Project on Mutual Fund Industry & impact of exit & entry load on IFA segment

A PROJECT REPORT ONChanging Trends in Mutual Fund Industry Post Entry Load Waiver & The Resultant Impact On IFA Segment

SUBMITTED BY

PREETI YADAV (M100700040)

ORGANISATION: DSP BlackRock MUTUAL FUND COMPANY LTD.

LOCATION: CHANDIGARH

ACKNOWLEDGEMEN T

At the ecstatic time of presenting my project on

First of all, I bow the almighty God for blessing me with enough patience and strength to go

through this challenging face of life.

I express my sincere thanks to DSP BlackRock Mutual Fund Company for giving me

an opportunity to work with them through this summer project. It gives me a sense of

great pride to acknowledge the fact that working on this project has added value to

my learning process.

My humble thanks and feigned gratefulness to Mr. Bimal Jeet Singh, my company

guide and Mr. Iqbal Bhatti who emitted signals of profound knowledge and deep

insight without which it would have been difficult to give a physical shape to the

project.

I would also like to thank Ms. Lipika Nangia and Ms. Nishi Kalia who supported me

and help me to understand the practical working of the mutual fund industry.

I wish to acknowledge with regards the staff and officials of the DSP BlackRock Mutual

Fund Company Ltd. for their support during my internship.

1

Preeti Yadav (M100700040)

Table of Content

1. Introduction of the Company

1.1DSP Group Overview

1.2Management of DSP Group

1.3Main competitors

1.4Financial statement analysis

2. Executive summary

3. Abstract

4. Objective of the study

5. Scope of the study

6. Introduction to project title

7. Concept of a Mutual Fund

8. Conceptual Framework of MF

9. Advantages & Disadvantages of MF

10. Types of MF schemes

11. Modes of Receiving Income Earned From MF Investment

12. Investment Philosophy of DSP BlackRock MF

13. Different scheme of BlackRock

14. Growth of MF Industry in India

15. Recent trends in MF Industry

16. How to invest in MF Industry

17. Fees & commission paid to MF

18. How Financial Advisers get paid for selling MF?

19. Changing distribution structure of MF

20. Why an IFA?

21. MF with NO distributors

22. Literature Review

23. Research Methodology

1.1 Survey Analysis

1.2 Objectives

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1.3 Sampling Method1.4 Research Instrument1.5 Assumption1.6 Limitation of study

24. Performance Evaluation

25. How to calculate the value of a MF

26. Measuring MF Performance

27. Composition of the portfolio

28. Questionnaire Analysis

30. Bibliography

31. Annexures

Figures

Fig 1 Concept of MF

Fig 2 Structure of MF

Fig 3 Types of MF Schemes

Fig 4 Aggressive plan

Fig 5 Conservative plan

Fig 6 Fees paid to shareholders

Fig 7 Asset growth & shift in source of adviser’s compensation

Fig 8 Investment in MF

Fig 9 Decision Influencer

Fig 10 Risk appetite

Fig 11 safe/ secured returns

Fig 12 Income tax Incentives

Fig 13 Quality of service of MF agents

Fig 14 Selection of Investment Fund

Fig 15 Entry and Exit load

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Introduction

DSP Group Overview

DSP Group Holds a 60% stake in DSP BlackRock Investment Managers.

The Kothari family of D.S. Purbhoodas and Co. is the promoter and owner of DSP

Group.

Track record of over 140 years, one of the oldest financial services firms in India.

One of the founding members and first directors of the Bombay Stock Exchange

(BSE).

Each generation of the DSP Group has seen a partner serving as President of the

Bombay Stock Exchange, bearing testimony to the long-standing position DSP

Group occupies in the Indian Financial arena.

Mr. Hemendra Kothari, Chairman of DSP BlackRock Investment Managers, has an

experience of over 40 years in the financial services industry, and also served the

Bombay Stock Exchange in the capacity of Vice President for three years after which

he was elected as President in 1991-92.

BlackRock holds 40% stake in DSP BlackRock Investment Managers Independent firm in

ownership and governance.

Established in 1988, BlackRock is a public company (NYSE:BLK)

- No majority owners

- Majority of Board of Directors is independent.

Laurence Fink, Chairman& CEO since firm’s inception.

Leader in creating solutions for clients4


Strategies and services differentiated for clients.

Customizes solutions to meet risk/return objectives.

Innovative strategies and services within and across asset classes.

Client dialogues have resulted in advisory assignments.

Senior level of commitment to client service.

“One BlackRock” approach result in consistency & quality throughout firm.

Pioneer in risk management and technology

Provides risk management and enterprise investment services for $ 9 trillion in

assets.

BlackRock Solutions offers independent risk management products.

DSP BlackRock

DSP BlackRock Investment Managers is a joint venture between DSP

Group and BlackRock

With our three – dimensional approach to managing the organization, we

seek to:

Ensure consistency on a global basis.

Allow for the tailoring of products and services according to client or local needs.

Promote teamwork among our employees worldwide; and

Facilitate operational integrity and efficiency.

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Our Values

Integrity

Demonstrate honesty, integrity and professionalism in all internal and external

dealings. Maintain the highest standards of ethics.

We are fiduciaries and leaders in our industry. We understand the responsibility we

carry.

We respect differences and learn from them. We take time to teach others.

We are open and honest in all our communications. We speak the truth.

Values

Client focus

We listen carefully to our clients.

We put our clients first and at the heart of all we do.

We listen and deeply understand our clients businesses, risk and issues.

We help our clients better meet their investment goals.

We anticipate trends and help clients plot the future course.

Consistently exceed our client’s expectations. Make decisions close to our clients.

Management - DSP BlackRock

Name Designation

Shitin Desai Executive Vice Chairman

Jennifer Taylor Additional Director

Name Designation

Pradeep Dokania Director

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Antonios Biniaris Additional Director

Main Competitors

HDFC Mutual Fund

Birla Sun Life Mutual Fund

Reliance Mutual Fund

Prudential ICICI Mutual Fund

Kotak Mutual Fund

Franklin Templeton Mutual Fund

UTI Mutual Fund

Competitors Last Price Market Cap.(Rs.cr.)

SalesTurnover

Net Profit Total Assets

Rel Capital 575.55 14,167.74 1,808.81 229.27 18,917.21

Bajaj Holdings 772.05 8,592.42 1,074.56 1,000.09 4,603.16

Bajaj Finserv 535.70 7,750.70 119.81 188.34 1,390.16

Muthoot Finance 185.35 6,889.70 - - -

Religare Enterp 464.40 6,478.08 126.71 4.99 2,583.28

Responsive Ind 106.65 2,790.44 724.50 47.21 452.31

Tata Inv Corp 480.30 2,646.23 245.95 198.59 1,639.68

JM Financial 21.80 1,634.53 44.12 10.04 1,617.88

Future Ventures 9.70 1,528.96 13.12 -0.67 -

JSW Holdings 865.20 960.34 24.07 20.70 642.64

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Financial Statement Analysis

Balance Sheet

Balance Sheet of DSP

BlackRock------------------- in Rs. Cr. -------------------

Mar '09 Mar '08 Mar '07 Dec '05

12mths 12mths 15mths 12mths

Sources Of Funds

Total Share Capital 697.50 697.50 697.50 22.50

Equity Share Capital 22.50 22.50 22.50 22.50

Share Application Money 0.00 0.00 0.00 0.00

Preference Share Capital 675.00 675.00 675.00 0.00

Reserves1,395.5

11,322.66 912.81 529.65

Revaluation Reserves 0.00 0.00 0.00 0.00

Net worth2,093.0

12,020.16 1,610.31 552.15

Secured Loans 4.80 4.96 1,020.75 3.12

Unsecured Loans 0.00 151.40 839.88 12.00

Total Debt 4.80 156.36 1,860.63 15.12

Total Liabilities2,097.8

12,176.52 3,470.94 567.27

Mar '09 Mar '08 Mar '07 Dec '05


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Application Of Funds

Gross Block 187.46 168.28 81.30 60.36

Less: Accum. Depreciation 111.68 78.21 52.30 42.15

Net Block 75.78 90.07 29.00 18.21

Capital Work in Progress 0.94 5.84 15.65 2.75

Investments1,676.8

81,684.79 644.70 70.49

Inventories 128.91 41.41 2,206.18 303.41

Sundry Debtors 53.69 200.04 546.60 187.06

Cash and Bank Balance 274.35 610.86 115.33 56.13

Total Current Assets 456.95 852.31 2,868.11 546.60

Loans and Advances 339.93 315.13 298.10 645.07

Fixed Deposits 961.19 1,996.11 1,186.19 289.24

Total CA, Loans &

Advances

1,758.0

73,163.55 4,352.40 1,480.91

Deffered Credit 0.00 0.00 0.00 0.00

Current Liabilities1,249.3

12,716.80 1,562.88 658.20

Provisions 164.56 50.92 7.91 346.90

Total CL & Provisions1,413.8

72,767.72 1,570.79 1,005.10

Net Current Assets 344.20 395.83 2,781.61 475.81

Miscellaneous Expenses 0.00 0.00 0.00 0.00

Total Assets2,097.8

02,176.53 3,470.96 567.26

Contingent Liabilities 33.76 36.01 56.56 15.08

Book Value (Rs) 630.23 597.85 415.69 245.40

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Profit & Loss account of DSP

BlackRock------------------- in Rs. Cr. -------------------

Mar '09

Mar '08 Mar '07 Dec '05 Dec '04

12mths 12mths 15mths 12mths 12mths

Income

Sales Turnover 649.63 1,236.52 1,160.21 480.96 363.05

Excise Duty 0.00 0.00 0.00 0.00 0.00

Net Sales 649.63 1,236.52 1,160.21 480.96 363.05

Other Income 164.50 35.31 119.37 7.12 6.73

Stock Adjustments 0.00 0.00 0.00 0.00 0.00

Total Income 814.13 1,271.83 1,279.58 488.08 369.78

Expenditure

Raw Materials 0.00 0.00 0.00 0.00 0.00

Power & Fuel Cost 0.00 0.00 0.00 0.00 0.00

Employee Cost 296.69 339.37 348.37 139.04 87.16

Other Manufacturing Expenses 3.77 4.32 2.83 1.78 1.57

Selling and Admin Expenses 129.64 178.89 145.72 49.65 46.18

Miscellaneous Expenses 29.16 27.53 35.46 14.76 11.96

Preoperative Exp Capitalized 0.00 0.00 0.00 0.00 0.00

Total Expenses 459.26 550.11 532.38 205.23 146.87

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Mar'09 Mar '08 Mar '07 Dec '05 Dec '04

12mths 12mths 15mths 12mths 12mths

Operating Profit 190.37 686.41 627.83 275.73 216.18

PBDIT 354.87 721.72 747.20 282.85 222.91

Interest 3.83 39.23 172.29 15.21 11.54

PBDT 351.04 682.49 574.91 267.64 211.37

Depreciation 35.43 28.17 12.70 6.69 6.30

Other Written Off 0.00 0.00 0.00 0.00 0.00

Profit Before Tax 315.61 654.32 562.21 260.95 205.07

Extra-ordinary items 11.55 -3.03 0.61 -0.01 -0.03

PBT (Post Extra-ord Items) 327.16 651.29 562.82 260.94 205.04

Tax 102.62 217.76 177.64 90.98 72.72

Reported Net Profit 224.53 433.54 385.19 169.98 132.33

Total Value Addition 459.27 550.10 532.38 205.22 146.86

Preference Dividend 20.25 20.25 0.94 0.00 0.00

Equity Dividend 0.00 0.00 0.00 22.50 54.00

Corporate Dividend Tax 9.93 3.44 0.16 3.16 7.70

Per share data (annualized)

Shares in issue (lakhs) 225.00 225.00 225.00 225.00 225.00

Earnings Per Share (Rs) 90.79 183.68 170.77 75.54 58.82

Equity Dividend (%) 0.00 0.00 0.00 100.00 240.00

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Book Value (Rs) 630.23 597.85 415.69 245.40 181.26

Cash Flow of DSP BlackRock ------------------- in Rs. Cr. -------------------

Mar '09 Mar '08 Mar '07 Dec '05


Net Profit Before Tax 229.59 654.34 456.27 276.06

Net Cash From Operating

Activities-406.74 1636.10 -221.63 159.84

Net Cash (used in)/from

Investing Activities94.48 -622.70 -500.14 -54.20

Net Cash (used in)/from

Financing Activities-24.01 0.34 649.01 -61.34

Net (decrease)/increase In

Cash and Cash Equivalents-336.26 1013.74 -72.76 44.30

Opening Cash & Cash

Equivalents1105.38 91.64 164.40 120.10

Closing Cash & Cash

Equivalents769.11 1105.38 91.64 164.40

key Financial Ratios of DSP BlackRock

------------------- in Rs. Cr. -------------------

Mar '09 Mar '08 Mar '07 Dec '05 Dec '04

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Investment Valuation Ratios

Face Value 10.00 10.00 10.00 10.00 10.00

Dividend Per Share -- -- -- 10.00 24.00

Operating Profit Per

Share (Rs)84.61 305.08 279.03 122.55 96.08

Net Operating Profit Per

Share (Rs)288.72 549.57 515.65 213.76 161.36

Free Reserves Per

Share (Rs)620.17 587.80 308.40 172.35 123.31

Bonus in Equity Capital 75.55 75.55 75.55 75.55 75.55

Profitability Ratios

Operating Profit Margin (%) 29.30 55.51 54.11 57.33 59.54

Profit Before Interest And Tax

Margin (%)

22.85 52.53 52.56 55.26 56.82

Gross Profit Margin (%) 23.84 53.23 39.78 54.72 57.11

Cash Profit Margin (%) 16.56 35.58 33.99 36.28 37.53

Adjusted Cash Margin (%) 16.56 35.58 24.60 36.03 37.43

Net Profit Margin (%) 33.11 34.60 32.91 34.91 35.82

Adjusted Net Profit Margin

(%)33.11 34.60 23.52 34.65 35.72

Return On Capital Employed

(%)8.73 30.99 18.01 48.46 30.86

Return On Net Worth (%) 14.40 30.72 23.92 30.78 32.45

Adjusted Return on Net

Worth (%)3.99 29.54 29.33 30.55 32.35

Return on Assets Excluding

Revaluations630.23 597.85 415.69 10.81 9.23

Return on Assets Including 630.23 597.85 415.69 10.81 9.23

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Revaluations

Return on Long Term Funds

(%)8.73 33.31 18.01 48.46 30.86

Liquidity And Solvency Ratios

Current Ratio 1.24 1.08 2.77 1.47 1.90

Quick Ratio 1.13 1.12 1.35 1.17 1.25

Debt Equity Ratio 0.48 0.62 2.71 0.03 0.72

Long Term Debt Equity Ratio 0.48 0.51 2.71 0.03 0.72

Debt Coverage Ratios

Interest Cover 47.83 17.20 3.63 18.07 18.74

Total Debt to Owners Fund 0.48 0.62 2.71 0.03 0.72

Financial

Charges Coverage Ratio

57.07 17.92 3.70 18.51 19.29

Financial

Charges Coverage Ratio

Post Tax

68.82 12.77 3.31 12.61 13.02

Management Efficiency Ratios

Inventory Turnover Ratio -- -- 0.53 1.60 0.77

Debtors Turnover Ratio 5.12 3.31 3.16 2.05 1.66

Investments Turnover Ratio -- -- -- -- --

Fixed Assets Turnover Ratio -- -- 49.63 41.45 32.35

Total Assets Turnover Ratio -- 0.57 0.34 0.86 0.52

Asset Turnover Ratio 3.81 7.85 16.21 9.39 7.16

Average Raw Material

Holding-- -- -- -- --

Average Finished Goods

Held-- -- -- -- --

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Number of Days In Working

Capital190.75 115.24 1,078.88 356.15 655.21

Profit & Loss Account Ratios

Material Cost Composition -- -- -- -- --

Imported Composition of Raw

Materials Consumed-- -- -- -- --

Selling Distribution Cost

Composition3.38 3.20 3.99 2.75 3.98

Expenses as Composition of

Total Sales9.34 8.20 6.59 13.00 10.91

Cash Flow Indicator Ratios

Dividend Payout Ratio Net

Profit4.85 0.83 0.04 15.09 46.62

Dividend Payout Ratio Cash

Profit4.14 0.77 0.04 14.52 44.50

Earning Retention Ratio 82.48 99.14 99.95 84.80 53.26

Cash Earning Retention Ratio 89.22 99.20 99.95 85.38 55.38

Adjusted Cash Flow Times 0.04 0.35 6.46 0.09 2.12

Dec'0

4Dec '05 Mar '07 Mar '08 Mar '09

Earnings Per Share 58.82 75.54 170.77 183.68 90.79

Book Value 181.26 245.40 415.69 597.85 630.23

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Executive Summary

I am Preeti Yadav from the batch of 2010-11, Chitkara Business School, Baddi.

I did my Summer Internship Project with DSP BlackRock Asset Management Company Ltd.

(www.dspblackrock.com) from May 2010 to 15th July 2010.

Profile- a) Evaluate the performance of DSP BlackRock Funds.

b) Distribution Channel Management.

c) Investor awareness about mutual funds.

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http://www.dspblackrock.com/

Reporting – I reported to Mr. Bimal Jeet Singh, Manager – Sales who kept guiding me

during the project as and when required.

Learning during training-

a) Learning about the Mutual Fund Industry and their importance in the current

scenario.

b) The nature of project involved the whole survey of how to calculate the value and

performance of mutual fund and by comparing these values from different company’s

mutual funds.

c) Know about the risks associated with mutual funds and the difference in the

evaluation of debt funds and equity funds.

d) I learned the difference of investing in mutual fund and other investment (bank/post

office) products.

e) The scope of the project was also to find out that what factors forces the customers

to buy a particular mutual fund. I learned what things investor should keep in mind

before investing into any fund apart from that I have also seen what Indian investors

think about mutual fund and how much they are aware about mutual funds.

f) Opportunity to learn about the ups and downs in the market and its impact on the

performance of various schemes.

g) The presentations of DSP BlackRock MF that I gave to our alternate distribution

channel’s employees helped me to get exposed to various problems that the

distributors face during selling of mutual fund schemes and how to tackle with such

problems.

h) I have learned that mutual funds now present perhaps the most appropriate

investment opportunity for most investors. As financial markets become more

sophisticated and complex, investors need a financial intermediary who provides the

required knowledge and professional expertise on successful investing.

i) Learning about several business operations of the company.

j) Corporate Exposure during training made me more confident and outgoing.

Training provided me an opportunity to interact with employees in the company. This

made me used to corporate Environment and also helped me hone my soft skill.

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Interaction with Relationship Managers and branch heads at various banks boosted my

confidence and infused enthusiasm in me.

Achievements – The performance evaluation of different mutual fund schemes done by

me will help the organization to explore where DSP BlackRock MF stands in the market

compared to other mutual funds. I have also tried to check the Indian investor’s

awareness about MF investments. My work during the summer training was appreciated

a lot which was a constant source of inspiration for me. The Indian MF industry has

already started opening up many of the exciting investment opportunity to Indian

investors. Despite the expected consulting growth in the industry, mutual funds are still a

new financial intermediary in India. Hence, it is important that the investors, the mutual

fund agents/ distributors, the investment advisors and even the fund employees acquire

better knowledge of what mutual funds are, what they can do for investors and what

they cannot and how they function differently from other intermediaries such as banks.

This is what I try to achieve by giving training to them as DSP asset management’s

representative.

I have done my best to make it a genuine study. But there are some chances of mistakes. A

critical appraisal of anyone will be heartily welcomed.

Abstract

Mutual fund industry in India is relatively new with a lot of untapped market. After the

opening up of this industry since 1993 there has been no looking back and the ‘Assets

under Management’ have only been rising. The industry today is facing stiff competition

with each player fighting for a bigger mind share and market size.

I have selected this project in order to know the changing trends in mutual fund industry

post entry load waiver and the resultant impact on the IFA segment. It is also done in order

to know as to how much knowledge the investor has about the mutual funds and their

performance and to study in detail the results of investing in this alternate channel of

18


investment. During the course of mu training I have made use of various test and

techniques. These techniques were effective to analyze various finding and interpret correct

results as required by research objectives. The results are being analyzed through various

bar graphs and other similar charts.

The first part of the project involves the whole survey of how to calculate the value and

performance of mutual fund and by comparing these values from different company’s

mutual funds. The project also includes comparison of mutual fund with other bank/post

office products. The research also includes what things investor should keep in mind before

investing into any fund.

In the second part of the project a market research was conducted to determine the level of

investor awareness & marketing strategy followed by the organization to promote the fund

as well as performance evaluation of the mutual funds offered by DSP Blackrock Mutual

Fund in Chandigarh, Panchkula and Mohali region. The scope of the project was also to

find out those factors which forces the customers to buy a particular mutual fund and those

factors which discourage the investor to buy them. Apart from

that I have also tried to find out what investors thinks about mutual fund i.e. how much are

they aware about mutual funds.

The project also contains about the history of mutual funds, investing strategies, conceptual

framework, risk associated and investment philosophy.

Objective of the Study

To study and evaluate the performance of selected schemes offered by the

DSP BlackRock Mutual Fund with respect to other growing Mutual Funds so as to

find out the competitive edge of DSP BlackRock MF over others.

To study investor awareness regarding various types of Mutual Funds and

various schemes offered by these mutual funds.

To study where DSP MF does stands in the market & what steps they should

take to improve their position in the market.

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Scope of the Study

The study is conducted to understand the investor awareness and the performance of the

various schemes offered by DSP MF and managing the inactive alternate distribution

channel of DSP AMC Ltd. It also includes studying in the depth this alternate tool of

investment (mutual fund).

The primary research required going to various employees and speaking to relationship

managers of various banks and customers present in Chandigarh, Panchkula and Mohali.

The secondary research required exploring research papers, newspapers, magazines, fact

sheets of various funds and their offer documents.

It also involved surfing the internet.

Ch. 1- Introduction

The one investment vehicle that has truly come of age in India in the past decade is mutual

funds. Today, the mutual fund industry in the country manages around Rs 329,162 crore

(As of Dec, 2006) of assets, a large part of which comes from retail investors. And this

amount is invested not just in equities, but also in the entire gamut of debt instruments.

Mutual funds have emerged as a proxy for investing in avenues that are out of reach of

most retail investors, particularly government securities and money market instruments.

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Specialization is the order of the day, be it with regard to a scheme’s investment objective

or its targeted investment universe. Given the plethora of options on hand and the hard-sell

adopted by mutual funds vying for a piece of your savings, finding the right scheme can

sometimes seem a bit daunting. Mind you, it’s not just about going with the fund that gives

you the highest returns. It’s also about managing risk–finding funds that suit your risk

appetite and investment needs.

So, how can you, the retail investor, create wealth for yourself by investing through mutual

funds? To answer that, we need to get down to brass tacks–what exactly is a mutual fund?

Very simply, a mutual fund is an investment vehicle that pools in the monies of several

investors, and collectively invests this amount in either the equity market or the debt

market, or both, depending upon the fund’s objective. This means you can access either

the equity or the debt market, or both, without investing directly in equity or debt.

The essential features of the mutual funds distinguishing from other of the

investments are:-

The mutual fund is a trust into which many relatively small investors invest their

money to form a large pool of cash which is then invested in securities by the manager of

the trust.

The price at which units can be bought and sold is governed solely by the value of

the underlying securities held by the MF and dealing in units are on the basis of net market

value of the investment per unit.

The managers of MF are obliged to redeem any units in issue on demand or certain

specified period.

All dividend income that the MF receives on its investments is paid out to unit

holders.

Since the unit held by investor evidences the ownership of the fund’s assets, the

value of an investors part ownership is determined by the NAV of the number of units held.

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Concept of a Mutual Fund

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 appreciation realized is 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. The flow chart below

describes broadly the working of a mutual fund:-

Figure 1

Savings form an important part of the economy of any nation. With savings invested in

various options available to the people, the money acts as the driver for growth of the

country. Indian financial scene too presents multiple avenues to the investors. Though

certainly not the best or deepest of markets in the world, it has ignited the growth rate in

mutual fund industry to provide reasonable options for an ordinary man to invest his

savings.

Investment goals vary from person to person. While somebody wants security, others might

give more weightage to returns alone. Somebody else might want to plan for his child’s

education while somebody might be saving for the proverbial rainy day or even life after

22


retirement. With objectives defying any range, it is obvious that the products required will

vary as well.

Investors earn from a Mutual Fund in three ways:

1. Income is earned from dividends declared by mutual fund schemes from time to

time.

2. If the fund sells securities that have increased in price, the fund has a capital gain.

This is reflected in the price of each unit. When investors sell these units at prices

higher than their purchase price, they stand to make a gain.

3. If fund holdings increase in price but are not sold by the fund manager, the fund's

unit price increases. You can then sell your mutual fund units for a profit. This is

tantamount to a valuation gain.

Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves

broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt

and balanced funds. There are also funds meant exclusively for young and old, small and

large investors. Moreover, the setup of a legal structure, which has enough teeth to

safeguard investors’ interest, ensures that the investors are not cheated out of their hard-

earned money. All in all, benefits provided by them cut across the boundaries of investor

category and thus create for them, a universal appeal.

Investors of all categories could choose to invest on their own in multiple options but opt for

mutual funds for the sole reason that all benefits come in a package.

Conceptual Framework of Mutual Fund

A mutual fund is constituted as a public trust created under the Indian Trust Act, 1882. SEBI

(mutual fund) regulations, 1996 regulate the structure of the mutual funds in India. As per

these regulations should have the following three-tier structure:

i) Sponsor

ii) Trust/trustee

iii) Asset Management Company

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Apart from this mutual fund consist of

Figure 2

Sponsor

Sponsor is the person who acting alone or in combination with another body corporate

establishes a mutual fund. The sponsor establishes the mutual fund and registers the same

with SEBI. Sponsor appoints the Trustees, custodians and the AMC with prior approval of

SEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track record

of business interest in the financial markets. Sponsor must have been profit making in at

least 3 of the above 5 years. 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

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

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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 alia 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 AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. 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. At least 50% of the directors of

the AMC are independent directors who are 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.

Custodian

A custodian is an agent, bank, trust company, or other organization which holds and

safeguards an individual's, mutual funds, or investment company's assets for them.

Advantages of Mutual Funds

25


1. 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. This

risk of default by any company that one has chosen to invest in, can be minimized by

investing in mutual funds as the fund managers analyze the companies’ financials more

minutely than an individual can do as they have the expertise to do so. They can manage

the maturity of their portfolio by investing in instruments of varied maturity profiles.

2. 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.

3. 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.

4. 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. Apart from liquidity, these funds

have also provided very good post-tax returns on year to year basis. Even historically, we

find that some of the debt funds have generated superior returns at relatively low level of

risks. On an average debt funds have posted returns over 10 percent over one-year

horizon. The best performing funds have given returns of around 14 percent in the last one-

year period. In nutshell we can say that these funds have delivered more than what one

expects of debt avenues such as post office schemes or bank fixed deposits. Though they

26


are charged with a dividend distribution tax on dividend payout at 12.5 percent (plus a

surcharge of 10 percent), the net income received is still tax free in the hands of investor

and is generally much more than all other avenues, on a post-tax basis.

5. 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.

6. 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. Since there is no penalty on pre-

mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity.

Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the

securities as a result of interest rate variation and one can benefits from any such price

movement.

7. Transparency

Investors 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.

8. 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.

9. Affordability

27


A single person cannot invest in multiple high-priced stocks for the sole reason that his

pockets are not likely to be deep enough. This limits him from diversifying his portfolio as

well as benefiting from multiple investments. Here again, investing through MF route

enables an investor to invest in many good stocks and reap benefits even through a small

investment. 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.

10. Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

11. 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.

12. Tax Benefits

Last but not the least, mutual funds offer significant tax advantages. Dividends distributed

by them are tax-free in the hands of the investor. They also give you the advantages of

capital gains taxation. If you hold units beyond one year, you get the benefits of indexation.

Simply put, indexation benefits increase your purchase cost by a certain portion, depending

upon the yearly cost-inflation index (which is calculated to account for rising inflation),

thereby reducing the gap between your actual purchase cost and selling price. This reduces

your tax liability. What’s more, tax-saving schemes and pension schemes give you the

added advantage of benefits under Section 88. You can avail of a 20 per cent tax

exemption on an investment of up to Rs 10,000 in the scheme in a year.

28


Disadvantages of mutual fundsMutual funds are good investment vehicles to navigate the complex and unpredictable

world of investments. However, even mutual funds have some inherent drawbacks.

Understand these before you commit your money to a mutual fund.

1. No assured returns and no protection of capital

If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not

offer assured returns and carry risk. For instance, unlike bank deposits, your investment in

a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by

any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by

the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India).

There are strict norms for any fund that assures returns and it is now compulsory for funds

to establish that they have resources to back such assurances. This is because most

closed-end funds that assured returns in the early-nineties failed to stick to their assurances

made at the time of launch, resulting in losses to investors. A scheme cannot make any

guarantee of return, without stating the name of the guarantor, and disclosing the net worth

29


Indian Equity

Income from dividends-(investor-

free & DDT-NIL)

Iincome from capital gains-(short term-15% & long

term- free)

Others

Income from dividends-(investor-

free & DDT-individual & HUL-14.025 &

others-22.440

Income from capital gains-(short term-as per tax slab & long term-10% or

20% with indexation

of the guarantor. The past performance of the assured return schemes should also be

given.

2. Restrictive gains

Diversification helps, if risk minimization is your objective. However, the lack of investment

focus also means you gain less than if you had invested directly in a single security.

Assume, Reliance appreciated 50 per cent. A direct investment in the stock would

appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10

per cent of its corpus in Reliance, will see only a 5 per cent appreciation.

3. 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.

4. 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 SCHEMES

There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your

age, financial position, risk tolerance and return expectations. Whether as the foundation of

your investment programme or as a supplement, Mutual Fund schemes can help you meet

your financial goals.

30


TYPES OF MUTUAL FUND SCHEME

Figure 3

(AI) By Structure

Open-Ended Schemes

These do not have a fixed maturity. You deal directly with the Mutual Fund for your

investments and redemptions. The key feature is liquidity. You can conveniently buy and

sell your units at Net Asset Value ("NAV") related prices.

31


By structureBy Investment

ObjectivesOther Schemes

Open-ended Schemes

Interval Schemes

Sector specific fund

Index Schemes

Tax saving fund

Small cap fund

Equity SchemesDebt Schemes

Close Ended Schemes

MM Mutual fund

Other Debt Schemes

FMP

Any Other Equity Fund

Mid cap Fund

Large cap fund

Close-Ended Schemes

Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called

close-ended schemes. You can invest directly in the scheme at the time of the initial issue

and thereafter you can buy or sell the units of the scheme on the stock exchanges where

they are listed. The market price at the stock exchange could vary from the scheme's NAV

on account of demand and supply situation, Unit holders' expectations and other market

factors.

One of the characteristics of the close-ended schemes is that they are generally traded at a

discount to NAV but closer to maturity, the discount narrows. Some close-ended schemes

give you an additional option of selling your units directly to the Mutual Fund through

periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the

two exit routes are provided to the investor.

Interval Schemes

These combine the features of open-ended and close-ended schemes. They may be traded

on the stock exchange or may be open for sale or redemption during predetermined

intervals at NAV related prices.

(B) By Investment Objective

Growth Schemes

Aim to provide capital appreciation over the medium to long term. These schemes normally

invest a majority of their funds in equities and are willing to bear short-term decline in value

for possible future appreciation. These schemes are not for investors seeking regular

income or needing their money back in the short term.

32


Income Schemes

Aim to provide regular and steady income to investors. These schemes generally invest in

fixed income securities such as bonds and corporate debentures. Capital appreciation in

such schemes may be limited.

Ideal for

Retired people and others with a need for capital Stability and regular income

Investor who need some income to supplement their earnings.

Balanced Schemes

Aim to provide both growth and income by periodically distributing a part of the income and

capital gains they earn. They invest in both shares and fixed income securities in the

proportion indicated in their offer documents. In a rising stock market the NAV of these

schemes may not normally keep pace, or fall equally when the market falls.

Ideal for:

Investors looking for a combination of income and moderate growth.

Money Market/Liquid Schemes

Aim to provide easy liquidity, preservation of capital and moderate income. These schemes

generally invest in safer, short-term instruments such as treasury bills, certificates of

deposit, commercial paper and inter-bank call money. Returns on these schemes may

fluctuate, depending upon the interest rates prevailing in the market.

Ideal for:

33


Corporate and individual investors as a means to park their surplus funds for

short periods or awaiting a more favorable investment alternative.

Other Schemes

Tax Saving Schemes

These schemes offer tax rebates to the investors under tax laws as prescribed from time to

time. This is made possible because the Government offers tax incentives for investment in

specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension

Schemes. The details of such tax saving schemes are provided in the relevant offer

documents.

Ideal for:

Investors seeking tax rebates.

Special Schemes

This category includes index schemes that attempt to replicate the performance of a

particular index such as the BSE Sensex or the NSE 50, or industry specific schemes

(which invest in specific industries) or sectorial schemes (which invest exclusively in

segments such as A Group shares or initial public offerings)

Different Modes of Receiving the Income Earned From

Mutual Fund Investments

Mutual funds offer three methods of receiving income:

Growth Plan :

In this plan, dividend is neither declared nor paid out to the investors but it is built

into the value of the NAV. In the other words, the NAV increases over time due to 34


such incomes and the investor realizes only the capital appreciation on redemption

of his investment.

Income plan or Dividend Payout Plan:

In this plan, dividends are paid-out to the investors. In other words, the NAV only

reflects the capital appreciation or depreciation in the market price of the underlying

portfolio.

Dividend Reinvestment Plan:

In this plan, dividend is declared but not paid out to the investors. Instead, it is

reinvested back in to the scheme at the then prevailing NAV. In other words, the

investor is given additional units and not cash as dividend.

Mutual Fund Investment Strategies

Systematic Investment Plan (SIP):

SIPs entail an investor to invest a fixed sum of money at regular intervals in MF scheme the

investor has chosen. This may help you gain from any appreciation in the event of upside or

alternatively, average your cost during downside. Seeing the

present volatility in the market SIP is the best option available to the investor due to regular

entry into the market which causes rupee cost averaging and hence covers the volatility.

Systematic Withdrawal Plan (SWPs):

These plans are best suited for people nearing retirement. In these plans investor invest in

a mutual fund scheme and is allowed to withdraw a fixed sum of money at regular intervals

to take care of expenses.

Systematic Transfer Plan (STP):

35


They allow the investor to transfer on a periodic basis a specified amount from one scheme

to another with in the same fund family meaning two schemes belonging to the same

mutual fund. A transfer will be treated as redemption of units from the scheme from which

the transfer is made.

Investment Philosophy of DSP BlackRock Mutual Fund

Equity

The investment philosophy of DSP revolves around the concept of growth oriented stocks, which are available at relatively attractive valuations.

DSP MF uses a combination of the top down and bottom up approaches for investment.

o Top down approach for sector allocation.

o Bottom up approach for stock selection.

DSP MF identifies and invests in business that has a sustainable competitive advantage.

It invests with a medium term view, with an investment horizon of at least 18months.

Risk minimization is an important element of their strategy.

DSP MF believes in pro-active fund management to outperform benchmark indices.

36


In determining their investment universe, DSP MF employs a multi-stage filtering process.at

the first level filtering, they look at liquidity.at the second level filter, they look at

management quality. The third level is the competitive position of the company and the final

level is the share price valuation.

Debt

There are three main types of debt funds and the investment philosophy for each differs

due to different investment objectives and type of investors.

Liquid Fund

The investment philosophy of this scheme is to invest in short term money market debt

instruments like T-bills, commercial paper, debentures, certificate of deposits, etc. to

provide a higher than average rate of return.

Income Fund

The income fund invests in all type of debt instruments. The investment philosophy can be

broadly defined as consisting of active duration and interest rate management to give

optimal returns. The fund is mainly between Government Securities and Corporate Bonds

with some residual investments in money market instruments.

Gilt Fund

Gilt fund invest in the gilt edged government securities, which is predominantly a wholesale

market. It allows retail investors to participate in this market. The Gilt Fund aims to

maximize returns by active interest rate management, with zero credit risk. Active interest

rate management involves studying the domestic and international politico-economic

scenario as well as in-depth analysis of the liquidity in the system, the shape of the yield

curve and the spreads between various sectors on the curve.

37


To maximize the “risk adjusted returns” for the investors based on their risk tolerance

Manage the schemes on a “Portfolio basis”

Active management of interest rate risk.

Credit risk management by following the conservative approach.

Continuous monitoring.

Different Schemes of DSP BlackRock Mutual Fund

There is different kind of open ended schemes:

Equity fund

Debt fund

Balanced fund

Liquid fund

Equity Fund:

DSP BLACKROCK EQUITY FUND

Investment Strategy: The Investment Manager prefers adopting a top-down approach with

regard to investment in equity and equity related securities. This approach encompasses an

evaluation of the key economic trends, an analysis of various sectors in the economy

leading to an outlook on their future prospects and a diligent study of various investment

opportunities within the favored sectors. The Investment Manager will conduct in – house

research in order to identify both value and growth stocks. The analysis will focus, among

38


other things, on industry and company fundamentals and valuation metrics. The quality or

strength or management would be a key focus area.

Date of Inception: 29th April, 1997

Minimum Investment

Initial: Rs.5000/-

Additional: Rs.1000/-

Systematic: Rs.1000/-

Exit Load: If Holding Period is <12 months: 1%

>=12 months: NIL

Entry Load: no entry load shall be charged for

i) For “all direct” applications received br AMC i.e. applications received through

internet facility offered (www.dspblackrock.com), on application forms that are not

routed through any distributor/agent/broker and submitted to AMC office or

collection center/investment service center.

ii) Else 2.25%.

Options: Growth, Dividend Payout, Dividend RE-Investment.

Minimum Redemption Size Rs1000/- or 100units.

Benchmark Index S&P CNX Nifty.

39



DSP BlackRock Tax Saver Fund

DSP Tax Saver Scheme is an Open ended Equity Linked Savings Scheme (ELSS) from

DSP Mutual fund which offers investors tax benefits on an investment up to 1 Lakh under

Section 80C of Indian Income Tax Act 1961. The fund was launched in the year 2007 and is

one of the top performers in the ELSS category.

Scheme Highlights:

Entry Load-NIL

Exit Load-NIL

SIP : Minimum amount Rs.500/month – 12 months Rs.1000/month - months,

Rs.1500/Quarter-12 months(subject to completion of the 3year Lock-in Period)

STP : Minimum amount Rs.500/month- 12month Rs.1000/month (subject to

completion of the 3year Lock-in Period)

Asset Allocation : 80-100% in Equity, partly convertible debentures and fully

convertible debentures and bonds & 0-20% in Money market instruments

Minimum application amount - Rs.500 for purchase & Multiples of Rs. 500 for

additional purchase.

Plans and Option : Dividend option with payout and reinvestment facility.

DSP BlackRock Opportunities Fund

DSP Opportunities Fund is diversified equity scheme, with a flexible investing style. It will

invest in sectors, which the fund Manager believes would outperform others in the short to

medium-term. By virtue of its flexible investment pattern, the fund is uniquely positioned to

increase concentration sectors which look promising. As markets evolve and grow, new

opportunities for growth keep emerging. DSP Opportunities would endeavor to capture

these opportunities to generate wealth for its investors.

40


Date of inception: 16/05/2000

Minimum investment: Initial: Rs.5000/-

Additional: Rs1000/-

Systematic: Rs.1000/-

Entry Load: no entry load shall be charged for

iii) For “all direct” applications received by AMC i.e. applications received through

internet facility offered (www.dspblackrock.com), on application forms that are not

routed through any distributor/agent/broker and submitted to AMC office or

collection center/investment service center.

iv) Else 2.25%.

Exit Load: If Holding Period is <12 months: 1%

>=12 months: NIL

Options: Growth, Dividend Payout, Dividend RE-Investment.

Minimum Redemption Size Rs1000/- or 100units.

Benchmark Index S&P CNX Nifty.

GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

While the Indian mutual fund industry has grown in size by about 320% from March, 1993

(Rs.470 billion) to December, 2010 (Rs.4505 billion) in terms of AUM, the AUM of the

sector excluding UTI has grown over times from Rs.152 billion in March 1999 to $ 148

billion as at March 2008.

41



Though India is a minor player in the global mutual fund industry, its AUM as a proportion of

the global AUM has steadily increased and has doubled over its levels in 1999.

The growth rate of Indian mutual fund industry has been increasing for the last few years. It

was approximately 0.12% in the year of 1999 and it is noticed 0.50% in 2010 in terms of

AUM as percentage of global AUM.

Some facts for the growth of mutual funds in India

• 100% growth in the last 6 years.

• Number of foreign AMC’s is in the queue to enter the Indian markets.

• 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 are much less than US having more

than 800. There is a big scope for expansion.

• Mutual fund can penetrate rural 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.

Recent Trends in Mutual Fund industry

The most important trend in the mutual fund industry is the aggressive expansion of the

foreign owned mutual fund companies and the decline of the companies floated by the

nationalized banks and smaller private sector players.

42


The mutual fund industry in India has evolved little over three decades but the real impetus

has come after the changes in the mutual fund regulations in early 80s. Private and foreign

mutual funds are operating in the Indian market and constitute a substantial portion of the

mutual fund industry. Today the industry consists of Unit Trust of India, mutual funds

sponsored by public sector banks and insurance corporations, private and foreign mutual

funds. Investors are constantly being bombarded by questions concerning their risk profile.

Either a money market or guilt fund is targeted for the risk averse or a low graded company

offering a high return on its fixed deposits. Banks like Citibank , ANZ Grindlays, Deutsche

bank, Hongkong bank, Commerze bank, Banque national de Paris and HDFC bank are not

only aggressively marketing funds many are also planning to launch their own. The list of

potential entrants includes ABN Amro, ANZ Grindlays, Hongkong bank and Jammu and

Kashmir bank.

The Reserve Bank’s Currency and Finance report 1997-1998 shows that the investors’

appetite for risk has diminished considerably. As much as 46% of the financial savings of

the household sector found its way back to bank deposits; 12% went in to Government

savings plans and 18% in to provident funds. Only a miniscule 2% wound up in the capital

market and 4% in company deposits. The mutual fund product designers have identified a

strategic gap in the product offering in the capital market and now are fighting a loosing

battle with government savings plans, bank deposits and provident funds. They are

providing cheque facility on money market mutual funds to make them more enticing and

guilt funds for the risk averse. Product innovations and new product combinations have

started rolling in to the Indian market.

IMPACT OF TECHNOLOGY

Mutual fund, during the last one decade brought out several innovations in their products

and is offering value added services to their investors. Some of the value added services

that are being offered are:

• Electronic fund transfer facility.

• Investment and re-purchase facility through internet. 43


• Added features like accident insurance cover, med claim etc.

• Holding the investment in electronic form, doing away with the traditional form of unit

certificates.

• Cheque writing facilities.

• Systematic withdrawal and deposit facility.

ONLINE MUTUAL FUND TRADING

The innovation the industry saw was in the field of distribution to make it more easily

accessible to an ever increasing number of investors across the country. For the first time in

India the mutual fund start using the automated trading, clearing and settlement system of

stock exchanges for sale and repurchase of open-ended de-materialized mutual fund units.

Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) were options

introduced which have come in very handy for the investor to maximize their returns from

their investments. SIP ensures that there is a regular investment that the investor makes on

specified dates making his purchases to spread out reducing the effect of the short term

volatility of markets. SWP was designed to ensure that investors who wanted a regular

income or cash flow from their investments were able to do so with a pre-defined

automated form. Today the SW facility has come in handy for the investors to reduce their

taxes.

HOW TO INVEST IN MUTUAL FUNDS.

Step One - Identify your investment needs. Your financial goals will vary, based on your

age, lifestyle, financial independence, family commitments, level of income and expenses

among many other factors. Therefore, the first step is to assess your needs.

44


Step Two - Choose the right Mutual Fund. Once you have a clear strategy in mind, you

now have to choose which Mutual Fund and scheme you want to invest in. The offer

document of the scheme tells you its objectives and provides supplementary details like the

track record of other schemes managed by the same Fund Manager. Some factors to

evaluate before choosing a particular Mutual Fund are:

The track record of performance over the last few years in relation to the

appropriate yardstick and similar funds in the same category.

How well the Mutual Fund is organized to provide efficient, prompt and

personalized service.

Degree of transparency as reflected in frequency and quality of their

communications.

Step Three - Select the ideal mix of Schemes.

Investing in just one Mutual Fund scheme may not meet all your investment needs. You

may consider investing in a combination of schemes to achieve your specific goals.

The following charts could prove useful in selecting a combination of schemes that

satisfy your needs.

Figure 4

This plan may suit

Investor seeking

Income &

moderate growth.

Investor looking for growth & stability with moderate risk

45


Aggressive Plan

Growth Scheme

Income Scheme

Money market Scheme

Balanced Scheme

Conservative Plan

Growth SchemeIncome SchemeMoney SchemeBalanced Scheme

Figure 5

Step Four - Invest regularly.

Step Five - Keep your taxes in mind

Step Six- Start early It is desirable to start investing early and stick to a regular investment

plan. If you start now, you will make more than if you wait and invest later. The power of

compounding lets you earn income on income and your money multiplies at a compounded

rate of return.

Step Seven -The final step all you need to do now is to get in touch with a Mutual Fund or

your Agent/broker and start investing. Reap the rewards in the years to come. Mutual

Funds are suitable for every kind of investor-whether starting a career or retiring,

conservative or risk taking, growth oriented or income seeking.

What fees and commissions will you pay when you invest in mutual

funds?

The fees and commissions you may be charged can vary widely from one fund, and one

dealer, to the next. Some of the charges may be negotiable, but you should make sure that

you understand all of the costs before you invest. There are two main costs to consider –

the management and operating expenses that are charged to the fund each year, and

the sales charges (or loads) that you pay when you buy or sell the fund.

46


Management and Operating Expenses are expenses paid each year by the fund and

include such things as the manager’s fees, legal and accounting fees, custodial fees and

bookkeeping costs. The Management Expense Ratio (MER) is the percentage of the

fund’s average net assets that these expenses represent. For example, if a $100 million

fund has $2 million in costs for the year its MER will be 2%. MERs can range from under

1% per year for some money market funds to almost 3% for some equity funds. The higher

the MER, the greater the impact on the fund’s performance and the return to its investors

because these expenses are removed before the value is reported.

Sales Charges (Loads) are the commissions that you may have to pay when you buy or

redeem units of a fund. Sales charges may be applied when you buy units of the fund

(A front-end load), when you redeem your units (a back-end load), or there may be no

sales charges at all (no-load). Where front-end loads are charged, the rate can vary from

dealer to dealer and may be negotiable. Shop around, and remember that every dollar you

pay up-front in commission is a dollar that does not go to work for you in the fund. Many

funds are sold on a back-end load basis, meaning generally that the sales charges are

applied only when you redeem the fund. Back-end load fees are paid by the fund

management company to your mutual fund salesperson – you do not pay this fee. You do,

however, pay a ‘redemption fee’ if you redeem your units in the fund before a certain time

period, typically 7 years. Redemption fees decline each year that you hold the investment.

For example, you might have to pay a 6% fee if you redeem the fund after one year, 4% if

you redeem after three years, and no commission if you redeem after seven years. An

increasing number of funds are being sold on a no-load basis, in which investors pay no

sales charges, but before you decide that a no-load fund is right for you, consider the fund’s

performance, its management expense ratio and the level of service and advice you will

receive.

How do financial advisers get paid for selling mutual funds?

47


Some mutual fund managers employ their own sales force to sell their mutual funds. Most,

however, rely on independently operated dealers to sell their funds and pay sales

incentives to these dealers to encourage them to do so. These incentives generally take the

form of sales commissions, but fund managers can also pay for some of the marketing and

educational costs incurred by a dealer. You do not pay these sales incentives directly. The

mutual fund manager pays them to dealers out of the management fees it receives from its

mutual funds.

The compensation paid to the dealer can vary depending on how the mutual fund is

acquired. For example, if you buy a mutual fund with a front-end load, the mutual fund firm

may allow your dealer to keep the front-end load fees you pay. If you buy a mutual fund on

a deferred sales charge basis, the mutual fund manager will still pay your dealer a sales

commission at the time of sale (generally 5% of the amount you invest).When you redeem

a deferred sales charge fund, you pay any applicable redemption fees directly to the mutual

fund manager.

Mutual fund managers also pay trailing commissions to dealers. Trailing commissions are

paid as long as you hold the fund. They are generally paid quarterly and typically range

from 0.25% to 1.0% of the value of the funds held by the dealer’s clients. The amount of

trailing commission paid to your dealer can depend on the type of mutual fund you buy and

on the load that you pay. Generally, mutual fund firms pay lower trailing commissions on

fixed income and money market funds than for equity funds.

The sales incentives paid by the fund manager are described in the fund’s prospectus. You

can also ask your financial adviser for details. Securities regulations govern the types of

incentives that can be paid and the sales practices that must be followed by both mutual

fund firms and dealers.

The Changing Distribution Structure of Mutual Funds

Many mutual fund investors pay for the services of a professional financial adviser. ICI

research finds that among investors owning mutual fund shares outside of retirement plans

at work, 81 percent own fund shares through professional financial advisers. Financial

48


advisers typically devote time and attention to prospective investors before investors make

an initial purchase of funds and other securities. The adviser generally meets with the

investor, identifies financial goals, analyzes existing financial portfolios, determines an

appropriate asset allocation, and recommends funds to help achieve the investor’s goals.

Advisers also provide ongoing services, such as periodically reviewing investors’ portfolios,

adjusting asset allocations, and responding to customer inquiries.

Thirty years ago, fund shareholders usually compensated financial advisers for their

assistance through a front-end load—a one-time, upfront payment for current and future

services. After 1980, when the U.S. Securities and Exchange Commission (SEC) adopted

Rule 12b-1 under the Investment Company Act of 1940, funds and their shareholders had

greater flexibility in compensating financial advisers. Rule 12b-1 and subsequent regulatory

action established a framework under which investors can pay indirectly for some or all of

the services they receive from financial advisers through 12b-1 fees—asset-based fees that

are included in a fund’s expense ratio.

Under this framework, 12b-1 fees can also be used to compensate financial intermediaries,

such as retirement plan record keepers and discount brokerage firms, for the services they

provide to fund shareholders. Although they can be used to pay for advertising and

marketing, 12b-1 fees are primarily used to compensate financial advisers and other

financial intermediaries for assisting fund investors before (40 percent of fees collected) and

after they purchase fund shares (52 percent of fees collected)

Most 12b-1 Fees Used to Pay for Shareholder Services

Percentage of 12b-1 fees collected, 2010

49


Fig 6

No- Load Share Classes

No-load share classes have no front-end load or CDSL, and have a 12b-1 fee of 0.25

percent or less. Originally, no-load share classes were offered by mutual fund sponsors that

sold directly to investors. Now, investors can purchase no-load funds through employer-

sponsored retirement plans, mutual fund supermarkets, discount brokerage firms, and bank

trust departments, as well as directly from mutual fund sponsors. Some financial advisers

who charge investors separately for their services rather than through a load or 12b-1 fee

use no-load share classes.

The introduction of Rule 12b-1 changed the means by which financial advisers were

compensated. The maximum front-end load fees that funds might charge declined sharply

in the 1980s as funds adopted 12b-1 fees as an alternative way to compensate financial

advisers and intermediaries for providing services to fund shareholders. Since 1990, 12b-1

fees paid by shareholders rose from $1.1 billion to $10.6 billion This increase reflects, in

part, the roughly tenfold increase in mutual fund assets and the more than twofold increase

in the number of households owning funds since 1990.

12b-1 Fees Paid Reflect Asset Growth and Shift in Source of Financial Advisers’

Compensation

Billions of dollars, selected years*

50


1Data exclude mutual funds available as investment choices in variable annuities and

mutual funds that invest primarily in other mutual funds.2Front-end load = 0 percent, CDSL = 0 percent, and 12b-1 fee ≤ 0.25 percent.

Sources: Investment Company Institute and Lipper

Figure 7

In recent years, the system for compensating financial intermediaries for distributing mutual

fund shares and assisting investors has continued to evolve. For example, maximum front-

end load fees have stabilized, but front-end load fee payments (as a percentage of assets)

have continued to decline. This, in large measure, reflects the discounts from the maximum

front-end load that investors often receive when making large share purchases or

purchases through 401(k) plans.

There has also been a shift by investors toward no-load share classes. No-load share

classes have consistently attracted more net new cash than load share classes in recent

years (Figure 7). In 2010, for example, no-load share classes of long-term funds garnered

$253 billion in net new cash, compared to an outflow of $33 billion for load share classes.

Cumulatively, these flows have led to a concentration of long-term fund assets in no-load

share classes; by 2010, no-load share classes of long-term funds had $5.1 trillion in total

net assets compared to $2.6 trillion in load share classes (figure7). The shift toward no-load

funds should not be taken as indicating that investors are eschewing advice from financial

advisers. To be sure, some of the flows to no-load funds owe to “do-it-yourself” investors.

However, much of the shift represents a change in the way investors compensate their

financial advisers, with many investors now paying for financial advice directly out of their

51


pockets instead of indirectly through their mutual funds. Flows from 401(k) plans and other

retirement accounts also are often invested in no-load funds.

Why use an Independent Financial Advisor - IFA?

As with most things in the modern world, the financial services industry moves at a rapid

pace. Financial markets change constantly and become increasingly more complex.

Regulators review the opportunities to obtain high quality products and control the basis on

which advice is given. Financial institutions compete aggressively with each other to bring

new and improved products to the market..........

it isn't too difficult to see why so many people find financial services confusing!

Choosing the most suitable financial products will often play an essential role in helping to

secure your financial future. But with literally thousands of different products on offer, and

hundreds of financial services companies, one of the most important decisions you can

make about your future is who to seek financial advice from.

In essence, the role of an Independent Financial Adviser (IFA) is clearly defined - they work

for you, not the product provider as is the case with ‘tied' advisors. Of course, in order to

assist you, they will need to know your current position and what it is you want to achieve.

Only then can an IFA create a strategy to meet your needs and your budget.

IFAs are your guide to the market and will undertake detailed research and comparisons

relating to financial products available and then recommend a way forward. An IFA will

‘shop around' on your behalf to ensure your needs are catered for fully and that any product

recommended is the most suitable and provides value for money.

Whether your needs are simple or complex it pays to ensure you receive the right financial

advice at the right time and Independent Financial Advisors will be happy to assist you.

52


Mutual Fund with NO Distributors

When you own shares in a mutual fund you may get dividends from the fund

company that were from the dividends earned by the individual stocks held by the fund. In

additional you may get a “distribution” of short term and long term capital gains. These are

usually issued in November or December.

Investors don’t like getting distributions from a mutual fund because this means taxes

have to be paid. Investors emotionally feel that they should only have to pay tax when they

take the initiative to sell an investment. However a mutual fund is a collective investment

and when the fund manager sells assets then that may trigger a capital gain which must be

paid by the individual shareholders because a mutual fund is a “pass-through” entity where

taxable events in the fund are passed through to the individual shareholders.

Methods to avoid capital gains distributions:

1. Hold mutual funds (that you suspect will give a distribution) in a traditional IRA.

However that causes a worse tax problem: traditional IRA’s wash out the tax

treatment of dividends and long term capital gains and convert them to ordinary

income. So in most cases it would be very wrong to do this. Of course a Roth IRA is

tax free, so that would be different.

2. By mutual funds after the annual distribution has occurred. The problem is that

investing (in theory) should be for the long run, so buying a fund in December and

selling in October just to avoid distributions is wrong and impractical and would

trigger short term gains tax (if it was profitable) on your sale of the mutual fund.

3. Buy ETF’s to avoid capital gains distributions. They obtain shares of stocks through

“creation units” which have a different tax consequence when these units are redeemed by

an “authorized market maker” from a mutual fund. Unfortunately the goal of pursuing tax

savings is trumped by the goal of getting good investments. I don’t recommend passive

ETF’s because I believe in actively managed mutual funds. If an investor is trying too hard

to chase after tax benefits an investor may not be able to make the right investment

decisions.

53


4. Recognize that distributions often occur for a reason: They may occur at the top of a

bubble or just after the top when investors withdraw funds from a mutual fund the manager

needs to sell assets to pay the investors who are redeeming mutual fund shares. These

sales then trigger a distribution which is assessed on the remaining shareholders. So the

best defense against distributions would be to avoid funds that are part of a bubble top

because the fund’s assets will go down in value and will be sold to meet redemption

requests. Thus you get two benefits by avoiding bubbles. Now the question is how do you

spot and avoid bubbles? This is the real question that is far more important than avoiding

distributions.

Investors should seek independent financial advice.

Managing the risk by diversification in terms of Asset Allocation

Strings, woodwinds and brass. Stocks, bonds and cash. What do these very different

things have in common? They are all parts of a whole and when they work together, they

perform the way none could alone. An orchestra without violins wouldn't sound as good.

And a portfolio without stocks just wouldn't offer peak performance.

Asset allocation is important for portfolio performance. And what exactly is asset

allocation? It's a systematic division and risk management of your investment among

various asset classes such as fixed income or equities. By having a portfolio that holds

different types of investments, you help reduce your risk and portfolio volatility.

Markets and asset classes do not move in tandem: What's hot today may be cold

tomorrow. Spreading your investment among different types of asset classes and markets

—stocks and bonds, domestic and foreign markets—lets you position yourself to seize

opportunities as the performance cycle shifts from one market or asset class to another.

Depending on your investment style and goals, your asset allocation will vary. One

should work with his financial advisor to create a personalized asset allocation for his

portfolio.

Asset allocation—not stock or mutual fund selection, not market timing—is generally the

most important factor in determining the return on your investments. In fact, according to 54


research which earned the Nobel Prize, asset allocation (the types or classes of securities

owned) determines approximately 90% of the return. The remaining 10% of the return is

determined by which particular investments (stock, bond, mutual fund, etc.) you select and

when you decide to buy them.

Consequently, buying a "hot" stock or mutual fund recommended by a financial magazine

or newsletter, a brokerage firm or mutual fund family, an advertisement or any other source

can be downright dangerous. One should note that recommendations in publications may

be out-of-date, having been prepared several months prior to the publication date.

As for market timing—that is, moving in and out of an investment or an investment class in

anticipation of a rise or fall in the market—it’s been proven that the modern market cannot

be timed. Market timing strategies, such as moving your money into stocks when the

market is rising or out of stocks when it’s falling, just do not work.

Asset allocation is the cornerstone of good investing. Each investment must be part of an

overall asset allocation plan. And this plan must not be generic (one-size-fits-all), but rather

must be tailored to your specific needs.

Sound financial advice from a trusted and competent advisor is very important as the

investment world is populated by many "advisors" who either are unqualified or don't have

your best interests at heart.

In a nutshell, following are the basic investment guidelines one should live by:

Determine your financial profile, based on your time horizon, risk tolerance, goals

and financial situation. For more sophisticated investment analysis, this profile

should be translated into a graph or curve by a computer program.

Find the right mix of "asset classes" for your portfolio. The asset classes should

balance each other in a way that will give the best return for the degree of risk you are

willing to take. Financial advisors can determine the proper mix of assets for your financial

profile. Over time, the ideal allocation for you will not remain the same; it will change as

your situation changes or in response to changes in market conditions.

55


LITERATURE REVIEW

Literature on mutual fund performance evaluation is enormous. A few research studies that

have influenced the preparation of this paper substantially are discussed in this section.

Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance.

Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has

suggested a new predictor of mutual fund performance, one that differs from virtually all

those used previously by incorporating the volatility of a fund's return in a simple yet

meaningful manner.

Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance

(Jensen’s alpha) that estimates how much a manager’s forecasting ability contributes to

fund’s returns.

As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the

portfolio over the return of the benchmark index, where the portfolio is leveraged to have

the benchmark index’s standard deviation.

Narayan Rao, ET. al., evaluated performance of Indian mutual funds in a bear market

through relative performance index, risk-return analysis, Treynor’s ratio, Sharpe’s ratio,

Sharpe’s measure , Jensen’s measure, and Fama’s measure. The study used 269 open-

ended schemes (out of total schemes of 433) for computing relative performance index.

Then after excluding funds whose returns are less than risk-free returns, 58 schemes are

finally used for further analysis. The results of performance measures suggest that most of

mutual fund schemes in the sample of 58 were able to satisfy investor’s expectations by

giving excess returns over expected returns based on both premiums for systematic risk

and total risk.

Bijan Roy, ET. al., conducted an empirical study on conditional performance of Indian

mutual funds. This paper uses a technique called conditional performance evaluation on a

sample of eighty-nine Indian mutual fund schemes .This paper measures the performance

56


of various mutual funds with both unconditional and conditional form of CAPM, Treynor-

Mazuy model and Henriksson-Merton model. The effect of incorporating lagged information

variables into the evaluation of mutual fund managers’ performance is examined in the

Indian context. The results suggest that the use of conditioning lagged information variables

improves the performance of mutual fund schemes, causing alphas to shift towards right

and reducing the number of negative timing coefficients.

Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In

this paper, measures of evaluating portfolio performance based on lower partial moment

are developed.

Risk from the lower partial moment is measured by taking into account only those states in

which return is below a pre-specified “target rate” like risk-free rate. Kshama Fernandes

(2003) evaluated index fund implementation in India. In this paper, tracking error of index

funds in India is measured .The consistency and level of tracking errors obtained by some

well-run index fund suggests that it is possible to attain low levels of tracking error under

Indian conditions. At the same time, there do seem to be periods where certain index funds

appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction

of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek

market of equity mutual funds. The methodology is based on the combination of discrete

and continuous multi-criteria decision aid methods for mutual fund selection and

composition. UTADIS multi-criteria decision aid method is employed in order to develop

mutual fund’s performance models.

Goal programming model is employed to determine proportion of selected mutual funds in

the final portfolios.

Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched

to randomly select conventional funds of similar net assets to investigate differences in

characteristics of assets held, degree of portfolio diversification and variable effects of

diversification on investment performance. The study found that socially responsible funds

do not differ significantly from conventional funds in terms of any of these attributes.

Moreover, the effect of diversification on investment performance is not different between

the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500

during the study period.

57


Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance

(Jensen’s alpha) that estimates how much a manager’s forecasting ability contributes to

fund’s returns.

As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the

portfolio over the return of the benchmark index, where the portfolio is leveraged to have

the benchmark index’s standard deviation. S.Narayan Rao, ET. al., evaluated performance

of Indian mutual funds in a bear market through relative performance index, risk-return

analysis, Treynor’s ratio, Sharpe’s ratio, Sharpe’s measure , Jensen’s measure, and

Fama’s measure. The study used 269 open-ended schemes (out of total schemes of 433)

for computing relative performance index. Then after excluding funds whose returns are

less than risk-free returns, 58 schemes are finally used for further analysis. The results of

performance measures suggest that most of mutual fund schemes in the sample of 58 were

able to satisfy investor’s expectations by giving excess returns over expected returns based

on both premiums for systematic risk and total risk.

Research Methodology

Research Methodology is a systematic method of discovering new facts or verifying old

facts, their sequence, inter-relationship, casual explanation and the natural laws which

58


governs them. In it we study the various steps that are generally adopted by a researcher in

the studying his research problem along with the logic behind them.

Different stages involved in research consists of enacting the problem, formulating a

hypothesis, collecting the facts or data, analyzing the facts and reaching certain conclusion

either in the form of solution towards the concerned problem or in generalization for some

theoretical formulation.

Type of Sample Design: Judgment Sampling

Sample Size: 80

In Research Methodology mainly Data plays an important role.

The Data is divided in two parts:

a) Primary Data.

b) Secondary Data.

Primary Data is the data, which is collected directly by direct personal interview,

Interview, indirect oral investigation, Information received through local agents, Drafting a

schedule, drafting a questionnaire.

Secondary Data is the data, which is collected from:

Various books.

Magazine and material.

Internet

Fact sheets of various MFs

The data which is stored in the organization and provide by the FINANCE people are also

secondary data. The various information is taken out regarding that subject as well other

subject from various sources and stored. The last years data stored can also be secondary

data. This data is kept for the internal use of the organization.

The FINANCE manual is for the internal use of the organization they are secondary data

which help people to gain information. In this report the data plays a very crucial role. For

59


this report the data was provided to me by FINANCE department and other departmental

head in the organization.

SURVEY ANALYSIS

OBJECTIVES

I conducted a survey to assess the popularity and awareness among people about the,

mutual funds. For the purpose we chose a random sample of 80 end consumers in the city

of Chandigarh, Panchkula and Mohali. The methodology adopted was that of questionnaire.

The question addressed the basic questions relating to investment in mutual Funds and for

distributors also.

Sampling Method

The sampling method so as to obtain a representative sample is the Non- Probability

Sampling methods. Under non-probability sampling, we selected the respondents to the

survey on the basis of Judgment sampling with Convenience taken into account.

Research instrument

The research instrument used for this survey is a structured questionnaire. The

questionnaire contains both open-ended and close ended questions. The questionnaire

provides a provision with respect to rating scales.

Assumptions

The sample selected represents the population fully.

The data has been collected by administering an open and close ended

questionnaire to sample of end investors and with the assumption that the primary data

collected is true and reflects the actual preferences of the investors.

60


The sample selected has thorough knowledge of the subject.

Limitations of Study

The respondents who have not given any information are not included in the sample

but do come under the population.

Factors like change in tax and regulatory framework has not been considered.

Performance Evaluation

How to Calculate the value of a Mutual Fund:

The investor’s funds are deployed in a portfolio of securities by the fund manager. The

value of these investments keeps changing as the market price of the securities change.

Since investors are free to enter and exit the fund at any time, it is essential that the market

value of their investments is used to determine the price at which such entry and exit will

take place. The net assets represent the market value of assets, which belong to the

investors, on a given date.

Net Asset Value or NAV of a mutual fund is the value of one unit of investment in the fund,

in net asset terms.

NAV= Net Asset of the scheme / Number of Units Outstanding

Where Net Assets are calculated as:-

61


(Market value of investment + current assets and other assets + Accrued income – current

liabilities and other liabilities – less accrued expenses) / No. of Units Outstanding as at the

NAV date.

NAV of all schemes must be calculated and published at least weekly for closed – end

schemes and daily for open- end schemes.

The major factors affecting the NAV of a fund are :

Sale and purchase of securities

Sale and repurchase of units

Valuation of assets

Accrual of income and expenses

Measuring Mutual Fund Performance :

We can measure mutual fund’s performance by different method:

Absolute Return Method

Percentage change in NAV is an absolute measure of return, which finds the NAV

appreciation between two points of time, as a percentage.

e.g.: If NAV of one fund changes from Rs. 20 to Rs. 22 in 12 months then

Absolute return = (22-20) / 20 X 100 = 10%

Simple Annual Return Method :

Converting a return value for a period other than one year, into a value for one year, is

called as annualisation. In order to annualize a rate, we find out what the return would be

62


for a year, if the return behaved for a year, in the same manner it did, for any other

fractional period.

e.g.: If NAV of one fund changes from Rs.20 to Rs.22 in 6 months then

Annual Return = (22-20) / 20 X 12/6 X 100 = 20%

Total Return Method :

The total return method takes into account the dividends distributed by the mutual fund, and

adds it to the NAV appreciation, to arrive at returns.

(Dividend distributed + Change in NAV) / NAV at the start X 100

e.g.: If the NAV of one fund changes from Rs.20 to Rs.22 in 6 months if in between

dividend of Rs.4 has been distributed then

Total Return = {4 + (22 – 20)} / 20 X 100 = 30%

Total Return when dividend is reinvested :

This method is also called the return on investment (ROI) method. In this method, the

dividends are reinvested into the scheme as soon as they are received at the then

prevailing NAV (ex-dividend NAV).

= {(Value of holdings at the end of the period / value of the holdings at the beginning) – 1} X

100

e.g.: An investor buys 100 units of a fund at Rs.10.5 on January 1, 2009. On June 30, 2009

he receives dividends at the rate of 10%. The ex- dividend NAV was Rs.10.25. On

December 31, 2009, the fund’s NAV was 12.25.

Value of holdings at the beginning period = 10.5 X 100 = 1050

Number of units reinvested = 100/10.25 = 9.756

63


End period value of investment = 109.756 X 12.25 = Rs.1344.51

Returns on Investment = {(1344.51/1050)-1} X 100

28.05%

Compound Average Annual Return Method :

This method is basically used for calculating the return for more than 1 year. In this method

return is calculated with the following formula:

A = P X (1 + R / 100) N

Where P = Principal invested.

A = Maturity value.

N = period of investment in years.

R = Annualized compounded interest rate in %.

R = {(Nth root of A / P) - 1} X 100

e.g.: If amount invested is Rs.100 & in the end we get return of Rs.200 & period of

investment is 10 years then annualized compounded return is

200 = 100 (1 + R / 100)10

Rate = 7.2%

Composition of the Portfolio :

64


Credit quality of the portfolio is measured by looking at the credit ratings of the investment

in the portfolio. Mutual Fund fact sheets show the composition of the portfolio and the

investments in various asset classes over time.

Portfolio turnover ratio is the ratio of lesser of asset purchased or sold by funds in the

market to the net assets of the fund.

If portfolio ratio is 100% means portfolio has been changed fully. When portfolio ratio is high

means expense ratio is high.

Portfolio Turnover Ratio = Total Sales & Purchase

Net Assets of fund

In order to meaningfully compare funds some level of similarity in the following factors has

to be ensured:

Size of the funds.

Investment objective.

Risk profile

Portfolio composition.

Expense ratios.

Fund evaluation against benchmark :

Funds can be evaluated against some performance indicators which are known as

benchmarks.

There are 3 types of benchmarks:

Relative to market as whole

Relative to other comparable financial products.

Relative to other mutual funds.

1. Relative to market as whole :

65


There are different ways to measure the performance of fund w.r.t market as

Equity Funds

Index fund – an index fund invests in the stock comprising of the index in the same

ratio. This is a passive management style.

For example,

Market Index Fund - BSE Sensex

Nifty Index Fund - NIFTY

The difference between the return of this fund and its index benchmark can be

explained by “TRACKING ERROR”.

Active Equity Funds :

The fund manager actively manages this fund. To evaluate performance in such

case we have to select an appropriate benchmark.

Large diversified equity fund - BSE 100

Sector fund - Sectoral Indices

Debt Funds :

Debt fund can be judged against a debt market index e.g. I-BEX. In the Indian

Context, CRISIL and some private players like I-sec, have tried to develop some

indices to which debt funds can benchmark themselves. The market has different

indexes for different maturities and composition of debt instruments so that mutual

funds can benchmark against a pertinent index. For example there is a CP index,

Call index, corporate bond index, MIP blended index and also Composite indices.

The presence of such benchmarks has made the scene a little more pragmatic.

2. Relative to other comparable financial products:

66


Schemes Return

Convenience

Safety volatility Liquidity

Equity High

Moderate

Low High High

FI Bonds Moderate

High

High Moderate Moderate

Corporate Moderate Moderate Moderate Low

Debenture Low

Company

Fixed

Deposits

Moderate

Moderate

Low Low Low

Bank Deposits Low

High

High Low High

PPF Moderate

High

High Low Moderate

67


Life Insurance Low

Moderate

High Low Low

Gold Moderate

Low

High Moderate Moderate

Real Estate High

Low

Moderate High Low

Mutual Funds High

High

Moderate Moderate High

Schemes Investment

Objective

Risk Tolerance Investment

Horizon

Equity Term Capital

Appreciation

High Long

FI Bonds Income Low Medium to long

term

68


Corporate

Debentures

Income High

Moderate

Medium to long

term

Company Fixed

Deposits

Income Moderate

Low

Medium

Bank Deposits Income Generally Flexible all terms

PPF Income Low Long

Life Insurance Risk Cover Low Long

Gold Inflation hedge Low Long

Real Estate Inflation hedge Low Long

3. Relative to other mutual funds

When we compare one company’s mutual fund with other company then we have to see

the following things:

69


The performance of fund can be compared with similar scheme of other mutual fund.

We should also see the investment objective and rating profile of portfolios.

Average maturity of debt portfolio should be same.

Size of fund should be same ( Big Small)

The investment objectives and risk profiles

Expense ratio

Returns must be calculated on a comparable basis:

Compare returns of two funds over the same periods only.

Similarly, only average annualized compound returns are comparable.

Only after- tax returns of two different schemes should be compared.

Type of Investors & Recommended Investment

Portfolio

According to lifecycle Stages:

Stages of Lifecycle Surplus to save Risk tolerance Options

Childhood Stage - - -

Young unmarried High High Life Insurance,

equity

Young Married High High Emerging fund

equity

70


Young Married /

Children

Moderate Low/ Moderate Investment for child

education

Married / Old

Children

Moderate Low Debt service/

pension provision

Post family/ pre-

retirement age

Low Low Pension Provision

Questionnaire Analysis

Investment in Mutual Funds

Options Frequency Proportion

Yes 66 78.75%

No 14 23.33%

Total 80

71


Options0

10

20

30

40

50

60

70

80

90

yes no total

Figure 8

Interpretation

The study conducted on 80 persons revealed that 78.75% person invests in mutual

funds and 21.25% people do not invest in the schemes of the mutual funds.

Reason for not investing in Mutual Funds

Ranking Scale 5 4 3 2 1

Reasons Strongly

Agree

Agree Neutral Strongly

disagree

Disagree

Risky 31 27 11 6 5

Lack of Awareness 18 16 20 18 8

Lack of Funds 12 19 14 20 15

Afraid of Scams 9 10 17 15 29

Quality of Management 10 8 18 21 23

Decision Influencer

72


Options Family Relatives Friends TV Internet MF Agent

Observed 11 9 20 4 6 30

Percentag

e

13.75% 11.25% 25% 5% 7.5% 37.5%

14%

11%

25%

5%8%

38%

Decision Influencer

FamilyRelativesFriendTVInternetMF Agent

Figure 9

Interpretation:

From the above analysis it may be concluded that 38% people’s decision to invest in mutual

funds is affected by mutual fund agent. So there is a need to concentrate on updating the

skills of the agents to enable them to motivate the potential customers. Second variable i.e.

the friend’s circle will also be able to motivate more people for investment in mutual funds

rather than traditional investment avenues.

More Risky73


Fund Based Schemes Frequency Proportion

Equity 68 85%

Debt - -

Balanced 8 10%

Liquid 4 5%

Total 80

Frequency0

10

20

30

40

50

60

70

80

EquityDebtBalancedLiquid

Figure 10

Interpretation:

The analysis revealed that 85% people feel that equity schemes are the most risky

schemes. Only 10% people think that balanced schemes are risky. Since some proportion

under balanced scheme is also invested in the equity, this cannot be termed as more risky.

Similarly liquid scheme has also been considered as more risky by 5 % people. Investment

under the liquid schemes is a money market instruments which are highly volatile. These

are comparatively more risky.

Therefore the conclusion is drawn that lack of awareness about the different MF schemes is

the main reason for giving proper opinion by the respondents.

74


Safe / Secured Returns

Avenues Stock Market Property Bank Mutual Fund Others

Observed 8 18 36 16 2

Percentag

e

10% 22.5% 45% 20% 2.5%

Observed0

5

10

15

20

25

30

35

Stock MarketPropertyBankMutual Fundother

Figure 11

Interpretation:

The analysis revealed that people in our country have still the same mind-set of investing in

traditional, safer investments even at low returns. Accordingly, 45% people think that bank

is safe for investment. But 22.5% people showed their interest in making investment in

property even when the investment becomes illiquid. Only 20% people feel comfortable with

investment in MF.

75


Know About Income-Tax Incentives

Options Yes No

Frequency 68 12

Proportion 85% 15%

Frequency0

10

20

30

40

50

60

70

80

yesNo

Figure 12

Interpretation:

The analysis revealed that 85% people were aware of the income – tax incentives available

on investing in some of the MF schemes notified under Income-Tax Act and only 15%

people were not aware.

Quality of Service of Mutual Fund Agent

76


Parameters Excellent Very Good Good Average Poor

Observed 7 14 38 12 9

Percentage 8.75% 17.5% 47.5% 15% 11.25%

Observed0

5

10

15

20

25

30

35

40

ExcellentVery GoodGoodAveragePoor

Figure 13

Interpretation:

The analysis revealed that the quality of service provided by the MF agents is not very

satisfactory as only 8.75% people said that the service provided by the agents are

excellent, 47.5% and 17.5% people said that quality provided by the MF agents is good and

very good respectively. About 26% people were not satisfied with the quality of service

provided by the MF agents. It is suggested that agents should be highly motivated about

their knowledge and skill required periodical updating.

Selection of investment fund

77


By comparing with other MF. 16 20%

By studying past performance of the fund. 8 10%

Through the suggestion given by Distributor /

Advisor

56 70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

comparing with other MFstudying past performanceDistributors advice

Figure 14

Interpretation:

The analysis revealed that 70% people take suggestions of the distributors or advisors

before making investment in MF and 20% people compare with other MF and only 10%

people study the past performance of the fund.

Entry and Exit Load

Yes 22 27.5%

No 58 72.5%

78


Entry & Exit Load

YesNO

Figure 15

Interpretation:

The analysis revealed that only 27.5% people are aware about the entry and exit load

charged on their investment and 72.5% people are not aware of entry and exit load.

Bibliography

References:

79


BOOKS:

AMFI (Advisors module) Study Material.

Offer documents of various Mutual Funds.

Mutual Funds by Akhilesh.

WEBSITES:

http://en.wikipedia.org

http://dspblackrock.com

www.amfi.com

www.mutualfundsindia.com

www.moneycontrol.com

http://investopedia.com/articles/mutualfunds

http://kotakmutualfund.com

www.muthootfinance.com

www.cviindia.com

Annexures

Questionnaire

80


Personal Information:

Name: _____________________

Gender:

Male

Female

Age:

20-25

25-35

35-45

45-55

55+

Monthly Income:

>10000

10000 – 25000

25000 – 40000

40000 – 55000

55000 +

Q1) Do you invest in Mutual Funds?

Yes

No

Q2) What are the Reasons for investing in Mutual Funds? 5 --------- 1

Reasons Strongly

Agree


Disagree

Disagree

Liquidity

Higher

returns

81


Retirement

benefits

Exposure in

capital

market

Safety

Q 3) what are the Reasons for not investing in Mutual Funds? 5 ------------- 1

Reasons Strongly

Agree


Disagree

Disagree

Risky

Lack of

Awareness

Lack of Funds

Afraid of Scams

Quality of

Management

Q 4) Who influenced your decision to invest in Mutual Fund?

Family

Friends

Relatives

MF agents

Q5) According to you which of the following fund is most risky?

Equity

Debt

Balanced

Liquid

82


Q6) What according to you give safe/secured returns?

Bank

Stock Market

Property

Mutual Funds

Others _______________

Q7) Do you know about the Income-tax incentives available in any of the Mutual Fund

Schemes?

Yes

No

Q8) How is the quality of service provided by your MF Agent?

Excellent

Very good

Good

Average

Poor

Q9) How do you select your investment fund?

By comparing with other MF.

By studying past performance of the fund.

Through the suggestion given by Distributor / Advisor.

Q10) Being a MF investor are you aware of the various charges like entry and exit load?

Yes No

83


Economy & Finance

Project on Mutual Fund Industry & impact of exit & entry load on IFA segment