A Project Report

On
A
Study On
Comparison of Mutual Fund Schemes
With
Reference
To
Motilal Oswal Securities Ltd., Anantapur

SUBMITTED BY:
P. Sumanth
18HX1E0035

UNDER THE GUIDANCE OF:

Dr. K. Rajendra Prasad

1|Page
 CHAPTER-1
INTRODUCTION

2|Page
INTRODUCTION:

A Mutual fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could range
from shares to debentures to money market instruments. The income earned through these
investments and the capital appreciations realized by the scheme are shared by its unit holders
in proportion to the number of units owned by the (pro rata). Thus a Mutual fund is the most
suitable investment for the common man as it offers an opportunity to invest in a diversified,
professionally managed portfolio at a relatively low cost. Anybody with an inventible surplus
of as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a
defined investment objective and strategy.

A mutual fund is the ideal investment vehicle for today's complex and modern
financial scenario. Markets for equity shares, bonds and other fixed income instruments, real
estate, derivatives and other assets have become mature and information driven. Price
changes in these assets are driven by global events occurring in faraway places. A typical
individual is unlikely to have the knowledge, skills, inclination and time to keep track of
events, understand their implications and act speedily. An individual also finds it difficult to
keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.

A mutual fund is answer to all these situations. It appoints professionally qualified

and experienced staff that manages each of these functions on a full time basis. The large

3|Page
pool of money collected in the fund allows it to hire such staff at a very low cost to each
investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas -
research, investments and transaction processing. While the concept of individuals coming
together to invest money collectively is not new, the mutual fund in its present form is a 20th
century phenomenon. In fact, mutual fund gained popularity only after the Second World
War. Globally, there are thousands of firms offering tens of thousands of mutual funds with
different investment objectives. Today, mutual funds collectively manage almost as much as
or more money as compared to banks.

A draft offer document is to be prepared at the time of launching the fund. Typically,
it pre specifies the investment objectives of the fund, the risk associated, the costs involved in
the process and the broad rules for entry into and exit from the fund and other areas of
operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI
(Securities exchange Board of India) in our case. SEBI looks at track records of the sponsor
and its financial strength in granting approval to the fund for commencing operations.

A sponsor then hires an asset management company to invest the funds according to
the investment objective. It also hires another entity to be the custodian of the assets of the
fund and perhaps a third one to handle registry work for the unit holders (subscribers) of the
fund.

In the Indian context, the sponsors promote the Asset Management Company also, in
which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset
Management Company (AMC). E.g. ICICI is the sponsor of the ICICI PRUDENTIAL AMC
Ltd., which has floated different mutual funds schemes and also acts as an asset manager for
the funds collected under the schemes.

A mutual fund is a collective investment fund formed with the objective of raising
money from a large number of investors and investing it in accordance with a specified
objective to provide returns that accrue pro rata to all the investors in proportion to their
investment. The units held by an investor represent the stake of the investors in the fund. A
professionally qualified and experienced team manages the investments and all other
functions. With the large pool of money, a mutual fund is able to exploit economies of scale
in the areas of research, investing, shuffling the investments and transaction processing - it is
able to hire professionals in these functions at a very low cost per investor.

4|Page
 As per SEBI regulations, mutual funds can offer guaranteed returns for a maximum
period of one year. In case returns are guaranteed, the name of the guarantor and how the
guarantee would be honored is required to be disclosed in the offer document.

Definition Of Mutual Fund:

“A Mutual fund is an investment that pools yours money with the money of an
unlimited number of other investors. In return, you and the other investors each own shares of
the fund".

"Mutual funds are collective savings and investment vehicles where savings of small
or big investors are pooled together to invest for their mutual benefit and returns distributed
proportionately".

Mutual funds are investment vehicles that pool money from many different investors
to increase their buying power and diversify their holdings. This allows investors to add a
substantial number of securities to their portfolio for a much lower price than purchasing each
security individually.

ORGANISATION OF A MUTUAL FUND:

5|Page
 A Mutual Fund is set up in the form of trust, which has sponsor, trustees, asset
management company (AMC), and custodian. The trust is established by sponsor or more
than one sponsor who is like a promoter of company. The trustee of mutual fund holds its
property for the benefit of unit holders. Asset Management Company (AMC) approved by
SEBI manages the funds by making investments in various types of securities. Custodian,
who registered with SEBI, holds the securities of the fund in its custody. The trustees are
vested with the general power of superintendence and direction over AMC. They monitor the
performance and compliance of SEBI regulations by mutual fund.

SEBI regulations required that at least two thirds of the directors of trustee company
or board of trustees must be independent i.e. they should not be associated with sponsors.
Also, 50% of the directors of the AMC must be independent. All mutual funds are required to
be registered with SEBI before they launch their schemes.

TYPES OF MUTUAL FUND SCHEMES

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.

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:

1. 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).

2. 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.

6|Page
Interval Funds:

These combine the features of open-ended and close-ended schemes. They may be
traded on the stock exchange or may be open for sale or redemption during predetermined
intervals at NAV related prices.

[Load Funds | No-load Funds]:

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. Entry Load –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.

2. Exit Load – 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.

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

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.

No-load Funds:

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

Tax-exempt Funds [Non-Tax-exempt Funds]:

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.

Non-Tax-exempt Funds:

7|Page
 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 13 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.

BENEFITS OF MUTUAL FUND INVESTMENT:

 Professional Management:

Mutual Funds provide the services of experienced and skilled professionals, backed
by a dedicated investment research team that analyses the performance and prospects of
companies and selects suitable investments to achieve the objectives of the scheme.

 Diversification:

Mutual Funds invest in a number of companies across a broad cross-section of

industries and sectors. This diversification reduces the risk because seldom do all stocks
decline at the same time and in the same proportion. You achieve this diversification through
a Mutual Fund with far less money than you can do on your own.

 Convenient Administration:

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems
such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual
Funds save your time and make investing easy and convenient.

 Return Potential:

Over a medium to long-term, Mutual Funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.

 Low Costs:

Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial and other
fees translate into lower costs for investors.

 Liquidity:

In open-end schemes, the investor gets the money back promptly at net asset value
related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock
exchange at the prevailing market price or the investor can avail of the facility of direct
repurchase at NAV related prices by the Mutual Fund.

8|Page
  Transparency:

You get regular information on the value of your investment in addition to disclosure
on the specific investments made by your scheme, the proportion invested in each class of
assets and the fund manager's investment strategy and outlook.

 Flexibility:

Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans, you can systematically invest or withdraw funds according to
your needs and convenience.

 Affordability

Investors individually may lack sufficient funds to invest in high-grade stocks. A

mutual fund because of its large corpus allows even a small investor to take the benefit of its
investment strategy.

 Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

 Well Regulated

All Mutual Funds are registered with SEBI and they function within the provisions of
strict regulations designed to protect the interests of investors. The operations of Mutual
Funds are regularly monitored by SEBI.

LIMITATIONS OF MUTUAL FUND INVESTMENT:

1. No Control Over Cost:

An Investor in mutual fund has no control over the overall costs of investing. He pays
an investment management fee (which is a percentage of his investments) as long as he
remains invested in fund, whether the fund value is rising or declining. He also has to pay
fund distribution costs, which he would not incur in direct investing.

However this only means that there is a cost to obtain the benefits of mutual fund services.
This cost is often less than the cost of direct investing.

2. No Tailor-Made Portfolios:

Investing through mutual funds means delegation of the decision of portfolio

composition to the fund managers. The very high net worth individuals or large corporate
investors may find this to be a constraint in achieving their objectives.

However, most mutual funds help investors overcome this constraint by offering large
no. of schemes within the same fund.

9|Page
3. Managing A Portfolio Of Funds:

Availability of large no. of funds can actually mean too much choice for the investors.
He may again need advice on how to select a fund to achieve his objectives.

AMFI has taken initiative in this regard by starting a training and certification
program for prospective Mutual Fund Advisors. SEBI has made this certification compulsory
for every mutual fund advisor interested in selling mutual fund.

The portfolio of fund does not remain constant. The extent to which the portfolio
changes is a function of the style of the individual fund manager i.e. whether he is a buy and
hold type of manager or one who aggressively churns the fund. It is also dependent

on the volatility of the fund size i.e. whether the fund constantly receives fresh
subscriptions and redemptions. Such portfolio changes have associated costs of brokerage,
custody fees etc. that lowers the portfolio return commensurately.

HISTORY OF MUTUAL FUND:

 Mutual Funds in India (1964-2014)

The end of millennium marks 36 years of existence of mutual funds in this country.
The ride through these 36 years is not been smooth. Investor opinion is still divided. While
some are for mutual funds others are against it.

UTI commenced its operations from July 1964 .The impetus for establishing a formal
institution came from the desire to increase the propensity of the middle and lower groups to
save and to invest. UTI came into existence during a period marked by great political and
economic uncertainty in India. With war on the borders and economic turmoil that depressed
the financial market, entrepreneurs were hesitant to enter capital market.

UTI commenced its operations from July 1964 "with a view to encouraging savings
and investment and participation in the income, profits and gains accruing to the Corporation
from the acquisition, holding, management and disposal of securities." Different provisions
of the UTI Act laid down the structure of management, scope of business, powers and
functions of the Trust as well as accounting, disclosures and regulatory requirements for the
Trust.

The opening up of the asset management business to private sector in 1993 saw
international players like Morgan Stanley, Jardine Fleming, JP Morgan, George Soros and
Capital International along with the host of domestic players join the party. But for the

equity funds, the period of 1994-96 was one of the worst in the history of Indian Mutual
Funds.

10 | P a g e
  2013-2014 Year of the funds

Mutual funds have been around for a long period of time to be precise for 36 yrs but
the year 1999 saw immense future potential and developments in this sector. This year
signaled the year of resurgence of mutual funds and the regaining of investor confidence in
these MF’s. This time around all the participants are involved in the revival of the funds the
AMC’s, the unit holders, the other related parties. However the sole factor that gave life to
the revival of the funds was the Union Budget. The budget brought about a large number of
changes in one stroke. An insight of the Union Budget on mutual funds taxation benefits is
provided later.

It provided centrestage to the mutual funds, made them more attractive and provides
acceptability among the investors. The Union Budget exempted mutual fund dividend given
out by equity-oriented schemes from tax, both at the hands of the investor as well as the
mutual fund. No longer were the mutual funds interested in selling the concept of mutual
funds they wanted to talk business which would mean to increase asset base, and to get asset
base and investor base they had to be fully armed with a whole lot of schemes for every
investor .So new schemes for new IPO’s were inevitable. The quest to attract investors
extended beyond just new schemes. The funds started to regulate themselves and were all out
on winning the trust and confidence of the investors under the aegis of the Association of
Mutual Funds of India (AMFI).

One can say that the industry is moving from infancy to adolescence, the industry is
maturing and the investors and funds are frankly and openly discussing difficulties
opportunities and compulsions.

 Future Scenario

The asset base will continue to grow at an annual rate of about 30 to 35 % over the
next few years as investor’s shift their assets from banks and other traditional avenues. Some
of the older public and private sector players will either close shop or be taken over.

Out of ten public sector players five will sell out, close down or merge with stronger
players in three to four years. In the private sector this trend has already started with two
mergers and one takeover. Here too some of them will down their shutters in the near future
to come.

But this does not mean there is no room for other players. The market will witness a
flurry of new players entering the arena. There will be a large number of offers from various
asset management companies in the time to come. Some big names like Fidelity, Principal,
Old Mutual etc. are looking at Indian market seriously. One important reason for it is that
most major players already have presence here and hence these big names would hardly like
to get left behind.

The mutual fund industry is awaiting the introduction of derivatives in India as this
would enable it to hedge its risk and this in turn would be reflected in it’s Net Asset Value
(NAV).

11 | P a g e
 SEBI is working out the norms for enabling the existing mutual fund schemes to trade
in derivatives. Importantly, many market players have called on the Regulator to initiate the
process immediately, so that the mutual funds can implement the changes that are required to
trade in Derivatives.

RECENT TRENDS IN MUTUAL FUND INDUSTRY:

The most important trend in the mutual fund industry is the aggressive expansion of
the foreign owned mutual fund companies and the decline of the companies floated by
nationalized banks and smaller private sector players. Many nationalized banks got into the
mutual fund business in the early nineties and got off to a good start due to the stock market
boom prevailing then. These banks did not really understand the mutual fund business and
they just viewed it as another kind of banking activity.

Few hired specialized staff and generally chose to transfer staff from the parent
organizations. The performance of most of the schemes floated by these funds was not good.
Some schemes had offered guaranteed returns and their parent organizations had to bail out
these AMC’s by paying large amounts of money as the difference between the guaranteed
and actual returns. The service levels were also very bad.

Most of these AMC’s have not been able to retain staff, float new schemes etc. and it
is doubtful whether, barring a few exceptions, they have serious plans of continuing the
activity in a major way. The experience of some of the AMC’s floated by private sector
Indian companies was also very similar. They quickly realized that the AMC business is a
business, which makes money in the long term and requires deep-pocketed support in the
intermediate years.

Some have sold out to foreign owned companies, some have merged with others and
there is general restructuring going on. The foreign owned companies have deep pockets and
have come in here with the expectation of a long haul. They can be credited with introducing
many new practices such as new product innovation, sharp improvement in service standards
and disclosure, usage of technology, broker education and support etc. In fact, they have
forced the industry to upgrade itself and service levels of organizations like UTI have
improved dramatically in the last few years in response to the competition provided by these.

WHY SHOULD INVESTORS INVEST IN MUTUAL FUND?

An investor avails of the service of experienced and skilled professionals who are
backed by a dedicated of companies and selects suitable investments to achieve the objectives
of the schemes.

12 | P a g e
 Mutual funds invest in a number of companies across a broad cross- section of
industries and sectors. This diversification reduces the risk because seldom do all the stocks
decline at the same time and in the same proportion. The investors achieve this diversification
through a mutual fund with far less money than you can do on our own.

Investing in a mutual fund reduces paperwork and helps an investor avoid many
problems such as bad deliveries, delayed payments and unnecessary follow.

EMERGING ISSUES IN MUTUAL FUND:

 Rating of Mutual Fund Schemes:

Total returns has been the criteria for measuring the performance of mutual fund.
Therefore, CRISIL has development a composite performance ranking which measures
performance for each of the open- ended schemes. According to CRISIL, this measures is
applicable only to those schemes, which are at least two years old and disclose 100% of their
portfolios.

 Changes in Mutual Fund due to the Advent of Net:

As per SEBI regulations, bond funds and equity funds can charge a maximum of
2.25% and 2.5% as administrative fees, respectively. Mutual Funds could bring down their
administrative costs to 0.75%, if trading is done online and consequently improves the return
potential of their schemes. Mutual Funds could provide better advise or servise to their
investors through the Net.

 New Norms on NPA Classification:

The Malegaon committee has made important recommendations regarding norms on

classification of NPAs in debt securities and norms for valuation of liquid securities in a
mutual fund schemes. The committee has recommended that debt securities held by mutual
fund in their portfolio can be classified as NPA, if the principal or interest is not received for
six months. The mutual funds will have to disclose the NPAs to unit holders in a half-yearly
basis.

 INFLUENCE OF TECHNOLOGY:

A majority of the mutual fund have their own websites providing basic information
relating to the schemes. Mutual Fund have begun to use electronic fund transfer method top
remit their dividends and redemption proceeds. However, the most significant influence of
technology is seen in servicing investors. So technology can bridge the gap between investor
education and products positioning.

 PRODUCT INNOVATION:

13 | P a g e
 Product innovation is an emerging feature in the mutual fund industry in India. Most
of the products offered by mutual fund can be divided among three classes of cash funds,
income funds and equity funds. The year 2002 was different in that the products offered were
far more innovative. Templeton India launched a debt fund that would invest predominantly
in floating rate bonds.

 INDICES FOR MUTUAL FUNDS:

The AMFI has recently launched four indices for gilt funds and another set of indices
for balanced funds, bond funds, monthly income plans and liquid funds. The indices, which
have been developed and will be maintained by ICICI securities and finance companied and
CRISIL.com, respectively, will be mandated for use by mutual funds to enable the
comparison of performance.

 FUNDS OF FUNDS:

The SEBI may soon permit mutual funds to float a new category of funds called
“funds of funds”, which will invest in other mutual fund schemes. These scheme will enable
people to invest in different mutual funds schemes through a single find.

MUTUAL FUND BEST PRACTICES:

 THE PRACTICE OF “RESTFUL” Risk- Reward Relationship:

A clear and direct relationship of risk with reward has to be developed and the
concept instilled in the mind of the investor, and this is the basis of all classification of
Mutual Fund.

 Ease of Business:

The business of Mutual Fund is not an easy one. It is easy only for the ones who have
either been in the business for a long time, or for the people, institutions which have been in
the investment space for a long time and are willing to experiment and learn from their
mistake, and can be flexible.

 Services:

The service provision ought to be flawless, for after all, Mutual Fund is a service, and
the only way the number of customers can be increased and the existing ones retained is by
providing a higher level of service, thereby increasing customer satisfaction.

 Trust / Transparency:

A high level of transparency has to be built into the system of processes and
investments in Mutual Fund. This is of vital importance as the terms “Transparency” and

14 | P a g e
“Trust”, in the case of Mutual Funds is synonyms. T rust in the firm would come only with
transparency. And with Trust would come more business.

 Fairness to Investors:

This, of course, is an offshoot of the previous point that we made. No business can
survive unless it is fair to the customer. However, what is important here is that it has to be
made evidently clear that the firm is actually being fair to its customers. Modesty doesn’t
help, and this has to be told to your customers so that they actually notice.

 Utility:

The objective of the investment have to be always kept in mind while marketing
Mutual Fund, for if there is a deviation, its utility is lost, or the customers remain unsatisfied.

 Liquidity:

This has again and again highlighted, for it the basic premise that most investors
invest in Mutual Fund only because of the high level of liquidity. There has to be a good
market development for your issue, so that there is a ready market available for them. latile a
particular Mutual Fund as related to stock market is.

15 | P a g e
 BROAD CLASSIFICATION OF MUTUAL FUNDS

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:

16 | P a g e
a. 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.

b. 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, Grow th Funds invest in those companies that are expected to
post above average earnings in the future.

c. 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:

i. Sector 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

ii. 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.

iii. 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.

iv. 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 graph income for investors.

a. 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

17 | P a g e
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.

b. 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 sectoral indices (like BSEBANKEX or CNX Bank Index etc).
Narrow indices are less diversified and therefore, are more risky.

c. 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.

d. 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. 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.

e. 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 sectoral indices (like BSEBANKEX or CNX Bank Index etc).
Narrow indices are less diversified and therefore, are more risky.

f. 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
18 | P a g e
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.

g. 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. 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:

a. 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.

b. Focused 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.

c. 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

19 | P a g e
more volatile and bear higher default risk, although they may earn at times higher returns for
investors.

d. Assured Return Funds – Although it is not necessary that a fund will meet its objectives
or provide assured returns to investors, but there can be funds that come with a lock-in period
and offer assurance of annual returns to investors during the lock-in period. Any shortfall in
returns is suffered by the sponsors or the Asset Management Companies (AMCs). These
funds are generally debt funds and provide investors with a low-risk investment opportunity.
However, the security of investments depends upon the net worth of the guarantor (whose
name is specified in advance on the offer document). To safeguard the interests of investors,
SEBI permits only those funds to offer assured return schemes whose sponsors have adequate
net-worth to guarantee returns in the future. In the past, UTI had offered assured return
schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the
future. UTI was not able to fulfill its promises and faced large shortfalls in returns.
Eventually, government had to intervene and took over UTI’s payment obligations on itself.
Currently, no AMC in India offers assured return schemes to investors, though possible.

e. 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.

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.

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).

5. Hybrid Funds:

20 | P a g e
 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:

a. 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.

b. 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.

c. 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.

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.

7. Real Estate Funds:

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. Exchange Traded Funds (ETF):

21 | P a g e
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. Fund of Funds:

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 investments into different mutual fund
schemes.

22 | P a g e