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    The mutual fund industry in India started in 1963 with the
formation of Unit Trust of India, at the initiative of the Government of
India and Reserve Bank the. 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 were 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 billion. 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 was rather no choice 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 the market, the investors
disinvested by selling at a loss in the secondary market. The
performance of mutual funds in India suffered qualitatively. The 1992
stock market scandal, the losses by disinvestments and of courses the
lack of transparent rules in the where about 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. The history of mutual funds in India can be broadly
divided into four distinct phases

First Phase – 1964-87
    Unit Trust of India (UTI) was established on 1963 by an Act of
Parliament. It was set up by the Reserve Bank of India and functioned
under the Regulatory and administrative control of 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 cores
of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)
   1987 marked the entry of non- UTI, public sector mutual funds set
up by public sector banks and Life Insurance Corporation of India (LIC)
and General Insurance Corporation of India (GIC). SBI Mutual Fund
was the first non- UTI Mutual Fund established in June 1987 followed
by 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 established its mutual
fund in June 1989 while GIC had set up its mutual fund in December
1990 At the end of 1993, the mutual fund industry had assets under
management of Rs.47,004 cores.

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 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
    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.
Fourth Phase – since February 2003

      In February 2003, following the repeal of the Unit Trust of India
Act 1963 UTI was bifurcated into two separate entities. One is the
Specified Undertaking of the Unit Trust of India with assets under
management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and
certain other schemes. 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 assets under
management 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. As at the
end of September, 2004, there were 29 funds, which manage assets of
Rs.153108 crores under 421 schemes.
                   Mutual Fund

         A mutual fund is financial intermediary that pools a savings of
number of investors who share a financial goal. The money then
invested in capital markets instruments such as shares, debentures
and other securities. Thus mutual fund is the most suitable investment
for common means it offers opportunity in diversified manner at
relatively cost. The flow chart below describes broadly working of
mutual fund

          The above flow chart explain how money flow in mutual fund
first the investors invest money with the help of fund manager in
securities and after whatever return is earned in that security is giving
back to the investor. More than 80 million people, or one half of the
households in America, invest in mutual funds. That means that, in the
United States alone many people investing means buying mutual
After all, it's common knowledge that investing in mutual funds is
better than simply letting your cash waste away in a savings account,
but, for most people, that's where the understanding of funds ends. It
doesn't help that mutual fund salespeople speak a strange language
that is interspersed with jargon that many investors don't understand.
        Originally, mutual funds were heralded as a way for the little
guy to get a piece of the market instead of spending all your free time
buried in the financial pages of The Economic Times, all you had to do
was buy a mutual fund and you'd be set on your way to financial
freedom. As you might have guessed, it's not that easy. Mutual funds
are an excellent idea in theory, but, in reality, they haven't always
delivered. Not all mutual funds are created equal, and investing in
mutual isn't as easy as throwing your money dollars are investing in
mutual funds. At the first salesperson who solicits your business
          The one investment vehicle that has truly come of age in
India in the past decade is mutual funds. Today, the mutual fund
industry in the country manages around Rs 100,000 crore of assets, a
large part of which comes from retail investors. And this amount is
invested not just in equities, but also in the entire gamut of debt
instruments. Mutual funds have emerged as a proxy for investing in
avenues that are out of reach of most retail investors, particularly
government securities and money market instruments.

            Specialization is the order of the day, be it with regard to a
scheme‟s investment objective or its targeted investment universe.
Given the plethora of options on hand and the hard-sell adopted by
mutual funds vying for a piece of your savings, finding the right scheme
can sometimes seem a bit daunting. Mind you, it‟s not just about going
with the fund that gives you the highest returns. It‟s also about
managing risk–finding funds that suit your risk appetite and
investment needs.
                So, how can you, the retail investor, create wealth for
yourself by investing through mutual funds? To answer that, we need
to get down to brass tacks–what exactly is a mutual fund?

            Very simply, a mutual fund is an investment vehicle that
pools in the monies of several investors, and collectively invests this
amount in either the equity market or the debt market, or both,
depending upon the fund‟s objective. This means you can access either
the equity or the debt market, or both, without investing directly in
equity or debt.

       “A mutual fund is nothing more than a collection of stocks
and/or bonds. You can think of a mutual fund as a company that
brings together a group of people and invests their money in
stocks, bonds, and other securities. Each investor owns shares,
which represent a portion of the holdings of the fund.”

Make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and interest on bonds. A
fund pays out nearly all of the income it receives over the year to fund
owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has
a capital gain. Most funds also pass on these gains to investors in a
3) If fund holdings increase in price but are not sold by the fund
manager, the fund's shares increase in price. You can then sell your
mutual fund shares for a profit.
Concept of Mutual fund
Characteristics of a Mutual Fund :

The following are the characteristics of the mutual funds:-

    A mutual fund belongs to the investors who have pooled their
      funds. The ownership of the mutual fund is in the hands of the

    Investment professionals and other service providers, who earn
      a fee for their services, from the fund, manage the mutual fund.

    The pool of funds is invested in a portfolio of marketable
      investments. The value of the portfolio is updated every day.

    The investors share in the fund is denominated by “units”. The
      value of the units changes with change in the portfolio‟s value,
      every day. The value of one unit of investment is called as the Net
      Asset Value or NAV.

    The investment portfolio of the mutual fund is created
      according to the stated investment objectives of the fund.
Advantages of Mutual Funds:

  Professional Management :- The primary advantage of funds (at
     least theoretically) is the professional management of your
     money. Investors purchase funds because they do not have the
     time or the expertise to manage their own portfolios. A mutual
     fund is a relatively inexpensive way for a small investor to get a
     full-time manager to make and monitor investments.

  Diversification :- By owning shares in a mutual fund instead of
     owning individual stocks or bonds, your risk is spread out. The
     idea behind diversification is to invest in a large number of assets
     so that a loss in any particular investment is minimized by gains
     in others. In other words, the more stocks and bonds you own,
     the less any one of them can hurt you (think about Enron). Large
     mutual funds typically own hundreds of different stocks in many
     different industries. It wouldn't be possible for an investor to
     build this kind of a portfolio with a small amount of money.

    Economies of Scale :- Because a mutual fund buys and sells
     large amounts of securities at a time, its transaction costs are
     lower than what an individual would pay for securities

    Liquidity :- Just like an individual stock, a mutual fund allows
     you to     request that your shares be converted into cash at any
Disadvantages of Mutual Funds:

 Professional Management :- Did you notice how we qualified the
   advantage of professional management with the word "theoretically"?
   Many investors debate whether or not the so-called professionals are
   any better than you or I at picking stocks. Management is by no
   means infallible, and, even if the fund loses money, the manager still
   takes his/her cut. We'll talk about this in detail in a later section.
 Costs :- Mutual funds don't exist solely to make your life easier - all
   funds are in it for a profit. The mutual fund industry is masterful at
   burying costs under layers of jargon. These costs are so complicated
   that in this tutorial we have devoted an entire section to the subject.
 Dilution :- It's possible to have too much diversification. Because
   funds have small holdings in so many different companies, high
   returns from a few investments often don't make much difference on
   the overall return. Dilution is also the result of a successful fund
   getting too big. When money pours into funds that have had strong
   success, the manager often has trouble finding a good investment
   for all the new money.
 Taxes :- When making decisions about your money, fund managers
   don't consider your personal tax situation. For example, when a
   fund manager sells a security, a capital-gains tax is triggered, which
   affects how profitable the individual is from the sale. It might have
   been more advantageous for the individual to defer the capital gains
          Mutual Fund in Organization

                Organization of a Mutual Fund

   Mutual funds
       Mutual fund is vehicle that enables a number of investors to
pool their money and have it jointly managed by a professional money

   Sponsor
      Sponsor is the person who acting alone or in combination with
another body corporate establishes a mutual fund. The Sponsor is not
responsible or liable for any loss or shortfall resulting from the
operation of the Schemes beyond the initial contribution made by it
towards setting up of the Mutual Fund.
    Trustee
         Trustee is usually a company (corporate body) or a Board of
Trustees (body of individuals). The main responsibility of the Trustee is
to safeguard the interest of the unit holders and ensure that the AMC
functions in the interest of investors and in accordance with the
Securities and Exchange Board of India (Mutual Funds) Regulations,

    Asset Management Company (AMC)
         The AMC is appointed by the Trustee as the Investment
Manager of the Mutual Fund. At least 50% of the directors of the AMC
are independent directors who are not associated with the Sponsor in
any manner. The AMC must have a net worth of at least 10 crores at all

    Transfer Agent
         The AMC if so authorised by the Trust Deed appoints the
Registrar and Transfer Agent to the Mutual Fund. The Registrar
processes the application form, redemption requests and dispatches
account statements to the unit holders. The Registrar and Transfer
agent also handles communications with investors and updates
investor records.
           Types of mutual fund
                        There are different types of mutual fund and
they are divided into different categories. It is explained by following

                             Mutual fund

 By structure                By investment              Other schemes
                             objectives                 1) Tax saving
 1) Open ended               1) Growth schemes              schemes
    schemes                  2) Income schemes          2) Special
 2) Close ended              3) Balanced                    schemes
    schemes                     schemes                 i)Index schemes
 3) Interval scheme          4) Money market            ii)Sector specific
                                schemes                   schemes
By structure :

    Open Mutual Funds

    Open mutual funds are established by a fund sponsor, usually a
mutual fund company. The sponsor has promised in the documents of
the fund that it will issue and refund or units of the fund at the fund
unit value. This type of fund is valued by the fund company or an
outside valuation agent. This means that the investments of the fund
are valued at "fair market" value, which is the closing market value for
listed public securities. Essentially, the fund company prices all of the
fund's holdings at the market close and adds up their value; it then
subtracts amounts owing and adds amounts to be received by the fund;
and finally it divides this net amount by the number of units
outstanding to "strike" the unit value for that day. Any participants
withdrawing funds from the fund that day receive this unit value for
their funds withdrawn. Any new purchases are made at the same unit

    Open mutual funds keep some portion of their assets in short-term
and money market securities to provide available funds for
redemptions. A large portion of most open mutual funds is invested in
highly "liquid securities", which means that the fund can raise money
by selling securities at prices very close to those used for valuations.
Funds also have the ability to borrow money for short periods of time to
fund redemptions. The documents of open mutual funds usually
provide for the suspension of unit redemptions in "extraordinary
conditions" such as major interruptions to the financial markets or
total demands for redemptions forming a substantial portion of the
fund assets in a short period of time. These clauses were invoked in
October, 1987, when the stock market crashed 30% in a few days and
the volume of stock transactions caused trading activity to be hours out

        Illiquid investments, those not actively traded on the public
markets, are restricted by government regulators because they are
difficult to dispose of in a short period of time. A fund holding an
illiquid investment might not be able to sell it in a short period of time
or would have to take a significant discount to the valuation level the
fund was using. In Canada, most open real estate mutual funds
suspended redemptions during the real estate debacle of the early
1990s. Fund participants did not obtain redeemed funds until these
funds were restructured into closed-end funds in the mid 1990s and
they could sell their units on the stock market.

        The valuation of investments that are less liquid and trade
infrequently is an important issue for mutual funds

    Closed Mutual Funds

         Closed mutual funds are really financial securities that are
traded on the stock market. A sponsor, a mutual fund company or
investment dealer, will create a "trust fund" that raises funds through
an underwriting to be invested in a specific fashion. The fund retains
an investment manager to manage the fund assets in the manner
specified. A good example of this type of fund is the "country funds"
that were underwritten during the international investment euphoria of
the early 1990s. An investment dealer would decide that a "Germany"
or "Portugal" or "Emerging Country" fund would sell given the popular
consensus that these were "no lose" investments. It would then retain a
well respected investment advisor to manage the fund assets for a fee
and underwrite a public issue that it would sell through retail stock
brokers to individual investors. It is interesting to note that many of
these funds were caught in the sell-off of the stock market of 1994 and
have languished ever since. This has led to the phrase "submerging
country" replacing "emerging market" for many of these funds. This is
wry proof of the fickleness of investor fashion!

         Once underwritten, closed mutual funds trade on stock
exchanges like stocks or bonds. Their value is what investors will pay
for them. Usually closed mutual funds trade at discounts to their
underlying asset value. For example, if the price of the fund assets less
liabilities divided by the outstanding units is $10, the fund might trade
on the stock market at $9. This fund would be said to be trading at a
"10% discount to its net asset value". The reason for this discount is
debated by academics, but is due in large part to the lack of liquidity of
the fund units and the presence of the management fee.
By investment :

                              The aim of growth funds is to provide
                              capital appreciation over the medium to
                              long term. Such schemes normally invest
                              a majority of their corpus in equities.
Growth schemes are ideal for investors who have a long-term outlook
and are seeking growth over a period of time. The primary investment
objective of the Scheme is to achieve long-term growth of capital by
investment in equity and equity related securities through a research
based investment approach.

The aim of Income Funds is to provide regular and steady income to
investors. Such schemes generally invest in fixed income securities
such    as    bonds,    corporate   debentures    and    Government
securities.Income Funds are ideal for
capital stability and regular income.
Capital appreciation in such funds may
be limited, though risks are typically
lower than that in a growth fund.
Reliance Money Market Funds

The aim of Money Market Funds is to provide easy liquidity,
preservation of capital and moderate income. These schemes generally
invest in safer short-term instruments such as Treasury Bills,
Certificates of Deposit, Commercial Paper and Inter-Bank Call Money.
Returns on these schemes may fluctuate depending upon the interest
rates prevailing in the market.These are ideal for corporate and
individual investors as a means to park their surplus funds for short

Reliance Balanced Funds

The aim of Balanced Funds is to provide both growth and regular
income. Such schemes periodically distribute a part of their earning
and invest both in equities and fixed income securities in the
proportion indicated in their offer documents. This proportion affects
the risks and the returns associated with the balanced fund - in case
equities are allocated a higher proportion, investors would be exposed
to risks similar to that of the equity market. Balanced funds with equal
allocation to equities and fixed income securities are ideal for investors
looking for a combination of income and moderate growth.
Other Schemes:

                                           These schemes offer tax rebates
                                           to the investors under specific
                                           provisions of the Indian Income
                                           Tax laws, as the Government
offers tax incentives for investment in specified avenues.Investments
made in Equity Linked Savings Schemes (ELSS) and Pension Schemes
are allowed as deduction under Section 80c of the Indian Income Tax
Act, 1961.

Index Funds attempt to replicate the performance of a particular index
such as the BSE Sensex or the NSE S&P CNX 50.The objective of Nifty
Plan is to replicate the composition of the Nifty, with a view to endeavor
to   generate   returns,   which   could
approximately be the same as that of

          Every scheme is bound by the investment objectives outlined
by it in its prospectus, which determine the class(es) of securities it can
invest in. Based on the asset classes, broadly speaking, the following
types of mutual funds currently operate in the country.
    Equity funds:
       The highest rung on the mutual fund risk ladder, such funds
invest only in stocks. Most equity funds are general in nature, and can
invest in the entire basket of stocks available in the market. There are
also „specialized‟ equity funds, such as index funds and sector funds,
which invest only in specific categories of stocks.

    Debt funds:
       Such funds invest only in debt instruments, and are a good
option for investors averse to taking on the risk associated with
equities. Here too, there are specialized schemes, namely liquid funds
and gilt funds. While the former invests predominantly in money
market instruments, gilt funds do so in securities issued by the central
and state governments.

    Balanced funds:
      Lastly, there are balanced funds, whose investment portfolio
includes both debt and equity. As a result, on the risk ladder, they fall
somewhere between equity and debt funds. Balanced funds are the
ideal mutual funds vehicle for investors who prefer spreading their risk
across various instruments.

      Let‟s now take a closer look at the working of each of these three
categories of funds, the investment options they offer, and how best you
can make money from them.
    Equity funds:
     As explained earlier, such funds invest only in stocks, the riskiest
of asset classes. With share prices fluctuating daily, such funds show
volatile performance, even losses. However, these funds can yield great
capital appreciation as, historically, equities have outperformed all
asset classes. At present, there are four types of equity funds available
in the market. In the increasing order of risk, these are:

    Index funds:
          These funds track a key stock market index, like the BSE
(Bombay Stock Exchange) Sensex or the NSE (National Stock
Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they
track, both in terms of composition and the individual stock
weightages. For instance, an index fund that tracks the Sensex will
invest only in the Sensex stocks. The idea is to replicate the
performance of the benchmarked index to near accuracy. Index funds
don‟t need fund managers, as there is no stock selection involved.

        Investing through index funds is a passive investment strategy,
as a fund‟s performance will invariably mimic the index concerned,
barring a minor "tracking error". Usually, there‟s a difference between
the total returns given by a stock index and those given by index funds
benchmarked to it. Termed as tracking error, it arises because the
index fund charges management fees, marketing expenses and
transaction costs (impact cost and brokerage) to its unitholders. So, if
the Sensex appreciates 10 per cent during a particular period while an
index fund mirroring the Sensex rises 9 per cent, the fund is said to
have a tracking error of 1 per cent.
         To illustrate with an example, assume you invested Rs 1,000
in an index fund based on the Sensex on 1 April 1978, when the index
was launched (base: 100). In August, when the Sensex was at 3.457,
your investment would be worth Rs 34,570, which works out to an
annualised return of 17.2 per cent. A tracking error of 1 per cent would
bring down your annualised return to 16.2 per cent. Obviously, the
lower the tracking error, the better the index fund.

      Diversified funds:
               Such funds have the mandate to invest in the entire
       universe of stocks. Although by definition, such funds are meant
       to have a diversified portfolio (spread across industries and
       companies), the stock selection is entirely the prerogative of the
       fund manager.

        This discretionary power in the hands of the fund manager can
work both ways for an equity fund. On the one hand, astute stock-
picking by a fund manager can enable the fund to deliver market-
beating returns; on the other hand, if the fund manager‟s picks
languish, the returns will be far lower.

          The crux of the matter is that your returns from a diversified
fund depend a lot on the fund manager‟s capabilities to make the right
investment decisions. On your part, watch out for the extent of
diversification prescribed and practised by your fund manager.
Understand that a portfolio concentrated in a few sectors or companies
is a high risk, high return proposition. If you don‟t want to take on a
high degree of risk, stick to funds that are diversified not just in name
but also in appearance.
      Tax-saving funds:
                Also known as ELSS or equity-linked savings schemes,
       these funds offer benefits under Section 88 of the Income-Tax
       Act. So, on an investment of up to Rs 10,000 a year in an ELSS,
       you can claim a tax exemption of 20 per cent from your taxable
       income. You can invest more than Rs 10,000, but you won‟t get
       the Section 88 benefits for the amount in excess of Rs 10,000.
       The only drawback to ELSS is that you are locked into the
       scheme for three years.

In terms of investment profile, tax-saving funds are like diversified
funds. The one difference is that because of the three year lock-in
clause, tax-saving funds get more time to reap the benefits from their
stock picks, unlike plain diversified funds, whose portfolios sometimes
tend to get dictated by redemption compulsions.

      Sector funds:
                  The riskiest among equity funds, sector funds invest
       only in stocks of a specific industry, say IT or FMCG. A sector
       fund‟s NAV will zoom if the sector performs well; however, if the
       sector languishes, the scheme‟s NAV too will stay depressed.

           Barring a few defensive, evergreen sectors like FMCG and
pharma, most other industries alternate between periods of strong
growth and bouts of slowdowns. The way to make money from sector
funds is to catch these cycles–get in when the sector is poised for an
upswing and exit before it slips back. Therefore, unless you understand
a sector well enough to make such calls, and get them right, avoid
sector funds.
Types of returns from a Mutual Fund:

     Mutual Funds give returns in two ways - Capital Appreciation or
Dividend Distribution:

    Capital Appreciation: An increase in the value of the units of
      the fund is known as capital appreciation. As the value of
      individual securities in the fund increases, the fund's unit price
      increases. An investor can book a profit by selling the units at
      prices higher than the price at which he bought the units.
    Dividend Distribution: The profit earned by the fund is distributed
      among unit holders in the form of dividends. Dividend distribution
      again is of two types. It can either be re-invested in the fund or can
      be on paid to the investor.
Mutual fund wheel of fortune:

     Imagine you have two wheel in front of you each with different
possible outcomes each pie piece represent a different return on your

      The above wheel represents purchasing a single stock there is
basically 50-50 chance that you will either make money or loose
money. It is like flipping a coin. And among the winning and loosing
wheel pieces there is great range of possible outcomes from a loss of
50% to gain of 50%
       The above wheel represents a purchase of mutual fund that holds
many stocks. This time there is better chance that you will make
money because there are only two pieces that represent loss. The range
is bit smaller from a loss of 11% to gain of 35%.

Case study on pension plan V/s mutual fund:
  Let us look at the given set of variables first.

       The client‟s age is 38 years and he would like to retire 22 years
        hence i.e. at the age of 60 years

       The client would like to invest an amount of Rs 1,000,000 (Rs 1
        m) each year for three years. In total, he will invest an amount of
        Rs 3 m over 3 years.

       The client has been suggested a single premium plan of Rs 1 m
        with additional „top-ups‟ worth Rs 1 m p.a. (per annum) for the
        following two years. In all, the client would be paying Rs 3 m over
        the 3-yr period.

       The client has a high-risk appetite and would like to remain
        invested in equities throughout the tenure of the pension plan.

       The client has a well-diversified portfolio including mutual funds
        and stocks.
   Based on the information, we have worked out a likely retirement
   solution for the investor.

   Let us first take a look at how investments in the unit linked pension
   plan (ULPP) pan out.

                   Pension plan: Preparing for the future

Investment     One-time Administration Fund Mgt. Investment        Net
amt (Rs)         charge Charges (Rs)# Charges        Tenure maturity
                     (%)                  (%)          (Yrs) Value (Rs)
1,000,000           2.50              180        0.80            22 18,400,000
1,000,000           2.50              180        0.80            21
1,000,000           1.00              180        0.80            20

   „#‟ Administration charges are subjected to 5.00% inflation per annum

   Investments in unit linked pension plan (ULPP)
            If the client decides to buy the pension plan, then he would be
   paying Rs 1,000,000 in the first year. Since this is a single premium
   plan, one-time charges on the same are 2.50% (i.e. in the first year). In
   other words, Rs 25,000 would be deducted from the client‟s single
   premium amount and the remaining amount (i.e. Rs 975,000) would be
   invested in the 100% equity ULPP option. This amount will remain
   invested for the entire 22-yr tenure.

       The charges for any additional top-ups in the second year too
   would be to the tune of 2.50%. Similar to the first year, Rs 25,000
   would be deducted from the second year‟s top-up amount. So Rs
   975,000 would be invested over 21 years.
      One-time charges for any top-ups from the third year onwards fall
to 1% for the year. Therefore, only Rs 10,000 (i.e. 1% of Rs 1,000,000)
would be deducted and the remaining amount would be invested. The
third year amount (Rs 990,000) will remain invested for a 20-yr period
(i.e. time to maturity).

      Fund management charges (FMC) for managing equities in the
given ULPP are 0.80% p.a. Administration charges are assumed to be
Rs 180 p.a. (increasing at an assumed inflation rate of 5.00%).

       As can be seen from the table above, assuming a compounded
growth rate (CAGR) of 10% p.a. over a 22-Yr tenure, the client‟s
investments will grow to approximately Rs 18,400,000.

       As against the ULPP given above, let us now analyse how
investments in a mutual fund would have worked out over a similar

                  How do mutual funds fare?

 Investment         Entry load    Fund Mgt. Investment            Net
 amt (Rs)                  (%)      Charges     Tenure       maturity
                                       (%)#       (Yrs)     Value (Rs)
 1,000,000                 2.25        2.00           22 15,240,000
 1,000,000                 2.25        2.00           21
 1,000,000                 2.25        2.00           20

# FMC is assumed to be 2.00% for the first five years, 1.75% for the
next five years and 1.50% the remaining tenure.
Investments in a mutual fund :
Similar to a ULPP, the client would invest Rs 1,000,000 p.a. for 3 years
in a mutual fund scheme. However, unlike a one-time initial charge
associated with the ULPP above, mutual funds usually have an
entry/exit load on their schemes.

Assuming an entry load of 2.25% for each of his three annual
investments (of Rs 1,000,000), the net amount invested would be
drawn down by Rs 22,500 (i.e. 2.25% of Rs 1,000,000) each year for the
initial three years.

We have also assumed a decreasing FMC on the mutual fund schemes-
the assumption here is it would be 2.00% for the first 5 years, 1.75%
for the next 5 years and 1.50% for the remaining period thereafter. The
„decreasing FMC‟ assumption is based on the fact that as the corpus for
a mutual fund scheme grows over a period of time, economies of scale
come into play. This helps the mutual fund spread its costs over a
larger corpus, thereby reducing its overall cost of managing the fund.

As with the ULPP, assuming a 10% rate of growth over a 22-yr period,
the mutual fund investments would have grown to approximately Rs.
15,240,000. The corpus generated by ULPP is higher than the mutual
fund corpus by Rs. 3,160,000 (i.e. 20.73%).

The reason why ULPP scores over mutual funds is because of a low FMC.
The FMC on the ULPP under review is 0.80% throughout the tenure as
compared to the mutual fund FMC, which is in the 1.50%-2.00% range.
Over the long term, FMC makes a significant impact by reducing the
corpus available for investments. In other words, lower the FMC, higher
the invest able surplus and vice-versa.
Why the mutual funds are so popular?
        Mutual funds provide an easy way for small investors to make
long-term,   diversified,   professionally   managed   investments   at   a
reasonable cost.If an investor only has a small amount of money with
which to invest, then he/she will most likely not be able to afford a
professional money manager, a diversified basket of stocks, or have
access to low trading fees. With a mutual fund, however, a large group
of investors can pool their resources together and make these benefits
available to the entire group. Mutual funds are also popular because
they provide an excellent way for anyone to direct a portion of their
income towards a particular investment objective. Whether you're
looking for a broad-based fund or a narrow industry-focused niche
fund, you're almost certain to find a fund that meets your needs.
Although the various style and category types are virtually endless,
here's a quick summary of some of the various choices available to
equity investors:

Why invest in mutual fund?

      There are variety of reasons insist many investors to invest in
mutual fund rather than any other investment such as share, bond,
securities and many more. The one reason is diversity which can both
increase potential returns and overall risk. Mutual fund allows
investors to spread out his money across as handful as to as many as
several thousands companies at one time.
    It can be especially advantageous for small investors who would be
force to pay enormous transaction fees if they bought the securities
individually and for the investors who either don‟t have time to research
their own investment or who don‟t trust their own investment expertise.
That said mutual funds aren‟t low cost investment. Many of them
charged one time „load fees‟ to new purchasers that can exceed 5% of
the investment and all mutual funds take on average take 1.3% of
assets a year for operating expenses, expressed as expense ratio.
Professional management can be both a benefit and a liability of
actively managed mutual funds. Several studies show that, over time,
the average, actively managed fund has underperformed the overall
stock market.

How Mutual Fund reduces risk of investors?

       Mutual Funds invest in a portfolio of securities. This means that
all funds are not invested in the same investment avenue. It is well
known that risk and returns of various options do not move uniformly.
E.g. If a Reliance Company share is moving upwards, a Kotak
Mahindra company‟s shares could be moving downwards; if the debt
markets may be moving up, the equity market is moving down.
Therefore, holding a portfolio that is diversified across investment
avenues is a wise way to manage risk. When such a portfolio is liquid
and marked to market, it enables investors to continuously evaluate
the portfolio and manage their risks more efficiently.
How Funds Can Earn Money for You:

You can earn money from your investment in three ways:

   Dividend Payments :- A fund may earn income in the form of
     dividends and interest on the securities in its portfolio. The fund
     then pays its shareholders nearly all of the income it has earned
     in the form of dividends.

   Capital Gains Distributions :- The price of the securities a fund
     owns may increase. When a fund sells a security that has
     increased in price, the fund has a capital gain. At the end of the
     year, most funds distribute these capital gains (minus any capital
     losses) to investors.

   Increased NAV: - If the market value of a fund's portfolio
     increases after deduction of expenses and liabilities, then the
     value (NAV) of the fund and its shares increases. The higher NAV
     reflects the higher value of your investment.
How to pick an equity fund?
            Now, that you have an idea of the investment profile and
objective behind each type of equity fund, let‟s get down to specifics:
what you should look for while evaluating an equity fund. First, narrow
down your investment universe by deciding which category of equity
fund you would like to invest in. That decided, seek the following four
attributes from a prospective fund.

    Track record:
           It‟s always safer to opt for a fund that‟s been around for a
while, as you can study its track record. You can see how the fund has
performed over the years, which will facilitate historical comparison
across its peer set.

           Although past trends are no guarantee of future
performance, it does give an indication of how well a fund has
capitalised on upturns and weathered downturns in the past. The
fund‟s track record also gives an indication of the volatility in its
returns. Avoid funds that show a volatile returns patterns.

    Diversified portfolio
            Unless you are willing to take on high risk, avoid funds that
have a high exposure to a few sectors or a handful of stocks. Such
funds will give superior returns when the selected sectors are doing
well, but if the market crashes or the sector performs badly, the fall in
NAV will be equally sharp. Ideally, a diversified equity fund should have
an exposure to at least four sectors and seven to 10 scrips.
Diversified investor base:
             Just as the fund needs diversified investments, it also
needs to have a diversified investor base. This ensures that a few
investors do not own a significant part of the fund, as it would belie the
very principle of a mutual fund.

             SEBI (Securities and Exchange Board of India) regulations
stipulate that a fund must publish, in its half-yearly disclosures,
details of the number of investors who hold more than 25 per cent of
the scheme‟s corpus. Avoid such funds, as they could well be catering
to the interests of the large investors–at your expense.

Transparency in operations:
            Before investing in a fund, always go through its offer
document and fact sheet. If the fund house doesn‟t give out such
information regularly, avoid that fund. Funds that do not disclose
details on a regular basis to their unitholders are better left alone, as
you may not be told what will happen to your money once you invest.

Debt funds:
          Such funds attempt to generate a steady income while
preserving investors‟ capital. Therefore, they invest exclusively in fixed-
income instruments securities like bonds, debentures, Government of
India securities, and money market instruments such as certificates of
deposit (CD), commercial paper (CP) and call money. There are basically
three types of debt funds.
Income funds:
             By definition, such funds can invest in the entire gamut of
debt instruments. Most income funds park a major part of their corpus
in corporate bonds and debentures, as the returns there are the higher
than those available on government-backed paper. But there is also the
risk of default–a company could fail to service its debt obligations.

Gilt funds:
             They invest only in government securities and T-bills–
instruments on which repayment of principal and periodic payment of
interest is assured by the government. So, unlike income funds, they
don‟t face the spectre of default on their investments. This element of
safety is why, in normal market conditions, gilt funds tend to give
marginally lower returns than income funds.

Liquid funds:
             They invest in money market instruments (duration of up to
one year) such as treasury bills, call money, CPs and CDs. Among debt
funds, liquid funds are the least volatile. They are ideal for investors
seeking low-risk investment avenues to park their short-term

The „risk‟ in debt funds:
             Although debt funds invest in fixed-income instruments, it
doesn‟t follow that they are risk-free. Sure, debt funds are insulated
from the vagaries of the stock market, and so don‟t show the same
degree of volatility in their performance as equity funds. Still, they face
some inherent risk, namely credit risk, interest rate risk and liquidity

Interest rate risk:
              This is common to all three types of debt funds, and is the
prime reason why the NAVs of debt funds don‟t show a steady,
consistent rise. Interest rate risk arises as a result of the inverse
relationship between interest rates and prices of debt securities.

              Prices of debt securities react to changes in investor
perceptions on interest rates in the economy and on the prevelant
demand and supply for debt paper. If interest rates rise, prices of
existing debt securities fall to realign themselves with the new market
yield. This, in turn, brings down the NAV of a debt fund. On the other
hand, if interest rates fall, existing debt securities become more
precious, and rise in value, in line with the new market yield. This
pushes up the NAVs of debt funds.

Credit risk:
           This throws light on the quality of debt instruments a fund
holds. In the case of debt instruments, safety of principal and timely
payment of interest is paramount. There is no credit risk attached with
government paper, but that is not the case with debt securities issued
by companies.

          The ability of a company to meet its obligations on the debt
securities issued by it is determined by the credit rating given to its
debt paper.
The higher the credit rating of the instrument, the lower is the chance
of the issuer defaulting on the underlying commitments, and vice-
versa. A higher-rated debt paper is also normally much more liquid
than lower-rated paper.

          Credit risk is not an issue with gilt funds and liquid funds.
Gilt funds invest only in government paper, which are safe. Liquid
funds too make a bulk of their investments in avenues that promise a
high degree of safety. For income funds, however, credit risk is real, as
they invest primarily in corporate paper.

Liquidity risk:
          This refers to the ease with which a security can be sold in
the market. While there is brisk trading in government securities and
money market instruments, corporate securities aren‟t actively traded.
More so, when you go down the rating scale–there is little demand for
low-rated debt paper.

           As with credit risk, gilt funds and liquid risk don‟t face any
liquidity risk. That‟s not the case with income funds, though. An
income fund that has a big exposure to low-rated debt instruments
could find it difficult to raise money when faced with large redemptions.
How to pick a debt fund?
             It‟s evident there is an element of risk associated with debt
funds. Hence, some care and thought has to go into picking a debt
fund. Here are some factors you ought to look at while scouting for a
debt fund.

      Investment horizon:
             The first thing you need to get a fix on is your investment
horizon. If you wish to invest in a debt fund for anything up to one
year, opt for a liquid fund. Anything above that, you should be looking
at a gilt fund or an income fund.

      Track record:
             As with equity funds, a debt fund with a good track record is
always preferable. The longer the track record, the better–to be on the
safe side, choose funds that have been in the market for at least a year.

      Credit quality:
             One of the most important factors you need to look for in an
income fund is the credit rating of the debt instruments in its portfolio.

          A credit rating of AAA denotes the highest safety, while a
rating of below BBB is classified as non-investment grade. Although
rating agencies classify BBB paper as investment grade, you should
budget for downgrades, and set the minimum acceptable rating
benchmark at AA. In order to ensure the safety of your investment, opt
for a fund that has at least 75 per cent of its corpus in AAA-rated
paper, and 90 per cent in AA and AAA paper.
           In order to limit the loss from a possible default, an income
fund should be reasonably diversified across companies. Say, a fund
manager invests his entire corpus in debt instruments of just one
company. If the company goes under, the fund loses everything. Now,
had the fund manager diversified and invested 10 per cent of his
corpus in 10 companies, with one-tenth in the troubled company, his
loss would be lower. Assuming the other companies meet their debt
obligations, the fund‟s loss would be restricted to 10 per cent.

      Diversified investor base:
         Similar to the pre-condition for equity funds, avoid debt funds
where a few large investors account for an abnormally high portion of
the corpus.

      Balanced funds
                As the name suggests, balanced funds have an
      exposure to both equity and debt instruments. They invest in a
      pre-determined proportion in equity and debt–normally 60:40 in
      favour of equity. On the risk ladder, they fall somewhere between
      equity and debt funds, depending on the fund‟s debt-equity spilt–
      the higher the equity holding, the higher the risk. Therefore, they
      are a good option for investors who would like greater returns
      than from pure debt, and are willing to take on a little more risk
      in the process.
How to pick a balanced fund?

           The same criterion that applies to selecting an equity fund
holds good when choosing a balanced fund. The one additional factor
you should check for a balanced fund is the equity and debt split. The
offer document will state the ratio of equity and debt investments the
fund plans to have. Mostly, this takes on a range, and varies from time
to time depending on the fund manager‟s perception of the financial

           Before investing in an existing balanced fund, go through a
few of its past fund fact sheets, and look up the equity-debt split. If you
are a conservative investor, opt for a fund where equity investments are
capped at 60 per cent of corpus. However, if you are the aggressive sort,
you could even go along with a higher equity holding.

The intelligent investor's seven rules:
           It‟s one thing to understand mutual funds and their working;
it‟s another to ride on this potent investment vehicle to create wealth in
tune with your risk profile and investment needs. Here are seven must-
dos that go a long way in helping you meet your investment objectives.

      Know your risk profile
                    Can you live with volatility? Or are you a low-risk
       investor? Would you be satisfied if your fund invests in fixed-
       income securities, and yields low but sure-shot returns? These
       are some of the questions you need to ask yourself before
       investing in a fund.
              Your investments should reflect your risk-taking capacity.
Equity funds might lure when the market is rising and your neighbour
is making money, but if you are not cut out for the risk that
accompanies it, don‟t bite the bait. So, check if the fund‟s objective
matches yours. Invest only after you have found your match. If you are
racked by uncertainty, seek expert advice from a qualified financial

      Identify your investment horizon:
                   How long you want to stay invested in a fund is as
       important as deciding upon your risk profile. A mutual fund is
       essentially a savings vehicle, not a speculation vehicle–don‟t get
       in with the intention of making overnight gains.

            Invest in an equity fund only if you are willing to stay on for

        at least two years. For income and gilt funds, have a one-year

        perspective at least. Anything less than one year, the only

        option among mutual funds is liquid funds.

      Read the offer document carefully:
                 This is a must before you commit your money to a
       fund. The offer document contains essential details pertaining to
       the fund, including the summary information (type of scheme,
       name of the asset management company and price of units,
       among other things), investment objectives and investment
       procedure, financial information and risk factors.
   Go through the fund fact sheet:
               Fund fact sheets give you valuable information of how
    the fund has performed in the past. You can check the fund‟s
    portfolio, its diversification levels and its performance in the past.
    The more fact sheets you examine, the better.

   Diversify across fund houses:
              If you are routing a substantial sum through mutual
    funds, you should diversify across fund houses. That way, you
    spread your risk.

   Do not chase incentives:
             Don‟t get lured by investment incentives. Some financial
    intermediaries give upfront incentives, in the form of a percentage
    of your initial investment, to invest in a particular fund. Don‟t
    buy it. Your focus should be to find a fund that matches your
    investment needs and risk profile, and is a performer.

   Track your investments
              Your job doesn‟t end at the point of making the
    investment. It‟s important you track your investment on a regular
    basis, be it in an equity, debt or balanced fund. One easy way to
    keep track of your fund is to keep track of the Intelligent Investor
    rankings of mutual funds, which are complied on a quarterly
    basis (log on to to see the rankings for the quarter
    ended June 2001). These rankings allow you to take note of your
    fund‟s performance and risk profile, and compare it across
      various time periods as well as across its peer set. In addition,
      you should run some basic checks in the fund fact sheets and
      the quarterly reports you get from your fund.

           Equity funds are subject to market volatility, and the pace of
change can be quite brisk. Check your fund‟s quarterly reports for
changes that could have severe implications on your investment. If you
find a high degree of concentration in a few stocks or sectors, it means
the fund manager is banking on the performance of these sectors. If
they keep up to his expectations, you could end up making hefty
returns, but if they don‟t, chances are that the NAV will depreciate

           In the case of debt funds, check the portfolio distribution and
the fund‟s holding in AAA and equivalent papers. If you find your fund
is holding a significant quantity (above 10 per cent) in below AA-rated
paper, your investment is not safe. Remember, even a single default
can drag the NAV of your debt down.

           If you come across negative reports of the fund, ask your
financial advisor or broker about it, especially if there‟s a possibility of
your investment depreciating in value. If the threat is real, reduce your
exposure to the fund.
                  Choosing a Mutual Fund

         Each individual has different financial goals, based on lifestyle,
financial independence and family commitments and level of incomes
and expenses and many other factors. Thus before investing your
money you need to analyze the following factors:

     Investment objective:

         Your financial goals will vary, based on your age, lifestyle,
financial independence, family commitments and level of income and
expenses among many other factors. Therefore, the first step should be
to assess your needs. You can begin by defining the investment
objectives, which could be regular income, buying a home or finance a
wedding or educate your children or a combination of all these needs.
Also your risk appetite and cash flow requirements need to be taken
into account.

       Choose the right Mutual Fund
              Once the investment objective is clear in your mind the next
        step is choosing the right Mutual Fund scheme. Before choosing
        a mutual fund the following factors need to be considered:

       NAV performance in the past track record of performance in
        terms of returns over the last few years in relation to appropriate
        yardsticks and other funds in the same category.
       Risk in terms of volatility of returns
       Services offered by the mutual fund and how investor friendly it
Tips to consider when choosing mutual funds:

   You don't need to own a lot of different mutual funds. A handful
    should be enough to achieve diversification, because each of
    them in turn invests in dozens of stocks, bonds, etc.

   Investing in just one Mutual Fund scheme may not meet all your
    investment needs. You may consider investing in a combination
    of schemes to achieve your specific goals.

   Keep in mind that just because a fund had excellent performance
    last year does not necessarily mean that it will duplicate that
    performance. For example, market conditions can change and
    this year‟s winning fund might be next year‟s loser.

   The above advice should get you started on the right path. You
    will probably discover other things to consider as you investigate
       Current scenario of mutual fund

    Mutual      funds   in
India        have   been
attracting     investment
from retail investors for
a few years now. Gone
are the UTI mutual fund
days    of     guaranteed
returns and controlled
economy. Today's funds are completely linked to the market and they
are open ended and fully redeemable. Unfortunately, the investment
community in India still looks at them like they way a day trader looks
at stocks. They get in and get out quickly hoping to make a quick
killing. The only people who get rich in that process are the fund
managers. You can see in the figure also that that the side of the fund
managers is more heavier then the side of the share holders.We believe
that the mutual fund industry has only grown in terms of size or
choices available, but is still a long distance from being regarded as a
mature one. Because no doubt, now there are benefits to the share
holders in mutual funds but not as much as we all are thinking Indian
mutual funds are giving.
       Future of mutual fund in India

          Mutual funds are the one of the fastest growing segment of
the financial services sector in India. Analysts believe that the mutual
funds and banks would be able to corner sizeable funds from savings
bank accounts in metros such as Delhi, Mumbai, Kolkata, Chennai and
Bangalore. But semi-urban and rural centers would continue to be out
of reach for the new schemes--at least for some more time. Surely,
investors are not going to say no to the banker or financial advisor who
will make that extra buck for you.

          By December 2004, Indian mutual fund industry reached Rs
1, 50,537 crores. It is estimated that by 2010 March-end, the total
assets of all scheduled commercial banks should be Rs.40, 90,000
crores.The annual composite rate of growth is expected 13.5% during
the rest of the decade. In the last 5 years we have seen annual growth
rate of 8.5%. According to the current growth rate, by year 2010,
mutual fund assets will be double the current markets.

        You can see in the figure also that the side of the share holders
is a bit heavier then the side of the. fund managers. Thats what the
future of indian mutual funds is going to be. Its really going to be
brighter as the way the progress is been made, and the pains taken for
the improvement are really going to be paid up by well developed indian
mutual fund.

         The numbers of investors are also going to grow with the
massive speed, which no one would have thought. There are going to be
very high expectations with the working and the functioning of the
mutual funds.
           By December 2004, Indian mutual fund industry reached Rs
1,50,537 crore. It is estimated that by 2010 March-end, the total assets
of all scheduled commercial banks should be Rs 40,90,000 crore.

               The annual composite rate of growth is expected 13.4%
during the rest of the decade. In the last 5 years we have seen annual
growth rate of 9%. According to the current growth rate, by year 2010,
mutual fund assets will be double.

Aggregate deposits of scheduled com bank in India

Aggregate deposits of Scheduled Com Banks in India (Rs.Crore)
Month/Year     Mar-98 Mar-00 Mar-01 Mar-02            Mar-03        Sep-04   4-Dec
Deposits       605410 851593 989141 1131188 1280853 -               1567251 1622579

Change in %
                      15        14        13          12       -    18       3
over last yr

Mutual Fund AUM‟s Growth
                    Mar-   Mar-      Mar-      Mar-    Mar-
Month/Year                                                     Mar-04 Sep-04 4-Dec
                    98     00        01        02      03
MF AUM's            68984 93717 83131 94017 75306 137626 151141 149300
Change in % over
                           26        13        12      25      45        9       1
last yr
Some facts for the growth of mutual funds in
India :

     100% growth in the last 6 years.

     Number of foreign AMC's are in the queue to enter the Indian
      markets like Fidelity Investments, US based, with over
      US$1trillion assets under management worldwide.

     Our saving rate is over 23%, highest in the world. Only canalizing
      these savings in mutual funds sector is required.

     We have approximately 29 mutual funds which is much less than
      US having more than 800. There is a big scope for expansion.

     'B' and 'C' class cities are growing rapidly. Today most of the
      mutual funds are concentrating on the 'A' class cities. Soon they
      will find scope in the growing cities.

     Mutual fund can penetrate rural like the Indian insurance
      industry with simple and limited products.

     SEBI allowing the MF's to launch commodity mutual funds.

     Emphasis on better corporate governance.

     Trying to curb the late trading practices.

     Introduction of Financial Planners who can provide need based
Mutual Fund in Indian Rural Market!
    Indian Rural market:
          Gone are the days when a rural consumer went to a nearby city
to buy``branded products and services". Time was when only a select
household consumed branded goods, be it tea or jeans. There were
days when big companies flocked to rural markets to establish their
brands. Today, rural markets are critical for every marketer - be it for a
branded shampoo or an automobile. Time was when marketers thought
van campaigns, cinema commercials and a few wall paintings would
suffice to entice rural folks under their folds. Thanks to television,
today a customer in a rural area is quite literate about myriad products
that are on offer in the market place. An Indian farmer going through
his daily chores wearing jeans may sound idiotic. Not for Arvind Mills,
though. When it launched the Ruf & Tuf kits, it had created quite a
sensation among the rural folks as well within few months of their

          Trends indicate that the rural markets are coming up in a big
way and growing twice as fast as the urban, witnessing a rise in sales
of hitherto typical urban kitchen gadgets such as refrigerators, mixer-
grinders and pressure cookers. According to a National Council for
Applied Economic Research (NCAER) study, there are as many 'middle
income and above' households in the rural areas as there are in the
urban areas. There are almost twice as many 'lower middle income'
households in rural areas as in the urban areas. At the highest income
level there are 2.3 million urban households as against 1.6 million
households in rural areas. According to Mr. D. Shivakumar, Business
Head (Hair), Personal Products Division, Hindustan Lever Limited, the
money available to spend on FMCG (Fast Moving Consumer Goods)
products by urban India is Rs. 49,500 crores as against is Rs. 63,500
crores in rural India.

        As per NCAER projections, the number of middle and high
income households in rural India is expected to grow from 80 million to
111 million by 2007. In urban India, the same is expected to grow from
46 million to 59 million. Thus, the absolute size of rural India is
expected to be double that of urban India. The study on ownership of
goods indicates the same trend. It segments durables under three
groups - (1) necessary products - Transistors, wristwatch and bicycle,
(2) Emerging products - B&W TV and cassette recorder, (3) Lifestyle
products - CTV and refrigerators. Marketers have to depend on rural
India for the first two categories for growth and size. Even in lifestyle
products, rural India will be significant over next five years.

        At a recent seminar in Chennai on 'rural marketing for
competitive advantage in globalize India', organized by Anugrah
Madison Advertising Pvt. Limited, marketing pundits have echoed that
a sound network and a thorough understanding of the village psyche
are a SINE QUO NON for making inroads into rural markets. The price-
sensitivity of a consumer in a village is something the marketers should
be alive to. Rural income levels are largely determined by the vagaries
of monsoon and, hence, the demand there is not an easy horse to ride
on. Apart from increasing the geographical width of their product
distribution, the focus of corporate should be on the introduction of
brands and develop strategies specific to rural consumers. Britannia
Industries launched Tiger Biscuits especially for the rural market. It
clearly paid dividend. Its share of the glucose biscuit market has
increased from 7 per cent to 15 per cent. Following factors are
responsible for the tremendous growth of rural market in recent years

    Effective communication:
        An important tool to reach out to the rural audience is through
effective communication. ``A rural consumer is brand loyal and
understands symbols better. This also makes it easy to sell look -
alike", says Mr. R.V Rajan, CMD, Anugrah Madison Advertising. The
rural audience has matured enough to understand the communication
developed for the urban markets, especially with reference to FMCG
products. Television has been a major effective communication system
for rural mass and, as a result, companies should identify themselves
with their advertisements. Advertisements touching the emotions of the
rural folks, it is argued, could drive a quantum jump in sales.

        There is a need to differentiate the brand according to regional
disparities. The differentiation may not necessarily be in terms of
product content. It may also be in terms of packaging, communication
or association with the brand.

        The brand has to be made relevant by understanding local
needs. Even offering the same product in different regions with different
brand names could be adopted as a strategy. At times it is difficult to
pass on an innovation over an existing product to the rural consumer
unlike his urban counterpart - like increased calcium or herbal content
or a germ-control formula in toothpaste.

        According to Mr. Shivakumar, HLL, the four factors which
influence demand in rural India are - access, attitude, awareness and
Affluence. HLL has successfully used this to influence the rural market
for its shampoos in sachets. The sachet strategy has proved so
successful that, according to an ORG - MARG data, 95 per cent of total
shampoo sales in rural India is by sachets. The company had developed
a direct access to markets through wholesale channel and created
awareness through media, demonstration and on ground contact. This
changed the attitude of the villagers. Today, the young and the
educated in the villages are already large in number. And this number
is increasing. Already, 40 per cent of all those graduating from colleges
are rural youth. They are the decision makers and are not very different
in education, exposure, attitudes and aspirations from their
counterparts at least in smaller cities and towns.

    District marketing:
        Since marketing is to target the growing segments, Mr. Francis
Xavier, Managing Director, Francis Kanoi Marketing Research, wants to
see the urban-like village dweller as an urbanized person from the
districts. The village then becomes a location or a suburb of a district.
And the district becomes the basic geographical entity. Since the
urban-like populations in the villages are taken as a part of the district,
they will represent the dominant part of the market in most of the
districts. This will compel the kind of attention that it deserves. A
districts perspective removes the complexities, heterogeneity, access
and target ability that have hindered rural marketing initiatives. He
feels that rural marketing requires every element of marketing
including product, pricing, packaging, advertising, and media planning
to have the rural customer as the target. And, this becomes possible
when we have districts marketing as a separate entity.
    Impact of globalization:
        The impact of globalization will be felt in rural India as much as
in urban. But it will be slow. It will have its impact on target groups like
farmers, youth and women. Farmers, today 'keep in touch' with the
latest information and maximize both ends. Animal feed producers no
longer look at Andhra Pradesh or Karnataka. They keep their cell
phones constantly connected to global markets. Surely, price
movements and products' availability in the international market place
seem to drive their local business strategies. On youth its impact is on
knowledge and information and while on women it still depends on the
socio-economic aspect.

      The marketers who understand the rural consumer and fine
tune their strategy are sure to reap benefits in the coming years. In
fact, the leadership in any product or service is linked to leadership in
the rural India except for few lifestyle-based products, which depend on
urban India mainly.
What will be strategy to introduce mutual
fund in rural market?
      To introduce mutual fund in rural market will be very difficult as
Indian villages are scattered and some villages are still not connected
with proper communication channels. literacy rate in rural is
increasing but not as per its estimation which can be a major challenge
to introduce mutual fund in rural market. An organization must adopt
an appropriate strategy to introduce mutual fund in rural market, a
company should undertake following step for introducing mutual fund
in rural market

    Creating company‟s brand name:
      The company should create its brand loyalty in the minds of rural
people. For this the company should undertake various welfare
programes for the benefit of rural people such as opening schools,
women employment, if possible providing them credit facility at lowest
rate of interest and so on. This would lead to a good image about
company‟s name and its brand in the minds of rural people

    Research:
    When company‟s is creating its brand loyalty in the minds of
villagers at the same time they should done a research of village its
geographical background, the nature of people, their income, their
lifestyle, their opinion about share market and so on. The data collected
from this research would decide the company‟s next step and try to find
out the scope of mutual fund in that particular village.
    Awareness:
       An organization should aware people about share market and how
it contribute to growth of GDP. They should try to eradicate the wrong
impression of share market from the minds of rural people. For this
they can arrange various presentations on share market and its
importance, slide shows etc.

    Infrastructure:
       After conducting research programe and creating awareness the
should plan out the requirement of infrastructure. The most essential
infrastructure required is internet banking, development of internet
banking must for development of mutual fund in rural market transfer
of quick money is most essential in share market as share market is
constantly fluctuating and it is necessary to have current information
about share market to get better returns.

       The above step can act as a supplementary to the actual strategy
for introducing mutual fund actually in rural market

Strategy to introduce mutual fund in rural area:
            Company can open a common account for a particular
village and tell them whatever you can save at the end of month or day
deposit it into that common account which result into a large amount
and after this the company can invest this amount in mutual fund and
whatever return company will earn it should be distributed among
villagers as per their contribution. Once the villagers started believing
on it they might ask for their separate account for investing in mutual
Scope of mutual fund in rural market:
       The mutual funds have a great scope to find its way in rural
market and also to develop the rural economy and balance between the
rural economy and urban economy. There is vast untapped market in
rural India where development of mutual fund market is possible the
organization as well as Indian economy and the investor will be
benefited from mutual fund in rural market. In rural India micro
economics and micro investment strategy should be used to reached
out small and potential investors the additional though it may be small
can be utilized for better returns of the rural masses this will eventually
help rural people in increasing standard of living.

Effect of mutual fund on income of rural people:
       In today‟s rural India people are still preferred banking
instruments or co-operative society for investment purpose. As their
perception about share market is not good they think that it is
gambling which is not actual case. Share market help to increase
nation‟s GDP, the foreign investors also consider position of share
market while investing, if company want to introduce mutual fund in
rural very first thing they have to do is creating awareness among the
rural masses and aware them about the importance of mutual fund as
well as share market and how it can help them to increase in their
income with increase in standard of living. The mutual fund provides
better returns than return on fixed deposit in bank. It can be very
effective if it introduce properly in rural market because presently it
has been found that presently 7% to 9% of small saving is invested in
share market and rest of the saving is invested in fixed deposit, Kisan
Vikas Patrak etc. if just 1% of such saving is shifted to mutual fund it
will be tune of 2300 crores. This can lead to tremendous increase in
share market and also lead to increase in standard of living of rural

          Proper utilization of additional money available to generate
better returns will raise standard of living of rural people. It will give
boost to the purchasing power of rural people thus generating
additional demand for material and services in rural market the exodus
of people in rural India to urban centers will gradually come down
development of rural economy see a balance development of India

Effect on Gross Domestic Product (GDP):

          GDP rate is depending on the production and consumption of
goods and services produced within a financial year. In the current
rural market there is huge development of various facilities such as
Kisan credit card, specially designed investment schemes for them and
so on, but the part of rural India in share market is not good due to the
non availability of adequate infrastructural facilities. It can be
developed by introducing mutual fund in rural India with adequate
infrastructure. This will help to increase their income as it provides
higher returns as compared to other investments. The increase in
income of rural people lead to increase in their purchasing power and
also increase in demand for goods and services which result into
increase in production of such goods and services and the organization
will be able to provide a qualitative goods at cheaper rate as they are
getting the advantage of scale of economy. Thus the increase in
production and consumption of goods and services result in to increase
in nation‟s GDP. Thus introduction of mutual fund in rural market will
be more effective as compared to the urban market as there is vast and
untapped rural market is available in India.

Effect on share market:
    Presently presentation of share market investment in overall small
savings is very small development of mutual fund in rural market will
give boost to investment in share market as money is invested in
mutual fund find their route to share market.

   To find out the scope of mutual fund in rural market I undertake a
research and concentrate on one village named Gulsundhe. I collected
information about 26 people having different age group and perspective
about their income, investment habit, how much part of income they
save and their opinion about share market which have been presented
in the form of graphical presentation.
Income graph:
                                              Y- Axis :- No. of people
                                              X- Axis :- Income range
                                                       1cm = 2 people

   The above graph indicates more than half of the villagers income is
less than Rs. 1 lakh which resulted into no savings
                                         Y- Axis :- No. of people
                                         X- Axis :- % of Income saved
                                                 1cm = 2 people

       The above graph shown that most of the villagers are not able
to save the money due to low per capita income
Sources of Investment:

                                          Y- Axis :- No. of people
                                          X- Axis :- sources of investment
                                                 1cm = 2 people

             The above graph indicates more than half of the villagers are
choose nationalized sources such as nationalized banks, Kisan Vikas
Patra etc.
Following points have been noted after research:

      1) More than 50% of people having income less than 1 lakh.
         The people fall under this category are not much educated
         they are hardly SSC passed (11th SSC), some of them are
         just seven and third standard. This people are in the age
         range of 50 yrs. To 60 yrs. This people prefer only
         nationalized banks for saving not even private bank. They
         even don‟t know what is share market
      2) The people who are graduated are able to earn in between
         1 lakh to 1,50,000. They want to invest in share market
         but due to inadequate infrastructure and lack of knowledge
         they can‟t do it. This people also think that share market is
         game of luck and it is a very bad habit. But the young
         generation in the village wants to know about share market
         and also want to invest but due to parental pressure they
         couldn‟t invest in shares. The people fall under this
         category are prefer nationalize and co-operative sources for
         investment purpose
      3) The villagers who are retired they are not able to save their
         income. There are some people who are working and not
         able to save at least some income for their future
         requirements all their income is spend on day to day
         needs, children education, payment of debts etc.
      4) There are some villagers who are earning more than Rs.
         1,50,000 are only able to save money in the banks. Their
         opinion about share market is also not so good because
            according to them it is very risky as it always fluctuating.
            As they have family responsibility they don‟t want to take
            any risk with respect to their money. The people falls under
            this category prefer both nationalized as well as private
            sources for investment

          After studying all the above graphs and point I want to
conclude that mutual does not have any scope in this particular village
because only few people are educated and rest of the people are just
SSC (11th SSC) pass out and some people are just seven or third
standard pass. Even if they are provided with adequate information
they would not prefer as it involve risk and they are not from good
educational background they would not able to understand the various
factors involved in mutual fund. Most important reason for this is
income, more than 50% of people save just 10% to 15% of their income
for their future requirements which they don‟t want to loose it by
investing in mutual fund. There are some people who not able to save
the money due to low income and more expenses. The average income
of the people living in this village is between Rs. 6000 to Rs. 7000 and
only few peoples having income more than this limit.
    There are lots of articles, graphs showing the growth of rural India.
The rural market is getting importance and developing but the effect of
this is not equal still there are some villages having low per capita
income. To develop mutual fund first thing should do is to increase the
per capita income of rural people. Here the government plays a major
role in doing this. The mutual fund can be introduced in the rural
market with appropriate strategy. The mutual fund can be effective
measure to improve the standard of living and increase the income of
rural people. It would also result in to GDP growth and try to balance
between rural and urban economy.

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