MUTUAL FUNDS

1. INTRODUCTION
Mutual fund is a pool of money collected from investors and is invested according to certain
Investment options. A mutual fund is a trust that pools the saving of a number of investors who
share a common financial goal. A mutual fund is created when investors put their money
together. It is, therefore, a pool of investor's fund. The money thus collected is then invested in
capital market instruments such as shares, debentures and other securities. The income earned
through these Investments and the capital appreciations realized are shared by its unit holders in
proportion to the numbers of units owned by them.
The most important characteristics of a fund are that the contributors and the beneficiaries of the
fund are the same class of people namely the investors. The term mutual fund means the
investors contribute to the pool and also benefit from the pool. The pool of funds held mutually
by investors is the mutual fund.
A mutual fund business is to invest the funds thus collected according to the wishes of the
investors who created the pool. Usually the investors appoint professional investment managers
create a product and offer it for investment to the investors. This project represents a share in the
pool and pre status investment objectives.
Thus, a mutual fund is the most suitable investment for a common man as it offers an
opportunity to invest in a diversified, professionally managed basket of securities at relatively
low cost.

Concept of a Mutual Fund

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 then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciations realized are shared by its unit holders in proportion to the number of units
owned by them. 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 basket of securities at a
relatively low cost. The flow chart below describes broadly the working of a mutual fund:-
Savings form an important part of the economy of any nation. With savings invested in various
options available to the people, the money acts as the driver for growth of the country. Indian
financial scene too presents multiple avenues to the investors. Though certainly not the best or
deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide
reasonable options for an ordinary man to invest his savings.
Investment goals vary from person to person. While somebody wants security, others might give
more weightage to returns alone. Somebody else might want to plan for his child’s education
while somebody might be saving for the proverbial rainy day or even life after retirement. With
objectives defying any range, it is obvious that the products required will vary as well.

Investors earn from a Mutual Fund in three ways:

1. Income is earned from dividends declared by mutual fund schemes from time to time.
2. If the fund sells securities that have increased in price, the fund has a capital gain. This is
reflected in the price of each unit. When investors sell these units at prices higher than
their purchase price, they stand to make a gain.
3. If fund holdings increase in price but are not sold by the fund manager, the fund's unit
price increases. You can then sell your mutual fund units for a profit. This is tantamount
to a valuation gain.

Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves
broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt and
balanced funds. There are also funds meant exclusively for young and old, small and large
investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard
investors’ interest, ensures that the investors are not cheated out of their hard-earned money. All
in all, benefits provided by them cut across the boundaries of investor category and thus create
for them, a universal appeal.
Investors of all categories could choose to invest on their own in multiple options but opt for
mutual funds for the sole reason that all benefits come in a package.
1.1 NEED OF THE STUDY:

The main purpose of doing this project was to have a dissertation on Mutual Fund and investors
behavior. This helps to know in details about mutual fund industry right from its inception stage,
growth and future prospects.
It also helps in understanding different schemes of mutual funds. Because the study depends
upon the various functions and performances of Mutual Fund in India which study in depth of
their schemes like equity, income, balance as well as the returns associated with those schemes.
The project study was done to know about the investors’ behavior on the mutual fund with
reference to Bajaj Capital. Ultimately this would help in understanding the benefits of mutual
funds to investors.
1.2 STATEMENT OF THE PROBLEM:

Today there are plenty of investment avenues open. Some of them include banks deposits,
bonds, stocks, mutual fund investments and corporate debentures. Investors may invest money
in banks, bonds and corporate debentures where the risk is low and so are the returns. On the
contrary, stocks of companies have high risk but the returns are also proportionately high.
The recent trends since last year clearly suggest that the average investors have lost money in
equities. People have now started opting for portfolio managers who have the expertise in stock
markets. There are many institutions in India which provide wealth management services. An
average investor has found refuge with the mutual funds.

1.3
1.4 INDUSTRY PROFILE

History of the Mutual Fund Industry

The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in
the year 1963. The primary objective at that time was to attract the small investors and it was
made possible through the collective efforts of the Government of India and the Reserve Bank of
India. The history of mutual funds in India can be broadly divided into four distinct phases:
Phase 1 – 1964-87: establishment and growth of Unit Trust of India
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The
first scheme launched by UTI was Unit Scheme 1964, named as unit schemes 1964 (US – 64),
which attracted the largest number of investors in any single investment scheme over the years.
UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors.
It launched ULIP in 1971, six more schemes between 1981 and 1984, children’s Gift Growth
Fund and India Fund (India’s first offshore fund) in 1986, Master share (Indian’s first equity
diversified scheme) in 1987 and Monthly Income schemes (offering assured returns) during
1990s. By the end of 1987, UTI’s assets under management grew ten times to Rs.6, 700 Crores.
Phase 11 – 1987 – 1993: Entry of Public Sector Funds
The Indian mutual fund industry witnessed a number of public sector players entering the market
in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the
first non – UTI mutual fund in India. SBI Mutual fund was later followed by Can bank Mutual
Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual
Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased
seven times to Rs. 47,004 Crores. However, UTI remained to be the leader with about 80%
market share.

1992 – 93 Amount Mobilized Assets Under Mobilisation as %

Management of Gross Domestic
Savings
 UTI 11,057 38,247 5.2%
Public Sector 1,964 8,757 0.9%
Total 13,021 47,004 6.1%
Source: Secondary Data
Phase 111 – 1993 – 96: Emergence of Private Sector Funds
The permission given to Private sectors funds including foreign fund management companies
(most of them entering through joint ventures with Indian promoters) to enter the mutual fund
industry. Private funds introduced innovative products investment techniques and investor –
servicing technology. By 1994-95 about 11 private sector funds had launched their schemes.
Phase 1V – 1996-2004: Growth and SEBI Regulation
The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the
year 1996. The mobilization of funds and the number of players operating in the industry reached
new heights as investors started showing more interest in mutual funds.
Investors interest were safeguard by SEBI and the Government offered tax benefits to the
investors in order to encourage them. SEBI (Mutual Fund) Regulations, 1996 was introduced by
SEBI that set uniform for all mutual funds in India. The union Budget in 1999 exempted all
dividend incomes in the hands of investors from income tax. Various Investor Awareness
Programmes were launched during this phase, both by SEBI and AMFI, with an objective to
educate investors and make them informed about the mutual fund industry.
In February 2003, the UTI Act was repealed and UTI was stripped of its special legal status as a
trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual
fund players on the same level. UTI was recognized into two parts:
1. The Specified Undertaking
2. The UTI Mutual Fund
Presently Unit Trust of India operates under the name of UTI mutual fund and its pas schemes
(like US – 64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual
Fund is still the largest player in the industry. In 1999, there was a significant growth in
mobilization of funds from investors and assets under management which is supposed by the
following data:

Table 3.1
 Gross Fund Mobilizations (Rs. Crores)

From To UTI Public Private Total

Sector Sector
01–April-98 31-March-99 11,679 1,732 7,966 21,377
01-April-99 31-March-00 13,536 4,039 42,173 59,748
01-April-00 31-March-01 12,413 6,192 74,352 92,957
01-April-01 31-March-02 4,643 13,613 1,46267 1,64,523
01-April-02 31-Jan-03 5,505 22,923 2,20,551 2,48,979
01-Feb-03 31-March-03 - 7,258 58,435 65,694
01-April-03 31-March-04 - 68,558 5,21,632 5,90,190
01-April-04 31-March-05 - 1,03,246 7,36,416 8,39,662
01-April-05 31-March-06 - 1,83446 9,14,712 10,98,158

Assets Under Management ( Rs. Crores)

As On UTI Public Sector Private Total
Sector
31-March_99 53,320 8,292 6,860 68,472
Sources: Secondary Data

Phase V – 2004 Onwards: Growth and Consolidation

The industry has also witnessed several mergers and acquisition recently, examples of
which are acquisition of schemes of Alliance Mutual Fund by Birla Sun life; more international
mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There
are 33 funds at the end of March 2008. This is a continuing Phase of growth of the industry
through consolidation and entry of new international and Private Sector players. As on
November 2008, the total Asset Under Management in the Mutual Fund industry was over Rs. 4,
02,027 Crores.

The Graphical presentation gives a clear understanding of the growth in Assets Under
Management

Figure 3.1
Sources: Secondary Data
Mutual funds in India

There are a total of 37 Mutual Funds in India today. The Mutual Fund industry in India is very
competitive and a large number of Mutual fund industries have been set up. After 2004, there
have been a lot of mergers and acquisitions in the industry and new funds have been set up. A list
of Mutual Funds in India has been provided in Annexure 1.

Recent Developments in the Mutual Fund Industry:

Know Your Customer (KYC):

The Securities and Exchange Board of India has issued guidelines under The Prevention of
Money Laundering Act, 2002 (PMLA) requiring Mutual Funds to follow enhanced Know Your
Customer (KYC) norms. Applicant must be KYC compliant while investing with any SEBI
registered Mutual Fund for subscription of Rs. 50,000 and above with effect from February,
2008.

New Guidelines on Permanent Account Number (PAN):

Submission of copy of PAN card is mandatory for all investors for investing in mutual funds
with effect from July 2007. Investors not having a PAN card must apply for PAN immediately
and applications for investment should be accompanied with evidence of having applied for PAN
(copy of Form 49-A), until the PAN is allotted. If the investment is for a value of Rs. 50,000 or
more, this should also be accompanied by Form 60 and address proof to satisfy the KYC norms.

Real Estate Mutual Fund (REMF):

Real Estate Mutual Funds are now approved by SEBI after much waiting Real Estate Mutual
Fund Scheme is defined to mean a scheme of a mutual fund which has investment objective to
invest directly or indirectly in real estate property. It will be governed by SEBI (Mutual Funds)
Regulation REMF’s shall initially, be close ended. The units of REMF’s shall be compulsorily
listed on the Stock Exchange and Net Asset value (NAV) of the scheme shall be declared daily.
Interval Funds:

Interval Funds are a new type of closed ended funds in which the investors are allowed to sell
back their shares to the mutual fund company every quarter. This is advantageous to the
investors who might not be able to redeem their shares through the stock market where the price
for such a fund may be low. This is an intermediary to the open – ended and the closed – ended
funds. Currently open ended funds can be redeemed very easily but this causes lot volatility in
the fund and the total Asset Under Management of the fund keeps fluctuating causing difficulties
in planning.

Gold Fund:

Gold Funds are relatively new in the Indian mutual fund industry. The prices of gold funds are
more volatile than the price of gold itself. This is a relatively safer option for the investors
because of the inherent risk mitigation because of diversification within the fund.
1.5 COMPANY PROFILE:

Bajaj capital is a financial services company engaged in the business of Merchant Banking,
Resource Mobilization, Distribution of Financial products, Stock Broking, Money Market
Booking, Investment Advisory and Financial Planning.  Bajaj Capital is a Securities and
Exchange Board of India (SEBI) approved Category I Merchant Banker/Investment Advisor,
member of Delhi Stock Exchange and dealer on OTC Exchange of India.   
 
The company was promoted in 1965 by Shri. K K Bajaj with an objective to provide professional
guidance to investor on where, when and how to invest and to assist the corporate sector in its
resource raising activities.  Bajaj capital became the first company to set up Investment Centers’
al over India for this purpose.  Today, Bajaj Capital has 80 officers in over 40 important Indian
cities and has a team of around 500 employees nationwide.
 
Every day Bajaj Capital raises resources for over 1000 top Institutions/corporates for their fixed
income and equity India’s largest distributor of financial products like Mutual funds and
Insurance.
 
 BAJAJ CAPITAL SERVICES FOR GOVERNMENT INSTITUTIONS/PRIVATE
CORPORATES.
 Merchant banking.
 Resources Mobilisation-Debt and Equity.
 Distribution of Mutual Funds.
 Distribution of Insurance.
 
 BAJAJ CAPITALS SERVICES FOR INDIVIDUAL AND INSTITUTIONAL
INVESTORS.
 
 Investment Advisory.
 Financial Planning.
 Stock broking
  Money Market Broking.
 IMPORTANT MILESTONE:
 
 History of Indian Capital Market & Role of Bajaj Capital: 
Bajaj Capital has been there at every step, to contribute to the growth of the Indian Capital
Market.  Starting in 1965 when we innovate the ‘Companies Fixed Deposit’ instrument to
year 2000 when we are playing an active role in the growth Mutual fund Industry.
We are already gearing up for our next challenge that is to work closely with private
insurance companies for deepening India’s insurance market.
1964
Bajaj Capital sets up its first ‘Investment Centre’ in New Delhi to guide individual investors
on where, when and how to invest. India’s first Mutual Fund, Unit Trust (UTI) of India is
incorporated in the same year.
1965
Bajaj Capital is incorporated as a company and in the same year innovates a new financial
instrument ‘Companies Fixed Deposits’.  EIL Ltd. (Oberoi Hotels, then  known as
Associated Hotels of India Ltd.) becomes the first company to raise Fixed Deposits.
1966
Bajaj Capital expands its product range and includes all UTI schemes and Government
saving schemes in addition to Company Fixed Deposits.
1969
Bajaj Capital manages its first Equity issue (through associate company) of Grauer & Weli
India Ltd., right from drafting of prospectus to marketing of issue.
1975
Bajaj Capital starts offering ‘need based’ investment advice to investors which would later be
christened as ‘Financial Planning’ in the investment world.
1981
SAIL becomes the first government company to accept deposits, later followed by IOC,
BHEL, BPCL, HPCL & others.  Thus opening floodgates for the growth of retail investment
market in India. Bajaj Capital plays an active role in all the schemes as ‘Principal Brokers’.
1986
Public Sector Undertakings (PSU’s) start making Public issues of Bonds-MTNL, NHPC,
IRFC offer a series of Bond Issues.  Bajaj Capital tops ranking in most of them.
1987
Launch of Public Sector Mutual Funds in India led by SBI.  Bajaj Capital plays a significant
role in fund mobilisation for all these players.
1991
SBI issues ‘India Development Bonds’ for NRIs.  Bajaj Capital becomes the top mobiliser
with collections over US $ 20 million.
1993
Launch of first Private Sector Mutual Fund- Kothari Pioneer followed by Birla & Alliance in
the following years.  Bajaj Capital plays an active role and ranked among top mobilisers for
all these schemes.
1995
IDBI & ICICI start issuing their series of Bonds for retail investors.  Bajaj Capital is Co-
manager in all these offerings & rank constantly among top 5 mobilisers, on all India basis.
1997
Private sector players lead revival of Mutual Funds in India through Open ended Debt
schemes.  Bajaj Capital consolidates its position as India’s largest retail Distributor of Mutual
funds.              
1999
Bajaj Capital starts marketing Life & General Insurance Products of LIC & GIC (through
associate firm) in anticipation of opening up of  the Insurance Sector.  Bajaj Capital achieves
milestone of becoming top ‘Pension Scheme’ seller in India & launches marketing of Health
insurance schemes of GIC.
2000
As a ‘One stop Financial Supermarket; Bajaj Capital offers all Financial products including
the full range of  Investment and Insurance products.  Bajaj Capital offers ‘Full service
Merchant Banking including structuring, management & marketing of Capital Issues.  Bajaj
 Capital reinvents ‘Financial Planning’ in its international sense and equips its full team of
Investment Experts as ‘Financial Planners’.
2. OBJECTIVES

 Primary Objectives:
 To know various factors considered by the customers while going to invest in the Mutual
Fund.

 Secondary Objectives:
 To study the working of mutual fund.
 To study the characteristics of mutual fund this attracts the customers.
 3. REVIEW OF LITERATURE

Mutual Fund:
A mutual fund is a common pool of money in to which investors with common investment
objective place their contributions that are to be invested in accordance with the stated
investment objective of the scheme. The investment manager would invest the money collected
from the investor in to assets that are defined/ permitted by the stated objective of the scheme.
For example, an equity fund would invest equity and equity related instruments and a debt fund
would invest in bonds, debentures, gilts etc.
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 then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciation realized is shared by its unit holders in proportion to the number of units
owned by them. 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 basket of securities at a
relatively low cost. The flow chart below describes broadly the working of a mutual fund.

Mutual Fund Operation Flow Chart:

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 then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciation realized is shared by its unit holders in proportion to the number of units
owned by them. 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 basket of securities at a
relatively low cost.
REGULATORY FRAMEWORK:

Regulatory Jurisdictions of SEBI:

SEBI is the apex regulatory of capital markets. SEBI has enacted the SEBI (Mutual Fund)
regulation 1996 which provides the scope of regulation of Mutual Fund in India. All mutual
funds are required to be mandatory registered with SEBI. The structure and formation of Mutual
Funds, appointment of key functionaries, operations of Mutual Funds, accounting and disclosure
norms, rights and obligations of functionaries and investors, investment restrictions, compliance
and penalties all arc defined under the SEBI registration. Mutual Fund has to be sending half
yearly compliance reports to SEBI and promote all information about their operations.

Regulatory Jurisdiction of RBI:

RBI is the monetary authority of the country and is also the regulatory of banking system. Farlier
bank sponsored mutual fund were under the dual regulatory control of RBI and SEBI. These
provisions arc no longer in vogue. SEBI is the regulator of all mutual funds. The present position
is that RBI is involved with the mutual fund industry only to the limited extent of being the
regulator of the sponsor of bank sponsored mutual funds.

Role of Ministry of Finance in Mutual Fund:

The finance ministry is [he supervisor of both RBI and SEBI. The ministry of finance is also (lie
appellate authority under SUB) Regulation. Aggrieved parties can make appeal to the Ministry of
Finance on the SEBI ruling relating the Mutual Fund.

Role of Companies Act in Mutual Fund:

The AMC and the Trustee Company may be structured as limited companies, which may come
under the regulatory purview of the Company Law Board (CLB). The provisions of the
Companies Act 1956, is applicable to this form of organization. The company law Board is the
apex regulatory authority for company. Any grievance agency the AMC or the trustee can be
addressed to the company law board for redresses.
Role of Stock Exchange:
If a mutual fund is listed its scheme on stock exchange such listing are subject to the listing
regulation of Stock Exchange. Mutual Funds have to sign the listing agrccmcnl and abide by iis
provisions which primarily deal with the periodic notification and disclosure of information that
may impart the trading of listed units.
LEGAL STRUCTURE:
Mutual Fund has a unique structure not shared with other entities such as companies or the firms.
It is important for the employees and agents to be aware of the special nature of the structure
because it determines the rights and responsibilities of the fund's constitutes viz. sponsor trustee,
custodian, transfer agents and of course the AMC. The legal structure also drives the inter
relationship between these constituents.
Like other countries India has a legal framework within which Mutual Funds must be constituted
along one unique structure as unit trust. A mutual fund in India is allowed to issue open ended
and a close ended under a common legal structure. Therefore, a mutual fund may have several
different schemes under it at any point of time.
 The fund sponsors: Sponsor is defined by the SEBI regulation as any person who acting
alone or in combination with another body corporate establishes a mutual fund. The sponsor
of a fund is taken as he gets the fund registered with the SEBI.
The sponsor will form a trust and appoints the Board of trustee. The sponsor will also
generally appoint the AMC as the fund managers. The sponsor, either directly or acting
through the trustee will also appoints a custodian to hold the fund asset. All these
appointments arc made in accordance with the guidelines of SFBI. As per the existing SeBI
regulations for a person to quantity as the sponsor he must contribute at least 40% of the net
worth of the AMC and possess a second final track over a period of 5 years prior to
registration.
 Mutual fund as a trust: A mutual fund is constituted in form of a public trust created under
the INDIA TRUST ACT, 1882. The fund sponsor act as the settlers of the trust contributing
to its initial capital and appoints a Trustee to hold the asset of the trust for the benefits of the
unit holders who arc the beneficiaries of the trust. The fund then invites investors to
contribute their money in a common pool by subscribing to units issued by various schemes
established by the trust unit being the evidence of their beneficial interest in the fund.
 Trustee: The trust - the mutual fund may be managed by a board of trustee - a body of
individuals or a trust company- a corporate body. Most of the funds in India arc managed by
the board of trustee while the board is governed by the provisions of the Indian Trust Act
where the trustee is a corporate body, it would also be required to comply the provisions of
the Companies Act 1956 the board as an independent body act as the protector of the interest
of the unit holders. The trustees do not directly manage the portfolio of securities. For this
specialist function, they appoint the AMC. They ensure that the fund is managed by the
AMC as per the defined objective in accordance with the trust deed and regulations of SFRI.
The trust is created through a document called the Trust deed and is executed by the fund
sponsor in favor of the trustee. The trust deed is required to be stamped as registered under
the provisions of the Indian Regulatory Act and regulation with SLBI clause in the trust deed,
inter alias, and deal with the establishment of the trust, the appointment of the trustee. Their
powers and duties and the obligation of the trustee towards the unit holders and the AMC.
These clauses also specify activity that the fund; AMC can't undertake. The third schedule of
the SFBI (Mutual Fund) Regulatory Act, 1996 specifics the content of the Trust Deed.
 4. RESEARCH METHODOLOGY

METHODOLOGY:
Marketing research is the process of collecting and analyzing marketing information and
ultimately arrived at certain conclusion. Management In any organization needs information
about potential marketing plans and to change the market place. Marketing Research includes all
the activities that enable an organization to obtain the information. This research is very
important in strategy formulation and feedback of any organizational plan.

RESEARCH DESIGN:
1. Data:
Primary data: Personal interaction with the respondent through questionnaire.
Secondary data: Information through websites, books, fact sheet of various funds etc.
2. SOURCES:
 Books
 Magazines
 Articles
 Journals.
3. Area of the study: Chennai region.
4. Sampling procedure: Random sampling method.
5. Tools and technique: Simple statistical methods.

PERIOD OF THE STUDY: The period of the study is for four month.
SCOPE OF THE STUDY:

1. The project will provide us the better platform to understand the history, growth and various
aspects of Mutual Funds.
2. It will also help to understand the behavior of Indian investment towards Mutual Fund.
3. Also with the help of this project one can better understand the different type of Mutual Fund
working in India.
LIMITATIONS
1. This project is limited in scope as the survey is conducted with a shortage of time constraint
and also based on secondary data.
2. The answer given by the respondents may be biased due to several reasons or could be
attachment to a particular bank.
3. Due to ignorance factor some of the respondents were not able to give correct answer.
4. The respondent were not disclosing their exact portfolio because they have a fear in their
mind that they can come under tax slab.