History 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 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. 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. GROWTH IN ASSETS UNDER MANAGEMENT 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 funds. 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. Definition: “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 distribution. 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 investors. 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 transactions. Liquidity :- Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time. 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 liability. 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 manager 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, 1996. 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 times. 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 diagram 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 value. 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 date. 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 periods. 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 Nifty. 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 money 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 tenure. 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 surpluses. 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 risk. 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. Diversification: 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 markets. 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 advisor. 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 iinvestor.com 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 heavily. 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 is. 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 further. 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) Mar- Month/Year Mar-98 Mar-00 Mar-01 Mar-02 Mar-03 Sep-04 4-Dec 04 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 advice 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 launch. 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 fund 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 people. 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. Survey: 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 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. Conclusion: 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.