project report by komal jhanwar on mutual fund[1]

8/8/2019 Project Report by Komal Jhanwar on Mutual Fund[1]

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A

PROJECT REPORT

ON

“STUDY ON MUTUAL FUND AND

ITS COMPRISON WITH DIFFERENT

SAVING INSTRUMENTS”

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

*Contractual saving comprises Life Insurance,Provident Fund and Pension FundsProvident and Pe *Contractual savingcomprises Life Insurance,Provident and Pension Funds

nsion Funds

Contractual

Savings*27.9%%

Small Savings17.7%%

41.1%

h

ares &

entures

3.2%



JODHPUR

ACKNOWLEDGEMENT

I put myself in humblest desk in order to give the same measure and recognition to allthose 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 covetedopportunity 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 identifiedhere; this whole effort is the result of guidance, assistance and inspiration of several peoplewho held me through my study and in the preparation of this report. I find no words toexpress 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 animmense source of inspiration in completing this project. I feel greatly honored to show myindebtness 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 wereundertaken.

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

MANAGEMENT, JODHPUR for their consistent encouragement, inspiration and varioussuggestions from the conception to completion of the project. They helped me to prepare afactual, 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 invaluableencouragement and help to me in this whole research project. I am intellectually indebted tomany 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 Funds6. 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 withVijaya 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 (ason 31st May, 2007) more than 579,899 investors have entrusted us with managing their assetsworth Rs.13, 149 crores)

Principal Pnb Asset Management Company Private Limited (PPAMC), a companyincorporated 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 sellmutual funds through the postal network.

PPAMC was originally incorporated as a wholly owned subsidiary of IndustrialDevelopment 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 March31, 2000, through its subsidiary Principal Financial Group (Mauritius) Limited (PFGML).Subsequently, the name of the Company was changed to IDBI-PRINCIPAL AssetManagement Company Limited. On June 23, 2003, PFGML acquired 100% stake in the paidup equity capital of IDBI-PRINCIPAL Asset Management Company Limited. Subsequentlythe name of the company was changed to Principal Asset Management Company PrivateLimited, to reflect the change in ownership.

On May 05, 2004, Punjab National Bank and Vijaya Bank became equityshareholders 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 witheffect from Janua24, 2005 has been changed to Principal Pnb Asset Management CompanyPrivate 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, amember of Principal Financial Group Inc. USA.

Principal Financial Group entered Indian mutual fund market in September 2000through 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 lifestage 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 uniquefeatures such as Asset Allocation and Automatic Rebalancing and Triggers, which gaveinvestors 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’svery innovative investment options and value-added services, many of which are ‘first’ in theIndian 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 themember 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, includingretirement and investment services, life and health insurance and mortgage banking throughits diverse family of financial services companies. More employers choose the PrincipalFinancial Group for their 401(k) plans than any other bank, mutual fund, or insurancecompany in the United States. Its flagship and largest member, Principal Life Insurance

Company (The Principal ®), was founded in 1879.

http://www.principal.com/

http://www.principal.com/



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 groupof visionaries. The bank successfully withstood various trials of strength and wasnationalized in 1969. Showing consistent growth and profit performance, PNB now emergedas 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 AllIndia 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. TheBank has introduced several customer friendly deposit schemes and has also launched severalretail 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 MasterCardInternational.

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 formallyannounced that henceforth the company would be called Principal PNB Asset ManagementCompany (in partnership with Vijaya Bank). The name change is the result of the formationof Principal’s alliance with Punjab National Bank and Vijaya Bank, two of nation’s leadingnationalized banks.

This development heralds a new beginning for the Mutual Fund industry with thecoming together of three well-respected financial institutions. Punjab National Bank with4474 offices and Vijaya Bank, with 868 branches that span all 28 states and 4 UnionTerritories in the country, will help in augmenting the infrastructure of Principal MutualFund. The equity structure in the new company would see the Principal Financial Groupholding 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 MutualFund offerings at the Bank’s select branches. This initiative will reflect Principal PNB’sgrowth strategy in the Indian mutual fund sector. Internationally, the Principal brand is

known for its innovative investment solutions and the Banks are the most respectedinstitutions in the Indian financial sector. The combination of the expertise and reach broughtto 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 PvtLtd. (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 IndiaAssurance 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 motethan 15 million customers across India through its network of 2097 outlets. The bank hasgrown 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 growthduring 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 mereRs. 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 andmarketing. 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 AssetManagement Company Pvt Ltd. (in association with Vijaya Bank) today announced astrategic 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 productswith State of the Art Technology. The Bank offers Anywhere Banking Facility at more than262 branches. Bank’s International Debit Card can be used at over 12500 ATMs of UTIBank, Corporation Bank, Cash Tree network banks & State Bank of India and its 8Associated Banks. It can also be used at over 10 Lac ATMs world wide and is acceptable atover 117000 merchants’ establishments in India and 24 million merchants in more than 160countries. The Bank is also providing Internet Banking. It facilitates Demat Services, Lifeand 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 DISTRIBUTIONPRINCIPAL PNB TIES UP WITH INDIAN OVESRSEAS BANK FOR DISTRIBUTION OF ITS MF SCHEMES: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. Thismove reflects Principal MF’s strategy to rapidly expand and achieve the 10,000 crore mark inthis fiscal year.



EXPERTISE:

Principal’s strong expertise at understanding customer needs and mapping themagainst its wide range of superior products, gives us a comprehensive edge in themarket place.

Since September 2000, Principal has offered and continues to offer innovativeinvestment options coupled with value added services in the Indian Mutual FundIndustry.

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 industryallows 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 oncea 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’ byEconomic Times on November 2, 2006.

Principal Personal Tax Saver Fund listed as World’s No.4 Fund in Times Of IndiaReport on November 20, 2



PEOPLE BEHIND THE ORGANIZATION

Rajan Ghotgalkar

Managing Director

Rajan Ghotgalkar is Country Head -INDIA at Principal Internationaland Managing Director of Principal Pnb Asset Management

Company (in association with Vijaya Bank.) He has overallresponsibility of all the Principal International business units inIndia. Mr. Ghotgalkar also serves as a Director on the Board’s of Pnb Principal Insurance Advisory Company Private Limited, PnbPrincipal Financial Planners Co. Pvt. Ltd and Principal GlobalServices Pvt. Ltd.

Mr. Ghotgalkar has a rich International banking experience spanning more than 24 years andcomes 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 KrishnanBusiness Head-Asset Management

Mr. Rajan Krishnan is the Business Head - Asset Management atPrincipal PNB Asset Management Company Pvt. Ltd.

Mr. Krishnan has over 10 years of experience in the Mutual Fundindustry, working in the Sales & Marketing area. He started his

career in the mutual fund with Kothari Pioneer, the first private sector mutual fund in thecountry. 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 MutualFund since June of 2003. Prior to joining the mutual funds industry, Mr. Krishnan garneredrich and solid experience in the field of advertising and market research and has worked withrenowned 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 fromXLRI, Jamshedpur.



Rajat JainChief Investment Officer

Rajat Jain is the Chief Investment Officer of Principal PNB AssetManagement Company Private Limited. Rajat has an experience of over 11 years in the capital markets. Hislast 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 FundManager, Head of Research and Equities Dealer.

His graduate degree is in Mechanical Engineering and he holds a Diploma in Managementfrom Indian Institute of Management, Lucknow.

Ritesh JainChief Financial Officer

Ritesh Jain is the Chief Financial Officer at Principal PNB AssetManagement Company Pvt. Ltd. He has over 10 years experience in the areas of finance, treasury, taxand audit. In his previous assignment he worked with Morgan

Stanley, for their asset management and custody business asFinancial 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 BhatAVP (Investments)

Shyam Bhat has joined Principal PNB Asset Management CompanyPrivate Ltd as AVP (Investments) in May 2004, and is managingPrincipal Growth Fund, Principal Focussed AdvantageFund, 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 Studiesfrom NMIMS, Mumbai.



R.SrinivasanFund Manager

R. Srinivasan has been working with Principal Pnb AssetManagement Company Pct Ltd since July 2005. He has over 13years of experience in the areas of Fund Management and EquityResearch. In his previous assignment, he worked with ImperialInvestment Advisors as Equity Analyst.

Srinivasan has done his Masters in Commerce and FinancialManagement.

Ritesh Jain

Fund Manager

Ritesh Jain has over 10 years of experience in areas of Investment,Broking, Sales and Marketing in fixed income andfinancial products. In his previous assignment with Mata SecuritiesIndia Pvt Ltd., he carried out the broking business for financial products.

Ritesh has done M.B.A. in Finance

Pankaj TibrewalFund Manager

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

Sandeep BaglaFund Manager

Mr.Sandeep Bagla manages the Debt portfolio of Principal MutualFund, which comprises more than 75% of the total corpus. Bagla alsodirectly manages the Principal Income Fund, Principal Short TermFund, Principal G-Sec Fund, and the Principal Monthly Income Plans.Bagla joined Principal in 2004 as Senior Fund Manager-Debt and waselevated to his current assignment in September 2005.

Prior to joining Principal, Sandeep was with Reliance Mutual Fund, where he managed debtschemes (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 inEconomics from Presidency College, Calcutta, and holds a Post Graduate Diploma inManagement 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 inflationrate. Therefore, keeping large amounts of money in bank is not a wise option, as in real termsthe value of money decreases over a period of time. One of the options is to invest the moneyin stock market. But a common investor is not informed and competent enough to understandthe intricacies of stock market. This is where mutual funds come to the rescue. Mutual Fundis 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 andvery 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 goodinvestment 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 variousinstruments while taking investment decisions. The investors may seek advice from experts

and consultants including agents and distributors of mutual funds schemes while makinginvestment decisions.

Lower per capita income, apprehensions of loss of capital and economic insecuritysignificantly influence the investment decisions of the investors. Nevertheless, the avowedobjective of every investor is to reduce the risk as low as possible and ensure the returns asfast high as possible. Mutual funds, obviously, are them most popular channel in theinvestment activity as they, by and large, not only guarantee repayment of the principalmoney invested but assures a reasonable and regular return. But, there are some exemptionsto this phenomenon. Mutual funds, being an institution/investment agency, are treated as asuitable vehicle specifically for small investors, who normally feel shy of the capital marketand 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 mutualfunds 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 controlof the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the IndustrialDevelopment 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 1988UTI 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 1987followed +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 fundin 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 theyear in which the first Mutual Fund Regulations came into being under which all mutualfunds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (nowmerged with Franklin Templeton) was the first private sector mutual fund registered in July1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensiveand revised Mutual Fund Regulations in 1996. The industry now functions under the SEBIRegulations 1996.

The number of Mutual Funds went on increasing, with many foreign mutual fundssetting up funds in India and also the industry has witnessed several mergers andacquisitions. 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 intotwo 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, theassets 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 Indiaand 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 registeredwith 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 MutualFund 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. Asat the end of October 31, 2003,there were 31 funds, which manage assets of Rs. 126726crores 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 Assetsunder management of the Specified Undertaking of the Unit Trust of India hastherefore been excluded from the total assets of the industry as a whole fromFebruary 2003 onwards.



SOME DEFINITIONS OF MUTUAL FUNDS

According to SEBI (MF) Regulations, 1996 “ Mutual Fund means a fundestablished in the form of a trust to raise monies through the sale of units to the public or asection of the public under one or more schemes for investing in securities, including moneymarket 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 inthe 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 receiveyour money, and then having received it, make investments with the money via an AMC. Itis an ideal tool for people who want to invest but don't want to be bothered with decipheringthe 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 theamount you invest, you own part of the overall fund.”

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

“The beauty of mutual funds is that anyone with an investible surplus of a fewhundred 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 financialinstitutions or any other person, or of public or any part of public at large and deploys thecollected 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 personredeems his/her units, the Mutual Fund Asset Management Company (AMC) will pay himhis 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 themoney of several investors and invests this in stocks, bonds, money market instruments andother types of securities.

A Mutual Fund is a trust that pools the savings of a number of investors who share acommon financial goal. The money thus collected is then invested in capital marketinstruments such as shares, debentures and other securities. The income earned through theseinvestments and the capital appreciation realized are shared by its unit holders in proportionto 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 mutualfunds. The investors buy units of a fund that best suit their investment objectives and futureneeds. 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 theAMC fees. The income earned and the capital appreciation realized by the scheme, areshared 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 commoninvestible 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 differentfrom each other.

When you deposit money with the bank, the bank promises to pay you a certain rateof interest for the period you specify. On the date of maturity, the bank is supposed to returnthe principal amount and interest to you. Whereas, in a mutual fund, the money you invest, isin 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 investmentobjectives of all their Unit holders. Some Unit holders may want to invest in risk-bearingsecurities such as equity and some others may want to invest in safer securities such as bondsor government securities. Hence, the Mutual Fund comes out with different schemes, eachwith a different investment objective.

Mutual funds can be divided into various types depending on asset classes. They canalso invest in debt instruments such as bonds, debentures, commercial paper and governmentsecurities 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 investin.

There are many entities involved and the diagram below illustrates the

organizational set up of a mutual fund

MUTUAL FUND ORGANISATIONAL FLOW CHART



• Right to inspect major documents of the fund i.e. material contracts, the investmentmanagement 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 theunit 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 suchschemes.

R EGULATION /C ONSTITUTION OF M UTUAL F UNDS

S ECURITIES AND E XCHANGE B OARD OF I NDIA (SEBI) (I NVESTMENT IN M UTUAL F UNDS )

CONSTITUTION OF A MUTUAL FUND

In India, a mutual fund is allowed to issue both close ended and open-ended fundsunder the common law. This is against the practice as followed in UK. A mutual fund inIndia is constituted in the form of trust created under the Indian Trusts Act, 1882. The fundsponsor acts as the Settler of the trust, contributing to its initial capital and appoints a Trusteeto 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 capacityitself, rather it is the trustee or trustees who have the legal capacity and therefore all acts inrelation 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 tothe fund for the purpose of investment. The fund sponsor can be compared to a promoter of acompany. The Asset Management Company (AMC) is appointed to act as the investmentmanager 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 differentinvestment 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 theSEBI’s Mutual Funds Regulations. The sponsor should have a sound track record and generalreputation 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 fiveyears.

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 capitalcontribution of the sponsor in the asset management company.

4 The sponsor has profits after providing for depreciation, interest and tax inthree 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 trustshall be in the form of a deed. The deed shall be executed by the sponsor infavour of the trustees named in the instrument of trust. The trust deed shall beduly registered under the provisions of the Indian Registration Act, 1908. Thetrust deed shall contain clauses specified in the Third Schedule of theRegulations.

2 An Asset Management Company, who holds an approval from SEBI. Is to beappointed to manage the affairs of the mutual fund and it should operate theschemes of such fund.

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

4 The Trustee should hold the property of the mutual fund in trust for the benefitof the unitholders.



T RUSTEE

Definition- “T

rustee means the Board of Trustees or the Trustee Company who hold the property of theMutual Fund in trust for the benefit of the unit holders.”

Eligibility for Appointment as Trustee1. 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 SEBIRegulations.

Sponsor Company

Managed by aBoard of Trustees Mutual Fund

Establishes MF as Trust,Registers MF with SEBI

Hold Unitholders fund in

MF, Ensure compliance toSEBI, Enter into agreementwith SEBI

AMC

Appointed byBoard of Trustees

Float Mutual Funds fund,Manages funds as per SEBIguidelines and AMCagreement

Appointed byTrustees

Custodian

Provides necessaryCustodian Services


Bankers

Provides Banking Services


Register Transfer

Agents

Provide Registrars Servicesand act as a transfer Agents



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 atrustee 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 beenobtained for such an appointment.

4. Two-thirds of the trustees shall de independent persons and shall not beassociated 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 astrustees of any other trust provided that the object of the trust is not in conflict withthe 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 Trust1. The trustee shall have a right to obtain from the Asset Management Companysuch information as is considered necessary by the trustees.2. If the trustees have reason to believe that the business of the Mutual Fund isnot conducted in conformity with the SEBI regulations, they shall forthwith take suchremedial steps as are necessary to rectify the situation and keep SEBI informed of theviolation and the action taken by them.3. The trustees shall ensure that the transactions entered into by the AssetManagement 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 unitholders 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 paidto the mutual fund and also of any income received in the mutual fund for the holdersof the units of any scheme in accordance with the SEBI Regulations and the trustdeed.

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

The trustees shall ensure that the Asset Management Company has not givenany 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 unitholders.

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



The trustees shall ensure that the Asset Management Company has beenmanaging the mutual fund schemes independently of other activities and have takenadequate steps to ensure that the interest of investors of on scheme are not beingcompromised with those of any other scheme or other activities of the Asset ManagementCompany.

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 assetManagement Company on a six monthly basis and shall repot to SEBI, as and whenrequired.

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

The trustee shall quarterly review the net worth of the asset Management companyand in case of any shortfall, ensure that the Asset Management Company make up for theshortfall 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 theunit holders. Each trustee shall file the details of his transactions of dealings in securitieswith 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 managingthe scheme independently of any other activities and in case of activities of the naturereferred to in the regulation 24 have been undertaken by the Asset ManagementCompany and has taken adequate steps to ensure that the interest of the unit holdersare protected,

4. The independent trustees referred to in regulation 16 shall give their comments on thereport received from the Asset Management Company regarding the investments bythe 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 schemesand shall not allow the asset management to float new schemes.

The trustees shall ensure that the trust property is properly heldand administered by proper reasons and by a proper number of such persons.



The trustees shall ensure that all service providers are holdingthe 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 specialdevelopment in the mutual fund.

2. Specific Due DiligenceThe trustee shall-

Obtain internal audit reports at regular intervals from independent auditorsappointed by the trustees,

Obtain compliance certificates at regular intervals from the Asset ManagementCompany,

Hold meeting of trustees more frequently,

Consider the reports of the independent auditor and compliance reports of AssetManagement Company at the meetings of trustees for appropriate action,

Maintain records of the decisions of the trustees at their meetings and of theminutes of the meetings,

Prescribe and adhere to a code of ethics by the trustees, Asset ManagementCompany and its personnel,

Communicate in writing to the Asset Management Company of the deficienciesand 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 thesponsor 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 eachyear on its activities and the compliance with SEBI.

A SSET M ANAGEMENT C OMPANY (AMC) • Who can be Asset Management Company

A company formed and registered under the Companies Act, 1956 and whichhas obtained the approval of SEBI to function as the sponsor of the mutual fund mayappoint an Asset Management Company as such.

If the trust deed of a mutual fund authorizes the trustees, the later shall appointthe 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 ManagementCompany shall be subject to prior of SEBI and unitholders.

SEBI’s approval of an Asset Management Company – before granting anapproval to the Asset Management Company, SEBI will take into account thefollowing factors: -

1. All matters that are relevant to efficient and orderly conduct of the affairs of the AssetManagement Company.



2. The existing Asset Management Company has a sound track record, generalreputation and fairness in transactions. For this purpose, sound track record means thenet 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 foundguilty of moral turpitude or convicted of any economic offence or violation of anysecurities laws.

5. The Board of Directors of the Asset Management Company has at least fifty percentdirectors, who are not associate of or associated in a manner with the sponsors or anyof its subsidiaries or the Trustees.

6. The Chairman of the Asset Management Company should not be trustee of anymutual fund.

7. The Asset Management Company shall have a minimum net worth of rupees tencrores. If an Asset Management Company was already granted approval under the provisions of SEBI (Mutual Fund) Regulations, 1993, it shall, within a period of 12months 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 uptothree 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 AssetManagement 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 notwritten off or adjusted or deferred revenue expenditure, intangible assets andaccumulated 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 duringthe period when registration has been suspended or cancelled at any time by SEBI.

• Conditions to be fulfilled by the Asset Management Company1. 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 AMCof which such person is a director, has been obtained.2. The AMC shall forthwith inform SEBI of any material change in theinformation or particulars previously furnished which have a bearing on the approvalgranted 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 nationwidecirculation and in a newspaper published in the language of the region where theHead Office of the mutual fund is situated.

The unit holders are given an option to exit at the prevailing Net Asset Valuewithout any exit load.

The AMC shall furnish such information and documents to the trustees as and whenrequired by the trustees.

• Obligation of the Asset Management Company

1. The AMC shall manage the affairs of the mutual fundand operate the schemes of such fund.

2. The AMC shall take all reasonable steps and exercisedue diligence to ensure that the investment of the mutual funds pertaining to anyscheme is not contrary to the provisions of SEBI Regulations and the trust deed of theMutual Fund. The AMC shall exercise due diligence and care in all its investmentdecisions as would be exercised by other persons engaged in the same business.Recording of investment decisions – SEBI has advised AMCs to maintain records insupport 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.

C USTODIAN AND D EPOSITORIES

Custodian is a person appointed for safe keeping of the securities. Mutual funds dealin buying and selling of large number of securities. AMC appoints a Custodian for safekeeping 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 SEBIto carry on the business of custodian of securities under the Securities and Exchange Boardof 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 theappointment 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 thedirectors of the custodian represent the interest of the sponsor or its associates shall act ascustodian 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, whichshall 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 thecustodian shall be entered into with the prior approval of the trustees.

B ANKERS 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.

T RANSFER A GENTS He is responsible for issuing and redeeming units of mutual funds. He prepares

transfer documents and update investor records.

T YPES OF S CHEMES/ F UNDS

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

1. Open – Ended Scheme 1. Growth Scheme 1. Tax Saving2. Close – Ended Scheme 2. Income Scheme 2. Index Scheme3. Interval Schemes 3. Balanced Scheme 3. Sector Specific

4. Money Market 4. Real Estate Schemes5. 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 inIndia.

• Closed ended Schemes1. 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 theyare listed.



4. Unlike open-ended schemes, the unit capital in closed-ended schemes usuallyremains unchanged.

5. After an initial closed period, the scheme may offer direct repurchase facility tothe 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 aspecified 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 Schemes1. Commonly called as Equity Schemes.2. Seek to invest a majority of their funds in equities and a small portion in moneymarket instruments and have the potential to deliver superior returns over the longterm.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 investmenthorizon and risk bearing capacity.5. The return comes in two sizes in this type of schemes, one is small i.e. dividendand another is medium i.e. at redemption time.

GENERAL PURPOSE EQUITY SCHEMESIncome 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 theinvestor 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 arelooking for regular income through dividend or steady capital appreciation.

5. The prices of these schemes tend to be more stable compared with equity schemesand most of the returns to the investors are generated through dividends or steadycapital appreciation.

6. These schemes are ideal for conservative investors or those not in a position totake higher equity risks, such as retired individuals.

7. However, as compared to the money market schemes they do have a higher pricefluctuation 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 schemesinvest 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 investmentsin 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 beingencouraged 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), etc2. 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 inthe 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 performanceof the market as a whole, or a specific sector of the market.

• Sector Specific Schemes1. 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 sectorsonly, 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 SchemesSpecialized real estate funds would invest in real estates directly, or may fund realestate developers or lend to them directly or buy shares of housing finance companiesor may even buy their securitized assets.

Gilt Schemes

This scheme primarily invests in Government Debt. Hence the investor usually doesnot have to worry about credit risk since Government Debt is generally credit risk free.

T YPES OF R ETURNS

Mutual Funds give returns in two ways - Capital Appreciation or DividendDistribution.

• Capital Appreciation

An increase in the value of the units of the fund is known as capital appreciation. As thevalue 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 beon paid to the investor.

Under the Growth Plan, the investor realizes the capital appreciation of his/her investmentswhile under the Dividend Reinvestment Plan, the dividends declared are reinvestedautomatically in the scheme.

F REQUENTLY U SED T ERMS

• 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 unitsoutstanding on the Valuation Date.

• Sale PriceSale 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 F EW I NTERESTING T ERMS



FLOATING RATE FUNDSA 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 RateInstrument 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 Fundinvests primarily in: -

Floating rate debentures and bondsShort tenor fixed rate instrumentsLong 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 thanthe ones that are currently issued. Consequently older higher interest bearing securitieswould go at a premium. Thus long term income funds by virtue of their investments inlonger maturing securities would see a rise in their Net Asset Values.

However, when interest rates are on the rise newer securities appear moreattractive 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. Sothe same income fund with a majority of investment in longer maturing securities, nowstart earning you lesser as newer securities continues to earn higher returns than the onesin 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 isanyway 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 interestrate 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 closelywatches. A benchmark rate should be from an unbiased source, be representative of the

market, transparent, reliable and continuously available and most importantly be widelyacceptable to the market as the benchmark rate. Such benchmark rates issued byunbiased 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 firstsix months is 5.75% +1%=6.75%.

DIVIDEND SWEEP

One more convenient method of investing is provided by the Mutual Funds. In this optionone 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 hiswealth continuously. No load will be applicable for sweep in, even if the Scheme in whichthe 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 aboveoption, 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 schemesInvestors 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.

TRIGGERSTriggers are options provided to the unit holder as part of systematic withdrawal plan toenable automatic redemption on the happening of the desired event. Triggers can helpInvestor 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 bysubmitting a written application or by filling the relevant form. Under this option, theentire account will be redeemed when the chosen event occurs.

• Cancellation of Triggers

A mandate of triggers could be cancelled by giving a letter tothat effect mentioning information like Folio No, Name of the scheme, the transactionfor which Trigger is to be cancelled etc When a request is made for canceling atrigger, 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 awritten application or by filling the relevant form. Under this option, the entire accountwill 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 youwhen 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 fromtoday, 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 specifyseparate 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 thanthe investment amount i.e. a Stop Loss Concept. For example- if aninvestor invest say Rs. 10,000/-, he can specify a Value Trigger of 8,000/-. Incase of depreciation in NAV, as and when his investment value reaches8,000/- 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 Switchoption is available ONLY for Date, Value and Index Trigger and not for CapitalGains Trigger.

• Index Based Triggers

All equity schemes can now avail a new trigger based on NSE Nifty / BSE Sensexvalues. 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 whenthe Trigger gets fired (happening of specified event). The alert option is availableONLY 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 mustfor this option.



Mutual Funds: Universal Appeal

Savings form an important part of the economy of any nation. With savings invested invarious options available to the people, the money acts as the driver for growth of thecountry. Indian financial scene too presents multiple avenues to the investors. Thoughcertainly not the best or deepest of markets in the world, it has ignited the growth rate inmutual 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’seducation 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 willvary 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, giltand balanced funds. There are also funds meant exclusively for young and old, small andlarge investors. Moreover, the setup of a legal structure, which has enough teeth to safeguardinvestors’ 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 thuscreate 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. Sodifferent 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 reductionis of prime importance. This is the area for the risk-averse investors and here, mutual fundsare 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 byinvesting in open-ended debt funds at lower risk. Many people have burnt their fingers byinvesting in fixed deposits of companies who were assuring high returns but have gone bustin course of time leading to distraught investors as well as pending cases in the CompanyLaw Board.

This risk of default by any company that one has chosen to invest in, can be minimized byinvesting in mutual funds as the fund managers analyze the companies’ financials moreminutely 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 thereis no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provideenough 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 deliveredmore than what one expects of debt avenues such as post officeschemes or bank fixed deposits. Though they are charged with a dividend distribution tax ondividend payout at 10 percent (plus a surcharge of 10 percent), the net income received isstill 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 alsolimited, they would rather have some exposure to debt as well. For these investors, balancedfunds provide an easy route of investment. Armed with the expertise of investmenttechniques, 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 canreshuffle their portfolio as per market conditions, they are likely to generate moderate returnseven in pessimistic market conditions.

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

Capital markets interest people, albeit not all for there are several problemsassociated. First issue is that of expertise. While investing directly into capital market one hasto be analytical enough to judge the valuation of the stock and understand the complexundertones of the stock. One needs to judge the right valuation for exiting the stock too. It isvery difficult for a small investor to keep track of the movements of the market. Entrustingthe job to experts, who watch the trends of the market and analyze the valuations of thestocks 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 rightmoment. Sector funds provide an edge and generate good returns if the particular sector isdoing 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 limitshim from diversifying his portfolio as well as benefiting from multiple investments. Hereagain, 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. Thoughidentification of the right fund might not be an easy task, availability of good investmentconsultants and counselors will help investors take informed decision.

RISK AND RETURN GRID :

Risk

Tolerance/ReturnExpected

Focus Suitable Products Benefits offered by MFs

Low DebtBank/ Company FD, Debt

based FundsLiquidity, Better Post-Tax

returns

MediumPartially Debt,Partially Equity

Balanced Funds, SomeDiversified Equity Funds

and some debt Funds, Mixof shares and Fixed

Deposits

Liquidity, Better Post-Taxreturns, Better Management,

Diversification

High EquityCapital Market, Equity

Funds (Diversified as wellas Sector)

Diversification, Expertise instock picking, Liquidity, Tax

free dividends

Their appeal is not just limited to these categories of investors. Specific goals likecareer 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 alreadyhaving 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. Youcan invest today and assure financial support to your child when he/she requires them. Theschemes have given very good returns of around 14 percent in the last one-year period. Theseschemes are also designed to provide tax efficiency. The returns generated by these fundscome under capital gains and attract tax at concessional rates.

Besides this, if the objective was to save taxes, the industry offers equity linkedsavings schemes as well. Equity-based funds, they can take long-term call on stocks andmarket conditions without having to worry about redemption pressure as the money is lockedin 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 offeredtax benefits under various sections of the IT Act. For e.g. dividend income is free in thehands of the investor while capital gains are taxed after providing for cost inflationindexation. 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 theindustry can attract investments from institutional and big investors as well. Liquid fundsoffer 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 tothe banking sector but in India the case is reverse. We lack awareness about the benefits thatare 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:

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.

Income

Birth & Education Earning Years Retirement

Phase I Phase II Phase III

22 yrs 60 yrs

Marriage

Child birth

Child’s Education

Child’s Marriage

Housing

22 yrs 38 yrs Over 25 - 30 yrs



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 hewould 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 investorsovercome 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



Value of Money over time

PERFORMANCE OF VARIOUS ASSET CLASSES

Source: CSO - 2003 -

30,000

38,288

62,368

79,599

Today 5 yrs. 15 yrs.20yrs.ye

ars

100,000

78,353

48,102

37,689

Today5 yrs.

ears

15 yrs.

ye20 yrs

Impact of inflation onmonthly

Value of Rs. 100,000 ove

At inflation of 5% investors need to beat Inflation.

6.7%5.7%

10.3%

3.55%

17.6%

8.9%

-----1.1%

Inflation Gold Bank FDs BSE Sen.

Growth Real Growth

Cumulative annualized returns 1980-2006



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. Letsexplore that--

But when should an investor start?

Benefit of starting early

0

10

20

30

40

50

60

6 8 10 15

Returns (%)

V a l u e o f

I n v e s

t m e n t ( R s .

L a c s )

8.38

Lacs

12.24

Lacs

18.09Lacs

49.99Lacs

10,00020,432

42,441

91,378

2,14,140

0

50000

100000

150000

200000

250000

30 35 40 45 50

Age (Years)

Y e a r l y I n v e s t m e n t ( R s . )

Goal Value: - Rs. 50 Lacs at the age of 60

Investments when started early yield greater returns due to the power ocompounding

Higher the returns from the invested amount, greater the benefit accrued dto the power of compounding

Rs. 10000 saved every year for 30 years invested at

6%, 8%, 10% and 15% every year



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:

-50

0

50

100

150

200

250

300

1 year 2 year 3 year 5year 10 year 15 year

Years

R e t u r n s (

-0.100

-0.050

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

P r o b a b i l i t

Data: March-1979 to March 2005



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 samethere 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.

0.26

0.31

0.36

0.41

0.30 0.35 0.40 0.45 0.50

Risk

R e t u r n

A stock

B stock

C stock

DiversifiedPortfolio

Individual Stock v/s Stock Portfolio



Analysis Of Different Options Of Investment

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

M ONTHLY INCOME SCHEME

The post-office monthly income scheme (MIS) provides for monthly payment of interestincome 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 prematurewithdrawals. 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 ona 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 jointaccounts. The maximum investment for a single account is Rs 3 lakh and Rs 6 lakh for a jointaccount.

MaturityThe duration of the MIS is six years.

Premature withdrawalInvestors can withdraw money before three years, but at a discount of 5 per cent. No suchdeduction will be made if an account is closed after three years. Premature closure of theaccount 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 FacilityDepends 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. Inaddition, 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 80Lof the Income Tax Act, 1961. Moreover, no TDS is deductible on the interest income. The balance is exempt from Wealth Tax.

R ECURRING 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 thescheme is a powerful tool for regular savings. As the name says, the RDA is a systematicway 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 appreciatesin five years. The scheme is meant for investors who want to deposit a fixed amountregularly, in order to get a tidy sum after five years. If you invest Rs 10 every month, youwill 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 buyAn 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 inhis own name. RDA can also be held by a HUF, Trust, regimental fund, welfare fund,company, banking company, corporation, association, institution, registered society, or localauthority. Accounts can also be opened in the name of a minor or a person of unsound mind.

Minimum InvestmentThe minimum investment in a post-office RDA is Rs 10. There is no prescribed upper limiton your investment.

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

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

Premature Withdrawal

Only one withdrawal is allowed after one year of opening a post-office RDA. You canwithdraw 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.



BorrowingThe 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 TaxAct, 1961.

T IME DEPOSIT

On opening a Time Deposit, you will receive an account statement stating the amountdeposited and the duration of the account. These are suitable for capital appreciation in thesense that your money grows at a pre-determined rate. Unlike certain other investmentoptions, where returns are commensurate with the risks, the rate of growth is also high; TimeDeposits 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 isthat 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.

MaturityTime 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 acoupon rate of 6.25 per cent, a 2-year deposit offers an interest of 6.5 per cent, and 3 years is7.25 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 theinterest accrued for the time the account has been in operation.

BorrowingYou can borrow against a Time Deposit. The balance in your account can be pledged as asecurity for a loan.



Tax Implications

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

Deposit is also exempt from TDS.

P ublic Provident fund Scheme

The Central Government has established the Public Provident Fund for the benefit of thegeneral public to mobilize personal savings any member of the public (whether a salariedemployee 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 inthis 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 eachsubsequent year one single withdrawal is permissible. The amount that can be withdrawncannot 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.

YearOpeningBalance

(Rs)

Amt.Invested

p.a. (Rs)

Total

(Rs)

Interest12 % p.a.

(Rs)

GrandTotal

(Rs)

( 1 ) ( 2 ) ( 3 ) ( 4 )[2 + 3]

( 5 )[4 x 0.12]

( 6 )[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, itwill 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 15years, 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 15year 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 TaxAct, 1961.

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

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 specifiedinvestments, 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 5yrs 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.

C omparison 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 till58 years for the pension to start. You are also not given any option of allowing the fund togrow 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 thescheme. 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. Amongstthe LIC schemes, you are eligible for policy loans under Jeevan Suraksha but not for JeevanDhara (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 itsofficial expiry date) the policy would have acquired. In the case of cash policies, 90 per centof 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 isgiven 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 isdetermined by a formula that LIC has worked out.

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

PPF is more of a tax concession scheme. Under section 88 of the Income TaxAct, 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 lawsunder certain conditions. Income from units under all schemes of the UTI including RBPenjoys 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 JeevanAkshay premia enjoy a rebate of 20 per cent under section 88. This rebate is deductible fromthe total tax payable by individuals or a Hindu undivided family (HUF). Jeevan Suraksha hasa few other benefits. Contributions under it up to Rs 10,000 per year are eligible for taxexemption 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 atthe 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 RBPafter tax. It would not be fair to compare the LIC schemes with these as they offer the benefitof 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 andinvested 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 butthese 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 bechanged but they are guaranteed under the LIC and UTI schemes.

I nvestment In Banks

A variety of banks operate in India. These are:

• Public Sector Banks• Private Sector Banks

• Foreign Banks

• Co-operative Banks

PublicWe 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 moderntechnology, to improve services do not endear them to the savvy bank customer in themetros. Lack of technology deprives customers of universally popular services like inter- branch banking. The scenario is now slowly changing with the introduction of the `SwadhanATMs', 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.

PrivateThere are of two types - the old and the new banks. Old private sector banks have been therefor decades - for example, Vysya Bank, Bank of Madura, Karnataka Bank and JammuKashmir 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 - likeICICI Bank, HDFC Bank and so on - are known for their intensive customer-friendlyapproach 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.

ForeignSome 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 andwere 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-operativeThe 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 candouble in 6 years. An analysis of bank rates reveals that short-term bank deposits are the bestinvestment 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 knowwhere 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 alsoavail 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 ahigher 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 isRs. 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 lockedin at a rate, it does not change till maturity. They attract TDS (tax deducted at source) if theinterest credited by the bank exceeds Rs. 5,000. These deposits cannot be broken. Should youneed funds in an emergency, you can either get a loan against the FD or you can withdrawthe money after losing certain interest on the deposit.



We are all familiar with savings account, current account and term deposit. Each has its ownadvantages and drawbacks but the norms are quite rigid. Savings accounts offer highliquidity but an abysmally low rate of interest. FDs on the other hand, give you a goodinterest rate but you can't take money out of them except in case of dire emergency. Bankshave 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 toyour savings account when you need them. It works like this. Your fixed deposits are held inclusters 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 FDamounting to Rs. 25,000, which are held in clusters of Rs. 100 each. Now if you need tooverdraw Rs. 5,000 from your savings account in some emergency, then a cluster of 50 unitswill 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 anaccount, if your existing savings account exceeds a certain amount, which you don't reallyneed, 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 aboutit and left it to languish with just the 4.5% interest it gives him. If he chooses a ReverseSweep account, this Rs 10,000, being in excess, will be automatically transferred to a freshFD which will now, earn it a handsome 9.5% interest.

Loan against FDMost 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 annuminterest, and if you want to overdraw from your savings account to the tune of Rs. 5,000, thenit will be treated as a loan, which you have to return to your bank at 11% interest (9% of FD+ 2% extra).

R ecurring DepositsIn 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 candecide the date. The deposit gives a rate of interest normally equal to the Fixed Deposit rateand 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.



R einvestment 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 atthe end of each quarter is reinvested in the FD. Since interest is earned on interest on acumulative 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 thistime the money in the saving account will be earning poor interest. Auto-Renewal facilityoffers a solution. The matured amount is automatically locked up for a further period to giveyou 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 'automaticrollovers'.

Interest on deposits

Interest is always compounded quarterly in a bank fixed deposit. However, you can decidehow you want to receive it, depending on the bank's schemes and your needs. You maychoose to have it collected on a monthly, quarterly, half-yearly or annual basis. Or you canwait till maturity and take it all in a lump sum - in which case, you will keep getting intereston 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 WealthTax.

With effect from Assessment Year 2002-03, you get tax exemption under Section 80L uptoRs. 9,000 per year, from interest income from bank deposits. For example, if your totaltaxable 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. Nowyou will be taxed on Rs. 1, 11,000.

As far as individual bank deposits go, banks have to deduct tax at source (TDS) on interestcheques 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 earnedon 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. Howit will be remitted, is mutually decided upon by you and the bank.or sometimes it is creditedto the savings account of the depositor or it could be sent to the depositor in the form of adraft, 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 thedate 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 beyondRs.5, 000 from one bank attracts TDS @10.2%. Also, keep in mind thatdeduction 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 tocredit your savings account on maturity of the FD in order to at least earnsavings 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 atraditional demand deposit, gives you nothing more than 4.5% p.a. interest. And why shouldthey 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 practicalityand common sense. Lets see how.

What many of you probably don't know is that the interest in your savings account iscalculated 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, assumethat you have deposited a huge sum, say Rs. 50.000 in your account in the first week. Youneed this money sometime in the last week of the month for some major expense. If youdeposit this cheque in your savings account, you will lose the interest on this amount. If youare smart, you will park this money in a 15-day, or even a 30-day deposit. By the time thedeposit matures, not only will you will be ready to meet your expenses, but also you willhave 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 looksfor safety and accepts a relatively lower return. Equity Funds cannot clearly be comparedwith the bank deposits, as investors can expect higher returns from equity funds only at therisk 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 twoin a meaningful manner.

A bank deposit is guaranteed by the bank for repayment of principal and interest. Any risksassociated with investment of the investor’s funds have to be borne bythe 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 guaranteefor repayment of principal or interest to the investor.

The bank depositor does not directly hold the bank portfolio of investments, as he does incase 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 highquality 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 lowreturns. A conservative debt fund can give higher returns than a bank deposit, even if there is ncontractual 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 andrisk appetite is well advised to consider part of his investment in debt funds.

C omparative Analysis

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

Following are the saving instruments (mutual funds, Post Office Schemes, Fixed Depositin companies, Bonds and Debentures, Bank Deposits, NBFCS) available to an investor. Thetabular comparison is done on the basis of Risk, Return, Liquidity and in addition to the Taxincentives. Here is the comparison:-



MUTUAL FUNDS

POST OFFICE

Types of instruments

Risk Returns LiquidityTax-

Efficiency

Mutual Fund Low to high risk dependingon the fund. Gilt funds, debtfunds etc have low risk.Pure equity funds are highrisk. Though the verybottom line of mutual fundsis diversification, the riskfactor is reducedconsiderably, but on anaverage, a liquid fund is lowrisk, an income fund ismedium risk and an equityfund is high risk.

No assured returns. Thereturns range from highto low depending on thescheme For example, inequity-based schemes, ashort-term return ispractically impossible. Byand large, liquid schemesgive a return of between7 and 9%. The incomeschemes give a return of between 9 and 20% andequity schemes give a

return of between 15 and25%.

High liquiditybut only inopen-endedfunds wherethe units aretraded in theopen market.

They aretaxefficient.Not somuch onliquidfunds, ason incomeand equityfunds.

Types of

instrumentsRisk Returns Liquidity

Tax-

Efficiency

Post Office

and OtherSmall

Savings

Very Low. All these savings

are operated directly by theGovernment or byGovernment organizationslike banks, post offices andtherefore they are very safe.

These have assured

returns. The returnsthemselves depend onthe schemes. Someschemes like the IndiraVikas Patra and KisanVikas Patra offer ratesof interest that are evenhigher than bank deposits.

All these

accounts havesome provisions for prematurewithdrawal.So liquidity isnot such a problem. The NationalSavingsCertificatesare extremely

liquid whilethe KisanVikas Patrascan be easilytransferred.

These are

beneficialfor those inthe high taxbrackets,since theyoffer severalexemptionslike IncomeTax, WealthTax and GiftTax.



Fixed Deposits in Companies

INVESTMENT IN BONDS AND DEBENTURES

Types of

instrumentsRisk Returns Liquidity Tax-Efficiency

Bonds and

Debentures

Among these, the tax-free bonds are verylow risk since theGovernment issues

them. The PublicSector Undertaking(PSU) bonds are alsolow risk since theyhave the backing of the government. TheCorporate debenturesas compared tocompany fixeddeposits are safer since they are fullysecured, and some

also have a buy-back policy by thecompany.

The Public Sector Undertakings give between 11 to 12%interest. The Corporates

give between 12 and13% interest and theGovernment-sponsoredtax-free bonds givearound 8.5% interest. Non-convertibledebentures byfundamentally soundcompanies give a highrate of interest, usuallyin the range of 12 to15%.

Depends on the bonds. Corporate bonds are not soliquid. Neither

are the PSU bonds, nor thoseissued by theGovt. However the investor-friendly FI bonds, like theAnytime and theEasy Encash bonds doguarantee easyliquidity.

The corporatedebentures arenot so taxefficient. But

the PSU bondsare extremelytax efficient.Infact the RBIrelief bondsoffer thehighestcomfort.

Types of

instrumentsRisk Returns Liquidity

Tax-

Efficiency

Company

FDs

Deposits in company fixeddeposits are unsecured.

Incase of the companydefaulting, there is very littlechance of recovering your principal amount. However,if you invest in a companywith a high credit rating, thenyour investment is safe. Themanufacturing companiescarry medium risk.

Here you getassured returns.

The manufacturingcompanies give between 10 and13% interest.These are muchhigher than bank deposits, sincesome companieseven compoundtheir interestmonthly.

Practically noliquidity at all.

You can inextremeemergency, break your deposits but youstand to lose agreat deal of interest in the bargain

Not taxefficient. No

bigconcessionsgiven. Theseare by andlarge moresuited for non-tax payers andretiredindividuals.



B ank Deposits

Investment in NBFCS

Type of


NBFCS Carry a higher risk, since theyface constantthreat of beingdowngraded incredit ratings.Also they areunsecured, soyou stand to

lose your entireamount unlessyou invest in an NFBC with thehighest creditrating.

The returns from NFBCs can be higher than those of themanufacturingcompanies. Selected NFBCs with a highcredit rating are offeringinterest rates in therange of 10% to 12% on

one-year deposits.

Very little liquidity.At the most, you canavail of a loan of about 75% of your deposit, and that too

after six months of your date of deposit.

Certain housingfinancecompanies likeHUDCO andHDFC offer taxexemptions

upto Rs. 12,000under Section80L

Types of


Bank FDsVery Low Risk.Since bank deposits upto Rs.1 lakh areinsured.

Returns are assured.Bank FDs give interestrates between 7 and9.5%. Interests arecompounded quarterly.So, even in bank deposits, your moneycan double in 6-7 years.

With traditional banks prematurewithdrawal is not possible but loansare available upto90% of your deposit.However, the morerecent private andforeign banks havecome out with so-called "unfixed"deposits where you

can withdraw fromyour deposit. So, inthat sense there ishigh liquidity in suchdeposits.

They are quitetax efficientsince you getexemption uptoRs. 9,000 under Section 80L.Also, no TDS iscut upto aninterest incomeof Rs. 5,000 per deposit per bank.



COMPARISON BY CURRENT PERFORMANCE

Besides the inherent advantages of investing through mutual funds, recent tax amendmentshave also helped to enhance the attractiveness of mutual funds. Dividends distributed bymutual 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 financialmarkets are now deregulated and dynamic, causing frequent changes in comparative returnsfrom 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, againthere will be an impact on the comparative status of different options. Similarly, theindividual taxpayer’s situation may change, whereby he may pay higher of lower tax on hisincome. That is why; it is recommended that the specific comparisons of different investmentoptions 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 fundsare 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 detailedresearch and monitoring of the market. Mutual funds specialize in this area and processthe requisite resources to carry out research and continuous market monitoring. This isclearly beyond the capability of most individual investors.

• Another critical element towards successful equity investing is diversification. Adiversified portfolio serves to minimize risk by ensuring that a downtrend in somesecurities/securities is offset by an upswing in the others. Clearly, diversification requiressubstantial 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, aninvestor can, through his proportionate share, reap the benefit of diversification.

• Mutual fund specializes in the business of investment management, and thereforeemploys 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 keptunder 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 asincome, 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 toattain 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 investingwhere several stocks are often not traded for long periods.

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

• In terms of convenience, mutual funds score over direct equity interesting. Funds serveinvestors not only through their investor services networks, but also through associatessuch 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 equityinvesting.

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 andresources 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 andgenerally yield lower but safe returns.

It all depends on the risk attitude of the investor. This is understood clearly by looking at thedisclaimer attached with any mutual fund options that are nearly identical with thatapplicable to any other (kind of) stock. They have their advantages and loopholes like anyother 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 avoidthem.

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 cashwith a primary goal that depends upon the type of fund. The manger usually diversifies in amanner 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 highestreturn 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 approachcan be expected to make the same earnings.

It all depends really on the overall investment climate and the sectors in which funds areflowing. 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, therebylosing 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 fewwell-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 thefund's portfolio. As this is her/his primary occupation, s/he can devote much more time tochoosing investments than an individual investor. This provides the investor with the peaceof mind that comes with informed investing without the stress of analyzing financialstatements or calculating financial ratios.

But on the negative side, a mutual fund, unless open-ended, must remain confined within afixed portfolio. Even with open-ended mutual funds, the range of potential is often low ascompared 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 thesales commission on top of the net asset value of the fund’s shares. Also, the dollar-costaveraging 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 resultin 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 ashade better than independent trading, if low but steady is ok for you.



Comparison Chart of Various InvestmentsComparison Chart of Various Investments

BASIS OF

ANALYSIS

PPF NSC POST OFFICE

Time

Deposits

Monthly Deposits R.D.

Compounded Quarterly

Rate of Return 8% 8%(comp.

Half yearly)

6.25%-7.5% 8% (9% for senior

Citizens)

7.5%

(p.a.)

Interest

Received

On Maturity On Maturity On Maturity Monthly On

Maturity

Tenure 15 years 6 years 1-5 years 6 years 6moths-

10 years

Minimum

Investment

Rs.500

(p.a.)

Rs. 100(units) Rs.200 Rs.1000 Rs.10

Maximum

Investment

(in Rs.)

100000

(p.a.)

100000

(p.a.)

No Limit 300000 for an

individual, 600000

for joint venture,

1500000 for senior

citizens

No Limit

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/

Risk

Low Low Low Low Low



Deep Analysis of Banks With Mutual FundsDeep Analysis of Banks With Mutual Funds

S.No. BASIS OF

ANALYSIS

BANK MUTUAL FUNDS

Saving Time

Deposits

R.D.

1. Rate of Return 3%-4% 5.5%-6.5%

(p.a)

7%-11%

(p.a)

As per market and Co.

performance

2 Interest

Received

Quarterly On

Maturity

On

Maturity

Depend upon

performance

3 Tenure N.A. 180days-5

years andabove

6 months-

10 years

3yrs Lock in pd for ELSS

schemes,.6mths for SIP,open and close ended

4

Minimum

Investment

Rs. 500 Depend

upon

banks

Rs. 100 Rs.500 for ELSS SIP,

Rs1000 for Equity SIP,

Rs.3000 for One time

investment.

5 Maximum

Investment

No Limit No Limit No Limit No limit for other

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/

Risk

Low Low Low Very high Transparency

and Diversified Risk.



COMPARATIVE PICTURE OF RISK AND RETURN INVOLVED INCOMPARATIVE PICTURE OF RISK AND RETURN INVOLVED IN VARIOUS INVESTMENT OPTIONS:VARIOUS INVESTMENT OPTIONS:

Types of investment Risk ReturnsRisk 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 optionhas 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 costof return. Mutual funds seek to combine the advantages of investing in each of thesealternatives while dispensing with the shortcomings. Clearly, it is the investors interest tofocus his investment on mutual funds.



This shows that equity investing in general has good potential in terms of return, liquidityand convenience. It is recommended only for investors who are willing to invest the timerequired for research in stock selection.

Bonds issued by institutions are an attractive option, particularly with the liquidity thataccompanies their listing on stock exchanges. Bonds are a stable option in terms of fixedreturns, and are recommended for the risk-averse investor. However, bonds can lose valuewhen general interest rates go up. The secondary market in corporate bonds in India is alsovery 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 issuingcompany 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 bythe bank.

PPF combines stability with a respectable return. Its tax-exempt status makes it an attractivemechanism 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 eventerms with the other options. Its liquidity is also extremely low, though safety is consideredhigh 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 FidelityInvestments, US based, with over US$1trillion assets under management worldwide.

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

• 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds areconcentrating 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 andlimited 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 andreaching conclusions; and at last carefully testing the conclusions to determine whether theyfit the formulating hypothesis.” ---- By Clifford Woody

What is research methodology?

“ Research methodology is the way to systematically solve the research problems. It notonly 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 researchresults 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 withcompetitors 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 performancecan 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 onlyfour 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



1.1. OccupationOccupation•• BusinessmanBusinessman

•• Service classService class

•• ProfessionalsProfessionals

•• OthersOthers

Businessman

service

Prof.

other

29%

44%11%16%

2. Age of the Investor 2. Age of the Investor •• Below 25Below 25

•• 25-4025-40

•• 40-5040-50

•• Above 50Above 50

0

5

10

15

20

25

30

Below 25

25 to 40

40 to 50

above 50



3.3. Where do you like to invest your savings?Where do you like to invest your savings?• Bank Deposits

• Post Office

• Mutual Funds

• PPF

Bank Deposits

Mutual Funds

Post Office

PPF40%

20%

29%11%

4. What is the priority of making investment?• Brand value

• Saving for future

• Tax Shelter

• Rate of Return

Brand Value

Saving for future

Tax Shelter

Rate of Return

44%

29%

7%20%



Sectoral equity

Equity-oriented

Tax saving

Debt

40%

15%

12%33%

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

• ICICI

• Principal• HDFC

5. What type of scheme you prefer to invest in Mutual Funds?• Sectoral Equity

• Equity-oriented

• Tax Saving

• Debt

Reliance

Principal

HDFC

ICICI

42%

31%

20%

7%



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

Principal PTS

Fund

Reliance visionplan

ICICI pru

dynamic plan

HDFC child giftplan30%

35%15%20%

8. What returns you expect from mutual funds?• 5%-10%

• 11%-15%

• 16%-20%

• Can’t say

16%-20%

11%-15%

5%-10%

Can't say

29%

7%

35%29%



9. Are you satisfied with the returns?9. Are you satisfied with the returns?• Yes

• No

35%

65%

YES

NO10. According to you, which of the following gives the maximum returns?10. According to you, which of the following gives the maximum returns?• Bank Deposits

• Mutual Funds

• Post office

• PPF

Bank Deposits

Mutual Funds

Post Office

PPF33%

25%

27%15%



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

• Good

• Poor • Cannot Say

60%

20%

10% 10%

0%

10%

20%

30%

40%

50%

60%

70%

Very Good Good Poor Cannot Say

11. What are the reasons for investing your savings in mutual funds, as11. What are the reasons for investing your savings in mutual funds, as there are other saving instruments available?there are other saving instruments available?

• Diversified Risk

•

Rate of Return• Safety

• Mix of all

Tax incentives

Return

Diversified Risk

Mix of all

30%

13%

35%22%



E. Analysis of the data :

Besides sampling various statistical and analytical tools were used to depictand 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 investorsrather 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 relatedto 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 thesequestions:

1. What are my investment objectives and needs?

Probable Answers: I need regular income or need to buy a home or finance awedding 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 mayfluctuate or that there may be a short-term loss in order to achievea 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 aspecific 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 andscheme you want to invest in. The offer document of the scheme tells you itsobjectives and provides supplementary details like the track record of other schemesmanaged 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 tothe appropriate yardstick and similar funds in the same category.2) How well the Mutual Fund is organized to provide efficient, promptand 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 investmentneeds. 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 thatsatisfy 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 %


Growth Schemes 30-40 %



CONSERVATIVE PLAN

Money Market Schemes 10 %

Income Schemes 50-60 %


Growth Schemes 10 %

• Step Four - Invest regularly

For most of us, the approach that works best is to invest a fixed amount at specificintervals, 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 bringingdown your average cost per unit. This is called rupee cost averaging and is adisciplined investment strategy followed by investors all over the world. With manyopen-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 section80L of the Income Tax Act, investing in growth funds that do not pay dividendsmight 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 incomecould be more tax efficient. Further, there are other benefits available for investmentin 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 earlyIt is desirable to start investing early and stick to a regular investment plan. If you startnow, 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 thecompounded 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 suitablefor 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 notwant to depend on someone then, even your kids. The good news is that you can start todayand build sizeable savings by -50% the time you retire.

Assuming annual compounding at the same rate as the investment rate throughout the periodof investment.The chart shows how saving at a more than average rate of 20% can make your savingsincrease 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 cangive 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 periodhave 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 weare optimistic about the equity markets.

http://www.standardcharteredmf.com/learningcenter/

http://www.standardcharteredmf.com/learningcenter/



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, wehave some news for you…

3. Historical data proves that investing in the Equity market becomes less

risky in the long termAs shown below, the peaks and troughs of returns can be mellowed by remaining investedfor the long term. The historical analysis shows how the maximum and minimum returnsgenerated by the Sensex behave from 1 year to 20 years.

BSE Sensex Rolling returns (yearly basis) from March 1979 to March 2005But 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 fundmanagers 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 thereturns to you. All it deducts is a management fee and its expenses, which are declared in itsoffer 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 PrivateSector Diversified Equity funds (7schemes existing for more than 10 years) for the past 10years.The logic is simple; it makes sense to leave your investments in the hand of professionals youcan 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 DomesticProduct (Broadly the Total Production of goods and services in the country). A boomingmarkets.

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, wherethe Mutual Funds are lagging behind.

Many individuals find investments to be fascinating because they can participate in thedecision 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 periodof 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 thatdramatically rose after he sold or did not buy. Both the big fish he catches and the fish thatget away can make wonderful stories.

Investing is not a game but a serious subject that can have a major impact on investor'sfuture well being. Virtually everyone makes investments. Even if the individual does notselect 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 youmust bear. The future is uncertain, and an investor must determine how much risk he iswilling 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 whichinvestment decisions are made. These include the process by which securities are issued andsubsequently bought and sold, the regulations and tax laws that have been enacted by variouslevels of government, and the sources of information concerning investment that areavailable 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 whoare risk averse either lacks knowledge or they have some misconception regarding theconcept of mutual funds. The main problem was that there were more myths and fewer factsknown to the investors. Like some of them were only aware of the equity oriented schemesoffered by the companies and not about the Debt oriented schemes; so the perception thatwas 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 alltypes of schemes that today’s fund houses offer.

The schemes that mutual fund companies are offering are so diversified that it suits theinvestment criteria of every investor. Let the investor be risk averse or risk taking or acombination 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 isthe 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 indirect equities now a days is very risky because market is very hot in these days but if anyoneinvests 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 RaoHow 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

http://www.valueresearchonline.com/

http://www.principalindia.com/

http://www.investopedia.com/

http://www.amfiindia.com/

http://www.mutualfundindia.com/

http://www.ezilon.com/

http://www.valueresearchonline.com/

http://www.principalindia.com/

http://www.investopedia.com/

http://www.amfiindia.com/

http://www.mutualfundindia.com/

http://www.ezilon.com/

project report by komal jhanwar on mutual fund[1]

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