An

Assignment on
Mutual fund
Assignment-2

Submitted to
Ms. Khyati Shah
Royale Business School

Submitted by:
Bhargav Pathak
Roll no-02
PGDM-2
What is Mutual Fund??
A mutual fund is a company that invests in a diversified portfolio of securities.
People who buy shares of a mutual fund are its owners or shareholders. Their
investments provide the money for a mutual fund to buy securities such as stocks
and bonds. A mutual fund can make money from its securities in two ways: a
security can pay dividends or interest to the fund or a security can rise in value. A
fund can also lose money and drop in value.

There are three basic types of mutual funds—stock (also called equity), bond, and
money market. Stock mutual funds invest primarily in shares of stock issued by
U.S. or foreign companies. Bond mutual funds invest primarily in bonds. Money
market mutual funds invest mainly in short-term securities issued by the
government

A mutual fund is nothing more than a collection of stocks and/or bonds. You can
think of a mutual fund as a company that brings together a group of people and
invests their money in stocks, bonds, and other securities. Each investor owns
shares, which represent a portion of the holdings of the fund.

You can make money from a mutual fund in three ways: 

1) Income is earned from dividends on stocks and interest on bonds. A fund pays
out nearly all of the income it receives over the year to fund owners in the form of
a distribution. 
2) If the fund sells securities that have increased in price, the fund has a capital
gain. Most funds also pass on these gains to investors in a distribution. 
3) If fund holdings increase in price but are not sold by the fund manager, the
fund's shares increase in price. You can then sell your mutual fund shares for a
profit. 

Funds will also usually give you a choice either to receive a check for distributions
or to reinvest the earnings and get more shares. 
Importance
Small investors face a lot of problems in the share market, limited resources, lack
of professional advice, lack of information etc. Mutual funds have come as a much
needed help to these investors. It is a special type of institutional device or an
investment vehicle through which the investors pool their savings which are to be
invested under the guidance of a team of experts in wide variety of portfolio’s of
Corporate securities in such a way, so as to minimize risk, while ensuring safety
and steady return on investment. It forms an important part of the capital market,
providing the benefits of a diversified portfolio and expert fund management to a
large number, particularly small investors. Now a days, mutual fund is gaining its
popularity
due to the following reasons :

l. With the emphasis on increase in domestic savings and improvement in

deployment of investment through markets, the need and scope for mutual
fund operation has increased tremendously. The basic purpose of reforms
in the financial sector was to enhance the generation of domestic resources by
reducing the dependence on outside funds. This calls for a market based institution
which can tap the vast potential of domestic savings and canalize them for
profitable investments. Mutual funds are not only best suited for the purpose but
also capable of meeting this challenge.

2. An ordinary investor who applies for share in a public issue of any company is
not assured of any firm allotment. But mutual funds who subscribe to the capital
issue made by companies get firm allotment of shares. Mutual fund latter sell these
shares in the same market and to the Promoters of the company at a much higher
price. Hence, mutual fund creates the investors’ confidence.

3. The phyche of the typical Indian investor has been summed up by Mr.S.A.
Dave, Chairman of UTI, in three words; Yield, Liquidity and Security. The mutual
funds, being set up in the public sector, have given the impression of being as safe
a conduit for investment as bank deposits. Besides, the assured returns promised by
them have investors had great appeal for the typical Indian investor.

4. As mutual funds are managed by professionals, they are considered to have a

better knowledge of market behaviours. Besides, they bring a certain competence
to their job. They also maximise gains by proper selection and timing of
investment.
5. Another important thing is that the dividends and capital gains are reinvested
automatically in mutual funds and hence are not fritted away. The automatic
reinvestment feature of a mutual fund is a form of forced saving and can make a
big difference in the long run.

6. The mutual fund operation provides a reasonable protection to investors.

Besides, presently all Schemes of mutual funds provide tax relief under Section 80
L of the Income Tax Act and in addition, some schemes provide tax relief under
Section 88 of the Income Tax Act lead to the growth of importance of mutual fund
in the minds of the investors.

7. As mutual funds creates awareness among urban and rural middle class people
about the benefits of investment in capital market, through profitable and safe
avenues, mutual fund could be able to make up a large amount of the surplus funds
available with these people.

8. The mutual fund attracts foreign capital flow in the country and secure profitable
investment avenues abroad for domestic savings through the opening of off shore
funds in various foreign investors. Lastly another notable thing is that mutual funds
are controlled and regulated by SEBI and hence are considered safe. Due to all
these benefits the importance of mutual fund has been increasing.

Growing Scope of Mutual Fund

Despite being available in the market for over two decades now with assets under
management equaling Rs 7,81,71,152 Lakhs (as of 28 February,2010) (Source:
Association of Mutual Funds, India) , less than 10% of Indian households have
invested in mutual funds. A recent report on Mutual Funds Investments in India
published by research and analytics firm, Boston Analytics, suggests investors are
holding back from putting their money in mutual funds due to their perceived high
risk and a lack of information on how mutual funds work. This report is based on a
survey of approximately 10,000 respondents in 15 Indian cities and towns as of
March 2010.There are 43 Mutual Funds at present.
The primary reason for not investing appears to be correlated with city size. For
example, as depicted in the exhibit below, among respondents with a high savings
rate, close to 40% of those who live in metros and Tier I cities cited
such investments were very risky, whereas 33% of those in Tier II cities said they
did not how and where to invest in such assets.

On the other hand, among those who invested, close to nine out of
ten respondents did so because they felt these assets to be more professionally
managed than other asset classes. Figure 2 lists some of the influencing factors for
investing in mutual funds. Interestingly, while non-investors cite “risk” as one of
the primary reasons they do not invest in mutual funds, those who do invest cite
the fact that they are “professionally managed” and “more diverse” most often as
the reasons they invest in mutual funds versus other investments.
Mutual fund competition with banks
There are people asking this question that in India, which is better, Mutual Funds
or Fixed Deposit. Lets say for one year period, you get 7.5% interest rate on 1 lakh
rupees than is it good or should you take more risk and invest in mutual funds ?

X have invested money in both in the past and currently have 3 mutual funds of
ICICI, HDFC and SBI as well have money in fixed deposit too in HDFC and ICICI
banks, so from my experience this is what I can suggest

If you are looking for No Risk

Go with fixed deposit option, 7.5% interest rate is not bad at all as on average
investing in property or stock market too gives same return (assuming you have no
time to spend and no knowledge about them) on average. Having money in fixed
deposit is the best option for you if you don’t want to lose even 10% of your
money.

Small Rick Decent Return

If you are willing to take some risk and can look for 2+ year range, I will advice
you to go with mutual funds, Right now the stock market is at its peak (BSE at
20000) so you won’t get any return from mutual funds in say next 3-6 months.

Mutual funds will always outperform fixed deposit in long run of 3 and more years
provided you trust the manager of fund and don’t get panicked when the market
take deep dives. For example, a friend of money had invested 3 lakh in Mutual
fund in 2008 when the market was its all time high, the market took a nose dive to
7000 and the value of his mutual fund became 80,000 though after 2 years he has
recovered all his value.

High Risk High Return

If you are looking for high risk high return investment, you should stick to Mutual
funds or better, jump in stock market (but with very small amount of money, say
Rs 2000 or 5000, Never put big money), but again, only invest in mutual funds if
you can resist selling it for few years.
 BANKS MUTUAL FUNDS

Returns Low Better

Administrative exp. High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Minimum balance between 10th.
Interest calculation Everyday
& 30th. Of every month
Guarantee Maximum Rs.1 lakhs on deposits None

Conclusion
so i like to conclude in following points
 A mutual fund brings together a group of people and invests their money in
stocks, bonds, and other securities.
 The advantages of mutual’s fund are professional
management, diversification, economies of scale, simplicity and liquidity.
 The disadvantages of mutual’s are high costs, over-diversification, possible
tax consequences, and the inability of management to guarantee a superior
return.
 There are many, many types of mutual funds. You can classify funds based
on asset class, investing strategy, region, etc.
 Mutual funds have lots of costs.
 Costs can be broken down into ongoing fees
 The biggest problems with mutual funds are their costs and fees.
 Mutual funds are easy to buy and sell. You can either buy them directly from
the fund company or through a third party.
 Mutual fund ads can be very deceiving.