SUMMER TRAINING REPORT ON

COMPARATIVE ANALYSIS OF MUTUAL FUND SCHEMES

Submitted in Partial Fulfillment of MBA (2007-09)
Submitted to: COMPANY GUIDE: MR. AMIT VERMA (BRANCH MANAGER) KARVY STOCK BROKING LTD. FACULTY GUIDE: MISS SACHITA

Submitted by: KAPIL KUMAR MBA-3RD SEM. ROLL NO.: 122

DECLARATION

I, KAPIL KUMAR , Roll No.(in words) One hundered twenty two, M.B.A. Final year (III semester) of Gurgaon Institute of Management hereby declare that the Summer Training Report entitled COMPARATIVE ANALYSIS OF MUTUAL FUND SCHEMES is an original work and the same has not been submitted to any other institute for the award of any other degree. A seminar presentation of the Training Report was made on _________________________ and the suggestions as approved by the faculty were duly incorporated.

Signature of the Candidate

Presentation In charge (Faculty) Head of Department

Seal

Countersigned Director
Seal

ACKNOWLEDGEMENT

Live as if your were to die tomorrow. Learn as if you were to live forever. Gandhi The satisfaction and euphoria that accompany the successful completion of any task be incomplete without mentioning the people who made it possible, whose guidance and encouragement crowned the efforts with success. I would consider it my privilege to express my gratitude and respect to having accorded me the opportunity to learn in their organization. I cannot forget the contribution of the staff of KARVY. As I troubled them through my queries at every stage of their work and I really appreciate the patience with which they resolved my doubts amidst their busy schedule, I express my sincere thanks to all of them. I would also like to thank my mentor Miss Sachita for her motivation and guidance, which were pivotal in completion of the project. I also like to thank our placement coordinator who has provided me the opportunity to do my summer training and get engaged with such a supreme organization. MR. AMIT VERMA for would

consistent

(KAPIL KUMAR )

PREFACE
Practical knowledge is an important suffix to theoretical knowledge. One cannot merely depend upon the theoretical knowledge. Classroom lectures make the fundamental concepts of management clear. They also facilitate the learning of practical things. However to develop healthy managerial and administrative skills potential managers, it is necessary that they combine their classroom learning with real life project research plays a significant role in the curriculum of Business Management Courses. Any science without its practical application or knowledge is considered to be unsystematic. Since management is a developing science, the students of Management Degree courses are required to undergo a project in the final year of the course. Thus for the fulfillment of the above requirement a project was undertaken by me on the topic COMPARATIVE ANALYSIS OF MUTUAL FUND SCHEMES. The project was a good experience and helped me in widening my knowledge and sharpening my managerial skills.

INDEX
CHAPT ER NO. CHAPTER NAME PA GE NO.
A B C D (1)

CERTIFICATE DECLARATION ACKNOWLEGEMENTS PREFACE INTRODUCTION

1.1 INTRODUCTION TO MUTUAL FUND 1.2 SIGNIFICANCE OF THE STUDY 1.3 CONCEPTULIZATION 1.4 REVIEW OF EXISTING LITERATURE 1.5 FOCUS OF THE STUDY 1.6 OBJECTIVES OF THE STUDY 1.7 ORGANIZATION OF THE STUDY

(2) (3)

COMPANY PROFIL RESEARCH METHODOLOGY

3.1 RESEARCH DESIGN 3.2 SAMPLING 3.3 SCOPE OF THE STUDY 3.4 COLLECTION OF DATA
3.5 STATISTICAL TOOLS FOR ANALYZING DATA

(4) (5) (6) (7) (8)

ANALYSIS PATTERN ANALYSIS & INTERPRETATION

LIMITATIONS OF THE STUDY CONCLUSION FINDINGS & RECOMMENDATIONS ANNEXURS

o BIBLOGRAPHY

CHAPTER 1 INTRODUCTION

1.1 INTRODUCTION TO MUTUALFUND

Mutual funds are financial intermediaries which pool the savings of numerous individuals and invest the money thus raised in a diversified portfolio of securities, including equity, bonds, debentures and other instruments, thus spreading and reducing risk. The object is to maximize the return to the investor who participates in equity indirectly through mutual funds.

Actually, it is a pool of money collected from investors and is invested according to stated investment objectives. Mutual Fund investors are like shareholders and they own the fund. They are not lenders or deposit holders in a mutual fund. Everybody else associated with a mutual fund is a service provider, who earns a fee. The money in the mutual fund belongs to the investors and nobody else. Mutual funds invest in marketable securities according to the investment objective. The value of the investments can go up or down, changing the value of the investors holdings. NAV of a mutual fund fluctuates with market price movements. The market value of the investors fund is also called as net assets. Investors hold a proportionate share of the fund in the mutual fund. New investors come in and old investors can exit, at prices related to net asset value per unit. A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Prices changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.

A mutual fund is the answer to all these situations.

It appoints professionally qualified and

experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas- researches, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the investments objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations.

A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the funds and perhaps a third one to handle registry work for the unit holders (subscribers) of the fund. In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC).

ORGANISATION OF MUTUAL FUND

A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. :

Organizational set up of a mutual fund

10

MUTUAL FUND TERMINOLOGY

1. Net Asset Value (NAV)

Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund. Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day-to-day basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.

2. Loads or No Load Fund

A load fund is one that charges a percentage of NAV of entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs. 10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these their yields/ returns. However, the investors should also consider the performance track record and service standard of the mutual fund, which are more important. Efficient funds may give higher returns in spite of loads. A no- load fund is one that does not charge for entry or exit. It means the investors can enter the

11

fund/scheme at NAV and no additional charges are payable on purchase on purchase or sale of units.

3. Sale or Repurchase/ Redemption Price

The price or NAV a unit holder is charged while investing in an open-ended scheme is called sales price. It may include sales load, if applicable. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unit holders. It may include exit load, if applicable.

TYPES OF MUTUAL FUND SCHEMES

TYPES OF MUTUAL FUNDS SCHEMES According to Maturity Period Open Ended Close Ended According to Investment Objective Equity funds Debt funds Balanced funds Money Market funds
Other types of schemes

Tax Saving schemes Special schemes Index schemes

12

1. SCHEMES ACCORDING TO MATURITY PERIOD: A mutual fund scheme can be classified into open -ended scheme or close-ended scheme depending on its maturity period.

Open-ended Fund / Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices that are declared on a daily basis. The key feature of open-ended schemes is liquidity. The AMC is always ready to accept money from investors and is always willing to return the amount to the investors.

Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the NFO (New Fund Offer) and thereafter they can buy or sell the units of the units of the scheme on the stock exchange where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual funds through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the exit routes is provided to the investor i.e. either repurchases facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. 2. SCHEMES ACCORDING TO INVESTMENT OBJECTIVE: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

Growth /Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long-term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high

13

risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Various kinds of equity funds 1. Simple diversified equity funds 2. Sector specific funds

Simple diversified equity funds

This fund invests in equity across all sectors, companies. These funds invest a pre-dominant portion of the funds mobilized in equity, and equity related products. In most cases about 80-90% of their investments are in equity shares. These funds have the freedom to invest both in primary and secondary markets for equity. A simple diversified equity fund can be made by selectind companies based on their market capitalization or some other predetermined criteria.

Sector specific funds

The investment objective of a sectoral fund is to invest in securities of a specific sector. The choice of the sector could vary depending on the investor preference and the return risk attributes of the sector. For example: banking stocks have shown quite decent growth in the last four years. Investors who wanted to participate in this sector could do so, by investing in sectoral funds. Sectoral funds are not as well diversified as simple equity funds, as they tend to focus on fewer sectors in the equity markets. They can exhibit very volatile returns.

Few examples: a) Banking sector fund b) Power sector fund c) IT sector fund d) FMCG sector fund 14

e) Petroleum sector fund

Income / Debt Oriented Schemes

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such are likely to increase in the short run and vice versa. However, long-term investors may not brother about these fluctuations.

Various kinds of debt funds

1. Diversified debt funds 2. Gilt funds 3. Focused debt funds 4. High yield debt funds 5. Liquid and money market mutual funds 6. Floating rate debt funds 7. Fixed term plan series .

Balanced schemes
A balanced fund invests in debt and security in comparable proportion. The proportion need not be exactly same but comparable. In India, balanced funds are normally invested 60% in debt and remaining in equity. A balanced fund tends to provides investors an exposure to both equity and debt markets in a one product. This provides asset call diversification, as equity and debt markets are not subject to the same kinds of external risk factors. A balanced fund gives an investor exposure in equity at a relatively lower volatility.

15

3. OTHER SCHEMES: Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity linknewed Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961

Index Funds
Index funds replicate the portfolio of a particular index such as the BSE Sensitive index; S&P NSE 50 index (NIFTY), etc. These schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

1.6 ALLOCATION OF ASSETS Investment Pattern of Mutual Funds

The most important feature in a mutual fund scheme is the allocation of its assets. The investment pattern of a scheme is to a large extent determined by the broad guidelines issued by SEBI. But these are of a generalized nature and applicable to all mutual fund schemes. What primarily distinguishes one scheme from another is the manner in which a fund manager actually deploys the amount raised from investors.

INSTRUMENTS OF INVESTMENT
At the outset, therefore, it is essential to consider the various instruments in which mutual funds deploy their funds.

16

Equity Convertible debentures Fixed income Securities

4. Short term Securities These are: a) Certificates of deposit; b) Treasury bills; c) Bill discounting; d) Commercial paper; and e) Call money These are meant for shot term investments. Their yield is relatively low but there is greater liquidity. Mutual Funds invest a portion of their money market investments in order to meet their need for money at short notice, whether to meet dividend liabilities or for redemption of units upon the maturity of a scheme.

MEASURING AND EVALUATING MUTUAL FUND PERFORMANCE

Different performance measures:

Change in NAV = NAV at the end of the period NAV at the beginning of the period Advantage: Very simple method. Disadvantage: However does not give the correct picture, in case the fund has distributed dividend. Total Return = [Dividend distributions + change in NAV] *100 Beginning NAV Advantage: Corrects the shortcomings of the first method by taking into account the divided distributed.

17

Suitable for all types of funds. Performance must be interpreted in the light of market conditions and investment objectives. Disadvantage: However, it ignores the fact that distributed dividend also get reinvested.

ROI =

[{Units held [ Div ]} / End NAV- begin NAV ] Ex div NAV ___________________________________________ *100 Beginning NAV

Advantage: Most suitable method. Overcomes the limitation of second method by considering the reinvestment of dividend. Expense Ratio -Total expense/average net assets of the fund. -Is an indicator of the funds efficiency and cost effectiveness? Income Ratio Net Investment Income Net Assets Portfolio Turnover Ratio -It measures the amount of buying and selling done by a fund. It gives an idea of how fast the fund manager is churning his portfolio. -High turnover ratio also indicates high transaction costs. -Transaction Costs include all expenses related to trading such as brokerage commission paid; stamp duty on transfer registrar fees and custodians fees. It has significant bearing a fund performance. Fund Size Small Funds 18

-Easy to manage. -Achieve objective in focused manner with limited holding. Large Funds -Economies of scale. -Lower Expense Ratio. Cash Holdings -Enables meeting redemption needs. -A cushion against decline in market prices of shares/bonds. -May reduce the return on the portfolio.

Evaluating Fund Performance

Basis of choosing an appropriate performance Benchmark: -The asset class if invests in. -An equity fund should be judged against another equity fund &equity benchmark (indices).

Equity Funds
Index Fund An Index fund invests in the stock comprising of the index in the same ratio. For example, Market Index Fund Nifty Index Fund - BSE Sensex - NIFTY

This is a passive management style.

The difference between the return of this fund, and its index benchmark can be explained by TRACKING ERROR.

Active Equity Funds The fund manager actively manages this fund. To evaluate performance in such case we have to select an appropriate benchmark. Large diversified equity fund BSE 100 Sector fund -- Sectoral Indices

Even when two funds with similar characteristics are otherwise comparable, their returns must be calculated on a comparable basis. Hence, 1. Compare returns of two funds over the same periods only.

19

2. Similarly, only average annualized compound returns are comparable. 3. Only after tax returns of two different schemes should be compared.

NET ASSET VALUE (NAV) OF MUTUAL FUND UNITS

The net asset value (NAV) of the units of a mutual fund scheme is of vital importance to determine its performance and health. Formula for Determination of NAV The calculation of NAV is based on the total market value of a mutual fund schemes assets, to which are added the following: a) Receivables. b) Accrued income. c) Other assets. From the total of the above is deducted the aggregate of: a) Accrued expenses. b) Payables. c) Other net liabilities. The number of units outstanding divides the net figure obtained, and this constitutes the NAV. Total market value of mutual fund schemes assets _ _ _ + Receivables. + Accrued income. + Other assets. ___ ___ ___ ----------------------------- Accrued expenses. - Payables. - Other net liabilities. ___ ___ ___

-----------------

20

Net figure / No. Of units outstanding ----------------------------NAV ------------------------------.

-----------------

ADDITIONAL FACILITIES PROVIDED BY MUTUAL FUNDS TO THE INVESTORS 1) Systematic Investment Plan (SIP) 2) Systematic Withdrawal Plan (SWP) 3) Systematic Transfer Plan (STP) 4) Dividend Transfer Plan (DTP) 5) Auto debit facility and Electronic Clearing Service (ECS) 6) Switching

Systematic Investment Plan (SIP)

An existing unit holder can benefit under this facility by investing specified amounts regularly. By investing a fixed amount of rupees at regular intervals, one would end up buying more units of the fund when the price is low and fewer units when the price is high. As a result, over a period, the average cost per unit to the unit holder will always be less than the average subscription price per unit, irrespective of whether it is a rising, falling or fluctuating market. Thus, the unit holder automatically gains and averages out the fluctuations of market, without having to monitor prices on a day-to-day basis. This concept is called Rupee Cost Averaging. The following points should be noted regarding SIP: i. ii. iii. In case of a SIP, the minimum amount for investing is much lower around Rs. 500 to Rs. 1000. The minimum number of payments that should be invested in order to get this facility might be 12 cheques of Rs. 500 each or 6 cheques of Rs. 1000 each. It is mandatory that cheques should be of same value.

21

iv. v.

The frequency of investment offered for SIP varies from fund to fund. In general all mutual funds offer monthly and quarterly investment facility. The first cheque can be of any date in the month but the subsequent cheques should bear any of the dates offered by the mutual fund for this facility.

Systematic Withdrawal Plan (SWP)

Under a Systematic Withdrawal Plan, an investor can receive regular/quarterly payments from the scheme into his account. The unit holder can opt to withdraw a fixed amount subject to a prescribed minimum amount per month or per quarter. The amount withdrawn by redemption shall be converted into units at the applicable NAV and such units shall be subtracted from the unit balance of the unit holder.

Systematic Transfer Plan (STP)

A systematic transfer plan gives investor facility to transfer amount from one scheme to another scheme at periodic intervals. In STP, investors can choose between a fixed systematic transfer plan and capital appreciation STP. Each mutual fund specifies the schemes in which the amount can be transferred.

Dividend Transfer Plan (DTP)

Under DTP, investors can choose to transfer their dividends of one scheme on to the other scheme as and when dividends are paid out. If such a plan is chosen than the amount of dividend distribution will be automatically invested on the ex-dividend date into the scheme selected by the investor and the units will be allotted accordingly.

Auto debit facility and Electronic Clearing Service (ECS)

A SIP can be affected in two ways. The investor can pay post-dated cheques dated at requisite intervals or the investor can choose for an auto debit facility/ECS. In auto debit/ECS facility, the amount mentioned in his application form would be automatically debited on the date of investment and amount would be invested in the scheme.

22

The investor opting for auto debit/ECS facility will be required to sign up a mandate form based on which the mutual fund will arrange for his account to be debited as per the frequency, amount & date chosen by the investor.

SWITCHING Unit holders have an option to switch all or part of their investment in one scheme plan to another scheme plan established by the fund that is available for investment at that time. The switch will be affected by way of redemption of units and a re-investment of the redemption proceeds in another scheme. To affect the switch the unit holder must provide clear instructions to the fund, such instructions may be provided by completing a form or lodging the same on any business day with any of the investor service or collection center.

1.11 BENEFITS OF MUTUAL FUND INVESTMENT Professional management

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

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

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

23

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

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

Tax Benefits
It is essential for the investor to know about the tax benefits available for mutual funds. These benefits fall into three categories: a) Those available to mutual funds. b) Those available to corporate bodies and trusts investing in mutual funds. c) Tax benefits available to individual investors for investing in mutual funds.

1.12 DRAWBACKS
Mutual funds have their drawbacks and may not be for everyone:

No Guarantees
No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual fund than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.

Fees and commissions

24

All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or loads to compensate brokers, financial consultants, or financial planners. Even if you dont use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.

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

Management risk
When you invest in a mutual fund, you depend on the funds manager to make the right decisions regarding the funds portfolio. If the manager does not perform as well as you had hoped, you might as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.

1.13 REGULATORY ASPECTS

Mutual funds in India are regulated by SEBI (Securities and Exchange Board of India). All mutual funds in India are regulated by SEBI. SEBI has framed the SEBI (Mutual Funds) Regulations, 1996, which provides the scope of the regulation of mutual funds in India. It is mandatory for all mutual funds to get registered with SEBI. Apart from SEBI there are some other agencies that regulate mutual funds in their respective fields. These are: 1. RBI RBI acts as regulator of sponsors of bank-sponsored mutual funds, especially in case of funds offering guaranteed returns. No mutual fund can bring out a guaranteed return scheme without taking approval from RBI. 2. Companies Act, 1956 AMC and Trustee Company will be subject to the provisions of the Companies Act, 1956.

25

 Under the Act, Company Law Board is the regulator. CLB has to be approached for filling complaints against directors of AMC and Trustee Company. RoC is responsible for compliances: The RoC oversees the compliance by the AMC and trustee company, with the provisions of the companies act. Periodic reports and annual accounts have to be filed by these companies with the RoC. 3. Stock Exchange The listing of close-ended funds are subject to listing regulation of Mutual funds have to follow the provisions of the Indian

stock exchanges. Mutual funds have to sign the listing agreement and abide by its provisions. 4. Indian Trust Act, 1882 Trusts Act, 1882. 5. Ministry of Finance The finance ministry is the supervisor of both the RBI and SEBI. Aggrieved parties can make appeals to the MoF on the SEBI rulings relating to mutual funds.

Schemes of a Mutual Fund

The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board. Every mutual fund shall along with the offer document of each scheme pay filing fees. The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme shall be fully redeemed at the end of the maturity period. Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution. The mutual fund and asset management company shall be liable to refund the application money to the applicants(i) (ii) If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub regulation (1); If the money received from the applicants for units are in excess of subscription as referred to in clause (b) of sub regulation (1).

26

The asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicants as soon as possible but not later than six weeks from the date of receipt of the request from the unit holders in any open ended scheme.

General Obligations:
Every asset management company for each scheme shall keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the fund and intimate to the Board the place where such books of accounts, records and documents are maintained. The financial year for all the schemes shall end as of March 31 of each year. Every mutual fund or the asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and the fund as specified in Eleventh Schedule. Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company.

Procedure for Action in case of Default:

On and from the date of the suspension of the certificate or the approval, as the case may be, the mutual fund, trustee or asset management company, shall cease to carry on any activity as a mutual fund, trustee or asset management company, during the period of suspension, and shall be subject to the directions of the Board with regard to any records, documents or securities that may be in its custody or control, relating to its activities as mutual fund, trustees or asset management company.

1.14 AMFI

27

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 22 August 1995. AMFI is an apex body of all Asset Management Companies (AMC) that has been registered with 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 objectives of Association of Mutual Funds in India

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 operations of the industry. It also recommends and promotes the top class business practices and code of conduct which is followed by members and related 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. AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.

MUTUAL FUNDS INDUSTRY

The mutual funds started in the USA. Today the number of assets under management in mutual funds industry in the USA is more than the deposits with banks in USA.

28

STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY

The Indian Mutual Fund industry is dominated by the Unit trust of India, which has a total corpus of Rs 700bn, collected from more than 20 million investors. The UTI has many funds/schemes in all categories i.e. equity, balanced, income etc with some being open ended and some being close ended. The Unit Scheme 1964 commonly referred to a US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs 200bn. UTI was floated by financial institutions and is governed by a special act of Parliament. Most of its investors believe that the UTI is governmental owned and controlled, which, while legally incorrect, is true for all practical purposes. The second largest categories of mutual funds are the ones floated by nationalized banks. Canbank Asset Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones. The aggregate corpus of funds managed by this category of AMC is about Rs 150bn. The third largest category of mutual funds is the one floated by the private sector and by foreign asset management companies. of AMC is in excess of Rs 250bn. The largest of these are Reliance Mutual Fund, ICICI Prudential AMC and Birla Sun Life AMC. The aggregate corpus of assets managed by this category

RECENT TRENDS IN MUTUAL FUNDS INDUSTRY

The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players. Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes had 29

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

EVOLUTION OF INDIAN MUTUAL FUND INDUSTRY

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

First Phase 1964-87

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

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund

30

(Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

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

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management

31

and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of July 2007, there were 33 funds, which manage assets of Rs. 487,398 crores under 1234 schemes. Table 2.1 Some of the AMCs operating currently are: Bank Sponsored

SBI Fund Management Ltd. BOB Asset Management Co. Ltd. Canbank Investment Management Services Ltd. UTI Asset Management Company Pvt. Ltd.

Institutions

GIC Asset Management Co. Ltd. Jeevan Bima Sahayog Asset Management Co. Ltd.

Private Sector Indian:

Benchmark Asset Management Co. Pvt. Ltd. Cholamandalam Asset Management Co. Ltd. Credit Capital Asset Management Co. Ltd. Escorts Asset Management Ltd. JM Financial Mutual Fund Kotak Mahindra Asset Management Co. Ltd. Reliance Capital Asset Management Ltd. Sahara Asset Management Co. Pvt. Ltd Sundaram Asset Management Company Ltd. Tata Asset Management Private Ltd.

Predominantly India Joint Ventures: -

32

Birla Sun Life Asset Management Co. Ltd. DSP Merrill Lynch Fund Managers Limited HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:

ABN AMRO Asset Management (I) Ltd. Alliance Capital Asset Management (India) Pvt. Ltd. Deutsche Asset Management (India) Pvt. Ltd. Fidelity Fund Management Private Limited Franklin Templeton Asset Mgmt. (India) Pvt. Ltd. HSBC Asset Management (India) Private Ltd. ING Investment Management (India) Pvt. Ltd. Morgan Stanley Investment Management Pvt. Ltd. Principal Asset Management Co. Pvt. Ltd. ICICI Prudential Asset Management Co. Ltd. Standard Chartered Asset Mgmt Co. Pvt. Ltd.

SOME OF THE AMCS OPERATING CURRENTLY ARE

AMCs at a glance (Scheme Wise) June 2008 in crores
Clos e Ende d Sche mes Total Schemes 120

AMC Compa ny AUM Relian 61095.07

Equity Value 20907.90

Debt Value 30355.28

Others Value 9831.89

Open Ended Schemes 120

33

ce Mutual Fund ICICI Pruden tial Mutual Fund UTI Mutual Fund HDFC Mutual Fund Birla Sun Life Mutual Fund Frankli n Templ eton Mutual Fund SBI Mutual Fund DSP Merill Lynch Mutual Fund Kotak Mahin dra Mutual Fund Tata Mutual Fund Princip al PNB Mutual Fund

55292.87 48889.78 48157.76

10928.71 15541.90 14599.30

40091.86 26646.44 31125.23

4272.30 6701.44 2433.23

139 106 90

139 106 90

39144.72

7440.68

28029.92

3674.12

142

142

24248.68 22851.80

11370.35 12401.81

11102.63 9913.83

1775.70 536.16

116 106 49

116 155

16533.54

6921.94

7246.99

2364.61

82

87

169

16281.24 13588.58

2943.72 3734.38

11804.24 8117.48

1533.29 1736.71

61 172

61 172

12569.61

2101.16

9290.67

1177.79

93

46

139

34

LIC Mutual Fund Sundar am BNP Pariba s Mutual Fund HSBC Mutual Fund IDFC Mutual Fund JM Financ ial Mutual Fund ABN Amro Mutual Fund ING Mutual Fund Fidelit y Mutual Fund Deutsc he Mutual Fund Lotus India Mutual Fund Canara Robec o Mutual Fund AIG

11949.24

664.15

9846.13

1438.97

47

47

11288.20 11280.58 10924.95

5668.15 2777.37 2629.75

3757.59 7783.56 7657.38

1862.46 719.65 637.82

102 83 95

102 83 95

10008.69

3274.67

6266.68

467.33

83

83

7212.42 6960.25

584.75 275.99

6343.41 5904.65

284.26 779.60

51 131

51 131

6441.47

5233.20

876.73

331.53

40

40

6233.32

307.11

5206.02

720.18

65

65

6127.02

705.30

5113.12

308.61

73

73

3785.63 3526.30

502.66 930.90

3215.62 2289.39

67.35 306.01

57 60

57 60

35

Mutual Fund Bench mark Mutual Funds Mirae Asset Mutual Fund JP Morga n Mutual Fund DBS Chola Mutual Fund Taurus Mutual Fund Escort s Mutual Fund Sahara Mutual Fund Quant um Mutual Fund BOB Mutual Fund GIC Mutual Fund Unit Trust of India Morga n Stanle

2641.87

1791.18

781.46

69.23

10

12

2372.89

107.15

2258.54

7.20

35

35

2351.14

930.49

1207.83

212.81

18

18

2147.73 260.70

213.34 222.00

1794.08 37.37

140.31 1.32

45 14

45 14

172.23 169.50

68.20 41.37

57.92 116.16

46.11 11.97

26 32

6 10

32 42

57.70 53.86

34.13 44.07

21.18 6.02

2.38 3.77

7 20

7 20

2797.0234

2682.3038

114.7196

36

y Mutual Fund Shrira m Mutual Fund Bharti AXA Mutual Fund

21

21

2.4 MAJOR MUTUAL FUND COMPANIES IN INDIA

ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsor namely Housing Development Finance Corporation Limited and Standard Life Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India)

37

Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on April 6, 1998

ICICI Prudential Mutual Fund

The

mutual fund of ICICI is a joint venture with Prudential Plc. of UK, one of the largest life insurance companies in the UK. ICICI Prudential Mutual Fund was setup on 13th of October 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company formed is ICICI Prudential Trust Ltd. and the AMC is ICICI Prudential Asset Management Company Limited incorporated on 22nd of June 1993.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs spread over 18 schemes.

38

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsor for Tata Mutual Fund is Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest in the country with more than Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having more than 1, 99,818 investors in its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was the first company to launch dedicated gilt scheme investing only in government securities.

Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset Management Company presently manages a corpus of over Rs.20000 Crore. The sponsorers of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds and Balance Funds.

39

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund that was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities.

Standard

Chartered

Mutual

Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC that was incorporated with SEBI on December 20, 1999.

Franklin

Templeton

India

Mutual

Fund

The group, Franklin Templeton Investments is a California (USA) based company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest

40

financial services groups in the world. Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income schemes and Open end Fund of Funds schemes to offer.

Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital Management Corp. of Delaware (USA) as sponsorer. The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd. with the corporate office in Mumbai.

DBS Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam AMC

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life Financial is a global organization evolved in 1871 and is being represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart
41

from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 crores.

BOB Mutual Fund

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.

Morgan

Stanley

Mutual

Fund

India

Morgan Stanley is a worldwide financial services company and its leading in the market in securities, investmenty management and credit services. Morgan Stanley Investment Management (MISM) was established in the year 1975. It provides customized asset management services and products to governments, corporations, pension funds and non-profit organisations. Its services are also extended to high net worth individuals and retail investors. In India it is known as Morgan Stanley Investment Management Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close end diversified equity scheme serving the needs of Indian retail investors focussing on a long-term capital appreciation.

42

Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance Limited as its sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the name Escorts Asset Management Limited.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund

Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate Office of the AMC is in Mumbai.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for LIC Mutual Fund.

GIC

Mutual

Fund
43

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India undertaking and the four Public Sector General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act, 1882. in a closet. The fund mobilization trend by mutual funds in the current year indicates that money is going to mutual funds in a big way. The collection in the first half of the financial year 1999-2000 matches the whole of 1998-99..

1.2 SIGNIFICANCE OF STUDY

This research work has an applied basis in nature, which can be used for further analysis and study. It has great practical implications in investment decisions. An investment portfolio can be suggested on the basis of the study. Persons interested in investing in capital market can use the result of this study to make a comparison between risks and returns offered by various mutual funds and to find out suitable avenues for investments in capital market. Mutual fund industry is increasing day by day so aspect of risk & return concerned to various schemes of mutual fund become so important. There are various schemes available in market. There is big problem that what scheme should be choose or not. This study give proper attention on risk & return of various schemes.

44

This study has great significance because there are many type of investors some investors have risky attitude some want to play safe game .on the basis of standard deviation & beta we can find out the risky situation of various schemes. This study is highly concerned to risk & return of various fund which will be helpful in establish overview in relation to various mutual funds schemes.

1.3 REVIEW OF LITERATURE REVIEW

Mutual funds industry is a growing at a very fast rate India. Various studies and research has been on this industry by experts. Here are the list of few books that have been referred to for the purpose of the study. Mr. M. Jaidev in his book has Investment policy and performance of Mutual Fund has studied the Indian Public Sector Mutual Funds. In this book he has covered risk , rate of return. Investment policy and pricing of mutual funds. In this book he has done an empirical study covering all aspects of mutual fund investment along with the regulatory framework. Nalini Prava Tripathy in her book Mutual Funds in India. Emerging Issues provides a detailed evaluation of investment management which is not only helpful for influencing marketing operations but also for securities selection, investment research and timing and resource allocation. Dr H. Sadak in his book Mutual Funds in India has highlighted the importance of financials institutions in India. The basically focuses on the growth and development of mutual funds in India. The entire gamut of the theoretical aspects of the fund

45

management has been critically examined in the context of the performance of mutual funds and it provides an insight into fund management and the areas of weakness. Mr. Sharad Panwar and Dr. R. Madhumathi in their journal Characteristics and Performance of selected mutual funds in India., have studied a sample of Public and Private sector mutual funds of varied net assets to investigate the differences in characteristics of assets held, portfolio diversification, and variable effects of diversification on investment performance. The extent of diversification in the portfolio of securities of public-sector sponsored and private-sector sponsored mutual funds have been highlighted.

1.4 CONCEPTUALIZATION
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 appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund

WORKING OF MUTUAL FUND:

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

46

Fund Managers: Fund Managers are the people who perform the role of managing investments under an organization.

Money in Trust: Mutual Funds are for the benefit of its investors. Each scheme has the following: The Investment portfolio (Portfolio Statement) Account of income and expenditure Account of assets and liabilities (Balance Sheet) The gains and losses have to be borne by investors. Thus, the Mutual Fund manages the schemes money in trust for the benefit of investors. SEBI regulates the expenditure by the organization (AMC) whether as charge for management fees or as other expenses.

Who all are involved in Mutual Fund? 1. Investors

47

Investors are the people who put their money or invest in the Mutual Fund. Every investor, given his/her financial position and personal disposition, has a certain inclination to take risk. The more risk one is capable of taking, the more return one can expect to get, and vice versa. However, most people have neither the time nor the knowledge to directly invest in the market. Mutual Fund is a solution for investors who lack either the time or the inclination or the necessary skills to actively manage their investments in individual securities. In the scheme of a Mutual Fund, the investor may have invested in a bank or any other safe option, thus depriving them of the possibility of getting a better return.

2. Trustees: Trustees are the people who are responsible for ensuring the proper care of the investors interest in a scheme. In return, they are paid the trustees fees. 3. Asset Management Company (AMC): Asset Management Companies are those companies who manage the investment portfolios of the schemes such as SCMF, FI, BMF, SMF, LICMF, etc. Its income comes from the management fee that it charges for its services. The management fee is calculated as a percentage of the net asset that is managed. In some countries, the management fee is based on performance. An AMC has to employ people in order to bear all the establishment costs related to its activities such as premises, furniture, etc. These costs are paid from the management fee earned by it. Expenses such as trustee fees, marketing costs, etc are borne by the Mutual Fund scheme. Sometimes, due to competition, the AMC is forced to bear these costs. As long as the income is more than the expenditure, the AMC is viable. All AMCs have certain Asset Under Management (AUM), below which it is not viable. In Indian context, it is difficult for an AMC to achieve BreakEven if its AUM is below Rs. 2,000 crores. Within an AMC, the fund manager ensures that the schemes funds are invested in such a way that the objectives of the scheme in the interest of its investors are achieved. The CEO, in turn, sees that the fund manager performs his duty in a correct way. 4. Distributors:

48

Distributors are the people who attract or bring in the investors into the schemes of a mutual fund. They earn a commission for this. The commission is an expense for the AMC and it may choose to bear the cost wholly or partially. Depending upon the financial and physical resources at their disposal, the distributors can be classified into 3 tiers: Tier-1 Distributor: These distributors have their own or franchise network reaching out to investors all across the country. Tier-2 Distributor: These distributors are mostly regional players. Tier-3 Distributor: These are the small distributors marginal players and have limited reach. Distributors bring in investors for the AMC, for which they earn commission from them. But they also safeguard the financial health of the investors who dont pay them in return. In recognition of this anomaly in the distribution structure, a body of financial planner is expected to emerge in the Indian financial market. They will safeguard the investors interests in return for a fee from the investors. 5. Registrars: Registrars and Transfer Agents (R&T) keeps track of the Mutual Fund scheme on account of the investors investments and disinvestments from the scheme. The R&T of the Mutual Fund maintains the database of investors. As a result, interest based transactions of the existing investors in the schemes of an AMC are affected through its database server. Request to invest more money into the scheme, or to redeem money against existing investment in a scheme, are procured by R&T.

6. Custodial Depository: The Custodial Depository maintains custody of the securities in which the scheme invests. This ensures an ongoing independent record of the investment of the scheme. It also follows various corporate actions such as bonus and dividends declared by the invested companies. Its importance is growing as securities are increasingly being dematerialized.

1.5 FOCUS OF STUDY

49

The present study focuses on the performance appraisal of mutual funds schemes of different AMCs and their ranking according to the findings. The study focuses on o Find out beta of various mutual funds schemes for the propose of calculating fund performance according to market lactations. o Find out total risk concerned to specific scheme of mutual fund o Evaluate performance of mutual funds schemes by applying the Sharpe index . Due to a large number of Mutual Fund schemes in existence, it was not feasible to present the investment pattern of each of them separately. Therefore, the analysis of investment pattern is restricted to 20 schemes. These schemes were selected on judgment and convenience basis.

1.6 OBJECTIVES & HYPHOTHESIS OF THE STUDY

OBJECTIVES OF THE STUDY

The present study focuses on the performance appraisal of mutual funds schemes. The objectives of the research are: To understand the concept of mutual funds and get an insight of working of the mutual funds. To evaluate the funds sensitivity to the market movements by calculating beta.

50

To evaluate funds risk adjusted return To evaluate the performance of mutual funds schemes by applying the Sharpe index. To find out various aspect of mutual fund for future prediction. To establish framework for decision regarding various schemes available in market.

ASSUMPTIONS UNDER THE STUDY/HYPOTHESIS

Rate of risk less return, that is bank rate for 1 year has been taken as 7.5 % Secondary data sources are assumed to be done. Data provided by karvy is free from error.

1.7 ORGANIZATION OF THE STUDY

The present study has been organized in eight chapters. The first chapter presents an introduction to mutual fund as an avenue for investment this chapter is divided into seven parts. First part presents introduction of mutual fund. Second part presents the significance of study. Third part is concern to review of existing literature. Fourth part shows that how mutual fund works. Fifth part is concerned with focus of study. Sixth part presents what is the objective of study and what are assumptions in this project fifth. In the second chapter company profile has been discussed. The third chapter which is the present chapter describe the different elements of research process used in

51

completeting this project. The fourth chapter comprises the main body of the research project. As it incorporates analysis and interpretation of data. The fifth chapter presents the limitation of study. Six chapter is concerned with findings and conclusion. Seventh chapter presents recommendations & suggestions. Last chapter shows annexure of the project. This part also shows bibliography.

52

CHAPTER 2 COMPANY PROFILE

53

COMPANY PROFILE
Overview about company Karvy Group Companies Management Team Our Alliances Achievements Quality Policy

OVERVIEW ABOUT COMPANY

KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, comprising the who is who of Corporate India. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products mutual funds, bonds, fixed deposit, equalities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments. Banking & Corporate Finance, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations, and more importantly, in research of various industrial segments.

54

History of Karvy
The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company Karvy Consultants Limited. We started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, we have utilized our experience and superlative expertise to go from strength to strength to better our services, to provide new ones, to innovate, diversity and in the process, evolved Karvy as one of Indias premier integrated financial service enterprise. Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And we have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finallytotality in service. Our highly qualified manpower, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for us the position of an emerging financial services giant enjoying the confidence and support of an enviable clientele across diverse fields in the financial world. Our values and vision of attaining total competence in our servicing has served as the building block for creating a great financial enterprise, which stands solid on our fortresses of financial strength-our various companies. With the experience of years of holistic financial servicing behind us and years of complete expertise in the industry to look forward to, we have now emerged as a premier integrated financial services provider. And today, we can look with pride at the fruits of our mastery and experience comprehensive financial services that are competently segregated to service and manage a diverse range of customer requirements.

55

MANAGEMENT TEAM
BOARD MEMBERS
C Parthasarathy, Chairman & Managing Director Mr. C Parthasarathy, a leader in the financial services industry in India is responsible for building KARVY as one of India's truly integrated Financial Services Provider; he is a fellow member of the Institute of Company Secretaries of India, a Fellow Member of the Institute of Chartered Accountants of India and a graduate in law.As Chairman and Managing Director, he oversees the group's operations and renders vision and business direction. M Yugandhar, Managing Director Mr. M Yugandhar, Managing Director, founder member of KARVY Consultants Limited, has varied experience in the field of financial services spanning over 20 years. He is a Fellow Member of the Institute of Chartered Accountants of India and was involved in the statutory and branch audit of banks for 26 years. . M S Ramakrishna, Executive Director Mr. M S Ramakrishna, Director, founder member of KARVY Consultants Limited is the orchestrator of technology initiatives such as the call center in the service of the customer.

OTHER MEMBERS
K Sridhar

56

V Mahesh V Ganesh S Gopichand J Ramaswamy M S Manohar S Ganapathy Subramanian

Karvy Group Cos

Karvy Depository Participant Services (NSDL & CDSL) Karvy the Finapolis Karvy Consultants Ltd. Karvy Stock Broking Ltd. (NSE & BSE) Karvy Investor Services Ltd. Karvy Computer Share Pvt. Ltd. Karvy Global Services Ltd. Karvy Commodities Broking Pvt. Ltd. Karvy Insurance Broking Pvt. Ltd. Karvy E-TDS Returns & PAN Application Process Karvy Reality Services

Karvy Consultants Ltd.

57

As the flagship company of the Karvy Group, Karvy Consultants Limited has always remained at the helm of organizational affairs, pioneering business policies, work ethic and channels of progress. Having emerged as a leader in the registry business, the first of the businesses that we ventured into, we have now transferred this business into a joint venture with Computershare Limited of Australia, the worlds largest registrar. With the advent of depositories in the Indian capital market and the relationships that we have created in the registry business, we believe that we were best positioned to venture into this activity as a Depository Participant. We were one of the early entrants registered as Depository Participant with NSDL (National Securities Depository Limited), the first Depository in the country and then with CDSL (Central Depository Services Limited). Today, we service over 6 lakhs customer accounts in this business spread across over 250 cities/towns in India and are ranked amongst the largest Depository Participants in the country. With a growing secondary market presence, we have transferred this business to Karvy Stock Broking Limited (KSBL), our associate and a member of NSE, BSE and HSE.

Karvy Stock Broking Ltd

Member - Natio nal Stock Exchange (NSE), The Bombay Stock Exchange (BSE), and The Hyderabad Stock Exchange (HSE).
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely towards attaining diverse goals of the customer through varied services. Creating a plethora of opportunities for the customer by opening up investment vistas backed by research-based advisory services. Here, growth knows no limits and success recognizes no boundaries. Helping the customer create waves in his portfolio and empowering the investor completely is the ultimate goal.

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by in-depth knowledge of market functioning and changing trends, planning with foresight and choosing one’s options with care. This is what we provide in our Stock Broking services..

Karvy the Finapolis

58

The paradigm shift from pure selling to knowledge based selling drives the business today. With our wide portfolio offerings, we occupy all segments in the retail financial services industry. A 1600 team of highly qualified and dedicated professionals drawn from the best of academic and professional backgrounds are committed to maintaining high levels of client service delivery. This has propelled us to a position among the top distributors for equity and debt issues with an estimated market share of 15% in terms of applications mobilized, besides being established as the leading procurer in all public issues. To further tap the immense growth potential in the capital markets we enhanced the scope of our retail brand, Karvy the Finapolis , thereby providing planning and advisory services to the mass affluent. Here we understand the customer needs and lifestyle in the context of present earnings and provide adequate advisory services that will necessarily help in creating wealth. Judicious planning that is customized to meet the future needs of the customer deliver a service that is exemplary. The market-savvy and the ignorant investors, both find this service very satisfactory. The edge that we have over competition is our portfolio of offerings and our professional expertise. The investment planning for each customer is done with an unbiased attitude so that the service is truly customized. Our monthly magazine, Finapolis, provides up-dated market information on market trends, investment options, opinions etc. Thus empowering the investor to base every financial move on rational thought and prudent analysis and embark on the path to wealth creation.

Karvy Investor Service Limited

Recognized as a leading merchant banker in the country, we are registered with SEBI as a Category I merchant banker. This reputation was built by capitalizing on opportunities in corporate consolidations, mergers and acquisitions and corporate restructuring, which have earned us the reputation of a merchant banker. Raising resources for corporate or Government Undertaking successfully over the past two decades have given us the confidence to renew our focus in this sector.

Karvy Computershare Pvt. Ltd.

59

We have traversed wide spaces to tie up with the worlds largest transfer agent, the leading Australian company, Computershare Limited. The company that services more than 75 million shareholders across 7000 corporate clients and makes its presence felt in over 12 countries across 5 continents has entered into a 50-50 joint venture with us. With our management team completely transferred to this new entity, we will aim to enrich the financial services industry than before. The future holds new arenas of client servicing and contemporary and relevant technologies as we are geared to deliver better value and foster bigger investments in the business. The worldwide network of Computershare will hold us in good stead as we expect to adopt international standards in addition to leveraging the best of technologies from around the world. Excellence has to be the order of the day when two companies with such similar ideologies of growth, vision and competence, get together.

Karvy Global Services Ltd.

The specialist Business Process Outsourcing unit of the Karvy Group. The legacy of expertise and experience in financial services of the Karvy Group serves us well as we enter the global arena with the confidence of being able to deliver and deliver well. Here we offer several delivery models on the understanding that business needs are unique and therefore only a customized service could possibly fit the bill. Our service matrix has permutations and combinations that create several options to choose from. Be it in re-engineering and managing processes or delivering new efficiencies, our service meets up to the most stringent of international standards. Our outsourcing models are designed for the global customer and are backed by sound corporate and operations philosophies, and domain expertise. Providing productivity improvements, operational cost control, cost savings, improved accountability and a whole gamut of other advantages. .

Karvy Comtrade Ltd.

60

At Karvy Commodities, we are focused on taking commodities trading to new dimensions of reliability and profitability. We have made commodities trading, an essentially age-old practice, into a sophisticated and scientific investment option. Here we enable trade in all goods and products of agricultural and mineral origin that include lucrative commodities like gold and silver and popular items like oil, pulses and cotton through a well-systematized trading platform. Our technological and infrastructural strengths and especially our street-smart skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages, the first and foremost being our legacy of human resources, technology and infrastructure that comes from being part of the Karvy Group.

Karvy Insurance Broking Pvt. Ltd.

At Karvy Insurance Broking Limited., we provide both life and non-life insurance products to retail individuals, high net-worth clients and corporates. With the opening up of the insurance sector and with a large number of private players in the business, we are in a position to provide tailor made policies for different segments of customers. In our journey to emerge as a personal finance advisor, we will be better positioned to leverage our relationships with the product providers and place the requirements of our customers appropriately with the product providers. With Indian markets seeing a sea change, both in terms of investment pattern and attitude of investors, insurance is no more seen as only a tax saving product but also as an investment product. By setting up a separate entity, we would be positioned to provide the best of the products available in this business to our customers.

Karvy Reality & Service (India) Ltd.

KARVY Realty & Services (India) Limited (KRSIL) is engaged in the business of real estate and property services offering value added property services and offers individuals and establishments a myriad of options across investments, financing and advisory services in the realty sector. KARVY Realty & Services (India) Limited Take a Realty Byte !!! 61

Promoted by the KARVY Group of companies, Indias largest integrated financial services company. KARVY Realty & Services India Limited carries forward its legacy of trust and excellence in investor and customer services delivered with a passion for services and the highest level of quality that align with global standards. KARVY Realty & Services (India) Limited welcomes you to take a reality check on realty options that you can be rest assured of and of course profit from.

OUR ALLIANCE
Karvy Computer share Private Limited is a 50:50 joint venture of Karvy Consultants Limited and Computershare Limited, Australia. Computereshare Limited is world's largest -- and only global -share registry, and a leading financial market services provider to the global securities industry. The joint venture with Computershare, reckoned as the largest registrar in the world, servicing over 60 million shareholder accounts for over 7,000 corporations across eleven countries spread across five continents. Computershare manages more than 70 million shareholder accounts for over 13,000 corporations around the world. Karvy Computershare Private Limited, today, is India's largest Registrar and Share Transfer Agent servicing over 300 corporates and mutual funds and 16 million investors.

ACHIEVEMENTS

Among the top 5 stock brokers in India (4% of NSE volumes) India's No. 1 Registrar & Securities Transfer Agents Among the top 3 Depository Participants

62

Largest Network of Branches & Business Associates ISO 9002 certified operations by DNV Among top 10 Investment bankers Largest Distributor of Financial Products Adjudged as one of the top 50 IT uses in India by MIS Asia Full Fledged IT driven operations Every 50th Indian is Serviced by Karvy Every 20th Trade in Stock Maarket is done through Karvy.

QUALITY POLICY
To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations.

Quality Objectives

Build in-house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services. Establish a partner relationship with its investor service agents and vendors that will help in keeping up its commitments to the customers. Provide high quality of work life for all its employees and equip them with adequate knowledge & skills so as to respond to customer's needs.

63

CHAPTER 3 RESEARCH METHODOLOGY

64

3.1 RESEARCH DESIGN

A Research Design is the framework or plan for a study, which is used as a guide in collecting and analyzing the data collected. It is the blue print that is followed in completing the study. The basic objective of research cannot be attained without a proper research design. It specifies the methods and procedures for acquiring the information needed to conduct the research effectively. It is the overall operational pattern of the project that stipulates what information needs to be collected, from which sources and by what methods. This chapter has been divided into 8 sections that consist of Present Study, Objective of the Study, Assumptions under the study, Research Methodology, Scope of the study, Statistical tools, Usefulness of study and its limitations. Each section gives the complete description of the things included in it. In the sections, the topic related to particular section is very clearly written to enhance the understanding of the concepts. This chapter also includes the sub sections which are we can also say as the sub parts. This has been done in order to enhance the comfortability while understanding and reading the methodology of research.

PRESENT STUDY
A mutual fund is an investment company or trust that pools the resources of thousands of its shareholders or unit holders and invest on behalf of these diversified securities and a cross section of companies to attain the objective of the investors, which in turn achieve income or growth or both long with low risk (depending upon the securities). The present study is done to evaluate the performance of mutual fund schemes of different AMCs and to rank them as per the findings.

65

3.2 SAMPLING
Due to a large number of Mutual Fund schemes in existence, it was not feasible to present the investment pattern of each of them separately. Therefore, the analysis of investment pattern is restricted to 20 schemes. These schemes were selected on judgment and convenience basis.

SAMPLING DESIGN
Sampling Unit scheme of mutual fund Sampling Size- 20 mutual fund schemes

3.3 SCOPE OF THE STUDY

The scope of the study is kept limited to the period beginning from 1st Apr. 2007 to ending in 31st March 2008. It is important to point out that NVAs have been taken on daily basis. The funds covered under the study are: Sr. No. 1 2 3 4 5 6 7 8 9 Scheme Name ICICI Prudential Balance Fund - Dividend Option ICICI Prudential Growth Fund - Dividend ICICI Prudential Dynamic Plan ICICI Prudential Liquid Plan LIC MF Equity Fund - Dividend LIC MF Index Funds - Nifty - Dividend LIC MF Balance Fund - Dividend LIC MF Growth Fund HDFC Equity Fund - Dividend Plan 66

10 11 12 13 14 15 16 17 18 19 20

HDFC Income Fund - Dividend HDFC Balance Fund - Growth Plan HDFC Growth Fund - Dividend Plan TATA Balance Fund - Dividend Option TATA Income Fund - Dividend Qtly TATA Growth Fund - Dividend TATA Equity Management Fund Sundaram BNP Paribus Balance Fund - Dividend Option Sundaram BNP Paribus Plus - Dividend Sundaram BNP Paribus Growth Fund - Dividend Sundaram BNP Paribus Select Mid Cap Dividend

3.4 COLLECTION OF DATA

The data has been collected from the secondary sources including the annual reports of the various mutual funds and their offer documents, fact sheets of various mutual funds. NAVs and return on securities have been taken for 12 months starting from Apr. 2007 to March 2008 and CNX Nifty and CNX 500 have been noted from www.amfindia.com, www.indianfonline.com and www.nseindia.com respectively.

3.5 STATISTICAL TOOLS FOR ANALYZING DATA

To come to the finding of the research project an extensive use of statistical techniques has been made. Following tools have been used for analysis of data.

Average
It has used to calculate average market returns and average return of mutual funds over the period of study.

Return of portfolio
Rp = NAV (t) NAV (t-1) + DIVIDEND

67

NAV (t-1) Where, Rp NAV(t) NAV (t-1) = = = Daily return on a scheme Net Asset Value on a scheme Net Asset Value for preceding day.

Average Daily Return (Avg R)

The average daily returns have been arrived at by dividing the summation of the daily returns for individual schemes by the total number of days for which returns are calculated.

Mathematically
Avg Rp = (Rp1 + Rp2 + Rp3 + ..Rpn)/N Where Rp1, Rp2, Rp3.Rpn are returns 1st, 2nd, 3rd and so on upto nth day returns based on NAVs (MPs) and N is the total number of days under a particular scheme.

Market returns :
Rm = M.I (t) - M.I. (t-1) M.I. (t-1) Where, Rm M.I. (t) = M.I. (t-1) Avg Rm Where, = = = Market daily return Market index for preceding day (Rm1+Rm2+Rm3+Rmn)/N Market index for the day

68

Where Rm1, Rm2, Rm3..Rpn are return for 1st, 2nd, 3rd and so on upto nth day returns.

Variance and standard deviation

Variance and standard deviation of prices of mutual funds from average price have been calculated for the purpose of studying fluctuations in prices.

Risk of portfolio
Denoted by Sp Sp Where, Sp Rp Avg Rp N = = = = Total risk of the scheme Return on portfolio (scheme) Average weekly returns of portfolio (scheme) Number of observations = (Rp-Avg Rp)2 N-1

Market risk
Denoted by Sm Sm Where, Rm Avg Rm N = = = Weekly return of market Average weekly return of market Number of observations = (Rm - Avg Rm)2 N-1

Covariance
Beta is a measure of risk, which is arrived at by dividing covariance between returns of mutual fund scheme and market return, COV (Rp, Rm), by variance of market return Var (Rm). 69

Beta analysis
Beta measures non diversifiable risk. Beta shows how prices of securities respond to the market forces. Beta is calculated by relating the returns on the security with return for the market, is beta is higher than I the stock is said to be riskier than market. If beta is less than I, the indication is that stock is less risky in comparison to market. If beta is one then risk same as that of the market. Negative beta is rare. Beta measures the systematic risk, which is undiversifiable in nature. It shows how the price of portfolio responds to market forces beta. Beta for overall market is assumed to be 1. Beta can be calculated as: Beta = COV (Rp, Rm) VARm

Where, COV (Rp.Rm) = VARm = Covariance of the portfolio and market returns Variance of the market

Risk Adjusted Performance Measure

The performance of a portfolio is measured by combining the risk and return levels with a single value. The differential return earned by a portfolio may be due to the difference in the risk exposure from that of the stock market index. Following are the major methods of assessing a riskadjusted performance.

Sharpes Ratio:
Sharpe index measure risk premium of portfolio relative to the total amount of risk in the portfolio. Sharpe index summarizes the risk and return of a portfolio in a single measure that categorizes the performance of funds on risk adjusted basis. The larger the Sharpes index the portfolio is over performing the market and vice versa.

70

William F Sharpe developed a method of measuring return per unit of risk. Sharpes ratio is simply the ratio of reward, define as the realized portfolio return Rp in excess of the risk-free rates, to the variability of the return as measured by the standard deviation of returns. RVARp = Avg Rp Avg Rf Sp Where, RVARp Avg. Rp Avg. Rf Sp = = = = Reward to variability of the fund portfolios total risk/Sharpes ratio Average daily return of fund Average risk free return Standard deviation of fund

Here the benchmark is additional return of market over risk free return related with market portfolios total risk. RVARm Where, RVARm Avg. Rp Avg. Rf Sm = = = = Reward to variability of the market Average daily market return Average risk free return Standard deviation of market = Avg.R Avg Rf Sm

In case RVARp is greater than RVARm (Benchmark_, a funds performance is better than market.

71

CHAPTER 4 ANALYSIS & INTERPRETATION OF DATA

72

CHAPTER 4
ANALYSIS & INTERPRETATION OF DATA
This chapter has been devoted to appraise the performance of various schemes of mutual funds in the framework of daily returns and the risk associated therewith. Since the mutual funds work out their net asset value (NAV) as well as the carry market prices, the chapter has been divided into four sections viz. Section 1 NAV based analysis and Section 2 Risk Analysis, Beta Analysis and Sharpes Index Model Each section gives the complete explanation of the tables included in it. In the sections, the topic related to particular section is very clearly written to enhance the understanding of the concepts.

4.1 ANALYSIS OF DATA

This chapter has been devoted to appraise the performance of listed growth schemes of mutual funds in the framework of their daily returns and the risk associated therewith. With a view to associate the returns and risk of individual schemes their relationship has been examined with S & P CNX Nifty as proxies to the market with a view to reach a complete result regarding the extent to which return on various mutual fund schemes have reached to the changes in the market portfolio return. Beta value has been calculated with reference to CNX Nifty. In an attempt to bring forth under performing and outperforming schemes they have been evaluated with reference to the benchmark i.e. market return. To reach the concise and meaningful results by optimally using benchmark, we have relied on Sharpe model of performance appraisal.

4.2 RETURN ANALYSIS

At the outset, an effort has been made to analyze the returns and the number of schemes yielding positive/negative returns. For this purpose overall 20 schemes has been selected for appraisal. A 73

glance at the average daily returns of the year 2007-08 shown by table 4.2 reveal that there is hardly any scheme which has been constantly at a particular rank in the ordering of the schemes. For instance ICICI Prudential Liquid Plan scheme of ICICI Prudential stands at first rank which means that it is giving the maximum returns and on the other side the lowest scheme in this is TATA Income Fund Div Qtly which means that it is giving very less returns as compared to the others.

Table 4.2: NAVs based average daily returns and ranking of selected Mutual Funds Schemes (Apr. 1, 2007 to March 31, 2008) Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Scheme Name ICICI Prudential Balance Fund - Dividend Option ICICI Prudential Growth Fund - Dividend ICICI Prudential Dynamic Plan ICICI Prudential Liquid Plan LIC MF Equity Fund - Dividend LIC MF Index Funds - Nifty - Dividend LIC MF Balance Fund - Dividend LIC MF Growth Fund HDFC Equity Fund - Dividend Plan HDFC Income Fund - Dividend HDFC Balance Fund - Growth Plan HDFC Growth Fund - Dividend Plan TATA Balance Fund - Dividend Option TATA Income Fund - Dividend Qtly TATA Growth Fund - Dividend TATA Equity Management Fund Sunderam BNP Paribus Balance Fund - Dividend Option Sunderam BNP Paribus Plus - Dividend Sunderam BNP Paribus Growth Fund - Dividend Sunderam BNP Paribus Select Mid Cap Dividend Avg. Rp. -0.00026648 -0.00003307 0.0009368 0.000505 -0.00058 -0.00091 -0.00128 0.000104 0.00002531 0.00001349 0.00004644 -0.00055878 -0.00006526 -0.00377652 -0.0015706 -0.00006553 0.00009535 0.00000806 -0.00068222 -0.00118189 Rank 12 9 4 1 14 16 18 2 6 7 5 13 10 20 19 11 3 8 15 17

Table 4.2 TOP THREE SCHEMES ON THE BASIS OF THEIR AVERAGE DAILY RETURN

74

Sr. No. 1 2 3

Schemes ICICI Prudential Liquid Plan LIC MF Growth Fund Sundaram BNP Paribus Balanced Fund -Dividend Option

Sponsor ICICI Prudential LIC

Average Return 0.000505 0.000104 0.00009535

Rank 1 2 3

Sundaram BNP Paribus

Table 4.2 LOWEST THREE SCHEMES ON THE BASIS OF THEIR AVERAGE DAILY RETURN Sr. No. 1 2 3 Schemes TATA Income FundDividend Qtly TATA Growth Fund Dividend LIC Mutual Fund Balance- Dividend Sponsor TATA TATA LIC Average Return -0.00377652 -0.00157060 -0.00128000 Rank 20 19 18

4.3 RISK ANALYSIS

Having carried out the return analysis of some selected schemes it is considered imperative to examine the magnitude of variability in the daily returns of different mutual fund schemes around the mean. The variation, which is also known as risk, has been measured in terms of standard deviation (SD), which is an absolute measure of variability. A sectoral position as to risk (SDp) prevailing in all 20 schemes taken in the sample for analysis and ranking thereof, based on SDp have been presented in Table 4.3. According to this table the scheme that is most risky is HDFC Income while the scheme that is least risky is the Sundaram BNP Paribus Income plus Dividend option.

75

Table 4.3: Ranking of selected Mutual Funds Schemes according to Standard Deviation of NAVs based daily returns (Apr 1, 2007 to Mar.31, 2008). Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Scheme Name ICICI Prudential Balance Fund - Dividend Option ICICI Prudential Growth Fund - Dividend ICICI Prudential Dynamic Plan ICICI Prudential Liquid Plan LIC MF Equity Fund - Dividend LIC MF Index Funds - Nifty - Dividend LIC MF Balance Fund - Dividend LIC MF Growth Fund HDFC Equity Fund - Dividend Plan HDFC Income Fund - Dividend HDFC Balance Fund - Growth Plan HDFC Growth Fund - Dividend Plan TATA Balance Fund - Dividend Option TATA Income Fund - Dividend Qtly TATA Growth Fund - Dividend TATA Equity Management Fund Sunderam BNP Paribus Balance Fund - Dividend Option Sunderam BNP Paribus Plus - Dividend Sunderam BNP Paribus Growth Fund - Dividend Sunderam BNP Paribus Select Mid Cap Dividend SDp 0.0145644 0.01526872 0.191230 0.0183790 0.0229385 0.0246479 0.1680580 0.0187313 0.017513166 0.17133388 0.017335195 0.011835666 0.0142209 0.0865846 0.0395498 0.040381 0.0054506 0.0025847 0.0032910 0.0043735 Rank 8 9 14 12 15 16 19 13 11 20 10 6 7 18 17 3 5 1 2 4

Table 4.3 TOP THREE SCHEMES ON THE BASIS OF THEIR TOTAL RISK Sr. No. 1 Schemes Sundaram BNP Paribus Income 2 plus Dividend Sundaram BNP Paribus Growth 3 Fund Dividend TATA Equity TATA 0.0040381 3 Sundaram BNP Paribus 0.0032910 2 Sponsor Sundaram BNP Paribus SDp 0.0025847 Rank 1

76

Management Fund

Table 4.3 LOWEST THREE SCHEMES ON THE BASIS OF THEIR TOTAL RISK Sr. No. 1 2 3 Schemes HDFC Income Fund LIC MF Balance Fund - Dividend TATA Income Fund Div Qtly Sponsor HDFC Bank ICICI Bank Prudential TATA SDp 0.17133388 0.1680580 0.0865846 Rank 20 19 18

4.4 BETA ANALYSIS

In this subsection an attempt has been made to bring out the extent to which returns of various mutual funds schemes have reacted to the changes in the market portfolio return. As has been discussed earlier market portfolio returns are represented by daily returns calculated with reference to CNX Nifty has been presented in Table 4.4. Table 4.4: Beta Values and ranking of selected Mutual Funds Schemes (Apr. 1, 2007 to March 31, 2008) Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Scheme Name ICICI Prudential Balance Fund - Dividend Option ICICI Prudential Growth Fund - Dividend ICICI Prudential Dynamic Plan ICICI Prudential Liquid Plan LIC MF Equity Fund - Dividend LIC MF Index Funds - Nifty - Dividend LIC MF Balance Fund - Dividend LIC MF Growth Fund HDFC Equity Fund - Dividend Plan HDFC Income Fund - Dividend HDFC Balance Fund - Growth Plan HDFC Growth Fund - Dividend Plan TATA Balance Fund - Dividend Option TATA Income Fund - Dividend Qtly TATA Growth Fund - Dividend BETA 0.9959016 0.9969016 0.9957447 1.0682317 0.4895782 0.2159701 0.4965751 0.5445563 0.9920986 0.7120805 0.9518567 -0.9959183 0.9928188 0.9962685 0.9371198 Rank 5 2 7 1 18 19 17 16 9 15 11 20 8 3 14

77

16 17 18 19 20

TATA Equity Management Fund Sunderam BNP Paribus Balance Fund - DividenOption Sunderam BNP Paribus income Plus - Dividend Sunderam BNP Paribus Growth Fund - Dividend Sunderam BNP Paribus Select Mid Cap Dividend

0.9390835 0.9959183 0.9863118 0.9959349 0.9386306

12 6 10 4 13

Table 4.4 TOP THREE SCHEMES ON THE BASIS OF THEIR BETA Sr. No. 1 2 3 Schemes ICICI Prudential Liquid Plan ICICI Prudential Growth Fund - Dividend TATA Income Fund Dividend Qtly Table 4.4 LOWEST THREE SCHEMES ON THE BASIS OF THEIR BETA Sr. No. 1 2 3 Schemes HDFC Growth Fund Dividend Plan LIC MF Index Funds Nifty - Dividend LIC MF Equity Fund Dividend Sponsor HDFC Bank LIC LIC Beta -0.9959183 0.2159701 0.4895782 Rank 20 19 18 Sponsor ICICI Prudential ICICI Prudential TATA Beta 1.0682317 09969016 0.9962685 Rank 1 2 3

4.5 RISK ADJUSTED PERFORMANCE MEASURES

Yet another way to measure the performance of mutual fund is to evaluate them with reference to the benchmark, which is the case in stock market return. In the process of holding such a comparison, we can identify the under performing and over performing schemes. Here an attempt has been made to do much the same thing. The Benchmark taken here includes the daily returns based on CNX Nifty. With a view to reach concise and meaningful results, the well-known Sharpes models for performance appraisal has been applied. According to the Table 4.5 No. 1 scheme on the basis of

78

Sharpes Index is Sunderam BNP paribus Balance Fund and the Lowest Scheme is LIC MF Balance Fund - Dividend Table 4.5: Sharpes index and its difference from benchmark based on CNX Nifty and NAV returns for selected MF schemes. (Apr 1, 2007 to Mar 31, 2008). Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Scheme Name ICICI Prudential Balance Fund - Dividend Option ICICI Prudential Growth Fund - Dividend ICICI Prudential Dynamic Fund ICICI Prudential Liquid Plan LIC MF Equity Fund - Dividend LIC MF Index Funds - Nifty - Dividend LIC MF Balance Fund - Dividend LIC MF Growth Fund HDFC Equity Fund - Dividend Plan HDFC Income Fund - Dividend HDFC Balance Fund - Growth Plan HDFC Growth Fund - Dividend Plan TATA Balance Fund - Dividend Option TATA Income Fund - Dividend Qtly TATA Growth Fund - Dividend TATA Equity Management Fund Sunderam BNP Paribus Balance Fund - Dividend Option Sunderam BNP Paribus Plus - Dividend Sunderam BNP Paribus Growth Fund - Dividend Sunderam BNP Paribus Select Mid Cap Dividend RVARp. RAVRm 0.006014 0.000128 -0.002025 -0.000453 -0.013064 -0.003655 0.002809 0.000692 -0.023641 -0.000795 -0.034520 -0.001248 -0.065117 -0.001755 0.005199 0.000142 0.001351 0.000034 0.000073 0.000018 0.002504 0.000766 -0.044142 -0.000080 -0.004290 -0.000089 -0.040781 -0.005180 -0.037130 -0.002154 -0.015173 -0.000089 0.016356 0.002915 -0.193824 -0.252673 0.000130 0.000011 -0.000935 -0.001621

Table 4.5 TOP THREE SCHEMES ON THE BASIS OF SHARPES INDEX Sr. No. 1 Schemes Sunderam BNP Paribus Balance Fund - Dividend Sponsor Sunderam BNP Paribus SI-BMS 0.01635641

79

2 3

Option ICICI Prudential Balance Fund - Dividend Option LIC MF - Growth Fund

ICICI Bank Prudential LIC

0.00601403 0.00519912

Table 4.5 LOWEST THREE SCHEMES ON THE BASIS OF SHARPES INDEX Sr. No. 1 Schemes Sunderam BNP Paribus Select Mid Cap Dividend 2 3 Sunderam BNP Paribus Growth Fund - Dividend LIC MF Balance Fund Dividend Sunderam BNP Paribus LIC -0.19382427 -0.00519912 Sponsor Sunderam BNP Paribus SI-BMS -0.25267340

CHAPTER-5

80

LIMITATIONS OF THE STUDY

o The study is based on only secondary data, the researcher therefore cannot comment on the investors preferences of the schemes. o The data is based on daily basis it is very difficult to arrange it. o It is very difficult to compare the data with Nifty because dates are not properly matched with NAV dates and daily closing price of nifty. o The calculations are made manually, and all care has been taken to ensure the accuracy, yet inadvertent lapses cannot be ruled out. o In calculations of returns on portfolio, dividend has not been taken due to its non availability. o Study is very complicated because of complicated formulas. o Study is complete in very short period. o This study has lack of investors participation in study.

CHAPTER 6 CONCLUSION
81

This project reach at the conclusion that some schemes are highly risky and some are less risky some schemes have good return and some do not have good return following things are include in the conclusion of the project o According to average daily return ICICI prudential liquid plan is the best scheme among 20 schemes of mutual fund and Tata income fund dividend qtly is worst scheme among these schemes. o On the time of upward in stock market high beta funds should be purchase but in time of downward in stock market inventors should consider those stock which have less beta. o According to standard deviation sundram BNP paribus-income plus-dividend is best and HDFC income fund is worst fund among all schemes this shows that return of sundram is less volatile but return of HDFC is highly volatile. o On the basis of beta ICICI Prudential Liquid Plan is best and HDFC Growth Fund Dividend Plan has last ranking. This shows that ICICI fund give more return in front of market. o On the basis of sharp ratio Sunderam BNP Paribus Balance Fund - Dividend Option and Sunderam BNP Paribus Select Mid Cap Dividend is worst. This tell over all performance of scheme.

CHAPTER 7 FINDINGS & RECCOMENDATIONS

82

SUMMARY OF FINDINGS
Now, in the end we shall recapitulate some of the more important points emerging from the performance appraisal of the mutual funds carried out in this work. A summary of the introduction to mutual funds in this study forms the subject matter of first section of this chapter. The second and third sections will present the view regarding mutual funds industry and research methodology. The last section encompasses a brief commentary on the Analysis of data so as to put forward some policy measures which may be beneficial to investors, fund managers, regulatory authorities and other interested individuals and institutions

SECTION 1
Mutual Funds are the financial intermediaries which pool the savings of numerous individuals and invest the money thus raised in a diversified portfolio of securities, including equity, bonds, debentures and other instruments, thus spreading and reducing risk. There are different types of Mutual Fund Schemes like Open-ended, Close ended, Gilt, Index Fund etc. Benefits of Mutual Funds are transparency, affordability, flexibility, etc.

SECTION 2
The Indian Mutual Fund Industry is dominated by UTI, which has a total corpus of Rs 700 bn collected from more than 20 million investors. The Unit scheme 64, which is a balanced fund, is the biggest scheme with a corpus of about 200 bn. Regarding the growth of mutual fund industry in India, the study reveals that this industry has registered a sharp rise in terms of resource mobilization. Major Mutual Fund Companies in India are ABN Amro Mutual Fund, HDFC Mutual Fund, HSBC Mutual Fund, ICICI Prudential Mutual Fund and Reliance Mutual Fund etc

SECTION 3
ICICI Prudential Asset Management Company enjoys the strong parentage of ICICI Bank, a well-known and trusted name in financial services in India and Prudential plc, one of UK's largest players in the insurance & fund management sectors. ICICI Prudential Asset Management Company, in a span of just over eight years, has forged a position of pre-eminence in the Indian Mutual Fund industry as second largest asset management companies in the country with assets under management of Rs. 48,689 crores (as of July 31, 2008). The Company manages a

83

comprehensive range of schemes to meet the varying investment needs of its investors spread across 68 cities in the country.

SECTION 4
This section summarizes the results of the performance appraisal of selected schemes in terms of daily returns and the risk associated therewith. The risk and return analysis has been carried out aim wise and according to periodicity. The model devised by Sharpe has been applied to evaluate the risk-adjusted performance of sample schemes. By the analysis of data on the basis of daily returns, it can be said that ICICI Prudential Liquid Plan is the best for investment because returns on ICICI Prudential Liquid Plan scheme is much higher than the others. On the basis of risk analyses, Sunderam BNP Paribus Plus-Dividend scheme is the best because the risk is very less in this scheme as compared to the others and on the basis of Beta and Sharpes Index, it will be right to say that ICICI Prudential Liquid Plan and Sunderam BNP Paribus Balanced Fund Dividend Option are the most suitable schemes for investment.

84

RECOMMENDATIONS

Do not panic; remain disciplined and stay committed to your investment plans. the markets does these kinds of things once in a while; but it will pass. In the long run, a disciplined investor will see his objectives being met.

In our view, the long term investment opportunity presented by the Indian stock markets remains unchanged. The fundamentals of the economy and the companies continue to be generally robust. we could expect a 15% sustainable growth in earnings over the next few years.

At this time there is big chance of stock market appreciation so investors should purchase those funds which have high beta.

Investors should consider past performance of funds on the basis of sharp ratio, standard deviation, beta of funds. This will be helpful in maximize the return of investors

If investor is risk averter then he should go to those funds which do not have high standard deviation.

85

ANNEXURE

86

LIST OF TABLES

Tables Some of the AMCs operating currently Banks V/s Mutual Funds NAVs based average daily returns and ranking of selected mutual fund schemes Ranking of selected mutual fund schemes according to Standard Deviation of NAVs based daily returns Beta Values and ranking of selected mutual fund schemes Sharpes Index and its difference from benchmark based on CNX Nifty and NAV returns for selected mutual fund schemes

87

BIBLIOGRAPHY
Books Bodla, BS, Turan MS, Performance Appraisal of Mutual Funds Gupta, S P, Statistical Methods Chandra, Prasanna, The Investment Game - How to Win Seema Vaid, Mutual Fund Operations in India Newspapers Economic Times Financial Express Business Standard The Economic Survey of India SEBI Annual Report Business Line

88