A RESEARCH REPORT

ON

COMPARISION BETWEEN MUTUAL FUND AND SHARE MARKET

Submitted for the partial fulfillment for the endowment of Master of Business Administration Programme

(2007-09)

BY

NEETI JAISWAL

MBA IV

GRAPHIC ERA INSTITUTE OF TECHNOLOGY566/6, BELL ROAD , CLEMENT TOWN

DEHRADUN

ACKNOWLEDGEMENT

I want to acknowledge the attempts of all the people who

really showed me the path to reach the final destination of my

project.

I express my thanks to Lect. Ashu khanna (Project Guide) &

all the Staff members of the department for their help and

encouragement throughout my project work.

I owe a debt of gratitude to my parents and friends, without

whom I would not have been able to achieve this objective.

NEETI JAISWAL MBA IV

PREFACE

In the broad sense research report is necessary to make the

student of professional institutions familiar with the business

environment. This not only helps professionals to speedily

accommodate themselves in business but also to have better

usage of their studies.

To be dynamic, strategic & work aggressively they need to

know the policies, procedures and trends going in the present

business environment apart from their studies. The research

fulfills all these needs.

The main source of the study is primary data collected from

the customer and retail stores.

The various modern and standard tools to achieve the

objective of the study carry out the analysis of the data.

DECLARATION

I hereby state that dissertation on “Comparison between

mutual fund and share market” has been prepared by

me under the guidance of Lect. Ashu khanna for the award of

MBA degree the empirical findings in the report is based on

the data collected by myself while preparing the report. I also

declare that this project work has not been submitted to any

other university or title.

NEETI JAISWALMBA IV

BRIEF DESCRIPTION ABOUT THE

PROJECT:

AS my project is based on comparison between share market and Mutual funds so I have to collect data regarding share market and mutual funds. For my project I have to make a methodology that describe the difference between shares and mutual funds and after some analysis I have make some points at which we can differentiate both like: -

1. DEFINATION 2. TYPES

3. RISK4. RETURNS5. KNOWLEDGE6. FUTURE7. INVESTMENT

Summary of the progress till date-

OBJECTIVE

The objective of this project to get better knowledge about share market and mutual funds and also taking in depth knowledge of various kinds of mutual funds and shares their prices, risk, fluctuation, returns and how do both works.

As well as the objective of my project is to compare the different mutual funds companies and share companies.

After a comparison I have to decide and reach at the conclusion that which is better for customer who is knowledgeable and non knowledgeable for shares and mutual funds.

Mutual fund Definition: -

A mutual fund enables investors to pool their money and place it

under professional investment management. The portfolio manager

trades the fund's underlying securities, realizing a gain or loss, and

collects the dividend or interest income. The investment proceeds are

then passed along to the individual investors. There are more mutual

funds than there are individual stocks.

In other words: -A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the scheme 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 portfolio at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

BRIEF HISTORY OF MUTUAL FUND

Current year 2006, which is the sixth year of this millennium, marks the 41

years of the existence of mutual fund in India. The ride through these 41 years

is not been smooth. This journey has seen lots of ups and downs and changes in

this period.

Mutual funds were introduced in India in July 1964 with the establishment

of Unit Trust of India (UTI 1963). The motive behind the establishment of this

formal institution was the desire to increase the propensity of the middle and the

lower groups to save and to invest. 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 to raise fresh capital, as investors did not respond

adequately to new issues. UTI commenced its operation from July 1964 “with a

view to encouraging savings and investment and participation in the income,

profits and gains accruing to the Corporation from the acquisition, holding,

management and disposal of securities”. UTI enjoyed 23 years of monopoly in

the mutual fund industry. The industry was one entity Show till 1987 when the

monopoly of UTI was broken when SBI and Canbank Mutual Fund entered into

the arena. This was followed by the entry of others like LIC, GIC etc.

Sponsored by public sector banks. Amendment to the Banking Regulation Act

in 1983, which empowered the RBI to permit the banks to carry on non-banking

business such as leasing, mutual funds etc. under section 6 of this Act, was a

major factor, which helps in ending of this monopoly. Whereas 1986 was the

year for the entry of the other public sector mutual find, 1993 was the year for

entry of other public sector mutual funds. Starting with an asset base of Rs. 0.25

ban in 1964 the industry has grown at a compounded average growth of approx.

26 % to its current size

A mutual fund is an investment vehicle, which pools the money of many

investors. The fund’s manager uses the money collected to purchase securities

such as stocks and bonds. The securities purchased are referred as to the fund’s

portfolio.

A professional money manager who is called fund manager manages a mutual

fund’s portfolio. The manager’s business is to choose securities, which are best,

suited for the portfolio. Investments in securities are spread across a wide cross-

section of industries and sectors and thus the risk is reduced. Diversification

reduces the risk because all stocks may not move in the same direction in the

same proportion at the same time.

As at the end of September 2004, there were 29 funds, which manage assets of

Rs.153108 cores under 421 schemes

ASSET UNDER MANAGEMENT CHART

The above figure shows the emerging mutual fund industries performance in

India it shows a reasonable efforts in quite a short span. One can say if it would be

consistently performing by this way only. We have a shining future in this industry.

CONCEPT OF MUTUAL FUND CHART

As the above chart tells that when several investors invest their money, this pool is invested

in different securities by fund manager. The returns generates by this investment

Here are some of the traditional and distinguishing characteristics of mutual funds:Investors purchase mutual fund shares from the fund itself (or through a broker

for the fund), but are not able to purchase the shares from other investors on a

secondary market, such as the New York Stock Exchange or Nasdaq Stock

Market. The price investors’ pay for mutual fund shares is the funds per share

net asset value (NAV) plus any shareholder fees that the fund imposes at

purchase (such as sales loads).

Mutual fund shares are "redeemable." This means that when mutual fund

investors want to sell their fund shares, they sell them back to the fund (or to a

broker acting for the fund) at their approximate NAV, minus any fees the fund

imposes at that time (such as deferred sales loads or redemption fees).

Mutual funds generally sell their shares on a continuous basis, although some

funds will stop selling when, for example, they become too large.

The investment portfolios of mutual funds typically are managed by separate

entities known as "investment advisers" that are registered with the SEC.

Mutual funds come in many varieties. For example, there are index funds, stock

funds, bond funds, money market funds, and more. Each of these may have a

different investment objective and strategy and a different investment portfolio.

Different mutual funds may also be subject to different risks, volatility, and fees

and expenses.

All funds charge management fees for operating the fund. Some also charge for

their distribution and service costs, commonly referred to as "12b-1" fees. Some

funds may also impose sales charge or loads when you purchase or sell fund

shares. In this regard, a fund may offer different "classes" of shares in the same

portfolio, with each class having different fees and expenses.

To figure out how the costs of a mutual fund add up over time and to compare

the costs of different mutual funds, you should use the SEC’s Mutual Fund Cost

Calculator. Some funds may reduce their sales charges depending on the

amount you invest in the fund. At certain thresholds, known as breakpoints, you

may receive increasingly lower sales charges as your investment increases.

Keep in mind that just because a fund had excellent performance last year does

not necessarily mean that it will duplicate that performance. For example,

market conditions can change and this year’s winning fund might be next year’s

loser. That is why the SEC requires funds to tell investors that a fund’s past

performance does not necessarily predict future results. To understand the

factors you should consider before investing in a mutual fund, read Mutual

Fund Investing: Look at More Than a Mutual Fund's Past Performance. In

addition, you should carefully read all of a fund’s available information,

including its prospectus, or profile if it has one, and most recent shareholder

report.

There are some investment companies, known as exchange-traded funds or

ETFs, which are legally classified as open-end companies or UITs. ETFs differ

from traditional open-end companies and UITs, because, pursuant to SEC

exceptive orders, shares issued by ETFs trade on a secondary market and are

only redeemable in very large blocks (blocks of 50,000 shares for example).

ETFs are not considered to be, and are not permitted to call themselves, mutual

funds.

Mutual funds are subject to SEC registration and regulation, and are subject to

numerous requirements imposed for the protection of investors. Mutual funds

are regulated primarily under the Investment Company Act of 1940 and the

rules and registration forms adopted under that Act. Mutual funds are also

subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.

You can find the definition of "open-end company" in Section 5 of the

Investment Company Act of 1940.

For information about the basics of mutual funds, read from a list of

publications by a variety of organizations.

1. Investment Companies

Generally, an "investment company" is a company (corporation, business trust,

partnership, or limited liability company) that issues securities and is primarily

engaged in the business of investing in securities.

An investment company invests the money it receives from investors on a

collective basis, and each investor shares in the profits and losses in proportion

to the investor’s interest in the investment company. The performance of the

investment company will be based on (but it won’t be identical to) the

performance of the securities and other assets that the investment company

owns.

2.Closed-end funds

Closed-end funds generally do not continuously offer their shares for sale.

Rather, they sell a fixed number of shares at one time (in the initial public

offering), after which the shares typically trade on a secondary market, such as

the New York Stock Exchange or the Nasdaq Stock Market.

3.Unit Investment Trusts (UITs)

A UIT typically issues redeemable securities (or "units"), like a mutual fund,

which means that the UIT will buy back an investor’s "units," at the investor’s

request, at their approximate net asset value (or NAV) . Some exchange-traded

funds (ETFs) are structured as UITs. Under SEC exceptive orders, shares of

ETFs are only redeemable in very large blocks (blocks of 50,000 shares, for

example) and are traded on a secondary market.

4.Net Asset Value

"Net asset value," or "NAV," of an investment company is the company’s total

assets minus its total liabilities. For example, if an investment company has

securities and other assets worth $100 million and has liabilities of $10 million,

the investment company’s NAV will be $90 million. Because an investment

company’s assets and liabilities change daily, NAV will also change daily.

NAV might be $90 million one day, $100 million the next, and $80 million the

day after.

5.Index Funds

"Index fund" describes a type of mutual fund or Unit Investment Trust (UIT)

whose investment objective typically is to achieve the same return as a

particular market index, such as the S&P 500 Composite Stock Price Index, the

Russell 2000 Index, or the Wiltshire 5000 Total Market Index. An index fund

will attempt to achieve its investment objective primarily by investing in the

securities (stocks or bonds) of companies that are included in a selected index.

Some index funds may also use derivatives (such as options or futures) to help

achieve their investment objective. Some index funds invest in all of the

companies included in an index; other index funds invest in a representative

sample of the companies included in an index.

6.Money Market Funds

A money market fund is a type of mutual fund that is required by law to invest

in low-risk securities. These funds have relatively low risks compared to other

mutual funds and pay dividends that generally reflect short-term interest rates.

Unlike a "money market deposit account" at a bank, money market funds are

not federally insured.

7.Bond Funds

"Bond fund" and "income fund" are terms used to describe a type of investment

company (mutual fund, closed-end fund, or Unit Investment Trust (UIT)) that

invests primarily in bonds or other types of debt securities. Depending on its

investment objectives and policies, a bond fund may concentrate its investments

in a particular type of bond or debt security—such as government bonds,

municipal bonds, corporate bonds, convertible bonds, mortgage-backed

securities, zero-coupon bonds—or a mixture of types. The securities that bond

funds hold will vary in terms of risk, return, duration, volatility, and other

features.

8.Stock Funds

"Stock fund" and "equity fund" describe a type of investment company (mutual

fund, closed-end fund, Unit Investment Trust (UIT)) that invests primarily in

stocks or "equities" (as contrasted with "bonds"). The types of stocks in which a

stock fund will invest will depend upon the fund’s investment objectives,

policies, and strategies. For example, one stock fund may invest in mostly

established, "blue chip" companies that pay regular dividends. Another stock

fund may invest in newer, technology companies that pay no dividends but that

may have more potential for growth. Another type of stock fund—an index

fund—invests in stocks of companies contained in a particular market index.

(There are also index funds that invest in bond indices.)

9.Mutual Fund Fees and Expenses

As with any business, running a mutual fund involves costs. For example, there

are costs incurred in connection with particular investor transactions, such as

investor purchases, exchanges, and redemptions. There are also regular fund

operating costs that are not necessarily associated with any particular investor

transaction, such as investment advisory fees, marketing and distribution

expenses, brokerage fees, and custodial, transfer agency, legal, and accountants

fees.

three classes of shares that are sold to the general public—Class A, Class B, and

Class C—and a class that is sold only to institutional investors—Class I.

Class A shares might have a front-end sales load (a type of fee that investors

pay when they purchase fund shares).

Class B shares might not have any front-end sales load, but might have a

contingent deferred sales load (CDSL) (a type of fee that investors pay only

when they redeem fund shares, and that typically decreases to zero if the

investors hold their shares long enough) and a 12b-1 fee (an annual fee paid by

the fund for distribution and/or shareholder services). Class B shares also might

convert automatically to a class of shares with a lower 12b-1 fee if held by

investors long enough.

Class C shares might have a 12b-1 fee and a CDSL or front-end sales load, but

the CDSL or sales load would be lower than Class B’s CDSL or Class A’s

front-end sales load, and the Class would not convert to another class.

Types of mutual funds: -

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

According to structure:

(a)Open-ended Scheme: -

An open-ended fund or scheme is one that is available for subscription

and Repurchase on a continuous basis. These schemes do not have a fixed

maturity Period. Investors can conveniently buy and sell units at Net Asset

Value (NAV) Related prices, which are declared on a daily basis. The key

feature of open-end Schemes is liquidity.

(b) Close–ended Scheme: -

A close – ended fund or scheme has a stipulated maturity period e.g.

5-7 years. The fund is open for subscription only during a specified period at

the time of Launch of the scheme. Investors can invest in the scheme at the time

of the Initial public issue and thereafter they can buy or sell the units of the

scheme on the stock exchanges where the units are listed. In order to provide an

exit route to the investors, some close-ended funds give an option of selling

back the Units to the mutual fund through periodic repurchase at NAV related

prices. SEBI Regulations stipulate that at least one of the two exit routes is

provided the investor i.e. either repurchase facility or through listing on stock

exchanges. These mutual fund schemes disclose NAV generally on weekly

basis.

(C) Interval scheme : -

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

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

related prices.

According to investment objective

(a) Growth/Equity oriented scheme : -

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

Long- Term. Such schemes normally invest a majority of their corpus in

Equities. It has been proven that returns from stocks, have outperformed most

other kind of investment held over the long term. Growth schemes are ideal for

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

(b). Income/Debt Oriented Scheme: -

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

investors. Such schemes generally invest in fixed income securities such as

bonds, Corporate, debentures, Government securities and money market

instruments.

Such funds are less risky compared to equity schemes. These funds are

not affected because of fluctuation in equity markets. However, opportunities of

Capital appreciations are also limited in such funds. The NAV’s of such funds

are affected because of change in interest rates in the country. If the interest

rates fall, NAV of such funds are likely to increase in the short run and vice

versa. However, long-term investors may not bother about these fluctuations.

(c). Balanced Scheme: - The aim of balanced funds is to provide both growth and regular

income. Such Schemes periodically distribute a part of their earning and invest

both in equities and fixed income securities in the proportion indicated in their

offer documents.

In a rising stock market, the NAV of these schemes may not normally

keep pace, or fall equally when the market falls. These are ideal for investors

looking for a Combination of income and moderate growth.

d). Money Market/ Liquid Scheme: - The aim of money market fund is to provide easy liquidity, preservation

of Capital and moderate income. These schemes are generally invest in short

term Instruments such as treasury bills, certificates of deposits, commercial

paper and Inter bank call money. Return on these schemes may fluctuate

depending upon the Interest rates prevailing in the market. These are ideal for

Corporate and Individual investors as a means to park their surplus funds for

shorter periods.

Other schemes: -

(a). Tax saving schemes: - These schemes offer tax rebate to the investors under specific provision of the

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

in specified avenues. Investment made in Equity Linked Saving Schemes

(ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income

Tax Act, 1961. The Act also provides opportunities to investors to save capital

gains u/s 54EA and 54EB by investing in Mutual Funds, provided the capital

asset has been sold prior to April 1, 2000 and the amount is invested before

September 30, 2000.

(b). Index Scheme: -

Index funds replicate the portfolio of particular index such as the BSE Sensitive

index, S&P NSE 50 index (Nifty), etc. These schemes invest in the securities in

the same weight age comprising of an index. NAVs of such schemes would rise

or fall in accordance with the rise or fall in the index, though not exactly by the

same percentage due to some factors known as “tracking error” in technical

terms. Necessary disclosures in this regard are made in the offer document of

the mutual fund scheme.

(c). Sector Specific Scheme:

These are the funds/ schemes, which invest in the securities of only those

sectors or industries as specified in the offer documents. E.g. Pharmaceuticals,

Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The

returns in these funds are dependent on the performance of the respective

sectors/ industries. While these funds may give higher returns, they are more

risky compared to diversified funds. Investors need to keep a watch on the

performance of those sectors/industries and must exit at an appropriate time.

They may also seek advice of an expert.

How to invest in Mutual Fund

Step One - Identify your Investment needs

Your financial goals will vary, based on your age, lifestyle, financial

independence, family commitments, and level of income and expenses among

many other factors. Therefore, the first step is to assess your needs. You can

begin by defining your investment objectives and needs, which could be regular

income, buying a home or finance a wedding or educate your children or a

combination of all these needs, the quantum of risk you are willing to take and

your cash flow requirements.

Step Two - Choose the right Mutual Fund

The important thing is to choose the right mutual fund scheme, which suits your

requirements. The offer document of the scheme tells you its objectives and

provides supplementary details like the track record of other schemes managed

by the same Fund Manager. Some factors to evaluate before choosing a

particular Mutual Fund are the track record of the performance of the fund over

the last few years in relation to the appropriate yardstick and similar funds in

the same category. Other factors could be the portfolio allocation, the dividend

yield and the degree of transparency as reflected in the frequency and quality of

their communications.

Step Three - Select the ideal mix of Schemes

Investing in just one Mutual Fund scheme may not meet all your investment

needs. You may consider investing in a combination of schemes to achieve your

specific goals.

Step Four - Invest regularly

The best approach is to invest a fixed amount at specific intervals, say every

month. By investing a fixed sum each month, you buy fewer units when the

price is higher and more units when the price is low, thus bringing down your

average cost per unit. This is called rupee cost averaging and do investors all

over the world follow a disciplined investment strategy. You can also avail the

systematic investment plan facility offered by many open-end funds.

Step Five- Start early

It is desirable to start investing early and stick to a regular investment plan. If

you start now, you will make more than if you wait and invest later. The power

of compounding lets you earn income on income and your money multiplies at

a compounded rate of return.

Advantages of Mutual Funds

• Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.

• Professional Management: Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.

• Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.

• Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.

• Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet.

• Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index

• Transparency

• Flexibility

• Choice of schemes

• Tax benefits

• Well regulated

Drawbacks of Mutual Funds

No Guarantees: No investment is risk free. If the entire stock market

declines in value, the value of mutual fund shares will go down as well, no

matter how balanced the portfolio. Investors encounter fewer risks when

they invest in mutual funds than when they buy and sell stocks on their own.

However, anyone who invests through a mutual fund runs the risk of losing

money.

Fees and commissions: All funds charge administrative fees to cover their

day-to-day expenses. Some funds also charge sales commissions or "loads"

to compensate brokers, financial consultants, or financial planners. Even if

you don't use a broker or other financial adviser, you will pay a sales

commission if you buy shares in a Load Fund.

Taxes: During a typical year, most actively managed mutual funds sell

anywhere from 20 to 70 percent of the securities in their portfolios. If your

fund makes a profit on its sales, you will pay taxes on the income you

receive, even if you reinvest the money you made.

Management risk: When you invest in a mutual fund, you depend on the

fund's manager to make the right decisions regarding the fund's portfolio. If

the manager does not perform as well as you had hoped, you might not make

as much money on your investment as you expected. Of course, if you invest

in Index Funds, you forego management risk, because these funds do not

employ managers.

DEFINITION OF SHARE

SHARES:

Shares are also known as equity, issue of shares is the most important

source of rasing long term finance. Shares refer to a share in the share

capital of a company. It is one of the units which the share capital of

company can be devided. It indicates the interest in the assets and profits of

a company.

According to justice Farewell, a share is the interest of the

shareholder in the company measured by a sum of money for the purpose of

liability and of interest (dividend).

SHARE ARE OF TWO TYPES :

1) Equity shares

2) Preference shares

Equity share:-

Equity shares are those shares which do not carry special or

preferential rights in the payment of annual dividend of repayment of

capital, rate of dividend on such shares is not fixed.

Preference shares:-

Preference shares are those shares which carry certain special of

priority rights.

Firstly dividend at fixed rate is payable on these shares before any

dividend is paid on equity shares. Secondly at the time of winding up of the

company capital is repaid to preference shareholders prior to the return of

equity capital.

WHAT IS THE SHARE MARKET OR A STOCK

MARKET

stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings.

Holding a company's stock means that you are one of the many owners (shareholders) of a company, and, as such, you have a claim (albeit usually very small) to everything the company owns.

A stock is represented by a stock certificate. This is a fancy piece of paper that is proof of your ownership.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company.

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed--well, this is the theory anyway. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.

The importance of being a shareholder is that you are entitled to a portion of the company's profits and have a claim on assets. Profits are sometimes paid out in the form of dividends.

In case of liquidation, you'll receive what's left after all the creditors have been paid. This last point is worth repeating: the importance of stock ownership is your claim on assets and earnings.

INDIAN STOCK MARKET

Thee origination of the Indian securities market may be traced back to 1875, when 22 enterprising brokers under a Banyan tree established the Bombay Stock Exchange(BSE). Over the last 125 years, the Indian securities market has evolved continuously to become one of the most dynamic, modern and efficient securities markets in Asia. Today, Indian markets conform to international standards both in terms of structure and in terms of operating efficiency.

Structure and size of the markets Today India has two national exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Each has fully electronic trading platforms with around 9400 participating broking outfits. Foreign brokers account for 29 of these.

There are some 9600 companies listed on the respective exchanges with a combined market capitalisation near $125.5bn.

Any market that has experienced this sort of growth has an equally substantial demand for highly efficient settlement procedures. In India 99.9% of the trades, according to the National Securities Depository, are settled in dematerialised form in a T+2 rolling settlement environment. In addition, trades are guaranteed by the National Clearing Corporation of India Ltd (NSCCL) and Bank of India Shareholding Ltd (BOISL), Clearing Corporation houses of NSE and BSE respectively. The main functions of the Clearing Corporation are to work out

(a) what counter parties owe and (b) whatcounter parties are due to receive on the settlement date.

Furthermore, each exchange has a Settlement Guarantee Fund to meet with any unpredictable situation and a negligible trade failure of 0.003%. The Clearing Corporation of the exchanges assumes the counter-party risk of each member and guarantees settlement through a fine-tuned risk

management system and an innovative method of online position monitoring. It also ensures the financial settlement of trades on the appointed day and time irrespective of default by members to deliver the required funds and/or securities with the help of a settlement guarantee fund.

The Bombay Stock Exchange

The Bombay Stock Exchange Limited ( formerly, The stock exchange , mumbai ; popularly called the Bombay stock exchange, or BSE ) is the oldest stock exchange in Asia. It is located at Dalal Street, Mumbai, India.

Bombay Stock Exchange was established in 1875 . there are around 3,500 indian companies listed with the stock exchange, and has a significant trading volume. As of july2005, the market capitalization of the BSE SENSEX ( SENSITIVE INDEX ), also called the BSE 30, is a widely used market indix in India and Asia. As of 2005 it is among 5 biggest stock exchanges in the world in terms of transactions volume. Along with the NSE the companies listed on the BSE a combined market capitalization of US $ 125.5 billion.

INTORDUCTION

BOMBAY STOCK EXCHANGE LIMITED is the oldest stock exchange is asia with a rich heritage. Popularly known as “BSE”, It was established as “ the native share & stock brokers association “ in 1875. it is the first stock exchange in the country to obtain permanent recognition in 1956 from the government of India under the secutities contracts ( regulation ) Act 1956. The exchange’s pivotal and preeminent role in the development of the Indian capital market is widely recognized and its index SENSEX, is tracked worldwide. Earlier an association of persons ( AOP), the exchange is now a demutualised and corporative sentity incorporated under the provisions of the companies Act, 1956, pursuant to the BSEs ( corporatisation and demutualizaion ) scheme, 2005 notified by the securities and exchange board of India (SEBI).

With demutualization, the trading rights and ownership right s have been de-linked effectively addressing concerns regarding perceived and real conflicts of interest. The exchange is professionally managed under the overall direction of the board of directores. The board comprises eminent professional, representatives of trading members and the managing director of the exchange. The board is inclusive and is designed to benefit from the participation of market intermediaries.

In terms of organization structure, the board formulates larger policy issues and exercises over-all control. The committees constituted by the board are broad-based. The day-to-day operations of the exchange are managed by the managing director and a management team of professionals.

The exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 2004-2005 the trading volumes on the exchange showed robust growth.

The exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSEs online trading system ( BOLT ) Is a proprietary system of the exchange and is BS 7792-2-2002 Certified. The surveillance and clearing and settlement functions of the exchange are ISO 9001:2000 certified.

NATIONAL STOCK EXCHANGE

The National Stock Exchange of India (NSE), is one of the largest and most advanced stock markets in India . The NSE is the world's third largest stock exchange in terms of transactions. It is located in Mumbai , the financial capital of India . The NSE VSAT has 2791 terminals that cover 334 cities across India.

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts

(Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.

NSE conducts online examination and awards certification, under its programmes of NSE's Certification in Finanacial Markets (NCFM). Currently, certifications are available in 9 modules, covering different sectors of financial and capital markets. Branches of the NSE are located throughout India.

WHAT IS SHARE?

Share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market.

What is share market?

A market where dealing of securities is done is known as share market. There are basically two types of share market in India:

1. Bombay Stock Exchange (BSE)2. National Stock Exchange (NSE)

There are two ways of market in which investors gets share from market. There are:1. Primary Market: Markets in which new securities are issued are known as primary market.

This is part of the financial market where enterprises issue their new shares

and bonds. It is characterized by being the only moment when the enterprise

receives money in exchange for selling its financial assets.

2. Secondary Market: Market in which existing securities are dealt is

known as secondary market. The market where securities are traded after

they are initially offered in the primary market. Most trading is done in the

secondary market.

Terminology used in share market

1. Stock Broker / Sub – Broker: - People like you and me cannot just go to a stock exchange and buy and sell shares. Only the members of the stock exchange can. These members are called stockbrokers and they buy and sell shares on our behalf. So, if you want to start investing in shares, you can do it only through a broker. Every stockbroker has to be registered with the Securities and Exchange Board of India, which is the stock market regulator. You can either choose a broker (who is directly registered with SEBI) or a sub-broker (people licensed by brokers to work under them).

2. Demat account: - Gone are the days when shares were held as physical certificates. Today, they are held in an electronic form in demat accounts. Demat refers to a dematerialized account. Let's say your portfolio of shares looks like this: 40 shares of Infosys, 25 of Wipro, 45 of HLL and 100 of ACC. They will show in your demat account. You don't have to possess any physical certificates showing you own these shares. They are all held electronically in your account. Periodically, you will get a demat statement telling you what shares you have in your demat account.

How to get a demat account

To get a demat account, you will have to approach a Depository Participant. A depository is a place where an investor's stocks are held in electronic form. There are only two depositories in India -- the National Securities Depository Ltd and the Central Depository Services Ltd.

The depository has agents who are called Depository Participants. In India,

there are over a hundred DPs. Think of it like a bank. The head office, where all

the technology rests and the details of all the accounts are held, is like the

depository. The DPs are like the branches of banks that cater to individuals.

A broker, however, is not similar to a DP. A broker is a member of the stock exchange and he buys and sells shares for his clients and for himself. A DP, on the other hand, gives you an account where you can hold those shares.

To get a list of the registered DPs, visit the NSDL and CDSL Web sites.

3. Get a PAN: - The taxman demands that you get yourself a Permanent Account Number. This is a unique 10-digit alphanumeric number (AABPS1205E, for example) that identifies and tracks an individual in the taxman’sdatabase.

4. Trading / Square off Transaction: -

Whenever a trader / investor buys or sells a security and on the same day before the market closes, he sells or buys that particular security (in the same quantity), the transaction is called as square off transaction or a trading transaction. Shares lying in the T, TS and T are not square off the same day.

5. Delivery Transaction: -

Delivery transaction are those transactions which are not squared off at the day end, and the investor/trader is ready to take / give the delivery of the security.

Charges such as brokerage, service tax on brokerage, STT, stamping charges etc. are very high on the delivery transactions.

6. Settlement Period: -

Currently the settlement period is T+2. Settlement period i.e. T+2 means one has to give the delivery of the shares sold within 2 days of the date of the transaction. In case of purchase transaction, one will get the delivery within 2 days of the date of transaction.

7. Shares Category: -

The stock exchange has divided the shares into the categories according to the performance of the company.

The different categories are A, B1, B2, S (BSE Indonext), T, TS, Z

8. Auction: -

In case of failure of delivery of shares for sale transaction within the stipulated time period, the BSE auction those shares as per the rules and regulations.

9. Close Out: -

In case of failure of delivery of shares for purchase transaction within the stipulated time period, the person buying the shares gets the benefit in the form of Close Out as per the BSE’s rules and regulations.

Mutual Funds Investment Versus Direct Equity Investment

Investors have the option to invest directly through the stock market instead of

investing through mutual funds. However a practical evaluation reveals that mutual

funds are indeed a more recommended option for the individual investors. Here is

the comparison between two options:

Identifying stocks that have growth potential is a difficult process

involving detailed research and monitoring of the market. Mutual funds

specialize in the

Area and possess the requisite resources to carry out research and

continuous market monitoring.

Another critical element towards successful equity investing is

diversification. A diversified portfolio serves to minimize risk by

ensuring that a downtrend in some securities /securities is offset by an

upswing in the others. Clearly diversification requires substantial

investment that may be beyond the means of

most individual investors. Mutual fund pool the resources of many

investors and thus have the funds necessary to build a diversified

portfolio, and by investing even a small amount in a mutual fund, an

investor can, though his proportionate share, reap the benefit of

diversification.

Mutual funds specialize in the business of investment management,

and therefore employ professional management for carting out the

activities. Professional management ensures that the best investment

avenues are taped with the aid of comprehensive information and

detailed research. It also ensures that expenses are kept under tight

control and market opportunities are fully utilized. Investors who opts

for direct equity loses out on these benefits.

Mutual funds focus their investment activities based on

investment objectives such as income, growth or tax savings. An

investor can choose a fund that has investment objectives in line with

his objectives. Therefore, funds provide the investor with a vehicle to

attain his objectives in a planned manner.

Mutual funds offer liquidity through listing on stock exchange

(for close end funds) and repurchase option (for open end schemes). In

case of direct equity investing, several stacks are often not traded for

long periods. While some closed-end funds may not be traded

frequently, they are nevertheless more liquid than many stocks. In any

case, all funds provide one of the two avenues for liquidity.

Direct equity investing involves a high level of transaction costs

per rupee invested in form of brokerage, commission, stamp duty etc.

while mutual funds charge a management fee; they succeed in keeping

transaction costs under control because of the scale they enjoy.

In terms of convenience, mutual funds score over direct equity

investing. Funds serve investors not only through their investor’s

service networks, but also through associates such as banks and other

distributors. Many funds allow investors the flexibility to switch

between schemes within a family of fund. They also offer facilities

such as cheque writing and accumulation plans. These benefits are not

matched by directly equity investing.

The points mentioned above show the advantages of mutual funds over

direct investment in equity. Following comparison between a mutual fund

scheme and BSE Sensex make it clearer.

MUTUAL FUND RETURNS AGAINST THEIR MARKET BENCHMARKS--

Scheme name

Return

(%) Benchmark return (%)Tata index fund 16.23 16.83Tata pure equity fund 33.31 18.46Tata select equity fund 41.66 18.46Magnum equity fund 18.52 17.38Magnum tax gain scheme 90.51 17.38Franklin India blue chip funds 98.9 33.7Templeton India growth funds89.3 32.8

Now as equity investment is considered to be the most risky investment

instrument. So taking this perception and investors doubts in mind all

AMC`s offer a nice balance in there investment portfolio. Even in equity

funds all corpus do not go to equity investment straight away. Most of it

been invested in debt instrument consist of money market instruments

consisting of government securities which are considered to be less risky.

Now let’s take a look on the portfolio of investment in TATA`s schemes.

SCHEME EQUITY PROPORTION (%)

DEDT PROPORTION (%)

TATA EQUITY OPPORTUNITIES FUND

80-100 0-20

TATA EQUITY P/E FUND

70-100 0-30

TATA TAX SAVING FUND

80-100 0-20

TATA GROWTH FUNDS

80-100 0-20

TATA PURE EQUITY 95-100 0-5

FUNDTATA DIVIDEND YIELD FUND

70-100 0-30

TATA INFRASTRUCTURE FUND

70-100 0-30

TATA INDEX FUND 95-100(Sensex or Nifty securities)

0-5

TATA BALANCE FUND 50-70 30-50

The above chart shows that the AMC`s keep their investment options open and flexible. They time the market for the best returns. Government securities under debt instruments considered to be most defensive instrument for investment and thus at the time of crisis. The fund manager can park the money in them. And thus can ensure at least security of customers.

RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research

problem. It may be understood as a science of studies how research is done

scientifically. Research methodology has many dimensions.

The purpose of methodology is to describe the process involved in the

research work. This includes the overall research design, the data collection

process, the sampling process, the field survey, and analysis procedure.

RESEARCH DESIGN

Research Design consists of three parts:

1. Exploratory Research

2. Descriptive Research

3. Causal Research

An exploratory research focuses on the discovery of idea and is generally

based on secondary data. It is preliminary investigation that does not have a rigid

design. This is because a researcher engaged in an exploratory study that may have

to change his focus as a result of new ideas and relationship among the variables.

A descriptive study is undertaken when the researcher wants to know the

characteristics of certain group such as age, sex, educational level, income, and

occupation etc.

A casual research is undertaken when the researcher is interested in knowing

the cause and effect relationship between two or more variables. Such studies are

based on reasoning along well-tested lines.

DATA SOURCE

Data is generally of two types:

1. Primary data

2. Secondary data

Primary Data are those data specially collected for problem in hand. In this

study data were collected from primary sources in personal interview of retailers

and interaction with consumers by survey method.

These methods of data collection are quite popular. These are the major

methods of data collection in the research study.

Secondary Data are those data, which are collected for some purpose other

than helping and solving the problem.

Sources of secondary data are:

• Old reports

• Company records

• Magazines

• Company web site

Sample Procedure:

How should the respondents be chosen? To get the most feasible and

accurate result, simple random probability sampling method was adopted for direct

interview of retailers and cluster sampling was used to communicate the consumers

from different apartments of different Market for the survey.

In simple random probability sampling, probability of being chosen as a

sample unit for each unit in the population is equal. Each sample unit from the

population is chosen randomly. Probability of being chosen as a sample unit

depends upon the population size and no. of sample units to be chosen.

While in cluster (area) sampling the population is divided into mutually

exclusive groups (such as city blocks, sectors etc.), and the researcher draws a

sample of the groups using random sampling. Sometimes researcher again draws

sample units of respondents from the selected groups, it is known as two step area

sampling.

Sample Size:

450 questionnaires

Questionnaires

What is the difference between "Load" and "No Load" funds?

Load funds charge an upfront percentage of your investment to compensate the managers for their skill. If you have a three percent load, the fund managers would

get 3% of your money and would invest 97%. No Load funds do not charge this type of management compensation. Most financial advisors tell you not to pay loads, they are a tremendous drag on performance and it is very hard to overcome.

What is the difference between "Classes A" and "Class B" shares of a mutual fund?

Class A funds have a charge at the front end; Class B funds have a back end charge for redemption. The back end charge is sometimes waived if you leave the investment longer than a specified period. I recommend finding funds that do not have these types of charges. But if you really love the fund, buy the one where you can at least get out of the fee by leaving the investment for a while.

What is the 12b-1

All funds charge management fees to run the fund. However, some also charge for their distribution and service costs. These are referred to as 12b-1 fees.

What is "Net Asset Value (NAV)"?

NAV is the price an investor pays for a share of a fund before any load or sales charge is made.

COMPARISON PART BASED ON QUESTIONNAIRE

1. Customers who are interested to invest.

2. Investors Preferences to invest in particular field.

3. Investment Criteria

4. Risk associated with investment

CONCLUSION

The strategy adopted by me in completion of this project help me a lot till now in making comparison between share market and mutual funds. From the analysis we can say that if there is more risk there is more return and we can also say that share market is totally dependent on the risk taken by the investors in investing in shares. And in mutual funds is less risk as the money of investors invested in different sectors so it can divide the risk in different portfolio adopted by mutual funds companies.

At last I can say that money invested in this rise and fall market it is better to invest in mutual funds for those investors who are risk adverse and for those who are risk taker it is better for them to invest in share market.

In OJT the strategy adopted by me in achieving my target helped me a lot. This strategy helped me in knowing the customer reaction towards share market; customer’s attitude towards share broking firms and in this I helped how to interact with the customers which is beneficial for me in future.

BASIS Share market MUTUAL FUNDSRETURNS HIGH BETTERADMINISTRATION EXPENSES

HIGH LOW

RISK HIGH MODERATEINVESTMENT MORE MORENETWORK WIDE NOT SO WIDELIQUIDITY AT A COST BETTERQUALITY OF ASSETS

TRANSPARENT TRANSPARENT

Executive Summary: -

Most people do not enter financial markets directly but use intermediaries or

middlemen.

Commercial banks are the financial intermediary wet meet most often it

macroeconomics, but mutual funds, pension funds, credit unions, savings and loan

associations, and insurance companies are also important financial intermediaries.

Mutual Funds were started in India in the year 1963.Since then mutual funds have

grown dramatically. India has been a country where a general investor first

considers the safety of the investment whether the returns are as low as negligible.

Banks, gold and PPF were some of the safest avenues in this series. But entry of

mutual funds changed the whole scenario. Now mutual funds are preferred by the

investors. This intermediary has grown rapidly since its establishment. Mutual

funds have several advantages over other intermediaries. Different investment

avenues are available to investments, they also good investment opportunities to

the investors. Like all investments, they also carry certain risks. The investors

should compare the risks and expected yields after adjustment of tax on various

instruments while taking investment decisions. The investors may seek advice

from experts and consultants including agents and distributors of mutual funds

schemes while making investment decisions. Mutual funds give better returns on

investment in relation to risk than other financial intermediaries. Now Indian

mutual fund industry is set to post impressive growth over the next few years on

the back of rising incomes and higher savings in the country.

The industry has grown in size by about 200 percent from March 1993 to

December 2003,

At Rs. 1.40 trillion in terms of assets under management. It is likely to enlarge its

present share of 6 percent to the country’s gross domestic product to 40 percent in

10 years. The emerging trends indicate that the future investments will drastically

pour into mutual fund industry that will automatically enlarge its share to the

country’s gross domestic product. The size of the industry is estimated to go up to

over Rs. 1.65 trillion till 2014. Mutual funds have been able to command investors’

appetite in recent years with increasing presence of private sector companies and a

distinct shift in investor preferences. Availability of higher choices of investors, the

gradual change in the risk profile of investors as well as attempts by industry to put

in place an appropriate regulatory environment has helped the sector grow. The

mutual fund institutions in India are one of the most important among the newer

capital market institutions. The industry has experienced the biggest structural

change from monolithic structure to a competitive one. As the industry is showing

signs of maturing, its consolidation would take place and in this context mergers

and acquisition would play a crucial role.

Recommendations: -

The network of mutual funds has spread in recent years, but it is still not

wider than other intermediaries like commercial banks. So, AMC’s must

recruit more distributors.

Mutual funds have still not reach to all classes of the people. So a thoroughly

prepared campaign is needed for the awareness of people

BIBLIOGRAPHY

1. Albert J. Fredman & Russ Wiles (1997); How Mutual Funds Works; Prentice Hall of India Private Limited.

2. Donald E Fischer & Ronald J. Jordan (1996); Security Analysis and Portfolio Management; Prentice Hall of India Private Limited.

3. P. Chandra (2001); Financial Management ; Tata McGrill-Hill Publishing Company Limited.

4. www.google.com

5. www.valueresarchonline.com

6. www.myiris.com

7. www.amfiindia.com

8. www.sebiindia.com

9. www.indiainfoline.com

10. http://www.sec.gov/answers/mutfund.htm

a

LITERATURE REVIEW

Understanding Mutual Fund Accounting

By Aru Srivastava

Mutual Fund is a Fund established in the form of a trust by a sponsor to raise money by the trustees through the sale of units to the public under one or more schemes for investing in securities in accordance with the regulations. Thus, a mutual fund collects money from the investors, issues certificates to them known as units and invests the money collected in securities so as to achieve mutual benefits in terms of capital appreciation in such securities. It is a non-depository, non-banking financial intermediary, which acts as an important vehicle for bringing wealth holders and deficit units together indirectly. Mutual funds are distinct from portfolio management schemes and are essential vehicles for collective investment in stock market, risk diversification and expert management advice of the fund managers.

Performance Evaluation of Mutual Funds:

Any meaningful evaluation of performance will necessarily have to measure total return per unit of risk or the ability to earn superior returns for a given risk class. There are various statistical techniques to measure this factor. One of the technique estimates the realized portfolio returns in excess of the risk free return, as a multiple of the factor of the portfolio. The factor of portfolio, in turn, measures the systematic or undiversifiable risk of the portfolio, the relation to the market index.

Mutual funds sell their shares to public and redeem them to current net asset value (NAV) which is calculated as under-

Total market value of all MF holdings - All MF liabilities NAV of MF = ------------------------------------------------------------- No. of MF units or shares

OR

Market value of Scheme's Investments + Receivables + Accrued Income + Other Assets - Accrued Expenses - Payables - Other Liabilities NAV of MF = ------------------------------------------------------------------------------- No. of Units outstanding under the Scheme

The net asset Value of a mutual fund scheme is basically the per unit market value of all the assets of the scheme. To illustrate this better, a simple example will help.

Scheme name XYZScheme size Rs. 50,00,00,000 (Rs. Fifty crores)

Face value of units Rs. 10No. Of Units (Scheme size) 5,00,00,000Face value of unitsInvestments In sharesMarket value of shares Rs. 75,00,00,000 (Rs Seventy Five crores)

NAV(Market value of Investments / No. of units) = Rs. 75,00,00,000 ----------------------- 5,00,00,000 = Rs.15

Thus, each unit of Rs. 10 is worth Rs. 15.

Simply stated, NAV is the value of the assets of the assets of each unit of the scheme, or even simpler value of one unit of the scheme. Thus, if the NAV is more than the face value (Rs. 10), it means the money has appreciated and vice versa.

NAV also includes dividends, interest accruals and reduction of liabilities and expenses, besides market value of investments.

Presentation of accounts:

Mutual funds , should prepare schemewise balance sheet as per Annexure IA and IB of Eleventh Schedule of SEBI (Mutual Funds) Regulations 1996. As per regulation 54, every mutual fund or asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and funds.

The balance sheet shall give schemewise particulars of its assets and liabilities and shall contain particulars as per Eleventh Schedule. It should also disclose accounting policies relating to valuation of investments and other important items. Under each type of investment, the aggregate carrying value and market value of non-performing investments shall be disclosed. It should

also indicate the extent of provision made in revenue account for the depreciation /loss in the value of non -performing investments. It shall also disclose per unit Net Asset Value (NAV) as at the end of accounting year. Previous year figures should also be given against each item.

It should also indicate the appropriation of surplus by way of transfer to reserves and dividend distributed. It should also contain -

• Provision for aggregate value of doubtful deposits, debts and outstanding and Accrued income.

• Profit or loss in sale and redemption of investment may be shown on a net basis.

• Custodian and registrar fees. • Total income and expenditure expressed as a percentage of average net

assets, calculated on a weekly basis.

Schemewise balance sheet normally contains the information under following groups -

Asset side - Investments, Deposits, Other Current Assets, Fixed Assets, Deferred revenue expenditure

Liability side - Unit capital, Reserves and surpluses, Loans, Current liabilities

We know that shares carry a risk but are mutual funds also risky? Well any investment decision has to carry a certain amount of risk-doesn’t it? So, it means that mutual funds also carry a risk profile with them. So how do you assess your mutual fund’s risk profile? Some of the tools available to assess your scrip’s riskiness can also be used to assess a mutual fund's risk (or its close cousin, volatility).

BetaThis common measure compares a mutual fund's volatility with that of a benchmark and is supposed to give some sense of how far you can expect a fund to fall when the market takes a dive, or how high it might climb if the bull is running hard. A fund with a

beta greater than 1 is considered more volatile than the market; less than 1 means less volatile. So say your fund gets a beta of 1.15 -- it has a history of fluctuating 15% more than the benchmark If the market is up, the fund should outperform by 15%. If the market heads lower, the fund should fall by 15% more.

But beta, though a useful guide, is far from perfect, especially when used as a proxy for "risk." The problem here, as with many risk measures, is the benchmark. The benchmark has to be a correct measure of comparison only then will the beta hold any indicative value.

AlphaAlpha was designed to take beta one step further. It looks at the relationship between a fund's historical beta and its current performance, or the difference between the return beta would lead you to expect and the return a fund actually gets. An alpha of 0 simply means that the fund did as well as expected, considering the risks it took. So if that fund with the beta of 1.15 beat the market by 15% (or underperformed it by 15% when the market was down), it would have a 0 alpha. If your fund has a positive alpha, that means it returned more than its beta predicted. A negative alpha means it returned less. The trouble with alpha is that it's only as good as its beta. If the benchmark isn't appropriate to a fund in deriving its beta, then alpha, too, will be imprecise.

Standard DeviationMeet the most popular of the risk measures -- one with a distinct advantage over beta. While beta compares a fund's returns with a benchmark, standard deviation measures how far a fund's recent numbers stray from its long-term average. For example, if Fund X has a 10% average rate of return and a standard deviation of 5%, most of the time, its return will range from 5% to 15%. A large standard deviation supposedly shows a more risky fund than a smaller one. But here, again, what's problematic is your reference point. The number alone doesn't tell you much. You have to

compare one standard deviation with the others among a fund's peers. But a more glaring problem is that the standard deviation system rewards consistency above all else. A fund is considered stable based on the uniformity of its own monthly returns. So if it loses money but does so very consistently it can have a very low standard deviation -- down 3% each and every month wins a standard deviation of zero. And likewise, a fund that gains 10% one month and 15% the next would be penalized by a high standard deviation -- a reminder that volatility, although perhaps a cousin to risk, itself isn't necessarily a bad thing.

Sharpe RatioThis formula, worked by Nobel Laureate Bill Sharpe, tries to quantify how a fund performs relative to the risk it takes. Take a fund's returns in excess of a guaranteed investment (a 90-day T-bill) and divide by the standard deviation of those returns. The bigger the Sharpe ratio, the better a fund performed considering its riskiness. Here, again, you have the problem of relativity -- the ratio itself doesn't tell you anything, you have to compare it with the Sharpe of other funds. But this ratio has an advantage over alpha because it uses standard deviation instead of beta as the volatility variable, and therefore you don't have to worry that a fund doesn't relate well to the chosen index.

Overseas, one has mutual fund rating companies - like Morning Star which provide views of risk. Morningstar says that what we investors really care about is when our funds LOSE money, not when they're doing better than the benchmark or than their long-term averages. It measures how often and by how much a fund trails the monthly T-bill rate, and then compares that average loss with that for the investment class. The average for a class is 1.00, so numbers above that mean a fund is riskier than its peers, and below is considered less risky.

In India we still have to introduce this kind of a risk rating. However till then remember one needs to be conscious of risk, but not push it to the last decimal point. It's about awareness, rather than mathematics.

Advantage Mutual Funds

BY S S Prashanth

FEB 2000. Stock Markets reach dizzy heights of about 6000 mark. Investors go ga-ga over the benefits of stock market investing, especially the Mutual Funds. A case in example, Birla Advantage Fund’s NAV reaches Rs 80. Investors queue up at investor service centers to buy more Mutual Fund units in the euphoric expectation of the NAV reaching the Rs 100 mark.

FEB 2001. An ‘event’ful year has passed by. Stock markets are on a roller coaster ride with the Sensex reaching the nadir of about 3000 mark. Investors shun the very concept of Mutual Fund investing. They are back to the good old days of saving their money in the form of fixed deposits.

Doesn’t this sound like a typical answer to a typical examination question, which says – "What are the differences between the stock market conditions in 2000 and 2001? Relate your answer to Mutual funds"!!! It's time for introspection.

If the markets crash, it must be the time to indulge in Mutual Fund bashing. If the markets are on a swan song, it's time to shower heaps of praises on the virtues of Mutual Funds. Unfortunately, of late, this ominous tendency has become the order of the day. And, so, once again we have been having investors and casual observers commenting on the bleak and the unsteady future of Mutual Funds. Is this domino effect justified? Are Mutual Funds really in for a sun-set?

Criticisms and concerns are however mostly a reaction to the falling SHORT TERM returns and an IMPROPER understanding of the funds. Investors fail to understand that fund managers are not demi-gods and that Mutual fund are also susceptible to market conditions and remain invested in the market. As a consequence

of this, the NAVs will, more than obviously, respond to the market movements. If an investor were to expect that the decline in the NAV of his investment be put to a halt, then the fund manager would have to exit value investing, which is what he is paid for, and move into cash. If he were to do that, there is no reason why the fund managers have to be paid for and why investors need to bear the asset management fees!

The fall in the NAVs is a perfectly natural occurrence. The below par NAV of over 100 schemes today certainly disheartens the investors. A closer look at these Mutual Funds and their schemes would unfold the truth that most of these schemes are dividend options of a fund, where dividend pay out has been made. It is a universal truth that once dividend has been paid out, the NAV falls reflecting the payout which should be factored into while analyzing why most of these schemes have acquired a ‘below par’ status. Thus, inclusion of such schemes in this category and terming them ‘poor performers’ is really incompatible.

Secondly, funds whose NAV has remained above par for months or have given reasonable returns should not be counted with those funds whose NAV never crossed the par value. Fundamentally speaking, the below par NAVs show that the current value is less than the value at which one entered. This is no different from buying a fund at an NAV of Rs 14 and then seeing it fall below this level.

Another alleged ‘sin’ of a mutual fund is being overweight in technology. When the fund was performing with the same ‘overweight’ in technology stocks, that did not attract any complaints as the investor was getting high returns. If technology still is believed to be the business driver in the near future, it is all the more natural that the funds will commit a larger part of its portfolio to such stocks, albeit with the required realignment in the assigned weightages from time to time.

Mutual Funds are still and would continue to be the unique financial tools, in the country. One has to appreciate the fact that every aspect of life has its periods of highs and lows. This has been the case with the stock markets. Why not apply the same

logic to Mutual Funds? Mutual Funds have not failed in any country where they work within a regulatory framework. Their future is bright.

STOCK MARKET TIPS

By Manshu Verma

The stock markets are at all time highs and just like the last time around when the market was at its previous high every one thinks that nothing can go wrong and there is just one way where the market can go which is UP. Nothing could be farther from the truth and this will be clear from the way the market behaves in the next few months. Here are a few tips that would hopefully save you from losing a lot of cash in the current frenzy

Time and again investors have burnt their fingers in the markets and here are some tips to you so that you do not end up burning your fingers in this market.

The number one tip at this point would be to sell if you have stocks and not to buy them if you have cash. The golden principle in the markets is “Buy when everyone else sells and sell when everyone else buys”. Simple enough right? Not really.

Why? Because of peer pressure pure and simple. When everyone else around you seems to be having a ball at the markets you would feel like a fool if you didn’t participate now.

OK so you can’t resist buying at this time then at least do yourself a favor and stay away from unknown Penny Stock and hot tips that your barber gave you. True that the stock has tripled in the last fifteen days but that was before people like your barber started buying the stock. Chances are that the Promoter of the company have started buying into the stock and have spread rumors like acquisition or a big export order to fool investors and sell out to them at a later date.

Another tip that would serve useful is to value a stock based on its future growth and not its past performance. For instance many investors say that I will not buy stocks of X company because it has doubled in the last year. Well it may have doubled in the last year but that should not be the thing you should be telling yourself. Rather you should ask yourself why has this doubled in the last year and can it do so again? There should be a solid answer to your question like the launch of a new product or reduction in the prices of raw material. And indeed if the answer is in the positive then by all means go ahead and buy that stock regardless of what has happened in the last year.

Another tip would be to remember what you are buying. Quite simply investors often forget that when buying a stock they are simply buying ownership in the companies. Most of you would know that nothing spectacular would happen in the company that you work for, in a month, they are not going to double their revenues and certainly not double your salary every month. Then why expect anything different from the companies that you are investing in. Why expect the prices to double in a month or two. Give time to your investments; don’t reduce it to a gamble. Only when you invest in fundamentally sound companies and then give the investments sufficient time to grow will you see some healthy returns on your investments. Ideally a minimum horizon of one year is a good time.

Hope these tips will prove helpful and you will make a lot more in the stock markets than you have already been making. Happy Investing!

We’ve often heard of "the secret of successful investing is to diversify their risk" - so how does one go about this? And what does diversification really mean - does it only mean that one should spread ones portfolio across various types of assets, in terms of cash, debt, shares, mutual funds, deposits etc? Or can one diversify ones portfolio even further?

Looking at the investment instruments available to investors there is plenty to choose from in each category. For example, within deposits, today investors have the choice of fixed, semi

fixed, two in one accounts etc. For mutual funds also investors can diversify across liquid, balanced, growth, income etc. Coming to stocks also there is a lot of diversification possible. It's critical to understand the basic types of stock available on the market in order to match your investment style to types of stock. The most basic way to classify stocks is by size, growth potential and returns.

When stock market experts talk about size, they're referring to the market capitalization of a stock. "Market cap" refers to the rupee value of a company. It's computed by multiplying the total number of a company's shares by the current price per share. Large-cap stocks are shares of companies with the biggest market capitalization. Stocks of Reliance, ACC, Infosys, Satyam etc, are considered the most stable and successful. Their sheer size provides a cushion during recessions. Large caps are more likely to pay dividends to shareholders. But because they are more established with less room to grow, large caps are less likely than smaller stocks to give those big-time returns. A blue chip is one of an elite group of stocks of corporations that have a history of good dividend returns (in both good financial times and bad), solid management and good growth potential. Blue-chip stocks, like Hindustan Levers, ITC, etc are among the most stalwart and low-risk investments available in the stock market.

Small-cap stocks are the babies of the stock market. The upside to these stocks lies in the market perception that these stocks have a major growth potential. Orchid pharmaceuticals, Morepan lab, Aks opticfibre etc. can be classified in this category. Small caps have the potential to do even better than large-caps, in terms of returns at the bourses. Investors interested in long-term growth, hunt out the strongest small-cap prospects. The downside: Many small-cap stocks may not even have any real earnings. In the short term, these stocks can be volatile and are less likely to pay dividends.

Penny stocks are so named because their shares can often be had for mere pennies. That sounds good to frugal investors. Obviously, penny stocks have enormous growth potential. But every good shopper knows that cheap is not always a bargain.

There may be good reasons that the stock is depressed in the first place. The company may be too new to have gained investor confidence, or perhaps it is in a state of financial turmoil. Journalists and professional analysts at major stock brokerages tend to ignore penny stocks, so there is little information about these companies from third-party sources, increasing the risk of fraud and thus making them less attractive. Since most penny stocks are traded on minor stock exchanges with less-than stellar reputations for overseeing their member firms, the risk of fraud is compounded. All these variables make the purchase of penny stocks risky for novices, no matter what they might hear in an Internet chat room. However, experienced investors should not rule out penny stocks altogether, because they do offer the potential for big rewards. The trick is to find the diamond in the rough.

In terms of growth potential and return growth stocks, Momentum stocks, value stocks, income stocks and cyclical stocks should all form a part of the portfolio. Growth stocks are stocks with rapidly rising profits, such as Global telesystems, Himachal futuristic, Visual Soft, NIIT etc. Technically speaking, growth stocks usually register annual earnings increase of 15-25 percent. Growth investors expect that a company with accelerating profits will also have a rising stock price. As you'd expect, while you can make lots of money in growth stocks, you can also lose a lot. This happens when professional growth investors divest from a growth stock if its growth rate slows, sending the stock price spiraling down.

Momentum stocks are like growth stocks-squared. Momentum investors buy shares in companies whose earnings are growing at increasingly higher rates. Lately, these have been technology stocks such as Infosys, Satyam, Wipro etc. Momentum investing often only works for a short period of time, but when it does, it pays off. However, momentum stocks are risky for that very reason, that it's difficult to determine when their window of opportunity will close. The stock price can plummet rapidly.