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Dissertation on

“A Study of Risk and Return Analysis of Equity Mutual


Funds”

PREPARED BY
Mohammad Majid
BATCH - 2009-2011

AS A PARTIAL FULFILLMENT OF MBA PROGRAMME


OF
JAMIA HAMDARD, NEW DELHI

UNDER THE GUIDANCE OF


MR. P.S RAYCHAUDHARI
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Acknowledgement

I would like to express my gratitude to all those who gave me the


opportunity and subsequently guidance to complete this project. A
mission of this magnitude could not have been be under taken
without the guiding light of inspiration, cooperation, critical
supervision, encouragement and above all the blessings of
Almighty ALLAH.

It is with such a multitude of emotions that I shall ever remember


the inspiring encouragement of my supervisor MR. P.S
RAYCHAUDHARI at every step during the period of the present
study.

I am thankful to my institute and the faculty for their constant


support and guidance throughout my project work. I am bound to
thank other staff members for their stimulating support.

I would like to give my special thanks to my PARENTS , their


constant support enabled me to complete this project work
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CERTIFICATE

This is to certify that this dissertation project named “A Study of

Risk and Return Analysis of Equity Mutual Funds” has been

made by Mohammad Majid of MBA-Gen under the guidance of

Mr. P.S. Raychaudhari and has completed it sucessfully.

Mohammad Majid Mr. P.S. Raychaudhari


(signature) (signature)
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ABSTRACT

Mutual Funds (MF) have become one of the most attractive ways
for the average person to invest their money. It is said that bank
investment is the first priority of people to invest their savings and
the second place is for investment is held by mutual funds and th
ere afte r other avenues. A Mutual Fund pools resources from
thousands of investors and then diversifies its investment into
many different holdings such as stocks, bonds, or Government
securities in order to provide high relative safety and returns as per
the scheme principles.

The Project is a “FINANCE PROJECT” which tries to explain in


layman’s language about the history, growth, & pros and cons of
investing in Mutual Funds and the second part of it deals with the
analysis of risk and returns of equity schemes of different Mutual
Fund Companies.

The main objective of the project was to get an overview of


Mutual Fund Industry, its set up, its working and to find out the
risks and returns of equity schemes of different Mutual Fund
Companies.

The project includes a brief idea about the growth of MF industry


(History), the broad idea about the organization and concept of MF
and SEBI Guidelines on Mutual Funds. There are many
improvements pending in the field and it has to happen as soon as
possible so as to call the MF industry as an Organized and well-
developed sector.
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The past performance of MF is not necessarily indicative of future


performance of the scheme and no AMC guarantees Returns and or
safety of Principal.
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INTRODUCTION TO MUTUAL FUNDS

MUTUAL FUNDS - THE CONCEPT


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

A mutual fund is a professionally managed type of collective


investment scheme that pools money from many investors and
invests it in stocks, bonds, short- term money market instruments,
and/or other securities. The mutual fund will have a fund manager
that trades the pooled money on a regular basis. As of early 2008,
the worldwide value of all mutual funds totals more than $26
trillion. In the rest of the world, mutual fund is used as a generic
term for various types of collective investment vehicles, such as
unit trusts, open-ended investment companies (OEICs), unitized
insurance funds, and undertakings for collective investments in
transferable securities.

Mutual funds can invest in many kinds of securities. The most


common are cash instruments, stock, and bonds, but there are
hundreds of sub-categories. Stock funds, for instance, can invest
primarily in the shares of a particular industry, such as technology
or utilities. These are known as sector funds. Bond funds can vary
according to risk (e.g., high-yield junk bonds or investment-grade
corporate bonds), type of issuers (e.g., government agencies,
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corporations, or municipalities), or maturity of the bonds (short- or


long-term). Both stock and bond funds can invest in primarily U.S.
securities (domestic funds), both U.S. and foreign securities (global
funds), or primarily foreign securities (international funds).

Most mutual funds' investment portfolios are continually adjusted


under the supervision of a professional manager, who forecasts
cash flows into and out of the fund by investors, as well as the
future performance of investments appropriate for the fund and
chooses those which he or she believes will most closely match the
fund's stated investment objective. A mutual fund is administered
under an advisory contract with a management company, which
may hire or fire fund managers.

Mutual funds are subject to a special set of regulatory, accounting,


and tax rules. In the U.S., unlike most other types of business
entities, they are not taxed on their income as long as they
distribute 90% of it to their shareholders and the funds meet certain
diversification requirements in the Internal Revenue Code. Also,
the type of income they earn is often unchanged as it passes
through to the shareholders. Mutual fund distributions of tax- free
municipal bond income are tax-free to the shareholder. Taxable
distributions can be either ordinary income or capital gains,
depending on how the fund earned those distributions. Net losses
are not distributed or passed through to fund investors.

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. In the last few years
Indian Mutual Fund industry has grown at a rapid pace. Some of
the top performing and best mutual funds in India are: SBI Mutual
Funds, UTI Mutual Funds, Prudential ICICI Mutual Funds and
HDFC Mutual Funds.
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The flow chart below describes broadly the working of a


mutual fund:

The following simple diagram clearly shows the working of a


mutual fund:-
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ADVANTAGES OF MUTUAL FUNDS:

Professional Management - The primary advantage of funds (at


least theoretically) 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.

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. In
other words, the more stocks and bonds you own, the less any one
of them can hurt you (think about Enron). Large mutual funds
typically own hundreds of different stocks in many different
industries. It wouldn't be possible for an investor to build this kind
of a portfolio with a small amount of money.

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.

Liquidity –

Just like an individual stock, a mutual fund allows you to request


that your shares be converted into cash at any time. Simplicity -
Buying a mutual fund is easy! Pretty well any bank has its own
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line of mutual funds, and the minimum investment is small. Most


companies also have automatic purchase plans whereby as little as
$100 can be invested on a monthly basis.

DISADVANTAGES OF MUTUAL FUNDS

Costs –

Mutual funds don't exist solely to make your life easier - all funds
are in it for a profit. The mutual fund industry is masterful at
burying costs under layers of jargon. These costs are so
complicated that in this tutorial we have devoted an entire section
to the subject.

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. 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-gains tax is triggered, which
affects how profitable the individual is from the sale. It might have
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been more advantageous for the individual to defer the capital


gains liability.
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STATEMENT OF THE PROBLEM:

“The project deals with the Overview of Mutual Industry in India


and evaluation study of Risk and Returns Equity Schemes of
different mutual fund companies”.

OBJECTIVES OF THE STUDY:

• To study Mutual Fund Industry in India.


• To study the performance of equity schemes of different
company.
• To study the Risk involved in different Schemes.
• To compare the returns of different mutual funds.

HYPOTHESIS:

H0 : There is no significant difference between the returns of


Mutual Fund Companies.

H1 : There is a significant difference in the returns of Mutual Fund


Companies.
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LITERATURE SURVEY

Investors shy away from equity mutual funds

Source: The Economic Times/ Nishant Kumar / Reuters


Mumbai: Investors are shying away from Indian equity funds as a
sustained slump in the stock market wipes out a major chunk of
their stunning gains in 2007, but the industry is not yet facing
pressure from redemptions.

Diversified stock funds delivered returns of nearly 60% in 2007, as


the benchmark stock index rose 47%.

But with the market down about a quarter so far in 2008, investors
have seen the value of their holdings cut by almost a third and have
started cutting back on new investments.

“There has been a slowdown in the flows of equity funds in the last
two months,” Sanjay Prakash, chief executive of the Indian fund
unit of HSBC, told Reuters.

“We are seeing net inflows every day, but very small amounts,”
said Prakash, whose firm saw its average monthly assets drop
0.95% to Rs184.7 billion ($4.3 billion) in the six months ending
May.
Mesmerised by a six-times rise in the stock market in the five years
to the end of 2007, investors saw a 23% drop in the March quarter
as a buying opportunity, pouring in Rs449 billion into the funds,
67% more than a year earlier.

But as the market slump persists, euphoria has given way to


caution. Flows into equity funds slumped to Rs45.9 billion in
April, the lowest since August 2006, and about Rs48 billion in
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May, data from the Association of Mutual Funds in India (AMFI)


showed.

The money is mainly coming from preset investment plans where


a fixed sum is deposited regularly into the funds. The industry
body estimates there are about 3 million such accounts.

“Slowdown is in the high net-worth and institutional segment,”


said Vikrant Gugnani, the chief executive of India’s number one
fund firm, Reliance Capital Asset Management. He said big-ticket
investors were no longer looking at stocks, shifting instead to real
estate, gold and fixed-maturity plans, which essentially close-end
bond funds are investing in securities in line with their maturity
profile.

Investors may not be topping up their funds, but they are also not
in a hurry to pull out of them. Outflows of Rs36 billion in May
were lowest since July 2006, AMFI data showed. Outflows from
equity funds in January, when the stock market hit a record high
and before dropping sharply, were more than two times those of
May, but inflows were even higher at a record Rs212.5 billion.

Equity funds are not likely to see any major redemption pressure if
the stock market held above 14,000 as investors would like to wait
for a recovery, HSBC’s Prakash said, adding there might be higher
redemptions if the market dropped below 13,000. Indian shares fell
to a 2008 low of 14,645 on June 10.

While the market was trading above 15,000 on Thursday, Credit


Suisse saw it falling to 13,000 by end-2008.
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HISTORY OF MUTUAL FUNDS


(WORLDWIDE):
When three Boston securities executives pooled their money
together in 1924 to create the first mutual fund, they had no idea
how popular mutual funds would become.

The idea of pooling money together for investing purposes started


in Europe in the mid-1800s. The first pooled fund in the U.S. was
created in 1893 for the faculty and staff of Harvard University. On
March 21st, 1924 the first official mutual fund was born. It was
called the Massachusetts Investors Trust.

After one year, the Massachusetts Investors Trust grew from


$50,000 in assets in 1924 to $392,000 in assets (with around 200
shareholders). In contrast, there are over 10,000 mutual funds in
the U.S. today totalling around $7 trillion (with approximately 83
million individual investors) according to the Investment Company
Institute.

The stock market crash of 1929 slowed the growth of mutual


funds. In response to the stock market crash, Congress passed the
Securities Act of 1933 and the Securities Exchange Act of 1934.
These laws require that a fund be registered with the SEC and
provide prospective investors with a prospectus. The SEC (U.S.
Securities and Exchange Commission) helped create the
Investment Company Act of 1940, which provides the guidelines
that all funds must comply with today.

With renewed confidence in the stock market, mutual funds began


to blossom. By the end of the 1960s there were around 270 funds
with $48 billion in assets.
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In 1976, John C. Bogle opened the first retail index fund called the
First Index Investment Trust. It is now called the Vanguard 500
Index fund. In November of 2000 it became the largest mutual
fund ever with $100 billion in assets.
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HISTORY OF INDIAN MUTUAL FUND


INDUSTRY
The history of Mutual Funds in India can be broadly divided into 4
Phases:

1. First phase (1964-1987)

The Unit Trust of India (UTI) was established in the year 1963
by passing an Act in the Parliament.

The UTI was setup by the Reserve Bank of India (RBI) and
functioned under the Regulatory and Administrative control of
the RBI.

The First scheme in the history of mutual funds was UNIT


SCHEME-64, which is popularly known as US-64.

In 1978, UTI was de-linked from RBI. The Industrial


Development Bank of India (IDBI) took over the Regulatory
and Administrative control.

At the end of the year 1988, UTI had Rs.6,700/- Crores of


Assets Under Management.

2. Second phase (1987-1993)

Entry of Public Sector Funds.

In the year 1987, public sector Mutual Funds setup by public


sector banks.
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Life Insurance Corporation of India (LIC) and General


Insurance Corporation of India (GIC) came in to existence.

State Bank of India Mutual Fund was the first non-UTI Mutual
Fund.

The following are the non-UTI Mutual Funds at initial stages-

• SBI Mutual Fund in June 1987.


• Can Bank Mutual Fund in December 1987.
• LIC Mutual Fund in June 1989.
• Punjab National Bank Mutual Fund in August 1989.
• Indian Bank Mutual Fund in November 1989.
• Bank of India Mutual Fund in June 1990.
• GIC Mutual Fund in December 1990.
• Bank of Baroda Mutual Fund in October 1992.
At the end of 1993, the entire Mutual Fund Industry had Assets
under Management (AUM) of Rs. 47, 004/- Crores.

3. Third phase (1993-2003)

Entry of Private Sector Funds - a wide choice to Indian Mutual


Fund investors.

In 1993, the first Mutual Fund Regulations came into existence,


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.
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In 1996, the 1993 Securities Exchange Board of India (SEBI)


Mutual Funds Regulations were substituted by a more
comprehensive and revised Mutual Fund regulator.

The number of Mutual Fund houses went on increasing, with


many foreign mutual funds setting up funds in India.

In this time, the Mutual Fund industry has witnessed several


Mergers & Acquisitions.

4. Fourth phase (since 2003 February)

Following the repeal of the UTI Act in February 2003, it was


(UTI) bifurcated into 2 separate entities.

One is the specified undertaking of the UTI with asset under


management of Rs.29,835/- Crores as at the end of January
2003.

The second is the UTI Mutual Funds Limited, sponsored by


State Bank of India, Punjab National Bank, Bank of Baroda and
Life Insurance Corporation of India.

UTI is functioning under an Administrator and under the Rules


framed by the Government of India and does not come under
the purview of the Mutual Fund Regulations.

The UTI Mutual Funds Limited is registered with SEBI and


functions under the Mutual Funds Regulations.
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Association of Mutual Funds in India


(AMFI)

With the increase in Mutual Fund players in India, a need for


Mutual Fund Association in India was generated to function as a
non-profit organization. Association of Mutual Funds in India
(AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies


(AMC) which has been registered with Securities Exchange Board
of India (SEBI). Till date all the AMCs are that have launched
mutual fund schemes are its members. It functions under the
supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian


Mutual Fund Industry to a professional and healthy market with
ethical lines enhancing and maintaining standards. It follows the
principle of both protecting and promoting the interests of mutual
funds as well as their unit holders.

The Association of Mutual Funds of India works with 30 registered


AMCs of the country. It has certain defined objectives which
juxtaposes the guidelines of its Board of Directors.

The objectives are as follows:

• This Mutual Fund Association of India maintains high


professional and ethical standards in all areas of operation of the
industry.

• It also recommends and promotes the top class business practices


and code of conduct which is followed by members and related
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people engaged in the activities of Mutual Fund and Asset


Management. The agencies who are by any means connected or
involved in the field of capital markets and financial services also
involved in this code of conduct of the association.

The sponsors of Association of Mutual Funds in India:

A. Bank Sponsored

1. Joint Ventures - Predominantly Indian


- Canara Robeco Asset Management Company Limited
- SBI Funds Management Private Limited

2. Others –
-UTI Asset Management Company Ltd

B. Institutions
- LIC Mutual Fund Asset Management Company Limited

C. Private Sector

1. Indian
- Benchmark Asset Management Company Pvt. Ltd.
- DBS Cholamandalam Asset Management Ltd.
- Deutsche Asset Management (India) Pvt. Ltd.
- Edelweiss Asset Management Limited
- Escorts Asset Management Limited
- IDFC Asset Management Company Private Limited
- JM Financial Asset Management Private Limited
- Kotak Mahindra Asset Management Company Limited
(KMAMCL)
- Quantum Asset Management Co. Private Ltd.
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- Reliance Capital Asset Management Ltd.


- Religare Asset Management Company Pvt. Ltd.
- Sahara Asset Management Company Private Limited
- Tata Asset Management Limited - Taurus Asset Management
Company Limited

2. Foreign
- AIG Global Asset Management Company (India) Pvt. Ltd.
- FIL Fund Management Private Limited
- Fortis Investment Management (India) Pvt. Ltd.
- Franklin Templeton Asset Management (India) Private Limited
- Goldman Sachs Asset Management (India) Private Limited
- Mirae Asset Global Investments (India) Pvt. Ltd.

3. Joint Ventures - Predominantly Indian


- Birla Sun Life Asset Management Company Limited
- DSP BlackRock Investment Managers Limited
- HDFC Asset Management Company Limited
- ICICI Prudential Asset Mgmt.Company Limited
- Religare AEGON Asset Management Company Pvt. Ltd.
- Sundaram BNP Paribas Asset Management Company Limited

4. Joint Ventures - Predominantly Foreign


- Baroda Pioneer Asset Management Company Limited
- Bharti AXA Investment Managers Private Limited
- HSBC Asset Management (India) Private Ltd.
- ING Investment Management (India) Pvt. Ltd.
- JPMorgan Asset Management India Pvt. Ltd.
- Morgan Stanley Investment Management Pvt.Ltd.
- Principal Pnb Asset Management Co. Pvt. Ltd.
- Shinsei Asset Management (India) Pvt. Ltd.
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TYPES OF MUTUAL FUNDS

Open-end fund

The term mutual fund is the common name for what is classified as
an open-end investment company by the SEC. Being open-ended
means that, at the end of every day, the fund issues new shares to
investors and buys back shares from investors wishing to leave the
fund.

Mutual funds must be structured as corporations or trusts, such as


business trusts, and any corporation or trust will be classified by
the SEC as an investment company if it issues securities and
primarily invests in non-government securities. An investment
company will be classified by the SEC as an open-end investment
company if they do not issue undivided interests in specified
securities (the defining characteristic of unit investment trusts or
UITs) and if they issue redeemable securities. Registered
investment companies that are not UITs or open-end investment
companies are closed- end funds. Neither UITs nor closed-end
funds are mutual funds (as that term is used in the US).

Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is


often structured as an open-end investment company. ETFs
combine characteristics of both mutual funds and closed-end
funds. ETFs are traded throughout the day on a stock exchange,
just like closed- end funds, but at prices generally approximating
the ETF's net asset value. Most ETFs are index funds and track
stock market indexes. Shares are issued or redeemed by
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institutional investors in large blocks (typically of 50,000). Most


investors purchase and sell shares through brokers in market
transactions. Because the institutional investors normally purchase
and redeem in in kind transactions, ETFs are more efficient than
traditional mutual funds (which are continuously issuing and
redeeming securities and, to effect such transactions, continually
buying and selling securities and maintaining liquidity positions)
and therefore tend to have lower expenses.

Exchange-traded funds are also valuable for foreign investors who


are often able to buy and sell securities traded on a stock market,
but who, for regulatory reasons, are limited in their ability to
participate in traditional U.S. mutual funds.

Equity funds

Equity funds, which consist mainly of stock investments, are the


most common type of mutual fund. Equity funds hold 50 percent
of all amounts invested in mutual funds in the United States. Often
equity funds focus investments on particular strategies and certain
types of issuers.

Bond funds

Bond funds account for 18% of mutual fund assets.Types of bond


funds include term funds, which have a fixed set of time (short-,
medium-, or long-term) before they mature. Municipal bond funds
generally have lower returns, but have tax advantages and lower
risk. High-yield bond funds invest in corporate bonds, including
high-yield or junk bonds. With the potential for high yield, these
bonds also come with greater risk.
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Money market funds

Money market funds hold 26% of mutual fund assets in the United
States. Money market funds entail the least risk, as well as lower
rates of return. Unlike certificates of deposit (CDs), money market
shares are liquid and redeemable at any time.

Funds of funds

Funds of funds (FoF) are mutual funds which invest in other


underlying mutual funds (i.e., they are funds comprised of other
funds). The funds at the underlying level are typically funds which
an investor can invest in individually. A fund of funds will
typically charge a management fee which is smaller than that of a
normal fund because it is considered a fee charged for asset
allocation services. The fees charged at the underlying fund level
do not pass through the statement of operations, but are usually
disclosed in the fund's annual report, prospectus, or statement of
additional information. The fund should be evaluated on the
combination of the fund-level expenses and underlying fund
expenses, as these both reduce the return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by


the same advisor), although some invest in funds managed by other
(unaffiliated) advisors. The cost associated with investing in an
unaffiliated underlying fund is most often higher than investing in
an affiliated underlying because of the investment management
research involved in investing in fund advised by a different
advisor. Recently, FoFs have been classified into those that are
actively managed (in which the investment advisor reallocates
frequently among the underlying funds in order to adjust to
changing market conditions) and those that are passively managed
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(the investment advisor allocates assets on the basis of on an


allocation model which is rebalanced on a regular basis).

The design of FoFs is structured in such a way as to provide a


ready mix of mutual funds for investors who are unable to or
unwilling to determine their own asset allocation model. Fund
companies such as TIAA-CREF, American Century Investments,
Vanguard, and Fidelity have also entered this market to provide
investors with these options and take the "guess work" out of
selecting funds. The allocation mixes usually vary by the time the
investor would like to retire: 2020, 2030, 2050, etc. The more
distant the target retirement date, the more aggressive the asset
mix.

Hedge funds

Hedge funds in the United States are pooled investment funds with
loose SEC regulation and should not be confused with mutual
funds. Some hedge fund managers are required to register with
SEC as investment advisers under the Investment Advisers Act.
The Act does not require an adviser to follow or avoid any
particular investment strategies, nor does it require or prohibit
specific investments. Hedge funds typically charge a management
fee of 1% or more, plus a "performance fee" of 20% of the hedge
fund's profits. There may be a "lock-up" period, during which an
investor cannot cash in shares. A variation of the hedge strategy is
the 130-30 fund for individual investors.

Equity funds

A stock fund or equity fund is a fund that invests in Equities more


commonly known as stocks. Such funds are typically held either in
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stock or cash, as opposed to Bonds, notes, or other securities. This


may be a mutual fund or exchange-traded fund. The objective of an
equity fund is long-term growth through capital appreciation,
although dividends and interest are also sources of revenue.
Specific equity funds may focus on a certain sector of the market
or may be geared toward a certain level of risk.

Stock funds can be distinguished by several properties. Funds may


have a specific style, for example, value or growth. Funds may
invest in solely the securities from one country, or from many
countries. Funds may focus on some size of company, that is,
small-cap, large-cap, et cetera. Funds which are managed by
professionals are said to be actively managed where as Index funds
try as best as possible to mirror specific market indices.
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FUND TYPES

Index Fund

Index funds invest in securities to mirror a market index, such as


the S&P 500. An index fund buys and sells securities in a manner
that mirrors the composition of the selected index. The fund's
performance tracks the underlying index's performance. Turnover
of securities in an index fund's portfolio is minimal. As a result, an
index fund generally has lower management costs than other types
of funds.

Growth Fund

A growth fund invests in the stocks of companies that are growing


rapidly. Growth companies tend to reinvest all or most of their
profits for research and development rather than pay dividends.
Growth funds are focused on generating capital gains rather than
income.

Value Fund

This is a fund that invests in "value" stocks. Companies rated as


value stocks usually are older, established businesses that pay
dividends.

Sector (Specialized)

Fund A Fund that tracks one area of industry, is called a Sector


Fund. Most sector funds have a minimum of 25% of their assets
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invested in its specialty. These funds offer high appreciation


potential, but may also pose higher risks to the investor. Examples
include gold funds (gold mining stock), technology funds, and
utility funds.

Income Fund

An income fund stresses current income over growth. The funds


objective may be accomplished by investing in the stocks of
companies with long histories of dividend payments, such as utility
stocks, blue-chip stocks, and preferred stocks.

Option income funds invest in securities on which options may by


written and earn premium income from writing options. They may
also earn capital gains from trading options at a profit. These funds
seek to increase total return by adding income generated by the
options to appreciation on the securities held in the portfolio.

Balanced Fund

Balanced Funds invest in stocks for appreciation and bonds for


income. The goal is to provide a regular income payment to the
fund holder, while increasing its principal.

Asset Allocation Fund

These funds split investments between growth stocks, income


stocks/bonds, and money market instruments or cash for stability.
Fund advisers switch the percentage of holdings in each asset
category according to the performance of that group. Example: A
fund may have 60% invested in stocks, 20% in bonds, and 20% in
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cash or money market. If the stock market is expected to do well,


that could switch to 80% stocks, and 10% each in both bond and
cash investments. Conversely, if the stock market is expected to
perform poorly, the fund would decrease its stock holdings.

Dynamic Fund of Funds

Portfolio disclosure will be limited to details of underlying


schemes and will not include investments made by these Schemes.
Dynamic asset allocation may result in higher transaction costs.
Since Scheme may invest predominantly in diversified Large Cap
Equity or Liquid Schemes of Mutual Funds registered with SEBI,
its performance may depend on that of these underlying schemes.
Dynamic asset allocation may result in higher transaction costs.
The Scheme is closed-ended; investors can redeem units only
during the last three business days of every third month from the
date of allotment of units, at NAV- related prices.

Portfolio disclosure will be limited to details of underlying


schemes and will not include investments made by these Schemes.
Dynamic asset allocation may result in higher transaction costs.
Since Scheme may invest predominantly in Diversified Equity
schemes and Liquid/ Short Term / Floating Rate Schemes of
Mutual Funds registered with SEBI, its performance may depend
on that of these underlying schemes.
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IMPORTANT TERMINOLOGIES

Capitalization

Fund managers and other investment professionals have varying


definitions of mid-cap, and large-cap ranges.

Growth vs. Value

Another distinction is made between growth funds, which invest in


stocks of companies that have the potential for large capital gains,
and value funds, which concentrate on stocks that are undervalued.
Value stocks have historically produced higher returns; however,
financial theory states this is compensation for their greater risk.
Growth funds tend not to pay regular dividends. Income funds tend
to be more conservative investments, with a focus on stocks that
pay dividends. A balanced fund may use a combination of
strategies, typically including some level of investment in bonds,
to stay more conservative when it comes to risk, yet aim for some
growth.

Index funds Vs Active

Management An index fund maintains investments in companies


that are part of major stock (or bond) indices, such as the S&P 500,
while an actively managed fund attempts to outperform a relevant
index through superior stock-picking techniques. The assets of an
index fund are managed to closely approximate the performance of
a particular published index. Since the composition of an index
changes infrequently, an index fund manager makes fewer trades,
on average, than does an active fund manager. For this reason,
32

index funds generally have lower trading expenses than actively


managed funds, and typically incur fewer short-term capital gains
which must be passed on to shareholders. Additionally, index
funds do not incur expenses to pay for selection of individual
stocks (proprietary selection techniques, research, etc.) and
deciding when to buy, hold or sell individual holdings. Instead, a
fairly simple computer model can identify whatever changes are
needed to bring the fund back into agreement with its target index.

Certain empirical evidence seems to illustrate that mutual funds do


not beat the market and actively managed mutual funds under-
perform other broad-based portfolios with similar characteristics.
One study found that nearly 1,500 U.S. mutual funds under-
performed the market in approximately half of the years between
1962 and 1992. Moreover, funds that performed well in the past
are not able to beat the market again in the future (shown by
Jensen, 1968; Grimblatt and Sheridan Titman, 1989).

Risk Factors

Mutual funds, like securities investments, are subject to market


risks and there is no guarantee against loss in the Scheme or that
the Scheme's objectives will be achieved.

As with any investment in securities, the NAV of the Units issued


under the Scheme can go up or down depending on various factors
and forces affecting capital markets.

Past performance of the Sponsor or the AMC or the mutual funds


managed by the Sponsor does not indicate the future performance
of the Scheme.

Investments in the Scheme will be affected by trading volumes,


settlement periods, volatility, price fluctuations, inability to sell
33

securities, disinvestment of holdings of any unlisted stocks prior to


target date of disinvestment, credit risk and interest rate risk and
the risks associated with investments in derivatives.

Specific Risk Factor

The investors of the Scheme shall bear the recurring expenses of


the Scheme in addition to the expenses of the underlying schemes.
Hence the investor under the Scheme may receive lower pre-tax
returns than what they may receive if they had invested directly in
the underlying schemes in the same proportions. The portfolio
disclosure of the Scheme will be limited to providing the
particulars of the underlying schemes where the Scheme has
invested and will not include the investments made by the
underlying schemes. Since the Scheme proposes to invest at least
in 5 underlying schemes, the significant underperformance in even
one of the underlying schemes may adversely affect the
performance of the Scheme. Investments in underlying equity/debt
schemes will have all the risks associated with such schemes.

Expenses and TER's

Mutual funds bear expenses similar to other companies. The fee


structure of a mutual fund can be divided into two or three main
components: management fee, non- management expense. All
expenses are expressed as a percentage of the average daily net
assets of the fund.
34

Management fees

The management fee for the fund is usually synonymous with the
contractual investment advisory fee charged for the management of
a fund's investments. However, as many fund companies include
administrative fees in the advisory fee component, when
attempting to compare the total management expenses of different
funds, it is helpful to define management fee as equal to the
contractual advisory fee + the contractual administrator fee. This
"levels the playing field" when comparing management fee
components across multiple funds.

Contractual advisory fees may be structured as "flat-rate" fees, i.e.,


a single fee charged to the fund, regardless of the asset size of the
fund. However, many funds have contractual fees which include
breakpoints, so that as the value of a fund's assets increases, the
advisory fee paid decreases. Another way in which the advisory
fees remain competitive is by structuring the fee so that it is based
on the value of all of the assets of a group or a complex of funds
rather than those of a single fund.

Non-management expenses

Apart from the management fee, there are certain non-management


expenses which most funds must pay. Some of the more significant
(in terms of amount) non- management expenses are: transfer
agent expenses (this is usually the person you get on the other end
of the phone line when you want to purchase/sell shares of a fund),
custodian expense (the fund's assets are kept in custody by a bank
which charges a custody fee), legal/audit expense, fund accounting
expense, registration expense (the SEC charges a registration fee
when funds file registration statements with it), board of
directors/trustees expense (the disinterested members of the board
35

who oversee the fund are usually paid a fee for their time spent at
meetings), and printing and postage expense (incurred when
printing and delivering shareholder reports).

Investor fees and expenses

Fees and expenses borne by the investor vary based on the


arrangement made with the investor's broker. Sales loads (or
contingent deferred sales loads (CDSL)) are not included in the
fund's total expense ratio (TER) because they do not pass through
the statement of operations for the fund. Additionally, funds may
charge early redemption fees to discourage investors from
swapping money into and out of the fund quickly, which may force
the fund to make bad trades to obtain the necessary liquidity. For
example, Fidelity Diversified International Fund (FDIVX) charges
a 1 percent fee on money removed from the fund in less than 30
days.

Brokerage commissions

An additional expense which does not pass through the statement


of operations and cannot be controlled by the investor is brokerage
commissions. Brokerage commissions are incorporated into the
price of the fund and are reported usually 3 months after the fund's
annual report in the statement of additional information. Brokerage
commissions are directly related to portfolio turnover (portfolio
turnover refers to the number of times the fund's assets are bought
and sold over the course of a year). Usually the higher the rate of
the portfolio turnover, the higher the brokerage commissions. The
advisors of mutual fund companies are required to achieve "best
execution" through brokerage arrangements so that the
commissions charged to the fund will not be excessive.
36

SEBI REGULATIONS ON MUTUAL


FUNDS:

The Government brought Mutual Funds in the Securities market


under the regulatory framework of the Securities and Exchange
board of India (SEBI) in the year 1993. SEBI issued guidelines in
the year 1991 and comprehensive set of regulations relating to the
organization and management of Mutual Funds in 1993.

SEBI REGULATIONS 1993 (20.1.1993)

The regulations bar Mutual Funds from options trading, short


selling and carrying forward transactions in securities. The Mutual
Funds have been permitted to invest only in transferable securities
in the money and capital markets or any privately placed
debentures or securities debt. Restrictions have also been placed on
them to ensure that investments under an individual scheme, do not
exceed five per cent and investment in all the schemes put together
does not exceed 10 per cent of the corpus. Investments under all
the schemes cannot exceed 15 per cent of the funds in the shares
and debentures of a single company.

SEBI grants registration to only those mutual funds that can prove
an efficient and orderly conduct of business. The track record of
sponsors, a minimum experience of five years in the relevant field
of Investment, financial services, integrity in business transactions
and financial soundness are taken into account. The regulations
also prescribe the advertisement code for the marketing schemes of
Mutual Funds, the contents of the trust deed, the investment
management agreement and the scheme-wise balance sheet.
Mutual Funds are required to be formed as trusts and managed by
separately formed as trusts and managed by separately formed
37

Asset Management Companies (AMC). The minimum net worth of


such AMC is stipulated at Rs.5 crores of which, the Mutual Fund
should have a custodian who is not associated in any way with the
AMC and registered with the SEBI.

The minimum amount raised in closed-ended scheme should be


Rs.20 Crores and for the open- ended scheme, Rs.50 Crores. In
case, the amount collected falls short of the minimum prescribed,
the entire amount should be refunded not later than six weeks from
the date of closure of the scheme. If this is not done, the fund is
required to pay an interest at the rate of15 per cent per annum from
the date of expiry of six weeks. In addition to these, the Mutual
Funds are obliged to maintain books of accounts and provision for
depreciation and bad debts. Further, the Mutual Funds are now
under the obligation to publish scheme-wise annual reports, furnish
six month un-audited accounts, quarterly statements of the
movements of the net asset value and quarterly portfolio
statements to the SEBI. There is also a stipulation that the Mutual
Funds should ensure adequate disclosures to the investors. SEBI
has agreed to let the Mutual Funds buy back the units of their
schemes.

However, the funds cannot advertise this facility in their


prospectus. SEBI is also empowered to appoint an auditor to
investigate into the books of accounts or the affairs of the Mutual
Funds. SEBI can suspend the registration of Mutual Funds in the
case of deliberate manipulation, price rigging or deterioration of
the financial position of Mutual Funds.

SEBI REGULATIONS, 1996

SEBI announced the amended Mutual Fund Regulations on


December 9, 1996 covering Registration of Mutual Funds,
Constitution and Management of Mutual funds and Operation of
38

Trustees, Constitution and Management of Asset Management


Companies (AMCs) and custodian schemes of MFs, investment
objectives and valuation policies, general obligations, inspection
and audit. The revision has been carried out with the objective of
improving investor protection, imparting a greater degree of
flexibility and promoting innovation.

The increase in the number of MFs and the types of schemes


offered by them necessitated uniform norms for valuation of
investments and accounting practices in order to enable the
investors to judge their performance on a comparable basis. The
Mutual Fund regulations issued in December 1996 provide for a
scheme-wise report and justification of performance, disclosure of
large investments which constitute a significant portion of the
portfolio and disclosure of the movements in the unit capital. The
existing Asset Management Companies are required to increase
their net worth from Rs.10 crores within one year from the date of
notification of the amended guidelines. AMCs are also allowed to
do other fund-based businesses such as providing investment
management services to offshore funds, other Mutual Funds,
Venture Capital Funds and Insurance Companies. The amended
guidelines retained the former fee structure of the AMCs of 1.25%
of weekly average Net Asset Value (NAV) up to Rs.100 crores and
1% of NAV for net assets in excess of Rs.100 crores.

The consent of the investors has to be obtained for bringing about


any change in the fundamental attributes of the scheme on the
basis of which the unit holders had made initial investments. The
regulation empowers the investor. The amended guidelines require
portfolio disclosure, standardization of accounting policies,
valuation norms for NAV and pricing. The regulations also sought
to address the areas of misuse of funds by introducing prohibitions
and restrictions on affiliate transactions and investment exposures
to companies belonging to the group of sponsors of mutual funds.
The payment of early bird incentive for various schemes has been
39

allowed provided they are viewed as interest payment of early bird


incentive for early investment with full disclosure.

The various Mutual Funds are allowed to mention an indicative


return for schemes for fixed income securities. In 1998-99 the
Mutual Funds Regulation were amended to permit Mutual Funds
to trade in derivatives for the purpose of hedging and portfolio
balancing. SEBI registered Mutual Funds and Fund managers are
permitted to invest in overseas markets, initially within an overall
limit of US $500 million and a ceiling for an individual fund at
US$ 50 million.

SEBI made (October 8, 1999) investment guidelines for MFs more


stringent. The new guidelines restrict MFs to invest no more than
10% of NAV of a scheme in share or share related instruments of a
single company. MFs in rated debt instruments of a single issue is
restricted to 15% of NAV of the scheme (up to 20% with prior
approval of Board of Trustees or AMC), restrictions in un- rated
debt instruments and in shares of unlisted companies.

The new norms also specify a maximum limit of 25% of NAV for
any scheme for investment in listed group companies as against an
umbrella limit of 25% of NAV of all schemes taken together
earlier. SEBI increased (June 7, 2000) the maximum investment
limit for MFs in listed companies from 5% to 10% of NAV in
respect of open-ended funds. Changes in fundamental attributes of
a scheme was also allowed without the consent of three fourths of
unit holders provided the unit holders are given the exit option at
NAV without any exit load.

MFs are also not to make assurance or claim that is likely to


mislead investors. They are also banned from making claims in
advertisement based on past performance.
40

Comparison of Mutual Funds with other


products/investment opportunities:

The mutual fund sector operates under stricter regulations as


compared to most other investment avenues. Apart from the tax
efficiency and legal comfort how do mutual funds compare with
other products? Here the investment in Mutual Funds is compared
with:

1. Company Fixed Deposits.


2. Bank Fixed Deposits.
3. Bonds and Debentures.
4. Equity.
5. Life Insurance

1. Company Fixed Deposits versus Mutual Funds

Fixed deposits are unsecured borrowings by the company


accepting the deposits. Credit rating of the fixed deposit
program is an indication of the inherent default risk in the
investment.

The moneys of investors in a mutual fund scheme are invested


by the AMC in specific investments under that scheme. These
investments are held and managed in- trust for the benefit of
scheme’s investors. On the other hand, there is no such direct
correlation between a company’s fixed deposit mobilization,
and the avenues where these resources are deployed. A
corollary of such linkage between mobilization and investment
is that the gains and losses from the mutual fund scheme
entirely flow through to the investors. Therefore, there can be
no certainty of yield, unless a named guarantor assures a return
41

or, to a lesser extent, if the investment is in a serial gilt scheme.


On the other hand, the return under a fixed deposit is certain,
subject only to the default risk of the borrower.

Both fixed deposits and mutual funds offer liquidity, but subject
to some differences:

• The provider of liquidity in the case of fixed deposits is the


borrowing company. In mutual funds, the liquidity provider is
the scheme itself (for open-end schemes) or the market (in the
case of closed-end schemes).

• The basic value at which fixed deposits are en-cashed is not


subject to market risk. However, the value at which units of a
scheme are redeemed entirely depends on the market. If
securities have gained in value during the period, then the
investor can even earn a return that is higher than what she
anticipated when she invested. Conversely, she could also end
up with a loss.

• Early encashment of fixed deposits is always subject to a


penalty charged by the company that accepted the fixed deposit.
Mutual fund schemes also have the option of charging a penalty
on “early” redemption of units (by way of an ‘exit load’). If the
NAV has appreciated adequately, then despite the exit load, the
investor could earn a capital gain on her investment.

2. Bank Fixed Deposits versus Mutual Funds

Bank fixed deposits are similar to company fixed deposits. The


major difference is that banks are more stringently regulated
than are companies. They even operate under stricter
requirements regarding Statutory Liquidity Ratio (SLR) and
Cash Reserve Ratio (CRR). While the above are causes for
42

comfort, bank deposits too are subject to default risk. However,


given the political and economic impact of bank defaults, the
Government as well as Reserve Bank of India (RBI) tries to
ensure that banks do not fail.

Further, bank deposits up to Rs 1, 00, 000 are protected by the


Deposit Insurance and Credit Guarantee Corporation (DICGC),
so long as the bank has paid the required insurance premium of
Rs 0.05 per annum for every Rs 100 of deposits. The monetary
ceiling of Rs 100,000 is for all the deposits in all the branches of
a bank, held by the depositor in the same capacity and right.

3. Bonds and Debentures versus Mutual Funds

As in the case of fixed deposits, credit rating of the bond /


debenture is an indication of the inherent default risk in the
investment. However, unlike fixed deposits, bonds and
debentures are transferable securities.

While an investor may have an early encashment option from


the issuer (for instance through a “put” option), generally
liquidity is through a listing in the market.

Implications of this are:

• If the security does not get traded in the market, then the
liquidity remains on paper. In this respect, an open-end scheme
offering continuous sale / re-purchase option is superior.

• The value that the investor would realize in an early exit is


subject to market risk. The investor could have a capital gain or
a capital loss. This aspect is similar to a MF scheme.
43

It is possible for an astute investor to earn attractive returns by


directly investing in the debt market, and actively managing the
positions. Given the market realities in India, it is difficult for
most investors to actively manage their debt portfolio. Further,
at times, it is difficult to execute trades in the debt market even
when the transaction size is as high as Rs 1 crore. In this
respect, investment in a debt scheme would be beneficial.

Debt securities could be backed by a hypothecation or mortgage


of identified fixed and or current assets (secured bonds /
debentures). In such a case, if there is a default, the identified
assets become available for meeting redemption requirements.
An unsecured bond/ debenture is for all practical purposes like a
fixed deposit, as far as access to assets is concerned.

The investment in mutual fund scheme is held by a Custodian


for the benefit of all investors in that scheme. Thus, the
securities that relate to a scheme are ring-fenced for the benefit
of its investors.

4. Equity versus Mutual Funds

Investment in both equity and mutual funds are subject to


market risk. An investor holding an equity security that is not
traded in the market place has a problem in realizing value from
it. But investment in an open-end mutual fund eliminates this
direct risk of not being able to sell the investment in the market.
An indirect risk remains, because the scheme has to realize its
investments to pay investors. The AMC is however in a better
position to handle the situation.

Another benefit of equity mutual fund schemes is that they give


investors the benefit of portfolio diversification through a small
44

investment. For instance, an investor can take an exposure to the


index by investing a mere Rs 5,000 in an index fund.

5. Life Insurance versus Mutual Funds

Life insurance is a hedge against risk – and not really an


investment option. So, it would be wrong to compare life
insurance against any other financial product. Occasionally on
account of market inefficiencies or mis-pricing of products in
India, life insurance products have offered a return that is higher
than a comparable “safe” fixed return security – thus, you are
effectively paid for getting insured! Such opportunities are not
sustainable in the long run.
45

FUTURE OF MUTUAL FUNDS IN


INDIA

At the end of 2006 March, Indian mutual fund industry reached Rs.
2, 57, 499 crores. It is estimated that by 2010 March-end, the total
assets of all scheduled commercial banks should be Rs. 40, 90, 000
crores.

The annual composite rate of growth is expected 13.4% during the


rest of the decade. In the last 5 years we have seen annual growth
rate of 9%. According to the current growth rate, by year 2010,
mutual fund assets will be double.

Going by the above facts and generally, mutual funds have often
been considered a good route to invest and earn returns with
reasonable safety. Small and big investors have both invested in
instruments that have suited their needs. And so equity and debt
funds have attracted investments alike. The performance of the
investments, equity in particular, for the last one-year, has however
been disappointing for the investors.

The fall in NAVs of equity funds, and it is really steep in some,


even to the extent of 60-70 percent, has left investors disgusted.
Such backlash was only to be expected when funds, in a hurry to
post good returns invested in volatile tech stocks. The move,
though good under conducive market conditions, is the point of
rebuttal now. Owing to volatility in market and profit warnings by
some IT majors, tech stocks have been on the downhill journey and
the result is fall in NAVs of most equity funds.

This hurts the investor but then investments in equity are never
safe. Mutual funds are not just guilty of mismanaging their risks as
the recent survey by Pricewaterhouse Coopers indicates but also
46

not educating their investors enough on the risks facing them. It is


for the mutual benefit of the investors as well as mutual funds that
investor is educated enough or else an agitated investor might route
his investments to other avenues that are considered safe. Debt
funds are safe investments and generate returns far in excess of
what other so-called safe avenues such as banks generate. Despite
this, the inflow of funds in debt funds and banks is by no means
comparable. The factor contributing to this is the lack of
understanding caused by improper guidance by the intermediaries.

Till now, Investor education has been one of the issues, less cared
for, by the industry. The industry focused upon the amounts and
not why a person wanted to invest or whether a particular product
suited him or not. While educating the customer might not have
been on the cards earlier, the things are beginning to change now.

With SEBI passing on the guidelines, the funds will engage in


investor education. The guidelines state that funds will utilize the
income earned on unclaimed money lying with them for a period
exceeding three years to educate the investors. AMFI has started a
certification program for intermediaries. This will be made
mandatory for the intermediaries and is aimed at educating the
investors about the risks attached to the schemes and to inculcate
adequate skills into the intermediaries to help the investors choose
the right kind of fund. Steps such as these are aimed at obliterating
various flaws in the system by standardizing the knowledge base of
intermediaries, as they are the interface between the investor and
the funds.

Although the investors themselves are also guilty of picking funds


that were not suited for them, the blame can’t lie square on their
shoulders alone. The industry has also got to bear some of it. With
such programs becoming mandatory, it can be ensured to some
extent that ignorance ceases to be an aspect associated with the
industry.
47

Till now, investors have been ignorant about the kind of fund to be
picked or how to select a fund. Teaching an investor how to select
a fund is thus an important aspect. Educated investors can, on their
part, ask pertinent questions to find funds that qualify to be in their
portfolio as per their risk bearing capacity.

It would not be improper to say that investor education is still the


key to managing the funds handed over by investors. The investors
are important to the industry and likewise, mutual funds form an
important avenue for an investor. It would thus be of critical
importance to educate people for an informed investor is in the
best position to pick up Schemes as per his need. This would also
infuse some confidence in the minds of the investors who under
the current scenario seem to be losing faith on account of the falls
suffered in recent times.

An educated and informed intermediary stands the best chance of


understanding the needs of the client and also of winning his
confidence through proper guidance. As it is, investor education
will remain a key issue for mutual funds in the longer run and
educating the intermediaries will be the first step towards it.
48

NEED AND SCOPE OF THE STUDY

NEED FOR THE STUDY:

The evaluation study of risk and returns of Equity Schemes of


different Mutual Funds is useful to know the performance of
schemes and it helps the investors to invest in Mutual Fund
schemes Equity.
The performance of different schemes however helps the
prospective investors to choose the best scheme that suits his
objective.

SCOPE OF THE STUDY:

• The study was limited to just finding the risk and returns
associated with the schemes.
• The study covers the schemes provided by six different
companies.
• The study covers the period of past two years from January 2007
to January 2009.
• The study covers only the open-ended funds.

LIMITATIONS OF THE STUDY:

•The study was limited only to six companies.


•Time duration for the study was very short as it was restricted to
just two years.
•The study was limited to the extent of just finding the risks and
returns of each Scheme.
49

PRODUCT PROFILE

Tata Equity Management Fund

Objective: Tata Equity Management Fund seeks to generate capital


appreciation & provide long term growth opportunities by
investing in a portfolio constituted of equity & equity related
instruments and to generate consistent returns by investing in debt
and money market securities.

Structure: Open-ended Equity Fund

Inception Date: May 15, 2006

Plans and Options under the Plan: Growth, Dividend

Face Value (Rs/Unit): Rs. 10

Minimum Investment: Rs. 5000

Entry Load: Nil.

Exit Load: In case of redemption before expiry of close ended


period, proportionate unamortized NFO expenses will be recovered
from the redemption proceeds of the investors.

Birla SunLife Equity Plan

Objective: To provide growth along with tax benefits to investors.

Structure: Open Ended Inception Date : February 16, 1999


50

Plans and Options under the Plan : Dividend and Growth Option.

Face Value (Rs/Unit): Rs. 10

Minimum Investment: Rs.5000

Entry Load: 2.25% for amount < 5 crores. Nil, for amount > 5
crore.

Exit Load: Nil.

DWS Alpha Equity Fund

Objective: The fund seeks to achieve capital appreciation through


investment in Asian companies (excluding Japan), which have
high growth potential.

Structure: Open ended scheme.

Inception Date: January 16, 2008

Plans and Options under the Plan: Growth and Dividend options.

Face Value (Rs/Unit): Rs 10

Minimum Investment: Rs 5000/-

Entry Load: 2.25% for less than 5 crores.

Exit Load : For less than 5 crores- 1% if redeemed within 6


months, 0.5% if redeemed after 6 months but within 1 year. For
greater than 5 crores but less than 25 crores-1% if redeemed within
6 months. Greater than 25 crores- Nil
51

HSBC Equity Fund

Objective: HSBC Equity Fund (HEF) aims to generate long term


capital growth from an actively managed portfolio of equity and
equity related securities.

Structure: Open-ended Equity Scheme

Inception Date: December 03, 2002

Plans and Options under the Plan: Open-ended Equity Scheme

Face Value (Rs/Unit): Rs. 10

Minimum Investment: Rs.5000

Entry Load: For investments below Rs. 5 crores, Entry load is


2.25%. For Investments of Rs. 5 crores and above, Entry Load is
Nil.

Exit Load: If redeemed before 6 Months; and Amount less than 5


crores, Exit load is 0.5%. For Amount greater than 5 crore, Exit
load is Nil.

LIC MF Equity Fund

Objective: LIC MF Equity Fund seeks to obtain maximum possible


capital growth consistent with reasonable levels of safety and
security by investing the funds mainly in equities and also in debts
and other permitted instruments of capital and money market.

Structure: Open-ended Equity Scheme Inception Date: January 11,


1993
52

Plans and Options under the Plan : Growth, Dividend.

Face Value (Rs/Unit): Rs. 10 Minimum Investment: Rs. 2000

Entry Load: For investments below Rs.1 crore, Entry load is


2.25%. For Investments of Rs. 1 crore and above, Entry Load is
Nil.

Exit Load: Nil.

UTI Equity Fund

Objective: Capital appreciation through investments in Equities


and Equity related instruments, convertible debentures, derivatives
in India and also in overseas markets.

Structure: Open Ended Equity Fund

Inception Date: April 20, 1992 Plans and Options under the Plan:

Plans and Options under the Plan : Growth Option, Income


Option

Face Value (Rs/Unit): Rs. 10

Minimum Investment: Rs. 5,000/-

Entry Load: 2.25% for < Rs.2 crores; Nil for >= Rs.2 crores.

Exit Load: Nil.


53

DESIGN OF THE STUDY

INTRODUCTION:

A detail study is done on Equity Schemes provided by six Mutual


Fund Companies. Analysis is done on the Risk and Returns of
Equity Scheme provided by the organization, where it is useful to
the investors to mobilize the savings in the respective schemes
provided by the Company.

RESEARCH DESIGN:

A Research design is a method and procedure for acquiring


information needed to solve the problem. A research design is the
basic plan that helps in the data collection or analysis. It specifies
the type of information to be collected the sources and data
collection procedure.

METHOD OF RESEARCH DESIGN USED UNDER


STUDY IS:

DESCRIPTIVE RESEARCH

Descriptive research is study of existing facts to come to a


conclusion. In this research an attempt has been made to analyze
the past performance of the equity schemes and to know the
benefits to the investors. The study is done on equity schemes
provided by six companies to know the company’s performance
for the past two years and to know the risk and returns of the
funds.
54

OPERATIONAL DEFINITIONS OF
THE CONCEPT

RISK:

The dictionary meaning of risk is the possibility of loss or injury.


Any rational investor, before investing his/her investible wealth in
the security, analyzes the risk associated with a particular security.
The actual return he receives from a security may vary from his
expected return and the risk is expressed in term of variability of
return. The down side of risk may be caused by several factors,
either common to all securities or specific to a particular security.

Investor in general would like to analyze the risk factors and a


through knowledge of a risk helps him to plan his portfolio in such
a manner so as to minimize risk associated with the investment.

Risk consists of two components:

• The systematic risk.


• The unsystematic risk.

The systematic risk is caused by the factors external to a particular


company and uncontrollable by the company. The systematic risk
affects the market as a whole.

In case of unsystematic risk the factors are specific, unique and


related to a particular industry or company.
55

Systematic Risk:

The systematic risk affects the entire market. The economic


conditions, political situations and the sociological changes affect
the security market. These factors are beyond the control of the
corporate and the investor. The investor cannot avoid them.

This is subdivided into:

i. Market Risk
ii. Interest Rate Risk
iii. Purchasing Power Risk.

Unsystematic Risk:

The unsystematic risk is unique and peculiar to a firm or an


industry. Unsystematic Risk stems from managerial inefficiency,
technological change in the production process, availability of raw
material changes in the customer preference, and labor problems.
The nature and magnitude of the above-mentioned factors differ
from industry to industry, and company to company. They have to
be analyzed separately for each industry and firm. Broadly,
unsystematic risk can be classified into:

i. Business Risk
ii. Financial Risk

Risk Measurement:

Understanding the nature of risk is not adequate unless the investor


or analyst is capable of expressing it in some quantitative terms.
Measurements cannot be assured of cent percent accuracy because
56

risk is caused by numerous factors such as social, political,


economic and managerial efficiency. The statistical tools used to
quantify risk are:

i. Standard Deviation:

a. A measure of the dispersion of a set of data from its mean. The


more spread apart the data is, the higher the deviation.

b. In finance, standard deviation is applied to the annual rate of


return of an investment to measure the investment's volatility
(risk).

A volatile stock would have a high standard deviation. In mutual


funds, the standard deviation tells us how much the return on the
fund is deviating from the expected normal returns. Standard
deviation can also be calculated as the square root of the variance.

ii. Beta:

Beta describes the relationship between the securities return and


the index returns.

Beta = + 1.0
One percent change in market index returns causes exactly one
percent change in the security return. It indicates that the security
moves in tandem with the market.

Beta = + 0.5
One percent change in the market index return causes 0.5 percent
change in the security return. The security is less volatile compared
to the market.
57

Beta = + 2.0
One percent change in the market index return causes 2 percent
change in the security return. The security return is more volatile.
When there is a decline of 10% in the market return, the security
with beta of 2 would give a negative return of 20%. The security
with more than 1 beta value is considered to be risky.

Negative Beta
Negative beta value indicates that the security return moves in the
opposite direction to the market return. A security with a negative
beta of -1 would provide a return of 10%, if the market return
declines by 10% and vice-versa.

RATE OF RETURN:

The compounded annual return on a mutual fund scheme


represents the return to investors from a scheme since the date of
issue. It is calculated on NAV basis or price basis. On NAV basis
it reflects the return generated by the fund manager on NAV. On
price basis it reflects the return to investors by way of market or
repurchase price

Net Asset Value (NAV):

The net asset value of the fund is the cumulative market value of
the assets fund of its liabilities. In other words, if the fund is
dissolved or liquidated, by selling off all the assets in the fund, this
is the amount that the shareholders would collectively own. This
gives rise to the concept of net asset value per unit, which is the
value, represented by the ownership of one unit in the fund. It is
calculated simply by dividing the net asset value of the fund by
thenumber of units. However, most people refer loosely to the
58

NAV per unit as NAV, ignoring the “per unit”. We also abide by
the same convention.

Computation of Net Asset Value

The Net Asset Value (NAV) of the units will be determined as of


every working day and for such other days as may be required for
the purpose of transaction of units. The NAV shall be calculated in
accordance with the following formula, or such other formula as
may be prescribed by SEBI from time to time.

NAV = Market Fair value of scheme’s investments + Receivables


+ Accrued Income + Other Assets – Accrued Expenses – Payables
– Other Liabilities / Number of Units Outstanding
59

METHODOLOGY OF DATA
COLLECTION:

SOURCES OF DATA

SECONDARY DATA used for the study:

• Internet sources.

• Newspapers.

• Announcements and publishing’s by the company.


60

TOOLS & TECHNIQUES USED FOR


THE STUDY

To analyze the data in the project various statistical tools are used.
They are:

i. Beta:

β = N∑XY - (∑X)( ∑Y) / N∑(Y*Y) - ( ∑Y)^2

β = Beta of the fund;


N = Number of Observations;
X = Weekly return of NAV;
Y = Weekly return of the Index.

ii. Standard Deviation:

σ = (∑(d^2)/N - (∑d/N)^2)^1/2
d = (X - (∑X/N))

Where σ = Standard Deviation;


N = Number of observations;
d = Deviations from actual mean;

iii. Rate of Return for a period:

X = B-A+D/B

Where,
A = NAV at the end of the period of the period;
61

B = NAV at the beginning of the period;


D = Dividend paid during the period;

iv. Analysis of Variance (ANOVA):

ANOVA has been conducted using inbuilt function of Microsoft


Excel. Single factor ANOVA has been used for this purpose. If F-
value is less than tabulated, then we accept the null hypothesis. We
are using 5% Level of Significance. Annova is used to see if there
is a significant difference between the returns of the schemes.
62

EVALUATION OF PORTFOLIO
PERFORMANCE:

Composite Equity Portfolio Performance Measures

As late as the mid 1960s investors evaluated PM performance


based solely on the rate of return. They were aware of risk, but
didn't know how to measure it or adjust for it. Some investigators
divided portfolios into similar risk classes (based upon a measure
of risk such as the variance of return) and then compared the
returns for alternative portfolios within the same risk class.

We shall look at some measures of composite performance that


combine risk and return levels into a single value.

Treynor Portfolio Performance Measure

This measure was developed by Jack Treynor in 1965. Treynor


(helped developed CAPM) argues that, using the characteristic
line, one can determine the relationship between a security and the
market. Deviations from the characteristic line (unique returns)
should cancel out if you have a fully diversified portfolio.

Treynor's Composite Performance Measure: He was interested in a


performance measure that would apply to ALL investors regardless
of their risk preferences. He argued that investors would prefer a
CML with a higher slope (as it would place them on a higher
utility curve). The slope of this portfolio possibility line is:

Treynor Ratio = (ARp-ARf)/B


63

A larger Ti value indicates a larger slope and a better portfolio for


all investors regardless of their risk preferences. The numerator
represents the risk premium and the denominator represents the
risk of the portfolio; thus the value, T, represents the portfolio's
return per unit of systematic risk. All risk averse investors would
want to maximize this value.

The Treynor measure only measures systematic risk--it


automatically assumes an adequately diversified portfolio.

We can compare the T measures for different portfolios. The


higher the T value, the better the portfolio performance. For
instance, the T value for the market is:

Ti = (ARp-ARf)/B

In this expression, < m = 1.

Demonstration of Comparative Treynor Measures: Assume that


we are an administrator of a large pension fund (i.e. Terry Teague
of Boeing) and we are trying to decide whether to renew contracts
with our three money managers. We must measure how they have
performed. Assuming we have the following results for each
individual's performance:

Avg. annual rate of


Investment manager Beta
return
Z 0.12 0.9
B 0.16 1.05
Y 0.18 1.2

We can calculate the T values for each investment manager:


Tm = (0.14 – 0.08)/1.00 = 0.06
64

TZ = (0.12 – 0.08)/0.09 = 0.044


TB = (0.16 – 0.08)/1.05 = 0.076
TY = (0.18 – 0.08)/1.20 = 0.083

These results show that Z did not even "beat-the-market." Y had


the best performance, and both B and Y beat the market. [To find
required return, the line is: .08 + .06(Beta) ]

One can achieve a negative T value if you achieve very poor


performance or very good performance with low risk. For instance,
if you had a positive beta portfolio but your return was less than
that of the risk-free rate (which implies you weren't adequately
diversified or that the market performed poorly) then you would
have a (-) T value. If you have a negative beta portfolio and you
earn a return higher than the risk-free rate, then you would have a
high T-value. Negative T values can be confusing, thus you may
be better off plotting the values on the SML or using the CAPM (in
this case, .08+.06(Beta)) to calculate the required return and
compare it with the actual return.

Sharpe Portfolio Performance Measure

This measure was developed in 1966. It is as follows:

Si=(ARp-ARf)/std dev

It is VERY similar to Treynor's measure, except it uses the total


risk of the portfolio rather than just the systematic risk. The Sharpe
measure calculates the risk premium earned per unit of total risk.
In theory, the S measure compares portfolios on the CML, whereas
the T measure compares portfolios on the SML

Demonstration of Comparative Sharpe Measures:


65

Sample returns an SDs for four nd portfolios (and the calculated


Sharpe Index) are given below:

Avg. annual rate SD of Sharpe


Portfolio
of return Return Measure
B 0.13 0.18 0.278
O 0.17 0.22 0.409
P 0.16 0.23 0.348
MARKET 0.14 0.2 0.3

Thus, portfolio O did the best, and B failed to beat the market. We
could draw the CML given this information: CML=.08 + (0.30)
ation: (0.30)SD

Treynor Measure vs. Sharpe Measure. The Sharpe measure


evaluates the portfolio manager on the basis of both rate of return
and diversification (as it considers total portfolio risk in the
denominator). If we had a fully diversified portfolio, then both the
inator). Sharpe and Treynor measures should given us the same
ranking. A poorly diversified asures portfolio could have a higher
ranking under the Treynor measure than for the Sharpe measure.

Jenson Portfolio Performance

Measure This measure (as are all the previous measures) is based
on the CAPM: We can express the expectations formula (the above
formula) in terms of realized rates of return by adding an error
term to reflect the difference between E(Rj) vs actual Rj:

Rp – RFR + beta(Rm-RFR)

, By subtracting the risk free rate from both sides,


66

p rp – [rf p (rM – rf )]

we get: Using this format, one would not expect an intercept in the
regression. However, if we had superior portfolio managers who
were actively seeking o undervalued out securities, they could earn
a higher risk-adjusted return than those implied in the model. So, if
we examined returns of superior portfolios, they would have a
significant positi intercept. positive An inferior manager would
have a significant negative intercept. A manager that was not
anager clearly superior or inferior woul have a statistically
insignificant intercept. We would test ld the constant, or intercept,
in the following regression:

p rp – [rf p (rM – rf )]

This constant term would tell us how much of the return is


attributable to the manager's ability to derive above-average
returns adjusted for risk.

Applying the Jenson Measure. This requires that you use a


different risk risk-free rate for each time interval during the sa
sample period. You must subtract the risk-free rate from the free
returns during each observation period rather than calculating the
average return and average risk-free rate as in the Sharpe and
Treynor measures. Also, the Jensen measure does not evaluate the
ability of the portfolio manager to diversify, as it calc calculates
risk premiums in terms of systematic risk (beta). For evaluating
diversified portfolios (such a atic most mutual funds) this is
probably adequate. Jensen finds that mutual fund returns are
typically correlated with the market at rates above 0.90.
67

ANALYSIS AND INTEPRETATIONS


68

NAV-Net Asset Value


(Closing month end values: Equity Funds)

BIRLA
TIME DEUTSCHE HSBC UTI LIC TATA SUNLIFE
January 11.8178 73.0236 32.86 21.5973 11.339 183.53
February 12.3544 73.9072 33.62 22.5309 11.3209 188.79
March 10.6932 67.5688 31.06 19.6142 10.3624 172.01
April 10.9721 64.9581 29.64 18.4244 10.6306 167.37
May 12.1329 72.6258 33.21 21.0207 10.8756 187.76
June 12.2531 75.3107 34.94 21.2184 10.9052 203.87
July 12.3014 76.9942 34.98 21.5221 11.2891 209.45
August 12.6771 77.9247 35.06 21.9315 11.1341 212.68
September 13.0877 80.017 35.96 22.8593 11.5812 219.63
October 15.1709 89.453 40.16 25.6692 12.4419 242.73
November 16.7393 105.7896 44.57 30.8318 13.3582 269.86
December 17.1336 109.2251 45.11 32.8405 13.8287 283.85
January 17.6996 115.0424 48.33 34.8438 14.5373 308.33
February 15.4311 101.7038 42.13 28.6223 12.5876 254.44
March 14.3606 93.8314 39.98 26.4151 11.9001 234
April 13.8577 87.9695 37.94 22.313 11.0109 211.51
May 14.84 97.1612 41.24 26.21 12.0565 232.89
June 13.3027 91.8995 38.75 22.859 11.4104 215.16
July 11.9187 77.6541 32.34 19.2678 9.6343 172.22
August 13.1324 83.9529 35.32 21.7883 10.4812 188.61
September 12.8837 82.4644 35.87 21.2754 10.3467 189.22
October 11.4472 75.343 33.24 19.3474 9.2684 170.79
November 8.6122 60.6914 27.16 15.0982 7.8354 137.68
December 7.6261 55.5332 24.3 12.8871 7.1906 120.52
January 8.3681 60.5767 26.62 15.1599 7.9427 136.66
69

BSE SENSEX

AVERAGE
MARKET MARKET
RETURNS RETURNS (RM-
TIME INDEX (RM) (ARM) RM-ARM ARM)^2
JANUARY 14,090.92 -0.08 -0.04676 -0.0332 0.0011
FEBRUARY 12,938.09 0.0104 -0.04676 0.0571 0.0033
MARCH 13,072.10 0.0612 -0.04676 0.108 0.0117
APRIL 13,872.37 0.048 -0.04676 0.0948 0.009
MAY 14,544.46 0.0073 -0.04676 0.0541 0.0029
JUNE 14,650.51 0.0615 -0.04676 0.1083 0.0117
JULY 15,550.99 -0.0149 -0.04676 0.0319 0.001
AUGUST 15,318.60 0.1288 -0.04676 0.1755 0.0308
SEPTEMBER 17291.1 0.1473 -0.04676 0.1941 0.0377
OCTOBER 19837.99 -0.0239 -0.04676 0.0228 0.0005
NOVEMBER 19363.19 0.0477 -0.04676 0.0945 0.0089
DECEMBER 20286.99 -0.13 -0.04676 -0.0833 0.0069
JANUARY 17648.71 -0.004 -0.04676 0.0428 0.0018
FEBRUARY 17578.72 -0.11 -0.04676 -0.0633 0.004
MARCH 15644.44 0.105 -0.04676 0.1518 0.023
APRIL 17287.31 -0.0504 -0.04676 -0.0036 0
MAY 16,415.57 0.01799 -0.04676 0.0288 0.0008
JUNE 13,461.60 0.0664 -0.04676 0.1132 0.0128
JULY 14,355.75 0.0145 -0.04676 0.0613 0.0038
AUGUST 14,564.53 -0.117 -0.04676 -0.0702 0.0049
SEPTEMBER 12,860.43 -0.2389 -0.04676 -0.1921 0.0369
OCTOBER 9,788.06 -0.071 -0.04676 -0.0243 0.0006
NOVEMBER 9,092.72 0.061 -0.04676 0.1078 0.0116
DECEMBER 9,647.31 -0.0231 -0.04676 0.0237 0.0006
JANUARY 9,424.24 -1 -0.04676 -0.9532 0.9087
SUM(RM-
ARM)^2 1.135
70

RISK FREE RATE

TIME RISK FREE RETURN (RF)


JANUARY 4.25
FEBRUARY 4.25
MARCH 4.25
APRIL 4.25
MAY 4.25
JUNE 4.25
JULY 4.25
AUGUST 4.25
SEPTEMBER 4.25
OCTOBER 4.25
NOVEMBER 4.25
DECEMBER 4
JANUARY 4
FEBRUARY 4
MARCH 4
APRIL 3.75
MAY 3.75
JUNE 3.75
JULY 3.75
AUGUST 3.75
SEPTEMBER 3.75
OCTOBER 3.75
NOVEMBER 4.25
DECEMBER 4.25
JANUARY 4.25

SUM RF 101.75
ARF 0.0424
71

4.3
4.2
4.1
4
RETURN

3.9 Series1
3.8
3.7
3.6
3.5

Y
Y

Y
P T UL Y
CH

P T U LY
CH
R
AY

R
JA ER

JA ER
AY
AR

AR
AR
BE

BE
AR

AR
B

B
M

M
J

J
NU

NU

NU
EM

EM
M

M
M

VE
VE
JA

NO
NO
SE

SE
TIME

ABBREVITIONS

RM MARKET RETURNS

ARM AVERAGE MARKET RETURNS

RF RISK FREE RETURN

ARF AVERAGE RISK FREE RETURN

RP ASSET RETURN

ARP AVERAGE ASSET RETURN

SML SECURITIES MARKET LINE


72

DEUTSCHE

(RP-
RP- RM- ARP)*(RM- (RP-
TIME NAV RP ARP ARP ARM ARM) ARP)^2
-
JANUARY 11.8178 0.045406 -0.051 0.0964 0.03324 -0.0032 0.0093
FEBRUARY 12.3544 -0.13446 -0.051 -0.0835 0.0571 -0.0048 0.007
MARCH 10.6932 0.026082 -0.051 0.0771 0.108 0.0083 0.0059
APRIL 10.9721 0.105796 -0.051 0.1568 0.0948 0.0149 0.0246
MAY 12.1329 0.009907 -0.051 0.0609 0.0541 0.0033 0.0037
JUNE 12.2531 0.003942 -0.051 0.0549 0.1083 0.0059 0.003
JULY 12.3014 0.030541 -0.051 0.0815 0.0319 0.0026 0.0066
AUGUST 12.6771 0.032389 -0.051 0.0834 0.1755 0.0146 0.007
SEPTEMBER 13.0877 0.159172 -0.051 0.2102 0.1941 0.0408 0.0442
OCTOBER 15.1709 0.103382 -0.051 0.1544 0.0228 0.0035 0.0238
NOVEMBER 16.7393 0.023555 -0.051 0.0746 0.0945 0.007 0.0056
DECEMBER 17.1336 0.033035 -0.051 0.084 -0.0833 -0.007 0.0071
JANUARY 17.6996 -0.12817 -0.051 -0.0772 0.0428 -0.0033 0.006
FEBRUARY 15.4311 -0.06937 -0.051 -0.0184 -0.0633 0.0012 0.0003
MARCH 14.3606 -0.03502 -0.051 0.016 0.1518 0.0024 0.0003
APRIL 13.8577 0.070885 -0.051 0.1219 -0.0036 -0.0004 0.0149
MAY 14.84 -0.10359 -0.051 -0.0526 0.0288 -0.0015 0.0028
JUNE 13.3027 -0.10404 -0.051 -0.053 0.1132 -0.006 0.0028
JULY 11.9187 0.101832 -0.051 0.1528 0.0613 0.0094 0.0234
AUGUST 13.1324 -0.01894 -0.051 0.0321 -0.0702 -0.0023 0.001
SEPTEMBER 12.8837 -0.1115 -0.051 -0.0605 -0.1921 0.0116 0.0037
OCTOBER 11.4472 -0.24766 -0.051 -0.1967 -0.0243 0.0048 0.0387
NOVEMBER 8.6122 -0.1145 -0.051 -0.0635 0.1078 -0.0068 0.004
DECEMBER 7.6261 0.097297 -0.051 0.1483 0.0237 0.0035 0.022
JANUARY 8.3681 -1 -0.051 -0.949 -0.9532 0.9046 0.9006
Sum 1.0032 1.1681
73

Arp = -0.0510
(Rm – Arm)^2 = 1.1351
B = 0.8838
Std Dev = 0.2206
Arm = -0.0468
ARf = 0.0424
SML = -0.0364

Measures:

Treynor -0.1057

Sharpe -0.4234

Jensen -0.0146
74

HSBC

(RP-
RP- RM- ARP)*(RM- (RP-
TIME NAV RP ARP ARP ARM ARM) ARP)^2
JANUARY 73.0236 0.0121 -0.0451 0.05718 -0.0332 -0.0019 0.0033
FEBRUARY 73.9072 -0.08576 -0.0451 -0.04068 0.0571 -0.00232 0.0017
MARCH 67.5688 -0.03864 -0.0451 0.00644 0.108 0.000696 0
APRIL 64.9581 0.118041 -0.0451 0.16312 0.0948 0.015457 0.0266
MAY 72.6258 0.036969 -0.0451 0.08205 0.0541 0.004436 0.0067
JUNE 75.3107 0.022354 -0.0451 0.06743 0.1083 0.0073 0.0045
JULY 76.9942 0.012085 -0.0451 0.05717 0.0319 0.001821 0.0033
AUGUST 77.9247 0.02685 -0.0451 0.07193 0.1755 0.012625 0.0052
SEPTEMBER 80.017 0.117925 -0.0451 0.16301 0.1941 0.031632 0.0266
OCTOBER 89.453 0.182628 -0.0451 0.22771 0.0228 0.005198 0.0519
NOVEMBER 105.79 0.032475 -0.0451 0.07756 0.0945 0.007327 0.006
DECEMBER 109.225 0.05326 -0.0451 0.09834 -0.0833 -0.00819 0.0097
JANUARY 115.042 -0.11595 -0.0451 -0.07087 0.0428 -0.00303 0.005
FEBRUARY 101.704 -0.07741 -0.0451 -0.03233 -0.0633 0.002045 0.001
MARCH 93.8314 -0.06247 -0.0451 -0.01739 0.1518 -0.00264 0.0003
APRIL 87.9695 0.104487 -0.0451 0.14957 -0.00364 -0.00054 0.0224
MAY 97.1612 -0.05415 -0.0451 -0.00907 0.02877 -0.00026 0.0001
JUNE 91.8995 -0.15501 -0.0451 -0.10993 0.11316 -0.01244 0.0121
JULY 77.6541 0.081114 -0.0451 0.12619 0.06126 0.007731 0.0159
AUGUST 83.9529 -0.01773 -0.0451 0.02735 -0.0702 -0.00192 0.0007
SEPTEMBER 82.4644 -0.08636 -0.0451 -0.04128 -0.1921 0.007931 0.0017
OCTOBER 75.343 -0.19447 -0.0451 -0.14939 -0.0243 0.003627 0.0223
NOVEMBER 60.6914 -0.08499 -0.0451 -0.03991 0.1078 -0.0043 0.0016
DECEMBER 55.5332 0.09082 -0.0451 0.1359 0.02366 0.003215 0.0185
JANUARY 60.5767 -1 -0.0451 -0.95492 -0.9532 0.910268 0.9119
Sum 0.983755 1.1589
75

Arp -0.0451
(Rm – Arm)^2 1.1351
B 0.8667
Std Dev 0.2197
Arm -0.0468
ARf 0.0424
SML -0.0349

Measures:

Treynor -0.1009

Sharpe -0.3981

Jensen -0.0102
76

UTI

(RP-
RM- ARP)*(RM-
TIME NAV RP ARP RP-ARP ARM ARM) (RP-ARP)^2

JANUARY 32.86 0.023128 -0.04644 0.069568 -0.0332 -0.00231 0.0048398

FEBRUARY 33.62 -0.07615 -0.04644 -0.02971 0.0571 -0.0017 0.0008824

MARCH 31.06 -0.04572 -0.04644 0.000722 0.108 7.80E-05 5.21E-07

APRIL 29.64 0.120445 -0.04644 0.166885 0.0948 0.015814 0.0278507

MAY 33.21 0.052093 -0.04644 0.098533 0.0541 0.005327 0.0097087

JUNE 34.94 0.001145 -0.04644 0.047585 0.1083 0.005152 0.0022643

JULY 34.98 0.002287 -0.04644 0.048727 0.0319 0.001552 0.0023743

AUGUST 35.06 0.02567 -0.04644 0.07211 0.1755 0.012657 0.0051999

SEPTEMBER 35.96 0.116796 -0.04644 0.163236 0.1941 0.031677 0.0266461

OCTOBER 40.16 0.109811 -0.04644 0.156251 0.0228 0.003567 0.0244143

NOVEMBER 44.57 0.012116 -0.04644 0.058556 0.0945 0.005532 0.0034288

DECEMBER 45.11 0.071381 -0.04644 0.117821 -0.0833 -0.00981 0.0138818

JANUARY 48.33 -0.12828 -0.04644 -0.08184 0.0428 -0.0035 0.0066986

FEBRUARY 42.13 -0.05103 -0.04644 -0.00459 -0.0633 0.000291 2.11E-05

MARCH 39.98 -0.05103 -0.04644 -0.00459 0.1518 -0.0007 2.10E-05

APRIL 37.94 0.086979 -0.04644 0.133419 -0.0036 -0.00049 0.0178007

MAY 41.24 -0.06038 -0.04644 -0.01394 0.0288 -0.0004 0.0001943

JUNE 38.75 -0.16542 -0.04644 -0.11898 0.1132 -0.01346 0.0141561

JULY 32.34 0.092146 -0.04644 0.138586 0.0613 0.00849 0.0192061

AUGUST 35.32 0.015572 -0.04644 0.062012 -0.0702 -0.00436 0.0038455

SEPTEMBER 35.87 -0.07332 -0.04644 -0.02688 -0.1921 0.005165 0.0007226

OCTOBER 33.24 -0.18291 -0.04644 -0.13647 -0.0243 0.003313 0.0186246

NOVEMBER 27.16 -0.1053 -0.04644 -0.05886 0.1078 -0.00634 0.0034647

DECEMBER 24.3 0.095473 -0.04644 0.141913 0.0237 0.003358 0.0201394

JANUARY 26.62 -1 -0.04644 -0.95356 -0.9532 0.908972 0.9092767


Sum 0.967873 1.1356629
77

Arp -0.04644
(Rm – Arm)^2 1.1351
B 0.8527
Std Dev 0.2175
Arm -0.0468
ARf 0.0424
SML -0.0336

Measures:

Treynor -0.1042

Sharpe -0.4084

Jensen -0.0128
78

LIC

(RP-
ARP)*(RM- (RP-
TIME NAV RP ARP RP-ARP RM-ARM ARM) ARP)^2

JANUARY 21.5973 0.043228 -0.04854 0.091768 -0.0332 -0.00305 0.008421

FEBRUARY 22.5309 -0.12945 -0.04854 -0.08091 0.0571 -0.00462 0.006547

MARCH 19.6142 -0.06066 -0.04854 -0.01212 0.108 -0.00131 0.000147

APRIL 18.4244 0.140916 -0.04854 0.189456 0.0948 0.017953 0.035894

MAY 21.0207 0.009405 -0.04854 0.057945 0.0541 0.003133 0.003358

JUNE 21.2184 0.014313 -0.04854 0.062853 0.1083 0.006804 0.003951

JULY 21.5221 0.019022 -0.04854 0.067562 0.0319 0.002153 0.004565

AUGUST 21.9315 0.042304 -0.04854 0.090844 0.1755 0.015945 0.008253

SEPTEMBER 22.8593 0.122922 -0.04854 0.171462 0.1941 0.033273 0.029399

OCTOBER 25.6692 0.20112 -0.04854 0.24966 0.0228 0.005699 0.06233

NOVEMBER 30.8318 0.06515 -0.04854 0.11369 0.0945 0.01074 0.012926

DECEMBER 32.8405 0.061001 -0.04854 0.109541 -0.0833 -0.00912 0.011999

JANUARY 34.8438 -0.17855 -0.04854 -0.13001 0.0428 -0.00556 0.016904

FEBRUARY 28.6223 -0.07711 -0.04854 -0.02857 -0.0633 0.001808 0.000817

MARCH 26.4151 -0.15529 -0.04854 -0.10675 0.1518 -0.0162 0.011396

APRIL 22.313 0.174652 -0.04854 0.223192 0.00364 -0.00081 0.049815

MAY 26.21 -0.12785 -0.04854 -0.07931 0.02877 -0.00228 0.00629

JUNE 22.859 -0.1571 -0.04854 -0.10856 0.11316 -0.01228 0.011786

JULY 19.2678 0.130814 -0.04854 0.179354 0.06126 0.010987 0.032168

AUGUST 21.7883 -0.02354 -0.04854 0.025 -0.0702 -0.00176 0.000625

SEPTEMBER 21.2754 -0.09062 -0.04854 -0.04208 -0.1921 0.008086 0.001771

OCTOBER 19.3474 -0.21963 -0.04854 -0.17109 -0.0243 0.004154 0.029271

NOVEMBER 15.0982 -0.14645 -0.04854 -0.09791 0.1078 -0.01055 0.009586

DECEMBER 12.8871 0.176362 -0.04854 0.224902 0.02366 0.005321 0.050581

JANUARY 15.1599 -1 -0.04854 -0.95146 -0.9532 0.90697 0.905276

Sum 0.96547 1.314073


79

Arp -0.0464
(Rm – Arm)^2 1.1351
B 0.8527
Std Dev 0.2175
Arm -0.0468
ARf 0.0424
SML -0.0336

Measures:

Treynor -0.1042

Sharpe -0.4084

Jensen -0.0128
80

TATA

(RP-
RM- ARP)*(RM- (RP-
TIME NAV RP ARP RP-ARP ARM ARM) ARP)^2

JANUARY 11.339 -0.0016 -0.05324 0.051644 -0.0332 -0.00172 0.002667

FEBRUARY 11.3209 -0.08467 -0.05324 -0.03143 0.0571 -0.0018 0.000988

MARCH 10.3624 0.025882 -0.05324 0.079122 0.108 0.008544 0.00626

APRIL 10.6306 0.023047 -0.05324 0.076287 0.0948 0.007229 0.00582

MAY 10.8756 0.002722 -0.05324 0.055962 0.0541 0.003025 0.003132

JUNE 10.9052 0.035203 -0.05324 0.088443 0.1083 0.009575 0.007822

JULY 11.2891 -0.01373 -0.05324 0.03951 0.0319 0.001259 0.001561

AUGUST 11.1341 0.040156 -0.05324 0.093396 0.1755 0.016393 0.008723

SEPTEMBER 11.5812 0.074319 -0.05324 0.127559 0.1941 0.024753 0.016271

OCTOBER 12.4419 0.073646 -0.05324 0.126886 0.0228 0.002896 0.0161

NOVEMBER 13.3582 0.035222 -0.05324 0.088462 0.0945 0.008357 0.007826

DECEMBER 13.8287 0.051241 -0.05324 0.104481 -0.0833 -0.0087 0.010916

JANUARY 14.5373 -0.13412 -0.05324 -0.08088 0.0428 -0.00346 0.006541

FEBRUARY 12.5876 -0.05462 -0.05324 -0.00138 -0.0633 8.71E-05 1.90E-06

MARCH 11.9001 -0.07472 -0.05324 -0.02148 0.1518 -0.00326 0.000462

APRIL 11.0109 0.09496 -0.05324 0.1482 -0.00364 -0.00054 0.021963

MAY 12.0565 -0.05359 -0.05324 -0.00035 0.02877 -1.00E-05 1.22E-07

JUNE 11.4104 -0.15566 -0.05324 -0.10242 0.11316 -0.01159 0.010489

JULY 9.6343 0.087905 -0.05324 0.141145 0.06126 0.008647 0.019922

AUGUST 10.4812 -0.01283 -0.05324 0.040407 -0.0702 -0.00284 0.001633

SEPTEMBER 10.3467 -0.10422 -0.05324 -0.05098 -0.1921 0.009795 0.002599

OCTOBER 9.2684 -0.15461 -0.05324 -0.10137 -0.0243 0.002461 0.010276

NOVEMBER 7.8354 -0.08229 -0.05324 -0.02905 0.1078 -0.00313 0.000844

DECEMBER 7.1906 0.104595 -0.05324 0.157835 0.02366 0.003734 0.024912

JANUARY 7.9427 -1 -0.05324 -0.94676 -0.9532 0.90249 0.896355

Sum 0.972201 1.084083


81

Arp -0.05324
(Rm – Arm)^2 1.1351
B 0.8527
Std Dev 0.2175
Arm -0.0468
ARf 0.0424
SML -0.0336

Measures:

Treynor -0.1042

Sharpe -0.4084

Jensen -0.0128
82

BIRLA SUNLIFE

(RP-
ARP)*(RM- (RP-
TIME NAV RP ARP RP-ARP RM-ARM ARM) ARP)^2

JANUARY 183.53 0.02866 -0.04827 0.07693 -0.0332 -0.00256 0.005918

FEBRUARY 188.79 -0.08888 -0.04827 -0.04061 0.0571 -0.00232 0.001649

MARCH 172.01 -0.02698 -0.04827 0.021295 0.108 0.002299 0.000454

APRIL 167.37 0.121826 -0.04827 0.170096 0.0948 0.016118 0.028933

MAY 187.76 0.085801 -0.04827 0.134071 0.0541 0.007248 0.017975

JUNE 203.87 0.02737 -0.04827 0.07564 0.1083 0.008189 0.005722

JULY 209.45 0.015421 -0.04827 0.063691 0.0319 0.002029 0.004057

AUGUST 212.68 0.032678 -0.04827 0.080948 0.1755 0.014208 0.006553

SEPTEMBER 219.63 0.105177 -0.04827 0.153447 0.1941 0.029777 0.023546

OCTOBER 242.73 0.11177 -0.04827 0.16004 0.0228 0.003653 0.025613

NOVEMBER 269.86 0.051842 -0.04827 0.100112 0.0945 0.009457 0.010022

DECEMBER 283.85 0.086243 -0.04827 0.134513 -0.0833 -0.0112 0.018094

JANUARY 308.33 -0.17478 -0.04827 -0.12651 0.0428 -0.00541 0.016005

FEBRUARY 254.44 -0.08033 -0.04827 -0.03206 -0.0633 0.002029 0.001028

MARCH 234 -0.09611 -0.04827 -0.04784 0.1518 -0.00726 0.002289

APRIL 211.51 0.101083 -0.04827 0.149353 -0.00364 -0.00054 0.022306

MAY 232.89 -0.07613 -0.04827 -0.02786 0.02877 -0.0008 0.000776

JUNE 215.16 -0.19957 -0.04827 -0.1513 0.11316 -0.01712 0.022892

JULY 172.22 0.095169 -0.04827 0.143439 0.06126 0.008787 0.020575

AUGUST 188.61 0.003234 -0.04827 0.051504 -0.0702 -0.00362 0.002653

SEPTEMBER 189.22 -0.0974 -0.04827 -0.04913 -0.1921 0.00944 0.002414

OCTOBER 170.79 -0.19386 -0.04827 -0.14559 -0.0243 0.003535 0.021198

NOVEMBER 137.68 -0.12464 -0.04827 -0.07637 0.1078 -0.00823 0.005832

DECEMBER 120.52 0.13392 -0.04827 0.18219 0.02366 0.004311 0.033193

JANUARY 136.66 -1 -0.04827 -0.95173 -0.9532 0.907227 0.90579

Sum 0.96924 1.205484


83

Arp -0.04827
(Rm – Arm)^2 1.1351
B 0.8527
Std Dev 0.2175
Arm -0.0468
ARf 0.0424
SML -0.0336

Measures:

Treynor -0.1042

Sharpe -0.4084

Jensen -0.0145
84

Measure DEUTSCHE HSBC UTI LIC TATA Sunlife

Treynor -0.1057 -0.1009 -0.1042 -0.1069 -0.1117 -0.1062


Rank III I II V VI IV

Sharpe -0.4234 -0.3981 -0.4084 -0.3886 -0.45 -0.4045


Rank V II IV I VI III

Jensen -0.0146 -0.0102 -0.0128 -0.0151 -0.0193 -0.0145


Rank IV I II V VI III

RETURNS OF MUTUAL FUNDS

DEUTSCHE HSBC UTI LIC TATA BirlaSunlife


JANUARY 0.045406 0.0121 0.023128 0.043228 -0.0016 0.02866
FEBRUARY -0.13446 -0.08576 -0.07615 -0.12945 -0.08467 -0.08888
MARCH 0.026082 -0.03864 -0.04572 -0.06066 0.025882 -0.02698
APRIL 0.105796 0.118041 0.120445 0.140916 0.023047 0.121826
MAY 0.009907 0.036969 0.052093 0.009405 0.002722 0.085801
JUNE 0.003942 0.022354 0.001145 0.014313 0.035203 0.02737
JULY 0.030541 0.012085 0.002287 0.019022 -0.01373 0.015421
AUGUST 0.032389 0.02685 0.02567 0.042304 0.040156 0.032678
SEPTEMBER 0.159172 0.117925 0.116796 0.122922 0.074319 0.105177
OCTOBER 0.103382 0.182628 0.109811 0.20112 0.073646 0.11177
NOVEMBER 0.023555 0.032475 0.012116 0.06515 0.035222 0.051842
DECEMBER 0.033035 0.05326 0.071381 0.061001 0.051241 0.086243
JANUARY -0.12817 -0.11595 -0.12828 -0.17855 -0.13412 -0.17478
FEBRUARY -0.06937 -0.07741 -0.05103 -0.07711 -0.05462 -0.08033
MARCH -0.03502 -0.06247 -0.05103 -0.15529 -0.07472 -0.09611
APRIL 0.070885 0.104487 0.086979 0.174652 0.09496 0.101083
MAY -0.10359 -0.05415 -0.06038 -0.12785 -0.05359 -0.07613
JUNE -0.10404 -0.15501 -0.16542 -0.1571 -0.15566 -0.19957
JULY 0.101832 0.081114 0.092146 0.130814 0.087905 0.095169
AUGUST -0.01894 -0.01773 0.015572 -0.02354 -0.01283 0.003234
SEPTEMBER -0.1115 -0.08636 -0.07332 -0.09062 -0.10422 -0.0974
OCTOBER -0.24766 -0.19447 -0.18291 -0.21963 -0.15461 -0.19386
NOVEMBER -0.1145 -0.08499 -0.1053 -0.14645 -0.08229 -0.12464
DECEMBER 0.097297 0.09082 0.095473 0.176362 0.104595 0.13392
JANUARY -1 -1 -1 -1 -1 -1
85

GRAPHICAL PRESENTATION OF RETURNS OF


MUTUAL FUNDS
86

Annova Single Factor

Groups Count Sum Average Variance

Column 1 25 1.22403 -0.04896 0.048665

Column 2 25 1.08182 -0.04327 0.048286

Column 3 25 1.11449 -0.04458 0.047316

Column 4 25 1.16506 -0.0466 0.054749

Column 5 25 1.27775 -0.05111 0.045165

Column 6 25 1.15849 -0.04634 0.050225

Source of
Variation SS df MS F P-value F crit

Between
groups 0.001022 5 0.000204 0.004164 0.999997 2.277044
within
group 7.065738 144 0.049068

Total 7.06676 149

LOS 5%
F-tab 2.62
87

FINDINGS

The Treynor, Sharpe and Jensen methods of analysis was carried


out on the sample taken. From the analysis done we can rank the
portfolio according to Treynor measure in the following order:
HSBC, UTI, StanChart, Birlasun Life, LIC and Tata Mutual Fund
Companies.

When the Sharpe measure was used the mutual funds can be
ranked in the order: LIC, HSBC, Birlasun Life, UTI, StanChart and
Tata mutual funds as per the decreasing values of the measure.

According to Jensen measure, the order of the funds is: HSBC,


UTI, Birlasun Life, StanChart, LIC and Tata mutual funds as per
the decreasing values of the measure.

From carrying out the ANOVA test on the returns of the mutual
funds, we see that the F calculated value is less than the tabulated
value, we hence conclusively accept the null hypothesis i.e. There
is no significant difference in the returns of the mutual fund
companies analysed.
88

CONCLUSION

From the market indices it is very clear that the markets have been
falling over the two years from which the data has been taken. As a
result, equity mutual funds that are dependent on the market have
also witnessed falling returns. From the analysis it is very clear that
the measures used to evaluate the equity mutual funds i.e. Treynor,
Jenson and Sharpe have all got negative values. The negative
values of these funds suggests that the investor stands to lose
money as long as the markets keep falling. The farther the measure
is from zero, the more they lose money. Since the measures used
here use different parameters for valuation, the ranks assigned by
each measure are different from each other.

From our analysis using Treynor Measure, we see that all the
values are negative and that HSBC Mutual Fund has the highest
value. Hence, this fund stands to lose the least as long as the
prevailing market conditions exist.

In our analysis using Sharpe’s Measure, LIC mutual Fund has the
highest value among samples used and hence stands to lose the
least amount of money.

Jensen Measure of Equity analysis tells us that HSBC Mutual Fund


performed the best in the prevailing market conditions.

It is very clear from the ANOVA test that has been carried out, We
have been able to accept the NULL Hypothesis, that there is no
significant difference between the returns of the different mutual
funds that have been analysed. Hence investing in equity mutual
funds at a time when the markets are falling is not the best
available option and also the difference in returns is minimal. Even
though mutual funds tend to hedge risks of the investor but an
89

entirely equity based fund does not perform any better than the
Sensex itself in a drastically falling market. None of the Mutual
Fund House were able to perform contrary to to the falling BSE
SENSEX index, hence providing no hedging of risk as such.
90

BIBLIOGRAPHY

BOOKS REFERRED

• Investment and Portfolio Management by Chandra Prasanna,


Tata McGraw Hill Publication, New Delhi, 2007 Edition.
• Invest India Economic Foundation’s Mutual Fund Industry
Guide, Himalayan Publications, Mumbai, 2007.

JOURNALS

• Outlook Money.
• Business World.

WEB SITES

• www.sebi.gov.in
• www.mutualfundsindia.com
• www.amfi.com
• www.nseindia.com
• www.value-research.com

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