mutual funds is the best investment plan
TRANSCRIPT
“MUTUAL FUNDS IS THE BEST INVESTMENT PLAN”
Submitted in partial fulfillment for
MASTER OF BUSINESS ADMIMISTRATION
Submitted to: - Submitted by: -
MR. R K SRIVASTAVA SANDEEP VERMA
(H.O.D- FINANCE DEPARTMENT ) ( MBA-IIIrd SEM )
ACKNOWLEDGEMENT
“Knowledge is an experience gained in life, it is the choicest possession, which should not be shelved but should be happily shared with others”
Sometimes words fall short to show gratitude, the same happened with me during this project. The immense help and support received from Karvy the finapolis limited overwhelmed me during the project.
It was my great fortune to have been associated and work under the dynamic supervision of Mr. Sandeep Srivastava (Branch Manager), Lucknow. It was due to his best efforts, constant source of inspiration, encouragement and co-operation this work has taken the present shape.
I am extremely thankful to Mr. Brijesh Srivastava (Area manager), for providing an strength to work in this particular field with which the work has been done efficiently.
I am thankful to Ms.Pallavi Lal Asthana, training & placement officer, Sherwood college of engineering, research and technology, Barabanki for allowing me to work at Karvy the finapolis, Lucknow and giving me all the possible helps and valuable suggestions.
I wish to express my heartfelt gratitude to my parents who always filled my mind with positive affirmations and crowded out the negative thoughts.
Above all I am thankful to all my friends for providing me moral support and timely help, whenever I was in need.
EXECUTIVE SUMMARY
India is a large and growing economy with rapidly expanding financial services sector. The sector has witnessed a transformation over the last decade as a result of the economic liberalization which started in 1991. India is now placed among the mature markets of the world. With over 20 million shareholders, India has the third largest investor base in the world after USA and Japan.
Mutual Funds are investment institutions set up to manage money pooled in from the public. The advantages of investing in Mutual Funds are the professional expertise they employ coupled with the variations offered on the basis of asset classification and the diversification of the chosen portfolio aimed at optimizing the risk for the required return.
The benefits that can be accrued from Mutual Funds are
The schemes could be added to the portfolio with online updates for monitoring the performance of your investments in Mutual Funds.
The comprehensive search, which gets you the fund matching your criteria. The comparison of various schemes of different Mutual Funds based on the critical and most sought after
investment criteria. The analysis of different schemes and the outlook for the same. List of new launches in the market provided continuously.
Basically, Mutual funds are trusts that are formed to mobilize the savings from the people and pool them together to invest within the securities markets. The main advantage of mutual funds is that it is professionally managed. And the general idea is for investors to contribute small amounts into units in the various schemes, which in turn is deployed in the various markets. This way, any investor who is not in a position to directly invest in the markets can take advantage of this route.
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My summer internship was at KRAVY THE FINE POLIS, LUCKNOW branch, for a period of Two Months. I had a chance to take part in the day to day functioning of the organization where in I had to make telephonic calls to our potential clients/agents and convince them to get more emphasis in our product. I also had to meet them personally when required.
I was given a project titled “MUTUAL FUNDS IS THE BEST INVESTMENT PLAN”, where in I had to analyze the market scenario for mutual funds and retail distribution strategies for the company. I was also asked to perform some additional assignments in order to activate the company’s retail distribution channels. I had to do a competitive analysis for KRAVY THE FINESPOLIS mutual fund to know where it currently stands in the Indian Mutual Fund Market. I did a thorough analysis on KRAVY competitors to know its competitive
advantage. I have done a SWOT analysis for KRAVY THE FINEPOLIS and have come up with few suggestion and recommendations for the company.
DECLARATION
The summer project on MUTUAL FUNDS IS THE BEST INVESTMENT PLAN is the original
work done by me. This is the property of institute & the use of this report without prior permission
of this institute will be considered illegal & actionable.
SANDEEP VERMA
DATE: - MBA (IInd YEAR)
SCERT, BARABANKI
CONTENTS
Executive Summary
Chapter - 1 INTRODUCTION
Chapter - 2 COMPANY PROFILE
Chapter - 3 OBJECTIVES AND SCOPE
Chapter - 4 RESEARCH METHODOLOGY
Chapter - 5 DATA ANALYSIS AND INTERPRETATION
Chapter - 6 FINDINGS AND CONCLUSIONS
Chapter - 7 SUGGESTIONS & RECOMMENDATIONS
Chapter - 8 BIBLIOGRAPHY
ALL ABOUT MUTUAL FUNDS
Before we understand what is mutual fund, it’s very important to know the area in which mutual funds works, the basic understanding of stocks and bonds.
STOCKS : Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.
BONDS : Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.
What Is 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 shares, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.The flow chart below describes broadly the working of a Mutual Fund.
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual/corporate investors and invests the same on behalf of the investors/unit holders, in Equity shares, Government securities, Bonds, Call Money Markets etc, and distributes the profits. In the other words, a Mutual Fund allows investors to indirectly take a position in a basket of assets.
Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread among a wide cross-section of industries and sectors thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at same time. Investors of mutual funds are known as unit holders.
The investors in proportion to their investments share the profits or losses. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A Mutual Fund is required to be registered with Securities Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
MUTUAL FUNDS : UNIVERSAL APPEAL
Savings form an important part of the economy of any nation. With savings invested in various
options available to the people, the money acts as the driver for growth of the country. Indian financial
scene too presents multiple avenues to the investors. Though certainly not the best or deepest of markets
in the world, it has ignited the growth rate in mutual fund industry to provide reasonable options for an
ordinary man to invest his savings.
Investment goals vary from person to person. While somebody wants security, others might give
more weightage to returns alone. Somebody else might want to plan for his child's education while
somebody might be saving for the proverbial rainy day or even life after retirement. With objectives
defying any range, it is obvious that the products required will vary as well.
Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves
broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt and balanced
funds. There are also funds meant exclusively for young and old, small and large investors. Moreover, the
setup of a legal structure, which has enough teeth to safeguard investors' interest, ensures that the
investors are not cheated out of their hard - earned money. All in all, benefits provided by them cut
across the boundaries of investor category and thus create for them, a universal appeal.
Investors of all categories could choose to invest on their own in multiple options but opt for
mutual funds for the sole reason that all benefits come in a package.
Let us see how :
An investor normally prioritizes his investment needs before undertaking an investment. So
different goals will be allocated different proportions of the total disposable amount. Investments for
specific goals normally find their way into the debt market as risk reduction is of prime importance. This
is the area for the risk - averse investors and here, mutual funds are generally the best option. The reasons
are not difficult to see. One can avail of the benefits of better returns with added benefits of anytime
liquidity by investing in open – ended debt funds at lower risk. Many people have burnt their fingers by
investing in fixed deposits of companies who were assuring high returns but have gone bust in course of
time leading to distraught investors as well as pending cases in the Company Law Board.
This risk of default by any company that one has chosen to invest in, can be minimized by
investing in mutual funds as the fund managers analyze the companies' financials more minutely than an
individual can do as they have the expertise to do so. They can manage the maturity of their portfolio by
investing in instruments of varied maturity profiles. Since there is no penalty on pre – mature withdrawal,
as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better
placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and
one can benefits from any such price movement.
Apart from liquidity, these funds have also provided very good post - tax returns on year to year
basis. Even historically, we find that some of the debt funds have generated superior returns at relatively
low level of risks. On an average debt funds have posted returns over 10 percent over one – year
horizon. The best performing funds have given returns of around 14 percent in the last one – year
period. In nutshell, we can say that these funds have delivered more than what one expects of debt
avenues such as post office schemes or bank fixed deposits. Though they are charged with a dividend
distribution tax on dividend payout at 10 percent (plus a surcharge of 10 percent), the net income
received is still tax free in the hands of investor and is generally much more than all other avenues, on
a post tax basis.
Moving up in the risk spectrum, we have people who would like to take some risk and invest in
equity funds / capital market. However, since their appetite for risk is also limited, they would rather
have some exposure to debt as well. For these investors, balanced funds provide an easy route of
investment. Armed with the expertise of investment techniques, they can invest in equity as well as good
quality debt thereby reducing risks and providing the investor with better returns than he could otherwise
manage. Since they can reshuffle their portfolio as per market conditions, they are likely to generate
moderate returns even in pessimistic market conditions.
Next come the risk takers. Risk takers by their very nature, would not be averse to investing in
high – risk avenues. Capital markets find their fancy more often than not, because they have historically
generated better returns than any other avenue, provided, the money was judiciously invested. Though the
risk associated is generally on the higher side of the spectrum, the return – potential compensates for the
risk attached.
Capital markets interest people, albeit not all for there are several problems associated. First issue
is that of expertise. While investing directly into capital market one has to be analytical enough to
judge the valuation of the stock and understand the complex undertones of the stock. One needs to judge
the right
valuation for exiting the stock too. It is very difficult for a small investor to keep track of the
movements of the market. Entrusting the job to experts, who watch the trends of the market and analyze
the valuations of the stocks will solve this problem for an investor. Mutual funds specialize in
identification of stocks through dedicated experts in the field and this enables them to pick stocks at the
right moment. Sector funds provide an edge and generate good returns if the particular sector is doing
well.
Next problem is that of funds / money. A single person can't invest in multiple high - priced stocks
for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying
his portfolio as well as benefiting from multiple investments. Here again, investing through MF route
enables an investor to invest in many good stocks and reap benefits even through a small investment.
This not only diversifies the portfolio and helps in generating returns from a number of sectors
but reduces the risk as well. Though identification of the right fund might not be an easy task,
availability of good investment consultants and counselors will help investors take informed decision.
GLOBAL SCENARIO
Some basic facts-
The money market mutual fund segment has a total corpus of $ 1.48 trillion in the U.S. against a
corpus of $ 100 million in India.
Out of the top 10 mutual funds worldwide, eight are bank - sponsored. Only Fidelity and Capital
are non – bank mutual funds in this group.
In the U.S. the total number of schemes is higher than that of the listed companies while in
India we have just 277 schemes
Internationally, mutual funds are allowed to go short. In India fund managers do not have such
leeway.
In the U.S. about 9.7 million households will manage their assets on - line by the year 2003,
such a facility is not yet of avail in India.
On - line trading is great idea to reduce management expenses from the current 2 % of total
assets to about 0.75% of the total assets.
72% of the core customer base of mutual funds in the top 50 - broking firms in the U.S. are
expected to trade on - line by 2003.
Internationally, on – line investing continues its meteoric rise. Many have debated about the
success of e-commerce and its breakthroughs, but it is true that this aspect of technology could and
will change the way financial sectors function. However, mutual funds cannot be left far behind. They
have realised the potential of the Internet and are equipping themselves to perform better.
In fact in advanced countries like the U.S.A, mutual funds buy - sell transactions have already
begun on the Net, while in India the Net is used as a source of Information . Such changes could
facilitate easy access, lower intermediation costs and better services for all. A research agency that
specializes in internet technology estimates that over the next four years Mutual Fund Assets traded on
– line will grow ten folds from $128 billion to $1,227 billion ; whereas equity assets traded on – line
will increase during the period from $246 billion to $1,561 billion. This will increase the share of
mutual funds from 34% to 40% during the period. Such increases in volumes are expected to bring
about large changes in the way Mutual Funds conduct their business.
MUTUAL FUND INDUSTRY IN INDIA
The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry.
In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family raised the AUM to Rs. 470 in March 1993 and till April 2004; it reached the height of 1,540 bn.
Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry.
The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling.
The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under
MUTUAL FUND INDUSTRY
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases.
FIRST PHASE:-1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of
1988 UTI had Rs.6, 700 crore of assets under management.
SECOND PHASE – 1987-1993
(Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crore.
THIRD PHASE – 1993-2003
(Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crore. The Unit Trust of India with Rs.44, 541 crore of assets under management was way ahead of other mutual funds.
FORTH PHASE – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crore as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
GROWTH IN ASSETS UNDER MANAGEMENT
When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund).
Mutual Fund investor is also known as a mutual fund shareholder or a unit holder.Any change in the value of the investments made into capital market instruments (such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets by the total number of units issued to the investors
ORGANISATION OF MUTUAL FUND
There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:
ROLE OF SEBI IN MUTUAL FUND INDUSTRY
Unit Trust of India was the first mutual fund set up in India in the year 1963.Inearly 1990s, Government allowed public sector banks and institutions to set up mutual funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed.
The objectives of SEBI are to protect the interest of investors in securities and to promote the development of and to regulate the security market. As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors.
SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations.
There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on January 15, 2002)
GUIDELINES OF THE SEBI FOR MUTUAL FUND COMPANIES
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds.It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time.
SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent.
The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc.
Documents required (PAN mandatory):
Proof of identity :
1. Photo PAN card
2. In case of non-photo PAN card in addition to copy of PAN card any one of the following: driving license/passport copy/ voter id/ bank photo pass book.Proof of address (any of the following ) :latest telephone bill, latest electricity bill, Passport, latest bank passbook/bank account statement, latest Demat account statement, voter id, driving license, ration card, rent agreement.
Offer document: An offer document is issued when the AMCs make New Fund Offer(NFO). Its advisable to every investor to ask for the offer document and read it before investing. An offer document consists of the following:Standard Offer Document for Mutual Funds (SEBI Format)
Summary Information Glossary of Defined Terms Risk Disclosures Legal and Regulatory Compliance Expenses Condensed Financial Information of Schemes Constitution of the Mutual Fund Investment Objectives and Policies Management of the Fund Offer Related Information.
Key Information Memorandum: a key information memorandum, popularly known as KIM, is attached along with the mutual fund form. And thus every investor get to read it. Its contents are:
1 Name of the fund.2. Iestment objective3. Aset allocation pattern of the scheme.4. Risk profile of the scheme5. Plans & options6. Minimum application amount/ no. of units7. Benchmark index8. Dividend policy9. Name of the fund manager(s)10 . Expenses of the scheme: load structure, recurring expenses11. Performance of the scheme (scheme return v/s. benchmark return)12. Year- wise return for the last 5 financial year.
AMFI (The Association of Mutual Funds in India)
AMFI is the supervisory body of Mutual Fund Industry. It is dedicated to developing the Indian
Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in
all areas with a view to protecting and promoting the interests of mutual funds and their unit holders
To define and maintain high professional and ethical standards in all areas of operation of mutual fund
industry.
To recommend and promote best business practices and code of conduct to be followed by members and
others engaged in the activities of mutual fund and asset management including agencies connected or
involved in the field of capital markets and financial services.
To interact with the Securities and Exchange Board of India ( SEBI ) and to represent to SEBI on all
matters concerning the mutual fund industry.
To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the
Mutual Fund Industry.
To develop a cadre of well - trained Agent distributors and to implement a programme of training and
certification for all intermediaries and other engaged in the industry.
To undertake nation wide investor awareness programme so as to promote proper understanding of the
concept and working of mutual funds.
To disseminate information on Mutual Fund Industry and to undertake studies and research directly and / or
in association with other bodies.
FACTORS THAT MAKE MUTUAL FUNDS, A VIABLE INVESTMENT
OPTION:
Mutual funds are investment vehicles, and one can use them to invest in asset classes such as
equities or fixed income. Finance experts recommends that one use the mutual fund investment route
rather than invest themselves, unless they have the required temperament, aptitude and technical knowledge
because -
We are not all investment professionals -
We go to a doctor when we need medical advice or a lawyer for legal guidance. Similarly, mutual
funds are investment vehicles managed by professional fund managers. Mutual funds are like professional
money managers, however a key factor in their favour is that they are more regulated and hence offer
investors the ability to analyze and evaluate their track record.
Investing is becoming more complex -
There was a time when things were quite simple – the market went up with the arrival of the
first monsoon showers and every year around Diwali. Since India started integrating with the world ( with
the start of the liberalisation process ), complex factors such as an increase in short - term US interest
rates, the collapse of the Brazilian currency or default on its debt by the Russian government, have
started having an impact on the Indian stock market.
Although it is possible for an individual investor to understand Indian companies ( and investing ) in such
an environment, the process can become fairly time consuming. Mutual funds ( whose fund managers are
paid to understand these issues and whose asset management company invests in research ) provide an
option of investing without getting lost in the complexities.
Mutual funds provide risk diversification -
Diversification of a portfolio is amongst the primary tenets of portfolio structuring. And a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option.
MUTUAL FUNDS V/S INDIVIDUAL STOCKS
There are several advantages mutual funds have over stocks. The key advantage funds have over
stocks is diversification. Any fund normally invests in a diverse basket of securities, which may include
stocks. Consider, one of the market favorites, Birla Advantage Fund, a growth scheme with 26.43% of its
portfolio in Infosys, 14.75% in Visual Soft and another 8.22% in SSI. With an investment of Rs.50,000
in the scheme you could own Rs.13,215 worth of Infosys, Rs.7375 of Visual Soft and Rs.4110 of SSI.
Likewise you would own 27 other stocks that the scheme has put its money in. Hmmm, is that more
satisfying than purchasing seven stocks of Infosys on your own with the same money. Hence, funds make
it possible for individual investors to achieve more diversification and with less of their effort than
compared to investing in individual stocks. Funds are also professionally managed and backed by an
investment research team. The team looks at the performance of companies and then makes investments in
them to achieve the objectives of the scheme.
Compared to investing in stocks, your experience with fund investing will show you that you save
a lot of paperwork as well as time. Under normal functioning, fund investment also does away with
common problems associated with stocks like bad deliveries, delayed payments and the frequent visits to
brokers and companies.
MUTUAL FUNDS V/S BANKS
BASIS OF
DIFFERENCE
BANKS MUTUAL FUNDS
Returns Low Better
Administrative exp. High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest calculation Minimum balance
between 10th. & 30th. Of
every month
Everyday
Guarantee Maximum Rs.1 lakh on
deposits
None
ADVANTAGES OF MUTUAL FUNDS
The advantages of investing in a Mutual Fund are:
• Flexibility – Mutual funds offer a variety of schemes that will suit your needs over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.
• Affordability – As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.
• Liquidity - In open-ended schemes, you have the option of withdrawing or redeeming your money at any point of time at the current NAV.
• Diversification – Risk is lowered with Mutual Fund as they invest across different industries stocks.
• Professional Management – Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.
• Low Costs – The economy of scale result in low cost.
• Regulations - All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI.
• Transparency - The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unit holder, you are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy.
DISADVANTAGES OF INVESTING THROUGH MUTUAL FUND
1. Professional Management- Some funds doesn’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 so-called professionals are any better than mutual fund or investor himself, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. 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.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
CATEGORIES OF MUTUAL FUND:
MUTUAL FUNDS CAN BE CLASSIFIED AS FOLLOWS:
Based on their structure :
Open-ended funds: Investors can buy and sell the units from the fund, at any point of time. Close-ended funds: These funds raise money from investors only once. Therefore, after the
offer period, fresh investments can not be made into the fund. If the fund is listed on a stocks exchange the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified intervals. Therefore, such funds have relatively low liquidity.
Based on their investment objective :
Equity funds: These funds invest in equities and equity related instruments. With fluctuating share prices, such funds show volatile performance, even losses. However, short term fluctuations in the market, generally smoothens out in the long term, thereby offering higher returns at relatively lower volatility. At the same time, such funds can yield great capital appreciation as, historically, equities have outperformed all asset classes in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as:
i) Index funds - In this case a key stock market index, like BSE Sensex or Nifty is tracked. Their portfolio mirrors the benchmark index both in terms of composition and individual stock weightages.
ii) Equity diversified funds - 100% of the capital is invested in equities spreading across different sectors and stocks.
iii) Dividend yield funds- it is similar to the equity diversified funds except that they invest in companies offering high dividend yields.
iv) Thematic funds- Invest 100% of the assets in sectors which are related through some theme.e.g. -An infrastructure fund invests in power, construction, cements sectors etc.
v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund will invest in banking stocks.
vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.
Balanced fund: Their investment portfolio includes both debt and equity. As a result , on the risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Following are balanced funds classes:
i) Debt-oriented funds -Investment below 65% in equities.
ii) Equity-oriented funds -Invest at least 65% in equities, remaining in debt.
Debt fund: They invest only in debt instruments, and are a good option for investors averse to idea of taking risk associated with equities. Therefore, they invest exclusively in fixed-income instruments like bonds, debentures, Government of India securities; and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put your money into any of these debt funds depending on your investment horizon and needs.
i) Liquid funds- These funds invest 100% in money market instruments, a large portion being invested in call money market.
ii) Gilt funds ST- They invest 100% of their portfolio in government securities of and treasury bills (T- bills).
iii) Floating rate funds- Invest in short-term debt papers. Floaters invest in debt instruments which have variable coupon rate.
iv) Arbitrage fund- They generate income through arbitrage opportunities due to mis-pricing between cash market and derivatives market. Funds are allocated to equities, derivatives and money markets. Higher proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities.
v) Gilt funds LT- They invest 100% of their portfolio in long-term government securities.
vi) Income funds LT- Typically, such funds invest a major portion of the portfolio in long-term debt papers.
vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure of 10%-30% to equities.
viii) FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that of the fund.
INVESTMENT STRATEGIES
1. Systematic Investment Plan: under this a fixed sum is invested each month on a fixed date of a month. Payment is made through post dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA)
2. Systematic Transfer Plan: under this an investor invest in debt oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund.
3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then he can withdraw a fixed amount each month.
WORKING OF A MUTUAL FUNDS
The entire mutual fund industry operates in a very organized way. The investors, known as unit holders,handover their savings to the AMCs under various schemes. The objective of the investment should match with the objective of the fund to best suit the investors’ needs. The AMCs further invest the funds into various securities according to the investment objective. The return generated from the investments is passed on to the investors or reinvested as mentioned in the offer document.
DISTRIBUTION CHANNELS Mutual funds posses a very strong distribution channel so that the ultimate customers doesn’t face any difficulty in the final procurement. The various parties involved in distribution of mutual funds are:
1. Direct marketing by the AMCs: the forms could be obtained from the AMCs directly. The investors can approach to the AMCs for the forms. some of the top AMCs of India are; Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram, ICICI, Mirae Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCs include: Standard Chartered, Franklin Templeton, Fidelity, JP Morgan, HSBC, DSP Merill Lynch, etc.
2 .Broker/ sub broker arrangements: the AMCs can simultaneously go for broker/sub-broker to popularize their funds. AMCs can enjoy the advantage of large network of these brokers and sub brokers.eg: SBI being the top financial intermediary of India has the greatest network. So the AMCs dealing through SBI has access to most of the investors.
3. Individual agents, Banks, NBFC: investors can procure the funds through individual agents, independent brokers, banks and several non- banking financial corporations too, whichever he finds convenient for him.
COSTS ASSOCIATED
Expenses:
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management. A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.
Loads:
Entry Load/Front-End Load (0-2.25%)- its the commission charged at the time of buying the fund to cover the cost of selling, processing etc.
Exit Load/Back- End Load (0.25-2.25%)- it is the commission or charged paid when an investor exits from a mutual fund, it is imposed to discourage withdrawals. It may reduce to zero with increase in holding period.
Measuring and evaluating mutual funds performance
Every investor investing in the mutual funds is driven by the motto of either wealth creation or wealth increment or both. Therefore it’s very necessary to continuously evaluate the funds’ performance with the help of factsheets and newsletters, websites, newspapers and professional advisors like SBI mutual fund services. If the investors ignore the evaluation of funds’ performance then he can loose hold of it any time. In this ever-changing industry, he can face any of the following problems:
1. Variation in the funds’ performance due to change in its management/ objective.
2. The funds’ performance can slip in comparison to similar funds.
3. There may be an increase in the various costs associated with the fund.
4 .Beta, a technical measure of the risk associated may also surge.
5. The funds’ ratings may go down in the various lists published by independent rating agencies.
6 .It can merge into another fund or could be acquired by another fund house.
Performance measures:
Equity funds : the performance of equity funds can be measured on the basis of: NAV Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and Distributions, Computing Total Return (Per Share Income and Expenses, Per Share Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund Size, Transaction Costs, Cash Flow, Leverage.
Debt fund: likewise the performance of debt funds can be measured on the basis of: Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs, besides NAV Growth, Total Return and Expense Ratio.
Liquid funds: the performance of the highly volatile liquid funds can be measured on the basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio.
Concept of benchmarking for Performance evaluation
Every fund sets its benchmark according to its investment objective. The funds performance is measured in comparison with the benchmark. If the fund generates a greater return than the benchmark then it is said that the fund has outperformed benchmark , if it is equal to benchmark then the correlation between them is exactly 1. And if in case the return is lower than the benchmark then the fund is said to be underperformed.
Some of the benchmarks are :
1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU, BSE 500 index, BSE bankex, and other sectoral indices.
2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total Return Index, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds.
3. Liquid funds: Short Term Government Instruments’ Interest Rates as Benchmarks, JPM T-Bill Index
To measure the fund’s performance, the comparisons are usually done with:
i) with a market index.ii) Funds from the same peer group.
iii) Other similar products in which investors invest their funds.
Financial planning for investors( ref. to mutual funds):
Investors are required to go for financial planning before making investments in any mutual fund. The objective of financial planning is to ensure that the right amount of money is available at the right time to the investor to be able to meet his financial goals. It is more than mere tax planning. Steps in financial planning are:
Asset allocation. Selection of fund. Studying the features of a scheme.
In case of mutual funds, financial planning is concerned only with broad asset allocation, leaving the actual allocation of securities and their management to fund managers. A fund manager has to closely follow the objectives stated in the offer document, because financial plans of users are chosen using these objectives.
Why has it become one of the largest financial instruments?
If we take a look at the recent scenario in the Indian financial market then we can find the market flooded with a variety of investment options which includes mutual funds, equities, fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life insurance, gold, real estate etc. all these investment options could be judged on the basis of various parameters such as- return, safety convenience, volatility and liquidity. measuring these investment options on the basis of the mentioned parameters, we get this in a tabular form:
Return Safety Volatility Liquidity Convenience
Equity High Low High High Moderate
Bonds Moderate High Moderate Moderate High
Co. Debentures
Moderate Moderate Moderate Low Low
Co. FDs Moderate Low Low Low Moderate
Bank Deposits
Low High Low High High
PPF Moderate High Low Moderate High
Life Insurance
Low High Low Low Moderate
Gold Moderate High Moderate Moderate Gold
Real Estate High Moderate High Low Low
Mutual Funds
High High Moderate High High
We can very well see that mutual funds outperform every other investment option. On three parameters it scores high whereas it’s moderate at one. comparing it with the other options, we find that equities gives us high returns with high liquidity but its volatility too is high with low safety which doesn’t makes it favourite among persons who have low risk- appetite. Even the convenience involved with investing in equities is just moderate.
Now looking at bank deposits, it scores better than equities at all fronts but lags badly in the parameter of utmost important ie; it scores low on return , so it’s not an happening option for person who can afford to take risks for higher return. The other option offering high return is real estate but that even comes with high volatility and moderate safety level, even the liquidity and convenience involved are too low. Gold have always been a favourite among Indians but when we look at it as an investment option then it definitely doesn’t gives a very bright picture. Although it ensures high safety but the returns generated and liquidity are moderate. Similarly the other investment options are not at par with mutual funds and serve the needs of only a specific customer group. Straightforward, we can say that mutual fund emerges as a clear winner among all the options available. The reasons for this being:
I) Mutual funds combine the advantage of each of the investment products: mutual fund is one such option which can invest in all other investment options. Its principle of diversification allows the investors to taste all the fruits in one plate. just by investing in it, the investor can enjoy the best investment option as per the investment objective.
II) Dispense the shortcomings of the other options: every other investment option has more or les some shortcomings. Such as if some are good at return then they are not safe, if some are safe then either they have low liquidity or low safety or both….likewise, there exists no single option which can fit to the need of everybody. But mutual funds have definitely sorted out this problem. Now everybody can choose their fund according to their investment objectives.
III) Returns get adjusted for the market movements: as the mutual funds are managed by experts so they are ready to switch to the profitable option along with the market movement. Suppose they predict that market is going to fall then they can sell some of their shares and book profit and can reinvest the amount again in money market instruments.
IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists one more reason which has established mutual funds as one of the largest financial intermediary and that is the flexibility that mutual funds offer regarding the investment amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs and even Rs. 100 in some cases.
HOW DO INVESTORS CHOOSE BETWEEN FUNDS?
When the market is flooded with mutual funds, it’s a very tough job for the investors to choose the best fund for them. Whenever an investor thinks of investing in mutual funds, he must look at the investment objective of the fund. Then the investors sort out the funds whose investment objective matches with that of the investor’s. Now the tough task for investors start, they may carry on the further process themselves or can go for advisors like SBI . Of course the investors can save their money by going the direct route i.e. through the AMCs directly but it will only save 1-2.25% (entry load) but could cost the investors in terms of returns if the investor is not an expert. So it is always advisable to go for MF advisors. The mf advisors’ thoughts go beyond just investment objectives and rate of return. Some of the basic tools which an investor may ignore but an mf advisor will always look for are as follow:
1. Rupee Cost Averaging (RCA):
The investors going for Systematic Investment Plans(SIP) and Systematic Transfer Plans(STP) may enjoy the benefits of RCA (Rupee Cost Averaging). Rupee cost averaging allows an investor to bring down the average cost of buying a scheme by making a fixed investment periodically, like Rs 5,000 a month and nowadays even as low as Rs. 500 or Rs. 100. In this case, the investor is always at a profit, even if the market falls. In case if the NAV of fund falls, the investors can get more number of units and vice-versa. This results in the average cost per unit for the investor being lower than the average price per unit over time.The investor needs to decide on the investment amount and the frequency. More frequent the investment interval, greater the chances of benefiting from lower prices. Investors can also benefit by increasing the SIP amount during market downturns, which will result in reducing the average cost and enhancing returns. Whereas STP allows investors who have lump sums to park the funds in a low-risk fund like liquid funds and make periodic transfers to another fund to take advantage of rupee cost averaging.
2. Rebalancing:
Rebalancing involves booking profit in the fund class that has gone up and investing in the asset class that is down. Trigger and switching are tools that can be used to rebalance a portfolio. Trigger facilities allow automatic redemption or switch if a specified event occurs. The trigger could be the
value of the investment, the net asset value of the scheme, level of capital appreciation, level of the market indices or even a date. The funds redeemed can be switched to other specified schemes within the same fund house. Some fund houses allow such switches without charging an entry load. To use the trigger and switch facility, the investor needs to specify the event, the amount or the number of units to be redeemed and the scheme into which the switch has to be made. This ensures that the investor books some profits and maintains the asset allocation in the portfolio.
3. Diversification:
Diversification involves investing the amount into different options. In case of mutual funds, the investor may enjoy it afterwards also through dividend transfer option. Under this, the dividend is reinvested not into the same scheme but into another scheme of the investor's choice.
For example, the dividends from debt funds may be transferred to equity schemes. This gives the investor a small exposure to a new asset class without risk to the principal amount. Such transfers may be done with or without entry loads, depending on the MF's policy.
4. Tax efficiency:
Tax factor acts as the “x-factor” for mutual funds. Tax efficiency affects the final decision of any investor before investing. The investors gain through either dividends or capital appreciation but if they haven’t considered the tax factor then they may end loosing.
Debt funds have to pay a dividend distribution tax of 12.50 per cent (plus surcharge and education cess) on dividends paid out. Investors who need a regular stream of income have to choose between the dividend option and a systematic withdrawal plan that allows them to redeem units periodically. SWP implies capital gains for the investor.
If it is short-term, then the SWP is suitable only for investors in the 10-per-cent-tax bracket. Investors in higher tax brackets will end up paying a higher rate as short-term capital gains and should choose the dividend option.
If the capital gain is long-term (where the investment has been held for more than one year), the growth option is more tax efficient for all investors. This is because investors can redeem units using the SWP where they will have to pay 10 per cent as long-term capital gains tax against the 12.50 per cent DDT paid by the MF on dividends.
All the tools discussed over here are used by all the advisors and have helped investors in reducing risk, simplicity and affordability. Even then an investor needs to examine costs, tax implications and minimum applicable investment amounts before committing to a service.
DOES FUND PERFORMANCE AND RANKING PERSIST?
This project has been a great learning experience for me. But the analyses that are carried onward these pages are really close to my heart. After taking a look at the data presented below, an expert might underestimate my efforts. One might think it as a boring task and can go for recording historic NAVs since last 1 month instead of recording it daily.But frankly speaking, while tracking the NAVs, I really developed some sentiments with these funds. Really the ups and downs in the NAVs affected me as if I m tracking my own portfolio. The portfolio consists of different types of funds. We can see some funds are 5- star rated but their performances are below the unrated funds. We can also find some funds which performed very well initially but gradually declined either in short- run or long run. Some funds have high NAVS but the returns offered are low. We can also see some funds following same benchmark and reflecting diverse NAV and returns. Even it can be seen that the expense ratios for various funds varies which may affect the ultimate return.
Now before going into details, lets have a look at those funds: in this downgrading equity market, we can easily make out that the 1 year return of the fund that was on 17 th of april could not be sustained till 1 month. One can sort out that the present return of funds has decreased a lot and subsequently its NAV too has come down. All the funds are showing negative returns for the last 1 month. Even the two hybrid funds are showing negative monthly returns. That means all those who bought these funds a month back must be experiencing a negative return. Although the annual return of the funds have gone down in comparison to what it was offering a month back. Still the total return is positive. On an average the equity funds are offering a return of 30% annually, inspite of a week equity market.
Now checking the validity of funds’ ratings, we can see that some of the funds are 5 star or 4 star rated but their returns lag behind the unrated funds. Although, since the ratings include both risk and return so it will not be a total justice to judge the funds purely on a return basis but still we can go for it just to judge them on the basis of returns generated.
Looking at the funds, we have three 5 star rated funds, one 4star rated and six unrated funds. In other way, we have seven equity diversified funds, one equity specialty, one hybrid: dynamic asset allocation and one hybrid: debt oriented fund. It is not possible to compare each and every fund in details. So I have compared 2 funds out of this list on the basis of their returns and expenses.
Here DBS Chola opportunities and ICICI Pru infrastructure follows the same benchmark S&P CNX NIFTY. In this case, DBS Chola opportunities is a 4 star rated fund whereas ICICI Pru infrastructure is an unrated fund. The star rating definitely gives DBS a competitive advantage but now lets have a look at other factors, we can see that ICICI Pru has really performed worse in the last month. Its 1 month return is -5.8% whereas DBS gave a return of -3.07%. Even if we consider 6 months return or yearly returns, definitely DBS is a winner. We can easily spot the difference by change in their rankings even. Considering 1 yr return, we can spot DBS at no.5 whereas ICICI at no.6 but when we look at the monthly ratings, to our ultimate shock, DBS is at 52 and ICICI far behind at 172. But if we look at the yearly returns, then there is not much difference between them, DBS offering returns of 35.17% whereas ICICI offering 34.27. But looking at the expenses, the expenses charged by ICICI is lower to that of DBS, which may act as the ultimate factor in choosing the fund in a long run.Thus at last we can conclude that ratings are totally irrelevant for investors. Here is why they are totally irrelevant to investor:
1. Mutual fund ratings are based on the returns generated, that is, appreciation of net asset value, based on the historical performance. So they rely more on the past, rather than the current scenario.
2. As returns play a key role in deciding the ratings, any change in returns will lead to re-rating of the mutual fund. If you choose your mutual fund only on the basis of rating, it will be a nuisance to keep realigning your investment in line with the revision of the ratings.
3. The ratings don’t value the investment processes followed by the mutual fund. As a result, a fund following a certain process may lose out to a fund that has given superior returns only because it has a star fund manager. But there is a higher risk associated with a star fund manager that the ratings
don’t reflect. If the star fund manager quits, it can throw the working of a mutual fund out of gear and thus affect its performance.
4. The ratings don’t show the level of ethics followed by the fund. A fund or fund manager that is involved in a scam or financial irregularities won’t get poor ratings on the basis of ethics. As the star ratings look at just returns, any wrongdoing carried out by the fund or fund manager will be completely ignored.
5. Ratings also don’t consider two very important factors: transparency and keeping investors informed. There are no negative ratings awarded to the fund for being investor-unfriendly.
6. Ratings don’t match the investor’s risk-appetite with their portfolio. As a matter of fact, investments should be done only after considering the risk appetite of the investor. For example, equities may not be the best investment vehicle for a very conservative investor. However ratings fail to take that into account.
Ratings should be the starting point for making an investment decision. They are not the be all and end all of mutual fund investments. There are other important factors like portfolio management, age of funds and more, which should be taken into accountbefore making an investment.
PORTFOLIO ANALYSIS TOOLS
With the increasing number of mutual fund schemes, it becomes very difficult for an investor to choose the type of funds for investment. By using some of the portfolio analysis tools, he can become more equipped to make a well informed choice. There are many financial tools to analyze mutual funds. Each has their unique strengths and limitations as well. Therefore, one needs to use a combination of these tools to make a thorough analysis of the funds.The present market has become very volatile and buoyant, so it is getting difficult for the investors to take right investing decision. so the easiest available option for investors is to choose the best performing funds in terms of “returns” which have yielded maximum returns.But if we look deeply to it, we can find that the returns are important but it is also important to look at the ‘quality’ of the returns. ‘Quality’ determines how much risk a fund is taking to generate those returns. One can make a judgment on the quality of a fund from various ratios such as standard deviation, sharpe ratio, beta, treynor measure, R-squared, alpha, portfolio turnover ratio, total expense ratio etc.Now I have compared two funds of SBI on the basis of standard deviation, beta, R-squared, sharpe ratio, portfolio turnover ratio and total expense ratio. So before going into details, lets have a look at these ratios:
Standard deviation:
In simple terms standard deviation is one of the commonly used statistical parameter to measure risk, which determines the volatility of a fund. Deviation is defined as any variation from a mean value (upward & downward). Since the markets are volatile, the returns fluctuate everyday. High standard deviation of a fund implies high volatility and a low standard deviation implies low volatility.
Beta analysis:
Beta is used to measure the risk. It basically indicates the level of volatility associated with the fund as compared to the market. In case of funds, as compared to the market. In case of funds, beta would indicate the volatility against the benchmark index. It is used as a short term decision making tool. A beta that is greater than 1 means that the fund is more volatile than the benchmark index, while a beta of less than 1 means that the fund is more volatile than the benchmark index. A fund with a beta very close to 1 means the fund’s performance closely matches the index or benchmark.The success of beta is heavily dependent on the correlation between correlation between a fund and its benchmark. Thus, if the fund’s portfolio doesn’t have a relevant benchmark index then a beta would be grossly inappropriate. For example if we are considering a banking fund, we should look at the beta against a bank index.
R-Squared (R 2 ):
R squared is the square of ‘R’ (i.e.; coefficient of correlation). It describes the level of association between the fun’s market volatility and market risk. The value of R- squared ranges from0 to1. A high R- squared (more than 0.80) indicates that beta can be used as a reliable measure to analyze the performance of a fund. Beta should be ignored when the r-squared is low as it indicates that the fund performance is affected by factors other than the markets.
For example:
Case 1 Case 2R2 0.65 0.88B 1.2 0.9
In the above tableR2 is less than 0.80 in case 1, implies that it would be wrong to mention that the fund is aggressive on account of high beta. In case 2, the r- squared is more than 0.85 and beta value is 0.9. it means that this fund is less aggressive than the market.
Sharpe ratio: sharpe ratio is a risk to reward ratio, which helps in comparing the returns given by a fund with the risk that the fund has taken. A fund with a higher sharpe ratio means that these returns have been generated taking lesser risk. In other words, the fund is less volatile and yet generating good returns. Thus, given similar returns, the fund with a higher sharpe ratio offers a better avenue for investing. The ratio is calculated as:
Sharpe ratio = (Average return- risk free rate) / standard deviation
Portfolio turnover ratio: Portfolio turnover is a measure of a fund's trading activity and is calculated by dividing the lesser of purchases or sales (excluding securities with maturities of less than one year) by the average monthly net assets of the fund. Turnover is simply a measure of the percentage of portfolio value that has been transacted, not an indication of the percentage of a fund's holdings that have been changed. Portfolio turnover is the purchase and sale of securities in a fund's portfolio. A ratio of 100%, then, means the fund has bought and sold all its positions within the last year. Turnover is important when investing in any mutual fund, since the amount of turnover affects the fees and costs within the mutual fund.
Total expenses ratio: A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses.
The total cost of the fund is divided by the fund's total assets to arrive at a percentage amount, which represents the TER:
Total expense ratio = (Total fund Costs/ Total fund Assets)
Performance report and portfolio analysis of magnum equity fund and magnum multiplier plus against their benchmark BSE100:
YTD 1M 3M 6M 1Y 3Y 5YMagnum equity fund
-23.73% 9.02% -7.71% -15.18% 26.61% 45.07% 48.96%
Magnum multiplier plus
-26.16% 5.57% -11.26% -18.00% 21.44% 45.28% 59.31%
BenchmarkBSE100
-17.53% 11.74% -2.56% 11.47% 30.71% 40.46% 44.24%
Now in the above table, we have two funds from SBI ie; magnum equity fund and magnum multiplier plus following the same benchmark i.e; BSE 100. In this case, we have compared their returns during various time periods. We have their returns YTD, during last 1 month, 3month, 6 months, 1 year, 3 year and 5 year. If we look at a long term perspective, then magnum multiplier plus totally outperformed both magnum equity fund as well as bse 100. In case of 5 year returns, neither the benchmark nor the magnum equity fund stands anywhere near multiplier plus. It is greater than equity fund by 10.35% and from benchmark by 15.07%. but in case of 3 year returns, surely multiplier plus gave the maximum return but it fell sharply in comparison to its 5 yr return. A 45.28% return scored over equity fund just by a margin of 0.21% and benchmark by a mere 4.28%. now moving down to 1 yr return, we can clearly see that BSE 100 emerges as a true winner. The benchmark gave a return of 30.71% but both the funds failed to match it even.
But the ultimate surprise comes when we look at the data of last 6 months. Here not only the fund mangers failed to beat or match the market. Rather they also performed as laggards, giving negative returns. When the BSE 100 gave returns of 11.47%, these funds were trailing by 29.47% and 26.65% which is a huge figure. In the last 3 months too, both the funds were behind bse100 but all the three gave negative returns and the difference between them and benchmark was narrowed down. Again, during last 1 month return of all three got positive but the funds always remained behind the benchmark.
The BSE 100 outscored multiplier plus and equity fund by 6.17% and 2.72% respectively. Similarly, the YTD return of all 3 is negative even then the benchmark is at a better position than the funds.
From the following analysis we can infer that inspite of all the steps taken; it is not always possible for the fund managers to always beat the market. Also, the past performance just tells the background and history of the fund, by looking at it we cannot interpret that the fund will perform in the same way in the future too. The data can be presented in the form of a graph as follow:
QUANTITAVE DATA
Ratios Magnum equity fund Magnum multiplier plusStandard deviation 26.00% 26.90%Beta 0.96% 0.95%
r-squared
0.84%
Sharpe ratio 1.46% 1.42%Portfolio turnover 31% 25%Total expense ratio 2.5% 2.5%
ANALYSIS
We can see that the standard deviation of both the funds are more or less same even then the S.D of multiplier plus is greater than that of equity fund by 0.90%. Generally higher the SD higher is the risk and vice-versa. Therefore, magnum multiplier plus is riskier than magnum equity fund.
The beta of magnum equity fund is higher than that of magnum multiplier plus. Therefore, equity fund is more volatile than multiplier plus. But beta of both the funds is smaller than 1 that means both the funds are less volatile than the market index. As r- squared values are more than 0.80 in both the cases, we can rely on the usage of beta for the analysis of these funds.
A look at the Sharpe ratio indicates that magnum equity has outperformed multiplier plus. A higher Sharpe ratio of equity fund depicts that these return have been generated taking lesser risk than the multiplier plus. It Is less volatile than the other.
R-squared of both the funds are greater than 0.80. it indicates that beta can be used as a reliable measure to analyze the performance of these funds. Magnum equity fund’s R- squared is higher. So its beta is more reliable.
Portfolio turnover ratio of magnum equity fund is higher than multiplier plus. It mean the manager is frequently churning the portfolio of equity fund than of multiplier plus. It may lead to an increase in expenses but could be ignored if could generate higher return by changing the composition of portfolio.
Total expense ratio of both the funds are same i.e.; 2.5%
FUTURE OUTLOOK
Mutual Fund in India has emerged as a critical institutional linkage among various financial segments like savings, capital markets and the corporate sector. As various taxes the government offers incentives and benefits on mutual funds investment, their role in the mobilization of savings and the development of the economy will assume more significance. They provide much needed impetus to direct and indirect support to the corporate sector. Above all, mutual funds having given a new direction to the flow of personal savings and enables small medium investors in remote rural and semi rural area to reap the benefits of stock markets investments. Indian mutual fund are thus playing a very crucial development role in allocating resources in the emerging market economy. A perceptible change is sweeping across the mutual fund landscape in India. Factors such as changing investors need and their appetite for risk , emergence of internet as a powerful servicing platform and above all the growing commoditization of mutual fund products are acting as major catalysts putting pressure on industry players to formulate strategies to stay the course. In the changed scenario today product innovation is increasingly becoming one of the key determinants of success. Building and sustaining a powerful brand is also becoming an issue of paramount importance. Increased deregulation of the financial markets in the country coupled with the introduction of derivative products offer tremendous scope for the industry to design and sell innovative schemes to suit individual customer needs. Distribution has taken a whole new mode like banks, post offices and co-branded credit cards are bound meaning with the introduction of automated trading clearing and settlement system. Factors such as cross selling through modes like banks, post offices and co-branded credit cards are bounds to play decisive role in the success of the industry players.
Globally it has seen that the top ten players account for a greater pie of the market hare. With competition getting intense in the domestic industry churning in the industry looks imminent
SUCCESS FACTORS
Product Innovation:Product innovation is an important part of mutual fund industry. Over the years mutual fund have been reshaping the financial landscape of investors, drawing in monies from various segments and providing a whole new range of products with easy access to financial products. Considering the fact that the current regulations provide ample freedom in terms of product designing and the mutual fund schemes have distinct objectives that characterize them there is a room for product innovation. While the focus of the industry will remain on the plain vanilla products with add-ons to tackle the changes in the economic environment the specialty products will help players in creating a niche for themselves.
Customer Focus:Mutual funds especially in the private sectors have set new standards in providing prompt and efficient service to investors by taking advantages of technology. In fact they have redefined the concept of service in the Indian context by helping investors in understanding economic trends and their impact on mutual funds disclosure of portfolio evaluating fund performance answering questions on specifics of mutual fund investing and offering information /advice through a newsletter etc. Moreover healthy competition among mutual funds will ensure that the industry continues to innovate to satisfy the needs of mutual funds investors better than even before.
Market Innovation:Over a period of time the mutual fund industry has made progress in reaching a situation where investors are encouraged in making informed decision and the seller has to cater to this need. The fact realizing these banks and some of the distributors have started offering tailor made asset allocation service bundled up with other services such as tax advice and a wide range of research services etc. In other words they provide supermarkets that allow investor to select from a variety of schemes run by various mutual fund
Brand Building:As the mutual fund industry continues its effort to achieve consistent growth funds with a strong brand will be in a better position to market their products compared to the competition. Corporate image would really matter when prospects star looking at the products rank them on the basis of image performance services and costs. While there is no short cut for establishing track record both in term of fund management as well as customer service a strong brand will ensure increased awareness among investing public and that will encourage distributors to push the products. Moreover will take them beyond traditional markets and enable them to expand geographical
operations. Therefore serious players will continue to do a focus and sustained brand building exercise.
Distribution strategy: In a country as big as India geographically diversified and densely populated there is a need to have a network of distribution sufficiently large and varied to tap investment from all corners and segments. The mutual fund industry has already taken several initiatives to sharpen the skills of intermediaries as also find new method of harnessing people’s saving.
Information Technology:The mutual fund industry will have to use the technology to reach masses so that services can be provided in a cost advantageous manner. The development of independent distribution network will be an important element for mutual fund industry. Never in the history of Indian mutual fund industry had the information flows as freely as it does today. The distributors who are not technology savvy will have to act quickly and empower themselves with the growing power of internet. Information technology has an important role to play in marketing of mutual fund products. In fact IT enables much more sophisticated database marketing leading to better relationship building. Net-based marketing has the potential to be highly relevant, personalized and productive.
FREQUENTLY USED TERMS : Asset Management Company (AMC) :
A company that invests its clients' pooled fund into securities that match its declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves.
Mutual funds, hedge funds and pension plans are all run by asset management companies. These companies earn income by charging service fees to their clients.
AMCs offer their clients more diversification because they have a larger pool of resources than the individual investor. Pooling assets together and paying out proportional returns allows investors to avoid minimum investment requirements often required when purchasing securities on their own, as well as the ability to invest in a larger set of securities with a smaller investment.
Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. The net asset value, or NAV, is the current market value of a fund's holdings, less the fund's liabilities, usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. The public offering price, or POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV, and so process orders only after the NAV is determined. Closed-end funds (the shares of which are traded by investors) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares,
each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.
Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.
New Fund Offer (NFO) :
A security offering in which investors may purchase units of a closed-end mutual fund. A new fund offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing securities.
A new fund offer is similar to an initial public offering. Both represent attempts to raise capital to further operations. New fund offers are often accompanied by aggressive marketing campaigns, created to entice investors to purchase units in the fund. However, unlike an initial public offering (IPO), the price paid for shares or units is often close to a fair value. This is because the net asset value of the mutual fund typically prevails. Because the future is less certain for companies engaging in an IPO, investors have a better chance to purchase undervalued shares.
Money market :
In finance, the money market is the global financial market for short-term borrowing and lending. It provides short-term liquid funding for the global financial system. The money market is where short-term obligations such as Treasury bills, commercial paper and bankers' acceptances are bought and sold.
The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short term financial instruments commonly called "paper". This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.
Sale Price :
It is the price you pay when you invest in a scheme. Also called as Offer Price. It may include a sales load.
Repurchase Price :
It is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.
Redemption Price :
It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.
Sales Load :
It is a charge collected by a scheme when it sells the units. Also called as ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.
Chapter – 2
Company Profile
INTRODUCTION
“Success is a journey, not a destination.” If we look for examples to prove this quote then we can find many but there is none like that of karvy. Back in the year 1981, five people created history by establishing karvy and company which is today known as karvy, the largest financial service provider of India.
Success sutras of karvy:
The success story of karvy is driven by 8 success sutras adopted by it namely trust, integrity, dedication, commitment, enterprise, hard work and team play, learning and innovation, empathy and humility. These are the values that bind success with karvy. The Karvy group was formed in 1983 at Hyderabad, India. Karvy ranks among the top player in almost all the fields it operates. Karvy Computershare Limited is India’s largest Registrar and Transfer Agent with a client base of nearly 500 blue chip corporates, managing over 2 crore accounts. Karvy Stock Brokers Limited, member of National Stock Exchange of India and the Bombay Stock Exchange, ranks among the top 5 stock brokers in India. With over 6, 00,000 active accounts, it ranks among the top 5 Depositary Participant in India, registered with NSDL and CDSL. Karvy Comtrade, Member of NCDEX and MCX ranks among the top 3 commodity brokers in the country. Karvy Insurance Brokers is registered as a Broker with IRDA and ranks among the top 5 insurance agent in the country. Registered with AMFI as a corporate Agent, Karvy is also among the top Mutual Fund mobilizer with over Rs. 5,000 crores under management.
Karvy Realty Services, which started in 2006, has quickly established itself as a broker who adds value, in the realty sector. Karvy Global offers niche off shoring services to clients in the US. Karvy has 575 offices over 375 locations across India and overseas at Dubai and New York. Over 9,000 highly qualified people staff Karvy.
ORGANISATION
Karvy was started by a group of five chartered accountants in 1979. The partners decided to offer, other than the audit services, value added services like corporate advisory services to their clients. The first firm in the group, Karvy Consultants Limited was incorporated on 23rd July, 1983. In a very short period, it became the largest Registrar and Transfer Agent in India. This business was spun off to form a separate joint venture with Computershare of Australia, in 2005. Karvy’s foray into stock broking began with marketing IPOs, in 1993. Within a few years, Karvy began topping the IPO procurement league tables and it has consistently maintained its position among the top 5. Karvy was among the first few members of National Stock Exchange, in 1994 and became a member of The Stock Exchange, Mumbai in 2001. Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront educating investors on the advantages of dematerializing their shares.
Today Karvy is among the top 5 Depositary Participant in India.
While the registry business is a 50:50 Joint Venture with Computer share of Australia, we have equity participation by ICICI Ventures Limited and Barings Asia Limited, in Karvy Stock Broking Limited. For a snapshot of our organization structure, Karvy has always believed in adding value to services it offers to clients. A top-notch research team based in Mumbai and Hyderabad supports its employees to advise clients on their investment needs. With the information overload today, Karvy’s team of analysts help investors make the right calls, be it equities, mf, insurance. On a typical working day Karvy:
Has more than 25,000 investors visiting our 575 offices.
Publishes/broadcasts at least 50 buy/ sell calls.
Attends to 10,000+ telephones calls
Mails 25,000 envelopes, containing Annual Repots, dividend cheques/ advises, allotment/ refund advises
Executes150,000+ trades on NSE/ BSE
Executes 50,000debit/ credit in the despositary accounts
Advises3,000+ clients on the investments in mutual funds
ABOUT KARVY
KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporates, comprising the who is who of Corporate India.
KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products like mutual funds, bonds, fixed deposit, Merchant Banking & Corporate Finance, Insurance Broking, Commodities Broking, Personal Finance
Advisory Services, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations, and more importantly, in research of various industrial segments.
VISION
Karvy Financial Planning, Your Ambition Our Profession.
After having fortified our position across the personal finance spectrum, we are now commencing a "comprehensive personal financial planning service" which is in line with our ambition of emerging as a personal finance advisor.
Our vision is:To cater to the unique needs and requirements of the mass affluent by providing complete financial solutions and thereby transform their dreams into reality to bring a better tomorrow.
MISSION STATEMENT
“Our mission is to be a leading and preferred service provider to our customers, and we aim to achieve this leadership position by building an innovative, enterprising , and technology driven organization which will set the highest standards of service and business ethics.”
Board of Directors - Karvy Computershare Private Limited
William Stuart Crosby Chairman
C Parthasarathy Managing Director
M Yugandhar Managing Director
M S Ramakrishna Director
Chandra Balaraman Director
James Wong Director
Board of Directors -Karvy consultant Limited
C Parthasarathy Chairman
M Yugandhar Managing Director
M S Ramakrishna Director
C Parthasarathy Chairman
M Yugandhar Managing Director
M S Ramakrishna Director
Board of Directors -Karvy Stock Broking Limited
C Parthasarathy Chairman
M Yugandhar Director
M S Ramakrishna Director
Akash Mehta Director
Peter Wing Hung So Director
Board of Directors -Karvy Investor Service Limited
C Parthasarathy Chairman
M Yugandhar Director
M S Ramakrishna Director
Board of Directors -Karvy Global Service
C Parthasarathy Director
M Yugandhar Director
M S Ramakrishna Director
Board of Directors -Karvy Comtrade Limited
C Parthasarathy Chairman
M Yugandhar Director
M S Ramakrishna Director
Board of Directors -Karvy Insurance Broking Limited
C Parthasarathy Chairman
M Yugandhar Director
M S Ramakrishna Director
Mutual Funds
KARVY as Mutual Fund investment advisor
Investment is the stepping stone to achieving one's financial dreams. Mutual funds offer an opportune way to long-term wealth creation. However, with more and more funds flooding the market, the task of selecting the most suitable scheme gets even more complicated. Mutual Fund Advisory Service at Karvy guides you through this maze and ensures that your investments are backed by our quality research. We, at Karvy help you to reach your goals by offering:
Products of 33 AM
Research reports (existing funds & NFOs; strategy reports etc.) Customized mutual fund portfolios Portfolio revision (depending on changing market outlook and evolving trends) Access to online consolidated portfolio statement
Insurance
About KARVY Insurance Broking Ltd. (KIBL):
At KIBL we provide both life and non-life insurance products to retail individuals, high net-worth clients and corporates. With the opening up of the insurance sector, we are in a position to provide holistic and tailor made policies for different segments of customers. With Indian markets seeing a sea change, both in terms of investment pattern and attitude of investors, insurance is no more seen as only a tax saving product but also as a product which provides a financial solution for the customer. Our wide national network, spanning the length and breadth of India, further supports these initiatives. Our strengths include personalized service provided by a dedicated team committed in giving hassle-free service to the clients.
Tax Planning KARVY as an Income Tax advisor
In line with KARVY’s ambition of emerging as a personal finance advisor, we are now launching a tax advisory module, thereby providing assistance with respect to personal income tax planning. This service inter-alia includes the following:
Investment planning Tax planning Preparation of theme based reports on important events like Pre budget expectations, Budget
analysis, New Economic survey etc. Regular strategy reports through a fortnightly tax refresher called HUM TUM
Personalized assistance in the context of salary structuring Tax free retirement planning Other innovative strategies on tax planning
Bonds - FDs
Fixed Income Securities & Trading (K-FIST)
Background - It was started in December 2002 with a roll out from 7 dedicated centers of Karvy.
The Retail Debt Market division which is centralized at the HO in Hyderabad provides fixed income products to its clients and is primarily a fund based activity. The deal sizes vary from Rs.10,000 to Rs.5 crores.
Products - Central Government securities, State Development Loans, State Guaranteed bonds, Public Sector Undertaking Bonds, Financial Institution Bonds, and Bank bonds of SLR/Non-SLR category, both taxable and tax-free.
Target clients - Provident Fund Trusts, Educational & Religious trusts, charitable trusts, and Co-operative banks, Regional Rural Banks, Corporates, and High Net worth Individuals
Standard Operating Procedures - Based on the specific needs of the prospects Quotes of all category of bonds are sent. The selection of instrument is done and post negotiation (if any) the settlement date is finalized. Contract notes are exchanged and written confirmations are obtained before initiating the trade settlement. On the agreed settlement date, the funds and securities are exchanged between the parties. Primarily all the trades are in the electronic mode only.
The Wholesale Debt Market division is centralized at Mumbai and is a voice based order matching activity which is fee based. The deal size is a minimum of Rs.5 cr. And the reporting is done on the NSE.
Products - Central Government securities, State Development Loans, State Guaranteed bonds, Public Sector Undertaking Bonds, Financial Institution Bonds, and Bank bonds of SLR/Non-SLR category, both taxable and tax-free.
Target clients- Co-operative banks, commercial banks, Corporates, Financial Institutions, Insurance companies and Asset Management Companies.
Standard Operating Procedures - The dealers generate 2-way quotes during the trading hours and match the institutional buyers and sellers. The deal contract notes are generated and exchanged between the 2 parties. The fees are collected by raising debit notes on a monthly basis.
IPOs
An Initial Public Offer (IPO) is a means of collecting money from the public by a company for the first time in the market to fund its projects. In return, the company gives the share to the investors in the company.
In an IPO, the Lead managers decide the price of the issue. In a book building offer, the syndicate members decide the indicative price range and the investors decide the price of the issue through a tender method
draft prospectus provides the information on the financials of the company, promoters, background, tentative issue price etc. It is filed by the Lead Managers with the Securitie s& Exchange
Board of India (SEBI) to provide issue details.
Financial Planning
In its ambition to emerge as a complete financial advisor, KARVY has recently launched its personal financial planning wing, KARVY Financial Planning. It proposes to cater all advice to its customer pertaining to personal finance. With India emerging as a strong market, the investments avenues have also increased, to advice our customers the right avenue according to their suitability.
Our vision is "To cater to the unique needs and requirements of the mass affluent by providing complete financial solutions and thereby enabling them to transform their dreams into reality."
WHY KFP ?
karvy is one of the largest financial stores in India. It is a one stop shop for all financial services. However, it is off late, emerging as a financial doctor, a financial planner. There are various benefits of having a relation with Karvy because of the following reasons: 1. Sound research team in equities, F&O, income tax, insurance, mutual funds 2. An ever expanding network of branches to provide you service at your door step 3. A wide basket of products which includes: stock broking, commodity broking, derivatives
trading, insurance broking, tax planning, mutual funds advice, property services etc. 4. Personalized service catering to your unique tastes and requirements 5. Over a decade of experience in the financial services spectrum 6. A member of FPSB and an exclusive team of CFPs involved in the preparation of financial
plan 7. An ever expanding product portfolio consisting of future products like Mint Street, co-branded
credit cards etc. 8. An efficient and effective top management 9. Professional management 10. Passion for making you financial successful.
WHAT WE DO? Karvy help you to help yourself to take care of all your financial need by the way of planning them well. This is done by a simple process. We follow a PDCA cycle for this.
STEP I – PLAN STEP II - DO STEP III - CHECK STEP IV - ACT .. And subsequently help you in answering
few questions for your self like. Where to invest ?
Is it worth taking risk ? Equity or Mutual Fund ? Continue or foreclose the loan ? Am I doing enough with regard to tax planning ? Am I overspending ? How much will I need to invest to realize my financial freedom ?
The success ladder:
SPECTRUM OF SERVICES OFFERED BY KARVY
Karvy being the top registrar and transfer agent, functions as registrar in most of the issues in the country. Talking about the mutual fund services offered by karvy, we can get the products of 33 AMCs over here. it deals in both closed ended funds as well as open ended too. Now one must be
thinking why to get the mutual funds from karvy instead of getting it directly from AMCs???we have great reasons for it: the first one being ; if we avail the services of karvy then we can get the information about all the AMCs and their products at a single place along with expert recommendations whereas at an AMC we can get information about the products of that specific AMC only. And the second being wide network of karvy….nowadays we can find karvy offices at remote areas too. Along with these, karvy is very well handling the role of depository participant. Being registered with both the depositories i.e.; NSDL (national securities depository ltd) and CDSL (central depository services ltd), karvy can have access to both. Its wide network also facilitates it in distribution of retail financial products.
Karvy believes in being updated always. So it is always ready to use latest technologies so that its clients always be in touch with the latest happenings along with karvy. It offers e-business through internet through its website: www.karvy.com . Other than it, it also provides its various services through SMSes. Karvy’s services are not limited to its investors only rather its offerings are for its corporate clients and distributors too. it is very well aware of the fact that in this era of neck to neck competition, we cant ignore any of the aspects of our business….so there’s a offering for everybody…everyone’s welcome at karvy.
Why should investors choose for Karvy?
Excellence is next to nothing….and here at karvy everybody tries their best to offer excellent services to its clientele through its offerings maintaining the karvy culture which includes:
1. Controlled and low cost service culture: karvy is there to serve its client at the minimum possible cost. it controls cost by its various cost- cutting techniques and minimization of avoidable costs.
2. Large volume processing capability: being the largest financial service provider in the country, it has the unique distinction of operating its activities on a large scale which benefits all the parties cordially.
3. Adherence to strict time schedule: karvy knows that time is money and tries it best to finish the task within the stipulated time schedule.
4. Expertise in coordinating multi-location responses: karvy has got a wide network and hence one can find its branches at most of the places in India. Thus it enjoys its presence everywhere and coordinates among itself in solving the queries and in responding to any situation.
5.Expertise in managing independent entities such as banks, post-office etc.: the work culture of karvy and the ethics followed inside karvy makes its workforce compatible with everybody, so the karvy people establishes good coordination with independent entities too.
6. Pooling of group resources: karvy group consists of eight subsidiaries, so it can easily pool up its resources for accomplishment of its goals, whenever needed. The groups can help each other whenever there are peaks and lows, and even in the case when they have huge targets just as we saw few years back, Tata group pooling its resources to acquire Corus.
How Karvy achieved it?
The core competency of Karvy lies in the following points due to which it enjoys a competitive edge over its competitors. The following culture adopted by karvy makes it all time favorite among its clientele:1. Professionally managed by qualified and trained manpower.2. Uniquely structured in-house software and hardware department3. Query handling within 48 hrs.4. Strong secretarial, accounting and audit systems.5. Unique work culture of working 7 days a week in 3 shifts.6. Unmatched network spreading all over India.
How Achievements sounds synonymous to karvy
The landmarks achieved by karvy very well define its success story. In the previous pages, we learnt how a company started by five chartered accountants, named as karvy and company turned into today’s karvy group, the largest financial intermediary of India. But success didn’t came to karvy at a flow, the hard work and dedication of its workforce made it what it is today…gradually it achieved the following landmarks and now it has became what we call the karvy group, now it is:
1. Largest independent distributor for financial products.2. Amongst the top 5 stock broker.3. Among the top 3 depository participants.4. Largest network of branches & business associates.5. ISO 9002 certified operations by DNV.6. Amongst top 10 investment bankers.7. Adjudged as one of the top 50 IT users in India by MIS south Asia.8. Full- fledged IT driven operation.9. India’s no.1 registrar & securities transfer agent.
Clientele of KarvyKarvy’s culture has helped Karvy in achieving such a distinct position in the market where
it can boast of its huge client base. Be it a retail investor investing Rs. 500 in a SIP in Reliance
mutual fund or be it the largest corporate house of the country: Reliance industries- everybody is heading towards Karvy for their wealth maximization, lets have a look at the clientele of Karvy :According to the data published in year 2007, Karvy stock broking ltd. Operates through more than 12000 terminals, more than 290000 accounts are maintained and commands over 3.14% market share of NSE. The distribution services has access to more than Rs. 40 billion Assets Under Management. Karvy being a depository participant with both NSDL and CDSL, manages more than 700000 accounts from more than 380 locations. Talking about the registry services, it manages over 750 public/ right issues at the same time, it is managing over 16 million portfolios as registrar. If we took a look at some of the top corporate houses availing the services of Karvy then we have: Reliance, IOC, IDBI,LIC, Hindustan Unilever, Principal Mutual Fund, Duetsche Mutual Fund, Yogokawa, Marico Industries, Patni Computers, Morgan Stanley, Glenmark, CRISIL, 3M, Kotak Mahindra Bank, Bharti Televenture, Infosys Technologies, Wipro, Infotech, IPCL,TATA consultancy services, UTI mutual fund etc. Thus in total Karvy serves over 16 million investors and 300 corporates.
Structure according to the Products offered by Karvy:
REGIONAL HEADS
REGIONAL HEADS
COMPETITORS OF KARVY MUTUAL FUND
PRODUCT
HEADSHEA
PRODUCT
HEADSHEA
Mutual funds
Mutual funds
Insurance broking
Insurance broking
commodities
commodities
Stock broking
Stock broking
Depository participant
Depository participant
Merchant & inv.banking
Merchant & inv.banking
PMSPMS
RealtyRealtyDebt division
Debt division
Some of the main competitors of Karvy Mutual Fund in Lucknow are as Follows:
i. ICICI Mutual Fundii. Reliance Mutual Fund
iii. UTI Mutual Fundiv. Birla Sun Life Mutual Fundv. Kotak Mutual Fund
vi. HDFC Mutual Fundvii. Sundaram Mutual Fund
viii. LIC Mutual Fund ix. Sherekhanx. Franklin Templeton
AWARDS AND ACHIEVEMENTS
ACHIEVEMENTS
Largest mobiliser of funds as per PRIME DATABASE First ISO - 9002 Certified Registrar in India A Category- I -Merchant banker. A Category- I -Registrar to Public Issues. Ranked as " The Most Admired Registrar" by MARG. Handled the largest- ever Public Issue - IDBI Handled over 500 Public issues as Registrars. Handling the Reliance Account which accounts for nearly 10 million account holders First Depository Participant from Andhra Pradesh.
Chapter - 3
Objectives and scope
OBJECTIVES OF THE STUDY
1. To find out the Preferences of the investors for Asset Management Company.
2. To know the Preferences for the portfolios.
3. To know why one has invested or not invested in SBI Mutual fund
4. To find out the most preferred channel.
5. To find out what should do to boost Mutual Fund Industry.
SCOPE OR THE SUDY
A big boom has been witnessed in Mutual Fund Industry in resent times. A large number of new players have entered the market and trying to gain market share in this rapidly improving market.
The research was carried on in Lucknow I had been sent at one of the branch of Karvy, The Finapolis Lucknow where I completed my Project work. I surveyed on my Project Topic “A study of preferences of the Investors for investment in Mutual Fund” on the visiting customers of the Karvy.
The study will help to know the preferences of the customers, which company, portfolio, mode of investment, option for getting return and so on they prefer. This project report may help the company to make further planning and strategy.
Chapter – 4
Research Methodology
RESEARCH METHODOLOGY
This report is based on primary as well secondary data, however primary data collection was given more importance since it is overhearing factor in attitude studies. One of the most important users of research methodology is that it helps in identifying the problem, collecting, analyzing the required information data and providing an alternative solution to the problem .It also helps in collecting the vital information that is required by the top management to assist them for the better decision making both day to day decision and critical ones.
DATA SOURCES:
Research is totally based on primary data. Secondary data can be used only for the reference. Research has been done by primary data collection, and primary data has been collected by interacting with various people. The secondary data has been collected through various journals and websites.
DURATION OF STUDY:
The study was carried out for a period of two months, from 3rd June to 3rd August 2009
SAMPLING
SAMPLING PROCEDURE:
The sample was selected of them who are the customers/visitors of Karvy of India, Lucknow Branch, irrespective of them being investors or not or availing the services or not. It was also collected through personal visits to persons, by formal and informal talks and through filling up the questionnaire prepared. The data has been analyzed by using mathematical/Statistical tool.
SAMPLE SIZE:
The sample size of my project is limited to 200 people only. Out of which only 120 people had invested in Mutual Fund. Other 80 people did not have invested in Mutual Fund.
SAMPLE DESIGN
Data has been presented with the help of bar graph, pie charts, line graphs etc.
LIMITATIONS
Some of the persons were not so responsive.
Possibility of error in data collection because many of investors may have not given actual answers
of my questionnaire.
Sample size is limited to 200 visitors of Karvy,The Finapolis Lucknow Branch, out of these only
120 had invested in Mutual Fund. The sample. size may not adequately represent the whole market.
Some respondents were reluctant to divulge personal information which can affect the validity of all
responses.
The research is confined to a certain part of Lucknow
Chapter -5
DataAnalysis & Interpretation
ANALYSIS & INTERPRETATION OF THE DATA
1. (a) Age distribution of the Investors of Lucknow:
Age Group <= 30 31-35 36-40 41-45 46-50 >50
No. of
Investors
12 18 30 24 20 16
Interpretation:
According to this chart out of 120 Mutual Fund investors of Lucknow the most are in the age group of 36-40 yrs. i.e. 25%, the second most investors are in the age group of 41-45yrs i.e. 20% and the least investors are in the age group of below 30 yrs.
(b). Educational Qualification of investors of Lucknow:
Educational Qualification Number of Investors
Graduate/ Post Graduate 88
Under Graduate 25
Others 7
Total 120
Interpretation:
Out of 120 Mutual Fund investors 71% of the investors in Lucknow are Graduate/Post Graduate, 23% are Under Graduate and 6% are others (under HSC).
c). Occupation of the investors of Lucknow:
.
Interpretation:
In Occupation group out of 120 investors, 38% are Pvt. Employees, 25% are Businessman, 29% are Govt. Employees, 3% are in Agriculture and 5% are in others.
(d). Monthly Family Income of the Investors of Lucknow:
Occupation No. of Investors
Govt. Service 30
Pvt. Service 45
Business 35
Agriculture 4
Others 6
Income Group No. of Investors
<=10,000 5
10,001-15,000 12
15,001-20,000 28
20,001-30,000 43
>30,000 32
Interpretation:
In the Income Group of the investors of Lucknow, out of 120 investors, 36% investors that is the maximum investors are in the monthly income group Rs. 20,001 to Rs. 30,000, Second one i.e. 27% investors are in the monthly income group of more than Rs. 30,000 and the minimum investors i.e. 4% are in the monthly income group of below Rs. 10,000
(2) Investors invested in different kind of investments:
Kind of Investments No. of RespondentsSaving a/c 195
Fixed deposits 148Insurance 152
Mutual Fund 120Post office (NSC) 75Shares/Debentures 50
Gold/Silver 30Real Estate 65
Interpretation: From the above graph it can be inferred that out of 200 people, 97.5% people have invested in Saving A/c, 76% in Insurance, 74% in Fixed Deposits, 60% in Mutual Fund, 37.5% in Post Office, 25% in Shares or Debentures, 15% in Gold/Silver and 32.5% in Real Estate.
3. Preference of factors while investing:
Factors (a) Liquidity (b) Low Risk (c) High Return (d) Trust
No. of
Respondents
40 60 64 36
Interpretation:
Out of 200 People, 32% People prefer to invest where there is High Return, 30% prefer to invest where there is Low Risk, 20% prefer easy Liquidity and 18% prefer Trust
4. Awareness about Mutual Fund and its Operations:
Interpretation:
From the above chart it is inferred that 66% People are aware of Mutual Fund and its operations and 33% are not aware of Mutual Fund and its operations.
Response Yes No
No. of Respondents 133 67
5. Source of information for customers about Mutual Fund:
Source of information No. of Respondents
Advertisement 18
Peer Group 25
Bank 30
Financial Advisors 62
Interpretation:
From the above chart it can be inferred that the Financial Advisor is the most important source of information about Mutual Fund. Out of 135 Respondents, 46% know about Mutual fund Through Financial Advisor, 22% through Bank, 19% through Peer Group and 13% through Advertisement.
6. Investors invested in Mutual Fund:
Response No. of Respondents
YES 120
NO 80
Total 200
Interpretation:
Out of 200 People, 60% have invested in Mutual Fund and 40% do not have invested in Mutual Fund.
7. Reason for not invested in Mutual Fund:
Reason No. of Respondents
Not Aware 65
Higher Risk 5
Not any Specific Reason 10
Interpretation:
Out of 80 people, who have not invested in Mutual Fund, 81% are not aware of Mutual Fund, 13% said there is likely to be higher risk and 6% do not have any specific reason.
8. Investors invested in different Assets Management Co. (AMC):
Name of AMC No. of InvestorsSBIMF 55
UTI 75HDFC 30
Reliance 75ICICI Prudential 56
Kotak 45Others 70
Interpretation:
In Lucknow most of the Investors preferred UTI and Reliance Mutual Fund. Out of 120 Investors 62.5% have invested in each of them, only 46% have invested in SBIMF, 47% in ICICI Prudential, 37.5% in Kotak and 25% in HDFC.
9. Reason for invested through Karvy:
Reason No. of Respondents
Associated with Karvy 15
Brand Value 25
Agents Advice 15
Interpretation:
Out of 55 investors through Karvy 27% have invested because of its association with Karvy, 27% invested on Agent’s Advice, 46% invested because of its brand value.
10. Reason for not invested through Karvy:
Reason No. of Respondents
Not Aware 37
Agent’s Advice 28
Interpretation:
Out of 65 people who have not invested through Karvy, 57% were not aware of Karvy as a mutual fund advicer, 43% due to Agent’s Advice.
11. Preference of Investors for future investment in Mutual Fund:
Name of AMC No. of InvestorsSBIMF 76
UTI 45HDFC 35
Reliance 82ICICI Prudential 80
Kotak 60Others(Karvy) 75
Interpretation:
Out of 120 investors, 68% prefer to invest in Reliance, 67% in ICICI Prudential, 63% in SBIMF, 62.5% in Others (Karvy), 50% in Kotak, 37.5% in UTI and 29% in HDFC Mutual Fund.
12. Channel Preferred by the Investors for Mutual Fund Investment:
Channel Financial Advisor Bank AMC
No. of Respondents 72 18 30
Interpretation:
Out of 120 Investors 60% preferred to invest through Financial Advisors, 25% through AMC and 15% through Bank.
13. Mode of Investment Preferred by the Investors:
Mode of Investment One time Investment Systematic Investment Plan (SIP)
No. of Respondents 78 42
Interpretation:
Out of 120 Investors 65% preferred One time Investment and 35 % Preferred through Systematic Investment Plan.
14. Preferred Portfolios by the Investors:
Portfolio No. of Investors
Equity 56
Debt 20
Balanced 44
Interpretation:
From the above graph 46% preferred Equity Portfolio, 37% preferred Balance and 17% preferred Debt portfolio
15. Option for getting Return Preferred by the Investors:
Option Dividend Payout Dividend
Reinvestment
Growth
No. of Respondents 25 10 85
Interpretation:
From the above graph 71% preferred Growth Option, 21% preferred Dividend Payout and 8% preferred Dividend Reinvestment Option.
16. Preference of Investors whether to invest in Sectoral Funds:
Response No. of Respondents
Yes 25
No 95
Interpretation:
Out of 120 investors, 79% investors do not prefer to invest in Sectoral Fund because there is maximum risk and 21% prefer to invest in Sectoral Fund.
Chapter – 6
Findings and Conclusion
FINDINGS
In Lucknow, the Age Group of 36-40 years were more in numbers. The second most Investors were in the age group of 41-45 years and the least were in the age group of below 30 years.
In Lucknow most of the Investors were Graduate or Post Graduate and below HSC there were very few in numbers.
In Occupation group most of the Investors were Govt. employees, the second most Investors were Private employees and the least were associated with Agriculture.
In family Income group, between Rs. 20,001- 30,000 were more in numbers, the second most were in the Income group of more than Rs.30,000 and the least were in the group of below Rs. 10,000.
About all the Respondents had a Saving A/c in Bank, 76% Invested in Fixed Deposits, Only 60% Respondents invested in Mutual fund.
Mostly Respondents preferred High Return while investment, the second most preferred Low Risk then liquidity and the least preferred Trust.
Only 67% Respondents were aware about Mutual fund and its operations and 33% were not. Among 200 Respondents only 60% had invested in Mutual Fund and 40% did not have
invested in Mutual fund. Out of 80 Respondents, 81% were not aware of Mutual Fund, 13% told there is not any
specific reason for not invested in Mutual Fund and 6% told there is likely to be higher risk in Mutual Fund.
Most of the Investors had invested in Reliance or UTI Mutual Fund, ICICI Prudential has also good Brand Position among investors, SBIMF places after ICICI Prudential according to the Respondents.
Out of 55 clients of Karvy 27% have invested due to they are associated with Karvy, 27% Invested because of Advisor’s Advice and 46% due to its brand value.
Most of the investors who did not invested through Karvy 57% were not Aware of Karvy as a mutual fund adviser, and 43% due to Agent’s advice.
For Future investment the maximum Respondents preferred Reliance Mutual Fund, the second most preferred ICICI Prudential, Karvy has been preferred after them.
60% Investors preferred to Invest through Financial Advisors, 25% through AMC (means Direct Investment) and 15% through Bank.
65% preferred One Time Investment and 35% preferred SIP out of both type of Mode of Investment.
The most preferred Portfolio was Equity, the second most was Balance (mixture of both equity and debt), and the least preferred Portfolio was Debt portfolio.
Maximum Number of Investors Preferred Growth Option for returns, the second most preferred Dividend Payout and then Dividend Reinvestment.
Most of the Investors did not want to invest in Sectoral Fund, only 21% wanted to invest in Sectoral Fund.
CONCLUSION
Running a successful Mutual Fund requires complete understanding of the peculiarities of the Indian Stock Market and also the psyche of the small investors. This study has made an attempt to understand the financial behavior of Mutual Fund investors in connection with the preferences of Brand (AMC), Products, Channels etc. I observed that many of people have fear of Mutual Fund. They think their money will not be secure in Mutual Fund. They need the knowledge of Mutual Fund and its related terms. Many of people do not have invested in mutual fund due to lack of awareness although they have money to invest. As the awareness and income is growing the number of mutual fund investors are also growing.
“Brand” plays important role for the investment. People invest in those Companies where they have faith or they are well known with them. There are many AMCs in Lucknow but only some are performing well due to Brand awareness. Some AMCs are not performing well although some of the schemes of them are giving good return because of not awareness about Brand. Reliance, UTI, Karvy, ICICI Prudential etc. they are well known Brand, they are performing well and their Assets Under Management is larger than others whose Brand name are not well known like Principle, Sundaram, etc.
Distribution channels are also important for the investment in mutual fund. Financial Advisors are the most preferred channel for the investment in mutual fund. They can change investors’ mind from one investment option to others. Many of investors directly invest their money through AMC because they do not have to pay entry load. Only those people invest directly who know well about mutual fund and its operations and those have time.
Chapter – 7
Suggestions And
Recommendations
SUGGESTIONS AND RECOMMENDATIONS
The most vital problem spotted is of ignorance. Investors should be made aware of the benefits. Nobody will invest until and unless he is fully convinced. Investors should be made to realize that ignorance is no longer bliss and what they are losing by not investing.
Mutual funds offer a lot of benefit which no other single option could offer. But most of the people are not even aware of what actually a mutual fund is? They only see it as just another investment option. So the advisors should try to change their mindsets. The advisors should target for more and more young investors. Young investors as well as persons at the height of their career would like to go for advisors due to lack of expertise and time.
Mutual Fund Company needs to give the training of the Individual Financial Advisors about the Fund/Scheme and its objective, because they are the main source to influence the investors.
Before making any investment Financial Advisors should first enquire about the risk tolerance of the investors/customers, their need and time (how long they want to invest). By considering these three things they can take the customers into consideration.
Younger people aged under 35 will be a key new customer group into the future, so making greater efforts with younger customers who show some interest in investing should pay off.
Customers with graduate level education are easier to sell to and there is a large untapped market there. To succeed however, advisors must provide sound advice and high quality.
Systematic Investment Plan (SIP) is one the innovative products launched by Assets Management companies very recently in the industry. SIP is easy for monthly salaried person as it provides the facility of do the investment in EMI. Though most of the prospects and potential investors are not aware about the SIP. There is a large scope for the companies to tap the salaried persons.
BIBLIOGRAPHY
NEWS PAPERS
OUTLOOK MONEY
TELEVISION CHANNEL (CNBC AAWAJ)
MUTUAL FUND HAND BOOK
FACT SHEET AND STATEMENT
WWW.SBIMF.COM
WWW.MONEYCONTROL.COM
WWW.AMFIINDIA.COM
WWW.ONLINERESEARCHONLINE.COM
WWW. MUTUALFUNDS
QUESTIONNAIRE
A study of preferences of the investors for investment in mutual funds.
1. Personal Details:
(a). Name:- (b). Address: - Phone:- (c). Age:- (d). Qualification:-
(e). Occupation. Pl tick (√)
Govt.
Ser
Pvt. Ser Business Agriculture Others
(g). What is your monthly family income approximately? Pl tick (√).
Up to Rs.10,000
Rs. 10,001 to 15000
Rs. 15,001 to 20,000
Rs. 20,001 to 30,000
Rs. 30,001 and above
2. What kind of investments you have made so far? Pl tick (√). All applicable.
a. Saving b. Fixed deposits c. Insurance d. Mutual Fund
Graduation/PG Under Graduate Others
account
e. Post Office-
NSC, etc
f. Shares/Debentures g. Gold/ Silver h. Real Estate
3. While investing your money, which factor will you prefer? .
(a) Liquidity (b) Low Risk (c) High Return (d) Trust
4. Are you aware about Mutual Funds and their operations? . Pl tick (√) Yes No
5. If yes, how did you know about Mutual Fund?
a. Advertisement b. Peer Group c. Banks d. Financial Advisors
6. Have you ever invested in Mutual Fund? Pl tick (√). Yes No 7. If not invested in Mutual Fund then why?
(a) Not aware of MF (b) Higher risk (c) Not any specific reason
8. If yes, in which Mutual Fund you have invested? Pl. tick (√). All applicable.
a. Karvy b. SBIMF c. HDFC d. Reliance e. Kotak f. Other. specify
9. If invested in Karvy, you do so because (Pl. tick (√), all applicable).
a. They have a record of giving good returns year after year.
b. Agent’ Advice
c. Any other source
10. If NOT invested in Karvy, you do so because (Pl. tick (√) all applicable).
a. You are not aware of Karvy
b. Karvy gives less return compared to the others.
c. Agent’ Advice
11. When you plan to invest your money in asset management co. which AMC will you prefer?
Assets Management Co.
a. Karvy
b. SBIMF
c. Reliance
d. HDFC
e. Kotak
f. ICICI
12. Which Channel will you prefer while investing in Mutual Fund?
(a) Financial Advisor (b) Bank (c) AMC
13. When you invest in Mutual Funds which mode of investment will you prefer? Pl. tick (√).
a. One Time Investment b. Systematic Investment Plan (SIP)
14. When you want to invest which type of funds would you choose?
a. Having only debt portfolio
b. Having debt & equity portfolio.
c. Only equity portfolio.
15. How would you like to receive the returns every year? Pl. tick (√).
a. Dividend payout b. Dividend re-investment c. Growth in NAV
16. Instead of general Mutual Funds, would you like to invest in sectorial funds? Please tick (√). Yes No
