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International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)

Volume 1, Number 2, Aug - Sep (2010), © IAEME

44

A CRITICAL VIEW OF UNDISCLOSED FACTS OF

DISCLOSED FACT SHEETS:

A CASE STUDY OF BENCHMARKING OF MUTUAL

FUNDS

Prof. Abdul Noor Basha

Chairman, Board of Studies Commerce (PG)

Acharya Nagarjuna Unviersity,

Nagarjuna Nagar, Guntur.

G.V.satya sekhar

Assistant Professor, Dept of Finance

GITAM Institute of Management

GITAM University, Visakhapatnam- 530 045

Email: [email protected]

ABSTRACT:

Financial statements should focus on the true and fair view of state of affairs of

the corporate entity. It is the responsibility of audit committee to authenticate the true

and fair view of financial position. But, there are several undisclosed facts which are to

be unearthed by audit committee are ignored. This leads to financial turmoil and loss of

investor’s confidence as well as investment made by them

In this context, this paper is intended to examine the importance of disclosure

practices of financial statements with reference to benchmarking of a select mutual

funds’ fact sheets.

This paper focuses on the following objectives:

• To examine the prevailing disclosure norms of financial statements.

• To study on improving efficiency methods in timely reporting of financial statements

• To educate the readers about financial statement disclosures in UTI mutual funds

Key words: financial statements, disclosure practices, misstatements, benchmarking

International Journal of Management (IJM)

ISSN 0976 – 6502(Print), ISSN 0976 – 6510(Online)

Volume 1, Number 2, Aug - Sep (2010), pp. 44-52

© IAEME, http://www.iaeme.com/ijm.html

IJM

© I A E M E



45

Nature of Paper: empirical data based analytical paper

INTRODUCTION:

Disclosed Financial Statements (DFS) should be replica of financial position of

any corporate entity. But the variability in the quality of reporting is common as

companies try and take refuge under legal subtleties. DFS can also be called as financial

reporting which is the communication of accounting information of an entity to user or

group of users1.

There is a broader view of corporate governance, which views the subject as the

methods by which suppliers of finance control managers in order to ensure that their

capital cannot be expropriated and that they earn a return on their investment (Shleifer

and Vishny, 1997). Macey and O’Hara (2001) argue that a broader view of corporate

governance should be adopted in the case of banking institutions, arguing that because of

the peculiar contractual form of banking, corporate governance mechanisms for banks

should encapsulate depositors as well as shareholders.

Government-provided guarantees in the form of implicit and explicit deposit

insurance might encourage economic agents to deposit their wealth with a bank, as a

substantial part of the moral hazard cost is borne by the government. Nevertheless, even

if the government provides deposit insurance, bank managers still have an incentive to

opportunistically increase their risk taking, but now it is mainly at the government’s

expense.

1.1. BENCHMARK RETURNS

This will give you a standard by which to make the comparison. It basically

indicates what the fund has earned as against what it should have earned. A fund's

benchmark is an index that is chosen by a fund company to serve as a standard for its

returns. The market watchdog, the Securities and Exchange Board of India, has made it

mandatory for funds to declare a benchmark index. In effect, the fund is saying that the

benchmark's returns are its target and a fund should be deemed to have done well if it

1 Ramesh Venkatram (2008), ‘Good Governance can be as strong differentiator as good

strategy’, The Hindu-Business Line, April, 24, pp 9.



46

manages to beat the benchmark. Let's say the fund is a diversified equity fund that has

benchmarked itself against the Sensex. So the returns of this fund will be compared vis-a-

viz the Sensex. Now if the markets are doing fabulously well and the Sensex keeps

climbing upwards steadily, then anything less than fabulous returns from the fund would

actually be a disappointment.

1.2. REVIEW OF LITERATURE:

Naser Abdelkarim et al (2009)2 carried out a study to investigate the perception

of users regarding the availability, adequacy, and usefulness of information disclosed in

the financial reports of companies listed on the Palestine Securities Exchange (PSE).

Results of the study demonstrated that users perceive reported information as neither

adequate nor relevant to investment decisions. In particular, reported information was

insufficient, as listed companies did not comply with the minimum disclosure

requirements of international standards. This unfavorable perception, along with poor

credibility and bad timeliness of the disclosures, has prevented information from being

impounded into stock prices. The study presented a number of recommendations that

may be helpful in improving the efficiency of the PSE, which in turn will contribute to

the Palestinian economy as a whole.

Vrajlal Sapovadia3 critically examined the relevant Accounting Standards and

such practices in India, to evaluate potency and fairness vis-à-vis Good Corporate

Governance. As per OECD principles of Corporate Governance, Accounting Information

should be prepared and disclosed in accordance with high quality standards of accounting

and financial and non-financial disclosure s. The application of high quality standards is

expected to significantly improve the ability of investors to monitor the company by

providing increased reliability and comparability of reporting, and improved insight into

2 Naser Abdelkarim , Yasser. A. Shahin & Bayan M. Arqawi, Investor Perception of

Information Disclosed in Financial Reports of Palestine Securities Exchange Listed

Companies, Accounting & Taxation, Volume 1, Number 1, 2009.

3 Vrajlal Sapovadia (2008), “Critical Analysis of Accounting Standards vis-à-vis

Corporate Governance Practice in India”, SSRN-ID-712461.



47

company performance. The quality of information substantially depends on the standards

under which it is compiled and disclosed.

Shiw Kumar Jiloka (2006)4 mentions that disclosure is regarded as a process

through which a business enterprise communicates to third parties. Government and

other regulating bodies like ICAI, SEBI propagate expanded disclosure in annual reports

on the hand, but at the time the Government through section 210 of the companies to

disclose the maximum possible information. It may be helpful to the Government in

making disclosure laws, to the ICAI and SEBI in considering the areas of disclosure

regarding which some standards or guidelines need to be issue. Dave (2000) conducted a

study on accounting standards during the period 1990-91 to 1993-94. This study covers

50 companies of which 25 from public sector and 25 from private sector. The companies

in both the sector complying with the accounting standards while preparing annual

reports differently, but not up to the satisfactory level.

Surendar and Manish Khanduri,5 explained that an absolute lack of disclosure

norms- from declaring the Net Asset Value of US-64 to inter-fund transfers- characterizes

UTI’s functioning. Unit Scheme, 1964 (US-64), is the Unit Trust of India’s largest and

best known mutual fund scheme. With this scheme there was a trouble of disclosure

policy. UTI discloses at the end of every quarter where it has invested about only 70% of

US-64’s corpus.

1.3. MEASURES FOR GOOD CORPORATE GOVERNANCE

In developed economies, protection of depositors in a deregulated environment is

typically provided by a system of prudential regulation, but in developing economies

such protection is undermined by the lack of well-trained supervisors, inadequate

disclosure requirements, the cost of raising capital and the presence of distributional

cartels. In order to deal with these problems, it was suggested that developing economies

need to adopt the following measures.

4 Shiw Kumar Jiloka (2006), ‘Corporate Financial Disclosure’, The Management

Accountant, November, 2006, pp 867-871. 5 T. Surender & Manish Khanduri, ‘US- 64: Pandora ’s Box opens’- Business world, 6

th August,

2001.



48

Firstly, Liberalizations policies need to be gradual, and should be dependent upon

improvements in prudential regulation. Secondly, developing economies need to expend

resources enhancing the quality of their financial reporting systems. Thirdly, given that

capital plays such an important role in prudential regulatory systems, it may be necessary

to improve investor protection laws, increase financial disclosure and impose fiduciary

duties upon directors so that firms can raise the equity capital required for regulatory

purposes.

A further reason as to why this policy needs implemented is the growing

recognition that the corporate governance has an important role to play in assisting

supervisory institutions to perform their tasks, allowing supervisors to have a working

relationship with bank management, rather than adversarial one. It was suggested that

the corporate governance in developing economies is severely affected by political

considerations. Firstly, given the trend towards privatization of government-owned firms

in developing economies, there is a need for the managers of such firms to be granted

autonomy and be gradually introduced to the corporate governance practices of the

private sector prior to divestment. Secondly, where there has only been partial divestment

and governments have not relinquished any control to other shareholders, it may prove

very difficult to divest further ownership stakes unless corporate governance is

strengthened. Finally, given that limited entry of foreign firm may lead to increased

competition, which in turn encourages domestic banks to emulate the corporate

governance practices of their foreign competitors.

1.4. RELEVANCE OF BENCHMARK IN MUTUAL FUNDS:

The idea behind investing in a specialized fund, be in diversified or sectoral fund,

is to outperform the market benchmark. If he is not able to beat the benchmark, there is

something wanting in investment skills of fund manager. For example if any investor

want to invest in an index fund, where the costs are lower. Also, there is no risk of a great

downslide. This is because an index fund invests only in stocks in proportion to their

weightage in the index. It is a passive investment strategy. The returns would be in

tandem with the movement of index, save for a small tracking error. Since these funds do

not have to churn their portfolio heavily, the transaction costs are also lower. In addition,



49

investor do not have worry about the performance record of the fund manager, as

investing in an index is not rocket science.

1.5. ANALYSIS OF SELECT FACT SHEETS OF MUTUAL FUNDS:

The following note is made by this organization is a caution to investors:

IISL is not responsible for any errors or omissions or the results obtained from the use of

such index and in no event shall IISL have any liability to any party for any damages of

whatsoever nature (including loss of profit) resulted to such party due to purchase or sale

or otherwise of such product benchmarked to such index. For instance, HDFC Equity

Fund and Capital Builder Fund are benchmarked to S&P CNX 500 Index are not

sponsored, endorsed, sold or promoted by India Index & Service Products Ltd (IISL).

The following tables 1 to 3 gives a reflection of the performance of HDFC growth fund,

equity fund and capital builder fund against its benchmark.

Table 1 HDFC GROWTH FUND (As on 28th

Feb, 2007)

Details NAV per unit Growth Fund

% returns

Bench Mark: ENSEX

% returns

Since Inception

(sept.11.2000)

10.00 26.20** 16.96**

March31,2006 41.236 9.24* 14.70*

36.490 23.45* 24.76*

* Absolute Returns

** Compounded Annualized return

Table 2 HDFC EQUITY FUND As on 28th

Feb, 2007)


% returns

Bench Mark-

S &P CNX 500

% returns

Since Inception (1

ST JAN1995)

10.00 24.31** 10.01**

March31,2006 127.169 11.06* 6.78*

Last 1year (2007) 116.84 20.87* 16.88

Last year(as at 2003) 22.790 126.30 98.14

* Absolute Returns




50

Table 3 HDFC Capital Builder Fund


% returns

Bench Mark-

S &P CNX 500

% returns

Since Inception

Feb 1st, 1994

10.00 14.86** 8.55*

March31,2006 60.169 1.81* 6.78*

Last 1year (2007) 55.290 10.80* 16.88*

Last year(as at 2003) 0.740 121.91 98.14(due to share

rise in stockprise)

* Absolute Returns


Table-4: JM Financial Mutual fund

Scheme Bench Mark

JM Equity Fund BSE SENSEX

JM Balanced Fund CRISIL Balanced Fund Index

JM Basic Fund BSE Basic Industries Index

JM Auto Sector fund BSE Auto Sector Index

JM Health care Sector Fund BSE Health Care Index

JM Emerging Leaders Fund BSE 200 Index

JM Hi fi Fund S&P CNX Nifty Index

The above table gives information about JM Financial Mutual Fund. The fund

manager selects BSE Basic Industries Index as a bench mark for JM Basic fund. BSE

cautions the investors by the following note: “All rights in the BSE Basic Industries

Index vest in BSE. It shall not liable in any manner whatsoever (including in negligence)

for any loss arising to any person whosever out of use of a reliance on this fund by any

person.

Table-5 Tata Mutual Fund

Scheme Bench Mark Rate of return

of the scheme

since

inception

Bench mark

return since

inception

Tata Equity Opportunities Fund SENSEX 13.37% 11.95%

Tata Pure Equity Fund SENSEX 33.83% 14.62%

Tata Select Equity Fund SENSEX 22.26% 12.81%

Tata Life Sciences and Technology

Fund

SENSEX 24.44% 16.71%

Tata Tax Saving Fund SENSEX 27.13% 13.62%

Tata Growth Fund SENSEX 11.02% 9.92%



51

All the schemes mentioned above listed by Tata Mutual Fund selected ‘Sensex’ as

their bench mark as per their ‘portfolio statement’ released on 30th

April, 2007.

However, the rate of return for these schemes with reference to benchmark is same for

one year duration (15.19%), three year duration (34.87%) and five year duration

(32.94%). It varies with respect to rate of return of the bench mark, since inception for

each scheme. It shows that index of bench mark may be different for each scheme. In

practice, the indices selected as bench mark should be varied according to nature of

scheme.

1.6. CONCLUSION:

Benchmark Mutual Fund, which specializes in managing exchange traded funds

(ETFs), has lined up a scheme that will try to generate returns through investment in

securities represented by a host of sectoral indices. The indices - the offer document sent

to SEBI mentions nine of them - are owned by India Index Services & Products Ltd, the

joint venture formed by NSE and CRISIL to provide a variety of indices and index-

related services for the capital market. These indices cover the following sectors:

Automobiles/four-wheeler, cement, electrical equipment, pharmaceutical, power, steel,

telecom, services and information technology. Their names are S&P CNX

Pharmaceutical Index, S&P CNX Cement and Cement Product Index, S&P CNX Power

Index and the like.

Thus, investors should have awareness of benchmarking of mutual funds as they

may not reveal real risk factors which are undisclosed in disclosed fact sheets.

REFERENCES:

• Agarwal G.D (1992), ‘Mutual Funds and Investors Interest’, Chartered Secretary,

Jan.

• Bhatt, Narayana M (1990)., ‘Mutual Funds; Some Regulatory Issues’, The

Economic Times, January 7th

.

• Dave S.A (1994), ‘An Open Ended fund may be more prudent’, The Economic

Times, December 20th

.

• Goyal Madan (1990), ‘Off-shore country funds: The Indian Experience’, State

Bank of India Monthly Review, May.



52

• Gupta, L.C (1993), ‘Mutual Funds and Assets Preference’, Society for Capital

Market Research and Development, New Delhi.

• Naser Abdelkarim, Yasser. A. Shahin & Bayan M. Arqawi (2009), Investor

Perception of Information Disclosed in Financial Reports of Palestine Securities

Exchange Listed Companies, Accounting & Taxation, Volume 1, Number 1, 2.

• Ramesh Venkatram (2008), ‘Good Governance can be as strong differentiator as

good strategy’, The Hindu-Business Line, April, 24, pp 9.

• Shiw Kumar Jiloka (2006), ‘Corporate Financial Disclosure’, The Management

Accountant, November, 2006, pp 867-871

• T. Surender & Manish Khanduri (2001), ‘US- 64: Pandora’s Box Opens’-

Business world, 6th

August.

• Vrajlal Sapovadia (2008), “Critical Analysis of Accounting Standards vis-à-vis

Corporate Governance Practice in India”, SSRN-ID-712461.

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