PROJECT REPORT

ON

FINANCIAL PLANNING USING MUTUAL FUNDS

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ACKNOWLEDGEMENT

I wish to express my heartfelt appreciation to many who have contributed to

this study. I would like to thank to Faculty Guide, Firdaus Khan,for her

valuable guidance. I wish to express my gratitude to my faculty guide, who

provided me with constant impetus to complete this project.

SOHAIL DHANANI

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INDEX

1.0 Executive Summary 2.0 Introduction 3.0 Research Methodology

a. Research Objectives b. Hypothesis c. Research Design d. Sample Design e. Data Collection f. Limitations

4.0 Industry Profilea. Review of literature on the industryb. Basics of mutual fundc. Major Companiesd. Growth chart – past and projections for futuree. Swotf. Financial planning

5.0 Issues and challenges faced by the company and the MF industry 6.0 Finding and Analysis 7.0 Recommendations 8.0 Bibliography9.0 Annexure10.0 Case study

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1.0 EXECUTIVE SUMMARY

I always preferred finance as a subject because I always wanted to enter Finance Industry. As Finance is the core area be it be personal finance(cash in hand) of an individual or funds available with the company, needs to be well taken care of. Finance is a branch of economics that deals with the management of funds, financial resources and other assets. In broader terms, finance is raising or investing money both as equity or debt .Finance is a wide-ranging term which includes funding, investments, trading and risk management. Finance involves investment of funds in financial assets, such as stocks, bonds, mutual funds and private equities for income generation. We are not all investment professional. We go to a doctor when we need medical advice or a lawyer for legal guidance. Similarly, mutual funds are investment vehicles managed by professional fund managers. Mutual funds are like professional money managers, however a key factor in their favour is that they are more regulated and hence offer investors the ability to analyse and evaluate their track record.According to a study conducted by Associated Chambers of Commerce and IndustryOf India (ASSOCHAM), the mutual fund industry is expected to be worth Rs. Mutual funds offloaded shares worth more than Rs 14,000 crore during FY 2013-14, making it the fifth consecutive year of net outflows. This is based on the perception that investors in future would prefer mutual funds for their investment destination rather than choosing to park their funds in stock markets because of safer returns and lower degree of risk as compared to other markets.Such undoubted potential that the future holds for companies in the business, has called for a very competitive scenario, wherein each mutual fund house will try to grab the opportunity to increase its market share. Tata Asset Management Limited, the Mutual Fund arm of the Tata group, is one such company in the race.Banks all over the world have now stepped into the mutual fund business. The branch systems that are part of banks provide the opportunity for extensive networks of retail outlets for mutual fund sales. So far, banks have had an excellent record as managers of mutual funds who are marketing mutual them with good reason: deposits in these funds could soon surpass bank deposits.However, now with more than 10,000 mutual funds to choose from, banks have begun streamlining their focus on a few set of funds over a period of time.This Project gave me a great learning experience and at the same time it gave me enough scope to implement my analytical ability.

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2.0 INTRODUCTION

Financial Planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a house, saving for your child's higher education or planning for retirement. The Financial Planning Process consists of six steps that help you take a 'big picture' look at where you are currently. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals. The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans.

Financial Planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of the whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.

Financial Planning is the process of creating strategies to help you manage your finances in order to meet your life goals. It is a complicated matter that all rational and capable people must one day begin to pursue. Financial Planning consists of four primary steps: creating Financial Planning Objectives, developing plans that will fulfill these objectives, creating a budget by which the assets will be obtained, and finally review and revision of the financial plan.

The Financial Planning Objectives can be divided into 5 sections. The first is the basic things you need for survival, and obviously this is the primary objective that must be met before others can be considered. These things are comprised of food, clothing, shelter, and even our automobile expenses. Next is the money left over that we can afford to put into savings or an emergency fund.

Then there are the discretionary insurance you put on things such as life insurance, home owners insurance, and auto insurance. Investment is the next step, the accumulation of assets in order to secure a return. Finally, we have estate planning which includes providing for heirs by leaving them assets and minimizing taxes.

After the Financial Planning Objectives have been laid out, financial plans must be devised in order to fulfill them. This is done by analyzing both your current problems that are keeping you from obtaining your goals and whatever economic opportunities from which you may currently benefit. Solutions are then developed on how to fix the problems or benefit from opportunities and then they are implemented. The final step is to monitor and keep track of these objectives and review their progress.

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The third step in the financial planning process is to devise a budget by which the previous objectives can be accomplished. There are three steps to the budget creation process: identify how you're spending your money, set goals for yourself that will accomplish your financial plan, and track your spending to make sure you're following your budget. Look for small expenses that add up over time, reduce larger expenses, and try to cut taxes. Finally, keep track of how inflation will influence your savings.

The final step in financial planning is to review and revise your financial plan. There are many reasons for this step, the most important being to make sure that you are meeting your objectives and that these objectives are helping to achieve your goal. It's also important to review and revise your financial plan as you may have a drastic change in circumstances, your objectives may have changed, and maybe you have made a change to your long-term financial goals.

Financial Planning may seem to be difficult and time consuming, which it is, but with practice and dedication you will find it to be easier than you expected. There are also many financial institutions and computer software that can aid you when it comes to financial planning. Remember that with social security becoming less trustworthy, you'll never too young to begin to prepare for retirement.

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3.0 RESEARCH METHODOLOGY

Financial Planning is a branch of the finance advising field which caters to individual clients rather than corporations or Business. Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors.The financial market holds great opportunities for companies in the financial sector of the country. It is a growing market backed by a strong economy with huge untapped potential. Tata Asset Management Company is a part of this financial market where it offers its mutual fund units for sale through its various distribution channels. Investors form the backbone of such a market, hence, the company. With growing investor awareness and knowledge of mutualFunds, it has become imperative for every company to provide the investor with a thorough analysis of the various schemes available, before suggesting him to vouch his money on a particular scheme.It is also a responsibility of a mutual fund house to ensure that the investor is not misguided at any point of time and is given due time and attention. Hence, proper knowledge and time needs to be provided to the investor leading to more informed decision making at his end.Also, increased consciousness towards the benefits and importance of saving and the evident increase in the saving and investment habit of people has made it possible for Mutual Fund houses to tap new investments. Since most investors trust Banks for the custody and management of their cash, the onus of ensuring adequate returns on such resource falls on them. Hence, banks form a major distribution channel for a mutual fund house.

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a. RESEARCH OBJECTIVES

My project, “FINANCIAL PLANNING USING MUTUAL FUND” focuses on:

I. Primary ObjectiveThe Primary objective of the project is to gain a better understanding of the branch that help investor in investing across investment avenues specially mutual funds based on his risk profile and investment objective.

II. Secondary Objective

The secondary objective is “TO STUDY THE VARIOUS FACTORS CONSIDERED BY THE CUSTOMER WHILE GOING FOR INVESTMENT IN MUTUAL FUND”

b. HYPOTHSIS

H0- (NULL HYPOTHESIS): All investors seek help from a professional Financial Planner. H1-(ALTERNATE HYPOTHESIS): Many investors don’t trust advice by financial

planner.

c. RESEARCH DESIGN

Exploratory research: Here we are going to find out the Preference of investors towards MUTUAL FUND.

d. SAMPLE DESIGN

Sample size

Total of 170 respondents were contacted and Questionnaire was given.

Sampling unit

Jubilee Hills Place in the Delhi Hyderabad Region was selected for sampling and the target area for collecting data because there are many brokerage houses nearby.

Sampling Technique

The Non- Probabilistic technique under which convenient sampling is used.

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e. DATA COLLECTION

The source of my data collection is primary as well as secondary data.Primary Data: Qualitative data is collected on investor’s preference towards mutual fund investment option.

Secondary Data: Qualitative as well as quantitative data collected from various sources including material available in the corporate office, business newspapers, magazines and trade journals and internet. Other sources of information include industry statistics published by AMFI, SEBI & CAMS, product performance statistics from various sources like mutualfundsindia.com, Value Research, CRISIL.

f. LIMITATIONS

The survey sample was not very large for analysis. Respondent were so busy in their work, they hardly read the questions properly leading to

unfair result. The survey was carried through questionnaire and the questions were based on perception. There may be some biased views.

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4.0 INDUSTRY PROFILE A .REVIEW OF LITERATURE ON THE INDUSTRYLiterature on mutual fund performance evaluation is enormous. Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner.Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance (Jensen’s alpha) that estimates how much a manager’s forecasting ability contributes to fund’s returns.As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark index’s standard deviation. S.Narayan Rao , et. al., evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynor’s ratio, Sharpe’s ratio, Sharpe’s measure , Jensen’s measure, and Fama’s measure. The study used 269 open-ended schemes (out of total schemes of 433) for computing relative performance index. Then after excluding funds whose returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investor’s expectations by giving excess returns over expected returns based on both premium for systematic risk and total risk.Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual funds. This paper uses a technique called conditional performance evaluation on a sample of eighty-nine Indian mutual fund schemes .This paper measures the performance of various mutual funds with both unconditional and conditional form of CAPM, Treynor- Mazuy model and Henriksson-Merton model. The effect of incorporating lagged information variables into the evaluation of mutual fund managers’ performance is examined in the Indian context. The results suggest that the use of conditioning lagged information variables improves the performance of mutual fund schemes, causing alphas to shift towards right and reducing the number of negative timing coefficients.Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this paper, measures of evaluating portfolio performance based on lower partial moment are developed.Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified “target rate” like risk-free rate. Kshama Fernandes(2003) evaluated index fund implementation in India. In this paper, tracking error of index funds in India is measured .The consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be periods where certain index funds appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek market of equity mutual funds. The methodology is based on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS multi-criteria decision aid method is employed in order to develop mutual fund’s performance models.Goal programming model is employed to determine proportion of selected mutual funds in the final portfolios.

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Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to randomly selected conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investment performance. The study found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500 during the study period.

A number of recent studies have examined the issue of performance persistence in mutual funds. Grinblatt and Titman (1992) analyze performance of 279 funds over the period of 1975 to 1984 using a benchmark technique and find evidence that performance differences between funds persists over time. Hendricks, Patel, and Zeckhauser (1993) study 165 no-load growth-oriented funds over the period 1974 to 1988 and obtain similar results. In a study of 728 mutual fund returns over the period 1976 to 1988, Goetzman and Ibbotson (1994) find that two-year performance is predictive of performance over the successive two years. Volkman and Wohar (1995) extend this analysis to examine factors that impact performance persistence. Their data consists of 322 funds over the period 1980 to 1989, and shows performance persistence is negatively related to size and negatively related to levels of management fees.

Studies of performance persistence in mutual funds are not without contrary evidence. Carhart (1997) shows that expenses and common factors in stock returns such as beta, market capitalization, one-year return momentum, and whether the portfolio is value or growth oriented "almost completely" explain short term persistence in risk-adjusted returns. He concludes that his evidence does not "support the existence of skilled or informed mutual fund portfolio managers" (Carhart, 1997, p. 57). In the Kahn and Rudd 1995 study of 300 equity funds and 195 bond funds between 1983 and 1993, only the bond funds show evidence of persistence. In an article in this issue, Detzel and Weigand (1998) use a regression residual technique to control for the effects of investment style, size and expense ratios. They find, after controlling for these variables, no evidence of performance persistence.

Two other studies have used performance ranks. Dunn and Theisen (1983) rank the annual performance of 201 institutional portfolios for the period 1973 through 1982 without controlling for fund risk. They found no evidence that funds performed within the same quartile over the ten-year period. They also found that ranks of individual managers based on 5-year compound returns revealed no consistency. Bauman and Miller (1995) studied the persistence of pension and investment fund performance by type of investment organization and investment style. They employed a quartile ranking technique because they noted that "investors pay particular attention to consultants' and financial periodicals' investment performance rankings of mutual funds and pension funds" (Bauman & Miller, 1995, p. 79). They found that portfolios managed by investment advisors showed more consistent performance (measured by quartile rankings) over market cycles and that funds managed by banks and insurance companies showed the least consistency. They suggest that this result may be caused by a higher turnover in the decision-making structure in these less consistent funds. This study controls for the effects of turnover of key decision makers by restricting the sample to those funds with the same manager for the entire period of study.

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Two important research streams in the finance literature focus on predicting fund performance and understanding investor behavior. The academic literature on mutual funds has mostly focused on fund performance and management style (e.g., Grinblatt and Titman, 1992; Brown and Goetzman, 1997; Lunde et al., 1999; Chevalier and Ellison, 1999; Kothari and Warner, 2001), although others have focused on the risk-return characteristics of bond mutual funds (Philpot et al., 2000; Blake et al., 1993). Some studies (Indro et al., 1999; Morey and Morey, 1999; Sirri and Tufano, 1998) have also investigated the different methods of predicting fund performance by using tools, such as neural networks or benchmarking. Recent literature, however, proposes the use of integrated or hybrid models for predicting fund performance. Tsaih et al. (1998), for example, develop a hybrid artificial intelligence technique to implement trading strategies in the S & P 500 stock index futures market. Their empirical results show that their system outperformed the passive buy-and-hold investment strategy during the six-year testing period. The authors suggest that the hybrid approach facilitates the development of more reliable intelligent systems than standalone expert systems models.

Hybrid systems also offer the organization a method to facilitate knowledge management. Knowledge management includes knowledge repositories, expert networks, best practices, and communities of practice (King et al., 2002). The repositories consist of databases from which members of the organization can retrieve specific technical knowledge. Knowledge management has been used to add external knowledge to Web sites (Ojala, 2002), provide knowledge discovery for destination management (Pyo et al., 2002), and deliver distance teaching (Hirschbuhl et al., 2002). These applications reflect the fact that one of the uses of knowledge management is to provide a strategic advantage (King et al., 2002).

Some recent studies have begun to address the issue of understanding investor behavior (e.g., Zheng, 1999; Harliss and Peterson, 1998; Goetzmann and Peles, 1997; Alexander et al. 1997, 1998; Bogle, 1992). These studies have aroused scholarly interest in understanding how investors make investment decisions. A study by Alexander et al. (1998) examines responses of randomly selected mutual fund investors. Their findings show that employees investing in mutual funds through their employer-sponsored pension plans [e.g., 401(k)] are generally younger, more likely to own stock funds, and less likely to own certificate of deposits and money market accounts. In addition, individuals investing in mutual funds via non employer channels are significantly more experienced than individuals investing in employer-sponsored pension plans. Both types of mutual fund holders (those investing through employers and those investing in non employer plans) are well educated, with 55% having at least a college degree, and do not consider the operating expenses of the mutual fund to be an important factor in their purchasing decision.Overall, limited research has been performed to integrate these three streams of literature--financial, behavioral, and information technology (e.g., Nagy and Obenberger, 1994). This paper attempts to integrate these three streams of research to enhance our understanding of investors' fund-switching behavior and in improving prediction accuracy. Our study attempts to extend the literature on the investment behavior of mutual fund investors by focusing on the differences and similarities between individuals investing in employer versus non employer investment plans. This issue has not been investigated adequately in the literature.

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B. BASICS OF MUTUAL FUND A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. and hence need a financial intermediary who can provide the required knowledge and the professional expertise for the purpose of investing successfully. In USA the banking industry has been well overtaken by the Mutual Fund Industry as there is more money into the Mutual Fund Industry for management than the deposits in the bank. Indian households started investing more of the saving’s into the capital market after 1980’s. Now the investment flows more into the equity and debt instruments than the conventional bank deposits. Until 1992 the investors of the primary market were assured good return because the price of the new equity issues was controlled and was very low. The Industry has been facing a problem due to market crash and the six months returns of almost all the equity schemes have gone negative. And the philosophy of the Indian Investor is to invest in a period of boom rather than opting for value investing. The Industry is only allowed to invest in Options for the purpose of hedging rather but is not allowed to use them for earning good returns. A Mutual Fund is allowed only to invest maximum of 20% of their Assets into Mutual Funds have merged as professional intermediaries. They not only provide expertise on successful investing but also allow investing in small amount and have benefits of having a diversified portfolio with a good potential for income and growth. Over the course of the past 60 years, the mutual fund industry has Undergone tremendous change. In 1945, it was a tiny industry offering a relative handful of funds—largely diversified equity and balanced Funds. As 2005 begins, it is a multi-trillion-dollar titan offering thousands of funds with a dizzying array of investment policies and strategies. In India Unit Trust of India occupied the place in the capital market as the first intermediaries in 1964 which was the market monopoly till 1987. UTI was established in 1963 by an act of Parliament. It was set up by the Reserve Bank of India and later was de-linked from RBI. The first scheme launched by UTI was US-64 which was the first open end scheme in the country. Unit linked Insurance Plan (ULIP) was launched in 1971 and after that scheme like Children’s Gift Growth Fund, Master share were launched.

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CONCEPT OF MUTUAL FUND A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

THE SECURITY AND EXCHANGE BOARD OF INDIA (Mutual Funds) REGULATIONS,1996 defines a mutual fund as a " a fund establishment in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments."

Every Mutual Fund is managed by a fund manager, who using his investment management skills and necessary research works ensures much better return than what an investor can manage on his own. The capital appreciation and other incomes earned from these investments are passed on to the investors (also known as unit holders) in proportion of the number of units they own.

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When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit holder.Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors.For example:

A. If the market value of the assets of a fund is Rs. 100,000 B. The total number of units issued to the investors is equal to 10,000. C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00 D. Now if an investor 'X' owns 5 units of this scheme

E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied by the NAV of the scheme)

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The Evolution

The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better understood divided into following phases:

Phase 1. Establishment and Growth of Unit Trust of India - 1964-87Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was transferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years.

UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Mastershare (India’s first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores.

Phase II. Entry of Public Sector Funds - 1987-1993The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.

Phase III. Emergence of Private Sector Funds - 1993-96The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes.

Phase IV. Growth and SEBI Regulation - 1996-2004The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilization of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds.

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Investors’' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry.

In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual fund players on the same level. UTI was re-organized into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund

Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a significant growth in mobilization of funds from investors and assets under management.

Phase V. Growth and Consolidation - 2004 OnwardsThe industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players

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CONSTITUENTS OF A MUTUAL FUNDMutual fund is vehicle that facilitates a number of investors to pool their money and have it jointly managed by a professional money manager. There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund.

Since mutual funds receive money from the public for investments, the regulatory authorities have to ensure that the investors' rights and interests are protected. If mutual fund promoters and fund managers are given a free hand, there is every possibility of the interests of investors being ignored. A fund promoter may prefer to invest in companies which he is associated with. Internal control and risk management systems may be ignored. The best way to avoid such problems is to separate ownership of the mutual fund, management of the fund organization and investment management from each other. To increase transparency and professional management, the functions and responsibilities of each should be well defined. Finally, to ensure objectivity in decision making, independent persons should be inducted in organizational and fund management.   The SEBI regulations stipulate that a mutual fund should be structured in such a way as to ensure clear differentiation between the promoters and managers of a fund. A mutual fund is set up in the form of a trust, which has Sponsor, Trustees, Asset Management Company (AMC) and Custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

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SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002). The various functionaries as defined in the regulations and required for any mutual fund are:

Sponsors: Sponsors are individuals, group of individuals or companies who promote a mutual fund. Sponsors should have at least five years of experience in the financial services business. They should be financially sound and stable. To be more specific, they should have reported positive net worth for the previous five years and net profits for at least three of the preceding five years. Also, sponsors or any of their principal officers, like directors and chief executive officers, should not have been convicted for economic offences.

Trustees: Trustees are board members of the mutual fund trust. They should be persons of good capability and standing and should not have been convicted for any economic offence. At least two thirds of the trustees shall be independent, or in other words they should not be associated with the promoters. No person can serve as the trustee of more than one mutual fund, unless he is an independent trustee. Trustees can be individuals or companies.Trustees are responsible for the overall management of the mutual fund. They hold all assets of the mutual fund on behalf of its investors and it is their job to ensure proper management of such funds. Trustees are not allowed to manage the funds or take investment decisions themselves. Their responsibilities include appointment of fund managers, ensuring all legal compliances, appointment of auditors, establishment of internal controls, supervision of fund management, etc.Trustees are required to carry out frequent checks on the activities of the fund and its managers. They are also required to report about the activities to SEBI, once every six months. A compliance officer should be appointed by the trustees to ensure that all legal provisions are adhered to.

Asset Management Company: An Asset Management Company or AMC is a company engaged in the business of professional investment management for mutual funds. An AMC should be registered with SEBI and its board of directors should have sufficient experience in the financial service industry. They should not have been convicted of any economic offence. The chairman of the company should not be the trustee of any mutual fund and at least half of the company's directors should not have any association with the sponsors or trustees of the mutual fund. An AMC or any of its employees cannot become the trustee of a mutual fund. The sponsors or trustees of a mutual fund should appoint a registered AMC to invest the funds received from investors. The contract between the trust and the asset management company is called investment management agreement. The AMC can charge a fee from the mutual fund for its services, subject to the limits set by SEBI.

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Custodian: A custodian is an external agency, registered with SEBI, who physically hold the assets of a fund like shares, bonds etc. Many large commercial banks offer custodial services to mutual funds. A custodian is responsible for the administrative and back office work relating to transactions undertaken by the fund. They are also responsible for ensuring collection of incomes due to the fund, like dividend from shares and interest on bonds. The custodian can charge a fee for offering such services.Registrars and Transfer Agents: A Registrar is an external agency responsible for handling the administrative work relating to collection of application from investors, issue of mutual fund units, and transfer of mutual fund units from a seller to a buyer when the scheme starts trading on the stock exchanges etc. The fund can pay a fee to the registrar for such services.

TYPES OF MUTUAL FUND

General classification of Mutual Fund (By Structure)

A. Open ended and Close ended Funds

Open-end FundsFunds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day.

Closed-end FundsFunds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions:

1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a closed end fund is computed on a weekly basis (updated every Thursday).

2. Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed.

B. Load and No Load Funds

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Load FundsMutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning, fund manager's salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds. A load fund may impose following types of loads on the investors:

Entry Load - Also known as Front-end load, it refers to the load charged to an investor at the time of his entry into a scheme. Entry load is deducted from the investor's contribution amount to the fund.

Exit Load - Also known as Back-end load, these charges are imposed on an investor when he redeems his units (exits from the scheme). Exit load is deducted from the redemption proceeds to an outgoing investor.

Deferred Load - Deferred load is charged to the scheme over a period of time. Contingent Deferred Sales Charge (CDSC) - In some schemes, the percentage of exit load

reduces as the investor stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge.

No-load Funds All those funds that do not charge any of the above mentioned loads are known as No-load Funds.

C. Tax exempt Funds and Non Tax exempt Funds

Tax-exempt Funds Funds that invest in securities free from tax are known as Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are tax-free.

Non-Tax-exempt FundsFunds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor

Types of Mutual Funds by Investment objective:

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1. Equity Funds Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds:

a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds.

b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future.

c. Specialty Funds - Specialty Funds have stated criteria for investments and their portfolio

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comprises of only those companies that meet their criteria. Criteria for some specialty funds could be to invest/not to invest in particular regions/companies. Specialty funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of specialty funds:

i. Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors.

ii. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk.

iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky.

iv. Option Income Funds*: While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.

v. d. Diversified Equity Funds - Except for a small portion of investment in liquid money market,

diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past.

e. Equity Index Funds - Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds

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that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.

f. Value Funds - Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earnings Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or specialty funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced.

g. Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.

2. Debt / Income FundsFunds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds:

a. Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors

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which further reduces risk for an individual investor. b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are narrow focus

funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.

c. High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors.

d. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible.

e. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period.

3. Gilt Funds Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates

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and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

4. Money Market / Liquid FundsMoney market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).

5. Hybrid Funds As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:

a. Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon.

b. Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.

c. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.

6. Commodity FundsThose funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund"

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and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds.

7. Real Estate FundsFunds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation.

8. Exchange Traded Funds (ETF) Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad.

9. Fund of FundsMutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.

MUTUAL FUNDS ADVANTAGES: The benefits on offer are many with good post-tax returns and reasonable safety being the hallmark that we normally associate with them. Some of the other major benefits of investing in them are:

Number of available options

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Mutual funds invest according to the underlying investment objective as specified at the time of launching a scheme. So, we have equity funds, debt funds, gilt funds and many others that cater to the different needs of the investor. The availability of these options makes them a good option. While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of security that aimed at the time of making investments. Money market funds offer the liquidity that desired by big investors who wish to park surplus funds for very short-term periods. The only pertinent factor here is that the fund has to selected keeping the risk profile of the investor in mind because the products listed above have different risks associated with them. So, while equity funds are a good bet for a long term, they may not find favour with corporate or High Net worth Individuals (HNIs) who have short-term needs.

Diversification Investments spread across a wide cross-section of industries and sectors and so the risk is reduced. Diversification reduces the risk because not all stocks move in the same direction at the same time. One can achieve this diversification through a Mutual Fund with far less money than one can on his own.

Professional Management Mutual Funds employ the services of skilled professionals who have years of experience to back them up. They use intensive research techniques to analyze each investment option for the potential of returns along with their risk levels to come up with the figures for performance that determine the suitability of any potential investment.

Potential of Returns Returns in the mutual funds are generally better than any other option in any other avenue over a reasonable period. People can pick their investment horizon and stay put in the chosen fund for the duration. Equity funds can outperform most other investments over long periods by placing long-term calls on fundamentally good stocks. The debt funds too will outperform other options such as banks. Though they are affected by the interest rate risk in general, the returns generated are more as they pick securities with different duration that have different yields and so are able to increase the overall returns from the .

Efficiency By pooling investors' monies together, mutual fund companies can take advantage of economies of scale. With large sums of money to invest, they often trade commission-free and have personal contacts at the brokerage firms.

Ease of Use Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The bookkeeping duties involved with stocks are much more complicated than owning a mutual fund. If you are doing your own taxes, or are short on time, this can be a big deal.

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Wealthy stock investors get special treatment from brokers and wealthy bank account holders get special treatment from the banks, but mutual funds are non-discriminatory. It doesn't matter whether you have $50 or $500,000; you are getting the exact same manager, the same account access and the same investment.

Risk In general, mutual funds carry much lower risk than stocks. This is primarily due to diversification (as mentioned above). Certain mutual funds can be riskier than individual stocks, but you have to go out of your way to find them. With stocks, one worry is that the company you are investing in goes bankrupt. With mutual funds, that chance is next to nil. Since mutual funds, typically hold anywhere from 25-5000 companies, all of the companies that it holds would have to go bankrupt. We discussed all advantages of investing in mutual funds. These advantages together make mutual fund a very attractive investment avenue because it provides high return at low risk.

Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:

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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.

Cash, Cash and More Cash: As we know already, mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolios as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous.

Misleading Advertisements: The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labelled as growth funds, while others are classified as small cap or income funds. The Securities and Exchange Commission (SEC) requires that funds have at least 80% of assets in the particular type of investment implied in their names. How the remaining assets are invested is up to the fund manager. However, the different categories that qualify for the required 80% of the assets may be vague and wide-ranging. A fund can therefore manipulate prospective investors by using names that are attractive and misleading. Instead of labeling itself a small cap, a fund may be sold as a "growth fund". Or, the "Congo High-Tech Fund" could be sold with the title "International High-Tech Fund".

Evaluating Funds: Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how

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do you know if one fund is better than another?

Furthermore, advertisements, rankings and ratings issued by fund companies only describe past performance. Always note that mutual fund descriptions/advertisements always include the tagline "past results are not indicative of future returns". Be sure not to pick funds only because they have performed well in the past - yesterday's big winners may be today's big losers.

LEGAL AND REGULATORY ENVIRONMENT

SEBIIn 1998 the securities and exchange board of india was established by the government of india through an executive resolution, and was subsequently upgraded as a fully autonomous body in the year 1992 with the passing of the securities and exchange board of india act on 30th January 1992.The SEBI was established on April 12, 1992 in accordance with the provisions of the securities and exchange board of India act, 1992 to protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.SEBI has 9 members including a chairman, 2 members from amongst the officials of the ministry of the central government, 1 member from amongst the officials of the reserve bank and 5 other members to be appointed by the central government.

Functions of SEBI Main purpose of SEBI is to protect the interest of the investors in securities and to promote

the development of, and to regulate the securities market, by such measures as it thinks fit. Regulating the business in stock exchanges and any other securities market. Registering and regulating the working of stock brokers, share transfer agents, bankers to an

issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters , portfolio managers, investment advisors and such other intermediaries who may be associated with securities market in any manner.

Registering and regulating the working of the depositories, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries.

Registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds.

Promoting and regulating self-regulatory organizations. Prohibiting fraudulent and unfair trade practices relating to securities market. Promoting investors education and training of intermediaries of securities market. Prohibiting insider trading in securities. Regulating substantial acquisition of shares and take-over of companies.

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SEBI as Mutual Fund RegulatorThe MFs are regulated under the SEBI [MF] Regulation, 1996. All the MFs have to be registered with SEBI. the regulations have laid down a detailed procedure for launching of schemes , disclosures in the offer document ,advertisement, listing and repurchase of close ended schemes, offer period o, transfer of units, investments, among others.In addition ,RBI also supervises the operations of bank –owned MFs .While SEBI regulates all market related and investor related activities of the bank /FI –owned funds ,any issues concerning the ownership of the AMCs by bank falls under the regulatory ambit of the RBI.

FURTHER, AS THE MF’s, AMC’s AND CORPORATE TRUSTEES AS REGISTERED AS COMPANIES ACT 1956, THEY HAVE TO COMPLY WITH THE PROVISION OF THE COMPANIES ACT. MANY CLOSE –ENDED SCHEMES OF THE MF’s are listed on one or more stock exchanges. Such schemes are therefore subject to the regulations of the concerned stock exchanges through the listing agreement between the fund and the stock exchange.

MF’s being public trust are governed by the Indian Trust Act, 1882, are accountable to the office of the Public Trustee, which in turn reports to the Charity Commissioner, that enforces provisions of the Indian Trusts Act.

AMFIAssociation of mutual funds in India incorporated in august 1995 is the umbrella body of all the mutual funds registered with SEBI. It is non-profit organizations committed to develop the Indian mutual fund industry on professional, healthy and ethical lines and to enhance and maintain

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standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders.AMFI is an industry association, not an SRO, so it can just issue guidelines to members. It cannot enforce regulations.

Objectives To promote the interests of mutual funds and unit holders. To set ethical, commercial and professional standards in the industry. To increase public awareness of the mutual fund industry.

AMFI is a governed by a board of directors elected from mutual fund and is headed by a full time chairman. The association of Mutual Funds in India (AMFI) is dedicated to developing the Indian Mutual Fund industry on professional, healthy and ethical lines and to enhance and maintain standard in all areas with a view to protecting and promoting the interests of mutual fund and their unit holders by AMFI.

AGNI-AMFI Guidelines &Norms for IntermediariesIntermediaries / Distributors play a vital role in promoting sales of mutual fund scheme. AMFI has therefore taken the initiative of developing a cadre of trained professional intermediaries.Intermediaries consisting of individual agents, brokers, distribution houses and banks engaged in selling of mutual fund products. As of now do not have any guidelines or regulatory framework relating to the business of selling mutual funds. It is important and necessary that these intermediaries follow professional and healthy practices. AMFI has therefore prepared guidelines for intermediaries called AMFI guidelines and norms for intermediaries (AGNI).Ministry of finance Ministry of finance is the supervisor of both RBI and SEBI. Aggrieved parties can make appeals to the MOF on the SEBI ruling relating to the mutual funds.

Self regulating organizationA self regulatory organization is a 2nd tier regulatory organization created by market participants to regulate the working of an industry or profession. If the SRO is registered with the regulatory authority, it obtains certain powers from the regulatory authority. The regulatory authority could be applied in addition to some form of government regulation, or it could fill the vacuum of an absence of government oversight and regulation. For example the stock changes are regulated by SEBI. But they are registered SRO’s. It means SEBI is a frontline regulator and SRO is a sub regulator that reduces the burden of SEBI.

An SRO is a non-governmental organization that has a power to create and enforce industry regulations and standards. The priority is to protect investors through the establishment of rules that promote ethics and equality.

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Stock exchanges are registered SRO’s. AMFI is also trying to get registration form SEBI to become an SRO and SEBI is also working on it.

RISKS ASSOCIATED WITH MUTUAL FUNDS

Mutual funds and securities investment are subject to various risks and there is no assurance that a scheme objective will be achieved. These risks should be properly understood by investors so that they can understand how much risky their investment avenue is. Equity and fixed income bearing securities have different risks associated with them. Various risks associated with mutual funds can be described as below.

Risk associated to fixed income bearing securities are:

Interest rate risk - As with all the securities, changes in interest rates may affect the schemes Net Asset Value (NAV) as the prices of the securities generally increase as interest rates decline and generally decrease as interest rates rise. Prices of long-term securities generally fluctuate more in response to interest rates changes than short term securities do. Indian Debt markets can be volatile leading to the possibility of price movements up or down in the fixed income securities and thereby to the possible movements in the NAV.

Liquidity or marketable risk - This refers to the ease with which a security can be sold at near to its valuation yield to maturity. The primary measure of liquidity risk is the spread between the bid price and the offer price quoted by the dealer. Liquidity risk is inherent to the Indian Debt market.

Credit risk - Credit risk or default risk refers to the risk that an issuer of fixed income security may default (i.e., will be unable to make timely principal and interest payments on the security). Because of this risk corporate debentures are sold at a yield above those offered on Government securities, which are sovereign obligations and free of credit risk. Normally the value of fixed income security will fluctuate depending upon the perceived level of credit risks well as the actual event of default. The greater the credit risk the greater the yield require for someone to be compensated for increased risk.

Risk associated to equities

Market risk – The NAV of the scheme investing in equity will fluctuate as the daily prices of the individual securities in which they invest fluctuate and the units when redeemed may be worth more or less than the original cost.

Timing the market – It is difficult to identify which is the right time to invest and which is the right time to take out the money. There may be situations where stocks may not be rightly timed according to the market leading to loss in the value of scheme.

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Liquidity - Investment made in unlisted equities or equity related securities might only be realizable upon the listing of the securities. Settlement problems could cause the scheme to miss certain investment opportunities.

C A L C U L A T I O N O F N A V

Risk Hierarchy of Different Mutual FundsThus, different mutual fund schemes are exposed to different levels of risk and investors should know the level of risks associated with these schemes before investing. The graphical representation

here under provides a clearer picture of the relationship between mutual funds and levels of risk associated with these funds:

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RISK V/S. RETURN

Evaluation Parameters

Following are the evaluation parameters on the basis of which the analysis and comparison of various schemes is done.

Net Asset Value (NAV) The value of a collective investment fund based on the market price of securities held in its portfolio. NAV per share is calculated by dividing net assets of the scheme /number of Units outstanding.

Assets under Management  It is used to gauge how much money a fund is managing. Mutual Funds use this as a measure of success and comparison against their competitors; in lieu of revenue or total revenue they use total 'assets under management'.

The difference between two AUM balances consists of market performance gains/(losses), foreign exchanges movements, net new assets (NNA) inflow/(outflow) and structural effects of the company. Investors are mainly interested in the NNA, which indicate how much money from clients had been newly invested. Furthermore, it's common to calculate the key figure 'NNA growth', which shows the NNA in relation of the previous AUM balance (annualized).

Expense Ratio Expense ratio states how much you pay a fund in percentage term every year to manage your money. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent, then you are paying the fund Rs 150 to manage your money. In other words, if a fund earns 10 per cent and has a 1.5 per cent expense ratio, it would mean an 8.5 per cent return for an investor. Funds' NAVs are reported net of fees and expenses; therefore, it is necessary to know how much the fund is deducting. Since this is charged regularly (every year), a high expense ratio over the long-term may eat into your returns massively through power of compounding. Different funds have different expense ratios. But the Securities & Exchange Board of India has stipulated a limit that a fund can charge. Equity funds can charge a maximum of 2.5 per cent, whereas a debt fund can charge 2.25 per cent of the average weekly net assets. The largest component of the expense ratio is management and advisory fees. From management fee an AMC generates profits. Then there are marketing and distribution expenses. All those involved in the operations of a fund like the custodian and auditors also get a share of the pie. Interestingly, brokerage paid by a fund on the purchase and sale of securities is not reflected in the expense ratio. Funds state their buying and selling price after taking the transaction cost into account. Recently, funds have launched institutional plans for big-ticket investors, where the expense ratio is relatively lower than normal funds. This is because the cost of servicing is low due to larger investment

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amount, which means lower expenses. A lower expense ratio does not necessarily mean that it is a better-managed fund. A good fund is one that delivers a good return with minimal expenses.

Portfolio Turnover Each buys and sell transaction in the stock markets involves a brokerage cost. This brokerage cost has to be borne by the mutual fund, which in turn passes it on to its investors. So investors have to pay for the trading carried out by the fund on their behalf. Obviously, higher the volume of trading, greater will be the associated costs. And greater trading costs can definitely reduces returns. So how does one know how much the fund manager is trading? The answer to this question is provided by the turnover ratio. The turnover ratio represents the percentage of a fund's holdings that change every year. To put it simply, a turnover rate of 100 per cent implies that the fund manager has replaced his entire portfolio during the period given. Higher the turnover ratio, greater is the volume of trading carried out by the fund.

Is a high turnover bad? Well, that depends on what it achieves. If high turnover can generate high returns, then there should be no problems. The problem arises when a fund is trading heavily and not generating commensurate returns. The turnover ratio is more important for equity funds where the trading cost of equities is substantial. So, each time a fund manager buys and sells, he has to keep in mind that the cost of buying and selling will eat into the fund's returns.

Standard Deviation

Standard deviation is a measure of total risks of a fund. In other words it measures the volatility of returns of a fund. It indicates the tendency of the fund’s NAV to rise and fall in a short period. It measures the extent to which the NAV fluctuates as compared to the average returns during a period. A fund that has a consistent four –year return of 3% for example would have a mean or average, of 3%. The standard deviation for this fund would then be zero because the fund's return in any given year does not differ from its four year mean of 3%. On the other hand, a fund that in each of the last four years returned -5%, 17%, 2%, and 30% will have a mean return of 11%. The fund will also exhibit a high standard deviation because each year the return of the fund differs from the mean return. The fund is therefore more risky because it fluctuates widely between negative and positive returns within a shorter period. A higher standard deviation means that the returns of the fund have been more volatile than a fund having low standard deviation. In other words high standard deviation means high risk.

Sharpe Ratio The Sharpe ratio represents tradeoff between risk and returns. At the same time it also factors in the desire to generate returns, which are higher than those from risk free returns. Mathematically the Sharpe ratio is the returns generated over the risk free rate, per unit of risk. Risk in this case is taken to be the fund's standard deviation. As standard deviation represents the total risk experienced by a fund, the Sharpe ratio reflects the returns generated by undertaking all possible risks. It is thus one

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single number, which represents the tradeoff between risks and returns. A higher Sharpe ratio is therefore better as it represents a higher return generated per unit of risk.

Sharpe ratio provides an unbiased look into fund's performance. This is because they are based solely on quantitative measures. However, these do not account for any risks inherent in a fund’s portfolio. For example, if a fund is loaded with technology stocks and the sector is performing well, then all quantitative measures will give such a fund high marks. But the possibility of the sector crashing and with it the fund sinking is not calculated. In view of these possibilities quantitative tools should be used along with information on the nature of the funds strategies, its fund management style and risk inherent in the portfolio. Quantitative tools can be used for screening but they should not be the only indicator of a fund's performance.

The Sharpe ratio is one of the most useful tools for determining a fund's performance. This measure is used the world over and there is no reason why you as an in investor should not use it.

Beta Beta is a statistical measure that shows how sensitive a fund is to market moves. If the Sensex moves by 25 per cent, a fund's beta number will tell you whether the fund's returns will be more than this or less. The beta value for an index itself is taken as one. Equity funds can have beta values, which can be above one, less than one or equal to one. By multiplying the beta value of a fund with the expected percentage movement of an index, the expected movement in the fund can be determined. Thus if a fund has a beta of 1.2 and the market is expected to move up by ten per cent, the fund should move by 12 per cent (obtained as 1.2 multiplied by 10). Similarly,  if the market loses ten per cent, the fund should lose 12 per cent.

Each dot represents a fund's returns plotted against the market returns in the same period. The line is the beta of these returns. While the beta is same in both, it is far more representative of the returns in the left graph then right one. This shows that a fund with a beta of more than one will rise more than the market and also fall more than market. Clearly, if you would like to beat the market on the upside, it is best to invest in a high-beta fund. But you must keep in mind that such a fund will also fall more than the market on the way down.

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Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way down. When safety of investment is important, a fund with a beta of less than one is a better option. Such a fund may not gain much more than the market on the upside; it will protect returns better when market falls.

Essentially, beta expresses the fundamental trade-off between minimizing risk and maximizing return. A fund with a beta of 1 will historically move in the same direction of the market. A beta above 1 is more volatile than the overall market, while a beta below 1 is less volatile. So while you can expect a high return from a fund that has a beta of 2, you will have to expect it to drop much more when the market falls. The effectiveness of the beta depends on the index used to calculate it. It can happen that the index bears no correlation with the movements in the fund.

R-squared But the problem with beta is that it depends on the index used to calculate it. It can happen that the index bears no correlation with the movements in the fund. Thus, if beta is calculated for large cap fund against a mid-cap index, the resulting value will have no meaning. This is because the fund will not move in tandem with the index. Due to this reason, it is essential to take a look at a statistical value called R-squared along with beta. The R-squared value shows how reliable the beta number is. R-squared values range between 0 and 100, where 0 represents the least correlation and 100 represents full correlation. If a fund's beta has an R-squared value that is close to 100, the beta of the fund should be trusted. On the other hand, an R-squared value that is close to 0 indicates that the beta is not particularly useful because the fund is being compared against an inappropriate benchmark. Thus, an index fund investing in the Sensex should have an R-squared value of one when compared to the Sensex. For equity diversified funds, an R-squared value greater than 0.8 is generally accepted to mean that the underlying beta value is reliable and can be used for the fund.

P/E Ratio A valuation ratio of a company's current share price compared to its per-share earnings. It is calculated as:

Also sometimes known as "price multiple" or "earnings multiple". Companies with higher growth rates command higher P/E ratios. Confidence that a company will improve its profitability or remain profitable generally results in a higher P/E ratio. If profits are threatened or weak, the P/E ratio is likely to drop.

P/B Ratio A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. It is also called as "Price to Equity Ratio". It is calculated as:

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A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, this varies by industry. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.

Concept of SYSTEMATIC INVESTMENT PLANAn SIP is a method of investing a fixed sum, on a regular basis, in a mutual fund scheme. It is similar to regular saving schemes like a recurring deposit. An SIP allows one to buy units on a given date each month, so that one can implement a saving plan for themselves. A SIP can be started with as small as Rs 500 per month in ELSS schemes to Rs 1,000 per month in diversified equity schemes.   Buy low sell high, just four words sum up a winning strategy for the stock markets. But timing the market is not easy for everyone. In timing the markets one can miss the larger rally and may stay out while the markets were doing well. Therefore, rather than timing the market, investing month after month will ensure that one is invested at the high and the low, and make the best out of an opportunity that could be tough to predict in advance.

How to invest in SIPs?

The SIP option is available with all types of funds like equity, income or gilt.

An investor can avail the SIP option by giving post-dated cheques of Rs 500 or Rs 1,000 according to the funds’ policy.

If an investor wants to put more than Rs 500 or Rs 1,000 in any given month he will have to fill in a new a form for SIP intimating the fund that he is changing his SIP structure. Also he will be allowed to change the SIP structure only in the multiples of the SIP amount.

If an investor is investing in two different schemes of the same fund he can fill in a common SIP form for all the schemes. However if the first holders in those schemes are different than they will have to fill different SIP forms, as the first holder has to sign on the form.

The investor can get out of the fund i.e. redeem his units any time irrespective of whether he has completed his minimum investment in that scheme. In such a case his post-dated cheques will be returned back to him.

Investment in fund 'X' of Mr. Rahul

Period Investment(Rs) NAV(Rs per unit) Units allocated

20th May'09 500.0 10.0 50.0

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20th June,09 500.0 13.0 38.5

20th July'09 500.0 10.5 47.6

20th Aug'09 500.0 9.5 52.6

20th Sep'09 500.0 8.0 62.5

Total a=2,500   b=251.2

Actual average NAV (Rs.) = Rs 10.2 per unitNAV for Rahul= Rs 9.95 per unit (a/b)

The above table shows clearly how rupee cost averaging works and how it was beneficial to ‘Rahul’. The actual average NAV of a fund is Rs 10.2/- per unit, but the average NAV for ‘Rahul’ is Rs 9.95/- per unit, which is lower than the current NAV.

An investor who is not having a lump-sum amount to invest and also does not want to take much risk on his investment should always select a ‘Systematic Investment Plan’ option. This will enable him to invest regularly i.e. improve investing discipline. Also, the investor stands to benefit from rupee cost averaging.

Key benefits of SIP

Light on the wallet - If you cannot put aside large sums of money as investment on a monthly basis, the SIP route will trigger your mutual fund investment with an amount as low as Rs 500.

Makes market timing irrelevant - Most investors are not experts on stocks and are even more out-of-sorts with stock market oscillations. With an SIP investment, disciplined investing over the long term sees to it that an investor is not guided by the market-timing strategy.

Helps you build for the future - Most of us have needs that involve significant amounts of money, like child´ s education, daughter’s marriage, buying a house or a car. By saving a small amount every month through SIPs for some purpose, you actually subscribe to a far more scientific process of building wealth.

Compounds returns - The early bird gets the worm is not just a part of the jungle folklore. Even the ‘early’ investor gets a lion’s share of the investment booty vis-à-vis the investor who comes in later. This is mainly due to a thumb rule of finance called compounding′. By starting early, you give more time for your investment to perform for you, leaving you with a sizably larger corpus compared to the late investor.

Rupee cost averaging: the investors going for Systematic Investment Plans (SIP) and Systematic Transfer Plans (STP) may enjoy the benefits of RCA (Rupee Cost Averaging). Rupee cost averaging allows an investor to bring down the average cost of buying a scheme by making a fixed investment

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periodically, like Rs 5,000 a month and nowadays even as low as Rs. 500 or Rs. 100. In this case, the investor is always at a profit, even if the market falls. In case if the NAV of fund falls, the investors can get more number of units and vice-versa. This results in the average cost per unit for the investor being lower than the average price per unit over time.The investor needs to decide on the investment amount and the frequency. More frequent the investment interval, greater the chances of benefiting from lower prices. Investors can also benefit by increasing the SIP amount during market downturns, which will result in reducing the average cost and enhancing returns. Whereas STP allows investors who have lump sums to park the funds in a low-risk fund like liquid funds and make periodic transfers to another fund to take advantage of rupee cost averaging. 

Rebalancing: Rebalancing involves booking profit in the fund class that has gone up and investing in the asset class that is down. Trigger and switching are tools that can be used to rebalance a portfolio. Trigger facilities allow automatic redemption or switch if a specified event occurs. The trigger could be the value of the investment, the net asset value of the scheme, level of capital appreciation, level of the market indices or even a date. The funds redeemed can be switched to other specified schemes within the same fund house. Some fund houses allow such switches without charging an entry load. To use the trigger and switch facility, the investor needs to specify the event, the amount or the number of units to be redeemed and the scheme into which the switch has to be made. This ensures that the investor books some profits and maintains the asset allocation in the portfolio. 

Diversification: Diversification involves investing the amount into different options. In case of mutual funds, the investor may enjoy it afterwards also through dividend transfer option. Under this, the dividend is reinvested not into the same scheme but into another scheme of the investor's choice. For example, the dividends from debt funds may be transferred to equity schemes. This gives the investor a small exposure to a new asset class without risk to the principal amount. Such transfers may be done with or without entry loads, depending on the MF's policy. 

Tax efficiency: tax factor acts as the “x-factor” for mutual funds. Tax efficiency affects the final decision of any investor before investing. The investors gain through either dividends or capital appreciation but if they haven’t considered the tax factor then they may end loosing.Debt funds have to pay a dividend distribution tax of 12.50 per cent (plus surcharge and education cess) on dividends paid out. Investors who need a regular stream of income have to choose between the dividend option and a systematic withdrawal plan that allows them to redeem units periodically. SWP implies capital gains for the investor. If it is short-term, then the SWP is suitable only for investors in the 10-per-cent-tax bracket. Investors in higher tax brackets will end up paying a higher rate as short-term capital gains and should choose the dividend option. 

If the capital gain is long-term (where the investment has been held for more than one year), the growth option is more tax efficient for all investors. This is because investors can redeem units using

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the SWP where they will have to pay 10 per cent as long-term capital gains tax against the 12.50 per cent DDT paid by the MF on dividends.All the tools discussed over here are used by all the advisors and have helped investors in reducing risk, simplicity and affordability. Even then an investor needs to examine costs, tax implications and minimum applicable investment amounts before committing to a service.

OPTIONS AVAILABLE TO INVESTORSEach plan of every mutual fund has three options – Growth, Dividend and dividend reinvestment. Separate NAV are calculated for each scheme.

Dividend OptionUnder the dividend plan dividend are usually declared on quarterly or annual basis. Mutual fund reserves the right to change the frequency of dividend declared.Dividend reinvestment option

Instead of remittances of units through payouts, Units holder may choose to invest the entire dividend in additional units of the scheme at NAV related prices of the next working day after the record date. No sales or entry load is levied on dividend reinvest.

Growth OptionUnder this plan returns accrue to the investor in the form of capital appreciation as reflected in the NAV. The scheme will not declare the dividend under the Growth plan and investors who opt for this plan will not receive any income from the scheme. Instead of income earned on their units will remain invested within the scheme and will be reflected in the NAV

ANATOMY OF TAX

The tax treatment in the mutual fund is categorized on the basis of:1. Equity and Debt funds2. Long term and Short term3. Dividend and Capital Income

Classification of Mutual funds for taxation:

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MUTUAL FUND

INDIAN EQUITY >65%

OTHERS

TAX PROVISION FOR EQUITY ORIENTED FUNDS

Equity, Debt and the tax impact

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EQUITY > 65%

DIVIDENDS CAPITAL GAINS

INVESTOR

DDT LONG TERM

SHORT TERM

TAX FREE NIL 10%TAX FREE

CAPITAL GAINSDIVIDENDS

DDT

INVESTOR

SHORT TERM

LONG TERM

TAX FREE

INDIVIDUAL AND HUF14.025%Others22.44%

AS PER TAX SLAB

TWO OPTIONS

EQUITY>65%

10%20% after

indexation

Equity oriented funds are those funds where more than 65 per cent of the corpus is invested in stocks of Indian companies. Debt funds are those which invest more than 65 per cent in the debt market. Now let’s say we hold the units of equity scheme for more than a year, in that case you are eligible for long term capital gains, which is zero. In other words, you pay no tax. But if you sell the units within a year, you have to pay short- term capital gains.In the case of debt funds, if you sell the units after a year, you will have to pay a long- term capital gains tax, either with or without indexation, whichever is lower. Indexation is used to calculate tax when inflation is taken into account. This is good because it reduces the amount of capital gain and subsequently, the amount you end up paying as tax. If you sell the units within a year, the short term capital gain will be clubbed with the income of the individual investor, to be taxed as per the prevailing slab system.Securities Transaction Tax of 0.25% will be deducted by the Mutual Fund on redemption or switch from any equity oriented fund.

C. Major Companies:The major players of the Indian Mutual Fund Industry are:

The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existence of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market.

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The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund.

The succeeding decade showed a new horizon in Indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund Regulations came into existence with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996.

Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India.

Reliance Mutual Fund The sponsor of Reliance Mutual Fund is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on 11th March, 2004. Today reliance is the market leader in the mutual fund industry. The approach of the AMC is very aggressive. The AUM of Reliance MF is approximately Rs. 71094 Crores

ICICI Prudential Mutual FundThe mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October, 1993 with two sponsorers, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June, 1993.

DSP Blackrock Mutual FundDSP Blackrock Investment Managers Ltd. is the investment manager to DSP Blackrock Mutual Fund.The philosophy of DSP Blackrock Investment Managers Ltd. has been grounded in the belief that experienced investment professionals, using a disciplined process and sophisticated analytical tools, can consistently add value to client portfolios.DSP Blackrock Investment Managers Ltd. takes a three dimensional approach to the management of the organization, incorporating functional, product and regional elements in support of clients' goals. The functional dimension looks at the company's operations by specific task, such as portfolio management, account management or operations. The product dimension brings together the cross-disciplinary expertise critical to managing client assets in each class. Finally, the regional aspect of the company's model recognizes the unique, geography-specific needs of clients as well as the importance of local regulatory issues

ABN AMRO Mutual FundABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated

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on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

Birla Sun Life Mutual FundBirla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a global organisation evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual FundHDFC Mutual Fund was setup on June 30, 2000 with two sponsorers namely Housing Development Finance Corporation Limited and Standard Life Investments Limited. HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000.In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is Rs. 25.161 crore.

HSBC Mutual FundHSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund. The HSBC Group is one of the largest banking and financial services organisations in the world. The Group has around 10,000 offices in 83 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa, serves over 128 million customers and has assets of USD2, 354 billion as at 31 December 2007.

ING Vyasya Mutual FundING Vyasya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998.

Sahara Mutual FundSahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.

State Bank of India Mutual Fund

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State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes.

Tata Mutual FundTata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual FundKotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1, 99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities.Unit Trust of India Mutual FundUTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds.

Standard Chartered Mutual FundStandard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20, 1999.

Franklin Templeton India Mutual FundThe group, Franklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, closed end Income schemes and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund IndiaMorgan Stanley is a worldwide financial services company and its leading in the market in securities, investment management and credit services. Morgan Stanley Investment Management (MISM) was

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established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focusing on a long-term capital appreciation.

Escorts Mutual FundEscorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited.Alliance Capital Mutual FundAlliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.

Benchmark Mutual FundBenchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC.

Canbank Mutual FundCanbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual FundChola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC Limited.

LIC Mutual FundLife Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.

GIC Mutual FundGIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India undertaking and the four Public Sector General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) and

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United India Insurance Co. Ltd. (UII) and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882.Canara Robeco Mutual FundCanbank Investment Management Services Ltd. (the AMC) was established as a wholly owned subsidiary of Canara Bank in 1993. The AMC is managing the assets of Canbank Mutual Fund (the Fund) by virtue of an investment management agreement dated 16th June 1993 (as amended from time to time).Canara Bank entered into a joint venture agreement on 19th March, 2007, with Robeco Groep N.V. 120 Coolsingel, 3011 AG Rotterdam, and The Netherlands for asset management business in India. Robeco is a 75-year old asset manager, with over Rs. 8, 09,000 crores (EUR 146 billion) under management.

Mutual Fund No. of Assets Under Management (Rs. cr.) schemes May-13 June—13 Change % Change

Reliance Mutual Fund 273 88,388 102,730 14,342 16.23

 HDFC Mutual Fund 234 63,881 75,406 11,525 18.04

 ICICI Prudential Mutual Fund 313 56,049 65,550 9,501 16.95

 UTI Mutual Fund 217 54,490 63,438 8,948 16.42

 Birla Sun Life Mutual Fund 305 51,829 56,586 4,757 9.18

 SBI Mutual Fund 130 30,875 34,441 3,566 11.55

 LIC Mutual Fund 75 26,115 28,599 2,483 9.51

 Kotak Mahindra Mutual Fund 143 21,648 28,338 6,690 30.90

 Franklin Templeton Mutual Fund 207 20,634 23,618 2,984 14.46

 Tata Mutual Fund 183 19,439 21,305 1,866 9.60

 IDFC Mutual Fund 174 16,028 20,139 4,111 25.65

 DSP BlackRock Mutual Fund 112 15,945 17,097 1,152 7.22

 Deutsche Mutual Fund 129 11,111 12,780 1,670 15.03

 Sundaram BNP Paribas MF 187 11,162 12,413 1,252 11.21

 HSBC Mutual Fund 131 9,321 9,813 492 5.28

 Religare Mutual Fund 137 7,274 9,290 2,016 27.71

 Fidelity Mutual Fund 57 7,293 8,601 1,308 17.94

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 PRINCIPAL Mutual Fund 117 7,555 8,555 1,000 13.24

 Canara Robeco Mutual Fund 82 6,592 8,051 1,459 22.13

 Fortis Mutual Fund 187 6,365 7,381 1,016 15.97

 JM Financial Mutual Fund 122 5,473 7,012 1,539 28.13

 JPMorgan Mutual Fund 31 2,777 3,956 1,179 42.46

 Baroda Pioneer Mutual Fund 35 1,882 3,483 1,601 85.09

 ING Mutual Fund 146 2,353 2,422 69 2.94

 DBS Chola Mutual Fund 53 1,611 2,159 548 34.00

 Morgan Stanley Mutual Fund 13 1,588 1,846 258 16.25

 AIG Global Investment Group MF 52 1,455 1,521 66 4.52

 Benchmark Mutual Fund 13 939 1,042 103 11.00

 Taurus Mutual Fund 41 345 597 253 73.26

 Bharti AXA Mutual Fund 45 249 272 23 9.16

 Sahara Mutual Fund 40 186 196 10 5.64

 Escorts Mutual Fund 34 185 193 9 4.73

 Quantum Mutual Fund 9 59 60 1 1.35

 Edelweiss Mutual Fund 41 15 21 6 41.59

   Total 551,300 639,130 87,830 13.74

D.Growth chart – past and projections for future

Past Performance of Mutual Funds in IndiaOver the course of the past 60 years, the mutual fund industry has undergone tremendous change. In 1945, it was a tiny industry offering a relative handful of funds—largely diversified equity and balanced funds. As 2005 begins, it is a multi-trillion-dollar titan offering thousands of funds with a dizzying array of investment policies and strategies. The staggering increase in the size of the industry and the huge expansion in the number and types of funds are but the obvious manifestations of the radical changes in the mutual fund industry. It has also undergone a multifaceted change in character. In 1945, it was an industry engaged primarily in the profession of serving investors and striving to meet the standards of the recently enacted Investment Company Act of 1940, which established the policy that funds must be “organized, operated, and managed” in the interests of their shareholders rather than in the interests of their managers and distributors. It was an industry that focused primarily on stewardship. Today, in contrast, the industry is a vast and highly successful marketing business, an industry focused primarily on salesmanship. As countless independent commentators have observed, asset gathering has become the fund industry’s driving force.

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Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that investing in mutual funds provide like diversification, professional management, the ease of investment process has proved to be a major enabling factor. However, with the introduction of innovative products, the world of mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors needs to choose a mutual fund that meets his risk acceptance and his risk capacity levels and has similar investment objectives as the investor.

Indian households started investing more of the saving’s into the capital market after 1980’s. Until 1992 the investors of the primary market were assured good return because the price of the new equity issues was controlled and was very low. In 1995 there were eleven private sector mutual funds existing into the economy. During the period 1996-1999 both SEBI and AMFI launched Investor awareness programmes which were designed to educate investors about mutual funds which made a positive effect on the Industry and since then it has grown very fast as we can see in the above mentioned chart. Followings points are noted:

The AUM of the Indian mutual fund industry has declined by 1.5% in Mar 09 mainly due to redemption in liquid and short term debt schemes. The redemption from liquid schemes is mainly contributed by banks, who have taken this position to boost their balance sheets at the end of financial year

In past few weeks, inflows have been seen in equity schemes but that has not impacted the growth in asset under management of the mutual fund companies

Out of the 35 existing Asset Management Companies, only 12 AMCs have seen increase in their AUM. Reliance continues to be the market leader with AUM of Rs 81,000 cr (approx) followed by HDFC and ICICI Prudential AMC

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The performance of mutual funds in India from the day the concept of mutual fund took birth in India. The year was 1963. Unit Trust of India invited investors or rather to those who believed in savings, to park their money in UTI Mutual Fund. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization.The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn. The net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There was rather no choice apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of their net asset value. The measure was taken to make mutual funds the key instrument for long-term saving. The more the variety offered, the quantitative will be investors. At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time,

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more and more people will be inclined to invest until and unless they are fully educated with the dos and don'ts of mutual funds.

Future of Mutual Funds in India - An OverviewFinancial experts believe that the future of Mutual Funds in India will be very bright. It has been estimated that by March-end of 2015, the mutual fund industry of India will reach Rs 107,90,000 crore, taking into account the total assets of the Indian commercial banks. The estimation was based on the December 2011 asset value of Rs 7, 50,537 crore. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9% annually. Based on the current rate of growth, it can be forecasted that the mutual fund assets will be double by 2010.

Future of Mutual Funds in India-Facts on growthImportant aspects related to the future of mutual funds in India are -

The growth rate was 100 % in 6 previous years. There is a huge scope in the future for the expansion of the mutual funds industry. A number of foreign based assets management companies are venturing into Indian markets. The Securities Exchange Board of India has allowed the introduction of commodity mutual

funds. The emphasis is being given on the effective corporate governance of Mutual Funds. The Mutual funds in India has the scope of penetrating into the rural and semi urban areas. Financial planners are introduced into the market, which would provide the people with better

financial planning Numbers of foreign AMC’s are in the queue to enter the Indian markets like Fidelity

Investments, US based, with over US$1trillion assets under management worldwide. Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual

funds sector is required. We have approximately 29 mutual funds which is much less than US having more than 800.

There is a big scope for expansion. Trying to curb the late trading practices.

Mutual fund assets to touch Rs16.8 trillion by 2016Indian mutual fund market would see an 18% compounded annual growth rate (CAGR) over the next five yearsNew Delhi: Country’s mutual fund industry is expected to see its assets more than double to Rs12.8 trillion by 2012, with the entry of over 15 new fund houses in the near future, a latest report says.US-based financial services research and consulting firm Cerulli Associates stated “India will continue to be one of the faster growing asset management markets in the world, with our projections showing assets will more than double to Rs12.8 trillion over the next five years to 2012”.The report named ‘Asset Management Opportunities in India 2008´ stated that the growth in assets over the next half a decade would be driven by strong economic growth, deeper financial markets and a multi-varied distribution system.At the end of 2007, there were 33 fund houses in the country including 16 joint ventures and 3 wholly-owned foreign asset managers with total assets worth Rs5.4 trillion.

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The international asset management community is also well -represented in the country and is likely to grow as more global asset managers intend to set up business here.Cerulli believes the total number of asset managers in India could rise to as many as 50 in the near future, with many of the new entrants coming from abroad.The research firm’s projections suggest that Indian mutual fund market would see an 18% compounded annual growth rate (CAGR) over the next five years.The growth of the domestic MFs might appear modest compared to the recent past, but it is likely to remain subdued in the short term as internationally the market is expected to see slower growth, it stated. “Although country’s financial markets are still largely domestic in nature, and this is equally true for the asset management industry, India is far more correlated with the global economy than any time in the past and this will only increase in the future,” Cerulli MD Shiv Taneja said.The mutual fund assets increased 67% last year compared to the year before. Coming off a four-year redhot growth phase, where assets saw a cumulative growth of just over 40% between 2003 and 2007, the country would still remain one of the faster growing asset management markets in the world, the report added.Experts believe country’s mutual fund industry holds immense potential as it is significantly under penetrated and covers just 2% of households in the country. Also, several new fund houses are entering the space with plans to tap the tier II and III cities, even the rural areas.Meanwhile, the correction in the equity markets in the past few months saw investors pulling out from fund houses but experts maintain that in the long term investments may definitely prove to be fruitful.

E.SWOT ANALYSISSTRENGTH

Portfolio Diversification-Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio (whether the amount of investment is big or small).

Professional Management-Fund manager undergoes through various research works and has better investment management skills which ensure higher returns to the investor than what he can manage on his own.

Less Risk- Investors acquire a diversified portfolio of securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities

Low Transaction Costs- Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors.

Liquidity- An investor may not be able to sell some of the shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid

Choice of Schemes- Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options

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Transparency-Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator.

Flexibility -Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes

Safety- Mutual Fund industry is part of a well-regulated investment environment where the interests of the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced.

WEAKNESS Costs Control Not in the Hands of an Investor- Investor has to pay investment

management fees and fund distribution costs as a percentage of the value of his investments (as long as he holds the units), irrespective of the performance of the fund.

No Customized Portfolios -The portfolio of securities in which a fund invests is a decision taken by the fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives

Difficulty in Selecting a Suitable Fund Scheme- Many investors find it difficult to select one option from the plethora of funds/schemes/plans available. For this, they may have to take advice from financial planners in order to invest in the right fund to achieve their objectives.

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.

Over Diversification Due to Success- sometimes AMC gets huge inflows of money because of its success in the past times. So Mutual Funds have to invest this money in different companies of stocks. Due to this over Diversification, high returns from a few investments often don’t make much difference on the overall return and overall returns affect. The Fund managers often have trouble finding a good investment for all the new money

Absence of well informed, educated selling by financial intermediaries. Limited knowledge based differential. Distributors typically tend to sell…what ‘sells’…and

not what’s ‘good’ or what is ‘required’… Absence of need based selling. Investment options are today sold as ‘products’ …& not as

‘solutions’. Oversupply position of investment options, which has resulted into incorrect tangibles like

rates, pricing, and promotions etc coming to fore.

Rebating is the symptom…not the inherent problem! Rebating is a good substitute in the absence of other value adds.

Due to usage of rebates as ‘sops’, investors’ decision making is primarily based on the rebates they are offered.

Players not focusing much on taking initiatives in terms of expanding market size per se. Promotions are typically driven with a very short term objective.

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Growth of Fund Houses are more absolute…rather than relative

OPPORTUNITIES Huge untapped Potential

A 50 basis point rate cut in the small savings rate, with deliberate shift investors to focus on investments with a one year longer time frame.

Investments into the very popular Reserve Bank of Indian Relief Bonds capped, and the rate of return reduced by 50 basis points to 8%. This is expected to have a positive impact, as investors will have no alternative avenues for investments and will look to Mutual Funds for investments.

Tax withholding on brokerage and commissions to distributors has been reduced from 10% to 5%. This is expected to benefit our distributors. Though the administrative procedures are expected to increase.

Mutual Funds allowed investing in rated paper overseas in Countries which have fully convertible currencies as well as overseas sovereign debt. This is expected to open up new opportunities.

Reforms in the Capital Markets… The opening up of the Indian Pension Sector

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THREATS1. The Financial Services Sector is now in the forefront of globalization of the Indian Economy,

and is expected to be one of the biggest growth areas in the coming years, with the liberalization of the Insurance & Pension Sector.

2. Now there are many other investment instruments which are more lucrative than mutual fund.3. Unawareness among investor regarding mutual funds.4. Removal of distribution tax on dividends. All dividends from Mutual Funds will be taxable

in the hands of the investor. Income from equity oriented Mutual Funds which were earlier tax free will now be taxed at a rate of 10%.

5. Debt and liquid Funds which provided a tax arbitrage opportunity for large investors was tax free in the hands of the investors. This anomaly has been removed, and the dividend from the debt funds will henceforth be clubbed with the investor’s income and taxed at his normal tax rate.

6. We believe, debt and liquid funds will again find favor based on returns, liquidity and convenience parameters, and not purely on tax attractiveness.

7. Investors would prefer holding on to their debt investments for more than a year, and take advantage of long term capital gains of 10%, rather than incur a higher tax rate of 31.5% if they invest in the debt funds for a period of less than a year.

F. FINANCIAL PLANNING Financial planning is a process through which an individual can chart a road map to meet expected and unforeseen needs in life .Simply put, the intension is to take necessary steps to ensure that the individual is equipped to accomplish what he has set out to achieve and is prepared to deal with contingencies as well. financial planner or personal financial planner is a practicing professional who helps people to deal with various personal financial issues through proper planning, which includes but is not limited to these major areas: cash flow management ,education planning ,retirement planning, investment planning, risk management and insurance planning ,tax planning ,estate planning and business succession planning (for owners).The work engaged in by this professional is commonly known as personal financial planning. In carrying out the planning function, he is guided by the financial planning process to create a detailed strategy tailored to a client’s specific situation, for meeting a client’s specific goals.

WHY FINANCIAL PLANNING IMPORTANT?Financial planning is not the same as financial advice. It is not a recommendation to purchase a particular product but an involving action plan, regularly reviewed to ensure that your goals are met.The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan on how you can meet your goals given your current and projected situation.

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In practice this strategy will utilize available tax allowances, target liquid assets into appropriate vehicles, ensure your investments are structured correctly and managed professionally. Having created a plan you will be able to understand how each decision you make affects other areas of your finances and you can consider the short and long term effect on your goals .You can also adapt more easily to life changes and feel more secure that your goals are on track.However, the true objective of financial planning is to secure that this strategy is not neglected and its value is not diminished .Only through regular reviews can you ensure that you remain on track to meet your goals and maximize new ideas and opportunities.

WHO IS FINANCIAL PLANNER? The financial planner is someone who can help you invest across investment avenues based on your risk profile and investment objective. Post- investment, he monitors your investment and ensure that you are on course to achieve your investment objective. If necessary, he suggests changes to your financial plan so that you are able to achieve your investment objectives as planned. The advice of a good financial planner to manage one’s finances can help to avoid investment mistakes that can seriously damage one’s financial health .financial planning professional are a disciplined group of individual who adhere to ethical &regulatory standards, posses specialized knowledge &skill,& apply these in the interest of individual who wish to benefit from them. A financial planner inculcates the discipline of saving regularly among his clients.

The Personal Financial Planning Process is generally accepted as a seven –step process as follow: Step 1: Identify your investment needs. Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore, the first step is to assess your needs. Begin by asking yourself these questions: 1. What are my investment objectives and needs? Probable Answers: I need regular income or need to buy a home or finance a wedding or educate my children or a combination of all these needs.2. How much risk am I willing to take? Probable Answers: I can only take a minimum amount of risk or I am willing to accept the fact that my investment value may fluctuate or that there may be a short term loss in order to achieve a long term potential gain.3. What are my cash flow requirements? Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a specific need after a certain period or I don’t require a current cash flow but I want to build my assets for the future.By going through such an exercise, you will know what you want out of your investment and can set the foundation for a sound Mutual Fund Investment strategy.

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Step 2:- Choose the right Mutual Fund.Once you have a clear strategy in mind, you now have to choose which Mutual Fund and scheme you want to invest in. 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 performance over the last few years in relation to the appropriate yardstick and similar funds in the same category. How well the Mutual Fund is organised to provide efficient, prompt and personalised service. Degree of transparency as reflected in frequency and quality of their communications.

Step 3 - 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.The following charts could prove useful in selecting a combination of schemes that satisfy your needs.

AGGRESSIVE PLAN

Blue: Money Market Schemes Red: Balanced schemes

Green: income scheme Purple: Growth Funds

This plan may suit:_ Investors in their prime earning years and willing to take m ore risk._ Investors seeking growth over a long term.

MODERATE PLAN

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5%

10%-15%

10%-20%

60%-70%

Red: money market schemes Green: balanced schemes

Yellow: income scheme Blue: growth funds

This plan may suit:_ Investors looking for growth and stability with moderate risk._investors seeking income and moderate growth

Conservative plan

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10%

20%

40%-50%

30%-40%

10

%

50%-60%

20%-30%

10%

BROWN: Money Market Schemes GREEN: INCOME schemes

BLUE: BALANCED FUND scheme PURPLE: Growth Funds

This plan may suit:_Retired and other investors who need to preserve capital and earn regular income.

Step four- invest regularlyFor most of us, the approach that works best is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, you get fewer units when the price is high and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. With many open-ended schemes offering systematic investment plans, this regular investing habit is made easy for you.

STEP FIVE- Keep your taxes in mindAs per the current tax laws, Dividend/Income Distribution made by mutual funds is exempt from Income Tax in the hands of investor. However, in case of debt schemes Dividend/ Income Distribution is subject to Dividend Distribution Tax. Further, there are other benefits available for investment in Mutual Funds under the provisions of the prevailing tax laws. You may therefore consult your tax advisor or Chartered Accountant for specific advice to achieve maximum tax efficiency by investing in mutual funds.

STEP SIX - Start earlyIt 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.

STEP SEVEN -The final stepAll you need to do now is to get in touch with a Mutual Fund or your advisor and start investing. Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.

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PLACE OF MUTUAL FUNDS IN FINANCIAL PLANNING A mutual fund is simply a financial intermediary that allows a of investor to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds).When you invest in a mutual fund ,you are buying shares (or portion)on the mutual fund and become a shareholder of the fund .Mutual fund are one of the best investment ever created because they are very cost efficient and very easy to invest .Different investment avenues are available to investors .Mutual fund also offer good investment opportunities to the investors .Like all investments, mutual funds also carry certain risks.The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking mutual fund investment decisions. The investors may seek advice from expert and consultants including agents and distributors of mutual funds schemes while making investment decision .By using mutual funds as the core foundation of there financial planning strategies ,financial planners are able to take on professional fund managers as allies ,instead of taking on the entire burden off tracking financial market themselves. In essence ,financial planner and their clients concentrating on the strategic or asset allocation decision i.e.focusing on clients needs & deciding how much to allocate in various asset classes. Two major decisions of asset allocation & stock selection get splitted here one decide in consultation with financial planner & other left on fund manager .

THE CONCEPT OF FINANCIAL PLANNING FOR THE INVESTORS The role of each participant Today our country financial planning means only investing money in the tax saving instruments thanks to the plethora of tax exemptions and incentives available under various sections and subsection of the Income Tax Act .This has led to the situation where people invest money without really understanding the logic or the rationale behind the investments made .further the guiding force in investment seems to the “rebate” they receive from the individual agents and advisors. The more the rebate an agent gives ,the more smug you are in the belief that you have made an intelligent decision of choosing the right agent who has offered you more rebate. In the process what is not being realized is the fact that the financial future is getting compromised .We shall elaborate on this in later section.

The right financial planning practice starts with asking ourselves a few questions .Questions which throw up a lot of surprising answers and which helps us in understanding our needs better .For example do you have enough cash resources to cover the expences for atleast next two months ?Seems like a simple question butin this era of pink slips a very relevant one .pink slip refers to the American practice ,by a personnel department ,of including a discharge notice (printed on pink paper) in an employee’s pay envelope to notify the worker of his or her termination of employment or layoff . The right planning practice also begins with understanding the basics of various investment tools .So let us know of various option available;Insurance,Mutual funds,Public Provident Funds,Stocks and Shares and Debt and money market instruements among others .A good plan is one which takes the maximum advantage of various incentives offered by the income tax laws of the country .However,do understand that the tax incentives are just that ,only

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incentives . if you can plan in such a way to get the maximum advantage of these incentives good .Else nothing is lost . The prudent investment decision made and the returns that accrue will more thanuuu offset the tax outgo . In any case the primary objective of a good financial plans is to maximize the wealth,not to beat taxmen.The investment philosophy and the requirements change according to the life cycle. Thus the investment philosophy of a person in his twenties would be far different than that of a person who is in his thirties,forties or fifties. Due to the improved living condition and access to better medical facilities ,the life expectancy of people is increasing .This has led to a situation where people will be spending apporoximately the same number of years in retirement what they have spent in their active working life. Thus it has become imperative to ensure that the golden year of the life are not spent worrying about financial hardship. A proper retirement planning ,to a very large extent ,will ensure this.Without medical coverage you are risking the collapse of your entire financial plan.Medical Insurance reduces the need for a reservoir of emergency funds. The cost associated with the risk of not having medicalcoverage is limitless.If one gets in a major accident ,which doesn’t involve a third party ,the costs could easily extent to hundreds of thousands of rupees .If you do not have adequate medical coverage, do you have at least one hundred thousand dollars in saving to cover this risk.Saving for the higher education of one’s children counts as one of the most daunting financial objectives in one’s life. And even in the era of scholarships and cheap loans that have made overseas study eminently affordable, this is one responsibility that no parent will ever abdicate . In fact, it is not uncommon for parents to start saving , even at the birth of the children , for their higher education – or for wedding .Can we plan for this to ensure that the most important objective doesn’t get derailed in the midway due to an unforeseen mishap? A roof on the head is perhaps one of the most coveted ambitions in anybody’s life. Today owning a house has become one of the easiest tasks thanks to the chief credit and the tax incentive that is being doled out. Factor in all the hidden costs when choosing the home loan service provider and also cover the loan amount with term insurance. The good thing is there are home loan products, which come with in-built with insurance cover.Finally , please keep all the documentation regarding all your investments in a single and safe place and please keep someone near and dear aware or informed various investments, maturity dates, key instructions and other details which would help when you need these investments the most. The characteristics of mutual fund that is suitable for you when you are in your 30s may be much different from one that you would choose in your 60s. This table highlights how your investing profile might change throughout your life.Investment Characteristics Early Career Mid Career Late Career Retiremen

tRisk tolerance High High Moderate LowHolding period Long Long Medium MediumLiquidity needs Low Low High HighRegular income requirements Low Low Low High

High risk tolerance means you can tolerate substantial risk to your original investment, or principle. Low risk tolerance means it is vital to preserve principal at all times.

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Holding Period is length of time you anticipate being able to allow your fund shares to grow. The longer your holding period, the more risk you can tolerate.Low liquidity needs mean you are unlikely to meet your shares cashed in on short notice. High liquidity means your cash needs may be unpredictable or unknown, and requires a fund in which withdrawals can be made at any time with reasonable certainty that pre-share value will not have dropped sharply. Aggressive growth stock funds are the least liquid, and money market funds are the most liquid.

Regular Income requirement typically are highest for investors in their retirement years. Retirees rely on their investments for a periodic, consistent level of income. Bond funds generally produce a more reliable income flow than stock income.

The Basic of Financial Planning ___The life Cycle StageLife cycle is the chain of events that many people go through ,in roughly the same order ,in their lives.Each stages in the lifecycle Such as childhood &young adulthood affect a person needs,wants &aspirations .In terns these needs ,wants &aspiration affect how people manage their money . Life –cycle financial planning is based on a simple precept;Life tends to progress along a series of stages,and the portfolios of your clients need to be structured around the constraints and opportunities inherent within each of these stages.

Typically, life-cycle financial –planning models progress toward a 180-degree turn in term of financial risk tolerance –from young adulthood to retirement, when the balance of aggressive to conservative assets is reversed. This means that clients in their early-morning year tend to have a higher tolerance for financial risk than retirees who are in a distribution, or capital-preservation, phase of their financial life cycle.

Recognizing that different advisor and various planning models apply a range of names and dividing lines for the stages within a client‘s life cycle, Advisors has identify four basic phases. During the initial interviewing process with a client, financial advisors determine the degree to which the client fits within or deviates from one of the following phases:

A. 20s to 35-40s (early–earning stage).during their post collage year, clients are offen paying off collage loans while learning how to handle cash-flow issues and budgeting. They are focused on short-and medium –term savings objectives, perhaps to buy a car or make a down payment on a home. If they have children, they might have begun to think about a collage fund for these children. They also have a high level of risk tolerance for long-term retirement savings. B. 35-40s to 55th (established -earning stage). Saving for their children’s college education becomes paramount during this phase. At this point in a client’s life cycle, the percentage of equities in the portfolio begins to ratchet down. Advisors need to ensure that there is a right mix of international, domestic and emerging- market investments, depending on current cycles.

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C. Pre-retirement phase: While many clients are dealing with a range of critical, financial, this is the to begin thinking about legacy planning and to position assets more conservatively.

D. Retirement .As clients enter the asset-distribution phase of their life cycle, cash-flow issues once again became a primary focus. Long-term care insurance needs to be addressed if it has not been already, as well as other health issues. Many clients are looking at life insurance as a means to avoid estate taxes or to create an estate to leave as a legacy. Planned philanthropic giving is among the end-of-life issues that clients address as they examine what they want to spend, share and leave as a legacy.

By going through a process called life cycle financial planning, you can identify the main financial priorities that should be addressed at each of these stages, which can be broken down as follows:

Optimizing wealth –The primary needs here are management of your assets and utilizing leverage opportunities. Trading securities (stock, bonds, mutual funds, etc.)And participating in private equity investments are potential tactics for wealth optimization. Managing acquired wealth-This may include exercising stock options, selling a closely held business, or managing the proceeds from an inheritance or retirement plan distribution. Protecting existing assets –The main goal here is to ensure the financial protection of your family. Insurance planning, preservation of capital and minimizing taxes are key tactics. Enjoying wealth-Enjoying the fruits of labor might entail the purchase of a second home, traveling abroad, entrepreneurial endeavors, hobbies, and collectibles such as classic cars, artwork and boats. Distributing wealth –The distribution of wealth at the end of your life must be carefully planned in order to ensure that your wishes are followed and taxes are minimized. Trust and estate planning, including charitable giving strategies and controlled wealth distribution, are critical.

Financial planning may take form in the following steps through the financial planning Life cycle:

Age of an investor is an important determinant of financial goals. Also financial goals and plans depend on the income, expenditure &cash flow requirements of an individual Stages Needs Saving Goals Childhood stage Taken care by parents’ investment of gifts long term Young Unmarried Immediate & short term limited due to higher spending

Case Study:Mr. Neeraj Choudhary is 26 years old. His monthly investible surplus RS.12000. The aim of his investment is to save for your retirement &he is comfortable with investing in the stock market? This will give you the opportunity to earn higher returns, but the risks will also be higher. Neeraj assuming getting the return. Between -13%to +25%. Suddenly the value of one of your investments declines by 30%in six months after purchase. What would you do? Portfolio A-return p.a between -18% to +27%. Suggest the recommended portfolio?Recommended portfolio?

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Remarks Suggested portfolio

The person is highly risk averse 100%debt (income fund,children benift)The person can take moderate risk 75% debtThe person can take a fair degree of risk 50% debt (Balanced Fund)The person can take risk to a large degree 25% debt

The following questions will help you establish your investment goals :1. How much do I learn?2. How much do I learn?3. Do I need to follow any fixed savings plan , by setting aside a regular sum periodically ?4.Do the returns on my present investments take care of inflation ?5. What are my future financial obligations/needs/goals?(eg.child’s education , buying a horse or a car ,children’s marriage, retirement, etc)6. Considering my present economic circumstances, are my investment goals reasonable?7. What is the time frame in which I have to meet each of my goals ?8. How much money do I require to fulfill my future obligations and will my presents investments be sufficient to meet them?9. If not, how long will take me to obtain the required money ?10.Do I have a savings and investment plan to accumulate the required amount?11.How much risk am I willing to assume in my investment plan?12.What are the possible economic or personal conditions that could alter my investment plan ?13. Am I willing to make the sacrifices necessary to ensure that I meet my investment goals?

As the life-cycle theory of investing washes into daily financial life, you can expect to see an increased focus on safety first in investments as well as increased attention to coordinating investment policy with human capital. Human capital is something that we all have and there is tremendous choice about what to do with it. The financial planning implication is that what you do with your God-given gifts has a lot to do with personal happiness and your mark on the world- and everything to do with how you manage your investment portfolio .

The length of the various stages in the lifecycle & happens during them ,is affected by socio-economic trends . These trends happen because of changes in the economy of the country & in the country’s demographic.

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Aspect of safety & risk within the lifecycle.Throughout life, we are vulnerable to various risks – the possibility of things going wrong. Our appetite for risk changes through our lives. Often, people’s appetite for risk decrease as they get older. Younger people may tolerate more risk because:A. If things do go wrong; it’s often not as bad as it would be for someone older. For example if a young person losses their saving, they have quite a long time to make them up again. B.Young people don’t have people relying heavily on them. Young people can, quite reasonably, take greater risk if they had a partner or children to look after.

However, some people get more relaxed with age, taking the view that they have seen & survived all kinds of supposedly disastrous events. Also, if they have saved up plenty of money, they may feel financially secure enough to take bigger risks with parts of their saving: they feel they have some “fun money”.

Risk can be divided into four categories:A. Physical Risk includes hazardous sports like motorcycling. They also include more subtle risks like drinking, smoking because of the long-term damage these can do.B. Emotional risk includes getting involved with someone & risking being hurt by that person.C.Reputational Risk could involve looking bad, or stupid.D.Financial risk could involve putting money in an investment that might fall in value or gambling

Risk Example Impact on life Physical Not wearing a seatbelt Accident,injury&deathEmotional Asking someone out Rejection &embarrassmentReputation Committing a crime Criminal record , fines

&imprisonmentfinancial Investing in share Fall in value & financial

losses Someone’s lifestyle stage can affect their likely attitudes to risk &impact on their lives that risks coming true might have. For example , if you loss all your saving when you are in your late 20s you do at least have the change to rebuilt them .Someone is their 60s who losses all their savings could be in a much worse position , having very little time to left to rebuild their saving through work to secure their old age . People’s attitude to risk is not always directly related to the true impact of a risk on their lives. Some people are more timid than others,& some people will happily run quite dangerous risks because they are brave or foolhardy.

Points to Remember:The income level of investors, the saving potential, the time horizon and the risk appetite of an investor depend on his life cycle.Younger investors have higher income and saving potential, take longer view and may be willing to take risks. Older investors may have limited income and saving, shorter time horizon, and Unwilling to risks their savings.

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WEALTH CYCLE Wealth cycle refers to using a generalized approach to saving and investment as basis of classification, rather than age or life stage. Needs are generally classified into protection needs and investment needs. Protection needs have to be primarily taken care of, to protect the living standard, current requirements and survival requirements of investors. Needs for regular income, need for retirement income and need for insurance cover are protection needs. Investments needs are additional financial needs that have to be served through saving and investments. These are needs for children’s education, housing and children’s professional growth. There are investors who have ample wealth and hence their individual needs like assets purchase, children’s welfare, retirement etc. can be accomplished even without a financial plan or goals based investing. They do not need to plan specifically for individual goals. Wealth creating affluent investors are still in the phase of increasing their wealth and do not mind taking risk for this purpose. While wealth preserving affluent investors preserve the wealth created by them and hence do not wish to take risk. Wealth cycle based categorization of investors financial needs, refers to using a generalized approach to saving and investments as the basis of classification , rather than age or life stages:

Stage Financial needs Investment preferences

Accumulation stage

Investing for long term identifed

Growth options and long term

  financial goals products.High risk appetite

Transition Stage

Near term needs for funds as

Liquid and medium term investments.

  pre-specified needs draw closer

Lower risk appetite

     

Reaping Stage

Higher liquidity requirements

Liquid and medium term investments.

    Preference for income and debt products

     

Inter Generational

Long term investment of inheritance

Low liquidity needs.

transfer   Ability to take risk and invest for the long term

     

Sudden wealth surge

Medium to long term Wealth preservation.

    Preference for low risk products

Financial planning for Affluent Investors

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Affluent or high net worth are defined as those who have so much wealth that they do not specifically plan for the typical financial goals such as retirement or children’s welfare of assets acquisitions. Their net worth is such that these needs can be easily accommodated with or without them having to implement a financial plan or embark on goal based investing.The global pool of HNWIs is shifting in a way that presents enormous potential for wealth management firm. World wealth continues to grow broadly, despite fluctuation & economic conditions, &global demographics & economic trends are bringing entirely new segments of clients into the HNW band all the time. HNW clients are demanding comprehensive &tailored services from the multiple firms with they do business.

The best way to determine whether the clients are in a wealth preserving mode to ask a serious of questions. The client need to be asked to make trade – offs between higher returns with the possibility & more nominal returns but with the possibility of loss, & more nominal return but with a lower probability of loss. By analyzing the response, the financial planner can identify the category the client belongs to.

RECOMMENDING MODEL PORTFOLIOS AND SELECTING THE RIGHT FUND What is Bogle’s strategic asset allocation?

• Older investors in the distribution phase:- 50% equity : 50% debt

• Younger investors in the distribution phase:- 60% equity : 40% debt

• Older investors in the accumulation phase:- 70% equity : 30% debt

• Younger investors in the accumulation phase:- 80% equity : 20% debt

Model portfolios recommended for investors according to their life cycle stages:• Young unmarried professionals :

– 50% in aggressive equity funds.– 25% in high yield bond funds, growth and income funds.– 25% in conservative money market funds.

Young couple with 2 incomes and 2 children:– 10% in money market funds.– 30% in aggressive equity funds.– 25% in high yield bond funds and long term growth funds.– 35% in municipal bond funds.

– Older couple single Income :– 30% in short term municipal funds– 35% in long term municipal funds– 25% in moderately aggressive equity– 10% emerging growth equity

– Recently retired couple :– 35% in conservative equity funds for capital preservation / income

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– 25% in moderately aggressive equity for modest capital growth– 40% in money market funds

What is the recommended portfolio for investors in accumulation phase?• Diversified Equity : Sector and balanced funds

– 65 – 80% • Income and gilt funds :

– 15 – 30% • Liquid funds and bank deposits :

– 5% What is the recommended portfolio for investors in distribution phase?

• Diversified Equity and balanced funds: – 15 – 30%

• Income funds :– 65 – 80%

• Cash funds:– 5%

Challenges for Mutual fund industry in coming times

The Indian Mutual Fund (MF) industry is expected to witness explosive growth over the next five years. A study by McKinsey & Company projects the MF industry’s assets under management (AUM) to grow at a CAGR of 33 per cent over the next five years, taking the AUM of the overall industry to nearly Rs 16 lakh crore, a four-fold increase over current levels. More than half a dozen new mutual funds are expected to join the Mutual Fund Club in India and by 2009 the Mutual fund industry is expected to cross 50 Asset Management Companies with lot of untapped opportunities available in the Indian Fund market. International and domestic financial firms are queuing up to launch mutual funds in India, lured by attractive fees and rising valuations in Asia’s third-biggest economy, and to counter the impact of a sharp fall in broking fees. At least six brokerages are awaiting regulatory approval to break into the 33-member Indian funds industry, assets of which are forecast to more than triple to $520 billion by 2015. With more and more of investment demand being generated in the country through sustained consumption and household savings there are ample opportunities for Indian Mutual Funds to scratch the surface. Players are tapping into rising savings as the economy booms and where double-digit salary hikes are common in sectors such as real estate, information technology and financial services. Opportunities are coupled with challenges and we feel the below mentioned factors have to be overcome to tap the opportunities available for the fund Industry          I perceive the following challenges facing the Mutual fund Industry in years to comeProduct innovation - The industry needs to come out with new products with market hedging capabilities which can enhance returns for investors as well as Asset Management Companies. There has to be increased level of sophistication in the products offered in the market. In order to obtain better returns for the investments, fund managers have to look towards more structured products and absolute return investment products to increase overall fund performance. For Example- We can have long term funds which tap the retirement money of individuals.Maintaining Right balance between Business and Compliance- There is an increased cost of

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Compliance and Risk Management with regulations and practices being benchmarked to international standards. Allegations of misconduct have led to rising regulatory standards around the world. The stricter regulatory standards pose a challenge to asset management companies, especially smaller firms lacking economies of scale. The increasing scrutiny of sales of funds is altering the financial relationship between asset management companies and third party distributors. The new environment for distribution will entail far more disclosure than in the past. In additional to regulatory developments, operational and compliance risk has become a top priority for traditional and standalone asset management companies as wellTalent retention and Management- The global upheaval in the mutual fund industry seems to be taking its toll on the Indian outfits with many fund managers changing gears. Some have gone off to rival asset management companies, while others have started their own private equity fund. Managing and retaining the right talent will be a key challenge for the fund Industry Lack of awareness & financial education- Investor education especially in small town and cities and rural areas is woefully lacking. While AMFI has been making some efforts in this direction, it is relatively inadequate compared to the size of the investing population. More grass-root campaigns especially in rural areas need to be undertaken to popularise Mutual funds and their benefits. With the introduction of more asset classes like gold, real estate and commodities through the MF route, investor education will attain paramount importance in the future Challenge of penetration in country’s vast geography- This is another vexed issue that has been worrying SEBI and the finance ministry. It is reported that almost 80% of all MF collections emanate from six metros. This anomaly needs to be corrected at the earliest. While MF houses have been increasing penetration into small towns, they often find the business un-remunerative due to the poor image of Mutual Funds that result in poor collections. Lack of Investor education is an equally important factor responsible for low penetration Establishing Uniformity and common standards: The common bugbear of all MF investors is the amount of paperwork required to tackle purchases and redemptions. No two fund application forms are similar; likewise each fund house has different rules pertaining to switches, redemptions and loads. For the lay investor this means confusion and ultimately chaos. The introduction of the mutual fund identification Number (MIN) was supposed to reduce this clutter but scrapping of the same by the Finance ministry just added to investor woes. Hence, a uniform and common set of standards is the need of the hour. Need for Self regulatory Organisation (SRO)- This is by far the most important catalyst for the sustained and orderly growth of mutual funds in the country. In the current dispensation, Securities and Exchange Board of India, through its mutual fund department, is in charge of overseeing the MF industry. While this sounds good on paper, in effect SEBI is quite busy with its governance of the capital markets (and rightly so) and is thus playing a passive role as far as the MF industry is concerned. While SEBI has been pushing Association of Mutual Funds in India (AMFI) to convert itself into  a self-regulatory organization, AMFI,  being a representative of Mutual fund is quite reluctant to do so due to the inherent multiple conflict of interest. There is a crying need for an independent regulator on the lines of IRDA which could understand the issues on hand and which could devote complete time and energy to the same.Managing Competition from new entrants- Low barriers to entry and increased competition from other asset Management Companies will squeeze returns and share in the Fund market in India. Though there is lot of untapped opportunity in India it will take its own time to unleash the

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potentialManaging nuances of Distributor driven business- Since the fund business is primarily distributor driven enabling them to reach to common man, there is heightened possibilities of mis-selling. Today there is no restriction on multiple fund and insurance distributorship and as a result the probability of selling a fund with higher commission for the distributor is very high. Also the perennial problem of pass back of commission is a challenging task to handleCompliance with Global Accounting and Reporting standards- Down the years it will become imperative for the Fund houses to move to a more transparent and International accounting and reporting standards like IFRS (International Financial reporting Standards) and GIPS ( Global Investment Performance Standards). This will warrant higher Compliance and technical challenges. IFRS incorporate accounting principles familiar to investors worldwide which will encourage investor confidence in capital markets with various jurisdictions and financial reporting and this will further facilitate investment from both domestic and foreign sources of capitalMore use of technology- Unlike Equity Market, Mutual fund market is somewhat primitive in terms of technical infrastructure and settlement process. One of the key challenges would be to enhance the use of technology for efficient and seamless investor transactions between all the stakeholders like the Fund House, Registrar and the Bankers.Managing Competition from the Insurance Industry- Unit Linked Insurance Plans (ULIP) account for 80% of the Insurance business in India. They being similar in nature of Mutual funds the challenge is to face the competition both within Asset Management firm and Insurance Company. Though, Insurance firms require more Capital for each insurance policy sold and have more onus of social responsibility, the nature of the ULIP business is similar to the Fund business. It is a challenge which needs to be faced as a cohesive forceOutsourcing challenges- Back office and Middle office outsourcing to specialist third party service providers is the ‘mantra’ of the day to drive cost effective returns. The industry is seeing more and more of outsourcing enabling them to focus on the core business and avoid fixed overhead and infrastructural costs. The challenge for the Fund houses will be to balance risk and outsourcing driven benefits.         Internationally, in the Mutual Fund Industry transparency, disclosure and fairness in Fund Performance and Fund Investments as the Key challenges. After the consequences of the subprime and the financial crisis in the United States, performance and creditability of international Funds is questionable.The top four challenges will be:-

1. To work even harder to maintain the framework of accountability towards the investors.2. To always accord the fair and equal treatment to the investors3. Continue to inform the investors fully and meaningfully about their fund investments.4. Most importantly, the challenge to be loyal to the interests of the investors whom they serve in trust and be deeply conscious of the obligations they assume as fiduciaries on behalf of the investors.

FINDINGS AND ANALYSIS

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This proves majority of customer visits bank 2-3 times in a month.

ACCOUNT FEATURE MOST PREFERED BY ACCOUNT HOLDER

internet & phone baking13%

financial advisor8%

365 day working21%

ATM cum debit card22%

credit card16%

door step banking20% internet & phone baking

financial advisor

365 day working

ATM cum debit card

credit card

door step banking

This prove that customer prefer less of financial advice from bank.

Most important feature as desired by client include ATM cum debit card, 365 day working & door step banking.

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Number of visits by client in months

22%

39%

15%

24%once

2-3 times4-5 times5+ times

NUMBER OF BANK FOR WHICH SERVICE IS AVAILED(IN PERCENTAGE)

one bank23%

2-3 bank68%

4 or more bank9%

one bank 2-3 bank 4 or more bank

This again clearly shows that more than 68% client avail the service 2-3 bank.

MUTUAL FUND SCHEME PREFERED BY CLIENT

EQUITY45%

DEBT13%

BALANCED42%

EQUITY DEBT BALANCED

This analysis shows that debt mutual fund are preferred By very small percentage of people

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While majority of people prefers either equity or Balanced mutual fund scheme.

BENEFIT PREFERD BY PEOPLE AS MUTUAL FUND HOLDER

INCOME22%

GROWTH21%BONUS

8%

TAX BENEFITS24%

GROWTH & INCOME

25%

INCOME GROWTH BONUS TAX BENEFITS GROWTH & INCOME

This analysis shows that except bonus almost All of the benefits are desired by the mutual Fund holder which includes income, growth, And tax benefits.

MUTUAL FUND PLAN PREFERED BY THE PEOPLE

SIP47%

ONE TIME INVESTMENT

53%

SIP ONE TIME INVESTMENT

This analysis shows that sip being the better of the two still is not a popular mean of investment. Both of plans are almost being equally preferred by the people.

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FACTORS IMPORATANT IN SELECTING MUTUAL FUND SCHEME

PAST PERFORMANCE

23%

BRAND NAME21%FUND MANAGER

17%

INVESTMENT OBJECTIVE

24%

RECOMMENDATION

15%

PAST PERFORMANCE BRAND NAME FUND MANAGER

INVESTMENT OBJECTIVE RECOMMENDATION

This analysis shows that recommendation & fund manager are being least considred by the people. While investment objective, past performance & brand name are being most influencing factor in selecting mutual fund.

FEATURE DESIRED IN FINACIAL PLANNER

appropriate portfolio recommendation

25%

effective database management

11%

extended hour personal support

14%

online service15%

alliance with other financial companies

6%

high on promptness & responsiveness

29%

appropriate portfolio recommendation effective database management

extended hour personal support online service

alliance with other financial companies high on promptness & responsiveness

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This analysis majority of people desires high on promptness & responsive service as well as appropriate portfolio recommendation from financial planner.

PERCENTAGE OF PEOPLE SATISFIED WITH THEIR INVESMENT

8%

61%

31%

0%

HIGHLY SATISFIED SATISFIED SOMEWHAT SATISFIED NOT SATISFIED

This research shows that nearly 61 %(majority) of investor are satisfied with there investments & only 8% investor are highly satisfied.

While, none of the investor are dissatisfied with there investment.

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CONCLUSION

From the analysis of the responses received from the investors in Hyderabad, majorities of the investors are found to be conscious and enlightened regarding their investments, returns and growth.

We have a good market in Jubilee Hills , which comprises potential investors, but due to lack of basic promotions and publicity these investors are fully aware and whosoever is aware, their investments decision are done on the basis of security, analysis of risk yield and return.

The Indian mutual fund industry needs to widen its range of products with affordable and competitive schemes to tap the semi-urban and rural markets in order to attract more investors. The industry has still not been able to penetrate among retail investors and it needs to share best practices from mature markets like US and Britain where mutual funds are the most preferred form of investment. Mutual fund companies need to introduce products for the semi-urban and rural markets that are affordable and yet competitive against low-risk assured returns of government sponsored saving schemes such as post office saving deposits.The industry is also overwhelmed by scarce technological infrastructure and needs to collaborate with other sectors of the economy such as banking and telecommunications.Mutual fund companies are also required take advantage of the growing opportunity in the commodities market. Further, the mutual funds could also enable the small investors to participate in the real estate boom through real estate mutual funds. With a strong regulatory framework, clear guidelines and the talent to back it up, the Indian mutual fund industry is in a position to cater to the new breed of investors who are keen to diversify their risks.

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Recommendations

On the basis of what all I have gathered in the process, I would like to propose the following:1. Marketing tools should be used at the point of purchase, advertisements through mass media

like newspapers, magazines, exhibitions, SMS on mobiles, and on internets.2. Organize programmes for customer awareness in developing areas and establish a confidence

and belief among the customers residing their.3. Systematic Investment Plan (SIP) is one the innovative products launched by Assets

Management companies very recently in the industry. SIP is easy for monthly salaried person as it provides the facility of do the investment in EMI. Though most of the prospects and potential investors are not aware about the SIP. There is a large scope for the companies to tap the salaried persons.

4. Indian Mutual Fund industry is going through a consolidation phase. But in these times mutual fund industry need to communicate clearly and strongly to the masses that equity investments are really an experts job and need to give time to investments and need not to react heavily in these times. These times can give opportunities to major/big industry players to consolidate and acquire smaller players

5. Timing of the product launch / product focus is key and should be consider will full care.

6. On servicing part, focusing more on delivering customer delight, service team can help in creating GREAT brand image.

7. Customers with graduate level education are easier to sell to and there is a large untapped market there. To succeed however, advisors must provide sound advice and high quality.

8. The most vital problem spotted is of ignorance. Investors should be made aware of the benefits. Nobody will invest until and unless he is fully convinced. Investors should be made to realize that ignorance is no longer bliss and what they are losing by not investing.

9. AMCs should increase incentives to be given to distributors to push there product because there are lot of competition exist.

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REFERENCESPeriodicals

MUTUAL FUND INSIGHT (15 JAN-14 FEB 2010)- Volume VI, Number 8, Lessons From The Downturn

1. Top Rated Funds-Page no. 142. Special Report- EXPECTATIONS OF INDIA INC. Page no. 233. Analyst Pick- Page no. 384. Buy Sell Hold- EXPERT ADVICE ON FUNDS-Page no. 445. Portfolio Makeover- MISSED OPPORTUNITY-Page. 466. Fund Overview- Page no. 497. Guide to the SCOREBOARD-Page no. 50( Equity Funds, Balanced Funds, Bond Funds,

Short Term Bonds Funds, Cash Funds, Closed End Funds)8. Fund Insider- Aggregated across funds, portfolios tell you a lot about sectors and companies.-

Page no.82

MONEY TODAY (June 25, 2009), Registered No. L/HR/FBD/258/07-091. Why Choose Index Funds by Dipen Sheth(Vice President, Institutional equities,BRICS

Securities Ltd-Page no.42. Restructure Your Portfolio By Narayan Krishnamurthy –Page no.63. Innovation : The Way Forward By Dhirendra Kumar( CEO,Value research)Page no.484. An SIP is for all seasons by Ashu Suyash (MD and Country Head, India, Fidelity

International) Page no.52

EMPOWERING THE INVESTOR Presented by HSBC MUTUAL FUNDTopic 1- What are Mutual FundTopic 2- Why invest in themTopic 3- How to pick the fundTopic 4 -Systematic InvestingTopic 5- Fund Mistakes to avoidTopic 6 -Fund Myths

OUTLOOK MONEY- Systematic Investment Plans By SUNDARAM BNP PARIBAS MUTUAL

1. Overview- Page no.22. Why SIP works for you- Page no.63. What questions do I need to ask before I Buy?- Page no.84. How important are costs in a SIP? Page no.95. Focus on Long Term- Page no.116. Do I have to renew each year?- Page no.12

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Books AMFI MUTUAL FUND TESTING PROGRAMME- For Distributors and Employees of Mutual

Funds in India. Third Edition, May 2006 Complied By D.C. Anjaria1. The Concept and Role of Mutual Funds2. Fund Structure and Constituents3. Legal and Regulatory Framework4. The Offer Document5. Fund Distribution and Sales Practices6. Accounting, Valuation and Taxation7. Investor Services8. Investment Management9. Measuring and Evaluating Mutual Fund Performance10. Helping Investor with Financial planning11. Recommending Financial Planning Strategies to Investors12. Selecting the right Investment Products for Investing13. Recommending Model Portfolios and selecting the right fund14. Business Ethics in Mutual Fund

MUTUAL FUND-THEORY AND PRACTICE- Summer Edition 2008 by Dr Vinod Kumar- Sri Dean and Director (ICFP), Prity Sharma- Asst. professor(ICFP), Mithilesh Kumar –(ICFP), Gaurav Singla- Faculty Asst. and Research Asst.(ICFP)

1. An overview of Mutual Fund2. Types of Mutual Fund3. Fund Structure and Constituents4. Legal and Regulatory Environment5. Offer Document6. Fund distribution and Sales Practices7. Accounting and Valuation of investment and Taxation of Mutual Funds8. Performance Evaluation Mutual Funds

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Websites http://www.mutualfundsindia.com/charts/ http://www.tatamutualfund.com/mutual-fundas/glossary.asp http://www.knowledgerush.com/kr/encyclopedia/Finance_and_investment/ http://finance.indiamart.com/india_business_information/mutual_funds_performance.htl http://www.mutualfundadvisorindia.in/ http://www.itrust.in/content/mutual-funds/guides/mutual-funds-fivetips www.appuonline.com/mf/knowledge/industry.html www.bseindia.com/downloads/MutualFunds.pdf http://www.articledashboard.com/Category/Mutual-Funds/105/tipsonmutualfund-by http://www.pticindia.com/article-stock-mutualfund.html/stocksvsmutualfund:whatisbetter www.valueresearchonline.com/mutualfund/overview/sip/ www.moneycontrol.com/india/mutualfunds/amclist http://www.fundsavvy.com/mutualfund/investorguide/agewise/ http://www.indiainfoline.com/mf/reg_aspects.asp?lmn=7&bChkFlg=11 http://www.hdfcbank.com/personal/investments/mutual_funds.htm http://www.icfaipress.org/Books/MutualFundIndustryinIndia_cont.asp http://www.kotak.com/Kotak_BankSite/wealthmgmt/mutualfunds.htm http://www.marketwatch.com/tools/mutualfunds/overview www.mutualfundsindia.com/fundfacts/tatamutualfund/tatainfrasructurefund/portfolio/ www.amfiindia.com/latestnav/tatapureequityfund http://www.bobshermancredit.com/mutual.fund.overview.htm http://www.crisil.com/financial-news/financial-news-crisil-marketwire-overview.jsp www.google.com/infrastructure/wikipedia/typesofinfrastructure/ http://www.lifetimefp.net/ http://www.jstor.org/pss/3665081 http://www.finplans.net/documents/The%20Objectives%20of%20Financial%20Planning

%20-%200505.pdf http://www.streetdirectory.com/travel_guide/183564/finance/financial_planning.html http://en.wikipedia.org/wiki/Financial_planner http://financialplan.about.com/od/budgeting/l/blfinancial.htm http://www.ppfas.com/products-services/financial-planning/taxation/index.php http://www.fpsb.co.in/Scripts/LearnFinancialPlanningBasics.aspx#h1 http://www.123finance.org/mutual_fund.html http://socialinvesting.about.com/od/srimutualfunds/a/MutualFunds.htm http://beginnersinvest.about.com/cs/mutualfunds1/a/aa031501.htm http://www.britannica.com/bps/additionalcontent/18/22701421/The-Asset-Allocation-

Debate-A-Review-and-Reconciliation http://www.unpan1.un.org/intradoc/groups/public/.../UNPAN025795.pdf

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http://findarticles.com/p/articles/mi_qa3743/is_199801/ai_n8807425/pg_2/?tag=conteno1

8.0 ANNEXURE

QUESTIONAIREStudy on Mutual Funds

This questionnaire is intended to serve the following two purposes: 1. The purpose of this questionnaire is to find out the attitude of investor, towards bank and

mutual fund based on selected attitudinal parameters and individual characteristics.

Instructions to respondents1. Please answer all the questions, i.e. to the maximum extent possible.2. Please be as accurate as possible in answering the questions.3. If you do not know an answer or it does not apply to you please write, Not Applicable (NA).4. Any suggestions will be welcomed and would be appreciated.

1. How many times you visit your bank in a month? (Please tick app. Choice) Once

2-3 times

4-5 times

5+ times

2. How important is the following benefit to you being an account holder of bank?

Bank Features

Very Important

Important Partially Important

Not Important

Internet & phone bankingFinancial advisor365 days workingATM cum Debit cardCredit cardDoor step banking

3. You avail the services of One bank

2-3 Banks

4 or more banks

4. Does your bank play the role of an investment advisor for you?

Yes No If no please specify whose advice do you consider for investment……………………….

5. How much do you save annually, (approximately)? Up to 10%

10-20% 21-30%

31% and above

6. Which of the following mutual fund scheme would you prefer?

Equity Debt Balanced

7. How important are the following benefits to you, being an investor for Mutual funds?

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Benefit Very Important

Important Partially Important

Not Important

IncomeGrowthBonusTax BenefitsGrowth and Income

8. Which plan do you prefer while investing in Mutual Fund? (Please tick app. Choice)SIP (systematic investment plan)

One Time Investment

9. How important are the following factors in selecting for mutual funds

FactorsVery Important

Important Partially Important

Not Important

Past performanceBrand nameFund managerInvestment objectiveRecommendation

10. How satisfied are you with your investments in Mutual Funds? Highly Satisfied

Satisfied Somewhat satisfied

Not satisfied

11. Rank the following investment options in order of preference (Rank 1 for most preferred and 6 for the least preferred)

Investment Options

Rank

SharesBondsFixed DepositsInsurance PlansSaving AccountAny Other__________

12. How important is the role of the financial planner in providing the following services?Services provided by Financial Planner Very

ImportantImportant Partially

ImportantNot

ImportantAppropriate portfolio recommendationEffective database managementExtended hour personal supportOnline Service and query solvingAlliances with other financial companiesHigh on promptness and responsiveness

13. How satisfied are you with your overall investments?Highly Satisfied Satisfied Somewhat

satisfiedNot satisfied

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Personal Details:

1. Name:………………………………………………..…………

2. Gender: Male Female

3. Age: 18-25 26-35 36-60 60+

4. Education: School Level Diploma Graduation Professional Degree

5. Occupation:Self Employed Government/ Defense Private Any Other

6. Annual Income: Up to 4 Lakhs 4 Lakhs-8 Lakhs 8Lakhs-12 Lakhs 12 Lakhs +

Thank You So Much For Your Valuable Time and Responses!!!

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CASE STUDY: ULIPS VS MUTUAL FUNDS 

As financial planners, we get queries from our clients on how to go about managing their finances. We were recently faced with a rather interesting query related to ULIPs. In this article we discuss the query and our solution for the same.

Let us look at the information available,

The client’s age is 38 years and he wants a life insurance cover for Rs 5,000,000. He has an

above-average risk appetite. 

He has been recommended a ULIP (unit linked insurance plan) by his insurance agent with a

sum assured of Rs 5,000,000 till he reaches the age of 84 years. This works out to the client

being insured for a tenure of 46 years (i.e. 84 - 38). 

The premium paying term however, is only ten years and the actual premium he will have to

pay per annum is approximately Rs 894,000.

The client has also been advised by his agent to consider investing his premiums in the ‘Aggressive’

(as has been defined by the insurance company in question) option, which allows upto 35% exposure

to equities.

We have always maintained that one’s interests would be best served if he keeps his life insurance

and investment needs distinct.

Given below is our solution based on the client’s needs.

The insurance component

To begin with, we knew from our interaction with the client and based on the Human Life Value

Calculations that he is underinsured. An immediate action point for him would be to buy a term

plan. And considering his annual income, he would need to buy a term plan for more than the sum

assured recommended on the ULIP (i.e. Rs 5,000,000). Even if we were to consider his sum assured

to be Rs 5,000,000 (as per the ULIP) for a term plan, the annual premium he would have to shell out

would be approximately Rs 30,000 per annum for a 30-Yr period.

The investment component

Having taken care of the client’s insurance needs, now let’s shift our focus to his investments. We

took into consideration the client’s current financial portfolio. He had a sizable portion of his

portfolio invested in fixed income instruments like bonds and fixed deposits. Bearing this in mind,

our view was he did not need to have another debt-heavy (ULIP with a 65% debt component)

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product in his portfolio. Instead what his portfolio needed was a higher equity component; this would

not only ‘balance’ his portfolio but also ensure that the portfolio reflects his true risk profile.

It was also relevant that the client invest in equities since he was considering his investments from a

long-term (over 30 years) horizon. This could be achieved by investing in equity-oriented mutual

funds. Mutual funds can offer several benefits:

Several studies have shown that over the long term, equities give a higher return vis-à-vis

fixed income instruments like bonds and gsecs. And given that the client’s investment

horizon is of over 30 years, this is an ideal time frame to reap the rewards of investing in

equities. Also, over a 30-Yr period, a 100% equity mutual fund is better geared to outperform

a ULIP portfolio with a 65% debt component.

ULIP tend to be expensive propositions (vis-a-vis mutual funds) during the intial years.

However, over longer time horizons, the expenses balance out and ULIPs work out to be

cheaper as compared to mutual funds. However, even if the lower expenses of a ULIP vis-à-

vis that of a mutual fund scheme were to be considered, the latter would still surface as the

better option. 

Several mutual funds also have a track record to boast of. ULIPs do not have much of a track

record to show for; in fact most ULIPs are yet to experience a bear phase. 

Investing in a mutual fund portfolio will offer the benefit of diversification to the client. The

investor will reap the reward of diversifying across several fund management styles. On the

other hand, by investing all his money in just one ULIP, the client would be committing his

entire corpus to just one style of investment. This can prove to be quite risky over the long

term. 

You can make adjustments to your mutual fund portfolio. If you believe you have made a

wrong investment decision, you can redeem your investment in a particular mutual fund and

invest in another one. Such adjustments are not entirely feasible in a ULIP.

The tax aspect

We also had to contend with Section 80C tax benefits. However, given the client’s annual income,

the Section 80C tax benefits were being taken care of by way of Employees’ Provident Fund (EPF)

as well the recommended term plan. The client therefore can invest in regular diversified mutual

funds and not necessarily in tax saving funds (ELSS).

As can be seen, term plans combined with mutual funds have the potential to add considerable value to an investor’s portfolio. In our view individuals should first ensure that they are adequately covered by opting for a term plan. Then they can either opt for ULIPs for the investment component or as we have shown, they can

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consider mutual funds.

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