A PROJECT REPORT ON

Changing Trends in Mutual Fund Industry Post Entry

Load Waiver & The Resultant Impact On IFA Segment









SUBMITTED BY
NITESH JAIN
JAGANATH INTERNATIONAL MANAGEMENT SCHOOL

ORGANISATION: DSP BlackRock MUTUAL FUND COMPANY LTD.
LOCATION: PATNA



1

ACKNOWLEDGEMENT
At the ecstatic time of presenting my project on
First of all, I bow the almighty God for blessing me with enough patience and strength to go
through this challenging face of life.
I express my sincere thanks to DSP BlackRock Mutual Fund Company for giving me
an opportunity to work with them through this summer project. It gives me a sense of
great pride to acknowledge the fact that working on this project has added value to
my learning process.
My humble thanks and feigned gratefulness to Mr. Nikhil Verma, my company guide
who emitted signals of profound knowledge and deep insight without which it would
have been difficult to give a physical shape to the project.
I would also like to thank Ms. Richa Sharma and Ms. Nidhi Jain who supported me
and help me to understand the practical working of the mutual fund industry.

I wish to acknowledge with regards the staff and officials of the DSP BlackRock Mutual
Fund Company Ltd. for their support during my internship.

2

Table of Content
1. Introduction of the Company
1.1 DSP Group Overview
1.2 Management of DSP Group
1.3 Main competitors
1.4 Financial statement analysis
2. Executive summary
3. Abstract
4. Objective of the study
5. Scope of the study
6. Introduction to project title
7. Concept of a Mutual Fund
8. Conceptual Framework of MF
9. Advantages & Disadvantages of MF
10. Types of MF schemes
11. Modes of Receiving Income Earned From MF Investment
12. Investment Philosophy of DSP BlackRock MF
13. Different scheme of BlackRock
14. Growth of MF Industry in India
15. Recent trends in MF Industry
16. How to invest in MF Industry
17. Fees & commission paid to MF
18. How Financial Advisers get paid for selling MF?
19. Changing distribution structure of MF
20. Why an IFA?
21. MF with NO distributors
22. Literature Review
23. Research Methodology
1.1 Survey Analysis
1.2 Objectives
1.3 Sampling Method
1.4 Research Instrument
1.5 Assumption

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1.6 Limitation of study
24. Performance Evaluation
25. How to calculate the value of a MF
26. Measuring MF Performance
27. Composition of the portfolio
28. Questionnaire Analysis
30. Bibliography
31. Annexures
Figures
Fig 1 Concept of MF
Fig 2 Structure of MF
Fig 3 Types of MF Schemes
Fig 4 Aggressive plan
Fig 5 Conservative plan
Fig 6 Fees paid to shareholders
Fig 7 Asset growth & shift in source of advisers compensation
Fig 8 Investment in MF
Fig 9 Decision Influencer
Fig 10 Risk appetite
Fig 11 safe/ secured returns
Fig 12 Income tax Incentives
Fig 13 Quality of service of MF agents
Fig 14 Selection of Investment Fund
Fig 15 Entry and Exit load


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Introduction
DSP Group Overview
DSP Group Holds a 60% stake in DSP BlackRock Investment Managers.
The Kothari family of D.S. Purbhoodas and Co. is the promoter and owner of DSP
Group.
Track record of over 140 years, one of the oldest financial services firms in India.
One of the founding members and first directors of the Bombay Stock Exchange
(BSE).
Each generation of the DSP Group has seen a partner serving as President of the
Bombay Stock Exchange, bearing testimony to the long-standing position DSP
Group occupies in the Indian Financial arena.
Mr. Hemendra Kothari, Chairman of DSP BlackRock Investment Managers, has an
experience of over 40 years in the financial services industry, and also served the
Bombay Stock Exchange in the capacity of Vice President for three years after which
he was elected as President in 1991-92.

BlackRock holds 40% stake in DSP BlackRock Investment Managers Independent firm in
ownership and governance.
Established in 1988, BlackRock is a public company (NYSE:BLK)
- No majority owners
- Majority of Board of Directors is independent.
Laurence Fink, Chairman& CEO since firms inception.





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Leader in creating solutions for clients
Strategies and services differentiated for clients.
Customizes solutions to meet risk/return objectives.
Innovative strategies and services within and across asset classes.
Client dialogues have resulted in advisory assignments.
Senior level of commitment to client service.
One BlackRock approach result in consistency & quality throughout firm.

Pioneer in risk management and technology
Provides risk management and enterprise investment services for $ 9 trillion in
assets.
BlackRock Solutions offers independent risk management products.

DSP BlackRock
DSP BlackRock Investment Managers is a joint venture between DSP
Group and BlackRock
With our three dimensional approach to managing the organization, we
seek to:
Ensure consistency on a global basis.
Allow for the tailoring of products and services according to client or local needs.
Promote teamwork among our employees worldwide; and
Facilitate operational integrity and efficiency.



6

Our Values
Integrity
Demonstrate honesty, integrity and professionalism in all internal and external
dealings. Maintain the highest standards of ethics.
We are fiduciaries and leaders in our industry. We understand the responsibility we
carry.
We respect differences and learn from them. We take time to teach others.
We are open and honest in all our communications. We speak the truth.

Values
Client focus
We listen carefully to our clients.
We put our clients first and at the heart of all we do.
We listen and deeply understand our clients businesses, risk and issues.
We help our clients better meet their investment goals.
We anticipate trends and help clients plot the future course.
Consistently exceed our clients expectations. Make decisions close to our clients.

Management - DSP BlackRock
Name Designation
Shitin Desai Executive Vice Chairman
Jennifer Taylor
Additional Director
Name
Designation
Pradeep Dokania Director
Antonios Biniaris Additional Director

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Main Competitors
HDFC Mutual Fund
Birla Sun Life Mutual Fund
Reliance Mutual Fund
Prudential ICICI Mutual Fund
Kotak Mutual Fund
Franklin Templeton Mutual Fund
UTI Mutual Fund

Competitors
Last Price Market Cap.
(Rs.cr.)
Sales
Turnover
Net Profit Total Assets
Rel Capital
575.55 14,167.74 1,808.81 229.27 18,917.21
Bajaj Holdings
772.05 8,592.42 1,074.56 1,000.09 4,603.16
Bajaj Finserv
535.70 7,750.70 119.81 188.34 1,390.16
Muthoot Finance
185.35 6,889.70 - - -
Religare Enterp
464.40 6,478.08 126.71 4.99 2,583.28
Responsive Ind
106.65 2,790.44 724.50 47.21 452.31
Tata Inv Corp
480.30 2,646.23 245.95 198.59 1,639.68
JM Financial
21.80 1,634.53 44.12 10.04 1,617.88
Future Ventures
9.70 1,528.96 13.12 -0.67 -
JSW Holdings
865.20 960.34 24.07 20.70 642.64




8

Financial Statement Analysis
Balance Sheet
Balance Sheet of DSP
BlackRock
------------------- in Rs. Cr. -------------------

Mar '09 Mar '08 Mar '07 Dec '05

12mths 12mths 15mths 12mths

Sources Of Funds

Total Share Capital 697.50 697.50 697.50 22.50

Equity Share Capital 22.50 22.50 22.50 22.50

Share Application Money 0.00 0.00 0.00 0.00

Preference Share Capital 675.00 675.00 675.00 0.00

Reserves 1,395.51 1,322.66 912.81 529.65
Revaluation Reserves 0.00 0.00 0.00 0.00
Net worth 2,093.01 2,020.16 1,610.31 552.15
Secured Loans 4.80 4.96 1,020.75 3.12
Unsecured Loans 0.00 151.40 839.88 12.00

Total Debt 4.80 156.36 1,860.63 15.12

Total Liabilities 2,097.81 2,176.52 3,470.94 567.27






Mar '09



Mar '08



Mar '07



Dec '05


12mths 12mths 15mths 12mths

Application Of Funds

Gross Block 187.46 168.28 81.30 60.36

Less: Accum. Depreciation 111.68 78.21 52.30 42.15

Net Block 75.78 90.07 29.00 18.21

Capital Work in Progress 0.94 5.84 15.65 2.75


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Investments 1,676.88 1,684.79 644.70 70.49

Inventories 128.91 41.41 2,206.18 303.41

Sundry Debtors 53.69 200.04 546.60 187.06

Cash and Bank Balance 274.35 610.86 115.33 56.13

Total Current Assets 456.95 852.31 2,868.11 546.60

Loans and Advances 339.93 315.13 298.10 645.07

Fixed Deposits 961.19 1,996.11 1,186.19 289.24

Total CA, Loans &
Advances
1,758.07 3,163.55 4,352.40 1,480.91

Deffered Credit 0.00 0.00 0.00 0.00

Current Liabilities 1,249.31 2,716.80 1,562.88 658.20

Provisions 164.56 50.92 7.91 346.90

Total CL & Provisions 1,413.87 2,767.72 1,570.79 1,005.10

Net Current Assets 344.20 395.83 2,781.61 475.81

Miscellaneous Expenses 0.00 0.00 0.00 0.00

Total Assets 2,097.80 2,176.53 3,470.96 567.26

Contingent Liabilities 33.76 36.01 56.56 15.08

Book Value (Rs) 630.23 597.85 415.69 245.40




Profit & Loss account of DSP
BlackRock
------------------- in Rs. Cr. -------------------

Mar
'09
Mar '08 Mar '07 Dec '05 Dec '04


12mths 12mths 15mths 12mths 12mths

Income

Sales Turnover 649.63 1,236.52 1,160.21 480.96 363.05

Excise Duty 0.00 0.00 0.00 0.00 0.00



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Net Sales 649.63 1,236.52 1,160.21 480.96 363.05

Other Income 164.50 35.31 119.37 7.12 6.73

Stock Adjustments 0.00 0.00 0.00 0.00 0.00

Total Income 814.13 1,271.83 1,279.58 488.08 369.78

Expenditure

Raw Materials 0.00 0.00 0.00 0.00 0.00

Power & Fuel Cost 0.00 0.00 0.00 0.00 0.00

Employee Cost 296.69 339.37 348.37 139.04 87.16

Other Manufacturing Expenses 3.77 4.32 2.83 1.78 1.57

Selling and Admin Expenses 129.64 178.89 145.72 49.65 46.18

Miscellaneous Expenses 29.16 27.53 35.46 14.76 11.96

Preoperative Exp Capitalized 0.00 0.00 0.00 0.00 0.00

Total Expenses 459.26 550.11 532.38 205.23 146.87


Mar'09 Mar '08 Mar '07 Dec '05 Dec '04



12mths 12mths 15mths 12mths 12mths


Operating Profit 190.37 686.41 627.83 275.73 216.18

PBDIT 354.87 721.72 747.20 282.85 222.91

Interest 3.83 39.23 172.29 15.21 11.54

PBDT 351.04 682.49 574.91 267.64 211.37

Depreciation 35.43 28.17 12.70 6.69 6.30

Other Written Off 0.00 0.00 0.00 0.00 0.00

Profit Before Tax 315.61 654.32 562.21 260.95 205.07

Extra-ordinary items 11.55 -3.03 0.61 -0.01 -0.03

PBT (Post Extra-ord Items) 327.16 651.29 562.82 260.94 205.04

Tax 102.62 217.76 177.64 90.98 72.72

Reported Net Profit 224.53 433.54 385.19 169.98 132.33

Total Value Addition 459.27 550.10 532.38 205.22 146.86

Preference Dividend 20.25 20.25 0.94 0.00 0.00


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Equity Dividend 0.00 0.00 0.00 22.50 54.00

Corporate Dividend Tax 9.93 3.44 0.16 3.16 7.70

Per share data (annualized)

Shares in issue (lakhs) 225.00 225.00 225.00 225.00 225.00

Earnings Per Share (Rs) 90.79 183.68 170.77 75.54 58.82

Equity Dividend (%) 0.00 0.00 0.00 100.00 240.00

Book Value (Rs) 630.23 597.85 415.69 245.40 181.26






Mar '09 Mar '08 Mar '07 Dec '05

12mths 12mths 15mths 12mths

Net Profit Before Tax 229.59 654.34 456.27 276.06

Net Cash From Operating
Activities
-406.74 1636.10 -221.63 159.84

Net Cash (used in)/from
Investing Activities
94.48 -622.70 -500.14 -54.20

Net Cash (used in)/from
Financing Activities
-24.01 0.34 649.01 -61.34

Net (decrease)/increase In
Cash and Cash Equivalents
-336.26 1013.74 -72.76 44.30

Opening Cash & Cash
Equivalents
1105.38 91.64 164.40 120.10

Closing Cash & Cash
Equivalents
769.11 1105.38 91.64 164.40




Cash Flow of DSP BlackRock
------------------- in Rs. Cr. -------------------

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key Financial Ratios of DSP
BlackRock
------------------- in Rs. Cr. -------------------



Mar '09 Mar '08 Mar '07 Dec '05 Dec '04

Investment Valuation Ratios


Face Value 10.00 10.00 10.00 10.00 10.00

Dividend Per Share -- -- -- 10.00 24.00

Operating Profit Per
Share (Rs)
84.61 305.08 279.03 122.55 96.08

Net Operating Profit Per
Share (Rs)
288.72 549.57 515.65 213.76 161.36

Free Reserves Per
Share (Rs)
620.17 587.80 308.40 172.35 123.31

Bonus in Equity Capital 75.55 75.55 75.55 75.55 75.55

Profitability Ratios


Operating Profit Margin (%) 29.30 55.51 54.11 57.33 59.54

Profit Before Interest And Tax

Margin (%)
22.85 52.53 52.56 55.26 56.82

Gross Profit Margin (%) 23.84 53.23 39.78 54.72 57.11

Cash Profit Margin (%) 16.56 35.58 33.99 36.28 37.53

Adjusted Cash Margin (%) 16.56 35.58 24.60 36.03 37.43

Net Profit Margin (%) 33.11 34.60 32.91 34.91 35.82

Adjusted Net Profit Margin
(%)
33.11 34.60 23.52 34.65 35.72

Return On Capital Employed
(%)
8.73 30.99 18.01 48.46 30.86

Return On Net Worth (%) 14.40 30.72 23.92 30.78 32.45

Adjusted Return on Net
Worth (%)
3.99 29.54 29.33 30.55 32.35

Return on Assets Excluding 630.23 597.85 415.69 10.81 9.23


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Revaluations
Return on Assets Including
Revaluations
630.23 597.85 415.69 10.81 9.23

Return on Long Term Funds
(%)
8.73 33.31 18.01 48.46 30.86

Liquidity And Solvency Ratios


Current Ratio 1.24 1.08 2.77 1.47 1.90

Quick Ratio 1.13 1.12 1.35 1.17 1.25

Debt Equity Ratio 0.48 0.62 2.71 0.03 0.72

Long Term Debt Equity Ratio 0.48 0.51 2.71 0.03 0.72

Debt Coverage Ratios


Interest Cover 47.83 17.20 3.63 18.07 18.74

Total Debt to Owners Fund 0.48 0.62 2.71 0.03 0.72

Financial

Charges Coverage Ratio
57.07 17.92 3.70 18.51 19.29

Financial
Charges Coverage Ratio
Post Tax
68.82 12.77 3.31 12.61 13.02

Management Efficiency Ratios


Inventory Turnover Ratio -- -- 0.53 1.60 0.77

Debtors Turnover Ratio 5.12 3.31 3.16 2.05 1.66

Investments Turnover Ratio -- -- -- -- --

Fixed Assets Turnover Ratio -- -- 49.63 41.45 32.35

Total Assets Turnover Ratio -- 0.57 0.34 0.86 0.52

Asset Turnover Ratio 3.81 7.85 16.21 9.39 7.16

Average Raw Material
Holding
-- -- -- -- --

Average Finished Goods -- -- -- -- --


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Held
Number of Days In Working
Capital
190.75 115.24 1,078.88 356.15 655.21

Profit & Loss Account Ratios


Material Cost Composition -- -- -- -- --

Imported Composition of Raw
Materials Consumed
-- -- -- -- --

Selling Distribution Cost
Composition
3.38 3.20 3.99 2.75 3.98

Expenses as Composition of
Total Sales
9.34 8.20 6.59 13.00 10.91

Cash Flow Indicator Ratios


Dividend Payout Ratio Net
Profit
4.85 0.83 0.04 15.09 46.62

Dividend Payout Ratio Cash
Profit
4.14 0.77 0.04 14.52 44.50

Earning Retention Ratio 82.48 99.14 99.95 84.80 53.26

Cash Earning Retention Ratio 89.22 99.20 99.95 85.38 55.38

Adjusted Cash Flow Times 0.04 0.35 6.46 0.09 2.12




Dec'04 Dec '05 Mar '07 Mar '08 Mar '09


Earnings Per Share 58.82 75.54 170.77 183.68 90.79

Book Value 181.26 245.40 415.69 597.85 630.23











15













Executive Summary
I am Nitesh Jain from the batch of 2013-15, Jagannath International Management School,
Kalkaji, New Delhi
I did my Summer Internship Project with DSP BlackRock Asset Management Company Ltd.
(www.dspblackrock.com) from May 2014 to 25
th
June 2014.
Profile- a) Evaluate the performance of DSP BlackRock Funds.
b) Distribution Channel Management.
c) Investor awareness about mutual funds.
Reporting I reported to Mr. Nikhil Verma, Manager Sales who kept guiding me during
the project as and when required.
Learning during training-
a) Learning about the Mutual Fund Industry and their importance in the current
scenario.
b) The nature of project involved the whole survey of how to calculate the value and
performance of mutual fund and by comparing these values from different companys
mutual funds.

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c) Know about the risks associated with mutual funds and the difference in the
evaluation of debt funds and equity funds.
d) I learned the difference of investing in mutual fund and other investment (bank/post
office) products.
e) The scope of the project was also to find out that what factors forces the customers
to buy a particular mutual fund. I learned what things investor should keep in mind
before investing into any fund apart from that I have also seen what Indian investors
think about mutual fund and how much they are aware about mutual funds.
f) Opportunity to learn about the ups and downs in the market and its impact on the
performance of various schemes.
g) The presentations of DSP BlackRock MF that I gave to our alternate distribution
channels employees helped me to get exposed to various problems that the
distributors face during selling of mutual fund schemes and how to tackle with such
problems.
h) I have learned that mutual funds now present perhaps the most appropriate
investment opportunity for most investors. As financial markets become more
sophisticated and complex, investors need a financial intermediary who provides the
required knowledge and professional expertise on successful investing.
i) Learning about several business operations of the company.
j) Corporate Exposure during training made me more confident and outgoing.
Training provided me an opportunity to interact with employees in the company. This
made me used to corporate Environment and also helped me hone my soft skill.
Interaction with Relationship Managers and branch heads at various banks boosted my
confidence and infused enthusiasm in me.
Achievements The performance evaluation of different mutual fund schemes done by
me will help the organization to explore where DSP BlackRock MF stands in the market
compared to other mutual funds. I have also tried to check the Indian investors
awareness about MF investments. My work during the summer training was appreciated
a lot which was a constant source of inspiration for me. The Indian MF industry has
already started opening up many of the exciting investment opportunity to Indian
investors. Despite the expected consulting growth in the industry, mutual funds are still a
new financial intermediary in India. Hence, it is important that the investors, the mutual
fund agents/ distributors, the investment advisors and even the fund employees acquire

17

better knowledge of what mutual funds are, what they can do for investors and what
they cannot and how they function differently from other intermediaries such as banks.
This is what I try to achieve by giving training to them as DSP asset managements
representative.
I have done my best to make it a genuine study. But there are some chances of mistakes. A
critical appraisal of anyone will be heartily welcomed.

Abstract
Mutual fund industry in India is relatively new with a lot of untapped market. After the
opening up of this industry since 1993 there has been no looking back and the Assets
under Management have only been rising. The industry today is facing stiff competition
with each player fighting for a bigger mind share and market size.
I have selected this project in order to know the changing trends in mutual fund industry
post entry load waiver and the resultant impact on the IFA segment. It is also done in order
to know as to how much knowledge the investor has about the mutual funds and their
performance and to study in detail the results of investing in this alternate channel of
investment. During the course of mu training I have made use of various test and
techniques. These techniques were effective to analyze various finding and interpret correct
results as required by research objectives. The results are being analyzed through various
bar graphs and other similar charts.
The first part of the project involves the whole survey of how to calculate the value and
performance of mutual fund and by comparing these values from different companys
mutual funds. The project also includes comparison of mutual fund with other bank/post
office products. The research also includes what things investor should keep in mind before
investing into any fund.
In the second part of the project a market research was conducted to determine the level of
investor awareness & marketing strategy followed by the organization to promote the fund
as well as performance evaluation of the mutual funds offered by DSP Blackrock Mutual

18

Fund in Patna, region. The scope of the project was also to find out those factors which
forces the customers to buy a particular mutual fund and those factors which discourage
the investor to buy them. Apart from
that I have also tried to find out what investors thinks about mutual fund i.e. how much are
they aware about mutual funds.
The project also contains about the history of mutual funds, investing strategies, conceptual
framework, risk associated and investment philosophy.
Objective of the Study
To study and evaluate the performance of selected schemes offered by the
DSP BlackRock Mutual Fund with respect to other growing Mutual Funds so as to
find out the competitive edge of DSP BlackRock MF over others.
To study investor awareness regarding various types of Mutual Funds and
various schemes offered by these mutual funds.
To study where DSP MF does stands in the market & what steps they should
take to improve their position in the market.

Scope of the Study
The study is conducted to understand the investor awareness and the performance of the
various schemes offered by DSP MF and managing the inactive alternate distribution
channel of DSP AMC Ltd. It also includes studying in the depth this alternate tool of
investment (mutual fund).

The primary research required going to various employees and speaking to relationship
managers of various banks and customers present in Chandigarh, Panchkula and Mohali.

The secondary research required exploring research papers, newspapers, magazines, fact
sheets of various funds and their offer documents.
It also involved surfing the internet.

19


Ch. 1- Introduction

The one investment vehicle that has truly come of age in India in the past decade is mutual
funds. Today, the mutual fund industry in the country manages around Rs 329,162 crore
(As of Dec, 2006) of assets, a large part of which comes from retail investors. And this
amount is invested not just in equities, but also in the entire gamut of debt instruments.
Mutual funds have emerged as a proxy for investing in avenues that are out of reach of
most retail investors, particularly government securities and money market instruments.

Specialization is the order of the day, be it with regard to a schemes investment objective
or its targeted investment universe. Given the plethora of options on hand and the hard-sell
adopted by mutual funds vying for a piece of your savings, finding the right scheme can
sometimes seem a bit daunting. Mind you, its not just about going with the fund that gives
you the highest returns. Its also about managing riskfinding funds that suit your risk
appetite and investment needs.
So, how can you, the retail investor, create wealth for yourself by investing through mutual
funds? To answer that, we need to get down to brass tackswhat exactly is a mutual fund?

Very simply, a mutual fund is an investment vehicle that pools in the monies of several
investors, and collectively invests this amount in either the equity market or the debt
market, or both, depending upon the funds objective. This means you can access either
the equity or the debt market, or both, without investing directly in equity or debt.

The essential features of the mutual funds distinguishing from other of the
investments are:-

The mutual fund is a trust into which many relatively small investors invest their
money to form a large pool of cash which is then invested in securities by the manager of
the trust.

20

The price at which units can be bought and sold is governed solely by the value of
the underlying securities held by the MF and dealing in units are on the basis of net market
value of the investment per unit.
The managers of MF are obliged to redeem any units in issue on demand or certain
specified period.
All dividend income that the MF receives on its investments is paid out to unit
holders.
Since the unit held by investor evidences the ownership of the funds assets, the
value of an investors part ownership is determined by the NAV of the number of units held.


Concept of a Mutual Fund

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realized is shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost. The flow chart below
describes broadly the working of a mutual fund:-

Figure 1

Savings form an important part of the economy of any nation. With savings invested in

21

various options available to the people, the money acts as the driver for growth of the
country. Indian financial scene too presents multiple avenues to the investors. Though
certainly not the best or deepest of markets in the world, it has ignited the growth rate in
mutual fund industry to provide reasonable options for an ordinary man to invest his
savings.
Investment goals vary from person to person. While somebody wants security, others might
give more weightage to returns alone. Somebody else might want to plan for his childs
education while somebody might be saving for the proverbial rainy day or even life after
retirement. With objectives defying any range, it is obvious that the products required will
vary as well.

Investors earn from a Mutual Fund in three ways:
1. Income is earned from dividends declared by mutual fund schemes from time to
time.
2. If the fund sells securities that have increased in price, the fund has a capital gain.
This is reflected in the price of each unit. When investors sell these units at prices
higher than their purchase price, they stand to make a gain.
3. If fund holdings increase in price but are not sold by the fund manager, the fund's
unit price increases. You can then sell your mutual fund units for a profit. This is
tantamount to a valuation gain.

Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves
broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt
and balanced funds. There are also funds meant exclusively for young and old, small and
large investors. Moreover, the setup of a legal structure, which has enough teeth to
safeguard investors interest, ensures that the investors are not cheated out of their hard-
earned money. All in all, benefits provided by them cut across the boundaries of investor
category and thus create for them, a universal appeal.
Investors of all categories could choose to invest on their own in multiple options but opt for
mutual funds for the sole reason that all benefits come in a package.



22

Conceptual Framework of Mutual Fund
A mutual fund is constituted as a public trust created under the Indian Trust Act, 1882. SEBI
(mutual fund) regulations, 1996 regulate the structure of the mutual funds in India. As per
these regulations should have the following three-tier structure:
i) Sponsor
ii) Trust/trustee
iii) Asset Management Company

Apart from this mutual fund consist of
Figure 2
Sponsor
Sponsor is the person who acting alone or in combination with another body corporate
establishes a mutual fund. The sponsor establishes the mutual fund and registers the same
with SEBI. Sponsor appoints the Trustees, custodians and the AMC with prior approval of
SEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track record
of business interest in the financial markets. Sponsor must have been profit making in at
least 3 of the above 5 years. Sponsor must contribute at least 40% of the net worth of the
Investment Managed and meet the eligibility criteria prescribed under the Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible

23

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 Mutual Fund.

Trust
The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian
Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration
Act, 1908.

Trustee
Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals).
The main responsibility of the Trustee is to safeguard the interest of the unit holders and
inter alia ensure that the AMC functions in the interest of investors and in accordance with
the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the
provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least
2/3rd directors of the Trustee are independent directors who are not associated with the
Sponsor in any manner.

Asset Management Company (AMC)
The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The
AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to
act as an asset management company of the Mutual Fund. At least 50% of the directors of
the AMC are independent directors who are not associated with the Sponsor in any
manner. The AMC must have a net worth of at least 10 crore at all times.

Registrar and Transfer Agent
The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to
the Mutual Fund. The Registrar processes the application form, redemption requests and
dispatches account statements to the unit holders. The Registrar and Transfer agent also
handles communications with investors and updates investor records.


Custodian

24

A custodian is an agent, bank, trust company, or other organization which holds and
safeguards an individual's, mutual funds, or investment company's assets for them.


Advantages of Mutual Funds

1. Professional Management
Mutual Funds provide the services of experienced and skilled professionals, backed by a
dedicated investment research team that analyses the performance and prospects of
companies and selects suitable investments to achieve the objectives of the scheme. This
risk of default by any company that one has chosen to invest in, can be minimized by
investing in mutual funds as the fund managers analyze the companies financials more
minutely than an individual can do as they have the expertise to do so. They can manage
the maturity of their portfolio by investing in instruments of varied maturity profiles.

2. Diversification
Mutual Funds invest in a number of companies across a broad cross-section of industries
and sectors. This diversification reduces the risk because seldom do all stocks decline at
the same time and in the same proportion. You achieve this diversification through a Mutual
Fund with far less money than you can do on your own.

3. Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as
bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds
save your time and make investing easy and convenient.



4. Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide a higher return as
they invest in a diversified basket of selected securities. Apart from liquidity, these funds

25

have also provided very good post-tax returns on year to year basis. Even historically, we
find that some of the debt funds have generated superior returns at relatively low level of
risks. On an average debt funds have posted returns over 10 percent over one-year
horizon. The best performing funds have given returns of around 14 percent in the last one-
year period. In nutshell we can say that these funds have delivered more than what one
expects of debt avenues such as post office schemes or bank fixed deposits. Though they
are charged with a dividend distribution tax on dividend payout at 12.5 percent (plus a
surcharge of 10 percent), the net income received is still tax free in the hands of investor
and is generally much more than all other avenues, on a post-tax basis.

5. Low Costs
Mutual Funds are a relatively less expensive way to invest compared to directly investing in
the capital markets because the benefits of scale in brokerage, custodial and other fees
translate into lower costs for investors.

6. Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value related
prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock
exchange at the prevailing market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund. Since there is no penalty on pre-
mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity.
Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the
securities as a result of interest rate variation and one can benefits from any such price
movement.

7. Transparency
Investors get regular information on the value of your investment in addition to disclosure
on the specific investments made by your scheme, the proportion invested in each class of
assets and the fund manager's investment strategy and outlook.





26


8. Flexibility
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans; you can systematically invest or withdraw funds according to your
needs and convenience.

9. Affordability
A single person cannot invest in multiple high-priced stocks for the sole reason that his
pockets are not likely to be deep enough. This limits him from diversifying his portfolio as
well as benefiting from multiple investments. Here again, investing through MF route
enables an investor to invest in many good stocks and reap benefits even through a small
investment. Investors individually may lack sufficient funds to invest in high-grade stocks. A
mutual fund because of its large corpus allows even a small investor to take the benefit of
its investment strategy.

10. Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.


11. Well Regulated
All Mutual Funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of Mutual Funds
are regularly monitored by SEBI.

12. Tax Benefits
Last but not the least, mutual funds offer significant tax advantages. Dividends distributed
by them are tax-free in the hands of the investor. They also give you the advantages of
capital gains taxation. If you hold units beyond one year, you get the benefits of indexation.
Simply put, indexation benefits increase your purchase cost by a certain portion, depending
upon the yearly cost-inflation index (which is calculated to account for rising inflation),
thereby reducing the gap between your actual purchase cost and selling price. This reduces
your tax liability. Whats more, tax-saving schemes and pension schemes give you the

27

added advantage of benefits under Section 88. You can avail of a 20 per cent tax
exemption on an investment of up to Rs 10,000 in the scheme in a year.




Disadvantages of mutual funds
Mutual funds are good investment vehicles to navigate the complex and unpredictable
world of investments. However, even mutual funds have some inherent drawbacks.
Understand these before you commit your money to a mutual fund.

1. No assured returns and no protection of capital
If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not
offer assured returns and carry risk. For instance, unlike bank deposits, your investment in
a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by
any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by
the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India).
There are strict norms for any fund that assures returns and it is now compulsory for funds
to establish that they have resources to back such assurances. This is because most
closed-end funds that assured returns in the early-nineties failed to stick to their assurances
made at the time of launch, resulting in losses to investors. A scheme cannot make any
Indian Equity
Income from
dividends-(investor-
free & DDT-NIL)
Iincome from
capital gains-(short
term-15% & long
term- free)
Others
Income from
dividends-(investor-
free & DDT-individual
& HUL-14.025 &
others-22.440
Income from capital
gains-(short term-
as per tax slab &
long term-10% or
20% with indexation

28

guarantee of return, without stating the name of the guarantor, and disclosing the net worth
of the guarantor. The past performance of the assured return schemes should also be
given.

2. Restrictive gains
Diversification helps, if risk minimization is your objective. However, the lack of investment
focus also means you gain less than if you had invested directly in a single security.
Assume, Reliance appreciated 50 per cent. A direct investment in the stock would
appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10
per cent of its corpus in Reliance, will see only a 5 per cent appreciation.

3. Taxes
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70
percent of the securities in their portfolios. If your fund makes a profit on its sales, you will
pay taxes on the income you receive, even if you reinvest the money you made.


4. Management risk
When you invest in a mutual fund, you depend on the fund's manager to make the right
decisions regarding the fund's portfolio. If the manager does not perform as well as you had
hoped, you might not make as much money on your investment as you expected. Of
course, if you invest in Index Funds, you forego management risk, because these funds do
not employ managers.

TYPES OF MUTUAL FUND SCHEMES
There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your
age, financial position, risk tolerance and return expectations. Whether as the foundation of
your investment programme or as a supplement, Mutual Fund schemes can help you meet
your financial goals.

29


TYPES OF MUTUAL FUND SCHEME



















Figure 3


(AI) By Structure
Open-Ended Schemes
These do not have a fixed maturity. You deal directly with the Mutual Fund for your
investments and redemptions. The key feature is liquidity. You can conveniently buy and
sell your units at Net Asset Value ("NAV") related prices.
Close-Ended Schemes
By structure


By Investment
Objectives
Other Schemes
Open-ended
Schemes
Interval Schemes
Sector specific fund
Index Schemes
Tax saving fund
Small cap fund
Equity Schemes Debt Schemes
Close Ended
Schemes
MM Mutual
fund
Other Debt
Schemes
FMP
Any Other
Equity Fund
Mid cap Fund
Large cap fund

30

Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called
close-ended schemes. You can invest directly in the scheme at the time of the initial issue
and thereafter you can buy or sell the units of the scheme on the stock exchanges where
they are listed. The market price at the stock exchange could vary from the scheme's NAV
on account of demand and supply situation, Unit holders' expectations and other market
factors.
One of the characteristics of the close-ended schemes is that they are generally traded at a
discount to NAV but closer to maturity, the discount narrows. Some close-ended schemes
give you an additional option of selling your units directly to the Mutual Fund through
periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the
two exit routes are provided to the investor.
Interval Schemes
These combine the features of open-ended and close-ended schemes. They may be traded
on the stock exchange or may be open for sale or redemption during predetermined
intervals at NAV related prices.



(B) By Investment Objective
Growth Schemes
Aim to provide capital appreciation over the medium to long term. These schemes normally
invest a majority of their funds in equities and are willing to bear short-term decline in value
for possible future appreciation. These schemes are not for investors seeking regular
income or needing their money back in the short term.
Income Schemes

31

Aim to provide regular and steady income to investors. These schemes generally invest in
fixed income securities such as bonds and corporate debentures. Capital appreciation in
such schemes may be limited.
Ideal for
Retired people and others with a need for capital Stability and regular income
Investor who need some income to supplement their earnings.
Balanced Schemes
Aim to provide both growth and income by periodically distributing a part of the income and
capital gains they earn. They invest in both shares and fixed income securities in the
proportion indicated in their offer documents. In a rising stock market the NAV of these
schemes may not normally keep pace, or fall equally when the market falls.
Ideal for:
Investors looking for a combination of income and moderate growth.



Money Market/Liquid Schemes
Aim to provide easy liquidity, preservation of capital and moderate income. These schemes
generally invest in safer, short-term instruments such as treasury bills, certificates of
deposit, commercial paper and inter-bank call money. Returns on these schemes may
fluctuate, depending upon the interest rates prevailing in the market.
Ideal for:
Corporate and individual investors as a means to park their surplus funds for
short periods or awaiting a more favorable investment alternative.

32

Other Schemes
Tax Saving Schemes
These schemes offer tax rebates to the investors under tax laws as prescribed from time to
time. This is made possible because the Government offers tax incentives for investment in
specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension
Schemes. The details of such tax saving schemes are provided in the relevant offer
documents.
Ideal for:
Investors seeking tax rebates.
Special Schemes
This category includes index schemes that attempt to replicate the performance of a
particular index such as the BSE Sensex or the NSE 50, or industry specific schemes
(which invest in specific industries) or sectorial schemes (which invest exclusively in
segments such as A Group shares or initial public offerings)

Different Modes of Receiving the Income Earned From
Mutual Fund Investments

Mutual funds offer three methods of receiving income:

Growth Plan:
In this plan, dividend is neither declared nor paid out to the investors but it is built
into the value of the NAV. In the other words, the NAV increases over time due to
such incomes and the investor realizes only the capital appreciation on redemption
of his investment.

Income plan or Dividend Payout Plan:

33

In this plan, dividends are paid-out to the investors. In other words, the NAV only
reflects the capital appreciation or depreciation in the market price of the underlying
portfolio.

Dividend Reinvestment Plan:
In this plan, dividend is declared but not paid out to the investors. Instead, it is
reinvested back in to the scheme at the then prevailing NAV. In other words, the
investor is given additional units and not cash as dividend.
Mutual Fund Investment Strategies
Systematic Investment Plan (SIP):
SIPs entail an investor to invest a fixed sum of money at regular intervals in MF scheme the
investor has chosen. This may help you gain from any appreciation in the event of upside or
alternatively, average your cost during downside. Seeing the
present volatility in the market SIP is the best option available to the investor due to regular
entry into the market which causes rupee cost averaging and hence covers the volatility.

Systematic Withdrawal Plan (SWPs):

These plans are best suited for people nearing retirement. In these plans investor invest in
a mutual fund scheme and is allowed to withdraw a fixed sum of money at regular intervals
to take care of expenses.

Systematic Transfer Plan (STP):

They allow the investor to transfer on a periodic basis a specified amount from one scheme
to another with in the same fund family meaning two schemes belonging to the same
mutual fund. A transfer will be treated as redemption of units from the scheme from which
the transfer is made.


34

Investment Philosophy of DSP BlackRock Mutual Fund

Equity

The investment philosophy of DSP revolves around the concept of growth oriented
stocks, which are available at relatively attractive valuations.

DSP MF uses a combination of the top down and bottom up approaches for
investment.

o Top down approach for sector allocation.
o Bottom up approach for stock selection.

DSP MF identifies and invests in business that has a sustainable competitive
advantage.

It invests with a medium term view, with an investment horizon of at least 18months.

Risk minimization is an important element of their strategy.

DSP MF believes in pro-active fund management to outperform benchmark indices.

In determining their investment universe, DSP MF employs a multi-stage filtering process.at
the first level filtering, they look at liquidity.at the second level filter, they look at
management quality. The third level is the competitive position of the company and the final
level is the share price valuation.
Debt

35

There are three main types of debt funds and the investment philosophy for each differs
due to different investment objectives and type of investors.

Liquid Fund
The investment philosophy of this scheme is to invest in short term money market debt
instruments like T-bills, commercial paper, debentures, certificate of deposits, etc. to
provide a higher than average rate of return.

Income Fund
The income fund invests in all type of debt instruments. The investment philosophy can be
broadly defined as consisting of active duration and interest rate management to give
optimal returns. The fund is mainly between Government Securities and Corporate Bonds
with some residual investments in money market instruments.

Gilt Fund
Gilt fund invest in the gilt edged government securities, which is predominantly a wholesale
market. It allows retail investors to participate in this market. The Gilt Fund aims to
maximize returns by active interest rate management, with zero credit risk. Active interest
rate management involves studying the domestic and international politico-economic
scenario as well as in-depth analysis of the liquidity in the system, the shape of the yield
curve and the spreads between various sectors on the curve.

To maximize the risk adjusted returns for the investors based on their risk tolerance

Manage the schemes on a Portfolio basis
Active management of interest rate risk.
Credit risk management by following the conservative approach.
Continuous monitoring.

36



Different Schemes of DSP BlackRock Mutual Fund
There is different kind of open ended schemes:
Equity fund
Debt fund
Balanced fund
Liquid fund




Equity Fund:
DSP BLACKROCK EQUITY FUND
Investment Strategy: The Investment Manager prefers adopting a top-down approach with
regard to investment in equity and equity related securities. This approach encompasses an
evaluation of the key economic trends, an analysis of various sectors in the economy
leading to an outlook on their future prospects and a diligent study of various investment
opportunities within the favored sectors. The Investment Manager will conduct in house
research in order to identify both value and growth stocks. The analysis will focus, among
other things, on industry and company fundamentals and valuation metrics. The quality or
strength or management would be a key focus area.

Date of Inception: 29
th
April, 1997
Minimum Investment
Initial: Rs.5000/-
Additional: Rs.1000/-

37

Systematic: Rs.1000/-

Exit Load: If Holding Period is <12 months: 1%
>=12 months: NIL
Entry Load: no entry load shall be charged for
i) For all direct applications received br AMC i.e. applications received through
internet facility offered (www.dspblackrock.com), on application forms that are not
routed through any distributor/agent/broker and submitted to AMC office or
collection center/investment service center.
ii) Else 2.25%.

Options: Growth, Dividend Payout, Dividend RE-Investment.

Minimum Redemption Size Rs1000/- or 100units.

Benchmark Index S&P CNX Nifty.


DSP BlackRock Tax Saver Fund
DSP Tax Saver Scheme is an Open ended Equity Linked Savings Scheme (ELSS) from
DSP Mutual fund which offers investors tax benefits on an investment up to 1 Lakh under
Section 80C of Indian Income Tax Act 1961. The fund was launched in the year 2007 and is
one of the top performers in the ELSS category.

Scheme Highlights:
Entry Load-NIL
Exit Load-NIL

38

SIP: Minimum amount Rs.500/month 12 months Rs.1000/month - months,
Rs.1500/Quarter-12 months(subject to completion of the 3year Lock-in Period)

STP: Minimum amount Rs.500/month- 12month Rs.1000/month (subject to
completion of the 3year Lock-in Period)
Asset Allocation: 80-100% in Equity, partly convertible debentures and fully
convertible debentures and bonds & 0-20% in Money market instruments
Minimum application amount- Rs.500 for purchase & Multiples of Rs. 500 for
additional purchase.
Plans and Option: Dividend option with payout and reinvestment facility.

DSP BlackRock Opportunities Fund
DSP Opportunities Fund is diversified equity scheme, with a flexible investing style. It will
invest in sectors, which the fund Manager believes would outperform others in the short to
medium-term. By virtue of its flexible investment pattern, the fund is uniquely positioned to
increase concentration sectors which look promising. As markets evolve and grow, new
opportunities for growth keep emerging. DSP Opportunities would endeavor to capture
these opportunities to generate wealth for its investors.

Date of inception: 16/05/2000
Minimum investment: Initial: Rs.5000/-
Additional: Rs1000/-
Systematic: Rs.1000/-

Entry Load: no entry load shall be charged for
iii) For all direct applications received by AMC i.e. applications received through
internet facility offered (www.dspblackrock.com), on application forms that are not
routed through any distributor/agent/broker and submitted to AMC office or
collection center/investment service center.

39

iv) Else 2.25%.
Exit Load: If Holding Period is <12 months: 1%
>=12 months: NIL

Options: Growth, Dividend Payout, Dividend RE-Investment.
Minimum Redemption Size Rs1000/- or 100units.
Benchmark Index S&P CNX Nifty.

GROWTH OF MUTUAL FUND INDUSTRY IN INDIA
While the Indian mutual fund industry has grown in size by about 320% from March, 1993
(Rs.470 billion) to December, 2010 (Rs.4505 billion) in terms of AUM, the AUM of the
sector excluding UTI has grown over times from Rs.152 billion in March 1999 to $ 148
billion as at March 2008.

Though India is a minor player in the global mutual fund industry, its AUM as a proportion of
the global AUM has steadily increased and has doubled over its levels in 1999.
The growth rate of Indian mutual fund industry has been increasing for the last few years. It
was approximately 0.12% in the year of 1999 and it is noticed 0.50% in 2010 in terms of
AUM as percentage of global AUM.

Some facts for the growth of mutual funds in India
100% growth in the last 6 years.
Number of foreign AMCs is in the queue to enter the Indian markets.
Our saving rate is over 23%, highest in the world. Only channelizing these savings in
mutual funds sector is required.
We have approximately 29 mutual funds which are much less than US having more
than 800. There is a big scope for expansion.
Mutual fund can penetrate rural like the Indian insurance industry with simple and
limited products.
SEBI allowing the MF's to launch commodity mutual funds.

40

Emphasis on better corporate governance.
Trying to curb the late trading practices.
Introduction of Financial Planners who can provide need based advice.






Recent Trends in Mutual Fund industry
The most important trend in the mutual fund industry is the aggressive expansion of the
foreign owned mutual fund companies and the decline of the companies floated by the
nationalized banks and smaller private sector players.

The mutual fund industry in India has evolved little over three decades but the real impetus
has come after the changes in the mutual fund regulations in early 80s. Private and foreign
mutual funds are operating in the Indian market and constitute a substantial portion of the
mutual fund industry. Today the industry consists of Unit Trust of India, mutual funds
sponsored by public sector banks and insurance corporations, private and foreign mutual
funds. Investors are constantly being bombarded by questions concerning their risk profile.
Either a money market or guilt fund is targeted for the risk averse or a low graded company
offering a high return on its fixed deposits. Banks like Citibank , ANZ Grindlays, Deutsche
bank, Hongkong bank, Commerze bank, Banque national de Paris and HDFC bank are not
only aggressively marketing funds many are also planning to launch their own. The list of
potential entrants includes ABN Amro, ANZ Grindlays, Hongkong bank and Jammu and
Kashmir bank.

The Reserve Banks Currency and Finance report 1997-1998 shows that the investors
appetite for risk has diminished considerably. As much as 46% of the financial savings of
the household sector found its way back to bank deposits; 12% went in to Government
savings plans and 18% in to provident funds. Only a miniscule 2% wound up in the capital
market and 4% in company deposits. The mutual fund product designers have identified a
strategic gap in the product offering in the capital market and now are fighting a loosing

41

battle with government savings plans, bank deposits and provident funds. They are
providing cheque facility on money market mutual funds to make them more enticing and
guilt funds for the risk averse. Product innovations and new product combinations have
started rolling in to the Indian market.


IMPACT OF TECHNOLOGY

Mutual fund, during the last one decade brought out several innovations in their products
and is offering value added services to their investors. Some of the value added services
that are being offered are:
Electronic fund transfer facility.
Investment and re-purchase facility through internet.
Added features like accident insurance cover, med claim etc.
Holding the investment in electronic form, doing away with the traditional form of unit
certificates.
Cheque writing facilities.
Systematic withdrawal and deposit facility.

ONLINE MUTUAL FUND TRADING

The innovation the industry saw was in the field of distribution to make it more easily
accessible to an ever increasing number of investors across the country. For the first time in
India the mutual fund start using the automated trading, clearing and settlement system of
stock exchanges for sale and repurchase of open-ended de-materialized mutual fund units.

Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) were options
introduced which have come in very handy for the investor to maximize their returns from
their investments. SIP ensures that there is a regular investment that the investor makes on
specified dates making his purchases to spread out reducing the effect of the short term
volatility of markets. SWP was designed to ensure that investors who wanted a regular
income or cash flow from their investments were able to do so with a pre-defined

42

automated form. Today the SW facility has come in handy for the investors to reduce their
taxes.


HOW TO INVEST IN MUTUAL FUNDS.
Step One - Identify your investment needs. Your financial goals will vary, based on your
age, lifestyle, financial independence, family commitments, level of income and expenses
among many other factors. Therefore, the first step is to assess your needs.
Step Two - Choose the right Mutual Fund. Once you have a clear strategy in mind, you
now have to choose which Mutual Fund and scheme you want to invest in. The offer
document of the scheme tells you its objectives and provides supplementary details like the
track record of other schemes managed by the same Fund Manager. Some factors to
evaluate before choosing a particular Mutual Fund are:
The track record of performance over the last few years in relation to the
appropriate yardstick and similar funds in the same category.
How well the Mutual Fund is organized to provide efficient, prompt and
personalized service.
Degree of transparency as reflected in frequency and quality of their
communications.
Step Three - Select the ideal mix of Schemes.
Investing in just one Mutual Fund scheme may not meet all your investment needs. You
may consider investing in a combination of schemes to achieve your specific goals.

The following charts could prove useful in selecting a combination of schemes that
satisfy your needs.

43




Figure 4
This plan may suit
Investor seeking Income & moderate growth.
Investor looking for growth & stability with moderate risk

Figure 5
Step Four - Invest regularly.
Step Five - Keep your taxes in mind
Step Six- Start early It is desirable to start investing early and stick to a regular investment
plan. If you start now, you will make more than if you wait and invest later. The power of
compounding lets you earn income on income and your money multiplies at a compounded
rate of return.

Step Seven -The final step all you need to do now is to get in touch with a Mutual Fund or
your Agent/broker and start investing. Reap the rewards in the years to come. Mutual
Conservative Plan
Growth Scheme
Income Scheme
Money Scheme
Balanced Scheme
Aggressive Plan
Growth Scheme
Income Scheme
Money market Scheme
Balanced Scheme

44

Funds are suitable for every kind of investor-whether starting a career or retiring,
conservative or risk taking, growth oriented or income seeking.

What fees and commissions will you pay when you invest in mutual
funds?

The fees and commissions you may be charged can vary widely from one fund, and one
dealer, to the next. Some of the charges may be negotiable, but you should make sure that
you understand all of the costs before you invest. There are two main costs to consider
the management and operating expenses that are charged to the fund each year, and
the sales charges (or loads) that you pay when you buy or sell the fund.

Management and Operating Expenses are expenses paid each year by the fund and
include such things as the managers fees, legal and accounting fees, custodial fees and
bookkeeping costs. The Management Expense Ratio (MER) is the percentage of the
funds average net assets that these expenses represent. For example, if a $100 million
fund has $2 million in costs for the year its MER will be 2%. MERs can range from under
1% per year for some money market funds to almost 3% for some equity funds. The higher
the MER, the greater the impact on the funds performance and the return to its investors
because these expenses are removed before the value is reported.

Sales Charges (Loads) are the commissions that you may have to pay when you buy or
redeem units of a fund. Sales charges may be applied when you buy units of the fund
(A front-end load), when you redeem your units (a back-end load), or there may be no
sales charges at all (no-load). Where front-end loads are charged, the rate can vary from
dealer to dealer and may be negotiable. Shop around, and remember that every dollar you
pay up-front in commission is a dollar that does not go to work for you in the fund. Many
funds are sold on a back-end load basis, meaning generally that the sales charges are
applied only when you redeem the fund. Back-end load fees are paid by the fund
management company to your mutual fund salesperson you do not pay this fee. You do,
however, pay a redemption fee if you redeem your units in the fund before a certain time
period, typically 7 years. Redemption fees decline each year that you hold the investment.


45

For example, you might have to pay a 6% fee if you redeem the fund after one year, 4% if
you redeem after three years, and no commission if you redeem after seven years. An
increasing number of funds are being sold on a no-load basis, in which investors pay no
sales charges, but before you decide that a no-load fund is right for you, consider the funds
performance, its management expense ratio and the level of service and advice you will
receive.


How do financial advisers get paid for selling mutual funds?

Some mutual fund managers employ their own sales force to sell their mutual funds. Most,
however, rely on independently operated dealers to sell their funds and pay sales
incentives to these dealers to encourage them to do so. These incentives generally take the
form of sales commissions, but fund managers can also pay for some of the marketing and
educational costs incurred by a dealer. You do not pay these sales incentives directly. The
mutual fund manager pays them to dealers out of the management fees it receives from its
mutual funds.

The compensation paid to the dealer can vary depending on how the mutual fund is
acquired. For example, if you buy a mutual fund with a front-end load, the mutual fund firm
may allow your dealer to keep the front-end load fees you pay. If you buy a mutual fund on
a deferred sales charge basis, the mutual fund manager will still pay your dealer a sales
commission at the time of sale (generally 5% of the amount you invest).When you redeem
a deferred sales charge fund, you pay any applicable redemption fees directly to the mutual
fund manager.

Mutual fund managers also pay trailing commissions to dealers. Trailing commissions are
paid as long as you hold the fund. They are generally paid quarterly and typically range
from 0.25% to 1.0% of the value of the funds held by the dealers clients. The amount of
trailing commission paid to your dealer can depend on the type of mutual fund you buy and
on the load that you pay. Generally, mutual fund firms pay lower trailing commissions on
fixed income and money market funds than for equity funds.

46

The sales incentives paid by the fund manager are described in the funds prospectus. You
can also ask your financial adviser for details. Securities regulations govern the types of
incentives that can be paid and the sales practices that must be followed by both mutual
fund firms and dealers.

The Changing Distribution Structure of Mutual Funds
Many mutual fund investors pay for the services of a professional financial adviser. ICI
research finds that among investors owning mutual fund shares outside of retirement plans
at work, 81 percent own fund shares through professional financial advisers. Financial
advisers typically devote time and attention to prospective investors before investors make
an initial purchase of funds and other securities. The adviser generally meets with the
investor, identifies financial goals, analyzes existing financial portfolios, determines an
appropriate asset allocation, and recommends funds to help achieve the investors goals.
Advisers also provide ongoing services, such as periodically reviewing investors portfolios,
adjusting asset allocations, and responding to customer inquiries.
Thirty years ago, fund shareholders usually compensated financial advisers for their
assistance through a front-end loada one-time, upfront payment for current and future
services. After 1980, when the U.S. Securities and Exchange Commission (SEC) adopted
Rule 12b-1 under the Investment Company Act of 1940, funds and their shareholders had
greater flexibility in compensating financial advisers. Rule 12b-1 and subsequent regulatory
action established a framework under which investors can pay indirectly for some or all of
the services they receive from financial advisers through 12b-1 feesasset-based fees that
are included in a funds expense ratio.
Under this framework, 12b-1 fees can also be used to compensate financial intermediaries,
such as retirement plan record keepers and discount brokerage firms, for the services they
provide to fund shareholders. Although they can be used to pay for advertising and
marketing, 12b-1 fees are primarily used to compensate financial advisers and other
financial intermediaries for assisting fund investors before (40 percent of fees collected) and
after they purchase fund shares (52 percent of fees collected)




47



Most 12b-1 Fees Used to Pay for Shareholder Services
Percentage of 12b-1 fees collected, 2010

Fig 6
No- Load Share Classes
No-load share classes have no front-end load or CDSL, and have a 12b-1 fee of 0.25
percent or less. Originally, no-load share classes were offered by mutual fund sponsors that
sold directly to investors. Now, investors can purchase no-load funds through employer-
sponsored retirement plans, mutual fund supermarkets, discount brokerage firms, and bank
trust departments, as well as directly from mutual fund sponsors. Some financial advisers
who charge investors separately for their services rather than through a load or 12b-1 fee
use no-load share classes.


The introduction of Rule 12b-1 changed the means by which financial advisers were
compensated. The maximum front-end load fees that funds might charge declined sharply
in the 1980s as funds adopted 12b-1 fees as an alternative way to compensate financial
advisers and intermediaries for providing services to fund shareholders. Since 1990, 12b-1
fees paid by shareholders rose from $1.1 billion to $10.6 billion This increase reflects, in
part, the roughly tenfold increase in mutual fund assets and the more than twofold increase
in the number of households owning funds since 1990.



48

12b-1 Fees Paid Reflect Asset Growth and Shift in Source of Financial Advisers
Compensation
Billions of dollars, selected years*

1
Data exclude mutual funds available as investment choices in variable annuities and
mutual funds that invest primarily in other mutual funds.
2
Front-end load = 0 percent, CDSL = 0 percent, and 12b-1 fee 0.25 percent.
Sources: Investment Company Institute and Lipper
Figure 7
In recent years, the system for compensating financial intermediaries for distributing mutual
fund shares and assisting investors has continued to evolve. For example, maximum front-
end load fees have stabilized, but front-end load fee payments (as a percentage of assets)
have continued to decline. This, in large measure, reflects the discounts from the maximum
front-end load that investors often receive when making large share purchases or
purchases through 401(k) plans.
There has also been a shift by investors toward no-load share classes. No-load share
classes have consistently attracted more net new cash than load share classes in recent
years (Figure 7). In 2010, for example, no-load share classes of long-term funds garnered
$253 billion in net new cash, compared to an outflow of $33 billion for load share classes.
Cumulatively, these flows have led to a concentration of long-term fund assets in no-load
share classes; by 2010, no-load share classes of long-term funds had $5.1 trillion in total
net assets compared to $2.6 trillion in load share classes (figure7). The shift toward no-load
funds should not be taken as indicating that investors are eschewing advice from financial
advisers. To be sure, some of the flows to no-load funds owe to do-it-yourself investors.
However, much of the shift represents a change in the way investors compensate their

49

financial advisers, with many investors now paying for financial advice directly out of their
pockets instead of indirectly through their mutual funds. Flows from 401(k) plans and other
retirement accounts also are often invested in no-load funds.

Why use an Independent Financial Advisor - IFA?

As with most things in the modern world, the financial services industry moves at a rapid
pace. Financial markets change constantly and become increasingly more complex.
Regulators review the opportunities to obtain high quality products and control the basis on
which advice is given. Financial institutions compete aggressively with each other to bring
new and improved products to the market..........

it isn't too difficult to see why so many people find financial services confusing!
Choosing the most suitable financial products will often play an essential role in helping to
secure your financial future. But with literally thousands of different products on offer, and
hundreds of financial services companies, one of the most important decisions you can
make about your future is who to seek financial advice from.
In essence, the role of an Independent Financial Adviser (IFA) is clearly defined - they work
for you, not the product provider as is the case with tied' advisors. Of course, in order to
assist you, they will need to know your current position and what it is you want to achieve.
Only then can an IFA create a strategy to meet your needs and your budget.

IFAs are your guide to the market and will undertake detailed research and comparisons
relating to financial products available and then recommend a way forward. An IFA will
shop around' on your behalf to ensure your needs are catered for fully and that any product
recommended is the most suitable and provides value for money.

Whether your needs are simple or complex it pays to ensure you receive the right financial
advice at the right time and Independent Financial Advisors will be happy to assist you.


50

Mutual Fund with NO Distributors
When you own shares in a mutual fund you may get dividends from the fund
company that were from the dividends earned by the individual stocks held by the fund. In
additional you may get a distribution of short term and long term capital gains. These are
usually issued in November or December.
Investors dont like getting distributions from a mutual fund because this means taxes
have to be paid. Investors emotionally feel that they should only have to pay tax when they
take the initiative to sell an investment. However a mutual fund is a collective investment
and when the fund manager sells assets then that may trigger a capital gain which must be
paid by the individual shareholders because a mutual fund is a pass-through entity where
taxable events in the fund are passed through to the individual shareholders.
Methods to avoid capital gains distributions:
1. Hold mutual funds (that you suspect will give a distribution) in a traditional IRA.
However that causes a worse tax problem: traditional IRAs wash out the tax
treatment of dividends and long term capital gains and convert them to ordinary
income. So in most cases it would be very wrong to do this. Of course a Roth IRA is
tax free, so that would be different.
2. By mutual funds after the annual distribution has occurred. The problem is that
investing (in theory) should be for the long run, so buying a fund in December and
selling in October just to avoid distributions is wrong and impractical and would
trigger short term gains tax (if it was profitable) on your sale of the mutual fund.
3. Buy ETFs to avoid capital gains distributions. They obtain shares of stocks through
creation units which have a different tax consequence when these units are redeemed by
an authorized market maker from a mutual fund. Unfortunately the goal of pursuing tax
savings is trumped by the goal of getting good investments. I dont recommend passive
ETFs because I believe in actively managed mutual funds. If an investor is trying too hard
to chase after tax benefits an investor may not be able to make the right investment
decisions.
4. Recognize that distributions often occur for a reason: They may occur at the top of a
bubble or just after the top when investors withdraw funds from a mutual fund the manager
needs to sell assets to pay the investors who are redeeming mutual fund shares. These

51

sales then trigger a distribution which is assessed on the remaining shareholders. So the
best defense against distributions would be to avoid funds that are part of a bubble top
because the funds assets will go down in value and will be sold to meet redemption
requests. Thus you get two benefits by avoiding bubbles. Now the question is how do you
spot and avoid bubbles? This is the real question that is far more important than avoiding
distributions.
Investors should seek independent financial advice.

Managing the risk by diversification in terms of Asset Allocation
Strings, woodwinds and brass. Stocks, bonds and cash. What do these very different
things have in common? They are all parts of a whole and when they work together, they
perform the way none could alone. An orchestra without violins wouldn't sound as good.
And a portfolio without stocks just wouldn't offer peak performance.
Asset allocation is important for portfolio performance. And what exactly is asset
allocation? It's a systematic division and risk management of your investment among
various asset classes such as fixed income or equities. By having a portfolio that holds
different types of investments, you help reduce your risk and portfolio volatility.
Markets and asset classes do not move in tandem: What's hot today may be cold
tomorrow. Spreading your investment among different types of asset classes and
marketsstocks and bonds, domestic and foreign marketslets you position yourself to
seize opportunities as the performance cycle shifts from one market or asset class to
another.
Depending on your investment style and goals, your asset allocation will vary. One
should work with his financial advisor to create a personalized asset allocation for his
portfolio.
Asset allocationnot stock or mutual fund selection, not market timingis generally the
most important factor in determining the return on your investments. In fact, according to
research which earned the Nobel Prize, asset allocation (the types or classes of securities
owned) determines approximately 90% of the return. The remaining 10% of the return is

52

determined by which particular investments (stock, bond, mutual fund, etc.) you select and
when you decide to buy them.
Consequently, buying a "hot" stock or mutual fund recommended by a financial magazine
or newsletter, a brokerage firm or mutual fund family, an advertisement or any other source
can be downright dangerous. One should note that recommendations in publications may
be out-of-date, having been prepared several months prior to the publication date.
As for market timingthat is, moving in and out of an investment or an investment class in
anticipation of a rise or fall in the marketits been proven that the modern market cannot
be timed. Market timing strategies, such as moving your money into stocks when the
market is rising or out of stocks when its falling, just do not work.
Asset allocation is the cornerstone of good investing. Each investment must be part of an
overall asset allocation plan. And this plan must not be generic (one-size-fits-all), but rather
must be tailored to your specific needs.
Sound financial advice from a trusted and competent advisor is very important as the
investment world is populated by many "advisors" who either are unqualified or don't have
your best interests at heart.
In a nutshell, following are the basic investment guidelines one should live by:
Determine your financial profile, based on your time horizon, risk tolerance, goals
and financial situation. For more sophisticated investment analysis, this profile
should be translated into a graph or curve by a computer program.
Find the right mix of "asset classes" for your portfolio. The asset classes should
balance each other in a way that will give the best return for the degree of risk you are
willing to take. Financial advisors can determine the proper mix of assets for your financial
profile. Over time, the ideal allocation for you will not remain the same; it will change as
your situation changes or in response to changes in market conditions.



53

LITERATURE REVIEW

Literature on mutual fund performance evaluation is enormous. A few research studies that
have influenced the preparation of this paper substantially are discussed in this section.

Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance.
Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has
suggested a new predictor of mutual fund performance, one that differs from virtually all
those used previously by incorporating the volatility of a fund's return in a simple yet
meaningful manner.

Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance
(Jensens alpha) that estimates how much a managers forecasting ability contributes to
funds returns.
As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the
portfolio over the return of the benchmark index, where the portfolio is leveraged to have
the benchmark indexs standard deviation.
Narayan Rao, ET. al., evaluated performance of Indian mutual funds in a bear market
through relative performance index, risk-return analysis, Treynors ratio, Sharpes ratio,
Sharpes measure , Jensens measure, and Famas measure. The study used 269 open-
ended schemes (out of total schemes of 433) for computing relative performance index.
Then after excluding funds whose returns are less than risk-free returns, 58 schemes are
finally used for further analysis. The results of performance measures suggest that most of
mutual fund schemes in the sample of 58 were able to satisfy investors expectations by
giving excess returns over expected returns based on both premiums for systematic risk
and total risk.

Bijan Roy, ET. al., conducted an empirical study on conditional performance of Indian
mutual funds. This paper uses a technique called conditional performance evaluation on a
sample of eighty-nine Indian mutual fund schemes .This paper measures the performance
of various mutual funds with both unconditional and conditional form of CAPM, Treynor-
Mazuy model and Henriksson-Merton model. The effect of incorporating lagged information
variables into the evaluation of mutual fund managers performance is examined in the

54

Indian context. The results suggest that the use of conditioning lagged information variables
improves the performance of mutual fund schemes, causing alphas to shift towards right
and reducing the number of negative timing coefficients.

Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In
this paper, measures of evaluating portfolio performance based on lower partial moment
are developed.
Risk from the lower partial moment is measured by taking into account only those states in
which return is below a pre-specified target rate like risk-free rate. Kshama Fernandes
(2003) evaluated index fund implementation in India. In this paper, tracking error of index
funds in India is measured .The consistency and level of tracking errors obtained by some
well-run index fund suggests that it is possible to attain low levels of tracking error under
Indian conditions. At the same time, there do seem to be periods where certain index funds
appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction
of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek
market of equity mutual funds. The methodology is based on the combination of discrete
and continuous multi-criteria decision aid methods for mutual fund selection and
composition. UTADIS multi-criteria decision aid method is employed in order to develop
mutual funds performance models.
Goal programming model is employed to determine proportion of selected mutual funds in
the final portfolios.
Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched
to randomly select conventional funds of similar net assets to investigate differences in
characteristics of assets held, degree of portfolio diversification and variable effects of
diversification on investment performance. The study found that socially responsible funds
do not differ significantly from conventional funds in terms of any of these attributes.
Moreover, the effect of diversification on investment performance is not different between
the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500
during the study period.

Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance
(Jensens alpha) that estimates how much a managers forecasting ability contributes to
funds returns.

55

As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the
portfolio over the return of the benchmark index, where the portfolio is leveraged to have
the benchmark indexs standard deviation. S.Narayan Rao, ET. al., evaluated performance
of Indian mutual funds in a bear market through relative performance index, risk-return
analysis, Treynors ratio, Sharpes ratio, Sharpes measure , Jensens measure, and
Famas measure. The study used 269 open-ended schemes (out of total schemes of 433)
for computing relative performance index. Then after excluding funds whose returns are
less than risk-free returns, 58 schemes are finally used for further analysis. The results of
performance measures suggest that most of mutual fund schemes in the sample of 58 were
able to satisfy investors expectations by giving excess returns over expected returns based
on both premiums for systematic risk and total risk.







Research Methodology

Research Methodology is a systematic method of discovering new facts or verifying old
facts, their sequence, inter-relationship, casual explanation and the natural laws which
governs them. In it we study the various steps that are generally adopted by a researcher in
the studying his research problem along with the logic behind them.

Different stages involved in research consists of enacting the problem, formulating a
hypothesis, collecting the facts or data, analyzing the facts and reaching certain conclusion
either in the form of solution towards the concerned problem or in generalization for some
theoretical formulation.

56


Type of Sample Design: Judgment Sampling

Sample Size: 80

In Research Methodology mainly Data plays an important role.

The Data is divided in two parts:
a) Primary Data.
b) Secondary Data.
Primary Data is the data, which is collected directly by direct personal interview,
Interview, indirect oral investigation, Information received through local agents, Drafting a
schedule, drafting a questionnaire.

Secondary Data is the data, which is collected from:
Various books.
Magazine and material.
Internet
Fact sheets of various MFs
The data which is stored in the organization and provide by the FINANCE people are also
secondary data. The various information is taken out regarding that subject as well other
subject from various sources and stored. The last years data stored can also be secondary
data. This data is kept for the internal use of the organization.
The FINANCE manual is for the internal use of the organization they are secondary data
which help people to gain information. In this report the data plays a very crucial role. For
this report the data was provided to me by FINANCE department and other departmental
head in the organization.

SURVEY ANALYSIS

OBJECTIVES
I conducted a survey to assess the popularity and awareness among people about the,
mutual funds. For the purpose we chose a random sample of 80 end consumers in the city

57

of Chandigarh, Panchkula and Mohali. The methodology adopted was that of questionnaire.
The question addressed the basic questions relating to investment in mutual Funds and for
distributors also.

Sampling Method
The sampling method so as to obtain a representative sample is the Non- Probability
Sampling methods. Under non-probability sampling, we selected the respondents to the
survey on the basis of Judgment sampling with Convenience taken into account.


Research instrument

The research instrument used for this survey is a structured questionnaire. The
questionnaire contains both open-ended and close ended questions. The questionnaire
provides a provision with respect to rating scales.

Assumptions
The sample selected represents the population fully.

The data has been collected by administering an open and close ended
questionnaire to sample of end investors and with the assumption that the primary data
collected is true and reflects the actual preferences of the investors.

The sample selected has thorough knowledge of the subject.


Limitations of Study

The respondents who have not given any information are not included in the sample
but do come under the population.

Factors like change in tax and regulatory framework has not been considered.

58




Performance Evaluation
How to Calculate the value of a Mutual Fund:
The investors funds are deployed in a portfolio of securities by the fund manager. The
value of these investments keeps changing as the market price of the securities change.
Since investors are free to enter and exit the fund at any time, it is essential that the market
value of their investments is used to determine the price at which such entry and exit will
take place. The net assets represent the market value of assets, which belong to the
investors, on a given date.
Net Asset Value or NAV of a mutual fund is the value of one unit of investment in the fund,
in net asset terms.
NAV= Net Asset of the scheme / Number of Units Outstanding
Where Net Assets are calculated as:-
(Market value of investment + current assets and other assets + Accrued income current
liabilities and other liabilities less accrued expenses) / No. of Units Outstanding as at the
NAV date.
NAV of all schemes must be calculated and published at least weekly for closed end
schemes and daily for open- end schemes.

The major factors affecting the NAV of a fund are :
Sale and purchase of securities
Sale and repurchase of units
Valuation of assets
Accrual of income and expenses


59


Measuring Mutual Fund Performance :
We can measure mutual funds performance by different method:
Absolute Return Method
Percentage change in NAV is an absolute measure of return, which finds the NAV
appreciation between two points of time, as a percentage.
e.g.: If NAV of one fund changes from Rs. 20 to Rs. 22 in 12 months then
Absolute return = (22-20) / 20 X 100 = 10%

Simple Annual Return Method :
Converting a return value for a period other than one year, into a value for one year, is
called as annualisation. In order to annualize a rate, we find out what the return would be
for a year, if the return behaved for a year, in the same manner it did, for any other
fractional period.
e.g.: If NAV of one fund changes from Rs.20 to Rs.22 in 6 months then
Annual Return = (22-20) / 20 X 12/6 X 100 = 20%

Total Return Method :
The total return method takes into account the dividends distributed by the mutual fund, and
adds it to the NAV appreciation, to arrive at returns.
(Dividend distributed + Change in NAV) / NAV at the start X 100
e.g.: If the NAV of one fund changes from Rs.20 to Rs.22 in 6 months if in between
dividend of Rs.4 has been distributed then
Total Return = {4 + (22 20)} / 20 X 100 = 30%

60


Total Return when dividend is reinvested :
This method is also called the return on investment (ROI) method. In this method, the
dividends are reinvested into the scheme as soon as they are received at the then
prevailing NAV (ex-dividend NAV).
= {(Value of holdings at the end of the period / value of the holdings at the beginning) 1} X
100
e.g.: An investor buys 100 units of a fund at Rs.10.5 on January 1, 2009. On June 30, 2009
he receives dividends at the rate of 10%. The ex- dividend NAV was Rs.10.25. On
December 31, 2009, the funds NAV was 12.25.
Value of holdings at the beginning period = 10.5 X 100 = 1050
Number of units re- invested = 100/10.25 = 9.756
End period value of investment = 109.756 X 12.25 = Rs.1344.51
Returns on Investment = {(1344.51/1050)-1} X 100
28.05%
Compound Average Annual Return Method :
This method is basically used for calculating the return for more than 1 year. In this method
return is calculated with the following formula:
A = P X (1 + R / 100)
N
Where P = Principal invested.
A = Maturity value.
N = period of investment in years.
R = Annualized compounded interest rate in %.
R = {(Nth root of A / P) - 1} X 100

61

e.g.: If amount invested is Rs.100 & in the end we get return of Rs.200 & period of
investment is 10 years then annualized compounded return is
200 = 100 (1 + R / 100)
10
Rate = 7.2%



Composition of the Portfolio :
Credit quality of the portfolio is measured by looking at the credit ratings of the investment
in the portfolio. Mutual Fund fact sheets show the composition of the portfolio and the
investments in various asset classes over time.
Portfolio turnover ratio is the ratio of lesser of asset purchased or sold by funds in the
market to the net assets of the fund.
If portfolio ratio is 100% means portfolio has been changed fully. When portfolio ratio is high
means expense ratio is high.
Portfolio Turnover Ratio = Total Sales & Purchase
Net Assets of fund
In order to meaningfully compare funds some level of similarity in the following factors has
to be ensured:
Size of the funds.
Investment objective.
Risk profile
Portfolio composition.
Expense ratios.

62

Fund evaluation against benchmark :
Funds can be evaluated against some performance indicators which are known as
benchmarks.
There are 3 types of benchmarks:
Relative to market as whole
Relative to other comparable financial products.
Relative to other mutual funds.

1. Relative to market as whole :
There are different ways to measure the performance of fund w.r.t market as
Equity Funds
Index fund an index fund invests in the stock comprising of the index in the same
ratio. This is a passive management style.
For example,
Market Index Fund - BSE Sensex
Nifty Index Fund - NIFTY
The difference between the return of this fund and its index benchmark can be
explained by TRACKING ERROR.

Active Equity Funds :
The fund manager actively manages this fund. To evaluate performance in such
case we have to select an appropriate benchmark.
Large diversified equity fund - BSE 100
Sector fund - Sectoral Indices


Debt Funds :
Debt fund can be judged against a debt market index e.g. I-BEX. In the Indian
Context, CRISIL and some private players like I-sec, have tried to develop some

63

indices to which debt funds can benchmark themselves. The market has different
indexes for different maturities and composition of debt instruments so that mutual
funds can benchmark against a pertinent index. For example there is a CP index,
Call index, corporate bond index, MIP blended index and also Composite indices.
The presence of such benchmarks has made the scene a little more pragmatic.

2. Relative to other comparable financial products:
Schemes Return
Convenience
Safety volatility Liquidity
Equity High
Moderate
Low High High
FI Bonds Moderate
High
High Moderate Moderate
Corporate Moderate Moderate Moderate Low
Debenture Low

Company
Fixed
Deposits
Moderate
Moderate
Low Low Low

64

Bank Deposits Low
High
High Low High

PPF Moderate
High
High Low Moderate
Life Insurance Low
Moderate
High Low Low
Gold Moderate
Low
High Moderate Moderate
Real Estate High
Low
Moderate High Low
Mutual Funds High
High
Moderate Moderate High


Schemes Investment
Objective
Risk Tolerance Investment
Horizon


65

Equity Term Capital
Appreciation
High Long
FI Bonds Income Low Medium to long
term
Corporate
Debentures
Income High
Moderate
Medium to long
term
Company Fixed
Deposits
Income Moderate
Low
Medium
Bank Deposits Income Generally Flexible all terms
PPF Income Low Long
Life Insurance Risk Cover Low Long
Gold Inflation hedge Low Long

66

Real Estate Inflation hedge Low Long


3. Relative to other mutual funds
When we compare one companys mutual fund with other company then we have to see
the following things:
The performance of fund can be compared with similar scheme of other mutual fund.
We should also see the investment objective and rating profile of portfolios.
Average maturity of debt portfolio should be same.
Size of fund should be same ( Big Small)
The investment objectives and risk profiles
Expense ratio
Returns must be calculated on a comparable basis:
Compare returns of two funds over the same periods only.
Similarly, only average annualized compound returns are comparable.
Only after- tax returns of two different schemes should be compared.

Type of Investors & Recommended Investment
Portfolio
According to lifecycle Stages:
Stages of Lifecycle Surplus to save Risk tolerance Options

67

Childhood Stage - - -
Young unmarried High High Life Insurance,
equity
Young Married High High Emerging fund
equity
Young Married /
Children
Moderate Low/ Moderate Investment for child
education
Married / Old
Children
Moderate Low Debt service/
pension provision
Post family/ pre-
retirement age
Low Low Pension Provision



Questionnaire Analysis
Investment in Mutual Funds

Options Frequency Proportion
Yes 66 78.75%
No 14 23.33%
Total 80

68




Figure 8
Interpretation
The study conducted on 80 persons revealed that 78.75% person invests in mutual
funds and 21.25% people do not invest in the schemes of the mutual funds.

Reason for not investing in Mutual Funds
Ranking Scale 5 4 3 2 1
Reasons Strongly
Agree
Agree Neutral Strongly
disagree
Disagree
Risky 31 27 11 6 5
Lack of Awareness 18 16 20 18 8
Lack of Funds 12 19 14 20 15
Afraid of Scams 9 10 17 15 29
Quality of Management 10 8 18 21 23
0
10
20
30
40
50
60
70
80
90
Options
yes
no
total

69


Decision Influencer
Options Family Relatives Friends TV Internet MF Agent
Observed 11 9 20 4 6 30
Percentage 13.75% 11.25% 25% 5% 7.5% 37.5%


Figure 9
Interpretation:
From the above analysis it may be concluded that 38% peoples decision to invest in mutual
funds is affected by mutual fund agent. So there is a need to concentrate on updating the
skills of the agents to enable them to motivate the potential customers. Second variable i.e.
the friends circle will also be able to motivate more people for investment in mutual funds
rather than traditional investment avenues.


14%
11%
25%
5%
7%
38%
Decision Influencer
Family
Relatives
Friend
TV
Internet
MF Agent

70

More Risky
Fund Based Schemes Frequency Proportion
Equity 68 85%
Debt - -
Balanced 8 10%
Liquid 4 5%
Total 80


Figure 10
Interpretation:
The analysis revealed that 85% people feel that equity schemes are the most risky
schemes. Only 10% people think that balanced schemes are risky. Since some proportion
under balanced scheme is also invested in the equity, this cannot be termed as more risky.
Similarly liquid scheme has also been considered as more risky by 5 % people. Investment
under the liquid schemes is a money market instruments which are highly volatile. These
are comparatively more risky.
Therefore the conclusion is drawn that lack of awareness about the different MF schemes is
the main reason for giving proper opinion by the respondents.
0
10
20
30
40
50
60
70
80
Frequency
Equity
Debt
Balanced
Liquid

71



Safe / Secured Returns
Avenues Stock Market Property Bank Mutual Fund Others
Observed 8 18 36 16 2
Percentage 10% 22.5% 45% 20% 2.5%


Figure 11
Interpretation:
The analysis revealed that people in our country have still the same mind-set of investing in
traditional, safer investments even at low returns. Accordingly, 45% people think that bank
is safe for investment. But 22.5% people showed their interest in making investment in
property even when the investment becomes illiquid. Only 20% people feel comfortable with
investment in MF.

Know About Income-Tax Incentives
0
5
10
15
20
25
30
35
Observed
Stock Market
Property
Bank
Mutual Fund
other

72

Options Yes No
Frequency 68 12
Proportion 85% 15%

Figure 12
Interpretation:
The analysis revealed that 85% people were aware of the income tax incentives available
on investing in some of the MF schemes notified under Income-Tax Act and only 15%
people were not aware.


Quality of Service of Mutual Fund Agent
Parameters Excellent Very Good Good Average Poor
Observed 7 14 38 12 9
Percentage 8.75% 17.5% 47.5% 15% 11.25%

0
10
20
30
40
50
60
70
80
Frequency
yes
No

73


Figure 13
Interpretation:
The analysis revealed that the quality of service provided by the MF agents is not very
satisfactory as only 8.75% people said that the service provided by the agents are
excellent, 47.5% and 17.5% people said that quality provided by the MF agents is good and
very good respectively. About 26% people were not satisfied with the quality of service
provided by the MF agents. It is suggested that agents should be highly motivated about
their knowledge and skill required periodical updating.

Selection of investment fund
By comparing with other MF. 16 20%
By studying past performance of the fund. 8 10%
Through the suggestion given by Distributor /
Advisor
56 70%
0
5
10
15
20
25
30
35
40
Observed
Excellent
Very Good
Good
Average
Poor

74


Figure 14
Interpretation:
The analysis revealed that 70% people take suggestions of the distributors or advisors
before making investment in MF and 20% people compare with other MF and only 10%
people study the past performance of the fund.

Entry and Exit Load
Yes 22 27.5%
No 58 72.5%

0%
10%
20%
30%
40%
50%
60%
70%
80%
comparing with other MF
studying past performance
Distributors advice

75


Figure 15
Interpretation:
The analysis revealed that only 27.5% people are aware about the entry and exit load
charged on their investment and 72.5% people are not aware of entry and exit load.






Bibliography
References:
BOOKS:
AMFI (Advisors module) Study Material.
Entry & Exit Load
Yes
NO

76

Offer documents of various Mutual Funds.
Mutual Funds by Akhilesh.

WEBSITES:
http://en.wikipedia.org
http://dspblackrock.com
www.amfi.com
www.mutualfundsindia.com
www.moneycontrol.com
http://investopedia.com/articles/mutualfunds
http://kotakmutualfund.com
www.muthootfinance.com
www.cviindia.com









Annexures
Questionnaire
Personal Information:
Name: _____________________

77

Gender:
Male
Female

Age:
20-25
25-35
35-45
45-55
55+

Monthly Income:
>10000
10000 25000
25000 40000
40000 55000
55000 +

Q1) Do you invest in Mutual Funds?
Yes
No
Q2) What are the Reasons for investing in Mutual Funds? 5 --------- 1
Reasons Strongly
Agree
Agree Neutral Strongly
Disagree
Disagree
Liquidity
Higher
returns

Retirement
benefits

Exposure in
capital market


78

Safety

Q 3) what are the Reasons for not investing in Mutual Funds? 5 ------------- 1
Reasons Strongly
Agree
Agree Neutral Strongly
Disagree
Disagree
Risky
Lack of
Awareness

Lack of Funds
Afraid of Scams
Quality of
Management


Q 4) Who influenced your decision to invest in Mutual Fund?
Family
Friends
Relatives
MF agents
Q5) According to you which of the following fund is most risky?
Equity
Debt
Balanced
Liquid
Q6) What according to you give safe/secured returns?
Bank
Stock Market
Property
Mutual Funds
Others _______________

79

Q7) Do you know about the Income-tax incentives available in any of the Mutual Fund
Schemes?
Yes
No
Q8) How is the quality of service provided by your MF Agent?
Excellent
Very good
Good
Average
Poor
Q9) How do you select your investment fund?
By comparing with other MF.
By studying past performance of the fund.
Through the suggestion given by Distributor / Advisor.
Q10) Being a MF investor are you aware of the various charges like entry and exit load?
Yes No