A project report on

PERFORMANCE EVALUATION OF EQUITY ORIENTED

MUTUAL FUNDS AND BENEFITS TO CUSTOMERS
At

India Infoline Ltd. (IIFL) Bengaluru- 560068 Submitted in partial fulfillment of the requirement for the award of Post Graduate degree in MBA from Christ University Institute of Management By Preeti Agarwal Under the guidance of Internal Guide Prof.Arvind .S Department of Finance, Christ University Institute of Management Bengaluru- 59 External Guide Ms. Anitha S Relationship Manager India Infoline Ltd.(IIFL) Hosur main road Bengaluru- 68

DECLARATION
I hereby declare that the project report Performance Evaluation of Equity Oriented Mutual Funds and Benefits to Customers for the degree of Master Of Business Administration at Christ University Bangalore, is my original work and the project has not formed the basis for the award of any degree, associate ship, fellowship or any other similar titles.

Place: Bangalore Date:

Signature of the Student

CERTIFICATE
This is to certify that the project titled Performance Evaluation of Equity Oriented Mutual Funds and Benefits to Customers is the bonafide summer project done by Preeti Agarwal, student of MBA at Christ University during the year 2012 -2013, in partial fulfillment of the requirements for the award of the Degree of Master of Business Administration and that the project has not formed the basis for the award previously of any degree, diploma, associate ship, fellowship or any other similar title.

ACKNOWLEDGEMENT
In the first place, I thank Ms.Anitha.S for having given me their valuable guidance for the project. Without their help it would have been impossible for me to complete the project. I would be failing in my duty if I do not acknowledge with a deep sense of gratitude the sacrifices made by my parents who have thus helped me in completing the project work successfully.

Place: Bangalore Date:

Signature of the Student

TABLE OF CONTENTS
S.NO. Chapter 1. Chapter 2. Chapter 3. Chapter 4. Chapter 5. Chapter 6. Chapter 7. Chapter 8. Chapter 9. Chapter 10. Chapter 11. Chapter 12. Chapter 13. Chapter 14. Chapter 15. Chapter 16. Chapter 17. Chapter 18. Chapter 19. PARTICULARS PAGE NO. Company Profile 05 Introduction 16 Statement of the problem 16 Scope 16 Objectives 16 History of mutual funds 17 Types of mutual funds 19 Major fund houses in India 19 Reasons for preferring mutual funds over 20 simple equity funds Advantages and Disadvantages of mutual 23 funds Techniques of Analysis 23 Equity oriented mutual funds under 43 consideration for performance comparison and evaluation Base Indices used as comparison 43 parameter Comparison of performance between the 45 equity oriented mutual funds under consideration for 2011-2012 Interpretation 74 SWOT Analysis 76 Conclusion 77 References 78 Bibliography 79

1. Company Profile: About IIFL The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd (NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of the leading players in the Indian financial services space. IIFL offers advice and execution platform for the entire range of financial services covering products ranging from Equities and derivatives, Commodities, Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking, Gold bonds and other small savings instruments. IIFL recently received an in-principle approval for Securities Trading and Clearing memberships from Singapore Exchange (SGX) paving the way for IIFL to become the first Indian brokerage to get a membership of the SGX. IIFL also received membership of the Colombo Stock Exchange becoming the first foreign broker to enter Sri Lanka. IIFL owns and manages the website, www.indiainfoline.com, which is one of Indias leading online destinations for personal finance, stock markets, economy and business. IIFL has been awarded the Best Broker, India by Finance Asia and the Most improved brokerage, India in the Asia Money polls. India Infoline was also adjudged as Fastest Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the field of equity research, IIFLs research is acknowledged by none other than Forbes as Best of the Web and a must read for investors in Asia. Our research is available not just over the Internet but also on international wire services like Bloomberg, Thomson First Call and Internet Securities where it is amongst one of the most read Indian brokers. A network of over 2,500 business locations spread over more than 500 cities and towns across India facilitates the smooth acquisition and servicing of a large customer base. All our offices are connected with the corporate office in Mumbai with cutting edge networking technology. The group caters to a customer base of about a million customers, over a variety of mediums viz. online, over the phone and at our branches. IIFL/India Infoline refer to India Infoline Ltd and its subsidiaries/ group companies.

History & Milestones 2011 Launched IIFL Mutual Fund. 2010 Received in-principle approval for membership of the Singapore Stock Exchange. Received membership of the Colombo Stock Exchange. 2009 Acquired registration for Housing Finance. SEBI in-principle approval for Mutual Fund Obtained Venture Capital license. 2008 Launched IIFL Wealth. Transitioned to insurance broking model. 2007 Commenced institutional equities business under IIFL. Formed Singapore subsidiary, IIFL (Asia) Private Ltd. 2006 Acquired membership of DGCX. Commenced the lending business. 2005 Maiden IPO and listed on NSE, BSE.
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2004 Acquired commodities broking license. Launched Portfolio Management Service. 2003 Launched proprietary trading platform Trader Terminal for retail customers. 2000 Launched online trading through www.5paisa.com and started distribution of life insurance and mutual fund. 1999 Launched www.indiainfoline.com. 1997 Launched research products of leading Indian companies, key sectors and the economy Client included leading FIIs, banks and companies. 1995 Commenced operations as an Equity Research firm .

IIFL (India Infoline Ltd) - Corporate Structure

Board of directors Mr. Nirmal Jain Chairman, India Infoline Ltd.

Mr. Nirmal Jain is the founder and Chairman of India Infoline Ltd. He is a PGDM (Post Graduate Diploma in Management) from IIM (Indian
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Institute of Management) Ahmedabad, a Chartered Accountant and a rank-holder Cost Accountant. His professional track record is equally outstanding. He started his career in 1989 with Hindustan Lever Limited, the Indian arm of Unilever. During his stint with Hindustan Lever, he handled a variety of responsibilities, including export and trading in agrocommodities. He contributed immensely towards the rapid and profitable growth of Hindustan Levers commodity export business, which was then the nations as well as the Companys top priority. He founded Probity Research and Services Pvt. Ltd. (later re-christened India Infoline) in 1995; perhaps the first independent equity research Company in India. His work set new standards for equity research in India. Mr. Jain was one of the first entrepreneurs in India to seize the internet opportunity, with the launch of www.indiainfoline.com in 1999. Under his leadership, India Infoline not only steered through the dotcom bust and one of the worst stock market downtrends but also grew from strength to strength.

Mr. R. Venkata raman Managing Director , India Infoline Ltd.

Mr. R Venkataraman, Co-Promoter and Managing Director of India Infoline Ltd, is a B.Tech (electronics and electrical communications engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined the India Infoline Board in July 1999. He previously held senior managerial positions in ICICI Limited, including ICICI Securities Limited, their investment banking joint venture with J P Morgan of US, BZW and Taib Capital Corporation Limited. He was also the Assistant Vice President with G E Capital Services India Limited in their private equity division, possessing a varied experience of more than 19 years in the financial
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services sector

Mr. Nilesh Vikamse y Independent Director , India Infoline Ltd.

Mr. Nilesh Vikamsey Board Member since February 2005 - is a practicing Chartered Accountant for 25 years and Senior Partner at M/s Khimji Kunverji & Co., Chartered Accountants, a member firm of HLB International, a world-wide organisation of professional accounting firms and business advisers, ranked amongst the top 12 accounting groups in the world. Mr. Vikamsey headed the audit department till 1990 and thereafter also handled financial services, consultancy, investigations, mergers and acquisitions, valuations and due diligence, among others. He is elected member of the Central Council of Institute of Chartered Accountant of India (ICAI), the Apex decision making body of the second largest accounting body in the world, 20102013. He is on the ICAI study group member for the introduction of the Accounting Standard 30 on financial instruments recognition and management. Convener of the Study group Formed by ASB of ICAI to formulate comments on various Exposure Drafts, Discussion Papers and other matters pertaining to IFRS originating from IASB, Representative of the Institute of Chartered Accountants of India on the Committee for Improvement in Transparency, Accountability and Governance(ITAG) of South Asian Federation of Accountants (SAFA), Member of Executive Committee & IFRS Implementation Committee of WIRC of Institute of Chartered Accountant of India (ICAI), Accounting and Auditing Committee of Bombay Chartered Accountant Society (BCAS) and also on its Core Group, member of Review, Reforms & Rationalization
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Committee, IPR Committee of Bombay Chamber of Commerce and Industry (BCCI), Member of Legal Affairs Committee of Bombay Chamber of Commerce and Industry(BCCI), Corporate Members Committee of The Chamber of Tax Consultants (CTC), Regular Contributor to WIRC Annual Referencer on Bank Branch Audit, Study/ Sub Group formed by ICAI for Considering Developments on Fair Value Accounting (AS 30) post Sub Prime crisis, Sub Group formed by ICAI for approaching the Government and Regulatory Authorities for Convergence with IFRS. He is also a Vice Chairman of Financial Reporting Review Board Accounting Standard Board and Member of Accounting Standard Board and various other Standing and Non Standing Committees. Mr. Vikamsey is also a Director of Miloni Consultants Private Limited, HLB Offices and Services Private Limited, Trunil Properties Private Limited, BarKat Properties Private Limited and India Infoline Investment Services Limited.

Mr. Kranti Sinha Independent Director , India Infoline Ltd.

Mr. Kranti Sinha Board member since January 2005 completed his masters from the Agra University and started his career as a Class I Officer with Life Insurance Corporation of India. He served as the Director and Chief Executive of LIC Housing Finance Limited from August 1998 to December 2002 and concurrently as the Managing Director of LICHFL Care Homes (a wholly-owned subsidiary of LIC Housing Finance Limited). He retired from the permanent cadre of the Executive Director of LIC; served as the Deputy President of the Governing Council of Insurance Institute of India and as a member of the Governing Council of National Insurance Academy, Pune apart from
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various other such bodies. Mr. Sinha is also on the Board of Directors of Hindustan Motors Limited and Cinemax (India) Limited.

Mr. A. K. Purwar Independent Director , India Infoline Ltd.

Mr. Purwar is currently the Chairman of IndiaVenture Advisors Pvt. Ltd., investment manager to IndiaVenture Trust Fund I, the healthcare and life sciences focussed private equity fund sponsored by the Piramal Group. He has also taken over as the Chairman of IL & FS Renewable Energy Limited in March 2008 and India Infoline Investment Services Ltd in November 2009. He is working as Independent Director in leading companies in Telecom, Steel, Textiles, Power, Auto components, Renewable Energy, Engineering Consultancy, Financial Services and Healthcare Services. He is an Advisor to Mizuho Securities in Japan and is also a member of Advisory Board for Institute of Indian Economic Studies (IIES), Waseda University, Tokyo, Japan. Mr. Purwar was the Chairman of State Bank of India, the largest bank in the country from November 02 to May 06 and held several important and critical positions like Managing Director of State Bank of Patiala, Chief Executive Officer of the Tokyo branch covering almost the entire range of commercial banking operations in his illustrious career at the bank from 1968 to 2006. Mr. Purwar also worked as Chairman of Indian Bank Association during 2005 2006. Mr. Purwar has received the CEO of the year Award from the Institute for Technology & Management (2004); Outstanding Achiever of the year Award from Indian Banks
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Association (2004); Finance Man of the Year Award by the Bombay Management Association in 2006.

Sunil Kaul Independent Director , India Infoline Ltd.

Mr. Kaul earned his post graduate degree in management from the Indian Institute of Management, Bangalore and a bachelors degree in technology from the Indian Institute of Technology, Bombay. Sunil Kaul is a Managing Director for Carlyles Asia Buyout fund focused on investments in the financial services sector across Asia. He is based in Singapore. Since joining Carlyle, Mr. Kaul has worked on several notable portfolio investments of Carlyle including HDFC Ltd, Indias leading financial services group, TC Bank, a leading mid-sized bank in Taiwan and Caribbean Investment Holdings, one of the largest provider of offshore company incorporation and trust services in Asia and India Infoline Limited Mr. Kaul serves as a director on the board of TC Bank and a member of its Risk and Executive Committees. He is also a member of the Asia Pacific Infrastructure Partnership. Prior to joining Carlyle, Mr. Kaul served as the president of Citibank Japan, covering the banks corporate and retail banking operations. He concurrently served as the chairman of Citi's credit card and consumer finance companies in Japan. He was also a member of Citi's Global Management Committee and Global Consumer Planning Group. Mr. Kaul has over 20 years experience in corporate and consumer banking of which more than 10 have been in Asia. He has lived and worked in India, the United States, Japan, Netherlands and Singapore. In his earlier roles, Mr. Kaul served as the Head of Retail Banking for Citi in Asia Pacific. He has also held senior positions in Business Development for Citi's Global Transaction Services based in New York, Transaction Services Head for Citi Japan
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and Global Cash Business Management Head for ABN Amro, based out of Holland.

IIFLs philosophy on Corporate Governance IIFL (India Infoline) is committed to placing the Investor First, by continuously striving to increase the efficiency of the operations as well as the systems and processes for use of corporate resources in such a way so as to maximize the value to the stakeholders. The Group aims at achieving not only the highest possible standards of legal and regulatory compliances, but also of effective management. Code Of Conduct A strict code of conduct is followed in the office premises along with guidelines for implementing policies. Insider Dealing Insider Dealing is prevented through various acts of Indian Govt. and through strict adherence to company policies. Committee Audit Committee Terms of reference & Composition, Name of members and Chairman: The Audit committee comprises Mr Nilesh Vikamsey (Chairman), Mr R Venkataraman, Mr Kranti Sinha, two of whom are independent Directors. The Chairman along with the Statutory and Internal Auditors are invitees to the Meeting. The Terms of reference of this committee are as under: - To investigate into any matter that may be prescribed under the provisions of Section 292A of The Companies Act, 1956 - Recommendation and removal of External Auditor and fixation of the Audit Fees. - Reviewing with the management the financial statements before submission of the same to the Board. - Overseeing of Companys financial reporting process and disclosure of its financial information. - Reviewing the Adequacy of the
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Internal Audit Function. Compensation/ Remuneration Committee Terms of reference & Composition, Name of members and Chairman: The Compensation / Remuneration Committee comprises Mr Kranti Sinha (Chairman) & Mr Nilesh Vikamsey, both of whom are independent Directors. The Terms of reference of this committee are as under: - To fix suitable remuneration package of all the Executive Directors and NonExecutive Directors, Senior Employees and officers i.e. Salary, perquisites, bonuses, stock options, pensions etc. - Determination of the fixed component and performance linked incentives along with the performance criteria to all employees of the company - Service Contracts, Notice Period, Severance Fees of Directors and employees. - Stock Option details: whether to be issued at discount as well as the period over which to be accrued and over which exercisable. - To conduct discussions with the HR department and form suitable remuneration policies. Share Transfer and Investor Grievance Committee Details of the Members, Compliance Officer, No. of Complaints received and pending and pending transfers as on close of the financial year. The committee functions under the Chairmanship of Mr Kranti Sinha, a Nonexecutive independent Director. The other Members of the committee are Mr. Nirmal Jain and Mr. R Venkataraman. Ms Sunil Lotke, Company Secretary is the Compliance Officer of the Company. Vision To be the most respected company in the financial services space. Mission To educate, empower, enrich and enhance customer investment skills set through research, knowledge and delightful service. Values Team Work
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Mutual Respect Execution Transformation Transparency Accountability Trust

2. Introduction: A mutual fund is a professionally managed fund formed by groups of investors whose investments are channeled towards purchasing securities. It is generally attributed to the funds that are collected from the public and are openended in nature. Hedge funds are not considered as mutual funds for the sake of convenience. It is more popular in the United States than in India. They play an important role in households. Investors in a mutual fund must pay the funds expenses. There is controversy regarding these expenses including legal conflicts. A single mutual fund would be sufficient to give investors several combinations of expenses by taking different types of share classes. 3. Statement of the problem: The study is to be undertaken for comparison of mutual funds schemes under equity orientation namely in large cap, mid cap and flexi cap which are offered and also to understand the investment performance schemes in relation to the benchmark parameters for IIFL so that they can advise their clients in the right manner to make them aware of the performance of the schemes and offer suggestions to improve their performance and / or better investment options. 4. Scope of the project: Top performing mutual funds are selected in terms of superior returns and overall stability / consistency from various categories such as equity large cap funds, equity mid cap funds and equity flexi cap funds. 5. Objectives:

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 The primary objective of this project is to select the top mutual funds that can be suggested by IIFL so that the wealth of its customers can be maximized and there by IIFL can increase their customers. The secondary objective is to find out the financial performance of best performing mutual funds to examine the funds sensitivity to the market fluctuations in terms of beta value of the fund.

6. History of mutual funds: The first mutual funds were established in Europe. The first mutual fund was created in 1774 apparently by a Dutch merchant. The first mutual fund outside the Netherlands, the Foreign & Colonial Government Trust, was established in London circa 1868. It was rechristened as the Foreign & Colonial Investment Trust and currently trades on the London stock exchange. Mutual funds were introduced into the United States in the 1890s.They became popular during the 1920s. These early funds were generally of the closed-end type with a fixed number of shares which often traded at prices above the value of the portfolio. The first open-end mutual fund with redeemable shares was established on March 21, 1924, the Massachusetts Investors Trust, is now part of the MFS family of funds. However, closed-end funds remained more popular than open-end funds throughout the 1920s. By 1929, open-end funds accounted for a mere 5% of the industry's $27 billion in total assets. After the stock market crash of 1929 leading to the Great Depression in the U.S. and worldwide economic crisis, the U.S. Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the Securities and Exchange Commission and that they provide prospective investors with a prospectus that discloses essential facts about the investment. The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors; this act also created the Securities and Exchange Commission, which is the principal regulator of
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mutual funds. The Revenue Act of 1936 established guidelines for the taxation of mutual funds, while the Investment Company Act of 1940 governs their structure. When confidence in the stock market returned in the 1950s, the mutual fund industry began to grow again. By 1970, there were approximately 360 funds with $48 billion in assets. The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth significantly. The first retail index fund, First Index Investment Trust, was formed in 1976 by The Vanguard Group, headed by John Bogle; it is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100 billion in assets as of January 31, 2011. Fund industry growth propelled into the 1980s and 1990s, as a result of 3 factors: a bull market for both stocks and bonds, new product introductions (including tax-exempt bond, sector, international and target date funds) and wider distribution of fund shares. Among the new distribution channels were retirement plans. Mutual funds have become the preferred investment option in certain types of fast-growing retirement plans, specifically in 401(k) and other defined contribution plans and in individual retirement accounts (IRAs), which grew in popularity in the 1980s. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008. In 2003, the mutual fund industry was involved in a scandal involving unequal treatment of fund shareholders. Some fund management companies allowed favored investors to engage in late trading, which is illegal, or market timing, which is a practice prohibited by fund policy. The scandal was initially discovered by then-New York State Attorney General Eliot Spitzer and resulted in significantly increased regulation of the industry. At the end of 2010, there were over 15,000 mutual funds of all types in the United States with combined assets of $13.1 trillion, according to the Investment Company Institute (ICI), a fund assets rests national trade association of investment companies in the United States. The ICI reports that worldwide mutual fund assets were $24.7 trillion on the same date. More than 50% of the global mutual within the U.S. Mutual funds play an important role in U.S. household finances. At the end of 2010, they accounted for 23% of household financial assets. Their role in retirement planning is particularly significant. Roughly half of assets in
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401(k) plans and individual retirement accounts were invested in mutual funds. The first introduction of a mutual fund in India occurred in 1963, when the Government of India launched Unit Trust of India (UTI). Until 1987, UTI enjoyed a monopoly in the Indian mutual fund market. Then a host of other government-controlled Indian financial companies came up with their own funds. These included State Bank of India (SBI), Canara Bank, and Punjab National Bank (PNB). This market opened to private players in 1993, as a result of the historic constitutional amendments brought forward by the then Congress-led government under the existing regime of Liberalization, Privatization and Globalization (LPG). The first private sector fund to operate in India was Kothari Pioneer, which later merged with Franklin Templeton. 7. Types of mutual funds: There are basically 3 types of mutual funds: open-end, unit investment trust, and closed-end. The most popular type, the open-end mutual fund, buys back its shares from its investors at the end of every business day. Exchange-traded funds are open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most preferred, but exchangetraded funds have been gaining in popularity. Mutual funds are classified by their principal investments. The 4 largest categories of funds are Money market funds Bond or fixed income funds Stock or equity funds Hybrid funds Funds may also be categorized as index or actively-managed. 8. The major fund houses which have operated in India include: Fortis Birla Sunlife
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 Bank of Baroda HDFC ING Vysya ICICI Prudential SBI Mutual Fund Tata Kotak Mahindra Unit Trust of India Reliance IDFC Franklin Templeton Sundaram Mutual Fund Religare Mutual Fund Principal Mutual Fund 9. Reason for preferring mutual funds over equity funds:

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Mutual funds are an under tapped market in India. Despite being available in the market for over two decades now with assets under management equaling Rs. 7,81,71,152 Lakhs as of February 2010 and as estimated by Association of Mutual Funds, India, less than 10% of Indian households have invested in mutual funds. A recent report on Mutual Fund Investments in India published by research and analytics firm, Boston Analytics, reveals that investors are refraining from putting their money into mutual funds due to their perceived high risk and an asymmetry of information on how mutual funds work. This report is based on a survey of approximately 10,000 respondents in 15 Indian cities and towns as of March 2010. There are 43 Mutual Funds at present reportedly. The primary reason for not investing at present appears to be correlated with city size. Among respondents with a high savings rate, close to 40% of those who live in metros and Tier I cities considered such investments to be very risky, whereas 33% of those in Tier II cities said they did not how or where to invest in such assets.

Exhibit 1-Reasons for not investing in mutual funds in India On the other hand, among those who invested, close to nine out of ten respondents did so because they felt these assets were more professionally managed than other asset classes. Exhibit 2 lists some of the influencing factors for investing in mutual funds. Interestingly, while non-investors cite risk as one of the primary reasons they do not invest in mutual funds,
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those who do invest consider that they are professionally managed and more diverse most often as their reasons to invest in mutual funds versus other investments.

Exhibit 2-Reasons for investing in mutual funds in India Tracking leading economic indicators helps economic policy planners, business decision makers, and investors detect turning points and predict the future behavior of business cycles. Because no single measure of aggregate economic activity (such as GDP) adequately predicts business cycles, accurate analysis requires a composite picture referencing critically valuable & practically versatile/multiple types of time-series data. To help corporate and investor clients make informed decisions in complex and competitive emerging markets, Boston Analytics has developed a set of time-series-based economic indicators modeled after indices used in North American and European markets, but adapted to the unique conditions and requirements of nations and regions such as India, Asia/Pacific, and the Middle East.

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The index for March 2010 stood at 73.3, an increase of 0.9 percent from Februarys reading of 72.6. The improvement in consumer confidence was driven by increasing optimism related to overall economic conditions, personal financial outlook and discretionary spending. However, sentiment related to inflation has declined significantly in the last month. While the drop in inflation sentiment is more pronounced, employment sentiment appears to have flattened out in the last two months and is still considerably low. A tier-wise disaggregation of the data reveals that the Tier-I cities and Tier III cities and towns have been the largest contributor to the improvement in the national composite. In contrast, consumer confidence in Tier II cities is below the national average. Thus it is understandable that mutual funds have a great potential in the future and promise a huge plethora of options and high returns to investors. The economy of our country is growing at a fairly rapid rate and hence with greater purchasing power and better enlightenment through education about the benefits of mutual funds and their overwhelming reliability in the long run, peoples attitude is likely to change and hence Mutual funds can be preferred over equity funds and other funds as they hold great potential for the future.

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10. Advantages & Disadvantages of mutual funds: Mutual funds have advantages compared to direct investing in individual securities. These include

Increased diversification Daily liquidity Professional investment management Ability to participate in investments that may be available only to larger investors Service and convenience Government oversight Ease of comparison

Mutual funds have disadvantages as well, which include

Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize

11. Techniques of analysis: Returns - Portfolio Returns and Market Returns/Profitability Absolute Returns Beta Ratio Standard Deviation (SD) Expense Ratio R-square Price Earning Ratio Price to Book Ratio

Returns Portfolio Returns The term portfolio refers to any collection of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial
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institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The euro amount of each asset may influence the risk/reward ratio of the portfolio and is referred to as the asset allocation of the portfolio. When determining a proper asset allocation one aims at maximizing the expected return and minimizing the risk. This is an example of a multiobjective optimization problem: more "efficient solutions" are available and the preferred solution must be selected by considering a tradeoff between risk and return. In particular, a portfolio A is dominated by another portfolio A' if A' has a greater expected gain and a lesser risk than A. If no portfolio dominates A, A is a Pareto-optimal portfolio. The set of Pareto-optimal returns and risks is called the Pareto Efficient Frontier for the Markowitz Portfolio selection problem. Performance Attribution or Investment Performance Attribution is a set of techniques that performance analysts use to explain why a portfolio's performance differed from the benchmark. This difference between the portfolio return and the benchmark return is known as the active return. The active return is the component of a portfolio's performance that arises from the fact that the portfolio is actively managed. Different kinds of performance attribution provide different ways of explaining the active return. Attribution analysis attempts to distinguish which of the two factors of portfolio performance, superior stock selection or superior market timing, is the source of the portfolios overall performance. Specifically, this method compares the total return of the managers actual investment holdings with the return for a predetermined benchmark portfolio and decomposes the difference into a selection effect and an allocation effect. 1. Asset Allocation: The manager might choose to allocate majority of the assets into equities (leaving only minority for cash), on the belief that equities will produce a higher return than cash. 2. Stock Selection: Especially within the equities sector, the manager may try to simply hold securities that will give a higher return than the overall equity benchmark. Arithmetic & Geometric attribution

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The most common approach to performance attribution (found in sources such as Brinson et al. 1985 and Carino 1999) can be described as "arithmetic attribution". It is arithmetic in the sense that it describes the difference between the portfolio return and the benchmark return. Another approach (known as geometric attribution) has been common. One advantage of doing attribution in geometric form is that the attribution results translate consistently from one currency to another. It is plausible that this explains the popularity of geometric approaches in Europe. Simple example Consider a portfolio whose benchmark consists of 30% cash and 70% equities. The following table provides a consistent set of weights and returns for this example.
Sector Equities Cash Total Portfolio Weight 90% 10% 100% Benchmark Weight 70% 30% 100% Portfolio Return 5.00% 1.00% 4.60% Benchmark Return 3.00% 1.00% 2.40% Asset Allocation 0.12% 0.28% 0.40% Stock Selection 1.40% 0.00% 1.40% Interaction 0.40% 0.00% 0.40% Total Active 1.92% 0.28% 2.20%

The portfolio performance was 4.60%, compared with a benchmark return of 2.40%. This leaves an active return of 2.20%. The task of performance attribution is to explain the decisions that the portfolio manager took to generate this 2.20% of value added. Under the most common paradigm for performance attribution, there are two different kinds of decision that the portfolio manager can make in an attempt to produce added value: 1. Asset Allocation: the manager might choose to allocate 90% of the assets into equities (leaving only 10% for cash), on the belief that equities will produce a higher return than cash. 2. Stock Selection: Especially within the equities sector, the manager may try to hold securities that will give a higher return than the overall equity benchmark. In the example, the securities selected by the equities manager produced an overall return of 5%, when the benchmark return for equities was only 3%. The attribution analysis dissects the value added into three components:
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Asset allocation is the value added by under-weighting cash (0.28%), and over-weighting equities (0.12%). The total value added by asset allocation was 0.40%. Stock selection is the value added by decisions within each sector of the portfolio. In this case, the superior stock selection in the equity sector added 1.40% to the portfolio's return. Interaction captures the value added that is not attributable solely to the asset allocation and stock selection decisions. In this particular case, there was 0.40% of value added from the combination that the portfolio was overweight equities, and the equities sector also outperformed its benchmark.

The three attribution terms (asset allocation, stock selection, and interaction) sum exactly to the active return without the need for any "fudge factors". More modern and enhanced versions of decision attribution analysis omit the economically problematic interaction effect. As opposed to determining the contribution of uncontrollable market factors to active return, the type of analysis described here is meant to evaluate the effect of each (type of) controllable decision on the active return, and interaction is not a clearly defined controllable decision. Decision attribution also needs to address the combined effect of multiple periods over which weights vary and returns compound. In addition, more structured investment processes normally need to be addressed in order for the analysis to be relevant to actual fund construction. Such sophisticated investment processes might include ones that nest sectors within asset classes and/or industries within sectors, requiring the evaluation of the effects of deciding the relative weights of these nested components within the border classes. They might also include analysis of the effects of country and/or currency decisions in the context of the varying risk-free rates of different currencies or the decisions to set fund or bucket values for continuous properties like capitalization or duration. In addition, advanced systems allow for the decision process within asset classes, such as, following an asset allocation, when capitalization decisions
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are only made for the equity assets but duration decisions are only made for the fixed income assets. The most robust attribution models precisely address all of these aspects of decision attribution without residuals. Furthermore, modern portfolio theory requires that all return analysis be conjoined with risk analysis, else good performance results can mask their relationship to greatly increased risk. Thus, a viable performance attribution system must always be interpreted in parallel to a precisely commensurate risk attribution analysis. Market Returns/Profitability Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment. The ratio is calculated as follows:

Assuming that the cash flow calculated does not include the investment made in the project, a profitability index of 1 indicates breakeven. Any value lower than one would indicate that the project's PV is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project. Rules for selection or rejection of a project:

If PI > 1 then accept the project If PI < 1 then reject the project

Simple Example

Investment = $40,000 Life of the Machine = 5 Years CFAT 18000

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CFAT Year 1

2 3 4 5

12000 10000 9000 6000

Calculate Net present value at 10% and PI: Year 1 2 3 4 5 CFAT PV@10% PV 16362 9924 7520 6147 3726 43679 40000 3679

18000 0.909 12000 0.827 10000 0.752 9000 0.683 6000 0.621 Total present value (-) Investment NPV

PI = 43679 / 40000 = 1.091 = >1 = Accept the project Absolute Return Short selling Suppose that a manager thinks the share price of company A will go down. Then he can borrow 1000 shares of company A to his prime broker and sell them for (say) 10 USD per share. The immediate gain for the manager is 1000*10=10000USD. If (say) after a week the share price of company A drops to 9.5 then the manager buys 1000 shares, paying 1000*9.5=9500 USD, and gives the shares back to his prime broker. He thus ends up earning a return of (10000-9500)/10000 = 5%. If his prime broker asked a 2% interest rate for borrowing the shares then the net gain of the manager is 5% - 2% = 3%. Leverage Sometimes a strategy gives a positive return but it is a very tiny one. Therefore, a manager can use leverage to magnify his return. For example, a
30

long-short manager can deposit 100M with his prime broker in order to buy 200M of shares and simultaneously sell another 200M of shares, which gives a leverage ratio of (200M+200M)/100M = 4. As another example, a manager can borrow money from a country at an interest rate of 2% and reinvest the amount on another country that pays 4%, thus earning the spread 4%-2%=2% (this is called carry trade). If the manager has a leverage ratio of (say) 5 then his return is not 2% but 5 * 2 %=10%. However, leverage also amplifies losses: if a manager has a market loss of 3% in his portfolio and a leverage of 4 then his total losses are 4*3=12%. Therefore, even small market losses are small can be disastrous when there is a huge leverage. According to the OECD, prior to the 2007 crisis, hedge funds in 2007 had an average leverage of 3 whilst investment banks had leverage above 30. With a leverage of 30, a market loss of 3.3% wipes out the entire portfolio whilst a leverage of 3 gives a total loss of 10%. High turnover Absolute-return managers are very active with their portfolios because they buy and sell shares more frequently than normal investors, which allows them to profit from short-term investment opportunities, typically lasting less than 90 days. The turnover is the rate at which managers rebalance their portfolios, and it strongly depends on the hedge fund's size: in 2008 hedge funds with less than 15M USD in AUM (Assets Under Management) had a 46.9% turnover per month whilst funds with over 250M USD in AUM had only 9.8%. Beta Ratio 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. Often, the return of a benchmark is subtracted in order to consider relative performance, which yields Jensen's alpha. The alpha coefficient ( ) is a parameter in the capital asset pricing model (CAPM). It is the intercept of the security characteristic line (SCL), that is, the coefficient of the constant in a market model regression.

31

It can be shown that in an efficient market, the expected value of the alpha coefficient is zero. Therefore the alpha coefficient indicates how an investment has performed after accounting for the risk it involved:

: the investment has earned too little for its risk (or, was too risky for the return) : the investment has earned a return adequate for the risk taken : the investment has a return in excess of the reward for the assumed risk

For instance, although a return of 20% may appear good, the investment can still have a negative alpha if it's involved in an excessively risky position. In finance, the Beta () of a stock or portfolio is a number describing the volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500. 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. It measures the part of the asset's statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index. The formula for the beta of an asset within a portfolio is

where ra measures the rate of return of the asset, rp measures the rate of return of the portfolio, and cov(ra,rp) is the covariance between the rates of return. The portfolio of interest in the CAPM formulation is the market
32

portfolio that contains all risky assets, and so the rp terms in the formula are replaced by rm, the rate of return of the market. Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk. On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. In fund management, measuring beta is thought to separate a manager's skill from his or her willingness to take risk. The beta coefficient was born out of linear regression analysis. It is linked to a regression analysis of the returns of a portfolio (such as a stock index) (xaxis) in a specific period versus the returns of an individual asset (y-axis) in a specific year. The regression line is then called the Security characteristic Line (SCL).

is called the asset's alpha and

is called the asset's beta coefficient.

For an example, in a year where the broad market or benchmark index returns 25% above the risk free rate, suppose two managers gain 50% above the risk free rate. Because this higher return is theoretically possible merely by taking a leveraged position in the broad market to double the beta so it is exactly 2.0, we would expect a skilled portfolio manager to have built the outperforming portfolio with a beta somewhat less than 2, such that the excess return not explained by the beta is positive. If one of the managers' portfolios has an average beta of 3.0, and the other's has a beta of only 1.5, then the CAPM simply states that the extra return of the first manager is not sufficient to compensate us for that manager's risk, whereas the second manager has done more than expected given the risk. Whether investors can expect the second manager to duplicate that performance in future periods is of course a different question.

33

Figure 1.The Security Market Line Security market line The SML shown in Figure 1 graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta), and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. The relationship between and required return is plotted on the security market line (SML) which shows expected return as a function of . The intercept is the nominal risk-free rate available for the market, while the slope is E(Rm) Rf. The security market line can be regarded as representing a single-factor model of the asset price, where Beta is exposure to changes in value of the Market. The equation of the SML is thus:

It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk. Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued because the investor can expect a greater return for the inherent risk. A security plotted below the SML is overvalued because the investor would be accepting a lower return for the amount of risk assumed. Standard Deviations (SD) In this project we use a particular finance oriented application of standard deviation called Volatility. Standard deviation is a widely used measure of variability or diversity used in statistics and probability theory. It shows how much variation or "dispersion" exists from the average (mean, or expected value). A low standard deviation indicates that the data points tend to be very close to the
34

mean, whereas high standard deviation indicates that the data points are spread out over a large range of values. With standard deviation of the sample(s) for this project An estimator for sometimes used is the standard deviation of the sample, denoted by sN and defined as follows:

This estimator has a uniformly smaller mean squared error than the sample standard deviation (see below), and is the maximum-likelihood estimate when the population is normally distributed. But this estimator, when applied to a small or moderately sized sample, tends to be too low: it is a biased estimator. The standard deviation of the sample is the same as the population standard deviation of a discrete random variable that can assume precisely the values from the data set, where the probability for each value is proportional to its multiplicity in the data set. In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices. An implied volatility is derived from the market price of a market traded derivative (in particular an option). Volatility as described here refers to the actual current volatility of a financial instrument for a specified period (for example 30 days or 90 days). It is the volatility of a financial instrument based on historical prices over the specified period with the last observation the most recent price. This phrase is used particularly when it is wished to distinguish between the actual current volatility of an instrument and

actual historical volatility which refers to the volatility of a financial instrument over a specified period but with the last observation on a date in the past

35

actual future volatility which refers to the volatility of a financial instrument over a specified period starting at the current time and ending at a future date (normally the expiry date of an option) historical implied volatility which refers to the implied volatility observed from historical prices of the financial instrument (normally options) current implied volatility which refers to the implied volatility observed from current prices of the financial instrument future implied volatility which refers to the implied volatility observed from future prices of the financial instrument

Volatility and Liquidity Much research has been devoted to modeling and forecasting the volatility of financial returns, and yet few theoretical models explain how volatility comes to exist in the first place. Roll (1984) shows that volatility is affected by market microstructure. Glosten and Milgrom (1985) shows that at least one source of volatility can be explained by the liquidity provision process. When market makers infer the possibility of adverse selection, they adjust their trading ranges, which in turn increases the band of price oscillation. Volatility for investors Investors care about volatility for five reasons. 1) The wider the swings in an investment's price the harder emotionally it is to not worry. 2) When certain cash flows from selling a security are needed at a specific future date, higher volatility means a greater chance of a shortfall. 3) Higher volatility of returns while saving for retirement results in a wider distribution of possible final portfolio values. 4) Higher volatility of return when retired gives withdrawals a larger permanent impact on the portfolio's value. 5) Price volatility presents opportunities to buy assets cheaply and sell when overpriced. In today's markets, it is also possible to trade volatility directly, through the use of derivative securities such as options and variance swaps. See Volatility arbitrage. Volatility versus direction
36

Volatility does not measure the direction of price changes, merely their dispersion. This is because when calculating standard deviation (or variance), all differences are squared, so that negative and positive differences are combined into one quantity. Two instruments with different volatilities may have the same expected return, but the instrument with higher volatility will have larger swings in values over a given period of time. For example, a lower volatility stock may have an expected (average) return of 7%, with annual volatility of 5%. This would indicate returns from approximately negative 3% to positive 17% most of the time (19 times out of 20, or 95% via a two standard deviation rule). A higher volatility stock, with the same expected return of 7% but with annual volatility of 20%, would indicate returns from approximately negative 33% to positive 47% most of the time (19 times out of 20, or 95%). These estimates assume a normal distribution; in reality stocks are found to be leptokurtotic. Volatility over time Although the Black Scholes equation assumes predictable constant volatility, none of these are observed in real markets, and amongst the models are Bruno Dupire's Local Volatility, Poisson Process where volatility jumps to new levels with a predictable frequency, and the increasingly popular Heston model of Stochastic Volatility. It's common knowledge that types of assets experience periods of high and low volatility. That is, during some periods prices go up and down quickly, while during other times they might not seem to move at all. Periods when prices fall quickly (a crash) are often followed by prices going down even more, or going up by an unusual amount. Also, a time when prices rise quickly (a bubble) may often be followed by prices going up even more, or going down by an unusual amount. The converse behavior, 'doldrums' can last for a long time as well. Most typically, extreme movements do not appear 'out of nowhere'; they're presaged by larger movements than usual. This is termed autoregressive conditional heteroskedasticity. Of course, whether such large movements have the same direction, or the opposite, is more difficult to say. And an
37

increase in volatility does not always presage a further increasethe volatility may simply go back down again.

Mathematical definition The annualized volatility is the standard deviation of the instrument's yearly logarithmic returns. The generalized volatility T for time horizon T in years is expressed as:

Therefore, if the daily logarithmic returns of a stock have a standard deviation of SD and the time period of returns is P, the annualized volatility is

A common assumption is that P = 1/252 (there are 252 trading days in any given year). Then, if SD = 0.01 the annualized volatility is

The monthly volatility (i.e., T = 1/12 of a year) would be

The formula used above to convert returns or volatility measures from one time period to another assume a particular underlying model or process. These formulas are accurate extrapolations of a random walk, or Wiener process, whose steps have finite variance. However, more generally, for natural stochastic processes, the precise relationship between volatility
38

measures for different time periods is more complicated. Some use the Lvy stability exponent to extrapolate natural processes:

If = 2 you get the Wiener process scaling relation, but some people believe < 2 for financial activities such as stocks, indexes and so on. This was discovered by Benot Mandelbrot, who looked at cotton prices and found that they followed a Lvy alpha-stable distribution with = 1.7. (See New Scientist, 19 April 1997.) Crude volatility estimation Using a simplification of the formulae above it is possible to estimate annualized volatility based solely on approximate observations. Suppose you notice that a market price index, which has a current value near 10,000, has moved about 100 points a day, on average, for many days. This would constitute a 1% daily movement, up or down. To annualize this, you can use the "rule of 16", that is, multiply by 16 to get 16% as the annual volatility. The rationale for this is that 16 is the square root of 256, which is approximately the number of trading days in a year (252). This also uses the fact that the standard deviation of the sum of n independent variables (with equal standard deviations) is n times the standard deviation of the individual variables. Of course, the average magnitude of the observations is merely an approximation of the standard deviation of the market index. Assuming that the market index daily changes are normally distributed with mean zero and standard deviation , the expected value of the magnitude of the observations is (2/) = 0.798. The net effect is that this crude approach underestimates the true volatility by about 20%. Estimate of compound annual growth rate (CAGR) Consider the Taylor series:

Taking only the first two terms one has:

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Realistically, most financial assets have negative skewness and leptokurtosis, so this formula tends to be over-optimistic. Some people use the formula:

for a rough estimate, where k is an empirical factor (typically five to ten). Expense Ratio The Total Annual Fund Operating Expenses ("Expense Ratio") is the line of the fee table in the prospectus that represents the total of all of a mutual fund's annual fund operating expenses, expressed as a percentage of the fund's average net assets. Looking at the expense ratio can help you make comparisons among funds. The expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative, management, advertising (12b-1), and all other expenses. An expense ratio of 1% per annum means that each year 1% of the fund's total assets will be used to cover expenses. The expense ratio does not include sales loads or brokerage commissions. Expense ratios are important to consider when choosing a fund, as they can significantly affect returns. Factors influencing the expense ratio include the size of the fund (small funds often have higher ratios as they spread expenses among a smaller number of investors), sales charges, and the management style of the fund. A typical annual expense ratio for a U.S. domestic stock fund is about 1%, although some passively managed funds (such as index funds) have significantly lower ratios: for example, the Vanguard US Large Cap ETF has an expense ratio of 0.07%. One notable component of the expense ratio of U.S. funds is the "12b-1 fee", which represents expenses used for advertising and promotion of the fund. 12b-1 fees are generally limited to a maximum of 1.00% per year (.75% distribution and .25% shareholder servicing) under Financial Industry Regulatory Authority Rules. Waivers, reimbursements & recoupments

40

Some funds will execute "waiver or reimbursement agreements" with the fund's adviser or other service providers, especially when a fund is new and expenses tend to be higher (due to a small asset base). These agreements generally reduce expenses to some pre-determined level or by some predetermined amount. Sometimes, these waiver/reimbursement amounts must be repaid by the fund during a period that generally cannot exceed 3 years from the year in which the original expense was incurred. If a recoupment plan is in effect, the effect may be to require future shareholders to absorb expenses of the fund incurred during prior years. It is calculated by operating expenses. Changes in expense ratio (fixed & variable expenses) Generally, unlike past performance, expenses are very predictive. Funds with high expenses ratios tend to continue to have high expenses ratios. An investor can examine a fund's "Financial Highlights" which is contained in both the periodic financial reports and the fund's prospectus, and determine a fund's expense ratio over the last five years (if the fund has five years of history). It is very hard for a fund to significantly lower its expense ratio once it has had a few years of operational history. This is because funds have both fixed and variable expenses, but most expenses are variable. Variable costs are fixed on a percentage basis. For example, assuming there are no breakpoints, a .75% management fee will always consume .75% of fund assets, regardless of any increase in assets under management. The total management fee will vary based on the assets under management, but it will always be .75% of assets. Fixed costs (such as rent or an audit fee) vary on a percentage basis because the lump sum rent/audit amount as a percentage will vary depending on the amount of assets a fund has acquired. Thus, most of a fund's expenses behave as a variable expense and thus, are a constant fixed percentage of fund assets. It is therefore, very hard for a fund to significantly reduce its expense ratio after it has some history. Thus, if an investor buys a fund with a high expense ratio that has some history, he/she should not expect any significant reduction. Expenses matter relative to investment type There are 3 broad investment categories for mutual funds (equity, bond, and money market - in declining order of historical returns). That is an over
41

simplification but adequate to explain the effect of expenses. In an equity fund where the historical gross return might be 10%, a 1% expense ratio will consume approximately 10% of the investor's return. In a bond fund where the historical gross return might be 8%, a 1% expense ratio will consume approximately 12.5% of the investor's return. In a money market fund where the historical gross return might be 5%, a 1% expense ratio will consume approximately 20% of the investor's historical total return. Thus, an investor must consider a fund's expense ratio as it relates to the type of investments a fund will hold. R-Square In statistics, the coefficient of determination R2 is used in the context of statistical models whose main purpose is the prediction of future outcomes on the basis of other related information. It is the proportion of variability in a data set that is accounted for by the statistical model. It provides a measure of how well future outcomes are likely to be predicted by the model. There are several different definitions of R2 which are only sometimes equivalent. One class of such cases includes that of linear regression. In this case, if an intercept is included then R2 is simply the square of the sample correlation coefficient between the outcomes and their predicted values, or in the case of simple linear regression, between the outcomes and the values of the single regressor being used for prediction. In such cases, the coefficient of determination ranges from 0 to 1. Important cases where the computational definition of R2 can yield negative values, depending on the definition used, arise where the predictions which are being compared to the corresponding outcomes have not been derived from a model-fitting procedure using those data, and where linear regression is conducted without including an intercept. Additionally, negative values of R2 may occur when fitting non-linear trends to data. In these instances, the mean of the data provides a fit to the data that is superior to that of the trend under this goodness of fit analysis. A data set has values yi, each of which has an associated modelled value fi (also sometimes referred to as i). Here, the values yi are called the observed values and the modelled values fi are sometimes called the predicted values. The "variability" of the data set is measured through different sums of squares:
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the total sum of squares (proportional to the sample variance); the regression sum of squares, also called the explained sum of squares. , the sum of squares of residuals, also called the residual sum of squares. In the above is the mean of the observed data:

where n is the number of observations. The notations and should be avoided, since in some texts their meaning is reversed to Residual sum of squares and Explained sum of squares, respectively. The most general definition of the coefficient of determination is

Relation to unexplained variance In a general form, R2 can be seen to be related to the unexplained variance, since the second term compares the unexplained variance (variance of the model's errors) with the total variance (of the data). See fraction of variance unexplained. As explained variance In some cases the total sum of squares equals the sum of the two other sums of squares defined above,

43

See sum of squares for a derivation of this result for one case where the relation holds. When this relation does hold, the above definition of R2 is equivalent to

In this form R2 is given directly in terms of the explained variance: it compares the explained variance (variance of the model's predictions) with the total variance (of the data). This partition of the sum of squares holds for instance when the model values i have been obtained by linear regression. A milder sufficient condition reads as follows: The model has the form

where the qi are arbitrary values that may or may not depend on i or on other free parameters (the common choice qi = xi is just one special case), and the coefficients and are obtained by minimizing the residual sum of squares. This set of conditions is an important one and it has a number of implications for the properties of the fitted residuals and the modelled values. In particular, under these conditions:

As squared correlation coefficient Similarly, after least squares regression with a constant+linear model (i.e., simple linear regression), R2 equals the square of the correlation coefficient between the observed and modeled (predicted) data values. Under general conditions, an R2 value is sometimes calculated as the square of the correlation coefficient between the original and modeled data values. In this case, the value is not directly a measure of how good the modeled values are, but rather a measure of how good a predictor might be constructed from the modeled values (by creating a revised predictor of the form + i). According to Everitt (2002, p. 78), this usage is specifically the definition of the term "coefficient of determination": the square of the correlation between two (general) variables.
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Price-Earnings Ratio It is the ratio of the market price of share of company to the earnings per share of the company. Here Earnings per share of company = Net profit/Total number of outstanding shares and Market price per share of company=Total market capitalization/Total number of outstanding shares of the company. The lesser the value, the better will be the financial position of the company. Price-Book Ratio It is the ratio of the market price of share of company to the book value per share of the company. Here Book value per share of company = Net Worth/Total number of outstanding shares and Market price per share of company=Total market capitalization/Total number of outstanding shares of the company. The lesser the value, the better will be the financial position of the company. 12. Equity oriented mutual funds under consideration for performance evaluation and comparison: Axis Mutual Fund Birla Sun life Mutual Fund Bharti AXA Mutual Fund HSBC Mutual Fund HDFC Mutual Fund SBI Mutual Fund TATA Mutual Fund Sundaram Mutual Fund LIC Nomura Mutual Fund Franklin Templeton Asia Fund

13. Base Indices used as comparison parameter: NIFTY index SENSEX index
45

 NIFTY Midcap 50 index BSE Small cap index

14. Comparison of performance between the equity oriented mutual funds under consideration for 2011-2012: NIFTY Index

46

SENSEX Index

47

Nifty Midcap 50 Index

48

BSE Small cap Index

49

Franklin Templeton Asia Fund

50

51

Tata Mutual Fund

52

53

54

SBI Mutual Fund

55

56

Axis Mutual Fund

57

58

59

HSBC Mutual Fund

60

61

62

Bharti AXA Mutual Fund

63

64

65

HDFC Mutual Fund

66

67

LIC Nomura Mutual Funds

68

69

Sundaram Mutual Fund

70

71

72

Birla Sunlife Mutual Fund

73

74

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15. Interpretations: When it comes to 1-month growth rates ,Birla sun life Advantage FundDividend shows least promise as an investment option due to relatively lower growth rates (or higher depreciation rates)while Franklin Asian Equity Fund seems most lucrative as an investment option due to relatively higher growth rates(or lesser depreciation rates) than the others compared. On a 3-month basis, Birla sun life Advantage Fund-Dividend shows least promise as an investment option due to relatively lower growth rates (or higher depreciation rates)while Franklin Asian Equity Fund seems most lucrative as an investment option due to relatively higher growth rates(or lesser depreciation rates) than the others compared. On a 6-month basis, Birla Sun Life Advantage Fund-Dividend shows least promise as an investment option due to relatively lower growth rates (or higher depreciation rates)while Franklin Asian Equity Fund seems most lucrative as an investment option due to relatively higher growth rates(or lesser depreciation rates) than the others compared. On a 1 year basis, Birla Sun Life Advantage Fund-Dividend shows least promise as an investment option due to relatively lower growth rates (or higher depreciation rates)while Franklin Asian Equity Fund seems most lucrative as an investment option due to relatively higher growth rates(or lesser depreciation rates) than the others compared. On a 3 year basis, Bharti AXA Equity Fund Reg Dividend shows least promise as an investment option due to relatively lower growth rates (or higher depreciation rates) while HDFC Long Term Equity Fund Dividend seems most lucrative as an investment option due to relatively higher growth rates(or lesser depreciation rates) than the others compared. Average performance of similar category funds was best in 3 years category/basis. BSE SMALL CAP market performance was best in 3 years category. NIFTY MID CAP market performance was best in 3 years category. NIFTY market performance was best in 3 years category. SENSEX market performance was best in 3 years category.
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Based on Portfolio Returns, Bharti AXA Equity fund-Reg-Dividend is most active & that implies it has more securities traded as a portion of its net assets (as compared to other companies),while LIC Nomura Equity FundDividend is least active & that implies it has lesser securities traded as a portion of its net assets(as compared to other companies). Based on Market Returns/Profitability, LIC Nomura Equity Funds-Dividend seems to have the highest market return (due to the high dividend yield) while compared to the others & Franklin Asian Equity Fund has the lowest market return (due to the low dividend yield) while compared to others. Based on Absolute Returns, Birla Sun Life Advantage Fund-Dividend shows least promise as an investment option due to relatively lower growth rates (or higher depreciation rates)while Franklin Asian Equity Fund seems most lucrative as an investment option due to relatively higher growth rates(or lesser depreciation rates) than the others compared. Based on Beta ratios, Franklin Asian Equity Fund has the highest ratio to volatility of asset against volatility of the standard index/benchmark of the market (NSE-Nifty by default). HSBC has the lowest ratio of volatility of asset against the standard index/benchmark of the market (BSE-200) among the companies compared. Based on Standard Deviation (SD), the risk associated with pricefluctuations of a given asset (stocks, bonds, property, etc.), or the risk of a portfolio of assets (actively managed mutual funds, index mutual funds, or ETFs) is maximum for Franklin Asian Equity Fund Dividend and minimum for Axis Equity Fund-Dividend among the companies compared. Based on Expense Ratio, HSBC and Bharti AXA Equity Fund-RegDividend have best performance while Axis Equity Fund-Dividend has least performance in terms of financial soundness among the companies compared. Based on R-square or correlation coefficient square, Franklin Asian Equity Fund -Dividend -has future outcomes most likely to be predicted by appropriate models and Axis Equity Fund Dividend - has future outcomes least likely to be predicted by appropriate models among the companies compared.
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Based on Price-Earning Ratio, Franklin Asian Equity Fund-Dividend has best economic performance in terms of amount invested per unit earnings due to lowest P/E ratio while Sundaram Equity Multiplier Fund-Dividend has worst economic performance in terms of amount invested per unit earnings due to highest P/E ratio among the companies compared. Based on Price-Book Ratio, investors expect more value to be created by management based on present assets for Tata Equity management fund with the highest level of expectation while investors expect more value to be created by management based on present assets for Franklin Asian Equity Fund-Dividend with the lowest level of expectation among the companies compared. 16.SWOT Analysis: Strength The analysis we have done shows that a company needs to have better values of parameters for better performance prediction/forecast. Thus the various parameters we have used for comparison are highly effective and have been able to differentiate between the weaker and stronger companies on various parameters. Weakness A company that scores maximum under a particular parameter for performance may not score maximum under another parameter. The weights have not been used for any combination of parameter methods. This is because there exists no standard code for assigning weights or importance for the various methods so that a possible average score can be achieved for each company using weighted average method which would aid in better comparison and prediction. Opportunity The biggest advantage of using these methods is that it is simple to calculate and compare the values against certain standards or against a benchmark and hence better methods could be developed / evolved based on the current fundamental methods for greater accuracy. Threats There is a problem of losing out on accuracy in the name of attaining better precision due to alteration of tolerance range for errors in order to get a
78

perfect result which may lead to deviation of actual results to match expected results. 16. Conclusion: Thus through this project , I have understood the nuances of the stock market process and developed a neat interpretation of results of stock performance with respect to equity oriented mutual funds through thorough methodological analysis and evaluation , thereby enabling my potential customers to make a sound decision or myself to make a good decision on their behalf as funds manager.

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17. References: http://en.wikipedia.org/wiki/Mutual_fund http://en.wikipedia.org/wiki/Portfolio_(finance) http://en.wikipedia.org/wiki/Goal-based_investing http://en.wikipedia.org/wiki/Absolute_returns http://en.wikipedia.org/wiki/Beta_(finance) http://en.wikipedia.org/wiki/Standard_deviation http://en.wikipedia.org/wiki/Expense_ratio http://en.wikipedia.org/wiki/Coefficient_of_determination http://en.wikipedia.org/wiki/Price-Earnings_Ratio http://en.wikipedia.org/wiki/P/B_ratio http://www.mutualfundsindia.com http://www.mutualfundsindia.com/comparefund.asp http://www.googlefinance.com http://www.yahoofinance.com http://www.technicalanalysis.com http://www.nseindia.com http://www.bseindia.com

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18. Bibliography: 1. Rouwenhorst, K. Geert, "The Origins of Mutual Funds," Yale ICF Working Paper No. 04-48 (December 12, 2004), p. 5. 2. Rouwenhorst (2004), p. 16. 3. Rouwenhorst (2004), p. 17. 4. Fink, Matthew P. (2008). The Rise of Mutual Funds. Oxford University Press. p. 9. 5. Fink (2008), p. 15. 6. Fink (2008), p. 63. 7. Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance 7 (1): 77-91. 8. Matthew Tuttle. (2009) How Harvard and Yale beat the market. John Wiley and Sons. 9. Robert A. Jaeger, "All about Hedge Funds", Mc Graw Hill, pp.133145 and 184-185. 10. Levinson, Mark (2006). Guide to Financial Markets. London: The Economist (Profile Books). pp. 1456. 11. Walker, Helen (1931). Studies in the History of the Statistical Method . Baltimore, MD: Williams & Wilkins Co. pp. 2425. 12. Steel, R. G. D. and Torrie, J. H., Principles and Procedures of Statistics, New York: McGraw-Hill, 1960, pp. 187, 287. 13. Anderson, K.; Brooks, C. (2006). The Long-Term Price-Earnings Ratio. 14. Graham and Dodd's Security Analysis, Fifth Edition, pp 318 - 319.

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