CHAPTER – I

INTRODUCTION

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 INTRODUCTION TO MUTUAL FUND

Mutual Fund was introduced in the year 1963 in India. UTI is the first concern to
deal with mutual fund in India. The performance of mutual fund started going high
after liberalization in the country.

Mutual Fund came into existence in India in the year 1963. Unit trust of India was
the first association to launch the concept of Mutual Fund in India. It invited a lot of
investors to invest in UTI Mutual Funds in order to make savings. UTI Mutual Fund
ruled India for around 30 years and there were no competitors till 1988.

In spite of this, UTI Mutual Fund had always remained in the leading position. The
performance of Mutual Funds in India started climbing the ladder of success with the
consistently good performance of UTI Mutual Fund. Initially, people in India were
not very much familiar with the Mutual Funds. In the year 1992, that is, in the post-
liberalization era around 24 million shareholders or investors in the UTI Mutual Fund
were assured high returns on investing in Mutual Funds. UTI Mutual Funds schemes
actually sold the idea of getting benefited by investing in mutual funds to the Indian
population which proved to be a successful measure in attracting investors. There was
0% risks involved in mutual funds schemes after liberalization and the number of
investors started increasing rapidly there after.. .

The Assets Under Management of UTI Mutual Fund stood at Rs. 67 billion by the
end of the year 1987. It rose to Rs. 470 billion in March 1993 and by April 2004, the
figure reached thrice the amount of March 1993 and stood at Rs. 1,540 billion. The
net asset value (NAV) of mutual funds started to go down with the falling of share
prices in 1992. Portfolio shifts were not allowed into alternative investments during

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the crisis period. The closed-end funds were floated in the Indian market at that time
which made the investors sell the shares at a loss in the secondary market.

Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as disclosed
in offer document.

Investments in securities are spread across a wide cross-section of industries and

sectors and thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at the same time. Mutual
fund issues units to the investors in accordance with quantum of money invested by
them. Investors of mutual funds are known as unit holders.

The profits or losses are shared by the investors in proportion to their investments.
The mutual funds normally come out with a number of schemes with different
investment objectives which are launched from time to time. A mutual fund is
required to be registered with Securities and Exchange Board of India (SEBI) which
regulates securities markets before it can collect funds from the public.

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
Management Company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unit holders. Asset Management Company
(AMC) approved by SEBI manages the funds by making investments in various types
of securities. Custodian, who is registered with SEBI, holds the securities of various
schemes of the fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance and
compliance of SEBI Regulations by the mutual fund.

You can make money from a mutual fund in three ways:

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 1) Income is earned from dividends on stocks and interest on bonds.
2) If the fund sells securities that have increased in price, the fund has a
capital gain.
3) If fund holdings increase in price but are not sold by the fund manager,
the fund's shares increase in price. You can then sell your mutual fund
shares for a profit.
Advantages of Mutual Funds:

• Professional Management - The primary advantage of funds is the

professional management of your money. Investors purchase funds because
they do not have the time or the expertise to manage their own portfolios. A
mutual fund is a relatively inexpensive way for a small investor to get a full-
time manager to make and monitor investments.

• Diversification - By owning shares in a mutual fund instead of owning

individual stocks or bonds, your risk is spread out. The idea behind
diversification is to invest in a large number of assets so that a loss in any
particular investment is minimized by gains in others.

• Economies of Scale - Because a mutual fund buys and sells large amounts of
securities at a time, its transaction costs are lower than what an individual
would pay for securities transactions.

• Liquidity - Just like an individual stock, a mutual fund allows you to request
that your shares be converted into cash at any time.

• Simplicity – Minimum investment is small.

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Disadvantages:

• Dilution - It's possible to have too much diversification. Because funds have small
holdings in so many different companies, high returns from a few investments often
don't make much difference on the overall return.

• Taxes - When making decisions about your money, fund managers don't consider
your personal tax situation.

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NEED AND IMPORTENCE OF THE STUDY

1. Mutual funds are dynamic financial intuitions which play crucial role in an
economy by mobilizing savings and investing them in the capital market.

2. The activities of mutual funds have both short and long term impact on the
savings in the capital market and the national economy.

3. Mutual funds, trust, assist the process of financial deepening & intermediation.

4. To banking at the same time they also compete with banks and other financial
intuitions.

5. India is one of the few countries to day maintain a study growth rate is domestic
savings.

SCOPE OF THE STUDY:

The study is limited to the analysis made on two major types of schemes offered by
six banks. Each scheme is calculated in term of their risk and return using different
performance measurement theories. The reasons for such performance in immediately
analyzed in the commentary. Column charts are used to reflect the portfolio risk and
return.

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OBJECTIVES OF THE STUDY:

 To understand what Mutual fund companies.

 To understand Mutual fund companies viz.SBI, Birla, Tata, Kotak.

 To understand each company performance basing on weekly wise data starting

from Monday.

 To understand the investment strategies followed by each company.

HYPOTHESIS :

The Market data that has been used to see whether the risk and return calculated
can be used has an indicator to the investor to minimize the risk and maximize the
returns on its investment.

RESEARCH METHODOLOGY:

For, the purpose of the study, the data collected from primary and Secondary has
sanitized edited and presented in the from of tables and statements. The analysis of
the data has been made with the help of certain mathematical techniques lie
percentages etc. Where ever feasible and opportiate graphs and diagrams are used.

The collection of data is done through two principles sources viz

1. Primary Data
2. Secondary Data

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PRIMARY DATA

It is the information collected directly without any reference. In the study, it mainly
interviews with concerned officers and staff either individually or collectively. Some
of the information had been verified or supplemented with personal observation, the
data collected through conducting personal interview with the officer of the India
bulls.

SECONDARY DATA:

The data that is used in this project is of secondary nature. The data has been
collected from secondary sources such has various websites, journals, newspapers,
books, etc.

METHOD OF STUDY:

The data collected for the two sectors are of three months data i.e., Nov 2008 – Jan
2009.The data for study purpose is taken on weekly basis .The data taken into
consideration is every Monday.

TIME PERIOD

The time duration of the study for analyzing the data is from Dec 2011

Data is collected from websites and ECONOMIC TIMES.

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`

LIMITATIONS OF THE STUDY:

 The study is conducted in short period, due to which the study may not be
detailed in all aspects.
 The study is limited only to the analysis of different schemes and its suitability
to different investors according to their risk-taking ability.
 The study is based on secondary data available from monthly fact sheets, web
sites, offer documents, magazines and newspapers etc. as primary data was not
accessible.
 The study is limited by the detailed study of various schemes.

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 CHAPTER-II

REVIEW OF LITERATURE

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 MUTUAL FUND

Mutual fund is a trust that pools money from a group of investors (sharing
common financial goals) and invest the money thus collected into asset classes that
match the stated investment objectives of the scheme. Since the stated investment
objective of a mutual fund scheme generally forms the basis for an investor's
decision to contribute money to the pool, a mutual fund can not deviate from its
stated objectives at any point of time.

Every Mutual Fund is managed by a fund manager, who using his investment
management skills and necessary research works ensures much better return than
what an investor can manage on his own. The capital appreciation and other
incomes earned from these investments are passed on to the investors (also known
as unit holders) in proportion of the number of units they own.

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When an investor subscribes for the units of a mutual fund, he becomes part owner
of the assets of the fund in the same proportion as his contribution amount put up
with the corpus (the total amount of the fund). Mutual Fund investor is also known
as a mutual fund shareholder or a unit holder.

Any change in the value of the investments made into capital market instruments
(such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the
scheme. NAV is defined as the market value of the Mutual Fund scheme's assets
net of its liabilities. NAV of a scheme is calculated by dividing the market value of
scheme's assets by the total number of units issued to the investors.

For example:

A. If the market value of the assets of a fund is Rs. 100,000

B. The total number of units issued to the investors is equal to 10,000.

C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00

D. Now if an investor 'X' owns 5 units of this scheme

E. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held
multiplied by the NAV of the scheme)

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ADVANTAGES OF MUTUAL FUND

1. Portfolio Diversification Mutual Funds invest in a well-diversified portfolio of

securities which enables investor to hold a diversified investment portfolio
(whether the amount of investment is big or small).

2. Professional Management Fund manager undergoes through various research

works and has better investment management skills which ensure higher returns to
the investor than what he can manage on his own.

3. Less Risk Investors acquire a diversified portfolio of securities even with a

small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than
investing in merely 2 or 3 securities.

4. Low Transaction Costs Due to the economies of scale (benefits of larger

volumes), mutual funds pay lesser transaction costs. These benefits are passed on
to the investors.

5. Liquidity An investor may not be able to sell some of the shares held by him
very easily and quickly, whereas units of a mutual fund are far more liquid.

6. Choice of Schemes Mutual funds provide investors with various schemes with
different investment objectives. Investors have the option of investing in a scheme
having a correlation between its investment objectives and their own financial
goals. These schemes further have different plans/options

7. Transparency Funds provide investors with updated information pertaining to

the markets and the schemes. All material facts are disclosed to investors as
required by the regulator.

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8. Flexibility Investors also benefit from the convenience and flexibility offered by
Mutual Funds. Investors can switch their holdings from a debt scheme to an equity
scheme and vice-versa. Option of systematic (at regular intervals) investment and
withdrawal is also offered to the investors in most open-end schemes.

9. Safety Mutual Fund industry is part of a well-regulated investment environment

where the interests of the investors are protected by the regulator. All funds are
registered with SEBI and complete transparency is forced.

DISADVANTAGES OF MUTUAL FUND

1.Costs Control Not in the Hands of an Investor Investor has to pay investment
management fees and fund distribution costs as a percentage of the value of his
investments (as long as he holds the units), irrespective of the performance of the
fund.

2. No Customized Portfolios The portfolio of securities in which a fund invests is

a decision taken by the fund manager. Investors have no right to interfere in the
decision making process of a fund manager, which some investors find as a
constraint in achieving their financial objectives.

3. Difficulty in Selecting a Suitable Fund Scheme Many investors find it difficult

to select one option from the plethora of funds/schemes/plans available. For this,
they may have to take advice from financial planners in order to invest in the right
fund to achieve their objectives.

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TYPES OF MUTUAL FUNDS :

General Classification of Mutual Funds

Open-end Funds / Closed-end Funds

Open-end Funds

Funds that can sell and purchase units at any point in time are classified as Open-
end Funds. The fund size (corpus) of an open-end fund is variable (keeps
changing) because of continuous selling (to investors) and repurchases (from the
investors) by the fund. An open-end fund is not required to keep selling new units
to the investors at all times but is required to always repurchase, when an investor
wants to sell his units. The NAV of an open-end fund is calculated every day.

Closed-end Funds

Funds that can sell a fixed number of units only during the New Fund Offer (NFO)
period are known as Closed-end Funds. The corpus of a Closed-end Fund remains
unchanged at all times. After the closure of the offer, buying and redemption of
units by the investors directly from the Funds is not allowed. However, to protect
the interests of the investors, SEBI provides investors with two avenues to
liquidate their positions:

1. Closed-end Funds are listed on the stock exchanges where investors can
buy/sell units from/to each other. The trading is generally done at a discount to the
NAV of the scheme. The NAV of a closed-end fund is computed on a weekly basis
(updated every Thursday)

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2. Closed-end Funds may also offer "buy-back of units" to the unit holders. In
this case, the corpus of the Fund and its outstanding units do get changed.

Load Funds/no-load funds

Load Funds

Mutual Funds incur various expenses on marketing, distribution, advertising,

portfolio churning, fund manager’s salary etc. Many funds recover these expenses

from the investors in the form of load. These funds are known as Load Funds. A

load fund may impose following types of loads on the investors:

 Entry Load – Also known as Front-end load, it refers to the load charged to

an investor at the time of his entry into a scheme. Entry load is deducted from the

investor’s contribution amount to the fund.

 Exit Load – Also known as Back-end load, these charges are imposed on an

investor when he redeems his units (exits from the scheme). Exit load is deducted

from the redemption proceeds to an outgoing investor.

 Deferred Load – Deferred load is charged to the scheme over a period of

time.

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 Contingent Deferred Sales Charge (CDSS) – In some schemes, the

percentage of exit load reduces as the investor stays longer with the fund. This type

of load is known as Contingent Deferred Sales Charge.

No-load Funds

All those funds that do not charge any of the above mentioned loads are known as
No-load Funds.

Tax-exempt Funds/ Non-Tax-exempt Funds

Tax-exempt Funds

Funds that invest in securities free from tax are known as Tax-exempt Funds. All
open-end equity oriented funds are exempt from distribution tax (tax for
distributing income to investors). Long term capital gains and dividend income in
the hands of investors are tax-free.

Non-Tax-exempt Funds

Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In

India, all funds, except open-end equity oriented funds are liable to pay tax on
distribution income. Profits arising out of sale of units by an investor within 12
months of purchase are categorized as short-term capital gains, which are taxable.
Sale of units of an equity oriented fund is subject to Securities Transaction Tax
(STT). STT is deducted from the redemption proceeds to an investment.

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BROAD MUTUAL FUND TYPES

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1. Equity Funds

Equity funds are considered to be the more risky funds as compared to other fund
types, but they also provide higher returns than other funds. It is advisable that an
investor looking to invest in an equity fund should invest for long term i.e. for 3
years or more. There are different types of equity funds each falling into different
risk bracket. In the order of decreasing risk level, there are following types of
equity funds:

a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers

aspire for maximum capital appreciation and invest in less researched shares of
speculative nature. Because of these speculative investments Aggressive Growth
Funds become more volatile and thus, are prone to higher risk than other equity
funds.
b. Growth Funds - Growth Funds also invest for capital appreciation (with
time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds
in the sense that they invest in companies that are expected to outperform the
market in the future. Without entirely adopting speculative strategies, Growth
Funds invest in those companies that are expected to post above average earnings
in the future.

c. Speciality Funds - Speciality Funds have stated criteria for investments and
their portfolio comprises of only those companies that meet their criteria. Criteria
for some speciality funds could be to invest/not to invest in particular
regions/companies. Speciality funds are concentrated and thus, are comparatively
riskier than diversified funds. There are following types of speciality funds:

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1. Sector Funds: Equity funds that invest in a particular sector/industry of the
market are known as Sector Funds. The exposure of these funds is limited to a
particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or
Fast Moving Consumer Goods) which is why they are more risky than equity funds
that invest in multiple sectors.

2. Foreign Securities Funds: Foreign Securities Equity Funds have the option to
invest in one or more foreign companies. Foreign securities funds achieve
international diversification and hence they are less risky than sector funds.
However, foreign securities funds are exposed to foreign exchange rate risk and
country risk.

3. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower

market capitalization than large capitalization companies are called Mid-Cap or
Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of
big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores)
and Small-Cap companies have market capitalization of less than Rs. 500 crores.
Market Capitalization of a company can be calculated by multiplying the market
price of the company's share by the total number of its outstanding shares in the
market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of
Large-Cap Companies which gives rise to volatility in share prices of these
companies and consequently, investment gets risky.

4. Diversified Equity Funds - Except for a small portion of investment in liquid

money market, diversified equity funds invest mainly in equities without any
concentration on a particular sector(s). These funds are well diversified and reduce
sector-specific or company-specific risk. However, like all other funds diversified
equity funds too are exposed to equity market risk. One prominent type of

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diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per
the mandate, a minimum of 90% of investments by ELSS should be in equities at
all times. ELSS investors are eligible to claim deduction from taxable income (up
to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in
period and in case of any redemption by the investor before the expiry of the lock-
in period makes him liable to pay income tax on such income(s) for which he may
have received any tax exemption(s) in the past.

d. Equity Index Funds - Equity Index Funds have the objective to match the
performance of a specific stock market index. The portfolio of these funds
comprises of the same companies that form the index and is constituted in the same
proportion as the index. Equity index funds that follow broad indices (like S&P
CNX Nifty, Sensex) are less risky than equity index funds that follow narrow
sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are
less diversified and therefore, are more risky.

2.Debt/IncomeFunds

Funds that invest in medium to long-term debt instruments issued by private

companies, banks, financial institutions, governments and other entities belonging
to various sectors (like infrastructure companies etc.) are known as Debt / Income
Funds. Debt funds are low risk profile funds that seek to generate fixed current
income (and not capital appreciation) to investors. In order to ensure regular
income to investors, debt (or income) funds distribute large fraction of their surplus
to investors. Although debt securities are generally less risky than equities, they are
subject to credit risk (risk of default) by the issuer at the time of interest or
principal payment. To minimize the risk of default, debt funds usually invest in

21
securities from issuers who are rated by credit rating agencies and are considered
to be of "Investment Grade". Debt funds that target high returns are more risky.
Based on different investment objectives, there can be following types of debt
funds:

a. Diversified Debt Funds - Debt funds that invest in all securities issued by
entities belonging to all sectors of the market are known as diversified debt funds.
The best feature of diversified debt funds is that investments are properly
diversified into all sectors which results in risk reduction. Any loss incurred, on
account of default by a debt issuer, is shared by all investors which further reduces
risk for an individual investor.
b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are
narrow focus funds that are confined to investments in selective debt securities,
issued by companies of a specific sector or industry or origin. Some examples of
focused debt funds are sector, specialized and offshore debt funds, funds that invest
only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow
orientation, focused debt funds are more risky as compared to diversified debt
funds. Although not yet available in India, these funds are conceivable and may be
offered to investors very soon.

c. Assured Return Funds - Although it is not necessary that a fund will meet its
objectives or provide assured returns to investors, but there can be funds that come
with a lock-in period and offer assurance of annual returns to investors during the
lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset
Management Companies (AMCs). These funds are generally debt funds and
provide investors with a low-risk investment opportunit

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However, the security of investments depends upon the net worth of the guarantor
(whose name is specified in advance on the offer document). To safeguard the
interests of investors, SEBI permits only those funds to offer assured return
schemes whose sponsors have adequate net-worth to guarantee returns in the
future. In the past, UTI had offered assured return schemes (i.e. Monthly Income
Plans of UTI) that assured specified returns to investors in the future. UTI was not
able to fulfill its promises and faced large shortfalls in returns. Eventually,
government had to intervene and took over UTI's payment obligations on itself.
Currently, no AMC in India offers assured return schemes to investors, though
possible.

d. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end
schemes having short term maturity period (of less than one year) that offer a series
of plans and issue units to investors at regular intervals. Unlike closed-end funds,
fixed term plans are not listed on the exchanges. Fixed term plan series usually
invest in debt / income schemes and target short-term investors. The objective of
fixed term plan schemes is to gratify investors by generating some expected returns
in a short period. nds | Closed-end

3.GiltFunds

Also known as Government Securities in India, Gilt Funds invest in government

papers (named dated securities) having medium to long term maturity period.
Issued by the Government of India, these investments have little credit risk (risk of
default) and provide safety of principal to the investors. However, like all debt
funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of

23
debt securities are inversely related and any change in the interest rates results in a
change in the NAV of debt/gilt funds in an opposite direction.

4. Money Market/Liquid Funds

Money market / liquid funds invest in short-term (maturing within one year)
interest bearing debt instruments. These securities are highly liquid and provide
safety of investment, thus making money market / liquid funds the safest
investment option when compared with other mutual fund types. However, even
money market / liquid funds are exposed to the interest rate risk. The typical
investment options for liquid funds include Treasury Bills (issued by
governments), Commercial papers (issued by companies) and Certificates of
Deposit (issued by banks).

5. HybridFunds

As the name suggests, hybrid funds are those funds whose portfolio includes a
blend of equities, debts and money market securities. Hybrid funds have an equal
proportion of debt and equity in their portfolio. There are following types of hybrid
funds in India:

a. Balanced Funds – The portfolio of balanced funds include assets like debt
securities, convertible securities, and equity and preference shares held in a
relatively equal proportion. The objectives of balanced funds are to reward
investors with a regular income, moderate capital appreciation and at the same time
minimizing the risk of capital erosion. Balanced funds are appropriate for
conservative investors having a long term investment horizon

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b. Growth-and-Income Funds – Funds that combine features of growth funds
and income funds are known as Growth-and-Income Funds. These funds invest in
companies having potential for capital appreciation and those known for issuing
high dividends. The level of risks involved in these funds is lower than growth
funds and higher than income funds.

6. Commodity Funds

Those funds that focus on investing in different commodities (like metals, food
grains, crude oil etc.) or commodity companies or commodity futures contracts are
termed as Commodity Funds. A commodity fund that invests in a single
commodity or a group of commodities is a specialized commodity fund and a
commodity fund that invests in all available commodities is a diversified
commodity fund and bears less risk than a specialized commodity fund. “Precious
Metals Fund” and Gold Funds (that invest in gold, gold futures or shares of gold
mines) are common examples of commodity funds.

7. Real Estate Funds

Funds that invest directly in real estate or lend to real estate developers or invest in
shares/securitized assets of housing finance companies, are known as Specialized
Real Estate Funds. The objective of these funds may be to generate regular income
for investors or capital appreciation.

8. ExchangeTradedFunds (ETF)

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Exchange Traded Funds provide investors with combined benefits of a closed-end
and an open-end mutual fund. Exchange Traded Funds follow stock market indices
and are traded on stock exchanges like a single stock at index linked prices. The
biggest advantage offered by these funds is that they offer diversification,
flexibility of holding a single share (tradable at index linked prices) at the same
time. Recently introduced in India, these funds are quite popular abroad.

9. Fund of Funds

Mutual funds that do not invest in financial or physical assets, but do invest in
other mutual fund schemes offered by different AMCs, are known as Fund of
Funds. Fund of Funds maintain a portfolio comprising of units of other mutual
fund schemes, just like conventional mutual funds maintain a portfolio comprising
of equity/debt/money market instruments or non financial assets.

Fund of Funds provide investors with an added advantage of diversifying into

different mutual fund schemes with even a small amount of investment, which
further helps in diversification of risks. However, the expenses of Fund of Funds
are quite high on account of compounding expenses of investments into different
mutual fund schemes.

Risk Hierarchy of Different Mutual Funds

Thus, different mutual fund schemes are exposed to different levels of risk and
investors should know the level of risks associated with these schemes before

26
investing. The graphical representation hereunder provides a clearer picture of the
relationship between mutual funds and levels of risk associated with these funds:

MUTUAL FUND STRUCTURE

27
The SEBI (Mutual Funds) Regulations 1993 define a mutual fund (MF) as a fund
established in the form of a trust by a sponsor to raise monies by the Trustees
through the sale of units to the public under one or more schemes for in vesting in
securities in accordance with these regulations.

These regulations have since been replaced by the SEBI (Mutual Funds)
Regulations, 1996. The structure indicated by the new regulations is indicated as
under.

A mutual fund comprises four separate entitles, namely sponsor, mutual fund trust,
AMC and custodian. The sponsor establishes the mutual fund and gets its
registered with SEBI.

The mutual fund needs to be constituted in the form of a trust and the instrument of
the trust should be in the form of a deed registered under the provisions of the
Indian Registration Act, 1908.

The sponsor is required to contribute at lease 40% of the minimum net worth
(Rs.10 crore) of the asset management company. The board of trustees manages the
MF and the sponsor executes the trust deeds in favour of the trustees. It is the job
of the MF trustees to see that schemes floated and managed by the AMC appointed
by the trustees are in accordance with the trust deed and SEBI guidelines.

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 Sponsor Company Establishes the MF as a trust

(E.g. Prudential, ICICI) Registers the MF with SEBI

Managed by a Board of Trustees

Mutual Fund Hold unit-holders funds in MF enter

into an agreement with SEBI and
(E.g. Prudential, ICICI, Mutual ensure compliance
Fund)
AMC Float MF funds

(e.g. prudential ICICI Asset Manages the fund as per SEBI

guidelines and AMC agreement
Management Company)
Custodian Provide custodial services

Registrar Provides registrar and transfer

services

Distributors Provides the network for

distribution of the scheme to the

investors

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Choosing a fund

The first step to investing in Mutual Fund is to define the objective of investing.
You should clearly lay down the purpose for which you desire to invest. There are
several schemes tailor made to meet certain personal financial goals (children's
education, marriage, retirement etc.) which can be availed of. You should define
the tenure of investment and the risk appetite you have. Thereafter, you can select a
fund type that best meets your need i.e. income schemes, liquid schemes, tax
saving schemes, equity schemes etc. Given the plethora of fund options available
to you, you can then choose the particular fund that you are comfortable with.
You can choose the fund on various criteria but primarily these can be the
following:
 The track record of performance of schemes over the last few years
managed by the fund
 Quality of management and administration
 Parentage of the Mutual Fund
 Quality and adequacy of disclosures
 Service levels
 The price at which you can enter/exit (i.e. entry load / exit load) the scheme
and its impact on overall return
 The market price of the units of the scheme (where available) to see the
discount/premium that the market .assigns to the stated NA V of the scheme
 Independent rating of the schemes, if available
You could be investing in a mutual fund either at the initial stage when the mutual

30
fund approaches the market through an offer document route or at a subsequent
stage.
If you choose to invest at the initial stage, the offer document would detail the
schemes being offered and the manner of investing. The manner is usually similar
to that of investing any public issue of any security (equity/debt).
If you are planning to purchase the units subsequently. Then the following choices
exist:
1. A close ended scheme. If the desired, units are of a close-ended scheme, then
the investor would be able to purchase them at the stock exchange where the MF
has listed them. This purchase would resemble the purchase of an equity share
wherein the investor would pay the quoted price of the unit as well as a brokerage
for the purchase transaction. In the case of a close ended scheme, the sale also is
affected through the stock exchange mechanism and resembles the sale of equity
share. The pricing for the transaction, as was mentioned earlier, is driven by the
price the units quote. This is driven by the NA V (Net Asset Value) of the scheme.
The price, however, may be either at a discount or premium to the NA V.

2. Purchasing a unit in a open-ended scheme is different as there is no

exchange where these units are traded. Their price ret1ects the NA V of the
scheme. The mutual fund in an open-ended scheme sells these units to the investor
at the NA V (plus a sale / entry load).

Selling units in an open-ended scheme is similar to the way they are purchased. It
is the mutual fund that buys back the units and at a price based on the NA V. The
actual price is the NA V less the exit load. The exit load is similar in concept to the
entry load.

31
The Ground rules of Mutual Fund Investing

Moses gave to his followers 10 commandments that were to be followed till

eternity. The world of investments too has several ground rules meant for investors
who are novices in their own right and wish to enter the myriad world of
investments. These come in handy for there is every possibility of losing what one
has if due care is not taken.

1. Assess yourself: Self-assessment of one's needs; expectations and risk

profile is of prime importance failing which; one will make more mistakes in
putting money in right places than otherwise. One should identify the degree of
risk bearing capacity one has and also clearly state the expectations from the
investments. Irrational expectations will only bring pain.
2. Try to understand where the money is going: It is important to identify
the nature of investment and to know if one is compatible with the investment. One
can lose substantially if one picks the wrong kind of mutual fund. In order to avoid
any confusion it is better to go through the literature such as offer document and
fact sheets that mutual fund companies provide on their funds.
3. Don't rush in picking funds, think first: one first has to decide what he
wants the money for and it is this investment goal that should be the guiding light
for all investments done. It is thus important to know the risks associated with the
fund and align it with the quantum of risk one is willing to take. One should take a
look at the portfolio of the funds for the purpose. Excessive exposure to any
specific sector should be avoided, as it will only add to the risk of the entire
portfolio. Mutual funds invest with a certain ideology such as the "Value Principle"
32
or "Growth Philosophy". Both have their share of critics but both philosophies
work for investors of different kinds. Identifying the proposed investment
philosophy of the fund will give an insight into the kind of risks that it shall be
taking in future.
4. Invest. Don't speculate: A common investor is limited in the degree of risk
that he is willing to take. It is thus of key importance that there is thought given to
the process of investment and to the time horizon of the intended investment. One
should abstain from speculating which in' other words would mean getting out of
one fund and investing in another with the intention of making quick money. One
would do well to remember that nobody can perfectly time the market so staying
invested is the best option unless there are compelling reasons to exit.
5. Don't put all the eggs in one basket: This old age adage is of utmost
importance. No matter what the risk profile of a person is, it is always advisable to
diversify the risks associated. So putting one's money in different asset classes is
generally the best option as it averages the risks in each category. Thus, even
investors of equity should be judicious and invest some portion of the investment
in debt. Diversification even in money in the hands of several fund managers. This
might reduce the maximum return possible, but will also reduce the risks.
6. Be regular: Investing should be a habit and not an exercise undertaken at
one's wishes, if one has to really benefit from them. As we said earlier, since it is
extremely difficult to know when to enter or exit the market. It is important to beat
the market by being systematic. The basic philosophy of Rupee cost averaging
would suggest that if one invests regularly through the ups and downs of the
market, he would stand a better chance of generating more returns than the market
for the entire duration. The SIPs (Systematic Investment Plans) offered by all funds
helps in being systematic.

33
Performance Measures of Mutual Funds

Mutual Fund industry today, with about 34 players and more than five hundred
schemes, is one of the most preferred investment avenues in India. However with a
plethora of schemes to choose from the retail investor faces problems in selecting
funds. Factors such as investment strategy and management style are qualitative,
but the funds record is an important indicator too. Though past performance alone
cannot be indicative of future performance, it is, frankly, the only quantitative way
to judge how good a fund is at present. Therefore, there is a need to correctly
assess the past performance of different mutual funds.

Worldwide, good Mutual fund companies over are known by their AMCs and this
fame is directly linked to their superior stock selection skills. For mutual funds to
grow, AMCs must be held accountable for their selection of stocks. In other words,
there must be some performance indicator that will reveal the quality of stock
selection of various AMCs.

Return alone should not be considered as the basis of measurement of the

performance of a mutual fund scheme. It should also include the risk taken by the
fund manager because different funds will have different levels of risk attached to
them. Risk associated with a fund, in a general, can be defined as variability or
fluctuations in the returns generated by it. The higher the t1uctuations in the returns
of a fund during a given period, higher will be the risk associated with it. These
34
fluctuations in the returns generated by a fund are resultant of two guiding force

First, general market fluctuations, which affect all the securities present in the
market, called market risk or systematic risk and second, t1uctuations due to
specific securities present in the portfolio of the fund, called unsystematic risk.
The Total Risk of a given fund is sum of these t\VO and is measured in terms of
standard deviation of returns of the fund. Systematic risk. On the other hand is
measured in terms of Beta, which represents t1uctuations in the NA V of the fund
vis-à-vis market. The more responsive the NA V of a mutual fund is to the changes
in the market; higher will be its beta. Beta is calculated by relating the returns on a
mutual fund with the returns in the market. While unsystematic risk can be
diversified through investments in a number of instruments, systematic risk can
not.

By using the risk return relationship, we try to assess the competitive strength of
the mutual funds vis-à-vis one another in a better way:
In order to determine the risk-adjusted returns of investment portfolios, several
eminent authors have worked since 1960s to develop composite performance
indices to evaluate a portfolio by comparing alternative portfolios within a
particular risk class.

The most important and widely used measures of performance are:

 The Treynor Measure
 The Sharpe Measure
 Jenson Model
 Fama Model

35
The Trevnor 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 Hi 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.

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

36
of a fund, a low and negative Sharpe Ratio is an indication of unfavorable
performance.
Comparison of Sharpe and Treynor

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

Jenson Model

Jenson’s model proposes another risk adjusted performance measure.

This measure was developed by Michael Jenson and is sometimes referred to as the
Differential Return Method. This measure involves evaluation of the returns that
the fund has generated vs. the returns actually expected out of the fund given the
level of its systematic risk. The surplus between the two returns is called Alpha,
which measures the performance of a fund compared with the actual returns over
the period. Required return of a fund at a given level of risk (Bi) can be calculated
as:
Ri = Rf+ Bi (Rm – Rf)
Where, Rm is average market return during the given period. After calculating it
37
alpha can be obtained by subtracting required return from the actual return of the
fund.
Higher alpha represents superior performance of the fund and vice versa.
Limitation of this model is that it considers only systematic risk not the entire risk
associated with the fund and an ordinary investor can not mitigate unsystematic
risk, as his knowledge of market is primitive.

Fama Model

The Eugene Fama model is an extension of Jenson model. This model compares
the performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these
two is taken as a measure of the performance of the fund and is called net
selectivity.
The net selectivity represents the stock selection skill of the fund manager, as it is
the excess return over and above the return required to compensate for the total
risk taken by the fund manager. Higher value of which indicates that fund manager
has earned returns well above the return commensurate with the level of risk taken
by him.

Required return can be calculated as: Ri = Rf + Si/Sm*(Rm – Rf)

Where, Sm is standard deviation of market returns. The net selectivity is then
calculated by subtracting this required return from the actual return of the fund.
Among the above performance measures, two models namely, Treynor measure
and Jenson model use systematic risk based on the premise that the unsystematic
risk is diversifiable. These models are suitable for large investors like institutional

38
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.

TYPES OF MUTUAL FUND SEHEMES

BY STRUCTURE

 Open-Ended Schemes
 Close-Ended Schemes
 Interval Schemes

BY INVESTMENT OBJECTIVE

 Growth Schemes
 Income Schemes
 Balanced Schemes
 Money Market Schemes

39
OTHER SCHEMES

 Tax saving Schemes

 Special Schemes
 Index Schemes
 Sector Specific Schemes

Mutual fund schemes may be classified on the basis of its structure and its investment
objective.
By Structure:
Open-ended funds

An open ended 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 specific 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.

40
Interval funds

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

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 the 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 investment 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

41
equally when the market falls. These are ideal for investors looking for a combination
of income and moderate growth.

Money market funds

For over 30 years, money market funds have treated investors well. Money market
funds have been around for 30 years and are a very popular place for investors to park
their money.

Money market funds are a type of mutual fund that invests in short-term (less than a
year) debt securities of agencies of the U.S. Government, banks and corporations and
U.S. Treasury Bills. They are fixed at $1 per share and only the yield fluctuates.

Load Funds

A load fund is one that charges a commission for entry of exit. That is, each time you
buy or sell units in the fund, a commission will be payable. Typically entry exit loads
range from 1% to 2%. It could be corpus is put to work.

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 investor under specific provisions of the Indian
income tax laws as the Government offers tax incentives for investment in Equity

42
Linked Saving Scheme (ELSS) and Pension Schemes are allowed as deduction u/s 88
of the Income Tax Act. The Act also provide opportunities to investors to save capital
gains u/s 54EA and 54EB by investing in Mutual funds, provided the capital asset has
been sold to April 1,2000 and the amount is invested before September 30,2000.

Special Schemes:

Industry Specific Schemes :

Industry Specific Schemes invest in the industries specified in the offer document.
The investment of these funds is limited to specific like Info Tech, 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.

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.

FREQUENTLY USED TERMS

Net Asset Value (NAV)

43
Net Asset Value is the market value of the assets of the scheme minus its liabilities.
The per unit NAV is the net asset value of the scheme divided by the number of units
outstanding on the Valuation Date.
Is the price at which a close-ended scheme repurchases its units and it may include a
back-end load. This is also called Bid Price.

Redemption Price
Is the price at which open-ended schemes repurchase their units and close-ended
schemes redeem their units on maturity. Such prices are NAV related.

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

Repurchase or ‘Back-end’ Load

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

44
 LIST OF AMC’S

ABN AMRO Mutual fund

Birla Mutual fund

Franklin Templeton Mutual fund

HDFC Mutual fund

HSBC Mutual fund

ING Vysya Mutual fund

JM Financial Mutual fund

Kotak Mahindra Mutual fund

Morgan Stanley Mutual fund

Principal Mutual fund

Prudential ICICI Mutual fund

Reliance Mutual fund

SBI Mutual fund

Sundaram Mutual fund

TATA Mutual fund

45
Unit Trust of India Mutual fund

UTI Mutual fund

CHAPTER-Ill

INDUSTRY PROFILE

&

COMPANY PROFILE

46
History of the Indian Mutual Fund Industry:

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
objective then is to attract the small investors and introduce them to market
investments. Since then, 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. The mutual Funds Industry in India not only
started with UTI, but still count UTI as its largest Player with the largest corpus of
investible funds among all Mutual Funds currently opening in India.

For the period of 1987-88

Table No: 1 Source: Secondary Data

Amount Mobilized Assets Under

(Rs.Crores) Management ( Rs.Crores)

47
 2,175 6,700
UTI
Total 2,175 6,700

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 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. From 1987to 1992-93, the fund industry expanded nearly seven
times in terms of Assets under Management, as seen in the following figures:

For the period of 1992-93

Table No: 2 Secondary

Data

Amount Mobilized Assets Under

(Rs.Crores) Management
( Rs.Crores)
UTI 11,057 38,247
Public Sector 1,964 8,757

48
 Total 13,021 47,004

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 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.

49
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
October 31, 2003, there were 31 funds, which manage assets of Rs.126726 crores
under 386 schemes. The graph indicates the growth of assets over the years

50
 Fig: 1.GROWTH IN ASSETS UNDER MANAGEMENT

Unit holding pattern of mutual funds industry as on March 31, 2003

51
SEBI has done an analysis of the unit holding pattern of mutual funds industry as
on March 31, 2003. The details are given below: -

A) Mutual Funds Industry Unit holding Pattern

From the data collected from the mutual funds, the following has been observed:-

i) As on March 31, 2003 there are a total number of 1.6 crore investors
accounts (it is likely that there may be more than one folio of an investor
which might have been counted more than once and actual number of
investors would be less) holding units of Rs. 79,601 crore. Out of this total
number of investors accounts, 1.56 crore are individual investors accounts,
accounting for 97.42% of the total number of investors accounts and
contribute Rs.32,691 crore which is 41.07% of the total net assets.

ii) Corporate and institutions who form only 2.04% of the total number of
investors accounts in the mutual funds industry, contribute a sizeable
amount of Rs.45,470 crore which is 57.12% of the total net assets in the
mutual funds industry.

iii) The NRIs/OCBs and FIIs constitute a very small percentage of investors
accounts (0.54%) and contribute Rs.1440.18crore (1.81%) of net assets.

52
The details of unit holding pattern are given in the following table:

Table No: 3 Secondary Data

UNIT HOLDING PATTERN OF MUTUAL FUNDS INDUSTRY

No. Of % To Total NAV(Rs.Crore) %To

Category
Investors Investors A/C Total
A/C NAV

Individuals
15,557,506 97.42 32,691.12 41.07
NRIs/OCBs
84,311 0.53 878.51 1.10
FIIs
2,058 0.01 561.67 0.71
Corporate/
Institutions/O
thers

324,979 2.04 45,469.53 57.12

53
TOTAL
15,968,854 100.00 79,600.83 100.00

B] Unit holding Pattern – Private/Public Sector Mutual Funds:

From the analysis of data on unit holding pattern of Private Sector Mutual Funds
and Public Sector Mutual Funds, the following observations are made:-

1. Out of a total of 1.6 crore investors accounts in the mutual funds industry, (it
is likely that there may be more than one folio of an investor which might
have been counted more than once and therefore actual number of investors
may be less) 42.93 lakh investors accounts i.e. 27% of the total investors
accounts are in private sector mutual funds whereas the 1.17 crore investors
accounts ie.73% are with the public sector mutual funds which includes UTI
Mutual Fund. However, the private sector mutual funds manage 71.2% of
the net assets whereas the public sector mutual funds own only 28.8% of the
assets.

2. UTI Mutual Fund has 97. 12 lakh investors’ accounts which is 60.82% of
the total investor’s accounts in the mutual funds industry.

54
Details of unit holding pattern of private sector and public sector mutual
funds are:

Table No: 4 Secondary Data

UNIT HOLDING PATTERN OF PRIVATE SECTOR MFS

No. Of % To Total NAV(Rs. %To Total

Category
Investors A/C Investors A/C Crore) NAV

Individuals

4001841 93.23 17956.48 31.68

NRIs/OCBs

38416 0.89 723.02 1.28

FIIs
1317 0.03 528.51 0.93
Corporate/
Institutions/
Others
250972 5.85 37465.91 66.11
TOTAL

4292546 100.00 56673.92 100.00

55
Table No: 5 Secondary Data

UNIT HOLDING PATTERN OF PUBLIC SECTOR MFS

(INCLUDING UTI MF )

NO. Of % To Total NAV(Rs. %To Total

Category
Investors Investors A/C Crore) NAV
A/C

Individuals

11,555,665 98.97 14734.64 64.27

NRIs/OCBs
45895 0.39 155.49 0.68
FIIs
741 0.01 33.16 0.14
Corporate/
Institutions/
Others

74007 0.63 8003.62 34.91

56
TOTAL

11676308 100.00 22926.91 100.00

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

57
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 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.

58
 CHAPTER-IV
DATA ANALYSIS
&
INTERPRETATION

59
For the purpose of data analysis and interpretation
the following mutual funds have been chosen;

a) SBI Magnum Equity Fund Growth

b) Birla Sun life 95 Growth
c) Kotak 30 Growth
d) TATA Equity Management Fund Growth

Each product has been analyzed using the

following tools and the results tabulated, presented
graphically and the evaluation of the same has
been given under the caption 'Interpretation' below
the graph.

The fund NAVs are compared with the bench mark of nifty
for the analysis.

60
For analysis Net Asset Value ( NAV) of the Four AMC’S
have been taken for Nov-Dec 2011

SBI
Magnu Birla Kot TATA
Market
m Sun ak Equity
Level
Date Equity life 95 30 Managem
( NIFT
fund Growt Gro ent Fund
Y)
Growt h wth Growth
h
57.6
22/11/11 3033.45 21.08 159.95 7.94
2
57.9
23/11/11 3046.75 21.22 162.21 7.98
4
59.1
24/11/11 3121.45 21.69 163.7 8.1
8
59.2
25/11/11 3112.8 21.86 163.84 8.12
2
56.4
28/11/11 2920.4 20.7 154.38 7.7
4
55.5
29/11/11 2873 20.18 154.48 7.57
5
53.9
30/11/11 2773.1 19.75 152.69 7.42
9
53.5
030/11/11 2744.95 19.64 152.59 7.39
5

61
 54.6
02/12/11 2835.3 20 155.28 7.53
4

53.3
05/12/11 2736.7 19.56 152.9 7.33
1
54.5
07/12/11 2828.45 19.87 154.27 7.46
6
54.7
08/12/11 2846.2 19.98 156.12 7.49
3
53.9
09/12/11 2796.6 19.63 155.72 7.38
2
52.4
12/12/11 2706.15 19.18 153.08 7.25
7
13/12/11 2713.8 19.11 151.88 52.5 7.24
51.7
14/12/11 2678.55 18.71 150.67 7.14
6
53.0
15/12/11 2771.35 19.24 151.51 7.24
3
54.0
16/12/11 2849.5 19.62 152.33 7.35
4
53.8
19/12/11 2823.95 19.47 151.76 7.34
6
54.5
20/12/11 2874.8 19.71 152.91 7.42
4

54.8
Average 2854.36 20.01 155.11 7.52
4

62
Calculations of Risk of SBI Magnum Equity fund Growth
for the period of Nov-Dec 2011

SBI
Market Magnum
Market
Date Level Equity Return
Return
( NIFTY) fund
Growth
22/11/11 3033.45 21.08
23/11/11 3046.75 0.44 21.22 0.66
24/11/11 3121.45 2.45 21.69 2.21
25/11/11 3112.8 -0.28 21.86 0.78
28/11/11 2920.4 -6.18 20.7 -5.31
29/11/11 2873 -1.62 20.18 -2.51
30/11/11 2773.1 -3.48 19.75 -2.13
30/11/11 2744.95 -1.02 19.64 -0.56
02/12/11 2835.3 3.29 20 1.83
05/12/11 2736.7 -3.48 19.56 -2.20
07/12/11 2828.45 3.35 19.87 1.58
08/12/11 2846.2 0.63 19.98 0.55
09/12/11 2796.6 -1.74 19.63 -1.75

12/12/11 2706.15 -3.23 19.18 -2.29

13/12/11 2713.8 0.28 19.11 -0.36

63
 14/12/11 2678.55 -1.30 18.71 -2.09

15/12/11 2771.35 3.46 19.24 2.83

16/12/11 2849.5 2.82 19.62 1.98

19/12/11 2823.95 -0.90 19.47 -0.76

20/12/11 2874.8 1.80 19.71 1.23

Average Return -0.36 -0.42

Standard deviation
2.75 2.15
(Risk)

Beta 0.75

Graphical Presentation of SBI Magnum Equity

Fund-Growth For the month of Nov-Dec 2011

64
Interpretation:

SBI Magnum Equity Fund-Growth has been

analyzed and it is found that there is a negative
growth. How ever on the basis of the avg returns
of SBI there is a negative growth 0.42 as against
the index avg of negative 0.36 the beta being less
than 1 the stock is not highly volatile.

Calculations of Risk of Birla Sun life 95 Growth

for the period of Nov-Dec 2011

65
66
 Market Birla Sun
Market
Date Level life 95 Return
Return
( NIFTY) Growth

22/11/11 3033.45 159.95

23/11/11 3046.75 0.44 162.21 1.41
24/11/11 3121.45 2.45 163.7 0.92
25/11/11 3112.8 -0.28 163.84 0.09
28/11/11 2920.4 -6.18 154.38 -5.77
29/11/11 2873 -1.62 154.48 0.06
30/11/11 2773.1 -3.48 152.69 -1.16
30/11/11 2744.95 -1.02 152.59 -0.07
02/12/11 2835.3 3.29 155.28 1.76
05/12/11 2736.7 -3.48 152.9 -1.53
07/12/11 2828.45 3.35 154.27 0.90
08/12/11 2846.2 0.63 156.12 1.20
09/12/11 2796.6 -1.74 155.72 -0.26
12/12/11 2706.15 -3.23 153.08 -1.70
13/12/11 2713.8 0.28 151.88 -0.78
14/12/11 2678.55 -1.30 150.67 -0.80
15/12/11 2771.35 3.46 151.51 0.56
16/12/11 2849.5 2.82 152.33 0.54
19/12/11 2823.95 -0.90 151.76 -0.37
20/12/11 2874.8 1.80 152.91 0.76

Average Return -0.36 -0.28

Standard deviation 67 2.75 1.69

Graphical Presentation of Birla Sun life 95

GrowthFor the month of Nov-Dec 2011

68
 Interpretation:

Birla Sun life 95 Growth have been analysed and it

is found that there is a negative growth. How ever
on the basis of the avg returns of Birla Sun life
there is a negative growth 0.28as against the index
avg of negative 0.36 the beta being less than 1 the
stock is not highly volatile.

Calculations of Risk of Kotak 30 Growth

69
for the period of Nov-Dec 2011

Market Market
Kotak 30
Date Level Return
Growth Return(y)
( NIFTY) (x)

22/11/11 3033.45 57.62

23/11/11 3046.75 0.44 57.94 0.56
24/11/11 3121.45 2.45 59.18 2.14
25/11/11 3112.8 -0.28 59.22 0.07
28/11/11 2920.4 -6.18 56.44 -4.69
29/11/11 2873 -1.62 55.55 -1.58
30/11/11 2773.1 -3.48 53.99 -2.81
30/11/11 2744.95 -1.02 53.55 -0.81
02/12/11 2835.3 3.29 54.64 2.04
05/12/11 2736.7 -3.48 53.31 -2.43
07/12/11 2828.45 3.35 54.56 2.34
08/12/11 2846.2 0.63 54.73 0.31
09/12/11 2796.6 -1.74 53.92 -1.48
12/12/11 2706.15 -3.23 52.47 -2.69
13/12/11 2713.8 0.28 52.5 0.06
14/12/11 2678.55 -1.30 51.76 -1.41
15/12/11 2771.35 3.46 53.03 2.45

70
16/12/11 2849.5 2.82 54.04 1.90
19/12/11 2823.95 -0.90 53.86 -0.33
20/12/11 2874.8 1.80 54.54 1.26

x y
Average Return -0.36 -0.35

Standard deviation 2.75 2.07

Beta 0.75

Graphical Presentation of KOTAK 30

Growth Fund

For the month of Nov-Dec 2011

71
 Interpretation:

KOTAK 30 Growth Fund have been analysed and

it is found that there is a negative growth. How
ever on the basis of the avg returns of KOTAK
there is a negative growth 0.35 as against the index
avg of negative 0.36 the beta being less than 1 the
stock is not highly volatile.

Calculations of Risk of TATA Equity Management Fund Growth

for the period of Nov-Dec 2011

72
 Market Market TATA Equity
Date Level Return Management Return(y)
( NIFTY) (x) Fund Growth
22/11/11 3033.45 7.94
23/11/11 3046.75 0.44 7.98 0.50
24/11/11 3121.45 2.45 8.1 1.50
25/11/11 3112.8 -0.28 8.12 0.25
28/11/11 2920.4 -6.18 7.7 -5.17
29/11/11 2873 -1.62 7.57 -1.69
30/11/11 2773.1 -3.48 7.42 -1.98
30/11/11 2744.95 -1.02 7.39 -0.40
02/12/11 2835.3 3.29 7.53 1.89
05/12/11 2736.7 -3.48 7.33 -2.66
07/12/11 2828.45 3.35 7.46 1.77
08/12/11 2846.2 0.63 7.49 0.40
09/12/11 2796.6 -1.74 7.38 -1.47
12/12/11 2706.15 -3.23 7.25 -1.76
13/12/11 2713.8 0.28 7.24 -0.14
14/12/11 2678.55 -1.30 7.14 -1.38
15/12/11 2771.35 3.46 7.24 1.40
16/12/11 2849.5 2.82 7.35 1.52
19/12/11 2823.95 -0.90 7.34 -0.14
20/12/11 2874.8 1.80 7.42 1.09

73
 x y
Average Return -0.36 -0.42

Standard deviation 2.75 1.86

Beta 0.65

Graphical presentation of TATA Equity

Management Fund Growth For the month of

Nov-Dec 2011

74
 Interpretation:

TATA Equity Management Fund Growth has been

analyzed and it is found that there is a negative
growth. How ever on the basis of the avg returns
of TATA Equity there is a negative growth 0.42 as
against the index avg of negative 0.36 the beta
being less than 1 the stock is not highly volatile.

HDFC BANK :

HDFC Limited was established in 1977 by the World Bank, the Government of

India and the Indian Industry, for the promotion of industrial development in India

by giving project and corporate finance to the industries in India.

75
HDFC Bank has financed all the major sectors of the economy, covering 6,848 companies and 16,851

projects. As of March 31, 2000, HDFC had disbursed a total of Rs. 1, 13,070 crores, since inception.

HDFC PRUDENTIAL MUTUAL FUND

HDFC EMERGING STAR FUND Growth & Dividend
DATE DIVIDEND GROWTH
05-Nov-2010 24.13 36.87
12-Nov-2010 23.63 36.10
19-Nov-2010 25.86 39.51
26-Nov-2010 25.14 38.42
03-Dec-2010 26.05 39.80
10-Dec-2010 27.85 42.56
17-Dec-2010 28.07 41.95
24-Dec-2010 28.06 42.88
31-Dec-2010 30.19 46.12
07-Jan-2011 31.14 47.58
14-Jan-2011 29.62 45.26
21-Jan-2011 23.25 38.30
28-Jan-2011 23.55 38.80

HDFC EQUITY FUND – Dividend & Growth

76
From the above graph it indicates that the Growth and Dividend are performing

similar but in the month of Feb both of them have declined .It had drastically fallen

in the month of the Feb. From the 1st week of Dec to 1st week of Feb both have

increased and the performance showed is well.

77
Comparative Study of the performance of the Selected AMC’s

78
Sharp index and Treynor index are calculated
For the month of Nov-Dec 2011

Sharp's Treynor
Return Risk(std Beta
Name of the Fund Rf (Rm- (Rm-
(Rm) dev) (β)
Rf)/σ Rf)/β

SBI Magnum Equity -0.42 2.15 0.75 0.06 -0.22 -0.64

Fund Growth

Birla Sun life 95 -0.28 1.69 0.51 0.06 -0.20 -0.67

Growth

Kotak 30 Growth -0.35 2.07 0.75 0.06 -0.20 -0.55

TATA Equity
Management Fund -0.42 1.86 0.65 0.06 -0.26 -0.73
Growth

79
The graphical representation of Sharp
Index:

Interpretation:

80
 From the above table and graph we can know that

Birla sunlife and kotak are giving good returns and

they are in first position,

 And the second position is SBI

The graphical representation of TREYNER

Index:

Interpretation:

 From the above table and graph we can know

Kotak is performing well and it is in first position

 And the second position is SBI

 The general trend in the reduction of the market

price for various mutual funds studied is not

encouraging the stock market index has also been

falling continuously because of general economic

81
 slow down how ever the funds are ranked

considering sharp and trenyors in the order of

performances

CHAPTER-V

FINDINGS

CONCLUSIONS

SUGGESTIONS

BIBILIOGRAPHY

82
 FINDINGS

SHARPE’S: As per Sharpe performance measure, a high Sharpe ratio is preferable

as it indicates a superior risk adjusted performance of a fund. From the above table

Birla sunlife and kotak show a better risk-adjusted performance out of top4

AMC’S.

TREYNOR’s: As per TREYNOR’S ratio the Treynor’s reward to volatility -

having high positive index is favorable. Therefore, as per this ratio also Kotak

MUTUAL FUND is preferable.

1. When we see corporate banks (i e) HDFC the performance of Growth is very

good when compared to Dividends. This bank has been shown a positive

performance when compared to other banks were it is good for investing in this

bank.

2. When we see HDFC bank both the Dividends and Growth are equal or

similar to each other there is no change in them. In the month of Feb it raised in the

first week but it had a drastic fall in all the following weeks.

83
3. In corporate banks we can see internally in Dividends and Growth HDFC

bank has performed relatively well when compare to other banks. Both the values

are high in this bank. It had reached to a maximum height.

CONCLUSIONS

 From the study analysis conducted it is clear that in EQUITY FUNDS-

BIRLA SUNLIFE MUTUAL FUND is performing very well.

 Investing in the KOTAK MUTUAL FUND (GROWTH) will leads to

profits.

 By seeing the overall performance KOTAK MUTUAL FUND is

performing very well.

 The prospective investors are needed to be made aware of the investment in

mutual funds.

 The Industry should keep consistency and transparency in its management

and investors objectives.

 There is 100% growth of mutual fund as foreign AMCS are in queue to enter

the Indian markets.

 Mutual funds can also perctrate in to rural areas.

84
 Corporate sectors provide good services if we see through customer point of

view. They are very caring to their customers.

 With the increase in infrastructure, technology, introduction of various

schemes and services, online trading it’s clear that any one wants to invest

will surely invest in corporate banks.

 Now you see most of them are opening their account in corporate banks

instead of nationalized banks this is due to extra benefit & services which

they are getting from that sector.

85
 SUGGESTIONS TO INVESTORS:

1.Investing Checklist

 Financial goals & Time frame

(Are you investing for retirement? A child’s
education? Or for current income? )

Risk Taking Capacity

Identify funds that fall into your Buy List

Obtain and read the offer

Documents match your objectives

 In terms of equity share and bond weightings,

downside risk
 protection, tax benefits offered, dividend payout
policy, sector focus
 Performance of various funds with similar
objectives for at least 3-5 years

86
  Think hard about investing in sector funds For
relatively aggressive investors
 Close touch with developments in sector, review
portfolio regularly – Look for `load' costs
 Management fees, annual expenses of the fund and
sales loads

 Look for size and credentials

 Asset size less than Rs. 25 Crores
 Diversify, but not too much
 Invest regularly, choose the S-I-P
 MF- an integral part of your savings and wealth
building plans.

Portfolio Decision

The right asset allocation

i. Age = % in debt instruments

ii. Reality= different financial position, different
allocation
iii. Younger= Riskier

2. Selecting the right fund/s

i. Based on scheme’s investment philosophy
ii. Long-term, appetite for risk, beat inflation– equity
funds best
87
3. TRAPS TO AVOID
4. IPO Blur
5. Begin with existing schemes (proven track record)
and then new
6. schemes
i. Avoid Market Timing

7. MF Comparison
8. Absolute returns
9. –% Difference of NAV
i. Diversified Equity with Sector Funds– NO

10.Benchmark returns
i. SEBI directs
ii. Fund's returns compared to its benchmark

11.Time period –Equal to time for which you plan to

invest
i. Equity- compare for 5 years, Debt- for 6 months
12.Market conditions
i. Proved its mettle in bear market

88
Recommendations and Suggestions to AMCS:

1) Brand building:

Brand building is an exercise, which every

business enterprise will have. Brand is the soul of
an institution; it survives on it, lives with it and
cherishes it. Example: BIRLA SUNLIFE
MUTUAL FUND has a brand, every bank,
insurance companies; mutual fund companies have
got their own brands.

2) Strength full Strategies:

Every AMC should try to turn into a more

modern, a more vibrant, a more transparent and
regulatory compliance institution. It is with this in
mind, every institution should try to come up with
verity of different type of products to fill different
investment objectives.

89
 3) Marketing tools for total quality
achievement:

a) Large Network.
b) Effective Man power
c) Distribution across the Market
d) Customer relations(Building better relationships)
e) Value added service
f) Better transparency level
g) Building brand name as a disciplined player.

4) Innovation:

MF industry can be classified morely into

three categories like equity, debt and balanced.
And there is also complexive in nature. Fund
managers are not able to reach niche market. The
products are should be innovative that can meet
niche market. Here MF should follow the FMCG
industry innovative strategy.

The Ground rules of Mutual Fund Investing

Assess yourself
1) Try to understand where the money is going

2) Don't rush in picking funds, think first

3) Invest. Don’t speculate

90
4) Don’t put all the eggs in one basket

5) Be regular

6) Do your homework

7) Find the right funds

8) Keep track of your investments

9) Know when to sell your mutual funds.

BIBILIOGRAPHY

I. TEXT BOOKS

Donald E Fischer
Security Analysis Portfolio Management

Ronald J Jordan

H.Sadhak Mutual Fund in India

II. WEB SITES

www.amfiindia.com

www.religare.com

www.bseindia.com

www.bluechipinda.co.in

III. MAGAZINES

91
 Business India

Business World

IV. NEWS PAPERS

Economic Time

Business Standard.

92