CHAPTER-1

INTRODUCTION
 INTRODUCTION

INTRODUCTION TO FINANCIAL MANAGEMENT:

Financial Management is about preparing, directing and managing the money activities of a
company such as buying, selling and using money to its best results to maximise wealth or
produce best value for money. It is basically applying general management concepts to the
cash of the company. Financial Management can also be defined as-The management of the
finances of a business/organisation in order to achieve financial objectives.

MEANING:
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.

SCOPE OF FINANCIAL MANAGEMENT:

 Investment decision: Investment decisions includes investment in fixed assets (called
as capital budgeting).Investment in current assets are also a part of investment
decisions called as working capital decisions.
 Financial decisions: They relate to the raising of finance from various resources
which will depend upon decisions on type of source, period of financing, cost of
financing and the returns thereby.
 Dividend decisions: The finance manager has to take decisions with regards to the
net profit distribution.Net profits are generally divided into two:
a) Dividend for shareholders-Dividend and the rate of it has to be
decided.
b) Retained profits-Amount of retained profits has to be finalized which
will depend upon expansion and diversification plans of the enterprise.

OBJECTIVES OF FINACIAL MANAGEMENT:

The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern. The objectives can be-

a) To ensure regular and adequate supply of funds to the concern.

b) To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
c) To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
d) To ensure safety on investment, i.e., funds should be invested in safe ventures so that
adequate rate of return can be achieved.
e) To plan a sound capital structure-There should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.
 FUNCTIONS OF FINANCIAL MANAGEMENT:

 ESTIMATION OF CAPITAL REQUIREMENT: A finance manager has to

make estimation with regards to capital requirements of the company. This will
depend upon expected costs and profits and future programmes and policies of a
concern. Estimations have to be made in an adequate manner which increases
earning capacity of enterprise.
 Determination of capital composition: Once the estimation have been made, the
capital structure have to be decided. This involves short-term and long-term debt
equity analysis. This will depend upon the proportion of equity capital a company
is possessing and additional funds which have to be raised from outside parties.
 Choice of sources of funds: For additional funds to be procured, a company has
many choices like-
a) Issue of shares and debentures
b) Loans to be taken from banks and financial institutions
c) Public deposits to be drawn like in form of bonds

Choice of factor will depend on relative merits and demerits of each source and
period of financing.

 Investment of funds: The finance manager has to decide to allocate funds into
profitable ventures so that there is safety on investments and regular returns is
possible.
 Disposal of surplus: The net profits decisions have to be made by the finance
manager. This can be done in two ways:
a) Dividend declaration- It includes identifying the rate of dividends and
other benefits like bonus.
b) Retained profits- The volume has to be decided which will depend upon
expansion, innovation, diversification plans of the company.
 Management of cash: Finance manager has to make decisions with regards
to cash management. Cash is required for many purposes like payments of
wages and salaries, payment of electricity and water bills, payment to
creditors, meeting current liabilities, maintainance of enough stock, purchase
of raw materials, etc.
 Financial controls: The finance manager has not only to plan, procure and
utilize the funds but he also has to exercise control over finances. This can be
done through many techniques like ratio analysis, financial forecasting, cost
and profit control, etc.

INTRODUCTION ON MUTUAL FUNDS:

The concept of “mutual fund” is a new featuring the cap of Indian capital market.
The concept of market but not to international market. The concept of mutual fund spread to
USA in the beginning of 20th century and three mutual fund companies were started in 1924.
Mutual funds have been funds successfully working in the USA and some western countries.
These funds have been useful in filling the gap between the demand and supply of capital in
the market. A mutual fund motivates small and big investors to entrust their savings to it so
that these are professionally employed in sharing good return. A large number of investors
have small savings with them. They can at the most buy shares of one or two companies.
When small savings are pooled and entrusted to mutual fund then these can be used to buy
blue chips where regular returns and capital appreciation are ensured.

Fund is an American concept. The terms like investment company money fund investment
trust and mutual funds are used interchangeably and used to describe the same thing in
American literature. In British literature mutual funds has not been explained but is
considered as a synonym of investment trust of USA.

DEFINITION&MEANING:

A mutual fund is an investment vehicle for investors , who pool their savings for
investing in diversified portfolio of securities with the aim of attractive yields and
appreciation in their value.

SEBI (mutual fund) regulations,1996 defines mutual funds as

“A fund established in the form of a trust to raise monies through the sale of units to the
public or a section of public under one or more schemes for investing in securities including
money market instruments”

A mutual fund is a trust that pools the savings of a number of investors who
wish to start investing but do not have a large amount of capital to work with or who want to
take hands of approach and let the professional take all decisions. Mutual Funds are basically
large funds operated by investment companies and pull money from many different people
and then invest according to a certain goal for the fund. This allows for greater diversification
than would be possible for a single person with less-than-generous assets and also removes
the burden of researching market conditions and adjusting investments accordingly from the
individual.

INTRODUCTION TO EQUITY SHARES:

Equity is a term commonly used to describe the ordinary share capital of the business.
Ordinary share in the equity capital of the business entitle the holders to all distributed profits
after the holders of debentures and preferences shares have been paid. Ordinary shares are
issued to the owners of the company. It is important to understand the market values of
company’s shares have little relationship to their nominal or face value. The market value of
the money company share is determined by the price another investors is prepared to pay for
them. In the case of publicly quoted companied, this is reflected in the market value of the
ordinary shares traded on the stock exchange. In case of privately owned companies, where
there is unlikely to be much trading in shares, market value is often determined when the
business is sold or when the minority share holding is valued for taxation purpose.
 Differed ordinary shares are a form of ordinary shares which are entitled to a
dividend only after a certain date or only if profits rise above a certain amount. Voting
rights might also differ from those attach to other ordinary shares. Financing a company
through the sale of stock in company is known as equity financing. Alternatively debt
financing can be done to avoid giving up shares of ownership of the company. Equity
financing are usually used for longer term investment projects such as investments in a new
factory or a new foreign market.

Equity investment generally refers to the buying and holding of shares of stock on
a stock market by individuals and funds in anticipation of income from dividends and capital
gains as the value of stock rises. It also sometimes refers to the acquisition of equity
(ownership)participation in a private (unlisted)company or a start up.(A company being
created or newly created). When the investment and is generally understood to be higher risk
than investment in listing Going concern situations.

NEED OF THE STUDY:

1. The study helps the investors to compare various investment schemes and the returns
from those investments.
2. The reader can have thorough knowledge on concepts and trends of mutual funds.
3. The study helps to have the knowledge of various schemes and working of mutual
funds.
4. User can make proper analysis of returns in different schemes comparing the
performance of the study period.
5. The study enables the reader to assess the Net Asset Value (NAV) by seeing the
charts.
6. Researchers can think of further study by including the data of large period.
7. The study also enables us to understand the fluctuations related to Sensex and Nifty.

SCOPE OF THE STUDY:

1. The study covers the concept and details of mutual funds and introduction on equity,
derivatives and index.
2. The study also includes returns of equity, mutual funds and relative index of different
sectors.
3. Equities year high and low is also included in the study.
4. The project report covers the study of Net Asset Value (NAV) of mutual funds in
different sectors.
5. The analysis part includes the Net Asset Value (NAV) charts which gives the clear
picture of the present value of the mutual fund company.
6. The study includes the information regarding the selection of portfolio for different
funds in theory part.
 7. The theory part also includes the following information related to mutual fund:
 History of mutual funds
 Concept of mutual funds
 Why mutual funds
 Net Asset Value(NAV)
 Types and benefits of mutual funds
 Trends in mutual funds
 Future scenario
 Problem of mutual fund industry in India

OBJECTIVES OF THE STUDY:

 The main purpose is to study whether mutual fund is investor’s best choice or not.
 The objective of doing this project is to make a study of various investments
schemes in the secondary market.
 To ascertain the various fluctuations in different sectoral schemes of mutual
funds.
 To examine mutual funds investment with equity shares and also relative to Nifty
and Sensex.
 To assist the community at large in deciding which investment provides best
return considering various points at a time.
 To know how various schemes effect mutual fund companies and its performance
taking past records.
 To study the performance of selected mutual funds companies and equity
companies and their performance in 1 year.
 To reveal the current situation of mutual funds and equities as well as index in
last one year in India.

LIMITATIONS OF THE STUDY:

 Equity return is not taken from NSE stock exchange.
 The data of mutual fund companies and equity companies is taken only for 3&6
months due to non availability of data.
 Due to limitation of time all sectors are not studied, only selected sectors have been
studied.
 Data for mutual funds available on websites is day to day basis details updated daily.
Hence the data is available as on 31 March 2006.
 Only growth funds are taken.
 Due to non availability of data NSE scrip Tata Consultancy information has not taken.
RESEARCH METHODOLOGY OF THE STUDY:
All information related to the topic needs to be carefully scrutinized to avoid the
risk of biased analysis. Having once identified which information is relevant and need to be
collected, we will have to define how this will be done.

The method employed in the investigation depends on the purpose and scope of the
study .let us try to understand methodology.

RESEARCH DESIGN: Research design is some statement or specification of procedures for

collecting and analyzing the information required for the solution of some specific problem.

Here the exploratory research is used as investigation is mainly concerned with

determining the trend and positive and negative returns in different sectors of mutual funds
and equities. Exploratory research is generally carried out by three sources of information

 Study of secondary sources.

 Discussion with individuals
 Analyzing some specific areas

DATA COLLECTION METHODS:

The key for creating useful system are selectively in collection of data and linking that
security to the analysis and decisions issue of the action to be taken. The accuracy of
collected data is of great significance for drawing correct and valid conclusions from the
investigations.

The following are the main steps in data collection process

 Type of information required in the investigation

 Establishing the facts that are available at present and additional facts required
 Identification of sources from where the information can be available

SOURCES OF INFORMATION: Data available in marketing research are either primary or

secondary.

Primary data: primary data are generated in an investigation according to the needs of
problem in head. Primary data is collected using case study methods. There are some set of
qualitative techniques used for collection of some socio economic information about some
phenomenon.

Secondary data: secondary data can be defined as data collected by someone else for
purpose other than solving the problem being investigated. Secondary data is collected from
external sources which include information from published material of SEBI and some of the
information is collected online. The data sources also include various books, journals,
magazines, news papers, etc. The organization profile is collected from Branch Manager.