Вы находитесь на странице: 1из 49








ACADEMIC YEAR - 2016-2017.



Mutual Fund Page 1







ACADEMIC YEAR (2016 2017)


Mutual fund



Prof. Mackrina Tuscano

Mutual Fund Page 2


Declaration :
I Saif Shaikh, student of T.Y.BMS from S.N.College of Arts,
Commerce & Science, hereby declare that I have completed this project on
Mutual fund and all the information submitted is true and original to the best of
my knowledge.

I also declare that the project which has been in the partial fulfillment of
the requirement of the Mumbai University is the result of my efforts.

Signature of Student

Saif Shaikh

Mutual Fund Page 3



I take this opportunity to thank the UNIVERSITY OF MUMBAI for giving me a

chance to do this project.

I take this opportunity to express my profound gratitude to management of

Shankar Narayan College for giving me this completion of my project. A special
thanks to Principal Dr.V.N.Yadav of Shankar Narayan College for their kind
co-operation in the completion of my project.

A special vote of thanks to Mr. Vivek Wankhede who is our HOD &
Prof.Mackrina Tuscano our project guide for their most sincere, useful and
encouraging contribution through-out the project span.

I am also grateful to my friends for giving support in my project. Lastly I would

like to thank each and every person who helped me in completing my project
specially my Parents.

Signature of the student

(Saif Shaikh)

Mutual Fund Page 4










Mutual Fund Page 5


Mutual Fund Page 6



An overview of Mutual fund has been done.

To know the working of Mutual fund in India.

How Mutual fund does helps investors to cover their risk and earn good

Requirements for Purchasing Mutual fund.

SEBI initiatives to improve the functioning of Mutual fund in India.

Chapter 1
Mutual Fund Page 7

Mutual Fund

1. Introduction to Mutual fund

A Mutual fund is formed by the coming together of a number of investor who hands over
their surplus funds to a professional organization to manage their funds.

Mutual fund is a financial intermediary which collects savings of the people for secured
and profitable investment. The main function of mutual fund is to mobilize the savings of the
general public and invest them in stock, bond and other securities. Mutual fund in India is
registered as trusts under the Indian Trust Act.

Mutual fund is popular investment because of low risk and higher returns. There is
liquidity in case of open ended schemes and some of the schemes provide tax savings. There are
income schemes which provide regular income to their investor.

History of Mutual Funds

Mutual Fund Page 8


The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank of India. The history of mutual funds in
India can be broadly divided into four distinct phases.

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The
first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700
Crores of assets under management.

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in December

At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 Crores.

Third Phase 1993-2003 (Entry of Private Sector Funds)

Mutual Fund Page 9


With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 Crores. The
Unit Trust of India with Rs.44, 541 Crores of assets under management was way ahead of other
mutual funds

Phase since February Fourth 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets
under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered
with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs.76,000 Crores of assets under
management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

Mutual Fund Page 10


Assets of the mutual fund industry touched an all-time high of Rs639,000 crore (approximately
$136 billion) in May, aided by the spike in the stock market by over 50 per cent in the last one
month and fresh inflows in liquid funds, data released by the Association of Mutual Funds in
India (AMFI) shows yesterday.

The country's burgeoning mutual fund industry is expected to see its assets growing by 29%
annually in the next five years. The total assets under management in the Indian mutual funds
industry are estimated to grow at a compounded annual growth rate (CAGR) of 29 per cent in the
next five years," the report by global consultancy Celent said. However, the profitability of the
industry is expected to remain at its present level mainly due to increasing cost incurred to
develop distribution channels and falling margins due to greater competition among fund houses,
it said.

Mutual Fund Page 11


The following are the characteristics of Mutual Fund:

a) The ownership of the fund lies in the hands of the investors who have put
their fund in the various schemes.

b) There is a predetermined investment objective.

c) The fund is managed by a group of investment professionals in return for

a fee.

d) The investors share in the M.F. is expressed in the form of units.

e) The value of one unit of investment is termed as Net Asset Value.

f) The return generated from investment in a mutual fund is made available

to the investors in ways such as dividend, interest, etc.

Concept of Mutual Fund

Mutual Fund Page 12


Conceptof Mutual Fund

Many investors with common financial objectives pool their


Investors get mutual fund units for the sum contributed to the

Money collected from investors is invested into various avenues

by fund manager

The fund manager realizes gains or losses, and collects dividend

or interest income

Any capital gains or losses from such investments are passed on

to the investors in proportion of the number of untis held by

Mutual Fund Page 13


Working of mutual fund

Working of
Mutual Fund

Types of Mutual Fund Schemes

Mutual Fund Page 14


Broad Mutual Fund Types

Equity Money
Hybrid Funds Debt Funds Gilt Funds
Funds Market Funds Others

Aggressive Balanced Diversified Commodity

Growth funds Funds Debt Funds Funds

Growth and Focused Debt Real Estate

Growth Funds
income Funds Funds Funds

High Yield
Dividend Yield Allocation Exchange
Debt Funds
Funds Traded Funds

Equity linked Assured Funds of

saving scheme Return Funds Funds

Equity Index Fixed Term

Funds Plan Series

Value Funds


Mutual Fund Page 15


Types of Mutual Fund Schemes

a) Open Ended Scheme:-
When a fund is accepted and liquidated on a continuous basis by a mutual fund
manager it is called Open Ended Scheme.
In an Open ended M.F. scheme one can buy and sell units at any time, so they are
more convenient at Net Asset Value.
Main objective is income generation.
b) Close Ended Scheme:-
In these funds one can buy units from the fund house only during the new offering
Most of these funds have restricted exit option for investors.
These funds have fix tenure and main objective is Capital generation.
c) Income Fund:-
Investors who need regular returns can go for these schemes.
The scheme offer maximum current income whereby the income earned by units
is distributed periodically.
It is for short run and best suited for old & retire people.
d) Growth Fund:-
The aim of growth fund is to provide capital appreciation over medium to long
Such schemes normally invest major part in equity market.
They have comparatively high risk and it is best suited for salaried and business
e) Balanced Fund:-
The aim of balanced fund is to provide both growth and regular income.
This is appropriate for investor looking for moderate growth.
They generally invest (40%/60%) in equity and debt instrument.

f) Specialized Fund:-
Mutual Fund Page 16

These Mutual Fund units are for meeting the specific needs of specific category of
This includes Pensioners, Children, widow, etc.
This fund opens the doors for foreign investor.
g) Money Market Mutual Funds:-
They are open ended funds but they invest in highly liquid and safe securities &
they pay money market rate of interest.
They can invest only in short term instruments such as Certificate of deposit, etc.
The repurchase could be subject to minimum lock in period of 3 months.
h) Taxation Fund:-
Certain M.F. schemes offer tax rebate on investments made in equity shares u/s
88 of the Income Tax Act 1961.
Suitable to salaried people who want to enjoy the tax rebates.
i) Index Fund:-
They are linked to specific index of share prices.
It means that the funds mobilized under such act scheme are invested principally
in the securities of the company that are included in the Index.
j) Gilt Fund:-
These funds invest exclusively in Government securities.
Government securities have no default risk.
The value of securities also fluctuates due to change in interest rates and other
economic factors.
k) Leverage Fund:-
This fund is also called as borrowed funds because they are used primarily to
increase the size of the value of portfolio of Mutual fund.
The value increases and the earning capacity also increase.
The gains are distributed to the unit holders.

Benefits of Mutual Fund

Mutual Fund Page 17

A) Portfolio Diversification:-
Mutual Fund normally invests in a well diversified portfolio of securities even
with a small amount of investment.

B) Professional Management:-
The Mutual schemes are managed by professional so as to give maximum return
to the investor.

C) Diversification/ Reduction of Risk:-

Diversification reduces the risk of loss as funds invest in various instruments; the
risk of loss is shared.

Mutual Fund Page 18


D) Reduction of Transaction Cost:-

The M.F. investors pay lesser cost because of larger volume and therefore the
benefit is passed on to its investor.

E) Liquidity:-
The investment in M.F. is more liquid.
There are very less formalities in M.F to liquidate at any time as it is flexible in

F) Convenience and Flexibility:-

Within the same fund family the investor can easily transfer their holding from
one Scheme to another.
The M.F. investment process has been made more convenient by offering the
facility to sell their units through internet or e-mail or other means of

G) Safety:-
M.F. investment industry is well regulated as it is governed by the guidelines of
SEBI & AMFI which are governing & controlling authorities for M.F. business.

Drawbacks of Mutual funds

Mutual Fund Page 19


A) No Insurance:

Mutual funds, although regulated by the government, are not insured against losses.
The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks,
credit unions, and savings and loans, not mutual funds. That means that despite the risk-reducing
diversification benefits provided by mutual funds, losses can occur, and it is possible (although
extremely unlikely) that you could even lose your entire investment.

B) Dilution:

Although diversification reduces the amount of risk involved in investing in mutual funds, it
can also be a disadvantage due to dilution. For example, if a single security held by a mutual
fund doubles in value, the mutual fund itself would not double in value because that security is
only one small part of the funds holdings. By holding a large number of different investments,
mutual funds tend to do neither exceptionally well nor exceptionally poorly.

C) Fees and Expenses:

Most mutual funds charge management and operating fees that pay for the funds
management expenses (usually around 1.0% to 1.5% per year for actively managed funds). In
addition, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees.
And some funds buy and trade shares so often that the transaction costs add up significantly.
Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a
commission is paid only when you buy and sell.

D) Poor Performance:

Mutual Fund Page 20


Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all
mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of
critics now question whether or not professional money managers have better stock-picking
capabilities than the average investor.

E) Loss of Control:

The managers of mutual funds make all of the decisions about which securities to buy and
sell and when to do so. This can make it difficult for you when trying to manage your portfolio.
For example, the tax consequences of a decision by the manager to buy or sell an asset at a
certain time might not be optimal for you. You also should remember that you are trusting
someone else with your money when you invest in a mutual fund.

F) Trading Limitations:

Although mutual funds are highly liquid in general, most mutual funds (called open-ended
funds) cannot be bought or sold in the middle of the trading day. You can only buy and sell them
at the end of the day, after theyve calculated the current value of their holdings.

G) Size:

Some mutual funds are too big to find enough good investments. This is especially true of
funds that focus on small companies, given that there is strict rules about how much of a single
company a fund may own. If a mutual fund has $5 billion to invest and is only able to invest an
average of $50 million in each, then it needs to find at least 100 such companies to invest in; as a
result, the fund might be forced to lower its standards when selecting companies to invest in.

Mutual Fund Page 21


H) Inefficiency of Cash Reserves:

Mutual funds usually maintain large cash reserves as protection against a large number of
simultaneous withdrawals. Although this provides investors with liquidity, it means that some of
the funds money is invested in cash instead of assets, which tends to lower the investors
potential return.

I) Too Many Choices:

The advantages and disadvantages listed above apply to mutual funds in general.
However, there are over 10,000 mutual funds in operation, and these funds vary greatly
according to investment objective, size, strategy, and style. Mutual funds are available for
virtually every investment strategy (e.g. value, growth), every sector (e.g. biotech, internet), and
every country or region of the world. So even the process of selecting a fund can be tedious.

Terms used in Mutual Fund

Mutual Fund Page 22


Asset Management Company (AMC)

An AMC is the legal entity formed by the sponsor to run a mutual fund. The AMC is usually a
private limited company in which the sponsors and their associates or joint venture partners are
the shareholders. The trustees sign an investment agreement with the AMC, which spells out the
functions of the AMC. It is the AMC that employs fund managers and analysts, and other
personnel. It is the AMC that handles all operational matters of a mutual fund from launching
schemes to managing them to interacting with investors.

Fund Offer document

The mutual fund is required to file with SEBI a detailed information memorandum, in a
prescribed format that provides all the information about the fund and the scheme. This
document is also called as the prospectus or the fund offer document, and is very detailed and
contains most of the relevant information that an investor would need.


The Mutual Fund is constituted as a Trust in accordance with the provisions of the Indian Trusts
Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.
The Trust appoints the Trustees who are responsible to the investors of the fund.

Mutual Fund Page 23

Trustees are like internal regulators in a mutual fund, and their job is to protect the interests of
the unit holders. Trustees are appointed by the sponsors, and can be either individuals or
corporate bodies. In order to ensure they are impartial and fair, SEBI rules mandate that at least
two-thirds of the trustees be independent, i.e., not have any association with the sponsor.

Trustees appoint the AMC, which subsequently, seeks their approval for the work it does, and
reports periodically to them on how the business being run.


A custodian handles the investment back office of a mutual fund. Its responsibilities include
receipt and delivery of securities, collection of income, distribution of dividends and segregation
of assets between the schemes. It also track corporate actions like bonus issues, right offers, offer
for sale, buy back and open offers for acquisition. The sponsor of a mutual fund cannot act as a
custodian to the fund. This condition, formulated in the interest of investors, ensures that the
assets of a mutual fund are not in the hands of its sponsor. For example, Deutsche Bank is a
custodian, but it cannot service Deutsche Mutual Fund, its mutual fund arm.


Mutual Fund Page 24


Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit
NAV is the net asset value of the scheme divided by the number of units outstanding on the
Valuation Date.The NAV is usually calculated on a daily basis. In terms of corporate valuations,
the book values of assets less liability.

The NAV is usually below the market price because the current value of the funds assets is
higher than the historical financial statements used in the NAV calculation.

Market Value of the Assets in the Scheme + Receivables + Accrued Income

- Liabilities - Accrued Expenses

NAV = ------------------------------------------------------------------------------------------------

No. of units outstanding

Calculation of NAV

Scheme ABN

Mutual Fund Page 25


Scheme Size Rs. 5, 00, 00,000 (Five Crores)

Face Value of Units Rs.10/-

Scheme Size 5, 00, 00,000

--------------------------- = ------------------- = 50, 00,000

Face value of units 10

The fund will offer 50, 00,000 units to Public.

Investments: Equity shares of Various Companies.

Market Value of Shares is Rs.10, 00, 00,000 (Ten Crores)

Rs. 10, 00, 00,000

NAV = -------------------------- = Rs.20/-

50, 00,000 units

Thus each unit of Rs. 10/- is Worth Rs.20/-

It states that the value of the money has appreciated since it is more than the face value.

Sale price

Mutual Fund Page 26


Is the price we pay when we invest in a scheme.Also called Offer Price. It may include a sales

Repurchase price

Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such
prices are NAV related

Redemption Price

Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV

Sales load

Is a charge collected by a scheme when it sells the units.Also called, Front-end load. Schemes
that do not charge a load are called No Load schemes.

Repurchase or Back-end Load

Is a charge collected by a scheme when it buys back the units from the unit holders.

Mutual Fund Page 27


14 important steps taken by SEBI for regulating mutual

funds in India

Important steps taken by SEBI for the regulation of mutual funds are listed

(1) Formation:
Certain structural changes have also been made in the mutual fund industry, as part of
which mutual funds are required to set up asset management companies. This is to ensure an
arms length relationship between trustees, fund managers and custodians, and is in contrast with
the situation prevailing earlier in which all three functions were often performed by one body
which was usually the sponsor of the fund or a subsidiary of the sponsor.

Thus, the process of forming and floating mutual funds has been made a tripartite
exercise by authorities. The trustees, the asset management companies (AMCs) and the mutual
fund shareholders form the three legs. SEBI guidelines provide for the trustees to maintain an
arms length relationship with the AMCs and do all those things that would secure the right of

Mutual Fund Page 28


(2) Registration:
In January 1993, SEBI prescribed registration of mutual funds taking into account track
record of a sponsor, integrity in business transactions and financial soundness while granting

This will curb excessive growth of the mutual funds and protect investors interest by
registering only the sound promoters with a proven track record and financial strength. In
February 1993, SEBI cleared six private sector mutual funds viz. 20th Century Finance
Corporation, Industrial Credit & Investment Corporation of India, Tata Sons, Credit Capital
Finance Corporation, Ceat Financial Services and Apple Industries.

(3) Documents:
The offer documents of schemes launched by mutual funds and the scheme particulars
are required to be vetted by SEBI. A standard format for mutual fund prospectuses is being

(4) Code of advertisement:

Mutual funds have been required to adhere to a code of advertisement

(5) Assurance on returns:

SEBI has introduced a change in the Securities Control and Regulations Act governing
the mutual funds. Now the mutual funds were prevented from giving any assurance on the land
of returns they would be providing. However, under pressure from the mutual funds, SEBI
revised the guidelines allowing assurances on return subject to certain conditions.

Hence, only those mutual funds which have been in the market for at least five years are
allowed to assure a maximum return of 12 per cent only, for one year. With this, SEBI, by
default, allowed public sector mutual funds an advantage against the newly set up private mutual

Mutual Fund Page 29


(6) Minimum corpus:

The current SEBI guidelines on mutual funds prescribe a minimum start-up corpus of
Rs.50 crore for an open-ended scheme, and Rs.20 crorecorpuses for closed-ended scheme, failing
which application money has to be refunded.

The idea behind forwarding such a proposal to SEBI is that in the past, the minimum
corpus requirements have forced AMCs to solicit funds from corporate bodies. In fact, the
Association of Mutual Funds in India (AMFI) has repeatedly appealed to the regulatory
authorities for scrapping the minimum corpus requirements.

(7) Institutionalization:
The efforts of SEBI have, in the last few years, been to institutionalize the market by
introducing proportionate allotment and increasing the minimum deposit amount to Rs.5000 etc.
These efforts are to channel the investment of individual investors into the mutual funds.

(8) Investment of funds mobilized:

In November 1992, SEBI increased the time limit from six months to nine months within
which the mutual funds have to invest resources raised from the latest tax saving schemes. The
guideline was issued to protect the mutual funds from the disadvantage of investing funds in the
bullish market at very high prices and suffering from poor NAV thereafter.

(9) Investment in money market:

SEBI guidelines say that mutual funds can invest a maximum of 25 per cent of resources
mobilized into money-market instruments in the first six months after closing the funds and a
maximum of 15 per cent of the corpus after six months to meet short term liquidity requirements.

Private sector mutual funds, for the first time, were allowed to invest in the call money
market after this years budget. However, as SEBI regulations limit their exposure to money
markets, mutual funds are not major players in the call money market. Thus, mutual funds do not
have a significant impact on the call money market.

Mutual Fund Page 30


(10) Valuation of investment:

The transparent and well understood declaration or Net Asset Values (NAVs) of mutual
fund schemes is an important issue in providing investors with information as to the performance
of the fund. SEBI has warned some mutual funds earlier of unhealthy market

(11) Inspection:
SEBI inspect mutual funds every year. A full SEBI inspection of all the 27 mutual funds
was proposed to be done by the March 1996 to streamline their operations and protect the
investors interests. Mutual funds are monitored and inspected by SEBI to ensure compliance
with the regulations.

(12) Underwriting:
In July 1994, SEBI permitted mutual funds to take up underwriting of primary issues as a
part of their investment activity. This step may assist the mutual funds in diversifying their

(13) Conduct:
In September 1994, it was clarified by SEBI that mutual funds shall not offer buy back
schemes or assured returns to corporate investors. The Regulations governing Mutual Funds and
Portfolio Managers ensure transparency in their functioning.

(14) Voting rights:

In September 1993, mutual funds were allowed to exercise their voting rights.
Department of Company Affairs has reportedly granted mutual funds the right to vote as full-
fledged shareholders in companies where they have equity investments.

Mutual Fund Page 31


SWOT Analysis of Mutual Funds


1) large number of potential customers is base.

2) Government support by way of tax concession for MF investors

3) Volatility of bank interest rate.

4) Better scope for accessing market information

5) Offer liquidity to the investors at any time.

6) Offers variety of products to the investors.

7) The size of the market is large.

1) Poor participation of retail investors

2) Lack of focus

3) Under performance

4) Poor service conditions

5) Distribution network is confines only to metro cities

Mutual Fund Page 32



1) huge untapped market in semi-urban and rural areas.

2) High level of savings habit among the people

3) Liberalized business environments.

4) Using on-line mode of trading systems.

5) Investment opportunities abound in the international market.

6) Failures of non bank financial company operations.


1) increasing competition among the players.

2) High level of volatility in the stock market.

3) Possibility of more stringent regulations by SEBI,RBI, AMFI,etc., in


Mutual Fund Page 33


Risk involved in mutual funds are as follows :

Call risk
This is one of the types of the risks that are involved with the mutual funds. When
the rate of interest falls the person who has issued bonds will redeem or otherwise known
as go for the call option. The issuer has the right to redeem it before the maturity rate. So
when the interest rate is low they will redeem at the best value.

Country risk
This is another risk which rises because of the political events like war or change
in the government leading to change in policies, natural disasters like earthquake or
floods or financial issue like issues due to inflation. All these will definitely reduce the
investments as well as the value of the investments.

Credit Risk there is small possibility that the person who has issued the bond might
not return the interest or the capital as well.

Mutual Fund Page 34


Currency Risk there can be fluctuations in the market because of the fluctuations in
the currency.

Income Risk when there is a fall in the interest rate there are chances
the dividend income from the fixed income funds may reduce.

Industry risk when there is a development in the industry there are chances that the
value of the stock that is associated with that industry will reduce.

Inflation risk when the cost of living increases then the funds that have returns after
the inflation adjustment is done will face a lot of risks.

Interest rate risk when the rate of interest increases then the value of the bond will
reduce. This again is a risk which is associated with the funds.

Principal risk there are remote chances that of losing the principal.

Mutual Fund Page 35


5 ways to measure mutual fund risk

There are flashy numbers of dividend pay outs in percentages declared by fund houses on
a regular basis in newspapers, periodicals, websites, etc. These numbers attract investor
eyeballs towards their schemes. Now, SEBI has stepped in and has asked fund houses to
disclose their pay outs in rupee terms. This shows that investors are trying to get a clearer
picture on their investment returns through dividends.

However, investing by considering only historical returns and dividends in a mutual fund
scheme is risky. Investors need to evaluate the risk involved in mutual fund schemes
before investing and review their investments, say, at least once a year.

Investors may perform a small 5-step exercise to evaluate riskiness of particular mutual
fund scheme, as described below -

We will take a hypothetical example of ABC-Equity (G)" scheme to compute its

riskiness in our PaanchKa Dum (Power of 5)"concept:-

1) Standard Deviation (SD):

The total risk (market risk, security-specific risk and portfolio risk) of a mutual fund is
measured by Standard Deviation (SD). In mutual funds, the standard deviation tells us
how much the return on a fund is deviating from the expected returns based on its
historical performance. In other words can be said it evaluates the volatility of the fund.

The standard deviation of a fund measures this risk by measuring the degree to which the
fund fluctuates in relation to its average return of a fund over a period of time.

Mutual Fund Page 36


In other words, it is a measure of the consistency of a mutual fund's returns. A higher SD

number indicates that the net asset value (NAV) of the mutual fund is more volatile and,
it is riskier than a fund with a lower SD.

2) Alpha:

Alpha basically is the difference between the returns an investor expects from a fund,
given its beta, and the return it actually produces.

Computation: Alpha = {(Fund return-Risk free return) (Funds beta) *(Benchmark

return- risk free return)}.


Fund return (Fund performance in last one year): 75%

Risk free return: 8%

Benchmark return (Sensex performance in last one year): 41%

Beta: 0.69

By computing with above formula we will get alpha as 0.44 for this fund.

A positive alpha means the fund has outperformed its benchmark index. Whereas, a
negative alpha indicates an underperformance of the fund.The more positive an alpha the
healthier for investors.

Here, the fund has underperformed since an alpha we computed is less than beta. It
means fund has produced less returns considering the risks fund is taking while
comparing it with actual return to the one predicted by beta.

Note: The ideal time period for analysing alpha and beta value is one year returns from
their funds.

Mutual Fund Page 37


3) Beta:

Beta is a measure of the volatility of a particular fund in comparison to the market as a

whole, that is, the extent to which the fund's return is impacted by market factors. Beta is
calculated using a statistical tool called regression analysis.By definition, the market
benchmark index of Sensex and Nifty has a beta of 1.0.

It may be challenging for investors to compute it for each mutual fund scheme. However,
one need not worry. Important statistical measures for various mutual fund schemes are
easily available on financial websites like InvestmentYogi where mutual funds
performance is tracked and analysed regularly.

Let us consider 3 possible scenarios in interpreting beta numbers:

[Sensex is assumed as benchmark index].

1. A beta of 1.0 indicates that the fund NAV will move in same direction as that of
benchmark index. The fund will move up and down in tandem with the movement of the
markets (as indicated by the benchmark)

2. A beta of less than 1.0 indicates that the fund NAV will be less volatile than the
benchmark index.

3. A beta of more than 1.0 indicates that the investment will be more volatile than the
benchmark index. It is an aggressive fund that will move up more than the benchmark,
but the fall will also be steeper.

For example, if the beta of ABC-Equity (G)" is 1.4 - then its considered as 40% more
volatile than the benchmark index (beta of benchmark index being 1).

Similarly, in example-1, as we have considered beta of ABC-Equity (G)" fund as 0.69 -

this means the mutual fund scheme will be less volatile than its benchmark index.

Mutual Fund Page 38


4) R-Squared:

As discussed above, beta is dependent on correlation of a mutual fund scheme to its

benchmark index. So, while considering the beta of any fund, an investor also needs to
consider another statistic concept called R-squared that measures the correlation
between beta and its benchmark index. The beta of a fund has to be seen in conjunction
with the R-squared for better understanding the risk of the fund.

R-squared values range between 0 and 1, where 0 represents no correlation and 1

represents full correlation. If a fund's beta has an R-squared value that is between 0.75
and 1, the beta of that fund should be trusted. On the other hand, an R-squared value that
is less than 0.75 than it indicates the beta is not particularly useful because the fund is
being compared against an inappropriate benchmark index. This fund will not give
returns similar to their benchmark index. The lower the R-squared the less reliable is the
beta, and vice versa.

The R-squared of an index fund, investing in same securities and in the same weightage
as the index, will be one.

Note: Beta and R-squared are calculated based on the historical data. They give an
adequate estimate of risks to be evaluated by investors before investing.

Mutual Fund Page 39


5) Sharpe Ratio:

Sharpe ratio (SR) is another important measure that evaluates the return that a fund has
generated relative to the risk taken. Risk here is measured by SD. It is used for funds that
have low correlation with benchmark index. This ratio helps an investor to know whether
it is a safe bet to invest in this fund by taking the quantum of risk.

The higher the Sharpe ratio (SR), the better a funds return relative to the amount of risk
taken. In other words, a mutual fund with a higher SR is better because it implies that it
has generated higher returns for every unit of risk that was taken. On the contrary, a
negative Sharpe ratio indicates that a risk-free asset would perform better than the fund
being analyzed.

It tries to find out the excess return generated by a mutual fund over and above a risk-free
rate of return such as an RBI bond or a post-office savings scheme, etc.

Lets say the Sharpe ratio = 0.957 for a fund. As discussed above, the higher this ratio, the
better a funds return relative to the amount of risk taken. Here, this fund could be a risky
investment option for their investors since ratio is just near to 1 (approx.).

Quick View

Mutual Fund Evaluation Criteria

Consistent Performer -> Low SD; High SR -> Higher ranked fund

Volatile Performer -> High SD; Low SR > Lower ranked fund

Mutual Fund Evaluation Criteria:-

Consistent Performer -> Low SD; High SR -> Higher ranked fund

Volatile Performer -> High SD; Low SR -> Lower ranked fund

Mutual Fund Page 40


Conclusion of the above answer:

This PaanchKa Dum" concept we just discussed to evaluate a mutual funds risk will
enable an investor to take a wise decision on his mutual fund investments. An investor
should not blindly invest by considering only past returns mentioned, but needs to do
some research of the fund schemes and reviewing their performance at regular intervals.

These risk measure are readily calculated and are available on financial websites and
research reports. For example, you can logon to www.investmentyogi.com and click on
the mutual fund tab to look for the fund you wish to evaluate. You will find the latest data
for all these parameters (under returns tab of a particular fund).

However, the above measures cannot be viewed in isolation while evaluating the risks of
investing in a mutual fund scheme. Other important parameters such as the corpus held,
disclosure norms followed by the AMC, portfolio composition, consistency in investment
objectives and strategy must also be considered.

Mutual Fund Page 41


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.

Mutual Fund Page 42


Charges and Fees

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

Mutual Fund Page 43


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. 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

Fund Performance Metrics

Historical Performance

The investor should see the past returns of the fund and should compare it with the peer group

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.

Mutual Fund Page 44




Research is systematic quest of knowledge. For the project secondary and primary
sources are used. The information collected has been explained and presented in a
very lucid manner.



Data of the project has been collected from various sources. A library research was
done and Internet research was done to find out the materials about specific topic
of research. These include newspapers, magazines, websites, and books on finance
and so on.


Data which is collected manually are known as Primary data. In this Project the
data is collected through questionnaires by the researcher.

Mutual Fund Page 45



Mutual Fund Page 46



Mutual Fund Page 47




In view of the findings, the following conclusions are drawn. After going through a
two months summer training and survey, I have come to know about different
aspects of mutual funds and mutual funds industry. India is an emerging market.
Consumption level is rising with rising earning level. Economic indicators micro
and macro both show a sky facing arrows. Data shows that there will be more
number of billionaires from India than any of other country.

We know that Indians are earning more therefore spending more, but how much
they save/invest in order to secure future. There are numbers of traditional ways of
saving. They give guaranteed return with low risk. High risk associated investment
options was not considered a right decision. India is a young country having a
considerably big part of young people. They are more risk taker. They need a right
direction for investment options.

This study and survey on mutual funds is a small eye hole to see the picture of
mutual funds industry in India. This provides almost clear view to the readers.

Private sector is aggressively participating in mutual funds business. Numbers of

schemes are much more than earlier.

Indian market potential is high, investors are willing to pour money in mutual
funds, despite some temporary restraints, other economic factors are in favorable
mode. Thus we need proper management of advisory services, more schemes,
financial advisors and institutions to cater untouched markets.

Mutual Fund Page 48









Mutual Fund Page 49