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PROJECT REPORT
ON
“PERFORMANCE AND RISK ANALYSIS OF MUTUAL FUND
AND
IT’S COMPARISON WITH THE STOCK MARKET”
SUBMITTED IN PARTIAL FULFILLMENT OF
PGDM COURSE.
JRE SCHOOL OF MANAGEMENT
Date: March 13th , 2013
Student : Ankit Chandra Prakash
PGDM 2012-14
Roll NO: 8
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Acknowledgement
I wish to place on record my deep sense of gratitude to JRE School Of Management for
providing me an opportunity to take up this project and giving me a platform which is the first
step of my professional career..
A successful project can never be prepared by the single efforts of the person to whom
project is assigned, but it also demand the help and guardianship of some conversant person who
helped the undersigned actively or passively in the completion of successful project.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY 5CHAPTER 1: INTRODUCTION 6
1.1 Literature review 81.2 Problem of the Study 91.3 Objective 91.4 Definition of key term 101.5 Brief Outline of the Chapters 10
CHAPTER 2: METHODOLOGY 11 2.1 Universe of the study 11 2.2 Locale of the Study 12 2.3 Data Collection 12 2.4 Data Analysis 13CHAPTER 3: INDIAN MUTUAL FUND INDUSTRY 3.1 Classification of Mutual Fund 13 3.2 Risk Involved with Mutual Fund 13CHAPTER 4: EQUITY MARKET AND ITS COMPARISON WITH MUTUAL FUNDS 33 4.1 Equity Market in India 34 4.2 Equity Stock Selection Approaches
35 4.3 Comparison of Stock Market with Mutual Fund 39CHAPTER 5: CONCLUSION AND SUGGESTIONS
45 5.1 Findings 45 5.2 Suggestions 46 5.3 Limitations of the Study 46 5.4 Further Scope of the Study 47REFERENCE 47BIBLIOGRAPHY 48ANNEXURE 48
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EXECUTIVE SUMMARY
The significant outcome of the government policy of liberalization in industrial and financial
sector has been the development of new financial instruments. These new instruments are
expected to impart greater competitiveness flexibility and efficiency to the financial sector.
Growth and development of various mutual fund products in Indian capital market has proved to
be one of the most catalytic instruments in generating momentous investment growth in the
capital market.
There is a substantial growth in the mutual fund market due to a high level of precision in the
design and marketing of variety of mutual fund products by banks and other financial institution
providing growth, liquidity and return. In this context, in this project has been done with an
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objective to have an overall understanding of the different types mutual fund in various AMCs.
To conduct a detailed analysis of the stock market, and its relationship with mutual funds.
Mutual Fund is definitely growing at a high rate but the awareness of the benefits of investments in mutual funds among individual investors in India is still low. Among them those who are well aware of mutual fund investments are scared of the risk involved in it as they associate mutual funds with the stock market.
After getting thorough with the parameters required to measure the performance of Mutual
fund a comparative analysis of the stock market and mutual funds have been done. This analysis
revealed that the Mutual Funds have been able to perform better than the stock market and have
given good return considering the fact that it carries risk equivalent to the stock market.
Debt Funds and bond funds are preferred in low risk, low return scenario. For those willing to take high risks, equity and sector funds are the picks: Balance Funds are a good alternative for those who seek something between high risk sector funds and low risk bond funds.
CHAPTER 1: Introduction
The Mutual Funds originated in UK and thereafter they crossed the border to reach other
destinations. The concept of MF was Indianized only in the later part of the twentieth century in
the year 1964 with its roots embedded into Unit Trust of India (UTI). Now after 50 years,
booming stock markets & innovative marketing strategies of mutual fund companies in India are
influencing the retail investors to invest their surplus funds with different schemes of mutual
fund companies with or without complete understanding of Mutual Funds (MF).
There is a general notion that an investment in mutual fund is always risky. Investors should
always be conscious of the fact that Mutual Funds invest their funds in capital market
instruments such as shares, debentures, bonds etc and that all the capital market instruments have
risk. Risks can be Investor Psychology Risks, Prediction Risks, Choice Risks, and Cost Risks
etc.
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Although there is no one mutual fund that will be suitable to all kinds of investors. Hence,
mutual fund investors need to identify a suitable fund for them. It will be the first step towards
making successful investments in mutual funds to make Mutual Funds their "CUP OF TEA".
Identifying a suitable fund can be done in a two-step manner as follows:
* Selecting a fund with investment objectives and preferences, return objectives, time horizon
and risk tolerances that meet the requirements of the investor.
* Selecting a fund that has a detailed asset allocation strategy by fund type category to reflect
the investment objectives of the fund.
Mutual funds can be win-win option available to the investors who are not willing to take any
exposure directly to the security markets as well as it helps the investors to build their wealth
over a period of time. But the thing which must be remembered by the investors is
"INVESTMENT IN MUTUAL FUND IS SUBJECT TO MARKET RISK".
The Indian Equity Market has grown significantly during the last three years; Mutual Funds are
not left far behind. Both the avenues have created wealth for the investors. But for the creation of
wealth through this avenue a proper understanding of the Mutual Funds is must.
Understanding Mutual Funds
A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and capital
appreciation realized is shared by its unit holders in proportion to the number of units owned by them.
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(Mutual Fund and Market Risks: Article By: Devindar Kaur Lecturer (Finance) Ludhiana
College of Engineering & Technology)
Thus a Mutual Fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed basket of securities at a relatively
low cost.
When we talk about all these, one hard fact is about risks that are faced by the Mutual Fund
investors. Whenever we see any Mutual Fund offer, there are few statements inevitably found
along with that, which is commonly known as "Disclaimer Clause of the Mutual Fund".
1.1 LITERATURE REVIEW
Mutual funds industry is a growing at a very fast rate India. Various studies and research has
been on this industry by experts. Here are the list of few books that have been referred to for the
purpose of the study.
Mr M. Jaidev in his book has “Investment policy and performance of Mutual Fund”
has studied the Indian Public Sector Mutual Funds. In this book he has covered risk ,
rate of return. Investment policy and pricing of mutual funds. In this book he has
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done an empirical study covering all aspects of mutual fund investment along with
the regulatory framework.
Nalini Prava Tripathy in her book “Mutual Funds in India. Emerging Issues” provides
a detailed evaluation of investment management which is not only helpful for
influencing marketing operations but also for securities selection, investment research
and timing and resource allocation.
Dr H. Sadak in his book “Mutual Funds in India” has highlighted the importance of
financials institutions in India. The basically focuses on the growth and development
of mutual funds in India. The entire gamut of the theoretical aspects of the fund
management has been critically examined in the context of the performance of mutual
funds and it provides an insight into fund management and the areas of weakness.
Mr. Sharad Panwar and Dr. R. Madhumathi in their journal “Characteristics and
Performance of selected mutual funds in India.”, have studied a sample of Public and
Private sector mutual funds of varied net assets to investigate the differences in
characteristics of assets held, portfolio diversification, and variable effects of
diversification on investment performance. The extent of diversification in the
portfolio of securities of public-sector sponsored and private-sector sponsored mutual
funds have been highlighted.
1.2 PROBLEM OF THE STUDY
Mutual Fund is definitely growing at a high rate but the awareness of the benefits of investments in mutual funds among individual investors in India is still low. Among them those who are well aware of mutual fund investments are scared of the risk involved in it as they associate mutual funds with the stock market . Through this project an attempt is made to increase the level of awareness of mutual funds, and to understand the risk involved in mutual fund investment, its performance and comparison with the stock market.
1.3 OBJECTIVES The present study has the following objectives:
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1 To have an overall understanding of the different types mutual fund in various AMCs.
1 To conduct a detailed analysis of the stock market and its relationship with mutual funds.
2 To come up with viable suggestions for investors and mutual fund companies in India based
on the above study.
1.4 DEFINITION OF KEY TERMS :
1. AMC : An 'Asset Management Company' is a firm that invests the pooled funds of retail investors in securities in line with the stated investment
2. Asset Allocation: When you divide your money among various types of
investments, such as stocks, bonds, and short-term investments (also known as
"instruments"), you are allocating your assets.
3. NAV: The per-share value of a mutual fund, found by subtracting the fund’s
liabilities from its assets and dividing by the number of shares outstanding.
4. Entry/Exit load: The Fund charges some amount before buying the scheme. This is
usually some percentage of the amount invested and goes as the amount charged by
the Fund house to manage their money.
It is calculated as: Sales Purchase = Applicable NAV x ( 1 + Sales Charge )
Exit load is the charges you have to pay to the Fund house, if you wish to exit the
scheme. For most schemes the Exit load is nil. It is usually calculated as:
Repurchase Price = Application NAV x ( 1 - exit load)
5. Fund Factsheet: A newsletter sent by a mutual fund to its unit holders, either
quarterly or half yearly. The newsletter reviews performance of all its schemes
during the reference period, gives important schemes information such as portfolio
details, and offers pointers on what lies ahead.
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CHAPTER 2: Methodology
In this chapter we aim to discuss the methodology that is being followed to achieve the stated
objectives. A lot of secondary research has been undertaken in order to ensure that
comprehensive understanding can be developed. The existent scenario in the mutual funds
industry and present statistical figures have been established on the basis of data collected
through secondary research. As far as the data collection from primary resources is concerned,
not much was revealed by the company so we had to rely on the data published by reliable
websites.
2.1 UNIVERSE OF THE STUDY
The entire Indian mutual fund industry and the Indian Financial Market is the universe of the
study. The scope of our universe further extends to all the investors who are an important part of
the financial markets.
2.2 LOCALE OF THE STUDY
Locale of the study are few of the Mutual Fund Houses in India namely Reliance Capital
AMC Ltd, DBS Cholamandalam AMC Ltd, Kotak Mahindra AMC Ltd, SBI Fund Management
Pvt Ltd, Birla Sun Life AMC Ltd HDFC AMC Ltd, Taurus AMC Ltd have been being analyzed
for the purpose of achieving the defined objectives.
2.3 DATA COLLECTION
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Most of the data has been mainly collected from the secondary sources Primary sources for
data collection could not be used because of limited sources. Secondary Data has been collected
from
Capitaline Database
NSE Website
BSE Website
Mutualfundsindia.com
AMFI Module
2.5 DATA ANALYSIS
Datas that have been collected from secondary sources have been analyzed using statistical
tools. Statistical ratios like Treynor ratio, Sharpe ratio, standard deviation, beta, co variance etc.
of different schemes has been obtained from reliable sources on which the investors rely. For
statistical analysis, calculations wherever possible have been done to ensure that facts and
figures presented do not have any discrepancies.
CHAPTER 3: Indian Mutual Fund Industry
The Indian mutual fund industry is dominated by the Unit Trust of India, which has a total
corpus of Rs700bn collected from more than 20 million investors. The UTI has many
funds/schemes in all categories i.e. equity, balanced, income etc with some being open-ended
and some being closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which is a
balanced fund, is the biggest scheme with a corpus of about Rs200bn. Most of its investors
believe that the UTI is government owned and controlled, which, while legally incorrect, is true
for all practical purposes.
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The second largest category of mutual funds is the ones floated by nationalized banks. Can bank
Asset Management floated by Canara Bank and SBI Funds Management floated by the State
Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and
Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones.
3.1 MUTUAL FUND
The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate
about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets under
Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher
performance by April 2004. It rose as high as Rs. 1,540bn. The net asset value (NAV) of mutual
funds in India declined when stock prices started falling in the year 1992. Those days, the market
regulations did not allow portfolio shifts into alternative investments. There was rather no choice
apart from holding the cash or to further continue investing in shares. One more thing to be
noted, since only closed end funds were floated in the market the investors disinvested by selling
at loss in the secondary market.
3.2 CLASSIFICATION OF MUTUAL FUND
Mutual fund schemes may be classified on the basis of their structure and their investment
objective
By Structure
1) Open-ended Funds: An Open-ended Fund is one that is available for subscription all
through the year. These do not have a fixed maturity. Investors can conveniently buy and
sell units at Net Asset Value (NAV) related prices.
2) Close-ended Funds: A Close-ended Fund has a stipulated maturity period, which
generally ranges from 3 to 15 years. The fund is open for subscription only during a
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specified period. Investors can invest in the scheme at the time of the initial public issue
and thereafter they can buy or sell the units of the scheme on the Stock Exchanges, if they
are listed. The market price at the stock exchange could vary from the scheme's NAV on
account of demand and supply situation, unit holders' expectations and other market
factors.
By Investment Objective
1) Growth Funds: The aim of growth funds is to provide capital appreciation over the
medium to long term. Such schemes normally invest a majority of their corpus in
equities. Growth schemes are ideal for investors who have a long-term outlook and are
seeking growth over a period of time.
2) Income Funds: The aim of Income Funds is to provide regular and steady income to
investors. Such schemes generally invest in fixed income securities such as bonds,
corporate debentures and Government securities. Income Funds are ideal for capital
stability and regular income. Capital appreciation in such funds may be limited, though
risks are typically lower than that in a growth fund.
3) Balanced Funds: The aim of Balanced Funds is to provide both growth and regular
income. Such schemes periodically distribute a part of their earning and invest both in
equities and fixed income securities in the proportion indicated in their offer documents.
This proportion affects the risks and the returns associated with the balanced fund - in
case equities are allocated a higher proportion, investors would be exposed to risks
similar to that of the equity market. Balanced funds with equal allocation to equities and
fixed income securities are ideal for investors looking for a combination of income and
moderate growth.
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4) Money Market Funds: The aim of Money Market Funds is to provide easy liquidity,
preservation of capital and moderate income. These schemes generally invest in safer
short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper
and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the
interest rates prevailing in the market. These are ideal for corporate and individual
investors as a means to park their surplus funds for short periods.
Other Equity Related Schemes
1) Tax Saving Schemes: These schemes offer tax rebates to the investors under specific
provisions of the Indian Income Tax laws, as the Government offers tax incentives for
investment in specified avenues. Investments made in Equity Linked Savings Schemes
(ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian
Income Tax Act, 1961.
2) Index Schemes: Index Funds attempt to replicate the performance of a particular index
such as the BSE Sensex or the NSE S&P CNX 50.
3) Sectoral Schemes: Sectoral Funds are those which invest exclusively in specified
sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes
carry higher risk as compared to general equity schemes as the portfolio is less
diversified, i.e. restricted to specific sector(s) / industry (ies).
Different Mutual Fund plansTo cater to different investment needs, Mutual Funds offer various investment options. Some of
the important investment options include:
1) Growth Option: Dividend is not paid-out under a Growth Option and the investor
realizes only the capital appreciation on the investment (by an increase in NAV).
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2) Dividend Payout Option: Dividends are paid-out to investors under the Dividend
Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the
dividend payout.
3) Dividend Re-investment Option: Here the dividend accrued on mutual funds is
automatically re-invested in purchasing additional units in open-ended funds. In most
cases mutual funds offer the investor an option of collecting dividends or re-investing the
same.
4) Retirement Pension Option: Some schemes are linked with retirement pension.
Individuals participate in these options for themselves, and corporate participate for their
employees.
5) Insurance Option: Certain Mutual Funds offer schemes that provide insurance cover to
investors as an added benefit.
6) Systematic Investment Plan (SIP) : Here the investor is given the option of preparing a
pre-determined number of post-dated cheques in favour of the fund. The investor is
allotted units on a predetermined date specified in the offer document at the applicable
NAV.
7) Systematic Encashment Plan (SEP) : As opposed to the Systematic Investment Plan,
the Systematic Encashment Plan allows the investor the facility to withdraw a pre-
determined amount / units from his fund at a pre-determined interval. The investor's units
will be redeemed at the applicable NAV as on that day.
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Mutual Fund Advantages
The benefits on offer are many with good post-tax returns and reasonable safety being the
hallmark that we normally associate with them. Some of the other major benefits of investing in
them are:
a) Number of available options: Mutual funds invest according to the underlying
investment objective as specified at the time of launching a scheme. So, we have equity
funds, debt funds, gilt funds and many others that cater to the different needs of the
investor. The availability of these options makes them a good option. While equity funds
can be as risky as the stock markets themselves, debt funds offer the kind of security that
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aimed at the time of making investments. Money market funds offer the liquidity that
desired by big investors who wish to park surplus funds for very short-term periods.
b) Diversification: Investments spread across a wide cross-section of industries and
sectors and so the risk is reduced. Diversification reduces the risk because not all stocks
move in the same direction at the same time. One can achieve this diversification through
a Mutual Fund with far less money than one can on his own.
c) Professional Management: Mutual Funds employ the services of skilled
professionals who have years of experience to back them up. They use intensive research
techniques to analyze each investment option for the potential of returns along with their
risk levels to come up with the figures for performance that determine the suitability of
any potential investment.
d) Potential of Returns: Returns in the mutual funds are generally better than any
other option in any other avenue over a reasonable period. People can pick their
investment horizon and stay put in the chosen fund for the duration.
e) Get Focused: Investing in individual stocks can be fun because each company has
a unique story. However, it is important for people to focus on making money. Investing
is not a game. Your financial future depends on where you put you hard-earned dollars
and it should not take lightly.
f) Efficiency: By pooling investors' monies together, mutual fund companies can
take advantage of economies of scale. With large sums of money to invest, they often
trade commission-free and have personal contacts at the brokerage firms.
g) Ease of Use: Can you imagine keeping track of a portfolio consisting of hundreds
of stocks? The bookkeeping duties involved with stocks are much more complicated than
owning a mutual fund. If you are doing your own taxes, or are short on time, this can be a
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big deal. Wealthy stock investors get special treatment from brokers and wealthy bank
account holders get special treatment from the banks, but mutual funds are non-
discriminatory. It doesn't matter whether you have Rs 1000 or Rs 10,00,000, you are
getting the exact same manager, the same account access and the same investment.
h) Risk: In general, mutual funds carry much lower risk than stocks. This is
primarily due to diversification (as mentioned above). Certain mutual funds can be riskier
than individual stocks, but you have to go out of your way to find them.
i) Transparent & well regulated: The Mutual Fund industry is well regulated both
by SEBI and AMFI. They have, over the years, introduced regulations, which ensure
smooth and transparent functioning of the mutual funds industry. This makes it safer and
convenient for investors to invest through the mutual funds.
j) Market timing becomes irrelevant: One of the biggest difficulties in equity
investing is WHEN to invest, apart from the other big question WHERE to invest. While,
investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome
the problem of ‘when’. SIP is a disciplined investing irrespective of the state of the
market. It thus makes the market timing totally irrelevant.
k) Does not strain our day-to-day finances: Mutual Funds allow us to invest very
small amounts (Rs 500 – Rs 1000) in SIP, as against larger one-time investment required,
if we were to buy directly from the market. This makes investing easier as it does not
strain our monthly finances. It, therefore, becomes an ideal investment option for a small-
time investor, who would otherwise not be able to enjoy the benefits of investing in the
equity market.
l) Reduces the average cost: In SIP fixed amount regularly is invested. Therefore,
you end up buying more number of units when the markets are down and NAV is low
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and less number of units when the markets are up and the NAV is high. This is called
rupee-cost averaging. Generally, we would stay away from buying when the markets are
down. We generally tend to invest when the markets are rising. SIP works as a good
discipline as it forces us to buy even when the markets are low, which actually is the best
time to buy.
With stocks, one worry is that the company you are investing in goes bankrupt. With mutual
funds, that chance is next to nil. Since mutual funds, typically hold anywhere from 25-5000
companies, all of the companies that it holds would have to go bankrupt.
It cannot be argued on investing in individual stocks, but the advantages of using mutual funds
can help an investor earn good return with moderate risk.
Drawbacks of Mutual Funds
Mutual funds have their drawbacks and may not be for everyone:
a) No Guarantees: No investment is risk free. If the entire stock market declines in value,
the value of mutual fund shares will go down as well, no matter how balanced the
portfolio.
b) Fees and commissions: All funds charge administrative fees to cover their day-to-day
expenses. Some funds also charge sales commissions or "loads" to compensate brokers,
financial consultants, or financial planners.
c) Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20
to 70 percent of the securities in their portfolios.
d) Management risk: When you invest in a mutual fund, you depend on the fund's manager
to make the right decisions regarding the fund's portfolio.
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3.3 TYPES OF RISK INVOLVED WITH MUTUAL FUNDSRisk is an inherent aspect of every form of investment. For mutual fund investments, risks would
include variability, or period-by-period fluctuations in total return.
Market Risk: At times, the prices or yields of all the securities in a particular market rises or
falls due to broad outside influences. When this happens, the stock prices of both an outstanding,
highly profitable company and a fledgling corporation may be affected. This change in price is
due to "market risk".
Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever the rate of
inflation exceeds the earnings on your investment, you run the risk that you'll actually be able to
buy less, not more.
Credit Risk: In short, how stable is the company or entity to which you lend your money when
you invest? How certain are you that it will be able to pay the interest you are promised, or repay
your principal when the investment matures?
Interest Rate Risk: Changing interest rates affect both equities and bonds in many ways. Bond
prices are influenced by movements in the interest rates in the financial system. Generally, when
interest rates rise, prices of the securities fall and when interest rates drop, the prices increase.
Investment Risks: In the sectoral fund schemes, investments will be predominantly in equities
of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to
the equity performance of such companies and may be more volatile than a more diversified
portfolio of equities.
Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near
their real values. The fund manager may therefore be unable to quickly sell an illiquid bond and
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this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian
fixed income market.
Changes in the Government Policy: Changes in Government policy especially in regard to the
tax benefits may impact the business prospects of the companies leading to an impact on the
investments made by the fund.
Various Parameters to Measure Risk
1) BETA
A Beta is a measure of risk that when applied to investment portfolios, provides
useful statistical information. It indicates a fund’s past price volatility relative to a
particular stock market index.
High beta stocks react strongly to variations in the market, and low beta stocks are less
affected by market variations.
If Beta is 1, then an issue has the same volatility as the general market. It is either
growing at the same rate or declining at the same rate.
If Beta is greater than 1, then an issue is more volatile. At 1.25 it will probably
move 25% more than the market. If the market is in an up trend, then the security
will gain 25% more than the general market.
If Beta is less than 1, then an issue is less volatile. At 0.5 it probably will move
only 50% or a half of the market. If the market is In a downtrend, it will only lose
50% of what the general market loses.
If beta is less than 0, then the stock is moving in a reverse pattern to the index.
When the index moves up the stock declines and vice versa.
The formula for the Beta of an asset within a portfolio is
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Where
ra measures the rate of return of an asset,
rp measures the rate of return of the portfolio of which the asset is a part
Cov(ra,rp) is the covariance between the rate of return.
2) STANDARD DEVIATION
It measures the risk of an asset from the mean/expected value of return. It represents
the square root of the average squared deviations of the individual returns from the
expected returns.
3) CORRELATION
It is a statistical measure of the degree to which security returns move together. In
order to diversify risk to have an efficient portfolio, i.e. maximum return for a given level
of risk or to minimize risk for a given level of return, the correlation between returns on
different securities is significant.
Positive correlation means that they move together,
Negative correlation suggests that they move in opposite direction
Zero correlation shows that they show no tendency to vary together in either
positive or negative.
4) SHARPE’S MEASURE
Sharpe’s measure evaluates the performance of the portfolio based on the total risk of
the portfolio, that is, standard deviation as a measure of risk. The Sharpe’s measure of
performance evaluation is given by:
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S(x) = ( rx - Rf ) / StdDev(x)
Where,
x = some investment
rx = average annual rate of return of x
Rf = best available rate of return of a "risk-free" security (i.e. cash)
StdDev(x) = standard deviation of rx
5) TREYNOR’S MEASURE
Treynor’s measure relates the rate of return earned over and above the risk-free rate to
the portfolio beta during the time period under consideration.
Where
T = Treynor Ratio , = Portfolio Return , = Risk free return, = Portfolio Beta
6) SORTINO’S MEASURE
The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio
or strategy. The Sortino ratio is a financial ratio, similar to the Sharpe ratio that measures
the risk-adjusted return of investments or portfolios. Unlike the Sharpe ratio, the Sortino
uses downside-volatility (sometimes referred to as semi-volatility) as the denominator
instead of standard deviation. The use of downside-volatility allows the Sortino ratio to
measure the return of "negative" volatility.
The ratio is calculated as
Where,
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R = asset or portfolio realized return;
T = target or required rate of return for the investment strategy under consideration
DR = downside risk
7) P/E RATIO
The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a
share relative to the annual income or profit earned by the firm per share.
The price per share (numerator) is the market price of a single share of the stock. The
earnings per share(denominator) is the net income of the company for the most recent 12
month period, divided by number of shares outstanding.
8) PORTFOLIO TURNOVER RATIO
The Portfolio Turnover ratio shows how actively a scheme has been managed in a
particular year. It is the aggregate value of purchases or sales of investments during the
year, expressed as a percentage of average weekly net assets.
9) EXPENSE RATIO
The Expense ratio helps to shed light on a fund’s efficiency and cost effectiveness. It
is the ratio of total recurring expenses to the average net assets.
10)DIVIDEND YIELD
The gross yield is a significant indicator of mutual fund investment characteristics.
11)TOTAL REURNS
The most common way to tell how well a fund performed is to check its total return,
which includes the impact of appreciation of its value and dividends, if any.
TR= Distributions + Change in NAV
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NAV at the beginning of the period
(Graph taken from mutualfundsindia.com)
The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vise versa if he pertains to lower risk
instruments, which would be satisfied by lower returns. .
Thus investors choose mutual funds as their primary means of investing, as Mutual funds
provide professional management, diversification, convenience and liquidity. That doesn’t mean
mutual fund investments risk free. This is because the money that is pooled in are not invested
only in debts funds which are less riskier but are also invested in the stock markets which
involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it
is mostly traded in the derivatives market which is considered very volatile.
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Relationship between Return and Risk:
(Figure taken from the website mutualfundsindia.com)
In the above graph it shows that as the standard deviation increases, the returns from the
particular type of fund increases.
3.4 MUTUAL FUND ANALYSIS
From the learning got from the fund houses as well as Mutual Fund distributors the selection
of funds is mainly based on the following criteria:
Funds Objective
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Net Asset Value (NAV) Asset Under Management (AUM) Ratios
o Sharpe Ratio
o Standard Deviation
o Beta
o Alpha
o Treynor Ratio
o R-Squared
Returnso 1 Year
o 3 Year
o 5 Year
o Since Inception
o Fund Manager’s Performance.
Details of Mutual Funds and their constitution .
As on 31st march 2013 Ownership Foreign- Domestic - Sponsor
ABN AMRO Mutual Fund Private 75%, 25% ABN AMRO Asset
Management (Asia) Ltd.
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Benchmark Mutual Fund Private 0%, 100% Niche Financial Services
Private Ltd
Birla Mutual Fund Foreign JV 50%, 50% Sun Life (India) AMC
Investments Inc., Birla
Global Finance Ltd
BOB Mutual Fund Public 0%, 100% Bank of Baroda
Canbank Mutual Fund Public 0%, 100% Canara Bank
DBS Chola Mutual Fund Private 37.48%, 62.52% Cholamandalam DBS
Finance Ltd.
Deutsche Mutual Fund Private 100%, 0% Deutsche Asset
Management (Asia) Limited
DSP Merrill Lynch Mutual Fund Foreign JV 40%, 60% DSP Merrill Lynch Ltd,
HMK Investment Pvt. Ltd.,
ADIKO Investment Pvt.
Ltd.
Escorts Mutual Fund Private 0%, 100% Escorts Finance Ltd
Fidelity Mutual Fund Private 100%, 0% Fidelity Internal Investment
Advisors
Franklin Foreign JV 75%, 25% Franklin Resources, Inc.
HDFC Mutual Fund Private 0%, 100% HDF Corporation Ltd
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HSBC Mutual Fund Private -- 100% HSBC Securities and
Capital Markets (India)
Private Limited
ING Mutual Fund Foreign JV 85.68%, 14.32% National Nederlanden
Interfinance B.V (ING
Group),ING Vysya Bank
Ltd., Kirti Equities Pvt. Ltd.
(Mehta
JM Financial Mutual Fund Private 0%, 100% J.M Financial Consultancy
Services Private Ltd, J.M
Share & Stock Brokers Ltd.
Kotak Mutual Fund Private 0%, 100% Kotak Mahindra Finance
Ltd
LIC Mutual Fund Public 0%, 100% Life Insurance Corporation
of
India
Morgan Stanley Mutual Fund Foreign JV 75%, 25% Morgan Stanley Dean Witter
& Company
Principal Mutual Fund Private 65%, 35% Principal Financial Services
Inc.
Prudential ICICI Mutual Fund Foreign JV 55%, 45% Prudential plc, ICICI Bank
Quantum Mutual Fund Private 0%, 100% Quantum Advisors Private
Limited
Reliance Mutual Fund Private 0%, 100% Reliance Capital Ltd
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Sahara Mutual Fund Private 0% 100% Sahara Ind Fin. Corporation
Ltd
SBI Mutual Fund Public 37%, 63% SBI, Societe Generale AM
Stan Chartered MF Foreign JV 75%, 25% Standard Chartered Bank
Sundaram Mutual Fund Private 0%, 100% Sundaram Finance Ltd
Tata Mutual Fund Foreign JV 0%, 100% Tata InvestCorp Ltd, Tata
Sons Ltd
Taurus Mutual Fund Private 0%, 100% HB Portfolio Ltd
UTI Public 100% 0% UTI
UTI Mutual Fund Public 0%, 100% SBI, LIC, PNB, Bank of
Baroda
( Source: website mutualfundsindia.com)
(Source: website mutualfundsindia.com)
Recommendations regarding the fund selection depending upon the risk of the investor:
Debt Funds and bond funds are preferred in low risk, low return scenario: However, the bond funds faces interest rate risk .Income risk is the possibility that a fixed Income fund’s dividends will decline as a result of falling overall interest rates. There have been instances of investors locking in debt or income fund. They on seeing how returns pay up huge exit loads and get out of such schemes. Hence, it is very important that investors first measure their risk appetite. Once they understand their risk tolerance level they can choose the appropriate investment vehicle.
For those willing to take high risks, equity and sector funds are the picks: Sector funds limit their stock selection to the specific sectors and are not amply diversified. Since all the stocks are restricted to a particular sector like FMCG, pharma, or civil, if the sector takes a beating, the returns will be directly impacted. Equity Funds invest wholly in the stock markets. They have the same volatility as the investments in the stock market.
Balance Funds are a good alternative for those who seek something between high risk sector funds and low risk bond funds: balanced funds invest 80 to 90 percent of their money in equity instruments and generate decent returns. The
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remaining money is locked in safe debt instruments. Investors should build a well diversified portfolio.
CHAPTER 4: Equity Market in Comparison with Mutual fund
Capital markets are the markets for the long term funds. It enhances capital formation, which
has a very significant role to play in the development of any economy.
Primary Market is a place where new offerings by Companies are made either as an
Initial Public Offering (IPO) or Rights Issue.
Secondary Market is a market where securities are traded after being initially offered to
the public in the Primary Market and/or listed on the Stock Exchange. Majority of trading
is done in this market which comprises of equity market and debt market. As the
secondary market is created for the securities raised in the primary markets, the depth of
the secondary market depends upon the primary markets.
India’s financial market began its transformation path in the early 1990s. The banking sector
witnessed sweeping changes, including the elimination of interest rate controls, reductions in
reserve and liquidity requirements and an overhaul in priority sector lending. Persistent efforts by
the Reserve Bank of India (RBI) to put in place effective supervision and prudential norms since
then have lifted the country closer to global standards.
Around the same time, India’s capital markets also began to stage extensive changes. The
Securities and Exchange Board of India (SEBI) was established in 1992 with a mandate to
protect investors and usher improvements into the microstructure of capital markets, while the
repeal of the Controller of Capital Issues (CCI) in the same year removed the administrative
controls over the pricing of new equity issues.
For over a century, India’s capital markets, which consist primarily of debt and equity
markets, have increasingly played a significant role in mobilizing funds to meet public and
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private entities’ financing requirements. The advent of exchange-traded derivative instruments in
2000, such as options and futures, has enabled investors to better hedge their positions and
reduce risks. In total, India’s debt and equity markets were equivalent to 130% of GDP at the end
of 2005. This is an impressive stride, coming from just 75% in 1995, suggesting issuers’ growing
confidence in market based financing. However, the size of the country’s capital markets relative
to the United States’, Malaysia’s and South Korea’s remains low, implying a strong catch-up
process for India. India’s capital markets have experienced sweeping changes since the
beginning of the last decade. Its market infrastructure has advanced while corporate governance
has progressed faster than in many other emerging market economies. But still we can say there
is plenty of room for improvement and further reforms are needed to make India a world-class
financial centre.
4.1 EQUITY STOCK SELECTION APPROACHES
When the objective of the analysis is to determine what stock to buy and at what price, there
are two basic methodologies:
1. Fundamental Analysis
Fundamental Analysis is a technique that attempts to determine a security’s value by
focusing on underlying factors that affect a company's actual business and its future prospects.
As with most analysis, the goal is to derive a forecast and profit from future price movements.
To forecast future stock prices, fundamental analysis combines economic, industry, and company
analysis to derive a stock's current fair value and forecast future value. If fair value is not equal
to the current stock price, fundamental analysts believe that the stock is either over or under
valued and the market price will ultimately gravitate towards fair value.
2. Technical Analysis
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Technical Analysis maintains that all information is reflected already in the stock price, so
fundamental analysis is a waste of time. Trends 'are your friend' and sentiment changes predate
and predict trend changes. Investors' emotional responses to price movements lead to
recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is.
Their price predictions are only extrapolations from historical price patterns.
In short, Fundamental Analysis tells us which stocks to buy, whereas the other Technical
Analysis gives us an indication as to when to buy the stocks. Investors use both these different
but somewhat complementary methods for stock picking. Many fundamental investors use
technical’s for deciding entry and exit points. Many technical investors use fundamentals to limit
their universe of possible stock to 'good' companies. In my project I have decided to limit my
study to only Fundamental Analysis.
Factors to be considered while selecting a Stock
The Selection of a stock is generally done from a three-dimensional perspective namely:
A. Qualitative Factors
The principal objective of qualitative analysis is to identify sustainable competitive
advantages of each company and to determine the level of confidence and conviction in
corporate management. The analysis includes evaluating both internal and external factors that
may have an impact on a company's ability to sell its product. It also involves having regular
open dialogue with management and regular conference calls to discuss recent developments.
The intent is to be long-term holders of the company one purchases. Strong belief in
management is required in order to maintain conviction during the short-term adversities that
virtually all companies experience.
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The various qualitative factors to be considered are:
Industry
Industry is a grouping used to describe a company's main business activity. It is generally
determined by the major source of a company's income. A hot sector is a sector of the economy
experiencing a higher than regular growth rate. If companies across an industry show solid
earnings and revenue figures, that industry may be showing signs that it is in its growth phase.
Our goal is to select securities that area in a hot industry.
Scale of Opportunity: The trick lies in identifying Sectors which present huge scope of
opportunities. This involves finding sectors whose market cap are way beyond that of the total
industry.
For example when Mobile Telephony was in growing stage in India in 2004, Bharti Airtel
was trading at a market cap of $ US 1.5 billion against a total market size of US $ 100 billion.
Three years down the line and we can see the remarkable returns given by the stock.
Going forward we can estimate the case of the Indian Retail sector. The Indian Retail market
is presently worth US $ 300 billion and the collective market cap of the leaders in the listed
space was less than 1% in 2003 and is at a similar level currently. The total share of organized
retail has gone up from 2% in 2003 to 3% in 2006 and is estimated to hit 10% by 2010.
Company Market Capitalization
Pantaloon Retail US $ 1 billion
Titan US $ 756 million
Shopper Stop US $ 358 million
Trent US $ 263 million
Total market cap of listed Retail players US $ 2.37 billion
Total size of the Retail market US $ 300 billion
Percentage to the total Retail Market 0.79%
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Industry Leader: The top two or three stocks in a strong industry group can have
incredible growth, while others in the group may barely move. One should buy the best
companies, the ones that lead their sectors and are number one in their particular field. The
number one market leader is not the biggest one. It is the one with the highest annual growth,
earning per share, and price relative strength. It’s a company that has competitive advantage over
its competitors. A company that is offering the best product
Management: Great management can make a difference between an average business and an
extraordinary one. Our goal as an investor is to find management teams that think like
shareholders; executives who treat the company as if they own a piece of it. One way to find out
about the management and how much they really care about share holders is to check the top
executive’s compensation plans.
Competitive Advantage: Generally, there are different ways that a company can create
sustainable competitive advantage:
1. Creating a real different product
2. Creating a strong brand
3. Keeping costs down
4. Locking in customers by creating high switching cost
5. Locking out competitors
Research and Development: One should consider the following questions in this respect
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Does the Company have anything in the pipeline?
What are the Company’s technological capabilities?
Can the Company bring to market new products in a timely manner?
Shareholding Pattern: One should carefully analyze the Shareholding Pattern of the
Companies. If the institutional holding is very high on can say that the stock is fully researched
but at the same time its upside is also limited. One should also track Promoter holding to see
whether promoters involve in Insider Trading or not.
Analyst Coverage: Analysts issue their recommendations on individual companies. Analyst
coverage is useful to gauge market consensus on a stock price movement. A stock with no
analyst coverage could be a hidden value stock.
B. Quantitative Factors
These factors include analyzing the financial statements of a company through Ratio
Analysis. Ratio analysis includes calculating the various ratios and interpreting them in the
context of the company. The ratios help as to examine the critical parameters of a company like
Profitability, Liquidity, Valuation, Leverage and Price of the shares. The important ratios used
for the purpose of stock selection are:
Price-Book Value (P/BV) Enterprise Value (EV) EV/EBITDA Operating Profit Margin (OPM) Price/ Earnings Ratio (P/E) Beta Market Capitalization (MC) PEG Ratio Dividend payout ratio Dividend Yield ROCE ROE DEBT EQUITY
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4.3 COMPARISON OF THE STOCK MARKET WITH MUTUAL FUND
It is a known fact that that mutual fund investments actually enter into the stock market. The
returns so particularly depend on the performance of the stock market. But then the question
arises whether mutual funds are actually capable of performing better than the stock market.
Comparison of stock market with mutual fund becomes an important issue and so here in this
section I have tried to compare few of the best mutual fund schemes with the stock market.
1) Comparison of S&p Bse 100 and UTI equity
Risk free return(assumed) 0.07
Covariance 0.004566
Variance 0.005645
Beta 0.83
Standard deviation 0.1562
Market Return 0.1025
Fund Return 0.1356
Expected Return using CAPM model 0.1203
Sharp ratio 0.24
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Here, from the covariance and beta of BSE 100 and UTI Equity it’s pretty clear that gold
normally will provide return even if other market based assets do not.
ANALYSIS: After Covariance of this mutual fund with respect to the market is positive .
This tells that the movement of the NAV of this scheme depends on the movement of the market.
The covariance clears the point that the moves in the same direction and in parallel with the
stock market either upwards or downwards.
Beta of this particular scheme is very close to 1 which says that this fund has a average well
diversified portfolio. This means that the portfolio of this scheme is moderately aggressive. This
fund’s return moves in the same direction with respect to the market and with the same intensity
as the market.
If we look at the return of this fund it is clearly outperformed the market. The return of BSE
100 has for the period of 1st February 2013 to 7th March 2014 has been 10.25 %. The expected
return of this fund as per CAPM should have been 12.03%. But the funds performed and have
given an return of 13.56%.
The Sharpe ratio of the fund is 0.24 which is good. This means that for every single unit of
risk there is a probability of earning an extra return of 0.24 units.
2) NIFTY V/S ICICI Prudential Dynamic Fund
Risk free return(assumed) 0.07
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Covariance 0.000391
Variance 0.000417
Beta 0.83
Standard deviation 0.1609
Market Return 0.1116
Fund Return 0.2006
Expected Return using CAPM model 0.1022
Sharp ratio 0.22
ANALYSIS : Covariance of this mutual fund with respect to the market is positive . This
tells that the movement of the NAV of this scheme depends on the movement of the market. The
covariance clears the point that the moves in the same direction and in parallel with the stock
market either upwards or downwards.
Beta of this particular scheme is very close to 1 which says that this fund has a average well
diversified portfolio. This means that the portfolio of this scheme is moderately aggressive. This
fund’s return moves in the same direction with respect to the market and with the same intensity
as the market.
If we look at the return of this fund it is clearly outperformed the market. The return of
NIFTY has for the period of 1st February 2013 to 7th March 2014 has been 11 %. The expected
return of this fund as per CAPM should have been 10.02%. But the funds outperformed and have
given an excellent return of 20.06%.
The Sharpe ratio of the fund is 0.22 which is good. This means that for every single unit of
risk there is a probability of earning an extra return of 0.22 units.
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3) S&P BSE Sensex Vs Franklin India Bluechip
Covariance 0.000367
Market Variance 0.000523
Beta 0.86
ST. dev 0.1568
Risk free return(Assumed) 0.07
Market return 0.1246
Fund return 0.2237
Expected return using Capm Model 0.188546
Sharp ratio 2
ANALYSIS : Covariance of this mutual fund with respect to the market is positive . This
tells that the movement of the NAV of this scheme depends on the movement of the market. The
covariance clears the point that the moves in the same direction and in parallel with the stock
market either upwards or downwards.
Beta of this particular scheme is less than 1 which says that this fund has a below average
volatility. This means that the portfolio of this scheme is less aggressive. This fund’s return
moves in the same direction with respect to the market but not with the same intensity as the
market.
If we look at the return of this fund it is clearly outperformed the market. The return of BSE
Sensex has for the period of 1st February 2013 to 7th March 2014 has been 12.46 %. The
expected return of this fund as per CAPM should have been 18.85%. But the fund outperformed
and has given an excellent return of 22.37%.
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The Sharpe ratio of the fund is high i.e. 2 which is excellent. This means that for every single
unit of risk there is a probability of earning an extra return of 2 units. Thus the risk return trade
off with this stock is satisfactory.
4) BSE 200 V/S SBI Magnum Comma Growth Fund
Covariance 0.000313
Variance 0.000523
Beta 0.90
Stdev 0.1892
Risk free Return( Assumed) 0.07
Market return 0.1008
Fund return 0.2012
Expected return using CAPM Model 0.1305
Sharpe ratio -0.72
ANALYSIS : Covariance of this mutual fund with respect to the market is positive . This
tells that the movement of the NAV of this scheme depends on the movement of the market. The
covariance clears the point that the moves in the same direction and in parallel with the stock
market either upwards or downwards.
Beta of this particular scheme is less than 1 which says that this fund has a below average
volatility. This means that the portfolio of this scheme is less aggressive. This fund’s return
moves in the same direction with respect to the market but not with the same intensity as the
market.
If we look at the return of this fund it is clearly outperformed the market. The return of
SENSEX has for the period of 1st February 2013 to 7th March 2014 has been 11 %. The expected
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return of this fund as per CAPM should have been 13.05%. But the funds outperformed and have
given an excellent return of 20.12%.
The Sharpe ratio of the fund is high i.e. -0.72which is to be considered ok. This means that
for every single unit of risk there is a probability of earning an extra return of 0.72 units. Thus
the risk return trade off with this stock is satisfactory.
CHAPTER 5: Conclusion and Suggestions
From the above study it can be finally concluded that the mutual fund industry in India is
growing in India because to the brisk growth of the capital market. Most of the funds mobilized
by various AMCs are actually pumped into the capital market. The performance of mutual funds
actually depends in the performance of the stock market. We have seen in the recent past that the
the performance of the mutual fund have been impressive but the future growth will still depend
on the capital market behaves. Risk element always exists in mutual fund investment as they do
not guarantee any sure shot returns. But an investor can consider his risk being minimized as he
gets the expertise of fund managers and since the investments made by fund houses are in large
amounts the cost of investments also gets reduced. The top 10 % of the schemes that have
performed the best are mostly the equity diversified schemes. This explains the dependencies of
returns are on equities. There is no denying the fact that the returns have also gone down as and
when the stock markets have fell. Diversification of investments by AMCs has been the key of
their success in India.
5.2 FINDINGS
The key findings of the following study have been highlighted below:
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1) Investments in equity diversified mutual funds are heavily depended on mutual and thus
the risk involved is very high.
2) The risk return trades off in mutual funds have been very satisfactory. Equity growth
schemes having high risk have generated a return in a range of 30% to 40%, whereas the
debt funds those have relatively low risk have given a moderate return of 6% to 8%.
3) Mutual Fund investments do not gurantee any fixed returns which might create fear in the
minds of risk free investors.
5.3 SUGGESTIONS
From the above study the following recommendations can be given to an investor.
1) For investors willing to take high risks, equity and sector funds are the picks: 2) Balance Funds are a good alternative for those who seek something between high risk
sector funds and low risk bond funds.3) Debt Funds and bond funds are preferred in low risk, low return scenario.4) Salaried persons earning a fixed salary can go for Systematic Investment Plan (SIP).5.4 LIMITATIONS OF THE STUDY
1) The time horizon is very short, so in depth analysis could be done only of few schemes.
2) The project is dependent on the relevance of the secondary data (eg, factsheets of various
schemes and investments vehicles of different companies) collected from the internet
which might not be correct.
3) The study has been done on only a handful of schemes so it cannot be generalized to the
entire industry.
4) The internal information about the creation of various asset classes and formation was not
revealed to the internees.
5.5 FURTHER SCOPE OF THE STUDY
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There is lot of scope for improvement in the research for evaluating mutual fund
performances.
1) Various other multi-criteria decision models could be tested for evaluating mutual fund
performances.
2) Testing of fund performances in the long run can be done.
3) Extended sample of public-sector sponsored, private-sector Indian sponsored and
private-sector foreign sponsored mutual funds can be taken for generating results.
Portfolio risk through the measure of value at risk (VaR) can also be tested for
differences in mutual fund classes.
4) Mutual fund schemes used can be of varied class such as balanced fund , money market
fund , sectoral funds etc.
5) Hypothesis testing can also be done to predict the future performance of any scheme.
REFERENCES
1) Tripathy Nalini Prava “Mutual Funds in India. Emerging Issues” Vol – 1
( 2007) ,123-158
2) Riter,Jay,R1998, The buying and selling behavior of individual investors at the turn
of the year, journal of finance 43, 701-717.
3) Frazzini Andrea, “Dumb Money: Mutual Fund flows as the cross-section of stock
returns”, NCFM’s AMFI Material on mutual funds(workbook)
4) Nalini Prabha Tripathy , “Market Timing Abilities and Mutual Fund Performance-
An Empirical Investigation into Equity Linked Saving Schemes” (2006) XIMB
Journal of management ,Vilakshan, April 200 ,pp 6-8
5) Fact Sheets Of different AMCs.
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BIBLIOGRAPHY
1) Jaidev M , “Investment policy and performance of Mutual Fund”
2) Sadak H. “Mutual Funds in India”
3) Pandey I.M , “Financial Management”
4) Damodaran Aswanth “Corporate Finance”
5) Tripathy Nalini Prava “Mutual Funds in India. Emerging Issues”
6) Panwar Sharad and Madhumathi R “Characterstics and Performance of selected
mutual funds in India.”
7) Frazzini Andrea, “Dumb Money: Mutual Fund flows as the cross-section of stock
returns”, NCFM’s AMFI Material on mutual funds(workbook)
8) Sankaran Sundar, “ Mutual fund Handbook ,A guide for distributors and
intelligent investors”
9) AMFI Module
10) Fund factsheet Of various Schemes
11) WEBSITES:
a. www.valueresearchonline.comb. www.moneycontrol.comc. www.amfiindia.comd. www.bseindia.come. www.indiainfoline.comf. www.myiris.comg. www.mutualfundindia.comh. www.nseindia.comi. www.capitaline.comj. www.capitalmarket.com
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