You are on page 1of 66




Mutual funds play a crucial role in an economy by mobilizing savings and

investing them in the capital market, thus establishing a link between savings and the
capital market. The activities of mutual funds have both short-and long-term impact
on the savings and capital markets, and the national economy.

The Indian Mutual fund Industry has witnessed a structural transformation

during the past few years. The fund industry has grown phenomenally over the past
couple of years, and as on 29th February 2008, it had debt and equity assets of
Rs.5,32,864 crore. Its equity corpus of Rs.2,20,263 lakh crore accounts for over 3
percent of the total market capitalization of BSE, at Rs.58 lakh crore. Its holding in
Indian companies ranges between 1 percent and almost 29 percent making them an
influential shareholder.

In India most mutual funds have an expense ratio of 2.5 percent, a ceiling
fixed by the market regulator, SEBI .The management cost is 1.75 percent. On an
average equity funds in India charge expense ratios of over 2 percent per annum more
than double the global average of sub 1 percent. Bond funds charge around 0.6
percent, which is lower than global average of 0.9 percent. Expense ratio comprises
of management fees and operating expenses.

Mutual funds that invest more than half their corpus in shares of companies
accounting for the top 70 percent of the total market capitalization are categorized as
large cap funds. Funds predominantly investing in mid cap companies are those that
account for another 20 percent of the overall market cap. Mutual fund houses have
restricted their investment universe to barely 768 companies as on 31st January

2008.A chunk of mutual fund money has gone into companies that are a part of two
indices, Sensex and Nifty. The mutual fund investment in companies ranges between
1 percent and 29 percent of their paid up capital.

In India only 3 percent of the household savings is invested in the mutual

funds. According to CRISIL 30 fund houses in India are together tapping only about 4
percent of the incremental household savings market annually. The top 5 asset
management companies in India account for 52 percent of the Indian mutual funds
market. And the Indian mutual fund industry forms only 0.37 percent of the globally
managed funds in the industry which are pegged at $23 trillion (Rs.92 lakh crore).The
main reason for this lopsided development is the lack of geographical penetration: a
substantial portion of the asset under management comes from larger cities.

Mutual Funds over the years have gained immensely in their popularity. With
the introduction of innovative products, the world of mutual funds nowadays has a lot
to offer to its investors. Since Indian economy is no more a closed market, and has
started integrating with the world markets, external factors which are complex in
nature affect us too. Factors such as an increase in short-term US interest rates, the
hike in crude prices, or any major happening in Asian market have a deep impact on
the Indian stock market. Mutual funds provide an option of investing without getting
lost in the complexities. India's mutual fund industry, buoyed by a phenomenal rise in
stock market indices and a spurt in foreign institutional investments, has been
rewarding investors handsomely. India's mutual funds sector has never had it so good.
Retail investors have been pouring billions of dollars into funds, and have been
reaping handsome rewards.

With emerging markets (including India, China and Brazil) being the flavor of
the season, international funds have been furiously earmarking a large portion of their
allocations to developing countries. Not surprising, considering the phenomenal
returns that markets like India have fetched them. With the Indian stock markets
providing attractive returns, foreign institutional investors (FIIs) have been making a

beeline to the country. India's robust capital market has resulted in a flowering of its
mutual fund sector. Investors who had been disenchanted with mutual funds have
returned in a big way.

Mutual funds in India are also looking at increasing their exposure to the
infrastructure sector in the country. About $10 billion would be invested to build new
roads, highways, ports, airports and other infrastructure in India over the next three
years. Funds like Tata Mutual Fund, DSP Merrill Lynch and Prudential ICICI have
launched infrastructure funds, and others are also expected to follow suit.


The history of mutual funds in India can be broadly divided into 5 important phases.

First Phase: 1963-87 Initial Development phase (Unit Trust of India)

In 1963, UTI was established by an Act of Parliament and given a monopoly.

The impetus for establishing a formal institution came from the desire to increase the
propensity of the middle and lower groups to save and to invest. The first and still one
of the largest schemes, launched by UTI was Unit Scheme 1964. UTI created a
number of products such as monthly income plans, children’s plans, equity-oriented
schemes and offshore funds during this period. The total asset under management for
the year 1987-88 was 6,700 crores.

Second Phase: 1987-93 (Entry of Public Sector Funds)

Second phase witnessed the entry of mutual funds sponsored by state owned
banks and financial institutions. With the opening up of the economy, many public
sector and financial institutions were allowed to establish mutual funds. In November
1987 the State Bank of India established the first non-UTI mutual fund-SBI Mutual
Fund. This was followed by Canbank Mutual Fund (launched in December, 1987),

LIC Mutual Fund (1989), and Indian Bank Mutual Fund (1990) followed by Bank of India
Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. The fund industry expanded nearly
seven times in terms of Assets under Management. The total asset under management
considering both UTI and Public Sector was 47,004.

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

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.

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. 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 February 29, 2008,
there were 40 funds, which manage assets of Rs.5, 32,864 crores.


Indian financial institutions have played a dominant role in assets formation and
intermediation, and contributed substantially in macroeconomic development. In this process of
development Indian mutual funds have emerged as strong financial intermediaries and are
playing a very important role in bringing stability to the financial system and efficiency to
resource allocation. Mutual funds play a crucial role in an economy by mobilizing savings and
investing them in the capital market, thus establishing a link between savings and the capital
market. The activities of mutual funds have both short-and long-term impact on the savings and
capital markets, and the national economy. Mutual funds, thus, assist the process of financial
deepening and intermediation. They mobilize funds in the savings market and act as
complementary to banking; at the same time they also compete with banks and other financial
institutions. In the process stock market activities are also significantly influenced by mutual

There is thus hardly any segment of the financial market, which is not (directly or
indirectly) influenced by the existence and operation of mutual funds. However, the scope and
efficiency of mutual funds are influenced by overall economic fundamentals: the
interrelationship between the financial and real sector, the nature of development of the savings
and capital markets, market structure, institutional arrangements and overall policy regime.

Composition of Indian Mutual Fund Industry:

Asset under Management for all Mutual Fund houses, as on 31, March, 2008 is as

Amount in Rs. Crores

Sl. Asset Under

Mutual Fund Name No. of Schemes
No. Management

1 Reliance Mutual Fund 335 77,210

2 ICICI Prudential Mutual Fund 419 64,045

3 UTI Mutual Fund 315 52,465

4 HDFC Mutual Fund 351 43,763

5 Birla Sun Life Mutual Fund 330 36,391

6 Franklin Templeton Investments 225 29,604

7 SBI Mutual Fund 171 27,582

8 Tata Mutual Fund 389 19,423

9 Kotak Mahindra Mutual Fund 178 19,368

10 DSP Merrill Lynch Mutual Fund 207 19,136

11 HSBC Mutual Fund 213 15,530

12 Deutsche Mutual Fund 181 14,405

13 Standard Chartered Mutual Fund 255 13,763

14 LIC Mutual Fund 112 13,387

15 PRINCIPAL Mutual Fund 151 13,319

16 Sundaram Mutual Fund 203 13,285

17 JM Financial Mutual Fund 171 12,560

18 Lotus India Mutual Fund 212 10,057

19 ING Mutual Fund 255 9,845

20 Fidelity Mutual Fund 39 9,487

21 ABN AMRO Mutual Fund 325 6,814

22 Benchmark Mutual Fund 12 5,611

23 Morgan Stanley Mutual Fund 3 3,670

AIG Global Investment Group Mutual

24 54 3,303

25 Canara Robeco Mutual Fund 54 3,147

26 DBS Chola Mutual Fund 80 2,953

27 JPMorgan Mutual Fund 9 2,517

28 Taurus Mutual Fund 14 360

29 Sahara Mutual Fund 43 211

30 Escorts Mutual Fund 26 176

31 BOB Mutual Fund 22 80

32 Quantum Mutual Fund 6 65

Table 1 Composition of Indian Mutual Fund Industry


The asset base will continue to grow at an annual rate of about 30 to 35 % over
the next few years as investor’s 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. May the Net Asset Values grow!!



As you probably know, mutual funds have become pretty popular over the last
few years. What was once just another obscure financial instrument is now a part of
our lives and here to stay. According to sources, more than 80 million people, or one
half of the households in America, invest in mutual funds. That means that, in the
United States alone, trillions of dollars are invested in mutual funds.

Its common knowledge that investing in mutual funds is (or at least should be)
better than simply letting your cash waste away in a savings account, but, for most
people, that's where the understanding of funds ends.

Originally mutual funds were meant to allow the common man to get a piece
of the market considering that the common man would be less knowledgeable about
financial markets and would have smaller investments to transact with. Instead of
spending all your free time buried in the financial pages of the Economic Times, all
you have to do is buy a mutual fund and you'd be set on your way to financial
freedom. As you might have guessed, it's not that easy. Not all mutual funds are the
same, and investing in mutual funds isn't as easy as throwing your money at the first
salesperson who attracts your attention.

Mutual Fund- Meaning

A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. It is essentially a diversified portfolio of financial
instruments - these could be equities, debentures / bonds or money market
instruments. The corpus of the fund is then deployed in investment alternatives that
help to meet predefined investment objectives. Investors of mutual funds are known
as unit holders. The income earned through these investments and the capital
appreciation realised are shared by its unit holders in proportion to the number of

units owned by them. Thus a Mutual Fund is a 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 investors, in proportion to their investments, share the profits or losses.

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.

An investor could make money from a mutual fund in three ways:

Income is earned from dividends declared by mutual fund schemes from time
to time.
If the fund sells securities that have increased in price, the fund has a capital
gain. This is reflected in the price of each unit. When investors sell these units
at prices higher than their purchase price, they stand to make a gain.
If fund holdings increase in price but are not sold by the fund manager, the
fund's unit price increases. You can then sell your mutual fund units for a
profit. This is tantamount to a valuation gain.

The SEBI, 1993 defines a Mutual Fund 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 investing in securities in accordance with
these regulations.


A mutual fund invites the prospective investors to join the fund by offering
various schemes so as to suit to the requirements of categories of investors. The
resources of individual investors are pooled together and the investors are issued
units/shares for the money invested. The amount so collected is invested in capital
market instruments like treasury bills, commercial papers, etc.

For managing the fund, a mutual fund gets an annual fee of 1.25% of funds
managed at the maximum as fixed by SEBI (MF) regulations, 1993 and if the funds
exceed Rs. 100 cores, the fee is only 1%. The fee cannot exceed 1%. Of course,
regular expenses like custodial fee, cost of dividend warrants, fee for registration, the
asset management fee etc are debited to the respective schemes. These expenses
cannot exceed 3% of the assets in the respective schemes. These expenses cannot
exceed 3% of the assets in the respective schemes each year. The remaining amount is
given back to the investors in full.

The flow chart below describes broadly the working of a mutual fund:

Figure 1 Mutual Fund Operation Flow Chart


There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund:

Figure 2 Organization of Mutual Fund


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 approved by SEBI manages the funds by making investments
in various types of securities. Custodian, who is registered with SEBI, holds the
securities of various schemes of the fund in its custody. The trustees are vested with
the general power of superintendence and direction over AMC. They monitor the
performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be associated

with the sponsors. Also, 50% of the directors of AMC must be independent. All
mutual funds are required to be registered with SEBI before they launch any scheme.
However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15,

The formation and operations of Mutual Funds in India is solely guided by

SEBI (Mutual Funds) Regulations, 1993, which came into force on 20th January,
1996, through a notification on 9th December, 1996. these Regulations make it
mandatory for Mutual Funds to have a three-tier structure of :

1. A Sponsor Institution to promote the Fund.

2. A team of Trustees to oversee the operations and to provide checks for the
efficient, profitable and transparent operations of the fund and
3. An Asset Management Company (AMC) to actually deal with the funds.

Sponsoring Institution:

The Company, which sets up the mutual fund, is called the Sponsor. SEBI has
laid down certain criteria to be met by the sponsor. The criterion mainly deals with
adequate experience, good past track record, net worth etc.
· Sponsor appoints the Trustees, Custodian and the AMC with the prior
approval of SEBI, and in accordance with SEBI Regulations.
· Sponsor must have at least 5-year track record of business interest in the
Financial Markets.

Trustees are the people with long experience and good integrity in the
respective fields carry the crucial responsibility in safeguarding the interests of the
investors. For this purpose, they monitor the operations of the different schemes. They
have wide ranging powers and they can even dismiss AMC with the approval of
SEBI. The Indian Trust Act governs them.

Asset Management Company:

The AMC actually manages the funds of the various schemes. The AMC
employs a large number of professionals to make investments, carry out research &to
do agent and investor servicing. In fact, the success of any Mutual Fund depends upon
the efficiency of this AMC. The AMC submits a quarterly report on the functioning of
the mutual fund to the trustees who will guide and control the AMC.

The AMC is usually a private limited company, in which the sponsors and their
associations or joint venture partners are shareholders. The AMC has to be registered
by SEBI and should have a minimum Net worth of Rs.10 cores all times. The role of
the AMC is to act as the Investment Manager of the Trust along with the following
· It manages the funds by making investments in accordance with the provision
of the Trust Deed and Regulations
· The AMC shall disclose the basis of calculation of NAV and Repurchase price
of the schemes and disclose the same to the investors.
· Funds shall be invested as per Trust Deed and Regulations.

Registrars and Transfer Agents:

The Registrars and Transfer Agents are responsible for the investor servicing
functions, as they maintain the records of investors in the mutual funds. They process
investor applications , record details provided by the investors on application forms,
send out periodical information on the performance of the mutual fund; process
dividend pay-out to the investors; incorporate changes in information as
communicated by investors; and keep the investor record up to date, by recording
new investors and removing investors who have withdrawn their funds.


Custodians are responsible for the securities held in the mutual funds portfolio. They
discharge an important back-office function, by ensuring that securities that are
bought are delivered and transferred to the books of mutual funds, and that funds are
paid-out when mutual fund buys securities. They keep the investment account of the
mutual fund, and also collect the dividends and interest payments due on the mutual
fund investments. Custodians also track corporate actions like bonus, issues, right
offers, offer for sale, buy back and open offers for acquisition.


The benefits of investing in mutual funds are as follows -

Access to professional money managers - Experienced fund managers using

advanced quantitative and mathematical techniques manage your money.

Diversification - Mutual funds aim to reduce the volatility of returns through

diversification by investing in a number of companies across a broad section of
industries and sectors. It prevents an investor from putting "all eggs in one
basket". This inherently minimizes risk. Thus with a small investible surplus an
investor can achieve diversification which would have otherwise not been

Liquidity - Open-ended mutual funds are priced daily and are always willing to
buy back units from investors. This means that investors can sell their holdings in
mutual fund investments anytime without worrying about finding a buyer at the
right price. In the case of other investment avenues such as stocks and bonds,
buyers are not necessarily available and therefore these investment avenues are
less liquid compared to open-ended schemes of mutual funds.

Tax Efficiency - Mutual fund offers a variety of tax benefits. Please visit the tax
corner section or consult your tax advisor for details.

Low transaction costs - Since mutual funds are a pool of money of many
investors, the amount of investment made in securities is large. This therefore
results in paying lower brokerage due to economies of scale.

Transparency - Prices of open ended mutual funds are declared daily. Regular
updates on the value of your investment are available. The portfolio is also
disclosed regularly with the fund manager's investment strategy and outlook.

Well-regulated industry - All the mutual funds are registered with SEBI and they
function under strict regulations designed to protect the interests of investors.

Convenience of small investments - Under normal circumstances, an individual

investor would not be able to diversify his investments (and thus minimize risk)
across a wide array of securities due to the small size of his investments and
inherently higher transaction costs. A mutual fund on the other hand allows even
individual investors to hold a diversified array of securities due to the fact that it
invests in a portfolio of stocks. A mutual fund therefore permits risk
diversification without an investor having to invest large amounts of money.

Tax benefits on Investment in Mutual Funds -

1) 100% Income Tax exemption on all Mutual Fund dividends.
2) Capital Gains Tax to be lower of -
10% on the capital gains without factoring indexation benefit and
20% on the capital gains after factoring indexation benefit.
3) Open-end funds with equity exposure of more than 65% (Revised from 50%
to 65% in Budget 2006) are exempt from the payment of dividend tax for a
period of 3 years from 1999-2000.


Professional Management:- Some funds doesn’t perform in neither the market,

as their management is not dynamic enough to explore the available opportunity in
the market, thus many investors debate over whether or not the so-called
professionals are any better than mutual fund or investor himself, for picking up
Costs – The biggest source of AMC income is generally from the entry & exit
load which they charge from an investors, at the time of purchase. The mutual
fund industries are thus charging extra cost under layers of jargon.
Dilution - Because funds have small holdings across different companies, high
returns from a few investments often don't make much difference on the overall
return. Dilution is also the result of a successful fund getting too big. When
money pours into funds that have had strong success, the manager often has
trouble finding a good investment for all the new money.
Taxes - when making decisions about your money, fund managers don't consider
your personal tax situation. For example, when a fund manager sells a security, a
capital-gain tax is triggered, which affects how profitable the individual is from
the sale. It might have been more advantageous for the individual to defer the
capital gains liability.

Risks of investment in Mutual Funds:

Mutual funds are not free from risks as the funds so collected are invested
in stock markets, which are volatile in nature and are not risk free. The following risks
are generally involved in mutual funds

1. Market risks: In general, there are many kinds of risks associated with every kind
of investment on shares. They are called market risks. These market risks can be
reduced, but not completely eliminated even by a good investment management.
The prices of shares are subject to wide price fluctuations depending upon market
conditions over which nobody has control. The various phases of business cycle
such as Boom, Recession, Slump and Recovery affects the market conditions to a
larger extent.

2. Scheme risks: There are certain risks inherent in the scheme itself. For instance,
in a pure growth scheme, risks are greater. It is obvious because if one expects
more returns as in the case of a growth scheme, one has to take more risks.

3. Investment risk: Whether the mutual fund makes money in shares or loses
depends upon the investment expertise of the Asset Management Company
(AMC). If the investment advice goes wrong, the fund has to suffer a lot. The
investment expertise of various funds are different and it is reflected on the
returns, which they offer to the investors.

4. Business Risk: The corpus of a mutual fund might have been invested in a
company’s shares. If the business of that company suffers any set back, it cannot
declare any dividend. It may even go to the extent of winding up its business.
Though the mutual funds can withstand such a risk, its income paying capacity is
5. Political risks: Every government brings new economic ideologies and policies.
It is often said that many economic decisions are politically motivated. Change of
government brings in the risk of uncertainty, which every player in the finance
service industry has to face.



Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial
position, risk tolerance and return expectations etc. The table below gives an
overview into the existing types of schemes in the Industry.

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

Figure 3 Mutual Fund Types


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.
Close-ended Funds
A Close-ended Fund has a stipulated maturity period, which generally ranges 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, if
they are listed. The market price at the stock exchange could vary from the
scheme's NAV on account of demand and supply situation, unit holders'
expectations and other market factors.


Growth/Equity Oriented 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.
Growth schemes are ideal for investors who have a long-term outlook and are
seeking growth over a period of time.

Income/Debt Oriented 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. Capital
appreciation in such funds may be limited, though risks are typically lower than
that in a growth fund.

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. This proportion affects the risks and the returns associated with the
balanced fund - in case equities are allocated a higher proportion, investors would
be exposed to risks similar to that of the equity market.

Balanced funds with equal allocation to equities and fixed income securities
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.

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.

Gilt Fund
These funds invest exclusively in government securities. Government
securities have no default risk. NAVs of these schemes also fluctuate due to

change in interest rates and other economic factors as is the case with income or
debt oriented schemes

There are also exchange traded index funds launched by the mutual funds,
which are traded on the stock exchanges.

These are ideal for corporate and individual investors as a means to park their
surplus funds for short periods.


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 under Section 88 of the Indian Income Tax
Act, 1961.

Index Schemes
Index Funds attempt to replicate the performance of a particular index such as
the BSE Sensex or the NSE S&P CNX 50. These schemes invest in the securities
in the same weightage comprising of an index. NAVs of such schemes would rise
or fall in accordance with the rise or fall in the index, though not exactly by the
same percentage due to some factors known as "tracking error" in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual
fund scheme.

Sectoral Schemes
Sectoral Funds are those which invest exclusively in specified sector(s) such
as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry
higher risk as compared to general equity schemes as the portfolio is less
diversified, i.e. restricted to specific sector(s) / industry (ies).


Investment Who should Investmen
Fund Objective Risk
Portfolio invest t horizon
Those who
Treasury Bills,
Liquidity + park their
Certificate of
Moderate funds in
Money Deposits, 2 days - 3
Income + Negligible current
Market Commercial weeks
Reservation of accounts or
Papers, Call
Capital short-term
bank deposits
term Call Money,
Funds Commercial Those with
Liquidity +
(Floating Little Papers, Treasury surplus 3 weeks -
- short- Interest Rate Bills, CDs, Short- short-term 3 months
term) term Government funds

Credit Risk Debentures, Salaried & More than
Regular Income &Interest Government conservative 9 - 12
Rate Risk securities, investors months
- Long-
Corporate Bonds
Salaried &
Gilt Security & Interest Rate Government 12 months
Funds Income Risk securities & more
Equity investors with 3 years
Capital High Risk Stocks
Funds long term plus

To generate
returns that are
NAV varies Portfolio indices
Index commensurate Aggressive 3 years
with index like BSE, NIFTY
Funds with returns of investors. plus
performance etc
Balanced ratio of
equity and debt
Balanced Growth & Market Risk Moderate & 2 years
funds to ensure
Funds Regular Income and Interest Aggressive plus
higher returns at
Rate Risk
lower risk
Table 2 Mutual fund Scheme


Investment horizon Ideal Instruments
1- 6 months Liquid/Short-term plans
Capital Diversified Equity/ Balanced
Over 3 years
Appreciation Funds
Monthly Income Plans /
Regular Income Flexible
Income Funds
Equity-Linked Saving
Tax Saving 3 yrs lock-in
Schemes (ELSS)
Table 3 Selecting the Right Scheme


To cater to different investment needs, Mutual Funds offer various investment

options. Some of the important investment options include:
Growth Option: Dividend is not paid-out under a Growth Option and the investor
realizes only the capital appreciation on the investment (by an increase in NAV).
Dividend Payout Option: Dividends are paid-out to investors under the Dividend
Payout Option. However, the NAV of the mutual fund scheme falls to the extent
of the dividend payout.
Dividend Re-investment Option: Here the dividend accrued on mutual funds is
automatically re-invested in purchasing additional units in open-ended funds. In
most cases mutual funds offer the investor an option of collecting dividends or re-
investing the same.
Retirement Pension Option: Some schemes are linked with retirement pension.
Individuals participate in these options for themselves, and corporate’s participate
for their employees.
Insurance Option: Certain Mutual Funds offer schemes that provide insurance
cover to investors as an added benefit.
Systematic Investment Plan (SIP): Here the investor is given the option of
preparing a pre-determined number of post-dated cheques in favour of the fund.
The investor is allotted units on a predetermined date specified in the offer
document at the applicable NAV.
Systematic Encashment Plan (SEP): As opposed to the Systematic Investment
Plan, the Systematic Encashment Plan allows the investor the facility to withdraw
a pre-determined amount / units from his fund at a pre-determined interval. The
investor's units will be redeemed at the applicable NAV as on that day.


With a view to find out the solutions for the problem raised above, the following
objectives have been framed.
1. To understand the concept of Mutual Funds.
2. To find out the Performance of different schemes of different companies in
relation with market performance.
3. To identify investment of funds which have generated high returns and low
4. To analysis the risk involved in the selected scheme of different companies
5. To analysis the performance of selected scheme of different companies using
different models of performance evaluation.


The scope of this project can be extended to various wealth management firms,
asset management companies, financial advisors, portfolio managers, High Net
worth individuals and retail investors. This study will help them in understanding the
risk and returns of various funds under study and help them in taking an informed
investment decision.


· Since the funds selected for this study are only related to Balanced, ELSS and
Index based growth mutual funds, so the fund composition kept on changing over
the time period, so it became difficult to understand the fund properties as
historical data pertaining to the fund composition was not available.

· Because of unavailability of more historical data and fund composition it was

difficult to ascertain the performance to the fund properties and a simple
evaluation was done against the market performance.

Literature on mutual fund performance evaluation is enormous. A few research

studies that have influenced the preparation of this paper substantially are discussed in
this section.

Barua, Raghunathan and Varma (1991)[3] evaluated the performance of

Master Share during the period 1987 to 1991 using Sharpe, Jensen and Treynor
measures and concluded that the fund performed better that the market, but not so
well as compared to the Capital Market Line.

Kothari,S.P. and Warner,Jerold (1997)[6], examined the empirical properties of

performance measures for mutual funds using Simulation procedures combined with
random and random-stratified samples of NYSE and AMEX securities and other
performance measurement tools employed are Sharpe measure, Jensen alpha, Treynor
measure, appraisal ratio, and Fama-French three-factor model alpha. The study
revealed that standard mutual fund performance was unreliable and could result in
false inferences. In particular, it was easy to detect abnormal performance and
market-timing ability when none exists. The results also showed that the range of
measured performance was quite large even when true performance was ordinary.
This provided a benchmark to gauge mutual fund performance. Comparisons of their
numerical results with those reported in actual mutual fund studies raised the
possibility that reported results were due to misspecification, rather than abnormal
performance. Finally, the results indicated that procedures based on the Fama-French
3-factor model were somewhat better than CAPM based measures.

Sethu (1999)[8] conducted a study examining 18 open-ended growth schemes

during 1985-1999 and found that majority of the funds showed negative returns and
no fund exhibited any ability to time the market.

Arnold L. Redman, N.S. Gullett and Herman Manakyan (2000)[2] examines
the risk-adjusted returns using Sharpe’s Index, Treynor’s Index, and Jensen’s Alpha
for five portfolios of international mutual funds and for three time periods: 1985
through 1994, 1985-1989, and 1990-1994. The benchmarks for comparison were the
U. S. market proxied by the Vanguard Index 500 mutual fund and a portfolio of funds
that invest solely in U. S. stocks. The results show that for 1985 through 1994 the
portfolios of international mutual funds outperformed the U. S. market and the
portfolio of U. S. mutual funds under Sharpe’s and Treynor’s indices. During 1985-
1989, the international fund portfolio outperformed both the U. S. market and the
domestic fund portfolio, while the portfolio of Pacific Rim funds outperformed both
benchmark portfolios. Returns declined below the stock market and domestic mutual
funds during 1990-1994.

Srisuchart (2001)[9] measures Thai mutual fund performance regarding to

selectivity and market timing ability. He applied several models which were Jensen
model (1968), Treynor and Muzay (1966), Henriksson and Merton model (1981),
Kon and Jen model (1979), and Kon model14 (1983) to 144 funds from Jan 1990 to
May 2000. He discovered that for market timing ability, equity funds showed better
performance than fixed income funds but for selectivity ability, fixed income funds
showed better performance than equity funds. For overall abilities, fixed income
funds still showed better performance from fixed return. The reason is that the period
of study includes recession period where the fixed return is a good investment
strategy while market returns are highly volatile and continuously declining.
Ahmed,Parvez; Gangopadhyay, Partha & Nanda, Sudhir (2001)[1], examined
the performance of equity and bond mutual funds that invested primarily in the
emerging markets using Treynor’s ratio, Sharpe’s r atio, Jensen’s measure. With this
research they found that on an average the U.S. stock market outperformed emerging
equity markets but the emerging market bonds outperformed U.S. bonds. They also
found that overall emerging market stock funds under-performed the respective MSCI
indexes. These were evident by their lower return, higher risk, and thus lower Sharpe

Muthappan, P. K., Damondharan, E. (2006)[7] The objective of this paper is to
evaluate the performance of Indian Mutual Fund schemes in the framework of risk and
return during the period April 1, 1995 to March 31, 2000. Performance measures used
are Sharpe ratio, Treynor ratio, Jensen measure, Sharpe differential return measure
and Modigliani–Miller theorem 's components of performance. The results indicate
that the risk and return of mutual fund schemes are not in conformity with their stated
investment objectives. Further sample schemes are not found to be adequately
diversified. The funds are able to earn higher returns due to selectivity, however the
proper balance between selectivity and diversification is not maintained. The analysis
made by the application of Modigliani– Miller theorem 's measure indicates that the
returns out of diversification are very less. Based on the empirical investigation, it is
observed that the Indian Mutual Funds are not properly diversified.

Guha (2008) focused on return-based style analysis of equity mutual funds in

India using quadratic optimization of an asset class factor model proposed by William
Sharpe. The study found the “Style Benchmarks” of e ach of its sample of equity
funds as optimum exposure to 11 passive asset class indexes. The study also analyzed
the relative performance of the funds with respect to their style benchmarks. The
results of the study showed that the funds have not been able to beat their style
benchmarks on the average.

Bessler, Wolfgang, Zimmermann, Heinz (2009)[4] investigate the conditional

performance of a sample of German equity mutual funds over the period from 1994 to
2003 using both the beta-pricing approach and the stochastic discount factor (SDF)
framework. On average, mutual funds cannot generate excess returns relative to their
benchmark that are large enough to cover their total expenses. Compared to
unconditional alphas, fund performance sharply deteriorates when we measure
conditional alphas. Given that stock returns are to some extent predictable based on
publicly available information, conditional performance evaluation raises the
benchmark for active fund managers because it gives them no credit for exploiting
readily available information. Underperformance is more pronounced in the SDF
framework than in beta-pricing models. The fund performance measures derived from

alternative model specifications differ depending on the number of primitive assets
taken to calibrate the SDF as well as the number of instrument variables used to scale
assets and/or factors.

S.Narayan Rao [5] evaluated performance of Indian mutual funds in a bear

market through relative performance index, risk-return analysis, Treynor’s ratio,
Sharpe’s ratio, Sharpe’s measure, and Jensen’s meas ure. The study used 269 open-
ended schemes (out of total schemes of 433) for computing relative performance
index. Then after excluding funds whose returns are less than risk-free returns, 58
schemes are finally used for further analysis. The results of performance measures
suggest that most of mutual fund schemes in the sample of 58 were able to satisfy
investor’s expectations by giving excess returns over expected returns based on both
premium for systematic risk and total risk.

Wolasmal,Hewad[10] looked at some measures of composite performance that

combine risk and return levels into a single value using Treynor’s ratio, Sharpe’s
ratio, Jenson’s measure. The study analyzed the performance of 80 mutual funds and
based on the analysis of these 80 funds, it was found that none of the mutual funds
were fully diversified. This implied there is still some degree of unsystematic risk that
one cannot get rid of through diversification. This also led to another conclusion that
none of those funds would land on Markowitz’s efficient portfolio curve.




The major aims of Performance Evaluation are to:

We intend to carry out research which would

1. Collect and disseminate information related to performance aspects of mutual fund,
2. Promote interdisciplinary flow of technical information among researchers
and Professionals; and
3. Serve as a publication medium for various special interest groups in
the Performance of mutual fund at large.

Performance evaluation of mutual fund will be done with the help of different models
like, Treynor, Jenson, Sharpe, and Modigliani–Mille r theorem.


Null Hypothesis:

H0: Mutual Fund schemes are giving more return than market.

Alternative Hypothesis:

H1: Mutual Funds schemes are not giving more return than market.


1. Birla SL Tax Plan-D
2. Franklin India Index Tax
3. HDFC Taxsaver-G
4. ICICI Pru Tax Plan-G
5. LICMF Tax Plan-G
6. Magnum(SBI) Taxgain-G
7. Principal Tax Savings
8. Sundaram Taxsaver-G
9. Tata Tax Saving Fund
10. UTI Equity Tax Savings PlanG

For the research purpose different schemes of above companies will take into
consideration. The schemes will be ELSS fund, Indexed fund and Balanced Fund.

Time Horizon:

The time horizon of an individual will also influence the performance measures he/she
will look at more closely. If you are investing for less than four years, you need a fund
with consistent performance, so all your money will be there when you need it. You also
do not have time to earn back a large commission charge on the front end.

Conversely, if you plan to invest your money for more than four years, neither
consistency nor load is very important: you have plenty of time for the market to
recover. With a long-term horizon, we are conducting research for time period of last
5 years i.e. Jan. 2006 to Jan. 2011.

We shall use secondary data from following sources for research.

Mutual Fund Insight.

· 364 days T-Bill risk free rate of return i.e. 7.6404% from Reserve bank of India.
· Market Return and standard deviation- BSE- Sensex Five year returns


1. Standard Deviation:-

It is measure of the value of the variable around its mean or it is as squire root of the
sum of the squared deviations from the mean divided by the number of observance
The arithmetic mean of the return may be same for two companies but the returns
may vary widely.

2. Treynor’s performance index:

Treynor (1965) was the first researcher developing a composite measure of portfolio
performance. He measures portfolio risk with beta, and calculates portfolio’s market
risk premium relative to its beta:

Treynor P f

Where: P
Ti = Treynor’s performance index
Rp = Portfolio’s actual return during a specified time period

Rf = Risk-free rate of return during the same period
βp = beta of the portfolio

3. Sharpe’s Performance index

Sharpe (1966) developed a composite index which is very similar to the Treynor
measure, the only difference being the use of standard deviation, instead of beta, to
measure the portfolio risk, in other words except it uses the total risk of the portfolio
rather than just the systematic risk:

Sharpe P f

Si = Sharpe performance index
σp = Portfolio standard deviation
This formula suggests that Sharpe prefers to compare portfolios to the capital market
line(CML) rather than the security market line(SML). Sharpe index, therefore,
evaluates funds performance based on both rate of return and diversification (Sharpe
1967). For a completely diversified portfolio Treynor and Sharpe indices would give
identical rankings.

4. Jensen’s Alpha:
Jensen (1968), on the other hand, writes the following formula in terms of
realized rates of return, assuming that CAPM is empirically valid:

P P f P M

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.

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 cannot mitigate unsystematic risk, as his
knowledge of market is primitive.

5. Modigliani–Miller theorem (MM)

The Modigliani–Miller theorem (of Franco Modigliani , Merton Miller) forms the
basis for modern thinking on capital structure. The basic theorem states that, under a
certain market price process (the classical random walk), in the absence of taxes,

bankruptcy costs, and asymmetric information, and in an efficient market, the value of
a firm is unaffected by how that firm is financed. It does not matter if the firm's capital
is raised by issuing stock or selling debt. It does not matter what the firm's dividend
policy is. Therefore, the Modigliani–Mille r theorem is also often called the capital
structure irrelevance principle.

Required return can be calculated as:

σ = +σ(−)

6. T-test

T test is developed by British statistician, William Gossset.

· A family of distributions – a unique distribution o f each value of its parameter,
degrees of freedom (d.f.)
· It is symmetric, Unimodal. Its curve is flatter than Z test.

· Formula…

= √



= Market return

S= standard deviation of market

n = Sample size.



A fund that combines a stock component, a bond component and, sometimes, a

money market component, in a single portfolio. Generally, these hybrid funds stick to
a relatively fixed mix of stocks and bonds that reflects either a moderate (higher
equity component) or conservative (higher fixed-income component) orientation.

The proportion in which the balanced mutual funds allocate their assets is usually 60
% to 65 % in stocks and the balance in bonds. The proportion is not disturbed while
managing the fund as it is to remain within the pre set minimum and maximum limits.


1. Obviously the most striking advantage is being able to switch over from one
combination to the other available to a more aggressive growth oriented stocks
when the market is bullish and vice versa.
2. Diversity in true sense with portfolio containing top stocks and bonds for a
blend of growth and safety.
3. No trouble managing an assortment of investments yourself. The one fund
gives it all reduces your overall cost of owning and managing the investment.


1. Fees remain same regardless of whether you hold 60:40 patterns in favor of
stocks or the low return and sloppy 40:60 bond orientation.
2. If you forgot to switch back to growth 60:40 patterns even after market turning
around, you will lose out on the low risk high growth potential of bull market.
3. Funds may have bonds of lower tenures while your need is for a longer term.
Long term bonds earn significantly more than short term bonds.

FUNDS Mean Deviation Beta Rp Rf Rp-Rf Rm m Sharpe Treynor Jenson MM

Birla 12.23 25.98 1.06 15.02 7.64 7.38 27.97 44.97 0.30 6.96 -14.17 29.74
FT India 6.32 21.68 0.9 11.38 7.64 3.74 27.97 44.97 0.09 4.16 -14.56 22.42
HDFC 13.65 23.88 0.97 13.46 7.64 5.82 27.97 44.97 0.39 6.00 -13.90 27.08
ICICI 9.78 21.87 0.91 8.67 7.64 1.03 27.97 44.97 0.25 1.13 -17.47 12.98
LICMF 5.74 23.55 0.96 5.38 7.64 -2.26 27.97 44.97 0.06 -2.35 -21.78 -11.25

Magnum(SBI) 5.34 26 1.08 9.35 7.64 1.71 27.97 44.97 0.04 1.58 -20.25 15.86
Principal 4.11 25.37 1.05 6.82 7.64 -0.82 27.97 44.97 -0.01 -0.78 -22.17 2.23
Sundaram 7.37 26.78 1.1 10.08 7.64 2.44 27.97 44.97 0.11 2.22 -19.93 18.52
Tata 8.51 25.25 1.04 12.24 7.64 4.60 27.97 44.97 0.16 4.42 -16.55 24.54
UTI 12.33 23.62 0.99 9.85 7.64 2.21 27.97 44.97 0.34 2.23 -17.92 17.73
Table 4 Balanced Funds Descriptive

Balanced Scheme





Bi rla FT HDF ICICI LIC SBI Princ Su nd Tata UTI
India C MF ipal ara
Std. Deviation 25.98 21.68 23.88 21.87 23.55 26 25.37 26.78 25.25 23.62
Beta 1.06 0.9 0.97 0.91 0.96 1.08 1.05 1.1 1.04 0.99
Rp 15.02 11.38 13.46 8.67 5.38 9.35 6.82 10.08 12.24 9.85

Figure 4 Balanced Schemes



Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
India pal aram

Series1 0.3 0.09 0.39 0.25 0.06 0.04 -0.01 0.11 0 .16 0.34

Figure 5 Balanced Schemes Sharpe Ratio

Sharpe Ratio defines t he relation between return and volatility of the funds. It shows
the Risk adjusted retu rn. Comparatively HDFC fund is more rel iable i.e. its sharpe
ratio is 0.39 and Principal has the least ratio is -0.01. Birla, ICICI and UTI are giving
average risk adjusted r eturn.



Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
I ndia pal aram

Series1 6.96 4.16 6.00 1.13 -2.35 1.58 -0.78 2.22 4.42 2.23

Figure 6 Balanced Schemes Treynor Ratio


Treynor ratio of Birla is high i.e.6.96 and this shows that it has been able to earn
higher excess return near the risk free rate when compared to other schemes. LIC has
a Treynor ratio of -2.35 and is the undesirable choice for investmen t.






Birla FT C ICICI LIC SBI Princi Sund Tata UTI
India pal aram

Series1 -14.1 -14.5 -13.9 -17.4 -21.7 -20.2 -22.1 -19.9 - 16.5 -17.9

Figure 7 Balanced Schemes Jenson Ratio


Jenson measure invol ves evaluation of the returns that the fund ha s generated vs. the
returns actually expect ed out of the fund given the level of its systematic risk. Here
all the above schemes are not giving expected returns according to Jen son. Principal
fund is more unexpected fu nd i.e. jenson ratio is -22.1.



Birla FT C ICICI LIC SBI Princi Sund Tata UTI
India pal aram

Series1 29.74 22.42 27.08 12.98 -11.2 15.86 2.23 18.52 2 4.54 17.73

Figure 8 Balanced Schemes MM Ratio


MM measure involv es evaluation of the returns that the fund has generated in
efficient market condition. Here from the above schemes Birla fund is giving higher
return compare to others i.e. MM is 29.70. But LIC fund is not g enerating expected
return in efficient mar ket condition i.e. -11.2.


ELSS mutual funds give you tax benefit. These mutual funds are covered by Section
80C, which mean that the money you invest in these funds is reduced from your
taxable income (up to a limit of Rs. 1 lac) and hence you pay less tax.

Equity linked saving schemes are a kind of mutual funds like diversified equity funds
with Tax benefits. It is just like other tax saving instruments like National Savings
Certificate and Public Provident Fund. Main advantage with ELSS is lock-in period is
only 3 years while for NSC it is 6 years and for PPF it is 15 years. At the same time
risk factor is high in ELSS.


1. Since it is an equity linked scheme earning potential is very high.

2. Investor can opt for dividend option and get some gains during the lock-in
3. Investor can opt for Systematic Investment Plan
4. Some ELSS schemes also offer personal accident death cover insurance

5. Provides 30 to 40% returns compared to 8% in NSC and PPF.


1. Risk factor is high compared to NSC and PPF

2. Premature withdrawal is not allowed but it is allowed in other instruments in
some specific conditions.

ELSS FUNDS Mean Beta Rp Rf Rp-Rf Rm σm Sharpe Treynor Jenson MM
Birla 3.29 32.09 0.95 6.76 7.64 -0.88 27.97 44.97 -0.03 -0.93 -20.20 6.41
5.64 32.4 0.98 10.28 7.64 2.64 27.97 44.97 0.04 2.69 -17.29 11.30
HDFC 19.18 31.56 0.93 12.15 7.64 4.51 27.97 44.97 0.47 4.85 -14.40 14.07
ICICI 19.75 34.27 0.99 10.23 7.64 2.59 27.97 44.97 0.45 2.62 -17.54 11.04
LIC 9.37 33.05 0.99 3.73 7.64 -3.91 27.97 44.97 0.15 -3.95 -24.04 2.32
Magnum(SBI) 10.47 32.23 0.96 10.41 7.64 2.77 27.97 44.97 0.19 2.89 -16.75 11.50
Principal -5.62 32.55 0.94 3.48 7.64 -4.16 27.97 44.97 -0.31 -4.43 -23.27 1.89
Sundaram 6.72 31.88 0.92 11.3 7.64 3.66 27.97 44.97 0.07 3.98 -15.05 12.80
Tata 11.93 30.38 0.91 7.49 7.64 -0.15 27.97 44.97 0.24 -0.17 -18.65 7.42
UTI 9.51 29.13 0.87 6.2 7.64 -1.44 27.97 44.97 0.18 -1.66 -19.13 5.42
Table 5 ELSS Funds Descriptive

Birla Frankl HDFC ICICI LIC SBI Princi Sun d Tata UTI
in pal aram

Std. Deviation 32.09 32.4 31.56 34.27 33.05 32.23 32.55 31.88 30.38 29.13
Beta 0.95 0.98 0.93 0.99 0.99 0.96 0.94 0.9 2 0.91 0.87
Rp 6.76 10.28 12.15 10.23 3.73 10.41 3.48 11. 3 7.49 6.2

Figure 9 ELSS Funds



Birla FT HDFC ICICI LIC SBI Princi Sund Ta ta UTI
India pal aram

Series1 -0.03 0.04 0.47 0.45 0.15 0.19 -0.31 0.07 0.24 0.18

Figure 10 ELSS Fund Sharpe Ratio

Sharpe Ratio defines t he relation between return and volatility of the funds. It shows
the Risk adjusted retu rn. Comparatively HDFC fund is more rel iable i.e. its sharpe
ratio is 0.47 and Principal has the least ratio is -0.31. ICICI and TATA are giving
average risk adjusted r eturn.



Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
India pal aram

Series1 -0.93 2.69 4.85 2.62 -3.95 2.89 -4.43 3.98 -0.17 -1.66

Figure 11 ELSS Fund Treynor Ratio


Treynor ratio of HDFC fund is high i.e.4.85 and this shows that it has been able to
earn higher excess return near the risk free rate when compared to other schemes.
Principal Fund has a Treynor ratio of -4.43 and is the unde sirable choice for
investment. LIC is als o same like as Principal fund i.e.-3.95.






Birla FT C ICICI LIC SBI Princi Sund T ata UTI
India pal aram

Series1 -20.2 -17.2 -14.4 -17.5 -24.0 -16.7 -23.2 -15.0 -18.6 -19.1

Figure 12 ELSS Fund Jenson Ratio


Jenson measure invol ves evaluation of the returns that the fund ha s generated vs. the
returns actually expect ed out of the fund given the level of its systematic risk. Here
all the above schemes are not giving expected returns according to Je nson. LIC fund
and Principal fund are more unexpected fund i.e. jenson ratio i s -24.0 and -23.2



Birla FT HDF ICICI LIC SBI Princ Sund Tata I
Ind ia C ipal aram

Series1 6.41 11 .3 14.0 11.0 2.32 11.5 1.89 12.8 7.42 5.42

Figure 13 ELSS Fund MM Ratio


MM measure involv es evaluation of the returns that the fund has generated in
efficient market condition. Here from the above schemes HDFC fu nd is giving higher
return compare to oth ers i.e. MM is 14.00. But Principal fund is generating lesser
expected return in com pare to other funds i.e. 1.89.


An index fund or index tracker is a collective investment scheme (usually a mutual

fund or exchange-traded fund) that aims to replicate the movements of an index of a
specific financial market, or a set of rules of ownership that are held constant,
regardless of market conditions. An index mutual fund is said to provide broad market
exposure, low operating expenses and low portfolio turnover.


1. Enhanced portfolio diversity and lower risk factor.

2. Lower expense than most mutual funds.
3. Suitable for any type of investors.
4. Benefits from semi-active fund management which facilitates investors to

profit from changing market trends.

5. Investor of index funds also enjoys the tax advantages associated with this type of



1. The disadvantage of index funds is that their return over investment is low when
compared with other financial instruments; even with the best index funds.
2. Index funds are subject to the same financial trouble as the rest of securities.

Mean Beta Rp Rf Rp-Rf Rm σm Sharpe Treynor Jenson MM
Birla 5.31 33.39 1.01 10.00 7.64 2.36 27.97 44.97 0.03 0.07 -18.18 10.82
Franklin 6.09 33.36 0.99 10.39 7.64 2.75 27.97 44.97 0.05 0.08 -17.38 11.35
HDFC 4.35 33.27 0.99 7.97 7.64 0.33 27.97 44.97 0.00 0.01 -19.80 8.09
ICICI 13.12 32.96 1.00 12.53 7.64 4.89 27.97 44.97 0.26 0.15 -15.44 14.31
LIC 9.47 33.62 1.00 8.93 7.64 1.29 27.97 44.97 0.15 0.04 -19.04 9.37
SBI 4.95 33.10 1.00 9.46 7.64 1.82 27.97 44.97 0.02 0.05 -18.51 10.11
Principal 4.78 32.91 0.99 9.00 7.64 1.36 27.97 44.97 0.01 0.04 -18.77 9.50
Sundaram 10.09 31.39 0.92 11.60 7.64 3.96 27.97 44.97 0.18 0.13 -14.75 13.31
Tata 12.05 33.09 0.99 10.62 7.64 2.98 27.97 44.97 0.23 0.09 -17.15 11.69
UTI 12.56 33.32 1.00 11.23 7.64 3.59 27.97 44.97 0.25 0.11 -16.74 12.49
Table 6 Index Funds Descriptive







Birla Frankli H D F ICICI LIC SBI Princip Sunda Tata I
n C al ra m
Std. Dev 33.39 33.36 33.27 32.96 33.62 33.1 32.91 31. 39 33.09 33.32
Beta 1.01 0.99 0.99 1 1 1 0.99 0.9 2 0.99 1
Rp 10 10.39 7.97 12.53 8.93 9.46 9 11. 6 10.62 11.23

Figure 14 INDEX Fund




Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
India pal aram

Series1 0.03 0.05 0.00 0.26 0.15 0.02 0.01 0.18 0.23 0.25

Figure 15 INDEX Fund Sharpe Ratio

Sharpe Ratio defines t he relation between return and volatility of the funds. It shows
the Risk adjusted ret urn. Comparatively ICICI fund is more reli able i.e. its sharpe
ratio is 0.26 and HDF C has the least ratio is 0.00. UTI and TAT A funds are also at
high ratio i.e. 0.25 an d 0.23 respectively. Birla, SBI and Princip al are giving lower
risk adjusted return.


Birla FT HDFC ICICI LIC SBI Princi Sund Tata UTI
India pal aram

Series1 0.07 0.08 0.01 0.15 0.04 0.05 0.04 0.13 0.09 0.11

Figure 16 INDEX Fund Treynor Ratio


Treynor ratio of ICICI is high i.e. 0.15 and this shows that it ha s been able to earn
higher return compared to other schemes. HDFC has a Treynor ratio of 0.01 and is the
less desirable choice f or investment.



Birla FT HDF ICICI LIC SBI Princ Sund Tata I
India C ipal aram

Series1 -18. -17. -19. -15. -19. -18. -18. -14. -17. -16.

Figure 17 INDEX Fund Jenson Ratio


Jenson measure invol ves evaluation of the returns that the fund ha s generated vs. the
returns actually expect ed out of the fund given the level of its systematic risk. Here
all the above schemes are not giving expected returns according to Jen son. HDFC
fund is more unexpected fund i.e. Jenson ratio is -22.1.

Figure 18 INDEX Fund MM Ratio




Ratio 5.00

Birla FT HDFC ICICI LIC SBI Princi Sund Tata I
India pal aram

Series1 10.8 11.3 8.09 14.3 9.37 10.1 9.50 13.3 11.6 12.4

Figure 18 INDEX Fund MM Ratio


MM measure involv es evaluation of the returns that the fund has generated in efficient
market condition. Here from the above schemes ICICI fund is giving higher return
compare to others i.e. MM is 29.70. But LIC fund is not g enerating expected return in
efficient mar ket condition i.e. -11.2.

Hypothesis Testing (T-test)

T-test Balanced Fund

· Null Hypothesis:

H0: Balanced Funds are giving more return than market.

· Alternative Hypothesis:

H1: Balanced Funds are not giving more return than market.

n =10 df = n-1
x =10.225
=27.97 s=44.97 Significant level= 0.05

x −

10.22 − 27.97
= 44.97
= -1.248

tc < tt = -1.248 < 2.262

So, our Ho: Balanced Funds are giving more return than market is REJECTED.

T-test ELSS Fund

· Null Hypothesis:

H0: ELSS Funds are giving more return than market.

· Alternative Hypothesis:

H1: ELSS Funds are not giving more return than market.

n =10 df = n-1
x =8.203
=27.97 s=44.97 Significant level= 0.05

x −

8.203 − 27.97
= 44.97
= -1.39

tc < tt = -1.39 < 2.262

So, our Ho: ELSS Funds are giving more return than market is REJECTED.

T-test Index Fund

· Null Hypothesis:

H0: Index Funds are giving more return than market.

· Alternative Hypothesis:

H1: Index Funds are not giving more return than market.

n =10 df = n-1
x =10.173
=27.97 s=44.97 Significant level= 0.05

x −

10.173 − 27.97
= 44.97

= -1.2517

tc < tt = -1.2517 < 2.262

So, our Ho: INDEX Funds are giving more return than market is REJECTED.



Birla Fund has given highest return in last five years i.e.15.02 with compare to
other Balanced funds.
LIC has given lowest return i.e.5.38.
Franklin India has lowest volatility with Beta of 0.9 and Sundaram Fund has high
volatility with Beta of 1.1.
Sundaram Fund has highest risk (26.78) with return of 10.08.
Franklin India has lowest return (21.68) with return of 11.38.
According to Sharpe measure HDFC is more reliable fund and Principal Fund is
less profit generated fund.
As per Treynor measure Birla fund is more reliable fund and LIC is less profit
making fund.
As per Jenson measure all the balanced schemes are not giving expected returns.
Principal fund is more unexpected fund.
As per MM measure in efficient market condition Birla is giving more return than
other schemes and LIC is less profit making fund.
As per T-test Balanced funds are not giving more return than market.


HDFC Fund has given highest return in last five years i.e.12.15 with compare to
other ELSS funds.
Principal has given lowest return i.e.3.48.
ICICI and LIC has lowest volatility with Beta of 0.99.
ICICI Fund has highest risk (34.27) with return of
10.23. UTI has lowest risk (29.13) with return of 6.2.
According to Sharpe measure HDFC is more reliable fund and Principal Fund is
less profit generated fund.

As per Treynor measure HDFC fund is more reliable fund and Principal is less
profit making fund.
As per Jenson measure all the ELSS schemes are not giving expected returns. LIC
fund is more unexpected fund.
As per MM measure in efficient market condition HDFC is giving more return
than other schemes and LIC is less profit making fund.
As per T-test ELSS funds are not giving more return than market.


ICICI Fund has given highest return in last five years i.e.12.53 with compare to
other ELSS funds.
HDFC has given lowest return i.e.7.97.
ICICI, LIC, SBI and UTI has no volatility with Beta of 1. Birla has Beta of 1.01.
Birla Fund has highest risk (33.39) with return of 10.00.
Sundaram has lowest risk (31.39) with return of 11.6.
According to Sharpe measure ICICI is more reliable fund and HDFC Fund is less
profit generated fund.
As per Treynor measure ICICI fund is more reliable fund and HDFC is less profit
making fund.
As per Jenson measure all the Index schemes are not giving expected returns.
HDFC fund is more unexpected fund.
As per MM measure in efficient market condition ICICI is giving more return
than other schemes and HDFC is less profit making fund.
As per T-test INDEX funds are not giving more return than market.


This research report was a very good learning experience for us. The project
on mutual fund facilitated us in understanding the theoretical concepts along with the
in- depth study of various important parameters to evaluate mutual fund schemes and
has made us self sufficient in analyzing the wide variety of schemes available in the
market and picking up the right one to invest.

By and large it has been seen that specific schemes like BALANCED, ELSS
& INDEX have not found investors return as compare to market return, here market is
consider as BSE-Sensex. But market has more risk of 44.97 as giving higher return.
This is mainly due to the high risk involved by investing in a particular sector.
Investors tend to prefer diversified sectorial investment as the risks are reduced.

Ranking of funds maybe done as per Risk Adjusted Returns method. This is
the most precise and comparative way of ranking as it takes the risk and return, both
into consideration. Thus, it has proved to be more accurate and concrete. Also by the
means of Sharpe, Treynor, Jenson, MM measures all the specific schemes were
analyzed and ranked. This provides a ready guide for the investor in making the right
investment decision.

It was traced that the funds, which embarked lower risk, did not always
validate lower returns or vice versa. This states that the risks and return need not
always be in a beeline or point-blank relationship.


Books Referred

· Kotahri, C.R. (2009). Research Methodology (2nd Ed.). New Age

International Publication, Delhi.

· Fischer & Jordan.(2006) Security Analysis and Portfolio


Magazines Referred
· Value Research-Mutual Fund Insight



1. Ahmed,Parvez; Gangopadhyay, Partha & Nanda, Sudhir (2001), “ Performance of

Emerging Market Mutual Funds”,, paper no.289278 and PP. 1-41.

2. Arnold L. Redman, N.S. Gullett and Herman Manakyan, 2000, THE

Journal of Financial and Strategic Decision, Volume 13.

3. Barua, S. K., Raghunathan, V. and Verma, J. R.(1991). Master Share: A Bonanza

for Large Investors. Vikalpa, 17, 1: 29-34.

4. Bessler,Wolfgang, Drobetz, Zimmermann, Heinz, 2009, CONDITIONAL
FUNDS, European Journal of Finance; Vol. 15 Issue 3, p287-316, 30p, 10
Charts, 1 Graph.

5. Dr. Rao, Narayan “ Performance Evaluation of Indian Mutual Funds”,, paper no.433100 and PP.1-24

6. Kothari,S.P. and Warner,Jerold (1997), “ Evaluating Mutual Fund Performance”,, paper no.75871 and PP. 1-46.

7. Muthappan,P.K., Damondharan, E., 2006, RISK-ADJUSTED PERFORMANCE

Vol. 20 Issue 3, p965-983, 19p, 9 Charts.

8. Sethu, G. (1999). The Mutual Fund Puzzle, International Conference on

Management, UTI-ICM, Conference Proceedings: 23-24.

9. Srisuchart, S. (2001), Evaluation of Thai mutual fund performance (market timing

ability investigation), Master Degree in Economics, Thammasat University,
Bangkok, Thailand.

10. Wolasmal,Hewad, “ Performance evaluation of mutual funds”, published by Econ

WPA, paper no. 0509023 and PP. 1-20.