APROJECT REPORT

ON

“WEALTH CREATION STRATEGY THROUGH MUTUAL

FUNDS”

Carried out at

Submitted by

SUMIT RAY

K-56

Under guidance of

Mr. M.K GANDHI

Submitted in partial fulfillment of the requirement for the award of Post

Graduation Programme

From

INDIRA INSTITUTE OF CAREER STUDIES, PUNE

2008 – 20010

INDIRA INSTITUE OF CAREER STUDIES 1

INDIRA INSTITUE OF CAREER STUDIES 2

INDEX

I N D E X

I N D E X ......................................................................................................2

A C K N O W L E D G E M E N T ................................................................4

E X E C U T I V E S U M M A R Y ..............................................................6

H D F C B A N K ........................................................................................9

M I S S I O N A N D B U S I N E S S S T R A T E G Y .............................10

C O M P A N Y P R O F I L E ...................................................................12

S T R U C T U R E O F H D F C B A N K ...............................................62

M U T U A L F U N D ..............................................................................64

T Y P E S O F M U T U A L F U N D S .......Error! Bookmark not defined.

A B O U T P A M ......................................................................................79

( P R E M I E R E A C Q U I S I T I O N M A N A G E R ) ........................79

C L A S S I F I C A T I O N O F P A M ....................................................82

O F F E R S A N D D E A L S ...................................................................87

D I R E C T O R S ’ R E P O R T ...............................................................89

F A Q ’ s ( F R E Q U E N T L Y A S K Q U E S T I O N S ) .....................92

A N A L Y S I S O F D A T A ...................................................................93

INDIRA INSTITUE OF CAREER STUDIES 3

A N N E X U R E ............................................Error! Bookmark not defined.

B I B L I O G R A P H Y ...........................................................................129

INDIRA INSTITUE OF CAREER STUDIES 4

INDIRA INSTITUE OF CAREER STUDIES 5

ACKNOWLEDGEMENT

I take this opportunity to express my deep sense of gratitude to all those who have contributed significantly by sharing their knowledge and experience in the completion of this project work.

I am greatly obliged to Mr. M.K GANDHI for providing me the right kind of opportunity and facilities to complete this venture.

My first word of gratitude is due to Mr. RAJKUMAR SINGH, PUNE, my corporate guide, for his kind help and support and for his valuable guidance throughout the project. I am thankful to him for providing me with necessary insights and helping me out at every single step.

Finally, I would also like to thank all my dear friends for their kind cooperation, advice and encouragement during the long and arduous task of preparing this report and carrying out the project.

At last but not the least, who are always at the top of my heart, my dear family members whose blessings, inspiration and encouragement have resulted in the successful completion of this project.

SUMIT RAYIICS PUNE

INDIRA INSTITUE OF CAREER STUDIES 6

INDIRA INSTITUE OF CAREER STUDIES 7

EXECUTIVE SUMMARY

The Project is conducted to study,

“WEALTH CREATION STRATEGY THROUGH MUTUAL FUNDS ”

The project talks about “Wealth Creation Strategy Through mutual

funds”

The first few pages talk about the introduction and objectives of the

study.

This is followed by literature review with details about mutual funds.

Next come the survey, the purpose of which is to study the working of

mutual funds, the characteristics of mutual funds that attract the investor

and what an investor should consider for safe investment and better

returns.

The last part consists of findings, recommendations, limitations,

conclusion and bibliography. The questionnaire has been annexed to the

report

The point which was covered are as follows:-

To find the class of preferred customer.

To generate the leads and then convert them into prospects.

To generate new leads from prospects.

To create loyalty about HDFC Bank in the minds of customer.

To attain this objective I prepared Questionnaire regarding preferred

saving account.

Then I started Mapping and circulating Questionnaire.

After analysis of Questionnaire I started to generate leads, follow-ups and

INDIRA INSTITUE OF CAREER STUDIES 8

then closer. After analyzing this project I came upto certain points which

are discuss in this project report. This project helps me to know about

different Banking products and Banking transactions .It also provide me

an opportunity to interact with different clients and meet their required

demand and help me to build my career as a Marketing executive.

Mr. Rajkumar sir, has been very supportive and involved in this project. It

was his support that helped the project to start in its earliest and most

vulnerable stages. I would like to extend my gratitude towards him as he

took out time from his extremely busy schedule,

My sincere thanks to all at HDFC BANK, who directly and indirectly

helped me to carry forward this project..

INDIRA INSTITUE OF CAREER STUDIES 9

INDIRA INSTITUE OF CAREER STUDIES 10

HISTORY

H D F C B A N K

HDFC Bank was incorporated in August 1994 in the name of 'HDFC

Bank Limited', with its registered office in Mumbai, India. The Bank

commenced operations as a Scheduled Commercial Bank in January 1995.

The Housing Development Finance Corporation Limited (HDFC) was

amongst the first to receive an 'in principle' approval from the Reserve

Bank of India (RBI) to set up a bank in the private sector, as part of the

RBI's liberalization of the Indian Banking Industry in 1994.

Headquartered in Mumbai, HDFC Bank, has a network of over 531

branches spread over 228 cities across India. All branches are linked on an

online real-time basis. Customers in over 120 locations are serviced

through Telephone Banking. The Bank also has a network of about over

1054 networked ATMs across these cities. HDFC Bank's ATM network

can be accessed by all domestic and international Visa / MasterCard, Visa

Electron / Maestro, Plus / Cirrus and American Express Credit / Charge

cardholders.

HDFC Bank has won many awards for its excellent service. Major among

them are "Best Bank in India" by Hong Kong-based Finance Asia

magazine in 2005 and "Company of the Year" Award for Corporate

Excellence 2004-05.

INDIRA INSTITUE OF CAREER STUDIES 11

M I S S I O N A N D B U S I N E S S S T R AT E G Y

Our mission is to be "a World Class Indian Bank", benchmarking

ourselves against international standards and best practices in terms of

product offerings, technology, service levels, risk management and audit

& compliance. The objective is to build sound customer franchises across

distinct businesses so as to be a preferred provider of banking services for

target retail and wholesale customer segments, and to achieve a healthy

growth in profitability, consistent with the Bank's risk appetite. We are

committed to do this while ensuring the highest levels of ethical standards,

professional integrity, corporate governance and regulatory compliance.

Our business strategy emphasizes the following:

Increase our market share in India’s expanding banking and

financial services industry by following a disciplined growth

strategy focusing on quality and not on quantity and delivering high

quality customer service.

Leverage our technology platform and open scaleable systems to

deliver more products to more customers and to control operating

costs.

Maintain our current high standards for asset quality through

disciplined credit risk management.

INDIRA INSTITUE OF CAREER STUDIES 12

Develop innovative products and services that attract our targeted

customers and address inefficiencies in the Indian financial sector.

Continue to develop products and services that reduce our cost of

funds.

Focus on high earnings growth with low volatility.

INDIRA INSTITUE OF CAREER STUDIES 13

INDIRA INSTITUE OF CAREER STUDIES 14

Mutual Funds

Mutual fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. The mutual fund will have a fund manager that trades the pooled money on a regular basis. As of early 2008, the worldwide value of all mutual funds totals more than $26 trillion

.

Since 1940, there have been three basic types of investment companies in the United States: open-end funds, also known in the US as mutual funds; unit investment trusts (UITs); and closed-end funds. Similar funds also operate in Canada. However, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles, such as unit trusts, open-ended investment companies (OEICs), unitized insurance funds, and undertakings for collective investments in transferable securities (UCITS).

INDIRA INSTITUE OF CAREER STUDIES 15

 

What is Mutual Fund ? 

     Concept of Mutual Fund

     The flow chart below describes broadly the working of a mutual fund: 

A Mutual Fund is a trust that pools the savings of a number of investors who share common financial goal,  investments may be in shares, debt securities, money market securities or a combination of these. Those securities are professionally managed on behalf of the unit-holders, and each investor holds a pro-rata share of the portfolio i.e. entitled to any profits when the securities are sold, but subject to any losses in value as well. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. 

                

How does a Mutual fund work?

INDIRA INSTITUE OF CAREER STUDIES 16

INDIRA INSTITUE OF CAREER STUDIES 17

               STRUCTURE OF A MUTUAL FUND

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (“AMC”) and a custodian. The trust is established by a sponsor or more than one sponsor who is like a promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit-holders. The AMC, approved by SEBI, manages the funds by making investments in various types of securities. The custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

A typical mutual fund structure in India can be graphically represented as follows:

HDFC Mutual Fund

INDIRA INSTITUE OF CAREER STUDIES 18

History of Mutual Fund in India

Pioneer of mutual fund is UTI in 1963 Actual growth started in 1987 The dramatic improvement through quality wise and quantity wise Main reason for its poor growth is new concept in the country. Large sections of Indian investor are yet to be intellectual with this

concept. Hence the it is prime responsibility of all Mutual Fund companies ,

to make the product correctly abreast of selling. There are four 4 phases according to the development of sector  

         First Phase 1964-1987

1964 to 1987: - 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 cores of asset

         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.

INDIRA INSTITUE OF CAREER STUDIES 19

Third Phase – 1993-2003 (Entry of Private Sector Funds)  

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed.  

The erstwhile Kothari Pioneer (now merged with Franklin 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,

INDIRA INSTITUE OF CAREER STUDIES 20

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.  

                The graph indicates the growth of assets over the years.

               GROWTH IN ASSETS UNDER MANAGEMENT

          

Some facts for the growth of mutual funds in India                 

Our saving rate is over 23%, highest in the world. Only channel zing these savings in mutual fund sector is required.

100% growth in the last 6 years There are approximately 29 mutual funds which are 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.

INDIRA INSTITUE OF CAREER STUDIES 21

Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products.

        Regulations

Mutual Funds in India are governed by the SEBI (Mutual Fund) Regulations 1996 as amended     from time to time. For further details please visit the SEBI website http://www.sebi.gov.in  

                 Organization of Mutual Fund 

      

The structure consists of Sponsor

Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.   

     Trust  

INDIRA INSTITUE OF CAREER STUDIES 22

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.

     Trustee

Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alias ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.  

 Asset Management Company (AMC) 

The Trustee as the Investment Manager of the Mutual Fund appoints the AMC. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. Atlas 50% of the directors of the AMC is an independent director who is not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times.  

Registrar and Transfer Agent 

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form; redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.

INDIRA INSTITUE OF CAREER STUDIES 23

Types of Mutual Fund

Equity Oriented Schemes

These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.  

Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic.

Index Schemes

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds launched by the mutual funds, which are traded on the stock exchanges. 

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.

INDIRA INSTITUE OF CAREER STUDIES 24

Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.  

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.  

Income/Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

      Hybrid/Balanced Schemes 

These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. Balanced Fund and Gift Fund are examples of hybrid schemes.

Money Market/Liquid Schemes

These funds are also income funds and their aim is to provide easy

INDIRA INSTITUE OF CAREER STUDIES 25

liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.  

Gilt Schemes

These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as are the case with income or debt oriented schemes.

Arbitrage Fund

Arbitrage is one of the most effective ways to insulate against market volatility. An arbitrage fund buys equities in the cash market and simultaneously sells in the futures market, thus ensuring market neutrality for the investment.  In other words, it is a unique asset class by itself where returns are generated by capturing the pricing differential between the cash and the futures markets. It is also termed as a market-neutral fund where the returns are not going to be impacted by volatility in the market.  

For any arbitrage fund, the following market conditions are beneficial  -- a bullish market and a volatile market.  While the fund performs very well in bullish markets, a volatile market gives it opportunities for early exit, thus enhancing the overall yield of the portfolio. However, a prolonged bear phase is not an ideal situation for this kind of product. 

Difference between Arbitrage Fund & Income Fund both in terms of risk and returns

In terms of returns, an arbitrage fund is better than an income product. An income product has a fixed yield-to-maturity while in an arbitrage product, the yields are better due to lower cost of carry and are usually

INDIRA INSTITUE OF CAREER STUDIES 26

in the range of 10-14%.

Secondly, the risk parameters are similar or lower than an income product.  An arbitrage fund does not carry any credit rating risk and interest rate risk, while the returns can be much higher than an income product. Added to this, a mutual fund arbitrage product enjoys all the tax benefits enjoyed by mutual fund products Derivatives in India have more often been used for speculation purposes than for hedging and arbitrage. What are your views on this? Both in India and the world over, derivatives have been widely used as a leverage product but as the trends are changing and the investors are maturing, the other tools like hedging and risk free arbitrage strategies are also being widely used. 

       Gold Exchange-Traded Schemes

Exchange-traded funds (ETFs) are mutual fund schemes that are listed and traded on exchanges like stocks. ETFs trading value is based on the net asset value (NAV) of the assets it represents. Generally, ETFs invest in a basket of stocks and try to replicate a stock market index such as the S&P CNX Nifty or BSE Sensex, a market sector such as energy or technology, or a commodity such as gold or petroleum. 

Recently, the Securities and Exchange Board of India (SEBI) amended its regulations and allowed mutual funds launch gold exchange-traded funds (GETFs) in India. Two mutual funds, UTI mutual fund and Benchmark Mutual Fund, has been launched. These funds got  listed on the National Stock Exchange (NSE).

A gold-exchange traded fund unit is like a mutual fund unit backed by gold as the underlying asset and would be held mostly in demat form. An investor would get a securities certificate issued by the mutual fund running the Gold-ETF defining the ownership of a particular amount of gold. GETFs are designed to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell through trading of a security on a stock exchange.   With gold being one of the important asset classes, GETFs will provide a better, simpler and affordable method of investing as compared to other investment methods like bullion, gold coins, gold futures, or jewelry.

INDIRA INSTITUE OF CAREER STUDIES 27

Unit-Linked Plan

Unit-linked life insurance offers the interesting option of combining protection and tax advantages of life insurance with the attractive prospects of investing in  equities. A unit-linked plan works on a minimum premium basis and not on a sum assured one. You decide the amount you can contribute at regular intervals. ULIP offers you insurance cover till your insurance needs are fulfilled, beyond that it becomes an investment avenue.

Fixed Maturity Plans (FMPs)

Safe, predictable and better post-tax returns than bank FDs

Rising interest rates not only mean rising EMIs but also offer an opportunity to earn higher returns. Debt schemes are now offering attractive returns with short-term rates in the region of 8-10%. Call money rates have been moving higher to about 7.5-8% due to tight liquidity conditions. With the RBI deciding to raise the cash reserve ratio (CRR), liquidity conditions have worsened. Tightness in the money markets is expected to continue till the end of the current financial year and investors can consider investing in short term options like FMPs or floating rate schemes. Fixed maturity plans, or FMPs as they are popularly called, are close-ended funds with a fixed tenure and invest in a portfolio of debt products whose maturity coincides with the maturity of the product.  The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. The tenure can be of different maturities, ranging from one month to five years. FMPs can be compared to fixed deposits of a bank. While a fixed deposit offers a 'guaranteed' return, returns in FMPs are only 'indicative'. Typically, the fund house fixes a 'target amount' for a scheme, which it ties up informally with borrowers before the scheme opens. That way it knows the interest rate it will earn on its investments, providing the 'indicative return' to investors. Monthly Income Plans 

INDIRA INSTITUE OF CAREER STUDIES 28

Monthly income plans, or MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments. Only about 10-20-% of the assets are allocated to equity stocks. But the very name  – monthly income plan – is a misnomer, as these funds do not guarantee a monthly income. Like any other fund, the returns are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation. MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor. These are generally monthly, quarterly, half-yearly and annual options. A growth option is also available, where the investors do not receive regular dividends, but gains in the form of capital appreciation.    Courtesy:-ICICI Prudential Mutual Fund, TATA Mutual Fund Courtesy:-AMFI (Association of Mutual Fund in India) ,HDFC Mutual Fund

Benefits of Mutual Funds:

There are numerous benefits of investing in mutual funds and one of the key reasons for its phenomenal success in the developed markets like US and UK is the range of benefits they offer, which are unmatched by most other investment avenues. We have explained the key benefits in this section. The benefits have been broadly split into universal benefits, applicable to all schemes, and benefits applicable specifically to open-ended schemes.

Universal Benefits :

INDIRA INSTITUE OF CAREER STUDIES 29

Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.500/-. This amount today would get you less than quarter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directly in the stock market.

Diversification The nuclear weapon in your arsenal for your fight against Risk. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of your returns, for example during one period of time equities might underperform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology sector might be faring poorly but the auto and textile sectors might do well and may protect your principal investment as well as help you meet your return objectives.

Variety Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For example, an investor can invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk appetite and thus create a balanced portfolio easily or simply just buy a Balanced Scheme.

Professional Management Qualified investment professionals who seek to 30inimize returns and 30inimize risk monitor investor’s money. When you buy in to a mutual fund, you are handing your money to an investment professional who has experience in making investment decisions. It is the Fund Manager’s job to (a) find the best securities for the

INDIRA INSTITUE OF CAREER STUDIES 30

fund, given the fund’s stated investment objectives; and (b) keep track of investments and changes in market conditions and adjust the mix of the portfolio, as and when required.

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, 2003, will 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.

RegulationsSecurities Exchange Board of India (“SEBI”), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors

Benefits of Open-ended Schemes:

LiquidityIn open-ended mutual funds, you can redeem all or part of your units any time you wish. Some schemes do have a lock-in period where an investor cannot return the units until the completion of such a lock-in period.

Convenience An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic Investment Plan (“SIP”) or a Systematic Withdrawal Advantage Plan (“SWAP”). In addition to this an investor receives account statements and portfolios of the schemes.

Flexibility Mutual Funds offering multiple schemes allow investors to switch

INDIRA INSTITUE OF CAREER STUDIES 31

easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time.

Transparency Open-ended mutual funds disclose their Net Asset Value (“NAV”) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any other financial instrument. Thus the investor is in the know of the quality of the portfolio and can invest further or redeem depending on the kind of the portfolio that has been constructed by the investment manager.

Mutual Fund Industry Update February 2009

February 2009

For the interest of investors, SEBI has revised certain regulations and is considering new regulations. These regulations are revised due to recessionary global scenario, bad performance of stock market as well as certain debt mutual fund schemes. An Advisory Committee is formulated by SEBI to revise or formulate the regulatory provisions. Lets discuss some revised regulations and the industry trends in 2009

Changes in Nomenclature of Liquid Plus Funds The Asset Management Companies are recommended to

discontinue the use of term Liquid Plus Funds because this nomenclature gives a wrong impression of added liquidity in the scheme

Please watch out for the changes in names of Liquid Plus Schemes by various Asset Management Companies. Few examples are Principal Liquid Plus Fund renamed as Principal Ultra Short Term Fund and LIC Liquid Plus Fund renamed as LIC Income Plus Fund

Revised Guidelines on Portfolio of Liquid Schemes As per revised SEBI guidelines, the 'liquid fund schemes and plans'

shall: o With effect from 1st Feb 2009, make investment in debt

securities with maturity of upto182 days only.o With effect from 1st May 2009, make investment in debt

INDIRA INSTITUE OF CAREER STUDIES 32

securities with maturity of up to 91 days only. The objective of investing in liquid schemes is limited to the time

horizon of 3-6 months. This will help reducing the volatility of yields in liquid schemes caused by mismatch of maturities.

Disclosure of Indicative Portfolios and Yields in Mutual Fund Schemes

Mutual Funds shall not offer any indicative portfolio and indicative yield in their debt /fixed income products. This practice is prohibited because the indicative portfolio and indicative yield can be misleading to the investors.

It is, therefore, decided that the Mutual Funds shall not offer any indicative portfolio and indicative yield. The compliance of the same shall be monitored by the AMC & Trustees and reported in their respective reports to SEBI.

MUTUAL FUND INDUSTRY TRENDS Increase in Mutual Fund Asset Under Management (AUM) in

January 2009:The AUM of the Indian mutual fund industry has increased by 35% in Jan 09 reversing the earlier trend of declining AUM in last 6 months. This AUM increase is mainly due to large inflows in Liquid Funds and the main recipients were Reliance and HDFC mutual fund; their combined AUM has increased by Rs 10,000 cr in Jan 09. Fresh investment is expected to boost this AUM further in the coming quarter mainly contributed by tax saving Equity Linked Saving Schemes and Debt Schemes

Benchmark AMC launches Shariah-Complaint ETF: o Benchmark AMC is launching a Shariah-compliant open

ended exchange traded fund that will enable millions of Muslims and other investors to take the benefit of mutual fund investment. The scheme opens for subscription on February 4 and closes on February 25.

o The Benchmark ETF will refrain from having any exposure to business activities related with pork, alcohol, gambling, financials, advertising and media (newspapers are allowed, sub-industries are analyzed individually), tobacco and trading of gold and silver as cash on deferred basis

INDIRA INSTITUE OF CAREER STUDIES 33

Sectoral Picks of Fund Managers:

o Banking & Financial Services, Oil & Gas, Engineering, Pharmaceutical and Telecom sector are the top 5 sectors where approx 57.6% of total net assets of the various fund houses are invested.

o Services, Real Estate and Consumer durable are the ignored sectors for this quarter as minimal exposure is taken by the fund managers in these sectors

o Reliance, HDFC and UTI have taken the maximum exposure in Banking & Financial Services and oil & gas sector totalling to approx Rs 14,623 cr and Rs 8,355 cr each respectively

History

Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, it had 200 shareholders

INDIRA INSTITUE OF CAREER STUDIES 34

and $392,000 in assets. The entire industry, which included a few closed-end funds represented less than $10 million in 1924.

The stock market crash of 1929 hindered the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the Securities and Exchange Commission (SEC) and provide prospective investors with a prospectus that contains required disclosures about the fund, the securities themselves, and fund manager. The SEC helped draft the Investment Company Act of 1940, which sets forth the guidelines with which all SEC-registered funds today must comply.

With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s, there were approximately 270 funds with $48 billion in assets. The first retail index fund, First Index Investment Trust, was formed in 1976 and headed by John Bogle, who conceptualized many of the key tenets of the industry in his 1951 senior thesis at Princeton University [3] . It is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100 billion in assets.

A key factor in mutual-fund growth was the 1975 change in the Internal Revenue Code allowing individuals to open individual retirement accounts (IRAs). Even people already enrolled in corporate pension plans could contribute a limited amount (at the time, up to $2,000 a year). Mutual funds are now popular in employer-sponsored "defined-contribution" retirement plans such as (401(k)s) and 403(b)s as well as IRAs including Roth IRAs.

As of October 2007, there are 8,015 mutual funds that belong to the Investment Company Institute (ICI), a national trade association of investment companies in the United States, with combined assets of $12.356 trillion.

Usage

INDIRA INSTITUE OF CAREER STUDIES 35

Since the Investment Company Act of 1940, a mutual fund is one of three basic types of investment companies available in the United States.[5]

Mutual funds can invest in many kinds of securities. The most common are cash instruments, stock, and bonds, but there are hundreds of sub-categories. Stock funds, for instance, can invest primarily in the shares of a particular industry, such as technology or utilities. These are known as sector funds. Bond funds can vary according to risk (e.g., high-yield junk bonds or investment-grade corporate bonds), type of issuers (e.g., government agencies, corporations, or municipalities), or maturity of the bonds (short- or long-term). Both stock and bond funds can invest in primarily U.S. securities (domestic funds), both U.S. and foreign securities (global funds), or primarily foreign securities (international funds).

Most mutual funds' investment portfolios are continually adjusted under the supervision of a professional manager, who forecasts cash flows into and out of the fund by investors, as well as the future performance of investments appropriate for the fund and chooses those which he or she believes will most closely match the fund's stated investment objective. A mutual fund is administered under an advisory contract with a management company, which may hire or fire fund managers.

Mutual funds are subject to a special set of regulatory, accounting, and tax rules. In the U.S., unlike most other types of business entities, they are not taxed on their income as long as they distribute 90% of it to their shareholders and the funds meet certain diversification requirements in the Internal Revenue Code. Also, the type of income they earn is often unchanged as it passes through to the shareholders. Mutual fund distributions of tax-free municipal bond income are tax-free to the shareholder. Taxable distributions can be either ordinary income or capital gains, depending on how the fund earned those distributions. Net losses are not distributed or passed through to fund investors.

Net asset value

The net asset value, or NAV, is the current market value of a fund's holdings, less the fund's liabilities, usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. The public offering price, or

INDIRA INSTITUE OF CAREER STUDIES 36

POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV, and so process orders only after the NAV is determined. Closed-end funds (the shares of which are traded by investors) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.

Average Annual Return

US mutual funds use SEC form N-1A to report the average annual compounded rates of return for 1-year, 5-year and 10-year periods as the "average annual total return" for each fund. The following formula is used:[6]

P(1+T)n = ERV

Where:

P = a hypothetical initial payment of $1,000.T = average annual total return.n = number of years.

ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).

Turnover

INDIRA INSTITUE OF CAREER STUDIES 37

Turnover is a measure of the fund's securities transactions, usually calculated over a year's time, and usually expressed as a percentage of net asset value.

This value is usually calculated as the value of all transactions (buying, selling) divided by 2 divided by the fund's total holdings; i.e., the fund counts one security sold and another one bought as one "turnover". Thus turnover measures the replacement of holdings.

In Canada, under NI 81-106 (required disclosure for investment funds) turnover ratio is calculated based on the lesser of purchases or sales divided by the average size of the portfolio (including cash).

Expenses and TER's

Mutual funds bear expenses similar to other companies. The fee structure of a mutual fund can be divided into two or three main components: management fee, nonmanagement expense, and 12b-1/non-12b-1 fees. All expenses are expressed as a percentage of the average daily net assets of the fund.

Management fees

The management fee for the fund is usually synonymous with the contractual investment advisory fee charged for the management of a fund's investments. However, as many fund companies include administrative fees in the advisory fee component, when attempting to compare the total management expenses of different funds, it is helpful to define management fee as equal to the contractual advisory fee + the contractual administrator fee. This "levels the playing field" when comparing management fee components across multiple funds.

Contractual advisory fees may be structured as "flat-rate" fees, i.e., a single fee charged to the fund, regardless of the asset size of the fund. However, many funds have contractual fees which include breakpoints, so that as the value of a fund's assets increases, the advisory fee paid decreases. Another way in which the advisory fees remain competitive is by structuring the fee so that it is based on the value of all of the assets of a group or a complex of funds rather than those of a single fund.

INDIRA INSTITUE OF CAREER STUDIES 38

Non-management expenses

Apart from the management fee, there are certain non-management expenses which most funds must pay. Some of the more significant (in terms of amount) non-management expenses are: transfer agent expenses (this is usually the person you get on the other end of the phone line when you want to purchase/sell shares of a fund), custodian expense (the fund's assets are kept in custody by a bank which charges a custody fee), legal/audit expense, fund accounting expense, registration expense (the SEC charges a registration fee when funds file registration statements with it), board of directors/trustees expense (the disinterested members of the board who oversee the fund are usually paid a fee for their time spent at meetings), and printing and postage expense (incurred when printing and delivering shareholder reports).

12b-1/Non-12b-1 service fees

12b-1 service fees/shareholder servicing fees are contractual fees which a fund may charge to cover the marketing expenses of the fund. Non-12b-1 service fees are marketing/shareholder servicing fees which do not fall under SEC rule 12b-1. While funds do not have to charge the full contractual 12b-1 fee, they often do. When investing in a front-end load or no-load fund, the 12b-1 fees for the fund are usually .250% (or 25 basis points). The 12b-1 fees for back-end and level-load share classes are usually between 50 and 75 basis points but may be as much as 100 basis points. While funds are often marketed as "no-load" funds, this does not mean they do not charge a distribution expense through a different mechanism. It is expected that a fund listed on an online brokerage site will be paying for the "shelf-space" in a different manner even if not directly through a 12b-1 fee.

Investor fees and expenses

Fees and expenses borne by the investor vary based on the arrangement made with the investor's broker. Sales loads (or contingent deferred sales loads (CDSL)) are not included in the fund's total expense ratio (TER) because they do not pass through the statement of operations for the fund. Additionally, funds may charge early redemption fees to discourage investors from swapping money into and out of the fund quickly, which may force the fund to make bad trades to obtain the necessary liquidity.

INDIRA INSTITUE OF CAREER STUDIES 39

For example, Fidelity Diversified International Fund (FDIVX) charges a 1 percent fee on money removed from the fund in less than 30 days.

Brokerage commissions

An additional expense which does not pass through the statement of operations and cannot be controlled by the investor is brokerage commissions. Brokerage commissions are incorporated into the price of the fund and are reported usually 3 months after the fund's annual report in the statement of additional information. Brokerage commissions are directly related to portfolio turnover (portfolio turnover refers to the number of times the fund's assets are bought and sold over the course of a year). Usually the higher the rate of the portfolio turnover, the higher the brokerage commissions. The advisors of mutual fund companies are required to achieve "best execution" through brokerage arrangements so that the commissions charged to the fund will not be excessive.

INDIRA INSTITUE OF CAREER STUDIES 40

Typed of Funds

INDIRA INSTITUE OF CAREER STUDIES 41

Types of mutual funds

Open-end fund

The term mutual fund is the common name for what is classified as an open-end investment company by the SEC. Being open-ended means that, at the end of every day, the fund issues new shares to investors and buys back shares from investors wishing to leave the fund.

Mutual funds must be structured as corporations or trusts, such as business trusts, and any corporation or trust will be classified by the SEC as an investment company if it issues securities and primarily invests in non-government securities. An investment company will be classified by the SEC as an open-end investment company if they do not issue undivided interests in specified securities (the defining characteristic of unit investment trusts or UITs) and if they issue redeemable securities. Registered investment companies that are not UITs or open-end investment companies are closed-end funds. Neither UITs nor closed-end funds are mutual funds (as that term is used in the US).

Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an open-end investment company. ETFs combine characteristics of both mutual funds and closed-end funds. ETFs are traded throughout the day on a stock exchange, just like closed-end funds, but at prices generally approximating the ETF's net asset value. Most ETFs are index funds and track stock market indexes. Shares are issued or redeemed by institutional investors in large blocks (typically of 50,000). Most investors purchase and sell shares through brokers in market transactions. Because the institutional investors normally purchase and redeem in in kind transactions, ETFs are more efficient than traditional mutual funds (which are continuously issuing and redeeming securities and, to effect such transactions, continually buying and selling securities and maintaining liquidity positions) and therefore tend to have lower expenses.

Exchange-traded funds are also valuable for foreign investors who are often able to buy and sell securities traded on a stock market, but who, for regulatory reasons, are limited in their ability to participate in traditional U.S. mutual funds.

INDIRA INSTITUE OF CAREER STUDIES 42

Equity funds

Equity funds, which consist mainly of stock investments, are the most common type of mutual fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the United States. [7] Often equity funds focus investments on particular strategies and certain types of issuers.

Capitalization

Fund managers and other investment professionals have varying definitions of mid-cap, and large-cap ranges. The following ranges are used by Russell Indexes: [8]

Russell Microcap Index - micro-cap ($54.8 - 539.5 million) Russell 2000 Index - small-cap ($182.6 million - 1.8 billion) Russell Midcap Index - mid-cap ($1.8 - 13.7 billion) Russell 1000 Index - large-cap ($1.8 - 386.9 billion)

Growth vs. value

Another distinction is made between growth funds, which invest in stocks of companies that have the potential for large capital gains, and value funds, which concentrate on stocks that are undervalued. Value stocks have historically produced higher returns; however, financial theory states this is compensation for their greater risk. Growth funds tend not to pay regular dividends. Income funds tend to be more conservative investments, with a focus on stocks that pay dividends. A balanced fund may use a combination of strategies, typically including some level of investment in bonds, to stay more conservative when it comes to risk, yet aim for some growth.

Index funds versus active management

An index fund maintains investments in companies that are part of major stock (or bond) indices, such as the S&P 500, while an actively managed fund attempts to outperform a relevant index through superior stock-picking techniques. The assets of an index fund are managed to closely approximate the performance of a particular published index. Since the

INDIRA INSTITUE OF CAREER STUDIES 43

composition of an index changes infrequently, an index fund manager makes fewer trades, on average, than does an active fund manager. For this reason, index funds generally have lower trading expenses than actively managed funds, and typically incur fewer short-term capital gains which must be passed on to shareholders. Additionally, index funds do not incur expenses to pay for selection of individual stocks (proprietary selection techniques, research, etc.) and deciding when to buy, hold or sell individual holdings. Instead, a fairly simple computer model can identify whatever changes are needed to bring the fund back into agreement with its target index.

Certain empirical evidence seems to illustrate that mutual funds do not beat the market and actively managed mutual funds under-perform other broad-based portfolios with similar characteristics. One study found that nearly 1,500 U.S. mutual funds under-performed the market in approximately half of the years between 1962 and 1992.[9] Moreover, funds that performed well in the past are not able to beat the market again in the future (shown by Jensen, 1968; Grimblatt and Sheridan Titman, 1989).[10]

Bond funds

Bond funds account for 18% of mutual fund assets. [11] Types of bond funds include term funds, which have a fixed set of time (short-, medium-, or long-term) before they mature. Municipal bond funds generally have lower returns, but have tax advantages and lower risk. High-yield bond funds invest in corporate bonds, including high-yield or junk bonds. With the potential for high yield, these bonds also come with greater risk.

Money market funds

Money market funds hold 26% of mutual fund assets in the United States. [12] Money market funds entail the least risk, as well as lower rates of return. Unlike certificates of deposit (CDs), money market shares are liquid and redeemable at any time.

Funds of funds

Funds of funds (FoF) are mutual funds which invest in other underlying mutual funds (i.e., they are funds comprised of other funds). The funds at

INDIRA INSTITUE OF CAREER STUDIES 44

the underlying level are typically funds which an investor can invest in individually. A fund of funds will typically charge a management fee which is smaller than that of a normal fund because it is considered a fee charged for asset allocation services. The fees charged at the underlying fund level do not pass through the statement of operations, but are usually disclosed in the fund's annual report, prospectus, or statement of additional information. The fund should be evaluated on the combination of the fund-level expenses and underlying fund expenses, as these both reduce the return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor), although some invest in funds managed by other (unaffiliated) advisors. The cost associated with investing in an unaffiliated underlying fund is most often higher than investing in an affiliated underlying because of the investment management research involved in investing in fund advised by a different advisor. Recently, FoFs have been classified into those that are actively managed (in which the investment advisor reallocates frequently among the underlying funds in order to adjust to changing market conditions) and those that are passively managed (the investment advisor allocates assets on the basis of on an allocation model which is rebalanced on a regular basis).

The design of FoFs is structured in such a way as to provide a ready mix of mutual funds for investors who are unable to or unwilling to determine their own asset allocation model. Fund companies such as TIAA-CREF, American Century Investments, Vanguard, and Fidelity have also entered this market to provide investors with these options and take the "guess work" out of selecting funds. The allocation mixes usually vary by the time the investor would like to retire: 2020, 2030, 2050, etc. The more distant the target retirement date, the more aggressive the asset mix.

Hedge funds

Hedge funds in the United States are pooled investment funds with loose SEC regulation and should not be confused with mutual funds. Some hedge fund managers are required to register with SEC as investment advisers under the Investment Advisers Act. [13] The Act does not require an adviser to follow or avoid any particular investment strategies, nor does it require or prohibit specific investments. Hedge funds typically charge a management fee of 1% or more, plus a "performance fee" of 20% of the

INDIRA INSTITUE OF CAREER STUDIES 45

hedge fund's profits. There may be a "lock-up" period, during which an investor cannot cash in shares. A variation of the hedge strategy is the 130-30 fund for individual investors.

Mutual funds vs. other investments

Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, which allows for cost-effective diversification. Investors may also benefit by having a third party (professional fund managers) apply expertise and dedicate time to manage and research investment options, although there is dispute over whether professional fund managers can, on average, outperform simple index funds that mimic public indexes. Yet, the Wall Street Journal reported that separately managed accounts (SMA or SMAs) performed better than mutual funds in 22 of 25 categories from 2006 to 2008. This included beating mutual funds performance in 2008, a tough year in which the global stock market lost US$21 trillion in value. [14] [15] In the story, Morningstar, Inc said SMAs outperformed mutual funds in 25 of 36 stock and bond market categories. Whether actively managed or passively indexed, mutual funds are not immune to risks. They share the same risks associated with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market.

Share classes

Many mutual funds offer more than one class of shares. For example, you may have seen a fund that offers "Class A" and "Class B" shares. Each class will invest in the same pool (or investment portfolio) of securities and will have the same investment objectives and policies. But each class will have different shareholder services and/or distribution arrangements with different fees and expenses. These differences are supposed to reflect different costs involved in servicing investors in various classes; for example, one class may be sold through brokers with a front-end load, and another class may be sold direct to the public with no load but a "12b-1 fee" included in the class's expenses (sometimes referred to as "Class C" shares). Still a third class might have a minimum investment of $10,000,000 and be available only to financial institutions (a so-called "institutional" share class). In some cases, by aggregating regular investments made by many individuals, a retirement plan (such as a

INDIRA INSTITUE OF CAREER STUDIES 46

401(k) plan) may qualify to purchase "institutional" shares (and gain the benefit of their typically lower expense ratios) even though no members of the plan would qualify individually. [16]As a result, each class will likely have different performance results. [17]

A multi-class structure offers investors the ability to select a fee and expense structure that is most appropriate for their investment goals (including the length of time that they expect to remain invested in the fund).

Load and expenses

A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares are purchased, taken as a percentage of funds invested. The value of the investment is reduced by the amount of the load. Some funds have a deferred sales charge or back-end load. In this type of fund an investor pays no sales charge when purchasing shares, but will pay a commission out of the proceeds when shares are redeemed depending on how long they are held. Another derivative structure is a level-load fund, in which no sales charge is paid when buying the fund, but a back-end load may be charged if the shares purchased are sold within a year.

Load funds are sold through financial intermediaries such as brokers, financial planners, and other types of registered representatives who charge a commission for their services. Shares of front-end load funds are frequently eligible for breakpoints (i.e., a reduction in the commission paid) based on a number of variables. These include other accounts in the same fund family held by the investor or various family members, or committing to buy more of the fund within a set period of time in return for a lower commission "today".

It is possible to buy many mutual funds without paying a sales charge. These are called no-load funds. In addition to being available from the fund company itself, no-load funds may be sold by some discount brokers for a flat transaction fee or even no fee at all. (This does not necessarily mean that the broker is not compensated for the transaction; in such cases, the fund may pay brokers' commissions out of "distribution and marketing" expenses rather than a specific sales charge. The purchaser is

INDIRA INSTITUE OF CAREER STUDIES 47

therefore paying the fee indirectly through the fund's expenses deducted from profits.)

No-load funds include both index funds and actively managed funds. The largest mutual fund families selling no-load index funds are Vanguard and Fidelity, though there are a number of smaller mutual fund families with no-load funds as well. Expense ratios in some no-load index funds are less than 0.2% per year versus the typical actively managed fund's expense ratio of about 1.5% per year. Load funds usually have even higher expense ratios when the load is considered. The expense ratio is the anticipated annual cost to the investor of holding shares of the fund. For example, on a $100,000 investment, an expense ratio of 0.2% means $200 of annual expense, while a 1.5% expense ratio would result in $1,500 of annual expense. These expenses are before any sales commissions paid to purchase the mutual fund.

Many fee-only financial advisors strongly suggest no-load funds such as index funds. If the advisor is not of the fee-only type but is instead compensated by commissions, the advisor may have a conflict of interest in selling high-commission load funds.

Mutual funds and other investment companies

Investment companies a financial intermediary that pools funds from numerous investors and invests the funds in a wide range of securities.4 important functions of investment companies:i. risk diversification & asset divisibilityii. professional managementiii. lower transaction costsiv. record keeping & administrationThe value of each share in investment company is called net asset value, NAV, which is defined as:

Types of investment companies:

INDIRA INSTITUE OF CAREER STUDIES 48

I. unmanaged:

Unit investment trustsII. managed:

i closed-end fundsii. open-end funds, AKA mutual funds (90% of all

investment companies’ assets)

Unit (investment) trust pool of money invested in a portfolio that is fixed for the life of the fund. 90% of unit trusts hold fixed-income securities, i.e., bonds. 90% of fixed-income unit trusts invest in tax-exempt debts. little active management of a unit trust; thus lower management fees. sponsors earn profit by selling shares of unit trust at a premium to the

cost of acquiring the assets. shares can be sold back to the trustee who in turn liquidate part of

assets to obtain the cash or the trustee may sell the shares to new investor(s) at a slight premium to NAV.

Unit trusts expire at the maturity of the security held.Managed investment companies BOD’s hires a management company to manage the portfolio. Mgt fees of managed investment companies range from .2% to 1½%. Compare closed-end and open-end funds

Closed-end funds Open-end funds

Don’t redeem or issue sharesStand ready to redeem or issue shares at NAV.

Price can be at par, premium or discount.

Price cannot fall below NAV.

Shares are traded on organized exchanges or OTC.

Don’t trade on organized exchange or OTC.

# shares outstanding es only when sponsor repurchases.

# shares outstanding es daily.

Prices es thru’out business day. One end-of-day price quote only.$269b in total MV by June 2005 $7½t in total MV by June 2005

Commingled funds

INDIRA INSTITUE OF CAREER STUDIES 49

open-end funds where partnership of investors pool their funds; units are traded at NAV.

REITs (real estate investment trusts) closed-end funds that invest in real estate or loans secured by real estate.

Mutual funds

By June 2005, there were more than 8,000 mutual funds offered by fewer than 500 fund complexes.

By June 2004, assets under management of mutual fund industry surpassed $7.5 trillion. (c.f. U.S. GDP for 2005 3rd quarter was $12½ trillion)

Worldwide, mutual funds’ assets amount to about $14 trillion in year end 2003.

Some popular complexes of mutual funds are Fidelity, Vanguard, Putnam, and Dreyfus.

Mutual funds are classified by the investment policies some of which are:

1. money market funds2. equity funds3. fixed-income funds4. balanced funds5. income funds6. asset allocation funds7. index funds8. specified sector funds

Most mutual funds have an underwriter who has exclusive rights to distribute shares to investors.

Mutual funds are sold directly either by the underwriter or by brokers and financial advisers on behalf of the underwriter.

Brokers and financial advisers receive commissions for selling shares of mutual funds.

Fee structure of mutual funds include:1. front-end load: not to exceed 8.5%; rarely > 6.5%; low-load

funds have loads up to 3%; no-load funds available.

INDIRA INSTITUE OF CAREER STUDIES 50

2. back-end load: typically start at 5% to 6% and gradually reduce by 1% per year; known as “contingent deferred sales charges”.

3. operating expenses: range from .2% to 2%; include administrative expenses and advisory fees paid to investment manager; investors are not explicitly billed for; deducted from assets of funds.

4. 12b-1 charges: limited to 1% of a fund’s average net asset per year; used for advertising, promotional literature, and commissions to brokers.

Loads are paid once for each purchase whereas 12b-1 fees are paid annually.

Mutual funds’ performance is measured by the rate of return as:

The above return estimation ignores commissions such as front-end and/or back-end loads, but includes expenses such as 12b-1 fees.

Example: Funds A and B are no-load funds. Fund A has .5% expense ratio while Fund B has 1.5% expense ratio. Fund C has 8% load, and 1% expense ratio. Each fund returns 12% per year of which 5% is dividend yields. Estimate the terminal wealth levels in the following table, assuming you’ve $10k initial investment.

Cumulative proceeds (all dividends reinvested*)

TimeA B C

t=0, now 10,000 10,000 10,0005 years later 17,2341 16,474 15,2252,*

10 years later 29,699 27,141 25,19615 years later 51,183 44,713 41,69820 years later 88,206 73,662 69,007

* 5% reinvested dividends result in reduction due to the 8% load of .08*5% = .4%1 (1.12 - .005)5 * 10k = $17,2342 (1.12 - .01 - .004)5 * (10k – 800) = $15,225.

INDIRA INSTITUE OF CAREER STUDIES 51

Taxes on mutual funds

Mutual funds enjoy “pass-through status” tax code which means that taxes are paid only by investors, not by the funds themselves.

“Pass-through status” requires:i. At least 90% of all income is distributed;ii. <30% of gross income from sale of securities held < 3 mths.

If the mutual fund is held in tax-deferred retirement account, such as 401(k) or 403(b) account, then tax issues become irrelevant.

Turnover the fraction of the portfolio that is replaced each year. High turnover mutual funds are tax-inefficient, e.g., Fidelity Magellen. Low turnover mutual funds are tax-efficient, e.g., Vanguard Index

Trust 500.

Mutual Funds Performance Average rate of return of average equity mutual fund in the last 25

years has been below that of a passive index fund holding a portfolio to replicate a broad-based index like the S&P 500 or Wilshire 5000.

Reasons for the disappointing record are costs incurred by actively managed funds, and trading costs due to higher portfolio turnover.

Comparing mutual funds and hedge funds (excepted from Colter, Allison Bisbey, 3/3/2003, Choose your fund: hedge or mutual, The Wall Street Journal, p. R1 and p. R4)Features Mutual funds Hedge fundsRegulation Heavy regulation. Fund

directors required to represent investors’ interest

Light regulation. No SEC registration and open only to wealthy investors

Diversification and risk

Usually hold broad mix of investments, lowering risk and likely gains

Holding may be highly concentrated, raising risk and potential gains

Fees Relatively low, but managers get paid even if they lose money for investors

High, but managers don’t get paid biggest fees if they don’t make

INDIRA INSTITUE OF CAREER STUDIES 52

moneyPortfolio disclosure

Semiannual reports are required

No disclosure is required

Performance disclosure

Usually reported every trading day

Usually reported monthly to investors

Investment methods

Mostly buy publicly-traded securities. Little use of leverage or selling short

Widespread use of leverage, and short sales. Purchases of non-public securities, currencies, and commodities

Share buybacks Usually done daily after market close

Often limited to a few times a year

Tax liability Varies, but investors may face taxes even in years that funds lose money

Frequent trading can generate large tax bills

Exchange traded funds (ETFs) As of June 2005, ETFs manages $243b in assets. (Source: WSJ, p. D1,

Nov 9,2005) ETFs trade continuously like stocks in the exchanges. Some more popular ETFs include Spiders (ticker symbol: SPY, based

on S&P 500 Index), Diamonds (DIA; based on Dow Jones Industrial Average), Nasdaq-100’s QQQQ, Fortune Five Hundred’s FFF, Barclay’s International’s iShares MSCI (formerly known as WEBS, worldwide equity benchmark security), e.g., EWA, EWJ, EWS, EWM, etc.

ETFs have been found to be more tax-efficient for they trade less frequently.

ETFs : open-end :: country funds : closed-end ETFs differ from both mutual funds and closed-end funds in

governance; ETFs do not any board of directors.

What Is Risk?

INDIRA INSTITUE OF CAREER STUDIES 53

To begin with, let us understand the concept of risk on an investment. Consider the returns generated by two equity stocks, A and B, over a 5-year period. Stock A: 25%, 12%, 4%, 22%, and 7%. Stock B: 16%, 13%, 11%, 17% and 13%.Both Stock A and Stock B have provided average returns of 14% during the 5-year period. However, it is clearly evident that Stock A is a riskier investment because its returns have fluctuated more widely than that of Stock B. In other words, higher the volatility (variability) of the returns, greater will be the risk of the investment.

Diversification Reduces Risk

The principle of diversification involves investing in a portfolio of securities so that losses in some will offset gains in others, thereby reducing the variability of returns. In general, as the number of securities in a portfolio increases, say up to 20 or 25, the diversification reduces the portfolio risk - measured by standard deviation. Thereafter, any further diversification will result only in marginal reduction of portfolio risk. In other words, increasing the number of securities from 30 to 100 will only bring about marginal gains in diversification. Diversification reduces risk; it does not eliminate it completely. This can be elucidated by a greater understanding of systematic risk and unsystematic risk.

Diversifiable or Unsystematic Risk, which is unique to a company or industry and can be sharply reduced by diversification. For instance, presence of Pharma and FMCG stocks in the portfolio will help to offset the volatility inherent in IT and media stocks.

Undiversifiable or Systematic Risk, which stem from perils that affect the entire economy. Within an asset class, this risk cannot be reduced by diversification. For instance, macroeconomic factors like monsoon failure can have an adverse effect on equity, as an asset class, and the consequent impact on a highly diversified market index like the S&P CNX Nifty can prove to be quite detrimental.

INDIRA INSTITUE OF CAREER STUDIES 54

Factors Influencing Asset Allocation

An individual’s asset allocation strategy will depend on three major factors - age, investment goals, and risk tolerance.

Age is a major determinant of asset allocation. As a young investor at 30, model portfolio may typically include a greater proportion of higher risk-return assets like equity (or equity funds). As one grows older, he/she would much rather ease up on the equity investments and make more room for less volatile but more stable debt securities (or debt funds) in the portfolio.

All investment goals have a time horizon, which is the length of time between now and when the money being invested will be spent. This can range from buying a car next year, saving for a down payment on a house in three years time, or saving for retirement 25 years from now. Those with a long-term horizon, can afford to invest more aggressively in equity (or equity funds) because short-term volatility will usually be overcome by long-term growth. Moreover, the growth potential offered by equity

INDIRA INSTITUE OF CAREER STUDIES 55

Total Risk of Stock

Risk Eliminated By Diversification

Undiversifiable or Market Risk

No. of Stocks in Portfolio

Diversify Away Unsystematic Risk S.D

.(R

isk

) of

Por

tfol

io R

etur

n

tends to offset the effects of inflation in the long run. However, if ones investment horizon is sufficiently short, then the emphasis should be increasingly on more stable investments like debt securities (or debt funds).

Risk tolerance is also an important indicator of asset allocation. For investment securities, a chart is created with the different types of securities and their associated risk reward profile.

Although the chart is by no means scientific, it provides a guideline that investors can use when picking different investments. Located on the upper portion of this chart are investments that offer investors a higher potential for above-average returns, but this potential comes with a higher risk of below-average returns. On the lower portion are much safer investments, but these investments have a lower potential for high returns.

INDIRA INSTITUE OF CAREER STUDIES 56

Figure 13

14. DETERMINING RISK PREFERENCE

INDIRA INSTITUE OF CAREER STUDIES 57

With so many different types of investments to choose from, how does an investor determine how much risk he or she can handle? Every individual is different, and it's hard to create a steadfast model applicable to everyone, but here are two important things one should consider when deciding how much risk to take:

Time Horizon

Before one makes any investment, one should always determine the amount of time he has to keep the money invested. If he has Rs 200000 to invest today but need it in one year for a down payment on a new house, investing the money in higher-risk stocks is not the best strategy. The riskier an investment is, the greater its volatility or price fluctuations, so if ones time horizon is relatively short, one may be forced to sell his securities at a significant a loss.

With a longer time horizon, investors have more time to recoup any possible losses and are therefore theoretically be more tolerant of higher risks. For example, if that Rs 200000 is meant for a cottage that he is planning to buy in ten years, he can invest the money into higher-risk stocks because there is be more time available to recover any losses and less likelihood of being forced to sell out of the position too early.

Bankroll

Determining the amount of money one can stand to lose is another important factor of figuring out the risk tolerance. This might not be the most optimistic method of investing; however, it is the most realistic. By investing only money that one can afford to lose or afford to have tied up for some period of time, one won't be pressured to sell off any investments because of panic or liquidity issues.

The more money one has, the more risk one is able to take and vice versa. Compare, for instance, a person who has a net worth of Rs 500000 to another person who has a net worth of Rs 5,000,000. If both invest Rs 25,000 of their net worth into securities, the person with the lower net worth will be more affected by a decline than the person with the higher net worth. Furthermore, if the investors face a liquidity issue and require cash immediately, the first investor will have to sell off the investment while the second investor can use his or her other funds.

INDIRA INSTITUE OF CAREER STUDIES 58

Maximizing return while Minimizing risk

The main goal of allocating the assets among various asset classes is to maximize return for ones chosen level of risk, or stated another way, to minimize risk given a certain expected level of return. Of course to maximize return and minimize risk, one needs to know the risk-return characteristics of the various asset classes. The following chart compares the risk and potential return of some of the more popular ones:

Equities have the highest potential return, but also the highest risk. On the other hand, Treasury bills have the lowest risk since they are backed by the government, but they also provide the lowest potential return amongst the other assets.

The chart also demonstrates that when one chooses investments with higher risk, the expected returns also increase proportionately. But this is simply the result of the risk-return tradeoff. They will often have high volatility and are therefore suited for investors who have a high risk tolerance and who have a longer time horizon.

INDIRA INSTITUE OF CAREER STUDIES 59

It's because of the risk-return tradeoff - which says one can seek high returns only if he/she is willing to take losses - that diversification through asset allocation is important. Since different assets have varying risks and experience different market fluctuations, proper asset allocation insulates the entire portfolio from the ups and downs of one single class of securities.

So, while part of ones portfolio may contain more volatile securities - which is chosen for their potential of higher returns - the other part of the portfolio devoted to other assets remains stable. Because of the protection it offers, asset allocation is the key to maximizing returns while minimizing risk.

Investment Risk Pyramid

After deciding on how much risk is acceptable in ones’ portfolio by acknowledging time horizon and bankroll, one can use the risk pyramid approach for balancing assets.

This pyramid can be thought of as an asset allocation tool that investors can use to diversify their portfolio investments according to the risk profile of each security. The pyramid, representing the investor's portfolio, has three distinct tiers as seen in the figure.

INDIRA INSTITUE OF CAREER STUDIES 60

15. RETURNS

Absolute returns

Absolute returns measure how much a fund has gained over a certain period. So you look at the NAV on one day and look at it, say, six months or one year or two years later. The percentage difference will tell you the return over this time frame.

Benchmark returns

It basically indicates what the fund has earned as against what it should have earned. A fund's benchmark is an index that is chosen by a fund company to serve as a standard for its returns. The market watchdog, the Securities and Exchange Board of India, has made it mandatory for funds to declare a benchmark index.

In effect, the fund is saying that the benchmark's returns are its target and a fund should be deemed to have done well if it manages to beat the benchmark.Let's say the fund is a diversified equity fund that has benchmarked itself against the Sensex. So the returns of this fund will be compared vis-à-vis the Sensex. Now if the markets are doing fabulously well and the Sensex keeps climbing upwards steadily, then anything less than fabulous returns from the fund would actually be a disappointment.

If the Sensex rises by 10% over two months and the fund's NAV rises by 12%, it is said to have outperformed its benchmark. If the NAV rose by just 8%, it is said to have underperformed the benchmark. But if the Sensex drops by 10% over a period of two months and during that time, the fund's NAV drops by only 6%, then the fund is said to have outperformed the benchmark.

A fund's returns compared to its benchmark are called its benchmark returns. At the current high point in the stock market, almost every equity fund has done extremely well but many of them have negative benchmark returns, indicating that their performance is just a side-effect of the markets' rise rather than some brilliant work by the fund manager.

Time period

INDIRA INSTITUE OF CAREER STUDIES 61

The most important thing while measuring or comparing returns is to choose an appropriate time period. The time period over which returns should be compared and evaluated has to be the same over which that fund type is meant to be invested in. While comparing equity funds we may use three to five year returns. But this is not the case of every other fund. For instance, cash funds are known as ultra short-term bond funds or liquid funds that invest in fixed return instruments of very short maturities. Their main aim is to preserve the principal and earn a modest return. So the money one invests will eventually be returned to you with a little something added. Investors invest in these funds for a very short time frame of around a few months. So it is alright to compare these funds on the basis of their six month returns.

Market conditions

It is also important to see whether a fund's return history is long enough for it to have seen all kinds of market conditions. For example, at this point of time, there are equity funds that were launched one to two years ago and have done very well. However, such funds have never seen a sustained declining market (bear market). So it is a little misleading to look at their rate of return since launch and compare that to other funds that have had to face bad markets. If a fund has proved its mettle in a bear market and has not dipped as much as its benchmark, then the fund manager deserves a pat on the back.

Final checklist

Here are some quick pointers when comparing funds.

Compare funds that are similar. For instance, compare Alliance Equity with Franklin India Prima. Both are diversified equity funds. Similarly, compare UTI Auto with J M Auto, both being auto sector funds or compare Birla Midcap with Magnum Midcap, both being funds that invest in mid-cap companies.

When returns are compared, make sure that the time period is identical. Or else, one may be looking at the one-year returns for one fund and the three-year returns for another. For instance, if told that the return of Principal tax saving fund is 26.72% and that of Franklin India Prima was 61.74%, it would be misleading.

INDIRA INSTITUE OF CAREER STUDIES 62

Because the return stated of principal tax saving fund is a one year return while that of Franklin India Prima is the three-year return.

A good comparison would be:

ReturnsFranklin India

PrimaPrincipal Tax Saving Fund

1 year 81.13% 26.12%

3 year 61.74% 42.02%

5 year 39.58% 42.95%

ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a Mutual Fund are: Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

DRAWBACKS OF MUTUAL FUNDS

Mutual funds have their drawbacks and may not be for everyone:

• No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.• Fees and commissions: All funds charge administrative fees to cover

INDIRA INSTITUE OF CAREER STUDIES 63

their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund. • Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.• Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers

Types of mutual fund scheme

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

Performance of Mutual Funds in India:

Let us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. 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 was accustomed with guaranteed high returns by the begining 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 praparedness of risks factor after the liberalization.

INDIRA INSTITUE OF CAREER STUDIES 64

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn. 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 were 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 whereabout 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 supervisory authority adopted a set of measures to create a transparent and competitve 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.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 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.

INDIRA INSTITUE OF CAREER STUDIES 65

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 ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

• Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a golbal organisation evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 crores• Bank of Baroda Mutual Fund (BOB Mutual Fund) Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

• HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsorers

INDIRA INSTITUE OF CAREER STUDIES 66

nemely Housing Development Finance Corporation Limited and Standard Life Investments Limited.

• HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund.

• ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998.

• Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsorers, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June, 1993.

• Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.

• State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshor fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in

INDIRA INSTITUE OF CAREER STUDIES 67

India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes.

• Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsor for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2005) of AUM.

• Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities.

• Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Privete Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds.

• Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30,

INDIRA INSTITUE OF CAREER STUDIES 68

1995 as Reliance Capital Mutual Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities.

• Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Co.Pvt.Ltd.

• Franklin Templeton India Mutual Fund

The group, Frnaklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of Funds schemes to offer.

• Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading in the market in securities, investmenty management and credit services. Morgan Stanley Investment Management (MISM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focussing on a long-term capital appreciation.

• Escorts Mutual Fund

INDIRA INSTITUE OF CAREER STUDIES 69

Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited.

• Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.

• Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC.

• Canbank Mutual Fund

Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai.

• Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC Limited.

• LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June

INDIRA INSTITUE OF CAREER STUDIES 70

1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.

Future of Mutual Funds in India:

By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore.The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.

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

INDIRA INSTITUE OF CAREER STUDIES 71

INDIRA INSTITUE OF CAREER STUDIES 72

COMPANY PROFILE

HDFC Bank was amongst the first to receive an 'in-principle' approval

from the Reserve Bank of India (RBI) to set up a bank in the private sector

from Housing Development Finance Corporation Limited (HDFC), in

1994 during the period of liberalization of the banking sector in India.

HDFC India was incorporated in August 1994 in the name of 'HDFC Bank

Limited'. HDFC India commenced operations as a Scheduled Commercial

Bank in January 1995.

HDFC India deals in varieties of products like home loan, standard life

insurance, mutual fund, securities, credit cards, etc. HDFC has branch

offices in all major cities in India like Calcutta, Chennai, Delhi,

Bangalore, Hyderabad, and Ahmedabad apart from HDFC Mumbai.

During the quarter ended June 30, 2007 the bank opened 69 branches

and 111 ATMs taking the total number of branches and the ATMs to

753 branches and 1716 ATMs respectively.

Headquarter HDFC Bank India :

'Trade Star', 2nd floor, 'A' Wing,

Junction of Kondivita and M.V. Road,

Andheri-Kurla Road,

Andheri (East), Mumbai - 400 059.

Tel: (Board) 2822 0055 / 55516666 (Fax): 2822 9998 / 2822 2414

INDIRA INSTITUE OF CAREER STUDIES 73

Core Values

Increase market share in India’s banking and financial services industry by

following a disciplined growth strategy focusing on quality and not on

quantity and delivering high quality customer service.

Leverage technology platform and open scaleable systems to deliver more

products to more customers and to control operating costs.

Maintain current high standards for asset quality through disciplined credit

risk management.

Develop innovative products and services that attract targeted customers

and address inefficiencies in the Indian financial sector.

Continue to develop products and services that reduce cost of funds.

Focus on high earnings growth with low volatility

INDIRA INSTITUE OF CAREER STUDIES 74

INDIRA INSTITUE OF CAREER STUDIES 75

STRUCTURE OF HDFC

CEO& MD OF HDFC

(Mr.ADITYA PURI)

COUNTRY/GROUP HEAD

(Mr.RAHUL BHAGAT)

NSM

(Mr.ARVIND KAPIL)

ZONAL SALES MANAGER

(Mr.RAJESH BHAVSAUR)

Regional Sales Regional Sales Regional Sales

Manager Manager Manager

(Mr.KUMAR ANIMESH)

AREA SEARCH HEAD

CASA CANI CSA PAM

AREA SALES MANAGER

SALES MANAGER MANAGEMENT TRAINEE

INDIRA INSTITUE OF CAREER STUDIES 76

INDIRA INSTITUE OF CAREER STUDIES 77

INTRODUCTION

Mutual funds have been a significant source of investment in both

government and corporate securities. It has been for decades the monopoly

of the state with UTI being the key player, with invested funds exceeding

Rs.300 bn. The state-owned insurance companies also hold a portfolio of

stocks. Presently, numerous mutual funds exist, including private and

foreign companies. Banks--- mainly state-owned too have established

Mutual Funds (MFs). Foreign participation in mutual funds and asset

management companies is permitted on a case by case basis.

UTI, the largest mutual fund in the country was set up by the government

in 1964, to encourage small investors in the equity market. UTI has an

extensive marketing network of over 35, 000 agents spread over the

country. The UTI scrips have performed relatively well in the market, as

compared to the Sensex trend. However, the same cannot be said of all

mutual funds.

All MFs are allowed to apply for firm allotment in public issues. SEBI

regulates the functioning of mutual funds, and it requires that all MFs

should be established as trusts under the Indian Trusts Act. The actual

fund management activity shall be conducted from a separate asset

management company (AMC). The minimum net worth of an AMC or its

affiliate must be Rs. 50 million to act as a manager in any other fund. MFs

can be penalized for defaults including non-registration and failure to

observe rules set by their AMCs. MFs dealing exclusively with money

market instruments have to be registered with RBI. All other schemes

floated by MFs are required to be registered with SEBI.

INDIRA INSTITUE OF CAREER STUDIES 78

In 1995, the RBI permitted private sector institutions to set up Money

Market Mutual Funds (MMMFs). They can invest in treasury bills, call

and notice money, commercial paper, commercial bills accepted/co-

accepted by banks, certificates of deposit and dated government securities

having unexpired maturity upto one year.

INDIRA INSTITUE OF CAREER STUDIES 79

INDIRA INSTITUE OF CAREER STUDIES 80

AIMS AND OBJECTIVES OF STUDY

The summer training at HDFC Bank Limited in Liabilities department

was undertaken with the view to study certain fundamental as well as

commercial and operational aspect of the company in the Corporate

Relationship Department. The training was undertaken with the following

Aims and Objectives: -

PRIMARY OBJECTIVES To identify the suitable Client and influencing them to open

preferred with a bank which will cater for all its financial needs.

SECONDARY OBJECTIVES

Expanding market

Financial marketing

Market research in collecting the data

Providing primary data for further use and development of

company

Needs and Opportunities

Once again, the banking sector faces both a need and an opportunity. Clearly, the pressure from alternate distribution channels and the need to consider carefully the true value of many types of customers still exists. Previous attempts to aggrandize years of internal development have perpetuated the inability of internal or external solutions to fully address carrier needs.

INDIRA INSTITUE OF CAREER STUDIES 81

GENERATING A GOOD PROSPECT BASE

First before prospecting, we must go for proper segmentation of the target market. While segmenting we have to consider the criteria for segmentation:

Geographic Segmentation: For this, we have to look that which

area is the most suitable for targeting the prospect, by taking into

consideration their lifestyle and their standard of living.

Income: For this, we have to look for various income group

targets and accordingly we have to develop the strategy showing

them that it is their need and they are the one, who will be

benefiting by joining HDFC BANK LIMITED.

Psychographic: For this, we have to look for various target groups,

which are influenced by some of their traits like: motivation by the

person they consider their idol, their values & beliefs etc.

Lifestyle: This is the group that has a difference in lifestyles and a

very high standard of living referred as HNI’s (High Network

Individuals) generally working in premium Corporates. They are

basically influenced by some other factors like rewards and

recognition, extra facilities that gives them a chance to prove their

worth in the society. Therefore, we have to emphasis on the

Customer satisfaction in this cut – throat competitive edge.

INDIRA INSTITUE OF CAREER STUDIES 82

INDIRA INSTITUE OF CAREER STUDIES 83

INDIRA INSTITUTE OF CAREER STUDIES 84

RESEARCH METHODOLOGY

The objective of the study as we know is to create

awareness amongst the customers regarding the various

financial products under Wealth Management.

Research Plan:

The problem is to ascertain whether the awareness of the

products offered by the bank amongst the customers

would be successful or otherwise. Thus, the problem

specifically relates to collecting and analyzing the

responses of the customers to the various products.

Therefore, the customers residing and practicing in Pune

would be asked for their responses.

Information Required:

Information required was basically of two types: -

1) To understand the potential customers of the

bank, their needs, wants as well as the brand

awareness of the products as compared to the

competitors.

2) The database about the target customers and the

organization.

RESEARCH DESIGN: -

DESCRIPTIVE (Cross sectional) it is the deliberate

manner to collect the information and it describes the

phenomena without establishing the association between

the factors. This is most commonly used when we want

to know about the preferences of the customer. The

design is cross-sectional because it is suited and the

respondent is interviewed once.

INDIRA INSTITUTE OF CAREER STUDIES 85

METHOD OF ACCESSING THE DATA: -

• PRIMARY: - Through the structured questionnaire and

the personal interview which are interviewer

administrated

• SECONDARY: -it will be from the websites, books.

DATA COLLECTION FORM: -

STRUCTURED form will be used in which open ended

and close ended both type of question would be asked.

• OPEN ENDED OUESTION

• CLOSE ENDED QUESTION: - Multiple choice,

scales will be used,

dichotomous question.

SIMPLE RANDOM SAMPLING

SAMPLE SIZE: - 100

SAMPLE AREA: PUNE

Research Approach:

The research approach chosen was to survey and study

the necessarily required information, which was primary

in nature. It was felt that the survey was the best option

for the purpose as the objective involved Emerging

Trends in Establishing Customer Relationship. It was

not an easy task to gather information on the working of

existing system and developing brand new ideas. So, a

research was carried out on the flow of information and

the data was analyzed with the help of the research

instrument. The research instrument that was used is –

Questionnaires, on spot observation and Interaction.

Research Instrument:

INDIRA INSTITUTE OF CAREER STUDIES 86

The research approach used various research

instruments, the major of them were—

o Questionnaires

o On spot observations

Interactions

Questionnaires

The research instrument primarily chosen was

questionnaires. These set of questionnaires helped me in

collecting a primary set of data.

The questionnaires was to be filled up by the consumers,

the first questionnaires prepared was tested on 20

respondents. The aim was to check the questionnaire

itself, so that any flaw in the questionnaires could be

rectified, also it was helpful to understand whether it

was sufficient to give the required information and at the

same time it was user-friendly.

After this, some changes were made in the questionnaire

and a final questionnaire was prepared. The

questionnaire was to be filled up by the customers with

the assistance of the interviewer.

HDFC Mutual Fund analyzed what should be the

minimum facilities with the service provider of any

company. Accordingly, a set of questionnaire was

INDIRA INSTITUTE OF CAREER STUDIES 87

designed which included minimum requirements that a

company should possess in order to successfully start a

relationship with HDFC Mutual Fund and the

requirements that customers should possess to operate

financial products including both the assets as well as

the Wealth management.

Methods of Data Collection:

While deciding about the method of data collection to be used for the study, I had kept in my mind two types of data viz., primary and secondary.

Primary Data:

I had collected my primary data through my questionnaire which I had designed for the corporate selected as a sample.

Secondary Data:

According to me secondary data are as important as primary data for any research because there are various data which is needed to complete the research on time. This can be done only through secondary data. I had collected my secondary data through internet & books such as company detail information, major clients of HDFC Bank & other related data. The secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. We can collect secondary data through following ways:

1) Publications of central, state or local governments2) Publications of foreign governments or of

international bodies and their subsidiary organization

3) Technical and trade journals

INDIRA INSTITUTE OF CAREER STUDIES 88

4) Books, magazines, newspapers and internet5) Reports and publications of various associations

connected with business and industry, banks, stock exchanges, etc.

Data Interpretation:After collecting and analyzing the data, I had accomplished the task of drawing inferences followed by report writing. This had done very carefully, otherwise misleading conclusions might be drawn and the whole purpose of doing research may get vitiated. It is only through interpretation that the researcher can expose relations and processes that underlie his

findings.

INDIRA INSTITUTE OF CAREER STUDIES 89

INDIRA INSTITUTE OF CAREER STUDIES 90

HDFC PRODUCT RANGE

Products

Equity / Growth FundInvest primarily in equity and equity related instruments.

Children's Gift FundChildren's Gift Fund

Fixed Maturity PlanInvest primarily in Debt / Money Market Instruments and Government Securities...

Liquid FundsProvide high level of liquidity by investing in money market and debt instruments.

Debt/ Income FundInvest in money market and debt instruments and provide optimum balance of yield, ...

Quarterly Interval FundThe primary objective of the Scheme is to generate regular income through investme...

INDIRA INSTITUTE OF CAREER STUDIES 91

 

INDIRA INSTITUTE OF CAREER STUDIES 92

ABOUT PRODUCT SPECIALIZATION

INDIRA INSTITUTE OF CAREER STUDIES 93

DIRECTORS REPORT

To the Members,Thirteenth Annual Report on the business and operations of Bank together with the audited accounts for the year ended March 31, 2007.

FINANCIAL PERFORMANCEThe Bank posted total income and net profit of Rs. 8,405.3 crores and Rs. 1,141.5 crores respectively for the financial year 2006-07 as against Rs. 5,599.3 crores and Rs. 870.8 crores respectively in the previous year. Appropriations from the net profit have been effected as per the table given above.

(Rs. in lacs)

Summarized Balance Sheet

As at 31-03-2007

As at 31-03-2006

CAPITAL AND LIABILITIES Capital 31939 31314Reserves and Surplus 611376 498639Employees' Stock Options (Grants) Outstanding - 7Deposits 6829794 5579682Borrowings 281539 285848Other Liabilities and Provisions 1368913 955149Total 9123561 7350639ASSETS Cash and balances with Reserve Bank of India 518248 330661Balances with Banks 397140 361239

INDIRA INSTITUTE OF CAREER STUDIES 94

and Money at Call and Short notice Investments 3056480 2839396Advances 4694478 3506126Fixed Assets 96667 85508Other Assets 360548 227709Total 9123561 7350639

INDIRA INSTITUTE OF CAREER STUDIES 95

INDIRA INSTITUTE OF CAREER STUDIES 96

INDIRA INSTITUTE OF CAREER STUDIES 97

INDIRA INSTITUTE OF CAREER STUDIES 98

DATA ANALYSIS

1) What is the salary of Customer?

Interpretation

It means the major numbers of customers are having their salary between 10,001 to 15,000 i.e. 44%, whereas only 1% of customers are having their salary above 25,001 .

INDIRA INSTITUTE OF CAREER STUDIES

salary No. of Customers Percentage (%)7500 to 10000 143 4010001 to 15000 148 4415001 to 25000 50 1525001 & above 9 1Total 350 100

99

1. Would you like to change your banking service?

Interpretation

Majority of Customers are not satisfied with their serving Bank in spite of that only 38% of customers are willing to change the banks. According to customers point of view shifting to other bank takes lot of paper work and documentation

INDIRA INSTITUTE OF CAREER STUDIES

Change No. of Customers Percentage (%)Yes 134 38No 216 62

100

2. Which of the following things influence your decision?

Influence Mode No. of customers Percentage (%)Advertisement 55 13.33Word of Mouth 30 8.33Brand Name 120 36.66Past Experience 145 41.66Total 350 100

Interpretation

It represents that 42% customers are having their Banking service on the basis of past experience, 37% are inspired by brand name of the Bank whereas 13% & 8% have taken their decision because of word of mouth and advertisement respectively.

INDIRA INSTITUTE OF CAREER STUDIES 101

3.Are you aware of HDFC Mutual Funds wealth maximization?

Interpretation

Clear view says that 61%of the customers are unaware about HDFC preferred Saving account.

INDIRA INSTITUTE OF CAREER STUDIES

Aware No. of customers Percentage (%)Yes 225 39%No 350 61%

102

4.While investing in mutual funds the Source of information used?InternetFrequency Percent Valid Percent Cumulative Percent

Valid Yes 16 No 84 Total 100 Out of the total respondents, 16% relied on Internet as the source of information while investing in mutual funds and rest of the majority i.e. 84% said no to the same. Thus, it can be concluded that the source of Internet is relatively not the factor affecting the sale of Mutual Funds.Magazine Frequency Percent Valid PercentYes 23 No 77 Total 100

yes

no

INDIRA INSTITUTE OF CAREER STUDIES 103

Out of the total respondents, 23% said yes that they use magazines as the source of information while investing in mutual funds and rest 77% said no to the same.

Newspaper

Frequency Percent Valid Percent Cumulative PercentValid Yes 46 No 54 Total 100

yes

no

Out of the total respondents, 46% said yes that they use newspaper as the source of information while investing in mutual funds and rest 54% said no to the same.It is an effective source as almost half of the respondents are relying on the newspaper as the source of true information.

Financial advisor

Frequency Percent Valid Percent Cumulative PercentValid Yes 67 No 23Total 100

INDIRA INSTITUTE OF CAREER STUDIES 104

yes

no

Out of the total respondents, 67% said yes that they use financial advisor as the source of information while investing in mutual funds and rest 33% said no to the same. The respondents relied to a significant level on the Financial Advisors for getting Mutual fund information.

Spouse

Frequency Percent Valid Percent Cumulative PercentValid Yes 35 No 65 Total 100

yes

no

INDIRA INSTITUTE OF CAREER STUDIES 105

Out of the total respondents, 35% said yes that they took the information from their spouse while investing in mutual funds and rest 65% said no to the same.

Friends

Frequency Percent Valid Percent Cumulative PercentValid Yes 49 No 51 Total 100

yes

no

Out of the total respondents, 49% said yes that they took the information from their friends while investing in mutual funds and rest 51% said no to the same.

Advertisement

Frequency Percent Valid Percent Cumulative PercentValid Yes 62 No 38 Total 100

INDIRA INSTITUTE OF CAREER STUDIES 106

yes

no

Out of the total respondents, 62% said yes that advertisements are the source of Information used while investing in mutual funds and rest 38% said no to the same

5.Regular or a new investor in mutual fund?

Frequency Percent Valid Percent Cumulative PercentValid Regular 58 New 42 Total 100

yes

no

INDIRA INSTITUTE OF CAREER STUDIES 107

58% of the respondents are regular investors in mutual funds while rest 42% are new to that. Though the number of regular investors is high but at the same time new investors are showing significant participation in this field.

6.Investment portfolio consists:

Real estate

Frequency Percent Valid Percent Cumulative PercentValid Yes 40 No 60 Total 100

yes

no

Out of total respondents 40% said yes that investment portfolio consist of real estate.

Post office

Frequency Percent Valid Percent Cumulative PercentValid Yes 67 No 33 Total 100

INDIRA INSTITUTE OF CAREER STUDIES 108

yes

no

Out of total respondents 67% said yes that investment portfolio consist of Post office schemes.

Mutual fund

Frequency Percent Valid Percent Cumulative PercentValid Yes 74 No 26 Total 100

yes

no

Out of total respondents 74% said yes that investment portfolio consist of mutual funds.

INDIRA INSTITUTE OF CAREER STUDIES 109

Debt fund

Frequency Percent Valid Percent Cumulative PercentValid Yes 17 No 83Total 100

yes

no

Out of total respondents 17% said yes that investment portfolio consist of debt funds.

Shares

Frequency Percent Valid Percent Cumulative PercentValid Yes 36 No 64 Total 100

INDIRA INSTITUTE OF CAREER STUDIES 110

yes

no

Out of total respondents 36% said yes that investment portfolio consist of shares.Fixed deposit

Frequency Percent Valid Percent Cumulative PercentValid Yes 72 No 28 Total 100

yes

no

Out of total respondents 72% said yes that investment portfolio consist of fixed deposit

7.Type of fund you prefer the most

Frequency Percent Valid Percent Cumulative PercentValid Regular income 30 Debt 3Diversified equity 29

INDIRA INSTITUTE OF CAREER STUDIES 111

Sector funds 12 ELSS (tax shield) 26 Total 100

DIVERSIFIED

REGULAR INCOME

ELSS

DIVERSIFIED

REGULAR INCOME

DEBT

SECTOR FUND

Out of total respondents, 30% preferred regular income type of fund, 29% preferred diversified equity and 26% preferred ELSS (tax shield) while 12% preferred sector funds followed by 3% debt.

8.Features that attract most while choosing a specific Mutual fund

Frequency Percent Valid Percent Cumulative PercentValid Flexibility 3 Return 47 Managed by professional people 21 Risk diversion 29 Total 100

INDIRA INSTITUTE OF CAREER STUDIES 112

VALID FLEXIBILITY

RETURN

MANG BY PROFF.

RISK DIVERSION

Out of total respondents, 47% are attracted to mutual funds due to the returns, 29% because of risk diversion and 21% like to be managed by professional people while rest 3% are attracted due to the flexible mutual fund schemes.

9.Mutual fund scheme you prefer

Frequency Percent Valid Percent Cumulative PercentValid Open ended scheme 64 Close ended scheme 36 Total 100

INDIRA INSTITUTE OF CAREER STUDIES 113

OPEN ENDED

CLOSE ENDED

64% 0f the total respondents prefer open ended schemes for mutual fund and rest 36% prefer close ended.

10.Type of return expected from mutual funds?

Frequency Percent Valid Percent Cumulative PercentValid Monthly 25 Quarterly 33 Semi annual 7 Annual 35 Total 100

VALID MONTHLY

QUATERLY

SEMI ANNUAL

ANNUAL

INDIRA INSTITUTE OF CAREER STUDIES 114

35% of the respondents expect annual return from the mutual funds, 33% expect quarterly, 25% expect monthly and rest 7% expect semi annual returns.

11.Investment horizon

Frequency Percent Valid Percent Cumulative PercentValid Up to 6 months 6 Up to 1 year 15 Up to 2 year 34 Up to 3 year 37 Up to 5 year 8 Total 100

UPTO 1 YEAR

UPTO 2 YEAR

UP TO 3 YEAR

UP TO 5 YEAR

UP TO 6 MONTHS

Out of total respondents, 37% prefer to invest up to 3 yrs, 34% up to 2 yrs, 15Up to 1 yr and 8% prefer to invest up to 5 yrs.

12.Near future liabilities

Frequency Percent Valid Percent Cumulative PercentValid Child marriage 26 Education 60 Loans 14 Total 100

INDIRA INSTITUTE OF CAREER STUDIES 115

Out of total respondents, 60% of the respondents have children education as future liability, 26% have it as child marriage and rest 14% have the liability to pay off the loans.

13.Cross Tabs

Are you a regular or new investor * features attract you most Cross tabulation

CountFeatures attract you mostFlexibility Return Managed by professional people Risk diversion Type of investor TotalRegular 58New 42Total 100

INDIRA INSTITUTE OF CAREER STUDIES

VALID CHILD MARR.EDUCATIONLOANS

116

This table tells us that maximum number of investors i.e. 47 invest because of return they get from the mutual fund schemes. It also tells us that the regular investors i.e. 34 invest on the basis of returns they get and the new ones i.e. 13 are investing because of the people those who are managing the fund schemes.

14.Are you a regular or new investor type of return you expect Cross tabulation

Count Type of return you expect TotalMonthly Quarterly Semi annual Annual Are you a regular or new investor Regular 58New 42Total 100

INDIRA INSTITUTE OF CAREER STUDIES

REGULARNEW

117

REGULAR

NEW

A large number of the investors 43% of the regular investors expect annual returns.42% of the new investors expect early quarterly returns.

15.Are you a regular or new investor your investment horizon Cross tabulationCount Your investment horizon TotalUp to 6 months Up to 1 year Up to 2 year Up to 3 year Up to 5 year Are you a regular or new investor Regular 3 3 13 31 8 58New 3 12 21 6 042Total 6 15 34 37 8 100

53% of the regular investors invest upto a period of 3 years.50% of the new investors prefer it upto 2 years.22% of Regular invest it upto 2 years. It can be seen that the regular investors have propensity to invest for greater periods than new customers.

INDIRA INSTITUTE OF CAREER STUDIES 118

16.Are you a regular or new investor mutual fund scheme prefer Cross tabulationCount

Mutual fund scheme preferTotalOpen ended scheme Close ended scheme Are you a regular or new investor Regular 46 12 58New 18 24 42Total 64 36 100

Around 77% of the regular respondents prefer open-ended schemes while 57% of new investors prefer close-ended schemes. Regular investor is more concerned with the liquidity as compared to new investor and prefers open ended schemes.

17.Are you a regular or new investor type of fund prefer Cross tabulation

Count Type of fund prefer TotalRegular income Debt Diversified equity Sector funds ELSS (tax shield) Are you a regular or new investor Regular 17 3 13 3 22 58New 13 16 9 4 42Total 30 3 29 12 26 100

New Investors prefer to invest in ELSS followed by regular income schemes and Diversified equity. only a small 5% percent of them invest in Debt or sector funds.

The regular investors prefer to invest in diversified equity followed by regular income schemes and no one prefers to invest in debt.

INDIRA INSTITUTE OF CAREER STUDIES 119

INDIRA INSTITUTE OF CAREER STUDIES 120

QUESTIONNAIRE

Sir/madam

We are conducting market assessment of

HDFC product with special reference to ‘Preferred

saving account’ at Pune.

We would like to include your opinion for this

purpose.

NAME OF THE CUSTOMER :

DESIGNATION :

CONTACT NUMBER :

AGE :

SEX :

ADDRESS :

Q1. What is your annual income?

………………………………………………...………..........................1. What is your source of information while investing in mutual funds?

a) Internet [ ]b) Magazine [ ]c) Newspaper [ ]d) Financial Advisor [ ]e) Spouse [ ]f) Friends [ ]g) Advertisements [ ]

INDIRA INSTITUTE OF CAREER STUDIES 121

2. Are you a regular or a new investor in mutual fund?

REGULAR [ ] NEW [ ]

3. Your investment portfolio consists in %)

a) Real Estate [ ]b) Post office schemes [ ]c) Mutual Funds [ ]d) Debt [ ]e) Shares [ ]f) Fixed Deposits [ ]

4. Which type of fund you prefer the most?a) Regular income [ ] b) Debt [ ]c) Diversified Equity [ ]d) Sector funds [ ]e) ELSS (tax shield) [ ]

5 . Which Features attract you the most while choosing a specific Mutual Fund?

a) Flexibility [ ]b) Return [ ]c) Managed by professional people [ ]d) Risk Diversion [ ]e) Less Expenses [ ]

6. What type of Mutual Fund Scheme you prefer?

a) Open Ended Scheme [ ]b) Close Ended Scheme [ ]

INDIRA INSTITUTE OF CAREER STUDIES 122

7. What type of return you expect?

Monthly [ ] Quarterly [ ]Semi annual [ ] Annual [ ]

8. What is your investment horizon?

Up to 6 months [ ]Up to 1 year [ ]Up to 2 years [ ]Up to 3 years [ ]Up to 5 years [ ]Up to 10 years [ ]

9. What are your near future liabilities?

Child marriage [ ]Education [ ]Any other please specify………………………….

10. Which of the following things influence your decision?

Advertisement ()

Word of mouth( )

Brand name( )

Past experience( )

11. Are you aware of HDFC Mutual Fund’s Wealth Maximization?

Yes ( ) NO( )

INDIRA INSTITUTE OF CAREER STUDIES 123

Remarks if any………………………………………………………………...

………………………………………………………………………………...

We are grateful for your co-operation.

Thanking you.

Date:Signature:

FINDINGS

1. The investors give more preference to regular income funds besides the considerations of 1) Diversified Equity

2) Tax Saving Schemes. Thus if the government encourages the investment in mutual funds in the current

budget, then more people will be investing in the MFs for tax saving. However people are also not compliant to risk aversion. They are willing to invest in risky equity

funds.

2. Another significant finding of the project is that investors are lured by the returns MFs are showing.

However at the same time they also want to minimize their risk.

INDIRA INSTITUTE OF CAREER STUDIES 124

3. Investors desire or opt open-ended schemes than close-ended schemes. This means that they want

flexibility in the inflow and outflow of their funds.

4. The investment horizon, which is most liked by the investors, is 2-3 yrs.

5. The source of information the investors most rely is on advertisement. However they also require the

detailed information, which they take from Financial Advisors. On other sources the investors are quite

apprehensive.

6. Investor’s portfolio consists mainly of Fixed Deposits and Post Office schemes. However portfolio of regular investors do contain significant proportion of Mutual

Funds.

RECOMMENDATIONS

• There is lack of awareness among people about mutual funds so there should be more advertising and other

promotional campaigns to make them aware.

INDIRA INSTITUTE OF CAREER STUDIES 125

• People are more interested in investing in equity funds rather than debt funds because companies are promoting

more for equity funds. Companies should equally promote debt funds also as the provide security to

customers.

• Companies should give knowledge to its customer about its computerized operations to save their time and

to make the operations more easy

INDIRA INSTITUTE OF CAREER STUDIES 126

BIBILOGRAPHY

Websites

www.hdfcbank.com www.google.com www.business.com/directory/financial www.amfiindia.com www.mutualfundsindia.com www.hdfcfund.com www.mutualfundsabout.com www.moneycontrol.com www.valueresearchonline.com

Books

Philip Kotler: Marketing Management

C.R Kothari: Research Methodology

K. Nageswara Rao: Banking Strategy

V.K.Bhalla: The Book recommended of Invest Management

INDIRA INSTITUTE OF CAREER STUDIES 127

CONCLUSION

The comparison of the Indian Mutual Fund Industry with respect to global standards showed that India has a lot of catching up to do in terms of preparation, the diversity of products, and the risk mitigation techniques used. However, the attitude of the regular towards investor protection and governance of Mutual Funds was found to be close to global standards. The Indian Mutual Fund industry is possibly at a point of inflection on the verge of explosive growth. The factors that point towards this are the existence of robust capital markets and the presence of an impartial regular. In order to reap the benefits of this growth, the Mutual Fund industry has to introduce changes at the rate of knots. These chances include introduction of newer production improvements in Mutual Fund industry and better governance of Mutual Funds. The Mutual Fund regulator (SEBI) should increase the accountability of all major players including the AMCs, distributors and brokers to build trust among retail investors.

The Mutual fund industry is growing at a tremendous pace. A large number of plans have come up from different financial resources. With the Stock markets soaring the investors are attracted towards these schemes.

Only a small segment of the investors still invest in Mutual funds and the main sources of information still are the financial advisors followed by advertisements in different media. The Indian investor generally investors over a period of 2 to three years. Also there is a greater tendency to invest in fixed deposits due to the security attached with it.

INDIRA INSTITUTE OF CAREER STUDIES 128

In order to excel and make mutual funds a success, companies still need to create awareness and understand the Psyche of the Indian customer.

INDIRA INSTITUTE OF CAREER STUDIES 129