An

Assignment on

Mutual fund

Assignment-2

Submitted to

Ms. Khyati Shah

Royale Business School

Submitted by:

Bhargav Pathak

Roll no-02

PGDM-2

What is Mutual Fund??

A mutual fund is a company that invests in a diversified portfolio of securities. People who buy shares of a mutual fund are its owners or shareholders. Their investments provide the money for a mutual fund to buy securities such as stocks and bonds. A mutual fund can make money from its securities in two ways: a security can pay dividends or interest to the fund or a security can rise in value. A fund can also lose money and drop in value.

There are three basic types of mutual funds—stock (also called equity), bond, and money market. Stock mutual funds invest primarily in shares of stock issued by U.S. or foreign companies. Bond mutual funds invest primarily in bonds. Money market mutual funds invest mainly in short-term securities issued by the government

A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

You can make money from a mutual fund in three ways: 1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. 2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. 3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. 

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares. 

Importance

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

l. With the emphasis on increase in domestic savings and improvement in deployment of investment through markets, the need and scope for mutualfund operation has increased tremendously. The basic purpose of reformsin the financial sector was to enhance the generation of domestic resources by reducing the dependence on outside funds. This calls for a market based institution which can tap the vast potential of domestic savings and canalize them for profitable investments. Mutual funds are not only best suited for the purpose but also capable of meeting this challenge.

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

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

4. As mutual funds are managed by professionals, they are considered to have a better knowledge of market behaviours. Besides, they bring a certain competence to their job. They also maximise gains by proper selection and timing of investment.

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

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

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

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

Growing Scope of Mutual Fund

Despite being available in the market for over two decades now with assets under management equaling Rs 7,81,71,152 Lakhs (as of 28 February,2010) (Source: Association of Mutual Funds, India) , less than 10% of Indian households have invested in mutual funds. A recent report on Mutual Funds Investments in India published by research and analytics firm, Boston Analytics, suggests investors are holding back from putting their money in mutual funds due to their perceived high risk and a lack of information on how mutual funds work. This report is based on a survey of approximately 10,000 respondents in 15 Indian cities and towns as of March 2010.There are 43 Mutual Funds at present.

The primary reason for not investing appears to be correlated with city size. For example, as depicted in the exhibit below, among respondents with a high savings rate, close to 40% of those who live in metros and Tier I cities cited

such investments were very risky, whereas 33% of those in Tier II cities said they did not how and where to invest in such assets.

On the other hand, among those who invested, close to nine out of ten respondents did so because they felt these assets to be more professionally managed than other asset classes. Figure 2 lists some of the influencing factors for investing in mutual funds. Interestingly, while non-investors cite “risk” as one of the primary reasons they do not invest in mutual funds, those who do invest cite the fact that they are “professionally managed” and “more diverse” most often as the reasons they invest in mutual funds versus other investments.

Mutual fund competition with banks

There are people asking this question that in India, which is better, Mutual Funds or Fixed Deposit. Lets say for one year period, you get 7.5% interest rate on 1 lakh rupees than is it good or should you take more risk and invest in mutual funds ?

X have invested money in both in the past and currently have 3 mutual funds of ICICI, HDFC and SBI as well have money in fixed deposit too in HDFC and ICICI banks, so from my experience this is what I can suggest

If you are looking for No Risk

Go with fixed deposit option, 7.5% interest rate is not bad at all as on average investing in property or stock market too gives same return (assuming you have no time to spend and no knowledge about them) on average. Having money in fixed deposit is the best option for you if you don’t want to lose even 10% of your money.

Small Rick Decent Return

If you are willing to take some risk and can look for 2+ year range, I will advice you to go with mutual funds, Right now the stock market is at its peak (BSE at 20000) so you won’t get any return from mutual funds in say next 3-6 months.

Mutual funds will always outperform fixed deposit in long run of 3 and more years provided you trust the manager of fund and don’t get panicked when the market take deep dives. For example, a friend of money had invested 3 lakh in Mutual fund in 2008 when the market was its all time high, the market took a nose dive to 7000 and the value of his mutual fund became 80,000 though after 2 years he has recovered all his value.

High Risk High Return

If you are looking for high risk high return investment, you should stick to Mutual funds or better, jump in stock market (but with very small amount of money, say Rs 2000 or 5000, Never put big money), but again, only invest in mutual funds if you can resist selling it for few years.

BANKS MUTUAL FUNDS

Returns Low BetterAdministrative exp. High LowRisk Low ModerateInvestment options Less MoreNetwork High penetration Low but improvingLiquidity At a cost BetterQuality of assets Not transparent Transparent

Interest calculationMinimum balance between 10th.& 30th. Of every month

Everyday

Guarantee Maximum Rs.1 lakhs on deposits None

Conclusion so i like to conclude in following points

A mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities.

The advantages of mutual’s fund are professional management, diversification, economies of scale, simplicity and liquidity.

The disadvantages of mutual’s are high costs, over-diversification, possible tax consequences, and the inability of management to guarantee a superior return.

There are many, many types of mutual funds. You can classify funds based on asset class, investing strategy, region, etc.

Mutual funds have lots of costs. Costs can be broken down into ongoing fees The biggest problems with mutual funds are their costs and fees. Mutual funds are easy to buy and sell. You can either buy them directly from

the fund company or through a third party. Mutual fund ads can be very deceiving.