ASSIGNMENT ON

SECURITY ANALYSIS & PORTFOLIO

MANAGEMENT
A SYSTEMATIC STUDY ON
INVESTMENT IN MUTUAL FUND
WITH PARTICULAR REFRENCE TO
NEW FUND OFFER (NFO)

Submitted by:

Samir Shah & Akansha Sah

Roll No. -

TABLE OF CONTENTS
CHAPTER 1
Objectives and Scope of Study...5
Introduction.6
Mutual Funds : An Overview7
Understanding Mutual fund..8
Investment in Mutual Fund.10
Growth in Assets Under Management..11
CHAPTER 2
Types of Mutual Funds...12
Risk Hierarchy of different Mutual Funds.16
Types of returns that MFs offer to Investors17
Mutual Funds Vs Other Investments.18
CHAPTER 3
Why invest in Mutual Funds...25
Risks involved in Mutual Funds.28
Evaluation of Mutual Funds30
CHAPTER 4 (Literature Review)
New Fund Offers (NFOs) in MF industry..39

 Analysis of some NFOs launched in recent past40

Old (existing) funds Vs NFOs.46
Ways to invest in Mutual Fund/NFOs50
Factors to be considered while investing in MF NFOs...56
Investors perception of Mutual Funds...61
CHAPTER 5
Comparative Analysis of some MFs/NFOs with different
investment strategies...64
CHAPTER 6 (Research Methodology)71

Primary

Data.72

Secondary

Sources..72

Sample

size...72
CHAPTER 7
Data Analysis and Interpretation73
Conclusion.81
Limitations of the study83
Bibliography & References.84
3

 Annexure I - Questionnaire85
Annexure II Supporting Information...88

OBJECTIVES AND SCOPE OF THE STUDY

The objectives of the study is to analyses, in detail the growth pattern of
mutual fund industry in India and to evaluate performance of different
schemes floated by most preferred mutual funds in public fund in public and
private sector.
The main objectives of this project are: To study about the Mutual Funds in India
To study the various Mutual Funds schemes in India.
To study about the risk factors involved in the Mutual Funds and How
to analyze it?
To study the performance indices that can be used for mutual fund
comparison.
To compare mutual funds of selected five companies on the basis of
their return and Sharpe Index.
To study the people in which age and income group prefer mutual
funds over other investment options.
4

INTRODUCTION
The world of investments is a maze for most Indians, complicated by
insufficient information, unscrupulous opportunists and an array of tax
related issues. In the last few years, we have been witness to a securities
scam, an IPO bubble that burst, the virtual collapse of an NBFC regime,
plantation companies that have gone under and the venerable UTI coming
under a cloud each taking toil on investor wealth and confidence.
Investors are thus, looking for avenues that provide them with high safety,
good returns and liquidity. The destination of this search has to be mutual
funds a preferred mode of saving in advanced countries such as the
USA.
Mutual fund industry in India is growing at a very fast rate. By December
2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is
estimated that by 2010 March, the total assets of all scheduled commercial
banks should be Rs. 4,090,000 Cr.
The annual composite rate of growth is expected 13.4% during the rest of
the decade. In the last 5 years we have seen annual growth rate of 9%.

According to the current growth rate, by year 2010, mutual fund assets will
be double.

MUTUAL FUNDS: AN OVERVIEW

MUTUAL FUND INDUSTRY
The mutual fund industry in India is one of the emerging industries in India.
Today, the Indian mutual fund industry has 40 players. The number of public
sector players has reduced from 11 to 5. The public sector has gradually
receded into the background, passing on a large chunk of market share to
private sector players.
The Association of Mutual Funds in India (AMFI) is the industry body set
up to facilitate the growth of the Indian mutual fund industry. It plays a proactive role in identifying steps that need to be taken to protect investors and
promote the mutual fund sector.
It is noteworthy that AMFI is not a Self-Regulatory Organisation (SRO) and
its recommendations are not binding on the industry participants. By its very
nature, AMFI has an advisors or a counsellors role in the mutual fund
industry. Its recommendations become mandatory if and only if the
Securities and Exchange Board of India (SEBI) incorporates them into the
regulatory framework it stipulates for mutual funds.

Mutual Fund Operation Flow Chart

HISTORY OF MUTUAL FUND INDUSTRY

The mutual fund industry started in 1963 with the formation of the Unit Trust of India
which was the initiative of the Government of India and the Reserve Bank of India.
The history of mutual funds in India can be broadly classified into four distinct phases : First Phase : 1964 1987
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 RBI. In 1978, UTI was delinked from RBI and the IDBI took over the regulatory and
administrative control in place of RBI. The first scheme launched by UTI was Unit
Scheme, 1964. At the end of 1988 UTI had Rs. 6700 crores of AUM.
Second Phase : 1987 1993 (Entry of Public Sector Funds)
In 1987, it was the entry of non-UTI, public sector mutual funds setup by public sector
banks and the 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.
Third Phase : 1993 2003 (Entry of Private Sector Funds)
7

With the entry of the private sector funds in 1993, a new era started in the Indian Mutual
Fund Industry, giving the investors a wider choice of fund families. Also, 1993 was the
year in which 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 industry now functions under SEBI Regulations, 1996. 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 AUM 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, representing broadly, the assets of US 64 scheme, assured return and certain other
schemes.

UNDERSTANDING MUTUAL FUND

Every Mutual Fund is managed by a fund manager, who using his
investment management skills and necessary research works ensures
much better return than what an investor can manage on his own. The
capital appreciation and other incomes earned from these investments are
passed on to the investors (also known as unit holders) in proportion of the
number of units they own.

When an investor subscribes for the units of a mutual fund, he becomes

part owner of the assets of the fund in the same proportion as his
contribution amount put up with the corpus (the total amount of the fund).
Mutual Fund investor is also known as a mutual fund shareholder or a unit
holder.

Any change in the value of the investments made into capital

market instruments (such as shares, debentures etc) is reflected in the Net

Asset Value (NAV) of the scheme.

NAV is defined as the market value of the Mutual Fund scheme's assets
net of its liabilities. NAV of a scheme is calculated by dividing the market
value of scheme's assets by the total number of units issued to the
investors.
For Example:

A.
B.
C.
D.

If the market value of the assets of a fund is Rs. 100,000

The total number of units issued to the investors is equal to 10,000.
Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00
Now if an investor 'X' owns 5 units of this scheme

E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units
held multiplied by the NAV of the scheme)

INVESTMENT IN MUTUAL FUNDS

Mutual Funds over the years have gained immensely in their popularity.
Apart from the many advantages that investing in mutual funds provide like
diversification, professional management, the ease of investment process
has proved to be a major enabling factor. However, with the introduction of
innovative products, the world of mutual funds nowadays has a lot to offer
to its investors. With the introduction of diverse options, investors needs to

10

choose a mutual fund that meets his risk acceptance and his risk capacity
levels and has similar investment objectives as the investor.
With the plethora of schemes available in the Indian markets, an investors
needs to evaluate and consider various factors before making an
investment decision. Since not everyone has the time or inclination to
invest and do the analysis himself, the job is best left to a professional.
Since Indian economy is no more a closed market, and has started
integrating with the world markets, external factors which are complex in
nature affect us too. Factors such as an increase in short-term US interest
rates, the hike in crude prices, or any major happening in Asian market
have a deep impact on the Indian stock market. Although it is not possible
for an individual investor to understand Indian companies and investing in
such an environment, the process can become fairly time consuming.
Mutual funds (whose fund managers are paid to understand these issues
and whose Asset Management Company invests in research) provide an
option of investing without getting lost in the complexities.
Most of us are not necessarily well qualified to apply the theories of
portfolio structuring to our holdings and hence would be better off leaving
that to a professional. Mutual funds represent one such option.

GROWTH IN ASSETS UNDER MANAGEMENT

11

Note: - Erstwhile UTI was bifurcated into UTI Mutual Fund and the
Specified Undertaking of the Unit Trust of India effective from February
2003. The Assets under management of the Specified Undertaking of the
Unit Trust of India has therefore been excluded from the total assets of the
industry as a whole from February 2003 onwards.

TYPES OF MUTUAL FUND

12

MUTUAL FUNDS can be classified on the basis of its structure and

investment objectives:

By structure:
1. Open ended funds: An open ended fund is one that has units
available for sale and repurchase at all the times. an investor can buy
or redeem units from the fund itself at a price based on the net asset
value(NAV)per unit.NAV per unit is obtained by dividing the amount of
the market value of the funds assets by the number of units
outstanding. The number of units outstanding goes up or down every
time the fund issues new units or repurchases existing units. The
open ended fund. An open ended fund is available for subscription all
through the year. These do not have a fixed maturity. The key feature
of this type is liquidity. Investors who wish to exit from an open end
scheme can offer their units to the mutual fund for redemption.

13

Similarly; the mutual fund can sell new units to investors desirous of
participating in the scheme.

2. Closed ended funds: These are schemes that have a fixed

maturity. This fund is open for subscription only during a specified period.
Investors can invest in the scheme at the time of the initial public issue and
thereafter they can buy or sell the units of the scheme on the stock
exchanges where they are listed. Liquidity in such schemes is available
through listing in the stock market.

By Investment Objective:
A scheme can also be classified as a Growth scheme, an Income scheme,
or a balanced scheme considering its investment objectives. Such
schemes may be open-ended or close-ended as described earlier and may
be classified as follows:

1. Growth / Equity Oriented Schemes:

The aim of Growth Funds is to provide capital appreciation over medium
and long- term. Such schemes normally invest a major part of their corpus
in Equities. Such Funds have comparatively high risks. These schemes
provide different options to the Investors like dividend option, capital
appreciation, etc. and the Investors may choose an option depending on
their preferences. The Investors must indicate the option in the Application
Form. The Mutual Funds also allow the Investors to change the options at
a later date. Growth schemes are good for Investors having a long-term
outlook seeking appreciation over a period of time.

14

2. Income / Debt Oriented Schemes:

The aim of Income Funds is to provide a regular and steady income to
Investors. Such schemes generally invest in fixed income securities such
as bonds, corporate debentures, Government securities and money
market instruments. Such Funds are less risky compared to Equity
schemes. These Funds are not affected by the fluctuations in the Equity
markets. However, opportunities of capital appreciation are also limited in
such Funds. The NAVs of such Funds are affected by changes in interest
rates in the country. If interest rates fall, NAVs of such Funds are likely to
increase in the short run and vice versa. However, long term Investors may
not bother about these fluctuations.

3. Balanced Funds:
The aim of Balanced Funds is to provide both growth and regular income
as such schemes invest both in the Equities and Fixed Income Securities
in the proportion indicated in their Offer Documents. These are appropriate
for Investors looking for moderate growth. They generally invest 40-60% in
Equity and Debt instruments. These Funds are also affected by the
fluctuations in share prices in the Stock Markets. However, NAVs of such
Funds are likely to be less volatile compared to pure Equity Funds.

4. Money Markets or Liquid Funds:

These Funds are also Income Funds and they aim at providing easy
liquidity, preservation of capital and moderate income. These schemes
15

invest exclusively in safer short-term instruments such as treasury bills,

certificates of deposit, commercial paper and inter-bank call money,
government securities, etc. Returns on these schemes fluctuate much less
compared to other Funds. These Funds are appropriate for corporate and
individual investors as a means to park their surplus funds for short
periods.

5. Gilt Funds:
These Funds invest exclusively in Government Securities. Government
Securities have no default risk. The NAVs of these schemes fluctuate
because of a change in interest rates and other economic factors as is the
case with Income or Debt Oriented schemes.

6. Index Funds:
Index Funds replicate the portfolio of a particular index such as the BSE
Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in
the Securities in the same weight age comprising of an index. NAVs of
such schemes would rise or fall in accordance with the rise or fall in the
index, though not exactly by the same percentage due to some factors
known as "tracking error" in technical terms. Necessary disclosures in this
regard are made in the Offer Document of the Mutual Fund scheme.
There are also Exchange Traded Index Funds launched by the Mutual
Funds which are traded on the Stock Exchanges.

7. Sector specified funds:

16

These are the Funds / Schemes which invest in the Securities of only
those sectors or industries as specified in the Offer Documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),
Petroleum Stocks, etc. The returns in these Funds are dependent on the
performance of the respective sectors / industries. While these Funds may
give higher returns, they are more risky compared to diversified funds.
Investors must keep a watch on the performance of those sectors.

RISK HIERARCHY OF DIFFERENT MUTUAL FUNDS

Different mutual fund schemes are exposed to different levels of risk and
investors should know the level of risks associated with these schemes
before investing. The graphical representation hereunder provides a
clearer picture of the relationship between mutual funds and levels of risk
associated with these funds:

17

TYPES OF RETURNS THAT MFs OFFER TO INVESTORS

There are three ways, where the total returns provided by mutual funds
can be enjoyed by investors:
Income is earned from dividends on stocks and interest on bonds. A
fund pays out nearly all income it receives over the year to fund
owners in the form of a distribution.

18

 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.
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.

MUTUAL FUNDS VS OTHER INVESTMENTS

It is common for investors to struggle with various investment options. So
it's not surprising that at any point of time, their 'to do' list usually has at
least half-a-dozen investment options spanning various assets.
As if investing isn't enough, they also have to make elaborate
arrangements to track their investments, take revised decisions (in case
investments aren't working out as expected) and re-allocate assets (in
case allocations have deviated sharply from original levels).

Stocks V/S Mutual Funds:

Within the domain of investments, two options that investors regularly
grapple with are stocks (i.e. direct equity investing) and mutual funds.
Let's see how stocks and mutual funds face off against one another.
A matter of time - Investing directly in the stock markets is a fulltime activity. There is research to be done pre-investment and post-

19

investment. And research on a company does not just involve

knowing its business. The investor is expected to master several
subjects, i.e. prospect of the sector, other companies operating in
that sector and how the company (under review) is superior to them.
The investor is also expected to study the economic and political climate of
the country to gauge the bearing they can have on the sectors and
companies in them.
Having done this research before investing, the investor is expected to
continue doing it even after he has invested in it so as to ensure he is
invested in the right company/companies.
Conversely, investing via the mutual funds route is far less time
consuming. Sure, it might take a while to select the right mutual funds
(your financial planner should be able to help you with that); however
beyond that, a better part of the responsibility lies with the fund manager
and your financial planner.
Investing skills - If you have the time to take up investing then
you have cleared the first hurdle. There are other hurdles to be
cleared like investment skills. A successful fund manager hasn't got
where he has, only because he has the time to invest; he has
something even more scarce -- the skill and knack of investing.
And the skill sets to invest are not acquired overnight. Fund managers
earn their spurs over the years after going through several market trends
and cycles (ups and downs) and after making several mistakes. So apart
from the time factor, investing demands a lot of skill and experience.

20

 Access to research - Most investors who wish to take up

investing as a full-time activity are likely to hit a roadblock in getting
unrestricted access to quality research. For more information you
have to read up extensively on sectors and companies in those
sectors. While some of this information could be available for free (in
libraries or on the internet for instance), the quality inputs (read
updated and insightful research) are usually available for a stiff fee.
Getting reports (premium or otherwise) is not the only thing, ideally you
would like to meet the company management if possible or an authority on
a particular sector. Mutual fund managers on the other hand have no
problem with these issues. For them, accessing research (regardless of
the price) is never a problem. Meeting up with the company management
and industry bigwigs is something they do on a regular basis.
In fact, investment decisions are rarely taken without these inputs. On the
other hand, the lay investor will often be compelled to take an investment
decision devoid of these inputs. It is not surprising then, that there is
usually a wide chasm between the quality of investments across both
these categories (fund managers and lay investors).
Apart from above, Mutual funds offer several advantages over stock
investments, including diversification and professional management. A
mutual fund may hold investments in hundreds or thousands of stocks,
thus reducing risk of any particular stock. Also, the transaction costs
associated with buying individual stocks are also spread around among all
the mutual fund shareholders. Mutual funds, however, are not immune to
risks. Mutual funds share the same risks associated with the types of
investments the fund makes. If the fund mainly invests in stocks, the

21

mutual fund is usually subject to the same ups and downs and risks as the
stock market.

Banks V/S Mutual Funds

PARTICULARS

BANKS

Returns

Low

Administrative exp.

High

Risk

Low

Investment options

Less

Network

High penetration

Liquidity

At a cost

Quality of assets

Not transparent

Interest calculation

Minimum
balance
& 30th. Of every month

Guarantee

Maximum Rs.1 lakh on deposits

Interest Dividend

MUTUAL FUNDS
Better
Low
Moderate
More
Low but improving
Better
Transparent

between

Low and taxable under Income tax act.

22

10th.

Everyday

None

High and exempted from

Income tax act

For example: It is assumed that both, the Bank FD as well as the FMP
(Fixed Maturity Plan issued by mutual funds) yield the same rate of interest
i.e. 10.25 per cent pa An investment of Rs. 1 lakh is made in an FMP of 91
days. The corresponding figures for the Bank FD appear alongside.
FMP 91 days v/s Fixed Deposits
Dividend
Option
(Individuals)

Dividend
Option
(Corporates)

Fixed
Deposits

Investment Amount

Rs 100,000

Rs 100,000

Rs 100,000

Post Expense Indicative Yield

10.25%

10.25%

10.25%

Maturity Value

102,555

102,555

Rs 102,555

Gain=Maturity Value - Investment 2,555

Amount

2,555

2,555

Tax Rate

14.16%

22.66%

33.99%

Tax

Rs 317

Rs 472

Rs 869

Post Tax Gains

Rs 2,239

Rs 2,083

Rs 1,687

Post Tax annualised returns

9.29%

8.62%

6.94%

Interest on Bank FDs is fully taxable whereas the return from FMPs is
either subject to the Dividend Distribution Tax (for the dividend option) or
the capital gains tax rate (for the growth option). The Distribution Tax rate
@14.16 per cent or the capital gains tax rate @10 per cent are lower than
the income tax rate, especially in the case of investors in the higher tax
bracket. Tax directly eats into returns, which is why FMPs have the edge
over Bank FDs.

Risk Return Trade Off:

23

The risk return trade-off indicates that if investor is willing to take higher
risk then correspondingly he can expect higher returns and vise versa if he
pertains to lower risk instruments, which would be satisfied by lower
returns. For example, if an investors opt for bank FD, which provide
moderate return with minimal risk. But as he moves ahead to invest in
capital protected funds and the profit-bonds that give out more return
which is slightly higher as compared to the bank deposits but the risk
involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing,
as Mutual funds provide professional management, diversification,

24

convenience and liquidity. That doesnt mean mutual fund investments risk
free. This is because the money that is pooled in are not invested only in
debts funds which are less riskier but are also invested in the stock
markets which involves a higher risk but can expect higher returns. Hedge
fund involves a very high risk since it is mostly traded in the derivatives
market which is considered very volatile.

WHY INVEST IN MUTUAL FUNDS:

Investing in mutual fund has various benefits which makes it an ideal
investment avenue. Following are some of the primary benefits.

Benefits of Mutual Funds

1. Professional investment management: One of the primary

benefits of mutual funds is that an investor has access to professional
management. A good investment manager is certainly worth the fees you
will pay. Good mutual fund managers with an excellent research team can
do a better job of monitoring the companies they have chosen to invest in

25

than you can, unless you have time to spend on researching the
companies you select for your portfolio. That is because Mutual funds hire
full-time, high-level investment professionals. Funds can afford to do so as
they manage large pools of money. The managers have real-time access
to crucial market information and are able to execute trades on the largest
and most cost-effective scale. When you buy a mutual fund, the primary
asset you are buying is the manager, who will be controlling which assets
are chosen to meet the funds' stated investment objectives.
2. Diversification: A crucial element in investing is asset allocation. It
plays a very big part in the success of any portfolio. However, small
investors do not have enough money to properly allocate their assets. By
pooling your funds with others, you can quickly benefit from greater
diversification. Mutual funds invest in a broad range of securities. This
limits investment risk by reducing the effect of a possible decline in the
value of any one security. Mutual fund unit-holders can benefit from
diversification techniques usually available only to investors wealthy
enough to buy significant positions in a wide variety of securities.
3. Low Cost: A mutual fund let's you participate in a diversified portfolio
for as little as Rs.5000, and sometimes less. And with a no-load fund, you
pay little or no sales charges to own them.
4. Convenience and Flexibility: Investing in mutual funds has its
own convenience. While you own just one security rather than many, you
still enjoy the benefits of a diversified portfolio and a wide range of
services. Fund managers decide what securities to trade collect the
interest payments and see that your dividends on portfolio securities are
received and your rights exercised. It also uses the services of a high
quality custodian and registrar. Another big advantage is that you can
26

move your funds easily from one fund to another within a mutual fund
family. This allows you to easily rebalance your portfolio to respond to
significant fund management or economic changes.
5. Liquidity: In open-ended schemes, you can get your money back
promptly at net asset value related prices from the mutual fund itself.
6. Transparency: Regulations for mutual funds have made the industry
very transparent. You can track the investments that have been made on
you behalf and the specific investments made by the mutual fund scheme
to see where your money is going. In addition to this, you get regular
information on the value of your investment.
7. Variety: There is no shortage of variety when investing in mutual
funds. You can find a mutual fund that matches just about any investing
strategy you select. There are funds that focus on blue-chip stocks,
technology stocks, bonds or a mix of stocks and bonds. The greatest
challenge can be sorting through the variety and picking the best for you.

RISKS INVOLVED IN MUTUAL FUNDS:

1. NO INSURANCE: - Mutual funds, although regulated by the
government, are not insured against losses. Mutual fund returns are
subject to market risks. Despite the risk reducing diversification benefits
provided by the mutual funds, losses can occur, and it is possible that one
may even lose the entire investment.
27

2. DILUTION: - Mutual funds generally have such small holdings of so

many different stocks that insanely great performance by a fund's top
holdings still doesn't make much of a difference in a mutual fund's total
performance. If a single security held by a mutual fund doubles in value,
the mutual fund itself will not double in value because that security is only
one small part of the funds holdings.
3. INEFFICIENCY OF CASH RESERVES: - Mutual funds usually
maintain large cash reserves as protection against a large number of
simultaneous withdrawals. Although this provides investors with liquidity, it
means that some of the funds money is invested in cash instead of assets,
which tends to lower the investors potential return.
4. LOSS OF CONTROL: - The managers of mutual funds make all
the decisions about which securities to buy and sell and when to do so.
This makes difficult on the part of the investor in managing his portfolio.
For example, the tax consequences of a decision by the manager to buy
or sell an asset at a certain time might not be optimal for the investor.
Unlike picking your own individual stocks, a mutual fund puts you in the
passenger seat of somebody else's car.
5. BURIED COSTS: Many mutual funds specialize in burying their costs
and in hiring salesmen who do not make those costs clear to their clients.
6. MANAGEMENT RISK: It always there as the funds manager takes
the decision for you regarding funds portfolio. A lot will depend on the fund
managers ability to pick stocks very scientifically so the investor must look
closely at the track record and the reputation of the fund manager.

So Many Mutual Funds, So Little Time

28

How to Choose and Evaluate Mutual Funds

Mutual funds offer an optimal investment vehicle where you take risks
but (hopefully) sensibly. If the mutual fund you are investing is a highquality fund, then what you are actually getting is a high-quality research
infrastructure and analytical brains to work on your money.
However, with over thousands of mutual funds available in market, the
odds of making a serious financial mistake are enormous. The world of
mutual funds is a volatile world where mistakes can be quite expensive.
Picking up the right funds is hence of terrible importance. Below are some
of the important factors that help the investors to pick up the right funds:

Define your objective: The most important step in selecting a mutual

fund may very well be deciding what you want it for. Unfortunately, many
investors skip this step, and choose a mutual fund without a clear idea of
what they want from it. That is like paying for a product without knowing
what that product is! Investment objectives can be specific (e.g. down
payment on a home), or general (become more wealthy) whatever the
objectives, these should be well defined articulated up front.

Define your time period: How long do you wish to wait have to reach
my objective? Naturally, all of us would like to reach our financial objectives
at the earliest, but please be realistic even if ambitious while setting
this time period. That is, setting a time period that is difficult is all right, but
setting a time period that is impossible, is not.
As a general rule, investors with near-term needs should probably
concentrate on money market funds or short-term bond funds. Those with
an intermediate-term outlook may want to choose either income funds or
29

funds that seek a combination of income and growth. And investors with
long-term horizons should consider growth-oriented funds, since these
invest primarily in stocks, an asset class which, when compared to income
investments, has achieved the best historical returns over time.

Define your risk tolerance: How much risk can you tolerate? If you
have a low tolerance for risk, you should stick to the most conservative
choices, such as money market funds. If you have a moderate tolerance
for risk, you should seek to blend conservative and aggressive funds or
look for one fund with a blended approach, such as a growth and income
fund or a balanced fund. If you are comfortable with a fair amount of risk,
you can choose from among the more aggressive mutual funds like
aggressive growth funds and sector funds.

Define how mutual funds will complement your other

investments: Make an assessment of your total financial picture. The
goal is to avoid duplication or over-concentration of assets. Do you have
savings accounts, retirement plans or individual stocks and bonds?
Insurance or income-producing property? As you can easily see, mutual
funds may have a role to play in your overall investment portfolio, but they
should not be viewed as stand-alone assets.

Evaluate the fund's portfolio: Service levels of fund houses vary.

Some fund houses regularly update investors on details like stock
allocation, sectoral allocation, asset allocation, Portfolio Turnover Ratio
and Expense Ratio among other details. Most fund houses provide a lot of
these details at monthly/quarterly frequency through mutual fund fact
sheets.

30

However, this information is not quite as standardized as it should be, so

the investor has to be careful while making a comparison. Making a
comparison would typically include evaluating a fund's portfolio in terms of
diversification across top 10 stocks and leading sectors (in case of equity
funds) to ensure that the fund is not taking on more risk than necessary. It
is evident that this is no mean task and requires considerable effort and
patience on the investor's part.

Evaluate the fund's performance : Every fund is benchmarked

against an index like the BSE Sensex, Nifty, BSE 200 or the CNX 500 to
cite a few names. Investors should compare fund performance over
varying time frames vis--vis both the benchmark index and peers.
Carefully evaluate the fund's performance across market cycles particularly
the downturns. A well-managed fund should not fall too hard (relative to the
benchmark and peers) during a market downturn even if it does not feature
at the top during a stock market rally.
Apart from above, few key financial factors to be considered when
evaluating Mutual funds are as below:
Dividend Yield
If your goal is to receive steady income, then you need to pay attention to
the dividend yield. Basically, a dividend is the return on investment the
dollar amount of earnings each share receives (dividends per share). A
mutual funds dividend yield shows how much a company pays in each
year relative to its share price. You can calculate the dividend yield by
dividing the annual dividend by the current stock price.
Risk

31

How do you measure risk or volatility? Measuring a fund's volatility can be

determined by examining a fund's beta and standard deviation figures.
These help measure risk. A mutual funds beta indicates how much risk it
has compared to the market. If the beta is higher than the markets
benchmark index average of 1.00, then the fund is considered more
volatile. Likewise, if the beta is less than 1.00, it is considered to be less
volatile.
Standard Deviation
However, a mutual funds standard deviation is a risk measurement that
compares the fluctuations of returns in a fund rather than to an index. The
standard deviation indicates the difference between actual and expected
returns. The higher the standard deviation measure, the more volatile the
fund will be. Likewise, the lower the standard deviation measure, the less
volatile the fund will be.
Total Return
The value of a fund over a set period of time helps determine your total
return. It includes realized: interest, capital gains, dividends and
distributions. To get a better idea of a fund's long-term performance, you
should compare the average annual returns for three, five and 10-year
periods.
Costs
This affects the total return. No-load funds don't charge you to buy or sell
shares. Load funds have sales charges. Every fund charges annual fees
for management and operating expenses.
Lets take an example to understand better.

Principal Personal Taxsaver Mutual Fund

32

Aims at providing tax benefits along with capital appreciation.

Type of Scheme

Open Ended

Nature

Equity

Fund Manager

Pankaj Tibrewal .

SIP

Option

Growth

Inception Date

Jan 1, 1996

Face
(Rs/Unit)

10

Value

STP
SWP
Expense ratio(%)

2.30

Portfolio Turnover
42
Ratio(%)

Fund Size in Rs.

265.99 as on Oct 31,
Cr.
2008

Last
Declared

Divdend

400 % as on Mar 31, 2008

Minimum Investment
500
(Rs)
Purchase
Redemptions

Weekly

NAV Calculation

Weekly

Entry Load

Amount Bet. 0 to 49999999 then Entry load is 2.25%.

Exit Load

Nil

FUND FACTS

Increase/Decrease in Fund Size since

2008 (Rs. in crores)

Sep 30,

33

-97.32

Mutual Fund

PRINCIPAL
Mutual
Fund
3rd Floor, Exchange Plaza, B-wing
A NSE Building, Bandra Kurla Complex,
Bandra-E
Mumbai
Tel.-22021111

Asset Management Company

PRINCIPAL PNB Asset Management

Company
Pvt.
Ltd.
3rd Floor, Exchange Plaza, B-wing
A NSE Building, Bandra Kurla Complex,
Bandra-E
Mumbai - 400051 Tel.- 22021111
Karvy
Computershare
Pvt.
21,
Avenue
Street
No
1,
Banjara
Hyderbad

Registrar

NAV

Latest NAV

43.47 as on Nov 20, 2008

Benchmark Index - BSE100

4,332.17 as on Nov 20, 2008

52 - Week High

221.26 as on Dec 31, 2007

52 - Week Low

43.04 as on Oct 27, 2008

RISK AND RETURN

SCHEME PERFORMANCE (%) AS ON NOV 20, 2008
1 Month

3 Months

6 Months

1 Year

34

3 Years

5 Years

Since
Inception

Ltd.
4,
Hills

-15.93

-46.51

-53.71

-60.85

-0.26

11.68

Mean

1.24

Treynor

1.76

Standard
Deviation

2.93

Sortino

0.58

Correlation

0.64

Sharpe

0.39

Fama

0.47

Beta

0.64

PORTFOLIO

35

25.42

P/E

15.72 as on Sep 2008

P/B

2.99 as on Sep 2008

Dividend Yield

1.26 as on Sep 2008

Market Cap (Rs. in

crores)

31,156.67 as
Sep - 2008

on

Large

44.01 as on Oct 2008

Mid

23.45 as on Oct 2008

Small

13.89 as on Oct 2008

Top 5 Holding (%)

18.74 as on Oct 2008

No. of Stocks

61

Expense Ratio (%)

2.30

State Bank of India

ITC Ltd

HDFC Bank Ltd

Bajaj Auto Ltd

Oil & Natural Gas Corpn Ltd

Easun Reyrolle Ltd

Larsen & Toubro Limited

Cipla Ltd

P/E
Stock

Sector

36

Percentage
of Net Assets

Qty

Value

Percentage
of
Change
with
last

Nifty

Miscellaneous

Oil
&
Reliance Industries
Petroleum
Ltd
Refinery
Jindal Steel
Power Ltd.

and

NA

Gas,
& 13.93

4.80

NA

12.77

-3.44

4.14

80,134

11.02

-38.24

Steel

7.87

3.42

114,728

9.09

-4.14

Consumer
Durables

11.73

3.38

1,221,783 8.99

-4.83

ICICI BANK LTD. Banks

10.78

3.00

200,247

7.98

-25.68

Bharti Airtel Ltd

17.95

2.62

106,448

6.96

-16.85

5.18

2.43

503,993

6.45

-0.82

14.07

2.41

225,472

6.40

-29.87

Gas,
&
2.38
406.11

491,199

6.34

-37.82

24,267

6.14

-46.01

Voltas Ltd

Sector Allocation (%)

Telecom

Auto & Auto ancilliaries

Indian Bank
Banks 10.45
Banks
Sterlite Industries
Cement
3.55

Metals

(India) Ltd- Software &

Computers
Education
5.79
Oil
&
Consumer
Durables
3.38
Cairn India Ltd.
Petroleum
Current Assets
9.13
Refinery
Electricals
Credit & Electrical
Rating
Equipments

3.82

Information
Miscellaneous
Engineering & Industrial
Services Of India
Machinery
5.51
Ltd
Finance
Housing & Construction
Metals
Mining & Minerals
Miscellaneous

10.08
1.79
3.7
1.62
8.62

Oil & Gas, Petroleum &

Refinery
Paper
Personal Care
Pharmaceuticals
Plastic

8.03
0.84
1.92
0.01
2.08

Power Generation,
Transmission & Equip
Shipping
Steel
Telecom
Textiles

2.62
1.44
8.93
2.62
2.46

13.65

2.31

Asset Allocation (%)

Equity

Debt

Cash & Equivalent

37

90.87

0.00

9.13

LITERATURE REVIEW
NEW FUND OFFERS (NFOs) IN THE MF INDUSTRY
Mutual Fund NFOs (New Fund Offers) mark the commencement of a new
scheme that has generated huge interest among investors today. The
several bull-phases in the stock market in the last couple of years appear
to have increased the interest of investors in equities. Mutual funds were
quick to tune into this and have come out with new fund offers (NFO) with
increasing regularity. And they have not been disappointed. The new funds
have mopped up huge sums from investors. Between October 2005 and
September 2006 alone, about Rs 32,000 crore (36 per cent of the total
equity fund sales in that period) was collected by equity NFOs through
open- and close-ended schemes.
A Business Line analysis reveals that quite a few of the new funds underperformed their benchmarks. However, with the frequent reversals in the
market and the considerable churn in the sectors leading each rally, the
past year has been challenging, even for established equity funds.
The analysis considered only funds launched before September 2006
less than six months being too short to evaluate performance. However,
investors need to note that this exercise cannot form a sufficient basis for
investments in these funds. It can, at best, be seen as a performance
tracker.
NFOs witness to a very volatile phase in the market in May/June 2006. The
new funds in that period lost an average of 32 per cent between May 10

38

and June 14, against the Sensex decline of 29 per cent. So, which of the
new funds managed this phase well?
The performance round-up for the June 2006 quarter showed that among
the new funds, only Reliance Equity and Quantum Mutual, which held a
significant proportion of cash, contained the declines. The rest of the funds
fell more than the market. Ironically, the new contra funds from the DBS
Chola, UTI and Tata fund houses also fell with the rest, despite a specific
focus on "value" or contrarian investing.

ANALYSIS OF SOME NFOs LAUNCHED IN RECENT PAST:

We have analyzed some of the NFOs launched in the recent past to
determine if they have added any value to the investor's portfolio.
While selecting NFOs, we have employed some filters. To begin with, we
have only selected equity NFOs since they attract maximum investor
attention and net assets. To be fair to the NFOs under review, we have
selected only those that have a track record of being 'fully invested' for at
least12 months. Given that funds can take up to 6 months from launch for
being fully invested, we have considered NFOs that have been in
existence for at least 18 months. Of course many of these NFOs are still
not necessarily fully invested, but at least they can be if they want to.
Moreover, we only evaluated NFOs from leading fund houses (by net
assets).

High on net assets, low on value

Fund Name Category

NFO
Close

Reliance
Equity

7-Mar-06 45.0

Equity:
Diversified

AUM (Rs Comments

bn)

39

1-Yr
(%)

A large cap fund 15.2

that hedges its

portfolio in line
with market levels.
At higher market
levels, a larger
portion
of
its
portfolio
is
hedged.
A
defensive
investment
strategy that does
not
allow
the
investor
to
generate returns
beyond a point.
Also in terms of
stock picks, this
fund is similar to
Reliance
(RELI.BO, news)
Vision,
a
predominantly
large cap equity
fund.
SBI Bluechip Equity:
Diversified

20-Jan-06 28.6

A large cap fund 7.6

quite similar to
Magnum Equity in
terms of stock
picks. No different
from the scores of
other large cap
funds.

Magnum
Multicap

Equity:
Diversified

16-Sep-05 21.0

As
the
name 7.8
suggests, the fund
can invest in both
large caps and
mid caps. Similar
to
Magnum
Multiplier Plus in
terms of stock
picks.

HSBC

Equity:

27-Jan-06 16.0

A thematic fund 7.2

40

Advantage
India

Diversified

that will target a

few themes and
invest in them
aggressively.
Eventually, most
thematic
funds
end up investing
in more than one
theme
because
they have such
broad mandates,
so the NFO did
not really offer
anything unique.

PruICICI
Equity:
16-Aug-05 14.2
Infrastructure Infrastructure

Was launched to 28.8

tap
the
infrastructure
theme
aggressively.
However, one look
at
its
broad,
inclusive,
investment
mandate and one
would think it is a
diversified equity
fund.

HDFC Long Equity:

Term Equity Diversified

A
5-Yr
close- 8.8
ended fund that
can invest across
market caps. It
was close-ended
since the fund
wanted to take
long-term
bets
which is difficult in
an
open-ended
structure.
Given
the
free-flowing
investment style
and
process-

27-Jan-06 13.0

41

driven investment
approach,
we
recommended this
fund to Personalfn
clients.
Franklin
Smaller
Companies

Equity:
Caps

Mid 14-Dec-05 12.0

Stanchart
Classic
Equity

Equity:
Diversified

14-Jul-05 11.7

The first equity 12.4

fund launched by
Stanchart Mutual
Fund anywhere in
the world. But
investors
could
not care less, they
took to the fund
like it was a
veteran in the
stock
markets.
After launching a
string of equity
NFOs, the fund
house
realized
that mutual fund is
not core business
for it globally.

Magnum
Comma

Equity:
Diversified

25-Jul-05 9.5

Was initially pulled 8.4

up
by
SEBI
because it gave
the
impression
that it would be
investing
in

42

The fund was 1.1

launched to target
small caps, a first
in the industry.
One of the few
innovative funds
of its kind and one
of the few NFOs
recommended by
Personalfn
selectively to its
clients.

commodities; the
fund was only
targeting
commodity stocks.
Expectedly,
the
fund paid a heavy
price for its narrow
theme, especially
during the crash in
May 2006.
BSE Sensex

15.6

(AUMs are assets under management. These are the net assets
mobilised at the time of the NFO; they are approximate numbers. NAV
performance as on May 16, 2006. All NFOs except Franklin Smaller
Companies and HDFC Long Term Equity are open-ended.)

It is apparent from the table that many of these NFOs didn't really need to
be launched. In many cases the themes (infrastructure, commodities, and
outsourcing to name a few) failed to add any significant value to the
investor's portfolio. In quite a few cases, it is evident that the fund house
had another fund with a relatively similar investment style/positioning. It
could have been much simpler if the fund house chose to talk about the
existing fund, rather than launch another NFO.
It is apparent given the quality of NFOs, why Personalfn was not enthused
enough into recommending them to clients. Of the NFOs listed above only
two caught our attention viz. Franklin Smaller Companies (a 5-Yr closeended equity fund investing in small caps) and HDFC Long Term Equity (a
5-Yr close-ended equity fund investing in companies across market
capitalizations). Being launched by well-managed fund houses, with a lockin allowing the fund manager to invest for the long-term in opportunities

43

that were being ignored by most fund houses (like small caps for instance)
were some of the compelling reasons for recommending such NFOs.
In addition to the NFOs selectively mentioned in the table, there are scores
of NFOs that have added little value to the investor. If anything, they have
added to the confusion, because the thought uppermost on the investor's
mind is - NFO A is so similar to Fund B from the same fund house, what
value will NFO A offer that is not already being offered by Fund B? And it is
apparent from looking at the NFOs that most haven't achieved the level of
performance that was expected of them. As we mentioned earlier, many
were too niche to outperform a broad-based index like the BSE Sensex.
So investors are left wondering if they weren't better off investing in the
index (i.e. an index fund) or a well-diversified equity fund. Of course, 1-Yr
is an abbreviated time frame for evaluating an equity fund (we prefer a
minimum 3-Yr time frame for this), but at Personalfn we have noticed that
most thematic funds under perform the index over longer time frames.
With regards to NFOs, we have a clear action plan for investors - avoid
NFOs, instead opt for well-managed, existing funds from that category (of
the NFO) with well-established track records over the long-term, especially
during a market downturn.
However, if the NFO offers something that no existing fund in the industry
does, then there is a case for considering it for investment. Or if an NFO
from a well-managed, process-driven fund house, is open for a limited time
period over which it will collect monies only up to a pre-determined ceiling
(like DSP ML Micro Cap Fund), then again there is a case for evaluating it
as a probable investment. Barring these exceptions, we are of the view
that an NFO must establish a track record over the long-term (at least 3

44

years for an equity-oriented fund) before meriting inclusion in the investor's

portfolio.

OLD (EXISTING) FUNDS Vs NEW FUND OFFERS

With the equity markets on fire it was boom time for all equity funds. This
was evident as the mutual funds started to come up with many new
schemes and woo the investors to invest in the markets through the MF
route. Since the beginning of 2005, 27 Diversified Equity schemes have
concluded their NFOs. Together they have collected over Rs.10,000
crores. The common investor seems excited with the idea of getting an
opportunity to invest at par in a booming market, without understanding its
implications.
On an average over the last quarter all new equity schemes (schemes less
than 6 months of age as on June 30) gave a return of 7.47%, while the
other existing schemes gave an average return of 12.43%. The main
reason behind this is the time taken by the fund manager in deploying the
funds in the market. The fund manager has to allocate the money in the
most judicious manner with a view to get maximum return for the investor.
With the markets at such high levels, the fund manager takes a cautious
approach in investing, and rightfully so, which results in a higher cash
component in the portfolio. Looking at some figures we find that Reliance
Equity Opportunity had 35.18% of its assets as cash and equivalents in the
month of April 2005. This figure afterwards started to come down and in
May 05 it was at 14.41% and in June at 7.54%. Franklin India Flexi Cap
had a similar story to tell. In April 05, the cash component was 18.47,
which came down to 1.41% by June end. Principal Focused Fund was
another scheme where the cash component was quiet high at 21% even at
June end. This basically happens as the fund managers take time to
45

deploy all the funds in the market and the cash component does not yield
returns as high when compared to the stock markets. However, schemes
which have completed say over 6 months are better off as the fund
manager has already invested fully in the market and the investor reaps
the benefit of the boom conditions. The average return generated by
schemes which have completed six months but less than one year is
31.4%, which is quite similar to the oldies (funds having completed 3
years) which delivered an average 31.7% return.
The investor needs to act judiciously to take maximum advantage of the
booming stock markets. A fully invested portfolio is always better than
building a new one. The smart investor should give some time to the new
fund, follow a wait and watch strategy, compare the performance of the
NFO with similar existing funds and then switch to the new fund, it the
performance warrants.
Some of the Investors have the tendency to prefer a scheme that is
available at lower NAV compared to the one available at higher NAV.
Sometimes, they prefer a new scheme (NFO) which is issuing units at
Rs.10 whereas existing schemes in the same category are available at
much higher NAVs. Investors may please note that in case of mutual funds
schemes, lower or higher NAVs of similar type schemes of different mutual
funds have no relevance. On the other hand, investors should choose a
scheme based on its merit, considering performance track record of the
mutual fund, service standards, professional management, etc. This is
explained

in

an

example

given

below.

Suppose scheme A is available at a NAV of Rs.10 and another scheme B

at Rs.30. Both schemes are diversified equity oriented schemes. Investor
has put Rs.9,000 in each of the two schemes. He would get 900 units
46

(9,000/10) in scheme A and 300 units (9,000/30) in scheme B. Assuming

that the markets go up by 10 per cent and both the schemes perform
equally good. NAV of scheme A would go up to Rs.11 and that of scheme
B to Rs.33. Thus, the market value of investments would be Rs.9,900
(900*11) in scheme A and it would be the same amount of Rs.9,900 in
scheme B (300*33). The investor would get the same return of 10% on his
investment in each of the schemes. Thus, lower or higher NAV of the
schemes and allotment of higher or lower number of units within the
amount an investor is willing to invest, should not be the factors for making
investment decision. Likewise, if a new equity oriented scheme is being
offered at Rs.10 and an existing scheme is available for Rs.30, should not
be

factor

for

decision

making

by

the

investor.

The investor should give more weightage to the professional management

of a scheme instead of a lower NAV. He may get much higher number of
units at lower NAV, but the scheme may not give higher returns if it is not
managed efficiently.

SCHEMES LESS THAN 6 MONTHS OLD

OLD SCHEMES
% Performance as on June 30, 2005
Absolute
Scheme Name
3 Months
Franklin India Flexi Cap
11.4979
Fund - Growth
Reliance
Equity
Opportunities Fund - 7.5537
Growth
LIC MF Opportunities
3.1642
Fund - Growth

Absolute
3 Months

Scheme Name
Alliance Equity Fund
18.0545
- Growth
Reliance
Growth

Growth

15.5338

SBI Magnum Global

12.5074
Fund 94 - Growth
47

Can Emerging Equities

2.4339
- Growth

SBI Magnum Sector

Umbrella - Contra -13.1326
Growth

PRINCIPAL
Advantage
Growth

Sundaram
Select
10.2178
Midcap - Growth

Focussed
Fund
- 2.3958

WAYS TO INVEST IN MUTUAL FUNDS

Have you ever read the statutory warning on every cigarette pack:
Cigarette Smoking Is Injurious To Health? In the same vein, every single
mutual fund offer document will carry the caveat: Mutual Funds Are Subject
To Market Risks. Just like ardent cigarette smokers who chose to ignore
this warning, investors too will look the other way.

48

EVER WONDERED WHAT IT MEANT?

Market risk refers to the possibility that your investment in a mutual fund
can go down in value over a period of time. That's right. Understand that
you can earn a negative return by investing in a mutual fund. It is not
always great (positive) returns. Investors tend to focus only on returns
when investing in mutual funds. I will refrain from quoting returns here as I
strongly believe they skew the investor's perception without giving due
respect to risk. And I am confident most of us are exposed to different
versions of numbers through friends, family, the media and mutual fund
agents. So, invest in mutual funds but do it in alignment with your risk
profile. This indicates your capacity to take risks and the amount of risk you
can tolerate (ability to sleep well during turbulent markets). Accordingly,
allocate your savings to various investment avenues (asset allocation). The
ability to do so is far more important than purely looking at the Sensex
levels and taking an investment call. People generally want to invest in
funds by asking just one question: Which ones have delivered the highest
returns this year? There are an equally large number of people willing to
provide an answer.
But an equally important question that is never asked is: What risks has
this fund taken to generate those returns as compared to other funds?
Mutual funds are outstanding long-term investment products and big
money can be made in mutual funds by systematically and consistently
investing over a period of time. You need to stay invested over several
business cycles which could span 10, 20 or even 30 years. Though there
might be declines or even corrections in the shorter term, over several
business cycles, equities have proven to be the best asset class in terms

49

of risk adjusted returns (when you take risk into account to evaluate
returns).

There are two broad ways you can invest in a mutual fund:
An outright payment or
A Systematic Investment Plan.
A SIP is nothing but a periodic investment that has to be done. The amount
stays fixed while you can select your duration -- it could be monthly or
quarterly. Let's say you commit to investing Rs 1,000 in your fund on the
10th of every month. At the end of a year, you would have invested Rs
12,000 in your fund. Let's say the Net Asset Value (price of a unit of a fund)
on the day you invest in the first month is Rs 20; you will get 50 units. The
next month, the NAV is Rs 25. You will get 40 units. The following month,
the NAV is Rs 18. You will get 55.56 units. So, after three months, you
would have 145.56 units. On an average, you would have paid around Rs
21 per unit. This is because, when the NAV is high, you get fewer units per
Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

MAKING THE RIGHT CHOICE

Moses gave to his followers 10 commandments that were to be followed
till eternity. The world of investments too has several ground rules meant
for investors who are novices in their own right and wish to enter the
myriad world of investments. These come in handy for there is every
possibility of losing what one has if due care is not taken.
1.

Assess yourself:
50

Self-assessment of ones needs; expectations and risk profile is of prime

importance failing which; one will make more mistakes in putting money in
right places than otherwise. One should identify the degree of risk bearing
capacity one has and also clearly state the expectations from the investments.
Irrational expectations will only bring pain.
2.

Try to understand where the money is going:

It is important to identify the nature of investment and to know if one is

compatible with the investment. One can lose substantially if one picks the
wrong kind of mutual fund. In order to avoid any confusion it is better to go
through the literature such as offer document and fact sheets that mutual fund
companies provide on their funds.
3.

Don't rush in picking funds, think first:

One first has to decide what he wants the money for and it is this investment
goal that should be the guiding light for all investments done. It is thus
important to know the risks associated with the fund and align it with the
quantum of risk one is willing to take. One should take a look at the portfolio of
the funds for the purpose. Excessive exposure to any specific sector should
be avoided, as it will only add to the risk of the entire portfolio. Mutual funds
invest with a certain ideology such as the "Value Principle" or "Growth
Philosophy". Both have their share of critics but both philosophies work for
investors of different kinds. Identifying the proposed investment philosophy of
the fund will give an insight into the kind of risks that it shall be taking in
future.
4.

Invest. Dont speculate:

51

A common investor is limited in the degree of risk that he is willing to take. It is

thus of key importance that there is thought given to the process of
investment and to the time horizon of the intended investment. One should
abstain from speculating which in other words would mean getting out of one
fund and investing in another with the intention of making quick money. One
would do well to remember that nobody can perfectly time the market so
staying invested is the best option unless there are compelling reasons to exit.
5.

Dont put all the eggs in one basket:

This old age adage is of utmost importance. No matter what the risk profile of
a person is, it is always advisable to diversify the risks associated. So putting
ones money in different asset classes is generally the best option as it
averages the risks in each category. Thus, even investors of equity should be
judicious and invest some portion of the investment in debt. Diversification
even in any particular asset class (such as equity, debt) is good. Not all fund
managers have the same acumen of fund management and with identification
of the best man being a tough task, it is good to place money in the hands of
several fund managers. This might reduce the maximum return possible, but
will also reduce the risks.
6.

Be regular:

Investing should be a habit and not an exercise undertaken at ones wishes, if

one has to really benefit from them. As we said earlier, since it is extremely
difficult to know when to enter or exit the market, it is important to beat the
market by being systematic. The basic philosophy of Rupee cost averaging
would suggest that if one invests regularly through the ups and downs of the
market, he would stand a better chance of generating more returns than the
market for the entire duration. The SIPs (Systematic Investment Plans)

52

offered by all funds helps in being systematic. All that one needs to do is to
give post-dated cheques to the fund and thereafter one will not be harried
later. The Automatic investment Plans offered by some funds goes a step
further, as the amount can be directly/electronically transferred from the
account of the investor.
7.

Do your homework:
It is important for all investors to research the avenues available to them
irrespective of the investor category they belong to. This is important
because an informed investor is in a better decision to make right
decisions. Having identified the risks associated with the investment is
important and so one should try to know all aspects associated with it.

Asking the intermediaries is one of the ways to take care of the

problem.
8.

Find the right funds:

Finding funds that do not charge much fees is of importance, as the fee
charged ultimately goes from the pocket of the investor. This is even more
important for debt funds as the returns from these funds are not much.
Funds that charge more will reduce the yield to the investor. Finding the
right funds is important and one should also use these funds for tax
efficiency. Investors of equity should keep in mind that all dividends are
currently tax-free in India and so their tax liabilities can be reduced if the
dividend payout option is used. Investors of debt will be charged a tax on
dividend distribution and so can easily avoid the payout options.

9.

Keep track of your investments:

53

Finding the right fund is important but even more important is to keep track
of the way they are performing in the market. If the market is beginning to
enter a bearish phase, then investors of equity too will benefit by switching
to debt funds as the losses can be minimized. One can always switch back
to equity if the equity market starts to show some buoyancy.
10.

Know when to sell your mutual funds: Knowing when to exit a

fund too is of utmost importance. One should book profits immediately

when enough has been earned i.e. the initial expectation from the fund has
been met with. Other factors like non-performance, hike in fee charged and
change in any basic attribute of the fund etc. are some of the reasons for
to exit.
Investments in mutual funds too are not risk-free and so investments
warrant some caution and careful attention of the investor. Investing in
mutual funds can be a dicey business for people who do not remember to
follow these rules diligently, as people are likely to commit mistakes by
being ignorant or adventurous enough to take risks more than what they
can absorb. This is the reason why people would do well to remember
these rules before they set out to invest their hard-earned money.

FACTORS TO BE CONSIDERED WHILE

INVESTING IN MF NFOs
RS.10 OR RS.100 NAV MAKES NO DIFFERENCE
One of the major reasons for the success of mutual fund NFOs has been
the continued ignorance of an average investor with regards to the NAV.
54

They have all along assumed that if they are getting the units at par i.e.
Rs.10, they are getting it cheap. NAV merely represents the market value
of the portfolio. It is the book value. Thus when one invests in a mutual
fund one is buying the units at the book value which is Rs.10 for a NFO
and could be Rs.15 or Rs.20 or whatever for an existing scheme. The NAV
of an existing scheme is higher merely for the fact that its portfolio has
appreciated since the time it built its portfolio. Going forward, the returns
over a given period of time will be same from an existing portfolio (with a
higher NAV) and an identical new portfolio (with Rs.10 NAV). The earlier
appreciation of the old fund does not make it expensive vis--vis an NFO.
LET US LOOK AT AN EXAMPLE TO GET A BETTER FEEL OF THE
MATTER
Say a fund (Old Fund) was launched in Sept 2004. It raised a corpus of
Rs.1 crore and allotted 10 lakh units at Rs.10 each. The corpus of Rs.1
crore was invested equally i.e. Rs. 25 lakh each in Reliance, ONGC,
Infosys and Arvind Mills. Over the next 1-year i.e. till Sept 05 all these
share prices appreciated and the corpus became Rs.1.49 crores.
Accordingly the NAV of Old Fund now is Rs.14.9608. Assume that in Sept
05 a NFO is launched. It raises Rs.1 crore and allots 10 lakh units at Rs.10
each. It also invests in the same 4 shares viz. Reliance, ONGC, Infosys
and Arvind Mills. The amount to be invested in a particular share is in the
same % as in the Old Fund now (This is important, as we have to compare
the impact of NAV on the returns and not the impact of the portfolio). Now
we invest Rs.10,000 each in Old Fund and NFO. In Old Fund, we get
668.414 units @Rs.14.9608/unit. And in NFO we get 1000 units
@Rs.10/unit.
After one year in Sept 2006, due to appreciation in the share prices, the
corpus of Old Fund increases to Rs.1.74 crores and NAV to 17.4669. And
55

corpus of NFO increases to Rs.1.16 crores and NAV to 11.6751. But the
investment value in both cases would have increased to Rs.11, 675.
NAV: DOES SIZE MATTER?
NFOs (New Fund Offers) launched at an issue price of Rs 10 are
perceived to be a good investment opportunity by a large section of mutual
fund investors. Similarly, existing mutual funds with a lower NAV (Net Asset
Value) often appeal more to investors. But, neither approach to selecting a
mutual fund is right.
The following illustration will clearly establish the irrelevance of NAV while
making an investment decision.
Open-ended large cap equity funds NAV (Rs) 1-Yr (%)
Franklin Prima Plus (G)

146.17

43.57

Franklin Bluechip (G)

138.10

39.09

Pru ICICI Power (G)

84.51

38.67

HSBC Equity (G)

74.42

37.63

Kotak 30 (G)

72.06

36.54

HDFC Equity (G)

153.79
35.50
(Data sources from Credence Analytics. NAV as on Feb 09 2007) (To
ensure a fair comparison we have only considered open-ended equity
funds from the predominantly large cap segment.)
Franklin Prima Plus with an NAV of Rs 146.17 (second highest NAV in our
sample) clocked a growth of 43.57% over 1-Yr and is the top performer in
the segment. Pru ICICI Power with a much lower NAV of Rs 84.51 has
clocked a return of 38.67%. Kotak 30 with a lowest NAV of Rs 72.06 has
clocked a return of 36.54% and performed better then HDFC Equity which
has the highest NAV of Rs 153.79 but recorded an NAV appreciation of
35.50%, which is the lowest in our sample. This table clearly indicates that

56

there is no correlation between the NAV and the performance of the mutual
fund.
It is evident that the fund's current NAV and its expected performance are
unrelated and therefore making an investment decision based on the NAV
would be misguided.
Therefore, the first the thing to keep in mind when investing in an
NFO is to understand very clearly that at par NAV has absolutely no
role to play in your future returns.
The following factors should be kept in mind before investing in NFOs:
Quality

of

the

portfolio

is

the

key

to

success.

As we seen in the above example, the price or NAV is irrelevant. It is the

portfolio, which determines the returns one can expect from a scheme. Say
we had invested in an index fund a year back. We would get returns, which
would be more or less equal to the appreciation in the index. But suppose
we had invested in a mid-cap fund, our returns would have been
significantly higher as the mid-cap stocks have appreciated much more
(though of course the risk profile of the two is different).
It is, therefore, important to give emphasis to the portfolio. This is of course
not known for a NFO. Therefore, to judge how the scheme is likely to
perform in future one need to look at:

The fund managers past track record and

The performance of the other similar funds being managed by that

AMC.
Is there anything NEW about it?

57

Ideally the new fund should have something different to offer. Or at least it
should be a new scheme launched by an AMC you are comfortable with.
For example, when Standard Chartered launched a normal diversified
equity fund, when a 100 other similar funds were available; one could have
considered the same for investing, as it was the first diversified equity fund
from Standard Chartered. JM Equity and Derivative Fund, Benchmark Split
Capital Fund, a few Fund of Funds etc. are some of the examples of new
concepts.
Therefore, unless something different is offered it may be prudent to invest
in fund which already has a track record, you are aware of its portfolio, its
investment philosophy, its expenses, etc.
It makes no sense for an AMC, which is already managing a diversified
equity fund, to launch another diversified equity fund.
Does the NFO meet your investment?
We invest with some objective. Also, we all have our own individualistic risk
profile. It is, therefore, important to look at the NFO from these two
perspectives does it meet our investment objective and our risk profile.
It would be wrong and we may end up making a loss if we ignore these two
very basic investment tenets.
Just because it is a new offer you should not rush to invest it the scheme.
Study the objectives of the scheme. Ensure that it meets your investment
needs and the investment horizon. Look at the risk parameters. For
example, if you are not in a position to take risks it would not be correct to
invest in equity NFO.
The cost of issue expenses
Marketing a new issue entails substantial expenses for the AMC floating
the issueon ads, road shows, offer documents, the incentives to
58

distributors, among other things. Under Sebi rules, mutual funds can
charge up to 6% of NFO collections as marketing expenses to the scheme.
These expenses are written off from the NAV over a period of 5 years.
Considering the amounts NFOs have raised these expenses are quite
substantial. Say a scheme raises Rs 1000 crore (which has become quite
normal today). At 6% the issue expenses work out a whopping Rs 60
crore.
All these costs go to reduce your NAV. In an existing scheme, especially
those more than 5 years old, these expenses would have been written off.
Therefore, all things remaining same, the net returns from an NFO would
be lower to the extent it has to write-off the issue expenses, vis--vis an
existing scheme.
Concluding
Do not rush into an NFO. See that it meets your investment objects and
risk profile. Do not be misled by at par hype. See that is adds quality and
diversity to your portfolio.

INVESTORS PERCEPTION OF MUTUAL FUNDS

In financial markets, expectations of the investors play a vital role. They
influence the price of the securities; the volumes traded and determine
quite a lot of things in actual practice. These expectations of the investors
are influenced by their perception and humans generally relate
perception to action. The beliefs and actions of many investors are
influenced by the dissonance effect and endowment effect. The tendency
to adjust beliefs to justify past actions is a psychological
phenomenon termed by Festinger (1957) as Cognitive Dissonance.

59

We find ample proof for the wide prevalence of such a psychological state
among Mutual Fund (MF) investors in India. For instance, UTI had a
glorious past and had always been perceived as a safe, high yield
investment vehicle with the added tax benefit. Many UTI account holders
had justified their beliefs by staying invested in UTI schemes even after the
1999 bail out and many have still not lost faith in UTI, even after the July
2001 episode. Endowment Effect is explained by Thaler Kahneman and
Knetsch (1992) as People are more likely to believe that something
they own is better than something they do not own.
Now lets have a look at some Behavioral Finance studies that were
conducted specifically to judge investors perceptions, preferences,
attitudes and behavior towards mutual funds.
1. Ippolito (1992) says that fund/scheme selection by investors is
based on past performance of the funds and money flows into
winning funds more rapidly than they flow out of losing funds.
2. De Bondt and Thaler (1985) while investigating the possible
psychological basis for investor behavior, argue that mean reversion
in stock prices is an evidence of investor over reaction where
investors overemphasize recent firm performance in forming future
expectations. In India, one of the earliest attempts was made by
NCAER in 1964 when a survey of households was undertaken to
understand the attitude towards and motivation for saving of
individuals. Another NCAER study in 1996 analyzed the structure of
the capital market and presented the views and attitudes of
individual shareholders.

60

SEBI NCAER Survey (2000) was carried out to estimate the number of
households and the population of individual investors, their economic and
demographic profile, portfolio size, investment preference for equity as well
as other savings instruments. This is a unique and comprehensive study of
Indian Investors, for, data was collected from 3,00,0000 geographically
dispersed rural and urban households. Some of the relevant findings of the
study are : Households preference for instruments match their risk
perception; Bank Deposit has an appeal across all income class; 43% of
the non-investor households equivalent to around 60 million households
(estimated) apparently lack awareness about stock markets; and,
compared with low income groups, the higher income groups have higher
share of investments in Mutual Funds (MFs) signifying that MFs have still
not become truly the investment vehicle for small investors. Nevertheless,
the study predicts that in the next few years the investment of households
in MFs is likely to increase.
(Note: Behavior is a reaction to a situation. So as situation changes,
behavior gets modified. Hence, findings and predictions of behavior
studies should be viewed accordingly).
3. Madhusudhan V Jambodekar (1996) conducted a study to assess
the awareness of MFs among investors, to identify the information
sources influencing the buying decision and the factors influencing
the choice of a particular fund. The study reveals among other things
that Income Schemes and Open Ended Schemes are more
preferred than Growth Schemes and Close Ended Schemes during
the then prevalent market conditions. Investors look for safety of
Principal, Liquidity and Capital appreciation in the order of
importance; Newspapers and Magazines are the first source of
information

through

which

investors
61

get

to

know

about

MFs/Schemes and investor service is a major differentiating factor in

the selection of Mutual Fund Schemes.
Investors Perception Today .
Changing Perception

- Negative

Positive +

"Savvy",convinced investor

10%

Reluctant, lazy investor

30%

Unaware, Disbelieving

60%

This shows we still dont have the largest investor class investing
today in Mutual Funds.

Comparative Analysis of Major MFs/NFOs with different

Investment Strategies
We
all know the name games that most fund houses play, and enough
Clearly, we still dont have the largest investor class

investing today in Mutual Funds.

information
has been published by several authors about New Fund Offers

(NFOs), what to stay away from, and the nuances of mutual fund investing.
When new products are launched, fund houses and distributors alike share
several themes or marketing wisdom. The lay investor is obviously
bombarded with what we call as financial pornography.

62

Innovative themes such as Invest in all 4 regions of India or invest in

India's true potential are launched practically every month. So what should
an investor do is the key question facing all of us today?
The rat race for becoming the top fund house in the country is getting fund
houses to launch several schemes that actually are nothing but a replica of
some of their existing schemes. Some of the mutual funds do launch
products to complete their portfolio, which is fair (e.g. a fund house with no
mid cap or balanced fund launching one).
However, hardly any effort is made by the fund industry to educate
investors by providing them the right set of offerings, instead most of the
focus is on increasing the Assets Under Management (AUM) on the basis
of collection in NFOs.
There are no set rules for differentiating advisors either. To the fund
houses, the best advisor is the one who has the most assets. This is like
saying that the best doctor is the one with most patients or should I say
"Lives".
So, lets compare two schemes from one fund house to see if New Fund
Offers are really anything different or just OLD WINE in a NEW BOTTLE.

HSBC Vs HSBC: Comparison of two existing schemes

At the start of 2006, HSBC launched a NFO called HSBC Advantage India
Fund. It was asked from one of their Sales Managers at that point of time
"How is HSBC Advantage Fund different from HSBC Equity Fund?" We got
some fundas on how the fund manager would pick stocks based on
several themes prevalent in the industry but most of it was pure marketing
talk.

63

Beneath the layer we could see that most of the fund houses were
adopting the "Make hay while the sun shines" approach and were
launching another ME-TOO scheme under the garb of fancy terms.
Exactly 1 year down the line, December 2006 factsheet of the Fund house
revealed the following
1.

7 of the top 9 holdings in HSBC Equity and HSBC Advantage India

Fund are same.

2.

28 of the stocks in HSBC Advantage India Fund and HSBC Equity

Fund were common. In all HSBC Equity had 35 stocks and HSBC
Advantage India had 39 stocks.
HSBC Equity
HSBC Advantage India
Fund
Fund
Top 9 Equity Holdings as on
Top 9 Equity Holdings as on
Dec 29, 2006
Dec 29, 2006
Company
Value(Cr.) % Company
Value(Cr.) %
Infosys
Infosys
74.8
7.08
83.15
5.93
Technologies
Technologies
Tata
JaiPrakash
Consultancy
51.69
4.89
62.14
4.44
Associates.
Serv.
Reliance
Larsen &
51.44
4.87
58.56
4.18
Industries
Toubro
Mahindra &
Bharat Heavy
47.42
4.49
58.4
4.17
Mahindra
Electricals
JaiPrakash
Grasim
43.25
4.09
54.91
3.92
Associates.
Industries
Bharat Heavy
Nagarjuna
43.23
4.09
54.68
3.90
Electricals
Construction
Tata
Tata Motors
37.97
3.59 Consultancy
52.42
3.74
Serv.
Maruti Udyog
37.62
3.56 Tata Motors
51.73
3.69
Larsen &
Mahindra &
37.56
3.55
44.16
3.15
Toubro
Mahindra

64

Take a look at the holdings and does anything seem radically different to
you. Now let's look at the return component from Feb 24, 2006 (the date of
first declaration of Advantage India NAV) till date.
Returns
Scheme
Date NAV Date NAV AbsoluteAnnualized
Name
HSBC
Advantage 25/01/0713.17624/02/0610.298 27.9502
30.4532
India (G)
HSBC
Equity
25/01/0773.60724/02/0654.353 35.4235
38.5958
Fund (G)

HSBC Equity scores by over 8 %.

So how much do the investors who have invested close to Rs 1,700 crore
in the fund lose?
8% of Rs 1700 crore is a stupendous Rs 136 crore. This is the cost you
pay by investing on the basis of Billboard ads, commercials, or rosy
themes.

Lets see some other funds and their investment strategies:

SBI Arbitrage Opportunities Fund
Summary
Type
Min.
Investment
Entry Load

Open-ended
Arbitrage
Rs 25,000
Nil

CRISIL Liquid Fund Index

Benchmark

Rs 10
Face Value

Exit 0.25%*
65

Load
Issue Opens September
15, Issue
October 13, 2006
2006
Closes
___________________________________________________________
* For investments less than Rs 5 m made during the NFO period, an exit
load of 0.25% will be charged on exit upto April 20, 2007. For investment of
Rs 5 m and above, there will be no exit load.
Investment
Objective*
To provide capital appreciation and regular income for unitholders by
identifying profitable arbitrage opportunities between the spot and
derivative market segments as also through investment of surplus cash in
debt and money market instruments.
Investment Strategy
SBI Arbitrage Opportunities Fund (SBI-AOF) is an open-ended equity
oriented fund based on the Arbitrage Strategy. The fund proposes to
capitalize on the arbitrage opportunities arising out of mis-pricing of stocks
in the equities and derivatives (Futures & Options) markets.
SBI-AOF seeks to exploit such mis-pricing opportunities and in the
absence of profitable arbitrage opportunities, the fund will hold its assets in
debt and money market instruments.
Besides adopting the most commonly used arbitrage strategy of
purchasing stocks in equity markets and simultaneously selling futures
contract of the same stocks, SBI-AOF will use other complex strategies as
permitted by SEBI
An important feature of an arbitrage strategy is that it can act as a
safeguard against market volatility as both the buying and selling legs
offset each other. The returns in an arbitrage transaction are locked at the
time of the transaction. In that respect, the fund offers a relatively low-risk
investment option for investors. Also simultaneous trades in different
markets increase the transaction cost considerably; this could have an
adverse impact on the returns of the fund.
Before investing in SBI-AOF or any other arbitrage fund, investors must
know that despite investing in both, equity and derivatives market, these
are not like conventional diversified equity funds. This is because the
returns generated by these funds are based purely on mis-pricing (across
markets) and not from investments in the cash market (which is how equity
funds generate a return). Therefore, expectations of returns from arbitrage

66

funds must be tempered.

The concept of using an arbitrage strategy in the domain of mutual funds is
a relatively new concept and has not yet evolved completely. Also, in the
context of SBI-AOF, some of the strategies used are very complex and
difficult for investors to understand. Our advice to investors is to give
arbitrage funds some time to evolve and review their performance over a
period of time before investing in them.

Portfolio Strategy
SBI-AOF is mandated to invest between 65%-85% in equity and equity
related instruments and derivatives.
Instruments
Allocation
Range
Equity and equity related instruments

65%-85%

Derivatives including index options, index

futures,
stock options and stock futures

65%-85%

Debt and money market instruments

15%-35%
The fund has stated that every derivative position will be backed by an
equal and opposite position in equity markets and that the fund will remain
hedged at all times under the respective arbitrage strategy. The fund can
also park upto 35% of its corpus in money market/debt instruments in the
absence of adequate arbitrage opportunities in the market.
Outlook
One peculiar quality of the arbitrage strategy is that it does not participate in the
upside or downside of the market, rather it makes a market-neutral investment
decision. Thus, even if the market gets corrected to a large extent, the fund is
unlikely to get affected. Given that the arbitrage strategy can insulate the fund from
the risk of market volatility, one can expect a degree of stability in SBI-AOF's
performance.
But investors would do well to appreciate that investing in derivatives is not a sure
shot way of generating returns. It all depends on the arbitrage opportunities
available and even then the fund manager must be quick enough to benefit from
them. Finally, the returns from SBI-AOF will also be capped given that the fund's
portfolio will be fully hedged.

67

DSP Merrill Lynch Small and Mid Cap Fund

Summary
Type

Open-ended
equity
(Diversified)
Rs 5,000

Min.
Investment
Entry Load 2.25%*
Issue
Opens

September 29,
2006

CNX Midcap
Benchmark

Rs 10
Face Value
Exit
0.50%**
Load
Issue
October 16, 2006
Closes

*For investments less than Rs 50 m (Rs 5 crore)

**On exit within 3 months from NFO
Investment
Objective*
The primary investment objective is to seek to generate long-term capital
appreciation from a portfolio that is substantially constituted of equity and
equity-related securities, which are not part of top 100 stocks by market
capitalization. From time to time the investment manager will also seek
participation in other equity and equity-related securities to achieve
optimal portfolio construction. This shall be the fundamental attribute of
the Scheme. The Scheme may also invest a certain portion of its corpus
in debt and money market securities, in order to meet liquidity
requirements from time to time.
*Source: Offer document

Portfolio/Investmen
t Strategy
Instruments
Allocation Range
Equities and related securities that are not
part of the top 100 stocks by market capital

65%-100%

Equities and related securities that are

part of the top 100 stocks by market capital

0%-35%

68

Investments in ADRs and GDRs and foreign

securities

0%-25%

Debt and money market instruments

0%-10%

DSP ML SMC has a relatively straightforward investment strategy. Unlike

other AMCs that have drawn up elaborate asset allocation patters by
defining the market capitalization in terms of rupees, DSP ML SMC
professes to simply target companies that are not part of the top 100
companies by market capitalization.
It has also made provision for investing a portion of its net assets
(maximum 35% of net assets) in companies that rank among the top 100
in terms of market capitalisation.
Outlook
Investing in DSP ML SLC will be subject to the risks that have come to be
closely associated with mid cap stocks - above average volatility, factors
leading to which we have outlined earlier. However, over the long term, at
least 5 years, the volatility could get ironed out by a portfolio of carefully
selected mid cap companies. We have taken 5 years (minimum) as an
ideal time frame for investing in DSP ML SLC, because mid caps typically
take longer than large caps to unlock their potential.

RESEARCH METHODOLOGY
The research is both qualitative and quantitative in its support. The
qualitative approach includes both, descriptive and inductive forms of
research, while as in case of quantitative approach, an extensive use of
the available literature has been made to carry out a detail research on the
nature of the problem. The data obtained from the study will be analyzed
by using Factor Analysis for identification of the key features preferred by
69

the respondents in a mutual fund product. Factor analysis identifies

common dimensions of factors from the observed variables that have a
high correlation with the observed and seemingly unrelated variables but
no correlation among the factors. Principal Component Analysis is the
commonly used method for grouping the variables under few unrelated
factors. Variables with a factor loading of higher than .5 are grouped under
a factor. A factor loading is the correlation between the original variable
with the specified factor and the key to understanding the nature of that
particular factor. When developing new products marketers would like to
be able to judge the consumers response to their offer before it is
introduced. One way to deal with the situation is to perform concept tests.
Here the customer is presented with a description for a new product and is
asked about the likelihood of purchase. The various attributes of a mutual
fund product are broken down into levels.
Once the utilities of the attribute levels are known, it is possible to specify a
new product that should have a maximum desirability.
The methodology that will be used for the study shall consist of both i.e. is
primary & secondary research. Primary and secondary data thus collected
will be analyzed in a systematic manner to bring about a justifiable solution
to my research work. Over all it proved to be a huge learning experience
and opportunity to me..

NATURE OF DATA:
The research is based on making use of both, the primary sources and the
secondary sources of data in eliciting information.

70

PRIMARY DATA: The primary source of data involves oral interviews

and questionnaires. These sources are inadvertently expected to yield
more qualitative data and results.

SECONDARY SOURCES: Books, Magazines, Documents, Reports,

websites and the available literature from other sources.

SAMPLE SIZE:

40

SURVEY AREA:

NATIONAL CAPITAL REGION DELHI

DATA ANALYSIS AND INTERPRETATION

Question 1: What age group do you belong to?

71

Question 2: What is your occupation?

Question 3: Do you invest in Mutual Funds?

Interpretation: - The major part of the sample taken has invested in the
Mutual Funds. The demand for the mutual funds have increased in the
past few years with many Foreign players entering in the Indian market,
Fidelity, Franklin Templeton, DSP Meryll Lynch to name a few. Still there
are few who are not investing in MF.

72

Question 4: NFOs are quite attractive than the old mutual funds.
What is your opinion?

Interpretation: - Majority of people believe that NFOs being offered at par

value of Rs.10 provide a chance of good returns as compared to the old
funds. Whereas there are few people who are strictly against this view.

Question 5: What are the major factors that influence you to invest in
mutual funds?

73

Interpretation: - Almost half of the sample was attracted towards the high
returns provided by the mutual funds. Some of the people especially
service class invested in mutual funds to claim the tax benefits. And very
few people considered MFs as a source of consistent income or less risky.

Question 6: On scale one to 10 (10 being the strongest) how much does
product qualities has a bearing on your selection of Fund/Scheme by
investors while investing in Mutual Fund /NFOs?
Interpretation: - The 10 fund related variables were analyzed for their
importance. The analysis reveals that the investor considers all the 10
variables as important in his selection of the fund/scheme. The weighted
mean value and scale importance is given below:

74

Hence, to identify the investors underlying fund/scheme selection criteria,

so as to group them into specific market segment to enable the designing
of the appropriate marketing strategy, Factor Analysis was done using
Principal Component Analysis. The analysis revealed that Factor loadings
are very high in case of factor 1 (5 out of 10 variables have factor loading
>0.5). It reveals that 50% of the variables are clubbed into one factor. But
on the basis of theory, we can infer that there must be more than one
factor. Therefore, Varimax Rotation was done to obtain factors that can be
named and interpreted. Under Varimax Rotation also 5 out of 10 variables
have factor loadings >0.5 in case of factor 1. On the basis of Varimax
Rotation with Kaiser Normalization, 3 factors have emerged. Each factor is
constituted of all those variables that have factor loadings greater than or
equal to 0.5. Thus A6, A7, A8, A9 and A10 constituted the first factor. The
researcher conceptualized this factor as Intrinsic Product Qualities; A1
and A4 constituted the second factor and this was conceptualized as
Portfolio

Management; A2 constituted

conceptualized as Image factor.

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the

3rd factor

and

was

Question 7: How do you think Mid-Cap investment solve the problem of

Large-cap orientation in the mutual fund market?
Interpretation: - The majority view is that a clear differentiation between the
diversified equity funds should be maintained. The Principal Equity Fund
as a large cap fund should be retained to cater to such investors with
Principal Growth Fund investing in a blend of mid and large caps. The
blend strategy, felt the investors, will work well for Principal Growth Fund
and its performance will be on par with that of many mid cap focused
funds.

Question 8: Which Sectors Or Any Particular Sector You Look As Market

Performer?

Interpretation: - More than78 percent of the investors were of the opinion

that it is the Information Technology which is the main driving force behind
the present market boom. They felt that IT combined by Engineering and
Telecom can take the Indian investment scenario to a new high.

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Question 9: As You Think About Investments, What Option Comes First

In Your Mind?

Interpretation: - With regard to the this question, almost all (i.e. 38 out of
the sample size 40) opined that when it comes to investment in life they
prefer bank deposits than any other financial instruments available in the
market. This may be because of dominance of middle class people in
Indian economy who are having a fixed salary and the amount of the
salary they are getting is little bit more than their necessities. Therefore, it
is understood that our respondents are not ready to invest in financial
instruments which are volatile in nature. Even if the return is low they
prefer financial instruments which are safe and not subject to market risks.
But the interesting fact is that even if the respondents preferred bank
deposits over other financial instruments, they are not uni- dimensional in
investments. Along with bank deposits majority of our respondents are
investors in stocks and shares. But still the concept of mutual funds is yet
to make its place.

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Question 10: How Do You Perceive The Present Market Condition For
Investment?

Interpretation: - With regard to this question, it can be stated that the

present rise in Sensex has made everybody aware about the present
investment scenario. Almost 78% of the respondents are of the opinion
that the present economic market condition is either conducive or very
conducive for investment. Almost 90% of the respondents belonging to the
upper middle class feel that the present market condition is very conducive
for investment. 17% of the respondents share the opinion that the present
market condition is not conducive for investment, whereas the rest 5% said
in terms of can not say/ do not know.

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Question 11: If you get a chance to invest in a NFO, then what kind of
Mutual Fund would you prefer?

Interpretation: - There are different types of mutual funds available in the

market according to the needs of the investors. There are Equity funds,
Income funds, Balanced Funds, etc. The highest sought after fund is the
Income fund which offers a regular income through investments in the
Govt. Bonds. The risk is also low in this. It is followed by the Equity Fund
which offers higher returns but it is riskier also. Some people would like to
Tax Saver Schemes. This provides some exemption in the Tax also.

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CONCLUSION
This study has made an attempt to understand the financial behavior of MF
investors in connection with the scheme preference and selection. The
post survey developments are likely to have an influence on the findings.
Behavioral trends usually take time to stabilize and they get disturbed even
by a slight change in any of the influencing variables. Hence, surveys
similar to the present one need to be conducted at intervals to develop
useful models. The buying intent of a mutual fund product by a small
investor can be due to multiple reasons depending upon customers risk
return trade off. Due to the reduction in the bank interest rates and high
degree of volatility in Indian stock market, investors are looking for an
alternative for their small time investments which will provide them a higher
return and also safety to their investments. So mutual funds offer the best
alternative to the small investors in India. The factors identified in the study
provide key information inputs regarding investors preferences and
priorities that will guide future mutual fund product managers in designing
attractive mutual fund products for the Indian market.
Further, the investors loss of confidence in mutual funds since 2000, when
most of the schemes lost money, has been regained due to the good
performance from 2003 till now, and the past has been forgotten.
Increased retail investors seem to be investing largely through the mutual
fund route as total assets managed by mutual fund industry has grown by
62% in the last one year topping the Rs 2,50,000 crore mark as on April
end. The corpus of several existing schemes have increased manifold and
fund houses have raked in huge sums through new fund offers in the
recent past.

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This indicates that investors have started realizing the important of mutual
funds as an investment avenue which offer everything an investor looks for
which includes convenience, transparency, professional management, risk
containment and above all - decent returns.

LIMITATIONS
There were certain limitations faced during the study.
Some people were not willing to disclose their investment profile
The area of sample was decided after taking into consideration the
major factors like
-

Availability of Investors

Approachability

Time available with investor for interaction

BIBLIOGRAPHY
Ippolito, R., 1992, Consumer reaction to measures of poor quality :
Evidence from Mutual Funds, Journal of Law and Economics, 35,
45-70
De Bondt, W.F.M. and Thaler, R, 1985, Does the stock market over
react? Journal of Finance, 40, 793-805.
Madhusudan V. Jambodekar, 1996, Marketing Strategies of Mutual
Funds Current Practices and Future Directions, Working Paper,
UTI IIMB Centre for Capital Markets Education and Research,
Bangalore.

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REFERENCES
1. www.mutualfundsindia.com
2. www.amfiindia.com
3. http://www.moneycontrol.com/
4. http://ibnlive.in.com/news
5. http://www.google.co.in/
6. http://www.personalfn.com/

Annexure I Questionnaire
1. What age group do you belong to?
a. 20 30 yrs
b. 30 40 yrs
c. 40 60 yrs
d. 60 yrs or above
2. What is your occupation?
a. Own business/Self Employed
b. Service/Salaried
c. Retired
d. Any other, please specify.......
3. Do you invest in mutual funds?
a. Yes
b. No

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If yes, then continue answering, otherwise go to question no.8.

4. NFOs are quite attractive than the old mutual funds. What is your
opinion.
a. Agree
b. Dis-agree
c. Do not know/ Cannot say
5. What are the major factors that influence you to invest in mutual
funds ? (Tick Applicable)
a. Less Risky
b. High Returns
c. Consistent source of income
d. Tax Planning/Tax Saving
e. Any other, please specify...........
6. On scale one to 10 (10 being the strongest) how much does
product qualities has a bearing on your selection of Fund/Scheme by
investors while investing in Mutual Fund /NFOs?
.......................................................................................................
7. How do you think Mid-Cap investment solve the problem of Largecap orientation in the mutual fund market?
a. Gives you opportunity to remain in stock for longer period and
earn huge returns.
b. Active and Affordable Retail investors participation
c. Any other, please specify..............
8. Which Sectors Or Any Particular Sector You Look As Market
Performer?
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a. IT
b. Banking
c. Engineering and Infrastructure
d. Telecom
e. Power
f. Any other, please specify..........
9. As You Think About Investments, What Option Comes First In Your
Mind?
a. Equities, Debentures and Bonds
b. Mutual funds
c. Commodities
d. Bank Fixed Deposits
e. Any other, please specify ....................
10. How Do You Perceive The Present Market Condition For
Investment?
a. Very Conducive
b. Conducive
c. Not conducive at all
d. Can not say/ do not know
11. If you get a chance to invest in a NFO, then what kind of Mutual
Fund would you prefer? (Tick all Relevant)
a. Equity oriented fund
b. Income fund
c. Diversified fund
d. Tax saver fund
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e. Balanced fund
f. Growth fund
g. Sector specific fund
h. Any other, please specify..........

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