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A
COMPARATIVE STUDY
ON
MUTUAL FUNDS AND FIXED DEPOSITS
IN INDIA
A COMPARATIVE STUDY ON MUTUAL FUNDS AND FIXED DEPOSITS IN INDIA
UNDERTAKEN AT
KARVY STOCK BROKING LIMITED
This report is submitted in partial fulfilment of the requirement for the degree Bachelors of Business Administration (BBA) programme of Amity Global Business School, Kolkata.
BY
ASEM NAOCHA SINGH ENROLLMENT No: A30906412032
BBA 2012-2015
UNDER THE GUIDANCE OF
FACULTY MENTOR INDUSTRY GUIDE
PROF. GAUTAM SINHA MR. SHARAT AGARWAL
P (PROFESSOR) (REGIONAL HEAD)
AMITY GLOBAL BUSINESS SCHOOL, KOLKATA
AND
MR CHANCHAL RANJAN SAHU
( (ZONAL CO-ORDINATOR & BUSINESS
D DEVELOPMENT – EAST)
KARVY STOCK BROKING LIMITED
AMITY GLOBAL BUSINESS SCHOOL, KOLKATA
AUGUST 2014
DECLARATION
I hereby declare that this report on “A COMPARATIVE STUDY ON MUTUAL
FUNDS AND FIXED DEPOSITS IN INDIA” is the outcome of my sincere effort.
It is submitted by me for the fulfillment of Summer Internship Programme for the
award of Bachelor of Business Administration to Amity Global Business School in
an original and genuine work. It has not been submitted anywhere else for any
other purpose.
ASEM NAOCHA SINGH
ENROLLMENT NO: A30906412032
BBA 2012-2015
AMITY GLOBAL BUSINESS SCHOOL, KOLKATA
DATE:
PLACE:
PROJECT DETAILS
PROJECT TITLE: A COMPARATIVE STUDY ON MUTUAL FUNDS AND FIXED
DEPOSITS IN INDIA
COMPANY: KARVY STOCK BROKING LIMITED
INDUSTRY GUIDE: Mr. SHARAT AGARWAL
Mr. CHANCHAL RANJAN SAHU
FACULTY MENTOR: Prof. GAUTAM SINHA
DURATION OF THE PROJECT: 11TH JUNE TO 11TH AUGUST
OBJECTIVE OF THE STUDY: COMPARING MUTUAL FUNDS AND FIXED DEPOSITS
V IN INDIA AND DETERMINING WHICH IS BETTER.
ACKNOWLEDGEMENT
I take this opportunity to express my profound gratitude and deep regards to my guide
Professor Gautam Sinha for his exemplary guidance, monitoring and constant encouragement
and my college Amity Global Business School, Kolkata, for giving me the golden opportunity to
do this wonderful project.
I also take this opportunity to express a deep sense of gratitude to Mr. Sharat Agarwal
(Regional Head) and Mr. Chanchal Ranjan Sahu (Zonal Co-ordinator and Business
Developmnet) of Karvy Stock Broking Limited, for their cordial support, valuable information
and guidance, which helped me in completing this task through various stages.
I am obliged to staff members of Karvy Stock Broking Limited, for the valuable information
provided by them in their respective fields. I am grateful for their cooperation during the period
of my assignment.
Lastly, I thank almighty, my parents, brother and friends for their constant encouragement
without which this assignment would not be possible.
ASEM NAOCHA SINGH
ABSTRACT
As part of the Bachelors of Business Administration (BBA) degree course at Amity Global
Business School, Kolkata, I undertook the Summer Internship Program at Karvy Stock Broking
Ltd. for the duration from 11th July 2104 to 11th August 2014 (ie; 2 months).
The project deals with understanding different financial products and the comparison of mutual
funds and fixed deposits. It describes a detail study on the mutual funds and fixed deposits in
India, its history, growth, how it works, advantages and disadvantages respectively and the
comparison of the both(ie ; mutual funds and fixed deposits).
The project also involves comparing of the mutual fund returns with fixed deposit returns in
bull and bear markets and determining which form of investment (mutual fund or fixed
deposits) is better for which kind of investor.
CONTENTS
Declaration
Acknowledgement
Abstract
TOPIC PAGE NO. Introduction to the Project 1
Company Profile (Karvy Stock Broking Ltd) 2 Brief history of the Company 4
Karvy Groups 5
Introduction to Mutual Fund 10 Net Asset Value 10
Assets Under Management 12 History of Mutual Fund in India 13
Mutual Fund Houses in India 15
Types of Mutual Funds 18 Organizational Structure of Mutual Fund 24
Management of Mutual Funds 26 Types of Returns in Mutual Fund 27
Advantages and Disadvantages of MF 27 Risk Management of Mutual Funds 30
Introduction to Fixed Deposits 31
Features of Fixed Deposits 31 Company Fixed Deposits 32
Benefits and Drawbacks of Fixed Deposits 34 Comparison of Mutual funds and Fixed Deposits
36
Bear Market and Bull Market 39
Comparison of Mutual Fund Returns and Fixed Deposits Returns
40
Risk Return Matrix of MF & FD 44
Research Methodology 45 Recommendation 45
Bibliography 46
Weekly Report
INTRODUCTION TO THE PROJECT
Every individual have their financial goals. They will all have different timescales, objectives, risk
involved. That’s why it is important to make a plan. Most people do savings or investments to
meet future uncertainties, emergencies and provide security to their family. There are many
types of savings and investment products like stocks, bonds, mutual funds, exchange-traded
funds, certificates of deposit or fixed deposits and money market funds etc.
This project describes two of these investment products (ie; mutual funds and fixed deposits),
and explains their basics, workings, and details their benefits and drawbacks and the
comparison of the two products based on factors like risk, return, liquidity, quality of assets,
diversification etc.
Comparison between mutual funds and fixed deposits is a long debate, especially when it
comes to a comparison between fixed deposits and debt mutual funds. Even a few years ago,
any conservative and risk averse investor would think investing in fixed deposits is better than
mutual funds (debt or otherwise). Nevertheless, the market scenario has changed a lot in the
recent years, and many a mutual funds family has come up with interest debt mutual fund
schemes with guaranteed returns alongside capital appreciations.
Whether one should invest in fixed deposits or mutual funds or any other investment is no
more a simple question as it used to be five six years back, and needs a detailed examination
and explanation.
The project also involves comparing of the mutual fund returns with fixed deposit returns in
bull and bear markets and determining which form of investment (mutual fund or fixed
deposits) is better for which kind of investor.
COMPANY PROFILE
KARVY|||
STOCK BROKING
VISION "Strive to be the leaders and experts through our processes, people and technology offering the unique blend that delivers superior value by establishing and maintaining the highest levels of services and professionalism”. MISSION "To be the 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".
ABOUT THE COMPANY
KARVY, is a premier integrated financial services provider, and ranked among the top five in the
country in all its business segments, services over 20 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 – mutual funds, bonds, fixed deposit,
equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services,
Merchant Banking & Corporate Finance, Registrars & Transfer agents . Karvy has a professional
management team and ranks among the best in technology, operations and research of various
industrial segments. Karvy Stock Broking Ltd offer trading on a vast platform – National Stock
Exchange, Bombay Stock Exchange and Hyderabad Stock Exchange. More importantly, we make
trading safe to the maximum possible extent, by accounting for several risk factors and
planning accordingly. We are assisted in this task by our in-depth research, constant feedback
and sound advisory facilities. Our highly skilled research team, comprising of technical analysts
as well as fundamental specialists, secure result-oriented information on market trends, market
analysis and market predictions. . Our Stock Broking services are widely networked across India,
with the number of our trading terminals providing retail stock broking facilities. Pacific Century
Group, the holding company of Mr. Richard Li, Hong Kong has invested in the company during
June 2005 for further expansion of branch network and to increase the product range. The
investment in Karvy Stock Broking Ltd will represent Pacific Century Group’s first investment in
the Indian Financial Services arena. Our services have increasingly offered customer oriented
convenience which we provide to a spectrum of investors, high-networth or otherwise, with
equal dedication and competence. Depository Participant Services The onset of the technology
revolution in financial services Industry saw the emergence of Karvy as an electronic custodian
registered with National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd
(CSDL) in 1998. Karvy set standards enabling further comfort to the investor by promoting
paperless trading across the country and emerged as the top3 Depository Participants in the
country in terms of customer serviced. Offering a wide trading platform with a dual
membership at both NSDL and CDSL, we are a powerful medium for trading and settlement of
dematerialized shares. We have established live DPMs, Internet access to accounts and an
easier transaction process in order to offer more convenience to individual and corporate
investors. A team of professional and the latest technological expertise allocated exclusively to
our Demat division including technological enhancements like SPEED-e, make our response
time quick and our delivery impeccable. A wide national network of 546 offices across 363 cities
/ towns makes our efficiencies accessible to all.
BOARD OF DIRECTORS
Name Designation
C.PARTHASARATHY Designated Director
M.S.RAMAKRISHNA Designated Director
ASHISH AGARWAL Director
BHAGWAN DASS NARGANG Director
M.YUGANDHAR Director
KARVY GROUP Karvy Consultants Limited Karvy Investor Services Limited Karvy Stock Broking Limited Karvy Computer Shares Pvt. Limited Karvy Realty (India) Pvt. Limited Karvy Global Services Limited Karvy Data Base Management Services Karvy Comtrade Limited Karvy Consultants Limited
BRIEF HISTORY OF KARVY
BACKGROUND
Karvy Consultants Limited was established in 1982 at Hyderabad. It was established by a group
of Hyderabad -based practicing Chartered Accountants. At initial stage it was very small in size.
It was started with a capital of Rs.1,50,000. In starting it was only offering auditing and taxation
services. Later, it acts into the Registrar and Share transfer activities and subsequently into
financial services and other services like Financial Product Distribution, Investment Advisory
Services, Demat Services, Corporate Finance, Insurance etc. All along, Karvy’s strong work ethics
and professional background leveraged with Information Technology enabled it to deliver
quality to the individual. A decade of commitment, professional integrity and vision helped
Karvy achieving a leadership position in its field when it handled largest number of corporate
and retail that proved to be a sound business synergy. Karvy has access to millions of Indian
shareholders, besides companies, banks, financial institutions and regulatory agencies. Over the
past one and half decades, Karvy has evolved as a veritable link between industry, finance and
people.
In January 1998, Karvy became first Depository Participant in Andhra Pradesh. An ISO 9002
Company, Karvy’s commitment to quality and retail reach has made it an Integrated Financial
Services Company. Today, Karvy has 230 branch offices in 164 cities all over the India. The
company adds 5 new offices every month to the company’s ever growing national network in
every nook and corner of the country. The company service over 16 million individual
investors, 180 corporate and handle corporate disbursements that exceed Rs.2500 Crores.
WHERE KARVY STAND IN THE MARKET?
KARVY is a legendary name in financial services, Karvy’s credit is defined by its mission to
succeed, passion for professionalism, excellent work ethics and customer centric values.
KARVY is well known as a premier financial services enterprise, offering a broad spectrum of
customized services to its clients, both corporate and retail. Services that KARVY constantly
upgrade and improve are because of company’s skill in leveraging technology. Being one of the
most techno-savvy organizations around helps company to deliver even more cost effective
financial solutions in the shortest possible time.
What bears ample testimony to Karvy’s success is the faith reposed in company by valued
investors and customers, all across the country. Indeed, with Karvy’s wide network touching
every corner of the country, even the most remote investor can easily access Karvy’s services
and benefit from company’s expert advice.
KARVY GROUP
Karvy Consultants Limited
As the flagship company of the KARVY Group, KARVY Consultants Limited has always remained
at the helm of organizational affairs, pioneering business policies, work ethic and channels of
progress. Having emerged as a leader in the registry business, the first of the businesses that
we ventured into, we have now transferred this business into a joint venture with
Computershare Limited of Australia, the world’s largest registrar. With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business, we believe that we were best positioned to venture into this activity as a
Depository Participant. We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited), the first Depository in the country and then
with CDSL (Central Depository Services Limited). Today, we service over seven lakh customer
accounts in this business spread across over 540 cities/towns in India and are ranked amongst
the largest Depository Participants in the country. With a growing secondary market presence,
we have transferred this business to KARVY Stock Broking Limited (KSBL), our associate and a
member of NSE, BSE and HSE.
KARVY Stock Broking Limited
KARVY Stock Broking Limited, one of the cornerstones of the KARVY edifice, flows freely
towards attaining diverse goals of the customer through varied services. It creates a plethora of
opportunities for the customer by opening up investment vistas backed by research-based
advisory services. Here, growth knows no limits and success recognizes no boundaries. Helping
the customer create waves in his portfolio and empowering the investor completely is the
ultimate goal.
KARVY Stock Broking Limited is a member of:
National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)
Hyderabad Stock Exchange (HSE)
Karvy Investor Services Limited
Deepening of the Financial Markets and an ever-increasing sophistication in corporate
transactions, has made the role of Investment Bankers indispensable to organizations seeking
professional expertise and counselling, in raising financial resources through capital market
apart from Capital and Corporate Restructuring, Mergers & Acquisitions, Project Advisory and
the entire gamut of Financial Market activities.
Karvy Investor Services Limited (‘KISL’), a SEBI registered Merchant Banker has emerged as a
leading Investment Banking entity in the country with over a decade of experience. KISL has
built its reputation by capitalizing on its qualified professionals, who have successfully executed
a large number of complex and unique transactions. Karvy’s quality professional team and our
work-oriented dedication have propelled us to offer value-added corporate financial services
and act as a professional navigator for long term growth of our clients, who include leading
corporates, State Governments, Foreign Institutional Investors, public and private sector
companies and banks, in Indian and global markets. Karvy have also emerged as a trail blazer in
the arena of relationships, both at the customer and trade levels because of our unshakable
integrity, seamless service and innovative solutions that are tuned to meet varied needs. Our
team of committed industry specialists, having extensive experience in capital markets, further
nurtures this relationship.
Credentials
• Emerging as a leading Investment Banker with a strong support from its Group entities in
Research, Stock Broking, Institutional Sales and Retail Distribution.
• Strong team of more than 25 qualified professionals operating from six cities; Hyderabad,
Mumbai, Delhi, Kolkata, Chennai, and Bangalore apart from two overseas offices at New York
(USA) and Dubai.
• One of the largest retail distribution networks with over 584 branches in over 389
cities/towns.
• Excellent Institutional Sales D
Karvy Computer Shares Pvt. Ltd
Karvy Computershare Private Limited is a joint venture between Computershare, Australia and
Karvy Consultants Limited, India in the registry management services industry.
Computershare, Australia is the world’s largest and only global share registry providing financial
market services and technology to the global securities industry.
Karvy Realty (India) Pvt. Ltd
Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group, India’s largest financial
services group. The group carries forward its legacy of trust and excellence in investor and
customer services delivered with passion and the highest level of quality that align with global
standards.
Karvy Realty (India) Limited is engaged in the business of real estate and property services
offering:
• Buying/ selling/ renting of properties
• Identifying valuable investments opportunities in the real estate sector
• Facilitating financial support for real estate and investments in properties
• Real estate portfolio advisory services.
KRIL is your personal real estate advisor guiding and hand holding you through real estate
transactions and offering valuable investment opportunities.
Building on the KARVY brand as a leading industry benchmark for world class customer
servicing and quality standards, KRIL brings to investors a reputation of reliability, dependability
and honesty. Our understanding of the needs and preferences of our clients and our teams of
qualified realty professionals help us to establish fruitful relationships with buyers and sellers of
properties alike.
A single stop shop for realty services offering:
• Transacting Options: Choose to buy, sell or rent properties (residential and commercial)
• Investing Options: Give your investments a good opportunity with properties marketed by
KRIL.
• Financing Options: Get unmatched deals for financing your investment
• Research Options: We undertake valuation and feasibility studies, area analysis and
customized analysis on behalf of clients.
KRIL has ongoing relations with builders and developers across the country which will help you
place your investments in the most genuine properties for a good value appreciation at the
right place and at the right price.
KRIL is committed to the guiding principles of quality, timely service delivery, fair pricing,
transparency and integrity.
Karvy Global Services Limited
Karvy Global is pioneering the creative business solutions approach to transform information
into insight aimed to address the business, marketing and operational intelligence needs of
global companies
Karvy Database Management Services
KDMSL is emerging as a leading service provider in the areas of E-governance processing,
insurance back office processing, record keeping, back office for BFSI clientele and is in pursuit
to establish credentials in the areas of Telecom processing, Data management requirements of
large corporates. KDMSL is striving to achieve leadership position by tapping the Indian retail
sector boom, through a combination of our extensive branch network and proprietary IT
backbone. Needless to say, KDMSL is run as an independent outfit with seasoned professionals
on board, who have decades of expertise in the industry. KDMSL is a fully owned subsidiary of
Karvy Stock Broking Limited (KSBL), incorporated in April 2008 and is head quartered at
Hyderabad.
Karvy Comtrade Limited
Commodities market, contrary to the beliefs of many people, has been in existence in India
through the ages. However the recent attempt by the Government to permit Multi-commodity
National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges
Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX)
have come into being. These exchanges, by virtue of their high profile promoters and
stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a
hassle-free settlement system. The futures contracts available on a wide spectrum of
commodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Chana etc.,
provide excellent opportunities for hedging the risks of the farmers, importers, exporters,
traders and large scale consumers. They also make open an avenue for quality investments in
precious metals. The commodities market, as it is not affected by the movements of the stock
market or debt market provides tremendous opportunities for better diversification of risk.
Realizing this fact, even mutual funds are contemplating of entering into this market.
Karvy Comtrade Limited is another venture of the prestigious Karvy group. With our well
established presence in the multifarious facets of the modern Financial services industry from
stock broking to registry services, it is indeed a pleasure for us to make foray into the
commodities derivatives market which opens yet another door for us to deliver our service to
our beloved customers and the investor public at large.
With the high quality infrastructure already in place and a committed Government providing
continuous impetus, it is the responsibility of us, the intermediaries to deliver these benefits at
the door-steps of our esteemed customers. With our expertise in financial services, existence
across the lengths and breadths of the country and an enviable technological edge, we are all
set to bring to you, the pleasure of investing in this burgeoning market, which can touch upon
the lives of a vast majority of the population from the farmer to the corporate alike. We are
confident that the commodity futures can be a good value addition to your portfolio.
The company provides investment, advisory and brokerage services in Indian Commodities
Markets. And most importantly, we offer a wide reach through our branch network of over 225
branches located across 180 cities.
FIELD OF ACTIVITIES ENGAGED/ SERVICES
Stock broking services
Depository participant services
Financial products distribution services
Advisory services
Private client group services
INTRODUCTION TO MUTUAL FUNDS
A mutual fund is a common pool of money into which investors with common investment
objectives place their contributions that are to be invested, in accordance with the stated
objective of the scheme. The investment manager invests the money collected into assets that
are defined by the stated objective of the scheme. The Mutual Funds usually invest their funds
in equities, bonds, debentures, call money etc., depending on the objectives and terms of
scheme floated by MF. Now a days there are MF which even invest in gold or other asset
classes. For example, an Equity fund would invest in Equity and Equity related instruments and
a Debt fund would invest in Bonds, Debentures, Gilts etc.
Mutual funds serve as a link between the saving people and the capital market in that they
mobilize saving from investors and bring them to borrowers in the capital markets. In short, it is
a common pool of money into which investors place their contribution that is to be invested in
accordance with a stated objective. A mutual fund uses the money collected from the investors
to buy those assets, which are specially permitted by its stated investment objective. When an
investor subscribes to a mutual fund, he/she buys a part of asset or the pool of funds that are
outstanding at that time.
A mutual fund is constituted as an investment company and an investor buys into the fund,
means he buys the share of the fund and is known as a unit holder. Since each unit holder is a
part of owner of a mutual fund, it is necessary to establish the value of his part. Since the unit
held by an investor evidences the ownership of the fund’s assets, the value of the total asset of
the fund when divided by the total number of units issued by the mutual fund gives us the
value of one unit. This is called as Net Asset Value (NAV). Each shareholder participates
proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can
typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per
share, which is sometimes expressed as NAVPS.
NET ASSET VALUE (NAV)
The net asset value (NAV) of a mutual fund indicates the price at which the units of that mutual
fund are bought or sold. It represents the fund's market value after subtracting the liabilities.
The NAV per unit is derived after dividing the net asset value of the fund by the total number of
its outstanding units.
The formula for calculating NAV:
Assets of the fund – Liabilities of the fund
NAV of a Mutual Fund =
(Net Asset Value) Number of the Outstanding Units of the fund
NAV is an indicator of the market value of the fund's units. Hence, it helps track the
performance of the mutual fund you have invested in. The percentage increase in your fund's
NAV over time is the actual increase in the value of your investment. Therefore, an investor can
gain accurate information about his investment by studying the NAV movements of a fund over
a period of time.
Many investors assume that putting money in mutual funds with a lower NAV may offer them
better returns compared to a mutual fund with a higher NAV. However, this is a misconception
and often leads investors to invest in under performing mutual funds. Low NAV of a mutual
fund may suggest that the fund was either floated recently or the fund has poor performance
and return history.
Therefore, low or high, NAV does not impact the return on investment from the mutual fund.
NAV VS PRICE OF AN EQUITY SHARE
In case of companies, the price of its share is 'as quoted on the stock exchange,' which apart
from the fundamentals, is also dependent on the perception of the company's future
performance and the demand-supply scenario. And hence the market price is generally
different from its book value.
There is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV,
we are buying at book value. And since we are buying at book value, we are paying the right
price of the assets whether be it Rs 10 or Rs 100.
There is no such thing as a higher or lower price.
NAV AND ITS IMPACT ON THE RETURNS
We feel that a MF with lower NAV will give better returns. This again is due to the wrong
perception about NAV. An example will make it clear that returns are independent of the NAV.
Say, you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as
the portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV
of Rs 50. You will get 1000 units of Fund X or 200 units of Fund Y. After one year, both funds
would have grown equally as their portfolio is same, say by 25%. Then NAV after one year
would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment would be
1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns
would be same irrespective of the NAV.
It is quality of fund, which would make a difference to your returns. In fact for equity shares
also broadly this logic would apply.
ASSETS UNDER MANAGEMENT (AUM)
Assets Under Management is the market value of assets that an investment company manages
on behalf of investors. Assets Under Management (AUM) is looked at as a measure of success
against the competition and consists of growth/decline due to both capital appreciation/losses
and new money inflow/outflow.
A mutual fund's assets under management (AUM), can be useful to an investor because larger
AUM can make a mutual fund more difficult and cumbersome to manage, which can drag fund
performance.
Figure: Assets Under Management as on 30th June 2014(Type and Category Wise)
ROLE OF A FUND MANAGER
Fund managers constantly monitor market and economic trends and analyse securities in order
to make informed investment decisions.
They play a vital role in implementing a consistent investment strategy that is in synergy with
the goals and objectives of the fund.
HISTORY OF MUTUAL FUND
Development of Mutual Funds in India
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 of India. The history of mutual funds
in India can be broadly divided into four distinct phases
First Phase (1964 - 1987)
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
crores 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
crores.
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 crores.
The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of
other mutual funds.
Fourth 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 crores as at the end of January 2003, representing broadly, the assets of US (Unit
Scheme) 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.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with
SEBI and functions under the Mutual Fund Regulations.
With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores
of assets under management and with the setting up of a UTI Mutual Fund, conforming to the
SEBI Mutual Fund Regulations, and with recent mergers taking place among different private
sector funds, the mutual fund industry has entered its current phase of consolidation and
growth.
As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108
crores under 421 schemes.
THE GRAPH INDICATES THE GROWTH OF ASSETS OVER THE YEARS.
Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust
of India effective from February 2003. The Assets under management of the Specified Undertaking of the
Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from
February 2003 onwards.
MUTUAL FUND HOUSES/ ASSET MANAGEMENT COMPANIES IN INDIA
Sr. No. Name of Mutual Fund / Asset Management
Company
Website of the AMC
1 Axis Asset Management Company Ltd. www.axismf.com
2 Baroda Pioneer Asset Management Company
Ltd
www.barodapioneer.in
3 Birla Sun Life Asset Management Company Ltd www.birlasunlife.com
4 BNP Paribas Asset Management India Pvt. Ltd www.bnpparibasmf.in
5 BOI AXA Investment Managers Pvt. Ltd www.boiaxa-im.com
6 Canara Robeco Asset Management Company
Ltd
www.canararobeco.com
7 Daiwa Asset Management (India) Pvt. Ltd www.daiwafunds.in
8 Deutsche Asset Management (India) Pvt. Ltd. www.dws-india.com
9 DSP Black Rock Investment Managers Pvt. Ltd. www.dspblackrock.com
10 Edelweiss Asset Management Ltd www.edelweissmf.com
11 Escorts Asset Management Ltd www.escortsmutual.com
12 FIL Fund Management Pvt. Ltd www.fidelity.co.in
13 Franklin Templeton Asset Management (India)
Pvt. Ltd.
www.franklintempletonindia.com
14 Goldman Sachs Asset Management (India) Pvt.
Ltd.
www.gsam.in
15 HDFC Asset Management Company Ltd www.hdfcfund.com
16 HSBC Asset Management (India) Pvt. Ltd. www.assetmanagement.hsbc.com/i
n
17 ICICI Prudential Asset Management Company
Ltd
www.icicipruamc.com
18 IDBI Asset Management Ltd. www.idbimutual.co.in
19 IDFC Asset Management Company Ltd www.idfcmf.com
20 India Infoline Asset Management Co. Ltd. www.iiflmf.com
21 India Bulls Asset Management Company Ltd. www.indiabullsmf.com
22 ING Investment Management (India) Pvt. Ltd. www.ingim.co.in
23 JM Financial Asset Management Pvt. Limited www.jmfinancialmf.com
24 JPMorgan Asset Management India Pvt. Ltd. www.jpmorganmf.com
25 Kotak Mahindra Asset Management Co. Ltd. www.kotakmutual.com
26 L&T Investment Management Ltd. www.lntmf.com
27 LIC NOMURA Mutual Fund Asset Management
Company Ltd.
www.licnomuramf.com
28 Mirae Asset Global Investments (India) Pvt. Ltd. www.miraeassetmf.co.in
29 Morgan Stanley Investment Management Pvt.
Ltd.
www.morganstanley.com/indiamf
30 Motilal Oswal Asset Management Company Ltd. www.motilaloswal.com/assetmanag
ement/
31 Peerless Funds Management Co. Ltd. www.peerlessmf.co.in
32 Pine Bridge Investments Asset Management
Company (India) Pvt. Ltd.
www.aiginvestments.co.in
33 Pramerica Asset Managers Private Ltd www.pramericamf.com
34 Principal PNB Asset Management Co. Pvt. Ltd. www.principalindia.com
35 Quantum Asset Management Company Pvt. Ltd. www.QuantumAMC.com
36 Reliance Capital Asset Management Ltd. www.reliancemutual.com
37 Religare Asset Management Company Pvt. Ltd. www.religaremf.com
38 Sahara Asset Management Company Pvt. Ltd www.saharamutual.com
39 SBI Funds Management Pvt. Ltd. www.sbimf.com
40 Sundaram Asset Management Company Ltd www.sundarammutual.com
41 Tata Asset Management Ltd www.tatamutualfund.com
42 Taurus Asset Management Company Ltd www.taurusmutualfund.com
43 Union KBC Asset Management Company Pvt.
Ltd
www.unionkbc.com
44 UTI Asset Management Company Ltd www.utimf.com
TYPES OF MUTUAL FUND
There exist various mutual fund schemes to cater to the needs such as financial position, risk
tolerance and return expectations etc.
The content below gives an overview of the existing types of mutual fund schemes in the
industry.
MUTUAL FUNDS
BY STRUCTURE
OPEN - ENDED SCHEMES CLOSED - ENDED SCHEMES
INTERVAL SCHEMES
BY INVESTMENT OBJECTIVE
GROWTH SCHEMES INCOME SCHEMES
BALANCED SCHEMES MONEY MARKET SCHEMES
OTHERS
SECTOR SPECIFIC SCHEMES TAX SAVING SCHEMES
SPECIAL SCHEMES INDEX SCHEMES
By Structure
Open-Ended Schemes
Open-ended schemes are mutual funds that can issue and redeem their shares at any time.
Open-ended funds do not have restriction on the amount of shares the fund will issue. They
offer units for sale without specifying any duration for redemption. If demand is high enough,
the fund will continue to issue shares, no matter how many investors are there. Open-ended
funds also buy back shares when investors wish to sell. Investors can conveniently buy and sell
units of open-ended funds directly from the fund house at the prevalent Net Asset Value (NAV)
prices. One of the key features of open-end schemes is the liquidity that these funds offer to
investors.
Close-Ended Schemes
Close-ended schemes are mutual funds with a fixed number of shares (or units). Unlike open-
ended funds, new shares/units are not created by managers to meet demand from investors
but the shares can only be purchased (and sold) in the secondary market.
Close-ended funds raise a fixed amount of capital through a New Fund Offer (NFO). The fund is
then structured, listed and traded like a stock, on a stock exchange. The price per share is
determined by the market and is usually different from the underlying value or net asset value
(NAV) per share of the investments held by the fund. The price is said to be at a discount or
premium to the NAV when it is below or above the NAV, respectively. A premium might be due
to the market's confidence in the investment manager’s ability to produce above-market
returns. A discount might reflect the charges to be deducted from the fund in future by the
fund managers. Some close-ended funds give an option of selling back the units to the mutual
fund through periodic repurchase at NAV related prices. SEBI regulations stipulate that at least
one of the two exit routes is provided to the investor, that is, either repurchase facility or
through listing on stock exchanges. These mutual funds schemes disclose NAV generally on
weekly basis.
Interval Schemes
Interval schemes are those that combine the features of both open-ended and close-ended
schemes.
The units may be traded on the stock exchange or may be open for sale or redemption during
pre-determined intervals at NAV-related prices.
By Investment objective:
Growth or Equity-Oriented Schemes
The aim of growth funds is to provide capital appreciation over medium to long- term. These
schemes normally invest a major part of their portfolio in equities and have comparatively high
risks. They provide different options to the investors like dividend option, capital appreciation,
etc. and investors may choose one depending on their preferences. The mutual funds also allow
the investors to change the options at a later date. Growth schemes are good for investors
having a long-term outlook seeking appreciation over a period of time.
It can be further classified into following depending upon objective:
Large-Cap Funds: These funds invest in companies from different sectors. However, they
put a restriction in terms of the market capitalization of a company, i.e., they invest
largely in BSE 100 and BSE 200 Stocks.
Mid-Cap Funds: These funds invest in companies from different sectors. However, they
put a restriction in terms of the market capitalization of a company, i.e., they invest
largely in BSE Mid Cap Stocks.
Sector Specific Funds: These are schemes that invest in a particular sector, for example,
IT.
Thematic: These schemes invest in various sectors but restrict themselves to a particular
theme e.g., services, exports, consumerism, infrastructure etc.
Diversified Equity Funds: All non-theme and non-sector funds can be classified as equity
diversified funds.
Tax Savings Funds (ELSS): Investments in these funds are exempt from income tax at the
time of investment, upto a limit of Rs 1 lakh.
Income or Debt oriented Schemes
The aim of income funds is to provide regular and steady income to investors. These schemes
generally invest in fixed-income securities such as bonds, corporate debentures, Government
Securities and money-market instruments and are less risky compared to equity schemes.
However, opportunities of capital appreciation are limited in such funds. The NAVs of such
funds are impacted because of change in interest rates in the economy. If the interest rates fall,
NAVs of such funds are likely to increase in the short run and vice versa. However, long-term
investors do not bother about these fluctuations.
Balanced Schemes
The aim of the balanced funds is to provide both growth and regular income as such schemes
invest both in equities and fixed income instruments in the proportion indicated in their offer
documents. These are appropriate for investors looking for moderate growth. They generally
invest between 65% and 75% in equity and the rest in debt instruments. They are impacted
because of fluctuation in stock markets but NAVs of such funds are less volatile compared to
pure equity funds.
Money Market or Liquid Funds
These funds are also income funds and their aim is to provide easy liquidity, preservation of
capital and moderate income. These schemes invest exclusively in safer short-term instruments
such as Treasury Bills, Certificates of Deposits, Commercial Paper and inter-bank call money,
Government Securities, etc. Returns of these schemes fluctuate much less than other funds.
These are appropriate for investors as a means of short-term investments.
Gilt Funds
These funds invest exclusively in Government Securities. NAVs of these schemes also fluctuate
due to change in interest rates and other economic factors as is the case with income or debt-
oriented schemes.
Fund of Funds Schemes
Fund of Funds invests in other mutual fund schemes. A traditional mutual fund comprises a
portfolio of shares, but a Fund of Funds comprises a portfolio of different mutual fund schemes.
A Fund of Funds helps the investor to reduce his chances of selecting the wrong mutual fund.
Gold Exchange Traded Funds
It is an open-ended Exchange Traded Fund. The investment objective of the scheme is to
generate returns that are in line with the returns on investment in physical gold, subject to
tracking error.
Floating Rate Funds
These are open-ended income schemes seeking to generate reasonable returns with
commensurate risk from a portfolio which comprises floating rate debt instruments and fixed
rate debt instruments swapped for floating rate returns. The scheme may also invest in fixed
rate money market and debt instruments
Other schemes:
Tax-saving schemes
These schemes offer tax rebates to the investors under specific provisions of the Income Tax
Act, 1961 as the Government offers tax incentives for investment in specified avenues like
Equity Linked Savings Schemes (ELSS). ELSS is a type of diversified equity mutual fund, which is
qualified for tax exemption under Section 80C of the Income Tax Act, and offers the twin-
advantage of capital appreciation and tax benefits. It comes with a lock-in period of three
years.
The Rajiv Gandhi Equity Savings scheme (RGESS), which was revised in the Union Budget 2013-
14, would provide a 50% tax deduction on investments up to Rs. 50,000 to first time investors
in equity whose annual taxable income is below Rs. 12 lakh.
Index Schemes
Index funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE
50 index (Nifty), etc. NAVs of such schemes would rise or fall in accordance with the rise or fall
in the index, though not exactly by the same percentage due to some factors known as
"tracking error". Necessary disclosures in this regard are made in the offer document of the
scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on
the stock exchanges.
Sector Specific Schemes
These are the funds which invest in the securities of only those sectors or industries as specified
in the offer documents like Pharmaceuticals, Software, FMCG, Petroleum stocks etc. The
returns of these funds are dependent on the performance of the respective sectors. While
these funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and must exit at
an appropriate time.
Load Funds
A load fund is one that charges a percentage of NAV for exit. That is, each time one sells units in
the fund, a charge will be payable. This charge is used by the Mutual fund for marketing and
distribution expenses.
No Load Funds
A no-load fund is one that does not charge for exit. It means the investors can exit the fund at
no additional charges during sale of units. In accordance with the SEBI circular no. SEBI/IMD/CIR
No.4/168230/09 dated June 30, 2009, no entry load will be charged for purchase / additional
purchase / switch-in accepted by the fund with effect from August 1, 2009.
Similarly, no entry load will be charged with respect to applications for registrations under
Systematic Investment Plan/ Systematic Transfer Plan / Systematic Investment Plan Plus
accepted by the fund with effect from August 1, 2009.
Dividend Payout Schemes
Mutual Fund companies as when they keep on making profit, distribute a part of the money to
the investors by way of dividends. If the investor wants to keep on taking part of the profit
regularly, he may select this option.
Dividend Reinvestment Schemes
This option is similar to the first option except that the dividend declared is re-invested in the
same fund on the same day’s NAV.
IMPORTANT CHARACTERISTICS OF MUTUAL FUND
• The ownership is in the hands of the investors who have pooled in their funds.
• It is managed by a team of investment professionals and other service providers.
• The pool of funds is invested in a portfolio of marketable investments.
• The investors share is denominated by ‘units’ whose value is called as Net Asset Value
(NAV) which changes every day.
• The investment portfolio is created according to the stated investment objectives of the
fund.
ORGANISATIONAL STRUCTURE OF MUTUAL FUND
Sponsor
Sponsor is the person who either alone or in association with another corporate body,
establishes a mutual fund. The sponsor must contribute at least 40% of the net worth of the
investment managed and meet the eligibility criteria prescribed under the Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996.The sponsor is not responsible or
liable for 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 Indian Trusts
Act, 1882 by the sponsor. The trust deed is registered under the Indian Registration Act, 1908.
UNIT HOLDERS
SEBI
SPONSORS
TRUSTEES AMC
THE MUTUAL FUND TRANSFER AGENT
CUSTODIAN
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 inter
alias ensure that the AMC functions in the interest of investors and in accordance with the
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the
trust deed and the offer documents of the respective schemes. At least 2/3rd of the directors of
the Trustee are independent directors who are not associated with the sponsor in any manner.
Asset Management Company (AMC)
The trustee, as the investment manager of the mutual fund, appoints the AMC. 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 Rs. 10 crore at all times.
Custodian
A trust company, bank or similar financial institution, registered with SEBI is responsible for
holding and safeguarding the securities owned within a mutual fund. A mutual fund’s custodian
may also act as its transfer agent.
Registrar and Transfer Agent
The AMC, if so authorized by the trust deed, appoints the registrar and transfer agent to the
mutual fund. The registrar processes the application form, redemption requests and dispatches
account statements to the unit holders. The registrar and transfer agent also handles
communication with investors and updates investor records.
REGULATORY AUTHORITY OF MUTUAL FUNDS IN INDIA
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds in India.
To protect the interest of 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.
Mutual funds, either promoted by public or by private sector entities including one promoted
by foreign entities, are governed by these regulations.
MANAGEMENT OF MUTUAL FUNDS
The company that puts together a mutual fund is called an AMC. An AMC may have several
mutual fund schemes with similar or varied investment objectives. The AMC hires a
professional money manager, who buys and sells securities in line with the fund's stated
objective
MUTUAL FUND – HOW IT WORKS
Mutual funds raise money by selling shares of the fund to the public, much like any other type
of company can sell stock in itself to the public. Mutual funds then take the money they receive
from the sale of their shares (along with any money made from previous investments) and use
it to purchase various investment vehicles, such as stocks, bonds and money market
instruments. In return for the money they give to the fund when purchasing shares,
shareholders receive an equity position in the fund and, in effect, in each of its underlying
securities. For most mutual funds, shareholders are free to sell their shares at any time,
although the price of a share in a mutual fund will fluctuate daily, depending upon the
performance of the securities held by the fund.
Benefits of mutual funds include diversification and professional money management. Mutual
funds offer choice, liquidity, and convenience, but charge fees and often require a minimum
investment.
TYPES OF RETURN IN MUTUAL FUND
Following are the ways by which returns can be realized in a mutual fund:
Dividends
Unit holders earn dividends on mutual funds. These dividends are distributed from the income
generated through dividends on stocks and interest on other instruments.
Capital Gains
Investors get capital gains on mutual funds. If the fund sells securities that have appreciated in
value, it earns capital gains. Most funds distribute these capital gains also to investors.
Profit from higher NAV
Any increase in value of fund’s asset increases the NAV of the fund. Investors can make profit
by selling back their units to fund house.
ADVANTAGES AND DISADVANTAGES OF MUTUAL FUNDS
ADVANTAGES:
Professional Management
Mutual funds employ experienced and skilled professionals who make investment research and
analyze the performance and prospects of various instruments before selecting a particular
investment. Thus, by investing in mutual funds, one can avail the services of professional fund
managers, which would otherwise be costly for an individual investor.
Diversification
Diversification involves holding a wide variety of investments in a portfolio so as to mitigate
risks. Mutual funds usually spread investments across various industries and asset classes,
constrained only by the stated investment objective. Thus, by investing in mutual funds, one
can avail the benefits of diversification and asset allocation without investing a large amount of
money that would be required to create an individual portfolio.
Liquidity
In an open-ended scheme, unit holders can redeem their units from the fund house anytime.
Even with close-ended schemes, one can sell the units on a stock exchange at the prevailing
market price. Besides, some close-ended and interval schemes allow direct repurchase of units
at NAV related prices from time to time. Thus investors do not have to worry about finding
buyers for their investments.
Flexibility
Mutual funds offer a variety of plans, such as regular investment, regular withdrawal and
dividend reinvestment plans. Depending upon one’s preferences and convenience, one can
invest or withdraw funds, accordingly.
Cost Effective
Since Mutual funds have a number of investors, the fund’s transaction costs, commissions and
other fees get reduced to a considerable extent. Thus, owing to the benefits of larger scale,
mutual funds are comparatively less expensive than direct investment in the capital markets.
Well Regulated
Mutual funds in India are regulated and monitored by the Securities and Exchange Board of
India (SEBI), which strives to protect the interests of investors. Mutual funds are required to
provide investors with regular information about their investments, in addition to other
disclosures like specific investments made by the scheme and the proportion of investment in
each asset classes.
Convenient Administration
The facility of making investments through service centers as well as through internet ensures
convenience.
Return Potential
By allocating right asset mix, mutual funds offer a chance of higher potential of returns. The
high concentration of risky assets would lead to higher return and vice-versa.
Transparency
Information available through fact sheets, offer documents, annual reports and promotional
materials help investors gather knowledge about their investments.
Choice of Schemes
The investors can chose from various kinds of scheme available to them. The risk-seeker
investors can go for more aggressive schemes while risk-averse investors can go for income
schemes funds and so on.
Tax benefits
To encourage investments, Government of India offers investors a spate of tax benefits from
mutual funds held beyond a year. Some of these benefits are no tax is to be paid for
redemption of units of an equity scheme held for over a year, no tax is to be paid on dividends
in case of Equity Oriented Schemes.
DISADVANTAGES
Costs
Mutual funds provide investors with professional management; however, it comes at a cost.
Funds will typically have a range of different fees that reduce the overall payout. In mutual
funds, the fees are classified into two categories: shareholder fees and annual fund-operating
fees. The shareholder fees, in the form of loads and redemption charges, are paid directly by
shareholders while purchasing or selling the funds. The annual fund operating fees are charged
as an annual percentage - usually ranging from 1-3%. These fees are paid by mutual fund
investors, regardless of the performance of the fund. As one can imagine, in years when the
fund doesn't make money, these fees only magnify losses.
Inefficiency of Cash Reserves
Mutual funds usually maintain large cash reserves as protection against a large number of
simultaneous withdrawals. Although this provides investors with liquidity, it means that some
of the fund’s money is invested in cash instead of assets, which tends to lower the investors’
potential return.
Diversification
Although diversification is one of the keys to successful investing, many mutual fund investors
tend to over diversify. The idea of diversification is to reduce the risks associated with holding a
single security. Over diversification occurs when investors buy many funds that are highly
related and so don't get the benefits of diversification.
Dilution
Diversification reduces the amount of risk involved in investing in mutual funds but it can also
be disadvantageous due to dilution. For example, if a single security held by a mutual fund
doubles in value, the mutual fund itself would not double in value because that security is only
one small part of the fund’s holdings. By holding a large number of different investments,
mutual funds tend to do neither exceptionally well nor very poorly either.
Trading Limitations
Although mutual funds are highly liquid in general, most mutual funds (called open-ended
funds) cannot be bought or sold in the middle of the trading day. One can only buy and sell
them at the end of the day.
RISK MANAGEMENT OF MUTUAL FUNDS
How do mutual funds diversify their risks?
An investor can reduce his total risk by holding a portfolio of assets instead of only one asset.
This is because by holding all your money in just one asset, the entire fortunes of your portfolio
depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially
reduced. Mutual Funds minimize or diversify the risk by distributing our investments among
various financial instruments, industries and other categories.
Here the intent is to maximize returns by investing in different areas, where each would react
differently to the same event. This not only buffers the impact of a market downturn, but also
allows for more potential rewards by offering a broader exposure to various stocks and sectors.
Can mutual funds be viewed as risk-free investments?
No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains
the same risk as investing in the markets, the only difference being that due to professional
management of funds the controllable risks are substantially reduced.
What are the risks involved in investing in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When the market
is in doldrums, most of the equity funds will also experience a downturn. However, the
company specific risks are largely eliminated due to professional fund management.
How is investment in a mutual fund different from a bank deposit? When you deposit money with the bank, the bank promises to pay you a certain rate of interest for the period you specify. On the date of maturity, the bank is supposed to return the principal amount and interest to you. Whereas, in a mutual fund, the fund manager invests your money as per the investment strategy specified for the scheme. The profit, if any, minus manager expense, is reflected in the NAV or distributed as income. Similarly, loss, if any, with the expenses, is to be borne by you.
INTRODUCTION TO FIXED DEPOSIT (FD)
A fixed deposit (FD) is a financial instrument provided by banks which provides investors with a
higher rate of interest than a regular savings account, until the given maturity date. It may or
may not require the creation of a separate account. The defining criteria for a fixed deposit, is
that the money cannot be withdrawn for the FD as compared to a recurring deposit or a
demand deposit before maturity. Some banks may offer additional services to FD holders such
as loans against FD certificates at competitive interest rates.
In deposit terminology, the term Fixed Deposit refers to a savings account or certificate of
deposit that pays a fixed rate of interest until a given maturity date. Funds placed in a Fixed
Deposit usually cannot be withdrawn prior to maturity or they can perhaps only be withdrawn
with advanced notice and/or by having a penalty assessed. For example, a Fixed Deposit will
often be used by individuals, businesses and financial institutions around the world as a means
of storing their liquid funds for a fixed period of time for future use. In the retail market, Fixed
Deposits are relatively safe investments when provided by insured financial institutions such as
banks, savings and loan corporations and credit unions that are duly regulated within the
country in which they operate.
With FDs we deposit a lump sum of money for a fixed period ranging from a few weeks to a few
years and earn a pre-determined rate of interest. The rate of interest paid for fixed deposit vary
(changes) according to amount, period and from bank to bank.
FDs are offered by both banks and companies though putting our money with the company FD
is generally considered riskier.
FEATURES OF FIXED DEPOSIT
The main features of fixed deposit are as follows:-
1. The main purpose of fixed deposit account is to enable the individuals to earn a higher
rate of interest on their surplus funds (extra money).
2. The amount can be deposited only once. For further such deposits, separate accounts
need to be opened.
3. The period of fixed deposits range between 15 days to 10 years.
4. A high interest rate is paid on fixed deposits. The rate of interest may vary as per
amount, period and from bank to bank.
5. Withdrawals are not allowed. However, in case of emergency, banks allow to close the
fixed account prior to maturity date. In such cases, the bank deducts 1% (deduction
percentage many vary) from the interest payable as on that date.
6. The depositor is given a fixed deposit receipt, which depositor has to produce at the
time of maturity. The deposit can be renewed for a further period.
COMPANY FIXED DEPOSITS
Corporate/Company Fixed Deposits are one of the many money raising tools for the companies.
Under these, Companies raise money from the public and offer them a Fixed rate of interest for
different tenures. The amount of money which can be raised is decided by the Approving
authorities. In other words, Company Fixed Deposit is the deposit placed by investors with
companies for a fixed term carrying a prescribed rate of interest
How are interest payments made in case of Company FDs?
Interest is paid on monthly/quarterly/half yearly/yearly or on maturity basis and is sent either
through cheque or ECS facility. This depends from company to company which are accepting
Deposits.
What can be the Period (Tenure) of Investment?
The Investment in FDs may be made for a period of 1 year or 2 years or 3 years or may be even
more. Some companies accept deposits for 6 months also. Again, the period depends on the
Companies accepting deposits.
COMPANIES THAT CAN OFFER DEPOSITS:
Companies registered under Companies Act 1956, such as
» Manufacturing Companies
» Non-Banking Finance Companies
» Housing Finance Companies
» Financial Institutions
» Government Companies
LIMITS OF ACCEPTING A DEPOSIT BY A COMPANY
A Non-Banking Non-Finance Company (Manufacturing Company) can accept deposit subject
to following limits.
Upto 10% of aggregate of paid-up share capital and free reserves if the deposits are
from shareholders or guaranteed by directors.
Otherwise upto 25% of aggregate of paid-up share capital and free reserves.
A Non-Banking Finance Company can accept deposits upto following limits:
Equipment Leasing Company can accept four times of its net owned fund.
Loan or Investment Company can accept deposit upto one and half time of its net
owned funds.
COMPANY OFFERING FIXED DEPOSITS
• Dewan Housing Finance Ltd. (DHFL)
• Exim Bank
• Gruh Finance (Individuals/Trust)
• Housing Development Finance Corporation Ltd. (HDFC)
• Kerala Transport Development Finance Corporation Limited
• LIC Housing Finance
• Mahindra Finance Ltd
• Shriram Transport Finance Ltd
• SIDBI (Individuals & Huf) (Trust)
• Sundaram Home Finance (Regular)
• Hudco (Individuals/Trust)
• National Housing Bank (Sunidhi)
• NHB SUVRIDDHI (Tax Saving)
• PNB Housing
• PNB Housing (PNB Silver Jubilee Deposit Scheme)
BENEFITS AND DRAWBACKS OF FIXED DEPOSITS
BENEFITS:
Safety
The fixed deposits of reputed banks and financial institutions regulated by RBI (Reserve Bank of India), the banking regulator in India are very secure and considered as one of the safest investment methods.
Regular Income
Fixed deposits earn fixed interest rates for their entire tenure, which is usually compounded quarterly. So, those who want an income on a regular basis can invest into fixed deposits and use the interest rate as their income. This makes a fixed deposit very popular way of investing money for retirees.
Saves tax
With the directives of the income tax department stating that investment in fixed deposits up to a maximum of Rs.100,000 for 5 years are eligible for tax deductions under section 80 C of income tax act, fixed deposits have again become popular. Fixed deposits save tax and give high returns on invested money.
Convenience
This is pretty high with bank deposits. The investments can start from very low amounts (Rs 100 in most cases). There are no upper limits for investment. However, investments above Rs 50,000 will require your PAN card. Fixed deposits can also be linked to savings accounts of banks in the form of a sweep-in-deposit. This gives the benefit of higher rate of return (when money is in excess) and flexibility to use the money when required.
DRAWBACKS:
Lower rate of returns
The money grows slowly in the case of fixed deposits.
Taxes
The interest earned on fixed deposits is fully taxable and is added to the annual income of the individual. Gains from stocks are considered capital gains while dividends are tax free.
Rising inflation can wipe out the interest benefits
The actual benefits or income from fixed deposit can be annulled by a rising inflation. Suppose the inflation which is currently at 3 % rises to about 6%, your fixed deposit at 10% annual return will effectively yield only(10%-6%) = 4% of return. This return would have been (10% -3%) = 7% if the rate of inflation had not changed. This can drastically eat into your fixed deposit income.
Fixed interest rate
Since the interest rate is fixed for the duration of the term, investors wouldn't be able to take
advantage of any cash rate increases.
COMPARISON OF MUTUAL FUNDS AND FIXED DEPOSITS
Comparison between mutual funds and fixed deposits is a long debate, especially when it
comes to a comparison between fixed deposits and debt mutual funds. For years now, a risk
averse investor has considered fixed deposits as the safest bet. But with more mutual fund
houses floating pure debt funds, which guarantee a fixed income and assure better returns, a
conservative investor now has more choices to consider.
A fixed deposit is a secure investment option floated by banks and financial institutions. It
offers a predetermined rate of interest over a fixed time period. A debt mutual fund is a
professionally managed fund, which invests money in government securities, bonds, money
market instruments and corporate deposits. They include a small percentage of equity
investment of around 10% in their portfolio to give investors capital appreciation. Hence, debt
funds are associated with little or limited investor risk.
While choosing between capital appreciations and guaranteed returns it pays to compare the
following key features of the two products.
RETURN ON INVESTMENT
Fixed Deposits: Banks offer an assured fixed rate of return on maturity. Currently the rate of
return varies from 3.5% to 8.5% depending on the maturity period. Interest is compounded
quarterly and the proceeds are paid on maturity.
Mutual Fund: The rate of return of a mutual fund is not assured and is governed by movement
in interest rates and money market conditions. Any fluctuations in prices or interest rate impact
the NAV of the fund.
LIQUIDITY
Fixed Deposit: Most banks allow premature withdrawal of the amount invested, before the
actual maturity date. The interest would be calculated on the basis of the number of days the
amount stayed invested with the bank. For larger amounts, banks have surrender charges or
penalties. In such cases, money would not be made available without penalties or until the
fixed deposit matures.
Mutual Funds: Liquidity is similar to individual stocks or equity mutual funds which allow
investors to liquidate their units in the market as and when they require. On redemption, one
can expect to receive the amount in a day or two from the fund house. The amount received
would be based on the Net Asset Value (NAV) of the fund as on the date of redemption.
TAX IMPLICATIONS
From the tax angle, in the long run, a mutual fund seems more friendly than a fixed deposit.
Fixed Deposits: The interest earned on fixed deposits is added to the total income, and then
taxed at applicable slabs. Also, if the total interest earned on all fixed deposits in a bank is
greater than Rs 10,000 in a financial year, a tax of 10.3% will be deducted at source by the
banks.
Mutual Funds: The short term capital gain of a mutual fund is added to the income and then
taxed at applicable slabs. For long term capital gain tax, it is calculated as 10% without
indexation or 20% with indexation.
Dividends received on a mutual fund are tax free in the hands of the investor. However, a
Dividend Distribution Tax of 25% is to be paid by the Asset Management Company (AMC).
Though this tax is not paid by the investor, the burden of this is eventually passed on to the
investor by the AMC, by declaring lower dividends.
CAPITAL APPRECIATION
Here is where a mutual fund scores over a fixed deposit. The equity investment in a mutual
fund provides an edge over a traditional fixed deposit. In the long run, changes in market
condition increase in interest rates and with the professionalism of fund managers, mutual
funds manage to provide investors a better capital appreciation.
RISK FACTOR
A fixed deposit assures the investor capital protection unlike a mutual fund. With volatility in
the market, the value of a mutual fund may be eroded, resulting in low or sometimes even
negative returns. Thus an investor may not receive the expected returns on redemption. Risk
also arises from the credit rating or quality of the invested instruments.
IMPACT OF INFLATION
A fixed deposit doesn't offer protection against inflation. If the inflation rises steeply during the
tenure of a fixed deposit, the inflation adjusted return could be low or even negative. For
positive returns, the interest rate of a fixed deposit should be much higher than the core
inflation rate of the country. Mutual funds have managed to generate returns that have
surpassed this inflation rate thus providing positive real returns.
INVESTMENT COSTS
Banks do not generally charge any management costs for a fixed deposit investment. Investing
in mutual funds cost the investor investment management fees and fund distribution costs,
charged as a percentage of the investment value. This is borne by the investor irrespective of
the fund performance. Fund houses also charge an entry or exit load from investors during
entry or exit from a scheme.
COMPARISON OF MUTUAL FUNDS AND FIXED DEPOSITS
PARAMETER MUTUAL FUNDS FIXED DEPOSITS
RETURNS BETTER LOW
RISK MODERATE LOW
ADMINISTRATIVE EXPENSES LOW HIGH
INVESTMENT OPTIONS MORE LESS
LIQUIDITY BETTER AT A COST
QUALITY OF ASSETS TRANSPARENT NOT TRANSPARENT
ARE FIXED DEPOSITS LUCRATIVE THAN MUTUAL FUNDS?
No, the returns of mutual funds are anytime better than fixed deposits. The bank usually offers
the lowest possible rates on their deposits, in order to increase their gross spread. The actual
difference between the rate at which banks offer loans to borrowers and rate at which they
raise deposit is generally 4-5%. However, the fee is lower for mutual funds, it ranges between
1.0 – 1.5%. The SEBI is always present to regulate mutual funds to make sure they charge
nominal fees.
BEAR AND BULL MARKET
The terms bull market and bear market describe upward and downward market trends, respectively, and can be used to describe either the market as a whole or specific sectors and securities.
Bull Market A bull market is when the market appears to be in a long-term climb. Bull markets tend to develop when the economy is strong, the unemployment rate is low, and inflation is under control. The emotional and psychological state of investors also affects the market. For example, if investors have faith that the upward trend in stock prices will continue, they are likely to buy more stocks. If there are more buyers interested in buying shares at a given price than there are sellers who are willing to part with their shares at that price, stock prices will continue to rise. Examples India's Bombay Stock Exchange Index, SENSEX, was in a bull market trend for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Notable bull markets marked the 1925-1929, 1953–1957 and the 1993-1997 periods when the U.S. and many other stock markets rose; while the first period ended abruptly with the start of the Great Depression the end of the later time periods were mostly periods of soft landing, which became large bear markets. Bear Market A bear market describes a market that appears to be in a long-term decline. Bear markets tend to develop when the economy enters a recession, unemployment is high, and inflation is rising. Investors lose faith in the market as a whole, which in turn decreases the demand for stocks. Keep in mind that a sustained bear market is something that you should expect to occur from time to time, and that, in the past, the stock market has risen more than it has declined. Examples A bear market followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of the Dow Jones Industrial Average's market capitalization by July 1932, marking the start of the Great Depression. After regaining nearly 50% of its losses, a longer bear market from 1937 to 1942 occurred in which the market was again cut in half. Another long-term bear market occurred from about 1973 to 1982, encompassing the 1970s energy crisis and the high unemployment of the early 1980s. Yet another bear market occurred between March 2000 and October 2002. The most recent examples occurred between October 2007 and March 2009, as a result of the financial crisis of 2007–08.
COMPARING MUTUAL FUND RETURNS WITH FIXED DEPOSIT RETURNS IN BULL AND BEAR MARKETS When it comes to mutual funds or equity investing, various perceptions are usually at play in the minds of the investors. Share markets are speculative. They can give good returns, but the investor can also lose a lot of money. As such, most investors in India prefer the safety of fixed deposits, which guarantees capital protection along with assured returns. While it is true that equities oriented mutual funds are riskier than fixed deposits, equity market professionals argue that equities provide much higher returns than fixed deposits in the long term. But many investors are still not impressed with that argument. Here, we will objectively look at returns given by mutual funds and fixed deposits, over the last 10 year period across different market cycles, both bull markets and bear markets. In the last 10 years we have gone through a long bull market from 2002 to 2007, recently again over the past year or so, and intermittent periods in between. However, during this period we also went through one of the worst recessions in 2008 and then again in 2011. By analyzing returns across both bull and bear market cycles we can evaluate the risk return trade off for mutual funds versus fixed deposits. It is important to note here that mutual funds are essentially long term investments. For our analysis, we have assumed that the investment time horizon in mutual funds is 5 years. We will examine the returns given by mutual funds over 5 years versus fixed deposit returns, for the period from 2002 to 2013 which included both bull and bear market periods. For our equity investment, we have taken an average large cap equity fund. For our fixed deposits, we have taken the average interest rates offered by different banks over the last 10 years. The chart below shows the average category returns for large cap funds since 2002.
As per the chart, above if an investor invested Rs 10,000 in an average large cap fund at the end of 2001 and redeemed his units after 5 years at the end of 2006, his investment would have grown to Rs 43,788. Similarly, if the investor invested Rs 10,000 in a large cap fund at the end of 2002 and redeemed his units after 5 years at the end of 2007, his investment would have grown to Rs 59,484. Long term capital gains in equity funds are tax exempt. Therefore the investor would not have to pay any tax on his returns. Now let us look at the average fixed deposit interest rates over the last 10 year period. The 1 to 3 year term rate is usually the highest fixed deposit rate. The rates for longer terms, e.g. 3 to 5 years and above are usually lower.
For the fixed deposit investment, we have assumed that the investor does a term deposit of 1 year (which usually has the highest interest rate) and renews it every year at the new rate. Since fixed deposit rates have been usually increasing year on year over this period, except a couple of years, this strategy would have worked best for the fixed deposit investor. If the investor invested Rs 10,000 in an FD at the end of 2001 and renewed it every year for 5 years, his principal and interest would amount to Rs 13,300 at the end of 2006. Fixed deposit interest is taxed as per the income tax slab rate of the investor. Assuming the investor is at the highest slab rate, the tax will be Rs 1,029. Therefore the post tax amount received by the investor would be Rs 12,301. Similarly, if the investor invested Rs 10,000 in an FD at the end of 2002 with annual renewal for 5 years, his post tax amount at the end of 2007 will be Rs 12,597. From the above, we see Mutual Fund returns beat Fixed Deposit interest by a wide margin in the Bull Market years.
The table below shows 5 year growth of Rs 10,000 investment, made at the end of various years from 2001 to 2008.
All investments made after 2003 (shaded in amber in the table above) had to go through bear markets of either 2008 or 2011 or both. Investors with a five year horizon did not make a loss in the above example, except the investment made in the 2007 to 2012 time horizon. Even the investment made in the 2007 to 2012 time horizon, probably worst years of the financial crisis in the last 50 years, lost less than 2%, only Rs 181 loss on the Rs 10,000 investment. There is no denying that equities are risky. But if you have a long time horizon, the investment can recover from the negative impact of a bear market and give you good returns. The table above shows that in the most of the periods the investors doubled their investment tax free despite the severe bear market. Now let us look at Fixed Deposit post tax returns. The table below shows 5 year growth of Rs 10,000 investment, made at the end of various years from 2001 to 2008.
Let us compare the fixed deposit returns with the mutual fund returns. See the chart below, for the mutual fund returns versus fixed deposit returns over different 5 year time horizon over the last 10 years.
The chart above shows that while fixed deposits assure capital safety and guaranteed returns, mutual funds over a sufficiently long horizon have given much higher returns. Mutual fund returns are much higher in the 5 year time horizons starting 2002 to 2006. In the
2006 – 2011 and 2007 – 2012 time horizons, fixed deposits have given higher returns, no doubt
as a result of the severe market downturns in 2008 and 2011. Again starting 2009, mutual
funds have started to give better returns.
When evaluating risk return trade-off between mutual funds and fixed deposits, investors
should compare their returns over sufficiently long period comprising of both bull markets and
bear markets, as discussed above. The investment horizon is also of vital importance in
determining the risk return trade off. It suffices to say that, if the investment horizon in our
example was short, say 1 to 2 years, mutual funds would have had more periods of under
performances.
RISK RETURN MATRIX OF MUTUAL FUNDS VS FIXED DEPOSITS
MUTUAL FUNDS
LOWER RISK, HIGHER RETURNS
FIXED DEPOSITS
LOWER RISK, LOWER RETURNS
RESEARCH METHODOLOGY
Source of Data
The data for this study is mainly collected from Secondary Sources like Books, Journals,
Magazines, and various websites like www.nseindia.com, www.amfiindia.com,
www.mutualfundindia.com, www.sebi.gov.in and www.moneycontrol.com.
Statistical Tools
The simple statistical techniques like averages and rate of returns are used. Considering the
interest of the retail investors the study has been made simple and average rate of return of
mutual fund schemes compared with fixed deposit rates and use of different types of graphs
gives a better pictorial understanding about the whole project
RECOMMENDATION
The goal of any investor is to accumulate wealth to fulfill future wants and needs. For a
conservative investor, protection of principal is of utmost importance. However, financial
prudence lies in having liquidity for contingencies, as well as a means for capital appreciation. If
you seek capital appreciation and tax comfort, along with reasonable safety of capital, then
mutual funds score over fixed deposits. On the other hand, if capital preservation is all that
matters to you then fixed deposits would be the right option.
If you are young and come from the average middle and upper middle class (at least), you can
supposedly take more risk and should go for investing in mutual funds. On the other hand,
elderly people and low-income persons cannot take much risk; securing the capital matters
most to them. Such people should opt for bank fixed deposits instead of mutual funds.
BIBLIOGRAPHY
WEBSITES
www.moneycontrol.com
www.managefinance.in
www.allbankingsolutions.com
www.idfcmf.com
www.amfiindia.com
www.mutualfundindia.com
www.rediff.com/business
www.rediff.com/getahead
mutualfunds.about.com
online.principalindia.com
JOURNALS
Tactful Management Research Journal (Vol. 2 | Issue. 6 | March 2014)