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Chapter 1 Introduction and Back ground
1.1Indian mutual funds………………………………………..……..…1
1.2Asset allocation…………………………….………………….……..2
1.3Aim and objectives…………………………………………………..3
1.4 Rationale of study…………………………...……..…………….….3
1.5 Research road map……………………...………....……………….5
1.6 Limitations of research…...…………..…………..…..……...……..6
Chapter 2 Literature Review
2.1 Definitions and types of asset allocation…………….…….……..8
2.2 Classifications of assets………..………………………………….13
2.2.1Characteristics of cash ……………………………..15
2.2.2 Characteristics of equity…………………………..15
2.2.3 Characteristics of real Assets …………………….16
2.3 Changes in asset allocation decision in UK and India ………….....17
2.4 Differences in developed and emerging markets…………..19
2.5 How far mutual funds have reflected in development of capital market…………………………………………………………….…….21
2.6 Mutual fund industry role in channelling investments….….....22
2.7 Performance measurement tools of mutual funds measuring risk and risk adjusted return………………………………………………24
2.7.1 Markowitz’ portfolio theory……………………........….26
2.7.2 Variance and Standard Deviation (Total risk)
as measure of risk…………………………………………..…27
2.7.3 Treynor’s Ratio………………….……………………………28
2.7.4 Sharpe’s Ratio…………………………………………..…….29
Chapter 3 Research Methodology
3.1Introduction………………………………………………………..33
3.2The terminology of research ………………………………….….33
3.3 Crafting the design of the research……………………………...33
3.4 The Philosophy appropriate to the research……………………35 3.4.1 Quantitative Research……………………………………………...36 3.4.2 Qualitative Research……………………………………………..…36 3.4.3 Justification of selected philosophy………………………………..37
3.5 Selection of a proper approach…………………....................…..37 3.5.1 Deductive…………………………………………………………….37 3.5.2 Inductive…………………………………………………...…...……38 3.5.3Justifying the selected approach………………………………39
3.6 Choose the appropriate Strategy and Methodology…………….39 3.6.1 Justification of selected method…………..…………………40
3.7 The role of the researcher ……………………………………….40
3.8 Collection of Data………………………………………………….42 3.8.1 Secondary research………………………………………...………43 3.8.2 Primary data………………………………………………………..44
3.8.3 Relevance of Data………………………………………………………..45
3.9 Reviewing the method to analyse data……………………..……43
Chapter 4 Analysis
4.1 Introduction……………………………………………………….46
4.2 Asset allocation patterns …………………………………..……..47
4.3 Analysis of sector allocation………………………………………51
4.4 Return comparison with benchmark……………………………53
4.5 Analysis of top ten holdings……………………………………....57
4.6 Analysis of top ten holding……………………………………….63
4.7 Analysis of risk and risk adjusted return………………………..65
4.7.1 Analysis of Beta and Market Timings………………………….65
4.7.2 Sharpe Ratio………………………………………………….….66
4.8 Analysis of annual management charges and entry fees…….….67
4.9 Analysis of fund manager and their experience………………...70
Chapter 5 Conclusion and Findings
References
Appendices
List of Tables
Table No 4.1 Sector wise asset allocation of Indian funds and comparison with BSE 200……………………………………………..50
Table 4.2 Asset allocation of UK domicile funds investing in India……………………………………………………...……………..51
Table 4.3 Comparison of return as compared to benchmark……...53
Table 4.4 Comparison of UK domicile fund with MSCI bench mark………………………………………………………………….…54
Table 4.5 Risk and risk adjusted return analysis of Indian funds……………………………………………………………..……..64
Table 4.6 Risk and risk adjusted return analysis ok UK domicile funds………………………………………………………………….…64
Table 4.7 Analysis of Annual management charges and entry load of funds…………………………………………………….67
List of Figures
Fig 1.1 Factor contributing to portfolio performance…………..……3
Fig 1.2 Research road map………………………….………...………..4
Fig 2.1 Types of asset allocation………………………………………..7
Fig 2.2 Factors which effect asset allocation decision… .……………8
Fig 2.3 Three stage process of tactical asset allocation…………..…11
Fig 2.4 Different financial assets and real assets..…...12
Fig 2.5 House hold financial asset allocation…….….……………….16
Fig 2.6 Illustrate the various direct and indirect investment vehicle used in UK for channelling individual saving……………………….17
Fig 2.7 Function performed by mutual funds……....……..21
Fig 2.8 Asset under management in Indian mutual fund market.23
Fig 2.9 Ownership of mutual fund …………………………...………23
Fig 2.10 3 categories of assets on capital market line……….……...25
Fig 3.1 Shows the steps that would be taken in order to design a research…….…………………………………………………………..32
Fig 3.2 Showing the steps in design of the research….……………..34
Fig 3.3 5 sequential steps through which deductive approach will progress………………………………………………………………..36
Figure 3.4 Iceberg Metaphor ………..………………………….……40
Fig 3.5 Various source of data used in this thesis………..………..…42
Fig 3.6 Various parameter used in analysis……..………….………..43
Fig 4.1 Road Map of analysis………………………………………….46
Fig 4.2 Asset allocation among Equity, Debt and Cash among Indian Fund and UK domicile Indian fund…………….……………47
Figure 4.3 Risk return matrix of different investment by portfolio manager……………….………………………………….……………48
Fig 4.4 Top ten holding of Indian funds……………….…………….56
Fig 4.5 Top ten Holdings of UK domicile funds investing in Indian funds…………………………………………………….……………..59
Fig 4.6 Total holdings and percentage of top ten holdings in Indian funds…………………………………………………………..………..62
Fig4.7 Total holdings and percentage of top ten holdings UK domicile funds………………………………………………………….63
Fig 4.8 Fund manager of Indian funds and there association with funds……………………………………………..……………………..69
Figure4.9 Fund manager of UK domicile funds and there association with funds………………………..……………………….70
CHAPTER CONTENTS
Chapter II
CHAPTER 1
Introduction and background
Back ground1.1Indian mutual fundsIndian mutual fund Mutual fund industry is one of the most overriding and fast
growing sector in capital and financial market of India. As impressive improvements
is clearly visible in Indian capital market, in terms of regulation by SEBI(Security and
exchange board of India) and liquidity in market, further more the quality and
quantity of product offering by fund houses has shown an remarkable improvement in
recent time. The industry in itself has seen the most eye catching and incredible
growth, of 140% of asset under management between period of 1997 to 2006 and its
contribution to GDP has rose from 8% to 15%. The industry as on date sits on
$ 30351 billion asset under management. The Indian mutual funds model, regulated
by SEBI (Security and exchange board of India) is not identical, to that of in U.S and
U.K model, where it is termed as individual fund, on contrary they are offered as an
exclusive vehicle of investment to Investor. Individual funds offered in U.S and U.K
is known as scheme in India.
A fund structured in form of trust, and incorporated with trust deed is defined as
mutual fund. It can be referred vehicle of investment, which has juridical and legal
status. In fact, the distinctive term fund family in U.S is identical of term mutual fund
in India for e.g. The bunch of schemes operated by Reliance is known as Reliance
Mutual Fund. The long term view carried by researcher and world of finance, states
that the Indian earning potential and fundamentals of economy are going to be strong.
And these views can be further acknowledged by surging consumer demand from a
dominant and emerging middle class in India and out performance by consumer sector
further give an evidence of this well believed notion. Researcher also pointed on the
potential of India to lead among the BRIC (Brazil, Russia, India and China )
economies which all are emerging, as well as attracting the interest and capital from
all around the globe. Despite of having such strong fundamentals for mutual fund
growth in India, lack is known to retail investor or foreign investors intending to
invest in India about the asset allocation and performance measure. As there is strong
conviction among the finance world that returns from India will be superior as
compared to other emerging economies but ironically exposure received by India is
only 4 % of worlds international investment, major reason encountered by many
analyst, for lack of confidence in Indian market, is the poor infrastructure, red tapism,
lack of transparency, internal political disturbance etc effect on economic system of
companies. This research basically focuses on transparency part and trying to put light
on asset allocation decision of mutual funds and giving a reference point to UK
investor in evaluating there decision to invest in India.
1.2Asset allocation
The origin of asset allocation theory initiated with piece of work called capital asset
pricing model (CAPM) and further extended into MPT modern portfolio theory.
( standard deviation as measure of risk). The households or fund manager asset
allocation pattern and decision, have become a subject of gaining importance, as in this
modern era increasing number of households manage their investments and retirement
accounts. Portfolios of different asset classes assumed by households reflect their attitude
and preferences toward risk and objective of their investments, considering demographic
characteristics associated with them. Risk preference understanding is central and most
important aspect in asset allocation decision for a household or a fund manager. There is a
risk/return trade-off. Generally, as the intensity of risk rises, as measured by the deviation
of the return, the expectation of return also increases and vice versa. The main types of
asset allocation style, orientation and inputs- are discussed in this research. An asset
allocation style may be conservative, moderate, or aggressive, the orientation of asset
allocation may be strategic, tactical or blend of two and the main inputs of asset allocation
may be quantitative and qualitative or both. Thus in short, considering mutual fund as an
important vehicle of investing within domestic boundary and attracting investment from
foreign country, it is relevant to study the asset allocation pattern and relative
performance of that. So that a researched advise can be given specifically to an UK
investor seeking investment in Indian capital market.
Figure1.1 illustrate factor contributing to portfolio performance
Sourced: Francis & Ibbotson (2002)
1.3Aims and objective
The study aims to review asset allocation theory and its practices in broad essence. It
also aims to review the Pattern of asset allocation among Indian investor and mutual
funds. The basic objective behind the aim of this thesis is to give a crystallized view
to UK investor who is seeking to invest in the Indian capital market using the vehicle
of mutual funds. In order to achieve the above objective further 3 sub objective are
considered which will lead us to final conclusion.
To analyze the asset allocation pattern in India. And review of theory and
practices in asset allocation.
To ascertain the role of mutual fund in capital market development of India
and classifying difference between emerging and developed market.
A specific case study of 5 UK funds investing in India and 5 Indian top
performing funds. Is analyzed in terms of there asset allocation, sector
allocation and performance is measured using various attributes.
1.4 Rational and significance of study
The remarkable growth of mutual funds in India has fascinated the attention of
institutional and corporate investors, professional and academic researcher and
individual investor during past eight years. A number of empirical studies have been
conducted to examine the growth, competition, performance and regulation of mutual
funds in India. At present the mutual fund industry of India is in the period of
consolidation and growth phase of the product life cycle.
It has been convicted that the industry will assume intensified competition, without
being an exception, in the coming period of economic boom in India. Hence, this time
is the most suitable, relevant and contemporary to focus our concentration, as to how
the Indian mutual fund industry would emerge in the coming few years, to ascertain
what kind of prospects are there for an United Kingdom investor who is seeking an
investment in Indian capital market through mutual funds. Despite the impressive
growth of the mutual fund industry in India over the last ten years lack of comparative
studies has been done for foreign investor seeking to invest in India. This study
basically follows the bottom up approach as it has started from birth of asset
allocation in India and then tried to look on all positive and negative aspect of
emerging market like India, by comparing it with developed market and finally the
vehicle of investment, mutual fund is tested by literature and historical data, in terms
of its contribution in growth of Indian capital market. And case study gives a clear
understanding to Investor about the patterns, consequences and all possible aspects of
investing in UK domicile fund or fund operating in India. Thus finally in short it gives
an analysis platform to an investor intending to invest in India.
Fig 1.2 Research Road Map
Chapter 1Back ground of Indian mutual fund Industry and asset allocation importance
Aims and objective
Rational and road map of research
Limitation of research
Limitation of Research
Chapter 2 Literature review Asset allocation definition, strategies and dynamic strategies
Classification of different assets
Changes in asset allocation decision in India and UK
Difference in developed and emerging market
Role of mutual funds in development of capital market and performance measure of mutual funds
Performance measure tool of mutual funds testing there asset and sector allocation competency
Chapter 4 Finding and analysisData sourced from secondary source Trustnet, morning star and BSE of 5 Indian and 5 UK managed fund
Analysis of thereAsset allocationSector allocationTop ten holding,Return of past three year,Risk(standard deviation, Sharpe and beta),Entry fees and annual management fees,Lastly there management.
Chapter 5Based on analysis a conclusion on overall performance and asset allocation ability of these fund
Recommendation for UK investor seeking investment in Indian market
Chapter 3 Methodology Introduction
The terminology of Research
Crafting the Design of the Research
The Philosophy appropriate to the Research
Selection of a proper Approach
Choose the appropriate Strategy and Methodology
Collection of Data, Relevance of Data, Reviewing the method to analyse data
1.5 Limitation of Research Sample size chosen in the research is very small it may. Not
give the generalized view of all mutual funds operating in
India and UK.
Past can never reflect future accurately the data taken in case
study is all past performance data thus we cant give any
concrete recommendation to investors seeking investment in
India
Another important aspect is the secondary source of data thus
inaccurate data or data over exaggerated for some purpose
can give vague results.
Because of word limit of dissertation, all relevant performance
measure is not discussed in detail.
CHAPTER CONTENTS
Introduction ?
Chapter II
Asset allocation and
Mutual fund Role in
Channelling
INVESTMENT
Literature Review
2.1 Introduction
The chapter focuses on different aspects of asset allocation, their application and
relevance in fund management. The chapter has maintain a flow and that starts from
Definition and other characteristics of asset allocation, and after discussing the
allocation of assets, the characteristic of individual assets are discussed briefly, and
than the chapter moves to study changing pattern in asset allocation, where the
literature identified the importance of capital markets and thus focus of chapter got
diverted to study literature on capital market of India and compared it with developed
market. In that literature mutual fund was identified as a dominant vehicle of
investment in India. Thus the last step of chapter diverted toward mutual fund study
and its role in channelling investment in India and finally the performance measure
tools are discussed giving an reader a concise and in depth knowledge, from generic
birth of asset allocation to ultimate vehicle of investment and its performance
evaluation method. The literature will create a foundation for our analysis in chapter
four. All findings of analysis will be related back to theory, practices and trends
reviewed in this chapter.
Figure 2.1: Flow of literature i.e. how from one aspect, need to study the other
aspect derived.
Below given is a Route Map of the chapter which reflects how the literature is
flowing, encompassing variety of aspects relevant to this Research.
What asset allocation? And reviewing the theory and practices
Of asset allocation
Reviewing the characteristics of various assets
Reviewing the pattern of asset allocation
Identification of mutual fund as an important vehicle of
Investment
Analyzing the role of mutual fund in channelling investment.
Reviewing the performance measurement tools of mutual funds
2.1 Definitions and types of Asset allocation
Asset allocation strategy is about trying to achieve the most effective blend of risk and
return for each investor, depending on the investment aims and the time horizon of the
investment strategy (Cowdell 2001).
Fabozzi and Markowitz (2002) states that asset allocation means different thing to
different people in different context. Asset allocation can loosely be divided into three
categories long term policy asset allocation, short term or intermediate term tactical
asset allocation and dynamic asset allocation strategies
Long term or policy asset allocation
It is an identification of the normal asset mix policy, which
will represent the best compromise between a need for stability
and need for performance. The intent of long term asset
allocation is to; shape the normal risk profile of a portfolio to
meet the long term needs of a plan. This involves careful
balancing of needs for return, against the investor aversion to
risk, it is referred as an inactive strategy (Pike and Neale
1999).
Short term or intermediate term tactical asset allocation
It refers to active management process in which the investor
seeks to be opportunistic, and responds to changing risk and
return pattern in the capital market. The objective of this
strategy is to make money by shifting assets mix in response to
changing opportunities. Tactical asset allocation is typically an
inherently “buy low sell high process” The basic underlying
objective is short term performance (Fabozzi and Markowitz
2002).
Dynamic asset allocation strategies
It is also referred as an active allocation strategy. The best
known dynamic strategy is portfolio insurance. The basic
intent of this strategy is to protect portfolio against adverse
consequences rather than to make money by responding to
opportunities in market place (Lofthouse 1994).
Fig 2.2 Types of asset allocation
Bernstein (2000) argues that asset allocation is referred as practice of splitting
investable assets among a number of different types of securities, in an effort to limit
risk. At the extreme, parishioners of asset allocation, slice and dice their assets into
numerous categories as per the recommendations of gurus.
Cardona (1998) states that asset allocation means building a diversified portfolio,
utilizing different asset classes. Since every individual investor has its own tolerance
for risk, objective and unique asset allocations pattern, or the technique of dividing
investment among bond, cash, stock and real asset stocks can be very different. Thus
from above definitions one can conclude that asset allocation decision will depend on
combination factors such as:
Style
Conservative
Moderate
Aggressive
Orientation
Tactical
Strategic
Inputs
Blend
Quantitative
Qualitative
Blend
Fig 3.2 Factors which effect asset allocation decision
Jones (2006) states that basic rational behind asset allocation is formulating strategies
that provide return higher than the market return, he further filter it and emphasized
that tax deferred account should be used for investment yielding higher returns,
furthermore higher capital gain yield investment should be subject to conventional
savings accounts. Perold and Sharpe (1995) in there article argues that risky asset
proportion can dominate in portfolio with passage of time, so an intelligent investor
needs to realign the portfolio in response to such change. Dynamic strategies are
precise rules for doing so, he further examine four dynamic strategies buy-and-hold;
constant mix; constant-proportion portfolio insurance and option based portfolio
insurance. They stated that Buy-and-hold strategies are "do nothing" strategies: it
ignores the important aspect of relative value, and emphasize on no need of
rebalancing. Whereas Constant-mix strategies are dynamic ("do something")
approaches to investment decision-making and is responsive to relative value of asset,
purchases and sales are required, to return to the desired mix. Where as constant-
proportion strategy (CPPI) takes the following form Dollar in stock = m (Assets -
Floors) as with buy and hold strategy, tolerance of risk is zero for investor who likes
CPPI strategies ( hence no exposure to stock) below a specified floor. However with
CPPI, risk tolerance increases more quickly above the floor than with buy and hold
Asset allocation decision
Expected level of return available from each asset class
Expected level of risk associated with each asset class
Investor time horizon Investor attitude toward risk
strategy. They find that the strategy with concave payoff profiles (buying stocks when
they fall and selling stocks when they rise) gives a higher return when the stock
markets are experiencing reversal trends and finaly there studies concluded that a
continuous resetting is necessary to achieve the optimal returns; and rebalancing is an
important part of asset allocations for investment strategies with limited maturities.
Martellini (1995) states that bottom up and top down are two rival approaches, used in
practice to structure a portfolio. The bottom up approach is leaned toward pricing
individual stock and is traditional in nature, on contrary, importance to different
market is more focused in top-down approach, and ultimately emphasizes on
magnitude of asset allocation. Fraser (2002) is his studies confirmed that one can’t
underestimate the importance of asset allocation. He argued that managing investment
mix is a continuous process and can’t have static nature, it is must to adjust your mix
in response of market fluctuation and changes in your life, including age. Simply a
well start is not enough, if an initial investment of 100% in share based fund is falling
to rebalance its asset allocation will soon loose their initial advantages.
Liu (1997) studies prove that asset allocation is an
investment strategy that has specific goal to balance risk and reward by tailoring a
portfolio's assets, according to an individual's investor goals, investment horizon and
tolerance of risk. He emphasized that 4 main asset classes’ equities, fixed-income
bond or treasury bills, cash and real assets (Gold and property) have diverse levels of
risk and return, so each will react in different manner over time. Thus he came to
conclusion that no simple static formula can discover the accurate asset allocation for
each different individual. However, he agrees to the point that most financial
professionals have consensus on importance of asset allocation, in tailoring portfolio.
Thus from above studies one can interpret that, an investor choice of specific security
is secondary to the manner you allocate your investment in bonds, stock, cash, and
real estate that can be land marked as prime determinants of your investment results.
Cowdell (2001) states that rational behind effective asset allocation, is an investment
principle that is intended to optimize investment performance, for a given risk
tolerance. Instead of "putting all of your eggs in one basket" or putting all of your
money in one asset class, one should diversify across asset classes. This way, your
investment will not be subjected to the volatility of any one asset class. He further
states that Different types of investments perform differently under various economic
and political scenarios. And, changes in the financial environment will not have the
same impact on all asset classes. Since no one can consistently predict how any type
of investment will perform, a well diversified portfolio will reduce the impact of
underperformance from any one market.
2.2.2Asset allocation orientation
According to Pike and Neale (2003) there are two strategies of asset allocation that
can construct a diversified portfolio, each by using its unique characteristics and
different intellects. Strategic Asset Allocation is the first thought, that clicks in mind,
whenever an individual hear the term “asset allocation”. It is an intuitive process
which involves establishing and rebalancing weightings for diverse asset classes-cash,
stocks, bonds and real assets, as periodic rebalancing is inherent in this strategy, when
one thinks rationally, investors overall financial and personal situations changes over
time. Solnik (1995) states that strategic asset allocation can be referred as portfolio
strategy that periodically rebalance the portfolio in order to maintain and sustain long
term goal of asset allocation. Markowitz (1952) optimization model is most
commonly referred model in strategic asset allocation. The data inputted is the mean
variance estimated for each asset class, and the covariances between asset classes. The
model provides the most profitable; percentage to be invested in each asset class, to
obtain the best possible return for a given level of risk, measured by portfolio
volatility. The set of all optimal portfolios is known as the efficient frontier.
Haugen (2000) stated that model is appropriate for managing the problem of asset
allocation, because the limited number of asset classes facilitates efficient and reliable
estimation of the variance-covariance matrix and thus becomes more tractable.
However Solnik (1995) further states that second strategy tactical asset allocation also
referred to as "market timing." The strategy basically emphasize on overweight or
underweight, diverse asset classes at certain point of times, to get better returns he
further stated that factors like objective, time horizon, financial and risk versus reward
should be considered before making asset allocation decisions. Kamiyama (2007)
states that tactical asset allocation takes the advantage of anomalies in market pricing
or strong market, by realigning the percentage held in various asset and can be
referred as active management portfolio strategy. Martellini (1995) stated that tactical
asset allocation can regarded as 3 stage process
Figure 2.3 illustrate the three stage process of tactical asset allocation
Sourced: Martellini (1995)
TAA strategies were conventionally concerned with wealth allocating between two
asset classes, typically shifting in range of bonds and stocks. However recently, more
intricate style timing strategies have been successfully tested and implemented. At
this stage after considering the allocation of assets among different asset classes it
would be more rational to look upon the characteristics and classification of different
asset.
2.2 Classifications of Assets
Levy and Post (2005) categorize assets into two financial asset and physical asset the
later are tangible and are also characterized real asset whereas financial asset are
intangible such as corporate stocks, they further states that marketability and
divisibility are the two main characteristics of financial assets, which are not shared
by real assets, marketability and liquidity reflects the feasibility of converting an
Stage 1 Forecast asset return by asset
class
Stage 2Build portfolio based on
forecast
Stage 3 Conduct out of sample
performance test.
assets into cash quickly and without affecting its price significantly. Levy and Post
(2005) states that bonds are type of financial assets that represent, a creditor
relationship with an individual, they can be referred as the debt instrument for a firms
Varma (1994) studies on bond states size of bond market is greater than equity
market in developed economies. Taking a specific case of India he referred that bond
market is small than equity market, the rational behind that a large potion of corporate
debts are loan from financial intermediaries and is not securitized. However drastic
change is clearly visible in past few years as more and more companies are heading
toward capital market, to meet there financial requirement using vehicle of
convertible and non convertible debentures. As my interpretation states that
liberalized environment after 1991 and interest rate deregulation are two important
factors facilitating companies to use the dynamic ways to raise capital to finance there
growth. Now is the time to classify various set of assets and review few of them in
brief
Figure 2.4 Different financial assets and real assets
Financial assets
Pension plan
Life insurance policies
Unit trust/ Investment trust/OEIC (open ended investment companies)
Equities/ordinary shares
Loan stocks (including gilts, local and company stocks
National saving investments
Property bonds/ Individual saving accounts
Real Assets
Chattels (e.g. Paintings, antiques, jewellery, fine wines
Property (not owner occupied)
Property (owner occupied)
Sourced: Cowdell (2001)
2.2.1Characteristics of cash
Holding cash is most traditional form of asset with households. In the modern time
cash is holded in economies where capital market is unsafe and undeveloped. Dreman
(1998) states that cash has zero beta it is referred as unfluctautive but holding cash
can be highly risky, because it offers no protection against inflation it basically refer,
that it doesn’t satisfy goal of investing which is to protect and increase your portfolio
and adjust inflation. However Meyer (1987) reflects on unique characteristics of cash
and states that it is king under certain economic circumstances, rational in support of
his argument was Cash collateral, in the form of US dollars, dominates the US for a
mix of regulatory, economic and operational reasons. Cash was original form of
collateral pledge in 1990 when lending of security. It has operationally flexibility,
easy to transfer and beneficiary owners could legally accept it.
2.2.2 Characteristics of Equity
Dreamer (1998) characterized stocks as less risky investment if the holding period is
long, he state that comparing stocks with Treasury bonds and T bill, there return can
counterbalance by inflation and can erode the individual investor. Jones and Wilson
(2003) argue in his study of portfolio management that an extreme risk averse
investor should allocate 40% of his invested portfolio in stocks, as in long run they
provide an most efficient hedge against inflation subject to risk and diversification of
portfolio in which an individual investor has invested. Their studies concluded that
having 100% bonds will yield an investor more risk and lower return when inflation
taken in account, than a 50-50 portfolio in stocks and bonds. Madhusoodanan (1997)
states that over along horizon above average return offset below average return. This
is known as time diversification basic logic underlying this popular notion is simple,
if stock returns are independent from one period to another, then the losses from bad
periods will be offset by the good ones. Therefore, the risk of holding equities over
long periods will be lower, than the risk of holding them for shorter periods. The
practitioner's view it as time diversification, because of its analogy with the risk
reduction via diversification, across assets that are not perfectly positively correlated.
Mark(1992) states that the most common advice in financial advising, is to go for
risky investment when you are young and divert your investment to low risky one as
slowly and gradually you approach your retirement. He emphasized on a most usually
accepted rule that percentage of equity holding in an investor portfolio should be 100
minus the investor age. His study concluded that individual with investment motive of
more than one year can afford to have higher portion of equity in there portfolio and
lastly the investor who has higher appetite to risk will have higher portion of equity
compared to those, who are more risk averse.
2.2.3 Characteristics of Real Assets A comprehensive definition of real assets Miles (1996) physical, tangible, identifiable
assets having some monitory value which includes property, gold, plants machinery,
equipment etc. and these characteristics are opposite to those of financial assets. He
stated hedge which real assets provides, against high inflation is the most efficient of
all other asset classes. A study by Bond and Webb (1989) argued that actual inflation
can be perfectly hedged by a real asset (residential home). Real estate hold by
corporate is hedge against the inflation that is expected to erode value of money.
Whereas Miller (1996) have a slightly different view stating that real asset can only
provide hedge against inflation, in an efficient manner, when we observe a balance
real asset market. Haugen (2000) states that modern portfolio theory suggest that,
diversification benefits and opportunities should be provided by real asset, given that
correlation between property ( an dominating real asset) and equity is usually very
low.
Chatrath et al (2001) in there studies analyze the comparative impact of real asset
ownership, on risk adjusted return and systematic risk to the equity holders of a
corporate.
The generated hypothesis tested the diversification benefit of holding real asset in the
portfolio of firm. And the result would be expressed in terms of higher risk adjusted
return and lower systematic risk, but there study concluded that there are no evidence
that support benefit of diversification by holding real asset in there portfolio of
corporate, both in terms of systematic risk (beta) and risk-adjusted returns. They
further emphasized that this should not be implied as real asset brings disadvantage to
corporate in terms of risk and return. Han and Liang (1995) comprehended the view
of many academics and come to conclusion that risk of real asset measured in terms
of coefficient of variation and standard deviation is far more different from other asset
like equity, furthermore there is usually a minute positive to minute negative
correlation among common stock and real asset return.
2.3 Changes in broader aspect in asset allocation decision in UK and
India
Chatterjee (2008) studies on saving patterns in India reflected that 65% of a normal
household saving is in liquid asset like bank or post office deposit or cash at home,
12% weighting given to real assets like property and only 3% of saving is invested in
financial assets. A part of his study concluded that an average middle class Indian in
past, use to prefer in house saving rather than investment in fund or banks. The
supporting reason which he identified behind this irrational and unsecured approach,
is unlike in west India don’t have any social security which protect a poor household
in his bad face of life (i.e. unemployment or old age), thus lack of social support and
economic support can be a justified reason for this approach of investment. The most
eye catching and strange part of the study was that only 3% of total household income
is invested in financial instruments which are far less than developed economies of
west.
However, Survey conducted by Kamiyama (2007) reveals that household who invest
in capital market, invest very high portion of there income in risky assets like equity.
He emphasized that India, is still an under researched market and investing high
portion of income or in other words taking risk which one is not capable to take is not
a rational approach of investment. In support of his study a survey conducted by Max
New York Life reveals that, stock market investor invest 22 percentage of his house
hold income comparing to life insurance weighting is 4 percentage and saving 14%.
Lionel Martellini(1995) emphasized on the drastic change in Indian investor
behaviour, which is on its way he revealed in his studies, that investors are now
leaving behind the traditional investment options like the fixed deposits, company
deposits, gold etc they are now more focused and optimistic toward equity linked
investment options. Like most developed and developing countries the mutual fund
cult has been catching on in India. The rational behind rocket growth of mutual fund
in Indian capital market is the unique characteristic of being operationally easy and
economical vehicle of investment which satisfies the need for capital growth and
income preservation. Krishnamurthy(2007) states that rise in income level followed
by robust economic growth after liberalization has accelerated the demand for greater
and varied investment opportunities in India. He states that accelerated growth of the
Indian corporate sector, has build investor confidence and trust on equity markets.
The variety of dynamic and novel schemes introduced by fund houses, has further
attracted attention of investors to this growing avenue of investment. Commodity
funds, hybrid funds and emerging market funds are some products that are gaining
immense popularity. More of the efforts of regulators and fund houses are directed
toward investor education, taking informed decisions has become relatively easy. He
further stated that ironically the dilemma in current situation which is hampering the
growth of Indian capital market is percentage of saving this avenue has managed to
attract is very low despite its growing popularity. Analysts Tyagi(2008) state that
mutual funds formed a mere contribution of 5% in the total Indian household savings
in the fiscal 2007-08. Majority of the Indian population still restricts investments to
fixed deposits, small saving schemes and insurance.
Figure 3.5 illustrate the Indian house hold financial asset allocation from period 1993 to 2005
Leece (1999) states that the primary assumption of economic model is the presence of
risky investment in the portfolio of all investor, he argued against this assumption and
tried to focus on realistic aspect. Stating the case of UK where investment in risky
assets like mutual funds (unit trust) and personal equity plans has been made by niche
segment of investor despite having favourable tax treatment and comparatively large
share possession. In support of his statement a survey conducted by 1995 British
Household Panel Survey1995 mentioned that only 9.6% of individual possess a
collective risky investment. In UK majority of individual saving is confined to there
pension and property (house). But under new changing circumstances a niche segment
of market is attracted toward emerging economies and trying to find the reliable and
consistent vehicle of investing in these economies to take advantage of this forecasted
growth. Sentence (2007) states that since 1995 individual investor in UK is taking
higher level to debts and investing higher portion of there income in financial
instrument. He further explain that saving ratio is falling and fresh borrowing is
increasing and that is boosting spending of consumer which further is leading toward
rising inflation.
Figure 2.6 illustrate the various direct and indirect investment vehicle used in UK for channelling individual saving
2.4 Difference in developed and emerging market
Baid (2003) states that in terms of liquidity risk and return, emerging markets are
immensely different, from developed markets. Jiawei and Jianping (1999) studies
Direct investment
Pension plan
Life insurance policies
Unit trust/ Investment trust/OEIC (open ended investment companies)
Equities/ordinary shares
Loan stocks (including gilts, local and company stocks
National saving investments
Property bonds/ Family society bonds
Indirect investment
Chattels (e.g. Paintings, antiques, jewellery, fine wines
Property
came to conclusion that volatility in emerging market indices are higher than that of
developed market he further highlighted, experiences of investor with rising
volatility and falling liquidity. Campbell (1995) focused on important characteristic of
emerging markets in Africa, Latin America, Europe, the Mid-East and Asia that
expected return and volatility in these markets is high when compared to developed
market. Seth (1998) has putted light on important point that emerging market indexes
lies beneath efficient frontier and therefore is inefficient portfolios.
Madhusoodanan (1997) took specific case of India and highlighted the fact that there
is higher volatilities in short term view as compared to long term and Indian investor
are normally have a tendency to take short term view. He tested an hypothesis and
came to conclusion that risk in seven year investment and one year investment is same
but on the other hand return grow at faster rate in seven year investment. His studies
came to a result stating that investor can earn seven times the return of one year
investment if they are having a seven year investment horizon, with the same
exposure of risk of one year investment. Thus from above analysis one can conclude
that having a longer term view of the market definitely pays rich rewards. That is, buy
and hold strategy is likely to be better than any trading strategy on a long-term basis.
But the basic dilemma in emerging market is investors are having short term view
even though we can see that institutional investors, making foreign direct investment
in country like India take out there money in short term as soon as they get any idea of
coming political or economical disturbance.
Yeung (2003) states that regulation extent; market volatility and fund size are the
important distinguishing factor of mutual funds in emerging and developed market.
Carthty (2007) research in field of emerging market states that there is strong believe
among investor, that returns of emerging market will be superior as compared to
developed market almost 70% investor feels so. But ironically the exposure received
by India is 4% and China is 7%. That basically reflects that in spite of having strong
convictions that emerging market will outperform, investors are cautious and are
sacrificing superior returns, to be invested in more familiar and well tested market of
UK and USA and as a result there portfolio are not on efficient frontier. But changes
are initiated in this era and investor attitude have changed toward emerging
economies are looking forward to make it a part of there portfolio. One research
conducted by AMFI (Association of mutual funds India) states that investment in
emerging market is on its way to increase and new variety of emerging market funds
such as Aberdeen Global India and First state India subcontinent are positioning
themselves to provide benefit from the expected growth.
2.5 How far mutual funds have reflected in development of capital
market
Silva & Armada (2003) investigated the Euro market and stated that mutual funds are
one important aspect in house hold saving portfolio 11% of total financial asset has
been represented by this asset class in 2002. These funds provide finance to bank. On
the other hand insurance company and bank invest in them thus they are characterized
to have close link with other financial institutions.
According to Chan (2003) Literature suggest that the most important aspect in
selection of mutual fund in Asian market is asset allocation. He reflected on the
importance of institutional investor and stated that they are one of dominant asset
class in portfolio of individual house hold in most of the countries. Within this
category the financial wealth received by pension fund and insurance company, on
average is greater that mutual funds. Belgium in Euro area is an exception, mutual
funds here enjoy dominant position in house hold portfolio. Several studies have been
conducted which discuss the reason of increasing popularity of institutional investor
as saving medium.
Davis (2003) The important facility provided by Institutional investor is efficient
allocation of household wealth by providing a platform on which savings can be
pooled and financial risk can be diversified. Economies of scale are another important
characteristics of institutional investor which ultimately lead to lower transaction cost.
Levy & Post (2005) stock market participation has increased since 1970, and mutual
funds and pension plan have played an important role, in the process of providing low
cost access to well diversified portfolio for an average investor, they further stated
that still large fraction of household keeps a non negligible share of their financial
resources in undiversified portfolio of individual stock and often hold such portfolio
jointly with well diversified portfolio.
Luo,Dengpan(2003) study stated that asset allocation of mutual fund investor change
between bonds and stock in an response to change in expected stock market return
and business conditions Investor have tendency to allocate more asset into equity
funds during the business cycle peak when low returns are expected. He further stated
another important aspect that have strong influence on asset allocation of mutual fund
investor between stock and bond, are the variables that are confine to changes in real
macroeconomic activities. He stated that investors tend to invest more into equity
funds than into bond or fixed income funds during the following expansion of
economy but on other hand they invest less in equity fund during recessions of
economy.
2.6 Indian Mutual Fund Industry role in channelling investments
Dabbeeru (2007) states that Mutual fund industry in India is emerging as one of the
promising and dominant financial intermediary in capital market of India. As on
March 2007, the industry managing asset of 3.3 trillion rupees (Rs 3.3 trillion) and
comprises of 33 Asset Managements companies. It serves more than 20 million
investors associated with it. It has made a recorded compound annual growth of 48%
over a period of 1965-2007(four decades) which itself is a sufficient evidence to
prove the growing popularity of mutual funds in the country. He emphasized on
important role played by commercial banks and private player and concluded that this
impressive growth credit can be given to them. Baid (2006) pointed the importance of
potential gain through diversification, he further stated that diversification cost is
continuously falling, with emergence of mutual funds, index funds and ETF which
offer low cost diversification.
Khatri (2008) stated that position of Indian equity fund into the Lipper world’s list of
the top 100 performing equity funds of 2007, with 4 funds included and manifested
in list, comparing to none a year ago, as Indian shares have shown there best
performance in four years of 2003-2007. Reliance capital a power sector fund
managed by the country's largest asset manager has positioned itself as top
performers’ Indian fund in 2007. The24,887 funds were tracked to carve the list of top
100 funds in world by global fund intelligence firm LIPPER it list also included 5
dedicated Indian offshore funds. He further states that Indian mutual funds assets
under management (AUM) which is on mark of 8% of GDP has a further potential to
go up to 20% in coming 5 -7 years.
According to Lyons (2001) contribution of international mutual is key and significant
to the financial markets globalization and is encountered as one the most prominent
source of capital flows to emerging market and economies. Despite their prominent
role in emerging economies, modest or very little is known about their allocation of
investment in various asset classes and strategies. He further pointed that Mutual
funds based in developed economies are main instruments or financial intermediates,
for having exposure in emerging economies. In 1980s first fund was launched and
was a closed-end fund, which is the must for having exposure in illiquid markets
because reluctance faced in redeeming shares. However as liquidity in emerging
markets increases, open end fund becomes the most extensively used instrument.
Solonik (1995) studies concluded that increasingly mutual funds are diversifying
internationally and gains from this are substantial. An internationally well-diversified
portfolio in terms of return variability would have one-tenth of risk as compared to
individual equity and less than half risky when compared to U.S stock well-
diversified portfolio (Having the equal number of holdings). Ranganathan (2004)
viewed mutual funds as a new and innovative option for retail investor by virtually
bringing the easily accessible vehicle of investment readily available. He stated that
bank deposit is the most common vehicle of investment for retail investor in India,
which cant provide any protection against inflation and often real return generated are
negative, he pointed on another dilemma of small investor that they cant have access
to sensitive information because of price involved in it and if they get access due to
technical nature of that information they are not able to comprehend that. Having
view of these dilemma, he rated mutual funds as helping hand to small investor they
are basically act as an financial intermediaries or portfolio manager who perform
sequence of function on behalf of investor
Figure 2.7 illustrate function performed by mutual funds.
Thus it can be easily interpreted that the MF success is in essence the fruit, which
comes out of combined efforts by investor and proficient fund manager. Worden
Process information Identify investment opportunities
Formulate investment strategies
Invest fund & monitor progress at low cost
(1999) states the process involved in asset allocation is basically formulating a
portfolio having exposure in variety of assets like cash, fixed interest bonds, gold,
property and equities, progressively more, alternative techniques and asset classes,
from private equity to hedge funds which will exhibit a range of different level of risk
premium and return. Thus diversifying risk in range of investment can be regarded as
an important characteristic of this approach. Majority of investor are aware of the fact
that portfolio which is exposed to few securities or few asset classes will have
comparatively high level of volatility as compared to diverse portfolio. Worden
(1999) has explained operation of one of the latest range of fund, the life-cycle fund,
the main rational behind operation of these funds, is to is intended to make investment
process simpler for an investor, after he had come to decision in light of evaluating his
capacity and attitude toward risk, the basis of selection of these funds is based on the
dates of there specific saving goal, those saving for retirement would select funds
targeted for the date of their expected retirement; He further characterized these fund
on the basis of active and passive, they mobilize the asset on behalf of investor as
there date of maturity becomes near. That basically mean they transfer asset from
aggressive investment to more conservative investment.
Figure 2.8 illustrate asset under management in Indian mutual fund market
Figure 2.9 illustrate the ownership of mutual fund (as on march 2007)
After analysing the above two figures, extensive growth of asset under management
in Indian mutual fund industry, which is suggested in above literature, can be
justified. As figure 3.8 above reflects that growth rate in past 3 years is remarkable,
though the industry has shown considerable growth over past 10 years. The data
reveals the strong position of equity fund as its has managed to attract the most inflow
among the entire available sector. Which inherently give a message that Investor are
bullish over the growth of Indian operating firms and other most eye catching feature
of Indian mutual fund market, is the corporation participation which is over 50%
compared to individual participation of minutely lower that 50%. The rational behind
this high participation by corporate, is the tax reform initiated in 1999 which intended
to promote mutual fund in India, by putting dividend income and interest earned on
mutual fund in lower slab of taxation, which is lower than the corporate tax rate
applied on income generating from direct exposure to equity.
2.7 Performance measurement tools of mutual funds, measuring risk
and risk adjusted return.
Markowitz (1952) in its portfolio theory states that the most suitable measure of risk is
the variance of the rate of return. He further emphasized on the point that every single
investor in this world bears risk, even an individual who is inactive, in investment or do
nothing, is exposed to purchasing power risk by doing nothing. A universal concept of
risk return trade off is applicable for all investor. Risk is basically getting anxious about
the future uncertainty, and the main concern is that will the future realized return will be
equal to expected returns. The main objective of an investor is to design a portfolio,
which provides the maximum possible return, with the minimum possible exposure to
risk. Portfolio theories find out the combination of risk and return, which facilitate an
investor operation, to accomplish the goal of highest return for a given level of risk.
Figure 2.10 illustrate 3 categories of assets on capital market line
Sourced: Cowdell(2001)
Figure 3.10 represents the position of three main financial assets, on the Capital Market
Line. Additional return generated by getting exposed to additional risk, is reflected by
slope of line. Figure basically represents that how the three types of assets may position
themselves on capital market line and how the replacement of one type of assets affects
the investor, risk and return exposure. Point C is the most efficient portfolio point for a
risk averse investor, where the capital market line is tangent to the indifference curve, it is
appoint where the major concentration of assets are safe and risk free. Similarly, point
R, reflects the most efficient choice for an risk taker investor, where the capital market
line is tangent to the indifference curve, and major concentration of assets are in risky
assets like equity.
Watson & Head (2004) states that overall risk that investor and company face can be
seprated into systematic and unsytematic risk, systematic risk (also know as non-
diversifiable, non specific, unavaoidable or market risk represents how returns are
affected by business cycle, government policy and changes in interest rate
unsystematic risk (also known as diversifiable risk, specific, avoidable is a risk
specific to particular company or share)
Crane (2008) states that allocation of assets will decide the return a individual
investor will breed over a time. But the expected return by an investor will be
determined by the risk tolerance level of that investor, determination of risk will
depends on investor required liquidity, the time of investment, individual tax bracket
and other situation in his consideration horizon. Usually an investor portfolio is divide
its portfolio into different asset classes, and then further sub divide into more
fragmented classes, majority of portfolio have a portion of equity and equity funds to
provide an efficient hedge against inflation.
Riley and Chow (1992) states that an individual relative risk aversion in depended
on factors like age, income and wealth. So finaly he concluded that allocation of asset
to equity (risky), bond and real assets will be depended on those demographic. So
this section focuses on certain well recognizeed theory and model in the world of
finance which measure risk and returns of mutual funds so that they can be matched
to individual investor risk and return.
2.7.1 Markowitz’ portfolio theory
Haugen (2004) states that cornerstone of this theory is the ability of investor to
diversify away unsystematic risk, by holding portfolio consisting of a number of
different shares. He states that statrting point is to construct what is known as the
envelope curve. While investor can locate themselve anywhere in within the
envelope curve. Rational investor will invest only in those portfolio on the efficient
frontier.
Watson and Head (2004) states that unrealistic assumption that a investor can borrow
at risk free rate, probleum in identifying the market portfolio as this require
knowledge of the risk and return of all risky investment and their corresponding
correlation coefficient, and lastly changes in composition of the market portfolio this
is due to change in risk free rate and envelope curve are some of the grounds on
which this theory is questioned.
CAPM (Capital asset pricing model)
Mayer (2003) states that CAPM is the next logical step from portfolio theory and is
based on foundation provided by Mrakowitz CAPM uses the systematic risk (beta) of
individual securities to determine their fair price, it is inherently assumed that investor
have eradicated unsystematic risk by holding diversified portfolio he states that
CAPM is based on simplified world using assumptions like investor are rational and
want to maximize their utility; they do not take risk for risk sake, all information is
freely available, investor are able to borrow and lend at risk free rate, investor hold
diversified portfolio eliminating all unsystematic risk and lastly investment occurs
over a single, standardised holding period. Central to CAPM is the existence on linear
realationship between risk and return. The linear realtionship is defined by what is
known as the security market line, where the systematic risk of a security is compared
with the risk and return of the market and the risk free rate of return in order to
calculate a required rate of return. CAPM calculates the risk-adjusted discount rate,
with the risk-free rate, the market risk premium, and beta:
2.7.2 Variance and Standard Deviation (Total risk) as measure of
risk
The variance of random variable is a measure of the dispersion or variability of the
possible outcome around the expected value (mean). In case of asset, return variance
is a measure of the dispersion of the possible rate of return outcome, around the
expected return. Followins is the equation of variance:
Standard deviation SD: Watson and head (2000) it basicaly represents the risk
inherent in a given security or portfolio as risk is an important diterminant of
portfolio efficiency, SD gives a investor a mathematic basis to determine the
variations in return he further states that Standard deviation provides a quantified
estimate of the uncertainty of future returns. It is basicaly a measure of risk,
risk-adjusted rate = risk-free rate + market risk premium * beta
calculated using either the historical return or the expected future return. The
equation of Standard deviation.
From the perspective of capital asset pricing model, below are the most extensively
used risk-adjusted performance measures, which are based on ex-post
Sharpe’s measure (Sharpe 1966)
Trey nor measure (Trey nor 1965)
2.7.3 Treynor’s Ratio
Fabozzi and Markowitz (2002) Treynor measure is as measure of the excess return
per unit of risk. The excess return is defined as the difference between the portfolio’s
return and the risk free rate of return over the some evaluation period. The risk
measure used is the relative systematic risk as measured by the portfolio beta. Treynor
argue that this is the appropriate risk measure since in a well diversified portfolio; the
unsystematic risk is close to zero.
Where:
Ti = Treynor’s performance index
RP = Portfolio’s actual return during a specified time period
RF = Risk-free rate of return during the same period
βP = beta of the portfolio
At any time when RP> RF and βP > 0 a larger Treynors value imply that its an
efficient portfolio for an individual without considering the individual risk appetite.
The measure imply that negative Treynor can be obtained in 2 situations when BP<0
or RF>RP in latter case when Treynor is negative it reflects a extremely poor position
of portfolio. On the other hand if negative Beta force Treynor to be negative than the
portfolio performance can be regarded as efficient. In last negative RP- RF, and β will
give positive Treynor. But the clear picture of fund performance can only be obtained
by seeing that whether portfolio return is below or above SML (Security market line)
considering the evaluation period.
2.7.4 Sharpe’s RatioWilliam F.Sharpe (1966) this measure is the gauge of the risk/ reward ratio. The
numerator is same as in the Treynor measure. The risk of the portfolio is measured by
the standard deviation of the portfolio it is referred as reward to variability ratio.
Consequently, the Sharpe index is measure of the excess return relative to total
variability of the portfolio. The Sharpe and Treynor measure will give identical
performance ranking if the portfolio evaluated are well diversified. If they are poorly
diversified ranking could be quite different. Fabozzi and Markowitz (2002) states that
if the Sharpe of market is lower than the fund. Than in that case portfolio of fund has
outperform the market. The edge of Sharpe over Treynor is, the point at which
individual is fairly rewarded for the standard deviation (total volatility or risk) when
compared to market, is considered in it. One of the major draw back of Sharpe is its
reliance on CML capital market line. As one of the main feature of CML is, efficient
portfolio can only be plotted on that and there is no room for inefficient one. Hence
it’s based on an assumption that the portfolio under consideration is an efficient
portfolio.
2.8 Summary
To sum it up, the literature defines asset allocation as a strategy, which focuses on
achieving a most efficient balance between risk and return, and this strategy is tailor
made for each individual, depending on an investor or fund aim and time horizon of
investment, literature also referred it, as a most important factor which contributes in
portfolio performance.
Further more pattern of asset allocation has changed drastically in India and UK. And
this has been identified as an intuitive process which will continue to change as new
innovative products will hit the market. Among the current asset classes’ equity
investment (Capital market) is regarded as most efficient mean of investment in long
run. And other asset classes like cash and etc can’t provide efficient hedge against
inflation. So in order to take the benefit of equity exposure, mutual funds have been
positioned as most efficient vehicle of investment in Indian capital market,
specifically for a small investor as it provides benefit of diversification, expert
analysis, and economies of scale. It has also been summarised that mutual fund have
provided dual benefit, on one hand it has benefited investor, on the other hand they
have played a major role in attracting investment in capital market. However it has
been pointed that only those funds can beat the market in long run, which have an
efficient sector and asset allocation ability. Thus our next section will analyze and
judge mutual fund on different parameters, by specifically taking the case of two
groups of funds investing in Indian equity, but are operated in different country. That
will give the investor a detail framework to check the feasibility of fund before
investing in that.
.
Chapter III
Asset allocation and Mutual
funds. A case study of funds
investing in India
3.1Introduction
Research Methodology
-----------------------------------------------------------------------------------------The basic aim and focus of chapter is itself reflected by its name Research
methodology. This section of paper basically discuss the various steps, strategies and
approaches used in collection of data and analysis of different aspects of sample
Indian funds and UK domicile funds. The section of paper discusses the various
drawback and advantages of using the chosen approach and structure of the research.
Furthermore it puts light on rationale of using the collected data and explicitly
explains how data will be used in achieving the desired objectives. The section will
also address the various merits and demerits of using secondary data, obtained
through various analytical and company websites. For the purpose of this study 5
Indian fund investing in Indian equity is termed as Indian group and 5 UK domicile
fund investing in Indian equity are termed as UK group.
-----------------------------------------------------------------------------------------3.2The terminology of Research ----------------------------------------------------------------------------------------- The word ‘Research’ is usually allied either with the concept of medicinal or natural
sciences or with the technological achievements in these sectors. However, the
academic research is primarily concerned with developing a theoretical explanation or
understanding of issue (Welman et al, 2005). Moreover, according to Hussey and
Hussey (1997) research is a process of step by step investigation, in order to enhance
the extent of knowledge in that particular field. The most important aspect of any
research is accurately defined objective and scope of the individual study. Logical
structure further adds on to obtain the reliable outcome.
-----------------------------------------------------------------------------------------3.3 Crafting the Design of the Research-----------------------------------------------------------------------------------------
Research Design is the science (and art) of planning procedure for conducting studies
so as to get the most valid findings, it is basically a common reflection of both the
design of research problem and structure adopted by researcher to conduct his
investigation. (Cooper et al, 2008). The aim of this research is to analyze what kind of
prospects are there for a United Kingdon investor who is seeking an investment in
Indian capital market through mutual funds. This section focuses towards the creation
of a design which will be incorporated as the research progresses in order to test
connotation of asset allocation pattern in mutual fund. Although selecting a suitable
design is a bit convoluted task due to range of options that the researcher have but by
using diversified methodologies researchers get into the insight knowledge and depth
of the study that is being conducted (Collis and Hussey, 2003). It is important to
revise the merits, demerits and the appropriateness of all the designs to the study.
Below mentioned is a flowchart which shows the steps that would be taken in order to
design a research. Followed by a diagram which shows the various philosophies and
approaches to research
Fig 3.1 Flowchart illustrate the sequence of steps that would be taken
in order to structure a research
Figure 3.2 showing the steps in design of the research
Choosing the philosophy that align with model research
Identifying the appropriate Approach
Identifying the relevant strategy to be initiated for the completion of the study
Choosing the appropriate methodology
Selecting the range of methods to assemble the relevant data
Data analyses procedure is reviewed
Positivism
Deductive Experiment Survey Cross Sectional
Sampling, Case Study Secondary Data, Observation, Interviews, Questionnaires,
Surveys, Primary Data Ethnography Interviews, Longitudinal Action Research Grounded Theory Inductive
Phenomenology
Figure reflecting the Onion of Research process Saunders et al (2000)
The above figure is a reflective image of onion which incorporates 5 layers showing
different stages of research. Parallel to the onion is flowchart which illustrates the
different strategy and approaches adopted in the design of this research paper. The
approaches and strategies identified for this research have been explicitly explained in
the chapter with, justification to use that in this research.
-----------------------------------------------------------------------------------------3.4 The Philosophy appropriate to the Research-----------------------------------------------------------------------------------------The philosophy of research depends on the way that you think about the development
of knowledge. It is vital to identify the correct concept and structure of research
because it helps to support various essential assumptions about the various elements
of study and the philosophy pertaining to that in the world (Hussey and Hussey,
1997). It aligns towards the acceptable way in which the thesis would be directed. The
most suitable philosophy for this kind of research is identified as a theory of
Pragmatism. Pragmatism is based on idea of using both positivistic (quantitative) and
phenomenological (qualitative) philosophy in the same research and is based on
Pragmatism
Secondary data
Case Study
Deductive
Cross Sectional
Philosophy of Research
Approach of Research
Strategy of Research
Time Horizon
Methods of Data Collection
Flow chart reflecting the selected entities from Onion to suit requirement of research
philosophical approach (Denscombe, 2007). The nature of Quantitative technique
personifies that reality is objective and singular where as Qualitative method outlines
that reality is subjective and multiple. The pragmatic approach allows having a
broader and a clearer view at the problem of the study through the use of both
Qualitative and Quantitative methods. A brief description of the both the method is
given below.
3.4.1 Quantitative Research: The paradigm of Quantitative data refers to the
collection and analysis of data which is present in the numerical form. The data is
mainly analyzed and evaluated in the form of statistical tests (Denscombe, 2007). The
interpretations and findings are generally in the form of measured quantities rather
than impressions. The nature of the approach is objective because of its focus on the
phenomenon of measurement.
3.4.2 Qualitative Research: The paradigm of Qualitative approach lays emphasis on
examining the subjective aspects of social and human activities instead of
measurement (Mauch and Jack, 1998). The data which is gathered is presented in the
linguistic form instead of numbers. The nature of the approach is subjective and it is
generally produced in the minds of the human beings for e.g. interviewees or
observation.
3.4.3 Justification of selected philosophy
Gummesson (2000) describes the nature of Qualitative and Quantitative research
methods as exploratory and experimental. Both these techniques would be used in a
combined effort to encompass the aspects of this research. Hussey and Hussey (1997)
argue that using different techniques of research in the same study leads to the
Triangulation. On a similar note Cooper et al (2008) also says that using both
Quantitative and Qualitative approaches for collecting and analyzing data is an act of
Triangulation. This research justifies the use of methodological Triangulation because
the collected data would be analyzed through both Quantitative and Qualitative
techniques. Qualitative approach would stress on testing appropriateness and
significance of mutual fund as vehicle of investing in Indian capital market and it will
further analyze the significance of asset allocation in investment world by reviewing
various theory and literature. Simultaneously Quantitative technique would stand to
test and analyze the asset allocation and performance pattern of selected funds, to
provide a data about the most efficient funds group(i.e Indian or UK), and finally the
most efficient and sustained fund out of both groups will be pointed out, as most
reasonable, reliable and progressive vehicle to invest in Indian capital market, for UK
investor (who has an option to choose among UK domicile fund and Indian fund)
seeking investment in Indian capital market.
-----------------------------------------------------------------------------------------3.5 Selection of a proper Approach -----------------------------------------------------------------------------------------
It is an important task to silhouette the type of approach that has to be followed from
the beginning of the study in order to achieve certain landmark.
The criteria for opting the proper approach to collect the data fundamentally depends
upon the nature of information needed, along with the accessibility of resources and
also on what do we determine to achieve through this study (Patton, 1998). There are
basically two broad categories in which the approach of research cascades, they are:
3.5.1 Deductive: This method is referred to as moving from general to particular,
Saunders et al (2000) refer it to a form of empirical enquiry by testing a hypothesis or
an idea. The Deductive approach emphasizes on developing a basic abstract or a
theoretical framework which is later on tested by practical observations and
conclusions (Hussey and Hussey, 1997). It is basically about finding out specific
things from general perspectives.
Fig 3.3 Robson (1993) 5 sequential steps through which deductive approach will progress
3.5.2 Inductive this approach is referred as moving from particular to general Collis
and Hussey (2003) refer this as a notion of developing a theory from certain empirical
observations. This approach reflects the induction of various specific instances to
general inferences. It is about exploring and understanding the nature of a problem or
an issue and later analyzing the results by formulating a theory (Saunders et al, 2000).
3.5.3Justifying the selected approach
Step 1Deducting a hypothesis (a testable proposition about relationship between two or more events or concept) from the theory
Step 2Expressing the hypothesis in operational term which proposes a relationship between two specific variables
Step 3Testing this operational hypothesis. This involves an experiment or some other form of empirical inquiry
Step 4Examining the specific outcome of enquiry. It will either trend to confirm the theory or indicate need of modification
Step 5If necessary modify theory in light of finding
The nature of the study that is being conducted perfectly co-relates with Deductive
approach because the rational of study is to ascertain what kind of prospects are there
for an United Kingdon investor who is seeking an investment in Indian capital market,
through vehicle of mutual fund. And to come at any conclusion study has started
from the generic birth of the term asset allocation and than latter on came to mutual
fund as vehicle of investment. The research aims to use deductive approach in order
to test the comparative performance (by analyzing various measures), sector and asset
allocation of selected 5 UK domicile fund investing in India and top 5 Indian, based
on the theoretical structure developed in the earlier chapter. The deductive approach
would lead the research to conclude how appropriate is the broad asset and sector
allocation of selected fund by analyzing there performance in terms of risk, return,
management fees and fund manager retention. Saunders et al (2000) argue that using
the deductive approach is beneficial because it leads the thinking of the researcher
from a general perspective to a specific perspective allowing him to gain the insights
to the issue being studied.
----------------------------------------------------------------------------------------- 3.6 Choose the appropriate Strategy and Methodology-----------------------------------------------------------------------------------------
After determining the paradigm and the approach to be adopted for the research the
choice of choosing the methodology and the strategy becomes almost determined.
Saunders et al (2000) describes research strategy as a plan about answering the
research question(s) where as Bryman and Bell (2004) describes methodology as the
overall approach to the process of research. The rational of this research personifies
the use of case study as a strategy to achieve set objectives. The strategy of the
research, aims not only to explore the appropriateness of asset allocation and mutual
funds, it aims to provide a frame work to UK investor who is seeking to invest in
Indian capital market by the using an intermediate called mutual fund. In the same
vein, Yin (1994) identifies case study as the best adoptable way to not only to explore
an issue but also understanding it in a definite context based on certain empirical
observations. By using case study method as a strategy various questions relating to
‘why’, ‘what’ and ‘how’ can be considerably answered. There is variety of methods
for collecting data to answer the question(s). The methods of collecting data for this
case study are explained later in the chapter. The use of case study method as a
strategy personifies the shadow of the phenomenologistic paradigm.
According to Saunders et al (2000) the cross sectional method of study allows the
researcher to study a particular phenomenon at a particular time. The methodology of
cross sectional approach allows testing of one or more variables at a particular time.
3.6.1 Justification of selected method: As mentioned earlier the aim of this
study is to analyze and compare the performances, sector and asset allocation of
selected fund managed in two different countries, having different attitude to risk and
return, but investing in same market. Thus the cross sectional approach perfectly suits
the pattern of this research because it would allow the researcher to analyze and
compare asset allocation pattern, role and significance of mutual fund and finally
specific case of mutual funds operating in India and UK are put together which give
an informed and studied frame work to investor seeking investment in India. As the
cross sectional has an advantage being conducted over a short period of time which
allows academic researcher like me to complete the research in the short span of time.
Miles and Huberman (1994) explicates that using this type of methodology boosts the
confidence of not only the venerable experts but also encourages the young ponies
from the field of research to achieve milestones through their collection of data.
3.7 The Role of the Researcher
Different types of roles are played by different types of researchers based upon the
principles of their study. The role of an academic researcher could be described as a
movement beyond the superficial stage of an idea or a problem towards the
application and consideration of certain principles or methods that would allow them
to make a balanced judgment. According to Hussey and Hussey (1997) there are two
types of researcher’s i) positivist (quantitative researcher) – who remain distant from
the research situation and have objective views, and ii) anti-positivist (qualitative
researcher) – who develops a certain kind of relationship with the subject of
investigation and they totally absorb themselves in the research situations.
Furthermore, according to Welman et al (2005) what researchers observes is not the
reality as such but an interpreted reality.
My role in this thesis could be described by stepping into the shoes of a quantitative
researcher through which I would analyze the asset allocation pattern and apply it to
sample funds The character could further be described by explaining the iceberg
metaphor of Gummesson (2000) which says that an academic researcher like me sees
only 10% - 15% of the mass of an iceberg above the water by embracing desk
research of the existing material about the proposed study together with the field work
of data collection through the methods adopted i.e. published data or financial report.
According to Gummesson (2003) it would not be possible for an academic researcher
to go below the surface of the water or into the depth of an issue to explore the
remaining 85% - 90% because of the lack of resources, time, industry experience etc
and most unfavorably the portion of the iceberg underneath the water is not amenable
for academic researchers like myself. However, by mobilizing all the traditional
resources that are present with us such as consultation and guidance that we get
through our mentors, collection of data through secondary sources such as reading
books, journals, articles etc and also through primary sources by gaining access
through various channels into the capital market who work on the level of water we
can at least help ourselves to step out onto the iceberg so as to explore some bits of
various underlying issues instead of viewing from the top.
Figure 3.4 Iceberg Metaphor adapted from Gummesson (2003)
3.8 Collection of DataThe term ‘Data’ refers to the acknowledgement of information in the form of known
facts and figures which are used for the summation of inferences or assumptions
(Hussey and Hussey, 1997). There are two categories through which the data can be
recorded i) Qualitative data - refers to the subjective or non-numerical type of data
and ii) Quantitative data - refers to numerical form in which the information exists
(Saunders et al, 2000). The category of data which suits to the rational of this study
refers to the collection of information in the objective form i.e. quantitative data.
Although it is relatively a difficult method of collecting and analyzing the data in
comparison to the qualitative method but it helps the researchers observe and analyze
the issues more close and deeply rather than presenting a subjective view of the
collected information..
In the process data collection it is significantly important to identify the sources
through which the data would be collected. The sources for collecting the data can be
classified in terms of i) Secondary Research and ii) Primary Research.
3.8.1 Secondary Research: Secondary Research is a simple phenomenon of
collecting or diagnosing the interpreted or observed information which was composed
in the past. Secondary data is a record of various statements or analysis which has
been given in the past by several theorists or proponents. Glatthorn and Allan (1998)
says that collecting data through secondary sources saves a handful amount of time
which can be used by the researcher at later stages for drawing analysis and
conclusions. There are several sources through which secondary data can be gathered
in order to lay the base for the research. The secondary sources have been utilized to
interpret and collect data on variety of topics like What is asset allocation?,
Importance and strategies of asset allocation, role of Mutual fund in development of
Indian capital market, mutual fund performance measurement tools and models, data
on mutual fund schemes operating in India and UK, and finally data on bench mark
index i.e BSE and MSCI India index. The principal source thorough which the
secondary information is collected for this research ranges from numerous books on
investment and asset allocation. Various websites and databases have been used to
get the asset allocation, sector allocation, performance figure, management fees, fund
manger experience and etc. of selected fund schemes used in analysis. Access to
ABI/INFORM Global accessed through the electronic Library of BCU have played a
vital role in the collection of secondary information for this research.
Figure 3.5 below illustrate the various source of data used in this thesis
3.8.2 Primary Data: The study has been carried out entirely on the basis secondary sources and hence there was no need of primary data to be collected.
3.8.3 Relevance of DataThe data is sourced from the websites and data base which is authentic and well
renounced in worlds for the financial data they provide further for better analysis data
of say one fund is taken from two sources one is the individual analyst website like
morning star and other source is the website of fund house. Both the data sourced is
compared and than included for further study, data for theory and literature is mostly
sourced from books and scholar Journal and article so there cant be any question
mark on there relevancy. Benchmark index data is taken from Bombay stock
Data on mutual fund schemes and bench mark indices
Morning star
Trustnet
Bnet
Money extra
Amfi (Association of mutual
funds India
BSE (Bombay stock exchange)
Barclays capital
Fidelity India
First state India subcontinent
Aberdeen global
Reliance
HDFC Bank
ICICI Bank
Jupiter India
New Star UK
Data on theory and literature
Books from Kenrick library (Birminghamcity University)
Journals and Articles from ABI/INFO Global.
Research papers from SSRN(Social science research network).
exchange website, the index is broad based, consisting of 200 actively traded equity
shares listed on Bombay Stock Exchange (BSE) These two hundred shares in the
index constitute 71 per cent of the total market capitalization of companies listed on
Bombay Stock Exchange, The BSE 100 Index is widely considered as market proxy
or benchmark for the purpose of academics, research and by practicing fund
managers. MSCI Index (Morgan Stanley country index data is taken from Barclays
capital website.
3.9 Reviewing the method to analyse dataThe analysis of 5 UK domicile and 5 Indian funds investing in Indian capital market
is done and it can be termed as comparative case study, where comparison is done
within the boundary (i.e. among Indian funds) and cross border comparison is also
conducted (i.e among Indian and UK funds). The parameters used in comparison are
following:
Fig 3.6 illustrate the various parameter used in analysis
Management and fund manager experience
Parameters of comparison
Broad asset allocation of selected funds
Sector allocation by these funds
Top ten holdings and percentage in top ten
holdings
Return and comparison with bench mark of last 3 years
Return and Risk adjusted return.
Entry load and annual management fees
On the basis of comparison of selected funds, the analysis will lead us toward
choosing the Indian fund or UK domicile fund as vehicle of investing in India and
finally from the given sample we will identify the most efficient fund and will analyze
the reason of its out performance.
3.10SummaryIn conclusion, this chapter has given the approach through which the research process
would be taken. It explains the methods and sources that will be used in collecting
secondary data. It further highlights the limitation faced during the study.
The findings and analysis of the research are discussed in the following chapter of
this dissertation.
Chapter IV
A case of 5 Indian and 5 UK
domicile funds investing in
India
4.1 Introduction
Analysis and Findings
India once termed as, the most promising emerging market is now moving ahead,
with well-built and structured development in the capital and funds market. It has
managed to be on the radar of investors and corporates around the globe seeking fresh
growth opportunities and is tired of saturated market in west. The Indian economy is
one of the fastest growing in the world and this time is referred as the most lucrative,
to enter in Indian capital market either through investment in funds or launching
specific Indian focused fund. The capital market is going through leaps and bounds,
with strong economic fundamentals; a vast population of more than 1.2 billion, and a
Optimistic future, as majority of market analyst has view that opportunities in India
will exceed that of China. This section of paper analysis the case of 5 Indian
managed fund and 5 UK domicile fund, that will equip us in having indepth
knowledge of funds managed by Indian AMC and Foreign AMC(Asset management
company), this study will benefit an investor who is seeking to invest in Indian capital
market giving him opportunity to analyze the comparable measure and make inform
decision before entering in Indian capital market, though the sample size used in
analysis is small but they are top performer Indian fund and top UK domicile fund,
channelling investments of UK investor in India, they can give comprehend view of
using each channel, as after liberalization (1991) UK retail investor has an option to
put money for investment either through UK domicile fund or can go and directly buy
NAVS in Indian AMC.
Fig No 4.1 Road Map of analysis
Figure 4.2 illustrate the Asset allocation among Equity, Debt and Cash among Indian Fund and UK domicile Indian fund
Broad asset allocation of selected funds
Sector allocation by these funds
Top ten holdings and percentage in top ten
holdings
Return and comparison with bench mark of last 3 years
Risk and Risk adjusted return.
Entry load and annual management fees
Management and fund manager experience
Sourced from: Morning star, Trustnet and Mutual funds India
4.2 Asset allocation patterns
As we are analyzing Equity funds in this part of paper we will concentrate on Asset
allocation of selected funds in Equity, money market and debt data reveals that
Indian funds are having higher proportion of cash investment when compared to UK
domicile fund, second most successful Indian equity fund Reliance vision is having
22.6% in cash and top performing UK domicile Aberdden global has cash portions of
Equity 86.3%
Debt 3.5%
Cash 10.9%
DSMPL OP Fund
Equity 90.5%
Debt 0.00%
Cash 9.42%
Realiance Vision
Equity 77.34%
Debt 0.00%
Cash 22.6%
Franklin India Flexi
Equity 97.7%
Debt 0.00%
Cash 2.25%
ICICI PRU Equity
HDFC EquityIndian
Equity 97.9%
Debt 0.00%
Cash 2.06%
Fidelity India
Equity 98.6%
Debt 0.91%
Cash .45%
Indian Funds UK domicile Funds
First state India Fund
Equity 96.2%
Debt 0.00%
Cash 3.8%
Aberdeen global India
Equity 98.9
Debt 0.00%
Cash 1.1%
Jupiter India Fund
Equity 89.7%
Debt 0.00%
Cash 10.3%
HSBC equity
Equity 94.6%
Debt 1.59%
Cash 3.73%
1.1% in its portfolio, as cash has an characteristics of being liquid these funds are
open-ended and screening the mentality of Indian investor we can state that there are
higher proportion of immature investor in Indian market as compared to UK and
sudden panic in Indian market leads to cash call by investor thus these uncertainties
force Indian fund manager to keep high portion of liquid in their portfolio, in order to
avoid emergency selling of securities in case of cash calls.
But comparatively UK funds are less likely to be exposed to these condition as they
are serving the mature niche market which has view on Indian capital market and
doesn’t react like immature investor in case of volatile market, they are bullish on
long run and are not affected by short falls, thus not forcing there fund manager to
maintain high money market investment in there portfolio as on our matrix below
cash (money market i.e. bank FD or etc.) is putted on low risk low return.
Figure 4.3 illustrate risk return matrix of different investment by portfolio manager
Individual equity investment
Giving benefit of diversification
Risk and return trade off
Kallman (2005) the world of finance have an objective definition for risk, it is termed
as deviation from the expected result over time. Markowitz (1952) defined the
variance of the rate of return as the appropriate measure of risk in the portfolio theory.
Risk can be termed in two general type systematic and unsystematic risk. The blend
of systematic and unsystematic risk is defined as the total risk (or portfolio risk). Risk
which is associated with economic system is termed as Systematic risk. Sharpe (1963)
defined systematic risk as the proportion of an asset’s variability that can be attributed
to common factors, resulting from general market and economic conditions that
cannot be diversified away. Systematic risk can also be called undiversifiable risk and
includes market risk, interest rate risk, purchasing power risk, and exchange rate risk,
etc. Similarly, unsystematic risk or diversifiable risk is defined as the proportion of an
asset’s variability that can be diversified away. There are two types of unsystematic
risk: business risk and financial risk, associated with the risks that exist within
specific economic enterprises. Analysing the above diagram we can state that for an
investor holding only a single equity can lead to high unsystematic risk. Thus here
comes the benefit of diversification which is provided by mutual funds. As in our
matrix they are on low risk high return, the only rational reason behind is that they
have diversified there unsystematic risk by having combination of various asset
classes.
Table No 4.1 Sector wise Asset allocation of Indian funds and comparison with BSE 200
Indian Funds
BSE 200 Benchmark
DSMPL op Fund
Franklin India Flexi fund
Prudential ICICI
Reliance Vision
HDFC equity
Sectors weighting
in %
Financial and
Banking
20.30 11.38 11.55 17.80 9.80 17.96
Oil and Gas 17.92 12.84 9.25 15.57 6.98 4.68
InformationTech
9.15 8.36 13.39 10.16 9.07 3.91
Metal and Metal Pdt.
7.32 2.11 3.54 2.60 2.33
Telecom 6.22 5.27 15.68 4.85 4.42
Power 5.28 .58 .45 1.45 4.64 .42
Health care and
Pharmacy
4.49 6.26 3.16 .01 7.67 19.02
Housing 4.48 3.39 2.29 2.29 1.28 5.49
Auto 3.45 1.53 2.32 3.48 7.08 7.72
Diversified 2.23 2.77 1.06 1.16
Textile .08 2.98 3.28 3.28 1.06
Sourced: Morning star, Trustnet, Mutual funds India and BSE
Table 4.2 Sector wise Asset allocation of UK domicile funds investing in India and Comparison with Morgan Stanley country index of
India
UK DomicileFunds
MSCI Index sector
weightings
Fidelity India Focus
Aberdeen Global
HSBC India
First state India sub continent
Jupiter India
Sector weighting in %
Energy 22.7 5.7 3.3 12.2 8.0 10.23
Financial 22.5 26.3 19.1 9.8 11.3 15.91
Information Technology
15.8 18.3 27.4 19.1 13.0 12.96
Material 9.5 6.5 22.6 4.6 4.07
Industrial 8.4 12.7 4.6 12.0 18.3 5.50
Consumer staples
5.3 5.8 8.4 7.7 17.10 19.80
Utilities 5.1 2.5 6.8 1.2 1.7
Health care 4.2 8.5 10.3 6.3 5.7 12.90
Telecommunication
3.7 3.2 4.3 3.9 7.79
Consumer discretionary
2.8 10.6 7.3 12.5 .54
Others 2.4 2.7
Cash 7.2 .4 4.5 3.8 10.30
Sourced from: Morning star, Trustnet, Mutual funds India and Barclays capital
4.3 Analysis of sector allocation
Section reflects on the asset allocated by the selected funds 5 Indian funds and 5 UK
domicile funds investing in India, in different sector of Indian capital market has
been analysed and that too again is compared with weighting of that sector in Bench
mark index. MSCI in used as benchmark in case of UK domicile funds and BSE
200(Bombay stock exchange) in case of Indian fund above data reveals that Jupiter
India one the most newly launched fund has deviated its asset allocation from
corresponding benchmark index, as instance the benchmark weighting of consumer
staples is 5.3% but the asset allocated by fund is 19.8%. As the fund manager concern
is to beat that index so the proportion allocated to individual stocks will depend on
their perceived probability of out performance relative to that index. The strength of
the manager’ conviction will determine his asset allocation. That conviction will itself
depend on the fund manager’s perception of a company’s fundamental strengths and
whether these are properly reflected in the market’s current valuation. Only stocks
which are undervalued relative to their fundamentals will have a place in the
manager’s portfolio. This approach to asset allocation suggests that if a fund manager
is extremely bullish on a large number of stocks then the total asset allocation could
come to more than 100%. That suggests there should be scope for using leverage
(borrowing to buy stock). In the above asset allocation pattern we can state that these
funds are having an aggressive style and tactical orientation asset allocation strategy
An aggressive asset allocation style may very well exhibit higher price volatility and
generate proportion of its return in the form of capital gain rather than primarily
through income, from above table we can analyze that UK domicile funds are bullish
on IT and financial sector, as all the five have the higher percentage of there asset
allocated to this sector as compared to Indian funds.
Whereas energy sector is most bearish as both UK and Indian funds have there lowest
consideration in comparison to benchmark weighting. Industrial sector is an another
important sector receiving higher consideration of asset allocated by UK domicile
funds, the common sectors among both type of equity funds is IT, Banking, finance,
Energy and telecom. Whereas infrastructure is seen as the most attractive sector in
Indian market as country is going through rapid expansion to manage its 1.3 billion
population thus need of infrastructure and telecom is immensely on high priorities due
to large IT and outsourcing base in India which are the two important arms of Indian
economy most of the funds are bullish on them thus keeping high percentage of these
sector in there respective portfolio. Tohani(2007) believes that future growth of India
is in hand of 550 million strong workforce greater than the USA, UK, Germany and
France put together. He further emphasized that the talent pool in India is its real
edge, it is generating 23 million graduates, 75,000 IT professional and half million
engineers annualy. Naren (2007) a fund manager of ICICI Prudential considered in
our study states that the “best Indian companies are amongst the best in the world”
with extraordinarily good quality. He pointed this as one of the major criteria of
difference between India and China. He stated that investor in India has a wide variety
of choice among number of quality companies.
He is bullish on the telecom sector especially mobile phone sector is seen as an
lucrative opportunity in India in coming three years. He further states that existing
infrastructure in place will continue to be used and this will be a major growth area in
future when broadband technology takes hold. It is estimated that $350 billion (179
billion pounds) will be spent on the country's infrastructure by 2012, which Tohani
thinks will not be achieved. "But even if it is half of that, it's still a huge opportunity,"
he said.
Table 4.3 Comparison of return as compared to Benchmark
Indian Funds
DSMPL op Fund
Reliance Vision
Prudential ICICI
Franklin HDFC equity
BSE 200 Benchmark
Returns
1 month 0.24 .40 1.42 -1.37 1.75 -0.20
3 month -15.91 -16.24 -11.96 -16.89 -13.31 -18.12
6 months -28.07 -28.19 -17.36 -27.18 -21.83 -25.02
1 years -12.75 -16.13 -6.47 -16.41 -11.72 -8.89
3 years 23.30 22.29 27.03 20.95 23.91 21.33
5 years 37.70 38.09 38.66 NA 37.20
Since inception
23.54 25.56 39 22.88 22.12
Sourced from: Morning star, Trustnet, Mutual funds India Barclays capital and BSE
Table 4.4 Comparison of UK domicile fund with MSCI bench mark
UK domicile Indian Funds
MSCI Benchmark
Fidelty Indian Focus
First state India sub continent
Aberdeen global
HSBC equity
Jupiter
Returns
1 month -19.57 -11.8 -7.9 1.42 -5.44 N/A
3 month -19.70 -19.71 -17.9 -11.96 -18.99 N/A
6 months -41.38 -26.77 -36.13 -10.99 -23.78 N/A
1 years -13.38 -14.37 -11.9 -5.27 -6.21 N/A
3 years 24.48 14.49 26.40 20.36 N/A
5 years 33.33 37.31 31.84 N/A
Since inception
-1.7 20.16
Sourced from: Morning star, Trustnet, Mutual funds India , Barclays capital and BSE
4.4 Analysis of Return and comparison with Benchmark
MSCI India Index is comprised of companies that are listed in India. The Index is
free-float adjusted,(refer appendix c for explanation) and is available in real time in
Rupee. As at 3 March 2008, the Index was carrying 64 stocks with the largest 10
constituent stocks represented in excess of 54.5% of the total market capitalisation,
based on total shares in issue, of the Index. Above data clearly represent that 4 out of
5 UK domicile fund can be compared against benchmark, Jupiter India is newly
launched fund. Aberdeen global is seems to be most efficient fund as its fall in last 1
year is half that of the benchmark due to fund selection ability of the fund manager
IT, Financial and healthcare are the three sector on which fund manager emphasized
and these sector have not fallen in comparison to benchmark, giving a fund an edge
against its competitors comparing all of four funds against benchmark, Fidelty seems
to be least performing as 3 year return of Bench mark is 24.48% and Fidelity is
14.49% as it emphasized much on financial, industrial and consumer discretionary
sector, which have underperformed against benchmark. When we compare Indian
fund with UK domicile fund we can state that 4 out of 5 Indian funds outperformed
benchmark in Bull face of 3 years, but on the other side of coin in the bear phase of 1
year, 4 out of the 5 Indian funds have underperformed the bench mark BSE 200,
comparing from investor point of view where to invest in UK managed fund or Indian
managed fund.
We can state from that in falling market Indian managed fund have fallen sharply as
compared to UK managed fund as three of the 5 Indian managed fund have double
fall than there benchmark, whereas on the other side UK managed fund have fallen
less than there Benchmark. During the upside phase, taking consideration of three
years 3 out of the 5 Indian funds have outperformed there respective benchmark
whereas only 1 UK fund (Aberdeen global) have outperformed there respective
benchmark.
Fig 4.4 Top ten holding of Indian funds
DSMPL op Fund
Reliance Industries 5.69%
Infosys Technologies 3.69%
ICICI Bank 3.03%
ITC Ltd 2.83%
Oil and natural gas 2.71%
Reliance community 2.63
Hindustan lever 2.45
Bharti Airtel 2.38
Aidtya Birla 2.30%
Tata Steel 2.27%
Reliance Vision
Divis Laboratories 7.67%
Reliance Industries 5.91
State Bank of India 5.02%
ICICI Bank 4.78%
Reliance community. 4.42
Maruti Ltd. 4.09
Infosys Technologies 3.99%
Grasim Ind 3.99
Larsen and Tourbo 3.58
Missc. 3.62
Franklin India Flexi Cap
Infosys Technologies 9.24%
Bharati Tele venture 8.69 %
Bharat Electrical 6.42%
Reliance Industries 6.01%
Tata steel 5.17%
Laresen Tourbo 4.73%
Infrastructure Dev 4.39%
TCS 4.15%
Reliance comm. 3.80%
Sterlite Ind. 3.54%
Sourced from: Morning star, Trustnet, Mutual funds India , Barclays capital and BSE
4.5 Analysis of top ten holdings
As from the above data it can be clearly interpreted that Infosys tech which is India
biggest IT company is present in 4 out of 5 Indian fund top ten holding, HDFC equity
fund which has the best results in terms of return is not holding Infosys in there top
ten, Reliance industries a power and energy company is one of the most attractive
holding for Indian managers. After analysing the past data and market sentiments, one
can derive a conclusion that in recent trend funds are shifting there holdings from IT
ICICI Pru.
Reliance Industries 12.57%
Infosys Technologies 4.90
Federal Bank 4.11%
Mahindra & M 3.55%
Bharti 3.28%
Satyam comp. 3.08%
Oil & Natural gas 3.00%
Deccan chronical 2.99%
Bharat heavy 2.85%
Nifty 2.27%
HDFC Equity
ICICI Bank 8.81%
DR Reddy Lab 5.67%
Divis lab. 4.59%
State Bank of India 4.45%
Sun Pharma 4.32%
Comp & greaves 4.30%
Oil and natural gas 4.19%
United Phos 3.72%
Larsen and turbo 3.22%
Hero Honda motors 3.16%
and financial equities, to Infrastructure and consumer staple equities as these are
playing major role in economic development of India. Larsen and turbo carrying out
major infrastructure work in Indian infrastructure development, is currently on top
list of all fund manager, though the stock is beaten 46 % from last year because of
sharp fall in market, but analyst coverage favour this stock as it is most attractive
infrastructure stock at this valuations. In telecom sector Bharti and Realiance
communication are playing major role in attracting fund manager and is part of
portfolio of 3 funds out of 5 sample of Indian funds, the best out performing fund in
bull market HDFC equity is having its biggest holding in Financial and Pharmacy
sector.
The above table clearly interpret that funds which have over performed the
benchmark in bull phase (rising market), has under performed the benchmark in bear
phase( falling market). Thus we can interpret from above analysis that
Financial(ICICI, HDFC AND SBI), IT (Infoysy and Satyam), Pharmacy (Sun pharma
and Dr Reddy) and Infrastructure are the most promising sector in Indian capital
market as per the view reflected in asset allocation decision of these top performing
Indian funds. But infrastructure is slowly winning race among these top performing
sector and is attracting attention of global investment toward its strong and demanding
growth.
Fig 4.5 Top ten Holdings of UK domicile funds investing in Indian
funds
Jupiter
Opto circuits India 6.30%
Bharti Airtel Ltd 5.96%
Infosys Technologies 4.66%
Cairn India 4.53%
Sun Pharma 4.32%
Satyam Comp 4.19%
Godfrey India 3.86%
Aban offshore 3.61%
Hindustan Unilever 3.55%
Axis Bank 2.72%
First State Indian Fund
Infosys 7.00%
Reliance Industries 5.30%
Housing development5.30%
Sun pharmacy 4.0%
Hindustan Unilever 3.9%
Bharti Airtel 3.3%
ONGC 2.8%
Tata consultancy 2.8%
Titan Industries 2.7%
Mahindra & M 2.6%
Aberdeen global India fund
Satyam Comp 10.10%
Infosys Technologies 10%
HDFC 9.2%
ICICI Bank 6.2%
Tata consultancy s 5.3%
Hero Honda 4.4%
Gail India 3.5%
Grasim India 3.5%
ITC 3.4%
Sun Pharmacy 5.3%
Sourced from: Morning star, Trustnet, Mutual funds India, Barclays capital and BSE
After analysing the data of UK domicile funds investing in India it can be interpreted
that sector allocation of these funds is having some commonalities with Indian fund.
As IT again is the most lucrative sector among these funds and Infosys (biggest IT
company) is getting the highest weight age and is present in 4 out of 5 top ten
Fidelity India Focus
Tata Consultancy 6.05%
ICICI Bank 6.00%
Infosys Tech 5.27%
Oil & Natural 4.65%
Financial Tech 4.53%
United spirits 3.65%
Idea Cellular 3.00%
Piramal Health 2.95%
Tata Motors 2.85%
Multi coomodity 2.31%
HSBC equity fund
Jindal steel 8.82%
Cairn energy 7.43%
Wipro 6.36%
TCS 4.27%
HCL technology 3.96%
Tata Steel 3.66%
India Bull real estate 3.59
Glenmark Pharma ltd 3.07
Aditya Birla 2.84
Mahindra and M ltd 2.64
holdings of these funds, other important sector weighted by these fund is financial
ICICI bank enjoying the dominance as it is present in 3 out of 5 funds analysed and
auto sector is also enjoying good inflow with Mahindra and Tata motors attracting
the major investment the most surprising aspect after analysing data of UK domicile
fund was there lack of attention on infrastructure sector, only Jupiter India a newly
launched fund have its 3.59% asset invested in India bulls real estate. As the
infrastructure sector is seen as most lucrative sector in India in coming 10 years, a
newly launched fund New Star has given its 40% weight in its asset to infrastructure
sector. The best performing fund Aberdeen global is having 20% of asset in top 2
Indian IT companies which are Infosys and Satyam. And another 20% in top 2
financial sector company ICICI and HDFC, thus we can conclude that IT and Finance
sector are the 2 main sector attracting Fund manager of UK domicile fund investing in
India.
Figure 4.6 Total holdings and percentage of top ten holdings in Indian funds.
Sourced from: Morning star, Trustnet, Mutual funds India, Barclays capital and BSE
Indian fund percentage in top ten holding
DSMPL Opp fund89
Franklin India
38
ICICI Pru46
Reliance Vision
25
HDFCEquity
43
30.0
56.1
45.6
47.7
46.4
Total holdings in
numbers
Top ten holdings in percentage
Figure 4.7 illustrate total holdings and percentage of top ten holdings UK domicile funds
Sourced from: Morning star, Trustnet, Mutual funds India, Barclays capital and BSE
4.6 Analysis of top ten holding
The above figure reflects that percentage concentration in top ten holdings by UK
domicile funds are more than that of there Indian counterparts, Aberdeen global
having the highest concentration in top 10 holdings of 58% and lowest no of total
holding, the systematic risk is below the sample average that reflects the efficient
stock selection ability of fund manger, on the other hand DSMPL opportunities Indian
fund having the lowest concentration of 30% in top ten and having the highest no of
holding of 89 stocks, this trend basically implies that the fund have diversified its
investment in range of stocks. Ekholm (2005) is his studies came to a conclusion that
the funds having higher concentration in top ten holdings, will have more consistent
performance, as the manager will be able to concentrate in a better way because of
UK domicile fund total holdings and percentage in top ten holding
Fidelity India
42
HSBCEquity
116
Aberden Global
33
First state
52
Jupiter
53
41.8
46.6
58.0
39.7
43.6
Total holdings in
numbers
Top ten holdings in percentage
fewer holdings on which he have to focus, thus giving him the opportunity to analyse
those few holdings in better and reliable way, at the same time enjoying the benefits
of diversification. Thus if we apply his findings to our case we can state that
Aberdden global the top performer UK domicile fund has highest concentration in top
ten holdings and lowest no of total holding thus his findings can be partially justified
by our analysis.
Table 4.5 Risk and risk adjusted return analysis of Indian funds
Standard Deviation
Beta Sharpe Treynor
FundsDSMPL Opp fund
3.39 0.90 0.27 1.01
Franklin India
3.25 0.87 0.24 0.90
ICICI Pru 2.71 0.70 0.24 0.95Reliance
vision3.42 0.85 0.28 1.14
HDFC Equity
3.18 0.82 0.26 1.01
Sourced from: Morning star, Trustnet, Mutual funds India and Barclays capital
Table 4.6 Risk and risk adjusted return analysis ok UK domicile funds
Standard Deviation%
Beta Sharpe Treynor
FundsFidelity
India28.96 0.86 0.51
HSBC Equity
31.83 0.97 0.69 0.90
Aberdeen Global
23.56 .82 1.27
First state India
35.35 2.59 0.05 1.14
Jupiter
Sourced: Morning star, Trustnet, Mutual funds India and Barclays capital
4.7 Analysis of risk and risk adjusted return
For evaluating the performance generally there are two accepted measure of the risk.
a) total risk and b) systematic or non-diversifiable risk. The former can be measured
by the standard deviation of the return distribution while the latter can be measured by
beta. The selection among the two depends on the point of evaluation, whether it is
done on investor end or portfolio manager end. But ironically taking a case, which
says that portfolio is mot diversified at both the ends in that case the most reliable
measure of risk, would be standard deviation. However beta would be considered to
be an appropriate measure of risk, in general empirical studies or performance
evaluation. Standard deviation of Indian fund have moved in range of ICICI 27.1 %
and 34.2% Reliance vision. Standard Deviation (SD) is a measure of the volatility in a
mutual fund's performance; a lower SD effectively implies lower risk when we
compare UK domicile fund Standard deviation is in range 23.56% Aberdeen global to
35.35% First state India thus from above data interpretation we can state that
Aberdden global a UK domicile fund is best investment pick with lowest standard
deviation and highest 3 year return of 26.40%
When we compare risk and return profile of Indian funds and UK domicile fund it is
clearly stated that average standard deviation of UK funds is less than that of Indian
funds. But the average return given by both the funds are approximately identical
4.7.1 Analysis of Beta and Market Timings
In addition of using stock selection technique, fund manger can also generate superior
performance by timing the market correctly. This mean that they are capable of
assessing direction of market either bull or bear correctly. In case they do, they would
be positioning there portfolio accordingly. For instance, if mangers are expecting a
declining market, they can change their portfolio properly by increasing the cash
percentage of the portfolio or by decreasing the beta of the equity portion of the
portfolio. However, in case of rising market, fund manager could reduce the cash
position or increase the beta of the equity portion of their portfolio.
Treynor and Mazuy (1966) in there studies have proposed method to test the market
timing ability of the fund manager. The basic rational behind there approach was to
illustrate the point that , those fund manger who concentrate much on stock selectivity
and pay less attention on trimming the market, will have a comparatively constant
beta of fund. In this type of case the plot of return generated by fund against market
return would be a straight line depicting a linear relationship. They further argued that
if the fund manager is successful in assessing the market rising direction and change
the beta of their portfolio as per situation, in that case one may observe a beta higher
that usual one. The fund in that situation is doing better than otherwise. If we analyse
the above table of UK domicile funds we can state that short term capital market
situation in India is bearish and thus having below average beta will result in less fall
of portfolio value as compared to market. Aberdeen global beta is lowest with .86 and
First state India is in awkward position of 2.26 it basically reflects that if MSCI will
fall by 10% than the portfolio value of first state India will fall by 22 %. However
Indian fund Beta is in range of 0.70 ICICI to .90 DSMPL when we compare UK and
Indian fund we can conclude that to the extent both funds except First state India is
having identical average systematic risk.
4.7.2 Sharpe Ratio
Sharpe Ratio (SR) helps evaluate how well the mutual fund has compensated
investors for the risk borne. For this purpose its returns are compared with those of a
risk-free instrument. The higher a fund's SR, the better is its performance on the risk-
adjusted return front. In above case we can state that Aberdeen global has delivered a
competent performance on this parameter which when combined with its impressive
volatility control performance is even more noteworthy. First state India is considered
here as to be the fund with highest volatility, the analysis also reveal that average
sharp ratio of 5 UK funds is higher than the Indian funds, thus had better risk adjusted
excess returns highlighting the fact that Indian fund Sharpe is moving in range of 0.24
ICICI to 0.28 Reliance Vision, whereas UK domicile fund Sharp is moving in range of
1.27 of Aberdeen to 0.05 least performer First state India so from above analysis we can
conclude that for an UK investor seeking investment in Indian market the best way of
channelling money is through UK domicile fund as it is giving better range of risk
adjusted return.
Table 4.7 Analysis of Annual management charges and Entry load of Indian funds and UK domicile funds
Annual Management
charges %
Entry Load %
Annual Management
Charges%
Entry Load%
Indian Funds
UK Funds
DSMPL Opp fund
1.98 2.25 Fidelity India
1.50 3.50
Franklin India
1.89 2.25 HSBC Equity
1.90 5.00
ICICI Pru 1.96 2.25 Aberdeen Global
1.75 4.25
Reliance vision
1.83 1.25 First state India
1.75 4.00
HDFC Equity
1.80 Nil Jupiter 1.50 5.25
Sourced: Morning star, Trustnet, Mutual funds India and Barclays capital
4.8 Analysis of annual management charges and entry fees
Relationships between mutual fund performance and their individual characteristics of
load fees and annual management charge have been studied by various academics
Sharpe (1966) in his studies came to a conclusion that, funds on an average show
better performance if their management fees is low. Whereas, Ippolito (1989) in his
studies reported there is positive relation between performance and management fees.
On the other hand, Elton et al (1993) have the opposite view of that, stating negative
relationship between fund performance and management fees. Golec (1996) report a
positive relationship between management fees and performance. Load fees in
relation to fund performance have also attracted attention of various academics.
Ippolito (1989) concluded that there is no particular relationship between performance
and load fees. Dahlquist et al (1998) investigation on relation between load fees and
funds, came to conclusion that there is inverse relationship between fund performance
and load fees.
Entry load is a charge which is taken from investors pocket when he/she is purchasing
the unit of particular fund. Normally, premium is paid by investor over the NAV of
the scheme to account for the entry load. An exit load is a charge that may be levied
on an investor when exiting a scheme. The maximum entry charges in case of India as
set by SEBI (Security and exchange board of India) is 6% if the amount invested is
less than 50 million INR, if its above that than these charges are eliminated When we
analyze the Indian funds HDFC equity seems to be the most favoured fund in terms of
charges as, there is no entry load and AMC (Annual management charges) is the least
among the set sample. And Reliance has created the second most lucrative position. In
case of UK funds Fidelity India has the lowest entry charges but the least performer in
the entire range in terms of risk and return. Aberdden global has the second lowest
entry charges as an investor one need to be aware of these charges as there is no
separate cheque taken but the it can drag down the value of your initial investment.
Comparing entry charges of Indian funds and UK managed funds the former are in
position to offer something better to there investors. AMC charges is the range of
annual expenses that are charged to fund every year for the ongoing management and
operating cost of running your investment, these are indirectly borne by investor each
year, through a reduced return on your investment. One can expect to pay 1% to 2% a
year for these. In the above table it is clearly visible that annual charges of UK funds
are considerably less than those of Indian funds that basically imply, that UK fund
offer its services at low annual cost having a positive effect on investor annual return.
Our analysis justifies the Ippolito (1989) result. Stating that management fees have a
positive effect on performance the top performer ICICI prudential Indian fund and
Aberdeen UK are having above average management fees and above average returns.
The extent of fees paid by an mutual fund investor is regulated by SEBI in India the
maximum sale fees on mutual fund is 6%, However there are very few of them
charging this amount on an average the fees charged by an fund is 2.25%, having an
criteria of investment below certain amount that can be charged by India's mutual
funds are regulated and offer a declining scale of sales fees as the amount of
investment increases. Many funds do not charge any redemption fees, although there
are some funds that charge a fairly high fee for redemptions within a short timeframe.
Figure 4.8 Figure illustrate the fund manager of Indian funds and there association with funds
Sourced from: Morning star, Trustnet, Mutual funds India, ICICI, Relaince and HDFC
Figure4.9 illustrate the fund manager of UK domicile funds and there association with funds
HDFC Equity
Indian Fund manager and there experience
DSMPL Opp fund
Franklin India Reliance Vision
ICICI Pru
Ashwani KumarK.N. Rajah
Anup Maheshwari
S. Naren Prashant Jain
Experience of 10 years and managing fund since January2004
Experience of 12years and managing fund since
1994
Experience of 7 years managing fund since
2002
Experience of 12 + years managing fund since
inception 1997
Experience of 10 years managing fund since
inception 2005
Sourced from: Morning star, Trustnet, Mutual funds India, Fidelity, HSBC and Jupiter
4.9 Analysis of fund manager and their experience
Interpreting above data gives me clear view that on an average mutual fund industry
accepts person with an average experience of 9 to 12 years in fund management or
market research, as there fund manager. One most surprising aspect of this data is that
almost all the managers are Indian accept Aberdeen global but that too is stating Asia
Jupiter India Fund
UK domicile fund manager experience
Fidelity India HSBC Equity
First state IndiaAberdeen Global
Vijay TohaniSanjeev Dugal
Arun Mehra Hugh Young and Asia Equity team
Avinash Vazirani
Experience of 8 years and managing fund since
launch Nov 2006
Experience of 13years and managing fund since
launch 2008
Managing Fund since launch of 06/06
Experience of 11 years with Fidelity managing
fund since 07/06
Experience of 13 years managing fund since
06/07 to present
equity team as part of there fund management team. As Indian market are very under
researched market ( i.e. modest analyst coverage) in that case having an Indian
manager can facilitate the operation of even a UK domicile fund, as it can understand
the nature and extent of market better than any other foreign fund manager, another
important aspect of data analysed is that retention of fund manager in Indian Asset
management company is longer than compared to UK.
As data reveals that 4 out of 5 managers of Indian funds are managing fund since
launch and average manager retention period of our sample of Indian fund is 8 years.
whereas UK domicile fund have all new managers but on the other side of coin all UK
funds are new and operating since 2002 so this limitation of data may not give us
clear scenario of UK funds manager retention but recently on 23rd July it was in news
that Arun Mehra manager of fidelity India was leaving fund after his 5 years of
services.
However from the analysis of experience of above data we can interpret that on an
average UK domicile fund manager are more experienced than their Indian counter
part, with Avinash Vizrani manager of Jupiter India having 13 years of experience in
investing in Indian capital market and S Naren manager of Indian fund ICICI having
minimum experience of 7 years. Ding (2005) finding states that managerial
experience and stock picking track-record are important predictors of the future
stockholdings-level performance of mutual funds, controlling for other characteristics
of these funds, such as investment style or fund size.
Baks (2001), the replacement of a manager provides a unique opportunity to study the
impact of the manager on the performance of a fund, independent of the fund's other
characteristics. He further stated that experience and stock picking track record of a
fund manager are correlated with following-year performance, however, this relation
indicates some evidence of manager entrenchment. He also emphasized that
replacement of a manager is good news for a fund, as the pre-replacement
performance of the fund is reliably lower than its counterpart funds, while the post-
replacement performance is statistically indistinguishable from the counterpart.
4.10 Summary
This chapter has focused on all important aspects of mutual fund, which are relevant
for an investor seeking investment in Indian capital market. As the an reader one can
get an essence of, hot sector in Indian markets and further more an investor can get
clear picture on holdings, return and fund manger retention of these selected funds. As
the main theme of chapter is focused on asset and sector allocation analysis, all other
parameters are related back to our main theme and we have tried to generate a
conclusion for an investor after analysing all these factors. And the next chapter of
this dissertation is devoted to conclusion, derived from these analysis followed by
recommendation for an retail investor.
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