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A PROJECT REPORT ON WEALTH CREATION STRATEGY THROUGH MUTUAL FUNDS Carried out at

Submitted by MOHIT KUMAR

Under guidance of Mr. GAURAV AGGARWAL Submitted in partial fulfillment of the requirement for the award of Post Graduation Programme

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INDEX

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&

INDEX
IND"'(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((() !he Pro*ect is conducted to study+ ((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((, -D$C . N/((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((%0 1ISSI#N ND .USIN"SS S!R !"G2((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((%% 1utual $und Industry Update $ebruary &003(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((&) 1utual funds and other in4estment companies(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((), Unit in4estment trusts((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((()5 Don6t redeem or issue shares((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((()5 1utual funds((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((()3 !ime((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((70 !a8es on mutual funds(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((7% 1utual $unds Performance((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((7% C"#9 1D #$ -D$C(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((:; ((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((5& %< =hat is the salary of Customer>(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((5, $INDINGS(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((%%& %( !he in4estors gi4e more preference to regular income funds besides the considerations of %< Di4ersified "quity &< !a8 Sa4ing Schemes( !hus if the go4ernment encourages the in4estment in mutual funds in the current budget+ then more people will be in4esting in the 1$s for ta8 sa4ing( -owe4er people are also not compliant to ris? a4ersion( !hey are willing to in4est in ris?y equity funds(((((((((((((((%%& &( nother significant finding of the pro*ect is that in4estors are lured by the returns 1$s are showing( -owe4er at the same time they also want to minimi@e their ris?(( %%& )( In4estors desire or opt openAended schemes than closeAended schemes( !his means that they want fle8ibility in the inflow and outflow of their funds((((((((((((((((((((((((((((((%%) 7( !he in4estment hori@on+ which is most li?ed by the in4estors+ is &A) yrs(((((((((((((((%%) ;( !he source of information the in4estors most rely is on ad4ertisement( -owe4er they also require the detailed information+ which they ta?e from $inancial d4isors( #n other sources the in4estors are quite apprehensi4e((((((((((((((((((((((((((((((((((((((((((((((((((((((%%) :( In4estor6s portfolio consists mainly of $i8ed Deposits and Post #ffice schemes( -owe4er portfolio of regular in4estors do contain significant proportion of 1utual $unds((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((%%) R"C#11"ND !I#NS(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((%%) B !here is lac? of awareness among people about mutual funds so there should be more ad4ertising and other promotional campaigns to ma?e them aware((((((((((((((((((((((((((((%%) B People are more interested in in4esting in equity funds rather than debt funds because companies are promoting more for equity funds( Companies should equally promote debt funds also as the pro4ide security to customers(((((((((((((((((((((((((((((((((((((((((((((((((((%%7 B Companies should gi4e ?nowledge to its customer about its computeri@ed operations to sa4e their time and to ma?e the operations more easy((((((((((((((((((((((((((((((((((((((((((((%%7

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ACKNOWLEDGEMENT

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I ta?e this opportunity to e8press my deep sense of gratitude to all those who ha4e contributed significantly by sharing their ?nowledge and e8perience in the completion of this pro*ect wor?( I am greatly obliged to r pro4iding me the right ?ind of opportunity and facilities to complete this 4enture( 1y first word of gratitude is due to + PUN"+ my corporate guide+ for his ?ind help and support and for his 4aluable guidance throughout the pro*ect( I am than?ful to him for pro4iding me with necessary insights and helping me out at e4ery single step(

$inally+ I would also li?e to than? all my dear friends for their ?ind cooperation+ ad4ice and encouragement during the long and arduous tas? of preparing this report and carrying out the pro*ect( t last but not the least+ who are always at the top of my heart+ my dear family members whose blessings+ inspiration and encouragement ha4e resulted in the successful completion of this pro*ect(

SUMIT RAY IICS PUNE

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EXECUTIVE SUMMARY

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The Pro e!" #$ !o%&'!"e& "o $"'&() C=" D!- CR" !I#N S!R !"G2 !-R#UG- 1U!U D $UNDS E !he pro*ect tal?s about C=ealth Creation Strategy !hrough mutual fundsE !he first few pages tal? about the introduction and ob*ecti4es of the study( !his is followed by literature re4iew with details about mutual funds( Ne8t come the sur4ey+ the purpose of which is to study the wor?ing of mutual funds+ the characteristics of mutual funds that attract the in4estor and what an in4estor should consider for safe in4estment and better returns( !he last part consists of findings+ recommendations+ limitations+ conclusion and bibliography( !he questionnaire has been anne8ed to the report !he point which was co4ered are as followsFA !o find the class of preferred customer( !o generate the leads and then con4ert them into prospects( !o generate new leads from prospects( !o create loyalty about -D$C .an? in the minds of customer( !o attain this ob*ecti4e I prepared Guestionnaire regarding preferred sa4ing account( !hen I started 1apping and circulating Guestionnaire( fter analysis of Guestionnaire I started to generate leads+ followAups and
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then closer(

fter analy@ing this pro*ect I came upto certain points which

are discuss in this pro*ect report( !his pro*ect helps me to ?now about different .an?ing products and .an?ing transactions (It also pro4ide me an opportunity to interact with different clients and meet their required demand and help me to build my career as a 1ar?eting e8ecuti4e( 1r( Ra*?umar sir+ has been 4ery supporti4e and in4ol4ed in this pro*ect( It was his support that helped the pro*ect to start in its earliest and most 4ulnerable stages( I would li?e to e8tend my gratitude towards him as he too? out time from his e8tremely busy schedule+ 1y sincere than?s to all at -D$C . N/+ who directly and indirectly helped me to carry forward this pro*ect((

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HISTORY

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HDFC *ANK

-D$C .an? was incorporated in

ugust %337 in the name of H-D$C

.an? DimitedH+ with its registered office in 1umbai+ India( !he .an? commenced operations as a Scheduled Commercial .an? in Ianuary %33;( !he -ousing De4elopment $inance Corporation Dimited J-D$C< was amongst the first to recei4e an Hin principleH appro4al from the Reser4e .an? of India JR.I< to set up a ban? in the pri4ate sector+ as part of the R.IHs liberali@ation of the Indian .an?ing Industry in %337( -eadquartered in 1umbai+ -D$C .an?+ has a networ? of o4er ;)% branches spread o4er &&5 cities across India( ll branches are lin?ed on an online realAtime basis( Customers in o4er %&0 locations are ser4iced through !elephone .an?ing( !he .an? also has a networ? of about o4er %0;7 networ?ed !1s across these cities( -D$C .an?Hs !1 networ? can be accessed by all domestic and international Kisa L 1asterCard+ Kisa "lectron L 1aestro+ Plus L Cirrus and cardholders( -D$C .an? has won many awards for its e8cellent ser4ice( 1a*or among them are M.est .an? in IndiaM by -ong /ongAbased $inance sia merican "8press Credit L Charge

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%0

maga@ine in &00; and MCompany of the 2earM "8cellence &007A0;(

ward for Corporate

M I S S I O N A N D * U S I N E S S S T R AT E G Y

#ur mission is to be Ma =orld Class Indian .an?M+ benchmar?ing oursel4es against international standards and best practices in terms of product offerings+ technology+ ser4ice le4els+ ris? management and audit 9 compliance( !he ob*ecti4e is to build sound customer franchises across distinct businesses so as to be a preferred pro4ider of ban?ing ser4ices for target retail and wholesale customer segments+ and to achie4e a healthy growth in profitability+ consistent with the .an?Hs ris? appetite( =e are committed to do this while ensuring the highest le4els of ethical standards+ professional integrity+ corporate go4ernance and regulatory compliance( #ur business strategy emphasi@es the followingF Increase our mar?et share in India6s e8panding ban?ing and financial ser4ices industry by following a disciplined growth strategy focusing on quality and not on quantity and deli4ering high quality customer ser4ice(

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%%

De4erage our technology platform and open scaleable systems to deli4er more products to more customers and to control operating costs( 1aintain our current high standards for asset quality through disciplined credit ris? management( De4elop inno4ati4e products and ser4ices that attract our targeted customers and address inefficiencies in the Indian financial sector( Continue to de4elop products and ser4ices that reduce our cost of funds( $ocus on high earnings growth with low 4olatility(

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%&

M'"'+, F'%&$

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%)

M'"'+, -'%& .'"'+, -'%& is a professionally managed type of collecti4e in4estment scheme that pools money from many in4estors and in4ests it in stoc?s+ bonds+ shortAterm money mar?et instruments+ andLor other securities( !he mutual fund will ha4e a fund manager that trades the pooled money on a regular basis( s of early &005+ the worldwide 4alue of all mutual funds totals more than N&: trillion

( Since %370+ there ha4e been three basic types of in4estment companies in the United StatesF openAend funds+ also ?nown in the US as mutual fundsO unit in4estment trusts JUI!s<O and closedAend funds( Similar funds also operate in Canada( -owe4er+ in the rest of the world+ mutual fund is used as a generic term for 4arious types of collecti4e in4estment 4ehicles+ such as unit trusts+ openAended in4estment companies J#"ICs<+ uniti@ed insurance funds+ and underta?ings for collecti4e in4estments in transferable securities JUCI!S<(

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Wh+" #$ M'"'+, F'%& / Co%!e0" o- M'"'+, F'%& The -,o1 !h+r" 2e,o1 &e$!r#2e$ 2ro+&,( "he 1or3#%4 o- + .'"'+, -'%&5 1utual $und is a trust that pools the sa4ings of a number of in4estors who share common financial goal+ in4estments may be in shares+ debt securities+ money mar?et securities or a combination of these( !hose securities are professionally managed on behalf of the unitAholders+ and each in4estor holds a proArata share of the portfolio i(e( entitled to any profits when the securities are sold+ but sub*ect to any losses in 4alue as well( !he income earned through these in4estments and the capital appreciation reali@ed are shared by its unit holders in proportion to the number of units owned by them( !hus a 1utual $und is the most suitable in4estment for the common man as it offers an opportunity to in4est in a di4ersified+ professionally managed bas?et of securities at a relati4ely low cost(

Ho1 &oe$ + M'"'+, -'%& 1or3/


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STRUCTURE OF A MUTUAL FUND mutual fund is set up in the form of a trust+ which has sponsor+ trustees+ asset management company 6AMC7 and a custodian( !he trust is established by a sponsor or more than one sponsor who is li?e a promoter of a company( !he trustees of the mutual fund hold its property for the benefit of the unitAholders( !he 1C+ appro4ed by S".I+ manages the funds by ma?ing in4estments in 4arious types of securities( !he custodian+ who is registered with S".I+ holds the securities of 4arious schemes of the fund in its custody( !he trustees are 4ested with the general power of superintendence and direction o4er 1C( !hey monitor the performance and compliance of S".I Regulations by the mutual fund( typical mutual fund structure in India can be graphically represented as followsF

HDFC M'"'+, F'%&

H#$"or( o- M'"'+, F'%& #% I%&#+


Pioneer of mutual fund is U!I in %3:) ctual growth started in %35,

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%,

!he dramatic impro4ement through quality wise and quantity wise 1ain reason for its poor growth is new concept in the country( Darge sections of Indian in4estor are yet to be intellectual with this concept( -ence the it is prime responsibility of all 1utual $und companies + to ma?e the product correctly abreast of selling( !here are four 7 phases according to the de4elopment of sector F#r$" Ph+$e 89:;<89=>

%3:7 to %35,F A Unit !rust of India JU!I< was established on %3:) by an ct of Parliament( It was set up by the Reser4e .an? of India and functioned under the Regulatory and administrati4e control of the Reser4e .an? of India( In %3,5 U!I was deAlin?ed from the R.I and the Industrial De4elopment .an? of India JID.I< too? o4er the regulatory and administrati4e control in place of R.I( !he first scheme launched by U!I was Unit Scheme %3:7( t the end of %355 U!I had Rs(:+,00 cores of asset Se!o%& Ph+$e ? 89=><899@ 6E%"r( o- P'2,#! Se!"or F'%&$7

%35, mar?ed the entry of nonA U!I+ public sector mutual funds set up by public sector ban?s and Dife Insurance Corporation of India JDIC< and General Insurance Corporation of India JGIC<( S.I 1utual $und was the first nonA U!I 1utual $und established in Iune %35, followed by Canban? 1utual $und JDec 5,<+ Pun*ab National .an? 1utual $und J ug 53<+ Indian .an? 1utual $und JNo4 53<+ .an? of India JIun 30<+ .an? of .aroda 1utual $und J#ct 3&<( DIC established its mutual fund in Iune %353 while GIC had set up its mutual fund in December %330( t the end of %33)+ the mutual fund industry had assets under management of Rs(7,+007 crores(

Th#r& Ph+$e ? 899@<ABB@ 6E%"r( o- Pr#C+"e Se!"or F'%&$7

=ith the entry of pri4ate sector funds in %33)+ a new era started in
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the Indian mutual fund industry+ gi4ing the Indian in4estors a wider choice of fund families( lso+ %33) was the year in which the first 1utual $und Regulations came into being+ under which all mutual funds+ e8cept U!I were to be registered and go4erned( !he erstwhile /othari Pioneer Jnow merged with $ran?lin !empleton< was the first pri4ate sector mutual fund registered in Iuly %33)( !he %33) S".I J1utual $und< Regulations were substituted by a more comprehensi4e and re4ised 1utual $und Regulations in %33:( !he industry now functions under the S".I J1utual $und< Regulations %33:( !he number of mutual fund houses went on increasing+ with many foreign mutual funds setting up funds in India and also the industry has witnessed se4eral mergers and acquisitions( s at the end of Ianuary &00)+ there were )) mutual funds with total assets of Rs( %+&%+50; crores( !he Unit !rust of India with Rs(77+;7% crores of assets under management was way ahead of other mutual funds(

Fo'r"h Ph+$e ? $#%!e Fe2r'+r( ABB@

In $ebruary &00)+ following the repeal of the Unit !rust of India ct %3:) U!I was bifurcated into two separate entities( #ne is the Specified Underta?ing of the Unit !rust of India with assets under management of Rs(&3+5); crores as at the end of Ianuary &00)+ representing broadly+ the assets of US :7 scheme+ assured return and certain other schemes( !he Specified Underta?ing of Unit !rust of India+ functioning under an administrator and under the rules framed by Go4ernment of India and does not come under the pur4iew of the 1utual $und Regulations( !he second is the U!I 1utual $und Dtd+ sponsored by S.I+ PN.+ .#. and DIC( It is registered with S".I and functions under the 1utual $und Regulations =ith the bifurcation of the erstwhile U!I which had in 1arch &000 more than Rs(,:+000 crores of assets under management and with the setting up of a U!I 1utual $und+ conforming to the S".I 1utual $und Regulations+ and with recent mergers ta?ing place among different

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%3

pri4ate sector funds+ the mutual fund industry has entered its current phase of consolidation and growth( !he graph indicates the growth of assets o4er the years( GROWTH IN ASSETS UNDER MANAGEMENT

So.e -+!"$ -or "he 4ro1"h o- .'"'+, -'%&$ #% I%&#+

#ur sa4ing rate is o4er &)P+ highest in the world( #nly channel @ing these sa4ings in mutual fund sector is required( %00P growth in the last : years !here are appro8imately &3 mutual funds which are much less than US ha4ing more than 500(!here is a big scope for e8pansion( H.H and HCH class cities are growing rapidly( !oday most of the mutual funds are concentrating on the H H class cities( Soon they will find scope in the growing cities( 1utual fund can penetrate rural li?e the Indian insurance industry with simple and limited products(

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Re4',+"#o%$ 1utual $unds in India are go4erned by the SE*I 6M'"'+, F'%&7 Re4',+"#o%$ 899: as amended from time to time( $or further details please 4isit the S".I website h""05DD111.$e2#.4oC.#% Or4+%#E+"#o% o- M'"'+, F'%&

The $"r'!"'re !o%$#$"$ o- S0o%$or Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund( Sponsor must contribute at least 70P of the net worth of the In4estment 1anaged and meet the eligibility criteria prescribed under the Securities and "8change .oard of India J1utual $unds< Regulations+ %33:(!he Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the 1utual $und( Tr'$" !he 1utual $und is constituted as a trust in accordance with the pro4isions of the Indian !rusts ct+ %55& by the Sponsor( !he trust deed is registered under the Indian Registration ct+ %305(

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Tr'$"ee !rustee is usually a company Jcorporate body< or a .oard of !rustees Jbody of indi4iduals<( !he main responsibility of the !rustee is to safeguard the interest of the unit holders and inter alias ensure that the 1C functions in the interest of in4estors and in accordance with the Securities and "8change .oard of India J1utual $unds< Regulations+ %33:+ the pro4isions of the !rust Deed and the #ffer Documents of the respecti4e Schemes( t least &L)rd directors of the !rustee are independent directors who are not associated with the Sponsor in any manner( A$$e" M+%+4e.e%" Co.0+%( 6AMC7 !he !rustee as the In4estment 1anager of the 1utual $und appoints the 1C( !he 1C is required to be appro4ed by the Securities and "8change .oard of India JS".I< to act as an asset management company of the 1utual $und( tlas ;0P of the directors of the 1C is an independent director who is not associated with the Sponsor in any manner( !he 1C must ha4e a net worth of at least %0 crore at all times( Re4#$"r+r +%& Tr+%$-er A4e%" !he 1C if so authori@ed by the !rust Deed appoints the Registrar and !ransfer gent to the 1utual $und( !he Registrar processes the application formO redemption requests and dispatches account statements to the unit holders( !he Registrar and !ransfer agent also handles communications with in4estors and updates in4estor records(

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&&

T(0e$ o- M'"'+, F'%& EF'#"( Or#e%"e& S!he.e$ !hese schemes+ also commonly called Growth Schemes+ see? to in4est a ma*ority of their funds in equities and a small portion in money mar?et instruments( Such schemes ha4e the potential to deli4er superior returns o4er the long term( -owe4er+ because they in4est in equities+ these schemes are e8posed to fluctuations in 4alue especially in the short term( "quity schemes are hence not suitable for in4estors see?ing regular income or needing to use their in4estments in the shortAterm( !hey are ideal for in4estors who ha4e a longAterm in4estment hori@on( !he N K prices of equity fund fluctuates with mar?et 4alue of the underlying stoc? which are influenced by e8ternal factors such as social+ political as well as economic( I%&eG S!he.e$ Inde8 $unds replicate the portfolio of a particular inde8 such as the .S" Sensiti4e inde8+ S9P NS" ;0 inde8 JNifty<+ etc !hese schemes in4est in the securities in the same weight age comprising of an inde8( N Ks of such schemes would rise or fall in accordance with the rise or fall in the inde8+ though not e8actly by the same percentage due to some factors ?nown as Mtrac?ing errorM in technical terms( Necessary disclosures in this regard are made in the offer document of the mutual fund scheme( !here are also e8change traded inde8 funds launched by the mutual funds+ which are traded on the stoc? e8changes( Se!"or S0e!#-#! S!he.e$ !hese are the fundsLschemes+ which in4est in the securities of only those sectors or industries as specified in the offer documents( e(g( Pharmaceuticals+ Software+ $ast 1o4ing Consumer Goods J$1CG<+ Petroleum stoc?s+ etc( !he returns in these funds are dependent on the performance of the respecti4e sectorsLindustries( =hile these funds may gi4e higher returns+ they are more ris?y compared to di4ersified funds( In4estors need to ?eep a watch on the performance of those sectorsLindustries and must e8it at an appropriate time( !hey may also
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H#$"or( 1assachusetts In4estors !rust Jnow 1$S In4estment 1anagement< was founded on 1arch &%+ %3&7+ and+ after one year+ it had &00 shareholders and N)3&+000 in assets( !he entire industry+ which included a few closedA end funds represented less than N%0 million in %3&7( !he stoc? mar?et crash of %3&3 hindered the growth of mutual funds( In response to the stoc? mar?et crash+ Congress passed the Securities ct of %3)) and the Securities "8change ct of %3)7( !hese laws require that a fund be registered with the Securities and "8change Commission JS"C< and pro4ide prospecti4e in4estors with a prospectus that contains required disclosures about the fund+ the securities themsel4es+ and fund manager( !he S"C helped draft the In4estment Company ct of %370+ which sets forth the guidelines with which all S"CAregistered funds today must comply( =ith renewed confidence in the stoc? mar?et+ mutual funds began to blossom( .y the end of the %3:0s+ there were appro8imately &,0 funds with N75 billion in assets( !he first retail inde8 fund+ $irst Inde8 In4estment !rust+ was formed in %3,: and headed by Iohn .ogle+ who conceptuali@ed many of the ?ey tenets of the industry in his %3;% senior thesis at Princeton Uni4ersityQ)R( It is now called the Kanguard ;00 Inde8 $und and is one of the worldHs largest mutual funds+ with more than N%00 billion in assets( ?ey factor in mutualAfund growth was the %3,; change in the Internal Re4enue Code allowing indi4iduals to open indi4idual retirement accounts JIR s<( "4en people already enrolled in corporate pension plans could contribute a limited amount Jat the time+ up to N&+000 a year<( 1utual funds are now popular in employerAsponsored MdefinedAcontributionM retirement plans such as J70%J?<s< and 70)Jb<s as well as IR s including Roth IR s( s of #ctober &00,+ there are 5+0%; mutual funds that belong to the In4estment Company Institute JICI<+ a national trade association of in4estment companies in the United States+ with combined assets of N%&();: trillion(

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&7

U$+4e Since the In4estment Company ct of %370+ a mutual fund is one of three basic types of in4estment companies a4ailable in the United States(Q;R 1utual funds can in4est in many ?inds of securities( !he most common are cash instruments+ stoc?+ and bonds+ but there are hundreds of subA categories( Stoc? funds+ for instance+ can in4est primarily in the shares of a particular industry+ such as technology or utilities( !hese are ?nown as sector funds( .ond funds can 4ary according to ris? Je(g(+ highAyield *un? bonds or in4estmentAgrade corporate bonds<+ type of issuers Je(g(+ go4ernment agencies+ corporations+ or municipalities<+ or maturity of the bonds JshortA or longAterm<( .oth stoc? and bond funds can in4est in primarily U(S( securities Jdomestic funds<+ both U(S( and foreign securities Jglobal funds<+ or primarily foreign securities Jinternational funds<( 1ost mutual fundsH in4estment portfolios are continually ad*usted under the super4ision of a professional manager+ who forecasts cash flows into and out of the fund by in4estors+ as well as the future performance of in4estments appropriate for the fund and chooses those which he or she belie4es will most closely match the fundHs stated in4estment ob*ecti4e( mutual fund is administered under an ad4isory contract with a management company+ which may hire or fire fund managers( 1utual funds are sub*ect to a special set of regulatory+ accounting+ and ta8 rules( In the U(S(+ unli?e most other types of business entities+ they are not ta8ed on their income as long as they distribute 30P of it to their shareholders and the funds meet certain di4ersification requirements in the Internal Re4enue Code( lso+ the type of income they earn is often unchanged as it passes through to the shareholders( 1utual fund distributions of ta8Afree municipal bond income are ta8Afree to the shareholder( !a8able distributions can be either ordinary income or capital gains+ depending on how the fund earned those distributions( Net losses are not distributed or passed through to fund in4estors( Ne" +$$e" C+,'e !he net asset value+ or N K+ is the current mar?et 4alue of a fundHs holdings+ less the fundHs liabilities+ usually e8pressed as a perAshare amount( $or most funds+ the N K is determined daily+ after the close of
INDIR INS!I!U" #$ C R""R S!UDI"S &;

trading on some specified financial e8change+ but some funds update their N K multiple times during the trading day( !he public offering price+ or P#P+ is the N K plus a sales charge( #penAend funds sell shares at the P#P and redeem shares at the N K+ and so process orders only after the N K is determined( ClosedAend funds Jthe shares of which are traded by in4estors< may trade at a higher or lower price than their N KO this is ?nown as a premium or discount+ respecti4ely( If a fund is di4ided into multiple classes of shares+ each class will typically ha4e its own N K+ reflecting differences in fees and e8penses paid by the different classes( Some mutual funds own securities which are not regularly traded on any formal e8change( !hese may be shares in 4ery small or ban?rupt companiesO they may be deri4ati4esO or they may be pri4ate in4estments in unregistered financial instruments Jsuch as stoc? in a nonApublic company<( In the absence of a public mar?et for these securities+ it is the responsibility of the fund manager to form an estimate of their 4alue when computing the N K( -ow much of a fundHs assets may be in4ested in such securities is stated in the fundHs prospectus( ACer+4e A%%'+, Re"'r% US mutual funds use S"C form NA% to report the a4erage annual compounded rates of return for %Ayear+ ;Ayear and %0Ayear periods as the Ma4erage annual total returnM for each fund( !he following formula is usedF
Q:R

PJ%S!<n T "RK =hereF P T a hypothetical initial payment of N%+000( ! T a4erage annual total return( n T number of years( "RK T ending redeemable 4alue of a hypothetical N%+000 payment made at the beginning of the %A+ ;A+ or %0Ayear periods at the end of the %A+ ;A+ or %0Ayear periods Jor fractional portion<( T'r%oCer

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&:

Turnover is a measure of the fundHs securities transactions+ usually calculated o4er a yearHs time+ and usually e8pressed as a percentage of net asset 4alue( !his 4alue is usually calculated as the 4alue of all transactions Jbuying+ selling< di4ided by & di4ided by the fundHs total holdingsO i(e(+ the fund counts one security sold and another one bought as one Mturno4erM( !hus turno4er measures the replacement of holdings( In Canada+ under NI 5%A%0: Jrequired disclosure for in4estment funds< turno4er ratio is calculated based on the lesser of purchases or sales di4ided by the a4erage si@e of the portfolio Jincluding cash<( EG0e%$e$ +%& TERH$ 1utual funds bear e8penses similar to other companies( !he fee structure of a mutual fund can be di4ided into two or three main componentsF management fee+ nonmanagement e8pense+ and %&bA%LnonA%&bA% fees( ll e8penses are e8pressed as a percentage of the a4erage daily net assets of the fund( M+%+4e.e%" -ee$ !he management fee for the fund is usually synonymous with the contractual in4estment ad4isory fee charged for the management of a fundHs in4estments( -owe4er+ as many fund companies include administrati4e fees in the ad4isory fee component+ when attempting to compare the total management e8penses of different funds+ it is helpful to define management fee as equal to the contractual ad4isory fee S the contractual administrator fee( !his Mle4els the playing fieldM when comparing management fee components across multiple funds( Contractual ad4isory fees may be structured as MflatArateM fees+ i(e(+ a single fee charged to the fund+ regardless of the asset si@e of the fund( -owe4er+ many funds ha4e contractual fees which include brea?points+ so that as the 4alue of a fundHs assets increases+ the ad4isory fee paid decreases( nother way in which the ad4isory fees remain competiti4e is by structuring the fee so that it is based on the 4alue of all of the assets of a group or a comple8 of funds rather than those of a single fund(

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&,

No%<.+%+4e.e%" eG0e%$e$ part from the management fee+ there are certain nonAmanagement e8penses which most funds must pay( Some of the more significant Jin terms of amount< nonAmanagement e8penses areF transfer agent e8penses Jthis is usually the person you get on the other end of the phone line when you want to purchaseLsell shares of a fund<+ custodian e8pense Jthe fundHs assets are ?ept in custody by a ban? which charges a custody fee<+ legalLaudit e8pense+ fund accounting e8pense+ registration e8pense Jthe S"C charges a registration fee when funds file registration statements with it<+ board of directorsLtrustees e8pense Jthe disinterested members of the board who o4ersee the fund are usually paid a fee for their time spent at meetings<+ and printing and postage e8pense Jincurred when printing and deli4ering shareholder reports<( 8A2<8DNo%<8A2<8 $erC#!e -ee$ %&bA% ser4ice feesLshareholder ser4icing fees are contractual fees which a fund may charge to co4er the mar?eting e8penses of the fund( NonA%&bA% ser4ice fees are mar?etingLshareholder ser4icing fees which do not fall under S"C rule %&bA%( =hile funds do not ha4e to charge the full contractual %&bA% fee+ they often do( =hen in4esting in a frontAend load or noAload fund+ the %&bA% fees for the fund are usually (&;0P Jor &; basis points<( !he %&bA% fees for bac?Aend and le4elAload share classes are usually between ;0 and ,; basis points but may be as much as %00 basis points( =hile funds are often mar?eted as MnoAloadM funds+ this does not mean they do not charge a distribution e8pense through a different mechanism( It is e8pected that a fund listed on an online bro?erage site will be paying for the MshelfAspaceM in a different manner e4en if not directly through a %&bA% fee( I%Ce$"or -ee$ +%& eG0e%$e$ $ees and e8penses borne by the in4estor 4ary based on the arrangement made with the in4estorHs bro?er( Sales loads Jor contingent deferred sales loads JCDSD<< are not included in the fundHs total e8pense ratio J!"R< because they do not pass through the statement of operations for the fund( dditionally+ funds may charge early redemption fees to discourage in4estors from swapping money into and out of the fund quic?ly+ which may force the fund to ma?e bad trades to obtain the necessary liquidity(
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$or e8ample+ $idelity Di4ersified International $und J$DIK'< charges a % percent fee on money remo4ed from the fund in less than )0 days( *ro3er+4e !o..#$$#o%$ n additional e8pense which does not pass through the statement of operations and cannot be controlled by the in4estor is bro?erage commissions( .ro?erage commissions are incorporated into the price of the fund and are reported usually ) months after the fundHs annual report in the statement of additional information( .ro?erage commissions are directly related to portfolio turno4er Jportfolio turno4er refers to the number of times the fundHs assets are bought and sold o4er the course of a year<( Usually the higher the rate of the portfolio turno4er+ the higher the bro?erage commissions( !he ad4isors of mutual fund companies are required to achie4e Mbest e8ecutionM through bro?erage arrangements so that the commissions charged to the fund will not be e8cessi4e(

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&3

T(0e& o- F'%&$

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)0

T(0e$ o- .'"'+, -'%&$ O0e%<e%& -'%& !he term mutual fund is the common name for what is classified as an openAend in4estment company by the S"C( .eing openAended means that+ at the end of e4ery day+ the fund issues new shares to in4estors and buys bac? shares from in4estors wishing to lea4e the fund( 1utual funds must be structured as corporations or trusts+ such as business trusts+ and any corporation or trust will be classified by the S"C as an in4estment company if it issues securities and primarily in4ests in nonA go4ernment securities( n in4estment company will be classified by the S"C as an openAend in4estment company if they do not issue undi4ided interests in specified securities Jthe defining characteristic of unit in4estment trusts or UI!s< and if they issue redeemable securities( Registered in4estment companies that are not UI!s or openAend in4estment companies are closedAend funds( Neither UI!s nor closedAend funds are mutual funds Jas that term is used in the US<( EG!h+%4e<"r+&e& -'%&$ relati4ely recent inno4ation+ the e8changeAtraded fund or "!$+ is often structured as an openAend in4estment company( "!$s combine characteristics of both mutual funds and closedAend funds( "!$s are traded throughout the day on a stoc? e8change+ *ust li?e closedAend funds+ but at prices generally appro8imating the "!$Hs net asset 4alue( 1ost "!$s are inde8 funds and trac? stoc? mar?et inde8es( Shares are issued or redeemed by institutional in4estors in large bloc?s Jtypically of ;0+000<( 1ost in4estors purchase and sell shares through bro?ers in mar?et transactions( .ecause the institutional in4estors normally purchase and redeem in in ?ind transactions+ "!$s are more efficient than traditional mutual funds Jwhich are continuously issuing and redeeming securities and+ to effect such transactions+ continually buying and selling securities and maintaining liquidity positions< and therefore tend to ha4e lower e8penses( "8changeAtraded funds are also 4aluable for foreign in4estors who are often able to buy and sell securities traded on a stoc? mar?et+ but who+ for regulatory reasons+ are limited in their ability to participate in traditional U(S( mutual funds(
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EF'#"( -'%&$ "quity funds+ which consist mainly of stoc? in4estments+ are the most common type of mutual fund( "quity funds hold ;0 percent of all amounts in4ested in mutual funds in the United States( Q,R #ften equity funds focus in4estments on particular strategies and certain types of issuers( C+0#"+,#E+"#o% $und managers and other in4estment professionals ha4e 4arying definitions of midAcap+ and largeAcap ranges( !he following ranges are used by Russell Inde8esF Q5R

Russell 1icrocap Inde8 A microAcap JN;7(5 A ;)3(; million< Russell &000 Inde8 A smallAcap JN%5&(: million A %(5 billion< Russell 1idcap Inde8 A midAcap JN%(5 A %)(, billion< Russell %000 Inde8 A largeAcap JN%(5 A )5:(3 billion<

Gro1"h C$. C+,'e nother distinction is made between growth funds+ which in4est in stoc?s of companies that ha4e the potential for large capital gains+ and 4alue funds+ which concentrate on stoc?s that are under4alued( Kalue stoc?s ha4e historically produced higher returnsO howe4er+ financial theory states this is compensation for their greater ris?( Growth funds tend not to pay regular di4idends( Income funds tend to be more conser4ati4e in4estments+ with a focus on stoc?s that pay di4idends( balanced fund may use a combination of strategies+ typically including some le4el of in4estment in bonds+ to stay more conser4ati4e when it comes to ris?+ yet aim for some growth( I%&eG -'%&$ Cer$'$ +!"#Ce .+%+4e.e%" n inde8 fund maintains in4estments in companies that are part of ma*or stoc? Jor bond< indices+ such as the S9P ;00+ while an acti4ely managed fund attempts to outperform a rele4ant inde8 through superior stoc?A pic?ing techniques( !he assets of an inde8 fund are managed to closely appro8imate the performance of a particular published inde8( Since the

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)&

composition of an inde8 changes infrequently+ an inde8 fund manager ma?es fewer trades+ on a4erage+ than does an acti4e fund manager( $or this reason+ inde8 funds generally ha4e lower trading e8penses than acti4ely managed funds+ and typically incur fewer shortAterm capital gains which must be passed on to shareholders( dditionally+ inde8 funds do not incur e8penses to pay for selection of indi4idual stoc?s Jproprietary selection techniques+ research+ etc(< and deciding when to buy+ hold or sell indi4idual holdings( Instead+ a fairly simple computer model can identify whate4er changes are needed to bring the fund bac? into agreement with its target inde8( Certain empirical e4idence seems to illustrate that mutual funds do not beat the mar?et and acti4ely managed mutual funds underAperform other broadAbased portfolios with similar characteristics( #ne study found that nearly %+;00 U(S( mutual funds underAperformed the mar?et in appro8imately half of the years between %3:& and %33&(Q3R 1oreo4er+ funds that performed well in the past are not able to beat the mar?et again in the future Jshown by Iensen+ %3:5O Grimblatt and Sheridan !itman+ %353<(Q%0R *o%& -'%&$ .ond funds account for %5P of mutual fund assets( Q%%R !ypes of bond funds include term funds+ which ha4e a fi8ed set of time JshortA+ mediumA+ or longAterm< before they mature( 1unicipal bond funds generally ha4e lower returns+ but ha4e ta8 ad4antages and lower ris?( -ighAyield bond funds in4est in corporate bonds+ including highAyield or *un? bonds( =ith the potential for high yield+ these bonds also come with greater ris?( Mo%e( .+r3e" -'%&$ 1oney mar?et funds hold &:P of mutual fund assets in the United States( Q%&R 1oney mar?et funds entail the least ris?+ as well as lower rates of return( Unli?e certificates of deposit JCDs<+ money mar?et shares are liquid and redeemable at any time( F'%&$ o- -'%&$ $unds of funds J$o$< are mutual funds which in4est in other underlying mutual funds Ji(e(+ they are funds comprised of other funds<( !he funds at
INDIR INS!I!U" #$ C R""R S!UDI"S ))

the underlying le4el are typically funds which an in4estor can in4est in indi4idually( fund of funds will typically charge a management fee which is smaller than that of a normal fund because it is considered a fee charged for asset allocation ser4ices( !he fees charged at the underlying fund le4el do not pass through the statement of operations+ but are usually disclosed in the fundHs annual report+ prospectus+ or statement of additional information( !he fund should be e4aluated on the combination of the fundAle4el e8penses and underlying fund e8penses+ as these both reduce the return to the in4estor( 1ost $o$s in4est in affiliated funds Ji(e(+ mutual funds managed by the same ad4isor<+ although some in4est in funds managed by other Junaffiliated< ad4isors( !he cost associated with in4esting in an unaffiliated underlying fund is most often higher than in4esting in an affiliated underlying because of the in4estment management research in4ol4ed in in4esting in fund ad4ised by a different ad4isor( Recently+ $o$s ha4e been classified into those that are acti4ely managed Jin which the in4estment ad4isor reallocates frequently among the underlying funds in order to ad*ust to changing mar?et conditions< and those that are passi4ely managed Jthe in4estment ad4isor allocates assets on the basis of on an allocation model which is rebalanced on a regular basis<( !he design of $o$s is structured in such a way as to pro4ide a ready mi8 of mutual funds for in4estors who are unable to or unwilling to determine their own asset allocation model( $und companies such as !I ACR"$+ merican Century In4estments+ Kanguard+ and $idelity ha4e also entered this mar?et to pro4ide in4estors with these options and ta?e the Mguess wor?M out of selecting funds( !he allocation mi8es usually 4ary by the time the in4estor would li?e to retireF &0&0+ &0)0+ &0;0+ etc( !he more distant the target retirement date+ the more aggressi4e the asset mi8( He&4e -'%&$ -edge funds in the United States are pooled in4estment funds with loose S"C regulation and should %o" be confused with mutual funds( Some hedge fund managers are required to register with S"C as in4estment ad4isers under the In4estment d4isers ct( Q%)R !he ct does not require an ad4iser to follow or a4oid any particular in4estment strategies+ nor does it require or prohibit specific in4estments( -edge funds typically charge a management fee of %P or more+ plus a Mperformance feeM of &0P of the
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hedge fundHs profits( !here may be a Mloc?AupM period+ during which an in4estor cannot cash in shares( 4ariation of the hedge strategy is the %)0A)0 fund for indi4idual in4estors( M'"'+, -'%&$ C$. o"her #%Ce$".e%"$ 1utual funds offer se4eral ad4antages o4er in4esting in indi4idual stoc?s( $or e8ample+ the transaction costs are di4ided among all the mutual fund shareholders+ which allows for costAeffecti4e di4ersification( In4estors may also benefit by ha4ing a third party Jprofessional fund managers< apply e8pertise and dedicate time to manage and research in4estment options+ although there is dispute o4er whether professional fund managers can+ on a4erage+ outperform simple inde8 funds that mimic public inde8es( 2et+ the =all Street Iournal reported that separately managed accounts JS1 or S1 s< performed better than mutual funds in && of &; categories from &00: to &005( !his included beating mutual funds performance in &005+ a tough year in which the global stoc? mar?et lost USN&% trillion in 4alue( Q%7R Q%;R In the story+ 1orningstar+ Inc said S1 s outperformed mutual funds in &; of ): stoc? and bond mar?et categories( =hether acti4ely managed or passi4ely inde8ed+ mutual funds are not immune to ris?s( !hey share the same ris?s associated with the in4estments made( If the fund in4ests primarily in stoc?s+ it is usually sub*ect to the same ups and downs and ris?s as the stoc? mar?et( Sh+re !,+$$e$ 1any mutual funds offer more than one class of shares( $or e8ample+ you may ha4e seen a fund that offers MClass M and MClass .M shares( "ach class will in4est in the same pool Jor in4estment portfolio< of securities and will ha4e the same in4estment ob*ecti4es and policies( .ut each class will ha4e different shareholder ser4ices andLor distribution arrangements with different fees and e8penses( !hese differences are supposed to reflect different costs in4ol4ed in ser4icing in4estors in 4arious classesO for e8ample+ one class may be sold through bro?ers with a frontAend load+ and another class may be sold direct to the public with no load but a M%&bA% feeM included in the classHs e8penses Jsometimes referred to as MClass CM shares<( Still a third class might ha4e a minimum in4estment of N%0+000+000 and be a4ailable only to financial institutions Ja soAcalled MinstitutionalM share class<( In some cases+ by aggregating regular in4estments made by many indi4iduals+ a retirement plan Jsuch as a
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70%J?< plan< may qualify to purchase MinstitutionalM shares Jand gain the benefit of their typically lower e8pense ratios< e4en though no members of the plan would qualify indi4idually( Q%:R s a result+ each class will li?ely ha4e different performance results( Q%,R multiAclass structure offers in4estors the ability to select a fee and e8pense structure that is most appropriate for their in4estment goals Jincluding the length of time that they e8pect to remain in4ested in the fund<( Lo+& +%& eG0e%$e$ frontAend load or sales charge is a commission paid to a bro?er by a mutual fund when shares are purchased+ ta?en as a percentage of funds in4ested( !he 4alue of the in4estment is reduced by the amount of the load( Some funds ha4e a deferred sales charge or bac?Aend load( In this type of fund an in4estor pays no sales charge when purchasing shares+ but will pay a commission out of the proceeds when shares are redeemed depending on how long they are held( nother deri4ati4e structure is a le4elAload fund+ in which no sales charge is paid when buying the fund+ but a bac?Aend load may be charged if the shares purchased are sold within a year( Doad funds are sold through financial intermediaries such as bro?ers+ financial planners+ and other types of registered representati4es who charge a commission for their ser4ices( Shares of frontAend load funds are frequently eligible for brea?points Ji(e(+ a reduction in the commission paid< based on a number of 4ariables( !hese include other accounts in the same fund family held by the in4estor or 4arious family members+ or committing to buy more of the fund within a set period of time in return for a lower commission MtodayM( It is possible to buy many mutual funds without paying a sales charge( !hese are called noAload funds( In addition to being a4ailable from the fund company itself+ noAload funds may be sold by some discount bro?ers for a flat transaction fee or e4en no fee at all( J!his does not necessarily mean that the bro?er is not compensated for the transactionO in such cases+ the fund may pay bro?ersH commissions out of Mdistribution and mar?etingM e8penses rather than a specific sales charge( !he purchaser is

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):

therefore paying the fee indirectly through the fundHs e8penses deducted from profits(< NoAload funds include both inde8 funds and acti4ely managed funds( !he largest mutual fund families selling noAload inde8 funds are Kanguard and $idelity+ though there are a number of smaller mutual fund families with noAload funds as well( "8pense ratios in some noAload inde8 funds are less than 0(&P per year 4ersus the typical acti4ely managed fundHs e8pense ratio of about %(;P per year( Doad funds usually ha4e e4en higher e8pense ratios when the load is considered( !he e8pense ratio is the anticipated annual cost to the in4estor of holding shares of the fund( $or e8ample+ on a N%00+000 in4estment+ an e8pense ratio of 0(&P means N&00 of annual e8pense+ while a %(;P e8pense ratio would result in N%+;00 of annual e8pense( !hese e8penses are before any sales commissions paid to purchase the mutual fund( 1any feeAonly financial ad4isors strongly suggest noAload funds such as inde8 funds( If the ad4isor is not of the feeAonly type but is instead compensated by commissions+ the ad4isor may ha4e a conflict of interest in selling highAcommission load funds( 1utual funds and other in4estment companies

Investment companies U a financial intermediary that pools funds from numerous in4estors and in4ests the funds in a wide range of securities( 7 important functions of in4estment companiesF i( ris? di4ersification 9 asset di4isibility ii( professional management iii( lower transaction costs i4( record ?eeping 9 administration !he 4alue of each share in in4estment company is called net asset value+ NAV+ which is defined asF
NAV = MV J assets < liabilities Shares outs tan ding

!ypes of in4estment companiesF


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I(

unmanagedF

Unit investment trusts II( managedF i closed-end funds ii( open-end funds+ / mutual funds J30P of all in4estment companies6 assets< U%#" 6#%Ce$".e%"7 "r'$" U pool of money in4ested in a portfolio that is fi8ed for the life of the fund( 30P of unit trusts hold fi8edAincome securities+ i(e(+ bonds( 30P of fi8edAincome unit trusts in4est in ta8Ae8empt debts( little acti4e management of a unit trustO thus lower management fees( sponsors earn profit by selling shares of unit trust at a premium to the cost of acquiring the assets( shares can be sold bac? to the trustee who in turn liquidate part of assets to obtain the cash or the trustee may sell the shares to new in4estorJs< at a slight premium to N K( Unit trusts e8pire at the maturity of the security held( M+%+4e& #%Ce$".e%" !o.0+%#e$ .#D6s hires a management company to manage the portfolio( 1gt fees of managed in4estment companies range from (&P to %VP( Compare closedAend and openAend funds C,o$e&<e%& -'%&$ Do%I" re&ee. or #$$'e $h+re$ Price can be at par+ premium or discount( Shares are traded on organi@ed e8changes or #!C( W shares outstanding es only when sponsor repurchases( Prices es thru6out business day( N&:3b in total 1K by Iune &00; O0e%<e%& -'%&$ Stand ready to redeem or issue shares at N K( Price cannot fall below N K( Don6t trade on organi@ed e8change or #!C( W shares outstanding es daily( #ne endAofAday price quote only( N,Vt in total 1K by Iune &00;

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)5

Co..#%4,e& -'%&$ U openAend funds where partnership of in4estors pool their fundsO units are traded at N K( REITs Jreal estate in4estment trusts< U closedAend funds that in4est in real estate or loans secured by real estate(

M'"'+, -'%&$ .y Iune &00;+ there were more than 5+000 mutual funds offered by fewer than ;00 fund comple8es( .y Iune &007+ assets under management of mutual fund industry surpassed N,(; trillion( Jc(f( U(S( GDP for &00; )rd quarter was N%&V trillion< =orldwide+ mutual funds6 assets amount to about N%7 trillion in year end &00)( Some popular comple8es of mutual funds are $idelity+ Kanguard+ Putnam+ and Dreyfus( 1utual funds are classified by the in4estment policies some of which areF %( money mar?et funds &( equity funds )( fi8edAincome funds 7( balanced funds ;( income funds :( asset allocation funds ,( inde8 funds 5( specified sector funds 1ost mutual funds ha4e an underwriter who has e8clusi4e rights to distribute shares to in4estors( 1utual funds are sold directly either by the underwriter or by brokers and financial advisers on behalf of the underwriter( .ro?ers and financial ad4isers recei4e commissions for selling shares of mutual funds( $ee structure of mutual funds includeF

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)3

%( front-end loadF not to e8ceed 5(;PO rarely X :(;PO low-load funds ha4e loads up to )PO noAload funds a4ailable( &( back-end loadF typically start at ;P to :P and gradually reduce by %P per yearO ?nown as Ccontingent deferred sales chargesE( )( operating expensesF range from (&P to &PO include administrati4e e8penses and ad4isory fees paid to in4estment managerO in4estors are not e8plicitly billed forO deducted from assets of funds( 7( !b- chargesF limited to %P of a fund6s a4erage net asset per yearO used for ad4ertising+ promotional literature+ and commissions to bro?ers( Doads are paid once for each purchase whereas %&bA% fees are paid annually( 1utual funds6 performance is measured by the rate of return asF
rate of return = NAV% NAV0 + income and capital gain distribution NAV0

!he abo4e return estimation ignores commissions such as frontAend andLor bac?Aend loads+ but includes e8penses such as %&bA% fees( "8ampleF $unds and . are noAload funds( $und has (;P e8pense ratio while $und . has %(;P e8pense ratio( $und C has 5P load+ and %P e8pense ratio( "ach fund returns %&P per year of which ;P is di4idend yields( "stimate the terminal wealth le4els in the following table+ assuming you64e N%0? initial in4estment( C'.',+"#Ce 0ro!ee&$ 6+,, &#C#&e%&$ re#%Ce$"e&J7 A * C %0+000 %,+&)7% &3+:33 ;%+%5) 55+&0: %0+000 %:+7,7 &,+%7% 77+,%) ,)+::& %0+000 %;+&&;&+Y &;+%3: 7%+:35 :3+00,

T#.e tT0+ now ; years later %0 years later %; years later &0 years later

Y ;P rein4ested di4idends result in reduction due to the 5P load of ( 05Y;P T (7P


INDIR INS!I!U" #$ C R""R S!UDI"S 70

J%(%& A (00;<; Y %0? T N%,+&)7 & J%(%& A (0% A (007<; Y J%0? Z 500< T N%;+&&;(

!a8es on mutual funds 1utual funds en*oy CpassAthrough statusE ta8 code which means that ta8es are paid only by in4estors+ not by the funds themsel4es( CPassAthrough statusE requiresF i( t least 30P of all income is distributedO ii( [)0P of gross income from sale of securities held [ ) mths( If the mutual fund is held in ta8Adeferred retirement account+ such as 70%J?< or 70)Jb< account+ then ta8 issues become irrele4ant( Turnover U the fraction of the portfolio that is replaced each year( -igh turno4er mutual funds are ta8Ainefficient+ e(g(+ $idelity 1agellen( Dow turno4er mutual funds are ta8Aefficient+ e(g(+ Kanguard Inde8 !rust ;00( M'"'+, F'%&$ Per-or.+%!e 4erage rate of return of a4erage equity mutual fund in the last &; years has been below that of a passi4e inde8 fund holding a portfolio to replicate a broadAbased inde8 li?e the S9P ;00 or =ilshire ;000( Reasons for the disappointing record are costs incurred by acti4ely managed funds+ and trading costs due to higher portfolio turno4er( Co.0+r#%4 .'"'+, -'%&$ +%& he&4e -'%&$ Je8cepted from Colter+ llison .isbey+ )L)L&00)+ Choose your fundF hedge or mutual+ The "all Street #ournal+ p( R% and p( R7< Fe+"'re$ M'"'+, -'%&$ He&4e -'%&$ Regulation -ea4y regulation( $und Dight regulation( No directors required to represent S"C registration and in4estors6 interest open only to wealthy in4estors Di4ersification Usually hold broad mi8 of -olding may be highly and ris? in4estments+ lowering ris? concentrated+ raising and li?ely gains ris? and potential gains

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7%

$ees

Relati4ely low+ but managers get paid e4en if they lose money for in4estors Semiannual reports are required Usually reported e4ery trading day 1ostly buy publiclyAtraded securities( Dittle use of le4erage or selling short

Portfolio disclosure Performance disclosure In4estment methods

Share buybac?s !a8 liability

Usually done daily after mar?et close Karies+ but in4estors may face ta8es e4en in years that funds lose money

-igh+ but managers don6t get paid biggest fees if they don6t ma?e money No disclosure is required Usually reported monthly to in4estors =idespread use of le4erage+ and short sales( Purchases of nonApublic securities+ currencies+ and commodities #ften limited to a few times a year $requent trading can generate large ta8 bills

EG!h+%4e "r+&e& -'%&$ J"!$s< s of Iune &00;+ "!$s manages N&7)b in assets( JSourceF =SI+ p( D%+ No4 3+&00;< "!$s trade continuously li?e stoc?s in the e8changes( Some more popular "!$s include Spiders Jtic?er symbolF SPY+ based on S9P ;00 Inde8<+ $iamonds JDIAO based on Dow Iones Industrial 4erage<+ NasdaqA%006s KKKK+ $ortune $i4e -undred6s FFF+ .arclay6s International6s iShares MS%I Jformerly ?nown as =".S+ worldwide equity benchmar? security<+ e(g(+ EWA) EWJ+ EWS+ EWM+ etc( "!$s ha4e been found to be more ta8Aefficient for they trade less frequently( "!$s F openAend FF country funds F closedAend "!$s differ from both mutual funds and closedAend funds in go4ernanceO "!$s do not any board of directors(

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7&

Wh+" I$ R#$3/

!o begin with+ let us understand the concept of ris? on an in4estment( Consider the returns generated by two equity stoc?s+ and .+ o4er a ;Ayear period(

Stoc? F &;P+ %&P+ 7P+ &&P+ and ,P( Stoc? .F %:P+ %)P+ %%P+ %,P and %)P( .oth Stoc? and Stoc? . ha4e pro4ided a4erage returns of %7P during the ;Ayear period( -owe4er+ it is clearly e4ident that Stoc? is a ris?ier in4estment because its returns ha4e fluctuated more widely than that of Stoc? .( In other words+ higher the 4olatility J4ariability< of the returns+ greater will be the ris? of the in4estment(

D#Cer$#-#!+"#o% Re&'!e$ R#$3

!he principle of di4ersification in4ol4es in4esting in a portfolio of securities so that losses in some will offset gains in others+ thereby reducing the 4ariability of returns( In general+ as the number of securities in a portfolio increases+ say up to &0 or &;+ the di4ersification reduces the portfolio ris? A measured by standard de4iation( !hereafter+ any further di4ersification will result only in marginal reduction of portfolio ris?( In other words+ increasing the number of securities from )0 to %00 will only bring about marginal gains in di4ersification( Di4ersification reduces
ris?O it does not eliminate it completely( !his can be elucidated by a greater understanding of systematic ris? and unsystematic ris?(

Di4ersifiable or Unsystematic Ris?+ which is unique to a company or industry and can be sharply reduced by di4ersification( $or instance+ presence of Pharma and $1CG stoc?s in the portfolio will help to offset the 4olatility inherent in I! and media stoc?s( Undi4ersifiable or Systematic Ris?+ which stem from perils that affect the entire economy( =ithin an asset class+ this ris? cannot be reduced by di4ersification( $or instance+ macroeconomic factors li?e monsoon failure can ha4e an ad4erse effect on equity+ as an asset class+ and the consequent impact on a highly di4ersified mar?et inde8 li?e the S9P CN' Nifty can pro4e to be quite detrimental(

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7)

S.D.6R#$37 o- Por"-o,#o Re"'r%

D#Cer$#-( A1+( U%$($"e.+"#! R#$3

R#$3 E,#.#%+"e& *( D#Cer$#-#!+"#o% To"+, R#$3 o- S"o!3

U%&#Cer$#-#+2,e or M+r3e" R#$3

No. o- S"o!3$ #% Por"-o,#o

F+!"or$ I%-,'e%!#%4 A$$e" A,,o!+"#o%

n indi4idual6s asset allocation strategy will depend on three ma*or factors A age+ in4estment goals+ and ris? tolerance(

ge is a ma*or determinant of asset allocation( s a young in4estor at )0+ model portfolio may typically include a greater proportion of higher ris?Areturn assets li?e equity Jor equity funds<( s one grows older+ heLshe would much rather ease up on the equity in4estments and ma?e more room for less 4olatile but more stable debt securities Jor debt funds< in the portfolio( ll in4estment goals ha4e a time hori@on+ which is the length of time between now and when the money being in4ested will be spent( !his can range from buying a car ne8t year+ sa4ing for a down payment on a house in three years time+ or sa4ing for retirement &; years from now( !hose with a longAterm hori@on+ can afford to in4est more aggressi4ely in equity Jor equity funds< because shortAterm 4olatility will usually be o4ercome by longA term growth( 1oreo4er+ the growth potential offered by equity tends to offset the effects of inflation in the long run( -owe4er+ if
INDIR INS!I!U" #$ C R""R S!UDI"S 77

ones in4estment hori@on is sufficiently short+ then the emphasis should be increasingly on more stable in4estments li?e debt securities Jor debt funds<( Ris? tolerance is also an important indicator of asset allocation( $or in4estment securities+ a chart is created with the different types of securities and their associated ris? reward profile(

lthough the chart is by no means scientific+ it pro4ides a guideline that in4estors can use when pic?ing different in4estments( Docated on the upper portion of this chart are in4estments that offer in4estors a higher potential for abo4eAa4erage returns+ but this potential comes with a higher ris? of belowAa4erage returns( #n the lower portion are much safer in4estments+ but these in4estments ha4e a lower potential for high returns(

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7;

F#4're 8@ 8;. DETERMINING RISK PREFERENCE

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7:

=ith so many different types of in4estments to choose from+ how does an in4estor determine how much ris? he or she can handle> "4ery indi4idual is different+ and itHs hard to create a steadfast model applicable to e4eryone+ but here are two important things one should consider when deciding how much ris? to ta?eF

T#.e Hor#Eo%

.efore one ma?es any in4estment+ one should always determine the amount of time he has to ?eep the money in4ested( If he has Rs &00000 to in4est today but need it in one year for a down payment on a new house+ in4esting the money in higherAris? stoc?s is not the best strategy( !he ris?ier an in4estment is+ the greater its 4olatility or price fluctuations+ so if ones time hori@on is relati4ely short+ one may be forced to sell his securities at a significant a loss( =ith a longer time hori@on+ in4estors ha4e more time to recoup any possible losses and are therefore theoretically be more tolerant of higher ris?s( $or e8ample+ if that Rs &00000 is meant for a cottage that he is planning to buy in ten years+ he can in4est the money into higherAris? stoc?s because there is be more time a4ailable to reco4er any losses and less li?elihood of being forced to sell out of the position too early(

*+%3ro,,

Determining the amount of money one can stand to lose is another important factor of figuring out the ris? tolerance( !his might not be the most optimistic method of in4estingO howe4er+ it is the most realistic( .y in4esting only money that one can afford to lose or afford to ha4e tied up for some period of time+ one wonHt be pressured to sell off any in4estments because of panic or liquidity issues( !he more money one has+ the more ris? one is able to ta?e and 4ice 4ersa( Compare+ for instance+ a person who has a net worth of Rs ;00000 to another person who has a net worth of Rs ;+000+000( If both in4est Rs &;+000 of their net worth into securities+ the person with the lower net worth will be more affected by a decline than the person with the higher net worth( $urthermore+ if the in4estors face a liquidity issue and require cash immediately+ the first in4estor will ha4e to sell off the in4estment while the second in4estor can use his or her other funds(
INDIR INS!I!U" #$ C R""R S!UDI"S 7,

M+G#.#E#%4 re"'r% 1h#,e M#%#.#E#%4 r#$3 !he main goal of allocating the assets among 4arious asset classes is to ma8imi@e return for ones chosen le4el of ris?+ or stated another way+ to minimi@e ris? gi4en a certain e8pected le4el of return( #f course to ma8imi@e return and minimi@e ris?+ one needs to ?now the ris?Areturn characteristics of the 4arious asset classes( !he following chart compares the ris? and potential return of some of the more popular onesF

"quities ha4e the highest potential return+ but also the highest ris?( #n the other hand+ !reasury bills ha4e the lowest ris? since they are bac?ed by the go4ernment+ but they also pro4ide the lowest potential return amongst the other assets( !he chart also demonstrates that when one chooses in4estments with higher ris?+ the e8pected returns also increase proportionately( .ut this is simply the result of the ris?Areturn tradeoff( !hey will often ha4e high 4olatility and are therefore suited for in4estors who ha4e a high ris? tolerance and who ha4e a longer time hori@on(

INDIR INS!I!U" #$ C R""R S!UDI"S

75

ItHs because of the ris?Areturn tradeoff A which says one can see? high returns only if heLshe is willing to ta?e losses A that di4ersification through asset allocation is important( Since different assets ha4e 4arying ris?s and e8perience different mar?et fluctuations+ proper asset allocation insulates the entire portfolio from the ups and downs of one single class of securities( So+ while part of ones portfolio may contain more 4olatile securities A which is chosen for their potential of higher returns A the other part of the portfolio de4oted to other assets remains stable( .ecause of the protection it offers+ asset allocation is the ?ey to ma8imi@ing returns while minimi@ing ris?(

I%Ce$".e%" R#$3 P(r+.#&

fter deciding on how much ris? is acceptable in ones6 portfolio by ac?nowledging time hori@on and ban?roll+ one can use the ris? pyramid approach for balancing assets(

!his pyramid can be thought of as an asset allocation tool that in4estors can use to di4ersify their portfolio in4estments according to the ris? profile of each security( !he pyramid+ representing the in4estorHs portfolio+ has three distinct tiers as seen in the figure(

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73

8L. RETURNS A2$o,'"e re"'r%$ bsolute returns measure how much a fund has gained o4er a certain period( So you loo? at the N K on one day and loo? at it+ say+ si8 months or one year or two years later( !he percentage difference will tell you the return o4er this time frame( *e%!h.+r3 re"'r%$ It basically indicates what the fund has earned as against what it should ha4e earned( fundHs benchmar? is an inde8 that is chosen by a fund company to ser4e as a standard for its returns( !he mar?et watchdog+ the Securities and "8change .oard of India+ has made it mandatory for funds to declare a benchmar? inde8( In effect+ the fund is saying that the benchmar?Hs returns are its target and a fund should be deemed to ha4e done well if it manages to beat the benchmar?( DetHs say the fund is a di4ersified equity fund that has benchmar?ed itself against the Sense8( So the returns of this fund will be compared 4isA\A4is the Sense8( Now if the mar?ets are doing fabulously well and the Sense8 ?eeps climbing upwards steadily+ then anything less than fabulous returns from the fund would actually be a disappointment( If the Sense8 rises by %0P o4er two months and the fundHs N K rises by %&P+ it is said to ha4e outperformed its benchmar?( If the N K rose by *ust 5P+ it is said to ha4e underperformed the benchmar?( .ut if the Sense8 drops by %0P o4er a period of two months and during that time+ the fundHs N K drops by only :P+ then the fund is said to ha4e outperformed the benchmar?( fundHs returns compared to its benchmar? are called its benchmar? returns( t the current high point in the stoc? mar?et+ almost e4ery equity fund has done e8tremely well but many of them ha4e negati4e benchmar? returns+ indicating that their performance is *ust a sideAeffect of the mar?etsH rise rather than some brilliant wor? by the fund manager( T#.e 0er#o&

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;0

!he most important thing while measuring or comparing returns is to choose an appropriate time period( !he time period o4er which returns should be compared and e4aluated has to be the same o4er which that fund type is meant to be in4ested in( =hile comparing equity funds we may use three to fi4e year returns( .ut this is not the case of e4ery other fund( $or instance+ cash funds are ?nown as ultra shortAterm bond funds or liquid funds that in4est in fi8ed return instruments of 4ery short maturities( !heir main aim is to preser4e the principal and earn a modest return( So the money one in4ests will e4entually be returned to you with a little something added( In4estors in4est in these funds for a 4ery short time frame of around a few months( So it is alright to compare these funds on the basis of their si8 month returns( M+r3e" !o%&#"#o%$ It is also important to see whether a fundHs return history is long enough for it to ha4e seen all ?inds of mar?et conditions( $or e8ample+ at this point of time+ there are equity funds that were launched one to two years ago and ha4e done 4ery well( -owe4er+ such funds ha4e ne4er seen a sustained declining mar?et Jbear mar?et<( So it is a little misleading to loo? at their rate of return since launch and compare that to other funds that ha4e had to face bad mar?ets( If a fund has pro4ed its mettle in a bear mar?et and has not dipped as much as its benchmar?+ then the fund manager deser4es a pat on the bac?( F#%+, !he!3,#$" -ere are some quic? pointers when comparing funds( Compare funds that are similar( $or instance+ compare lliance "quity with $ran?lin India Prima( .oth are di4ersified equity funds( Similarly+ compare U!I uto with I 1 uto+ both being auto sector funds or compare .irla 1idcap with 1agnum 1idcap+ both being funds that in4est in midAcap companies( =hen returns are compared+ ma?e sure that the time period is identical( #r else+ one may be loo?ing at the oneAyear returns for one fund and the threeAyear returns for another( $or instance+ if told that the return of Principal ta8 sa4ing fund is &:(,&P and that of $ran?lin India Prima was :%(,7P+ it would be misleading(
INDIR INS!I!U" #$ C R""R S!UDI"S ;%

.ecause the return stated of principal ta8 sa4ing fund is a one year return while that of $ran?lin India Prima is the threeAyear return( good comparison would beF Re"'r%$ % year ) year ; year Fr+%3,#% I%&#+ Pr#.+ 5%(%)P :%(,7P )3(;5P Pr#%!#0+, T+G S+C#%4 F'%& &:(%&P 7&(0&P 7&(3;P

ADVANTAGES OF MUTUAL FUNDS !he ad4antages of in4esting in a 1utual $und areF Professional 1anagement Di4ersification Con4enient dministration Return Potential Dow Costs Diquidity !ransparency $le8ibility Choice of schemes !a8 benefits =ell regulated DRAW*ACKS OF MUTUAL FUNDS 1utual funds ha4e their drawbac?s and may not be for e4eryoneF B No GuaranteesF No in4estment is ris? free( If the entire stoc? mar?et declines in 4alue+ the 4alue of mutual fund shares will go down as well+ no matter how balanced the portfolio( In4estors encounter fewer ris?s when they in4est in mutual funds than when they buy and sell stoc?s on their own( -owe4er+ anyone who in4ests through a mutual fund runs the ris? of losing money(
INDIR INS!I!U" #$ C R""R S!UDI"S ;&

B $ees and commissionsF ll funds charge administrati4e fees to co4er their dayAtoAday e8penses( Some funds also charge sales commissions or MloadsM to compensate bro?ers+ financial consultants+ or financial planners( "4en if you donHt use a bro?er or other financial ad4iser+ you will pay a sales commission if you buy shares in a Doad $und( B !a8esF During a typical year+ most acti4ely managed mutual funds sell anywhere from &0 to ,0 percent of the securities in their portfolios( If your fund ma?es a profit on its sales+ you will pay ta8es on the income you recei4e+ e4en if you rein4est the money you made( B 1anagement ris?F =hen you in4est in a mutual fund+ you depend on the fundHs manager to ma?e the right decisions regarding the fundHs portfolio( If the manager does not perform as well as you had hoped+ you might not ma?e as much money on your in4estment as you e8pected( #f course+ if you in4est in Inde8 $unds+ you forego management ris?+ because these funds do not employ managers T(0e$ o- .'"'+, -'%& $!he.e =ide 4ariety of 1utual $und Schemes e8ist to cater to the needs such as financial position+ ris? tolerance and return e8pectations etc( !he table below gi4es an o4er4iew into the e8isting types of schemes in the Industry( Per-or.+%!e o- M'"'+, F'%&$ #% I%&#+F Det us start the discussion of the performance of mutual funds in India from the day the concept of mutual fund too? birth in India( !he year was %3:)( Unit !rust of India in4ited in4estors or rather to those who belie4ed in sa4ings+ to par? their money in U!I 1utual $und( $or )0 years it goaled without a single second player( !hough the %355 year saw some new mutual fund companies+ but U!I remained in a monopoly position( !he performance of mutual funds in India in the initial phase was not e4en closer to satisfactory le4el( People rarely understood+ and of course in4esting was out of question( .ut yes+ some &7 million shareholders was accustomed with guaranteed high returns by the begining of liberali@ation of the industry in %33&( !his good record of U!I became mar?eting tool for new entrants( !he e8pectations of in4estors touched the s?y in profitability factor( -owe4er+ people were miles away from the
INDIR INS!I!U" #$ C R""R S!UDI"S ;)

praparedness of ris?s factor after the liberali@ation( !he ssets Under 1anagement of U!I was Rs( :,bn( by the end of %35,( Det me concentrate about the performance of mutual funds in India through figures( $rom Rs( :,bn( the ssets Under 1anagement rose to Rs( 7,0 bn( in 1arch %33) and the figure had a three times higher performance by pril &007( It rose as high as Rs( %+;70bn( !he net asset 4alue JN K< of mutual funds in India declined when stoc? prices started falling in the year %33&( !hose days+ the mar?et regulations did not allow portfolio shifts into alternati4e in4estments( !here were rather no choice apart from holding the cash or to further continue in4esting in shares( #ne more thing to be noted+ since only closedAend funds were floated in the mar?et+ the in4estors disin4ested by selling at a loss in the secondary mar?et( !he performance of mutual funds in India suffered qualitati4ely( !he %33& stoc? mar?et scandal+ the losses by disin4estments and of course the lac? of transparent rules in the whereabout roc?ed confidence among the in4estors( Partly owing to a relati4ely wea? stoc? mar?et performance+ mutual funds ha4e not yet reco4ered+ with funds trading at an a4erage discount of %0&0 percent of their net asset 4alue( !he super4isory authority adopted a set of measures to create a transparent and competit4e en4ironment in mutual funds( Some of them were li?e rela8ing in4estment restrictions into the mar?et+ introduction of openA ended funds+ and pa4ing the gateway for mutual funds to launch pension schemes( !he measure was ta?en to ma?e mutual funds the ?ey instrument for longA term sa4ing( !he more the 4ariety offered+ the quantitati4e will be in4estors( t last to mention+ as long as mutual fund companies are performing with lower ris?s and higher profitability within a short span of time+ more and more people will be inclined to in4est until and unless they are fully educated with the dos and donts of mutual funds( M'"'+, F'%& Co.0+%#e$ #% I%&#+ !he concept of mutual funds in India dates bac? to the year %3:)( !he era between %3:) and %35, mar?ed the e8istance of only one mutual fund company in India with Rs( :,bn assets under management J U1<+ by the end of its monopoly era+ the Unit !rust of India JU!I<( .y the end of the 50s decade+ few other mutual fund companies in India too? their position
INDIR INS!I!U" #$ C R""R S!UDI"S ;7

in mutual fund mar?et( !he new entries of mutual fund companies in India were S.I 1utual $und+ Canban? 1utual $und+ Pun*ab National .an? 1utual $und+ Indian .an? 1utual $und+ .an? of India 1utual $und( !he succeeding decade showed a new hori@on in indian mutual fund industry( .y the end of %33)+ the total U1 of the industry was Rs( 7,0(07 bn( !he pri4ate sector funds started penetrating the fund families( In the same year the first 1utual $und Regulations came into e8istance with reAregistering all mutual funds e8cept U!I( !he regulations were further gi4en a re4ised shape in %33:(/othari Pioneer was the first pri4ate sector mutual fund company in India which has now merged with $ran?lin !empleton( Iust after ten years with pri4ate sector players penetration+ the total assets rose up to Rs( %&%5(0; bn( !oday there are )) mutual fund companies in India( M+ or M'"'+, F'%& Co.0+%#e$ #% I%&#+ B .N 1R# 1utual $und .N 1R# 1utual $und was setup on pril %;+ &007 with .N 1R# !rustee JIndia< P4t( Dtd( as the !rustee Company( !he 1C+ .N 1R# sset 1anagement JIndia< Dtd( was incorporated on No4ember 7+ &00)( Deutsche .an? G is the custodian of .N 1R# 1utual $und( B .irla Sun Dife 1utual $und .irla Sun Dife 1utual $und is the *oint 4enture of ditya .irla Group and Sun Dife $inancial( Sun Dife $inancial is a golbal organisation e4ol4ed in %5,% and is being represented in Canada+ the US+ the Philippines+ Iapan+ Indonesia and .ermuda apart from India( .irla Sun Dife 1utual $und follows a conser4ati4e longAterm approach to in4estment( Recently it crossed U1 of Rs( %0+000 crores B .an? of .aroda 1utual $und J.#. 1utual $und< .an? of .aroda 1utual $und or .#. 1utual $und was setup on #ctober )0+ %33& under the sponsorship of .an? of .aroda( .#. sset 1anagement Company Dimited is the 1C of .#. 1utual $und and was incorporated on No4ember ;+ %33&( Deutsche .an? G is the custodian( B -D$C 1utual $und -D$C 1utual $und was setup on Iune )0+ &000 with two sponsorers
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nemely -ousing De4elopment $inance Corporation Dimited and Standard Dife In4estments Dimited( B -S.C 1utual $und -S.C 1utual $und was setup on 1ay &,+ &00& with -S.C Securities and Capital 1ar?ets JIndia< Pri4ate Dimited as the sponsor( .oard of !rustees+ -S.C 1utual $und acts as the !rustee Company of -S.C 1utual $und( B ING Kysya 1utual $und ING Kysya 1utual $und was setup on $ebruary %%+ %333 with the same named !rustee Company( It is a *oint 4enture of Kysya and ING( !he 1C+ ING In4estment 1anagement JIndia< P4t( Dtd( was incorporated on pril :+ %335( B Prudential ICICI 1utual $und !he mutual fund of ICICI is a *oint 4enture with Prudential Plc( of merica+ one of the largest life insurance companies in the US of ( Prudential ICICI 1utual $und was setup on %)th of #ctober+ %33) with two sponsorers+ Prudential Plc( and ICICI Dtd( !he !rustee Company formed is Prudential ICICI !rust Dtd( and the 1C is Prudential ICICI sset 1anagement Company Dimited incorporated on &&nd of Iune+ %33)( B Sahara 1utual $und Sahara 1utual $und was set up on Iuly %5+ %33: with Sahara India $inancial Corporation Dtd( as the sponsor( Sahara sset 1anagement Company Pri4ate Dimited incorporated on ugust )%+ %33; wor?s as the 1C of Sahara 1utual $und( !he paidAup capital of the 1C stands at Rs &;(5 crore( B State .an? of India 1utual $und State .an? of India 1utual $und is the first .an? sponsored 1utual $und to launch offshor fund+ the India 1agnum $und with a corpus of Rs( &&; cr( appro8imately( !oday it is the largest .an? sponsored 1utual $und in
INDIR INS!I!U" #$ C R""R S!UDI"S ;:

India( !hey ha4e already launched ); Schemes out of which %; ha4e already yielded handsome returns to in4estors( State .an? of India 1utual $und has more than Rs( ;+;00 Crores as U1( Now it has an in4estor base of o4er 5 Da?hs spread o4er %5 schemes( B !ata 1utual $und !ata 1utual $und J!1$< is a !rust under the Indian !rust ct+ %55&( !he sponsor for !ata 1utual $und are !ata Sons Dtd(+ and !ata In4estment Corporation Dtd( !he in4estment manager is !ata sset 1anagement Dimited and its !ata !rustee Company P4t( Dimited( !ata sset 1anagement DimitedHs is one of the fastest in the country with more than Rs( ,+,0) crores Jas on pril )0+ &00;< of U1( B /ota? 1ahindra 1utual $und /ota? 1ahindra sset 1anagement Company J/1 1C< is a subsidiary of /1.D( It is presently ha4ing more than %+33+5%5 in4estors in its 4arious schemes( /1 1C started its operations in December %335( /ota? 1ahindra 1utual $und offers schemes catering to in4estors with 4arying ris? A return profiles( It was the first company to launch dedicated gilt scheme in4esting only in go4ernment securities( B Unit !rust of India 1utual $und U!I sset 1anagement Company Pri4ate Dimited+ established in Ian %7+ &00)+ manages the U!I 1utual $und with the support of U!I !rustee Company Pri4ete Dimited( U!I sset 1anagement Company presently manages a corpus of o4er Rs(&0000 Crore( !he sponsorers of U!I 1utual $und are .an? of .aroda J.#.<+ Pun*ab National .an? JPN.<+ State .an? of India JS.I<+ and Dife Insurance Corporation of India JDIC<( !he schemes of U!I 1utual $und are Diquid $unds+ Income $unds+ sset 1anagement $unds+ Inde8 $unds+ "quity $unds and .alance $unds( B Reliance 1utual $und Reliance 1utual $und JR1$< was established as trust under Indian !rusts ct+ %55&( !he sponsor of R1$ is Reliance Capital Dimited and Reliance Capital !rustee Co( Dimited is the !rustee( It was registered on Iune )0+
INDIR INS!I!U" #$ C R""R S!UDI"S ;,

%33; as Reliance Capital 1utual $und which was changed on 1arch %%+ &007( Reliance 1utual $und was formed for launching of 4arious schemes under which units are issued to the Public with a 4iew to contribute to the capital mar?et and to pro4ide in4estors the opportunities to ma?e in4estments in di4ersified securities( B Standard Chartered 1utual $und Standard Chartered 1utual $und was set up on 1arch %)+ &000 sponsored by Standard Chartered .an?( !he !rustee is Standard Chartered !rustee Co(P4t(Dtd( B $ran?lin !empleton India 1utual $und !he group+ $rna?lin !empleton In4estments is a California JUS < based company with a global U1 of USN 703(& bn( Jas of pril )0+ &00;<( It is one of the largest financial ser4ices groups in the world( In4estors can buy or sell the 1utual $und through their financial ad4isor or through mail or through their website( !hey ha4e #pen end Di4ersified "quity schemes+ #pen end Sector "quity schemes+ #pen end -ybrid schemes+ #pen end !a8 Sa4ing schemes+ #pen end Income and Diquid schemes+ Closed end Income schemes and #pen end $und of $unds schemes to offer( B 1organ Stanley 1utual $und India 1organ Stanley is a worldwide financial ser4ices company and its leading in the mar?et in securities+ in4estmenty management and credit ser4ices( 1organ Stanley In4estment 1anagement J1IS1< was established in the year %3,;( It pro4ides customi@ed asset management ser4ices and products to go4ernments+ corporations+ pension funds and nonAprofit organisations( Its ser4ices are also e8tended to high net worth indi4iduals and retail in4estors( In India it is ?nown as 1organ Stanley In4estment 1anagement Pri4ate Dimited J1SI1 India< and its 1C is 1organ Stanley 1utual $und J1S1$<( !his is the first close end di4ersified equity scheme ser4ing the needs of Indian retail in4estors focussing on a longAterm capital appreciation( B "scorts 1utual $und
INDIR INS!I!U" #$ C R""R S!UDI"S ;5

"scorts 1utual $und was setup on pril %;+ %33: with "8corts $inance Dimited as its sponsor( !he !rustee Company is "scorts In4estment !rust Dimited( Its 1C was incorporated on December %+ %33; with the name "scorts sset 1anagement Dimited( B lliance Capital 1utual $und lliance Capital 1utual $und was setup on December )0+ %337 with lliance Capital 1anagement Corp( of Delaware JUS < as sponsorer( !he !rustee is C 1 !rust Company P4t( Dtd( and 1C+ the lliance Capital sset 1anagement India JP4t< Dtd( with the corporate office in 1umbai( B .enchmar? 1utual $und .enchmar? 1utual $und was setup on Iune %&+ &00% with Niche $inancial Ser4ices P4t( Dtd( as the sponsorer and .enchmar? !rustee Company P4t( Dtd( as the !rustee Company( Incorporated on #ctober %:+ &000 and headquartered in 1umbai+ .enchmar? sset 1anagement Company P4t( Dtd( is the 1C( B Canban? 1utual $und Canban? 1utual $und was setup on December %3+ %35, with Canara .an? acting as the sponsor( Canban? In4estment 1anagement Ser4ices Dtd( incorporated on 1arch &+ %33) is the 1C( !he Corporate #ffice of the 1C is in 1umbai( B Chola 1utual $und Chola 1utual $und under the sponsorship of Cholamandalam In4estment 9 $inance Company Dtd( was setup on Ianuary )+ %33,( Cholamandalam !rustee Co( Dtd( is the !rustee Company and 1C is Cholamandalam 1C Dimited( B DIC 1utual $und Dife Insurance Corporation of India set up DIC 1utual $und on %3th Iune
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%353( It contributed Rs( & Crores towards the corpus of the $und( DIC 1utual $und was constituted as a !rust in accordance with the pro4isions of the Indian !rust ct+ %55&( !he Company started its business on &3th pril %337( !he !rustees of DIC 1utual $und ha4e appointed Iee4an .ima Sahayog sset 1anagement Company Dtd as the In4estment 1anagers for DIC 1utual $und( F'"'re o- M'"'+, F'%&$ #% I%&#+F .y December &007+ Indian mutual fund industry reached Rs %+;0+;), crore( It is estimated that by &0%0 1archAend+ the total assets of all scheduled commercial ban?s should be Rs 70+30+000 crore( !he annual composite rate of growth is e8pected %)(7P during the rest of the decade( In the last ; years we ha4e seen annual growth rate of 3P( ccording to the current growth rate+ by year &0%0+ mutual fund assets will be double( So.e -+!"$ -or "he 4ro1"h o- .'"'+, -'%&$ #% I%&#+F B %00P growth in the last : years( B Number of foreign 1CHs are in the que to enter the Indian mar?ets li?e $idelity In4estments+ US based+ with o4er USN%trillion assets under management worldwide( B #ur sa4ing rate is o4er &)P+ highest in the world( #nly channeli@ing these sa4ings in mutual funds sector is required( B =e ha4e appro8imately &3 mutual funds which is much less than US ha4ing more than 500( !here is a big scope for e8pansion( B H.H and HCH class cities are growing rapidly( !oday most of the mutual funds are concentrating on the H H class cities( Soon they will find scope in the growing cities( B 1utual fund can penetrate rurals li?e the Indian insurance industry with simple and limited products( B S".I allowing the 1$Hs to launch commodity mutual funds( B "mphasis on better corporate go4ernance( B !rying to curb the late trading practices( B Introduction of $inancial Planners who can pro4ide need based ad4ice(

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:0

COMPANY PROFILE

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:%

-D$C .an? was amongst the first to recei4e an HinAprincipleH appro4al from the Reser4e .an? of India JR.I< to set up a ban? in the pri4ate sector from -ousing De4elopment $inance Corporation Dimited J-D$C<+ in %337 during the period of liberali@ation of the ban?ing sector in India( -D$C India was incorporated in ugust %337 in the name of H-D$C .an? DimitedH( -D$C India commenced operations as a Scheduled Commercial .an? in Ianuary %33;( -D$C India deals in 4arieties of products li?e home loan+ standard life insurance+ mutual fund+ securities+ credit cards+ etc( -D$C has branch offices in all ma*or cities in India li?e Calcutta+ Chennai+ Delhi+ .angalore+ -yderabad+ and hmedabad apart from -D$C 1umbai( During the quarter ended Iune )0+ &00, the ban? opened :3 branches and %%% !1s ta?ing the total number of branches and the !1s to ,;) branches and %,%: !1s respecti4ely( -eadquarter -D$C .an? India F H!rade StarH+ &nd floor+ H H =ing+ Iunction of /ondi4ita and 1(K( Road+ ndheriA/urla Road+ ndheri J"ast<+ 1umbai A 700 0;3(

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:&

!elF J.oard< &5&& 00;; L ;;;%:::: J$a8<F &5&& 3335 L &5&& &7%7

Core V+,'e$ Increase mar?et share in India6s ban?ing and financial ser4ices industry by following a disciplined growth strategy focusing on quality and not on quantity and deli4ering high quality customer ser4ice( De4erage technology platform and open scaleable systems to deli4er more products to more customers and to control operating costs( 1aintain current high standards for asset quality through disciplined credit ris? management( De4elop inno4ati4e products and ser4ices that attract targeted customers and address inefficiencies in the Indian financial sector( Continue to de4elop products and ser4ices that reduce cost of funds( $ocus on high earnings growth with low 4olatility

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:)

STRUCTURE OF HDFC

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:7

CEOM MD OF HDFC J1r( DI!2 PURI<

COUNTRYDGROUP HEAD J1r(R -UD .- G !<

NSM J1r( RKIND / PID<

NONAL SALES MANAGER J1r(R I"S- .- KS UR<

Re4#o%+, S+,e$ M+%+4er

Re4#o%+, S+,e$ M+%+4er

Re4#o%+, S+,e$ M+%+4er

J1r(/U1 R NI1"S-<

AREA SEARCH HEAD CASA CANI CSA PAM

AREA SALES MANAGER SALES MANAGER MANAGEMENT TRAINEE

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:;

INTRODUCTION

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::

1utual funds ha4e been a significant source of in4estment in both go4ernment and corporate securities( It has been for decades the monopoly of the state with U!I being the ?ey player+ with in4ested funds e8ceeding Rs()00 bn( !he stateAowned insurance companies also hold a portfolio of stoc?s( Presently+ numerous mutual funds e8ist+ including pri4ate and foreign companies( .an?sAAA mainly stateAowned too ha4e established 1utual $unds J1$s<( $oreign participation in mutual funds and asset management companies is permitted on a case by case basis( U!I+ the largest mutual fund in the country was set up by the go4ernment in %3:7+ to encourage small in4estors in the equity mar?et( U!I has an e8tensi4e mar?eting networ? of o4er );+ 000 agents spread o4er the country( !he U!I scrips ha4e performed relati4ely well in the mar?et+ as compared to the Sense8 trend( -owe4er+ the same cannot be said of all mutual funds( ll 1$s are allowed to apply for firm allotment in public issues( S".I regulates the functioning of mutual funds+ and it requires that all 1$s should be established as trusts under the Indian !rusts ct( !he actual fund management acti4ity shall be conducted from a separate asset management company J 1C<( !he minimum net worth of an 1C or its affiliate must be Rs( ;0 million to act as a manager in any other fund( 1$s can be penali@ed for defaults including nonAregistration and failure to obser4e rules set by their 1Cs( 1$s dealing e8clusi4ely with

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:,

money mar?et instruments ha4e to be registered with R.I( ll other schemes floated by 1$s are required to be registered with S".I( In %33;+ the R.I permitted pri4ate sector institutions to set up 1oney 1ar?et 1utual $unds J111$s<( !hey can in4est in treasury bills+ call and notice money+ commercial paper+ commercial bills acceptedLcoAaccepted by ban?s+ certificates of deposit and dated go4ernment securities ha4ing une8pired maturity upto one year(

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:5

AIMS AND O*JECTIVES OF STUDY

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:3

!he summer training at HDFC *+%3 L#.#"e& in Diabilities department was underta?en with the 4iew to study certain fundamental as well as commercial and operational aspect of the company in the Corporate Relationship Department( !he training was underta?en with the following ims and #b*ecti4esF A PRIMARY O*JECTIVES !o identify the suitable Client and influencing them to open preferred with a ban? which will cater for all its financial needs( SECONDARY O*JECTIVES "8panding mar?et $inancial mar?eting 1ar?et research in collecting the data Pro4iding primary data for further use and de4elopment of company Nee&$ +%& O00or"'%#"#e$ #nce again+ the ban?ing sector faces both a need and an opportunity( Clearly+ the pressure from alternate distribution channels and the need to consider carefully the true 4alue of many types of customers still e8ists( Pre4ious attempts to aggrandi@e years of internal de4elopment ha4e perpetuated the inability of internal or e8ternal solutions to fully address carrier needs(

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,0

G"N"R !ING

G##D PR#SP"C! . S"

$irst before prospecting+ we must go for proper segmentation of the target mar?et( =hile segmenting we ha4e to consider the criteria for segmentationF Geographic SegmentationF $or this+ we ha4e to loo? that which area is the most suitable for targeting the prospect+ by ta?ing into consideration their lifestyle and their standard of li4ing( IncomeF $or this+ we ha4e to loo? for 4arious income group targets and accordingly we ha4e to de4elop the strategy showing them that it is their need and they are the one+ who will be benefiting by *oining -D$C . N/ DI1I!"D( PsychographicF $or this+ we ha4e to loo? for 4arious target groups+ which are influenced by some of their traits li?eF moti4ation by the person they consider their idol+ their 4alues 9 beliefs etc( DifestyleF !his is the group that has a difference in lifestyles and a 4ery high standard of li4ing referred as -NI6s J-igh Networ? Indi4iduals< generally wor?ing in premium Corporates( !hey are basically influenced by some other factors li?e rewards and recognition+ e8tra facilities that gi4es them a chance to pro4e their worth in the society( !herefore+ we ha4e to emphasis on the Customer satisfaction in this cut Z throat competiti4e edge(

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,%

RESEARCH METHODOLOGY

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,&

!he ob*ecti4e of the study as we ?now is to create awareness amongst the customers regarding the 4arious financial products under =ealth 1anagement( Re$e+r!h P,+%5 !he problem is to ascertain whether the awareness of the products offered by the ban? amongst the customers would be successful or otherwise( !hus+ the problem specifically relates to collecting and analy@ing the responses of the customers to the 4arious products( !herefore+ the customers residing and practicing in Pune would be as?ed for their responses( I%-or.+"#o% ReF'#re&5 Information required was basically of two typesF A %< !o understand the potential customers of the ban?+ their needs+ wants as well as the brand awareness of the products as compared to the competitors( &< !he database about the target customers and the organi@ation( R"S" RC- D"SIGNF A D"SCRIP!IK" JCross sectional< it is the deliberate manner to collect the information and it describes the phenomena without establishing the association between the factors( !his is most commonly used when we want to ?now about the preferences of the customer( !he design is crossAsectional because it is suited and the respondent is inter4iewed once(
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1"!-#D #$ CC"SSING !-" D ! F A B PRI1 R2F A !hrough the structured questionnaire and the personal inter4iew which are inter4iewer administrated B S"C#ND R2F Ait will be from the websites+ boo?s( D ! C#DD"C!I#N $#R1F A S!RUC!UR"D form will be used in which open ended and close ended both type of question would be as?ed( B #P"N "ND"D #U"S!I#N B CD#S" "ND"D GU"S!I#NF A 1ultiple choice+ scales will be used+ dichotomous question( SI1PD" R ND#1 S 1PDING S 1PD" SI]"F A %00 S 1PD" R" F PUN" Re$e+r!h A00ro+!h5 !he research approach chosen was to sur4ey and study the necessarily required information+ which was primary in nature( It was felt that the sur4ey was the best option for the purpose as the ob*ecti4e in4ol4ed "merging !rends in "stablishing Customer Relationship( It was not an easy tas? to gather information on the wor?ing of e8isting system and de4eloping brand new ideas( So+ a research was carried out on the flow of information and the data was analy@ed with the help of the research instrument( !he research instrument that was used is Z Guestionnaires+ on spot obser4ation and Interaction(
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Research InstrumentF The re$e+r!h +00ro+!h '$e& C+r#o'$ re$e+r!h #%$"r'.e%"$) "he .+ or o- "he. 1ereO o Questionnaires o On spot observations Interactions Questionnaires !he research instrument primarily chosen was

questionnaires( !hese set of questionnaires helped me in collecting a primary set of data(

!he questionnaires was to be filled up by the consumers+ the first questionnaires prepared was tested on &0 respondents( !he aim was to chec? the questionnaire itself+ so that any flaw in the questionnaires could be rectified+ also it was helpful to understand whether it was sufficient to gi4e the required information and at the same time it was userAfriendly(

fter

this+

some

changes

were

made

in

the

questionnaire and a final questionnaire was prepared( !he questionnaire was to be filled up by the customers with the assistance of the inter4iewer(

-D$C 1utual $und analy@ed what should be the minimum facilities with the ser4ice pro4ider of any
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company(

ccordingly+ a set of questionnaire was

designed which included minimum requirements that a company should possess in order to successfully start a relationship with -D$C 1utual $und and the requirements that customers should possess to operate financial products including both the assets as well as the =ealth management( Me"ho&$ o- D+"+ Co,,e!"#o%5 =hile deciding about the method of data collection to be used for the study+ I had ?ept in my mind two types of data 4i@(+ primary and secondary( Pr#.+r( D+"+5 I had collected my primary data through my questionnaire which I had designed for the corporate selected as a sample( Se!o%&+r( D+"+5 ccording to me secondary data are as important as primary data for any research because there are 4arious data which is needed to complete the research on time( !his can be done only through secondary data( I had collected my secondary data through internet 9 boo?s such as company detail information+ ma*or clients of -D$C .an? 9 other related data( !he secondary data are those which ha4e already been collected by someone else and which ha4e already been passed through the statistical process( =e can collect secondary data through following waysF %< Publications go4ernments of central+ state or local

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,:

&< Publications of foreign go4ernments or of international bodies and their subsidiary organi@ation )< !echnical and trade *ournals 7< .oo?s+ maga@ines+ newspapers and internet ;< Reports and publications of 4arious associations connected with business and industry+ ban?s+ stoc? e8changes+ etc( D+"+ I%"er0re"+"#o%5 fter collecting and analy@ing the data+ I had accomplished the tas? of drawing inferences followed by report writing( !his had done 4ery carefully+ otherwise misleading conclusions might be drawn and the whole purpose of doing research may get 4itiated( It is only through interpretation that the researcher can e8pose relations and processes that underlie his findings(

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,,

HDFC PRODUCT RANGE

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,5

Products EF'#"( D Gro1"h F'%& In4est primarily in equity and equity related instruments( Ch#,&re%H$ G#-" F'%& ChildrenHs Gift $und F#Ge& M+"'r#"( P,+% In4est primarily in Debt L 1oney 1ar?et Instruments and Go4ernment Securities((( L#F'#& F'%&$ Pro4ide high le4el of liquidity by in4esting in money mar?et and debt instruments( De2"D I%!o.e F'%& In4est in money mar?et and debt instruments and pro4ide optimum balance of yield+ ((( K'+r"er,( I%"erC+, F'%& !he primary ob*ecti4e of the Scheme is to generate regular income through in4estme(((

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,3

A*OUT PRODUCT SPECIALINATION

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50

DIRECTORS REPORT

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5%

!o the 1embers+ !hirteenth nnual Report on the business and operations of .an? together with the audited accounts for the year ended 1arch )%+ &00,( FINANCIAL PERFORMANCE !he .an? posted total income and net profit of Rs( 5+70;() crores and Rs( %+%7%(; crores respecti4ely for the financial year &00:A0, as against Rs( ;+;33() crores and Rs( 5,0(5 crores respecti4ely in the pre4ious year( ppropriations from the net profit ha4e been effected as per the table gi4en abo4e( JR s( in lac s< S'..+r#Ee& *+,+%!e Shee" CAPITAL AND LIA*ILITIES Capital Reser4es and Surplus "mployeesH Stoc? #ptions JGrants< #utstanding Deposits .orrowings #ther Diabilities and Pro4isions To"+, ASSETS Cash and balances with Reser4e .an? of India .alances with .an?s and 1oney at Call and Short notice In4estments A$ +" @8<B@<ABB> )%3)3 :%%),: A :5&3,37 &5%;)3 %):53%) 98A@L:8 ;%5&75 )3,%70 )0;:750 A$ +" @8<B@<ABB: )%)%7 735:)3 , ;;,3:5& &5;575 3;;%73 >@LB:@9 ))0::% ):%&)3 &5)3)3:
5&

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d4ances $i8ed ssets #ther ssets To"+,

7:377,5 3:::, ):0;75 98A@L:8

);0:%&: 5;;05 &&,,03 >@LB:@9

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5)

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57

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5;

DATA ANALYSIS

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5:

87 Wh+" #$ "he $+,+r( o- C'$"o.er/ $+,+r( ,;00 to %0000 %000% to %;000 %;00% to &;000 &;00% 9 abo4e !otal No. o- C'$"o.er$ %7) %75 ;0 3 );0 Per!e%"+4e 6P7 70 77 %; % %00

160 140 120 100 80 60 40 20 0 No. of Custemers


I%"er0re"+"#o%

7500 to 10000 10001 to 15000 15001 to 25000 25001 & above

Percentage (%)

It means the ma*or numbers of customers are ha4ing their salary between %0+00% to %;+000 i(e( 77P+ whereas only %P of customers are ha4ing their salary abo4e &;+00% (

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5,

8. Wo',& (o' ,#3e "o !h+%4e (o'r 2+%3#%4 $erC#!e/ Ch+%4e No. o- C'$"o.er$ Per!e%"+4e 6P7 2es %)7 )5 No &%: :&

250 200 150 es 100 50 0 No. of Customers Percentage (%) No

I%"er0re"+"#o% 1a*ority of Customers are not satisfied with their ser4ing .an? in spite of that only )5P of customers are willing to change the ban?s( ccording to customers point of 4iew shifting to other ban? ta?es lot of paper wor? and documentation

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55

A. Wh#!h o- "he -o,,o1#%4 "h#%4$ #%-,'e%!e (o'r &e!#$#o%/ I%-,'e%!e Mo&e d4ertisement =ord of 1outh .rand Name Past "8perience !otal
!50 !00 250 200 150 100 50 0 No. of Percentage customers (% ) "#vert$sement %or# of &out' (ran# Name Past )*+er$ence ,ota-

No. o- !'$"o.er$ ;; )0 %&0 %7; );0

Per!e%"+4e 6P7 %)()) 5()) ):(:: 7%(:: %00

I%"er0re"+"#o% It represents that 7&P customers are ha4ing their .an?ing ser4ice on the basis of past e8perience+ ),P are inspired by brand name of the .an? whereas %)P 9 5P ha4e ta?en their decision because of word of mouth and ad4ertisement respecti4ely(

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53

@(Are (o' +1+re o- HDFC M'"'+, F'%&$ 1e+,"h .+G#.#E+"#o%/

A1+re No. o- !'$"o.er$ Per!e%"+4e 6P7 2es &&; )3P No );0 :%P

!50 !00 250 200 150 100 50 0 No. of customers Percentage (%) es No

I%"er0re"+"#o% Clear 4iew says that :%Pof the customers are unaware about -D$C preferred Sa4ing account(

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30

;.Wh#,e #%Ce$"#%4 #% .'"'+, -'%&$ "he So'r!e o#%-or.+"#o% '$e&/ Internet $requency Percent Kalid Percent Cumulati4e Percent
100 80 60 40 20 0 YE S NO

Kalid 2es %: No 57 !otal %00 #ut of the total respondents+ %:P relied on Internet as the source of information while in4esting in mutual funds and rest of the ma*ority i(e( 57P said no to the same( !hus+ it can be concluded that the source of Internet is relati4ely not the factor affecting the sale of 1utual $unds( 1aga@ine $requency Percent Kalid Percent 2es &) No ,, !otal %00

yes no

INDIR INS!I!U!" #$ C R""R S!UDI"S

3%

#ut of the total respondents+ &)P said yes that they use maga@ines as the source of information while in4esting in mutual funds and rest ,,P said no to the same( Newspaper $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es 7: No ;7 !otal %00

yes no

#ut of the total respondents+ 7:P said yes that they use newspaper as the source of information while in4esting in mutual funds and rest ;7P said no to the same( It is an effecti4e source as almost half of the respondents are relying on the newspaper as the source of true information( $inancial ad4isor $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es :, No &) !otal %00

INDIR INS!I!U!" #$ C R""R S!UDI"S

3&

yes no

#ut of the total respondents+ :,P said yes that they use financial ad4isor as the source of information while in4esting in mutual funds and rest ))P said no to the same( !he respondents relied to a significant le4el on the $inancial d4isors for getting 1utual fund information( Spouse $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es ); No :; !otal %00

yes no

INDIR INS!I!U!" #$ C R""R S!UDI"S

3)

#ut of the total respondents+ );P said yes that they too? the information from their spouse while in4esting in mutual funds and rest :;P said no to the same( $riends $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es 73 No ;% !otal %00

yes no

#ut of the total respondents+ 73P said yes that they too? the information from their friends while in4esting in mutual funds and rest ;%P said no to the same( d4ertisement $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es :& No )5 !otal %00

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37

yes no

#ut of the total respondents+ :&P said yes that ad4ertisements are the source of Information used while in4esting in mutual funds and rest )5P said no to the same L.Re4',+r or + %e1 #%Ce$"or #% .'"'+, -'%&/ $requency Percent Kalid Percent Cumulati4e Percent Kalid Regular ;5 New 7& !otal %00

yes no

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3;

;5P of the respondents are regular in4estors in mutual funds while rest 7&P are new to that( !hough the number of regular in4estors is high but at the same time new in4estors are showing significant participation in this field( :.I%Ce$".e%" 0or"-o,#o !o%$#$"$5 Real estate $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es 70 No :0 !otal %00

yes no

#ut of total respondents 70P said yes that in4estment portfolio consist of real estate( Post office $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es :, No )) !otal %00

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3:

yes no

#ut of total respondents :,P said yes that in4estment portfolio consist of Post office schemes( 1utual fund $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es ,7 No &: !otal %00

yes no

#ut of total respondents ,7P said yes that in4estment portfolio consist of mutual funds(
INDIR INS!I!U!" #$ C R""R S!UDI"S 3,

Debt fund $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es %, No 5) !otal %00

yes no

#ut of total respondents %,P said yes that in4estment portfolio consist of debt funds(

Shares $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es ): No :7 !otal %00

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35

yes no

#ut of total respondents ):P said yes that in4estment portfolio consist of shares( $i8ed deposit $requency Percent Kalid Percent Cumulati4e Percent Kalid 2es ,& No &5 !otal %00

yes no

#ut of total respondents ,&P said yes that in4estment portfolio consist of fi8ed deposit >.T(0e o- -'%& (o' 0re-er "he .o$" $requency Percent Kalid Percent Cumulati4e Percent Kalid Regular income )0 Debt ) Di4ersified equity &3
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Sector funds %& "DSS Jta8 shield< &: !otal %00

DIVERSIFIED REGULAR INCOME ELSS DIVERSIFIED REGULAR INCOME DEBT SECTOR FUND

#ut of total respondents+ )0P preferred regular income type of fund+ &3P preferred di4ersified equity and &:P preferred "DSS Jta8 shield< while %&P preferred sector funds followed by )P debt( =.Fe+"'re$ "h+" +""r+!" .o$" 1h#,e !hoo$#%4 + $0e!#-#! M'"'+, -'%& $requency Percent Kalid Percent Cumulati4e Percent Kalid $le8ibility ) Return 7, 1anaged by professional people &% Ris? di4ersion &3 !otal %00

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%00

VALID FLEXIBILITY RETURN MANG BY PROFF. RISK DIVERSION

#ut of total respondents+ 7,P are attracted to mutual funds due to the returns+ &3P because of ris? di4ersion and &%P li?e to be managed by professional people while rest )P are attracted due to the fle8ible mutual fund schemes(

9.M'"'+, -'%& $!he.e (o' 0re-er $requency Percent Kalid Percent Cumulati4e Percent Kalid #pen ended scheme :7 Close ended scheme ): !otal %00

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%0%

OPEN ENDED CLOSE ENDED

:7P 0f the total respondents prefer open ended schemes for mutual fund and rest ):P prefer close ended( 8B.T(0e o- re"'r% eG0e!"e& -ro. .'"'+, -'%&$/ $requency Percent Kalid Percent Cumulati4e Percent Kalid 1onthly &; Guarterly )) Semi annual , nnual ); !otal %00

VALID MONTHLY QUATERLY SEMI ANNUAL ANNUAL

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%0&

);P of the respondents e8pect annual return from the mutual funds+ ))P e8pect quarterly+ &;P e8pect monthly and rest ,P e8pect semi annual returns( 88.I%Ce$".e%" hor#Eo% $requency Percent Kalid Percent Cumulati4e Percent Kalid Up to : months : Up to % year %; Up to & year )7 Up to ) year ), Up to ; year 5 !otal %00

UPTO 1 YEAR UPTO YEAR UP TO ! YEAR UP TO " YEAR UP TO # MONTHS

#ut of total respondents+ ),P prefer to in4est up to ) yrs+ )7P up to & yrs+ %; Up to % yr and 5P prefer to in4est up to ; yrs( 8A.Ne+r -'"'re ,#+2#,#"#e$ $requency Percent Kalid Percent Cumulati4e Percent Kalid Child marriage &: "ducation :0 Doans %7 !otal %00
INDIR INS!I!U!" #$ C R""R S!UDI"S %0)

VALID CHILD MARR. EDUCATION LOANS

#ut of total respondents+ :0P of the respondents ha4e children education as future liability+ &:P ha4e it as child marriage and rest %7P ha4e the liability to pay off the loans( 8@.Cro$$ T+2$ re you a regular or new in4estor Y features attract you most Cross tabulation Count $eatures attract you most $le8ibility Return 1anaged by professional people Ris? di4ersion !ype of in4estor !otal Regular ;5 New 7& !otal %00

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%07

REGULAR NE$

!his table tells us that ma8imum number of in4estors i(e( 7, in4est because of return they get from the mutual fund schemes( It also tells us that the regular in4estors i(e( )7 in4est on the basis of returns they get and the new ones i(e( %) are in4esting because of the people those who are managing the fund schemes(

8;.Are (o' + re4',+r or %e1 #%Ce$"or "(0e o- re"'r% (o' eG0e!" Cro$$ "+2',+"#o% Count !ype of return you e8pect !otal 1onthly Guarterly Semi annual nnual re you a regular or new in4estor Regular ;5 New 7& !otal %00

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%0;

REGULAR NE$

large number of the in4estors 7)P of the regular in4estors e8pect annual returns(7&P of the new in4estors e8pect early quarterly returns( 8L.Are (o' + re4',+r or %e1 #%Ce$"or (o'r #%Ce$".e%" hor#Eo% Cro$$ "+2',+"#o% Count 2our in4estment hori@on !otal Up to : months Up to % year Up to & year Up to ) year Up to ; year re you a regular or new in4estor Regular ) ) %) )% 5 ;5 New ) %& &% : 0 7& !otal : %; )7 ), 5 %00

;)P of the regular in4estors in4est upto a period of ) years(;0P of the new in4estors prefer it upto & years(&&P of Regular in4est it upto & years( It can be seen that the regular in4estors ha4e propensity to in4est for greater periods than new customers(

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%0:

8:.Are (o' + re4',+r or %e1 #%Ce$"or .'"'+, -'%& $!he.e 0re-er Cro$$ "+2',+"#o% Count 1utual fund scheme prefer !otal #pen ended scheme Close ended scheme re you a regular or new in4estor Regular 7: %& ;5 New %5 &7 7& !otal :7 ): %00 round ,,P of the regular respondents prefer openA ended schemes while ;,P of new in4estors prefer closeAended schemes( Regular in4estor is more concerned with the liquidity as compared to new in4estor and prefers open ended schemes( 8>.Are (o' + re4',+r or %e1 #%Ce$"or "(0e o- -'%& 0re-er Cro$$ "+2',+"#o% Count !ype of fund prefer !otal Regular income Debt Di4ersified equity Sector funds "DSS Jta8 shield< re you a regular or new in4estor Regular %, ) %) ) && ;5 New %) %: 3 7 7& !otal )0 ) &3 %& &: %00 New In4estors prefer to in4est in "DSS followed by regular income schemes and Di4ersified equity( only a small ;P percent of them in4est in Debt or sector funds(

!he regular in4estors prefer to in4est in di4ersified equity followed by regular income schemes and no one prefers to in4est in debt(

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%0,

KUESTIONNAIRE

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%05

SirLmadam =e are conducting mar?et assessment of -D$C product with special reference to ^Preferred sa4ing account6 at Pune( =e would li?e to include your opinion for this purpose(

N 1" #$ !-" CUS!#1"R D"SIGN !I#N C#N! C! NU1."R G" S"' DDR"SS F F

F F F

G%( =hat is your annual income> __________________((( ___(((((((((((((((((((((((((( %( =hat is your source of information while in4esting in mutual funds> a< Internet Q R b< 1aga@ine Q R c< Newspaper Q R d< $inancial d4isor Q R e< Spouse Q R f< $riends Q R g< d4ertisements Q R

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%03

&( re you a regular or a new in4estor in mutual fund> R"GUD R Q R N"= Q R

)( 2our in4estment portfolio consists in P< a< Real "state Q R b< Post office schemes Q R c< 1utual $unds Q R d< Debt Q R e< Shares Q R f< $i8ed Deposits Q R 7( =hich type of fund you prefer the most> a< Regular income Q R b< Debt Q R c< Di4ersified "quity Q R d< Sector funds Q R e< "DSS Jta8 shield< Q R ; ( =hich $eatures attract you the most while choosing a specific 1utual $und> a< $le8ibility Q R b< Return Q R c< 1anaged by professional people Q R d< Ris? Di4ersion Q R e< Dess "8penses Q R

:( =hat type of 1utual $und Scheme you prefer> a< #pen "nded Scheme Q R b< Close "nded Scheme Q R

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%%0

,( =hat type of return you e8pect> 1onthly Q R Guarterly Q R Semi annual Q R nnual Q R

5( =hat is your in4estment hori@on> Up to : months Q R Up to % year Q R Up to & years Q R Up to ) years Q R Up to ; years Q R Up to %0 years Q R 3( =hat are your near future liabilities> Child marriage Q R "ducation Q R ny other please specify__________( %0( =hich of the following things influence your decision> d4ertisement < =ord of mouth J < .rand name J < Past e8perience J < J

%%( re you aware of -D$C 1utual $und6s =ealth 1a8imi@ation> J 2es < J < N#

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%%%

Remar?s if any_____________________ ___((( ______________________ ________((( =e are grateful for your coAoperation( !han?ing you(

DateF SignatureF

FINDINGS %( !he in4estors gi4e more preference to regular income funds besides the considerations of %< Di4ersified "quity &< !a8 Sa4ing Schemes( !hus if the go4ernment encourages the in4estment in mutual funds in the current budget+ then more people will be in4esting in the 1$s for ta8 sa4ing( -owe4er people are also not compliant to ris? a4ersion( !hey are willing to in4est in ris?y equity funds( &( nother significant finding of the pro*ect is that in4estors are lured by the returns 1$s are showing( -owe4er at the same time they also want to minimi@e their ris?(

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%%&

)( In4estors desire or opt openAended schemes than closeAended schemes( !his means that they want fle8ibility in the inflow and outflow of their funds( 7( !he in4estment hori@on+ which is most li?ed by the in4estors+ is &A) yrs( ;( !he source of information the in4estors most rely is on ad4ertisement( -owe4er they also require the detailed information+ which they ta?e from $inancial d4isors( #n other sources the in4estors are quite apprehensi4e( :( In4estor6s portfolio consists mainly of $i8ed Deposits and Post #ffice schemes( -owe4er portfolio of regular in4estors do contain significant proportion of 1utual $unds(

RECOMMENDATIONS B !here is lac? of awareness among people about mutual funds so there should be more ad4ertising and other promotional campaigns to ma?e them aware(

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%%)

B People are more interested in in4esting in equity funds rather than debt funds because companies are promoting more for equity funds( Companies should equally promote debt funds also as the pro4ide security to customers( B Companies should gi4e ?nowledge to its customer about its computeri@ed operations to sa4e their time and to ma?e the operations more easy

*I*ILOGRAPHY
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We2$#"e$ www(hdfcban?(com www(google(com www(business(comLdirectoryLfinancial www(amfiindia(com www(mutualfundsindia(com www(hdfcfund(com www(mutualfundsabout(com www(moneycontrol(com www(4alueresearchonline(com *oo3$ Philip /otlerF 1ar?eting 1anagement C(R /othariF Research 1ethodology /( Nageswara RaoF .an?ing Strategy K(/(.hallaF !he .oo? recommended of In4est 1anagement

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%%;

CONCLUSION

!he comparison of the Indian 1utual $und Industry with respect to global standards showed that India has a lot of catching up to do in terms of preparation+ the di4ersity of products+ and the ris? mitigation techniques used( -owe4er+ the attitude of the regular towards in4estor protection and go4ernance of 1utual $unds was found to be close to global standards( !he Indian 1utual $und industry is possibly at a point of inflection on the 4erge of e8plosi4e growth( !he factors that point towards this are the e8istence of robust capital mar?ets and the presence of an impartial regular( In order to reap the benefits of this growth+ the 1utual $und industry has to introduce changes at the rate of ?nots( !hese chances include introduction of newer production impro4ements in 1utual $und industry and better go4ernance of 1utual $unds( !he 1utual $und regulator JS".I< should increase the accountability of all ma*or players including the 1Cs+ distributors and bro?ers to build trust among retail in4estors( !he 1utual fund industry is growing at a tremendous pace( large number of plans ha4e come up from different financial resources( =ith the Stoc? mar?ets soaring the in4estors are attracted towards these schemes( #nly a small segment of the in4estors still in4est in 1utual funds and the main sources of information still are the financial ad4isors followed by ad4ertisements in different media( !he Indian in4estor generally in4estors o4er a period of & to three years( lso there is a greater

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%%:

tendency to in4est in fi8ed deposits due to the security attached with it( In order to e8cel and ma?e mutual funds a success+ companies still need to create awareness and understand the Psyche of the Indian customer(

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%%,