Awarness of mutual funds- A choice of factors.doc

8/22/2019 Awarness of mutual funds- A choice of factors.doc

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INTRODUCTION TO MUTUAL FUNDS

A Mutual Fund is a trust that pools the savings of a number of investors

who share a common financial goal. The money thus collected is invested by the

fund manager in different types of securities depending upon the objective of the

scheme. These could range from shares to debentures to money market

instruments. The income earned through these investments and the capital

appreciations realized by the scheme are shared by its unit holders in proportion

to the number of units owned by them (pro rata. Thus a Mutual Fund is the most

suitable investment for the common man as it offers an opportunity to invest in a

diversified! professionally managed portfolio at a relatively low cost. Anybody

with an investible surplus of as little as a few thousand rupees can invest in

Mutual Funds. "ach Mutual Fund scheme has a defined investment objective

and strategy.

A mutual fund is the ideal investment #vehicle for today$s comple% and

modern financial scenario. Markets for e&uity shares! bonds and other fi%ed

income instruments! real estate! derivatives and other assets have become

mature and information driven. 'rice 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. )t appoints

professionally &ualified and e%perienced 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. )n effect! the mutual

fund vehicle e%ploits economies of scale in all three areas * research!

investments and transaction processing. +hile the concept of individuals coming

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together to invest money collectively is not new! the mutual fund in its present

form is a ,-th century phenomenon. )n fact! mutual funds gained popularity only

after the econd +orld +ar. /lobally! there are thousands of firms offering tensof thousands of mutual funds with different investment objectives. Today! mutual

funds collectively manage almost as much as or more money as compared to

banks.

A draft offer document is to be prepared at the time of launching the fund.

Typically! it pre specifies the investment objectives$ of the fund! the risk $

associated! the costs involved in the process and the broad rules for entry into

and e%it from the fund and other areas of operation. )n )ndia! as in most

countries! th0se sponsors need approval from a regulator! "1) (ecurities

e%change 1oard of )ndia in our case. "1) 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. )t also hires another entity to be the

custodian of the assets of the fund and perhaps a third one to handle registry

work for the unit holders (subscribers of the fund.

)n the )ndian conte%t! the sponsors promote the Asset Management

2ompany also! in which it holds a majority stake. )n many cases a sponsor can

hold a 3--4 stake in the Asset Management 2ompany (AM2. ".g. 1irla /lobal

Finance is the sponsor of the 1irla un 5ife Asset Management 2ompany 5td.!

which has floated different mutual funds schemes and also acts as an asset

manager for the funds collected under the schemes.

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CONCEPT

Mutual fund is a mechanism for pooling the resources by issuing units to

the investors and investing funds in securities in accordance with objectives as

disclosed in offer document.

)nvestments in securities are spread across a wide cross*section of

industries and sectors and thus the risk is reduced. 6iversification reduces the

risk because all stocks may not move in the same direction in the same

proportion at the same time. Mutual fund issues units to the investors in

accordance with &uantum of money invested by them. )nvestors of mutual funds

are known as unit holders

The investors! in proportion to their investments! share the profits or

losses. The mutual funds normally come out with a number of schemes with

different investment objectives! which are launched from time to time. A mutual

fund is re&uired to be registered with ecurities and "%change 1oard of )ndia

("1)! which regulates securities markets before it can collect funds from the

public.

MUTUAL FUND OPERATION CYCLE

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ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates the

organizational set up of a mutual fund7

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ORIGIN - U.S. EXPERIENCE

The origin of mutual funds in the 8A dates back to the formation of the

Massachusetts )nvestors Trust in 30,9. +ith seven decades of growth history!

the mutual fund industry has become the second largest financial servicesindustry in the 8A. +hile closed*end funds form a major chunk of the mutual

funds in )ndia! they represent only a small portion of investment business in the

8. 1y the end of 300:! there were appro%imately ;-- closed*end funds with


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subjected to stringent guidelines and strict enforcement of rules and regulations!

investment company industry in the 8A is distinguishes to be largely self*

regulated. Aiming to promote ethical and fair dealings in the industry! the

)nvestment 2ompany )nstitute works in association with the "2.

+hile the "2 ensures compliance with the federal regulations and

imposes its own regulations! it is necessary for funds to comply withy the )

code in order to be e%empt from corporate ta%. The )nvestment 2ompanies

2ommittee is responsible for specific guidance relating to financial reporting!

accounting! and financial statement disclosure issues. The FA1 is the general

accounting standards board for all industries including the investment

companies. )n addition to the regulatory control by these agencies! bank*

sponsored mutual funds are subject to regulation by the =ffice of the 2ontroller

of the 2urrency! the 1oard of 6irectors of the Federal eserve 1oard and the

Federal 6eposit )nsurance 2ompany. 2urrently! there is s debate about the

regulatory status of bank mutual funds! and one of these regulations may

become the sole regulation.

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STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY

The )ndian mutual fund industry is dominated by the 8nit Trust of )ndia!

which has a total corpus of s;--bn collected from more than ,- million

investors. The*8T) has many fundsBschemes in all categories ie e&uity!$balanced!income etc with some being open*ended and some being closed*ended. The 8nit

cheme 30C9 commonly referred to as 8 C9! which is a balanced fund! is the

biggest scheme with a corpus of about s,--bn. 8T) was floated by financial

institutions and is governed by a special act of 'arliament. Most of its investors

believe that the 8T) is government 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. 2an bank Asset Management floated by 2anara 1ank and

1) Funds Management floated by the tate 1ank of )ndia are the largest of

these. /)2 AM2 floated by /eneral )nsurance 2orporation and Deevan 1ima

ahayog AM2 floated by the 5)2 are some of the other prominent ones. The

aggregate corpus of funds managed by this category of AM2s is about s3E-bn.

The third largest categories of mutual funds are the ones floated by the private

sector and by foreign asset management companies. The largest of these are

'rudential )2)2) AM2 and 1irla un 5ife AM2. The aggregate corpus of assets

managed by this category of AM2s is in e%cess of s,E-bn

F"8">T5G 8"6 T"M

Net Asset Value (NAV)

>et Asset ?alue is the market value of the assets of the scheme minus its liabilities. The

per unit >A? is the net asset value of the scheme divided by the number of units

outstanding on the ?aluation 6ate.

ale 'rice

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)s the price you pay when you invest in a scheme. Also called =ffer 'rice. )t may include

a sales load.

epurchase 'rice

)s the price at which a close*ended scheme repurchases its units and it may include a

back*end load. This is also called 1id 'rice.

edemption 'rice

)s the price at which open*ended schemes repurchase their units and close*ended

schemes redeem their units on maturity. uch prices are >A? related.

ales 5oad

)s a charge collected by a scheme when it sells the units. Also called! HFront*endI load.

chemes that do not charge a load are called H>o 5oadI schemes.

epurchase or H1ack*endI 5oad

)s a charge collected by a scheme when it buys back the units from the unit holdersJ

The mutual fund industry in )ndia started in 30C: with the formation of 8nit Trust of )ndia!

at the initiative of the /overnment of )ndia and eserve 1ank the. The history of mutual

funds in )ndia can be broadly divided into four distinct phases First 'hase K 30C9*L;

8nit Trust of )ndia (8T) was established on 30C: by an Act of 'arliament. )t was set up

by the eserve 1ank of )ndia and functioned under the egulatory and administrative

control of the eserve 1ank of )ndia. )n 30;L 8T) was de*linked from the 1) and the

)ndustrial 6evelopment 1ank of )ndia ()61) took over the regulatory and administrative

control in place of 1). The first scheme launched by 8T) was 8nit cheme 30C9. At the

end of 30LL 8T) had s.C!;-- crores of assets under management. econd 'hase K

30L;*300: ("ntry of 'ublic ector Funds 30L; marked the entry of non* 8T)! public

sector mutual funds set up by public sector banks and 5ife )nsurance 2orporation of

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)ndia (5)2 and /eneral )nsurance 2orporation of )ndia (/)2. 1) Mutual Fund was the

first non* 8T) Mutual Fund established in Dune 30L; followed by 2an bank Mutual Fund

(6ec L;! 'unjab >ational 1ank Mutual Fund (Aug L0! )ndian 1ank Mutual Fund (>ov

L0! 1ank of )ndia (Dun 0-! 1ank of 1aroda Mutual Fund (=ct 0,. 5)2 established itsmutual fund in Dune 30L0 while /)2 had set up its mutual fund in 6ecember 300-. At the

end of 300:! the mutual fund industry had assets under management of s.9;!--9

crores. Third 'hase K 300:*,--: ("ntry of 'rivate ector Funds +ith the entry of

private sector funds in 300:! a new era started in the )ndian mutual fund industry! giving

the )ndian investors a wider choice of fund families. Also! 300: was the year in which the

first Mutual Fund egulations came into being! under which all mutual funds! e%cept 8T)

were to be registered and governed. The erstwhile othari 'ioneer (now merged with

Franklin Templeton was the first private sector mutual fund registered in Duly 300:.The 300: "1) (Mutual Fund egulations were substituted by a more comprehensive

and revised Mutual Fund egulations in 300C. The industry now functions under the

"1) (Mutual Fund egulations 300C. The number of mutual fund houses went on

increasing! with many foreign mutual funds setting up funds in )ndia and also the industry

has witnessed several mergers and ac&uisitions. As at the end of Danuary ,--:! there

were :: mutual funds with total assets of s. 3!,3!L-E crores. The 8nit Trust of )ndia

with s.99! E93 crores of assets under management was way ahead of other mutual

funds. Fourth 'hase K since February ,--: )n February ,--:! following the repeal of

the 8nit Trust of )ndia Act 30C: 8T) was bifurcated into two separate entities. =ne is the

pecified 8ndertaking of the 8nit Trust of )ndia with assets under management of s.,0!

L:E crores as at the end of Danuary ,--:! representing broadly! the assets of 8 C9

scheme! assured return and certain other schemes. The pecified 8ndertaking of 8nit

Trust of )ndia! functioning under an administrator and under the rules framed by

/overnment of )ndia and does not come under the purview of the Mutual Fund

egulations. The second is the 8T) Mutual Fund 5td! sponsored by 1)! '>1! 1=1 and

5)2. )t is registered with "1) and functions under the Mutual Fund egulations. +ith the

bifurcation of the erstwhile 8T) which had in March ,--- more than s.;C!--- crores of

assets under management and with the setting up of a 8T) Mutual Fund! conforming to

the "1) Mutual Fund egulations! 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 eptember! ,--9! there were ,0 funds! which

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manage assets of s.3E:3-L crores under 9,3 schemes. The graph indicates the

growth of assets over the years. /=+T@ )> A"T 8>6" MA>A/"M">T

>ote7

"rstwhile 8T) was bifurcated into 8T) Mutual Fund and the pecified 8ndertaking of the

8nit Trust of )ndia effective from February ,--:. The Assets under management of the

pecified 8ndertaking of the 8nit Trust of )ndia has therefore been e%cluded from the

total assets of the industry as a whole from February ,--: onwards.

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AM2 "T8'

A mutual fund is setup in the form of a trust! which has sponsor! trustees!

Asset Management 2ompany (AM2 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 2ompany (AM2 approved by "1) manages the funds by

making investments in various types of securities. 2ustodian! who is registered

with "1)! holds the securities of various schemes of the fund in its custody. The

trustees are direction over AM2. They monitor the performance and compliance

of "1) egulations by the mutual fund.

"1f egulations re&uire that at feast 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! E- 4 of the directors of AM2 must be

independent. All mutual funds are re&uired to be registered with "1) b$efore the

launch any scheme. @owever! 8nit Trust of )ndia (8T) is not registered with

"1) (as on Danuary 3E! ,--,.

The objectives to be achieved by mutual funds are as follows7

'rovide an opportunity for lower income groups to ac&uire property.

To cater mainly to the need of individual investors who means are small.

To manage investorIs portfolios in a manner that provides regular income!

growth! afety! li&uidity and diversification.

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MUTUAL FUNDS IN INDIA (!"#-$%%%)

The end of millennium marks :C years of e%istence of mutual funds in this

country. The ride through these :C years is not been smooth. )nvestor opinion is

still divided. +hile some are for mutual funds others are against it.

8T) commenced its operations from Duly 30C9. The impetus for

establishing a formal institution came from the desire to increase the propensity

of the middle and lower groups to save and to invest. 8T) came into e%istence

during a period marked by great political and economic uncertainty in )ndia. +ith

war on the borders and economic turmoil that depressed the financial market!

entrepreneurs were hesitant to enter capital market.

The already e%isting companies found it difficult to raise fresh capital! as

investors did not respond ade&uately to new issues. "arnest efforts were

re&uired to canalize savings of the community into productive uses in order to

speed up the process of industrial growth. Then the Finance Minister! T.T.

rishnamachari set up the idea of a unit trust that would be #open to any person

or institution to purchase the units offered by the trust. @owever! this institution

as we see it! is intended to cater to the needs of individual investors! and evenamong them as far as possible! to those whose means are small.#

@is ideas took the form of the 8nit Trust of )ndia! an intermediary that

would help fulfill the twin objectives of mobilizing retail savings and investing

those savings in the capital market and passing on the benefits so accrued to the

small investors.

8T) commenced its operations from Duly 30C9 "with a view to encouragingsavings and investment and participation in the income, profits and gains

accruing to the Corporation from the acquisition, holding, management and

disposal of securities." 6ifferent provisions of the 8T) Act laid down the structure

of management! scope of business! powers and functions of the Trust as well as

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=ne thing is certain * the fund industry is here to stay. The industry was

one*entity show till 30LC when the 6T) monopoly was broken when 1) and 2an

bank mutual fund entered the arena. This was followed by the entry of others like

1=)! 5)2! /)/! etc. sponsored by public sector banks. tarting with an asset

base of s-.,Ebn in 30C9 the industry has grown at a compounded average

growth rate of ,C.:94 to its current size of s33:-bn.

The period 30LC*300: can be termed as the period of public sector mutual

funds ('MFIs. From one player in 30LE the number increased to L in 300:. The

party did not last long. +hen the private sector made its debut in 300:*09! the

stock market was booming.

The opening up of the asset management business to private sector in

300: saw international players like Morgan tanley! Dar dine Fleming!

D'.Morgan! /eorge oros and 2apital )nternational along with the host of

domestic players join the party. 1ut for the e&uity funds! the period of 3009*0C

was one of the worst in the history of )ndian Mutual Funds.

3000*,--- Gear of the funds

Mutual funds have been around for a long period of time to be precise for

:C yrs but the year 3000 saw immense future potential and developments in this

sector. This year signaled the year of resurgence of mutual funds and the

regaining of investor confidence in these MF$s. This time around all the

participants are involved in the revival of the funds ***** the AM2$s! the unit

holders! the other related parties. @owever the sole factor that gave life to the

revival of the funds was the 8nion 1udget. The budget brought about a large

number of changes in one stroke. An insight of the 8nion 1udget on mutual

funds ta%ation benefits is provided later.

)t provided centre stage to the mutual funds! made them more attractive

and provides acceptability among the investors. The 8nion 1udget e%empted

mutual fund dividend given out by e&uity*oriented schemes from ta%! both at the

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hands of the investor as well as the mutual fund. >o longer were the mutual

funds interested in selling the concept of mutual funds they wanted to talk

business! which would mean to increase asset base! and to get asset base! and

investor base they had to be fully armed with a whole lot of schemes for every

investor .o new schemes for new )'=$s were inevitable. The &uest to attract

investors e%tended beyond just new schemes. The funds started to regulate

themselves and were all out on winning the trust and confidence of the investors

under the aegis of the Association of Mutual Funds of )ndia (AMF)

=ne can say that the industry is moving from infancy to adolescence! the

industry is maturing and the investors and funds are frankly and openly

discussing difficulties opportunities and compulsions.

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AMFI MEM&ERS

A) &a' s*'s*+e,

a. 1=1 Asset Management 2o. 5td.

b. 2anbank )nvestment Management ervices 5td.

c. 1) Funds Management 5td.

d. 8T) Asset Management 2ompany (' 5td.

&) I'sttut*'s

a. /)/ Asset Management 2o. 5td.

b. Deevan 1ima ahayog Asset Management 2o. 5td.

C) P+ate Se/t*+

3. )ndian

a. 1enchMark Asset Management 2o. 'vt. 5td.

b. 2holamandalam Asset Management 2o. 5td.

c. "scorts Asset Management 5td.

d. D.M. 2apital Management 'vt. 5td.

e. otak Mahindra Asset Management 2o. 5td.

f. undaram Asset Management 2ompany 5td.

g. eliance 2apital Asset Management 5td.

h. Tata Asset Management 'rivate 5td.

,. Doint ?entures * 'redominantly )ndian

a. 1iria un 5ife Asset Management 2o. 5td.

b. 2redit 2apital Asset Management 2o. 5td.

c. 6' Merrill 5ynch Fund Managers 5imited

d. ahara Asset Management 2o. 'vt. 5td.

e. @6F2 Asset Management 2ompany 5td.

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:. Doint ?entures * 'redominantly Foreign

a. A1> AM= Asset Management () 5td.

b. Alliance 2apital Asset Management ()ndia 'vt. 5td.

c. 6eutsche Asset Management ()ndia 'vt. 5td.

d. @12 Asset Management ()ndia 'rivate 5td.

e. )>/.)nvestment Management ()ndia 'vt. 5td.

f. Morgan tanley )nvestment Management 'vt. 5td.

g. 'rincipal Asset Management 2o. 'vt. 5td.

h. 'rudential )2)2) Asset Management 2o. 5td.

i. tandard 2hartered Asset Mgmt 2o. 'vt. 5td.

j. Franklin Templeton Asset Mgmt. ()ndia 'vt. 5td.

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TYPES OF MUTUAL FUNDS

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

investment objective.

1y tructure7

Oe'-e',e, Fu',s

An open*end fund is one that is available for subscription all through the

year. These do not have a fi%ed maturity. )nvestors can conveniently buy and sell

units at >et Asset ?alue (#>A?# related prices. The key feature of open*end

schemes is li&uidity.

Cl*se,-e',e, Fu',s

A closed*end fund has a stipulated maturity period which generally

ranging from : to 3E years. The fund is open for subscription only $during a

specified period. )nvestors can invest in the scheme at the time of the initial

public issue and thereafter they can buy or sell the units of the scheme on the

stock e%changes where they are listed. )n order to provide an e%it route to the

investors! some close*ended funds give an option of selling back the units to the

Mutual Fund through periodic repurchase at >A? related prices. "1)

egulations stipulate that at least one of the two e%it routes is provided to the

investor.

I'te+al Fu',s

)nterval funds combine the features of open*ended and close*ended

schemes. They are open for sale or redemption during pre*determined intervals

at >A? related prices.

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1y )nvestment =bjective7

G+*0t1 Fu',s

The aim of growth funds is to provide capital appreciation over the

medium to long* term. uch schemes normally invest a majority of their corpus in

e&uities. )t has been proven that returns from stocks! have outperformed most

other kind of investments held over the long term. /rowth schemes are ideal for

investors having a long*term outlook seeking growth over a period of time.

I'/*2e Fu',s

The aim of income funds is to provide regular and steady income to

investors. uch schemes generally invest in fi%ed income securities such asbonds! corporate debentures and /overnment securities. )ncome Funds are

ideal for capital stability and regular income.

&ala'/e, Fu',s

The aim of balanced funds is to provide both growth and regular income.

uch schemes periodically distribute a part of their earning and invest both in

e&uities and fi%ed income securities in the proportion indicated in their offer

documents. )n a rising stock market! the >A? of these schemes may not

normally keep pace! or fall e&ually when the market falls. These are ideal for

investors looking for a combination of income and moderate growth.

M*'e3 Ma+et Fu',s

The aim of money market funds is to provide easy li&uidity! preservation of

capital and moderate income. These schemes generally invest in safer short*

term instruments such as treasury bills! certificates of deposit! commercial paperand inter*bank call money. eturns on these schemes may fluctuate depending

upon the interest rates prevailing in the market. These are ideal for 2orporate

and individual investors as a means to park their surplus funds for short periods.

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L*a, Fu',s

A 5oad Fund is one that charges a commission for entry or e%it. That is!

each time you buy or sell units in the fund! a commission will be*payable.

Typically entry and e%it loads range from 3 4 to ,4. )t could be worth payingthe load! if the fund has a good performance history.

N*-L*a, Fu',s

A >o*5oad Fund is one that does not charge a commission for entry or

e%it. That is! no commission is payable on purchase or sale of units in the

fund. The advantage of a no load fund is that the entire corpus is put to work.

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&ENEFITS OF MUTUAL FUND INVESTMENT

'rofessional Management

Mutual Funds provide the services of e%perienced 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.

De+s4/at*'

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. Gou

achieve this diversification through a Mutual Fund with far less money than you

can do on your own.

C*'e'e't A,2'st+at*'

)nvesting 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.

Retu+' P*te'tal

=ver 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.

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L*0 C*sts

Mutual Funds are a relatively less e%pensive 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.

L5u,t3

)n open*end schemes! the investor gets the money back promptly at net

asset value related prices from the Mutual Fund. )n. closed*end schemes! the

units can be sold on a stock e%change at the prevailing market price or the

investor can avail of the facility of direct repurchase at >A? related prices by the

Mutual Fund.

T+a'sa+e'/3

Gou get regular information on the value of your investment in addition to

disclosure on the specific investments made by your scheme! the proportion

invested in each class of assets and the fund manager$s investment strategy and

outlook.

Fle67lt3

Through features such as regular investment plans! regular withdrawal

plans and dividend reinvestment plans! you can systematically invest or withdraw

funds according to your needs and convenience.

A44*+,a7lt3

)nvestors individually may lack sufficient funds to invest in high*grade

stocks. A mutual fund because of its large corpus allows even a small investor to

take the benefit of its investment strategy.

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C1*/e *4 S/1e2es

Mutual Funds offer a family of schemes to suit your varying needs over a

lifetime.

8ell Re9ulate,

All Mutual Funds are registered with "1) and they function within the

provisions of strict regulations designed to protect the interests of investors. The

operations of Mutual Funds are regularly monitored by "1).

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NET ASSET VALUE (NAV)

The net asset value of the fund is the cumulative market value of the

assets fund net of its liabilities. )n other words! if the fund is dissolved or

li&uidated! by selling off all the assets in the fund! this is the amount that theshareholders would collectively own. This gives rise to thN concept of net asset

value per unit! which is the value! represented by the ownership of one unit in the

fund. )t is calculated simply by dividing the net asset value of the fund by the

$number of units. @owever! most people refer loosely to the >A? per unit as >A?!

ignoring the #per unit#. +e also abide by the same convention.

Cal/ulat*' *4 NAV

The most important part of the calculation is the valuation of the assets owned by

the fund. =nce it is calculated! the >A? is simply the net value of assets divided

by the number of units outstanding. The detailed methodology for the calculation

of the asset value is given below.

Asset alue s e5ual t*

um of market value of sharesBdebentures

O 5i&uid assetsBcash held! if any

O 6ividendsBinterest accrued

OAmount due on unpaid assets

*"%penses accrued but not paid

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6etails on the above items

For li&uid sharesBdebentures! valuation is done on the basis of the last or

closing market price on the principal e%change where the security is traded

For illi&uid and unlisted andBor thinly traded sharesBdebentures! the value

has to be estimated. For shares! this could be the book value per share or an

estimated market price if suitable benchmarks are available. For debentures and

bonds! value is estimated on the basis of yields of comparable li&uid securities

after adjusting for li&uidity. The value of fi%ed interest bearing securities moves in

a direction opposite to interest rate changes ?aluation of debentures and bonds

is a big problem since most of them are unlisted and thinly traded. This gives

considerable leeway to the AM2s on valuation and some of the AM2s are

believed to take advantage of this and adopt fle%ible valuation policies depending

on the situation.

)nterest is payable on debenturesBbonds on a periodic basis say every C

months. 1ut! with every passing day! interest is said to be accrued! at the daily

interest rate! which is calculated by dividing the periodic interest payment with

the number of days in each period! Thus! accrued interest on a particular day is

e&ual to the daily interest rate multiplied by the number of days since the last

interest payment date.

8sually! dividends are proposed at the time of the Annual /eneral

meeting and become due on the record date. There is a gap between the dates

on which it becomes due and the actual payment date. )n the intermediate

period! it is deemed to be #accrued#.

"%penses including management fees! custody charges etc. are

calculated on a daily basis.

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RECENT TRENDS IN MUTUAL FUND INDUSTRY

The most important trend in the mutual fund industry is the aggressive

e%pansion 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. ome schemes

had offered guaranteed returns and their parent organizations had to bail out

these AM2s 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 AM2s have not been able to retain staff! float new schemes etc. and it is

doubtful whether! barring a few e%ceptions! they have serious plans of continuing

the activity in a major way.

The e%perience of some of the AM2s floated by private sector )ndian

companies was also very similar. They &uickly realized that the AM2 business is

a business! which makes money in the long term and re&uires deep*pocketed

support in the intermediate years. ome have sold out to foreign owned

companies! some have merged with others and there is general restructuring

going on.

The foreign owned companies have deep pockets and have come in here

with the e%pectation of a long haul. They can be credited with introducing many

new practices such as new product innovation! sharp improvement in service

standards and disclosure! usage of technology! broker education and support

etc. )n fact! they have forced the industry to upgrade itself.

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MAR:ET TRENDS

A lone 8T) with just one scheme in 30C9 now competes with as many as

9-- odd products and :9 players in the market. )n spite of the stiff competition

and losing market share! 8T) still remains a formidable force to reckon with. 5astsi% years have been the most turbulent as well as e%iting ones for the industry.

>ew players have come in! while others have decided to close shop by either

selling off or merging with others. 'roduct innovation is now passP with the game

shifting to performance delivery in fund management as well as service. Those Q

directly associated with the fund management industry like distributors! registrars

and transfer agents! and even the regulators have become more mature and

responsible.

The industry is also having a profound impact on financial markets. +hile

8T) has always been a dominant player on the bourses as well as the debt

markets! the new generations of private funds! which have gained substantial

mass! are now seen fle%ing their muscles. Fund managers by their selection

criteria for stocks have forced corporate governance on the industry. 1y

rewarding honest and transparent management with higher valuations! a system

of risk*reward has been created where the corporate sector is more transparent

then before.

Funds have shifted their focus to the recession free sectors like

'harmaceuticals! FM2/ and technology sector. Funds performances are

improving. Funds collection! which averaged at less than sl--bn per annum

over five*year period spanning 300:*0L doubled to s,3-bn in 300L*00. )n the

current year mobilization till now have e%ceeded sE--bn. Total collection for the

current financial year ending March ,--- is e%pected to reach s9E-bn.

+hat is particularly noteworthy is that bulk of the mobilization has been

by the private sector mutual funds rather than public sector mutual funds.

)ndeed private MFs saw a net inflow of s. ;L30.:9 crore during the first nine

months of the year.

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Mutual funds are now also competing with commercial banks in*the race

for retail investor$s savings and corporate float money. The power shift towards

mutual funds has become obvious. The coming few years will show .that the

traditional saving avenues are losing out in the current scenario. Many investors

are realizing that investments in savings accounts are as good as locking up their

deposits 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 3000*,--- matches the whole of 300L*00.

)ndia is at the first stage of a revolution that has already peaked in the

8.. The 8.. boasts of an Asset base that is much higher than its bank

deposits. )n )ndia! mutual fund assets are not even 3-4 of the bank deposits! but

this trend is beginning to change. ecent figures indicate that in the first &uarter

of the current fiscal year mutual fund assets went up by 33E4 whereas bank

deposits rose by only 3;4. #(ource7 Think tank! The Financial "%press eptember!

00 This is forcing a large number of banks to adopt the concept of narrow

banking wherein the deposits are kept in /ilts and some other assets which

improves li&uidity and reduces risk. The basic fact lies that banks cannot beignored and they will not close down completely. Their role as intermediaries

cannot be ignored. )t is just that Mutual Funds are going to change the way

banks do business in the future.

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GLO&AL SCENARIO

S*2e 7as/ 4a/ts;

The money market mutual fund segment has a total corpus of < 3.9L

trillion in the 8.. against a corpus of < 3-- million in )ndia.

Q =ut of the top 3- mutual funds worldwide! eight are bank* sponsored. =nly

Fidelity and 2apital are non*bank mutual fundsI in this group.

)n the 8.. the total number of schemes is higher than that of the listed

companies while in )ndia we have just ,;; schemes

)nternationally! mutual funds are allowed to go short. )n )ndia fund managers do

not have such leeway.

Q )n the 8.. about 0.; million households will manage their assets on*line

by the year ,--:! such a facility is not yet of avail in )ndia.

=n* line trading is a great idea to reduce management e%penses from the

current , 4 of total assets to about -.;E 4 of the total assets.

;,4 of the core customer base of mutual funds in the top E-*broking firms

in the 8.. is e%pected to trade on*line by ,--:.

)nternationally! on* line investing continues its meteoric rise. Many have

debated about the success of e* commerce and its breakthroughs! but it is true

that this aspect of technology could and will change the way financial sectors

function. @owever! mutual funds cannot be left far behind. They have realized the

potential of the )nternet and are e&uipping themselves to perform better.

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)n fact in advanced countries like the 8..A! mutual funds buy* sell

transactions have already begun on the >et! while in )ndia the >et is used as a

source of )nformation.

uch changes could facilitate easy access! lower intermediation costs and

better services for all. A research agency that specializes in )nternet technology

estimates that over the ne%t four years Mutual Fund Assets traded on* line will

grow ten folds from < 3,L billion to < 3!,,; billion whereas e&uity assets traded

on*line will increase during the period from < ,9C billion to < 3!EC3 billion. This

will increase the share of mutual funds from :94 to 9-4 during the period.

uch increases in volumes are e%pected to bring about large changes in

the way Mutual Funds conduct their business.

@ere are some of the basic changes that have taken place since the

advent of the >et.

5ower 2osts7 6istribution of funds will fall in the online trading regime by

,--:. Mutual funds could bring down their administrative

costs to -.;E4 if trading is done on* line. As per "1)

regulations! bond funds can charge a ma%imum of ,.,E4

and e&uity funds can charge ,.E4 as administrative fees.

Therefore if the administrative costs are low! the benefits are

passed down and hence Mutual Funds are able to attract

mire investors and increase their asset base.

1etter advice7 Mutual funds could provide better advice to their investorsthrough the >et rather than through the traditional

investment routes where there is an additional channel to

deal with the 1rokers. 6irect dealing with the fund could help

the investor with their financial planning.

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)n )ndia! brokers could get more >et savvy than investors and could help

the investors with the knowledge through get from the >et.

Q >ew investors would prefer online7 Mutual funds can target investors who

are young individuals and who are >et savvy! since servicing them wouldbe easier to the >et.

Q )ndia has around 3.C million net users who are prime target for these funds

and this could just be the beginning. The )nternet users are! going to

increase dramatically and mutual funds are going to be the

best beneficiary. +ith smaller administrative costs more funds would

be mobilized .A fund manager must be ready to tackle the volatility and

will have to maintain sufficient amount of investments which are high

li&uidity and low yielding investments to honor redemption.

>et based advertisements7 There will be more sites involved in ads and

promotion of mutual funds. )n the 8.. sites like A=5 offer detailed research and

financial details about the functioning of different funds and their performance

statistics! a is witnessing a genesis in this area . There are many sites such as

indiainfoline.com and indiafn.com that are doing something similar and providing

advice to investors regarding their investments.

)n the 8.. most mutual funds concentrate only on financial funds like

e&uity and debt. ome like real estate funds and commodity funds also take an

e%posure to physical assets. The latter type of funds are preferred by corporate$s

who want to hedge their e%posure to the commodities they deal with.

For instance! a cable manufacturer who needs 3-- tons of 2opper in the

month of Danuary could buy an e&uivalent amount of copper by investing in a

copper fund. For "%ample! 'ermanent 'ortfolio Fund! a conservative 8.. based

fund invests a fi%ed percentage of it$s corpus in /old! ilver! wiss francs!

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)n 8..A. apart from bullion funds there are copper funds! precious metal

funds and real estate funds (investing in real estate and other related assets as

well..)n )ndia! the 2anada based 6undee mutual fund is planning to launch a

gold and a real estate fund before the year*end.

)n developed countries like the 8..A there are funds to $atisfy

everybody$s re&uirement! but in )ndia only the tip of the iceberg has been

e%plored. )n the near future )ndia too will concentrate on financial as well as

physical funds.

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FUTURE SCENARIO

The asset base will continue to grow at an annual rate of about :- to :E 4

over the ne%t few years as investor$s shift their assets from banks and other

traditional avenues. ome of the older public and private sector players will either

close shop or be taken over.

=ut of ten public sector players five will sell out! close down or merge with

stronger players in three to four years. )n the private sector this trend has already

started with two mergers and one takeover. @ere too some of them will down

their shutters in the near future to come.

1ut this does not mean there is no room for other players. The market will

witness a flurry of new players entering the arena. There will be a large number

of offers from various asset management companies in the time to come. ome

big names like Fidelity! 'rincipal! =ld Mutual etc. are looking at )ndian market

seriously. =ne important reason for it is that most major players already have

presence here and hence these big names would hardly like to get left behind.

The mutual fund industry is awaiting the introduction of derivatives in )ndia

as this would enable it to hedge its risk and this in turn would be reflected in it$s

>et Asset ?alue (>A?.

"1) is working out the norms for enabling the e%isting mutual fund

schemes to trade in derivatives. )mportantly! many market players have called on

the egulator to initiate the process immediately! so that the mutual funds can

implement the changes that are re&uired to trade in 6erivatives.

May the >et Asset ?alues growRR

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SPSS PAC:AGE DETAILS

SPSS is a computer program used for statistical analysis and is also the name

of the company (' )nc. that sells it.

SPSS

Deel*e,

73' )nc.

Latest

+elease

3C.- (+in! 3C.- (Mac! 3C.-

(5inu% B ,--;

OS +indows! 5inu% B 8>)S Mac

Ge'+e tatistical analysis

L/e'se proprietary

8e7ste www.spss.com

Statistics program

' (originally! tatistical 'ackage for the ocial ciences was released in

its first version in 30CL after being founded by >orman >ie! then a political

science postgraduate at tanford 8niversity!U3V and now esearch 'rofessor in

the 6epartment of 'olitical cience at tanford and 'rofessor "meritus of

'olitical cience at the 8niversity of 2hicago.U,V ' is among the most

widely used programs for statistical analysis in social science. )t is used by

market researchers! health researchers! survey companies! government!

education researchers! marketing organisations and others. )n addition to

statistical analysis! data management (case selection! file reshaping! creating

derived data and data documentation (a metadata dictionary is stored with the

data are features of the base software.

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tatistics included in the base software7

• 6escriptive statistics7 2ross tabulation! Fre&uencies! 6escriptives!

"%plore! 6escriptive atio tatistics

• 1ivariate statistics7 Means! t*test! A>=?A! 2orrelation (bivariate! partial!

distances! >onparametric tests

• 'rediction for numerical outcomes7 5inear regression

• 'rediction for identifying groups7 Factor analysis! cluster analysis (two*

step! *means! hierarchical! 6iscriminant

The many features of ' are accessible via pull*down menus or can be

programmed with a proprietary 9/5 command syntax language. 2ommand

synta% programming has the benefits of reproducibility and handling comple%

data manipulations and analyses. The pull*down menu interface also

generates command synta%! though the default settings have to be changed to

make the synta% visible to the user. 'rograms can be run interactively! or

unattended using the supplied 'roduction Dob Facility. Additionally a #macro#

language can be used to write command language subroutines and a 'ython

programmability e%tension can access the information in the data dictionary

and data and dynamically build command synta% programs. The 'ython

programmability e%tension! introduced in ' 39! replaced the less

functional AS 1asic #scripts# for most purposes! although a%1asic remains

available. )n addition! the 'ython e%tension allows ' to run any of the

statistics in the free software package . From version 39 onwards ' can

be driven e%ternally by a 'ython or a ?1.>"T program using supplied #plug*

ins#.

' places constraints on internal file structure! data types! data processing

and matching files! which together considerably simplify programming. '

datasets have a ,*dimensional table structure where the rows typically

represent cases (such as individuals or households and the columns

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represent measurements (such as age! se% or household income. =nly , data

types are defined7 numeric and te%t (or #string#. All data processing occurs

se&uentially case*by*case through the file. Files can be matched one*to*one

and one*to*many! but not many*to*many.

The graphical user interface has two views which can be toggled by clicking

on one of the two tabs in the bottom left of the ' window. The $6ata ?iew$

shows a spreadsheet view of the cases (rows and variables (columns. The

$?ariable ?iew$ displays the metadata dictionary where each row represents a

variable and shows the variable name! variable label! value label(s! print

width! measurement type and a variety of other characteristics. 2ells in both

views can be manually edited! defining the file structure and allowing dataentry without using command synta%. This may be sufficient for small datasets.

5arger datasets such as statistical surveys are more often created in data

entry software! or entered during computer*assisted personal interviewing! by

scanning and using optical character recognition and optical mark recognition

software! or by direct capture from online &uestionnaires. These datasets are

then read into '.

' can read and write data from A2)) te%t files (including hierarchical

files! other statistics packages! spreadsheets and databases. ' can read

and write to e%ternal relational database tables via =612 and 5.

tatistical output is to a proprietary file format (W.spo file! supporting pivot

tables for which! in addition to the in*package viewer! a stand*alone reader is

provided. The proprietary output can be e%ported to te%t or Microsoft +ord.

Alternatively! output can be captured as data (using the =M command! as

te%t! tab*delimited te%t! @TM5! SM5! ' dataset or a variety of graphic

image formats (D'"/! '>/! 1M' and "MF.

Add*on modules provide additional capabilities. The available modules are7

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• ' 'rogrammability "%tension (added in version 39. Allows 'ython

programming control of '.

• ' 6ata ?alidation (added in version 39. Allows programming of

logical checks and reporting of suspicious values.

• ' egression Models * 5ogistic regression! ordinal regression!

multinomial logistic regression! and mi%ed models (multilevel models.

• ' Advanced Models * Multivariate /5M and repeated measures

A>=?A (removed from base system in version 39.

• ' 2lassification Trees. 2reates classification and decision trees for

identifying groups and predicting behaviour.

• ' Tables. Allows user*defined control of output for reports.

• ' "%act Tests. Allows statistical testing on small samples.

• ' 2ategories

• ' TrendsX

•

' 2onjoint

• ' Missing ?alue Analysis. imple regression*based imputation.

• ' Map

• ' 2omple% amples (added in ?ersion 3,. Adjusts for stratification

and clustering and other sample selection biases.

' erver is a version of ' with a clientBserver architecture. )t has

some features not available in the desktop version! such as scoring functions.

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Versions

' version 3C.- runs under +indows! Mac = 3-.E and earlier! and 5inu%.

The graphical user interface is written in Dava. The Mac = version is

provided as a 8niversal binary! making it fully compatible with both 'ower'2

and )ntel*based Mac hardware.

'rior to ' 3C.-! different versions of ' were available for +indows!

Mac = S and 8ni%. The +indows version was updated more fre&uently! and

had more features! than the versions for other operating systems.

' version 3:.- for Mac = S was not compatible with )ntel*based

Macintosh computers! due to the osetta emulation software causing errors in

calculations. ' 3E.- for +indows needed a downloadable hotfi% to be

installed in order to be compatible with +indows ?ista.

SPSS Inc.

The program ' is sold by ' )nc.! a company that sells a wide range of

software for market research! survey research and statistical analysis. These

include AM= for structural e&uation modeling! ample'ower for power

analysis! AnswerTree used for market segmentation! ' Te%t Analysis for

urveys to code open*ended responses! uantum for cross*tabulation!

2lementine for data mining and mr)nterview for 2AT) and online surveys. The

company is head&uartered in 2hicago! )llinois.

Factor analysis

40

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A''*tate, SPSS Outut

Fa/t*+ A'al3ss

This page shows an e%ample of a factor analysis with footnotes e%plaining the

output. 'rofessor Dames idanius! who has generously shared them with us!

collected the data used in this e%ample. Gou can download the data set

=verview7 The #what# and #why# of factor analysis

Factor analysis is a method of data reduction. )t does this by seeking

underlying unobservable (latent variables that are reflected in the observed

variables (manifest variables. There are many different methods that can be

used to conduct a factor analysis (such as principal a%is factor! ma%imum

likelihood! generalized least s&uares! unweighted least s&uares! There are

also many different types of rotations that can be done after the initial

e%traction of factors! including orthogonal rotations! such as varima% and

e&uima%! which impose the restriction that the factors cannot be correlated!

and obli&ue rotations! such as proma%! which allow the factors to be correlated

with one another. Gou also need to determine the number of factors that you

want to e%tract. /iven the number of factor analytic techni&ues and options! itis not surprising that different analysts could reach very different results

analyzing the same data set. @owever! all analysts are looking for simple

structure. imple structure is pattern of results such that each variable loads

highly onto one and only one factor.

Factor analysis is a techni&ue that re&uires a large sample size. Factor

analysis is based on the correlation matri% of the variables involved! and

correlations usually need a large sample size before they stabilize.

Tabachnick and Fidell (,--3! page ELL cite 2omrey and 5ee$s (300, advise

regarding sample size7 E- cases is very poor! 3-- is poor! ,-- is fair! :-- is

good! E-- is very good! and 3--- or more is e%cellent. As a rule of thumb! a

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bare minimum of 3- observations per variable is necessary to avoid

computational difficulties.

For the e%ample below! we are going to do a rather #plain vanilla# factor

analysis. +e will use iterated principal a%is factor with three factors as our

method of e%traction! a varima% rotation! and for comparison! we will also

show the proma% obli&ue solution. The determination of the number of factors

to e%tract should be guided by theory! but also informed by running the

analysis e%tracting different numbers of factors and seeing which number of

factors yields the most interpretable results.

)n this e%ample we have included many options! including the original and

reproduced correlation matri%! the scree plot and the plot of the rotated

factors. +hile you may not wish to use all of these options! we have included

them here to aid in the e%planation of the analysis. +e have also created a

page of annotated output for a principal components analysis that parallels this

analysis. For general information regarding the similarities and differences

between principal components analysis and factor analysis! see Tabachnick

and Fidell (,--3! for e%ample.

4a/t*+

te2" te2? te2@ te2! te2$% te2$

te2$$ te2$= te2$#


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The table above is output because we used the u'a+ate option on the


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of a concern that the variables have very different means andBor standard

deviations (which is often the case when variables are measured on different

scales.

a. Mea' * These are the means of the variables used in the factor analysis.

b. St,. Deat*' * These are the standard deviations of the variables used in

the factor analysis.

c. A'al3ss N * This is the number of cases used in the factor analysis.

The table above is included in the output because we used the ,et option on

the


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Taken together! these tests provide a minimum standard which should be

passed before a factor analysis (or a principal components analysis should be

conducted.

a. C*22u'altes * This is the proportion of each variable$s variance that can

be e%plained by the factors (e.g.! the underlying latent continua. )t is also

noted as h, and can be defined as the sum of s&uared factor loadings for the

variables.

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b. I'tal * +ith principal factor a%is factoring! the initial values on the diagonal

of the correlation matri% are determined by the s&uared multiple correlation of

the variable with the other variables. For e%ample! if you regressed items 39

through ,9 on item 3:! the s&uared multiple correlation coefficient would be .

EC9.

c. E6t+a/t*' * The values in this column indicate the proportion of each

variable$s variance that can be e%plained by the retained factors. ?ariables

with high values are well represented in the common factor space! while

variables with low values are not well represented. ()n this e%ample! we don$t

have any particularly low values. They are the reproduced variances from the

factors that you have e%tracted. Gou can find these values on the diagonal ofthe reproduced correlation matri%.

a. Fa/t*+ * The initial number of factors is the same as the number of

variables used in the factor analysis. @owever! not all 3, factors will be

retained. )n this e%ample! only the first three factors will be retained (as we

re&uested.

b. I'tal E9e'alues * "igenvalues are the variances of the factors.

1ecause we conducted our factor analysis on the correlation matri%! the

variables are standardized! which means that the each variable has a variance

of 3! and the total variance is e&ual to the number of variables used in the

analysis! in this case! 3,.

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c. T*tal * This column contains the "igenvalues. The first factor will always

account for the most variance (and hence have the highest "igenvalue! and

the ne%t factor will account for as much of the left over variance as it can! and

so on. @ence! each successive factor will account for less and less variance.

d. O4 Va+a'/e * This column contains the percent of total variance

accounted for by each factor.

e. Cu2ulate * This column contains the cumulative percentage of

variance accounted for by the current and all preceding factors. For e%ample!

the third row shows a value of CL.:3:. This means that the first three factors

together account for CL.:3:4 of the total variance.

f. E6t+a/t*' Su2s *4 S5ua+e, L*a,'9s * The number of rows in this panel

of the table correspond to the number of factors retained. )n this e%ample! we

re&uested that three factors be retained! so there are three rows! one for each

retained factor. The values in this panel of the table are calculated in the

same way as the values in the left panel! e%cept that here the values are

based on the common variance. The values in this panel of the table will

always be lower than the values in the left panel of the table! because they arebased on the common variance! which is always smaller than the total

variance.

g. R*tat*' Su2s *4 S5ua+e, L*a,'9s * The values in this panel of the

table represent the distribution of the variance after the varima% rotation.

?arima% rotation tries to ma%imize the variance of each of the factors! so the

total amount of variance accounted for is redistributed over the three e%tracted

factors.

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The scree plot graphs the eigenvalue against the factor number. Gou can see

these values in the first two columns of the table immediately above. From the

third factor on! you can see that the line is almost flat! meaning the each

successive factor is accounting for smaller and smaller amounts of the total

variance.

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b. Fa/t*+ Mat+6 * This table contains the unrotated factor loadings! which arethe correlations between the variable and the factor. 1ecause these are

correlations! possible values range from *3 to O3. =n the


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read by removing the clutter of low correlations that are probably not

meaningful anyway.

c. Fa/t*+ * The columns under this heading are the unrotated factors that

have been e%tracted. As you can see by the footnote provided by ' (a.!

three factors were e%tracted (the three factors that we re&uested.

c. Re+*,u/e, C*++elat*'s * This table contains two tables! the reproduced

correlations in the top part of the table! and the residuals in the bottom part of

the table.

d. Re+*,u/e, C*++elat*' * The reproduced correlation matri% is the

correlation matri% based on the e%tracted factors. Gou want the values in the

reproduced matri% to be as close to the values in the original correlation matri%

as possible. This means that the residual matri%! which contains the

differences between the original and the reproduced matri% to be close to

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zero. )f the reproduced matri% is very similar to the original correlation matri%!

then you know that the factors that were e%tracted accounted for a great deal

of the variance in the original correlation matri%! and these few factors do a

good job of representing the original data. The numbers on the diagonal of the

reproduced correlation matri% are presented in the 2ommunalities table in the

column labeled "%tracted.

e. Res,ual * As noted in the first footnote provided by ' (a.! the values

in this part of the table represent the differences between original correlations

(shown in the correlation table at the beginning of the output and the

reproduced correlations! which are shown in the top part of this table. For

e%ample! the original correlation between item3: and item39 is .CC3! and thereproduced correlation between these two variables is .C9C. The residual is .

-3C Y .CC3 * .C9C (with some rounding error.

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b. R*tate, Fa/t*+ Mat+6 * This table contains the rotated factor loadings!

which are the correlations between the variable and the factor. 1ecause these

are correlations! possible values range from *3 to O3. =n the


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read by removing the clutter of low correlations that are probably not

meaningful anyway.

c. Fa/t*+ * The columns under this heading are the rotated factors that have

been e%tracted. As you can see by the footnote provided by ' (a.! three

factors were e%tracted (the three factors that we re&uested. These are the

factors that analysts are most interested in and try to name. For e%ample! the

first factor might be called #instructor competence# because items like

#instructor well prepare# and #instructor competence# load highly on it. The

second factor might be called #relating to students# because items like

#instructor is sensitive to students# and #instructor allows me to ask &uestions#

load highly on it. The third factor has to do with comparisons to otherinstructors and courses.

The table below is from another run of the factor analysis program shown

above! e%cept with a proma% rotation. +e have included it here to show how

different the rotated solutions can be! and to better illustrate what is meant by

simple structure. As you can see with an obli&ue rotation! such as a proma%

rotation! the factors are permitted to be correlated with one another. +ith an

orthogonal rotation! such as the varima% shown above! the factors are not

permitted to be correlated (they are orthogonal to one another. =bli&ue

rotations! such as proma%! produce both factor pattern and factor structure

matrices. For orthogonal rotations! such as varima% and e&uima%! the factor

structure and the factor pattern matrices are the same. The factor structure

matri% represents the correlations between the variables and the factors and is

often called the factor loading matri%. The factor pattern matri% represents thelinear combination of the variables.

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St+u/tu+e Mat+-6

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.C,L .;-3 .C90

.9C, .CEC .EEC

.;3L .CC0 .LLE

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item3: )>T82 +"55

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item,3 )>T82T=

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item,: 2=M'A"6 T=

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item,9 2=M'A"6 T=

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2=8" +A

3 , :

Factor

"%traction Method7 'rincipal A%is Factoring.

otation Method7 'roma% with aiser >ormalization.

The table below indicates that the rotation done is an obli&ue rotation. )f

an orthogonal rotation had been done (like the varima% rotation shown above!

this table would not appear in the output because the correlations between the

factors are set to -. @ere! you can see that the factors are highly correlated.

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The rest of the output shown below is part of the output generated by the

' synta% shown at the beginning of this page.

a. Fa/t*+ T+a's4*+2at*' Mat+6 * This is the matri% by which you multiplythe unrotated factor matri% to get the rotated factor matri%.

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The plot above shows the items (variables in the rotated factor space. +hile

this picture may not be particularly helpful! when you get this graph in the

' output! you can interactively rotate it. This may help you to see how the

items (variables are organized in the common factor space.

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a. Fa/t*+ S/*+e C*e44/e't Mat+6 * This is the factor weight matri% and is

used to compute the factor scores.

a. Fa/t*+ S/*+e C*a+a'/e Mat+6 * 1ecause we used an orthogonal

rotation! this should be a diagonal matri%! meaning that the same number

should appear in all three places along the diagonal. )n actuality the factors

are uncorrelated however! because factor scores are estimated there may be

slight correlations among the factor scores.

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PRINCIPAL COMPONENTS ANALYSIS

'rincipal components analysis is a method designed to transfer a set of

interrelated variables into a new set of uncorrelated components whichaccount for all the variance in the original variables.

P+'/al C*2*'e'ts A'al3ss

Apply ' Factor Analysis 'rocedure to obtain principal components

analysis.

SPSS 4*+ 8',*0s

A. "nter 6ata.

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1. From the menus choose7 Analyze Z 6ata eduction Z Factor. elect two

variables (%3 and %, to be analyzed.

2. 2lick on 6escriptive

)n the 2orrelation Matri% area7 elect 2oefficients. 2lick on

continue.

6. 2lick on "%traction. The "%traction dialog bo% will appear.

Method7 The default is 'rincipal 2omponents.

)n the "%tract area7 elect >umber of Factors. Type [,\. 2lick

2ontinue.

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". 2lick on cores. The Factor cores dialog bo% will appear.

elect ave as ?ariables (>ote that Factor 3]3 and Factor ,]3 will

be saved..

elect 6isplay Factor core 2oefficient Matri%.

2lick 2ontinue. 2lick =.

SPSS Outut

3. 2orrelation Matri% and 2ommunalities

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• >otice that the original variables are correlated (r Y .:-.

• The trace of the correlation matri% e&uals OY,.

• "ach variable is standardized to have a variance of . The total variance

of the original standardized variables is e&ual to ,.

• The proportion of variance in a variable e%plained by the components is

called the communality of the variable.

'rincipal components analysis transfers a set of interrelated

variables into a new set of uncorrelated components which account

for all the variance in the original variables. Thus! the communality

of each original variable is always 3.

,. "igenvalues

• um of "igenvalues

>otice that the sum of the eigenvalues (3.: O .; Y ,.- e&uals the trace of

the correlation matri% and the total variance of the original standardized

variables is e&ual to ,. Thus! the total variance of both variables was

analyzed.

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• The eigenvalue indicates the amount of variance accounted for by each

new component. The first principal component e%plains the ma%imum

variance in all the variables ** a variance of 3.:-. The second principal

component e%plains the ma%imum amount of the remaining variance ** a

variance of .;-. The two components e%plain all the variance in the

original variables (3.:- O .;- Y ,.

• The proportion of variance accounted for by the first principal component

e&uals .CE.

The proportion of variance accounted for by the second principal

component e&uals .:E.

:. 2omponent core 2oefficient Matri%

"ach principal component can be e%pressed as a linear

combination of the original variables. The component score

coefficients (weights are shown below

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9. Factor (2omponent cores

After obtaining the factor score coefficients! we can compute factor

scores. The saved factor scores are displayed in the 6ata "ditor+indow7 Factor 3]3 and Factor ,]3.

E. 2omponent Matri%

The correlations between the principal component scores and the

original variables are shown below

This type of matri% is known as a 2at+6 *4 4a/t*+ (/*2*'e't)

l*a,'9s.

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C. To compute the correlation between the two factor scores (factor 3]3 and

factor ,]3! from the menus choose7 Analyze Z 2orrelate Z 1ivariate.

elect two variables7 factor 3]3 and factor ,]3.

SPSS Outut

The correlation between the two components is zero. 'rincipal

components analysis is a method designed to transfer a set of

interrelated variables into a new set of u'/*++elate, components

which account for all the variance in the original variables.

E6a2le $

A researcher measured 3,-- children on the eleven subtests of

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