1.1 market and financial services industry including merchant banking,

1.1 INTRODUCTION:
 The Indian financial system based on
four basic components like Financial Market, Financial Institutions, Financial Service,
Financial Instruments. All are play important role for smooth activities for the
transfer of the funds and allocation of the funds. The main aim of the Indian financial
system is that providing the efficiently services to the capital market. The Indian
capital market has been increasing tremendously during the second generation reforms.
The first generation reforms started in 1991 the concept of LPG. (Liberalization,
privatization, Globalization)  Then after 1997 second generation reforms
was started, still the it’s going on, its include reforms of industrial investment,
reforms of fiscal policy, reforms of ex- imp policy, reforms of public sector, reforms
of financial sector, reforms of foreign investment through the institutional investors,
reforms banking sectors. The economic development model adopted by India in the
post independence era has been characterized by mixed economy with the public sector
playing a dominating role and the activities in private industrial sector control
measures emaciated form time to time. The last two decades have been a phenomenal
expansion in the geographical coverage and the financial spread of our financial
system.  The spared of the banking system has
been a major factor in promoting financial intermediation in the economy and in
the growth of financial savings with progressive liberalization of economic policies,
there has been a rapid growth of capital market, money market and financial services
industry including merchant banking, leasing and venture capital, leasing, hire
purchasing. Consistent with the growth of financial sector and second generation
reforms its need to fruition of the financial sector. Its also need to providing
the efficient service to the investor mostly if the investors are supply small amount,
in that point of view the mutual fund play vital for better service to the small
investors. The main vision for the analysis for this study is to scrutinize the
performance of five star rated mutual funds, given the weight of risk, return, and
assets under management, net assets value, book value and price earnings ratio.   1.2 WHAT IS A MUTUAL FUND?  Mutual fund is the pool of the money,
based on the trust who invests the savings of a number of investors who shares a
common financial goal, like the capital appreciation and dividend earning. The money
thus collect is then invested in capital market instruments such as shares, debenture,
and foreign market. Investors invest money and get the units as per the unit value
which we called as NAV (net assets value). Mutual fund is the most suitable investment
for the common man as it offers an opportunity to invest in diversified portfolio
management, good research team, professionally managed Indian stock as well as the
foreign market, the main aim of the fund manager is to taking the scrip that have
under value and future will rising, then fund manager sell out the stock. Fund manager
concentration on risk – return trade off, where minimize the risk and maximize the
return through diversification of the portfolio. The most common features of the
mutual fund unit are low cost. The below I mention the how the transactions will
done or working with mutual fund  

 1.3 GROWTH OF MUTUAL FUND INDUSTRY:
 The history of mutual funds dates support
to 19th century when it was introduced in Europe, in particular, Great Britain.
Robert Fleming set up in 1868 the first investment trust called Foreign and colonial
investment trust which promised to manage the finances of the moneyed classes of
Scotland by scattering the investment over a number of different stocks. This investment
trust and other investment trusts which were afterward set up in Britain and the
U.S., resembled today’s close – ended mutual funds. The first mutual fund in the
U.S., Massachusetts investor’s trust, was set up in March 1924. This was the open
– ended mutual fund.  The stock market crash in 1929, the
Great Depression, and the outbreak of the Second World War slackened the pace of
growth of the mutual fund industry. Innovations in products and services increased
the popularity of mutual funds in the 1950s and 1960s. The first international stock
mutual fund was introduced in the US in 1940. In 1976, the first tax – exempt municipal
bond funds emerged and in 1979, the first money market mutual funds were created.
The latest additions are the international bond fund in 1986 arm funds in 1990.
This industry witnessed substantial growth in the eighties and nineties when there
was a significant increase in the number of mutual funds, schemes, assets, and shareholders.
In the US the mutual fund industry registered s ten – fold growth the eighties.
Since 1996, mutual fund assets have exceeds bank deposits. The mutual fund industry
and the banking industry virtually rival each other in size.  A Mutual fund is type of Investment
Company that gathers assets form investors and collectively invests in stocks, bonds,
or money market instruments. The investment company concepts date to Europe in the
late 1700s, according to K. Geert Rouwen host in the Origins Mutual Funds, when
“a Dutch Merchant and Broker Invited subscriptions from investor with limited means.”
The materialization of “investment Pooling” in England in the 1800s brought the
concept closer to U.S. shores. The enactment of two British Laws, the Joint Stock
Companies Acts of 1862 and 1867, permitted investors to share in the profits of
an investment enterprise, and limited investor liability to the amount of investment
capital devoted to the enterprise.  May be more outstandingly, the British
fund model established a direct link with U.S. Securities markets, serving finance
the development of the post – Civil War U.S. economy. The Scottish American Investment
Trust, Formed on February1, 1873 by fund pioneer Robert Fleming, invested in the
economic potential of the United States, Chiefly through American railroad bonds.
Many other trusts followed that not only targeted investment in America, but led
to the introduction of the fund investing concept on U.S. shores in the late 1800
and early 1900s.  Nov. 1925. All these funds were open
– ended having redemption feature. Similarly, they had almost all the features of
a good modern Mutual Funds – like sound investment policies and restrictions, open
end ness, self – liquidating features, a publicized portfolio, simple capital structure,
excellent and professional fund management and diversification etc…….and hence they
are the honored grand – parents of today’s funds. Prior to these 5 200726.20 croers200621.82
croers200517.77 croers funds all the initial investment companies were closed –
ended companies. Therefore, it can be said that although the basic concept of diversification
and professional fund management, were picked by U.S.A. from England Investment
Companies “The Mutual Fund is an American Creation.” Because of their exclusive feature,
open – ended Mutual Funds rapidly became very popular. By 1929, there were 19 open
– ended Mutual Funds in USA with total assets of $ 140 millions. But the 1929 Stock
Market crash followed by great depression of 1930 ravaged the U.S. Financial Market
as well as the Mutual Fund Industry. This necessitated stricter regulation for mutual
funds and for Financial Sectors. Hence, to protect the interest of the common investors,
U.S. Government passed various Acts, such a Securities Act 1933, Securities Exchange
Act 1934 and the Investment Companies Act 1940. A committee called the National
Committee of Investment Company (Now, Investment Company Institute), was also formed
to co – operate with the Federal Regulatory Agency and to keep informed of trends
in Mutual Fund Legislation.  As a result of these measure, the Mutual
Fund Industry began to develop speedily and the total net assets of the Mutual Funds
Industry increased form $ 448 million in 1940 to $ 2.5 billion in 1950. The number
of shareholder’s accounts increased from 296000, to more than one Million during
1940 – 1951. “As a result of renewed interest in Mutual Fund Industry they grew
at 18% annual compound rate reaching peak of their rapid growth curve in the late
1960s.”  1.4 WORLDWIDE ROLE OF MUTUAL FUND
 Operation of mutual fund investors Fund
Manager Securities  
  1.5 ORGANIZATION STRUCTURE OF
MUTUAL FUNDS  Mutual funds have organization straucture
as per ther Security Exchange Board of India guideline, Security Exchange Board
of India specified authority and responsibility of Trustee and Aeest Management
Companies. The objectives is to controlling, to promoted, to regulate, to protected
the investors right and efficient trading of units. Operation of Mutual fund start
with investors save their money on mutual fund, than Mutual Fund manager handling
the funds and strategic investment on scrip. As per the objectives of particular
scheme manager selected scrips. Unit value will become high when fund manager investment
policy generate the return on capital market. Unit return depends on fund return
and efficient capital market. Also affects international capital market, liquidity
and at last economic policy. Below the graph indicates how the process was going
on to investors to earn returns. Mutual fund manager having high responsibility
inside of return and how to minimize the risk. When fund provided high return with
high risk, investors attract to invest more fund for same scheme.    THEMUTUAL FUNDSSPONSROSTRANSFER AGENTCUSTODIAN The Mutual fund organization as per
the SEBI formation and necessary formation is needed for sooth activities of the
companies and achieved the desire objectives. Transfer agent and custodian play
role for dematerialization of the fund and unit holders hold the account statement,
but custody of the unit is on particular Asset Management Company. Custodian holds
all the fund units on dematerialization form. Sponsor had decided the responsibility
of custodian when investor to purchase the fund and to sell the unit. Application
forms, transaction slip and other requests received by transfer agent, middle men
between investors and Assts Management Companies.
 1.6 ORIGIN OF MUTUAL FUND IN INDIA
 The history of mutual funds dates backs
to 19th century when it was introduced in Europe, in particular, Great Britain.
Robert Fleming set up in 1968 the first investment trust called Foreign and Colonial
Investment Trust which promised to manage the finances of the moneyed classes of
Scotland by spreading the investment over a number of different stocks. This investment
trust and other investments trusts which were subsequently set up in Britain and
the US, resembled today’s close – ended mutual funds. The first mutual in the U.S.,
Massachustsettes investor’s Trust, was set up in March 1924. This was the open –
ended mutual fund.  The stock market crash in 1929, the
Great Depression, and the outbreak of the Second World War slackened the pace of
mutual fund industry, innovations in products and services increased the popularity
of mutual funds in the 1990s and 1960s. The first international stock mutual fund
was introduced in the U.S. in 1940. In 1976, the first tax – exempt municipal bond
funds emerged and in 1979, the first money market mutual funds were created. The
latest additions are the international bond fund in 1986 and arm funds in 1990.
This industry witnessed substantial growth in the eighties and nineties when there
was a significant increase in the number of mutual funds, schemes, assets, and shareholders.
In the US, the mutual fund industry registered a ten – fold growth the eighties.
Since 1996, mutual fund assets have exceeded bank deposits. The mutual fund industry
and the banking industry virtually rival each other in size.  1.7 GROWTH OF MUTUAL FUNDS IN
INDIA  By the year 1970, the industry had 361
Funds with combined total assets of 47.6 billion dollars in 10.7 million shareholder’s
account. However, from 1970 and on wards rising interest rates, stock market stagnation,
inflation and investors some other reservations about the profitability of Mutual
Funds, Adversely affected the growth of mutual funds. Hence Mutual Funds realized
the need to introduce new types of Mutual Funds, which were in tune with changing
requirements and interests of the investors. The 1970’s saw a new kind of fund innovation;
Funds with no sales commissions called ” no load ” funds. The largest and most successful
no load family of funds is the Vanguard Funds, created by John Bogle in 1977.  I n the series of new product, the First
Money Market Mutual Fund (MMMF) i.g. The Reserve Fund” was started in November 1971.
This new concept signaled a dramatic change in Mutual Fund Industry. Most importantly,
it attracted new small and individual investors to mutual fund concept and sparked
a surge of creativity in the industry. 

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 1.8 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. The table below gives an overview into the existing types of schemes
in the Industry.

By Structure

Open Ended Funds

 

Close Ended Funds

 

Interval Funds

 

By Investment Objectives

Growth Funds

 

Income Funds

 

Balanced Funds

 

Money Market Funds

 

Other Schemes

Tax Saving Funds

 

Special Funds
·        
Index Funds

·        
Sector
Specific Funds

 1.9 ADVANTAGES
OF MUTUAL FUNDS  Mutual
funds have designed to provide maximum benefits to investors, and fund manager have
research team to achieve schemes objective. Assets Management Company has different
type of sector funds, which need to proper planning for strategic investment and
to achieve the market return.  Portfolio
Diversification Mutual
Funds invest in a well-diversified portfolio of securities which enables investor
to hold a diversified investment portfolio (whether the amount of investment is
big or small).  Professional
Management Fund
manager undergoes through various research works and has better investment management
skills which ensure higher returns to the investor than what he can manage on his
own.  Less
Risk Investors
acquire a diversified portfolio of securities even with a small investment in a
Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely
2 or 3 securities.  Low Transaction
Costs Due to
the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction
costs. These benefits are passed on to the investors.  Liquidity
An investor
may not be able to sell some of the shares held by him very easily and quickly,
whereas units of a mutual fund are far more liquid.  Choice
of Schemes Mutual
funds provide investors with various schemes with different investment objectives.
Investors have the option of investing in a scheme having a correlation between
its investment objectives and their own financial goals. These schemes further have
different plans/options  Transparency
Funds
provide investors with updated information pertaining to the markets and the schemes.
All material facts are disclosed to investors as required by the regulator. Flexibility
Investors
also benefit from the convenience and flexibility offered by Mutual Funds. Investors
can switch their holdings from a debt scheme to an equity scheme and vice-versa.
Option of systematic (at regular intervals) investment and withdrawal is also offered
to the investors in most open-end schemes.  Safety
Mutual Fund industry is part of a well-regulated
investment environment where the interests of the investors are protected by the
regulator. All funds are registered with SEBI and complete transparency is forced. 1.10
DISADVANTAGES OF MUTUAL FUNS  The mutual
fund not just advantage of investor but also has disadvantages for the funds. The
fund manager not always made profits but might creates loss for not properly managed.
The fund have own strategy for investment to hold, to sell, to purchase unit at
particular time period.  Costs
Control Not in the Hands of an Investor Investor
has to pay investment management fees and fund distribution costs as a percentage
of the value of his investments (as long as he holds the units), irrespective of
the performance of the fund  No Customized
Portfolios The portfolio
of securities in which a fund invests is a decision taken by the fund manager. Investors
have no right to interfere in the decision making process of a fund manager, which
some investors find as a constraint in achieving their financial objectives.  Difficulty
in Selecting a Suitable Fund Scheme

Many investors find it difficult to
select one option from the plethora of funds/schemes/plans available. For this,
they may have to take advice from financial planners in order to invest in the right
fund to achieve their objectives.

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