THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
CHANGING TREND OF INVESTMENT IN DIFFERENT ASSET CLASSES&
EMERGENCE OF MUTUAL FUND INDUSTRY IN INDIA
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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
CHANGING TREND OF INVESTMENT IN DIFFERENT ASSET CLASSES&
EMERGENCE OF MUTUAL FUND INDUSTRY IN INDIA
GROUP MEMBERS
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WRO NUMBER
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TOPICS
GROUP DETAILS
REASONS FOR SELECTING THE TOPIC
INTRODUCTION
INTRODUCTION TO INVESTMENTS
DIFFERENT ASST CLASSES
REAL ESTATE & PROPERTY
GOLD & GETF
CASH
FIXED INTEREST ASSETS
BANK DEPOSITS
COMPANY FIXED DEPOSITS
GOVERNMENT SECURITIES
PUBLIC BOND & UNIT TRUST OF INDIA
POST OFFICE INVESTMENTS
EQUITIES
ONLINE TRADING
INTRODUCTION TO MUTUAL FUNDS
BASICS AND WORKING OF MUTUAL FUNDS
HISTORY OF MUTUAL FUNDS
DIFFERENT TYPES OF MUTUAL FUNDS
MONTHLY INCOME PLANS (MIP)
FIXED MATURITY PLANS (FMP)
SYSTEMATIC INVESTMENT PLANS (SIP)
RISK AND RETURNS IN MUTUAL FUNDS
BENEFITS OF MUTUAL FUNDS
DISADVANTAGES OF MUTUAL FUNDS
EXMAPLE AND LATEST PATTERN OF INVESTMENT
BIBLIOGRAPHY AND SOURCE OF INFORMATION
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REASONS FOR SELECTING THIS TOPIC
THE PRESENTATION TOPICS PROVIDED BY THE INSTITUTE ARE VERY INFORMATIVE AND
INTERESTING. IT HAS SERVED A GOOD BASE FOR CHOICE MAKING. AFTER HAVING A
GLANCE WITH EACH AND EVERY TOPIC, OUR GROUP DECIDED TO CHOOSE…
‘CHANGING TREND OF INVESTMENT PATERN IN DIFFERENT ASSET
CLASSES AND EMERGENCE OF MUTUAL FUND INDUSTRY IN INDIA’
INDIA IS ONE OF THE FASTEST GROWING ECONOMIES AS COMPARED TO OTHER
DEVELOPING COUNTRIES. THE COUNTRY’S INVESTMENT MARKET HAS BECOME VERY
POPULAR AMONG THE GLOBAL INVESTORS. MOREOVER, THE PACE AT WHICH INVESTMENT
MARKET IS GROWING, IS GIVING A GRIP AND A SENSE OF CONFIDENCE TO THE DOMESTIC
INVESTORS. THE TOPIC HAS HELPED US TO GAIN KNOWLEDGE REGARDING DIFFERENT
ASSET CLASSES, THEIR CHARACTERISTICS AND THE CHANGING TREND OVER THE YEARS
AND THE MUTUAL FUND INDUSTRY AS WELL.
IT IS VITAL FOR EVERY INDIVIDUAL TO KNOW HOW SAFE HIS MONEY IS, OR WOULD BE, IN
A PARTICULAR INVESTMENT. BESIDES THE SAFETY OF HIS FUNDS, HE SHOULD ALSO BE
TACTFUL WHILE CHOOSING THE INVESTMENT KEEPING IN MIND THE RATE OF RETURN
OFFERED, RISK TAKEN & PERIOD OF INVESTMENT. THUS THE TOPIC HAS RENDERED A
GOOD AREA OF GRASPING KNOWLEDGE SO THAT EVEN WE CAN GET AN IDEA OF PLANNING
OUR INVESTMENT STRATEGIES AT AN EARLY STAGE. HOPEFULLY, BEING THE FUTURE
CHARTERED ACCOUNTANTS, WE WILL ADVICE PEOPLE REGARDING THEIR INVESTMENT
PLANNING.
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INTRODUCTION
INDIAN ECONOMY
The Indian economy is amongst the largest emerging market economies (US$ 1 trillion) and, we believe,
amongst the most attractive growth opportunities globally. According to a Goldman Sachs report – BRICs and
beyond, January 2007 India’s GDP (in USD terms) is expected to surpass that of the US before 2050, making
it the world’s second largest economy.
Around 85% of India’s aggregate economic demand is domestically driven. India’s large investment program
and the demographic dividend of a growing young and educated middle class will likely drive strong domestic
demand.
The sectoral mix by way of economic activity also helps cushion the impact on overall growth from the
vagaries of monsoons. The contribution of the industries and services sector is well above 80% of the total
economic output and has been increasing over time (Source: Central Statistical Organization, 2007-2008).
The Indian financial services industry has experienced significant growth in the last few years. There has
been a considerable broadening and deepening of the Indian financial markets due to various financial market
reforms undertaken by the regulators, the sophisticated domestic and international players. Sectors such as
banking, asset management companies, insurance companies and brokerage have been liberalized to allow
private sector involvement, which has contributed to the development and modernization of the financial
services sector.
One of the significant features of the sweeping economic and financial reforms set in motion by the
Government of India since 1991 has been a conscious recognition of the importance of Foreign Direct
Investment (FDI) in the accelerated economic growth of the country. India is now ushering in the second
generation of reforms aimed at a further and faster integration of the Indian economy with the global
economy. As a result of the various policy initiatives taken and under way, India has become one of the most
attractive destinations for foreign investment.
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GDP Growth in India over a Period of time
Following table shows the G.D.P. growth of India over last 10
years:
Year
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
Mar
8.8
9.7
10
9
8.1
3.6
6.4
1.8
6.3
Jun
7.9
9.1
9.6
8.4
8.3
5.4
5
4.6
5.1
7.1
Sep
7.6
9.1
10.1
8
7.1
9
5.4
5.3
6.7
6.1
Dec
Average
5.3
7.4
8.9
9.2
9.3
9.75
9.3
8.68
5.5
7.25
11.3
7.33
1.5
4.58
6.8
4.63
4.4
5.63
6.2
6.47
The global financial crisis interrupted India’s growth momentum. Since downside risks have materialized, the
GDP growth for 2008-09 is now projected to turn out to be in the range of 6.5 to 6.7 per cent after clocking
annual growth of 8.9 per cent on an average over the preceding five years (2003-08).
Source: Reserve Bank of India website
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WHAT IS INVESTMENT?
The concept of “Investment is defined in many different
ways as follows:

The money you earn is partly spent and rest saved for future expenses. Instead of keeping savings
ideal this money is invested to earn additional income this is called investment

In simple investment means employment of funds in order to generate future returns or future
income.

Investment means the employment of money on the securities of others company for the purpose of
gaining some return in future, where risk is also available.

Investment is another side of the return where anyone can use their money to earn a future profit
through carrying Risk.

The money you earn is the partly spent and the rest saved for meeting future expenses. Instead of
keeping the savings idle you may like to use savings in order to get return on it in the future. This is
called investment.

Investment means buying are putting some money in a company are anything, because of the
earning returns and also one type of saving
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ASSET CLASSES AND TYPES OF ASSET CLASSES
An asset class is a set of securities that show similar characteristics and behavior in the market. The
group of securities in an asset class is also governed by the same rules and regulations.
Asset classes can be broadly classified into two types, namely defensive and growth oriented. The first
category comprises assets that generate safe and consistent returns. The assets in the defensive asset class are
suitable for investors who are not willing to take
high risks. Growth oriented asset classes match the
profile of long-term investors who do not fear
risks. Their aim is to generate higher returns.
TYPES OF ASSET CLASSES:

REAL ESTATE

GOLD

CASH

FIXED INTEREST ASSETS

EQUITIES
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ASSET
CLASSES AND
TRENDS OF
DIFFERENT
ASSET CLASSES
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REAL ESTATE/ PROPERTY:
Investing in immovable property in the form of a residential or commercial
building or land is suitable for long term investors. Investing can take place
by purchasing the property directly or by investing in a property trust fund.
Property investment is not usually flexible as it requires sufficient time to buy
or sell property.
Property is another asset class that can help you to diversify your investments - it is less dependent on stock
market performance than some other assets and more on local factors, like supply and demand. Bear in mind
that if you are a homeowner, a large proportion of your wealth will already be tied up in your property, so you
won't be diversifying if it is the only other investment you have.
If you do want to put more money into this type of asset you have two choices: buy another building or invest
in a fund holding commercial properties.
Not every piece of land is meant is meant for construction of a house, or a shop, or any other structure, for that
matter. Not every bungalow or house is meant to be lived in. Property can also be treated as an asset class.
In India, the reforms programmer has been going on for past one and a half decade and in the process it has
led to a phenomenal growth in several sectors like IT, ITES, Telecom, etc. All economic indicators are
pointing to the India Property market as the next growth story.
Facts speak for themselves. The growth in the India Property sector is all round with hardly any element of
the value chain being out of this “being on fire” trend. The real estate sector is perhaps the most recent one to
join the coveted list of sectors which have taken off in a major way and all slated to hit the stratosphere in the
years ahead. It indeed has the capacity to display “sky is the limit” syndrome and this is what it has begun to
display in India.
Why Invest In Indian Real Estate?
Flying high on the wings of booming real estate, property in India has become a dream for every potential
investor looking forward to dig profits. All are eyeing Indian property market for a wide variety of reasons:
 It’s ever growing economy which is on a continuous rise with 8.1 percent increase witnessed in the
last financial year. The boom in economy increases purchasing power of its people and creates
demand for real estate sector.

India is going to produce an estimated 2 million new graduates from various Indian universities
during this year, creating demand for 100 million square feet of office and industrial space.

Presence of a large number of Fortune 500 and other reputed companies will attract more companies
to initiate their operational bases in India thus creating more demand for corporate space.
 Real estate investments in India yield huge dividends. 70 percent of foreign investors in India are
making profits and another 12 percent are breaking even.
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
Apart from IT, ITES and Business Process Outsourcing (BPO) India has shown its expertise in
sectors like auto-components, chemicals, apparels, pharmaceuticals and jewellery where it can match
the best in the world. These positive attributes of India is definitely going to attract more foreign
investors in the near future.
 The relaxed FDI rules implemented by India last year has invited more foreign investors and real
estate in India is seemingly the most lucrative ground at present.

The revised investor friendly policies allowed foreigners to own property, and dropped the
minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres
(40 hectares). With this sudden change in investment policies, the overseas firms can now put up
commercial buildings as long as the projects surpass 50,000 square meters (538,200 square feet) of
floor space.
THERE HAS BEEN CHANGE IN INVESTMENT PATTERN IN REAL ESTATE AS FOLLOWS:
 Initially people with strong backing of wealth use to invest in Land (plots) for long term
Investments.\
 With the Government involvement in reforming the norms for Real Estate it gave a boost to the
Investors for investing their funds in Real Estate and Property Market.
 Then as time passed people also started to invest in residential property for purely Investment
purpose, like investing in blocks, flats, etc.
 Gradually then the trend for investing in commercial property came in picture.
 Then new avenue came when real estate companies got listed on stock exchanges and people now
can buy even small quantity of shares of these companies and even earn through these securities.
 Now Real Estate Investment Trusts (REITs) Legislation for the establishment of REITs is expected
to be in place by the end of 2009. With questions around availability of credit and real estate
ownership mindset, it needs to be seen how successful India will be after it joins the bandwagon.
However, it would surely help bring transparency in the real estate sector and will give organized
players and small investors a kick start in the commercial real estate investment sphere.
India is currently in the process of formulating definitive legislation for the introduction and smooth
functioning of REITs (Real Estate Investment Trust) in the Indian real estate market. Once introduced
these Indian REITs (country specific/generic version I-REITs) will help individual investors enjoy the
benefits of owning an interest in the securitized real estate market. The best benefit being that of fast and easy
liquidation of investments in the real estate market unlike the traditional way of disposing real estate. The
government and Securities and Exchange Board of India SEBI through various notifications is in the process
of easing the norms of investing in real estate in India directly and indirectly through foreign direct
investment, through listed real estate companies, mutual funds etc. With the current real estate boom and the
market being flooded with Initial Public Offer of various listed real estate companies in India it will be the
best time for investors to own a share of the profiting market economy. Legislative framework, revised
investment norms, a favorable investment opportunity, and a clear taxation policy will provide the right kind
of investing opportunity in India in the time to come.
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Gold is a precious metal obtained from the earth. Investing in gold is one of the best options. People buy
gold and keep it as a security against any economical, political, social or money crisis. People trade in the
gold market to gain financially due to the increasing price of gold. Gold is regarded by some as a store of
value (without growth) whereas stocks are regarded as a return on value (i.e. growth due to anticipated
real price increase plus dividends).
There are many savings and investment options available in India. One of the options is gold. Gold has
been valued since prehistoric times and is the investment option that has been seen as the ultimate form of
safe haven investment and the only true form of wealth. Gold has been popular in India because it
acted as a good hedge against inflation. There is so much uncertainty in the world in terms of economic
growth and geopolitics, it is no surprise that many investors, big and small have chosen to hedge their
investments through gold.
In Indian Scenario
There is no doubt about the popularity & demand of gold in a country which exceeds 1000 tones of this metal. They buy
it for jewelry, contingencies, gifting, wedding, mortgage requirement etc. Gold has ritual, religious, sentimental values
attached to it, so it can’t be Substituted and demand is more or less indispensable. However apart from Jewelry purpose
one does not need it in a physical form. The per capita gold consumption is 0.7 grams, half that of the US and one third
of the Middle East that is likely to go up.
Gold is an important and popular investment for many reasons:
 Gold remains as an integral part of social and religious customs, besides being the basic form of
saving.
 Gold has aesthetic appeal .Its beauty recommends it for ornament making above all other metals.
 Gold is indestructible which does not tarnish and is also not corroded by acid-except by a mixture of
nitric and hydrochloric acids.
 Gold is a currency that has no borders and does not need to be honored by any governmental
obligations.
 Gold has long proven ability to retain value and appreciate in value.
 Gold is readily available in a standardized form.
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Q. The present situation indicates that all those investments hitherto
pitched as BEST investments are not really best. Instead, they are
worst. They are not recession-proof. In this kind of scenario, which
investment ranks high as the best recession-proof investment?
A. The only answer for a recession-proof investment lies in GOLD.
Gold Exchange Traded Fund
When investing in gold it is better to invest in gold coins or gold mutual funds. When you buy gold ornaments
you will lose money as making charge and wastage. GETF is an open ended Gold Exchange Traded Fund
which will track the performance of Gold Bullion. The units issued under the scheme will represent the value
of gold held in the scheme. It is designed to provide returns that, before expenses, closely correspond to the
returns provided by domestic price of Gold.
Gold ETF is a security listed on the stock exchange available for trading with an intention to offer investors a
means of participating in the gold bullion market without the necessity of taking physical delivery of gold.
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ADVANTAGES OF EXCHANGE TRADED GOLD FUND AS INVESTMENT
 Safety & Security
Zero concerns about physical security, theft or adulteration when faced with the tasks of custody and spot
transactions. Safeguard in the form of electronic mode in case of unforeseen circumstances where you
have lost all the physical wealth
 Long Term Commitments
A cost effective and convenient way to invest in gold through an instantaneous exposure to a physical
asset viz gold. For example it can help accumulate gold for your daughter’s wedding
 Transparency & Liquidity
Its units can be traded like a share and therefore it provides the ability to buy and sell them quickly at the
ruling market price and therefore highly liquid
 Diversification
An efficient diversification for the portfolio of the investor
 Cost Effective
The expenses incurred in buying and selling units and the schemes ongoing expenses will be less than the
costs associated with buying and selling of gold and storing and insuring gold bullion in a traditional gold
bullion market.
Due to all the above advantages there has been increase in asset allocation towards gold as it has also
become affordable and it provides liquidity in investors portfolio.
DISADVANTAGES OF EXCHANGE TRADED GOLD FUND AS INVESTMENT
 Professional Management
These funds need a proper management to run it in a way that is dynamic enough to explore the available
opportunity in the market.
 Investors Awareness
No lot of people are aware of the ways and means to obtain and invest these fund due to less knowledge
and infrastructure availability and also due to less use of Online trading knowledge there is less response
to these sector.
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GOLD PRICES, IN DOLLAR, terms have given positive returns for consecutive eight years irrespective of
performance in other markets. Not many other asset classes are able to show such an astonishing performance.
FOLLOWING CHART SHOWS THE MOVEMENT OF GOLD PRICES IN DOLLARS
FROM 1968-2008
Source: World Gold Council
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GOLD PRICES AND THE SENSEX CHART
SHOWING THE TRENDS & FLUCTUATIONS
IN SECURITIES MARKET AND GOLD RATES
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CASH:
This type of asset class includes everyday bank
transactions and short-term investments in the money
market. Cash investments reduce the overall risk in
an investment portfolio as investors can easily access
their capital. However, the rate of return in cash
investments is the lowest. There is very limited scope
for capital growth.
Why Cash is Considered as an asset class!
Most people think of cash as something to be spent or invested. But actually cash in a deposit account is an
investment, and in troubled financial markets can outperform bonds and equities. Paying off debts is also a
good idea, as they are almost certainly costing you more than you would earn with cash on deposit.
In a recession cash is king! We might also add, and debt is a disaster! This old stock market adage might seem
inappropriate at a time of new record highs on Wall Street and the recent performance of the bond market.
STAGFLATION
What he does note is that inflation is probably going to be worse than expected, eventually upsetting bond
prices and causing a downturn in equities as profits come under pressure.
In this scenario we are back to the stagflation of the 1970s - higher inflation and lower growth. This was a
terrible decade for investors, and the best performing asset proved to be none other than good old cash.
What have happened thus far in the 21st century have been an inflation of asset prices and a depression of the
US dollar to compensate. This could continue for a while. But once something happens to upset this party - it
could be a geopolitical event or the US housing slump - then the reverse will be true.
Asset classes will be sold for cash. This flight to the US dollar as a safe haven will produce an upward
revaluation of the greenback. We saw this in May this year when financial markets had a wobble, and the
effect on the dollar will be even bigger if markets suffer more than a wobble.
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CASH TO BUY BARGAINS
In any case if major asset classes fall, then in relative terms the US dollar is automatically worth more. It is
this simple: you can buy more with your dollars after a financial shake-out than before. Therefore, save your
dollars on deposit for a rainy day, and remember that in a recession cash really is king!
But most people will have just seen their paper wealth dissolve into dust. They will not have the ready cash to
take advantage of bargain basement prices.
Alternatively buy precious metals as these become currency instruments at times of financial crisis, and the
supply will not keep pace with demand in such an environment jacking up prices.
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Fixed interest assets:
These assets yield fixed rates of return until the expiry of the
maturity period. Examples are Fixed Deposits, Bonds, certificate of
deposits (CDs). The level of risk associated with fixed interest
assets is low. So, the rate of return of these assets is usually lower
than that of shares and real estate. An added benefit is that fixed
interest investments can be converted to cash whenever required. This asset class is usually preferred by those
who have low risk appetite.
TYPES OF FIXED INTEREST ASSET INSTRUMENT:

BANK DEPOSITS

COMPANY FIXED DEPOSITS

GOVERNMENT SECURITIES

UNIT TRUST OF INDIA BONDS


POST OFFICE DEPOSITS
MUTUAL FUNDS
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
Bank Deposits:
 Bank Saving Account
 Bank Fixed Deposits/ Time Deposits
BANK SAVING
Savings accounts are offered by commercial banks, savings and loan associations, credit unions, building
societies and mutual savings banks. Obtaining funds held in a savings account may not be as convenient as
from a demand account. For example, one may need to visit an ATM or bank branch, instead of writing a
cheque or using a debit card. However, this transference is easy enough that savings accounts are often termed
"near money".
Some savings accounts require funds to be kept on deposit for a minimum length of time, but most permit
unlimited access to funds. Banks comply with these regulations differently; some will immediately prevent
the transfer from happening, while others will allow the transfer to occur but will notify the account holder
upon violation of the regulation. True savings accounts do not offer cheque-writing privileges, although many
institutions will call their higher-interest demand accounts or money market accounts "savings accounts." All
savings accounts offer itemized lists of all financial transactions, traditionally through a passbook, but also
through a bank statement.
BANK FIXED DEPOSITS
Bank Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of
money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest for
Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity period. There is
great flexibility in maturity period and it ranges from 15days to 5 years. The interest can be compounded
quarterly, half-yearly or annually and varies from bank to bank. Minimum deposit amount is Rs 1000/- and
there is no upper limit. Loan / overdraft facility is available against bank fixed deposits. Premature
withdrawal is permissible but it involves loss of interest
Importance of Bank Deposit

Fixed deposits with the banks are nearly 100% safe as all the banks operating in the country, irrespective
of whether they are nationalised, private, or foreign, are governed by the RBI's rules and regulations, and
give due weightage to the interest of the investor. Till recently, all bank deposits were insured under the
Deposit Insurance & Credit Guarantee Scheme of India, which has now been made optional.
Nonetheless, bank deposits are among the safest modes of investment.
 One can get loans up to 75- 90% of the deposit amount from banks against fixed deposit receipts.
Though the interest charged will be slightly more than the interest earned by the deposit.
 The amount invested in fixed deposits with a maturity period of 5 years in a Scheduled bank is eligible
for tax deduction under section 80C. However, the interest earned on the deposit is taxable.
 Tax will be deducted at the source, if the interest income on a fixed deposit per annum exceeds Rs.10,
000
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TRADITIONALLY, bank deposits have been the favorite investment avenue for us Indians.
Close to 20 per cent of household savings are invested in bank deposits.
Here's why:
 Low risk
Banks deposits come with very low default risk and offer security of your capital. The real risk to
these products is in the form of inflation. This is because if interest rates are low, the post inflation
returns on FDs may be negligible or even negative.

Capitals guarantee
your deposit of up to Rs 1 lakh in any bank is protected under RBI's Deposit Guarantee Scheme. This
means if you place your deposit in a bank that defaults, you will get up to Rs 1 lakh of your money in
the deposit.

Fixed returns
Interest rate on bank deposits is fixed for the entire tenure of the deposit. FDs of different tenures carry
different interest rates. Generally, higher the tenure, higher is the rate.

Liquidity
Investor can invest in a FD for as little as a month too. Thus, it provides ample liquidity as you can
place your surplus for the short term. Besides, bank deposits can be prematurely withdrawn. However,
you will need to pay a penalty of 1 per cent of the interest rate.

Good returns
With High interest rates at present, FD returns have become attractive. For a longer tenure deposit
(two to three years), you can even get a rate of around eight to nine per cent per annum. However,
rates vary from bank to bank.
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 Company FD’s:
APART from banks, even Non Banking Finance Companies
(NBFCs) offer fixed deposits.
Investors have also started to allocate funds in FDs of good
companies. This has therefore emerged as a good option for
asset allocation to the investors as compared to earlier times
as more and more companies are coming up with this
investment option.
What is a company fixed deposit (FD)? How does it work? Is
it safe? Let's answer these questions on company FDs. Here
are the answers to those questions.
What is a company FD?
It is a fixed deposit scheme offered by a company. It works similar to a bank deposit where you earn interest
income.
Safety!
It may not be as safe as a bank deposit. This is primarily because banks in India have the backing of the
central government. Company deposits enjoy no such benefit.
Furthermore, company deposits are 'unsecured'. This means, you have no lien on any asset of the company, in
case it goes into financial difficulties and is wound up.
How to find out if a company FD is safe?
NBFCs that offer FDs need to mandatorily get them rated by rating agencies such as CRISIL, ICRA, CARE,
etc. However, manufacturing companies do not have any such compulsions.
Check the rating of the FD before you put your money. For instance, a company FD with AA rating can be
considered a good investment.
Also, check the company's past record in making timely interest payments before you invest.
Returns on Company FDs
Company FDs offer much higher returns than bank FDs, since they entail higher risks. The higher the risk, the
higher is the interest rate offered. So, be careful before choosing a company with say a 15 per cent coupon
rate as against one with an 11 per cent coupon. While the higher return may be tempting, the safety is lower.
Since you are investing in FDs because you are risk averse, it may make more sense to go with companies that
have high ratings.
Companies even raise fund by issuing Debentures which carries Fixed rate of returns on the amount
investment therein.
22
 government securities
OVER the years, the gross fiscal deficit of state governments has been on the rise. Nearly 60 per cent of the
deficit is on account of revenue deficits arising mainly due to
expenditure overrun.
State government bonds represent the market borrowings used in
financing this deficit. The state government bond issuance is currently
managed by the Reserve Bank of India along with the central
borrowings. The states have the option to manage their own market
borrowings to the extent of 35 per cent of total market borrowings.
Mainly banks, provident funds, mutual funds and insurance
companies like the Life Insurance Corporation invest in state
government securities.
So, by investing in instruments issued by these companies, you will have an indirect exposure to state
government securities.
Returns given by state government securities
Today, the coupon rate for state government securities is fixed at 25 basis points above central government
securities.
Risk concerned with these securities
Maturity Risk: Default risk in government securities is always zero. However, these securities suffer from a
small variant of default risk, that is, maturity risk. Maturity risk is the risk associated with the likelihood of the
government issuing a new security in place of redeeming the existing security.
A state guarantee does not mean assured return of capital. State governments can default as well. The ratio of
the total outstanding guarantees to total revenue receipts indicates the degree of vulnerability of the state
government. The high coupon incorporates these risks.
Redemption risk: There could be two scenarios

Straight default -- This, however, may not happen, given the political considerations (if a large
number of retail investors are involved). Further, according to a state legislature act, the total
outstanding government guarantees as on April 1 in any year shall not exceed 80 per cent of the state's
revenue receipts of the second preceding year. Logically, therefore, a state government can honor
commitments of an existing issue by borrowing from the market.

Compulsory renewal -- This is, in fact, more likely to take place. The government might force
investors to renew the bonds at a rate that could upset their YTM (yield-to-maturity) calculations, even
though it would assure repayment of principal.
Invest through nationalised banks and post offices. You can also buy RBI bonds directly through Reserve
Bank of India or through a broker.
23
 UNIT TRUST OF INDIA,
PUBLIC BONDS
FIXED income instruments are products that offer predictable
or fixed rate of returns. In India, these typically include
company bonds, fixed deposits and government schemes.
You should go in for such products if you need a certain, predictable stream of income, as against shares
where returns are uncertain. Besides being predictable, such instruments are also low in risk. They are thus
better investment options for people whose risk tolerance is low.
Time is another important parameter. Equity shares are best recommended as a long-term (more than five
years) option. Use money you are likely to need in the short term to invest in fixed-income instruments.
Before you decide to invest in fixed-income instruments, evaluate your needs from three key perspectives risk, returns and liquidity. Match the investment options with your financial needs.
Credit risk
What if the issuer fails to pay what he owes you (principal, interest)? Evaluate credit ratings assigned by
rating agencies like CRISIL, ICRA and CARE to find corporate bonds/ fixed deposits that match your risk
tolerance level.
Diversify
Diversification across issuers of fixed-income instruments is a recommended approach to reducing credit risk
Returns
Return calculations should consider effective yield, interest rate expectations and taxes.
Calculate post-tax effective yield (IRR or Internal Rate of Return) for each instrument for comparison.
Take inflation into account. If interest rates increase during your investment period, you will not benefit from
investing. So, if you expect interest rates to increase, invest only in short-term instruments, and vice versa.
While calculating your interest yield remember to include post-tax interest receipts. For investors in high-tax
brackets, tax-free government bonds/ schemes might be more attractive.
Mutual funds are also good fixed income instruments due to zero tax liability on income.
Liquidity
Fixed-income instruments are normally not liquid, since the secondary market for these instruments has not
yet developed in India. Before investing, be sure to carefully evaluate potential liquidity, exit route and
penalties of the instrument.
24
 Post office As an Investment
 Kisan Vikas Patra
 Post Office Monthly Income Scheme
 Nation Savings Certificate
 Public Provident Fund
IT'S the end of an era. The Fiat has been phased out,
ceiling fans have given way to air conditioners and now
with the scrapping of the maturity bonus on the Post
Office Monthly Income Scheme (PO MIS), one of the few
safe and secure fixed income avenues has become poorer.
PO MIS is the Post Office Monthly Income Scheme
which is the refuge of many a senior citizen. The PO MIS
was a product that hitherto yielded the highest return
amongst fixed income instruments. It is essentially a 6year scheme. It yielded 8% interest per annum
compounded monthly. The 10% bonus at maturity
essentially booms enraged the IRR (Internal Rate of Return) or net return to the investor to 9.67% per annum.
Offering an optimal mix of return, risk and liquidity, the PO MIS was one of the essential fixed income
investments in any investor's portfolio, big or small.
The following table provides a snapshot of how this instrument has steadily been diluted of its return over the
years. The IRR in the second column is higher than the coupon rate on account of the 10% bonus.
Period
%
IRR %
Before 1.1.99
1.1.99 to 14.1.00
15.1.00 to 28.2.01
1.3.01 to 28.2.02
1.3.02 to 28.2.03
1.3.03 Onwards
13.2.06 Onwards
13.0
12.0
11.0
9.5
9.0
8.0
8.0
15.04
13.95
12.86
11..26
10.73
9.67
8.31

So finally vide Notification GSR 59(E) dated 10.2.06; the bonus was cancelled for accounts opened
on or after 13th February 2006
Other than the obvious senior citizen anguish, what were other reactions to this circular? The media
lauded the government for this move because they saw it as another step in removing the remnants of
the control Raj. They also felt that savers were being pampered by high rates whereas state
governments, which are anyway capable of raising cheaper funds, were being made to accept the more
expensive National Small Savings Fund.
25

First of all, this move has come just at the time when the interest rates in our economy are rising.
Those very savers who shouldn’t be 'pampered' have been very quickly made to cough up higher
interest on their home loans.
 We do not have social security. In other words, our government doesn't provide us with a safety net.
That being so, we ourselves have to stitch the net on our own. PO MIS was one of the needles that we
used to try and sow such a net.
 The officially declared rate of inflation is around 4.7% per annum. But for the common man it is
more like 10% with the prices you see, notwithstanding what the 'official' rate is. Which means, we are
earning sub-inflation rates on our fixed income investments?

There is a limit of Rs 3 lakh per person for investments in PO MIS. Surely our government can
afford a marginal 1.3% (9.6% - 8.3%) for its citizens. At least in view of the above factors.
But at the end of the day, what is done is done. However good they might be, fixed income products
no longer belong to this world. Just like the fabulous Fiat – the only sign you see of their existence are
in the form of black and yellow taxicabs! JUST a decade ago, the most sought after investment option
were small savings +schemes. Though many investors have taken a liking to equities now, some
allocation to safe fixed income investments helps to balance the portfolio. Here are the popular small
savings schemes you can include in your investment portfolio.

Kisan Vikas Patra (KVP)
The Kisan Vikas Patra or KVP was launched with an eye on the large potential in the rural areas.
Investments in KVP double every 8 years and 7 months. The rate of interest is 8.41 per cent per
annum approximately.
• Certificates are available in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000, Rs 10,000 and
Rs50, 000.
• You can purchase the certificates at any Post Office.
• There is no maximum limit on the number of certificates purchased.
• An identity slip will be issued to you on request.
• On maturity, you can encash the certificates at the issuing post office. They can also be encashed at
any other post office, once the officer-in-charge verifies your identity.
• You can also nominate someone to receive the money.
26

Post Office Monthly Income Scheme
• we can open an account with any post office either singly or jointly, with a nomination facility
available.
• Interest rate of 8 per cent pa is payable monthly.
• Minimum investment amount is Rs 1500 and maximum is Rs 450,000 for single accounts and Rs
900,000 for a joint account.
• Maturity period of the scheme is six years.
• You can transfer your account from one post office to another across India, without any cost.
A HASSLED wealth reader enquired about Monthly Income Plans (MIP). His concern was that he
hasn't been getting any monthly payments (income/dividends) from the fund he had invested in. He
has already made huge loss in the fund and withdrawing from the plan would mean a greater loss.
 NATIONAL SAVINGS CERTIFICATE
National Savings Certificate?
National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and
are available at all post office counters in the country. It is a long term safe savings option for the investor.
The scheme combines growth in money with reductions in tax liability as per the provisions of the Income
Tax Act, 1961. The duration of a NSC scheme is 6 years.
Features
NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 for a maturity period
of 6 years. There is no prescribed upper limit on investment. Individuals, singly or jointly or on behalf of
minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. One
person can be nominated for certificates of denomination of Rs. 100- and more than one person can be
nominated for higher denominations.
The certificates are easily transferable from one person to another through the post office. There is a nominal
fee for registering the transfer. They can also be transferred from one post office to another.
 PUBLIC Provident fund
Public Provident Fund came into force on Ist July, 1968.
The Public Provident Fund Scheme is a statutory scheme of the Central Government of India.
The Scheme is for 15 years. The rate of interest is 8% compounded annually. The minimum deposit is 500/and maximum is Rs. 70,000/- in a financial year. One deposit with a minimum amount of Rs.500/- is
mandatory in each financial year. The deposit can be in lumpsum or in convenient installments, not more than
12 Installments in a year or two installments in a month subject to total deposit of Rs.70,000/-. It is not
necessary to make a deposit in every month of the year. The amount of deposit can be varied to suit the
convenience of the account holders.
.
27
POST OFFICE
SAVINGS SCHEMES
28
EQUITIES:
A share, also called equity, is a stake or a unit of ownership that an investor
can buy in a company. Usually, the returns yielded by shares are much higher
than that of other asset classes. Investment in shares is quite flexible as they
can be traded easily. However, the investment in shares is risky due to price
fluctuations. Investing in shares is suitable for long-term investors who are
willing to take risks. Investment in shares can be also be done through Mutual
Funds, Insurance, Portfolio Management Service Companies.
Since liberalization of the Indian economy we have seen that foreign financial institutions have come to
Indian capital markets in large numbers and invested billions of dollars. Due to these huge investments these
institutions have started influencing Indian stock markets. Indian markets are also considered as the part of
Emerging markets across the world.
Till some years ago many Indians were uncomfortable with the idea of investing their money in equities
(stock markets). The things have of course changed now for better. Many young Indians now look to stock
markets as good place to make investment. Much credit of this transformation is rightly been given to late
Mr. Dhirubhai Ambani, of Reliance Industries Ltd. It is Reliance, which was instrumental in spreading the
equity culture in our country. This is due to the fact that the investors of this company have over the years
reaped many benefits and thus the company has become an icon in the Indian markets. Along with these
developments the opening of mutual fund industry, first for banks and then for private players, has also helped
in the spread of equity culture. By investing mutual funds individuals can acquire shares of various
companies without actually buying them. The mutual funds pool the savings of individuals and invest them in
corporate equities and debt instruments.
The establishment of National Stock Exchange was the turning point in the working of Indian capital markets.
There has been demutualization of the stock
exchanges. Both the National Stock Exchange (NSE)
and
(BSE) are demutualised, where the ownership and
management of the Exchange is completely divorced
from
the right to trade on it. There have been many other
developments that have taken place in the last few
years. Some of these developments like Online
Trading and Establishment of Securities Exchange
Board of India as the regulatory for these
developments have taken Indian markets to
international standards. Even the regulator is trying
to
incorporate best international practices of capital
markets. The Indian equity markets have witnessed a
dramatic change:
29
The trading on stock exchanges in India used to take place through open outcry
without use of information technology for immediate matching or recording of
trades. This was time consuming and inefficient. This imposed limits on trading
volumes and efficiency. In order to provide efficiency, liquidity and
transparency, NSE introduced a nation-wide ON-LINE fully automated screen
based trading system (SBTS)
Online trading India is the internet based investment activity that involves no direct involvement of the
broker. There are many leading online trading portals in India along with the online trading platforms of the
biggest stock houses like the National stock exchange and the Bombay stock exchange. The total portion of
online share trading India has been found to have grown from just 3 per cent of the total turnover in 2003-04
to 16 per cent in 2006-07.
Facilities of the online trading India:
The investor has to register with an online trading portal and get into an agreement with the firm to trade in
different securities following the terms and conditions listed down on the agreement. The order processing is
done in correct timings as the servers of the online trading portal are connected to the stock exchanges and
designated banks all round the clock. They can also get updates on the trading and check the current status of
their orders either through e-mail or through the interface. Brokerages also provides research content on their
websites, such that the clients can take their own decisions on stocks before investing.
Products and services of the online trading India:
The major financial products and services of the online trading India are like equities, mutual funds, life
insurance, general insurance, loans, share trading, commodities trading, portfolio management and financial
planning.
30
NATIONAL STOCK EXCHANGE AND BOMBAY STOCK EXCHANGE:
In spite of many private stock houses at present involved in online trading in India, the NSE and BSE are
among the largest exchanges. They handle huge daily trading volumes, supporting large amounts of data
traffic, and possessing a countrywide network. The automated online systems used for trading by the national
stock exchange and the Bombay stock exchange are the NIBIS or NSE's Internet Based Information System
and NEAT for the national stock exchange and the BSE Online Trading system or BOLT for the Bombay
stock exchange.
Due to Online Trading a investor can access a stockbroker’s website and place orders through the broker’s
Internet-based routing and trading engine. Convenience is probably the greatest advantage online trading
offers an investor. If he doesn’t have time to trade during market hours, when perhaps he is at work, he can
log on to the web-trading site and place his orders offline, during off-market hours. His order would join the
queue and be executed the next day. The investor today can look forward to redressal of his grievances
through SEBI.
Welcome to the world of online trading. A world where you buy and sell shares online. This trend is fast
spreading among stock market investors today.
Millions of people are making their millions sitting at home. And all it needs? A click or two. You can buy
shares and transfer them to your demat account. Another click and you can sell them at a solid profit and put
the cash in the bank.
Earlier, you had to call your broker, place your buying/ selling orders over the phone, sign cheques and wait
for money transfers. Online trading frees you from constant calls to the broker, long queues for transacting
and maintaining paperwork. "Even if you are travelling and have Net access, it is cheaper to trade on the
Internet than to make a long distance call to instruct your broker."
31
Benefits of online trading:

Full control over trading decisions.

The advantage of speed.

Saving trees through paperless transactions.

Real time payment settlement.
But online trading also has its disadvantages:
 A high degree of comfort factor with the computer.
 Technical snags, which could spoil the party.
 No personal touch.
 Absence of advice/ assistance.
 You are at the mercy of the power supply.
Online trading is here to stay, and could be the future of trading. Today, it is through your computer. But,
tomorrow, it could be through your mobile phone. The faster you get down to embracing technology, the
better convenience in investing for you.
Under Liberalized Remittance Scheme of Reserve Bank of India, Resident Individuals are allowed to remit up
to USD 2, 00,000 in a financial year (April to March) for any current or capital account transaction or
combination of both. Under this scheme various brokers have facilitated investors/ customers to invest in
various Stocks and Options that are traded on the exchanges in United States of America.
SEBI also runs investor awareness programs in different parts of the country in order to make the investors
aware of the benefits of investing in equity and also risks associated with it.
Investing in Shares and Mutual Funds are risky options but return is more you will have to study about the
company well before investing. To invest in shares we have to open a demat a/c. first. As compared to earlier
times where investor was finding difficult to invest in equity directly and thereby allocate less or no amount to
equities in his asset allocation. Now If investor has enough time to spent to study about the companies and
invest wisely or Otherwise invest in Mutual Funds or Unit Linked Insurance Plans (ULIPs) of Insurance
companies where experienced fund managers manage the investors funds and thereby reduce the risk of
investing without knowledge of the companies. Thus due to various reforms in equity market investors now as
compared to earlier are more aware of investing in equities and there has been increased allocation towards
equities in investor’s portfolio. Due to introduction of web technology investors are more convenient to
invest in equities. As well as investors are now even investing in various stocks and options that are traded on
the exchanges in U.S.A.
32
ASSET CLASS
ADVANTAGES
DISADVANTAGES
PROPERTY
More conservative investment.
Investing in immovable property in the
Less volatility in capital as property is form of a residential or commercial
revalued every year.
building or land is suitable for long term
investors.
Longer-term commitment.
Invested for the long term and cant
Change exposure to different tenants.
GOLD
The advantages are that it is number
one, a hedge against a falling
currency, like the U.S. dollar.
It has a history of over 5,000 years as
money. It is no one's liability
It is durable and that is why it has
lasted centuries as money and if the
current fiat money system collapsed,
would be used as money again.
It doesn't pay interest.
If currencies are doing well (people
actually think they are useful as a medium
of exchange), then the price of gold could
be negatively affected.
CASH
Most liquid and risk-free investment.
No hedge against inflation.
Predictable income stream.
Lower risk but also generally a lower
“Short-term parking place” for excess return.
Funds while deciding where to invest
for the longer term.
Often seen as a safe haven during
Economic downturns.
Return may outperform equities or
bonds over short periods.
FIXED
INTEREST
ASSETS
The level of risk associated with fixed The rate of return of these assets is usually
interest assets is low.
lower than that of shares and real estate.
An added benefit is that fixed interest
investments can be converted to cash
whenever required.
EQUITIES
Offer the best returns over the medium Are volatile and require a medium- to long
to long term. Investment in shares is term view.
quite flexible as they can be traded
easily
Investing in shares is suitable for longterm investors who are willing to take
risks.
33
EMERGENCE
OF
MUTUAL FUNDS
Mutual Funds have emerged as an important segment of financial markets
in India, especially following the initiatives taken by Government in the
1999-2000 Budget to resolve problems associated with UTI’s US-64
Scheme and to liberalise tax treatment of incomes earned through mutual
funds. They now play a crucial role in channeling savings of millions of
Individuals/ households from different parts of the country into investment
in both equity and debt instruments.
34
EMERGENCE & INTRODUCTION TO MUTUAL FUNDS
Mutual Funds have emerged as an important segment of financial markets in India,
Especially following the initiatives taken by Government in the 1999-2000 Budget to resolve Problems
associated with UTI’s US-64 Scheme and to liberalized tax treatment of incomes Earned through mutual
funds. They now play a crucial role in channeling savings of millions of Individuals/households from different
parts of the country into investment in both equity and Debt instruments. The mutual fund industry has
witnessed several innovations in the current financial year. The monetary and credit policy for 1999-2000 has
permitted money market Mutual funds to offer cheque writing facility to unit holders. Some of the Mutual
Funds have introduced limited cheque writing facility by allowing its unit holders to issue cheques against a
savings account with a designated bank. The Mid-term Review of Monetary and Credit Policy announced the
decision to permit scheduled commercial banks to offer “cheque Writing“ facility to Gilt Funds and those
Liquid Income Schemes of Mutual Funds which Predominantly (not less than 80 % of the corpus) invest in
money market instruments. The Midterm policy statement of RBI has also permitted Mutual Funds to
undertake Forward Rate Agreement (FRA)/Interest Rate Swaps (IRS) with banks, primary dealers and
financial Institutions for the purpose of hedging their own balance sheet risks. Mutual Funds cannot, however,
undertake market making in FRAs/ IRS. Another significant development related to the emergence of sector
funds targeting sectors such as information technology, Pharmaceuticals, fast moving consumer goods, etc.
Equally important was the emergence of Dedicated Gilt Fund envisaging 100 percent investment in
Government securities, which has Made the gilt market accessible to small investors. In order to promote
dematerialization, the mutual fund industry introduced an innovative product facilitating investment solely in
Dematerialized securities and exchange of any security in dematerialized segment for the units of the scheme.
35
MUTUAL FUND BASICS
A Mutual Fund is a trust that collects money from investors who share a common financial goal, and invest
the proceeds in different asset classes, as defined by the investment objective. Simply put, mutual fund is a
financial intermediary, set up with an objective to professionally manage the money pooled from the investors
at large.
By pooling money together in a mutual fund, investors can enjoy economies of scale and can purchase stocks
or bonds at a much lower trading costs compared to direct investing in capital markets. The other advantages
are diversification, stock and bond selection by experts, low costs, convenience and flexibility.
An investor in a Mutual Fund Scheme receives units which are in accordance with the quantum of money
invested by him. These units represent an investor’s proportionate ownership into the assets of a scheme and
his liability in case of loss to the fund is limited to the extent of amount invested by him.
The pooling of resources is the biggest strength for mutual funds. The relatively lower amounts required for
investing into a mutual fund scheme enables small retail investors to enjoy the benefits of professional money
management and lends access to different markets, which they otherwise may not be able to access.
The investment experts who invest the pooled money on behalf of investors of the scheme are known as Fund
Managers. These fund managers take the investment decisions pertaining to the selection of securities and the
proportion of investments to be made into them. However, these decisions are governed by certain guidelines
which are decided by the investment objective(s), investment pattern of the scheme and are subject to
regulatory restrictions. It is this investment objective and investment pattern which also guides the investor in
choosing the right fund for his investment purpose. Today, there are a variety of schemes offered by mutual
funds in India, which cater to different categories of investors to suit different financial objectives e.g. some
schemes may provide capital protection for the risk-averse investor, whereas some other schemes may provide
for capital appreciation by investing in small cap segment of the equity market for the more aggressive
investor.
The diversity in investment objectives and mandates has helped to classify and sub-classify the schemes
accordingly. The broad classification can be done at the asset class levels: thus we have Equity Funds, Bond
Funds, Liquid or Money Market Funds, Balanced Funds, Gilt Funds etc. These can be further. Classified into
different categories like mid cap funds, small cap funds, sector funds, index funds etc.
MUTUAL FUNDS STRUCTURE IN INDIA
For anybody to become well aware about mutual funds, it is imperative for him or her to
 First know the structure of a mutual fund.
 How does a mutual fund come into being?
 Who are the important people in a mutual fund?
 What are their roles? Etc.
36
LET US NOW KNOW & UNDERSTAND THE MUTUAL FUND STRUCTURE IN BRIEF. MUTUAL
FUNDS IN INDIA FOLLOWS A
3-TIER STRUCTURE
THE FIRST TIER:
There is a sponsor (the First tier), who thinks of starting a mutual fund. The Sponsor approaches the
Securities & Exchange Board of India (SEBI), which are the market regulator and also the regulator for
mutual funds. Not everyone can start a mutual fund. SEBI checks whether the person is of integrity, whether
he has enough experience in the financial sector, his Net worth etc.
THE SECOND TIER:
Once SEBI is convinced about the credibility of the Sponsors it is then the sponsors create a Public Trust
(the Second tier) as per the Indian Trusts Act, 1882. Trusts have no legal identity in India and cannot enter
into contracts, hence the Trustees are the people authorized to act on behalf of the Trust. Contracts are
entered into in the name of the Trustees. Once the Trust is created, it is registered with SEBI AFTER WHICH
THIS TRUST IS KNOWN AS THE MUTUAL FUND IN INDIA.
It is important to understand the difference between the Sponsor and the Trust. They are two separate entities.
Sponsor is not the Trust; i.e. Sponsor is not the Mutual Fund. It is the Trust which is the Mutual Fund. The
Trustees role is not to manage the money. Their job is only to see, whether the money is being managed as per
stated objectives. Trustees may be seen as the internal regulators of a mutual fund. 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.
THE THIRD TIER:
The role of the AMC (ASSET MANAGEMENT COMPANY) is to manage investor’s money on a day to day
basis. Thus it is imperative that people with the highest integrity are involved with this activity. The AMC
cannot act as a Trustee for some other Mutual Fund. It thus emerges to be the Third Tier of the Mutual Fund
Structure. Its objective is to increase public awareness of the mutual fund industry.
37
WHO MANAGES INVESTOR’S MONEY?
This is the role of the Asset Management Company (the Third tier). Trustees appoint the Asset Management
Company (AMC), to manage investor’s money. The AMC in return charges a fee for the services provided
and this fee is borne by the investors as it is deducted from the money collected from them. The AMC’s Board
of Directors must have at least 50% of Directors who are independent directors. The AMC has to be approved
by SEBI. The AMC functions under the supervision of it’s Board of Directors, and also under the direction of
the Trustees and SEBI. It is the AMC, which in the name of the Trust, floats new schemes and manage these
schemes by buying and selling securities. In order to do this the AMC needs to follow all rules and 8
regulations prescribed by SEBI and as per the Investment Management Agreement it signs with the Trustees.
If any fund manager, analyst intends to buy/ sell some securities, the permission of the Compliance Officer is
a must. A compliance Officer is one of the most important persons in the AMC. Whenever the fund intends to
launch a new scheme, the AMC has to submit a Draft Offer Document to SEBI.
This draft offer document, after getting SEBI approval becomes the offer document of the scheme. The Offer
Document (OD) is a legal document and investors rely upon the information provided in the OD for investing
in the mutual fund scheme. The Compliance Officer has to sign the Due Diligence Certificate in the OD. This
certificate says that all the information provided inside the OD is true and correct. This ensures that there is
accountability and somebody is responsible for the OD. In case there is no compliance officer, then senior
executives like CEO, Chairman of the AMC has to sign the due diligence certificate. The certificate ensures
that the AMC takes responsibility of the OD and its contents.
WHO IS A CUSTODIAN?
A custodian’s role is safe keeping of physical securities and also keeping a tab on the corporate actions like
rights, bonus and dividends declared by the companies in which the fund has invested. The Custodian is
appointed by the Board of Trustees. The custodian also participates in a clearing and settlement system
through approved depository companies on behalf of mutual funds, in case of dematerialized securities. In
India today, securities (and units of mutual funds) are no longer held in physical form but mostly in
dematerialized form with the Depositories. The holdings are held in the Depository through Depository
Participants (DPs). Only the physical securities are held by the Custodian. The deliveries and receipt of units
of a mutual fund are done by the custodian or a depository participant at the instruction of the AMC and under
the overall direction and responsibility of the Trustees. Regulations provide that the Sponsor and the
Custodian must be separate entities.
WHAT IS THE ROLE OF THE AMC?
One of the biggest roles played by AMC is managing investor’s money on a day to day basis. The AMC
cannot deal with a single broker beyond a certain limit of transactions. The AMC cannot act as a Trustee for
some other Mutual Fund. The responsibility of preparing the OD lies with the AMC. Appointments of
intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also
done by the AMC. Finally, it is the AMC which is responsible for the acts of its employees and service
providers. As can be seen, it is the AMC that does all the operations. All activities by the AMC are done
under the name of the Trust, i.e. the mutual fund. The AMC charges a fee for providing its services. SEBI has
prescribed limits for this. This fee is borne by the investor as the fee is charged to the scheme, in fact, the fee
is charged as a percentage of the scheme’s net assets. An important point to note here is that this fee is
included in the overall expenses permitted by SEBI. There is a maximum limit to the amount that can be
charged as expense to the scheme, and this fee has to be within that limit. Thus regulations ensure that beyond
a certain limit, investor’s money is not used for meeting expenses.
38
MUTUAL FUND CONSTITUENTS
39
WORKING OF MUTUAL FUND
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, debentures and other
securities. The income earned through these investments and the capital appreciation realised are shared by its
unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a diversified, professionally managed
basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual
fund:
40
MUTUAL FUND INDUSTRY IN INDIA
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 I. ESTABLISHMENT AND GROWTH OF UNIT TRUST OF INDIA - 1964-87
Unit 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, Masters hare (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 - 1987-1993
The 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 Can bank 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 - 1993-96
The 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 - 1996-1999
The 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.
Invetors' 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.
.
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PHASE V. EMERGENCE OF LARGE & UNIFORM INDUSTRY 1999 - 2004 ONWARDS
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-organised 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
PHASE VI. GROWTH AND CONSOLIDATION 2004 ONWARDS
The 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.
42
TYPES OF MUTUAL FUND SCHEMES:
Mutual Fund schemes can be classified into different categories and sub-categories based on their investment
objectives or their maturity periods.
A) Classification based on maturity period:
Mutual Fund schemes can be classified into three categories based on their maturity periods.
 Open-ended schemes
These are mutual fund schemes which offer units for purchase and redemption subscription on a
continuous basis. In other words, the units of these schemes can be purchased or redeemed at any point
of time at Net Asset Value (NAV) based prices. Also, these schemes do not have a fixed maturity
period and an investor can redeem his units anytime.
 Close-ended schemes
These are mutual fund schemes which have a defined maturity period e.g. 1 year / 5 years etc. The
units of close ended scheme can be bought only during a specified period at the time of initial launch.
SEBI stipulates that all close-ended schemes should provide for a liquidity window to its investors.
These schemes are either required to be listed on a recognized stock exchange or provide periodic
repurchase facility to investors.
 Interval schemes
These schemes are a cross between an open-ended and a close-ended structure. These schemes are
open for both purchase and redemption during pre-specified intervals (viz. monthly, quarterly,
annually etc.) at the prevailing NAV based prices. Interval funds are very similar to close-ended funds,
but differ on the following points.
• They are not required to be listed on the stock exchanges, as they have an in-built redemption
window.
• They can make fresh issue of units during the specified interval period, at the prevailing NAV based
prices.
• Maturity period is not defined.
B) Classification based on investment objective
Apart from the above classification, mutual fund schemes can also be classified based on their investment
objectives:
 Equity Oriented Schemes
Growth/ Equity oriented schemes are those schemes which predominantly invest in equity and equity
related instruments. The objective of such schemes is to provide capital appreciation over the medium
to long term. These types of schemes are generally meant for investors with a long-term outlook and
with a higher risk appetite.
 Debt Oriented schemes
The main objective of debt-oriented funds is to provide regular and steady income to investors. These
schemes mainly invest in fixed income securities such as Bonds, Money Market Instruments,
Corporate Debentures, Government Securities (Gilts) etc. Debt-oriented schemes are suitable for
investors whose main objective is safety of capital along with modest growth. These funds are not
affected because of fluctuations in equity markets. However, the NAV of such funds is affected
because of change in the interest rate in the country.
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 Balanced Fund
Balanced Funds provide the best of both worlds i.e. equity and debt. The aim of the balanced funds is
to provide both capital appreciation and stability of income in the long run. The proportion of
investment made into equities and fixed income securities is pre-defined and mentioned in the offer
document of the scheme. This type of scheme is a good alternative for pure equity-oriented products
and provides an effective asset allocation tool. These schemes are suitable for investors looking for
moderate growth. NAVs of such funds are generally less volatile in nature compared to pure equity
funds.
 Gilt Funds
These Funds invest exclusively in the dated securities issued by the government. These funds carry a
very minimal risk because they are free of any default or credit risk. However, they do carry an
interest rate risk as is the case with other debt products.
 Money Market/ Liquid Funds
These are predominantly debt-oriented schemes, whose main objective is preservation of capital, easy
liquidity and moderate income. To achieve this objective, liquid funds invest predominantly in safer
short-term instruments like Commercial Papers, Certificate of Deposits, Treasury Bills, and G-Secs
etc. These schemes are used mainly by institutions and individuals to park their surplus funds for short
periods of time. These funds are more or less insulated from changes in the interest rate in the
economy and capture the current yields prevailing in the market.
 Fund of Funds
Fund of Funds (FoF) as the name suggests are schemes which invest in other mutual fund schemes.
The concept is popular in markets where there are number of mutual fund offerings and choosing a
suitable scheme according to one’s objective is tough. Just as a mutual fund scheme invests in a
portfolio of securities such as equity, debt etc, the underlying investments for a FoF is the units of
other mutual fund schemes, either from the same fund family or from other fund houses.
C) New Product categories

Capital Protection Oriented schemes
The term ‘capital protection oriented scheme’ means a mutual fund scheme which is designated as
such and which endeavors to protect the capital invested therein through suitable orientation of its
portfolio structure. The orientation towards protection of capital originates from the portfolio structure
of the scheme and not from any bank guarantee, insurance cover etc. SEBI stipulations require these
types of schemes to be close-ended in nature, listed on the stock exchange and the intended portfolio
structure would have to be mandatory rated by a credit rating agency. A typical portfolio structure
could be to set aside major portion of the assets for capital safety and could be invested in highly rated
debt instruments. The remaining portion would be invested in equity or equity related instruments to
provide capital appreciation. Capital Protection Oriented schemes are a recent entrant in the Indian
capital markets and should not be confused with ‘capital guaranteed’ schemes.
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
Gold Funds
The objective of these funds is to track the performance of Gold. The units represent the value of gold
or gold related instruments held in the scheme. Gold Funds which are generally in the form of an
Exchange Traded Fund (ETF) are listed on the stock exchange and offers investors an opportunity to
participate in the bullion market without having to take physical delivery of gold.

Real Estate Mutual Funds
Real Estate Mutual Funds or realty funds as they are popularly known are the latest addition to the
mutual fund offerings in India. SEBI recently paved way for the launch of such products, by making
amendments to its existing Regulations. However, real estate mutual funds are yet to be introduced in
India by any asset management company. These schemes invest in real estate properties and earn
income in the form of rentals, capital appreciation from developed properties. Also some part of the
fund corpus is invested in equity shares or debentures of companies engaged in real estate assets or
developing real estate development projects. REMFs are required to be close-ended in nature and
listed on a stock exchange. In addition to the above broad classification, mutual fund schemes can be
further classified into sub-categories. Each of the sub-categories has a stated objective and caters to
specific requirements of investors.
Investment options available to investors
 Growth Option
The growth option on a mutual fund means that an investor in the fund will not receive any dividends
that may be paid out by the stocks in the mutual fund. Some shares pay regular dividends, but by
selecting a growth option, the mutual fund holder is allowing the fund company to reinvest the money
it would otherwise pay out to the investor in the form of a dividend. Under growth option, dividends
are not paid out to the unit holders. Income attributable to the Unit holders continues to remain
invested in the Scheme and is reflected in the NAV of units under this option. Investors can realize
capital appreciation by way of an increase in NAV of their units by redeeming them.
 Dividend Payout Option
Dividends are paid out to the unit holders under this option. However, the NAV of the units falls to the
extent of the dividend paid out and applicable statutory levies.
 Dividend Re-investment Option
The dividend that accrues on units under option is re-invested back into the scheme at ex-dividend
NAV. Hence investors receive additional units on their investments in lieu of dividends.
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46
MONTHLY INCOME PLANS AS AN INVESTMENT
A general misunderstanding about MIP among investors is that it is believed to offer regular monthly income.
From the name you may infer that MIP gives you monthly returns, but that's not the way it functions. "An
MIP is generally mistaken for a regular income plan; but actually, it gives you returns based on market's
performance."
MIP?
MIP is a hybrid investment that invests a small portion of its portfolio, around 15 to 30 per cent, in equities,
and the remaining in debt and money market instruments. This plan is ideal for those who score low or
medium on their risk profile.
Following are the features of Monthly Income Plan

Returns
MIPs are products that give you market-linked returns. This means when the equity market is
performing well, it will give you moderate returns, thanks to the 30 per cent equity component. But
when the tide turns, your returns are limited to the debt component. This fact comes out clear
especially, in the current market situation.

Tax
MIPs score better on the tax front when compared with other debt instruments such as postal savings
and bank deposits. The dividend income is tax free whereas interest from postal savings and bank
deposits is taxable.

Safety
But there is no guarantee that it will give you assured returns like its counterparts. "Investors in the
highest tax bracket can add MIPs to their portfolios if they are looking better post-tax returns
compared to bank deposits. It is a good choice provided you are not totally dependent on it. Since
stock market is a volatile business, don't expect continuous income,"

Ideal
If you do not like taking much risk and are looking for better post-tax returns, then MIP would fit in
your portfolio because 70 per cent is invested in debt. This lends security to your principal while the
30 per cent equity component can give returns a boost.
"But if you are looking at regular flow of income, and are depending on that income for financial stability,
MIP is not meant for you; it’s better to look for alternative,"
MIP is chosen for the following

It is no harm to add MIP to your portfolio provided you are
not expecting continuous flow of income. It can just be
another variant of a debt fund.

If investing in MIP, check the dividend history and its past
performance.
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Fixed Maturity Plans
Fixed Maturity Plans seem to be the latest bug to bite the Indian mutual
fund industry.
Fixed Maturity Plans (FMPs) invest in fixed income instruments, like
bonds, government securities and short-term fixed return investments to
name a few. So they are among less risky investment options, considering
highs and lows of share market and interest rates. You will be expected to
invest a minimum of Rs 5,000 in an FMP.
As compared to fixed deposits (FD), returns from the fixed maturity plans have been better. While FMP has
given 8% return in the past one year, returns from FD have been 7.25-7.50%. You also get the benefit of
indexation in FMP. At present, FMP is hugely popular among institutional investors. But now it is reaching
out to small investors.
Mutual funds have a new way of taking FMPs to small investors. Earlier, they have been investing in only
government bonds. But now they have added equity to their investment portfolio.
In the past six months, funds houses like Standard Chartered, Kotak and Principal have launched fixed
maturity plans in which 65-80% is debt and 20-35% equity. Generally, FMPs tenure is one to two years. Not
just safe investment they also promise dual benefits. People have gone for FMPs in the past six months.
Closed ended funds with an investment period of three or 13 months have collected Rs 30,000 crore in the
past six months.
Mutual funds can hope to attract small investors into investing in FMP considering increasing interest rates
and volatility in stock market. After a sharp fall in the share market, people have started looking for a safe
investment option having good returns. And FMP could be a good option for them.
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Systematic Investment Plan (SIP)
An 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.
FEATURES
 Mutual Fund investments are managed by qualified and experienced professionals who have the
expertise of investment techniques, backed by dedicated investment research team
 You can purchase scheme units at a lesser cost as most of the Asset Management Companies (AMCs)
charge less “entry load” (for some scheme even NIL) for SIP investments, as compared to normal
purchases in the scheme.
 SIPs make the volatility in the market work in your favour. Since a fixed amount is invested more
units are purchased when a scheme NAV is low and fewer units when the NAV is high. As a result,
over a period of time these market fluctuations are generally averaged. Thus the average cost of your
investment is often reduced.
 Since you invest regularly, it makes you disciplined in your savings, which leads to wealth
accumulation.
 The SIP reduces the average purchase cost, even in volatile markets with relative ease. When you
invest a fixed amount every month, the number of mutual fund units you actually buy depends on their
market price. Therefore, with the money you invest each month, you can buy less units when the
market moves up and more units when the market moves down.
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RISK FACED WHILE INVESTING
Where to Find the Best Mutual Funds
Two important distinctions need to be made between categories of money market fund. Money market funds
can be taxable or tax-free. Those that are tax-free are government or municipal funds. Taxable money market
funds that are offered by mutual funds are insured privately. Government money market funds only make
loans to government agencies. Municipal money market funds will only loan to state and local governments
and agencies. A money market fund that only makes loans in your own state will generally be free from tax.
It’s important to calculate whether avoiding taxes with tax-free funds will lead to a greater return on your
investment of not, because these tax-free funds have slightly lower returns.
The Safest Bet Is Money Market Funds
Money market funds can be the best mutual funds for investors who require particularly liquid investments.
For anyone who isn’t quite ready to invest, money market funds are mostly predictable and you will be able to
predict your income from your investment. These funds are a good place to hold cash that is pulled out from
other investments if it is needed in the short term. There will still be earnings from the investment, with the
added bonus of being able to pull money out when it’s needed. Money is simpler to withdraw from money
market funds, similar to withdrawing money from a bank or trust. Payment to the investor can be made
through the mail, wire transfer or cheque. Money market funds are low-risk, but no investing is entirely risk
free. Shares have only a few times fallen below the one dollar mark, so whilst it is unlikely money can be lost
through money market funds. You need to be aware that the lower returns from money market funds can be
eaten up by the management fees. Money markets aren’t big
earners and shouldn’t be your only investment, unless you are in
need of highly liquid assets. They are most appropriate for
parking funds temporarily and to accumulate cash that is needed
in the short-term.
Money market funds have made money markets accessible to
mainstream investors by pooling financial assets, similar to
mutual funds. Mutual funds offer you the opportunity to pool
resources with other investors. Mutual funds reduce risk to the
individuals hip pocket by spreading out investments over are
variety of investment types. Money market funds are the safest
investment within mutual funds.
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INVESTMENT IN MUTUAL FUND = PROFIT?
The rate of profit can differ between the various types of mutual funds – some fluctuate wildly in value and
thus have the potential to net you a large financial gain, however this comes hand in hand with a proportionate
amount of risk – you could end up leaving with nothing, no matter how hard you crossed your fingers. Some
funds operate on a more solid basis – investing in stable assets which are likely to maintain a steady, if less
explosive, rate of growth. Unless you are a Wall Street cowboy, it is advisable to concentrate your
investments in funds which are established and show a steady rate of profit rather than ones which are
constantly shooting up and down in value – this is the best way of ensuring that the mutual fund you have
chosen is more likely to net you a profit. The money market funds mentioned earlier are a good example of a
‘safe bet’, however even an investment in one of these will not necessarily guarantee you a profit, and could
even lose you money, as we have seen happening recently on the global economic stage.
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BENEFITS OF MUTUAL FUND
There are two major reasons why most people around the globe are afraid to take investment decisions on
their own. One of them is the lack of time to study the pros and cons of different investment opportunities and
the other being lack of financial know-how. Apart from that, some financial markets have a steep entry
barrier, which prevents a small ticket investor from participating in the growth of that sector. Investment
needs across different category of investors are also not common. While some may settle for safety of capital,
others may chase returns. There may be others who would want their capital to grow at a steady pace, while
some may want to save for retirement or child’s education. The need and objective of the investors are truly
diverse and any one financial product can’t fulfill all of them. The emergence of mutual funds in the past
decade as a popular investment vehicle is due to the fact that it serves broadly all categories of investors
through the plethora of schemes that it offers. The benefits provided by mutual funds far outweigh its
shortcomings, and has thus gained wide-spread acceptance.
BENEFITS OF INVESTING IN MUTUAL FUNDS

Professional Management: Mutual funds provide the benefit of professional management as people’s
money is managed by experienced fund managers. Investors, who do not have time, inclination and the knowhow to manage their investments, can look towards mutual funds as an alternative. It is inexpensive and is
ideal for a small ticket investor.

Economies of scale: The way mutual funds are structured
gives it a natural advantage. The “pooled” money from a number
investors ensures that mutual funds enjoy economies of scale; it is
cheaper compared to investing directly in the capital markets
which involves higher charges. This also allows retail investors
access to high entry level markets like real estate, and also there is
greater control over costs.
of
a

Diversification: Mutual funds provide investors with the benefit of diversification across different
companies and sectors. Diversification in simple terms means to spread your portfolio across different sectors,
industries and companies so that the overall portfolio is relatively safeguarded from downturns in one or more
sectors. Since small investors do not have enough money to make meaningful investments across different
assets, a mutual fund does the job for them.

Liquidity: Open ended mutual funds provide easy liquidity and investors can buy or sell units
anytime, at the prevailing NAV based prices. Close-ended schemes also provide periodic repurchase facility
or are listed on a stock exchange where investors can redeem their units at the prevailing market price.
Interval funds which are a cross between a close-ended and an open-ended structure also provide periodic
liquidity option to its investors. Just like an individual stock, mutual fund also allows investors to liquidate
their holdings as and when they want.

Flexibility: There are a lot of features in a regular mutual fund scheme, which imparts flexibility to
the scheme. An investor can opt for Systematic Investment Plan (SIP), Systematic Withdrawal Plan etc. to
plan his cash flow requirements as per his convenience. The wide range of schemes being launched in India
by different mutual funds also provides an added flexibility to the investor to plan his portfolio accordingly.
52

Transparency: The mutual fund industry in India works on a very transparent basis, and various kind
of information are available to their investors, through fact sheets, offer documents, annual reports etc.

Simplicity - Investments in mutual fund is considered to be easy, compare to other available
instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase
plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.

Limited Funds: An investor with limited funds might be able to invest in only one or two stocks /
bonds, thus increasing his / her risk. However, a mutual fund will spread its risk by investing a number of
sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is
diversified.

No Time Bar: Investors can enter / exit schemes anytime they want (at least in open ended schemes).
They can invest in an SIP, where every month, a stipulated amount automatically goes out of their savings
account into a scheme of their choice. Such hassle free arrangement is not always easy in case of direct
investing in shares.

Well Regulated: Indian Mutual Fund industry is well regulated by the Securities and Exchange Board
of India (SEBI). This helps to instill confidence and provides comfort to the investors. The regulatory
environment in India is quite healthy, and ensures transparency in the processes and transactions.
The best practices adopted by the industry in India have helped them win investors’ confidence over the
years. The ease and convenience which mutual funds offer and the different variety of schemes made
available to the investors creates popularity for mutual funds, which cuts across investor classes and creates a
favorable appeal Mutual Fund Myths
Common myths associated with mutual fund investing
There are few myths and misconceptions associated with investing in mutual fund schemes. Some of these
notions have faded over time, as investor awareness has increased but some continue to hold strong. It is
imperative to dispel these myths as investments should not be made under wrong impressions. It can throw
the best laid out financial plan out of control, and the situation can be avoided with a little bit of caution.
53

Lower NAV is cheaper
The most common myth that is prevalent among mutual fund investors is that of associating a scheme with a
lower NAV being a better buy compared to a scheme with a higher NAV. This stems from the mindset of
equating mutual fund units with equity shares of a company. NAV of a Scheme is irrelevant and irrespective
of whether we are investing into a fund having a low NAV or a fund with a higher NAV, the amount of
investment remains the same.
Let’s look at a hypothetical investment into two schemes A and B. Scheme A has a NAV of Rs 10 whereas
scheme B has a NAV of Rs 200. We made equal amount of investment of Rs. 1 lac each in both the schemes.
Scheme A would come across as a cheaper buy because we got 10,000 units as against 500 units in scheme B.
Now, let us assume that both the scheme grows by 10 % in a month. The NAV for scheme A is Rs 11 and
Scheme B has a NAV of Rs 220. The value of your investment in both the case is Rs 1, 10,000. Therefore, we
see that the NAV of a scheme is irrelevant, as far as generating returns is concerned. The only difference
being in case of the former, the investor gets more units and in the latter, he gets lesser units. For two schemes
with identical portfolio and other things remaining constant, the difference in NAV will hardly matter and
both the schemes will grow at the same rate.

Regular dividends means good performance
Another popular myth which emerges due to the linkages we make between the concepts of a stock markets
and mutual funds is the dividend payout mechanism. When a company pays dividend, in effect it is
transferring a certain portion of its surplus to its share holders. Therefore a generous dividend payout policy
could be considered favorable in case of a company. However, in case of mutual funds, dividends are declared
out of the distributable surplus which is included in calculation of net asset value. In effect it is paying back a
certain portion of net assets from our own investments. Therefore, dividends from mutual fund units don’t
make us any richer, as there are no additional gains to be made. The NAV of the scheme falls to the extent of
the divi
dend payout, when a scheme pays dividend Thus, a scheme with a high dividend payout record does not
necessarily mean that it is performing well. Dividend option may prove important to plan cash flows,
especially in the case of tax savings scheme which have a lock-in period and also for tax incidence.
54
DISADVANTAGES OF INVESTING MUTUAL FUNDS:
 Demat account:
Demat account is required for MF investments except in case of Schemes which are listed on the stock
exchange, demat account is not required to own units in a mutual fund scheme.
 Past Performers Are the Best Funds to Buy
Despite the disclaimers, mutual fund investors tend to invest in the top performing scheme of the last
year, hoping that past performance will ensure that the scheme continues to stay at the top. However,
empirical studies have shown that no scheme has been able to do
that successfully and consistently. Therefore instead of chasing the
top performer in the short term, it is advisable to invest in a
scheme which features in the top quartile consistently over a
longer period of time. In addition to past performance, the
investors should also consider other factors viz. professional
management, service standards etc.
 Fees And Expenses
As is the case with any other business, running a mutual fund
business also involves costs. The various costs incurred by a
mutual fund could be associated with transactions made by
investors, operating costs, marketing and distribution expenses etc.
Expenses borne by the Mutual Fund investor can be broadly classified into two categories. The load
which is charged to the investor at the time of subscription or redemption and the recurring expenses
which are charged to the fund.
 Loads Or Sales Charges
Loads are charges which investors incur when they buy/ redeem units in a mutual fund scheme. A load
charged at the time of purchase is known as ‘Entry Load or Front End Load’ and charged at the time
of redemption is known as ‘Exit Load or Back End Load’. Asset management companies charge these
loads to defray the selling and distribution expenses including commission paid to the
agents/distributors.
However, an investor is not required to pay entry load where an application is not routed through any
agent or distributor. (Direct application)
Expenses related to New Fund Offer (NFO) have to be met from the entry load collected from the
investors and cannot be charged to the investor through initial issue expenses route. Any excess
expenses over the entry load collected have to be borne by the AMC, Sponsor or the Trustee.
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 Entry & Exit Loads
Investors have to bear expenses for availing of the services (professional management) of the mutual
fund. The First expense that an investor has to incur is by way of Entry Load. This is charged to meet
the selling and distribution expenses of the scheme. A major portion of the Entry Load is used for
paying commissions to the distributor. The distributor (also called a large national distributor or a
regional distributor etc. They are the intermediaries who help an investor with choosing the right
scheme, financial planning and investing in scheme s from time to time to meet one’s requirements.
Investors must ensure that his Advisor has passed the AMFI –Mutual Fund (Advisors) module
certification mutual fund advisor) could be an Independent Financial Advisor, a bank or Loads are
charged to a scheme to meet its selling, marketing and distribution expenses. Loads can be charged at
the time of entry, at the time of exit, as a fixed amount every year or in a staggered manner depending
upon the time for which the investor is invested. Loads are charged as a percent of the NAV. Entry
Load is charged when the investor enters the scheme. This is also known as front end load.
As there are Entry Loads, there exist Exit Loads as well. As Entry Loads increase the cost of buying,
similarly Exit Loads reduce the amount received by the investor. Not all schemes have an Exit Load,
and not all schemes have similar exit loads as well. Some schemes have Contingent Deferred Sales
Charge (CDSC). This is nothing but a modified form of Exit Load, wherein the investor has to pay
different Exit Loads depending upon his investment period. If the investor exits early, he will have to
bear more Exit Load and if he remains invested for a longer period of time, his Exit Load will reduce.
Thus the longer the investor remains invested, lesser is the Exit Load. After some time the Exit Load
reduces to nil; i.e. if the investor exits after a specified time period, he will not have to bear any Exit
Load. Loads are charged to a scheme to meet its selling, marketing and distribution expenses. Loads
can be charged at the time of entry, at the time of exit, as a fixed amount every year or in a staggered
manner depending upon the time for which the investor is invested. Loads are charged as a percent of
the NAV. Entry Load is charged when the investor enters the scheme. This is also known as front end
load.
 Recurring Expenses
These are costs incurred for day to day operation of a scheme. These expenses inter-alias include
investment management and advisory fees, trustee fees, registrar’s fees, custodian’s fees, Audit fees,
marketing and selling expenses including agents’ commission etc.
The recurring expenses (including investment management fees) that can be charged to the scheme are
subject to following limits (as a percentage of weekly average net assets):
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Some of the other Disadvantages of Mutual Fun are stated as under:
 Professional ManagementSome funds don’t perform in neither the market, as their management is not dynamic enough to
explore the available opportunity in the market, thus many investors debate over whether or not the socalled professionals are any better than mutual fund or investor himself, for picking up stocks.
 Costs – The biggest source of AMC income is generally from the entry & exit load which they charge
from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under
layers of jargon.
 Dilution - Because funds have small holdings across different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is also the result of a
successful fund getting too big. When money pours into funds that have had strong success, the
manager often has trouble finding a good investment for all the new money.
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HERE IS A SNAPSHOT OF A INVESTMENT SCHEDULE OF INDIA`S LEADING
INFRASTRUCTURE COMPANY
LARSEN & TOURBO As on 31st March, 2002
Just look at the current investment figures of the company are at around zero rupees in 2001 & about 1.63
crores in 2002 which should the little bit awareness the companies had about the mutual fund industry during
the past few years
And now just have look at the Investment pattern by the same company over a period of 8-9 years, there is a
dynamic change in the figures (Mutual Fund) it has gone up to 984.77 crores in 2007 and further high to
4050.65 crores by 2008. This simply proves the fact that the companies are changing their investment pattern
from the traditional ways to a much secured way of earning returns called `MUTUAL FUNDS`
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BELOW IS THE LATEST FII & MUTUAL FUND HOLDING IN THE MARKET.
From the above figures it can be said that the Investments done by the FII`s and the Mutual fund
institutions in market are very much prominent and they act as a key players.
Conclusion
B
eating the market is neither easy nor painless. In the financial markets, human beings, with all their
frailties, come and process information and make their best judgments’ on what assets are worth. Not
surprisingly, they make mistakes and even those who believe that markets are efficient and can concede this
reality. The open question, though, is whether you can take advantages of these mistakes and do better than
the average investors. You can, but only if you do your hard work, assess the weakness of your investments
strategies and attempt to protect yourself against them. If you have short time horizon, you will also need luck
as an ally.
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BIBLIOGRAPHY
SOURCES OF INFORMATION
1. MERCHANT BANKING & FINANCIAL
SERVICES – By Prof. Anil Agashe
2. MUTUAL FUNDS IN INDIA –
Marketing Strategies and Investment
Practices – Second Edition – By
H.Sadhak
3. Capital Market (Dealers) Module

Primary Sources

Discussion

Debate

Interview

E-Mail contact
4. www.rbi.org.in
5. www.sebi.gov.in

Secondary Sources
6. www.gold.org
7. www.amfiindia.com
8. www.bseindia.com
9. www.icicidirect.com
10.
www.indiapost.gov.in
11.
www.mutualfundsindia.com
12.
Other Internet websites

Book

Newspaper

TV

Internet Website

Graph, chart, diagram, table
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