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Summer Internship Report
For the partial fulfillment of the requirement for the degree
of
MASTER OF BUSINESS ADMINISTRATION
UNDERSTANDING INVESTMENT PATTERN IN
MUTUAL FUNDS AND ADVISORY SERVICES
At
Under The SupervisionOf
Mr. Mohsin ShamimAssistant Manager- II
ICICI bank,GK-II,New Delhi
By
YASIR MOHEET
MBA (2007-08)
Department of Business StudiesJAMIA HAMDARD
New Delhi
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ACKNOWLEDGEMENT
I would like to thank Mr. Mohsin Shamim (AM-II , ICICI
Bank), for giving me an opportunity to work on this project
and help me increase my knowledge about the subject and
get the first hand experience about the product. Without his
panegyric support it would have been difficult for me to
imbibe such skills required for completing the project.
I would also like to thankMr. Shahid Siddiqui(AM-I ,
ICICI Bank), for his valuable help without whom it would not
have been easier for me to work on this project.
(Md. Anwar Khan)
06 MBA-26
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TABLE OF CONTENTS
ACKNOWLEDGEMENT.2
EXECUTIVE SUMMARY
COMPANY OVERVIEW. 4
SERVICES PROVIDED BY ICICI BANK.7
INVESTMENT OPTIONS9
COMPARISION OF MODERN AND TRADITIONAL METHODS OF
INVESTMENTS..13
HISTORY OF INDIAN MUTUAL FUND INDUSTRY..14
CONCEPT OF MUTUAL FUNDS..16
ORGANIZATIONAL STRUTURE OF MUTUAL FUND.19
TYPES OF MUTUAL FUNDS.....20
CLASSIFICATION OF MUTUAL FUNDS22
RISKS ASSOCIATED WITH MUTUAL FUNDS.26
ADVANTAGES OF INVESTING IN MUTUAL FUNDS.28
TAX BENEFITS OF INVESTING IN THE MUTUAL FUND.30CUSTOMER PROFILING OF MUTUAL FUNDS44
OBJECTIVES OF THE STUDY
RESEARCH METHODOLOGY
FINDINGS AND INTERPRETATIONS
CONCLUSIONS DRAWN
RECOMMENDATIONS
LIMITATIONS OF THE STUDY
SWOT ANALYSIS OF MUTUAL FUND BASED ON THE STUDY..54
BIBLIOGRAPHY
QUESTIONAIRRE
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COMPANY OVERVIEW
I C I C I B A N K
ICICI Bank is India's second-largest bank with total assets of about
Rs.146, 214 crore at December 31, 2004 and profit after tax of Rs. 1,391 crore in
the nine months ended December 31, 2004.
ICICI Bank has a network of about 505 branches and extension countersand about 1,850 ATMs. ICICI Bank offers a wide range of banking products and
financial services to corporate and retail customers through a variety of delivery
channels and through its specialized subsidiaries and affiliates in the areas of
investment banking, life and non-life insurance, venture capital and asset
management. ICICI Bank has a global presence with subsidiaries.
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In the United Kingdom and Canada, branches in Singapore and Bahrain and
representative offices in the United States, China, United Arab Emirates and
Bangladesh.
ICICI Bank's equity shares are listed in India on the Stock Exchange,
Mumbai and the National Stock Exchange of India Limited and its American
Depositary Receipts (ADRs) are listed on the New York Stock Exchange
(NYSE).
As required by the stock exchanges, ICICI Bank has formulated a Code of
Business Conduct and Ethics for its directors and employees.
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian
financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in
ICICI Bank was reduced to 46% through a public offering of shares in India in
fiscal 1998,
An equity offering in the form of ADRs listed on the NYSE in fiscal 2000,
ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation
in fiscal 2001, and secondary market sales by ICICI to institutional investors in
fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the
World Bank, the Government of India and representatives of Indian industry. The
principal objective was to create a development financial institution for providing
medium-term and long-term project financing to Indian businesses. In the 1990s,
ICICI transformed its business from a development financial institution offering
only project finance to a diversified financial services group offering a wide
variety of products and services, both directly and through a number of
subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian
company and the first bank or financial institution from non-Japan Asia to be
listed on the NYSE.
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After consideration of various corporate structuring alternatives in thecontext of the emerging competitive scenario in the Indian banking industry, and
the move towards Universal banking, the managements of ICICI and ICICI Bank
formed the view that the merger of ICICI with ICICI Bank would be the optimal
strategic alternative for both entities, and would create the optimal legal structure
for the ICICI group's universal banking strategy. The merger would enhance
value for ICICI shareholders through the merged entity's access to low-cost
deposits, greater opportunities for earning fee-based income and the ability to
participate in the payments system and provide transaction-banking services.
The merger would enhance value for ICICI Bank shareholders through a large
capital base and scale of operations, seamless access to ICICI's strong
corporate relationships built up over five decades, entry into new business
segments, higher market share in various business segments, particularly fee-
based services, and access to the vast talent pool of ICICI and its subsidiaries.
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved
the merger of ICICI and two of its wholly-owned retail finance subsidiaries,
ICICI Personal Financial Services Limited and ICICI Capital Services Limited,
with ICICI Bank.
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SERVICES PROVIDED BY ICICI BANK
1. DEPOSITS
SAVING BANK
SPECIAL SAVING ACCOUNT
SENIOR CITIZEN SERVICE
ROAMING CURRENT ACCOUNT
PRIVATE BANK
SALARY ACCOUNT
WOMENS ACCOUNT
FIXED DEPOSITS
EASY FD
RECURRING DEPOSIT
YOUNG STAR
EEFC ACCOUNT
RFC ACCOUT
2. LOAN
HOME LOAN
CAR LOAN
PERSONAL LOAN
TWO WHEELERS LOAN
LOAN AGAINST SECURITY
FARM EQUIPMENTS LOAN
COMMERCIAL VEHICLE LOAN
CONSTRUCTION EQUIPMENTS LOAN
OFFICE EQUIPMENTS LOAN
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MEDICAL EQUIPMENTS LOAN
3. INVESTMENTS
ICICI BANK BONDS
MUTUAL FUNDS
PURE GOLD
INITIAL PUBLIC OFFER
GOVERNMENT OF INDIA BOND
4. DEMAT
5. CARDS
CREDIT CARD
DEBIT CARD
TRAVEL CARD
6. YOUNG STAR LOGIN
7. MOBILE BANKING
8. ONLINE SERVICES
BILL PAY
SHOPPING
TICKETING
CHARITY
SHARE TRADING
9. NRI SERVICES
NRI HOME
BANKING PRODUCTS
MONEY TO INDIA
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INVESTMENT OPTIONS
MODERN INVESTMENT OPTIONS
Along with Deposit products and Loan offerings, ICICI Bank assists you to
manage your finances by providing various investment options ranging from
ICICI Bank Tax Saving Bonds to Equity Investments through Initial Public Offers
and Investment in Pure Gold. ICICI Bank facilitates following investment
products:
ICICI Bank Tax Saving Bonds
Government of India Bonds
Investment in Mutual Funds
Initial Public Offers by Corporate
Investment in "Pure Gold"
TRADITIONAL INVESTMENT OPTIONS
ICICI Bank offers wide variety of Deposit Products to suit Investors
requirements. Coupled with convenience of networked branches with over 1800
ATMs and facility of E-channels like Internet and Mobile Banking, ICICI Bank
brings banking at Customers doorstep. There are three Options available to the
investors.
Fixed Deposits
Savings Account
Recurring Deposit
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Comparison of Traditional & Modern invest ment
HISTORY OF INDIAN MUTUAL FUND INDUSTRY
The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India, at the initiative of the Government of India and the Reserve Bank
S.No. Options Risk Return Tax
1
TRADITIONAL
METHODS
Fixed Deposit LOW Less Than 6%
p.a
Taxable
2 Recurring
Deposit
LOW Less than 6%
p.a
Taxable
3 Savings LOW 3.5% p.a Taxable
4
MODERN
METHODS
ICICI Bank
Tax Saving
Bonds
LOW 8% Deductible
From Taxa
Income
5 Government
of India
Bonds
No Risk 8% Tax Free
6 Investment in
Mutual Funds
Moderate Average
returns
Depend On
Market
Fluctuations
Funds Und
ELSS
Deductible
From Taxa
Income
7 Initial Public
Offers by
Corporate
High High or Low
Depends on
Market
Conditions
Returns Af
One Year a
Tax Free
8 Investment in
Pure Gold
Low Depends on
the Growth in
the Market
Taxable
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of India. The history of mutual funds in India can be broadly divided into four
distinct phases.
First Phase: 1964 1987
An Act of Parliament established Unit Trust of India (UTI) in 1963. It was
set up by the Reserve Bank of India and functioned under the Regulatory andadministrative control of the Reserve Bank of India. In 1978 UTI was de-linked
from the RBI and the Industrial Development Bank of India (IDBI) took over the
regulatory and administrative control in place of RBI. The first scheme launched
by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of
assets under management.
Second Phase:1987 - 1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and General
Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI
Mutual Fund established in June 1987 followed by Can bank Mutual Fund
(December 87), Punjab National Bank Mutual Fund (August 89), Indian Bank
Mutual Fund (November 89), Bank of India (June 90), Bank of Baroda Mutual
Fund (October 92). LIC established its mutual fund in June 1989 while GIC had
set up its mutual fund in December 1990. At the end of 1993, the mutual fund
industry had assets under management of Rs.47, 004 crores.
Third Phase: 1993 - 2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new 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
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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 withtotal assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541
crores of assets under management was way ahead of other mutual funds.
Fourth Phase: Since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963
UTI was bifurcated into two separate entities. One is the specified undertaking of
the Unit Trust of India with assets under management of Rs.29, 835 crores as at
the end of January 2003, representing broadly, the assets of US 64 scheme,
assured return and certain other schemes. The Specified Undertaking of Unit
Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund
Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB,
BOB and LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March 2000
more than Rs.76, 000 crores of assets under management and with the setting
up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and
with recent mergers taking place among different private sector funds, the mutual
fund industry has entered its current phase of consolidation and growth. As at
the end of October 31, 2003, there were 31 funds, which manage assets of
Rs.126726 crores under 386 schemes.
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CONCEPT OF MUTUAL FUNDS
A mutual fund is an investment vehicle which allows investors with similar
(one could say mutual) investment objectives, to pool their resources and
thereby achieve economies of scale and diversification in their investing.
Economies of Scale mean lower costs on a per unit basis by doing things "in
bulk" which spreads fixed costs over greater volume. A mutual fund achieves
lower per unit costs for professional money management and for transaction
charges, than small investors could achieve on their own. This can increase
return to the investor. Diversification is just another way of saying "Dont put all
your eggs in one basket." A mutual fund allows its investors to a small
percentage of many different investments. So in a well-diversified mutual fund no
one particular investment dominates its performance. Poor results from some
investments are likely to be offset by good results from other investments.Therefore, the unit value of a mutual fund will not fluctuate as sharply as the
value of any one of its investments. This can reduce risk to the investor.
A mutual fund is the ideal investment vehicle for todays complex and
modern financial scenario. Markets for equity shares, bonds and other fixed
income instruments, real estate, derivatives and other assets have become
mature and information driven. Price changes in these assets are driven by
global events occurring in faraway places. A typical individual is unlikely to have
the knowledge, skills, inclination and time to keep track of events, understand
their implications and act speedily. An individual also finds it difficult to keep track
of ownership of his assets, investments, brokerage dues and bank transactions.
A mutual fund is the answer to all these situations. It appoints
professionally qualified and experienced staff that manages each of these
functions on a full time basis. The large pool of money collected in the fund
allows it to hire such staff at a very low cost to each investor. In effect, the mutual
fund vehicle exploits economies of scale in all three areas - research,
investments and transaction processing. While the concept of individuals coming
together to invest money collectively is not new, the mutual fund in its present
form is a 20th century phenomenon. In fact, mutual funds gained popularity only
after the Second World War. Globally, there are thousands of firms offering tens
of thousands of mutual funds with different investment objectives. Today, mutual
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funds collectively manage almost as much as or more money as compared to
banks.
Despite these advantages mutual funds do not guarantee do not return,
nor do they eliminate risk to investors. The return and risk of a mutual fund
depend primarily on the type of securities instruments in which it invests, and
secondarily on how well it is managed by the company offering it.Typically a mutual fund scheme is initiated by asponsorwho recognizes
and markets the fund. It pre specifies the investment objective of the fund and
the risks associated with the costs involved in the process and broad rules for
entry into and exit from the fund and other areas of operation. In India as in most
nations the sponsors need approval from the regulator viz. SEBI. A sponsor then
hires an asset management company to invest the funds according to the
investment objective. It also hires another entity to the custodian of the assets of
the funds and perhaps a third one to handle registry work.
In the Indian context, the sponsors promote theAsset Management
Companyalso, in which it holds a majority stake. In many cases a sponsor can
hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global
Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd.,
which has floated different mutual funds schemes and also acts as an asset
manager for the funds collected under the schemes.
A Mutual Fund is a trust that pools the savings of a number of investors
who share a common financial goal. The money thus collected is then invested
in capital market instruments such as shares, debentures and other securities.
The income earned through these investments and the capital appreciations
realized are shared by its unit holders in proportion to the number of units owned
by them. Thus a Mutual Fund is 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.
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The flow chart below describes broadly the working of a mutual
fund
Mutual fund Investment Flow-chart
Organization of Mutual Funds
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ORGANIZATIONAL STRUTURE OF MUTUAL FUND
18
Sponsor Company
(For eg. Prudential icici)
Managed by the board of
trustee
Hold unit holders fund in MF
Enter into an agreement with SEBI
and ensure compliance
Mutual Fund
(For eg prudential icici
mutual fund)
Float MF funds,
Manages the fund as SEBI
Guidelines and AMC agreement
AMC
(eg. Prudential ICICI
AMC)
Provides custodial services
REGISTERProvides registrar and transfer
service
CUSTODIAN
Established MF as the trust
Register the MF under SEBI
DISTRIBUTORS
Provides the network for
distribution of the schemes to the
investor
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TYPES OF MUTUAL FUNDS
Most mutual funds are open-ended funds. This means you can subscribe
to one at any time of the year. Open-ended funds are not listed on stock
exchanges.
A converse set of rules apply to closed ended funds. Closed ended funds
have a fixed number of shares, are open for subscription during a specified
period and operate for a fixed period of time. For example, five years and so,
the number of buyers and sellers are exact someone would have to sell for you
to be able to buy. Closed ended funds are generally listed on stock exchanges.
Mutual funds can also be broadly classified into four distinguishable types:
Equity funds
Debt or Income funds
Balanced funds
Money Market funds
Debt or Income Funds
The aim of debt or income funds is to make regular payments to its
investors, although dividends can be reinvested to buy more units of the fund. To
provide you with a steady income, these funds generally invest in fixed income
securities such as bonds, corporate debentures, government securities (gilts)
and money market instruments. Opportunities for capital appreciation are limited
and the downside is that as interest rates fluctuate, the net asset value or NAV of
the fund could follow suit if interest rates fall, the NAV is likely to increase and
vice versa. There is also a risk that a company issuing a bond may default on its
payment, if it is not financially healthy. However, if the fund invests in
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government securities there is little risk of the government defaulting on its
payment.
Equity Funds
Equity funds (often described as growth funds) aims to provide capital
growth by investing in the shares of individual companies. Depending on the
funds objective, this could range from large blue-chip organizations to small and
new businesses. Any dividends received by the fund can be reinvested by the
fund manager to provide further growth or paid to investors. Both risk and returnsare high but they could be a good investment if you have a long-term perspective
and can stay invested for at least five years.
Balanced funds - The best of both the worlds
As the name suggests, these funds aim for balance, so they are made up
of a mixture of equities and debt instruments. They match the goals of investors
who seek to grow their capital and get regular income, while retaining relatively
low risk.
The debt or bond element of the fund provides a level of income and acts
as the safety net during dynamic periods in the market, while equities provide the
potential for capital appreciation.
Balanced funds could be suitable for investors who are looking for moderate
capital appreciation.
Money market funds
Money market or liquid funds are an appealing alternative to bank
deposits because they aim to provide stability, liquidity, capital preservation and
slightly higher interest rates than bank accounts. When you invest in a money
market fund, the fund manager invests in cash assets such as treasury bills,
certificates of deposit and commercial paper. Returns on these funds fluctuate
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much less compared to other funds, but they are not guaranteed. They are
appropriate for corporate and individual investors who wish to park their surplus
money in a fund for a short period.
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CLASSIFICATION OF MUTUAL FUNDS
There are varied ways in which funds can be classified. From the
investors perspective funds are usually classified in terms:
Constitution Structure
Collection entry or
exit charges from
investors
Close ended Load funds
Open ended No-Load funds
Under each broad classification, there are several types of funds,
depending on the basis of the nature of their portfolio. Every fund has unique
risk-profiles that are determined by its portfolio.
Open-ended Funds
An open-end fund is one that has units available for sale and repurchase
at all the times at a price based on the NAV per unit. Such funds are open for
subscription the whole year. Capitalization/corpus is continuously changing.
Fund size and the total investment amount goes up if more new subscription
comes in from new investors than redemption by exiting investors, the fund
shrinks when redemption of units exceeds fresh subscription. Theres no fixed
maturity.
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Shares or units of such funds are normally not traded on the stock
exchange but are repurchased by the fund at announced rates. They provide
better liquidity even though not listed as investors can any time approach mutual
funds for sale of such units.
Dividend reinvestment option is also available in case of such funds.
Since there is always a possibility of withdrawals, management of such fundsbecomes more tedious as managers have to work from crises to crises. Crises
may be two fronts:
Unexpected withdrawals require funds to maintain a high level of cash
available every time implying thereby idle cash.
By virtue of this situation such funds may fail to grab favorable
opportunities. Further to match quick cash payments, funds cannot have
matching realization from their portfolio due to intricacies of the stock market.
Close-ended Funds
Close end funds can be subscribed to, only during the initial public offer.
Thereafter the units of such funds can be bought and sold on the stock exchange
on which they are listed through a broker. Such funds have a stipulated maturity
period. The duration of such funds is generally 2 to 15 years.
The funds units may be traded at the discount or premium to NAV based
on the investors perception about the funds future performance and other
market factors affecting the demand for a supply of the funds units. An important
point to note here is that the number of outstanding units of such fund doesnt
vary on account of trading in the funds units at the stock exchange. From
management point of view, managing close ended schemes is comparatively
easy since fund managers can evolve and adopt long term investment strategies
depending on the life of the scheme.
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Load Funds
Marketing of new mutual fund scheme involves initial expenses. Charges
made to the investor to cover distribution/sales/marketing expenses are often
called loads. These expenses may be recovered from the investors in different
ways at different times.Typically entry and exit loads range from 1% to 2%. Three usual ways in
which funds sales expenses may be recovered from the investor are:
At the time of entry into the fund, by deducting a specific amount from his
initial expenses. The load charges to the investor at the time of his entry into the
scheme are called a front-end or entry load.
By charging the fund/scheme with a fixed amount each year, during the
stated number of years. The load amount charged to the scheme over a period
of time is called deferred load.
At the time of investors exit from the scheme, by deducting a specified
amount from the redemption precedes payable to the investor. The load that the
investors pay at the time of his exit is called a back-end or exit load.
Some funds may also charge different amounts of load to the investor
depending upon how many years the investors has stayed with the fund, the
longer the investor stays with the fund less the amount of exit load, he is
charged. This is called as contingent deferred sales charge. The schemes NAV
would reflect the net amount after the deferred load.
Loads are charged not only by an open-ended fund but even a close-ended
fund can charge a load to cover the initial issue expense.
No-Load Funds
Funds that make no such charges or loads for sales expenses are calledas no load funds.
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OPTIONS AVAILABLE TO THE INVESTORS
Each plan of every mutual fund has three options Growth, Dividend and
dividend reinvestment. Separate NAV are calculated for each scheme.
Dividend Option
Under the dividend plan dividend are usually declared on quarterly or
annual basis. Mutual fund reserves the right to change the frequency of dividend
declared.
Dividend reinvestment option
Instead of remittances of units through payouts, Units holder may choose
to invest the entire dividend in additional units of the scheme at NAV related
prices of the next working day after the record date. No sales or entry load is
levied on dividend reinvest.
Dividend Payout option
Dividend declared by the fund manager is remitted to the investors and
NAV is reduced by that value.
Growth Option
Under this plan returns accrue to the investor in the form of capital
appreciation as reflected in the NAV. The scheme will not declare the dividend
under the Growth plan and investors who opt for this plan will not receive any
income from the scheme. Instead of income earned on their units will remain
invested within the scheme and will be reflected in the NAV.
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Calculation of NAV
RISKS ASSOCIATED WITH MUTUAL FUNDS
Mutual funds and securities investment are subject to various risks and
there is no assurance that a scheme objective will be achieved. These risks
should be properly understood by investors so that they can understand how
much risky their investment avenue is. Equity and fixed income bearing
securities have different risks associated with them. Various risks associated
with mutual funds can be described as below.
Risk associated to fixed income bearing securities are
Interest rate risk
As with all the securities, changes in interest rates may affect the
schemes Net Asset Value (NAV) as the prices of the securities generally
increase as interest rates decline and generally decrease as interest rates rise.
Prices of long-term securities generally fluctuate more in response to interest
rates changes than short term securities do. Indian Debt markets can be volatile
leading to the possibility of price movements up or down in the fixed income
securities and thereby to the possible movements in the NAV.
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Liquidity or marketable risk
This refers to the ease with which a security can be sold at near to its
valuation yield to maturity. The primary measure of liquidity risk is the spread
between the bid price and the offer price quoted by the dealer. Liquidity risk isinherent to the Indian Debt market.
Credit risk
Credit risk or default risk refers to the risk that an issuer of fixed income
security may default (i.e., will be unable to make timely principal and interest
payments on the security). Because of this risk corporate debentures are sold at
a yield above those offered on Government securities, which are sovereign
obligations and free of credit risk. Normally the value of fixed income security will
fluctuate depending upon the perceived level of credit risks well as the actual
event of default. The greater the credit risk the greater the yield require for
someone to be compensated for increased risk.
Risk associated to equities
Market risk
The NAV of the scheme investing in equity will fluctuate as the daily prices
of the individual securities in which they invest fluctuate and the units when
redeemed may be worth more or less than the original cost.
Timing the market
It is difficult to identify which is the right time to invest and which is the
right time to take out the money. There may be situations where stocks may not
be rightly timed according to the market leading to loss in the value of scheme.
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Liquidity
Investment made in unlisted equities or equity related securities might
only be realizable upon the listing of the securities. Settlement problems could
cause the scheme to miss certain investment opportunities.
ADVANTAGES OF INVESTING IN MUTUAL FUNDS
Professional Management
Mutual Funds provide the services of experienced and skilled
professionals, backed by a dedicated investment research team that analyses
the performance and prospects of companies and selects suitable investments to
achieve the objectives of the scheme.
Diversification
Mutual Funds invest in a number of companies across a broad cross-
section of industries and sectors. This diversification reduces the risk because
seldom do all stocks decline at the same time and in the same proportion. You
achieve this diversification through a Mutual Fund with far less money than you
can do on your own.
Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and follow up with brokers
and companies. Mutual Funds save your time and make investing easy and
convenient.
Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide a
higher return as they invest in a diversified basket of selected securities.
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Low Costs
Mutual Funds are a relatively less expensive way to invest compared to
directly investing in the capital markets because the benefits of scale in
brokerage, custodial and other fees translate into lower costs for investors.
Liquidity
In open-end schemes, the investor gets the money back promptly at net
asset value related prices from the Mutual Fund. In closed-end schemes, the
units can be sold on a stock exchange at the prevailing market price or the
investor can avail of the facility of direct repurchase at NAV related prices by the
Mutual Fund.
Transparency
You get regular information on the value of your investment in addition to
disclosure on the specific investments made by your scheme, the proportion
invested in each class of assets and the fund manager's investment strategy and
outlook.
Flexibility
Through features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans, you can systematically invest or withdraw
funds according to your needs and convenience.
Affordability
Investors individually may lack sufficient funds to invest in high-grade
stocks. A mutual fund because of its large corpus allows even a small investor to
take the benefit of its investment strategy.
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Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a
lifetime.
Well Regulated
All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The
operations of Mutual Funds are regularly monitored by SEBI.
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TAX BENEFITS OF INVESTING IN THE MUTUAL FUND
A. TO THE UNITHOLDERS
INCOME RECEIVED FROM MUTUTAL FUND
Any income received in respect of units of Mutual Fund under clause
(23D) of Section 10, in respect of Assessment Year 2004-2005, will be exempt
from income tax in the hands of the unit holders. Further, it has been clarified
that income arising from transfer of units of Mutual Fund shall not be exempt
under section10 (35).
No tax would be payable by unit holders in respect of income distributed
by the Fund and no tax needs to be deducted at source thereon by the Fund.
B. LONG TERM CAPITAL GAINS ON TRANSFER OF UNITS
For Individuals and HUFs
Long-term Capital Gain tax is not applicable if the Units are held for more
than 12 months.
For Non-resident Indians
Under section 115E of the Act for non-resident Indians, income by way of
long-term capital gains in respect of Units is chargeable at the rate of 20% plus
applicable surcharge.
C. SHORT TERM CAPITAL GAINSShort term Capital Gains in respect of Units held for a period of not more
than 12 months is added to the total income. Total income including short-term
capital gains is chargeable to tax as per the relevant slab rates Income Tax
Rates
The maximum taxes rates applicable to different categories of assess are as
follows:
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Resident individuals and HUF 30% plus surcharge
Partnership Firms 35% plus surcharge
Indian companies 35% plus surcharge
Non Resident Indians 30% plus surcharge
Foreign Companies 40% plus surcharge
As per the Finance Act 2003, a surcharge of 2.5% on the income tax
would be applicable for all categories of assesses except in the case of
individuals and HUF.
TAX DEDUCTION AT SOURCE
For Income in respect of units
As per section 10(35), section 194K and section 194A, no tax shall be
deducted in respect of any income credited or paid on or after April 1, 2003 in
respect of units of the Fund.
For Capital Gains
In respect of Resident Unit holders:
No tax is required to be deducted at source on capital gains arising to any
resident unit holder (under section 194K)
In respect of Non- Resident Unit holders
Under section 195 of the Income Tax Act, 1961, tax shall be deducted at
source in respect of capital gains as under:
In case of non resident other than a company
Long term capital gains 20% plus surcharge
Short term capital gains 30% plus surcharge
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EXEMPTION FROM TAX ON CAPITAL GAINS ARISING ON TRANSFER OF
UNITS HELD FOR MORE THAN 12 MONTHS
Under section 54EC of the Act the Income Tax Act, 1961, where an
assesses has made capital gains from the transfer of units held in Mutual Fund
Scheme for a period exceeding 12 months, such capital gains shall be exempted
from tax on capital gains under section 54EC of the Income Tax Act 1961.
WEALTH TAX
Units held under the Mutual Fund Scheme are not treated as assets within
the meaning of section 2(ea) of the Wealth Tax Act, 1957 and are, therefore, not
liable to Wealth-Tax.
GIFT TAX
Units of the Mutual Fund may be given as a gift and no gift tax will be
payable either by the donor or the done, as the Gift Tax Act has been abolished.
CUSTOMER PROFILING OF MUTUAL FUNDS
We plan to do customer profiling of mutual funds investors that would help
us to know their investment behavior and their risk taking ability. This would
involve questionnaire filling and interviewing them.
PROBLEM STATEMENT
Analysis of the Investment pattern in Mutual Funds.
RESEARCH PROBLEM
There are myriad choices available to the investor of today. Investment
avenues are Galore. There are different investment vehicles such as stocks and
bonds. We however need to invest carefully, and work out various investment
options and decide on how to make best of our investment in terms of monetary
benefits.
The key questions on mutual funds are:
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What are the selection criteria for customers in buying of mutual funds?
What is the buying behavior of mutual fund customers?
What is the level of awareness about mutual funds among investor?
What percentage of investors invests in mutual funds in proportion of their
investments?
What is the most preferred mutual fund among various mutual funds?
What are the customers objectives of investing in mutual funds?
What is the level of satisfaction of investors from their mutual funds?
Objectives of the Study
To understand the investment behavior of the investors
To analyze the risk appetite of the investors
Role of a distributor in investment decisions of the investors and to
identify the areas for improvement
To find out the major factor influencing the investment decision of
an investor
Research Methodology
Research design: Exploratory research
Data source : Primary & Secondary
Sampling Method: Simple Random Sampling
Sample Size: 150
Sampling Unit: Investors above 20 yrs of age
Area covered: DelhiTime period: 2 Months (20/5/2008-30/6/2008)
How research was conducted: 150 questionnaires were distributed and filled up
by the target sample.
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DEFINE POPULATION
The population of our research consists of people residing in DELHI.
All the age groups above the age of 20 form the elements of our
population.
DEFINING SAMPLE
Our sample size consists of 150 respondents, consisting of people from
the age range of 20 and above.
We have chosen this sample because the investors in this age group are
adults and they are ready to invest there savings in financial instruments.
HOW THE SAMPLE SIZE IS CHOSEN
The sample size of 150 people has been chosen by the process of simple
random sampling technique where each element of the population has an
equal and likely chance to get selected.
WHERE THE SURVEY WAS CONDUCTED
Our sample selection target places have been mostly malls and few
financial institutions like ICICI bank. We choose these places because the
respondents that we would get at these places would be mostly of our
requirement, who usually invest in these financial instruments.
RESEARCH DESIGN
Our study is mainly Exploratory in nature.
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Findings & Interpretations
Age-wise distribution
Majority of the MF investors fall in age bracket of 35-50 yrs.This shows that
middle aged persons are quite liberal in investing in Mutual Funds.
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Educational background
Aa
A large number of investors are post graduates and graduates. It shows that MF
investments are hotter among the educated class. Less qualified persons are a
bit hesitant in investing in MFs. This may be due to the lack of knowledge and
expertise about the Mutual Funds.
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Nature of occupation
Majority of the investors are either Professionals, Businessmen or Private sector
employees.
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Types of investment(s) made
A large number of our sample invests in Mutual Funds (137) and Insurance
(124). Also a good number in FDs (94). This shows that investors approach is
somewhat balanced as nearly one third also invest in Equities (46).
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Investment objective
In this graph we can see that 35% invest for Capital gains and 32% for Future
plans while 26% invest for Tax savings.
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Criteria for selecting a MF Scheme
This graph shows that 42% of the investors select a Mutual Fund scheme on the
basis of return potential while 26% of them on the basis of past performance.
This shows that people are somewhat aggressive in selecting a MF scheme and
they consider returns for some amount of risk.
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Type of MF Scheme most preferred
Most of the investors (42%) go for Growth schemes while a good number(29%)
go for Balanced scheme. Very few (8%) go for Debt scheme. This may be due to
good equity market over a couple of years and poor debt market conditions.
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Channel of Investment
A large number of investors (96%) invest through advisors or distributors. This
may be due to time constraint or lack of expertise.
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Annual investment in Mutual Funds
49% of our sample invest less than Rs. 50,000 in MFs annually while 32% invest
in the range of Rs. 50,000-1,00,000. Very few i.e only 2% invest more than Rs.
3,00,000 annually.
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Level of satisfaction from MF investments
52% of the investors are satisfied with their MF investments while 15% are highly
satisfied. This is also probably due the outcome of good equity market conditions
for the past few years.
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Annual Income of the investors
Majority of our investors fall in the income of Rs. 1,00,000-2,50,000 (54%) and
Rs.2,50,000-5,00,000 (31%) annually. The HNIs were not easily accessible
which was the major constraint of my study.
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Conclusions
Awareness level of mutual Funds is very high among the
investors in Delhi.
Returns is the prime factor which affect their investment
decisions.
Investors in Delhi are reasonably aggressive and are
willing to take risk for return. Distributors play a very important role in investors
decision making.
Investors in Delhi have a well organized portfolio.
New investors are a bit apprehensive in investing in
Public Sector AMCs and they prefer the names like UTI,
SBI,etc.
Majority of the investors are satisfied with their MF
investments
A good number of investors invest in FDs and they can
be convinced to invest in MFs.
Majority of the MF investors are Graduates and Post
graduates.
Pvt. Sector employees and Professionals are more
liberal in making their investment decisions.
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Recommendations
FCs be given more structured training.
After sales service of the distributors be improved.
More awareness campaigns be launched to educate the
investors especially for undergraduate investors.
Walk ins of FDs be induced to start with small amounts.
Research be conducted over a larger sample &
coverage.
Respondents can be lured by offering incentives.
Organizations should provide access to their HNI
database.
SIPs should be promoted to small investors.
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Limitations
The results cannot be generalized as the investors
behavior in Delhi are quite different .
The sample size was very small and population is verylarge.
Respondents unwillingness to respond.
Time constraint led to limit our sample size.
Research was limited mostly to MF investors only.
Respondents reluctance in disclosing their income
levels.
Lack of experience of the researcher.
The HNIs were not easily accessible.
Financial constraint.
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SWOT ANALYSIS BASED ON THE STUDY OF MFs
Strength
Good for new investor as the fund has to be managed by specialized fund
manager.
Only product which invests in money market, debt market and equity
market at same time.
Investment needed is comparatively less than other investments.
During the stack market boom periods all mutual funds have performed
fairly well thereby increasing investors expectations.
Weakness
Customers do not prefer it because of risk attached to it that is market
risk.
Fund manager if makes a wrong prediction then customer will bear thebrunt therefore it depends on funds managers analysis.
Sometimes the age factor affects the investment preference of the
investors.
People are afraid of investing in the equity market.
Opportunities Creating positive image about the fund and changing the nature of the
market itself.
Market of mutual fund is expanding as many foreign companies are
coming in this.
Great scope of new investment due to the budget announcement this
year.
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The objective of investing in mutual fund is Tax-saving apart form returns
third main objective is growth.
Threats
Now there are many other investment instruments which are more
lucrative than mutual fund. (real estate , gold)
Unawareness among investors regarding mutual funds. Also in India most
of the people lack of awareness about mutual fund. They dont know
anything about what is mutual fund, how it works. How fund managers
invest peoples money in different portfolios and provide the better returns
to the customers
Lack of promotions, advertising by mutual fund industry