“ A STUDY ON INVESTOR AWARENESS ABOUT

INVESTMENT IN MUTUAL FUND”

Project Report
(A Report Submitted in Partial Fulfillment of the Requirements for the
Degree of Master of Business Administration in
Pondicherry University)

Submitted by

Mr./ Ms. : HARSHINI A

Enrolment No. : 9023370958
MBA : FINANCE

Project Supervisor
(DR . VINOTHA K)
(Designation)

DIRECTORATE OF DISTANCE EDUCATION

PONDICHERRY UNIVERSITY
Puducherry - 605 014
 CERTIFICATE OF THE GUIDE

This is to certify that the Project Work titled " A STUDY ON INVESTOR
AWARENESS ABOUT INVESTMENT IN MUTUAL FUND " is a bonafide work of
Ms . HARSHINI A , Enroll No : 9023370958 Carried out in partial fulfillment for the award
of degree MBA : FINANCE of Pondicherry University under my guidance . This project
work is original and not submitted earlier for the award of any degree / diploma or
associateship of any other University / Institution .

Signature of the Guide

Guide's seal*

Place : chennai

Date :
 STUDENTS' DECLARATION

I , Ms. HARSHINI A hereby declare that the Project Work titled

“ A STUDY ON INVESTOR AWARENESS ABOUT INVESTMENT IN MUTUAL FUND ” is

the Original work done by me and submitted to the Pondicherry University in partial

Fulfillment of requirements for the award of Master of Business Administration in

FINANCE is a record of original work done by me under the supervision of

Dr . / Mrs . VINOTHA K of LOYOLA COLLEGE .

Enrolment No : 9023370958

Date :

Signature of the Student

 ABSTRACT
Mutual funds have emerged as one of the most popular and effective investment vehicles in India’s
rapidly evolving financial landscape. They offer individual investors an opportunity to participate in
diversified portfolios managed by professionals, thereby enabling both wealth creation and risk
management. With growing investor awareness, technological advancements, and regulatory
reforms, mutual funds now occupy a central role in retail investment planning. This project explores
the concept, structure, types, advantages, and emerging trends related to mutual funds, with a
detailed case study of HDFC Asset Management Company (HDFC AMC), one of India’s leading
fund houses.

The study begins by establishing the theoretical framework of mutual funds, covering key categories
such as equity, debt, hybrid, index, and sector-specific funds. It highlights the advantages of mutual
fund investments—including diversification, liquidity, affordability, and professional management—
as well as associated risks like market volatility and management fees. Special emphasis is placed on
Systematic Investment Plans (SIPs), which have become an essential tool for disciplined, long-term
investing.

To assess practical applications, the project examines the financial performance of HDFC AMC over
five fiscal years (FY2020–FY2024). Key indicators such as revenue, net profit, and assets under
management (AUM) are analyzed through tables and graphs. The findings reveal consistent financial
growth and strong operational resilience, even during volatile market conditions. Additionally, a
survey conducted among 100 investors provides insights into awareness levels, fund preferences,
and investment behavior, confirming the rising popularity of SIPs and large-cap equity funds.
 ACKNOWLEDGEMENT

An endeavour over project report on successful only with the advice and
support of many well-wishers . I take this opportunity to express my gratitude and
appropriation to all them.

I express my profound gratitude to my parents and my Sister for their co-

operation towards the completion of my project successfully.

I express my deep sense of gratitude to Principal, (PULCS) Pondicherry

University- Loyola College, for giving me an opportunity to do my MBA project, Who
guided me constantly and shared infinite time and interest and helped me at all times
to enable me to carry out my project with confidence.

I would like to record the excellent help given by our Prof. DR. VINOTHA K
is my project guide. I am thankful for his valuable guidance and patience for helping me
bring this project report to its final form.

I acknowledge my heart full gratitude to my brothers who are always behind me

in every movement of my life.

I pray thanks to all my friends who are supporting , inspiring and motivating
me.

Last but not least ; I wish to acknowledge the help of all those who have
provided me information , guidance and other help during my research period .
 TABLE OF CONTENTS
CHAPTER TITLE PAGE NO
ABSTRACT 6
LIST OF TABLES 8
LIST OF CHARTS 9
I INTRODUCTION 10
1.1 Introduction about the study
1.3 Need for the study
1.4 Statement of the Problem 11
1.5 Objectives of the study
1.6 Scope of the study
1.7 Significance of the study 12
1.8 Limitations of the study
1.9 Chapter framework 13
1.10 Industry profile 14
1.11 Company profile 49
II REVIEW OF LITERATURE 59
III RESEARCH METHODOLOGY 64
3.1 Research Methodology
3.2 Population
3.3 Research design
3.4 Sample size
3.5 Sampling method
3.6 Data Collection Method 65
3.7 Statistical tools used
3.8 Area of the study
3.9 Duration of the study
IV DATA ANALYSIS AND INTERPRETATION 66
4.1 Percentage analysis
4.2 Chi square analysis
V FINDINGS, SUGGESTIONS, CONCLUSION
5.1 Findings 100
5.2 Suggestions 101
5.3 Conclusion 102
QUESTIONNAIRE 103
REFERENCES 105
 LISTOFTABLES

TABLENO LISTOFTABLES PAGENO

4.1.1 Comparativebalancesheetfortheyear2021- 2022 56

4.1.2 Comparativebalancesheetfortheyear2022- 2023 57

4.1.3 Comparativebalancesheetfortheyear2023- 2024 59

4.2.1 Commonsizebalancesheetfortheyear2021-2022 62

4.2.2 Commonsizebalancesheetfortheyear2022-2023 63

4.2.3 Commonsizebalancesheetfortheyear2023-2024 65

4.3.1 Current Ratio for the year 2022 - 2024 68

4.3.2 Quick ratio for the year 2022-24 69

4.3.3 Net profit ratiofortheyear2022-2024 71

4.3.4 Return on assets fortheyear2022-2024 72

4.3.5 Return on equity fortheyear2022-2024 73

Debt to equity ratio fortheyear
4.3.6 2022-2024 74
Inventory turnover ratiofortheyear
4.3.7 2022-2024 75

4.3.8 Asset turnover ratiofortheyear2022-2024 76

4.3.9 Working capital turnover ratiofortheyear 78

2022-2024

4.3.10 Working capital analysis fortheyear 2022-2024 79

1
 LISTOFCHARTS

CHARTNO LISTOFCHARTS PAGENO

4.3.1 Current Ratio for the year 2022 - 2024 68

4.3.2 Quick ratio for the year 2022-24 70

4.3.3 Net profit ratiofortheyear2022-2024 71

4.3.4 Return on assets fortheyear2022-2024 72

4.3.5 Return on equity fortheyear2022-2024 73

Debt to equity ratio fortheyear
4.3.6 75
2022-2024
Inventory turnover ratiofortheyear
4.3.7 76
2022-2024

4.3.8 Asset turnover ratiofortheyear2022-2024 77

4.3.9 Working capital turnover ratiofortheyear 2022- 78

2024

4.3.10 Working capital analysis fortheyear 2022-2024 79

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CHAPTER-I
INTRODUCTION

1.1 INTRODUCTION TO THE TOPIC

In the last decade we have seen enormous growth in the size of mutual fund industry in India.
Especially the private sector has show treatment growth. With unmatched advances on the
information technology, increased role of the institutional investors in the stock market and the
SEBI still in its infancy, the mutual fund industry players gained unparalleled and unlocked power.
To ensure the safety of investment of small investors against whims and fancies of professional
fund managers have become the need of the hour.

1.2 WHAT IS INVESTMENT?

Trade off between risk and reward while aiming for incremental gain and preservative of the
invested amount (principal). In contrast, speculation aims at ‘high gain or heavy loss’, and gambling
at ‘out of proportion gain or total loss.’ Two main classes of investment are

 Fixed income investment such as bonds, fixed deposits, preference shares

 Variable income investment such as business ownership (equities), property ownership.

In economics, investment means creation of capital or goods capable of producing other goods or
services. Expenditure on education and health is recognized as an investment in human capital, and
research and development in intellectual capital. Return on investment (ROI) is a key measure of
firm’s performance.

1.3 NEED FOR THE STUDY

• The main purpose of doing this project was to know about mutual fund and its functioning.
This helps to know in details about mutual fund industry right from its inception stage,
growth and future prospects.
• The research involves only a general study related to the investment Awareness of
investors towards mutual funds.
• The research would reveal results regarding the Investment Awareness of various investors
about mutual funds and thus in turn, helps the organization to identify the Awareness of
various investors and to improve the marketing of mutual funds.

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 1.4 STATEMENT OF THE PROBLEM

Mutual fund is an investment vehicle created with pooling of funds collected from the scattered
investors for the purpose of investing in stocks, bonds, money market instruments or similar
assets. Some have benefited from it and many are not even aware of such a mode of
investment. Some of the investors, with their limited knowledge on this mode, invest in it
expecting return higher than those provided under time deposits in commercial banks if the
expected yield under do not come up instead turn to backfire, they quit from this mode and
demotivate new ones from entering. One of the lucrative investment avenues available for
investors is mutual fund nowadays. The problem at hand was to study and measure the
awareness level of people regarding mutual funds in the city. To find out Investors’ awareness
about Mutual fund products. The study includes analysis of the investors on the basis of their
investment objectives, age etc. It also examined the position of MF among investment avenues
available for the investors and the past performances of various schemes from the active AMCs
in Indian market on the basis of NAV & time. So that it can help the advisors as well as investors
to choose the correct portfolio. This study is conducted with the aim to understand the extent of
awareness of Mutual funds in investors and steps in familiarizing them among potential
investors.

1.5 OBJECTIVES OF THE STUDY

• To study and analyze of mutual fund industry funds.

• To examine the awareness level of mutual fund investors.

1.6 SCOPE OF THE STUDY

The scope of the study is to track out the investors’ preferences, priorities and their awareness
towards different mutual fund schemes. Keeping in view the various constraints the scope of the
study is limited only to the investors residing in Salem. Data for the study is collected from a sample
of 150 investors by using stratified sampling.

1.7 SIGNIFICANCE OF THE STUDY

In the present scenario Mutual fund investments are the excellent resource of investments and it is
further helpful for the salary class people for getting tax benefit. Mutual fund industries are gaining
weight for the reason that salaried group people and the middle income people prefer their
investment preferable avenue for the investment destination. There are different traditional
investment options are available i.e., gold investment, government bonds, real estate, post office
savings schemes, insurances and fixed deposits etc. Most of the investors are gaining awareness
about the mutual funds irrespective of their age, gender and their income etc. In reality, most of

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 the people investing in mutual funds are not clear regarding its functioning and management.
Subsequently the business organizations which are offering mutual funds have to present absolute
information to the potential investors relating to mutual funds.

1.8 LIMITATIONS OF THE STUDY

i)This research reflects on individual customer in Salem only. So findings and suggestions given on
the basis of this research cannot be extrapolated to the entire population.

ii)Sample size is 150 which is very small that is not enough to study the awareness of consumers of
the country.

iii)Respondents are not sincere and care full to fill up the questionnaire so we cannot find right
solution.

iv)As sampling technique is convenient sampling so it may result in personal bias. So perfect result
cannot be achieved.

v)The study might also consist of the respondents’ bias answer.

vi)It take much time to go in different areas and fill up questionnaire so the timings are also limited
to make the project.

vii)To create hypothesis and make cross tabulation is little bit confusing technique so it may be a
limitation.

viii)In India people are not much care full and educated regarding investment plan so to
do this type of research is little hard.

1.9 CHAPTER FRAMEWORK

CHAPTER I deals with the crisp introduction of topic. Along with this it deals with the
introduction of the topic, need for the study, statement of the study, objective of the study, scope
of the study, significance of the study, limitations of the study and portrays the profiles of the
mutual fund industry and UTI mutual fund. Then contains a detailed study of functioning of
mutual fund and regulatory authorities, tax planning for investors, how cost evolved in mutual
fund. CHAPTER II gives the review of literature

CHAPTER III gives the research methodology

CHAPTER IV gives the analysis and interpretation of the data

CHAPTER V suggests some suggestions, findings, recommendation based on the study done.

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 1.10 INDUSTRY PROFILE

1.10.1 INTRODUCTION:

The Indian financial system based on four basic components like Financial Market, Financial
Institutions, Financial Service, Financial Instruments. All are play important role for smooth
activities for the transfer of the funds and allocation of the funds. The main aim of the Indian
financial system is that providing the efficiently services to the capital market. The Indian capital
market has been increasing tremendously during the second generation reforms. The first
generation reforms started in 1991 the concept of LPG. (Liberalization, privatization, Globalization)

Then after 1997 second generation reforms was started, still the it’s going on, its include reforms of
industrial investment ,reforms of fiscal policy, reforms of ex-imp policy, reforms of public sector,
reforms of financial sector, reforms of foreign investment through the institutional investors,
reforms banking sectors. The economic development model adopted by India in the post-
independence era has been characterized by mixed economy with the public sector playing a
dominating role and the activities in private industrial sector control measures emaciated form
time to time. The last two decades have been a phenomenal expansion in geographical coverage
and the financial spread of our financial system.

The spared of the banking system has been a major factor in promoting financial intermediation in
the economy and in the growth of financial savings with progressive liberalization of economic
policies, there has been a rapid growth of capital market, money market and financial services
industry including merchant banking, leasing and venture capital, leasing, hire purchasing.
Consistent with the growth of financial sector and second generation reforms its need to fruition of
the financial sector. Its also need to providing the efficient service to the investor mostly if the
investors are supply small amount, in that point of view the mutual fund play vital for better service
to the small investors. The main vision for the analysis for this study is to scrutinize the
performance of five star rated mutual funds, given the weight of risk, return, and assets under
management, net assets value, book value and price earnings ratio.

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1.10.2 WHAT IS A MUTUAL FUND?

Mutual fund is the pool of the money, based on the trust who invests the savings of a number of
investors who shares a common financial goal, like the capital appreciation and dividend earning.
The money thus collect is then invested in capital market instruments such as shares, debenture,
and foreign market. Investors invest money and get the units as per the unit value which we called
as NAV (net asset value). Mutual fund is the most suitable investment for the common man as it
offers as opportunity to invest in diversified portfolio management, goosd research team,
professionally managed Indian stock as well as the foreign market, the main aim of the fund
manager is to taking the scrip that have under value and future will rising, then fund manager sell
out the stock. Fund manager concentration on risk- return trade off, where minimize the risk and
maximize the return through diversification of the portfolio. The most common feature of the
mutual fund unit are low cost.

Figure 1.1

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1.10.3 GROWTH OF MUTUAL FUND INDUSTRY

The history of mutual funds dates support to 19th century when it was introduced in Europe, in
particular, Great Britain, Robert Fleming set up in 1868 the first investment trust called Foreign
and colonial investment trust which promised to manage the finances of the moneyed classes of
Scotland by scattering the investment over a number of different stocks. This investment trust and
other investment trusts which were afterward set up in Britain and the U.S., resembled today’s
close – ended mutual funds. The first mutual fund in the U.S., Massachusetts investor’s trust, was
set up in March 1924.This was the open –ended mutual fund.

The stock market crash in 1929, the Great Depression, and the outbreak of the Second World War
slackened the pace of growth of the mutual fund industry. Innovations in products and services
increased the popularity of mutual funds in the 1950s and 1960s. The first international stock
mutual fund was introduced in the US in 1940. In 1976,the first tax exempt municipal bond funds
emerged and in 1979, the first money market mutual funds were created. The latest additions are
the international bond fund in 1986 arm funds in 1990. This industry witnessed substantial growth
in the eighties and nighties when there was a significant increase in the number of mutual funds,
schemes, assets, and shareholders. In the US the mutual fund industry registered s ten – fold
growth the eighties. Since 1996, mutual fund assets have exceeds bank deposits. The mutual fund
industry and the banking industry virtually rival each other in size.

A Mutual fund is type of Investment Company that gathers assets form investors and collectively
invests in stocks, bonds, or money market instruments. The investment company concepts date to
Europe in the late 1700s, according to K. Geert Rouen host in the Origins Mutual Funds, when “a
Dutch Merchant and Broker Invited subscriptions from investor with limited means.” The
materialization of “investment pooling” in England in the 1800s brought the concept closer to U.S.
shares. The enactment of two British Laws, the joint Stock Companies Acts of 1862 and 1867,
permitted investors to share in the profits of an investment enterprise, and limited investor liability
to the amount of investment capital devoted to the enterprise.

May be more outstandingly, the British fund model established a direct link with U.S. Securities
markets, serving finance the development of the post -Civil War U.S. economy. The Scottish
American Investment Trust, Formed on February1, 1873 by fund pioneer Robert Fleming, invested
in the economic potential of the United States, Chiefly through American railroad bonds. Many

8
other trusts followed that not only targeted investment in America, but led to the introduction of
the fund investing concept on U.S. shores in the late 1800 and early 1900s.

Nov.1925. All these funds were open-ended having redemption feature. Similarly, they had almost
all the features of good modern Mutual Funds –like sound investment policies and restrictions,
open end ness, self-liquidating features, a publicized portfolio, simple capital structure, excellent
and professional fund management and diversification etc., and hence they are the honored grand
–parents of today’s funds. Prior to these funds all the initial investment companies were closed –
ended companies. Therefore, it can be said that although the basic concept of diversification and
professional fund management, were picked by U.S.A. from England Investment Companies ”The
Mutual fund is an American Creation.”

Because of their exclusive feature, open –ended Mutual funds rapidly became very popular. By
1929, there were 19 open –ended Mutual funds in USA with total assets of $140 millions. But the
1929 Stock Market crash followed by great depression of 1930 ravaged the U.S. Financial Market as
well as the Mutual fund Industry. This necessitated stricter regulation for mutual funds and for
Financial Sectors. Hence , to protect the interest of the common investors, U.S. Government passed
various Acts, such a Securities Act 1933, Securities Exchange Act 1934 and the Investment
Companies Act 1940. A committee called the National Committee of Investment
Company (Now, Investment Company Institute), was also formed to co –operate with Federal
Regulatory Agency and to keep informed of trends in Mutual Fund Legislation.

As a result of these measure, the Mutual Fund Industry began to develop speedily and the total net
assets of the Mutual Funds Industry increased from $448 million in 1940 to
$2.5 billion in 1950. The number of shareholder’s accounts increased from 29600, to more than one
Million during 1940-1951. “As a result of renewed interest in Mutual Fund Industry they grew at
18% annual compound rate reaching peak of their rapid growth curve in the late 1960s.”

1.10.4 ORGANIZATION STRUCTURE OF MUTUAL FUNDS

Mutual funds have organization structure as per the Security Exchange Board of India guideline,
Security Exchange Board of India specified authority and responsibility of Trustee and Asset
Management Companies. The objective is to be controlling, to promoted, to regulate, to protect
the investors right and efficient trading of units. Operations of mutual fund start with investors save

9
their money on mutual fund, then Mutual Fund manager handling the funds and strategic
investment on scrip. As per the objectives of scheme manager selected scrips. Unit value will

become high when fund manager investment policy generate the return on capital market. Unit
return depends on fund return and efficient capital market. Also affects international capital
market, liquidity and at last economic policy. Below the graph indicates how the process was going
on to investors to earn returns. Mutual fund manager having high responsibility inside of return
and how to minimize the risk.

Figure 1.2
The Mutual fund organization as per the SEBI formation and necessary formation is needed for
smooth activities of the companies and achieved objectives. Transfer agent and custodian play role
for dematerialization of the fund and unit holders hold the account statement, but custody of the
unit is on Asset Management Company. Custodian holds all the fund units on dematerialization
form. Sponsor had decided the responsibility of custodian when investor to purchase the fund and
to sell the unit. Application forms, transaction slip and other requests received by transfer agent,
middlemen between investors and Asset Management Companies.

Sponsor

Sponsor is the person who acting alone or in combination with another body corporate establishes
a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment managed

10
and meet the eligibility criteria prescribed under the Securities and Exchange Board of India
(Mutual fund) regulations,1996. The sponsor is not responsible or liable of any loss or shortfall
resulting from the operation of the Schemes beyond the initial contribution made by it towards
setting up of the Mutual Fund.

Trust

The Mutual Fund is constituted as a trust in accordance with the provisions of the India Trusts Act,
1882 by the Sponsor. The Trust deed is registered under the Indian Registration Act,1908.

Trustee

Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The
main responsibility of the trustee is to safeguard the interest of the unit holders and ensure that
the AMC functions in the interest of investors and in accordance with the SEBI (Mutual funds)
regulations,1996, the provisions of the Trust Deed and the offer Documents of the respective
Schemes. At least 2/3rd directors of the trustee are independent directors who are not associated
with the sponsor in any manner.

Asset Management Company(AMC)

The AMC is appointed by the trustee as the Investment Manager of the Mutual fund. The AMC is
required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset
management company of the Mutual fund. At least 50% of the directors of the AMC are
independent directors who are not associated with the sponsor in any manner. The AMC must have
a net worth of at least 10 cores at all times.

Registrar and Transfer agent

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the
Mutual Funds. The registrar processes the application form, redemption requests and dispatches
account statements to the unit holders. The registrar and Transfer agent also handles
communications with investors and updates investor records.

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 Figure 1.3

1.10.5 HISTORY OF MUTUAL FUND IN INDIA

A strong financial market with broad participation is essential for a developed economy.

With this broad objective India’s first mutual fund was establishment in 1963, namely, Unit Trust of
India (UTI), at the initiative of the Government of India and Reserve Bank of India ‘with a view to
encouraging saving and investment and participation in the income, profits and gains accruing to
the Corporation from the acquisition, holding, management and disposal of securities’.

In the last few years the MF Industry has grown significantly. The history of Mutual Funds in India
can be broadly divided into five distinct phases as follows:

FIRST PHASE – 1964-1987

The Mutual Fund industry in India started in 1963 with formation of UTI in 1963 by an Act of
Parliament and functioned under the Regulatory and administrative control of the Reserve Bank of
India (RBI). 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. Unit Scheme 1964 (US
’64) was the first scheme launched by UTI. At the end of 1988, UTI had ₹ 6,700 crores of Assets
Under Management (AUM).

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SECOND PHASE – 1987-1993 – ENTRY OF PUBLIC SECTOR MUTUAL FUNDS

The year 1987 marked the entry of 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. 1987), Punjab National Bank Mutual Fund (Aug. 1989), Indian Bank Mutual Fund
(Nov 1989), Bank of India (Jun 1990), Bank of Baroda Mutual Fund (Oct. 1992). 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 MF industry had assets under management of ₹47,004 crores.

THIRD PHASE -1993-2003 –ENTRY OF PRIVATE SECTOR MUTUAL FUNDS

The Indian securities market gained greater importance with the establishment of SEBI in April
1992 to protect the interests of the investors in securities market and to promote the development
of, and to regulate, the securities market.

In the year 1993, the first set of SEBI Mutual Fund Regulations came into being for all mutual funds,
except UTI. The erstwhile Kothari Pioneer (now merged with Franklin Templeton MF) was the first
private sector MF registered in July 1993. With the entry of private sector funds in 1993, a new era
began in the Indian MF industry, giving the Indian investors a wider choice of MF products. The
initial SEBI MF Regulations were revised and replaced in 1996 with a comprehensive set of
regulations, viz., SEBI (Mutual Fund) Regulations, 1996 which is currently applicable.

The number of MFs increased over the years, with many foreign sponsors setting up mutual funds
in India. Also the MF industry witnessed several mergers and acquisitions during this phase. As at
the end of January 2003, there were 33 MFs with total AUM of

₹1,21,805 crores, out of which UTI alone had AUM of ₹44,541 crores.

FOURTH PHASE –SINCE FEBRUARY 2003-APRIL 2014

In February 2003, following the repeal of the Unit Trust of India Act 1963, UTI was bifurcated into
two separate entities, viz., the Specified Undertaking of the Unit Trust of India (SUUTI) and UTI
Mutual Fund which functions under the SEBI MF Regulations. With the bifurcation of the erstwhile

13
UTI and several mergers taking place among different private sector funds, the MF industry entered
its fourth phase of consolidation.

Following the global melt-down in the year 2009, securities markets all over the world had tanked
and so was the case in India. Most investors who had entered the capital market during the peak,
had lost money and their faith in MF products was shaken greatly. The abolition of Entry Load by
SEBI, coupled with the after-effects of the global financial crisis, deepened the adverse impact on
the Indian MF Industry, which struggled to recover and remodel itself for over two years, in an
attempt to maintain its economic viability which is evident from the sluggish growth in MF Industry
AUM between 2010 to 2013.

FIFTH (CURRENT) PHASE –SINCE MAY 2014

Taking cognisance of the lack of penetration of MFs, especially in tier II and tier III cities, and the
need for greater alignment of the interest of various stakeholders, SEBI introduced several
progressive measures in September 2012 to "re-energize" the Indian Mutual Fund industry and
increase MFs’ penetration.

In due course, the measures did succeed in reversing the negative trend that had set in after the
global melt-down and improved significantly after the new Government was formed at the Center.

Since May 2014, the Industry has witnessed steady inflows and increase in the AUM as well as the
number of investor folios (accounts).

The Industry’s AUM crossed the milestone of ₹10 Trillion (₹10 Lakh Crore) for the first time as on
31st May 2014 and in a short span of two years the AUM size has crossed ₹15 lakh crore in July
2016.

The overall size of the Indian MF Industry has grown from ₹ 3.26 trillion as on 31st

March 2007 to ₹ 15.63 trillion as on 31st August 2016, the highest AUM ever and a fivefold increase
in a span of less than 10 years !!

In fact, the MF Industry has more doubled its AUM in the last 4 years from ₹ 5.87 trillion as on 31st
March, 2012 to ₹ 12.33 trillion as on 31st March, 2016 and further grown to ₹
15.63 trillion as on 31st August 2016.

The no. of investor folios has gone up from 3.95 crore folios as on 31-03-2014 to 4.98 crore as on
31-08-2016.

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On an average 3.38 lakh new folios are added every month in the last 2 years since Jun 2014.

The growth in the size of the Industry has been possible due to the twin effects of the regulatory
measures taken by SEBI in re-energising the MF Industry in September 2012 and the support from
mutual fund distributors in expanding the retail base.

MF Distributors have been providing the much needed last mile connect with investors, particularly
in smaller towns and this is not limited to just enabling investors to invest in appropriate schemes,
but also in helping investors stay on course through bouts of market volatility and thus experience
the benefit of investing in mutual funds.

In fact, even though FY 2015-16 was not a very good year for the Indian securities market, the MF
Industry witnessed steady positive net inflows month after month, even when the FIIs were pulling
out in a big way. This was largely because of the ‘handholding’ of the investors by the MF
distributors and convincing them to stay invested and/or invest at lower NAVs when the market
had fallen.

MF distributors have also had a major role in popularising Systematic Investment Plans (SIP) over
the years. In April 2016, the no. of SIP accounts has crossed 1 crore mark and currently each month
retail investors contribute around ₹3,500 crore via SIPs.

The graph indicates the growth of assets over the last 10 years.

Figure 1.4

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1.10.6 GROWTH OF MUTUAL FUNDS IN INDIA

By the year 1970, the industry had 361 Funds with combined total assets of 47.6 billion dollars in
10.7 million shareholder’s account. However, from 1970 and on wards rising interest rates, stock
market stagnation, inflation and investors some other reservation about the profitability of mutual
funds, Adversely affected the growth of mutual funds. Hence mutual fund realized the need to
introduce new types of mutual funds, which were in tune with changing requirements and interests
of the investors. The 1970’s saw a new kind of fund innovation; Funds with no sales commission
called “no load” funds. The largest and most successful no load family of funds is the Vanguard
Funds, created by John Bogle in 1977.

In the series of new product, the first Money Market Mutual Fund (MMMF) i.g. The Reserve Fund
was started in November 1971. This new concept signaled a dramatic change in Mutual Fund
Industry. Most importantly, it attracted new small and individual investors to mutual fund concept
and sparked a surge of creativity in the industry.

Figure 1.5

16
1.10.7 TYPES OF MUTUAL FUNDS

Wide variety of Mutual Funds Schemes exists to cater to the needs such as financial position, risk
tolerance and return expectations etc. The chart below gives an overview into the existing

Types of schemes in the Industry

Types of mutual
funds

Based on
Based on
Investment
Maturity period
objective

Open -ended Close-ended Hybrid/Balanced

Equity Fund Debt Fund
Schemes Schemes Fund

Monthly Income
Index Funds Liquid Fund
Plans (MIPs)

Fixed Maturity
Glit Funds
Sectoral Funds Plans (FMPs)

Capital
Corporate Bond
Appreciation
Tax -Saving Fund Funds
Plans

Short-Term,
Medium Term &
Diversified Fund
Long-Term Funds

Dynamic Bond
Funds
Figure 1.6

17
I.BASED ON MATURITY PERIOD
i) Open-Ended Funds

You can enter & exit these schemes at any time of the year because these don’t have fixed maturity
dates. The scheme declares Net Asset Value (NAV) on a daily basis.
These schemes are highly liquid as these allow you to buy & sell units at the prevailing NAV as per
your convenience.

ii) Close –Ended Funds

This scheme remains open for subscription only for a fixed period. You can buy units of this scheme
at the time of New Fund Offer(NFO) i.e. when it launches for the first time for the subscription.
Afterwards, you can buy/sell units of the scheme on the stock exchange. The company provides
repurchase option for those schemes which are not listed on the stock exchange. Repurchase
implies buy back of units by the fund house from the investor at the current NAV.

II.BASED ON INVESTMENT OBJECTIVES

i) Equity Funds

This fund is relevant if you enjoy risk –taking & have an investment horizon of more than five years.
This fund enables wealth creation via appreciation of capital through a majority investment in
equity. While applying for the scheme, you may choose from different investment options like
dividend option, growth option, etc.

a) Index Funds

These funds imitate the investment mechanism of popular indices like Nifty, BSE Sensitive Index,
etc. These funds invest in the asset classes in the same proportion as is done by the index.
Consequently, the NAVs of these funds follow the price movements of securities listed on the
index.

b) Sector-specific Funds

Here, investment is made in one of the sectors like IT, infrastructure, pharmaceuticals, FMCG,
petroleum, etc. as mentioned in the offer document. The returns fluctuate in response to changes

18
in the particular sector. These funds provide comparatively higher returns but at the same time are
exposed to sector-specific risks.

c) Tax –Saving Funds

These are also called Equity Linked Saving Scheme(ELSS) used to save taxes along with capital
appreciation. These funds offer the shortest lock –in period of 3 years, and the portfolio diversifies
into equities of small, mid and large caps as per fund structure. Before investing, do check the
composition of securities in the portfolio in addition to other analytics.

d) Diversified Funds

Instead of sticking to a particular sector/company, these funds invest in a variety of sectors like the
small, mid & large cap. The large caps provide a stable foundation for the portfolio while mid &
small caps ensure a higher rate of return.

II) DEBT FUNDS

If regular income and steady returns on investment top your priority chart, then go for debt funds.
These are lesser risky than equity funds as these extensively invest in fixed –income securities of
the varied investment horizon. The NAV of these funds tends to changes in interest rates.

Debt funds has following five categories:

a)Liquid/Money Market Funds

If your investment horizon is up to one year, then park your money in these funds for liquidity,
safety of capital & moderate returns. These funds invest in fixed-interest bearing short-term
instruments i.e. treasury bills, commercial paper, certificate of deposit, etc.

b)Gilt Funds

Gilt funds invest primarily in G-sec i.e. government security of medium to long term maturity issued
by the union & state governments. These securities have zero risks of default. However, NAV of
these schemes tends to fluctuate in response to change in the economy like a drop in overall
interest rate.

c) Corporate Bond Funds

Corporate Bond Funds are good option if you have a moderate risk appetite coupled with an
investment horizon of around 5 to 10 years. You would get modest growth with regular income but

19
at the same time be prepared to face credit risk & volatile returns. Also, the longer the maturity
period, the more your investment would be exposed to market vulnerabilities.

d) Short Term Funds, Medium Term Funds & Long Term Fund

Short Term Funds primarily invest in short-term debt securities partly in long-term debt. Go for
these funds when you want to fix your surplus funds for 1 to 9 months & require a marginal
increase in your risk appetite.

If you are a conservative investor, then Medium Term Funds are suitable investment option. These
funds invest mainly in debt securities having maturity period up to 3 years & give higher returns in a
rising interest rate regime.

Long Term Funds have investment tenure of more than a decade and the returns are affected by
changes in the interest rate regime in the economy. It is advisable to enter the fund at the time of
falling interest rates & monitor the interest rate movements to exit at a favorable time.

e) Dynamic Bond Funds

These funds largely invest in long-term debt securities i.e. corporate bonds & government securities
which are highly sensitive to the interest rate regime. Your fund manager would track the interest
rate movements & adjust the maturity profile of the portfolio. When the interest rates rise in the
short-run, he may divert some funds in short-term papers to arrest interest rate risk.

III) HYBRID/BALANCED FUNDS

If you want moderate growth & steady returns, then invest in these funds. These funds invest in
both equity & debt in a certain proportion as mentioned in the offer document. You would enjoy
investing in this fund if you want higher returns corresponding to increased risk as compared to
regular debt fund.

20
Hybrid Fund has following three categories:

a)Monthly Income Plans (MIPs)

These funds allocate comparatively higher money in debt as compared to equity to provide periodic
dividends coupled with benefits of long-term growth.

b) Fixed Maturity Plans

These are close-ended schemes which aim at protection of capital & moderate growth by
investment in both debt & equity. The allocation in debt ensures that you get back the original
investment amount upon maturity & equity portion of allocation provides the return for risk-taking.
These plans need to secure mandatory rating from at least one rating agency.

c) Capital Appreciation Plans

These are close-ended schemes which invest both in rated debt instruments & shares of
companies. The aim is capital appreciation via participation in the growth of these companies.

1.10.8 THE WAY & TYPE TO INVEST IN MUTUAL FUND

Mutual fund normally come out with an advertisement in newspaper publishing the date of launch
of the new schemes. Investors can also contact the agents and distribution of mutual funds who are
spread all over the country for necessary information and application forms. Forms can be
deposited with mutual funds through the agents and distribution who provide such services. Now
days, the post offices and banks also distribute the units of mutual funds. However, the investors
may please note that the mutual funds schemes being marketed by banks and post offices should
not be taken as their own schemes and no assurance of returns is given by them. The only role of
banks and post offices is to help in distribution of mutual funds schemes to the investors. Investors
should not be carried away by commission/gifts given by agents/distributors for investing in a
particular scheme. On the other hand they must consider the track record of the mutual fund and
should take objective decision.

 ONE TIME INVESTMENT

The amount that has to be invested in onetime is known as Onetime Investment. The
investors has to pay the whole amount at once. The minimum amount is
Rs.5000 and maximum is as per the investor’s choice. This investment is generally
preferred for the business man who is able to pay at one time.

21
  SYSTEMATIC INVESTMENT PLAN(SIP)
The amount that has to be invested through same monthly installment is known as
Systematic Investment Plan. The investor has to pay the minimum amount Rs.1000
monthly for all equity and balanced schemes like that for 6 months. And Rs.500 monthly
for Tax Saver scheme like that for 12 months. The minimum amount that the investor has
to invest is Rs.6000 and maximum as per their choice. This type of investment is generally
preferred for the salaried people.

1.10.9 REGULATORY OF MUTUAL FUND IN INDIA

 SEBI
The capital market regulates the mutual funds in India. SEBI requires all mutual funds to be
registered with them. SEBI issues guidelines for all mutual funds operations-investment,
accounts, expenses, etc. Recently, it has been decided that Money Market Mutual Funds of
registered mutual funds will be regulated by SEBI through (Mutual Fund) Regulation 1996.

 RBI
RBI, a supervisor of the banks owned Mutual Funds- As banks in India come under the
regulatory Jurisdiction of RBI, banks owned funds to be under supervision of RBI and SEBI.
RBI has supervisory responsibility over all entities that operate in the money markets.

 MINISTRY OF FINANCE(MOF)
Ministry of Finance ultimately supervises both the RBI and SEBI and plays the role of apex
authority for any major disputes over SEBI guidelines.

 COMPANY LOW BOARD

Registrar of companies is called Company Low Board. AMCs of Mutual Funds are
companies registered under the companies Act 1956 and therefore answerable to
regulatory authorities empowered by the Companies Act.

 STOCK EXCHANGE
Stock Exchanges are self-regulatory organizations supervised by SEBI. Many closed ended
funds of AMCs are listed as stock exchanges and are traded like shares.

22
  OFFICE OF THE PUBLIC TRUSTEE
Mutual fund being public trust is governed by the Indian Trust Act 1882. The board of
trustees Company is accountable to the office of public trustee, which in turn reports to the
charity commissioner.

1.10.10 ADVANTAGES OF MUTUAL FUNDS

Mutual funds have designed to provide maximum benefits to investors, and fund manager have
research team to achieve schemes objective. Assets Management Company has different type of
sector funds, which need to proper planning for strategic investment and to achieve the market
return.

Portfolio Diversification

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

Professional Management

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

Less Risk

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

Low Transaction Costs

Due to the economies of scale (benefits of larger volumes), mutual fund pay lesser transaction
costs. These benefits are passed on to the investors.

Choice of Schemes

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

23
Transparency

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

Flexibility

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

Safety

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

1.4.11 DISADVANTAGES OF MUTUAL FUND:

The mutual fund not just advantage of investor but also has disadvantages for the funds. The fund
manager not always made profits but might create loss for not properly managed. The fund have
own strategy for investment to hold, to sell, to purchase unit at particular time period.

Costs Control Not in the Hands of an investor

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

No Customized Portfolios

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

Difficulty in Selecting a Suitable Fund Scheme

24
Many investors find it difficult to select one option from the plethora of funds/scheme/plans available.
For this, they may have to take advice from financial planners in order to invest in the right fund to
achieve their objectives.

1.10.12 SEBI REGISTERED MUTUAL FUND COMPANIES IN INDIA

1.Axis Mutual Fund - MF/061/09/02

2.Baroda Pioneer Mutual Fund - MF/018/94/2

3.Birla Sun Life Mutual Fund – MF/020/94/8

4.BNP Paribas Mutual Fund – MF/049/04/01

5.BOI AXA Mutual fund – MF/056/08/01

6.Canara Robeco Mutual Fund – MF/004/93/4

7.DSP Blackrock Mutual Fund – MF/036/97/7

8.EDELWEISS Mutual Fund – MF/057/08/02

9.ESSEL Mutual Fund – MF/062/09/03

10.Franklin Templeton Mutual Fund – MF/026/96/8

11.HDFC Mutual Fund – MF/044/00/6

12.HSBC Mutual Fund – MF/046/02/5

13. ICICI Prudential Mutual Fund – MF/003/93/6

14. IDBI Mutual Fund – MF/064/10/01

15. IDFC Mutual Fund – MF/042/00/3

16. IIFCL Mutual Fund(IDF) – MF/071/13/01

17. IIFL Mutual Fund – MF/067/11/02

18. IL&FS Mutual Fund(IDF) – MF/072/13/02

25
19. INDIABULLS Mutual Fund – MF/068/11/03

20. INVESCO Mutual Fund – MF/052/06/01

21. ITI Mutual Fund – MF/073/18/01

22. JM Financial Mutual Fund – MF/015/94/8

23. Kotak Mahindra Mutual Fund – MF/038/98/1

24. L&T Mutual Fund – MF/035/97/9

25. LIC Mutual Fund – MF/012/94/5

26. Mahindra Mutual Fund – MF/069/16/01

27. MIRAE ASSET Mutual Fund – MF/055/07/03

28. Motilal Oswal Mutual Fund – MF/063/09/04

29. Nippon India Mutual Fund – MF/022/95/1

30. PIGM Mutual Fund – MF/069/12/01

31. Principal Mutual Fund – MF/019/94/0

32. Quant Mutual Fund – MF/028/96/4

33. Quantum Mutual Fund – MF/051/05/02

34. SBI Mutual Fund – MF/009/93/3

35. Shriram Mutual Fund – MF/017/94/4

36. Sundaram Mutual Fund – MF/034/97/2

37. TATA Mutual Fund – MF/023/95/9

38. Taurus Mutual Fund – MF/002/93

39. Union Mutual Fund – MF/066/11/01

40. UTI Mutual Fund – MF/048/03/01

26
41. Yes Mutual Fund – MF/074/18/02

1.10.13 POINTERS TO MEASURE MUTUAL FUND PERFORMANCE

MEASURES DESCRIPTION IDEAL RANGE

STANDARD Standard deviation allows Should be near to it’s mean
DEVIATION evaluating the volatility of the return.
fund. The standard deviation of
a fund measures this risky by
measuring the degree to which
the fund fluctuates in relation to
its mean return.

BETA Beta is a fairly commonly used Beta > 1 =high risky

measure of risk. It basically Beta = 1 =Average
indicates the level of volatility
associated with fund as Beta < = Low risky
compared to the benchmark.

R-SQUARE R-Square measures the R-square values range between

correlation of a fund’s 0 and 1,where 0 represents no
movement to that of an index. correlation and 1 represent full
R-square describes the level of correlation.
association between the fund’s
volatility and market risk.

ALPHA Alpha is the difference between Alpha is positive = returns of

the returns one would expect
stock are better than market
from a fund , and the return it
actually produces. It also returns.
measures the unsystematic risk. Alpha is negative = returns of
stock are worst than market.
Alpha is zero = returns are same
as market.

27
SHARPE RATIO Sharpe Ratio = Fund return in The higher the sharpe ratio, the
excess of risk free return/ better a funds returns relative to
Standard deviation of fund. the amount of risk taken.
Sharpe ratios are ideal for
comparing funds that have a
mixed asset classes.

Table 1.1

1.10.14 COST INVOLVED IN MUTUAL FUNDS

As with any business, running a mutual funds involves costs –including shareholders transaction
costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these
costs to investors by imposing fees and expenses. It is important that you understand these charges
because they lower your returns. Some funds impose “shareholders fees” directly on investors
whenever they buy or sell shares. In addition, every fund has regular, recurring, fund –wide
“operating expenses”. Funds typically pay their operating expenses out of fund assets –which mean
that investors indirectly pay these costs.

An investor must know that there are certain costs involved while investing in mutual funds.

1.OPERATING EXPENSES/EXPENSE RATIO

These refer to cost incurred to operate a mutual fund. Advisory fee is paid to investment managers,
audit fees to charted accountant, custodial fees, registrar and transfer agent fees, trustee fees,
agent commission. Operating expenses also known as expenses ratio which is annual expenses
expressed as a percentage of these expenses is required to be reported in the schemes offer
document or prospectus.

Expenses ratio = operating expenses / Average net assets

For instance, if funds Rs. 100 crores and expenses Rs. 20 Lakh. Then expenses ratio is 2% expenses
ratio is available in the offer document and for historical per unit statistics include in the financial
results of the fund which are published by annually, un audited for the half year ending September
30th and audited for physically year end 1st March 30th.

28
Depending upon scheme and net asset, operating expenses are determined by limits mandated by
SEBI mutual funds regulation act, Any excess over specified limits as to borne by Management
Company, the trustees or sponsors.

2.SALES CHARGES:

These are known commonly sale loads; these are charged directly to investor. Sales loads are used
by mutual fund for the payment of agent’s commission, distribution and marketing expenses. These
charges have no effect on the performance of the scheme. Sales loads are usually expression
percentage and or of two types-

1. Front-end load
2. Back-end load

 FRONT-END LOAD:
It is a onetime fixed fee paid by an investor when buying a Mutual fund scheme.

It determines public offer price which intern decide how much of your initial investment actually
get invested the standard practice of arriving a public offer is as follows.

Public offer price = Net asset value / (1-front end load)

Let us assume, an investor invests Rs. 10,000 in a scheme that charges if 2% front end load at a NAV
per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs.
10,20. So only 980 units are allowed to the investor.

Number of units allotted = Amount invested / public offer price

10000/10.20 = 980 units at a NAV of Rs.10.

This means units worth 9800 are allotted to him an initial investment Rs.10,000 front end loads
tend to decrease as initial investment amount increase.

 BACK-END LOAD:

May be fixed fee redemption or a contingent differed sales charged a redemption so load continues
so long as the redeeming or selling of the units of a fund does not take place in the event of a back
end load is applied. The redemption price is arrive or using following formula.

29
Redemption price = Net asset value / (1+back end load)

Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a 2% back,
end load at a NAV per units of Rs. 10 using the formula Redemption price 10/(1+0.02)=Rs. 9.8 s,
what the investor gets in hand is 9800(9.8*1000).

3.CONTINGENT DEFERRED SALES CHARGES (CDSC):

Contingent differed sales charges of a structured back end load. It is paid when the units are
reading during the initial years of ownership. It is for a predetermined period only and reduced
over the time you invested for a fund, the longer remains in a fund the lower the CDSC.

The SEBI stipulate the a CDSC may be charge only for first four years after purchase of units and
also stipulate the maximum CDSC that can we charge every year. This is the SEBI mutual funds
regulations 1996 do not allow either the front end load or back end load to any combination is
higher than 7%.

4.TRANSACTION COST:

Some funds may also impose a switch over fee which is charge on transfer of investment from one
scheme to another within a same mutual funds family and also to switch from one plan to another
within same scheme. The real estate mutual funds sector is now being considered as the engine of
economic growth.

The AMC reports to the trustees who safeguard the interests of investors in the mutual fund and
also ensure compliance of the operations of the fund with SEBI guidelines. They not only monitor
performance of the AMC but also oversee operations of the custodian and transfer agent. The AMC
receives a fee for its services. Currently, SEBI permits a maximum fee of 1.25% p.a. of the asset
value of the fund size less than Rs.1 bn. As the asset size of the fund increases, this falls
progressively to 0.75% p.a. of the incremental asset value. In addition, SEBI also permits AMC to
charge expense related to the management of the fund up to certain limits. These are of two kinds
of as follows:

 Up front expenses related to fund marketing and initial account opening – up tp maximum
of 6% of the investment amount (termed as “load”).
 Recurring expenses, which together with the management fees should not exceed certain
limits. The maximum is 2.5% per year for equity funds and 2.25% per year for debt funds.

30
 As the asset size increases, the maximum limit falls progressively to 1.75% of the
incremental assets

First 1bn. Next 3 bn. Next 3 bn. Over 7 bn.

2.5% 2.25% 2.00% 1.75%

1.10.15 RISKS ASSOCIATED WITH MUTUAL FUNDS

The most important relationship to understand is the risk-return trade-off. Higher the risk greater
the returns/loss and lower the risk lesser the returns/loss.

Hence it is up to you, the investor decide how much risk you are willing to take. In order to do this
you must first be aware of the different types of risks involved with your investment decision.

• MARKET RISK
Sometimes prices and yields of all securities rise and fall. Broad outside influences
affecting the market in general leads to this. This is true, may it be big corporation or
smaller mid-sized companies. This is known as Market Risk. A Systematic Investment
Plan(SIP) that works on the concept of Rupee Cost Averaging(RCA) might help mitigate this
risk.
• CREDIT RISK
The debt services ability (may it be interest payment or repayment of principal) of a
company through its cash flows determines the Credit Risk faced by you. This credit risk is
measured by independent rating agencies like CRISIL who rate companies and their paper.
An ‘AAA’ rating is considered the safe whereas a ‘D’ rating is considered poor credit quality.
A well-diversified portfolio might help mitigate this risk.
• INFLATION RISK
Inflation is the loss of purchasing power over time. A lot of times people make conservative
investment decisions to protect their capital but end up with a sum of money that can buy
less than what the principal could at the time of the investment. This happen when

31
 inflation grows faster than the return on your investment. A well-diversified portfolio with
some investment in equities might help mitigate this risk.

• INTEREST RATE RISK

In a free market economy interest rates are difficult if not impossible to predict. Changes in
interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of
bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate this risk.
• POLITICAL RISK
Changes in government policy and political decision can change the investment
environment. They can create a favorable environment for investment or vice versa.
• LIQUIDITY RISK
Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.
Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as
internal risk controls that lean towards purchase of liquid securities. You have been reading
about diversification above, but what is it? Diversification the nuclear weapon in your
arsenal for your fight against risk. It simply means that you must spread your investment
across different securities (stocks, bonds, money market instruments, real estate, fixed
deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of
a diversification may add to the stability of your returns, for example during one period of
time equities might underperform but bonds and money market instruments might do well
enough to offset the effect of a slump in the equity markets. Similarly the information
technology sector might be faring poorly but the auto and textile sectors might do well and
may protect you principal investments as well as help you meet your return objectives.

32
1.10.16 RISK V/S RETURN

Sectoral Funds
R
Equity Funds
E
T
Index Funds
U
R Balanced Funds
N
Debt Funds

Liquid Funds

RISK

Figure 1.7

1.10.17 INVESTMENT STRATEGIES IN MUTUAL FUNDS

SYSTEMATIC INVESTMENT PLAN (SIP): under this a fixed sum is invested each month on a
fixed date of a month. Payments are made through post dated cheques or direct/auto 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)

SYSTEMATIC TRANSFER PLAN (STP): under this an investor invests in debt oriented fund
and gives instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same
mutual fund.

SYSTEMATIC WITHDRAWAL PLAN (SWP): if someone wishes to withdraw from a mutual

fund then he can withdraw a fixed amount each month.

33
1.10.18 ROLE OF REGULATORS IN INDIA

Securities and Exchange Board of India

Securities and Exchange Board of India (SEBI) is the regulatory authority for securities markets in
India. It regulates, among other entities, mutual funds, depositories, custodians and registrars and
transfer agents in the country. The applicable guidelines for mutual funds are set out in SEBI
(Mutual Funds) Regulations, 1996, as amended till date. Some aspects of these regulations are
discussed in various sections of this workbook. An updated and comprehensive list of circulars
issued by SEBI can be found in the Mutual Funds section of SEBI’s website: www.sebi.gov.in. Master
Circulars, which capture the essence of various circulars issued upto a specified date, may be
downloaded from www.sebi.gov.in.

Some segments of the financial markets have their own independent regulatory bodies. Wherever
applicable, mutual funds need to comply with regulations issued by other regulators also. For
instance, RBI regulates the money market and foreign exchange market in the country. Therefore,
mutual funds need to comply with RBI’s regulations regarding investment in the money market,
investments outside the country, investments from people other than Indians resident in India,
remittances (inward and outward) of foreign currency etc.

Stock Exchanges are regulated by SEBI. Every stock exchange has its own listing, trading and
margining rules. Mutual Funds need to comply with the rules of the exchanges with which they
choose to have a business relationship.

Anyone who is aggrieved by a ruling of SEBI, can file an appeal with the Securities Appellate
Tribunal (SAT).

Self-Regulatory Organizations (SRO)

In the developed world, it is common for market players to create Self-Regulatory Organizations,
whose prime responsibility is to regulate their own members. The statutory regulatory bodies set
up by the Government only lay down the broad policy framework, and leave the micro-regulations
to the SRO. For instance, the Institute of Chartered Accountants of India (ICAI) regulates its own
members.

34
The securities exchanges in India such as the NSE, BSE and MSEI are vested with selfregulatory
responsibilities. They regulate the firms listed on their stock exchange and also their trading
members.

Association of Mutual Funds in India

Asset Management Companies (AMCs) in India are members of Association of Mutual Funds in
India (AMFI), an industry body that has been created to promote the interests of the mutual funds
industry [such as the Confederation of Indian Industry (CII) for overall industry and NASSCOM for
the IT/BPO industry]. AMFI is not an SRO. The objectives of AMFI are as follows:

• 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 undertake nationwide 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.

AMFI Code of Ethics (ACE)

One of the objectives of the Association of Mutual Funds in India (AMFI) is to promote the
investors’ interest by defining and maintaining high ethical and professional standards in the
mutual fund industry. The AMFI Code of Ethics (ACE) sets out the standards of good practices to be
followed by the Asset Management Companies in their operations and in their dealings with
investors, intermediaries and the public.

35
SEBI (Mutual Funds) Regulation, 1996 requires all Asset Management Companies and
Trustees to abide by the Code of Conduct as specified in the Fifth Schedule to the Regulation. The
AMFI Code has been drawn up to supplement that schedule, to encourage standards higher than
those prescribed by the Regulations for the benefit of investors in the mutual fund industry.

While the SEBI Code of Conduct lays down broad principles, the AMFI Code of Ethics (ACE) sets
more explicit standards for AMCs and Trustees.

AMFI’s Code of Conduct for Intermediaries of Mutual Funds

AMFI has also framed a set of guidelines and code of conduct for intermediaries (known as AMFI
Guidelines & Norms for Intermediaries (AGNI)), consisting of individual agents, brokers, distribution
houses and banks engaged in selling of mutual fund products. The Code of Conduct is detailed in .

In the event of breach of the Code of Conduct by an intermediary, the following sequence of steps
is initiated by AMFI:

• Write to the intermediary (enclosing copies of the complaint and other documentary
evidence) and ask for an explanation within 3 weeks.

• In case explanation is not received within 3 weeks, or if the explanation is not satisfactory,
AMFI will issue a warning letter indicating that any subsequent violation will result in cancellation
of AMFI registration.

• If there is a proved second violation by the intermediary, the registration will be cancelled,
and intimation sent to all AMCs. The intermediary has a right of appeal to AMFI.

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