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CHAPTER -1INTRODUCTION


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INTRODUCTION

MUTUAL FUNDS

Mutual Fund is a trust that pools the savings of a number of investors who share a

common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities.

The incomes earned through these investments are shared by its unit holders in

proportion to the number of units owned by them.

A MUTUAL fund is a pool of money, collected from investor, and is invested

according to certain investment objective.

The Mutual Fund industry in India started in 1963 with the formation of Unit Trust

of India. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed.

As far as Mutual funds are concerned, SEBI formulates policies and regulates the mutual

funds to protect the interest of the investors. A mutual fund is created when investor put

their money together. It is therefore a pool of the investors' fund. The most important

characteristic of a mutual fund is that the contribution and the beneficiaries of the fund are

the same class of people, namely the investor. The term mutual fund means that investor

contribute to the pool, and also benefit from the pool. There are no other claimants to the

fund. The fund held mutually by investors is the mutual fund.




funds to protect the interest of the investors. A mutual fund is created when investor put

their money together. It is therefore a pool of the investors' fund. The most important

characteristic of a mutual fund is that the contribution and the beneficiaries of the fund are

the same class of people, namely the investor. The term mutual fund means that investor

contribute to the pool, and also benefit from the pool. There are no other claimants to the

fund. The fund held mutually by investors is the mutual fund.



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funds to protect the interest of the investors.

Investors in the mutual fund industry today have a choice of around 30 mutual

funds companies, offering cumbersome amount of funds. Though the categories ofproducts

offered could be classified under about a dozen generic heads, competition in the industry

has led to innovative alterations to standard products. It is also possible for investors to

decide the manner in which their returns would be distributed and choose from daily,

monthly, quarterly or annual pay outs: or reinvestment of dividends into the

mutual fund product itself: or a growth option that would seek growth in investment over

distribution of income. The most important benefits of product choice are that it enables

investors to choose options that suit their return requirements and risk appetite. Investors

can combine the options to arrive at their own mutual fund portfolio that fit with their

financial planning objectives.

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In fact too many people, investing means buying mutual funds. After all, its

common knowledge that investing in mutual funds is better than simply letting your cash

waste away in saving account but for most people that's where the understanding of funds

ends.

A Mutual fund is nothing more than a collection of stocks and bonds. One can think

of mutual fund as a company that brings together a group of people and invests their money

in stocks, bonds and other securities.

Characteristics

A mutual fund belongs to the investors who have pooled their funds. The ownership of

the mutual fund is in the hands of the investor.

Investment professionals and other service providers, who earn a fee for their services,

from the fund, manage the mutual fund.

The pool of funds is invested in a portfolio of marketable investments. The value of the

portfolios is updated every day.

The investors share n the fund is denominated by "UNITS". The values of the units

change with change in the portfolio's value, every day. The value of one unit ofinvestment is called as the NET ASSET VALUE (NAV).

The investment portfolio of the mutual fund is created according to the stated investment

objectives of the fund.

IMPORTANT PHASES IN THE HISTORY OF MUTUAL FUNDS IN INDIA

First Phase - 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up

by the Reserve Bank of India and functioned under the Regulatory and administrative

control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the

Industrial Development Bank of India (IDBI) took over the regulatory and administrative

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control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the

end of 1 988 UTI had Rs.6, 700 crores of assets under management

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector

banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of

India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June

1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund

(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda

Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up

its mutual fund inDecember1990. At the end of 1993, the mutual fund industry had assets

under management of Rs.47, 004 crores.

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

With the entry of private sector funds in 1993, a new era started in the Indian

mutual fund industry, giving the Indian investors a wider choice of fund families. Also,

1993 was the year in which the first Mutual Fund Regulations came into being, under

which all mutual funds, except UTI were to be registered and governed. The erstwhile

Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual

fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substitutedby a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now

functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual

funds setting up funds in India and also the industry has witnessed several mergers and

acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of

Rs. 1,21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under

management was way ahead of other mutual funds

Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was

bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of

India with assets under management of Rs.29, 835 crores as at the end of January 2003,

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representing broadly, the assets of US 64 scheme, assured return and certain other schemes.

The Specified Undertaking of Unit Trust of India, functioning under an administrator and

under the rules framed by Government of India and does not come under the purview of the

Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It

is registered with SEBI and functions under the Mutual Fund Regulations. With the

bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of

assets under management and with the setting up of a UTI Mutual Fund, conforming to the

SEBI Mutual Fund Regulations, and with recent mergers taking place among different

private sector funds, the mutual fund industry has entered its current phase of consolidation

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

Rs.153108 crores under 421 schemes.

MUTUAL FUND COMPANIES IN INDIA

ABN AMRQ Mutual Fund

Alliance Capital Mutual Fund

Benchmark Mutual Fund

Birla Sun Life Mutual Fund

BOB Mutual Fund

Can bank Mutual Fund

DBS Chula Mutual Fund

Deutsche Mutual Fund

DSP Merrill Lynch Mutual Fund

Escorts Mutual Fund

Fidelity Mutual Fund

Franklin Templeton Mutual Fund

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GIC Mutual Fund

HDFC Mutual Fund

HSBC Mutual Fund

IL&F S Mutual Fund

ING Vysya Mutual Fund

JM Financial Mutual Fund

Kotak Mahindra Mutual Fund

LIC Mutual Fund

Morgan Stanley Mutual Fund

PNB Mutual Fund

PRINCIPAL Mutual Fund

Prudential ICICI Mutual Fund

Quantum Mutual Fund

SBI Mutual Fund

ADVANTAGES

Professional Management

Mutual Funds are managed by investment managers Asset Management Companies

who are appointed by trustees and bound by the investment management

agreement, on the how's and whys of their investment management functions. AMC

are also required to adequately capitalized, and are closely regulated to SEBI.

Investment managers and funds are also bound by the AMFI code of ethics, which

foster professional standards in the industry.

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Diversified Portfolio

By offering ready diversified portfolio, mutual funds enable investors to hold

diversified portfolios. Though investors can create their own diversified portfolio,

the costs of creating and monitoring such portfolios can be high, apart from the fact

that investors may lack the professional expertise to manage such a portfolio.

Reduction In Risk

Mutual fund invests in a portfolio of securities. This means that all funds are not

invested in the same investment avenue. It is well known that risk and return of

various investment options do not move uniformly or in sympathy with one

another.

Liquidity

Most of the funds being sold today are open -ended. That is investors can sell their

existing units or buy new units, at any point of time, at prices that are related to the

NAV of the fund on the date of the transaction this enables investors to enjoy a high

level of liquidity on their investments.

Convenient Potential

Investing in a mutual fund reduces paper work and helps you avoid

many problems such as bad deliveries, delayed payments and follow up

with brokers and companies. Mutual Funds save your time and make

investing easy and convenient.

Return Potentials

As it is said that NO ONE CAN TIME THE MARKET. Still from the past record

long term investments have been giving higher returns as compared to short term

benefits i.e. over a medium to long term , Mutual Fund have the potential to provide

a higher return as they invest in a diversified basket of selected securities.

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DISADVANTAGES

No Control over costs: - Since investors do not directly monitor the fund's operations they

cannot control the costs effectively. Regulators therefore usually limit the expenses of mutual funds.

No tailor-made portfolios: Mutual Fund portfolio axe created and marketed by AMC"S

into which investors invest. They cannot create tailor made portfolios.

Managing a portfolio of funds: As the number of mutual funds increases, in order to

tailor a portfolio for himself, an investor may be holding a portfolio of funds, with the costs of

monitoring them and using them, being incurred by him.

Trading Limitation: Mutual Funds are liquid; most mutual funds cannot be bought or sold

in the middle of the trading day. These are only buying and sell them at the end of the day, after

they have calculated the current value of their holdings.

No Insurance: Mutual Funds although regulated by the Government, are not insuring

against LOSSES. The Federal Deposit insurance Corporation (FDIC) only insures against certain

losses at banks, credit unions and savings and loans, not Mutual funds. That means that despite the

risk reducing diversification benefits provided by Mutual Funds, losses can occur.

THE REGULATORY STRUCTURE OF MUTUAL FUNDS IN INDIA

The structure of mutual funds in India is governed by the SEBI (Mutual Fund)

Regulations, 1996. These regulations make it mandatory for Mutual funds to have a

three- tier structure of SPONSOR-TRUSTEE- ASSET MANAGEMENT COMPANY

(AMC)

The Sponsor is the Promoter of the Mutual Fund and appoints the Trustees.

The trustees are responsible to the investors in the mutual fund and appoint the AMC for

managing the investment portfolio.

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The AMC is the business face of the mutual fund, as it manages all the Affairs of

the Mutual Fund. The mutual fund and the AMC have to be registered with SEBI.

SEBI regulation also provide for who can be sponsor, trustee and AMC and specify

the format of agreements between these entities. These agreements provide for the rights,

duties and obligations of these three entities.

The UTI is also structured as a TRUST. The important difference though, is that

UTI does not have Sponsors or Separate AMC.

Financial institution and banks that contributed to the initial capital of the UTI have

their representatives on UTI's Board of Trustees, which oversees the operation of the UTI.

The chairman appointed by the board, who in turn employs managers and staff to run its

activities, manages UTI.

SPONSOR: -

The sponsor is the promoter of the mutual fund. The sponsor establishes the Mutual

Fund and Registers the same with SEBI.

TASKS OF THE SPONSOR

a) Sponsor appoints the trustees,

Custodians and the AMC with

prior approval of SEBI, and in

accordance with SEBIRegulation.

b) Sponsor must be carrying on business in financial

services for a minimum period of five years.

c) Sponsor must be in profit making in at least 3

of the immediately proceeding 5 years

including the 5th year.

d) Sponsor must contribute at least 40% of the Net worth of

the AMC.

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Trustee:

The mutual fund which is a trust is managed either by a Trust Company or a aboard

of Trustees. Board of Trustees and Trust companies are governed by the provisions of the

Indian trust Act. If the Trustee is a company, it is also subject to the provisions of the

Indian Companies Act. It is the responsibility of the Trustees to protect the interests of

investors, whose Fund is managed by the AMC. The AMC and other functionaries are

functionally accountable to the trustees.

The sponsor executes and registers a Trust Deed in Favor of the Trustees. The third

Schemes of the SEBI Regulations specify the contents of the Trust deed. The trust deed has

to be stamped and registered according to the Indian Regulation Act.

The appointment of all trustees has to be done with prior approval of SEBI.

There must be at least 4 members in the Board of Trustees and at least 2/3"1 of the

members of the board of trustees must be independent.

Trustee of one Mutual Fund cannot be the trustee of another Mutual Fund, unless

he is an Independent Trustee in both cases, and has approval of both the boards.

AMC

The trustees on the advice of the sponsors usually

appoint the AMC. The trust deed authorizes the trustees to

appoint the AMC. The AMC is usually a private limited

company, in which the sponsors and their associates or joint

venture partners are shareholders. The AMC has to be a SEBI

registered entity, and should have a minimum net worth of

Rs.10 crore. The trustees sign an investment management

agreement with the AMC, which spells out the functions of the AMC. The

investment management agreement has to be in accordance of SEBI

regulations.

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Responsibility Of Amc

1. The AMC shall not act as a trustee of any Mutual Funds.

2. AMC shall not undertake any business activity except in the Nature of portfolio

management services, management and advisory services to offshore funds etc,

provided these activities are not in conflict with activities of Mutual Fund

3. AMC shall not invest in any of its scheme unless full disclosure of its intention to invest

has been made in the offer document.

Mutual fund schemes can be classified as follows:

BY STRUCTURE

Open -Ended Schemes

Close - Ended Schemes

Interval Schemes

BY INVESTMENT OBJECTIVES

Growth Schemes

Income Schemes

. Balanced Schemes

Money Market Schemes

OTHER SCHEMES

Tax Saving Schemes

Special Schemes

Index Schemes

Sector Specific.

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By Structure

Open Ended Schemes:

In an open ended fund, investor can buy and sell units of the fund, at NAV related

prices, at any time, directly from the fund. This is called Open Ended Fund because, the

pool of funds is open for additional sales and repurchases. Therefore both the amount of

funds that the mutual fund manages and the number of units vary everyday. The price at

which investor buy or sell unit is related to its NAV. Open ended funds have to balance the

investors who come in, investor who go out and investors who stay invested .Open ended

funds are offered for sales at a pre-specified price, say Rs.10 in the initial offer period.

After a Pre- specified period, saySO days, the fun is declared open fro further sales and

repurchases. These transactions happen at the computed NAV related price. An investor in

an open ended fund can liquidate his investments by repurchasing the units from the fund.

Investor in open ended funds receives an account statement of their holdings.

Close Ended Fund:

A closed end fund is open for sale to investor for a specific period after which

.further sales are closed. Any further Transaction for buying the units or repurchasing them,

happen in the Secondary markets, where closed end funds are listed. Therefore new

investors buy from the existing investors, and existing investor can liquidate their units by

selling them to other willing buyers. In a closed end fund, thus the pool of funds can

technically be kept constant. The AMC however, can buy out the investors. The price at

which units can be sold or redeemed depends on the market prices, which are

fundamentally linked to the NAV. Investors in closed end funds receive either certificates

or depository receipts, for their holdings in a closed end mutual fund.

Interval Funds

Interval funds combine the feature of open-ended and close- endedschemes. They

are open for sale or redemption during pre-determined intervals at NAV related prices.

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BY INVESTMENT OBJECTIVES

Growth funds:

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

medium to long term. Such schemes normally invest a majority of their

corpus in equities. It has been proven that returns from stocks, have out

performed most other kind of investments held over the long term. Growth

schemes are ideal for having a long term outlook seeking growth over a period of time.

Income funds:

The aim of income funds is to provide regular and steady income to investors. Such

schemes generally invest in fixed income securities such as bonds, corporate debentures

and government Securities. Income funds are ideal for capital stability and regular income.

Balanced funds:

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

schemes periodically distribute a part of their earning and invest both in equities and fixed

income securities in the proportion indicated in their offer documents. In a rising stock

market, the NAV of these schemes may not normally keep pace, or fall equally when the

market falls these are ideal for investors looking for a combination of income and

moderate growth.

Money market funds:

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

and moderate income. These schemes generally invest in safer short term instruments such

as treasury bills, certificates of deposit, commercial paper and inter bank call money.

Returns on these schemes may fluctuate depending upon the interest rates prevailing in the

market. These are ideal fro Corporate and individual investors as a means to park their

surplus funds for short periods.

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OTHER SCHEMES

Tax Saving Schemes

These Schemes offer tax rebates to the investor s under specific provision of the

Indian Income Tax Las as the government offers tax incentives for investment in specified

avenues. Investments made in Equity Linked Saving Schemes (ELSS) and pension

Schemes are allowed as deduction u/s 88 of the Income Tax Act.1961. The Act also

provides opportunities to investors to save capital gains u/s 54 EB by investing in Mutual

Funds, provides the capital asset has been sold prior to aprill, 2000 and the amount is

invested before September 30, 2000.

Finance Minister has allowed a Tax deduction up to Rs.1 Lakh under section 80 C.

If we invest in any Tax Saver Mutual Fund for just three years.

This is inclusive of your other investments like PPF, NSE, KVP,

Insurance, Infrastructure Bonds etc. But the return in these Tax Saver schemes is

much higher then any other type of investment.

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SPECIAL SCHEMES:

Industry Specific Schemes

Industry Specific Schemes invest only in the industries in the offer document. The

investment of these funds is limited to specific industries like Info Tech, FMCG, Pharma,

Cement, Sports etc.

Index Schemes

Index Funds attempt to replicate the performance of a particular index such as BSE

Sensex or The NSE 50.

Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or a group

industry or a group of industries or various segments such as "A" Group Shares or initial

Public offering.

OPTIONS FOR RESTRUCTURING RETURNS TO AN INVESTOR IN MUTUAL

FUND DIVIDEND OPTION:

Investors, who choose a dividend option on their investments, will receive

dividends from mutual fund. As and when such dividends are declared. Dividends are paidin the form of warrants or are credited to the investor bank accounts.

Growth Fund

In growth option the income earned are retained in the investment portfolio, and

allowed o grow, rather then being distributed to the investor. The return to the investor

who chooses a growth option is the rate at which his initial investment has grown over the

period for which he was invested in the fund. The NAV of the investor choosing this

option will vary with the value of the investment portfolio, while the number of units held

will remain constant.

Re-Investment

Investor re-invest the dividends that are declared buy the mutual fund, back into the fund

itself, at NAV that is prevalent at the time of re investment. In this option, the number of

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units held by the investor will change with every re-investment. The value of the units will

be same as under dividend option.

Investments Plans

Investment Plans are the different ways to invest or re-invest in a scheme by

investors. These are services offered by Different mutual funds of their investors. These

plans provide variable degree of convenience and flexibility to investors. The convenience

could be in the form of freedom to invest at regular intervals or making withdrawals

periodically. Similarly flexibility may be offered by allowing investors to transfer from one

scheme to another.

Systematic Investment Plan (SIP)

This is plan based on the concept of "Rupee Cost Averaging". In this plan the

investor is allowed to invest a fixed amount at regular intervals. This gives the investor a

way to save and invest in a disciplined and phased manner. The investment could be made

by giving post dated cheque advance or by a facility of direct debit to the investors' salary

accounts.

Automatic Reinvestment Plan (ARP)

As we already know that a scheme may have two broad options- The dividend

option and the Growth investment. In the dividend option the income earned by the funds

is distributed to the unit holders. The automatic reinvestment plan allows the investors to

reinvest the amount of dividend instead of receiving it in cash. This reinvestment may

either be in the same scheme or into other scheme of the same fund. The reinvestment will

happen at the ex- dividend NAB. After reinvestment the investor will receive additional

unit's equivalent to the amount of dividend less any dividends distribution tax, if any.

Systematic Transfer Plan (STP)

This plan gives the facility to transfer on a periodic basis a specific amount from

one scheme to another scheme of the same mutual fund. A transfer from one scheme will

mean redemption of unit's form that scheme and, like wise it would be considered as an

investment in units of the scheme to which the transfer is made. This redemption and

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investment would happen at applicable NAV's. This plan gives investor the leverage to

manage his funds among different schemes to achieve his objectives.

Systematic Withdrawl Plan (SWP)

This is a plan whereby an investor can make systematic withdrawals and credited

to his bank account on a periodic basis. The amount withdrawn is treated as redemption of

units by investors and the units are calculated using the applicable NAV as the offer

document.

PRODUCTS OFFERED BY MUTUAL FUNDS

Equity Funds

Equity funds are those that invest pre-dominantly in Equity Share of Companies. There are

a variety of ways an equity portfolio can be created for investors. There are thus the

following choices in Equity Funds:-

Simple Equity Fund: These funds invest pre-dominant portion of the fund

mobilized in Equity and Equity related products. In most cases 80-90% of their

investments are in equity shares. These funds have the freedom to invest both to invest

both in primary and secondary markets fro Equity.

Primary Market Funds: The Primary market funds invest in Equity

Shares, but do so only when a primary market offering is available. The

focus is on capturing the opportunity to buy those companies which

issue their equity in Primary Markets, either through a public offer or

through a private placement.

Sectoral Funds: Sectoral funds choose to invest in one or more chosen sectors of

the equity markets. The sectors vary depending on the investor preferences and the return-

risk attributes of the sector.

Index Funds: In a simple equity fund, the fund manager has the mandate to create

an investment portfolio of equity shares. According to his understanding of the valuation

and returns market

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Debt Fund

Debt funds are those that predominantly invest in debt securities. Since most debt

securities pay periodic interest these funds are also known as income funds. The universe

of debt securities comprises of long term instruments such as bond Issues by central and

state governments, public sector organizations, public financial institutions and private

sector companies and short term instruments such as call money lending, commercial

papers, certificates of deposits and treasury bills. Debt funds tend to create a variety of

options fro investors by choosing one or more of these segments of the debt markets in

their investment portfolio.

Gilt Funds: A gilt fund invests only in securities that are issued by the

government and therefore does not carry any credit risk.

Simple Debt Funds: These funds invest in a portfolio of debt

securities indicates above.

Sectoral Debt Funds: These funds invest in a pre- specified subset of the

debt markets. For example, there are debt funds that would invest only in AAA rated debt

securities issues by the corporate sector.

Serial Plans or Fixed Term Plans: This is a variation to the simple debtfund, where the objective is to match the holding period

horizon of the investor, with the maturity of the investment. A variety of

serial plans that enable investor to choose from 1 day to 5 years are

available.

Balanced Funds

Funds that invest both in debt and equity markets are called balanced funds. A

typical balanced Fund would be almost equally invested in both the markets. The variations

are funds that invest predominantly in equity (about 70%) and keep a smaller part of their

portfolios in debt securities. These funds seek to enhance the income potential of their

equity component, by bringing in debt. Similarly there are predominantly debt funds

(over 70% in debt securities) which invest in equity, to provide both equity and debt

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markets in a one product. Therefore the benefits of diversification get further enhanced, as

equity and debt markets have different risk and return profiles.

COMMON TERMS

Load Fund

Investment Manager charges a fee for Managing Funds, and also imposes certain

operation costs on the investment income of a fund. These expenses are usually calls Load.

Whether investor or the AMC's bear these costs is a load fund.

No Load Fund

If the expenses are not charged to the fund, but borne by the investment manager, they are

called as No-Load fund.

Entry Load

An entry load is an additional cost that an investor pays at the point of entry.

Example: your proposed investment is Rs.10, OOO/-. Also assume that the current NAV of

the fund is Rs.12.00 and that the entry load is Rs.0.50. Then you will receive 10000/12.50

= 800 units.

Exit Load

An exit load is levy that an investor pays at the point of exit. This is levied to

dissuade investors from exiting the fund.

Example: Assume that the current NAV of the fund is Rs.12.00 % and that the exit

load is Rs.0.50. Now if you sell 800 units then you stand to receive 800X11.5 = Rs. 9200.

Sale Price

Is the price you pay when you invest in a scheme. Also called Offer Price. It may

include a sales load

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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

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 Load

Is a charge collected by a scheme when it sells the units? Also called, 'Front-end 1

load. Schemes that do not charge a load are called 'No Load' schemes

Repurchase And Back End Loan

Is a charge collected by a scheme when it buys back the units from the unit holders?

RIGHTS AS A MUTUAL FUND UNIT HOLDER

Some of the important rights that investors in Mutual Funds have are:

1. Investors are entitled to receive dividends declared in a scheme, within 30 days.

2. Redemption proceeds have to be sent to the investor with 10 business days form the date receipt

of such request by the AMC.

3. If an investor fails to claim the dividend or redemption proceeds, he has the rights to claim it up

to a period of 5 years from the due date, at the then prevailing NAV. After the expiry of this period,

Investor will be eligible to receive the NAV prevailing at the end of the 3 rd year.

4. Mutual Funds have to allot units within 30 Days of the IPO and also open the scheme for

redemption, if it is an open ended scheme.

5. Mutual fund have to publish their half-yearly results in at least one national daily, and publish

their entire portfolios at least one national daily, and publish their entire portfolio at least once in 6

months. Such disclosure should be done with 30 days from the six monthly account- closing dates

of the fund.

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6. Trustees will have to ensure that any information having a material impact on the unit holder's

investments should be made, public by the mutual fund.

7. If 75% of the unit holders decide:

A scheme can be wound up.

Meeting of unit holders can be called

Appointment of the AMC of the mutual fund can be terminated.

8. If there is any change in any fundamental attribute of a scheme, the unit holders have to

be notified through a letter. They also have the right to repurchase at NAV, without

any load, before such a change is effected.

9. Unit holders have the right to inspect the following documents:

Copies of the Trust Deed, investment management agreement and agreements with

fund constituents.

Memorandum and articles of Association of the AMC

Unabridged balance sheet of the mutual fund schemes, sponsors and AMC.

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WHAT MUTUAL FUNDS CAN EARN FOR YOU

You can earn money from your investment in three ways:

Dividend Payments on the securities in its portfolio the fund pays its

shareholders all of the income (minus disclosed expenses) it has earned in

the form of dividends.

Capital Gains Distributions The

price of the securities a fund owns may

increase. When a fund sells a security that has

increased in price, the fund has a capital gain.

At the end of the year, most funds distribute

these capital gains (minus any capital losses)

to investors.

Increased NAV If the market value of a

fund's portfolio increases after deduction of

expenses and liabilities, then the value

(NAV) of the fund and its shares increases.

The higher NAV reflects the higher value of your investment.

Why some people always make money in Mutual Fund

There are 669 mutual funds in India. There are 24 types of Mutual Funds'175 new

Funds have been launched in the last year.

It's a confusing world out there and the funds picked are those that advertise heavily

and sell aggressively. If you play it right you can be richly rewarded. Over the last fiveyears, the best equity has tripled investor's money while the worst ones have actually made

losses. Rs1 lakh invested in a good fund would have become over Rs.2.5 Lakh today, but

the same amount in a poorly performing fund would be just Rs.95, 000.

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To make the right choices you need information, insight and advice. Most important from

Independent and trusted sources.

Objectives of AM FI:

AMFI was incorporated in 1995. Its principal objectives are:

1. To promote the interests of Mutual Funds and Unit Holders.

2. To set ethical, Commercial and professional standards in the industry

3. To increase Public awareness of the Mutual Fund Industry.

AMFI is governed by a board of directors elected form Mutual Funds and is leaded by a

full time Chairman.

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25

CHAPTER -2OBJECTIVES


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OBJECTIVES

The objectives of my project are as under:

1. To study the level of customer awareness and consciousness regarding mutual

funds.

2. To know the expectations of customers from mutual funds.

3. To know that why do consumers find it risky to invest in mutual funds.

4. To analyze why do consumers prefer to invest in mutual funds.

5. To find why have consumers shifted from Stock market to mutual funds.

6. To find what are advantages to consumers to invest in mutual funds.

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27

CHAPTER -3RESEARCHMETHODOLOGY


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RESEARCH METHODOLOGY

Research methodology is one of the important aspects of any project. This gives us

a clear cut view of the methods so used while gathering the information so needed for

the completion of the report.

RESEARCH DESIGN

Research design is a series of advanced decisions that taken together comprise a

master plan or model for the conduct of an investigation. So research design

provides a framework of plan for study, which guides the collection, measurement,

analysis, and interpretation of the data.

The research in my project is exploratory.

DATA COLLECTION METHOD

In this project sources of data collection are both primary and secondary data.

Primary source of data includes personal interviews as well as structured

questionnaire.

Secondary source of data includes the use of books, brochures and Internet services.

SAMPLING DESIGN

Universe

The basic thing to be decided is the universe (what is to be surveyed?). In this

research universe for the survey includes the investors investing in Mutual

Funds. The target population includes Business class, Service class,

Professionals who had invested in mutual funds.

Sample size

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The next issue to be decided is the sample size (how many units are to be

surveyed?). Of course, the whole universe cannot be studied in a single research

project. The researcher has to select a relevant fraction of population, which is

represented of the entire population or universe. The sample size is 80

respondents in concern to this research.

Sampling Technique

The technique to be used in this project is convenience sampling. In this

method, the sample units are chosen primarily on the basis of the convenience

to the investigator.

DATA ANALYSIS AND INTERPRETATION

The data has been processed and analyzed by tabulation interpretation so that the findings

can be communicated and can be easily understood. The findings are presented in the best

possible way. Tables and graphs have been used for illustration of principle findings of the

research.

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1. What is your monthly income?

30

CHAPTER -4

DATA ANALYSIS&

INTREPRETATION


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2. Why do you invest? Give ranks according to your priority.

Table 2: Reasons for investing.

Rank 1 2 3 Total

Factors

For Savings 39 19 22 80

For tax benefits 11 19 50 80

For higher returns 30 42 8 80

Total 80 80 80 240

OBJECTIVE: This question was aimed to know the underlying reasons behind the

investment decisions.

INFERENCE: As clearly indicated from the rankings, savings and higher returns are the

two most dominant purposes of investments.

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3. Do you invest in stock markets?

Table 3: Proportion of people invests in stock market.

Invest Respondents

Yes 18

No 62

Total 80

18

62

0

10

20

30

40

50

60

70

Yes

No

Graph 3: Proportion of people invests in stock market.

OBJECTIVES: This question was intended to check the awareness of the respondents

regarding the stock markets.

INFERENCE: Majority of the respondents don't invest in stock markets, reasons of the

same being revealed in the next question.

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3 (i). If no, why you don't invest in stock market?

Table 3.1: Reasons for not investing in a stock market.

Why don't you invest Respondents

Due to higher risk 33

Due to lack of awareness 29

Total 62

53%

47%

Higher risk

Lack of

Awareness

Graph 3.1: Reasons for not investing in a stock market.

OBJECTIVE: Motive of the question was to know the reasons why respondents don't

invest in stock markets.

INFERENCE: Both factors shown above are equally important reasons for

respondents not investing in stock markets.

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4. Do you know about mutual funds?

Table 4: Awareness about mutual funds.

0

20

40

60

Yes No

Yes

Yes

Graph 4: Awareness about Mutual Funds

Knowledge about mutual funds Respondents

Yes 52

No 28

Total 80

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OBJECTIVE: This question was intended to check the awareness regarding mutual funds

among the respondents.

INFERENCE: A clear majority of respondents know about mutual funds, thus

showing a good awareness level.

5. What is your source of knowledge about mutual funds?

Table 5: Sources of Awareness about Mutual Funds

Respondents

Through bank 36

NBFC 0

Media 6

Qualified professionals 3

Friends and colleagues 7

Total 52

69%0%

12%

6%

13%

Bank

NBFC

Media

Professionals

Friends

Graph 5: Sources of Awareness about Mutual Funds

OBJECTIVE: The intention of the question was to understand the proportion of major

sources making people aware of mutual funds.

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INFERENCE: Banks play a dominant role in making their customers aware about mutual

funds.

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6. Do you invest in mutual funds?

Table 6: Percentage investment in Mutual Funds.

Invest in mutual funds Respondents

Yes 38

No 14

Total 52

73%

27%

YesNo

Graph 6: %age investment in mutual funds.

OBJECTIVE: The purpose of the question was to know the proportion of people who

know about mutual fund and invest in it.

INFERENCE: The response of the respondents shows that a majority of people who know

about mutual fund do invest in it.

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6 (i). If no, where do you invest?

Table 6.1: Investment choices of people not investing in mutual fund.

Investment Choice Respondents

Fixed Deposits 5

Post Office Schemes 6

Insurance 2

Bonds 0

Real Estate 1

Total 14

5

6

2

0

1

0

1

2

3

4

5

6

7Fixed Deposits

Post Office

Schemes

Insurance

Bonds

Real Estate

Graph 6.1: Investment choices of people not investing in mutual fund.

OBJECTIVE: Motive of the question was to know the various alternatives where people

not investing in mutual funds do invest.

INFERENCE: The Response depicts that from people who dont invest in mutualfunds majority invest in low risk instruments i.e. FDs, Pos etc. This indicates one of

the implied behavior of such people that they are risk averse.

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7. What is your reason for not investing in mutual funds? (Open ended)

Table 7: Reasons for not investing in mutual funds.

Reason Respondents

Risk 8

Lack of trust 4

Lack of knowledge 2

Total 14

0

2

4

6

8

10

Risk

Lack of Trust

Lack of Knowledge

Graph 7:Reasons for not investing in mutual funds.

OBJECTIVE: An open ended question was asked to cite the major reasons for not

investing in mutual funds in spite of knowing about them.

INFERENCE: This response clearly signifies that Risk is the major factor of not

investing in mutual funds followed by lack of trust and lack of knowledge.

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8. Why do you invest in mutual funds? Give ranks according to your priority.

Table 8: Reasons for investing in mutual funds.

Rank

Factors-1 1 2 3 Total

For 38

higher 25 13 0

returns

For tax

benefits

5 15 18 38

Savings 8 10 20 38

Total 38 38 38 114

OBJECTIVE: This question was intended to understand the relative preferences of

investors and what factor lures them the most out of the above three mentioned purposes.

INFERENCE: The table above clearly shows that a higher return is the major factor that

induces the investors into mutual funds followed by tax benefits and savings.

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9. Are you aware of the composition of the mutual fund investment?

Table 9: Awareness about composition of mutual funds.

Aware about composition Respondents

Yes 25

No 13

Total 38

OBJECTIVE: It was intended to know whether the investors know where their

money is being put into.

INFERENCE: We can infer that most are active in choosing their investment but

their still lies a considerable no. of investors who are not that aware.

42

66%

34%

Yes

No


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10. What composition do you expect for your funds?

Table 10: Expectations from the composition.

Expectation about Composition Respondents

85% -100% Equity 12

65% - 85% Equity 6

50% - 65% Equity 4

25% - 50% Equity 3

10% -25% Equity 0

Total 25

0

2

4

6

8

10

12

85-100%

65-85%

50-65%

25-50%

10-25%

OBJECTIVE: The main purpose for asking this question was to know the investors

preference regarding the composition of their schemes.

INFERENCE: Majority of the investors go for funds which have high equity instrument

in its portfolio. Thus the implied inference is that they invest for higher profits and they

don't mind higher risks for that purpose.

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11. For how long you would like to keep your investment in mutual funds?

Table 11: Time period of investment in mutual funds.

Time period Respondents

Upto 1 year 4

1 - 3 Years 18

Above 3 years 16

Total 38

0 5 10 15 20

upto 1yr

1-3 yrsAbove 3 yrs

OBJECTIVE: Generally, time period of an investment has a direct relation with its

returns because in long term the fluctuations in the stock market get neutralized. So my

aim was to study the time period of investments

INFERENCE: Fairly large proportion of people don't like to keep their investment for a

long time periods.

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12. How regularly do you check the NAV of your mutual fund investment?

Table 12: Checking of NAV.

Period Respondents

Daily 6

Weekly 13

Monthly 10

Not regularly 9

Total 38

0

2

4

6

8

10

12

14

Daily

Weekly

Monthly

Not regularly

OBJECTIVE: To check the level of consciousness among investors regarding their investments.

INFERENCE: Only half of the investors show regularity in checking the current value of their

investments, thus depicting high level of concern.

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13. What return do you expect from your mutual fund investment in future (3

yrs)?

Table 13: Expectations of returns from mutual funds.

Expectation Respondents

Upto15% 5

15% -25% 8

25% - 35% 24

35% and above 1

Total 38

Expectation of returns from mutual fund

0

5

10

15

20

25

Upto15% 15% -

25%

25% -

35%

35% and

above

OBJECTIVE: To have an idea about the expectation of investors from his/her mutual

fund investment.

INFERENCE: A major proportion of investors expect 15 to 25% returns showing their

high expectations from the investment.

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CHAPTER -5

LIMITATIONS


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LIMITATIONS OF THE STUDY

Due to the constraints of time and resources, the present study is likely to suffer from a

certain limitations. Some of these are mentioned under, so that the findings of the study

may be understood in a proper perspective. The limitations of the study are:

The research is carried on respondents as per the convenience, thus the result may

vary.

The nature of respondents affects response in every study. Although great care was

taken to select educated respondents, yet casualness or biasness in responses cannot

be ruled out.

The questionnaire might also be having certain undetectable errors and limitations

that also affect the study, since no pre-test was done before the circulation of the

questionnaire.

The sample size taken is small and may not be sufficient to predict the results with

100% accuracy. For a study like this one a still bigger sample size would have been

appropriate.


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CHAPTER -6

FINDINGS


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FINDINGS

1. More than half of the customers know about mutual funds and out of these 73%

invest in them.

2. Most of the customers are induced by higher returns of mutual funds apart from tax

benefits and savings.

3. As the report reveals, more than 50% of the mutual fund investors know about their

composition and check its NAVs regularly.

4. Banks play a major role in making people aware about mutual funds but still there is

a huge proportion of customers who are unaware of mutual funds and have doubts

about them thus indicating that banks should come up with more efforts on

customer education and spreading awareness about different types of mutual funds

according to customer needs.

5. Only half of the investors show regulatory in checking the current value of their

investments, thus depicting high level of concern.

6. Majority of the investors go for funds which have high equity instrument in its

portfolio. Thus they invest for higher profits and dont mind higher risks.


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CHAPTER -7SUGGESTIONS&

RECOMMENDATIONS


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SUGGESTIONS & RECOMMENDATIONS

1. Some people dont invest in stock market because of high risk So more awareness

among public about the mutual funds should be increased.

2. Customers should invest in mutual funds as these offer savings and high returns on

investments.

3. As banks play a dominant role in creating awareness about mutual funds, banks

should adopt new measures to increase the awareness about mutual funds like conducting

seminars, or circulating pamphlets.

4. Investors should show regularity in checking the current value of their investments.


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CHAPTER -8

CONCLUSION


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CONCLUSION

Mutual fund performance Braving a bumpy market Shanthi

Venkataraman

THE first quarter of 2005 saw the market scale new highs and investors taking to equity

mutual funds with renewed vigour. But the euphoria did not last too long, with the indices

tumbling as rapidly as they rose, much to the chagrin of equity investors. Mutual fund

investors could only hope that their funds would keep pace with the choppy market. And

they did.

Fund managers turned out to be savvy investors, with a majority of the funds faring better

than the market. About 60 per cent of the 175 equity funds evaluated by Business Line

declined less than the Sensex; and 70 per cent beat the Nifty. With the benchmark indices

shedding 3-4 per cent over the period, however, quite a few funds turned in negative

returns.

The striking feature of the quarter's performance, however, was the divergence in returns

across funds. Top-performing equity funds

brought in 6-15 per cent no mean achievement in the volatile market of January-March.

On an average, however, the value of funds fell about 1.5 per cent. Diversified funds that

figured in the bottom quartile of the mutual fund rankings not only trailed the benchmark


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indices, but with negative returns of 5-10 per cent, their performance was also much worse

than that of the leading funds.

A look at the funds' performance this quarter reveals few surprises. As is often the

case when evaluating performances over such a short time-frame, funds known toconsistently outperform the market did not figure in the top of the rankings. Instead, quite a

few funds with inconsistent track records raced ahead, aided by focussed exposures to

sector themes that enjoyed fancy.

With the market going topsy-turvy, the risk-averse would have found balanced

funds a safer option. With their limited exposure to stocks, these funds were better placed

to preserve capital than equity. The returns of the top-performing funds in this category

were, however, comparatively modest.

But do not let the relatively poor performance of your fund prompt you to switch

to one of those funds at the top of the performance chart. While the top ten funds delivered

strong returns, they are not necessarily the ones with the best track record over a longer

time-frame. Funds such as Taurus Star Share and GIC Growth Plus II, for instance, had an

uninspiring five-year record.

For SBI Mutual, the quarter proved exceptional, with four of its schemes figuring in

the top ten. While SBI Magnum Tax Gain and Magnum Contra were among the topperforming funds in 2004, Magnum Global has had its ups and downs, figuring among the

top performers in some quarters, and lagging behind in others. Magnum Emerging

Business Fund was only recently launched.

Quite a few funds launched over the past year figure in the top quartile of fund

rankings. UTI Basic Industries, Reliance NRI Equity, ABN Amro Equity, Prudential ICICI

Discovery and Principal pividend Yield all turned in relatively good performances.

In contrast, funds with a superior long-term track record, such as Franklin

Bluechip, Templeton Growth and Alliance Basic Industries, trailed the indices this quarter.


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Riding on sector themes

While the performance of new funds needs to be evaluated over a longer term

before fresh exposures can be considered, the good showing of theme-based funds, such as

Magnum Emerging Business and UTI Basic, does highlight the benefits of a focused

approach to investing in dominant sector themes. While the former focuses on companies

with an export orientation, UTI Basic zeroes in on sectors such as engineering,

construction, power and metals.

Engineering and construction sectors have been in the limelight; stocks from these

sectors have formed a major part of the portfolios of the top performers. Funds such as

Magnum Taxgain and Magnum Contra have a large exposure to engineering and

construction sectors, while metals form the largest holding of UTI Basic.

A few missed opportunities

A sector that has made a comeback, but does not figure in the top sector holdings of

any of the major funds, is consumer products. Sector funds such as PrulCICI FMCG and

Franklin FMCG are among the highfliers. But most diversified funds appear to have

missed the opportunity in this segment.

Strangely, the banking sector is conspicuously missing from the best holdings of

the good performers, save Magnum Contra, despite the re-rating that this sector has

enjoyed. The BSE Bankex has advanced by about 2.5 per cent even as other sector indices

declined over this period.

While sectors such as construction and banking continue to be in favour, investor

appetite for pharmaceutical and oil stocks waned over the past quarter. This is underscored

by the decline in the BSE Healthcare and BSE Oil and Gas Indices; the former dipped by

about 17 per cent and the latter by five per cent over the period.

Funds focussed on the pharmaceutical and oil sectors piled up at the bottom of the

performer's list. Franklin Pharma, JM Healthcare, JM Basic and UTI Petro had as much as

8 to 15 per cent shaved off from their NAVs.


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Diversified funds such as GIC Growth Plus II and Magnum Emerging Business

Fund, however, were better placed to deliver superior returns despite their significant

exposures to the pharmaceutical sector.

ViMid-caps outperform

Even as large-cap stocks lost ground steadily, the mid-caps gained. Usually, mid-

cap stocks tend to shed more value during a market correction. This quarter, however,

proved an exception. The CNX Midcap 200 gained about 5 per cent between January and

March, against the decline of 3-4 per cent in the Sensex and Nifty.

More mid-cap funds recently joined the race UTI Midcap, Chola Mid-cap and

PrulCICI Emerging STAR Fund were launched over the past year. While Chola Midcap

emerged as the top performing mid-cap fund this quarter, PrulCICI Emerging STAR

lagged.

Chola Midcap, Birla Midcap and Sundaram Midcap were the only ones that were

able to keep pace with the CNX Midcap 200.

Stock picks such as Siemens, LIC Housing Finance, Birla Corporation and

Geometric Software paid off for Birla Midcap. Chola Midcap, too, had its share of offbeat

stocks such as Jain Irrigation and Infotech Enterprises. Sundaram Midcap's performance

was helped by its exposure to sugar and construction stocks.

While these funds are relatively recent entrants, Franklin Prima, which has been a

consistent outperformer over the years, turned in only a modest performance. Its largest

sector exposure was auto and stocks in this space did not fare well.

Balanced funds, preserving capital

With the equity market volatile and the debt segment offering only modest returns,

the returns registered by the top-performing balanced funds this quarter, at 4-5 per cent,

may not be as attractive as that of equity funds. But balanced funds have, on an average,

contained the declines better than equity funds, given the limited exposure to equity.

Funds that raced ahead in this category, such as Tata Balanced Fund and SBI

Magnum Balanced Fund, have allocated about 70 per cent to equity and about 20-25 per

cent to debt. These funds have invested in a blend of mid-cap and large-cap stocks. Stocks


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such as Crompton Greaves, Siemens, Coromandel Fertilisers and Deepak Fertilizers, which

delivered good returns over the quarter, helped the performance of these funds.

Asset allocation funds with a tilt towards debt also did better than their more

aggressive counterparts. For instance, FT India Life Stage Fund of Funds-50s plus plan,with its 20 per cent allocation to equity, turned in 1.3 per cent, while its 20s-plus plan,

which allocates 80 per cent of its assets to equity, lost 4 per cent of its NAV.


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CHAPTER -9

APPENDIX


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QUESTIONNAIRE

Dear Customer,

I am a student of Regional Institute of Management and Computer Technology, Mandi

Gobindgarh. I am undergoing a project named, "Customer preference towards Mutual

Funds". So by filling this questionnaire, please help me in completing my project.

1. What is your monthly income?

a) Below 8300 [ ] b) 8300 - 15000 [ ] c) 15000-25000 [ ]

d) 25000 35000 [ ] e) Above 35000 [ ]

2. Why do you invest? Give ranks according to your priority.

For Savings [ ]

For Tax Benefits [ ]

For High Returns [ ]

3. Do you invest in stock markets?

Yes [ ] No [ ]

4. If no, why you don't invest in stock market?

Due to Higher Risk [ ] Due to Lack of awareness [ ]

5. Do you know about mutual funds?

Yes [ ] No [ ]


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6. What is your source of knowledge about mutual funds?

Through Bank [ ] Media [ ]

Qualified Professionals [ ] Friends and Colleagues [ ]

7. Do you invest in mutual funds?

Yes [ ] No [ ]

8. If no, where do you invest?

Fixed Deposit [ ] Post office Schemes [ ]

Insurance [ ] Bonds [ ]

Real Estate [ ]

9. What is your reason for not investing in mutual funds?

__________________________________________________________

10. Why do you invest in mutual funds? Give ranks according to your priority. For

Higher Returns________________

For tax Benefits____________________

Savings___________________________

11. Are you aware of the composition of mutual fund investment?

Yes [ ] No [ ]


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12. What composition do you expect for your funds?

85 100% Equity [ ]

65 85% Equity [ ]

50 65% Equity [ ]

25 50% Equity [ ]

10 25% Equity [ ]

13. For how long you would like to keep your investment in mutual funds?

Upto 1 Year [ ] 1-3 Years [ ] Above 3 Years [ ]

14. How regularly do you check the NAV of your mutual fund investment?

Daily [ ] Weekly [ ]

Monthly [ ] Not regularly [ ]

15. What return do you expect from your mutual fund investment in future (3 yrs)?

Upto 15% [ ] 15-25% [ ]

25-35% [ ] 35% & above [ ]

Personal Details: -

Name _____________________________

Age _____________________________

Gender_____________________________

Occupation _____________________________

Address _____________________________

Thanks for your valuable time given to us.


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BIBLIOGRAPHY

Websites are:

www.sbi.com

ww\v. sbimutualfunds.com

www.sbiaxvardsandachievement.com

BOOKS

The beginner's guide to smart investors

Knowledge series from S.B.I Mutual Funds
http://www.sbiaxvardsandachievement.com/http://www.sbiaxvardsandachievement.com/

rimt mutual fund

Documents