Pankaj Kumar-Mutual Fund

8/9/2019 Pankaj Kumar-Mutual Fund

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A RESEARCH STUDY ON PORTFOLIO BUILDING FOR

MUTUAL FUND INVESTORS

A DISSERTATION SUBMITTED IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE

AWARD OF MBA DEGREE OF BANGALORE UNIVERSITY.

BY

PANKAJ KUMAR

REG.NO-02XQCM6037

UNDER THE GUIDANCE OF

Prof Meena Kumari

(Faculty -Finance)

M.P.BIRLA INSTITUDE OF MANAGEMENTASSOCIATE BHARTIYA VIDYA BHAVAN.

BANGALORE-560001

October 2004


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CONTENTS Page No

CHAPTER 1 RESEARCH EXTRACT 1

CHAPTER 2 INTRODUCTION 4

2.1 Background of the study

2.2 Need and importance of the study

2.3 Objectives of the study

2.4 Limitations of the study

CHAPTER 3 REVIEW OF LITERATURE 27

CHAPTER 4 METHODOLOGY 304.1 Type of research

4.2 Sampling technique

4.3 Sample size

4.4 Sample description

4.5 Tools used

CHAPTER 5 DATA ANALYSIS

AND INTERPRETATION 37

CHAPTER 6 CONCLUSIONS AND

RECOMMENDATIONS 1166.1 Summary of findings

6.2 Conclusions from the study

6.3 Suggestions of the study


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LIST OF TABLES

SLNOTABLE PARTICULARS PAGE

NUMBER

1Table showing the % growth rate of return of

mutual funds39

2Table showing the comparison between bank vs.

mutual funds as an investment avenue41

3 Table showing fund monitor 43-47

4Table showing classification of investors based

on age group

48

5 Table showing the annual income of investors 50

6Table showing the relationship between the

investors age and income51

7Table showing the decision variables that govern

investments53

8Table showing the investors preference prior to

investing54

9 Table showing lock-in-period of funds invested 56

10Table showing the % of monthly income that can

be invested 57

11Table showing the relationship between the age

and % monthly income invested59

12Table showing relationship between income of

investors and their % monthly investment61

13 Table showing volatility level of investors 63

14Table showing the toleration towards temporary

decline of investments65

15

Table showing the priority of important variables

while investing in mutual funds 67

16Table showing the prime concern for

investments69

17Table showing the relationship between age and

prime concern for investments70

18 Table showing the relationship between income 72


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and prime concern for investments

19 Table showing the safety quotient 74


safety quotient and age76

21 Table showing the relationship between thesafety quotient and income

78

22Table showing the reaction of investors in case

of fluctuations80

23

Table showing the relationship between reaction

of investors incase of fluctuations and their

annual income

81

24Table showing the array of products already

invested by investors83

25

Table showing the relationship between the

investors age and the investments in the array of

products

84

26

Table showing the relationship between the

income and the investments in the array of

products

85


investors age and risk factors87

28 Table showing the financial goals of investors 88

29Table showing the relationship between

investors income and financial goals 89


financial goals and the age of investors91

31Table showing the existing investments in

mutual funds92

32 Table showing the safety model portfolio 100

33 Table showing the income model portfolio 102

34Table showing the income and moderate growth

portfolio104

35 Table showing the balance growth portfolio 10636 Table showing the aggressive growth portfolio 108

37 Table showing the maximum growth portfolio 110

38 Table showing the investments of ABC Ltd. 112-115


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LIST OF GRAPHS

SLNO

GRAPH PARTICULARS PAGE

NUMBER

1Chart showing performance of various

instruments38

2Chart showing investors classification based on

age49

3 Chart showing the annual income of investors 50

4Chart showing the relationship between the

investors age and annual income52

5Chart showing the decision variables that govern

investments

53

6Chart showing investors preference prior to

investing55

7Chart showing the lock-in-period of funds

invested56

8Chart showing the percentage of monthly income

that can be invested by potential investors58

9Chart showing the age and % monthly income

invested60

10 Chart showing the relationship between incomeof investors and their % monthly investment 61

11 Chart showing the risk level of investors 63

12Chart showing the toleration towards the

temporary decline of investments65

13 Chart showing the criteria for investing 67

14Chart showing the relationship between the age

and prime concern for investments69

15Chart showing the relationship between investors

income and prime concern for investments71

16 Chart showing the safety quotient 72


safety quotient and age74


safety quotient and income77

19 Chart showing the reaction of investors in case 79


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of fluctuations

20Chart showing the reaction of investors incase of

fluctuations80

21Chart showing the relationship between age and

array of investments made

82

22Chart showing the relationship between income

and investments in the array of products84

23 Chart showing the financial goal of investors 86

24Chart showing the mutual fund invested in

earlier by investors88

25 Chart showing the investment model 92

26 Chart showing the aggressive growth portfolio 96

27 Chart showing conservative portfolio 97

28 Chart showing the moderate growth portfolio 98


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CHAPTER 1RESEARCH EXTRACT


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RESEARCH EXTRACT

In India, the only mutual fund operating for a long time since 1964 was the UTI. It

was a public sector undertaking enjoying the monopoly position and some unique

tax benefits such as exemption from income tax of its entire income. During the

1960s, government wanted to mobilize huge sums from the public. Thus this gave

rise to mutual funds. Contribution towards the mutual funds was only from the high

net worth individuals and the other individuals were not contributing. Overall the

investors were not actively participating in the stock market mainly

because of lack of knowledge. To fill the gap between mobilization of huge sums to

the government as well as to increase the knowledge of the investors in relation to

risk and return, mutual funds were created. Until 1991, the private mutual funds were

not encouraged. But after privatization, which brought about changes in the

economic policies and the reforms, it has caught the imagination of financial

community and is in a growing stage. These funds mainly cater to the individual

investors and small savers. It was thrown open to the private sector and the foreign

sector in 1992-93. Thus mutual funds were liberated and this gave rise to

competition between the various players offering mutual funds. This gave rise to the

various schemes of mutual funds.

Throughout life, one may experience many changes, such as marriage, having

children, buying a home, financing college education, and even caring for ageing

parents. All of these situations can put a dent in ones finances. Thats why its

important to set goals and follow a financial plan.

With liberalization and opening of the global markets countries like India have made

rapid advancements in the fields of finance. A country that was used to plain vanilla

products like Fixed Deposits, PPFs, NSS and LIC as investment avenues suddenly

saw a plethora of complex financial products storming the Indian market andmentality. People now have a wide range of choices to exercise when it came to

investments. The only aspect, which did suffer, was that of awareness of these

products.


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The company responsive to customer expectation places a strong emphasis on

existing emergency and latent needs. A strong orientation towards personalized

value service has made a force to reckon with.

The entire process of portfolio management is triggered by clearly articulating the

clients risk return profile and his investment objectives. Such an investment

objective is then suitably qualified by constraint such as liquidity needs and

investments time horizon to determine the information in proprietary in-house an

external database to identify various mutual funds and to arrive at an optimum

portfolio.


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CHAPTER 2

INTRODUCTION


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2.1 INTRODUCTION

FINANCIAL SYSTEM AND FINANCIAL MARKET

Financial markets are the backbone of an economic system and aid allocation of

scare capital across the productive sectors of the economy. While Indian economicgrowth is in evitable, stability and dynamism of the financial system is essential for

proper allocation of resources, which in turn helps sustain a healthy climate for

saving and investment. In fact, the financial system has to be more dynamic than the

real system as it has to continuously respond to the needs of the real economy to

help it achieve its goals.

Financial system implies a set of complex and closely connected or interlinked

institutions, agents, practices, markets, transactions and liabilities in the economy.

The financial system is concerned about money, credit and finance. The three terms

are intimately related yet different from each other. Money refers to the current

medium of exchange or means of payment. Credit or loans is the sum of money to

be returned, normally with interest- it refers to a debt of economic unit. Finance is a

monetary resource comprising of debt and ownership funds of the state, company or

person. The financial system functions as an intermediary and facilitates the flow of

funds from

the areas of surplus to the areas of deficit. A financial system is a composition of

various institutions, market regulations, transactions and claims.

The financial system helps bring together sowers and users of capital. Hence, the

efficiency of financial markets is essential for facilitating optimal intermediation

between households and firms.

The Indian financial system has always had a well-defined institutional structure.

While it has been dominated by government sponsored financial institutions and

nationalized commercial banks, in recent years, the private sector has been showing

steady growth in the areas of asset management and financial services. Today India

can boast of having would-comparable capital market and money markets.


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A financial market can be defined as a market in which financial assets are created

or transferred. These markets are classified as Money Market (where the

instruments dealt are short-term maturity) and Capital Market (the instruments dealt

are of long-term maturity).

2.2 INVESTMENTS

Investment is making the money work for you. Idle saved money will be eroded of its

value by reduction in purchasing power. Investing smartly

makes money grow. In other words one must involve funds available in such

avenues that may counter balance the reduction of real value. Assets whose value

increases over time must be chosen for such purpose. The investments must offermaximum advantages to the investor.

Now there are a number of investments avenues available to common man.

Recently all financial products investment opportunities come with some or other

innovations. It is at the behest of the consumer the investor depending on the

advantages in the investment is chosen.

2.3 FEATURES OF INVESTMENTS

1. Security:

It is guarantee that at least the amount deposited with the agency will be given

back to the investor.

2. Risk Involved:

As different from security risk involved is risk associated with type of investment.

It is said risk and returns go hand in hand, mainly there are four types of risk

inflation risk, business risk, rate of returns and uncertainty (of the future) risk.

3. Capital Appreciation:

The worth of investment when redeemed must be more than the initial


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investment.

4. Periodical Returns:

Most people would like to have assured periodical returns regularly. Better rates

of returns surely attract good number of investors.

5. Liquidity:

It is the case with which we can convert investments into cash or can be

transferred to another individuals for some consideration.

6. Investor Services:

These are the backbone of any organizations marketing activity. They are:

Convenience of Investing

Consultancy Restricted Early Redemption

Flexible Maturity Period and Liquidity

Good Rates of Returns

Trust Worthy and Able Management

2.4 INVESTMENT BASICS

In the wonderful world of finance, there are a wide variety of choices available. One

needs to understand the different investment vehicles such as

stocks and bonds, and how these investment options work and what they can do for

an investor. One can invest in stocks and bonds through mutual funds and take

advantages of each of these vehicles and use them to invest and generate wealth in

the most effective way.

It is practical to diversify the investors money among different types of investment

vehicles, such as stocks, bonds and money market instruments.

The goal is to help reduce risk and enhance returns. Establishing a well-diversified

portfolio may allow the investor to avoid the risks associated with putting all his eggs

in one basket.


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As the investors financial goals are diverse, his investment choices need to be as

well. No single investment is likely to meet all of his needs, so he should keep some

money in bank deposits to meet any urgent needs for cash and keep the balance in

other schemes that maximize his return and minimize the risk.

Depending on the investors age, lifestyle, family commitments and the level of

income and expensed, his financial goals will vary. In order to assess his needs, the

investor needs to define his investment objectives which could be for example,

receiving a regular income, buying a house, financing a wedding, paying for

childrens education, or it could even be a combination of these.

Besides defining the investors objectives, one also needs to take into consideration

the amount of risk the investor is willing to take or can tolerate and what his cash

flow requirements are.

2.5 INVESTMENT AVENUES

The various investments avenues available here in India to todays investors are

briefly mentioned below. A portfolio can contain investments from one or all of the

following categories.

STOCKS

The term is used to describe the ownership in companies is stocks. When a

company needs to grow or expand, it may sell part of its ownership to the public in

the form of shares (stock). In exchange for the money received from the sale, the

company gives shareholders a portion of its future profits, s well as a measure of its

decision-making power. Stock prices can change greatly from day to day, depending

on the supply and demand for the stock. If many investors want to buy the stock, the

price may go up; if fewer investors are interested in buying the stock, the price may

go down. This is one of the types of investment, which can make up part of an

investors portfolio.

FINANCIAL SECURITIES


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Direct financial investments, which are represented by negotiable securities, are

referred to as financial securities. The major financial securities available

in India are:

1. Equity shares

2. Preference shares

3. Convertible shares

4. Non convertible shares

5. Public sector bonds

6. Savings certificates

7. Gilt-edged securities

8. Money market securities

Since the project will be dealing with mainly such investments, a detailed description

follows.

NON- SECURITIES FINANCIAL INVESTMENTS

A non-securitized financial investment, unlike a financial security, represents a

financial investment that is not transferable or negotiable. The major non-securitized

financial investments available in India are:

1. Bank deposits

2. Post office deposits

3. Company fixed deposits

4. Provident fund schemes

5. National savings scheme

6. Life insurance

REAL ASSETS


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The investments avenues discussed so far are broadly referred to as financial

investments as they represent financial claims. Real assets, on the other hand,

represent physical investment. The important categories of real asset are:

1. Real estate

2. Gold and silver

3. Precious stones

4. Art objects

EQUITY SHARES

Of all the forms of securities, equity shares appear to be the most romantic. While

fixed income investment avenues may be more important to most of the investors,

equity shares seem to capture the interest the most.

PREFERENCE SHARES

Preference shares represent a hybrid security that partly assumes some

characteristics of equity shares and some attributes of debentures. The salient

features of preference shares are as follows:

1. Preference shares carry a fixed of dividend

2. Preference dividend is payable only out of distributable profits.

3. Dividend on preference shares is generally cumulative.

4. Preference shares are redeemable-the redemption period is around 12

months.

CONVERTIBLE BONDS (DEBENTURES)


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A convertible bond is a bond that may be compulsorily or optionally converted into

equity shares in future. The general features of a convertible bond include the

conversion ratio, conversion price, conversion timing and conversion (or stock)

value.

NON-CONVERTIBLE DEBENTURES

Akin to promissory notes, non-convertible debentures are instruments for raising

long-term debt capital. The obligation of a company towards its debenture holders is

similar to that of a borrower who promises to pay interest and principal at specified

times.

CORPORATE BONDS

Many types of companies issue corporate bonds in order to finance projects ranging

from building a new plant to modernizing at a current location. Risk and return vary,

depending on the financial strength of a corporation.

Bonds issued by corporations with lower credit quality generally pay a

higher rate of interest to compensate investors for the higher repayment risk; bonds

issued by corporations with excellent credit ratings and established profitability pay

lower interest due to the relatively low degree of risk. Depending on the issuing

company, these securities can vary widely in yield, maturity and credit quality.

STATE GOVERNMENT BONDS

Local governments issue state Government Bonds in order to finance a variety of

projects, ranging from water systems and public schools, to hospitals and police

protection. Since these bonds are unique in that the interest paid by the bond is

generally free from income tax, it is important to consider the equivalent taxable yield

(the rate of return on a taxable investment needs to match that of a tax-free

State Government Bonds investments). State Government Bonds are generally

considered to be relatively low risk investments, second only to securities issued by


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the government and its agencies. However, within State Government Bonds

themselves, there is a wide range of credit quality.

PUBLIC SECTOR BONDS

Two schemes have been introduced in recent years to enable central public sector

undertakings to issue bonds for raising long-term finance. The salient

features between the two schemes are as follows:

Scheme 1 Scheme 2

Maturity period 7-10 years 10 years

Interest rate 13 percent 9 percent

Tax benefits Exemption of interest

As per section 80L of

The Income Tax Act

Total exemption

Of interest

The similar features of the two schemes are:

1. The bonds are not guaranteed by the government of India

2. The bonds are exempt form wealth tax, like any other financial asset

3. There is no deduction of tax at source on the interest paid on these bonds

4. They are transferable by mere endorsement and delivery

5. Theres no stamp duty applicable on transfer

6. These bonds are traded on the stock exchanges. In addition SBI Capital

Markets and other institutions are ready to buy and sell with a small price

difference.


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7. There is a buy back scheme under which individuals holding bonds up to its

40,000 can sell them back to the company after a lock- in period of three

years.

SAVINGS CERTIFICATES

Issued by the post offices, savings certificates are a part of small savings schemes.

The important Savings Certificates are:

Indira Vikas Patra

Kisan Vikas Patra

GOVERNMENT SECURITIES

Debt securities issued by the central government, State government and quasi-

governmental agencies are referred to as government securities or gilt-edged

securities. Three types of instruments are issued:

An Investment that resembles a company debenture

It carries the name of the holder/s and is registered with the public debt office (PDO).

For transfer, it has to be lodged with the PDO along with a duly completed transfer

deed.

The PDO pays interest to the holders registered with it on the specified date of

payments.A promissory note, issued to the original holder, which contains a promise

by the president of India (or the governor of a state) to pay as per a given schedule.

It can be transferred to a buyer by an endorsement of the seller. The current holder

has to present the note to the government treasury (or a designated authorized

agency) to receive interest and other payments.A bearer security, where the interest and other payments are made to the holder of

the security.


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MONEY MARKET SECURITIES

A money market security is a debt instrument that has a very short maturity. The

common money market securities in India are treasury bills, commercial paper, and

certificates of deposit.

In many respects, most money market instruments are just short-term versions of

bonds. For example Treasury Bills (T-Bills), commercial paper, and certificates of

deposit are just three of the dozens of fixed-income investments that mature in one

year or less. While bonds are used primarily to receive a steady income, money

market instruments are used more like savings accounts. They generally preserve

your initial investment whilst generating a more modest level of income giving you

yields that are usually only slightly higher than interest rates offered by banks on

savings accounts. This type of investment has the lowest risk out of the three types

of investment described.

2.6 PORTFOLIO MANAGEMENT

The art and science of decisions about investment mix and policy, matching

investments to objectives, asset allocation for individuals and institutions, and

balancing risk vs. performance.

Portfolio management is all about strengths, weaknesses, opportunities and threats

in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and

numerous other trade-offs encountered in the attempt to maximize return at a given

appetite for risk.

The primary allocation methodology uses the precise statistical calculation approach

that has proven that a mix of uncorrelated investments can produce a more efficient

portfolio that has a high rate of return and less volatility (risk).

Applying these techniques allows Companies to provide continuous asset

management on a scientific and objective basis. This consistent approach avoids the

plight of most money managers who end up chasing the markets


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for short-term yields. These methods substantially increase the potential for

consistently higher returns and greatly reduce the risk of loss of capital and

purchasing power.

2.7 MUTUAL FUNDS

The competition among funds has led to the launch of newer products, tailor-made

to suit the requirements of investors. Mutual funds now offer products for the entire

range of needs of investors. The encouraging response to index funds and sector

funds shows the growing maturity among investors.

Open-end funds, which provide liquidity to investors at daily NAV related prices are

growing in popularity. The funds have been adopting technology to provide good

service to investors and with the proposed introduction of electronic funds transfer

and the growing trend towards E-Commerce; the efficiency of service will increase

even further.

In the coming years mutual funds as saving intermediaries will play a greater role in

bringing the gap between investors and issuers, especially in the area of equity

funds. At present these funds represents 13% of BSE market capitalization. This is

expected to go up with increasing flows into financial savings, especially the mutual

fund with the growth and stability in the capital market flows into equity funds are

expected to go up.

A Mutual Fund is a trust that pools the savings of a number of investors who share a

common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned

through these investments and the capital appreciation realized are shared by its

unit holders in proportion to the number of units owned by them. Thus a Mutual Fund

is the most suitable investment for the common man as it offers an opportunity to

invest in a diversified, professionally managed basket of securities at a relatively low

cost.

Mutual funds, also referred to as investment companies, offer an alternative

investment choice for individuals with a long-term horizon. The way they operate is


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that individual investor money are pooled and invested in many different companies.

Assets are professionally managed to meet various investment objectives. They

issue and sell shares to share holders and also redeem them (buy them back) upon

request. Prices of shares are set daily at the close of business, based on the value

of all investments in the mutual funds portfolio. Their major advantages are

diversification and professional management, which are not readily available to small

investors outside the mutual fund arena. Money market mutual funds are short-term

funds. They invest in short-term cash and cash equivalent instruments, such as

Treasury bills, certificates of deposit, and short-term notes. Mutual funds may own

stocks and bonds of many different companies.

A mutual fund is the ideal investment vehicle for todays complex and modern

financial scenario. Markets for equity shares, bonds and other fixed income

instruments, real estate, derivatives and other assets have become mature and

information driven. Price changes in these assets are driven by global events

occurring in faraway places. A typical individual is unlikely to have the knowledge,

skills, inclination and time to keep track of events, understand their implications and

act speedily. An individual also finds it difficult to keep track of ownership of his

assets, investments, brokerage dues and bank transactions etc.

History of Mutual Funds

In 1924 three Boston securities executives pooled their money together to create the

first mutual fund. The idea of pooling money together for investing purposes started

in Europe in the mid-1800s. The first pooled fund in the U.S was created in 1893 for

the faculty and staff of Harvard University on March 21st, 1924 the first official mutual

fund was born. It was called the Massachusetts Investors Trust.

However in India UTI was the first to introduce mutual funds in the Indian markets

and it commenced its operations from July 1964, Government allowed public sectorbanks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed.

The objectives of SEBI are to protect the interest of investors in securities and to

promote the development of and to regulate the securities market.


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As far as mutual funds are concerned, SEBI formulates policies and regulates the

mutual funds to protect the interest of the investors. SEBI notified regulations for the

mutual funds in1993. Thereafter, mutual funds sponsored by private sector entities

were allowed to enter the capital market. The regulations were fully revised in 1996

and have been amended thereafter from time to time. SEBI has also issued

guidelines to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities

including those promoted by foreign entities are governed by the same set of

Regulations. There is no distinction in regulatory requirements for these mutual

funds and all are subject to monitoring and inspections by SEBI. The risks

associated with the schemes launched by the mutual funds sponsored

by these entities are of similar type. It may be mentioned here that Unit Trust of India

(UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002.

The end of millennium marks 36 years of existence of mutual funds in our country.

The ride through these 36 years is not been smooth. Investor opinion is still divided.

While some are for mutual funds others are against it.

Benefits of Mutual Fund Investment

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.

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


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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.

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.

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.

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.

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.

Transparency

You 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 managers investment strategy and outlook.

FlexibilityThrough 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.

Affordability


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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.

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.

Advantages of mutual funds include:

Diversification of risk,

Professional management Different investment options and ability to purchase a large selection of

investments at a modest cost.

Their large size permits them to buy larger volumes of stocks at a discount

The investor can be a part owner of many different companies even with a

modest investment

Disadvantages of mutual funds include:

Inability to make ones own decisions No guarantee that the professional managers will provide anticipated results

Investment company managers can switch styles of investing, even while

adhering to the objectives and policy agreed upon by the mutual fund. This

makes it difficult for the investor to keep track of the investments owned by

the fund and the activity of fund managers.

Past performance, a highly reported indicator is just that, one of many

indicators; it is no guarantee for future performance. Careful scrutiny iswarranted when reading a funds advertisement about past stellar

performance.

Risk Involved in Mutual Funds


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All investments involve some form of risk, which should be evaluated them potential

rewards when an investment is selected.

Managing risk

At times the prices or yields of all the securities in a particular market rise or fall due

to broad outside influences. When this happens, the stock prices of both an

outstanding, highly profitable company and a fledgling corporation may be affected.

This change in price is due to market risk.

Interest rate risk

Sometimes referred to as loss of purchasing power. Whenever inflation sprints

forward faster than the earnings on your investment, you run the risk that you will

actually be able to buy less, not more. Inflation risk also occurs when prices rise

faster than your returns.

Credit risk

In short, how stable is the company or entity to which you lend your money when

you invest? How certain are you that it will be able to pay the interest you are

promised, or repay your principal when the investment matures?

Inflation risk

Changing interest rates affect both equities and bonds in many ways. Investors are

reminded that predicting which way rates will go is rarely successful. A diversified

portfolio can help in offsetting these changes.

Effect of loss of key professional and inability to adopt

An industries key asset is often the personnel who run the business i.e. intellectualproperties of the key employees of the respective companies. Given the ever-

changing complexion of few industries and the high obsolescence levels, availability

of qualified, trained and motivated personnel is very critical for the success of

industries in few sectors. It is, therefore, necessary to attract key personnel and also

to retain them to meet the changing environment and challenges the sector offers.


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Failure or inability to attract/retain such qualified key personnel may impact the

prospects of the companies in the particular sector in which the fund invests.

Exchange risks

A number of companies generate revenues in foreign currencies and may have

investments or expenses also denominated in foreign currencies. Changes in

exchange rates may, therefore, have a positive or negative impact on companies

which in turn would have an effect on the investment of the fund.

Investment risks

The sectoral fund schemes, investments will be predominantly in equities of select

companies in the particular sectors. Accordingly, the NAV of the schemes are linked

to the equity performance of such companies and may be more volatile than a more

diversified portfolio of equities.

Changes in government policy

Changes in Government policy especially in regard to the tax benefits may impact

the business prospects of the companies leading to an impact on the investments

made by the fund.

Types of Mutual Funds

Mutual fund schemes may be classified on the basis of its structure and its

investment objectives.

1.By Structure:

Open-ended Funds


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An open-end fund is one that is available for subscription all through the year. These

do not have a fixed maturity. Investors can conveniently buy and sell units at Net

Asset Value (NAV) related prices.

The key feature of open-end schemes is liquidity.

Closed-ended Funds

A closed-end fund has a stipulated maturity period which generally ranging from 3 to

15 years. The fund is open for subscription only during a specified period. Investors

can invest in the scheme at the time of the initial public issue and thereafter they can

buy or sell the units of the scheme on the stock exchanges where they are listed. In

order to provide an exit route to the investors, some close-ended funds give an

option of selling back the units to the Mutual Fund through periodic repurchase at

NAV related prices. SEBI regulations stipulate that at least one of the two exit routes

is provided to the investor.

Interval Funds

Interval funds combine the features of open-ended and close-ended schemes. They

are open for sale or redemption during pre-determined intervals at NAV related

prices.

1. By Investment Objective: Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long-

term. Such schemes normally invest a majority of their corpus in equities. It has

been proven that returns from stocks, have outperformed most other kind of


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investments held over the long term. Growth schemes are ideal for investors having

a long-term outlook seeking growth over a period of time.

Income Funds

The aim of income funds is to provide regular and steady income to investors. Such

schemes generally invest in fixed income securities such as bonds, corporate

debentures and Government securities. Income Funds are ideal for capital stability

and regular income.

Balanced Funds

The aim of balanced funds is to provide both growth and regular income. Such

schemes periodically distribute a part of their earning and invest both in equities 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. These are ideal for investors looking for a combination

of income and moderate growth.

Money Market Funds

The aim of money market funds is 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. These are ideal for Corporate and individual

investors as a means to part their surplus funds for short periods.

Load Funds

A Load Fund is one that charges a commission for entry or exit. That is, each time

you buy or sell units in the fund, a commission will be payable. Typically

entry and exit loads range from 1% to 2%. It could be worth paying the load, if the

fund has a good performance history.

No-Load Funds


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A No-Load Fund is one that does not charge a commission for entry or exit. That is,

no commission is payable on purchase or sale of units in the fund. The advantage of

a no load fund is that the entire corpus is put to work.

2. Other Schemes:

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the

Indian Income Tax laws as the Government offers tax incentives for investment in

specified avenues. Investments made in Equity Linked Savings Schemes and

Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The

Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB

by investing in Mutual Funds, provided the capital asset has been sold prior to April

1, 2000 and the amount is invested before September 30, 2000.

3. Special Schemes

Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer

document. The investment of these funds is limited to specific industries like

InfoTech, Fast moving consumer goods Pharmaceuticals etc.

Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the

BSE Sensex or the NSE 50.

Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or a group

of industries or various segments such as A Group shares or initial public offerings.

2.8 RISKS AND RETURN

Investors interest in investments is largely pecuniary to earn a return on their

money. However, selecting stocks exclusively on the basis of maximization of

returns is not enough.


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The fact that most investors do not place available funds into the one, two or even

three stocks promising the greatest returns suggests that other factors must be

considered besides returns in the selection process. Investors not only like returns

but they also dislike risk. Their holding of an assortment of securities attests to that

fact.

To say that investors like returns and dislike risk is however, simplistic. Before we

can analyze securities and portfolios within a risk return context, we must begin

with a clear understanding of the meaning of both, risk and return, what creates

them and how they should be measured.

The ultimate decisions to be made in investments are:

What mutual funds should be held?

How much to allocate to each.

Security analysis and portfolio management is built around the idea that investors

are concerned with two principal properties inherent in securities: the return that can

be expected from holding a security, and the risk that the return that is achieved will

be less than the return that was expected. Investors want to maximize expected

returns subject to their tolerance for risk.

The level of risk you are willing to take typically determines the funds you decide to

invest in. Mutual funds offer 3 levels of risk - low, medium and high. In general, the

higher the risk, the greater the potential gain or loss. As a result, unit prices for high-

risk mutual funds fluctuate far more widely than for lower risk funds. People who are

more cautious would tend to purchase lower risk funds, while more aggressive

investors tend to purchase higher risk units. One method of investment that many

people like to use is diversification - that is, buying a variety of funds across the

various risk levels. As a result, they will never totally

miss out on major market gains, and their losses will be less than if they invested

only in high risk funds. Depending on how quickly you want to build your capital, you

can choose from a number of investment styles, ranging from conservative to

aggressive.


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2.9 BUDGET HIGHLIGHTS

Distribution tax on dividends abolished

Dividends will be taxable in the hands of the investor

Section 80M provides benefits to mutual funds

Dividends on equity to be charged tax at 10% for the year 2002 to 2003.

Dividends on the debt funds to be clubbed in the individual income

SEBI to be given more powers

Penalty on capital markets offenses increased to Rs. 25 crores or thrice the

gains, which ever is higher.


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CHAPTER 3

REVIEW OF LITERATURE


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LITERATURE REVIEW

Literature review is the beginning of the primary data collection. It acts as a

gateway to the familiarity exercise by getting exposed to the study field in details.

Literature review included texts, databases, internet, journals and dailies.

3.1 PURPOSE

The purpose of literature review is innumerable in research work. Specific

need for references and citations makes secondary data quite valid. Literature

review forms the integral part of larger research. Secondary data forms the sole

basis for research in some instances. Above all, secondary data has proven to be

less costly, readily available, less time consuming and less effort required comparedto primary data.

Literature reviews provides support to validate secondary data hence

complementing the field data conclusion. It has also been observed that secondary

data gives insight into the research details. It is mandatory to examine secondary

data as a prerequisite for accuracy and relevance for primary data and subsequent

analysis.

Document Review

This report has been supplemented by observational fieldwork and

interviewing with and gathering and analyzing documentary material. These kinds of

documents are a useful source of information on program activities and processes,

and they can generate ideas for questions that can be pursued through observation

and interviewing.


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3.2 METHODOLOGY FOR LITERATURE REVIEW

Literature review heavily relied on published materials like journals,

newspaper articles; magazines and write-ups of Current issues on the internet

concerning inventory management were constantly reviewed. Dailies and journalswere visited from time to time as articles appeared in the newspapers and

magazines. Methodology is the concept of methods used in conducting the study.

The methodology used for data collection is mainly through primary and secondary

data.

The secondary data is collected in the form of Balance sheets, Profit & Loss

accounts and Financial Statements from the annual reports published by the

company and other records, documents, journals, facts and figures of the company.

3.3 CONCLUSION

The collection of data depends on the nature of particular problem and on the

time and resources available. It also depends upon the ability and the experience of

the researcher. Secondary data may be either published data or unpublished data.

The researcher before using the secondary data must see that the data is reliable,

suitable and adequate.


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CHAPTER 4

METHODOLOGY


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4.1 RESEARCH DESIGN

The research design includes an outline of the study. The research design contains

information stating the objectives of the study, meaning of mutual funds, samplesize, and techniques used for data collection, tools used to analyze data, limitations

of the study and the chapter overview of the project.

In India, the only mutual fund operating for a long time since 1964 was the UTI. It

was a public sector undertaking enjoying the monopoly position and some unique

tax benefits such as exemption from income tax of its entire income. During the

1960s, government wanted to mobilize huge sums from the public. Thus this gave

rise to mutual funds. Contribution towards the mutual funds was only from the high

net worth individuals and the other individuals were not contributing. Overall the

investors were not actively participating in the stock market mainly because of lack

of knowledge. To fill the gap between mobilization of huge sums to the government

as well as to increase the knowledge of the investors in relation to risk and return,

mutual funds were created. Until 1991, the private mutual funds were not

encouraged. But after privatization, which brought about changes in the economic

policies and the reforms, it has caught the imagination of financial community and is

in a growing stage. These funds mainly cater to the individual investors and small

savers. It was thrown open to the private sector and the foreign sector in 1992-93.

Thus mutual funds were liberated and this gave rise to competition between the

various players offering mutual funds. This gave rise to the various schemes of

mutual funds.

Throughout life, one may experience many changes, such as marriage, having

children, buying a home, financing college education, and even caring for ageing

parents. All of these situations can put a dent in ones finances. Thats why itsimportant to set goals and follow a financial plan.

With liberalization and opening of the global markets countries like India have made

rapid advancements in the fields of finance. A country that was used to plain vanilla

products like Fixed Deposits, PPFs, NSS and LIC as investment


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avenues suddenly saw a plethora of complex financial products storming the Indian

market and mentality. People now have a wide range of choices to exercise when it

came to investments. The only aspect, which did suffer, was that of awareness of

these products.

The company responsive to customer expectation places a strong emphasis on

existing emergency and latent needs. A strong orientation towards personalized

value service has made a force to reckon with.

The entire process of portfolio management is triggered by clearly articulating the

clients risk return profile and his investment objectives. Such an investment

objective is then suitably qualified by constraint such as liquidity needs and

investments time horizon to determine the information in proprietary in-house an

external database to identify various mutual funds and to arrive at an optimum

portfolio.

4.2 STATEMENT OF PROBLEM

Investors are not aware about mutual funds, which are the higher return investment

option because of the enormous flow of foreign exchange investment avenues in the

country. Another problem is in meeting the requirements of investors belonging to

different profiles while investing in mutual funds so that there is maximum return at

optimal risk and proper resource allocation.

Hence, the criteria are to develop a mutual fund portfolio, which ensures satisfaction

to an investor.

4.3 OBJECTIVES OF THE STUDY

1. To study the array of investment products available in the market and

evaluate the performance of various mutual funds.

2. To ascertain the various investment goals of various investors.

3. To device a standardized portfolio for the investors keeping in mind their

investment capacities.


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4.4 SCOPE OF THE STUDY

The study is focused primarily at Bangalore and in potential individual

investors. This study seeks to explain a practical approach tomutual fund investments and portfolio management. It would

serve as a guide for Investment Advisors in advising investors

regarding the Mutual Fund Investments, the returns they

would fetch for the risk a client is willing to take.

4.5 METHODOLOGY OF RESEARCH

The type of research used in the study is primary analytical research design.

Survey method of data collection was adopted.

The research instrument used for collection of primary data was a questionnaire.

The secondary data was obtained from various company journals, annual reports,

books from the library and websites.

4.6 SAMPLING TECHNIQUE

Since the size of the investors was large, sampling was adopted. Cluster random

sampling was adopted and further, convenience random sampling was adopted to

conduct the research. Depending on the availability of respondents, the sample was

selected.

SAMPLE SIZE

A sample of 100 was targeted for the study. The sample consists of individual

investors classified as:

High Net worth individuals with an annual income of Rs. 600000 and above.

Medium Net worth Individuals with an annual income of Rs.300000 - Rs.600000.

Low Net worth Individuals with an annual income less than Rs.300000.


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4.7 SOURCES, TOOLS AND TECHNIQUES OF DATA

COLLECTIONData was collected from both primary and secondary sources.

Primary Data

An interview schedule that is a questionnaire was designed, pre-tested and

administrated on the individual potential investors.

Secondary Data

It is collected from a wide array of research papers, capital market, finance journals,

various websites and companys database.

TOOLS OF DATA COLLECTION

Purpose based questionnaire have been designed seeking relevant information.

Furthermore, past history of investors and market watch is also used. Data has also

been collected through specific search engines over the Internet.

4.8 PLAN OF ANALYSIS

All data collected was carefully classified, tabulated and interpreted on the basis of

which, tables, charts and graphs were drawn up. Percentages were drawn from the

tabulated frequencies and the data have been analyzed. The analysis helped in

drawing inferences and for better understanding graphs were plotted.


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4.9 OPERATIONAL DEFINITION OF CONCEPTS

Portfolio

A collection of investment all owned by the same individual or organization.

Mutual Fund

A fund operated by an investment company, which raises money from shareholders

and invests in a group of assets, in accordance with a stated set of objectives.

Benefits include diversification and professional money management.

Fund manager

A person who manages a mutual fund scheme.

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities.

The per unit NAV is the net asset value of the scheme divided by the number of

units outstanding on the Valuation Date.

Diversification

When one invests in the mutual fund, he instantly spreads his risk over a number ofdifferent companies. He can also diversify over several different kinds of securities

by investing in different mutual funds, further reducing the potential risk.

Diversification is a basic risk management tool that will be used in the portfolio to

meet changing needs and goals. Based on their objectives schemes have been

clubbed together in categories. These are broad market classifications and help

investors narrow down their search for a scheme. After short-listing schemes by their

common objectives one can further look into each scheme for more specific

differences in their objectives.

Investment

An item of value purchased for income or capital appreciation.

Composition

The break down of portfolio by investment type.


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4.10 LIMITATIONS

Most quantum algorithms deal in probabilities rather than absolutes.

The portfolio mix is highly dependent on a number of external factors that are

very volatile in nature, such as market movement for instance. This might

reduce the certainty of gain to an extent.

Free, continuous and reliable information is not always available.

Hence, availability of information or the lack of it is a serious constraint.

Besides, information could also be misleading, thus leading to an undesirable

impact as a result of such information based decision-making. The sample size consists of 100 clients. Being a small sample size,

generalization arrived at is not 100% accurate.

The study is restricted only to Bangalore City.


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CHAPTER 4

DATA ANALYSIS AND

INTERPRETATION


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The study was conducted to develop a mutual fund portfolio, which ensures

satisfaction to an investor. The study was based on the following objectives.

a. To study the array of investment products available in the market and

evaluate the performance of various mutual funds.

b. To ascertain the various investment goals of investors.

c. To device a standardized portfolio for the investors keeping in mind their

investment capacities.

All of the three objectives of the study are dealt with in detail in this chapter. The

data, which was collected by administrating questionnaires to potential investors ofdiversified profiles, was carefully tabulated. On the basis of the data analysis and

inferences is drawn. Charts, graphs and diagrams support the analysis wherever

necessary.

I. To study the array of investment products available in the market

GRAPH 1:CHART SHOWING THE PERFORMANCE OF

VARIOUS INSTRUMENTS

9.19%7.62%

9.74%

14.47%

20.16%

Inflation Gold BankFD CO.FD Equities

%R

ETUR

1

20 Year CAGR

Source RBI reports (1997-98) and BSE sensitive index of equity prices BSE


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OBSERVATIONS

As inflation grew at a rate of 9.19%, Gold has shown a growth rate of 7.62%.

Bank fixed deposits have risen at a rate of 9.74% while Company fixed deposits

have shown a growth rate of 14.47%. However, equity investments have

emerged with a growth rate of 20.16%.

TABLE 1: TABLE SHOWING THE % GROWTH RATE OF RETURN OF

MUTUAL FUNDS

Zurich Equity Fund 3 year SIP 5 year SIP 7 year SIP

Total Money Invested 3,700,000.00 6,100,000.00 8,500,000.00

Value of Investment 5,020,228.20 10,448,972.76 20,364,198.88

IRR - % 18.57 19.45 21.89

Franklin Blue-chip Fund 3 year SIP 5 year SIP 7 year SIP

Total Money Invested 3,700,000.00 6,100,000.00 8,500,000.00

Value of Investment 4,486,327.20 9,448,229.53 14,151,427.17

IRR - % 11.88 16.00 13.29

Source: Cholamandalam Investment and Finance Limited

ANALYSIS:

The above table indicates the rate of returns the investor can derive from his

investments in mutual fund. It shows that the investor can get up to 21.89% from an

equity or growth fund and as much as 13.29% in a blue-chip fund. Considered as the

safest of all options, banks have been the roots of the financial systems in


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India. The two main modes of investment in banks, savings accounts and fixed

deposits have been effectively used by one and all. However, today the interest rate

structure in the country is headed southwards, keeping in line with global trends.

With the banks offering little above 9 percent in their fixed deposits for one year, the

yields have come down substantially in recent times. Add to this, the inflationary

pressures in economy and you have a position where the savings are not earning.

Another oft-used route to invest has been the fixed deposit schemes floated by

companies. Companies have used fixed deposit schemes as a means of mobilizing

funds for their operations and have paid interest on them. The safer a company is

rated, the lesser the return offered has been the thumb rule. However, there are

several potential roadblocks in these. First of all, the danger of financial position of

the company not being understood by the investor lurks. The investors rely on

intermediaries who more often than not, dont reveal the entire truth. Secondly,

liquidity is a major problem with the amount being received months after the due

dates. Premature redemption is generally not entertained without cuts in the returns

offered and though they present a reasonable option to counter interest rate risk

(especially when the economy is headed for a low interest regime), the safety of

principal amount has been found lacking. Stock markets provide an option to investin a high risk, high return game. While the potential return is much more than 10-11

percent any of the options discussed above can generally generate, the risk is

undoubtedly of the highest order. But then, the general principle of encountering

greater risks and uncertainty when one seeks higher returns holds true. However, as

enticing as it might appear, people generally are clueless as to how thestock market

functions and in the process canendanger the hard-earned money.

INFERENCE

For those who are not adept at understanding the stock market, the task of

generating superior returns at similar levels of risk is arduous to say the least. This is

where Mutual Funds come into picture, which gives a higher rate of


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return, which extends from 13% onwards. Thus mutual funds give better rate of

returns compared to various other financial instruments.

TABLE 2: TABLE SHOWING THE COMPARISON BETWEEN BANKS VS

MUTUAL FUNDS AS AN INVESTMENT AVENUE

BASES BANKS MUTUAL FUNDS

Returns Low Better

Administrative Expenses High Low

Risk Low Moderate

Investment Options Less More

Network High Penetration Low but improving

Liquidity At a cost Better

Quality of Assets Not transparent Transparent

Interest Calculation Minimum Balance

between 10th and 30th of

every month

Every day

Guarantee Maximum Rs.1 lakh on

deposits

None

Source: Prudential ICICI Ltd

ANALYSIS

The above table clearly indicates the demarcation between the investments in banksand mutual funds. It can be inferred that mutual fund proves to be a better

investment avenue because of its better returns and liquidity and the transparency in

the quality of assets.

INFERENCE


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Banks have been the roots of the financial system in India. However, today, the

interest rate structure in the country is headed southwards, keeping in line with

global trends. With the banks offering little above 9% in their fixed deposits for 1

year, the yields have come down substantially in recent times. Add to this, the

inflationary pressure in economy have reduced the earnings on savings. Thus

mutual funds come into the picture, which gives a higher rate of return, which

extends from 13% onwards. This proves that mutual fund is a brighter and a more

attractive investment avenue for an investor.

EVALUATION OF THE PERFORMANCE OF THE VARIOUS MUTUAL FUNDS

TABLE 3: TABLE SHOWING THE FUND MONITOR

Funds with at least a 24-month track record have been ranked on the basis of

Sharpe ratio. Sharpe ratio measure is the ratio of the risk premium and the

standard deviation of the returns. The NAV growth is the growth from the date

of inception till 9th May 2004.

Source: HSBC Financial Planning Services


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LIQUID FUNDS

NAV ON 9TH

MAY 2004

(INR)

ABSOLUTE RETURNS (%)

(CAGR)FUND DATE

OF

INCEPTI

ONGROW

TH

DIVIDE

ND

24

MONTH

S

12

MONTH

S

6

MONT

H

1

MONT

H

RANKIN

GS

BASED

ON

SHARPE

RATIO

Alliance

cash

manag

er

18-05-98 14.92 10.00 7.18 6.54 2.97 0.44 1

Zurich

India

liquidity

fund

17-11-99 12.61 10.64 7.34 6.73 3.07 0.47 2

Temple

ton

India

treasur

y mgmt

A/C

30-04-981514.4

31245.20 7.48 6.77 2.96 0.45 3


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The aim of the Liquid Fund is to provide preservation of capital and moderate

income. The above table indicates the returns a person would get when they part

their surplus funds for short periods. The above table shows the top 3 Liquid Funds

and an investor has got the best growth up to 14.92 (INR) on the NAV of liquid fund.

BALANCED FUND

NAV ON 9TH MAY

2004 (INR)


(CAGR)FUND

DATE OF

INCEPTI

ON GROWT

H

DIVIDEN

D24

MON

TH

12

MON

TH

6

MON

TH

1

MON

TH

RANKIN

GS

BASED

ON

SHARPE

RATIO

Allianc

e 95

fund

27-03-95 47.58 26.37 5.03 -4.03 10.04 -0.92 1

Prudential

ICICI

11-11-99 9.73 8.99 5.88 0.21 9.33 -0.10 2

Birla

balanc

e fund

1-11-99 9.06 9.06 3.00 -0.98 12.69 0.22 3

The Balance Fund provides both growth and regular income. The above table shows

the top 3 Balanced Funds and that an investor has got a best growth of up to 47.58

INR on NAV of balanced fund.

EQUITY OR GROWTH FUNDS


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NAV ON 9TH MAY

2004 (INR)


(CAGR)FUND DATE

OF

INCEPTI

ONGROWT

H

DIVIDEN

D24

MON

TH

12

MON

TH

6

MON

TH

1

MON

TH

RANKIN

GS

BASEDON

SHARPE

RATIO

Zurich

(I)

EquityFund

23-12-94 23.97 13.10 16.34 1.78 20.27 1.52 1

Zurich

(I) top

200

Fund

4-09-96 17.97 12.25 12.06 4.17 17.76 3.10 2

Frankli

n IndiaPrima

Plus

13-12-94 23.95 13.06 8.54 -1.28 13.61 1.44 3

Equity Fund is suitable for investors to get capital appreciation over the medium to

long term. It is ideal for investors having a long-term outlook seeking growth over a

period of time. The Franklin India Prima Plus has shown a negative absolute return

for 12 months-this means that there would be a high rise only after 24 months. Theabove table shows the top 3 funds where an investor has got a growth up to 23.97

(INR) on NAV of equity or growth funds.


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SECTOR FUNDS

NAV ON 9TH

MAY

2004 (INR)


(CAGR)FUND

DATE

OF

INCEPTI

ON GROWT

H

DIVIDEN

D

24

MON

TH

12

MON

TH

6

MON

TH

1

MON

TH

Alliance

Basic

Industrie

s Fund

25-02-00 13.07 13.06 25.19 19.69 33.91 6.17

Alliance

Buy India

Fund

25-02-00 4.30 4.30 -5.94-

23.89-6.52 -0.49

Alliance

New

Millenniu

m Fund

25-02-00 3.63 3.62-

12.61

-

29.84-3.21 -6.46

The above table indicates that an investor has got a growth up to 13.07 (INR) on

NAV of sector funds.

Sharpe ratio is not available for Sector Fund Category during the particular period.

INCOME FUNDS


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NAV ON 9TH MAY

2004 (INR)


(CAGR)FUND

DATE OF

INCEPTI

ON GROWT

H

DIVIDEN

D24

MON

TH

12

MON

TH

6

MON

TH

1

MON

TH

RANKIN

GS

BASEDON

SHARPE

RATIO

Allianc

e

IncomeFund

26-03-97 21.55 10.65 14.76 13.22 5.70 0.62 1

Zurich

(I) High

Interes

t Fund

19-05-97 21.58 11.54 15.13 13.87 5.91 0.67 2

Birla

IncomePlus

10-11-95 26.33 10.63 15.22 14.12 6.27 0.76 3

The aim of the income fund is to provide regular and steady income to investors.

The above table shows the top Mutual Funds and indicates an investor has got a

growth up to 21.55 (INR) on NAV of Income Funds.

ANALYSIS:


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The above tables clearly indicate that the rate of return from the mutual funds is

higher when compared to the other investment options. Thus this clearly shows that

mutual funds are a better investment avenue to trade off between risk and return.

II. To study the Financial Goals of the Investors

TABLE 4: TABLE SHOWING CLASSIFICATION OF INVESTORS BASED ON

AGE GROUP

AGE (YEARS) NO. OF RESPONDENTS

PERCENTAGE

Below 25 ---------- -----------

25-30 20 20

30-35 22 22

35-40 12 12

40-45 14 14

45-50 20 20

50 and above 12 12

Total 100 100

GRAPH 2: CHART SHOWING THE INVESTORSCLASSIFICATION BASED ON AGE

0

2022

1214

20

12

0

5

10

15

20

25

Below

25

25-30 30-35 35-40 40-45 45-50 50 and

above

Age(years)

No

ofinvestors


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ANALYSIS:

The above table indicates that there are no investors below the age group of 25

years. 20% of the investors belong to the age group of 25 - 30 years and 20% of the

investors also belong to the age group of 45-50 years.22% of the investors belong to

the age group of 30-35 years. The remaining percentage of investors lies in the age

group of 35-45 years and 50years and above.

INFERENCE:

Age is one of the important demographic characteristics that influence the

investment habits. It can be inferred that people in the age group of 30-35 years are

keen investors. It is also shown that disposable income is there even in the age

group of 45-50 and 25-30 years. So this age group can also be taken as potential

investors.

TABLE 5: TABLE SHOWING THE ANNUAL INCOME OF INVESTORS


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ANNUAL INCOME (RS.) NO OF RESPONDENTS PERCENTAGES

LESS THAN 300000 20 20

300000-600000 42 42

600000 & ABOVE 38 38

TOTAL 100 100

ANALYSIS

The above table shows that out of 100 respondents, 20% belong to the income

category of less than Rs.300000, 42% of the investors belong to the income

category of Rs.300000-Rs.600000 and the remaining 38% of the investors belong to

the income category of Rs.600000.

INFERENCE

GRAPH 3: CHART SHOWING THE ANNUAL INCOME

OF INVESTORS

20

42

38

LESS THAN

300000

300000-600000

600000 & ABOVE

AnnualIncom

No of Investors


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From the above table, one can infer that the investors lie in the income category of

Rs.300000 and above. This shows that the potential investors belong to the medium

and high net worth category that are willing to invest and get returns at minimal

levels of risk.

TABLE 6: TABLE SHOWING THE RELATIONSHIP BETWEEN THE INVESTORS

AGE AND INCOME

AGE

(YRS)

INCOME

(RS)

BELOW25

(%)

25-30

(%)

30-35

(%)

35-40

(%)

40-45

(%)

45-50

(%)

50 &ABOVE

(%)

LESS

THAN

300000

0 4 7 3 2 3 1

300000-

6000000 11 12 3 8 6 2

600000 &

ABOVE0 5 3 6 4 11 9

GRAPH 4: CHART SHOWING THE RELATIONSHIP BETWEEN

THE INVESTORS AGE AND ANNUAL INCOME

0%

20%

40%

60%

80%

100%

BELOW

25

30-35 40-45 50 &

ABOVE

Age of Investors

AnnualIncome

600000 & ABOVE

300000-600000

LESS THAN 300000


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ANALYSIS

The above table shows that most of the investors lie in the annual income category

of Rs.300000 and above. It also shows that most of the investors lie in the age

category of 30-35 years followed by 25-30 and 45-50 years.

INFERENCE

From the above table, we can infer that any investor having an income of above

Rs.300000 will make investments according to his financial goals and in accordance

with his age. An investor would make an income based on the risk factor (risk = 100-

Age). It shows that most of the investors would basically invest at the age above 30

years.


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TABLE 7: TABLE SHOWING THE DECISION VARIABLES THAT GOVERN

INVESTMENTS

DECISION VARIABLES NO OF RESPONDENTS PERCENTAGES

Safety of principle 53 53

Beat inflation 10 10

Earn high returns at high

risks 7 7

Fixed rate of return frominvestment 15 15

Liquidity 15 15

Total 100 100

GRAPH 5: CHART SHOWING THE DECISION

VARIABLES THAT GOVERN INVESTMENTS

53

10

7

15

15

Safety of principle

Beat inflation

Earn high returns at

high risks

Fixed rate of return

from investment

Liquidity

Decision

Variables

No of respondents


60/136

ANALYSIS:

The above table shows that out of 100 respondents, 53% believe that their

investments should be 100% safe, 25% want fixed rate of return from investments,

15% want their investments in the form of liquidity and the remaining want

investments that can beat inflation and earn high returns at high risks.

INFERENCE:

The above figures help us to come to the conclusion that majority of the Indian

investors are not ready to take high risk. They would rather ensure that their

investments are 100% safe than make investments that earn higher than the

inflation rate. In fact this is the reason why people prefer to invest in fixed and public

deposits.

TABLE 8: TABLE SHOWING INVESTORS PREFERENCE PRIOR TO INVESTING

OPTIONS NO OF RESPONDENTS PERCENTAGES

Evaluate investment options 38 38

Based decisions on friendly advice 21 21

Rely on advisor 41 41

Total 100 100


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ANALYSIS:

The above table shows that out of 100 respondents 38% evaluate investment

options, 21% invest based on friendly advice and 41% invest in accordance with the

advisor.

INFERENCE:

The above figures clearly show that most of the investors prefer to invest relying on

the advisors because the advisor has the latest information relating to the risk and

return which ensures an optimum investment portfolio relating to mutual funds.

38

21

41

Evaluate

investment

options

Based

decisions on

friendly

advice

Rely on

advisor

Options

GRAPH 6:CHART SHOWING INVESTORS PREFERENCE PRIOR

TO INVESTING

No of

Respondents


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TABLE 9: TABLE SHOWING THE LOCK-IN-PERIOD OF THE FUNDS INVESTED

LOCK-IN-PERIOD NO OF RESPONDENTS PERCENTAGES

Up to 2 years 37 37

2-5 years 36 36

6 years and above 27 27

Total 100 100

GRAPH 7:CHART SHOWING THE LOCK-IN-PERIOD OF

FUNDS INVESTED

37%

36%

27%

2-5 Years

Upto 2 Years

6 Years and above

ANALYSIS:


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The table above gives the time period that the investors like to stay invested. 37%

wanted to invest for less than 2 years, 36% wanted to stay invested for 2-5 years

and 27% wanted to make investments for a period of over 6 years.

INFERENCE:

The time frame within which the investors want to stay invested helps to create a

portfolio for them. Those who want to invest for less than 2 years invest in debt

funds while others can invest in equity-based funds, which include sector specific

funds, balanced funds and thus ensuring tax benefits.

TABLE 10: TABLE SHOWING THE PERCENTAGE OF MONTHLY INCOME THAT

CAN BE INVESTED

Percentage of monthly

income that can be

invested

Number of respondents Percentages

Less than 10% 28 28

10% - 25% 44 44

25% - 40% 18 18

40% and above 10 10

Total 100 100


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GRAPH 8: CHART SHOWING THE PERCENTAGE OF MONTHLY

INCOME THAT CAN BE INVESTED BY POTENTIAL INVESTORS

28%

44%

18%

10%

Less than 10%

10%-25%

25%-40%

40% & above


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ANALYSIS:

The table shows that out of 100 respondents, 44% would like to invest any amount

between 10%-25% of their monthly income, 28% would like to invest less than 10%

while the balance 28% want to invest in more than 25%.

INFERENCE:

The fact that more respondents would like to invest between 10-25% of their monthly

income goes to show that they want to generate income through investments, which

they can use on a later date. These investors can avail the systematic investment

schemes, which allow them to make installment payments.

TABLE 11: TABLE SHOWING THE RELATIONSHIP BETWEEN AGE AND %

MONTHLY INCOME INVESTED

MONTHLY

INCOME

INVESTED

AGE (YEARS)

LESS

THAN 10%

(%)

10%-25%

(%)

25%-40%

(%)

40% AND

ABOVE

(%)

Less than 25 0 0 0 0

25-30 6 8 6 0

30-35 10 7 3 2

35-40 0 8 1 2

40-45 4 7 2 1

45-50 4 7 4 5

50 and above 4 6 2 0


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GRAPH 9: CHART SHOWING THE RELATIONSHIP BETWEEN THE AGE

AND % MONTHLY INCOME INVESTED

Less

than 25

30-35 40-45 50 and

above

Age in Years

MonthlyIncome

Invested

LESS THAN 10%

10%-25%

25%-40%

40% AND ABOVE

ANALYSIS:

The above table indicates that there are more number of investors within the age

group of 25-30 and 30-35 years. It also shows that there is more investment in the

monthly income investment category of less than 10% and 10-25%.

INFERENCE:

The above figure shows that the maximum number of investors is in the age group

of 25-35 years. This shows that monthly income invested is inversely proportional to

age. More number of investors would like to invest 10-25% of their monthly income

rather than make an investment 25% and above.


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TABLE 12: TABLE SHOWING THE RELATIONSHIP BETWEEN INCOME OF

INVESTORS AND THEIR % MONTHLY INVESTMENT.

MONTHLY

INCOME

INVESTED

INCOME (Rs)

LESS THAN

10%

(%)

10%-25%

(%)

25%-40%

(%)

40% AND

ABOVE

(%)

Less than 300000 8 10 2 0

300000-600000 15 20 7 0

600000 and

above

5 14 9 10

8

15

5

10

20

14

2

79

0 0

10

LESS

THAN 10%

10%-25% 25%-40% 40% AND

ABOVE

Income of Investors

GRAPH 10: CHART SHOWING THE RELATIONSHIP BETWEEN THE

INCOME OF INVESTORS AND THEIR MONTHLY INVESTMENT

INCOME (Rs)

Less than 300000

300000-600000

600000-900000

Monthly

Investment


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ANALYSIS:

The above table indicates that out of 100 respondents 42% of them earn 300000-

600000 per annum, 38% earn 600000-900000 and 20% earn less than 300000. It

also indicates that 44% of the respondents would like to invest 10-25% of their

monthly income and 28% would like to invest less than 10% of their monthly income.

The remaining 28% of the respondents would like to invest 25% and above.

INFERENCE:

From the above table, we can infer that a rise in income increases the percentage of

monthly income that can be invested but Indian investors would rather prefer to

invest mostly 10-25% of their monthly income.

TABLE 13: TABLE SHOWING THE VOLATILITY LEVEL OF INVESTORS


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RISK LEVEL NO OF

RESPONDENTS

PERCENTAGES

Minimal 36 36

Some 42 42

Moderate 18 18

Considerate/substantial 4 4

Total 100 100

GRAPH 11: CHART SHOWING THE RISK LEVEL OF

INVESTORS

3642

18

4

Minimal

Some

Moderate

Considerate/s

ubstantial

Risk Level

Noo

fRespondents

ANALYSIS:


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The above table clearly indicates that 42% of the respondents would take up some

risk, 36% fall in the category of minimal risk level, 18% in the moderate risk level and

a very small percentage would fall under the considerate or substantial risk level of

investment.

INFERENCE:

From the above table one can infer that most of the investors are in a position to

accept decline in value as long as the portfolio generates current income and

exhibits some capital appreciation over time. People would also prefer that the result

should be relatively stable with the majority of return derived from current income,

even if it means that the total returns are relatively small. Indian investors do not like

to fall in the substantial risk category. Substantial risk can be undertaken while

pursuing larger potential total returns which is inversely proportional to the Indian

investors.


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TABLE 14: TABLE SHOWING THE TOLERATION TOWARDS TEMPORARY

DECLINE OF INVESTMENTS

LEVEL OF DECLINE

NO OF RESPONDENTS

PERCENTAGES

No Decline 34 34

5%-10% 62 62

10%-15% 4 4

15% and above 0 0

Total 100 100

GRAPH 12: CHART SHOWING THE TOLERATION TOWARDS

THE TEMPORARY DECLINE OF INVESTMENTS

62%

4%

34%

No Decline

5%-10%

10%-15%

ANALYSIS:


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The above table gives the response of 100 people when asked how much of

temporary decline they would tolerate. 34% said that they would not tolerate any

amount of decline, 62% would tolerate 5-10% decline, 4% of the respondents would

tolerate 10%-15% while no respondents would tolerate any decline above 15%.

INFERENCE:

From the above table, one can infer that 34% of the people are looking for 100%

safe investments while the rest 66% of the respondents feel that they would be able

to take decline in investments from anywhere between 5-15%.

TABLE 15: TABLE SHOWING THE PRIORITY OF IMPORTANT VARIABLES

WHILE INVESTING IN MUTUAL FUNDS.


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PRIORITY

CRITERIA

1 2 3 4 5

Safety 18 6 12 0 4

Liquidity 4 12 16 8 0

Returns 2 12 2 20 4

Convenience 0 2 6 6 26

Tax Benefits 16 8 4 6 6

WEIGHT SCORE WEIGHT AVERAGE PERCENTAGES

154 1.54 30.80

132 1.32 26.40

108 1.08 21.6

64 0.64 12.8

142 1.42 28.4

TOTAL 6 100

Weighted Average = Weighted Score / No of Respondents

Total Weighted Average =6

Maximum Possible Score = 5*5 = 25

Weighted Average Percentage = 6/25 * 100 = 24%

Likert Scale a predetermined scale used to determine as to where this weighted

average percentage falls.


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The scale for measuring priority is given below as:

1 Very important

2 Important

3 Considerably important4 Moderately important

5 Least important

The weighted average percentage has been calculated using the following formula

for each question.

a) Safety

Weighted Average Percentage = Weighted Average / Maximum Possible Score

Weighted Average = 1.54

Maximum Possible Score = 1*5 = 5

Weighted Average Percentage = 1.54 / 5 * 100 = 30.80%

ANALYSIS:

The table given above shows the ranks assigned by prospective invest

Documents

Pankaj Kumar-Mutual Fund