entered its current phase of consolidation and growth. As at the end of
September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421
schemes.
The graph indicates the growth of assets under management over the years.

Today there are over 30 AMCs offering a huge number of

schemes giving the investor a huge horizon to choose from. The
market has become very competitive with the companies
fighting tooth and nail to attract and keep the investor from
investing in their competitors schemes. Today, Reliance Mutual
Funds is the leading company in this sector with total assets
under management being Rs.46,307 crores while Prudential ICICI
being in the second position with Rs.37,870 crores. The following
 graph shows the composition of five of the top AMCs in India-

ADVANTAGES OF MUTUAL FUNDS:

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

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

2. Professional Management:
Even if an investor has a big amount of capital available to him, he benefits from the
professional management skills brought in by the fund in the management of the investors
portfolio. The investment management skills, along with the needed research into available
investment options, ensure a much better return than what an investor can manage on his own.
Few investors have the skill and resources of their own to succeed in todays fast moving, global
and sophisticated markets.
3. Reduction/Diversification Of Risk:
When an investor invests directly, all the risk of potential loss is his own, whether he
places a deposit with a company or a bank, or he buys a share or debenture on his own or in any
other from. While investing in the pool of funds with investors, the potential losses are also
shared with other investors. The risk reduction is one of the most important benefits of a
collective investment vehicle like the mutual fund.
4. Reduction Of Transaction Costs:
What is true of risk as also true of the transaction costs. The investor bears all the costs of
investing such as brokerage or custody of securities. When going through a fund, he has the
benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit
passed on to its investors.

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

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

7. Tax Benefits:
Any income distributed after March 31, 2002 will be subject to tax in the assessment of
all Unit holders. However, as a measure of concession to Unit holders of open-ended equity-
oriented funds, income distributions for the year ending March 31,2003will be taxed at a
concessional rate of 10.5%.
In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the
Total Income will be admissible in respect of income from investments specified in Section 80L,
including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-
Tax and Gift-Tax.

8. Choice of Schemes:
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
9. Well Regulated:
All Mutual Funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of Mutual Funds are
regularly monitored by SEBI.

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

DISADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS:

1. No Control Over Costs:
An investor in a mutual fund has no control of the overall costs of investing. The investor
pays investment management fees as long as he remains with the fund, albeit in return for the
professional management and research. Fees are payable even if the value of his investments is
declining. A mutual fund investor also pays fund distribution costs, which he would not incur in
direct investing. However, this shortcoming only means that there is a cost to obtain the mutual
fund services.

2. Liquidity Crisis:
Mutual fund of india face liquidity problems.Investors are not able to draw back from
some of the schemes,there is no easy exit route. Bad delivery has caused a lot of
problems.

3. Managing A Portfolio Of Funds:

Availability of a large number of funds can actually mean too much choice for the
investor. He may again need advice on how to select a fund to achieve his objectives, quite
similar to the situation when he has individual shares or bonds to select.
4. The Wisdom Of Professional Management:
That's right, this is not an advantage. The average mutual fund manager is no better at
picking stocks than the average nonprofessional, but charges fees.

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

6. No rural sector investment base:

Sufficient efforts have not been made to educate the potential investors.Mutual funds
should launch investors eduction programmes and expand their activities to rural areas.
7. Buried Costs:
Many mutual funds specialize in buying their costs and in hiring salesmen who do not
make those costs clear to their clients.
TYPES OF MUTUAL FUNDS SCHEMES IN INDIA
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors,
Being a collection of many stocks, an investors can go for picking a mutual fund might be easy.
There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual
funds in categories, mentioned below.
A). BY STRUCTURE

1. Open - Ended Schemes:

An open-end fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value
("NAV") related prices. The key feature of open-end schemes is liquidity.

2. Close - Ended Schemes:

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15
years. The fund is open for subscription only during a specified period. Investors can invest in
the scheme at the time of the initial public issue and thereafter they can buy or sell the units of
the scheme on the stock exchanges where they are listed. In order to provide an exit route to the
investors, some close-ended funds give an option of selling back the units to the Mutual Fund
through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of
the two exit routes is provided to the investor.

3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-
ended schemes. The units may be traded on the stock exchange or may be open for sale or
redemption during pre-determined intervals at NAV related prices.
B). BY NATURE
1. Equity Fund:
These funds invest a maximum part of their corpus into equities holdings. The structure
of the fund may vary different for different schemes and the fund managers outlook on different
stocks. The Equity Funds are sub-classified depending upon their investment objective, as
follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds

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

2. Debt Funds:
The objective of these Funds is to invest in debt papers. Government authorities, private
companies, banks and financial institutions are some of the major issuers of debt papers. By
investing in debt instruments, these funds ensure low risk and provide stable income to the
investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as
Government of India debt papers. These Funds carry zero Default risk but are associated
with Interest Rate risk. These schemes are safer as they invest in papers backed by
Government.

Income Funds: Invest a major portion into various debt instruments such as bonds,
corporate debentures and Government securities.

MIPs: Invests maximum of their total corpus in debt instruments while they take
minimum exposure in equities. It gets benefit of both equity and debt market. These
scheme ranks slightly high on the risk-return matrix when compared with other debt
schemes.
 Short Term Plans (STPs): Meant for investment horizon for three to six months. These
funds primarily invest in short term papers like Certificate of Deposits (CDs) and
Commercial Papers (CPs). Some portion of the corpus is also invested in corporate
debentures.

Liquid Funds: Also known as Money Market Schemes, These funds provides easy
liquidity and preservation of capital. These schemes invest in short-term instruments like
Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for
short-term cash management of corporate houses and are meant for an investment
horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are
considered to be the safest amongst all categories of mutual funds.

3. Balanced Funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both
equities and fixed income securities, which are in line with pre-defined investment objective of
the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part
provides growth and the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the
objectives of the fund. The investor can align his own investment needs with the funds objective
and invest accordingly.
C). BY INVESTMENT OBJECTIVE:
Growth Schemes:
Growth Schemes are also known as equity schemes. The aim of these schemes is to
provide capital appreciation over medium to long term. These schemes normally invest a major
part of their fund in equities and are willing to bear short-term decline in value for possible
future appreciation.

Income Schemes:
Income Schemes are also known as debt schemes. The aim of these schemes is to provide
regular and steady income to investors. These schemes generally invest in fixed income
securities such as bonds and corporate debentures. Capital appreciation in such schemes may be
limited.

Balanced Schemes:
Balanced Schemes aim to provide both growth and income by periodically distributing a
part of the income and capital gains they earn. These schemes invest in both shares and fixed
income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes:

Money Market Schemes aim to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer, short-term instruments, such as
treasury bills, certificates of deposit, commercial paper and inter-bank call money.

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 will be 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 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.
OTHER SCHEMES
Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time
to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings
Scheme (ELSS) are eligible for rebate.

Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE
Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that
constitute the index. The percentage of each stock to the total holding will be identical to the
stocks index weightage. And hence, the returns from such schemes would be more or less
equivalent to those of the Index.

Sector Specific Schemes:

These are the funds/schemes which invest in the securities of only those sectors or industries as
specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods
(FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of
the respective sectors/industries. While these funds may give higher returns, they are more risky
compared to diversified funds. Investors need to keep a watch on the performance of those
sectors/industries and must exit at an appropriate time.
MUTUAL FUND FEES AND EXPENSES
Mutual fund fees and expenses are charges that may be incurred by investors who hold
mutual funds. Running a mutual fund involves costs, including shareholder transaction costs,
investment advisory fees, and marketing and distribution expenses. Funds pass along these costs
to investors in a number of ways.

1. TRANSACTION FEES
i) Purchase Fee:
It is a type of fee that some funds charge their shareholders when they buy shares.
Unlike a front-end sales load, a purchase fee is paid to the fund (not to a broker) and is
typically imposed to defray some of the fund's costs associated with the purchase.

ii) Redemption Fee:

It is another type of fee that some funds charge their shareholders when they sell
or redeem shares. Unlike a deferred sales load, a redemption fee is paid to the fund (not
to a broker) and is typically used to defray fund costs associated with a shareholder's
redemption.

iii) Exchange Fee:

Exchange fee that some funds impose on shareholders if they exchange (transfer)
to another fund within the same fund group or "family of funds."

2. PERIODIC FEES
i) Management Fee:
Management fees are fees that are paid out of fund assets to the fund's investment
adviser for investment portfolio management, any other management fees payable to the
fund's investment adviser or its affiliates, and administrative fees payable to the
investment adviser that are not included in the "Other Expenses" category. They are also
called maintenance fees.
 ii) Account Fee:
Account fees are fees that some funds separately impose on investors in
connection with the maintenance of their accounts. For example, some funds impose an
account maintenance fee on accounts whose value is less than a certain dollar amount.

3. OTHER OPERATING EXPENSES

Transaction Costs:
These costs are incurred in the trading of the fund's assets. Funds with a high
turnover ratio, or investing in illiquid or exotic markets usually face higher transaction
costs. Unlike the Total Expense Ratio these costs are usually not reported.

LOADS
Definition of a load
Load funds exhibit a "Sales Load" with a percentage charge levied on purchase or sale of
shares. A load is a type of Commission (remuneration). Depending on the type of load a mutual
fund exhibits, charges may be incurred at time of purchase, time of sale, or a mix of both. The
different types of loads are outlined below.

Front-end load:
Also known as Sales Charge, this is a fee paid when shares are purchased. Also known as
a "front-end load," this fee typically goes to the brokers that sell the fund's shares. Front-end
loads reduce the amount of your investment. For example, let's say you have Rs.10,000 and want
to invest it in a mutual fund with a 5% front-end load. The Rs.500 sales load you must pay comes
off the top, and the remaining Rs.9500 will be invested in the fund. According to NASD rules, a
front-end load cannot be higher than 8.5% of your investment.
Back-end load:
Also known as Deferred Sales Charge, this is a fee paid when shares are sold. Also
known as a "back-end load," this fee typically goes to the brokers that sell the fund's shares. The
amount of this type of load will depend on how long the investor holds his or her shares and
typically decreases to zero if the investor holds his or her shares long enough.

Level load / Low load:

It's similar to a back-end load in that no sales charges are paid when buying the fund.
Instead a back-end load may be charged if the shares purchased are sold within a given time
frame. The distinction between level loads and low loads as opposed to back-end loads, is that
this time frame where charges are levied is shorter.

No-load Fund:
As the name implies, this means that the fund does not charge any type of sales load. But,
as outlined above, not every type of shareholder fee is a "sales load." A no-load fund may charge
fees that are not sales loads, such as purchase fees, redemption fees, exchange fees, and account
fees.
SELECTION PARAMETERS FOR MUTUAL FUND
Objective of Investment:
The first point to note before investing in a fund is to find out whether your objective
matches with the scheme. It is necessary, as any conflict would directly affect your prospective
returns. Similarly, you should pick schemes that meet your specific needs. Examples: pension
plans, childrens plans, sector-specific schemes, etc.

Capacity and capability of Risk:

This dictates the choice of schemes. Those with no risk tolerance should go for debt
schemes, as they are relatively safer. Aggressive investors can go for equity investments.
Investors that are even more aggressive can try schemes that invest in specific industry or
sectors.

Fund Managers and scheme track record:

Since you are giving your hard earned money to someone to manage it, it is imperative
that he manages it well. It is also essential that the fund house you choose has excellent track
record. It also should be professional and maintain high transparency in operations. Look at the
performance of the scheme against relevant market benchmarks and its competitors. Look at the
performance of a longer period, as it will give you how the scheme fared in different market
conditions.

Cost factor:
Though the AMC fee is regulated, you should look at the expense ratio of the fund before
investing. This is because the money is deducted from your investments. A higher entry load or
exit load also will eat into your returns. A higher expense ratio can be justified only by
superlative returns. It is very crucial in a debt fund, as it will devour a few percentages from your
modest returns.
 Also, Morningstar rates mutual funds. Each year end, many financial publications list the
year's best performing mutual funds. Naturally, very eager investors will rush out to purchase
shares of last year's top performers. That's a big mistake. Remember, changing market conditions
make it rare that last year's top performer repeats that ranking for the current year. Mutual fund
investors would be well advised to consider the fund prospectus, the fund manager, and the
current market conditions. Never rely on last year's top performers.

Types of Returns on Mutual Fund:

There are three ways, where the total returns provided by mutual funds can be enjoyed by
investors:
Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly
all income it receives over the year to fund owners in the form of a distribution.
If the fund sells securities that have increased in price, the fund has a capital gain. Most
funds also pass on these gains to investors in a distribution.
If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase
in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you
a choice either to receive a check for distributions or to reinvest the earnings and get more
shares.
 REVIEW OF LITERATURE

Friend and Vickers (1965) evaluated the performance of mutual fund against the
randomly constructed portfolios. The study concludes that MFs on the whole have not
performed superior to random portfolios.

The emergence of Markowittzs portfolio theory, followed by the development of capital

assets pricing model gave a new direction to the evaluation of portfolio performance.
Following the CAPM, Treynor (1965), Sharpe (1966) and Jensen (1960) made
remarkable contribution by developing models to evaluate the portfolio performance.
The later works mostly followed the methodology of Treynor, Sharpe and Jensen.

Sharpe (1966) study concludes that out of 34 funds selected, 19 had

outperformed the bench-mark in term of total risk. Treynor (1966) evaluated the
performance of Mutual funds managers in terms of their ability in market timing. The
evidence on 57 MFs shows that, none of the fund managers has outguessed the
markets. Jenson (1968) evaluated the ability of the fund managers in selecting the
undervalued securities. He concludes that for the sample of 115 MFs, the fund
managers were not able to forecast security prices well enough to recover research
expenses and fees. Friend, Blume and Crockett (1970) compared the performance of
86 MFs with random portfolios. The study concludes that, MFs did worse than the
randomly selected portfolios in terms of total risk. Further, the funds with high turnover
seem to outperform the funds with low turnover and the fund size has no impact on the
performance.

Risk adjusted performance evaluation is also made by Carlson (1970) and SEC
study (1971). The broad conclusions arrived by them are, that some of the funds had
outperformed the bench-marks, but there is no consistency in performance.

John McDonald (1974) examined the relationship between the stated fund
objectives and their risk and return attributes. The study concludes that, on an average
the fund managers appeared to keep their portfolios within the stated risk. But there is
considerable overlap between funds in different groups. Some funds in the lower risk
groups possessed higher risk than funds in the most risky group. Ang and Chua (1982)
conducted a similar study. The study concludes that a majority of fund managers did
not deliver the goods although they stated different investment objectives. Further, all
funds at one time or other provided superior performance relative to the bench-mark,
however only half the funds consistently achieved this degree of relative performance.

Norman E. Mains (1977) applied neutral risk adjusted performance measure

and concludes that approximately 66% of the funds (out of 75) had larger net returns
adjusted for systematic risk. Klemosky (1977) concludes that past risk adjusted
performance is not a good guide to future performance.

James R.F. Guy (1978) evaluated the risk adjusted performance of UK

investment trust through the application of Sharpe and Jensen measures. The study
concludes that no trust had exhibited superior performance, compared to the London
Stock Exchange Index.

Kon and Jen (1979), Viet and Cheney (1982), Henricson (1984), and Chang
and Lewellen (1984) evaluated the performance of the mutual funds managers in terms
of their ability in market timings and selectivity. The broad conclusion of these studies is
that the fund managers did not possess these abilities. Even if any little evidence is
there regarding selectivity, the additional returns earned are not able to cover the
research expenses. The developments in the asset pricing theory is the emergence of
Arbitrage Price Theory(APT) , in its simplest form it states that , the expected return on
the security is a linear function of the securitys sensitivity to various common factors in
addition to sensitivity of changes in the market portfolio (as stated by CAPM).

Lehmann and Modest (1987) study found that, the Jensen measure and the
Treynor Black appraisal ratios of individual mutual funds are quite sensitive to the
method used to construct the APT bench-marks. This study suggests the importance of
knowing the appropriate model for risk and return.
 Grinblatt and Titman (1989) and Richard A. Ippolito (1989) took a relook at
the evaluation of MF performance. The former study concludes that, MFs do not offer
abnormal returns for any category of funds. Contrary to this, the later study concludes
that, MFs on aggregate offer superior returns. But they are offset by expenses and load
charges. The characteristics the efficient market hypothesis.

Hendricks and others (1993) found that, MFs offer superior returns predominantly over
a short period of roughly four quarters. The study suggests that, a strategy of selecting
the top performers in the last four quarters significantly outperform the average returns
on mutual funds.

Jaideep and Sudip Majumdar (1994) evaluated the performance of five growth
oriented schemes for the period February 1991 to August 1993. They have employed
the CAPM and Jensen measure to evaluate the performance. They have also evaluated
the boom period performance of the scheme during the first quarter of 1992 by
employing Jensen (adjusted) model. They conclude that the selected mutual fund
schemes have not offered superior returns during the study period than the market in
general. However, they conclude that in the boom period the funds performed well.
Kaura and Jayadev (1995) evaluated the performance of five growth oriented schemes
in the year 1993-94, by employing the Sharpe, Treynor and Jensen measures.
According to them,Mastergain 91,Canbonus and IndSagar have performed better
than the market in terms of systematic but not in terms of total risk. However, the
methodology would have been more appropriate had the study period were longer.

All the above studies attempted to evaluate the performance of a few growth or
equity-oriented schemes in terms of risk and return. The popular of CAPM and the
measures based on that were experimented in these studies.

A few articles also appeared in the Financial dailies (The Economic Times, Financial
Express, Business Standard) and the periodicals ( Dalal Street, Business Today, etc)
about the evaluation of mutual fund schemes by comparing the changes in stock
 market indices. However, these analyses were purely for a short period and ignored
the concept of risk.

In 1994, UTI constituted a social audit committee under the chairmanship of Justice
M.H. Kania ( former Chief Justice of India). The social audit committee evaluated the
performance of UTI from various dimensions, such as return, investor services and
satisfaction of employees and agents of UTI. The main findings of the committee
report are as follows:

(i) Unit Scheme 64 (US64) and various other monthly income schemes have
consistently yielded more than interest rate on bank deposits. The
Mastershare scheme has higher return
(ii) than the BSE SENSEX and National Index

Narasimhan M. and Vijayalakshmi S. discussed the Performance Analysis of

Mutual Funds in India. After noticing a general shift from holding a large portfolio to a
lean portfolio, they examined the impact of this change on achieving diversification
benefit and performance of funds. They observed that funds invest in select stocks
frequently which have a strong positive correlation between them. The lack of
diversification observed in the study is also consistent with earlier studies (Jayadev,
1998 and Shah and Thomas, 1994), which used different methodology to examine the
performance of funds on diversification front. The results show that there is a general
shift in the investment strategies of holding a diversified portfolio and in optimizing the
risk-return of investments to investing in predictive winners of the period.

Jayadev M. (2000) discussed the Performance Evaluation of Managers. It is an

Empirical Evidence on Indian Mutual Funds. The average monthly return of mutual fund
schemes is 1.29 percent and the average risk is 7.5 percent. Thirty three schemes are
in conformity with the linear relationship of return and risk. However, around half of the
schemes do not demonstrate this relationship. On an average fund managers appeared
to keep their portfolios with in the risk classes define by their investment objective, but
there is considerable overlap the funds in the same category.
 Gupta A. (2000) in his Empirical study discussed the Market Timing Abilities of
Indian Mutual Funds Managers. This paper has examines the market timing abilities of
Indian fund managers in term of two models, one proposed by Treynor and Mazuy and
the other by Henriksson and Merton. He used weekly NAV data for 73 mutual fund
schemes for the recent five year period i.e. from April 1, 1994 to March 31, 1999, the
empirical result reported here do not lend support to the hypothesis that Indian fund
managers are able to time the market correctly. There are only three schemes where
some evidence that fund managers were timing the market in the wrong direction since
in as many as 9 schemes such a behavior was reflected in terms of both the models.
Further, there is no evidence that supports the hypothesis that market timing is more an
attribute of managers of growth schemes. Also, the results do not support the
hypothesis that managers of close-ended schemes can time the market easily. The
empirical result reported here does not provide evidence to the market timing abilities of
the Indian fund managers.

Madhusoodanan T. (2000) described the performance analysis with India stock

market return under his case study. He used a CAPM type of set up to form optimal
portfolios of risky assets and tested their performance during the next period. The
investment strategy he employed is that supplied by the theory and he has not used any
subjective assessment of the situation. He neither added nor deleted any of the assets
from the list of possible investment opportunities. He did a subjective analysis about the
investment climate and investment avenues.

Jatana R. and Keros J. (2003) discussed about the Mutual funds and
development- pricing the bubbles with mutual fund priorities. The fourth growth depends
upon participation of small investors (household savers) in capital market, variety of
instruments and break-through of mutual funds from the large city limit to rural parts, a
geographical spread, etc. Mutual funds are integrating modern technology driven
system for better efficiency, these become a one stop service-center by providing a wide
range of products and services the investor has a plethora of options to choose from,
enhancing a quality-conscious assessment, comparison among the competing products
in the market through product differentiation. As the mutual fund industry expands;
interest in mutual fund portfolios diversification techniques increase, though on the flip-
side the investor is thrown to more dilemma, without enough information, perhaps
improvement of ethical standards is a remaining task.
 CHAPTER 3
RESEARCH METHODOLOGY
Research methodology is a careful investigation or inquiries in a systematic manner and finding
solution to problem under investigation. It is used for finding and re-finding the solution for any
problem which is occurred in our project.

NEED FOR THE STUDY:

The main purpose of doing this project was to know about mutual fund and its
functioning. This helps to know in details about mutual fund industry right from its inception
stage, growth and future prospects.
It also helps in understanding different schemes of mutual funds. Because my study
depends upon prominent funds in India and their schemes like equity, income, balance as well as
the returns associated with those schemes.
The project study was done to ascertain the asset allocation, entry load, exit load,
associated with the mutual funds. Ultimately this would help in understanding the benefits of
mutual funds to investors.

Method of Data Collection

Secondary Data: Secondary data are those which have been collected by some one else
and which have already been through the statistical process, for example libraries,
literature, periodicals etc.

My sources of secondary data are:-

Newspapers
Internet different websites of Companies & Organizations
Books on Mutual Fund
Magazines.
OBJECTIVE:
To examine benefits available from Mutual Fund investment.
To knowing about SEBI Guideline of mutual fund
To study the Reliance mutual fund and UTI mutual fund Schemes.
To study the other investment option v/s Mutual Fund

LIMITATIONS
The lack of information sources for the analysis part.
All data are collected from secondary sources.
Time factors limiting this study.
The study is limited to selected mutual fund schemes.
 CHAPTER-4
ANALYSIS & INTERPRETATION
WORKING OF MUTUAL FUNDS

The mutual fund collects money directly or through brokers from investors. The money is
invested in various instruments depending on the objective of the scheme. The income generated
by selling securities or capital appreciation of these securities is passed on to the investors in
proportion to their investment in the scheme. The investments are divided into units and the
value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is the market
value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of
the scheme divided by the number of units outstanding on the valuation date. Mutual fund
companies provide daily net asset value of their schemes to their investors. NAV is important, as
it will determine the price at which you buy or redeem the units of a scheme. Depending on the
load structure of the scheme, you have to pay entry or exit load.
RISK FACTORS OF MUTUAL FUNDS:

1. The Risk-Return Trade-Off:

The most important relationship to understand is the risk-return trade-off. Higher the risk
greater the returns / loss and lower the risk lesser the returns/loss.
Hence it is upto you, the investor to decide how much risk you are willing to take. In
order to do this you must first be aware of the different types of risks involved with your
investment decision.

2. Market Risk:
Sometimes prices and yields of all securities rise and fall. Broad outside influences
affecting the market in general lead to this. This is true, may it be big corporations or smaller
mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that
works on the concept of Rupee Cost Averaging (RCA) might help mitigate this risk.

3. Credit Risk:
The debt servicing ability (may it be interest payments or repayment of principal) of a
company through its cashflows determines the Credit Risk faced by you. This credit risk is
measured by independent rating agencies like CRISIL who rate companies and their paper. A
AAA rating is considered the safest whereas a D rating is considered poor credit quality. A
well-diversified portfolio might help mitigate this risk.

4. Inflation Risk:
Things you hear people talk about:
"Rs. 100 today is worth more than Rs. 100 tomorrow."
"Remember the time when a bus ride costed 50 paise?"
"Mehangai Ka Jamana Hai."
The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times
people make conservative investment decisions to protect their capital but end up with a sum of
money that can buy less than what the principal could at the time of the investment. This happens
when inflation grows faster than the return on your investment. A well-diversified portfolio with
some investment in equities might help mitigate this risk.

5. Interest Rate Risk:

In a free market economy interest rates are difficult if not impossible to predict. Changes
in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of
bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate this risk.

6. Political / Government Policy Risk:

Changes in government policy and political decision can change the investment
environment. They can create a favorable environment for investment or vice versa.

7. Liquidity Risk:
Liquidity risk arises when it becomes difficult to sell the securities that one has
purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities as
well as internal risk controls that lean towards purchase of liquid securities.
BASIC TERM USE IN MUTUAL FUND
Sale Price
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
It 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
It is a charge collected by a scheme when it sells the units. Also called as Front-end
load. Schemes that do not charge a load are called No Load schemes.

Repurchase or Back-end Load

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

Net Asset Value (NAV):

Since each owner is a part owner of a mutual fund, it is necessary to establish the value of
his part. In other words, each share or unit that an investor holds needs to be assigned a value.
Since the units held by investor evidence the ownership of the funds assets, the value of the total
assets of the fund when divided by the total number of units issued by the mutual fund gives us
the value of one unit. This is generally called the Net Asset Value (NAV) of one unit or one
share. The value of an investors part ownership is thus determined by the NAV of the number of
units held.
Calculation of NAV:

Let us see an example. If the value of a funds assets stands at Rs. 100 and it has 10
investors who have bought 10 units each, the total numbers of units issued are 100, and the value
of one unit is Rs. 10.00 (1000/100). If a single investor in fact owns 3 units, the value of his
ownership of the fund will be Rs. 30.00(1000/100*3). Note that the value of the funds
investments will keep fluctuating with the market-price movements, causing the Net Asset Value
also to fluctuate. For example, if the value of our funds asset increased from Rs. 1000 to 1200,
the value of our investors holding of 3 units will now be (1200/100*3) Rs. 36. The investment
value can go up or down, depending on the markets value of the funds assets.
STRUCTURE OF A MUTUAL FUND:
India has a legal framework within which Mutual Fund have to be constituted. In India
open and close-end funds operate under the same regulatory structure i.e. as unit Trusts. A
Mutual Fund in India is allowed to issue open-end and close-end schemes under a common legal
structure. The structure that is required to be followed by any Mutual Fund in India is laid down
under SEBI (Mutual Fund) Regulations, 1996.

The Fund Sponsor:

Sponsor is defined under SEBI regulations as any person who, acting alone or in
combination of another corporate body establishes a Mutual Fund. The sponsor of the fund is
akin to the promoter of a company as he gets the fund registered with SEBI. The sponsor forms a
trust and appoints a Board of Trustees. The sponsor also appoints the Asset Management
Company as fund managers. The sponsor either directly or acting through the trustees will also
appoint a custodian to hold funds assets. All these are made in accordance with the regulation
and guidelines of SEBI.
 As per the SEBI regulations, for the person to qualify as a sponsor, he must contribute at
least 40% of the net worth of the Asset Management Company and possesses a sound financial
track record over 5 years prior to registration.

Mutual Funds as Trusts:

A Mutual Fund in India is constituted in the form of Public trust Act, 1882. The Fund
sponsor acts as a settlor of the Trust, contributing to its initial capital and appoints a trustee to
hold the assets of the trust for the benefit of the unit-holders, who are the beneficiaries of the
trust. The fund then invites investors to contribute their money in common pool, by scribing to
units issued by various schemes established by the Trusts as evidence of their beneficial
interest in the fund.
It should be understood that the fund should be just a pass through vehicle. Under the
Indian Trusts Act, the trust of the fund has no independent legal capacity itself, rather it is the
Trustee or the Trustees who have the legal capacity and therefore all acts in relation to the trusts
are taken on its behalf by the Trustees. In legal parlance the investors or the unit-holders are the
beneficial owners of the investment held by the Trusts, even as these investments are held in the
name of the Trustees on a day-to-day basis. Being public trusts, Mutual Fund can invite any
number of investors as beneficial owners in their investment schemes.

Trustees:
A Trust is created through a document called the Trust Deed that is executed by the fund
sponsor in favour of the trustees. The Trust- the Mutual Fund may be managed by a board of
trustees- a body of individuals, or a trust company- a corporate body. Most of the funds in India
are managed by Boards of Trustees. While the boards of trustees are governed by the Indian
Trusts Act, where the trusts are a corporate body, it would also require to comply with the
Companies Act, 1956. The Board or the Trust company as an independent body, acts as a
protector of the of the unit-holders interests. The Trustees do not directly manage the portfolio of
securities. For this specialist function, the appoint an Asset Management Company. They ensure
that the Fund is managed by ht AMC as per the defined objectives and in accordance with the
trusts deeds and SEBI regulations.
The Asset Management Companies:
The role of an Asset Management Company (AMC) is to act as the investment manager
of the Trust under the board supervision and the guidance of the Trustees. The AMC is required
to be approved and registered with SEBI as an AMC. The AMC of a Mutual Fund must have a
net worth of at least Rs. 10 Crores at all times. Directors of the AMC, both independent and non-
independent, should have adequate professional expertise in financial services and should be
individuals of high morale standing, a condition also applicable to other key personnel of the
AMC. The AMC cannot act as a Trustee of any other Mutual Fund. Besides its role as a fund
manager, it may undertake specified activities such as advisory services and financial consulting,
provided these activities are run independent of one another and the AMCs resources (such as
personnel, systems etc.) are properly segregated by the activity. The AMC must always act in the
interest of the unit-holders and reports to the trustees with respect to its activities.

Custodian and Depositories:

Mutual Fund is in the business of buying and selling of securities in large volumes.
Handling these securities in terms of physical delivery and eventual safekeeping is a specialized
activity. The custodian is appointed by the Board of Trustees for safekeeping of securities or
participating in any clearance system through approved depository companies on behalf of the
Mutual Fund and it must fulfill its responsibilities in accordance with its agreement with the
Mutual Fund. The custodian should be an entity independent of the sponsors and is required to be
registered with SEBI. With the introduction of the concept of dematerialization of shares the
dematerialized shares are kept with the Depository participant while the custodian holds the
physical securities. Thus, deliveries of a funds securities are given or received by a custodian or
a depository participant, at the instructions of the AMC, although under the overall direction and
responsibilities of the Trustees.

Bankers:
A Funds activities involve dealing in money on a continuous basis primarily with respect
to buying and selling units, paying for investment made, receiving the proceeds from sale of the
investments and discharging its obligations towards operating expenses. Thus the Funds banker
plays an important role to determine quality of service that the fund gives in timely delivery of
remittances etc.

Transfer Agents:
Transfer agents are responsible for issuing and redeeming units of the Mutual Fund and
provide other related services such as preparation of transfer documents and updating investor
records. A fund may choose to carry out its activity in-house and charge the scheme for the
service at a competitive market rate. Where an outside Transfer agent is used, the fund investor
will find the agent to be an important interface to deal with, since all of the investor services that
a fund provides are going to be dependent on the transfer agent.

REGULATORY STRUCTURE OF MUTUAL FUNDS IN INDIA:

The structure of mutual funds in India is guided by the SEBI. Regulations, 1996.These
regulations make it mandatory for mutual fund to have three structures of sponsor trustee and
asset Management Company. The sponsor of the mutual fund and appoints the trustees. The
trustees are responsible to the investors in mutual fund and appoint the AMC for managing the
investment portfolio. The AMC is the business face of the mutual fund, as it manages all the
affairs of the mutual fund. The AMC and the mutual fund have to be registered with SEBI.
SEBI REGULATIONS:
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual
funds to protect the interest of the investors.

SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored
by private sector entities were allowed to enter the capital market.

The regulations were fully revised in 1996 and have been amended thereafter from time to
time.

SEBI has also issued guidelines to the mutual funds from time to time to protect the interests
of investors.

All mutual funds whether promoted by public sector or private sector entities including those
promoted by foreign entities are governed by the same set of Regulations. The risks
associated with the schemes launched by the mutual funds sponsored by these entities are of
similar type. There is no distinction in regulatory requirements for these mutual funds and all
are subject to monitoring and inspections by SEBI.

SEBI Regulations require that at least two thirds of the directors of trustee company or board
of trustees must be independent i.e. they should not be associated with the sponsors.

Also, 50% of the directors of AMC must be independent. All mutual funds are required to be
registered with SEBI before they launch any scheme.

Further SEBI Regualtions, inter-alia, stipulate that MFs cannot gurarnatee returns in any
scheme and that each scheme is subject to 20 : 25 condition [I.e minimum 20 investors per
scheme and one investor can hold more than 25% stake in the corpus in that one scheme].

Also SEBI has permitted MFs to launch schemes overseas subject various restrictions and
also to launch schemes linked to Real Estate, Options and Futures, Commodities, etc.
ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI):

With the increase in mutual fund players in India, a need for mutual fund association in
India was generated to function as a non-profit organisation. Association of Mutual Funds in
India (AMFI) was incorporated on 22nd August, 1995.
AMFI is an apex body of all Asset Management Companies (AMC) which has been
registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its
members. It functions under the supervision and guidelines of its Board of Directors.
Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to
a professional and healthy market with ethical lines enhancing and maintaining standards. It
follows the principle of both protecting and promoting the interests of mutual funds as well as
their unit holders.

The Objectives of Association 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 do 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
programme of training and certification for all intermediaries and other engaged in the
mutual fund industry.
 AMFI undertakes all India awareness programme for investors in order to promote proper
understanding of the concept and working of mutual funds.
At last but not the least association of mutual fund of India also disseminate informations
on Mutual Fund Industry and undertakes studies and research either directly or in
association with other bodies.

AMFI Publications:
AMFI publish mainly two types of bulletin. One is on the monthly basis and the other is
quarterly. These publications are of great support for the investors to get intimation of the
knowhow of their parked money.
MUTUAL FUNDS IN INDIA

In 1963, the day the concept of Mutual Fund took birth in India. Unit Trust of India
invited investors or rather to those who believed in savings, to park their money in UTI Mutual
Fund.
For 30 years it goaled without a single second player. Though the 1988 year saw some
new mutual fund companies, but UTI remained in a monopoly position.
The performance of mutual funds in India in the initial phase was not even closer to
satisfactory level. People rarely understood, and of course investing was out of question. But yes,
some 24 million shareholders were accustomed with guaranteed high returns by the beginning of
liberalization of the industry in 1992. This good record of UTI became marketing tool for new
entrants. The expectations of investors touched the sky in profitability factor. However, people
were miles away from the preparedness of risks factor after the liberalization.
The net asset value (NAV) of mutual funds in India declined when stock prices started
falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into
alternative investments. There was rather no choice apart from holding the cash or to further
continue investing in shares. One more thing to be noted, since only closed-end funds were
floated in the market, the investors disinvested by selling at a loss in the secondary market.
The performance of mutual funds in India suffered qualitatively. The 1992 stock market
scandal, the losses by disinvestments and of course the lack of transparent rules in the
whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock
market performance, mutual funds have not yet recovered, with funds trading at an average
discount of 1020 percent of their net asset value.
The securities and Exchange Board of India (SEBI) came out with comprehensive
regulation in 1993 which defined the structure of Mutual Fund and Asset Management
Companies for the first time.
The supervisory authority adopted a set of measures to create a transparent and
competitive environment in mutual funds. Some of them were like relaxing investment
restrictions into the market, introduction of open-ended funds, and paving the gateway for
mutual funds to launch pension schemes.
 The measure was taken to make mutual funds the key instrument for long-term saving.
The more the variety offered, the quantitative will be investors.
Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the
private players has risen rapidly since then. Currently there are 34 Mutual Fund organizations in
India managing 1,02,000 crores.
At last to mention, as long as mutual fund companies are performing with lower risks and
higher profitability within a short span of time, more and more people will be inclined to invest
until and unless they are fully educated with the dos and donts of mutual funds.
Mutual fund industry has seen a lot of changes in past few years with multinational
companies coming into the country, bringing in their professional expertise in managing funds
worldwide. In the past few months there has been a consolidation phase going on in the mutual
fund industry in India. Now investors have a wide range of Schemes to choose from depending
on their individual profiles.
MUTUAL FUND COMPANIES IN INDIA:
The concept of mutual funds in India dates back to the year 1963. The era between 1963
and 1987 marked the existance of only one mutual fund company in India with Rs. 67bn assets
under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the
end of the 80s decade, few other mutual fund companies in India took their position in mutual
fund market.
The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank
Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India
Mutual Fund.
The succeeding decade showed a new horizon in Indian mutual fund industry. By the end
of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started
penetrating the fund families. In the same year the first Mutual Fund Regulations came into
existance with re-registering all mutual funds except UTI. The regulations were further given a
revised shape in 1996.
Kothari Pioneer was the first private sector mutual fund company in India which has now
merged with Franklin Templeton. Just after ten years with private sector players penetration, the
total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India.

Major Mutual Fund Companies in India

ABN AMRO Mutual Fund Unit Trust of India Mutual
Birla Sun Life Mutual Fund Fund

Bank of Baroda Mutual Fund Reliance Mutual Fund

HDFC Mutual Fund Standard Chartered Mutual

HSBC Mutual Fund Fund

Franklin Templeton India
ING Vysya Mutual Fund
Mutual Fund
Prudential ICICI Mutual
Morgan Stanley Mutual Fund
Fund
India
State Bank of India Mutual
Escorts Mutual Fund
Fund
Alliance Capital Mutual Fund
Tata Mutual Fund
 Benchmark Mutual Fund LIC Mutual Fund
Canbank Mutual Fund GIC Mutual Fund
Chola Mutual Fund
For the first time in the history of Indian mutual fund industry,
Unit Trust of India Mutual Fund has slipped from the first slot. Earlier, in
May 2006, the Prudential ICICI Mutual Fund was ranked at the number
one slot in terms of total assets.
In the very next month, the UTIMF had regained its top position as
the largest fund house in India.
Now, according to the current pegging order and the data released
by Association of Mutual Funds in India (AMFI), the Reliance Mutual
Fund, with a January-end AUM of Rs 39,020 crore has become the largest
mutual fund in India
On the other hand, UTIMF, with an AUM of Rs 37,535 crore, has
gone to secomd position. The Prudential ICICI MF has slipped to the third
position with an AUM of Rs 34,746 crore.
It happened for the first time in last one year that a private sector mutual
fund house has reached to the top slot in terms of asset under management
(AUM). In the last one year to January, AUM of the Indian fund industry
has risen by 64% to Rs 3.39 lakh crore.

According to the data released by Association of Mutual Funds in

India (AMFI), the combined average AUM of the 35 fund houses in the
country increased to Rs 5,512.99 billion in April compared to Rs 4,932.86
billion in March
Reliance MF maintained its top position as the largest fund house
in the country with Rs 74.25 billion jump in AUM to Rs 883.87 billion at
April-end.
The second-largest fund house HDFC MF gained Rs 59.24 billion in its
AUM at Rs 638.80 billion.
 ICICI Prudential and state-run UTI MF added Rs 46.16 billion and
Rs 57.35 billion re respectively to their assets last month. ICICI
Prudential`s AUM stood at Rs 560.49 billion at the end of April, while
UTI MF had assets worth Rs 544.89 billion.
The other fund houses which saw an increase in their average
AUM in April include -Canara Robeco MF, IDFC MF, DSP BlackRock,
Deutsche MF, Kotak Mahindra MF and LIC MF.
 4.2 MUTUAL FUNDS VS. OTHER INVESTMENTS

From investors viewpoint mutual funds have several advantages such

as:
Professional management and research to select quality securities.
Spreading risk over a larger quantity of stock whereas the investor
has limited to buy only a hand full of stocks. The investor is not
putting all his eggs in one basket.
Ability to add funds at set amounts and smaller quantities such as
$100 per month
Ability to take advantage of the stock market which has generally
outperformed other investment in the long run.
Fund manager are able to buy securities in large quantities thus
reducing brokerage fees.

However there are some disadvantages with mutual funds such as:
The investor must rely on the integrity of the professional fund
manager.
Fund management fees may be unreasonable for the services
rendered.
The fund manager may not pass transaction savings to the investor.
The fund manager is not liable for poor judgment when the
investor's fund loses value.
There may be too many transactions in the fund resulting in higher
fee/cost to the investor - This is sometimes call "Churn and Earn".
Prospectus and Annual report are hard to understand.
Investor may feel a lost of control of his investment dollars.

There may be restrictions on when and how an investor sells/redeems

his mutual fund shares.
Company Fixed Deposits versus Mutual Funds
Fixed deposits are unsecured borrowings by the company
accepting the deposit. Credit rating of the fixed deposit program is an
indication of the inherent default risk in the investment.

The moneys of investors in a mutual fund scheme are invested by

the AMC in specific investments under that scheme. These investments
are held and managed in-trust for the benefit of schemes investors. On the
other hand, there is no such direct correlation between a companys fixed
deposit mobilisation, and the avenues where these resources are deployed.

A corollary of such linkage between mobilisation and investment is

that the gains and losses from the mutual fund scheme entirely flow
through to the investors. Therefore, there can be no certainty of yield,
unless a named guarantor assures a return or, to a lesser extent, if the
investment is in a serial gilt scheme. On the other hand, the return under a
fixed deposit is certain, subject only to the default risk of the borrower.

Both fixed deposits and mutual funds offer liquidity, but subject to
some differences:
The provider of liquidity in the case of fixed deposits is the
borrowing company. In mutual funds, the liquidity provider is the scheme
itself (for open-end schemes) or the market (in the case of closed-end
schemes).

The basic value at which fixed deposits are encashed is not subject
to a market risk. However, the value at which units of a scheme are
redeemed depends on the market. If securities have gained in value during
the period, then the investor can even earn a return that is higher than what
he anticipated when he invested. But he could also end up with a loss.
 Early encashment of fixed deposits is always subject to a penalty
charged by the company that accepted the fixed deposit. Mutual fund
schemes also have the option of charging a penalty on early redemption
of units (through by way of an exit load,) If the NAV has appreciated
adequately, then even after the exit load, the investor could earn a capital
gain on his investment.
Bank Fixed Deposits verses Mutual Fund:
Bank fixed deposits are similar to company fixed deposits. The
major difference is that banks are generally more stringently regulated
than companies. They even operate under stricter requirements regarding
Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).

While the above are causes for comfort, bank deposits too are
subject to default risk. However, given the political and economic impact
of bank defaults, the government as well as Reserve Bank of India (RBI)
try to ensure that banks do not fail.

Further, bank deposits upto Rs 100,000 are protected by the

Deposit Insurance and Credit Guarantee Corporation (DICGC), so long as
the bank has paid the required insurance premium of 5 paise per annum
for every Rs 100 of deposits. The monetary ceiling of Rs 100,000 is for
all the deposits in all the branches of a bank, held by the depositor in the
same capacity and right.

BANKS MUTUAL FUNDS

Returns Low Better
Administrative exp. High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Quarterly
Interest calculation Every Month
i.e. 3rd, 6th, 9th & 12th.
Guarantor Guarantor is needed. Guarantor is not needed.
Account Needed. Not Needed.
Bonds and Debentures versus Mutual Funds

As in the case of fixed deposits, credit rating of the bond /

debenture is an indication of the inherent default risk in the investment.
However, unlike FD, bonds and debentures are transferable securities.

While an investor may have an early encashment option from the

issuer (for instance through a put option), generally liquidity is through
a listing in the market.

Implications of this are:

If the security does not get traded in the market, then the liquidity
remains on paper. In this respect, an open-end scheme offering
continuous sale / re-purchase option is superior.
The value that the investor would realise in an early exit is subject to
market risk. The investor could have a capital gain or a capital loss.
This aspect is similar to a MF scheme.

It is possible for a professional investor to earn attractive returns

by directly investing in the debt market, and actively managing the
positions. Given the market realities in India, it is difficult for most
investors to actively manage their debt portfolio. Further, at times, it is
difficult to execute trades in the debt market even when the transaction
size is as high as Rs 1 crore. In this respect, investment in a debt scheme
would be beneficial.

Debt securities could be backed by a hypothecation or mortgage of

identified fixed and / or current assets (secured bonds / debentures). In
such a case, if there is a default, the identified assets become available for
meeting redemption requirements. An unsecured bond / debenture is for
all practical purposes like a fixed deposit, as far as access to assets is
concerned.
 The investments of a mutual fund scheme are held by a custodian
for the benefit of investors in the scheme. Thus, the securities that relate
to a scheme are ring-fenced for the benefit of its investors.
Equity versus Mutual Funds

Investment in both equity and mutual funds are subject to market risk.

An investor holding an equity security that is not traded in the

market place has a problem in realising value from it. But investment in
an open-end mutual fund eliminates this direct risk of not being able to
sell the investment in the market. An indirect risk remains, because the
scheme has to realise its investments to pay investors. The AMC is
however in a better position to handle the situation

Another benefit of equity mutual fund schemes is that they give

investors the benefit of portfolio diversification through a small
investment. For instance, an investor can take an exposure to the index by
investing a mere Rs 5,000 in an index fund.

Advantages Of Mutual Funds Over Stocks?

A mutual fund offers a great deal of diversification starting with
the very first dollar invested, because a mutual fund may own tens or
hundreds of different securities. This diversification helps reduce the
risk of loss because even if any one holding tanks, the overall value
doesn't drop by much. If you're buying individual stocks, you can't
get much diversity unless you have $10K or so.
Small sums of money get you much further in mutual funds than in
stocks. First, you can set up an automatic investment plan with many
fund companies that lets you put in as little as $50 per month.
Second, the commissions for stock purchases will be higher than the
cost of buying no-load fund (Of course, the fund's various expenses
like commissions are already taken out of the NAV). Smaller sized
purchases of stocks will have relatively high commissions on a
percentage basis, although with the $10 trade becoming common,
this is a bit less of a concern than it once was.
 You can exit a fund without getting caught on the bid/ask spread.
Funds provide a cheap and easy method for reinvesting dividends.
Last but most certainly not least, when you buy a fund you're in
essence hiring a professional to manage your money for you. That
professional is (presumably) monitoring the economy and the
markets to adjust the fund's holdings appropriately.

Advantages Of Stock Over Mutual Funds?

The opposite of the diversification issue: If you own just one stock
and it doubles, you are up 100%. If a mutual fund owns 50 stocks
and one doubles, it is up 2%. On the other hand, if you own just one
stock and it drops in half, you are down 50% but the mutual fund is
down 1%. Cuts both ways.
If you hold your stocks several years, you aren't nicked a 1% or so
management fee every year (although some brokerage firms charge
if there aren't enough trades).
You can take your profits when you want to and won't
inadvertently buy a tax liability. (This refers to the common practice
among funds of distributing capital gains around November or
December of each year. See the article elsewhere in this FAQ for
more details.)
You can do a covered write option strategy. (See the article on
options on stocks for more details.)
You can structure your portfolio differently from any existing
mutual fund portfolio. (Although with the current universe of funds
I'm not certain what could possibly be missing out there!)
You can buy smaller cap stocks which aren't suitable for mutual
funds to invest in.
You have a potential profit opportunity by shorting stocks. (You
cannot, in general, short mutual funds.)
 The argument is offered that the funds have a "herd" mentality and
they all end up owning the same stocks. You may be able to pick
stocks better.
Life Insurance versus Mutual Fund

Life insurance is a hedge against risk and not really an

investment option. So, it would be wrong to compare life insurance
against any other financial product.

Occasionally on account of market inefficiencies or mis-pricing of

products in India, life insurance products have offered a return that is
higher than a comparable safe fixed return security thus, you are
effectively paid for getting insured! Such opportunities are not sustainable
in the long run.
FUTURE PROSPECT OF MUTUAL FUNDS IN
INDIA
Financial experts believe that the future of Mutual Funds in India
will be very bright. It has been estimated that by March-end of 2010, the
mutual fund industry of India will reach Rs 40,90,000 crore, taking into
account the total assets of the Indian commercial banks. In the coming 10
years the annual composite growth rate is expected to go up by 13.4%.

100% growth in the last 6 years.

Number of foreign AMC's are in the queue 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.
Mutual fund can penetrate rurals like the Indian insurance industry
with simple and limited products.
SEBI allowing the MF'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.

Looking at the past developments and combining it with the

current trends it can be concluded that the future of Mutual Funds in India
has lot of positive things to offer to its investors.
 FINDING & CONCLUSION

Mutual Funds now represent perhaps most appropriate investment

opportunity for most investors. As financial markets become more
sophisticated and complex, investors need a financial intermediary who
provides the required knowledge and professional expertise on successful
investing. As the investor always try to maximize the returns and minimize
the risk. Mutual fund satisfies these requirements by providing attractive
returns with affordable risks. The fund industry has already overtaken the
banking industry, more funds being under mutual fund management than
deposited with banks. With the emergence of tough competition in this
sector mutual funds are launching a variety of schemes which caters to the
requirement of the particular class of investors. Risk takers for getting
capital appreciation should invest in growth, equity schemes. Investors
who are in need of regular income should invest in income plans.

The stock market has been rising for over three years now. This in
turn has not only protected the money invested in funds but has also to
help grow these investments.

This has also instilled greater confidence among fund investors

who are investing more into the market through the MF route than ever
before.

Reliance India mutual funds provide major benefits to a common

man who wants to make his life better than previous.

India's largest mutual fund, UTI, still controls nearly 80 per cent of
the market. Also, the mutual fund industry as a whole gets less than 2 per
cent of household savings against the 46 per cent that go into bank
deposits. Some fund managers say this only indicates the sector's
potential. "If mutual funds succeed in chipping away at bank deposits,
even a triple digit growth is possible over the next few years.
BIBLIOGRAPHY

Pandian Punithavathy. Security Analysis and Portfolio

Management, 2005, New Delhi:Vikas Publishing House
Pvt. Ltd.

Kothari,C.R., Research Methodology-An Introduction

2nd Edition , Research Methodology by Wishawa
Parkashan.
Narasimhan M.S. & Vijyalakshmi S., Performance Analysis of
Mutual Funds in India - Finance India
Jayadev M. (2000), The Performance Evaluation of Managers -
Finance India
Gupta A. (2000), Market Timing Abilities of Indian Mutual Funds
Managers - Finance India
Madhusoodanan T.P. (2000), A Performance Analysis with
Indian Stock Market Returns - Finance India
Jatana R. and Keros J. (2003), Mutual Funds & Development -
Finance India

WEBSITES:

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www.amfiindia.com
www.moneycontrol.com
www.indiamutualfund.com