finance project final

8/6/2019 Finance Project Final

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A RESEARCH REPORT

ON

COMPARISION BETWEENMUTUAL FUND AND SHARE MARKET

Submitted for the partial fulfillment for the endowment ofMaster of Business Administration Programme

(2007-09)

BY

NEETI JAISWAL

MBA IV

GRAPHIC ERA INSTITUTE OF TECHNOLOGY566/6, BELL ROAD , CLEMENT TOWN

DEHRADUN


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ACKNOWLEDGEMENT

I want to acknowledge the attempts of all the people who

really showed me the path to reach the final destination of my

project.

I express my thanks to Lect. Ashu khanna (Project Guide) &

all the Staff members of the department for their help and

encouragement throughout my project work.

I owe a debt of gratitude to my parents and friends, without

whom I would not have been able to achieve this objective.

NEETI JAISWAL

MBA IV


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PREFACE

In the broad sense research report is necessary to make thestudent of professional institutions familiar with the business

environment. This not only helps professionals to speedily

accommodate themselves in business but also to have better

usage of their studies.

To be dynamic, strategic & work aggressively they need to

know the policies, procedures and trends going in the present

business environment apart from their studies. The research

fulfills all these needs.

The main source of the study is primary data collected from

the customer and retail stores.

The various modern and standard tools to achieve the

objective of the study carry out the analysis of the data.


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Summary of the progress till date-

OBJECTIVE

The objective of this project to get better knowledge about sharemarket and mutual funds and also taking in depth knowledgeof various kinds of mutual funds and shares their prices, risk,fluctuation, returns and how do both works.

As well as the objective of my project is to compare the differentmutual funds companies and share companies.

After a comparison I have to decide and reach at the conclusion thatwhich is better for customer who is knowledgeable and nonknowledgeable for shares and mutual funds.


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Mutual fund Definition: -

A mutual fund enables investors to pool their money and place it

under professional investment management. The portfolio manager

trades the fund's underlying securities, realizing a gain or loss, and

collects the dividend or interest income. The investment proceeds are

then passed along to the individual investors. There are more mutual

funds than there are individual stocks.

In other words: -A Mutual Fund is a trust that pools the savings of a number ofinvestors who share a common financial goal. The money thus collected is

invested by the fund manager in different types of securities depending uponthe objective of the scheme. These could range from shares to debentures tomoney market instruments. The income earned through these investments andthe capital appreciations realized by the scheme are shared by its unit holders in

proportion to the number of units owned by them. Thus a Mutual Fund is the

most suitable investment for the common man as it offers an opportunity toinvest in a diversified, professionally managed portfolio at a relatively low cost.The small savings of all the investors are put together to increase the buying

power and hire a professional manager to invest and monitor the money.Anybody with an investible surplus of as little as a few thousand rupees caninvest in Mutual Funds. Each Mutual Fund scheme has a defined investmentobjective and strategy.


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BRIEF HISTORY OF MUTUAL FUND

Current year 2006, which is the sixth year of this millennium, marks the 41

years of the existence of mutual fund in India. The ride through these 41 years

is not been smooth. This journey has seen lots of ups and downs and changes in

this period.

Mutual funds were introduced in India in July 1964 with the establishment

of Unit Trust of India (UTI 1963). The motive behind the establishment of this

formal institution was the desire to increase the propensity of the middle and the

lower groups to save and to invest. UTI came into existence during a period

marked by great political and economic uncertainty in India. With war on the

borders and economic turmoil that depressed the financial market,

entrepreneurs were hesitant to enter capital market. The already existing

companies found it difficult to raise fresh capital, as investors did not respond

adequately to new issues. UTI commenced its operation from July 1964 with a

view to encouraging savings and investment and participation in the income,

profits and gains accruing to the Corporation from the acquisition, holding,

management and disposal of securities. UTI enjoyed 23 years of monopoly in

the mutual fund industry. The industry was one entity Show till 1987 when the


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monopoly of UTI was broken when SBI and Canbank Mutual Fund entered into

the arena. This was followed by the entry of others like LIC, GIC etc.

Sponsored by public sector banks. Amendment to the Banking Regulation Act

in 1983, which empowered the RBI to permit the banks to carry on non-banking

business such as leasing, mutual funds etc. under section 6 of this Act, was a

major factor, which helps in ending of this monopoly. Whereas 1986 was the

year for the entry of the other public sector mutual find, 1993 was the year for

entry of other public sector mutual funds. Starting with an asset base of Rs. 0.25

ban in 1964 the industry has grown at a compounded average growth of approx.

26 % to its current size

A mutual fund is an investment vehicle, which pools the money of many

investors. The funds manager uses the money collected to purchase securities

such as stocks and bonds. The securities purchased are referred as to the funds

portfolio.

A professional money manager who is called fund manager manages a mutual

funds portfolio. The managers business is to choose securities, which are best,

suited for the portfolio. Investments in securities are spread across a wide cross-

section of industries and sectors and thus the risk is reduced. Diversification

reduces the risk because all stocks may not move in the same direction in the

same proportion at the same time.


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As at the end of September 2004, there were 29 funds, which manage assets of

Rs.153108 cores under 421 schemes

ASSET UNDER MANAGEMENT CHART

The above figure shows the emerging mutual fund industries performance in

India it shows a reasonable efforts in quite a short span. One can say ifit would be

consistently performing by this way only. We have a shining future in this industry.


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CONCEPT OF MUTUAL FUND CHART

As the above chart tells that when several investors invest their money, this pool is invested

in different securities by fund manager. The returns generates by this investment

Here are some of the traditional and distinguishing characteristics ofmutual funds:Investors purchase mutual fund shares from the fund itself (or through a broker

for the fund), but are not able to purchase the shares from other investors on a

secondary market, such as the New York Stock Exchange or Nasdaq Stock

Market. Theprice investors pay for mutual fund shares is the funds per share

net asset value (NAV) plus any shareholder fees that the fund imposes at

purchase (such as sales loads).
http://www.sec.gov/answers/nav.htmhttp://www.sec.gov/answers/mffees.htm#shareholderhttp://www.sec.gov/answers/mffees.htm#shareholderhttp://www.sec.gov/answers/nav.htm


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Mutual fund shares are "redeemable." This means that when mutual fund

investors want to sell their fund shares, they sell them back to the fund (or to a

broker acting for the fund) at their approximate NAV, minus any fees the fund

imposes at that time (such as deferredsales loads or redemption fees).

Mutual funds generally sell their shares on a continuous basis, although some

funds will stop selling when, for example, they become too large.

The investment portfolios of mutual funds typically are managed by separate

entities known as "investment advisers" that are registered with the SEC.

Mutual funds come in many varieties. For example, there are index funds, stock

funds, bond funds, money market funds, and more. Each of these may have a

different investment objective and strategy and a different investment portfolio.

Different mutual funds may also be subject to different risks, volatility, and fees

and expenses.

All funds charge management fees for operating the fund. Some also charge for

their distribution and service costs, commonly referred to as "12b-1" fees. Some

funds may also impose sales charge or loads when you purchase or sell fund

shares. In this regard, a fund may offer different "classes" of shares in the same

portfolio, with each class having different fees and expenses.

To figure out how the costs of a mutual fund add up over time and to compare

the costs of different mutual funds, you should use the SECs Mutual Fund Cost
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Calculator. Some funds may reduce their sales charges depending on the

amount you invest in the fund. At certain thresholds, known asbreakpoints, you

may receive increasingly lower sales charges as your investment increases.

Keep in mind that just because a fund had excellent performance last year does

not necessarily mean that it will duplicate that performance. For example,

market conditions can change and this years winning fund might be next years

loser. That is why the SEC requires funds to tell investors that a funds past

performance does not necessarily predict future results. To understand the

factors you should consider before investing in a mutual fund, read Mutual

Fund Investing: Look at More Than a Mutual Fund's Past Performance. In

addition, you should carefully read all of a funds available information,

including its prospectus, or profile if it has one, and most recent shareholder

report.

There are some investment companies, known as exchange-traded funds or

ETFs, which are legally classified as open-end companies or UITs. ETFs differ

from traditional open-end companies and UITs, because, pursuant to SEC

exceptive orders, shares issued by ETFs trade on a secondary market and are

only redeemable in very large blocks (blocks of 50,000 shares for example).

ETFs are not considered to be, and arenot permitted to call themselves, mutual

funds.
http://www.sec.gov/investor/tools/mfcc/mfcc-int.htmhttp://www.sec.gov/answers/breakpt.htmhttp://www.sec.gov/investor/pubs/mfperform.htmhttp://www.sec.gov/investor/pubs/mfperform.htmhttp://www.sec.gov/answers/mfinfo.htmhttp://www.sec.gov/answers/etf.htmhttp://www.sec.gov/answers/etf.htmhttp://www.sec.gov/investor/tools/mfcc/mfcc-int.htmhttp://www.sec.gov/answers/breakpt.htmhttp://www.sec.gov/investor/pubs/mfperform.htmhttp://www.sec.gov/investor/pubs/mfperform.htmhttp://www.sec.gov/answers/mfinfo.htmhttp://www.sec.gov/answers/etf.htmhttp://www.sec.gov/answers/etf.htm


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Mutual funds are subject to SEC registration and regulation, and are subject to

numerous requirements imposed for the protection of investors. Mutual funds

are regulated primarily under the Investment Company Act of 1940 and the

rules and registration forms adopted under that Act. Mutual funds are also

subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.

You can find the definition of "open-end company" in Section 5 of the

Investment Company Act of 1940.

For information about the basics of mutual funds, read from a list of

publications by a variety of organizations.

1. Investment Companies

Generally, an "investment company" is a company (corporation, business trust,

partnership, or limited liability company) that issues securities and is primarily

engaged in the business of investing in securities.

An investment company invests the money it receives from investors on a

collective basis, and each investor shares in the profits and losses in proportion

to the investors interest in the investment company. The performance of the

investment company will be based on (but it wont be identical to) the

performance of the securities and other assets that the investment company

owns.
http://www.sec.gov/cgi-bin/goodbye.cgi?www.law.uc.edu/CCL/InvCoAct/sec5.htmlhttp://www.sec.gov/cgi-bin/goodbye.cgi?www.law.uc.edu/CCL/InvCoAct/sec5.htmlhttp://www.sec.gov/investor/pubs/investop.htm#mutualshttp://www.sec.gov/investor/pubs/investop.htm#mutualshttp://www.sec.gov/cgi-bin/goodbye.cgi?www.law.uc.edu/CCL/InvCoAct/sec5.htmlhttp://www.sec.gov/cgi-bin/goodbye.cgi?www.law.uc.edu/CCL/InvCoAct/sec5.htmlhttp://www.sec.gov/investor/pubs/investop.htm#mutualshttp://www.sec.gov/investor/pubs/investop.htm#mutuals


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2.Closed-end funds

Closed-end funds generally do not continuously offer their shares for sale.

Rather, they sell a fixed number of shares at one time (in the initial public

offering), after which the shares typically trade on a secondary market, such as

the New York Stock Exchange or the Nasdaq Stock Market.

3.Unit Investment Trusts (UITs)

A UIT typically issues redeemable securities (or "units"), like a mutual fund,

which means that the UIT will buy back an investors "units," at the investors

request, at their approximate net asset value (or NAV) . Some exchange-traded

funds (ETFs) are structured as UITs. Under SEC exceptive orders, shares of

ETFs are only redeemable in very large blocks (blocks of 50,000 shares, for

example) and are traded on a secondary market.

4.Net Asset Value

"Net asset value," or "NAV," of an investment company is the companys total

assets minus its total liabilities. For example, if an investment company has

securities and other assets worth $100 million and has liabilities of $10 million,

the investment companys NAV will be $90 million. Because an investment
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companys assets and liabilities change daily, NAV will also change daily.

NAV might be $90 million one day, $100 million the next, and $80 million the

day after.

5.Index Funds

"Index fund" describes a type ofmutual fund orUnit Investment Trust (UIT)

whose investment objective typically is to achieve the same return as a

particularmarket index, such as the S&P 500 Composite Stock Price Index, the

Russell 2000 Index, or the Wiltshire 5000 Total Market Index. An index fund

will attempt to achieve its investment objective primarily by investing in the

securities (stocks or bonds) of companies that are included in a selected index.

Some index funds may also use derivatives (such as options or futures) to help

achieve their investment objective. Some index funds invest in all of the

companies included in an index; other index funds invest in a representative

sample of the companies included in an index.

6.Money Market Funds

A money market fund is a type ofmutual fund that is required by law to invest

in low-risk securities. These funds have relatively low risks compared to other
http://www.sec.gov/answers/mutfund.htmhttp://www.sec.gov/answers/uit.htmhttp://www.sec.gov/answers/indices.htmhttp://www.sec.gov/answers/mutfund.htmhttp://www.sec.gov/answers/mutfund.htmhttp://www.sec.gov/answers/uit.htmhttp://www.sec.gov/answers/indices.htmhttp://www.sec.gov/answers/mutfund.htm


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mutual funds and pay dividends that generally reflect short-term interest rates.

Unlike a "money market deposit account" at a bank, money market funds are

not federally insured.

7.Bond Funds

"Bond fund" and "income fund" are terms used to describe a type ofinvestment

company (mutual fund, closed-end fund, orUnit Investment Trust (UIT)) that

invests primarily in bonds or other types of debt securities. Depending on its

investment objectives and policies, a bond fund may concentrate its investments

in a particular type of bond or debt securitysuch as government bonds,

municipal bonds, corporate bonds, convertible bonds, mortgage-backed

securities, zero-coupon bondsor a mixture of types. The securities that bond

funds hold will vary in terms of risk, return, duration, volatility, and other

features.

8.Stock Funds

"Stock fund" and "equity fund" describe a type ofinvestment company (mutual

fund, closed-end fund, Unit Investment Trust (UIT)) that invests primarily in

stocks or "equities" (as contrasted with "bonds"). The types of stocks in which a

stock fund will invest will depend upon the funds investment objectives,
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policies, and strategies. For example, one stock fund may invest in mostly

established, "blue chip" companies that pay regular dividends. Another stock

fund may invest in newer, technology companies that pay no dividends but that

may have more potential for growth. Another type of stock fundan index

fundinvests in stocks of companies contained in a particular market index.

(There are also index funds that invest in bond indices.)

9.Mutual Fund Fees and Expenses

As with any business, running a mutual fund involves costs. For example, there

are costs incurred in connection with particular investor transactions, such as

investor purchases, exchanges, and redemptions. There are also regular fund

operating costs that are not necessarily associated with any particular investor

transaction, such as investment advisory fees, marketing and distribution

expenses, brokerage fees, and custodial, transfer agency, legal, and accountants

fees.

three classes of shares that are sold to the general publicClass A, Class B, and

Class Cand a class that is sold only to institutional investorsClass I.
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Class A shares might have a front-end sales load (a type of fee that investors

pay when they purchase fund shares).

Class B shares might not have any front-end sales load, but might have a

contingent deferred sales load (CDSL) (a type of fee that investors pay only

when they redeem fund shares, and that typically decreases to zero if the

investors hold their shares long enough) and a 12b-1 fee (an annual fee paid by

the fund for distribution and/or shareholder services). Class B shares also might

convert automatically to a class of shares with a lower 12b-1 fee if held by

investors long enough.

Class C shares might have a 12b-1 fee and a CDSL or front-end sales load, but

the CDSL or sales load would be lower than Class Bs CDSL or Class As

front-end sales load, and the Class would not convert to another class.
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Types of mutual funds: -

Mutual fund schemes may be classified on the basis ofits structure and its investment objective.

According to structure:

(a)Open-ended Scheme: -

An open-ended fund or scheme is one that is available for subscription

and Repurchase on a continuous basis. These schemes do not have a fixed

maturity Period. Investors can conveniently buy and sell units at Net Asset

Value (NAV) Related prices, which are declared on a daily basis. The key

feature of open-end Schemes is liquidity.

(b) Closeended Scheme: -

A close ended fund or scheme has a stipulated maturity period e.g.

5-7 years. The fund is open for subscription only during a specified period at

the time of Launch of the scheme. Investors can invest in the scheme at the time

of the Initial public issue and thereafter they can buy or sell the units of the

scheme on the stock exchanges where the units are listed. In order to provide an


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exit route to the investors, some close-ended funds give an option of selling

back the Units to the mutual fund through periodic repurchase at NAV related

prices. SEBI Regulations stipulate that at least one of the two exit routes is

provided the investor i.e. either repurchase facility or through listing on stock

exchanges. These mutual fund schemes disclose NAV generally on weekly

basis.

(C)Interval scheme: -

Interval funds combine the features of open-ended and close ended-schemes.

They are open for sale or redemption during pre-determined intervals at NAV

related prices.

According to investment objective

(a) Growth/Equity oriented scheme: -

The aim of growth funds is to provide capital appreciation over the medium to

Long- Term. Such schemes normally invest a majority of their corpus in

Equities. It has been proven that returns from stocks, have outperformed most

other kind of investment held over the long term. Growth schemes are ideal for

Investors having a long-term outlook seeking growth over a period of time.


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(b). Income/Debt Oriented Scheme: -

The aim of the income fund is to provide regular and steady income to

investors. Such schemes generally invest in fixed income securities such as

bonds, Corporate, debentures, Government securities and money market

instruments.

Such funds are less risky compared to equity schemes. These funds are

not affected because of fluctuation in equity markets. However, opportunities of

Capital appreciations are also limited in such funds. The NAVs of such funds

are affected because of change in interest rates in the country. If the interest

rates fall, NAV of such funds are likely to increase in the short run and vice

versa. However, long-term investors may not bother about these fluctuations.

(c). Balanced Scheme: -

The aim of balanced funds is to provide both growth and regular

income. Such Schemes periodically distribute a part of their earning and invest

both in equities and fixed income securities in the proportion indicated in their

offer documents.


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In a rising stock market, the NAV of these schemes may not normally

keep pace, or fall equally when the market falls. These are ideal for investors

looking for a Combination of income and moderate growth.

d). Money Market/ Liquid Scheme: -

The aim of money market fund is to provide easy liquidity, preservation

of Capital and moderate income. These schemes are generally invest in short

term Instruments such as treasury bills, certificates of deposits, commercial

paper and Inter bank call money. Return on these schemes may fluctuate

depending upon the Interest rates prevailing in the market. These are ideal for

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

shorter periods.

Other schemes: -

(a). Tax saving schemes: -

These schemes offer tax rebate to the investors under specific provision of the

Indian Income Tax laws as the Government offers tax incentives for investment

in specified avenues. Investment made in Equity Linked Saving Schemes

(ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income

Tax Act, 1961. The Act also provides opportunities to investors to save capital

gains u/s 54EA and 54EB by investing in Mutual Funds, provided the capital


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asset has been sold prior to April 1, 2000 and the amount is invested before

September 30, 2000.

(b). Index Scheme: -

Index funds replicate the portfolio of particular index such as the BSE Sensitive

index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in

the same weight age comprising of an index. 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. Necessary disclosures in this regard are made in the offer document of

the mutual fund scheme.

(c). Sector Specific Scheme:

These are the funds/ schemes, which invest in the securities of only those

sectors or industries as specified in the offer documents. E.g. Pharmaceuticals,

Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The

returns in these funds are dependent on the performance of the respective

sectors/ industries. While these funds may give higher returns, they are more

risky compared to diversified funds. Investors need to keep a watch on the

performance of those sectors/industries and must exit at an appropriate time.

They may also seek advice of an expert.


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How to invest in Mutual Fund

Step One -Identify your Investment needs

Your financial goals will vary, based on your age, lifestyle, financial

independence, family commitments, and level of income and expenses among

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

begin by defining your investment objectives and needs, which could be regular

income, buying a home or finance a wedding or educate your children or a

combination of all these needs, the quantum of risk you are willing to take and

your cash flow requirements.

Step Two - Choose the right Mutual Fund

The important thing is to choose the right mutual fund scheme, which suits your

requirements. The offer document of the scheme tells you its objectives and

provides supplementary details like the track record of other schemes managed

by the same Fund Manager. Some factors to evaluate before choosing a

particular Mutual Fund are the track record of the performance of the fund over

the last few years in relation to the appropriate yardstick and similar funds in

the same category. Other factors could be the portfolio allocation, the dividend


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yield and the degree of transparency as reflected in the 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.

Step Four -Invest regularly

The best approach is to invest a fixed amount at specific intervals, say every

month. By investing a fixed sum each 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 do investors all

over the world follow a disciplined investment strategy. You can also avail the

systematic investment plan facility offered by many open-end funds.

Step Five-Start early

It is desirable to start investing early and stick to a regular investment plan. If

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

of compounding lets you earn income on income and your money multiplies at

a compounded rate of return.


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Advantages of Mutual Funds

Diversification: The best mutual funds design their portfolios soindividual investments will react differently to the same economicconditions. For example, economic conditions like a rise in interestrates may cause certain securities in a diversified portfolio to decreasein value. Other securities in the portfolio will respond to the sameeconomic conditions by increasing in value. When a portfolio is

balanced in this way, the value of the overall portfolio shouldgradually increase over time, even if some securities lose value.

Professional Management: Most mutual funds pay topflight professionals to manage their investments. These managers decide

what securities the fund will buy and sell.

Regulatory oversight: Mutual funds are subject to many governmentregulations that protect investors from fraud.

Liquidity: It's easy to get your money out of a mutual fund. Write acheck, make a call, and you've got the cash.

Convenience: You can usually buy mutual fund shares by mail,phone, or over the Internet.

Low cost: Mutual fund expenses are often no more than 1.5 percent ofyour investment. Expenses for Index Funds are less than that, becauseindex funds are not actively managed. Instead, they automatically buystock in companies that are listed on a specific index

Transparency

Flexibility

Choice of schemes

Tax benefits

Well regulated


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Drawbacks of Mutual Funds

No Guarantees: No investment is risk free. If the entire stock market

declines in value, the value of mutual fund shares will go down as well, no

matter how balanced the portfolio. Investors encounter fewer risks when

they invest in mutual funds than when they buy and sell stocks on their own.

However, anyone who invests through a mutual fund runs the risk of losing

money.

Fees and commissions: All funds charge administrative fees to cover their

day-to-day expenses. Some funds also charge sales commissions or "loads"

to compensate brokers, financial consultants, or financial planners. Even if

you don't use a broker or other financial adviser, you will pay a sales

commission if you buy shares in a Load Fund.

Taxes: During a typical year, most actively managed mutual funds sell

anywhere from 20 to 70 percent of the securities in their portfolios. If your

fund makes a profit on its sales, you will pay taxes on the income you

receive, even if you reinvest the money you made.

Management risk: When you invest in a mutual fund, you depend on the

fund's manager to make the right decisions regarding the fund's portfolio. If


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the manager does not perform as well as you had hoped, you might not make

as much money on your investment as you expected. Of course, if you invest

in Index Funds, you forego management risk, because these funds do not

employ managers.


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DEFINITION OF SHARE

SHARES:

Shares are also known as equity, issue of shares is the most important

source of rasing long term finance. Shares refer to a share in the share

capital of a company. It is one of the units which the share capital of

company can be devided. It indicates the interest in the assets and profits of

a company.

According to justice Farewell, a share is the interest of the

shareholder in the company measured by a sum of money for the purpose of

liability and of interest (dividend).

SHARE ARE OF TWO TYPES :

1) Equity shares

2) Preference shares


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Equity share:-

Equity shares are those shares which do not carry special or

preferential rights in the payment of annual dividend of repayment of

capital, rate of dividend on such shares is not fixed.

Preference shares:-

Preference shares are those shares which carry certain special of

priority rights.

Firstly dividend at fixed rate is payable on these shares before any

dividend is paid on equity shares. Secondly at the time of winding up of the

company capital is repaid to preference shareholders prior to the return of

equity capital.


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WHAT IS THE SHARE MARKET OR A STOCK

MARKET

stock is a share in the ownership of a company. Stock represents a claim onthe company's assets and earnings.

Holding a company's stock means that you are one of the many owners(shareholders) of a company, and, as such, you have a claim (albeit usually

very small) to everything the company owns.

A stock is represented by a stock certificate. This is a fancy piece of paperthat is proof of your ownership.

Being a shareholder of a public company does not mean you have a say inthe day-to-day running of the business. Instead, one vote per share to electthe board of directors at annual meetings is the extent to which you have asay in the company.

The management of the company is supposed to increase the value of thefirm for shareholders. If this doesn't happen, the shareholders can vote tohave the management removed--well, this is the theory anyway. In reality,individual investors like you and I don't own enough shares to have amaterial influence on the company. It's really the big boys like largeinstitutional investors and billionaire entrepreneurs who make the decisions.

The importance of being a shareholder is that you are entitled to a portion ofthe company's profits and have a claim on assets. Profits are sometimes paid

out in the form of dividends.

In case of liquidation, you'll receive what's left after all the creditors havebeen paid. This last point is worth repeating: the importance of stockownership is your claim on assets and earnings.


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INDIAN STOCK MARKET

Thee origination of the Indian securities market may be traced back to 1875,when 22 enterprising brokers under a Banyan tree established the BombayStock Exchange(BSE). Over the last 125 years, the Indian securities markethas evolved continuously to become one of the most dynamic, modern andefficient securities markets in Asia. Today, Indian markets conform tointernational standards both in terms of structure and in terms of operatingefficiency.

Structure and size of the markets

Today India has two national exchanges, the Bombay Stock Exchange(BSE) and the National Stock Exchange (NSE). Each has fully electronictrading platforms with around 9400 participating broking outfits. Foreign

brokers account for 29 of these.

There are some 9600 companies listed on the respective exchanges with acombined market capitalisation near $125.5bn.

Any market that has experienced this sort of growth has an equallysubstantial demand for highly efficient settlement procedures. In India99.9% of the trades, according to the National Securities Depository, aresettled in dematerialised form in a T+2 rolling settlement environment. Inaddition, trades are guaranteed by the National Clearing Corporation of IndiaLtd (NSCCL) and Bank of India Shareholding Ltd (BOISL), ClearingCorporation houses of NSE and BSE respectively. The main functions of theClearing Corporation are to work out

(a) what counter parties owe and(b) whatcounter parties are due to receive on the settlement date.

Furthermore, each exchange has a Settlement Guarantee Fund to meet withany unpredictable situation and a negligible trade failure of 0.003%. TheClearing Corporation of the exchanges assumes the counter-party risk ofeach member and guarantees settlement through a fine-tuned risk


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management system and an innovative method of online positionmonitoring. It also ensures the financial settlement of trades on theappointed day and time irrespective of default by members to deliver therequired funds and/or securities with the help of a settlement guarantee fund.


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The Bombay Stock Exchange

The Bombay Stock Exchange Limited ( formerly, The stock exchange, mumbai ; popularly called the Bombay stock exchange, or BSE ) is theoldest stock exchange in Asia. It is located at Dalal Street, Mumbai, India.

Bombay Stock Exchange was established in 1875 . there are around3,500 indian companies listed with the stock exchange, and has a significanttrading volume. As of july2005, the market capitalization of the BSE

SENSEX ( SENSITIVE INDEX ), also called the BSE 30, is a widely usedmarket indix in India and Asia. As of 2005 it is among 5 biggest stockexchanges in the world in terms of transactions volume. Along with the

NSE the companies listed on the BSE a combined market capitalization ofUS $ 125.5 billion.


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INTORDUCTION

BOMBAY STOCK EXCHANGE LIMITED is the oldest stock exchangeis asia with a rich heritage. Popularly known as BSE, It was established as the native share & stock brokers association in 1875. it is the first stockexchange in the country to obtain permanent recognition in 1956 from thegovernment of India under the secutities contracts ( regulation ) Act 1956.The exchanges pivotal and preeminent role in the development of the Indiancapital market is widely recognized and its index SENSEX, is trackedworldwide. Earlier an association of persons ( AOP), the exchange is now ademutualised and corporative sentity incorporated under the provisions ofthe companies Act, 1956, pursuant to the BSEs ( corporatisation anddemutualizaion ) scheme, 2005 notified by the securities and exchange board

of India (SEBI).

With demutualization, the trading rights and ownership right s havebeen de-linked effectively addressing concerns regarding perceived and realconflicts of interest. The exchange is professionally managed under theoverall direction of the board of directores. The board comprises eminent

professional, representatives of trading members and the managing directorof the exchange. The board is inclusive and is designed to benefit from the

participation of market intermediaries.

In terms of organization structure, the board formulates larger policyissues and exercises over-all control. The committees constituted by the

board are broad-based. The day-to-day operations of the exchange aremanaged by the managing director and a management team of professionals.

The exchange has a nation-wide reach with a presence in 417 citiesand towns of India. The systems and processes of the exchange are designedto safeguard market integrity and enhance transparency in operations.During the year 2004-2005 the trading volumes on the exchange showed

robust growth.

The exchange provides an efficient and transparent market for tradingin equity, debt instruments and derivatives. The BSEs online trading system( BOLT ) Is a proprietary system of the exchange and is BS 7792-2-2002Certified. The surveillance and clearing and settlement functions of theexchange are ISO 9001:2000 certified.


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NATIONAL STOCK EXCHANGE

The National Stock Exchange of India (NSE), is one of the largest andmost advanced stock markets in India . The NSE is the world's third largeststock exchange in terms of transactions. It is located in Mumbai , thefinancial capital of India . The NSE VSAT has 2791 terminals that cover334 cities across India.

The National Stock Exchange of India Limited has genesis in the report ofthe High Powered Study Group on Establishment of New Stock Exchanges,which recommended promotion of a National Stock Exchange by financial

institutions (FIs) to provide access to investors from all across the countryon an equal footing. Based on the recommendations, NSE was promoted byleading Financial Institutions at the behest of the Government of India andwas incorporated in November 1992 as a tax-paying company unlike otherstock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts


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(Regulation) Act, 1956 in April 1993, NSE commenced operations in theWholesale Debt Market (WDM) segment in June 1994. The Capital Market(Equities) segment commenced operations in November 1994 andoperations in Derivatives segment commenced in June 2000.

NSE conducts online examination and awards certification, under itsprogrammes of NSE's Certification in Finanacial Markets (NCFM).Currently, certifications are available in 9 modules, covering differentsectors of financial and capital markets. Branches of the NSE are locatedthroughout India.


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WHAT IS SHARE?

Share or stockis a document issued by a company, which entitles its holderto be one of the owners of the company. A share is issued by a company or

can be purchased from the stock market.

What is share market?

A market where dealing of securities is done is known as share market.There are basically two types of share market in India:

1. Bombay Stock Exchange (BSE)2. National Stock Exchange (NSE)

There are two ways of market in which investors gets share from market.There are:1. Primary Market:Markets in which new securities are issued are known as primary market.

This is part of the financial market where enterprises issue their new shares

and bonds. It is characterized by being the only moment when the enterprise

receives money in exchange for selling its financial assets.

2. Secondary Market: Market in which existing securities are dealt is

known as secondary market. The market where securities are traded after

they are initially offered in the primary market. Most trading is done in the

secondary market.


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Terminology used in share market

1. Stock Broker / Sub Broker:- People like you and me cannot justgo to a stock exchange and buy and sell shares. Only the members of thestock exchange can. These members are called stockbrokers and they buyand sell shares on our behalf. So, if you want to start investing in shares,you can do it only through a broker. Every stockbroker has to beregistered with the Securities and Exchange Board of India, which is thestock market regulator. You can either choose a broker (who is directlyregistered with SEBI) or a sub-broker (people licensed by brokers towork under them).

2. Demat account: - Gone are the days when shares were held asphysical certificates. Today, they are held in an electronic form in demataccounts. Demat refers to a dematerialized account. Let's say your

portfolio of shares looks like this: 40 shares of Infosys, 25 of Wipro, 45of HLL and 100 of ACC. They will show in your demat account. Youdon't have to possess any physical certificates showing you own theseshares. They are all held electronically in your account. Periodically, youwill get a demat statement telling you what shares you have in your

demat account.

How to get a demat account

To get a demat account, you will have to approach a Depository Participant. Adepository is a place where an investor's stocks are held in electronic form.There are only two depositories in India -- the National Securities

Depository Ltd and the Central Depository Services Ltd.

The depository has agents who are called Depository Participants. In India,

there are over a hundred DPs. Think of it like a bank. The head office, where all

the technology rests and the details of all the accounts are held, is like the

depository. The DPs are like the branches of banks that cater to individuals.


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A broker, however, is not similar to a DP. A broker is a member of the stockexchange and he buys and sells shares for his clients and for himself. A DP, onthe other hand, gives you an account where you can hold those shares.

To get a list of the registered DPs, visit theNSDL and CDSL Web sites.

3. Get a PAN: - The taxman demands that you get yourself a PermanentAccount Number. This is a unique 10-digit alphanumeric number(AABPS1205E, for example) that identifies and tracks an individual in thetaxmansdatabase.
http://www.nsdl.co.in/http://www.cdslindia.com/http://www.nsdl.co.in/http://www.cdslindia.com/


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4. Trading / Square off Transaction: -

Whenever a trader / investor buys or sells a security and on the same day beforethe market closes, he sells or buys that particular security (in the same quantity),the transaction is called as square off transaction or a trading transaction. Shareslying in the T, TS and T are not square off the same day.

5. Delivery Transaction: -

Delivery transaction are those transactions which are not squared off at the dayend, and the investor/trader is ready to take / give the delivery of the security.

Charges such as brokerage, service tax on brokerage, STT, stamping charges

etc. are very high on the delivery transactions.

6. Settlement Period: -

Currently the settlement period is T+2. Settlement period i.e. T+2 means onehas to give the delivery of the shares sold within 2 days of the date of thetransaction. In case of purchase transaction, one will get the delivery within 2days of the date of transaction.

7. Shares Category: -

The stock exchange has divided the shares into the categories according to theperformance of the company.

The different categories are A, B1, B2, S (BSE Indonext), T, TS, Z

8. Auction: -

In case of failure of delivery of shares for sale transaction within the stipulatedtime period, the BSE auction those shares as per the rules and regulations.

9. Close Out: -

In case of failure of delivery of shares for purchase transaction within thestipulated time period, the person buying the shares gets the benefit in the formof Close Out as per the BSEs rules and regulations.


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most individual investors. Mutual fund 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, though his proportionate share, reap the benefit of

diversification.

Mutual funds specialize in the business of investment management,

and therefore employ professional management for carting out the

activities. Professional management ensures that the best investment

avenues are taped 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. Investors who opts

for direct equity 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 exchange

(for close end funds) and repurchase option (for open end schemes). In


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MUTUAL FUND RETURNS AGAINST THEIR MARKET

BENCHMARKS--

Scheme name

Return

(%) Benchmark return (%)

Tata index fund 16.23 16.83Tata pure equity fund 33.31 18.46Tata select equity fund 41.66 18.46Magnum equity fund 18.52 17.38Magnum tax gain scheme 90.51 17.38Franklin India blue chip funds 98.9 33.7

Templeton India growth funds89.3 32.8

Now as equity investment is considered to be the most risky investment

instrument. So taking this perception and investors doubts in mind all

AMC`s offer a nice balance in there investment portfolio. Even in equity

funds all corpus do not go to equity investment straight away. Most of it

been invested in debt instrument consist of money market instrumentsconsisting of government securities which are considered to be less risky.

Now lets take a look on the portfolio of investment in TATA`s schemes.

SCHEME EQUITYPROPORTION (%)

DEDTPROPORTION (%)

TATA EQUITYOPPORTUNITIES FUND

80-100 0-20

TATA EQUITY P/EFUND

70-100 0-30

TATA TAX SAVINGFUND

80-100 0-20

TATA GROWTHFUNDS

80-100 0-20

TATA PURE EQUITY 95-100 0-5


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FUND

TATA DIVIDENDYIELD FUND

70-100 0-30

TATA

INFRASTRUCTUREFUND

70-100 0-30

TATA INDEX FUND 95-100(Sensex orNifty securities)

0-5

TATA BALANCE FUND 50-70 30-50

The above chart shows that the AMC`s keep their investment options open and

flexible. They time the market for the best returns. Government securities underdebt instruments considered to be most defensive instrument for investment andthus at the time of crisis. The fund manager can park the money in them. Andthus can ensure at least security of customers.

RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research

problem. It may be understood as a science of studies how research is done

scientifically. Research methodology has many dimensions.


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The purpose of methodology is to describe the process involved in the

research work. This includes the overall research design, the data collection

process, the sampling process, the field survey, and analysis procedure.

RESEARCH DESIGN

Research Design consists of three parts:

1. Exploratory Research

2. Descriptive Research

3. Causal Research

An exploratory research focuses on the discovery of idea and is generally

based on secondary data. It is preliminary investigation that does not have a rigid

design. This is because a researcher engaged in an exploratory study that may have

to change his focus as a result of new ideas and relationship among the variables.

A descriptive study is undertaken when the researcher wants to know the

characteristics of certain group such as age, sex, educational level, income, and

occupation etc.

A casual research is undertaken when the researcher is interested in knowing

the cause and effect relationship between two or more variables. Such studies are

based on reasoning along well-tested lines.


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DATA SOURCE

Data is generally of two types:

1. Primary data

2. Secondary data

Primary Data are those data specially collected for problem in hand. In this

study data were collected from primary sources in personal interview of retailers

and interaction with consumers by survey method.

These methods of data collection are quite popular. These are the major

methods of data collection in the research study.

Secondary Data are those data, which are collected for some purpose other

than helping and solving the problem.

Sources of secondary data are:

Old reports

Company records

Magazines

Company web site

Sample Procedure:

How should the respondents be chosen? To get the most feasible and

accurate result, simple random probability sampling method was adopted for direct


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interview of retailers and cluster sampling was used to communicate the consumers

from different apartments of different Market for the survey.

In simple random probability sampling, probability of being chosen as a

sample unit for each unit in the population is equal. Each sample unit from the

population is chosen randomly. Probability of being chosen as a sample unit

depends upon the population size and no. of sample units to be chosen.

While in cluster (area) sampling the population is divided into mutually

exclusive groups (such as city blocks, sectors etc.), and the researcher draws a

sample of the groups using random sampling. Sometimes researcher again draws

sample units of respondents from the selected groups, it is known as two step area

sampling.

Sample Size:

450 questionnaires

Questionnaires

What is the difference between "Load" and "No Load" funds?

Load funds charge an upfront percentage of your investment to compensate themanagers for their skill. If you have a three percent load, the fund managers would


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get 3% of your money and would invest 97%. No Load funds do not charge thistype of management compensation. Most financial advisors tell you not to payloads, they are a tremendous drag on performance and it is very hard to overcome.

What is the difference between "Classes A" and "Class B" shares of a mutual

fund?

Class A funds have a charge at the front end; Class B funds have a back end chargefor redemption. The back end charge is sometimes waived if you leave theinvestment longer than a specified period. I recommend finding funds that do nothave these types of charges. But if you really love the fund, buy the one where youcan at least get out of the fee by leaving the investment for a while.

What is the 12b-1

All funds charge management fees to run the fund. However, some also charge fortheir distribution and service costs. These are referred to as 12b-1 fees.

What is "Net Asset Value (NAV)"?

NAV is the price an investor pays for a share of a fund before any load or salescharge is made.


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COMPARISON PARTBASEDONQUESTIONNAIRE

1. Customers who are interested to invest.


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2. Investors Preferences to invest in particular field.


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3. Investment Criteria

4. Risk associated with investment


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CONCLUSION

The strategy adopted by me in completion of this project help me a lot till

now in making comparison between share market and mutual funds. From theanalysis we can say that if there is more risk there is more return and we can alsosay that share market is totally dependent on the risk taken by the investors ininvesting in shares. And in mutual funds is less risk as the money of investorsinvested in different sectors so it can divide the risk in different portfolio adopted

by mutual funds companies.

At last I can say that money invested in this rise and fall market it is better toinvest in mutual funds for those investors who are risk adverse and for those whoare risk taker it is better for them to invest in share market.

In OJT the strategy adopted by me in achieving my target helped me a lot. Thisstrategy helped me in knowing the customer reaction towards share market;customers attitude towards share broking firms and in this I helped how to interactwith the customers which is beneficial for me in future.

BASIS Share market MUTUAL FUNDS

RETURNS HIGH BETTER

ADMINISTRATIONEXPENSES

HIGH LOW

RISK HIGH MODERATE

INVESTMENT MORE MORE

NETWORK WIDE NOT SO WIDE

LIQUIDITY AT A COST BETTER

QUALITY OFASSETS

TRANSPARENT TRANSPARENT


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Executive Summary: -

Most people do not enter financial markets directly but use intermediaries or

middlemen.

Commercial banks are the financial intermediary wet meet most often it

macroeconomics, but mutual funds, pension funds, credit unions, savings and loan

associations, and insurance companies are also important financial intermediaries.

Mutual Funds were started in India in the year 1963.Since then mutual funds have

grown dramatically. India has been a country where a general investor first

considers the safety of the investment whether the returns are as low as negligible.

Banks, gold and PPF were some of the safest avenues in this series. But entry of

mutual funds changed the whole scenario. Now mutual funds are preferred by the

investors. This intermediary has grown rapidly since its establishment. Mutual

funds have several advantages over other intermediaries. Different investment

avenues are available to investments, they also 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


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schemes while making investment decisions. Mutual funds give better returns on

investment in relation to risk than other financial intermediaries. Now Indian

mutual fund industry is set to post impressive growth over the next few years on

the back of rising incomes and higher savings in the country.

The industry has grown in size by about 200 percent from March 1993 to

December 2003,

At Rs. 1.40 trillion in terms of assets under management. It is likely to enlarge its

present share of 6 percent to the countrys gross domestic product to 40 percent in

10 years. The emerging trends indicate that the future investments will drastically

pour into mutual fund industry that will automatically enlarge its share to the

countrys gross domestic product. The size of the industry is estimated to go up to

over Rs. 1.65 trillion till 2014. Mutual funds have been able to command investors

appetite in recent years with increasing presence of private sector companies and a

distinct shift in investor preferences. Availability of higher choices of investors, the

gradual change in the risk profile of investors as well as attempts by industry to put

in place an appropriate regulatory environment has helped the sector grow. The

mutual fund institutions in India are one of the most important among the newer

capital market institutions. The industry has experienced the biggest structural

change from monolithic structure to a competitive one. As the industry is showing


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signs of maturing, its consolidation would take place and in this context mergers

and acquisition would play a crucial role.


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Recommendations: -

The network of mutual funds has spread in recent years, but it is still not

wider than other intermediaries like commercial banks. So, AMCs must

recruit more distributors.

Mutual funds have still not reach to all classes of the people. So a thoroughly

prepared campaign is needed for the awareness of people


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BIBLIOGRAPHY

1. Albert J. Fredman & Russ Wiles (1997); How Mutual Funds Works;

Prentice Hall of India Private Limited.

2. Donald E Fischer & Ronald J. Jordan (1996); Security Analysis andPortfolio Management; Prentice Hall of India Private Limited.

3. P. Chandra (2001); Financial Management ; Tata McGrill-Hill PublishingCompany Limited.

4. www.google.com

5. www.valueresarchonline.com

6. www.myiris.com

7. www.amfiindia.com

8. www.sebiindia.com

9. www.indiainfoline.com

10. http://www.sec.gov/answers/mutfund.htm
http://www.google.com/http://www.valueresarchonline.com/http://www.myiris.com/http://www.amfiindia.com/http://www.sebiindia.com/http://www.indiainfoline.com/http://www.sec.gov/answers/mutfund.htmhttp://www.google.com/http://www.valueresarchonline.com/http://www.myiris.com/http://www.amfiindia.com/http://www.sebiindia.com/http://www.indiainfoline.com/http://www.sec.gov/answers/mutfund.htm


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a

LITERATURE REVIEW

Understanding Mutual Fund Accounting

By Aru Srivastava

Mutual Fund is a Fund established in the form of a trust by asponsor to raise money by the trustees through the sale of unitsto the public under one or more schemes for investing insecurities in accordance with the regulations. Thus, a mutual fundcollects money from the investors, issues certificates to themknown as units and invests the money collected in securities so asto achieve mutual benefits in terms of capital appreciation in suchsecurities. It is a non-depository, non-banking financialintermediary, which acts as an important vehicle for bringing

wealth holders and deficit units together indirectly. Mutual fundsare distinct from portfolio management schemes and areessential vehicles for collective investment in stock market, riskdiversification and expert management advice of the fundmanagers.


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Performance Evaluation of Mutual Funds:

Any meaningful evaluation of performance will necessarily have

to measure total return per unit of risk or the ability to earnsuperior returns for a given risk class. There are various statisticaltechniques to measure this factor. One of the technique estimatesthe realized portfolio returns in excess of the risk free return, as amultiple of the factor of the portfolio. The factor of portfolio, inturn, measures the systematic or undiversifiable risk of theportfolio, the relation to the market index.

Mutual funds sell their shares to public and redeem them tocurrent net asset value (NAV) which is calculated as under-

Total market value of all MF

holdings - All MF liabilitiesNAV of MF =

-------------------------------------------------------------No. of MF units or

shares

OR

Market value of Scheme'sInvestments + Receivables + Accrued

Income + Other Assets - AccruedExpenses - Payables - Other Liabilities

NAV of MF =-------------------------------------------------------------------------------

No. of Units outstandingunder the Scheme

The net asset Value of a mutual fund scheme is basically the perunit market value of all the assets of the scheme. To illustrate thisbetter, a simple example will help.

Scheme name XYZScheme size Rs. 50,00,00,000 (Rs. Fifty crores)


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Face value of units Rs. 10No. Of Units (Scheme size) 5,00,00,000Face value of unitsInvestments In shares

Market value of shares Rs. 75,00,00,000 (Rs Seventy Fivecrores)

NAV(Market value ofInvestments / No. of units) = Rs. 75,00,00,000

-----------------------5,00,00,000

= Rs.15

Thus, each unit of Rs. 10 is worth Rs. 15.

Simply stated, NAV is the value of the assets of the assets of eachunit of the scheme, or even simpler value of one unit of thescheme. Thus, if the NAV is more than the face value (Rs. 10), itmeans the money has appreciated and vice versa.

NAV also includes dividends, interest accruals and reduction ofliabilities and expenses, besides market value of investments.

Presentation of accounts:

Mutual funds , should prepare schemewise balance sheet as perAnnexure IA and IB of Eleventh Schedule of SEBI (Mutual Funds)Regulations 1996. As per regulation 54, every mutual fund orasset management company shall prepare in respect of eachfinancial year an annual report and annual statement of accountsof the schemes and funds.

The balance sheet shall give schemewise particulars of its assetsand liabilities and shall contain particulars as per EleventhSchedule. It should also disclose accounting policies relating tovaluation of investments and other important items. Under eachtype of investment, the aggregate carrying value and marketvalue of non-performing investments shall be disclosed. It should


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also indicate the extent of provision made in revenue account forthe depreciation /loss in the value of non -performinginvestments. It shall also disclose per unit Net Asset Value (NAV)as at the end of accounting year. Previous year figures should

also be given against each item.

It should also indicate the appropriation of surplus by way oftransfer to reserves and dividend distributed. It should alsocontain -

Provision for aggregate value of doubtful deposits, debts and outstandingand Accrued income.

Profit or loss in sale and redemption of investment may be shown on a netbasis.

Custodian and registrar fees. Total income and expenditure expressed as a percentage of average net

assets, calculated on a weekly basis.

Schemewise balance sheet normally contains the informationunder following groups -

Asset side - Investments, Deposits, Other Current Assets, FixedAssets, Deferred revenue expenditure

Liability side - Unit capital, Reserves and surpluses, Loans,Current liabilities

We know that shares carry a risk but are mutual funds also risky?Well any investment decision has to carry a certain amount ofrisk-doesnt it? So, it means that mutual funds also carry a riskprofile with them. So how do you assess your mutual funds riskprofile? Some of the tools available to assess your scrips riskinesscan also be used to assess a mutual fund's risk (or its closecousin, volatility).

BetaThis common measure compares a mutual fund's volatility withthat of a benchmark and is supposed to give some sense of howfar you can expect a fund to fall when the market takes a dive, orhow high it might climb if the bull is running hard. A fund with a


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beta greater than 1 is considered more volatile than the market;less than 1 means less volatile. So say your fund gets a beta of1.15 -- it has a history of fluctuating 15% more than thebenchmark If the market is up, the fund should outperform by

15%. If the market heads lower, the fund should fall by 15% more.

But beta, though a useful guide, is far from perfect, especiallywhen used as a proxy for "risk." The problem here, as with manyrisk measures, is the benchmark. The benchmark has to be acorrect measure of comparison only then will the beta hold anyindicative value.

AlphaAlpha was designed to take beta one step further. It looks at the

relationship between a fund's historical beta and its currentperformance, or the difference between the return beta wouldlead you to expect and the return a fund actually gets. An alphaof 0 simply means that the fund did as well as expected,considering the risks it took. So if that fund with the beta of 1.15beat the market by 15% (or underperformed it by 15% when themarket was down), it would have a 0 alpha. If your fund has apositive alpha, that means it returned more than its betapredicted. A negative alpha means it returned less. The trouble

with alpha is that it's only as good as its beta. If the benchmarkisn't appropriate to a fund in deriving its beta, then alpha, too, willbe imprecise.

Standard DeviationMeet the most popular of the risk measures -- one with a distinctadvantage over beta. While beta compares a fund's returns with a

benchmark, standard deviation measures how far a fund's recentnumbers stray from its long-term average. For example, if Fund Xhas a 10% average rate of return and a standard deviation of 5%,most of the time, its return will range from 5% to 15%. A largestandard deviation supposedly shows a more risky fund than asmaller one. But here, again, what's problematic is your referencepoint. The number alone doesn't tell you much. You have to


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compare one standard deviation with the others among a fund'speers. But a more glaring problem is that the standard deviationsystem rewards consistency above all else. A fund is consideredstable based on the uniformity of its own monthly returns. So if it

loses money but does so very consistently it can have a very lowstandard deviation -- down 3% each and every month wins astandard deviation of zero. And likewise, a fund that gains 10%one month and 15% the next would be penalized by a highstandard deviation -- a reminder that volatility, although perhapsa cousin to risk, itself isn't necessarily a bad thing.

Sharpe RatioThis formula, worked by Nobel Laureate Bill Sharpe, tries toquantify how a fund performs relative to the risk it takes. Take a

fund's returns in excess of a guaranteed investment (a 90-day T-bill) and divide by the standard deviation of those returns. Thebigger the Sharpe ratio, the better a fund performed consideringits riskiness. Here, again, you have the problem of relativity -- theratio itself doesn't tell you anything, you have to compare it withthe Sharpe of other funds. But this ratio has an advantage overalpha because it uses standard deviation instead of beta as thevolatility variable, and therefore you don't have to worry that afund doesn't relate well to the chosen index.

Overseas, one has mutual fund rating companies - like MorningStar which provide views of risk. Morningstar says that what weinvestors really care about is when our funds LOSE money, notwhen they're doing better than the benchmark or than their long-term averages. It measures how often and by how much a fundtrails the monthly T-bill rate, and then compares that average losswith that for the investment class. The average for a class is 1.00,so numbers above that mean a fund is riskier than its peers, and

below is considered less risky.

In India we still have to introduce this kind of a risk rating.However till then remember one needs to be conscious of risk,but not push it to the last decimal point. It's about awareness,rather than mathematics.


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Advantage Mutual Funds

BYS S Prashanth

FEB 2000. Stock Markets reach dizzy heights of about 6000 mark.Investors go ga-ga over the benefits of stock market investing,especially the Mutual Funds. A case in example, Birla AdvantageFunds NAV reaches Rs 80. Investors queue up at investor servicecenters to buy more Mutual Fund units in the euphoricexpectation of the NAV reaching the Rs 100 mark.

FEB 2001. An eventful year has passed by. Stock markets are ona roller coaster ride with the Sensex reaching the nadir of about3000 mark. Investors shun the very concept of Mutual Fundinvesting. They are back to the good old days of saving theirmoney in the form of fixed deposits.

Doesnt this sound like a typical answer to a typical examinationquestion, which says "What are the differences between thestock market conditions in 2000 and 2001? Relate your answer to

Mutual funds"!!! It's time for introspection.

If the markets crash, it must be the time to indulge in MutualFund bashing. If the markets are on a swan song, it's time toshower heaps of praises on the virtues of Mutual Funds.Unfortunately, of late, this ominous tendency has become theorder of the day. And, so, once again we have been havinginvestors and casual observers commenting on the bleak and theunsteady future of Mutual Funds. Is this domino effect justified?Are Mutual Funds really in for a sun-set?

Criticisms and concerns are however mostly a reaction to thefalling SHORT TERM returns and an IMPROPER understanding ofthe funds. Investors fail to understand that fund managers are notdemi-gods and that Mutual fund are also susceptible to marketconditions and remain invested in the market. As a consequence


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of this, the NAVs will, more than obviously, respond to the marketmovements. If an investor were to expect that the decline in theNAV of his investment be put to a halt, then the fund managerwould have to exit value investing, which is what he is paid for,

and move into cash. If he were to do that, there is no reason whythe fund managers have to be paid for and why investors need tobear the asset management fees!

The fall in the NAVs is a perfectly natural occurrence. The belowpar NAV of over 100 schemes today certainly disheartens theinvestors. A closer look at these Mutual Funds and their schemeswould unfold the truth that most of these schemes are dividendoptions of a fund, where dividend pay out has been made. It is auniversal truth that once dividend has been paid out, the NAV

falls reflecting the payout which should be factored into whileanalyzing why most of these schemes have acquired a below parstatus. Thus, inclusion of such schemes in this category andterming them poor performers is really incompatible.

Secondly, funds whose NAV has remained above par for monthsor have given reasonable returns should not be counted withthose funds whose NAV never crossed the par value.Fundamentally speaking, the below par NAVs show that thecurrent value is less than the value at which one entered. This isno different from buying a fund at an NAV of Rs 14 and thenseeing it fall below this level.

Another alleged sin of a mutual fund is being overweight intechnology. When the fund was performing with the sameoverweight in technology stocks, that did not attract anycomplaints as the investor was getting high returns. If technologystill is believed to be the business driver in the near future, it is allthe more natural that the funds will commit a larger part of its

portfolio to such stocks, albeit with the required realignment inthe assigned weightages from time to time.

Mutual Funds are still and would continue to be the uniquefinancial tools, in the country. One has to appreciate the fact thatevery aspect of life has its periods of highs and lows. This hasbeen the case with the stock markets. Why not apply the same


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logic to Mutual Funds? Mutual Funds have not failed in anycountry where they work within a regulatory framework. Theirfuture is bright.

STOCK MARKET TIPS

By Manshu Verma

The stock markets are at all time highs and just like the last time around when themarket was at its previous high every one thinks that nothing can go wrong andthere is just one way where the market can go which is UP. Nothing could be

farther from the truth and this will be clear from the way the market behaves in thenext few months. Here are a few tips that would hopefully save you from losing alot of cash in the current frenzy

Time and again investors have burnt their fingers in the marketsand here are some tips to you so that you do not end up burningyour fingers in this market.

The number one tip at this point would be to sell if you have

stocks and not to buy them if you have cash. The golden principlein the markets is Buy when everyone else sells and sell wheneveryone else buys. Simple enough right? Not really.

Why? Because of peer pressure pure and simple. When everyoneelse around you seems to be having a ball at the markets youwould feel like a fool if you didnt participate now.

OK so you cant resist buying at this time then at least do yourself

a favor and stay away from unknown Penny Stockand hot tipsthat your barber gave you. True that the stock has tripled in thelast fifteen days but that was before people like your barberstarted buying the stock. Chances are that the Promoter of thecompany have started buying into the stock and have spreadrumors like acquisition or a big export order to fool investors andsell out to them at a later date.


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Another tip that would serve useful is to value a stock based onits future growth and not its past performance. For instance manyinvestors say that I will not buy stocks of X company because ithas doubled in the last year. Well it may have doubled in the last

year but that should not be the thing you should be tellingyourself. Rather you should ask yourself why has this doubled inthe last year and can it do so again? There should be a solidanswer to your question like the launch of a new product orreduction in the prices of raw material. And indeed if the answeris in the positive then by all means go ahead and buy that stockregardless of what has happened in the last year.

Another tip would be to remember what you are buying. Quitesimply investors often forget that when buying a stock they are

simply buying ownership in the companies. Most of you wouldknow that nothing spectacular would happen in the company thatyou work for, in a month, they are not going to double theirrevenues and certainly not double your salary every month. Thenwhy expect anything different from the companies that you areinvesting in. Why expect the prices to double in a month or two.Give time to your investments; dont reduce it to a gamble. Onlywhen you invest in fundamentally sound companies and then givethe investments sufficient time to grow will you see some healthy

returns on your investments. Ideally a minimum horizon of oneyear is a good time.

Hope these tips will prove helpful and you will make a lot morein the stock markets than you have already been making.Happy Investing!

Weve often heard of "the secret of successful investing is todiversify their risk" - so how does one go about this? And whatdoes diversification really mean - does it only mean that one

should spread ones portfolio across various types of assets, interms of cash, debt, shares, mutual funds, deposits etc? Or canone diversify ones portfolio even further?

Looking at the investment instruments available to investorsthere is plenty to choose from in each category. For example,within deposits, today investors have the choice of fixed, semi


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fixed, two in one accounts etc. For mutual funds also investorscan diversify across liquid, balanced, growth, income etc. Comingto stocks also there is a lot of diversification possible. It's criticalto understand the basic types of stock available on the market in

order to match your investment style to types of stock. The mostbasic way to classify stocks is by size, growth potential andreturns.

When stock market experts talk about size, they're referring tothe market capitalization of a stock. "Market cap" refers to therupee value of a company. It's computed by multiplying the totalnumber of a company's shares by the current price per share.Large-cap stocks are shares of companies with the biggestmarket capitalization. Stocks of Reliance, ACC, Infosys, Satyam

etc, are considered the most stable and successful. Their sheersize provides a cushion during recessions. Large caps are morelikely to pay dividends to shareholders. But because they aremore established with less room to grow, large caps are less likelythan smaller stocks to give those big-time returns. A blue chip isone of an elite group of stocks of corporations that have a historyof good dividend returns (in both good financial times and bad),solid management and good growth potential. Blue-chip stocks,like Hindustan Levers, ITC, etc are among the most stalwart and

low-risk investments available in the stock market.

Small-cap stocks are the babies of the stock market. The upsideto these stocks lies in the market perception that these stockshave a major growth potential. Orchid pharmaceuticals, Morepanlab, Aks opticfibre etc. can be classified in this category. Smallcaps have the potential to do even better than large-caps, interms of returns at the bourses. Investors interested in long-termgrowth, hunt out the strongest small-cap prospects. Thedownside: Many small-cap stocks may not even have any real

earnings. In the short term, these stocks can be volatile and areless likely to pay dividends.

Penny stocks are so named because their shares can often be hadfor mere pennies. That sounds good to frugal investors.Obviously, penny stocks have enormous growth potential. Butevery good shopper knows that cheap is not always a bargain.


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There may be good reasons that the stock is depressed in the firstplace. The company may be too new to have gained investorconfidence, or perhaps it is in a state of financial turmoil.

Journalists and professional analysts at major stock brokerages

tend to ignore penny stocks, so there is little information aboutthese companies from third-party sources, increasing the risk offraud and thus making them less attractive. Since most pennystocks are traded on minor stock exchanges with less-than stellarreputations for overseeing their member firms, the risk of fraud iscompounded. All these variables make the purchase of pennystocks risky for novices, no matter what they might hear in anInternet chat room. However, experienced investors should notrule out penny stocks altogether, because they do offer thepotential for big rewards. The trick is to find the diamond in the

rough.

In terms of growth potential and return growth stocks, Momentumstocks, value stocks, income stocks and cyclical stocks should allform a part of the portfolio. Growth stocks are stocks with rapidlyrising profits, such as Global telesystems, Himachal futuristic,Visual Soft, NIIT etc. Technically speaking, growth stocks usuallyregister annual earnings increase of 15-25 percent. Growthinvestors expect that a company with accelerating profits will also

have a rising stock price. As you'd expect, while you can makelots of money in growth stocks, you can also lose a lot. Thishappens when professional growth investors divest from a growthstock if its growth rate slows, sending the stock price spiralingdown.

Momentum stocks are like growth stocks-squared. Momentuminvestors buy shares in companies whose earnings are growing atincreasingly higher rates. Lately, these have been technologystocks such as Infosys, Satyam, Wipro etc. Momentum investing

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