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Liquidity
Unless you opt for close-ended mutual funds, it is relatively easier to buy and exit a
mutual fund scheme. You can sell your units at any point (when the market is
high). Do keep an eye on surprises like exit load or pre-exit penalty. Remember,
mutual fund transactions happen only once a day after the fund house releases that
day’s NAV.
Diversification
Mutual funds have their share of risks as their performance is based on the market
movement. Hence, the fund manager always invests in more than one asset class
(equities, debts, money market instruments, etc.) to spread the risks. It is
called diversification. This way, when one asset class doesn’t perform, the other can
compensate with higher returns to avoid the loss for investors.
Expert Management
A mutual fund is favoured because it doesn’t require the investors to do the research
and asset allocation. A fund manager takes care of it all and makes decisions on what
to do with your investment. He/she decides whether to invest in equities or debt.
He/she also decide on whether to hold them or not and for how long.
Your fund manager’s reputation in fund management should be an essential criterion
for you to choose a mutual fund for this reason. The expense ratio (which cannot be
more than 1.05% of the AUM guidelines as per SEBI) includes the fee of the
manager too.
Cost Efficiency
You have the option to pick zero-load mutual funds with fewer expense ratios. You
can check the expense ratio of different mutual funds and choose the one that fits in
your budget and financial goals. Expense ratio is the fee for managing your fund. It
is a useful tool to assess a mutual fund’s performance.
Tax efficiency
You can invest up to Rs.1.5 lakh in tax-saving mutual funds mentioned under 80C
tax deductions. ELSS is an example of that. Though a 10% Long-Term Capital Gains
(LTCG) is applicable for returns above Rs.1 lakh after one year, they have
consistently delivered higher returns than other tax-saving instruments like FD in
recent years.
Automated Payment
It is common to forget or delay SIPs or prompt lumpsum investments due to any
given reason. You can opt for paperless automation with your fund house or agent.
Timely email and SMS notifications help to counter this kind of negligence.
Safety
There is a general notion that mutual funds are not as safe as bank products. This is a
myth as fund houses are strictly under the purview of statutory government bodies
like SEBI and AMFI. One can easily verify the credentials of the fund house and the
asset manager from SEBI. They also have an impartial grievance redressal platform
that works in the interest of investors.
Lock-in Period
Many mutual funds have long-term lock-in periods, ranging from five to eight years.
Exiting such funds before maturity can be an expensive affair. A specific portion of
the fund is always kept in cash to pay out an investor who wants to exit the fund.
This portion cannot earn interest for investors.
Dilution
While diversification averages your risks of loss, it can also dilute your profits.
Hence, you should not invest in more than seven to nine mutual funds at a time.
As you have just read above, the benefits and potential of mutual funds can
undoubtedly override the disadvantages, if you make informed choices. However,
investors may not have the time, knowledge or patience to research and analyse
different mutual funds.
No Control
Unlike picking your own individual stocks, a mutual fund puts you in the passenger
seat of somebody else’s car.
The Wisdom of Professional Management
That’s right, this is not an advantage. The average mutual fund manager is no better
at picking stocks than the average non-professional, but charge fees.
Buried Cost
Many mutual funds specialize in burying their cost and in hiring salesmen who do
not make those cost to their clients.
A. By Structure
An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors "an conveniently buy and sell
units at Net Asset Value (“NAV”) related prices. The key feature of open-end
schemes is liquidity.
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors "an conveniently buy and sell
units at Net Asset Value (“NAV”) related prices. The key feature of open-end
schemes is liquidity.
B. By Nature
1. Equity Fund:
These funds invest the maximum part of their corpus into equities
holdings. The structure of the fund may vary different for different
schemes and the fund manager’s outlook on different stocks. The
Equity Funds are sub-classified depending upon their investment
objective, as follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity
funds rank high on the risk-return matrix.
2. Debt Funds
The objective of these Funds is to invest in debt papers, Government
authorities, private companies, banks and financial institutions are
some of the major issuers of debt papers. By investing in debt
instruments, these funds ensure low risk and provide stable income to
the investors. Debt funds are further classified as:
• Gilt Funds: Invest their corpus in securities issued by Government,
popularly known as Government of India debt papers. These Funds
carry zero Default risk but are associated with Interest Rate risk. These
schemes are safer as they invest in papers backed by Government.
• Income Funds: Invest a major portion into various debt instruments
such as bonds, corporate debentures and Government securities.
• MIP’s: Invests maximum of their total corpus in debt instruments
while they take minimum exposure in equities. It gets benefit of both
equity and debt market. These scheme ranks slightly high on the risk-
return matrix when compared with other debt schemes.
• Short Term Plans (STPs): Meant for investment horizon for three to
six months. These funds primarily invest in short term papers like
Certificate of Deposits (CDs) and Commercial Papers (CPs). Some
portion of the corpus is also invested in corporate debentures.
• Liquid Funds: Also known as Money Market Schemes, These funds
provides easy liquidity and preservation of capital, These schemes
invest in short-term instruments like Treasury Bills, inter-bank call
money market, CPs and CDs. These funds are meant for short-term
cash management of corporate houses and are meant for an investment
horizon of 1 day to 3 months. These schemes rank low on risk-return
matrix and are considered to be the safest amongst all categories of
mutual funds.
3. Balanced Funds
As the name suggest they are a mix of both equity and debt funds.
They invest in both equities and fixed income securities, which are in
line with pre-defined investment objective of the scheme. These
schemes aim to provide investors with the best of both the worlds.
Equity part provides growth and the debt part provides stability in
returns. Further the mutual funds can be broadly classified on the basis
of investment parameter viz; each category of funds is backed by an
investment philosophy, which is pre-defined in the objectives of the
fund. The investor can align his own investment needs with the funds
objective and invest accordingly.
C. By Investment Objective
1. Growth Schemes:
Growth Schemes are also known as equity schemes. The aim of these
schemes is to provide capital appreciation over medium to long term.
These schemes normally invest a major part of their fund in equities
and are willing to bear short-term decline in value for possible future
appreciation.
2. Income Schemes:
Income Schemes are also known as debt schemes. The aim of these
schemes is to provide regular and steady income to investors. These
schemes generally invest in fixed income securities such as bonds and
corporate debentures. Capital appreciation in such schemes may be
limited.
3. Balanced Schemes:
Balanced Schemes aim to provide both growth and income by
periodically distributing a part of the income and capital gains they
can. These schemes invest in both shares and fixed income securities,
in the proportion indicated in their offer documents (normally 50:50).
4. Money Market Schemes:
Money Market Schemes aim to provide easy liquidity, preservation of
capital and moderate income. These schemes generally invest in safer,
short-term instruments, such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money.
D. Other Schemes
1. Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws
prescribed from time to time. Under Sec.88 of the Income Tax Act,
contributions made to any Equity Linked Savings Scheme (ELSS) are
eligible for rebate.
2. Index Schemes:
Index schemes attempt to replicate the performance of a particular
index such as the BSE Sensex or the NSE 50. The portfolio of these
schemes will consist of only those stocks that constitute the index. The
percentage of each stock to the total holding will be identical to the
stocks index weightage. And hence, the returns from such schemes
would be more or less equivalent to those of the Index.
a. As far as mutual funds are concerned, SEBI formulates policies and regulates the
mutual funds to protect the interest of the investors.
b. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds
sponsored by private sector entities were allowed to enter the capital market.
c. The regulations were fully revised in 1996 and have been amended thereafter from
time to time.
d. SEBI has also issued guidelines to the mutual funds from time to time to protect
the interests of investors.
e. All mutual funds whether promoted by public sector or private sector entities
including those promoted by foreign entities are governed by the same set of
Regulations. The risks associated with the schemes launched by the mutual funds
sponsored by these entities are of similar type. There is no distinction in regulatory
requirements for these mutual funds and all are subject to monitoring and
inspections by SEBI.
f. SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be
associated with the sponsors.
g. Also, 50% of the directors of AMC must be independent. All mutual funds are
required to be registered with SEBI before they launch any scheme.
h. Further SEBI Regulations, inter-alia, stipulate that MF’s cannot guarantee returns
in any scheme and that each scheme is subject to 20:25 condition [i.e. minimum 20
investors per scheme and one investor can hold more than 25% stake in the corpus
in that one scheme].
i. Also, SEBI has permitted MF’s to launch schemes overseas subject various
restrictions and also to launch schemes linked to Real Estate, Options and Futures,
Commodities, etc.
Chapter 2
Research Methodology
Research Methodology is a systematic method of discovering new facts or verifying old facts,
their sequence, inter-relationship, casual explanation and the natural laws which governs
them.
There are mainly two types of research methodology i.e. Primary research and Secondary
research.
To achieve the objective of studying the stock market data has been collected
This study is completely based on the secondary data. This data is collected from various sources
especially from the journals, magazines, articles, books and mainly from internet.
In my project the scope is limited to some prominent mutual funds in the mutual fund
industry. I analyzed the funds depending on their schemes like equity, income, balance. But
there is so many other schemes in mutual fund industry like specialized (banking,
infrastructure, pharmacy) funds, index funds etc.
My study is mainly concentrated on equity schemes, the returns, in income schemes the
rating of CRISIL, ICRA and other credit rating agencies.
To get a brief idea about the benefits available from Mutual Fund investment.
To get an idea of the types of schemes available.
To discuss about the market trends of Mutual Fund investment.
To study some of the mutual fund schemes and analysis them.
Observe the fund management process of mutual funds.
Explore the recent developments in the mutual funds in India.
To give an idea about the regulations of mutual funds.
2.3 Data Collection Method
A. Primary Data:
The primary information is taken from survey method by 100 respondent.
B. Secondary Data:
The secondary information is mostly taken from websites, books, journals, etc.
88.1% people have knowledge about the share market and its functioning.
11.9% people doesn’t have knowledge of share market and its functioning.
According to the survey conducted out of 100 respondent:
33.3% people invest their money in mutual funds from one year.
7.4% people invest their money in mutual funds from two years.
24.1% people invest their money in mutual funds for three years.
14.8% people invest their money in mutual funds for four years.
14.8% people invest their money in mutual funds for five years.
5.6% people invest their money in mutual funds for more than five years.
According to the survey conducted out of 100 respondent:
36.7% people do not invest in mutual funds because It’s not a lucrative investment
instrument.
46.7% people do not invest in mutual funds because No satisfactory return on
investment when compared to other investment instruments.
56.7% people do not invest in mutual funds because No safety for funds invested.
46.7% people do not invest in mutual funds because No knowledge about how to
invest.
41.75 people do not invest in mutual funds because It is related to share market, so it
is very risky and the returns are not guaranteed.
According to the survey conducted out of 100 respondent:
28.2% people think that savings bank is the best investment instrument.
31% people think that fixed deposit is the best investment instrument.
5.6% people think that shares/debentures is the best investment instrument.
21.1% people think that gold/silver is the best investment instrument.
1.4% people think that postal savings is the best investment instrument.
9.9% people think that real estate is the best investment instrument.
2.8% people think that insurance is the best investment instrument.
According to the survey conducted out 100 respondent:
17.9% belongs to the age group of 18-20 who invest in mutual funds.
16.8% belongs to the age group of 21-30 who invest in mutual funds.
30.5% belongs to the age group of 31-40 who invest in mutual funds.
20% belongs to the age group of 41-50 who invest in mutual funds.
14.7% belongs to the group of 51-60 who invest in mutual funds.
40.6% people faced problem while selling the mutual funds because delay in getting
cash.
50% people faced problem while selling the mutual funds because broker’s chargers
is more than commission.
31.3% people faced problem while selling the mutual funds because no fixed center.
15.6% people faced problem while selling the mutual funds because relie on broker
for sale.
According to the survey conducted out of 100 respondent:
37.5% people are very much interested in learning about new mutual fund schemes.
39.1% people are interested in learning about new mutual fund schemes to some
extent.
14.1% people are not much interested in learning about new mutual fund schemes.
9.4% people are not at all interested in learning about new mutual fund schemes.
Suggestions
2. a) Categorizing equities
Diversified – invest in large capitalized stocks belonging to multiple sectors.
Sectorial – Invest in specific sectors like technology, FMCG, Pharma, etc.
b) Categorized Debt
.• Gilt – Invest only in government securities, long maturity securities with average of 9 to 13
years, very sensitive to interest rate movement.
• Medium Term Debt (Income Funds) – Invest in corporate debt, government securities and
PSU bonds. Average maturity is 5 to 7 years.
• Short Term Debt – Average maturity is 1 year. Interest rate sensitivity is very low with
steady returns.
• Liquid – Invest in money market, other short term paper, and cash. Highly liquid. Average
maturity is three months.
3. Review Categories
• Diversified equity has done very well while sectorial categories have fared poorly in Indian
market.
• Index Funds have delivered much less compared to actively managed Funds.
• Gilt and Income Funds have performed very well during the last three years. They perform
best in a falling interest environment. Since interest rates are now much lower, short term
Funds are preferable.
Within debt class, presently more is allocated towards short term Funds, because of low
prevailing interest rates.
However if interest rates go up investor can allocate more to income Funds or gilt Funds.
BIBLOGRAPHY