Project Material Mutual Fund

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Investopedia explains 'Mutual Fund'

One of the main advantages of mutual funds is that they give small investors access

to professionally managed, diversified portfolios of equities, bonds and other securities, which

would be quite difficult (if not impossible) to create with a small amount of capital. Each

shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares,

are issued and can typically be purchased or redeemed as needed at the fund's current net asset

value (NAV) per share, which is sometimes expressed as NAVPS.

.

ACCORDING TO PETER GITUNDU

Mutual funds are a type of investment that brings together many

investors into a common pool. The money collected in the pool is invested in

other types of assets and securities like stocks, bonds and other money

market instruments. The pool is professional managed by a fund manager who

is in charge of looking out for the best type of securities in which to invest the

investors money.

The returns on the investments are divided among the investors

according to the percentage of the value of the fund that they own. The


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returns could either be positive or negative, meaning that the pool could

either realize profits or losses depending on a number of factors. The most

predominant factor is normally the prevailing market conditions. The returns

are realized when the pool sells shares to the general public.

Mutual funds fall into different categories and they all attract different

rates of returns according to the risk factor carried by each one of them. It is

normally upon an investor to decide which one to go for after carefully

scrutinizing all the factors at play. An investor is also normally free to sell of

his shares at ant time he may feel like, but this will mean that he should be

ready to sell them at the prevailing stock prices, which may at times be less

than the value he bought them for.

Mutual funds bring with them certain advantages and disadvantages, all

of which play their roles to make these investments unique in their own way.

For example, the risk involved is relatively lower than that of other types of

investments and so are the returns. However, when one gets to the specific

categories, this may change and you will find that there are those with high

risk factors and high returns as well, or low risk and high returns.

ACCOURDING TO GILBERT STOCKTON

There might be considerable confusion about the exact definition of mutual funds especially tolaymen who do not understand technical jargon. But, there is no need for confusion. The simple

definition of mutual funds is as follows: it is a professionally managed kind of collective

investment plan that pools funds from various investors, investing it in bonds, stocks or other


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assets. The combined holdings of the bonds, stocks and other assets are termed as portfolio. Each

investor holds shares, which forms a portion of the holdings.

Mutual funds may invest in various kinds of securities: cash instruments,

stocks, or bonds. There are various sub-categories as well. Stock funds can be

invested principally in the shares of a specific industry, such as technology orutilities. These are known as sector funds. A professional manager always

supervises mutual funds portfolios and monitors, as well as forecasts, the cash

flow in and out of the fund by the investors and checks the future performance

of the investments. He or she also chooses those investments that will follow

closely the mutual funds investment objectives.

There are three ways to make money out of mutual funds:

You can earn from dividends on stock or interest on bonds. The fund pays

most of the income it gets through the year to fund holders as distributions.

If the fund sells a security that has become more valuable, it makes a capital

gain. This profit is usually distributed amongst the investors.

If the fund holdings increase in price, but the manager does not sell them off,

the value of the fund's shares increase. You can then sell your owned shares

to make a profit.

The fund will also provide you the option of receiving a check for the

distribution or reinvest your money/earnings to buy more shares.

Advantages of mutual funds:

* Professional management: - a mutual fund is a great way to let a

professional handle your money if you do not have the time or expertise to

devote to your stocks. A mutual fund is the least expensive way for a small

investor to hire a full-time manager to take care of your money and make

investment decisions.

* Diversification: - with mutual funds, you get the chance to spread out your

money over a huge range of fields and sectors, which is impossible for a small

investor on one's own. The risk therefore is spread out. The more stocks you

own in different areas, the lesser the chance of loss.


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* Economies of scale: -Transaction costs are much lower as a mutual fund

buys and sells large amounts of securities at a time.

* Liquidity: -Like individual stock, mutual funds stock can be transformed into

cash at any time.

* Simplicity: -investing in a mutual fund is easy when you understand the

definition of mutual bonds. Banks usually have their own line of mutual funds

and the minimum investment required is small. Even as little as $100 dollars

might be invested on a monthly basis.

1.3 STATEMENT OF THE PROBLEM

One of the lucrative investment avenues available for investors is mutual fund nowadays.The

7problem at hand was to study and measure the awareness level of people regardingmutual fundsin the city. To find out Investors awareness about Mutual funds andPromotion of SIP plan. The

study includes analysis of the investors on the basis of their investment objectives, age etc. It also

examined the position of MF among investmentavenues available for the investors and the pastperformances of various schemesfromthe active AMCs in Indian market on the basis of NAV &

time. So that it can help theadvisors as well as investors to choose the correct portfolio.

1.4 OBJECTIVES OF THE STUDY

The major objective of the study was to determine the awareness about benefits of Mutual fundsand to impart information, knowledge and the functioning of mutual fundsamong financial

advisors.

Following are the specific objectives:

To know the awareness of mutual funds among Indian investors.

To evaluate the position of Mutual Fund among investment avenues available for the investors in

Indian market.

To promote the SIP Scheme (Systematic Investment Plan).

To come up with recommendations for independent financial advisor, investors and mutual fundcompanies in SURAT based on the above study.

1.5RESEARCH METHODOLOGYTh is i s a d es cr i pt iv e s tu dy . Tw o ty pe s o f d at a w il l b e t ak en i nto

cons idera t ion i . e . Secondary data & Primary data. My major emphasis will be on gathering

the primary data. The secondary data will be used to make things more clear.


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( i ) P r i m a r y D a t a :

Direct collection of data from the source of information,technology including personalinterviewing, survey etc.

( i i ) S e c o n d a r y D a t a :

Indirect collection of data from sources containing past or recent past information like BanksBrochures, Annual publications, Books, Fact sheetsof mutual funds, Newspaper & Magazines etc.

The secondary data was collected toknow the theoretical aspect of the mutual funds and also for

the performance evaluationof various mutual fund schemes.A questionnaire was constructed forsurvey. Questionnaire consisting of a set of questions made to be filled by various respondents. My

area of the study wasGwalior (M.P.).The sample consisted of 100 respondents. The sample was

drawn from walk incustomers of Reliance Mutual Fund, Some private & government banks and

offices,College students. The selection of the respondents was done on the basis ofconvenientsampling.The responses were takenthrough personal interviews, telephonic

interview.The next step is to extract the pertinent findings from the collected data. I have

tabulatedthe collected data & developed frequency distributions. Thus the whole data was

groupedaspect wise and was presented in tabular form. Thus, cross-tabulations, frequencies& percentages were prepared to render impact of the study.

1.6LIMITATIONS OF THE STUDYEvery research is incomplete without its own limitations. In this research too there weresome

limitations. They are:

2.1.1. BEGINNING OF THE MUTUAL FUND INDUSTRYHistorians are uncertain of the origins of investment funds; some cite the closed-endinvestment

companies launched in the Netherlands in 1822 by King William I as the firstmutual funds, while

others point to a Dutch merchant named Adrian van Ketwich whoseinvestment trust created in

1774 may have given the king the idea. Van Ketwich probablytheorized that diversification wouldincrease the appeal of investments to smaller investors with minimal capital. The name of van

Ketwich's fund, EENDRAGT MAAKTMAGT, translates to "unity creates strength". The next

wave of near-mutual fundsincluded an investment trust launched in Switzerland in 1849, followedby similar vehicles which is followed by many kind of companies created in Scotland in the

1880s.The ideaof pooling resources and spreading risk using closed-end investments soon

took root in Great Britain and France, making its way to the United States in the 1890s.TheBoston Personal Property Trust, formed in 1893, was the firstclosed-end fundin

the U.S.The creation of the Alexander Fund in Philadelphia, Pennsylvania, in 1907 was

animportant step in the evolution toward what we know as the modern mutual fund. TheAlexander

Fund featured semi-annual issues and allowed investors to make withdrawalson demand.2.1.2.THE ARRIVAL OF THE MODERN FUND

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded thearrival of

the modern mutual fund in 1924. The fund went public in 1928, eventuallyspawning the mutualfund firm known today as MFS Investment Management. StateStreet Investors' Trust was

thecustodian of the Massachusetts Investors' Trust. Later,State Street Investors started its own fund

in 1924 with Richard Paine, Richard Saltonstalland Paul Cabot at the helm. Saltonstall was alsoaffiliated with Scudder, Stevens and

Clark, an outfit that would launch the firstno-load fundin 1928. A momentous year

inthe history of the mutual fund, 1928 also saw the launch of the Wellington Fund, whichwas the


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first mutual fund to include stocks and bonds, as opposed to direct merchant bank style of

investments in business and trade.

2.1.3. REGULATIONS AND EXPANSIONBy 1929, there were 19open-end mutual fundscompeting with nearly 700 closed-

endfunds. With the stock market crash of 1929, the dynamic began to change as highly-leveraged

closed-end funds were wiped out and small open-end funds managed tosurvive.Governmentregulators also began to take notice of the fledgling mutual fundindustry. The creation of the

Securities and Exchange Commission (SEC), the passage of theSecurities Act of 1933and the

enactmen t of theSecur ities Exchange Act of 1934putin place safeguards to protectinvestors: mutual funds were required to register with theSEC and to provide disclosure in the

form of a prospectus. TheInvestment Company Actof 1940put in place additional regulations that

required more disclosures and sought tominimize grievance of investor of different categories

conflicts of interest.The mutual fund industry continued to expand. At the beginning of the 1950s,thenumber of open-end funds topped 100. In 1954, the financial markets overcame their 1929

peak, and the mutual fund industry began to grow in earnest, adding some 50 newfunds over the

course of the decade. The 1960s saw the rise of aggressive growth funds,with more than 100 new

funds established and billions of dollars in new asset inflows.Hundreds of new funds werelaunched throughout the 1960s until the bear marketof 1969 cooled the public appetite for mutual

funds. Money flowed out of mutual fundsas quickly as investors could redeem their shares, but theindustry's growth later resumed.

3.1 WHAT IS MUTUAL FUND?

Mutual fund is a trust that pools the savings of a number of investors who share acommonfinancial goal. This pool of money is invested in accordance with a statedobjective. The joint

ownership of the fund is thus Mutual, i.e. the fund belongs to allinvestors. The money thus

collected is then invested in capital market instruments such asshares, debentures and other

securities. The income earned through these investments andthe capital appreciations realized areshared by its unit holders in proportion the number of units owned by them. Thus a Mutual Fund is

the most suitable investment for thecommon man as it offers an opportunity to invest in a

diversified, professionally managed basket of securities at a relatively low cost. A Mutual Fund isan investment tool thatallows small investors access to a well-diversified portfolio of equities,

bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are

issuedand can be redeemed as needed. The funds Net Asset value (NAV) is determinedeachday.Investments in securities are spread across a wide cross-section of industries andsectors

and thus the risk is reduced. Diversification reduces the risk because all stocksmay not move in the

same direction in the same proportion at the same time. Mutual fundissues units to the investors in

accordance with quantum of money invested by them.Investors of mutual funds are known as unitholders.


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When an investor subscribes for the units of a mutual fund, hebecomes part owner of the assets of

the fund in the same proportionas his contribution amount put up with the corpus (the total amountof the fund). Mutual Fund investor is also known as a mutual fundshareholder or a unit holder.Any

change in the value of the investments made into capital marketinstruments (such as shares,

debentures etc) is reflected in the NetAsset Value (NAV) of the scheme. NAV is defined as the marketvalue

of the Mutual Fund scheme's assets net of its liabilities. NAV of ascheme is calculated by dividing the marketvalue of scheme'sassets by the total number of units issued to the investors.

For example:

? If the market value of the assets of a fund is Rs. 100,000? The total number of units issued to the

investors is equal to 10,000.? Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or10.0059


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? Now if an investor 'X' owns 5 units of this scheme? Then his total contribution to the fund is Rs. 50 (i.e.

Number of unitsheld multiplied by the NAV of the scheme)

Mutual Fund Operation Flow Chart

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

ADVANTAGES OF MUTUAL FUND1.

Portfolio Diversification

Mutual Funds invest in a well-diversified portfolio of securities whichenables investor to hold a diversified

investment portfolio (whetherthe amount of investment is big or small).2.

Professional Management

Fund manager undergoes through various research works andhas better investment managementskills which ensure higherreturns to the investor than what he can manage on his own.

3.

Less Risk


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Investors acquire a diversified portfolio of securities even with asmall investment in a Mutual

Fund. The risk in a diversified portfoliois lesser than investing in merely 2 or 3 securities.4.

Low Transaction CostsDue to the economies of scale (benefits of larger volumes),mutual funds pay lesser transaction

costs. These benefits are passedon to the investors.

5.

Liquidity

An investor may not be able to sell some of the shares held by himvery easily and quickly,

whereas units of a mutual fund are far moreliquid.6.

Choice of Schemes

Mutual funds provide investors with various schemes with differentinvestment objectives.

Investors have the option of investing in ascheme having a correlation between its investment

objectives andtheir own financial goals. These schemes further have differentplans/options7.

Transparency


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Funds provide investors with updated information pertaining tothe markets and the schemes. All material

facts are disclosed toinvestors as required by the regulator.

8.

Flexibility

Investors also benefit from the convenience and flexibility offeredby Mutual Funds. Investors can switch

their holdings from a debtscheme to an equity scheme and vice-versa. Option of systematic (atregular

intervals) investment and withdrawal is also offered to theinvestors in most open-end schemes.

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Safety

Mutual Fund industry is part of a well-regulated investmentenvironment where the interests of the

investors are protected by theregulator. All funds are registered with SEBI and completetransparency isforced.

DISADVANTAGES OF MUTUAL FUND1.

Costs Control Not in the Hands of an Investor

Investor has to pay investment management fees and funddistribution costs as a percentage of the

value of his investments(as long as he holds the units), irrespective of the performance of thefund.

2.

No Customized Portfolios

The portfolio of securities in which a fund invests is a decision takenby the fund manager.Investors have no right to interfere in thedecision making process of a fund manager, which some

investorsfind as a constraint in achieving their financial objectives.

3.

Difficulty in Selecting a Suitable Fund Scheme

Many investors find it difficult to select one option fromthe plethora of funds / schemes / plans available .For this, theymay have to take advice from financial planners in order to invest inthe right fund to

achieve their objectives.

TYPES OF MUTUAL FUNDS

General Classification of Mutual FundsOpen-end Funds

Funds that can sell and purchase units at any point in time areclassified as Open-end Funds. The

fund size (corpus) of an open-endfund is variable (keeps changing) because of continuous selling

(toinvestors) and repurchases (from the investors) by the fund. Anopen-end fund is not required to keep


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selling new units to theinvestors at all times but is required to always repurchase, when aninvestor

wants to sell his units. The NAV of an open-end fund iscalculated every day.

Closed-end FundsFunds that can sell a fixed number of units only during the New FundOffer (NFO) period are known as

Closed-end Funds. The corpus of aClosed-end Fund remains unchanged at all times. After the closureof the

offer, buying and redemption of units by the investors directlyfrom the Funds is not allowed. However, toprotect the interests of the investors, SEBI provides investors with two avenues to liquidatetheir

positions:1Closed-end Funds are listed on the stock exchanges whereinvestors can buy/sell units from/ to each

other. The trading isgenerally done at a discount to the NAV of the scheme. The NAV of aclosed-end fund iscomputed on a weekly basis (updated every Thursday).

1Closed-end Funds may also offer "buy-back of units" to the unitholders. In this case, the corpus

of the Fund and its outstandingunits do get changed.Load Funds

Mutual Funds incur various expenses on marketing, distribution,advertising, portfolio churning,

fund manager's salary etc. Many fundsrecover these expenses from the investors in the form of load.

Thesefunds are known as Load Funds. A load fund may impose followingtypes of loads on the investors:

Entry Load -Also known as Front-end load, it refers to theload charged to an investor at the time of his entry into

ascheme. Entry load is deducted from the investor's contributionamount to the fund.

Exit Load -

Also known as Back-end load, these charges areimposed on an investor when he redeems his units

(exits fromthe scheme). Exit load is deducted from the redemptionproceeds to an outgoing investor.

Deferred Load -

Deferred load is charged to the scheme overa period of time.

Contingent Deferred Sales Charge (CDSC) -

In some schemes,the percentage of exit load reduces as the investor stays longerwith the fund. This

type of load is known as Contingent DeferredSales Charge.No-load Funds

All those funds that do not charge any of the above mentioned loadsare known as No-load Funds.


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EXECUTIVE SUMMARYThe project titled A study of mutual fund and awareness among insurance advisors being carried out for NJ

INDIA INVESTS PVT. LTD. Today an investor is interested in tracking the value of his investments,

whether he invests directly in the market or indirectly through Mutual Funds. This dynamic change has taken

place because of a number of reasons. With globalization and the growing competition in the investmentsopportunity available he wouldhave to make guided and rational decisions on whether he gets an acceptable return

on hisinvestments in the funds selected by him, or if he needs to switch to another fund.In order to achieve such an

end the investor has to understand the basis of appropriatepreference measurement for the fund, and acquire the basicknowledge of the different measures of evaluating the performance of the fund. Only then would he be

in a position to judge correctly whether his fund is performing well or not, and make the right decision.This project

is undertaken to help the investors in tracking the performance of their investments in Mutual Funds and has beencarried out with the objective of givingperformance analysis of Mutual Fund.The methodology for carrying out the

project was very simple that is through secondary dataobtained through various mediums like fact sheet of the funds,

the Internet, Businessmagazines, Newspaper, etc. the analysis of Mutual Funds has been done with respect to
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itsvarious parameters. I hope NJ INDIA INVEST PVT. LTD., Udaipur will recognize this as wellas take more

references from this project report.
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Project Material Mutual Fund