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A report submitted to GALGOTIAS UNIVERSITY for the partial
Fulfillment of MBA Degree 2011-2013


Submitted By:


I Vishnu Dutt Sharma to declare that the Research project report entitled
TOPIC being submitted to the GALGOTIAS UNIVERSITY for the partial

fulfillment of the requirement for the degree of Master of Business

Administration is my own endeavors and it has not been submitted earlier to
any institution/university for any degree.


(Vishnu Dutt Sharma)

Table of Content


Mutual fund: Meaning and definition
Present Scenario
Role of Regulatory Bodies

Review of Literature

Research Methodology
Objective of the Research
Research Problem
Research Design
Sample and Data Collection

Performance Evaluation of Mutual Funds

Performance chart of different Bank
Selection of schemes

Findings and Suggestions







In pursuit of an PGDM Program, dissertation report is a critical component of the entire
learning experience that a B-School offers in terms of learning. These efforts are
individual, standing in isolation. Such individual efforts require three things for their
further development. These three things being Reason, Rationality and Self-Esteem.

The combination of these three basic traits delivers Productivity. However, time and
again this productivity requires encouragement and guidance.

Various wealth

management and investment banking has given me the opportunity to gain invaluable
experience under the guidance of my faculty guide
Their continuous support and cooperation along with their valuable in hand experience
about the Banking industry provided me with the conceptual understanding and practical
approach needed to work efficiently for this project.
I am also indebted to Mr. Md. Samshad Ahmad (Sales Manager HDFC Bank) for sharing
vital information critical to the accomplishment of the project objectives and providing
direction in pursuance of the project.
I would also like to thank my family and friends for the moral support I got from them
during my hectic schedule.
I hope this report reflecting my learning in the past eight weeks is as beneficial to the
organization as it has been to me. Again, I sincerely thank all of them.


This report gives an overview of Indian mutual fund industry, what mutual funds really
are and the regulatory framework of mutual funds in India. It briefly explains the
performance and progress of public sector and private sector mutual funds in India and
the various value added services offered by the fund houses to meet the changing
demands of the investor. The Indian mutual fund industry is poised to become one of the

largest and dominating constituent of the Indian financial service sector in the very near
future. The market is expected to grow at a CAGR of 40% and touch USD 500 bn by
2012. However, the industry faces a number of issues to reach the desired goal. This
report covers various issues and challenges in Indian mutual fund industry and deliberates
basis for this upbeat outlook.

Mutual Fund - Meaning & Concept

Investors are always in quest for finding new ways to generate optimal return from their
investments, and for such Investors stock markets provide a fair playing ground. Though
the stock market lures with enhanced return on investment, the inherent risk involved
keeps retail investors away from entering stock market. Large Investors having the risk
appetite can take head-on the stock market.
There must be some way for retail investors to enter the market for achieving that optimal
return and keeping the risk under control.
This led to invention of new concept in Financial Management. "Mutual Funds".
According to Invest India Economic Foundation, a Mutual Fund is a trust that pools
the savings of a number of investors who share a common financial goal. The money thus
collected is then invested in capital market instruments such as shares, debentures and
other securities. The income earned through these investments and the capital
appreciation realised are shared by its unit holders in proportion to the number of units
owned by them. Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost. According to AMFI It is a fund operated by a
professional investment firm that raises money from shareholders and invests it in a
variety of stocks, bonds, money market instruments, futures or commodities that meet the
investment objectives of the fund. Mutual funds allow investors to benefit from
professional management and asset diversification, for which a fee is charged.

A Mutual Fund is the ideal investment vehicle for todays complex and modern
financial scenario. Markets for equity shares, bonds and other fixed income
instruments, real estate, derivatives and other assets have become mature and
information driven. Price changes in these assets are driven by global events
occurring in faraway places. A typical individual is unlikely to have the knowledge,
skills, inclination and time to keep track of events, understand their implications and
act speedily. An individual also finds it difficult to keep track of ownership of his
assets, investments, brokerage dues and bank transactions etc.
A Mutual Fund is the answer to all these situations. It appoints professionally
qualified and experienced staff that manages each of these functions on a full time
basis. The large pool of money collected in the fund allows it to hire such staff at a
very low cost to each investor. In effect, the mutual fund vehicle exploits economies
of scale in all three areas - research, investments and transaction processing.

The flow chart below describes broadly the working of a mutual fund:
Mutual Fund Operation Flow Chart


Organization of Mutual Funds: There are many entities involved and the following
diagram illustrates the organizational set up of a mutual fund

The advantages of investing in a Mutual Fund according to IIEF are:

Diversification: The best mutual funds design their portfolios so individual

investments will react differently to the same economic conditions. For example,
economic conditions like a rise in interest rates may cause certain securities in a
diversified portfolio to decrease in value. Other securities in the portfolio will
respond to the same economic conditions by increasing in value. When a portfolio
is balanced in this way, the value of the overall portfolio should gradually increase
over time, even if some securities lose value.

Professional Management: Most mutual funds pay topflight professionals to

manage their investments. These managers decide what securities the fund will
buy and sell.

Regulatory oversight: Mutual funds are subject to many government regulations

that protect investors from fraud.

Liquidity: It's easy to get your money out of a mutual fund. Write a check, make
a call, and you've got the cash.

Convenience: You can usually buy mutual fund shares by mail, phone, or over
the Internet.

Low cost: Mutual fund expenses are often no more than 1.5 percent of your
investment. Expenses for Index Funds are less than that, because index funds are
not actively managed. Instead, they automatically buy stock in companies that are
listed on a specific index

Transparency: Mutual funds NAVs are published on AMFI website and the
websites of respective Mutual funds on daily basis.

Flexibility: Mutual funds offer varied flexibility of investing in bond market,

money market, stock market and so on.

Choice of schemes: Mutual funds offer various schemes. for e.g. Standard
Charted offers schemes which invests in IPO, debt market, equity linkage etc.

Tax benefits: Mutual funds offer tax benefits if lock-in period is of minimum 3

Growth in asset under management (AUM)

Present Scenario:
The Indian mutual funds industry is booming as the number of players is on the rise and
products are being rolled out by the dozen. Indian mutual funds (MFs) have rewarded
their investors better than any other funds in world. According to a report by Lipper, a
leading market research agency, Indian funds have grabbed eight of the top 10 ranks over
a 10-year period. If one takes the last five years, they account for seven of the top 10 and
over a 3-year period, six of the 10 best performing mutual funds are from India.
However this is in the medium and long term segments. If one takes a short-term view,
there is no Indian fund among the top 10 global performers over last year (November 1,
2006 to October 31, 2007) under preview. This is despite the fact that the last twelve
months have been among the best periods ever for Indian markets, with the Bombay
Index (sensex) rising by 64.2%.
As of today the size of the asset under management (AUM) in India is $68 billion
against the country's GDP of $ 780 billion. In some developed economies AUM size is
close to the GDP figure. This clearly shows the further scope for growth. If you take the
last four year period (January 2003-007) the AUM of the mutual fund industry has risen
substantially about 277%.
The MF sector has 30 active players and they have mopped up nearly $8 billion through
equity mutual fund schemes. Market pundits expect that this will further grow to $ 10-12

billion. Thirty-eight new equity schemes were launched in 2006 and garnered around
$6.3 billion. New categories of funds, like capital protection-oriented funds and equity
derivative funds were launched.
In calendar year 2006, the total AUM of mutual funds grew 6.47 percent to cross the $68
billion. The MF industry had achieved this landmark first in August 2006 according to
the data released by Association of Mutual Funds in India (AMFI).
While, the Securities and Exchange Board of India (SEBI) has already made few
amendments for launch of gold exchange-traded funds, whereby investors can trade in
gold as any other instrument, it is likely to take a final call on realty funds as well.
Consolidation and growth
The MF industry has been seeing few consolidations. With the Indian MF industry
witnessing sustained high growth, it is natural that the foreign players are eyeing the huge
Indian opportunity. It is likely to get further boost with major players like AIG, Japanese
Shinsai Bank and Nikko AMC planning to set shops in the country. Indian MF market is
expected to witness the entry of more global mutual funds in 2008.
Five leading global asset management companies are planning to enter India's mutual
fund industry in the face of the spectacular 65 per cent growth in 2006. American
International Group (AIG), JP Morgan, AXA Investment, Korean financial services major
Mirage Asset Group and a Japanese company are planning to foray into the MF business
in India in 2008. "This year at least four to five international players should come in. The
more the merrier," AMFI Chairman A.P. Kurien said in a statement.
Existing foreign funds like Franklin Templeton, Merrill Lynch, Fidelity and HSBC made
good returns in 2006. Out of 30 AMCs in the country now, nine are predominantly
controlled by global players.
The non-resident Indians (NRIs) have also increased their exposure in the Indian mutual
fund industry by 30 times in the past four years. While the NRI share in total AUM in
January 2003 stood at $102 million, in January 2007, the figure rose to $3.1 billion,
according to industry estimates. In percentage terms, the NRI share has risen from 0.5%
to more than 4%.
The Reserve Bank of India (RBI) has recently hiked the investment limit of mutual funds
in foreign equity and debt instruments from the current US$ 2 billion to US$ 3 billion.

This is a reform step. Domestic mutual funds are yet to even come near the existing limit
of $ 2 billion as the Indian markets currently look to be more attractive.
The mutual fund (MF) industry is seeking to get tax relief on debt schemes and a solution
to the issue of treating Fund of Funds (FoF) schemes on par with equity schemes from
this Budget. The decisions, it expects, will boost retail participation in these schemes. The
debt-oriented mutual fund schemes, at present, pay around 12.5 per cent and institutional
investors pay 23 per cent distribution tax plus surcharge and cess on the premium they
earn on their investment, while equity-oriented schemes are exempt from these taxes.
The industry in its wish list, which it submitted to

the finance ministry, sought

nullification or reduction of this tax. The industry expects the government to take a call
on this issue. If the tax limit is brought down, the industry will be able to attract far more
retail investments that, at present, go to conventional investment sources.
Stay invested
If the market remains subdued in 2007, returns from the equity schemes may narrow
down, but it still will be nearly 20 percent, predicts market analysts. With new products,
as many as 54,000 distributors (including 80 banks), retail investors are clearly swarming
in large numbers to invest in mutual funds. AMFI believes this trend will reinforce itself
as innovative products woven around commodities, and even real estate, make their entry
in the coming days.
A total of 13 new fund houses are either waiting for SEBI's approval or have plans to
enter the Indian mutual fund market. According to Lipper The best performer over the
five and ten-year period is Reliance Growth Fund, which has given a compounded annual
return of 71.38% and 35.21% respectively against the sensex's improvement of 34.10%
and 15.14% respectively.
According to observers, the growth in MF has been spectacular so far and the bottom line
and top line of the industry is attractive. With more players entering the market, the
industry is expected to grow 23% to 24% a year. The yields are good. The AUM will
witness tremendous growth.

Assets Under Management (AUM) as at the end of Jan-2007 (Rs in Lakhs)


Mutual Fund Name

1. ABN AMRO Mutual Fund
2. AIG Global Investment Group Mutual
3. Benchmark Mutual Fund
4. Birla Sun Life Mutual Fund
5. BOB Mutual Fund
6. Canbank Mutual Fund
7. DBS Chola Mutual Fund
8. Deutsche Mutual Fund
9. DSP Merrill Lynch Mutual Fund
10. Escorts Mutual Fund
11. Fidelity Mutual Fund
12. Franklin Templeton Mutual Fund
13. HDFC Mutual Fund
14. HSBC Mutual Fund
15. ING Vysya Mutual Fund
16. JM Financial Mutual Fund
17. JPMorgan Mutual Fund
18. Kotak Mahindra Mutual Fund
19. LIC Mutual Fund
20. Lotus India Mutual Fund
21. Morgan Stanley Mutual Fund
22. PRINCIPAL Mutual Fund
23. Prudential ICICI Mutual Fund
24. Quantum Mutual Fund
25. Reliance Mutual Fund
26. Sahara Mutual Fund
27. SBI Mutual Fund
28. Standard Chartered Mutual Fund
29. Sundaram BNP Paribas Mutual Fund
30. Tata Mutual Fund
31. Taurus Mutual Fund
32. UTI Mutual Fund
Grand Total

Average AUM For The Month
Excluding Fund
Excluding Fund
Fund Of Funds
Fund Of Funds
Of Funds
Of Funds





Role of regulatory Bodies:

The Association of Mutual Funds in India (AMFI) is dedicated to developing
the Indian Mutual Fund Industry on professional, healthy and ethical lines and to

enhance and maintain standards in all areas with a view to protecting and
promoting the interests of mutual funds and their unit holders.
To define and maintain high professional and ethical standards in all areas of operation of
mutual fund industry.
To recommend and promote best business practices and code of conduct to be
followed by members and others engaged in the activities of mutual fund and
asset management including agencies connected or involved in the field of capital
markets and financial services.
To interact with the Securities and Exchange Board of India (SEBI) and to
represent to SEBI on all matters concerning the mutual fund industry.
To represent to the Government, Reserve Bank of India and other bodies on all
matters relating to the Mutual Fund Industry.
To develop a cadre of well trained Agent distributors and to implement a
programme of training and certification for all intermediaries and other engaged
in the industry.
To undertake nation wide investor awareness programme so as to promote proper









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

research directly and/or in association with other bodies.
Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI
are to protect the interest of investors in securities and to promote the development of
and to regulate the securities market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual
funds to protect the interest of the investors. SEBI notified regulations for the mutual
funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed
to enter the capital market. The regulations were fully revised in 1996 and have been

amended thereafter from time to time. SEBI has also issued guidelines to the mutual
funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities
including those promoted by foreign entities are governed by the same set of
Regulations. There is no distinction in regulatory requirements for these mutual
funds and all are subject to monitoring and inspections by SEBI. The risks
associated with the schemes launched by the mutual funds sponsored by these
entities are of similar type.

Broad Guidelines Issued by SEBI for Mutual Funds in India

SEBI has the following broad guidelines pertaining to mutual funds:
Mutual funds should be formed as a Trust under Indian Trust Act and should be
operated by Asset Management Companies (AMCs).
Mutual funds need to set up a Board of Trustees and Trustee Companies. They
should also have their Board of Directors.
The net worth of the AMCs should be at least Rs.5 crore.
AMCs and Trustees of a MF should be two separate and distinct legal entities.
The AMC or any of its companies cannot act as managers for any other fund.
AMCs have to get the approval of SEBI for its Articles and Memorandum of
All Mutual fund schemes should be registered with SEBI.
Mutual funds should distribute minimum of 90% of their profits among the
According to SEBI (Securities and Exchange Board of India), following information
is available with regard to mutual funds:


Different investment avenues are available to investors. Mutual funds also offer good
investment opportunities to the investors. Like all investments, they also carry certain
risks. The investors should compare the risks and expected yields after adjustment of tax
on various instruments while taking investment decisions. The investors may seek advice
from experts and consultants including agents and distributors of mutual funds schemes
while making investment decisions.
With an objective to make the investors aware of functioning of mutual funds, an attempt
has been made to provide information in question-answer format which may help the
investors in taking investment decisions.
What is the history of Mutual Funds in India and role of SEBI in mutual funds
Unit Trust of India was the first mutual fund set up in India in the year 1963. In early
1990s, Government allowed public sector banks and institutions to set up mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The
objectives of SEBI are to protect the interest of investors in securities and to promote
the development of and to regulate the securities market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual
funds to protect the interest of the investors. SEBI notified regulations for the mutual
funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed
to enter the capital market. The regulations were fully revised in 1996 and have been
amended thereafter from time to time. SEBI has also issued guidelines to the mutual
funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities including
those promoted by foreign entities are governed by the same set of Regulations. There is
no distinction in regulatory requirements for these mutual funds and all are subject to


monitoring and inspections by SEBI. The risks associated with the schemes launched by
the mutual funds sponsored by these entities are of similar type.

How is a mutual fund set up?

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
Management Company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unit holders. Asset Management Company
(AMC) approved by SEBI manages the funds by making investments in various types of
securities. Custodian, who is registered with SEBI, holds the securities of various
schemes of the fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance and compliance
of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or
board of trustees must be independent i.e. they should not be associated with the
sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are
required to be registered with SEBI before they launch any scheme.
What is Net Asset Value (NAV) of a scheme?
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value
Mutual funds invest the money collected from the investors in securities markets. In
simple words, Net Asset Value is the market value of the securities held by the scheme.
Since market value of securities changes every day, NAV of a scheme also varies on day
to day basis. The NAV per unit is the market value of securities of a scheme divided by
the total number of units of the scheme on any particular date. For example, if the market
value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has

issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is
Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or
weekly - depending on the type of scheme.

What are the different types of mutual fund schemes?

Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on
a continuous basis. These schemes do not have a fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value (NAV) related prices which are
declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is
open for subscription only during a specified period at the time of launch of the scheme.
Investors can invest in the scheme at the time of the initial public issue and thereafter
they can buy or sell the units of the scheme on the stock exchanges where the units are
listed. In order to provide an exit route to the investors, some close-ended funds give an
option of selling back the units to the mutual fund through periodic repurchase at NAV
related prices. SEBI Regulations stipulate that at least one of the two exit routes is
provided to the investor i.e. either repurchase facility or through listing on stock
exchanges. These mutual funds schemes disclose NAV generally on weekly basis.


Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as follows:

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their corpus in equities. Such funds
have comparatively high risks. These schemes provide different options to the investors
like dividend option, capital appreciation, etc. and the investors may choose an option
depending on their preferences. The investors must indicate the option in the application
form. The mutual funds also allow the investors to change the options at a later date.
Growth schemes are good for investors having a long-term outlook seeking appreciation
over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky
compared to equity schemes. These funds are not affected because of fluctuations in
equity markets. However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of change in interest rates in the
country. If the interest rates fall, NAVs of such funds are likely to increase in the short run
and vice versa. However, long term investors may not bother about these fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes
invest both in equities and fixed income securities in the proportion indicated in their

offer documents. These are appropriate for investors looking for moderate growth. They
generally invest 40-60% in equity and debt instruments. These funds are also affected
because of fluctuations in share prices in the stock markets. However, NAVs of such
funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation
of capital and moderate income. These schemes invest exclusively in safer short-term
instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money, government securities, etc. Returns on these schemes fluctuate much
less compared to other funds. These funds are appropriate for corporate and individual
investors as a means to park their surplus funds for short periods.
Gilt Fund
These funds invest exclusively in government securities. Government securities have no
default risk. NAVs of these schemes also fluctuate due to change in interest rates and
other economic factors as is the case with income or debt oriented schemes.
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
weightage 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.


What are sector specific funds/schemes?

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 need to
keep a watch on the performance of those sectors/industries and must exit at an
appropriate time. They may also seek advice of an expert.
What is Tax Saving Schemes?
These schemes offer tax rebates to the investors under specific provisions of the Income
Tax Act, 1961 as the Government offers tax incentives for investment in specified
avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the
mutual funds also offer tax benefits. These schemes are growth oriented and invest predominantly in equities. Their growth opportunities and risks associated are like any
equity-oriented scheme.
What is a Fund of Funds (FoF) scheme?
A scheme that invests primarily in other schemes of the same mutual fund or other
mutual funds is known as a FoF scheme. An FoF scheme enables the investors to achieve
greater diversification through one scheme. It spreads risks across a greater universe.
What is a Load or no-load Fund?
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time
one buys or sells units in the fund, a charge will be payable. This charge is used by the
mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10.
If the entry as well as exit load charged is 1%, then the investors who buy would be
required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund
will get only Rs.9.90 per unit. The investors should take the loads into consideration

while making investment as these affect their yields/returns. However, the investors
should also consider the performance track record and service standards of the mutual
fund which are more important. Efficient funds may give higher returns in spite of loads.
A no-load fund is one that does not charge for entry or exit. It means the investors can
enter the fund/scheme at NAV and no additional charges are payable on purchase or sale
of units.
Can a mutual fund impose fresh load or increase the load beyond the level
mentioned in the offer documents?
Mutual funds cannot increase the load beyond the level mentioned in the offer document.
Any change in the load will be applicable only to prospective investments and not to the
original investments. In case of imposition of fresh loads or increase in existing loads, the
mutual funds are required to amend their offer documents so that the new investors are
aware of loads at the time of investments.
What is a sale or repurchase/redemption price?
The price or NAV a unit holder is charged while investing in an open-ended scheme is
called sales price. It may include sales load, if applicable.
Repurchase or redemption price is the price or NAV at which an open-ended scheme
purchases or redeems its units from the unit holders. It may include exit load, if
What is an assured return scheme?
Assured return schemes are those schemes that assure a specific return to the unitholders
irrespective of performance of the scheme.
A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor
or AMC and this is required to be disclosed in the offer document.


Investors should carefully read the offer document whether return is assured for the entire
period of the scheme or only for a certain period. Some schemes assure returns one year
at a time and they review and change it at the beginning of the next year.
Can a mutual fund change the asset allocation while deploying funds of investors?
Considering the market trends, any prudent fund managers can change the asset
allocation i.e. he can invest higher or lower percentage of the fund in equity or debt
instruments compared to what is disclosed in the offer document. It can be done on a
short term basis on defensive considerations i.e. to protect the NAV. Hence the fund
managers are allowed certain flexibility in altering the asset allocation considering the
interest of the investors. In case the mutual fund wants to change the asset allocation on a
permanent basis, they are required to inform the unitholders and giving them option to
exit the scheme at prevailing NAV without any load.
How to invest in a scheme of a mutual fund?
Mutual funds normally come out with an advertisement in newspapers publishing the
date of launch of the new schemes. Investors can also contact the agents and distributors
of mutual funds who are spread all over the country for necessary information and
application forms. Forms can be deposited with mutual funds through the agents and
distributors who provide such services. Now a days, the post offices and banks also
distribute the units of mutual funds. However, the investors may please note that the
mutual funds schemes being marketed by banks and post offices should not be taken as
their own schemes and no assurance of returns is given by them. The only role of banks
and post offices is to help in distribution of mutual funds schemes to the investors.
Investors should not be carried away by commission/gifts given by agents/distributors for
investing in a particular scheme. On the other hand they must consider the track record of
the mutual fund and should take objective decisions.
Can non-resident Indians (NRIs) invest in mutual funds?


Yes, non-resident Indians can also invest in mutual funds. Necessary details in this
respect are given in the offer documents of the schemes.
How much should one invest in debt or equity oriented schemes?
An investor should take into account his risk taking capacity, age factor, financial
position, etc. As already mentioned, the schemes invest in different type of securities as
disclosed in the offer documents and offer different returns and risks. Investors may also
consult financial experts before taking decisions. Agents and distributors may also help in
this regard.
How to fill up the application form of a mutual fund scheme?
An investor must mention clearly his name, address, number of units applied for and such
other information as required in the application form. He must give his bank account
number so as to avoid any fraudulent encashment of any cheque/draft issued by the
mutual fund at a later date for the purpose of dividend or repurchase. Any changes in the
address, bank account number, etc at a later date should be informed to the mutual fund
What should an investor look into an offer document?
An abridged offer document, which contains very useful information, is required to be
given to the prospective investor by the mutual fund. The application form for
subscription to a scheme is an integral part of the offer document. SEBI has prescribed
minimum disclosures in the offer document. An investor, before investing in a scheme,
should carefully read the offer document. Due care must be given to portions relating to
main features of the scheme, risk factors, initial issue expenses and recurring expenses to
be charged to the scheme, entry or exit loads, sponsors track record, educational
qualification and work experience of key personnel including fund managers,
performance of other schemes launched by the mutual fund in the past, pending
litigations and penalties imposed, etc.


When will the investor get certificate or statement of account after investing in a
mutual fund?
Mutual funds are required to despatch certificates or statements of accounts within six
weeks from the date of closure of the initial subscription of the scheme. In case of closeended schemes, the investors would get either a demat account statement or unit
certificates as these are traded in the stock exchanges. In case of open-ended schemes, a
statement of account is issued by the mutual fund within 30 days from the date of closure
of initial public offer of the scheme. The procedure of repurchase is mentioned in the
offer document.
How long will it take for transfer of units after purchase from stock markets in case
of close-ended schemes?
According to SEBI Regulations, transfer of units is required to be done within thirty days
from the date of lodgment of certificates with the mutual fund.
As a unit holder, how much time will it take to receive dividends/repurchase
A mutual fund is required to dispatch to the unit holders the dividend warrants within 30
days of the declaration of the dividend and the redemption or repurchase proceeds within
10 working days from the date of redemption or repurchase request made by the unit
In case of failures to dispatch the redemption/repurchase proceeds within the stipulated
time period, Asset Management Company is liable to pay interest as specified by SEBI
from time to time (15% at present).
Can a mutual fund change the nature of the scheme from the one specified in the
offer document?
Yes. However, no change in the nature or terms of the scheme, known as fundamental
attributes of the scheme e.g. structure, investment pattern, etc. can be carried out unless a

written communication is sent to each unit holder and an advertisement is given in one
English daily having nationwide circulation and in a newspaper published in the language
of the region where the head office of the mutual fund is situated. The unit holders have
the right to exit the scheme at the prevailing NAV without any exit load if they do not
want to continue with the scheme. The mutual funds are also required to follow similar
procedure while converting the scheme form close-ended to open-ended scheme and in
case of change in sponsor.
How will an investor come to know about the changes, if any, which may occur in
the mutual fund?
There may be changes from time to time in a mutual fund. The mutual funds are required
to inform any material changes to their unit holders. Apart from it, many mutual funds
send quarterly newsletters to their investors.
At present, offer documents are required to be revised and updated at least once in two
years. In the meantime, new investors are informed about the material changes by way of
addendum to the offer document till the time offer document is revised and reprinted.
How to know the performance of a mutual fund scheme?
The performance of a scheme is reflected in its net asset value (NAV) which is disclosed
on daily basis in case of open-ended schemes and on weekly basis in case of close-ended
schemes. The NAVs of mutual funds are required to be published in newspapers. The
NAVs are also available on the web sites of mutual funds. All mutual funds are also
required to put their NAVs on the web site of Association of Mutual Funds in India
(AMFI) and thus the investors can access NAVs of all mutual funds
at one place
The mutual funds are also required to publish their performance in the form of half-yearly
results which also include their returns/yields over a period of time i.e. last six months, 1
year, 3 years, 5 years and since inception of schemes. Investors can also look into other


details like percentage of expenses of total assets as these have an affect on the yield and
other useful information in the same half-yearly format.
The mutual funds are also required to send annual report or abridged annual report to the
unitholders at the end of the year.
Various studies on mutual fund schemes including yields of different schemes are being
published by the financial newspapers on a weekly basis. Apart from these, many
research agencies also publish research reports on performance of mutual funds including
the ranking of various schemes in terms of their performance. Investors should study
these reports and keep themselves informed about the performance of various schemes of
different mutual funds.
Investors can compare the performance of their schemes with those of other mutual funds
under the same category. They can also compare the performance of equity oriented
schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.
On the basis of performance of the mutual funds, the investors should decide when to
enter or exit from a mutual fund scheme.
How to know where the mutual fund scheme has invested money mobilized from the
The mutual funds are required to disclose full portfolios of all of their schemes on halfyearly basis which are published in the newspapers. Some mutual funds send the
portfolios to their unit holders.
The scheme portfolio shows investment made in each security i.e. equity, debentures,
money market instruments, government securities, etc. and their quantity, market value
and % to NAV. These portfolio statements also required to disclose illiquid securities in
the portfolio, investment made in rated and unrated debt securities, non-performing assets
(NPAs), etc.


Some of the mutual funds send newsletters to the unit holders on quarterly basis which
also contain portfolios of the schemes.
Is there any difference between investing in a mutual fund and in an initial public
offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at lower or higher price than the
issue price depending on market sentiment and perception of investors. However, in the
case of mutual funds, the par value of the units may not rise or fall immediately after
allotment. A mutual fund scheme takes some time to make investment in securities. NAV
of the scheme depends on the value of securities in which the funds have been deployed.
If schemes in the same category of different mutual funds are available, should one
choose a scheme with lower NAV?
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
which is issuing units at Rs. 10 whereas the 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.
Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both
schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the
two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in
scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform
equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs.
16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be
Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in
scheme B (100*99). The investor would get the same return of 10% on his investment in
each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher

or lower number of units within the amount an investor is willing to invest, should not be
the factors for making investment decision. Likewise, if a new equity oriented scheme is
being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a
factor for decision making by the investor. Similar is the case with income or debtoriented schemes.
On the other hand, it is likely that the better managed scheme with higher NAV may give
higher returns compared to a scheme which is available at lower NAV but is not managed
efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher
NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore,
the investor should give more weight age to the professional management of a scheme
instead of lower NAV of any scheme. He may get much higher number of units at lower
NAV, but the scheme may not give higher returns if it is not managed efficiently.
Are the companies having names like mutual benefit the same as mutual funds
Investors should not assume some companies having the name "mutual benefit" as
mutual funds. These companies do not come under the purview of SEBI. On the other
hand, mutual funds can mobilize funds from the investors by launching schemes only
after getting registered with SEBI as mutual funds.
Is the higher net worth of the sponsor a guarantee for better returns?
In the offer document of any mutual fund scheme, financial performance including the
net worth of the sponsor for a period of three years is required to be given. The only
purpose is that the investors should know the track record of the company which has
sponsored the mutual fund. However, higher net worth of the sponsor does not mean that
the scheme would give better returns or the sponsor would compensate in case the NAV
Where can an investor look out for information on mutual funds?


Almost all the mutual funds have their own web sites. Investors can also access the
NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association
of mutual funds in India (AMFI) AMFI has also published useful
literature for the investors.
Investors can log on to the web site of SEBI and go to "Mutual Funds"
section for information on SEBI regulations and guidelines, data on mutual funds, draft
offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual
reports of SEBI available on the web site, a lot of information on mutual funds is given.
There are a number of other web sites which give a lot of information of various schemes
of mutual funds including yields over a period of time. Many newspapers also publish
useful information on mutual funds on daily and weekly basis. Investors may approach
their agents and distributors to guide them in this regard.
Can an investor appoint a nominee for his investment in units of a mutual fund?
Yes. The nomination can be made by individuals applying for / holding units on their own
behalf singly or jointly.

Non-individuals including society, trust, body corporate,

partnership firm, Karta of Hindu Undivided Family, holder of Power of Attorney cannot
If mutual fund scheme is wound up, what happens to money invested?
In case of winding up of a scheme, the mutual funds pay a sum based on prevailing NAV
after adjustment of expenses. Unitholders are entitled to receive a report on winding up
from the mutual funds which gives all necessary details.
How can the investors redress their complaints?
Investors would find the name of contact person in the offer document of the mutual fund
scheme that they may approach in case of any query, complaints or grievances. Trustees
of a mutual fund monitor the activities of the mutual fund. The names of the directors of
asset Management Company and trustees are also given in the offer documents. Investors

should approach the concerned Mutual Fund / Investor Service Centre of the Mutual
Fund with their complaints,
What is the procedure for registering a mutual fund with SEBI?
An applicant proposing to sponsor a mutual fund in India must submit an application in
Form A along with a fee of Rs.25, 000. The application is examined and once the sponsor
satisfies certain conditions such as being in the financial services business and possessing
positive net worth for the last five years, having net profit in three out of the last five
years and possessing the general reputation of fairness and integrity in all business
transactions, it is required to complete the remaining formalities for setting up a mutual
fund. These include inter alia, executing the trust deed and investment management
agreement, setting up a trustee company/board of trustees comprising two- thirds
independent trustees, incorporating the asset management company (AMC), contributing
to at least 40% of the net worth of the AMC and appointing a custodian. Upon satisfying
these conditions, the registration certificate is issued subject to the payment of
registration fees of Rs.25.00 lacs For details, see the SEBI (Mutual Funds) Regulations,

Review of Literature
Studies undertaken by various scholars and researchers reveals that mutual funds is a
trust that pools the savings which are further invested into capital market instruments
such as shares, debentures and other securities and since most of the capital market
instruments, not all , have an element of risk so it very difficult to evaluate the
performance of various schemes .Various research papers have been written while
considering the performance evaluation criteria into mind which have been discussed in
the coming paragraphs


According to Bijan Roy & Saikat Sovan Deb 1 when the beta of the fund is conditioned
to lagged economic information variables (interest rates, dividend yields, term structure
yield spread and a dummy for April-effect), the fund performance does not change
appreciably. However, when fund alpha is also controlled for these information variables
the fund performance on an average becomes significantly negative. Thus, showing that
on an average the Indian mutual fund managers only capture the opportunities from the
available economic information, they do not contribute anything beyond it. They have
also examined the evidence of persistence in the performance of the Indian mutual funds.
Their approach to measure performance persistence is based on cross-sectional
regressions of future excess returns on a measure of past fund performance. Both
unconditional and conditional measures of performance were used as measure of past
fund performance. According to the findings of their study it was being evidenced that
conditional measures of past fund performance predict the future fund returns
significantly. Also, they found that between the two different conditional measures of past
performance, time-varying conditional alpha is found to be a better measure in indicating
persistence in performance of Indian mutual funds.
One of the most important developments in the field of finance during last forty years is
the mutual fund performance evaluation technique. The traditional techniques use the
unconditional moments of the returns. Such techniques cannot capture the time-varying
element of expected return
Bijan Roy & Saikat Sovan Deb2 have examined the effect of incorporating lagged
information variables(T-bill yield, dividend yields, term structure yield spread and a
dummy for April-effect) into the evaluation of mutual fund managers' performance using
conditional performance evaluation technique designed by Ferson and Schadt (96) .

1 Conditional Alpha and Performance Persistence for Indian Mutual Funds:

Empirical Evidence - ICFAI Journal of Applied Finance, pp. 30-48, January
2 The Conditional Performance of Indian Mutual Funds: An Empirical Study-Working Paper, Dec 2003


The findings of the research suggests that the use of conditioning lagged information
variables improves the performance of the mutual fund schemes, causing the alphas to
shift towards the right and reducing the number of negative timing coefficients. They
have also studied the impact of the tech rally( Major event in the history of Indian capital
market from 1999 to 2001) in the conditional models by introducing a dummy variable
indicating the period of rally in tech stocks. Finally, they found managers' performance as
well as timing skill worsens with the inclusion of this dummy.
Passive investment management has become an important component of the investment
management industry. The responsibility of the index fund managers is to deliver risk and
return same as the underlying index. Many factors impact investment performance. Some
of these factors lie outside the sphere of influence of the fund manager. For a
comprehensive assessment of fund performance and follow up, it has become necessary
to identify the causes and attribute components of fund performance to these causes.
Attribution analysis plays a crucial role in identifying factors controllable by the fund
manager and in computing the part of fund performance arising out of managing these
factors. While significant attention has been paid to performance attribution in equity and
income funds, research relating to the same in the index fund domain is scarce.
According to G. Sethu & Rachana Baid findings 3 significant contribution to index fund
tracking error may arise from factors that are not under index fund manager's control and
also tracking error is not neutral to some of the factors.
Banikanta Mishra & Mahmud Rahman4 have developed measures of evaluating
portfolio-performance based on LPM (Lower-Partial-Moment). According to them, the
three traditional measures by Treynor, Sharpe, and Jensen are based on the MeanVariance (M-V) rule are valid only when the distribution of asset returns is characterized
by spherical symmetry to which class normal and similar distributions belong. From the
LPM perspective, risk has been measured by taking into account only those states in
3 Index Funds Performance -Some insights- Capital Market Conference 02 Proceedings
4 Measuring Mutual Fund Performance using Lower Partial Moment- Capital Market Conference 2002



which return is below a pre-specified "target rate", like risk-free rate, and capturing the
extent to which it is below. They have also provided a new way to evaluate the
performance of a portfolio, which is similar to the M2 [Modigliani-Modigliani] approach,
but differs from it in an important way.
Despite of lot of research being done on the mutual funds, there has not been any fixed
criteria for evaluating the performance of the mutual funds , there is still lot of research
that needs to be done keeping in view changing investment pattern of the investors
,increasing market risk and various other factors linked with the mutual fund industry.

According to Dhirendra Garg- Impact on Mutual Funds Industry with respect

to Union Budget 2006-07 are:

Key Announcements:
Ceiling on aggregate investments by mutual funds in overseas instruments to be
raised from $ 1 billion to $ 2 billion with removal of requirement of 10%
reciprocal shareholding.
Limited number of qualified Indian mutual funds to be allowed to invest,
cumulatively up to $ 1 billion, in overseas exchange traded funds.
An investor protection fund to be setup under the aegis of SEBI.
RBIs anonymous electronic order matching trading module (NDS-OM) on its
Negotiated Dealing System to be extended to qualified mutual funds, provident
funds and pension funds.
Steps to be taken to create a single, unified, exchange-traded market for corporate
Increase of 25 per cent, across the board, on all rates of STT.
Investments in fixed deposits in scheduled banks for a term of not less than five
years included in section 80C of the Income tax Act.
Limit of Rs.10, 000 in respect of contribution to certain pension funds removed in
section 80CCC subject to overall ceiling of Rs.100, 000
5, 2007


Definition of open-ended equity-oriented schemes of mutual funds in the Income

tax Act aligned with the definition adopted by SEBI.
Open-ended equity-oriented schemes and close-ended equity oriented schemes to
be treated on par for exemption from dividend distribution tax.
According to Dhirendra Garg, Implications For Mutual Fund Industry are:
The Union Budget 06 moved on predictable and there were some sops for the mutual
fund industry as well. The dividends from MF units continue to be tax-free for its
investors. Debt-oriented Mutual Funds schemes continue to pay distribution tax
amounting to 12.5 percent on the dividends declared, while equity-oriented mutual funds
schemes will not be required to pay distribution tax. Long-term capital gains tax on
equity funds remains nil while for debt funds it would be taxed at the prevailing rates10% without indexation or 20% with indexation. The limit on FII investment in corporate
debt would be raised from $0.5bn to $1.5bn, which is expected to encourage the
investments in debt market. Open-ended equity-oriented schemes and close-ended equity
oriented schemes would now be treated on par for exemption from dividend distribution
The ceiling on aggregate investment by mutual funds in overseas instruments would be
raised from $1billion to $2billion and the requirement of 10% reciprocal share holding
would be removed and a limited number of qualified Indian mutual funds to invest,
cumulatively up to $1 billion, in overseas exchange traded funds would be allowed.
Mutual Fund investment abroad is currently restricted in companies that have a holding
of at least 10% in a listed Indian company. This will enable Indian investors to invest in
global equity markets with a wider choice of stocks to permit greater diversification and
the convenience of dealing with an Indian mutual fund.
However, now, investors would have to bear the brunt of increased rate of securities
transaction tax. The Investments in fixed deposits in scheduled banks for a term of not
less than five years has been included in section 80C of the Income tax Act, thereby


making them more attractive to the general public, which may affect debt-oriented mutual
fund schemes.

According to Mutual funds India Research Team, the Ground rules of Mutual Fund

Investing are:
Moses gave to his followers 10 commandments that were to be followed till eternity. The
world of investments too has several ground rules meant for investors who are novices in
their own right and wish to enter the myriad world of investments. These come in handy
for there is every possibility of losing what one has if due care is not taken.
1. Assess yourself: Self-assessment of ones needs; expectations and risk profile is
of prime importance failing which, one will make more mistakes in putting
money in right places than otherwise. One should identify the degree of risk
bearing capacity one has and also clearly state the expectations from the
investments. Irrational expectations will only bring pain.
2. Try to understand where the money is going: It is important to identify the
nature of investment and to know if one is compatible with the investment. One
can lose substantially if one picks the wrong kind of mutual fund. In order to
avoid any confusion it is better to go through the literature such as offer document
and fact sheets that mutual fund companies provide on their funds.
3. Don't rush in picking funds, think first: 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. Invest. Dont speculate: A common investor is limited in the degree of risk that
he is willing to take. It is thus of key importance that there is thought given to the
process of investment and to the time horizon of the intended investment. One
should abstain from speculating which in other words would mean getting out of
one fund and investing in another with the intention of making quick money. One
would do well to remember that nobody can perfectly time the market so staying
invested is the best option unless there are compelling reasons to exit.
5. Dont put all the eggs in one basket: 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: Investing should be a habit and not an exercise undertaken at ones
wishes, if one has to really benefit from them. As we said earlier, since it is
extremely difficult to know when to enter or exit the market, it is important to
beat the market by being systematic. The basic philosophy of Rupee cost
averaging would suggest that if one invests regularly through the ups and downs
of the market, he would stand a better chance of generating more returns than the
market for the entire duration. The SIPs (Systematic Investment Plans) 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. Asking the intermediaries is one of the ways
to take care of the problem.
8. Find the right funds
Finding funds that do not charge many fees is of importance, as the fee charged
ultimately goes from the pocket of the investor. This is even more important for
debt funds as the returns from these funds are not much. Funds that charge more
will reduce the yield to the investor. Finding the right funds is important and one
should also use these funds for tax efficiency. Investors of equity should keep in
mind that all dividends are currently tax-free in India and so their tax liabilities
can be reduced if the dividend payout option is used. Investors of debt will be
charged a tax on dividend distribution and so can easily avoid the payout options.


9. Keep track of your investments

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. Know when to sell your mutual funds: Knowing when to exit a fund too is of
utmost importance. One should book profits immediately when enough has been
earned i.e. the initial expectation from the fund has been met with. Other factors
like non-performance, hike in fee charged and change in any basic attribute of the
fund etc. are some of the reasons for to exit. For more on it, read "When to say
goodbye to your mutual fund."
According to Mutual funds India Research Team, Performance Measures Of Mutual
Funds are:
Mutual Fund industry today, with about 34 players and more than five hundred schemes,
is one of the most preferred investment avenues in India. However, with a plethora of
schemes to choose from, the retail investor faces problems in selecting funds. Factors
such as investment strategy and management style are qualitative, but the funds record is
an important indicator too. Though past performance alone can not be indicative of future
performance, it is, frankly, the only quantitative way to judge how good a fund is at
present. Therefore, there is a need to correctly assess the past performance of different
mutual funds.
Worldwide, good mutual fund companies over are known by their AMCs and this fame is
directly linked to their superior stock selection skills. For mutual funds to grow, AMCs
must be held accountable for their selection of stocks. In other words, there must be some
performance indicator that will reveal the quality of stock selection of various AMCs.


Return alone should not be considered as the basis of measurement of the performance of
a mutual fund scheme, it should also include the risk taken by the fund manager because
different funds will have different levels of risk attached to them. Risk associated with a
fund, in a general, can be defined as variability or fluctuations in the returns generated by
it. The higher the fluctuations in the returns of a fund during a given period, higher will
be the risk associated with it. These fluctuations in the returns generated by a fund are
resultant of two guiding forces. First, general market fluctuations, which affect all the
securities present in the market, called market risk or systematic risk and second,
fluctuations due to specific securities present in the portfolio of the fund, called
unsystematic risk. The Total Risk of a given fund is sum of these two and is measured in
terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is
measured in terms of Beta, which represents fluctuations in the NAV of the fund vis--vis
market. The more responsive the NAV of a mutual fund is to the changes in the market;
higher will be its beta. Beta is calculated by relating the returns on a mutual fund with the
returns in the market. While unsystematic risk can be diversified through investments in a
number of instruments, systematic risk can not. By using the risk return relationship, we
try to assess the competitive strength of the mutual funds vis--vis one another in a better
In order to determine the risk-adjusted returns of investment portfolios, several eminent
authors have worked since 1960s to develop composite performance indices to evaluate a
portfolio by comparing alternative portfolios within a particular risk class. The most
important and widely used measures of performance are:
The Treynor Measure
The Sharpe Measure
Jenson Model
Fama Model


The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index. This Index is a ratio of return generated by the fund over and above risk
free rate of return (generally taken to be the return on securities backed by the
government, as there is no credit risk associated), during a given period and systematic
risk associated with it (beta). Symbolically, it can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the
All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative
Treynor's Index is an indication of unfavorable performance.
The Sharpe Measure
In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a
ratio of returns generated by the fund over and above risk free rate of return and the total
risk associated with it. According to Sharpe, it is the total risk of the fund that the
investors are concerned about. So, the model evaluates funds on the basis of reward per
unit of total risk. Symbolically, it can be written as:
Sharpe Index (Si) = (Ri - Rf)/Si
Where, Si is standard deviation of the fund.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.


Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk
premium by a numerical risk measure. The total risk is appropriate when we are
evaluating the risk return relationship for well-diversified portfolios. On the other hand,
the systematic risk is the relevant measure of risk when we are evaluating less than fully
diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is
equal to systematic risk. Rankings based on total risk (Sharpe measure) and systematic
risk (Treynor measure) should be identical for a well-diversified portfolio, as the total
risk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higher
on Treynor measure, compared with another fund that is highly diversified, will rank
lower on Sharpe Measure.
Jenson Model
Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the Differential Return
Method. This measure involves evaluation of the returns that the fund has generated vs.
the returns actually expected out of the fund given the level of its systematic risk. The
surplus between the two returns is called Alpha, which measures the performance of a
fund compared with the actual returns over the period. Required return of a fund at a
given level of risk (Bi) can be calculated as:
Ri = Rf + Bi (Rm - Rf)
Where, Rm is average market return during the given period. After calculating it, alpha
can be obtained by subtracting required return from the actual return of the fund.
Higher alpha represents superior performance of the fund and vice versa. Limitation of
this model is that it considers only systematic risk not the entire risk associated with the
fund and an ordinary investor can not mitigate unsystematic risk, as his knowledge of
market is primitive.
Fama Model

The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these two is
taken as a measure of the performance of the fund and is called net selectivity.
The net selectivity represents the stock selection skill of the fund manager, as it is the
excess return over and above the return required to compensate for the total risk taken by
the fund manager. Higher value of which indicates that fund manager has earned returns
well above the return commensurate with the level of risk taken by him.
Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)
Where, Sm is standard deviation of market returns. The net selectivity is then calculated
by subtracting this required return from the actual return of the fund.
Among the above performance measures, two models namely, Treynor measure and
Jenson model use systematic risk based on the premise that the unsystematic risk is
diversifiable. These models are suitable for large investors like institutional investors
with high risk taking capacities as they do not face paucity of funds and can invest in a
number of options to dilute some risks. For them, a portfolio can be spread across a
number of stocks and sectors. However, Sharpe measure and Fama model that consider
the entire risk associated with fund are suitable for small investors, as the ordinary
investor lacks the necessary skill and resources to diversified. Moreover, the selection of
the fund on the basis of superior stock selection ability of the fund manager will also help
in safeguarding the money invested to a great extent. The investment in funds that have
generated big returns at higher levels of risks leaves the money all the more prone to risks
of all kinds that may exceed the individual investors' risk appetite.

According to Mutualfundsindia Research Team , basics pertaining to Bond Funds



The recent upsurge in debt market has seen the performance of bond funds go up
substantially. These funds hold major investments in bonds of different categories and so
the downward change in yield has seen the returns from these funds soar high. However,
despite the positive outcome, not many people know the mechanism and consequently
are not aware of their pros and cons. We have just tried to explain what are bond funds
and the factors that affect them.
What is a bond fund?
Debt funds by nature, bond funds like all mutual funds, are investment vehicles. They are
meant especially for investors with relatively less appetite for risk and having an
intention to earn returns higher than what are possible to earn from other avenues like
Fixed Deposits that are considered as safe. So, safety and return both are of equal concern
for those investing in Bond Funds. Most bond funds pay income regularly and their
NAVs tend to fluctuate less than an equity fund.


Where do they invest?

In order to successfully achieve the goals of the fund, they invest in a multiplicity of debt
instruments such as Corporate pares, papers issued by GOI etc. with different maturities
and qualities. In order to balance the liquidity needs of investors who might want to
redeem their funds any time, they also have exposure to money market instruments and
call papers. Generally, mutual funds invest in bonds issued by different issuers such as
government, corporate houses etc. Bonds can be classified on the basis of their issuer as:
1. Government Bonds
The Government Treasury and its agencies issue these bonds. Treasury bonds are
considered the highest quality of all bonds because the credit of the government
backs them and so the payment upon maturity is more or less guaranteed. In
exchange for this very high margin of credit safety, they have the lowest yields.
2. Corporate Bonds
These are issued by various companies to finance their operations, expansion
activities etc. Credit rating agencies such as CRISIL, CARE, ICRA rate these
instruments in India on the basis of their degree of safety, which is defined as their
ability to pay the amount on maturity. The risk-return trade off is witnessed here
as well, for companies with good rating offer less yield.
3. Municipal bonds
These bonds are issued by governments and municipalities. Considered as reasonably
safe, these bonds provide varying returns depending upon their maturities.


What affects the yield of a Bond Fund?

The returns from a bond fund are essentially the weighted average of the returns on each
of its investment. So if a fund has invested in bonds of different maturities and yields, the
yield from the fund will be the weighted average of the yields on different securities,
weighted by the proportion of invested sum. The quality of papers and average duration
of the portfolio are some of the factors that determine the returns one can earn from the
fund. However, the prices and yields of bonds can fluctuate like other investments and so
there is some risk inherent even in bond funds and they are not absolutely risk-free as
they are often made out to be.
What are the risks associated?
Bond funds invest in bonds and like any investment are affected by some risks. There are
several risks associated with bonds and so they also affect the funds that invest in bonds.
They are:
Interest-rate risk
Unlike stock market where an upward movement of market leads to upward movement in
stock prices, it is a fall in the market yield that pushes up the prices of debt securities.
This happens because there exists an inverse relationship between the yield and the price
of a bond. So, if there is an upward movement of interest rates after one has invested in a
bond fund, the prices of bonds will go down leading to a corresponding fall in the NAVs
of the bond funds. Let us take an example:
Suppose a person buys a bond for Rs. 100 with a coupon rate of 10 percent. In other
terms the person should get Rs. 110 at the end of the year. If the RBI announces a hike in
the bank rate and the market yield for the duration of the bond increased, say to 11
percent, the prices of the bond will fall around to Rs. 90.91 in order to adjust to the
market yield. This is termed as interest rate risk in financial jargon and is precisely what
happened in 2000 when RBI had hiked the interest rates.


An investor stands to benefit in the opposite scenario, when the interest rates are cut as
then the prices go up leading to better returns from the fund. If the interest rate in the
above example falls to 9 percent, a person still gets Rs. 10 in interest but in order to align
the amount received to the prevailing market yield, the price of the bond adjusts to Rs.
111.11. In this case, the investor is better of by selling it at Rs. 111.11 than holding it to
its maturity, as then he will only get Rs. 110.
This risk is also dependent upon the maturity and duration of the bond and generally, the
longer a fund's duration or average maturity, the higher its interest-rate risk, or the more
sensitive the NAV of the fund will be to changes in interest rates. One can reduce the
interest rate risk by choosing a bond fund with a shorter duration or average maturity.
Credit risk
Just like shares where the performance of the company has some bearing on the stock
prices, credibility of the issuer is of importance in debt instruments. The risk of the issuer
not being able to make payments on his liabilities (debt instrument) is termed as default
risk or credit risk. This is of special concern to the investor if the fund is investing into
junk bonds or lower quality bonds. Bond funds offer professional management and a
range of quality ratings to help lower this risk and so investors stand to benefit by the
expertise of fund to pick good papers only.
Delay Risk
Cash flows are estimated on the basis of the pattern of income distribution. For example,
a bond can pay interest half yearly, on fixed dates and so if there is any delay in receiving
payments from the issuer, there is bound to be a mismatch between the cash flows. This
can be termed as the delay risk. Mutual funds too can miss out on the interest due on an
investment and have to show it as accrued but not received. This also affects the time
value of the money due. A continuation of this trend may lead to a re-rating of the paper
and add to the non-performing assets of the fund.
Balancing Risk vs. Reward

As with any investment in any category, there is always a trade-off between the risks
taken and returns generated. The greater the risk of a bond fund (dependent on the quality
and duration of papers), the higher is the potential reward, or return. With a bond fund,
the risk that prices may fluctuate and the value of your investment may increase or
decrease is not eliminated and so one must choose funds based on his risk tolerance.

Donts for mutual fund investors

Dont select merely on returns basis:

Funds are not to be selected only on the basis of returns. If it were so, why would one
invest in the debt funds or liquid funds when returns generated by the equity -diversified
funds are superior to these funds? Therefore, the risk adjusted return should be
considered. An investor seeking high returns has to be in the category of high risk taking
investors. Contrarily, an investor unwilling to take risk has to remain satiated only by
minimum return. Further, investors should consider rolling returns because this would
divulge the consistency of the funds performance. These returns reflect the performance
of the fund over a period unlike trailing returns, which reflects point-to-point returns.

7 Karvyknowledgecentre

Dont assume MF IPOs as low cost entry option:

Contrary to the perception, IPOs are not the low cost entry option. Most of the IPOs are
issued at Rs.10. This does not mean that NAVs are undervalued and will definitely zoom
up. This is just a value given to one unit. Whatever may be the value of investments made
by the fund, initial issue price is Rs.10. This doesnt mean that NAVs are at their nadir
and will either rise or will remain at the
same level. Rather the rise or fall in NAVs is guided by the performance of the fund.
Further, unlike the stock IPOs, the fund IPOs are not triggered by the demand and supply.
Therefore, when the stock IPOs are listed, they are generally at premium since the
demand becomes more than the supply. Whereas in case of fund IPOs, the supply is not
limited. Therefore, the demand-supply factor doesnt come into the picture in this case.
Some of the major private sector Bank in India
ICICI Bank is India's second-largest bank with total assets of about Rs.146,214 crores as
on December 31, 2004 and profit after tax of Rs. 1,391 crores in the nine months ended
December 31, 2004 (Rs. 1,637 crores in fiscal 2004). ICICI Bank has a network of about
505 branches and extension counters and about 1,850 ATMs. ICICI Bank offers a wide
range of banking products and financial services to corporate and retail customers
through a variety of delivery channels and through its specialised subsidiaries and
affiliates in the areas of investment banking, life and non-life insurance, venture capital
and asset management.
ICICI Securities Limited (i-SEC) is a wholly owned investment-banking subsidiary of
ICICI Limited (ICICI). ICICI is the only non-Japanese Asian financial institution to be
listed on the New York Stock Exchange (NYSE symbols: IC, IC.D). ICICI Securities
was formed on February 22nd 1993, when ICICI's Merchant Banking Division was spun
off into a new company; ICICI Securities today is India's leading Investment Bank and
one of the most significant players in the Indian capital markets. ICICI Securities

Research Reports , Compendia, Updates, I-BEX and Sovereign Bond Index, have
become industry standards, sought after by finance, business and reputed publications
Investments Through ICICI Bank
Mutual Funds pool money of various investors to purchase a wide variety of securities
while pursuing a specific goal. Selection of Securities for the purpose is done by
specialists from the field. Returns generated are distributed to the Investors.
Mutual Fund Companies offer various schemes. Investors can choose any particular
Fund/Scheme or mix of Funds/Schemes depending upon their perception towards risk.
Investment is done on the basis of prevailing Net Asset Values of various schemes.
There are varied ways in which funds can be classified. From the investors perspective
funds are usually classified in terms:
Constitution Structure

Collection entry or exit

charges from investors

Close ended
Open ended

Load funds
No-Load funds

Under each broad classification, there are several types of funds, depending on the basis
of the nature of their portfolio. Even fund has unique risk-profiles that are determined by
its portfolio.


I. Open ended and close ended funds

Open-ended Funds
An open-end fund is one that has units available for sale and repurchase at all the times at
a price based on the NAV per unit. Such funds are open for subscription the whole year.
Capitalization/corpus is continuously changing. Fund size and the total investment
amount goes up if more new subscription comes in from new investors than redemption
by exiting investors, the fund shrinks when redemption of units exceeds fresh
subscription. Theres no fixed maturity.
Shares or units of such funds are normally not traded on the stock exchange but are
repurchased by the fund at announced rates. They provide better liquidity even though
not listed as investors can any time approach mutual funds for sale of such units.
Kotak Mahindra bank Limited
Kotak Mahindra Asset management company (KMAMC) limited, a wholly owned a
subsidiary of the KMBL, is the asset manager for Kotak Mahindra mutual fund.
KMAMC started operation in December 1998 and has over 4 lakhs investor in various
schemes. KMMF offer scheme catering to investors with varying risks return profiles
and was first fund house in the company to launch a dedicated gilt scheme investing only
in government securities.
Kotak mahindra bank ltd one of the Indias fastest growing banks with the pedigree of
over twenty years in Indian financial Market. Kotak mahindra asset management
company ltd., a wholly owned subsidiary of the bank is our investment manager.
Kotak mahindra bank ltd launched first mutual fund scheme in 1998. today its launched
complete bouquet of product and services suiting the diverse and varying needs and risk
returns profiles for the investors.
Today it committed to offer investment solutions and whole class services and
conveniences to facilitate wealth creation of f the investors.
As on 31st March 2008

AUM Rs.- 161352.52 cr

No. of Investors 8.94 lakhs
TATA Mutual Fund
At Tata Asset management, globalization is not merely an economic phenomenon. It is
also not merely about change. It is more specially a set of value that constantly evolve
around our clients and the way we do the business.
Being one of the earliest entrants private sector mf businesses, we have always strived to
offer the right product at the right time with the dynamic needs of the investor in mind.
We have honed our fund management skills over the years managing a vast universe of
funds within the framework of transparent and rigorous risk controls. Our proven fund
management expertise complements the latest technology backed service platforms to
ensure a complete and satisfy financial planning experience.
An endeavor to offer a wider clutch of offering to suits exiting and emerging investor
classes how it seek to offer the latest in funds management options to our investors. By
offering our investors globally prevalent choices in contemporary wealth management,
we stand true to our corporate management philosophy of excellence and true in what
ever we do.
TATA PORTFOLIO MANAGEMENT SERRVICES offers investors an option to
invest their savings under its specially created offering, TPMS brings to the exclusive set
of savvy investors the professional financial expertise and acumen of Tata AM , thereby
combing the trust , reassurance and the core value of our group.
TPMS has been created specially to meet the investment needs of select client who are
looking for customized and focused investments products in tune with their specific


TATA Asset management ltd one of the fastest of country with more than Rs 11323 crore
as on 31st march 2008.
HDFC Bank Mutual fund
HDFC bank mutual fud was set up on june 30 2000 with two sponsor namely housing
development finance corporation ltd and standard life investment ltd.
HDFC asset Management Company is the first AMC in India to have been assigned the
CRISIL fund house level 1rating. This is the highest fund governance and process
quality rating for two year succession over the past two years HDFC has own number of
awards and accolades for his performance.
As on 31st Jan. 2008
AUM Rs. - 43762.70
No. of Investors 2,398,935
No HDFC MF offices- 40
Location reach 133 cities

Reliance Mutual fund

Reliance mutual fund , a part of the reliance Anil Dhirubhai Ambani group is one of the
fastest growing mutual funds in the country. RMF offers investors a well rounded
portfolio of product to meet varying investor requirement and has presence in 115 cities
across the country.
Reliance mutual fund investor constantly endeavors to launch innovative products and
customer service initiatives to increase value to investors.


Reliance mutual fund schemes are managed by Reliance capital asset management
Limited, a subsidiary of Reliance capital ltd which holds 93.37% of the paid up capital
RCAM , the balance paid up capital being held by minority shareholders.
Reliance capital ltd is one of Indias leading and fastest growing private sector financial
services companies and ranked among the top 3 private sector financial services and
banking companies in terms of net worth.
As on 31st March 2008
AUM Rs- 90938 crore
No. of investor 66.87 lakhs
Location reach 115 cities


SBI Mutual fund is India largest bank sponsored mutual fund and has enviable track
record in curious investment and consistent wealth creation.
The fund traces its lineage to SBI India largest banking enterprises. The institution has
grown immensely since its inception and today it is India largest bank, patronized by over
80% of the top corporate houses of the country.
SBI Mutual fund is joint venture between the state bank of India and societies generals
asset management one of he leading fund management companies that manages over US
$ 500 billion world wide.


In the twenty years of operation, the fund has launched 38 schemes and successfully
redeemed fifteen of them. In the process it has rewarded its investors handsomely with
consistently high returns.
A total of over 5.4 million investors have reposed their faith in the wealth generation
expertise of the mutual fund.
Scheme of mutual fund have consistently outperformed benchmark indices and have
emerged as the preferred investment for millions of investors and HNIs.
Today the fund manages over Rs 51,461 crore of assets and has a diverse profile of
investor actively parking their investments across 36 active schemes.
The fund serves this vast family of investors by reaching out of them through network of
over 130 points of acceptance, 28 investor service center, 46 investors desk and 56
district organizers.
SBI mutual fund is the first bank sponsored fund to launch an offshore fund resurgent
India opportunities fund. Growth through innovation and stable investment policies is the
SBI MF Credo.


Suggesting most suitable Equity Mutual fund in India.
Research Problem:
Comparing Mutual funds with other investment options i.e. Fixed deposits, PPF.
Investors prefer Mutual Funds than other investment options
Investors do not prefer Mutual Funds over other investment options
Research Design
Exploratory Research
As the term suggests, exploratory research is often conducted because a problem has not
been clearly defined as yet, or its real scope is as yet unclear. It allows the researcher to
familiarize him/herself with the problem or concept to be studied, and perhaps generate
hypotheses to be tested. It is the initial research, before more conclusive research is
undertaken. Exploratory research helps determine the best research design, data
collection method and selection of subjects, and sometimes it even concludes that the
problem does not exist.
Sample and Data Collection
Secondary Research: The study is a completely a secondary one with no primary source
included. It will be consisting of data collected from various journals, internet, books,
magazines etc.


Convenience Sampling: In convenience sampling, the selection of units from the

population is based on easy availability and/or accessibility. Information collected
provides significant insights and is a good source of data in exploratory research.
Data Collection
For this study, data from various internet sites (mutual funds india, value research online)
funds has been taken for the purpose of our study. For the purpose of studying the
performance evaluation of the mutual fund in India, data was collected from websites of
SEBI, AMFI, RBI and various other finance related sites along with sites of some mutual
fund companies


Different investment avenues are available to investors. Mutual funds also offer good
investment opportunities to the investors. Like all investment, they also carry certain
risks. Risk factor is an important aspect while investing with the mutual fund schemes.
So, it is very important from the investors point of view to choose the right kind of
scheme based on different parameters of performance evaluation. To help investors in
evaluating the performance of a scheme , a comparative analysis of 28 equity growth
schemes has been made on certain set parameters which has been discussed below :

For the purpose of analyzing the various schemes following parameters has been used:

Risk and Volatility
Risk Adjusted Return


A valuable judging parameter for any scheme is its portfolio. It tells us the exposure the
fund has to various stocks and also various sectors. Careful analysis of the funds
portfolio would help an investor in making valuable insights into the investment strategy
of the fund manager. For analysis of the performance of the various mutual funds on the
basis of portfolio, Portfolio turnover rate has been considered which has been explained
as under:
By definition Portfolio Turnover is the lesser of annual purchases or annual sales,
divided by the average portfolio value. It measures the amount of buying and selling
done by the fund manager and hence tells us the weighted average holding period of a
given security. For example, if a fund produced a turnover of 50% , it is presumed that
the average holding period for any given security is 2 years and that 50% of the
portfolios total assets were replaced every year. This number varies by the type of fund
and the investment philosophy of the manager. A high turnover ratio means high
transaction costs.
From an investor point of view, it is very important to know about the expenses related
with the buying, selling, transferring fees and any other costs you may incur if you invest
in a specific fund .So for analyzing the expenses of the various mutual funds; the expense
ratio of the funds has been considered.
By definition Expense ratio is the ratio of total expenses to average net assets. An
investor can check information on schemes expenses ratio in its offer document.
Depending upon the type of scheme, expense ratio may vary from scheme to scheme. The
lowest expense ratio is observed among index funds and ETFs. Stock funds have higher
expense ratio than fixed income funds. Funds that invest internationally tend to have
significantly higher expense ratio than to domestic portfolios, due to greater research and


other costs associated with foreign investing .Expense ratios of the schemes in same
category are to be compared .Low expense ratio is desirable.

Risk and Volatility

Risk is the key dimension of performance measurement, and a decisive factor in
determining a fund managers skill .One cannot make a judgment about how skilful a
manger is in a particular period by looking at return only.
Risk in a generic sense is the possibility of loss, damage, or harm. For investment a more
specific definition of risk can be given .It refers to variability in the expected return.
For a mutual fund the following factors cause variability of the investment performance:
The kind of securities in the portfolio. For e.g., small cap stocks may be more
volatile than large cap stock
The degree of diversification. For e.g., a portfolio of only 5 stocks may be more
volatile than a portfolio comprising of 15 stocks.
The extent to which the portfolio manager times the market. For e.g., an index
fund tends to be less volatile than an aggressive growth fund.
Risk is neither good nor bad rather as it is viewed in some context. The difference
between the required rate of return on a mutual fund investment and the risk free rate is
the risk premium. There are many sources that determine appropriate risk premium
including market risk, business risk, liquidity risk, financial risk (leverage), duration, and
credit risks for bonds and political and currency risk for international assets. Broadly, the
market risk can be divided into 2 following categories:
Systematic Risk - Systematic risk is market related or non-diversifiable. It is the
risk that influences a large number of assets. An example is political events. It is
virtually impossible to protect yourself against this type of risk.

Unsystematic Risk Unsystematic risk is one that is unique to given particular

mutual fund portfolio and is diversifiable. It is the risk that affects a very small
number of assets. An example is news that affects a specific stock such as a
sudden strike by employees.

Volatility is a measure of the variability of returns over a chosen time-period. It reveals
the extent by which the daily/weekly/monthly price changes from the average. Low
percentage volatility shows that the price has stayed quite close to the average whereas
high percentage volatility shows that the price has moved up and down a lot over the
time-period. The higher the volatility of a fund, the greater the difference between the
highest and lowest returns and the higher the risk of the investment. So volatility is a
market measure of uncertainty investors keep changing their minds as to the value of
the share, which reflects uncertainty surrounding the companys future profit potential.
As such, it's an excellent indicator of investment risk. So for measuring the risk in context
of volatility of the fund, following measures has been used:
Funds Volatility () i.e. variation from the average.
Funds Resemblance (R2) i.e. the extent to which the movement in the fund
can be explained by corresponding benchmark index.
Funds Volatility as regards the market index () i.e. the extent of comovement of fund with that of benchmark index.
Standard Deviation ()
Standard deviation is a measure of dispersion in return .It is a statistic to measure the
variation in individual returns from the average expected return over a certain period of
time .A higher value of standard deviation means higher risk. In other words, the standard
deviation tells us how much the return on the fund is deviating from the expected normal
returns. Though, standard deviation measure volatility on both the upside and the

downside, its a good proxy for measuring the risk of loss with any security. One of the
strengths of standard deviation i.e. it can be used across the board for any type of
portfolio with any type of security. Standard deviation allows portfolios with similar
objectives to be compared over a particular time frame. It can also be used to gauge how
much more risk a fund in one category has versus the other. Hence, Standard deviation is
used probably more than any other measure to describe the risk of a security or a
portfolio of securities.
Co-Efficient Of Determination (R2)
It shows the extent to which benchmark market index taken explains the portfolio of the
given fund. It measures percentage of mutual funds movement that corresponds to use
bench market index. Therefore, a fund having R2 of 100% indicates perfect correlation
with the chosen index. A R2 of 0 %( zero percentage) would indicate no correlation
whatsoever with the chosen benchmark index .So an investor should screen for fund with
R2 approaching 100% so as to have better return assurance against benchmark index .The
lower the R2 _ squared the less reliable beta(systematic risk) is as a measure of a securitys
volatility . IT funds, for example, may have a low with the BSE 30 or Nifty indicating
that their betas relative to the BSE 30 or Nifty are pretty useless as risk measure. So to
evaluate fund properly comparison with appropriate benchmark is important. Hence
knowing the goodness of fit between a fund and its appropriate benchmark is crucial to
avoid meaningless and perhaps misleading analysis.
Beta relates to the return of a stock on mutual funds to a market index. When a portfolio
is evaluated in combination with other portfolios, its excess return should be adjusted by
its systematic risk rather than by its total risk. So is beta is used to measure market risk. It
compares the variability of funds return to the market as a whole .It reflects the
sensitivity of the funds return to fluctuations in the market index. By convention, market
will have Beta 1.0 and Mutual Funds can be volatile, more volatile or less volatile .A beta
that is greater than 1 means that the fund or stock is more volatile than the benchmark

index, while a beta of less than 1 means that the security is less volatile than the index.
Therefore, if the market goes up by 10%, a fund with a beta of 1.0 should go up 10%, too,
while if the market drops 10%, the fund should drop by an equal amount. Similarly, a
fund with its beta of 1.1 would be accepted to be a bit more volatile than the market i.e. if
the market gains 10%, then the fund will gain 11%, while a 10% drop in the market
should result in an 11% drop by the fund. And a fund with a beta of 0.9 would return 9%
when the market went up 10% but would loose only 9% when the market dropped by
10%. Hence, Beta provides a measurement of a securitys past volatility relative a
specific benchmark or index, but one needs to be extra cautious while choosing the
relevant benchmark.
Risk- Adjusted Return
The performance measurement is mainly associated in context of measure of risk with
realized returns. This is because the differential returns earned by the fund manager may
be due to difference in the exposure to risk. Hence it is imperative to adjust the return for
the risk. For this purpose the following 2 major methods assessing risk adjusted return
has been used for the evaluation of the performance of various mutual funds.

Return Per Unit of Risk

Differential Return ( )


The first of the risk adjusted performance measure is the type that assesses the
performance of a fund in terms of return per unit of risk. We have used following 2
measures for evaluating funds performance:

Sharpe Ratio

Treynor Ratio


Sharpe Ratio
It is Reward to variability ratio given by W. F. Sharpe in 1966.It is a measure of relative
performance and is expressed as the excess return per unit of risk, where risk is measured
by the standard deviation of the rate of return. The ratio is defined as:
Sp = (Rp Rf)/ p
Where, Sp = Sharpes ratio for fund p,
Rp = Average return on fund p,

p = Standard deviation of return on fund p, and

Rf = Return on risk free asset
As it is a measure of relative performance, therefore, it enables the investors to compare
two or more investment opportunities. A fund with a higher Sharpe ratio in relation to
another is preferable as it indicates that the fund has higher risk premium for every unit of
standard deviation risk. Since Sharpe ratio adjusts return to the total portfolio risk, the
implicit assumption of the Sharpe measure is that the portfolio will not be combined with
any other risky portfolios. Hence, it is a relevant measure for the performance evaluation
several mutually exclusive portfolios.
Treynor Ratio
It is reward to volatility ratio given by Jack Treynor in 1965 and is expressed as a ratio of
returns to systematic risk (Beta). The Treynor measure adjusts excess return for
systematic risk. It is computed by dividing a portfolios excess return by its beta as shown
in equation


Tp = (Rp Rf)/ p

Where: Tp = Treynors ratio for fund p

p = Sensitivity of fund return to market return
Rp = Average return on fund p
Rf = Return on risk-free asset.
Like Sharpe ratio it is measure of relative performance it measures the portfolio risk in
the terms of beta that is the weighted average of individual security betas. The higher the
ratio the better is the performance. As treynor ratio indicates return per unit of systematic
risk, it is valid performance criterion when we wish to evaluate a portfolio in combination
with the benchmark portfolio and other actively managed portfolios.


The second category of risk adjusted performance measure is referred ass differential
return measure. The underlying objective of this category is to calculate the return that
should be expected for the fund scheme given its realized risk and to compare that with
the return actually realized over the period .
Jensen Ratio

It is a regression of excess fund return with excess market return given by M.C. Jensen in
1968. It is expressed as:
Rpt Rf = + (Rm Rf) + ei
Where Alpha () = the intercept
= Systematic risk
Rm= Market return
Rpt = Fund return for time period t
Rf = Return on risk- free asset
The intercept of the equation provides Jensens measure of the performance. The measure
is derived from Capital Asset Pricing Model (CAPM). This involves running a regression
with excess return on the security and that on the market acting as dependent and
independent variables respectively, where excess return is computed with reference to
return on a risk-free return. Significantly positive alpha indicates superior performance.


Returns referred to total returns that an investor gets by investing into particular schemes.
Higher the return better it is from an investor point of view. .For the purpose of our
analysis last 3 years return i.e. from April 1, 2003 to March 31, 2006 s has been taken
into consideration so as to have true picture of the average return that a particular
schemes fetched. For comparing the returns earned by the schemes, BSE 30 has been
taken as the benchmark index...Return for both benchmark market index i.e. BSE 30 and
the schemes has been calculated from the daily index value and net asset value (NAV)
respectively. Then the average of the series so developed has been taken. By comparing
last 3 years average returns with the benchmark one can know how much returns were
given by particular schemes in comparison to the return given by the market on the
schemes under that same category.

Risk-free return
Risk-free rate of return refers to the minimum return on investment that has no risk of
loosing the investment over which it is earned. For the present study, it has been marked
around 5.75% per annum as the banks provides at the same rate on fixed deposits on an
average during the period under the study.
Selection of Mutual Fund schemes for Performance Evaluation
Selection has been done taking into mind top schemes in their respective domains (Equity
open ended, equity diversified)
Performance of the Top 5 Equity Linked Saving Schemes (ELSS) based on threeyear returns is shown in the table below:


Performance as on Jan 9,2006


Scheme Name


SBI Magnum Tax Gain Scheme

Prudential ICICI Tax plan

1 Year

3 Years

38.8008 109.6638 94.8006

HDFC Taxsaver Fund Growth 36.8585
HDFC Long Term Advantage
Birla Equity Plan-G

83.2852 82.3018
84.4011 81.1179
64.9043 77.1871




( crores)
Mutual Fund Name No.
of Corpus Under management
Schemes* As on
Corpus As on
Corpus Net
Feb 28,
Jan 31,
Feb 28,
Jan 31,
BOB Mutual Fund
118.40 13.497
Feb 28,
Jan 31,
Canbank Mutual Fund 39
Feb 28,
Jan 31,
HDFC Mutual Fund 203
31,424.74 -344.861
Feb 28,
Jan 31,
HSBC Mutual Fund 111
12,140.34 178.746
ING Vysya Mutual
JM Financial Mutual
Mutual Fund

Feb 28,
Jan 31,
Feb 28,
Jan 31,
3,816.10 12.021
Feb 28,
Jan 31,

Mutual Fund
Mutual Fund





Sahara Mutual Fund


SBI Mutual Fund


Standard Chartered
Mutual Fund
Tata Mutual Fund


Taurus Mutual Fund


Feb 28,
Jan 31,
Feb 28,
Jan 31,
Feb 28,
Jan 31,
Feb 28,
Jan 31,
Feb 28,
Jan 31,
Feb 28,
Jan 31,
180.87 -4.902
Feb 28,
Jan 31,
Feb 28,
Jan 31,
Feb 28,
Jan 31,
Feb 28,
Jan 31,

Tax-saving schemes at a glance

Tenure (years)


















High Risk




12.00 - 15.00

5.50 - 6.00



No assured






half yearly



Taxation of

Tax free


Dividend & capital

gains tax free



According to SEBI (Securities and Exchange Board of India) following trends in


Trends in Transactions on Stock Exchanges by Mutual Funds (since January 2000)

(Rs in


Debt (Rs
in Crores)





Jan 2000-March 2001.







April 2001 -March 2002.







April 2002-March 2003.







April 2003-March 2004








April 2004-March 2005







April 2005-March 2006







April 2006-March 2007







April 2007.







May 2007.







June 2007.







July 2007.







August 2007.



















November 2007.







December 2007.







January 2008.







February 2008.



















September 2007.

October 2007.

March 2008 (upto 8th)

Total (April '07 - March '08)


Trends in Transactions on Stock Exchanges by Mutual Funds

(Provisional and subject to revision) March 2008
Equity (Rs in crores)

Debt (Rs in crores)

n Date



s / Sales



/ Sales



















































Top 10 Open Ended -Equity & Debt Funds - Period (Jan1, 2007- Dec 6, 2007)
Rank Scheme Name


JM Balanced - Growth
PRINCIPAL Child Benefit - Dec
Career Builder Plan
PRINCIPAL Child Benefit - Dec
Future Guard Plan
Can Balanced II
Tata Balanced Fund - Growth
Tata Balanced Fund - Dividend
SBI Magnum Balanced Fund - Dec
SBI Magnum Balanced Fund - Dec
DSP Merrill Lynch Balanced Dec
Fund - Growth
JM Balanced - Dividend

NAV (Rs.)

% Return as
on NAV date






















Top 10 Open Ended -Debt Funds

Rank Scheme Name

- Period (Jan1, 2007- Dec 6, 2007)


LIC MF Unit Linked Insurance Dec

Templeton India Children Asset Dec
Gift Plan - Growth
Templeton India Children Asset Dec
Gift Plan - Dividend
- Dec
Escorts Income Bond - Growth
Sundaram BNP Paribas Floating Dec
Rate Fund - Long Term - IP - 2007

NAV (Rs.)

% Return as
on NAV date











, 12.9904



Reliance Monthly Income Plan - Dec
Income Dec
Multiplier Fund - Cumulative
Reliance Monthly Income Plan - Dec
Quarterly Dividend
Cancigo - Growth Plan










Top 10 Open Ended -Equity Funds

Rank Scheme Name

- Period (Jan1, 2007- Dec 6, 2007)


Sundaram BNP Paribas Select Dec

Midcap - Dividend
Sundaram BNP Paribas Select Dec
Midcap - Growth
UTI Thematic Infrastructure Dec
Fund - Growth
UTI Thematic Infrastructure Dec
Fund - Dividend
Tata Infrastructure Fund - Dec
Prudential ICICI Infrastructure Dec
Fund - Growth
Tata Infrastructure Fund - Dec
Prudential ICICI Infrastructure Dec
Fund - Dividend
SBI Magnum Global Fund 94 - Dec
SBI Magnum Global Fund 94 - Dec

NAV (Rs.)

% Return as
on NAV date






















Past Performance of the product
Name of Scheme: - HDFC Growth fund (HGF)

Year wise return for the last 5 financial years

Investment Objective:- To generate long term capital appreciation from a portfolio that
is invested predominantly in equity and equity related instrument.
Returns (%)

Last 1 years
Last 3 years
Last 5 years
Since Beginning

Benchmarks Returns (%)




Benchmark Returns

Las t 1 yrs

Last 3 yrs

Last 5 yrs

Since Start up

HDFC Growth fund launch on September 11 , 2000 with the NFO of Rs 10. First year
return was absolute though the economic condition is poor due to the attacked on world
trade center. Last three years return was good due to the benchmarks index is on booming
stage. Last five years return was much better than last three. Since beginning the average
return was expected.
Investment objective: - To achieve capital appreciation
Last 1 yrs
Last 3 yrs
Last 5 yrs
Since inception

Returns (%)

Benchmarks Returns (%)





Last 1 yrs

Benchmarks Returns

last 3 yrs

last 5 yrsSince Inception


(HEF) scheme is started on 1 Jan, 95 under the benchmark index of S& P CNX 500. Last
1 year return was absolute. Some effect due to the bad economic of the world. Last three
year return was good due to the sharp rise in stocks price.
Past performance of the product of KOTAK Mutual Fund
Name of the Scheme: - Kotak Mahindra technology Scheme
Investment objective: - To generate capital appreciation from a diversified portfolio of
equity and equity related securities in the technology sector.
Returns (%)

Last one year

Last three year
Last five year
Since inception

BSE IT index %



Benchmarks Returns

Last 1 yrs

last 3 yrs

last 5 yrs

since statred

Kotak Mahindra technology Scheme was launch on 4-April-2000 with the net fund offer
of Rs 10. Last one year return was not up to the marks. Benchmarks returns was better

than kotak tech returns. This fund are not performing good as its average returns are in
Past performance of the product:
Name of Scheme: - ABN AMRO Equity Fund
Investment Objective: - To generate long term capital growth from a diversified and
actively managed portfolio of equity related securities. This scheme is invest in the range
of the company with a bias towards the large a medium market capitalization companies.
Compound annualized
Last one year
Since inception

Returns (%)

Benchmarks Returns (%)





Benchmarks Return

Last 1 yrs

Since inception

ABN AMRO Dividend yield Fund allotted on September 23, 2005 under the Benchmarks
index of S& P CNX Nifty. Last year returns were comparatively better than benchmarks
returns. Average return of the product was also up to the marks.
Data record of the SBI Asset Management Company ltd.
Past performance of the product
Name of the Scheme:- MAGNUM BALANCE FUND
Investment objective: - To provide investor long term capital appreciation along with
the liquidity of an open ended scheme by investing in a mix of debt and equity. The
scheme will invest in diversified portfolio of equities of high growth companies and
balance the risk through investing the rest in a relatively safe portfolio of debt.


Asset Allocation Patterns of the Scheme:Types of Instruments

Normal Allocation

Equity and Equity Related instruments

At least 50 %

Debt Instrument like debentures , bonds

Khokas, etc.

Up to 40 %

Securitized Debt

Not more than 10 % of the investment in

debt instruments

Money Market instrument


Performance of Scheme as on 31st July 2007.

Compounded Annualized
Last 1 yrs
Last 3 yrs
Last 5 yrs
Since Inception


MBF Returns (%)


MBF Returns

Last 1 yrs

CRISIL Balanced Fund

Index Returns (%)

Last 3 yrs

CBFI Returns

Last 5 yrs

Since Inception

SBI Magnum Balance Fund is open-ended Balanced Scheme is launched by SBI asset
management company ltd in the financial year of 2002. This fund is allocated in the
different area. 50% of the invested amount is allocated in the Equity. So basically this
fund return is depend on the market share. In the last 5 year that why we find that the
returns are good due to the booming stage of share market.


Name of the scheme: - MAGNUM EQUITY FUND

Investment objective: - The objective of the scheme is to provide the investor long
term capital appreciation by investing in high growth companies along with the liquidity
of an open-ended scheme through investment primarily in equities and the balanced in
debt and money market instrument.
Asset Allocation pattern of the scheme
Types of instrument

Normal Allocation

Equity and Equity Related Instrument

Not less than 70 %

Debt instrument

Not more than 30%

Securitized Debt

Not more than 10 % of the investments in

debt instrument

Money Market Instrument


Performance of the scheme (As on 31st July 2007)

Compounded Annualized
Last 1 years
Last 3 years
Last 5 years
Returns since inception

MEF Return %

BSE Returns %




Findings and Suggestions

In the last decade we have seen enormous growth in the size of mutual fund industry in
India. Especially the private sector has shown tremendous growth. With unmatched
advances on the information technology, increased role of the institutional investors in
the stock market and the SEBI still in its infancy, the mutual fund industry players gained
unparalleled and unchecked power. To ensure the safety of investment of small investors
against whims and fancies of professional fund managers have become the need of the
The present study has been undertaken to impart awareness of the functioning of mutual
funds and also to provide information, knowledge and insight for taking investments
decision pragmatically and also simultaneously ward off the impending risk in taking
investments decision.
People have started considering mutual funds as an investment option in comparison with
other investment avenues. Hence , it can be said that Indian mutual funds industry is
expected to increase ,but there are lot of challenges ahead for the various AMCs to get an
edge over the other. The managers of these mutual funds needs to sharpen their skills
further so as to manage the pooled money in total professional way. Market timing,
during both the bull and the bear run, is the sole factor that would ensure their long-term
survival in the trade.
SEBI and other controlling bodies of capital markets have started monitoring the market
movements more closely. A consistent effort is being made by them to refine the working
of capital markets and mutual funds. This is expected to go a long way to further
strengthen the confidence of investors in the mutual funds.
Precisely, mutual funds invest their funds in the stock markets, which in turn depend
upon the economic performance and political stability of that economy on one hand and
funds professional management on the other. Hence, with flourishing business of mutual

funds in India, conclusive environment for capital markets expected to be provided by the
government and positive initiatives being taken by SEBI to streamline mutual funds
business, all now rest upon the professional fund managers that how they sharpen their
market timing skills and diversify product range so to make funds tailor made to the
needs of every investor to provide handsome returns to them who entrust their hard
earned money to the fund managers
The findings of this study, as discussed above, may prove to be of great use to the
government for streamlining the working capital markets through its regulatory bodies
like SEBI etc. So as to check the exploitation of small investors who are one of the major
players of capital needed for economic growth of the country. It may help SEBI to control
effectively the working of mutual funds so as to regain lost confidence with investors and
take effective steps for confirming investors right adherence by them.
As reported in the study, mutual funds, too, can earmark and try to improve upon their
weak areas regarding the factors that influence investors decision making as regards
choice of mutual fund, the facilities or options they expect from a mutual fund, the
criteria they generally believe to be the best for performance appraisal of a fund, their
general perception towards mutual funds at present and the problems which they
encountered that resulted in development of aversion towards mutual funds in the minds
of investors .



SBI Magnum Tax Gain Scheme 93-G is the best public sector mutual fund
scheme and Prudential ICICI Tax plan Growth is the best private sector
mutual fund as on January 9, 2006.

ELSS i.e. Equity Linked Saving Schemes or Equity mutual funds is the best
investment option.

Try to save as much as your budget allows, as more saving leads to more
investment that will grow into bigger capital base.

Plan your investment over a linger period of time, keeping in mind your age, your
financial targets, your level of risk aversion your saving pattern and your
investment objectives.

Invest more in stock funds but do keep a reasonable part of your investment in
liquid securities as money market funds, short term bonds etc so as to meet any
contingent situation.

Do not invest in highly volatile funds.

Think before you invest. Do collect and analyze enough information about the
funds you plan to invest in.

Do not confuse yourself by spreading your investment too wide but reasonable
diversification of investment is a must also.

Periodically keep reviewing objectives of your investment and try to keep your
assets in balance.

Lastly, maintain proper record of your transactions.


Mutual funds are such a wide area of research that no single study can cover different
related dimensions. Mutual fund investments are subject to market risk.
Past performance may not be the indicator of future profit. Thus it is very important to be
updated while investing in mutual funds. Mutual funds offer various schemes. Past
performance have shown that equity funds are piling profits. So it is advisable to invest
into equity mutual funds as in long run, they give maximum safe returns. Further,
research can also be conducted for studying
perceptions of institutional investors towards mutual funds, the area which has been left
out of the scope of the present study. Research is also needed to review use of parameter
beta ( i.e. systematic risk) for performance evaluation of mutual fund in relation to a
chosen market index as a benchmark. This is because, beta is calculated on the basis of
total return earned by a given equity - diversified fund in relation to the market return
whereas no equity - diversified fund even invest solely in equities rather they, too, keep
5% to 10% of total invested funds in liquid securities for meeting any contingent
occurrence. Hence, for true performance evaluation, beta should be adjusted accordingly
on the basis of percentage of total investment in equities.
Scope For Further Research
Mutual funds are such a wide area of research that no single study can cover different
related dimensions. Even primary surveys for studying the perception of investors
towards mutual funds from time to time are not regular feature in India, hence there is
much potential of research on a bigger scale covering wider area.
Further, research can also be conducted for studying perceptions of institutional investors
towards mutual funds, the area which has been left out of the scope of the present study.


Research is also needed to review use of parameter beta ( i.e. systematic risk) for
performance evaluation of mutual fund in relation to a chosen market index as a
benchmark. This is because, beta is calculated on the basis of total return earned by a
given equity - diversified fund in relation to the market return whereas no equity diversified fund even invest solely in equities rather they, too, keep 5% to 10% of total
invested funds in liquid securities for meeting any contingent occurrence. Hence, for true
performance evaluation, beta should be adjusted accordingly on the basis of percentage
of total investment in equities.



Sadhak H, Mutual Funds in India, Response Publication House 2003

Turan MS and Bodla BS, Performance Appraisal of Mutual Funds, Excel

Publication House 2001

Value Research, Mutual Fund Insight, 15 Jan-14 Feb issue 2007

Mathur BL, Management of Financial Services, RBSA Publication House 1996

Chander Ramesh, Performance Appraisal of Mutual Funds in India, Excel

Publication House 2002

Finance is Changing; Are You?, Invest India Economic Foundation 2005.