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EXECUTIVE SUMARY
In few years Mutual Fund has emerged as a tool for ensuring ones financial
well being. Mutual Funds have not only contributed to the India growth story
but have also helped families tap into the success of Indian Industry. As
information and awareness is rising more and more people are enjoying the
benefits of investing in mutual funds.
The first part gives an insight about Mutual Fund industry and its various
aspects, the Company Profile, Objectives of the study, Research Methodology.
One can have a brief knowledge about Mutual Fund and its basics through the
Project.
The project report in its later part presents data analysis. More importance is
given to analyse why debt funds are better? To realize the better performance
of debt funds, comparison of two good Fund Houses namely HDFC Mutual
Fund SBI Mutual fund have been done in detailed keeping in mind some
important schemes. Schemes that have been analysed in this project are
many like Gilt Short, Medium & Long, Debt Short Term, FMPs (Fixed Maturity
Plan) etc. These schemes have been analysed taking into consideration main
pillars of Debt Funds, i.e. Credit Quality, Liquidity, Return, Average Maturity
etc.
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INTRODUCTION TO THE SUBJECT
CONCEPT:
What are Mutual Funds
A mutual fund is pool of money, which is collected from many investors and is
invested by an Asset Management Company to achieve some common
objective of the investors.
The investment manager invests the money collected into assets that are
defined by the stated objective of the scheme. For example, an Equity fund
would invest in Equity and Equity related instruments and a Debt fund would
invest in Bonds, Debentures, and Gilts etc. Further, a mutual fund is just the
connecting bridge or a financial intermediary that allows a group of investors
to pool their money together with a predetermined investment objective. The
mutual fund will have a fund manager who is responsible for investing the
gathered money into specific securities (stocks or bonds).
MUTUAL FUND OPERATION FLOW CHART
THE INDIAN MUTUAL FUND INDUSTRY HAS PASSED THROUGH SIX
PHASES:
PHASE YEAR PHASE KNOWN ASPhase 1 1964-1987 Growth of UTIPhase 2 1987-1993 Entry of Public Sector banksPhase 3 1993-1996 Emergence of Private FundsPhase 4 1996-1999 Growth and SEBI regulationsPhase 5 1999-2004 Emergence of a large and uniform
industry
Phase 6 2004 onwards Consolidation and growth
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The risk return trade-off indicates that if investor is willing to take higher risk
then correspondingly he can expect higher returns and vise versa if he
pertains to lower risk instruments, which would be satisfied by lower returns.
For example, if an investors opt for bank FD, which provide moderate return
with minimal risk.
Thus investors choose mutual funds as their primary means of investing, as
Mutual funds provide professional management, diversification, convenience
and liquidity. That doesnt mean mutual fund investments risk free. This is
because the money that is pooled in are not invested only in debts funds
which are less riskier but are also invested in the stock markets which involves
a higher risk but can expect higher returns. Hedge fund involves a very high
risk since it is mostly traded in the derivatives market which is considered
very volatile.
WHY INVEST IN MUTUAL FUNDS ADVANTAGES
1. Increases the purchasing power of investors
2. Risk reduction through diversification
3. Reduction of risk
4.Money would be managed by professionals at low costs
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5. Reduction of transaction costs due to economies of operation at a large
scale
6. Liquidity (Fast redemption)
7. Convenience of investing the money and tracking the performance of
money
8. Flexibility to change investment objectives
9. Safety of regulatory environment by SEBI made the industry very
transparent
10.Mutual funds offer a whole range of industries / sectors to choose from.
DISADVANTAGES OF INVESTING IN MUTUAL FUNDS:
1. No control over Cost in the Hands of an Investor
2. No tailor-made Portfolios
3. Managing a Portfolio Funds
4. Difficulty in selecting a Suitable Fund Scheme
TYPES OF RISKS
All investments involve some form of risk. Mentioned below are the common
types of risks. An investor would do well to evaluate them against potentialrewards while selecting an investment.
Market Risk: At times, the prices or yields of all the securities in a particular
market rise or fall due to broad outside influences. When this happens, the
stock prices of both an outstanding, highly profitable company and a fledgling
corporation may be affected. This change in price is due to "market risk". It
is also known as systematic risk and interest rate risk.
Inflation Risk: Sometimes referred to as "loss of purchasing power."
There would be no such risk if the interest of the bond is linked to the rate of
inflation.
Credit Risk: In short, how stable is the company or entity to which one lends
his/her money while investing? How certain are you that it will be able to pay
the interest you are promised, or repay your principal when the investment
matures?
Interest Rate Risk: Changing interest rates affect both Equities and bonds in
many ways. Investors are reminded that "predicting" which way rates will go,
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is rarely successful. A diversified portfolio can help in offsetting these
changes.
Exchange risk: A number of companies generate revenues in foreign
currencies and may have investments or expenses also denominated in
foreign currencies. Changes in exchange rates may, therefore, have a positive
or negative impact on companies which in turn would have an effect on the
investment of the fund.
Investment Risks: In sartorial fund schemes, investments will be
predominantly in Equities of select companies in the particular sectors.
Accordingly, the NAV of the schemes are linked to the equity performance of
such companies and may be more volatile than a more diversified portfolio of
Equities.
TYPES OF RETURNS
There are three ways, where the total returns provided by mutual funds can
be enjoyed by investors:
1. Income is earned from dividends on stocks and interest on bonds. A
fund pays out nearly all income it receives over the year to fund owners
in the form of a distribution.
2. If the fund sells securities that have increased in price, the fund has a
capital gain. Most funds also pass on these gains to investors in a
distribution.
3. If fund holdings increase in price but are not sold by the fund manager,
the fund's shares increase in price. You can then sell your mutual fund
shares for a profit. Funds will also usually give you a choice either to
receive a check for distributions or to reinvest the earnings and get
more shares.
WHAT ARE THE TYPES OF MUTUAL FUNDS
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MUTUAL FUNDS CLASSIFICATION BASED ON INVESTMENT OBJECTIVE:
1. Equity Oriented
a. General Purpose : The investment objectives of general-
purpose. Equity schemes does not restrict these funds from investing
only in specific industries or sectors. Hence these funds have a
diversified portfolio of companies spread across a vast spectrum of
industries.
b. Sector Specific: These schemes restrict their investing to one or
more pre-defined sectors, e.g. technology sector. More risky since it is
concentrated only one sector.
c. Special schemes:
i. Index schemes: The primary purpose of an Index is to serve as a
measure of the performance of the market as a whole, or a specific
sector of the market. An Index also serves as a relevant benchmark
to evaluate the performance of Mutual Funds.
ii. Tax saving schemes: Tax-saving schemes offer tax rebates to the
investors under tax laws prescribed from time to time. Under Sec.88of the Income Tax Act, contributions made to any Equity Linked
Savings Scheme (ELSS) are eligible for rebate.
2. Debt Based
The objective of these Funds is to invest in debt papers. Government
authorities, private companies, banks and financial institutions are some of
the major issuers of debt papers. By investing in debt instruments, these
funds ensure low risk and provide stable income to the investors.
a. Income Schemes: Income schemes invest in long- and medium-term
instruments like corporate bonds, debentures, fixed deposits
b. Liquid Income Schemes: Liquid Income Schemes are similar to the
Income schemes but have a shorter maturity period.
c. Money Market Schemes: These schemes invest in short term
instruments such as commercial paper ("CP"), certificates of deposit
("CD"), treasury bills ("T-Bill") and overnight money ("Call"). Since they
invest in short-term maturities they are least volatile.
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d. Gilt Funds: Investment is done in Government securities. Less credit
risky, since Government Debt is generally credit risk free. Choosing
between a between gilt and an income fund would depend upon the risk
appetite of any investor.
3. Hybrid Scheme
These schemes are commonly known as balanced schemes and invest in both
equities as well as debt. By investing in a mix of this nature, balanced
schemes seek to attain the objective of income and moderate capital
appreciation and are ideal for investors with a conservative, long-term
orientation.
(II) Mutual Fund Investment Based on Constitution:
Open-ended schemes: An open-end fund is one that is available for
subscription all through the year. These do not have a fixed maturity.
Investors can conveniently buy and sell units at Net Asset Value ("NAV")
related prices. The key feature of open-end schemes is liquidity.
Close-ended schemes: Close-ended schemes have fixed maturity periods.
Investors can buy into these funds during the period when these funds are
open in the initial issue. After that, such schemes cannot issue new units
except in case of bonus or rights issue. However, after the initial issue, you
can buy or sell units of the scheme on the stock exchanges where they are
listed.
Interval schemes: These schemes combine the features of open-ended and
closed-ended schemes. They may be traded on the stock exchange or may be
open for sale or redemption during pre-determined intervals at NAV based
prices.
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INTRODUCTION TO THE INDUSTRY
MUTUAL FUND INDUSTRY
The Indian Mutual fund industry is likely to be one of the largest and most
dynamic parts of the Indian financial services sector in the years ahead.
Mutual Funds play a significant role in the development of the financial market
and this has been proved in the developed countries like United States, United
Kingdom and Japan. The mutual funds in India have emerged as strong
financial intermediaries and are playing a very important role in bringing
stability to the financial system and efficiency to resource allocation. Mutual
funds help corporate in raising funds for their financial needs and provide an
avenue of Investment to investors by parking their savings. This leads to over
all growth of the economy.
STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY
There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund:
INDIAN MUTUAL FUND ON THE RIGHT PATH
Nevertheless, the Indian MF industry is evolved into a more matured industry,
as investors now have a wider variety of fund schemes and types to invest in,
like index funds, sectorial funds, money market funds, ETFs and so on,
depending on their risk appetite and return expectations. ETFs and
commodity-linked funds like Gold ETFs are also gaining popularity among
Indian investors. The industry is also looking forward to make more cross
border investments in international capital market instruments on account of
the current volatility in the domestic capital market. The Indian MF industryoverall is in a growth mode, which will not only help India in building a strong
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financial system but also in providing a financial stabilizing factor to the
economy by absorbing financial risk and extra liquidity from investors base.
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INDUSTRY PERFORMANCE
The mutual funds in India have emerged as strong financial intermediaries and
are playing a very important role in bringing stability to the financial system
and efficiency to resource allocation. Mutual funds help corporate in raising
funds for their financial
Needs and provide an avenue of investment to investors by parking their
savings. This leads to over all growth of the economy. The major chunk of
household saving in India, which earlier went to bank deposit are now being
taken by Mutual funds. At the end of June 2007, there were 32 funds, which
manage assets of approximately Rs. 4,00,000 crores under 756 schemes. In
the same period mutual fund assets went up by 188% from April 2001 to June
2007.
CONTRIBUTION OF MUTUAL FUND TO INDIAS GDP
INDIAS GROWTH RECENT GDP RATES
YEAR GDP RATES (%) YEAR GDP RATES (%)1999-00 6.1 2003-04 8.22000-01 4.4 2004-05 7.52001-02 5.8 2005-06 8.42002-03 4 20006-07 9.4
The Indian mutual fund industry is one of the fastest growing sectors in the
Indian capital and financial markets. The mutual fund industry in India has
seen dramatic improvements in quantity as well as quality of product and
service offerings in recent years. Mutual Funds assets under management
grew by 96% between the end of 1997 and June 2003 and as a result it rose
from 8% of GDP to 15%. The industry has grown in size and manages total
assets of more than $30351 million.
GLOBAL MUTUAL FUND INDUSTRY
Over the year, structural changes in the global economic environment have
led to the emergence of a strong market economy and facilitated the growth
of the mutual funds industry. A market economy depends more on growth led
by financial market than by bank-finance. Since the mutual funds industry is a
strong pillar of the financial markets, it got a boost with the emergence of a
strong market economy. Mutual funds found increasing acceptance also
because they have the capacity to absorb the instability and uncertainties that
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characterize the financial market system. The rise in inflation, reduction in real
interest rates and growing complexities in the market provided tremendous
opportunities to mutual funds. For these reasons, the mutual funds industry
began to thrive well in not only the developed countries but also the newly
industrialized and developing country, particularly during the 1990s. Mutual
fund assets worldwide rose to $ 13 trillion at the end of 2003 from $ 11.32
trillion in the previous year-end 2002. Asset growth was boosted by positive
stock market return in all major economies and the on going net flow of new
investments.
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OBJECTIVE OF THE STUDY
The mutual fund industry in India has come a full circle from being an open
competitive market to nationalization.
The objective behind taking this project was:
To gain knowledge about Mutual Fund Industry with special focus on
Debt Fund
Analyse the performance of Debt Funds by comparing with Critical
parameters.
To know how effective debt schemes funds and their performance is in
comparison with various benchmark indices To look at the debt fund as a separate sector and therefore know its
benefits and limitations
To analyse the Debt Fund trend
To get a holistic picture of the Mutual Fund Industry in India, analyse its
trends and market potential
Apart from having theoretical knowledge of Mutual Fund as a subject there
was a need to know more things beyond academics syllabus. The same was
possible only by taking live project like this.
Hence, the project for Debt Fund Analysis was selected under the guidance of
Core faculty guide.
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METHODOLOGY
Market research calls for developing the research plan for gathering the
required information. The aim of the research was to find out How Mutual
Funds work with a special focus on Debt Fund Schemes. Two different debt
fund house were analysed to get a clear picture out of this project. The
following method is adopted for carrying out the research:
SOURCES OF DATA
Secondary data is taken into consideration for this project. Primary data could
not be collected as people are not aware much about Debt Fund Schemes. As
compare to Equity funds debt funds are not popular.
Although the secondary data has been used to compare critical parameter like
return till date, NAV, Current Sharpe Ratio & Expense ratio etc, care has been
taken not to take outdated secondary data.
Secondary source is the data obtained from published / unpublished sources.
This constitutes the chief material on the basis of which research work is
carried out. The secondary data used, in this report has been obtained from
Valueresearchonline, Indiainfoline, Research Database, Google and other
search engine websites. Secondary data has also helped to get a complete
information about the two different fund house.
COMPANY SELECTED FOR ANALYSIS
The Mutual Fund house selected for analysis are HDFC and SBI Mutual Fund,
which are performing well in the market, and different concepts in this project
can be easily understood and explored.
RESEARCH INSTRUMENTS
Initially common research instrument such as different types of graphs, Ratios
etc are used to study the parameters affecting the debt schemes.
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LIMITATIONS OF THE REPORT:
Time Constraint
Study is based on historical and current data
Detailed information related for future of debt fund was not completely
available
No primary data could be collected by actually visiting the people due
to lack of knowledge of Debt Funds.
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DEBT
FUND
ANALYSIS
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Investments goals vary from person to person. While somebody wants
security, others might give more weight age to returns alone. Somebody
might want to plan for his childs education while somebody might be saving
for proverbial rainy days or even life after retirement. With objectives defying
any range, it is obvious that the products required will vary as well.
HOW DO DEBT FUNDS MAKE MONEY?
In three ways precisely
1. Through the interest they get on the bonds they hold,
2. Through gains made by marking the portfolio to market values(assuming
that bond values rise),
. Through trading gains, i.e., by actively churning the portfolio
RISKS OF A DEBT MUTAUL FUND
Broadly, there can be two risks in a debt fund:
1. Credit Risk: The money in debt funds is invested in interest-bearing
instruments of banks, companies and Govt. such as bonds, FDs, GSecs
etc. Therefore if a particular company or a bank defaults, then it will
affect the returns. However, considering the fact that a particular
scheme would invest in many companies/banks, a default by a few will
not impact the returns much. Moreover, MFs invest mainly in top-rated
instruments, where the risk of default is very low. So overall this is not a
very big risk, unless of course there is a mass default or a MF invests in
low-rated instruments.
2. Interest Rate Risk: The interest rate and the bond price have an
inverse relationship. If interest rates rise, bond prices will fall.
Accordingly the NAV, which is calculated from the bond prices, will alsofall. But if interest rates fall, bond prices and consequently the NAV will
rise. And the longer is the maturity of a particular bond, the more it
falls/rises.
WHY DEBT?
Ideally, investments in the equity markets are fraught with uncertainties and
volatility. And hence, these factors nullify a constant flow of returns, which
debt schemes, to a certain extent, guarantee. And this being true of thecurrent market scenario, there is a growing shift towards debt schemes.
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Hence, in order to secure the hard-earned money, the investment is protected
through proper asset allocation of 60:40 between debt and equity. And this
also depends upon the investors goals and risk-taking capacity.
However, to consolidate a portfolio, one has to focus on retaining the income
generated through equity, considering their high-risk nature. And this way,
one can reduce the equity component and increase the debt exposure
gradually. Investing in debt funds will give a steady income without destroying
the capital.
THE DEBT ROUTE
In an environment where investors seek to achieve an asset allocation
between debt and equity, that suits their requirements, investing in debt
mutual fund schemes as a part of their debt allocation would offer investors
many advantages.
1. For starters, debt funds offer a superior risk-adjusted proposition along with
tax benefits.
2. While fixed deposits might appeal to conservative investors, in a growing
economy like India, inflation is a fact of life, which eats into the returns earned
on investments. From an inflation-adjusted perspective, fixed income mutual
funds compare very favorably to fixed deposits.
3. The fact is that debt funds are viable alternatives to other debt oriented
products is not widely understood by the investing populace. Most investors
still concentrate on the mutual fund part of the asset and miss the
significance of the underlying fixed income nature of the product.
Added advantage
1. In the investment world, it is not an either/or scenario between debtand equity. Basic principle of sound investing postulates a diversified
portfolio. Though debt funds often may just be the difference between
being able to retain the profits and loosing it all in the next round of
volatility. The main advantage of debt funds is relatively lower risk and
steady income additional to liquidity of investments.
2. FDs generally have a lock-in-period wherein in a pre-mature withdrawal
by an investor would mean a monetary penalty that would be charged to
the investor. Moreover, debt funds could generate better yields during
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economic growth, dependent on the kind of scheme chosen by the
investor. A fund invests in range of securities leading to diversification of
risk, an important parameter for an investor. Also, certain funds offer
regular income schemes where the interest payment is given to investor
for his investment at regular intervals. This facility not available with FDs.
3. Debt funds also tend to perform better in periods of economic
slowdown. Analysis says that debt should be looked upon as an effective
hedge against equity market volatility, which lends stability in terms of
value and income to a portfolio.
THE OPTIONS
Debt funds have a fairly wide range of schemes offering something for all
types of investors. Liquid fund, Liquid plus funds, Short term income
funds, GILT funds, income funds and hybrid funds are some of the
more popular categories.
For long term investors, income funds provide the best opportunity to gain
from interest rate movements. Liquid funds can be used for very short term
surpluses. Fixed maturity plans have been gaining in popularity as they
minimize the interest rate risk and offer reasonable returns to debt investors.
TAX ARBITRAGE
A potent reason behind investing in debt funds is the tax benefit. Specifically,
this is termed as tax arbitrage. Investing in debt attracts tax but in a
different manner. Opting for dividend option in liquid/money market schemes
attracts net dividend distribution tax of 28.325% and the remaining debt
schemes (like gilt, income/bonds) attract 14.16% tax in the hands of mutual
funds. Any investment, be it in fixed deposit schemes of any bank or in debtfunds have to be looked beyond the rate offered on the investment. For the
purpose of determining the attractiveness of the investment, effective return,
that is, post-tax returns should be given more weight. Dividends from debt
mutual funds are taxed at a rate lower than highest marginal tax rate. The
long term capital gains can also be paid after indexation benefit.
INVESTMENT HORIZON
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As an investor one should invest taking a holistic view and have debt funds as
part of overall portfolio. Beauty is, debt is one category where there is some
option for every investment horizon. Investors can select a fund on the basis
of respective investment horizon. For example, an investor with an overnight
investment horizon may choose a liquid fund where one may choose a hybrid
fund for investment horizon of 18 months or higher. Generally speaking, there
is a linear relationship between investment horizon and returns other things
remaining the same.
THE BEST PERFORMER
The returns on the funds depend on the maturity profile. And hence, in order
to differentiate the best performers in debt schemes, one should divide their
performances according to their maturity profiles. For instance, non-
convertible debentures give higher interest than commercial paper as the
former is for the medium- and long-term and the latter is for short and
medium term instruments.
Now, looking at the rising interest rates in the past, for more than one year,
gilt funds have not performed up to the mark. It is noteworthy to specify this,
as the rules of the game have changed over the last 2-3 years. There was a
time when government securities (G-secs) with a 10-year benchmark yield to
maturity (YTM) was moving in the range of 5-6%.The returns on gilt funds
depend on the bond prices. If bond prices are decreasing, then the returns on
them will decline over a period of time. But there are gilt funds that have
reasonably performed well.
After looking at the performances, it is seen that in the last one year, short-
term or liquid funds have been the best performers among all the categories,
considering returns generated by the majority of the schemes in this category.In order to expand, it is necessary for business owners to tap financial
resources. Business owners can utilize a variety of financing resources,
initially broken into two categories, debt and equity. "Debt" involves borrowing
money to be repaid, plus interest. "Equity" involves raising money by selling
interests in the company.
Investing in debt funds still makes sense. Here's why:
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1. Debt funds offer benefits, which pure debt investments (like bonds and
deposits) don't. If there were to be a further decline in interest rates, and
one has directly invested in debt instruments, it would not mean much.
One would hardly trade the securities that they hold since all one would
want to collect is the promised interest at the end of the term. But a debt
fund can post a better return by marking the bonds in its portfolio to their
rising market value, and by actively trading them.
2. The era of tax concessions is ending. With lower interest rates already
acting as a dampener, small saving schemes appear to be at a
disadvantage compared to debt funds.
3. Unlike the case of direct investments in bonds, higher returns in debt
funds need not necessarily mean higher risks. Several debt funds have
achieved great returns from a steady income stream and aggressive
duration management (that is managing bonds' tenure in the portfolio),
without their risk going up. In short, exceptional returns in debt funds need
not mean higher risks. In pure debt instruments, higher return is certainly
the result of the issuer taking higher risks.
4. Unlike retail investors, debt fund managers do not rely only on the
rating of credit rating agencies while evaluating bonds. The market has away of downgrading a bond even before the bond is actually downgraded
by a rating agency.
5. Debt fund managers can factor in a possible industrial recovery in their
strategies.
6. A debt fund manager can move a substantial chunk of the corpus into
corporate bonds and reap higher returns because of spread contraction. As
an individual investors, simply don't have the means to make such moves.
CURRENT SITUATION
While not too long ago, liquid and liquid plus funds faced a major crisis due to
the sudden redemption pressure, things have improved now. The debt market
is smooth and offers investors a safe place to keep money, provided no more
panic situations arise. After the Reserve Bank of India (RBI) cut cash reserve
ratios and opened a separate window for mutual funds to borrow against
certificates of deposit, the debt market overload eased up considerably.
Investors have burnt their fingers before in the equity market and are now
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focusing solely on wealth preservation. The debt market is looking the most
attractive currently and investors are still keen on keeping a sizeable portion
of their portfolio invested in debt.
In India, unlike abroad, one cannot invest in debt instruments as a retail
investor and that means the mutual fund route is what investors must use.
This has in such times been a blessing in disguise for investors as the risks
they could face have been considerably reduced. As such, amongst all the
risks mentioned the two most prominent ones that one should take care
against are interest rate risks and credit risks.
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REGULATORY AUTHORITY
SEBI (SECURITIES EXCHANGE BOARD OF INDIA)
Securities exchange board of India (SEBI) is the primary regulator of mutual
funds in India. It is mandatory for all mutual funds to get registered with SEBI.
SEBI regulations provide for the : The structure and formation of mutual
funds, the appointment of key functionaries, operation of the mutual fund,
accounting & disclosure norms, rights & obligations of functionaries and
investors, investment restrictions, compliance and penalties.
RBI
RBI acts as regulator of sponsors of bank-sponsored mutual funds, especially
in case of funds offering guaranteed / assured returns. No mutual fund can
bring out a guaranteed returns scheme without taking approval from RBI
COMPANIES ACT, 1956:
Asset Management Company and Trustees Company will be subject to the
provisions of the Companies Act, 1956. Under this act Company law board
(CLB) is the regulator and they can be approached for filling the complaints
against directors of AMC and Trustee Company. Registrar of Companies (RoC)
is responsible for compliances.
INDIAN TRUSTS ACT, 1882:
Since mutual fund is formed and registered as a public trust under the Indian
Trust Act, 1882, they have to follow the provision of this act.
MINISTRY OF FINANCE
The Finance Ministry is the supervisor of both the RBI & SEBI. The MoF s alsothe appellate authority under SEBI regulations. Aggrieved parties can make
appeals to the MoF on the SEBI rulings relating to mutual funds.
STOCK EXCHANGE
Stock Exchange is self regulatory organizations supervised by SEBI. Many
closed end schemes listed on exchanges are subject to regulations through a
listing agreement between the fund and the exchange on matters such as
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trading, clearing, transfer settlement of buying and selling of mutual fund
units in the market.
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IMPACT OF UNION BUDGET ON MUTUAL FUND INDUSTRY:
1. Easing in Income Tax Slabs
Measures
Threshold limit of Income Tax exemption for individuals raised as follows
Up to Rs.150,000 - NIL Rs.300,001 to Rs.500,000 - 20%
Rs.150,001 to Rs.300,000 - 10% Rs.500,001 and above - 30%Impact
This is expected to increase the disposable income in the hands of the
individuals to some extent which could translate into increased retail
investments in mutual funds.
Increase in Short Term Capital Gains Tax
Measures
Short Term Capital Gains Tax raised from 10% to 15%
Impact
Since long term capit
al gains tax has been left unchanged, this hike in short-term capital gains tax
could encourage long-term investments which augur well to the development
of the concept of long terms in the Indian Mutual Fund industry, which is
conspicuous by its absence but which is coveted by the fund industry given
the greater flexibility that this provides in fund management.
At the same time since the short term capital gains tax is still lower than the
income tax slabs of typical capital market investors, it is not expected to
cause too many investors to turn away from mutual funds.
2. Service Taxes Realigned for ULIPs
Measures
Asset management services provided under Unit Linked Insurance Plans
(ULIPs) would be brought on par with asset management services provided
under mutual funds as regards chargeability to service tax.
Services provided by stock/commodity exchanges and clearing houses would
also be brought under the service tax net.
Impact
The competitiveness of mutual funds vis--vis ULIPs in the investment basket
of investors is expected to increase somewhat.
Transactional expense levels of mutual funds are expected to go up
marginally on account of their exposure to stock and commodity exchangeswhich are expected to pass on the service tax. But clarity on what would
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define services here and on what amount the service tax would be levied is
awaited.
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COMPARATIVE ANALYSIS OF FUND HOUSE (DEBT SCHEMES)
WHY HDFC MUTUAL FUND?
HDFC Mutual Fund is one of the largest mutual funds and well-established
fund house in the country with consistent and above average fund
performance across categories since its incorporation on December 10, 1999.
The single most important factor that drives HDFC Mutual Fund is its belief to
give the investor the chance to profitably invest in the financial market,
without constantly worrying about the market swings. To realize this belief,
HDFC Mutual Fund has set up the infrastructure required to conduct all the
fundamental research and back it up with effective analysis.
HDFC GILT FUND - LONG TERM PLAN
INVESTMENT OBJECTIVE: Is to generate credit risk free returns through
investments in sovereign securities issued by the Central Government and/or
a State Government. The scheme is a dedicated gilt scheme which seeks togenerate reasonable returns with investments in government securities,
securities guaranteed by GoI with medium to long term residual maturities.
Entry Load: Nil, Exit Load: NIL
SNAPSHOTS
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PERFORMANCE
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ANALYSIS OF HDFC GILT FUND - LONG TERM PLAN
This fund has been rated 3 Star, this indicates Average performance of
this fund in the same category.
Average maturity of this fund is 11.73 years. Fund style of this fund is
also marked as high for Interest rate sensitivity.
Its benchmarking is done with the index which comprises securities
maturing late than seven years. So it can be said that benchmarking is
done correctly.
Credit quality is high for this fund, it can be determined that there will
be less possibility in its default risk. Default risk is less since the
investment of this fund is done AAA rated schemes.
Sharpe ratio is 0.47, that means the fund have generated 0.47
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 0.65
Beta of this fund is 0.66, it is less than 1 and it signifies that this fund is
conservative fund, means it is moving slowly than the market.
HDFC INCOME FUND - G
INVESTMENT OBJECTIVE
The primary objective of the Scheme is to optimise returns while maintaining
a balance of safety, yield and liquidity from a portfolio of debt and money
market instruments.
Entry Load: Nil, Exit Load: 2 % for redemption between 0 - 180 days and
investment below Rs. 1 Cr. 0.5 % for redemption between 0 - 90 days and
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investment of Rs. 1 Cr. and above 0.25 % for redemption between 91 - 180
days and investment of Rs. 1 Cr. and above 1 % for redemption between 181 -
365 days and investment below Rs. 1 Cr.
SNAPSHOTS
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ANALYSIS OF HDFC INCOME FUND
This fund has been rated 2 Star, this indicates below average
performance of this fund in the same category.
Average maturity of this fund is 9.27 years that can be considered as
shorter. Fund style is rated as high for Interest rate sensitivity.
Its benchmarking is done with the index which track the return on a
composite portfolio that includes call instrument, commercial paper,
government securities as also the AAA and AA related instruments. So it
can be said that benchmarking is done correctly. Credit quality is high for this fund, that means it can be determined that
there will be less possibility in its default risk. Default risk is less since the
investment of this fund is done AAA rated schemes.
Sharpe ratio is 0.75, that means the fund have generated 0.75
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 1.00
Standard Deviation is 7.76.
Beta of this Fund is 0.94, it is less than 1, it signifies that this fund is
conservative fund, means it is moving slowly than the market.
HDFC MF MONTHLY INCOME PLAN - SHORT TERM PLAN
INVESTMENT OBJECTIVE
The primary objective of Scheme is to generate regular returns through
investment primarily in Debt and Money Market Instruments. The secondaryobjective of the Scheme is to generate long-term capital appreciation by
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investing a portion of the Scheme's assets in equity and equity related
instruments. However, there can be no assurance that the investment
objective of the Scheme will be achieved.
This aims to generate regular returns through investment primarily in debt
and money market instruments. It will also invest inequity and equity related
securities to generate long-term capital appreciation.
Entry Load : NIL , Exit Load: 1 % for redemption between 0 - 365 days and
investment below Rs. 1 Cr. 0.25 % for redemption between 0 - 90 days and
investment of Rs. 1 Cr. and above
SNAPSHOT
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ANALYSIS OF HDFC MONTHLY INCOME PLAN SHORT TERM
This fund has been rated 2 Star, this indicates below average
performance of this fund in the same category.
Average maturity of this fund is 2.29 years that can be considered as
very short period, so this scheme is sensitive to market interest rate
change. Fund style for this is also rated as medium for Interest rate
sensitivity.
Its benchmarking is done with the index which track the return on a
MIP portfolio that includes both equity held in various companies as well as
debt market instruments. Since benchmarking is in line with this schemes
objective it can be said that benchmarking is done correctly.
Credit quality is high for this fund, that means it can be determined that
there will be less possibility in its default risk. Default risk is less since theinvestment of this fund is done AAA & AA rated schemes.
Sharpe ratio is -0.73 that means the fund have generated -0.73
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 2.23
Standard Deviation is 5. 68
Beta of this fund is 0.52 which is less than 1. This signifies that this fund
is conservative fund, means it is moving slowly than the market.
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HDFC MF MONTHLY INCOME PLAN - LONG TERM PLAN
INVESTMENT OBJECTIVE
The primary objective of Scheme is to generate regular returns through
investment primarily in Debt and Money Market Instruments. The secondary
objective of the Scheme is to generate long-term capital appreciation by
investing a portion of the Scheme`s assets in equity and equity related
instruments. However, there can be no assurance that the investment
objective of the Scheme will be achieved.
Entry Load: NIL, Exit Load : 1 % for redemption between 0 - 365 days and
investment below Rs. 5 Cr.
SNAPSHOTS
PERFORMANCE
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ANALYSIS OF HDFC MF MONTHLY INCOME PLAN - LONG TERM PLAN
This fund has been rated 3 Star, this indicates average performance of
this fund in the same category.
Average maturity of this fund is 5.95 years, Fund style for this fund is
also rated as high for Interest rate sensitivity.
Its benchmarking is done with the index which track the return on a
MIP portfolio that includes both equity held in various companies as well as
debt market instruments. Since benchmarking is in line with this schemes
objective it can be said that benchmarking is done correctly. Credit quality is high for this fund, that means it can be determined that
there will be less possibility in its default risk. Default risk is less since the
investment of this fund is done AAA rated schemes.
Sharpe ratio is -0.61 that means the fund have generated -0.61
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 1.74
Standard Deviation is 9.54
Beta of this fund is 0.89, which is less than 1. That signifies that this
fund is conservative fund, means it is moving slowly than the market.
HDFC Q INTERVAL PLAN C RETAIL-G
Entry Load: NIL, Exit Load: 1%
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ANALYSIS OF Q INTERVAL PLAN C RETAIL-G
Its benchmarking is done with the index which track the returns on a
portfolio that includes call instruments and commercial paper instruments.
Since benchmarking is in line with this schemes objective it can be said
that benchmarking is done correctly.
Sharpe ratio is 5.82 that means the fund have generated 5.82
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 0.03
Standard Deviation is 0.66
Beta of this fund is -0.02, which is less than 0, that means there is
inverse relationship between fund and market.
HDFC FMP 36M Jun 2007 Retail-G
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ANALYSIS HDFC FMP 36M Jun 2007 Retail-G
Its benchmarking is done with the index which track the return on a
short term portfolio that include call instruments, commercial papers,
government securities as also the AAA and AA rated instruments. it can be
said that benchmarking is done correctly.
Sharpe ratio is 0.72 that means the fund have generated 0.72
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 0.58
Standard Deviation is 4.43
Beta of this fund is -0.11 which is less than 0, this signifies that there is
inverse relation between fund and market.
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SNAPSHOT OF HDFC DEBT FUND SCHEMES
ANALYSIS OF VARIOUS FUND SCHEMES OF HDFC MUTUAL FUND:
Credit Quality for most of the funds has been rated as High. That
indicates that there will be less possibility of default risk. Less default
risk will be there since the schemes into which they are investing are
AAA or AA rated.
Sharpe Ratio, as the rule says higher the Sharpe ratio better is the fund.
Above all the funds only HDFC Q Interval plan (Retail G) has got theoutstanding ratio. This particular fund has been able to generate
returns by taking less risk compare to other funds. It can also be said
that this fund has performed well considering its riskiness. Rest all can
be categorized as Good. Further to analysis, negative Sharpe ratio
cannot be compared with others.
Expense Ratio, as the rule says lower the Expense ratio better is the
fund. Above all the funds lowest Expense ratio is observed in HDFC Q
Interval plan (Retail G) has got the lowest ratio. Rest all can be
categorized as Pretty Ok, except HDFC MF Monthly plan Short term
plan which is more than 2%.
Shorter the average maturity more sensitive is the fund to market rate
changes. HDFC MF Monthly Income Plan Short term plan is more
sensitive to market rate changes compared to other schemes.
Considering funds 5 years return every fund is in line with the
performance of the return of its respective category. Except HDFC MF
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Monthly Income Plan Long term which has outperformed than its
respective category.
Four funds have been observed as Conservative Funds and for
remaining two there is an inverse relationship between market and
fund.
Proven Skills in Wealth Generation.
SBI Mutual Fund is Indias largest bank sponsored mutual fund and has anenviable track record in judicious investments and consistent wealth creation.
The fund traces its lineage to SBI - Indias largest banking enterprise. The
institution has grown immensely since its inception and today it is India's
largest bank, patronised by over 80% of the top corporate houses of the
country.
SBI Mutual Fund is a joint venture between the State Bank of India and Socit
Gnrale Asset Management, one of the worlds leading fund
management companies that manages over US$ 500 Billion worldwide.
Exploiting expertise, compounding growth
In twenty years of operation, the fund has launched 38 schemes and
successfully redeemed fifteen of them. In the process it has rewarded its
investors handsomely with consistent returns.
A total of over 5.4 million investors have reposed their faith in the wealth
generation expertise of the Mutual Fund.
Schemes of the Mutual fund have consistently outperformed benchmark
indices and have emerged as the preferred investment for millions of
investors and HNIs.
Today, the fund manages over Rs. 27,076.63 crores of assets and has a
diverse profile of investors actively parking their investments across 36 active
schemes.
The fund serves this vast family of investors by reaching out to them through
network of over 130 points of acceptance, 28 investor service centers, 46
investor service desks and 56 district organisers.
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SBI Mutual is the first bank-sponsored fund to launch an offshore fund
Resurgent India Opportunities Fund.
Growth through innovation and stable investment policies is the SBI MF credo.
MAGNUM GILT LONG-TERM-G
INVESTMENT OBJECTIVE
To provide the investors with returns generated through investments in
government securities issued by the Central Government and / or a State
Government. It will normally maintain an average maturity of more than three
years. Entry Load: NIL, Exit Load: 0.25 % for redemption within 90 days.
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ANALYSIS OF MAGNUM GILT LONG-TERM-G
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This fund has been rated 2 Star, this indicates below average
performance of this fund in the same category.
Average maturity of this fund is 8.09 years. Fund style of this is also
rated as high for Interest rate sensitivity.
Its benchmarking is done with the index which comprises securities
maturing later than seven years. Since benchmarking is in line with this
schemes objective it can be said that benchmarking is done correctly.
Credit quality is high for this fund, that means it can be determined that
there will be less possibility in its default risk. Default risk is less since the
investment of this fund is done GoI schemes.
Sharpe ratio is 0.11 that means the fund have generated 0.11percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 1.38.
Standard Deviation is 11.16
Beta of this fund is 0.60, which is less than 1. This signifies that this
fund is conservative fund, means it is moving slowly than the market.
MAGNUM INCOME-G
INVESTMENT OBJECTIVE
The objective of the scheme is to provide the investors an opportunity to earn,
in accordance with their requirements, through capital gains or through
regular dividends, returns that would be higher than the returns offered by
comparable investment avenues through investment in debt & money market
securities.
Entry Load: Nil, Exit Load: 1 % for redemption between 0 - 180 days andinvestment upto Rs. 1 Cr. 0.5 % for redemption between 181 - 365 days and
investment upto Rs. 1 Cr.
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ANALYSIS OF MAGNUM INCOME-G
This fund has been rated 1 Star, this indicates poor performance, of this
fund in the same category.
Average maturity of this fund is 8.02 years. Fund style of this is also
marked as high for Interest rate sensitivity, that means they are sensitive
to market interest rate change.
Its benchmarking is done with the index which track the return on a
composite portfolio that includes call instruments, commercial paper,
government securities as also the AAA and AA rated instruments. Since
benchmarking is in line with this schemes objective it can be said that
benchmarking is done correctly.
Credit quality is high for this fund, that means it can be determined that
there will be less possibility in its default risk. Default risk is less since the
investment of this fund is done AAA rated schemes.
Sharpe ratio is -0.20 that means the fund have generated -0.20
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 1.52
Standard Deviation is 7.49
Beta of this is 0.96, which is less than 1. That means this fund is
conservative fund, means it is moving slowly than the market.
MAGNUM INCOME PLUS FUND (INVESTMENT PLAN)
INVESTMENT OBJECTIVE
The investment objective of the scheme will be to provide attractive returns tothe Magnum holders / Unit holders either through periodic dividends or
through capital appreciation through an actively managed portfolio of debt,
equity and money market instruments. Income may be generated through the
receipt of coupon payments, the amortization of the discount on the debt
instruments, receipt of dividends or purchase and sale of securities in the
underlying portfolio. The scheme aims to invest at least 80 per cent of its
corpus in investment grade debt instruments and money market instruments
and the balance in equity and equity related instruments. The stocks would be
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selected from the BSE 100 index only. Entry Load: NIL, Exit Load: 1 % for
redemption within 180 days 0.5 % for redemption between 181 - 365 days
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ANALYSIS OF MAGNUM INCOME PLUS FUND (INVESTMENT PLAN)
Average maturity is 1.27 years. Fund style of this is rated as medium for
Interest rate sensitivity.
Its benchmarking is done with the index which track the return on a
MIP portfolio that includes both equity held in various companies as well as
debt market instruments. Since benchmarking is in line with this schemes
objective it can be said that benchmarking is done correctly.
Credit quality is high for this fund, that means it can be determined that
there will be less possibility in its default risk. Less default risk since the
investment of this fund is done AAA rated schemes.
Sharpe ratio is -0.74 that means the fund have generated -0.74
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 1. 30
Standard Deviation is 6.88
Beta of this fund is 0.70, which is less than 1. This signifies that this
fund is conservative fund, means it is moving slowly than the market.
MAGNUM NRI INVESTMENT FUND
INVESTMENT OBJECTIVE
The investment objective of the scheme will be to provide attractive returns to
the Magnum holders either through periodic dividends or through capital
appreciation through an actively managed portfolio of debt, equity and money
market instruments. Income may be generated through the receipt of couponpayments, the amortization of the discount on the debt instruments, receipt of
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dividends or purchase and sale of securities in the underlying portfolio. The
scheme would invest only in investment grade debt instruments like
government securities, corporate bonds and debentures and money market
instruments. The average maturity of the scheme would normally not exceed
3 years. This would be ideal for investors with an investment horizon of more
than one year.
Fund Type: Open Ended. Entry Load: NIL, Exit Load: 0.5 % for redemption
within 180 days
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ANALYSIS OF MAGNUM NRI INVESTMENT FUND
Average maturity of this fund is 0.01 years. Fund style of this fund is
marked as low for Interest rate sensitivity.
Its benchmarking is done with the index which track the return on a
composite portfolio that includes call instrument, commercial paper,
government securities as also the AAA and AA related instruments. So it
can be said that benchmarking is done correctly.
Credit quality is high for this fund, that means it can be determined that
there will be less possibility in its default risk. Less default risk since the
investment of this fund is done AAA rated schemes.
Sharpe ratio is -4.88 that means the fund have generated -4.88
percentage point of return above the risk free return for each point of
standard deviation.
Expense ratio is 1.12
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Standard Deviation is 1.36
Beta of this fund is 0.05, which is less than 1. That means this fund is
hughly conservative fund, means it is moving very slowly than the market.
SBI DEBT FUND SERIES 24 MONTHS 1-G
INVESTMENT OBJECTIVE
The objective of the scheme will be to provide regular income, liquidity and
returns to the investors through investments in a portfolio comprising of debt
instruments such as Government Securities, AAA/AA+ Bonds and Money
Market instruments. Income may be generated through the receipt of coupon
payments, the amortization of the discount on the debt payments, or
purchase and sale of securities in the underlying portfolio.
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ANALYSIS OF SBI DEBT FUND SERIES 24 MONTHS 1-G
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Average maturity of this fund is 0.63 which can be considered as very
short. Therefore, fund style of this fund is also marked as low for Interest
rate sensitivity.
Its benchmarking is done with the index which track the return on a
composite portfolio that includes call instrument, commercial paper,
government securities as also the AAA and AA related instruments. So it
can be said that benchmarking is done correctly.
Credit quality is high for this fund, that means it can be determined that
there will be less possibility in its default risk. Less default risk since the
investment of this fund is done AA rated schemes.
Expense ratio is 0.60
SNAPSHOT OF SBI HDFC DEBT FUND SCHEMES
ANALYSIS OF VARIOUS FUND SCHEMES OF SBI MUTUAL FUND:
Credit Quality for all the funds has been rated as High. That indicates
that there will be less possibility of default risk. Less default risk will be
there since the schemes into which they are investing are AAA or AA
rated.
Sharpe Ratio, as the rule says higher the Sharpe ratio better is the fund.
Above all the funds none of the funds Sharpe ratio is outstanding or
pretty good. It can also be interpreted that none of the fund have been
able to generate returns by taking less risk compare to other funds.
Considering the risk attached to the funds have not performed well.
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Further to analysis, negative Sharpe ratio cannot be compared with
others.
Expense Ratio, as the rule says lower the Expense ratio better is the
fund. Above all the funds lowest Expense ratio is observed in SBI Debt
Fund series 24 months has got the lowest ratio.
Shorter the average maturity more sensitive is the fund to market rate
changes. NRI Investment fund has got the shortest average maturity.
Compare to SBI Debt Fund series rest schemes are less sensitive to
market rate.
Considering funds 5 years return not every fund of SBI is in line with
the performance of the return given by its respective category. Returnsgiven by NRI investment plan and return given by its category is having
maximum difference.
Three funds have been observed as Conservative Funds and only one
fund is having an inverse relationship with.
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RECOMMENDATIONS
There is great scope for the growth of the mutual funds in India. Mutual funds
have to compete with bank deposits and government securities for a share of
consumer savings. This requires the regulator and the AMC to increase the
creditability of mutual funds and develop a trust among the average retail
investors.
Mutual Fund can penetrate rural India like the Indian Insurance Industry with
simple and limited products.
SEBI should allow the mutual fund to launch commodity mutual funds
Emphasis on better corporate governance
Trying to curb the late trading practices Introduction of financial planners who can provide need based advice
The following steps should be taken by SEBI and AMC
STEPS TO BE TAKEN BY SEBI
Increase accountability among different players
Give the board of trustees the right to choose the fund manager of their own
choice. This will make them more accountable and aware as to what the
AMC is doing.
Benchmark the performance of funds with peers as well as with specific
indices.
Restriction on who can be appointed as a sub brokers
Implementation of international accounting principles across the mutual fund
industry will help promote fairness and stability of the sector,
Steps to be taken by AMCs Make mutual offer documents more comprehensible by making disclosures
more simple and relevant, and fund structure more distinctive to the
common people
Make disclosure regarding the MF expense more transparent especially
distributor expenses which form a major chunk of entry loads.
Make Fund managers accountable to unit holders. This can be done by
organizing Annual General Meetings of Unit holders where performance of
the fund would be reviewed.
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CONCLUSION
Savings form an important part of the economy of any nation. With savings
invested in various options available to the people, the money acts as the
driver for growth of the country. Indians have predominantly favoured
assured and guaranteed returns from their investments. Hence the
tendency to save in Bank FDs, NSCs, PPFs, Post Office schemes and such other
products!
Indian financial scene too presents multiple avenues to the investors. Though
certainly not the best or deepest of markets in the world, it has ignited the
growth rate in mutual fund industry to provide reasonable options for an
ordinary man to invest his savings. And because MFs are not allowed to offer
assured/guaranteed returns - which means there is some uncertainty of
returns - debt mutual funds have not enjoyed the kind of popularity they could
have.
Though still at a nascent stage, Indian MF industry offers plethora of schemes
and serves broadly all type of investors. The range of products includes Equity
, Debt, Liquid, Gilt and Balanced Funds.
Coming to the mutual fund space, if debt schemes are to attract the investors
then they can act favorable in softening interest rate scenario.
There is no doubt that debt funds will continue to be frontrunners of growth in
the mutual fund industry but investors should not underestimate the risks
involved there.
There was a time when fixed maturity plans (FMPs) were corporate Indias
favourite debt investment. But new regulations have taken liquidity out of the
picture, putting their future in doubt. Two major regulatory changes have
affected FMPs. First, market regulator Securities and Exchange Board of India
(Sebi) has forbidden redemptions at net asset value (NAV) by new closed-end
funds, instead mandating that these funds be listed on a stock exchange as a
way of providing exit. The practice of announcing indicative yields and
portfolios has also been disallowed. While the indicative yield rule isnt a major
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dampener, the lack of NAV-based liquidation is a big issue. It wont be
surprising if FMPs die out eventually. The old ones will be redeemed and no
new ones will be launched. That would be a pity. Except for the liquidity
problem, FMPs have many desirable characteristics. Its also possible that as
the economic situation settles down, liquidity shortcomings will seem to
matter less and shorter-duration FMPs will make a comeback as a viable
investment.
With equity markets in the doldrums, mutual funds are increasingly turning to
debt instruments. Several mutual funds have diverted a large portion of their
portfolios into debt schemes.
LOOKING AHEAD
Though the last credit policy announced by the RBI did not make any changes
in key interest rates, there is a buzz regarding a further hike in cash reserve
ratio (CRR), which can put further pressure on banks. There are mixed
reactions by fund managers over the trend of interest rates. In this situation,
where interest rates could remain stable or can decline a little, selecting a
lucrative debt fund is difficult. Investors with a time period of one to threeyears can go for FMPs. They can stay away from investing in gilts for some
time, looking at the uncertainty in interest rates in the near future.
Debt funds offer tremendous scope for most investors. One can get liquidity,
and most importantly, a regular flow of income. However, it has a risk
attached as compared to fixed deposits. But considering the benefit of tax
arbitrage and the imposition of penalty on withdrawal before maturity in fixed
deposits, liquid funds are a better option, though returns in both fixed depositsand liquid funds are more or less the same. On the other hand, FMPs are
relatively less risky than income funds as they have fixed maturity, which
gives fixed returns according to the time period selected.
With FMPs dying and liquid funds set to be commoditized, it looks as if things
are going to be difficult for debt funds. However, there are many positives on
the horizon.
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Fundamentally, debt funds are simple products, or at least they ought to be.
Unlike the complex world of equity analysis, all debt instruments can be
reduced to five simple characteristics. Five pillars are credit quality, returns,
maturity, liquidity and tax.. Moreover, it is also easy for investors to map their
own expectations and requirements on the basis of these five parameters.. As
long as an investor can define his own needs, it should be a simple matter to
choose the debt fund that is the best fit for his needs.
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BIBLOGRAPHY
www.nse.com
www.unittrustofindia.com
www.indiainfoline.com
www.amfiindia.com
www.debtonline.com
www.mutualfundsindia.com
www.google.com
www.finmin.nic.in
www.valueresearchonline.com
www.itfsl.co.in
www.investopedia.com
www.myiris.comwww.moneycontrol.com
AMFI Book
Mutual Fund by Akhilesh (Based On AMFI (Advisorys Module)
Mutual Fund Industry Prodcuts & Services by Indian Institute of Banking &
Finance
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http://www.nse.com/http://www.unittrustofindia.com/http://www.indiainfoline.com/http://www.amfiindia.com/http://www.debtonline.com/http://www.mutualfundsindia.com/http://www.google.com/http://www.finmin.nic.in/http://www.valueresearchonline.com/http://www.itfsl.co.in/http://www.investopedia.com/http://www.myiris.comwww.moneycontrol.com/http://www.nse.com/http://www.unittrustofindia.com/http://www.indiainfoline.com/http://www.amfiindia.com/http://www.debtonline.com/http://www.mutualfundsindia.com/http://www.google.com/http://www.finmin.nic.in/http://www.valueresearchonline.com/http://www.itfsl.co.in/http://www.investopedia.com/http://www.myiris.comwww.moneycontrol.com/ -
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ANNEXURE
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GLOSSARY:
PERFORMANCE MEASURES OF MUTUAL FUNDS
Mutual Fund industry today, with about 34 players and more than five
hundred schemes, is one of the most preferred investment avenues in India.
However, with a plethora of schemes to choose from, the retail investor faces
problems in selecting funds. Factors such as investment strategy and
management style are qualitative, but the funds record is an important
indicator too. Though past performance alone can not be indicative of future
performance, it is frankly, the only quantitative way to judge how good a fund
is at present. Therefore, there is a need to correctly assess the past
performance of different mutual funds. There must be some performance
indicator that will reveal the quality of stock selection of various AMCs.
Return alone should not be considered as the basis of measurement of the
performance of a mutual fund scheme, it should also include the risk taken by
the fund manager because different funds will have different levels of risk
attached to them. The most important and widely used measures of
performance are:
THE TREYNOR MEASURE: The Treynor ratio sometimes called Reward to
Variability Ratio also realtes return to risk; but systematic risk instead of total
risk is used. The higher the ratio the better the performance under analysis.
Treynors Index (Ti) = (Ri-Rf) / Bi
Where T= Treynor ratio, r = Portfolio return, rf= Riskfree rate, b= Portfolio
beta
THE SHARPE MEASURE: The Sharpe also known as Reward to Volatility
Ratio indicates the excess return per unit of risk associated with the excess
return. The higher the ratio the better performance.
Sharpe Index (Si) = (Ri-Rf)/SiWhere S=Sharpe ratio, r=Portfolio return, rf= Risk free rate, v=Portfolio
volatility
JENSON MODEL:Jensons model proposes another risk adjusted performance
measure. This measure involves evaluation of the returns that the fund has
generated vs. the returns actually expected out of the fund given the level of
its systematic risk. The surplus between the two returns is called Alpha.
Ri = Rf + Bi (Rm-Rf)
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FAMA MODEL : The Eugene Fama Model, is an extension of Jenson model.
This model compares the performance, measured in terms of returns, of a
fund with the required return commensurate with the total risk associated with
it. The difference between these two is taken as a measure of the
performance of the fund and is called net selectivity.
Required return can be calculated as : Ri = Rf + Si/Sm*(Rm-Rf)
Wehre, Sm = standard deviation of market returns.
Fama Model that consider the entire risks associated with fund are suitable for
small investors, as the ordinary investor lacks the necessary skill and
resources to diversify..
EXPENSE RATIO : Expense ratio is the ratio of total expenses of the fund to
the average net assets of the fund. Expense ratio states how much you pay a
fund in percentage term every year to manage your money. Since this is
charged regularly (every year), a high expense ratio over the long-term may
eat into our returns massively through power of compounding.
Expenses ratio = Total expenses / Avg net assets * 100
PORTFOLIO TURNOVER : Every mutual fund has a portfolio turnover rate.
The turnover rate is basically the percentage of the portfolio that is bought
and sold to exchange for other stocks. This number helps one determine how
much you will have to pay in taxes for that mutual fund. For example, if the
mutual fund has a low turnover rate, you will probably pay less in taxes. If it
has a high turnover rate, you will probably pay more in taxes. Higher portfolio
turnover generally results in higher costs such as brokerage costs, stamp duty
and custodian charges. In case of higher portfolio turnover, the scheme will try
to endeavour to cover these costs by way of higher gain from the increased
turnover.
PORTFOLIO P/E RATIO : Importance of portfolio P/E ratio in case of mutualfunds is rather less as portfolio consists of a number of stocks in different
sectors. Every sector has different P/E and every individual security has a
different P/E ratio and it calculates the weighted average with respect to
weight of the security in the portfolio.
Otherwise also a portfolio composition changes almost every day. As portfolio
turnover rate increases it becomes more and more immaterial to find out the
importance of P/E with respect to mutual funds.
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P/E (price-to-earnings) ratio of a stock tells us how much the investors will pay
for one rupee of a companys earnings. High P/E indicates higher expectations
of investors from a particular stock. But the P/E ratio of a fund is the weighted
average of the P/E of all stocks in its portfolio.
PORTFOLIO P/B RATIO
Portfolio P/B ratio indicates at what price market is wiling to pay for a portfolio
with respect to its book value and again it is the average of P/B ratio of
different individual securities which are present in the portfolio.
A higher P/B ratio indicates that market values a particular security higher
than its book value and that may be for a variety of reasons but the other side
of it indicates that a security is not trading at correct valuation level and it is
deliberately increased by speculators.
P/B (price-to-book value) ratio compares the market value of a stock to its
book value. A high P/B value indicates an overvalued stock and a low P/B
indicates an undervalued stock. A low P/B of a stock could also mean that
something is fundamentally wrong with the company. For a fund, the P/B ratio
is calculated like the P/E ratio, by taking the weighted average P/B of all stocks
in a funds portfolio.
A funds P/E and P/B ratios do not take the cash component into account. So,
they are not as relevant for funds as they are for stocks. Yet they can be used
to understand the broad nature of a funds portfolio within a category. The
growth funds in a category will have a relatively higher P/E and P/B than the
value funds.
BETA
Beta = Covariance (Index, Stock) / Variance (Index)
If Beta =1, than fund will move precisely in line with the market.
Beta < 1, than it means that it is an conservative fund, i.e it is moving slowlythan the market.
Beta > 1, it means that fund is moving aggressively in the market.