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An empirical study on awareness & acceptability of mutual fund

Conference Paper · January 2009

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 An empirical study on awareness and acceptability of mutual fund
By
Dr. Binod Kumar Singh* and Ashutosh Kr. Jha**

Abstract

A mutual fund is a professionally managed firm of collective investments that collects money from

many investors and puts it in stocks, bonds, short-term money market instruments, and/or in other

securities. A mutual fund is simply a financial intermediary that allows a group of investors to pool

their money together with a predetermined investment objective. The mutual fund will have a fund

manager who is responsible for investing the pooled money into specific securities (usually stocks or

bonds). Mutual funds are one of the best investments ever created because they are very cost effective

and easy to invest. In this paper the awareness level of mutual fund, acceptability of mutual fund,

factors behind the investment in mutual fund, the factors which will be considered by the investors

before investing in mutual funds and awareness of systematic investment plan have been studied. In

this paper the structure of the mutual fund, operation of mutual fund, comparison between

investment in mutual funds and bank and calculation of NAV etc. have been considered.

*Faculty Member, Alphia Institute of Business Management, Ranchi Campus

**Research Associate, Alphia Institute of Business Management, Ranchi Campus

Affiliation-ICFAI

E mail id- singhbinod4@yahoo.co.in

 Introduction

A Mutual Fund pools the money of people with certain investment goals. The money invested in

various securities depending on the objectives of the mutual fund scheme and the profits (or loss) is

shared among investors in proportion to their investment. Investments in securities are spread across

a wide cross-section of industries and sectors. Diversification reduces the risk because all stocks may

not move in the same direction in the same proportion at the same time. Mutual fund issues units to

the investors in accordance with quantum of money invested by them. Investors of mutual funds are

known as unit holders. The profits or losses are shared by the investors in proportion to their

investment. The mutual funds normally come out with a number of schemes with different

investment objectives which are launched from time to time. A mutual fund is required to be

registered with the Securities and Exchange Board of India (SEBI) which regulates securities markets

before it can collect funds from the public.

A Mutual fund is a trust that pools the savings of a number of investors who share a common

financial goal. The money collected from investors is invested in capital market instrument such as

shares, debentures and other securities. The income earned through these investments and the capital

appreciations realized are shared by its unit’s holder in proportion to the number of units owned by

them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an

opportunity, to invest in a diversified, professionally managed basket of securities at relatively low

cost.

Mutual funds can be invested in many different kinds of securities. The most common are cash,

stock, and bonds, but there are hundreds of sub-categories. Stock funds invest primarily in the shares

of a particular industry, such as technology or utilities. These are known as sector funds. Bond funds

can vary according to risk (e.g., high-yield or junk bonds, investment-grade corporate bonds), type of

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 issuers (e.g., government agencies, corporations, or municipalities), or maturity of the bonds (short-

or long-term). Both stock and bond funds can invest in primarily U.S. securities (domestic funds),

both U.S. and foreign securities (global funds), or primarily foreign securities (international

funds).Most mutual funds' investment portfolios are continually adjusted under the supervision of a

professional manager, who forecasts the future performance of investments appropriate for the fund

and chooses those which he or she believes will most closely match the fund's stated investment

objective. A mutual fund is administered through a parent management company, which may hire or

fire fund managers.

Mutual funds are liable to a special set of regulatory, accounting, and tax rules. Unlike most other

types of business entities, they are not taxed on their income as long as they distribute substantially

all of it to their shareholders. Also, the type of income they earn is often unchanged as it passes

through to the shareholders. Mutual fund distributions of tax-free municipal bond income are also

tax-free to the shareholder. Taxable distributions can be either ordinary income or capital gains,

depending on how the fund earned those distributions.

A mutual fund is a set up in the form of trust, which has sponsor, trustee, asset management

company (AMC) and custodian.

The sponsor is the person who acts alone or in combination with another body corporate and

establishes a mutual fund. The sponsor must contribute at least 40% of the net worth of the

investment managed and meet the eligibility criteria prescribed under the Securities and Exchange

Board of India (Mutual Funds) regulations, 1996. The sponsor is not responsible or liable for any loss

or shortfall resulting from the operation of the schemes beyond the initial contribution made by it

towards setting up of the Mutual Fund.

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 The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act,

1882 by the Sponsor. They must be registered under the Indian Registration Act 1908.

A trustee is usually a company (corporate body) or a board of trustees (body of individuals). The

main responsibility of the trustee is to safeguard the interest of the unit holders and also ensure that

AMC functions in the interest of investors and in accordance with the Securities and Exchange Board

of India (Mutual Fund) Regulations 1996 the provisions of the Trust deed and the offer Document of

the respective schemes.

The AMC is appointed by the Trustees as the investment Manager of the Mutual Fund. The AMC is

required to be approved by SEBI to act as an asset management company of the Mutual Fund. At

least 50% of the directors of the AMC are independent directors who are not associated with the

Sponsor in any manner. The AMC must have a net worth of at least 10crore at all times.

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to agent the

mutual fund. The registrar processes the application form, redemption requests and dispatches

account statements to the unit holders. The Registrar and Transfer agent also handles

communications with investors and updates investor records.

Objective(s) of the study

 To know about the awareness of mutual fund

 To know about the acceptability of mutual fund
 To know about the factor behind the investment in mutual fund
 To study the factors which will be considered by investors before investing
 To study about awareness of the systematic investment plan

Types of mutual fund scheme

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 Mutual funds can be divided into various schemes as Open ended, closed ended, interval, growth,

income, balanced, money market, tax saving, index sector specific and some special schemes etc.

Structure of mutual fund

SEBI

TRUSTEE SPONSOR

AMC
OPERATIONS
MKT./SALES
FUND MANAGER
MKT./SALES

MUTUAL FUND

DISTRIBUTER
SCHEMES

INVESTOR

Mutual Fund Operation Flow Chart

5
 Comparison between investment in bank and mutual fund

BANK MUTUAL FUND

Returns Low Better
Administrative Exp. High Low
Risk Low Moderate
Investment Options Less More
Network High Penetration Low but Improving
Liquidity At a cost Better
Quality of Assets Not transparent Transparent
Interest Calculation Minimum balance Every day
between 10th & 30th of
every month
Guarantee Maximum Rs. 1,00,000 None
on Deposits

Net asset value

The net asset value, or NAV, is the current market value of a fund's holdings, usually expressed as a

per-share amount. For most funds, the NAV is determined daily, after the close of trading on some

specified financial exchange, but some funds update their NAV multiple times during the trading day.

Open-end funds sell and redeem their shares at the NAV, and so process orders only after the NAV

are determined. Closed-end funds (the shares of which are traded by investors) may trade at a higher

or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is

divided into multiple classes of shares, each class will typically have its own NAV, reflecting

differences in fees and expenses paid by the different classes. Some mutual funds own securities

which are not regularly traded on any formal exchange. These may be shares in very small or

bankrupt companies; they may be derivatives; or they may be private investments in unregistered

financial instruments (such as stock in a non-public company). In the absence of a public market for

these securities, it is the responsibility of the fund manager to form an estimate of their value when

computing the NAV. How much of a fund's assets may be invested in such securities is stated in the

fund's prospectus.

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 Calculation of NAV

The most important of the calculation is the valuation of the assets owed by the funds. Once it is

calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The

detailed methodology for the calculation of the asset value is given below.

Asset value =Sum of market value of shares/debentures+Liquid assets/cash held (if any)

+Dividends/interest accrued-Amount due on unpaid assets -Expenses accrued but not paid

SIP illustration

Franklin India prima plus-growth

Installment date Investment Purchase price No. of units

01.01.06 1000.00 92.55 10.80
01.02.06 1000.00 98.45 10.16
01.03.06 1000.00 105.74 9.46
01.04.06 1000.00 116.18 8.81
01.05.06 1000.00 122.86 8.14
01.06.06 1000.00 99.08 10.09
01.07.06 1000.00 100.97 9.90
01.08.06 1000.00 102.40 9.77
01.09.06 1000.00 113.03 8.85
01.10.06 1000.00 118.56 8.43
01.11.06 1000.00 128.56 7.78
01.12.06 1000.00 134.86 7.42

12000.00 109.40

Average unit cost 12000/109.40= Rs 109.69

Current value (as of 16.05.07) = Rs 16,123.87

Gain = Rs 4,123.87

Absolute return = 34.37%

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 Taking the SIP strategy the investor can reduce his average cost per units. The investor gets the

advantage of getting more units when the market is down.

Research Methodology

Survey method has been adopted to collect primary data from Ranchi market. Data were collected

with the help of a prepared questionnaire from retailers.Quota sampling was used for this survey with

sample size 150.

Findings

The Study was aimed at identifying the level of awareness about mutual funds and acceptability of

mutual fund.

The figure-I explains the level of awareness about the mutual fund. About 75 respondents know

about mutual fund, 41 respondents aware about mutual fund through friends, 27 respondents aware

through broker etc.

The figure-II explains the acceptability of mutual fund. About 63 respondents having thought that

mutual fund is safe.

The figure-III explains about the factor behind the investment in mutual fund. About 51 respondents

having thought that mutual fund is wealth creation, 40 respondents having thought that mutual fund is

better for tax planning and 32 respondents having thought that mutual fund provide steady income.

The figure-IV explains the factors which will be considered by investors before investing in mutual

fund. About 48 respondents have invested in mutual fund due to security, 45 respondents have

considered the liquidity of mutual fund and 37 respondents have invested in mutual fund due to high

return.

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 The figure-V explains about the awareness of systematic investment plan (SIP). About 38

respondents know about the SIP.

References

Avadhani, V. A. (2003), Investment Management, Saujanya Books Ltd, New Delhi.

Narnolia Monthly Magazine (2008), Narnolia Securities.

Pandian, P. (2003), Security Analysis & Portfolio Management, Vikas Publication Pvt. Ltd.

www.amfiindia.com

www.finmin.nic.in

www.icicidirect.com

www.nseindia.com

www.sebi.gov.in

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 Figures

Figure I. The level of awareness about mutual fund

Figure II. The acceptability of mutual fund

Figure III. The factor behind the investment in mutual fund

Reasons for investment

No.of respondents

60 51
40
32 27
40
20
0
Wealth Steady Tax planning Higher
creation Incom e return
Reasons

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 Figure IV. The factors which will be considered by investors before investing in mutual fund

Factores considered by the investors

No.of respondents

60 45 48
37
40
20
20
0
Liquidity Firm Security Higher
credibility return
Reasons
Figure V. The awareness of systematic investment plan (SIP)

Awareness of SIP
No. of respondents.

100 80
80
60 38 32
40
20
0
Yes No Can't say
Answers of investors

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