MUTUAL FUNDS

INTRODUCTION

INTRODUCTION

MUTUAL FUNDS

Mutual fund industry is rapidly becoming popular in our country .The reason being for this is that it diversify the investment made by the investors and giving good return .So this industry is having a lot of potential and that is why this industry is also becoming very competitive. Presently more than five hundred schemes are running in our country so it becomes difficult for the investor to select the right option of investment. Therefore financial advisor companies are doing the job for the investor and recommending them the funds which are best suited to their risk profile. And for the purpose they analyze the schemes in terms of their risk factors. The project Comparative analysis of mutual fund schemes in India is basically a two way analysis at one side it will analyze the various schemes and on the other hand it will analyze the investor behavior.

Mutual Fund Investment Is Darling to the investor

Indian economy has achieved what it has been hoping for quite some time. The Feel Good Factor. Perhaps at no time during the post-liberalization period, Indian economy has shown such kind of optimism. It is poised to enhance its real economic growth rate by more than two full percentage points in the current year, holding a huge reserve of foreign exchange.

The growth of Mutual Fund in any economy is an indicator of the development of financial sector and the extent to which investor have faith in the regulatory environment. In the last decade the mutual fund industry has been one of the fastest growing industries in the financial services sector, with the assets under management growing at a CAGR of 13% from 1993 to 2005.

A Mutual fund is a trust that pools the saving of the 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 share to debentures these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (prorate). 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 investment in mutual funds. Each mutual funds scheme has a defined investment objective and strategy.

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Jensen's Index

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

Investors

Passedpool their

back to money with

Returns Fund

Manager

Generates Invest in

Securities

A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in fare way places. A typical individual is unlikely to have the knowledge, skills inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally qualified and experience staff that manages each of these functions on a full times basis. The large pool of money collected in the fund allows it to hire such at a very low cost to each investor. In effect, the mutual fund vehicle exploits economics of scale in all three areas-research, investments and transaction processing. While the concept of individual coming together the invest money collectively is now new, the mutual fund its present from is 20th century phenomenon. In fact, mutual funds gained popularity only after the second world war. Globally there are thousand of funds offering ten of thousands of mutual funds with different investment objectives. Today, mutual funds collectively mange almost as much as or more money as compared to banks.

A draft offer document is to be prepared at the time of lunching the fund. Typically, it pre species the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules fro entry in to and exit from the fund and other areas of operation. In India, as in countries, these sponsors need approval from a regulator, SEBI (Security and Exchange Board of India) in our case SEBI looks at track records of the sponsor and its financial strength in grating approval to the fund for commencing operations.

A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires another entity to bt 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.

In the Indian context, the sponsors promote the asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the asset management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Ltd. Which has floated mutual funds schemes and also acts as a manger for the funds collected under the schemes?

EVOLUTION

The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India. The history of mutual fund industry in India can be better understood divided into following phases:

Phase 1. Establishment and Growth of Unit Trust of India - 1964-87Unit Trust of India enjoyed complete monopoly when it was established in the year 1963 by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to operate under the regulatory control of the RBI until the two were de-linked in 1978 and the entire control was tranferred in the hands of Industrial Development Bank of India (IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64), which attracted the largest number of investors in any single investment scheme over the years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of different investors. It launched ULIP in 1971, six more schemes between 1981-84, Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master share (Inida's first equity diversified scheme) in 1987 and Monthly Income Schemes (offering assured returns) during 1990s. By the end of 1987, UTI's assets under management grew ten times to Rs 6700 crores.

Phase II. Entry of Public Sector Funds - 1987-1993The Indian mutual fund industry witnessed a number of public sector players entering the market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. SBI Mutual Fund was later followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.

Phase III. Emergence of Private Sector Funds - 1993-96The permission given to private sector funds including foreign fund management companies (most of them entering through joint ventures with Indian promoters) to enter the mutual fund industry in 1993, provided a wide range of choice to investors and more competition in the industry. Private funds introduced innovative products, investment techniques and investor-servicing technology. By 1994-95, about 11 private sector funds had launched their schemes.

Phase IV. Growth and SEBI Regulation - 1996-2004The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996. The mobilisation of funds and the number of players operating in the industry reached new heights as investors started showing more interest in mutual funds. Investors' interests were safeguarded by SEBI and the Government offered tax benefits to the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was introduced by SEBI that set uniform standards for all mutual funds in India. The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax. Various Investor Awareness Programmes were launched during this phase, both by SEBI and AMFI, with an objective to educate investors and make them informed about the mutual fund industry.In February 2003, the UTI Act was repealed and UTI was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual fund players on the same level. UTI was re-organised into two parts: 1. The Specified Undertaking, 2. The UTI Mutual Fund Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past schemes (like US-64, Assured Return Schemes) are being gradually wound up. However, UTI Mutual Fund is still the largest player in the industry.

Phase V. Growth and Consolidation - 2004 OnwardsThe industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutual fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players.

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Working of Mutual Fund:-

BRIEF HISTORY OF MUTUAL FUNDS (MFS)

The end of millennium marks 36 years pf existence of mutual funds in this country. The ride through these 36 years is not been smooth. Investor opinion is still divided. While some are for mutual funds other against it.

UTI commenced its operations from July 1964. the impetus for establishing a formal UTI. On came from the desire to increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during a period marked by great political and economic uncertainty in India. With war on the boards and economic turmoil that depressed the financial market, entrepreneurs were hesitant to enter capital market. The already existing companies found it difficult to raise fresh capital, as investors did not responds adequately to new issues. Earnest efforts were required to canalize saving of the community into productive uses in order to speed up the process of industrial growth. The finance minister, T.T Krishanmachari set up the idea of a unit trust that would be open the any person or UTI on o purchase the units offered by the truest. However this UTI on as we see it, is intended to cater to the needs of individual investors, and even among them as far as possible, to those whose means are small. His ideas took the form of the Unit Trust of India, an intermediary that would help fulfil the twin objectives of mobilizing retail saving and investing those savings in the capital market and passing on the benefits so accrued to the small investors.

UTI commenced its operations from July 1964 with a view to encouraging saving and investment and participation in the income, profits and gain occurring to the corporation from the acquisition, holding, management and disposal of securities.

Different, provisions of the UTI act laid down the structure of management, scope of business, powers and functions of the trust as well as accounting, disclosures and regulatory requirements for the trust.

One thing is certain the fund industry is here to stay. The industry was one entity show till 1986 when the UTI monopoly was broken when SBI and Can bank mutual fund entered the area. This was followed by the entry of others like LIC, IC, etc. sponsored by public sectors banks. Starting with an asset base of Rs. 0.25 ban in 1964 the industry has grown at a compounded average growth rate of 26.34% to its current size Rs. 1130 ban.

The period 1986-1993 can be termed as the period of public sector mutual funds (PMFs). From one player in 1985 the number increased to 8 in 199. The party did not last long. When the private sector made its debut in 1993-94, the stock market was booming. The opening up of the assets management business to private sector in 1993 saw international along with the host of domestic players join the party. But for the equity funds, the period of 1994-96 was one of the worst in the history of Indian mutual funds.

1999-2000 years of the funds: Mutual funds have been around for a long period of time precise for 36 yrs. But the year 1999 saw immense future potential and developments in this sector. This year signalled the year of resurgence of mutual funds and the regaining of investor confidence in these MFs this time around all the participants are developments in this sector. This year signaled the year of resurgence of mutual funds and the regaining of investor confidence in these MFs. this time around all the participants are involved in the revival of the funds the AMCs the unit holders, the other related parties. However the sole factor that give lift to the revival of the funds was the union budget. The budget brought about a large number of changes in one stroke. An insight of the union budget on mutual funds taxation benefits is provided later.

It provided centre stage to the mutual funds, made them more attractive and provides acceptability among the investors. The union budget exempted mutual fund dividend given out by equity-oriented schemes from, both at the hands of the investor as well as the mutual fund. No 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. So new schemes for new IPOs were inevitable. The quest to attract investors extended beyond just new schemes. The funds started to regulate themselves and were all out on wining the trust and confidence of the investors under the ages of the Association of Mutual funds of India (AMFI)

One can say that the industry is moving from infancy to adolescence, the industry is maturing and the investor and funds are frankly and openly discussing difficulties opportunities and compulsions.

FUTURE SCENARIO

The asset base will continue to grow at an annual rate of about 30 to 35 % over the next few years as investors shift their assets from banks and other traditional avenues. Some of the older public and private sector players will either close shop or be taken over.

Out of ten public sector players five will sell out, close down or merge with stronger players in three to four years. In the private sector this trend has already started with two mergers and one takeover. Here too some of them will down their shutters in the near future to come.

But this does not mean there is no room for other players. The market will witness a flurry of new players entering the arena. There will be a large number of offers from various asset management companies in the time to come. Some big names like Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously. One important reason for it is that most major players already have presence here and hence these big names would hardly like to get left behind.

In the U.S. most mutual funds concentrate only on financial funds like equity and debt. Some like real estate funds and commodity funds also take an exposure to physical assets. The latter type of funds are preferred by corporate who want to hedge their exposure to the commodities they deal with.

For instance, a cable manufacturer who needs 100 tons of Copper in the month of January could buy an equivalent amount of copper by investing in a copper fund. For Example, Permanent Portfolio Fund, a conservative U.S. based fund invests a fixed percentage of its corpus in Gold, Silver, Swiss francs, specific stocks on various bourses around the world, short term and long-term U.S. treasuries etc.

In U.S.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.).In India, the Canada based Dundee mutual fund is planning to launch a gold and a real estate fund before the year-end.

In developed countries like the U.S.A there are funds to satisfy everybodys requirement, but in India only the tip of the iceberg has been explored. In the near future India too will concentrate on financial as well as physical funds.

The mutual fund industry is awaiting the introduction of DERIVATIVES in the country as this would enable it to hedge its risk and this in turn would be reflected in its Net Asset Value (NAV).

SEBI is working out the norms for enabling the existing mutual fund schemes to trade in Derivatives. Importantly, many market players have called on the Regulator to initiate the process immediately, so that the mutual funds can implement the changes that are required to trade in Derivatives.

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BROAD MUTUAL FUND TYPES

Equity FundsEquity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds:

a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds.

b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future.

c. Speciality Funds - Speciality Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of speciality funds:

i. Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors.

ii. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk.

iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky.

iv. Option Income Funds*: While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.

d. Diversified Equity Funds - Except for a small portion of investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past.

e. Equity Index Funds - Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.

f. Value Funds - Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced.

g. Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.

2. Debt / Income FundsFunds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds:

a. Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor.

b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon.

c. High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors.

d. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate net-worth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible.

e. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period.

3. Gilt Funds Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction. 4. Money Market / Liquid FundsMoney market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks).

5. Hybrid Funds As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India:

a. Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon.

b. Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds.

c. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends.

6. Commodity FundsThose funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds. 7. Real Estate FundsFunds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation. 8. Exchange Traded Funds (ETF) Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad. 9. Fund of FundsMutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account compounding expenses of investments into different mutual fund scheme.

TYPES OF MUTUAL FUNDS

Mutual fund schemes may be classified on the basis of its Structure and its Investment objectives.

By Structure:

Open-ended funds

An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at net asset value (NAV) related prices. The key feature of the open-end schemes is liquidity.

Closed-ended Funds

A closed-end-fund has a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investor can invest in the scheme at the time of the initial public issue and thereafter they can by or sell the units of the stock exchanges where they are listed. In order to an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations Stipulate that at least one of the two exit routes is provided to the investor.

Interval Funds

Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during predetermined intervals at NAV related prices.

By Investment Objective:

Growth Funds

The aim of growth is to provide capital appreciation over the medium to long-term. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long term out look seeking growth over a period of time.

Income Funds

The aim of income fund is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities. Income Funds are ideal for capital stability and regular income.

Balanced Income

The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed securities in the proportion indicated in their offer documents. In a rising market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposits, commercial paper and inter-bank call money. Returns of this schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a mean to park their surplus funds for short periods.

Load funds

A load Fund is one that charges a commission for entry or exit. That is each time you buy or sell units in the fund, a commission will be payable. Typically entry or exit loads range from 1% to 2% It could be worth paying the load if the fund has a good performance history.

No-load Fund

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

Other Schemes:

Tax Saving Schemes

These schemes offer tax rebate to the investors under specific provision of the Indian income tax law as the Government offers tax incentives for investment in specified avenues. Investment made in Equity Liquid Saving Schemes (ELSS) and Pension schemes are allowed as deduction u/s 88 of the income Tax act, 1961. The Act also, provides opportunities to investors to save capital gains u/s 54 EA and 54 EB by investing in Mutual Funds, provided the capital asset has been sold prior to April 1, 2000 and the amount is invested before September 30, 2000.

Special Schemes

Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in offer document. The investment of these funds is limited to specific industries like Info Tech, FMCG, Pharmaceuticals, HDFC BANK LTD. calls etc.

Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE sensex or the NSF 50

Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as A Group shares or initial public offerings

REGULATORY ASPECT

Schemes of a Mutual Fund

The asset management company shall launch no schemes unless the trustees approve such scheme and a copy of the offer document has been filled by board.

Every mutual fund shall along with the offer document of each scheme pay filing fees.

The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor. A close-ended scheme shall be fully redeemed at the end of the maturity period. Unless a majority of the unit holders otherwise decide for its rollover by passing a resolution.

The mutual fund and Asset Management Company shall be liable to refund the application money to the applicants:

(i) If the mutual fund fails to receive the minimum subscription amount referred in to clause (a) of sub-regulation (1).

(ii) If the money received from the applicants for units are in excess of subscription amount referred to in clause (a) of sub-regulation (1).

The asset management company shall issue to the applicant whose application has been accepted as soon as possible but not later than six week from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme.

Rules regarding advertisement

The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false.

Investment Objectives and Valuation Policies:

The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors.

General obligations:

Every asset management company for each scheme shall keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its transaction and the disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the fund intimate to the board the place where such books of accounts, records and documents are maintained.

The financial year of all the schemes end as of March 31 of each year. Every mutual fund or the asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and the fund as specified in Eleventh Schedule.

Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company.

Procedure for Action in Case of Default :

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

No mutual fund under all its schemes should own more than ten percent of any companys paid up capital carrying voting rights.

Such transfers are done at the prevailing market rate for quoted instruments on spot basis.

The securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made.

A scheme may invest in another scheme under the same asset management company or any other mutual fund without charging any fees, provided that aggregate inter scheme investment made by all schemes under the same management company shall not exceed 5% of the net asset value of the mutual fund.

The initial issue expense in respect of any scheme may not exceed six percent of the funds raised under that scheme.

Every mutual fund shall, get the securities purchased or transferred in the name of mutual fund on the account of the concerned scheme, wherever investments are intended to be of long-term nature.

Pending deployment of funds of a scheme in securities in terms of investment objectives of the scheme a mutual fund can invest the funds of the scheme in short term deposits of scheduled commercial banks. No mutual fund scheme shall make any investment in :

(i) Any unlisted security of an associate or group company of the sponsor or

(ii) Any security issued by way of private placement by an associate or group company of the sponsor or

The listed securities of proup companies of the sponsor which is an excess of 30% of the net assets of all the schemes of a mutual fund.

No mutual fund scheme shall invest more than 10% of its NAV in the equity shares or equity relates instruments of any company. Provided that, the limit of 10% shall not be applicable for investments in index fund or sector or industry specific scheme.

A mutual fund scheme shall not invest more than 5% of its NAV in the equality related investment s in case of open-ended scheme and 10% of its NAV in case of close ended schemes.

BENEFITS OF MUTUAL FUND INVESTMENT

Professional Management

Mutual funds provide the service of experienced and skilled professionals, backed by a dedicated investment research team that analyze the performance and prospect of companies and selects suitable investments to achieve the objectives of the scheme.

Diversification

Investing in 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.

Return Potential

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

Low Costs

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

Liquidity

In open end schemes, the investor gets the money back promptly at net asset value related prices from the mutual funds. In closed end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by Mutual fund.

Transparency

You get regular information on the value of your investment in addition to disclosure on the specific investment made by you r scheme, the proportion invested in each class of assets and the fund managers investment strateer5gy and outlook.

Flexibility

Through features such as regular investment plans, regular withdraw plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.

Choice of schemes

Mutual funds offer a family of schemes of suit your varying needs over a lifetime.

Well regulated

All mutual funds are registered with SEBI and there function with the provisions of strict regulations designed to protect the interest of investors. The operations of mutual funds are regularly monitored by SEBI.

DIFFERENCE BETWEEN PRIVATE & PUBLIC SECTOR MUTUAL FUNDS

Public Sector Mutual Funds

Private Sector Mutual Funds

Purpose set by legislation

Focus on functions usually impacting significant groups in society.

Have the most money and more likely to award large grants/contracts.

More likely to pay all project cost and/or cover indirect costs.

Easier to find information about and to stay current on project needs/interests.

Application processes and deadlines are public information and very firm.

Use prescribed formats for proposals many use "common" application forms.

Possibilities of renewal known up front.

Plentiful staff resources most projects have specific contact person.

More likely to have resources for technical assistance.

Funds available to wider array of organizations (for-profit and non-profit).

Accountable to elected officials if administrative staff dont follow the rules.

More likely to focus on emerging issues, new needs, populations not yet recognized as "special interests."

Often willing to pool resources with other funders.

Wide range in size of available grants -- some can make very large awards, others are strictly for small local projects.

More willing source of start-up or experimental funds.

Full length, complex proposals not always necessary.

Can be much more flexible in responding to unique needs and circumstances.

Able to avoid bureaucratic requirements for administering grants.

Can often provide alternative forms of assistance, i.e., software/hardware donations, materials, expertise, etc.

Fewer applicants in most cases.

Can generally be much more informal and willing to help with the proposal process.

RECENT TRENDS IN MUTUAL FUND INDUSTRY IN INDIAN

RECENT trends in mutual fund flows suggest that the Indian investor is regaining his appetite for equities. But is he willing to make them a part of his regular diet? The evidence on this is not conclusive. For this, the robust inflows into equity funds since 2003 will have to be sustained through the ups and downs of the stock market.

Equity funds are certainly making a come back, judging by their sales numbers over the past year and a half. Equity funds notched up average sales of about Rs 2,700 crore a month in 2004. This is a hefty 70 per cent increase over the number for 2003 and about five times the monthly sales registered during the bull market of 1999.

With new investments steadily building up the corpus and rising equity values lending a helping hand, equity funds have doubled their asset base over the past year.

Yet to be tested

But an analysis of trends in Indian mutual fund flows over a five-year period shows that it may be early days yet to expect such a jump. It is only in the 22 months since August 2003 that equity fund flows accelerated sharply, and this has been a particularly buoyant period for the stock market.

Judging from the experience until 2003, investors appear typically comfortable entering an equity fund midway through a stock market rally, when the NAVs (net asset values) are trending steadily upwards.

Few investors venture into equity funds in a moribund market, confident that they will gain upon recovery.

Robust monthly inflows into equity funds usually follow a month or two of good stock market returns. In this respect, the period since August 2003 has been quite conducive to equity fund sales. The stock market has either notched up positive monthly returns or has stayed flat in 18 of the 22 months between May 2003 and February 2005. With the market marching predictably upwards and the returns on equity funds outpacing the market by a big margin, recent investors have tasted the rewards of equity investing, without experiencing its risks.

Disconcerting trend

However, the one disconcerting feature of the recent inflows is that new funds garnered a significant portion of the money flowing into equity funds. Over the past year, about 16 per cent of all inflows into equity funds (or Rs 5,168 crore) poured into initial public offerings from fund houses. Though old funds with an established record have garnered much more (Rs 27,000 crore), investments routed through an IPO suffer from a couple of disadvantages.

One, many investors who take the IPO route make one-off investments in equity funds and are not regular investors. This may not be the ideal way to invest in equity funds, as the returns from such an investment would depend heavily on the timing of the IPO. Should the market enter a corrective phase, these investors may be vulnerable to sharp erosion in the value of their entire investment.

Two, many investors who prefer a new fund over an established one do so under the mistaken notion that entering a fund at an NAV of Rs 10 reduces the downside risk associated with an equity investment.

These investors may be less prepared (than those who invest in established funds) for a blip in the value of their investments, in the event of a market correction.

Instead of rolling out new funds, fund houses need to put greater effort into persuading investors to place faith in established funds that have a good track record. Regular monthly investments in mutual funds also need to encouraged, rather than one-off investments prompted by a booming stock market.

They have made a beginning on this, by announcing entry load waivers on investments routed through the systematic investment route.

If the fund industry, through its distributors, does manage to convince a larger proportion of investors to make systematic investments in equity funds, one can look forward to fund flows that are not too influenced by the ebb and flow of the stock market.

Risk Hierarchy of Different Mutual Funds

Thus, different mutual fund schemes are exposed to different levels of risk and investors should know the level of risks associated with these schemes before investing. The graphical representation hereunder provides a clearer picture of the relationship between mutual funds and levels of risk associated with these funds:

LITERATURE

REVIEW

LITERATURE REVIEW

Literature on mutual fund performance evaluation is enormous. A few research studies that have influenced the preparation of this paper substantially are discussed in this section.

1. Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner.

2. Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance (Jensens alpha) that estimates how much a managers forecasting ability contributes to funds returns.

3. Mc. Donald (1974) examined the relationship between the stated fund objectives and their risk-return attributes and concludes that on an average, the fund managers appeared to keep their portfolios within the stated risk and ensured superior returns, but they were offset by expense and load charges.

4. Ippolito (1989) however, finds no significant relationship between performance, after expense and turnover and investment fees.

5. Barua,et.al (1991) concluded that the fund performed better than the market but not so well as compared to the Capital Market Line.

6. Ippolito (1993) suggest that mutual fund returns, after expense (but before load fund), are equivalent or superior to those available from a risk-adjusted market index implying that mutual fund managers may have access to useful private information.

7. Goetzmann and Ibbotson (1994) provide support for market inefficiency by finding evidence of repeated winners among fund managers and positive performance persistence.

8. Malkiel (1995) considers both benchmark error and survivorship bias in concluding that the results of prior studies suggesting market inefficiency are contaminated by these factors.

9. Elton et.al (1996) conclusion that the fund returns used in other studies may be overstated thus creating only the appearance of performance persistence.

10. Hooks (1996) concludes that low expense load fund do significantly outperform average expense no load fund.

11. ssssCarhart (1997) report a negative impact for portfolio turnover and total fund expense on fund returns.

12. Wermers (2000) decomposes mutual fund returns into stock picking talent, characteristics of stock holdings, trading costs and expenses.

13. As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark indexs standard deviation. S.Narayan Rao , et. al., evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynors ratio, Sharpes ratio, Sharpes measure , Jensens measure, and Famas measure. The study used 269 open-ended schemes (out of total schemes of 433) for computing relative performance index. Then after excluding funds whose returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investors expectations by giving excess returns over expected returns based on both premium for systematic risk and total risk. Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual funds. This paper uses a technique called conditional performance evaluation on a sample of eighty-nine Indian mutual fund schemes .This paper measures the performance of various mutual funds with both unconditional and conditional form of CAPM, Treynor- Mazuy model and Henriksson-Merton model. The effect of incorporating lagged information variables into the evaluation of mutual fund managers performance is examined in the Indian context. The results suggest that the use of conditioning lagged information variables improves the performance of mutual fund schemes, causing alphas to shift towards right and reducing the number of negative timing coefficients.

14. Dellva et.al (2001) concludes that improper benchmark specification is also cited for causing errors in fund performance evaluation.

15. Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this paper, measures of evaluating portfolio performance based on lower partial moment are developed. Risk from the lower partial moment is measured by taking into account only those states in which return is below a pre-specified target rate like risk-free rate.

16. Kshama Fernandes (2003) evaluated index fund implementation in India. In this paper, tracking error of index funds in India is measured .The consistency and level of tracking errors obtained by some well-run index fund suggests that it is possible to attain low levels of tracking error under Indian conditions. At the same time, there do seem to be periods where certain index funds appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction of mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek market of equity mutual funds. The methodology is based on the combination of discrete and continuous multi-criteria decision aid methods for mutual fund selection and composition. UTADIS multi-criteria decision aid method is employed in order to develop mutual funds performance models. Goal programming model is employed to determine proportion of selected mutual funds in the final portfolios.

17. Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to randomly selected conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investment performance. The study found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes. Moreover, the effect of diversification on investment performance is not different between the two groups. Both groups underperformed the Domini 400 Social Index and S & P 500 during the study period.

18. Bello (2005) matched a sample of socially responsible stock mutual fund matched to randomly select conventional funds of similar net assets to investigate differences in characteristics of assets held, degree of portfolio diversification and variable effects of diversification on investment performance. The studies have found that socially responsible funds do not differ significantly from conventional funds in terms of any of these attributes.

HDFC Asset Management Company Limited

HDFC Asset Management Company Limited (AMC) was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an Asset Management Company for the Mutual Fund by SEBI on July 3, 2000. The sponsor HDFC was incorporated in 1977 as first specialised housing finance institution in India. HDFC provides financial assistance to individuals, corporates and developers for the purchase and construction of residential housing. It also provides property-related services, training and consultancy. In the mutual fund venture, HDFC has tied up with Standard Life, one of the leading Insurance companies in the United Kingdom, having vast experience in management of funds. HDFC has developed a strong and dedicated team of agents that market its fixed deposit products. These key partners would constitute the backbone of the marketing and distribution network of Mutual Fund and will remain a central theme of the organisational framework in times to come.

No. of schemes

77

No. of schemes including options

293

Equity Schemes

29

Debt Schemes

240

Short term debt Schemes

14

Equity & Debt

6

Money Market

0

Gilt Fund

4

Corpus under management

Rs.46291.973Crs.as onFeb 29, 2008

Key Personnel

Deepak S. Parekh (Chairman), P. M. Thampi (Director), Milind Barve (MD & CEO), N. Keith Skeoch ( Director),Keki M. Mistry (Director), Mark Connolly (Director), Vijay Merchant (Director), Rajeshwar Raj Bajaaj (Director), Rahul Bhandari (CFO)

Fund Managers

Anand Laddha , Anil Bamboli , Chirag Setalvad, Mustafa Mehmood , Prashant Jain, Rajeev Shastri, Shabbir Kapasi, Shobhit Mehrotra , Srinivas Rao Ravuri .

SBI Funds Management Private Ltd.

SBI Funds Management Ltd. is the investment manager of SBI Mutual Fund. SBI Mutual Fund has been constituted as a trust, sponsored by State Bank India. Today the Fund has an investor base of over 2.8 million spread over 23 schemes. With a large network of collecting branches and investor service centres, SBI Mutual Fund constantly endeavours to get closer to its growing family of investors. SBI is the largest public sector Bank in India with 8,836 branches all over India. SBI is the leader in providing loans to trade & industry. It also provides related services, which generate significant fee-based income. It has also identified project finance and consumer banking as key areas.

No. of schemes

48

No. of schemes including options

141

Equity Schemes

34

Debt Schemes

79

Short term debt Schemes

10

Equity & Debt

5

Money Market

0

Gilt Fund

12

Corpus under management

Rs.29492.9685Crs.as onFeb 29, 2008

Key Personnel

Achal K Gupta (MD&CEO), Didier Turpin (Deputy Chief Exe. Off) ,C.A. Santosh (CM Cust Serv), Ms Aparna Nirgude (CRO), R.S. Srinivas Jain (CMO), Mr. Parijat Agrawal (FM - Fixed Income) , Ms. Vinaya Datar (CS & Compliance Officer), Navneet Munot(CIO)

Fund Managers

Arun Agrawal , Ganti Murthy, Mr. David Pezarkar , Mr. Jayesh Shroff , Pankaj Gupta , Parijat Agrawal , Rajiv Radhakrishnan , Ritesh Sheth , Sanjay Sinha,.

Reliance Capital Asset Management Ltd.

Reliance Capital Asset Management Ltd., the investment Manager of Reliance Capital Mutual Fund (RCMF), is a company incorporated under the Companies Act, 1956 with limited liability. Reliance Capital Limited holds 93.37% of the paid-up capital of RCAM. Reliance Capital Limited is a member of Reliance Group and has been promoted by Reliance Industries Limited (RIL), one of India s largest private sector enterprise. Setting a fast pace of growth, RCL in a short span of time has established its presence in the finance sector by rapidly expanding its operations into Leasing, Bill discounting, Merchant Banking, investment Banking and a member of OTCEI.

No. of schemes

72

No. of schemes including options

325

Equity Schemes

73

Debt Schemes

220

Short term debt Schemes

18

Equity & Debt

2

Money Market

0

Gilt Fund

10

Corpus under management

Rs.93531.6756Crs.as onFeb 29, 2008

Key Personnel

Sundeep Sikka (CEO), K Rajagopal (CIO), Madhusudan Kela (Hd-Equity), Manish Kumar (Hd HRD), Pratap Pandit (Mrkg Comm), Geeta Chandran (VPO), Sanjay Wadhwa (CFO), Milind Nesarikar (IRO), Sures T. Viswanathan (Compliance), Pankaj Gupta (Risk Manager).

Fund Managers

Amit Tripathy, Amitabh Mohanty , Arpit Malaviya, Arun Khairesan , Ashwani Kumar , Hiren Chandaria , Krishan Daga , Omprakash Kuckien , Prashant R.Pimple, Ramesh Rachuri , Sailesh Raj Bhan , Shiv Chanani , Sunil Singhania .

UTI Asset Management Company Ltd.

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

No. of schemes

97

No. of schemes including options

305

Equity Schemes

61

Debt Schemes

213

Short term debt Schemes

10

Equity & Debt

9

Money Market

0

Gilt Fund

10

Corpus under management

Rs.48347.6Crs.as onMar 31, 2008

Key Personnel

U K Sinha(Chairman & MD), A K Sridhar (CIO), A Rama Mohan Rao (Compliance Officer), K P Ghosh (IRO), S L Pandian(COO), Anoop Bhaskar(Head Equity), Amandeep S Chopra ( Head Fixed Income), Jaideep Bhattacharya (CMO)

Fund Managers

Puneet Pal, Anagha Hannurkar, V Suresh, Alok Sahoo , Amandeep Chopra, Anoop Bhaskar , Arun Khurana , Deb Bhattacharya , Harsha Upadhyaya, Manis Joshi , Puneet Pal, Sanjay Dongre, Swati Kulkarni, Vinay Kulkarni .

Name the Mutual Fund Houses that Comes Under your Mind When u Decide to Invest in Mutual funds

Most of respondents prefer big name they want to invest only in schemes of major players of the market. On the basis of customer response I select the various fund houses and compare their schemes. The top five fund houses that preferred by the customer is selected for the comparative analysis of their schemes. The fund houses selected for the analysis are Reliance, Tata, SBI, HDFC and Birla.

RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. Research is an academic activity and the term is used in a technical sense. Research is defined as the systematic and objective process of gathering, recording and analysing data for aid in making decisions.

According to CLIFFORD, research comprises defining & refining problems, formulating hypothesis, collecting, organizing & evaluating data, making deductions and reaching conclusion; and at last carefully testing the conclusion to determine whether fit the formulating hypothesis.

RESEARCH DESIGN

Research Design is the conceptual structure within which the research is conducted. Research design as a blue print for the collection, measurement and analysis of data. Research design is the plan, structure and strategy of investigation conceived so as to obtain answer to research questions and to control variances.

0510152025Datas ValueMutual Fund SchemesJensen's Index

Jensen's Index

Exploratory Research Design: -

Exploratory research design is termed as formulating research studies. The main purpose of study is that of formulating a problem. The major emphasis in such study is on discovery of new ideas and insights. As such the research design appropriate for such studies must be flexible enough to provide opportunity for considering different aspects of problem.

Descriptive and Diagnostic Research Design: -

Descriptive research designs are those design which are concerned with describing the characteristics of particular individual or of the group.

Whereas diagnostic research studies determine the frequency with which something occurs or its association with some else. In descriptive and diagnostic study the researcher must be able to define clearly what he wants to measure and must find adequate method for measuring it.

Experimental Research Design: -

These are those studies where the researcher tests the hypothesis of casual relationship between variables. Such study requires procedure that will not only reduce biasness and increase reliability but will permit drawing influence about casuality. Usually experiments meets this requirement, hence these research designs are prepared for experiment.

Research design in study: -

In the study research design is descriptive research. As descriptive research design is the description of state of affairs, as it exists at present.

OBJECTIVE of the STUDY

I. To identify the differences in characteristics of public-sector sponsored & private-sector sponsored mutual funds.

II. To find the extent of diversification in the portfolio of securities of public-sector sponsored & private-sector sponsored mutual funds.

III. To compare the performance of public-sector sponsored & private-sector sponsored mutual funds using traditional investment measures.

SAMPLING SIZE

Sample size for the research comprises of 4 Mutual Fund Companies

SAMPLING UNIT

Sample Unit for the research is consists of:-

2 Private Sectors Sponsored Mutual Funds

Reliance Mutual Funds

HDFC Bank Mutual Funds

2 Public Sectors Sponsored Mutual Funds

SBI Mutual Funds

UTI Mutual Funds

STUDY PERIOD

Study Period for Research consists of:-

2006-2007

2007-2008

HYPOTHESIS

Hypothesis for the research report is:-

H0: Both public and private mutual funds are equally efficient

H1: Private mutual funds are performing more efficiently than public mutual funds

DATA COLLECTION

After the research problem has been identified and selected the next step is to gather the requisite data. While deciding about the method of data collection to be used for the researcher should keep in mind two types of data i.e. primary and secondary.

Contd..

Primary Data: -

The primary data are those, which are collected afresh and for the first time, and thus happened to be original in character. We can obtain primary data either through observation or through direct communication with respondent in one form or another or through personal interview.

Secondary Data : -

The secondary data on the other hand, are those which have already been collected by someone else and which have already been passed through the statistical processes. When the researcher utilizes secondary data then he has to look into various sources from where he can obtain them. For eg. Books, magazine, newspaper, Internet, publications and reports.

METHODS USED IN STUDY: -

Methods used for the collection of data through the secondary sources such as:-

Books

Magazines

Newspapers

Internet

ANALYTICALTOOL USED

Sharpe

Sharpes performance index gives a single value to be used for the performance ranking of various funds or portfolio. Sharpe index measures the risk premium of the portfolio relative to the total amount of risk in the portfolio. This risk premium is the difference between the portfolios average rate of return and the riskless rate of return.

The Sharpe's index is measured as

S = RP Rf /(p

Where,

S = Sharpe's Index

rp = average monthly return of fund.

rf = risk free return *.

* risk free return (rf) is taken as 6% per annum

Treynor

Treynor measures the funds performance in relation to the market performance. The ideal funds return rises at a faster rate than the general market performance when the market is moving upwards and its rate of return declines slowly than the market return, in the decline.

Treynor is measured as:-

Tn = rP rf /(p

where

Tn = Treynor's index

rp = average return on portfolio

rf = risk free return

(p = beta coefficient of portfolio.

Jenson

The absolute risk adjusted return measure was developed by Michael Jenson and commonly known as Jensons Measure.

Jenson index compares the actual or realised return of the portfolio with the calculated or predicted return. Better performance of the fund depends on the predictive ability of the managerial personnel of the fund.

Rp = rf + (rm - rf ) (p

Where,

Rp= average return of the portfolio.

rf = risk free return

rm= average market return

= A measure of systematic risk

LIMITATIONS OF THE STUDY

The present study has the following limitations:

LACK OF PRIMARY DATA:

Conduction of study in lack of primary data makes unable to analyse the data properly as per the huge financial market and forces to rely upon secondary data collected through different sources which prevented the researcher to do research in a more explorative manner. Hence various areas and various people belong to different profession remained uncovered.

TIME CONSTRAINTS

Time has also affected the research due to less availability of number of days information was conducted in few days.

.

RESOURCE CONSTRAINT

Availability of data was a constraint due to only those mutual funds data is considered, which is available, and also there are some MFs whose data was not available so their duration was shortened.

PERIOD OF ANALYSIS

Generally longer period gives us more accurate estimates of beta. In this case period of analysis is only 2 years.

COMPLEX CALCULATIONS

Though every - "precaution has taken due to large data and complex calculations there may be chances of error.

Data Analysis & Interpretation of Mutual Funds Schemes

1. Performance Evaluation of Mutual Funds

LIQUID FUND

A. UTI Liquid Fund (G)

Year

X(Nifty)

Y(Return)

Y

2009

31.59

8.7

0.5

2008

11.99

7.7

-0.5

(X=43.58

(Y=16.4

(y=0

Y( =(Y/n

RM =(X/n

Here,

n=2

Y( =16.4/2

=8.2

RM = 43.58 / 2

=21.79

n

1. (P=(((Y- Y( ) 2

i=1

(P= ((7.7-8.2)2+ (8.7-8.2)2

= ((-0.5)2 + (0.5)2

(P =0.71

2. P = change in return in security/change in market index

= 8.7-7.7 / 31.59-11.99

P= 0.051

3. Sharpes Ratio = RP Rf /(p

RP= 8.2% or 0.082

RF=6% 0r 0.06

(P=0.71

Sharpes Ratio = 0.082-0.06 / 0.71

= 0.031

4. Treynor Ratio = RP Rf /(p

RP= 8.2% or 0.082

RF=6% 0r 0.06

P= 0.051

Treynor Ratio= 0.082-0.06 / 0.051

= 0.431

5. Jensens Ratio = rf + (rm - rf ) (p

RF=6% 0r 0.06

P= 0.051

RM=21.79% or 0.2179

Jensens Ratio= 0.06+0.051(0.2179-0.06)

= 0.06805 or 6.805%

B. Reliance Money Manager Fund- Retail Fund (G)

Year

X(Nifty)

Y(Return)

y

2009

31.59

9.1

1.15

2008

11.99

6.8

-1.15

(X=43.58

(Y=15.9

(y=0

Y( =(Y/n

RM =(X/n

Here,

n=2

Y( =15.9/2

=7.95

RM = 43.58 / 2

=21.79

n

1. (P=(((Y- Y( ) 2

i=1

(P= ((9.1-7.95)2+ (6.8-7.95)2

=((1.15)2 + (-1.1.5)2

(P =1.63

2. P = change in return in security/change in market index

= 9.1-6.8 / 31.59-11.99

P= 0.117

3. Sharpes Ratio = RP Rf /(p

RP= 7.95% or 0.0795

RF=6% 0r 0.06

(P=1.63

Sharpes Ratio = 0.0795-0.06 /1.63

= 0.012

4. Treynor Ratio = RP Rf /(p

RP= 7.95% or 0.0795

RF=6% 0r 0.06

P= 0.117

Treynor Ratio= 0.0795-0.06 / 0.117

= 0.166

5. Jensens Ratio = rf + (rm rf ) (p

RF=6% 0r 0.06

P= 0.117

RM=21.79% or 0.2179

Jensens Ratio= 0.06+0.117(0.2179-0.06)

= 0.06+0.0185

= 0.0785 or 7.85%

C. HDFC Cash Management Fund- Saving Plan (G)

Year

X(Nifty)

Y(Return)

y

2009

31.59

9.0

0.45

2008

11.99

8.1

-0.45

(X=43.58

(Y=17.1

(y=0

Y( =(Y/n

RM =(X/n

Here,

n=2

Y( =17.1/2

=8.55

RM = 43.58 / 2

=21.79

n

1. (P=(((Y- Y( ) 2

i=1

(P= ((9.0-8.55)2+ (8.1-8.55)2

=((0.45)2 + (-0.4.5)2

(P =0.636

2. P = change in return in security/change in market index

= 9.0-8.1 / 31.59-11.99

P= 0.0459

3. Sharpes Ratio = RP Rf /(p

RP= 8.55% or 0.0855

RF=6% 0r 0.06

(P=0.636

Sharpes Ratio = 0.0855-0.06 /0.636

= 0.0401

4. Treynor Ratio = RP Rf /(p

RP= 8.55% or 0.0855

RF=6% 0r 0.06

P= 0.0459

Treynor Ratio= 0.0855-0.06 / 0.0459

= 0.566

5. Jensens Ratio = rf + (rm rf ) (p

RF=6% 0r 0.06

P= 0.0459

RM=21.79% or 0.2179

Jensens Ratio= 0.06+0.0459(0.2179-0.06)

= 0.06+0.0072

= 0.06725 or 6.72%

D. SBI Magnum Insta Cash Fund- Liquid Floater Plan (G)

Year

X(Nifty)

Y(Return)

y

2009

31.59

8.7

1.4

2008

11.99

5.9

-1.4

(X=43.58

(Y=14.6

(y=0

Y( =(Y/n

RM =(X/n

Here,

n=2

Y( =14.6/2

=7.3

RM = 43.58 / 2

=21.79

n

1. (P=(((Y- Y( ) 2

i=1

(P= ((8.7-7.3)2+ (5.9-7.3)2

=((1.4)2 + (-1.4)2

(P =1.97

2. P = change in return in security/change in market index

= 8.7-5.9 / 31.59-11.99

P= 0.143

3. Sharpes Ratio = RP Rf /(p

RP=7.3% or 0.073

RF=6% 0r 0.06

(P=1.97

Sharpes Ratio = 0.073-0.06 /1.97

= 0.0065

4. Treynor Ratio = RP Rf /(p

RP= 7.3% or 0.073

RF=6% 0r 0.06

P= 0.143

Treynor Ratio= 0.073-0.06 / 0.143

= 0.091

5. Jensens Ratio = rf + (rm rf ) (p

RF=6% 0r 0.06

P= 0.14

RM=21.79% or 0.2179

Jensens Ratio = 0.06+0.143(0.2179-0.06)

= 0.06+0.02557

= 0.0825 or 8.25%

Interpretation:-

From the above evaluation of liquid mutual fund it reveals that:-

i. Sharpes Ratio of HDFC liquid fund is higher than other mutual fund schemes i.e. UTI liquid fund, SBI liquid fund and Reliance liquid fund. So HDFC liquid fund is performing best than other mutual fund schemes.

ii. Treynors Ratio of HDFC liquid fund is greater than the other mutual fund schemes i.e. SBI liquid fund, UTI liquid fund and Reliance liquid fund. So HDFC liquid fund is performing best among the other three because it provides the maximum risk premium in comparison to the other three funds.

iii. Jensens Ratio of SBI liquid fund has the maximum value 8.25% in comparison to other three fund schemes i.e. HDFC liquid fund, Reliance liquid fund and UTI liquid fund. So we can say that the SBI liquid fund is the best fund as it provides the maximum risk prem

EQUITY FUND

A. UTI Leadership Equity Fund (G)

Year

X(Nifty)

Y(Return)

y

2009

31.59

15.9

4.55

2008

11.99

6.8

-4.55

(X=43.58

(Y=22.7

(y=0

Y( =(Y/n

RM =(X/n

Here,

n=2

Y( =22.7/2

=11.35

RM = 43.58 / 2

=21.79

n

1. (P=(((Y- Y( ) 2

i=1

(P= ((15.9-11.35)2+ (6.8-11.35)2

=((4.55)2 + (-4.55)2

(P =6.438

2. P = change in return in security/change in market index

= 15.9-6.8 / 31.59-11.99

P= 0.464

3. Sharpes Ratio = RP Rf /(p

RP=11.35% or 0.1135

RF=6% 0r 0.06

(P=6.438

Sharpes Ratio = 0.1135-0.06 /6.438

= 0.0083

4. Treynor Ratio = RP Rf /(p

RP=11.35% or 0.1135

RF=6% 0r 0.06

P= 0.464

Treynor Ratio= 0.1135-0.06 / 0.464

= 0.1153

5. Jensens Ratio = rf + (rm rf ) (p

RF=6% 0r 0.06

P= 0.464

RM=21.79% or 0.2179

Jensens Ratio= 0.06+0.464(0.2179-0.06)

= 0.06+0.0732

= 0.1332 or 13.3%

B. Reliance Equity Fund- Retail Plan (G)

Year

X(Nifty)

Y(Return)

y

2009

31.59

24.81

8.55

2008

11.99

7.71

-8.55

(X=43.58

(Y=35.52

(y=0

Y( =(Y/n

RM =(X/n

Here,

n=2

Y( =35.52/2

=16.26

RM = 43.58 / 2

=21.79

n

1. (P=(((Y- Y( ) 2

i=1

(P= ((24.81-16.26)2+ (7.71-16.26)2

=((8.55)2 + (-8.55)2

(P =12.09

2. P = change in return in security/change in market index

= 24.81-7.71 / 31.59-11.99

P= 0.872

3. Sharpes Ratio = RP Rf /(p

RP=16.26% or 0.1626

RF=6% 0r 0.06

(P=12.09

Sharpes Ratio = 0.1626-0.06 /12.09

= 0.0084

4. Treynor Ratio = RP Rf /(p

RP= 16.26% or 0.1626

RF=6% 0r 0.06

P= 0.872

Treynor Ratio= 0.1626-0.06 / 0.872

= 0.1176

5. Jensens Ratio = rf + (rm rf ) (p

RF=6% 0r 0.06

P= 0.872

RM=21.79% or 0.2179

Jensens Ratio= 0.06+0.872(0.2179-0.06)

= 0.06+0.1376

= 0.1976 or 19.76%

C. HDFC Equity Fund (G)

Year

X(Nifty)

Y(Return)

y

2009

31.59

21.2

6.1

2008

11.99

9

-6.1

(X=43.58

(Y=30.2

(y=0

Y( =(Y/n

RM =(X/n

Here,

n=2

Y( =30.2/2

=15.1

RM = 43.58 / 2

=21.79

n

1. (P=(((Y- Y( ) 2

i=1

(P= ((21.2-15.1)2+ (9-15.1)2

=((6.1)2 + (-6.1)2

(P =8.63

2. P = change in return in security/change in market index

= 21.2-9 / 31.59-11.99

P= 0.622

3. Sharpes Ratio = RP Rf /(p

RP=15.1% or 0.151

RF=6% 0r 0.06

(P=8.63

Sharpes Ratio = 0.151-0.06 /8.63

= 0.0105

4. Treynor Ratio = RP Rf /(p

RP= 15.1% or 0.151

RF=6% 0r 0.06

P= 0.622

Treynor Ratio= 0.151-0.06 / 0.622

= 0.146

5. Jensens Ratio = rf + (rm rf ) (p

RF=6% 0r 0.06

P= 0.622

RM=21.79% or 0.2179

Jensens Ratio= 0.06+0.622(0.2179-0.06)

= 0.06+0.09821

= 0.1582 or 15.82%

D. SBI Magnum Equity Fund (G)

Year

X(Nifty)

Y(Return)

y

2009

31.59

21.4

4.6

2008

11.99

12.2

-4.6

(X=43.58

(Y=33.6

(y=0

Y( =(Y/n

RM =(X/n

Here,

n=2

Y( =33.6/2

=16.8

RM = 43.58 / 2

=21.79

n

1. (P=(((Y- Y( ) 2

i=1

(P= ((21.4-16.8)2+ (12.2-16.8)2

= ((4.6)2 + (-4.6)2

(P =6.51

2. P = change in return in security/change in market index

=21.4-12.2 / 31.59-11.99

P= 0.469

3. Sharpes Ratio = RP Rf /(p

RP=16.8% or 0.168

RF=6% 0r 0.06

(P=6.51

Sharpes Ratio = 0.168-0.06 /6.51

= 0.0165

4. Treynor Ratio = RP Rf /(p

RP= 16.8% or 0.168

RF=6% 0r 0.06

P= 0.469

Treynor Ratio= 0.168-0.06 / 0.469

= 0.230

5. Jensens Ratio = rf + (rm rf ) (p

RF=6% 0r 0.06

P= 0.469

RM=21.79% or 0.2179

Jensens Ratio= 0.06+0.469(0.2179-0.06)

= 0.06+0.0741

= 0.1341 or13.41%

Interpretation:-

From the above evaluation of liquid mutual fund it reveals that:-

i. Sharpes Ratio shows the risk adjusted return. Higher the Sharpe Index better the fund. In this case SBI equity fund have the maximum value i.e. 0.0165 in comparison to other three funds. So we can say that the SBI equity fund is the best fund among the three funds.

ii. Treynor Index of SBI equity fund has the maximum value i.e. 0.230 in comparison to other three funds. So we can say that the SBI equity fund is the best fund as it provides the maximum risk premium in comparison to the other three funds.

iii. Jensens Index shows the risk adjusted return. Higher the Jensen Index better the fund. In this case Reliance equity fund have the maximum value i.e. 19.76% in comparison to other three funds. So we can say that Reliance equity fund is the best fund as it provides the maximum risk premium in comparison to the other three fund

2. Comparison & Analysis of Mutual Fund Schemes

LIQUID FUND

a) Comparison & Analysis on the basis of Return & Sharpes Index

Mutual Fund Schemes

Return

Sharpes Index

UTI Liquid Fund

8.2

0.031

SBI Liquid Fund

7.3

0.0065

HDFC Liquid Fund

8.55

0.0401

Reliance Liquid Fund

7.95

0.012

sharpe index

0

0.02

0.04

0.06

UTI

SBI

HDFC

Reliance

Mutual fund scheme

Data Value

sharpe index

Interpretation:-

From the above evaluation of liquid mutual fund it reveals that:-

Sharpes Index of HDFC liquid fund have maximum value i.e. 0.0401in comparison to the other schemes i.e. SBI liquid fund, UTI liquid fund and Reliance liquid fund and returns is also higher than other three mutual fund schemes i.e. 8.55% which considered the best performing fund. So we can say that HDFC liquid fund is the best fund as it provides the maximum risk premium in comparison to the other three funds.

b) Comparison & Analysis on the basis of Return & Treynor Index

Mutual Fund Schemes

Return

Treynor Index

UTI Liquid Fund

8.2

0.431

SBI Liquid Fund

7.3

0.091

HDFC Liquid Fund

8.55

0.56

Reliance Liquid Fund

7.95

0.166

Treynor Index

0

0.1

0.2

0.3

0.4

0.5

0.6

Mutual Fund Schemes

UTI

SBI

HDFC

Reliance

Data Value

Interpretation:-

From the above evaluation of liquid mutual fund it reveals that:-

Treynors Index of HDFC liquid fund have maximum value i.e. 0.56 in comparison to the other schemes i.e. SBI liquid fund, UTI liquid fund and Reliance liquid fund and returns is also higher than other three mutual fund schemes i.e. 8.55% which considered the best performing fund. So we can say that HDFC liquid fund is the best fund as it provides the maximum risk premium in comparison to the other three funds.

c) Comparison & Analysis on the basis of Return & Jensens Index

Mutual Fund Schemes

Return

Treynor Index

UTI Liquid Fund

8.2

6.805%

SBI Liquid Fund

7.3

8.25%

HDFC Liquid Fund

8.55

6.72%

Reliance Liquid Fund

7.95

7.85%

Treynor Index

6.805

8.25

6.72

7.85

0

1

2

3

4

5

6

7

8

9

UTISBI

HDFC

RELIANCE

Mutual Fund Schemes

Data Value

Treynor Index

Interpretation:-

From the above evaluation of liquid mutual fund it reveals that:-

Jensens Index of SBI liquid fund have maximum value i.e. 8.25% in comparison to the other schemes i.e. HDFC liquid fund, UTI liquid fund and Reliance liquid fund and returns is less than other three mutual fund schemes i.e. 7.3% which is the lowest among all the mutual funds but risk adjusted returns is higher than other fund schemes. So we can say that SBI liquid fund is the best fund as it provides the maximum risk premium in comparison to the other three funds.

EQUITY FUND

a) Comparison & Analysis on the basis of Return & Sharpes Index

Mutual Fund Schemes

Return

Sharpes Index

UTI Equity Fund

11.35

0.0083

SBI Equity Fund

16.8

0.0165

HDFC Equity Fund

15.1

0.0105

Reliance Equity Fund

16.26

0.0084

Sharpe's Inde