SYNOPSIS

ON
“A COMPARATIVE STUDY ON DIRECT EQUITY INVESTING AND MUTUAL
FUND INVESTING ”

Submitted to KCL-IMT(PTU)

In partial fulfillment of the requirement for the award of degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by Supervisor

Name of the Student:- SUKHDEEP SABHARWAL Name: DR. NAVJIT SINGH

Roll No. 1718417 Designation: Assistant Prof.

DEPARTMENT OF MANAGEMENT

KCL-IMT JALANDHAR BATCH YEAR (2018-19)

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 TABLE OF CONTENTS

Chapters Page no.

1. Introduction 3-12

2. Review of literature 13-14

3. Need of the study 16

4. Objective of the study 16

5. Scope of the study 16

6. Research design 17-18

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INTRODUCTION TO RESEARCH PROBLEM

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Introduction to Financial Market:-
A financial market is a market in which people and entities can trade financial
securities, commodities, and other fungible items of value at low transaction costs and at
prices that reflect supply and demand. Securities include stocks and bonds, and commodities
include precious metals or agricultural goods.

Indian Financial Market:-

India Financial market is one of the oldest in the world and is considered to be the
fastest growing and best among all the markets of the emerging economies. The history of
Indian capital markets dates back 200 years toward the end of the 18th century when India
was under the rule of the East India Company. The development of the capital market in
India concentrated around Mumbai where no less than 200 to 250 securities brokers were
active during the second half of the 19th century.
The financial market in India today is more developed than many other
sectors because it was organized long before with the securities exchanges of Mumbai,
Ahmedabad and Kolkata were established as early as the 19th century.
By the early 1960s the total number of securities exchanges in India rose to
eight, including Mumbai, Ahmedabad and Kolkata apart from Madras, Kanpur, Delhi,
Bangalore and Pune.
Today there are 21 regional securities exchanges in India in addition to the
centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of
India). However the stock markets in India remained stagnant due to stringent controls on the
market economy that allowed only a handful of monopolies to dominate their respective
sectors.

The Equity Capital

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 Investors owning equity shares of a company are owners of the company. They
are issued equity shares of the company, as evidence of such ownership. Equity investors are
not entitled to any fixed return or repayment of capital. However, they are entitled to the
benefits that arise out of the performance of the company. If the business fails, they may lose
the entire investment. Of all the financiers, they take the most risk.

Issue of Shares
Most companies are usually started privately by their promoter(s). However, the promoters’
capital and the borrowings from banks and financial institutions may not be sufficient for
setting up or running the business over a long term. So companies invite the public to
contribute towards the equity and issue shares to individual investors. The way to invite share
capital from the public is through a ‘Public Issue’. Simply stated, a public issue is an offer to
the public to subscribe to the share capital of a company. Once this is done, the company
allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.

Advantages of Equity Shares:-

 More Income: Equity shareholders are the residual claimant of the profits after meeting
all the fixed commitments. The company may add to the profits by trading on equity. Thus
equity capital may get dividend at high in boom period.
 Right to participate in the Control and Management: Equity shareholders have voting
rights and elect competent persons as directors to control and manage the affairs of the
company.

 Capital profits: The market value of equity shares fluctuates directly with the profits of the
company and their real value based on the net worth of the assets of the company. An
appreciation in the net worth of the company's assets will increase the market value of equity
shares. It brings capital appreciation in their investments.
 An Attraction of Persons having Limited Income: Equity shares are mostly of lower
denomination and persons of limited recourses can purchase these shares.
 Tax Advantages: Equity shares also offer tax advantages to the investor. The larger
yield on equity shares results from an increase in principal or capital gains, which are taxed
at lower rate than other incomes in most of the countries

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  Other Advantages: It appeals most to the speculators. Their prices in security market
are more fluctuating.

Disadvantages of Equity Shares:-

 Uncertain and Irregular Income: The dividend on equity shares is subject to
availability of profits and intention of the Board of Directors and hence the income is quite
irregular and uncertain. They may get no dividend even three are sufficient profits.
 Capital loss During Depression Period: During recession or depression periods, the
profits of the company come down and consequently the rate of dividend also comes down.
Due to low rate of dividend and certain other factors the market value of equity shares goes
down resulting in a capital loss to the investors.
 Loss on Liquidation: In case, the company goes into liquidation, equity shareholders
are the worst suffers. They are paid in the last only if any surplus is available after every
other claim including the claim of preference shareholders is settled. It is evident from the
advantages and disadvantages of equity share capital discussed above that the issue of equity
share capital is a must for a company, yet it should not solely depend on it. In order to make
its capital structure flexible, it should raise funds from other sources also.
 Dividend at the board’s mercy: The rate of dividend is recommended by the board.
The shareholders in the AGM cannot declare a higher rate than what is recommended by the
board.
 Illiquid: Since equity shares are not refundable they are treated as illiquid.
 Speculation: higher dividends during prosperous periods and low dividend during
depression period shall lead to ample speculation.

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Mutual Fund:-
A mutual fund is a professionally managed type of collective investment scheme that
pools money from many investors and invests it in stocks, bonds, short-term money market
instruments and other securities. Mutual funds have a fund manager who invests the money
on behalf of the investors by buying / selling stocks, bonds etc.

There are various investment avenues available to an investor such as real estate, bank
deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more type
of Investment Avenue available to investors. There are many reasons why investors prefer
mutual funds. Buying shares directly from the market is one way of investing. But this
requires spending time to find out the performance of the company whose share is being
purchased, understanding the future business prospects of the company, finding out the track
record of the promoters and the dividend, bonus issue history of the company etc. An
informed investor needs to do research before investing. However, many investors find it
cumbersome and time consuming to pore over so much of information, get access to so much
of details before investing in the shares. Investors therefore prefer the mutual fund route.
They invest in a mutual fund scheme which in turn takes the responsibility of investing in
stocks and shares after due analysis and research. The investor need not bother with
researching hundreds of stocks. It leaves it to the mutual fund and its professional fund
management team. Another reason why investors prefer mutual funds is because mutual
funds offer diversification. An investor’s money is invested by the mutual fund in a variety of
shares, bonds and other securities thus diversifying the investor’s portfolio across different
companies and sectors. This diversification helps in reducing the overall risk of the portfolio.
It is also less expensive to invest in a mutual fund since the minimum investment amount in
mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be able to buy
only a few stocks and not get the desired diversification.

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Mutual Fund Operation:-

NAV (Net Asset Value) :-

NAV means Net Asset Value. The investments made by a Mutual Fund are marked
to market on daily basis. In other words, we can say that current market value of such
investments is calculated on daily basis. NAV is arrived at after deducting all liabilities
(except unit capital) of the fund from the realisable value of all assets and dividing by
number of units outstanding. Therefore, NAV on a particular day reflects the realisable value
that the investor will get for each unit if the scheme is liquidated on that date. This NAV
keeps on changing with the changes in the market rates of equity and bond markets.
Therefore, the investments in Mutual Funds is not risk free, but a good managed Fund can
give you regular and higher returns than when you can get from fixed deposits of a bank etc.

Various Types of Mutual Funds

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A common man is so much confused about the various kinds of Mutual Funds that he is
afraid of investing in these funds as he cannot differentiate between various types of Mutual
Funds with fancy names. Mutual Funds can be classified into various categories under the
following heads:-
(A) According to type of investments: - While launching a new scheme, every Mutual Fund
is supposed to declare in the prospectus the kind of instruments in which it will make
investments of the funds collected under that scheme. Thus, the various kinds of Mutual
Fund schemes as categorized according to the type of investments are as follows:-
 Equity funds/schemes
 Debt funds / schemes (also called Income Funds)
 Diversified funds / schemes (also called Balanced Funds)
B) According to the time of closure of the scheme :
While launching new schemes, Mutual Funds also declare whether this will be an open
ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a
closing date when finally the scheme will be wind up. Thus, according to the time of closure
schemes are classified as follows:-
 Open ended schemes
 Close ended schemes
Open ended funds are allowed to issue and redeem units any time during
the life of the scheme, but close ended funds cannot issue new units except in case of bonus
or rights issue. Therefore, unit capital of open ended funds can fluctuate on daily basis (as
new investors may purchase fresh units), but that is not the case for close ended schemes. In
other words we can say that new investors can join the scheme by directly applying to the
mutual fund at applicable net asset value related prices in case of open ended schemes but
not in case of close ended schemes. In case of close ended schemes, new investors can buy
the units only from secondary markets.

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C) According to tax incentive schemes: Mutual Funds are also allowed to float some tax
saving schemes. Therefore, sometimes the schemes are classified according to this also:-
 Tax saving funds
 Non tax saving funds / Other funds
(D) According to the time of pay-out: Sometimes Mutual Fund schemes are classified
according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as
follows:-
 Dividend Paying Schemes
 Reinvestment Schemes
Advantages of Mutual Fund
 Professional Management:- Mutual funds offer investors the opportunity to earn an
income or build their wealth through professional management of their investible funds.
There are several aspects to such professional management viz. investing in line with the
investment objective, investing based on adequate research, and ensuring that prudent
investment processes are followed.
 Affordable Portfolio Diversification: Units of a scheme give investors exposure to a
range of securities held in the investment portfolio of the scheme. Thus, even a small
investment of Rs 5,000 in a mutual fund scheme can give investors a diversified investment
portfolio.
 Economies of Scale: The pooling of large sums of money from so many investors
makes it possible for the mutual fund to engage professional managers to manage the
investment. Individual investors with small amounts to invest cannot, by themselves, afford
to engage such professional management.
 Liquidity: At times, investors in financial markets are stuck with a security for which
they can’t find a buyer – worse, at times they can’t find the company they invested in! Such
investments, whose value the investor cannot easily realise in the market, are technically
called illiquid investments and may result in losses for the investor. Investors in a mutual
fund scheme can recover the value of the moneys invested, from the mutual fund itself.
Depending on the structure of the mutual fund scheme, this would be possible, either at any
time, or during specific intervals, or only on closure of the scheme. Schemes where the
money can be recovered from the mutual fund only on closure of the scheme, are listed in a
stock exchange. In such schemes, the investor can sell the units in the stock exchange to
recover the prevailing value of the investment.

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  Tax Deferral: Mutual funds are not liable to pay tax on the income they earn. If the
same income were to be earned by the investor directly, then tax may have to be paid in the
same financial year. Mutual funds offer options, whereby the investor can let the moneys
grow in the scheme for several years. By selecting such options, it is possible for the
investor to defer the tax liability. This helps investors to legally build their wealth faster than
would have been the case, if they were to pay tax on the income each year.
 Tax benefits: Specific schemes of mutual funds (Equity Linked Savings Schemes)
give investors the benefit of deduction of the amount invested, from their income that is
liable to tax. This reduces their taxable income, and therefore the tax liability. Further, the
dividend that the investor receives from the scheme, is taxfree in his hands.
 Convenient Options: The options offered under a scheme allow investors to structure
their investments in line with their liquidity preference and tax position.
 Investment Comfort: Once an investment is made with a mutual fund, they make it
convenient for the investor to make further purchases with very little documentation. This
simplifies subsequent investment activity.
 Regulatory Comfort: The regulator, Securities & Exchange Board of India (SEBI) has
mandated strict checks and balances in the structure of mutual funds and their activities.
Mutual fund investors benefit from such protection.
 Systematic approach to investments: Mutual funds also offer facilities that help
investor invest amounts regularly through a Systematic Investment Plan (SIP); or withdraw
amounts regularly through a Systematic Withdrawal Plan (SWP); or move moneys between
different kinds of schemes through a Systematic Transfer Plan (STP). Such systematic
approaches promote an investment discipline, which is useful in long term wealth creation
and protection

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Disadvantages of Mutual Fund
 Lack of portfolio customization: Some securities houses offer Portfolio Management
Schemes (PMS) to large investors. In a PMS, the investor has better control over what
securities are bought and sold on his behalf. On the other hand, a unit-holder is just one of
several thousand investors in a scheme. Once a unitholder has bought into the scheme,
investment management is left to the fund manager (within the broad parameters of the
investment objective). Thus, the unitholder cannot influence what securities or investments
the scheme would buy. Large sections of investors lack the time or the knowledge to be able
to make portfolio choices. Therefore, lack of portfolio customization is not a serious
limitation in most cases.
 Choice overload: Over 800 mutual fund schemes offered by 38 mutual funds – and
multiple options within those schemes – make it difficult for investors to choose between
them. Greater dissemination of industry information through various media and availability
of professional advisors in the market should help investors handle this overload.
 No control over costs: All the investor's moneys are pooled together in a scheme. Costs
incurred for managing the scheme are shared by all the Unit holders in proportion to their
holding of Units in the scheme. Therefore, an individual investor has no control over the
costs in a scheme. SEBI has however imposed certain limits on the expenses that can be
charged to any scheme. These limits, which vary with the size of assets and the nature of the
scheme

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 CHAPTER 2
LITERATURE REVIEW

Sharpe (1966) evaluated the performance of mutual funds through capital market model that
substituted the expected returns and predicted deviation values by actual return and actual
standard deviation values [142].

After two years, Jensen (1968) measured the performance of mutual funds with a model that
statistically measured the fund performance relative to a benchmark [91].

John and Donald (1974) analysed the risk and return of 123 American mutual funds during
1960–1969 by applying Sharpe, Treynor and Jensen measures. Authors concluded that more
aggressive portfolios outperform the less aggressive one [93].

In India Singh and Singla (2000) evaluated the performance of twelve growth oriented mutual
funds for October 1992 to September 1996. They used Treynor index, Sharpe index and Jensen
measure and concluded that mutual funds did not perform better than their benchmark indicators
[149].

Also, Chander (2000) measured the performance of selected Indian mutual fund schemes by
using Sharpe measure, Treynor measure and Jensen differential measure. In their study, it was
found that majority of sample mutual funds showed superior performance as compared to their
benchmark portfolio [33].

In an another study, Busse (2001) examined 230 equity mutual funds during the period January
2, 1985 to December 29, 1995 and it was concluded that daily estimates were more precise
relative to monthly estimates [25].

Galagedera & Silvapulle (2002) examined 257 Australian mutual funds for five years from 1995
to 1999. Authors found that when fund’s long term growth and income distribution was
considered, DEA showed more funds were efficient as compared to shorter time horizons were
considered [66].
Sapar and Madava (2003) evaluated the performance of Indian mutual funds in a bear market
through studying a sample of 58 open– ended funds over a period September 1998 to April 2002.

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Chander and singh (2004) analysed the performance of 23 mutual fund schemes on risk and
return relationship. They took the sample from five Indian mutual funds as alliance Capital,
Prudential ICICI, Pioneer ITI, UTI and Templeton India. Authors found that Alliance Capital,
Prudential ICICI and Pioneer ITI scored better return than the market whereas, the schemes
floated by UTI and Templeton India recorded a poor return.

Rao et al. (2004) analysed the performance of 21 equity funds in India. They conducted their
study during 1997-2000 and 2001-2004 by employing data envelopment analysis (DEA), Semi-
Standard Deviation, Negative Potential Measure, Morning Star Methodology, Sharpe, Treynor,
and Jensen. According to DEA, no scheme was consistently among the top 5 in both time zones.
Also, authors provided the evidence that the schemes outperformed the Sensex.

Gregoriou et al. (2005) tested the performance of 614 hedge funds and compared the
performance of different types of hedge funds. BCC model, the crossefficiency model and the
super-efficiency model were employed. Their results indicated that DEA could test the non
normal distribution of hedge funds and compared the performance of different types of hedge
funds.

Anand and Murugaiah (2007) evaluated the performance of 113 Indian mutual fund schemes
having exposure of more than 90 percent of corpus to equity stocks of 25 fund houses, during
four year period from April, 1999 to March, 2003.

Bogle (1992) ranked equity mutual funds by one year total return for each year over the period
1980–1990. For each year, he reported the rank of funds that were top twenty performers in the
previous year and found that the previous year ranks do not indicate the future ranks

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 CHAPTER 3
NEED, SCOPE ,OBJECTIVE,

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 NEED:
This study aims at creating awareness in the minds of investor in terms of risk, return,
liquidity & marketability of their investments. Also focuses on which would be the better
investment for an individual investor.
SCOPE OF THE STUDY

The study which focuses on various aspects such as competitive study of direct investing in
equity or mutual fund and describe its strengths and weakness , customer perception etc .

o The result of this research would help the company to have a better understanding about
the consumers perception towards direct investing in equity or mutual fund.
o The study helps the company by creating awareness about the consumers of different
ages and income levels
o The study also enables the company to focus the consumers preferences and expectations
on the product which they offer

Objectives:
 To compare Equity and Mutual Fund Schemes in respect of their risk & return.
 To study investor perception regarding equity and mutual fund schemes.
 To study the factor affecting investment decision.

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 CHAPTER- 4
RESEARCH DESIGN

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 4.1 SAMPLING PROCEDURE
o Sample size : 50

o Type of research : Descriptive study

4.1.1 Descriptive Research: The type of research technique used is descriptive as the
data is collected from wide range of customers who are located in different locations of
the city. The data is said to be very intensive as the data analysis and research have been
done in depth

o Sampling Technique :
The sampling techniques used in this project is Convenience sampling

o Sampling Area :
The sample size was 50, which comprised of people from Jalandhar city.

4.1.2 Sources of data collection :

Primary Data: Personal interactions, Observations
Training programs. Through Questionnaire
Secondary Data: Data Available on Internet from various Websites,
Books and Magazine.

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