41.

1%

A
Small Savings
17.7%
% PROJECT REPORT
Cashh ON
0.1%

Shares &
Debentures
3.2%
“STUDY
ON MUTUAL FUND AND
Contractual
Savings*
ITS COMPRISON WITH DIFFERENT
*Contractual
27.9%
Provident
%
saving comprises Life Insurance,
Fund and Pension Funds
Provident and Pe *Contractual saving
SAVING INSTRUMENTS”
comprises Life Insurance,
Provident and Pension Funds

nsion Funds

Submitted by: Guided by:

Komal Maheshwari Mr. Amardeep

Soni
M.B.A. (PART-II) Branch Manager
Principal Pnb AMC
Pvt. Ltd.

JODHPUR INSTITUTE OF MANAGEMENT

 JODHPUR

ACKNOWLEDGEMENT
I put myself in humblest desk in order to give the same measure and recognition to all
those who have instrumental through out the entire process of carrying out this project report.
I would like to take this opportunity to acknowledge and thanks to “PRINCIPAL PNB
ASSET MANAGEMENT COMPANY, JODHPUR”, for providing me this highly coveted
opportunity to associate my summer internship project with the organization of national
repute.

My debts for assistance in making this report are more numerous than can be identified
here; this whole effort is the result of guidance, assistance and inspiration of several people
who held me through my study and in the preparation of this report. I find no words to
express my deep gratitude and thanks to all of them.

My special thanks and heartiest gratitude flows towards my training guide – Mr.
Amardeep Soni (Branch Manager, Principal Pnb Asset Management Company Pvt.
Ltd., Jodhpur) His knowledge, nature and judgment along with their experience were an
immense source of inspiration in completing this project. I feel greatly honored to show my
indebtness and my profound gratitude towards him, as he lent his precious time for
accomplishment of this project and under whose guidance this study and observation were
undertaken.

I further feel indebted to all my Faculty members of JODHPUR INSTITUTE OF

MANAGEMENT, JODHPUR for their consistent encouragement, inspiration and various
suggestions from the conception to completion of the project. They helped me to prepare a
factual, realistic and pragmatic report in limited period.

I shall be failing in my duty if I do not express my most gratitude to Mrs. Swati

Lodha, Jodhpur Institute of Management, Jodhpur for giving her invaluable
encouragement and help to me in this whole research project. I am intellectually indebted to
many person mentioned above, whose zeal, co-operative and Endeavor have gone into
preparation of this project report.

I shall feel amply rewarded if the project proves helpful for further studies.
Above all, I thank creator of all.
(Komal Maheshwari)
M.B.A (Part-II)
Jodhpur Institute of Management,
 Jodhpur.

DECLARATION

I myself KOMAL MAHESHWARI, pursuing MBA from JODHPUR INSTITUTE

OF MANAGEMENT, JODHPUR hereby declares that all the facts, data and information
presented by me in the report is true and is the result of my own efforts and research. I have
completed the whole training under the guidance of Mr. AMARDEEP SONI, (Branch
Officer) in Principal Pnb Mutual Fund, Jodhpur and he was my training supervisor during my
whole training.

This report is the result of ‘His’ assistance and guidance and my efforts. I devote my
report to the DIRECTOR OF OUR INSTITUTE, Mrs. SWATI LODHA, who gave us a lot of
encouragement and guidance at every step of our learning process whenever I was in need.

I submit my report to-

Mrs. SWATI LODHA

(DIRECTOR)
 PREFACE

Summer training is an integral part of MBA curriculum. Main objective behind this
training is to link the theoretical inputs and their practical applications, which are essential to
keep pace with the dynamic environment.

To survive, thrive and beat the competition in today’s brutally competitive world, one
has to manage the future. Managing the future means managing your savings. One can
manage his/her savings by investing them in Mutual Fund Companies, Banks and other
Financial Institutions.

The training undergone provides an overview of the complexities of today’s financial

market. It also showed my errors, which were not discovered until I worked on this project.
The training enriched my knowledge regarding Mutual Funds. It also helps me to analyze the
mindset of the Fund Manager while he is investing the fund in the diversified equities, bonds
and any other financial market instruments.

Instead of the efforts there might be some mistakes left in the project.
 A Summer Training Report
For

JODHPUR INSTITUTE OF MANAGEMENT

(Approved by AICTE, New Delhi and Affiliated to Rajasthan Technical University, Kota)
Jhanwar Road, Village Naranadi, Near Boranada, Jodhpur, (Raj.) Phone: (02931) 281552

Report submitted to:

MRS. SWATI LODHA
(DIRECTOR)

Report submitted by:

KOMAL MAHESHWARI
M.B.A PART II

INDEX
S.NO. CONTENTS
1. Objectives
2. A brief about the project
3. Company Profile
4. Introduction to Mutual funds
5. Concept of Mutual Funds
6. Types of schemes of Mutual Funds
7. Advantages and Disadvantages of Mutual Funds
8. Investors needs and goals; Investors saving profile
9. Time Value of money
10. How to overcome from the downside of equities
11. Investment options available to an investor
12. Comparative Analysis of Different Investment options
13. Facts of the growth of Mutual Funds in India
14. Research Methodology
15. Questionnaire
16. Analysis of Data collected through Questionnaire
17. Findings
18. Suggestions
19. Limitations
20. Conclusions
21. Bibliography
 COMPANY PROFILE

ABOUT PRINCIPAL PNB ASSET MANAGEMENT COMPANY

Principal Pnb Asset Management Company Private Limited (in association with
Vijaya Bank) is a joint venture between The Principal Financial Group (Des Monies, USA),
Punjab National Bank, and Vijaya Bank. The Principal holds 65% in this venture. Today (as
on 31st May, 2007) more than 579,899 investors have entrusted us with managing their assets
worth Rs.13, 149 crores)

Principal Pnb Asset Management Company Private Limited (PPAMC), a company

incorporated on October 17, 1994, is the Investment Manager to Principal Mutual Fund. It
was the first private sector company to tie-up with the Department of Postal Services to sell
mutual funds through the postal network.

PPAMC was originally incorporated as a wholly owned subsidiary of Industrial

Development Bank of India (IDBI). Principal Financial Services Inc. USA, acquired 50%
stake in the paid up equity capital of IDBI Investment Management Company Ltd., on March
31, 2000, through its subsidiary Principal Financial Group (Mauritius) Limited (PFGML).
Subsequently, the name of the Company was changed to IDBI-PRINCIPAL Asset
Management Company Limited. On June 23, 2003, PFGML acquired 100% stake in the paid
up equity capital of IDBI-PRINCIPAL Asset Management Company Limited. Subsequently
the name of the company was changed to Principal Asset Management Company Private
Limited, to reflect the change in ownership.

On May 05, 2004, Punjab National Bank and Vijaya Bank became equity
shareholders of the Asset Management Company and post this, Principal Financial Group
(Mauritius) Limited, Punjab National Bank and Vijaya Bank hold 65%, 30% and 5%
respectively of the paid up equity capital of the Asset Management Company.

To reflect the change in the controlling interest, the name of the Company with
effect from Janua24, 2005 has been changed to Principal Pnb Asset Management Company
Private Limited.
  ABOUT PRINCIPAL MUTUAL FUND:

“Our corporate mission and philosophy is to help businesses and people meet their
financial goals by providing quality investment and retirement solutions.”

Principal Mutual Fund is sponsored by Principal Financial Services Inc., USA, a

member of Principal Financial Group Inc. USA.

Principal Financial Group entered Indian mutual fund market in September 2000
through a 50:50 joint venture with IDBI. In October 2000, IDBI Principal Mutual Fund
pioneered an Asset Allocation Program, which it christened Future Goals — India's first life
stage investment plan.

In June 2003, Principal Financial Group bought out IDBI’s 50 per cent stake in the
joint venture.

In October 2000, Principal Mutual Fund launched India’s first Asset Allocation
program, branded as the ‘Future Goal Series’. This innovative offering offered unique
features such as Asset Allocation and Automatic Rebalancing and Triggers, which gave
investors tremendous flexibility in planning out their investment strategies.

Within a very short period of time, Principal Mutual Fund created a niche for itself
in the Indian Mutual Fund Industry, for its pioneering role with regards to offering investor’s
very innovative investment options and value-added services, many of which are ‘first’ in the
Indian Mutual Fund Industry.

 ABOUT THE PRINCIPAL FINANCIAL GROUP:

The Principal Financial Group is a 125-year-old diversified global conglomerate of

Financial Services Companies in the United States. The Principal Financial Group is the
member of Fortune 500 and serves its customers worldwide from offices in Asia, Australia,
Europe, Latin America and the United States. The Principal Financial Group is traded under
the ticker of PFG on the New York Stock Exchange (NYSE).

The Principal Financial Group (www.principal.com) is a leader in offering businesses,

individuals and institutional clients a wide range of financial products and services, including
retirement and investment services, life and health insurance and mortgage banking through
its diverse family of financial services companies. More employers choose the Principal
Financial Group for their 401(k) plans than any other bank, mutual fund, or insurance
company in the United States. Its flagship and largest member, Principal Life Insurance
Company (The Principal ®), was founded in 1879.
  ABOUT PUNJAB NATIONAL BANK:
Established in 1895 at Lahore, Punjab National Bank (PNB) (www. Pnbindia.com)
was started with an initial capital of Rs. 2 Lakh and working capital of Rs.20,000 by a group
of visionaries. The bank successfully withstood various trials of strength and was
nationalized in 1969. Showing consistent growth and profit performance, PNB now emerged
as the third largest bank in the country in terms of asset size and the second with respect to
number of branches. The bank today has a successful track record of over 109 years, with its
presence in virtually in all the important centers of the country, PNB offers a wide variety of
banking services which include corporate and personal banking, industrial finance,
agricultural finance, financing of trade and international banking.

• ABOUT VIJAYA BANK:

Vijaya Bank became a scheduled Bank in 1958 and steadily grew into a large All
India Bank. The bank was nationalized on 15th April 1980. It has built a network of 868
branches that span all 28 states and 4 union territories in the country. In the recent years, the
bank has opened 43 branches that offer specialized banking for industrial finance, small scale
industries, agricultural (hi-tech) finance, capital market, Commercial & Personal banking,
asset recovery management, overseas banking, corporate banking, and funds transfer. The
Bank has introduced several customer friendly deposit schemes and has also launched several
retail lending schemes to cater to its vast clientele base. Vijaya Bank is one among the few
banks in the country to take up principal membership of VISA International and MasterCard
International.

PRINCIPAL AMC GETS A NEW IDENTITY (July 02. 2004):

To be renamed Principal PNB Asset Management Company

Mumbai, July 02, 2004: Principal Asset Management Company formally

announced that henceforth the company would be called Principal PNB Asset Management
Company (in partnership with Vijaya Bank). The name change is the result of the formation
of Principal’s alliance with Punjab National Bank and Vijaya Bank, two of nation’s leading
nationalized banks.

This development heralds a new beginning for the Mutual Fund industry with the
coming together of three well-respected financial institutions. Punjab National Bank with
4474 offices and Vijaya Bank, with 868 branches that span all 28 states and 4 Union
Territories in the country, will help in augmenting the infrastructure of Principal Mutual
Fund. The equity structure in the new company would see the Principal Financial Group
holding a 65% stake, 30% with Punjab National Bank and Vijaya Bank holding the balance
5%.
PRINCIPAL PNB AMC ANNOUNCED STRATEGIC PARTNERSHIP WITH
FOLLOWING BANKS:

According to the agreement, Banks will offer the entire range of Principal’s Mutual
Fund offerings at the Bank’s select branches. This initiative will reflect Principal PNB’s
growth strategy in the Indian mutual fund sector. Internationally, the Principal brand is
known for its innovative investment solutions and the Banks are the most respected
institutions in the Indian financial sector. The combination of the expertise and reach brought
to the table by these financial powerhouses will provide the Indian customer with a wider
range of superior investment options under a single roof.

 WITH CORPORATION BANK-

Mumbai, September 13, 2005: Principal PNB Asset Management Company Pvt
Ltd. (in association with Vijaya Bank) and Corporation Bank announced a strategic
partnership for distribution of Principal’s Mutual Fund products.

About Corporation Bank:

Corporation Bank has already become the Composite Corporate Agent of LIC of
India for selling Life insurance products and general insurance products of New India
Assurance Company Ltd. Besides; the Bank is also dealing in GOI Bonds, PPF Scheme,
accepting Direct Taxes and also Central Excise and Service Tax in certain cities.

 WITH ALLAHABAD BANK

Mumbai, October 18, 2005: Principal PNB Asset Management Company Pvt. Ltd.
(in association with Vijaya Bank) and Allahabad Bank announced a strategic partnership for
distribution of Principal’s Mutual Fund Products.

About Allahabad Bank:

It is amongst the oldest Bank in India, established in 1865. The Bank caters to mote
than 15 million customers across India through its network of 2097 outlets. The bank has
grown rapidly in recent years. The total business of the Bank went up from Rs. 299.11 billion
(March 31, 2001) to Rs. 629.14 billion (March 31, 2005) showing more than double growth
during the last five years. Deposits of the Bank increased from Rs. 201 billion (March 31,
2001) to Rs. 408 billion (March 31, 2005.) The net profit of the Bank zoomed from a mere
Rs. 399 million during 2000-01 to a hefty Rs. 5.42 billion during 2004-05. The
spurt in business growth of the Bank can be attributed to the strategy of emphasising on Bulk
business the Bank in recent times and continued focus on retail credit expansion, primarily,
through its designated retail delivery channels namely Retail Banking Boutiques,
improvement in customer service through adoption of technology and instituting specialised
branches to cater needs of different segments of clientele and product innovation and
marketing. Allahabad Bank is going international by setting up a branch in Hong Kong and a
representative office in China shortly.

 WITH BANK OF RAJASTHAN

Mumbai, January 23rd 2006, Bank of Rajasthan and Principal Pnb Asset
Management Company Pvt Ltd. (in association with Vijaya Bank) today announced a
strategic partnership for distribution of Principal’s Mutual Fund investment solutions.

About Bank of Rajasthan:

Bank of Rajasthan is serving the customers with 434 fully computerized offices spread
over 21 States and 2 Union Territories. The Bank has on its shelf various innovative products
with State of the Art Technology. The Bank offers Anywhere Banking Facility at more than
262 branches. Bank’s International Debit Card can be used at over 12500 ATMs of UTI
Bank, Corporation Bank, Cash Tree network banks & State Bank of India and its 8
Associated Banks. It can also be used at over 10 Lac ATMs world wide and is acceptable at
over 117000 merchants’ establishments in India and 24 million merchants in more than 160
countries. The Bank is also providing Internet Banking. It facilitates Demat Services, Life
and Non Life Insurance products, Franking of Stamps on behalf of Government of
Maharashtra, Gujarat and Rajasthan states. The Bank has recently launched International
Visa Credit Card with two versions-Gold and Silver.

PRINCIPAL PNB TIES UP WITH INDIAN OVESRSEAS BANK FOR DISTRIBUTION

OF ITS MF SCHEMES:

Mumbai: Principal PNB AMC and Indian Overseas Bank announced a strategic tie-up for
distribution of Principal MF schemes. Under the agreement, Indian Overseas Bank will offer
the entire bouquet of Principal MF’s schemes across the Bank’s selected branches. This
move reflects Principal MF’s strategy to rapidly expand and achieve the 10,000 crore mark in
this fiscal year.
EXPERTISE:
 Principal’s strong expertise at understanding customer needs and mapping them
against its wide range of superior products, gives us a comprehensive edge in the
market place.

 Since September 2000, Principal has offered and continues to offer innovative
investment options coupled with value added services in the Indian Mutual Fund
Industry.

MISSION:
 To generate consistent and sustainable returns for our investors.

 To practice the values that stand at the core of our professional philosophy.

 Excellence in investment techniques along with the best of personnel in the industry
allows us to achieve consistent top quality in all our endeavors.

MILESTONES:
 October 2002 : Launch of Future Goal Series.
 March 2004 : Launch of Global Opportunities Fund.
 July 2004 : Tie up with Punjab National Bank and Vijaya Bank
 September 2004 : Launch of Dividend Yield Fund.
 January 2005 : Launch of Focused Advantage Fund.
 May 2005 : Launch of Junior Cap Fund.
 October 2005 : Launch of Large Cap Fund.
 January 2006 : Launch of Infrastructure and Service Industries Fund.

AWARDS AND RECOGNITIONS

 Principal G-Sec Fund-Investment Plan ranked ICRA-MFR, and the Gold Award for
‘Best Performance’ in the category of ‘open ended Gilt Scheme-Long Term’ for once
a period ending Dec. 31, 2005.

 Principal Income Fund won the CNBC TV18-CRISIL Mutual Fund of the Year
Award in the category of Income fund-second time in a row. As per Business World,
this Fund was even listed as “India’s Best Mutual Fund” on Oct. 16, 2006.

 Principal Tax Saving Fund and Principal Income Fund-STP rated ‘Platinum Fund’ by
Economic Times on November 2, 2006.

 Principal Personal Tax Saver Fund listed as World’s No.4 Fund in Times Of India
Report on November 20, 2
PEOPLE BEHIND THE ORGANIZATION
Rajan Ghotgalkar
Managing Director

Rajan Ghotgalkar is Country Head -INDIA at Principal International

and Managing Director of Principal Pnb Asset Management
Company (in association with Vijaya Bank.) He has overall
responsibility of all the Principal International business units in
India. Mr. Ghotgalkar also serves as a Director on the Board’s of
Pnb Principal Insurance Advisory Company Private Limited, Pnb
Principal Financial Planners Co. Pvt. Ltd and Principal Global
Services Pvt. Ltd.

Mr. Ghotgalkar has a rich International banking experience spanning more than 24 years and
comes with an excellent understanding of branch management, operations, finance, consumer
banking and retail banking.

He holds a Bachelor’s Degree in Commerce & Economics from the University of Bombay,
India and is a Chartered Accountant affiliated to the Institute of Chartered Accountant’s of
India.

Rajan Krishnan
Business Head-Asset Management

Mr. Rajan Krishnan is the Business Head - Asset Management at

Principal PNB Asset Management Company Pvt. Ltd.

Mr. Krishnan has over 10 years of experience in the Mutual Fund

industry, working in the Sales & Marketing area. He started his
career in the mutual fund with Kothari Pioneer, the first private sector mutual fund in the
country. After spending about five years in Kothari Pioneer, he moved to take on Sales &
Maketing responsibility at Zurich India Mutual Fund. He has been with Principal Mutual
Fund since June of 2003. Prior to joining the mutual funds industry, Mr. Krishnan garnered
rich and solid experience in the field of advertising and market research and has worked with
renowned names from the industry, like, Lintas, Ogilvy & Matter and Bozell.

Mr. Krishnan is a B. A. (Hons.) in Economics from Delhi University and has an MBA from
XLRI, Jamshedpur.
Rajat Jain
Chief Investment Officer

Rajat Jain is the Chief Investment Officer of Principal PNB Asset

Management Company Private Limited.

Rajat has an experience of over 11 years in the capital markets. His

last assignment was with SBI Mutual Fund where he was the CIO.
Prior to that, he worked in the investment function in various capacities including as a Fund
Manager, Head of Research and Equities Dealer.

His graduate degree is in Mechanical Engineering and he holds a Diploma in Management

from Indian Institute of Management, Lucknow.

Ritesh Jain
Chief Financial Officer

Ritesh Jain is the Chief Financial Officer at Principal PNB Asset

Management Company Pvt. Ltd.

He has over 10 years experience in the areas of finance, treasury, tax

and audit. In his previous assignment he worked with Morgan
Stanley, for their asset management and custody business as
Financial Controller and with JM Morgan Stanley for their securities business as Treasurer.

Ritesh is an ACA, CWA, CS and is a Commerce graduate from Bombay University.

Shyam Bhat
AVP (Investments)

Shyam Bhat has joined Principal PNB Asset Management Company

Private Ltd as AVP (Investments) in May 2004, and is managing
Principal Growth Fund, Principal Focussed Advantage
Fund, Principal Dividend Yield Fund & Principal Infrastructure &
Services Industries Fund.

Prior to joining Principal, Shyam was with Tata Mutual Fund for
approximately 10 years (since its inception), where he was a member
of the fund management team, managing equity and balanced funds.

Shyam is an electrical engineer from VJTI, and has done his Masters in Management Studies
from NMIMS, Mumbai.
R.Srinivasan
Fund Manager

R. Srinivasan has been working with Principal Pnb Asset

Management Company Pct Ltd since July 2005. He has over 13
years of experience in the areas of Fund Management and Equity
Research. In his previous assignment, he worked with Imperial
Investment Advisors as Equity Analyst.

Srinivasan has done his Masters in Commerce and Financial

Management.

Ritesh Jain
Fund Manager

Ritesh Jain has over 10 years of experience in areas of Investment,

Broking, Sales and Marketing in fixed income and
financial products. In his previous assignment with Mata Securities
India Pvt Ltd., he carried out the broking business for financial
products.

Ritesh has done M.B.A. in Finance

Pankaj Tibrewal
Fund Manager

Mr. Pankaj Tibrewal has over three years experience in debt market.
In his first professional assignment with Principal Pnb Asset
Management Company Private Limited he worked as Credit Analyst.
Presently, he continues to work with M/s. Principal Pnb Asset
Management Company Private Limited as Senior Investment Analyst.

Sandeep Bagla
Fund Manager

Mr.Sandeep Bagla manages the Debt portfolio of Principal Mutual

Fund, which comprises more than 75% of the total corpus. Bagla also
directly manages the Principal Income Fund, Principal Short Term
Fund, Principal G-Sec Fund, and the Principal Monthly Income Plans.
Bagla joined Principal in 2004 as Senior Fund Manager-Debt and was
elevated to his current assignment in September 2005.

Prior to joining Principal, Sandeep was with Reliance Mutual Fund, where he managed debt
schemes (Income, Short Term Plan, Government Securities Fund and Monthly Income Plan).
Bagla has more than 12 years experience in investment management. Bagla is a graduate in
Economics from Presidency College, Calcutta, and holds a Post Graduate Diploma in
Management from Xavier Institute of Management, Bhubaneswar. Bagla also has a number
of awards to his credit

Reasons Behind The Project

A common investor is risk averse and invests in opportunities with minimum risk such as
bank deposits, post office savings, small savings scheme, etc for the reasons of liquidity,
assured returns and attached tax benefits. However, an investor with a moderate to high risk
appetite has the opportunity to invest in the capital market so as to earn higher returns.

Prior to taking a plunge in the capital market, an investor should understand its mechanics
completely to reduce the risks involved, identify the entry and exit points for different stocks
and thereby maximize returns.

The answer to maximizing returns lies in diversification .By creating a portfolio and
investing in different stocks the investor is able to spread his risk within the portfolio rather
than concentrating the risk in one investment. This allows him to make gains even if a few of
the stocks in the portfolio do not perform well.

All this is easier said than done .A typical investor is unlikely to have the knowledge, skills,
inclination and time to keep track of events, understand their implications and act speedily.
An individual also finds it difficult to keep track of ownership of his assets, investments,
brokerage dues and bank transactions etc. In such a case, the investor may take wrong
investment decision and as a result may loose hefty amounts. Some investors might not be
able to benefit from diversification owing to their pocket size, as they may not have enough
savings to invest in many different stocks.

Mutual funds provide an excellent solution to such problems. Not only the investments are
continuously monitored for a risk taking investor but also enable a small investor to acquire a
diversified portfolio to maximize his benefits as mutual funds enable an investor to invest in
the capital market even with the minutest of investments.
 A Brief About Project Work

In my project the main goal is to study how individuals make decisions to spend
their available resources (time, money and effort) on investments (what they invest, why they
invest, when they invest, where they invest & how often they invest).

Certain Comparative analyses are done between various investment options so as to

find out where do the investors like to invest their savings. Today, a common investor is wise
enough to select the best investment opportunity available to him. Options which are
available to him are NSC`s, Bonds, Shares, Debentures, Bank Deposits, FD`s, RD`s, Post
Office Deposits and off course Mutual Funds. It was a great task to check out who invest
where and what amount for what period? It was impossible for me to prepare a questionnaire
as each investor has different priorities of investment so I took help of unofficial interviews.

I also took the help of brokers and leading agents in the city. I have prepared my
report on the basis of their personal reactions and views and with help of information, which
was available to me on internet about the company and about Mutual Funds.
 OBJECTIVES OF PROJECT

Every new work is started with some aim and ends with the fulfillment of that aim.
Same as this project report aims at imparting education about mutual funds
The objective of this project is to get acquainted about: -
• What is mutual fund
• What is the Concept of Mutual Fund
• What are the various schemes of Mutual Funds
• What is the constitution of AMC and how it is constituted.
• What are the benefits of investing in mutual funds
• What are the various options available to an investor
• What are the basis of differentiation between different investment options.
• What are the steps which should be followed to invest in Mutual Funds
• How mutual funds are beneficial.
 MUTUAL FUNDS

INTRODUCTION:
Nowadays, bank rates have fallen down and are generally below the inflation
rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms
the value of money decreases over a period of time. One of the options is to invest the money
in stock market. But a common investor is not informed and competent enough to understand
the intricacies of stock market. This is where mutual funds come to the rescue. Mutual Fund
is an instrument of investing money.

A mutual fund is a group of investors operating through a fund manager to

purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and
very easy to invest in. By pooling money together in a mutual fund, investors can purchase
stocks or bonds with much lower trading costs than if they tried to do it on their own. Also,
one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of
mutual funds is diversification.

Diversification means spreading out money across many different types of

investments. When one investment is down another might be up. Diversification of
investment holdings reduces the risk tremendously.

Different investment avenues are available to investors. Mutual funds also offer good
investment opportunities to the investors. Like all investments, they also carry certain risks.
The investors should compare the risks and expected yields after adjustment of tax on various
instruments while taking investment decisions. The investors may seek advice from experts
and consultants including agents and distributors of mutual funds schemes while making
investment decisions.

Lower per capita income, apprehensions of loss of capital and economic insecurity
significantly influence the investment decisions of the investors. Nevertheless, the avowed
objective of every investor is to reduce the risk as low as possible and ensure the returns as
fast high as possible. Mutual funds, obviously, are them most popular channel in the
investment activity as they, by and large, not only guarantee repayment of the principal
money invested but assures a reasonable and regular return. But, there are some exemptions
to this phenomenon. Mutual funds, being an institution/investment agency, are treated as a
suitable vehicle specifically for small investors, who normally feel shy of the capital market
and are unable to predict its conditions through different schemes.
 History of The Indian Mutual Fund Industry
The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India And Reserve Bank. The history of mutual
funds in India can be broadly divided into four distinct phases:

First Phase—1964-87
The Act of Parliament established Unit Trust of India (UTI) ON 1963. It was set
by the Reserve Bank of India and functioned under the Regulatory and administrative control
of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988
UTI had Rs. 6,700 crores of assets under management.

Second Phase—1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non-UTI, public sector mutual fund set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of
India (GIC). SBI mutual fund was the first non-UTI mutual fund established in 1987
followed +by Canbank Mutual Fund (Dec.87). Punjab National Bank Mutual Fund (Aug.89),
Indian Bank Mutual Fund (Nov.89), Bank of India (June 90), Bank of Baroda Mutual Fund
(Oct.92), LIC established its mutual fund in June 1989 while GIC had set up Its mutual fund
in December 1990.

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

With the entry of private sector funds in 1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now
merged with Franklin Templeton) was the first private sector mutual fund registered in July
1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI
Regulations 1996.
The number of Mutual Funds went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of
Rs. 1,21,805 crores. The UTI with Rs. 44,541 crores of assets under management was way
ahead of other mutual funds.

Fourth Phase—since February 2003

In February 2003, following the repeal of the UTI Act 1963 UTI was bifurcated into
two separate entities. One is the Specified Undertaking of the UTI with assets under
management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 Scheme, assured return and certain schemes. The specified undertaking of
UTI, functioning under an administrator and under the rules framed by Government of India
and does not come under the purview of the Mutual Fund Regulations.
 The second is the UTI Fund Ltd., sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs. 76,000 crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with the recent mergers taking place among different private sector
funds, the mutual fund industry has entered its current phase of consolidation and growth. As
at the end of October 31, 2003,there were 31 funds, which manage assets of Rs. 126726
crores under 386 schemes.

The graph indicates the growth of assets over the years.

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified
Undertaking of the Unit Trust of India effective from February 2003. The Assets
under management of the Specified Undertaking of the Unit Trust of India has
therefore been excluded from the total assets of the industry as a whole from
February 2003 onwards.
 SOME DEFINITIONS OF MUTUAL FUNDS
According to SEBI (MF) Regulations, 1996 “ Mutual Fund means a fund
established in the form of a trust to raise monies through the sale of units to the public or a
section of the public under one or more schemes for investing in securities, including money
market instruments.”

The other common and well-known definitions of Mutual Funds are as follows:

“A Mutual Fund is an investment tool that allows small investors access to a well-
diversified portfolio of equities, bonds and other securities. Each shareholder participates in
the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund's Net
Asset Value (NAV) is determined each day.”

“Mutual Funds are financial intermediaries. They are companies set up to receive
your money, and then having received it, make investments with the money via an AMC. It
is an ideal tool for people who want to invest but don't want to be bothered with deciphering
the numbers and deciding whether the stock is a good buy or not. A mutual fund manager
proceeds to buy a number of stocks from various markets and industries. Depending on the
amount you invest, you own part of the overall fund.”

“A Mutual Fund is a company that pools the money of many investors, its
shareholders – to invest in a variety of different securities.”

“The beauty of mutual funds is that anyone with an investible surplus of a few
hundred rupees can invest and reap returns as high as those provided by the equity markets or
have a steady and comparatively secure investment as offered by debt instruments.”

In conclusion, we can say that Mutual Fund collects the money of individuals,
partnership firms, association of persons/body of individuals, trust, HUFs, banks,
company/body corporate, society, financial institutions, foreign individuals, foreign financial
institutions or any other person, or of public or any part of public at large and deploys the
collected fund according to the scheme into the diversified portfolio of equities, bonds,
financial market instruments and other securities to generate returns. As and when any person
redeems his/her units, the Mutual Fund Asset Management Company (AMC) will pay him
his invested amount with the return generated depending on the option chosen by the person.
CONCEPT OF MUTUAL FUND
A Mutual Fund is not an alternative investment option to stocks and bond; rather it pools the
money of several investors and invests this in stocks, bonds, money market instruments and
other types of securities.

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 are shared by its unit holders in proportion
to the number of units owned by them. Thus, 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:

MUTUAL FUND OPERATION FLOW CHART

Anybody with an investible surplus of as little as a few hundred rupees can invest in mutual
funds. The investors buy units of a fund that best suit their investment objectives and future
needs. A Mutual Fund invests the pool of money collected from the investors in a range of
securities comprising equities, debt, money market instruments etc. after charging for the
AMC fees. The income earned and the capital appreciation realized by the scheme, are
shared by the investors in same proportion as the number of units owned by them.

In case of mutual funds, the investments of different investors are pooled to form a common
investible corpus and gain/loss to all investors during a given period are same for all
investors while in case of portfolio management scheme, the investments of a particular
investor remains identifiable to him. Here the gain or loss of all the investors will be different
from each other.

When you deposit money with the bank, the bank promises to pay you a certain rate
of interest for the period you specify. On the date of maturity, the bank is supposed to return
the principal amount and interest to you. Whereas, in a mutual fund, the money you invest, is
in turn invested by the manager, on your behalf, as per the investment strategy specified
for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or
distributed as income. Likewise, loss, if any, with the expenses, is to be borne by you.

A Mutual Fund may not, through just one portfolio, be able to meet the investment
objectives of all their Unit holders. Some Unit holders may want to invest in risk-bearing
securities such as equity and some others may want to invest in safer securities such as bonds
or government securities. Hence, the Mutual Fund comes out with different schemes, each
with a different investment objective.

Mutual funds can be divided into various types depending on asset classes. They can
also invest in debt instruments such as bonds, debentures, commercial paper and government
securities apart from equity.

Every mutual fund scheme is bound by the investment objectives outlined by it in its
prospectus. The investment objectives specify the class of securities a mutual fund can invest
in.

There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund

MUTUAL FUND ORGANISATIONAL FLOW CHART

 FUND STRUCTURE AND CONSTITUENTS
Legal Structure of Mutual Funds

Mutual funds have a unique structure not shared with other entities such as companies
or firms. It determines the rights and responsibilities of the fund’s constituents viz. sponsors,
trustees, custodian, transfer agent and of course, the fund and the asset management
company. The legal structure also drives the inter relationships between these constituents.

Structure of mutual funds in India

Like other countries, India has a legal framework within which mutual funds must be
constituted. In India, all mutual funds are constituted along one unique structure as unit
trusts. A mutual fund in India is allowed to issue open-end and closed-end schemes under a
common legal structure. Therefore, a mutual fund may have several different schemes (open
and closed-end) under it i.e. under one unit trust, at any point of time.

The structure, which is required to be followed by mutual funds in India, is laid

down under SEBI (Mutual Fund) Regulations, 1996.

Rights of the Mutual funds Unit Holders

The offer documents of a scheme lay down the investor’s rights. The important rights of the
unit holders are outlined below:
• Receive unit certificates or statements of accounts confirming the title within 6 weeks
from the date of closure of the subscription or within 6 weeks from the date of request
for a unit certificate is received by the Mutual Fund.

• Receive information about the investment policies, investment objectives, financial

position and general affairs of the scheme.

• Receive dividend within 42 days of their declaration and receive the redemption or
repurchase proceeds within 10 days from the date of redemption or repurchase.
• Right of beneficial ownership of the schemes assets as well as any dividend or
income declared under the scheme.

• Right to information regarding any adverse happening.

 • Right to inspect major documents of the fund i.e. material contracts, the investment
management agreement, the custodian services agreement, registrar and transfer
agency agreement, memorandum and articles of association of the AMC, recent
audited financial statements and the offer document of the scheme.
• Vote in accordance with the Regulations to:
1. Approve or disapprove any change in the fundamental investment policies of
the scheme, which are likely to modify the scheme or affect the interest of the
unit holder. The dissenting unit holder has a right to redeem the investment.
2. Change the Asset Management Company.
3. Wind up the schemes.

• Legal Limitations to Investor’s Rights:

1. Unit holder cannot sue the trust but they can initiate proceedings against the
trustees, if they feel that they are being cheated.
2. Except in certain circumstances AMC cannot assure a specified level of return
to the investors. AMC cannot be sued to make good any shortfall in such
schemes.

REGULATION/CONSTITUTION OF MUTUAL FUNDS

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
(INVESTMENT IN MUTUAL FUNDS)

CONSTITUTION OF A MUTUAL FUND

In India, a mutual fund is allowed to issue both close ended and open-ended funds
under the common law. This is against the practice as followed in UK. A mutual fund in
India is constituted in the form of trust created under the Indian Trusts Act, 1882. The fund
sponsor acts as the Settler of the trust, contributing to its initial capital and appoints a Trustee
to hold the assets of the trusts for the benefit of the unitholders, who are the beneficiaries of
the trust. Under the Indian Trusts Act, the trust or the fund has no independent legal capacity
itself, rather it is the trustee or trustees who have the legal capacity and therefore all acts in
relation to the trust are taken on its behalf by the trustees. The trustees hold the unitholders
money in a fiduciary capacity i.e. the money belongs to the unitholders and it is entrusted to
the fund for the purpose of investment. The fund sponsor can be compared to a promoter of a
company. The Asset Management Company (AMC) is appointed to act as the investment
manager of the trust under the Board supervision and direction of the trustees. The sponsor
appoints the AMC, which would in the name of trust, float and then manage the different
investment schemes as per SEBI guidelines.
The above aspects can be understood easily in the following paragraphs.
 • Who can establish a mutual fund?
A mutual fund is to be established through the medium of a sponsor –
A sponsor means any body corporate who, acting alone or in the combination with another
body corporate, establishes a mutual fund after completing the formalities prescribed in the
SEBI’s Mutual Funds Regulations. The sponsor should have a sound track record and general
reputation of fairness and integrity in all his business transactions.

“Sound track record” shall mean that the sponsor should:

1 Be carrying on business in financial services for a period of not less than five
years.

2 The net worth is positive in all the immediately preceding five years.

3 The net worth in the immediately preceding year is more than the capital
contribution of the sponsor in the asset management company.

4 The sponsor has profits after providing for depreciation, interest and tax in
three out of the immediately preceding five years, including the fifth year.

5 The sponsor should be a fit and proper person.

• How to establish a mutual fund

1 The mutual fund has to be established as a trust and the instrument of trust
shall be in the form of a deed. The deed shall be executed by the sponsor in
favour of the trustees named in the instrument of trust. The trust deed shall be
duly registered under the provisions of the Indian Registration Act, 1908. The
trust deed shall contain clauses specified in the Third Schedule of the
Regulations.

2 An Asset Management Company, who holds an approval from SEBI. Is to be

appointed to manage the affairs of the mutual fund and it should operate the
schemes of such fund.

3 The sponsor should contribute at least 40% to the net worth of the Asset
Management Company.

4 The Trustee should hold the property of the mutual fund in trust for the benefit
of the unitholders.
 Establishes MF as Trust,
Sponsor Company Registers MF with SEBI
Hold Unitholders fund in
Managed by a MF, Ensure compliance to
Board of Trustees Mutual Fund SEBI, Enter into agreement
with SEBI

Float Mutual Funds fund,

Appointed by Manages funds as per SEBI
Board of Trustees guidelines and AMC
AMC agreement

Appointed by
Trustees Provides necessary
Custodian Services
Custodian
Appointed by
Trustees
Provides Banking Services
Bankers

Appointed by
Trustees
Provide Registrars Services
Register Transfer and act as a transfer Agents
Agents

TRUSTEE
Definition- “T
rustee means the Board of Trustees or the Trustee Company who hold the property of the
Mutual Fund in trust for the benefit of the unit holders.”

Eligibility for Appointment as Trustee

1. No person shall be eligible to be appointed as a trustee unless:

 He is person of ability, integrity and standing;

 Has not been found guilty of moral turpitude;
 Has not been convicted of any economic offence or violation of any
 securities laws; and
 Has furnished particulars as specified in Form C specified in SEBI
Regulations.
 2. An asset management company or any of its officers or employees shall not
be eligible to act as a trustee of any mutual fund.
3. No person who is appointed as a trustee of a mutual fund can be appointed a
trustee of any other mutual fund unless:
 Such a person is an independent trustee, and
 Prior approval of the mutual fund of which he is a trustee has been
obtained for such an appointment.

4. Two-thirds of the trustees shall de independent persons and shall not be

associated with the sponsors or be associated with them in any manner whatsoever.

5. In case a company is appointed as a trustee then its directors can act as

trustees of any other trust provided that the object of the trust is not in conflict with
the object of the mutual fund, trustee shall initially or any other time thereafter be
appointed without prior approval of SEBI.

• Rights and Obligations of the Trustees – Operation of the Trust

1. The trustee shall have a right to obtain from the Asset Management Company
such information as is considered necessary by the trustees.
2. If the trustees have reason to believe that the business of the Mutual Fund is
not conducted in conformity with the SEBI regulations, they shall forthwith take such
remedial steps as are necessary to rectify the situation and keep SEBI informed of the
violation and the action taken by them.
3. The trustees shall ensure that the transactions entered into by the Asset
Management Company are in accordance with the SEBI Regulations and the scheme.
4. The trustees shall be accountable for and be the custodian of the property of
the respective schemes and shall hold the same in trust for the benefit of the unit
holders in accordance with the SEBI Regulations and the provisions of the trust deed.
5. The trustees shall be responsible for calculation of any income due to be paid
to the mutual fund and also of any income received in the mutual fund for the holders
of the units of any scheme in accordance with the SEBI Regulations and the trust
deed.

The trustees shall ensure that an Asset Management Company has been diligent
in empanelling the brokers, in monitoring securities transactions with brokers
and avoiding undue concentration of business with any broker.

The trustees shall ensure that the Asset Management Company has not given
any undue or unfair advantage to any associates or dealt with any of the associates of
the asset management company in any manner detrimental to interest of the unit
holders.

The trustees shall ensure that the Asset Management Company has not given any
undue or unfair advantage to any associates or dealt with any of the associates of the asset
management company in any manner detrimental to interest of the unit holders.
 The trustees shall ensure that the Asset Management Company has been
managing the mutual fund schemes independently of other activities and have taken
adequate steps to ensure that the interest of investors of on scheme are not being
compromised with those of any other scheme or other activities of the Asset Management
Company.
The trustees shall call for the details of transactions in securities by the key
personnel of the Asset Management Company in his own name or on behalf of the asset
Management Company on a six monthly basis and shall repot to SEBI, as and when
required.

The trustees shall quarterly review all transactions carried out between mutual
funds, Asset Management Company and its associates.

The trustee shall quarterly review the net worth of the asset Management company
and in case of any shortfall, ensure that the Asset Management Company make up for the
shortfall as per clause (f) of sub-regulation (1) of regulation 21.

The trustees shall ensure that there is no conflict of interest between the manner of
deployment of its net worth by the Asset Management Company and the interest of the
unit holders. Each trustee shall file the details of his transactions of dealings in securities
with the Mutual Fund on a quarterly basis.

• Report to SEBI
The trustees shall furnish to SEBI on a half yearly basis:
1. A report on the activities of the mutual fund,
2. A certificate stating that the trustees have satisfied themselves that there have been no
instances of self-dealing or front running by any of the trustees, directors and key
personnel of the Asset Management Company,
3. A certificate to the effect that the Asset Management Company has been managing
the scheme independently of any other activities and in case of activities of the nature
referred to in the regulation 24 have been undertaken by the Asset Management
Company and has taken adequate steps to ensure that the interest of the unit holders
are protected,
4. The independent trustees referred to in regulation 16 shall give their comments on the
report received from the Asset Management Company regarding the investments by
the mutual fund in the securities of group companies of the sponsor.

• Due Diligence by Trustees

1. General Due Diligence:

 The trustees shall be discerning in the appointment of the Board of

the Asset Management Company.
 Trustees shall review the desirability of continuance of
Management Company if substantial irregularities are observed of the schemes
and shall not allow the asset management to float new schemes.
 The trustees shall ensure that the trust property is properly held
and administered by proper reasons and by a proper number of such persons.
  The trustees shall ensure that all service providers are holding
the registrations from SEBI or concerned regulatory authority.
 The trustees shall arrange for test checks for service contracts.
 Trustees shall immediately report to SEBI of any special
development in the mutual fund.

2. Specific Due Diligence

The trustee shall-
 Obtain internal audit reports at regular intervals from independent auditors
appointed by the trustees,
 Obtain compliance certificates at regular intervals from the Asset Management
Company,
 Hold meeting of trustees more frequently,
 Consider the reports of the independent auditor and compliance reports of Asset
Management Company at the meetings of trustees for appropriate action,
 Maintain records of the decisions of the trustees at their meetings and of the
minutes of the meetings,
 Prescribe and adhere to a code of ethics by the trustees, Asset Management
Company and its personnel,
 Communicate in writing to the Asset Management Company of the deficiencies
and checking on the rectification of deficiencies.

. Reports to Trustees
The AMC shall submit a monthly report to the trustees giving details and adequate
justification about the purchase and sale of the securities of the group companies of the
sponsor or the AMC, as the case may be, by the mutual fund during the said quarter.
The AMC shall submit to the trustees, quarterly reports of each
year on its activities and the compliance with SEBI.

ASSET MANAGEMENT COMPANY (AMC)

• Who can be Asset Management Company
A company formed and registered under the Companies Act, 1956 and which
has obtained the approval of SEBI to function as the sponsor of the mutual fund may
appoint an Asset Management Company as such.

If the trust deed of a mutual fund authorizes the trustees, the later shall appoint
the aforesaid terminated by majority of the trustees or by seventy five percent of the
unitholders of the scheme. Any change in the appointment of the Asset Management
Company shall be subject to prior of SEBI and unitholders.
SEBI’s approval of an Asset Management Company – before granting an
approval to the Asset Management Company, SEBI will take into account the
following factors: -

1. All matters that are relevant to efficient and orderly conduct of the affairs of the Asset
Management Company.
2. The existing Asset Management Company has a sound track record, general
reputation and fairness in transactions. For this purpose, sound track record means the
net worth, and the profitability of the Asset Management Company.
3. The Asset Management Company is a fit and proper person.
4. The directors of the Asset management Company are persons having adequate
professional experience in finance and financial service related field and not found
guilty of moral turpitude or convicted of any economic offence or violation of any
securities laws.
5. The Board of Directors of the Asset Management Company has at least fifty percent
directors, who are not associate of or associated in a manner with the sponsors or any
of its subsidiaries or the Trustees.
6. The Chairman of the Asset Management Company should not be trustee of any
mutual fund.
7. The Asset Management Company shall have a minimum net worth of rupees ten
crores. If an Asset Management Company was already granted approval under the
provisions of SEBI (Mutual Fund) Regulations, 1993, it shall, within a period of 12
months from the date of notification of SEBI (Mutual Funds) Regulations, 1996,
increase its net worth to rupees ten crores.
 The period of 12 months referred to above may be extended by SEBI upto
three years in appropriate cases for reasons to be recorded in writing. However,
no new schemes should be allowed to be launched or managed by such Asset
Management Company till the net worth has been raised to rupees ten crores.
 Net Worth – It means the aggregate of paid up capital and free reserves of
the AMC after deducting there from miscellaneous expenditure to the extent not
written off or adjusted or deferred revenue expenditure, intangible assets and
accumulated losses.

The key personnel of the Asset Management Company have not been found guilty of
moral turpitude or convicted of economic offence or violation of securities laws or
worked for any Asset Management Company or Mutual Fund or any intermediary during
the period when registration has been suspended or cancelled at any time by SEBI.

• Conditions to be fulfilled by the Asset Management Company

1. Any director of the AMC shall not hold the place of a director in another
AMC unless such person is independent director referred to in clause (d) of Sub-
regulation (1) of Regulation 21 of the Regulations and approval of the Board of AMC
of which such person is a director, has been obtained.
2. The AMC shall forthwith inform SEBI of any material change in the
information or particulars previously furnished which have a bearing on the approval
granted by SEBI.
3. No appointment of a director of an AMC shall be made without the prior
approval of the trustees.
4. The AMC undertakes to comply with SEBI (Mutual Funds) Regulations,
1996.
5. No change in controlling interest of the AMC shall be made unless prior
approval of the trustees and SEBI is obtained:
  A written communication about the proposed change is sent to each unit holder and
an advertisement is given in one English daily newspaper having nationwide
circulation and in a newspaper published in the language of the region where the
Head Office of the mutual fund is situated.
 The unit holders are given an option to exit at the prevailing Net Asset Value
without any exit load.
 The AMC shall furnish such information and documents to the trustees as and when
required by the trustees.

• Obligation of the Asset Management Company

1. The AMC shall manage the affairs of the mutual fund

and operate the schemes of such fund.
2. The AMC shall take all reasonable steps and exercise
due diligence to ensure that the investment of the mutual funds pertaining to any
scheme is not contrary to the provisions of SEBI Regulations and the trust deed of the
Mutual Fund. The AMC shall exercise due diligence and care in all its investment
decisions as would be exercised by other persons engaged in the same business.
Recording of investment decisions – SEBI has advised AMCs to maintain records in
support of each investment decision.

The AMC shall be responsible for the acts of commissions by its employees or the
persons whose services have been obtained by that company.

CUSTODIAN AND DEPOSITORIES

Custodian is a person appointed for safe keeping of the securities. Mutual funds deal
in buying and selling of large number of securities. AMC appoints a Custodian for safe
keeping of these securities and for participating in clearing system on its behalf. In case of
dematerialized securities, holdings will be held by Depository through Depository
participant.

Definition
Custodian means a person who has been granted a certificate of registration by SEBI
to carry on the business of custodian of securities under the Securities and Exchange Board
of India (Custodian of Securities) Regulations, 1996.
The mutual fund shall appoint a custodian to carry out the custodial services for the
schemes of the fund and send intimation of the same to SEBI within fifteen days of the
appointment of the custodian..No custodian in which the sponsor or its associates hold 50%
or more of the voting rights of the share capital of the custodian or where 50% or more of the
directors of the custodian represent the interest of the sponsor or its associates shall act as
custodian for a mutual fund constituted by the same sponsor or any of its associate or
subsidiary company.
Agreement with Custodian
The mutual fund shall enter into a custodian agreement with the custodian, which
shall contain the clauses that are necessary for the efficient and orderly conduct of the

affairs of the custodian. The agreement, the service contract, terms and appointment of the
custodian shall be entered into with the prior approval of the trustees.

BANKERS
The AMC of the mutual fund appoints bankers to the mutual funds. It provides
facilities like receiving the proceeds on sale of investments, enchasing high value cheques,
giving multi city cheque book facilities etc.

TRANSFER AGENTS
He is responsible for issuing and redeeming units of mutual funds. He prepares
transfer documents and update investor records.

TYPES OF SCHEMES/FUNDS

I. By Structure II. By Investment Objective III. Other Schemes

1. Open – Ended Scheme 1. Growth Scheme 1. Tax Saving

2. Close – Ended Scheme 2. Income Scheme 2. Index Scheme
3. Interval Schemes 3. Balanced Scheme 3. Sector Specific
4. Money Market 4. Real Estate Schemes
5. Gilt Schemes

Open ended Schemes

1. The units offered by these schemes are available for sale and repurchase on any
business day at NAV based prices.
2. Unit capital of the schemes keeps changing each day.
3. Offer very high liquidity to investors and are becoming increasingly popular in
India.

• Closed ended Schemes

1. The unit capital of close-ended products is fixed as it makes a one-time sale of
fixed number of units.
2. Are launched with a New Fund Offer (NFO) with a stated maturity period after
which the units are fully redeemed at NAV linked prices.
3. In the interim, investors can buy or sell units on the stock exchanges where they
are listed.
 4. Unlike open-ended schemes, the unit capital in closed-ended schemes usually
remains unchanged.

5. After an initial closed period, the scheme may offer direct repurchase facility to
the investors.
6. Are usually more illiquid as compared to open-ended schemes and hence trade at
a discount to the NAV.

• Interval Scheme

1. Basically a close ended scheme with a peculiar feature that every year for a
specified period (interval) it is made open.
2. Prior to and such interval the scheme operates as close ended.
3. During the said period, mutual fund is ready to buy or sell the units directly from
or to the investors.

• Growth Schemes
1. Commonly called as Equity Schemes.
2. Seek to invest a majority of their funds in equities and a small portion in money
market instruments and have the potential to deliver superior returns over the long
term.
3. They are exposed to fluctuations in value especially in the short term.
4. Hence not suitable for investors seeking regular income or needing to use their
investments in the short-term. Ideal for investors who have a long-term investment
horizon and risk bearing capacity.
5. The return comes in two sizes in this type of schemes, one is small i.e. dividend
and another is medium i.e. at redemption time.

GENERAL PURPOSE EQUITY SCHEMES

Income Schemes
1. Commonly known as Debt Schemes.
2. These schemes invest in money markets, bonds and debentures
3. These schemes primarily target current income instead of capital appreciation.
They therefore distribute a substantial part of their distributable surplus to the
investor by way of dividend distribution.
4. Such schemes usually declare quarterly dividends and are suitable for
conservative investors who have medium to long term investment horizon and are
looking for regular income through dividend or steady capital appreciation.

5. The prices of these schemes tend to be more stable compared with equity schemes
and most of the returns to the investors are generated through dividends or steady
capital appreciation.
6. These schemes are ideal for conservative investors or those not in a position to
take higher equity risks, such as retired individuals.
7. However, as compared to the money market schemes they do have a higher price
fluctuation risk and compared to a Gilt fund they have a higher credit risk.

GENERAL PURPOSE DEBT SCHEMES

Balanced Schemes
1. Aim of balanced funds is to provide both growth and regular income as such schemes
invest both in equities and fixed income securities.
2. Appropriate for investors looking for moderate growth.
3. They generally invest 40-60% in equity and debt instruments.
4. NAVs of such funds are likely to be less volatile and bear lower risk compared to
pure equity funds.
5. Theses funds are also known as Hybrid Schemes.

Money Market Schemes

1. Invest in short term instruments such as Commercial Paper (“CP”),
Certificates of Deposit (“CD”), Treasury Bills and Call Money.
2. Least volatile of all the types of schemes because of their investments
in money market instrument with short-term maturities.
3. Are popular with institutional investors and high net worth individuals
having short-term surplus funds.
 Tax Saving Schemes
Investors (individuals and Hindu Undivided Families (“HUFs”)) are being
encouraged to invest in equity markets through Equity Linked Savings Scheme
(ELSS) by offering them a tax deduction u/s 80(C).
The deduction is allowable upto the limit of Rs. 1lac U/S 80C.

Index Schemes
1. Replicate the portfolio of a particular index such as the BSE Sensitive Index,
S&P NSE 50 index (Nifty), etc
2. Invest in the securities in the same weight age comprising of an index.
3. NAVs of such schemes would rise or fall in accordance with the rise or fall in
the index, though not exactly by the same percentage due to some factors known as
"tracking error" in technical terms.
4. Exchange traded index funds launched by the mutual funds which are traded
on the stock exchanges.
5. The primary purpose of an Index is to serve as a measure of the performance
of the market as a whole, or a specific sector of the market.

• Sector Specific Schemes

1. These schemes restrict their investing to one or
more pre-defined sectors, e.g. technology sector, pharma sector, power sector etc.
2. Depend upon the performance of select sectors
only, these schemes are inherently more risky than general-purpose schemes.
3. They are suited for informed investors who wish
to take a view and risk on the concerned sector.

• Real Estate Schemes

Specialized real estate funds would invest in real estates directly, or may fund real
estate developers or lend to them directly or buy shares of housing finance companies
or may even buy their securitized assets.
Gilt Schemes
This scheme primarily invests in Government Debt. Hence the investor usually does
not have to worry about credit risk since Government Debt is generally credit risk
free.

TYPES OF RETURNS
Mutual Funds give returns in two ways - Capital Appreciation or Dividend
Distribution.

• Capital Appreciation

An increase in the value of the units of the fund is known as capital appreciation. As the
value of individual securities in the fund increases, the fund's unit price increases. An
investor can book a profit by selling the units at prices higher than the price at which he
bought the units.

• Dividend Distribution

The profit earned by the fund is distributed among unit holders in the form of dividends.
Dividend distribution again is of two types. It can either be re-invested in the fund or can be
on paid to the investor.

Under the Growth Plan, the investor realizes the capital appreciation of his/her investments
while under the Dividend Reinvestment Plan, the dividends declared are reinvested
automatically in the scheme.

FREQUENTLY USED TERMS

• Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its liabilities.
The per unit NAV is the net asset value of the scheme divided by the number of units
outstanding on the Valuation Date.

• Sale Price
Sale price is the price you pay when you invest in a scheme. Also called Offer Price.
It may include a sales load.

• Repurchase Price
Repurchase price is the price at which a close-ended scheme repurchases its units and
it may include a back-end load. This is also called Bid Price.

• Redemption Price
Redemption price is the price at which open-ended schemes repurchase their units
and close-ended schemes redeem their units on maturity. Such prices are NAV related.

• Sales or Entry Load

Sale load is a charge collected by a scheme when it sells the units. Also called,
‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.

• Repurchase, Exit or Back-end Load

Repurchase load is a charge collected by a scheme when it buys back the units from
the unit holders.

A FEW INTERESTING TERMS

FLOATING RATE FUNDS
A floating rate fund is a fund that by its investments in floating rate instruments seeks
to provide stable returns with low level of interest rate risk and volatility. A Floating Rate
Instrument is a debt instrument whose interest rate (coupon) is not fixed and is linked to a
benchmark rate and is adjusted periodically. For example the Grindlays Floating Rate Fund
invests primarily in: -

Floating rate debentures and bonds

Short tenor fixed rate instruments
Long tenor fixed rate instrument swapped to floating rate (Interest Rate Swaps).

• Floating Rate Funds, Why?

In a declining interest rate scenario older securities issued at higher coupon rates
(interest paid on the face value of a debt instrument) appear much more attractive than
the ones that are currently issued. Consequently older higher interest bearing securities
would go at a premium. Thus long term income funds by virtue of their investments in
longer maturing securities would see a rise in their Net Asset Values.

However, when interest rates are on the rise newer securities appear more
attractive than the ones that were issued earlier, as they offer higher coupons than their
predecessors. The lesser paying older securities therefore will be sold at a discount. So
the same income fund with a majority of investment in longer maturing securities, now
start earning you lesser as newer securities continues to earn higher returns than the ones
in the portfolio.

This bearish scenario lasts as long as interest rates continue to show an upward
trend. It is during these times that floating rate funds offer the best utility.

• Right time to Invest in Floating Rate Funds

In a rising interest rate scenario, the interest rate on a Floating Rate instrument is
periodically reset to a higher level due to the fact that accompanying benchmark rate is
anyway at a higher level. On account of this periodic reset the difference in returns
between a floating rate fund and a security that is issued currently is marginal. So the
price difference is marginal leading to a marginal impact on the NAV.

Floating Rate funds are protective funds and shield your investments from interest
rate fluctuations.

• Benchmark Rate
A benchmark or a reference rate is a rate that is an accurate measure of the market
price. In the fixed income market, it is an interest rate that the market respects and closely
watches. A benchmark rate should be from an unbiased source, be representative of the
market, transparent, reliable and continuously available and most importantly be widely
acceptable to the market as the benchmark rate. Such benchmark rates issued by
unbiased sources are the Treasury Bill T-Bill) rate issued by the Government of India, the
bank rate as decided by the Reserve Bank of India, the Mumbai Inter Bank Offering Rate
(MIBOR) released by the National Stock Exchange of India and GOI Securities.

An Example: A company issues debentures at 1 year GOI Security yield + 100 basis
points (simply 1%) with a tenor of 5 years, periodically reset every six months. If the1
 year GOI security is currently ruling at 5.75%, the interest rate that is fixed for the first
six months is 5.75% +1%=6.75%.

DIVIDEND SWEEP
One more convenient method of investing is provided by the Mutual Funds. In this option
one can invest the Dividend declared in a particular scheme in other scheme.
The Dividends (net of TDS if any) earned by the Unit holder will be sweeped/
transferred into any desired Scheme or Plan. This facility helps the unit holder to build up his
wealth continuously. No load will be applicable for sweep in, even if the Scheme in which
the sweep is taking place has an entry load.
There are no minimum amount restrictions. Further there is no facility for transfer of
partial dividend or transfer of dividend to multiple schemes. With the introduction of above
option, the Investor can either opt for:-
• Pay out of full Dividend, subject to deduction of tax
• Reinvestment of full dividend into the same scheme, subject to payment of tax
• Transfer of full dividend to some other plan in the same scheme of other schemes
Investors may avail any of the above facilities by ticking the appropriate box in the
Application Form or may contact the ISCs or the AMC for further details.

TRIGGERS
Triggers are options provided to the unit holder as part of systematic withdrawal plan to
enable automatic redemption on the happening of the desired event. Triggers can help
Investor make the most of market movements without the hassle of constant tracking.
Triggers can also be used as an efficient downside protection tool.

• How to opt for Triggers

A unit holder may opt for this facility at any time by
submitting a written application or by filling the relevant form. Under this option, the
entire account will be redeemed when the chosen event occurs.

• Cancellation of Triggers
A mandate of triggers could be cancelled by giving a letter to
that effect mentioning information like Folio No, Name of the scheme, the transaction
for which Trigger is to be cancelled etc When a request is made for canceling a
trigger, it may take up to a maximum 5 business days to implement it.

• How to opt for Triggers

A unit holder may opt for this facility at any time by submitting a
written application or by filling the relevant form. Under this option, the entire account
will be redeemed when the chosen event occurs.

• Different Trigger Options

Following are the types of triggers offered by UTI Mutual Fund:
 1. The Value Trigger:
Redemption will be triggered when your investment reaches a value
that you have defined. For example - You have invested Rs 10,000 with us,
and have set the Trigger at Rs 15,000/-. We will automatically redeem you
when the repurchase value reaches Rs 15,000/-

2. The Date Trigger:

Redeem on a date specified by you.
For example - You may want to redeem your investment on a specific date -
Your 25th Wedding Anniversary, your retirement date, three years from
today, when your son reaches the age of 21 etc.

3. Capital Gains Distribution and Reinvestment Facility:

Allows you to redeem or reinvest when the requisite period for
realization of long-term capital gain is reached.

4. Triggers at Transaction Level:

An investor carries out two separate investment transactions with the
Fund at two different times (even within the same folio), he could specify
separate triggers for each of his transactions and these triggers could be of
different types.
5. Downside Triggers: For
Value Trigger, an investor now can specify the desired value being lower than
the investment amount i.e. a Stop Loss Concept. For example- if an
investor invest say Rs. 10,000/-, he can specify a Value Trigger of 8,000/-. In
case of depreciation in NAV, as and when his investment value reaches
8,000/- or lower, the Trigger would be fired.

• Switch Option for Triggers

Earlier redemption was the only available option on the happening of a
particular event. Now investors can switch to other Plan within the same Scheme or
another Scheme of the UTI Mutual Fund as and when the Trigger is fired. The Switch
option is available ONLY for Date, Value and Index Trigger and not for Capital
Gains Trigger.

• Index Based Triggers

All equity schemes can now avail a new trigger based on NSE Nifty / BSE Sensex
values. An investor has to specify the Index value on reaching of which, investments
should be redeemed/ switched.

• Alerts
Instead of Redemption or Switch, an investor may only opt to be alerted as and when
the Trigger gets fired (happening of specified event). The alert option is available
ONLY for Date, Value and Index Triggers and an email will be sent to the investor
informing him about the happening of event. Email address of the investors is a must
for this option.
 Mutual Funds: Universal Appeal
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
retirement. With objectives defying any range, it is obvious that the products required will
vary as well.

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.

Let us see how.

An investor normally prioritizes his investment needs before undertaking an investment. So

different goals will be allocated different proportions of the total disposable amount.
Investments for specific goals normally find their way into the debt market as risk reduction
is of prime importance. This is the area for the risk-averse investors and here, mutual funds
are generally the best option. The reasons are not difficult to see.

One can avail of the benefits of better returns with added benefits of anytime liquidity by
investing in open-ended debt funds at lower risk. Many people have burnt their fingers by
investing in fixed deposits of companies who were assuring high returns but have gone bust
in course of time leading to distraught investors as well as pending cases in the Company
Law Board.

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. 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.

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 are charged with a dividend distribution tax on
dividend payout at 10 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.

Moving up in the risk spectrum, we have people who would like to take some risk
and invest in equity funds/capital market. However, since their appetite for risk is also
limited, they would rather have some exposure to debt as well. For these investors, balanced
funds provide an easy route of investment. Armed with the expertise of investment
techniques, they can invest in equity as well as good quality debt thereby reducing risks and
providing the investor with better returns than he could otherwise manage. Since they can
reshuffle their portfolio as per market conditions, they are likely to generate moderate returns
even in pessimistic market conditions.

Next come the risk takers. Risk takers by their very nature, would not be averse to
investing in high-risk avenues. Capital markets find their fancy more often than not, because
they have historically generated better returns than any other avenue, provided, the money
was judiciously invested. Though the risk associated is generally on the higher side of the
spectrum, the return-potential compensates for the risk attached.

Capital markets interest people, albeit not all for there are several problems
associated. First issue is that of expertise. While investing directly into capital market one has
to be analytical enough to judge the valuation of the stock and understand the complex
undertones of the stock. One needs to judge the right valuation for exiting the stock too. It is
very difficult for a small investor to keep track of the movements of the market. Entrusting
the job to experts, who watch the trends of the market and analyze the valuations of the
stocks will solve this problem for an investor. Mutual funds specialize in identification of
stocks through dedicated experts in the field and this enables them to pick stocks at the right
moment. Sector funds provide an edge and generate good returns if the particular sector is
doing well.

Next problem is that of funds/money. A single person can’t 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. This not only diversifies the portfolio and helps in
generating returns from a number of sectors but reduces the risk as well. Though
identification of the right fund might not be an easy task, availability of good investment
consultants and counselors will help investors take informed decision.

RISK AND RETURN GRID:

Risk
Tolerance/Return Focus Suitable Products Benefits offered by MFs
Expected
Bank/ Company FD, Debt Liquidity, Better Post-Tax
Low Debt
based Funds returns
Balanced Funds, Some
Diversified Equity Funds Liquidity, Better Post-Tax
Partially Debt,
Medium and some debt Funds, Mix returns, Better Management,
Partially Equity
of shares and Fixed Diversification
Deposits
Capital Market, Equity Diversification, Expertise in
High Equity Funds (Diversified as well stock picking, Liquidity, Tax
as Sector) free dividends

Their appeal is not just limited to these categories of investors. Specific goals like
career planning for children and retirement plans are also catered to by mutual funds.
Children funds have found their way in a big way with many of the fund houses already
having launched a children fund. Essentially debt oriented, these schemes invite investments,
which are locked till the child attains majority and requires money for higher education. You
can invest today and assure financial support to your child when he/she requires them. The
schemes have given very good returns of around 14 percent in the last one-year period. These
schemes are also designed to provide tax efficiency. The returns generated by these funds
come under capital gains and attract tax at concessional rates.

Besides this, if the objective was to save taxes, the industry offers equity linked
savings schemes as well. Equity-based funds, they can take long-term call on stocks and
market conditions without having to worry about redemption pressure as the money is locked
in for three years and provide good returns. Some of the ELSS have been exceptional
performers in past and cater to equity investor with good performances. The industry offered
tax benefits under various sections of the IT Act. For e.g. dividend income is free in the
hands of the investor while capital gains are taxed after providing for cost inflation
indexation. Hitherto, the benefits under section 54 EA/EB were available to take benefits of
the tax provisions for capital gains but have now been removed.

The benefits listed so far have essentially been for the small retail investor but the
industry can attract investments from institutional and big investors as well. Liquid funds
offer liquidity as well as better returns than banks and so attract investors. Many funds
provide anytime withdrawal enabling a big investor to take maximum benefits.

Like we said earlier, the appeal of mutual funds cuts across investor classes.
 In other developed countries, mutual funds attract much more investments as compared to
the banking sector but in India the case is reverse. We lack awareness about the benefits that
are offered by these schemes. It is time that investors irrespective of their risk capacities,
made intelligent decisions to generate better returns and mutual funds are definitely one of
the ways to go about it.

OPPORTUNITY TO INVEST IN MUTUAL FUNDS ACROSS YOUR LIFE

STAGES:

Phase I Phase II Phase III

Child’s Marriage
Income
Child’s Education

Housing

Child birth

Marriage

22 yrs 38 yrs Over 25 - 30 yrs

Birth & Education Earning Years Retirement

22 yrs 60 yrs

Advantages of Mutual Funds:

If mutual funds are emerging as the favorite investment vehicle, it is because of the many
advantages they have over other forms and avenues of investing, particularly for the investor
who has limited resources available in terms of capital and ability to carry out detailed research
and market monitoring. The following are the major advantages offered by mutual funds to all
investors: -
 Portfolio diversification: Each investor in a fund is a part owner of all of the fund’s
assets, thus enabling him to hold a diversified investment portfolio even with a small
amount of investment that would otherwise require a big capital.
  Professional management: Even if an investor has a big amount of capital available
to him, he benefits from the professional management skills brought in by the fund in
the management of the investor’s portfolio. The investment management skills, along
with the needed research into available investment options, ensure a much better
return than what an investor can manage on his own. Few investors have the skills

And resources of their own to succeed in today’s fast-moving, global and sophisticated
markets.
 Reduction/Diversification of Risk: When an investor invests directly, all the risk of
potential loss is his own, whether he places a deposit with a company or a bank, or
buys a share of debenture on his own or in any other form. While investing in the
pool of funds with other investors, the potential losses are also shared with other
investors. This risk reduction is one of the most important benefits of a collective
investment vehicle like the mutual fund.
 Reduction of transaction costs: What is true of risk is also true of the transaction
costs. The investor bears all the costs of investing such as brokerage or custody of
securities. When going through a fund, he has the benefit of economies of scales; the
funds pay lesser costs because of larger volumes, a benefit passed on to its investors.
 Liquidity: Often, investors hold shares or bonds they cannot directly, easily and
quickly sell. When they invest in the units of a fund, they can generally cash their
investment any time, by selling their units to the fund if open ended, or selling them
in the market if the fund is closed end. Liquidity of investment is clearly a big benefit.
 Convenience and flexibility: Mutual fund management companies offer many
investor services that a direct market investor cannot get. Investors can easily transfer
their holdings from one scheme to the other, get updated market information, and so
on.
 Identifying stocks that have growth potential is a difficult process involving detailed
research and monitoring of the market. Mutual funds specialise in the area and
process the requisite resources to carry out research and continuous market
monitoring. This is clearly beyond the capability of most individual investors.

 Mutual funds focus their investment activities based on investment objectives such as
income, growth or tax savings. An investor can choose a fund that has investment
 objectives in line with his objectives. Therefore, funds provide the investor with a
vehicle to attain his objectives in a planned manner.

It is clear that investing through mutual funds is far superior to direct investing except
perhaps for the investor who has a truly large portfolio and the tine, knowledge and
resources required for direct investing.

Disadvantages of investing through mutual funds

While the benefits of investing through mutual funds far outweigh the disadvantages, an
investor and his advisor will do well to be aware of a few shortcomings of using the
mutual funds as investments vehicles.

 No control over costs: An investor in a mutual fund has no control over the
overall cost of investing. He pays investment management fees as long a he
remains with the fund, albeit in return for the professional management and
research. Fees are payable even while the value of his investments may be
declining. A mutual fund investor also pays fund distribution costs, which he
would not incur in direct investing. However, this shortcoming only means that
there is a cost to obtain the benefits of mutual fund services.

 No tailor made portfolios: Investors who invest on their own can build their own
portfolios of shares and bonds and other securities. Investing through funds means
he delegates this decision to the fund managers. The very high-net-worth
individuals or large corporate investors may find this to be a constraint in
achieving their objectives. However, most mutual fund managers help investors
overcome this constraint by offering families of funds- a large number of different
schemes-within their own management company. An investor can choose from
different investment plans and construct a portfolio of his choice.
  Managing a portfolio of funds: Availability of a large number of funds can
actually mean too much choice for the investor. He may again need advice on
how to select a fund to achieve his objectives. Quite similar to the situation when
he has to select individual shares or bonds to invest in.

Investor’s needs: Investment Goals

All individuals need to save for—

• Child’s education
• Child’s Marriage
• Medical Emergency
• Other Family Obligations
• Retirement

Investors: Savings Profile-

–Other family obligations
–Current share of Household Savings
Source: CSO - 2003 -
2004

Value of Money over time

Impact of inflation on Value

100,000 of Rs. 100,000 over
monthly 79,599
time
expenses of Rs. 30,000 78,353
62,368

48,102
38,288 37,689
30,000

20yrs.ye 5 yrs. 15 yrs.

Today 5 yrs. 15 yrs. Today 20 yrs.
ars ears ye

At inflation of 5% investors need to beat Inflation.

PERFORMANCE OF VARIOUS ASSET CLASSES17.6%

Cumulative annualized returns 1980-2006

10.3%
8.9%

6.7%
5.7%

3.55%

-----1.1%

Inflation Gold Bank FDs BSE Sen.

Growth Real Growth

Equity outperform other asset classes over the long term
 Equities can give us the best post inflation returns required to accumulate wealth.
They also score over other asset classes in terms of compounding effect. Lets
explore that--
Rs. 10000 saved every year for 30 years invested at
6%, 8%, 10% and 15% every year

49.99
60
Investment (Rs. Lacs)

Lacs
50
40
Value of

18.09
30 12.24 Lacs
8.38 Lacs
20 Lacs
10
0
6 8 10 15
Returns (% )
Higher the returns from the invested amount, greater the benefit accrued due
to the power of compounding

But when should an investor start?

Benefit of starting early
Goal Value: - Rs. 50 Lacs at the age of 60
Yearly Investment (Rs.)

250000 2,14,140
200000
150000
91,378
100000
42,441
50000 20,432
10,000
0
30 35 40 45 50
Age (Years)
Investments when started early yield greater returns due to the power of
compounding
 THE DOWNSIDE OF EQUITIES

• The Downside RISK in equities.

• The RISK of Market Volatility.
• The RISK of Market Timing.

HOW CAN THESE RISKS BE MANAGED?

• By investing for the long term
• By diversifying the portfolio.

Benefits of Long-Term Investing:

300 0.400

0.350
250
0.300

200 0.250
Returns (%)

Probability
0.200
150
0.150
100
0.100

50 0.050

0.000
0
1 year 2 year 3 year 5year 10 year 15 year -0.050

-50 -0.100
Years

Data: March-1979 to March 2005

 Individual Stock v/s Stock
Portfolio
0.41
Diversified A stock
0.36 Portfolio
Return

B stock
0.31
C stock
0.26
0.30 0.35 0.40 0.45 0.50
Risk

From the above graph it can be depicted that Diversification leads to less risk.
Therefore, to gain these benefits of equities and to overcome the downside of the same
there is single investment vehicle known as MUTUAL FUNDS.

INVESTMENT OPTIONS AVAILABLE TO AN INVESTOR

• Government Securities.
• Bank Deposits.
• Recurring Deposits.
• RD in Post Office.
• Other Saving Schemes of PO.
• Debenture and Preference shares.
• Insurance Sector.
• PF schemes.
• Mutual Funds.
• Company Fixed Deposits.
• FI Bonds.
Analysis Of Different Options Of Investment

There are various types of investment options available to the investor some of which are
discussed below,

MONTHLY INCOME SCHEME

The post-office monthly income scheme (MIS) provides for monthly payment of interest
income to investors. The post-office MIS gives a return of 8 per cent plus a bonus of 10 per
cent on maturity. However, this 10 per cent bonus is not available in case of premature
withdrawals. It is meant to provide a source of regular income on a long-term basis.

Who can Buy

It is meant for investors who want to invest a lump-sum amount initially and earn interest on
a monthly basis for their livelihood. The scheme is, therefore, a boon for retired persons.

Minimum Investment

The minimum investment in a Post-Office MIS is Rs 6,000 for both single and joint
accounts. The maximum investment for a single account is Rs 3 lakh and Rs 6 lakh for a joint
account.

Maturity
The duration of the MIS is six years.

Premature withdrawal
Investors can withdraw money before three years, but at a discount of 5 per cent. No such
deduction will be made if an account is closed after three years. Premature closure of the
account is permitted any time after the expiry of a period of one year of opening the account.
Deduction of an amount equal to 5 per cent of the deposit is to be made when the account is
prematurely closed.

Borrowing Facility
Depends if the banker accepts it as a security.

Mode of Holding

Post office MIS is held physically in the form of a certificate issued by the post office. In
addition, the investor is provided with a passbook to record his transactions against his MIS.
Tax Implication

The interest income accruing from a post-office MIS is exempt from tax under Section 80L
of the Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The
balance is exempt from Wealth Tax.

RECURRING DEPOSIT
A Post-Office Recurring Deposit Account (RDA) is akin to a Recurring Deposit in a bank,
where you invest a fixed amount on a monthly basis. The deposit has a fixed tenure, and the
scheme is a powerful tool for regular savings. As the name says, the RDA is a systematic
way of saving money. Recurring Deposits accumulate money at a fixed rate of interest
(currently 7.5 per cent per annum), compounded quarterly, and your investment appreciates
in five years. The scheme is meant for investors who want to deposit a fixed amount
regularly, in order to get a tidy sum after five years. If you invest Rs 10 every month, you
will get back Rs 728.90 after 5 years. A post-office RDA can be opened at any post office in
the country by filling up the appropriate forms.

Who can buy

An RDA can be opened by an individual adult as a single person account, two adults in a
joint mode, or by a guardian on behalf of the minor who has attained the age of 10 years in
his own name. RDA can also be held by a HUF, Trust, regimental fund, welfare fund,
company, banking company, corporation, association, institution, registered society, or local
authority. Accounts can also be opened in the name of a minor or a person of unsound mind.

Minimum Investment
The minimum investment in a post-office RDA is Rs 10. There is no prescribed upper limit
on your investment.

Interest
The advantage with post-office deposits is that it offers a fixed rate of return at 7.5 per cent
while banks constantly change their recurring deposit rates depending on their demand
supply position. The only disadvantage is that you will have to visit the post office every
month whereas in the case of banks, the amount will be automatically deducted from your
account.

Maturity
The post-office RDA scheme has tenure of five years. This can be extended for a further five
years if you so desire.

Premature Withdrawal

Only one withdrawal is allowed after one year of opening a post-office RDA. You can
withdraw up to half the balance lying to your credit. On premature closure (after one year),
interest is payable as per the rate for the Post Office Savings Bank Account.
Borrowing
The borrowing facility is not available in the post office RDA scheme.

Tax Implications

Although the investment in post-office RDA is itself not subject to tax benefits, interest
income up to Rs 12,000 per annum is exempt from tax under Section 80L of the Income Tax
Act, 1961.

TIME DEPOSIT
On opening a Time Deposit, you will receive an account statement stating the amount
deposited and the duration of the account. These are suitable for capital appreciation in the
sense that your money grows at a pre-determined rate. Unlike certain other investment
options, where returns are commensurate with the risks, the rate of growth is also high; Time
Deposits return a lower, but safer, growth in investment. Therefore, Time Deposits are one of
the better ways to get a relatively high interest rate for your savings. The only condition is
that they are bound for some specific period of time.

Who can apply

All categories of investors are eligible to open an account.

Minimum Investment
The minimum investment in a Time Deposit could be as low as Rs 50. There is no upper
limit on investment.

Interest
A Time Deposit is an investment option that pays annual interest rates between 6.25 and 7.5
per cent, compounded quarterly, and is available through post-offices across the country.

Maturity
Time Deposits have a term ranging between 1 and 5 years. The scheme pays annual interest,
but it is compounded quarterly, thus giving a higher yield. Time deposit for 1 year offers a
coupon rate of 6.25 per cent, a 2-year deposit offers an interest of 6.5 per cent, and 3 years is
7.25 per cent while a 5-year Time Deposit offers 7.5 per cent return.

Premature Withdrawal
While 2, 3, and 5-year Time Deposits can be closed after one year, they entail a loss in the
interest accrued for the time the account has been in operation.

Borrowing
You can borrow against a Time Deposit. The balance in your account can be pledged as a
security for a loan.
Tax Implications

Interest income up to Rs 9,000 from Time Deposits is exempt under section 80L of the
Income Tax Act, 1961, and no tax is deducted at source, i.e., the interest income from a Time
Deposit is also exempt from TDS.

Public Provident fund Scheme

The Central Government has established the Public Provident Fund for the benefit of the
general public to mobilize personal savings any member of the public (whether a salaried
employee or a self-employed person) can participate in the fund by opening an PPF a/c in a
post office, any branch of State Bank of India or its subsidiaries or in specified nationalized
bank. A PPF account can also be opened by NRIs.

A minimum of Rs 100 per year and a maximum of Rs 60,000 per annum can be deposited in
this account.

The PPF Account carries a compound interest at the rate of 12 %, p.a.

The accumulated sum is repayable after 15 year.

Conditions apply to the withdrawal of money during the period of 15 years. Withdrawal of
money from the PPF Account can be made only after the 5th year. Thereafter for each
subsequent year one single withdrawal is permissible. The amount that can be withdrawn
cannot exceed half of the balance at the end of the 4th year immediately before withdrawal or
at the end of the preceding year, whichever is lower.
Opening Amt. Interest Grand
Total
Year Balance Invested 12 % p.a. Total
(Rs)
(Rs) p.a. (Rs) (Rs) (Rs)
(1) (2) (3) (4) (5) (6)
[2 + 3] [4 x 0.12] [4 + 5]
1 0 10,000 10,000 1200 11200
2 11200 10,000 21200 2544 23744
3 23,744 10,000 33,744 4,049 37,793
15 3,62,797 10,000 3,72,797 44,736 4,17,533
20 7,10,524 10,000 720524 86463 8,06,987

An investment of Rs 10,000 every year for the next 15 years, is made in the PPF account, it
will mature after 15 years at Rs 4, 17,533, 41.75 times.
The Annual Investment.

In simple terms a total investment of Rs 1, 50,000, i.e. Rs 10,000 every year for the next 15
years, yields Rs 4, 17,533, which is about 3 times the total amount invested by the investor
over the period of 15 years.

If the individual chooses to continue the account for another 5 year beyond the required 15
year period then the maturity amount will be Rs 8,06,987

Note

 Interest is totally exempt from income-tax under section 10 (15) (i) of the Income Tax
Act, 1961.

 A PPF Account can be opened for a minor son/daughter and spouse; amount
deposited.

 An individual falling in the high income bracket can deposit a maximum of Rs 60,000

 Section 88 confers tax rebate at 20 pc of one's contribution to various specified

investments, PPF being one of them.

 There is no tax liability at the time of withdrawal.

 The account holder may opt for continuing the account for a further block period of 5
yrs at a time (obviously he / she will need to continue to deposit money every year for
these five years also).

 Finally, the balance in the PPF account cannot be attached even under decree of court.

Comparison between schemes of UTI, LIC, PPF

UTI’s RBP is open between the ages of 18 to 60 years. Under the scheme, one has to wait till
58 years for the pension to start. You are also not given any option of allowing the fund to
grow further Also, the pension is payable at any age (say the late forties to early fifties).

Among the LIC policies, Jeevan Suraksha has an entry age 25 to 65 years and
the pension starts from the age of 55 years. For Jeevan Dhara, the entry age is 18 to 65 years,
with pensions starting from 50. Jeevan Akshay has an entry age of 50 years. In return for the
purchase price paid, a monthly pension is paid during the lifetime of the purchaser.
Under PPF, there is a lock-in period of three years from the date you enter the
scheme. After this you can borrow up to 25 per cent of the money in your account as it
stood two years previously. The loan is repayable in 25 months and bears interest at 1 per
cent per annum (effectively 13 per cent).

In the UTI scheme you have an easy exit option. UTI purchases the units at a 10-
per cent discount on the net asset value (NAV) which is declared regularly by them. Amongst
the LIC schemes, you are eligible for policy loans under Jeevan Suraksha but not for Jeevan
Dhara (deferred annuity with profits) and Jeevan Akshay.

So for a loan under Jeevan Suraksha it is calculated depending on the surrender

value (or cash value payable by LIC if the policy-holder terminates the contract before its
official expiry date) the policy would have acquired. In the case of cash policies, 90 per cent
of the surrender value is given as loan while in the case of what LIC calls the "SSS mode"
(premium paid yearly, quarterly or monthly) policies, 80 per cent of the surrender value is
given as loan. The loan is charged at 10.5 per cent.

Surrender value for an endowment-type policy can be calculated thus: The paid-
up value multiplied the surrender value factor divided by 100. The surrender value factor is
determined by a formula that LIC has worked out.

Under Jeevan Dhara, you can reclaim the surrender value of the policy. Policies
affected by single premium can be surrendered for cash at any time after completion of three
years from the date of issue but before the date on which annuity vests. This is for an amount
equal to 80 per cent of the single premium if surrendered before expiry of five years from the
date of issue and 90 per cent of the single premium thereafter. Under policies effected by
annual premia, a cash surrender value equal to 90 per cent of all premia paid excluding the
first year’s premium is allowed.

PPF is more of a tax concession scheme. Under section 88 of the Income Tax
Act, annual contributions up to a limit of Rs 60,000 qualify for tax rebates. The taxation of
income and capital appreciation under the UTI plan will be subject to prevalent tax laws
under certain conditions. Income from units under all schemes of the UTI including RBP
enjoys a rebate of 20 per cent within an overall limit of Rs 60,000 under section 88.

LIC policies have an enormous tax-saving benefit. Jeevan Dhara and Jeevan
Akshay premia enjoy a rebate of 20 per cent under section 88. This rebate is deductible from
the total tax payable by individuals or a Hindu undivided family (HUF). Jeevan Suraksha has
a few other benefits. Contributions under it up to Rs 10,000 per year are eligible for tax
exemption under section 80 CCC (1) of the Income Tax Act. Apart from this, commuted
pension (amount one gets at the start of the pension) of 25 per cent received in lump sum at
the start of the pension is also exempt from income tax.

The PPF scheme pays 12-per cent tax-free, whereas the sky is the limit for RBP
after tax. It would not be fair to compare the LIC schemes with these as they offer the benefit
of a risk cover that no other savings plan provides.

Rates of return can be worked out for various LIC schemes but a number of
assumptions such as time of death after date of commencement of policy, tax saved and
invested on certain rates of return make it highly variable.
 For example, LIC’s Jeevan Akshay offers a gross annual return of nearly 12.7
per cent. Most company FDs, and debentures offer a rate of return of 12 to 14 per cent but
these investments are locked in for shorter periods compared to LIC policies. An important
point to be noted is that under the PPF schemes, gratuity and loyalty additions can be
changed but they are guaranteed under the LIC and UTI schemes.

Investment In Banks
A variety of banks operate in India. These are:

• Public Sector Banks

• Private Sector Banks
• Foreign Banks
• Co-operative Banks

Public
We can see them everywhere. They boast of vast networks and these banks have surely
brought banking to masses. But slothful staff and sluggish pace of deployment of modern
technology, to improve services do not endear them to the savvy bank customer in the
metros. Lack of technology deprives customers of universally popular services like inter-
branch banking. The scenario is now slowly changing with the introduction of the `Swadhan
ATMs', a collective effort of some PSB`s to have common Automatic Teller Machines. If
fully deployed, these have the potential to have a much wider reach than ATM networks of
more tech savvy foreign or private sector banks.

Private
There are of two types - the old and the new banks. Old private sector banks have been there
for decades - for example, Vysya Bank, Bank of Madura, Karnataka Bank and Jammu
Kashmir Bank. The new ones came up when RBI started issuing fresh banking licenses in the
beginning of 1993. Some of the old ones - like Vysya Bank - and most of the new ones - like
ICICI Bank, HDFC Bank and so on - are known for their intensive customer-friendly
approach and heavy use of technology to offer a variety of services. The new ones in
particular have changed the face of personal banking in India. Apart from inter-branch
banking and ATMs in convenient locations, they have also brought in phone and Internet
banking to customers. Their growth rates are very high.

Foreign
Some of these have been here for over 150 years and are much older than all other types of
banks. For decades, they have been targeting corporates and high net worth individuals and
were restricting themselves mainly to the metros. They offer a huge variety of financial
products and services that are on par with the private banks. Their only drawback is lack of
large branch network, which confines them mainly to the larger cities.
Co-operative
The co-operative banks started out to serve customers belonging to a particular community or
people of a geographic area. Though smaller in size, some of them are now well known for
the use of technology, customer friendliness and efficient services.

BANK DEPOSITS AS FIXED INCOME

A bank deposit clearly scores high in safety, liquidity and convenience. Interest rates are
better these days, and there are banks that offer to compound the rate for you on a quarterly
basis. This means a higher effective annual rate. Your money in some bank deposits can
double in 6 years. An analysis of bank rates reveals that short-term bank deposits are the best
investment in terms of maximum yield, safety, convenience and flexibility. You can actually
park your money for a period as short as 15 to 45 days and earn interest up to 6-7%, which
few other investment products offer.

On the flipside, a bank deposit is not so transparent as, say, a mutual fund. You don't know
where your money is actually going. But then, should you be really concerned?

Aggressive players like the new private banks and foreign banks have devised investor-
friendly deposits, which give easy access to your funds while earning a higher rate of
interest. Also don't forget the hidden advantages that a bank deposit gives you. You can also
avail of safe deposit lockers for keeping your valuables, financial assistance in emergencies,
discounted financial products like credit and debit cards, home and car loans.

Bank deposits are fairly safe because all banks come under the control of RBI with
operational rules. RBI checks a bank's functioning to see that the depositors' monies are safe.
In fact safety of depositors' monies in the banking system is one of RBI's primary functions.
Banks take money from you and give it to borrowers, both wholesale and retail and charge a
higher rate of interest.

Also, all bank deposits, even the ones with foreign banks, are insured by a Reserve Bank
subsidiary called Deposit Insurance and Credit Guarantee Corporation (DICGC). Of course,
there is a ceiling on the maximum limit of insurance on each individual's deposit, which is
Rs. 1 lakh. So don't worry about losing your deposit if it is within one lakh rupees. Even if
the bank sinks, you will get all your money.

These are the deposits in which you can place your money from 15 days to 3 years or more.
Banks fix interest rates on these deposits from time to time. But once your money is locked
in at a rate, it does not change till maturity. They attract TDS (tax deducted at source) if the
interest credited by the bank exceeds Rs. 5,000. These deposits cannot be broken. Should you
need funds in an emergency, you can either get a loan against the FD or you can withdraw
the money after losing certain interest on the deposit.
We are all familiar with savings account, current account and term deposit. Each has its own
advantages and drawbacks but the norms are quite rigid. Savings accounts offer high
liquidity but an abysmally low rate of interest. FDs on the other hand, give you a good
interest rate but you can't take money out of them except in case of dire emergency. Banks
have come up with instruments that combine positive aspects of savings account and fixed
deposits - namely the liquidity of a savings account and the high interest rates of an FD.
Different banks offer them in attractive sounding names like 'Sweep In Account,' 'Unfixed
Deposits', 'Smart Money', or 'Quantum Optima', 'Cluster deposits.'

There are facilities like Auto-Sweep, where funds are transferred from your fixed deposit to
your savings account when you need them. It works like this. Your fixed deposits are held in
clusters of units ranging from as low as rupee one each. When you need money from your
savings account exceeding its balance, a cluster of that much amount is taken out of your
fixed deposit and transferred to your savings account. For example, you have an FD
amounting to Rs. 25,000, which are held in clusters of Rs. 100 each. Now if you need to
overdraw Rs. 5,000 from your savings account in some emergency, then a cluster of 50 units
will be broken and transferred to your savings account. The rest of the Rs. 20,000 will remain
intact as an FD and earn 9.5% interest. Sounds wonderful, doesn't it?

The opposite of this is the Reverse Sweep, which some banks offer. In this type of an
account, if your existing savings account exceeds a certain amount, which you don't really
need, then the extra money is transferred into a Fixed Deposit, where it will now earn 9%
interest as against the meager 4.5% in your savings account.

For example, Ashok Kulkarni's company fixed deposit of Rs. 10,000 has matured. Normally,
if he had deposited this money in an ordinary savings account, he would have forgotten about
it and left it to languish with just the 4.5% interest it gives him. If he chooses a Reverse
Sweep account, this Rs 10,000, being in excess, will be automatically transferred to a fresh
FD which will now, earn it a handsome 9.5% interest.

Loan against FD
Most banks allow you to overdraw from your fixed deposit, but it is like a loan on
which you pay 2% more than what you would have received as interest on your FD. For
example, if you have an FD with a bank of Rs. 25,000 which gives you 9%per annum
interest, and if you want to overdraw from your savings account to the tune of Rs. 5,000, then
it will be treated as a loan, which you have to return to your bank at 11% interest (9% of FD
+ 2% extra).

Recurring Deposits
In a Recurring deposit, a certain amount is debited from one's savings or current
account and transferred to this Recurring Deposit on a certain date of the month. You can
decide the date. The deposit gives a rate of interest normally equal to the Fixed Deposit rate
and matures after a specified period. For example, you have a savings account with a bank.
You open a recurring deposit for two years of say, Rs 1000 per month. For the next twenty-
four months, Rs 1000 will be debited from your account and transferred to this deposit by the
bank. After two years you get a princely sum of Rs 24000 along with the interest. Thrift
being a part of the Indian psyche, this kind of deposit should find favor with most of us.
Reinvestment and Auto-renewal facilities
These facilitate smoother operations.

 Reinvestment facility

Here, the deposit will be held for a minimum period of 6 months. Interest which accrues at
the end of each quarter is reinvested in the FD. Since interest is earned on interest on a
cumulative basis, it gives you higher returns on your investment.

 Auto-Renewal facility:

When your Fixed Deposits matures, the matured amount is credited to your savings account.
It may take a while for you to decide what you should do with this deposit, and during this
time the money in the saving account will be earning poor interest. Auto-Renewal facility
offers a solution. The matured amount is automatically locked up for a further period to give
you better returns. So, a one-year deposit is auto renewed for another 1 year, and then the
deposit is seen as a 2-year deposit for calculating interest. Some banks call it 'automatic
rollovers'.

 Interest on deposits

Interest is always compounded quarterly in a bank fixed deposit. However, you can decide
how you want to receive it, depending on the bank's schemes and your needs. You may
choose to have it collected on a monthly, quarterly, half-yearly or annual basis. Or you can
wait till maturity and take it all in a lump sum - in which case, you will keep getting interest
on interest.
Some banks offer to compound your money even on a monthly basis, which makes all the
difference to your wealth building. Remember, shorter the frequency, the better for you.

 Tax Implication

With effect from Assessment Year 1993-94, bank deposits are totally exempt from Wealth
Tax.

With effect from Assessment Year 2002-03, you get tax exemption under Section 80L upto
Rs. 9,000 per year, from interest income from bank deposits. For example, if your total
taxable income is Rs. 1,20,000 out of which the interest income from bank deposits is Rs.
15,000, then your total taxable income becomes (1,20,000 - 9,000) Rs. 1,11,000. This is
because Section 80L gives you a reduction of Rs. 9,000 from your total taxable income. Now
you will be taxed on Rs. 1, 11,000.

As far as individual bank deposits go, banks have to deduct tax at source (TDS) on interest
cheques exceeding Rs. 5,000. The tax deducted is 10.2% (including surcharge) for
individuals and 20.4% (including surcharge) for corporates.
  Premature withdrawal of deposits

This varies from bank to bank, and from deposit to deposit; so find out whether the bank of
your choice offers you this facility, before deciding to make a deposit with them. However, it
is certain that you will forfeit a percentage of interest that you would have otherwise earned
on a full term deposit.

All banks give you facilities of loan against your FD so find out if that arrangement is more
profitable than withdrawing your FD with loss of interest.

 Maturity

On maturity, the entire amount and the interest, if any is credited back to the depositor. How
it will be remitted, is mutually decided upon by you and the bank.or sometimes it is credited
to the savings account of the depositor or it could be sent to the depositor in the form of a
draft, in case he does not have a savings account with the same bank or sometimes the
depositor instructs, for it to go in for automatic renewal, incase he feels he might forget the
date of maturity. This is a wise thing to do if you don't need for it immediately.

 Guidelines for opening a bank deposit.

a. Avoid banks requiring high amount of minimum deposits.

b. Keep smaller amounts in individual fixed deposits. Interest earned beyond

Rs.5, 000 from one bank attracts TDS @10.2%. Also, keep in mind that
deduction on bank interest is up to Rs.9,000 under section 80L of the ITA.
Beyond that is fully taxable. Keeping smaller amounts is also good because
you can break your FDs without losing interest on all the money.

c. Risk: keep in mind that deposits are insured only up to Rs.1 lakh, per deposit.

d. Keep deposits in joint names.

e. It is better to go for automatic renewal in order to avoid hassles of

remembering to renew the FD. The next best thing is to instruct your bank to
credit your savings account on maturity of the FD in order to at least earn
savings account interest.

f. Go for a longer term, to get better interest rates for FD

Remember, an ordinary savings bank account, which, in banking terms, is a

traditional demand deposit, gives you nothing more than 4.5% p.a. interest. And why should
they give any more? After all it just serves as some sort of a cupboard where you keep your
money - from which you take out money as and when you require. What does
the bank earn out of it? But you can still make the most of it with a little bit of practicality
and common sense. Lets see how.

What many of you probably don't know is that the interest in your savings account is
calculated on the minimum balance it has between the 11th and the last day of the month.
This is because most people, especially the salaried ones, have maximum funds at the
beginning of the month, but the funds start petering out as the month passes by. Now, assume
that you have deposited a huge sum, say Rs. 50.000 in your account in the first week. You
need this money sometime in the last week of the month for some major expense. If you
deposit this cheque in your savings account, you will lose the interest on this amount. If you
are smart, you will park this money in a 15-day, or even a 30-day deposit. By the time the
deposit matures, not only will you will be ready to meet your expenses, but also you will
have earned a handsome 5 to 8 % interest on your Rs 50,000 for that tenure. Go to our
investment module for bank deposits and look around.

Bank Deposits versus Debt Funds

It needs to be understood that bank deposits cater to a segment of the investor class that looks
for safety and accepts a relatively lower return. Equity Funds cannot clearly be compared
with the bank deposits, as investors can expect higher returns from equity funds only at the
risk of losing part of the capital also.

Given the risks, Indian investors are currently investing heavily in debt funds. However,
before a bank depositor considers shifting his funds to debt funds, he should compare the two
in a meaningful manner.

A bank deposit is guaranteed by the bank for repayment of principal and interest. Any risks
associated with investment of the investor’s funds have to be borne by
the bank. The depositor has a contractual commitment from the bank to pay. A mutual fund,
on the other hand, invests at the risk of the investor. Hence, there is no contractual guarantee
for repayment of principal or interest to the investor.

The bank depositor does not directly hold the bank portfolio of investments, as he does in
case of a fund. The investor needs to assess the risk in terms of the credit rating of the bank,
which provides an indication of the financial soundness of the bank.

However, a debt fund is not rated by any agency. The investor has to assess the risk on the
portfolio held by the fund. The investor needs to know whether the fund invests in high
quality assets or lower rated debt. Unlike in case of bank deposits, therefore, the investor
needs to know his own investment objective and risk appetite before investing in a debt fund.
The expected returns will be commensurate with the level of risk assumed by the fund.
It can be seen that the bank deposits are not totally free from risk, while generally giving lower
returns. A conservative debt fund can give higher returns than a bank deposit, even if there is no
contractual guarantee as in a deposit.

Investors seeking higher returns from the capital market securities, a diversified debt
portfolio while still investing small amounts, and a portfolio that matches his objective and
risk appetite is well advised to consider part of his investment in debt funds.

Comparative Analysis
On the basis of above facts and figures, a comparative analysis have been done between
different investment option which are available to an investor to show risk and returns
involved in each investment so that investor can come to know in which investment option
the amount should be invested .

Following are the saving instruments (mutual funds, Post Office Schemes, Fixed Deposit
in companies, Bonds and Debentures, Bank Deposits, NBFCS) available to an investor. The
tabular comparison is done on the basis of Risk, Return, Liquidity and in addition to the Tax
incentives. Here is the comparison:-
 MUTUAL FUNDS
Types of Tax-
Risk Returns Liquidity
instruments Efficiency
Mutual Fund Low to high risk depending No assured returns. The High liquidity They are
on the fund. Gilt funds, debt returns range from high but only in tax
funds etc have low risk. to low depending on the open-ended efficient.
Pure equity funds are high scheme For example, in funds where Not so
risk. Though the very equity-based schemes, a the units are much on
bottom line of mutual funds short-term return is traded in the liquid
is diversification, the risk practically impossible. By open market. funds, as
factor is reduced and large, liquid schemes on income
considerably, but on an give a return of between and equity
average, a liquid fund is low 7 and 9%. The income funds.
risk, an income fund is schemes give a return of
medium risk and an equity between 9 and 20% and
fund is high risk. equity schemes give a
return of between 15 and
25%.

POST OFFICE
Types of Tax-
Risk Returns Liquidity
instruments Efficiency
Post Office Very Low. All these savings These have assured All these These are
and Other are operated directly by the returns. The returns accounts have beneficial
Small Government or by themselves depend on some for those in
Savings Government organizations the schemes. Some provisions for the high tax
like banks, post offices and schemes like the Indira premature brackets,
therefore they are very safe. Vikas Patra and Kisan withdrawal. since they
Vikas Patra offer rates So liquidity is offer several
of interest that are even not such a exemptions
higher than bank problem. The like Income
deposits. National Tax, Wealth
Savings Tax and Gift
Certificates Tax.
are extremely
liquid while
the Kisan
Vikas Patras
can be easily
transferred.
 Fixed Deposits in Companies
Types of Tax-
Risk Returns Liquidity
instruments Efficiency
Company Deposits in company fixed Here you get Practically no Not tax
FDs deposits are unsecured. assured returns. liquidity at all. efficient. No
Incase of the company The manufacturing You can in big
defaulting, there is very little companies give extreme concessions
chance of recovering your between 10 and emergency, given. These
principal amount. However, 13% interest. break your are by and
if you invest in a company These are much deposits but you large more
with a high credit rating, then higher than bank stand to lose a suited for
your investment is safe. The deposits, since great deal of non-tax
manufacturing companies some companies interest in the payers and
carry medium risk. even compound bargain retired
their interest individuals.
monthly.

INVESTMENT IN BONDS AND DEBENTURES

Types of
Risk Returns Liquidity Tax-Efficiency
instruments
Bonds and Among these, the tax- The Public Sector Depends on the The corporate
Debentures free bonds are very Undertakings give bonds. Corporate debentures are
low risk since the between 11 to 12% bonds are not so not so tax
Government issues interest. The Corporates liquid. Neither efficient. But
them. The Public give between 12 and are the PSU the PSU bonds
Sector Undertaking 13% interest and the bonds, nor those are extremely
(PSU) bonds are also Government-sponsored issued by the tax efficient.
low risk since they tax-free bonds give Govt. However Infact the RBI
have the backing of around 8.5% interest. the investor- relief bonds
the government. The Non-convertible friendly FI offer the
Corporate debentures debentures by bonds, like the highest
as compared to fundamentally sound Anytime and the comfort.
company fixed companies give a high Easy Encash
deposits are safer rate of interest, usually bonds do
since they are fully in the range of 12 to guarantee easy
secured, and some 15%. liquidity.
also have a buy-back
policy by the
company.
 Bank Deposits
Types of
Risk Returns Liquidity Tax-Efficiency
instruments
Bank FDs Returns are assured.With traditionalThey are quite
Very Low Risk.Bank FDs give interestbanks prematuretax efficient
Since bankrates between 7 andwithdrawal is notsince you get
deposits upto Rs.9.5%. Interests arepossible but loansexemption upto
1 lakh arecompounded quarterly.are available uptoRs. 9,000 under
insured. So, even in bank90% of your deposit.Section 80L.
deposits, your moneyHowever, the moreAlso, no TDS is
can double in 6-7 years. recent private andcut upto an
foreign banks haveinterest income
come out with so-of Rs. 5,000 per
called "unfixed"deposit per
deposits where youbank.
can withdraw from
your deposit. So, in
that sense there is
high liquidity in such
deposits.

Investment in NBFCS
Type of
Risk Returns Liquidity Tax-Efficiency
instruments
NBFCS Carry a higher The returns from
risk, since they NFBCs can be higher
face constant than those of the
threat of being manufacturing Certain housing
downgraded in companies. Selected Very little liquidity. finance
credit ratings. NFBCs with a high At the most, you can companies like
Also they are credit rating are offering avail of a loan of HUDCO and
unsecured, so interest rates in the about 75% of your HDFC offer tax
you stand to range of 10% to 12% on deposit, and that too exemptions
lose your entire one-year deposits. after six months of upto Rs. 12,000
amount unless your date of deposit. under Section
you invest in an 80L
NFBC with the
highest credit
rating.
COMPARISON BY CURRENT PERFORMANCE

Besides the inherent advantages of investing through mutual funds, recent tax amendments
have also helped to enhance the attractiveness of mutual funds. Dividends distributed by
mutual funds are exempt from tax in the hands of the investor. Investments in recognized
mutual funds also qualify for tax rebate under section 88 and as approved investments under
section 54EA/EB.

Comparisons among different investment options are not valid for all time as the financial
markets are now deregulated and dynamic, causing frequent changes in comparative returns
from time to time. Each year, the mutual funds and other options may give different returns.
For example, when the banks increase or reduce the deposit interest rates, the mutual funds
performance may look better or worse. If the government changes the PPF interest rate, again
there will be an impact on the comparative status of different options. Similarly, the
individual taxpayer’s situation may change, whereby he may pay higher of lower tax on his
income. That is why; it is recommended that the specific comparisons of different investment
options be made at a given point of time, using the then prevalent return data.

Direct Equity Investment versus Mutual Fund Investing

Investors have the option to invest directly in equities through the stock market instead of
investing through mutual funds. However, a practical evaluation reveals that mutual funds
are indeed a more recommended option for the individual investor. Here is a comparison
between the two options:

• Identifying stocks that have growth potential is a difficult process involving detailed
research and monitoring of the market. Mutual funds specialize in this area and process
the requisite resources to carry out research and continuous market monitoring. This is
clearly beyond the capability of most individual investors.

• Another critical element towards successful equity investing is diversification. A

diversified portfolio serves to minimize risk by ensuring that a downtrend in some
securities/securities is offset by an upswing in the others. Clearly, diversification requires
substantial investment that may be beyond the means of most individual investors.
Mutual funds pool the resources of many investors and thus have the funds necessary to
build a diversified portfolio, and by investing even a small amount in a mutual fund, an
investor can, through his proportionate share, reap the benefit of diversification.

• Mutual fund specializes in the business of investment management, and therefore

employs professional management for carrying out their activities. Professional
management ensures that the best investment avenues are tapped with the aid of
comprehensive information and detailed research. It also ensures that expenses are kept
under tight control and market opportunities are fully utilized. An investor who opts for
direct equity investing loses out on these benefits.

• Mutual funds focus their investment activities based on investment objectives such as
income, growth or tax savings. An investor can choose a fund that has investment
 objectives in line with his objectives. Therefore, funds provide the investor with a vehicle to
attain his objectives in a planned manner.

• Mutual funds offer liquidity through listing on stock exchanges (for closed end funds)
and repurchase options (for open end funds). This is in contrast to direct equity investing
where several stocks are often not traded for long periods.

• Direct equity investing involves a high level of transaction costs per rupee invested in the
form of brokerage, commissions, stamp duty, etc. While mutual funds charge a
management fee, they succeed in keeping transaction costs under control because of the
economies of scale they enjoy.

• In terms of convenience, mutual funds score over direct equity interesting. Funds serve
investors not only through their investor services networks, but also through associates
such as banks and other distributors. Many funds allow investors the flexibility to switch
between schemes within a family of funds. They also offer facilities such as check
writing and accumulation plans. These benefits are not matched by direct equity
investing.

It is clear that investing through mutual funds is far superior to direct investing except
perhaps for the investor who has a truly large portfolio and the time, knowledge and
resources required for direct investing.

Mutual Funds – Better than Individual Stocks?

Though it cannot be said in general that mutual funds are always better than individual
stocks, it still cannot be denied that they usually involve lower risks, less money and
generally yield lower but safe returns.

It all depends on the risk attitude of the investor. This is understood clearly by looking at the
disclaimer attached with any mutual fund options that are nearly identical with that
applicable to any other (kind of) stock. They have their advantages and loopholes like any
other form of investment. And as in other forms of investment, one has to be fully aware of
potential pitfalls and while driving high with mutual funds, has to be alert enough to avoid
them.

Mutual funds are seemingly the easiest and least stressful way to invest in the stock market.
Quite a large amount of new money has been put into mutual funds during the past few years.

Briefly put, a mutual fund is a pool of money contributed to by individual investors,

companies, and other organizations. There will be a fund manager hired to invest this cash
with a primary goal that depends upon the type of fund. The manger usually diversifies in a
manner such that the net average earning is expected to be considerably positive. S/he may
be a fixed-income fund manager. In that case s/he would work hard to provide the highest
return at the lowest risk. On the other hand a long-term growth manager should try at least to
beat the Dow Jones Industrial Average or the S&P 500 in a given fiscal year.
But that is what any successful investor attempts to do, and anyone with a similar approach
can be expected to make the same earnings.

It all depends really on the overall investment climate and the sectors in which funds are
flowing. Diversification is definitely a good approach when it comes to successful investing
by a reasonable investor. But with mutual funds, there is that the controllers may over-
diversify.

Diversification minimizes the inherent risks of stock trading by spreading out the capital over
many stocks. But over-diversification is again a bad thing.

First, an investor gets into many funds that have significant mutual implications, thereby
losing out on the full benefits of risk stretching that diversification affords.

Secondly, over-diversification may decrease your overall return. By hitting too many poor
through mediocre funds, the investor reduces the return by missing the potential of a few
well-managed funds.

It is true that mutual funds play it safe. This is because mutual funds are actively organized
by a professional money manager who keeps constant checks on the stocks and bonds in the
fund's portfolio. As this is her/his primary occupation, s/he can devote much more time to
choosing investments than an individual investor. This provides the investor with the peace
of mind that comes with informed investing without the stress of analyzing financial
statements or calculating financial ratios.

But on the negative side, a mutual fund, unless open-ended, must remain confined within a
fixed portfolio. Even with open-ended mutual funds, the range of potential is often low as
compared to what is available to an investor free to choose any stock s/he likes.

Besides, mutual funds some times come as load funds in which the investor has to pay the
sales commission on top of the net asset value of the fund’s shares. Also, the dollar-cost
averaging strategy is just the same with mutual funds as to any common stock.

Of course, fixing such a plan can substantially reduce your long-term market risk and result
in a higher net worth over a period of ten years or more.

Hence considering the stress, agony and risk that any stock may involve, mutual funds look a
shade better than independent trading, if low but steady is ok for you.
Comparison Chart of Various Investments

BASIS OF PPF NSC POST OFFICE

ANALYSIS Time Monthly Deposits R.D.
Deposits
Compounded Quarterly
Rate of Return 8% 8%(comp. 6.25%-7.5% 8% (9% for senior 7.5%
Half yearly) Citizens) (p.a.)
Interest On Maturity On Maturity On Maturity Monthly On
Received Maturity
Tenure 15 years 6 years 1-5 years 6 years 6moths-
10 years
Minimum Rs.500 Rs. 100(units) Rs.200 Rs.1000 Rs.10
Investment (p.a.)
Maximum 100000 100000 No Limit 300000 for an No Limit
Investment (p.a.) (p.a.) individual, 600000
(in Rs.) for joint venture,
1500000 for senior
citizens
Tax Benefits Sec 80 C Sec 80 C Sec 80 C Sec 80 C Sec 80 C

Liquidity Very Low Very Low Low Moderate Low

Transparency/ Low Low Low Low Low

Risk
Deep Analysis of Banks With Mutual Funds
S.No. BASIS OF BANK MUTUAL FUNDS
ANALYSIS Saving Time R.D.
Deposits
1. Rate of Return 3%-4% 5.5%-6.5% 7%-11% As per market and Co.
(p.a) (p.a) performance
2 Interest Quarterly On On Depend upon
Received Maturity Maturity performance
3 Tenure N.A. 180days-5 6 months- 3yrs Lock in pd for ELSS
years and 10 years schemes,.6mths for SIP,
above open and close ended
4 Rs. 500 Depend Rs. 100 Rs.500 for ELSS SIP,
Minimum upon Rs1000 for Equity SIP,
Investment banks Rs.3000 for One time
investment.
5 Maximum No Limit No Limit No Limit No limit for other
Investment Schemes, Rs.100,000 for
Tax Saving Scheme
6 Tax Benefits Sec 80 C Sec 80 C Sec 80 C Sec 80 C, both Capital
gain and Dividend are
Tax Free
7 Liquidity Very High Low Low Very High

8 Transparency/ Low Low Low Very high Transparency

Risk and Diversified Risk.
COMPARATIVE PICTURE OF RISK AND RETURN INVOLVED IN
VARIOUS INVESTMENT OPTIONS:

Types of investment Risk Returns

1. Government Securities Low to Moderate

2.Bank Deposits Low to Moderate

3.Recurring Deposits Low to Moderate

4.RD in Post Office Low to Moderate

5.Other saving Schemes of PO Low to Moderate

6.Debentures and Pref. Shares Moderate

7.Insurance sector Moderate to Low

8.PF Schemes Moderate to Low

9.MUTUAL FUNDS Moderate to High

Diversified Risk

On the basis of above facts and comparative analysis it emerges that each investment option
has its strength and weakness. Some options seek to superior return (e.g. Equity), but with
the correspondingly higher risk. Other provides safety (such as PPF), but at the expenses of
liquidity and growth. Options such as bank deposits offer safety and liquidity, but at the cost
of return. Mutual funds seek to combine the advantages of investing in each of these
alternatives while dispensing with the shortcomings. Clearly, it is the investors interest to
focus his investment on mutual funds.
This shows that equity investing in general has good potential in terms of return, liquidity
and convenience. It is recommended only for investors who are willing to invest the time
required for research in stock selection.

Bonds issued by institutions are an attractive option, particularly with the liquidity that
accompanies their listing on stock exchanges. Bonds are a stable option in terms of fixed
returns, and are recommended for the risk-averse investor. However, bonds can lose value
when general interest rates go up. The secondary market in corporate bonds in India is also
very thin, leading to lack of liquidity for the investors who wish to sell.

Company fixed deposits fall short on several counts and recommended only if the issuing
company and the deposits on offer are rated highly by credit rating agencies.

The major advantage of bank deposits relative to other products is the liquidity they offer.
Bank deposits score high on safety, as the return of capital is guaranteed to the depositor by
the bank.

PPF combines stability with a respectable return. Its tax-exempt status makes it an attractive
mechanism for the small investor to build his savings portfolio.
Being a government supported investment, PPF scores very high on safety, compared even to
bank deposits.

The opportunity cost in terms of return is too high for insurance to be compared on even
terms with the other options. Its liquidity is also extremely low, though safety is considered
high at present for the government-owned LIC as the only insurer.

Some facts of the growth of mutual funds in India

• 100% growth in the last 6 years

• Numbers of foreign AMC’s are in the queue to enter the Indian markets like Fidelity
Investments, US based, with over US$1trillion assets under management worldwide.

• Our saving rate is over 23%, highest in the world. Only channelizing these savings in
mutual funds sector is required.

• 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are
concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

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

• SEBI allowing MF’s to launch commodity mutual funds.

• Emphasis on better corporate governance.

• Trying to curb the late trading practices and introduction of Financial Planners who can
provide need based advice.
 RESEARCH METHODOLOGY

What is research?
“Research comprises defining and redefining problems, formulating hypothesis or
suggested solutions; collecting, organizing and evaluating data; making deductions and
reaching conclusions; and at last carefully testing the conclusions to determine whether they
fit the formulating hypothesis.”
---- By Clifford Woody

What is research methodology?

“Research methodology is the way to systematically solve the research problems. It not
only considers the research methods but also the logic behind the methods used in context of
research study and explain why a particular method/technique is being used, so that research
results are capable of being evaluated either by the researcher himself or by others.”

METHODOLOGY ADOPTED

A. Objectives of the research:

 To find out the various options available to the investors.

 Compared the investment options with each other to find out which option is best for
investors.
 Understanding the saving pattern of the Consumers.
 To know the preferences of the costumers as regards their savings.
 Purpose of investing in mutual funds.
 To compare the results obtained by investing in Principal Pnb Mutual Funds with
competitors funds.
 To determine which option would bring maximum returns.

B. Assumptions taken while conducting research:

 The investor is an aggressive one, and is willing to take short-term risk for long-term
benefits.
 The data taken for comparison is for the past three years. A fund’s true performance
can be judged better over a long period of time.
  Past Performance may or may not be sustained in future.
 The options taken for comparison are the best ones and for better understanding only
four options have been taken in my report.

C. Type of research:

Descriptive and Analytical research.

D. Collection of Data and Information:

 Primary Data-
This data was collected through-

 Questionnaire Method.
 Interviews Method (Personal Interviews and Telephone Interviews)

• Secondary Data-
This data was collected through-

 Magazines, Newspapers.
 Journals
 Fact Sheets of Principal Pnb Mutual Funds and other AMC’s
 Different Web Sites.

DATA COLLECTED THROUGH QUESTIONNAIRE:

 The size of the selected sample taken was 100 persons

 Questionnaire was filled up by walk-in-clients, personal interviewee,
telephone interviewee.
 All this included brokers, agents, investors, students, housewives,
businessman, service class people, professionals, etc.

QUESTIONAAIRE IS AS FOLLOWS: It contains 12 questions

 1. Occupation
• Businessman
• Service class
• Professionals
• Others

44%
16% 11%

Businessman
service
Prof.
other

29%

2. Age of the Investor

• Below 25
• 25-40
• 40-50
• Above 50

30

25

20
Below 25
15 25 to 40
40 to 50
10 above 50

0
 3. Where do you like to invest your savings?
• Bank Deposits
• Post Office
• Mutual Funds
• PPF

29%
11%
20%

Bank Deposits
Mutual Funds
Post Office
PPF
40%

4. What is the priority of making investment?

• Brand value
• Saving for future
• Tax Shelter
• Rate of Return

20% 7%

Brand Value
44%
Saving for future
Tax Shelter
Rate of Return
29%
 5. What type of scheme you prefer to invest in Mutual Funds?
• Sectoral Equity
• Equity-oriented
• Tax Saving
• Debt

33% 12%

Sectoral equity
40% Equity-oriented
Tax saving
Debt
15%

6. Out of the following Mutual funds which one would you prefer
to invest?
• Reliance
• ICICI
• Principal
• HDFC

20%

7%
42%
Reliance
Principal
HDFC
ICICI
31%
7. Have you ever invested in any of the following schemes?
• Principal Personal Tax Saver Fund
• ICICI Prudential dynamic plan
• Reliance vision-growth
• HDFC children gift plan

35%
20% 15%
Principal PTS
Fund
Reliance vision
plan
ICICI pru
dynamic plan
HDFC child gift
30% plan

8. What returns you expect from mutual funds?

• 5%-10%
• 11%-15%
• 16%-20%
• Can’t say

35%
29%

16% -20%
11% -15%
7%
5% -10%
Can't say

29%
9. Are you satisfied with the returns?
• Yes
• No

10. According to you, which of the following gives

NO the maximum returns?

• Bank Deposits
• Mutual Funds YES

• Post office
35%
• PPF

65%

27%
15%
25%

Bank Deposits
Mutual Funds
Post Office
PPF
33%
11. What are the reasons for investing your savings in mutual funds, as
there are other saving instruments available?
• Diversified Risk
• Rate of Return
• Safety
• Mix of all

35%
22%

Tax incentives
Return
13%
Diversified Risk
Mix of all

30%

12. How do you rate future of Mutual Fund Sector in India?

• Very Good
• Good
• Poor
• Cannot Say

70%
60%
60%
50%
40%
30%
20%
20%
10% 10%
10%
0%
Very Good Good Poor Cannot Say
 E. Analysis of the data:

Besides sampling various statistical and analytical tools were used to depict
and analyse the data and information collected.

F. Findings and Interpretations:

After making certain analysis, following were the findings:

 Maximum number of customers wants to invest in mutual funds because of tax

benefits.

 Most of the investors while investing use opinion of their friends and other investors
rather than going by experts opinion. They follow the trend and not their mind.

 Mutual funds have given 15% to 20% return averagely each year.

 Nearly 60% o of the people are ready to invest in Mutual funds in near future.

 Reasons for not investing in Mutual Funds-

 Not willing to take risk

 Lack of knowledge about Mutual Funds.
 Still belief in traditional investment.
 Not good experience

 Respondents were agreed with the fact that a mutual fund provides better benefits.

 Most of the investors invest their savings for future and for higher rate of return.

G. SUGGESTIONS:
 Regarding investing in any investment avenues,
 Particularly for how to invest in Mutual Funds.
 Why you must invest in equity mutual funds.

 There are some suggestions to investors before investing in any

investment avenue

Ø Before investing in option go through the ins and outs of schemes

Ø Consult a market specialists before investing

Ø Make a plan before investing. Set your priorities before investing.

 Ø Don’t go before markets until you are fully satisfied that investment is safe.

Ø Don’t believe in humors.

Ø Regular Meting of consultants to share experience on various aspects related

to business as one can learn a lot from experience of others.

Ø Consultants should do their SWOT Analysis

 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. Begin by asking yourself these
questions:

1. What are my investment objectives and needs?

Probable Answers: I need regular income or need to buy a home or finance a

wedding or educate my children or a combination of all these needs.

2. How much risk I am willing to take?

Probable Answers: I can only take a minimum amount of risk or I

am willing to accept the fact that my investment value may
fluctuate or that there may be a short-term loss in order to achieve
a long-term potential gain.

3. What are my cash flow requirements?

Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a
specific need after a certain period or I don't require a current cash flow but I want to
build my assets for the future.

By going through such an exercise, you will know what you want out of your
investment and can set the foundation for a sound Mutual Fund investment strategy.

• Step Two - Choose the right Mutual Fund.

Once you have a clear strategy in mind, you 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:
 1) The track record of performance over the last few years in relation to
the appropriate yardstick and similar funds in the same category.
2) How well the Mutual Fund is organized to provide efficient, prompt
and personalized service.
3) 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 tables could prove useful in selecting a combination of schemes that
satisfy your needs.

AGGRESSIVE PLAN
Money Market Schemes 5%
Income Schemes 10-15%

Balanced Schemes 10-20 %

Growth Schemes 60-70 %

MODERATE PLAN

Money Market Schemes 10 %

Income Schemes 20 %

Balanced Schemes 40-50 %

Growth Schemes 30-40 %

 CONSERVATIVE PLAN

Money Market Schemes 10 %

Income Schemes 50-60 %

Balanced Schemes 20-30 %

Growth Schemes 10 %

• Step Four - Invest regularly

For most of us, the approach that works best is to invest a fixed amount at specific
intervals, say every month. By investing a fixed sum every month, you buy fewer
units when the price is higher and more units when the price is low, thus bringing
down your average cost per unit. This is called rupee cost averaging and is a
disciplined investment strategy followed by investors all over the world. With many
open-ended schemes offering systematic investment plans, this regular investing habit
is made easy for you.

• Step Five - Keep your taxes in mind

If you are in a high tax bracket and have utilised fully the exemptions under section
80L of the Income Tax Act, investing in growth funds that do not pay dividends
might be more tax efficient and improve your post-tax return.
If you are in a low tax bracket and have not utilised fully the exemptions available
under Section 80L of the Income Tax Act, selecting funds paying regular income
could be more tax efficient. Further, there are other benefits available for investment
in Mutual Funds under the provisions of the prevailing tax laws.
You may therefore, consult your tax advisor or Chartered Accountant for specific
advice.

• 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 the
compounded rate of return.

• Step Seven - The final step

All you need to do now is to get a 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.

 Five Reasons why you invest in Equity Mutual Funds?

1. Your money needs to generate much higher returns to secure your
retirement

Are you burning your retirement cash to light up your life today?
We don't want to spoil your party. But connect the dots of your ages, your 30s/ 40s or 50s
and they WILL connect to 60,70 and even 80. You will turn old one day. And you will not
want to depend on someone then, even your kids. The good news is that you can start today
and build sizeable savings by -50% the time you retire.

Assuming annual compounding at the same rate as the investment rate throughout the period
of investment.
The chart shows how saving at a more than average rate of 20% can make your savings
increase substantially over the next 20 years. By how much? A 1 lakh savings today can
increase to close to Rs. 40 lakhs by the time you are ready to hang up your boots.
The trick is not to be satisfied with the 5% or 10% returns and hunt for investments that can
give you above average returns. Your search ends here.

2. Equity markets can give the returns needed to secure your future.
The graph below shows that returns generated by the Sensex over the past 20 year period
have been a healthy 15%. This while the Indian economy grew at 3-4% for more than half
that 150% period. Going forward, this growth is targeted to be 6-8%, now you know why we
are optimistic about the equity markets.
 BSE Sensex Point to Point returns as on 25.05.05 Source: Bloomberg
If you have been wary of investing in equity mutual funds because of the risk involved, we
have some news for you…

3. Historical data proves that investing in the Equity market becomes less
risky in the long term
As shown below, the peaks and troughs of returns can be mellowed by remaining invested
for the long term. The historical analysis shows how the maximum and minimum returns
generated by the Sensex behave from 1 year to 20 years.

BSE Sensex Rolling returns (yearly basis) from March 1979 to March 2005
But you may be a complete beginner and may know nothing about how to invest.
Fortunately, there are collections of investors called Mutual funds that have professional fund
managers that invest in the stock market collectively on behalf of investors.
4. Mutual funds offer a better route to investing in equities for
lay investors.
A mutual fund acts like a professional fund manager, investing your money and passing the
returns to you. All it deducts is a management fee and its expenses, which are declared in its
offer document.
As seen in the following graph, looking at the past 10 years, mutual funds have given higher
returns over the BSE Sensex, even when measured on a 5-year rolling basis.

5 years rolling returns (daily basis) for last 10 years

Sensex Equity MF Average*

Average 2.46% 20.63%

Min -7.90% 8.94%

Max 14.51% 33.53%

*Average returns of private sector diversified equity fund (7 schemes) existing more than ten
years. Source Crisil Fund Tracker. Comparison of returns of BSE Sensex and Private
Sector Diversified Equity funds (7schemes existing for more than 10 years) for the past 10
years.
The logic is simple; it makes sense to leave your investments in the hand of professionals you
can trust.
However, you may ask, why invest now. Because…

5. The Indian economy is booming right now.

The Indian economy is growing strongly as shown by the growth rate of Gross Domestic
Product (Broadly the Total Production of goods and services in the country). A booming
markets.

BSE Sensex from 1985 to 2005 till date. Source: Bloomberg

 LIMITATIONS OF THE STUDY

Although the study has been done with optimal accuracy yet there are some limitations,
which I have faced during completion of my project. Some of them are summarized
below: -

 Sample size was very small as compared to the universe.

 The research was restricted to Jodhpur city only so it was difficult to generalize the
interpretations.
 Some of the respondents were lacking from dedication in giving response.
 Respondents may not be at home or offices and may have to be re-contacted.
 The researcher has to depend upon the information provided by the respondents,
which might be false as respondents are very reluctant in providing right information.
 Time constraint was one of the major limitations while conducting research.
 The investor’s sample can be biased on some questions and doesn’t want to share
their personal details of investment.
 CONCLUSION
With equity markets touching high records, optimism among investors seems unbounded.
Markets appear like they can do no wrong and euphoria among the investor community is
palpable. We present a Five-step strategy for the present scenario

 Invest in Tax-Saving funds

 Invest in Large-Cap funds
 Restructure your portfolio
 Curb your enthusiasm
 Get sound advice.

The report enlightened many facts, which were not known before. It also enlightened, where
the Mutual Funds are lagging behind.

Many individuals find investments to be fascinating because they can participate in the
decision making process and see the results of their choices. Not all investments will be
profitable, as investor will not always make the correct investment decisions over the period
of years; however, he should earn a positive return on a diversified portfolio. In addition,
there is a thrill from the major success, along with the agony associated with the stock that
dramatically rose after he sold or did not buy. Both the big fish he catches and the fish that
get away can make wonderful stories.

Investing is not a game but a serious subject that can have a major impact on investor's
future well being. Virtually everyone makes investments. Even if the individual does not
select specific assets such as stock, investments are still made through participation in
pension plan and employee saving programs or through purchase of life insurance or a home.
Each of this investment has common characteristics such as potential return and the risk you
must bear. The future is uncertain, and an investor must determine how much risk he is
willing to bear since higher return is associated with accepting more risk.

The individual should start by specifying investment goals. Once these goals are established,
the individual should be aware of the mechanics of investing and the environment in which
investment decisions are made. These include the process by which securities are issued and
subsequently bought and sold, the regulations and tax laws that have been enacted by various
levels of government, and the sources of information concerning investment that are
available to the individual

The investors are of a mixed breed, some of them are risk averse and some are risk taking.
The investors who are risk taking have adequate knowledge of mutual funds, but those who
are risk averse either lacks knowledge or they have some misconception regarding the
concept of mutual funds. The main problem was that there were more myths and fewer facts
known to the investors. Like some of them were only aware of the equity oriented schemes
offered by the companies and not about the Debt oriented schemes; so the perception that
was in their mind was that mutual fund investment is a very risky game as it involves stock
market. To some extent it is true that investment in mutual fund involves risk but not in all
types of schemes that today’s fund houses offer.

The schemes that mutual fund companies are offering are so diversified that it suits the
investment criteria of every investor. Let the investor be risk averse or risk taking or a
combination of both there are schemes for everyone.

There are a potentially large number of investors but they lack knowledge regarding the
benefits of investing in a mutual fund. Every type of investment in this world involves risk,
some has high risk and some has low risk. Mutual Fund investments have both types of plans
(schemes); higher the risk – higher is the returns and lower the risk-comparatively lower is
the return. There are advantages and disadvantages in all kinds of investments.

In the end, the market is at boom and is moving up day-by-day and therefore investing in
direct equities now a days is very risky because market is very hot in these days but if anyone
invests in mutual funds in these days with a perspective of long term it will definitely
produce a good return. So don’t see the market index while investing in the mutual funds.
 BIBLIOGRAPHY
 Chandra, Prasanna-
Investment Analysis and Portfolio Management.

 M.Jayadev-
Mutual Funds Management and Working.

 Dr. Peeush Rajan Agarwal-

Working at Mutual Fund Organization in India.

 P. Mohana Rao
How Mutual Fund Works.

 ICFAI Publications-
Mutual Fund Introduction.

 Fact Sheets of Principal Pnb Mutual Funds and other AMC’s

WEBSITES VISITED
 www.valueresearchonline.com
 www.principalindia.com
 www.investopedia.com
 www.amfiindia.com
 www.mutualfundindia.com
 www.ezilon.com