SUMMER TRAINING REPORT ON

Customer Perception Regarding Mutual Funds

Submitted to Punjab Technical University in partial fulfillment of the requirements for the degree of

BACHELOR OF BUSINESS ADMINISTRATION

By

AAZAM ABDAL 81010320001

SAS INSTITUTE OF INFORMATION TECHNOLOGY & RESEARCH.

MOHALI 2010

ACKNOWLEDGEMENT
Behind every achievement lies an unfathomable sea of gratitude to those who have extended their support and without whom it would never have come into existence. To them I say my words of gratitude. (AAZAM ABDAL)

PREFACE
The project includes the study of CUSTOMER PERCEPTION REGARDING MUTUAL FUNDS.

(AAZAM ABDAL)

DECLARATION
I the undersigned hereby declare that the project report entitled CUSTOMER PERCEPTION REGARDING MUTUAL FUNDS is compiled and submitted by me in my original work. The findings in the report are based on the data collected cases studied by me while preparing this report. I have not copied data from any previous report.

(AAZAM ABDAL)

TABLE OF CONTENTS
S.no. 1 2 3 4 5 6 7 8 9 10 Topic Industry Profile Review Of Literature Objectives Of The Study Research Methodology Limitations Of The Study Analysis Findings And Conclusions Suggestions Biblography Annexure Page No.

LIST OF TABLES
S.no. Table No. Table Name Page No.

LIST OF FIGURES
S.no. Figure No. Figure Name Page No.

EXECUTIVE SUMMARY
The structural changes and innovations took place in Indian financial system during eighties and nineties. The income level of urban and middle class people is increasing and these people are saving a part of their income to invest in profitable and safe avenues. Generally people mix bank deposits and investments with each other. But there is difference in these terms. The money, which is deposited in the banks, earns interest. It may be in the form of fixed deposits, saving etc and there is not any type of risk. But investors take risks to earn profits. If the risk is high, the return will also be high and vice versa. So investments earns profits having risk. Mutual funds offer good investment opportunities to investors carries different types of risks for different types of customers having different perception towards risk and returns from their investment. The findings of study are that people prefer to invest more in mutual funds due to good returns and because of getting good returns their confidence level in mutual funds investment has increased. So most of the people want to invest more in mutual funds in future.

CHAPTER 1
1.1 INDUSTRY PROFILE

Introduction
Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.

MUTUAL FUNDS
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme 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 portfolio at a relatively low

cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Each Mutual Fund scheme has a defined investment objective and strategy.

Mutual Funds-Investment Objectives:

Preservation of Capital & Liquidity--Achieved by investing in very Income--Achieved by investing in bonds Balanced--Achieved by investing in bonds and stocks Growth--Achieved by investing in stocks short-term bonds

IMPORTANT TERMINOLOGY
Net Asset Value (NAV) Net Asset Value (NAV) is the market value per unit. It is the actual value of one unit of a given scheme on any given business day. The NAV reflects the liquidation value of the fund's investments on that particular day after accounting for all expenses. It is calculated by deducting all liabilities (except unit capital) of the fund from the realizable value of all assets and dividing it by number of units outstanding.

Asset Management Company (AMC) An Asset Management Company or AMC is the investment manager of the respective trust, which is entitled to invest in different securities on behalf of unit holders, in line with the objectives of respective schemes. Load The charge collected by a Mutual Fund from an investor for selling the units or investing in it.

Entry load: When a charge is collected at the time of entering into the scheme it is called an Entry load or Front-end load or Sales load. The entry load percentage is added to the NAV at the time of allotment of units. Exit load: An Exit load or Back-end load or Repurchase load is a charge that is collected at the time of redeeming or for transfer between schemes (switch). The exit load percentage is deducted from the NAV at the time of redemption or transfer between schemes. Systematic Investment Plan Systematic Investment Plan is normally offered by many open-ended mutual funds in order to encourage regular investments. This plan allows an investor to purchase additional units of the Scheme by investing fixed amount of rupees every month/quarter. The beauty of the plan is that as the market falls the number of units purchased by the investor increases as the purchases are linked to the NAV. This concept is called Rupee Cost Averaging. Rupee Cost Averaging does not guarantee a profit or protect against a loss. Rupee Cost Averaging can smooth out the market's ups and downs and reduce the risk of investing in volatile markets. Systematic Withdrawal Plan The unit holder may set up a Systematic Withdrawal Plan on a monthly, quarterly or semi-annual or annual basis to redeem a fixed number of units Price/Earnings Ratio Abbreviated as P/E Ratio or P/E. Sometimes referred to as the "multiple." Calculated by dividing the stock's current price by the company's current annual earnings per share, usually from the last four quarters (known as the Trailing P/E Ratio), but sometimes from the estimates of the earnings expected in the next four quarters (the Projected P/E ratio), or from the sum of the last two actual quarters and the estimates of the next two quarters. In and of itself, the P/E Ratio tells very little, but can be usefully compared to the P/E Ratios of other companies in the same industry, or to the market in general, or to the company's own historical P/E Ratios, in order to determine how much the market is currently willing to pay for a share of the company's earnings.

TYPES OF MUTUAL FUND

There are wide varieties of Mutual Fund schemes that cater to investor needs, whatever the age, financial position, risk tolerance and return expectations. The mutual fund schemes can be classified according to both their investment objective (like income, growth, tax saving) as well as the number of units (if these are unlimited then the fund is an open-ended one while if there are limited units then the fund is close-ended).

CLASSIFICATION OBJECTIVE:

ACCORDING

TO

CAPITALIZATION

I. Open ended and closes ended funds

Open-ended Funds An open-end fund is one that has units available for sale and repurchase at all the times at a price based on the NAV per unit generally calculated on every business day. Such funds are open for subscription the whole year. These schemes have unlimited capitalization, open-ended schemes do not have a fixed maturity - i.e. there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange. Open-ended funds are bringing in a revival of the mutual fund industry owing to increased liquidity, transparency and performance in the new open-ended funds promoted by the private sector and foreign players. Open-ended funds score over close-ended ones on several counts. Some of these are listed below:

a) Any time exit option : The issuing company directly takes the responsibility of providing an entry and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds, signature verifications and bad deliveries. b) Tax advantage : Though Budget 2004 proposals envisage a tax rate of 20.91% (Corporate investors) and 13.06875%(Non-Corporate investors) on dividend distribution made by the Debt funds, the funds continue to remain attractive investment vehicles. In equity plans there is no distribution tax. c) Any time entry option : An open-ended fund allows one to enter the fund at any time and even to invest at regular intervals (a systematic investment plan). Close-ended Funds Close end funds can be subscribed to, only during the initial public offer. Thereafter the units of such funds can be bought and sold on the stock exchange on which they are listed through a broker. Such funds have a stipulated maturity period, limited capitalization and the units are listed on the stock exchange are called close-ended schemes. These schemes have historically seen a lot of subscription. This popularity is estimated to be on account of firstly, public sector MFs having floated a lot of close-ended income schemes with guaranteed returns and secondly easy liquidity on account of listing on the stock exchanges.

CLASSIFICATION ACCORDING TO INVESTMENT OBJECTIVE: INVESTMENT OBJECTIVES

Objectives Mutual funds have specific investment objectives such as growth of capital, safety of principal, current income or tax-exempt income. In general mutual funds fall into three general categories: Equity Funds invest in shares or equity of companies.

Fixed-Income funds invest in government or corporate securities that offer fixed rates of return. Balanced Funds invest in a combination of both stocks and bonds. I) GROWTH FUNDS These funds seek to provide growth of capital with secondary emphasis on dividend. They invest in shares with a potential for growth and capital appreciation. Because they invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential, growth funds provide low current income. Growth funds generally incur higher risks than income funds in an effort to secure more pronounced growth. These funds may invest in a broad range of industries or concentrate on one or more industry sectors. Growth funds are suitable for investors who can afford to assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income. II) GROWTH AND INCOME FUNDS Growth and income funds seek long-term growth of capital as well as current income. The investment strategies used to reach these goals vary among funds. Some invest in a dual portfolio consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixedincome securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks. Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who also want to maintain a moderate level of current income. III) FIXED-INCOME FUNDS

The goal of fixed income funds is to provide current income consistent with the preservation of capital. These funds invest in corporate bonds or government-backed mortgage securities that have a fixed rate of return. Within the fixed-income category, funds vary greatly in their stability of principal and in their dividend yields. High-yield funds, which seek to maximize yield by investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-income funds that invest in higher-rated but lower-yielding securities. Some fixed-income funds seek to minimize risk by investing exclusively in securities whose timely payment of interest and principal is backed by the full faith and credit of the Indian Government. Fixed-income funds are suitable for investors who want to maximize current income and who can assume a degree of capital risk in order to do so. IV) BALANCED The Balanced fund aims to provide both growth and income. These funds invest in both shares and fixed income securities in the proportion indicated in their offer documents.Ideal for investors who are looking for a combination of income and moderate growth. V) MONEY MARKET FUNDS/LIQUID FUNDS For the cautious investor, these funds provide a very high stability of principal while seeking a moderate to high current income. They invest in highly liquid, virtually riskfree, short-term debt securities of agencies of the Indian Government, banks and corporations and Treasury Bills. Because of their short-term investments, money market mutual funds are able to keep a virtually constant unit price; only the yield fluctuates. Therefore, they are an attractive alternative to bank accounts. With yields that are generally competitive with - and usually higher than -- yields on bank savings account, they offer several advantages. Money can be withdrawn any time without penalty. Although not insured, money market funds invest only in highly liquid, short-term, toprated money market instruments. Money market funds are suitable for investors who want high stability of principal and current income with immediate liquidity. VI) SPECIALTY/SECTOR FUNDS

These funds invest in securities of a specific industry or sector of the economy such as health care, technology, leisure, utilities or precious metals. The funds enable investors to diversify holdings among many companies within an industry, a more conservative approach than investing directly in one particular company. Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in favor" but also entail the risk of capital losses when the industry is out of favor. While sector funds restrict holdings to a particular industry, other specialty funds such as index funds give investors a broadly diversified portfolio and attempt to mirror the performance of various market averages. Index funds generally buy shares in all the companies composing the BSE Sensex or NSE Nifty or other broad stock market indices. They are not suitable for investors who must conserve their principal or maximize current income.

MUTUAL FUND STRUCTURE

A mutual fund comprises four separate entities, namely sponsor, mutual fund trust, AMC and custodian. The sponsor establishes the mutual fund and gets it registered with SEBI. The mutual fund needs to be constituted in the form of a trust and the instrument of the trust should be in the form of a deed registered under the provisions of the Indian Registration Act, 1908. The sponsor is required to contribute at least 40% of the minimum net worth (Rs. 10 crore) of the asset management company. The board of trustees manages the MF and the sponsor executes the trust deeds in favour of the trustees. It is the job of the MF trustees to see that schemes floated and managed by the AMC appointed by the trustees are in accordance with the trust deed and SEBI guidelines.

Sponsor

Mutual Trustee Fund AMC

Custodian

Fig.no. 1

TRUSTEE A Trustee is a Corporate Body governed by the provisions of Indian Trusts Act, required to comply with the provisions of the Companies Act, 1956. It acts as protector of the unitholders' interests. It does not directly manage the portfolio of securities but, appoints an Asset Management Company and ensures that the fund is managed as per the defined objectives and in accordance with the trust deed and SEBI regulations. CUSTODIAN A Custodian, registered with SEBI, is appointed by the board of Trustees for safekeeping of securities or participating in any clearing system through approved depository companies on behalf of the mutual fund and must fulfill its responsibilities in accordance with its agreement with the mutual fund. Since mutual funds are in the business of buying and selling of securities in large volumes, handling of such securities in terms of physical delivery and safe- keeping is the responsibility of a Custodian. SPONSOR A Sponsor is any person who, acting alone or in combination with another body corporate, establishes a mutual fund. The Sponsor, who is akin to the promoter of a company, gets the fund registered with SEBI, forms a Trust and appoint a Board of Trustees, will also generally appoint an Asset Management Company as fund managers. The Sponsor, either directly or acting through the trustees, will also appoint a Custodian to hold the fund assets. All these appointments are made in accordance with SEBI regulations. REGISTRAR/TRANSFER AGENT Transfer Agents are responsible for issuing and redeeming units of the mutual fund and provide other related services such as preparation of transfer documents and updating investor records.

HOW TO INVEST IN MUTUAL FUND?

Step One - Identify the Investment needs :Our financial goals will vary, based on the age, lifestyle, financial independence, family commitments, and level of income and expenses among many other factors. Therefore, the first step is to assess the needs. We can begin by defining the investment objectives and needs, which could be regular income, buying a home or finance a wedding or educate children etc. Step Two - Choose the right Mutual Fund: The important thing is to choose the right mutual fund scheme, which suits our requirements. The offer document of the scheme tells us 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 the performance of the fund over the last few years. Other factors could be the portfolio allocation, the dividend yield and the degree of transparency etc. Step Three - Select the ideal mix of Schemes: Investing in just one Mutual Fund scheme may not meet all the investment needs. We may consider investing in a combination of schemes to achieve our specific goals. Step Four - Invest regularly: The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, we buy fewer units when the price is higher and more units when the price is low, thus bringing down the average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. We can also avail the systematic investment plan facility offered by many open-end funds.

Step Five- Start early: It is desirable to start investing early and stick to a regular investment plan. If we start now, we will make more than if we wait and invest later. The power of compounding lets us earn income on income and our money multiplies at a compounded rate of return. Step Six - The final step: Finally we need to fill in the application forms of various mutual fund schemes and start investing. We may reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor - whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.

SWOT ANALYSIS OF MUTUAL FUNDS

Strengths of Mutual Funds are:
The fund industry has introduced the best products and services, and delivered superlative performances. It allows small investors to invest in market cheaply and efficiently. You get to own several companies no matter how much you decide to invest. In other words you get instant diversification. You can easily make monthly contributions. A professional manager is the one managing the money. Theoretically because of his/her experience and knowledge you should receive above average returns. Very high transparency, risk of fraud is very less. For every kind of profile (ie conservative, moderately aggressive , aggressive ) there are investment options available.

Weaknesses of Mutual Funds are:

Load being charged for entry into and exit from a particular fund is the biggest weakness of funds.

Lack of flexibility. Load is charged irrespective of the performance of the fund. Expense ratio is charged separately ie you pay management fee no matter if the fund makes you money or not. A large majority of mutual fund companies dont come close to beating market averages like the S&P 500.

Opportunities for Mutual Funds:

Only .5% of Indian savings is invested in mutual funds. Therefore there is a large potential for the fund industry to mobilize the savings of people into investments in MFs. Mutual funds are currently not allowed to invest in real estate. MF making investments in property should be allowed. Government is making necessary efforts.

Threats to the Mutual Funds:

One of the biggest ills plaguing the fund industry today is called late trading. The deal is to offer preferential treatment to large investors by offering them backdated net asset values (NAVs). ULIP (Unit Linked Investment Plan)- if the time horizon of the investor is more than 15 years, ULIP becomes a threat to fund industry. Also the brokers say (banks) get higher brokerage if an investor invests in ULIP rather than MFS. PPF (Public Provident Fund) is also a threat since it gives guaranteed return since no investment is risk free. Anyone who invests in mutual funds runs the risk of losing money. Real estate also poses a big threat for the industry since investor prefers investing in property rather than funds.

Portfolio management has now been started by various institutions such a (Kotak securities), whereby a separate portfolio can be designed for an individual investor. Here an individual is saved if the fund manger does not make right decision regarding funds portfolio.

CURRENT PLAYERS IN THE MUTUAL FUNDS INDUSTRY

The mutual fund sector in India currently comprises the following category of players.

BANK SPONSORED
BOB Asset Management Co. Ltd. Canbank Investment Management Services Ltd. PNB Asset Management Co. Ltd. SBI Funds Management Ltd.

INSTITUTIONS
GIC Asset Management Co. Ltd. IL and FS Asset Management Co.Ltd Jeevan Bima Sahayog Asset Management Co. Ltd.

PRIVATE SECTOR
Indian

Benchmark Asset Management Co. Ltd. Cholamandalam Asset Management Co. Ltd Escorts Asset Management Co. Ltd J.M. Capital Management Co. Ltd. Kotak Mahindra Asset Management Co. Ltd. Reliance Capital Asset Management Co. Ltd Sundaram Asset Management Co. Ltd Joint Ventures - Predominantly Indian Birla Sun Life Asset Management Co. Ltd. Credit Capital Asset Management Co. Ltd. DSP Merrill Lynch Investment Managers (India) Ltd. First India Asset Management Private Ltd. HDFC Asset Management Co. Ltd. Tata TD Waterhouse Asset Management Co. Ltd. Joint Ventures- Predominantly Foreign Alliance Capital Asset Management (India) Pvt.Ltd. Deutche Asset Management (India) Pvt. Ltd. HSBC Asset Management (India) Private Ltd. ING Investment Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Prudential ICICI Management Co. Ltd.

Standard Chartered Asset Management Co. Pvt. Ltd. Sun F & C Asset Management (I) Pvt. Ltd. Templeton Asset Management (India) Pvt. Ltd. Principal Asset Management Co. Ltd.

WHY MUTUAL FUND?

i) PROFESSIONAL INVESTMENT MANAGEMENT
Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale.

ii) DIVERSIFICATION
Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.

iii) LOW COST

A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000/-, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them.

iv) CONVENIENCE AND FLEXIBILITY

You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar in order to make sure that your convenience remains at the top of our mind.

v) PERSONAL SERVICE
One call puts you in touch with a specialist who can provide you with information you can use to make your own investment choices. They will provide you personal assistance in buying and selling your fund units, provide fund information and answer questions about your account status. Our Customer service centers are at your service and our Marketing team would be eager to hear your comments on our schemes.

vi) LIQUIDITY
In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.

vii) TRANSPARENCY
You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme

Review of literature
The mutual funds industry has seen unprecedented levels of growth over the past decade. Between 1987 and 1997, mutual funds increased their stock fund holdings from 4.1% to 21.2% of the market. The area of mutual finds research is clearly an important one to the financial services industry and The Wharton Financial Institutions Center has had the opportunity to support important research in this field, with a focus on the competitive structure of the mutual fund industry.

Roger M. Edelen

and Jerold B. Warner studied the relation between market returns using daily flow data. The concurrent daily

and aggregate flow into U.S. equity funds,

relation is positive. Their tests show that this concurrent relation reflects flow and institutional trading affecting returns.

Using a dataset comprising almost all equity and bond funds in existence in 1996,
Nicolaj Siggelkow

found that

fund providers shift advertising and distribution expenses

via so-called 12b-1 fees onto fund shareholders.

He also showed that bonds funds with

12b-1 fees are more risky, while having similar returns, than bond funds without 12b-1 fees. Lastly, he found that fund providers shift part of their research expenses onto fund shareholders by generating soft dollars (rebates in form of research services provided by brokers in return for excess commissions paid by fund providers) and not reducing explicit fees.

Chitru S. Fernando,

Srinivasan Krishnamurthy and Paul A. Spindt examined the which states that stock splits enhance the attractiveness

"marketability

hypothesis,"

of shares to investors by restoring prices to a preferred trading range. They examine splits of mutual fund shares because they provide a clean testing ground for the marketability hypothesis, since the conventional rationales for common stock splits do not apply. They found that splitting funds experience significant increases (relative to non-splitting matched funds) in net assets and shareholders. Stock splits did appear to enhance marketability.

It is a widespread practice among mutual fund managers to voluntarily waive fees that they have a contractual right to claim. This fact is puzzling and changes how

contractual fees should be interpreted by investors, regulators, and academic researchers.

Susan Kerr Christoffersen

argued that fund managers use

fee waivers

instead of a flat contracted fee because waivers provide flexibility. Flexible fees are desirable since managers can strategically adjust net advisory fees to current realization in performance as a means of attracting investors. However, it is costly for managers to attain full flexibility in fees. Estimation results suggest that investors react negatively to waivers in comparison with lower fixed net advisory fees.

Working papers on mutual funds research include:

Transaction-cost Expenditures and the Relative Performance of Mutual Funds

John M.R.

Chalmers, Roger M. Edelen and Gregory B. Kadlec, November 1999

The Wildcard Option in Transacting Mutual-Fund Shares

John M.R. Chalmers, Roger M.

Edelen and Gregory B. Kadlec, November 1999

Aggregate Price Effects of Institutional Trading: A Study of Mutual Fund Flowand Market Returns

Roger M. Edelen and Jerold B. Warner, October 1999

Expense Shifting: An Empirical Study of Agency Costs in the Mutual Fund Industry

Nicolaj Siggelkow, January 1999

Is Share Price Related to Marketability? Evidence from Mutual Fund Share Splits

Chitru S.

Fernando, Srinivasan Krishnamurthy and Paul A. Spindt, August 1999

Fee Waivers in Money Market Mutual Funds

Susan Kerr Christoffersen, November S. Fernando,

1997
Has the Rise of Mutual Funds Increased Market Instability?Chitru

Srinivasan Krishnamurthy and Paul A. Spindt, August 1999

How Are Derivatives Used? Evidence from the Mutual Fund Industry

Jennifer Koski and

Jeffrey Pontiff, May 1996 This is the preprint version only. For the published version please see: "How Are Derivatives Used? Evidence from the Mutual Fund Industry." Journal of Finance. Vol. 54(2), pp. 791-816. April 1999.
The Structure of Mutual Fund Charges

Tarun Chordia, November 1993 This is the Vol. 41 (1), pp. 3-39. May

preprint version only. For the published version please see: "The Structure of Mutual Fund Charges." 1996.
Journal of Financial Economics.

The Marketing of Closed-End Fund IPOs

Kathleen Weiss Hanley, Charles Lee and Paul

Seguin, November 1995 This is the preprint version only. For the published version please see: "The Marketing of Closed-End Fund IPOs: Evidence from Transactions Data." 1996.
Evolution of Capabilities and Industry: The Evolution of Mutual Fund Processing Journal of Financial Intermediation.

Vol. 5 (2), pp. 127-59. April

Daniel A. Levinthal and Jennifer Myatt, December 1994 This is the preprint version only. For the published version please see: "Co-Evolution of Capabilities and Industry: The Evolution of Mutual Fund Processing."
Journal. Strategic Management

Vol. 15, pp. 45-62. Winter 1994.

Guides and Periodicals o The vast majority of money invested in mutual funds goes into funds that have either four or five star ratings from Morningstar. While its difficult to gauge the exact degree of causation (or correlation) between Morningstar ratings and fund purchases, it is clear that Morningstar ratings have a major impact on investor behavior. As a result, Morningstar's rating system has come under a great deal of scrutiny. Wharton Professor Marshall Blume's article titled "An Anatomy of Morningstar Ratings" in the March/April issue of the Financial Analysts Journal argued that (1) funds with a long history are less likely to receive a five star rating than funds with a short history and that (2) no-load, diversified, domestic equity funds are far more likely to get four or five stars than they are to get one or two stars. More recently in the July/August edition of the FAJ, Stanford Professor William Sharpe's article titled "Morningstar's RiskAdjusted Ratings" discussed drawbacks of Morningstar's system. o Morningstar fully explains their system in "Star Ratings" and further perspective can be found in articles by John Rekenthaler (Morningstar's Research Director) - response to Blume's article (7/2/98) and response to Sharpe's article (9/4/98). To Morningstar's credit they have run several articles pointing out that hot fund categories tend to underperform unpopular categories. For instance, see Buy the unloved and Unpopularity Contest. See also DO take a skeptical attitude toward mutual fund ratings on the Bloomberg site. And what many investors really want to know is how do top rated funds perform going forward. According to Mark

Hulbert, the Hulbert Financial Digest has been tracking Morningstars performance since the beginning of 1991. Over the subsequent nearly seven years, Morningstars top-ranked no-load equity funds have lagged the stock market by an average of nearly three percentage points per year. " See Hulbert's "No Stars for Morningstar" in Forbes (12/29/97). o Stanford Professor and Nobel Prize winner William F. Sharpe has posted The Styles and Performance of Large Seasoned Mutual Funds, 1985-1994. It is not written for the novice but makes for interesting reading from one of the best known educators and writers in the industry. You can also read an interview with Professor Sharpe titled Setting the Record Straight on Style Analysis. o This is an abstract (Of Tournaments and Temptation) of an interesting Journal of Finance article that discusses mutual fund fees and how fund managers act depending on their performance. o The Vanguard Groups's TIC-TAC-TOE: Style Analysis and Mutual Fund Performance by John C. Bogle was the Keynote Speech at the June Morningstar Conference. The article offers evidence that fund expenses are an indicator of future performance.

o The July/August 1997 issue of Bloomberg Personal included an article titled "Cheaper is Better" by Jonathon Burton. The following are a few excerpts from the article o "Fund expenses make a difference-a huge difference-in your bottom-line investment return. In fact, according to a new study by Bloomberg Personal, low-cost funds are much more likely to deliver above-average performance than high-cost ones..." o "Phillips [Morningstar] has also produced disturbing research showing that higher-expense bond funds often take greater risks." o o Getting wise to mutual fund fees from Fortune (12/23/96). o A feature on high fund fees from Money. o 20 question about mutual funds from the Investment Company Institute o what do individual investors consider when buying a fund? According to an Investment Company Institute study 75% considered performance,

69% Risk, 49% Investment Goals, 46% Portfolio securities, and only 43% considered fees and expenses. Empirical studies suggest performance should certainly not be the primary consideration, but fees and expenses arguably should be. o Ronald N. Kahn and Andrew Rudd of BARRA titled "Does Historical Performance Predict Future Performance?" is an example supporting the argument against persistent performance. The study includes references to previous studies that did and studies that did not find support for persistence. Although they did find some evidence of persistence in fixed income funds, the authors come to the conclusion that both equity and fixed income investors may be better served by investing in index funds as opposed to funds that have performed well in the past. o Another recent study by Burton G. Malkiel (author of A Random Walk Down Wall Street ) in the June 1995 edition of Journal of Finance titled "Returns from Investing in Equity Mutual Funds 1971 to 1991" also addressed the issue. You can read the Abstract here. Numerous studies had demonstrated persistence in performance in the 1970s and Malkiel confirmed these findings. Malkiel specifically examined the issue of survivorship bias - the fact that poor performing mutual funds tend to disappear (commonly by merging into more successful funds "thereby burying the fund's bad record with it." See also Cherry-Picking). Approximately 3% of mutual funds disappear every year. The result is that most long term performance records do not include the records of poor performing funds that no longer exist. By examining all mutual funds that existed at the time, Malkiel determined "that survivorship bias is considerable more important than previous studies have suggested." Malkiel admits that the analysis provided some support for the buying funds with excellent records since they outperformed during certain periods and do no worse than the average fund, however he presented three caveats. First, the results are not robust, second, the returns are not actually achievable because of load charges and third, survivorship bias has to be accounted for. He concluded that o "It does not appear that one can fashion a dependable strategy of generating excess returns based on a belief that long-run mutual fund returns are persistent."

o "... funds have underperformed benchmark portfolios both after management fees and even gross of expenses." o "... while considerable performance persistence existed during the 1970s, there was no consistency in fund returns during the 1980s." o "... we have been unable to fashion a dependable strategy by which an investor can consistently achieve excess returns over long periods of time." o "Most investors would be considerably better off by purchasing a low expense index fund, than by trying to select an active fund manager who appears to possess a "hot hand." o Malkiel also discussed Forbes Magazine "honor roll" which ranks mutual funds for performance in both up and down markets. Over the 16-year period from 1975 to 1991, the "honor role" underperformed the S&P 500. Further, the results ignored load charges which would have reduced performance.

Objectives of the study

The main objectives of study are given below:

To know about the awareness of mutual funds. To know the customers expected return from Mutual Funds. To know the investment habit of the customers as percentage of savings in Mutual Funds. To know about the customers choice of investing in other investment avenues. To make comparison between Mutual Funds and other investment avenues.

CHAPTER 2
RESEARCH METHODOLOGY
This section deals with the Scope, need and significance of research, Research design, Data collection, Sample size, Sampling technique, used and Limitations of the study.

SCOPE
This study can be made effects study will be conducted at Chandigarh. This study can be made effective by selecting sample size as large as possible. Deeper study can be conducted by including perception of investors. Need and Significance The changing financial services scenario emerging by virtue of liberalization in last one decade has introduced a vast variety of concept Mutual Fund is one of those Mutual Funds in Indian context are a recent phenomenon. In a short span of less than one decade it has changed the investment pattern of medium and small investors in India. To meet the changing needs of the economy, the educational institutions have been upgrading their curriculum. Consequently, study of Mutual Funds has become an essential ingredient for living in this financial world so there is a need to appraise the financial and operation performance of mutual funds.

RESEARCH DESIGN :
The research design is a pattern or an outline of the research projects working. The present study being conducted followed DESCRIPTIVE RESEARCH design this is because it evaluate the performance of various mutual funds operating in India.

DATA COLLECTION:
Both primary and secondary source of information were used for data collection. For the purpose of data collection the sites of mutual funds are referred and questionnaire is prepared.

SAMPLE SIZE:
The total of 50 structured questionnaires have been distributed among people of all age at Chandigarh, Mohali.

Limitations of the study

The study is based only on 50 investors of Chandigarh, Mohali.. Study is not exhaustive and has a scope of further research. The present study will relate to urban people only. Influence of certain variables like culture, experts views and suggestions of brokers etc. on investors behaviour and satisfaction cant be studied in detail due to time factor. The result is based on primary and secondary data that has its own limitations. Personal bias involved in respondents answers becomes the major hurdle in obtaining the true information.

ANALYSIS

Percentage of people investing in mutual funds

Yes No

Fig.no.2

Options Yes No

Respondents 34 16

INFERENCE Hence Majority of people that is 68 % people invest in mutual funds.

Comfortability level regarding the various investment vehicles

Investment Vehicle Savings Accounts Fixed Deposits Stock Market Mutual Funds Insurance Others (Specify)

Respondents 18 2 2 13 15 0 50

20 15 10 Respondents 5 0 Savings a/c Fixed deposits Stock Market Mutual Funds Insurance

Fig.no.3 INFERENCE Most of the people are comfortable in investing in saving accounts.

Percentage of total savings invested in Mutual Funds

Options 0-20% 20-40% 40-60% 60-80% 80-100%

Respondents 10 9 16 12 3 50

16 14 12 10 8 6 4 2 0 Respondents

0-20%

20-40% 40-60%

60-80% 80-100%

Fig.no.4 INFERENCE Thus on an average people invest 40-60% of their total savings in mutual funds. .

Primary purpose of investing in Mutual Funds

Purpose

Respondents 13 7 18 6 6 50

Wealth Accumulation Educational Planning Current Income Major Purchase Other (Please Describe)

20 15 10 Respondents 5 0

Wealth Accumulation

Current Income

Other

Fig.no.5 INFERENCE Thus most of the people invest in mutual funds for the purpose of current income.

Options preferred while investing in mutual funds

Options Debt Balance fund Equity

Respondents 20 22 8 50

25 20 15 10 5 0 Debt Balance Fund Equity Respondents

Fig.no.6 INFERENCE Majority of People would like to choose balance fund while investing in mutual funds.

Type of attitude towards the trade-off between risk and return

Statement
I am primarily concerned with limiting risk. (I am willing to accept lower expected returns in order to limit my chance of loss.) Limiting risk and maximizing return are of equal importance to me. (I am willing to accept moderate risk and a moderate chance of loss in order to achieve moderate returns.) I am primarily concerned with maximizing the returns of my investments. (I am willing to accept high risk and a high chance of loss in order to maximize my investment return potential.)

Respondents
20

21

25 20 15 10 5 0 Limited Risk Moderate Risk High Risk Respondents

Fig.no.7 INFERENCE Hence most of the people want to take moderate risk when they invest in mutual funds.

Expectations regarding the average annual return of your portfolio

Options 0-20% 20-40% 40-60% 60-80% 80% above Respondents 6 20 5 10 9 50

20 15 10 Respondents 5 0 0-20% 20-40% 40-60% 60-80% 80 & Above

Fig.no.8 INFERENCE Hence we can see that majority of people expect near about 20-40% average annual return from their portfolio.

Time horizon for achieving the investment objectives

Options Respondents 0-2yr 9 2-4yr 8 4-6yr 18 more than 6 yr 15 50

18 16 14 12 10 8 6 4 2 0 0-2 yr 2-4yr 4-6yr > 6yr

Respondents

Fig.no.9 INFERENCE Hence majority of people want to achieve their investment objectives by investing in between 4-6 years.

Satisfaction level regarding the returns from Mutual Funds

Options fully satisfied Satisfied Neutral dissatisfied highly dissatisfied

Respondents 3 20 16 10 1

20 15 10 Respondents 5 0 Fully Satisfied Satisfied Neutral Dissatisfied Highly Dissatisfied

Fig.no.10 INFERENCE Hence we can see that most of the people are satisfied with the returns they are getting by investing in mutual funds.

Percentage of loss of capital that a investor can bear

Options 0-5% 5-10% 10-15% 15-20% more than 20%

Respondents 19 20 3 4 4 50

20 15 10 5 0 0-5% 5-10% 10-15% 15-20% > 20%

Respondents

Fig.no.11 INFERENCE Majority of people are ready to tolerate 5-10% loss in their investments.

Change in the level of confidence regarding Mutual Fund investment

Level of Confidence Diminished Increased Did not Change

Respondents 9 26 15

30 25 20 15 10 5 0 Diminished Increased Didn't Change Respondents

Fig.no.12 INFERENCE Thus we can notice that Confidence level of People for Mutual Fund investment is increasing.

Responses regarding investment in Mutual Funds in future

Options Yes No

Respondents 41 8

45 40 35 30 25 20 15 10 5 0 Yes No

Respondents

Fig.no.13 INFERENCE Thus we can see that 82% people want to invest in mutual funds in future and rest of the 8% people do not want to make any investment in mutual funds in future.

CHAPTER 3

Findings and conclusions

The findings and conclusions of the study are given below: During the survey it was found that Business people prefer Bharti Axa for opening their accounts and it is also interpreted that people are not equally interested in all the companies for opening their accounts. There is significant difference between different banks.

It is interpreted that all the investment vehicles like Savings accounts, Mutual Funds, Insurance, Fixed deposit, Stock Market are equally comfortable for people.

It is also interpreted that people are not equally interested in all the options like Debt, Equity, balance fund while investing in mutual funds and Majority of People would like to choose Balance Fund while investing in mutual funds because they want to take moderate risk and get good returns and the purpose of majority of people is Current income.

Suggestions

The performance of Mutual funds depends on the previous years Net asset value of the fund. All funds are doing well. But the future is uncertain. So the AMC (Asset Management Company) should take the following steps:

Proper awareness of Mutual funds should be spread through effective communication channels like print media, television etc. so that every investor would be able to think about investing in Mutual Funds.

As the people are not ready to take high risk. So the AMC should launch more diversified funds so that the risk becomes minimum. This will lure more and more people to invest in mutual Funds.

The expectation of people from Mutual Funds is very high. So the portfolio of the fund should be prepared taking into consideration the expectations of the people.

BIBLIOGRAPHY

www.webconnect.com www.hsbc.co.in www.amfiindia.com www.moneycontrol.com www.valueresearchindia.com

ANNEXURE
Questionnaire

1. Do you invest in mutual funds ? a. Yes b. No 2. Which of these investment vehicles are you most comfortable with? Investment Tool Savings Account Fixed Deposits Stock Market Mutual Funds Insurance Others (Specify) Answer

3. How much do you invest in mutual funds of your total investments?

a. 0-20% b. 20-40%

c. 40-60% d. 60-80% e. 80-100% 4. What is your primary purpose for investing in mutual funds ? a. b. c. d. e. Wealth Accumulation Educational Planning Current Income Major Purchase Other (Please describe) __________________________________

5. Which option will be preferred by you while investing in mutual funds ? a. Debt b. Equity c. Balanced Fund 6. Which one of the following statements best describes your attitude toward the trade-off between risk and return?

Statement
I am primarily concerned with limiting risk. (I am willing to accept lower expected returns in order to limit my chance of loss.) Limiting risk and maximizing return are of equal importance to me. (I am willing to accept moderate risk and a moderate chance of loss in order to achieve moderate returns.) I am primarily concerned with maximizing the returns of my investments. (I am willing to accept high risk and a high chance of loss in order to maximize my investment return potential.)

Type Of Attitude

7. What are your expectations regarding the average annual return of your portfolio? a. b. c. d. e. 0 - 20% 20 - 40% 40 - 60% 60 - 80% 80 - 100%

8. What is the time horizon for achieving your investment objectives? a. b. c. d. 0 2years. 2 4 years. 4 6 years. More than 6 years

9. Are you satisfied with the returns you are getting by investing in mutual funds ? a. b. c. d. e. Fully satisfied Satisfied Neutral Dissatisfied Highly dissatisfied.

10. How much of an unrealized loss of capital are you prepared tolerate in your investments ? a. 0 - 5%

b. c. d. e.

5 - 10% 10 - 15% 15 - 20% More than 20%

11.Over the past year how has your confidence level in mutual fund investment protection mechanism changed a. My confidence level diminished over the past year b. My confidence level increased over the past year c. My confidence level did not change. 12. Do you want to invest in mutual funds in future ? a. Yes b. No

Personal Details
First Name _ __________________ Last Name __________________
Age_______ Gender Male Marital Status _______________ Female

Income Group (p.a.) Phone No.

__________________

Occupation __________________