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)