Iifl Project Ultimate-1 Final

7/28/2019 Iifl Project Ultimate-1 Final

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A project report on

PERFORMANCE EVALUATION OF EQUITY ORIENTEDMUTUAL FUNDS AND BENEFITS TO CUSTOMERS

At

India Infoline Ltd. (IIFL)

Bengaluru- 560068

Submitted in partial fulfillment of the requirement for the award ofPost Graduate degree in MBA

from

Christ University Institute of Management

By

Preeti AgarwalUnder the guidance of

Internal Guide External GuideProf.Arvind .S Ms. Anitha SDepartment of Finance, Relationship ManagerChrist University Institute of Management India Infoline Ltd.(IIFL)Bengaluru- 59 Hosur main road

Bengaluru- 68

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DECLARATION

I hereby declare that the project report Performance Evaluation of

Equity Oriented Mutual Funds and Benefits to Customers for the

degree of Master Of Business Administration at Christ University

Bangalore, is my original work and the project has not formed the basis

for the award of any degree, associate ship, fellowship or any other

similar titles.

Place: BangaloreDate:

Signature of the Student

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CERTIFICATE

This is to certify that the project titled Performance Evaluation ofEquity Oriented Mutual Funds and Benefits to Customers is the

bonafide summer project done by Preeti Agarwal, student of MBA at

Christ University during the year 2012 -2013, in partial fulfillment of

the requirements for the award of the Degree of Master of Business

Administration and that the project has not formed the basis for the

award previously of any degree, diploma, associate ship, fellowship or

any other similar title.

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ACKNOWLEDGEMENT

In the first place, I thank Ms.Anitha.S for having given me theirvaluable guidance for the project. Without their help it would have been

impossible for me to complete the project.

I would be failing in my duty if I do not acknowledge with a deep sense

of gratitude the sacrifices made by my parents who have thus helped me

in completing the project work successfully.

Place: BangaloreDate:

Signature of the Student

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TABLE OF CONTENTS

S.NO. PARTICULARS PAGE NO.

Chapter 1. Company Profile 05

Chapter 2. Introduction 16Chapter 3. Statement of the problem 16Chapter 4. Scope 16Chapter 5. Objectives 16Chapter 6. History of mutual funds 17Chapter 7. Types of mutual funds 19Chapter 8. Major fund houses in India 19Chapter 9. Reasons for preferring mutual funds over

simple equity funds20

Chapter 10. Advantages and Disadvantages of mutualfunds 23

Chapter 11. Techniques of Analysis 23Chapter 12. Equity oriented mutual funds under

consideration for performance comparisonand evaluation

43

Chapter 13. Base Indices used as comparisonparameter

43

Chapter 14. Comparison of performance between the

equity oriented mutual funds underconsideration for 2011-2012

45

Chapter 15. Interpretation 74Chapter 16. SWOT Analysis 76Chapter 17. Conclusion 77Chapter 18. References 78Chapter 19. Bibliography 79

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1. Company Profile:

About IIFL

The IIFL (India Infoline) group, comprising the holding company, IndiaInfoline Ltd (NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is oneof the leading players in the Indian financial services space. IIFL offersadvice and execution platform for the entire range of financial servicescovering products ranging from Equities and derivatives, Commodities,Wealth management, Asset management, Insurance, Fixed deposits, Loans,Investment Banking, Gold bonds and other small savings instruments. IIFLrecently received an in-principle approval for Securities Trading andClearing memberships from Singapore Exchange (SGX) paving the way forIIFL to become the first Indian brokerage to get a membership of the SGX.

IIFL also received membership of the Colombo Stock Exchange becomingthe first foreign broker to enter Sri Lanka. IIFL owns and manages thewebsite, www.indiainfoline.com, which is one of Indias leading onlinedestinations for personal finance, stock markets, economy and business.

IIFL has been awarded the Best Broker, India by Finance Asia and theMost improved brokerage, India in the Asia Money polls. India Infolinewas also adjudged as Fastest Growing Equity Broking House - Large firms

by Dun & Bradstreet. A forerunner in the field of equity research, IIFLsresearch is acknowledged by none other than Forbes as Best of the Weband a must read for investors in Asia. Our research is available not justover the Internet but also on international wire services like Bloomberg,Thomson First Call and Internet Securities where it is amongst one of themost read Indian brokers.

A network of over 2,500 business locations spread over more than 500 citiesand towns across India facilitates the smooth acquisition and servicing of alarge customer base. All our offices are connected with the corporate officein Mumbai with cutting edge networking technology. The group caters to a

customer base of about a million customers, over a variety of mediums viz.online, over the phone and at our branches.

IIFL/India Infoline refer to India Infoline Ltd and its subsidiaries/ group

companies.

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History & Milestones

2011

Launched IIFL Mutual Fund.

2010

Received in-principle approval for membership of the Singapore StockExchange.Received membership of the Colombo Stock Exchange.

2009

Acquired registration for Housing Finance.SEBI in-principle approval for Mutual FundObtained Venture Capital license.

2008

Launched IIFL Wealth.

Transitioned to insurance broking model.

2007

Commenced institutional equities business under IIFL.Formed Singapore subsidiary, IIFL (Asia) Private Ltd.

2006

Acquired membership of DGCX.Commenced the lending business.

2005

Maiden IPO and listed on NSE, BSE.

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2004

Acquired commodities broking license.

Launched Portfolio Management Service.2003

Launched proprietary trading platform Trader Terminal for retailcustomers.

2000

Launched online trading through www.5paisa.com and started

distribution of life insurance and mutual fund.

1999

Launched www.indiainfoline.com.

1997

Launched research products of leading Indian companies, key sectors

and the economy Client included leading FIIs, banks and companies.

1995

Commenced operations as an Equity Research firm .

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IIFL (India Infoline Ltd) - Corporate Structure

Board of directors

Mr. Nirmal

Jain

Chairman,India InfolineLtd.

Mr. Nirmal Jain is the founder and Chairman of India Infoline Ltd. He is aPGDM (Post Graduate Diploma in Management) from IIM (Indian

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Institute of Management) Ahmedabad, a Chartered Accountant and arank-holder Cost Accountant. His professional track record is equallyoutstanding. He started his career in 1989 with Hindustan Lever Limited,the Indian arm of Unilever. During his stint with Hindustan Lever, hehandled a variety of responsibilities, including export and trading in agro-commodities. He contributed immensely towards the rapid and profitablegrowth of Hindustan Levers commodity export business, which was thenthe nations as well as the Companys top priority.

He founded Probity Research and Services Pvt. Ltd. (later re-christenedIndia Infoline) in 1995; perhaps the first independent equity researchCompany in India. His work set new standards for equity research inIndia. Mr. Jain was one of the first entrepreneurs in India to seize theinternet opportunity, with the launch of www.indiainfoline.com in 1999.

Under his leadership, India Infoline not only steered through the dotcombust and one of the worst stock market downtrends but also grew fromstrength to strength.

Mr. R.

Venkata

raman

ManagingDirector , IndiaInfoline Ltd.

Mr. R Venkataraman, Co-Promoter and Managing Director of IndiaInfoline Ltd, is a B.Tech (electronics and electrical communications

engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined theIndia Infoline Board in July 1999. He previously held senior managerial

positions in ICICI Limited, including ICICI Securities Limited, theirinvestment banking joint venture with J P Morgan of US, BZW and TaibCapital Corporation Limited. He was also the Assistant Vice Presidentwith G E Capital Services India Limited in their private equity division,

possessing a varied experience of more than 19 years in the financial

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services sector

Mr. Nilesh

Vikamse

y

IndependentDirector , IndiaInfoline Ltd.

Mr. Nilesh Vikamsey Board Member since February 2005 - is apracticing Chartered Accountant for 25 years and Senior Partner at M/sKhimji Kunverji & Co., Chartered Accountants, a member firm of HLBInternational, a world-wide organisation of professional accounting firmsand business advisers, ranked amongst the top 12 accounting groups inthe world. Mr. Vikamsey headed the audit department till 1990 andthereafter also handled financial services, consultancy, investigations,

mergers and acquisitions, valuations and due diligence, among others. Heis elected member of the Central Council of Institute of CharteredAccountant of India (ICAI), the Apex decision making body of the secondlargest accounting body in the world, 20102013.

He is on the ICAI study group member for the introduction of theAccounting Standard 30 on financial instruments recognition andmanagement. Convener of the Study group Formed by ASB of ICAI toformulate comments on various Exposure Drafts, Discussion Papers andother matters pertaining to IFRS originating from IASB, Representative

of the Institute of Chartered Accountants of India on the Committee forImprovement in Transparency, Accountability and Governance(ITAG) ofSouth Asian Federation of Accountants (SAFA), Member of ExecutiveCommittee & IFRS Implementation Committee of WIRC of Institute ofChartered Accountant of India (ICAI), Accounting and AuditingCommittee of Bombay Chartered Accountant Society (BCAS) and alsoon its Core Group, member of Review, Reforms & Rationalization

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Committee, IPR Committee of Bombay Chamber of Commerce andIndustry (BCCI), Member of Legal Affairs Committee of BombayChamber of Commerce and Industry(BCCI), Corporate MembersCommittee of The Chamber of Tax Consultants (CTC), RegularContributor to WIRC Annual Referencer on Bank Branch Audit, Study/Sub Group formed by ICAI for Considering Developments on Fair ValueAccounting (AS 30) post Sub Prime crisis, Sub Group formed by ICAIfor approaching the Government and Regulatory Authorities forConvergence with IFRS.

He is also a Vice Chairman of Financial Reporting Review BoardAccounting Standard Board and Member of Accounting Standard Boardand various other Standing and Non Standing Committees. Mr. Vikamseyis also a Director of Miloni Consultants Private Limited, HLB Offices and

Services Private Limited, Trunil Properties Private Limited, BarKatProperties Private Limited and India Infoline Investment ServicesLimited.

Mr. Kranti

Sinha

IndependentDirector ,India InfolineLtd.

Mr. Kranti Sinha Board member since January 2005 completed hismasters from the Agra University and started his career as a Class IOfficer with Life Insurance Corporation of India. He served as the

Director and Chief Executive of LIC Housing Finance Limited fromAugust 1998 to December 2002 and concurrently as the ManagingDirector of LICHFL Care Homes (a wholly-owned subsidiary of LICHousing Finance Limited). He retired from the permanent cadre of theExecutive Director of LIC; served as the Deputy President of theGoverning Council of Insurance Institute of India and as a member of theGoverning Council of National Insurance Academy, Pune apart from

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various other such bodies. Mr. Sinha is also on the Board of Directors ofHindustan Motors Limited and Cinemax (India) Limited.

Mr. A. K.

Purwar

Independent

Director , IndiaInfoline Ltd.

Mr. Purwar is currently the Chairman of IndiaVenture Advisors Pvt. Ltd.,investment manager to IndiaVenture Trust Fund I, the healthcare andlife sciences focussed private equity fund sponsored by the PiramalGroup. He has also taken over as the Chairman of IL & FS Renewable

Energy Limited in March 2008 and India Infoline Investment ServicesLtd in November 2009. He is working as Independent Director in leadingcompanies in Telecom, Steel, Textiles, Power, Auto components,Renewable Energy, Engineering Consultancy, Financial Services andHealthcare Services. He is an Advisor to Mizuho Securities in Japan andis also a member of Advisory Board for Institute of Indian EconomicStudies (IIES), Waseda University, Tokyo, Japan.

Mr. Purwar was the Chairman of State Bank of India, the largest bank inthe country from November 02 to May 06 and held several important

and critical positions like Managing Director of State Bank of Patiala,Chief Executive Officer of the Tokyo branch covering almost the entirerange of commercial banking operations in his illustrious career at the

bank from 1968 to 2006. Mr. Purwar also worked as Chairman of IndianBank Association during 2005 2006. Mr. Purwar has received the CEOof the year Award from the Institute for Technology & Management(2004); Outstanding Achiever of the year Award from Indian Banks

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Association (2004); Finance Man of the Year Award by the BombayManagement Association in 2006.

Sunil Kaul

IndependentDirector , IndiaInfoline Ltd.

Mr. Kaul earned his post graduate degree in management from the IndianInstitute of Management, Bangalore and a bachelors degree intechnology from the Indian Institute of Technology, Bombay. Sunil Kaulis a Managing Director for Carlyles Asia Buyout fund focused oninvestments in the financial services sector across Asia. He is based inSingapore. Since joining Carlyle, Mr. Kaul has worked on several notable

portfolio investments of Carlyle including HDFC Ltd, Indias leading

financial services group, TC Bank, a leading mid-sized bank in Taiwanand Caribbean Investment Holdings, one of the largest provider ofoffshore company incorporation and trust services in Asia and IndiaInfoline Limited Mr. Kaul serves as a director on the board of TC Bankand a member of its Risk and Executive Committees. He is also a memberof the Asia Pacific Infrastructure Partnership. Prior to joining Carlyle, Mr.Kaul served as the president of Citibank Japan, covering the bankscorporate and retail banking operations. He concurrently served as thechairman of Citi's credit card and consumer finance companies in Japan.He was also a member of Citi's Global Management Committee and

Global Consumer Planning Group. Mr. Kaul has over 20 yearsexperience in corporate and consumer banking of which more than 10have been in Asia. He has lived and worked in India, the United States,Japan, Netherlands and Singapore. In his earlier roles, Mr. Kaul served asthe Head of Retail Banking for Citi in Asia Pacific. He has also heldsenior positions in Business Development for Citi's Global TransactionServices based in New York, Transaction Services Head for Citi Japan

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and Global Cash Business Management Head for ABN Amro, based outof Holland.

IIFLs philosophy on Corporate Governance

IIFL (India Infoline) is committed to placing the Investor First, bycontinuously striving to increase the efficiency of the operations as well asthe systems and processes for use of corporate resources in such a way so asto maximize the value to the stakeholders. The Group aims at achieving notonly the highest possible standards of legal and regulatory compliances, but

also of effective management.Code Of Conduct

A strict code of conduct is followed in the office premises along withguidelines for implementing policies.

Insider Dealing

Insider Dealing is prevented through various acts of Indian Govt. and

through strict adherence to company policies.Committee

Audit Committee

Terms of reference & Composition, Name of members and Chairman: TheAudit committee comprises Mr Nilesh Vikamsey (Chairman), Mr RVenkataraman, Mr Kranti Sinha, two of whom are independent Directors.The Chairman along with the Statutory and Internal Auditors are invitees to

the Meeting. The Terms of reference of this committee are as under: - Toinvestigate into any matter that may be prescribed under the provisions ofSection 292A of The Companies Act, 1956 - Recommendation and removalof External Auditor and fixation of the Audit Fees. - Reviewing with themanagement the financial statements before submission of the same to theBoard. - Overseeing of Companys financial reporting process anddisclosure of its financial information. - Reviewing the Adequacy of the

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Internal Audit Function.

Compensation/ Remuneration Committee

Terms of reference & Composition, Name of members and Chairman: TheCompensation / Remuneration Committee comprises Mr Kranti Sinha(Chairman) & Mr Nilesh Vikamsey, both of whom are independentDirectors. The Terms of reference of this committee are as under: - To fixsuitable remuneration package of all the Executive Directors and Non-Executive Directors, Senior Employees and officers i.e. Salary, perquisites,

bonuses, stock options, pensions etc. - Determination of the fixedcomponent and performance linked incentives along with the performancecriteria to all employees of the company - Service Contracts, Notice Period,

Severance Fees of Directors and employees. - Stock Option details: whetherto be issued at discount as well as the period over which to be accrued andover which exercisable. - To conduct discussions with the HR departmentand form suitable remuneration policies.

Share Transfer and Investor Grievance Committee

Details of the Members, Compliance Officer, No. of Complaints receivedand pending and pending transfers as on close of the financial year. Thecommittee functions under the Chairmanship of Mr Kranti Sinha, a Non-

executive independent Director. The other Members of the committee areMr. Nirmal Jain and Mr. R Venkataraman. Ms Sunil Lotke, CompanySecretary is the Compliance Officer of the Company.

Vision

To be the most respected company in the financial services space.

Mission

To educate, empower, enrich and enhance customer investment skills setthrough research, knowledge and delightful service.

Values

Team Work

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Mutual Respect Execution Transformation Transparency Accountability Trust

2. Introduction:

A mutual fund is a professionally managed fund formed by groups ofinvestors whose investments are channeled towards purchasing securities. Itis generally attributed to the funds that are collected from the public and areopenended in nature. Hedge funds are not considered as mutual funds for

the sake of convenience. It is more popular in the United States than inIndia. They play an important role in households. Investors in a mutual fundmust pay the funds expenses. There is controversy regarding these expensesincluding legal conflicts. A single mutual fund would be sufficient to giveinvestors several combinations of expenses by taking different types of shareclasses.

3. Statement of the problem:

The study is to be undertaken for comparison of mutual funds schemes

under equity orientation namely in large cap, mid cap and flexi cap whichare offered and also to understand the investment performance schemes inrelation to the benchmark parameters for IIFL so that they can advise theirclients in the right manner to make them aware of the performance of theschemes and offer suggestions to improve their performance and / or betterinvestment options.

4. Scope of the project:

Top performing mutual funds are selected in terms of superior returns andoverall stability / consistency from various categories such as equity largecap funds, equity mid cap funds and equity flexi cap funds.

5. Objectives:

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The primary objective of this project is to select the top mutual fundsthat can be suggested by IIFL so that the wealth of its customers can

be maximized and there by IIFL can increase their customers.

The secondary objective is to find out the financial performance ofbest performing mutual funds to examine the funds sensitivity to themarket fluctuations in terms of beta value of the fund.

6. History of mutual funds:

The first mutual funds were established in Europe. The first mutual fund wascreated in 1774 apparently by a Dutch merchant. The first mutual fund

outside the Netherlands, the Foreign & Colonial Government Trust, wasestablished in London circa 1868. It was rechristened as the Foreign &Colonial Investment Trust and currently trades on the London stockexchange.

Mutual funds were introduced into the United States in the 1890s.Theybecame popular during the 1920s. These early funds were generally of theclosed-end type with a fixed number of shares which often traded at pricesabove the value of the portfolio.

The first open-end mutual fund with redeemable shares was established onMarch 21, 1924, the Massachusetts Investors Trust, is now part of the MFSfamily of funds. However, closed-end funds remained more popular thanopen-end funds throughout the 1920s. By 1929, open-end funds accountedfor a mere 5% of the industry's $27 billion in total assets.

After the stock market crash of 1929 leading to the Great Depression in theU.S. and worldwide economic crisis, the U.S. Congress passed a series ofacts regulating the securities markets in general and mutual funds in

particular. The Securities Act of 1933 requires that all investments sold tothe public, including mutual funds, be registered with the Securities andExchange Commission and that they provide prospective investors with a

prospectus that discloses essential facts about the investment. The Securitiesand Exchange Act of 1934 requires that issuers of securities, includingmutual funds, report regularly to their investors; this act also created theSecurities and Exchange Commission, which is the principal regulator of

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mutual funds. The Revenue Act of 1936 established guidelines for thetaxation of mutual funds, while the Investment Company Act of 1940governs their structure.

When confidence in the stock market returned in the 1950s, the mutual fundindustry began to grow again. By 1970, there were approximately 360 fundswith $48 billion in assets. The introduction of money market funds in thehigh interest rate environment of the late 1970s boosted industry growthsignificantly. The first retail index fund, First Index Investment Trust, wasformed in 1976 by The Vanguard Group, headed by John Bogle; it is nowcalled the Vanguard 500 Index Fund and is one of the world's largest mutualfunds, with more than $100 billion in assets as of January 31, 2011.

Fund industry growth propelled into the 1980s and 1990s, as a result of 3

factors: a bull market for both stocks and bonds, new product introductions(including tax-exempt bond, sector, international and target date funds) andwider distribution of fund shares. Among the new distribution channels wereretirement plans. Mutual funds have become the preferred investment optionin certain types of fast-growing retirement plans, specifically in 401(k) andother defined contribution plans and in individual retirement accounts(IRAs), which grew in popularity in the 1980s. Total mutual fund assets fellin 2008 as a result of the credit crisis of 2008.

In 2003, the mutual fund industry was involved in a scandal involving

unequal treatment of fund shareholders. Some fund management companiesallowed favored investors to engage in late trading, which is illegal, ormarket timing, which is a practice prohibited by fund policy. The scandalwas initially discovered by then-New York State Attorney General EliotSpitzer and resulted in significantly increased regulation of the industry.

At the end of 2010, there were over 15,000 mutual funds of all types in theUnited States with combined assets of $13.1 trillion, according to theInvestment Company Institute (ICI), a fund assets rests national tradeassociation of investment companies in the United States. The ICI reportsthat worldwide mutual fund assets were $24.7 trillion on the same date.More than 50% of the global mutual within the U.S.

Mutual funds play an important role in U.S. household finances. At the endof 2010, they accounted for 23% of household financial assets. Their role inretirement planning is particularly significant. Roughly half of assets in

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401(k) plans and individual retirement accounts were invested in mutualfunds.

The first introduction of a mutual fund in India occurred in 1963, when theGovernment of India launched Unit Trust of India (UTI). Until 1987, UTIenjoyed a monopoly in the Indian mutual fund market. Then a host of othergovernment-controlled Indian financial companies came up with their ownfunds. These included State Bank of India (SBI), Canara Bank, and Punjab

National Bank (PNB). This market opened to private players in 1993, as aresult of the historic constitutional amendments brought forward by the thenCongress-led government under the existing regime of Liberalization,Privatization and Globalization (LPG). The first private sector fund tooperate in India was Kothari Pioneer, which later merged with FranklinTempleton.

7. Types of mutual funds:

There are basically 3 types of mutual funds: open-end, unit investment trust,and closed-end. The most popular type, the open-end mutual fund, buys

back its shares from its investors at the end of every business day.Exchange-traded funds are open-end funds or unit investment trusts thattrade on an exchange. Open-end funds are most preferred, but exchange-traded funds have been gaining in popularity.

Mutual funds are classified by their principal investments. The 4 largestcategories of funds are

Money market funds Bond or fixed income funds

Stock or equity funds

Hybrid funds

Funds may also be categorized as index or actively-managed.

8. The major fund houses which have operated in India include:

Fortis Birla Sunlife

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Bank of Baroda

HDFC

ING Vysya ICICI Prudential

SBI Mutual Fund

Tata

Kotak Mahindra

Unit Trust of India

Reliance

IDFC

Franklin Templeton

Sundaram Mutual Fund

Religare Mutual Fund

Principal Mutual Fund

9. Reason for preferring mutual funds over equity funds:

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Mutual funds are an under tapped market in India. Despite beingavailable in the market for over two decades now with assets undermanagement equaling Rs. 7,81,71,152 Lakhs as of February 2010 andas estimated by Association of Mutual Funds, India, less than 10% ofIndian households have invested in mutual funds. A recent report onMutual Fund Investments in India published by research and analyticsfirm, Boston Analytics, reveals that investors are refraining from

putting their money into mutual funds due to their perceived high riskand an asymmetry of information on how mutual funds work. Thisreport is based on a survey of approximately 10,000 respondents in 15Indian cities and towns as of March 2010. There are 43 Mutual Fundsat present reportedly.

The primary reason for not investing at present appears to be correlated with

city size. Among respondents with a high savings rate, close to 40% of thosewho live in metros and Tier I cities considered such investments to be veryrisky, whereas 33% of those in Tier II cities said they did not how or whereto invest in such assets.

Exhibit 1-Reasons for not investing in mutual funds in India

On the other hand, among those who invested, close to nine out of tenrespondents did so because they felt these assets were more professionallymanaged than other asset classes. Exhibit 2 lists some of the influencingfactors for investing in mutual funds. Interestingly, while non-investors citerisk as one of the primary reasons they do not invest in mutual funds,

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those who do invest consider that they are professionally managed andmore diverse most often as their reasons to invest in mutual funds versusother investments.

Exhibit 2-Reasons for investing in mutual funds in India

Tracking leading economic indicators helps economic policy planners,business decision makers, and investors detect turning points and predict thefuture behavior of business cycles. Because no single measure of aggregate

economic activity (such as GDP) adequately predicts business cycles,accurate analysis requires a composite picture referencing critically valuable& practically versatile/multiple types of time-series data.

To help corporate and investor clients make informed decisions in complexand competitive emerging markets, Boston Analytics has developed a set oftime-series-based economic indicators modeled after indices used in NorthAmerican and European markets, but adapted to the unique conditions andrequirements of nations and regions such as India, Asia/Pacific, and theMiddle East.

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The index for March 2010 stood at 73.3, an increase of 0.9 percent fromFebruarys reading of 72.6. The improvement in consumer confidence wasdriven by increasing optimism related to overall economic conditions,

personal financial outlook and discretionary spending. However, sentimentrelated to inflation has declined significantly in the last month. While thedrop in inflation sentiment is more pronounced, employment sentimentappears to have flattened out in the last two months and is still considerablylow.

A tier-wise disaggregation of the data reveals that the Tier-I cities and TierIII cities and towns have been the largest contributor to the improvement inthe national composite. In contrast, consumer confidence in Tier II cities is

below the national average.

Thus it is understandable that mutual funds have a great potential in thefuture and promise a huge plethora of options and high returns to investors.The economy of our country is growing at a fairly rapid rate and hence withgreater purchasing power and better enlightenment through education aboutthe benefits of mutual funds and their overwhelming reliability in the longrun, peoples attitude is likely to change and hence Mutual funds can be

preferred over equity funds and other funds as they hold great potential forthe future.

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10. Advantages & Disadvantages of mutual funds:

Mutual funds have advantages compared to direct investing in

individual securities. These include

Increased diversification Daily liquidity Professional investment management Ability to participate in investments that may be available only to

larger investors Service and convenience Government oversight Ease of comparison

Mutual funds have disadvantages as well, which include

Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize

11. Techniques of analysis:

Returns - Portfolio Returns and Market Returns/Profitability Absolute Returns Beta Ratio Standard Deviation (SD) Expense Ratio R-square Price Earning Ratio Price to Book Ratio

Returns

Portfolio Returns

The term portfolio refers to any collection of financial assets such as stocks,bonds and cash. Portfolios may be held by individual investors and/ormanaged by financial professionals, hedge funds, banks and other financial

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institutions. It is a generally accepted principle that a portfolio is designedaccording to the investor's risk tolerance, time frame and investmentobjectives. The euro amount of each asset may influence the risk/rewardratio of the portfolio and is referred to as the asset allocation of the portfolio.When determining a proper asset allocation one aims at maximizing theexpected return and minimizing the risk. This is an example of a multi-objective optimization problem: more "efficient solutions" are available andthe preferred solution must be selected by considering a tradeoff betweenrisk and return. In particular, a portfolio A is dominated by another portfolioA' if A' has a greater expected gain and a lesser risk than A. If no portfoliodominates A, A is a Pareto-optimal portfolio. The set of Pareto-optimalreturns and risks is called the Pareto Efficient Frontier for the MarkowitzPortfolio selection problem.

Performance Attribution orInvestment Performance Attribution is a setof techniques that performance analysts use to explain why a portfolio'sperformance differed from the benchmark. This difference between theportfolio return and the benchmark return is known as the active return. Theactive return is the component of a portfolio's performance that arises fromthe fact that the portfolio is actively managed.

Different kinds of performance attribution provide different ways ofexplaining the active return.

Attribution analysis attempts to distinguish which of the two factors ofportfolio performance,superior stock selection orsuperior market timing, isthe source of the portfolios overall performance. Specifically, this methodcompares the total return of the managers actual investment holdings withthe return for a predetermined benchmark portfolio and decomposes thedifference into aselection effectand an allocation effect.

1. Asset Allocation: The manager might choose to allocate majority of theassets into equities (leaving only minority for cash), on the belief thatequities will produce a higher return than cash.

2. Stock Selection: Especially within the equities sector, the manager maytry to simply hold securities that will give a higher return than theoverall equity benchmark.

Arithmetic & Geometric attribution

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The most common approach to performance attribution (found in sourcessuch as Brinson et al. 1985 and Carino 1999) can be described as "arithmeticattribution". It is arithmetic in the sense that it describes the difference

between the portfolio return and the benchmark return.

Another approach (known as geometric attribution) has been common. Oneadvantage of doing attribution in geometric form is that the attributionresults translate consistently from one currency to another. It is plausible thatthis explains the popularity of geometric approaches in Europe.

Simple example

Consider a portfolio whose benchmark consists of 30% cash and 70%equities. The following table provides a consistent set of weights and returns

for this example.Sector

Portfolio

Weight

Benchmark

Weight

Portfolio

Return

Benchmark

Return

Asset

Allocation

Stock

SelectionInteraction

Total

Active

Equities 90% 70% 5.00% 3.00% 0.12% 1.40% 0.40% 1.92%Cash 10% 30% 1.00% 1.00% 0.28% 0.00% 0.00% 0.28%Total 100% 100% 4.60% 2.40% 0.40% 1.40% 0.40% 2.20%

The portfolio performance was 4.60%, compared with a benchmark return of2.40%. This leaves an active return of 2.20%. The task of performance

attribution is to explain the decisions that the portfolio manager took togenerate this 2.20% of value added.

Under the most common paradigm for performance attribution, there are twodifferent kinds of decision that the portfolio manager can make in an attemptto produce added value:

1. Asset Allocation: the manager might choose to allocate 90% of theassets into equities (leaving only 10% for cash), on the belief thatequities will produce a higher return than cash.

2. Stock Selection: Especially within the equities sector, the managermay try to hold securities that will give a higher return than theoverall equity benchmark. In the example, the securities selected bythe equities manager produced an overall return of 5%, when the

benchmark return for equities was only 3%.

The attribution analysis dissects the value added into three components:

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Asset allocation is the value added by under-weighting cash (0.28%),and over-weighting equities (0.12%). The total value added by assetallocation was 0.40%.

Stock selection is the value added by decisions within each sector ofthe portfolio. In this case, the superior stock selection in the equitysector added 1.40% to the portfolio's return.

Interaction captures the value added that is not attributable solely tothe asset allocation and stock selection decisions. In this particularcase, there was 0.40% of value added from the combination that the

portfolio was overweight equities, and the equities sector alsooutperformed its benchmark.

The three attribution terms (asset allocation, stock selection, and interaction)sum exactly to the active return without the need for any "fudge factors".

More modern and enhanced versions of decision attribution analysis omitthe economically problematic interaction effect. As opposed to determiningthe contribution of uncontrollable market factors to active return, the type ofanalysis described here is meant to evaluate the effect of each (type of)controllable decision on the active return, and interaction is not a clearlydefined controllable decision.

Decision attribution also needs to address the combined effect of multiple

periods over which weights vary and returns compound.

In addition, more structured investment processes normally need to beaddressed in order for the analysis to be relevant to actual fund construction.

Such sophisticated investment processes might include ones that nest sectorswithin asset classes and/or industries within sectors, requiring the evaluationof the effects of deciding the relative weights of these nested componentswithin the border classes.

They might also include analysis of the effects of country and/or currencydecisions in the context of the varying risk-free rates of different currenciesor the decisions to set fund or bucket values for continuous properties likecapitalization or duration.

In addition, advanced systems allow for the decision process within assetclasses, such as, following an asset allocation, when capitalization decisions

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are only made for the equity assets but duration decisions are only made forthe fixed income assets.

The most robust attribution models precisely address all of these aspects ofdecision attribution without residuals. Furthermore, modern portfolio theoryrequires that all return analysis be conjoined with risk analysis, else good

performance results can mask their relationship to greatly increased risk.Thus, a viable performance attribution system must always be interpreted in

parallel to a precisely commensurate risk attribution analysis.

Market Returns/Profitability

Profitability index (PI), also known as profit investment ratio (PIR) andvalue investment ratio (VIR), is the ratio of payoff to investment of a

proposed project. It is a useful tool for ranking projects because it allowsyou to quantify the amount of value created per unit of investment.

The ratio is calculated as follows:

Assuming that the cash flow calculated does not include the investmentmade in the project, a profitability index of 1 indicates breakeven. Any value

lower than one would indicate that the project's PV is less than the initialinvestment. As the value of the profitability index increases, so does thefinancial attractiveness of the proposed project.

Rules for selection or rejection of a project:

If PI > 1 then accept the project If PI < 1 then reject the project

Simple Example

Investment = $40,000 Life of the Machine = 5 Years

CFAT Year CFAT

1 18000

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2 12000

3 10000

4 9000

5 6000

Calculate Net present value at 10% and PI:

Year CFAT PV@10% PV

1 18000 0.909 16362

2 12000 0.827 9924

3 10000 0.752 7520

4 9000 0.683 6147

5 6000 0.621 3726

Total present value 43679

(-) Investment 40000

NPV 3679

PI = 43679 / 40000

= 1.091

= >1

= Accept the project

Absolute Return

Short selling

Suppose that a manager thinks the share price of company A will go down.Then he can borrow 1000 shares of company A to his prime broker and sellthem for (say) 10 USD per share. The immediate gain for the manager is1000*10=10000USD. If (say) after a week the share price of company Adrops to 9.5 then the manager buys 1000 shares, paying 1000*9.5=9500USD, and gives the shares back to his prime broker. He thus ends up earninga return of (10000-9500)/10000 = 5%. If his prime broker asked a 2%

interest rate for borrowing the shares then the net gain of the manager is 5%- 2% = 3%.

Leverage

Sometimes a strategy gives a positive return but it is a very tiny one.Therefore, a manager can use leverage to magnify his return. For example, a

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long-short manager can deposit 100M with his prime broker in order to buy200M of shares and simultaneously sell another 200M of shares, whichgives a leverage ratio of (200M+200M)/100M = 4. As another example, amanager can borrow money from a country at an interest rate of 2% andreinvest the amount on another country that pays 4%, thus earning the spread4%-2%=2% (this is called carry trade). If the manager has a leverage ratio of(say) 5 then his return is not 2% but 5 * 2 %=10%.

However, leverage also amplifies losses: if a manager has a market loss of3% in his portfolio and a leverage of 4 then his total losses are 4*3=12%.Therefore, even small market losses are small can be disastrous when thereis a huge leverage. According to the OECD, prior to the 2007 crisis, hedgefunds in 2007 had an average leverage of 3 whilst investment banks hadleverage above 30. With a leverage of 30, a market loss of 3.3% wipes out

the entire portfolio whilst a leverage of 3 gives a total loss of 10%.

High turnover

Absolute-return managers are very active with their portfolios because theybuy and sell shares more frequently than normal investors, which allowsthem to profit from short-term investment opportunities, typically lastingless than 90 days. The turnover is the rate at which managers rebalance their

portfolios, and it strongly depends on the hedge fund's size: in 2008 hedgefunds with less than 15M USD in AUM (Assets Under Management) had a

46.9% turnover per month whilst funds with over 250M USD in AUM hadonly 9.8%.

Beta Ratio

Alpha is a risk-adjusted measure of the so-called active return on aninvestment. It is the return in excess of the compensation for the risk borne,and thus commonly used to assess active managers' performances. Often, thereturn of a benchmark is subtracted in order to consider relative

performance, which yields Jensen's alpha.

The alpha coefficient ( ) is a parameter in the capital asset pricing model(CAPM). It is the intercept of the security characteristic line (SCL), that is,the coefficient of the constant in a market model regression.

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It can be shown that in an efficient market, the expected value of the alphacoefficient is zero. Therefore the alpha coefficient indicates how aninvestment has performed after accounting for the risk it involved:

: the investment has earned too little for its risk (or, was toorisky for the return)

: the investment has earned a return adequate for the risk taken : the investment has a return in excess of the reward for the

assumed risk

For instance, although a return of 20% may appear good, the investment canstill have a negative alpha if it's involved in an excessively risky position.

In finance, the Beta () of a stock or portfolio is a number describing the

volatility of an asset in relation to the volatility of the benchmark that saidasset is being compared to. This benchmark is generally the overall financialmarket and is often estimated via the use of representative indices, such asthe S&P 500.

An asset has a Beta of zero if its returns change independently of changes inthe market's returns. A positive beta means that the asset's returns generallyfollow the market's returns, in the sense that they both tend to be above theirrespective averages together, or both tend to be below their respectiveaverages together. A negative beta means that the asset's returns generally

move opposite the market's returns: one will tend to be above its averagewhen the other is below its average.

It measures the part of the asset's statistical variance that cannot be removedby the diversification provided by the portfolio of many risky assets, becauseof the correlation of its returns with the returns of the other assets that are inthe portfolio. Beta can be estimated for individual companies usingregression analysis against a stock market index.

The formula for the beta of an asset within a portfolio is

where ra measures the rate of return of the asset, rp measures the rate ofreturn of the portfolio, and cov(ra,rp) is the covariance between the rates ofreturn. The portfolio of interest in the CAPM formulation is the market

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portfolio that contains all risky assets, and so the rp terms in the formula arereplaced by rm, the rate of return of the market.

Beta is also referred to as financial elasticity or correlated relative volatility,and can be referred to as a measure of the sensitivity of the asset's returns tomarket returns, its non-diversifiable risk, its systematic risk, or market risk.On an individual asset level, measuring beta can give clues to volatility andliquidity in the marketplace. In fund management, measuring beta is thoughtto separate a manager's skill from his or her willingness to take risk.

The beta coefficient was born out of linear regression analysis. It is linked toa regression analysis of the returns of a portfolio (such as a stock index) (x-axis) in a specific period versus the returns of an individual asset (y-axis) ina specific year. The regression line is then called the Security characteristic

Line (SCL).

is called the asset's alpha and is called the asset's beta coefficient.

For an example, in a year where the broad market or benchmark indexreturns 25% above the risk free rate, suppose two managers gain 50% abovethe risk free rate. Because this higher return is theoretically possible merely

by taking a leveraged position in the broad market to double the beta so it is

exactly 2.0, we would expect a skilled portfolio manager to have built theoutperforming portfolio with a beta somewhat less than 2, such that theexcess return not explained by the beta is positive. If one of the managers'

portfolios has an average beta of 3.0, and the other's has a beta of only 1.5,then the CAPM simply states that the extra return of the first manager is notsufficient to compensate us for that manager's risk, whereas the secondmanager has done more than expected given the risk. Whether investors canexpect the second manager to duplicate that performance in future periods isof course a different question.

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Security market line

The SML shown in Figure 1 graphs the results from the capital asset pricingmodel (CAPM) formula. Thex-axis represents the risk (beta), and the y-axisrepresents the expected return. The market risk premium is determined fromthe slope of the SML.

The relationship between and required return is plotted on the securitymarket line (SML) which shows expected return as a function of . Theintercept is the nominal risk-free rate available for the market, while theslope is E(Rm)Rf. The security market line can be regarded as representinga single-factor model of the asset price, where Beta is exposure to changes invalue of the Market. The equation of the SML is thus:

It is a useful tool in determining if an asset being considered for a portfoliooffers a reasonable expected return for risk. Individual securities are plottedon the SML graph. If the security's risk versus expected return is plottedabove the SML, it is undervalued because the investor can expect a greaterreturn for the inherent risk. A security plotted below the SML is overvalued

because the investor would be accepting a lower return for the amount ofrisk assumed.

Standard Deviations (SD)

In this project we use a particular finance oriented application of standarddeviation called Volatility.

Standard deviation is a widely used measure of variability or diversity usedin statistics and probability theory. It shows how much variation or"dispersion" exists from the average (mean, or expected value). A lowstandard deviation indicates that the data points tend to be very close to the

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Figure 1.The Security Market Line
http://en.wikipedia.org/wiki/File:SecMktLine.pnghttp://en.wikipedia.org/wiki/File:SecMktLine.png


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mean, whereas high standard deviation indicates that the data points arespread out over a large range of values.

With standard deviation of the sample(s) for thisproject

An estimator forsometimes used is the standard deviation of the sample,denoted bysN and defined as follows:

This estimator has a uniformly smaller mean squared error than the samplestandard deviation (see below), and is the maximum-likelihood estimatewhen the population is normally distributed. But this estimator, whenapplied to a small or moderately sized sample, tends to be too low: it is a

biased estimator.

The standard deviation of the sample is the same as the population standarddeviation of a discrete random variable that can assume precisely the valuesfrom the data set, where the probability for each value is proportional to itsmultiplicity in the data set.

In finance, volatility is a measure for variation of price of a financialinstrument over time. Historic volatility is derived from time series of pastmarket prices. An implied volatility is derived from the market price of amarket traded derivative (in particular an option).

Volatility as described here refers to the actual current volatility of afinancial instrument for a specified period (for example 30 days or 90 days).It is the volatility of a financial instrument based on historical prices over thespecified period with the last observation the most recent price. This phraseis used particularly when it is wished to distinguish between the actual

current volatility of an instrument and

actual historical volatility which refers to the volatility of a financialinstrument over a specified period but with the last observation on adate in the past

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actual future volatility which refers to the volatility of a financialinstrument over a specified period starting at the current time andending at a future date (normally the expiry date of an option)

historical implied volatility which refers to the implied volatilityobserved from historical prices of the financial instrument (normallyoptions)

current implied volatility which refers to the implied volatilityobserved from current prices of the financial instrument

future implied volatility which refers to the implied volatilityobserved from future prices of the financial instrument

Volatility and Liquidity

Much research has been devoted to modeling and forecasting the volatility

of financial returns, and yet few theoretical models explain how volatilitycomes to exist in the first place.

Roll (1984) shows that volatility is affected by market microstructure.Glosten and Milgrom (1985) shows that at least one source of volatility can

be explained by the liquidity provision process. When market makers inferthe possibility of adverse selection, they adjust their trading ranges, which inturn increases the band of price oscillation.

Volatility for investors

Investors care about volatility for five reasons. 1) The wider the swings in aninvestment's price the harder emotionally it is to not worry. 2) When certaincash flows from selling a security are needed at a specific future date, highervolatility means a greater chance of a shortfall. 3) Higher volatility of returnswhile saving for retirement results in a wider distribution of possible final

portfolio values. 4) Higher volatility of return when retired giveswithdrawals a larger permanent impact on the portfolio's value. 5) Pricevolatility presents opportunities to buy assets cheaply and sell whenoverpriced.

In today's markets, it is also possible to trade volatility directly, through theuse of derivative securities such as options and variance swaps. SeeVolatility arbitrage.

Volatility versus direction

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Volatility does not measure the direction of price changes, merely theirdispersion. This is because when calculating standard deviation (orvariance), all differences are squared, so that negative and positivedifferences are combined into one quantity. Two instruments with differentvolatilities may have the same expected return, but the instrument withhigher volatility will have larger swings in values over a given period oftime.

For example, a lower volatility stock may have an expected (average) returnof 7%, with annual volatility of 5%. This would indicate returns fromapproximately negative 3% to positive 17% most of the time (19 times outof 20, or 95% via a two standard deviation rule). A higher volatility stock,with the same expected return of 7% but with annual volatility of 20%,would indicate returns from approximately negative 33% to positive 47%

most of the time (19 times out of 20, or 95%). These estimates assume anormal distribution; in reality stocks are found to be leptokurtotic.

Volatility over time

Although the Black Scholes equation assumes predictable constantvolatility, none of these are observed in real markets, and amongst themodels are Bruno Dupire's Local Volatility, Poisson Process where volatility

jumps to new levels with a predictable frequency, and the increasinglypopular Heston model of Stochastic Volatility.

It's common knowledge that types of assets experience periods of high andlow volatility. That is, during some periods prices go up and down quickly,while during other times they might not seem to move at all.

Periods when prices fall quickly (a crash) are often followed by prices goingdown even more, or going up by an unusual amount. Also, a time when

prices rise quickly (a bubble) may often be followed by prices going up evenmore, or going down by an unusual amount.

The converse behavior, 'doldrums' can last for a long time as well.

Most typically, extreme movements do not appear 'out of nowhere'; they'represaged by larger movements than usual. This is termed autoregressiveconditional heteroskedasticity. Of course, whether such large movementshave the same direction, or the opposite, is more difficult to say. And an

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increase in volatility does not always presage a further increasethevolatility may simply go back down again.

Mathematical definition

The annualized volatility is the standard deviation of the instrument'syearly logarithmic returns.

The generalized volatility Tfor time horizon Tin years is expressed as:

Therefore, if the daily logarithmic returns of a stock have a standarddeviation of SD and the time period of returns is P, the annualized volatilityis

A common assumption is that P= 1/252 (there are 252 trading days in anygiven year). Then, if SD = 0.01 the annualized volatility is

The monthly volatility (i.e., T= 1/12 of a year) would be

The formula used above to convert returns or volatility measures from onetime period to another assume a particular underlying model or process.These formulas are accurate extrapolations of a random walk, or Wiener

process, whose steps have finite variance. However, more generally, fornatural stochastic processes, the precise relationship between volatility

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measures for different time periods is more complicated. Some use the Lvystability exponent to extrapolate natural processes:

If = 2 you get the Wiener process scaling relation, but some people believe < 2 for financial activities such as stocks, indexes and so on. This wasdiscovered by Benot Mandelbrot, who looked at cotton prices and foundthat they followed a Lvy alpha-stable distribution with = 1.7. (See NewScientist, 19 April 1997.)

Crude volatility estimation

Using a simplification of the formulae above it is possible to estimate

annualized volatility based solely on approximate observations. Suppose younotice that a market price index, which has a current value near 10,000, hasmoved about 100 points a day, on average, for many days. This wouldconstitute a 1% daily movement, up or down.

To annualize this, you can use the "rule of 16", that is, multiply by 16 to get16% as the annual volatility. The rationale for this is that 16 is the squareroot of 256, which is approximately the number of trading days in a year(252). This also uses the fact that the standard deviation of the sum of nindependent variables (with equal standard deviations) is n times the

standard deviation of the individual variables.

Of course, the average magnitude of the observations is merely anapproximation of the standard deviation of the market index. Assuming thatthe market index daily changes are normally distributed with mean zero andstandard deviation , the expected value of the magnitude of theobservations is (2/) = 0.798. The net effect is that this crude approachunderestimates the true volatility by about 20%.

Estimate of compound annual growth rate (CAGR)

Consider the Taylor series:

Taking only the first two terms one has:

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Realistically, most financial assets have negative skewness andleptokurtosis, so this formula tends to be over-optimistic. Some people use

the formula:

for a rough estimate, where kis an empirical factor (typically five to ten).

Expense Ratio

The Total Annual Fund Operating Expenses ("Expense Ratio") is the line ofthe fee table in the prospectus that represents the total of all of a mutual

fund's annual fund operating expenses, expressed as a percentage of thefund's average net assets. Looking at the expense ratio can help you makecomparisons among funds. The expense ratio of a stock or asset fund is thetotal percentage of fund assets used for administrative, management,advertising (12b-1), and all other expenses. An expense ratio of 1% perannum means that each year 1% of the fund's total assets will be used tocover expenses. The expense ratio does not include sales loads or brokeragecommissions.

Expense ratios are important to consider when choosing a fund, as they can

significantly affect returns. Factors influencing the expense ratio include thesize of the fund (small funds often have higher ratios as they spreadexpenses among a smaller number of investors), sales charges, and themanagement style of the fund. A typical annual expense ratio for a U.S.domestic stock fund is about 1%, although some passively managed funds(such as index funds) have significantly lower ratios: for example, theVanguard US Large Cap ETF has an expense ratio of 0.07%.

One notable component of the expense ratio of U.S. funds is the "12b-1 fee",which represents expenses used for advertising and promotion of the fund.12b-1 fees are generally limited to a maximum of 1.00% per year (.75%distribution and .25% shareholder servicing) under Financial IndustryRegulatory Authority Rules.

Waivers, reimbursements & recoupments

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Some funds will execute "waiver or reimbursement agreements" with thefund's adviser or other service providers, especially when a fund is new andexpenses tend to be higher (due to a small asset base). These agreementsgenerally reduce expenses to some pre-determined level or by some pre-determined amount. Sometimes, these waiver/reimbursement amounts must

be repaid by the fund during a period that generally cannot exceed 3 yearsfrom the year in which the original expense was incurred. If a recoupment

plan is in effect, the effect may be to require future shareholders to absorbexpenses of the fund incurred during prior years. It is calculated by operatingexpenses.

Changes in expense ratio (fixed & variable expenses)

Generally, unlike past performance, expenses are very predictive. Funds

with high expenses ratios tend to continue to have high expenses ratios. Aninvestor can examine a fund's "Financial Highlights" which is contained inboth the periodic financial reports and the fund's prospectus, and determine afund's expense ratio over the last five years (if the fund has five years ofhistory). It is very hard for a fund to significantly lower its expense ratioonce it has had a few years of operational history.

This is because funds have both fixed and variable expenses, but mostexpenses are variable. Variable costs are fixed on a percentage basis. Forexample, assuming there are no breakpoints, a .75% management fee will

always consume .75% of fund assets, regardless of any increase in assetsunder management. The total management fee will vary based on the assetsunder management, but it will always be .75% of assets.

Fixed costs (such as rent or an audit fee) vary on a percentage basis becausethe lump sum rent/audit amount as a percentage will vary depending on theamount of assets a fund has acquired. Thus, most of a fund's expenses

behave as a variable expense and thus, are a constant fixed percentage offund assets. It is therefore, very hard for a fund to significantly reduce itsexpense ratio after it has some history. Thus, if an investor buys a fund witha high expense ratio that has some history, he/she should not expect anysignificant reduction.

Expenses matter relative to investment type

There are 3 broad investment categories for mutual funds (equity, bond, andmoney market - in declining order of historical returns). That is an over

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simplification but adequate to explain the effect of expenses. In an equityfund where the historical gross return might be 10%, a 1% expense ratio willconsume approximately 10% of the investor's return. In a bond fund wherethe historical gross return might be 8%, a 1% expense ratio will consumeapproximately 12.5% of the investor's return. In a money market fund wherethe historical gross return might be 5%, a 1% expense ratio will consumeapproximately 20% of the investor's historical total return. Thus, an investormust consider a fund's expense ratio as it relates to the type of investments afund will hold.

R-Square

In statistics, the coefficient of determinationR2 is used in the context ofstatistical models whose main purpose is the prediction of future outcomes

on the basis of other related information. It is the proportion of variability ina data set that is accounted for by the statistical model. It provides a measureof how well future outcomes are likely to be predicted by the model.

There are several different definitions ofR2 which are only sometimesequivalent. One class of such cases includes that of linear regression. In thiscase, if an intercept is included then R2 is simply the square of the samplecorrelation coefficient between the outcomes and their predicted values, orin the case of simple linear regression, between the outcomes and the valuesof the single regressor being used for prediction. In such cases, the

coefficient of determination ranges from 0 to 1. Important cases where thecomputational definition ofR2 can yield negative values, depending on thedefinition used, arise where the predictions which are being compared to thecorresponding outcomes have not been derived from a model-fitting

procedure using those data, and where linear regression is conducted withoutincluding an intercept. Additionally, negative values ofR2 may occur whenfitting non-linear trends to data. In these instances, the mean of the data

provides a fit to the data that is superior to that of the trend under thisgoodness of fit analysis.

A data set has values yi, each of which has an associated modelled value fi(also sometimes referred to asi). Here, the valuesyi are called the observedvalues and the modelled valuesfi are sometimes called the predicted values.

The "variability" of the data set is measured through different sums ofsquares:

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the total sum of squares (proportional to thesample variance);

the regression sum of squares, also called theexplained sum of squares.

, the sum of squares of residuals, also calledthe residual sum of squares.

In the above is the mean of the observed data:

where n is the number of observations.

The notations and should be avoided, since in some texts theirmeaning is reversed to Residual sum of squares and Explained sum ofsquares, respectively.

The most general definition of the coefficient of determination is

Relation to unexplained variance

In a general form,R2 can be seen to be related to the unexplained variance,since the second term compares the unexplained variance (variance of themodel's errors) with the total variance (of the data). See fraction of varianceunexplained.

As explained varianceIn some cases the total sum of squares equals the sum of the two other sumsof squares defined above,

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See sum of squares for a derivation of this result for one case where therelation holds. When this relation does hold, the above definition ofR2 isequivalent to

In this form R2 is given directly in terms of the explained variance: itcompares the explained variance (variance of the model's predictions) withthe total variance (of the data).

This partition of the sum of squares holds for instance when the modelvalues i have been obtained by linear regression. A milder sufficientcondition reads as follows: The model has the form

where the qi are arbitrary values that may or may not depend on i or on otherfree parameters (the common choice qi =xi is just one special case), and thecoefficients and are obtained by minimizing the residual sum of squares.

This set of conditions is an important one and it has a number ofimplications for the properties of the fitted residuals and the modelledvalues. In particular, under these conditions:

As squared correlation coefficient

Similarly, after least squares regression with a constant+linear model (i.e.,simple linear regression), R2 equals the square of the correlation coefficient

between the observed and modeled (predicted) data values.

Under general conditions, anR2 value is sometimes calculated as the square

of the correlation coefficient between the original and modeled data values.In this case, the value is not directly a measure of how good the modeledvalues are, but rather a measure of how good a predictor might beconstructed from the modeled values (by creating a revised predictor of theform + i). According to Everitt (2002, p. 78), this usage is specificallythe definition of the term "coefficient of determination": the square of thecorrelation between two (general) variables.

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Price-Earnings Ratio

It is the ratio of the market price of share of company to the earnings pershare of the company.

Here Earnings per share of company = Net profit/Total number ofoutstanding shares and Market price per share of company=Total marketcapitalization/Total number of outstanding shares of the company.

The lesser the value, the better will be the financial position of the company.

Price-Book Ratio

It is the ratio of the market price of share of company to the book value pershare of the company.

Here Book value per share of company = Net Worth/Total number ofoutstanding shares and Market price per share of company=Total marketcapitalization/Total number of outstanding shares of the company.

The lesser the value, the better will be the financial position of the company.

12. Equity oriented mutual funds under consideration for performance

evaluation and comparison:

Axis Mutual Fund Birla Sun life Mutual Fund Bharti AXA Mutual Fund HSBC Mutual Fund HDFC Mutual Fund SBI Mutual Fund TATA Mutual Fund Sundaram Mutual Fund

LIC Nomura Mutual Fund Franklin Templeton Asia Fund

13. Base Indices used as comparison parameter:

NIFTY index SENSEX index

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NIFTY Midcap 50 index BSE Small cap index

14. Comparison of performance between the equity oriented mutual

funds under consideration for 2011-2012:

NIFTY Index

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SENSEX Index

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Nifty Midcap 50 Index

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BSE Small cap Index

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Franklin Templeton Asia Fund

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Tata Mutual Fund

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SBI Mutual Fund

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Axis Mutual Fund

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HSBC Mutual Fund

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Bharti AXA Mutual Fund

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HDFC Mutual Fund

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LIC Nomura Mutual Funds

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Sundaram Mutual Fund

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Birla Sunlife Mutual Fund

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15. Interpretations:

When it comes to 1-month growth rates ,Birla sun life Advantage Fund-Dividend shows least promise as an investment option due to relativelylower growth rates (or higher depreciation rates)while Franklin Asian EquityFund seems most lucrative as an investment option due to relatively highergrowth rates(or lesser depreciation rates) than the others compared.

On a 3-month basis, Birla sun life Advantage Fund-Dividend shows leastpromise as an investment option due to relatively lower growth rates (orhigher depreciation rates)while Franklin Asian Equity Fund seems mostlucrative as an investment option due to relatively higher growth rates(orlesser depreciation rates) than the others compared.

On a 6-month basis, Birla Sun Life Advantage Fund-Dividend shows leastpromise as an investment option due to relatively lower growth rates (orhigher depreciation rates)while Franklin Asian Equity Fund seems mostlucrative as an investment option due to relatively higher growth rates(orlesser depreciation rates) than the others compared.

On a 1 year basis, Birla Sun Life Advantage Fund-Dividend shows leastpromise as an investment option due to relatively lower growth rates (orhigher depreciation rates)while Franklin Asian Equity Fund seems mostlucrative as an investment option due to relatively higher growth rates(orlesser depreciation rates) than the others compared.

On a 3 year basis, Bharti AXA Equity Fund Reg Dividend shows leastpromise as an investment option due to relatively lower growth rates (orhigher depreciation rates) while HDFC Long Term Equity Fund Dividendseems most lucrative as an investment option due to relatively higher growthrates(or lesser depreciation rates) than the others compared.

Average performance of similar category funds was best in 3 years

category/basis.

BSE SMALL CAP market performance was best in 3 years category.NIFTY MID CAP market performance was best in 3 years category.NIFTY market performance was best in 3 years category.SENSEX market performance was best in 3 years category.

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Based on Portfolio Returns, Bharti AXA Equity fund-Reg-Dividend is mostactive & that implies it has more securities traded as a portion of its netassets (as compared to other companies),while LIC Nomura Equity Fund-Dividend is least active & that implies it has lesser securities traded as a

portion of its net assets(as compared to other companies).

Based on Market Returns/Profitability, LIC Nomura Equity Funds-Dividendseems to have the highest market return (due to the high dividend yield)while compared to the others & Franklin Asian Equity Fund has the lowestmarket return (due to the low dividend yield) while compared to others.

Based on Absolute Returns, Birla Sun Life Advantage Fund-Dividendshows least promise as an investment option due to relatively lower growthrates (or higher depreciation rates)while Franklin Asian Equity Fund seems

most lucrative as an investment option due to relatively higher growthrates(or lesser depreciation rates) than the others compared.

Based on Beta ratios, Franklin Asian Equity Fund has the highest ratio tovolatility of asset against volatility of the standard index/benchmark of themarket (NSE-Nifty by default). HSBC has the lowest ratio of volatility ofasset against the standard index/benchmark of the market (BSE-200) amongthe companies compared.

Based on Standard Deviation (SD), the risk associated with price-fluctuations of a given asset (stocks, bonds, property, etc.), or the risk of a

portfolio of assets (actively managed mutual funds, index mutual funds, orETFs) is maximum for Franklin Asian Equity Fund Dividend andminimum for Axis Equity Fund-Dividend among the companies compared.

Based on Expense Ratio, HSBC and Bharti AXA Equity Fund-Reg-Dividend have best performance while Axis Equity Fund-Dividend has least

performance in terms of financial soundness among the companiescompared.

Based on R-square or correlation coefficient square, Franklin Asian EquityFund -Dividend -has future outcomes most likely to be predicted byappropriate modelsand Axis Equity Fund Dividend - hasfuture outcomesleast likely to be predicted by appropriate models among the companiescompared.

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Based on Price-Earning Ratio, Franklin Asian Equity Fund-Dividend hasbest economic performance in terms of amount invested per unit earningsdue to lowest P/E ratio while Sundaram Equity Multiplier Fund-Dividendhas worst economic performance in terms of amount invested per unitearnings due to highest P/E ratio among the companies compared.

Based on Price-Book Ratio, investors expect more value to be created bymanagement based on present assets for Tata Equity management fund withthe highest level of expectation while investors expect more value to becreated by management based on present assets for Franklin Asian EquityFund-Dividend with the lowest level of expectation among the companiescompared.

16.SWOT Analysis:

StrengthThe analysis we have done shows that a company needs to have bettervalues of parameters for better performance prediction/forecast. Thus thevarious parameters we have used for comparison are highly effective andhave been able to differentiate between the weaker and stronger companieson various parameters.

Weakness

A company that scores maximum under a particular parameter forperformance may not score maximum under another parameter. The weightshave not been used for any combination of parameter methods. This is

because there exists no standard code for assigning weights or importancefor the various methods so that a possible average score can be achieved foreach company using weighted average method which would aid in bettercomparison and prediction.

Opportunity

The biggest advantage of using these methods is that it is simple to calculateand compare the values against certain standards or against a benchmark and

hence better methods could be developed / evolved based on the currentfundamental methods for greater accuracy.

Threats

There is a problem of losing out on accuracy in the name of attaining betterprecision due to alteration of tolerance range for errors in order to get a

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perfect result which may lead to deviation of actual results to matchexpected results.

16. Conclusion:

Thus through this project , I have understood the nuances of the stockmarket process and developed a neat interpretation of results of stock

performance with respect to equity oriented mutual funds through thoroughmethodological analysis and evaluation , thereby enabling my potentialcustomers to make a sound decision or myself to make a good decision ontheir behalf as funds manager.

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17. References:

http://en.wikipedia.org/wiki/Mutual_fund http://en.wikipedia.org/wiki/Portfolio_(finance)

http://en.wikipedia.org/wiki/Goal-based_investing http://en.wikipedia.org/wiki/Absolute_returns http://en.wikipedia.org/wiki/Beta_(finance) http://en.wikipedia.org/wiki/Standard_deviation http://en.wikipedia.org/wiki/Expense_ratio http://en.wikipedia.org/wiki/Coefficient_of_determination http://en.wikipedia.org/wiki/Price-Earnings_Ratio http://en.wikipedia.org/wiki/P/B_ratio http://www.mutualfundsindia.com http://www.mutualfundsindia.com/comparefund.asp http://www.googlefinance.com http://www.yahoofinance.com http://www.technicalanalysis.com http://www.nseindia.com http://www.bseindia.com

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18. Bibliography:

1. Rouwenhorst, K. Geert, "The Origins of Mutual Funds," Yale ICFWorking Paper No. 04-48 (December 12, 2004), p. 5.

2. Rouwenhorst (2004), p. 16.3. Rouwenhorst (2004), p. 17.4. Fink, Matthew P. (2008). The Rise of Mutual Funds. Oxford

University Press. p. 9.5. Fink (2008), p. 15.6. Fink (2008), p. 63.7. Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of

Finance 7 (1): 77-91.8. Matthew Tuttle. (2009)How Harvard and Yale beat the market. John

Wiley and Sons.9. Robert A. Jaeger, "All about Hedge Funds", Mc Graw Hill, pp.133-

145 and 184-185.10. Levinson, Mark (2006). Guide to Financial Markets. London: The

Economist (Profile Books). pp. 1456.11. Walker, Helen (1931). Studies in the History of the Statistical Method.

Baltimore, MD: Williams & Wilkins Co. pp. 2425.12. Steel, R. G. D. and Torrie, J. H., Principles and Procedures of

Statistics, New York: McGraw-Hill, 1960, pp. 187, 287.13. Anderson, K.; Brooks, C. (2006). The Long-Term Price-Earnings

Ratio.14. Graham and Dodd's Security Analysis, Fifth Edition, pp 318 - 319.

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