Introduction

Investment is a commitment of funds in real assets or financial assets.

Investment involves risk and gain. Investment skills developed over a period of
time are considerably influenced by experience and spadework carried out to
arrive at conclusions. The success of an investment activity depends on the
knowledge and ability of investors to invest, the right amount, in the right type
of investment, at the right time.

Over the years, the financial services in India have undergone revolutionary
changes and had become more sophisticated, in response to the varied needs of
the economy. The process of financial sector reforms, economic liberalization
and globalization of Indian Capital Market had generated and augmented the
interest of the investors in equity. But, due to inadequate knowledge of the
capital market and lack of professional expertise, the common investors are still
hesitant to invest their hard earned money in the corporate securities.

The pre requisite for a successful investment lies in its liquidity, apart from
risk and return on investment. Liquidity through easy marketability of
investments demands the existence of a well- organised government regulated
financial system. Financial system comprises of financial institutions, services,
markets and instruments which are closely related and work in conjunction with
each other.

Financial services through the network of elements (institutions, markets,

instruments) serve the need of individuals, institutions and companies. It is
through the functioning of the financial system is facilitated.

There are a lot of investment avenues available today in financial market for
an investor with an investable surplus. He can in bank deposits, corporate
debentures and bonds where there is low risk but low return. He may invest in
stock of companies where the risk is high and the returns are also
proportionately high.

The recent trends in the stock market have shown that an average retail
investor always lost with periodic bearish trends. People began opting for
portfolio managers with expertise in stock markets who would invest on their
behalf. Thus we had wealth management services provided by many
institutions. However they proved too costly for a small investor. These
investors have found a good shelter with the mutual funds.

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 Mutual Fund is a common pool of money into which investors place their
contributions that are to be invested in accordance with a stated objective. The
ownership of fund is thus join or “mutual”, the fund belongs to all investors. A
single investor’s ownership of fund is in the same proportion as the amount of
the contribution made by him or her bears to the total amount of the fund.

Mutual Funds are trusts, which accept savings from investors and invest the
same in diversified financial instruments in terms of objectives set out in the
trusts deed with the view to reduce risk and maximize the income and capital
appreciation for distribution for the members.

A mutual fund is a corporation and the fund manager’s interest is to

professionally manage the funds provided by the investors and provide a return
on them after deducting reasonable management fees.

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Definition of Mutual Fund

“Mutual funds are collective savings and investment vehicle where savings of
small or sometimes big investors are pooled together to invest for their mutual
benefit and returns distributed proportionately”.

“A mutual fund is an investment that pools your money with the money of an
unlimited number of other investors. In return, you and the other investors each
own shares of fund. The fund’s assets are invested according to an investment
objective into the fund’s portfolio of investments. Aggressive growth funds seek
long- term capital growth by investing primarily in stocks of fast growing
smaller companies or market segments. Aggressive growth funds are also called
capital appreciation funds”.

History of Mutual Fund Industry in India

The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India at the initiative of the Government and Reserve Bank of India.
The history of mutual funds in India can be broadly divided into four distinct
phases.

First Phase (1964-87)

Unit Trust of India (UTI) was established on 1963 by an act of Parliament.

It was set up by the Reserve Bank of India and functioned under the regulatory
and administrative control of Reserve Bank of India. In 1978 UTI was de-
linked from the RBI and Industrial Development Bank of India (IDBI) took
over the regulatory and administrative control in place of RBI. The first phase
launched by UTI was Unit scheme 1964. At the end of 1988 UTI had Rs.6700
cr. of asset under management.

Second Phase (1987-93) Entry of Public Sector Funds

1987 marked the entry of non- UTI, Public sector mutual funds set up by
public sector mutual banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC). SBI mutual fund was the first
non- UTI mutual fund established in June 1987 followed by CAN bank mutual
fund (Aug.89), Indian bank mutual fund (Nov.89), Bank of India (Jan.90), Bank
of Baroda mutual fund (Oct.92). LIC established its mutual fund in June 1989
while GIC had set up its mutual fund in December 1990.

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 At the end of 1993, the mutual fund industry had assets under management
of Rs.47004 cr.

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

With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund
families. Also 1993 was the year in which the first mutual fund regulations
came into being, under which all mutual funds, except UTI were to be
registered and governed. The 1993 SEBI (Mutual Fund) Regulations were
substituted by more comprehensive and revised mutual fund regulations in
1996.

The Industry now functions under the SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing with many foreign
mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions.

Fourth Phase (Since February 2003)

February 2003, following the repeal of the Unit Trust of India Act 1963 and
UTI was divided into two separate entities. One is the specified undertaking of
the Unit Trust of India with assets under management of Rs.29835 cr. as at the
end of January 2003, representing broadly, the assets of US 64 scheme, assured
return and certain other schemes. The second is the UTI mutual fund ltd.
Sponsored by SEBI, PNB, BOB and LIC. It is registered with SEBI and
functions under the mutual fund regulations.

Types of Mutual Funds

Wide variety of mutual fund schemes exists to cater to the needs such as
financial position etc. There are over hundreds of mutual funds scheme to
choose from. It is easier to think of mutual funds in categories mentioned
below:

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 Mutual Funds

According to Scheme of According to According to According to

ownership Operation Portfolio Location Market
ownership Capitalisation
Equity
Public Sector Open ended

Balanced Location
Private Sector Close ended

Income Fund
Interval Schemes
o
Growth Fund

According to Ownership

 Public sector
Unit Trust of India (UTI) has been functioning in the arena of Mutual Fund
business in India since 1963-64. However it was after 23 years, in 1987 that
second mutual fund was established in India by the State Bank of India. SBI-
Mutual Fund was the first among all the public sector commercial banks that
started operations during November 1987. Thereafter a number of public sector
organisations like IND Bank- MF, CAN Bank- MF, BOI- MF, PNB- MF, GIC-
MF and LIC- MF etc. have joined the mutual fund business in a short span of
time.
 Private Sector
Seeing the success and growth of mutual fund in the Indian capital market,
the Government of India allowed the private sector corporate to join the
mutual fund industry on February 14, 1992. Since then, a number of private
sector companies have approached SEBI for permission to set up private
mutual funds. SEBI (Mutual Fund) Regulations, 1996 provide guidelines for
registration, constitution, management and schemes of mutual funds.

According to Scheme of Operation

 Open- Ended Scheme

Open- Ended Scheme means a scheme of mutual funds which offers unit

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 for sale without specifying any duration for redemption. These schemes do
not have a fixed maturity and entry to the fund is always open to investors
who can subscribe it at any time.
 Close- Ended Scheme
A close- ended scheme means any scheme of mutual fund in which the
period of maturity of the scheme is specified. An investor can subscribe
directly to the scheme only at the time of initial issue. After the initial issue is
closed a person can buy or sell the units of the scheme in the secondary
market i.e. the stock exchanges where these are listed. The price in the
secondary market is determined on the basis of demand and supply and hence
could be different from the net asset value.
 Interval Scheme
An interval scheme is a scheme of mutual fund which kept open for a
specific interval and after that it operates as a close scheme. Thus it combines
the feature of both open ended as well as close- ended schemes. Interval
schemes have been permitted by SEBI in recent year only.

According to Portfolio
 Income Funds
These funds aim at providing maximum current return/ income to the
investors. There may be income funds of two types; some funds may
concentrate on low risk, constant return while others, may aim at maximum
return even at the cost of some risk.
 Equity Fund
These funds mainly invest in shares of the companies. The investments
may vary from “blue chip” companies to newly established companies. Stock
funds may have further sub- divisions such as income funds and growth
funds. . A special type of equity fund is known as ‘index fund’.
 Balanced Fund
Balanced Funds spend both on common stock and preferred stock. Some
part of funds is spent on buying equity while other part is used in acquiring
interest bearing debentures and preference shares ensuring certain amount of
dividend. The investors have advantages of regular income and appreciation
in value of securities. These funds are also known as ‘conservative funds’ or
‘income and growth funds’.
 Growth Fund
These fund aim at providing capital appreciation in the value of

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 investments. Such funds invest in growth oriented securities have a potential
to appreciate in long run. The risk involved in such funds is higher than the
income funds.

According to Location
 Domestic Funds
These are the funds which mobilize savings of people within the country
where investments are made. Domestic funds can further be sub- divided on
the basis of scheme of operation or portfolio.
 Off- shore Funds
Off- shore mutual funds are those which raise or mobilise funds in
countries other than where investments are to be made. These funds attract
foreign savings for investment in India.

According to Market Capitalisation

Mutual funds can also be classified on the basis of market capitalisation
such as large cap, medium cap and small cap. In the Bombay Stock Exchange
(BSE), large cap, medium cap, small cap stocks are those which contribute
85, 15 and 5 percent of the total market capitalisation respectively. Large cap,
medium cap and small cap mutual funds are those that invest in the same
manner.

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 India has a legal framework within which mutual fund has to be
constituted. In India open and close ended funds operate under the same
regulatory structure i.e. as unit trusts. A mutual fund in India is allowed to
issue open- ended and close- ended schemes under a common legal structure.
The structure that is required to be followed by any mutual fund in India is
laid down under SEBI (Mutual Fund) Regulations, 1996.

The Fund Sponsor

Sponsor is defined under SEBI regulations as any person who, acting
alone or in combination of another corporate body established a mutual fund.
The sponsor of the fund is akin to the promoter of a company as he gets the
fund registered with SEBI. The sponsor forms a trust and appoints a board of
trustees. The sponsor also appoints the Asset Management Company as fund
managers. The sponsor either directly or acting through the trustees will also
appoint a custodian to hold funds assets. All these are made in accordance
with the regulation and guidelines of SEBI.

Trustees
A trust is created through a document called Trust Deed that is executed
by the fund sponsor in favour of the trustees. The Trust- the Mutual Fund-
may be managed by a board of trustees- a body of individuals, or a trust
company- a corporate body. Most of the funds in India are managed by board
of trustees. While the board of trustees are governed by the Indian Trust Act,
where the trusts are a corporate body, it also required to comply with the
Companies Act 1956. The board of the trust company as an independent
body, act as a protector of the unit- holders interest. The trustees do not
directly manage the portfolio of securities. For this specialist function, they
appoint an Asset Management Company. They ensure that the fund is
managed by the AMC as per the defined objectives and in accordance with
the trusts deeds and SEBI regulations.

The Asset Management Companies

The role of an Asset Management Companies (AMC) is to act the
investment manager of the trust under the board supervision and the guidance
of the trustees. The AMC is required to be approved and registerd with SEBI
as an AMC. The AMC of a mutual fund must have a net worth of atleast
Rs.10 cr. At all times. Director of the AMC, both independent and non-

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independent, should have adequate professional expertise in financial
services and should be indivisuals of high morale standings, a condition also
applicable to other key personnel of the AMC. The AMC cannot as a trustee
of any other mutual fund.

Custodian and Depositories

Mutual Fund is in the business of buying and selling of securities in large
volumes. The custodian is appointed by the board of trustees for safe keeping
of securities or participating in any clearance system through approved
depository companies on behalf of the mutual fund and it must fulfill its
responsibilities in accordance with its agreement with mutual fund. The
custodian should be an entity independent of the sponsors and is requried to
be registered with SEBI. With the introduction of the concept of
dematerialization of shares the dematerialised shares are kept with the
Depository participant while the custodian holds the physical securities.
Thus, deliveries of a fund’s securities are given or received by a custodian or
a depository participant, at the instuction of the AMC, although under the
overall direction and responsibilities of the trustees.

Bankers
A fund’s activities involve dealing in money on a continuous basis
primarily with respect to buying and sellind units, paying for investment
made, receivng the proceeds from sale of the investment and discharging its
obligations towards operating expenses. Thus the fund’s banker plays an
important role to determine quality of service that the fund gives in timely
delivery of remittances etc.

Transfer Agents
Transfer agents are responsible for issuing and redeeming units of the
mutual fund and provide other related services such as preparation of
transfer documents and updating investor records. A fund may choose to
carry out its activity in- house and charge the scheme for the service at a
competitive market rate. Where an outside transfer agent is used, the fund
investor wil find the agent to be an important interface to deal with, since all
of the investor services that a fund provides are going to be dependent on the
transfer agent.

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 Advantages of Mutual Funds
Mutual funds are becoming very popular worldwide because of following
important advantages:-

 Diversification
A large number of investors have small savings with them. They can at the
most buy shares of one or two companies. When small savings are pooled
and entrusted to mutual funds then these can be used to buy shares of many
different companies. Thus investors can participate in a large basket of shares
of different companies. This diversification of investment ensures regular
returns and capital appreciation at reduced risks.
 Liquidity
A peculiar advantage of a mutual fund is that investment made in its
schemes can be converted into cash promptly without heavy expenditure on
brokerage, delays etc. According to regulations of SEBI, a mutual fund in
India is required to ensure liquidity.
 Reduced Risk
As mutual funds invest in large number of companies and are managed
professionally, the risk factor of the investor is reduced. A small investor, on
the other hand, may not be in a position to minimise such risks.
 Tax Advantage
There are certain schemes of mutual fund which provides tax advantages
under the Income Tax Act. Thus, the tax liability of an investor is also
reduced when he invests in these schemes of mutual funds.
 Flexibility
Mutual funds provide flexible investment plans to its subscribers such as,
regular investment plans, regular withdrawal plans and dividend reinvestment
plans etc. Thus, an investor can invest or withdraw funds according to his
own requirements.
 Higher Returns
Mutual funds are expected to provide higher returns to the investor as
compare to direct investment because of professional management,
economies of scale, reduced risk etc.
 Investor Protection
Mutual are regulated and monitored by the Securities and Exchanges
Board of India (SEBI) the SEBI(Mutual Funds) Regulations, 1996 which

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 have replaced the regulations of 1993, provide better protection to the
investors, impart a greater degree of flexibility and facilitate competition.

Risk Factors of Mutual Fund

 The Risk Return Trade off
The most important relationship to understand is the risk- return trade- off.
Higher the risk greater the return/loss and lower the risk lesser the return/loss.
Hence it is up to the investor to decide how much risk he/she is willing to
take. In order to do this he/she must first be aware of the different types of
risks involved with investment decision.
 Market Risk
Sometimes prices and yields of all securities rise and fall. Broad outside
Influences affecting the market in general lead to this. This is true may it be
big corporations or smaller mid-sized companies. This is known as market
risk. A Systematic Investment Plan (SIP) that work on the concept of Rupee
Cost Averaging (RCA) might help mitigates risk.
 Credit Risk
The debt servicing ability of a company through its cashflows determines the
credit risk faced by investor. This credit risk is measured by independent
rating agencies like CRISIL who rate companies and their papers. A ‘AAA’
rating is considered the safest where as a ‘D’ rating considered poor credit
quality. A well diversified portfolio might help mitigates this risk.
 Inflation risk
Inflation is loss of purchasing power over time. A lot of times people make
conservative investment decision to protect their capital but end up with a
sum of money that can buy less than what the principal could at the time of
the investment. This happens when inflation grows faster than the return on
your investment. A well diversified portfolio with some investment in
equities might help mitigates the risk.
 Interest Rate Risk
In a free market economy interest rates are difficult to predict. Changes in
interest rate affect the prices of bonds as well as equities. If interest rates
raises the prices of bonds fall and vice versa. Equity might be negatively
affected as well in a rising interest rate environment.
 Political Risk
Changes in government policy and political decision can change the
investment environment. They can create a favourable environment for

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 investment or vice versa.

 Liquid Risk
Liquid risk arises when it becomes difficult to sell the securities that one
has purchased. Liquidity risk can be partly mitigated by diversification,
staggering of maturities as well as internal risk controls that lean towards
purchase of liquid securities.

Objective of the study

 To get insight knowledge about mutual funds.
 To know about various schemes provided by ICICI Prudential Mutual Fund.
 To analyze return of those schemes.
 To do a comparative study of performance of the schemes yearly basis.

Scope of the study

A big boom has been witnessed in mutual fund industry in recent time. A
large number of players have entered the market and trying to get market
share in this rapidly improving market. This study will help

 To make aware about the concept of mutual fund.

 Understanding the fundamentals of mutual fund and how does it
operate, which can help in improving knowledge in terms of financial
sector.
 To provide information regarding advantages and various risk involved
in mutual fund.
 To provide information regarding various schemes of ICICI Prudential
Mutual Fund, Its terms and conditions and returns of those schemes.

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