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CHAPTER-1

INTRODUCTION TO THE TOPIC

Introduction to The Mutual Funds

A Mutual Fund is a trust which pools the savings of a number of investors who share common financial goal.
The money thus collected is invested by the fund manager in different types of securities depending upon the
objective of the scheme. These could range from debentures to shares to money market instruments. The income
so earned through these investments and the capital appreciation realized by the scheme are shared by its unit
holders in proportion to the number of units which are owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in professionally managed and diversified
portfolio at a relatively low cost. The savings of all the investors are put together to increase the buying power
and hire a professional manager to invest and monitor the money.

In India, a mutual fund is constituted as a Trust and the investor subscribes to the “units” issued by fund. Since
each owner is a part owner of a mutual fund, it is necessary to establish the value of his part. In other words each
share or unit that an investor holds needs to be assigned the value.. This is generally called the Net Asset Value
of one unit or one share. The value of investors part ownership is thus determined by the NAV of the number of
units held.

Mutual Funds in India- A Brief History

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of
Government of India and Reserve bank. The objective was to attract the small investors and introduce them to
market investments. Since then, the history of mutual funds in India can be broadly divided into three distinct
phases.

Phase 1- 1964-87 (Unit Trust Of India)


In 1963, UTI was established by an Act of Parliament and given a monopoly. Operationally, UTI was set up
with the help of the Reserve Bank of India, but was later de linked from the RBI. The first and still one of the
largest schemes, launched by the UTI was the Unit Scheme 1964. In 1970s and 80s, UTI started innovating and
offering different schemes to suit the needs of different classes of investors. Unit Linked Insurance Plan (ULIP)
was launched in 1971.UTI is still the largest player with the largest corpus of investible funds among all mutual
funds currently operating in India.

Phase 2- 1987-1993 (Entry Of Pubic Sector Funds)

1987 marked the entry of non-UTI, Public Sector mutual funds, bringing in competition.
With the opening of the economy, many public sector banks and financial institutions were
allowed to establish mutual funds. The State Bank of India established the first non-UTI
mutual funds-SBI Mutual Fund-in November 1987. From 1987 to 1992-93, the fund industry
expanded nearly 7 times in terms of Assets under Management. During this period, investors
were shifting from the bank deposits to mutual funds, as they started allocating larger part of
their savings and financial assets to fund investments.

Phase 3- 1993-1996 (Emergence Of Private Funds)

Permission was granted for the entry of private sector funds in 1993, giving the investors a
broader choice of “funds” to choose from and increasing competition for the existing public
sector funds. Foreign fund management companies were also allowed to operate mutual
funds. These private funds brought in with them the latest product innovations, investment
management techniques and investor servicing technology that make the Indian mutual fund
industry today a vibrant and growing financial

intermediary. During the year 1993 94, 5 private sector mutual funds launched their schemes
followed by six others in 1994-95.

Phase 4- 1996 (Sebi Regulation For Mutual Funds)

Liberalization and deregulation of the Indian economy has introduced competition and
provided impetus to the growth of the industry. More investor friendly regulatory measures
have been taken both by SEBI to protect the investor and by the government to enhance
investors’ returns through these benefits. A comprehensive set of regulations for all mutual
funds operating in India was introduced with SEBI (Mutual Fund) Regulations,1996.these
regulations set uniform standards for all funds and will eventually be applied in full to Unit
Trust if India as well, even though UTI is governed by its own UTI Act.

1999 marks the beginning of a new phase in the history of mutual fund industry in India, a
phase ofsignificant growth in terms of both amounts mobilized from investors and assets
under management.

Phases In Mutual Fund Industry India

Table No.1.1 Phases In Mutual Fund Industry


Phases Years Number of MF Sectors AUM
1st phase 1964-1987 1 UTI 6700cr.
2nd phase 1987-1993 8 Public sector 47004cr.
3rd phase 1993-2003 33 Private sector 121805cr.

Advantages Of Mutual Funds

 Professional management-Even if an investor has a big amount of capital available


to him, he gets benefit from the professional management skills brought in by the
fund in the management of investor’s portfolio. The investment management skills
brought in, along with the needed research into available investment options ensure a
much better return than what an investor can manage on his own.
 Diversification of Risk- An investor in a mutual fund acquires a diversified portfolio,
no matter how small his investment is. Diversification reduces risk of loss, as
compared to investing directly in one or two shares or debentures or other instruments.
When an investor invests directly, all the risk of potential loss is his own. While
investing in pool of funds with other investors, any loss on one or two securities is
also shared with other investors. This risk reduction is one of the most important
benefits of a collective investment vehicle like mutual fund.
 Liquidity- Often, investors hold shares or bonds which they cannot directly, easily
and quickly sell. Investment in mutual funds, on the other hand, is more liquid. An
investor can liquidate the investment, by selling the units to the fund if open-end, or
selling them in the market if the fund is close-end, and collect funds at the end of each
period specified by the mutual fund or the stock market.
 Reduction of Transaction Cost- A direct investor bears all the cost of investing such
as custody of security and brokerage. When going through a fund, the investor has
the benefits of economies of scale; the funds pay a lesser costs because of larger
volumes, benefits passed on to its investors.
 Convenience and Flexibility- Mutual fund management companies often offer many
investor services that a direct market investor cannot get. Investors can easily transfer
their holdings from one scheme to the other; get updated on market information, and
so on.
 Regulation- Securities Exchange Board of India (“SEBI”), the mutual funds regulator
has clearly defined rules, which govern mutual funds. These rules relate to the
formation, administration and management of mutual funds and also prescribe
disclosure and accounting requirements. The high level of regulation seeks to protect
the interest of investors.

Disadvantages of Mutual Funds

 Professional Management- Many investors debate over whether or not the so-called
professionals are any better than the common investor at picking stocks.
Management is by no means infallible, and, even if the fund loses money, the
manager still takes his/her cut
 Costs - Mutual funds don't exist solely to make the life easier--all funds are in it for a
profit. The mutual fund industry is masterful at burying costs under layers of jargon.
These costs are very complicated
 Taxes - When making decisions about the money, fund managers don't consider the
personal tax situation. For example, when a fund manager sells a security, a capital-
gain tax is triggered, which affects how profitable the individual is from the sale. It
might have been more advantageous for the individual to defer the capital gains
liability.
 Dilution - It's possible to have too much diversification. Because funds have small
holdings in so many different companies, high returns from a few investments often
don't make much difference on the overall return.

Types of Mutual Fund Schemes

By Structure

 Open – Ended Schemes

The units offered by these schemes are available for sale and repurchase on any business day
at NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such
schemes thus offer very high liquidity to investors and are becoming increasingly popular in
India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units
at all times, and may stop issuing further subscription to new investors. On the other hand, an
open-ended fund rarely denies to its investor the facility to redeem existing units.

 Closed – Ended Schemes

The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number
of units. These schemes are launched with an initial public offer (IPO) with a stated maturity
period after which the units are fully redeemed at NAV linked prices. In the interim, investors
can buy or sell units on the stock exchanges where they are listed. Unlike open-ended
schemes, the unit capital in closed-ended schemes usually remains unchanged. After an initial
closed period, the scheme may offer direct repurchase facility to the investors. Closed-ended
schemes are usually more illiquid as compared to open-ended schemes and hence trade at a
discount to the NAV. This discount tends towards the NAV closer to the maturity date of the
scheme.

 Interval Schemes

These schemes combine the features of open-ended and closed-ended schemes. They may be
traded on the stock exchange or may be open for sale or redemption during pre-determined
intervals at NAV based prices.

By Investment Objective

 Growth Schemes

Such schemes have the potential to deliver superior returns over the long term. However,
because they invest in equities, these schemes are exposed to fluctuations in value especially
in the short term.

 Income Schemes

These schemes, also commonly called Debt Schemes, invest in debt securities such as
corporate bonds, debentures and government securities. The prices of these schemes tend to
be more stable compared with equity schemes and most of the returns to the investors are
generated through dividends or steady capital appreciation. These schemes are ideal for
conservative investors or those not in a position to take higher equity risks, such as retired
individuals. However, as compared to the money market schemes they do have a higher price
fluctuation risk and compared to a Gilt fund they have a higher credit risk.

 Balanced Schemes

These schemes are commonly known as Hybrid schemes. These schemes invest in both
equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain
the objective of income and moderate capital appreciation and are ideal for investors with a
conservative, long-term orientation.

 Money Market / Liqiud Schemes

These funds are also income funds and their aim is to provide liquidity,preservation of capital
and moderate income. These schemes invest exclusively in safer short term instruments such
as treasury bills,certificates of deposits,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 period.

Others

 Sector Specific Schemes


These are the funds/schemes, which invest in the securities of only those sectors or
industries as specified in the offer documents e.g. pharmaceuticals, software, fast
moving consumer goods(FMCG),petroleum stocks etc. The return in these funds are
dependent on the performance of the respective sectors/industries. While these funds
may give higher returns, they are more risky compared to diversified funds. Investors
need to keep a watch on performance of those sectors/industries and must exist at an
appropriate time. They may also seek advice of an expert.
 Tax Saving Schemes

Investors are being encouraged to invest in equity markets through Equity Linked
Savings Scheme (“ELSS”) by offering them a tax rebate. Units purchased cannot be assigned
/ transferred/ pledged / redeemed / switched – out until completion of 3 years from the date of
allotment of the respective Units.
The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations,
1996 and the notifications issued by the Ministry of Finance (Department of Economic
Affairs), Government of India regarding ELSS. Subject to such conditions and limitations, As
prescribed under Section 88 of the Income-tax Act, 1961.

 Index Schemes

The primary purpose of an Index is to serve as a measure of the performance of the market as
a whole, or a specific sector of the market. An Index also serves as a relevant benchmark to
evaluate the performance of mutual funds. Some investors are interested in investing in the
market in general rather than investing in any specific fund. Such investors are happy to
receive the returns posted by the markets.

Risk Associated With Mutual Fund

The Risk-Return Trade-off

The most important relationship to understand is the risk-return trade-off. Higher the risk
greater the returns/loss and lower the risk lesser the returns/loss.

Hence it is upto investor, the investor to decide how much risk you are willing to take. In
order to do this you must first be aware of the different types of risks involved with your
investment decision.

Market Risk

Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting
the market in general lead to this. This is true, may it be big corporations or smaller mid-sized
companies. This is known as Market Risk.

Credit Risk

The debt servicing ability (may it be interest payments or repayment of principal) of a


company through its cash flows determines the Credit Risk faced by you. This credit risk is
measured by independent rating agencies like considered poor credit quality.

Inflation Risk
“Rs. 100 today is worth more than Rs. 100 tomorrow.”“Remember the time when a bus ride
cost 50 paisa? The root cause, Inflation. Inflation is the loss of purchasing power over time. A
lot of times people make conservative investment decisions to protect their capital but end up
with a sum of money that can buy less than what the principal could at the time of the
investment. This happens when inflation grows faster than the return on your investment. A
well-diversified portfolio with some investment in equities might help mitigate this risk.

Interest Rate Risk

In a free market economy interest rates are difficult if not impossible to predict. Changes in
interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of
bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate
environment.

Political/Government Policy Risk

Changes in government policy and political decision can change the investment environment.
They can create a favorable environment for investment or vice versa.

Liquidity Risk

Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.
Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as
internal risk controls that lean towards purchase of liquid secure.

Systematic Investment Plan

One can invest in mutual funds regular sums of money through the Systematic Investment
Plan thereby making the volatility of the securities market work in his favour. Since the
amount invested per month/quarter is constant, the investor ends up buying more units when
the price is low and fewer units when the price is high. Therefore, the average unit cost will
always be less than the average sale price per unit irrespective of the market rising, falling or
fluctuating.
This concept is called "Rupee Cost Averaging". The investors can gain automatically
without having to monitor the market or attempt to predict the market for purchasing the units.

How to Invest In Sip?

Step 1- Select a mutual fund scheme of your choice with the payment option as SIP.

Step 2- Decide the investment periodicity (frequency of making payments).You can choose
to make your investment on a monthly or quarterly basis.

Step 3 – Select the minimum investment amount. For instance, if you choose to invest
Rs12000 every year with a monthly SIP option. Therefore you would be investing Rs1000
every month. By the end of the year you would have invested Rs12000 in your fund.

Step 4 – The amount gets converted into units, depending upon the Net Asset Value
(NAV).NAV is a market value per unit of a fund. If the NAV in the first month is Rs20, you
will get 50 units. Similarly in the next month if the NAV is Rs25, you will get 40 units. The
following month if the NAV is Rs 18, then you will get 55.56 units. So after 3 months, you
would have 145.56 units. On an average, you would have paid around Rs21 per unit.

Chapter 2

Review of Literature
CHAPTER-2

Review of Literature

As mutual fund is the most suitable alternative to invest in professionally managed and
diversified portfolio at a relatively low cost. These are the highly risky investments. some of
the researches were conducted on mutual funds which are discussed below:

Alex Green (2004), has revealed that most investors choose the set it and forget it approach
when it comes to their retirement accounts. And for good reason, the mutual fund industry
has done a clever job of making investors think that’s what they should do – Rely on an
expert. Unfortunately, it’s not all true. And it hides the fact that these experts skim from your
profits and your assets every year. The only way to get them out of your pockets is to take an
active role in your finances and manage your money yourself.

Aman Dhall & Anand Ramani (2009), have revealed in the article that for every regulation
there is a loophole and a backdoor. Securities & Exchange Board of India (Sebi) may have
abolished entry load to make mutual funds cheaper for investors, but fund houses have now
found a new way to keep their revenues intact. Many asset management companies have all
started charging exit load on switching money when a trigger is activated in funds providing
trigger facility.

Experts believe that rationale on exit load is to make sure that investments remain for a
minimum time with the fund so as to recover all the costs of acquisition.

Aru Srivastava (2011) ,suggested that many believe that this belief can be harmful,
particularly for those planning to invest in Equity Linked Saving (ELS) Schemes of Mutual
Funds. ELS schemes offer tax rebate under Section 88 for an investment up to a maximum of
Rs 10,000. These schemes typically invest at least 80 per cent of their corpus in equities and
carry a three-year lock-in period. The unit holder is free to redeem his holdings once this
lock-in expires at a price based on the Net Asset Value (NAV).Timing can be advantageous.
Since ELS Schemes invest primarily in the equity markets, timing can be a distinct advantage
for any investor. At a time when equity markets are down, exposure can be made to these
schemes to lower holding cost. Thus, an investor can put in money in these schemes even at
the beginning of the financial year if, in his opinion, the equity markets at that moment
present a good investment opportunity.

Dhirenderkumar (2012), have revealed that as soon as it became clear that the entry load
was on the way out, fund companies got down in earnest to collect as much investments as
was possible before the limit ran out. Clearly, distributors would not sell without some kind
of upfront fee from the funds and if they can’t be paid out of the entry load then they will
have to be paid out of the funds of the companies own slice of pie and that would mean lower
profits for everyone around. The race for gathering assets took two forms- new fund offers
and dividend.

M. Allirajan (2013), said that fund houses have increased exit load and the minimum time
period required to stay invested before making redemptions, without paying any charges on
equity schemes. While funds were charging 0.5% for exits made after six months but before a
year, on equity schemes, they have now hiked it to 1%. MFs were not charging any exit load
on redemptions made after a year but now an investor has to keep his money locked in a fund
for a minimum of two years to avoid the 1% exit load. Many fund houses have even hiked the
minimum time limit to three years. All these loads are applicable for the retail category.
However, exit loads for debt schemes continue to remain low.

So it is concluded that most of the people makes investment in the mutual funds.as mutual
funds is the most suitable investment for the Investors.Mutual funds involves high risk and
high returns.The Stocks, bonds, and cash typically form the major asset classes for
constructing portfolios of no load mutual funds .

Mayoor Patel (2007), have said that mutual funds are considered to be relatively safe in
most markets. That is not to say that there is no risk involved whatsoever. However, the
potential to realize more income from your settlement if it is invested in a mutual fund
account is very real. When your situation is such that you do not need the settlement money
to handle medical bills or provide revenue to fund home care, it is a very wise move to invest
the money in something promises a higher yield than just a standard savings account. A
second advantage to structured settlement mutual funds is that you have some leeway to
move the funds around as you experience life changes. The goal is to make sure you have
what you need to live an equitable quality of life both now and in the future. If you need the
money to make that happen now, then by all means set up the payments accordingly. But if
you do not have to depend on the payments to meet ongoing expenses, then investing for the
future is a smart side.

Sam Mossan Smith(2007), have unfolded the fact in his article that one must study the offer
document carefully before investing in the mutual funds as the mutual funds are subject to
market risks. Mutual funds do not provide any guarantee regarding the returns or capital
(initial amount invested). Mutual funds are a good place to start with as they offer the
opportunity to diversify quickly into arrange of investments. No one can be assure of losses
or returns. Returns tend to commensurate with the kind of risks one usually take. Mutual fund
schemes are riskier than the assured return schemes like fixed deposits and bonds. It is upon
the investor to strike a balance between the risk he want to take and returns he want to get.

Pat Lunsford (2006) , has said that when it comes to investment many investors look out for
the down market. Of course, there are exceptions but experienced investors recognize the
exceptions right away. Therefore, as in most any kind of business venture, experience is the
key to success. However, for the inexperienced investor, there are a number of agencies that
give good solid advice. The advice isn't free of course, but the small investment to protect
your larger investment may be a wise precaution until you gain more experience. New
investors dabble in stocks and mutual funds every day, but for someone who is not
experienced in the way the stock market works, it can be a little overwhelming. It can be a
frightening experience for someone new to stocks and mutual funds when the market dips
even a little. It is a common fact that while some have made incredible fortunes on the stock
market, others have lost incredible fortunes and in a very short period of time.

Subramanian(2004), have revealed that Stocks, bonds, and cash typically form the major
asset classes for constructing portfolios of no load mutual funds. Lot of emphasis rightly gets
placed on the percentage of assets allocated to no load mutual funds of different asset classes.
However, the division of assets within a particular class does not nearly get the attention it
should. All too often, investors exclusively use broadly diversified, no load mutual funds for
their stock investments. Investors can use sector funds to construct a diversified, no load
mutual fund portfolio. Investors can use sector funds to enhance the performance of their
portfolio of diversified, no load mutual funds.

Shauna Carther (2006), has unfolded about socially responsible mutual funds that a socially
responsible investing strategy is one that views successful investment returns and responsible
corporate behavior as going hand in hand. SRI investors believe that by combining certain
social criteria with rigorous investment standards, they can identify securities that will earn
competitive returns and help build a better world.SRI analysts gather information on industry
and company practices and review these in the context of a country's political, economic and
social environment. Generally, these seven areas are the focus of socially responsible
investors: Workplace practices, Environmental concerns, Product safety and impact, Human
rights, Community relations, Indigenous peoples' rights. It should be noted that socially
responsible investing is essentially interested in promoting the adherence to the positive
aspects of these areas with publicly held companies.

WS Smith (2006), have founded that mutual funds are the one of the most popular financial
investment vehicle in the world and for a good reason.

For a relatively small investment, these funds give individual investors the ability to buy a
diverse portfolio of stocks and / or other financial instruments - all in one transaction. Each
fund is actively managed by a mutual funds professional. This is someone who has several
years of experience analyzing and trading stocks or other securities, probably has an
advanced degree, and has worked his or her way u p the ladder to what is essentially the top
of the money management profession. The fund manager chooses the securities that the
mutual fund owns. These funds can be composed of stocks, bonds, and / or other financial
instruments. The types and balance of securities (i.e. 60 percent stocks, 35 percent bonds, 5
percent cash / money market), and the investment objectives and strategies (i.e. aggressive
growth or equity income) are listed in the mutual fund's prospectus. This way investors know
what they are getting into each time they buy new mutual funds.
Chapter 3
Needs scope and
Objective
Need of The Study

As mutual fund is the most suitable investment to invest in professionally managed and
diversified portfolio at a relatively low cost. There is high risk in investing in mutual funds.
The need arises of the study to know the perception of Investors towards mutual funds.

Scope of the Study

Scope of the study is limited only to Jalandhar.

Objectives of This Study

 To study the Investors awareness about mutual funds.


 To determine the factors which compels the Investors to invest mutual funds
 To study the interest of the Investors for investing in mutual funds
Chapter-4

Research methodology
CHAPTER-4

RESEARCH METHODOLOGY

Research methodology means "defining a problem, defining the research objectives,


developing the research plan, collecting the information, analyzing the information and
presentation of findings." Such framework is called "Research Design". The research process
that would be followed by me consisting following steps;

Research Define

The research would be carried out to know Investors perception towards mutual funds.

Research Design

A research design is the arrangement of conditions for the collection and analysis of data in a
manner that aims to combine relevance to research purpose with economy in procedure. My
research would be descriptive in nature. This step of the study consists of developing the
most efficient plan for gathering the relevant data. The following factors will be under focus
in the research plan:
Descriptive Research: Descriptive research is a research where in researcher has no control
over variable. It just presents the picture, which has already studied. It is a type of conclusive
research, which has as its major objective the description of something-usually market
characteristics or functions.

Sampling Design: It is a definite plan for obtaining a sample from a given population. It
refers to the technique or the procedure the researcher would adopt in selecting items for the
sample. The sampling plan or design calls for the following decisions:

Universe: Research sample unit refers to the geographical area that I will cover while
conducting the research. The universe of my study would be District Jalandhar.

Sample Unit: Who is to be surveyed? The target population must be defined that will be
sampled. It is necessary to develop a sampling frame so that everyone in the target population
has an equal chance of being sampled. The sample unit pertaining to my study would be
respondents of Jalandhar.

Sample Size: How many people will be surveyed? This refers to number of respondents to
be selected from the universe to constitute a sample. An optimum sample is one that fulfills
the requirements of efficiency, reliability and flexibility. The sample size of 70 will be served
the purpose of my study.

Sample Method: The sampling method used would be non-probability convenience


sampling (where the researcher selects the most accessible population members from which
to obtain information).

Methods of Data Collection and analysis: The researcher can get two types of data:

a) Primary Data

b) Secondary Data

Primary Data: Primary data is a data which did not exist earlier and is being collected by the
researcher first time for its specific objectives. The primary data would be collected through
questionnaires by conducting personal interview and telephonic interviews of the respondents
of District Jalandhar.
 Secondary data: Any data which have been collected earlier for some purpose are the
secondary data. Indirect collection of data from sources containing past or recent past
information like bank’s brochures, annual publication, books etc. Secondary sources
would be:- Text books Internet sites

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