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DEFINITION:
Mutual fund is the pool up savings of small investors to raise funds called mutual funds.
Mutual funds are invested in diversified portfolio to spread risk. While it opens an
investment channel to small investors, it reduces risks, improves liquidity and results in
stable returns and better capital appreciation in the long run.
CONCEPT
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost.
Mutual fund is a trust that pools money from a group of investors (sharing common
financial goals) and invest the money thus collected into asset classes that match the
stated investment objectives of the scheme. Since the stated investment objective of a
mutual fund scheme generally forms the basis for an investor's decision to contribute
money to the pool, a mutual fund can not deviate from its stated objectives at any point of
time.
Every Mutual Fund is managed by a fund manager, who using his investment
management skills and necessary research works ensures much better return than what an
investor can manage on his own. The capital appreciation and other incomes earned from
these investments are passed on to the investors (also known as unit holders) in
proportion of the number of units they own.
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UNIT LINKED INSURANCE PLANS
Unit Linked Insurance (ULIP) plans are designed to help you meet your financial goals
by ensuring you the value of your investments, or your nominee sum assured, which is
the life cover of your policy. To make sure that your ULIP is truly working to assure your
goal, you should choose a life cover that provides your family with adequate finances and
hence security even in your absence, so that important life goals of your family are
always secured.
Let us take the example of a 35-year-old man with 2 young children. He could begin with
a sum assured of Rs 5 lakh. As the children grow and thereby the financial liabilities
increase, he might want to increase the level of protection, which can be done by
increasing his sum assured.
When you decide the amount of premium to be paid and the amount of life cover you
want from the ULIP, the insurer deducts some portion of the ULIP premium upfront.
This portion is known as the Premium Allocation charge, and varies from product to
product. The rest of the premium is invested in the fund or mixture of funds chosen by
you. Mortality charges and ULIP administration charges are thereafter deducted on a
periodic (mostly monthly) basis by cancellation of units, whereas the ULIP fund
management charges are adjusted from NAV on a daily basis.
Since the fund of your choice has an underlying investment – either in equity or debt or a
combination of the two – your fund value will reflect the performance of the underlying
asset classes. At the time of maturity of your plan, you are entitled to receive the fund
value as at the time of maturity
NEED AND IMPORTENCE OF THE STUDY
1. Mutual funds are dynamic financial intuitions which play crucial role in an economy
by mobilizing savings and investing them in the capital market.
2. The activities of mutual funds have both short and long term impact on the savings in
the capital market and the national economy.
3. Mutual funds, trust, assist the process of financial deepening & intermediation.
4. To banking at the same time they also compete with banks and other financial
intuitions.
5. India is one of the few countries to day maintain a study growth rate is domestic
savings.
SCOPE OF THE STUDY:
Subject matter is related to the investor’s approach towards mutual funds and
Ulips.
Area limited to Hyderabad
Demographics include names, age, qualification, occupation, marital status and
annual income.
OBJECTIVES:
To study about the mutual funds industry.
To study the approach of investors towards mutual funds and ULIPs.
To study the behavior of the investors whether they prefer mutual funds or ULIPs.
To know the concept of Mutual funds.
To know how the KOTAK Mutual funds are participating in the stock market.
To know how the KOTAK Mutual funds are effecting on the overall performance
of the KOTAK Company
There are two types of data collection method use in my project report.
Primary data
Secondary data.
For my project, I decided on primary data collection method for observing working of
company and approaching customers directly in the field, tele-calling, cold calling,
campaigning and through references to know their interest in business with company in
my project and also make questionnaire for creating database of business class people is
Hyderabad city for company. I decided on Secondary data collection method was
used by referring to various websites, books, magazines, journals and daily newspapers
for collecting information regarding project under study.
Primary sources
Primary data was obtained through questionnaires filled by people
and through direct communication with respondents in the form of
Interview.
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Secondary sources
The secondary sources of data were taken from the various
websites, books, journals reports, articles etc. This mainly provided
information about the mutual fund and ULIPs industry in India.
Plan for data analysis: Analysis of data is planned with the help
of mean and analysis of variance.
LIMITATIONS
Mostly the data is related to the secondary data.
To collect the primary data from the company is difficult task and it is a
confidential matter to the company.
The product is restricted to only mutual funds.
The data is only limited to financial performance of the mutual funds.
The collected primary data is only from the one branch head of Hyderabad
INTRODUCTION OF MUTUAL FUNDS
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realized is shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. The
flow chart below describes broadly the working of mutual funds.
.
Mutual fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in offer
document.
Investments in securities are spread across a wide cross-section of industries and sectors
and thus the risk is reduced. Diversification reduces the risk because all stocks may not
move in the same direction in the same proportion at the same time. Mutual fund issues
units to the investors in accordance with quantum of money invested by them. Investors
of mutual funds are known as unit holders.
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The investors in proportion to their investments share the profits or losses. The mutual
funds normally come out with a number of schemes with different investment
objectives that are launched from time to time. A mutual fund is required to be
registered with Securities and Exchange Board of India (SEBI), which regulates
securities markets before it can collect funds from the public.
Different investment avenues are available to investors. Mutual funds also offer good
investment opportunities to the investors. Like all investments, they also carry certain
risks. The investors should compare the risks and expected yields after adjustment of
tax on various instruments while taking investment decisions.
History of the Indian Mutual Fund
The Indian mutual fund industry is dominated by the Unit Trust of India, which has a
total corpus of Rs700bn collected from more than 20 million investors. The UTI has
many funds/schemes in all categories i.e. equity, balanced, income etc with some being
open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred
to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about
Rs200bn. Most of its investors believe that the UTI is government owned and
controlled, which, while legally incorrect, is true for all practical purposes.
The second largest category of mutual funds is the ones floated by nationalized banks.
Can bank Asset Management floated by Canara Bank and SBI Funds Management
floated by the State Bank of India are the largest of these. GIC AMC floated by General
Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of
the other prominent ones. The mutual fund industry in India started in 1963 with the
formation of Unit Trust of India, at the initiative of the Government of India and
Reserve Bank. The history of mutual funds in India can be broadly divided into four
distinct phases: -
First Phase – 1964-87
An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of
the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the regulatory and administrative control in
place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of
1988 UTI had Rs.6, 700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector
banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation
of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June
1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund
(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda
Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set
up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had
assets under management of Rs.47, 004 cores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer
(now merged with Franklin Templeton) was the first private sector mutual fund registered
in July 1993.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29, 835 crores as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of
assets under management and with the setting up of a UTI Mutual Fund, conforming to
the SEBI Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of September, 2004, there were 29 funds, which
manage assets of Rs.153108 crores under 421 schemes
STRUCTURE OF MUTUAL FUND
There are many entities involved and the diagram below illustrates the structure
SEBI
The regulation of mutual funds operating in India falls under the preview of authority
of the “Securities and Exchange Board of India” (SEBI). Any person proposing to set
up a mutual fund in India is required under the SEBI (Mutual Funds) Regulations, 1996
to be registered with the SEBI
Sponsor
The sponsor should contribute at least 40% to the net worth of the AMC. However, if
any person holds 40% or more of the net worth of an AMC shall be deemed to be a
sponsor and will be required to fulfill the eligibility criteria in the Mutual Fund
Regulations. The sponsor or any of its directors or the principal officer employed by the
mutual fund should not be guilty of fraud or guilty of any economic offence.
Trustees
The mutual fund is required to have an independent Board of Trustees, i.e. two third
of the trustees should be independent persons who are not associated with the sponsors in
any manner. An AMC or any of its officers or employees is not eligible to act as a trustee
of any mutual fund. The trustees are responsible for - inter alia – ensuring that the AMC
has all its systems in place, all key personnel, auditors, registrar etc. have been appointed
prior to the launch of any scheme.
Asset Management Company
The sponsors or the trustees are required to appoint an AMC to manage the assets of
the mutual fund. Under the mutual fund regulations, the applicant must satisfy certain
eligibility criteria in order to qualify to register with SEBI as an AMC.
1. The sponsor must have at least 40% stake in the AMC.
2. The chairman of the AMC is not a trustee of any mutual fund.
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3. The AMC should have and must at all times maintain a minimum net worth of Cr.
100 million.
4. The director of the AMC should be a person having adequate professional
experience.
5. The board of directors of such AMC has at least 50% directors who are not
associate of or associated in any manner with the sponsor or any of its subsidiaries
or the trustees.
The Transfer Agents
The transfer agent is contracted by the AMC and is responsible for maintaining the
register of investors / unit holders and every day settlements of purchases and redemption
of units. The role of a transfer agent is to collect data from distributors relating to daily
purchases and redemption of units.
Custodian
The mutual fund is required, under the Mutual Fund Regulations, to appoint a
custodian to carry out the custodial services for the schemes of the fund. Only institutions
with substantial organizational strength, service capability in terms of computerization
and other infrastructure facilities are approved to act as custodians. The custodian must
be totally delinked from the AMC and must be registered with SEBI.
Unit Holders
They are the parties to whom the mutual fund is sold. They are ultimate beneficiary of
the income earned by the mutual funds.
ADVANTAGES:
The benefits on offer are many with good post-tax returns and reasonable safety being
the hallmark that we normally associate with them. Some of the other major benefits of
investing in them are:
Number of available options
Mutual funds invest according to the underlying investment objective as specified at the
time of launching a scheme. So, we have equity funds, debt funds, gilt funds and many
others that cater to the different needs of the investor. The availability of these options
makes them a good option. While equity funds can be as risky as the stock markets
themselves, debt funds offer the kind of security that aimed at the time of making
investments. Money market funds offer the liquidity that desired by big investors who
wish to park surplus funds for very short-term periods. The only pertinent factor here is
that the fund has to selected keeping the risk profile of the investor in mind because the
products listed above have different risks associated with them. So, while equity funds
are a good bet for a long term, they may not find favor with corporate or High Net
worth Individuals (HNIs) who have short-term needs.
Diversification
Investments spread across a wide cross-section of industries and sectors and so the risk
is reduced. Diversification reduces the risk because not all stocks move in the same
direction at the same time. One can achieve this diversification through a Mutual Fund
with far less money than one can on his own.
Professional Management
Mutual Funds employ the services of skilled professionals who have years of
experience to back them up. They use intensive research techniques to analyze each
investment option for the potential of returns along with their risk levels to come up
with the figures for performance that determine the suitability of any potential
investment.
Potential of Returns
Returns in the mutual funds are generally better than any other option in any other
avenue over a reasonable period. People can pick their investment horizon and stay put
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in the chosen fund for the duration. Equity funds can outperform most other investments
over long periods by placing long-term calls on fundamentally good stocks. The debt
funds too will outperform other options such as banks. Though they are affected by the
interest rate risk in general, the returns generated are more as they pick securities with
different duration that have different yields and so are able to increase the overall
returns from the
Get Focused
I will admit that investing in individual stocks can be fun because each company has a
unique story. However, it is important for people to focus on making money. Investing
is not a game. Your financial future depends on where you put you hard-earned dollars
and it should not take lightly.
Efficiency
By pooling investors' monies together, mutual fund companies can take advantage of
economies of scale. With large sums of money to invest, they often trade commissionfree
and have personal contacts at the brokerage firms.
Ease of Use
Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The
bookkeeping duties involved with stocks are much more complicated than owning a
mutual fund. If you are doing your own taxes, or are short on time, this can be a big
deal.
Wealthy stock investors get special treatment from brokers and wealthy bank account
holders get special treatment from the banks, but mutual funds are non-discriminatory.
It doesn't matter whether you have $50 or $500,000; you are getting the exact same
manager, the same account access and the same investment.
Risk
In general, mutual funds carry much lower risk than stocks. This is primarily due to
diversification (as mentioned above). Certain mutual funds can be riskier than
individual stocks, but you have to go out of your way to find them.
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With stocks, one worry is that the company you are investing in goes bankrupt. With
mutual funds, that chance is next to nil. Since mutual funds, typically hold anywhere
from 25-5000 companies, all of the companies that it holds would have to go bankrupt.
I will not argue that you should not ever invest in individual stocks, but I do hope you
see the advantages of using mutual funds and make the right choice for the money that
you really care about.
DISADVANTAGES
Mutual funds have their drawbacks and may not be for everyone:
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 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.
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.
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.
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 invest in Index Funds, you forego
management risk, because these funds do not employ managers
TYPES OF MUTUAL FUND SCHEMES
In India, there are many companies, both public and private that are engaged in the
trading of mutual funds. Wide varieties of Mutual Fund Schemes exist to cater to the
needs such as financial position, risk tolerance and return expectations etc. Investment
can be made either in the debt Securities or equity .The table below gives an overview
into the existing types of schemes in the Industry
Equity Funds
Equity funds are considered to be the more risky funds as compared to other fund
types, but they also provide higher returns than other funds. It is advisable that an
investor looking to invest in an equity fund should invest for long term i.e. for 3
years or more. There are different types of equity funds each falling into different
risk bracket. In the order of decreasing risk level, there are following types of equity
funds:
a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers
aspire for maximum capital appreciation and invest in less researched shares of
speculative nature. Because of these speculative investments Aggressive
Growth Funds become more volatile and thus, are prone to higher risk than
other equity funds.
b. Growth Funds - Growth Funds also invest for capital appreciation (with time
horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in
the sense that they invest in companies that are expected to outperform the
market in the future. Without entirely adopting speculative strategies, Growth
Funds invest in those companies that are expected to post above average
earnings in the future.
c. Specialty Funds - Specialty Funds have stated criteria for investments and their
portfolio comprises of only those companies that meet their criteria. Criteria for
some specialty funds could be to invest/not to invest in particular
regions/companies. Specialty funds are concentrated and thus, are
comparatively riskier than diversified funds.. There are following types of
specialty funds:
i. Sector Funds: Equity funds that invest in a particular sector/industry of
the market are known as Sector Funds. The exposure of these funds is
limited to a particular sector (say Information Technology, Auto,
Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is
why they are more risky than equity funds that invest in multiple sectors.
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ii. Foreign Securities Funds: Foreign Securities Equity Funds have the
option to invest in one or more foreign companies. Foreign securities
funds achieve international diversification and hence they are less risky
than sector funds. However, foreign securities funds are exposed to
foreign exchange rate risk and country risk.
iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having
lower market capitalization than large capitalization companies are
called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap
companies is less than that of big, blue chip companies (less than Rs.
2500 crores but more than Rs. 500 crores) and Small-Cap companies
have market capitalization of less than Rs. 500 crores. Market
Capitalization of a company can be calculated by multiplying the market
price of the company's share by the total number of its outstanding
shares in the market. The shares of Mid-Cap or Small-Cap Companies
are not as liquid as of Large-Cap Companies which gives rise to
volatility in share prices of these companies and consequently,
investment gets risky.
iv. Option Income Funds*: While not yet available in India, Option
Income Funds write options on a large fraction of their portfolio. Proper
use of options can help to reduce volatility, which is otherwise
considered as a risky instrument. These funds invest in big, high
dividend yielding companies, and then sell options against their stock
positions, which generate stable income for investors.
D.)Diversified Equity Funds - Except for a small portion of
investment in liquid money market, diversified equity funds invest mainly in
equities without any concentration on a particular sector(s). These funds are
well diversified and reduce sector-specific or company-specific risk.
However, like all other funds diversified equity funds too are exposed to
equity market risk. One prominent type of diversified equity fund in India is
Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS
investors are eligible to claim deduction from taxable income (up to Rs 1
lakh) at the time of filing the income tax return. ELSS usually has a lock-in
period and in case of any redemption by the investor before the expiry of the
lock-in period makes him liable to pay income tax on such income(s) for
which he may have received any tax exemption(s) in the past.
e.)Equity Index Funds - Equity Index Funds have the objective to match the
performance of a specific stock market index. The portfolio of these funds
comprises of the same companies that form the index and is constituted in the
same proportion as the index. Equity index funds that follow broad indices
(like S&P CNX Nifty, Sensex) are less risky than equity index funds that
follow narrow sectored indices (like BSEBANKEX or CNX Bank Index etc).
Narrow indices are less diversified and therefore, are more risky.
f) Value Funds - Value Funds invest in those companies that have sound
fundamentals and whose share prices are currently under-valued. The
portfolio of these funds comprises of shares that are trading at a low Price to
Earning Ratio (Market Price per Share / Earning per Share) and a low Market
to Book Value (Fundamental Value) Ratio. Value Funds may select
companies from diversified sectors and are exposed to lower risk level as
compared to growth funds or specialty funds. Value stocks are generally from
cyclical industries (such as cement, steel, sugar etc.) which make them volatile
in the short-term. Therefore, it is advisable to invest in Value funds with a
long-term time horizon as risk in the long term, to a large extent, is reduced.
g) Equity Income or Dividend Yield Funds - The objective of Equity
Income or Dividend Yield Equity Funds is to generate high recurring income
and steady capital appreciation for investors by investing in those companies
which issue high dividends (such as Power or Utility companies whose share
prices fluctuate comparatively lesser than other companies' share prices).
Equity Income or Dividend Yield Equity Funds are generally exposed to the
lowest risk level as compared to other equity funds.