Project report

On

Comparison of Mutual funds with other Investment options

Of Trinity Institute of Management and Research

Religare

Submitted By

Divya Gaikwad

Under the guidance of

CERTIFICATE
 INDEX

Chapter I Introduction
1.1 Importance of the topic selected

1.2 Selection of the organization

1.3 Objectives of the project study
1.4 Research Methodology

II Theory related to the topic

2.1 Investments ( Investor’s Portfolio)
2.2 Concept of Mutual funds and its types
2.3 Process of Mutual funds
2.4 Portfolio management and its process

III Organization
3.1 History
3.2 Structure
3.3 Organizational Chart

VI Analysis & Interpretation of data

V Findings & Suggestions

 DECLARATION

I, hereby, declare that the project titled “Comparison of Mutual funds with other
Investment options. “Is original to my best knowledge and has not published elsewhere. This is
for the purpose of partial fulfillment of Trinity Institute of management required for the award of
the degree of Master of Business Administration.
 EXECUTIVE SUMMARY

As a part of my study curriculum it is necessary to undertake a project. This

project provides me an opportunity to understand particular topic in depth and get exposure
towards the emerging scenario. My topic for the project is titled as “Comparison of Mutual funds
with other Investment options” in which the emphasis is given on the study of different
investment options which are available and how mutual funds can prove a better option.

Awareness about different options of investments in India has gradually gone up in the last two
decades. General public or investors don’t have clarity about the various options of investment as
well as mutual fund. As we have started witnessing the concept of more saving now being
entrusted to the funds than to keeping it in banks. So it is very important to manage the savings
efficiently to earn good and high returns. By efficient we mean which reduces the risk of investor
on one hand and increases returns on the other hand.

This project is all about how Mutual fund can be a better option for investment’s as compared
other investment options. It really diversifies our risk and can offer a better return as compared to
other investment options. A Portfolio of Mutual fund is presented and shown how the risk has
been diversified in different sectors so as to diversify the risk factor and show how the returns
are affected.

At last, the report concludes the suggestions how Mutual funds can act as better investment
options than other investment options by taking a bit of risk so as to increase the rate of returns.
If the investment is diversified then it will reduce the risk but should be managed properly or
efficiently so as to give better returns.

This report actually gives a review about certain short term and long term investments options
and comparatively how Mutual funds acts as a better option to gain good returns with a
diversified risk.
 INTRODUCTION

Economic liberalization and globalization of the Indian markets began in1991.

This meant that the Indian consumers had access to imported goods which resulted in fall in
prices of domestic goods due to increased competition. This meant that lower the interest rates
and more importantly transfer of risk from government to the individuals, forcing them to protect
their investments themselves.

Investors have plenty of option for investments. Some of them are providing fixed rate
of returns and some of them provide variable rate of return. Many of investment options like
Bank, Companies fixed deposits and UTI that were offering high returns are now falling after
globalization and liberalization.

There are some investors who are active. They are the ones who act promptly and make
informed decisions about market. They do their own research and understand the factors which
may affect their investments in future.

As every individual is different their objective behind investments also differs. Their
objective can be of different types like fixed return, capital appreciation, tax planning or current
income. The investment decision mainly depends upon the objective of the investors. Therefore,
it is necessary to understand the nature of the investor and his ability to take risk.

Mutual funds can act here as a better option for investments for an individual as the risk factor
can be minimized in this. It not only offers good returns but the management of mutual funds is
professional and experienced due to which it offers better returns compared to other investment
options.
 IMPORTANCE OF THE TOPIC SELECTED

The money we earn is partly spent and the rest is saved for meeting future
expenses. Instead of keeping the saving idle we may like to earn some returns on it. So, we try to
invest the money to earn good returns along with to generate a specified sum of money for a
specific goal in life and also make a provision for uncertain future.

There are numbers of option for investing one’s saving which can give better returns for the
investments made in physical assets or financial assets which may be further divided into short
or long term options.

Investing money where the risk is less has always been risky to decide. The first factor, which an
investor would like to see before investing, is risk factor, which can be reduced through
diversification of investment. Diversification of risk gave birth to the phenomenon called Mutual
Fund.

Mutual fund is a vehicle for investing in stocks and bonds. It is an alternative investment option
to stocks and bonds. It pools the money of several investor’s and invest their savings in stocks,
bonds, money market instruments and other type of securities.
 OBJECTIVES OF THE PROJECT

To provide basic knowledge about investments.

To find out the information about various investment options.

To study the nature of investment.

To study about Mutual funds.

To study whether Mutual funds are a better option.

To study how diversification can help in risk reduction.

To study how managing efficiently can lead to higher returns.

 INVESTMENTS

What is an Investment?

In Finance, the purchase of a financial product, or other item of value

with an expectation of favorable future returns is termed as investment. In general terms
investment means the use of money to gain higher rate of returns against savings or the
investments.

In business, the purchase made by a producer of a physical goods, such

as durable equipment or inventory, in the hope of generating a back up for future business or
maintaining a balance position for future business is termed as Investment.

“An investment is the use of capital to create more money through the
acquisition of a security that promises the safety of the principal and generates a reasonable
return”.
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Various Investment options:-

year.
Saving plays an important role in every nation’s economy. The
money which is collected through savings acts as a driver for growth of the country. The saving
can be invested into two ways that is short term or long term investment options.

1. Short term investment option:-

Short term financial option is where the holding of the asset is

for a shorter period of time or where an asset is expected to be converted into cash in the next

Broadly speaking, savings bank account, money market and fixed deposits can be considered as
short term financial investments options.
1.1 Savings Bank account:-

An account maintained by a customer with a depository institution for

the purpose of accumulating funds over a period of time. Funds deposited in a savings account
may be withdrawn only by the account owner or a duly authorized agent, or on the owner's
nontransferable order. The account may be owned by one or more persons. Some accounts
require funds to be kept on deposit for a minimum length of time, while others permit unlimited
access to funds. Earnings may be in the form of dividends, as in the case of a share type savings
account, or interest as in the case of a deposit type account.

It is often the first option or the banking product which is preferred,

which offers low interest (4%- 5% p.a.), making them only marginally better than fixed deposits.

Savings account balance will carry interest on a daily basis. Saving bank account holders were
paid interest on average balances held between 10th and last day of the month. Savings Bank
account didn't fetch huge returns even if the balance on the beginning of the month was healthy.

Liquidity

Returns
Safety
1.2. Money market or Liquid funds:-

The money market is a component of the financial markets for

assets involved in short-term borrowing and lending with original maturities of one year or
shorter time frames. Trading in the money markets involves Treasury bills, commercial paper,
bankers' acceptances, certificates of deposit, federal funds, and short-lived mortgage- and asset-
backed securities.

They are specialized form of mutual funds that invest in extremely short term fixed income
instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds
are primarily oriented towards protecting the capital and then, aim to maximize returns. Money
market funds usually yield better returns than savings accounts, but lower than bank fixed
deposits.

Liquidity
Returns
Safety

1.3 Fixed deposits with banks:-

 Fixed deposits are loan arrangements where a specific amount of
funds is placed on deposit under the name of the account holder. The money placed on deposit
earns a fixed rate of interest, according to the terms and conditions that govern the account.
They are also referred to as term deposits and minimum investment period for bank FD’s is 15
days. Fixed be considered for 6 – 12 months investments period as normally interest on less than
6 months bank FD’s is likely to be lower than money market fund returns.

The most unusual characteristic of a fixed deposit is that the funds cannot be withdrawn for a
specified period of time. In most cases, fixed deposits carry duration of five years. During that
time, the money remains in the account and cannot be withdrawn for any reason. Individuals,
corporate entities, and even non-profit organizations that wish to set aside funds and limit their
access to the funds for a period of time often find that fixed deposits are a simple way to
accomplish this goal. As an added benefit, the monies in the account will earn a fixed rate of
interest regardless of any fluctuations in interest rates that apply to other types of accounts.

However, both these benefits can also turn into disadvantages under certain circumstances.
Because the money cannot be withdrawn until the duration is complete, the funds cannot be used
even in emergency situations. Changes in the going interest rate may also rise to a point above
and beyond the interest rate applied to existing deposits. This means account holders are actually
earning less interest with fixed deposits than with other types of loans and accounts.

Liquidity
Returns
Safety

2. Long term investment option:-

 Long term investment can be referred as the holding an asset for
an extended period of time, depending upon the type of security. A long term asset can be held
for one year minimum or as long as for 30 years or more.

Post office savings schemes, Public provident fund, Company fixed deposits, bonds and
debentures, Mutual funds etc.

2.1 Post office savings:-

It is a monthly income scheme which is low risk saving instrument, which

can be availed through any post office. It provides an return of 8% per annum, which is paid
monthly. Minimum amount which can be invested is Rs. 1,000 and additional investments in
multiples of 1,000.

Scheme Interest Payable, Rates , Denominations & Salient Features Including

Periodicity etc. Investment limits Tax Rebate
Post 8% per annum payable In multiple Rs. Maturity period is 6 years.
Office i.e. Rs. 80/- will be paid 1000/- Maximum Rs. Can be prematurely encashed
Monthly every month on a deposit 3 lakhs in Single after one year at 3.5%
Income of Rs 12000/-. In addition account and Rs. 6 discount. However, no such
Account 10% bonus is also lakhs in joint deduction shall be made if the
payable on maturity i.e. account. account is closed after three
Rs. 1200/- will be paid as years from the date of opening
bonus after 6 years for of such account. Interest &
deposit of Rs. 12000/-. bonus deductible under Sec.
80-L of I.T. Act.
Liquidity
Returns
Safety
2.2 Public Provident fund:-

A long term savings instrument with a maturity of 15 years and interest

at 8% per annum compounded annually. A PPF account can be opened through a nationalized
bank at anytime during the year and is open all through the year for depositing money. Tax
benefits can be availed for the amount invested and interest accrued is tax free. A withdrawal is
permissible every year from the seventh financial year of the date of opening. Up to 50% of the
balance at credit at the end of the 4th year immediately preceding year or current balance,
whichever is lower can be withdrawn.

Scheme Interest Denominations & Salient Features Including

Payable, Rates Investment limits Tax Rebate
, Periodicity
etc.
15 YEARS 8% per annum Minimum Rs. 500/-. Deposits quality for Income
PUBLIC from 1.3.2003 Maximum Rs. 70,000/- Tax Rebate under Sec. 88-of
PROVIDENT compounded in a financial year. I.T. Act. Interest is completely
FUND yearly. Deposits can be made in tax free. Withdrawal is
ACCOUNT lump sum or in 12 permissible every year from 7th
installments. financial year. Loan facility
available from 3rd financial
year. No attachment under
court decree order.

 The Public Provident Fund Scheme is a statutory scheme of the Central

Government of India.
 The Scheme is for 15 years.
 The rate of interest is 8% compounded annually.
 The minimum deposit is 500/- and maximum is Rs. 70,000/- in a financial year.
 One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.
 The deposit can be in lump sum or in convenient installments, not more than 12
Installments in a year or two installments in a month subject to total deposit of
Rs.70,000/-.
 It is not necessary to make a deposit in every month of the year. The amount of deposit
can be varied to suit the convenience of the account holders.
 The account in which deposits are not made for any reasons is treated as discontinued
account and such account can not be closed before maturity.
 The discontinued account can be activated by payment of minimum deposit of Rs.500/-
with default fee of Rs.50/- for each defaulted year.
 Account can be opened by an individual or a minor through the guardian.
 Joint account is not permissible.
 A Power of attorney holder can neither open or operate a PPF account.
 The grand father/mother cannot open a PPF behalf of their minor
grand son/daughter.
 The deposits shall be in multiple of Rs.5/- subject to minimum amount of Rs.500/-.
 The deposit in a minor account is clubbed with the deposit of the account of the Guardian
for the limit of Rs.70, 000/-.
 No age is prescribed for opening a PPF account.
 Interest is not contractual but rate is notified by Ministry of Finance, Govt. of India, at the
end of each year.
 The facility of first withdrawal in the 7th year of the account subject to a limit of 50% of
the amount at credit preceding three year balance. Thereafter one Withdrawal in every
year is permissible.
 Pre-mature closure of a PPF Account is not permissible except in case of death.
 Nominee/legal heir of PPF Account holder on death of the account holder can not
continue the account, but account had to be closed.
 The account holder has an option to extend the PPF account for any period in a block of 5
years on each time.
  The account holder can retain the account after maturity for any period without making
any further deposits. The balance in the account will continue to earn interest at normal
rate as admissible on PPF account till the account is closed.
 One withdrawal in each financial year is also admissible in such account.
 The PPF scheme is operated through Post Office and Nationalized banks.
 PPF account can be opened either in Post Office or in a Bank.
 Account is transferable from one Post office to another and from Post office to Bank and
from Bank to Post office.
 Account is transferable from one Bank to another bank as well as within the bank to any
branch.
 Deposits in PPF qualify for rebate under section 80-C of Income Tax Act.
 The interest on deposits is totally tax free.
 Deposits are exempt from wealth tax.
 The balance amount in PPF account is not subject to attachment under any order or
decree of court in respect of any debt or liability.
 Nomination facility available.
 Best for long term investment.

Liquidity
Returns
Safety

2.3 Company fixed deposit:-

Fixed Deposit is an amount of money on deposit with Financial Institutions

for a fixed term at a rate determined by the term and other factors. Fixed deposits in companies
that earn a fixed rate of return over a period of time are called Company Fixed Deposits.
Primarily, financial institutions and Non-Banking Finance Companies (NBFCs) also accept such
deposits. Deposits thus mobilized are governed by the Companies Act under Section 58A.

Company Fixed Deposits are adequate for regular income with the option to receive monthly,
quarterly, half-yearly, and annual interest income. Moreover, the interest rates offered are higher
than banks.

 High Safety - since most of these instruments are rated

 Attractive Returns
 Stable and Fixed Source of Income
 Better rates for Senior Citizens
 High Service Standards
 Nomination Facility
 Potential to earn compounding interest by reinvesting the principal amount along
with the interest earned during the period
 Flexible Tenure - most of the issuers offer various tenures ranging from 1 year to
7 years
 Convenience of interest frequency - Most issuers offer monthly, quarterly, semi-
annual , annual or cumulative deposits
 Simple operational process - no requirement of PAN
 Direct ECS credit facility for interest payments or advance interest warrants for
the year issued by most of the companies
 No TDS for interest payment upto Rs 5000/- per financial year

Liquidity Most of these issuers offer 75% of the investment amount as loan @
2% over the interest rate on the deposit as well as pre-mature
withdrawal
Returns
Safety

2.4 Bonds:-
 It is a fixed income instrument issued for a period of more than one year with the
purpose of raising capital. The central or state government, corporations and similar institutions
sell bonds. A bond is a promise to repay the principal along with a fixed rate of interest on a
specified date, called the Maturity date.

Example:- Tax Saving Long Term Infrastructure Bonds

A popular reason to invest in long term infrastructure bonds is because they allow you to reduce
Rs.20, 000 from your taxable income over and above the Rs. 100,000 limit under Section 80 (C).

So, the most you can reduce your taxable income without using the long term infrastructure
bonds is Rs. 100,000, but investing money in these bonds gets you an extra Rs. 20,000 off your
taxable income, and you can reduce your taxable income by a total of Rs. 120,000 by investing
in these long term infrastructure bonds.

This increases your effective yield because along with the interest you earn on these
infrastructure bonds, you save on tax as well.

These bonds are good for a maximum of Rs. 20,000 as far as the tax saving aspect is concerned,
so if you buy bonds worth Rs. 30,000 and nothing else, even then the maximum you can reduce
from your taxable income is Rs. 20,000 because that is the cap on tax benefits on Infrastructure
bonds.

Interest Rate of 7.5% or 8.0%

These bonds are getting issued under two lock in options:

1. Ten year maturity: The bond will be issued with a ten year maturity and offer 8.0% interest
per annum.

2. Ten year maturity with an option for buy-back after 5 years: This bond will also be issued
with a ten year maturity, but there will be buy back option after 5 years. The interest rate on this
is 7.5% per annum.
Minimum Investment in the IDFC Long Term Infrastructure Bond

The face value of the infrastructure bond is Rs. 5,000, and you have to apply for a minimum of
two bonds, so the minimum investment in this infrastructure bond is Rs. 10,000.

Liquidity
Returns
Safety

2.5 Mutual funds:-

These are funds operated by an investment company which raises money from the
public and invests in a group of assets (shares, debentures etc). In accordance with a stated set of
objectives. It is a substitute for those who are unable to invest directly in equities or debt because
of resource, time or knowledge constraints.
Why Invest in Mutual Funds?

Professional Management

Fund managers are professionals who track the market on an ongoing basis. With their mix of
professional qualification and market knowledge, they are better placed than the average investor
to understand the markets.

Diversification and Lowered Risks

Since a mutual fund is a trust that pools the savings of a number of investors sharing a common
financial goal, the associated risks are greatly reduced. This is also because a fund will invest
your money in different types of instruments like shares and bonds. Hence, loss in one sphere
will not greatly affect your overall investment status.

Low Costs

When compared to direct investments in the capital market, mutual funds cost less. This is due to
savings in brokerage costs, Demat costs, depository costs, etc.

Liquidity

Investments in mutual funds are quite liquid and hence can be redeemed at the Net Assets Value
(NAV)–related price on any working day.

Transparency

All that you invest in a scheme is made known to you and you are periodically informed about
all the updates and changes taking place

Flexibility

Mutual funds offer flexibility in their options and schemes to match individual needs. Also, with
features like regular withdrawal plans and systematic investment plans, you can withdraw or
invest funds according to your needs and convenience
Choice of Schemes

Mutual funds offer a vast variety of well-designed schemes and options that you can choose from
depending on your risk appetite.

Tax Benefits

In India, these funds become even more attractive because of the tax advantage, indexation
benefits, long term capital gains tax, tax free dividends and much more.

Liquidity
Returns
Safety

CONCEPT OF MUTUAL FUNDS

 A mutual fund is just the connecting bridge or a financial intermediary that allows a
group of investors to pool their money together with a predetermined investment objective. The
mutual fund will have a fund manager who is responsible for investing the gathered money into
specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or
portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the
fund.

Mutual funds are considered as one of the best available investments as compared to others.
They are very cost efficient and also easy to invest in, thus by pooling money together in a
mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they
tried to do it on their own. But the biggest advantage to mutual funds is diversification, by
minimizing risk & maximizing returns.

Mutual fund is a vehicle for investing in stocks and bonds. It is an alternative investment option
to stocks and bonds; rather it pools the money of several investors and invests this in stocks,
bonds, money market instruments and other types of securities.

Stocks represent shares of ownership in a public company. Examples of public companies

include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned
investment traded on the market.

Bonds are basically the money which you lend to the government or a company, and in return
you can receive interest on your invested amount, which is back over predetermined amounts of
time. Bonds are considered to be the most common lending investment traded on the market.
There are many other types of investments other than stocks and bonds (including annuities, real
estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.
Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit
gets a proportional share of the fund’s gains, losses, income and expenses.
The above diagram gives an idea on the structure of an Indian mutual fund.

Sponsor:

Sponsor is basically a promoter of the fund. For example Bank of Baroda, Punjab National Bank,
State Bank of India and Life Insurance Corporation of India (LIC) are the sponsors of UTI
Mutual Funds. Housing Development Finance Corporation Limited (HDFC)  and Standard Life
Investments Limited are the sponsors of HDFC mutual funds. The fund sponsor raises money
from public, who become fund shareholders. The pooled money is invested in the securities.
Sponsor appoints trustees.

Trustees:

Two third of the trustees are independent professionals who own the fund and supervises the
activities of the AMC. It has the authority to sack AMC employees for non-adherence to the
rules of the regulator. It safeguards the interests of the investors. They are legally appointed i.e.
approved by SEBI.
AMC:

Asset Management Company (AMC) is a set of financial professionals who manage the fund. It
takes decisions on when and where to invest the money. It doesn’t own the money. AMC is only
a fee-for-service provider.

The above 3 tier structure of Indian mutual funds is very strong and virtually no chance for fraud.

Custodian:

A Custodian keeps safe custody of the investments (related documents of securities invested). A
custodian should be a registered entity with SEBI. If the promoter holds 50% voting rights in the
custodian company it can’t be appointed as custodian for the fund. This is to avoid influence of
the promoter on the custodian. It may also provide fund accounting services and transfer agent
services. JP Morgan Chase is one of the leading custodians.

Transfer Agents:

Transfer Agent Company interfaces with the customers, issue a fund’s units, help investors
while redeeming units. Provides balance statements and fund performance fact sheets to the
investors. CAMS is a leading Transfer Agent in India.
 TYPES OF MUTUAL FUNDS

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk
tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a
collection of many stocks, an investors can go for picking a mutual fund might be easy. There
are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in
categories:-

1. General Classification of Mutual Funds:-

1.1. Open-end Funds:-

Funds that can sell and purchase units at any point in time are classified as Open-end
Funds. The fund size (corpus) of an open-end fund is variable (keeps changing) because of
continuous selling (to investors) and repurchases (from the investors) by the fund. An open-end
fund is not required to keep selling new units to the investors at all times but is required to
always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is
calculated every day.

1.2. Closed-end Funds:-

Funds that can sell a fixed number of units only during the New Fund Offer
(NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains
unchanged at all times. After the closure of the offer, buying and redemption of units by the
investors directly from the Funds is not allowed. However, to protect the interests of the
investors, SEBI provides investors with two avenues to liquidate their positions:

Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to
each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a
closed-end fund is computed on a weekly basis (updated every Thursday).

Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus
of the Fund and its outstanding units do get changed.

1.3. Load Funds:-

Mutual Funds incur various expenses on marketing, distribution, advertising,

portfolio churning, fund manager's salary etc. Many funds recover these expenses from the
investors in the form of load. These funds are known as Load Funds. A load fund may impose
following types of loads on the investors:

1.3.1 Entry Load Funds:-

Also known as Front-end load, it refers to the load charged to an investor at the
time of his entry into a scheme. Entry load is deducted from the investor's contribution amount to
the fund.

1.3.2 Exit Load Funds:-

Also known as Back-end load, these charges are imposed on an investor when
he redeems his units (exits from the scheme). Exit load is deducted from the redemption
proceeds to an outgoing investor.

1.3.3 Deferred Load:-

Deferred load is charged to the scheme over a period of time.

1.3.4 Contingent Deferred Sales Charge (CDSC): -

In some schemes, the percentage of exit load reduces as the investor

stays longer with the fund. This type of load is known as Contingent Deferred Sales Charge.
1.4. No-load Funds:-

All those funds that do not charge any of the above mentioned loads are known as
No-load Funds.

1.5. Tax-exempt Funds:-

Funds that invest in securities free from tax are known as Tax-exempt Funds. All
open-end equity oriented funds are exempt from distribution tax (tax for distributing income to
investors). Long term capital gains and dividend income in the hands of investors are tax-free.

1.6. Non-Tax-exempt Funds:-

Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In

India, all funds, except open-end equity oriented funds are liable to pay tax on distribution
income. Profits arising out of sale of units by an investor within 12 months of purchase are
categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented
fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption
proceeds to an investor.
2. Broad Classification of Mutual funds:-
 2.1 Equity Funds:-

Equity funds are considered to be the more risky funds as compared to other fund
types, but they also provide higher returns than other funds. It is advisable that an investor
looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are
different types of equity funds each falling into different risk bracket. In the order of decreasing
risk level, there are following types of equity funds:

2.1.1 Aggressive Growth Funds:-

In Aggressive Growth Funds, fund managers aspire for maximum

capital appreciation and invest in less researched shares of speculative nature. Because of these
speculative investments Aggressive Growth Funds become more volatile and thus, are prone to
higher risk than other equity funds.

2.1.2 Growth Funds:-

Growth Funds also invest for capital appreciation (with time horizon of 3 to 5
years) but they are different from Aggressive Growth Funds in the sense that they invest in
companies that are expected to outperform the market in the future. Without entirely adopting
speculative strategies, Growth Funds invest in those companies that are expected to post above
average earnings in the future.

2.1.3 Specialty Funds: -

Specialty Funds have stated criteria for investments and their portfolio comprises of
only those companies that meet their criteria. Criteria for some specialty funds could be to
invest/not to invest in particular regions/companies. Specialty funds are concentrated and thus, are
comparatively riskier than diversified funds.. There are following types of specialty funds:

a. Sector Funds:-

Equity funds that invest in a particular sector/industry of the market are known as
Sector Funds. The exposure of these funds is limited to a particular sector (say Information
Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they
are more risky than equity funds that invest in multiple sectors.

b. Foreign Securities Funds:-

Foreign Securities Equity Funds have the option to invest in one or more
foreign companies. Foreign securities funds achieve international diversification and hence they are
less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate
risk and country risk.

c. Mid-Cap or Small-Cap Funds:-

Funds that invest in companies having lower market capitalization than

large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of
Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more
than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500
crores. Market Capitalization of a company can be calculated by multiplying the market price of the
company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap
or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility
in share prices of these companies and consequently, investment gets risky.

d. Option Income Funds:-

While not yet available in India, Option Income Funds write options on a large
fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise
considered as a risky instrument. These funds invest in big, high dividend yielding companies, and
then sell options against their stock positions, which generate stable income for investors.

2.1.4 Diversified Equity Funds:-

Except for a small portion of investment in liquid money market, diversified

equity funds invest mainly in equities without any concentration on a particular sector(s). These
funds are well diversified and reduce sector-specific or company-specific risk. However, like all
other funds diversified equity funds too are exposed to equity market risk. One prominent type of
diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a
minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are
eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income
tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before
the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he
may have received any tax exemption(s) in the past.

2.1.5 Equity Index Funds:-

Equity Index Funds have the objective to match the performance of a specific
stock market index. The portfolio of these funds comprises of the same companies that form the
index and is constituted in the same proportion as the index. Equity index funds that follow broad
indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sect
oral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and
therefore, are more risky.

2.1.6 Value Funds:-

Value Funds invest in those companies that have sound fundamentals and whose
share prices are currently under-valued. The portfolio of these funds comprises of shares that are
trading at a low Price to Earnings Ratio (Market Price per Share / Earning per Share) and a low
Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from
diversified sectors and are exposed to lower risk level as compared to growth funds or specialty
funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which
make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-
term time horizon as risk in the long term, to a large extent, is reduced.

2.1.7 Equity Income or Dividend Yield Funds:-

The objective of Equity Income or Dividend Yield Equity Funds is to

generate high recurring income and steady capital appreciation for investors by investing in those
companies which issue high dividends (such as Power or Utility companies whose share prices
fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend
Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.
2.2 Debt Income Funds:-

Funds that invest in medium to long-term debt instruments issued by private

companies, banks, financial institutions, governments and other entities belonging to various
sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are
low risk profile funds that seek to generate fixed current income (and not capital appreciation) to
investors. In order to ensure regular income to investors, debt (or income) funds distribute large
fraction of their surplus to investors. Although debt securities are generally less risky than
equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or
principal payment. To minimize the risk of default, debt funds usually invest in securities from
issuers who are rated by credit rating agencies and are considered to be of "Investment Grade".
Debt funds that target high returns are more risky. Based on different investment objectives,
there can be following types of debt funds:

2.2.1 Diversified Debt Funds –

Debt funds that invest in all securities issued by entities belonging to all
sectors of the market are known as diversified debt funds. The best feature of diversified debt
funds is that investments are properly diversified into all sectors which results in risk reduction.
Any loss incurred, on account of default by a debt issuer, is shared by all investors which further
reduces risk for an individual investor.

2.2.2 Focused Debt Funds –

Unlike diversified debt funds, focused debt funds are narrow focus funds
that are confined to investments in selective debt securities, issued by companies of a specific
sector or industry or origin. Some examples of focused debt funds are sector, specialized and
offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds.
Because of their narrow orientation, focused debt funds are more risky as compared to diversified
debt funds. Although not yet available in India, these funds are conceivable and may be offered to
investors very soon.
2.2.3 High Yield Debt funds –

As we now understand that risk of default is present in all debt funds, and
therefore, debt funds generally try to minimize the risk of default by investing in securities issued
by only those borrowers who are considered to be of "investment grade". But, High Yield Debt
Funds adopt a different strategy and prefer securities issued by those issuers who are considered
to be of "below investment grade". The motive behind adopting this sort of risky strategy is to
earn higher interest returns from these issuers. These funds are more volatile and bear higher
default risk, although they may earn at times higher returns for investors.

2.2.4 Fixed Term Plan Series –

Fixed Term Plan Series usually are closed-end schemes having short term
maturity period (of less than one year) that offer a series of plans and issue units to investors at
regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed
term plan series usually invest in debt / income schemes and target short-term investors. The
objective of fixed term plan schemes is to gratify investors by generating some expected returns
in a short period.

2.3 Gilt Funds:-

Also known as Government Securities in India, Gilt Funds invest in government

papers (named dated securities) having medium to long term maturity period. Issued by the
Government of India, these investments have little credit risk (risk of default) and provide safety
of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest
rate risk. Interest rates and prices of debt securities are inversely related and any change in the
interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

2.4 Money Market / Liquid Funds:-

Money market / liquid funds invest in short-term (maturing within one year) interest
bearing debt instruments. These securities are highly liquid and provide safety of investment,
thus making money market / liquid funds the safest investment option when compared with other
mutual fund types. However, even money market / liquid funds are exposed to the interest rate
risk. The typical investment options for liquid funds include Treasury Bills (issued by
governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by
banks).

2.5 Hybrid Funds:-

As the name suggests, hybrid funds are those funds whose portfolio includes a
blend of equities, debts and money market securities. Hybrid funds have an equal proportion of
debt and equity in their portfolio. There are following types of hybrid funds in India:

2.5.1 Balanced Funds:-

The portfolio of balanced funds include assets like debt securities, convertible
securities, and equity and preference shares held in a relatively equal proportion. The objectives
of balanced funds are to reward investors with a regular income, moderate capital appreciation
and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for
conservative investors having a long term investment horizon.

2.5.2 Growth-and-Income Funds:-

Funds that combine features of growth funds and income funds are known
as Growth-and-Income Funds. These funds invest in companies having potential for capital
appreciation and those known for issuing high dividends. The level of risks involved in these
funds is lower than growth funds and higher than income funds.

2.5.3 Asset Allocation Funds:-

Mutual funds may invest in financial assets like equity, debt, money
market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds
adopt a variable asset allocation strategy that allows fund managers to switch over from one asset
class to another at any time depending upon their outlook for specific markets. In other words,
fund managers may switch over to equity if they expect equity market to provide good returns
and switch over to debt if they expect debt market to provide better returns. It should be noted
that switching over from one asset class to another is a decision taken by the fund manager on the
basis of his own judgment and understanding of specific markets, and therefore, the success of
these funds depends upon the skill of a fund manager in anticipating market trends.

2.6 Commodity Funds:-

Those funds that focus on investing in different commodities (like

metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are
termed as Commodity Funds. A commodity fund that invests in a single commodity or a group
of commodities is a specialized commodity fund and a commodity fund that invests in all
available commodities is a diversified commodity fund and bears less risk than a specialized
commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or
shares of gold mines) are common examples of commodity funds.

2.7.RealEstateFunds:- :-
Funds that invest directly in real estate or lend to real estate developers or invest in
shares/securitized assets of housing finance companies, are known as Specialized Real Estate
Funds. The objective of these funds may be to generate regular income for investors or capital
appreciation.
8.ExchangeTradedFunds(ETF):-
Exchange Traded Funds provide investors with combined benefits of a closed-
end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are
traded on stock exchanges like a single stock at index linked prices. The biggest advantage
offered by these funds is that they offer diversification, flexibility of holding a single share
(tradable at index linked prices) at the same time. Recently introduced in India, these funds are
quite popular abroad.

9.FundofFunds:-
Mutual funds that do not invest in financial or physical assets, but do invest in
other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of
Funds maintain a portfolio comprising of units of other mutual fund schemes, just like
conventional mutual funds maintain a portfolio comprising of equity/debt/money market
instruments or non financial assets. Fund of Funds provide investors with an added advantage of
diversifying into different mutual fund schemes with even a small amount of investment, which
further helps in diversification of risks. However, the expenses of Fund of Funds are quite high
on account of compounding expenses of investments into different mutual fund schemes.

PROCESS OF MUTUAL FUND

In the above graph shows how Mutual Fund works and how investor earns money by investing in
the Mutual Fund. Investors put their saving as an investment in Mutual Fund. The Fund Manager
who is a person who takes the decisions where the money should be invested in securities
according to the scheme’s objective. Securities include Equities, Debentures, Govt. Securities

Bonds, and Commercial Paper etc. These Securities generates returns to the Fund Manager. The
Fund Manager passes back return to the investor.

MUTUAL FUNDS COMPANIES IN INDIA

   
     
     

     
     

     
   

     

     

     

     
      

     

     

   

     

PORTFOLIO MANAGEMENT

People have different investment objective and risk appetite so to get the highest returns asset
allocation through active portfolio management is the key element.

Asset allocation is a method that determines how you divide your portfolio among different
investment instruments and provides you with the proper blend of various asset classes.
It is based on the theory that the type or class of security you own equity, debt or money market-
is more important than the particular security itself. In other words asset allocation is way to
control risk in your portfolio. Different asset class will react differently to market conditions like
inflation, rising or falling interest rates or a market segment coming into or falling out of favor.

Asset allocation is different from simple diversification. Suppose you diversify your equity
portfolio by investing in five or ten equity funds. You really have not done much to control risk
in your portfolio if all these funds come from only one particular segment of the market say large
cap stocks or mid cap stocks. In case of an adverse reaction for that segment, all the funds will
react similarly means they will go down.

If you build your portfolio with various top performing growth funds without really bothering to
analyze their portfolio allocation, you may end up with over-exposure to a particular segment.
Another point you need to remember is that growth funds are highly correlated- they tend to
move in the same direction in response to a given market force.

The advantage of asset allocation lies in achieves superior returns when markets are down while
minimizing the exposure of the portfolio to volatility. In fact, asset allocation is based on certain
dimensions that, when combined tend to control the volatility while achieving targeted returns.

PORTFOLIO MANAGEMENT PROCESS

Portfolio management is a complex activity, which may be broken down into the following
steps:
Specification of investment objectives and constraints:

The typical objectives sought by an investor are current income, capital appreciation, safety,
fixed returns on principal investment.

Choice of asset mix:

The most important decision in portfolio management is the asset mix decision. This is
concerned with the proportions of “Stock” or “Units” of mutual fund or “Bond” in the portfolio.
The appropriate mix of Stock and Bonds will depend upon the risk tolerance and investment
horizon of the investor.

Formulation of portfolio strategy:

Once the certain asset mix has been chosen an appropriate portfolio strategy has to be decided
out. Two broad portfolio choices are available An active portfolio management: it strive to earn
superior risk adjusted returns by resorting to market timing, or sector rotation or security
selection or some combination of these.

A passive portfolio management involves holding a broadly diversified portfolio and maintaining
a pre-determined level of risk exposure.

Designing a model Portfolio

There are certain objectives that should keep in mind while designing a portfolio these are:

 Higher absolute rate of return and high real rate of return

 Maximization current income

 High post tax returns

 Positive real return

 Preservation of capital

 Growth in capital

ANALYSIS & INTERPRETATION OF DATA

“An investment is the use of capital to create more money through the acquisition of a
security that promises the safety of the principal and generates a reasonable return”.

As savings have become an initial part of the economy’s growth through which not only the
investor benefits but also the economy of a country can be raised which really helps to achieve a
growth rate or to meet the cost of Inflation. Inflation is the rate at which the cost of living
increases. The cost of living is simply what it costs to buy the goods and services you need to
live. Inflation causes money to lose value because it will not buy the same amount of good or a
service in the future as it does now or did in the past.

Therefore, it is important to consider inflation as a factor in any long term investment strategy.
The real rate of return on the investment is when the rate of returns achieved after inflation. The
aim of investments should be to provide a return above the inflation rate to ensure that the
investment does not decrease in value. So, there are financial options provided for investment
into two terms i.e. short and long term investment options.

MUTUAL FUNDS:-

Mutual fund is a divided investment where there is a risk diversification is

been done, some are pure equity schemes; others are a mix of equity and bonds. Investors are
also given the option of getting dividends, which are declared periodically by the mutual fund, or
to participate only in the capital appreciation of the scheme.
Portfolio of Mutual fund investment

HDFC PRUDENCE FUND – GROWTH

Fund Features

Type of Scheme    Open Ended Fund Manager Prashant Jain,

Anand Laddha .
Nature    Equity & Debt SIP
Option    Growth STP
Inception Date    Feb 1, 1994 SWP
Face Value    10 Expense ratio(%) 1.84
(Rs/Unit) Portfolio Turnover 33.1
Fund Size in Rs.    5078.31 as on Aug Ratio(%)
Cr. 31, 2010

As open ended is a scheme where the funds sell and purchase units at any point of time.
The fund size (corpus) of an open-end fund is variable (keeps changing) because of continuous
selling (to investors) and repurchases (from the investors) by the fund.

Fund size Amount ( in crores)

As on 31st Aug 2010 5078.31

As on 30th Sep 2010 5438.04

 Last Dividend Declared 12 % as on Sep 28, 1998
Minimum Investment 5000
(Rs)

Purchase /Redemptions Daily

NAV Calculation Daily
Entry Load Entry Load is 0%.
Exit Load If redeemed bet. 0 Year to 1 Year; Exit load is 1%.

   An open-end fund is not required to keep selling new units to the investors at all times but is
required to always repurchase, when an investor wants to sell his units. The NAV of an open-end
fund is calculated every day.

NET ASSET VALUE

Latest NAV 221.70 as on Oct

1, 2010
Benchmark Index - 3,633.64 as on Sep
Crisil Balanced Fund 30, 2010
Index
52 - Week High 221.70 as on Oct 1,
2010
52 - Week Low 157.27 as on Nov
3, 2009

Latest NAV 222.67 as on Oct 7,

2010

Benchmark Index - 3,669.36 as on Oct 7,

Crisil Balanced Fund 2010
Index

52 - Week High 222.84 as on Oct 6

52 - Week Low 157.27 as on Nov 3,

2009
 

As there is a daily NAV calculations so there is a change in the graph.

RISK & RETURNS

Scheme performance as on October 2010

1 Month 3 Months 6 Months 1 yr 3 yrs 5 yrs Since

Inception
5.71 13.54 20.52 37.73 17.34 23.20 20.52

The calculation of the returns is been dependent on the Net asset value which keeps changing on
daily basis and it is most probably affected by the Sensex too. Due to which the nature of mutual
funds differ and the risk is been diversified. The returns are divided periodically.

PORTFOLIO

P/E 24.61 as on  Aug - 2010

P/B 5.95 as on  Aug - 2010
Dividend Yield 1.22 as on  Aug - 2010
Market Cap (Rs. in crores) 53,321.78 as on  Aug - 2010
Large 37.20 as on Aug - 2010
Mid 28.21 as on Aug - 2010
Small 5.78 as on Aug - 2010
Top 5 Holding (%) 20.16 as on Aug - 2010
No. of Stocks 103
Expense Ratio (%) 1.84
Large caps:

A term used by the investment community to refer to companies with a market

capitalization value of more than $10 billion. Large cap is an abbreviation of the term "large
market capitalization". Market capitalization is calculated by multiplying the number of a
company's shares outstanding by its stock price per share.

Mid caps:

A type of stock fund that invests in mid-sized companies. A company's size is

determined by its market capitalization, with mid-sized firms generally ranging from $2 billion
to $10 billion in market cap. Most stocks held in a mid-cap fund are firms with established
businesses that are still considered developing companies. These funds tend to offer more growth
than large-cap stocks and less volatility than the small-cap segment.

Small cap:
Generally it is a company with a market capitalization of between $300 million and $2
billion. One of the biggest advantages of investing in small-cap stocks is the opportunity to beat
institutional investors. Because mutual funds have restrictions that limit them from buying large
portions of any one issuer's outstanding shares, some mutual funds would not be able to give the
small cap a meaningful position in the fund. To overcome these limitations, the fund would
usually have to file with the SEC, which means tipping its hand and inflating the previously
attractive price.
 Stock Sector P/E Percentag Qty Value Percentage
e of Net of Change
Assets with last
month
State Bank of Banks 21.06 4.74 870,000 240.68 274.38
India
Cash Current Assets NA 4.70 NA 239.59 -1.79

Oil & Natural Petroleum, Gas 19.24 3.49 1,325,000 177.23 21.57
Gas Corps Ltd and petrochemical
products
Bank of Baroda Banks 10.09 3.18 2,003,290 161.25 6.99

Titan Industries Consumer 50.97 2.79 483,424 141.72 4.48

Ltd Durables and
Electronics
Indian Railway FI NA 2.51 1,150 127.46 0.08
Finance
Corporation Ltd
Tata Software and 30.61 2.16 1,300,000 109.69 0.47
Consultancy Consultancy
Services Ltd. Services
3M India Ltd. Industrial 47.87 2.13 326,225 108.15 -4.95
Products
ICICI BANK Banks 30.55 2.12 1,098,900 107.44 1,251.51
LTD.
GOI Sovereign NA 1.99 10,000,00 100.86 164.31
0

Airliners 0.08
 Auto & Auto Ancillaries 4.92
Banks 16.30
Chemicals 2.55
Construction and Infrastructure 1.23
Consumer Durables and Electronics 3.68
Current Assets 4.70
Custodial, Depository, Exchanges and rating agencies 0.45
Engineering and Capital Goods 1.60
FI 4.97
FMCG 1.87
Food & Food Processing, Beverages 3.05
Garments, Fashion wear, Lifestyle 1.92
Green Transportation 0.20
Healthcare and related equipment manufacturers 1.48
HFC 2.24
Industrial Products 2.71
Leather & Leather Products 1.39
Media and Entertainment 4.25
NBFC 0.72
Paper and Natural fibre 1.13
Petroleum, Gas and petrochemical products 10.26
Pharmaceuticals & Biotechnology 5.28
Power & Control equipment Manufacturer 1.30
Power Generation 1.52
Power Transmission 0.89
Realty 0.29
Retailers 0.20
Software and Consultancy Services 3.44
Sovereign 11.72
Steel and Ferrous Metal 1.04
Telecom Services 1.93
Textiles 0.69

The market share of the stocks, bonds etc keeps on changing as there is a change in the Sensex
the valuation changes so the sector which yields in that duration is given more preference, and
Sector mutual funds promote themselves as helping to spread the risk of investing. Instead of
buying shares of a few companies in the same line of business, you buy a mutual fund that only
invests in companies belonging to that sector. With the pool of money brought in from different
investors, the mutual fund is able to buy shares of many companies. Thus, you have spread your
risk from a few companies to hundreds of companies. For example as in the above chart there is
a sector allocation is high in Banks than other that is 16.30 rather other fetch a bit lesser
compared to it. Here, the risk is been diversified so as to yield higher returns.

Equity Debt Cash & Equivalent

71.60 23.70 4.70

Equity or Stocks are ownership shares investors buy in a

corporation. When you make equity investments, you become part-owner (to the extent of your
shareholding) of the company you have invested in. However, there is no particular rate of return
indicated while investing. The current value of your holding is reflected in the price at which the
stock/share is traded in the stock markets. Hence, these constitute a relatively riskier form of
investment.
Debt instruments or Bonds are loans investors make to
corporations or the government. They promise a fixed return at the time of making the
investment. Also the promise of getting the money back is dependent on who is making the
promise. In case of the Government, the promise will certainly get fulfilled, but if the issuer of
debt is a company or an institution, the quality of the issuer needs to be adjudged, to ascertain its
ability to keep the promise. Debt investments, therefore, provide you with the promise that your
principal will be returned along with the interest payable thereon.

Cash includes money in bank savings accounts and other liquid investment options.

Balance fund like HDFC Prudence Fund –

This Mutual Fund invests in both equity (71%) , debt

(27%) instruments and cash instrument (4%). This is one of the safest funds with a great track
record of over 14 years, and has been giving a compounding return of around 20-25% per year.
This fund has one important virtue: it manages to lose less than the category average in periods
of downside. Couple this with its tendency to top charts & you get a safe & sure fund in HDFC
Prudence. Invest 30% of the funds in HDFC Prudence. This was an example of Systematic
Investment Planning (SIP).

Systematic Investment Planning is a form of Mutual fund which probably can be invested by any
class of people, it has a lower investment rates. Now we will compare PPF with Mutual funds.

Public Provident fund:-

It is a long term investment savings with a maturity of 15 years and interest

payable at 8% per annum compounded annually.

In case of PPF’s where the returns are fixed and most probably guaranteed but it is been for a
longer duration then the returns are enjoyed but in case of Mutual funds offer different time
periods as well as it is also important to know that it has a diversified portfolio which has a better
potential.

Example:-

a. If you play completely safe and say invest all your money in PPF @8% compounding, your Rs
2000 invested every month or RS. 24,000 invested annually will grow to 11, 86, 150. This
amount is guaranteed by the way, unless the government tinkers with the PPF rate. You can do
this calc simply in excel by multiplying 24k * 1.08, and adding 24K to the previous year’s value
and again multiplying by 1.08. Do this for 20 yrs and you will see the above value of Rs. 11, 86,
150.

2. If you can take slightly higher risk and split the available 24,000 equally between PPF and a
reputed mutual fund like HDFC Prudence for example. You will get 8% compounding with your
PPF and say 15% compounding with HDFC Prudence. PPF will grow to Rs.5, 93,075 and HDFC
Prudence may grow to Rs.14, 13,721; totally, a nice sounding Rs. 20, 06,796!!
Most of us leave a good amount of our income in the savings account. According to a RBI
report, the savings deposits comprise almost 20-25% of total deposits in scheduled commercial
banks. Clearly, the savings account works well as a vehicle for personal fiscal management
especially, as our utility bill payments, household expenses and impulsive shopping depends on
it.  Also, an emergency fund equivalent to 3-6 months of earnings protects you from any
unforeseen and immediate requirement.

Here, we look at some of the short-term savings instrument and how wise allocation to different
assets can grow your money. 

Interest from savings account

The savings rate currently stands at 3.5%.  Good news is that from 1 April 2010, the interest on
your savings account will be calculated on daily basis. So, you may wonder how it was
calculated in first place.

In 1997, the interest rates on banks were de-regulated which means different banks could then fix
rates depending the size and tenure of deposits.  As a result, banks became more competitive in
terms of deposit rates and services rendered to consumers. However, the savings account rate
being the only rate pre-decided by the central bank was calculated on the basis of minimum
balance of the account holder for the period between 10th and end of the month. Even if your
account balance reflected thousands during the month, if the balance in your account was zero,
even for a single day between the tenth and last day of the month, you would earn no interest.
Due to this method, the effective yield is lower than 3.5%. Interestingly, banks follow the
method of daily calculation of interest against loans extended to you.

Going ahead, the money lying in your savings account will earn interest using the daily method
of computation wherein the average of the account balance at the end of the day will be taken.
So, the closing balance every day will be added up and divided by no. of days and thereafter,
multiplied with savings rate.   Thus, this practice is expected to remove the anomaly in
calculation.
Mutual funds

Considering that the savings account forms an important part of your finances, we intend to
evaluate it along side some of the debt mutual fund products. Liquid, liquid plus, short term
income funds, floater funds are the different types of mutual funds which cater to a short-term
investment horizon. These funds typically invest in short maturity fixed income instruments
whose returns depend on prevailing as well as anticipated rise/fall in interest rates and supply of
money in the banking system. Also, the extent of government borrowing determines the demand
for the stated fixed income instruments in the market. Large borrowing programmed of the
government means huge issuances of debt paper in the market, thereby restricting increase in
bond prices and hence, reduced returns. 

Apart from fixed coupon papers, there are also floating rate papers which have a facility to reset
the coupon rate periodically. So these papers are protected against hike in interest rates but also,
when interest rates fall, such papers are more likely to be affected.  An ultra short-term or liquid
fund invests in Treasury Bills issued by the government as well as money market instruments
issued by financial institutions and corporate such as certificates of deposits and commercial
papers. The treasury bills and most money market instruments are not linked to the market and
hence, have low volatility. The taxation for non-equity schemes of mutual funds if the period of
holding is less than a year is as per your income slab. In case of long-term, the tax is 10%
without indexation and 20% with indexation so the net yield works out better than a fixed
deposit. Table 1 shows the historical performance of recommended funds.
 Table 1: Annualized Performance of Recommended Funds
Fund Name Fund Class 1 2 3 5 years
year year year
s s
HDFC FLOATING RATE Debt - Floater  7.09 8.47 8.54 7.52
INCOME FUND LONG TERM
PLAN- GROWTH 
BSL FLOATING RATE LONG Debt - Floater  7.69 8.29        7.58
TERM- GROWTH  8.41
TEMPLETON INDIA ULTRA Debt - Liquid 4.66 6.73 - -
SHORT BOND FUND- Plus / Ultra Short
GROWTH  Term 
JM SHORT TERM FUND- Debt - Short 5.04 10.6 10.3 8.61
GROWTH  Term Plan  9 5
RELIANCE SHORT TERM Debt - Short 5.80 10.1 10.0 8.71
FUND- GROWTH  Term Plan  6 6

Inflation erodes Cash

During the crisis of 2008, investors moved out of equity into cash as they feared massive losses.
Cash as a part of overall asset allocation is good but biggest threat to cash holding is inflation.
RBI has termed the period of low inflation and robust growth - an almost “nirvana” like
situation. Table 2 shows that the inflation in India has been quite high over years. WPI stands for
Wholesale Price Index and CPI represents Consumer Price Index. Both indices are used as a
measure to understand the level of price rise in the economy.

For investors who are approaching retirement or a big expense such as marriage or home
purchase, rebalancing from equity to cash or fixed income is a prudent approach. However, if
you are unlikely to use the cash in the near future, then it is better to invest in one or the other
instrument. Or else, inflation will end up drastically reducing the value of money held as cash.
The actual return on your investment should be considered after taking into account the effect of
inflation.  On an average inflation rate of 7.5%, the impact of inflation can be negated only by
ensuring that your returns from investments give an average growth greater than 7.5%.

This information tries to share some trends which can impact your financial goals. Since a good
cash position is very comforting, you can invest wisely so that the investments mature in time to
supplement your financial needs. Also, one can en-cash the portfolio to book profits or rebalance
it for better yield.  The ideal scenario would be managing your short-term savings and aligning it
with your long-term investments.

Table 2: Inflation in India: Medium to Long-term

(%)
Decades  WPI CPI
1951-52 to 1960-61   1.9 2.1
1961-62 to 1970-71  6.2 6.5
1971-72 to 1980-81   10.3 8.3
1981-82 to 1990-91 7.1 9
1991-92 to 2000-01   7.8 8.7
2001-02 to 2008-09  5.2 5.3
Long-term Trend (1971-72 to 7.7 8.0
2008-09)
 Amount in Rs

Investment F.D./ NSC Diversified Equity MF

NSC/ FD VS Equity/
Amount 10000 10000
MF Comparison table
Period 6 years 6 years Investments

Maturity Value 15868.74 29859.84

( Fixed Deposit/
Tax on Income/ 1573.68 0
National Savings
Capital gains
Certificate Vs
Inflation 4185.19 4185.19 Diversified Mutual
Fund)
Value of Inv after 5 10109.87 25674.65
Years

(post tax post inflation)

Difference (15564.78)

Rates Per annum

Inflation 6%

Rate of Interest on 8%
F.D./NSC

Rate of Return on MF 20% (Last five years average

40%)

Income Tax rate 30%

An old Axiom :

“It is not wise to put all eggs into one basket

……… was probably in

the minds of those who formed the first mutual fund.

Investing in equity also gives good returns, but the risk of losing the money is also very
high. To be on the safer side, it is good to invest in Mutual funds instead of investing in equities.
Before investing in mutual funds, we should analyze the performance of the mutual funds
through the ratings awarded by the mutual funds rating agencies.

Mutual fund investments can go on to fetch you the highest rates of returns and sometimes as
high as 20% to 40 %. The interest rates for all the mutual funds are quoted on a three month
basis. When you plan to invest in mutual funds, then you should analyze how they were
performing in the market for the past five years. This will give you a fair enough idea about the
way the mutual fund is being maintained and the profits that they have been posting. This will
also give an idea of the fund managers profile and level of expertise in generating returns.

The moment you are able to judge the best mutual funds and be in league with them, you will
certainly be able to diminish the risk that is involved with the mutual fund markets.

The Mutual funds that are performing well are floated by companies that have high profile fund
managers. They have enough cutting edges to be ranked right on top performing funds and are
doing well in the spheres of certain well defined criteria that have been preset to judge their
performance.
 FINDINGS & SUGGESTIONS

Mutual funds are conglomerations of stocks and bonds and therefore

their prospectus depends on how well the individual investments are doing. Fees can of course
also make a difference and all related charges associated with a mutual fund must also be
considered. Fees for mutual funds are classified as end load, front load and no load. Through
proper research, you will become informed of what types of fees are involved and whether or not
they are worth what you can expect out of the investment.

At the very minimum, when investing in a mutual fund you should know the category of
investments it focuses on, the asset value, the management strategy, the risk level of the assets
involved, and the funds relationship with the overall stock market outlook. As long as you are
well versed in these areas, the rest is just icing on the cake as long as you have chosen a well
managed fund.

Considerations for mutual fund categories include goals and objectives, classification of
securities in the fund and likely return expected for each category. Of all the important factors
when choosing a mutual fund, category is likely the most important.
Research should be conducted using as long a history as is available. All financial instruments
fluctuate greatly from one day to another but the important thing is how they perform over the
long term. Try to couple this history with the time period you plan on investing since trends seem
to run ii n cycles. Just because a fund isn’t currently in the top 10% of earners doesn’t mean that
it’s not an extremely lucrative fund over the long term. Don’t forget to also check the individual
histories of the stocks or other instruments in which the fund is invested.

Like any investment, mutual funds require careful planning. Overall, the strategy is pretty much
the same regardless of what type of investment you are making, but due to their nature mutual
funds require a slightly different form of research.

There are several factors that distinguish mutual funds from other types of funds. Those factors
are:

 The shares are purchased from the actual fund instead of from other investors via such
avenues as NSE or BSE.

 The purchase price is the price per share plus any fees imposed by the fund at the time.
These are commonly referred to as shareholder fees.

 When selling the shares, you are selling them back to the fund.

 New investors are accommodated through the creation of new funds that can be sold to
them.

 Investment advisors that are registered with the SEC are typically who takes care of
mutual funds.

Advantages and disadvantages to mutual funds:-

 Diversification of your portfolio - This is important in investing because a diversified

portfolio has better earning potential.
  They are affordable - There is a high degree of affordability when it comes to mutual
funds. Dollar amounts can be set low for purchases, giving lower income individuals the
ability to invest.

 Managed professionally - There are professionals who are constantly monitoring the
performance of these mutual funds and always looking for the best investments for the
fund in order to maximize its return to its investors.

 Liquidity - Investors are able to redeem their shares at the current NAV. This is in
addition to any fees or charges assessed at that time.

The advantages make it clear that a mutual fund can be a great investment, but like any type of
investment there are some disadvantages that come along with them as well. Those
disadvantages include:

 There are annual fees, charges for sales, and other fees associated with them. It doesn't
matter how the fund performs. These costs still apply. Taxes also have to be paid on
gains. This refers to any distributions received even if the fund performed poorly.

 Investors do not control their shares. The make-up of the portfolio is decided by the
manager of the fund.

 There is uncertainty that surrounds the price of shares. It isn't like how you can follow
regular shares of stock in real-time during trading hours. There is a delay in you finding
out what your share is within a mutual fund since you are sharing the fund with other
investors.
If a investor opts for bank FD, which provide moderate return with minimal risk. But as he
moves ahead to invest in capital protected funds and the profit-bonds that give out more return
which is slightly higher as compared to the bank deposits but the risk involved also increases in
the same proportion.

Thus investors choose mutual funds as their primary means of investing, as Mutual funds
provide professional management, diversification, convenience and liquidity. That doesn’t mean
mutual fund investments risk free. This is because the money that is pooled in are not invested
only in debts funds which are less riskier but are also invested in the stock markets which
involves a higher risk but can expect better returns.

The Post offices provide a number of savings schemes like the Savings Account Schemes,
Recurring Deposit Schemes, Time Deposit Schemes, Public Provident Fund Schemes, Monthly
Income Schemes, National Savings Certificates, Kisan Vikas Patras, and Senior Citizens’
Savings Scheme. A brief of the various schemes is as follows:

SCHEME INTEREST PAYABLE, INVESTMENT SALIENT FEATURES

 RATES, PERIODICITY LIMITS AND INCLUDING TAX
ETC. DENOMINATIONS REBATE

Post Office 3.5% per annum on Minimum INR 50/-. Cheque facility
Savings individual/ joint accounts. Maximum INR available.  Interest Tax
Account 1,00,000/- for an Free.
  individual account.
INR 2,00,000/- for
joint account.

5-YearPost Money doubles in 8 years & 7 Minimum INR 10/- One withdrawal upto
Office months. Facility for premature per month or any 50% of the balance
Recurring encashment. amount in multiples allowed after one year.
Deposit Rate of interest 8.4% of INR 5/-. No Full maturity value
Account (compounded yearly) maximum limit. allowed on R.D.
Accounts restricted to
that of INR. 50/-
denomination in case of
death of depositor
subject to fulfillment of
certain conditions. 6 &
12 months advance
deposits earn rebate.

KisanVikas Money doubles in 8 years & 7 No limit on A single holder type

Patra months. Facility for premature investment. Available certificate may be issued
encashment. in denominations of to an adult for himself or
Rate of interest 8.4% INR. 100/-, INR. on behalf of a minor or
(compounded yearly) 500/-, INR. 1000/-, to a minor, can also be
INR. 5000/-, INR. purchased jointly by two
 10,000/-, in all Post adults.
Offices and INR.
50,000/- in all Head
Post Offices.

Post Office Interest payable annually but Minimum INR 200/- Account may be opened
Time calculated quarterly. and in multiple by individual. 2,3 & 5
Deposit Period          Rate thereof. No year account can be
Account 1 yr. A/c      6.25% maximum limit. closed after 1 year at
2 yr. A/c      6.50% discount. Account can
3 yr. A/c      7.25% also be closed after six
5 yr. A/c      7.50% months but before one
year without interest.
The investment under
this scheme qualifies for
the benefit of Section
80C of the Income Tax
Act, 1961 from 1.4.2007.

Post Office 8% per annum payable i.e. In multiples of INR Maturity period is 6
Monthly INR 80/- will be paid every 1500/- Maximum years. Can be
Income month on a deposit of INR INR 4.5 lakhs in prematurely encashed
Account 12000/-. single account and after one year but before
INR 9 lakhs in joint 3 years at the discount of
account. 2% of the deposit and
after 3 years at the
 discount of 1% of the
deposit. (Discount means
deduction from the
deposit.) A bonus of 5%
on principal amount is
admissible on maturity in
respect of MIS accounts
opened on or after
8.12.07.
National 8% Interest compounded six Minimum INR. 100/- A single holder type
Savings monthly but payable at No maximum limit certificate can be
Certificate maturity. INR. 100/- grows to available in purchased by an adult for
(VIII issue) INR 160.10 after 6 years. denominations of himself or on behalf of a
  INR. 100/-, 500/-, minor or to a minor.
1000/-, 5000/- & Deposits quality for tax
INR. 10,000/-. rebate under Sec. 80C of
IT Act.
The interest accruing
annually but deemed to
be reinvested will also
qualify for deduction
under Section 80C of IT
Act
Senior 9% per annum, payable from There shall be only Maturity period is 5
Citizens the date of deposit of 31st one deposit in the years. A depositor may
Savings March/30th Sept/31st account in multiple operate more than a
Scheme December in the first instance of INR.1000/- account in individual
& thereafter, interest shall be maximum not capacity or jointly with
payable on 31st March, 30th exceeding rupees spouse.  Age should be
June, 30th Sept and 31st fifteen lakhs. 60 years or more, and 55
December. years or more but less
than 60 years who has
 retired on
superannuation or
otherwise on the date of
opening of account
subject to the condition
that the account is
opened within one month
of receipt of retirement
benefits. Premature
closure is allowed after
one year on deduction of
1.5% interest & after 2
years 1% interest. TDS is
deducted at source on
interest if the interest
amount is more than INR
10,000/- p.a.  The
investment under this
scheme qualifies for the
benefit of Section 80C of
the Income Tax Act,
1961 from 1.4.2007.
Sec 80C benefit: Investments up to INR 1 lakhs in specified securities (maximum of INR 70,000
in PPF) qualify for deduction

         Compounded half-yearly

         Compounded yearly

         Compounded quarterly

         Payable quarterly 

 There is a great option to put your money into and have liquidity as
well as earn good returns too also. Best choice is a liquid mutual fund.
Liquid mutual funds are open ended debt mutual funds. There is zero entry or exit load. They are
safe options as they are not invested into equity or markets. These are best place to invest for
short periods of time (even for 1-2 days). Also they give better returns than FDs and savings
bank account.

Whenever, you need money back, just redeem the funds and amount will be back in your account
in max 2 business days.

How much income tax one need to pay on returns from liquid mutual fund: In case of a liquid
fund with dividend option, dividends declared by mutual funds units are exempt from tax in the
hands of recipients. Dividend distribution tax of 22.06% is paid by the fund and is adjusted in the
net asset value (NAV) of fund.

Some best performing Liquid mutual fund:

LIC LIQUID FUND – GROWTH PLAN
HDFC Liquid Fund – Growth
Birla Cash Plus – Retail – Growth
HDFC Cash Management Fund – Saving Plus – Growth
Magnum Insta Cash Fund Liquid Floater Plan – Growth
HDFC Cash Management Fund-Savings-Growth

There are two types of these short terms debt funds available, Liquid and Liquid Plus.
Now question come to mind, how they differ and when to invest in which one.
Liquid plus funds holds investments for a longer period than liquid funds. So people investing in
liquid plus should hold for longer duration than liquid ones. Investors who need liquidity should
go for liquid funds. Some of the liquid plus funds may have an exit load. But there is no entry
load on liquid funds. Liquid Plus funds are a bit riskier than liquid funds as they hold
investments for a longer duration and also there is no limit on market-to-market components but
liquid funds has 10% limit on it. A dividend distribution tax of 28.33% is charged on liquid
funds, whereas 14.16% is charged for liquid plus funds.
BIBILIOGRAPHY