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A PROJECT
REPORT ON
Analysis of Mutual Fund & Portfolio Management in Mutual Fund
For
Motilal Oswal Securities Ltd
(ANP Investments)
By
Kalpa Kabra Under
the guidance of Dr.
Jyoti Mishra
Submitted To
Vishwakarma Institute Of Management
In partial fulfillment of the requirement for the award of the degree of
Master in Business Management (Autonomous)
ThroughVishwakarma Institute Of Management
Pune-48
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Table Of Contents
1. Acknowledgement
2. List of Tables and Illustrations
3. Abbreviations
4. Executive summary
5. Introduction
Company profile
6. Industry Profile
7. On The Job Training
8. Description of project Calculation of
NAV Advantages of Mutual
funds Disadvantages of Mutual
funds
Tool showing funds characteristics
Objectives of project
Limitation of project
Methodology
9. Managing Portfolio
Asset allocation
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Achieving optimal Asset allocation
Maximizing return while minimizing risk
Figures showing portfolio models
o
Conservative portfolioo Moderately portfolio
o Moderately aggressive portfolio
o Very aggressive portfolio
10. Maintaining your portfolio
11. Guide to portfolio construction
12.Mutual fund Cost (Look on IT)
13.Summary
A roadmap for your investments
Analysis of data
Conclusion
14. Glossary
15.Bibliography
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ACKNOWLEDGEMENT
A project will be never successful with out the assistance and guidance from appropriate persons.
So now it is the right time to express me sincere gratitude to all those who are helping me to
complete this project.
I express my sincere thanks to Mr. Ashish Pimpalwar giving me an opportunity to do project in
Motilal Oswal Securities Ltd.(ANP Investments).
I express my sincere thanks to my company guide Mrs. Sonali Madhamshettiwar, head
Distribution department for her guidance.
I also thanks to Kiran Chamle, Govind Chamle, and Amolika Jaju for their valuable guidance.
I whole heartedly thanks to my faculty guide Dr. Jyoti Mishra, who is giving me valuable
suggestions for completing my project in right way.
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LIST OF TABLES AND ILLUSTRATIONS
1. Calculation of NAV (Net Asset Value).
2. Tool showing funds characteristic.
3. Figure showing how to Maximizing returns while minimizing risk.
4. Figures showing portfolio models Conservative portfolio Moderately portfolio Moderately aggressive portfolio Very aggressive portfolio
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EXECUTIVE SUMMARY
Right from its existence, Banks, whether nationalize or corporate, always dominated others, in
case of public investments or retail investments. But in past few years due to various reasons like
continuously falling of interest rates, various scams etc. investors will have to look for various
other investments avenues that will give them better returns with minimization of risks. Here
Mutual Funds Industry has very important role to play in providing alternate investment avenue
to entire gamut of investors in scientific and professional manner.
Indian Mutual Fund Industry has been definitely maturing over the period. In four decades of its
existence in India Mutual Funds have gone through various structural changes and gained
prominent position in Financial Industry. Because of easy of investments, professional
management and diversification more and more investors are gaining confidence in Mutual
Funds. Even government policies like abolishment of long term capital benefit taxes added
advantage to growth of Mutual Funds. This is all the way is leading to pool of more and more
money from retail investors into the Mutual Funds.
So I carried out project in Mutual Funds and its Portfolio Management for the period of two
months starting from 1st
June 2007 to 31st
July 2007 to understand Mutual Funds, Mutual Fund
Industry, analyze the trend in Mutual Funds, what has been the performance so far and mapping
various methods of Client prospecting and servicing, what are the factors that attracts the
investors to invest in Mutual Funds over other investment avenues.
The project study focused on increasing brand awareness at retail level clients and various
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activities that results in brand awareness among the same. This project also consists of
generating and getting clients, generating database and after sales services to retain client and
make them happy investor.
While analyzing trend, I tried to map how Asset Under Management (AUM) varied over the
period with BSE-Sensex to facilitate feature projections. It has been done separately for Equity
Schemes, Income Schemes, Balanced Schemes and Liquid Schemes.
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INTRODUCTION
COMPANY PROFILE
MOTILAL OSWAL SECURITIES LIMITED is a leading full service securities firm providing
the entire gamut of financial services. Mr. Motilal Oswal and Mr. Raamdeo Agarawal lay the
foundation of a great partnership by starting a sub-broking firm. The venture stands out from the
rest due to their approach of Research-based broking even when sub-brokers.
At MOTILAL OSWAL SECURITIES LIMITED Advisors with unique approach to examining
and solving your long-term requirement, the strength of experience and depth of technical
awareness that you can call upon is all embracing.
MOSL assists companies in realizing tangible improvements in various facets of their businesses
by providing a range of corporate advisory services that includes the entire gamut from financial
restructuring andbusiness turnoverstrategies.
Motilal Oswal Financial Services is a well diversified financial services group having businesses
in securities, commodities, investment banking and venture capital. With 1160 Business
locations and more than 2,00,000 investors in over 360 cities, Motilal Oswal is well suited to
handle all your wealth creation and wealth management needs. And the company has many
francshisee all over and one of is our franchise that is ANP INVESTMENTS. The MOSL in the
last year placed 9.48% with two leading private equity investors - New Vernon Private Equity
Limited and Bessemer Venture Partners at post money company valuation of Rs. 1345 crore. (Rs.
13.45 billion).
ANP INVESTMENTS is one of India's mutual fund distribution house. There success lies in
their philosophy of providing consistently superior, independent and unbiased advice to clients
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backed by in-depth research. ANP INVESTMENTS firmly believes in the importance of
selecting appropriate asset allocations based on the client's risk profile.
ANP INVESTMENTS have a dedicated mutual fund research cell for mutual funds that
consistently churns out superior investment ideas, picking best performing funds across asset
classes and providing insights into performances of select funds.
Using various information sources like Customer, Employees, Books, Internet, and News etc can
do the project. This Project Study of Mutual Funds Market in India gives us idea about the
basics of Mutual Funds, Their Benefits, Types, Tax system, Risk Profile, Strategies for choosing
the best funds, Awareness among the people regarding Mutual Funds etc. which can be helpful
for the company to make people understand about Mutual Funds.
Core Purpose of the company
To be a well respected and preferred global financial services organization enabling wealth
creation for all our customers
Core Value of the Company
Integrity : A company honoring commitment with highest ethical and business practices.
Team Work : Attaining goals collectively and collaboratively.
Passion & Attitude : High energy and self motivated with a Do It attitude and entrepreneurial
spirit.
Excellence in Execution : Time bound results within the framework of the companys value
system.
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The firm's philosophy is entirely client centric, with a clear focus on providing long term value
addition to clients, while maintaining the highest standards of excellence, ethics and
professionalism. The entire firm activities are divided across distinct client groups: Individuals,
Private Clients, Corporate and Institutions.
Services offered in retail sector:
1. IPOs Distribution
2. Mutual Fund Distribution
3. Equity Trading
4. Derivative Trading
5. Research
6 Commodity Trading
7. Insurance ( Life & General)
8. Online Broking
9. Portfolio Management System (PMS)
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INDUSTRIAL PROFILE
Mutual Funds in India (1964-2000)
The end of millennium marks 36 years of existence of mutual funds in this 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.
UTI commenced its operations from July 1964. UTI came into existence during a period marked
by great political and economic uncertainty in India. With war on the borders and economic
turmoil that depressed the financial market, entrepreneurs were hesitant to enter capital market.
The already existing companies found it difficult toraise fresh capital, as investors did not
respond adequately to new issues. Earnest efforts were required to canalize savings of the
community into productive uses in order to speed up the process of industrial growth.
The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that would be
"open to any person or institution to purchase the units offered by the trust. However, this
institution as we see it, is intended to cater to the needs of individual investors, and even among
them as far as possible, to those whose means are small."
His ideas took the form of the Unit Trust of India, an intermediary that would help fulfill the
twin objectives of mobilizing retail savings and investing those savings in the capital market and
passing on the benefits so accrued to the small investors.
UTI commenced its operations from July 1964 "with a view to encouraging savings and
investment and participation in the income, profits and gains accruing to the Corporation from
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the acquisition, holding, management and disposal of securities."Different provisions of the UTI
Act laid down the structure of management, scope of business, powers and functions of the Trust
as well as accounting, disclosures and regulatory requirements for the Trust.
One thing is certain the fund industry is here to stay. The industry was one-entity show till
1986 when the UTI monopoly was broken when SBI and Canbank mutual fund entered the
arena. This was followed by the entry of others like BOI, LIC, GIC, etc. sponsored by public
sector banks. Starting with an asset base of Rs0.25bn in 1964 the industry has grown at a
compounded average growth rate of 26.34% to its current size of Rs1130bn.
The period 1986-1993 can be termed as the period of public sector mutual funds (PMFs). From
one player in 1985 the number increased to 8 in 1993. The party did not last long. When the
private sector made its debut in 1993-94, the stock market was booming.
The openings up of the asset management business to private sector in 1993 saw international
players like Morgan Stanley, Jardine Fleming, JP Morgan, George Soros and Capital
International along with the host of domestic players join the party. But for the equity funds, the
period of 1994-96 was one of the worst in the history of Indian Mutual Funds.
1999-2000 Year of the funds
Mutual funds have been around for a long period of time to be precise for 36 yrs but the year
1999 saw immense future potential and developments in this sector. This year signaled the year of
resurgence of mutual funds and the regaining of investor confidence in these MFs. This time
around all the participants are involved in the revival of the funds ----- the AMCs, the unit
holders, the other related parties. However the sole factor that gave lifr to the revival of the funds
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was the Union Budget. The budget brought about a large number of changes in one stroke. An
insight of the Union Budget on mutual funds taxation benefits is provided later.
It provided centre stage to the mutual funds, made them more attractive and provides acceptability
among the investors. The Union Budget exempted mutual fund dividend given out by equity-
oriented schemes from tax, both at the hands of the investor as well as the mutual fund. No longer
were the mutual funds interested in selling the concept of mutual funds they wanted to talk
business, which would mean to increase asset base, and to get asset base, and investor base they
had to be fully armed with a whole lot of schemes for every investor .So new schemes for new
IPOs were inevitable. The quest to attract investors extended beyond just new schemes.
The funds started to regulate themselves and were all out on winning the trust and confidence of
the investors under the aegis of the Association of Mutual Funds of India (AMFI)
One can say that the industry is moving from infancy to adolescence, the industry is maturing
and the investors and funds are frankly and openly discussing difficulties opportunities and
compulsions.
Future Scenario
The asset base will continue to grow at an annual rate of about 30 to 35 % over the next few years
as investors shift their assets from banks and other traditional avenues. Some of the older public
and private sector players will either close shop or be taken over.
Out of ten public sector players five will sell out, close down or merge with stronger players in
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three to four years. In the private sector this trend has already started with two mergers and one
takeover. Here too some of them will down their shutters in the near future to come.
But this does not mean there is no room for other players. The market will witness a flurry of
new players entering the arena. There will be a large number of offers from various asset
management companies in the time to come. Some big names like Fidelity, Principal, Old
Mutual etc. are looking at Indian market seriously. One important reason for it is that most major
players already have presence here and hence these big names would hardly like to get left behind.
The mutual fund industry is awaiting the introduction of derivatives in India as this would enable it
to hedge its risk and this in turn would be reflected in its Net Asset Value (NAV).
SEBI is working out the norms for enabling the existing mutual fund schemes to trade in
derivatives. Importantly, many market players have called on the Regulator to initiate the process
immediately, so that the mutual funds can implement the changes that are required to trade in
Derivatives.
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On The Job Training
Purpose-:
OJT is basically to give intern exposure to the outside world and it help to teach him/her
the real world work by giving him practical knowledge. Through OJT I learn that the theory we
have learned is difficult to implement in practical work. And we have to apply them in a very
different way.
As I am learning about mutual funds, initial public offers etc. Before this I was just aware of the
theory part of it i.e. definition of mutual funds, its requirement, why a company need additional
capital etc. But after working here I came to know that it is very important to learn the practical
procedure of handling the mutual funds and IPOs because the main part is the dealing with the
customers, convincing them to buy our product and make him to invest with us and providing
him best service.
I have started my OJT from the very first day. And the day to day work that I am suppose to do is
my OJT and it is not fixed what I have to do and before start working I have to learn the work
which is assigned to me. My company guide has given me the work related to IPOs (Initial
Public Offer).
Then I got work related to mutual funds. The details of the following are explained here-:
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So the objectives of my OJT are as follows-
Basics of IPOs
How a company comes up with new public offer?
Requirement of additional capital for a company?
Decision about fixing price band it includes 2 types fixed price or book building.
Online/Offline Bidding of Application forms-:
Bidding of forms.
I have to maintain the database of applicants of IPOs to report to the head office about the
applications collected. Customer Service-:o When a customer is asking some query I have to answer him but if I am not sure I
have to ask to my senior and solve hisproblem.
o By interacting customer we can study the main problems faced by them, as they
are not expert of the financial products so they need clear explanation.
Telemarketing -:Our primary objective is to get an appointment.
o Dont sale over phone, just make the call and the sale will follow.
o Determine the objection accurately before you start overcoming it.
o How to talk to a prospective customer who can become our customer.
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Attracting customers in this field is easy, if the person is ready to invest. He doesnt have
knowledge about financial products so we have convinced him for the same.
About Mutual Funds-:
o History
o Types of mutual funds scheme
By structure By investment objectives By various options
I got training for the software INVESTWELL. This is for maintaining the data of mutual
funds and this software provides the facility to make clients portfolio in various types so
that it become easy for us to give service to our customers.
I got training for depository department also where I learnt how a DP works, how to
register new client which is under compliance department then how to punch transaction
slips how to makes daily reports to send HO and how to dematerialized the physical
shares etc.
A Depository facilitates holding of securities in the electronic form and enables securities
transactions to be processed by book entry by a Depository Participant (DP), who as an agent of
the depository, offers depository services to investors. According to SEBI guidelines, financial
institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is
known as beneficial owner (BO) has to open a demat account through any DP for
dematerialization of his holdings and transferring securities.
I got training to understand the basics of equity market.
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Targets
Understanding & Executing the back office work.
Learning about capital markets, Share trading, IPOs, Mutual Funds & other concepts
etc.
Generation of leads.
Handling customers queries if any.
Operating the mutual funds software to work on it.
Updatingdatabase for IPOs and mutual fund in software.
Understanding the work done in DP department.
Strategy Employed to achieve the targets-:
By practically handling the work.
Asking to colleagues, guides & browsing net for understanding concepts of
Capital market, Share Trading, Mutual Funds & IPOs etc.
By training program arranged by the company many thing got clear.
By asking queries to the company guide and others.
Assisting the concerned person doing IPOs and Mutual funds.
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DES CRIPTIO N O F P ROJECT-:S TUDY O F MUTUAL FUND M ARK E T IN I NDI A
Investments: Various Options Available in Market
1. Investment:
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of
keeping the savings idle you may like to use savings in order to get return on it in the future. This
is called Investment.
2.Why should one invest?
One needs to invest to:
Earn return on your idle resources
Generate a specified sum of money for a specific goal in life
Make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of
Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply
what it costs to buy the goods and services you need to live. Inflation causes money to lose value
because it will not buy the same amount of a good or a service in the future as it does now or did
in the past.
For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100
Purchase today would cost Rs. 321 in 20 years. This is why it is important to
Consider inflation as a factor in any long-term investment strategy. Remember to look at an
investment's 'real' rate of return, which is the return after inflation. The aim of investments
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should be to provide a return above the inflation rate to ensure that the investment does not
decrease in value.
3. Various options available for investment:
I. Physical Assets: Real EstateReal Estate investment is also on of the good investment option available. Real Estate investment
means investments in the Land, Buildings, Flats, and Houses etc. Now a day the growth in the
prices of real estate is very rapid. Thats why investor gets good returns in this investment. But
the growth of real estate investment is in the long term only. In short term there is no growth in
this. It requires very huge investment. Only big investors can invest in this. Normal small
investor cannot invest in this. This is not in his reach. In Real Estate investment you will not
have the liquidity. Buying & selling of property is not so easy at lest in India. The Procedures &
Documentation of Transfer of Property is very lengthy. It takes time & money. For transfer you
have pay taxes & duties & some charges. Commodity:Commodities market, contrary to the beliefs of many people, has been in existence in India
through the ages. However the recent attempt by the Government to permit Multi-commodity
National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges Multi
Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX)
have come into being. These exchanges, by virtue of their high profile promoters and
stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a
hassle-free settlement system. The futures contracts available on a wide spectrum of
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commodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Channa etc.,
provide excellent opportunities for hedging the risks of the farmers,
Importers, exporters, traders and large-scale consumers. They also make open an avenue for
quality investments in precious metals. The commodities market, as the movements of the stock
market or debt market do not affect it provides tremendous opportunities for better
diversification of risk. Realizing this fact, even mutual funds are contemplating of entering into
this market.
II Financial Assets: Investment in Capital Market:Capital Market is a place where buyers and sellers of securities can enter into transactions to
purchase and sell shares, bonds, debentures etc. Further, it performs an important role of
enabling corporate, entrepreneurs to raise resources for their companies and business ventures
through public issues. Transfer of resources from those having idle resources (investors) to
others who have a need for them (corporate) is most efficiently achieved
Through the securities market. Stated formally, securities markets provide channels for
reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a
variety of intermediaries, through a range of financial products,
Called Securities.
Small Saving Instruments:It is again classified in to short term and long term saving instruments.
Short term saving instruments:
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with
banks may be considered as short-term financial investment options:
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Savings Bank Account: It is often the first banking product people use, which offers low
interest (4%-5% p.a.), making them only marginally better than fixed deposits.
Money Market or Liquid Funds:These funds are a specialized form of mutual funds that invest in extremely short-term fixed
income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market
funds are primarily oriented towards protecting your capital and then, aim to maximise returns.
Money market funds usually yield better returns than savings accounts, but lower than bank
fixed deposits.
Fixed Deposits with Banks:These are also referred to as term deposits and minimum investment period for bank FDs is 30
days. Fixed. Deposits with banks are for investors with low risk appetite, and may be considered
for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely
to be lower than money market fund returns.
Long Term Financial options available for investment:
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and
Debentures, Mutual Funds etc.
Public Provident Fund:A long-term savings instrument with a maturity of 15 years and interest payable at 8% per
annum compounded annually. A PPF account can be opened through a nationalized bank at
anytime during the yearand is open all through the year for depositing money. Tax benefits can
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be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible
every yearfrom the seventh. Financial year of the date of opening of the account and the amount
of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year
immediately preceding the year in which the amount is withdrawn or at the end of the preceding
year whichever is lower the amount of loan if any.
Bonds:It is a fixed income (debt) instrument issued for a period of more than one year with the purpose
of raising capital. The central or state government, corporations and similar institutions sell
bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a
specified date, called the Maturity Date.
Mutual Funds:These are funds operated by an investment company, which raises money from the public and
invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives.
It is a substitute for those who are unable to invest directly in equities or debt because of
resource, time or knowledge constraints. Benefits include professional money management,
buying in small amounts and diversification. Mutual fund units are issued and redeemed by the
Fund Management Companybased on the fund's net
Asset value (NAV), which is determined at the end of each trading session.
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Calculation of NAV
The most important part of the calculation is the valuation of the assets owned by the fund. Once it
is calculated, the NAV is simply the net value of assets divided by the number of units
outstanding. The detailed methodology for the calculation of the asset value is given below.
NAV = NE T VAL UE OF ASSET S
NUMBER OF UNITS OUTSTANDING
Asset value is equal to
Sum of market value of shares/debentures
+ Liquid assets/cash held, if any
+ Dividends/interest accrued
Amount due on unpaid assets
Expenses accrued but not paid
Details on the above items
For liquid shares/debentures, valuation is done on the basis of the last or closing market price on
the principal exchange where the security is traded
For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated.
For shares, this could be the book value per share or an estimated market price if suitable
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benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of
comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing
securities moves in a direction opposite to interest rate changes Valuation of debentures and
bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable
leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this
and adopt flexible valuation policies depending on the situation.
Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every
passing day, interest is said to be accrued, at the daily interest rate, which is calculated by
dividing the periodic interest payment with the number of days in each period. Thus, accrued
interest on a particular day is equal to the daily interest rate multiplied by the number of days
since the last interest payment date.
Usually, dividends are proposed at the time of the Annual General meeting and become due on
the record date. There is a gap between the dates on which it becomes due and the actual
payment date. In the intermediate period, it is deemed to be "accrued". Expenses including
management fees, custody charges etc. are calculated on a daily basis.
Mutual Funds are usually long term investment vehicle though there some categories of mutual
funds, such as money market mutual funds which are short term instruments.
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a
mutual fund as a company that brings together a group of people and invests their money in
stocks, bonds, and othersecurities.Each investor owns shares, which represent a portion of the
holdings of the fund.
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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 appreciations 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.
You can make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all
income it receives over the year to fund owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds
also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares
increase in price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a check for distributions or to reinvest
the earnings and get more shares.
Motilal Oswal Securities Ltd. (ANP Investments) is one of India's top mutual fund distribution
houses. There success lies in their philosophy of providing consistently superior, independent
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and unbiased advice to clients backed by in-depth research. MOSL firmly believes in the
importance of selecting appropriate asset allocations based on the client's risk profile.
MOSL have a dedicated mutual fund research cell for mutual funds that consistently churns out
superior investment ideas, picking best performing funds across asset classes and providing
insights into performances of select funds.
Using various information sources like Customer, Employees, Books, Internet, and News etc can
do the project. This Project Study of Mutual Funds Market in India gives us idea about the
basics of Mutual Funds, Their Benefits, Types, Tax system, Risk Profile, Strategies for choosing
the best funds, Awareness among the people regarding Mutual Funds etc. which can be helpful
for the company to make people understand about Mutual Funds & to prepare a diversified
profitable portfolio of the customers.
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ADVANTAGES OF MUTUAL FUNDS
Professional Management - The primary advantage of funds (at least theoretically) isthe professional management of your money. Investors purchase funds because they do
not have the time or the expertise to manage their own portfolio. A mutual fund is a
relatively inexpensive way for a small investor to get a full-time manager to make and
monitor investments.
Diversification - By owning shares in a mutual fund instead of owning individual stocksor bonds, yourriskis spread out. The idea behind diversification is to invest in a large
number of assets so that a loss in any particular investment is minimized by gains in
others. In other words, the more stocks and bonds you own, the less any one of them can
hurt you Large mutual funds typically own hundreds of different stocks in many
different industries. It wouldn't be possible for an investor to build this kind of a
portfolio with a small amount of money.
Economies of Scale - Because a mutual fund buys and sells large amounts of securitiesat a time, its transaction costs are lower than you as an individual would pay.
Liquidity - Just like an individual stock, a mutual fund allows you to request that yourshares be converted into cash at any time.
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Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line ofmutual funds, and the minimum investment is small. Most companies also have
automatic purchase plans whereby as little as $100 can be invested on a monthly basis.
DISADVANTAGES OF MUTUAL FUNDS:
Professional Management- Did you notice how we qualified the advantage ofprofessional management with the word "theoretically"? Many investors debate over
whether or not the so-calledprofessionals are any better than you or I at picking
stocks. Management is by no means infallible, and, even if the fund loses money, the
manager still takes his/her cut.
Costs - Mutual funds don't exist solely to make your life easier--all funds are in it for aprofit. The mutual fund industry is masterful at burying costs under layers of
jargon. These costs are so complicated that in this tutorial we have devoted an entire
section to the subject.
Dilution - It's possible to have too much diversification because funds havesmallholdings in so many different companies, high returns from a few investments
often don't make much difference on the overall return. Dilution is also the result of a
successful fund getting too big. When money pours into funds that have had strong
success, the manager often has trouble finding a good investment for all the new
money.
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Taxes - When making decisions about your money, fund managers don't consideryour personal tax situation. For example, when a fund manager sells a security, a
capital-gain tax is triggered, which affects how profitable the individual is from the
sale. It might have been more advantageous for the individual to defer the capital
gains liability.
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Mutual Funds: Different Types of Funds
No matter what type of investor you are there is bound to be a mutual fund that fits your style.
According to the last count there are over 10,000 mutual funds in North America! That means
there are more mutual funds than stocks.
It's important to understand that each mutual fund has different risks and rewards. In general,
the higher the potential return, the higher the risk of loss. Although some funds are less risky
than others, all funds have some level of risk--it's never possible to diversify away all risk.
This is a fact for all investments.
Each fund has a predetermined investment objective that tailors the fund's assets, regions of
investments, and investment strategies. At the fundamental level, there are three varieties of
mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds
All mutual funds are variations of these three asset classes. For example, while equity funds
that invest in fast-growing companies are known as growth funds, equity funds that invest
only in companies of the same sector or region are known as specialty funds.
Let's go over the many different flavors of funds. We'll start with the safest and then work
through to the more risky.
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Money Market Funds
The money market consists of short-term debt instruments, mostly T-bills. This is a safe place
to park your money. You won't get great returns, but you won't have to worry about losing
your principal. A typical return is twice the amount you would earn in a regular
checking/savings account and a little less than the average certificate of deposit (CD). We've
got a whole tutorial on the money market if you'd like to learn more about it.
Bond/Income Funds
Income funds are named appropriately: their purpose is to provide current income on a steady
basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are
synonymous. These terms denote funds that invest primarily in government and corporate debt.
While fund holdings may appreciate in value, the primary objective of these funds is to provide
a steady cash flow to investors. As such, the audience for these funds consists of conservative
investors and retirees.
Bond funds are likely to pay higher returns than certificates of deposit and money market
investments, but bond funds aren't without risk. Because there are many different types of
bonds, bond funds can vary dramatically depending on where they invest. For example, a
fund specializing in high-yield junk bonds is much more risky than a fund that invests in
government securities; also, nearly all bond funds are subject to interest rate risk, which
means that if rates go up the value of the fund goes down.
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Balanced Funds
The objective of these funds is to provide a "balanced" mixture of safety, income, and capital
appreciation. The strategy of balanced funds is to invest in a combination of fixed-income
and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed-
income. The weighting might also be restricted to a specified maximum or minimum for each
asset class.
A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a
balanced fund, but these kinds of funds typically do not have to hold a specified percentage of
any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset
classes as the economy moves through the business cycle.
Equity Funds
Funds that invest in stock represent the largest category of mutual funds. Generally, the
investment objective of this class of funds is long-term capital growth with some income.
There are, however, many different types of equity funds because there are many different
types of equities. A great way to understand the universe of equity funds is to use a style box,
an example of which is below.
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A tool showing a fund's characteristics such as the investment philosophy, underlying
investments and risks. This helps investors and investment companies easily understand
and convey information about the fund.
The above mutual fund style box illustrates that the mutual fund is a large-cap, value-
oriented fund. This conveys to investors that the fund is investing in well-
established companies that are under- or fairly valued. The company will not be invested in
small-cap, mid-cap or growth stocks.
Obj ecti ves of P roject -:
To make people aware of Anand Rathi.
To understand ways of systematic financial planning .
To compare various financial products.
To study of basics of Mutual Fund market & overall industry.
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To analyze various mutual funds schemes.
To enumerate risks associated with mutual fund scheme.
To analyze mutual fund investment by comparing its various investment avenues.
L imit a ti ons of P r o j ec t - :
Project is restricted to mutual funds and Portfolio Management
Area of project is very wide so its difficult to cover each and everypoint.
Methodolo g y -:
I am collecting data in 2 ways through
Primary data collection
Secondary data collection
Under primary data collection I will collect data by observing the people in the company who
come to give training, or the concern person doing work for mutual funds or in IPOs
department.
For my study of portfolio management I have asked questions to clients and collected
relevant data.
Visiting various sites of mutual funds and companies sites by reading leaflets, broachers that
already exist in company, collects secondary data.
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MANAGING PORTFOLIO
ASSET ALLOCATION
The process of dividing a portfolio among major asset categories such as bonds, stocks or
cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. The ideal
asset allocation differs based on the risk tolerance of the investor. For example, a young
executive might have an asset allocation of 80% equity, 20% fixed income, while a retiree
would be more likely to have 80% in fixed income and 20% equities.
What Is Asset Allocation?
Asset allocation is an investment portfolio technique that aims to balance risk and create
diversification by dividing assets among major categories such as cash, bonds, stocks, real
estate and derivatives. Each asset class has different levels of return and risk, so each will
behave differently over time. For instance, while one asset category increases in value,
another may be decreasing or not increasing as much. Some critics see this balance as a
settlement for mediocrity, but for most investors it's the best protection against major loss
should things ever go amiss in one investment class or sub-class.
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The consensus among most financial professionals is that asset allocation is one of the most
important decisions that investors make. In other words, your selection of stocks or bonds is
secondary to the way you allocate your assets to high and low-risk stocks, to short and long-
term bonds, and to cash on the sidelines.
We must emphasize that there is no simple formula that can find the right asset allocation for
every individual
ACHIEVING OPTIMAL ASSET ALLOCATION
The important task of appropriately allocating your available investment funds
among different assets classes can seem daunting, with so many securities to
choose from.
Essentially, asset allocation is an organized and effective method of diversification.
To help determine which securities, asset classes and subclasses are optimal foryour portfolio; let's define some briefly:
Large-cap stock - These are shares issued by large companies with a market
capitalization generally greater than $10 billion.
Mid-cap stock - These are issued by mid-sized companies with a market cap
generally between $2 billion and $10 billion.
Small-cap stocks - These represent smaller-sized companies with a market
cap of less than $2 billion. These types of equities tend to have the highest
risk due to lower liquidity.
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International securities - These types of assets are issued by foreign
companies and listed on a foreign exchange. International securities allow an
investor to diversify outside of his or her country, but they also have
exposure to country risk - the risk that a country will not be able to honor its
financial commitments.
Emerging markets - This category represents securities from the financial
markets of a developing country. Although investments in emerging markets
offer a higher potential return, there is also higher risk, often due to political
instability, country risk and lower liquidity. The fixed-income asset class
comprises debt securities that pay the holder a set amount of interest,periodically or at maturity, as well as the return of principal when the
security matures. These securities tend to have lower volatility than equities,
and have lower risk because of the steady income they provide. Note that
though the issuer promises payment of income, there is a risk of default.
Fixed-income securities include corporate and government bonds.
Money market - Money market securities are debt securities that areextremely liquid investments with maturities of less than one year. Treasury
bills make up the majority of these types of securities.
Real-estate investment trusts (REITs) - REITs trade similarly to equities,
except the underlying asset is a share of a pool of mortgages or properties,
rather than ownership of a company
MAXIMIZING RETURN WHILE MINIMISING RISK
The main goal of allocating your assets among various asset classes is to maximize
return for your chosen level of risk, or stated another way, to minimize risk given a
certain expected level of return. Of course to maximize return and minimize risk,
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you need to know the risk-return characteristics of the various asset classes. The
following chart compares the risk and potential return of some of the more popular
ones:
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As each asset class has varying levels of return for a certain risk, your risk
tolerance, investment objectives, time horizon and available capital will provide
the basis for the asset composition of your portfolio.
To make the asset allocation process easier for clients, many investment companies
create a series of model portfolios, each comprising different proportions of asset
classes. These portfolios of different proportions satisfy a particular level of
investor risk tolerance. In general, these model portfolios range from conservative
to very aggressive:
Conservative model portfolios generally allocate a large percent of the total
portfolio to lower-risk securities such as fixed-income and money market
securities.
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Our main goal with a conservative portfolio is to protect the principal value of our
portfolio. As such, these models are often referred to as "capital preservation
portfolios".
Even if you are very conservative and prefer to avoid the stock market entirely,
some exposure can help offset inflation. You could invest the equity portion in
high-quality blue chip companies, or an index fund, since the goal is not to beat the
market
A moderately conservative portfolio is ideal for those who wish to preserve a large
portion of the portfolios total value, but is willing to take on a higher amount of
risk to get some inflation protection.
A common strategy within this risk level is called "current income". With this
strategy, you chose securities that pay a high level of dividends or coupon
payments.
Moderately aggressive model portfolios are often referred to as "balanced
portfolios" since the asset composition is divided almost equally between fixed-
income securities and equities in order to provide a balance of growth and income.
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Since these moderately aggressive portfolios have a higher level of risk than those
conservative portfolios mentioned above, select this strategy only if you have a
longer time horizon (generally more than five years), and have a medium level ofrisk tolerance.
Aggressive portfolios mainly consist of equities, so these portfolios' value tends to
fluctuate widely. If you have an aggressive portfolio, your main goal is to obtain
long-term growth of capital. As such the strategy of an aggressive portfolio is often
called a "capital growth" strategy.
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To provide some diversification, investors with aggressive portfolios usually add
some fixed-income securities.
Very aggressive portfolios consist almost entirely of equities. As such, with a very
aggressive portfolio, your main goal is aggressive capital growth over a long time
horizon.
Since these portfolios carry a considerable amount of risk, the value of the
portfolio will vary widely in the short term.
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MAINTAINING YOUR PORTFOLIO
Once you have chosen your portfolio investment strategy, it is important to
conduct periodic portfolio reviews, as the value of the various assets within yourportfolio will change, affecting the weighting of each asset class. For example, if
you start with a moderately conservative portfolio, the value of the equity portion
may increase significantly during the year, making your portfolio more like that of
an investor practicing a balanced portfolio strategy, which is higher risk!
In order to reset your portfolio back to its original state, you need to rebalance your
portfolio. Rebalancing is the process of selling portions of your portfolio that have
increased significantly, and using those funds to purchase additional units of assets
that have declined slightly or increased at a lesser rate. This process is also
important if your investment strategy or tolerance for risk has changed.
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A GUIDE TO PORTFOLIO CONSTRUCTION
In today's financial marketplace, a well-maintained portfolio is vital to any
investor's success. As an individual investor, you need to know how to determinean asset allocation which best conforms to your personal investment goals and
strategies. In other words, your portfolio should meet your future needs for capital
and give you peace of mind. Investors can construct portfolios aligned to their
goals and investment strategies by following a systematic approach. Here we go
over some essential steps for taking such an approach.
Step 1: Determining the AppropriateAsset Allocation for You
Ascertaining your individual financial situation and investment goals is the first
task in constructing a portfolio. Important items to consider are age, how much
time you have to grow your investments, as well as amount of capital to invest and
future capital needs. A single college graduate just beginning his or her career and
a 55-year-old married person expecting to help pay for a child's college education
and plans to retire soon will have disparate investment strategies.
A second factor to take into account is your personality and risk tolerance. Are you
the kind of person who is willing to risk some money for the possibility of greater
returns? Everyone would like to reap high returns year after year, but if you are
unable to sleep at night when your investments take a short-term drop, chances are
the high returns from those assets are not worth the stress.
As you can see, clarifying your current situation and your future needs for capital,
as well as your risk tolerance, together will determine how your investments
should be allocated among different asset classes. The possibility of greater returns
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comes at the expense of greater risk of losses (a principle known as the risk/return
tradeoff) - you don't want to eliminate risk so much as optimize it for your unique
condition and style. For example, the young person who won't have to depend on
his or her investments for income can afford to take greater risks in the quest for
high returns. On the other hand, the person nearing retirement needs to focus on
protecting his or her assets and drawing income from these assets in a tax-efficient
manner.
Generally, the more risk you can bear, the more aggressive your portfolio will be,
devoting a larger portion to equities and less to bonds and other fixed-income
securities. Conversely, the less risk that's appropriate, the more conservative your
portfolio will be. Here are two examples: one suitable for a conservative investor
and another for the moderately aggressive investor.
The main goal of a conservative portfolio is to protect its value. The allocation
shown above would yield current income from the bonds, and would also provide
some long-term capital growth potential from the investment in high-quality
equities.
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A moderately aggressive portfolio satisfies an average risk tolerance, attracting
those willing to accept more risk in their portfolio in order to achieve a balance of
capital growth and income.
Step 2: Achieving the Portfolio Designed in Step 1
Once you've determined the right asset allocation, you simply need to divide your
capital between the appropriate asset classes. On a basic level, this is not difficult:
equities are equities, and bonds are bonds.
But you can further break down the different asset classes into subclasses, which
also have different risks and potential returns. For example, an investor might
divide the equity portion between different sectors and market caps, and between
domestic and foreign stock. The bond portion might be allocated between those
that are short term and long term, government versus corporate debt and so forth.
There are several ways you can go about choosing the assets and securities to
fulfill your asset allocation strategy (remember to analyze the quality and potential
of each investment you buy - not all bonds and stocks are the same):
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Stock picking - Choose stocks that satisfy the level of risk you want to carry in the
equity portion of your portfolio - sector, market cap and stock type are factors to
consider. Analyze the companies using stock screeners to shortlist potential picks,
than carry out more in-depth analysis on each potential purchase to determine its
opportunities and risks going forward. This is the most work-intensive means of
adding securities to your portfolio, and requires you to regularly monitor price
changes in your holdings and stay current on company and industry news.
Bond picking- When choosing bonds, there are several factors to consider
including the coupon, maturity, the bond type and rating, as well as the
general interest rate environment.
Mutual funds - Mutual funds are available for a wide range of asset classes
and allow you to hold stocks and bonds that are professionally researched
and picked by fund managers. Of course, fund managers charge a fee for
their services, which will detract from your returns. Index funds are another
choice as they tend to have lower fees since they mirror an established index
and are thus passively managed.
Exchange-traded funds (ETFs) - If you prefer not to invest with mutual
funds, ETFs can be a viable alternative. You can basically think of ETFs as
mutual funds that trade like a stock. ETFs are similar to mutual funds in that
they represent a large basket of stocks - usually grouped by sector,
capitalization, country and the like - except they are not actively managed,but instead track a chosen index or other basket of stocks. Because they are
passively managed, ETFs offer cost savings over mutual funds while
providing diversification. ETFs also cover a wide range of asset classes and
can be a useful tool to round out your portfolio.
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Step 3: Re-assessing Portfolio Weightings
Once you have an established portfolio, you need to analyze and rebalance it
periodically because market movements may cause your initial weightings to
change. To assess your portfolio's actual asset allocation, quantitatively categorize
the investments and determine their values' proportion to the whole.
The other factors that are likely to change over time are your current financial
situation, future needs and risk tolerance. If these things change, you may need to
adjust your portfolio accordingly. If your risk tolerance has dropped, you may need
to reduce the amount of equities held. Or perhaps you're now ready to take on
greater risk and your asset allocation requires a small proportion of your assets to
be held in riskier small-cap stocks.
Essentially, to rebalance, you need to determine which of your positions are over-
weighted and those that are under-weighted. For example, say you are holding
30% of your current assets in small-cap equities, while your asset allocation
suggests you should only have 15% of your assets kept in that class. You need to
determine how much of this position you need to reduce and allocate to other
classes.
Step 4: Rebalancing Strategically
Once you have determined which securities you need to reduce and by how much,
decide which under-weighted securities you will buy with the proceeds from selling
the over-weighted securities. To choose your securities, use the approaches
discussed in step 2.
When selling assets to rebalance your portfolio, take a moment to consider the tax
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implications of readjusting your portfolio. Perhaps your investment in growth stocks
has appreciated strongly over the past year, but if you were to sell all of your equity
positions to rebalance your portfolio, you may incur significant capital gains taxes.
In this case it might be more beneficial to simply not contribute any new funds to
that asset class in the future while continuing to contribute to other asset classes.
This will reduce your growth stocks' weighting in your portfolio over time without
incurring capital gains taxes.
At the same time, however, always consider the outlook of your securities. If you
suspect that those same over-weighted growth stocks are ominously ready to fall,
you may want to sell in spite of the tax implications. Analyst opinions and research
reports can be useful tools to help gauge the outlook for your holdings. And tax-loss
selling is a strategy you can apply to reduce tax implications.
Remember the Importance of Diversification.
Throughout the entire portfolio construction process, it is vital that you remember to
maintain your diversification above all else. It is not enough simply to own securities
from each asset class; you must also diversify within each class. Ensure that your
holdings within a given asset class are spread across an array of subclasses and
industry sectors.
As we mentioned, investors can achieve excellent diversification by utilizing mutual
funds and ETFs. These investment vehicles allow individual investors to obtain the
economies of scale that large fund managers enjoy, which the average person would
not be able to produce with a small amount of money.
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M utua l Fun ds : C o s ts (L oo k On It)
Costs are the biggest problem with mutual funds. These costs eat into your return,
and they are the main reason why the majority of funds end up with sub-parperformance.
What's even more disturbing is the way the fund industry hides costs through a
layer of financial complexity and jargon. Some critics of the industry say that
mutual fund companies get away with the fees they charge only because the
average investor does not understand what he/she is paying for.
Annual Fund Operating Expenses
Management Fees fees that are paid out of fund assets to the fund's
investment adviser for investment portfolio management, any other
management fees payable to the fund's investment adviser or its affiliates,
and administrative fees payable to the investment adviser that are not
included in the "Other Expenses" category (discussed below).
Distribution [and/or Service] Fees fees paid by the fund out of fund
assets to cover the costs of marketing and selling fund shares and sometimes
to cover the costs of providing shareholder services. "Distribution fees"
include fees to compensate brokers and others who sell fund shares and topay for advertising, the printing and mailing of prospectuses to new
investors, and the printing and mailing of sales literature. "Shareholder
Service Fees" are fees paid to persons to respond to investor inquiries and
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provide investors with information about their investments.
Other Expenses expenses not included under "Management Fees" or
"Distribution or Service (12b-1) Fees," such as any shareholder service
expenses that are not already included in the 12b-1 fees, custodial expenses,
legal and accounting expenses, transfer agent expenses, and other
administrative expenses.
Total Annual Fund Operating Expenses ("Expense Ratio") the line of
the fee table that represents the total of all of a fund's annual fund operating
expenses, expressed as a percentage of the fund's average net assets.
Looking at the expense ratio can help you make comparisons among funds.
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Summary
Overall, a well-diversified portfolio is your best bet for consistent long-term growth
of your investments and protects your assets from the risks of large declines and
structural changes in the economy over time. Monitor the diversification of yourportfolio, making adjustments when necessary and you will greatly increase your
chances of long-term financial success.
Asset allocation can be an active process in varying degrees or strictly passive in
nature. Whether an investor chooses a precise asset allocation strategy or a
combination of different strategies depends on that investor's goals, age, market
expectations and risk tolerance.
Keep in mind, however, this study gives only general guidelines on how investors
may use asset allocation as a part of their core strategies. Be aware that allocation
approaches that involve anticipating and reacting to market movements require a
great deal of expertise and talent in using particular tools for timing these
movements. Some would say that accurately timing the market is next to impossible,
so make sure your strategy isn't too vulnerable to unforeseeable errors.
A ROADMAP FOR YOUR INVESTMENTS
As per my study I have taken data of various age group people like age group of
20s ,30s etc
According to the study I have drawn this table which easily show the content of thestudy and gives the idea that which type of portfolio suited to which age group and
how we can make different asset allocation groups suited to various age group
peoples.
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Lets take a look on this
STAGE AGE CIRCUMSTANCES INVESTMENTSTRATEGY
I-Young adult 20s Has no dependants, lowinvestible surplus Pursue growth aggressivelyas risk taking ability is highat this stage
II-Youngfamily
30s Married, with young children;starts investing in earnest
Continue aggressive wealthcreation
III-Maturefamily
40s Higher education of childrenapproaching; income peaking
Start lowering risk ininvestment portfolio bymoving funds to saferinstruments
IV-Empty
nesters
50s Children independent;
surpluses peak; preparing forliquidation
Divert new surpluses to
building retirement corpus;keep reducing portfolio risk
V-Retired 60+ Creating regular cash flowsand beating inflation and
priority
Create adequate cash flowsfrom safe investments.
ASSET ALLOCATION FOR ABOVE GIVEN PROFILE PEOPLES
For stage I-:
Asset can be allocated for this age group in three different ways which is divided in3 types conservative , moderate, or aggressive
Conservative type-Equity Debt/Funds Small savings
Moderate type-
Aggressive type-
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For stage II-:
Conservative type-Equity Debt/Funds Small savings
Moderate type-
Aggressive type-
For stage III-:
Conservative type-Equity Debt/Funds Small savings
Moderate type-
Aggressive type-
For stage IV-:
Conservative type-Equity Debt/Funds Small savings
Moderate type-
Aggressive type-
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For stage V-:
Conservative type-Equity Debt/Funds Small savings
Moderate type-
Aggressive type-
Generally speaking when you are young, you can invest a greater proportion in
equities. At that stage financial responsibility are fewer , and you can commit to
equities for long periods of time, which help you reap the unmatched returns they
promise. Also since you are not relying on this money to meet recurring expenses
or approaching financial goal , losing some of it temporarily in the pursuit of
higher returns wont have you reach for the panic button or strain your finances as
much as it would in later years. As you grows older, your portfolio should
progressively tilt towards debt. At that stage of life, safety of principal becomes
more important than growth. Approaching retirement your prime concern should
be putting in place an alternative income stream , which is better met by debt thanequity.
Based on the study I have drawn up indicative asset allocation models to see you
through life. These asset break ups are not sacrosanct. Your asset allocation can
differ from my study at all stages, depending on your life circumstances, financial
needs and investing preferences. For example approaching retirement you find that
even after ensuring an alternative income stream you still have some surplus left
from which you would like higher returns. If you dont mind the uncertainty you
can stretch your equity allocation suitably.
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GLOSSARY
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BIBLIOGRAPHY