MUTUAL FUNDS HDFC

1.1 INTRODUCTION OF MUTUAL FUNDS:

A mutual fund is a type of financial vehicle made up of a pool of money collected from

many investors to invest in securities like stocks, bonds, money market instruments, and other
assets. Mutual funds are operated by professional money managers, who allocate the fund's
assets and attempt to produce capital gains or income for the fund's investors. A mutual
fund's portfolio is structured and maintained to match the investment objectives stated in its
prospectus.

Mutual funds give small or individual investors access to professionally managed

portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates
proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of
securities, and performance is usually tracked as the change in the total market cap of the
fund—derived by the aggregating performance of the underlying investments

1.1.1 DEFINITION:

According to Vasant Desai Mutual Fund is a financial intermediaries in the

investment business. They collect funds from public and invest on behalf of the investors as
“pass through entities” with losses and gains accruing to the investing only. Mutual funds sell
their share to the investors; invest the proceeds in wide choices of securities in the financial
market. Owners of shares receive pro rata shares of the earnings from these assets, minus
management and other fees assessed by the fund.

According to L M Bhole & Jithendra Mahakud “Mutual fund is a pure intermediary

which performs a basic function of buying and selling securities on behalf of its unit-holders,
which the latter also can perform but not as easily, convineantly, economically and
profitability. The investors in the mutual funds or given the share in its total funds which is
proportionate to their investment, and which is evidenced by the units certificates. One of the
major features of the operations of the kind of organization is that the financial clits which
have, like its assets.

According to E Gordon & K Natarajan “To state in simple words, a mutual fund
collect the savings from small investors, invest them in gov.t under the corporate securities
and on income through interest and devidents, besides capital gains. It works on the
principles of small drops of water make a big ocean. For instants, if one has rs.1000 to invest,

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it may not fetch very much on its own. But, when it is pooled with rs. 1000 each from a lot of
other people, then, one could create a big fund large enough to inverts in a wide varieties of
share and debentures on commanding scale and thus, to enjoy the economies of large scale
operations

1.1.2 HISTORY:

The first modern investment funds (the precursor of today's mutual funds) were

established in the Dutch Republic. In response to the financial crisis of 1772–1773,
Amsterdam-based businessman Abraham (or Adrian) van Keswick formed a trust named
Eendragt Maakt Magt ("unity creates strength"). His aim was to provide small investors with
an opportunity to diversify.

Mutual funds were introduced to the United States in the 1890s. Early U.S. funds
were generally closed-end funds with a fixed number of shares that often traded at prices
above the portfolio net asset value. The first open-end mutual fund with redeemable shares
was established on March 21, 1924 as the Massachusetts Investors Trust (it is still in
existence today and is now managed by MFS Investment Management).

In the United States, closed-end funds remained more popular than open-end funds
throughout the 1920s. In 1929, open-end funds accounted for only 5% of the industry's $27
billion in total assets. After the Wall Street Crash of 1929, the United States Congress passed
a series of acts regulating the securities markets in general and mutual funds in particular.

 The Securities Act of 1933 requires that all investments sold to the public, including
mutual funds, be registered with the SEC and that they provide prospective investors with
a prospectus that discloses essential facts about the investment.
 The Securities and Exchange Act of 1934 requires that issuers of securities, including
mutual funds, report regularly to their investors. This act also created the Securities and
Exchange Commission, which is the principal regulator of mutual funds.
 The Revenue Act of 1936 established guidelines for the taxation of mutual funds.
 The Investment Company Act of 1940 established rules specifically governing mutul
funds.
 These new regulations encouraged the development of open-end mutual funds. 

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1.1.3 ADVANTES & DIS-ADVANTAGES:

Mutual funds have advantages and disadvantages compared to investing directly in

individual securities. According to Robert Pozen and Theresa Hamacher, these are:

ADVANTAGES:

 Increased diversification: A fund diversifies

holding many securities. This diversification decreases risk.
 Daily liquidity: Shareholders of open-end funds
and unit investment trusts may sell their holdings back to the fund at regular intervals at a
price equal to the net asset value of the fund's holdings. Most funds allow investors to
redeem in this way at the close of every trading day.
 Professional investment management: Open-and
closed-end funds hire portfolio managers to supervise the fund's investments.
 Ability to participate in investments that may be
available only to larger investors. For example, individual investors often find it difficult
to invest directly in foreign markets.
 Service and convenience: Funds often provide
services such as check writing.
 Government oversight: Mutual funds are
regulated by a governmental body.
 Transparency and ease of comparison: All mutual
funds are required to report the same information to investors, which makes them easier
to compare to each other.
 Lower cost: The cost of a single investor to buy a
stock or a bond is lower than investing individually.
 Flexibility: Mutual funds enables changes
portfolio with market conditions change.
DIS-ADVANTAGES:

Mutual funds have disadvantages as well, which include

 Fees

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 Less control over timing of recognition of gains

 Less predictable income
 No opportunity to customize

1.1.4 TYPES OF MUTUAL FUNDS:

Mutual funds are normally classified by their principal investments, as described in

the prospectus and investment objective. The four main categories of funds are money market
funds, bond or fixed income funds, stock or equity funds, and hybrid funds. Within these
categories, funds may be sub-classified by investment objective, investment approach or
specific focus.

The types of securities that a particular fund may invest in are set forth in the
fund's prospectus, a legal document which describes the fund's investment objective,
investment approach and permitted investments. The investment objective describes the type
of income that the fund seeks. For example, a capital appreciation fund generally looks to
earn most of its returns from increases in the prices of the securities it holds, rather than from
dividend or interest income. The investment approach describes the criteria that the fund
manager uses to select investments for the fund.

Bond, stock, and hybrid funds may be classified as either index (or passively-
managed) funds or actively managed funds.

MONEY MARKET FUNDS:

Money market funds invest in money market instruments, which are fixed income
securities with a very short time to maturity and high credit quality. Investors often use
money market funds as a substitute for bank savings accounts, though money market funds
are not insured by the government, unlike bank savings accounts.

In the United States, money market funds sold to retail investors and those investing
in government securities may maintain a stable net asset value of $1 per share, when they
comply with certain conditions. Money market funds sold to institutional investors that invest
in non-government securities must compute a net asset value based on the value of the
securities held in the funds.

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In the United States, at the end of 2018, assets in money market funds were $3.0
trillion, representing 14% of the industry.

BOND VALUE:

Bond funds invest in fixed income or debt securities. Bond funds can be sub-classified
according to:

 The specific types of bonds owned (such as high-yield or junk bonds, investment-
grade corporate bonds, government bonds or municipal bonds)
 The maturity of the bonds held (i.e., short-, intermediate- or long-term)
 The country of issuance of the bonds (such as U.S., emerging market or global)
 The tax treatment of the interest received (taxable or tax-exempt)

In the United States, at the end of 2018, assets in bond funds (of all types) were $4.7
trillion, representing 22% of the industry.

STOCK FUNDS:

Stock or equity funds invest in common stocks. Stock funds may focus on a particular
area of the stock market, such as

 Stocks from only a certain industry

 Stocks from a specified country or region
 Stocks of companies experiencing strong growth
 Stocks that the portfolio managers deem to be a good value relative to the value of the
company's business
 Stocks paying high dividends that provide income
 Stocks within a certain market capitalization range

In the United States, at the end of 2018, assets in stock funds (of all types) were
$11.9 trillion, representing 56% of the industry.

HYBRID:

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Hybrid funds invest in both bonds and stocks or in  convertible securities. Balanced
funds, asset allocation funds, target date or target risk funds, and lifecycle or lifestyle funds
are all types of hybrid funds.

Hybrid funds may be structured as funds of funds, meaning that they invest by
buying shares in other mutual funds that invest in securities. Many funds of funds invest in
affiliated funds (meaning mutual funds managed by the same fund sponsor), although some
invest in unaffiliated funds (i.e., managed by other fund sponsors) or some combination of
the two.

In the United States, at the end of 2018, assets in hybrid funds were $1.4 trillion,
representing 7% of the industry.

OTHER FUNDS:

Funds may invest in commodities or other investments.

1.1.5 FUND STRUCTURES:

There are three primary structures of mutual funds: open-end funds, unit investment

trusts, and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit
investment trusts that trade on an exchange.

OPEN-END FUNDS:

Open-end mutual funds must be willing to buy back ("redeem") their shares from
their investors at the net asset value (NAV) computed that day based upon the prices of the
securities owned by the fund. In the United States, open-end funds must be willing to buy
back shares at the end of every business day. In other jurisdictions, open-funds may only be
required to buy back shares at longer intervals. For example, UCITS funds in Europe are only
required to accept redemptions twice each month (though most UCITS accept redemptions
daily).

Most open-end funds also sell shares to the public every business day; these shares are
priced at NAV.

Open-end funds are often referred to simply as "mutual funds".

Most mutual funds are open-end funds. In the United States at the end of 2018, there
were 8,078 open-end mutual funds with combined assets of $17.7 trillion, accounting for
84% of the U.S. industry.

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CLOSED-END FUNDS:

Closed-end funds generally issue shares to the public only once, when they are
created through an initial public offering. Their shares are then listed for trading on a stock
exchange. Investors who want to sell their shares must sell their shares to another investor in
the market; they cannot sell their shares back to the fund. The price that investors receive for
their shares may be significantly different from NAV; it may be at a "premium" to NAV (i.e.,
higher than NAV) or, more commonly, at a "discount" to NAV (i.e., lower than NAV).

In the United States, at the end of 2018, there were 506 closed-end mutual funds with
combined assets of $0.25 trillion, accounting for 1% of the U.S. industry.

UNIT INVERSTMENT TRUSTS:

Unit investment trusts (UITs) are issued to the public only once when they are
created. UITs generally have a limited life span, established at creation. Investors can redeem
shares directly with the fund at any time (similar to an open-end fund) or wait to redeem them
upon the trust's termination. Less commonly, they can sell their shares in the open market.

Unlike other types of mutual funds, unit investment trusts do not have a professional
investment manager. Their portfolio of securities is established at the creation of the UIT. In
the United States, at the end of 2018, there were 4,917 UITs with combined assets of less
than $0.1 trillion.

EXCHANGE TRADED FUNDS:

Exchange-traded funds (ETFs) combine characteristics of both closed-end funds and

open-end funds. They are structured as open-end investment companies or UITs. ETFs are
traded throughout the day on a stock exchange. An arbitrage mechanism is used to keep the
trading price close to net asset value of the ETF holdings.

In the United States, at the end of 2018, there were 1,988 ETFs in the United States
with combined assets of $3.3 trillion, accounting for 16% of the U.S. industry.

1.1.6 EXPENSES:

Investors in a mutual fund pay the fund's expenses. Some of these expenses reduce
the value of an investor's account; others are paid by the fund and reduce net asset value.

These expenses fall into five categories:

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MANAGEMENT FEE:

The management fee is paid by the fund to the management company or sponsor that
organizes the fund, provides the portfolio management or investment advisory services and
normally lends its brand to the fund. The fund manager may also provide other administrative
services. The management fee often has breakpoints, which means that it declines as assets
(in either the specific fund or in the fund family as a whole) increase. The fund's board
reviews the management fee annually. Fund shareholders must vote on any proposed
increase, but the fund manager or sponsor can agree to waive some or all of the management
fee in order to lower the fund's expense ratio.

While index funds generally charge a lower management fee than actively-managed
funds, prices have been converging in a margin compressing environment. In Canada,
management fees in fee-based mutual fund structures ("F" series) or direct investing ("D",
"E", or "I" series depending on the issuer) are also lower than their advisor
series/commission-based counterparts ("A" series or "Advisor" series).

DISTRIBUTION CHARGES:

Distribution charges pay for marketing, distribution of the fund's shares as well as
services to investors. There are three types of distribution charges.

 Front-end load or sales charge. A front-end load or sales charge is a commission paid

to a broker by a mutual fund when shares are purchased. It is expressed as a percentage of
the total amount invested or the "public offering price", which equals the net asset value
plus the front-end load per share. The front-end load often declines as the amount
invested increases, through breakpoints. The front-end load is paid by the investor; it is
deducted from the amount invested.
 Back-end load. Some funds have a back-end load, which is paid by the investor when
shares are redeemed. If the back-end load declines the longer the investor holds shares, it
is called a contingent deferred sales charges (CDSC). Like the front-end load, the back-
end load is paid by the investor; it is deducted from the redemption proceeds.
 Distribution and services fee. Some funds charge an annual fee to compensate the
distributor of fund shares for providing ongoing services to fund shareholders. In the
United States, this fee is sometimes called a 12b-1 fee, after the SEC rule authorizing it.
The distribution and services fee is paid by the fund and reduces net asset value.

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Distribution charges generally vary for each share class.

SECURITIES TRANSACTION FEES INCURRED BY THE FUND:

A mutual fund pays expenses related to buying or selling the securities in its portfolio.
These expenses may include brokerage commissions. These costs are normally positively
correlated with turnover.

SHAREHOLDER TRANSACTION FEES:

Shareholders may be required to pay fees for certain transactions, such as buying or
selling shares of the fund. A fund may charge a fee for maintaining an individual retirement
account for an investor.

Some funds charge redemption fees when an investor sells fund shares shortly after
buying them (usually defined as within 30, 60 or 90 days of purchase). Redemption fees are
computed as a percentage of the sale amount. Shareholder transaction fees are not part of the
expense ratio.

FUND SERVICE CHARGES:

A mutual fund may pay for other services including:

 Board of directors or trustees fees and expenses

 Custody fee: paid to a custodian bank for holding the fund's portfolio in safekeeping
and collecting income owed on the securities
 Fund administration fee: for overseeing all administrative affairs such as preparing
financial statements and shareholder reports, SEC filings, monitoring compliance,
computing total returns and other performance information, preparing/filing tax returns
and all expenses of maintaining compliance with state blue sky laws
 Fund accounting fee: for performing investment or securities accounting services and
computing the net asset value (usually every day the New York Stock Exchange is open)
 Professional services fees: legal and auditing fees
 Registration fees: paid to the SEC and state securities regulators
 Shareholder communications expenses: printing and mailing required documents to
shareholders such as shareholder reports and prospectuses

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 Transfer agent service fees and expenses: for keeping shareholder records, providing
statements and tax forms to investors and providing telephone, internet and or other
investor support and servicing
 Other/miscellaneous fees

The fund manager or sponsor may agree to subsidize some of these charges.

EXPENCE RATIO:

The expense ratio equals recurring fees and expenses charged to the fund during the
year divided by average net assets. The management fee and fund services charges are
ordinarily included in the expense ratio. Front-end and back-end loads, securities transaction
fees and shareholder transaction fees are normally excluded.

To facilitate comparisons of expenses, regulators generally require that funds use the
same formula to compute the expense ratio and publish the results.

NO-LOAD FUND:

In the United States, a fund that calls itself "no-load" cannot charge a front-end load
or back-end load under any circumstances and cannot charge a distribution and services fee
greater than 0.25% of fund assets

CONTROVERCY REGARDING FEES AND EXPENCES:

Critics of the fund industry argue that fund expenses are too high. They believe that
the market for mutual funds is not competitive and that there are many hidden fees, so that it
is difficult for investors to reduce the fees that they pay. They argue that the most effective
way for investors to raise the returns they earn from mutual funds is to invest in funds with
low expense ratios.

Fund managers counter that fees are determined by a highly competitive market and,
therefore, reflect the value that investors attribute to the service provided. They also note that
fees are clearly disclosed.

1.1.7 REGULATION AND OPERATION:

UNITED STATES:

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In the United States, the principal laws governing mutual funds are:

 The Securities Act of 1933 requires that all investments sold to the public, including
mutual funds, be registered with the SEC and that they provide potential investors with
a prospectus that discloses essential facts about the investment.
 The Securities and Exchange Act of 1934 requires that issuers of securities, including
mutual funds, report regularly to their investors; this act also created the Securities and
Exchange Commission, which is the principal regulator of mutual funds.
 The Revenue Act of 1936 established guidelines for the taxation of mutual funds.
Mutual funds are not taxed on their income and profits if they comply with certain
requirements under the U.S. Internal Revenue instead, the taxable income is passed
through to the investors in the fund. Funds are required by the IRS to diversify their
investments, limit ownership of voting securities, distribute most of their income
(dividends, interest, and capital gains net of losses) to their investors annually, and earn
most of the income by investing in securities and currencies. The characterization of a
fund's income is unchanged when it is paid to shareholders. For example, when a mutual
fund distributes dividend income to its shareholders, fund investors will report the
distribution as dividend income on their tax return. As a result, mutual funds are often
called "pass-through" vehicles, because they simply pass on income and related tax
liabilities to their investors.
 The Investment Company Act of 1940 establishes rules specifically governing mutual
funds. The focus of this Act is on disclosure to the investing public of information about
the fund and its investment objectives, as well as on investment company structure and
operations.
 The Investment Advisers Act of 1940 establishes rules governing the investment
advisers. With certain exceptions, this Act requires that firms or sole practitioners
compensated for advising others about securities investments must register with the SEC
and conform to regulations designed to protect investors.
 The National Securities Markets Improvement Act of 1996 gave rulemaking authority
to the federal government, preempting state regulators. However, states continue to have
authority to investigate and prosecute fraud involving mutual funds.

Open-end and closed-end funds are overseen by a board of directors, if organized

as a corporation, or by a board of trustees, if organized as a trust. The Board must ensure that

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the fund is managed in the interests of the fund's investors. The board hires the fund manager
and other service providers to the fund.

The sponsor or fund management company, often referred to as the fund

manager, trades (buys and sells) the fund's investments in accordance with the fund's
investment objective. Funds that are managed by the same company under the same brand are
known as a fund family or fund complex. A fund manager must be a registered investment
adviser.

1.2 NEED AND SCOPE OF STUDY:

NEED FOR THE STUDY:

Mutual funds or dynamic financial institution which play crucial roll in an economy
by mobilizing savings and investing them in the capital market. The activities of mutual
funds have both short and long term impact on the savings in the capital market and the
national economy. The main purpose of doing this project was to know about mutual funds
and its functioning. This helps to know the details about mutual fund industry right from its
inception stage, growth and future prospect . The project study was done to ascertain the asset
allocation, entry load, exit load, associated with the mutual funds. Ultimately this would help
in understanding the benefits of mutual funds to investors.

SCOPE OF THE STUDY

A big boom has been witnessed in mutual funds industry in recent times. A large
number of new players have entered the market and trying to gain market share in this rapidly
improving market. The research was carried on in Hyderabad. I had been sent one of the
branches of HDFC Hyderabad where I completed my project work. I surveyed on my project
topic “a study of preference of the investors for investment in mutual funds” on the visiting
customers of the HDFC bank. The study will help to know the preference of customers,
which company, portfolio, mode of investment, and option for getting return and so on they
prefer. This project report may help the company to make further planning and strategy.

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1.3 OBJECTIVES OF MUTUAL FUNDS:

 To know benefits available from Mutual Fund investment.

 To know the mutual fund performance level in the present market.
 To know about the Mutual Fund investment trends.
 To know fund management process of mutual funds.
 Comparing the performance of the selected funds vies-a-vise the benchmark index, BSE
(Bombay Stock Exchange) Sensex.

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1.4 RESEARCH METHEDOLOGY OF STUDY:

The system of collecting data for research projects is known as research methodology.

PRIMARY DATA:

Data observed or collected directly from firsthand experience is called primary data.
The primary data was collected mainly with interactions and discussions with the company’s
executives.

SECONDARY DATA:

The secondary data has been collected from published and unpublished literature like
books, reports and general articles is called secondary data.

SOURCES OF SECONDARY DATA:

 Text book reference
 Company website
 Company internal records.

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1.5 LIMITATIONS OF THE STUDY:

 The study is conducted in short period, due to which the study may not be detailed in
all aspect.
 The study is based on secondary data. The secondary data may not be believable.
 The true data collection is not so easy because of some mutual funds are not
disclosing the correct information.
 The fund manager is not providing sufficient data for the study
 The data considered 5 years only

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