Research report on mutual fund in india at mahindra finance

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A

RESEARCH REPORT
ON
MUTUAL FUND IN INDIA
AT
MAHINDRA FINANCE

In the partial Fulfillment of the Degree Master of Business
Administration

Submitted to:- Submitted by:-

DEPTT OF BUSINESS ANIL KUMAR
ADMINISTRATION MBA 3RD SEM
ROLL NO -80802317004

RIMT-Institute of Engineering &Technology
(Mandi Gobindgarh)

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DECLARATION

I, “Anil Kumar” declare that the Research report entitled “MUTUAL FUNDS IN
INDIA” being submitted to the PUNJAB TECHNICAL UNIVERSITY for
the partial fulfillment of the summer training of six to eight weeks report.

Place:
(Anil Kumar)
Date:



ACKNOWLEDGEMENT

The work on this summer report has been an inspiring, often exciting, sometimes
challenging, but always interesting experience for me because for the first time I
experience how the corporate world works .

I am very grateful to my supervisor “Mr.Mohd Waris” who has given me the chance to
participate in interesting research projects on “MUTUAL FUNDS IN INDIA” . He has
supported me with his encouragement and many fruitful discussions. I would also like to
express my sincere thanks to “MAHINDRA & MAHINDRA FINANCIAL SERVICES
Ltd” for chosing me. The close cooperation with my friends other colleagues of
mahindra and mahindra,and many other researchers fellowers, without their co-operation
it was impossible for me to complete this project. I would also like to thank my parents
that they allowed me to go to Delhi for this project and their continous support.

Finally, I wish to thank my sincere gratitude to Dr. Bimal Anjum (HOD) MBA
DEPTT. RIMT-IET for giving me opportunity to do research under his profound
guidance. Because of his inspiring guidance, motivation, positive criticism, continuous
encouragement and untiring supervision this work could be brought to its present shape.

I would like to thank all of them who in one way or the other helped me.

Anil Kumar



PREFACE
The success of any business entity solely depends on how effectively does it utilizes its
optimum resources and how soon does it make arrangements for the removal of the
customer’s grievances. Moreover, the company should always be ready to make
necessary changes according to the requirement in order to attract more customers so as
to maintain a substantial growth in the market. The topic given to me is :MUTUAL
FUNDS IN INDIA

“MUTUAL FUNDS IN INDIA”
I have tried to put my best efforts to complete this task on the basis of skill that I have
achieved during my management studies at RIMTIET.

I have tried to put my maximum effort to get the accurate statistical data. If there is any
error or any mistake in collecting the data, please overcome it.



CONTENTS
Page No.

CHAPTER 1 – INTRODUCITON 7

• PURPOSE OF THE STUDY

• EXECUTIVE SUMMARY

• INTRODUCTION TO THE CONCEPT

CHAPTER 2 - REVIEW OF LITERATURE 14

• A BRIEF HISTORY OF MUTUAL FUNDS.

• PERFORMANCE OF MUTUAL FUNDS IN INDIA

CHAPTER 3 - PRESENT STUDY 20

• MARKET TRENDS

• BANKS V/S MUTUAL FUN

• TYPES OF MUTUAL FUNDS

• ADVANTAGES & DISADVANTAGES OF MUTUAL FUNDS
• MUTUAL FUND CONSTITUENTS

• CALCULATION OF NAV



• MARKETING STRATEGIES ADOPTED

BY THE MUTUAL FUNDS

• CHALLENGES AND OPPORTUNITIES

• REASONS FOR BAD PERFORMANCE OF

MUTUAL FUNDS

• MARKET SHARE OF MUTUAL

FUNDS IN INDIA

CAPTER 4 – METHOD 51

• SURVEY METHOD

CHAPTER 5 – RESULT 54

CHAPTER 6 – RECOMMENDATIONS 67

CHAPTER 7 – SUMMARY & CONCLUSION 69

CHAPTER 8 – REFRENCES 71

ANNEXURE 73



CHAPTER 1 –
INTRODUCTION



Purpose of the Study

Indian households started allocating more of their savings to the capital markets in
1980’s, with investments flowing into equity and debt instruments, besides the
conventional mode of bank deposits.

Until 1992, primary market investors were effectively assured good returns as the issue
price of new equity issues was controlled and low. After introduction of free pricing of
shares, new issues prices were higher and with greater volatility in the stock markets,
many investors who bought highly priced shares lost money, and withdrew from the
markets altogether. Even those investors who continued as direct investors in the stock
markets realized that the key to successful investing in the capital markets lay in building
a diversified portfolio, which in turn required substantial capital. Besides, selecting
securities with growth and income potential from the capital market involved careful
research and monitoring of the market, which was not possible for all investors. Under
similar circumstances in other countries, mutual funds had emerged as professional
intermediaries. Besides providing the expertise in stock market investing, these funds
allow investing in small amounts and yet holding a diversified portfolio to limit risk,
while providing the potential for income and growth that is associated with the debt and
equity instruments. In India, Unit Trust of India occupied this place as the only capital
markets intermediary from 1964 until late 1987, when the Government started allowing
other sponsors also to set up mutual funds. With some ups and downs, this new class of
intermediary institutions has emerged, in India as elsewhere, as a good alternative to
direct investing in capital markets.

Mutual funds units are investment vehicles that help small investors to take a big ride
through capital market, which is not possible individually with small amount of



investment. It provides a means of participation in the stock market for people who do
not have the time not perhaps the expertise to take direct investment decisions in equities
successfully.

Mutual funds serve as a link between the saving public and the capital markets, as they
mobilize savings from investors and bring them to borrowers in the capital markets. By
the very nature of their activities, and by virtue of being knowledgeable and informed
investors, they influenced the stock markets and play an active role in promoting good
corporate governance, investor protection and the health of capital markets. Mutual funds
have imparted much needed liquidity into the financial system and challenged the
hitherto dominant role of banking and financial institutions in the capital markets.

The present study was undertaken to
• Understand the perception of small investors, who are the most exploited in
Indian capital Market.

• Analyze the type of funds available for the investor

• Understand the investment pattern of a common investor.

• Analyze factors which are considered before investing in mutual funds.

• Understand the trends in mutual fund industry.

• Importance of Marketing Strategies in mutual funds.



Executive Summary

Indian mutual fund industry now represents perhaps the most appropriate investment
opportunity for most investors. As financial markets become more sophisticated and
complex, investors need a financial intermediary who provides the required knowledge
and professional expertise on successful investing. There are various choices available to
the investor of today. One however needs to invest carefully, and work out various
investment options and decide on how to make best of the investment in terms of
monetary benefits.

A mutual fund is a common pool of money into which investors place their contributions
that are to be invested in accordance with a stated objective. The ownership of the fund is
thus join 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 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. 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.

Since each owner is a part owner of a mutual fund, it is necessary to establish the value
of his part. In other words, each share or unit that an investor holds needs to be assigned
a value. Since the units held by an investor evidence the ownership of the fund’s assets,



the value of the total assets of the fund when divided by the total number of units issued
by the mutual fund gives us the value of one unit. This is generally called the Net Asset
Value (NAV) of one unit or one share. The value of an investor’s part ownership is this
determined by the NAV of the number of units held.

Introduction to the concept

What is a Mutual fund?

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments. The income earned
through these investments and the capital appreciations realized by the scheme are shared
by its unit holders in proportion to the number of units owned by them (pro rata). Thus a
Mutual Fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed portfolio at a relatively low
cost. Anybody with an inventible surplus of as little as a few thousand rupees can invest
in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and
strategy.



Mutual Fund Operation Flow Chart

A mutual fund is the ideal investment vehicle for today’s complex and modern financial
scenario. Markets for equity shares, bonds and other fixed income instruments, real
estate, derivatives and other assets have become mature and information driven. Price
changes in these assets are driven by global events occurring in faraway places. A typical
individual is unlikely to have the knowledge, skills, inclination and time to keep track of
events, understand their implications and act speedily. An individual also finds it difficult
to keep track of ownership of his assets, investments, brokerage dues and bank
transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally qualified
and experienced staff that manages each of these functions on a full time basis. The large



pool of money collected in the fund allows it to hire such staff at a very low cost to each
investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas -
research, investments and transaction processing. While the concept of individuals
coming together to invest money collectively is not new, the mutual fund in its present
form is a 20th century phenomenon. In fact, mutual funds gained popularity only after
the Second World War. Globally, there are thousands of firms offering tens of thousands
of mutual funds with different investment objectives. Today, mutual funds collectively
manage almost as much as or more money as compared to banks.

Mutual funds for whom?

These funds can survive and thrive only if they can live upto the hopes and trusts of their
individual members. These hopes and trusts echo the peculiarities which support the
emergence and growth of such in rescue of such investors who come to the rescue of
such investors who face following constraints while making direct investments:

(a) Limited resources in the hands of investors quite often take them away from stock
market transactions.

(b) Lack of funds forbids investors to have a balanced and diversified portfolio.

(c) Lack of professional knowledge associated with investment business unable investors
to operate gainfully in the market. Small investors can hardly afford to have ex-pensive
investment consultations.

(d) To buy shares, investors have to engage share brokers who are the members of stock
exchange and have to pay their brokerage.

(e) They hardly have access to price sensitive information in time.

(f) It is difficult for them to know the development taking place in share market and
corporate sector.



(g) Firm allotments are not possible for small investors on when there is a trend of
over subscription to public issues.



CHAPTER 2 –
REVIEW OF LITERATURE

A brief history of Mutual funds in India

The origin of mutual fund industry in India is with the introduction of the concept of
mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated
from the year 1987 when non-UTI players entered theindustry.
In the past decade, Indian mutual fund industry had seen dramatic improvements, both
quality wise as well as quantity wise. Before, the monopoly of the market had seen an



ending phase; the Assets under Management (AUM) were Rs. 67bn. The private sector
entry to the fund family raised the AUM to Rs. 470 bn in March 1993 and till April 2004;
it reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is
less than the deposits of SBI alone, constitute less than 11% of the total deposits held by
the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the
country. Large sections of Indian investors are yet to be intellectuated with the concept.
Hence, it is the prime responsibility of all mutual fund companies, to market the product
correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to the
development of the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up
by the Reserve Bank of India and functioned under the Regulatory and administrative
control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over the regulatory and administrative
control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the
end
of 1988 UTI had Rs.6,700 crores of assets under management.



Second Phase - 1987-1993 (Entry of Public Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank
Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92).
LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47, 004 as assets under
management.

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

With the entry of private sector funds in 1993, a new era started in the Indian mutual
fund industry, giving the Indian investors a wider choice of fund families. Also, 1993
was the year in which the first Mutual Fund Regulations came into being, under which all
mutual funds, except UTI were to be registered and governed. The erstwhile Kothari
Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund
registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the
SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under
management was way ahead of other mutual funds.



FourthPhase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities. One
is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as
on January 2003). The Specified Undertaking of Unit Trust of India, functioning under
an administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of
AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different private sector
funds, the mutual fund industry has entered its current phase of consolidation and growth.

Performance of Mutual Funds in India

Let us start the discussion of the performance of mutual funds in India from the day the
concept of mutual fund took birth in India. The year was 1963. Unit Trust of India
invited investors or rather to those who believed in savings, to park their money in UTI
Mutual Fund.

For 30 years it goaled without a single second player. Though the 1988 year saw some



new mutual fund companies, but UTI remained in a monopoly position.

The performance of mutual funds in India in the initial phase was not even closer to
satisfactory level. People rarely understood, and of course investing was out of question.
But yes, some 24 million shareholders was accustomed with guaranteed high returns by
the beginning of liberalization of the industry in 1992. This good record of UTI became
marketing tool for new entrants. The expectations of investors touched the sky in
profitability factor. However, people were miles away from the preparedness of risks
factor after the liberalization.

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me
concentrate about the performance of mutual funds in India through figures. From Rs.
67bn. the Assets Under Management rose to Rs. 470 bn. in March 1993 and the figure
had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock prices started
falling in the year 1992. Those days, the market regulations did not allow portfolio shifts
into alternative investments. There were rather no choices apart from holding the cash or
to further continue investing in shares. One more thing to be noted, since only closed-end
funds were floated in market, the investors disinvested by selling at a loss the in the
secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market
scandal, the losses by disinvestments and of course the lack of transparent rules in the
whereabouts rocked confidence among the investors. Partly owing to a relatively weak
stock market performance, mutual funds have not yet recovered, with funds trading at an
average discount of 1020 percent of their net asset value.

The supervisory authority adopted a set of measures to create a transparent and
competitive environment in mutual funds. Some of them were like relaxing investment
restrictions into the market, introduction of open-ended funds, and paving the gateway



for mutual funds to launch pension schemes.

The measure was taken to make mutual funds the key instrument for long-term saving.
The more the variety offered, the quantitative will be investors.

At last to mention, as long as mutual fund companies are performing with lower risks and
higher profitability within a short span of time, more and more people will be inclined to
invest until and unless they are fully educated with the dos and don’ts of mutual funds



CHAPTER 3 –

PRESENT STUDY

Market Trends



A lone UTI with just one scheme in 1964, now competes with as many as 400 odd
products and 34 players in the market. In spite of the stiff competition and losing market
share, UTI still remains a formidable force to reckon with.

Last six years have been the most turbulent as well as exiting ones for the industry. New
players have come in, while others have decided to close shop by either selling off or
merging with others. Product innovation is now passé with the game shifting to
performance delivery in fund management as well as service. Those directly associated
with the fund management industry like distributors, registrars and transfer agents, and
even the regulators have become more mature and responsible.

The industry is also having a profound impact on financial markets. While UTI has
always been a dominant player on the bourses as well as the debt markets, the new
generation of private funds which have gained substantial mass are now seen flexing
their muscles. Fund managers, by their selection criteria for stocks have forced corporate
governance on the industry. By rewarding honest and transparent management with
higher valuations, a system of risk-reward has been created where the corporate sector is
Rs100bn per annum over five-year period spanning 1993-98 doubled to Rs210bn in 1998
more transparent then before.

Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG
and technology sector. Funds performances are improving. Funds collection, which
averaged at less than -99. In the current year mobilization till now have exceeded
Rs300bn. Total collection for the current financial year ending March 2000 is expected to
reach Rs450bn.

What is particularly noteworthy is that bulk of the mobilization has been by the private
sector mutual funds rather than public sector mutual funds. Indeed private MFs saw a net
inflow of Rs. 7819.34 crore during the first nine months of the year as against a net
inflow of Rs.604.40 crore in the case of public sector funds.

Mutual funds are now also competing with commercial banks in the race for retail
investor’s savings and corporate float money. The power shift towards mutual funds has



become obvious. The coming few years will show that the traditional saving avenues are
losing out in the current scenario. Many investors are realizing that investments in
savings accounts are as good as locking up their deposits in a closet. The fund
mobilization trend by mutual funds in the current year indicates that money is going to
mutual funds in a big way. The collection in the first half of the financial year 1999-2000
matches the whole of 1998-99.

India is at the first stage of a revolution that has already peaked in the U.S. The U.S.
boasts of an Asset base that is much higher than its bank deposits. In India, mutual fund
assets are not even 10% of the bank deposits, but this trend is beginning to change.
Recent figures indicate that in the first quarter of the current fiscal year mutual fund
assets went up by 115% whereas bank deposits rose by only 17%. (Source: Think-tank,
The Financial Express September, 99) This is forcing a large number of banks to adopt
the concept of narrow banking wherein the deposits are kept in Gilts and some other
assets which improves liquidity and reduces risk. The basic fact lies that banks cannot be
ignored and they will not close down completely. Their role as intermediaries cannot be
ignored. It is just that Mutual Funds are going to change the way banks do business in the
future.

Banks VS Mutual Funds

BANKS MUTUAL
FUNDS
Returns Low Better
Administrative High Low
exp.



Risk Low Moderate
Investment Less More
options
Network High penetration Low but
improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest Minimum balance between 10th. & 30th. Of everyEveryday
calculation month
Guarantee Maximum Rs.1 lakh on deposits None

Bankers better watch out! The Indian mutual fund industry will soon start relieving the
banking system of its prized deposits.

Innovative distribution, marketing and aggressive concept selling will drive savings into
the lap of the Indian Mutual Fund industry in the next millennium, fund managers
predicted at the Second Economic Times Roundtable on mutual funds held last week.

Fund chiefs predicted that ease of transactions, thanks to technology and increased
awareness, would lead to more investors putting their money into mutual funds. The day
was not far, they said , when small savings account s too began moving into mutual
funds.

Types of Mutual Funds

Any mutual fund has an objective of earning income for the investors and/ or getting
increased value of their investments. To achieve these objectives mutual funds adopt
different strategies and accordingly offer different schemes of investments. On this basis



the simplest way to categorize schemes would be to group these into two broad
classifications: Operational Classification and Portfolio Classification.

Operational classification highlights the two main types of schemes, i.e., open-ended and
close-ended which are offered by the mutual funds.

Portfolio classification projects the combination of investment instruments and
investment avenues available to mutual funds to manage their funds. Any portfolio
scheme can be either open ended or close ended.

A. OPERATIONAL CLASSIFICATION
(a) Open Ended Schemes: As the name implies the size of the scheme (Fund) is
open – i.e., not specified or pre-determined. Entry to the fund is always open to the
investor who can subscribe at any time. Such fund stands ready to buy or sell its
securities at any time. It implies that the capitalization of the fund is constantly changing
as investors sell or buy their shares. Further, the shares or units are normally not traded
on the stock exchange but are repurchased by the fund at announced rates. Open-ended
schemes have comparatively better liquidity despite the fact that these are not listed. The
reason is that investor can any time approach mutual fund for sale of such units. No
intermediaries are required. Moreover, the realizable amount is certain since repurchase
is at a price based on declared net asset value (NAV). No minute to minute fluctuations
in rates haunt the investors. The portfolio mix of such schemes has to be investments,
which are actively traded in the market. Otherwise, it will not be possible to calculate
NAV. This is the reason that generally open-ended schemes are equity based. Moreover,
desiring frequently traded securities, open-ended schemes hardly have in their portfolio
shares of comparatively new and smaller companies since these are not generally traded.
In such funds, option to reinvest its dividend is also available. Since there is always a
possibility of withdrawals, the management of such funds becomes more tedious as



managers have to work from crisis to crisis. Crisis may be on two fronts, one is, that
unexpected withdrawals require funds to maintain a high level of cash available every
time implying thereby idle cash. Fund managers have to face questions like ‘what to
sell’. He could very well have to sell his most liquid assets. Second, by virtue of this
situation such funds may fail to grab favorable opportunities. Further, to match quick
cash payments, funds cannot have matching realization from their portfolio due to
intricacies of the stock market. Thus, success of the open-ended schemes to a great extent
depends on the efficiency of the capital market.

(b) Close Ended Schemes: Such schemes have a definite period after which their
shares/ units are redeemed. Unlike open-ended funds, these funds have fixed
capitalization, i.e., their corpus normally does not change throughout its life period. Close
ended fund units trade among the investors in the secondary market since these are to be
quoted on the stock exchanges. Their price is determined on the basis of demand and
supply in the market. Their liquidity depends on the efficiency and understanding of the
engaged broker. Their price is free to deviate from NAV, i.e., there is every possibility
that the market price may be above or below its NAV. If one takes into account the issue
expenses, conceptually close ended fund units cannot be traded at a premium or over
NAV because the price of a package of investments, i.e., cannot exceed the sum of the
prices of the investments constituting the package. Whatever premium exists that may
exist only on account of speculative activities. In India as per SEBI (MF) Regulations
every mutual fund is free to launch any or both types of schemes.

B. PORTFOLIO CLASSIFICATION OF FUNDS: Following
are the portfolio classification of funds, which may be offered. This
classification may be on the basis of

(a) Return,

(b) Investment Pattern,



(c) Specialized sector of investment,

(d) Leverage and

(e) Others.

(a) Return based classification: To meet the diversified needs of the investors, the
mutual fund schemes are made to enjoy a good return. Returns expected are in form of
regular dividends or capital appreciation or a combination of these two.

i. Income Funds: For investors who are more curious for returns,
Income funds are floated. Their objective is to maximize current income. Such funds
distribute periodically the income earned by them. These funds can further be splitted up
into categories: those that stress constant income at relatively low risk and those that
attempt to achieve maximum income possible, even with the use of leverage. Obviously,
the higher the expected returns, the higher the potential risk of the investment.

ii. Growth Funds: Such funds aim to achieve increase in the value of the
underlying investments through capital appreciation. Such funds invest in growth
oriented securities which can appreciate through the expansion production facilities in
long run. An investor who selects such funds should be able to assume a higher than
normal degree of risk.

iii. Conservative Funds: The fund with a philosophy of “all things to all”
issue offer document announcing objectives as: (i) To provide a reasonable rate of return,
(ii) To protect the value of investment and, (iii) To achieve capital appreciation
consistent with the fulfillment of the first two objectives. Such funds which offer a blend
of immediate average return and reasonable capital appreciation are known as “middle of



the road” funds. Such funds divide their portfolio in common stocks and bonds in a way
to achieve the desired objectives. Such funds have been most popular and appeal to the
investors who want both growth and income.

(b) Investment Based Classification: Mutual funds may also be classified on
the basis of securities in which they invest. Basically, it is renaming the subcategories of
return based classification.

i. Equity Fund: Such funds, as the name implies, invest most of their
investible shares in equity shares of companies and undertake the risk associated with the
investment in equity shares. Such funds are clearly expected to outdo other funds in
rising market, because these have almost all their capital in equity. Equity funds again
can be of different categories varying from those that invest exclusively in high quality
‘blue chip’ companies to those that invest solely in the new, unestablished companies.
The strength of these funds is the expected capital appreciation. Naturally, they have a
higher degree of risk.

ii. Bond Funds: such funds have their portfolio consisted of bonds,
debentures, etc. this type of fund is expected to be very secure with a steady income and
little or no chance of capital appreciation. Obviously risk is low in such funds. In this
category we may come across the funds called ‘Liquid Funds’ which specialize in
investing short-term money market instruments. The emphasis is on liquidity and is
associated with lower risks and low returns.

iii. Balanced Fund: The funds, which have in their portfolio a reasonable mix
of equity and bonds, are known as balanced funds. Such funds will put more emphasis on
equity share investments when the outlook is bright and will tend to switch to debentures
when the future is expected to be poor for shares.



(c) Sector Based Funds: There are number of funds that invest in a specified sector
of economy. While such funds do have the disadvantage of low diversification by putting
all their all eggs in one basket, the policy of specializing has the advantage of developing
in the fund managers an intensive knowledge of the specific sector in which they are
investing. Sector based funds are aggressive growth funds which make investments on
the basis of assessed bright future for a particular sector. These funds are characterized
by high viability, hence more risky.

Advantages & Disadvantages of Mutual Funds

Advantages of Mutual Funds

The advantages of investing in a Mutual Fund are:

• Diversification: The best mutual funds design their portfolios so individual
investments will react differently to the same economic conditions. For example,
economic conditions like a rise in interest rates may cause certain securities in a
diversified portfolio to decrease in value. Other securities in the portfolio will
respond to the same economic conditions by increasing in value. When a portfolio
is balanced in this way, the value of the overall portfolio should gradually
increase over time, even if some securities lose value.

• Professional Management: Most mutual funds pay topflight professionals
to manage their investments. These managers decide what securities the fund will
buy and sell.

• Regulatory oversight: Mutual funds are subject to many government
regulations that protect investors from fraud.



• Liquidity: It's easy to get your money out of a mutual fund. Write a check,
make a call, and you've got the cash.

• Convenience: You can usually buy mutual fund shares by mail, phone, or over
the Internet.

• Low cost: Mutual fund expenses are often no more than 1.5 percent of your
investment. Expenses for Index Funds are less than that, because index funds are
not actively managed. Instead, they automatically buy stock in companies that are
listed on a specific index

• Transparency

• Flexibility

• Choice of schemes

• Tax benefits

• Well regulated

Drawbacks of Mutual Funds:

Mutual funds have their drawbacks and may not be for everyone:

• No Guarantees: No investment is risk free. If the entire stock market declines
in value, the value of mutual fund shares will go down as well, no matter how
balanced the portfolio. Investors encounter fewer risks when they invest in mutual



funds than when they buy and sell stocks on their own. However, anyone who
invests through a mutual fund runs the risk of losing money.

• Fees and commissions: All funds charge administrative fees to cover their
day-to-day expenses. Some funds also charge sales commissions or "loads" to
compensate brokers, financial consultants, or financial planners. Even if you don't
use a broker or other financial adviser, you will pay a sales commission if you
buy shares in a Load Fund.

• Taxes: During a typical year, most actively managed mutual funds sell
anywhere from 20 to 70 percent of the securities in their portfolios. If your fund
makes a profit on its sales, you will pay taxes on the income you receive, even if
you reinvest the money you made.

• Management risk: When you invest in a mutual fund, you depend on the
fund's manager to make the right decisions regarding the fund's portfolio. If the
manager does not perform as well as you had hoped, you might not make as much
money on your investment as you expected. Of course, if you invest in Index
Funds, you forego management risk, because these funds do not employ
managers.

Mutual fund constituents

All mutual funds comprise four constituents –

Sponsors,



Trustees,

Asset Management Company (AMC) and

Custodians.

Sponsors: The sponsors initiate the idea to set up a mutual fund. It could be a registered
company, scheduled bank or financial institution. A sponsor has to satisfy certain
conditions, such as capital, record (at least five year’s operation in financial services), de-
fault free dealings and general reputation of fairness. The sponsors appoint the Trustee,
AMC and Custodian. Once the AMC is formed, the sponsor is just a stakeholder.

Trust/ Board of Trustees: Trustees hold a fiduciary responsibility towards unit
holders by protecting their interests. Trustees float and market schemes, and secure
necessary approvals. They check if the AMC’s investments are within well-defined
limits, whether the fund’s assets are protected, and also ensure that unit holders get their
due returns. They also review any due diligence by the AMC. For major decisions
concerning the fund, they have to take the unit holders’ consent. They submit reports
every six months to SEBI; investors get an annual report. Trustees are paid annually out
of the fund’s assets – 0.5 percent of the weekly net asset value.

Fund Managers/ AMC: They are the ones who manage money of the investors. An
AMC takes decisions, compensates investors through dividends, maintains proper
accounting and information for pricing of units, calculates the NAV, and provides
information on listed schemes. It also exercises due diligence on investments, and
submits quarterly reports to the trustees. A fund’s AMC can neither act for any other
fund nor undertake any business other than asset management. Its net worth should not
fall below Rs. 10 crore. And, its fee should not exceed 1.25 percent if collections are
below Rs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can pull
up an AMC if it deviates from its prescribed role.



Custodian: Often an independent organisation, it takes custody of securities and other
assets of mutual fund. Its responsibilities include receipt and delivery of securities,
collecting income-distributing dividends, safekeeping of the units and segregating assets
and settlements between schemes. Their charges range between 0.15-0.2 percent of the
net value of the holding. Custodians can service more than one fund.

Calculation of NAV

The net asset value of the fund is the cumulative market value of the assets fund net of its
liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the
assets in the fund, this is the amount that the shareholders would collectively own. This
gives rise to the concept of net asset value per unit, which is the value, represented by the
ownership of one unit in the fund. It is calculated simply by dividing the net asset value
of the fund by the number of units. However, most people refer loosely to the NAV per
unit as NAV, ignoring the "per unit". We also abide by the same convention.

The most important part of the calculation is the valuation of the assets owned by the
fund. Once it is calculated, the NAV is simply the net value of assets divided by the
number of units outstanding. The detailed methodology for the calculation of the asset
value is given below.

Asset value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued

Amount due on unpaid assets



Expenses accrued but not paid

Details on the above items

For liquid shares/debentures, valuation is done on the basis of the last or closing market
price on the principal exchange where the security is traded.

For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be
estimated. For shares, this could be the book value per share or an estimated market price
if suitable benchmarks are available. For debentures and bonds, value is estimated on the
basis of yields of comparable liquid securities after adjusting for illiquidity. The value of
fixed interest bearing securities moves in a direction opposite to interest rate changes
Valuation of debentures and bonds is a big problem since most of them are unlisted and
thinly traded. This gives considerable leeway to the AMCs on valuation and some of the
AMCs are believed to take advantage of this and adopt flexible valuation policies
depending on the situation.

Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with
every passing day, interest is said to be accrued, at the daily interest rate, which is
calculated by dividing the periodic interest payment with the number of days in each
period. Thus, accrued interest on a particular day is equal to the daily interest rate
multiplied by the number of days since the last interest payment date.

Usually, dividends are proposed at the time of the Annual General meeting and become
due on the record date. There is a gap between the dates on which it becomes due and the
actual payment date. In the intermediate period, it is deemed to be "accrued".

Expenses including management fees, custody charges etc. are calculated on a daily
basis.

Marketing strategies adopted by the Mutual funds



The present marketing strategies of mutual funds can be divided into three main
headings:

• Direct marketing

• Selling through intermediaries.

• Joint Calls

Direct Marketing: This constitutes 20 percent of the total sales of mutual funds. Some
of the important tools used in this type of selling are:

Personal Selling: In this case the customer support officer of the fund at a particular
branch takes appointment from the potential prospect. Once the appointment is fixed, the
branch officer also called Business Development Associate (BDA) in some funds then
meets the prospect and gives him all details about the various schemes being offered by
his fund. The conversion rate in this mode of selling is in between 30% - 40%.

Telemarketing: In this case the emphasis is to inform the people about the fund. The
names and phone numbers of the people are picked at random from telephone directory.
Sometimes people belonging to a particular profession are also contacted through phone
and are then informed about the fund. Generally the conversion rate in this form of
marketing is 15% - 20%.

Direct mail: This one of the most common method followed by all mutual funds.
Addresses of people are picked at random from telephone directory. The customer
support officer (CSO) then mails the literature of the schemes offered by the fund. The
follow up starts after 3 – 4 days of mailing the literature. The CSO calls on the people to
whom the literature was mailed. Answers their queries and is generally successful in
taking appointments with those people. It is then the job of BDA to try his best to convert
that prospect into a customer.

Advertisements in newspapers and magazines: The funds regularly advertise in business
newspapers and magazines besides in leading national dailies. The purpose to keep
investors aware about the schemes offered by the fund and their performance in recent
past.



Hoardings and Banners: In this case the hoardings and banners of the fund are put at
important locations of the city where the movement of the people is very high. Generally
such hoardings are put near UTI offices in order to tap people who are at present
investing in UTI schemes. The hoarding and banner generally contains information either
about one particular scheme or brief information about all schemes of fund.

Selling through intermediaries: Intermediaries contribute towards 80% of the total
sales of mutual funds. These are the people/ distributors who are in direct touch with the
investors. They perform an important role in attracting new customers. Most of these
intermediaries are also involved in selling shares and other investment instruments. They
do a commendable job in convincing investors to invest in mutual funds. A lot depends
on the after sale services offered by the intermediary to the customer. Customers prefer to
work with those intermediaries who give them right information about the fund and keep
them abreast with the latest changes taking place in the market especially if they have
any bearing on the fund in which they have invested.

Regular Meetings with distributors: Most of the funds conduct monthly/bi-monthly
meetings with their distributors. The objective is to hear their complaints regarding
service aspects from funds side and other queries related to the market situation.
Sometimes, special training programmes are also conducted for the new agents/
distributors. Training involves giving details about the products of the fund, their present
performance in the market, what the competitors are doing and what they can do to
increase the sales of the fund.

Joint Calls: This is generally done when the prospect seems to be a high net worth
investor. The BDA and the agent (who is located close to the HNI’s residence or area of
operation) together visit the prospect and brief him about the fund. The conversion rate is
very high in this situation, generally, around 60%. Both the fund and the agent provide
even after sale services in this particular case.

Meetings with HNI’s: This is a special feature of all the funds. Whenever a top official
visits a particular branch office, he devotes atleast one to two hours in meting with the
HNI’s of that particular area. This generally develops a faith among the HNI’s towards
the fund.



Marketing of funds: Challenges and Opportunities

When we consider marketing, we have to see the issues in totality, because we cannot
judge an elephant by its trunk or by its tail but we have to see it in its totality. When we
say marketing of mutual funds, it means, includes and encompasses the following
aspects:

• Assessing of investors needs and market research;

• Responding to investors needs;

• Product designing;

• Studying the macro environment;

• Timing of the launch of the product;

• Choosing the distribution network;

• Finalizing strategies for publicity and advertisement;

• Preparing offer documents and other literature;

• Getting feedback about sales;

• Studying performance indicators about fund performance like NAV;

• Sending certificates in time and other after sales activities;

• Honoring the commitments made for redemptions and repurchase;

• Paying dividends and other entitlements;

• Creating positive image about the fund and changing the nature of the market
itself.



The above are the aspects of marketing of mutual funds, in totality. Even if there is a
single weak-link among the factors which are mentioned above, no mutual fund can
successfully market its funds.

WIDENING, BROADENING AND DEEPENING THE MARKETS

There are certain issues that are directly linked with the marketing of mutual funds, the
first of which is widening, broadening and deepening of the market for the mutual fund
products. Consider the geographical spread of the investors in the mutual fund industry.
Almost 80% of the funds are mobilized from less than 10 centers in the country. In fact
there are only around 35 centers in the country, which account for almost 95% of the
funds mobilized. Considering the vast nature of this country, the first priority is that the
geographic spread has to be widened and the market has to be deepened. Secondly, the
mutual funds must try to spread their wings not only within the country, but also outside
the country.

A. Markets in Rural and Semi-Urban Areas

There exists a large investor base in rural and semi-urban areas, having a population of
about one lakh, which normally has access to only post office savings and bank deposits.
This is the single largest untapped market for mutual funds in India.

Rural marketing, unlike the marketing of mutual funds in the metros and urban areas,
would require a completely different strategy, and different means of communication to
the target customer. Typically, investors in the rural and semi-urban areas are not well
educated and are inadequately exposed to the capital market mechanisms. Therefore,
more emphasis has to be given to the electronic media and other forms of publicity such
as wall paintings, hoardings, and educational films. It is also important to utilize the
services of local intermediaries like gram sevaks, postmasters, school teachers,



agricultural co-operative societies and rural banks. It would therefore be more expensive
to market mutual funds in such markets than marketing in the cities.

The mutual fund industry can collectively undertake this job of creating awareness
among the rural population about the mutual funds as a new form of savings; translate
that awareness into increased fund mobilsation. The retail distribution network,
comprising of the district representatives and the collection centers can be best utilized to
create such awareness and expand the market. Simplification of literature in regional
languages, group meetings in these semi-urban and rural areas, visits by mobile vans with
some audio visual aids and the like, should help develop these markets. In other words,
the untapped markets in the country should ideally be the first thing that the mutual funds
in India should endeavour to tap, not entirely relying upon the investors in the 35 odd
cities of the country. By concentrating on these areas, the investor base will get broader
based. Once the semi urban population gets acquainted with the concept of mutual funds,
it will naturally give the much needed stability to the market.

B. Overseas Markets

The second aspect with respect to the widening and deepening the market is expanding
the overseas investor base. A target group with large potential, which can be tapped is
non-resident Indians. If offered after sales services of international standard, reasonable
return and easy access to information, NRI’s are willing to invest in Indian mutual funds.
The expansion of the distribution network and quick dissemination of information,
coupled with prompt and timely service, efficient collection and remittance mechanism,
will play an important role in mobilizing and retaining these funds. NRI’s will also
require a continuous presence in their market, because that generates trust and
confidence, which translates into sustained mobilization of funds.

PRODUCT INNOVATION AND VARIETY

A. Investor Preferences

The challenge for the mutual funds is in the tailoring the right products that will help
mobilizing savings by targeting investors’ needs. It is necessary that the common



investor understands very clearly and loudly the salient features of funds, and
distinguishes one fund from another. The funds that are being launched today are more or
less look-alikes, or plain vanilla funds, and not necessarily designed to take into account
the investors’ varying needs.

The Indian investor is essentially risk averse and is more passive than active. He is not
interested in frequently changing his portfolio, but is satisfied with safety and reasonable
returns. Importantly, he understands more by emotions and sentiments rather than a
quantitative comparison of funds’ performance with respect to an index. Mere growth
prospects, in an uncertain market, are not attractive to him. He prefers one bird in the
hand to two in bush, and is happy if assured a rate of reasonable return that he will get on
his investment. The expectations of a typical investor, in order of preference are the
safety of funds, reasonable return and liquidity.

The investor is ready to invest his money over a long periods, provided there is a purpose
attached to it which is linked to his social needs and therefore appeals to his sentiments
and emotions. That purpose may be his child’s education and career development,
medical expenses, health care after retirement, or the need for steady and sure income
after retirement. In a country where social security and social insurance are conspicuous
more by their absence, mutual funds can pool their resources together and try to mobilize
funds to meet some of the social needs of the society.

B. Product Innovations

With the debt market now getting developed, mutual funds are tapping the investors who
require steady income with safety, by floating funds that are designed to primarily have
debt instruments in their portfolio. The other area where mutual funds are concentrating
is the money market mutual funds, sectoral funds, index funds, gilt funds besides equity
funds.

The industry can also design separate funds to attract semi-urban and rural investors,
keeping their seasonal requirements in mind for harvest seasons, festival seasons, sowing
seasons, etc.



DISTRIBUTION NETWORK

Among the competitors to the mutual fund industry, Life Insurance Corporation with its
dedicated sales force is offering insurance products; banks with their friendly
neighborhood presence offer the advantage of extensive network; finance companies
with their hefty upfront incentives offer higher returns; shares – provided the market is
moving favorably – also attract direct investments from retail investors. It is against this
background that the merits and demerits of the alternative methods of distribution have to
be studied.

Retail through agents

The alternative distribution channels that are available are selling, or using lead managers
and brokers along with sub-brokers, for selling units. The experience of UTI has been
that, if necessary motivation and incentive is provided to the retailer agents, they are
likely to be more successful than the lead managers. This is because, there is a sense of
loyalty amongst agents, in anticipation of getting continuous business throughout the
year, and the trust and credibility that has been generated or will be generated by being
loyal to one institution. Statistics reveal that the wastage ratio of application forms in the
lead manager concept, is much higher than in the retail agency system. Savings in
advertisement and publicity expenses is also affected, as the target of communication is
restricted to a few group of individuals, since the agent will function as a facilitator,
informer and educator. The reduced cost benefit will ultimately accrue to the investor in
the form of higher returns.

In such a system, one achieves brand loyalty through continuous interaction between
agents and investors. Building a team of agents and other distribution network such as
distribution and collecting agents and franchise offices, will provide the investor the
opportunity of having continuous interaction and contact with the mutual fund.
Therefore, retail distribution through the agents is a preferred alternative for distributing
mutual fund products.



ADVERTISING AND SALES PROMOTION

By their very nature, mutual funds require higher advertisement and sales promotion
expenses than any consumer product offering measurable performance. Different kinds
of advertising and sales promotion exercises are required to serve the needs of different
classes of investors. For instance, an aggressive ‘push’ marketing strategy is required for
retail markets, where investors are not adequately aware of the product and do not have
specialized skill in financial market, in contrast with ‘pull’ marketing strategies for the
wholesale market.

There are certain issues with reference to advertisement, publicity literature and offer
documents, which deserve attention. Most of the mutual fund advertisements look
similar, focusing on scheme features, returns and incentives. An investor exposed to the
increasing number of mutual fund products finds that all the available brands are rather
identical, and cannot appreciate any distinction.

The present form of application, brochures and other literature is generally lengthy,
cumbersome and at times complicated leading to higher emphasis on advertisement. One
of the limiting factors is the regulatory framework governing advertisements of mutual
fund products. For instance, in the offer documents, mutual funds are required to mention
the fund objectives in clear terms. Immediately thereafter, the first risk factor that has to
be mentioned is that there is no certainty whether the objectives of the fund will be
achieved or not. Some more relaxation in these may facilitate bringing more novelty in
advertisements, within a broad framework, without luring investors through false
promises, and will certainly improve the situation.

Another hurdle is the statutory disclaimer required to be carried along with every
advertisement. Mutual funds have to provide risk factors.

Under the present mutual fund regulations, a prior approval by SEBI is a must before a
mutual fund can launch its fund. In the regulation itself, a period of one month has been
provided. But in a month’s time, perhaps the situation may so change, that the timing of



launch gets affected. The requirement for getting approval, which normally takes about 2
months’ time, defeats the purpose for which the fund was designed also.

QUALITY OF SERVICE

This industry primarily sells quality of services, given that the performance cannot be
promised. It is with this attribute along with procedural simplicity, that the fund
gradually builds its brand and its class of loyal investors. The qualities of services are
broadly categorized as:

• Timely services after the sale of the units; and

• Continuous reporting of investment performance.

Mutual fund managers must give due attention and evaluate their performance on each
front. They may also consider an option of conducting a service audit for controlling and
improving the quality of service.

MARKET RESEARCH

Investment in mutual fund is not a one-time activity. It is a continuous activity. The same
investor, if satisfied, will come to the fund again and again. When the investor sends his
application, it is not only an application, but it also contains vital information. Most of
this information if tabulated and analyzed, would provide important insights into investor
needs, preferences and behavior and enables us to target customers need more accurately,
to achieve better penetration, deeper loyalty and reduced costs. It is in this context that
direct marketing will assume increased importance. Knowing the customer thoroughly is
of utmost importance. Unlike the consumer goods industry, it is not possible for mutual
fund industry to test market and have pilot projects before launch. At the same time,
focusing and concentrating on a particular geographic area where the fund has a strong
presence and proven marketing network, can help reduce network, can help reduce issue
expenses and ultimately translate into higher returns for the investor. Very little research



on investor preference is available, but the industry can collectively have a data bank,
and share the information for appropriate use.

Market Segmentation Different segments of the market have different risk-return criteria,
on the basis of which they take investment decisions. Not only that, in a particular
segment also there could be different sub-segments asking for yet different risk-return
attributes, and differential preference for various investments attributes of financial
product. Different investment attributes an investor expects in a financial product are:

• Liquidity,

• Capital appreciation,

• Safety of principal,

• Tax treatment,

• Dividend or interest income,

• Regulatory restrictions,

• Time period for investment, etc.

On the basis of these attributes the mutual fund market may be broadly segmented into
five main segments as under.

1) Retail Segment

This segment characterizes large number of participants but low individual volumes. It
consists of individuals, Hindu Undivided Families, and firms. It may be further sub-
divided into:

i. Salaried class people;

ii. Retired people;

iii. Businessmen and firms having occasional surpluses;

iv. HUF’s for long term investment purpose.



These may be further classified on the basis of their income levels. It has been observed
that prospects in different classes of income levels have different patterns of preferences
of investment. Similarly, the investment preferences for urban and rural prospects would
differ and therefore the strategies for tapping this segment would differ on the basis of
differential life style, value and ethics, social environment, media habits, and nature of
work. Broadly, this class requires security of the principal, liquidity, and regular income
more than capital appreciation. It lacks specialised investment skills in financial markets
and highly susceptible to mob behaviour. The marketing strategy involving indirect
selling through agency network and creating awareness through appropriate media would
be more effective in this segment.

2) Institutional Segment

This segment characterizes less number of participants, and large individual volumes. It
consists of banks, public sector units, financial institutions, foreign institutional investors,
insurance corporations, provident and pension funds. This class normally looks for more
specialized professional investment skills of the fund managers and expects a structured
product than a ready-made product. The tax features and regulatory restrictions are the
vital considerations in their investment decisions. Each class of participants, such as
banks, provides a niche to the fund managers in this segment. It requires more of a
personalized and direct marketing to sustain and increase volumes.

3) Trusts

This is a highly regulated, high volumes segment. It consists of various types of trusts,
namely, charitable trusts, religious trust, educational trust, family trust, social trust, etc.
each with different objectives. Its basic investment need would be safety of the principal,
regular income and hedge against inflation rather than liquidity and capital appreciation.
This class offers vast potential to the fund managers, if the regulators relax guidelines
and allow the trusts to invest freely in mutual funds.



4) Non-Resident Indians

This segment consists of very risk sensitive participants, at times referred as ‘fair weather
friends.’ They need the highest cover against political and exchange risk. They normally
prefer easy exit with repatriation of income and principal. They also hold a strategic
importance as they bring in crucial foreign exchange – a crucial input for developing
country like ours. Marketing to this segment requires special kind of products for groups
of foreign countries depending upon the provisions of tax treaties. The range of suitable
products are required to design to divert the funds flowing into bank accounts.

5) Corporates

Generally, the investment need of this segment is to park their occasional surplus funds
that earn return more than what they have to pay on account of holding them.
Alternatively, they also get surplus fund due to the seasonality of the business, which
typically become due for the payment within a year or quarter or even a month. They
need short term parking place for their fund,. This segment offers a vast potential to
specialized money market managers. Given the relaxation in the regulatory guidelines,
fund managers are expected design products to this segment.

Thus, each segment and sub-segment have their own risk return preferences forming
niches in the market. Mutual funds managers have to analyze in detail the intrinsic needs
of the prospects and design a variety of suitable products for them. Not only is that, the
products also required to be marketed through appropriately different marketing
strategies.

Changes that have taken place since the advent of the Net



• Lower Costs: Distribution of funds will fall in the online trading regime by
2003. Mutual funds could bring down their administrative costs to 0.75% if
trading is done online. As per SEBI regulations, bond funds can charge a
maximum of 2.25% and equity funds can charge 2.5% as administrative fees.
Therefore if the administrative costs are low, the benefits are passed down and
hence Mutual Funds are able to attract mire investors and increase their asset
base.

• Better advice: Mutual funds could provide better advice to their investors
through the Net rather than through the traditional investment routes where there
is an additional channel to deal with the Brokers. Direct dealing with the fund
could help the investor with their financial planning.
• In India, brokers could get more Net savvy than investors and could help the
investors with the knowledge through get from the Net.

• New investors would prefer online: Mutual funds can target investors who are
young individuals and who are Net savvy, since servicing them would be easier
on the Net.
• India has around 1.6 million net users who are prime target for these funds and
this could just be the beginning. The Internet users are going to increase
dramatically and mutual funds are going to be the best beneficiary. With smaller
administrative costs more funds would be mobilized .A fund manager must be
ready to tackle the volatility and will have to maintain sufficient amount of
investments which are high liquidity and low yielding investments to honor
redemption.

• Net based advertisements: There will be more sites involved in ads and
promotion of mutual funds. In the U.S. sites like AOL offer detailed research and
financial details about the functioning of different funds and their performance
statistics. a is witnessing a genesis in this area . There are many sites such as



indiainfoline.com and indiafn.com that are doing something similar and providing
advice to investors regarding their investments.

Reasons for bad performance of Mutual funds

Most investors associate mutual funds with Master gain, Monthly Equity Plans of SBI
Mutual Fund, UTI and Canbank Mutual Fund and of course Morgan Stanley Growth
Fund. This is so because these funds truly had participation from masses, with a fund like
Morgan Stanley having more than 1 million investors. Investors feel that after 5 years,
Morgan Stanley Growth Fund units still trade below the original IPO price of Rs 10.

It is incorrect to think that all mutual funds have performed poorly. If one looks at some
income funds, they have come with reasonable returns. It is only the performance of
equity funds, which has been poor. Their poor performance has been amplified by the
closed end discounts i.e. units of these funds quoting at sharp discounts to their NAV
resulting in an even poorer return to the investor.

One must remember that a Mutual Fund does not provide assured returns and neither can
it "manufacture" returns out of thin air. Returns provided by mutual funds are a function
of the returns in the underlying asset class in which the fund invests. Good funds can beat
returns in their asset class to some extent but that’s all. E.g. take the case of a sector
specific fund like a pharma fund which invests only in shares of pharmaceutical
companies. If the Govt. comes with new regulation that severely restricts the pricing
freedom of these companies resulting in negative outlook for the sector, the prices of all
stocks in the sector could fall substantially resulting in severe erosion in the NAV of the
fund. No one can do anything about it. A good fund manager would probably sell part of
the fund before prices fall too much and wait for an opportune time to reinvest at lower
levels once the dust has settled. In that case, the NAV of the fund would fall to a lesser
extent – but fall it will. If the investor in the fund has invested in some stocks in the



sector on his own, in all probability, his personal investments may have depreciated to a
larger extent.

Most mutual fund managers took some time to realize the changed circumstances
wherein the open economy ushered in by the liberalization took the full impact of the
global deflation in commodity prices. This problem was compounded further by the
Asian crisis after which cheap imports from Asia caused severe pressure on profits.

One more issue is that the fund managers in many funds were not "professionally
qualified and experienced". This is especially true of some of the funds floated by
nationalized banks. Some of these individuals were transferred from the parent
organization and did not really know much about investment management.

Lastly, investors would do well to have a look at the investments, which they made on
their own. In most cases, they would have done much worse than the mutual funds. We
have received numerous requests for advice from individual investors on what to do
about their own investments. If that were any indicator, investors would have done really
badly.

Market Share of Mutual funds in India

S.No. Asset Management AUM Market Share
Company (Rs. In Crore) ( in %)
1. ABN Amro 1572.1 0.94
2 Alliance Capital 1341.91 0.80
3. Benchmark 495.85 0.30
4. Birla Sun Life 10722.37 6.38
5. BoB 124.85 0.07



6. CanBank 1895.46 1.13
7. Cholamandalam 910.79 0.54
8. Deutsche 2317.65 1.38
9. DSP ML 7074.2 4.21
10. Escorts 122.62 0.07
11. Fidelity 1495.4 0.89
12. Franklin Templeton 17079.3 10.17
13. Global Insurance Co. 122.09 0.07
14. HDFC 15709.86 9.35
15. HSBC 7569.61 4.51
16. ING Vysya 1925.17 1.15
17. JM Financial 3975.26 2.37
18. Kotak Mahindra 7296.86 4.34
19. LIC 2872.26 1.71
20. Morgan Stanely 1640.47 0.98
21. Principal 611.5 3.64
22. Pru ICICI 17196.43 10.24
23. Reliance 10129.89 6.03
24. Sahara 300 0.18
25. SBI 7182.29 4.28
26. Standard Chartered 8143 4.85
27. Sundram 1871.42 1.11
28. TATA 8164.23 4.86
29. Taurus 176.27 0.10



30. UTI MF 22443.74 13.36
Total AUM 167986.85 100.00

CAPTER 4 –

METHOD



Research Methodology

Investment in mutual fund is not a one-time activity. It is a continuous activity. The same
investor, if satisfied, will come to the fund again and again. When the investor sends his
application, it is not only an application, but it also contains vital information. Most of
this information if tabulated and analyzed, would provide important insights into investor
needs, preferences and behavior and enables us to target customers need more accurately,
to achieve better penetration, deeper loyalty and reduced costs. It is in this context that
direct marketing will assume increased importance. Knowing the customer thoroughly is
of utmost importance. Unlike the consumer goods industry, it is not possible for mutual
fund industry to test market and have pilot projects before launch. At the same time,
focusing and concentrating on a particular geographic area where the fund has a strong
presence and proven marketing network, can help reduce network, can help reduce issue
expenses and ultimately translate into higher returns for the investor. Very little research
on investor preference is available, but the industry can collectively have a data bank,
and share the information for appropriate use.

This study on Mutual funds in India has been based on primary as well as secondary data
sources.

The primary data is collected by the getting the questionnaire filled from the common
investor above the age of 25.



For this research, I have made use of a questionnaire for ascertaining the investment
pattern of a common investor.

The questionnaire consisted of 13 questions in total, each question having various
multiple choices. Depending upon the choice selected by the respondent, each respondent
gets a total score which represents his degree of favorability towards the kind of
investment he makes and his knowledge about the investments.

The main aim of conducting the survey using a questionnaire was to
understand the perception of small investors, who are the most exploited in Indian capital
Market, analyze the type of funds available for the investor,
understand the investment pattern of a common investor, importance of marketing
Strategies in mutual funds.

This was done by ascertaining the average response of all the samples for the total 13
questions asked in the questionnaire. The results for the 13 questions asked were further
graphically represented, showing the favorability towards different parameters.

The secondary resources used in the study are:

• Books
• Journals
• Magazine Articles
• Internet Websites.



CHAPTER 5 –
RESULT



QUESTIONNAIRE ANALYSIS
(Sample Size: 100)

Q1. How would you rate your familiarity and experience with investments?

a) Familiar and experienced
b) Familiar but not experienced
c) Not familiar and inexperienced

C
7%

A
20%

B
73%


Q2. How would you describe your investment knowledge?

a) You rarely have financial discussions, because you do not understand any of the
concepts.
b) You understand how different types of mutual funds work and are confident in
selecting the right ones for you.
c) You understand investment basics such as stocks, bonds, and money markets and
could explain how they work.
a) You are a knowledgeable investor and understand concepts such as standard
deviation and beta.

60%
52%

50%

40%
33%

30%

20%
12%

10%
3%

0%
A B C D



Q3. Which of the following are possible investment motives for you with regard to a
portfolio.

a) Keeping aside money generated from business / profession, to specifically
generate alternate source of income / wealth
b) Wealth creation, with no alternative uses for the money in the foreseeable future
c) Preserving wealth, after accounting for inflation and taxes
d) Regular income to meet present commitments and expenses
e) Building a corpus to meet specific future requirements

45%
41%

40%

35%

30%

25%
21%

20%
18%

15%
11%
9%
10%

5%

0%
A B C D E



Q4. What is your anticipated Investment time frame?

a) Long term - more than 7 years
b) Medium term - 4 to 7 years
c) Short-medium term - 1 to 3 years
d) Short term - less than 1 year

8%
16%

31%

45%

A B C D



Q5. How would you like to classify your investment style?

a) Conservative
b) Moderate
c) Aggressive

70%
61%

60%

50%

40%
30%
30%

20%

9%
10%

0%
A B C



Q6. My experience with investing so far has been

a) Mainly low-risk debt investments - can't remember anything adverse
b) Mainly debt investments - some discomfort with interest rate risk
c) Mainly debt investments - comfortable experience so far
d) I am wary of equity investing - it has been a losing experience
e) I want to be in equities - have not got it right so far
f) I invest in equities - I know what it takes

3% 5%
19% 13%

21%
39%

A B C D E F



Q7. Assume that you have invested Rs. 10,000 in a mutual fund and the value of the
investment dropped to Rs. 8,500 after six months. What would you be most likely to
do?

a) I would move the money to a bank fixed deposit.
b) I would wait till the value reached 10,000 and then move to another fund.
c) I would not do anything.
d) I would invest more in the fund to bring down my average cost of acquisition

5%
15%

42%

38%

A B C D



Q8. Your existing portfolio consists most of?

a) Cash only (time deposits and savings accounts)
b) Mainly cash (as above plus some blue chip stocks, bonds or equivalent
investments)
c) A blend (blue chip and other speculative stocks/mutual funds, property and cash)
d) Speculative (Technology/Biomedical stocks, high risk funds, derivative based
investments)

8%
21%

20%

51%

A B C D



Q9. Your key objective when considering an investment vehicle is?

a) Income only
b) Income and some Capital Growth
c) Balance of Capital Growth and Income
d) Capital Growth and some Income
e) Capital Growth Only

8% 17%
9%

27%

39%

A B C D E



Q10. You would like to invest in?

a) Bank accounts, Debt and Debt Mutual Funds
b) Equities and Mutual Funds
c) Real Estate and Real Estate Funds
d) Commodities and Commodity Funds

35%
31%

30% 28% 27%

25%

20%

14%
15%

10%

5%

0%
A B C D



Q11. Which type of mutual funds do you prefer?

a) By Structure:

i. Open-ended Funds
ii. Closed-ended Funds

b) By Investment Objective:

i. Growth Funds
ii. Income Funds
iii. Balanced Funds
iv. Money Market Funds

c) Other Schemes:

i. Tax Saving Schemes
ii. Industry Specific Schemes
iii. Index Schemes
iv. Sectoral Schemes

27%
32%

41%

A B C


Q12. Are you aware of the tax saving benefits available in investment of mutual
funds?

a) Yes b) No

No
18%

Yes
82%

Q13. Do you think that advertising plays an important role in spreading the
awareness amongst investors for investing in mutual funds?

a) Yes b) No

No
11%

Yes
Projectsformba.blogspot.com 66 89%


CHAPTER 6 –
RECOMMENDATIONS



Recommendations

 More awareness is required regarding the differences in various schemes.

 Insider trading should be prohibited.

 Promote distributor for expansion of the Industry

 Less government involvement as far as management is concerned.

 Schemes to be made more investor friendly.

 Fund houses should increase tie ups with more banks for direct credit facility of
the dividends.



CHAPTER 7 –
SUMMARY & CONCLUSION



Conclusion

The Indian corporate scene is gradually transforming to cope with globalization and
liberalization of the Indian economy. Indian shareholders are getting restless to prevent
corporate board from offering them inferior deals. Mutual funds need to devise different
strategies for companies with different types of ownerships. In an effort to realign
ownership with control, the company should not develop a too comfortable relationship
with the stakeholders. This may also work against the interests of the minority
shareholders.

Mutual funds will have to do what the market fails to do- take initiative to make the
market for corporate control more efficient to counter the abuse of the separation of
ownership from control and the lack of contestability in the corporate boards, which are
the root causes of existing corporate governance practices.

The initiatives as suggested will help mutual funds not only release value for the
shareholders in many inefficient companies but also in the process promote better
corporate governance practices in the Indian corporate sector.



CHAPTER 8 –
REFRENCES



References

Books
• AMFI workbook
• SEBI note on investor Grievances- Rights & Remedies
• Annual Investment Planner- A.N. Shanbhag
• Investor’s Handbook- P. Nandagopal
• Mutual Fund Business- Robert C. Pozen

Websites
• www.amfiindia.com
• www.moneycontrol.com
• www.indiainfoline.com
• www.equitymaster.com



• www.google.com
• www.nse-india.com

ANNEXURE -



Questionnaire

“Please complete the following questions. Look for the closest reasonable answer
(your first response is usually best, don't try to read too much into the questions).
Couples could pick a consensus response. Remember that there are no 'right' or
'wrong' answers, only those answers that best describe you as you are most of the
time.”

Q1. How would you rate your familiarity and experience with investments?

a) Familiar and experienced
b) Familiar but not experienced
c) Not familiar and inexperienced

Q2. How would you describe your investment knowledge?

a) You rarely have financial discussions, because you do not understand any of the
concepts.
b) You understand how different types of mutual funds work and are confident in
selecting the right ones for you.



c) You understand investment basics such as stocks, bonds, and money markets and
could explain how they work.
d) You are a knowledgeable investor and understand concepts such as standard
deviation and beta.

Q3. Which of the following are possible investment motives for you with regard to a
portfolio.

a) Keeping aside money generated from business / profession, to specifically
generate alternate source of income / wealth
b) Wealth creation, with no alternative uses for the money in the foreseeable future
c) Preserving wealth, after accounting for inflation and taxes
d) Regular income to meet present commitments and expenses
e) Building a corpus to meet specific future requirements

Q4. What is your anticipated Investment time frame?

a) Long term - more than 7 years
b) Medium term - 4 to 7 years
c) Short-medium term - 1 to 3 years
d) Short term - less than 1 year

Q5. How would you like to classify your investment style?

a) Conservative
b) Moderate
c) Aggressive

Q6. My experience with investing so far has been



a) Mainly low-risk debt investments - can't remember anything adverse
b) Mainly debt investments - some discomfort with interest rate risk
c) Mainly debt investments - comfortable experience so far
d) I am wary of equity investing - it has been a losing experience
e) I want to be in equities - have not got it right so far
f) I invest in equities - I know what it takes

Q7. Assume that you have invested Rs. 10,000 in a mutual fund and the value of the
investment dropped to Rs. 8,500 after six months. What would you be most likely to
do?

a) I would move the money to a bank fixed deposit.
b) I would wait till the value reached 10,000 and then move to another fund.
c) I would not do anything.
d) I would invest more in the fund to bring down my average cost of acquisition

Q8. Your existing portfolio consists most of?

a) Cash only (time deposits and savings accounts)
b) Mainly cash (as above plus some blue chip stocks, bonds or equivalent
investments)
c) A blend (blue chip and other speculative stocks/mutual funds, property and cash)
d) Speculative (Technology/Biomedical stocks, high risk funds, derivative based
investments)

Q9. Your key objective when considering an investment vehicle is?



a) Income only
b) Income and some Capital Growth
c) Balance of Capital Growth and Income
d) Capital Growth and some Income
e) Capital Growth Only

Q10. You would like to invest in?

b) Bank accounts, Debt and Debt Mutual Funds
c) Equities and Mutual Funds
d) Real Estate and Real Estate Funds
e) Commodities and Commodity Funds

Q11. Which type of mutual funds do you prefer?

a) By Structure:

i. Open-ended Funds
ii. Closed-ended Funds

b) By Investment Objective:

i. Growth Funds
ii. Income Funds
iii. Balanced Funds



iv. Money Market Funds

c) Other Schemes:

i. Tax Saving Schemes
ii. Industry Specific Schemes
iii. Index Schemes
iv. Sectoral Schemes

Q12. Are you aware of the tax saving benefits available in investment of mutual
funds?

a) Yes b) No

Q13. Do you think that advertising plays an important role in spreading the
awareness amongst investors for investing in mutual funds?

a) Yes b) No

Other Information:

Name: ___________________



Age: _____________________

Occupation: _______________

Gender: ___________________


Research report on mutual fund in india at mahindra finance

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