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RISK ANALYSIS OF MUTUAL FUNDS

INDIANACADEMY SCHOOL OF MANGEMENT STUDIES Page 2

investors in accordance with quantum of money invested by them. Investors of mutual

funds are known as unit holders.

1.2 Concept of Mutual Fund:

Mutual funds, as the name indicates is the fund where in numerous investorscome together to invest in various schemes of mutual fund. Mutual funds are dynamic

institution, which plays a crucial role in an economy by mobilizing savings and investing

them in the capital market, thus establishing a link between savings and the capital

market. Mutual fund as an investment company combines or collects money of its

shareholders and invests those funds in variety of stocks, bonds, and money market

instruments. The latter include securities, commercial papers, certificates of deposits, etc.

Mutual funds provide the investor with professional management of funds and

diversification of investment.

Investors who invest in mutual funds are provided with units to participate in

stock markets. These units are investment vehicle that provide a means of participation in

the stock market for people who have neither the time, nor the money, nor perhaps the

expertise to undertake the direct investment in equities. On the other hand they also

provide a route into specialist markets where direct investment often demands both more

time and more knowledge than an investor may possess. The price of units in any mutual

fund is governed by the value of underlying securities. The value of an investors holding

in a unit can therefore, like an investment in share, can go down as well as up. Hence it is

said that mutual funds are subjected to market risk. Mutual fund cant guarantee a fixed

rate of return. It depends on the market condition and also depends on the fund managers

expertise knowledge. Mutual Funds employ the services of skilled professionals who

have years of experience to back them up. They use intensive research techniques to

analyze each investment option for the potential of returns along with their risk levels to

come up with the figures for performance that determine the suitability of any potential

investment.


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1.3 The Process of Mutual Fund

Figure 1.1

When an investor subscribes for the units of a mutual fund, he becomes part owner of the

assets of the fund in the same proportion as his contribution amount put up with the

corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual

fund shareholder or a unit holder. Any change in the value of the investments made into

capital market instruments (such as shares, debentures etc) is reflected in the NAV of the

scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net of its

Any capital gain or losses from such investments are passed on tothe investors in proportion of the number of units held by them

The fund manager realizes gains or losses, and collects dividendor interest income

The money collected from investors is invested into shares,debentures and other securities by the fund manager

Investors, on a proportionate basis , get mutual fund units forthe sum contributed to the pool

Many investors with common financial objectives pool their

money


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liabilities. NAV of a scheme is calculated by dividing the market value of scheme's assets

by the total number of units issued to the investors.

The above flow chart signifies the importance of Mutual Fund. 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 schemes 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 person as it offers an opportunity to invest in a diversified, professionally

managed basket of securities at a relatively low cost.

Since small investors generally do not have adequate time, knowledge, experience

& resources for directly accessing the capital market, they have to rely on an

intermediary, which undertakes informed investment decisions & provides consequential

benefits of professional expertise. The advantage of Mutual Funds to the investors is

professional managed, low transaction cost, liquidity, transparency, well regulated,

diversified portfolios & tax benefits. By pooling their assets through mutual funds,

investors achieve economies of scale. A collected corpus can be used to procure a

diversified portfolio indicating greater returns has also create economies of scale through

cost reduction. This principle has been effective worldwide as more & more investors are

going the mutual fund way. This portfolio diversification ensures risk minimization. The

criticality such a measure comes when the factor in the fluctuations that characterize

stock markets. The interest of the investors is protected by the SEBI, which acts as a

watchdog. Mutual funds are governed by SEBI (Mutual Funds) regulations, 1996.

1.4Advantages & Disadvantages of Mutual Funds

1.4.1 The advantages of investing in a Mutual Fund are:

Professional Management

The primary advantage of funds is the professional management of the money.

Investors purchase funds because they do not have the time or the expertise to manage


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their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to

get a full-time manager to make and monitor investments.

Diversification

By owning shares in a mutual fund instead of owning individual stocks or bonds, your

risk is spread out. The idea behind diversification is to invest in a large number of assets

so that a loss in any particular investment is minimized by gains in others. In other words,

the more stocks and bonds a person own, the less any one of them can hurt that person.

Large mutual funds typically own hundreds of different stocks in many different

industries. It wouldn't be possible for an investor to build this kind of a portfolio with a

small amount of money. Investments are spread across a wide cross-section of industries

and sectors and so the risk is reduced. Diversification reduces the risk because all stocks

dont move in the same direction at the same time. One can achieve this diversification

through a Mutual Fund with far less money than one can on his own.

Economies of Scale

Because a mutual fund buys and sells large amounts of securities at a time, its transaction

costs are lower than an individual would pay.

Convenient Administration:

Investing in a Mutual Fund reduces paperwork and helps to avoid many problems such as

bad deliveries, delayed payments and follow up with brokers and companies. Mutual

Funds save time and make investments in an easy and convenient way.

Potential of Return

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. Returns in the mutual funds

are generally better than any other option in any other avenue over a reasonable period of

time. People can pick their investment horizon and stay put in the chosen fund for the

duration. Equity funds can outperform most other investments over long periods by


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placing long-term calls on fundamentally good stocks. The debt funds too will

outperform other options such as banks. Though they are affected by the interest rate risk

in general, the returns generated are more as they pick securities with different duration

that have different yields and so are able to increase the overall returns from the portfolio.

Low Cost

Mutual Funds offer a relatively less expensive way to invest when compared to other

avenues such as capital market operations. The fee in terms of brokerages, custodial fees

and other management fees are substantially lower than other options and are directly

linked to the performance of the scheme. Investment in mutual funds also offers a lot of

flexibility with features such as regular investment plans, regular withdrawal plans and

dividend reinvestment plans enabling systematic investment or withdrawal of funds.

Even the investors, who could otherwise not enter stock markets with low investible

funds, can benefit from a portfolio comprising of high-priced stocks because they are

purchased from pooled funds.

Liquidity

Fixed deposits with companies or in banks are usually not withdrawn premature because

there is a penal clause attached to it. The investors can withdraw or redeem money at the

NAV related prices in the open-end schemes. In closed-end schemes, the units can be

transacted at the prevailing market price on a stock exchange. Mutual funds also provide

the facility of direct repurchase at NAV related prices. The market prices of these

schemes are dependent on the NAVs of funds and may trade at more than NAV (known

as Premium) or less than NAV (known as Discount) depending on the expected future

trend of NAV which in turn is linked to general market conditions. Bullish market may

result in schemes trading at Premium while in bearish markets the funds usually trade at

Discount. This means that the money can be withdrawn anytime, without much reduction

in yield. Some mutual funds however, charge exit loads for withdrawal within a period.


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Transparency

Customers will 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. So that people can systematically invest or withdraw funds

according to their 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 an investors 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.

Simplicity

Buying a mutual fund is easy. Pretty well any bank has its own line of mutual funds, and

the minimum investment is small. Most companies also have automatic purchase plans

whereby as little as Rs.5000 can be invested on a monthly basis.


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1.4.2 Disadvantages of Mutual Funds:

The disadvantages of investing in Mutual Funds are:

No Guarantees

No investment is risk free. If the entire stock market declines in value, the value of

mutual fund shares will go down as well, no matter how balanced the portfolio. Investors

encounter fewer risks when they invest in mutual funds than when they buy and sell

stocks on their own. However, anyone who invests through a mutual fund runs the risk of

losing money.

Fees and commissions

All funds charge administrative fees to cover their day-to-day expenses. Some funds also

charge sales commissions or "loads" to compensate brokers, financial consultants, or

financial planners. Even if a customer doesnt use a broker or other financial adviser, he

needs to pay a sales commission if he buys shares in a Load Fund.

Taxes

During a typical year, most actively managed mutual funds sell anywhere from 20 to 70

percent of the securities in their portfolios. If a fund makes a profit on its sales, customer

has to pay taxes on the income he received, even if he reinvests the money he earned.

Management risk

When we invest in a mutual fund, we depend on the fund's manager to make the right

decisions regarding the fund's portfolio. If the manager does not perform according to our

expectation, we might not make much money on our investment as we expected. Of

course, if we invest in Index Funds, we forego management risk, because these funds do

not employ managers.


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1.5 Types of Mutual Fund Schemes:

By Structure

Open-ended schemes

Close-ended schemes

Interval schemes

By Investment Objective

Growth schemes

Income schemes

Balance schemes

Money Market schemes

Other types of schemes Tax Saving schemes

Gilt Fund

Index schemes

Sector specific schemes

1.5.1 Schemes Based on their Structure:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme

depending on its maturity period.

Open-ended Fund / Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on

a continuous basis. These schemes do not have a fixed maturity period. Investors can

conveniently buy and sell units at NAV related prices which are declared on a daily basis.

The key feature of open-end schemes is liquidity. In other words we can say these are the

funds which an Investor can buy and sell the units from the fund, at any point of time.


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Close-ended Fund / Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is

open for subscription only during a specified period at the time of launch of the 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. 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.

Interval scheme

Interval funds combine the features of open-ended & closed ended schemes. They are

open for sale or redemption during pre-determined intervals at NAV related prices.

1.5.2 Schemes According to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme

considering its investment objective. Such schemes may be open-ended or close-ended

schemes as described earlier. Such schemes may be classified mainly as follows:

Growth / Equity Oriented Schemes

The aim of growth funds is to provide capital appreciation over the medium to long-

term. Such schemes normally invest a major part of their corpus in equities. Such funds

have comparatively high risks.

These schemes provide different options to the investors like dividend option, capital

appreciation, etc. and the investors may choose an option depending on their preferences.

The investors must indicate the option in the application form. The mutual funds also

allow the investors to change the options at a later date. Growth schemes are good for


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investors having a long-term outlook seeking appreciation over a period of time.

Figure 1.2

Equity schemes are hence not suitable for investors seeking regular income or needing to

use their investments in the short-term. They are ideal for investors who have a long-term

investment horizon. The NAV prices of equity fund fluctuates with market value of the

underlying stock which are influenced by external factors such as social, political as well

as economic.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such

schemes generally invest in fixed income securities such as bonds, corporate debentures,

Government securities and money market instruments. Such funds are less risky

compared to equity schemes. These funds are not affected because of fluctuations in

equity markets. However, opportunities of capital appreciation are also limited in such

funds. The NAVs of such funds are affected because of change in interest rates in the

country. If the interest rates fall, NAVs of such funds are likely to increase in the shortrun and vice versa. However, long term investors may not bother about these fluctuations.

These schemes invest in money markets, bonds and debentures of corporate companies

with medium and long-term maturities


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Figure 1.3

These schemes primarily target current income instead of capital appreciation. Hence, a

substantial part of the distributable surplus is given back to the investor by way of

dividend distribution. These schemes usually declare quarterly dividends and are suitable

for conservative investors who have medium to long-term investment horizon and are

looking for regular income through dividend or steady capital appreciation

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes

invest both in equities and fixed income securities in the proportion indicated in their

offer documents. These are appropriate for investors looking for moderate growth. They

generally invest 40-60% in equity and debt instruments. These funds are also affected

because of fluctuations in share prices in the stock markets. However, NAVs of such

funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation

of capital and moderate income. These schemes invest exclusively in safer short-term

instruments such as treasury bills, certificates of deposit, commercial paper and inter-

bank call money, government securities, etc. Returns on these schemes fluctuate much


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less compared to other funds. These funds are appropriate for corporate and individual

investors as a means to park their surplus funds for short periods.

1.5.3 Other Schemes:

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Income

Tax Act, 1961 as the Government offers tax incentives for investment in specified

avenues. E.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the

mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-

dominantly in equities. Their growth opportunities and risks associated are like any

equity-oriented scheme.

Gilt Fund

These funds invest exclusively in government securities. Government securities have no

default risk. NAVs of these schemes also fluctuate due to change in interest rates and

other economic factors as is the case with income or debt oriented schemes. Gilt funds, as

they are conveniently called, are mutual fund schemes floated by asset management

companies with exclusive investments in government securities. The schemes are also

referred to as mutual funds dedicated exclusively to investments in government

securities. Government securities mean and include central government dated securities,

state government securities and treasury bills. The gilt funds provide to the investors the

safety of investments made in government securities and better returns than direct

investments in these securities through investing in a variety of government securities

yielding varying rate of returns gilt funds, however, do run the risk. The first gilt fund in

India was set up in December 1998. All gilt funds - public and private sector, open-ended

or close- ended - are eligible to avail liquidity support and other facilities from the

Reserve Bank of India. The gilt funds schemes should, however, have the approval of the

Securities and Exchange Board of India. It would be prudent for the gilt funds to submit

an advance copy of the draft offer document to the Reserve Bank of India for preliminary

scrutiny at the time of submitting the draft offer document to the Securities and Exchange


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An average investor does not have enough time and resources to develop professional

attitude towards their investment. Here professional fund managers engaged by mutual

funds take desirable investment decision on behalf of investors so as to make better

utilization of resources.

Investment in mutual funds is comparatively more liquid because investor can sell the

units in open market or can approach mutual fund to repurchase the units at net asset

value depending upon the type of scheme.

Investors can avail tax rebates by investing in different tax saving schemes floated by

these funds, approved by the government.

Operating cost is minimized per head because of large size of investible funds, there

by realizing more net income of investors.

1.7 Organization Structure of Mutual Funds:

There are many entities involved and the diagram below illustrates the organizational set

up of a mutual fund. Mutual funds have a unique structure not shared with other entities

such as companies of firms. It is important for employees & agents to be aware of the

special nature of this structure, because it determines the rights & responsibilities of the

funds constituents viz., sponsors, trustees, custodians, transfer agents & of course the

fund & the AMC legal structure also drives the inter-relationships between theseconstituents. The structure of the mutual fund India is governed by the SEBI (Mutual

Funds) regulations, 1996. These regulations make it mandatory for mutual funds to have

a structure of sponsor, trustee, AMC, custodian. The sponsor is the promoter of the

mutual fund& appoints the trustees. The trustees are responsible to the investors in the

mutual fund, & appoint the AMC for managing the investment portfolio. The AMC is the

business face of the mutual fund, as it manages all affairs of the mutual fund. The mutual

fund & the AMC have to be registered with SEBI. Custodian, who is also registered with

SEBI, holds the securities of various schemes of the fund in its custody.


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Figure 1.4

1.7.1 Sponsor:

The sponsor is the promoter of the mutual fund. The sponsor establishes the Mutual

fund & registers the same with SEBI. He appoints the trustees, Custodians & the AMC

with prior approval of SEBI, & in accordance with SEBI regulations. He must have at

least five year track record of business interest in the financial markets. Sponsor must

have been profit making in at least three of the above five years. He must contribute at

least 40% of the capital of theAMC.

1.7.2 Trust:

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.

1.7.3 Trustee:

The Mutual Fund may be managed by a Board of trustees of individuals, or a trust

company a corporate body. Most of the funds in India are managed by board of

trustees. While the board of trustees is governed by the provisions of the Indian trust act,

where the trustee is the corporate body, it would also be required to comply with the


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provisions of the companies act, 1956. The board of trustee company, as an independent

body, act as protector of the unit-holders interest. The trustees dont directly manage the

portfolio of securities. For this specialist function, they appoint an AMC. They ensure

that the fund is managed by AMC as per the defined objectives & in accordance with the

trust deed & SEBI regulations.

The trust is created through a document called the trust deed i.e., executed by the fund

sponsor in favor of the trustees. The trust deed is required to be stamped as registered

under the provision of the Indian registration act & registered with SEBI. The trustees

begin the primary guardians of the unit-holders funds & assets; a trustee has to be a

person of high repute & integrity.

1.7.4 Asset Management Company

The role of an Asset management companies is to act as the investment manager of the

trust. They are the ones who manage money of investors. An AMC takes decisions,

compensates investors through dividends, maintains proper accounting & information for

pricing of units, calculates the NAV, & provides information on listed schemes. It also

exercises due diligence on investments & submits quarterly reports to the trustees. AMCs

have been set up in various countries internationally as an answer to the global problem

of bad loans.

Bad loans are essentially of two types: bad loans generated out of the usual banking

operations or bad lending, and bad loans which emanate out of a systematic banking

crisis.

It is in the latter case that banking regulators or governments try to bail out the banking

system of a systematic accumulation of bad loans which acts as a drag on their liquidity,

balance sheets and generally the health of banking. So, the idea of AMCs or ARCs is not

to bail out banks, but to bail out the banking system itself.

1.7.4.1 Types of AMCs in Indian Context:

The following are the various types of AMCs we have in India:


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AMCs owned by banks.

AMCs owned by financial institutions.

AMCs owned by Indian private sector companies.

AMCs owned by foreign institutional investors.

AMCs owned by Indian & foreign sponsors.

1.7.5 Registrar and Transfer Agent:

The Registrars & Transfer Agents(R & T Agents) are responsible for the investor

servicing function, as they maintain the records of investors in mutual funds. They

process investor applications; record details provide by the investors on application

forms; send out to investors details regarding their investment in the mutual fund; send

out periodical information on the performance of the mutual fund; process dividend

payout to investor; incorporate changes in information as communicated by investors; &

keep the investor record up-to-date, by recording new investors & removing investors

who have withdrawn their funds.

1.7.6 Custodian:

Often an independent organization, it takes custody of all securities & other assets of

mutual fund. Its responsibilities include receipt & delivery of securities collecting

income-distributing dividends, safekeeping of the unit, segregating assets & settlements

between schemes.

Mutual fund is managed either trust company or board of trustees. Board of trustees &

trust are governed by provisions of Indian trust act. If trustee is a company, it is also

subject Indian Company Act. Trustees appoint AMC in consultation with the sponsors &

according to SEBI regulation. All mutual fund schemes floated by AMC have to be

approved by trustees. Trustees review & ensure that net worth of the company is

according to stipulated norms, every quarter.

Though the trust is the mutual fund, the AMC is its operational face. The AMC is the first

functionary to be appointed, & is involved in appointment of all other functionaries. The


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AMC structures the mutual fund products, markets them & mobilizes fund, manages the

funds & services to the investors.

A draft offer document is to be prepared at the time of launching the fund. Typically, it

pre-specifies investment objectives of the fund, the risk associated, the cost involved in

the process, the broad rules to enter, to exit from the fund & other areas of operation. In

India as in most countries, these sponsors need approval from a regulator, SEBI in our

case. SEBI looks at track records of the sponsor & its financial strength 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 & perhaps the third one to handle registry work for the unit holder of the fund.

1.7.7 SEBISecurities and Exchange Board of India:

Securities and Exchange Board ofIndia (SEBI)is a board (autonomous body) created by the

Government of India in 1988 and given statutory form in 1992 with the SEBI Act 1992

with its head office at Mumbai.

The Securities and Exchange Board of India is perhaps the most important regulatory

body. Similar to the Securities Exchange Commission in the US, it is the authority that

has to always be on its toes. More so, when the markets are doing well and there are a

spate of IPOs (Initial Public Offerings) or FPOs (Follow-On Public Offerings) like now.

Its main mandate is to protect the interest of investors in the securities markets and to

promote the development and to regulate the securities markets so as to establish a

dynamic and efficient securities market.

When investors have complaints against listed companies or registered intermediaries,

SEBI acts as the nodal agency for addressing these complaints, if they are not solved

directly between the parties concerned, or if the investor is not happy with the response.

SEBI has listed certain categories of grievances for which investors can file complaints

with it these include:
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Non-receipt of refund order or allotment advice in case of investment in IPO's,

FPO's and right issues

Non-receipt of dividend from listed companies

Non-receipt of share certificates after transfer from listed companies

Non-receipt of debentures after transfer or non-receipt of interest or principal on

redemption and non-receipt of interest on delayed repayment

Non-receipt of rights offer letter

Collective investment schemes like plantation companies. Investors can send complaints

to SEBI regarding non-receipt of invested principal and returns there from.

Mutual funds/venture capital funds/foreign venture capital investors/foreign institutional

investors/portfolio managers/custodians - Complaints mutual funds like non-receipt or

delay in receipt of dividends/redemptions, non-availability of portfolio disclosures, non-

receipt of transaction statement, etc.

Brokers - This is the most common area of complaints for the average investor.

Complaints against brokers stem from disputes over brokerage rates, non-receipt of

purchased shares or payments for sold shares, auction of shares sold and delivered timely,

but delay at broker's end, etc. Complaints against securities lending intermediaries mayarise due to non-receipt of shares lent by the investor or interest thereupon, or non-receipt

of funds upon return of borrowed shares or excessive interest charged upon borrowing.

Complaints against merchant bankers, registrar and transfer agents, bankers to issues and

underwriters generally stem from problems in primary market issues, like non-

disclosures, service issues etc.

Derivative trading - Many investors sign legal papers empowering the broker to trade on

their behalf, without proper knowledge and wake up on seeing their margin money

eroded due to sustained losses. In other instances, major complaints are against brokers

squaring off outstanding derivatives positions due to lack of margins or not giving the

client adequate time or notice, leading to huge losses for investors/traders. These happen

especially when markets turn volatile of see sustained and large one- way movements.


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There are other areas such as corporate governance, corporate restructuring, acquisitions,

buybacks, delisting and other compliance related issues for which one could approach

SEBI. For all this one can

File complaints electronically on the SEBI website

Get a complaint registration number

Track the status of the complaint online

SEBI looks into the merit of the complaint and takes up the matter with the

concerned company or intermediary

It can also direct intermediaries to redress the investor complaints satisfactorily if the

case merits such an order one can also send grievances by post or fax. In other words,

there is a wide range of issues that come under the jurisdiction of SEBI. And the

responsibility is entirely on it to keep the stocks markets healthy.

1.8 Association of Mutual Funds in India (AMFI)

With the increase in mutual fund players in India, a need for mutual fund association in

India was generated to function as a non-profit organization. Association of Mutual

Funds in India (AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body

of all Asset Management Companies which has been registered with SEBI. Till date all

the AMCs are that have launched mutual fund schemes are its members. It functions

under the supervision and guidelines of its Board of Directors. Association of Mutual

Funds India has brought down the Indian Mutual Fund Industry to a professional and

healthy market with ethical lines enhancing and maintaining standards. It follows the

principle of both protecting and promoting the interests of mutual funds as well as their

unit holders.

1.8.1 Objectives of AMFI

To define and maintain high professional and ethical standards in all areas of

operation of mutual fund industry


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To recommend and promote best business practices and code of conduct to be

followed by members and others engaged in the activities of mutual fund and asset

management including agencies connected or involved in the field of capital markets

and financial services.

To interact with the Securities and Exchange Board of India and to represent to SEBI

on all matters concerning the mutual fund industry.

To represent to the Government, Reserve Bank of India and other bodies on all

matters relating to the Mutual Fund Industry.

To develop a cadre of well trained Agent distributors and to implement a program of

training and certification for all intermediaries and other engaged in the industry.

To undertake nationwide investor awareness program so as to promote proper

understanding of the concept and working of mutual funds.

To disseminate information on Mutual Fund Industry and to undertake studies and

research directly and/or in association with other bodies.

1.9 Investment Process In India

Seven Steps to Investing Wisely in Mutual Funds

Step 1:Identify the investment needs

Our financial goals will vary, based on factors such as age, lifestyle, financialindependence, family commitments and levels of income and expenses. The first step

involves the assessment of the needs.

What are the investment objectives and needs?

How much risk an investor willing to take?

What are cash flow requirements?

Step 2:Choose the right mutual fund

Having identified the investment needs, we have to choose the mutual fund and scheme

to invest in. The offer document details the schemes objectives, and the track record of

other schemes under the same fund manager. Here are some factors may wish to

evaluate before finalising a mutual fund:


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The schemes performance track record of the last few years in relation to that of similar

schemes in the category

The funds organisation structure and its ability to provide efficient, prompt and

personalised service

The funds degree of transparency as reflected in the frequency and quality of its

communications.

Step 3:Select the ideal mix of schemes

No single mutual fund scheme may meet all our investment needs; therefore, we wish to

invest in a combination of schemes to achieve our specific goals.

Step 4:Invest regularly

For most investors, the approach that works best is to invest a fixed amount at regular

intervals, say every month. By investing a fixed sum each month, we buy fewer units

when the price is high and more units when the price is low, thus it bringing down our

average cost per unit. This sort of disciplined strategy of investing in an SIP is called

rupee cost averaging, and is a disciplined investment strategy followed by investors the

world over.

Step 5:Keep taxes in mind

Dividends/income distributions made by mutual funds to investors are currently exempt

from income tax (I-T) in the hands of the investors. This is in addition to other benefits

available for investments in mutual funds under the prevailing tax laws.

Step 6:Begin early

It is desirable to begin investing early, and to stick to a regular investment plan. By

starting early, investor stands to earn more than from investing later: this is because the

power of compounding lets an investor earn income on income, and the money

multiplies at a compounded rate of return.

Step 7:The final step

Get in touch with a mutual fund, agent or broker, and begin investing right away. Begin

now, so we can reap the rewards in years to come. Mutual funds are suitable for every


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kind of investor, for those who are starting out on a career, or those about to retire, for

those with high risk appetite, or those who are risk averse, for those who are growth

oriented, or those seeking income.

1.10 Comparison of Mutual Funds with Other Products/ Investment Opportunities:

The mutual fund sector operates under stricter regulations as compared to most

other investment avenues. Apart from the tax efficiency and legal comfort we can

compare mutual funds with other products. Here the investment in Mutual Funds is

compared with:

1. Company Fixed Deposits.

2. Bank Fixed Deposits.3. Bonds and Debentures.

4. Equity.

5. Life Insurance

1.10.1 Company Fixed Deposits versus Mutual Funds

Fixed deposits are unsecured borrowings by the company accepting the deposits.

Credit rating of the fixed deposit program is an indication of the inherent default risk in

the investment. The moneys of investors in a mutual fund scheme are invested by the

AMC in specific investments under that scheme. These investments are held and

managed in-trustfor the benefit of schemes investors. On the other hand, there is no

such direct correlation between a companys fixed deposit mobilization, and the avenues

where these resources are deployed.

A corollary of such linkage between mobilization and investment is that the gains

and losses from the mutual fund scheme entirely flow through to the investors.

Therefore, there can be no certainty of yield, unless a named guarantor assures a return

or, to a lesser extent, if the investment is in a serial gilt scheme. On the other hand, the

return under a fixed deposit is certain, subject only to the default risk of the borrower.

Both fixed deposits and mutual funds offer liquidity, but subject to some differences:


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The provider of liquidity in the case of fixed deposits is the borrowing company. In

mutual funds, the liquidity provider is the scheme itself (for open-end schemes) or the

market (in the case of closed-end schemes).

The basic value at which fixed deposits are encashed is not subject to market risk.

However, the value at which units of a scheme are redeemed entirely depends on the

market. If securities have gained in value during the period, then the investor can

even earn a return that is higher than what she anticipated when she invested.

Conversely, she could also end up with a loss.

Early encashment of fixed deposits is always subject to a penalty charged by the

company that accepted the fixed deposit. Mutual fund schemes also have the option

of charging a penalty on early redemption of units (by way of an exit load). If the

NAV has appreciated adequately, then despite the exit load, the investor could earn a

capital gain on the investment.

1.10.2 Bank Fixed Deposits versus Mutual Funds

Bank fixed deposits are similar to company fixed deposits. The major difference

is that banks are more stringently regulated than are companies. They even operate under

stricter requirements regarding Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio

(CRR).While the above are causes for comfort, bank deposits too are subject to default

risk. However, given the political and economic impact of bank defaults, the Government

as well as Reserve Bank of India (RBI) tries to ensure that banks do not fail.

Further, bank deposits up to Rs 1, 00, 000 are protected by the Deposit Insurance

and Credit Guarantee Corporation (DICGC), so long as the bank has paid the required

insurance premium of 5 paisa per annum for every Rs 100 of deposits. The monetary

ceiling of Rs 100,000 is for all the deposits in all the branches of a bank, held by the

depositor in the same capacity and right.

1.10.3 Bonds and Debentures versus Mutual Funds

As in the case of fixed deposits, credit rating of the bond / debenture is an

indication of the inherent default risk in the investment. However, unlike fixed deposits,


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bonds and debentures are transferable securities. While an investor may have an early

encashment option from the issuer (for instance through a put option), generally

liquidity is through a listing in the market. Implications of this are:

If the security does not get traded in the market, then the liquidity remains on paper.

In this respect, an open-end scheme offering continuous sale / re-purchase option is

superior.

The value that the investor would realize in an early exit is subject to market risk.

The investor could have a capital gain or a capital loss. This aspect is similar to a MF

scheme.

It is possible for an astute investor to earn attractive returns by directly investing

in the debt market, and actively managing the positions. Given the market realities in

India, it is difficult for most investors to actively manage their debt portfolio. Further, at

times, it is difficult to execute trades in the debt market even when the transaction size is

as high as Rs 1 crore. In this respect, investment in a debt scheme would be beneficial.

Debt securities could be backed by a hypothecation or mortgage of identified

fixed and / or current assets (secured bonds / debentures). In such a case, if there is a

default, the identified assets become available for meeting redemption requirements. An

unsecured bond / debenture are for all practical purposes like a fixed deposit, as far as

access to assets is concerned. The investment in mutual fund scheme is held by a

Custodian for the benefit of all investors in that scheme. Thus, the securities that relate to

a scheme are ring-fenced for the benefit of its investors.

1.10.4 Equity versus Mutual Funds

Investment in both equity and mutual funds are subject to market risk. An investor

holding an equity security that is not traded in the market place has a problem in realizingvalue from it. But investment in an open-end mutual fund eliminates this direct risk of

not being able to sell the investment in the market. An indirect risk remains, because the

scheme has to realize its investments to pay investors. The AMC is however in a better

position to handle the situation. Another benefit of equity mutual fund schemes is that

they give investors the benefit of portfolio diversification through a small investment.


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For instance, an investor can take an exposure to the index by investing a mere Rs 5,000

in an index fund.

1.10.5 Life Insurance versus Mutual FundsLife insurance is a hedge against riskand not really an investment option. So, it

would be wrong to compare life insurance against any other financial product.

Occasionally on account of market inefficiencies or miss-pricing of products in India, life

insurance products have offered a return that is higher than a comparable safe fixed

return securitythus, we are effectively paid for getting insured. Such opportunities are

not sustainable in the long run.

1.11 Frequently Used Terms

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The

per unit NAV is the net asset value of the scheme divided by the number of units

outstanding on the valuation date.

The NAV is the market value of the fund's underlying securities. It is calculated at the

end of the trading day. Any open-end funds buy or sell order received on that day istraded based on the net asset value calculated at the end of the day. The NAV per units is

such Net Asset Value divided by the number of outstanding units

Market Value of Assets - Liabilities

NAV = - - - - - - - - - - - - - - - - - - - - - - - - -

Units Outstanding

For e.g., if the market value of the securities of a mutual fund scheme is Rs. 200 lakhs &

the mutual fund has issued 10 lakhs units at Rs. 10 to the investors, then the NAV per

unit of the fund is Rs.20. NAV is required to be disclosed by the mutual funds on a

regular basis- daily or weekly- depending


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Sale Price

Is the price an investor pays when he invests in a scheme or NAV a unit holder is charged

while investing in an open-ended scheme is sale price. Also called Offer Price. It may

include a sales load if applicable.

Repurchase Price

Is the price at which a close-ended scheme repurchases its units and it may include a

back-end load, it is also called Bid Price.

Redemption Price

Is the price at which open-ended schemes repurchase their units and close-ended schemes

redeem their units on maturity. Such prices are NAV related.

Sales Load

Is a charge collected by a scheme when it sells the units. Also called, Front -end load. A

load is one that charges a percentage of NAV for entry or exit. That is, each time one

buys or sells units in the fund, a charge will be payable. This charge is used by the mutual

fund for marketing & distribution expenses. Suppose the NAV per unit is Rs.10. if the

entry as well as exit load charged were 1%, then the investors who buy would be required

to pay Rs.10.10 & those who offer their units for repurchase to the mutual fund will get

only Rs.9.9 per unit. The investors should take the loads into consideration while making

investment as these affect their yields/returns.

No Load

Schemes that do not charge a load are called No Load schemes. A no -load fund is

one that does not charge for entry or exit. It means the investors can enter the

fund/scheme at NAV and no additional charges are payable on purchase or sale of

units.


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CHAPTER 2

REVIEW OF LITERATURE& RESEARCH DESIGN


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2.1 Introduction

A research is an art of scientific information. This research design constitutes the blue

print for the collection, measurement and analysis of data. It aids the researcher in the

allocation of his limited resources by posing crucial choices. Considering the importanceof mutual funds, several academicians have tried to study the performance of various

funds. Initially, their studies have tried to study the various factors and their impact on

fund performance.

2.2 Review of Literature

Literature on mutual fund performance evaluation is enormous. A few research studies

that have influenced the preparation of this paper substantially are discussed in this

section. Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio

performance. Drawing on result obtained in the field of portfolio analysis, economist Jack

L Treynor has suggested a new incorporating the volatility of a funds return in a simple

yet meaningful manner.

Micheal C Jenson (1967) derived a riskadjusted measure of portfolio performance

(Jensons alpha) that estimates how much a managers forecasting ability contributes to

funds returns. As indicated by Statman(2000), the e SDAR of a fund portfolio is the

excess return of the portfolio over the bench mark index, where the portfolio over the

return of the benchmark index, where the portfolio is leveraged to have benchmark

indexs standard deviation.

S.Narayan Rao, et. Al., evaluated performance of Indian mutual funds in a bear market

thorough relative performance index, risk-return analysis, Treynors ratio, Sharpes ratio,

Sharpes measure , Jensens measure, and famas measure. The study used 269 open-

ended schemes (out of total schemes of 4430)for computing relative performance index.

Then after excluding funds whose returns are less than risk-free returns, 27 schemes are

finally used for further analysis. The results of performance measures suggest that most

of mutual fund schemes in the sample of 27 were able to satisfy investors expectation by

giving excess return over expected return based on both premium for systematic risk and

total risk.


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Bijan Roy, et., conducted an empirical study on performance of Indian mutual funds.

This paper uses a technique called conditional performance evaluation on a sample of

eighty nine Indian mutual funds with both unconditional and conditional form of CAPM,

Treynor-Mazuy model and Henrikson Merton model. The effect of incorporating lagged

information variable into the evaluation of mutual funds managers performance is

examined in the Indian context. The results suggest that the use of conditioning lagged

information variables improves the performance mutual funds schemes, causing alphas to

shift towards right and reducing the number of negative timing coefficients.

Mirsha, et al., (2002)measured mutual fund performance using lower partial moment. In

this paper, measures of evaluating portfolio performance based on lower partial moment

are developed. Risk from the lower partial moment is measured by taking into account

only those states in which return is below a pre specified target rate like risk free rate.

Kshama Fernandas(2003) evaluated index funds implementation in india is measured.

The consistency and level of tracking errors obtained by some well-run index fund

suggests that it is possible to attain low levels of tracking error under Indian conditions.

At the same time, there do seem to be periods where certain index funds appear to depart

from the discipline of indexation. K . Pendaraki et al. studied construction of mutual fund

portfolios, developed a multi-criteria decision aid method is employed in order to develop

mutual funds performance models. Goal programming model is employed to determine

proportion of selected mutual funds in the final portfolios.

Zakri Y.Bello(2005) matched a sample of socially responsible stock mutual funds

matched to randomly selected conventional funds of net asset to investigate differences in

characteristics of asset held, degrees of portfolio diversification and variable effects of

diversification on investment performance is not difference between two groups. Both

groups underperformed the domini 400 social index and s&p 500 during the study period.


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PROFILE OF THE INDUSTRY

3.1Origin of the Mutual Fund


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Mutual funds really captured the public's attention in the 1980s and '90s when

mutual fund investment hit record highs and investors saw incredible returns. However, the

idea of pooling assets for investment purposes has been around for a long time. Here we

look at the evolution of this investment vehicle, from its beginnings in the Netherlands in

the 18th

century to its present status as a growing, international industry with fund holdings

accounting for trillions of dollars in the United States alone. In the beginning

Historians are uncertain of the origins of investment funds; some cite the closed-

end investment companies launched in the Netherlands in 1822 by King William I as the

first mutual funds, while others point to a Dutch merchant named Adriaan van Ketwich

whose investment trust created in 1774 may have given the king the idea. Ketwich

probably theorized that diversification would increase the appeal of investments to smaller

investors with minimal capital. The name of Ketwich's fund,Eendragt Maakt Magt,

translates to "unity creates strength". The next wave of near-mutual funds included an

investment trust launched in Switzerland in 1849, followed by similar vehicles created in

Scotland in the 1880s.

The idea of pooling resources and spreading risk using closed-end investments

soon took root in Great Britain and France, making its way to the United States in the

1890s. The Boston Personal Property Trust, formed in 1893, was the first closed-end

fund in the U.S. The creation of the Alexander Fund in Philadelphia in 1907 was an

important step in the evolution toward what we know as the modern mutual fund. The

Alexander Fund featured semi-annual issues and allowed investors to make withdrawals on

demand.

The Arrival of Modern Fund

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts,

heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928,eventually spawning the mutual fund firm known today as MFS Investment Management.

State Street Investors' Trust was the custodian of the Massachusetts Investors' Trust. Later,

State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall

and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and Clark,

an outfit that would launch the first no-load fund in 1928. A momentous year in the history
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of the mutual fund, 1928 also saw the launch of the Wellington Fund, which was the first

mutual fund to include stocks and bonds, as opposed to direct merchant bank style of

investments in business and trade.

3.2 History of Mutual Fund

Mutual funds made an opening in India in 1963 under the enactment f Unit Trust

of India (UTI), which came out with is debut scheme named US-64, an open ended

scheme n, which is operating till date. Up to 1986-87 it had launched 20 schemes;

mobilizing net resources amounting to Rs. 4564 crores for these 23 long years up to 1987

UTI enjoyed complete monopoly of the unit trust business in India. It remained one and the

only mutual fund in India.It was in 1986 that the government of India amended banking

regulation act and allowed commercial banks in public sector to set up mutual funds. This

lead to promotion of SBI-MUTUAL FUND by State Bank Of India (SBI) in July 1987

followed by

Canara Bank

Indian bank

Bank of India

Bank of Baroda

Punjab National bank

The government of India further granted permission to Insurance Corporation to public

sector to float mutual funds. The following were the corporations,

Life Insurance Corporation

General Insurance of Corporation

This was the picture till 1991, but when in 1991 the government of India followed a

policy of liberalization, privatization, and globalization it opened the gates to private

sector to launch mutual funds.

Phase 1: Monopoly of UTI


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This period was marked by the operations of a single institution, UTI, which

prepared ground for the future mutual fund industry. The first decade of UTIs operations

was the formative period. The first and still more popular product launched by UTI was

US-64. Due to immense popularity of unit 64, UTI launched a reinvestment plan in 1966-

67. Another popular scheme, Unit Linked Insurance Plan (ULIP), was launched in 1971.

By the end of June 1974 there were six lakhs unit holders with UTI. The unit capital

totaled Rs.152 crore and investible funds Rs.172 crore. The second phase of operations

(1974-84) was one of the consolidation and expansion. In this period UTI was delinked

from RBI .The period was marked by the introduction of open ended growth funds. Six

new schemes were introduced during 1981-84. by the end of June 84 the investible funds

crossed Rs. 1000 crore and unit holders numbered to 17 lakhs. During 1984-87,

innovative and widely accepted schemes such as Childrens Gift Growth Fund, Master

share were launched. The first Indian off shore fund, India Fund was launched in august

1986. Towards the end of 1980s, winds of change had started blowing in the Indian

economy. UTI was one of the few organizations to prepare fully to face the emerging

challenges. In the following years it launched all round diversification programs through

backward and forward integration in order to retain its position as the undisputed market

leader.

Phase 2 -Public Sector Competition

This period was marked by the entry of non-UTI public sector mutual funds in the

market, bringing in competition. With the opening up of the economy many public sector

financial institution established mutual funds in India. However, the mutual fund industry

remained the exclusive domain of the public sector in this period.

The first non-UTI mutual fund ---- SBI mutual fund was launched by the State Bank of

India in 1987.this was followed by Canbank mutual fund scheme (launched inDecember 1987),LIC mutual fund scheme (launched in June 1989) and Indian bank

mutual fund scheme (launched in January 1990). The entry of the public sector mutual

funds created waves in the market and attracted small investors. The cumulative

mobilization of resources went up from Rs.4500 crores in 1987 (mobilized by UTI

alone.) to Rs.19000 crore in 1990 (mobilized collectively by UTI, SBI mutual fund,


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Most of them are jointly floated by Indian organization along with experienced

foreign asset management companies, facilitating access the latest technology and foreign

fund management strategies.

Private sector funds are able to attract the best managerial talents from the public

sector.

Starting of the mutual funds has been easier for them because infrastructural inputs

created by the public sector mutual funds were already available.

The first private sector mutual fund to launch a scheme was the Madras based Kothari

Pioneer Mutual fund. It launched the open ended prima fund in November 1993.

During the year 93-94, five private sector mutual funds namely

Kothari Pioneer Mutual Fund

ICICI Mutual fund

20th century mutual fund

Morgan Stanley Mutual Fund

Taurus Mutual fund

During 1994-95 six more private sector funds were launched they are

Apple mutual fund

JM mutual fund

Shriram mutual fund

CRB mutual fund

Alliance mutual fund

Birla mutual fund

Between 1993 and 1995, further regulatory measures were introduced:-

The government of India has allowed NRIs and Overseas Corporate Bodies (OCB) to

invest in UTI and other mutual funds (in both primary and secondary market).

The practice of obtaining prior approval for advertising by mutual funds has been

dispensed with.

Mutual funds are allowed to invest in money market instruments up to 25% of

resources mobilized.


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The practice of reissuing of units of closed ended schemes has been dispensed with.

Mutual funds are allowed to buy back their own units from the secondary marketing

case they are traded at a substantial discount to NAV.

With effect from 1 December 1993 new issuers have been allowed to reserve 20% of

the public issue for mutual funds.

Mutual funds have been allowed to launch income schemes with assured returns one

at a time.

Mutual funds have been allowed to enter in to underwriting activities to augment their

resources.

Phase-4 -(Since 2003 February)

On Feb 2003, UTI was bifurcated in to 2 separate entities. One is specifiedundertaking of the UTI with asset under management of Rs.29, 835 crores as at the end of

Jan 2003. The second is the UTI mutual funds Limited, sponsored by the State Bank of

India, Bank of Baroda and Life Insurance Corporation of India. UTI is functioning under

an administrator and rules framed by the government of India do not come under the

purview of the Mutual fund Regulations. The Mutual Funds Limited is registered with

SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the

erstwhile UTI, with the setting up of a UTI mutual fund, confirming to the SEBI Mutual

Fund Regulations and recent mergers taking place among different private sector funds,

the mutual fund industry has entered its current phases of consolidation and growth. At

the end of September 2004, there are 29 funds, which manage assets of Rs. 153108 crores

under 421 different schemes.

3.3 Equity Mutual Fund Companies:-

3.3.1 HDFC Asset Management Company Limited

HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies

Act, 1956, on December 10, 1999, and was approved to act as an Asset Management


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Company for the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000. The

registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg,

169, Backbay Reclamation, Churchgate, Mumbai - 400 020. In terms of the Investment

Management Agreement, the Trustee has appointed the HDFC Asset Management

Company Limited to manage the Mutual Fund. The paid up capital of the AMC is Rs.

25.169 crore. HDFC Mutual Fund has been one of the best performing mutual funds in

the last few years. HDFC Asset Management Company Limited (AMC) functions as an

Asset Management Company for the HDFC Mutual Fund. AMC is a joint venture

between housing finance giant HDFC and British investment firm Standard Life

Investments Limited. It conducts the operations of the Mutual Fund and manages assets

of the schemes, including the schemes launched from time to time. As of Aug 2006, the

fund has assets of Rs.25,892 crores under management. IN 2003, following a decision

by the Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, to

divest its asset management business in India, AMC had entered into an agreement with

ZIC to acquire the asset management business. Consequently, all the schemes of Zurich

Mutual Fund in India had been transferred to HDFC Mutual Fund and renamed as

HDFC schemes.

On obtaining the regulatory approvals, the following Schemes of Zurich India Mutual

Fund have migrated to HDFC Mutual Fund on June 19, 2003. These Schemes have been

renamed as follows:

Former Name New Name

Zurich India Equity Fund HDFC Equity Fund

Zurich India Prudence Fund HDFC Prudence Fund

Zurich India Capital Builder Fund HDFC Capital Builder Fund

Zurich India TaxSaver Fund HDFC TaxSaver

Zurich India Top 200 Fund HDFC Top 200 Fund


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Zurich India High Interest Fund HDFC High Interest Fund

Zurich India Liquidity Fund HDFC Cash Management Fund

Zurich India Sovereign Gilt Fund HDFC Sovereign Gilt Fund*

Table 3.1

3.3.2 Birla sun life mutual fund

Birla Sun Life Asset Management Company Ltd. (BSLAMC), the investment

managers of Birla Sun Life Mutual Fund, is a joint venture between the Aditya Birla

Group and the Sun Life Financial Services Inc. of Canada. The joint venture brings

together the Aditya Birla Group's experience in the Indian market and Sun Life's global

experience. Established in 1994, Birla Sun Life Mutual fund has emerged as one of

India's leading flagships of Mutual Funds business managing assets of a large investor

base. Our solutions offer a range of investment options, including diversified and sector

specific equity schemes, fund of fund schemes, hybrid and monthly income funds, a wide

range of debt and treasury products and offshore funds. Birla Sun Life Asset

Management Company has one of the largest team of research analysts in theindustry,

dedicated to tracking down the best companies to invest in. BSLAMC strives to provide

transparent, ethical and research-based investments and wealth management services.

3.3.3 icici prudential mutual fund

ICICI Prudential Asset Management Company Ltd. is a joint venture between

ICICI Bank, Indias second largest commercial bank & a well-known and trusted name

in the financial services in India, & Prudential Plc, one of the United Kingdoms largest


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players in the financial services sectors. In a span of over 18 years since inception and

just over 13 years of the Joint Venture, the company has forged a position of preeminence

as one of the largest Asset Management Companys in the country, contributing

significantly towards the growth of the Indian mutual fund industry. The company

manages significant Mutual Fund Assets under Management (AUM), in addition to our

Portfolio Management Services (PMS) and International Advisory Mandates for clients

across international markets in asset classes like Debt, Equity and Real Estate with

primary focus on risk adjusted returns. As an Asset Management Company, we have over

18 years of experience and are currently managing a comprehensive range of schemes of

more than 46 Mutual fund schemes and a wide range of PMS Products for our investors

spread across the country. We service this investor base with our own branch network of

around 168 branches and a distribution reach of over 42,000 channel partners.

3.3.4 Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act,

1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co.

Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital MutualFund which was changed on March 11, 2004. Reliance Mutual Fund was formed for

launching of various schemes under which units are issued to the Public with a view to

contribute to the capital market and to provide investors the opportunities to make

investments in diversified securities.

3.3.5 Unit trust ofIndia

UTI Mutual Fund is managed by UTI Asset Management Company Private Limited (Est.

Jan 14, 2003) who has been appointed by the UTI Trustee Company Private Limited for


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CHAPTER FOUR

ANALYSIS AND INTREPRITATION


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risky when compared to a fund X because Y has a higher standard deviation. But

standard deviations by themselves are not necessarily a meaningful measure. To interpret

risk could divide the standard deviation by the average return and this could show fund X

as more risky than fund Y depending on the average return.

Alpha

The simplest definition of alpha would be the excess return of a fund compared

to its benchmark index. If a fund has outperformed its benchmark by 10% during a

specific period. Alpha is a risk-adjusted measure of the so-called active return on

an investment. It is the return in excess of the compensation for the risk borne, and

thus commonly used to assess active managers' performances. It can be shown that

in an efficient market, the expected value of the alpha coefficient is zero.

Beta

Beta of a stock or portfolio is a number describing the relation of its returns

with those of the financial market as a whole. An asset has a Beta of zero if its

returns change independently of changes in the market's returns. A positive beta

means that the asset's returns generally follow the market's returns, in the sense that

they both tend to be above their respective averages together, or both tend to be

below their respective averages together. A negative beta means that the asset's

returns generally move opposite the market's returns: one will tend to be above its

average when the other is below its average. Published betas typically use a stock

market index such as S&P 500 as a benchmark.

By definition, the market itself has a beta of 1.0, and individual stocks are ranked

according to how much they deviate from the macro market. A stock whose returnsvary more than the market's returns over time can have a beta whose absolute value

is greater than 1.0. A stock whose returns vary less than the market's returns has a

beta with an absolute value less than 1.0.


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movements in the index. A high R-squared (between 85 and 100) indicates the

fund's performance patterns have been in line with the index. A fund with a low R-

squared (70 or less) doesn't act much like the index. A higher R-squared value will

indicate a more useful beta figure. For example, if a fund has an R-squared value of

close to 100 but has a beta below 1, it is most likely offering higher risk-adjusted

returns. A low R-squared means we should ignore the beta.

Net Asset Value

A mutual fund's price per share or exchange-traded fund's (ETF) per-share

value. In both cases, the per-share dollar amount of the fund is calculated by

dividing the total value of all the securities in its portfolio, less any liabilities, by

the number of fund shares outstanding. In the context of mutual funds, NAV per

share is computed once a day based on the closing market prices of the securities in

the fund's portfolio. All mutual funds' buy and sell orders are processed at the NAV

of the trade date. However, investors must wait until the following day to get the

trade price. Mutual funds pay out virtually all of their income and capital gains. As

a result, changes in NAV are not the best measure of mutual fund performance,

which is best measured by annual total return. Because ETFs and closed-end funds

trade like stocks, their shares trade at market value, which can be a dollar value

above (trading at a premium) or below (trading at a discount) NAV.

NAV = (Market Valueof All Securities Held by Fund + Cash and Equivalent

Holdings - Fund Liabilities) / Total FundShares Outstanding
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HDFC Equity Mutual Fund Performance:-

Table 4.1 Current Stats & Profile

Latest NAV 237.734 (16/05/12)

52-Week High 285.928 (07/07/11)

52-Week Low 215.059 (20/12/11)

Fund Category Equity: Multi Cap

Type Open End

Launch Date December 1994

Risk Grade Below Average

Return Grade High

Net Assets (Cr) 9,916.37 (31/03/12)

Benchmark S&P CNX 500

(Source of table- value research online)

Analysis and interpretation: From modern portfolio statistics and volatile measurement,

it is analysed that the risk grade is below average, return grade is high and fund return is

five stars, where as best and worst performance of fund analysed from the table shows

Table 4.2 Returns and Risk Aggregates

Rating & Risk Modern Portfolio Stat Volatility Measures

Fund Rating R-Squared 0.91 Mean 27.13

Fund Risk Grade Below Average Alpha 10.46 Standard Deviation 26.47

Fund Return Grade High Beta 0.99 Sharpe Ratio 0.84

Table 4.3 Best and Worst Performance

Best (Period) Worst (Period)

Month 35.86 (28/04/2009 - 28/05/2009) -31.58 (26/09/2008 - 27/10/2008)

Quarter 95.14 (09/03/2009 - 10/06/2009) -40.02 (02/09/2008 - 02/12/2008)

Year 179.39 (20/10/1998 - 20/10/1999) -52.70 (03/12/2007 - 02/12/2008)
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Trailing Return:

Table 4.4 Trailing Returns

As of 16 May 2012 Fund Return Category Return Sensex S&P CNX Nifty

Year-to-Date 8.68 7.59 3.72 5.06

1-Week -2.36 -2.03 -2.73 -2.34

1-Month -8.55 -7.02 -6.54 -7.04

3-Month -11.42 -9.95 -11.70 -12.02

1-Year -14.89 -10.33 -12.62 -11.65

2-Year -0.49 -2.44 -2.87 -2.33

3-Year 20.36 16.08 9.59 9.77

5-Year 9.02 5.58 2.56 3.09

Performance of HDFC Equity fund return and S&P CNX Nifty

Figure 4.1

Analysis and interpretation: On the basis of five years return from the above table,

graph has been drawn which shows that, as per the market fluctuation i.e. .Change in

S&P CNX Nifty, the fund return changes. The return of the fund is fluctuates correspond

to the standard and poor index. From the above table also analysed that short term

investment does not provide better return as compared to long term investment. So

mutual fund is long term investment.

-30

-20

-10

0

10

20

30

40

1 2 3 4 5 6 7 8

S&P CNX Nifty

Fund Return


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Relative performance (fund Vs Category Average)

Figure 4.2

Analysis and interpretation:

Graph shows that, both fund and category average is moving in same way. Positive and

negative lines occurred almost equal months. It shows that HDFC Equity and Multi cap

has equal risk and Equal Return.


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Table 4.5 Annual Returns

Years 2011 2010 2009 2008 20

Fund Return -26.72 29.22 105.57 -49.68 53

Rank In Category 32/44 3/59 4/46 16/59 27

Category Average -24.43 18.77 90.44 -54.94 60

Sensex -24.64 17.43 81.03 -52.45 47

S&P CNX Nifty -24.62 17.95 75.76 -51.79 54

Table4.6Quarterly Returns

Q1 Q2 Q3 Q4

2012 19.63 -- -- --

2011 -5.10 -0.73 -12.73 -10.87

2010 2.28 7.20 17.12 0.62

2009 -3.14 58.81 22.53 9.06

2008 -25.76 -13.64 1.78 -22.88

2007 -1.91 15.93 10.60 22.14

2006 18.82 -10.48 17.56 8.65

2005 1.63 10.37 26.15 15.00

2004 0.05 -11.57 19.88 20.24

2003 -2.33 34.59 29.75 32.67

2002 21.58 -1.26 -9.62 14.47

2001 -12.92 2.55 -11.86 23.49

2000 5.47 -12.49 -13.41 0.111999 36.88 3.72 42.93 26.14

1998 11.98 -1.60 8.02 15.97

Analysis and Interpretation: Only the year 2008, 2011 have negative annual returns where

as all the other years have positive returns and performing well. With respect to the

performance in sensex and S&P Nifty, the performance of fund return are analyse for

different years. The fund return has analysed quarterly of that particular year. The return isdifferent in every quarter. Some quarters have negative returns but rest of the returns are

showing positive.


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HDFC Mutual Fund (Equity fund)

(Total return % till 20 April 2012)

SL.

NO

FUNDS NAV 1-Year 2-Year 3-Year 5-Year S.D Sharp

RatioEQUITY :DIVERSIED

1 HDFC Capitalbuilder fund

113.65 15.94 47.44 13.86 12.35 30.63 0.43

2 HDFC long term

equity fund

16.99 19.03 41.84 11.72 9.96 30.63 0.37

3 HDFC top 200fund 217.73 18.23 44.03 16.6 17 31.16 0.54

EQUITY :INDEX

4 HDFC indexsensex plan

161.29 11.24 31.35 4.04 7.64 32.87 0.2

5 HDFC idex nifty

plan

50.63 11.38 29.37 4.53 7.65 32.12 0.2

EQUITY:TAX

6 HDFC tax saver 217.49 14.28 46.44 15.25 10.88 31.56 0.47

S&P CNX Nifty 591.55 12.74 31.61 6.1 11.06 37.76 0.25

Table 4.7

Analysis and interpretation:

From the above its clear that almost all the HDFC equity funds have standard deviation

between 30.63(minimum) to 32.87(maximum) and Sharpe ratio is maximum 0.54,

average 0.43 and minimum .20 (few funds), that shows the risk is average and returns are

high for most of the HDFC funds. From the above HDFC funds HDFC top 200is

performing best.


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ICICI Prudential Indo Asia Equity Mutual Fund Performance:

Table 4.8 Current Stats & Profile

Latest NAV 10.16 (16/05/12)

52-Week High 11.08 (21/02/12)

52-Week Low 9.18 (05/10/11)

Fund Category Equity: Large Cap

Type Open End

Launch Date September 2007

Risk Grade Low

Return Grade Above Average

Net Assets (Cr) 183.78 (31/03/12)

Benchmark --

Table 4.9 Returns and Risk Aggregates

Rating & Risk Modern Portfolio Stat Volatility Measures

Fund Rating R-Squared 0.91 Mean 21.34

Fund Risk Grade Low Alpha 7.39 Standard Deviation 20.40

Fund Return Grade Above Average Beta 0.76 Sharpe Ratio 0.80

Table 4.10

Best and Worst Performance

Best (Period) Worst (Period)

Month 23.71 (29/04/2009 - 29/05/2009) -39.05 (26/09/2008 - 27/10/2008)

Quarter 64.33 (09/03/2009 - 10/06/2009) -45.23 (28/07/2008 - 27/10/2008)

Year 107.49 (25/11/2008 - 25/11/2009) -57.13 (26/10/2007 - 27/10/2008)

Analysis and Interpretation:

From modern portfolio statistics and volatile measurement, it is analysed that the risk

grade is low, return grade is above average and the fund return is four stars.The best and

worst performance of fund is analysed from the table shows that the year 2008 is only

have negative returns due to recession and after that fund shining well.
http://www.valueresearchonline.com/funds/h2_typecomp.asp?type=1&objective=8http://www.valueresearchonline.com/funds/h2_typecomp.asp?type=1&objective=8http://www.valueresearchonline.com/funds/h2_typecomp.asp?type=1&objective=8


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Table 4.11 Trailing Returns

As of 16 May 2012 Fund Return Category Return Sensex S&P CNX Nifty

Year-to-Date 5.28 4.84 3.72 5.06

1-Week -1.55 -2.12 -2.73 -2.34

1-Month -5.05 -6.65 -6.54 -7.04

3-Month -7.38 -11.21 -11.70 -12.02

1-Year -4.87 -10.79 -12.62 -11.65

2-Year 3.84 -1.57 -2.87 -2.33

3-Year 16.26 10.75 9.59 9.77

5-Year -- 3.15 2.56 3.09

Performance of ICICI Prudential Fund Return and S&P Nifty

Figure 4.3

10kscma088 repaired)

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