Factors affecting choice of mutusl funds

1 A Project Study Report On Survey based project Undertaken at Reliance Mutual Fund “FACTORS AFFECTING CHOICE OF MUTUAL FUNDS” Submitted in partial fulfillment for the award of degree of Master of Business Administration Submitted by: Madhu budhwani MBA PART II Submitted to: PROF: Mamta ranga (Associate professor, JODHPUR INSTITUTE 2007-2009 OF MANAGEMENT) 2 CERTIFICATION 3 Jodhpur institute of management, Jodhpur (Affiliated to Rajasthan technical university) Preface As you begin reading this report let me brief up its contents and their importance, so that it succeeds in it‘s very purpose. The report marks its beginning with a brief description of mutual funds, their benefits and drawbacks, evolution and so on. Then a brief history of the organization is described which is followed by its products and organizational structure. Then comes the crucial part of the report that is, analysis of ―Factors affecting choice of mutual funds”, for which I was permitted to work in the organization‘s Jodhpur branch. The report should remain as a document of academic interest only, and should not be used for other purpose unless permitted by the organization. 4 Acknowledgement I acknowledge my sincere thanks to my project guide Abhimanyu rathore for guiding me right from the inception till the successful completion of the project. I sincerely acknowledge him for extending his valuable guidance, support for literature, critical reviews of project and the report and above all the moral support he had provided to me during all stages of this project. No good work is complete with the moral support of parents and teachers. Therefore, I am also thankful to them including my faculties. Madhu budhwani 5 DECLARATION I hereby declare that this work entitled ―Factors affecting choice of mutual funds‖ is my work carried out under the guidance of my faculty ―Mamta ranga‖ mam. This report neither in full nor in part has ever been submitted for award of any other degree of either this university or any other university. This is to further declare that this project report is authentic and not being submitted by any other student previously. DATE: (Miss Madhu budhwani) 6 EXECUTIVE SUMMARY The project talks about ―the various factors considered by the customers while going for investment in mutual fund‖. The first few pages talk about the introduction and objectives of the study. This is followed by literature review with details about mutual funds. Next comes the survey, the purpose of which is to study the working of mutual funds, the characteristics of mutual funds that attract the investor and what an investor should consider for safe investment and better returns. The last part consists of findings, recommendations, limitations, conclusion and bibliography. The questionnaire has been annexed to the report. 7 Table of contents 1).Mutual funds An introduction     Benefits, drawbacks and risks involved Mutual fund options Working of mutual funds Entities involved in MF 2). The mutual fund industry   Mutual fund companies in India Competition in the industry  Evidence of competition : New entrants  Evidence of competition : New products    Future of Indian mutual funds: Growth facts Success factors for mutual funds Evolution of mutual funds 3). Performance of mutual funds:    Recent trends in mutual fund performance Performance of mutual funds: Implication to investors Performance of mutual funds: Implication to fund managers 8 4).Types of mutual funds 5). Rating of mutual funds by credit rating agencies 6). Brief history of organization     Reliance mutual funds Organization structure and hierarchy Corporate governance policy Schemes/products of the organization 7). Factors affecting choice of mutual funds  Background and need of study 8). Research methodology     Research objectives Research design sampling Sampling Limitations/scope of research 9). Survey and data analysis  Analysis based on primary data and secondary data 10). SWOT analyses 11). Findings, conclusion and recommendations. 9 10 Mutual funds: An introduction Mutual fund is an institutional arrangement, which mobilizes savings of millions of investors for investment in a diversified portfolio of securities with a view to spreading risk and ensuring adequate and consistent returns both in the form of dividend and capital appreciation. It is a financial intermediary that receives money from shareholders, invests it, earns on it and makes it grow to share it with them. Professional managers who make portfolio investment decision on behalf of unsophisticated investors manage these institutions. It is essentially a mechanism of pooling together savings of a large number of investors for a collective investment with an appreciation. Thus mutual fund is collective investment scheme designed to provide benefits of diversified investment with reduced risks and expert investment management to a large number of investors through institutionalized risk pooling mechanism. In fact time is money in investment management. Managing time and money are crucial in investment management .Mutual funds are the organizations that manage the funds of small investors who do not have the adequate amount of experience and expertise to cope up with complexities of investment instruments, tax laws, corporate performance, stock market behaviors etc. Mutual funds‘ professional managers are not only required to identify growth stocks but also deploy the limited resource at appropriate time and switch one stock to another to reap maximum return . Mutual funds play vital role in resource mobilization and their efficient allocation throughout the world. These funds have played a significant role in financial intermediation, developments of capital market and growth of the corporate sector as a whole. The active involvement of mutual funds in economic development can be seen by their dominant presence in the money and capital markets over the world. Their presence is, however, comparatively stronger in the economically advanced countries. Mutual fund as efficient allocators plays a vital role in transitional economy like India. 11 Investing in mutual has various benefits, which makes it an ideal investment avenue. Following are some of the primary Benefits: 1) Professional investment management - One of the primary benefits of mutual funds is that an investor has access to professional management. A good investment manager is certainly worth the fees paid. Good mutual fund managers with an excellent research team can do a better job of monitoring the companies they have chosen to invest in than a normal unsophisticated investor can, unless the investor has the time to spend on researching the companies to be selected for the portfolio. That is because Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. When an investor buys a mutual fund, the primary asset he/she is buying is the manager, who will be controlling which assets are chosen to meet the funds' stated investment objectives. 2) Diversification – A crucial element in investing is asset allocation. It plays a very big part in the success of any portfolio. However, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, one can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities. 12 3) Low Cost - A mutual fund let's an investor participate in a diversified portfolio for as little as Rs.5, 000, and sometimes less. Mutual fund expenses are often no more than 1.5 percent of the investment. . Since mutual funds collect money from millions of investors, they achieve economies of scale. The cost of running a mutual fund is divided between a larger pool of money and hence mutual funds are able to offer a lower cost alternative of managing one‘s funds. 4) Convenience and Flexibility - Investing in mutual funds has its own convenience. While you own just one security rather than many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar. Another big advantage is that one can move funds easily from one fund to another within a mutual fund family. This allows the investor to easily rebalance his/her portfolio to respond to significant fund management or economic changes. 5) Liquidity - Mutual funds are typically very liquid investments. Unless they have a pre-specified lock-in, investor‘s money will be available to him anytime he wants. Typically funds take a couple of days for returning the money to the investor. Since they are very well integrated with the banking system, most funds can send money directly to the banking account. 13 6) Transparency - India mutual funds are regulated by the Securities and Exchange Board of India, which helps provide comfort to the investors. SEBI forces transparency on the mutual funds, which helps the investor make an informed choice. SEBI requires the mutual funds to disclose their portfolios at least six monthly, which helps an investor keep track whether the fund is investing in line with its objectives or not. Regulations for mutual funds have made the industry very transparent. One can track the investments that have been made on his/her behalf and the specific investments made by the mutual fund scheme to see where his/her money is going. In addition to this, the investor get regular information on the value of his investment. 7) Variety - There is no shortage of variety when investing in mutual funds. One can find a mutual fund that matches just about any investing strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be sorting through the variety and picking the best. 8) Regulatory oversights: Mutual funds are subject to many government regulations that protect investors from fraud. Drawbacks of mutual funds: 1) No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no 14 matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money. 2) Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund. 3) Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made. 4) Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you 15 invest in Index Funds, you forego management risk, because these funds do not employ managers. Risks of mutual fund investments  Investor psychology risk: The investor psychology is such that most of the investors be it mutual fund investors or direct capital market investors, behave like reactionaries. They enter the market when share prices start rising and they get panicky and exit when the share prices are falling. Therefore, whether it is shares of a company or mutual fund units, investors resort to selling their investments when the markets start looking down. Because of this there will be more than normal demand on the mutual fund manager to redeem the units. To honor the redemption demands of the existing unit holders during the worst market times, mutual funds are forced to sell more stocks at the prevailing low prices. As a result of this, along with the redeeming unit holders all the other unit holders who have invested in the fund suffer. This means that irrespective of one being a long term buy and hold investor, he suffers because of investing in mutual funds.  Choice Risks: One of the basic and common problem mutual fund investor‘s faces is that all the experts recommend different schemes/ funds. Naturally, all of them cannot be and will not be right. Investors are also advised to stay invested for long-term to reap good returns. These experts also suggest different funds at different times. This 16  means investors need to move from fund to fund from time to time. Of course, to be in the well-being fund, one needs to move from fund to fund intermittently. Staying invested for a long term and being in the well-doing fund cannot happen simultaneously unless and except when one is very fortunate enters a magic fund, which does better than all other funds at all times. In an tempt to stay invested for a long-term and to be in the well-doing fund, the investor, whether educated and informed, will have to be satisfied with disappointment.  Cost Risks: Mutual Funds charge huge fees that they can get away with and that too in the most confusing manner possible. The fund managers never intend to make their costs clear to their clients. It would not be painful for the investors to pay for the expenses and costs of the funds when they derive satisfactory returns. But, the irony is that investors have to pay for the sales charges, annual fees and many other expenses irrespective of how the fund has performed.  Prediction Risks: Nobody can predict the capital market perfectly and can always find good investments. Similarly, the fund manager's predictions of future actions and outcomes are, of necessity, subject to error.  Jargon Risks: The newsletters and other documents that are distributed to the investors do report so much and that too in such a 17 language filled with technical jargons that it will not be very easy for an investor to understand and follow the report.  Competition Risks: Return is ultimate measure of job performance for any investment, be it in a mutual fund or otherwise. Performance is the matter of comparison and the evaluation is intended to measure how the fund has performed vis-à-vis its past performance, peers and market. At present, Mutual Funds are required to report their performance including returns on a quarterly basis. Therefore, to prove that the fund is performing well, managers focus on quarterly returns. Buying & Selling of stocks at the end of quarter will be done to report better quarterly returns and to make funds holdings look better based on recent market action. In this process, where the competition is not really productive, fund managers incur expenses & losses that are naturally passed on to the unit holders.  Risk of Redemption Restrictions: Whether informed in writing or not, normally the liquidity of schemes investments may be restricted by the trading volumes settlement period and transfer procedures.  Management Change Risks: It is not uncommon for a Mutual Fund to have changes in its management. The change in the funds management may affect the achievement of the objectives of the fund. The fund company may, for various reasons, replace a fund manager or may be the fund manager himself may resign from his job for any reason. This change will be significant since the fund manager controls the fund investments. 18  Judgment Risks: Investors may not know more than the fund manager about the investment strategy and whatever judgement the investor makes will not be fool proof.  Forward Pricing Risks: The prices of a Mutual Fund do not change during the day. Order placed up to a cut off time of 3:00 p.m. get that day's Net Asset Value (NAV) and orders placed after 3:00 p.m. receive the next day's NAV. This is called the rule of forward pricing. This system assures a level playing field for investors. No investor is supposed to have the benefit of post 3:00 p.m. information prior to making an investment decision.  Breakpoint Risks: Mutual Fund charge loads such as front end & back end. Few Mutual Fund charge front end sales load will charge lower sales loads for larger investments. The investment level required to obtain a reduced sales load are known as breakpoints. These breakpoints lure investors to invest huge funds to avail the discounts on volumes and end up losing focus on his planned diversification for his Mutual Fund investments.  Risks of Blind Diversification: It may happen that a fund is heavily committed to a particular area of the economy at any given time. This is called blind diversification risk and any investor would like to invest in Mutual Fund that concentrate in asset classes that he himself has not invested at his own. 19  Risks of changes in the Regulatory Norms: Mutual Funds are constantly regulated by SEBI and investors are subject to risk of the changes in the norms for the Mutual Funds. Besides the above risks, Mutual Funds will also have the common risks that any investment has. In fact, risk is present in every decision made with regard to the investments in capital markets. Following is the list of some common risks involved while investing in the capital markets and particularly in the mutual funds: Call Risk: The possibility that falling interest rates will cause a bond issuer to redeem—or call—its high-yielding bond before the bond's maturity date. Country Risk: The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline. Credit Risk: The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk. Currency Risk: The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk. Income Risk: The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates. Industry Risk: The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. 20 Inflation Risk: The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Interest Rate Risk: The possibility that a bond fund will decline in value because of an increase in interest rates. Manager Risk: The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives. Market Risk. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall. Principal Risk: The possibility that an investment will go down in value, or "lose money," from the original or invested amount. 21 Mutual Fund Options: Mutual fund offer various investment plans catering to the varying needs of investors. a basic understanding of these plans helps in selecting a suitable plan for oneself.  Growth plan: In a growth plan, investors realize the capital appreciation on the investment by an increase in NAV. This option is suitable for those who are interested in compounding the income generated.  Dividend plan: In this plan dividends are paid from time to time and the NAV falls to the extent of dividend payout  Dividend Re-investment Plan: Under this plan dividends are re invested in purchasing additional units of that scheme itself. This would help the investors to gain more units and at the same time, they will be able to reduce their short term capital gain tax. 22  Dividend Sweep Plan: Under the sweep plan dividend distributed under one scheme can be invested in some other schemes of the same mutual fund. This will best suit investor who seeks to diversify their portfolio in the same fund house.  Systematic Investment plan (SIP): In this option an investor contributes a fixed amount every month at the prevailing NAV. This plan caters to the unpredictable market scenarios and helps in cost averaging.  Systematic Transfer Plan (STP): This is a variation of STP the only difference being that instead of debiting the bank account units from other scheme. Then this fixed amount available from such redemption is invested in an equity fund. 23 “ Working of mutual funds” How Mutual Fund operates The following chart gives us operational flow of a Mutual Fund 24 The following diagram illustrates various entities involved in the organizational structure of Mutual Fund Entities involved in mutual funds Sponsor Trust AMC Custodian Distributor Registrar Investor 25 Each of the entities involved is discussed below briefly: A) Sponsor: Promoter of the Mf is called the sponsor .Following are the eligibility norms for a sponsor: 1)It must have carried on business in financial services for a period not less than 5 yrs 2) It should have positive net worth in all the immediate preceding 5 yrs of functioning. 3) It has to contribute at least 40% to the net worth of AMC. B) Trust: Indian trust act of 1882 is applicable to MF. It has to be formed under trust. It should have a board of trustees and trust deed.. Two third of the trustees should be independent persons. C) Asset Management Company: An asset management company or AMC approved by SEBI has to manage the funds by making investments in various types of securities. Minimum net worth for the AMC is Rs.10 cr. In the constitution of its board there should be 50% independent directors D) Custodian: There is necessity of a custodian to hold the securities of various schemes of the fund in its custody. It should be registered with SEBI only when it is eligible to be the custodian of MF 26 E) Distributor: There can be number of distributors to sell the MF products. They are given the agency to sell such products by MF itself.They do sell MF products on agency commission basis. The commission varies from MF to MF. F) Registrar: The registrar maintains the accounts of investors for both the purposes of investment and disinvestments. G) Investor: Whoever invests in the units of mutual funds, he is an investor. He is the key person for the MF industry. Mostly small investors who cannot keep track over the capital market and are hesitant to take direct risk invest in MF with the sole intention of maximizing returns. “The mutual fund industry: An overview and analysis” The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it reached the height of 1,540 inputting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. 27 Mutual Fund Companies in India The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existence of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market. The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund. The succeeding decade showed a new horizon in Indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund Regulations came into existence with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996. Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India. 28 Major Mutual Fund Companies in India ABN AMRO Mutual Fund ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund. Birla Sun Life Mutual Fund Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a global organization evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 crores. Bank of Baroda Mutual Fund (BOB Mutual Fund) Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian. 29 HDFC Mutual Fund HDFC Mutual Fund was setup on June 30, 2000 with two sponsorers namely Housing Development Finance Corporation Limited and Standard Life Investments Limited. HSBC Mutual Fund HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund. ING Vysya Mutual Fund ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998. Prudential ICICI Mutual Fund The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsorers, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June, 1993. 30 Sahara Mutual Fund Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paidup capital of the AMC stands at Rs 25.8 crore. State Bank of India Mutual Fund State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes. Tata Mutual Fund Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company 31 Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2005) of AUM. Kotak Mahindra Mutual Fund Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities. Unit Trust of India Mutual Fund UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds. Reliance Mutual Fund Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual 32 Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities. Standard Chartered Mutual Fund Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20,1999. Franklin Templeton India Mutual Fund The group, Franklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of Funds schemes to offer. Morgan Stanley Mutual Fund India Morgan Stanley is a worldwide financial services company and its leading in the market in securities, investment management and credit services. Morgan Stanley Investment 33 Management (MISM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organizations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focusing on a long-term capital appreciation. Escorts Mutual Fund Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited. Alliance Capital Mutual Fund Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai. 34 Benchmark Mutual Fund Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC. Canbank Mutual Fund Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai. Chola Mutual Fund Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC Limited. LIC Mutual Fund Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the 35 Investment Managers for LIC Mutual Fund. GIC Mutual Fund GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India undertaking and the four Public Sector General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882. 36 “Competition in the industry” What Is a Competitive Industry? The Theory of Contestable Markets Economists sometimes distinguish between competitive markets and contestable markets. A perfectly competitive market is a theoretical construct used for thinking about some highly abstract economic ideas, particularly the idea of general equilibrium. A perfectly competitive market has no barriers to entry, low transaction costs, and equal access by everybody to information and technology. For analyzing actual markets, the concept of contestable markets is more useful then the construct of a perfectly competitive market, and is closer to the meaning of ―competition‖ used in everyday speech. A market is contestable when entry and exit are possible at relatively low cost. Almost all actual markets have some barriers to entry. If the barriers to entry are not high, competitors can come in. New entrants may even be able to leapfrog existing firms technologically because they have no prior investment in the industry. The threat of potential competitors influences existing firms even if the potential competitors do not become actual competitors. Unless restricted by regulation, financial markets are generally contestable in that there are few significant barriers to entry, and potential entrants can enter at existing firms‘ prices. The tremendous growth in the number of automatic teller machines in recent decades, including their placement in such locations as shopping malls and convenience stores, is one example of the way in which the financial services industry is a highly contestable market. 37 The existence of contestable markets has important implications in pricing policy, product innovation and consumer choice for financial services. Mutual funds evolved as entrepreneurs reacted to, and anticipated change in, the financial marketplace. Individual investor choice was expanded as a more complete financial marketplace developed.Technological change enhanced competition by reducing research and transaction costs Evidence of Competition: New Entrants History provides some guidance on a market‘s contestability and the significance of barriers to entry. Growth in the mutual fund industry has been achieved through growth in the number of funds, new investment in existing mutual funds, and capital appreciation of existing fund assets. As we have seen, the numbers of mutual funds and individual shareholder accounts have increased steadily since 1970, with rapid growth in the last decade. Because the financial services market is contestable, potential entrants can, without restriction, serve the same market demands and use the same productive techniques as those available to incumbent firms. Market forces have led to a large number of firms because of the low cost of entry and the expectation of profit. The increasing willingness of households to invest in mutual funds has provided fertile ground for new providers of mutual funds. Banks, brokerage firms, insurance companies, and new specialist mutual fund firms have all jumped into the market. This entry exemplifies the competitive environment among financial services firms as they diversify by entering other businesses. 38 Potential entrants can evaluate the profitability of entry at incumbent firms‘ pre-entry prices, that is, potential entrants do not expect incumbent firms to retaliate by lowering prices when new entrants come and then raising prices if they succeed in driving the new entrants out. Rather than being characterized by short-term price wars, fees in the mutual fund industry are characterized by long-term downward pressure, which will be discussed later. Evidence of Competition: New Products Contestable markets are characterized by product innovation as well as by new entrants. Mutual fund offerings have expanded to fill every conceivable market niche in terms of pricing and type of fund. This section briefly describes some of the major mutual fund products and products that compete closely with mutual funds. These examples emphasize the search by entrepreneurs in the financial services industry to offer a complete market of financial alternatives to individual investors. Product Innovation in a Contestable Marketplace Money market funds. In the 1970s, money market funds became the first mutual fund product to attract a mass base of customers. Money market funds invest in short-term securities such as Treasury bills, bank certificates of deposit, and 39 commercial paper, which have highly liquid markets (there are many buyers and sellers). Their initial popularity came from their ability to offer higher yields than were available on savings deposits because they were exempt from Regulation Q ceiling on interest rates. In addition, money market funds often came with a check-writing capability that offered liquidity and convenience to families. The share of assets in money market funds as a percentage of mutual fund assets rose from 1974 to 1981. After the peak in commercial paper interest rates in 1981, the share of assets in money market funds declined (Figure 9). The general decline in the level of short-term interest rates and rejuvenation of stock market caused many investors to switch assets out of money market funds into equity investments and long-term bond funds. Specialized Bond funds. Bond funds invest in longer-term and typically less liquid securities than money market funds. There are bond funds that specialize in various types of bonds. Municipal bond funds offer tax-free returns to investors. Rising tax rates in the 1970s prompted the development of the first municipal bond fund in 1976. In addition, regulation changed in the mid-1970s that permitted funds to pass tax-exempt interest to fund shareholders. Before then, the interest would have been taxed as dividend income. As long-term rates fell in the 1980s, utility funds and the first government income and Ginnie Mae funds were founded. High-yield bond funds hold the high-risk but high-interest corporate bonds that became an important tool of corporate finance in the 1980s. Hybrid funds. The negative impact of higher interest rates and inflation on growth stocks led to the first option-income fund in 1977. After that, mutual fund advisers developed a range of hybrid equity/bond mutual funds that provided a range of 40 return/risk possibilities for investors. Sectoral stock/bond funds. In the late 1970s and early 1980s, gold funds were developed in response to fears of high inflation. The early 1990s saw emerging market equity and bond funds, while Internet funds became popular in the late 1990s. Stock index funds. An index fund is an open-end fund, registered under the Investment Company Act of 1940, which seeks to replicate a particular market index, such as the Standard and Poor‘s 500 stock index. Index funds may or may not hold all of the stocks in the index. These funds generally have low costs and appeal to investors who do not wish to track the volatility of price performance and dividend yield of individual stocks. Index funds do not actively manage their portfolios, although they adjust their portfolios to reflect changes in the index and cash inflows and outflows from the purchase and sale of fund shares. Because index funds typically have lower portfolio turnover than actively managed funds, they tend to distribute a smaller percentage of their assets as capital gains than actively managed funds . Closed-end funds. These funds, which are registered under the Investment Company Act of 1940, are diversified and professionally managed (like managed mutual funds) but they trade on an exchange (like regular stocks). Because closedend funds generally do not continuously offer to issue new shares or to redeem them the number of shares outstanding remains fairly constant. Exchange-traded funds. Shares of exchange-traded funds (ETFs), which are 41 registered under the Investment Company Act of 1940 as either unit investment trusts or open-end funds, trade on the American Stock Exchange or the New York Stock Exchange like stocks. Some of the largest exchange-traded funds are Spiders (SPDRs, an acronym for S&P 500 Depositary Receipts), which target the S&P500, Diamonds (DIA), which target the Dow Jones Industrial Average, and Cubes (QQQ), which target the NASDAQ 100 Index. ―IShares‖ are sector specific index funds. Exchange Traded Funds are often among the most actively traded securities on the American Stock Exchange. Exchange-traded funds offer intraday pricing and trading and can be purchased on margin. They tend to have relatively low annual operating expenses. Retail investors buy and sell exchange-traded funds through an exchange; these exchange trades do not result in activity in the underlying portfolio and therefore do not trigger capital gain distributions. The total market value of exchange-traded funds was $73 billion at the end of April 2001—rapid growth from the value of $15 billion at the end of 1998. Exchange-traded funds exist worldwide and not just for major indexes. Mutual fund complexes. The proliferation of new fund types has given increased importance to fund complexes. These complexes offer households another option in the complete marketplace by reducing the cost to transfer between funds and the search and information costs of finding different investment advisers for different investment objectives. Competitors to mutual funds: Folios. The remaining products this section discusses are competitors to mutual funds. Two aspects are key. First, unlike index mutual funds, exchange-traded funds, and closed-end funds, they do not need to be registered under the Investment Company Act of 1940. Second, owners of these funds can control the timing of capital gains realizations because they can control the 42 portfolio management decisions with respect to the underlying assets. Folio is a proprietary trading system that allows an investor to create a personalized portfolio of individual stocks. This portfolio can be structured for different levels of risk or beta relative to the overall equity market by the individual investor. The investor may also change a Folio anytime before or after purchasing it by adding stocks, removing stocks, or modifying the dollar amount. A Folio can hold anywhere from one to 50 stocks, although a ―Ready-to-go‖ Folio can be purchased on-line at Foliofn This service provides three Folios and covers all trading costs for a flat fee of $29.95 a month or $295 a year. Proponents of Folios contend that, relative to mutual funds, folios offer lower fees (although the $295 per year charge amounts to a 295 basis point ―expense ratio‖ for a $10,000 account and a follower fees (although the $295 per year charge amounts to a 295 basis point ―expense ratio‖ for a $10,000 account and a folio owner would have to invest $164,000 to pay a lower ―expense ratio‖ than the Vanguard Index 500 fund), more advantageous tax consequences (although every sale of a stock in a folio is a taxable event), and less loss of investor control over trading and profit-taking than with the traditional mutual fund. Managed accounts. Managed accounts are individual investment accounts offered by financial consultants who provide advisory services and are managed by independent money managers. These accounts offer a more customized investment approach to reach specific financial objectives such as a specified income per year or minimization of taxes. The fee structure is asset-based rather than commissionbased. The fee may include investment counseling, portfolio management and brokerage fees for example. Investments may be managed for tax efficiency. Investors may make specific portfolio requests. The initial size of the portfolio is often $250,000 or more. 43 Compared to mutual funds, the managed account approach is more personalized and investment managers can respond to specific client mandates. Portfolios are more customized. However, the size of the initial investment is significantly greater than the minimum required for most mutual funds and the asset-based charges are often greater than for funds. Hedge funds. Hedge funds are privately offered investment partnerships that are not registered under the Investment Company Act of 1940. Published figures estimate there are 2,500 to 5,800 hedge funds, with a total of $200 to $400 billion under management. Hedge funds are structured as limited partnerships, with one or two general partners who also serve as investment managers. These managers receive a performance–based compensation and therefore, by the Investment Advisers Act of 1940, may only accept qualified investors, that is, people whose net worth is $1 million or more. Mutual Fund in India has emerged as a critical institutional linkage among various financial segments like savings, capital markets and the corporate sector. As various taxes the government offers incentives and benefits on mutual funds investment, their role in the mobilization of savings and the development of the economy will assume more significance. They provide much needed impetus to direct and indirect support to the corporate sector. Above all, mutual funds having given a new direction to the flow of personal savings and enables small medium investors in remote rural and semi rural area to reap the benefits of stock markets investments. Indian mutual fund is thus playing a very crucial development role in allocating resources in the emerging market economy. A perceptible change is sweeping across the mutual fund landscape in India. Factors such as changing investors need and their appetite for risk, emergence of i 44 nternet as a powerful servicing platform and above all the growing commoditization of mutual fund products are acting as major catalysts putting pressure on industry players to formulate strategies to stay the course. In the changed scenario today product innovation is increasingly becoming one of the key determinants of success. Building and sustaining a powerful brand is also becoming an issue of paramount importance. Increased deregulation of the financial markets in the country coupled with the introduction of derivative products offer tremendous scope for the industry to design and sell innovative schemes to suit individual customer needs. Distribution has taken a whole new mode like banks, post offices and co-branded credit cards are bound meaning with the introduction of automated trading clearing and settlement system. Factors such as cross selling through modes like banks, post offices and co-branded credit cards are bounds to play decisive role in the success of the industry players. Globally it has seen that the top ten players account for a greater pie of the market share. With competition getting intense in the domestic industry churning in the industry looks imminent. 45 Future of Indian Mutual Funds - Growth Facts    In the past 6 years, Mutual Funds in India have recorded a growth of 100 %. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. Number of foreign AMC‘s is in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.    In the future, there lies a big scope for the Indian Mutual Funds industry to expand. Several asset management companies which are foreign based are now entering the Indian markets. A number of commodity Mutual Funds will be introduced in the future. The SEBI (Securities Exchange Board of India) has granted the permission for the same.   More emphasis is put on the effective Mutual Funds governance. There is also enough scope for the Indian Mutual funds to enter into the semiurban and rural areas. '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.    Financial planners will play a major role in the Mutual Funds market by providing people with proper financial planning. We have approximately 32 mutual funds which is much less than US having more than 800. There is a big scope for expansion. Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products. 46 Future of Indian Mutual Funds- “The future outlook” Looking at the past developments and combining it with the current trends it can be concluded that the future of Mutual Funds in India has lot of positive things to offer to its investors. Financial experts believe that the future of Mutual Funds in India will be very bright. It has been estimated that by March-end of 2010, the mutual fund industry of India will reach Rs 40,90,000 crore, taking into account the total assets of the Indian commercial banks. The estimation was based on the December 2004 asset value of Rs 1, 50,537 crore. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9% annually. Based on the current rate of growth, it can be forecasted that the mutual fund assets will be double by 2010. 47 Success factors for mutual funds  Product Innovation: Product innovation is an important part of mutual fund industry. Over the years mutual fund have been reshaping the financial landscape of investors, drawing in monies from various segments and providing a whole new range of products with easy access to financial products. Considering the fact that the current regulations provide ample freedom in terms of product designing and the mutual fund schemes have distinct objectives that characterize them there is a room for product innovation. While the focus of the industry will remain on the plain vanilla products with add-ons to tackle the changes in the economic environment the specialty products will help players in creating a niche for them.  Customer Focus: Mutual funds especially in the private sectors have set new standards in providing prompt and efficient service to investors by taking advantages of technology. In fact they have redefined the concept of service in the Indian context by helping investors in understanding economic trends and their impact on mutual funds disclosure of portfolio evaluating fund performance answering questions on specifics of mutual fund investing 48 and offering information /advice through a newsletter etc. Moreover healthy competition among mutual funds will ensure that the industry continues to innovate to satisfy the needs of mutual funds investors better than even before.  Market Innovation: Over a period of time the mutual fund industry has made progress in reaching a situation where investors are encouraged in making informed decision and the seller has to cater to this need. The fact realizing these banks and some of the distributors have started offering tailor made asset allocation service bundled up with other services such as tax advice and a wide range of research services etc. In other words they provide supermarkets that allow investor to select from a variety of schemes run by various mutual fund  Brand Building: As the mutual fund industry continues its effort to achieve consistent growth funds with a strong brand will be in a better position to market their products compared to the competition. Corporate image would really matter when prospects star looking at the products rank them on the basis of image performance services and costs. While there is no short cut for establishing track record both in term of fund management as well as customer service a strong brand will ensure increased awareness among investing public and that will encourage distributors to push the products. Moreover will take them 49 beyond traditional markets and enable them to expand geographical operations. Therefore serious players will continue to do a focus and sustained brand building exercise.  Distribution strategy: In a country as big as India geographically diversified and densely populated there is a need to have a network of distribution sufficiently large and varied to tap investment from all corners and segments. The mutual fund industry has already taken several initiatives to sharpen the skills of intermediaries as also find new method of harnessing people‘s saving.  Information Technology: The mutual fund industry will have to use the technology to reach masses so that services can be provided in a cost advantageous manner. The development of independent distribution network will be an important element for mutual fund industry. Never in the history of Indian mutual fund industry had the information flows as freely as it does today. The distributors who are not technology savvy will have to act quickly and empower themselves with the growing power of internet. Information technology has an important role to play in marketing of mutual fund products. In fact IT enables 50 much more sophisticated database marketing leading to better relationship building. Net-based marketing has the potential to be highly relevant, personalized and productive 51 Evolution of mutual funds in India: The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better understood divided into following phases: PHASE 2 Entry of public sector fund 1987-93 PHASE 1 establishment and gro PHASE 5 Growth and consolidation 2004 onwards PHASE 3 , Emergence of private sector funds1993-96 PHASE 4 Growth and Sebi regulation 1996-2004 Phase1. Establishment and Growth of Unit Trust of India - 1964-87: Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of 52 India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (India‘s first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores. Phase II. Entry of Public Sector Funds - 1987-1993 The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share. Phase III. Emergence of Private Sector Funds - 1993-96 The permission given to private sector funds including foreign fund management Companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes. 53 Phase IV. Growth and SEBI Regulation - 1996-2004; The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Investors‘' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry. In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutal fund players on the same level. UTI was re-organized into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. Phase V. Growth and Consolidation - 2004 Onwards: The industry has also witnessed several mergers and acquisitions recently, examples of 54 which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players 55 PERFORMANCE OF MUTUAL FUNDS “Performance of mutual funds : Recent trends” Performance of Mutual Funds: Unit Trust of India Unit Trust of India Mutual Funds governed the Indian mutual fund market for about 50 years. It had no competitors till the year 1988. It is only in 1988 that few mutual fund companies were set up to compete the Unit Trust of India. Despite the emergence of various Mutual Fund companies in 1988, UTI Mutual Fund remained in he topmost position. UTI Mutual Funds consistently exhibited excellence in this field, and this contributed to the performance of Mutual Funds in India. Back in 1992, 24 million UTI Mutual Fund shareholders were promised high returns. UTI Mutual Funds schemes sold the thought of gaining profits by investing in mutual funds to Indian people. This happened to be an extremely helpful measure in drawing more and more investors. Moreover, there was no risk in investing in mutual funds. Performance of Mutual Funds: Current Scenario Different Indian mutual fund companies have plans of introducing pension schemes. They are also planning to introduce open-ended mutual funds. According to experts, if certain restrictions are removed, the system will become more beneficial and flexible. 56 Performance of mutual funds: implication to investors Mutual fund industry today 34 players and more than five hundred schemes is one of the most preferred investment avenues in India. However with a plethora of schemes to choose from the retail investors faces problems in selecting funds. Factors such as investment strategy and management style are qualitative but the funds record is an important indicator too. Though past performance alone cannot be indicative of future performance it is frankly the only quantitative way to judge how good a fund is at present. Therefore there is a need to correctly assess the past performance of different mutual funds. Worldwide good mutual fund companies over are known by their AMCs and this fame is directly linked to their superior stock selection skills. For mutual funds to grow AMCs must held accountable for their selection of stocks. In other words there must be some performance indicator that will reveal the quality of stock selection of various AMCs. Return alone should not be considered as the basis of measurement of the performance of a mutual fund scheme it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. Risk associated with a fund in a general can be defined as variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period higher will be the risk associated with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces. First general market fluctuations which affect all the securities present in the market called market risk or systematic risk and second fluctuations due to specific securities present in the portfolio of the fund called unsystematic risk. The total risk of a given fund is sum of these two and is 57 measured in terms of standard deviation of returns of the fund. Systematic risk on the other hand is measured in terms of Beta which represents Fluctuations in the NAV of the fund Vis-a-Vis market. The more responsive the NAV of a mutual fund is to the changes in the market higher will be the returns in the market . While unsystematic risk can be diversified through investments in a number of instruments systematic risk cannot. By using the risk return relationship we try to assess the competitive strength of the mutual funds Vis-à-vis one another in a better way. Performance of the fund: Implications to the fund manager Professional management of mutual funds Mutual funds use professional managers to make the decisions regarding which companies' securities should be bought and sold. The managers of the mutual fund decide how the pooled funds will be invested. Investment opportunities are abundant and complex. Fund managers are expected to know what is available, the risks and gains possible, the cost of acquiring and selling the investments, and the laws and regulations in the industry. The ability of the managers to select profitable investments and to sell those likely to decline in value is a key factor for the mutual fund to earn money for the investors A very popular theory used by portfolio managers is the Modern portfolio theory (MPT). It is often used by fund managers to optimize their portfolios. An overview of the MPT is discussed below. 58 The Theory One of the most important and influential economic theories dealing with finance and investment, MPT was developed by Harry Markowitz and published under the title "Portfolio Selection" in the 1952 Journal of Finance. MPT says that it is not enough to look at the expected risk and return of one particular stock. By investing in more than one stock, an investor can reap the benefits of diversification - chief among them, a reduction in the riskiness of the portfolio. MPT quantifies the benefits of diversification, also known as not putting all of your eggs in one basket. For most investors, the risk they take when they buy a stock is that the return will be lower than expected. In other words, it is the deviation from the average return. Each stock has its own standard deviation from the mean, which MPT calls "risk". The risk in a portfolio of diverse individual stocks will be less than the risk inherent in holding any single one of the individual stocks (provided the risks of the various stocks are not directly related). Consider a portfolio that holds two risky stocks: one that pays off when it rains and another that pays off when it doesn't rain. A portfolio that contains both assets will always pay off, regardless of whether it rains or shines. Adding one risky asset to another can reduce the overall risk of an all-weather portfolio. In other words, Markowitz showed that investment is not just about picking stocks, but 59 about choosing the right combination of stocks among which to distribute one's nest eggs. Modern Portfolio Theory Tools Alpha: Alpha measures the relative value-added provided by an asset manager compared to a market index, given a portfolio‘s market risk. A positive alpha is the extra return received by an investor for taking a risk, instead of accepting the market return. For example, an alpha of 1.0 means a portfolio produced a return 1% higher than its beta would predict. An alpha of –1.0 means a portfolio produced a return 1% lower than would be expected. Alpha does not take into account total volatility risk and it assumes the manager holds a diversified portfolio. Diversification can be measured by R-squared. An R-squared of less than 50 makes a manager‘s alpha rating virtually meaningless. Alpha can change dramatically from quarter-to-quarter. Beta : Beta measures the performance of a portfolio‘s historical returns versus a chosen benchmark. For stocks, the benchmark is usually the S&P 500 Index. The beta of the benchmark is always 1.00. Therefore, if a portfolio has a beta of 1.00 its volatility is generally the same as the benchmark. For a fully diversified stock portfolio, a beta of 1.25 would mean that it has generally produced a 25% higher return than the S&P 500. A portfolio with a beta of 0.80 would be expected to produce a 20% lower return than the market over time and not go 60 up as much in an up market. Beta assumes the manager holds a totally diversified portfolio. Diversification can be measured by R-squared. An R-squared of less than 50 makes a manager‘s beta rating meaningless. Beta is typically measured taking into account three to five years of historical performance. R-Squared : R-squared measures how well a portfolio is diversified versus a market index(such as the S&P 500 Index). The R-squared number ranges from zero to 100. A score of 100 signifies a perfect correlation with the benchmark. For a portfolio with an Rsquared 0.85, 85% of the portfolio‘s risk can be attributed to being in the market, while 15% is due to other factors (i.e. security or sector selection). Correlation : Correlation measures the degree of a portfolio‘s return in relation to the return of an index or other portfolios. Correlation can range from -1.00 to 1.00. A portfolio with a correlation of 1.00 means that its returns move in the same direction as the index, whereas a correlation of -1.00 means that it moves in totally the opposite direction of the index. To maintain a diversified portfolio, an investor may want to select portfolios that have varying degrees of correlation among themselves. Sharpe Ratio: Sharpe ratio determines how much risk a manager assumed to achieve a portfolio‘s historical return. It is calculated by taking the difference between a portfolio‘s return and a risk-free return (measured by a Treasury bill) and dividing it by the portfolio‘s standard deviation. For example, if a portfolio had a Sharpe ratio of 1.30 and the benchmark has a Sharpe ratio of 1.00, then the portfolio produced a 30% better return than the index versus the risk-free rate. Sharpe ratio can be an effective way to compare individual portfolios to determine the value added by an asset manager. 61 Standard Deviation Standard deviation is a measurement of a portfolio‘s total volatility (risk). It is calculated by measuring the disparity of a portfolio‘s quarterly returns versus its total average return over the same time period. The more volatile a portfolio‘s returns the greater the standard deviation. Standard deviation does not predict a portfolio‘s future volatility. Up/Down Capture Ratio : This tool shows what percentage of the market‘s performance—such as the S&P 500 Index—a portfolio manager captured. These ratios are calculated by dividing a manager‘s performance returns by the market index‘s return. Up/down capture ratio = Manager‘s return /market index return The up capture ratio is calculated over quarterly periods when the market index generated a positive return. The down capture ratio is for quarters when the market posts negative returns. For example, a portfolio manager with a 120% up capture ratio captured 120% of the index‘s return when it appreciated (a 20% higher return than the index). A portfolio manager with a 120% down capture ratio captured 120% more than the index‘s return when it declined (20% worse than the index). Using an up/down capture ratio is just one of the tools to use to evaluate the performance of a portfolio manager. However, used in conjunction with other tools can be a useful way to determine if a particular manager and his or her portfolio are appropriate based on your risk/reward profile. 62 Information ratio: Information ratio measures the value added by a portfolio manager. The ratio shows the annualized return of a portfolio above its benchmark to annualized tracking error. Tracking Error Tracking error measures how closely an asset manager‘s portfolio performance is versus the market. Tracking error is calculated by taking the standard deviation of the differences in the portfolio‘s returns and the market‘s quarterly returns. If the portfolio tracks its benchmark closely is will have a small tracking error. Efficient Frontier An efficient frontier is a graph representing a set of portfolios that compare returns at each level of portfolio risk (or return volatility). According to Modern Portfolio Theory, for any portfolio of assets there exists an efficient frontier, which represents variously weighted combinations of the portfolio's assets that yield the maximum possible expected return at any given level of portfolio risk. Scattergrams A Scatter gram is a graphical representation of an asset manager's risk/return profile within a peer group or related benchmark, typically over a 5- or 10yeartime period. These graphs show the annualized rates of return of the manager‘s portfolio relative to risk, represented by standard deviation. Scattergrams can help investors judge an asset manager‘s performance based on the amount of risk taken, versus the overall risk/return of the market or other portfolios 63 Modern Portfolio Theory: A Rear View Mirror Look at Risk/Return Modern Portfolio Theory is but one way to judge the success of an asset manager. An analysis of the manager‘s commitment to ongoing success, overall firms‘ strengths, and individual investment manager talent can also provide critical insight. It‘s also important to remember that these tools measure historical risk and return and are not indicative of future results. MacKay Shields was founded in 1938, and has provided strong historical risk-adjusted returns across the capital markets by consistently applying a disciplined investment process to every client portfolio. With its sound investment process, highly experienced managers, and entrepreneurial culture, MacKay Shields is built on a solid foundation for generating strong results. Two Kinds of Risk Modern portfolio theory states that the risk for individual stock returns has two components: Systematic Risk - These are market risks that cannot be diversified away. Interest rates, recessions and wars are examples of systematic risks. 64 Unsystematic Risk - Also known as "specific risk", this risk is specific to individual stocks and can be diversified away as you increase the number of stocks in your portfolio. It represents the component of a stock's return that is not correlated with general market moves. For a well-diversified portfolio, the risk - or average deviation from the mean - of each stock contributes little to portfolio risk. Instead, it is the difference - or covariance between individual stocks' levels of risk that determines overall portfolio risk. As a result, investors benefit from holding diversified portfolios instead of individual stocks. 65 The Efficient Frontier Now that we understand the benefits of diversification, the question of how to identify the best level of diversification arises. Enter the efficient frontier. For every level of return, there is one portfolio that offers the lowest possible risk, and for every level of risk, there is a portfolio that offers the highest return. These combinations can be plotted on a graph, and the resulting line is the efficient frontier. Figure on next page shows the efficient frontier for just two stocks - a high risk/high return technology stock (Google) and a low risk/low return consumer products stock (Coca Cola). 66 Any portfolio that lies on the upper part of the curve is efficient: it gives the maximum expected return for a given level of risk. A rational investor will only ever hold a portfolio that lies somewhere on the efficient frontier. The maximum level of risk that the investor will take on determines the position of the portfolio on the line 67 Modern portfolio theory takes this idea even further. It suggests that combining a stock portfolio that sits on the efficient frontier with a risk-free asset, the purchase of which is funded by borrowing, can actually increase returns beyond the efficient frontier. In other words, if you were to borrow to acquire a risk-free stock, then the remaining stock portfolio could have a riskier profile and, therefore, a higher return than you might otherwise choose. The market portfolio The efficient frontier is a collection of portfolios, each one optimal for a given amount of risk. A quantity known as the Sharpe ratio represents a measure of the amount of additional return (above the risk-free rate) a portfolio provides compared to the risk it carries. The portfolio on the efficient frontier with the highest Sharpe Ratio is known as the market portfolio, or sometimes the super-efficient portfolio; it is the tangencyportfolio in the above diagram. This portfolio has the property that any combination of it and the risk-free asset will produce a return that is above the efficient frontier—offering a larger return for a given amount of risk than a portfolio of risky assets on the frontier would. Portfolio leverage An investor adds leverage to the portfolio by borrowing the risk-free asset. The addition of the risk-free asset allows for a position in the region above the efficient frontier. Thus, by combining a risk-free asset with risky assets, it is possible to construct portfolios whose risk-return profiles are superior to those on the efficient frontier.  An investor holding a portfolio of risky assets, with a holding in cash, has a positive risk-free weighting (a de-leveraged portfolio). The return and standard 68 deviation will be lower than the portfolio alone, but since the efficient frontier is convex, this combination will sit above the efficient frontier – i.e., offering a higher return for the same risk as the point below it on the frontier.  The investor who borrows money to fund his/her purchase of the risky assets has a negative risk-free weighting – i.e., a leveraged portfolio. Here the return is geared to the risky portfolio. This combination will again offer a return superior to those on the frontier Capital market line When the market portfolio is combined with the risk-free asset, the result is the Capital Market Line. All points along the CML have superior risk-return profiles to any portfolio on the efficient frontier. Just the special case of the market portfolio with zero cash weighting is on the efficient frontier. Additions of cash or leverage with the risk-free asset in combination with the market portfolio are on the Capital Market Line. All of these portfolios represent the highest possible Sharpe ratio. Capital asset pricing model The asset return depends on the amount for the asset today. The price paid must ensure that the market portfolio's risk / return characteristics improve when the asset is added to it. The CAPM is a model which derives the theoretical required return (i.e., discount rate) for an asset in a market, given the risk-free rate available to investors and the risk of the market as a whole. 69 Securities market line The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta), and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. The relationship between β and required return is plotted on the securities market line (SML) which shows expected return as a function of β. The intercept is the nominal riskfree rate available for the market, while the slope is E(Rm − Rf). The securities market line can be regarded as representing a single-factor model of the asset price, where Beta is exposure to changes in value of the Market. The equation of the SML is thus: It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued since the investor can expect a greater return for the inherent risk. And a security 70 plotted below the SML is overvalued since the investor would be accepting less return for the amount of risk assumed “What MPT means for investors” Modern portfolio theory has had a marked impact on how investors perceive risk, return and portfolio management. The theory demonstrates that portfolio diversification can reduce investment risk. In fact, modern money managers routinely follow its precepts. That being said, MPT has some shortcomings in the real world. For starters, it often requires investors to rethink notions of risk. Sometimes it demands that the investor take on a perceived risky investment (futures, for example) in order to reduce overall risk. That can be a tough sell to an investor not familiar with the benefits of sophisticated portfolio management techniques. Furthermore, MPT assumes that it is possible to select stocks whose individual performance is independent of other investments in the portfolio. But market historians have shown that there are no such instruments; in times of market stress, seemingly independent investments do, in fact, act as though they are related. Likewise, it is logical to borrow to hold a risk-free asset and increase your portfolio returns, but finding a truly risk-free asset is another matter. Governmentbacked bonds are presumed to be risk free, but, in reality, they are not. Securities such as gilts and U.S. Treasury bonds are free of default risk, but expectations of higher inflation and interest rate changes can both affect their value. 71 Then there is the question of the number of stocks required for diversification. How many is enough? Mutual funds can contain dozens and dozens of stocks. Investment guru William J. Bernstein says that even 100 stocks is not enough to diversify away unsystematic risk. By contrast, Edwin J. Elton and Martin J. Gruber, in their book "Modern Portfolio Theory And Investment Analysis" (1981), conclude that one would come very close to achieving optimal diversity after adding the twentieth stock. Conclusion The gist of MPT is that the market is hard to beat and that the people who beat the market are those who take above-average risk. It is also implied that these risk takers will get their comeuppance when markets turn down. 72 Types of mutual funds. Types of Mutual funds can be categorized along the following dimensions:-   According to maturity According to investment objectives. According to maturity Open ended Close ended According to objective Growth /equity Income/ debt Balanced MM/liquid Gilt Index 73 According to maturity there are mainly 2 types of mutual fund schemes: 1. Open- ended funds: An open ended mutual fund is that is available for subscription and purchase on a continuous basis. These funds do not have a fixed maturity period. Investors can conveniently buy and sell at NAV (net asset value) related prices which are declared on daily basis. The key feature of open ended equity is liquidity. 2. Close-ended funds: A close-ended Mutual fund has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some closeended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. 3. Interval funds: This scheme combines both the features of open ended and close ended funds. A scheme can also be classified as growth fund, income fund, or balanced fund considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: 74 1. Growth / Equity Oriented Scheme: The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. 2. Income / Debt Oriented Scheme: 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, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. 3. Balanced Fund: The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40- 75 60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. 4. Money Market or Liquid Fund: These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. 5. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. 6. Index Funds: Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. 76 Ratings of funds by credit rating agencies Credit rating agencies such as credit rating information services of india ltd. (CRISIL) publish performance rankings of funds on a quarterly basis. Retail investors can use these rankings in order to identify funds that have performed consistently. CRISIL-composite performance ranking (CRISIL-CPR) is the relative performance ranking of schemes within the peer group. The ranking is done on the following parameters:  Historic returns: Some rating agencies take into account the returns generated over the past three years. A 60% weight is allotted to past three years absolute returns and 40% to past one year return. CRISIL computes the superior return score (SRS) for various schemes. The SRS is computed for equity oriented categories, equity linked saving scheme (ELSS) , debt schemes , balanced schemes , monthly income plans and gilt categories for a two year period . The weights for these schemes for six monthly periods are 32.5 %, 27.5%, 22.5%, and 17.5%, respectively. Thus the most recent performance is given the highest weight while ranking the funds, but at consistent returns do influence the final ranking. the same time,  Portfolio diversification: concentration measures the risk arising out of improper diversification. In case of debt schemes, the portfolio is analyzed for 77  over exposure in gilts, manufacturing, securitized debt and banking, NBFCs, financial institutions and housing finance companies.  Liquidity analysis: liquidity analysis measures the ease with which the portfolio can be converted to cash.  Asset quality: This analysis is carried out for fixed income or debt portfolios. The probability of default by the issuer of debt is a risk that needs to be analyzed and measured.  Average maturity: In case of investment in debt, the portfolio is vulnerable to fluctuations in interest rates. Prices of fixed income securities are inversely related to interest rates. In case of a fall in rates, prices move up, and the maximum impact is on long term securities. On the other hand, the negative impact of a rise in interest rates is less in case of short term securities.  Downside risk: Some rating agencies measure downside risk as the probability of the scheme generating a return which is lower than the minimum acceptable rate of return (MAR) .Generally, average returns for all the schemes in the category are taken as the MAR. Downside risk probability can also measure the probability erosion of capital. It is measured by counting the number 78  of times a fund‘s return falls below the risk free return over the period of analysis. ( The risk free return is the yield on 91-day treasury bills) Interpretation of the rankings: A rank of CRISIL –CPR 1 means that the fund has shown a very good performance and is among the top 10% in its category The other rankings can be interpreted as follows:  CRISIL~CPR 2 indicates good performance and the fund is among the next 20% in its category  CRISIL~CPR 3 means average performance (next 40%).   CRISIL~CPR 4 means below average performance (next 20%) CRISIL~CPR 5 means poorest performance in the category (bottom 10%) For instance, if 100 schemes are being evaluated, then the best 10 out of them will receive a rating of CPR 1. The next 20 schemes (those which rank between 11 and 30) will be rated as CPR 3. All 40 schemes which are ranked between 31 and 70 will be rated CPR 3. Schemes which are ranked between 71 and 90 will 79 be rated CPR 4, while the poorest performers, which are ranked between 91 and 100, will receive lowest possible rating CPR 5. It should be noted that these rankings indicate only the relative performance of the schemes. Therefore, it is possible that some schemes will be ranked as CPR 1 and CPR 2 even if all schemes in the category have not performed well. However it should be kept in mind that the ratings issued by various agencies are based on the past performance and past performance may or may not be sustained in future. Also given the shortage of talent in the industry, fund managers frequently change jobs in search of better prospects. This is an important factor which affects fund performance. Hence the need of the hour is to rank fund managers along with the mutual fund schemes. 80 Credit rating agencies in India The credit rating agencies in India mainly include ICRA and CRISIL. ICRA was formerly referred to the Investment Information and Credit Rating Agency of India Limited. Their main function is to grade the different sector and companies in terms of performance and offer solutions for up gradation. Functions of Credit rating agencies in India: The credit rating agencies in India offer varied services like mutual consulting services, which comprises of operation up gradation, risk management. The have special sections to carry on research and development work of the industries. They provide training to the employees and executives of the companies for better management. They examine the risk involved in a new project, chalk out plans to fight with the problem successfully and thus ameliorate the percentage of risk to a great extent. For this they carry on thorough research into the respective industry. They have started offering services to the mutual fund sector through the application of fund utilization services. The major industries currently graded by the credit rating agencies include agriculture, health care industry, infrastructure, and maritime industry. Guidelines for Credit rating agencies in India: The Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 offers various guidelines with regard to the registration and functioning of the 81 credit rating agencies in India. The registration procedure includes application for the establishment of a credit rating agency, matching the eligibility criteria and providing all the details required. They have to undergo the strict examination procedure with regard to the details furnished by them. They are required to prepare internal procedures, abidance with circulars. They are offered guidelines regarding the credit rating procedure, by the Act. The credit rating agencies are provided with compliance officers. They are required to show their accounting records. CRISIL: CRISIL was set up in the year 1987 in order to rate the firms and then entered into the field of assessment service for the banks. Highly skilled members manage the agency. Ms. Roopa Kudva who acts as the Managing Director and Chief Executive Officer of the company heads it. The company has set up large number of committees to look after dispersal of various services offered by the company for example, investor grievance committee, investment committee, rating committee, allotment committee, compensation committee and so on. The head office of the company is located at Mumbai and it has established offices outside India also. ICRA: ICRA was established in the year 1991 by the collaboration of financial institutions, investment companies, and banks. The company has formed the ICRA group together with its subsidiaries. The company is headed by Mr. Piyush G. Mankad and offers products like short-term debt schemes, Issue-specific long-term rating and offers fund based as well as non-fund based facilities to its clients. 82 A brief History about the organization Reliance Anil Dhirubhai Ambani Group is a group of companies headed by Anil Ambani. The companies under the group are:  Reliance Entertainment o o o o o o o o o o o o o o Adlabs Films BIG Cinemas Big 92.7 FM Big Entertainment Big TV Big Music Zapak BIGFlix Bigadda Big Motion Pictures Big Animation (AniRights Infomedia) Jump Games (ParadoX Studios) Big Music & Home Entertainment Dreamworks Pictures  Reliance Capital o o o Reliance Capital Reliance Mutual Fund Reliance Life Insurance 83 o o o o  Reliance General Insurance Reliance Money Reliance Consumer Finance Reliance Asset Reconstruction Reliance Communications o o Reliance Globalcom Reliance BPO       Reliance Infrastructure Reliance Power Reliance Health Reliance Natural Resource Limited Reliance Technology Ventures DA-IICT Reliance Mutual Fund (RMF) has been established as a trust under the Indian Trusts Act, 1882 with Reliance Capital Limited (RCL), as the Settler/Sponsor and Reliance Capital Trustee Co. Limited (RCTCL), as the Trustee. RMF has been registered with the Securities & Exchange Board of India (SEBI) vide registration number MF/022/95/1 dated June 30, 1995. The name of Reliance Capital Mutual Fund has been changed to Reliance Mutual Fund effective 11th. March 2004 vide SEBI‘s letter no. IMD/PSP/4958/2004 date 11th. March 2004. Reliance Mutual Fund was formed to launch various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities. 84 The main objectives of the Trust are : To t1) To carry on the activity of a Mutual Fund as may be permitted at law and formulate and devise various collective Schemes of savings and investments for people in India and abroad and also ensure liquidity of investments for the Unit holders; 2).To deploy Funds thus raised so as to help the Unit holders earn reasonable returns on their savings and 3).To take such steps as may be necessary from time to time to realize the effects without any limitation. The Trustee has appointed Deutsche Bank, AG located at Kodak House, Ground Floor, 222 Dr. D.N.Road, Mumbai-400 001, as the Custodian of the securities that are bought and sold under the Scheme. A Custody Agreement has been entered with Deutsche Bank in accordance with SEBI Regulations. The Custodian is approved by SEBI under registration no. IN/CUS/003 to act as Custodian for the Fund. Deutsche Bank AG, the Custodian shall, inter alia:      1).Provide post-trading and custodial services to the Mutual Fund. 2).Keep Securities and other instruments belonging to the Scheme in safe custody 3).Ensure smooth inflow/outflow of securities and such other instruments as and when necessary, in the best interests of the unit holders. 85  4).Ensure that the benefits due to the holdings of the Mutual Fund are recovered and 5).Be responsible for loss of or damage to the securities due to negligence on its part on the part of its approved agents. Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance paid up capital being held by minority shareholders. Reliance Capital Asset Management Limited (RCAM) was approved as the Asset Management Company for the Mutual Fund by SEBI vide their letter no IIMARP/1264/95 dated June 30, 1995. The Mutual Fund has entered into an Investment Management Agreement (IMA) with RCAM dated May 12, 1995 and was amended on August 12, 1997 in line with SEBI (Mutual Funds) Regulations, 1996. Pursuant to this IMA, RCAM is authorized to act as Investment Manager of Reliance Mutual Fund. The net worth of the Asset Management Company as on March 31, 2008 is Rs 709.39 crores. “Vision statement” “To be a globally respected wealth creator with an emphasis on customer care and a culture of good corporate governance.‖ 86 “Mission statement” To create and nurture a world-class, high performance environment aimed at delighting our customers Organizational structure The management at Reliance Capital Asset Management Ltd. is committed to good Corporate Governance, which includes transparency and timely dissemination of information to its investors and unit holders. The Board of Directors of RCAM is a professional body, including well-experienced and knowledgeable Independent Members. Regular Audit Committee meetings are conducted to review the operations and performance of the company. Reliance Capital Asset Management Ltd. has at present, a code of conduct for all its officers. It has a clearly defined prohibition on insider trading policy and regulations. The management believes in the principles of propriety and utmost care is taken while handling public money, making proper and adequate disclosures. All personnel at Reliance Capital Asset Management Ltd are made aware of their rights, obligations and duties as part of the Dealing Policy laid down in terms of SEBI guidelines. They are taken through a well-designed HR program, 87 conducted to impart work ethics, the Code of Conduct, information security, Internet and e-mail usage and a host of other issues. One of the core objectives of Reliance Capital Asset Management Ltd. is to identify issues considered sensitive by global corporate standards, and implement policies/guidelines in conformity with the best practices as an ongoing process. compliance Reliance Capital Asset Management Ltd. gives top priority to in true letter and spirit, fully understanding its fiduciary responsibilities. 88 ―Organizational hierarchy” BOARD OF DIRECTORS MANAGEMENT TEAM FUND MANAGERS HEAD OF DEPARTMENTS ZONAL HEADS 89 FUND MANAGERS HEAD OF DEPARTMENTS ZONAL HEADS Infrastructure and administartion Equity fund managers Northern zone head Finance and accounts Human resource developement Western zone head Information technology Debt fund managers Operations and settlement Southern zone head Rand T operations and Investor relations Commodities Sales and distribution Eastern zone head Legal 90 Corporate governance policy Reliance Capital Asset Management Ltd. has a vision of being a leading player in the Mutual Fund business and has achieved significant success and visibility in the market. However, an imperative part of growth and visibility is adherence to Good Conduct in the marketplace. At Reliance Capital Asset Management Ltd., the implementation and observance of ethical processes and policies has helped us in standing up to the scrutiny of our domestic and international investors 91 Schemes/products of the mutual fund Following schemes are provided by the fund:  Equity growth schemes: The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Reliance Natural Resources Fund : (An Open Ended Equity Scheme) The primary investment objective of the scheme is to seek to generate capital appreciation & provide long-term growth opportunities by investing in companies principally engaged in the discovery, development, production, or distribution of natural resources and the secondary objective is to generate consistent returns by investing in debt and money market securities. 92 Reliance Equity Fund : (An open-ended diversified Equity Scheme.) The primary investment objective of the scheme is to seek to generate capital appreciation & provide long-term growth opportunities by investing in a portfolio constituted of equity & equity related securities of top 100 companies by market capitalization & of companies which are available in the derivatives segment from time to time and the secondary objective is to generate consistent returns by investing in debt and money market securities. Reliance Tax Saver (ELSS) Fund : (An Open-ended Equity Linked Savings Scheme.) The primary objective of the scheme is to generate long-term capital appreciation from a portfolio that is invested predominantly in equity and equity related instruments. Reliance Equity Opportunities Fund : (An Open-Ended Diversified Equity Scheme.) The primary investment objective of the scheme is to seek to generate capital appreciation & provide long-term growth opportunities by investing in a portfolio constituted of equity securities & equity related securities and the secondary objective is to generate consistent returns by investing in debt and money market securities. 93 Reliance Vision Fund : (An Open-ended Equity Growth Scheme.) 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. Reliance Growth Fund : (An Open-ended Equity Growth Scheme.) 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. Reliance Quant Plus Fund (Formerly known as Reliance Index Fund) (An Open Ended Equity Scheme.) The investment objective of the Scheme is to generate capital appreciation through investment in equity and equity related instruments. The Scheme will seek to generate capital appreciation by investing in an active portfolio of stocks selected from S & P CNX Nifty on the basis of a mathematical model. Reliance NRI Equity Fund : (An open-ended Diversified Equity Scheme.) The Primary investment objective of the scheme is to generate optimal returns by investing in equity or equity related instruments primarily drawn from the Companies in the BSE 200 Index. 94 Reliance Regular Savings Fund: (An Open-ended Scheme.) Equity Option : The primary investment objective of this option is to seek capital appreciation and/or to generate consistent returns by actively investing in Equity &Equity-related Securities. Balanced Option: The primary investment objective of this option is to generate consistent returns and appreciation of capital by investing in mix of securities comprising of equity, equity related instruments & fixed income instruments. Reliance Long Term Equity Fund: (An close-ended Diversified Equity Scheme.) The primary investment objective of the scheme is to seek to generate long term capital appreciation & provide long-term growth opportunities by investing in a portfolio constituted of equity & equity related securities and Derivatives and the secondary objective is to generate consistent returns by investing in debt and money market securities. Reliance Equity Advantage Fund: (An open-ended Diversified Equity Scheme.) The primary investment objective of the scheme is to seek to generate capital appreciation & provide long-term growth opportunities by investing in a portfolio predominantly of equity & equity related instruments with investments generally in S & P CNX Nifty stocks and the secondary objective is to generate consistent returns by investing in debt and money market securities. 95  Debt/income schemes 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, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Reliance Monthly Income Plan : (An Open Ended Fund. Monthly Income is not assured & is subject to the availability of distributable surplus ) The Primary investment objective of the Scheme is to generate regular income in order to make regular dividend payments to unitholders and the secondary objective is growth of capital. Reliance Gilt Securities Fund - Short Term Gilt Plan & Long Term Gilt Plan : Open-ended Government Securities Scheme) The primary objective of the Scheme is to generate Optimal credit risk-free returns by investing in a portfolio of securities issued and guaranteed by the central Government and State Government 96 Reliance Income Fund : (An Open-ended Income Scheme) The primary objective of the scheme is to generate optimal returns consistent with moderate levels of risk. This income may be complemented by capital appreciation of the portfolio. Accordingly, investments shall predominantly be made in Debt & Money market Instruments. Reliance Medium Term Fund: (An Open End Income Scheme with no assured returns.) The primary investment objective of the Scheme is to generate regular income in order to make regular dividend payments to unit holders and the secondary objective is growth of capital Reliance Short Term Fund : (An Open End Income Scheme) The primary investment objective of the scheme is to generate stable returns for investors with a short investment horizon by investing in Fixed Income Securities of short term maturity. Reliance Liquid Fund : (Open-ended Liquid Scheme). The primary investment objective of the Scheme is to generate optimal returns consistent with moderate levels of risk and high liquidity. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments. Reliance Floating Rate Fund : (An Open End Liquid Scheme) The primary objective of the scheme is to generate regular income through investment in a portfolio comprising substantially of Floating Rate Debt Securities (including floating rate securitised debt and Money Market 97 Instruments and Fixed Rate Debt Instruments swapped for floating rate returns). The scheme shall also invest in Fixed rate debt Securities (including fixed rate securitised debt, Money Market Instruments and Floating Rate Debt Instruments swapped for fixed returns Reliance NRI Income Fund : (An Open-ended Income scheme) The primary investment objective of the Scheme is to generate optimal returns consistent with moderate levels of risks. This income may be complimented by capital appreciation of the portfolio. Accordingly, investments shall predominantly be made in debt Instruments. Reliance Liquidity Fund : (An Open - ended Liquid Scheme) The investment objective of the Scheme is to generate optimal returns consistent with moderate levels of risk and high liquidity. Accordingly, investments shall predominantly be made in Debt and Money Market Instruments. Reliance Interval Fund (A Debt Oriented Interval Scheme) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio Reliance Liquid Plus Fund (An Open-ended Income Scheme.) The investment objective of the Scheme is to generate optimal returns consistent with moderate levels of risk and liquidity by investing in debt securities and money market securities. 98 Reliance Fixed Horizon Fund -I (A closed ended Scheme) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio. Reliance Fixed Horizon Fund -II (A closed ended Scheme.) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio. Reliance Fixed Horizon Fund -III (A Close-ended Income Scheme.) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio Reliance Fixed Tenor Fund (A Close-ended Scheme.) The primary investment objective of the Plan is to seek to generate regular returns and growth of capital by investing in a diversified portfolio. Reliance Fixed Horizon Fund -Plan C (A closed ended Scheme.) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio. Reliance Fixed Horizon Fund - IV: (A Close-ended Income Scheme.) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio 99 Reliance Fixed Horizon Fund - V: (A Close-ended Income Scheme.) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio of: Central and State Government securities and other fixed income/ debt securities normally maturing in line with the time profile of the scheme with the objective of limiting interest rate volatility Reliance Fixed Horizon Fund - VI: (A Close-ended Income Scheme.) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio of: Central and State Government securities and Other fixed income/ debt securities normally maturing in line with the time profile of the series with the objective of limiting interest rate volatility Reliance Fixed Horizon Fund - VII: (A Close-ended Income Scheme.) The primary investment objective of the scheme is to seek to generate regular returns and growth of capital by investing in a diversified portfolio of: Central and State Government securities and Other fixed income/ debt securities normally maturing in line with the time profile of the series with the objective of limiting interest rate volatility. 100  Sector specific schemes Sector Funds are specialty funds that invest in stocks falling into a certain sector of the economy. Here the portfolio is dispersed or spread across the stocks in that particular sector. This type of scheme is ideal for investors who have already made up their mind to confine risk and return to a particular sector. Reliance Banking Fund Reliance Mutual Fund has an Open-Ended Banking Sector Scheme which has the primary investment objective to generate continuous returns by actively investing in equity / equity related or fixed income securities of banks. Reliance Diversified Power Sector Fund Reliance Diversified Power Sector Scheme is an Open-ended Power Sector Scheme. The primary investment objective of the Scheme is to seek to generate consistent returns by actively investing in equity / equity related or fixed income securities of Power and other associated companies. Reliance Pharma Fund Reliance Pharma Fund is an Open-ended Pharma Sector Scheme. The primary investment objective of the Scheme is to generate consistent returns by investing in equity / equity related or fixed income securities of Pharma and other associated companies. 101 Reliance Media & Entertainment Fund Reliance Media & Entertainment Fund is an Open-ended Media & Entertainment sector scheme. The primary investment objective of the Scheme is to generate consistent returns by investing in equity / equity related or fixed income securities of media & entertainment and other associated companies.  Exchange traded fund Reliance Gold Exchange Traded Fund: (An open-ended Gold Exchange Traded Fund) :The investment objective is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold (and Gold related securities as permitted by Regulators from time to time). However, the performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors. 102 “Factors affecting choice of mutual funds” Introduction: In financial markets, ―expectations‖ of the investors play a vital role. They influence the price of the securities; the volume traded and determines quite a lot of things in actual practice. These ‗expectations‘ of the investors are influenced by their ―perception‖ and humans generally relate perception to action. The beliefs and actions of many investors are influenced by the dissonance effect and endowment effect. The tendency to adjust beliefs to justify past actions is a psychological phenomenon termed as Cognitive Dissonance. We find ample proof for the wide prevalence of such a psychological state among Mutual Fund (MF) investors in India. For instance, UTI had a glorious past and had always been perceived as a safe, high yield investment vehicle with the added tax benefit. Many UTI account holders had justified their beliefs by staying invested in UTI schemes even after the 1999 bail out and many have still not lost faith in UTI, even after the July 2001 episode. ―Endowment Effect‖ is explained as “People are more likely to believe that something they own is better than something they do not own‖. Background and Need for the Study : It is widely believed that MF is a retail product designed to target small investors, salaried people and others who are intimidated by the stock market but, nevertheless, like to reap the benefits of stock market investing. At the retail level, investors are unique and are a highly heterogeneous group. Hence, designing a general product and expecting a good response will be futile, though UTI could do this nearly for three decades (1964-1987) due to its monopoly in the industry. In the second phase of oligopolistic competition (1987-1992), the public sector banks and financial institutions entered the field, but with the then existing boom condition, it was a smooth sailing for 103 the industry. Further, the globalization and liberalization measures announced by the government led to a paradigm shift in the mind set of investors and the capital market environment became more unfriendly to retail investors. They had no other choice but to turn to MFs to reap the benefits of stock market investing. Hence, the need to be innovative in designing the product was not felt and investors had to choose from among the limited schemes offered. During the third phase (1992 hence)the industry was thrown open to the private sector and the stage got set for competition. Currently (as on 31/3/2001) there are 326 schemes (Source: Mutual Fund Year Book, 2000) with varied objectives and AMCs compete against one another by launching new products or repositioning old ones. In the future, MF industry has to face competition not only from within the industry but also from other financial products that may provide many of the same economic functions as mutual funds but are not strictly MFs. For example, in US, one savings institution has patented a product that promises to deliver consumers a pay off indexed to college tuition costs, thus attempting to meet a common consumer requirement [Ellen Schultz (1992)]. This product is structured as a certificate of deposit but it could have been set up as a Mutual Fund. Such products will shortly appear in the Indian market also. All this, in aggregate, heightens the consumer confusion in his selection of the product. He is confused as to how to sift the grain from the chaff? Unless the MF schemes are tailored to his changing needs, and unless the AMCs understand the fund selection/switching behavior of the investors, survival of funds will be difficult in future. With this background an attempt is made in this project to study the factors influencing choice of mutual funds. 104 “Research methodology”  Research objectives:  Main objective: “To know the various factors considered by customer while going for investment in mutual fund‖.  Sub objectives:  To study the general investment criteria of people  To find out in which investment tool people invests most.  To find out the awareness of Mutual Funds and it‘s various schemes.  To study the interest of people for further investment in Mutual Funds.  To study the characteristics of mutual fund which attracts the investor  What an investor should consider for safe investment and better returns.  Relationship between demographics and risk tolerance. 105 Research design A research design is the master plan or model for the conduct of formal investigation and needs for solving the problem. It decides the source of information and methods for gathering the data. A questionnaire and other forms are tested to use the collection of data. A sampling design is to be selected. Good research design ensures that the information obtained is relevant to the research question and that it was collected by objectives. Since research design is simply the framework of plan for a study, it should be used as a guide in collecting and analyzing the data. It is a blueprint that is followed in completing the research study. Our approach to research is descriptive. The major objective of the descriptive research is to describe something – usually market features or functions. It requires a clear Specification of the who, what, when, where, why, & the way (the 6 Ws) of the research.  Data collection method: Two types of data have been used in the research viz:  Primary data: It is the first hand data collected with help of questionnaires `filled by respondents. It is more reliable, fresh and accurate.  Secondary data: It is the data that is collected for a purpose other than the problems at hand. Secondary data has been collected from magazines, periodicals and internet. As compared to primary data it is less secure and reliable. 106 Sampling        Sample size : Elements : Sampling unit: Sample area : 100 Investors at broking house Angel broking house Jodhpur city Research instrument:: Questionnaire Sampling style : Response rate : Random sampling 100 percent ( 50 respondents) Limitations /scope of the study 1) Sample size is limited to 100 educated investors in Jodhpur city Only. The sample size may not adequately represent the national market. 2) This study has not been conducted over an extended period of time having both market ups and downs. The market state has a significant Influence on the buying patterns and preferences of investors. 107 “Survey and data analysis” 1) Source of information used: Following table shows which sources of information are used while investing in mutual funds Particulars Internet Magazines Newspapers Financial advisers Spouse Friends Advertisement Yes 16% 23% 46% 67% 35% 49% 62% No 84% 77% 54% 33% 65% 51% 38% 108 Internet: Out of the total respondents, 16% relied on Internet as the source of information while investing in mutual funds and rest of the majority i.e. 84% said no to the same. Thus, it can be concluded that the source of Internet is relatively not the factor affecting the sale of Mutual Funds. 60% 50% 40% 30% 20% 10% 0% New investors Regular investors Magazine: Out of the total respondents, 23% said yes that they use magazines as the source of information while investing in mutual funds and rest 77% said no to the same 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No 109 Newspaper: Out of the total respondents, 46% said yes that they use newspaper as the source of information while investing in mutual funds and rest 54% said no to the same. It is an effective source as almost half of the respondents are relying on the newspaper as the source of true information. 54% 52% 50% 48% 46% 44% 42% Yes No 110 Financial advisor: Out of the total respondents, 67% said yes that they use financial advisor as the source of information while investing in mutual funds and rest 33% said no to the same. The respondents relied to a significant level on the Financial Advisors for getting Mutual fund information. Advisors for getting Mutual fund. information 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Yes No i 111 Spouse: Out of the total respondents, 35% said yes that they took the information from their spouse while investing in mutual funds and rest 65% said no to the same. 70% 60% 50% 40% 30% 20% 10% 0% Yes No Friends: Out of the total respondents, 49% said yes that they took the information from their friends while investing in mutual funds and rest 51% said no to the same. 0.51 0.505 0.5 0.495 0.49 0.485 0.48 Yes No 112 Advertisement: Out of the total respondents, 62% said yes that advertisements are the source of information used while investing in mutual funds and rest 38% said no to the same 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Yes No 2)Regular or a new investor in mutual funds: 58% of the respondents are regular investors in mutual funds while rest 42% is new to that. Though the number of regular investors is high but at the same time new investors are showing significant 60% 50% 40% 30% 20% 10% 0% New investors Regular investors participation in this field. 113 3) Analyzing the ratio of investment products in the portfolio: Following table shows the ratio of different investment products in ones portfolio TABLE Investment products Real estate Post office schemes Mutual funds Debt funds Shares Fixed deposit schemes Yes 40% 67% 74% 17% 36% 72% No 60% 33% 26% 83% 64% 28% 114 Real estate: Out of total respondents 40% said yes that investment portfolio consist of real estate and rest say no to same. 70% 60% 50% 40% 30% 20% 10% 0% Yes No Post office schemes: Out of total respondents 67% said yes that investment portfolio consist of Post office schemes. 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Yes No 115 Mutual funds: Out of total respondents 74% said yes that investment portfolio consist of mutual funds. 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Yes No Debt funds: Out of total respondents 17% said yes that investment portfolio consist of debt funds. 1 0.8 0.6 0.4 0.2 0 Yes No 116 Shares: Out of total respondents 36% said yes that investment portfolio consist of shares 1 0.8 0.6 0.4 0.2 0 Yes No Fixed deposits: Out of total respondents 72% said yes that investment portfolio consist of fixed deposit. 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Yes No 117 4)Type of fund which is preferred the most: Out of total respondents, 30% preferred regular income type of fund(RI), 29% preferred diversified equity(DE) and 26% preferred ELSS (tax shield) while 12% preferred sector funds(SF) followed by 3% debt. (DF). 30% 25% 20% 15% 10% 5% 0% RI DE ELSS SF DF 5) Features that attract the most, while choosing a specific mutual fund: Out of total respondents, 47% are attracted to mutual funds due to the returns, 29% because of risk diversion and 21% like to be managed by professional people while rest 3% are attracted due to the flexible mutual fund schemes. 50% 40% 30% 20% 10% 0% Returns RD PM FS 118 6) Preference regarding mutual fund scheme: 64% 0f the total respondents prefer open ended schemes for mutual fund and rest 36% prefer close ended. 70% 60% 50% 40% 30% 20% 10% 0% Open Close ended ended 7) Type of return expected from mutual funds: 35% of the respondents expect annual return from the mutual funds, 33% expect quarterly, 25% expect monthly and rest 7% expect semiannual returns. 35% 30% 25% 20% 15% 10% 5% 0% Monthly Quarterly Semi annual Annual 119 8) Investment horizon: Out of total respondents, 37% prefer to invest up to 3 yrs, 34% up to 2 yrs, 15 Up to 1 yr and 8% prefer to invest up to 5 yrs. 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 1yr 2yrs 3yrs 5 and above 9) Investment objectives: Out of total respondents, 60% of the respondents have children education as future liability, 26% have it as child marriage and rest 14% have the liability to pay off the loans. 70% 60% 50% 40% 30% 20% 10% 0% Children's Children's liability to education marriage pay future loans 120 10) Past performance of mutual funds: Investors do agree that their decision to invest in mutual funds is affected by its past performance but they also consider the following facts before relying completely on funds past performance:  Risk v/s reward: One of the popular ideas amongst the investors is that the riskiest investments have the potential to be the most rewarding. Aggressive growth funds have always been considered the riskiest, and equity income funds the least risky.  Guarantee of future performance: Mutual funds that do extremely well in one quarter often have their funds in industries which are doing best at the moment. There is no guarantee for future performances.  Give short shrift to short-term data. The shorter the period, investors generally agree, the less reliable past performance is as an indicator of future success.  Be a contrarian. When you're looking at short-term performance, consider funds that have underperformed the market recently but have outstanding long-term records  Know the manager. If the fund has recently changed managers, it's a whole new ballgame and past performance means almost nothing But nevertheless past performance can help assess a fund's volatility over time. 121 Cross tabulation: New v/s regular investors 1)Features that attract the most in an investment product: This table tells us that maximum number of investors i.e. 47 invest because of return they get from the mutual fund schemes. It also tells us that the regular investors i.e. 34 invest on the basis of returns they get and the new ones i.e. 13 are investing because of the people those who are managing the fund schemes. Flexibility Return Professional management Risk diversion 17 Total New investors Regular investors Total 3 34 4 58 0 13 17 12 42 3 47 21 29 100 122 2) Type of returns expected: A large number of the investors 43% of the regular investors expect annual returns.42% of the new investors expect early quarterly returns. Monthly Quarterly Semi annually Annual Total New investor Regular investor Total 15 10 15 18 3 4 25 10 58 42 25 33 7 35 100 3) Investment horizon; 53% of the regular investors invest up to a period of 3 years.50% of the new investors prefer it up to 2 years.22% of Regular invest it up to 2 years. It can be seen that the regular investors have propensity to invest for greater periods than new customers. Upto 6 months Upto 1 yr. Upto 2 yrs. Upto3 yrs. Upto 5 yrs.and above 8 Total New investor Regular investor Total 3 3 13 31 58 3 12 21 6 0 42 6 15 34 37 8 100 123 4) Mutual fund scheme preference: Around 77% of the regular respondents prefer open-ended schemes while 57% of new investors prefer close-ended schemes. Regular investor is more concerned with the liquidity as compared to new investor and prefers open ended schemes. Open ended New investor Regular investor Total 46 18 64 Close ended 12 24 36 Total 58 42 100 5)Types of funds preferred: New Investors prefer to invest in ELSS followed by regular income schemes and Diversified equity. Only a small 5% percent of them invest in Debt or sector funds. The regular investors prefer to invest in diversified equity followed by regular income schemes and no one prefers to invest in debt. Regular income Debt Diversified equity Sector funds ELSS (tax shield) Total New investor Regular investors Total 17 3 13 3 22 58 13 0 16 9 4 42 30 3 29 12 26 100 124 Analysis based on literature survey. 1) Factors that should be considered for safe investment and better returns: 1) Don’t read too much into past performance: Read any mutual fund advertisement and there is likely to be a mention of the fund‘s incredible performance over the years. At times the focus on past performance is so overwhelming that it leaves investors with the impression that, it is all that matters while investing in a mutual fund. In our view, past performance is important, but it is just one of half a dozen factors that must be considered while investing in a mutual fund. Among other factors that rarely find a mention in advertisements are the fund house‘s investment philosophy and processes, level of ethics, performance across market phases especially the downturn. Therefore “Past performance is not everything” 2) Don’t read too much into mutual fund ratings In our view, mutual fund ratings get more than their share of attention from investors, which is unfortunate. This is especially true since in the Indian context mutual fund ratings are often biased towards returns with little or no room for evaluating among other factors, the fund house‘s investment philosophy, processes, track record on 125 transparency, compliance and ethics. Since the ratings are so heavily dependent on returns they are unviable, as investors cannot be expected to invest or redeem their investments every time there is a change in the ratings. Therefore-: “Mutual fund ratings aren‟t everything” 3) Don’t read too much into CAGR performance One of the many selling points for mutual funds is their performance in terms of compounded annualized growth rate (CAGR). Any student of mathematics can confirm this – CAGR is just an indicator of growth between two points (or between two dates as in the case of a mutual fund investment). It tells you nothing about what transpired in the interval and more importantly it tells you nothing about the risk the mutual fund has exposed investors to and the investment process that generated that CAGR. At the end, the CAGR hides more than it reveals which is why investors should not read more in it than necessary. Thus-: ―How CAGR can be misleading” 4) Don’t count on the star fund manager You will notice this point is a little different from the previous points. Unlike other factors like past performance that merit some (positive) consideration, the presence of a star fund manager merits no such consideration. On the contrary a fund house must be given negative marks for attributing its success to a star fund manager. While over the short-term a star fund manager may bring about a dramatic change in the mutual fund‘s performance, over the long-term he can do more harm than good. As a mutual fund‘s performance gets inextricably linked with the presence of the star fund manager, his existence in the fund house becomes a prerequisite for the fund‘s 126 success. If the star fund manager quits the fund house, it could leave the fund and its investors in the lurch because the existing team is unlikely to be capacitated to deliver on the same lines as the star fund manager. So what must investors do? Go for fund houses that institutionalize the fund management process by building teams that are guided by well-defined processes where individuals have a limited role to play. ― Say no to star fund managers‖ 5) Don’t question every investment decision made by your fund manager While it‘s good to be aware of what your fund manager is up to, it is only in the fitness of things that you let him do what he is good at doing, which is identifying the best investment opportunities ahead of the competition. As an investor you must do what you are supposed to do which is getting your financial planner involved in the process of keeping a tab on your investments. The financial planner (provided he is honest and competent) should be the one to tell you whether the fund manager is investing in line with his pre-determined investment mandate and philosophy. Once you understand the roles defined for all three parties over here – fund manager, financial planner and you (i.e. the investor) you will not waste your time agonizing over views like whether your fund manager is doing the right thing by investing in software stocks in the backdrop of a rising rupee. “Avoid „backseat‟ fund management” 6) Degrees of Risk: All funds carry some level of risk. You may lose some or all of the money you invest — your principal — because the securities held by a fund go up and down in value. Dividend or interest payments may also fluctuate as market conditions change. 127 7) Fees and Expenses As with any business, running a mutual fund involves costs — including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses. It is important that you understand these charges because they lower your returns. Some funds impose "shareholder fees" directly on investors whenever they buy or sell shares. In addition, every fund has regular, recurring, fund-wide "operating expenses." Funds typically pay their operating expenses out of fund assets — which means that investors indirectly pay these costs. SEC rules require funds to disclose both shareholder fees and operating expenses in a "fee table" near the front of a fund's prospectus. Fees and expenses are as below: Shareholder Fees:Sales Charge (Load) on Purchases — The amount you pay when you buy shares in a mutual fund. Also known as a "front-end load," this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment. For example, let's say you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 sales load you must pay comes off the top, and the remaining $950 will be invested in the fund. According to FINRA rules, a front-end load cannot be higher than 8.5% of your investment. Purchase Fee — Another type of fee that some funds charge their shareholders when they buy shares. Unlike a front-end sales load, a purchase fee is paid to 128 the fund (not to a broker) and is typically imposed to defray some of the fund's costs associated with the purchase. Deferred Sales Charge (Load) — A fee you pay when you sell your shares. Also known as a "back-end load," this fee typically goes to the brokers that sell the fund's shares. The most common type of back-end sales load is the "contingent deferred sales load" (also known as a "CDSC" or "CDSL"). The amount of this type of load will depend on how long the investor holds his or her shares and typically decreases to zero if the investor holds his or her shares long enough. Redemption Fee — Another type of fee that some funds charge their shareholders when they sell or redeem shares. Unlike a deferred sales load, a redemption fee is paid to the fund (not to a broker) and is typically used to defray fund costs associated with a shareholder's redemption. Exchange Fee — a fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group or "family of funds." Account fee — a fee that some funds separately impose on investors in connection with the maintenance of their accounts. For example, some funds impose an account maintenance fee on accounts whose value is less than a certain dollar amount. Annual Fund Operating Expenses:Management Fees — fees that are paid out of fund assets to the fund's investment adviser for investment portfolio management, any other management 129 fees payable to the fund's investment adviser or its affiliates, and administrative fees payable to the investment adviser that are not included in the "Other Expenses" category (discussed below). Distribution [and/or Service] Fees ("12b-1" Fees) — fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares and sometimes to cover the costs of providing shareholder services. "Distribution fees" include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. "Shareholder Service Fees" are fees paid to persons to respond to investor inquiries and provide investors with information about their investments. Other Expenses — expenses not included under "Management Fees" or "Distribution or Service (12b-1) Fees," such as any shareholder service expenses that are not already included in the 12b-1 fees, custodial expenses, legal and accounting expenses, transfer agent expenses, and other administrative expenses. Total Annual Fund Operating Expenses ("Expense Ratio") — the line of the fee table that represents the total of a fund‘s entire annual fund operating expenses, expressed as a percentage of the fund's average net assets. Looking at the expense ratio can help you make comparisons among funds. 8) Past Performance A fund's past performance is not as important as an investor might think. Advertisements, rankings, and ratings often emphasize how well a fund has 130 performed in the past. But studies show that the future is often different. This year's "number one" fund can easily become next year's below average fund. Be sure to find out how long the fund has been in existence. Newly created or small funds sometimes have excellent short-term performance records. Because these funds may invest in only a small number of stocks, a few successful stocks can have a large impact on their performance. But as these funds grow larger and increase the number of stocks they own, each stock has less impact on performance. This may make it more difficult to sustain initial results. While past performance does not necessarily predict future returns, it can tell you how volatile (or stable) a fund has been over a period of time. Generally, the more volatile a fund, the higher the investment risk. If you'll need your money to meet a financial goal in the near-term, you probably can't afford the risk of investing in a fund with a volatile history because you will not have enough time to ride out any declines in the stock market. Though past performance has to be an important consideration in the selection process, it‘s critical that one keeps performance in perspective. No doubt, a fund‘s successful track record can be a positive indicator, but it cannot be a guarantee for the future growth at the same rate.While reviewing a fund‘s performance, one needs to not only look at performance relative to funds with similar objectives over a period of at least 3-5 years but also the risk taken by the fund to deliver those returns. In other words, the objective should be to select a fund that is managed well and provides consistent returns.Avoid those funds that are showing very high past returns but are inconsistent performers over different time periods.Remember, it may not be wise to depend entirely on the past performance. It is equally necessary to have the right mix of funds in the portfolio.Therefore, one should first decide the allocation to each asset class and then select funds for each one of them. By investing in a haphazard manner, one 131 may end up having over exposure to an asset class and that may hamper the chances of success. 9) Investment objective and policy/philosophy of the fund The investment objective statement of the fund usually indicates whether it will be oriented towards capital gains or income or both. The fund manager also explains his approach to market timing, risk assumption and the anticipated level of portfolio turnover in the offer document. Some times, funds also indicate investment restrictions they have placed on the fund manager. Many a time‘s investors have to face disappointment both in terms of performance and the volatility because they do not match their own investment objective with that of the fund.To ensure that one achieves one‘s objective, it is important to place greater importance on the fund‘s investment objective and its investment policy. 10)Concentrated portfolio vs diversified portfolio The choice between a diversified and a concentrated portfolio largely depends upon on the risk profile of an investor. It is well known fact that a well diversified portfolio enables an investor to spread his investments across different sectors and market segments of the market.The idea is that if one or more stocks do badly, the portfolio won‘t be affected as much. On the other hand, if a few stocks do very well, the portfolio won‘t reap all the benefits. A diversified fund, therefore, is an ideal choice for someone who is looking for steady returns over the longer term. A concentrated portfolio works exactly in 132 the opposite manner. While a fund with a concentrated portfolio has a better chance of providing higher returns, it also increases one‘s chances of under-performing or losing a significant portion of portfolio in a market downturn.Thus, a concentrated portfolio isideallysuited for those investors who have the capacity to shoulder higher risk in order to improve thechances of getting better returns. 11)Level of risk To determine the right level of risk tolerance is an important ingredient for investors and can go a long way in designing an optimum investment strategy. Besides, it helps in customizing fund category allocations and suitable fund selections. There are certain broad guidelines to determine the risk tolerance.These are:  Be realistic with regard to volatility - it is necessary to consider the effect of potential downside loss as well as potential upside gain. Determine a ―comfort level‖ — if one is not confident with a particular level of risk tolerance, then select a different level.   Regardless of the level of risk tolerance, adhere to the principles of effective diversification — the allocation of investment assets among different fund categories to achieve a variety of distinct risk/reward objectives and a reduction in overall portfolio risk.  Reassess risk tolerance at least annually — sometimes one‘s risk tolerance may change due to either major adjustments in return objectives or to a realization that an existing risk tolerance is inappropriate for one‘s situation. Since it is the level of risk that provides the guidance about the level of volatility, and the kind of return one can expect, one has to be careful while assessing this. 133 13)Variety of funds offered by a fund house Most fund houses offer a family of funds thereby allowing investors to diversify across different asset classes to achieve different investments objectives as well as to invest for different time horizons. Considering the variety of funds on offer from a fund house, is important, in case one is required to make changes in line with one‘s revised investment objective/s or time horizon. In that case, it is much more convenient to move money within the same fund house rather than redeeming from one fund house and reinvesting in some other fund house. Besides, one can avoid the risk of redeeming at one level and reinvesting at a different market level. However, if the fund house where one is invested does not have the required options or the performance of alternate fund being considered is not up to the mark, it will not be prudent to go for the convenience alone. 14)Tax Efficiency Tax efficiency of an investment option considered for selection can be critical for the long-term success of a portfolio. As per the Income tax rules, there are two types of funds i.e. debt funds and equity funds. Those funds that have exposure of 65 per cent or more to equities are considered as equity funds and all others are considered as debt funds. As regards equity and equity-oriented funds, tax efficiency comes into play when one has to rebalance the portfolio or redeem holdings within one year of making investment. For debt funds, tax efficiency has a much bigger role to play in the selection process. This is because one has to consider short-term capital gains rate, dividend distribution tax as well as long term capital gains for gaikwadecting the right option i.e. dividend or growth. 134 15). Other factors surrounding the mutual funds: Besides the above following are the other factors that must be considered when choosing the fund for investment:  Fund’s volatility: In most instances funds with high returns tend to be more volatile. E.g. funds with mid-cap exposure and sector funds tend to be more volatile, but also offer higher returns. Also some fund managers tend to churn the portfolio in order to give higher returns, thus making it very volatile.   Fund management expenses: Higher the expenses lower the returns. Performance of the fund vis-à-vis its competitors and the benchmark index. should be checked  The investment objective: If an investor has a short-term investment goal like going on a holiday, then he/she is better off investing in debt funds instead of equities, which tend to very volatile over a short-term. Investors shouldn‘t simply look at the returns when deciding the choice of fund.  Investment horizon: If the investment horizon is long enough, equities should form the core of the portfolio, as time in the market is more important than timing the market. 135 “The most common mistakes people make while investing in mutual funds” These are some of the common mistakes made when choosing a mutual fund: (1) Buying only on past performance. In any market environment, some funds produce phenomenal returns. However, last year's best performers can be this year's laggards. One must take other considerations into account before buying into a fund. (2) Acting on tips and hunches. Since no one can consistently forecast market trends one needs to develop a consistent, disciplined approach and stick to it. (3) Over diversifying. Two or three mutual funds would offer instant cost-effective diversification. Investing in more schemes will mean losing the benefits of diversification. (4) Short-term horizon - for some time-periods, the market will favour diversified funds, or sector funds. When a style goes out of favour, fund performance in that group will suffer, but those funds will rebound when the style returns to favour. 136 “The Way Forward for the Mutual Fund Investors “ There is no one mutual fund that will be suitable to all kinds of investors. Hence, mutual fund investors need to identify a suitable fund for them. This would be the first step towards making successful investments in mutual funds. Identifying a suitable fund can be done in a two-step manner as follow: a. Selecting a fund with investment objectives and preferences, return objectives, time horizon and risk tolerances that meet the requirements of the investor. b. Selecting a fund that has a detailed asset allocation strategy by fund type category to reflect the investment objectives of the fund. To select a suitable fund, investors should read the fund's prospectus completely before making investment. By reading investment objectives, the fund's financial goals and the type of securities chosen can be known. An investor can make out whether or not a fund is advisable for him by determining if the goals are congruent with his own investment goals. Investor should also ensure that the fund is comparing itself with an appropriate benchmark. Another important aspect investors have to carefully examine is the fees and expenses charged by the fund. Finally, investors should always be conscious of the fact that mutual funds invest their funds in capital market instruments such as shares, debentures, bonds and money market instruments, and that all the capital market instruments have risk. Therefore an investor is supposed to have full knowledge and understanding that mutual fund investments are subject to market risk and should manage the risks carefully for a safe and happy investment. 137 2) Relationship between demographics and risk tolerance: Risk tolerance, a person‘s attitude towards accepting risk is an important concept that has implications for both financial service providers and consumers. For the latter, risk tolerance is one factor which may determine the appropriate combination of assets in a portfolio, which is optimal in terms of risk and return relative to the needs of the individual . Risk is often defined as portfolio volatility, or the fluctuation in the value of assets over time. At a personal level, risk can mean the chance that one will not achieve one‘s goal or the risk of losing one‘s savings. Understanding tolerance for risk, which differs for each investor, is a key to choosing an investment program. The tolerance for risk is a very personal characteristic that may be difficult to determine and may change over time. Analysis of demographics is important here as it will provide opportunities to the provider of financial service to be selective in his approach to various groups of individual investors. Following discussion provides an insight about relationship between demographics and risk tolerance. Age It is generally thought that risk tolerance decreases with age.Investment managers use this input as a measure of the time remaining until a client‘s financial assets are needed to meet goals and objectives. In addition to being used as a proxy for time, investment managers also use age as a measure of someone‘s ability to recoup financial losses. It is widely assumed that older individuals have less time to recover losses than do 138 younger individuals, and as such, risk tolerance will decrease with age. It was found that investors of different age group do vary significantly with regard to mutual funds and debentures/bonds as their choice of investment avenue. Young investors (26-35yrs) find investing in mutual funds comfortable, while middle aged investors (36-45yrs) find debentures/bonds as more comfortable option. [Mittal and vyas (2007)] Marital status Available evidence suggests that single investors (unmarried) are more risk tolerant. Investment managers consider marital status (i.e., married, never married, divorced, separated, and widowed) an effective factor in distinguishing among levels of investor risk tolerance for two reasons. First, it is assumed that single individuals have less to lose by accepting greater risk compared to married individuals who often have responsibilities for themselves and dependents Second, it is assumed that married individuals are more susceptible to social risk, which is defined as the potential loss of esteem in the eyes of colleagues and peers, if an investment choice leads to increased risk of loss Other researchers have suggested that married individuals, not singles, possess greater risk-taking propensities, though others have failed to find any statistically significant relationship between marital status and risk tolerance . [Daly and Wilson (2001)] Occupation Occupation refers to the principal activity in which someone engages for pay. Examples include manual labor, physician, manager, educator, and administrative personnel. Other things being equal, different occupations can be used to differentiate between 139 levels of financial risk tolerance Some investment managers and researchers have concluded that higher ranking occupational status (e.g., business executive, attorney, etc.) can be used as a classification factor related to higher levels of investor risk tolerance It appears that individuals who take less risks typically choose occupations with relatively small economic and political risks. There is also a general consensus among researchers and practitioners that individuals employed professionally are more likely to have higher levels of risk tolerance than those employed in non professional occupations. [Grabble and Lytton (1998)] Self-Employment Someone is generally considered to be self-employed if their income comes directly from their own business, trade, or profession rather than through salaries or wages from an employer. It has long been believed that self employed individuals, salespersons and people employed by private firms rather than public employers tend to be more risk tolerant occupations Investment managers have assumed that self-employment status automatically leads to higher levels of risk-taking, and that, other things being equal, self-employed individuals will typically choose riskier investments and accept increased investment volatility as compared to people who work for others on a straight salary. (Grey &Gordon, 1978; MacCrimmon & Wehrung, 1986; Meyer, Walker, & Litwin, 1961). Income Researchers have found a positive pattern between income and financial risk tolerance. Both the absolute income level and return requirements may influence one‘s investment decisions. High levels of wealth and income should encourage risk tolerance because 140 wealthy investors can tolerate some loss better than the less wealthy. Researchers found that people with low income(less than 1 lakh per annum) like to invest their money in low-risk investments like post office deposits and refrain themselves from investing in equities and mutual funds. Investors with yearly income between Rs.1 lakh2.5lakhs like to invest in mutual funds, while people with yearly income between Rs.2.5lakhs-4lakhs prefer investing in equities .Investment managers have concluded that increasing income levels are associated with access to more immediate resources, leading some to conclude that increased levels of income lead to increased levels of risk tolerance. [Mittal and Vyas (2007)] Education Some researchers have argued increased levels of education (i.e., formal attained academic training) allow someone to assess risk and benefits more carefully than someone with less education. Higher education has been found to encourage risk taking, and as such, investment managers assume that increased levels of education are associated with increased levels of risk tolerance. (MacCrimmon & Wehrung, 1986) Gender Gender was considered an important investor risk-tolerance classification factor because more men than women tend to fit the personality trait called ―thrill seeker‖ or ―sensation seeker‖ There also is a ―prevalent belief in our culture that men should, and 141 do, take greater risks than women‖, which has generated a strongly held view supported by research that gender is an effective differentiating and classifying factor. [(Roszkowski et al., 1993).] Following conclusions can be drawn from the above discussion:     Men are more risk tolerant than women. Older individuals are less risk tolerant than young individuals. Single individuals are more risk tolerant than married individuals Professionally employed people are more risk tolerant than non- professionals and certain occupations are associated with higher or lower levels of risk tolerance.    Individuals with greater income have greater risk tolerances than lower income earners Greater educational attainment is associated with increased risk tolerance Increased knowledge of personal finance leads to increased risk tolerance. 142 SWOT analysis Strengths:  Corporate memberships  Wider product offerings  Greater reliance on research  Accessing equity capital markets  Foreign collaborations and joint ventures  Specialized servicing / niche broking  Online broking Weaknesses  Inadequate distributors  Inadequate staff  Promotional activities need to be reinforced to lure customers Opportunities  There is a huge untapped market which can be penetrated through the variety of schemes provided by the fund . 143  Since product variety is already there it can increase its customer base by just strengthening its promotional activities or conducting investor awareness programmes Threats  Lack of trust and knowledge about the concept among the rural and semi urban investors is curtailing the growth of mutual fund industry in these areas.  The foreign MF industry is also posing threats . As compared to foreign MFs the Indian MFs provide a few schemes only which do not suit the requirements of the investors   Faces strong competition from HDFC , Kotak Mahindra etc. in the industry Bank deposits are considered as the biggest competition to MF products. 144 RESEARCH FINDINGS, CONCLUSIONS AND RECOMMENDATIONS/SUGGESTIONS “Findings” 1. The investors give more preference to regular income funds besides the considerations of a) Diversified Equity b) Tax Saving Schemes. Thus if the government encourages the investment in mutual funds in the current budget, then more people will be investing in the MFs for tax saving. However people are also not compliant to risk aversion. They are willing to invest in risky equity funds. 2. Another significant finding of the project is that investors are lured by the returns MFs are showing. However at the same time they also want to minimize their risk. 3. Investors desire or opt open-ended schemes than close-ended schemes. This means that they want flexibility in the inflow and outflow of their funds. 4. The investment horizon, which is most liked by the investors, is 2-3 yrs. 5. The source of information the investors most rely is on advertisement. However they also require the detailed information, which they take from Financial Advisors. On other sources the investors are quite apprehensive. 6. Investor‘s portfolio consists mainly of Fixed Deposits and Post Office schemes. However portfolios of regular investors do contain significant proportion of Mutual Funds. 145 “Conclusions”  The Mutual fund industry is growing at a tremendous pace. A large number of plans have come up from different financial resources. With the Stock markets soaring the investors are attracted towards these schemes.  Only a small segment of the investors still invest in Mutual funds and the main sources of information still are the financial advisors followed by advertisements in different media.   The Indian investor generally invests over a period of 2 to three years Also there is a greater tendency to invest in fixed deposits due to the security attached with it.  In order to excel and make mutual funds a success, companies still need to create awareness and understand the Psyche of the Indian customer. 146 “Recommendations / suggestions‖ 1) There is lack of awareness among people about mutual funds so there should be more advertising and other promotional campaigns to make them aware. 2) People are more interested in investing in equity funds rather than debt funds because companies are promoting more for equity funds. Companies should equally promote debt funds also as the provide security to customers. 3) Companies should give knowledge to its customer about its computerized operations to save their time and to make the operations easier. 4) The survey reveals that the investors are basically influenced by the intrinsic qualities of the product followed by efficient fund management and general image of the fund/scheme in their selection of fund scheme Hence, it is suggested that AMCs should design products consciously to meet the investors‘ needs and should be alert to capture the changing market moods and be innovative. Continuous product development and introduction of innovative products, is a must to attract and retain this market segment. Some suggestions are :a) Since insurance business has now become open, MFs can design products combining insurance and investment benefits to cater to the investor needs of safety and returns respectively. This will surely attract/retain low and moderate risk profile investors who often resist their desire to play directly in the capital market. We have currently schemes like GIC MF and LICMF which provide life and accident coverage. More such schemes can attract and expand this segment of investors. 147 b) Retirement schemes similar to 401K plan, a popular MF product in US, will attract the middle income group which seeks regular income after retirement. AMFI has suggested a similar scheme and submitted its proposal to the Government in March 2001. Under the envisaged scheme, individuals can contribute on monthly or yearly basis to select MFs which in turn will invest them. On retirement of the individual his accumulated NAV will be converted into units of their monthly income scheme. The scheme swill offer 3 options under which the accrued amount will be invested i.) Fully in government securities ii). 50% in government securities, 30% in bonds of AAA rated companies,and 20% in equities. iii). 40% in government bonds, 20% in AAA rated securities, 30% inequities and 10% in money market instruments .A large chunk of retail investors will turn to this product on government‘s approval, for, their financial needs of safety, return, and liquidity are reasonably met by this product. C) Theme based schemes can attract specific groups. These funds generally differ among themselves in defining problems and pursuing investment goals. For example, Aquinas Fund of U.S. is a Social Responsibility Fund to promote catholic values. PAX World Fund is a diversified no load fund that invests in such industries as pollution control, health care, food, clothing, housing, education, energy and leisure activities. It does not invest in industries involving weapon production, nuclear power, tobacco, alcohol, abortion, pornography or casino gambling. Funds/schemes on similar lines addressing ethical, ecological, environmental or educational themes can be launched in India too. Ethical funds can be a good option to someone who avoids the stock market entirely on philosophical objections and it is sure to capture/retain the retail investors with social/civic values (Note : India has quite a lot of such people). 148 Bibliography.  Mittal Sanjiv and Gupta Sunil ; ―Preference and pattern of investment in mutual fund‖ ; Technia journal of management studies; volume 2 ; no.2; October07March08;Page no.-25.  Purkayastha saptarshi; ―Investor profiling and investment planning‖ ; The ICFAI journal of management research” ; Volume 7 ; no.12 ; December 2008 ; Page no. 17.  Kishore N K ; ―Mutual fund investments are subject to market risk‖ ; Portfolio organizer (The ICFAI university press) ; Volume 6th ; issue 10th ; October 2005 ; Page no.53.  Mohanty Kumar Ajaya; ―ABC of mutual funds‖ ; “Portfolio organizer (The ICFAI university press) ; Volume 7th ; Issue 7th ; Page no. 45.  Internet links. http://www.appuonline.com/mf/knowledge/industry.html http://www.reliancemutual.com/Default.aspx http://www.personalfn.com/detail.asp?date=10/25/2007&story=4 http://6aa7f5c4a9901a3e1a1682793cd11f5a6b732d29.gripelements.com/pdf/vol917 .pdf http://www.indianmba.com/Faculty_Column/FC661/fc661.html 149 Appendices (Questionnaire) Factors affecting choice of mutual funds: A survey based on customer’s perception. Name : …………………………………………………………………………. Occupation/designation: ………………………………………………………………………. Contact no: …………………………………………………………………………… Questionnaire Q1. What is the source of information you use while investing in mutual funds? Tick yes/no for each option. Particulars Internet Magazines Newspapers Financial advisers Spouse Friends Advertisement Yes No 150 Q2. Are you a regular investor or a new investor in mutual funds? Answer. Regular investor new investor Q3. Tick yes/no in the respective columns that whether your portfolio contains such investment products. TABLE Investment products Real estate Post office schemes Mutual funds Debt funds Shares Fixed deposit schemes Yes No Q4. Which type of funds you prefer the most? Answer. Debt Diversified equity 151 Sector funds ELSS (tax shield) Q5. What are the features that attract you the most while choosing a specific mutual fund? Answer. Flexibility (flexible mutual funds) Return on funds Management by professional people Risk diversion Q6. Which type of mutual fund scheme do you prefer? Answer. Open ended scheme Close ended scheme Q7. What type of return do you expect from mutual funds? Answer. Quarterly returns Semiannual returns Annual returns Q8. What is your investment horizon? Answer. Up to 1 year Up to 2 years 152 Up to 3 years Up to 5 years or above 5 years and above Q9. What are your investment objectives? Answer. Regular income Buying a home Finance a wedding or any other family commitments Education of children Tax saving If other, then mention …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… Q10. Though past performance can help you assess a fund's volatility over time, but do you think that it is a reliable indicator of future performance? Why yes/no? Answer. …………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………… 153