Final Report Mutual Fund Valuation and Accounting 1

8/12/2019 Final Report Mutual Fund Valuation and Accounting 1

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A

PROJECT REPORT

ON

Mutual-Fund-Valuation-and-Accounting

SUBMITTED TOINDIRA AND!I NATIONA" OPEN UNIVERSIT# $INOU%

IN PARTIA" FU"FI""MENT OF

MBA $OPERATIONS%

UNDER T!E UIDANCE OF

INTERNA" UIDE & PROJECT INC!ARE&

E'TERNA" UIDE &

SUBMITTED B#

NE!A AAR(A"

R)gi*t+ation No,& ./012/3

DOABA CO""EE4 JA"AND!AR
http://www.ignou.ac.in/


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STUDENT5S DEC"ARATION

I, the undersigned Neha Aggarwal, declare that the project report titled Mutual-Fund-Valuation-and-Accounting, Submitted by me for the partial fulfillment of M..A is theoriginal record of wor! carried out by me under the guidance of A!shay erry and thesame has not formed the basis for the award of any degree, diploma, association,

fellowship, titles" in or for any other Statutory #ni$ersity or Autonomous Institutionsfunctioning in India or abroad imparting higher education in Management.

%ate & Signature'lace & N()A A**A+A-

MA /'(+A0I/NS1+oll No& 234567248

5


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AC6NO("EDEMENT

At the start, I would li!e to e9press my sincere gratitude to Mr. Nitin ansal I:I:I

Securities and my project guide Mr. A!shay erry from Infosys -imited for his ableguidance.

I am also than!ful to all the respondents and friends who ha$e helped me to conclude thecontents of my wor! in decent and presentable manner.

%ate & Signature'lace & N()A A**A+A-

MA ";th S(M(S0(++oll No& 234567248

S, No, Titl) Pag) No,

4


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INDE'&

I INTRODUCTION 3-77

< Introduction ;

5 (9ecuti$e Summary 6"3

4 +easons for Selection of this 0opic 7"und Industry

= 'erformance e$aluation =8"88

8 Major players in mutual fund industry 8;";4

III R)*)a+c9 :)t9odolog; < "i:itation* 83-17

< About research 3=

5 +esearch methodology 38

4 Sampling 'lan 3;

= Sampling si@e determination 36

8 )ypothesis and %ata collection techniues 36"33 ; +esearch -imitations 37

IV Data anal;*i* 4int)+=+)tation and =+)*)ntation 2-70

< 'ercentage analysis ,data interpretation 7


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C!APTER-7

INTRODUCTION

o (9plaining the topic or title

o (9ecuti$e Summary

o +easons for selection of this topic

o -imitations

8


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INTRODUCTION

In$estment in share mar!ets are influenced by the analysis ? reasoning which help in

predicting the mar!et to some e9tent. /$er the past years a number of technical ?

theories for analysis ha$e e$ol$ed, these combined with modern technology guides the

in$estor. 0he big players in the mar!et, li!e >oreign Institutional In$estors, Mutual

>unds, etc. ha$e the e9pertise for $arious analytical tools ? ma!e use of them. 0he small

in$estors are not in a position to benefit from the mar!et the way Mutual >unds can do.

*enerally a small in$estorCs in$estments are based on mar!et sentiments, inside

information, through grape$ine, tips ? intuition. 0he small in$estors depend on bro!ers

and bro!erage house for his in$estments. 0hey can in$est through the Mutual >unds who

are more e9perienced and e9pert in this field than a small in$estor himself.

In recent years a large number of players ha$e entered into his mar!et. 0he project has

been carried out to ha$e an o$er$iew of Mutual >und Industry and to understand

in$estorCs perception about Mutual >unds in the conte9t of their trading preference,

e9plore in$estorCs ris! perception ? find out their preference o$er 0op Mutual

;


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E'ECUTIVE SUMMAR#

In few years Mutual >und has emerged as a tool for ensuring oneCs financial well being.

Mutual >unds ha$e not only contributed to the IndiaCs growth story but ha$e also helped

families tap into the success of Indian Industry. As information and awareness is rising

more and more people are enjoying the benefits of in$esting in mutual funds. 0he main

reason the number of retail mutual fund in$estors remains small is that nine in ten people

with incomes in India do not !now properly about mutual funds. ut once people are

aware of mutual fund in$estment opportunities, the number who decide to in$est in

mutual funds increases to as many as one in fi$e people. 0he tric! for con$erting a person

with no !nowledge of mutual funds to a new Mutual >und customer is to understand

which of the potential in$estors are more li!ely to buy mutual funds and to use the right

arguments in the sales process that customers will accept as important and rele$ant to

their decision. 0his 'roject ga$e me a great learning e9perience and at the same time it

ga$e me enough scope to implement my analytical ability. 0he analysis and ad$ice

presented in this 'roject +eport is based on mar!et research on the sa$ing and in$estment

practices of the in$estors and preferences of the in$estors for in$estment in Mutual

>unds. 0his +eport will help to !now about the in$estorsC 'erception about Mutual >unds

in the conte9t of their trading preference, e9plore in$estorCs ris! perception ? find out

their preference o$er 0op Mutual funds.

0his 'roject as a whole can be di$ided into two parts. 0he first part gi$es an insight about

Mutual >und and its $arious aspects, the :ompany 'rofile, /bjecti$es of the study,

+esearch Methodology. /ne can ha$e a brief !nowledge about Mutual >und and its

basics through the 'roject.

0he second part of the 'roject consists of data and its analysis collected through sur$ey

done on or the collection of 'rimary data I made a uestionnaire and

sur$eyed of


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REASONS FOR SE"ECTION OF T!IS TOPIC

0he selection of an e9isting mutual funddepends on its performance " past as well as

e9pected. )ow should anin$estorjudge the performance of a mutual fundE hat criteria

should be used to e$aluate and ran! a mutual fundE 0here are a number of mutual funds

in the mar!et. New schemes are hitting the mar!et almost daily, with new names and

targets. So, it becomes difficult for the small in$estor to judge the performance of the

fundaccurately. 0he performance of a mutual fund scheme is reflected in its net asset

$alue NAD1 which is disclosed on a daily basis in case of open"ended schemes and on

wee!ly basis in case of close"ended schemes. 0he balance sheet of mutual fund is

different from the usual balance sheet of other corporate entities such as an!s,

:ompanies or 'artnership firms. All of the fundCs assets belong to in$estors and are held

in fiduciary capacity for them. Mutual fund employees need to be aware of the special

reuirements concerning accounting for the fundCs assets, liabilities and transactions with

in$estors and others li!e ban!s, custodians and registrar. 0his !nowledge will help them

understand their place in the organi@ation, by getting an o$er$iew of the functioning of

the firm. ($en the mutual fund distributors need to understand accounting for the fundCs

transactions with the in$estors and how the fund accounts for its assets and liabilities, as

the !nowledge is essential for them to perform their basic role in e9plaining the mutual

fund performance to their in$estors. If they donCt !now how the NAD is computed, then

they cannot use e$en simple measures such as NAD change to assess the fund

performance.

O?@)cti)*&

0o study the Mutual funds industry in detail

0o study the In$estment procedure in Mutual funds3
http://economictimes.indiatimes.com/Features/Financial_Times/Choosing_a_mutual_fund/articleshow/2929482.cmshttp://economictimes.indiatimes.com/Features/Financial_Times/Choosing_a_mutual_fund/articleshow/2929482.cmshttp://economictimes.indiatimes.com/Features/Financial_Times/Choosing_a_mutual_fund/articleshow/2929482.cmshttp://economictimes.indiatimes.com/Features/Financial_Times/Choosing_a_mutual_fund/articleshow/2929482.cmshttp://economictimes.indiatimes.com/Features/Financial_Times/Choosing_a_mutual_fund/articleshow/2929482.cmshttp://economictimes.indiatimes.com/Features/Financial_Times/Choosing_a_mutual_fund/articleshow/2929482.cmshttp://economictimes.indiatimes.com/Features/Financial_Times/Choosing_a_mutual_fund/articleshow/2929482.cmshttp://economictimes.indiatimes.com/Features/Financial_Times/Choosing_a_mutual_fund/articleshow/2929482.cms


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:hapter"5

0heoretical bac!ground

o D)tail)d *tud; o :utual und

o O+ganiation o :utual und

o Adantag) and di*adantag) o :utual und

o P)+o+:anc) )aluation

o Ma@o+ =la;)+* in :utual und indu*t+;


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MUTUA" FUNDS

A Mutual >und is a trust that pools the sa$ings of a number of in$estors who share a

common financial goal. 0he money thus collected is then in$ested in capital mar!et

instruments such as shares, debentures and other securities. 0he income earned through

these in$estments and the capital appreciation reali@ed is shared by its unit holders in

proportion to the number of units owned by them. 0hus a Mutual >und is the most

suitable in$estment for the common man as it offers an opportunity to in$est in a

di$ersified, professionally managed bas!et of securities at a relati$ely low cost. 0he flow

chart below describes broadly the wor!ing of a mutual fund

A

Mutual

>und is a

body

corporate registered with the Securities and (9change oard of India S(I1 that pools

up the money from indi$idualFcorporate in$estors and in$ests the same on behalf of the

in$estorsFunit holders, in (uity shares, *o$ernment securities, onds, :all Money

Mar!ets etc, and distributes the profits. In the other words, a Mutual >und allows

in$estors to indirectly ta!e a position in a bas!et of assets.

Mutual >und is a mechanism for pooling the resources by issuing units to the in$estors

and in$esting funds in securities in accordance with objecti$es as disclosed in offer

document. In$estments in securities are spread among a wide cross"section of industries

and sectors thus the ris! is reduced. %i$ersification reduces the ris! because all stoc!s


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may not mo$e in the same direction in the same proportion at same time. In$estors of

mutual funds are !nown as unit holders.

0he in$estors in proportion to their in$estments share the profits or losses. 0he mutual

funds normally come out with a number of schemes with different in$estment

objecti$es which are launched from time to time. A Mutual >und is reuired to be

registered with Securities (9change oard of India S(I1 which regulates securities

mar!ets before it can collect funds from the public.

ORANISATION OF A MUTUA" FUND&


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0here are many entities in$ol$ed and the diagram below illustrates the organi@ational

set up of a Mutual >und&

0he Mutual >unds are structured in two forms& :ompany form and 0rust form.

Co:=an; Fo+:&0hese forms of mutual funds are more popular in #S.

T+u*t Fo+:& In India, mutual funds are organi@ed as 0rusts. 0he 0rust is either

managed by a oard of 0rustees or by a 0rustee :ompany. 0here must be at

least = members in the oard of 0rustees and at least 5F4 of the members of the

board must be independent. 0rustee of one mutual fund cannot be a trustee of

another mutual fund.

Unit T+u*t* Con*titu)nt*&

A Mutual >und is set up in the form of a 0rust which has the following constituents&"

und Sponsor

5. Mutual >und as 0rust

4. Asset Management :ompany

=. /ther >und :onstituents

=.< :ustodian and %epositors


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=.5 ro!ers

=.4 0ransfer Agent

=.= %istributors

FUND SPONSOR

hat a promoter is to a company, a sponsor is to a mutual fund. 0he sponsor initiates

the idea to set up a mutual fund. It could be a financial ser$ices company, a ban! or a

financial institution. It could be Indian or foreign. It could do it alone or through a joint

$enture. In order to run a mutual fund in India, the sponsor has to obtain a license from

S(I. >or this, it has to satisfy certain conditions, such as on capital and profits, trac!

record at least fi$e years in financial ser$ices1, default"free dealings and a general

reputation for fairness. 0he sponsor must ha$e been profit ma!ing in at least 4 years of

the abo$e 8 years.

0he Sponsor appoints the 0rustees, :ustodian and the AM: with the prior appro$al of

S(I and in accordance with S(I +egulations.

-i!e the company promoter, the sponsor ta!es big"picture decisions related to the

mutual fund, lea$ing money management and other such nitty"gritty to the other

constituents, whom it appoints. 0he sponsor should inspire confidence in you as amoney manager and, preferably, be profitable. >inancial muscle, so long as it is

complemented by good fund management, helps, as money is then not an impediment

for the mutual fund" it can hire the best talent, in$est in technology and continuously

offer high ser$ice standards to the in$estors.

In the days of assured return schemes, sponsors also had to fulfill return promises made

to the unit holders. 0his sometimes meant meeting shortfalls from their own poc!ets, as

the go$ernment did for #0I. Now that assured return schemes are passed, such bailouts

wonCt be reuired. All things considered, choose sponsors who are good money

managers, who ha$e a reputation for fair business practices and who ha$e deep poc!ets.

TRUST

0he Mutual >und is constituted as a 0rust in accordance with the pro$isions of the

Indian 0rusts Act,


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+egistration Act, und Schemes floated by the AM: ha$e to be appro$ed by the

0rustees.

0rustees can see! information from the AM: regarding the operations andcompliance of the mutual fund.

0rustees can see! remedial actions from AM:, and in cases can dismiss theAM:.

0rustees re$iew and ensure that the net worth of the AM: is according to thestipulated norms, e$ery uarter.

O?ligation* o t9) T+u*t))*&

0rustees must ensure that the transactions of the mutual fund are in accordancewith the trust deed.


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0rustees must ensure that the AM: has systems and procedures in place.

0rustees must ensure due diligence on the part of AM: in the appointment ofconstituents and business associates.

0rustees must furnish to the S(I, on half yearly basis a report on the acti$ities ofthe AM:.

0rustees must ensure compliance with S(I +egulations.

ASSET MANAEMENT COMPAN# $AMC%

An AM: is the legal entity formed by the sponsor to run a mutual fund. 0he AM: is

usually a pri$ate limited company in which the sponsors and their associates or joint

$enture partners are the shareholders. 0he trustees sign an in$estment agreement with

the AM:, which spells out the functions of the AM:. It is the AM: that employs fund

managers and analysts, and other personnel. It is the AM: that handles all operational

matters of a mutual fund G from launching schemes to managing them to interacting

with in$estors.

0he people in the AM: who should matter the most to you are those who ta!e

in$estment decisions. 0here is the head of the fund house, generally referred to as the

:hief (9ecuti$e /fficer :(/1. #nder him comes the :hief In$estment /fficer :I/1,

who shapes the fundCs in$estment philosophy, and fund managers, who manages its

schemes. 0hey are assisted by a team of analysts, who trac! mar!ets, sectors and

companies.

Although these people are employed by the AM:, its you, the unit

holders, who pays their salaries, partly or wholly. (ach scheme pays the AM: an

annual Hfund management feeC, which is lin!ed to the scheme si@e and results in a

corresponding drop in your return. If a schemeCs corpus is up to +s.


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play& a cash"rich sponsor can easily pump in money to meet short falls, while a sponsor

with less financial clout might force the AM: to trim costs, which could well turn into

an e9ercise in cutting corners.

R)gulato+; +)ui+):)nt* o+ t9) AMC&

/nly S(I registered AM: can be appointed as in$estment managers of mutualfunds.

AM: must ha$e a minimum net worth of +s.und.

AM:s cannot indulge in any other business, other than that of asset management

At least half of the members of the oard of an AM: ha$e to be independent.

0he =thschedule of S(I +egulations spells out rights and obligations of bothtrustees and AM:s.

O?ligation* o t9) AMC&

In$estments ha$e to be according to the in$estment management agreement andS(I regulations.

0he actions of its employees and associates ha$e to be as mandated by thetrustees.

AM:s ha$e to submit detailed uarterly reports on the wor!ing and performanceof the mutual fund.

AM:s ha$e to ma!e the necessary statutory disclosures on portfolio, NAD andprice to the in$estors.

R)*t+iction* on t9) AMC&

AM:s cannot launch a scheme without the prior appro$al of the trustees.

AM:s ha$e to pro$ide full details of the in$estments by employees and oardmembers in all cases where the in$estment e9ceeds +s.< la!h.

AM:s cannot ta!e up any acti$ity that is in conflict with the acti$ities of themutual fund.

Condition* und)+ 9ic9 to AMC* can ?) :)+g)d&

S(I +egulations reuire the following&


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S(I and 0rustees of both the funds must appro$e of the merger.

#nit holders should be notified of the merger, and pro$ided the option to e9it atNAD without load.

Condition* und)+ 9ic9 an AMC can ?) taG)n o)+&

S(I appro$al is reuired for the change of ownership and unit holders ha$e to beinformed of the ta!eo$er.

Sc9):) taG) o)+& If an e9isting mutual fund scheme is ta!en o$er by another AM:, itis called as scheme ta!e o$er. 0he two mutual funds continue to e9ist. 0rustee and S(Iappro$al and notification of the unit holders are reuired for scheme ta!e o$er.

CUSTODIAN

A custodian handles the in$estment bac! office of a mutual fund. Its responsibilities

include receipt and deli$ery of securities, collection of income, and distribution of

di$idends and segregation of assets between the schemes. It also trac! corporate actions

li!e bonus issues, right offers, offer for sale, buy bac! and open offers for acuisition.

0he sponsor of a mutual fund cannot act as a custodian to the fund. 0his condition,

formulated in the interest of in$estors, ensures that the assets of a mutual fund are not in

the hands of its sponsor. >or e9ample, %eutsche an! is a custodian, but it cannot

ser$ice %eutsche Mutual >und, its mutual fund arm.

BRO6ERS

Rol) o B+oG)+* in a Mutual Fund&

0hey enable the in$estment managers to buy and sell securities.

ro!ers are the registered members of the stoc! e9change.

0hey charge a commission for their ser$ices.

In some cases, pro$ide in$estment managers with research reports.

Act as an important source of mar!et information.

REISTRAR OR TRANSFER AENTS


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+egistrars, also !nown as the transfer agents, are responsible for the in$estor ser$icing

functions. 0his includes issuing and redeeming units, sending fact sheets and annual

reports. Some fund houses handle such functions in"house. /thers outsource it to the

+egistrarsJ Lar$y and :AMS are the more popular ones. It doesnCt really matter which

model your mutual fund opt for, as longas it is prompt and efficient in ser$icing you.

Most mutual funds, in addition to registrars, also ha$e in$estor ser$ice centers of their

own in some cities.

Some of the in$estor G related ser$ices are&"

'rocessing in$estor applications.

+ecording details of the in$estors.

Sending information to the in$estors.

'rocessing di$idend payout.

Incorporating changes in the in$estor information.

Leeping in$estor information up to date.

DISTRIBUTORS

Rol) o S)lling and Di*t+i?ution Ag)nt*&

Selling agents bring in$estorCs funds for a commission.

%istributors appoint agents and other mechanisms to mobili@e funds from the

in$estors.

an!s and post offices also act as distributors.

0he commission recei$ed by the distributors is split into initial commission which

is paid on mobili@ation of funds and trail commission which is paid depending onthe time the in$estor stays with the fund.

Adantag)* o Mutual Fund


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P+o)**ional Manag):)nt

Mutual >unds pro$ide the ser$ices of e9perienced and s!illed professionals, bac!ed by

a dedicated in$estment research team that analyses the performance and prospects of

companies and selects suitable in$estments to achie$e the objecti$es of the scheme.

Di)+*iication

Mutual >unds in$est in a number of companies across a broad cross"section of

industries and sectors. 0his di$ersification reduces the ris! because seldom do all stoc!s

decline at the same time and in the same proportion. ou achie$e this di$ersification

through a Mutual >und with far less money than you can do on your own.

Con)ni)nt Ad:ini*t+ation

In$esting in a Mutual >und reduces paperwor! and helps you a$oid many problems

such as bad deli$eries, delayed payments and follow up with bro!ers and companies.

Mutual >unds sa$e your time and ma!e in$esting easy and con$enient.

R)tu+n Pot)ntial

/$er a medium to long"term, Mutual >unds ha$e the potential to pro$ide a higher

return as they in$est in a di$ersified bas!et of selected securities.

"o Co*t*

Mutual >unds are a relati$ely less e9pensi$e way to in$est compared to directly

in$esting in the capital mar!ets because the benefits of scale in bro!erage, custodial and

other fees translate into lower costs for in$estors.

"iuidit;

In open"end schemes, the in$estor gets the money bac! promptly at net asset $alue

related prices from the Mutual >und. In closed"end schemes, the units can be sold on a

stoc! e9change at the pre$ailing mar!et price or the in$estor can a$ail of the facility of

direct repurchase at NAD related prices by the Mutual >und.

T+an*=a+)nc;

52


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In$estors get regular information on the $alue of their in$estment in addition to

disclosure on the specific in$estments made by their scheme, the proportion in$ested in

each class of assets and the fund managers in$estment strategy and outloo!.

Fl)>i?ilit;

0hrough features such as regular in$estment plans, regular withdrawal plans and

di$idend rein$estment plans, you can systematically in$est or withdraw funds

according to your needs and con$enience.

Ao+da?ilit;

In$estors indi$idually may lac! sufficient funds to in$est in high"grade stoc!s. A

mutual fund because of its large corpus allows e$en a small in$estor to ta!e the benefit

of its in$estment strategy.

C9oic) o Sc9):)*

Mutual >unds offer a family of schemes to suit your $arying needs o$er a lifetime.

()ll R)gulat)d

All Mutual >unds are registered with S(I and they function within the pro$isions of

strict regulations designed to protect the interests of in$estors. 0he operations of Mutual

>unds are regularly monitored by S(I.

No Ent+; "oad

(ntry load is the commission charged


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0he costs of the fund management process are deducted from the fund. 0his includes

mar!eting and initial costs deducted at the time of entry itself, called, H-oadC. 0hen

there is the annual asset management fee and e9penses, together called the e9pense

ratio. #sually, the former is not counted while measuring performance, while the latter

is. A Standard 5 percent e9pense ratio means that, e$erything else being eual, the fund

manager under performs the benchmar! inde9 by an eual amount.

No tailo+-:ad) =o+tolio

0he portfolio of a fund does not remain constant. 0he e9tent to which the portfolio

changes is a function of the style of the indi$idual fund manager i.e. whether he is a buy

and hold type of mana2ger or one who aggressi$ely churns the fund. It is also depends

on the $olatility of the fund si@e i.e. whether the fund constantly recei$es fresh

subscriptions and redemptions. Such portfolios changes ha$e associated costs of

bro!erage, custody fees, registration fees etc. that lowers the portfolio return

commensurately.

No ua+ant)) o +)tu+n

No in$estment is ris! free. If the entire stoc! mar!et declines in $alue, the $alue of

mutual fund shares will go down as well, no matter how balanced the portfolio.

In$estors encounter fewer ris!s when they in$est in mutual funds than when they buy

and sell stoc!s on their own. )owe$er, anyone who in$ests through a mutual fund runsthe ris! of losing money.

Ta>)*

%uring a typical year, most acti$ely managed mutual funds sell anywhere from 52 to 62

percent of the securities in their portfolios. If your fund ma!es a profit on its sales, you

will pay ta9es on the income you recei$e, e$en if you rein$est the money you made.

Manag):)nt +i*G

hen you in$est in a mutual fund, you depend on the funds manager to ma!e the right

decisions regarding the funds portfolio. If the manager does not perform as well as you

had hoped, you might not ma!e as much money on your in$estment as you e9pected.

/f course, if you in$est in Inde9 >unds, you forego management ris!, because these

funds do not employ managers.

55


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!ISTOR# OF INDIAN MUTUA" FUNDS INDUSTR#

0he mutual fund industry in India started in und Aug 371, Indian an! Mutual >und No$ 371, an! of India Oun

721, an! of aroda Mutual >und /ct 751. -I: established its mutual fund in Oune


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0he und1 +egulations were substituted by a more comprehensi$e

and re$ised Mutual >und +egulations in und1 +egulations


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Note&

hile #0I was bifurcated into #0I Mutual >und and the Specified #nderta!ing of the

#nit 0rust of India effecti$e from >ebruary 5224. 0he Assets under management of the

Specified #nderta!ing of the #nit 0rust of India has therefore been e9cluded from the

total assets of the industry as a whole from >ebruary 5224 onwards.

0he Assets #nder Management of #0I was +s. ;6bn. by the end of rom +s. ;6bn.

the Assets #nder Management rose to +s. =62 bn. in March


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0he net asset $alue NAD1 of mutual funds in India declined when stoc! prices started

falling in the year


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T#PES OF MUTUA" FUNDS

Mutual fund schemes may be classified on the basis of its structure and its in$estment

objecti$e.

B; St+uctu+)&

Open Ended Fund :

As the name implies the si@e of the scheme fund1 is open G i.e. not specified or pre"

determined. (ntry to the fund is always open, the in$estor who can subscribe at

anytime. Such fund stands ready to buy or sell its securities at anytime. 0he !ey feature

of /pen"ended schemes is -iuidity. It implies that the capitali@ation of the fund is

constantly changing as in$estors sell or buy their shares. >urther, the shares or units are

normally not traded on the stoc! e9change but are repurchased by the funds at

announced rates. /pen"ended schemes ha$e comparati$ely better liuidity despite the

fact that these are not listed. 0he reason is that in$estors can any time approach mutual

fund for sale of such units. No intermediaries are reuired. Moreo$er, the reali@able

amount is certain since repurchase is at a price based on declared net asset $alue

NAD1. 0he portfolio mi9 of such schemes has to be in$estments, which are acti$ely

traded in the mar!et. /therwise it will not be possible to calculate NAD. 0his is the

reason that generally open"ended schemes are euity based. In /pen"ended schemes,

the option of di$idend rein$estment is a$ailable.

Close Ended Fund :A closed"end fund has a stipulated maturity period which generally

ranging from 4 to


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Interval Scheme:

Inter$al Schemes combine the features of both open"ended and close"ended schemes.

0hey are open for sale or redemption during pre"determined inter$als at NAD based

prices.

B; In)*t:)nt O?@)cti)&

Growth/Equity Oriented Schemes:

0he aim of growth funds is to pro$ide capital appreciation o$er the medium to long

term. Such schemes normally in$est a major part of their corpus in euities. Such funds

ha$e comparati$ely high ris!s. 0hese schemes pro$ide different options to the in$estors

li!e di$idend optionJ capital appreciation etc. and the in$estors may choose an option

depending on their preference. 0he in$estor must indicate the option in the application

form. 0he mutual funds also allow the in$estors to change the options at a later date.

*rowth schemes are good for in$estors ha$ing a long"term outloo! see!ing

appreciation o$er a period of time.

Income/Debt oriented Schemes :

0he aim of income funds is to pro$ide regular and steady income to in$estors. Such

schemes generally in$est in fi9ed income securities such as bonds, corporate

debentures, go$ernment securities and money mar!et instruments. Such funds are less

ris!y compared to euity schemes. 0hese funds are not affected because of fluctuations

in euity mar!et. )owe$er, opportunities of capital appreciation are also limited in such

funds. 0he NADs of such funds are affected because of change in interest rates in the

country. If the interest rates fall, NADs of such funds are li!ely to increase in the short

run and $ice $ersa. )owe$er, long"term in$estors may not bother about these

fluctuations.

alanced Fund:

0he aim of balanced funds is to pro$ide both growth and regular income as such

schemes in$est both in euities and fi9ed income securities in the proportion indicated

in their offer documents. 0hese are appropriate for in$estors loo!ing for moderate

growth. 0hey generally in$est =2";2 in euities and debt instruments. 0hese funds are

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may gi$e higher returns, they are more ris!y compared to di$ersified funds. In$estors

need to !eep a watch in the performance of those sectorsFindustries and must e9it at an

appropriate time. 0hey may also see! ad$ice of an e9pert.

Inde' "unds:

Inde9 >unds replicate the portfolio of a particular inde9 such as the S( Sensiti$e

inde9, S?' NS( 82 inde9 Nifty1, etc 0hese schemes in$est in the securities in the

same weightage comprising of an inde9. NADs of such schemes would rise or fall in

accordance with the rise or fall in the inde9, though not e9actly by the same percentage

due to some factors !nown as Ptrac!ing errorP in technical terms. Necessary disclosures

in this regard are made in the offer document of the mutual fund scheme.

Equity diversi"ied "unds&


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0hey generate income through arbitrage opportunities due to mispricing between cash

mar!et and deri$ati$es mar!et. >unds are allocated to euities, deri$ati$es and money

mar!ets. )igher proportion around 681 is put in money mar!ets, in the absence of

arbitrage opportunities.

#I,s:

Monthly Income 'lans ha$e an e9posure of 62"72 to debt and an e9posure of


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BAN6S VS MUTUA" FUNDS&

Mutual >unds are now also competing with commercial ban!s in the race for retailin$estorCs sa$ings and corporate float money. 0he power shift towards mutual funds

has become ob$ious. 0he coming few years will show that the traditional sa$ing

a$enues are losing out in the current scenario. Many in$estors are reali@ing that

in$estments in sa$ings accounts are as good as loc!ing up their deposits in a closet. 0he

fund mobili@ation trend by mutual funds indicates that money is going to mutual fund

in a big way. India is at the first stage of a re$olution that has already pea!ed in the

#.S. 0he #.S. boasts of an Asset base that is much higher than its ban! deposits. In

India, mutual fund assets are not e$en


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S;*t):atic T+an*)+ Plan $STP%&

0hey allow the in$estors to transfer on a periodic basis a specified amount from one

scheme to another within the same fund family meaning two schemes belonging to the

same mutual fund. A transfer will be treated as redemption of units from the schemefrom which the transfer is made .Such redemption or in$estment will be at the

applicable NAD. 0his ser$ice allows the in$estor to manage his in$estment acti$ely to

achie$e his objecti$es. Many funds do not e$en charge e$en any transaction feed for

this ser$ice an added ad$antage for the acti$e in$estor.

S;*t):atic (it9d+aal Plan $S(P%&

0hese plans are best suited for people nearing retirement. In these plans an in$estor

in$ests in a mutual fund scheme and is allowed to withdraw a fi9ed sum of money at

regular inter$als to ta!e care of e9penses.

P)+o+:anc) Ealuation

PARAMETERS OF MUTUA" FUND EVA"UATION&

RiskReturnsLiquidityExpense RatioComposition of PortfolioRi*G* A**ociat)d (it9 Mutual Fund*&

In$esting in mutual funds as with any security, does not come without ris!. /ne of the

most basic economic principles is that ris! and reward are directly correlated. In otherwords, the greater the potential ris!, the greater the potential return. 0he types of ris!

commonly associated with mutual funds are&

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Ma+G)t Ri*G&

Mar!et ris! relate to the mar!et $alue of a security in the future. Mar!et prices fluctuate

and are susceptible to economic and financial trends, supply and demand, and many

other factors that cannot be precisely predicted or controlled.

Political Ri*G&

:hanges in the ta9 laws, trade regulations, administered prices etc. is some of the many

political factors that create mar!et ris!. Although collecti$ely, as citi@ens, we ha$e

indirect control through the power of our $ote, indi$idually as in$estors, we ha$e

$irtually no control.

Inlation Ri*G&

Inflation or purchasing power ris!, relates to the uncertainty of the future purchasing

power of the in$ested rupees. 0he ris! is the increase in cost of the goods and ser$ices,

as measured by the :onsumer 'rice Inde9.

Int)+)*t Rat) Ri*G&

Interest +ate ris! relates to the future changes in interest rates. >or instance, if an

in$estor in$ests in a long term debt mutual fund scheme and interest rate increase, the

NAD of the scheme will fall because the scheme will be end up holding debt offeringlowest interest rates.

Business Risk:

usiness +is! is the uncertainty concerning the future e9istence, stability and

profitability of the issuer of the security. usiness +is! is inherent in all business

$entures. 0he future financial stability of a company can not be predicted or

guaranteed, nor can the price of its securities. Ad$erse changes in business

circumstances will reduce the mar!et price of the companyCs euity resulting in

proportionate fall in the NAD of mutual fund scheme, which has in$ested in the euity

of such a company.

4=


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Econo:ic Ri*G &

(conomic +is! in$ol$es uncertainty in the economy, which, in turn can ha$e an ad$erse

effect on a companyCs business. >or instance, if monsoons fall in a year, euity stoc!s

of agriculture bases companies will fall and NADs of mutual funds, which ha$ein$ested in such stoc!s, will fall proportionately.

0here are 4 different methods with the help of which we can measure the ris!.

M)a*u+):)nt o +i*G

I, B)ta Co)ici)nt M)a*u+) o Ri*G&

eta relates a fundCs return with a mar!et inde9. It basically measures the sensiti$ity of

funds return to changes in mar!et inde9.

If eta Q < then >und mo$es with the mar!et i.e. 'assi$e fund

If eta R < then >und is less $olatile than the mar!et i. e %efensi$e >und

If eta < then >unds will gi$e higher returns when mar!et rises ? higher losses when

mar!et falls i.e. Aggressi$e >und

II, E> Ma+G* o+ R-*ua+)d M)a*u+) O Ri*G &

(9 GMar!s represents co relation with mar!ets. )igher the (9"mar!s lower the ris! of

the fund because a fund with higher (9"mar!s is better di$ersified than a fund with

lower (9"mar!s.

III, Standa+d D)iation M)a*u+) O Ri*G &

It is a statistical concept, which measures $olatility. It measures the fluctuations of

fundCs returns around a mean le$el. asically it gi$es you an idea of how $olatile your

earnings are. It is broader concept than (0A. It also helps in measuring total ris! and

not just the mar!et ris! of the portfolio.

-ow to Calculate the .alue o" a #utual Fund:

0he in$estorsC funds are deployed in a portfolio of securities by the fund manager. 0he

$alue of these in$estments !eeps changing as the mar!et price of the securities change.

Since in$estors are free to enter and e9it the fund at any time, it is essential that the

48


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mar!et $alue of their in$estments is used to determine the price at which such entry and

e9it will ta!e place. 0he net assets represent the mar!et $alue of assets, which belong to

the in$estors, on a gi$en date. Net Asset Dalue or NAD of a mutual fund is the $alue of

one unit of in$estment in the fund, in net asset terms.

NAV N)t A**)t* o t9) *c9):) Nu:?)+ o Unit* Out*tanding

here Net Assets are calculated as&"

Mar!et $alue of in$estments K current assets and other assets K Accrued income G

current liabilities and other liabilities G less accrued e9penses1 F No. of #nits

/utstanding as at the NAD date

NAD of all schemes must be calculated and published at least wee!ly for closed"end

schemes and daily for open"end schemes.

0he major factors affecting the NAD of a fund are&

T Sale and purchase of securities

T Sale and repurchase of units

T Daluation of assets

T Accrual of income and e9penses

S(I reuires that the fund must ensure that repurchase price is not lower than 74 of

NAD 78 in the case of a closed"fund1. /n the other side, a fund may sell new units at

a price that is different from the NAD, but the sale price cannot be higher than


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A?*olut) +)tu+n Q 55 G 521F52 U


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Number of units re"in$ested Q


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Ri*G P+):iu: Q %ifference between the >undCs A$erage return and +is! free return

on go$ernment security or treasury bill o$er a gi$en period .

"IKUIDIT#:

Most of the funds being sold today are open"ended. 0hat is, in$estors can sell their

e9isting units, or buy new units, at any point of time, at prices that are related to the

NAD of the fund on the date of the transaction. Since in$estors continuously enter and

e9it funds, funds are actually able to pro$ide liuidity to in$estors, e$en if the

underlying mar!ets, in which the portfolio is in$ested, may not ha$e the liuidity that

the in$estor see!s.

E'PENSE RATIO:

(9pense ratio is defined as the ratio of total e9penses of the fund to the a$erage net

assets of the fund. (9pense ratio can actually understate the total e9penses, because

bro!erage paid on transactions of a fund are not included in the e9penses. According to

the current S(I norms, bro!erage commissions are capitali@ed and included in the cost

of the transactions.

E>=)n*) +atio Q 0otal (9penses F A$erage Net Assets

COMPOSITION OF T!E PORTFO"IO&

:redit uality of the portfolio is measured by loo!ing at the credit ratings of the

in$estments in the portfolio. Mutual >und fact sheets show the composition of the

portfolio and the in$estments in $arious asset classes o$er time. 'ortfolio turno$er rate

is the ratio of lesser of asset purchased or sold by funds in the mar!et to the net assets

of the fund. If 'ortfolio ratio is


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T +is! profile

T 'ortfolio composition

T (9pense ratios

Fund evaluation a(ainst benchmar$&

>unds can be e$aluated against some performance indicators which are !nown as

benchmar!s.

0here are 4 types of benchmar!s&

T +elati$e to mar!et as whole

T +elati$e to other comparable financial products

T +elati$e to other mutual funds

Relative to market as whole:0here are different ways to measure the performance of fund w.r.t mar!et as

Euit; Fund*

Ind)> FundG An Inde9 fund in$ests in the stoc! comprising of the inde9 in the same

ratio. 0his is a passi$e management style.

>or e9ample,

Mar!et Inde9 >und " S( Sense9

Nifty Inde9 >und G NI>0

0he difference between the return of this fund and its inde9 benchmar! can be

e9plained by 0+A:LIN* (++/+.

Acti) Euit; Fund*&

0he fund manager acti$ely manages this fund. 0o e$aluate performance in such case we

ha$e to select an appropriate benchmar!. -arge di$ersified euity fund G S(


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Sector fund " Sectoral Indices

D)?t Fund*&

%ebt fund can also be judged against a debt mar!et inde9 e.g. I"(U

RIS6 VS, RETURN&

MAJOR P"A#ERS IN MUTUA" FUNDS INDUSTR#

AN AM+/ Mutual >und

AN AM+/ Mutual >und was setup on April und follows a conser$ati$e long"term approach to

=


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in$estment. +ecently it crossed A#M of +s. und / Mutual >und1

an! of aroda Mutual >und or / Mutual >und was setup on /ctober 42, und and was incorporated on No$ember 8, : Mutual >und

)%>: Mutual >und was setup on Oune 42, 5222 with two sponsor namely )ousing%e$elopment >inance :orporation -imited and Standard -ife In$estments -imited.

)S: Mutual >und

)S: Mutual >und was setup on May 56, 5225 with )S: Securities and :apitalMar!ets India1 'ri$ate -imited as the sponsor. 0he oard of 0rustees, )S: Mutual>und acts as the 0rustee :ompany of )S: Mutual >und.

IN* Dysya Mutual >und

IN* Dysya Mutual >und was setup on >ebruary und

0he mutual fund of I:I:I is a joint $enture with 'rudential 'lc. of America, one of thelargest life insurance companies in the #S of A. 'rudential I:I:I Mutual >und was setupon


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Schemes out of which und has more than +s. 8,822 :rores as A#M. Now it has an in$estorbase of o$er 3 -a!hs spread o$er und

0ata Mutual >und 0M>1 is a 0rust under the Indian 0rust Act, und are 0ata Sons -td., and 0ata In$estment :orporation -td. 0hein$estment manager is 0ata Asset Management -imited and its 0ata 0rustee :ompany'$t. -imited. 0ata Asset Management -imited is one of the fastest in the country withmore than +s. 6,624 :rores as on April 42, 52281 of A#M.

Lota! Mahindra Mutual >und

Lota! Mahindra Asset Management :ompany LMAM:1 is a subsidiary of LM-. It ispresently ha$ing more than


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>ran!lin 0empleton India Mutual >und

0he group, >ran!lin 0empleton In$estments is a :alifornia #SA1 based company with aglobal A#M of #SY =27.5 bn. as of April 42, 52281. It is one of the largest financialser$ices groups in the world. In$estors can buy or sell the Mutual >und through their

financial ad$isor or through mail or through their website. 0hey ha$e /pen end%i$ersified (uity schemes, /pen end Sector (uity schemes, /pen end )ybridschemes, /pen end 0a9 Sa$ing schemes, /pen end Income and -iuid schemes, :losedend Income schemes and /pen end >und of >unds schemes to offer.

Morgan Stanley Mutual >und India

Morgan Stanley is a worldwide financial ser$ices company and its leading in the mar!etin securities, in$estment management and credit ser$ices. Morgan Stanley In$estmentManagement MISM1 was established in the year und

(scorts Mutual >und was setup on April und was setup on Oune inancial Ser$ices '$t.

-td. as the sponsorer and enchmar! 0rustee :ompany '$t. -td. as the 0rustee:ompany. Incorporated on /ctober


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5, und

:hola Mutual >und under the sponsorship of :holamandalam In$estment ? >inance:ompany -td. was setup on Oanuary 4, und

-ife Insurance :orporation of India set up -I: Mutual >und on und wasconstituted as a 0rust in accordance with the pro$isions of the Indian 0rust Act, und.

*I: Mutual >und

*I: Mutual >und, sponsored by *eneral Insurance :orporation of India *I:1, a*o$ernment of India underta!ing and the four 'ublic Sector *eneral Insurance:ompanies, $i@. National Insurance :o. -td NI:1, 0he New India Assurance :o. -td.NIA1, 0he /riental Insurance :o. -td /I:1 and #nited India Insurance :o. -td. #II1and is constituted as a 0rust in accordance with the pro$isions of the Indian 0rusts Act,idelity In$estments

>idelity In$estments was founded in idelity In$estments is an internationalpro$ider of financial ser$ices and in$estment resources that help indi$iduals andinstitutions meet their financial objejecti$es

=8


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RESEARC!

R)*)a+c9is a systematic organi@ed way of finding answers to uestionsand journey

of un!nown to !nown.

S#STEMATICbecause there is a definite set of procedures and steps which you will

follow. 0here are certain things in the research process, which are always done in

order to get the most accurate results.

/n the basis of research it is easy to !now that, what $alue of the product in the

mar!et and what is the demand of the product in the mar!et and how the people

aware about the product.

/n the behalf of this it is easy to capturing the mar!et.

RESEARC! MET!ODO"O#

I decided to do the project in two parts. 0he first part of the project is comprised of the

study of Mutual >unds as a whole and the second part deals with the in$estorCs

perception regarding their in$estment preferences about in$estment in Mutual >unds.

0he first part of the project i.e. descripti$e study is comprising an o$erall study of

Mutual funds as what it is, why to in$est and where to in$est, ris! factor associated

with it i.e. an o$er$iew of whole Mutual fund industry.

0he second part of the project that is related to in$estorCs perception about

in$estment in Mutual funds a$ailable in mar!et. Indian Stoc! mar!et has undergone

tremendous changes o$er the years. In$estment in Mutual >unds has become a major

alternati$e among In$estors. 0he project has been carried out to understand in$estorCs

perception about Mutual >unds in the conte9t of their trading preference and e9plore

in$estorCs ris! perception.

0he first part of the project relating the study of Mutual funds is collected through

secondary data obtained from internet ? boo!s whereas the second part relating the

In$estors perception about in$estment in Mutual >unds is co$ered using primary data.

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RESEARC! DESIN- 0he first part of the project IS AS(% /N %(S:+I'0ID(+(S(A+:) and second part of project is based on (U'-/+A0/+ +(S(A+:)

Sa:=l) A+)a- C9andiga+9

SAMP"E SILE

0he si@e of sample used for collection of primary data is


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U*)*&here $ery large numbers are included in the target population and simple

random sampling is difficult or where lists are already grouped into sections or

classes.

M)t9od&0here are many possible systems e.g. by ta!ing e$ery tenth name for e$ery

fifth name.

SAMP"E SILE DETERMINATION

Sample si@e determination is $ery importation, with the help of this it is easy to !now

about the customers, what they percei$e about the product. It is a $ery correct way to

!now the customers awareness.

!#POT!ESIS

Null 9;=ot9)*i*& Mutual fund is the safest a$enue for in$estment.

Alt)+nat) 9;=ot9)*i*& Mutual fund is not the safest a$enue for in$estment.

R)*ult o 9;=ot9)*i*& After the analysis of the in$estors perception we can say that the

in$estors had the penchant for the mutual fund due to the lac! of e9perience about

in$estment in mar!et so for new entrants Mutual fund is the safest a$enue for in$estment

therefore null 9;=ot9)*i* i* *ati*i)d,

CO""ECTION OF DATA

0he method of data collection begins after a research problem has been defined and

research designFplan chal!ed out.

0here are two sources from where the data can be collected, $i@.&"

'rimary

Secondary

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P+i:a+; data:0he primary data are those which are collected afresh and for the first

time and thus happen to be original in character.

S)conda+; data& 0he secondary data are those data which ha$e already been

collected by someone else and which already had been passed through the statistical

process.

Coll)ction o =+i:a+; data&

'rimary data can be collected either through obser$ation or through direct

communication with respondents in one form or another or through personal

inter$iews.

M)t9od* u*)d o+ coll)ction o P+i:a+; data&

Inter$iew Method

'ersonal Inter$iew

0elephonic Inter$iew

/bser$ation Method

0hrough Buestionnaires

Coll)ction o S)conda+; data&

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Secondary data mean data that are already a$ailable i.e. they refer to the data which

ha$e already been collected and analysed by someone else. Secondary data may

either be published data or unpublished data. #sually published data are a$ailable in&

0echnical ? trade journals.

oo!s, maga@ines, and newspapers. +eports prepared by research scholars.

RESEARC! "IMITATION


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:hapter"=

Data anal;*i*4 Int)+=+)tation

unds. It attracted as a safer a$enue as compared to share mar!et.

=3 respondents reflected confidence and optimism in the conte9t of their

in$estments.

Mutual >unds are more of an in$estment option than the speculati$e a$enue.

'eople tend to gain through long in$estments rather than through short term.

Income funds and (-SS are among the few top funds

'eople are not willing to ta!e much ris! and bear loss.

ro!erCs ad$ice matters to as much as 45 of the people. Major part of people

preferred self"e$aluation as best.

Most of the people loo! at the returns that are gi$en by a >unds8; are in

this fa$our and only 54 people are there who consider >und name and currentNAD of the fund before in$esting into a Mutual >und

(9perience was the main factor that made a person in$est in mutual funds

SUESTIONS

hat I recommend firstly there should be

7 First +id 0it "or 1ew Entrant into Securities #ar$et

0his will be a new step towards a good ser$ice pro$ider in this field. After all, this

mar!et depends on the after sales ser$ice. After seeing such a boost in the share mar!et,

not only our Adult generation but also the young generation is also so much e9cited to

enter the share mar!et. Now the actual problem starts specially with the young ones in

e9citement initially they in$ests the money ? due to lac! of e9perience they loose big

;4


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bloc! of money in one go ? later they blames the company about the loss. So, to ma!e

them train in the field we should pro$ide them the initial precautions that they should

ta!e while enter into the mar!et.

2 &he #ore 3ou Care For 3our Customer #ore &he Faith 4ill Get Develop FromCustomer Side5

0,rovision "or Class oom trainin( "or the new investors

>or the abo$e reason same thing to boost there moral and to gi$e them some thing

related to the mar!et will help them. Also some tips can also be gi$en to these in$estor

during the session as a precautions.

/ &oll Free 1umber

:ustomers generally want to call to the respecti$e branch for as!ing some problems or

gi$e orders, a customer can sa$e the money by dialing on the toll free number. It gi$es

a feeling to the customer that company care for them.

H Customer Care "or (eneral query handle

Initially customer want to sol$e his or her problem at the moment as it arises. /ur

relationship manager many times donCt ha$e that much time to discuss all that details

on phone, they may sometime get busy with the meeting with client. So for general

uery handle we can ha$e a separate section.

)6* #ore +ppointments o" elationship #ana(ers

0here should be more appointments by +M so that e$ery customer get euali@ed

attention

;=


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:hapter";

< BIB"IORAP!#

5 ANNE'URE

;8


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BIB"IORAP!#

BooG*&

Lotler, 'hilip.


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ANNE'URE

KUESTIONNAIRE

Name& ...ZZZZZZZZ.. /ccupation& ZZZZZZZZZ'hone& ...ZZZZZZZZ..

In)*t:)nt P+)*)ntl; !)ld&

'lease list the $alue of the assets in your total in$estments portfolio & in +s.1

Stoc!s& [[[[[[ Mutual >unds& [[[[[[[

onds& [[[[[[ ullion& [[[[[[[ /ptions& [[[[[[ *o$t. Securities&[[[[[[[ +eal (state& [[[[[[ an! %eposits& [[[[[[[

$undsE

es No (arlier, now stopped

51 hat is your (9perience in the mar!etE

-ess than a year


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;1 )ow much +is! are you willing to ta!eE

)igh -ow Moderate

61 )ow much Appreciation do you e9pect from your In$estmentsE

#p to unds (-SS

alanced >unds SI'

/thers

71 )ow much loss are you willing to ta!eE

)igh Moderate -ow


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Final Report Mutual Fund Valuation and Accounting 1

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