Consumer Behavior in Mutual Funds Finance Essay

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The objective of the research study is to know the factors of consumer behavior in mutual funds. Mutual is considered as a risky investment by common men in India. With change in time, people are investing in mutual funds.

The evaluation of financial planning has been increased through decades, which is best seen in customer rise. Now a day's investment of saving has assumed great importance.

In this project the great emphasis is given to the investor's mind in respect to investment in Mutual Fund. This research will reveal different factors affecting the investors' behavior in three different stages. The first stage is the pre purchase stage. In this an investors comes to know about a mutual fund plan. He takes many references before choosing a fund to invest. The second stage is the decision making. A customer several options to choose from. He evaluates the options keeping in mind different factors. The third stage is the after investment behavior. Mutual funds are directly link to the economy. When there are some fluctuations in economy how an investor reacts to it.

In this project an in-depth study will be carried out to reveal various factors in all above mention stages.


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 them (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 little 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 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. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company 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 actually belongs to the investors who have pooled their funds.

A mutual fund is managed by investment professionals and other service providers, who earn a fee for their services, from the fund.

The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day.

The investor's share in the fund is denominated by 'units'. The value of the units changes with change in the

portfolio's value, every day. The value of one unit of investment is called the Net Asset Value or NAV.


The structure of mutual funds in India is governed by the SEBI Regulations, 1996. These regulations make it mandatory for mutual funds to have a 3-tier structure of Sponsors-Trustee-AMC (Asset Management Company). The Sponsor is the promoter of mutual fund, and appoints the Trustee. The Trustees are responsible to the investors in the mutual funds, and appoint the AMC for managing the investment portfolio. The AMC is the business face of the mutual funds, as it manages all the affairs of mutual funds. The mutual funds and AMC have to be registered by the SEBI.

Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crores at all times.

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders.

A custodian handles the investment back office of a mutual fund. Its responsibilities include receipt and delivery of securities, collection of income, distribution of dividends, and segregation of assets between schemes. The sponsor of a mutual fund cannot act as a custodian to the fund. For example, Deutsche Bank is a custodian, but it cannot service Deutsche Mutual Fund, its mutual fund arm.

Indian capital markets are moving away from having physical certificates for securities, to ownership of these securities in 'dematerialized' form with a Depository.

A Mutual Fund may float several schemes, which may be classified on the basis of its structure, its investment objectives and other objectives.

As the name implies the size of the scheme (fund) is open - i.e. not specified or pre-determined. Entry to the fund is always open, the investor who can subscribe at anytime. Such fund stands ready to buy or sell its securities at anytime. The key feature of Open-ended schemes is Liquidity. It implies that the capitalization of the fund is constantly changing as investors sell or buy their shares. Further, the shares or units are normally not traded on the stock exchange but are repurchased by the funds at announced rates. Open-ended schemes have comparatively better liquidity despite the fact that these are not listed. The reason is that investors can any time approach mutual fund for sale of such units. No intermediaries are required. Moreover, the realizable amount is certain since repurchase is at a price based on declared net asset value (NAV). The portfolio mix of such schemes has to be investments, which are actively traded in the market. Otherwise it will not be possible to calculate NAV. This is the reason that generally open-ended schemes are equity based. In Open-ended schemes, the option of dividend reinvestment is available.

A Close - ended schemes have a definite period after which their shares/units are redeemed. The scheme is open for subscription only during a specified period at the time of launch of a scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. In these types of schemes, the size of the fund kept to be constant. SEBI regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

These funds invest a major part of their corpus in equities. The composition of the fund may vary from scheme to scheme and the fund manager's outlook on various scrip's. The Equity Funds are sub-classified depending upon their investment objective, as follows:

  1. Growth Fund: Aim to provide capital appreciations over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short term decline in value for possible future appreciation. These schemes are not for investors seeking regular income or needing their money back in the short-term.
  2. Diversified Equity Fund: Diversified equity funds are the most popular among investors. They invest in many stocks across many sectors, and because they have the freedom to chop and churn their portfolios as they like, diversified equity funds are a good proxy to the stock market. If a general exposure to equities is what you want, they are a good option. They can invest in all listed stocks, and even in unlisted stocks. They can invest in which ever sector they like, in what ever ratio they like.
  3. Equity - Linked Savings Schemes (ELSS): Equity - linked savings schemes (ELSS) are diversified equity funds that additionally offer income tax benefits to individuals. ELSS is one of the many section 80c instruments, along with the more popular debt options like the PPF, NSC and infrastructure bonds. In this Section 80c grouping. ELSS is unique. Being the only instrument to offer a total equity exposure.
  4. .Index Fund: An index fund is a diversified equity fund; with a difference- a fund manager has absolutely no say in stock selection. At all times, the portfolio of an index fund mirrors an index, both in its choice of stocks and their percentage holding. So, an index fund that mirrors the Sensex will invest only in the 30 Sensex stocks, which too in the same proportion as their weight age in the index.
  5. Sector Fund: Sector funds invest in stocks from only one sector, or a handful of sectors. The objective is to capitalize on the story in the sectors, and offer investors a window to profit from such opportunities. It's a very narrow focus, because of which sector funds are considered the riskiest among all equity funds.
  6. Mid - Cap Fund: These are diversified funds that target companies on the fast - growth trajectory. In the long run, share prices are driven by growth in a company's turnover and profits. Market players refer to them as 'mid-sized companies' and 'mid-cap cks' with size in this context being benchmarked to a company's market value. So, while a typical large cap stock would have a market capitalization of over Rs 1,000 crores, a mid-cap stock would have a market value of Rs 250-2,000 crores.


These Funds invest a major portion of their corpus in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors.

Debt funds are further classified as:

  1. Gilt Funds: Invest their corpus in securities issued by Government, popularly known as GOI debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
  2. .Income Funds: Income funds aim to maximize debt returns for the medium to longer term. Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
  3. MIPs: Invests around 80% of their total corpus in debt instruments while the rest of the portion is invested in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investors with an investment horizon of 3-6 months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds: Also known as Money Market Schemes, These funds are meant to provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market etc. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

Floating Rate Funds: These income funds are more insulated from interest rate than their conventional peers. In other words, interest rate changes, which cause the NAV of a conventional debt fund to go up or down, have little, or no, impact on NAVs of floating rate funds.

These funds, as the name suggests, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Each category of fund is backed by an investment philosophy, which is predefined in the in the objective of the fund. The investor can align his own investment need with the fund objectives and invest accordingly

Growth and Income Fund: Strike a balance capital appreciation and income for the investors. In these funds portfolio is a mix between companies with good dividend paying record and those with potential capital appreciation. These funds are less risky than growth funds bit more than income funds.

Asset Allocation Fund: These funds follow variable asset allocation policy. These move in an out of an asset class (equity, debt, money market or even non-financial assets). Asset allocation funds are those, which follow more stable allocation policies like balanced funds. Those, which flexible allocation policies, are like aggressive speculative funds.


Mutual Funds offer several benefits to an investor that are unmatched by the other investment options. Last six years have been the most turbulent as well as exiting ones for the industry. New players have come in, while others have decided to close shop by either selling off or merging with others. Product innovation is now passé with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulators have become more mature and responsible.

Affordability : Small investors with low investment fund are unable to invest in high-grade or blue chip stocks. An investor through Mutual Funds can be benefited from a portfolio including of high priced stock.

Diversification : Investors investment is spread across different securities (stocks, bonds, money market, real estate, fixed deposits etc.) and different sectors (auto, textile, IT etc.). This kind of a diversification add to the stability of returns, reduces the risk for example during one period of time equities might under perform but bonds and money market instruments might do well do well and may protect principal investment as well as help to meet return objectives.

Variety : Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors

Professional Management: Mutual Funds employ the services of experienced and skilled professionals and dedicated investment research team. The whole team analyses the performance and balance sheet of companies and selects them to achieve the objectives of the scheme.

Tax Benefits: Depending on the scheme of mutual funds, tax shelter is also available. As per the Union Budget-99, income earned through dividends from mutual funds is 100% tax free. Under ELSS of open-ended equity-oriented funds an exemption is provided up to Rs. 100,000/- under section 80C.

Regulation: 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.


The following are the disadvantages of investing through mutual fund:

No control over cost: Since investors do not directly monitor the fund's operations, they cannot control the costs effectively. Regulators therefore usually limit the expenses of mutual funds.

No tailor-made portfolio: Mutual fund portfolios are created and marketed by AMCs, into which investors invest. They cannot made tailor made portfolio.

Managing a portfolio of funds: As the number of funds increase, in order to tailor a portfolio for himself, an investor may be holding portfolio funds, with the costs of monitoring them and using hem, being incurred by him.

Delay in Redemption: The redemption of the funds though has liquidity in 24-hours to 3 days takes formal application as well as needs time for redemption. This becomes cumbersome for the investors.

Non-availability of loans: Mutual funds are not accepted as security against loan. The investor cannot deposit the mutual funds against taking any kind of bank loans though they may be his assets.


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Consumer Behavior In Mutual Funds Finance Essay. (2017, Jun 26). Retrieved July 13, 2024 , from

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