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TABLE OF CONTENTS
CHAPTER 1
Objectives and Scope of Study...5
Introduction.6
Mutual Funds : An Overview7
Understanding Mutual fund..8
Investment in Mutual Fund.10
Growth in Assets Under Management..11
CHAPTER 2
Types of Mutual Funds...12
Risk Hierarchy of different Mutual Funds.16
Types of returns that MFs offer to Investors17
Mutual Funds Vs Other Investments.18
CHAPTER 3
Why invest in Mutual Funds...25
Risks involved in Mutual Funds.28
Evaluation of Mutual Funds30
CHAPTER 4 (Literature Review)
New Fund Offers (NFOs) in MF industry..39
Primary
Data.72
Secondary
Sources..72
Sample
size...72
CHAPTER 7
Data Analysis and Interpretation73
Conclusion.81
Limitations of the study83
Bibliography & References.84
3
Annexure I - Questionnaire85
Annexure II Supporting Information...88
INTRODUCTION
The world of investments is a maze for most Indians, complicated by
insufficient information, unscrupulous opportunists and an array of tax
related issues. In the last few years, we have been witness to a securities
scam, an IPO bubble that burst, the virtual collapse of an NBFC regime,
plantation companies that have gone under and the venerable UTI coming
under a cloud each taking toil on investor wealth and confidence.
Investors are thus, looking for avenues that provide them with high safety,
good returns and liquidity. The destination of this search has to be mutual
funds a preferred mode of saving in advanced countries such as the
USA.
Mutual fund industry in India is growing at a very fast rate. By December
2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is
estimated that by 2010 March, the total assets of all scheduled commercial
banks should be Rs. 4,090,000 Cr.
The annual composite rate of growth is expected 13.4% during the rest of
the decade. In the last 5 years we have seen annual growth rate of 9%.
According to the current growth rate, by year 2010, mutual fund assets will
be double.
With the entry of the private sector funds in 1993, a new era started in the Indian Mutual
Fund Industry, giving the investors a wider choice of fund families. Also, 1993 was the
year in which first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer
( now merged with Franklin Templeton) was the first private sector mutual fund
registered in July 1993. The industry now functions under SEBI Regulations, 1996. At
the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805
crores. The UTI with Rs. 44,541 crores of AUM was way ahead of other mutual funds.
Fourth Phase Since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29, 835 crores as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain other
schemes.
NAV is defined as the market value of the Mutual Fund scheme's assets
net of its liabilities. NAV of a scheme is calculated by dividing the market
value of scheme's assets by the total number of units issued to the
investors.
For Example:
A.
B.
C.
D.
E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units
held multiplied by the NAV of the scheme)
10
choose a mutual fund that meets his risk acceptance and his risk capacity
levels and has similar investment objectives as the investor.
With the plethora of schemes available in the Indian markets, an investors
needs to evaluate and consider various factors before making an
investment decision. Since not everyone has the time or inclination to
invest and do the analysis himself, the job is best left to a professional.
Since Indian economy is no more a closed market, and has started
integrating with the world markets, external factors which are complex in
nature affect us too. Factors such as an increase in short-term US interest
rates, the hike in crude prices, or any major happening in Asian market
have a deep impact on the Indian stock market. Although it is not possible
for an individual investor to understand Indian companies and investing in
such an environment, the process can become fairly time consuming.
Mutual funds (whose fund managers are paid to understand these issues
and whose Asset Management Company invests in research) provide an
option of investing without getting lost in the complexities.
Most of us are not necessarily well qualified to apply the theories of
portfolio structuring to our holdings and hence would be better off leaving
that to a professional. Mutual funds represent one such option.
11
Note: - Erstwhile UTI was bifurcated into UTI Mutual Fund and the
Specified Undertaking of the Unit Trust of India effective from February
2003. The Assets under management of the Specified Undertaking of the
Unit Trust of India has therefore been excluded from the total assets of the
industry as a whole from February 2003 onwards.
12
By structure:
1. Open ended funds: An open ended fund is one that has units
available for sale and repurchase at all the times. an investor can buy
or redeem units from the fund itself at a price based on the net asset
value(NAV)per unit.NAV per unit is obtained by dividing the amount of
the market value of the funds assets by the number of units
outstanding. The number of units outstanding goes up or down every
time the fund issues new units or repurchases existing units. The
open ended fund. An open ended fund is available for subscription all
through the year. These do not have a fixed maturity. The key feature
of this type is liquidity. Investors who wish to exit from an open end
scheme can offer their units to the mutual fund for redemption.
13
Similarly; the mutual fund can sell new units to investors desirous of
participating in the scheme.
By Investment Objective:
A scheme can also be classified as a Growth scheme, an Income scheme,
or a balanced scheme considering its investment objectives. Such
schemes may be open-ended or close-ended as described earlier and may
be classified as follows:
14
3. Balanced Funds:
The aim of Balanced Funds is to provide both growth and regular income
as such schemes invest both in the Equities and Fixed Income Securities
in the proportion indicated in their Offer Documents. These are appropriate
for Investors looking for moderate growth. They generally invest 40-60% in
Equity and Debt instruments. These Funds are also affected by the
fluctuations in share prices in the Stock Markets. However, NAVs of such
Funds are likely to be less volatile compared to pure Equity Funds.
5. Gilt Funds:
These Funds invest exclusively in Government Securities. Government
Securities have no default risk. The NAVs of these schemes fluctuate
because of a change in interest rates and other economic factors as is the
case with Income or Debt Oriented schemes.
6. Index Funds:
Index Funds replicate the portfolio of a particular index such as the BSE
Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in
the Securities in the same weight age comprising of an index. NAVs of
such schemes would rise or fall in accordance with the rise or fall in the
index, though not exactly by the same percentage due to some factors
known as "tracking error" in technical terms. Necessary disclosures in this
regard are made in the Offer Document of the Mutual Fund scheme.
There are also Exchange Traded Index Funds launched by the Mutual
Funds which are traded on the Stock Exchanges.
16
These are the Funds / Schemes which invest in the Securities of only
those sectors or industries as specified in the Offer Documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),
Petroleum Stocks, etc. The returns in these Funds are dependent on the
performance of the respective sectors / industries. While these Funds may
give higher returns, they are more risky compared to diversified funds.
Investors must keep a watch on the performance of those sectors.
17
18
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.
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.
19
20
21
mutual fund is usually subject to the same ups and downs and risks as the
stock market.
BANKS
Returns
Low
Administrative exp.
High
Risk
Low
Investment options
Less
Network
High penetration
Liquidity
At a cost
Quality of assets
Not transparent
Interest calculation
Minimum
balance
& 30th. Of every month
Guarantee
Interest Dividend
MUTUAL FUNDS
Better
Low
Moderate
More
Low but improving
Better
Transparent
between
22
10th.
Everyday
None
For example: It is assumed that both, the Bank FD as well as the FMP
(Fixed Maturity Plan issued by mutual funds) yield the same rate of interest
i.e. 10.25 per cent pa An investment of Rs. 1 lakh is made in an FMP of 91
days. The corresponding figures for the Bank FD appear alongside.
FMP 91 days v/s Fixed Deposits
Dividend
Option
(Individuals)
Dividend
Option
(Corporates)
Fixed
Deposits
Investment Amount
Rs 100,000
Rs 100,000
Rs 100,000
10.25%
10.25%
10.25%
Maturity Value
102,555
102,555
Rs 102,555
2,555
2,555
Tax Rate
14.16%
22.66%
33.99%
Tax
Rs 317
Rs 472
Rs 869
Rs 2,239
Rs 2,083
Rs 1,687
9.29%
8.62%
6.94%
Interest on Bank FDs is fully taxable whereas the return from FMPs is
either subject to the Dividend Distribution Tax (for the dividend option) or
the capital gains tax rate (for the growth option). The Distribution Tax rate
@14.16 per cent or the capital gains tax rate @10 per cent are lower than
the income tax rate, especially in the case of investors in the higher tax
bracket. Tax directly eats into returns, which is why FMPs have the edge
over Bank FDs.
23
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. But as he moves ahead to invest in
capital protected funds and the profit-bonds that give out more return
which is slightly higher as compared to the bank deposits but the risk
involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing,
as Mutual funds provide professional management, diversification,
24
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.
25
than you can, unless you have time to spend on researching the
companies you select for your portfolio. That is because Mutual funds hire
full-time, high-level investment professionals. Funds can afford to do so as
they manage large pools of money. The managers have real-time access
to crucial market information and are able to execute trades on the largest
and most cost-effective scale. When you buy a mutual fund, the primary
asset you are buying is the manager, who will be controlling which assets
are chosen to meet the funds' stated investment objectives.
2. Diversification: A crucial element in investing is asset allocation. It
plays a very big part in the success of any portfolio. However, small
investors do not have enough money to properly allocate their assets. By
pooling your funds with others, you can quickly benefit from greater
diversification. Mutual funds invest in a broad range of securities. This
limits investment risk by reducing the effect of a possible decline in the
value of any one security. Mutual fund unit-holders can benefit from
diversification techniques usually available only to investors wealthy
enough to buy significant positions in a wide variety of securities.
3. Low Cost: A mutual fund let's you participate in a diversified portfolio
for as little as Rs.5000, and sometimes less. And with a no-load fund, you
pay little or no sales charges to own them.
4. Convenience and Flexibility: Investing in mutual funds has its
own convenience. While you own just one security rather than many, you
still enjoy the benefits of a diversified portfolio and a wide range of
services. Fund managers decide what securities to trade collect the
interest payments and see that your dividends on portfolio securities are
received and your rights exercised. It also uses the services of a high
quality custodian and registrar. Another big advantage is that you can
26
move your funds easily from one fund to another within a mutual fund
family. This allows you to easily rebalance your portfolio to respond to
significant fund management or economic changes.
5. Liquidity: In open-ended schemes, you can get your money back
promptly at net asset value related prices from the mutual fund itself.
6. Transparency: Regulations for mutual funds have made the industry
very transparent. You can track the investments that have been made on
you behalf and the specific investments made by the mutual fund scheme
to see where your money is going. In addition to this, you get regular
information on the value of your investment.
7. Variety: There is no shortage of variety when investing in mutual
funds. You can find a mutual fund that matches just about any investing
strategy you select. There are funds that focus on blue-chip stocks,
technology stocks, bonds or a mix of stocks and bonds. The greatest
challenge can be sorting through the variety and picking the best for you.
Define your time period: How long do you wish to wait have to reach
my objective? Naturally, all of us would like to reach our financial objectives
at the earliest, but please be realistic even if ambitious while setting
this time period. That is, setting a time period that is difficult is all right, but
setting a time period that is impossible, is not.
As a general rule, investors with near-term needs should probably
concentrate on money market funds or short-term bond funds. Those with
an intermediate-term outlook may want to choose either income funds or
29
funds that seek a combination of income and growth. And investors with
long-term horizons should consider growth-oriented funds, since these
invest primarily in stocks, an asset class which, when compared to income
investments, has achieved the best historical returns over time.
Define your risk tolerance: How much risk can you tolerate? If you
have a low tolerance for risk, you should stick to the most conservative
choices, such as money market funds. If you have a moderate tolerance
for risk, you should seek to blend conservative and aggressive funds or
look for one fund with a blended approach, such as a growth and income
fund or a balanced fund. If you are comfortable with a fair amount of risk,
you can choose from among the more aggressive mutual funds like
aggressive growth funds and sector funds.
30
31
Type of Scheme
Open Ended
Nature
Equity
Fund Manager
Pankaj Tibrewal .
SIP
Option
Growth
Inception Date
Jan 1, 1996
Face
(Rs/Unit)
10
Value
STP
SWP
Expense ratio(%)
2.30
Portfolio Turnover
42
Ratio(%)
Last
Declared
Divdend
Minimum Investment
500
(Rs)
Purchase
Redemptions
Weekly
NAV Calculation
Weekly
Entry Load
Exit Load
Nil
FUND FACTS
Sep 30,
33
-97.32
Mutual Fund
PRINCIPAL
Mutual
Fund
3rd Floor, Exchange Plaza, B-wing
A NSE Building, Bandra Kurla Complex,
Bandra-E
Mumbai
Tel.-22021111
Registrar
NAV
Latest NAV
52 - Week High
52 - Week Low
3 Months
6 Months
1 Year
34
3 Years
5 Years
Since
Inception
Ltd.
4,
Hills
-15.93
-46.51
-53.71
-60.85
-0.26
11.68
Mean
1.24
Treynor
1.76
Standard
Deviation
2.93
Sortino
0.58
Correlation
0.64
Sharpe
0.39
Fama
0.47
Beta
0.64
PORTFOLIO
35
25.42
P/E
P/B
Dividend Yield
31,156.67 as
Sep - 2008
on
Large
Mid
Small
No. of Stocks
61
2.30
ITC Ltd
Cipla Ltd
P/E
Stock
Sector
36
Percentage
of Net Assets
Qty
Value
Percentage
of
Change
with
last
Nifty
Miscellaneous
Oil
&
Reliance Industries
Petroleum
Ltd
Refinery
Jindal Steel
Power Ltd.
and
NA
Gas,
& 13.93
4.80
NA
12.77
-3.44
4.14
80,134
11.02
-38.24
Steel
7.87
3.42
114,728
9.09
-4.14
Consumer
Durables
11.73
3.38
1,221,783 8.99
-4.83
10.78
3.00
200,247
7.98
-25.68
17.95
2.62
106,448
6.96
-16.85
5.18
2.43
503,993
6.45
-0.82
14.07
2.41
225,472
6.40
-29.87
Gas,
&
2.38
406.11
491,199
6.34
-37.82
24,267
6.14
-46.01
Voltas Ltd
Telecom
Metals
3.82
Information
Miscellaneous
Engineering & Industrial
Services Of India
Machinery
5.51
Ltd
Finance
Housing & Construction
Metals
Mining & Minerals
Miscellaneous
10.08
1.79
3.7
1.62
8.62
8.03
0.84
1.92
0.01
2.08
Power Generation,
Transmission & Equip
Shipping
Steel
Telecom
Textiles
2.62
1.44
8.93
2.62
2.46
13.65
2.31
Equity
Debt
37
90.87
0.00
9.13
LITERATURE REVIEW
NEW FUND OFFERS (NFOs) IN THE MF INDUSTRY
Mutual Fund NFOs (New Fund Offers) mark the commencement of a new
scheme that has generated huge interest among investors today. The
several bull-phases in the stock market in the last couple of years appear
to have increased the interest of investors in equities. Mutual funds were
quick to tune into this and have come out with new fund offers (NFO) with
increasing regularity. And they have not been disappointed. The new funds
have mopped up huge sums from investors. Between October 2005 and
September 2006 alone, about Rs 32,000 crore (36 per cent of the total
equity fund sales in that period) was collected by equity NFOs through
open- and close-ended schemes.
A Business Line analysis reveals that quite a few of the new funds underperformed their benchmarks. However, with the frequent reversals in the
market and the considerable churn in the sectors leading each rally, the
past year has been challenging, even for established equity funds.
The analysis considered only funds launched before September 2006
less than six months being too short to evaluate performance. However,
investors need to note that this exercise cannot form a sufficient basis for
investments in these funds. It can, at best, be seen as a performance
tracker.
NFOs witness to a very volatile phase in the market in May/June 2006. The
new funds in that period lost an average of 32 per cent between May 10
38
and June 14, against the Sensex decline of 29 per cent. So, which of the
new funds managed this phase well?
The performance round-up for the June 2006 quarter showed that among
the new funds, only Reliance Equity and Quantum Mutual, which held a
significant proportion of cash, contained the declines. The rest of the funds
fell more than the market. Ironically, the new contra funds from the DBS
Chola, UTI and Tata fund houses also fell with the rest, despite a specific
focus on "value" or contrarian investing.
NFO
Close
Reliance
Equity
7-Mar-06 45.0
Equity:
Diversified
39
1-Yr
(%)
portfolio in line
with market levels.
At higher market
levels, a larger
portion
of
its
portfolio
is
hedged.
A
defensive
investment
strategy that does
not
allow
the
investor
to
generate returns
beyond a point.
Also in terms of
stock picks, this
fund is similar to
Reliance
(RELI.BO, news)
Vision,
a
predominantly
large cap equity
fund.
SBI Bluechip Equity:
Diversified
20-Jan-06 28.6
Magnum
Multicap
Equity:
Diversified
16-Sep-05 21.0
As
the
name 7.8
suggests, the fund
can invest in both
large caps and
mid caps. Similar
to
Magnum
Multiplier Plus in
terms of stock
picks.
HSBC
Equity:
27-Jan-06 16.0
40
Advantage
India
Diversified
PruICICI
Equity:
16-Aug-05 14.2
Infrastructure Infrastructure
A
5-Yr
close- 8.8
ended fund that
can invest across
market caps. It
was close-ended
since the fund
wanted to take
long-term
bets
which is difficult in
an
open-ended
structure.
Given
the
free-flowing
investment style
and
process-
27-Jan-06 13.0
41
driven investment
approach,
we
recommended this
fund to Personalfn
clients.
Franklin
Smaller
Companies
Equity:
Caps
Stanchart
Classic
Equity
Equity:
Diversified
14-Jul-05 11.7
Magnum
Comma
Equity:
Diversified
25-Jul-05 9.5
42
commodities; the
fund was only
targeting
commodity stocks.
Expectedly,
the
fund paid a heavy
price for its narrow
theme, especially
during the crash in
May 2006.
BSE Sensex
15.6
(AUMs are assets under management. These are the net assets
mobilised at the time of the NFO; they are approximate numbers. NAV
performance as on May 16, 2006. All NFOs except Franklin Smaller
Companies and HDFC Long Term Equity are open-ended.)
It is apparent from the table that many of these NFOs didn't really need to
be launched. In many cases the themes (infrastructure, commodities, and
outsourcing to name a few) failed to add any significant value to the
investor's portfolio. In quite a few cases, it is evident that the fund house
had another fund with a relatively similar investment style/positioning. It
could have been much simpler if the fund house chose to talk about the
existing fund, rather than launch another NFO.
It is apparent given the quality of NFOs, why Personalfn was not enthused
enough into recommending them to clients. Of the NFOs listed above only
two caught our attention viz. Franklin Smaller Companies (a 5-Yr closeended equity fund investing in small caps) and HDFC Long Term Equity (a
5-Yr close-ended equity fund investing in companies across market
capitalizations). Being launched by well-managed fund houses, with a lockin allowing the fund manager to invest for the long-term in opportunities
43
that were being ignored by most fund houses (like small caps for instance)
were some of the compelling reasons for recommending such NFOs.
In addition to the NFOs selectively mentioned in the table, there are scores
of NFOs that have added little value to the investor. If anything, they have
added to the confusion, because the thought uppermost on the investor's
mind is - NFO A is so similar to Fund B from the same fund house, what
value will NFO A offer that is not already being offered by Fund B? And it is
apparent from looking at the NFOs that most haven't achieved the level of
performance that was expected of them. As we mentioned earlier, many
were too niche to outperform a broad-based index like the BSE Sensex.
So investors are left wondering if they weren't better off investing in the
index (i.e. an index fund) or a well-diversified equity fund. Of course, 1-Yr
is an abbreviated time frame for evaluating an equity fund (we prefer a
minimum 3-Yr time frame for this), but at Personalfn we have noticed that
most thematic funds under perform the index over longer time frames.
With regards to NFOs, we have a clear action plan for investors - avoid
NFOs, instead opt for well-managed, existing funds from that category (of
the NFO) with well-established track records over the long-term, especially
during a market downturn.
However, if the NFO offers something that no existing fund in the industry
does, then there is a case for considering it for investment. Or if an NFO
from a well-managed, process-driven fund house, is open for a limited time
period over which it will collect monies only up to a pre-determined ceiling
(like DSP ML Micro Cap Fund), then again there is a case for evaluating it
as a probable investment. Barring these exceptions, we are of the view
that an NFO must establish a track record over the long-term (at least 3
44
deploy all the funds in the market and the cash component does not yield
returns as high when compared to the stock markets. However, schemes
which have completed say over 6 months are better off as the fund
manager has already invested fully in the market and the investor reaps
the benefit of the boom conditions. The average return generated by
schemes which have completed six months but less than one year is
31.4%, which is quite similar to the oldies (funds having completed 3
years) which delivered an average 31.7% return.
The investor needs to act judiciously to take maximum advantage of the
booming stock markets. A fully invested portfolio is always better than
building a new one. The smart investor should give some time to the new
fund, follow a wait and watch strategy, compare the performance of the
NFO with similar existing funds and then switch to the new fund, it the
performance warrants.
Some of the Investors have the tendency to prefer a scheme that is
available at lower NAV compared to the one available at higher NAV.
Sometimes, they prefer a new scheme (NFO) which is issuing units at
Rs.10 whereas existing schemes in the same category are available at
much higher NAVs. Investors may please note that in case of mutual funds
schemes, lower or higher NAVs of similar type schemes of different mutual
funds have no relevance. On the other hand, investors should choose a
scheme based on its merit, considering performance track record of the
mutual fund, service standards, professional management, etc. This is
explained
in
an
example
given
below.
factor
for
decision
making
by
the
investor.
Absolute
3 Months
Scheme Name
Alliance Equity Fund
18.0545
- Growth
Reliance
Growth
Growth
15.5338
PRINCIPAL
Advantage
Growth
Sundaram
Select
10.2178
Midcap - Growth
Focussed
Fund
- 2.3958
48
49
of risk adjusted returns (when you take risk into account to evaluate
returns).
There are two broad ways you can invest in a mutual fund:
An outright payment or
A Systematic Investment Plan.
A SIP is nothing but a periodic investment that has to be done. The amount
stays fixed while you can select your duration -- it could be monthly or
quarterly. Let's say you commit to investing Rs 1,000 in your fund on the
10th of every month. At the end of a year, you would have invested Rs
12,000 in your fund. Let's say the Net Asset Value (price of a unit of a fund)
on the day you invest in the first month is Rs 20; you will get 50 units. The
next month, the NAV is Rs 25. You will get 40 units. The following month,
the NAV is Rs 18. You will get 55.56 units. So, after three months, you
would have 145.56 units. On an average, you would have paid around Rs
21 per unit. This is because, when the NAV is high, you get fewer units per
Rs 1,000. When the NAV falls, you get more units per Rs 1,000.
Assess yourself:
50
One first has to decide what he wants the money for and it is this investment
goal that should be the guiding light for all investments done. It is thus
important to know the risks associated with the fund and align it with the
quantum of risk one is willing to take. One should take a look at the portfolio of
the funds for the purpose. Excessive exposure to any specific sector should
be avoided, as it will only add to the risk of the entire portfolio. Mutual funds
invest with a certain ideology such as the "Value Principle" or "Growth
Philosophy". Both have their share of critics but both philosophies work for
investors of different kinds. Identifying the proposed investment philosophy of
the fund will give an insight into the kind of risks that it shall be taking in
future.
4.
51
This old age adage is of utmost importance. No matter what the risk profile of
a person is, it is always advisable to diversify the risks associated. So putting
ones money in different asset classes is generally the best option as it
averages the risks in each category. Thus, even investors of equity should be
judicious and invest some portion of the investment in debt. Diversification
even in any particular asset class (such as equity, debt) is good. Not all fund
managers have the same acumen of fund management and with identification
of the best man being a tough task, it is good to place money in the hands of
several fund managers. This might reduce the maximum return possible, but
will also reduce the risks.
6.
Be regular:
52
offered by all funds helps in being systematic. All that one needs to do is to
give post-dated cheques to the fund and thereafter one will not be harried
later. The Automatic investment Plans offered by some funds goes a step
further, as the amount can be directly/electronically transferred from the
account of the investor.
7.
Do your homework:
It is important for all investors to research the avenues available to them
irrespective of the investor category they belong to. This is important
because an informed investor is in a better decision to make right
decisions. Having identified the risks associated with the investment is
important and so one should try to know all aspects associated with it.
9.
53
Finding the right fund is important but even more important is to keep track
of the way they are performing in the market. If the market is beginning to
enter a bearish phase, then investors of equity too will benefit by switching
to debt funds as the losses can be minimized. One can always switch back
to equity if the equity market starts to show some buoyancy.
10.
They have all along assumed that if they are getting the units at par i.e.
Rs.10, they are getting it cheap. NAV merely represents the market value
of the portfolio. It is the book value. Thus when one invests in a mutual
fund one is buying the units at the book value which is Rs.10 for a NFO
and could be Rs.15 or Rs.20 or whatever for an existing scheme. The NAV
of an existing scheme is higher merely for the fact that its portfolio has
appreciated since the time it built its portfolio. Going forward, the returns
over a given period of time will be same from an existing portfolio (with a
higher NAV) and an identical new portfolio (with Rs.10 NAV). The earlier
appreciation of the old fund does not make it expensive vis--vis an NFO.
LET US LOOK AT AN EXAMPLE TO GET A BETTER FEEL OF THE
MATTER
Say a fund (Old Fund) was launched in Sept 2004. It raised a corpus of
Rs.1 crore and allotted 10 lakh units at Rs.10 each. The corpus of Rs.1
crore was invested equally i.e. Rs. 25 lakh each in Reliance, ONGC,
Infosys and Arvind Mills. Over the next 1-year i.e. till Sept 05 all these
share prices appreciated and the corpus became Rs.1.49 crores.
Accordingly the NAV of Old Fund now is Rs.14.9608. Assume that in Sept
05 a NFO is launched. It raises Rs.1 crore and allots 10 lakh units at Rs.10
each. It also invests in the same 4 shares viz. Reliance, ONGC, Infosys
and Arvind Mills. The amount to be invested in a particular share is in the
same % as in the Old Fund now (This is important, as we have to compare
the impact of NAV on the returns and not the impact of the portfolio). Now
we invest Rs.10,000 each in Old Fund and NFO. In Old Fund, we get
668.414 units @Rs.14.9608/unit. And in NFO we get 1000 units
@Rs.10/unit.
After one year in Sept 2006, due to appreciation in the share prices, the
corpus of Old Fund increases to Rs.1.74 crores and NAV to 17.4669. And
55
corpus of NFO increases to Rs.1.16 crores and NAV to 11.6751. But the
investment value in both cases would have increased to Rs.11, 675.
NAV: DOES SIZE MATTER?
NFOs (New Fund Offers) launched at an issue price of Rs 10 are
perceived to be a good investment opportunity by a large section of mutual
fund investors. Similarly, existing mutual funds with a lower NAV (Net Asset
Value) often appeal more to investors. But, neither approach to selecting a
mutual fund is right.
The following illustration will clearly establish the irrelevance of NAV while
making an investment decision.
Open-ended large cap equity funds NAV (Rs) 1-Yr (%)
Franklin Prima Plus (G)
146.17
43.57
138.10
39.09
84.51
38.67
74.42
37.63
Kotak 30 (G)
72.06
36.54
56
there is no correlation between the NAV and the performance of the mutual
fund.
It is evident that the fund's current NAV and its expected performance are
unrelated and therefore making an investment decision based on the NAV
would be misguided.
Therefore, the first the thing to keep in mind when investing in an
NFO is to understand very clearly that at par NAV has absolutely no
role to play in your future returns.
The following factors should be kept in mind before investing in NFOs:
Quality
of
the
portfolio
is
the
key
to
success.
57
Ideally the new fund should have something different to offer. Or at least it
should be a new scheme launched by an AMC you are comfortable with.
For example, when Standard Chartered launched a normal diversified
equity fund, when a 100 other similar funds were available; one could have
considered the same for investing, as it was the first diversified equity fund
from Standard Chartered. JM Equity and Derivative Fund, Benchmark Split
Capital Fund, a few Fund of Funds etc. are some of the examples of new
concepts.
Therefore, unless something different is offered it may be prudent to invest
in fund which already has a track record, you are aware of its portfolio, its
investment philosophy, its expenses, etc.
It makes no sense for an AMC, which is already managing a diversified
equity fund, to launch another diversified equity fund.
Does the NFO meet your investment?
We invest with some objective. Also, we all have our own individualistic risk
profile. It is, therefore, important to look at the NFO from these two
perspectives does it meet our investment objective and our risk profile.
It would be wrong and we may end up making a loss if we ignore these two
very basic investment tenets.
Just because it is a new offer you should not rush to invest it the scheme.
Study the objectives of the scheme. Ensure that it meets your investment
needs and the investment horizon. Look at the risk parameters. For
example, if you are not in a position to take risks it would not be correct to
invest in equity NFO.
The cost of issue expenses
Marketing a new issue entails substantial expenses for the AMC floating
the issueon ads, road shows, offer documents, the incentives to
58
distributors, among other things. Under Sebi rules, mutual funds can
charge up to 6% of NFO collections as marketing expenses to the scheme.
These expenses are written off from the NAV over a period of 5 years.
Considering the amounts NFOs have raised these expenses are quite
substantial. Say a scheme raises Rs 1000 crore (which has become quite
normal today). At 6% the issue expenses work out a whopping Rs 60
crore.
All these costs go to reduce your NAV. In an existing scheme, especially
those more than 5 years old, these expenses would have been written off.
Therefore, all things remaining same, the net returns from an NFO would
be lower to the extent it has to write-off the issue expenses, vis--vis an
existing scheme.
Concluding
Do not rush into an NFO. See that it meets your investment objects and
risk profile. Do not be misled by at par hype. See that is adds quality and
diversity to your portfolio.
59
We find ample proof for the wide prevalence of such a psychological state
among Mutual Fund (MF) investors in India. For instance, UTI had a
glorious past and had always been perceived as a safe, high yield
investment vehicle with the added tax benefit. Many UTI account holders
had justified their beliefs by staying invested in UTI schemes even after the
1999 bail out and many have still not lost faith in UTI, even after the July
2001 episode. Endowment Effect is explained by Thaler Kahneman and
Knetsch (1992) as People are more likely to believe that something
they own is better than something they do not own.
Now lets have a look at some Behavioral Finance studies that were
conducted specifically to judge investors perceptions, preferences,
attitudes and behavior towards mutual funds.
1. Ippolito (1992) says that fund/scheme selection by investors is
based on past performance of the funds and money flows into
winning funds more rapidly than they flow out of losing funds.
2. De Bondt and Thaler (1985) while investigating the possible
psychological basis for investor behavior, argue that mean reversion
in stock prices is an evidence of investor over reaction where
investors overemphasize recent firm performance in forming future
expectations. In India, one of the earliest attempts was made by
NCAER in 1964 when a survey of households was undertaken to
understand the attitude towards and motivation for saving of
individuals. Another NCAER study in 1996 analyzed the structure of
the capital market and presented the views and attitudes of
individual shareholders.
60
SEBI NCAER Survey (2000) was carried out to estimate the number of
households and the population of individual investors, their economic and
demographic profile, portfolio size, investment preference for equity as well
as other savings instruments. This is a unique and comprehensive study of
Indian Investors, for, data was collected from 3,00,0000 geographically
dispersed rural and urban households. Some of the relevant findings of the
study are : Households preference for instruments match their risk
perception; Bank Deposit has an appeal across all income class; 43% of
the non-investor households equivalent to around 60 million households
(estimated) apparently lack awareness about stock markets; and,
compared with low income groups, the higher income groups have higher
share of investments in Mutual Funds (MFs) signifying that MFs have still
not become truly the investment vehicle for small investors. Nevertheless,
the study predicts that in the next few years the investment of households
in MFs is likely to increase.
(Note: Behavior is a reaction to a situation. So as situation changes,
behavior gets modified. Hence, findings and predictions of behavior
studies should be viewed accordingly).
3. Madhusudhan V Jambodekar (1996) conducted a study to assess
the awareness of MFs among investors, to identify the information
sources influencing the buying decision and the factors influencing
the choice of a particular fund. The study reveals among other things
that Income Schemes and Open Ended Schemes are more
preferred than Growth Schemes and Close Ended Schemes during
the then prevalent market conditions. Investors look for safety of
Principal, Liquidity and Capital appreciation in the order of
importance; Newspapers and Magazines are the first source of
information
through
which
investors
61
get
to
know
about
- Negative
Positive +
"Savvy",convinced investor
10%
30%
Unaware, Disbelieving
60%
This shows we still dont have the largest investor class investing
today in Mutual Funds.
(NFOs), what to stay away from, and the nuances of mutual fund investing.
When new products are launched, fund houses and distributors alike share
several themes or marketing wisdom. The lay investor is obviously
bombarded with what we call as financial pornography.
62
63
Beneath the layer we could see that most of the fund houses were
adopting the "Make hay while the sun shines" approach and were
launching another ME-TOO scheme under the garb of fancy terms.
Exactly 1 year down the line, December 2006 factsheet of the Fund house
revealed the following
1.
2.
64
Take a look at the holdings and does anything seem radically different to
you. Now let's look at the return component from Feb 24, 2006 (the date of
first declaration of Advantage India NAV) till date.
Returns
Scheme
Date NAV Date NAV AbsoluteAnnualized
Name
HSBC
Advantage 25/01/0713.17624/02/0610.298 27.9502
30.4532
India (G)
HSBC
Equity
25/01/0773.60724/02/0654.353 35.4235
38.5958
Fund (G)
Open-ended
Arbitrage
Rs 25,000
Nil
Rs 10
Face Value
Exit 0.25%*
65
Load
Issue Opens September
15, Issue
October 13, 2006
2006
Closes
___________________________________________________________
* For investments less than Rs 5 m made during the NFO period, an exit
load of 0.25% will be charged on exit upto April 20, 2007. For investment of
Rs 5 m and above, there will be no exit load.
Investment
Objective*
To provide capital appreciation and regular income for unitholders by
identifying profitable arbitrage opportunities between the spot and
derivative market segments as also through investment of surplus cash in
debt and money market instruments.
Investment Strategy
SBI Arbitrage Opportunities Fund (SBI-AOF) is an open-ended equity
oriented fund based on the Arbitrage Strategy. The fund proposes to
capitalize on the arbitrage opportunities arising out of mis-pricing of stocks
in the equities and derivatives (Futures & Options) markets.
SBI-AOF seeks to exploit such mis-pricing opportunities and in the
absence of profitable arbitrage opportunities, the fund will hold its assets in
debt and money market instruments.
Besides adopting the most commonly used arbitrage strategy of
purchasing stocks in equity markets and simultaneously selling futures
contract of the same stocks, SBI-AOF will use other complex strategies as
permitted by SEBI
An important feature of an arbitrage strategy is that it can act as a
safeguard against market volatility as both the buying and selling legs
offset each other. The returns in an arbitrage transaction are locked at the
time of the transaction. In that respect, the fund offers a relatively low-risk
investment option for investors. Also simultaneous trades in different
markets increase the transaction cost considerably; this could have an
adverse impact on the returns of the fund.
Before investing in SBI-AOF or any other arbitrage fund, investors must
know that despite investing in both, equity and derivatives market, these
are not like conventional diversified equity funds. This is because the
returns generated by these funds are based purely on mis-pricing (across
markets) and not from investments in the cash market (which is how equity
funds generate a return). Therefore, expectations of returns from arbitrage
66
Portfolio Strategy
SBI-AOF is mandated to invest between 65%-85% in equity and equity
related instruments and derivatives.
Instruments
Allocation
Range
Equity and equity related instruments
65%-85%
65%-85%
67
Open-ended
equity
(Diversified)
Rs 5,000
Min.
Investment
Entry Load 2.25%*
Issue
Opens
September 29,
2006
CNX Midcap
Benchmark
Rs 10
Face Value
Exit
0.50%**
Load
Issue
October 16, 2006
Closes
Portfolio/Investmen
t Strategy
Instruments
Allocation Range
Equities and related securities that are not
part of the top 100 stocks by market capital
65%-100%
0%-35%
68
0%-25%
0%-10%
RESEARCH METHODOLOGY
The research is both qualitative and quantitative in its support. The
qualitative approach includes both, descriptive and inductive forms of
research, while as in case of quantitative approach, an extensive use of
the available literature has been made to carry out a detail research on the
nature of the problem. The data obtained from the study will be analyzed
by using Factor Analysis for identification of the key features preferred by
69
NATURE OF DATA:
The research is based on making use of both, the primary sources and the
secondary sources of data in eliciting information.
70
SAMPLE SIZE:
40
SURVEY AREA:
71
72
Question 4: NFOs are quite attractive than the old mutual funds.
What is your opinion?
Question 5: What are the major factors that influence you to invest in
mutual funds?
73
Interpretation: - Almost half of the sample was attracted towards the high
returns provided by the mutual funds. Some of the people especially
service class invested in mutual funds to claim the tax benefits. And very
few people considered MFs as a source of consistent income or less risky.
Question 6: On scale one to 10 (10 being the strongest) how much does
product qualities has a bearing on your selection of Fund/Scheme by
investors while investing in Mutual Fund /NFOs?
Interpretation: - The 10 fund related variables were analyzed for their
importance. The analysis reveals that the investor considers all the 10
variables as important in his selection of the fund/scheme. The weighted
mean value and scale importance is given below:
74
Management; A2 constituted
the
3rd factor
and
was
76
Interpretation: - With regard to the this question, almost all (i.e. 38 out of
the sample size 40) opined that when it comes to investment in life they
prefer bank deposits than any other financial instruments available in the
market. This may be because of dominance of middle class people in
Indian economy who are having a fixed salary and the amount of the
salary they are getting is little bit more than their necessities. Therefore, it
is understood that our respondents are not ready to invest in financial
instruments which are volatile in nature. Even if the return is low they
prefer financial instruments which are safe and not subject to market risks.
But the interesting fact is that even if the respondents preferred bank
deposits over other financial instruments, they are not uni- dimensional in
investments. Along with bank deposits majority of our respondents are
investors in stocks and shares. But still the concept of mutual funds is yet
to make its place.
77
Question 10: How Do You Perceive The Present Market Condition For
Investment?
78
Question 11: If you get a chance to invest in a NFO, then what kind of
Mutual Fund would you prefer?
79
CONCLUSION
This study has made an attempt to understand the financial behavior of MF
investors in connection with the scheme preference and selection. The
post survey developments are likely to have an influence on the findings.
Behavioral trends usually take time to stabilize and they get disturbed even
by a slight change in any of the influencing variables. Hence, surveys
similar to the present one need to be conducted at intervals to develop
useful models. The buying intent of a mutual fund product by a small
investor can be due to multiple reasons depending upon customers risk
return trade off. Due to the reduction in the bank interest rates and high
degree of volatility in Indian stock market, investors are looking for an
alternative for their small time investments which will provide them a higher
return and also safety to their investments. So mutual funds offer the best
alternative to the small investors in India. The factors identified in the study
provide key information inputs regarding investors preferences and
priorities that will guide future mutual fund product managers in designing
attractive mutual fund products for the Indian market.
Further, the investors loss of confidence in mutual funds since 2000, when
most of the schemes lost money, has been regained due to the good
performance from 2003 till now, and the past has been forgotten.
Increased retail investors seem to be investing largely through the mutual
fund route as total assets managed by mutual fund industry has grown by
62% in the last one year topping the Rs 2,50,000 crore mark as on April
end. The corpus of several existing schemes have increased manifold and
fund houses have raked in huge sums through new fund offers in the
recent past.
80
This indicates that investors have started realizing the important of mutual
funds as an investment avenue which offer everything an investor looks for
which includes convenience, transparency, professional management, risk
containment and above all - decent returns.
LIMITATIONS
There were certain limitations faced during the study.
Some people were not willing to disclose their investment profile
The area of sample was decided after taking into consideration the
major factors like
-
Availability of Investors
Approachability
BIBLIOGRAPHY
Ippolito, R., 1992, Consumer reaction to measures of poor quality :
Evidence from Mutual Funds, Journal of Law and Economics, 35,
45-70
De Bondt, W.F.M. and Thaler, R, 1985, Does the stock market over
react? Journal of Finance, 40, 793-805.
Madhusudan V. Jambodekar, 1996, Marketing Strategies of Mutual
Funds Current Practices and Future Directions, Working Paper,
UTI IIMB Centre for Capital Markets Education and Research,
Bangalore.
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REFERENCES
1. www.mutualfundsindia.com
2. www.amfiindia.com
3. http://www.moneycontrol.com/
4. http://ibnlive.in.com/news
5. http://www.google.co.in/
6. http://www.personalfn.com/
Annexure I Questionnaire
1. What age group do you belong to?
a. 20 30 yrs
b. 30 40 yrs
c. 40 60 yrs
d. 60 yrs or above
2. What is your occupation?
a. Own business/Self Employed
b. Service/Salaried
c. Retired
d. Any other, please specify.......
3. Do you invest in mutual funds?
a. Yes
b. No
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a. IT
b. Banking
c. Engineering and Infrastructure
d. Telecom
e. Power
f. Any other, please specify..........
9. As You Think About Investments, What Option Comes First In Your
Mind?
a. Equities, Debentures and Bonds
b. Mutual funds
c. Commodities
d. Bank Fixed Deposits
e. Any other, please specify ....................
10. How Do You Perceive The Present Market Condition For
Investment?
a. Very Conducive
b. Conducive
c. Not conducive at all
d. Can not say/ do not know
11. If you get a chance to invest in a NFO, then what kind of Mutual
Fund would you prefer? (Tick all Relevant)
a. Equity oriented fund
b. Income fund
c. Diversified fund
d. Tax saver fund
84
e. Balanced fund
f. Growth fund
g. Sector specific fund
h. Any other, please specify..........
85