1. Summer Internship Project Report
On
“INVESTORS PERCEPTION TOWARDS INVESTMENT IN
MUTUAL FUND IN ODISA MARKET WITH SPECIAL
REFERENCE TO BAJAJ CAPITAL”
By
Pabita Mishra
Registration No: BIM0611BM021
work carried at
Bhubaneswar
Bhavan’s Centre for Communication & Management , Bharatiya Vidya Bhavan Bhubaneswar
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2. CONTENTS
Particulars Page
DECLARATION 4
CERTIFICATE FROM INTERNAL GUIDE 5
CERTIFICATE FROM EXTERNAL GUIDE 6
CERTIFICATE FROM APPROVAL 7
ACKNODLEDGEMENT 8
EXECUTIVE SUMMARY 9-12
OBJECTIVES 13
COMPANY PROFILE 14-21
SWOT ANALYSIS 22
REVIEW OF THE LITRETURE 23-45
RESEARCH METHEDOLOGY 46
DATA INTERPRETATION 47-56
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3. FINDINGS AND SUGGESTIONS 57-58
CONCLUSION 59
BIBLIOGRAPHY 60
MY EXPERIENCE AT SIP
QUESTIONNAIRE
DECLARATION
I hereby declare that this project report titled “Investor Perceptions towards Mutual Fund
Investments in the Odisha Market with special reference to Bajaj Capital”, submitted by
me under the direct supervision and guidance of Prof. Siddharth Shankar Kanungo,
Bharatiya Vidya Bhavan, Bhubaneswar and Mr. Anupam Mohanty, Marketing Manager,
Bajaj Capital, Bhubaneswar is my own work and has not been submitted to any other
university or institution or published earlier.
Pabita Mishra
Registration. No.: BIM0611BM021 Date: ............................
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4. CERTIFICATE FROM THE INTERNAL GUIDE
This is to certify that the report titled “Investor Perceptions towards Mutual Fund
Investments in the Odisha Market with special reference to Bajaj Capital”, submitted by
Ms. Pabita Mishra bearing Registration. No. BIM0611BM020, of Bhavan’s Centre for
Communication & Management, Bharatiya Vidya Bhavan, Bhubaneswar, towards partial
fulfillment of the requirements for the award of Post Graduate Diploma in Management
(PGDM) is a bonafide work carried out by her under my direct supervision and guidance.
Prof. Siddharth S Kanungo
Bharatiya Vidya Bhavan, Bhubaneswar
Date: ............................
4

5. CERTIFICATE FROM THE EXTERNAL GUIDE
This is to certify that the report “Investor Perceptions towards Mutual Fund Investments
in the Odisha Market with special reference to Bajaj Capital”,, submitted by Ms. Pabita
Mishra bearing Registration. No. BIM0611BM021, of Bhavan’s Centre for
Communication & Management, Bharatiya Vidya Bhavan, Bhubaneswar, towards partial
fulfilment of the requirements for the award of Post Graduate Diploma in Management
(PGDM) is a bonafide work carried out by her under my direct supervision and guidance.
Mr Annupam Mohanty
Bajaj Capital
Date: ............................
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6. CERTIFICATE OF APPROVAL
This is to certify that the report titled “Investor Perceptions towards Mutual Fund
Investments in the Odisha Market with special reference to Bajaj Capital”, Submitted by
Pabita Mishra bearing Registration. No. BIM0611BM021 of Bhavan’s Centre for
Communication & Management, Bharatiya Vidya Bhavan, Bhubaneswar Kendra, Orissa,
towards partial fulfillment of the requirements for the award of Post Graduate Diploma in
Management (PGDM) is a bonafide record of the work carried out by her under the
guidance Prof. Siddharth S. Kanungo.
Vice Principal Director (Academics)
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7. ACKNOWLEDGEMENT
Before I going to the thick of I would like to add some
heartfelt words. I owe a huge debt of thank and deep sense
of gratitude to my learned guide Mr. ANUPAM
MOHANTY[MANAGER] and Mr. SAMBIT MOHANTY
[BRANCH HEAD] at BAJAJ CAPITAL, Bhubaneswar branch
under whose guidance, supervision and encouragement the
present study was undertaken and completed. Their
sympathetic, accommodating and constructive nature
remained a constant source of inspiration for me through the
duration of this summer project.
I am thankful to all personnel in BAJAJ CAPITAL for
utmost co-operation and timely help extended by them for
the completion of the project.
My overriding debt is Prof. Sidharth Sankar Kanungo for
providing me the opportunity to take up this project with
BAJAJ CAPITAL.
(Pabita mishra)
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8. CHAPTER 1
EXECUTIVE SUMMARY
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9. EXECUTIVE SUMMARY
A Mutual Fund is common pool of money into which investor’s places their contributions that
are to be invested in accordance with a started objective. The ownership of the mutual fund is
thus join or “MUTUAL”; the 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. A mutual fund uses the money
collected from investors to buy those assets which are specifically permitted by its stated
investment objective. Thus, an equity fund would mainly buy debt instruments such as
debentures, bonds, or government securities. It is these assets which are owned by the
investors in the same proportion as their contribution bears to the total contribution of all
investors put together.
Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the
mutual funds must get registered with SEBI.
What are the benefits of investing in Mutual Funds
There are several benefits from investing in a Mutual Fund:
Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a
wide spectrum of companies with small investments.
Professional Fund Management: Professionals having considerable expertise, experience and resources
manage the pool of money collected by a mutual fund. They thoroughly analyse the markets and
economy to pick good investment opportunities.
Spreading Risk: An investor with limited funds might be able to invest in only one or two stocks/bonds,
thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of
sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the
risk is diversified.
Transparency
Mutual Funds regularly provide investors with information on the value of their investments. Mutual
Funds also provide complete portfolio disclosure of the investments made by various schemes and also
the proportion invested in each asset type.
Choice: The large amount of Mutual Funds offer the investor a wide variety to choose from. An investor
can pick up a scheme depending upon his risk/ return profile.
Regulations: All the mutual funds are registered with SEBI and they function within the provisions of
strict regulation designed to protect the interests of the investor
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10. What is NAV?
NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its
liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding.
Buying and selling into funds is done on the basis of NAV-related prices. The NAV of a mutual fund are
required to be published in newspapers. The NAV of an open end scheme should be disclosed on a daily
basis and the NAV of a close end scheme should be disclosed at least on a weekly basis
What is Entry/Exit Load?
A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is levied
to cover the up-front cost incurred by the mutual fund for selling the fund. It also covers one time
processing costs. Some funds do not charge any entry or exit load. These funds are referred to as ‘No
Load Fund’. Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary
between 0.25% and 2.00%.
For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry load
levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor receives
10000/13.13 = 761.6146
units. (Note that units are allotted to an investor based on the amount
invested and not on the basis of no. of units purchased).Let us now assume that the same investor decides
to redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is 0.50%.
Therefore the redemption price per unit works out to Rs. 14.925. The investor therefore receives
761.6146 x 14.925 = Rs.11367.10.
Are there any risks involved in investing in Mutual Funds?
Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest
in shares, debentures, bonds etc. All these investments involve an element of risk. The unit value may
vary depending upon the performance of the company and if a company defaults in payment of
interest/principal on their debentures/bonds the performance of the fund may get affected. Besides in case
there is a sudden downturn in an industry or the government comes up with new a regulation which
affects a particular industry or company the fund can again be adversely affected. All these factors
influence the performance of Mutual Funds. Some of the Risk to which Mutual Funds are exposed to is
given below:
Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock or
bond holdings in the fund's portfolio can drop, thereby impacting the fund performance.
Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively affect fund
holdings. This risk can be reduce by having a diversified portfolio that consists of a wide variety of
stocks drawn from different industries.
Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall
and this decline in underlying securities affects the fund negatively.
Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the
corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it
leads to a fall in the value of the bond causing the NAV of the fund to take a beating.
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11. Regulation of Mutual fund in India
The Reserve Bank of India (RBI) has issued a set of guidelines in 1987 for bank sponsored Mutual
funds. This was followed, in 1990, by stipulations for mutual funds from the ministry of finance,
Government of India. In 1991, the government of India initiated the process of creating a common
regulation for all mutual funds in 1991. In October 1991, the Securities and Exchange Board Of India
(SEBI) issued guidelines for the formation of Asset Management Companies (AMCs) for Mutual funds A
comprehensive set of guidelines was issued by the ministry of finance in February 1992. In 1993, the
SEBI issued comprehensive mutual funds regulations. These frame work in 1996, which have been
amended from time to time. The main Clements of the SBI regulatory mechanism of Mutual funds, other
than the Unit trust of India, are:
1. Registration of mutual funds with SEBI.
2. Constitution and Management of mutual funds and operation of trusts.
3. Constitution and management of asset management company and custodian.
4. Schemes of mutual funds.
5. Investment objectives and valuation policies.
6. Inspection and audit.
7. Procedure for action in case of default.
Some of the provisions of the SEBI (mutual fund) Regulations, 1996 (as amended from time to time)
have been summarized here under:
1. The sponsor, who wants to establish a mutual fund, should have a sound track record and
a general reputation of fairness and integrity, I.e., must be in business of financial services
for 5 years, and must have contributed at least 40% of the net worth of the asset
management company.
2. A mutual funds is constituted in form of trust. The trust shall incorporate an Asset
Management Company (AMC). The trustees shall ensure that the AMC has been
managing the schemes independently of other activities.
3. Two-thirds of the trustees shall be independent persons and not be associated with the
sponser.
4. The trustees shall ensure that activities of the AMC are in accordance with the
Regulations, 1996.
5. The trust shall periodically review the investors’ complaints recived and shall be
redressed by the AMC.
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12. 6. The mutual fund shall appoint a custodian to carry out the custodial services for the
schemes. The sponser or its associates shall not have 50% or more of the share capital of
the custodian.
7. No schemes shall be launched by the AMC unless the offer document contains disclosures
which are adequate in order to enable the investors to make informed investors to make
informed investment decisions.
8. Advertisement in respect of every scheme shall be in conformity with the Advertisement
code.
9. Every close-ended scheme shall be listed at a recognized stock exchange, or there will be
a repurchase facility.
10. The close-ended schemes may be converted in to open-ended schemes under certain
conditions. A close-ended schemes may be allowed to be rolled over if necessary
disclosures about NAV, etc, are made to the unit holders.
11. In case of over-subscription for a new scheme, the applicants applying for upto 5,000
units shall be allotted full. The refund to applicants, ii any made within 6 weeks from the
date of closure of the list.
12. No guaranteed return shall be provided in a scheme, unless such return is fully guaranteed
by the sponcer or the AMC.
13. An open-ended scheme shall be wound up after the expiration of the fixed period, or in
case, 75% of the unit holders decide so, after repaying the amount due to the unit holders.
14. The money collected under any scheme shall be invest only in transferable securities
debts.
15. The mutual fund shall not borrow any money except to meet temporary liquidity needs
and borrowing, if any, need not be more than 20% of NAV of the scheme, and for period
of less than 6 months.
16. The funds of a scheme shall not be used in option trading or a carry forward transaction.
However, derivatives can be traded by a mutual fund a recognised stock exchange for
portfolio balancing.
17. A mutual fund can enter in to underwriting agreement.
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13. OBJECTIVE:-
 To know the advantages of Mutual Fund for different age of people.
 To know the performance of funds in the market in comparison of BSE – 100 and BSE – 30.
 To knows the advantages of Systematic Investment Plan and advantages in comparison of lump-sum
investments.
 To know about all those calculations of Fund and BSE benchmark returns & risk and show the chart of
performance of vis-à-vis benchmark .
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14. CHAPTER 2
COMPANY PROFILE
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15. COMPANY PROFILE
Bajaj Capital is one of India’s leading Financial Services companies offering Free Advice on
Investments, Insurance, Tax Saving, Retirement Planning, Financial Planning, Children’s Future
Planning and other services. We also have a wide range of products and services for Corporate, High Net
worth Individuals, and NRIs… all under one roof.
At Bajaj Capital, we believe in dreaming big. Dreams inspire us to excel. They ignite hope and kindle in
us the passion to stretch our limits. We also believe that nothing can or should stop us from realising our
dreams… and financial constraints should be the last thing to stop anyone.
Four decades of excellence
For over four decades, we have been helping people realise their aspirations by helping them make their
wealth grow, and plan their financial lives.
Today, we are a one of the largest financial planning and investment advisory companies in India,
with a strong presence all over the country. We take pride in serving our customers – both individual and
institutional – and are known for our strong professionalism and work ethics.
Wide range of services
We offer a comprehensive range of services including financial planning and investment advice, and the
entire gamut of financial instruments and
investment products of almost all major companies, both public and private. In addition, we also
provide investment assistance by helping you complete all the formalities, and help you keep regular
track of your investments.
These services and products are delivered through our network of 134 Bajaj Capital Investment Centres
located all over the country.
We are also a SEBI-approved Category I Merchant Banker. We raise
Resources for over 1,000 top institutions and corporate houses every year, and offer specialised services
to Non-Resident Indian (NRIs) and High Net worth Clients.
THE HISTORY OF BAJAJ CAPITAL
Bajaj Capital has contributed to the growth of the Indian Capital Market at every step.
In 1965, we were the first to innovate the Companies Fixed Deposit. Today, we are playing an active role
in the growth of the Indian Mutual Fund industry.
We are also working closely with private insurance companies to deepen India’s insurance market.
What you can expect from us
 Sound, research-based advice
 Unbiased, independent and need-based advice
 Prompt, courteous service
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16.  Honest, ethical dealings
 Accessibility
Here is a brief gist of our journey through the years.
1964
Bajaj Capital sets up its first Investment Centre™ in New Delhi to guide
Individual investors on where, when and how to invest.
India's first Mutual Fund, Unit Trust of India (UTI) is incorporated in the same year.
1965
Bajaj Capital is incorporated as a Company. In the same year, the company introduces an innovative
financial instrument – the Company Fixed Deposit. EIL Ltd. (Oberoi Hotels, then known as Associated
Hotels of India Ltd.) becomes the first company to raise resources through Company Fixed Deposits.
1966
Bajaj Capital expands its product range to include all UTI schemes and Government saving schemes in
addition to Company Fixed Deposits.
1969
Bajaj Capital manages its first Equity issue (through an associate company) of Grauer & Wells India
Ltd.; right from drafting the prospectus to marketing the issue.
1975
Bajaj Capital starts offering 'need-based' investment advice to investors, which would later be known as
'Financial Planning' in the investment world.
1981
SAIL becomes the first government company to accept deposits, followed by IOC, BHEL, BPCL, HPCL
and others; thus opening the floodgates for growth of retail investment market in India. Bajaj Capital
plays an active role in all the schemes as 'Principal Brokers'
1986
Public Sector Undertakings (PSUs) begin making public issues of bonds MTNL, NHPC, IRFC offer a
series of Bond Issues. Bajaj Capital is among the top ranks of resource mobilisers.
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17. 1987
SBI leads the launch of Public Sector Mutual Funds in India. Bajaj Capital plays a significant role in fund
mobilisation for all these players.
1991
SBI issues India Development Bonds for NRIs. Bajaj Capital becomes the top mobiliser with collections
of over US $20 million.
1993
The first private sector Mutual Fund – Kothari Pioneer – is launched, followed by Birla and Alliance in
the following years. Bajaj Capital plays an active role and is ranked among the top mobilisers for all
these schemes.
1995
IDBI and ICICI begin issuing their series of Bonds for retail investors. Bajaj Capital is the co-manager in
all these offerings and consistently ranks among the top five mobilisers on an all-India basis.
1997
Private sector players lead the revival of Mutual Funds in India through Openended Debt schemes. Bajaj
Capital consolidates its position as India's largest retail distributor of Mutual Funds.
1999
Bajaj Capital begins marketing Life and General Insurance products of LIC and GIC (through associate
firms) in anticipation of opening up of the Insurance Sector. Bajaj Capital achieves the milestone of
becoming the top 'Pension Scheme' seller in India and launches marketing of GIC's Health Insurance
schemes.
2000
Bajaj Capital implements its vision of being a 'One-stop Financial Supermarket.' The Company offers all
kinds of financial products, including the entire range of investment and insurance products through its
Investment Centre. Bajaj Capital offers 'full-service merchant banking' including structuring,
management and marketing of Capital issues. Bajaj Capital reinvents 'Financial Planning' in its
international sense and upgrades its entire team of Investment Experts into Financial Planners.
2002
The company focuses on creating investor awareness for Financial Planning and need-based investing.
To achieve this goal, the company introduced the International College of Financial Planning. The
graduates of this institute become Certified Financial Planners (CFPs), a coveted professional
qualification.
2004
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18. Bajaj Capital obtains the All India Insurance Broking Licence. Simultaneously, a series of wealth
creation seminars are launched all over the country, making Bajaj Capital a household name.
2005
Bajaj Capital launches 360° Financial Planning, a software-based programme aimed at encouraging
scientific and holistic investing.
2007
Bajaj Capital launches Stock Broking and Depository (Demat) Services.
2008
Bajaj Capital launches Just Trade, an online Platform for investing in Equities, Mutual Funds, IPO's.
MISSION, AIMS & OBJECTIVES
Bajaj Capital's Mission Statement
The focus of our organisation is to be the most useful, reliable and efficient provider of Financial
Services. It is our continuous endeavour to be a trustworthy advisor to our clients, helping them achieve
their financial goals.
Aims
 To serve our clients with utmost dedication and integrity so that we exceed their expectations and
build enduring relationships.
 To offer unparalleled quality of service through complete knowledge of products, constant
innovation in services and use of the latest technology.
 To always give honest and unbiased financial advice and earn our clients' everlasting trust.
 To serve the community by educating individuals on the merits of
Financial Planning and in turn help shape a financially strong society
 To create value for all stake holders by ensuring profitable growth.
 To build an amicable environment that accords respect to every
individual and permits their personal growth.
 To utilise the power of teamwork to function as a family and build a seamless organisation.
Why Invest Through Bajaj Capital
 Wide range of products and services
 41 years experience as Investment Advisors and Financial Planners.
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19.  More than eight lakh satisfied clients all over India
 Countrywide network of 134 branches
 Over 12,000 NRI clients across the globe
 Personalised wealth management advice
 24 x 7 online accessibility through www.bajajcapital.com
 Strong team of qualified and experienced professionals including CAs, MBAs, MBEs, CFPs, CSs,
Insurance experts, Legal experts and others.
 SEBI-Approved Category I Merchant Bankers.
 Group Co BCIBL is an IRDA-licensed Direct Insurance Broker.
WHO’S WHO AT BAJAJ CAPITAL
Mr. K.K. Bajaj (Chairman)
A visionary par excellence, a pioneer and a leader, Mr K.K. Bajaj has been instrumental in shaping Bajaj
Capital’s emergence as one of India’s largest Investment Advisory companies.
He is a highly respected figure in the field of institutional and personal finance and Company FDs. His
emphasis on honesty, ethics and values are the guiding principles of the organisation.
Mr Bajaj is also a prolific writer and has written over 200 articles on diverse issues such as Personal
Finance, Economic Affairs, and Health.
Mr. Rajiv Deep Bajaj (Vice Chairman & Managing Director)
A qualified Financial Planner, Mr Rajiv Deep Bajaj was the first to introduce the concept of Financial
Planning in India. In fact, he is the Founding Chairman of the Association of Financial Planners (AFP).
He is also amongst the first batch of 25 Certified Financial Planners (CFP tm) designation holders in
India. A Post-graduate in Management and holder of an International Certificate for Financial Advisors
from the Chartered Insurance Institute, London, Mr Rajiv Deep Bajaj has played a pivotal role in
expanding Bajaj Capital's reach across the country. He has recently pursued an Executive MBA in
International Wealth Management under an exchange program between University of Geneva,
Switzerland and Carnegie Mellon University, Pittsburgh, USA.
His youthful energy, dynamic leadership, vision and 16 years strategic
management experience in Banking, Financial Advisory, Insurance Broking and Financial Planning have
strengthened Bajaj Capital.
The Media and Industry honchos have regularly acclaimed Mr. Rajiv Deep Bajaj for his strengths as a
powerful orator and writer. His views on various Investment Strategy and Financial Planning-related
issues are regularly flashed in some of the leading media entities like The Economic Times, Business
Today, Star TV, CNBC and Aaj Tak. His personal life goal is to spread ‘Financial Education’ amongst
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20. the Indian masses in order to increase their knowledge base and shift their perspective from ‘Saving to
Investing’.
Mr. Sanjiv Bajaj (Joint Managing Director)
Mr. Sanjiv Bajaj started his career in 1995 as managerial trainee, worked on various projects which
included developments at alternate channel of
distribution like Broker's associations...etc. From here, he moved on to
Investment Advisory services, which included understanding the client's needs, and by using various
tools of financial planning to offer them a solution to meet his requirements. Mr Sanjiv Bajaj is versatile
personality with diverse areas of interest. He is a Post-graduate in Business Management with
specialisation in Finance, and holds an International Certificate for Financial Advisors from the Chartered
Insurance Institute, London. Thanks to him, Bajaj Capital is today the largest individual agent for LIC.
Mr Sanjiv Bajaj has a keen interest in IT, and has played a major role in implementing the ERP software
and Ecommerce activities in the company.
Mr. Anil Chopra (CEO & Director)
Mr. Anil Chopra is the Chief Executive Officer & Director of Bajaj Capital Limited, He joined the
Company in 1984. Mr. Chopra has been instrumental in expanding the branch network of Bajaj Capital
Ltd. all over India. A Chartered Accountant and a Certified Financial Planner, Mr Chopra is credited with
introducing international accounting and HR practices in the organisation. His most valuable
contribution, however, has been in building up a financially literate society and making Bajaj Capital a
strong retail brand. He is considered an authority, and is widely sought after by the media for quotes on
key developments in the industry.
THE SIGNIFICANCE OF OUR LOGO
Our logo depicts Lord Ganesha who is the source of all our values and ethics in business.
 The large ears of Lord Ganesha remind us to hear more. We listen
carefully to our clients to understand their needs.
 The weight of the trunk on the mouth symbolises silence. We work
silently, without blowing our own trumpet.
 The long trunk symbolises continuous exploration. We explore all
avenues to provide the best investment opportunities for our clients.
 The heavy posture of Ganesha symbolises stability. We help our clients to attain financial stability
through wise investments.
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21.  Lord Ganesha is known as the remover of obstacles and bestower of prosperity. We emulate His
example and try our best to help our clients attain prosperity by proper financial planning.
 Our logo has a yellow background. Yellow is the colour of gold, which symbolises wealth.
According to Vedic lore, it is also the colour associated with Brihaspati, the guru and counsellor
of the Gods. We offer our clients sage counsel to make their wealth grow.
 The letters are in red. Red is the colour rajas – symbolising power and incessant activity. It
symbolises our aggressive quest for your well-being and happiness.
 The white streak represents the trunk of Lord Ganesha. White is the colour of satva guna, and
implies our selfless commitment to your lifelong happiness.
SWOT ANALYSIS
Strength
• Having a huge of financial products.
• Having expert financial planning scenario so that the goals and dreams of a client is properly
visualised.
• Having transparent business strategies.
• Having a trust of more than 40 years.
• Having large number of branches across the country with a large number of employee and clients.
Weakness
Lack of knowledge among the employees
• Lack of branches in small cities.
• Lack of publicity.
• Lack of awareness among the mindset of the people in small towns.
Opportunity
• To introduce more segments of financial products.
• To penetrate in the rural market and create awareness in the mind set of the people of rural area.
• To create more forms of publicity.
• To upgrade the process of financial planning
Threat
• Entry of new competitors.
• The market risk that a client have in investing.
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22. REVIEW OF THE LITRETURE
ALL FUNDS:-
A mutual fund is a common pool of money into which investors places their contributions that are to
be invested in accordance with a stated objective. The ownership of the fund is thus joint or “mutual”,
the fund belongs to all investors. A single investor’s ownership of the 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. A mutual
fund uses the money collected from investors to buy those assets which are specifically permitted by
its stated investment objective. Thus, an equity fund would buy mainly equity assets ordinary shares,
preference shares, warrants etc. A bond fund would mainly buy debt instruments such as debentures,
bonds, or government securities. It is these assets which are owned by the investors in the same
proportion as their contribution bears to the total contributions of all investors put together.
ADVANTAGES OF MUTUAL FUND
If mutual funds are emerging as the favourite investment vehicle, it is because of the many advantages
they have over other forms and avenues of investing, particularly for the investor who has limited
resources available in terms of capital and ability to carry out detailed research and market monitoring.
The following are the major advantages offered by mutual funds to all investors:
• Portfolio diversification: Mutual funds normally invest in a well-diversified portfolio or securities.
Each investor in a fund is a part owner of all of the fund’s assets. This enables him to hold a
diversified investment portfolio even with a small amount of investment that would otherwise require
big capital.
• Professional Management: Even if an investor has a big amount of capital available to him, he
benefits from the professional management skills brought in by the fund in the management of the
investor’s portfolio. The investment management skills, along with the needed research into available
investment options, ensure a much better return than what an investor can manage on his own. Few
investors have the skills and resources of their own to succeed in today’s fast moving, global and
sophisticated markets.
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23. • Reduction / Diversification of risk: An investor in a mutual fund acquires a diversified portfolio,
no matter how small his investment. Diversification reduces the risk of loss, as compared to investing
directly in one or two shares or debentures or other instruments. When an investor invests directly, all
the risk of potential loss is his own. Fund investors also reduce his risk in another way. While
investing in the pool of funds with other investors, any loss on one or two securities is also shared with
other investors. This risk reduction is one of the most important benefits of a collective investment
vehicle like the mutual fund.
• Reduction of transaction costs: What is true of risk is also true of the transaction costs. A direct
investor bears all the costs of investing such as brokerage or custody of securities. When going
through a fund, he has the benefit of economies of scale; the fund pay lesser costs because of large
volumes, a benefit passed on to its investors.
• Liquidity: Often, investors hold shares or bonds they cannot directly, easily and quickly sell.
Investment in a mutual fund, on the other hand, is more liquid. An investor can liquidate the
investment, by selling the units to the fund if open end, or selling them in the market if the fund is
closed end, and collect funds at the end of a period specified by the mutual fund or the stock market.
• Convenience and flexibility: Mutual fund management companies offer many investor services that
a direct market investor cannot get. Investors can easily transfer their holdings from one scheme to the
other; get updated market information, and so on.
DISADVANTGES OF INVESTING THROUGH MUTUAL FUNDS:
While the benefits of investing through mutual funds far outweigh the disadvanges, an investor and his
advisor will do well to be aware of a few shortcomings of using the mutual funds as investment
vehicles.
• No control over costs:- An investor in a mutual fund has any control over the overall cost of
investing. He pays investment management fees as long as he remains with the fund, albeit in return
for the professional management and research. Fees are usually payable as a percentage of the value
of his investments, whether the fund value is rising or declining. A mutual fund investor also pays
fund distribution costs, which he would not incur in direct investing. However, this shortcoming only
means that there is a cost to obtain benefits of a mutual fund services. However, this cost is often less
than the cost of direct investing by the investors.
• No tailor-made portfolios:- Investors who invest on their own can build their own portfolios of
shares, bonds and other securities. Investing through funds means he delegates this decision to the
fund managers. The very high net worth individuals or large corporate investors may find this to be a
constraint in achieving their objectives. However, most mutual funds help investors overcome this
constraint by offering families of schemes-a large member of different schemes-within the same fund.
An investor can choose from different investment plans and construct a portfolio of his choice.
• Managing a portfolio of funds: Availability of a large number of funds can actually mean too
much choice for the investor. He may again need advice on how to select a fund to achieve his
objectives, quite similar to the situation when he has to select individual shares or bonds to invest in.
TYPES OF FUND
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24. There are many types of mutual fund available to the investors. However, these different types of
funds can be grouped into certain classifications for better understanding. From the investor’s
perspective, we would follow three basic classifications.
Firstly, funds are usually classified in terms of their constitution-as-closed-end or open-end. The
distinction depends upon whether they give the investors the option to redeem and buy units at any
time from the fund itself (open end) or whether the investors have to await a given maturity before
they can redeem their units to the funds( close end).
Funds can also be grouped in terms of whether they collect from investors any charges at the time of
entry or exit or both, thus reducing the investible amount or the redemption proceeds. Funds that
make these charges are classified as load funds, and funds that do not make any of these charges are
termed no-loan funds.
Finally, funds can also be classified as being tax-exempt or non-tax-exempt, depending on whether
they invest in securities that tive tax-exempt returns or not. Currently in India, this classification may
be somewhat less important, given the recent tax exemptions given to investors receiving any
dividends from all mutual funds.
Under each board classification, we may then distinguish between several types of funds on the basis
of the nature of their portfolios, meaning whether they invest in equities or fixed income securities or
some combination of both. Every type of fund has a unique risk profile that is determined by its
portfolio, for which reason funds are often separated into more or less risk bearing. We first look at
the fund classifications and then understand the various types of funds under them.
1 MUTUAL FUND CLASSIFICATIONS
1.1. Open-end Vs. Closed –end Funds:
An open-end fund is one that has units available for sale and repurchase at all 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 fund’s assets (plus accrued
income minus the fund’s liabilities) 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. In
other words, the ‘unit capital’ of an open and mutual fund is not fixed but variable. The fund size and
its total investment amount go up if more new subscriptions come in from new investors than
redemptions by existing investors, the fund shrinks when redemptions of units exceed fresh
subscriptions.
An open-end fund is not obliged to keep selling/issuing new units at all times, and many successful
funds stop issuing further subscriptions from new investors after they reach a certain size and think
they cannot manage larger fund without adversely affecting profitability. On the other hand, an open-
end fund rarely denies to its investors the facility to redeem existing units, subject to certain obvious
conditions. For example, redemption is only possible after the investor’s cheque for initial
subscription has cleared, or until after any “lock-in period” specified by the fund is over, or only after
the specified redemption period for collection of funds.
Unlike an open-end fund, the “unit capital” of a closed-end fund is fixed, as it makes a onetime sale of
a fixed number of units. Later on, unlike open-end funds, closed-end funds do not allow investors to
buy or redeem units directly from the funds. However, to provide the much needed liquidity to
investors, many closed-end funds get themselves listed on a stock exchange(s). Trading through a
stock exchange enables investors to buy or sell units of a closed-end mutual fund from each other,
through a stockbroker, in the same fashion as buying or selling shares of a company. The fund’s units
24

25. may be traded at a discount or premium to NAV based on investors’ perceptions about the fund’s
future performance and other market factors affecting the demand for or supply of the fund’s units.
Note that the number of outstanding units of a closed-end fund does not vary on account of trading in
the fund’s units at the stock exchange. On the other hand, funds often do offer” buy-back of fund
shares/units”. Thus offering another avenue for liquidity to closed-end fund investors. In this case,
the mutual fund actually reduces the number of units outstanding with investors.
LOAN AND NO LOAD FUNDS :
Marketing of a new mutual fund scheme involves initial expenses. These expenses may be recovered
from the investors in different ways at different times. Three usual ways in which a fund’s sales
expenses may be recovered from the investors are:
1. At the time of investor’s entry into the fund/scheme, by deducting a specific amount from his initial
contribution, or
2. By charging the fund/scheme with a fixed amount each year, during the stated number of years, or
3. At the time of the investor’s exit from the fund/scheme, by deducting a specified amount from the
redemption proceeds payable to the investor.
These charges made by the fund managers to the investors to cover distribution/sales/marketing
expenses are often called “loads”. The loan charges to the investor at the time of his entry into a
scheme is called a “front-end or entry load”. This is the first case above. The load amount charged to
the scheme over a period of time is called a “deferred load”. This is the second case above.
The load that the investor pays at the time of his exit is called a “back-end or exit load”. This is the
third case above. Some funds may also charge different amount of loads to the investors, depending
upon how many years the investor has stayed with the fund; the longer the investor stays with the
fund, less the amount of “exit load” he is charged. This is called “contingent deferred sales charge”.
Note that the front-end load amount is deducted from the initial contribution/purchase amount paid by
the incoming investor, thus reducing his initial investment amount. Similarly exit loads would reduce
the redemption proceeds paid out to the outgoing investor. If the sales charge is made on a deferred
basis directly to the scheme, the amount of the load may not be apparent to the investor, as the
scheme’s NAV would reflect the net amount after the deferred load.
Funds that charge front-end, back-end or deferred loads are called load funds. Funds that make no
such charges or loads for sales expenses are called no-load funds.
In India SEBI has defined a “load” as the onetime fee payable by the investor to allow the fund to
meet initial issue expenses including brokers’/ agents’/distributors’ commissions, advertising and
marketing expenses. SEBI definition of a load fund would include all funds that charge a front-end
load, which is in line with the internationally used definition. However, SEBI would consider a fund
to be” a no-load” fund, if an AMC absorbs these initial marketing expenses and does not charge the
fund-a situation that is somewhat special to India and not widely prevalent elsewhere. Internationally,
a fund, even when it does not make a front-end load, would still be considered a load fund, if it
charges an exit load or a deferred sales load.
The reason for this slightly different definition of a load by SEBI is to be found in the nature of its
regulations. Front-end load, or load as defined by SEBI, is meant to cover the marketing expenses
associate with the first issue of a scheme. Other expenses are defined as “recurring expenses”, rather
than as “loads”. SEBI regulations allow AMCs to recover loads from the investors for the purpose of
paying for the initial issue expenses, subject however to a limit on the maximum amount that can be
25

26. charged by the AMC. This limit currently stands at 6%, meaning that initial issue expenses should not
exceed 6% of the initial corpus mobilized during the initial offer period. Similarly SEBI has also
imposed a limit on the maximum “recurring expenses” including investment management and
advisory fees that can be charged to a scheme. The limits have been related to the level of the weekly
net assets. Thus the AMC can charge a scheme 2.50% of the average net assets of the scheme as
recurring expenses, if the net assets do not exceed Rs 100 cores, 2.25% on the next 300 cores, 2.0% on
the next 300 cores and 1.75% over Rs 700 cores. In case the scheme intends to invest in bonds, the
maximum percentage limits are less by 0.25%. Further, if the AMC had absorbed the initial issue
expenses, it can charge an additional 1% of net assets as investment management fees.
From the investors’ perspective, it is important to note that loads are not charged only by open-end
funds; even a closed-end fund can charge load to cover the initial issue expenses. It is also important to
note that there are other expenses such as the fund manager’s fees, which are charged to the investors
on an on-going basis, thus reducing the net asset value of the fund. If the investor’s objective is to get
the benefit of compounding his initial investment by reinvesting and holding his investment for a very
long term, then, a no-front –load fund is preferable to a load fund; the initial amount of investment by
the fund gets reduced by the entry load, thus depriving the investor of the benefit of compounding his
returns on the amount invested to the extent of the load.
Some fund charge only an entry load, and some only an exit load. Such funds may be thought of as
partial load funds. Sometime back, a fund started a new scheme with deferred load over future years.
Some funds in India waive the initial issue expenses that are borne by the Asset Management
Company or the sponsors, so the entire amount paid in by the investor gets invested without entry load
deduction. At the same time, some of these no-front-load funds may charge exit loads from time to
time. In other words, from time to time, a no-load fund may become a load fund. Note that a no-load
fund only means a fund that does not charge sales expenses. All funds still charge the schemes for
management fees and other recurring expenses; it is only that an investor in a no-load fund enters or
exits at the net NAV of the fund, calculated after accounting for these expenses, but without any
further adjustment for sales expenses from the NAV.
1.2 Tax exempt Vs. Non Tax exempt Funds:
Generally, when a fund invests in tax-exempt securities, it is called a tax exempt fund. In the USA for
example, municipal bonds pay interest that is tax free, while interest on corporate and other bonds is
taxable. In India, after the 1999 Union Government Budget, all of the dividend income receipt from
any of the mutual funds is tax free in the hands of the investor. However, funds other than equity
funds have to pay a distribution tax, before distributing income to investors. In other words, equity
mutual fund schemes are tax-exempt investment avenues, while other funds are taxable for
distributable income.
While Indian mutual funds currently offer tax free income, any capital gains arising out of sale of fund
units are taxable. All the tax considerations are important in the decision on where to invest as the tax-
exemptions or concessions alter the returns obtained from these investments. Hence, classification of
mutual funds from the taxability perspective has great significance for investors.
1.3 Mutual Fund Types.
All mutual funds would be either closed-end or open-end, and either load or no-load. These
classifications are general. For example all open-end funds operate the same way; or in case of a load
fund deduction are made from investors’ subscription or redemption and only the net amount used to
determine his number of shares purchased or sold.
26

27. A) Board Fund Types by Nature of Investments.
Mutual funds may invest in equities, bonds or other fixed income securities, or short term
money market securities. So we have Equity, bond and money market funds. All of them invest in
financial assets. But there are funds that invest in physical assets. For example, we may have gold or
other precious metal funds, or Real estate funds.
B) Board Fund Types by Investment objective.
Investors and hence the mutual funds pursue different objectives while investing. Thus, Growth
fund invests form medium to long term capital appreciation. Income funds invest to generate regular
income, and les for capital appreciation. Value funds invest in equities that are considered undervalued
today, those value will be unlocked in the future.
C) Board Fund Types by Risk Profile:
The nature of a fund’s portfolio and its investment objective imply different levels of risk
undertaken. Funds are therefore often grouped in order of risk. Thus Equity funds have a greater risk
of capital loss than a Debt fund that seeks to protect the capital while looking for income. Money
market funds are exposed to less risk than even the Bond funds, since they invest in short term fixed
income securities, as compared to longer term portfolios of bond funds. Fund managers often try to
alter the risk profile of funds by suitably changing the investment objective. For example, a fund
house may structure an “Equity income fund” investing in shares that do not fluctuate much in value
and offer steady dividends-say Power sector companies, or a Real estate income fund that invests only
the in income producing assets. Balanced funds seek to produce a lower risk portfolio by mixing
equity investments with debt investments. Investors and their advisors need to understand both the
investment objective and risk level of the different types of funds.
1.4 Money Market Funds :
Often considered to be at the lowest rung in the order of the risk level, money market funds invest in
securities of a short term nature, which generally means securities of less than one year maturity. The
typical, short term, interest bearing instruments these funds invest in include Treasury bills issued by
govt. Certificate of deposit issued by banks and commercial paper issued by companies. In India
Money Market Mutual Funds also invest in the interbank call money market. UTI variant in this
category UTI Money Market Mutual Fund.
The major strength of money market funds is the liquidity and safety of principal that the investors can
normally expect form short term investors.
1.5 Gilt Funds:
Gilts are government securities with medium to long term maturities, typically of over one year (under
one year instruments being money market securities). In India, we have now seen the emergence of
Government Securities or Gilt Funds that invest in government paper called dated securities (unlike
Treasury Bills that mature in less than one year). Since the issuer is the Government/s of India/States,
these funds have little risk of default and hence offer better protection of principal. However,
investors have to recognize the potential changes in values of debt securities held by the funds that are
caused by changes in the market price of debt securities quoted on the stock exchanges ( just like the
equities). Debt securities prices fall when interest rate level increase and vice versa.
27

28. 1.6 Debt Funds or Income Funds:
Next in order of the risk level we have the general category debt funds. Debt funds invest in debt
instruments issued not only by governments but also by private companies, banks and financial
institutions and other entities such as infrastructure companies/utilities. By investing in debt, this
funds target low risk and stable income for the investor as their key objectives. However as compared
to the money market funds, they do have a higher price fluctuation risk, since they invest in longer
term securities. Similarly, as compared to gilt funds, general debt funds do have a higher risk of
default by their borrowers. Debt funds are largely considered as income funds as they do not target
capital appreciation, look for high current income, and therefore distribute a substantial part of their
surplus to investors. Income funds that target returns substantially above market levels can face more
risk. While we have an earlier described the equity income funds, the income funds fall largely in the
category of debt funds as they invest primarily in fixed income generating debt instruments’. Again,
different investment objectives set by the fund managers would result in different risk profiles.
A) DIVERSIFIED DEBT FUNDS:-
A debt fund that invests in all available types of debt securities issued by entities across all
industries and sector is a properly diversified debt fund. While debt funds offer high income and less
risk than equity funds, investors need to recognize that debt securities are subject to risk of default by
the issuer on payment of interest or principals.
A diversified debt fund has the benefit of risk reduction through diversification and sharing of any
default-related losses by a large number of investors. Hence a diversified debt fund is less risky than a
narrow focus fund that invests in debt securities of a particular sector or industry.
B) FOCUSED DEBT FUNDS:-
Some debt funds have a narrow focus, with less diversification in its investments. Examples
includes sector, specialized and offshore debt funds. The debt funds have a substantial part of their
portfolio invested in debt instruments and are therefore more income oriented and inherently less risky
than equity funds. However the Indian financial markets have demonstrated that debt funds should not
be automatically considered to be less risky than equity funds, as there have been relatively large
defaults by issuer of debt and many funds have non-performing assets in their debt portfolios. It
should also be recognized that the market values of debt securities will also fluctuate more as Indian
debt markets witnessed more trading and interest rate volatility in the future. The central point to note
is that all these narrow focused funds have greater risk than diversified debt funds.
Other examples of focused funds include those that invest only in corporate debentures and bonds or
only in tax free infrastructure or municipal bonds. While these funds are entirely conceivable now,
they may take some time to appear as a real choice for the Indian investor. One category of
specialized funds that invests in the housing sector, but offers greater security and safety that other
debt instruments, is the mortgage backed bond funds that invest in special securities created after
securitization of (and thus secured by) loan receivable of housing finance companies. As the Indian
finance markets witnessed the growth of securitization, such funds may appear on the mutual fund
scene sooner rather than later.
C) HIGH YIELD DEBT FUNDS:-
Usually, debt funds control the borrower default risk by investing in securities issued by
borrowers who are rated by credit rating agencies ad are considered to be of “investment grade”. There
are, whoever, high yield debt funds that seek to obtain higher interest returns by investing in debt
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29. instruments that are considered “below investment grade”. Clearly these funds are exposed to higher risk,
funds that invest in debt instruments that are too backed by tangible assets and rated below investment
grade (popularly known as junk bonds) are called junk bond funds. These funds tend to be more volatile
than other debt funds, although they may earn higher returns as a result of the higher risk taken.
D) ASSURED RETURN FUNDS-A INDIAN VARIANT:-
Fundamentally, mutual funds hold assets in trust for investors. All return is for account of the
investor. The roll of the fund manager is to provide the professional management service and to ensure
the highest possible return consistent with the investment objective of the fund. The fund manager or
the trustees or the sponsors do not give any guarantee on the minimum return to the investors. Returns
re indicated in advance for all of the future years of these closed-end schemes. If there is a short fall, it
is born by the sponsors. Assured return or guaranteed monthly income plans are essentially
Debt/Income funds. Assured return debt funds certainly reduced the risk level considerably, as
compared to all other debt or equity funds, but only to the extent that the guarantor has the required
financial strength. Hence, the market regulator of SEBI permits only hose funds whose sponsors have
adequate net worth to offer assurance of returns, if occurred explicit guarantee is required from a
guarantor whose name has to be specified in advance in the offer document in the scheme.
While assured return funds may certainly considered being the lowest risk type within the debt funds
category, they are still not entirely risk free, as investors have to normally lock I their funds for the
term of the scheme or at least a specified period such as 3 years. During this period, changes in the
financial markets may result in the investor losing the opportunity to obtain higher returns later in
other debt or equity fund. Besides, the investor does carry some credit a risk on the guarantor who
must remain solvent enough to honour its guarantee during the lock in period.
E) FIXED TERM PLAN-AN INDIAN VARIANT:-
A mutual fund scheme would normally be either open-end or closed-end. However, in India
mutual funds have involved on innovative middle option between the two, in response to the investor
needs. If a scheme is open-end, the fund issues new units and redeems them at any time. The fund
does not have a steed maturity or fixed term of investment as such. Fixed term plan series offers a
combination of both these features to investors, as a series of plans are offered and units are issued at a
frequent inverted for short plan duration.
Fixed term plans are essentially closed-end in nature in that the mutual fund AMC issues a fixed
number of units for each series only once ad close the issue after an initial offering period, like a
closed end scheme offering. However, a closed-end scheme would normally make a onetime initial
offering of units for a fixed duration generally exceeding one year. Investors have to hold the units
until the end of the stated duration, or sell them on stock exchange if listed. Fixed term plans are
closed-end, but usually for shorter term-less than a year. Being of a short direction they are not listed
on a stock exchange. Of course, like any closed-end fund, is plan series can be wound up earlier,
under certain regulatory conditions.
It is also important to bear in mind that the actual structure of the umbrella scheme under which a
fixed term plan series is offered can be either closed-end or open-end., some funds in India use a
closed-end structure, while others the open end structure, to offer term plans.
In any case, you can think of fixed term plans as a series of closed end plans within a scheme. Like
the closed-end funds, fixed term plans also make only a one time offering of units, but such offering
29

30. are made in a series of plans under one scheme prospectus or offered documents. No separate offer
document is issued each time a new series is launched.
The scheme under which such fixed term plans are offered is likely to be an income scheme, since the
objective is clearly of the AMC to attempt to reward investors with an expected return within a short
period. Mutual fund AMCs in India usually offering such plans do not guarantee any returns, but the
product has clearly been designed to attract the short term investor who would otherwise place the
money as fixed term bank deposits or inter corporate deposit.
1.7Equity Funds:-
As investors move from debt fund category to equity funds, they face increased risk levels. However,
there is a large variety of equity funds and all of them are not equally risk prone. Inventors and their
advisor need to short out and select the right equity fund that suits their risk appetite. In the following
section, we have presented the equity fund types, going from the highest risk level to the lowest level
within this category.
Before we look at the equity fund type in terms of the risk level, we must understand where the risks
of equity funds came from and how they are different from debt funds. Equity fund invest a major
portion of their corpus in equity shares issued by companies, accrued directly in initial public offering
or through the secondary market. Equity funds would be exposed to the equity price fluctuation risk at
the market level, at the industry or sector level and at the company specific level. Equity funds net
asset values fluctuate with all these price movements. These price movements are caused by all kinds
of external factors, political and social as well as economic. The issues of equity shares offer no
guaranteed repayment as in case of debt instruments. Hence, equity funds are generally considered at
the higher end of the risk spectrum among all funds available in the market. On the other hand, on like
debt instruments are that offer fixed amounts of repayments equity can appreciate in value in line with
the issuer’s earnings potential, and so offer the greatest potential for growth in capital.
Equity funds adopt different investment strategies resulting in different levels of risk. Hence, they are
generally separated in to different types in terms of their investment style.
A) AGGRESSIVE GROWTH FUNDS:-
There are many types of stocks/shares available in the market; blue chips that are recognized
market leaders, less researched stocks that are considered to have future growth potential, and even
some speculative stocks that are considered to have future growth potential, and even some speculative
stocks of somewhat unknown or unproven issuers. Fund managers seek out and investment in
different types of stocks in line with their own perception of potential returns and appetite for risk. As
the name suggests, aggressive growth funds target maximum capital appreciation, invest in less
researched or speculative shares and may adopt speculative investment strategies to attain their
objective of high returns for the investor. Consequently, they tend to be more volatile and riskier than
other funds.
B) GROWTH FUNDS:
Growth funds invest in companies whose earnings are expected to rise at an above average rate.
These companies may be operating in sectors like technology considered having a growth potential,
but not entirely unproven and speculative. The primary objective of growth funds is capital
appreciation over a three to five year span. Growth funds are therefore less volatile than funds that
target aggressive growth. UTI Master Share 86, UTI Equity Fund, UTI Index Select Fund and UTI
Master plus are few funds under UTI basket fall under this category.
30

31. C) SPECIALITY FUNDS:
These funds have a narrow portfolio orientation and invest in only companies that meet pre-
defined criteria. For example, some funds may build portfolios that will exclude Tobacco companies.
Funds that invest in particular regions such as the Middle East or the ASEAN countries are also an
example of specialty funds. Within the specialty fund category, some funds may be broad based in
terms of the types of investments in the portfolio. However, most specialty funds tend to be
concentrated funds, since diversification is limited of one type of investment. Clearly concentrate
specialty funds tend to be more volatile than diversified funds. UTI leadership Equity Fund as an
example having invested 65% in leaders of a sector.
C. i. Sector Funds:
Sector funds’ portfolios consist of investment I only one industry or sector of the market such
as information technology, pharmaceuticals or fast moving consumer goods that have recently been
launched I India. Since sector funds do not diversified into multiple sectors, they carry a higher level
of sector and company specific risk than diversified equity funds, UTI Pharms & Healthcare fund, UTI
Banking sector fund are few examples of the sector fund.
C. ii. Thematic Funds:
These fund’s asset-allocati9n and investment-universe are structured on a “theme”. Not as
restrictive as sector funds, the theme could run well across sectors, such UTI infrastructure Fund and
UTI Services Fund.
C. iii. Offshore funds:
These funds, invest in equity in one or foreign countries there by achieving diversification
across the country’s borders. However they also have additional risks-such as foreign exchange, rate
risk-and their performance depends on the economic conditions of the countries they invest in offshore
equity funds may invest in a single country ( hence riskier) or many countries ( hence more
diversified). India Fund, India Growth Fund, Columbus India Fund are varieties of Offshore Funds
UTI MF launched in different times.
C. iv. Small –Cap equity Funds:
These funds invest in shares of companies with relatively lower market capitalization than that
of big, blue chip companies. They may thus be more volatile than other funds, as smaller companies
shares are not very liquid in the markets. We can think of these funds as a segment of specialty funds.
In terms of risk characteristics, small company funds may be aggressive growth or just growth type.
In terms of investment style, some of these funds may also be “value investors”.
C. v. Option Income-Funds :
These funds do not yet exit in India, but option income funds write options on a significant part
of their portfolio. While options are viewed as risky instruments, they may actually help to control
volatility. If properly used. Conservative option funds invest in age, dividend paying companies.
And then sell options against their stock positions. This ensures a stable income stream in the form of
premium income through selling options and dividend. Now that options on individual shares have
become available in India, such funds may be introduced.
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32. D) DIVERSIFIED EQUITY FUNDS:
A fund that seeks to invest only on equities, except for a very small portion in liquid money
market securities, but is not focused on any one or few sectors or shares, may be termed a diversified
equity fund. While exposed to all equity price risk diversified equity fund seek to reduce the sector or
stock specific risk through diversification. They have mainly market risk expose. Such general
proposal proposes but diversified funds are clearly at the lower risk level than the growth funds .
D. i. Equity Linked Saving Schemes: an Indian variant
In India, the investors have been given tax concessions to encourage them to invest in equity
markets through these special schemes. Investment in these shames entitles the investor to claim an
income tax rebate, but usually has a lock-in period before the end of which funds cannot be
withdrawn. These funds are subject to the general SEBI investment guidelines for any ‘equity’ funds,
and would be in the diversified equity fund category. However, as there are no specific restrictions on
which sectors these funds ought to invest in, investors should clearly look for where the fund
management company proposes to invest and accordingly judge the level of risk involved. UTI is
having UTI Equity Tax Savings Plan in this category. This scheme provides tax benefit under sec 80©
of Income Tax Act 1961. The investments are locked for three years. Generally these schemes are
highly diversified equity funds invested across the sectors of the economy.
E. EQUITY INDEXES FUND:-
An index fund tracks the performance of a specific stock market index. The objective is to match
the performance of the stock market by tracking and index that represents the overall market. The
fund invests in shares that constitute the index and in the same proportion as the index. Since they
generally invest in a diversified market index portfolio, these funds stake only the overall market risk,
while reducing the sector and stock specific risks through diversification. In India the index funds
generally track NIFTY ad BSE Sensex. UTI Master Index Fund is a variety of equity Index Fund
which tracks BSE Sensex. UTI Nifty Index fund is a variant of such fund tracks NIFTY. These two
funds are best of the Index funds in the Indian Mutual Industry.
F. VALUE FUNDS:
The growth funds too reviewed above hold shares of companies with good or improving profit
prospects, and aim primarily at capital appreciation. They concentrate on the future growth prospects,
may be willing to pay high price/earnings multiples for companies considered to have good potential.
In contrast to the growth investing, other fund follow value investing approach. Value funds try to
seek out fundamentally sound companies whose shares are currently under priced in the market.
Value funds will add only those shares to their portfolios that are soloing at low price earnings ratios,
low market to book value ratios are undervalued by other yardsticks.
Value funds have the equity market price fluctuation risk, but stand often at a lower end of the risk
spectrum in comparison with the growth funds. Value stocks may be form a large number of sectors
and therefore diversified. However, value stocks often come from cyclical industries. Price of such
shares may fluctuate more than the overall market in both bull and bear markets, making such value
funds more risky than diversified funds in the short term. However, proponents of value investing
recommend it as a long term approach. In the long term, value funds ought to be less risky than
growth funds or even equity diversified funds.It picks up the stock considering its future potentials but
undervalued today to their intrinsic value and which will create wealth for the various stake holders in
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33. the medium to long term, Investment tools like low P/E, Low P/Book, value and positive EVA
(Economic Value Added) will be used to identify these types of stocks.
G) EQUITY INCOME FUNDS:
Usually income funds are in the debt funds category as they target fixed income investment.
However, there are equity funds that can be designed to give the investor a high level of current
income along with some steady capital appreciation, investing mainly in shares of companies with
high dividend yields.
As an example an equity income fund would invest largely in power/utility companies shares of
established companies that pay higher dividends and whose prices do not fluctuate as much as other
shares. These equity funds should therefore be less volatile and less risky than nearly all other equity
funds.
1.8 Hybrid Fund-Quasi Equity/ Quasi Debt:-
We have seen that in terms of the nature of financial securities held, there are 3 major mutual fund
types: money market, debt and equity. Many mutual funds mix these different types of securities in
their portfolios. Thus, most funds, equity and debt, always have some money market securities in their
portfolios as these securities offer the much needed liquidity. However, money market holdings with
constitute a lower proportion in the overall portfolios of debt or equity funds. There are funds that,
however, seek to hold a relatively balanced a holding of debt and equity securities in their portfolios.
Such funds are timed “hybrid funds” as they have dual equity/ bond focus. Some of the funds in this
category are described below.
a) Balanced Funds:
A balanced fund is one that has portfolio comprising debt instruments, convertible securities, and
preference and equity shares. Their assets are generally held in more or less equal proportion between
debt/money market securities and equities. By investing in mix of this nature, balanced funds seek to
attain the objectives of income moderate capital appreciation on preservation of capital, and are ideal
for investors with a conservative and long term orientation.
b) Growth –and-income Funds:
Unlike income focused or growth focused funds, these funds seek to strike a balance between
capital appreciation and income for the investors. Their portfolios are a mix between companies with
good dividend paying record as and those with potential for capital appreciation. These funds would
be less risky than pure growth funds, though more risky than income funds.
c) Asset allocation Funds:
Normally, an equity fund would have its primary portfolio in equities most of the time. Similarly, a
debt fund would not have measure equity holdings/ In other words their “asset allocation” is
predetermined within certain parameter.
However, there do exist funds that follow variable asset allocation policies and move in and out of an
asset class (equity, debt, money market, or even non-financial asset) depending upon their outlook for
specific markets. In many ways these funds have objective similar to balanced funds and may seek to
diversify into foreign equities, gold and real estate backed securities in addition to debt instruments,
convertible securities, and preference and equity shares. Asset allocation funds that follow more stale
allocation policies (which hold relatively fixed proportion of specific categories) are more like
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34. balanced funds. On the other hand, funds that follow more flexible allocation policies (which vary
their waiting depending upon the fund manager’s outlook) are more akin to aggressive growth or
speculative funds. The former are for investors who prefer low risk and stable return. The later carry
higher risk and potential for higher return because of the flexibility enjoyed by the fund managers.
1.9 Commodity Fund:
While all of the debt /equity/ money market funds invest in financial assets, the mutual fund vehicle in
suited for investment in any other for example-physical asset. Commodity funds specialize in
investing in different commodities directly or through share or commodity companies or through
commodity future contracts. Specialized funds may invest in a single commodity or a commodity
group such as edible oils or grains, while diversified commodities funds will spread their assets over
many commodities.
A most common example of commodity funds is the so-called precious metal funds. Gold funds
invest in gold, gold futures or shares of gold mines. Other precious metals funds such as platinum or
silver are also available in other countries. They may take expose to more than one metal to get some
benefit of diversification. In India a gold fund may hold potential, given a large public holdings and
interest in gold. However, commodity funds have not yet developed.
1.10 Beat Estate Funds:-
Specialized real estate funds would invest in real estate directly, or may fund real estate developers, or
lend to them or buy shares of housing finance companies or may even buy their securities assets. The
funds may have a growth orientation or seek to give investors regular income. There has recently been
an initiative to offer such an income fund by the HDFC.
The most important question that arises in the time of investment is that where to invest, or which kind
of asset to invest in, here arises the needs of allocation of investment approach suggested by Boggle
Bogie starts with the fundamental asset allocation advice given by one of the stalwarts of investment
planning, Benjamin Graham, who advocate 50/50 split between equities and bond, the common sense
approach to start.
With when value of equities goes up, balance can be restored by liquidating past of equity portfolio,
and vice versa. This is the basic defensive or conservative approach. Benefits include not being
drawn into investing more and more into equities in raising market. Bothy the gains and losses will be
limited. But it got to get about half of the returns of a rising market and to avoid the full losses of a
falling market.
Graham’s approach can be translated into reality by holding different kinds of portfolios of funds.
Boggle suggests the following combination;
1 A basic managed portfolio 50% in diversified equity ‘value’ funds
2 A basic indexed portfolio funds 25% in a government security funds
50% in total stock market /index
50% in total bond market portfolio
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35. 3 A simple managed portfolio 85% in a balanced 60/40 fund
15% in medium term bond fund
4 A complex managed portfolio 20% in diversified equity funds
20% in aggressive growth funds
10% in specialty funds
30% in long-term bond funds
20% in short –term bond funds
5 A readymade portfolio Single index fund with 60/40 equity/bond holding.
AWARENESS OF RISKS IN MUTUAL FUND INVESTING
The right level of risk tolerance of any investor depends upon his age, the amount of investible funds
available, and his financial circumstances including income level, job securities, family size etc.
EVALUTATING THE RISK OF A MUTUAL FUND:-
In generic sense, risk means the possibility of financial loss, in the investment world, the possibility of
loss is considered to arise from the variability of earning from time to time, in mutual fund case it
refers to the return of a fund. A fund with stable and positive earnings is less risky than a fund with
fluctuating total return. “Risk” is thus with volatility of earning, a statistical measurable concept.
Measurement of a specific fund’s risk is by now a highly evolved though somewhat Technical and
quantitative exercise. It is neither possible nor necessary for a fund distributor to learn or get involved
with sophisticated statistical techniques used to measure fund risks.
EQUITY FUNDS
Volatility of an equity mutual fund portfolio comes from:
a) The kind of stocks in the portfolio (growth or value, sell or big)
b) The number of stocks in, or degree of diversification of, the portfolio (smaller portfolio may be
more volatile than large, diversified ones)
c) Fund manager’s success t market timing (adjusting the asset allocation in response to asset class
price movement)
A. Equity Price risks
1. Company specific
2. Sector specific
3. Market level.
Company specific risks have to researched and assessed by the fund’s analyst and portfolio managers,
holding a large, say 15/20 –share portfolio, generally balanced out and diversified the company risks.
Sectors or industries have risk too. Funds research and track the sector with good potential, again, the
more the number of sectors is a portfolio sector risk. Specific sector funds clearly have more risk.
Then comes the market risk which is not diversifiable, as it arises from broad economic other factor.
Managers try to anticipate bear or bull phases and try to adjust their portfolio asset allocation. If equity
index futures and options are available, managers try to ‘hedge’ their portfolio with these instruments.
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36. B. MARKET CYCLE:
Market cycle are extensively researched and analysed in the U.S by agencies. Such as Lipper. In
India independent agencies, broker and newspapers are doing some of this analysis. It is important to
see how a portfolio or a share performs over a well-defined cycle than over some arbitrary, calendar
period. It is also important to understand that equity investment is basically more rewarding in the
long-term. Any equity fund can be more risky as a short-term investment, sticking to a good fund
helps.
C. RISK MEASURES:
Risk, define as volatility, is measured by the statistical concept of standard deviation. SD measures
the fluctuation of a fund’s returns around mean level. Use monthly results of an equity fund. Tabulate
returns, calculate mean returns. Calculate variances of each month’s returns from the mean. Square
this number. Sum up. Divide by the number of period of observation. Compute the overall variances
or the standard deviation.
Another measure of fund’s risk is BETA COFFICIENT. Beta relates a fund’s returns with a market
index and measure the sensitivity of the fund’s returns to change in the market index. A beta of 1
means the fund move with the market, typically in case of conservative portfolio. Higher beta
portfolio gives greater returns in rising market and is riskier in falling market. A good measure of
fund risk level. But, remember beta is based on past performance.
Boggle’s EXMARK or a number known as “R-SQUARED” is used to help spot questionable betas. R-
Squared measures how much of a fund’s fluctuations is attributes to movement in the overall market,
from 0 to 100 percent. Overall, standard deviation is the best of risk, even though it is also based on
past returns. It is the broader concept than beta that measures the total risk, not just market risk. It is
an independent number. Risk of both specialized and diversified funds, and both equity and debt fund
are measurable with standard deviation.
One can see that risk and return are inextricably related. So it make sense to measure what is called
RISK ADJUTMENT PERFORMANCE, SARPE AND TREYNOR ratio do that, both of which
compute the ‘risk premium’ o a funds difference between the funds average and the return of a risk
Government security or treasure bill over a given period. A simple way of getting a fund’s risk level
is to see tis PRICE/EARNING MULTIPULE. This is simply the weighted average of the price
/earnings ratio of all the stocks held in its portfolio. Higher the fund P/E as compared to the market or
other funds, the higher the probability of its fall in future.
Increasingly one can see these numbers being presented in the published analysis of fund performance
and their risk level. In India, three sources of such information are the fund tracking agencies, research
report from broker another, and funds’ own report.
DEBT FUNDS:-
Debt fund are expressed to credit risk. Risk of loss through borrower defaults, and interest rate risk
that comes from the average maturity of the fund’s portfolio. Look at two simple measures of risk.
First, what has been the default experience of the in the pat and it’s non-performing –asset at present?
Second, look t the average maturity or duration of a portfolio. To ensure that it matched with the risk
appetite of an investor. The longer the maturity of a portfolio, the greater the risk it has from interest
rate fluctuation.
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37. Once one has broadly understood the investor’s risk appetite, arrived at an asset allocation plan for
him, and devised a mutual fund action plan by choosing the funds with the risk level that suit the
investor.
RECOMMENDING MODEL PORTFOLIO AND SELECTING THE RIGHT FUNDS
A. DEVELOPING A MODEL PORTFOLIO
I. Avoid Ad-hoc investment advice or decision:
There was a time when Indian investor did not have many investment schemes.
To choose from, it was then for the agent to simply point out the benefits of any currently available
scheme to a prospective investor. The investor then decides whether the scheme was suited to his
needs or not. Now the Indian mutual fund industry a wide choice if investment scheme, unlike ever
before.
Different schemes suited to different investor needs. In this scenario, an investor not only needs
advice on how to choose from this variety of investment options available, but also a proper
investment strategy that is suitable to his situation and needs. The role of the gent in this scenario is to
help investor develop the approach to investing, not just offer ad-hoc advice or simply point out the
features and benefits of different options. Recommending.
A suitable investment to an investor can mean loss of customers for the agent.
II. Jacob’s four step program: developing a model portfolio:
 Work with investor to develop long-term goals:
As Jacobs puts it, mutual fund inviting is a “get-rich –quick scheme”. Investors must have an
investment programme and ought to set their own sight on long-term objective. In other words,
investment decisions ought to be taken in terms of clear, long-term goals, not on an ado basis.
Each investor should be advised expect only realistic wealth accumulation goals, no dramatic result
overnight. For example, in the current Indian market conditions, investors can expect 18-20% plus
long term result in equity investment, 10-12% returns in debt investment and 7-8% in money market.
Investment. “This expectation can change over time. Specific investment of funds can give greater
return, but higher returns will be in most cases achieved by investors or their fund mangers’ takings
greater risks.
 Determine the asset allocation of the investment portfolio:
So how can decide what level of risk to assume? One practical answer to that question is risk depend
upon the nature of investment: equity debt or money market securities and the proportion if these three
types of securities in any portfolio. This is called asset allocation.
Each investor ought to be advised to allocate his total investment fund three classes in proportion that
suit is personal and financial conditions. There is no such thing as an ideal asset allocation valid for
all investor. That is why, the mutual fund agent need to act as investment advisor and:
• Must first get know their investors, They ought to understand each investor’s availability of fund,
the size of his portfolio, beside his personal situation as expressed by the size of his family, his own
age, the nature of his work, etc.
• Only after understanding the investor’s need, go on to recommend an asset allocation plan that
would be appropriate to his need.
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38. III. Determination the sector distribution:
Once the liquidity, income and growth asset distribution is determined, the Advisor can determine how
much allocation to make sector of the mutual fund, liquidity needs are generally satisfied with Money
Mutual funds. Income needs are to be satisfied with debt funds or Equity income funds and growth
asset can be built up with equity funds, either conservative or aggressive growth.
IV. Select specific fund manager’s ad schemes
This step is required to translate the amounts to be invested in each mutual fund sector into actual
decision on which scheme on which fund manager to select for investments, as the investor would
have a choice of many debt funds or money market mutual funds or even balanced fund.
MODEL PORTFOLIOS
In preparing an investment program, the investor or the advisor would have to deal with investors at
different stage of their life cycle and therefore with different needs. Each type of investor may be
advised to have some typically suitable model portfolio, Jacobs gives four different portfolios,
summarized below.
A good exercise will have be to find out the Indian mutual fund equivalent recommendations for
Indian investors, using the above guide below is one set of recommendation on the suggested asset
allocation and model portfolio for investors categorized by wealth cycle stages, and using types of
mutual funds available in India.
TYPES OF INVESTORS AND RECOMMENDED INVESTMENT STRATEGIES
1. INVESTOR IN THE ACCUMULATION PHASE:
During this phase, clients are looking to build wealth because their financial goals are quite some time
away ad investment can be made for the long-term. For such client, the following asset allocation may
be appropriate.
ASSET ALLOCATION
Diversified equity, sector and balance fund 60% to 80%
Income and gilt fund 15% to 30%
Liquid funds and bank deposits 5%
2. INVESTORS IN THE TRANSITION PHASE:
During this phase, one or more of the client’s goals are approaching and clearly in sight. If a salaried
executive is planning to retire at 60 years of age, he should start preparing about 3 years in advance by
gradually transitioning from growth to income generating investment. Likewise, a couple in their
mid-40s who have children approaching the age of higher education marriage, should gradually start
converting some of their equity investment into income and cash fund to prepare for these financial
commitment.
3. INVESTOR IN DISTRIBUTION OR REPAPING PHASE:
This is the chasing out stage. For example if the client has retired, investment need to generate income
for a comfortable post-retirement life. Hence the financial planner has to ensure there is enough
investment in fixed income fund to support the client. If the post-tax return expected are 8% per
annum, then the client need to set aside about 150 times their monthly requirement in income fund,
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39. and opt for a dividend plan or systematic withdrawal plan. Some investment should certainly be left in
growth asset like equities, because only this can provide a hedge against inflation. This is because
while expenses will
ASSET ALLOCATION
DIVERSIFIED EQUITY 35% TO 30%
ANDBALANCED FUNDS
INCOME FUNDS 65% TO 80%
CASH FUNDS 5%
Rise over the year, the inflow from fixed income investment may not, all other thing being constant, a
typical asset allocation for client in the requirement stage could be:
If the cash inflow from income fund is not sufficient to meet the monthly requirement, a retired
couple can adopt a couple of strategies.
• Sell some of their fixed and hard asset, this will release fresh cash flow into system which can help
fund the gap, and
• Make small monthly withdrawal from the principle of both their equity and fixed income
investment to bridge the gap. There is no rule that client should not gradually draw down on
principle, as long as they don’t outlive all their source of money.
• In the case of a client who want to buy a home or fund a children’s education, the financial
planner can advise the client to liquidate a combination of equity and income investment to come
up with what’s required.
4. INVESTOR IN INTER-GENERATION TRANSFER PHASE :
Younger client up to their early 50’s would depend on life insurance policies to take care of the next
generation in event of death, for older investors, who want to transfer their wealth, the
recommended investment strategy will depend upon the beneficiaries :
• Children: if the children are grown up, then leaving behind a balanced combination of growth
and income funds may be appropriate for them.
• Grandchildren: If the grandchildren are young, then the growth fund may be best, as this group
has a log of time available for the investment to grow in value.
• Charitable causes: Typically income funds are bet to support such endeavors, as they have the
capacity to provide current income.
5. INVESTOR IN THE SUDDEN WEALTH STAGE:
The financial planner should advice client who acquire sudden wealth.
• To take into account the effect of taxes, because this onetime windfall may be greatly reduced
after taxes have taken bite.
• To keep the money in safe, liquid investment while they take their time on deciding what to do
with the money. This advice is very useful because client tend to spend the money
immediately, or just give it away recklessly in the first flush of getting a big amount. By giving
them time, client will act more rationally and hey can then be advised to make the appropriate
investment at a later stage.
6. FINANCIAL PLANNING FOR AFFLUENT INVESTOR:
• Wealth creating individuals :
For such investors, a 70% to 80% allocation to diversified equity and sector funds would provide
the kind of aggressive plan that they may be looking for. It should be kept in mind that wealthy
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40. investor have a higher risk bearing capacity as even the incurrence of losses may not seriously
impair their lifestyle or ability to fund their normal routine expense.
• Wealth preserving individuals :
For such investor, a conservative portfolio with a 70% to 80% exposure to income, gilt and liquid
fund would be appropriate, with the remaining in low-risk diversified equity or balanced funds.
The financial planner should recommend a low-risk investment strategy for such client, because
these investors have enough already, do not need to bear any risk, and are likely to go through
unnecessary trauma if their investment decline in value.
FINANCIAL PLANNING
Each one of us needs “finance” at various stages of line, and to ensure that one should have the money
available at the right time, when needed. Usually, personal financial needs are of two types-
protection and investment. An earning member providing for his family to have continued income
after his death is an example of a protection need. Providing for the marriage expenses of a daughter
is an example of an investment need.
“Financial planning is an exercise aimed at identifying all the financial needs of an individual,
translating the need into monetarily measurable the future, and goals at different times in planning the
financial investments that will allow the individual to provide for and satisfy his future financial needs
and achieve his life’s goals”. The objective of financial planning is to ensure that the right amount of
money is available in the right hands at the right point in the future to achieve an individual’s financial
goals.
BENEFITS OF FINANCIAL PLANNING:
It may be necessary for a person to save for money years to create adequate income in the retirement
phase. Certain financial product and technique can help to reduce the amount of tax one has to pay. It
is important that financial plans are tax sufficient. The simplest financial plans will involve detail
knowledge of law, taxation and investment principles. Amidst this complex environment for an
investor, financial planning provides direction and meaning to financial decisions. It allows one to
understand how each financial decisions one makes affect other areas of one’s finances. For example,
buying a particular investment product might help one save adequately to finance his/her children’s
higher education or it may provide enough for a comfortable retirement. By viewing each financial
decision as part of a whole, one can consider its short and long term effects on one’s life goals. One
can also adapt more easily to changes in life and feel more secure that one’s goals are on track.
Mutual fund distributors, who become a well-trained financial planner, also have many benefits:
A. Ability to establish long term relationship :
A financial planner is not just selling products, but is instead taking responsibility for the financial
wellbeing of his client. With such an approach, it is easy to build lasting relationship, unlike a
transaction oriented, where customer has to be found a new for every new investment. Also the
financial planner ideally links his reward and fees to the client financial success and the
achievement of their financial goals. On the other hand, a seller of a product makes the
commission regardless of how well or not the client fares, so the client may find it difficult to
consider such a product sales person as his guide.
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