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A project report on

MUTUAL FUNDS
At
Submitted by
Ms. SWETHA. Y.P
HT No: 245109672004
Project submitted in partial fulfillment for
The
Award Of The Degree Of
MASTER OF BUSINESS ADMINISTRATION TO

OSMANIA UNIVERSITY, Hyderabad -500007


2009-2011
DECLARATION

I hereby declare that this Project Report titled MUTUAL

FUNDS submitted by me to the Department of Business

Management, O.U., Hyderabad, is a bonafide work undertaken by

me and it is not submitted to any other University or Institution

for the award of any degree diploma / certificate or published any

time before.

Name and Address of the Student Signature of the Student


SWETHA.Y.P SWETHA.Y.P
CERTIFICATION

This is to certify that the Project Report title

EMUTUAL FUNDS submitted in partial fulfilment

for the award of MBA Programme of Department of

Business Management, O.U. Hyderabad, was

carried out by SWETHA Y.P under my guidance.

This has not been submitted to any other University

or Institution for the award of any

degree/diploma/certificate.

Name and address of the Guide Signature of the Guide

SHRAVANTHI.N SHRAVANTHI.N
CONTENTS

Chapter No. Name of the concept Page No.


Introduction

Need of the study

Objectives of the study


I
Scope of the study

Methodology of the study

Limitations of the study

II Review of Literature

III Industry Profile

IV Company Profile

V Data analysis and interpretation

VI Findings, Suggestions and Conclusion

VII Bibliography
CHAPTER I - INTRODUCTION
INTRODUCTION

A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciations realized are shared by its unit
holders in proportion to the number of units owned by them. Thus a Mutual Fund is the
most suitable investment for the common man as it offers an opportunity to invest in a
diversified, -professionally managed basket of securities at a relatively low cost.

The project idea is to project mutual funds as the better avenue for investment. Mutual
fund is productive package for a lay-investor with limited finances. Mutual fund is a
very old practice in U.S., and it has made a recent entry into India. Common man in
India still finds Bank as a safe door for investment. This shows that mutual funds
have not gained a strong foot-hold in his life.

The project creates an awareness that the mutual fund is worthy investment practice.
The various schemes of mutual funds provide the investor with a wide range of
investment options according to his risk-bearing capacities and interest. Besides, they
also give a handy return to the investor. The project analyses various schemes of mutual
fund by taking different mutual fund schemes from different AMCS. The future
challenges for mutual funds in India are also considered.

1
NEED OF THE STUDY

The study basically made to educate the investors about Mutual Funds. Analyze the
various schemes to highlight the risk and return of diversity of investment that mutual
funds offer. Thus, through the study one would understand how a common man could
fruitfully convert a pittance into great penny by wisely investing into the right scheme
according to his risk- taking abilities.

A small investor is the one who is able to correctly plan & decide in which profitable &
safe instrument to invest. To lock up ones hard earned money in a savings banks
account is not enough to counter the monster of inflation. Using simple concepts of
diversification, power of compound interest, stable returns & limited exposure to equity
investment, one can maximize his returns on investments & multiply ones savings.

Investment is a serious proposition one has to look into various factors before deciding
on the instruments in which to invest. To save is not enough. One must invest wisely &
get maximum returns. One must plan investment in such a way that his investment
objectives are satisfied. A sound investment is one which gives the investor reasonable
returns with a proper profitable management

This report gives the details about various investment objectives desired by an investor,
details about the concept & working of mutual fund.

2
OBJECTIVES OF THE STUDY

To understand the concept of Mutual Funds.

To study the different Sectoral Mutual Funds in India.

To analyse the performance of different sectoral mutual funds.

To identify the best Sectoral Mutual Funds to invest in India.

To suggest the best mutual funds for investors.

SCOPE OF THE STUDY

Now a days, there is a lot of scope for the mutual funds. The Financial managers
have to decide whether to invest in the Shares, bonds, debentures, real estate, gold and
other Commodities to get the maximum benefits for funds. The financial managers
should also reduce the risk from the Investments. The scope of the study is confirmed
to the sectoral funds available in Indian mutual funds.

RESEARCH METHODOLOGY

In the present project work the data as been collected from available source that is
secondary data like websites, Newspapers and magazines. The sample size taken is of 7
different sectoral funds

3
Sampling Design

Sampling method use is non probabilistic judgmental sampling. The Mutual Fund
Scheme for the study have been selected based on following 3 criteria

1 Type of the scheme Open-ended Sectoral


Funds(growth)
2 Minimum Assets Under Mgmt. Rs. 500 Crore
3 Inception Date Prior to 1st April, 2006

Growth option for the entire selected scheme has been considered.

Research Design

1. Benchmark Index: For this study the 50 shares market index S&P CNX
NIFTY has been used as the market index.

2. Period of study: Period of study has been taken as 5 years starting from
1st April, 2006 to 10th July 2010.

3. Risk Free Rate Of Return: Risk free rate of return refers to that
minimum return on an investment that has no risk of loosing the investment
over which it is earned. For this purpose of this study risk free rate of return
is represented by 91 days Treasury bill.

LIMITATIONS

1. The analysis is based on historical data and thus indicates the past performance
which may not always be indicative of the future performance.

2. Different schemes consider different market indices as their benchmarks, but for
the purpose of uniformity in the study all schemes have to be compared against
same benchmark index.

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3. Sharpe ratio (in its simplest forms) that the relationship between risk and return
is linear and remain linear throughout its entire range. Various research works
conducted in this regard show that the relationship is not as simple as Capital
Market theory would suggest. This is an inherent weakness of capital Asset
Pricing Model.

4. The time period considered by the study is only three years; a larger period
could have ensured coverage of a full market cycle, thus giving a more real
picture of the performance of the schemes.

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CHAPTER II - REVIEW OF LITERATURE

6
Mutual Funds: An overview

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments. The income earned
through these investments and the capital appreciations realized by the scheme are
shared by its unit holders in proportion to the number of units owned by them (pro
rata). Thus a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed portfolio at a
relatively low cost. Anybody with an investible surplus of as little as a few thousand
rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment
objective and strategy.

A mutual fund is the ideal investment vehicle for todays complex and modern financial
scenario. Markets for equity shares, bonds and other fixed income instruments, real
estate, derivatives and other assets have become mature and information driven. Price
changes in these assets are driven by global events occurring in faraway places. A
typical individual is unlikely to have the knowledge, skills, inclination and time to keep
track of events, understand their implications and act speedily. An individual also finds
it difficult to keep track of ownership of his assets, investments, brokerage dues and
bank transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally qualified
and experienced staff that manages each of these functions on a full time basis. The
large pool of money collected in the fund allows it to hire such staff at a very low cost
to each investor.

In effect, the mutual fund vehicle exploits economies of scale in all three areas -
research, investments and transaction processing. While the concept of individuals

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coming together to invest money collectively is not new, the mutual fund in its present
form is a 20th century phenomenon.

In fact, mutual funds gained popularity only after the Second World War. Globally,
there are thousands of firms offering tens of thousands of mutual funds with different
investment objectives. Today, mutual funds collectively manage almost as much as or
more money as compared to banks.

A draft offer document is to be prepared at the time of launching the fund. Typically, it
pre specifies the investment objectives of the fund, the risk associated, the costs
involved in the process and the broad rules for entry into and exit from the fund and
other areas of operation. In India, as in most countries, these sponsors need approval
from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI looks at
track records of the sponsor and its financial strength in granting approval to the fund
for commencing operations.

A sponsor then hires an asset management company to invest the funds according to the
investment objective. It also hires another entity to be the custodian of the assets of the
fund and perhaps a third one to handle registry work for the unit holders (subscribers)
of the fund.

In the Indian context, the sponsors promote the Asset Management Company also, in
which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the
Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the
Birla Sun Life Asset Management Company Ltd., which has floated different mutual
funds schemes and also acts as an asset manager for the funds collected under the
schemes

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History of Mutual Fund in India:
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 the. 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 1990.

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)


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

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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.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29,835 crores as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain
other schemes. 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 Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of March, 2006, there were 29 funds.

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Future Scenario

The asset base will continue to grow at an annual rate of about 30 to 35 % over the next
few years as investors shift their assets from banks and other traditional avenues. Some
of the older public and private sector players will either close shop or be taken over.

Out of ten public sector players five will sell out, close down or merge with stronger
players in three to four years. In the private sector this trend has already
Started with two mergers and one takeover. Here too some of them will down their
shutters in the near future to come.

But this does not mean there is no room for other players. The market will witness a
flurry of new players entering the arena. There will be a large number of offers from
various asset management companies in the time to come. Some big names like
Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously. One
important reason for it is that most major players already have presence here and hence
these big names would hardly like to get left behind.

The mutual fund industry is awaiting the introduction of derivatives in India as this
would enable it to hedge its risk and this in turn would be reflected in its Net Asset
Value (NAV).

SEBI is working out the norms for enabling the existing mutual fund schemes to trade
in derivatives. Importantly, many market players have called on the Regulator to
initiate the process immediately, so that the mutual funds can implement the changes
that are required to trade in Derivatives.

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Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive
expansion of the foreign owned mutual fund companies and the decline of
the companies floated by nationalized banks and smaller private sector
players.

Many nationalized banks got into the mutual fund business in the early nineties and got
off to a good start due to the stock market boom prevailing then. These banks did not
really understand the mutual fund business and they just viewed it as another kind of
banking activity.
Few hired specialized staff and generally chose to transfer staff from the parent
organizations. The performance of most of the schemes floated by these funds was not
good. Some schemes had offered guaranteed returns and their parent organizations had
to bail out these AMCs by paying large amounts of money as the difference between
the guaranteed and actual returns.

The service levels were also very bad. Most of these AMCs have not been able to retain
staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they
have serious plans of continuing the activity in a major way. The experience of some of
the AMCs floated by private sector Indian companies was also very similar. They
quickly realized that the AMC business is a business, which makes money in the long
term and requires deep-pocketed support in the intermediate years. Some have sold out
to foreign owned companies, some have merged with others and there is general
restructuring going on.

The foreign owned companies have deep pockets and have come in here with the
expectation of a long haul. They can be credited with introducing many new practices
such as new product innovation, sharp improvement in service standards and
disclosure, usage of technology, broker education and support etc. In fact, they have

12
forced the industry to upgrade itself and service levels of organizations like UTI have
improved dramatically in the last few years in response to the competition provided by
these.

Types of Mutual Funds


Mutual fund schemes may be classified on the basis of its structure and its investment
objective.

By Structure:
Open-ended Funds
An open-end fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset
Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

Closed-ended Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to
15 years. The fund is open for subscription only during a specified period. Investors can
invest in the scheme at the time of the initial public issue and thereafter they can buy or
sell the units of the scheme on the stock exchanges where they are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling
back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the
investor.

Interval Funds
Interval funds combine the features of open-ended and close-ended schemes. They are
open for sale or redemption during pre-determined intervals at NAV related prices.

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By Investment Objective:-

Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a majority of their corpus in equities. It has been
proven that returns from stocks, have outperformed most other kind of investments held
over the long term. Growth schemes are ideal for investors having a long-term outlook
seeking growth over a period of time.

Income Funds
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures
and Government securities. Income Funds are ideal for capital stability and regular
income.

Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and invest both in equities and fixed
income securities in the proportion indicated in their offer documents. In a rising stock
market, the NAV of these schemes may not normally keep pace, or fall equally when
the market falls. These are ideal for investors looking for a combination of income and
moderate growth.

Money Market Funds


The aim of money market funds is to provide easy liquidity, preservation of capital and
moderate income. These schemes generally invest in safer short-term instruments such
as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Returns on these schemes may fluctuate depending upon the interest rates prevailing in
the market. These are ideal for Corporate and individual investors as a means to park
their surplus funds for short periods.

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Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each time you
buy or sell units in the fund, a commission will be payable. Typically entry and exit
loads range from 1% to 2%. It could be worth paying the load, if the fund has a good
performance history.

No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no
commission is payable on purchase or sale of units in the fund. The advantage of a no
load fund is that the entire corpus is put to work.

Other Schemes:-

Tax Saving Schemes


These schemes offer tax rebates to the investors under specific provisions of the Indian
Income Tax laws as the Government offers tax incentives for investment in specified
avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension
Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also
provides opportunities to investors to save capital gains u/s 54EA and 54EB by
investing in Mutual Funds, provided the capital asset has been sold prior to April 1,
2000 and the amount is invested before September 30, 2000.

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Special Schemes

Industry Specific Schemes


Industry Specific Schemes invest only in the industries specified in the offer document.
The investment of these funds is limited to specific industries like InfoTech, FMCG,
and Pharmaceuticals etc.

Index Schemes
Index Funds attempt to replicate the performance of a particular index such as the BSE
Sensex or the NSE 50

Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a group of
industries or various segments such as 'A' Group shares or initial public offerings.

Commodities Funds

Commodities funds specialize in investing in different commodities directly or through


commodities future contracts. Specialized funds may invest in a single commodity or a
commodity group such as edible oil or rains, while diversified commodity funds will
spread their assets over many commodities

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RISK HIERARCHY OF MUTUAL FUNDS

Money Equity
Market Funds
Funds Debt
Gilt Funds Hybrid
Funds Funds
Aggressive
Growth
Flexible Asset Funds
allocation
Funds
Growth Funds
High Yield
Risk Debt Funds
Level Diversified
Equity Funds

Index Funds

Value Funds
Focused
Debt Funds Growth and
Income
funds
Equity Income
Funds
Balanced
Diversified Funds
Debt Funds
Money Gilt Funds
Market Funds
Type of Fund

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TABLE 2

Snapshot of Mutual Fund Schemes

Mutual
Investment Who should Investment
Fund Objective Risk
Portfolioinvest horizon
Type
Those who
Treasury Bills, park their
Liquidity +
Money Certificate offunds in 2 days - 3 weeks
Market Moderate
Deposits,current
Income +Negligible
Commercial accounts or
Short- Reservation of
term Papers, Call short-term
Funds Capital
(Floating Moneybank 3 weeks -
- short- deposits 3 months
term) Call Money,
Predominantly
Commercial
Debentures,
Papers,Those
Credit RiskSalaried & with
Bond Liquidity +
RegularGovernmentMore than 9 - 12
Funds &LittleTreasury Bills, surplus
Interestconservative
Moderate
Incomesecurities,months(Floating
Interest Rate CDs, Short- short-term
Rate Riskinvestors
Income Corporate- Long-
termfunds
Bondsterm)
Government Salaried &
GiltSecurity & Interest Rate Governmentsecurities.
conservative 12 months & more
FundsIncomeRisksecurities
investors
Aggressive
Long-terminvestors
Equity
CapitalHigh RiskStockswith long3 years plus
Funds
Appreciationterm out
look.
To generate
returns that arePortfolio
NAV varies
Index commensurateindices like Aggressive
with index3 years plus
18
Funds with returns ofBSE, NIFTY investors.
performance
respectiveetc
indices
Balanced ratio
Capitalof equity and
Growth &
Balanced Market Risk debt funds to Moderate &
Regular 2 years plus
Funds and Interest ensure higher Aggressive
Income
Rate Riskreturns at
lower risk

Benefits of Mutual Fund investment

1. Professional Management:
Mutual Funds provide the services of experienced and skilled professionals,
backed by a dedicated investment research team that analyses the performance and
prospects of companies and selects suitable investments to achieve the objectives of
the scheme.

2. Diversification:
Mutual Funds invest in a number of companies across a broad cross-section of
industries and sectors. This diversification reduces the risk because seldom do all
stocks decline at the same time and in the same proportion. You achieve this
diversification through a Mutual Fund with far less money than you can do on your
own.

3. Convenient Administration:
Investing in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and follow up with brokers and
companies. Mutual Funds save your time and make investing easy and convenient.

4. Return Potential:

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Over a medium to long-term, Mutual Funds have the potential to provide a
higher return as they invest in a diversified basket of selected securities.

5. Low Costs:
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial
and other fees translate into lower costs for investors.

6. Liquidity:
In open-end schemes, the investor gets the money back promptly at net asset
value related prices from the Mutual Fund. In closed-end schemes, the units can be
sold on a stock exchange at the prevailing market price or the investor can avail of
the facility of direct repurchase at NAV related prices by the Mutual Fund.

7. Transparency:
Investors get regular information on the value of your investment in addition to
disclosure on the specific investments made by the scheme, the proportion invested
in each class of assets and the fund manager's investment strategy and outlook.

8. Flexibility:
Through features such as regular investment plans, regular withdrawal plans
and dividend reinvestment plans, one can systematically invest or withdraw funds
according to your needs and convenience.

9. Affordability:
Investors individually may lack sufficient funds to invest in high-grade stocks. A
mutual fund because of its large corpus allows even a small investor to take the
benefit of its investment strategy

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10.Well Regulated:
All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The
operations of Mutual Funds are regularly monitored by SEBI.

Limitation of Mutual Fund Investment

1. No Control Over Cost:

An Investor in mutual fund has no control over the overall costs of investing. He
pays an investment management fee (which is a percentage of his investments) as
long as he remains invested in fund, whether the fund value is rising or declining.
He also has to pay fund distribution costs, which he would not incur in direct
investing.

However this only means that there is a cost to obtain the benefits of mutual fund
services. This cost is often less than the cost of direct investing.

2. No Tailor-Made Portfolios:

Investing through mutual funds means delegation of the decision of portfolio


composition to the fund managers. The very high net worth individuals or large
corporate investors may find this to be a constraint in achieving their objectives.

However, most mutual funds help investors overcome this constraint by offering
large no. of schemes within the same fund.

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3. Managing A Portfolio Of Funds:

Availability of large no. of funds can actually mean too much choice for the
investors. He may again need advice on how to select a fund to achieve his
objectives.
AMFI has taken initiative in this regard by starting a training and certification
program for prospective Mutual Fund Advisors. SEBI has made this certification
compulsory for every mutual fund advisor interested in selling mutual fund.

4. Taxes:

During a typical year, most actively managed mutual funds sell anywhere from 20
to 70 percent of the securities in their portfolios. If your fund makes a profit on its
sales, you will pay taxes on the income you receive, even if you reinvest the money
you made.

5. Cost of Churn:

The portfolio of fund does not remain constant. The extent to which the portfolio
changes is a function of the style of the individual fund manager i.e. whether he is a
buy and hold type of manager or one who aggressively churns the fund. It is also
dependent on the volatility of the fund size i.e. whether the fund constantly receives
fresh subscriptions and redemptions. Such portfolio changes have associated costs
of brokerage, custody fees etc. which lowers the portfolio return commensurately.

Conceptual background of the study:-

With a plethora of schemes to choose from, the retail investor faces problems in
selecting funds. Factors such as investment strategy and management style are
qualitative, but the funds record is an important indicator too. Though past performance
alone can not be indicative of future performance, it is, frankly, the only quantitative
way to judge how good a fund is at present.

Therefore, there is a need to correctly assess the past performance of different mutual
funds. Worldwide, good mutual fund companies over are known by their AMCs and

22
this fame is directly linked to their superior stock selection skills. For mutual funds to
grow, AMCs must be held accountable for their selection of stocks. In other words,
there must be some performance indicator that will reveal the quality of stock selection
of various AMCs.

Return alone should not be considered as the basis of measurement of the performance
of a mutual fund scheme, it should also include the risk taken by the fund manager
because different funds will have different levels of risk attached to them. For
evaluating the performance of selected Sectoral Mutual Fund schemes risk-return
relation models have been used like:

The Treynor Measure

The Sharpe Measure

Jenson Model

Fama Model

The Treynor Measure

Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index. This Index is a ratio of return generated by the fund over and above
risk free rate of return (generally taken to be the return on securities backed by the
government, as there is no credit risk associated), during a given period and systematic
risk associated with it (beta). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of
the fund.

All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and
negative Treynor's Index is an indication of unfavorable performance.

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The Sharpe Measure
In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is
a ratio of returns generated by the fund over and above risk free rate of return and the
total risk associated with it. According to Sharpe, it is the total risk of the fund that the
investors are concerned about. So, the model evaluates funds on the basis of reward per
unit of total risk. Symbolically, it can be written as:

Sharpe Index (Si) = (Ri - Rf)/Si


Where, Si is standard deviation of the fund.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.
Comparison of Sharpe and Treynor
Sharpe and Treynor measures are similar in a way, since they both divide the risk
premium by a numerical risk measure. The total risk is appropriate when we are
evaluating the risk return relationship for well-diversified portfolios. On the other hand,
the systematic risk is the relevant measure of risk when we are evaluating less than
fully diversified portfolios or individual stocks. For a well-diversified portfolio the total
risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and
systematic risk (Treynor measure) should be identical for a well-diversified portfolio,
as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that
ranks higher on Treynor measure, compared with another fund that is highly
diversified, will rank lower on Sharpe Measure.

Jenson Model
Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the Differential Return

24
Method. This measure involves evaluation of the returns that the fund has generated vs.
the returns actually expected out of the fund given the level of its systematic risk. The
surplus between the two returns is called Alpha, which measures the performance of a
fund compared with the actual returns over the period. Required return of a fund at a
given level of risk (Ri) can be calculated as:-

Ri = Rf + Bi (Rm - Rf)

Where, Rm is average market return during the given period. After calculating it,
alpha can be obtained by subtracting required return from the actual return of
the fund. Higher alpha represents superior performance of the fund and vice versa.
Limitation of this model is that it considers only systematic risk not the entire risk
associated with the fund and an ordinary investor can not mitigate unsystematic risk, as
his knowledge of market is primitive.

Fama Model
The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these two is
taken as a measure of the performance of the fund and is called net selectivity.

The net selectivity represents the stock selection skill of the fund manager, as it is the
excess return over and above the return required to compensate for the total risk taken
by the fund manager. Higher value of which indicates that fund manager has earned
returns well above the return commensurate with the level of risk taken by him.

Required return can be calculated as:-

Ri = Rf + Si/Sm*(Rm - Rf)

25
Where, Sm is standard deviation of market returns. The net selectivity is then
calculated by subtracting this required return from the actual return of the fund.

Among the above performance measures, two models namely, Treynor measure and
Jenson model use systematic risk based on the premise that the unsystematic risk
is diversifiable.

These models are suitable for large investors like institutional investors with high
risk taking capacities as they do not face paucity of funds and can invest in a number of
options to dilute some risks.

For them, a portfolio can be spread across a number of stocks and sectors. However,
Sharpe measure and Fama model that consider the entire risk associated with
fund are suitable for small investors, as the ordinary investor lacks the necessary skill
and resources to diversified.

Moreover, the selection of the fund on the basis of superior stock selection ability of the
fund manager will also help in safeguarding the money invested to a great extent. The
investment in funds that have generated big returns at higher levels of risks leaves the
money all the more prone to risks of all kinds that may exceed the individual investors'
risk appetite.

BETA
Beta measures a stock's volatility, the degree to which its price fluctuates in relation to
the overall market. In other words, it gives a sense of the stock's market risk compared
to the greater market. Beta is used also to compare a stock's market risk to that of other
stocks. Investment analysts use the Greek letter '' to represent beta.

This measure is calculated using regression analysis. A beta of 1 indicates that the
security's price tends to move with the market. A beta greater than 1 indicates that the

26
security's price tends to be more volatile than the market, and a beta less than 1 means it
tends to be less volatile than the market.
= rim i m
________________________
2m
rim is correlation coefficient between market returns and fund returns.
i is standard deviation of fund returns.(Si)
m is standard deviation of market returns.(Sm)

2m is market variance.

Coefficient of Determination ( R 2 ) ---a measure of reliability of Beta

Beta depends on the index used to calculate it. It can happen that the index bears no
correlation with the movements in the fund. Due to this reason, it is essential to take a
look at statistical value called Coefficient of Determination along with Beta. It shows
how reliable the beta number is. It varies between zero and one.

Value of 1 indicates perfect correlation with the indx. Thus, an If ( R 2 ) =0.64 it


implies that 64% of the variation in the portfolio returns is due to variations in the
market returns. Mathematically it is the square of correlation coefficient(R).

n { x ( xm e) a (ny ym
e) a}n

R= -----------------------------------------------
(x x ) (2 y y ) 2
mean mean

Where X and Y are returns on the portfolio and returns on the market respectively.
Beta and ( R 2 ) should thus be used together when examining a funds risk profile.

NET ASSET VALUE (NAV)

NAV per unit of a scheme on a day is the net market value of the securities held by the
total no. of the units of the scheme on the particular day. It is actually the value of of
net asset per unit. Since the market value of securities changes everyday, NAV of a
fund also varies on a day to day basis. NAVs for open ended schemes are required to
be disclosed a daily basis(business day).

27
Net Assets of the scheme
NAV = ___________________

No. of units outstanding

Where,
Numerator= Market value of investment+receivables+other Accrued Income +Other
Assets- Accrued Expenses-Other Payables-Other Liabilities.

Standard Deviation- a measure of Total Risk

Standard Deviation is the most common statistical measure of judging a funds


volatility and risk. It measures a funds total risk i.e. sum of systematic risk and
unsystematic risk. Mathematically it gives a quality rating of an avg. The SD of an
avg. is the amt. By which the no. that go in to an avg. deviate from that avg. It tells us
how closely an avg. represents the underlying avg. But one thing to be kept in mind is
that a high Standard Deviation may be a measure of volatility, but it does not
necessarily mean that such a fund is worse than one with a low Standard Deviation. If
the first fund is a much higher performer than the second one, the deviation will not
matter much.

SD= 1
( x i x mean ) 2
n
( x x mean ) 2 gives the square of the sum of differences of each value in the sample
i
from the mean of the sample of n element.

Note: - For this project following tools have been used:-

Standard Deviation
Beta
Sharp Ratio
R-Square

28
CHAPTER III - INDUSTRY PROFILE

29
FINANCIAL MARKETS

Finance is the pre-requisite for modern business and financial institutions play a vital

role in the economic system. It is through financial markets and institutions that the

financial system of an economy works. Financial markets refer to the institutional

arrangements for dealing in financial assets and credit instruments of different types

such as currency, cheques, bank deposits, bills, bonds, equities, etc.

Financial market is a broad term describing any marketplace where buyers and sellers

participate in the trade of assets such as equities, bonds, currencies and derivatives.

They are typically defined by having transparent pricing, basic regulations on trading,

costs and fees and market forces determining the prices of securities that trade.

Generally, there is no specific place or location to indicate a financial market. Wherever

a financial transaction takes place, it is deemed to have taken place in the financial

market. Hence financial markets are pervasive in nature since financial transactions are

themselves very pervasive throughout the economic system. For instance, issue of

equity shares, granting of loan by term lending institutions, deposit of money into a

bank, purchase of debentures, sale of shares and so on.

In a nutshell, financial markets are the credit markets catering to the various needs of

the individuals, firms and institutions by facilitating buying and selling of financial

assets, claims and services.

30
CLASSIFICATION OF FINANCIAL MARKETS

Financial markets

Organized markets Unorganized markets

Money Lenders,
Capital Markets Money Markets
Indigenuos Bankers

Industrial Securities
Call Money Market
Market

Commercial Bill
Primary Market
Market

Secondary market Treasury Bill Market

Government
Securities Market

Long-term loan
market

31
Capital Market

The capital market is a market for financial assets which have a long or indefinite

maturity. Generally, it deals with long term securities which have a period of above one

year. In the widest sense, it consists of a series of channels through which the savings

of the community are made available for industrial and commercial enterprises and

public authorities. As a whole, capital market facilitates raising of capital.

The major functions performed by a capital market are:

1. Mobilization of financial resources on a nation-wide scale.

2. Securing the foreign capital and know-how to fill up deficit in the required

resources for economic growth at a faster rate.

3. Effective allocation of the mobilized financial resources, by directing the same

to projects yielding highest yield or to the projects needed to promote balanced

economic development.

Capital market consists of primary market and secondary market.

Primary market: Primary market is a market for new issues or new financial claims.

Hence it is also called as New Issue Market. It basically deals with those securities

which are issued to the public for the first time. The market, therefore, makes available

a new block of securities for public subscription. In other words, it deals with raising of

fresh capital by companies either for cash or for consideration other than cash. The best

example could be Initial Public Offering (IPO) where a firm offers shares to the public

for the first time.

32
Secondary market: Secondary market is a market where existing securities are traded.

In other words, securities which have already passed through new issue market are

traded in this market. Generally, such securities are quoted in the stock exchange and it

provides a continuous and regular market for buying and selling of securities. This

market consists of all stock exchanges recognized by the government of India.

Money Market

Money markets are the markets for short-term, highly liquid debt securities. Money

market securities are generally very safe investments which return relatively low

interest rate that is most appropriate for temporary cash storage or short term time

needs. It consists of a number of sub-markets which collectively constitute the money

market namely call money market, commercial bills market, acceptance market, and

Treasury bill market.

Derivatives Market

The derivatives market is the financial market for derivatives, financial instruments like

futures contracts or options, which are derived from other forms of assets. A derivative

is a security whose price is dependent upon or derived from one or more underlying

assets. The derivative itself is merely a contract between two or more parties. Its value

is determined by fluctuations in the underlying asset. The most common underlying

assets include stocks, bonds, commodities, currencies, interest rates and market

indexes. The important financial derivatives are the following:

33
Forwards: Forwards are the oldest of all the derivatives. A forward contract

refers to an agreement between two parties to exchange an agreed quantity of an

asset for cash at a certain date in future at a predetermined price specified in that

agreement. The promised asset may be currency, commodity, instrument etc.

Futures: Future contract is very similar to a forward contract in all respects

excepting the fact that it is completely a standardized one. It is nothing but a

standardized forward contract which is legally enforceable and always traded on

an organized exchange.

Options: A financial derivative that represents a contract sold by one party

(option writer) to another party (option holder). The contract offers the buyer

the right, but not the obligation, to buy (call) or sell (put) a security or other

financial asset at an agreed-upon price (the strike price) during a certain period

of time or on a specific date (exercise date). Call options give the option to buy

at certain price, so the buyer would want the stock to go up. Put options give the

option to sell at a certain price, so the buyer would want the stock to go down.

Swaps: It is yet another exciting trading instrument. Infact, it is the combination

of forwards by two counterparties. It is arranged to reap the benefits arising

from the fluctuations in the market either currency market or interest rate

market or any other market for that matter.

34
Foreign Exchange Market

It is a market in which participants are able to buy, sell, exchange and speculate on

currencies. Foreign exchange markets are made up of banks, commercial companies,

central banks, investment management firms, hedge funds, and retail forex brokers and

investors. The forex market is considered to be the largest financial market in the

world. It is a worldwide decentralized over-the-counter financial market for the trading

of currencies. Because the currency markets are large and liquid, they are believed to be

the most efficient financial markets. It is important to realize that the foreign exchange

market is not a single exchange, but is constructed of a global network of computers

that connects participants from all parts of the world.

Commodities Market

It is a physical or virtual marketplace for buying, selling and trading raw or primary

products. For investors' purposes there are currently about 50 major commodity

markets worldwide that facilitate investment trade in nearly 100 primary

commodities. Commodities are split into two types: hard and soft commodities. Hard

commodities are typically natural resources that must be mined or extracted (gold,

rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn,

wheat, coffee, sugar, soybeans, pork, etc.)

35
INDIAN FINANCIAL MARKETS

India Financial market is one of the oldest in the world and is considered to be the

fastest growing and best among all the markets of the emerging economies.

The history of Indian capital markets dates back 200 years toward the end of the

18th century when India was under the rule of the East India Company. The

development of the capital market in India concentrated around Mumbai where

no less than 200 to 250 securities brokers were active during the second half of

the 19th century.

The financial market in India today is more developed than many other sectors because

it was organized long before with the securities exchanges of Mumbai,

Ahmadabad and Kolkata were established as early as the 19th century.

By the early 1960s the total number of securities exchanges in India rose to eight,

including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi,

Bangalore and Pune. Today there are 21 regional securities exchanges in India

in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over

the Counter Exchange of India).

However the stock markets in India remained stagnant due to stringent controls on the

market economy that allowed only a handful of monopolies to dominate their

respective sectors. The corporate sector wasn't allowed into many industry segments,

36
which were dominated by the state controlled public sector resulting in stagnation of

the economy right up to the early 1990s.

Thereafter when the Indian economy began liberalizing and the controls began to be

dismantled or eased out; the securities markets witnessed a flurry of IPOs that were

launched. This resulted in many new companies across different industry segments to

come up with newer products and services. A remarkable feature of the growth of the

Indian economy in recent years has been the role played by its securities markets in

assisting and fuelling that growth with money rose within the economy. This was in

marked contrast to the initial phase of growth in many of the fast growing economies of

East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring

growth in their initial days of market decontrol. During this phase in India much of the

organized sector has been affected by high growth as the financial markets played an

all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public

Sector Undertakings) that decided to offload part of their equity were also helped by the

well-organized securities market in India. The launch of the NSE (National Stock

Exchange) and the OTCEI (Over the Counter Exchange of India) during the mid 1990s

by the government of India was meant to usher in an easier and more transparent form

of trading in securities. The NSE was conceived as the market for trading in the

securities of companies from the large-scale sector and the OTCEI for those from the

small-scale sector. While the NSE has not just done well to grow and evolve into the

virtual backbone of capital markets in India the OTCEI struggled and is yet to show any

sign of growth and development. The integration of IT into the capital market

infrastructure has been particularly smooth in India due to the countrys world class IT

37
industry. This has pushed up the operational efficiency of the Indian stock market to

global standards and as a result the country has been able to capitalize on its high

growth and attract foreign capital like never before. The regulating authority for capital

markets in India is the SEBI (Securities and Exchange Board of India). SEBI came into

prominence in the 1990s after the capital markets experienced some turbulence. It had

to take drastic measures to plug many loopholes that were exploited by certain market

forces to advance their vested interests. After this initial phase of struggle SEBI has

grown in strength as the regulator of Indias capital markets and as one of the countrys

most important institutions.

38
FINANCIAL MARKET REGULATIONS

Regulations are an absolute necessity in the face of the growing importance of capital

markets throughout the world. The development of a market economy is dependent on

the development of the capital market. The regulation of a capital market involves the

regulation of securities; these rules enable the capital market to function more

efficiently and impartially.

A well regulated market has the potential to encourage additional investors to partake,

and contribute in, furthering the development of the economy. The chief capital market

regulatory authority is Securities and Exchange Board of India (SEBI).

SEBI is the regulator for the securities market in India. It is the apex body to develop

and regulate the stock market in India It was formed officially by the Government of

India in 1992 with SEBI Act 1992 being passed by the Indian Parliament. Chaired by C

B Bhave, SEBI is headquartered in the popular business district of Bandra-Kurla

complex in Mumbai, and has Northern, Eastern, Southern and Western regional offices

in New Delhi, Kolkata, Chennai and Ahmedabad. In place of Government Control, a

statutory and autonomous regulatory board with defined responsibilities, to cover both

development & regulation of the market, and independent powers has been set up.

39
The basic objectives of the Board were identified as:

to protect the interests of investors in securities;


to promote the development of Securities Market;
to regulate the securities market and
For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is attending to

the fulfillment of its objectives with commendable zeal and dexterity. The

improvements in the securities markets like capitalization requirements, margining,

establishment of clearing corporations etc. reduced the risk of credit and also reduced

the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration

norms, the eligibility criteria, the code of obligations and the code of conduct for

different intermediaries like, bankers to issue, merchant bankers, brokers and sub-

brokers, registrars, portfolio managers, credit rating agencies, underwriters and others.

It has framed bye-laws, risk identification and risk management systems for Clearing

houses of stock exchanges, surveillance system etc. which has made dealing in

securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like S&P CNX

Nifty & Sensex) in 2000. A market Index is a convenient and effective product because

of the following reasons:

40
It acts as a barometer for market behavior;

It is used to benchmark portfolio performance;

It is used in derivative instruments like index futures and index options;

It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level,

and also to diversify the trading products, so that there is an increase in number of

traders including banks, financial institutions, insurance companies, mutual funds,

primary dealers etc. to transact through the Exchanges. In this context the introduction

of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD

is a real landmark.

SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and

successively (e.g. the quick movement towards making the markets electronic and

paperless rolling settlement on T+2 bases). SEBI has been active in setting up the

regulations as required under law.

41
STOCK EXCHANGES IN INDIA

Stock Exchanges are an organized marketplace, either corporation or mutual

organization, where members of the organization gather to trade company stocks or

other securities. The members may act either as agents for their customers, or as

principals for their own accounts.

As per the Securities Contracts Regulation Act, 1956 a stock exchange is an

association, organization or body of individuals whether incorporated or not,

established for the purpose of assisting, regulating and controlling business in buying,

selling and dealing in securities.

Stock exchanges facilitate for the issue and redemption of securities and other financial

instruments including the payment of income and dividends. The record keeping is

central but trade is linked to such physical place because modern markets are

computerized. The trade on an exchange is only by members and stock broker do have

a seat on the exchange.

List of Stock Exchanges in India

Bombay Stock Exchange


National Stock Exchange 5. Cochin
OTC Exchange of India 6. Coimbatore
Regional Stock Exchanges 7. Delhi
1. Ahmedabad 8. Guwahati
2. Bangalore 9. Hyderabad
3. Bhubaneswar 10. Jaipur
4. Calcutta 11. Ludhiana

42
12. Madhya Pradesh
13. Madras
14. Magadh
15. Mangalore
16. Meerut
17. Pune
18. Saurashtra Kutch
19. Uttar Pradesh
20. Vadodara

43
BOMBAY STOCK EXCHANGE

A very common name for all traders in the stock market, BSE, stands for Bombay

Stock Exchange. It is the oldest market not only in the country, but also in Asia. In

the early days, BSE was known as "The Native Share & Stock Brokers Association."

It was established in the year 1875 and became the first stock exchange in the country

to be recognized by the government. In 1956, BSE obtained a permanent recognition

from the Government of India under the Securities Contracts (Regulation) Act, 1956.

In the past and even now, it plays a pivotal role in the development of the country's

capital market. This is recognized worldwide and its index, SENSEX, is also tracked

worldwide. Earlier it was an Association of Persons (AOP), but now it is a

demutualised and corporatised entity incorporated under the provisions of the

Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualization)

Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

BSE Vision

The vision of the Bombay Stock Exchange is to "Emerge as the premier Indian stock

exchange by establishing global benchmarks."

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BSE Management

Bombay Stock Exchange is managed professionally by Board of Directors. It

comprises of eminent professionals, representatives of Trading Members and the

Managing Director. The Board is an inclusive one and is shaped to benefit from the

market intermediaries participation.

The Board exercises complete control and formulates larger policy issues. The day-

to-day operations of BSE are managed by the Managing Director and its school of

professional as a management team.

BSE Network

The Exchange reaches physically to 417 cities and towns in the country. The

framework of it has been designed to safeguard market integrity and to operate with

transparency. It provides an efficient market for the trading in equity, debt

instruments and derivatives. Its online trading system, popularly known as BOLT, is a

proprietary system and it is BS 7799-2-2002 certified. The BOLT network was

expanded, nationwide, in 1997. The surveillance and clearing & settlement functions

of the Exchange are ISO 9001:2000 certified.

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BSE Facts

BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is

the benchmark equity index that reflects the robustness of the economy and finance. It

was the

First in India to introduce Equity Derivatives

First in India to launch a Free Float Index

First in India to launch US$ version of BSE Sensex

First in India to launch Exchange Enabled Internet Trading Platform

First in India to obtain ISO certification for Surveillance, Clearing &

Settlement

'BSE On-Line Trading System (BOLT) has been awarded the globally

recognized the Information Security Management System standard

BS7799-2:2002.

First to have an exclusive facility for financial training

Moved from Open Outcry to Electronic Trading within just 50 days

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BSE with its long history of capital market development is fully geared to continue

its contributions to further the growth of the securities markets of the country, thus

helping India increases its sphere of influence in international financial markets.

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NATIONAL STOCK EXCHANGE OF INDIA
LIMITED

The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which

recommended promotion of a National Stock Exchange by financial institutions (FIs)

to provide access to investors from all across the country on an equal footing. Based

on the recommendations, NSE was promoted by leading Financial Institutions at the

behest of the Government of India and was incorporated in November 1992 as a tax-

paying company unlike other stock Exchange in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation)

Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market

(WDM) segment in June 1994. The Capital Market (Equities) segment commenced

operations in November 1994 and operations in Derivatives segment commenced in

June 2000.

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NSE GROUP

National Securities Clearing Corporation Ltd. (NSCCL)

It is a wholly owned subsidiary, which was incorporated in August 1995 and

commenced clearing operations in April 1996. It was formed to build confidence in

clearing and settlement of securities, to promote and maintain the short and consistent

settlement cycles, to provide a counter-party risk guarantee and to operate a tight risk

containment system.

NSE.IT Ltd.

It is also a wholly owned subsidiary of NSE and is its IT arm. This arm of the NSE is

uniquely positioned to provide products, services and solutions for the securities

industry. NSE.IT primarily focuses on in the area of trading, broker front-end and

back-office, clearing and settlement, web-based, insurance, etc. Along with this, it

also provides consultancy and implementation services in Data Warehousing,

Business Continuity Plans, Site Maintenance and Backups, Stratus Mainframe

Facility Management, Real Time Market Analysis & Financial News.

India Index Services & Products Ltd. (IISL)

It is a joint venture between NSE and CRISIL Ltd. to provide a variety of indices and

index related services and products for the Indian Capital markets. It was set up in

May 1998. IISL has a consulting and licensing agreement with the Standard and

Poor's (S&P), world's leading provider of investible equity indices, for co-branding

equity indices.

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National Securities Depository Ltd. (NSDL)

NSE joined hands with IDBI and UTI to promote dematerialization of securities. This

step was taken to solve problems related to trading in physical securities. It

commenced operations in November 1996.

NSE Facts

It uses satellite communication technology to energize participation from

around 400 cities in India.

NSE can handle up to 1 million trades per day.

It is one of the largest interactive VSAT based stock exchanges in the world.

The NSE- network is the largest private wide area network in India and the

first extended C- Band VSAT network in the world.

Presently more than 9000 users are trading on the real time-online NSE

application.

Today, NSE is one of the largest exchanges in the world and still forging ahead. At

NSE, we are constantly working towards creating a more transparent, vibrant and

innovative capital market.

OVER THE COUNTER EXCHANGE OF INDIA

OTCEI was incorporated in 1990 as a section 25 company under the companies Act

1956 and is recognized as a stock exchange under section 4 of the securities Contracts

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Regulation Act, 1956. The exchange was set up to aid enterprising promotes in

raising finance for new projects in a cost effective manner and to provide investors

with a transparent and efficient mode of trading Modeled along the lines of the

NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian

capital markets such as screen-based nationwide trading, sponsorship of companies,

market making and scrip less trading. As a measure of success of these efforts, the

Exchange today has 115 listings and has assisted in providing capital for enterprises

that have gone on to build successful brands for themselves like VIP Advanta, Sonora

Tiles & Brilliant mineral water, etc.

Need for OTCEI:

Studies by NASSCOM, software technology parks of India, the venture capitals funds

and the governments IT tasks Force, as well as rising interest in IT, Pharmaceutical,

Biotechnology and Media shares have repeatedly emphasized the need for a national

stock market for innovation and high growth companies. Innovative companies are

critical to developing economics like India, which is undergoing a major

technological revolution. With their abilities to generate employment opportunities

and contribute to the economy, it is essential that these companies not only expand

existing operations but also set up new units. The key issue for these companies is

raising timely, cost effective and long term capital to sustain their operations and

enhance growth. Such companies, particularly those that have been in operation for a

short time, are unable to raise funds through the traditional financing methods,

because they have not yet been evaluated by the financial world.

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CHAPTER IV - COMPANY PROFILE

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INDIA INFOLINE LIMITED

India Infoline is a one-stop financial services shop, most respected for quality of its

information, personalized service and cutting-edge technology.

Vision

Our vision is to be the most respected company in the financial services space.

India Infoline Group

The India Infoline group, comprising the holding company, India Infoline Limited

and its wholly-owned subsidiaries, include the entire financial services space with

offerings ranging from Equity research, Equities and derivatives trading,

Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance,

Fixed deposits, GoI bonds and other small savings instruments to loan products and

Investment banking.

India Infoline also owns and manages the websites www.indiainfoline.com and

www.5paisa.com. The company has a network of over 2100 business locations

(branches and sub-brokers) spread across more than 450 cities and towns. The group

caters to approximately a million customers.

Founded in 1995 by Mr. Nirmal Jain (Chairman and Managing Director) as an

independent business research and information provider, the company gradually

evolved into a one-stop financial services solutions provider.

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India Infoline received registration for a housing finance company from the National

Housing Bank and received the Fastest growing Equity Broking House - Large

firms in India by Dun & Bradstreet in 2009. It also received the Insurance broking

license from IRDA; received the venture capital license; received in principle

approval to sponsor a mutual fund; received Best broker- India award from Finance

Asia; Most Improved Brokerage- India award from Asia money.

COMPANY STRUCTURE

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the

Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also

a member of both the exchanges. It is engaged in the businesses of Equities broking,

Wealth Advisory Services and Portfolio Management Services. It offers broking

services in the Cash and Derivatives segments of the NSE as well as the Cash

segment of the BSE. It is registered with NSDL as well as CDSL as a depository

participant, providing a one-stop solution for clients trading in the equities market. It

has recently launched its Investment banking and Institutional Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to

clients. These services are offered to clients as different schemes, which are based on

differing investment strategies made to reflect the varied risk-return preferences of

clients.

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India Infoline Media and Research Services Limited

The services represent a strong support that drives the broking, commodities, mutual

fund and portfolio management services businesses. It undertakes equities research

which is acknowledged by none other than Forbes as 'Best of the Web' and 'a must

read for investors in Asia'. India Infoline's research is available not just over the

internet but also on international wire services like Bloomberg (Code: IILL),

Thomson First Call and Internet Securities where India Infoline is amongst the most

read Indian brokers.

India Infoline Commodities Limited.

India Infoline Commodities Pvt Limited is engaged in the business of commodities

broking. Their experience in securities broking empowered them with the requisite

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skills and technologies to allow them to offer commodities broking as a contra-

cyclical alternative to equities broking. It enjoys memberships with the MCX and

NCDEX, two leading Indian commodities exchanges, and recently acquired

membership of DGCX. It has a multi-channel delivery model, making it among the

select few to offer online as well as offline trading facilities.

India Infoline Marketing & Services

India Infoline Marketing and Services Limited is the holding company of India

Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited.

India Infoline Insurance Services Limited is a registered Corporate Agent with

the Insurance Regulatory and Development Authority (IRDA). It is the largest

Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is

India's largest private Life Insurance Company. India Infoline was the first

corporate agent to get licensed by IRDA in early 2001.

India Infoline Insurance Brokers Limited India Infoline Insurance Brokers

Limited is a newly formed subsidiary which will carry out the business of

Insurance broking.

India Infoline Investment Services Limited

Consolidated shareholdings of all the subsidiary companies engaged in loans and

financing activities under one subsidiary. Recently, Orient Global, a Singapore-based

investment institution invested USD 76.7 million for a 22.5% stake in India Infoline

Investment Services. This will help focused expansion and capital raising in the said

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subsidiaries for various lending businesses like loans against securities, SME

financing, distribution of retail loan products, consumer finance business and housing

finance business. India Infoline Investment Services Private Limited consists of the

following step-down subsidiaries.

India Infoline Distribution Company Limited (distribution of retail loan

products)

Moneyline Credit Limited (consumer finance)

India Infoline Housing Finance Limited (housing finance)

IIFL (Asia) Private Limited

IIFL (Asia) Private Limited is wholly owned subsidiary which has been incorporated

in Singapore to pursue financial sector activities in other Asian markets. Further to

obtaining the necessary regulatory approvals, the company has been initially

capitalized at 1 million Singapore dollars.

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IIFL MANAGEMENT

THE MANAGEMENT TEAM

Mr. Nirmal Jain, Chairman & Managing Director

Nirmal Jain, MBA (IIM, Ahmadabad) and a Chartered and Cost Accountant, founded

Indias leading financial services company India Infoline Ltd. in 1995,

providing globally acclaimed financial services in equities and

commodities broking, life insurance and mutual funds distribution, among others.

Mr. R Venkataraman, Executive Director

R Venkataraman, co-promoter and Executive Director of India

Infoline Ltd., is a B. Tech (Electronics and Electrical Communications

Engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined

the India Infoline board in July 1999.

THE BOARD OF DIRECTORS

Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline

Ltd. comprises:

Mr. Nilesh Vikamsey, Independent Director

Mr. Vikamsey, Board member since February 2005 - a practicing Chartered

Accountant and partner (Khimji Kunverji & Co., Chartered

Accountants), a member firm of HLB International, headed the audit

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department till 1990 and thereafter also handles financial services, consultancy,

investigations, mergers and acquisitions, valuations etc

Mr Sat Pal Khattar, Non Executive Director

Mr Sat Pal Khattar, - Board member since April 2001 - Presidential Council of

Minority Rights member, Chairman of the Board of Trustee of

Singapore Business Federation, is also a life trustee of SINDA, a non

profit body, helping the under-privileged Indians in Singapore. He joined the India

Infoline board in April 2001.

Mr Kranti Sinha, Independent Director

Mr. Kranti Sinha Board member since January 2005 completed

his masters from the Agra University and started his career as a Class I

officer with Life Insurance Corporation of India.

Mr Arun K. Purvar, Independent Director

Mr. A.K. Purvar Board member since March 2008 completed his

Masters degree in commerce from Allahabad University in 1966 and a

diploma in Business Administration in 1967.

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PRODUCTS & SERVICES

Equities

India Infoline provided the prospect of researched investing to its clients, which was

hitherto restricted only to the institutions. Research for the retail investor did not exist

prior to India Infoline. India Infoline leveraged technology to bring the convenience

of trading to the investors location of preference (residence or office) through

computerized access. India Infoline made it possible for clients to view transaction

costs and ledger updates in real time. The Company is among the few financial

intermediaries in India to offer a complement of online and offline broking. The

Companies network of branches also allows customers to place orders on phone or

visit our branches for trading.

Commodities

India Infolines extension into commodities trading reconciles its strategic intent to

emerge as a one stop solutions financial intermediary. Its experience in securities

broking has empowered it with requisite skills and technologies. The Companies

commodities business provides a contra-cyclical alternative to equities broking. The

Company was among the first to offer the facility of commodities trading in Indias

young commodities market (the MCX commenced operations in 2003). Average

monthly turnover on the commodity exchanges increased from Rs 0.34 bn to Rs

20.02 bn.

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Insurance

An entry into this segment helped complete the client's product basket; concurrently,

it graduated the Company into a one stop retail financial solutions provider. To ensure

maximum reach to customers across India, it has employed a multi pronged approach

and reaches out to customers via our Network, Direct and Affiliate channels. India

Infoline was the first corporate in India to get the agency license in early 2001.

Invest Online

India Infoline has made investing in Mutual funds and primary market so effortless.

Only registration is needed. No paperwork no queues and No registration

charges. India Infoline offers a host of mutual fund choices under one roof,

backed by in-depth research and advice from research house and tools configured

as investor friendly.

Wealth Management

The key to achieving a successful Investment Portfolio is to have a carefully planned

financial strategy based on a thorough understanding of the client's investment

needs and risk appetite. The IIFL Private Wealth Management Team of financial

experts will recommend an appropriate financial strategy to effectively meet

customers investment requirements.

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Asset Management

India Infoline is a leading pan-India mutual fund distribution house associated with

leading asset management companies. It operates primarily in the retail segment

leveraging its existing distribution network to reach prospective clients. It has

received the in-principle approval to set up a mutual fund.

Portfolio Management

IIFL Portfolio Management Service is a product wherein an equity investment

portfolio is created to suit the investment objectives of a client. India Infoline

invests the clients resources into stocks from different sectors, depending on

clients risk-return profile. This service is particularly advisable for investors who

cannot afford to give time or don't have that expertise for day-to-day

management of their equity portfolio.

Newsletters

As a subscriber to the Daily Market Strategy, clients get research reports of India

Infoline research team on a priority basis. The Indiainfoline Weekly Newsletter is

the flashback for the week gone by. A weekly outlook coupled with the best of

the web stories from Indiainfoline and links to important investment ideas,

Leader Speak and features is delivered in the clients inbox every Friday evening.

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CHAPTER V

DATA ANALYSIS & INTERPRETATIONS

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Sectoral Mutual Funds Considered:-

1. Auto Sector - UTI Transportation and Logistics Fund

2. Banking Sector - UTI Banking Sector Fund

3. FMCG Sector - Franklin FMCG Fund

4. Infrastructure Sector - Tata Infrastructure Fund

5. Power Sector - Reliance Diversified Power Sector Fund

6. Service Sector - Prudential ICICI Services Industries Fund

7. Technology Sector - Franklin Infotech Fund

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1. Auto Sector:-

UTI Transportation and Logistics Fund

Scheme Snapshot
CIO: A K Shridhar Category: Equity
Fund Manager: Anoop Sub-Category: Sectoral-Auto
Bhaskar
Address: UTI Towers, `Gn` Block, Type: Open
Bandra-Kurla
Complex, Bandra (East), Mumbai 400051Min. Investment(Rs): 5000
Phone: 91 22 5678 6666 /
56578210 Total Assets(Rs./Mn): 719.8
Fax: 91 22 2652 4921
Registrars: UTI Technology Services
website: www.utimf.com Limited
Launch Date: 09-MAR-04
Scheme Objective:
The scheme aims to provide to investors growth of capital over a period of time as
well as to make periodical
distribution of income from investment in stocks of respective sectors of the Indian
economy.
Asset Allocation
Equity Shares 95.83
3.40
Net Current Assets
0.70
Unlisted Equities 0.07
Short Term Deposits
As on 31-OCT-10

Top 5 holdings As on 31-OCT-10


Mahindra & Mahindra 7.56
Limited
Tata Motors Limited 7.23
Ashok Leyland Limited 6.18
Bajaj Auto Limited 5.96
Eicher Motors Limited 5.89

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2. Banking Sector:-

UTI Banking Sector Fund

Scheme Snapshot
CIO: A K Shridhar Category: Equity
Fund Manager: Arun Khurana, AnoopSub-Category: Sectoral-Bank
Bhaskar
Address: UTI Towers, `Gn` Block, Type: Open
Bandra-Kurla
Complex, Bandra (East), Mumbai 400051Min. Investment(Rs): 5000
Phone: 91 22 5678 6666 /
56578210 Total Assets(Rs./Mn): 2312.5
Fax: 91 22 2652 4921
Registrars: UTI Technology Services
website: www.utimf.com Limited
Launch Date: 09-MAR-04
Scheme Objective:
To generate capital appreciation through investments in the stocks of the
companies/institutions engaged in the
banking and financial services activities.

Asset Allocation
Equity Shares 97.97
2.22
Short Term Deposits
-0.19
Net Current Assets
As on 31-OCT-10

Top 5 holdings As on 31-OCT-10


I C I C I Bank Limited 19.73
State Bank Of India 13.71
H D F C Bank Limited 12.51
Axis Bank Limited 10.11
Bank Of Baroda 7.28

3. FMCG Sector:-

Franklin FMCG Fund

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Scheme Snapshot
CIO: Santosh Kamath Category: Equity
Fund Manager: Anil Sub-Category:
Prabhudas Sectoral-FMCG
Address: Level 4, Wockhardt Towers, Bandra
Type: Open
- Kurla
Min. Investment(Rs): 5000
Complex, Bandra (East), Mumbai - 400051
Phone: 91 22 5632 5820
Total Assets(Rs./Mn): 485.42
Fax: 91 22 2281 0923
Registrars: Franklin Templeton Asset
website: Management
http://www.templetonindia.com (India) Pvt. Ltd.
Launch Date: 15-MAR-99
Scheme Objective:
Seeks to provide long term capital appreciation by investing primarily in shares of
companies operating in the
FMCG industry.

Asset Allocation
Equity Shares 96.13
2.84
Call And Other Assets
1.03
Corporate Debt / Bonds
As on 30-NOV-10

Top 5 holdings As on 30-NOV-10


Nestle India Limited 14.97
I T C Limited 11.27
Asian Paints Limited 9.25
Pidilite Industries Limited 6.48
Marico Limited 6.08

4. Infrastructure Sector

Tata Infrastructure Fund

Scheme Snapshot

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CIO: Ved Prakash Category: Equity
Chaturvedi
Fund Manager: M Venugopal Sub-Category:
Sectoral-Infrastructure
Address: Fort House, 221 Dr. D. N. Road,
Type: Open
Mumbai -
400 001 Min. Investment(Rs): 5000
Phone: 91 22 56505200 / 251 /
252 Total Assets(Rs./Mn):
Fax: 91 22 5631 5194 18972.93
Registrars: Computer Age Management
website: Services
http://www.tatamutualfund.com Pvt.Ltd.
Launch Date: 25-NOV-04
Scheme Objective:
The investment objective of the Scheme is to provide income distribution and / or medium
to long term capital
gains by investing predominantly in equity/equity related instrument of the companies in
the infrastructure sectors.
Asset Allocation
Equity Shares 95.22
4.78
Cash And Other Assets
As on 30-NOV-10

Top 5 holdings As on 30-NOV-10


I C I C I Bank Limited 4.97
Crompton Greaves 4.79
Limited
Cash And Other Assets 4.78
Oil & Natural Gas Corporation 4.70
Limited
H D F C Bank Limited 4.58

5. Power Sector:-

Reliance Diversified Power Sector Fund

Scheme Snapshot

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CIO: K Rajagopal Category: Equity
Fund Manager: Sunil Sub-Category:
Singhania Sectoral-Power
Address: One Indiabulls Centre, Tower1, Jupiter Mills Type: Open
Compound, 841, Senapati Bapat Marg, Elphinstone
Road, Mumbai - 400 013Min. Investment(Rs): 5000
Phone: 91 22 3099 4600 Total Assets(Rs./Mn):
50211.2
Fax: 91 22 3041 4899 Registrars: Karvy Computershare Private
Limited
website: Launch Date: 29-MAR-04
http://www.reliancemutual.com/
Scheme Objective:
The primary investment objective of the scheme is to seek to generate continous returns
by actively investing in
equity and equity related or fixed income securities of Power and other associated
companies

Asset Allocation
Equity Shares 94.65
Derivatives,Cash And Other 5.35
Receivables
As on 30-NOV-10

Top 5 holdings As on 30-NOV-10


Other Equities 8.33
Cummins India Limited 6.32
Torrent Power Limited 5.99
I C I C I Bank Limited 5.48
Cash And Other Assets And 5.35
Derivatives
6. Technology Sector:-

Franklin Infotech Fund

Scheme Snapshot

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CIO: Santosh Kamath Category: Equity
Fund Manager: Anand Radhakrishnan, Murali Yerram Sub-Category:
Sectoral-TMT
Address: Level 4, Wockhardt Towers, Bandra
Type: Open
- Kurla
Min. Investment(Rs): 5000
Complex, Bandra (East), Mumbai - 400051
Phone: 91 22 5632 5820
Total Assets(Rs./Mn): 1403.5
Fax: 91 22 2281 0923
Registrars: Franklin Templeton Asset
website: Management
http://www.templetonindia.com (India) Pvt. Ltd.
Launch Date: 22-JUL-98
Scheme Objective:
Seeks to provide long term capital appreciation by investing primarily in Information
Technology industry.
Asset Allocation
Equity Shares 96.38
3.62
Other Current Assets
0.00
Unlisted Equities
As on 30-NOV-10

Top 5 holdings As on 30-NOV-10


Infosys Technologies 52.15
Limited
Tata Consultancy Services 25.32
Limited
Wipro Limited 9.48
Cash And Other Assets 3.62
Oracle Financial Services Software 3.56
Limited

7. Service Sector:-

Prudential ICICI Services Industries Fund

Scheme Snapshot

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CIO: Nilesh Shah Category: Equity
Fund Manager: Sanjay Parekh Sub-Category:
Sectoral-Services
Address: 3rd Floor, Hallmark Business Plaza,
Type: Open
Sant
Dyaneshwar Marg, Bandra (East), Mumbai Min.- Investment(Rs): 5000
Phone: 91 22 22679665 / 22679676/
400 051 Total Assets(Rs./Mn): 2802.4
22697989
Fax: 91 22 22630419
Registrars: Computer Age Management
website: Services
http://www.icicipruamc.com Pvt.Ltd.
Launch Date: 13-OCT-05
Scheme Objective:
to generate capital appreciation and income distribution to unitholders by investing
predominantly in equity/equity
related securities of the companies belonging to the service industry and balance in debt
securities and money
marketAllocation
Asset instruments including call money.

Equity Shares 95.80


2.37
Futures
1.82
Debt And Cash And Other
Assets
As on 30-NOV-10

Top 5 holdings As on 30-NOV-10


Infosys Technologies 7.64
Limited
H D F C Bank Limited 7.37
Housing Development Finance Corporation 6.00
Limited
Jaiprakash Associates 5.89
Limited
Bharti Airtel Limited 5.72

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CHAPTER VI

FINDINGS, SUGGESTIONS & CONCLUSION

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FINDINGS

Rate of Return: Among the funds selected, UTI Banking Sector fund has
given the maximum rate of returns (39%) in the last one year followed by
Franklin FMCG (33%). Reliance Diversified Power Sector fund with a return
of (7.5%) stood last in the table.
Among the funds selected, Reliance Diversified Power has given the
maximum rate of returns (37%) in the last five years followed by Tata
Infrastructure (24%). UTI Transportation and Logistics with a return of
(16.98%) stood last in the table.

Total Risk (Standard Deviation)


UTI Banking Sector fund has the maximum standard deviation of 6.92 while
Franklin FMCG has the least standard deviation of 2.96

Systematic Risk (Beta) and Co - relation


UTI Banking Sector fund has the maximum Beta of 1.08 while UTI
Transportation and Logistics has the least Beta of 0.55.

UTI Banking Sector fund has the maximum co-relation of 1.07 while Franklin
FMCG has the least R-Squared of 0.65

Treynor & Sharpe Ratio:


UTI Banking Sector Fund has the maximum Treynor ratio of -0.19 while
Reliance Diversified fund has the least Treynor ratio of -0.85.

Franklin Infotech has the least Sharpe Ratio of -0.15 while ICICI Prudential
Services has the maximum sharpe ratio of 0.01

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SUGGESTIONS & CONCLUSIONS

1. Banking and FMCG sectors have fared well in the last one year and it
is suggested to invest in these sectors.

2. It is advised to be keep away from infrastructure funds especially


Reliance Infrastructure fund.

3. FMCG has the least risk and Banking has the highest risk among the
sectors. It is better to avoid Banking funds for people who want to
avoid the risk.

4. Investors who expect slow and steady returns are advised to for FMCG
sector.

5. UTI Banking Sector has a beta of greater than 1 (i.e market beta). This
implies that Banking Sector has a higher risk compared to the market
portfolio.

6. FMCG, Services, Transportation and Logistics sector has the least beta
and investors can invest in these funds

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ANNEXURE - I
TERMINOLOGY
Mutual Fund: An investment tool that pools in investments made by people and that
corpus is professionally managed by further investing as per the type of fund thats
being operated. The intention is to float money in the market by owning assets
components of many companies at the same meeting the assurances made to
investors. There is no obligation whatsoever for assured returns.
NAV-A cumulative market value of total assets component of its liabilities. Its
actually the measure of what each shareholder would aquire if the assets of the
company are liquidated.
No-Load funds - there is no commission component present to enter and exit
of the fund ownership. Its a full involvement of the corpus.
ELSS - Equity linked savings scheme is a scheme with a tax rebate allowed as
per the Sec 88 in the Indian income tax act, 1961.It provides the investors with the
opportunity to save gains on capital through investments made in MFs.
Index Funds - An interesting scheme that tries to replicate the behavior of the
particular stock index, that is of interest. The portfolio of the fund would majorly
consist of equities listed in that index.
Sector Funds - An MF scheme that has its portfolio chart of companies that
belong to a certain sector, say Oil. This is a high-risk fund, as the performance of that
sector would directly reflect in the funds NAV. So, here we are with the diverse
market of Mutual Funds. Each one claiming their USP. While MFs certainly are NOT
the safest, but they are relatively more safe than the direct involvement in the equity
market, given that fact that majority of the investors are either ill-informed or not
informed about the way the markets move.

So what exactly makes MFs the right kind of fund management tool, espy in a
country like India? A country like India or for that matter any developing country has
some basic problems which prevent the information to be available freely and that too
in an accessible fashion, so with a situation like that, a professionally managed

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agency that would monitor the ups and downs of the market and chart out the best
investment strategies would be the best thing to opt for.
With so many potential investors in India, MFs can go a long way in getting
established, plus with added set of alternatives within the MF schemes each has a
scheme ready for the specific needs.
Just to have a better perspective, there are various options available in the
form of Equity fund, Debt funds, Balance funds and components like Money market
funds, Index funds and the likes of it. Lets take a peek at the important ones.
Equity Funds: The High risk - High return scheme invests in the equity
markets, the risk involved is comparatively higher than but not as high as that of the
sector funds that focus investments on specific sectors. But the higher the risk
component, the higher is the return rate. However, there is a variant in this type of
equity based scheme called the ELSS or the Equity Linked Savings Schemes, the
offer a tax rebate under Sec 88 of I-T act, but the investment needs to be locked for at
least 3 years! Suitable for risk takers .The problem is that it reacts faster to the market
fluctuations, as the NAV would behave the way market behaves. Alliance AMC is
supposed to have a good equity fund expertise.
Debt Funds: Debt funds invest in the debt component or the fixed income
models. So the return is almost certain and the risk is low. However, the returns are
also combatively low compared to the principle amount. Investments in these kinds of
funds range from Govt.Securities to corporate bonds. If you are looking for short-
term safe investment options then the liquid funds in the category is the answer for
you. Several alternatives this category is now available like the income fund, growth
fund or any long-term childcare fund and the likes of it. More diverse Debt funds are,
more the chances of substantial returns.
Balance funds - This type of funds are part equity and part debt funds. The
pattern investment in balance funds is usually pre-determined. You have open-ended
and closed-ended balance funds, where the funds can be traded in an open ended case
just like equities but based on the Net Asset Value (NAV). The closed-ended funds
are locked and cannot bet traded.

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Balance funds are good for those who have ascertained the risk-return based
on their needs.
When to say goodbye to your Mutual Fund?
There are some professionals who talk of when to exit from mutual funds like other
talk of when to invest in mutual funds. People who want to invest get more than the
fixed deposit earning (risk free rate), preferred option is mutual funds. It is important
to base the decision on relative performance and not absolute performance. When
one fund is down 5% while other funds or the market in general are up 10%, it is very
tempting to switch over to what is "hot." Chasing Performance is the best way to
shoot oneself in the foot as we just discussed above.
When studying relative performance, one should look at his fund and
compare it to its peers. However, comparisons should be drawn between parallels and
so equity funds cannot and should not be compared with debt funds. When choosing a
benchmark, one must select funds in the same category. If ones fund was down 2%
and the average equity fund was down 4%, then there is no good enough reason to
sell it. One should compare the returns posted by his fund with that of the peers
across various horizons such as 1-year, 3-year and above. A short-term view can
often lead to committing hara-kiri, as it doesnt present the full picture. If it has
underperformed the average of its peers in all cases, then it sure is one of the better
reasons to exit from the fund.

A change in life stage


Investments are done with a certain objective in mind and life stages are often a
determining factor of what a person needs. A young man can afford to take more risks
than a person nearing his retirement can. In such cases, it pays to withdraw money
from the equity investments made earlier and put them in safer, more conservative
debt funds that offer stable returns without compromising on risk. So a change in life
stages would be one such reason to consider switching into a fund that matches with
ones needs. As one nears retirement, one might want to consider more conservative

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funds. If one gets married, one might need to compromise ones risk tolerance and
desired returns with that of the spouse. This could trigger off the need to exit.
A major change in any basic attribute of the fund
when the fund changes any basic attribute as mentioned by it in its offer documents,
the investors have a choice of getting out of it. Even SEBI has provided for an exit
route being made available to the investors. Changes like a change in Asset
Management Company or in investment style of fund or change of structure say from
closed-end to open-end etc. are good enough reasons for an investor to consider
switching or exiting from it as they are certainly likely to affect the fund in a major
way.
Fund doesnt comply with its objective
One of the important parameters in the selection of the fund is alignment of the risk
profiles of the investor and fund. The objective of the fund says a lot about how the
fund plans to invest. If the objective is not being complied with, it is one of the exit
points worth considering. For example, the three funds discussed above, Alliance
Equity, Birla Advantage and ING Growth all claim to be diversified equity funds yet
they had huge exposures to select ICE sector scripts that not only added volatility
than is expected out of diversified funds but also in a way, went against their stated
objective.
The Fund's Expense Ratio Rises
a small rise in an expense ratio is not a big deal, however a significant rise can result
in substantial reduction of yields and so it would be better to exit the fund. In the case
of bond funds or money market funds, it is highly unlikely that the fund can increase
its returns enough to justify an increase in the fund's expenses.
The Fund Manager has changed
a simple change of fund managers, in itself, is not enough reason to sell a fund on a
short-term basis. If it is a passively managed fund (index fund), then one has little to
no reason to worry. However, if it is an actively managed fund, then has to keep the
eyes open on the new manager. Observing the styles, stock picking and risks
undertaken by the new manager is important for it discloses a lot about how the fund

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might fare in the future. If satisfied, one will have no reason to complain later but the
process needs time and so an investor has to observe the fund manager for some time
before one takes a decision.
Enough has been earned
However, nothing is as important as to rein the horses in time. The primary principle
behind safety of investment is to take risks that can be tolerated. The principle also is
specific on the expectations that the investor must have from any investment. Just as
it is important to set realistic targets that one hopes to achieve from the investment, it
is also important to exit when target as expected has been achieved irrespective of the
fact that it might be generating better returns in a short-term.
The above list is certainly not exhaustive and individuals will have other
better reasons to quit as well. Its just that most dont know when to apply thought
and so these would come in handy.

TIPS FOR MUTUAL FUND INVESTORS: (SUGGESTIONS)


These are the few exact as regards investment in MFs taken from the book with
Marketing for the 90s given by the Wall Street.
1. Check your letter of offer of funds prospectus to guard yourselves against any
hidden fees.
2. Ensue that the funds track record is the same as that of the current management
3. Avoid MFs that charge exit fees at he back end door (fee s charged by MF from
the unit holders at he time to redemption of the units.)
4. Buy the funds with no sale charged loads.(a load is a charge by the fund when
investor buys it is called the entry load or when he sells is called the exit load.)
5. If the charge its heavy by the M F to discourage the investors from taking short
positions in the funds units because too many investors sell their units at a time
then the fund has to sell its holdings to meet the obligations that yield into vital of

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the fines overall return. Most short funds like guilt funds (these are the funds the
invest only in government securities and treasury bills thus the investors have an
opportunities to buy risk free securities). These funds yield a better return than a
money market fund. It is good for the investors who desire safety of principal
amount). Money market funds (these funds in views in money market instruments
such as treasury bills, govt. bonds, certificates of bank deposits, commercial
deposits). They charge no loads, however loads are limited by SEBI to 7%.
6. Check funds performance in bear as well a the bull market.
7. Guard fund risk by checking its portfolio for diversification volatility.

KEY STEPS FOR FINANCIAL PLANNING

INSURE YOURSELF BEFORE YOU INVEST

Insurance is the pre-requisite of all investments the main purpose of insurance is to


protect your current life style after retirement. It acts as a shield against all type of
financial risks. Investor has to realize that insurance is more for safe guarding against
risk faced in life rather than being an investment for profit.

CHOOSE SIMPLE INVESTMENT

Our daily life is full of complications the day-to-day grind leaves us with little energy
to keep track of our financial investments. That is copy an investor should choose

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simple & uncomplicated instruments. Therefore he has to invest the hassle free
instruments.

UTILIZE THE POWER OF COMPOUNDING

Compounding means payment of interest on accumulated interest. Thus money


earned by you works hard & earns more money for you. This implies that not only the
principal earns income for you but interest generated by you also earns income. One
important factor is the time period. Longer the time higher the benefit

INVEST IN INTRUMENTS THAT KEEP YOU AHEAD OF INFLATION

That silently creeps up from behind & starts eating your hard earned savings even
before you realize the situation. An investor should look at the real return (the rate of
return minus the rate of inflation) while considering an investment. He should invest
in instruments, which provide profitable-post-inflation returns.

REDUCE TAX ON YOUR INVESTMENT

There are two realities in the life. One is death & the other is tax. It is advisable that
investments should be so planned that least possible tax would be required to be paid.
Smart move for the investor is to save every rupee from tax man.

GO FOR STABLE & REALISTIC RETURNS

Stability of returns is more important that increased profit. Usually these are
associated with high volatile investment options like equities & even with
government securities or gilts as they also run high market risk. The asset allocation
is suggested according to the risk profile of an investor. So invest in the best option &
get the maximum returns.

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BIBLIOGRAPHY

www.njindiainvest.com
www.moneycontrol.com
www.amfiindia.com
www.karvy.com
www.valueresearchonline.com
MUTUAL FUND PRODUCT AND SERVICES----
TAXMAN
AMFI COURSE BOOK

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