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A Project Report On

COMPARISON AND ANALYSIS OF


MUTUAL FUND MARKET IN INDIA AND
USA

Submitted To:

Submitted By:

Mr. Prakash Kashwani


and
Mr. Vivek Verma
ICICI AMC, Narain Manzil, Barakhamba Rd,
Delhi 110001
and
Professor L. Ramani
BIMTECH, Greater Noida

Name: Amol Agarwal


Roll Number: 15DM021
Course: PGDM (Finance)
Batch: 2015-17

Index

S.n

Topic

Page No.

Executive Summary...

1 Introduction..

10

1. Industry profile..
10
2. Regulatory framework......
11
3. Organization profile.........
12
4. Structure of Mutual Fund in India.....
5. Basis of Comparisons of mutual funds.....
6. How to pick the right mutual fund........
7. Scheme/fund offerings by ICICI .....

16
22
25
28

2 Literature review..........

30

3 Objectives of the study.........

31

4 Research Methodology..........

32

5 Data Analysis...........

33

1. Study of scope of diversification of portfolio by investing in Indian


and US mutual funds...........
2. Study to examine the risks of investment in international market due
to fluctuations in FOREX market......
3. Finding of efficiently managed mutual fund using DEA model...

33

39
40

6 Results and Conclusion.........

49

7 Limitations and caveats............

51

8 Recommendations..........

52

9 References...........

53

List of Tables
S.no

Page No.

Taxation in mutual fund.

20

Comparison of US and India equity market..

33

Top 5 US and Indian large cap growth funds

34

Historical monthly returns of top US and Indian funds.

36

Correlation matrix of returns of US and Indian funds...

37

Output table of DEA..

44

Input table for DEA

45

DEA model for excel..

46

Efficiency table with no weights constraints.

47

10

Efficiency table with weights constraints..

48

List of Figures
S.no

Page No.

Mutual Fund Flow..

15

Framework of Mutual Fund Industry.

16

Mutual funds type...

17

USD-INR conversion rate..

39

06/28/2016
TO WHOMSOEVER IT MAY CONCERN
Sub: Training Certificate
We hereby certify that Mr. Amol Agarwal, a Full Time Student of
Post Graduate Diploma in Management Course, 2015-2017, of
Birla Institute of Management Technology (BIMTECH) has
undergone his Summer Internship as mandated for the
completion of his above course from BIMTECH, for a period of
10 weeks starting from April 11th 2016.
The title and scope of his project was Comparison and analysis
of mutual fund market in India and USA. The project was
carried

out

under

the

guidance

Designation: Deputy Manager.

of

Mr.

Vivek

Verma,

We found him to be a dedicated and diligent student. We take


this opportunity to wish him every success in his future
endeavors.
Sincerely,

Mr. Prakash Kashwani


Designation: Team Leader

Summer Project Certificate

This is to certify that Mr. Amol Agarwal, Roll No. 15DM021, a student of PGDM (Finance),
BIMTECH, has worked on a summer project titled Comparison and analysis of mutual
fund market in India and USA at ICICI Prudential AMC after Trimester III in partial
fulfillment of the requirement for the Post Graduation Diploma in Management program.
This is his original work to the best of my knowledge.

Signature

Date: 28/06/2016

(Professor L. Ramani)
Faculty guide

Letter of Authorization
I, Amol Agarwal, student of Birla Institute of Management Technology (BIMTECH),
hereby declare that I have worked on a project titled Comparison and analysis of
mutual fund market in India and USA during my summer internship at ICICI
Prudential AMC, in partial fulfillment of the requirement for the Post Graduation
Diploma in Management program.
I guarantee/underwrite my research work to be authentic and original to the best of my
knowledge in all respects of the process carried out during the project tenure.

Date: June 24, 2016

Amol Agarwal
(15DM021)

Acknowledgement
I take this opportunity to firstly thank my institute, for giving me this opportunity to
undergo this Project in one of the most reputed financial company. It has been a great
learning experience in terms of gaining exposure into the market and knowing how actually a
business can be developed and run.
I thank my Faculty Guide, Prof. L. Ramani and Mr. Prakash Kashwani who put all
their efforts in making me understand the overall theme of the Project and thereby increasing
my knowledge. Their time and efforts have indeed been very fruitful.
I also thank all other employees at ICICI AMC particularly Mr. Vivek Verma with
whom I have spent my training period. They have helped me in every possible manner in my
endeavor to complete this project successfully. I acknowledge the support and knowledge
they have provided me.

Letter of Transmittal

Birla Institute of Management Technology,


Plot no. 5, Knowledge Park-II, Institutional Area,
Greater Noida (NCR), U.P.-201306, INDIA
Date: June 24, 2016
Mr. Vivek Verma,
ICICI AMC,
Narain Manzil,
Barakhamba Rd,
Delhi 110001
Dear Sir,

SUB: Summer Project Report


Attached herewith is a copy of my summer-project report Comparison and
analysis of mutual fund market in India and USA which I am submitting in order
to mark the completion of a 10 weeks summer-project at your organization. This
report was prepared by me by using the best of practices and summarizes the work
performed on the project and is being submitted in partial fulfillment for award of
diploma.
I would like to mention that the overall experience with the organization was
very good, and helped me to know how work is carried out in real practice with the
help of your esteemed organization. I feel honored that I got an opportunity to work
with ICICI, a company of great repute.
I hope I did justice to the project and added some value to the organization.
Suggestions/comments would be appreciated.
Yours truly,
Amol Agarwal

Executive Summary
Mutual funds pool money from different investors and invest in different investment
sources like stocks, shares, bonds etc. A professional fund manager manages these and returns
are paid to the investors. Mutual funds have to be subscribed in units and the purchase or sale
is dependent on NAV (Net Asset Value), taking into consideration the exit and entry load
factors into account.
This project undertaken deals with scope of diversification of portfolio by investing in
Indian and USA mutual funds and also this project studies the differences and similarities
between mutual fund market of the above mentioned two countries.
The project also evaluates the risk associated with international investment due to
fluctuations in currency exchange rates. Finally efficiency of mutual funds is studied using
Data Envelopment Analytics (DEA) model.

1. Introduction
1.1 Industry Profile
In order to purchase securities, manage investments from many investors, the type of
fund present globally is Mutual funds. A mutual fund is a collective investment done by
various individuals that pools money from them and are professionally managed to invest in
bonds, money market instruments, stocks and other securities. Mutual funds can be organized
in various investments like bank deposits, shares, bonds, post office deposits, real estate etc.
It is regulated by SEBI and sold to general public. A fund manager is the person responsible
for the buying and selling of the securities on behalf of the various investors. Mutual funds
are introduced in India in the year 1964 by the launch of Unit Trust of India (UTI). Since
there is financial illiteracy in India it took around 20 years for this industry for the acceptance
of it in the financial market. As on December 2015, total amount of assets under management

10

(AUM) in mutual funds is worth Rs. 1,339,484 crores out of which AUM of ICICI are worth
Rs. 172,154 crores.
With the help of fund managers, the company has the privilege of taking
responsibility of deploying the funds in specific securities so that the investors have the
proper mind set in investing into the funds having a good return. The investor need not invest
in hundreds of stocks available. The best advantage that mutual fund offers is diversification.
The low investments are only possible in mutual funds. The various options available in
mutual funds are the shares, bonds and other securities which ensure diversity of portfolio
across different industries and sectors. The overall risk is reduced because of this option of
diversification in mutual funds. The minimum investment required in mutual funds is about
Rs 500 which is less expensive and diversification is possible and the shares can be bought
directly from the market. To prevent money laundering Mutual Funds are regulated by SEBI
and untoward happenings.

1.2 Regulatory Framework


Securities and Exchange Board of India (SEBI)
The Government of India constituted Securities and Exchange Board of India, by an
Act of Parliament in 1992, the apex regulator of all entities that either raise funds in the
capital markets or invest in capital market securities such as shares and debentures listed on
stock exchanges. Mutual funds have emerged as an important institutional investor in capital
market securities. Hence they come under the purview of SEBI. SEBI requires all mutual
funds to be registered with them. It issues guidelines for all mutual fund operations including
where they can invest, what investment limits and restrictions must be complied with, how
they should account for income and expenses, how they should make disclosures of
information to the investors and generally act in the interest of investor protection. To protect
the interest of the investors, SEBI formulates policies and regulates the mutual funds. MF

11

either promoted by public or by private sector entities including one promoted by foreign
entities are governed by these Regulations. SEBI approved Asset Management Company
(AMC) manages the funds by making investments in various types of securities. Custodian,
registered with SEBI, holds the securities of various schemes of the fund in its custody.
According to SEBI Regulations, two thirds of the directors of Trustee Company or board of
trustees must be independent.
Association of Mutual Funds in India (AMFI)
With the increase in mutual fund players in India, a need for mutual fund association
in India was generated to function as a non-profit organization. Association of Mutual Funds
in India (AMFI) was incorporated on 22nd August, 1995.
AMFI is an apex body of all Asset Management Companies (AMC) which has been
registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are
its member. It functions under the supervision and guidelines of its Board of Directors.
Association of Mutual Funds India has brought down the Indian mutual fund industry to a
professional and healthy market with ethical line enhancing and maintaining standards. It
follows the principle of both protecting and promoting the interests of mutual funds as well as
their unit holders.

The objectives of Association of Mutual Funds in India


The Association of Mutual Funds of India works with 30 registered AMCs of the
country. It has certain defined objectives which juxtaposes the guidelines of its Board of
Directors. The objectives are as follows:

This mutual fund association of India maintains high professional and ethical
standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct
which is followed by members and related people engaged in the activities of mutual
fund and asset management. The agencies who are by any means connected or

12

involved in the field of capital markets and financial services also involved in this
code of conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual
fund industry.

Association of Mutual Fund of India do represent the Government of India, the


Reserve Bank of India and other related bodies on matters relating to the Mutual Fund
Industry.

It develops a team of well qualified and trained Agent distributors. It implements a


program of training and certification for all intermediaries and other engaged in the
mutual fund industry.

AMFI undertakes all India awareness program for investors in order to promote
proper understanding of the concept and working of mutual funds.
At last but not the least association of mutual fund of India also disseminate

information on Mutual Fund Industry and undertakes studies and research either directly or in
association with other bodies.

1.3 Organization Profile


ICICI Prudential Asset Management Company Ltd is a joint venture between ICICI
Bank and Prudential Plc, UKs largest players in the financial services sectors. It was
integrated in the year 1993. In India ICICI Prudential Asset Management Company is the
second largest contributing to the growth of the Indian mutual fund industry.
The company handles Mutual Fund Asset under Management (AUM) in additional to
International Advisory Mandates, Portfolio Management Services across international
markets in asset classes like Equity, Debt and Real Estate with primary focus on risk adjusted
returns.
ICICI has recorded a substantial growth in this industry. Since its inception with 6
employees in locations, it increased its strength to 700 employees with reach across around

13

150 locations. It is nearly an exponential growth in its momentum. Presently, the organization
is a mix of resource bandwidth, investment expertise and process orientation. The companys
endeavor is to bridge the gap between savings & investments.

Their Business

What do they offer?


1.
2.
3.
4.

Mutual Funds
Real Estate Investments
Advisory Services
Portfolio Management Services

Distribution architecture:
1.
2.
3.

Retail Distribution Banks


National Distributors/Regional Distributors
Individual Financial Agents

Customers:
As this is mostly B2B business we deal typically with our Distributors who then in turn meet
with customers. Also a client can choose the choice of Direct Investment and can capitalize
on his own without approaching any of the IFAs.
Therefore both the Distributors and normal consumers are our customers. What
benefits do we create for our customers and partners?

To Customers:

Less risky investment profile-Actively managed fund and passively managed fund.

Marinating Relationships
Creating Value
Services
High Return.

To Partners:

14

Healthy return on investment in terms of Profit.


Association with good brand.
Capitalizing on the growth of the market.
High revenue.
Creating goodwill.

Leadership:
MD & CEO trusts to be quantifiable to all the workforces, and has curved around the
association. Aims to attain the highest market share and exploit on the huge potential of the
industry. ICICI Prudential AMC follows self-driven strategy. Every Individual is motivated to
achieve the common goal.

Figure 1: Mutual Fund Flow

Depending upon the risk appetite, requirements and return expectation of the investor,
investors invest their money in different schemes of the fund house. This can either turn to

15

profit or a loss. The investor will get the returns back from the fund house. This is how the
industry of Mutual Funds works.
In this, the investor tells the about his preference for the field of investment as in he
wants to invest in debt, equity or both. Then, the company or the advisor himself selects the
scheme or the portfolio as per the requirements of the investor.

1.4 Structure of Mutual Fund in India

Figure 2: Framework of Mutual Fund Industry

Sponsors Application of cataloguing is made to SEBI by the sponsors. Later they jump to
start investing in the capital of the asset management company.

16

TrusteesIt is from the trustees that the trust acts. Hence it is the trustees which protect the
interest of investors.
AMC The day to day management of the schemes is taken care by the Asset
Management Company which is appointed by the trustees. For the allocation of the money,
Asset Management Company (AMC) acts as an agent for the investor investing in the mutual
funds. AMC generates their income by charging service fees to their customers.
The Mutual FundOne or more sponsors create a mutual fund trust. They are the main
persons behind the mutual fund business.
CustodianCustodian will be appointed by trustees who take care of the assets in the
schemes of gold, securities, gold related instrument and real estate documents.
Transfer AgentKeeping a record of the investors and their unit holdings is very important
as investors invest in various schemes of the mutual fund. It can be done by the asset
management company itself or it appoints an RTA (Registered Transfer Agent).
Types of Mutual Funds:

17

Figure 3: Mutual funds type

Open-ended funds: Entering and existing of the funds option is available for the investors
even after the New Funds Offering (NFO) is over.
Close-ended funds: These funds have fixed maturity where the units can be bought from the
fund, only during its NFO. When the funds are listed, there will be exit option.
Interval funds: These are the funds which are both close ended and open ended. Majorly
they are close ended but they become open ended in some specific intervals.
Actively managed funds: These are funds where fund manager has huge role to perform and
their main objective is to overtake the benchmark indices.
Passive funds: Invest in stocks to book returns aligning to the directory (index). The role of
fund manager is very less in this type of funds when associated to active funds.
Debt Funds are those schemes whose distribution of funds is majorly in debt securities like
Government Securities, Treasury Bills, Debentures and Bonds.
Hybrid funds have a stock (investment) charter that delivers for investment in both debt and
equity.
Equity Funds are schemes that might have an investment objective to invest largely in equity
shares and equity related investments like convertible debentures.
Diversified equity fund is a type of fund which invests across different sectors and
industries.
Sector funds. Investments in a particular sector related stocks. Example: A portfolio with
stocks of only infrastructure.
Thematic funds are those funds which invest in funds in a sector and also relevant sectors.
Example: Like cement, Infrastructure, Steel industries.

18

Equity Linked Savings Schemes (ELSS) This type of funds help in providing tax benefits.
Arbitrage Funds take contrary positions in different markets / securities, such that the risk is
neutralized, but a return is earned.
Gold Funds are funds that invest in gold and gold-related securities.
Real Estate Funds take exposure to real estate. Generally investing in real state requires
huge corpus but these funds help small investors to get exposure towards real estate.

Taxation in Mutual Funds


For Resident
Long Term

Domestic Company

NRI

Nil

Nil

Nil

Nil

Nil

Nil

20% with

20% with

20% with

indexation+ 15%

indexation+ 12%

indexation+ 15%

surcharge+ 3% cess

surcharge+ 3% cess

surcharge+ 3% cess

= 23.690%

= 23.072%

= 23.690%

20% with

20% with

10% without

indexation+ 15%

indexation+ 12%

indexation+ 15%

surcharge+ 3% cess

surcharge+ 3% cess

surcharge+ 3% cess

Individual
Equity Schemes
(Listed)
Equity

Schemes

(Unlisted, exit by
way of redemption
of unit)
Debt Schemes
(Listed)

Debt Schemes

19

= 23.690%

= 23.072%

= 11.845%

Resident Individual

Domestic Company

Equity schemes

15%+ 15%

15%+ 12%

15%+ 15%

(listed and unlisted)

surcharge+ 3% cess

surcharge+ 3% cess

surcharge+ 3% cess

=17.7675%

=17.304%

=17.7675%

As per slab rate +

30% + 12%

As per slab rates +

15% surcharge + 3%

surcharge + 3%

15 % surcharge +

cess

cess= 34.608%

3% cess

Short Term

Debt Schemes

NRI

Income Tax rates for individual

Total Income
Up to INR 250000
INR 250001 to INR 500000

Tax Rate
Nil
10%

INR 500000 to INR


1000000
INR 1000001 and above

20%
30%

Table 1: Taxation in mutual fund

Advantages of Mutual Funds


There are many advantages of mutual funds over other investment avenues which are
listed below:
Portfolio Diversification
In the portfolio planning, since the option of diversification is present, the risk can be
minimized since the investments are made in several funds.

20

Professional Management
A higher return is possible in mutual funds as the allocation is made by the expert fund
managers who invest after researching about the credentials and fundamentals of the
company to earn profits.
Less Risk
There is an benefit of less risk as even with inadequate amounts diversification is possible
hence allows the diversification of risk.
Low Transaction Costs
Due to the economies of scale (benefits of larger volumes), mutual funds pay smaller
transaction costs. These low transaction cost benefits can be passed on to the investors thus
minimizing their costs.
Liquidity
Units of shareholders are extremely liquid and can be converted whenever there is a need.
Choice of Schemes
Mutual funds deliver investors with numerous schemes with diverse investment objectives.
Investors can select amongst the schemes which top matches his own monetary goals and
attain higher paybacks. Each scheme again has investor friendly options and plans.
Transparency
Updated data is provided to the investors clearly. The daily NAVs are available in the
newspapers and websites safeguarding transparency.
Flexibility
High level of suitability and flexibility is related with mutual funds. Investors can anytime
change from equity linked funds to debt and vice versa. If there are no sufficient funds to
capitalize in lump sum there are choices which are flexible like systematic investment plan
and systematic withdrawal plan which lets regular saving and withdrawal of funds.
Safety

21

Mutual Fund business is part of a well-regulated investment location where the benefits of the
investors are threatened by the regulator. SEBI ensures that all funds are registered with it
ensuring clearness against any fraud.
Disadvantages of Mutual Funds
There are few disadvantages on the flip side along with the many advantages. These
can be handled in an efficient way to book profits from the mutual fund investments.
Costs Control Not in the Hands of an Investor
Irrespective of the either returns or losses retained by the investors the management
subscriptions over the funds capitalized is stimulating by the mutual fund companies.

No Customized Portfolios
There are no personalized products for the clients according to their investment horizon, risk
appetite etc. They have to select from the obtainable products that greatest suits them. Hence
the whole pleasure is with the fund manager.
Difficulty in Selecting a Suitable Fund Scheme
There are about 40 fund houses functioning and giving a widespread horizon of harvests in
debt, equity and hybrid funds. It occasionally becomes problematic for the investor to select
the suitable fund that outfits his objectives and goals. A financial consultants help can be
taken in this regard.

1.5 Basis of Comparison of Various Schemes of Mutual Funds


Beta
Beta measures the sensitivity of the stock to the market. For example if beta=1.5; it
means the stock price will change by 1.5% for every 1% change in Sensex. It is also used to
measure the systematic risk. Systematic risk means risks which are external to the
organization like competition, government policies. They are non-diversifiable risks.

22

Beta is calculated using regression analysis, Beta can also be defined as the tendency
of a security's returns to respond to swings in the market. A beta of 1 indicates that the
security's price will move with the market. A beta less than 1 means that the security will be
less volatile than the market. A beta greater than 1 indicates that the security's price will be
more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20%
more volatile than the market.
If Beta > 1 then x is an aggressive stock
If beta < 1 then x is a defensive stock
If beta=1 then neutral
So, its a measure of the volatility, or systematic risk, of a security or a portfolio in
comparison to the market as a whole. Many utilities stocks have a beta of less than 1.
Conversely, most hi-tech NASDAQ-based stocks have a beta greater than 1, offering the
possibility of a higher rate of return but also posing more risk.
Alpha
Alpha takes the volatility in price of a mutual fund and compares its risk adjusted
performance to a benchmark index. The excess return of the fund relative to the returns of
benchmark index is a fundamental ALPHA. It is calculated as a return which is earned in
excess of the return generated by CAPM. Alpha is often considered to represent the value that
a portfolio manager adds to or subtracts from a fund's return. A positive alpha of 1.0 means
the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative
alpha would indicate underperformance of 1%.

If a CAPM analysis estimates that a portfolio should earn 35% return based on the
risk of the portfolio but the portfolio actually earns 40%, the portfolio's alpha would be 5%.
This 5% is the excess return over what was predicted in the CAPM model. This 5% is
ALPHA.
Sharpe Ratio
A ratio developed by Nobel Laureate Bill Sharpe to measure risk-adjusted
performance. It is calculated by subtracting the risk-free rate from the rate of return for a
portfolio and dividing the result by the standard deviation of the portfolio returns.

23

The Sharpe ratio tells us whether the returns of a portfolio are because of smart
investment decisions or a result of excess risk. This measurement is very useful because
although one portfolio or fund can reap higher returns than its peers, it is only a good
investment if those higher returns do not come with too much additional risk. The greater a
portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

Treynor Ratio
The treynor ratio, named after Jack Treynor, is similar to the Sharpe ratio, except that
the risk measure used is Beta instead of standard deviation. This ratio thus measures reward
to volatility.
Treynor Ratio = (Return from the investment Risk free return) / Beta of the
investment. The scheme with the higher treynor Ratio offers a better risk-reward equation for
the investor.
Since Treynor Ratio uses Beta as a risk measure, it evaluates excess returns only with
respect to systematic (or market) risk. It will therefore be more appropriate for diversified
schemes, where the non-systematic risks have been eliminated. Generally, large institutional
investors have the requisite funds to maintain such highly diversified portfolios.
Also since Beta is based on capital asset pricing model, which is empirically tested for
equity, Treynor Ratio would be inappropriate for debt schemes.
M- SQUARED
Modigliani and Modigliani recognized that average investors did not find the Sharpe
ratio intuitive and addressed this shortcoming by multiplying the Sharpe ratio by the standard

24

deviation of the excess returns on a broad market index, such as the S&P 500 or the Wilshire
5000, for the same time period. This yields the risk-adjusted excess return. This, too, is a
significant and useful statistic, as it measures the return in excess of the risk-free rate, which
is the basis from which all risky investments should be measured.
MSquared= [ (Ri Rf)/ Sd. Inv] * Sd. Mkt + Rf
or
MSquared= Sharpe Ratio* Sd. Mkt + Rf
Ri = Return from the investment
Rf = Risk free return
Sd. Inv= Standard Deviation Investment
Sd. Mkt= Standard Deviation Market
Leverage Factor
It reports the comparison of the total risk in the fund with the total risk in the market
portfolio and can be used in making investment decisions. It is calculated by dividing market
standard deviation by the fund standard deviation.
Li = Standard deviation of the market
Standard deviation of the fund
For example a leverage factor greater than one implies that standard deviation of the
fund is less than standard deviation of the market index, and that the investor should consider
levering the fund by borrowing money and invest in that particular fund. while this would
tend to increase the risk of investment somewhat ,there would be an greater than proportional
increase in returns. On the other hand leverage factor less than one implies that the risk of
fund is greater than risk of market index and the investor should consider unlevering the fund
by selling of the part of the holding in the fund and investing the proceeds I a risk free
security, such as treasury bill in this way returns on the investment reduce somewhat, there
would be an greater than proportional reduction in risk.
Standard Deviation

25

A measure of the dispersion of a set of data from its mean. The more spread apart the
data is, the higher the deviation. Standard deviation is applied to the annual rate of return of
an investment to measure the investment's volatility (risk).
A volatile stock would have a high standard deviation. The standard deviation tells us
how much the return on the fund is deviating from the expected normal returns. Standard
deviation can also be calculated as the square root of the variance.

1.6 How to pick the right mutual fund


Identifying Goals and Risk Tolerance
Before acquiring shares in any fund, an investor must first identify his or her goals
and desires for the money being invested. Are long-term capital gains desired, or is a current
income preferred? Will the money be used to pay for college expenses, or to supplement a
retirement that is decades away. One should consider the issue of risk tolerance. Is the
investor able to afford and mentally accept dramatic swings in portfolio value? Or, is a more
conservative investment warranted? Identifying risk tolerance is as important as identifying a
goal. Finally, the time horizon must be addressed. Investors must think about how long they
can afford to tie up their money, or if they anticipate any liquidity concerns in the near future.
Ideally, mutual fund holders should have an investment horizon with at least five years or
more.
Style and Fund Type
If the investor intends to use the money in the fund for a longer term need and is
willing to assume a fair amount of risk and volatility, then the style/objective he or she may
be suited for is a fund. These types of funds typically hold a high percentage of their assets in
common stocks, and are therefore considered to be volatile in nature. Conversely, if the
investor is in need of current income, he or she should acquire shares in an income fund.
Government and corporate debt are the two of the more common holdings in an income fund.
There are times when an investor has a longer term need, but is unwilling or unable to assume
substantial risk. In this case, a balanced fund, which invests in both stocks and bonds, may be
the best alternative.
Charges and Fees

26

Mutual funds make their money by charging fees to the investor. It is important to
gain an understanding of the different types of fees that you may face when purchasing an
investment. Some funds charge a sales fee known as a load fee, which will either be charged
upon initial investment or upon sale of the investment. A front-end load/fee is paid out of the
initial investment made by the investor while a back-end load/fee is charged when an investor
sells his or her investment, usually prior to a set time period. To avoid these sales fees, look
for no-load funds, which don't charge a front- or back-end load/fee. However, one should be
aware of the other fees in a no-load fund, such as the management expense ratio and other
administration fees, as they may be very high.
The investor should look for the management expense ratio. The ratio is simply the
total percentage of fund assets that are being charged to cover fund expenses. The higher the
ratio, the lower the investor's return will be at the end of the year.

Evaluating Managers/Past Results


Investors should research a fund's past results. The following is a list of questions that
perspective investors should ask themselves when reviewing the historical record:

Did the fund manager deliver results that were consistent with general market returns?

Was the fund more volatile than the big indexes (it means did its returns vary
dramatically throughout the year)?
This information is important because it will give the investor insight into how the

portfolio manager performs under certain conditions, as well as what historically has been the
trend in terms of turnover and return. Prior to buying into a fund, one must review the
investment company's literature to look for information about anticipated trends in the market
in the years ahead.
Size of the Fund
Although, the size of a fund does not hinder its ability to meet its investment
objectives. However, there are times when a fund can get too big. For example - Fidelity's
Magellan Fund. Back in 1999 the fund topped $100 billion in assets, and for the first time, it
was forced to change its investment process to accommodate the large daily (money) inflows.

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Instead of being nimble and buying small and mid-cap stocks, it shifted its focus primarily
toward larger capitalization growth stocks. As a result, its performance has suffered.
Fund Transactional Activity
Portfolio Turnover
Measure of how frequently assets within a fund are bought and sold by the managers.
Portfolio turnover is calculated by taking either the total amount of new securities
purchased or the amount of securities sold -whichever is less - over a particular period,
divided by the total net asset value (NAV) of the fund. The measurement is usually
reported for a 12-month time period

Historical Performance
The investor should see the past returns of the fund and should compare it with the
peer group fund. Whatever the objective, the mutual fund is an excellent medium to
accumulate financial assets and grow them over time to achieve any of these goals.

1.7 Scheme/fund offerings by ICICI


ICICI provides a variety of funds to match the investment needs of different investors.
Within the category of equity funds, there 22 different funds offered. Performance of equity
funds is highly dependent on the equity market performance. Hence, although they offer the
potential for high returns, they are riskier than other fund categories. Ideally these funds are
suitable for investors with high risk profile and investment horizon of more than 3 years.
Debt Mutual Funds invest in a range of interest bearing instruments such as Treasury
Bills, Government Securities, Corporate Bonds, Money Market Instruments and other debt
securities. As Debt Mutual Funds mainly invest in debt securities, they are relatively more
stable than equity investments. But these funds doesnt provide potential for high returns.

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Balanced Funds invest both in equity shares and debt (fixed income) instruments and
strive to provide both growth and regular income. They are ideal for medium- to long-term
investors willing to take moderate risks.
An investor is offered two styles of investment- Lumpsum and SIP (Systematic
investment Plan). Most of the schemes have restriction of minimum investment of Rs. 1000
in case of SIP and of Rs. 5000 on case of Lumpsum investment. Lumpsum is a onetime
investment. In SIP, a fixed amount of money is debited by the investors in bank accounts
periodically and invested in a specified mutual fund. The investor is allocated a number of
units according to the current Net asset value. Every time a sum is invested, more units are
added to the investors account.
The strategy frees the investors from speculating in volatile markets. As the investor is
getting more units when the price is low and less units when the price is high, in the long run
the average cost per unit is supposed to be lower. Most of the investment in banking channel
is through SIPs only.
SIP offers following advantages for the investors:

SIPs are done in open-ended funds where the investors can invest and take out the
money anytime

There is no fixed tenor for running SIP. Once the SIP tenor is fixed, it can stopped in
between or could be continued even after the tenor by placing the request with
respective mutual fund company

Full and partial withdrawal is possible during or after the SIP tenor.

The SIP amount can be increased or decreased

Reduces Risk because of Rupee Cost Averaging

Long term financial goal can be aligned with SIP

Timing the market is not necessary

Disciplined approach towards Investment helps in controlling the emotions

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However, there is no point in comparing lump-sum investments and SIPs for which
one is better. Both have their own advantages. Actually, they are two completely different
ideas, and the latter will typically beat SIPs. When you invest a lump sum, a larger chunk of
your money works for a longer period of time.
On the other hand, a SIP is a slow model, where you build your wealth with each
instalment. Had you invested Rs 10,000 per month in the Sensex since its inception in 1979
406 months in allyou would have about Rs 1.6 crore today. A lump-sum investment of
the same amount, Rs 4.06 lakh at that time would be worth over Rs 8 crore today. If you have
a lump sum handy, you are better off not trying to go for an SIP unless you think the market
is falling and you want to invest at lower levels.

2. Literature Review
Past research on the topic of mutual fund analysis of India and USA focuses on
comparison using various performances metrics like returns, standard deviation and more.
Some studies evaluates the trends of returns provided by mutual funds. A paper by George O
Aragon provides a review of the methods for measuring portfolio performance and the
evidence on the performance of professionally managed investment portfolios.
Prof. Amit Gera, 2007, Publication on research on Indo-US mutual fund comparison
A research report based on a comparison between top Indian and US mutual funds.
The report describes the benefits of mutual funds and the best options available in the current
market situation. The research is conducted through a comparison of various performance
measures including Expense Ratio, Portfolio Turnover, and most importantly Standard
Deviation, Sharpe ratio, Beta, R-squared, P/E Ratio, P/B Ratio and Alpha. The report also

30

analyses the future of mutual funds in both these countries and determines the best mutual
fund amongst both markets.
Madhumita Chakraborty, P K Jain and Vinay Kallianpur, South Asian Journal of
Management, Vol. 15, Issue No. 4, Oct-Dec 2008, Mutual Fund Performance: An
evaluation of Select Growth Funds in India
The report attempts to evaluate the performance of mutual funds based on rate of
return as well as risk-adjusted methods. Performance of mutual funds are compared with the
risk-free returns as well as the benchmark index (BSE 100), which is taken as a proxy for
market returns. The study provides some evidence of satisfactory performance in terms of
returns generated per unit of risk and a conclusive statement regarding the capabilities of
mutual fund managers still being elusive.

3. Objectives of the study

To find the similarities and differences in performances of mutual funds in two


different economies- India and USA: India and USA are two different economies
which makes their comparison difficult. To simplify, only Large-cap equity funds are
compared. The equity market of both countries is also analyzed.

To find whether an investor can effectively diversify his portfolio by investing in


international equity market (India and US).

To examine the risks of investment in international market due to fluctuations in


Foreign Exchange (FOREX) market.

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To find most efficiently managed mutual fund using DEA model: The presence of
multiple performance metrics makes it difficult to analyze that which funds are most
efficiently managed. While trying to provide potential for high returns, a fund
manager generally exposes the fund to more risk. The risk can be considered as a
resource or input available to the fund manager. A more efficient fund will be the one
that provides more output- short term return, long term return, alpha while utilizing
less input- risk (Standard Deviation), expense ratio etc.

4. Research Methodology
Top 5 Equity Large Cap Growth funds of both countries based on last 5 years returns
have been considered for most of the calculations and analysis. MS Excel is used for most of
the quantitative analysis.
Indian market is represented by BSE SENSEX while US market by S&P 500.
Correlation is calculated using monthly returns for past 10 years (2006-15) of both markets.

Data collection
The research is based on secondary data achieved through various online resources like

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www.valueresearchonline.com

http://www.morningstar.in/

http://www.moneycontrol.com/mutual-funds

http://www.marketwatch.com/investing/fund

http://money.usnews.com

http://in.investing.com/currencies/usd-inr-historical-data

5. Data Analysis
5.1 Study of scope of diversification of portfolio by investing in Indian and US
mutual funds
Comparing Indian and USA equity market

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Table 2: Comparison of US and India equity market

The table above summarizes equity market performances of both countries. Historical
data of monthly returns for ten years (2006-16) was collected to calculate standard deviation
and correlation coefficient. S&P 500 and BSE SENSEX index represents USA and Indian
markets respectively. There is a partial positive correlation of 0.65. It can be said that both
markets move in sync but quite a difference is observed in annual returns for past 5 and 10
years.

Factsheet of top 5 US and Indian large cap growth funds

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Table 3(a): Top 5 US and Indian large cap growth funds

It can be seen from above table that US funds have quite lower expense ratio than
their Indian counterparts. US funds have average expense ratio of 0.696% while for Indian
funds it is 2.22%. The average asset size is also larger for US funds.

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Table 3(b): Top 5 US and Indian large cap growth funds

As these are equity funds so their portfolio consists of around 90% equity stocks.

36

The table below which consists of historical monthly returns for 3 years of aforementioned funds has
been used to find correlation matrices for 3 years separately.

Table 4: Historical monthly returns of top US and Indian funds

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Find below the correlation matrices:

Table 5(a): Correlation matrix of returns of US and Indian funds for the year 2013

Table 5(b): Correlation matrix of returns of US and Indian funds for the year 2014

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Table 5(c): Correlation matrix of returns of US and Indian funds for the year 2015

Table 5(d): Correlation matrix of returns of US and Indian funds for 3 years combined

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5.2 Study to examine the risks of investment in international market due to


fluctuations in Foreign Exchange (FOREX) market
Investment in international equity market is exposed to the risk of changing value of
currency exchange rate. Those who seek international diversification benefits need to trade
currencies to buy and sell foreign assets and securities. Investors need to look for trends and
economic outlooks to predict the potential movement in a currency.
Ultimately, a currency fluctuates based on supply and demand characteristics. When
more investors demand a currency, it will likely strengthen relative to other currencies. When
there is excess supply, the opposite is true. This fundamental principle, however, is influenced
by a many factors that lead to constant currency fluctuations each and every day. It is beyond
the scope of this study to discuss many of these factors. The focus will be on how equity
markets can provide an insight into the foreign exchange markets.

USD-INR conversion rate


70
60
50
40

Value of 1 USD in INR

30
20
10
0

Figure 4: USD-INR conversion rate

The figure above shows fluctuations in USD-INR conversion rate during past ten years. The
same data has been used to create the table below. The standard deviation of 8.34 shows the
amount of fluctuations (risk) involved.

40

Evaluating whether FOREX market movement can be linked to movement in equity market:
To examine whether FOREX market movement can be linked to movement in equity
market, I have calculated the correlation between the percentage change in USD-INR rate and
percentage change in value of market index (SENSEX and S&P 500). The data used is
historical data from 2007 to 2016 on monthly basis thus utilizing a total of 112 data points.
The results are summarized below:

Hence, there is a negative correlation between USD-INR rate and equity market
index. It shows that a bullish US and Indian market is linked with the appreciation of rupee
with respect to USD while a bearish market is linked with depreciation of rupee. However,
since the correlation value is low (-0.62 and -0.53); a solid conclusion cant be drawn.

5.3 Finding of efficiently managed mutual fund using DEA model


Background of DEA model
Efficiency Measurement
The basic measure of efficiency is the ratio between one output and one input, which
can be written as:
Efficiency = Output / Input
However, this equation is normally not adequate to be applied in the real world
problem, because there often exist a numerous inputs and outputs of different categories. For
a company, investors concern would not limit to one single output or input factor. Instead,
investors pay highly attention to a lot of their financial information, including returns, risk
factor, alpha, beta, liquidity, AUM. One output or input can tell the information with respect
to a certain field, but none of them can represent the overall financial performance of the
mutual fund. An ideal way is to have all the major inputs and outputs information gathered

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together and develop a way to measure the efficiency of each fund in terms of these factors,
as well as flexible enough to put different constraints of weights.
A common measure for relative efficiency is used, by taking the weighted sum of
output divided by the weighted sum of input. The principle behind this model is linear
programming approach, which is definite as the problem of maximizing or minimizing a
linear function subject to linear constraints. If no additional restriction is inserted, this
problem could be then an unbounded one. Restriction includes that

Each of the weights of inputs and each of the weights of outputs must be greater all
equal to 0

For each of the DMUs, the ratio of the sum of the weighted output factors divided by
the sum of the weighted input factors is strictly less or equal than 1. This indicates
that the efficiency score of each DMUs would be always less or equal than 1. If the
ratio achieves 1, it indicates that this DMU is fully efficient, compared to rest DMUs
in this group. The lower, the ratio is, the less efficient the DMU is.

The mathematical model to achieve the relative efficiency score of DMUp among a set of
homogenous DMUs:

Subject to

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where
K = 1 to s,
J = 1 to m,
Q = 1 to n,
Y = amount of output k produced by DMU q
X = amount of input j utilized by DMU q,
V = weight given to output k,
= weight given to input j.
The model will need to be run one time for each DMUs. To find the relative efficiency
score of n DMUs, it will need to be run n times. For each DMUs, a unique set of weights of
inputs and outputs will be determined to maximize the efficiency score.
Methodology
I have divided the Data Envelopment Analysis process as a four stage process:

Input and Output Determination

Data Collection and Cleanup

Weights Determination

Efficiency calculation

Input and Output Determination


For a data envelopment analysis model, it is very crucial to determine a set of input
and output factors. The evaluating objectives are mutual funds, a selection of inputs and
outputs would be from some financial term factors. However, not all of the major financial
terms can be regarded as valid factors.
For the evaluation of output, one parameter in consideration is returns of the mutual
fund. Short term (1 year) as well as long term (3 years) returns are taken in consideration. A
fund must be able to provide not only long term gain but it should also be capable of

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providing short term gain. Any investor desires three results from his investment- high return,
low risk and liquidity. Either he will demand one of them or two of them or all three of them.
The basic concept of DEA model is to find the unit that gives maximum output with
minimum input. So higher output with lower input is desired.
Standard deviation is taken as input. Ideally higher the risk (standard deviation),
higher is the return. Hence an efficient fund will generate more return with less standard
deviation. Asset under management (AUM) is another input. Higher the AUM, more is the
available resources and choices with the fund manager to invest the money.
Data Collection and Cleanup
Only Large Cap equity growth funds of India and USA are considered. Moreover,
they are filtered by selecting only the top 5 funds of both countries based on the CAGR
(compounded annual growth rate) for last five years. The mutual funds thus selected are:
Indian funds
1. SBI Blue Chip Fund (G)
2. Kotak Select Focus Fund - Regular (G)
3. BNP Paribas Equity Fund (G)
4. Birla Sun Life Top 100 (G)
5. Birla SL Frontline Equity (G)
USA funds
1. ClearBridge Large Cap Growth I
2. Edgewood Growth Instl
3. Shelton Nasdaq-100 Index Direct
4. VALIC Company I NASDAQ-100
5. Loomis Sayles Growth Y

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Table 6(a): Output table for DEA (before adjustment)

As we can see, the 1-year returns column contains negative values which is not
allowed for the DEA model. So an adjustment is made by adding 1 to the entire column of 1year return.

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Table 6(b): Output table for DEA (after adjustment)

The input table is shown as below:

Table 7: Input table for DEA

After implementing adjustment to the 1-year returns column, this has been

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transformed to a standard data envelopment analysis problem and the efficiency of each
fund could be obtained linear programming approach.
Weights Determination
Without further constraints, the only constraints for weights of the input factors and
output factors are that the weights have to be positive. In reality, investors would have
different preference about the weights of factors. These preferences are arbitrary personal
assumption, and the result of efficiency would change as different preferences implement in
the data envelopment analysis model. I have first checked the model without any set of
restrictions for the weights and then implemented certain constraints of weights of
input/output factors to show the change of the efficiency score by the newly-implemented
constraints.
Efficiency calculation
All the funds are numbered 0 to 9. Input is denoted by I and output is denoted by O.

Table 8: DEA model for excel

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Firstly, efficiency will be calculated using no restrictions on weights except the one
that they should be positive.
So, mathematical model is:
Objective function:
Maximise: h0 = ur yrj0 / vi xij0
Subject to: ur yrj / vi xij <= 1 for each j

ur , vi >= 0
Solving above equations using solver in Excel, we get:

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Table 9: Efficiency table with no weights constraints

While finding the efficiencies, each DMU chose a specific set of weights to
maximize its efficiency. However, this resulted in some extreme values of weights which is
not realistic. Some inputs and outputs assumed weight as high as 1000 while others had a
weight of mere 0.1.
To overcome this problem, I will now run the model will a set of restrictions on the
values of weights. So resulting mathematical model is:
Maximize: h0 = ur yrj0 / vi xij0
Subject to: ur yrj / vi xij <= 1 for each j

0.5 >= u1 >= 0.1


0.5 >= u2 >= 0.1
0.5 >= u3 >= 0.1
0.5 >= v1 >= 0.1

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0.5 >= v2 >= 0.1


The resulting efficiency table is:

Table 10: Efficiency table with weights constraints

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6. Results and conclusions


Diversification of portfolio by investing in Indian and US mutual funds
US equity mutual funds have quite lower expense ratio than their Indian counterparts.
US equity funds have average expense ratio of 0.696% while for Indian equity funds it is
2.22%. The average AUM size is also larger for US funds.
Indian and US equity market returns have a correlation of 0.65. However, each US
equity mutual fund is highly correlated with the other US equity mutual funds. Same is the
case with Indian equity funds also. Their correlation is as high as 0.999. On the other hand
each US fund has very low correlation with every other Indian fund. Their correlation value
is as low as 0.22. Thus, investors can effectively diversify their portfolio by investing in both
Indian and US large cap growth mutual funds. However no negative correlation was found
between any two equity mutual funds.
Evaluation of the risks of investment in international market due to fluctuations in
Foreign Exchange (FOREX) market
In international investment the portfolio value in the home currency changes with
currency conversion rate. The table below shows data pertaining to USD-INR conversion rate
during past 10 years (2007-16).

The standard deviation of 8.34 shows the amount of fluctuations (risk) involved.
Investors need to predict the movement of currency rates by looking at trends and economic
outlook.
The research data shows a negative correlation between equity market index of both
countries and USD-INR conversion rate. So the Indian currency will appreciate when there is
positive return in equity market. For an Indian investor, appreciation of rupee will decrease
the value of his foreign investment. For example, suppose an investor has foreign investment
portfolio of USD 1 million. Currently USD-INR is 66. So by diluting his investment he can
get INR 66 million. But if INR appreciates, lets say to 60 then the investment will be worth
INR 60 million only.

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Due to this negative correlation the FOREX market variations can cover some of the
losses caused by fall in equity market.
Finding of efficiently managed mutual fund using DEA model
DEA model suggests following three as most efficiently managed funds:

SBI Blue Chip Fund (G)

ClearBridge Large Cap Growth I

Loomis Sayles Growth Y

The shaded ones are efficient mutual funds. SBI Blue Chip Fund has highest 1-year
and 5-year return. Loomis Sayles Growth Y is efficient because it has quite low expense ratio
and standard deviation while it provides 2nd highest 1-year return. ClearBridge Large Cap
Growth I has lowest standard deviation (11.77). It also provides high 1-year and 5-year
return.

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7. Limitations and Caveats


The study of portfolio diversification by investing in Indian and USA mutual funds is
based on historical performance of top 5 Large-Cap equity growth funds only. Diversification
is the concept of reducing the risk associated with the portfolio by combining multiple
different types of schemes in a single portfolio. Hence, consideration of only equity funds
cant provide the full scope of diversification.
It was difficult to obtain data for mutual funds in USA. In some cases, the data
couldnt be cross-checked through different sources.
DEA model was established to find efficient mutual funds. The inputs taken were
Standard deviation and expense ratio. Additional inputs like Value-at-risk (VaR) and
conditional Value-at-risk (CVaR) can be introduced into inputs which would enable DEA
model to fairly evaluate performance of same fund during different time periods.

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8. Recommendations
For investors looking for portfolio diversification, international investment can be the
answer. Investing in USA equity mutual funds along with Indian equity mutual funds
effectively diversifies the portfolio by reducing the total risk because the value of correlation
between the returns of mutual funds in these two countries is very low. Moreover, US equity
market is more stable than that of India.
But investment in international equity market is exposed to the risk of changing value
of currency exchange rate. So investors need to look for trends and economic outlooks to
predict the potential movement in a currency.
The expense ratio is much lower for US mutual funds than that of Indian funds. SEBI
should try to minimize that difference by evaluating the reasons for high expenses and then
correcting them. Such high expense ratios can discourage the investors.

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8. References

www.valueresearchonline.com

http://www.morningstar.in/

http://www.moneycontrol.com/mutual-funds

http://www.marketwatch.com/investing/fund

http://money.usnews.com

http://in.investing.com/currencies/usd-inr-historical-data

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