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    PROJECT REPORT

    ON

    INVESTMENTS AND FINANCIAL PLANNING

    AT ICICI BANK

    SUBMITTED TO SUBMITTED

    BY

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    (PROJECT GUIDE) B.B.A

    ACKNOWLEDGEMENT

    I take this opportunity to express my profound sense of gratitude and respectto all those who helped me through out the duration of this project.

    A first and foremost thanks to Dr. N.K. KAKKAR (Director,MAIMS) for hisinspiration and experienced words in making this project.

    It gives me immense pleasure to acknowledge my indebtedness and sense of

    gratitude to -(Project guide) for the project under taken.

    I also immensely thank the other faculty members of the institute under whocontinuous support and guidance I completed the project.

    Name of the student

    SHIVANI MOHAN

    Signature

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    CERTIFICATE

    It is to certify that SHIVANI MOHAN studying in our institute of managementhas successfully completed it under my guidance and upto my fullestsatisfaction.

    (SENIOR LECTURER)

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    INDEX

    CHAPTER PLAN

    1 Company Overview 5-7

    2 ICICI Bank Service 8

    3 Company Overview 10

    4 Services Provided by

    ICICI Bank 16

    5 Modern Investment Options 18

    6 Traditional Investment Options 20

    7 Comparison Modern & Traditional

    Methods of Investments 23

    8 Mutual Funds Introduction 24

    9 Findings 44

    10 Investment Management-Case Studies 47

    11 Bibliography 50

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    ABSTRACT

    The project involves in depth study and analysis of various financia

    instruments and to counsel and advise the retail as well as corporate

    investors about the best investment options available in the market; and

    to also make them aware about the risk and return parameters of those

    investment instruments.

    The project also involves designing a portfolio for the investors and to

    compare the Traditional Investment Products with the Modern Investment

    Products.

    The Project also analyses the Tax Implications on the Traditiona

    Investment Options like FDs (Fixed Deposits), RDs (Recurring Deposits)

    and how modern investment options are different from them in Tax

    treatment.

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    1 AN OVERVIEW OF THE BANKING INDUSTRY

    If there is one industry that has the stigma of being old and boring, it

    would have to be banking; however, a global trend of deregulation has

    opened up many new businesses to the banks. Coupling that with

    technological developments like Internet banking and ATMs, the banking

    industry is obviously trying its hardest to shed its lackluster image.

    Could you imagine a world without banks? At first this might sound like a

    great thought! Banks (and financial institutions) have, however, for

    several reasons, become cornerstones of our economy. They transfer risk,

    provide liquidity, facilitate both major and minor transactions, and provide

    financial information for both individuals and businesses.

    Banks safeguard money and valuables and provide loans, credit, and

    payment services, such as checking accounts, money orders, and

    cashiers checks. With the passage of the Financial Modernization Act in

    1999, banks also may offer investment and insurance products, which

    they were once prohibited from selling. As a variety of models for

    cooperation and integration between the financial services industries

    have emerged, some of the traditional distinctions between banks

    insurance companies, and securities firms have diminished. In spite ofthese changes, banks continue to maintain and perform their primary role

    in the financial systemaccepting deposits and lending funds from these

    deposits.

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    There are several types of banks, which differ in the number of services

    they provide and the clientele they serve. Although some of the

    differences between these types of banks have lessened as they begin to

    expand the range of products and services they offer, there are still key

    distinguishing traits.

    Commercial banks, which dominate this industry, offer a full range of

    services for individuals, businesses, and governments. These banks come

    in a wide range of sizes, from large global banks to regional and

    community banks. Global banks are involved in international lending and

    foreign currency trading, in addition to the more typical banking services.

    Regional banks have numerous branches and automated teller machine

    (ATM) locations throughout a multi-state area that provide banking

    services to individuals. Community banks are based locally and offer more

    personal attention, which many individuals and small businesses prefer

    In recent years, online bankswhich provide all services entirely over the

    Internethave entered the market, with some success. However, many

    traditional banks have also expanded to offer online banking, and some

    formerly Internet-only banks are opting to open branches.

    Savings banks and savings and loan associations, sometimes called thrift

    institutions, are the second largest group of depository institutions. They

    were first established as community-based institutions to finance

    mortgages for people to buy homes and still cater mostly to the savings

    and lending needs of individuals.

    Credit unions are another kind of depository institution. Most credit unions

    are formed by people with a common bond, such as those who work forthe same company or belong to the same labor union or church. Members

    pool their savings and, when they need money, they may borrow from the

    credit union, often at a lower interest rate than that demanded by other

    financial institutions.

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    Federal Reserve banks are Government agencies that perform many

    financial services for the Government. Their chief responsibilities are to

    regulate the banking industry and to control the Nations money supply

    the total quantity of money in the country, including cash and bank

    deposits. Federal Reserve banks also perform a variety of services for

    other banks. For example, they make emergency loans to banks that are

    short of cash and clear checks that are drawn and paid out by different

    banks.

    Interest on loans is the principal source of revenue for most banks

    making their various lending departments critical to their success. The

    Commercial Lending department loans money to companies to start or

    expand a business or to purchase inventory and capital equipment. The

    consumer lending department handles student loans, credit cards, and

    loans for home improvements, debt consolidation, and automobile

    purchases. Finally, the mortgage lending department loans money to

    individuals and businesses to purchase real estate.

    The money to lend comes primarily from deposits in checking and savings

    accounts, certificates of deposit, money market accounts, and other

    deposit accounts that consumers and businesses set up with the bank

    These deposits often earn interest for the owner, and accounts that offer

    checking provides an easy method for making payments safely without

    using cash. Deposits in many banks are insured by the Federal Deposit

    Insurance Corporation, which ensures that depositors will get their money

    back, up to a stated limit, if a bank should fail.

    Technology is having a major impact on the banking industry. Foexample, many routine bank services that once required a teller, such as

    making a withdrawal or deposit, are now available through ATMs that

    allow people to access their accounts 24 hours a day. Also, direct deposit

    allows companies and governments to electronically transfer payments

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    into various accounts. Further, debit cards, which oftentimes double as

    ATM cards, instantaneously deduct money from an account when the card

    is swiped across a machine at a stores cash register. Electronic banking

    by phone or computer allows customers to pay bills and transfer money

    from one account to another. Through these channels, bank customers

    can also access information such as account balances and statement

    history. Some banks have begun offering online account aggregation

    which makes available in one place detailed and up-to date information

    on a customers accounts held at various different institutions.

    Advancements in technology have also led to improvements in the ways

    in which banks process information. Use of check imaging, which allows

    banks to store photographed checks on the computer, is one such

    example that has recently been implemented by some banks. Other types

    of technology have greatly impacted the lending side of banking., For

    example, the availability and growing use of credit scoring software

    allows loans to be approved in minutesrather than daysmaking

    lending departments more efficient.

    Other fundamental changes are occurring in the industry as banks

    diversify their services to become more competitive. Many banks now

    offer their customers financial planning and asset management services,

    as well as brokerage and insurance services, often through a subsidiary or

    third party. Others are beginning to provide investment banking services

    that help companies and governments raise money through the issuance

    of stocks and bonds, also usually through a subsidiary. As banks respond

    to deregulation and as competition in this sector grows, the nature of thebanking industry will continue to undergo significant change.

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    2 STRUCTURE OF THE INDIAN FINANCIAL MARKET

    10

    Financial

    Institutions

    Reserve

    Bank ofSEBI

    CapitalMarkets

    Venture

    Capital

    Funds

    Mutual

    Funds

    Non- Bank

    Finance

    Companies

    Commercial

    Banks

    Term

    Lending

    InstitutionsIDBI

    IFCI

    ICICI

    Investment

    InstitutionsUTI

    LIC

    GIC

    Sectoral

    FinanceEXIM

    TFCI

    NABARD

    State-level

    FinancialInstitutions

    SFCs

    SIDCs Stock Exchange

    Merchant Bankers

    Underwriters

    Stock Brokers

    Retail Investors

    MINISTRY OF

    FINANCE

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    UTI and Mutual Funds: there are 35mutual funds in India. The three

    categories of mutual funds are public sector mutual funds, domestic

    private sector mutual funds, and foreign mutual funds. They have

    emerged as dynamic financial intermediaries and are very important

    institutional investors in India. In the savings market, mutual funds

    compete with banks and in the capital market they are the most

    influential players to influence market movements.

    2.1 The Capital Market

    An analysis of structural changes in the savings market indicates the

    growing importance of capital markets instruments like shares

    debentures and units in household financial assets. Growth and stability

    in the capital market are vital for efficient resource allocation, i.e., the

    transfer of resource from the saving market to the real sector of the

    economy.

    Two important constituents of the capital market are primary market and

    secondary market. Figure (b) shows the structure of the securities market

    in India. The primary market helps both corporates and the government

    raises funds by issuing securities. The secondary market, throughcontinuous trading activities, provides liquidity in the system. The

    secondary market is also a reflection of the changing mood and

    perception of investors. As can be imagined, stability and growth in the

    capital market depend on the efficient functioning of both the markets

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    since they are closely interdependent. Mutual funds play an all-important

    role in both the markets and strengthen the transfer mechanism.

    Household

    Particulars

    Equity

    shares

    Debentures/b

    onds

    UTI and

    other MFs

    Othe

    rs

    Tota

    lAll India 1.15 0.35 1.32 97.1

    8

    100

    Urban 2.93 0.96 2.97 93.1

    4

    100

    Rural 0.44 0.10 0.67 98.7

    9

    100

    Source: SEBI NCAER Survey of Indian Investors.

    Asset wise breakup (total-Rs.16098.51 Crores)

    Equity, 7970.36

    money market

    instruments,

    848.57

    gsecs, 2075.81

    debt, 5203.77

    Equity

    money market

    instruments

    gsecs

    debt

    Investment Pattern (as on 11th August, 2003)

    3 COMPANY OVERVIEW

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    3.1 ICICI Bank Limited

    ICICI Bank is India's second-largest bank with total assets of about

    Rs.146,214 crores as on December 31, 2004 and profit after tax of Rs.

    1,391 crores in the nine months ended December 31, 2004 (Rs. 1,637

    crores in fiscal 2004). ICICI Bankhas a network of about 505 branches

    and extension counters and about 1,850 ATMs. ICICI Bankoffers a wide

    range of banking products and financial services to corporate and retai

    customers through a variety of delivery channels and through its

    specialised subsidiaries and affiliates in the areas of investment banking,

    life and non-life insurance, venture capital and asset management. ICICI

    Bankset up its international banking group in fiscal 2002 to cater to the

    cross-border needs of clients and leverage on its domestic banking

    strengths to offer products internationally. ICICI Bank currently has

    subsidiaries in the United Kingdom and Canada, branches in

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    Singapore and Bahrain and representative offices in the United

    States, China, United Arab Emirates and Bangladesh.

    ICICI Bank's equity shares are listed in India on the Bombay Stock

    Exchange(BSE), and the National Stock Exchange of India

    Limited(NSE) and its American Depositary Receipts (ADRs) are listed on

    the New York Stock Exchange (NYSE).

    At October 31, 2004, ICICI Bank, with free float market capitalisation* of

    about Rs. 220.00 billion (US$ 5.00 billion) ranked third amongst all the

    companies listed on the Indian stock exchanges.

    ICICI Bankwas originally promoted in 1994 by ICICI Limited, an Indian

    financial institution, and was its wholly-owned subsidiary. ICICI's

    shareholding in ICICI Bankwas reduced to 46% through a public offering

    of shares in India in fiscal 1998, an equity offering in the form of ADRs

    listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of

    Madura Limited in an all-stock amalgamation in fiscal 2001, and

    secondary market sales by ICICI to institutional investors in fiscal 2001

    and fiscal 2002. ICICI was formed in 1955 at the initiative of the World

    Bank, the Government of India and representatives of Indian industry

    The principal objective was to create a development financial institution

    for providing medium-term and long-term project financing to Indian

    businesses. In the 1990s, ICICI transformed its business from a

    development financial institution offering only project finance to a

    diversified financial services group offering a wide variety of products and

    services, both directly and through a number of subsidiaries and affiliates

    like ICICI Bank. In 1999, ICICI become the first Indian company and thefirst bank or financial institution from non-Japan Asia to be listed on the

    NYSE.

    After consideration of various corporate structuring alternatives in the

    context of the emerging competitive scenario in the Indian banking

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    industry, and the move towards universal banking, the managements of

    ICICI and ICICI Bankformed the view that the merger ofICICI with ICICI

    Bank would be the optimal strategic alternative for both entities, and

    would create the optimal legal structure for the ICICI Group's universa

    banking strategy. The merger would enhance value for ICICI shareholders

    through the merged entity's access to low-cost deposits, greater

    opportunities for earning fee-based income and the ability to participate

    in the payments system and provide transaction-banking services. The

    merger would enhance value for ICICI Bankshareholders through a large

    capital base and scale of operations, seamless access to ICICI's strong

    corporate relationships built up over five decades, entry into new

    business segments, higher market share in various business segments

    particularly fee-based services, and access to the vast talent pool ofICICI

    and its subsidiaries. In October 2001, the Boards of Directors ofICICI and

    ICICI Bank approved the merger of ICICI and two of its wholly-owned

    retail finance subsidiaries, ICICI Personal Financial Services Limited

    and ICICI Capital Services Limited, with ICICI Bank. The merger was

    approved by shareholders of ICICI and ICICI Bank in January 2002, by

    the High Court of Gujarat at Ahmedabad in March 2002, and by the High

    Court of Judicature at Mumbai and the Reserve Bank of India in Apri

    2002. Consequent to the merger, the ICICI Group's financing and

    banking operations, both wholesale and retail, have been integrated in a

    single entity.

    *Free float holding excludes all promoter holdings, strategic investments

    and cross holdings among public sector entities

    3.2 ICICI Securities

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    ICICI Securities Limited (i-SEC) is a wholly owned investment-banking

    subsidiary ofICICI Limited (ICICI). ICICI is the only non-Japanese Asian

    financial institution to be listed on the New York Stock Exchange

    (NYSE symbols: IC, IC.D). ICICI Securities was formed on February

    22nd 1993, when ICICI's Merchant Banking Division was spun off into a

    new company; ICICI Securities today is India's leading Investment Bank

    and one of the most significant players in the Indian capital markets

    ICICI Securities Research Reports , Compendia, Updates, I-BEX and

    Sovereign Bond Index, have become industry standards, sought after by

    finance, business and reputed publications alike.

    The range of products offered by ICICI Securities includes:

    1. Investment Banking : Mergers and Acquisitions, Equity

    Bidding

    2. Fixed Income : Primary Dealership, Debt Research

    3. Equities : Lead Management, Underwriting, Syndication

    Private Equity Placement, Sales, Trading, Broking, Sectoral and

    Company Research.

    ICICI Securities continues to sustain a steady rate of growth by offering

    the most extensive range of services combined with unrivalled standards

    of professionalism.

    ICICI Brokerage Services Limited (IBSL) set up in March 1995; IBSL is

    a 100% subsidiary of I-SEC. It commenced its securities brokerage

    activities in February 1996 and is registered with the National Stock

    Exchange of India Limitedand The Stock Exchange, Mumbai.

    The U.S. subsidiary of I-Sec, ICICI Securities Inc., has been recently

    granted membership of the National Association of Securities

    Dealers, Inc. (NASD). With this registration, ICICI Securities Inc.

    (ICICI Securities Inc.) can engage in permitted activities in the U.S

    securities markets. These activities include dealing in securities markets

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    transactions in the United States and providing research and investment

    advice to U.S. investors. ICICI Securities Inc. has opened its office in

    New York.

    3.3 ICICI Venture

    ICICI Venture, incorporated in 1988, is the most experienced and largest

    private equity and venture fund management company in India with

    funds currently under management in excess of Rs.20 billion (USD 400

    million).

    Over the last 15 years, ICICI Venture has been successful in identifying

    trends well ahead of the curve; be it retail, media and entertainment,

    information technology, real estate or pharmaceuticals and

    biotechnology. During this period ICICI Venture launched and managed

    8 funds with a corpus exceeding Rs. 20billion (USD 400 million). Each

    fund had a distinct investment theme and ICICI Venture today has some

    of the best known and managed companies in India in its portfolio. Herein

    ICICI Venture has followed the philosophy of being a multi-sector player

    ensuring an optimum balance of risk and return to its investors.

    ICICI Venture has the distinction of managing a large number of exits in

    the country. With over 100 liquidity events, the organisation has reaped

    rich experience and is well positioned to handle IPOs, strategic sale and/or

    mergers.

    ICICI Venture has a wide network of third party investors, which include

    domestic investors such as public sector banks, financial institutions andinsurance companies. A significant portion of the fund's corpus is also

    from international development financial institutions and internationa

    funds. .

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    ICICI Venture has now launched the India Advantage Fund, with a

    corpus of Rs.10 Billion (USD 225 million). The Fund will invest in mid-sized

    growth companies for funding through expansions, acquisitions and

    restructuring. The Fund will also focus on mezzanine funding and buyouts.

    3.4 ICICI Prudential Life Insurance Company

    ICICI Prudential Life Insurance Company is a joint venture between

    ICICI Bank, a premier financial powerhouse and Prudential Plc, a

    leading international financial services group headquartered in the United

    Kingdom. ICICI Prudential was amongst the first private sector

    insurance companies to begin operations in December 2000 after

    receiving approval from Insurance Regulatory Development

    Authority (IRDA).

    ICICI Prudential's equity base stands at Rs. 9.25 billion with ICICI Bank

    and Prudential Plc holding 74% and 26% stake respectively. In the

    period April-December 2004, the company garnered Rs 8.6 billion of new

    business premium for a total sum assured of over Rs 73.6 billion and

    wrote nearly 345,000 policies. The company has a network of over 50,000

    advisors; as well as 7 banc assurance tie-ups. Today, ICICI Prudential

    has emerged as the No. 1 private life insurer in the country, with a wide

    range of flexible products that meet the needs of the Indian customer at

    every step in life.

    3.5 ICICI Lombard General Insurance Company

    ICICI Lombard General Insurance Company Limited is a 74:26 jointventure between ICICI Bank Limited and the US-based $ 26 billion

    Fairfax Financial Holdings Limited. ICICI Bank is India's second

    largest bank; while Fairfax Financial Holdings is a diversified financia

    corporate engaged in general insurance, reinsurance, insurance claims

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    management and investment management. Lombard Canada Ltd., a

    group company of Fairfax Financial Holdings Limited, is one of

    Canada's oldest property and casualty insurers.

    ICICI Lombard General Insurance Company received regulatory

    approvals to commence general insurance business in August 2001.

    Why ICICI Lombard

    India 's number one private general insurance company.

    First general insurance company in India to be ISO 9001:2000

    certified.

    Highest brand recall.

    Simple and fast documentation.

    Lightning fast claims settlement.

    Instant online policy issuance.

    Comprehensive product line.

    Highest security level offered through 128-bit encryption in case of

    online data exchange.

    First company to provide digitally signed documents through an

    online interface.

    Achieved financial breakeven in first full year of operations.

    Achieved underwriting breakeven in second year of operations.

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    4 SERVICES PROVIDED BY ICICI BANK

    4.1 DEPOSITS:

    SAVING BANK

    SPECIAL SAVING ACCOUNT

    SENIOR CITIZEN SERVICE

    ROAMING CURRENT ACCOUNT

    PRIVATE BANK

    SALARY ACCOUNT

    WOMENS ACCOUNT FIXED DEPOSITS

    EASY FIXED DEPOSIT

    RECURING DEPOSIT

    YOUNG STAR

    EEFC ACCOUNT

    RFC ACCOUT

    4.2 LOAN:

    HOME LOAN

    CAR LOAN

    PERSONAL LOAN

    TWO WHEELERS LOAN

    LOAN AGAINST SECURITY

    FARM EQUIPMENTS LOAN

    COMMERCIAL VEHICLE LOAN

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    CONSTRUCTION EQUIPMENTS LOAN

    OFFICE EQUIPMENTS LOAN

    MEDICAL EQUIPMENTS LOAN

    4.3 INVESTMENTS:

    ICICI BANK BONDS

    MUTUAL FUNDS

    PURE GOLD INITIAL PUBLIC OFFER

    GOVERNMENT OF INDIA BOND

    4.4 CARDS:

    CREDIT CARD

    DEBIT CARD

    TRAVEL CARD

    4.5 ONLINE SERVICES

    BILL PAY

    SHOPPING

    TICKETING

    CHARITY

    SHARE TRADING

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    4.6 NRI SERVICES:

    NRI HOME

    BANKING PRODUCTS

    MONEY TO INDIA

    5 MODERN INVESTMENT OPTIONS

    Along with Deposit products and Loan offerings, ICICI Bankassists you tomanage your finances by providing various investment options ranging

    from ICICI Bank Tax Saving Bonds to Equity Investments through

    Initial Public Offers and Investment in Pure Gold. ICICI Bank facilitates

    following investment products:

    ICICI Bank Tax Saving Bonds

    Government of India Bonds

    Investment in Mutual Funds

    Initial Public Offers by Corporate

    Investment in "Pure Gold"

    5.1 ICICI BANK BONDS

    Bonds are similar to Fixed Deposits. Like Bonds, fixed deposit receipts arenormally issued by a bank, a financial institution or a company, for a fixed

    period. A specified rate of interest is payable to the investor at regular

    intervals. However, unlike Bonds, Fixed Deposits are not transferable

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    6 TRADITIONAL INVESTMENT OPTIONS

    ICICI Bank offers wide variety of Deposit Products to suit Investors

    requirements. Coupled with convenience of networked branches/ over

    1800 ATMs and facility of E-channels like Internet and Mobile Banking

    ICICI Bankbrings banking at Customers doorstep.

    There are four Options available to the investors:

    Fixed Deposits

    Savings Account

    Recurring Deposit

    Safety, Flexibility, Liquidity and Returns!!!!

    A combination of unbeatable features of the Fixed Deposit from ICIC

    Bank.

    Fixed Deposit3

    Wide range of tenures

    Choice of investment plans

    Partial withdrawal permitted

    Safe custody of fixed deposit receipts

    Auto renewal possible

    Loan facility available

    Easy Deposit

    Free Debit/ATM card

    No need to open a Savings account.

    Options of Easy Withdrawal and Easy Loan

    Wide range of tenures

    Auto renewal possible

    Loan facility available

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    6.1 Benefits of Fixed Deposits:

    A wide range of tenures, ranging from 15 days to 10 years, to suit

    your investment plan.

    Partial withdrawal is permitted in units of Rs 1,000. The balance

    amount earns the original rate of interest. Safe custody of your fixed deposit receipts.

    Auto renewal is provided.

    Loan facility is available up to 90% of principal and accrued interest.

    Choice of two investment plans: Traditional or Reinvestment.

    6.2 Savings Account:

    ICICI Bankoffers Savings Account with a host of convenient features and

    banking channels to transact through.

    Savings Account

    Debit-cum-ATM card

    Auto Invest Account

    Internet Banking

    Phone Banking

    Anywhere Banking

    Standing instructions

    Nomination facility

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    Doorstep service

    6.2.1 Special Savings Account:

    Comprehensive Banking

    Solutions with added features

    Supplementary Savings

    Ideal for tax-exempt entities

    Internet Banking

    Anywhere Banking

    Doorstep Service

    6.2.2 Features:

    The ICICI Bank N-cash debit card is a debit-cum-ATM card providing you

    with the convenience of acceptance at merchant establishments and cash

    withdrawals at ATMs. z

    Auto Invest Account

    Internet Banking is offered free of cost.

    Anywhere Banking - This facility entitles the account holder to

    withdraw or deposit cash up to a limit of Rs.50, 000 across all ICICI

    Bankbranches.

    You can give us various types of standing instructions lik

    transferring to fixed deposit accounts at regular intervals.

    An average quarterly balance of Rs 5,000 only.

    Nomination facility is available.

    Interest is payable half-yearly.

    6.2.3 Senior Citizen Services:

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    ICICI Bankoffers an ideal Banking Service for those who are 60 years

    and above. The Senior Citizen Services from ICICI Bank has severa

    advantages that are tailored to bring convenience.

    Senior Citizen Services

    Higher Interest Rates

    Special Demand Loans against deposit

    Free collection of outstation cheques drawn on our locations

    Debit-cum-ATM card

    Auto Invest Account

    Internet Banking

    Phone Banking

    Anywhere Banking

    Standing instructions

    6.2.4 Young Stars:

    ICICI Bank helps children learn the value of finances and money

    management at an early age. Banking is a serious business and ICICI

    Bank aims to teach the young crowd how to manage their persona

    finances.

    6.3 Recurring Deposits:

    When expenses are high, one might not be having adequate funds to

    make big investments. Through ICICI Bank Recurring Depositone can

    invest small amounts of money every month that ends up with a large

    saving on maturity.So you enjoy twin advantages- affordability and higher earnings.

    Recurring Deposit

    Encourages savings

    High interest rates of interest

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    Loans against deposits available

    Non-applicability of Tax Deduction at Source (TDS)

    Encourages savings without stress on your finances

    High rates of interest (identical to the fixed deposit rates)

    Non-applicability of Tax Deduction at Source (TDS)

    7 COMPARISON BETWEEN TRADITIONAL AND

    MODERN METHODS OF INVESTMENTS:

    S.No. Options Risk Return Tax

    1

    TRADITIONAL

    METHODS

    Fixed

    Deposit

    L OW Less

    T han 6%

    p.a

    Taxable

    2 Recurring

    Deposit

    L OW Less

    t ha n 6 %

    p.a

    Taxable

    3Savings

    L OW 3.5% p .a Taxab l e

    4 ICICI Bank

    Tax

    Saving

    Bonds

    LOW 8% Deduc t ib

    l e F rom

    Taxable

    Income

    5 Governme

    nt of India

    Bonds

    No

    R isk

    8% Tax Free

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    MODERN

    METHODS

    6 Investmen

    t in Mutual

    Funds

    Moderat

    e

    Average

    returns

    Depend

    On Market

    Fluctuation

    s

    Funds

    Unde r

    E L SS

    Deduc t ib

    l e F rom

    Taxable

    Income7 Initial

    Public

    Offers by

    Corporate

    High High or

    Low

    Depends

    on Market

    Conditions

    R e t u rns

    A f t e r

    O n e Y e a r

    a re Tax

    F ree8 Investmen

    t in Pure

    Gold

    Low Depends

    on the

    Growth in

    the Market

    Taxable

    8 MUTUAL FUNDS:

    .Mutual funds are popular among all income levels. With a

    mutual fund, we get a diversified basket of stocks managed by

    a professional

    Barbara Stanny, author of Prince Charming Isnt

    Coming:

    How Women Get Smart About Money

    A mutual fund is a company that brings together money frommany people and invests it in stocks, bonds or other assets. The

    combined holdings of stocks, bonds or other assets the fund

    owns are known as its portfolio. Each investor in the fund owns

    shares, which represent a part of these holdings..

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    -The U.S. Securities and Exchange Commission

    8.1 HISTORY OF INDIAN MUTUAL FUND INDUSTRY:

    The Mutual Fund Industry in India started in 1963 with the formation of

    Unit Trust of India, at the initiative of the Government of India and

    Reserve Bank the. The history of mutual funds in India can be broadly

    divided into four distinct phases.

    First Phase 1964-87

    An Act of Parliament established Unit Trust of India (UTI) on 1963. It

    was set up by the Reserve Bank of India and functioned under the

    Regulatory and administrative control of the Reserve Bank of India. In

    1978 UTI was de-linked from the RBI and the Industrial Development

    Bank of India (IDBI) took over the regulatory and administrative contro

    in place of RBI. The first scheme launched by UTI was Unit Scheme

    1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under

    management.

    Second Phase 1987-1993 (Entry of Public Sector Funds)

    1987 marked the entry ofNon- UTI, Public sector mutual funds set up by

    public sector banks and Life Insurance Corporation of India (LIC) and

    General Insurance Corporation of India (GIC). SBI Mutual Fundwas the first Non- UTI Mutual Fundestablished in June 1987 followed

    by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual

    Fund(Aug 89), Indian Bank Mutual Fund(Nov 89), Bank of India (Jun

    90), Bank of Baroda Mutual Fund(Oct 92). LIC established its mutua

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    administrator and under the rules framed by Government of India and

    does not come under the purview of the Mutual Fund Regulations. The

    second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and

    LIC. It is registered with SEBI and functions under the Mutual Fund

    Regulations. With the bifurcation of the erstwhile UTI which had in March

    2000 more than Rs.76,000 crores of assets under management and with

    the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

    Fund Regulations, and with recent mergers taking place among

    different private sector funds, the mutual fund industry has entered its

    current phase of consolidation and growth. As at the end of October 31

    2003, there were 31 funds, which manage assets of Rs.126726 crores

    under 386 schemes.

    8.2 CONCEPT OF MUTUAL FUND:

    A mutual fund is an investment vehicle which allows investors with similar

    (one could say mutual) investment objectives, to pool their resources and

    thereby achieve economies of scale and diversification in their investing.

    Economies of Scale means lower costs on a per unit basis by doing things

    "in bulk" which spreads fixed costs over greater volume. A mutual fund

    achieves lower per unit costs for professional money management and for

    transaction charges, than small investors could achieve on their own. This

    can increase return to the investor. Diversification is just another way of

    saying "Dont put all your eggs in one basket." A mutual fund allows its

    investors to a small percentage of many different investments. So in a

    well-diversified mutual fund no one particular investment dominates itsperformance. Poor results from some investments are likely to be offset

    by good results from other investments. Therefore, the unit value of a

    mutual fund will not fluctuate as sharply as the value of any one of its

    investments. This can reduce risk to the investor.

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    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 individua

    also finds it difficult to keep track of ownership of his assets, investments

    brokerage dues and bank transactions etc.

    A mutual fund is the answer to all these situations. It appoints

    professionally qualified and experienced staff that manages each of these

    functions on a full time basis. The large pool of money collected in the

    fund allows it to hire such staff at a very low cost to each investor. In

    effect, the mutual fund vehicle exploits economies of scale in all three

    areas - research, investments and transaction processing. While the

    concept of individuals coming together to invest money collectively is not

    new, the mutual fund in its present form is a 20th century phenomenon. In

    fact, mutual funds gained popularity only after the Second World War

    Globally, there are thousands of firms offering tens of thousands of

    mutual funds with different investment objectives. Today, mutual funds

    collectively manage almost as much as or more money as compared to

    banks.

    Despite these advantages mutual funds do not guarantee do not return

    nor do they eliminate risk to investors. The return and risk of a mutual

    fund depend primarily on the type of securities instruments in which itinvests, and secondarily on how well it is managed by the company

    offering it.

    Typically a mutual fund scheme is initiated by a sponsor who recognizes

    and markets the fund. It pre specifies the investment objective of the fund

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    and the risks associated with the costs involved in the process and broad

    rules for entry into and exit from the fund and other areas of operation. In

    India as in most nations the sponsors need approval from the regulator

    viz. SEBI. A sponsor then hires an asset management company to invest

    the funds according to the investment objective. It also hires another

    entity to the custodian of the assets of the funds and perhaps a third one

    to handle registry work.

    In the Indian context, the sponsors promote the Asset Management

    Company also, in which it holds a majority stake. In many cases a sponsor

    can hold a 100% stake in the Asset Management Company (AMC). E.g

    Birla Global Finance is the sponsor of the Birla Sun Life Asset

    Management Company Ltd., which has floated different mutual funds

    schemes and also acts as an asset manager for the funds collected under

    the schemes.

    In nutshell, 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. The flow chart below

    describes broadly the working of a mutual fund:

    8.3 ORGANISATION OF A MUTUAL FUND:

    There are many entities involved and the diagram below illustrates the organizational

    set up of a mutual fund:

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    8.4 ADVANTAGES OF MUTUAL FUNDS:

    Mutual funds provide following benefit to investors:

    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 stocks decline at the same time and in the

    same proportion. You achieve this diversification through a Mutua

    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.

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    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

    manager's investment strategy and outlook.

    Flexibility

    Through features such as regular investment plans, regula

    withdrawal plans and dividend reinvestment plans, you can

    systematically invest or withdraw funds according to your needs and

    convenience.

    Affordability

    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 monitoredby SEBI.

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    8.5 Disadvantages of investing through mutual funds:

    While the benefits of investing through mutual funds far outweigh the

    disadvantages, an investor and his advisor will do well to be aware of a

    few shortcomings of using the mutual funds as investment vehicles.

    No control over costs:

    An investor in a mutual fund has no control over the overall cost of

    investing. He pays investment management fees as long as he remains

    with the fund, albeit in return for the professional management and

    research. Fees are payable even while the value of his investments

    may be declining. a mutual fund investor also pays fund distribution

    cost, which he would not incur in direct investing.however,this

    shortcoming only means that there is a cost to obtain the benefits of

    mutual fund services.

    No tailor made portfolios:Investor who invests on their own can build their own portfolios of

    shares and bonds and other securities. Investing through funds means

    he delegates this decision to the fund managers. The very high net

    worth individuals or large corporate investors may find this to be a

    constraint in achieving their objectives. However, most mutual fund

    managers help investors overcome this constraint by offering families

    of funds-----a large number of different schemes---within their own

    management company. An investor can choose from different

    investment plans and construct a portfolio of his choice.

    Managing a portfolio of funds:

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    Availability of a large number of funds can actually mean too much

    choice for the investor. He may again need advice on how to select a

    fund to achieve his objectives, quite similar to the situation when he

    has to select individual shares or bonds to invest in.

    8.6 Role of Mutual Funds in the Financial Market:

    The brief review in the preceding section of financial system and

    structural changes in the market suggests that Indian Financia

    institutions have played a dominant role in assets formation and

    intermediation, and contributed substantially in macroeconomic

    development. In this process of development, Indian mutual funds have

    emerged as strong financial intermediaries and are playing a very

    important role in bringing stability to the financial system and efficiency

    to resource allocation. Mutual funds have opened new vistas to investors

    and imparted much-needed liquidity to the system.

    Mutual funds are the fastest growing institutions in the household saving

    sector. Growing complications and risk in the stock market, rising tax

    rates and increasing inflation have pushed household towards mutua

    funds. The active involvement of mutual funds in promoting economic

    development can be seen not only in terms of their participation in the

    savings market but also in their dominant presence in the money andcapital market. A developed financial market is critical to overal

    development and mutual funds play an active role in promoting a healthy

    capital market. We have also noted that Indian investors have moved

    towards more liquid, growth-oriented tradable instrument like share/

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    debentures, and units of mutual funds. This shift in asset holding pattern

    of investors has been significantly influenced by the equity and unit

    culture.

    Mutual funds in India have emerged as a critical institutional linkage

    among various financial segments like saving, capital market and the

    corporate sector. They provide much needed impetus to the money

    market and stock market, in addition to direct and indirect support to the

    corporate sector. Above all, mutual funds have given a new direction to

    the flow of personal saving and enabled small and medium investors in

    remote, rural and semi urban areas to reap the benefit of stock market

    investment. Indian mutual funds are thus playing a very crucia

    developmental role in allocating resource in the emerging market

    economy.

    8.7 TAX STATUS:

    Dividend paid by mutual funds is fully tax-exempt at the hands of the

    investor, although, debt funds have to pay a 12.81 per cent dividend

    distribution tax. On redemption of any units held for more than a year,

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    your realization will attract long-term capital gains tax of 20 per cent plus

    surcharge after indexing for inflation, or at a flat rate of 10 per cent. If

    redeemed before a year it will be termed as short term capital gain and

    taxed along with your other income. However, you can save tax by

    investing in Equity-Linked Savings Scheme (ELSS) under Section 88 of the

    Income Tax Act, 1961, according to which 20 per cent of the amount

    invested in ELSS can be deducted from your tax liability subject to a

    maximum investment of Rs 10,000 per year

    8.8 RISK ASSOCITED WITH MUTUAL FUNDS:

    Mutual funds and securities investment are subject to various risks and there is no assurance

    that a scheme objective will be achieved. These risks should be properly understood by

    investors so that they can understand how much risky their investment avenue is. Equity and

    fixed income bearing securities have different risks associated with them. Various risks

    associated with mutual funds can be described as below.

    Risk associated to fixed income bearing securities

    Interest rate risk

    As with all the securities, changes in interest rates may affect the

    schemes Net Asset Value as the prices of the securities generally

    increase as interest rates decline and generally decrease as interest

    rates rise. Prices of long-term securities generally fluctuate more in

    response to interest rates changes then do short term securitiesIndian Debt markets can be volatile leading to the possibility of price

    movements p or down in the fixed income securities and thereby to the

    possible movements in the NAV.

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    Liquidity or marketable risk

    This refers to the ease with which an security can be sold at near to its

    valuation yield to maturity. The primary measure of liquidity risk is the

    spread between the bid price and the offer price quoted by the dealer.

    Liquidity risk is inherent to the Indian Debt market.

    Credit risk

    Credit risk or default risk refers to the risk that an issuer of fixed

    income security may default (i.e, will be unable to make timely

    principal and interest payments on the security). Because of those risk

    corporate debentures are sold at a yield above those offered on

    Government securities, which are sovereign obligations and free of

    credit risk. Normally the value of fixed income security will fluctuate

    depending upon the perceived level of credit risks well as the actua

    event of default. The greater the credit risk the greater the yieldrequire for someone to be compensated for increased risk.

    8.9 RISK ASSOCIATED TO EQUITIES:

    Market risk

    The NAV of the scheme investing in equity will fluctuate as the dailyprices of the individual securities in which they invest fluctuate and the

    units when redeemed may be worth more or less than the origina

    cost.

    Timing the market

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    It is difficult to identify which is the right time to invest and which is the

    right time to take out the money. There may be situations where

    stocks may not be rightly timed according to the market leading to loss

    in the value of scheme.

    Liquidity

    Investment made in unlisted equities or equity related securities might

    only be realizable upon the listing of the securities. Settlement

    problems could cause the scheme to miss certain investment

    opportunities.

    8.10 THE KEY ROLE OF FINANCIAL CONSULTANTS IN THE

    DISTRIBUTION OF FINANCIAL PRODUCTS:

    The world of financial product distribution is somewhat similar though

    there is no physical and the patent processes are more complicated.

    The first major similarity is the layered approach to the customer. As with

    an FMCG, here is a distributor and an agent who form the layer between

    the financial product supplier and the customer. In the FMCG space, the

    distributors are often competiting category exclusive, which means they

    may not distribute other non- products. Retailers of course carry a wide

    range of products. In financial products, however, the distributors are not

    necessarily exclusive (except for insurance) and agents are almost never

    exclusive to one principal.

    The next major similarity is in the nature of intermediary compensation

    As with an fmcg, intermediary compensation is often paid as a percentage

    of the sale value. Namely the investment. An exception is the mutuafunds. Where compensation is largely paid in the form of trailer fees,

    explained below.

    Trailer fees

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    Open ended mutual funds allow withdrawal of amounts deposited at any

    time. Many investors can and do deposit for as short a term as one week,

    and use the mutual fund as a proxy for a bank account. The management

    fee revenue stream for an asset management company is linked not to a

    transaction, but rather to the time the money is in the fund. For example,

    if an investor were to deposit Rs. 10000 in a mutual fund, the AMC will

    earn a fee, typically one percent per annums, on this amount, only; as

    long as it remains in the fund. In some sense it is like a reverse interest

    .in the above example, if the money stayed for a full year, the AMC would

    charge rs.100 as fee. If it stayed for one month, it would charge only Rs.

    8.33

    Suppose the AMC paid brokerage as a percentage of the transaction

    value, as is usual in the FMCG world, in the case, a typical brokerage

    amount would be 0.75%of Rs.10000 or Rs.75. this amount is paid by the

    amc in the expectation that it will earn a fee that exceeds Rs, 75. This

    amount is paid by the AMC in the expectation that it will earn a fee; that

    exceeds Rs. 75. Being an open ended fund, this is not necessarily true. In

    this example, the investor needs to stay put for at least nine months

    before the AMC even recovers the brokerage paid.

    Hence, the concept of trailer fee or revenue sharing was introduced. The

    trailer fee implies that the brokerage, instead of being an upfront lump

    sum amount, will be a share of the revenue stream arising to the AMC out

    of the money being in the fund. The trailer fee will be paid also at a rate

    of say 0.75% p.a. But only so long as the money stays in the fund. In the

    event the leaves in a months, the A, C will receive say rs.8.33 and thebroker will receive ,say Rs. 6.25 on the other hand ,if the money; stays

    for five years, the AMC will receive an aggregate of rs.500 while the

    broker will receive an aggregate of ts.375 over this period.

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    The example presents a highly simplified version of the process, bu

    serves to illustrate the concept of course mutual funds also pay upfront

    .in doing so they either take a calculated risk, or alternatively recover a

    load or entry fee from the investor, which is used to pay the brokerage.

    Trailer fees today represent over 75 percent of all brokerages paid by

    mutual funds, and are a phenomenon peculiar to them. Practically every

    other financial product pays upfront lump sum brokerages, because they

    are term products (the investment cannot be withdrawn for a certain

    period)

    Life insurance commissions are also often paid as annuities, based upon

    the premiums received .because a policy holder may let the policy lapse

    at any time it is usual to link the commission installments received. This

    also provides a motivation for the agent to follow up on premium

    installments.

    Differences from FMCG distribution

    In FMCG distribution, the ownership of the cake of soap changes hands as

    one moves along. That is why the consumer pays cash to the retailer for

    the soap instead of writing a cheque favoring the manufacturer. Financia

    product distribution however normally requires payment direct to the

    manufacturer. For example, a company fixed deposit or a mutual fund

    unit has to be purchased by writing a cheque favoring the company or the

    mutual fund, not the intermediary or agent. This means that every

    manufacturer; of a financial product must have a means of accepting

    payment at every retail outlet. This is a challenging task. And one of thekey reasons that soaps are available in every pan shop in every village

    while mutual fun units and deposits are not.

    The next major difference is that a financial product is normally an

    investment product unlike a soap which is consumed; a financial product

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    is a returnable product. For instance, fixed deposit pays periodic interest

    and returns the principal on maturity. A mutual fund pays periodic

    dividends and returns the principal on request. This means that unlike a

    soap manufacturer, the financial product manufacturer has to keep track

    of the investor. Bu investors are notoriously forgetful of their assets, and

    one often funds that after a 3-5 year period 10-30 percent of all investors

    are not traceable at their original addresses. Why is that? Because they

    have retired, married, been transferred, emigrated or even passed away

    and did not care to keep their investment record updated.

    Another major difference is embedded in the fact that the FMCG

    manufacturer typically sells consumable goods of low unit value. A wrong

    purchase based on an incorrect retailer recommendation has only a smal

    impact on the consumer. However, a financial product is relatively of a

    large unit value. This is not a sum that most would like to risk based on

    bad advice. In some sense this is like buying a white good-a fridge

    washing machine or TV, in any of these cases, the consumer will rather

    spend some time researching the features and go to a reputed shop

    where he can expect a proper comparison of the features of various

    options .also he may decide to buy am more expensive product if he feels

    it gives greater value. He does not mind going to a high street retail shop

    and paying the full price as he knows that he will get post sales warranty

    support in the case; of many financial products the investor needs good

    advice he may not know everything about the product the background of

    the issuer, the past track record of returns and quality of service and the

    risk involved. Often the investor may be blinded by the upfront incentive(gold coin being offered). Good advice from a reputed financia

    intermediary will alone helps in good product selection. Therefore

    financial intermediary unlike an fmcg intermediary must be well trained in

    product features.

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    An emerging issue is one of investor ownership; financial products are

    often purchased periodically by investors to invest their incrementa

    savings, or to reinvest matured investments.

    Emerging trends

    Any distributor or agent will obviously; like to keep track of an investors

    investment so that he may suggest suitable reinvestments upon maturity

    Also along association will tell the agent at what intervals he may expect

    incremental investment from an investor. This will normally be a function

    of the saving and of any bonuses. This process of keeping tab on an

    investor is called investor ownership. Where the offer is a single product

    say a fixed deposit the company; will be content to leave the investor

    ownership with the agent. This is because the particular company cannot

    address all the investment requirements of the investor. however where

    it offers a full suite of products of mutual funds in a bank -it would like to

    take over the ownership of its investors and try to cross sell other

    products.

    In most overseas markets investor ownership is with the agent or

    distributor. They go beyond the basic concept of investment advice, to

    provide the investor with such things as comprehensive account

    statements, return calculations and account maintenance of the account

    portfolio. Thus the investor need no longer be dependent on a varied set

    of manufacturers to provide him with these information and that too

    separately. This is called wealth management and is normally available

    with the higher bracket of investorIn India too some banks and national distributors have started offering

    wealth management services. Their proposition is that the investor should

    indicate their risk profile and then leave it to them to choose the

    appropriate investment that provides the right mix of security and

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    returns. In return it will be a single point service that the investor will get

    all his investment statements, returns, advice from a single source. This

    as time passes will become more attractive.

    Payment practices

    Earlier a reference was made to the need for payments for the financial

    products to be made directly favoring the manufacturer. It was explained

    how that imposed a requirement to have banking facilities available at

    100s of cities. It is obviously inefficient for 100s of manufacturers to

    have banking facilities in 100s of cities. This historic model has been

    followed because of the absence of well capitalized regulated and trust

    worthy intermediaries in the financial distribution sector.

    When one buys a soap or toothpaste the money is paid against delivery of

    the product. In financial products the product is delivered after the money

    is realized by the manufacturer and after some administrative delay

    Paying the manufacturer directly gives the investor assurance and lega

    basis to establish that he has a claim on the product.

    In most overseas markets financial products are purchased just like

    physical products by writing a cheque to the agent. Agent is normally of

    the high reputation, well capitalized and well regulated giving the investor

    the necessary confidence that the money will indeed be passed on to the

    manufacturer and the product obtained on his behalf.

    India too will soon see the emergence of this class of intermediaries

    Already banks which enjoy the trust of the investor anyway, are

    leveraging on this trust to offer such single point investment facilities. It isa matter of time before non-bank corporate entities offer this level of

    comfort to the investor.

    Investment Principles

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    The first and the most important principle is to decide what ones risk

    appetites.

    Most of us have a definite view on equities. Mostly a middle class

    person perceives it as very risky. At the same time its a well established

    fact that equities have always provided better returns over a long time

    frame. Establishing an appropriate ratio between equities (higher return

    but higher risk) and fixed income (lower return lower risk) is the challenge

    for most of us.

    Intermediaries Role

    Good financial intermediaries have a practice of risk profiling their

    investors. They will spend some time with the investor understanding his

    future financial needs and future retirement income expectation. Then

    they would advice a suitable mix of investment. That is expected to meet

    their expectations and objectives. A well paid software professional can

    be expected to have a better risk appetite than an elderly soon to ret\ire

    manager. Accordingly the software professional will have a greater share

    of equities in his portfolio.

    The most important principle of sound investing is to get a good

    intermediary or advisor. A good advisor is not necessarily one who gives a

    discount or rebate. Infact the good ones will not give a rebate because

    they need to make a decent living themselves. The level of commitment

    shown by the advisor in understanding the investor needs and goals is a

    clear sign of his competence.

    It is advisable to stick to one intermediary in respect of all onesinvestments. One of the key pieces of advice that one will need is when to

    sell a security. That advice will only come when one has a long standing

    and continuous relationship with his intermediary. Rooting all ones

    investments through one intermediary also gives a complete view of

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    clients investments and therefore the risk that the client is exposed to

    These alone will give proper investment and disinvestmemt advice.

    The intermediary is also human and can make mistakes in judgmen

    .however too many mistakes will be a sign that it is time to change. One

    should remember it is ultimately ones money and so should never

    hesitate to ask for a reason for an investment recommendation. Also one

    should keep an eye on the news that offers an opportunity.

    Thus financial product distribution is in the process of change. Regulators

    and indeed the industry itself are trying to change themselves for the

    better. Meanwhile there is no substitute to having a trustworthy advisor

    and to keeping your eyes and ears open.

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    8.11 THE GROUND RULES OF MUTUAL FUND INVESTING:

    Moses gave to his followers 10 commandments that were to be followed

    till eternity. The world of investments too has several ground rules meant

    for investors who are novices in their own right and wish to enter the

    myriad world of investments. These come in handy for there is every

    possibility of losing what one has if due care is not taken.

    1. Assess yourself: Self-assessment of ones needs; expectations and

    risk profile is of prime importance failing which; one will make more

    mistakes in putting money in right places than otherwise. One

    should identify the degree of risk bearing capacity one has and also

    clearly state the expectations from the investments. Irrationa

    expectations will only bring pain.

    2. Try to understand where the money is going: It is important to

    identify the nature of investment and to know if one is compatible

    with the investment. One can lose substantially if one picks the

    wrong kind of mutual fund. In order to avoid any confusion it is

    better to go through the literature such as offer document and fact

    sheets that mutual fund companies provide on their funds.

    3. Don't rush in picking funds, think first: One first has to decide

    what he wants the money for and it is this investment goal that

    should be the guiding light for all investments done. It is thus

    important to know the risks associated with the fund and align it

    with the quantum of risk one is willing to take. One should take a

    look at the portfolio of the funds for the purpose. Excessiveexposure to any specific sector should be avoided, as it will only add

    to the risk of the entire portfolio. Mutual funds invest with a certain

    ideology such as the "Value Principle" or "Growth Philosophy". Both

    have their share of critics but both philosophies work for investors of

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    different kinds. Identifying the proposed investment philosophy of

    the fund will give an insight into the kind of risks that it shall be

    taking in future.

    4. Invest. Dont speculate: A common investor is limited in the

    degree of risk that he is willing to take. It is thus of key importance

    that there is thought given to the process of investment and to the

    time horizon of the intended investment. One should abstain from

    speculating which in other words would mean getting out of one

    fund and investing in another with the intention of making quick

    money. One would do well to remember that nobody can perfectly

    time the market so staying invested is the best option unless there

    are compelling reasons to exit.

    5. Dont put all the eggs in one basket: This old age adage is of

    utmost importance. No matter what the risk profile of a person is, it

    is always advisable to diversify the risks associated. So putting ones

    money in different asset classes is generally the best option as it

    averages the risks in each category. Thus, even investors of equity

    should be judicious and invest some portion of the investment in

    debt. Diversification even in any particular asset class (such as

    equity, debt) is good. Not all fund managers have the same acumen

    of fund management and with identification of the best man being a

    tough task; it is good to place money in the hands of several fund

    managers. This might reduce the maximum return possible, but wil

    also reduce the risks.

    6. Be regular: Investing should be a habit and not an exerciseundertaken at ones wishes, if one has to really benefit from them

    As we said earlier, since it is extremely difficult to know when to

    enter or exit the market, it is important to beat the market by being

    systematic. The basic philosophy of Rupee cost averaging would

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    suggest that if one invests regularly through the ups and downs of

    the market, he would stand a better chance of generating more

    returns than the market for the entire duration. The SIPs (Systematic

    Investment Plans) offered by all funds helps in being systematic. Al

    that one needs to do is to give post-dated cheques to the fund and

    thereafter one will not be harried later. The Automatic investment

    Plans offered by some funds goes a step further, as the amount can

    be directly/electronically transferred from the account of the

    investor.

    7. Do your homework: It is important for all investors to research the

    avenues available to them irrespective of the investor category they

    belong to. This is important because an informed investor is in a

    better decision to make right decisions. Having identified the risks

    associated with the investment is important and so one should try to

    know all aspects associated with it. Asking the intermediaries is one

    of the ways to take care of the problem.

    8. Find the right funds: Finding funds that do not charge much fees

    is of importance, as the fee charged ultimately goes from the pocket

    of the investor. This is even more important for debt funds as the

    returns from these funds are not much. Funds that charge more will

    reduce the yield to the investor. Finding the right funds is important

    and one should also use these funds for tax efficiency. Investors of

    equity should keep in mind that all dividends are currently tax-free

    in India and so their tax liabilities can be reduced if the dividend

    payout option is used. Investors of debt will be charged a tax ondividend distribution and so can easily avoid the payout options.

    9. Keep track of your investments: Finding the right fund is

    important but even more important is to keep track of the way they

    are performing in the market. If the market is beginning to enter a

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    bearish phase, then investors of equity too will benefit by switching

    to debt funds as the losses can be minimized. One can always

    switch back to equity if the equity market starts to show some

    buoyancy.

    10. Know when to sell your mutual funds: Knowing when to

    exit a fund too is of utmost importance. One should book profits

    immediately when enough has been earned i.e. the initia

    expectation from the fund has been met with. Other factors like non-

    performance, hike in fee charged and change in any basic attribute

    of the fund etc. are some of the reasons for to exit. For more on it,

    read "When to say goodbye to your mutual fund."

    Investments in mutual funds too are not risk-free and so investments

    warrant some caution and careful attention of the investor.

    After learning the concept of mutual funds and various schemes of mutua

    funds available for investment it is required to effectively manage the

    portfolio of an investor which depends upon the objective of investor. The

    most important objective of any investor is to generate returns

    Requirement for return for every investor varies which depends upon

    many factors and these factors determine the category to which an

    investor belongs. Depending upon the category to which an investors

    belongs portfolio of any customer is managed.

    9 FINDINGS:

    9.1 How does changes in NAV benefit investors?

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    Suppose the IPO price of a scheme was Rs. 10 and today its NAV is Rs. 15.35.

    The increment of Rs. 5.35 is the total return on the scheme, which has been

    generated due to some factors. These factors can be explained as below.

    Trading Gains-

    These are the gains generated from buying and selling of securities. Any

    security bought at a lower price and sold at a higher price leads to trading

    gains.

    Mark on market-

    Mark on market is also called unbooked gains. Because these are gainsthat could have been generated if securities would have been sold

    instead of being retained in the portfolio.

    Accrued interest-

    It is the amount accrued as interest by keeping the securities in the

    portfolio.

    The ratio of these three components keeps varying. Increment of NAV

    consists primarily of accrued interest .The proportion of these factors

    moves in the following manner.

    Accrued interest 75%

    Mark on market 20%

    Trading gains 5%

    This is the proportion in which returns are generated. But fund managers capability

    lies in generating trading gains because interest can be generated by anyone by keeping same

    securities in his portfolio. It is only due to the expertise of fund managers in generating

    trading gains that people invest through mutual funds.

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    9.2 NAV calculation for different options:

    Growth-

    For growth option NAV will be calculated in the same manner as

    discussed above

    Dividend and Dividend reinvested For dividend option the dividend

    declared per unit will be deducted from the NAV under growth scheme to

    arrive at the NAV for dividend option. Similarly for dividend reinvestment

    option the NAV will remain the same. The only difference is that Investors

    under dividend reinvestment option will have more units that with

    dividend option for the same amount of money invested.

    9.3 Investment Management:

    After learning the concept of mutual funds and various schemes of mutua

    funds available for investment it is required to effectively manage theportfolio of an investor which depends upon the objective of investor. The

    most important objective of any investor is to generate returns

    Requirement for return for every investor varies which depends upon

    many factors and these factors determine the category to which an

    investor belongs. Depending upon the category to which an investors

    belongs portfolio of any customer is managed.

    Investors can be categorized on the basis of certain factors which can be

    described as below.

    1. On the basis of Risk and Return

    Low Risk Bearing Capacity

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    Medium Risk Bearing Capacity

    High Risk Bearing Capacity

    Risk and return goes hand to hand. Higher return means

    higher risk. Low risk means moderate return.

    2. On the basis of Age of Investor:

    Young Age (20-35 years)

    Middle Age (35-50 years)

    Old Age (50 and above)

    3. On the basis of Liquidity required by Investor:

    Less Liquidity

    Medium Liquidity

    More Liquidity

    4. On the basis of tenure of investment:

    Short Term

    Medium Term

    Long Term

    5. Investment can also be made to

    Park the Idle Funds

    Make a full time investment

    Avail tax benefits

    Meet requirement for Contingencies

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    3) In order to provide a good opportunity in equity funds he was advisedinvestment in Birla Dividend Yield Plus( which invest in high dividend yieldcompanies). He was advised to enter into BDYP at this point of timebecause some good dividends were expected to be declared by thecompanies in the month of June ehich could have further enriched hisreturns.

    CASE II: Mr. B

    Profile of the Investor : MR. B a HNI is also a aggressive player inmarket. HE likes to play directly both in equity as well as Debt market

    Though he is overweight on equity he is not convinced with the idea ofMIP as he believes that he himself can manage his portfolio the way it ismanaged I MIPs. He has already parked his investments in safer avenues

    so he wants to play in equity market. At this point of time he requiredmoney to construct his house and for his sons marriage.

    Recommendations :1) We can see in the portfolio he has been given recommendation in

    liquid funds. As he require money to construct his house and forsons marriage, invest in liquid funds is a wise decision becauseliquid funds provide the opportunity to earn moderate returns ofaround 4- 4.5% a better return than savings and current accountwith maintaining liquidity and safety.

    2) In order to avail Tax benefit he had invested in various avenues. HEwas also advised investment in equity Plan which would not onlyprovide him tax benefit but also high returns with long term growthof capital.

    3) He was also advised Reliance power sector fund as at that point oftime Govt. was bringing certain reforms in power sector. So thisinvestment would fetch him a good returns. What reforms

    CORPARATES

    CASE III: Company X.

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    Profile of the Company: X Ltd. A photocopier company has collectionon daily basis throughout India. They want to park their money in aninvestment option which can bring them some returns along withmaintaining liquidity. They have a resolution form their board that theycannot park their money whole money in one single investment avenue.

    Recommendations:1) They have been advised investment in various liquid schemes of

    mutual funds. As all the liquid schemes provide more or less thesame return schemes have been chosen on the basis of consistencyof return and their expense ratio.

    2) It has been advised dividend Reinvestment option in order to saveshort term capital gins tax.

    CASE IV: Company Y.

    Profile of the Company: Y Ltd. wants to park their money in aninvestment option which can bring them some returns along withmaintaining liquidity. They want to continuously churn their portfolio

    They also demand a avenue where they can get better returns thensavings and current account.

    Recommendations:1) They have been advised investment in various liquid schemes of

    mutual funds. As all the liquid schemes provide more or less thesame return schemes have been chosen on the basis of consistencyof return and their expense ratio.

    2) It has been advised dividend Reinvestment option in order to saveshort term capital gins tax.

    RETAILERS

    CASE V: Mr. P

    Profile of the Company: Mr. P is a NRI. He is a aggressive equity playerin market. He likes to invest small amounts in full range of diversified

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    equities. He has a long term horizon. He is bullish about Indian Equitymarket he wanted to enter through mutual funds route.Recommendations:

    1) He has been advised various sector funds as well other equityschemes running successfully in the market which associate high

    risks along with providing handsome returns.2) As he is overweight with equity market he has been advised to take

    exposure in MIP plan os Franklin Templeton so that he can get somegood returns along with maintaining safety of his capital.

    CASE VI: Mrs. Q

    Profile of the Company: Mrs. Q is an old lady, a widow. She has a

    capital of around 15- 20 lakhs. She wants to keep invested for long termand earn regular return on her investments along with maintaining safetyof capital.Recommendations:

    3) They have been advised investment in various liquid schemes ofmutual funds. As all the liquid schemes provide more or less thesame return schemes have been choosen on the basis ofconsistency of return and their expense ratio.

    4) It has been advised dividend Reinvestment option in order to saveshort term capital gins tax.

    One of the need to invest in mutual fund is for the provident fund

    investors, who are required to generate around 9.5% return on their

    provident fund investments.

    Provident fund interest Provident funds are required to invest theirmoney in securities issued by government or in the mutual funds with the

    portfolio containing government securities only. So the investors who are

    required to generate provident fund return can also invest in mutua

    funds.

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    Investors can have one particular objective or can have a mix of

    various objectives. On the basis of objective and asset allocation

    mutual funds can be categorized as follows.

    11 BIBLIOGRAPHY:

    http://www.iciciprulife.com/public/default.htm

    http://www.iciciprulife.com/online/index.jsp

    http://www.google.co.in/search?

    hl=en&q=iciciprudential+life+insurance&meta=

    http://www.indiahousing.com/insurance-companies/icici-life-

    insurance-company.html

    http://www.icicibank.com/

    http://www.iciciprulife.com/public/default.htmhttp://www.iciciprulife.com/online/index.jsphttp://www.google.co.in/search?hl=en&q=iciciprudential+life+insurance&metahttp://www.google.co.in/search?hl=en&q=iciciprudential+life+insurance&metahttp://www.indiahousing.com/insurance-companies/icici-life-insurance-company.htmlhttp://www.indiahousing.com/insurance-companies/icici-life-insurance-company.htmlhttp://www.icicibank.com/http://www.iciciprulife.com/public/default.htmhttp://www.iciciprulife.com/online/index.jsphttp://www.google.co.in/search?hl=en&q=iciciprudential+life+insurance&metahttp://www.google.co.in/search?hl=en&q=iciciprudential+life+insurance&metahttp://www.indiahousing.com/insurance-companies/icici-life-insurance-company.htmlhttp://www.indiahousing.com/insurance-companies/icici-life-insurance-company.htmlhttp://www.icicibank.com/