Pratik 17095 Specialization Project Report On

8/2/2019 Pratik 17095 Specialization Project Report On

1/64

Siva Sivani Institute of Management

Page | 1

A Specialization Project Report onCharacteristics and Performance Evaluation of selected Equity

Oriented Mutual funds in India

Report submitted in partial fulfillment of

POST GRADUATE DIPLOMA IN MANAGEMENT

Submitted By

Pratik Kumar ShuklaPGDM-TPS-17

thBatch

Roll No. 17095

Under The Esteemed Guidance of

Prof. C. Sudhakar

Professor (IT & Finance)

SIVA SIVANI INSTITUTE OF MANAGEMENT, KOMPALLY

SECUNDERABAD-500014

(2008-10)


2/64


Page | 2

ACKNOWLEDGEMENT

I bow to Almighty for bestowing upon me with patience, perseverance and courage to

complete this project timely and successfully.

I express my heartiest gratitude to my extreme teacher, Prof. C. Sudhakar, Professor (IT &

finance), SSIM, whose thorough knowledge, excellent guidance, valuable helps and co-

operative nature became the way to complete this project report in the proper manner.

I am also thankful to Mr. Pardha Saradhi and Dr. Murlidhar Prasad, Faculty Finance, SSIM for

their help and guidance on this project.

I also thank Mr. Shyam Sunder, in charge Library and other library staff for providing all the

literatures required completing the project.

Last but not the least; I want to express my gratitude towards my parents and my friends for

their cooperation during the project.


3/64


Page | 3

DECLARATION

I, Pratik Kumar Shukla, declare that this project report titled Characteristics

and Performance Evaluation of selected Equity oriented Mutual funds in

Indiais done by me on my own. I further declare that it is my original work as a

part of my academic course. I have not published it anywhere else for any

academic or business purpose.

PLACE: Hyderabad (Pratik Kumar Shukla)

DATE: 23- 12- 2009 PGDM-TPS-17th batch


4/64


Page | 4

CONTENTS

1 Chapter-1

Abstract

Introduction

Objective of the study

Scope of the Study

Limitations of the study

Review of literature

6

6

7

7

7

8

2 Chapter2

Mutual Fund Industry profile

Brief Introduction of selected Companies

17

34

3 Chapter-3

Research methodology

Data collection

Performance Evaluation measureBeta value

Treynor Ratio

Sharp Ratio

Return and mean

Standard deviation

Fama model

Sortino Ratio

Theoretical concept about performance evaluation

38

38

38

39

39

40

40

40

41

41

42

4 Chapter-4

Data Analysis and Interpretation 44

5 Chapter-5

Findings

Recommendations

61

62

Bibliography 63


5/64


Page | 5

CHAPTER 1Abstract

Introduction

Objectives of the study

Scope of the study

Limitation of the study


6/64


Page | 6

ABSTRACT

The study used sample of public-sector sponsored (LIC Mutual fund, SBI mutual fund and

Canara Bank Mutual fund) & private-sector sponsored equity mutual funds (HDFC Mutual

fund and ICICI mutual fund) of varied net assets to investigate the differences in characteristicsof assets held, portfolio diversification, and variable effects of diversification on investment

performance for the period December, 2008 to November, 2009.

Introduction

In few years Mutual Fund has emerged as a tool for ensuring ones financial wellbeing.

Mutual Funds have not only contributed to the India growth story but have also helped families

tap into the success of Indian Industry. As information and awareness is rising more and more

people are enjoying the benefits of investing in mutual funds. The main reason the number of

retail mutual fund investors remains small is that nine in ten people with incomes in India donot know that mutual funds exist. But once people are aware of mutual fund investment

opportunities, the number who decide to invest in mutual funds increases to as many as one in

five people. The trick for converting a person with no knowledge of mutual funds to a new

Mutual Fund customer is to understand which of the potential investors are more likely to buy

mutual funds and to use the right arguments in the sales process that customers will accept as

important and relevant to their decision.

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 the

capital appreciation realized is shared by its unit holders in proportion to the number of units

owned by them. 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. The flow chart below describes broadly the working of a mutual fund.

Like most developed and developing countries the mutual fund has been catching on in India.

The important reasons for this interesting occurrence are:

Mutual funds make it easy and less costly for investors to satisfy their need for capitalgrowth, income and/or income preservation.

Mutual fund brings the benefits of diversification and money management to theindividual investor, providing an opportunity for financial success that was once

available only to a select few.

Mutual Funds are investment institutions set up to manage money pooled in from the public.

Today the Mutual Fund Market in India is really flourishing. From progressive liberalization

economic policies, there has been rapid growth of capital market, money market and financial

services industry including merchant banking, leasing and venture capital. Consistent with this

evolution of the financial sector, the mutual fund industry has also come to occupy animportant place, to full fill the requirement of investor.


7/64


Page | 7

Objectives of the study

The objective of the study is to evaluate the performance of the selected equity schemes of the

equity schemes of selected public sector sponsored as well as private sector sponsored Mutual

funds by calculating the risk involved in the scheme and return on the scheme. The study

determines the performance of the selected mutual fund schemes on the basis of risk-returntrade off.

The other objectives of the study are

To identify differences in characteristics of public-sector sponsored & private-sectorsponsored mutual funds

To find the extent of diversification in the portfolio of securities of public-sectorsponsored and private-sector sponsored mutual funds

To find out asset allocation pattern, sector allocation pattern and top 10 holdings of theselected schemes and analyze its effect on risk and return.

To compare the performance of public-sector sponsored and private-sector sponsoredmutual funds using traditional investment measures

Scope of Study

The study was carried out for a period 1 year, in which the main focus was to follow the

performance of different equity oriented schemes of both public sector sponsored as well as

private sector sponsored mutual funds. Since different companies come out with similar type of

schemes in the same season, it becomes crucial for the company to constantly perform well so

as to survive the competition and provide maximum capital appreciation or return as the casemay be. Other than the market the performance of the fund depends on the kind of stock

chosen by the fund managers of the company. Performance evaluations of the schemes also

take into consideration the level of risk in each type of scheme. For evaluating the performance

of the funds, it is important to consider both the risk involved and return on investing in the

scheme.

Limitations of the Study

The study is done by using NAV data of equity schemes of one year only. Only a certain traditional tools of performance evaluations are used in the study.


8/64


Page | 8

REVIEW OF LITERATURE

B.Venkatesh states that fund houses often insist that they pursue long term objectives,

meaning that they are not quite concerned about the short-term declines in the NAVs. But that

is not always true, for portfolio managers appear concerned about the short-term performanceof their portfolio.The fund that has performed well in the near term is more likely to attract

higher cash inflows than one that has not.

Nalini Prava Tripathy states mutual fund as a single, large professionally managed

investment organization that combines the funds of many individual investors having similar

investment objectives. It designs its schemes to meet the needs of different types of investors in

terms of nature of investments, dividend distribution and liquidity. The entire income is

distributed to the investors in proportion of their investments.

James L.Pierce defines a mutual fund as a non-depository or non-banking financialintermediary, which acts as an important vehicle for bringing wealth holders and deficit units

together indirectly.

(Mutual funds in India Mutual funds in India-Emerging issues, 2007, pp, 48-50)

Fred & Brigham states Mutual Funds as corporations which accept dollars to buy stocks, long

term bonds, and short term debt instruments issued by business or Government units, these

corporations pool funds and thus reduce risk by diversification.

(Essentials of Managerial Finance)

As per the Mutual Fund Fact Book A Mutual Fund is a Financial Service Organization that

receives money from shareholders invests it earns returns on it, attempts to make it grow and

agrees to pay the shareholders cash on demand for the current value of his investment.

(Investment Company Institute, U.S)

Joel Ross states Mutual Fund is taking the pool of money and investing it in the securities of

a wide range of companies, managers of mutual funds decide when to buy, sell or held in order

to achieve the objective of the fund.


Encyclopedia Britannica defines Mutual Fund as a company that invests the fund of its

subscribers in diversified securities and in turn issues units representing shares in these

holdings. They make continuous offering of new shares at net asset value and redeem the

shares at net asset value and redeem the shares on demand at net asset value determined daily

by the market value of the securities they hold.

Investopedia, defines mutual funds as an investment vehicle that is made up of a pool of funds

collected from many investors for the purpose of investing in securities such as stocks, bonds,

money market instruments and similar assets. Mutual funds are operated by money managers,


9/64


Page | 9

who invest the fund's capital and attempt to produce capital gains and income for the fund's

investors.

Business Dictionary defines mutual fund as an Investment firm managed by finance

professionals that raises its capital by selling its shares (called units) to the public. Mutual

fund's capital is invested in a pool (portfolio) of corporate securities, commodities, options,etc., that match the fund's objectives detailed in its prospectus..

Dhirendra Kumar states that the main principle behind mutual fund is mutuality i.e. all

investors in a fund must be equal partners in it. There are two sides to this. One, the fund

company must treat all of them equally. Another, fund must be run in such a manner that the

actions of one investor can not harm another.

According to Seth C.Anderson and Parvez Ahmed ,mutual fund popularity is largely due to

following reasons 1)the ease of buying and selling fund shares 2)the small minimum

investment required 3)provision of professional record- keeping 4)the provision ofprofessional portfolio management 5)the availability of a large choice of investment

objectives.

Lee Louis Gremillion refers a mutual fund allows individuals and institutions to pool smaller

amounts of money into a larger amount for investment. Investment management professionals

then manage this larger amount to allow investment strategies, achieving economies of scale

and reduction of risk.


AnshumanRay says The Indian Economy is vibrant and ripe with opportunities. Here comes

the conception of Mutual Fund. A mutual fund is a common pool of money in to which

investors with common investment objective place their contributions that are to be invested in

accordance with the stated investment objective of the scheme.This implies that all the

investors investing in a particular mutual fund scheme shall have same investing objective. For

e.g. those investors want to have tax benefits .they invest in Equity Linked Savings Scheme. So

mutual funds is the only way to invest in stock market when retail investors who have money,

but dont have time and expertise. A typical individual is obviously unlikely to to have the

knowledge, skills, inclination and time to keep track of events, understand their implications

and act speedily. So mutual funds collectively manage huge amount of capital of investors. Theincreasing disposable income of Indians, rising aspiration levels, growing number of young

people in the country is likely to bring great changes in the investment arena.

(Mutual Funda New Era in Investment, 2007)

Indians have been traditionally savers and invested money in traditional savings instruments

such as bank deposits.Going by various reports, not more than 5% of household savings are

channelized into the markets, either directly or through the mutual fund route. Not all parts of

the country are contributing equally into the mutual fund corpus. 8 cities account for over 60%

of the total assets under management in mutual funds. The total number of certified MutualFunds Advisors is around 50,000 whereas there are over 20 lakhs life insurance advisors.


10/64


Page | 10

Market dynamics are making industry players to look at smaller cities to increase penetration.

Competition is ensuring that costs incurred in managing the funds are kept low and fund

houses are trying to give more value for money by increasing operational efficiencies and

cutting expenses.As of today there are 41 Mutual Funds in the country. Together they offer

over 1000 schemes to the investor.

(National Stock Exchange Ltd., www.nseindia.com)

WHY SHOULD INVESTORS INVEST IN MUTUAL FUNDS?

An investor avails of the services of experienced and skilled professionals who are backed by a

dedicated investment research team that analyzes the performance and prospects of companies

and selects suitable investments to achieve the objectives of the scheme.

Mutual Funds invest in a number of companies across a broad cross-section ofindustries and sectors. This diversification reduces the risk .This diversification is

achieved through a mutual fund with far less money.

Investing in a mutual fund reduces paperwork and helps an investor avoid manyproblems such as bad deliveries, delayed payments and unnecessary follow-up with

brokers and companies.

Over a medium to long-term ,mutual funds have the potential to provide a higher returnas they invest in a diversified basket of selected securities

Mutual Funds are a relatively less expensive way to invest compared to directlyinvesting in capital markets because the benefits of scale in brokerage, custodial and

other fees are translated into lower costs for investors. In open ended schemes, investors can get their money back promptly at net asset value

related prices from the mutual fund itself with close-ended schemes.

An investor gets regular information on the value of investments in addition todisclosure on the specific investments made by investors schemes, the proportion

invested in each class of assets and the fund managers investment in strategy and

outlook.

Investors can systematically invest or withdraw funds according to their needs andconvenience.

All mutual funds are registered with SEBI and they function within the provisions ofstrict regulations designed to protect the interests of investors. The operations of mutual

funds are regularly monitored by SEBI.

(AMFI mutual fund test workbook, advisory module)


11/64


Page | 11

SELECTION OF MUTUAL FUNDS

On the Basis Of Risk and Return

Risk and Returns Mutual Fund

Investment

Types of Mutual

Funds

Benefits from the

Mutual Fund

Low Only in debt income

fund

Bank/Co. FD ,debt

base & income funds

Liquidity, better

post-tax returns

Medium Partly in debt Partly

in Equity

Mix of shares and FD

balanced funds.

Liquidity, better

post-tax returns

,better

diversification

High Only in Equity Capital market

,Equity funds

Diversification,

liquidity

(Source Rajni Sofat and Preeti Hiro, Best Funds to Invest. Portfolio organizer, IcfaiUniversity Press, 2004 edition, p35)

Role of mutual funds in the financial market

Indian financial institutions have played a vital role in assets formation, intermediation and

contributed substantially in microeconomic development. In the process of development

mutual funds play an important role in bringing stability and liquidity in the financial markets

.India is at the first stage of a revolution that has already peaked in the United States, where the

asset base of mutual funds is much higher than its bank deposits. In India, mutual funds assets

are only 10 percent of the bank deposits. The mutual fund in India have emerged as strong

financial intermediaries and are playing a very important role in bringing stability to thefinancial system and efficiency to resource allocation. Mutual Funds help corporate in raising

funds for their financial needs and provide an avenue of investment to investors by parking

their savings. The major chunk of household savings in India which earlier went to bank

deposits is now being taken by mutual funds. The active involvement of mutual funds in

promoting economic development can be seen not only in terms of their participation in the

savings market but also in their dominant presence in the money and capital markets.

(Mutual funds in India, Mutual Funds, ICFAI University Press, 2004 Edition, pp 33-34)

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

Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance.

Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has

suggested a new predictor of mutual fund performance, one that differs from virtually all those

used previously by incorporating the volatility of a fund's return in a simple yet meaningful

manner.

Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance (Jensens

alpha) that estimates how much a managers forecasting ability contributes to funds returns.

As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the


12/64


Page | 12

portfolio over the return of the benchmark index, where the portfolio is leveraged to have the

benchmark indexs standard deviation. S.Narayan Rao, et. al., evaluated performance of

Indian mutual funds in a bear market through relative performance index, risk-return analysis,

Treynors ratio, Sharpes ratio, Sharpes measure , Jensens measure, and Famas measure. The

study used 269 open-ended schemes (out of total schemes of 433) for computing relative

performance index. Then after excluding funds whose returns are less than risk-free returns, 58

schemes are finally used for further analysis. The results of performance measures suggest that

most of mutual fund schemes in the sample of 58 were able to satisfy investors expectations

by giving excess returns over expected returns based on both premium for systematic risk and

total risk.

Bijan Roy, et. al., conducted an empirical study on conditional performance of Indian mutual

funds. This paper uses a technique called conditional performance evaluation on a sample of

eighty-nine Indian mutual fund schemes .This paper measures the performance of various

mutual funds with both unconditional and conditional form of CAPM, Treynor- Mazuy modeland Henriksson-Merton model. The effect of incorporating lagged information variables into

the evaluation of mutual fund managers performance is examined in the Indian context. The

results suggest that the use of conditioning lagged information variables improves the

performance of mutual fund schemes, causing alphas to shift towards right and reducing the

number of negative timing coefficients.

Mishra, et al., (2002) measured mutual fund performance using lower partial moment. In this

paper, measures of evaluating portfolio performance based on lower partial moment are

developed.

Risk from the lower partial moment is measured by taking into account only those states in

which return is below a pre-specified target rate like risk-free rate. Kshama

Fernandes(2003) evaluated index fund implementation in India. In this paper, tracking error of

index funds in India is measured .The consistency and level of tracking errors obtained by

some well-run index fund suggests that it is possible to attain low levels of tracking error under

Indian conditions. At the same time, there do seem to be periods where certain index funds

appear to depart from the discipline of indexation. K. Pendaraki et al. studied construction of

mutual fund portfolios, developed a multi-criteria methodology and applied it to the Greek

market of equity mutual funds. The methodology is based on the combination of discrete and

continuous multi-criteria decision aid methods for mutual fund selection and composition.

UTADIS multi-criteria decision aid method is employed in order to develop mutual funds

performance models. Goal programming model is employed to determine proportion of

selected mutual funds in the final portfolios.

Zakri Y.Bello (2005) matched a sample of socially responsible stock mutual funds matched to

randomly selected conventional funds of similar net assets to investigate differences in

characteristics of assets held, degree of portfolio diversification and variable effects of

diversification on investment performance. The study found that socially responsible funds do

not differ significantly from conventional funds in terms of any of these attributes. Moreover,

the effect of diversification on investment performance is not different between the two groups.

Both groups underperformed the Domini 400 Social Index and S & P 500 during the study


13/64


Page | 13

period.

M.S.Narasimhan and S.Vijaya Lakshmi have observed that an empirical evaluation of

diversification and timing performance. Mutual funds compete with each other to show

superior performance and also outperformed the benchmark indices. Mutual funds have also

changed their investment strategy from creating a large diversified portfolio to investments inselected stocks .The holdings of a large number of schemes of mutual funds are compared with

top performing stocks of proper understudy.

(Performance Analysis of Mutual Funds, Finance India)

P.K.Muthappan and E.Damodharan, indicate that the risk and return of mutual fund

schemes are not in conformity with their stated investment objectives. The funds are able to

earn higher returns due to selectivity and diversification is not funds are not properly

diversified.

(Risk Adjusted Performance Evaluation of Indian Mutual Fund Schemes, Finance India)

M. Jayadev attempted to evaluate the performance of two growth oriented mutual funds (on the

basis of monthly returns compared to benchmark returns. For this purpose, risk adjusted

performance measures suggested by Jenson, Treynor and Sharpe are employed. It can be

concluded that, the two growth oriented funds have not performed better in terms of total risk

and the funds are not offering advantages of diversification and professionalism to the

investors.

(Mutual Fund Performance: An Analysis of Monthly Returns, Finance India, , Volume

X, No.1, March 1996)

As economic fundamentals continued to show improvement, this made India one of the most

significant investment destinations among the emerging markets globally. The major

beneficiaries of this Bull Run have been the mutual fund, which at one point of time, after the

crash of market in the wake of worldwide recession, had fallen off the investment radar of

common investors. Further, a fund performance when viewed on the basis of returns alone

would not give true picture about the risk the fund would have taken. In other words funds

performance should be evaluated on the basis of risk-adjusted return.

(Chartered Financial Analyst, Performance Analysis of Indian Mutual Fund Industry)

Mutual funds have become one of the largest financial intermediaries in the leading world

economies, currently controlling about 7 trillion dollars in assets in the US and over 3 trillion

Euros in assets in Europe. In Russia, the mutual fund industry is relatively underdeveloped but

has a huge potential for growth. One of the crucial factors ensuring efficient functioning of

mutual funds is proper evaluation of their performance. This is important for investors who

would like to make sure that their funds follow desirable strategies and earn positive risk-

adjusted returns.

In general, there are two types of performance measures: absolute (based only on the

performance record of a given fund) and relative (constructed with respect to some endogenous


14/64


Page | 14

or exogenous benchmark). Absolute performance measures may be raw, such as fund total

return, or risk-adjusted, such as the Sharpe ratio or Jensens alpha. Relative performance

measures can be cardinal (e.g., fund return adjusted by the category benchmark) or ordinal

(e.g., fund performance rank within a given category). Obviously, the use of a raw

performance measure such as fund total return may be inappropriate, since it neglects the

riskiness of fund investments.

(Evaluating performance and strategy of mutual funds, Alexei P. Goriaev, April 5, 2002)

Bruce Lehman and David modest found that there is little similarity between the absolute

and relative mutual fund rankings obtained from alternative benchmark which suggests the

importance of knowing the appropriate model for risk and expected return in this context. In

addition, the rankings are quite sensitive to the method used to construct the APT benchmark.

One would reach very different conclusions about the funds' performance using smaller

numbers of securities in the analysis or the less efficient methods for estimating the necessary

factor models than one would arrive at using the maximum likelihood procedures with 750

securities. We did, however, find the rankings of the funds are not very sensitive to the exact

number of common sources of systematic risk that are assumed to impinge on security returns.

Finally, we found statistically significant measured abnormal performance using all the

benchmarks. The economic explanation of this phenomenon appears to be an open question.

(Lehman B. and Modest D. Mutual Fund Performance Evaluation: A Comparison of

Benchmarks and Benchmark Comparisons)

Mutual Fund industry today, with about 34 players and more than five hundred schemes, is

one of the most preferred investment avenues in India. However, with a plethora of schemes to

choose from, the retail investor faces problems in selecting funds. Factors such as investment

strategy and management style are qualitative, but the funds record is an important indicator

too. Though past performance alone cannot be indicative of future performance, it is, frankly,

the only quantitative way to judge how good a fund is at present. Therefore, there is a need to

correctly assess the past performance of different mutual funds.

Worldwide, good mutual fund companies over are known by their AMCs and this fame is

directly linked to their superior stock selection skills. For mutual funds to grow, AMCs must

be held accountable for their selection of stocks. In other words, there must be some

performance indicator that will reveal the quality of stock selection of various AMCs.

Return alone should not be considered as the basis of measurement of the performance of a

mutual fund scheme, it should also include the risk taken by the fund manager because

different funds will have different levels of risk attached to them. Risk associated with a fund,

in a general, can be defined as variability or fluctuations in the returns generated by it. The

higher the fluctuations in the returns of a fund during a given period, higher will be the risk

associated with it. These fluctuations in the returns generated by a fund are resultant of two

guiding forces. First, general market fluctuations, which affect all the securities present in the

market, called market risk or systematic risk and second, fluctuations due to specific securitiespresent in the portfolio of the fund, called unsystematic risk. The Total Risk of a given fund is

sum of these two and is measured in terms of standard deviation of returns of the fund.


15/64


Page | 15

Systematic risk, on the other hand, is measured in terms ofBeta, which represents fluctuations

in the NAV of the fund vis--vis market. The more responsive the NAV of a mutual fund is to

the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a

mutual fund with the returns in the market. While unsystematic risk can be diversified through

investments in a number of instruments, systematic risk cannot. By using the risk return

relationship, we try to assess the competitive strength of the mutual funds vis--vis one another

in a better way.

In order to determine the risk-adjusted returns of investment portfolios, several eminent

authors have worked since 1960s to develop composite performance indices to evaluate a

portfolio by comparing alternative portfolios within a particular risk class. The most important

and widely used measures of performance are:

The Treynor Measure The Sharpe Measure Jenson Model Fama net selectivity Sortino ratio

(Mutualfundsindia.com)


16/64


Page | 16

CHAPTER 2Mutual Fund Industry profile

Brief description of the selected companies


17/64


Page | 17

MUTUAL FUND INDUSTRY

Mutual funds go back to the times of the Egyptians and Phoenicians when they sold shares in

caravans and vessels to spread the risk of these ventures. The foreign and colonial government

Trust of London of 1868 is considered to be the fore-runner of the modern concept of mutualfunds. The USA is, however, considered to be the Mecca of modern mutual funds. By the early

1930s quite a large number of close - ended mutual funds were in operation in the U.S.A.

Much later in 1954, the committee on finance for the private sector recommended mobilization

of savings of the middle class investors through unit trusts. Finally in July 1964, the concept

took root in India when Unit Trust of India was set up.

Mutual fund industry in India

Different investment avenues are available to investors. Mutual funds also offer good

investment opportunities to the investors. Like all investments, they also carry certain risks.The investors should compare the risks and expected yields after adjustment of tax on various

instruments while taking investment decisions. The investors may seek advice from experts

and consultants including agents and distributors of mutual funds schemes while making

investment decisions.

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

investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and

thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the

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

investors in accordance with quantum of money invested by them. Investors of mutual funds

are known as unit holders.

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

financial goal. The money collected & invested by the fund manager in different types of

securities depending upon the objective of the scheme. These could range from shares to

debentures to money market instruments. The income earned through these investments and its

unit holders in proportion to the number of units owned by them (pro rata) shares the capital

appreciation realized by the scheme. Thus, a Mutual Fund is the most suitable investment forthe common person as it offers an opportunity to invest in a diversified, professionally

managed portfolio at a relatively low cost. Anybody with an investible surplus of as little as a

few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined

investment objective and strategy.

The security and exchange board of India (Mutual Funds) regulations, 1996 defines a

mutual fund as a " a fund establishment in the form of a trust to raise money through the sale of

units to the public or a section of the public under one or more schemes for investing in

securities, including money market instruments."


18/64


Page | 18

Mutual fund industry growth in India

In India, the mutual fund concept took root only in the sixties, after a century old history

elsewhere in the world. Reacting to the needs for a more active mobilization of household

savings to provide investible resources to industry, the idea of the first mutual fund in India

was born out of far-sighted vision of Shri T.Krishnamachari, the then Finance Minister.

First Phase (1964-87)

The UTI was set up by the Reserve Bank of India and functioned under the Regulatory and

Administrative Control of the RBI. In 1978, UTI was delinked from the RBI and IDBI took

over the regulatory and administrative control in place of RBI.

Second Phase (1987-93)

The second phase witnessed the broadening of the base of the industry on account of the entry

of mutual funds sponsored by commercial banks and public sector financial institutions.

During this phase SBI, Life Insurance Corporation, General Insurance Corporation, Canara

Bank, Indian Bank, Bank of India and Punjab National Bank set up mutual funds sponsored by

public sector banks.

Third Phase (1993-2003)

A new era begun in the Indian mutual fund industry with the entry of private sector funds in

1993, giving Indian investors a wider choice of fund families. Kothari pioneer mutual fund wasthe first private sector fund to be established in association with a foreign fund. As at the end

of January 2003 ,there were 33 mutual funds with total assets worth Rs 1,21,805 crores.

Fourth Phase (since February 1993)

UTI bifurcated into two separate entities. One is the Specified Undertaking of Unit Trust of

India and the other is the UTI Mutual Fund Ltd. sponsored by SBI, PNB, BOB and LIC. It is

registered with SEBI and functions under the Mutual Fund Regulations.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual fundsto protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993.

Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital

market. The regulations were fully revised in 1996 and have been amended thereafter from

time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect

the interests of investors

Mutual fund structure in India

Mutual Funds in India follow a 3-tier structure. There is a Sponsor (the First tier), who thinksof starting a mutual fund. The Sponsor approaches the Securities & Exchange Board of India

(SEBI), which is the market regulator and also the regulator for mutual funds. Once SEBI is


19/64


Page | 19

convinced, the sponsor creates a Public Trust (the Second tier) as per the Indian Trusts Act,

1882. Trusts have no legal identity in India and cannot enter into contracts, hence the Trustees

are the people authorized to act on behalf of the Trust .Contracts are entered into in the name

of the Trustees. Once the Trust is created, it is registered with SEBI after which this trust is

known as the mutual fund. Trustees appoint the Asset Management Company (AMC), the third

tier, to manage investors money. The AMC in return charges a fee for the services provided

and this fee is borne by the investors as it is deducted from the money collected from them.

A custodians role is safe keeping of physical securities and also keeping a tab on th e corporate

actions like rights, bonus and dividends declared by the companies in which the fund has

invested.

A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset Management

Company (AMC) and custodian. The trust is established by a sponsor or more than one

sponsor who is like promoter of a company. The trustees of the mutual fund hold its property

for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI

manages the funds by making investments in various types of securities. Custodian, who is

registered with SEBI, holds the securities of various schemes of the fund in its custody. The

trustees are vested with the general power of superintendence and direction over AMC. Theymonitor the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board

of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50%

of the directors of AMC must be independent. All mutual funds are required to be registered

with SEBI before they launch any scheme.

Sponsor

TRUST

AMC


20/64


Page | 20

Terms and definitions

1. Fund sponsor

Sponsor is a person who alone or in combination with another body corporate, establishes a

mutual fund. The sponsor of a fund is akin to the promoter of a company as he gets the fundregistered with SEBI. The sponsor will form a trust and appoint a Board of trustees. The

sponsor generally appoints an asset management company.

2. Mutual Funds as Trusts

A mutual fund in India is constituted in the form of a Public Trust created under the Indian

Trusts Act, 1882.The Fund Sponsor acts as the settler of the trust, contributing to its initial

capital and appoints a Trustee to hold its assets of the TRUST.

3. Trustees

The Board or the Trustee Company, as an independent body, acts as protector of the unit-

holders interests. They are the primary guardians of the unit-holders funds and assets.

4. Asset Management Company

The role of an AMC is to act as the investment manager of the trust. It functions under the

supervision of its own Board of Directors, and direction of Trustees and Sebi.

5. Custodian

A custodians role is safe keeping of physical securities and also keeping a tab on the corporate

actions like rights, bonus and dividends declared by the companies in which the fund has

invested. The Custodian is appointed by the Board of Trustees.

6. New Fund Offer

The AMC launches new schemes, under the name of the Trust, after getting approval from theTrustees and SEBI .The launch of a new scheme is known as a New Fund Offer (NFO).

7. Registrar and transfer agent

Registrars and Transfer Agents (RTAs) perform the important role of maintaining investor

records. All the New Fund Offer (NFO) forms, redemption forms (i.e. when an investor wants

to exit from a scheme, it requests for redemption) go to the RTAs office where the

information is converted from physical to electronic for


21/64


Page | 21

Mutual fund operational flow chart

Different types of mutual fund schemes

1. Schemes according to Maturity Period

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme

depending on its maturity period.

1.1 Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a

continuous basis. These schemes do not have a fixed maturity period. Investors can

conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on

a daily basis. The key feature of open-end schemes is liquidity.


22/64


Page | 22

1.2 Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open

for subscription only during a specified period at the time of launch of the scheme. 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 where the units are listed. In order to

provide an exit route to the investors, some close-ended funds give an option of selling back

the units to the mutual fund through periodic repurchase at NAV related prices. SEBI

Regulations stipulate that at least one of the two exit routes is provided to the investor i.e.

either repurchase facility or through listing on stock exchanges. These mutual funds schemes

disclose NAV generally on weekly basis.

2. Schemes according to investment objective

A scheme can also be classified as growth scheme, income scheme, or balanced schemeconsidering its investment objective. Such schemes may be open-ended or close-ended

schemes as described earlier. Such schemes may be classified mainly as follows

2.1 Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long- term.

Such schemes normally invest a major part of their corpus in equities. Such funds have

comparatively high risks. These schemes provide different options to the investors like

dividend option, capital appreciation, etc. and the investors may choose an option depending

on their preferences. The investors must indicate the option in the application form. The mutual

funds also allow the investors to change the options at a later date. Growth schemes are good

for investors having a long-term outlook seeking appreciation over a period of time.

Equity mutual funds can be classified in following types;

2.1.1 Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P

NSE 50 index (Nifty), etc these schemes invest in the securities in the same weight agecomprising of an index. NAVs of such schemes would rise or fall in accordance with the rise

or fall in the index, though not exactly by the same percentage due to some factors known as

"tracking error" in technical terms. Necessary disclosures in this regard are made in the offer

document of the mutual fund scheme.

2.1.2 Sector specific funds/schemes

These are the funds/schemes which invest in the securities of only those sectors or industries as

specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer

Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on theperformance of the respective sectors/industries. While these funds may give higher returns,


23/64


Page | 23

they are more risky compared to diversified funds. Investors need to keep a watch on the

performance of those sectors/industries and must exit at an appropriate time. They may also

seek advice of an expert.

2.1.3 Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Income Tax

Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g.

Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also

offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities.

Their growth opportunities and risks associated are like any equity-oriented scheme.

2.1.4 Equity diversified funds

100% of the capital is invested in equities spreading across different sectors and stocks

.2.1.5 Dividend yield funds

It is similar to the equity diversified funds except that they invest in companies offering high

dividend yields.

2.1.6 Thematic funds

Invest 100% of the assets in sectors which are related through some theme. e.g., An

infrastructure fund invests in power, construction, cements sectors etc.

2.2 Income / Debt Oriented Scheme

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, Government

securities and money market instruments. Such funds are less risky compared to equity

schemes. These funds are not affected because of fluctuations in equity markets. Debt funds

are of following types

2.2.1 Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation of

capital and moderate income. These schemes invest exclusively in safer short-term instruments

such as treasury bills, certificates of deposit, commercial paper and inter-bank call money,

government securities, etc. Returns on these schemes fluctuate much less compared to other

funds. These funds are appropriate for corporate and individual investors as a means to park

their surplus funds for short periods.

2.2.2 Gilt Fund

These funds invest exclusively in government securities. Government securities have no

default risk. NAVs of these schemes also fluctuate due to change in interest rates and othereconomic factors as is the case with income or debt oriented schemes.


24/64


Page | 24

2.2.3 Floating rate funds

Invest in short-term debt papers. Floaters invest in debt instruments which have variable

coupon rate.

2.2.4 Arbitrage fund

They generate income through arbitrage opportunities due to mispricing between cash market

and derivatives market. Funds are allocated to equities, derivatives and money markets. Higher

proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities.

2.3 Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes

invest both in equities and fixed income securities in the proportion indicated in their offer

documents. These are appropriate for investors looking for moderate growth. They generally

invest 40-60% in equity and debt instruments. These funds are also affected because offluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be

less volatile compared to pure equity funds. Balanced funds can be classified as

2.3.1 Debt-oriented funds -Investment below 65% in equities.

2.3.2 Equity-oriented funds -Invest at least 65% in equities, remaining in debt.

Load or no-load fund

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one

buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fundfor marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as

well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10

and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit.

The investors should take the loads into consideration while making investment as these affect

their yields/returns. However, the investors should also consider the performance track record

and service standards of the mutual fund which are more important. Efficient funds may give

higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the

fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Importance of mutual fund

Small investors face a lot of problems in the share market, limited resources, lack of

professional advice, lack of information etc. Mutual funds have come as a much needed help to

these investors. It is a special type of institutional device or an investment vehicle through

which the investors pool their savings which are to be invested under the guidance of a team of

experts in wide variety of portfolios of corporate securities in such a way, so as to minimize

risk, while ensuring safety and steady return on investment. It forms an important part of thecapital market, providing the benefits of a diversified portfolio and expert fund management to


25/64


Page | 25

a large number, particularly small investors. Now a day, mutual fund is gaining its popularity

due to the following reasons

With the emphasis on increase in domestic savings and improvement in deployment ofinvestment through markets, the need and scope for mutual fund operation has

increased tremendously. The basic purpose of reforms in the financial sector was to

enhance the generation of domestic resources by reducing the dependence on outside

funds. This calls for a market based institution which can tap the vast potential of

domestic savings and channelize them for profitable investments. Mutual funds are not

only best suited for the purpose but also capable of meeting this challenge.

An ordinary investor who applies for share in a public issue of any company is notassured of any firm allotment. But mutual funds who subscribe to the capital issue

made by companies get firm allotment of shares.

The psyche of the typical Indian investor has been summed up in three words Yield,Liquidity and Security. The mutual funds, being set up in the public sector, have giventhe impression of being as safe a conduit for investment as bank deposits. Besides, the

assured returns promised by them have investors had great appeal for the typical Indian

investor.

As mutual funds are managed by professionals, they are considered to have a betterknowledge of market behaviors. Besides, they bring a certain competence to their job.

They also maximize gains by proper selection and timing of investment.

Another important thing is that the dividends and capital gains are reinvestedautomatically in mutual funds and hence are not fritted away. The automatic

reinvestment feature of a mutual fund is a form of forced saving and can make a big

difference in the long run.

As mutual funds creates awareness among urban and rural middle class people aboutthe benefits of investment in capital market, through profitable and safe avenues,

mutual fund could be able to make up a large amount of the surplus funds available

with these people.

The mutual fund attracts foreign capital flow in the country and secures profitableinvestment avenues abroad for domestic savings through the opening of off shore funds

in various foreign investors. Lastly another notable thing is that mutual funds are

controlled and regulated by S E B I and hence are considered safe. Due to all these

benefits the importance of mutual fund has been increasing.

Advantages of mutual funds

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 aimed at the time of making investments. Money market funds offerthe liquidity that desired by big investors who wish to park surplus funds for very short-term

periods.


26/64


Page | 26

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.

Professional Management

Mutual Funds employ the services of skilled professionals who have years 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.

Potential of Returns

Returns in the mutual funds are generally better than any other option in any other avenue overa reasonable period. People can pick their investment horizon and stay put in the chosen fund

for the duration. Equity funds can outperform most other investments over long periods by

placing long-term calls on fundamentally good stocks. The debt funds too will outperform

other options such as banks

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.

Ease of Use

The bookkeeping duties involved with stocks are much more complicated than owning a

mutual fund. 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 $50 or $500,000; you are getting the exact same manager,

the same account access and the same investment.

Disadvantages of Mutual Funds

Mutual funds are good investment vehicles to navigate the complex and unpredictable world of

investments. However, even mutual funds have some inherent drawbacks. Understand these

before you commit your money to a mutual fund.

No assured returns and no protection of capital

If we are planning to go with a mutual fund, this must be your mantra: mutual funds do not

offer assured returns and carry risk.


27/64


Page | 27

Taxes

During a typical year, most actively managed mutual funds sell anywhere from 20 to 70

percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay

taxes on the income you receive, even if you reinvest the money you made.

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. If the manager does not perform as well as you had

hoped, you might not make as much money on your investment as you expected. Of course, if

you invest in Index Funds, you forego management risk, because these funds do not employ

managers.

Costs

The biggest source of AMC income is generally from the entry & exit load which they charge

from investors, at the time of purchase. The mutual fund industries are thus charging extra cost

under layers of jargon.

Dilution

Because funds have small holdings across different companies, high returns from a few

investments often don't make much difference on the overall return. Dilution is also the result

of a successful fund getting too big. When money pours into funds that have had strong

success, the manager often has trouble finding a good investment for all the new money.

Risk-return trade-off

The most important relationship to understand is the risk-return trade-off. Higher the riskgreater the returns/loss and lower the risk lesser the returns/loss.

Hence it is up to you, the investor to decide how much risk you are willing to take. In order to

do this you must first be aware of the different types of risks involved with your investment

decision.

Market Risk

Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting

the market in general lead to this. This is true, may it be big corporations or smaller mid-sized

companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works

on the concept of Rupee Cost Averaging (RCA) might help mitigate this risk.


28/64


Page | 28

Credit Risk

The debt servicing ability (may it be interest payments or repayment of principal) of a

company through its cash flows determines the Credit Risk faced by you. This credit risk is

measured by independent rating agencies like CRISIL who rate companies and their paper.

AAA rating is considered the safest whereas a D rating is considered poor credit quality. A

well-diversified portfolio might help mitigate this risk.

Inflation Risk

The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times

people make conservative investment decisions to protect their capital but end up with a sum

of money that can buy less than what the principal could at the time of the investment. This

happens when inflation grows faster than the return on your investment. A well-diversified

portfolio with some investment in equities might help mitigate this risk.

Interest Rate Risk

In a free market economy interest rates are difficult if not impossible to predict. Changes in

interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of

bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate

environment. A well-diversified portfolio might help mitigate this risk.

Political/Government Policy Risk

Changes in government policy and political decision can change the investment environment.

They can create a favorable environment for investment or vice versa

Liquidity Risk

Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.

Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as

internal risk controls that lean towards purchase of liquid securities.


29/64


Page | 29

To cater to different investment needs, Mutual Funds offer various investment options. Some

of the important investment options include

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).

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.

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.

Retirement Pension Option

Some schemes are linked with retirement pension. Individuals participate in these options for

themselves, and corporate participate for their employees.

Insurance Option

Certain Mutual Funds offer schemes that provide insurance cover to investors as an added

benefit.

Systematic Investment Plan (SIP)Here the investor is given the option of preparing a pre-determined number of post-dated

cheques in favor of the fund. The investor is allotted units on a predetermined date specified in

the offer document at the applicable NAV.

Systematic Withdrawal Plan (SWP)

As opposed to the Systematic Investment Plan, the Systematic Withdrawal 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.

Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive expansion of the foreign

owned mutual fund companies and the decline of the companies floated by nationalized banks

and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties and got off to a

good start due to the stock market boom prevailing then. These banks did not really understand

the mutual fund business and they just viewed it as another kind of banking activity. Few hired

specialized staff and generally chose to transfer staff from the parent organizations. The

performance of most of the schemes floated by these funds was not good. Some schemes had

offered guaranteed returns and their parent organizations had to bail out these AMCs by paying


30/64


Page | 30

large amounts of money as the difference between the guaranteed and actual returns. The

service levels were also very bad. Most of these AMCs have not been able to retain staff, float

new schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans

of continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also verysimilar. They quickly realized that the AMC business is a business, which makes money in the

long term and requires deep-pocketed support in the intermediate years. Some have sold out to

foreign owned companies, some have merged with others and there is general restructuring

going on.

They can be credited with introducing many new practices such as new product innovation,

sharp improvement in service standards and disclosure, usage of technology, broker education

and support etc. In fact, they have forced the industry to upgrade itself and service levels of

organizations like UTI have improved dramatically in the last few years in response to the

competition provided by these.

Regulatory authorities

To protect the interest of the investors, SEBI formulates policies and regulates the mutual

funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to

time. MF either promoted by public or by private sector entities including one promoted by

foreign entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making

investments in various types of securities. Custodian, registered with SEBI, holds the securities

of various schemes of the fund in its custody.

According to SEBI Regulations, two thirds of the directors of Trustee Company or board of

trustees must be independent. The Association of Mutual Funds in India (AMFI) reassures the

investors in units of mutual funds that the mutual funds function within the strict regulatory

framework. Its objective is to increase public awareness of the mutual fund industry. AMFI

also is engaged in upgrading professional standards and in promoting best industry practices in

diverse areas such as valuation, disclosure, transparency etc.

Performance of mutual funds

The performance of mutual funds in India from the day the concept of mutual fund took birthin India. The year was 1963. Unit Trust of India invited investors or rather to those who

believed in savings, to park their money in UTI Mutual Fund. The performance of mutual

funds in India in the initial phase was not even closer to satisfactory level. People rarely

understood, and of course investing was out of question. But yes, some 24 million shareholders

were accustomed with guaranteed high returns by the beginning of liberalization of the

industry in 1992. This good record of UTI became marketing tool for new entrants. The

expectations of investors touched the sky in profitability factor. However, people were miles

away from the preparedness of risks factor after the liberalization.

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


31/64


Page | 31

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 a loss in the secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market

scandal, the losses by disinvestments and of course the lack of transparent rules in the

whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock

market performance, mutual funds have not yet recovered, with funds trading at an average

discount of 1020 percent of their net asset value. The measure was taken to make mutual funds

the key instrument for long-term saving. The more the variety offered, the quantitative will be

investors. At last to mention, as long as mutual fund companies are performing with lowerrisks and higher profitability within a short span of time, more and more people will be

inclined to invest until and unless they are fully educated with the dos and don'ts of mutual

funds.

Mutual funds houses operating in India

Mutual Fund Name No. of Schemes

AIG Global Investment Group Mutual Fund 59

Baroda Pioneer Mutual Fund 25

Bharti AXA Mutual Fund 43

Birla Sun Life Mutual Fund 364

Canara Robeco Mutual Fund 90

DBS Chola Mutual Fund 55

Deutsche Mutual Fund 145

DSP Blackrock Mutual Fund 124

Edelweiss Mutual Fund 40

Escorts Mutual Fund 34

Fidelity Mutual Fund 57

Fortis Mutual Fund 247

Franklin Templeton Mutual Fund 243
http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM051http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM053http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM010http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM054http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM011http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM047http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM046http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM037http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM037http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM046http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM047http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM011http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM054http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM010http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM044http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM009http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM008http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM005http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM053http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM006http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM051


32/64


Page | 32

HDFC Mutual Fund 295

HSBC Mutual Fund 172

ICICI Prudential Mutual Fund 440

IDFC Mutual Fund 198

ING Mutual Fund 191

JM Financial Mutual Fund 142

JPMorgan Mutual Fund 31

Kotak Mahindra Mutual Fund 178

LIC Mutual Fund 81

Mirae Asset Mutual Fund 70

PRINCIPAL Mutual Fund 131

Reliance Mutual Fund 331

Religare Mutual Fund 181

Sahara Mutual Fund 42

SBI Mutual Fund 141

Sundaram BNP Paribas Mutual Fund 212

Tata Mutual Fund 199

Taurus Mutual Fund 42

UTI Mutual Fund 288

Net Resources mobilized by Mutual Funds

Year UTI Bank

sponsored

FI Sponsored Private

sector fund

Total

2001-02 -7284 863 407 16134 10120

2002-03 -9434 1033 862 12122 4583

2003-04 1050 4526 787 41510 47873

2004-05 -2467 707 -3384 7933 2789

2005-06 3424 5365 2112 41581 52482

2006-07 7326 3032 4226 76687 91271

2007-08 9820 10677 133304 153802

(Source - Securities Exchange Board of India,www.sebi.gov.in)
http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM041http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM043http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM024http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM040http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM038http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM019http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM049http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM033http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM052http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM016http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM050http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM032http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM034http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.sebi.gov.in/http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM045http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM036http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM034http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM032http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM026http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM012http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM050http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM025http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM016http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM052http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM021http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM033http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM049http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM019http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM038http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM040http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM024http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM043http://www.mutualfundsindia.com/amc_snapshot.asp?amc_name=AM041


33/64


Page | 33

Assets under management of mutual funds (Rs. crores)

Types of

fund

2004 2005 2006 2007

Money Market 59,447-39.5

64,711-32.5

97,757-30.2

1,12,349

-20.4

Gilt 4876

-3.2

3730

-1.9

2057

-0.6

1975

-0.4

Income 47,451

-31.5

52,903

-26.6

86,350

-26.7

1,97,342

-35.9

Growth 31551

-21

67144

-33.7

1,19,538

-36.9

1,92,129

-34.9

Balanced 5,472

-3.6

6,833

-3.4

9,170

-2.8

19,938

-3.6

ELSS 1,740

-1.2

3,927

-2.0

8,726

-2.7

19,063

-3.5

Total 1,50,537 1,99,248 3,23,598 5,54,000

(SourceHandbook of Statistics on the Indian securities market 2008)


34/64


Page | 34

BRIEF INTRODUCTION OF SELECTED COMPANIES

SBI Magnum mutual funds

SBI Mutual Fund is Indias largest bank sponsored mutual fund and has an enviable trackrecord in judicious investments and consistent wealth creation. The fund traces its lineage to

SBI - Indias largest banking enterprise. The institution has grown immensely since its

inception and today it is India's largest bank, patronized by over 80% of the top corporate

houses of the country.

SBI Mutual Fund is a joint venture between the State Bank of India and Socit Gnrale Asset

Management, one of the worlds leading fund management companies that manages

over US$ 500 Billion worldwide. In twenty years of operation, the fund has launched 38

schemes and successfully redeemed fifteen of them. In the process it has rewarded its

investors handsomely with consistent returns. A total of over 5.8 million investors have

reposed their faith in the wealth generation expertise of the Mutual Fund. Schemes of the

Mutual fund have consistently outperformed benchmark indices and have emerged as the

preferred investment for millions of investors and HNIs.

Today, the fund manages over Rs. 38,782 crores of assets and has a diverse profile of investors

actively parking their investments across 38 active schemes. The fund serves this vast family

of investors by reaching out to them through network of over 130 points of acceptance, 28

investor service centers, 46 investor service desks and 56 district organizers.

Canara Robeco Asset Management Company Ltd.

Canbank Investment Management Services Ltd. (the AMC) was established as a wholly owned

subsidiary of Canara Bank in 1993. The AMC is managing the assets of Canbank Mutual

Fund (the Fund) by virtue of an investment management agreement dated 16th June 1993 (as

amended from time to time).

Canara Bank entered into a joint venture agreement on 19th March, 2007, with Robeco Groep

N.V. 120 Coolsingel, 3011 AG Rotterdam, The Netherlands for asset management business in

India. Robeco is a 75-year old asset manager, with over Rs. 8,09,000 crores ( EUR 146 billion)

under management as of Dec 31, 2007. According to this agreement, Robeco Groep N.V.

through its subsidiary, Robeco India Holding B.V. has acquired 49% stake in the AMC.

As a consequence, the Fund is renamed as Canara Robeco Mutual Fund (the Fund) and the

AMC as Canara Robeco Asset Management Company Limited (the AMC). The AMC is also

the sub-Investment Manager to IS-Himalayan Fund / Canbank (Offshore) Mutual Fund.

The Fund launched thirty schemes since its inception, besides taking over four schemes from

GIC Mutual Fund. Of these, sixteen schemes have been redeemed / terminated / merged so far.


35/64


Page | 35

The AMC now manages eighteen schemes of which fifteen are open-ended and three are close-

ended. As on 30.10.2009, the assets under management stood at Rs. 7815.00 Crore.

HDFC Mutual funds

HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act,1956, on December 10, 1999, and was approved to act as an Asset Management Company for

the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000.

The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg,

169, Backbay Reclamation, Churchgate, Mumbai - 400 020.

In terms of the Investment Management Agreement, the Trustee has appointed the HDFC

Asset Management Company Limited to manage the Mutual Fund. The paid up capital of the

AMC is Rs. 25.161 crore.

The present equity shareholding pattern of the AMC is as follows:

Particulars % of the paid up equity capital

Housing Development Finance Corporation Limited 60

Standard Life Investments Limited 40

Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, following a

review of its overall strategy, had decided to divest its Asset Management business in India.

The AMC had entered into an agreement with ZIC to acquire the said business, subject to

necessary regulatory approvals.

On obtaining the regulatory approvals, the following Schemes of Zurich India Mutual Fund

have migrated to HDFC Mutual Fund on June 19, 2003. These Schemes have been renamed as

follows:

Former Name New Name

Zurich India Equity Fund HDFC Equity Fund

Zurich India Prudence Fund HDFC Prudence Fund

Zurich India Capital Builder Fund HDFC Capital Builder Fund

Zurich India TaxSaver Fund HDFC TaxSaverZurich India Top 200 Fund HDFC Top 200 Fund

Zurich India High Interest Fund HDFC High Interest Fund

Zurich India Liquidity Fund HDFC Cash Management Fund

Zurich India Sovereign Gilt Fund HDFC Sovereign Gilt Fund*

The AMC is managing 24 open-ended schemes of the Mutual Fund viz. HDFC Growth Fund

(HGF), HDFC Balanced Fund (HBF), HDFC Income Fund (HIF), HDFC Liquid Fund (HLF),

HDFC Long Term Advantage Fund (HLTAF), HDFC Children's Gift Fund (HDFC CGF),

HDFC Gilt Fund (HGILT), HDFC Short Term Plan (HSTP), HDFC Index Fund, HDFC

Floating Rate Income Fund (HFRIF), HDFC Equity Fund (HEF), HDFC Top 200 Fund

(HT200), HDFC Capital Builder Fund (HCBF), HDFC TaxSaver (HTS), HDFC Prudence


36/64


Page | 36

Fund (HPF), HDFC High Interest Fund (HHIF), HDFC Cash Management Fund (HCMF),

HDFC MF Monthly Income Plan (HMIP), HDFC Core & Satellite Fund (HCSF), HDFC

Multiple Yield Fund (HMYF), HDFC Premier Multi-Cap Fund (HPMCF), HDFC Multiple

Yield Fund . Plan 2005 (HMYF-Plan 2005), HDFC Quarterly Interval Fund (HQIF) and

HDFC Arbitrage Fund (HAF).

The AMC is also managing 9 closed ended Schemes of the HDFC Mutual Fund viz. HDFC

Long Term Equity Fund, HDFC Mid-Cap Opportunities Fund, HDFC Infrastructure Fund,

HDFC Fixed Maturity Plans - Series V, HDFC Fixed Maturity Plans - Series VII, HDFC Fixed

Maturity Plans - Series VIII, HDFC Fixed Maturity Plans - Series IX, HDFC Fixed Maturity

Plans - Series X and HDFC Fixed Maturity Plans - Series XI.

ICICI Prudential Mutual funds

ICICI Prudential Asset Management Company enjoys the strong parentage of Prudential plc, one

of UK's largest players in the insurance & fund management sectors and ICICI Bank, a well-

known and trusted name in financial services in India. ICICI Prudential Asset Management

Company, in a span of just over eight years, has forged a position of pre-eminence in the Indian

Mutual Fund industry as one of the largest asset management companies in the country with

average assets under management of Rs. 82,168.12 Crore (as of Nov 30, 2009). The Company

manages a comprehensive range of schemes to meet the varying investment needs of its investors

spread across 230 cities in the country. Presently company is managing 40 different schemes.

LIC Mutual fund

LIC Mutual Fund was set up by Life Insurance Corporation of India on 19th June 1989 with a

corpus of Rs. 2 crores. LIC Mutual Funds are managed by LIC Mutal Fund Asset Management

Company Ltd which was formed on 20th April 1994 in compliance with the Securities and

Exchange Board of India (Mutual Funds) Regulations, 1993.
http://www.icicipruamc.com/http://www.icicipruamc.com/


37/64


Page | 37

CHAPTER 3Research Methodology

Data collection

Returns

Beta value

Treynors Ratio

Sharpe ratio

Standard deviations

Fama Ratio

Sortino Ratio


38/64


Page | 38

Research Methodology

Exploratory research design is used to evaluate the performance of mutual funds. One of the

most important users of research methodology is that it helps in identifying the problem,

collecting, analyzing the required information data and providing an alternative solution to the

problem .It also helps in collecting the vital information that is required by the top management

to assist them for the better decision making both day to day decision and critical ones.

Data Collection

Data used in the study is secondary data. The secondary data has been collected through

various journals, magazines, news papers and websites. Important sites of data collection are

AMFI website, SEBI website, Mutual fund houses website, Zen money website and Money

control.

For the purpose of estimating the performance of schemes in terms of returns, NAV of the

schemes are taken into consideration. As data relating to NAV is available more frequently

than any other data it is taken as the basis for estimation.

Performance Measures of Mutual Funds

Mutual Fund industry today, with about 34 players and more than five hundred schemes, is one

of the most preferred investment avenues in India. Retail investor faces problems in selecting

funds. Factors such as investment strategy and management style are qualitative, but the funds

record is an important indicator too. Though past performance alone cannot be indicative of

future performance, it is, frankly, the only quantitative way to judge how good a fund is at

present. Therefore, there is a need to correctly assess the past performance of different mutualfunds.

Worldwide, good mutual fund companies over are known by their AMCs and this fame is

directly linked to their superior stock selection

Documents

Pratik 17095 Specialization Project Report On